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Celje, March 2012 Annual Report 2011 Banka Celje, d.d., and the Banka Celje Group

Banka Celje, d.d., and the Banka Celje Groupc6201b61-1a28-4b94...Banka Celje, d.d., and the Banka Celje Group . The framework of the Supervisory Board's operations and its responsibilities

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Page 1: Banka Celje, d.d., and the Banka Celje Groupc6201b61-1a28-4b94...Banka Celje, d.d., and the Banka Celje Group . The framework of the Supervisory Board's operations and its responsibilities

Celje, March 2012

Annual Report 2011Banka Celje, d.d., and the Banka Celje Group

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Banka Celje, d.d., and the Banke Celje Group

Annual Report 2011, prepared in accordance withInternational Financial Reporting Standards, as adopted by the European Union.

2Banka Celje, d.d., and the Banka Celje Group

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A WORD BY THE PRESIDENT OF THE MANAGEMENT BOARD 5

REPORT OF THE SUPERVISORY BOARD OF BANKA CELJE, d.d. 6

I BUSINESS REPORT 9

1 HIGHLIGHTS 11

2 PRESENTATION 12

3 STRATEGY 13

4 SIGNIFICANT EVENTS 14

5 ECONOMIC AND BANKING ENVIRONMENT 15

5.1 Economic environment 15

5.2 Banking environment 15

6 REPORT ON THE OPERATIONS IN 2011 16

6.1. Financial results 16

6.2. Financial position 18

6.3 Operations according to key areas 21

6.4 Shareholder information 27

6.5 Assuming and managing banking risks 28

6.6 Development 32

6.7 Social responsibility 32

6.8 Internal Audit Department operations 33

7 MANAGING BODIES OF THE BANK 34

8 ORGANIZATIONAL STRUCTURE OF THE BANK 35

9 STATEMENT OF CORPORATE GOVERNANCE 36

10 STATEMENT OF MANAGEMENT’S RESPONSIBILITIES 41

11 REPORT OF THE AUDITORS 42

II FINANCIAL STATEMENTS 45

1 INCOME STATEMENT 47

2 STATEMENT OF COMPREHENSIVE INCOME 48

3 STATEMENT OF FINANCIAL POSITION 49

4 STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY 50

5 STATEMENT OF CASH FLOWS 51

NOTES TO THE FINANCIAL STATEMENTS 53

1 GENERAL INFORMATION 53

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 53

2.1 Basis for the presentation of financial statements 53

2.2 Comparative information 56

2.3 Consolidation 56

2.4 Segment reporting 56

2.5 Foreign currency translation 56

2.6 Interest income and expenses 56

2.7 Fee and commission income 57

2.8 Dividend income 57

2.9 Financial instruments 57

2.10 Impairment of financial assets 59

2.11 Offsetting 60

2.12 Sale and repurchase agreements 60

2.13 Cash and cash equivalents 60

2.14 Accounting for leases 60

2.15 Investment property 61

2.16 Property and equipment 61

2.17 Intangible assets 61

2.18 Inventories 61

2.19 Taxes 61

2.20 Employee benefits 61

2.21 Loans taken, deposits and debt securities issued 62

2.22 Provisions 62

2.23 Financial guarantees 62

2.24 Share capital 62

CONTENT

3Banka Celje, d.d., and the Banka Celje Group

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2.25 Management of bank risks 62

2.26 Critical accounting estimates and judgements 96

2.27 Segment reporting 97

NOTES TO INDIVIDUAL ITEMS INCLUDED IN CONSOLIDATED FINANCIAL STATEMENTS 101

3 Net interest and similar income 101

4 Dividend income 101

5 Net fee and commission income 1026 Gains less losses from financial assets and liabilities

not classified at fair value through profit or loss 102

7 Gains less losses from financial assets and liabilities held for trading 1038 Gain less losses from financial assets and liabilities

designated at fair value through profit or loss 103

9 Changes in fair value from hedge accounting 103

10 Gains less losses from foreign exchange differences 10411 Gains less losses from derecognition of assets 104

12 Other net operating profit / loss 104

13 Administrative expenses 105

14 Amortisation and depreciation 105

15 Provisions 106

16 Impairment charges 106

17 Income tax expense 107

18 Basic and diluted earnings per share 107

19 Cash and balances with the Central Bank 108

20 Financial assets held for trading 108

21 Financial assets designated at fair value through profit or loss 109

22 Available for sale financial assets 110

23 Loans and advances to banks 111

24 Loans and advances to customer 111

25 Held to maturity investments 115

26 Hedging derivatives 116

27 Property and equipment 116

28 Investment property 118

29 Intangible assets 11930 Investments in subsidiaries 121

31 Income tax assets 121

32 Other assets 123

33 Deposits from Central Bank 123

34 Financial liabilities held for trading 124

35 Financial liabilities designated at fair value through profit or loss 124

36 Financial liabilities at amortised cost – deposits from banks 125

37 Financial liabilities at amortised cost – due to customers 126

38 Financial liabilities at amortised cost – borrowings from banks 127

39 Financial liabilities at amortised cost – borrowing from customers 127

40 Debt securities 128

41 Subordinated liabilities 12942 Financial liabilities associated with transferred assets 130

43 Derivatives - hedge accounting 130

44 Provisions 130

45 Other liabilities 131

46 Share capital 132

47 Dividend per share 134

48 Contingent liabilities and commitments 134

49 Cash and cash equivalents 135

50 Related party transactions 136

51 Information on the results of organizational units abroad 140

52 Events after the reporting date 140

4Banka Celje, d.d., and the Banka Celje Group

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2011 was marked significantly by the economic and financial crises, with the debt crisis joining the fray. Due to the aforementioned, the Bank took measures to ensure secure and stable operations, preserve good operational and structural liquidity and to keep capi-tal adequacy stable. The capital adequacy ratio amounted to 14.42%, with tier 1 capital ratio coming in at 10.65%. Based on the cost rationalisation programme in place, these having decreased by 6% in 2011, the Bank improved its overall cost efficiency. The cost to net income ratio amounted to 51.90%.

In spite of the difficult conditions, the Bank was successful in selling bonds in an amount of EUR 34 million in the domestic market and was able to raise a syndicated loan in an amount of EUR 65 million. In December it participated successfully in the European Central Bank's auction.

The Bank made a profit of EUR 34.7 million before impairment and provisioning. The challenging market conditions, apparent in the operations of the Bank's customers and subsequently in the deterioration of the credit portfolio quality, influenced the requirement for impairment and provisioning. The Bank covered the negative net financial result in the amount of EUR 14.9 million from other profit reserves. Compared with 2010, impairment costs and provisions were 73% higher.

This past year was a year that saw country and bank credit ratings decrease. Due to the economic conditions, the decreased country rating and the decrease in the rating of the banking system as a whole, the international rating agency Fitch Ratings also changed its rating for Banka Celje. In spite of the decreased credit rating we did not see any larger repayment requirements in relation to the loans raised abroad.

Of the more significant events from last year, the due diligence by a potential buyer in the second half of May warrants special men-tion (later the owners temporarily suspended the sale of the Bank) and the constitution of a new Supervisory Board.

Macroeconomic forecasts for 2012 are negative, which is why the Bank is not yet planning growth in total balance sheet business. The Bank will encourage increased investments in loans to non-banking clients and it will increasingly direct its efforts into attaining stable funding from the non-banking sector to decrease its dependence on international funding sources. Despite less than promising forecasts the Bank's objective is to improve key operational ratios from 2011.

Respected owners, business partners and co-workers, speaking on behalf of the Management Board, I would like to express my sin-cere appreciation of the trust you have shown us and thank you for the good cooperation.

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

A WORD BY THE PRESIDENT OF THE MANAGEMENT BOARD

5Banka Celje, d.d., and the Banka Celje Group

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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 Companies 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 Association 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 2011, the Supervisory Board was supported by the Audit Committee.

Operations of the Supervisory BoardIn May 2011 the term of office of the Supervisory Board elected in May 2007 expired. It held three regular meeting prior to the expiry of its term, where it dealt with 39 items on the agenda, also adopting the annual reports of Banka Celje, d.d., and the Banka Celje Group, d.d., for 2010 with the Auditor's reports and the Letter of the Auditor to the Bank's Management Board and the Supervisory Board. It also approved the materials for the calling of the 26th Annual Regular Meeting of Shareholders and submitted a list of candidates for membership in the Supervisory Board for the new term.

At the 26th Annual Regular Meeting of Shareholders held in May 2011 the new Supervisory Board of the Bank was elected, comprising: Jure Peljhan, M. Sc., as President, Zvonko Ivanušič, M. Sc., as Vice-President and with the following members: Uroš Čufer, Ph.D., Melita Malgaj, Tomaž Subotič, Ph.D., Bojan Šrot, and Zdenko Zanoški, M. Sc. The Supervisory Board members’ term of office expires on fourth anniversary of their election, being the General Meeting of Shareholders in 2015.

After election the Supervisory Board in its new make-up met at four regular meetings, where it dealt with 50 items on the agenda and held a correspondent session. At its meetings the Supervisory Board acquainted itself with the Bank's interim results on the basis of reports prepared by the Management Board. It addressed letters the Bank received from the Bank of Slovenia, acquainted itself with the Bank's measures implemented in relation to risk management and reviewed the Bank's policies and strategies on risk management and the risk profile for 2012. The Supervisory Board adopted the operational policies and the financial plan of the Bank for 2012 as well as its strategies and financial plans for the period from 2012 to 2016.

At its 6th regular meeting in 2012 the Supervisory Board also reviewed and approved the annual report of the Bank and the Group for 2011, the disclosures document for 2011, the report onthe operations of the Internal Audit Service for the period from July to December 2011, gave its consent to the auditor's report and confirmed the Bank's Statement on Compliance with the Corporate Governance Code. It also reviewed the proposal by the Audit Committee on the naming of the auditor for 2012. Additionally, it reviewed the entire documentation relating to the 27th Annual Regular Meeting of Shareholders and adopted the report to the Meeting of Shareholders on it own operations during 2011.

The President of the Supervisory Board was in constant contact with the Management Board, which allowed the Supervisory Board constantly supervise the operations of the Management Board. The Supervisory Board invited the authorised auditor to its regular meetings, thus making it possible for the auditor to present the findings related to audit of the Bank. Based on the decision of the Bank of Slovenia, stating that, according to its criteria, Banka Celje has the status of a bank with systemic significance, the Supervisory Board named a Remuneration Committee, which all systemically significant banks in the Republic of Slovenia must name in accordance with the regulations by the Bank of Slovenia. The Remuneration Committee comprises: Jure Peljhan, M.Sc., as President and members: Zvonko Ivanušič, M.Sc., and Tomaž Subotič, Ph.D. In January 2012 the Committee reviewed and confirmed the Remuneration Policies at Banka Celje, which were subsequently adopted by the Supervisory Board.

The Supervisory Board also ascertains the in 2011 its' members were not subject to conflict of interest and have performed their duties as Supervisory Board members autonomously and independently. The members attended the Supervisory Board meetings regularly, based on which it was able to meet in full composition, with all members actively participating in the creation of decisions by taking part in discussions related to individual items on the agenda. The members of the Supervisory Board attended a training course for supervisory board membersand acquainted themselves with the most recent views related to the role and the meaning of membership.

Based on the scope of activities conducted during 2011 and due to the fact that the Supervisory Board operated in full composition at its meetings, the President and the members of the Supervisory Board assess the operations of the Supervisory Board in 2011 to have been performed with all due diligence and care without any deviations from good practice.

Operations of the Audit CommitteeIn 2011 2 audit committees were in operation at the Bank.

The old committee comprised Borut Stanič as President, Tadej Tufek as Vice President and Marina Poboljšaj as an external independent member. The committee performed its duties untilits term of office expired in May 2011 (the term of office of Audit Committee members expires with the expiry of the term of office of the Supervisory Board). Until the expiry of its term the Audit Committee met at a single meeting, where it reviewed with the annual reports of the Bank and the Group together with the Letter from the Auditor to the Management Board. It was also presented with the document on the Bank's disclosures, prepared a proposal to the Supervisory Board on the naming of the auditor for the 2011 business year, it reviewed the report on its own operations during 2010 and approved the plan for its operations until the expiry of its term and the report on the operations of the Internal Audit in 2010 (semi-annual and annual) and the Report to the Bank of Slovenia on the execution of the ICAAP process.

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

6Banka Celje, d.d., and the Banka Celje Group

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The new committee was named at the 1st meeting of the newly appointed Supervisory Board in June 2011 and comprises: Uroš Čufer, Ph.D., as President, Tomaž Subotič as Vice-President and Zdenka Habe, authorised auditor, as the external independent member. In 2011 the new Committee met three times (in September, October and in December). It dealt with 28 items on the agenda. The materials it reviewed pertained to the adoption of the plan of operation of the Audit Committee in 2011 (since being named), to the presentation of the Rules of Procedure on the operations of the Audit Committee and the proposal on changes to the aforementioned document, to the report on the operations of the Internal Audit during the first half of 2011 and tothe plan of operations of the Internal Audit for the second half of 2011. The Committee was also informed of the three-year strategic plan of the Internal Audit (2012 – 2014) and the programme of the Internal Audit's operations for 2012, of the review by the Bank of Slovenia (ICAAP process); it reviewed the strategies and policies on risk management, the trading strategyand the Bank's risk profile – all for 2012, as well as the report on the implementation of both strategies during the first ten months of 2011. It also monitored the Bank's interim results, the Bank's exposure to credit risk (on a quarterly basis), its five-year development plan, its business policies and financial plan for 2012. It was presented with the Agreement on the Audit of the Bank's Operations in 2011, with the findings of the external auditor after the completion of the initial phase of the audit for 2011 and with the report on the operations of the Posest subsidiary.

The President of the Audit Committee kept the Supervisory Board informed of the committee's activities on a regular basis through reports at the Supervisory Board meetings. The Committee was successful in the execution of all planned assignments during the first months of its active operation all the while offering the Supervisory Board support with its advice, which is what it was established for.

Annual Report 2011In line with the legislative requirements the Bank prepared annual reports for the Bank and its Group. Both reports were merged into a single report in 2011 for the first time. The Group comprises the Bank and its subsidiary Posest, d.o.o., Celje, wherein the Bank holds a 100% interest. The subsidiary deals mainly with the realisation of bad debt, the marketing of own and the Bank’s real estate, own and other property engineering, property leasing, real estate and equipment appraisals and the supervision of purposeful use of loans granted to investors.

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

In 2011 the annual audit of the Bank’s and the Group's financial statements was conducted by the authorized auditors of PricewaterhouseCoopers, d.o.o., Ljubljana, which approved the Bank’s financial statements without reservation and confirmed the content as being in line with the Bank’s business report. It also issued a 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 BoardThe Supervisory Board reviewed the audited annual report for 2011 at its 6th Regular Meeting on April 18, 2012, giving its consent and approval without remark. The auditor's report, forming an integral part of the annual report, was approved.

The Supervisory Board also confirmed the proposal of the Management Board on covering for loss from other profit reserves in line with the legislation.

In addition to the aforementioned the Supervisory Board members ascertain that the macroeconomic conditions in 2011 were extremely unfavourable and that the Bank, in spite of a net loss from operations, ensured safe and stable as well as cost efficient operations during the past business year.

Jure Peljhan, M. Sc. President of the Supervisory Board

7Banka Celje, d.d., and the Banka Celje Group

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I BUSINESS REPORT

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I BUSINESS REPORT

1 HIGHLIGHTS- amounts in thousands of EUR

Bank GROUP

2011 2010 2009 2011 2010 2009

Balance Balance Balance Balance Balance Balance

1. Statement of financial position (on 31 December)

Total assets 2,490,913 2,598,080 2,559,083 2,492,765 2,599,217 2,560,233

Total deposits from the non-banking sector 1,485,029 1,507,808 1,453,439 1,485,025 1,507,805 1,453,436

- corporates 756,301 781,172 750,184 756,299 781,169 750,181

- retail 728,728 726,636 703,255 728,726 726,636 703,255

Total amount of loans to the non-banking sector 1,693,360 1,710,049 1,705,475 1,690,161 1,707,367 1,700,739

- corporates 1,355,464 1,378,530 1,399,426 1,352,198 1,375,778 1,394,652

- retail 337,896 331,519 306,049 337,963 331,589 306,087

Total equity 181,333 199,926 198,873 182,169 200,702 199,391

Impairment of financial assets at cost and provisions 152,460 111,297 88,879 152,515 111,318 88,892

Commitments and contingent liabilities 676,866 472,090 455,875 674,955 471,867 455,688

2. Income statement (from 1 January to 31 December)

net interest and similar income 48,927 55,067 53,888 48,895 55,008 53,505

net non-interest income 23,171 20,837 22,734 23,939 21,595 23,462

Labour costs, general and administrative costs 33,658 35,992 36,349 34,298 36,384 36,818

Depreciation and amortisation 3,764 3,757 3,876 3,791 3,771 3,914

Impairment and provisions 53,266 30,730 27,880 53,275 30,763 27,910

Profit before income tax (18,590) 5,425 8,517 (18,530) 5,685 8,325

Income tax expense (3,715) 925 1,746 (3,715) 926 1,773

3. number of employees (on 31 December) 530 538 571 534 542 576

4. ShaRES

number of shareholders 704 708 703 704 703 703

number of shares 508,629 508,629 508,629 508,629 508,629 508,629

nominal share value (in EUR) 33 33 33 33 33 33

Book value per share (in EUR) 357 393 391 357 393 391

5. Ratios in %

Capital

Capital 277,717 297,629 298,997 278,489 298,141 299,729

Capital adequacy ratio 14,42 15,19 15,35 14,46 15,21 15,36

asset quality

Impairment charges on financial assets, measured atamortised cost, and provisions for guarantees andcommitments / classified balance and off-balancesheet asset items 6,68 4,79 3,80 6,68 4,79 3,80

Profitability

Interest margin 1,95 2,14 2,17 1,95 2,13 2,15

Financial mediation margin 2,88 2,95 3,08 2,91 2,97 3,09

Return on assets - before tax -0,74 0,21 0,34 -0,74 0,22 0,33

Return on equity - before tax -9,49 2,70 4,34 -9,42 2,82 4,23

Return on equity - after tax -7,60 2,24 3,45 -7,53 2,36 3,33

Operational costs

Operational expenses / average assets 1,49 1,54 1,62 1,52 1,56 1,64

Liquidity

average liquid assets / average short-term depositsfrom non-banking sector 49,14 49,95 40,65 49,14 49,95 40,65

average liquid assets / average assets 19,06 20,38 19,25 19,06 20,38 19,25

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Banka Celje, d.d., and the Banka Celje Group Business report 2011

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On 31 December 2011 the Banka Celje Group comprised: Banka Celje, d.d. (the ''Bank''), as the parent bank and Posest, d.o.o., Celje (the ''Subsidiary''). The Bank owns 100% of the Subsidiary.

Head officeThe Bank's head office is located in Celje, at Vodnikova 2.

Subsidiary's head officeThe Posest, d.o.o., subsidiary's headquarters is situated in Celje at Vrunčeva 1.

Scope of operationsThe Bank is an independent financial institution, established as a joint-stock company to execute all banking and other financial services based on the Banking Act (Zban-1) and the Companies Act (ZGD-1). Based on the authorisations it holds, it is licensed to perform the following mutually recognised financial sevices in accordance with Article 10 of the Banking Act:- accepting deposits;- lending that also includes: consumer loans, mortgage loans,

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

- payment services and »e-money« issuing;- issuing and managing of other payment instruments (such as

travellers cheques and bank notes);- issuing guarantees and other commitments;- trading for own account or for the account of customers in:

foreign exchange, including currency exchange transactions, 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 leasing products, while also providing advisory services in the recovery of bad debt.

Subsidiary's scope of operationThe company is registered to perform a number of different types of activities, with its core business comprising:- repayment of 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;- supervision of the purposeful use of loans granted to investors.

HistoryThe beginnings of the Bank reach as far back as 1864, when Hranilnica mestne občine Celje was established. As the Kreditna banka Celje it joined Ljubljanska banka in 1971. The Bank was transformed into a joint-stock company in at the end of 1989 and remained part of the Ljubljanska banka system as a subsidiary bank until 1994.

Since 15 June 1994, the Bank has been operating independently under the name it holds today, namely Banka Celje, d.d. In line with the strategy of extending its operations outside the Celje region, the Bank acquired Banka Noricum, d.d., Ljubljana in 1996 and transformed it into its main branch in Ljubljana, named Glavna Podružnica Ljubljana. The Bank also acquired Hmezad banka, d.d., Žalec in 1998 and first transformed it into a branch, namely Podružnica Hmezad (Hmezad branch), later making it a business unit at the start of 2011. In 1999 the Bank signed a Strategic partnership and business cooperation agreement with Nova Ljubljanska banka, d.d., thus becoming an associated member of its banking group.

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

2 PRESENTATION

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In December of 2011 the Bank prepared a strategy of operation for the period from 2012 to 2016 as well as the business policies and the financial plan for 2012.

The strategy for the coming five-year period includes the decision that the Bank must remain a universal bank with emphasis on operations with low-risk customer segments, a subsequently more diversified portfolio of investments and funding sources and an offer of banking and financial services, which will, while using minimal capital, ensure good profitability and full work-time utilisation at the Bank. A stable strategic owner will play an important role in the further long-term sustainable development of the Bank, supporting its tradition and preserving its universal banking status through the offer of comprehensive banking services in domestic and international operations.

In setting strategic indicator goals the Bank took into consideration the risk profile, a decrease in dependency on international funding, a dividend policy, which should enable retained profits to become the main generator of capital and an increase in profitability based on increased cost efficiency and a more optimal structure of operations. A stable capital position remains one of the Bank’s key objectives in coming five-year period.

To attain its strategic goals, the Bank set key objectives for 2011, including the maintenance of the ratio of net loans to deposits from the non-banking sector, acquisition of other long-term funding sources by taking dedicated long-term loans from domestic and foreign financial institutions, active credit risk management aimed at decreasing receivables due, ensuring the adequate amount of capital and capital adequacy, further rationalisation of operations and the optimisation of the number and structure of employees.

The Bank will improve the organisation of operations in the coming years through internal optimisation measures and by streamlining business processes. At the same time it will actively adjust its product mix to market conditions, develop new, marketable services and introduce modern marketing approaches. In the area of promotion, it will focus on product advertising, while boosting the Banka Celje brand awareness at the same time.

Due to the unfavourable macroeconomic forecasts on economic growth, employment and funding the Bank does not plan to increase the volume of operations in 2012, it does however expect the volume to gradually start increasing in the coming years. In investment operations it plans for a moderate growth of lending to the non-banking sector. Special emphasis will be put on the quality of investments and on accelerated recovery to reduce the volume of outstanding claims. The objective of the Bank is to focus on clients while using less capital and offering services with lower capital requirements. The volume of securities investments will gradually be decreased. Investment activities in prime debt securities will be adjusted to suit the requirements of secondary liquidity reserves, whereby matured debt securities will be reinvested in government bonds with the best quality ratings.

With regard to risk the Bank will focus on adequately covering the risk portfolio with impairments and provisions, all the while decreasing the share of bad debt in gross loans. It will ensure an adequate liquidity position, with special attention given to upgrading the system of liquidity risk management in accordance with European guidelines. By regularly monitoring and with timely action, the Bank will maintain a stable capital position, whereby it will carefully monitor the new capital accord set to come into effect on 2013. It will also continue to develop the procedures of measuring and estimating capital requirements and internal capital, while using the findings in the decision-making process.

Due to the global financial and economic crisis the Banks saw a dramatic slide in business results and the coming years likely will not allow for the achievement of the level of return on capital as was the case prior to the crisis. In spite of this, the Bank has planned for a positive financial result in 2012, with special attention put on ensuring stable income. Net interest income is set to remain at the 2011 level, with non-interest income coming in lower, as the Bank does not expect major effects from the sale or valuation of financial instruments. Operating costs will continue to decrease with continued rationalisation of operations, while the volume of impairments and provisions will gradually begin to go down subject to effective risk management procedures.

In 2012 the Bank will continue to gradually reduce the number of employees, which it will attain by providing for flexibility in substituting for absence and during temporarily increased workload. New jobs will be minimal, which is why the process of employment will require a high level of selectivity.

To ensure adequate quality of IT support to operational processes, the Bank will, within the framework of its key strategic activities, provide for uniformity in IT support, upgrade the data warehouse, move to more modern software, update the content of application software, upgrade computer hardware by transitioning to a modern setup in the form of slice computing.

The Subsidiary prepared its plan of operations for 2012, wherein it wrote that it will continue to follow its core mission, being the performance of activities to satisfy the Bank’s needs. It plans to perform analyses of investment projects, perform appraisals and monitor the purposeful use of loans granted to investors. It also plans to sell housing in Velenje, continue to actively disinvest the housing facilities in the Ljubljanska building and increase the volume of real estate brokerage, while also devoting more attention the recovery of property of the Bank’s debtors.

3 STRATEGY

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2011:

- issue and successful sale of regular long-term bonds in the domestic market amounting to EUR 34 million in March 2011 and their listing on the Ljubljana Stock Exchange;

- due diligence of the Bank’s operations by a potential buyer in the second half of May 2011, with an ensuing temporary suspension of the sale by the owners;

- closure of the Prešernova branch on 16 May 2011 based on the analysis of the usage of modern banking services, which are increasingly replacing the traditional operations;

- at the 26th Regular Meeting of Shareholders on 24 May 2011 all of the proposed resolutions were adopted – new members of the Bank’s Supervisory Board having been named as well;

- signing of the agreement on a long-term syndicated loan in an amount of EUR 65 million with a consortium of 8 foreign banks on 8 June 2011;

- the first constitutive meeting of the new Supervisory Board on 8 June 2011;- dividend payment on 22 June 2011 in an amount of EUR 2.1 per ordinary and preference shares pursuant to the decision made at

the Meeting of Shareholders;- since 26 September 2011 clients have a new service at their disposal, the E-account, which allows for the exchange of invoices

between their issuers and recipients in electronic form;- rating received at the end of September 2011 (long-term BB, short-term B, individual C/D, support 3, outlook negative), which was

lowered due to the harsh economic conditions, the downgrade of the country rating and the downgrade of the banking system as a whole.

4 SIGNIFICANT EVENTS

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5.1 Economic environment

The international economic and financial crisis, persisting since 2008, have been joined by the debt crisis in 2011. Economic conditions were harsh in most developed countries, especially in the euro area, which was driven mainly by weak demand and uncertainty pertaining to the funding of peripheral eurozone countries. The final quarter of 2011 saw economic growth in the US strengthen, while contracting in some of the euro area countries, with 2012 forecasts even lower still. 2011 was marked by rating downgrades of European countries and banks, including Slovenia and Slovene banks, which results in more expensive borrowing. Rating agencies downgraded Slovenia and its banks on account of political instability within the country and due to the delay in the increasing of capital at the banks.

According to the latest data economic growth in Slovenia decreased in real terms by 0.2% in 2011. Quarter-on-quarter growth was negative for the entire year, with conditions deteriorating in the second half of the year in particular, due an acceleration in the decline of domestic consumption and the simultaneous deterioration of conditions in the international markets. The continuing decrease in the volume of investments in fixes assets, with total volume of investments having decreased since the start of the economic crisis in 2008 by approximately 40%. Economic growth was also negatively impacted by the restriction in government consumption, which was especially evident in the final quarter of the last year. With employment dropping further and due to a real decrease in salaries, end-consumption by households fell also. In spite of an increase in exports these were not sufficient to compensate for the drop in domestic spending. Slovenia exported 12.2% more goods in 2011 than in 2010, with import coming in higher by 11.1%. The import to export ratio thus reached 92.4%. Industrial production increased by 2.5% in 2011.

The registered number of unemployed persons exhibits a seasonal increase in December 2011, though less than in previous years and the end-of-year figure reached 112,754 persons. Loss of fixed term employment was the most frequent reason for registering as unemployed. Among the persons no longer registered as unemployed approximately half were employed again, with the other half no longer registered due to increased retirement, especially by persons registered at the Employment Service of Slovenia in December 2010 with the intention to wait so that they could retire in accordance with the more favourable stipulations of the old pension legislation. The registered unemployment rate in 2011 amounted to 12.1% according to December data, having stood at 11.8% in December 2010. Despite the increase the trend in the job market in 2011 was more favourable as compared with the past crisis ridden years. Especially the large number of new jobs was encouraging.

The public finance deficit reached 4.2% of gross domestic product in 2011 according to November data, thus coming in lower than planned by the supplementary budget. State budget revenues were 4.1% higher year-on-year, while expenditure increased by 0.7%, wherein pension payments, transfers to the unemployed and interest payments increasing most. Revenue from the European Union budget was highest ever in 2011. For the purposes of reducing the deficit in 2012 to 3.6% of the gross domestic product, a new act on the further intervention measures was adopted in December 2011, followed in January 2012 by the measure of suspending the execution of the budget until a supplementary budget is adopted, which is required due to the deterioration of economic conditions.

In 2011 consumer prices increased in Slovenia by 2.0%, where goods prices increased by 2.7% and prices of services increased by 0.4%. The annual inflation rate, measured by the harmonised index of consumer prices, reached 2.7% in the European Monetary Union member states, whereas it came in at 2.1% in Slovenia. Energy and food prices contributed most to the inflation rate due to higher commodity prices in the world markets in early 2011. In spite of increases in some sectors with limited competition, inflation is expected to decrease in 2012.

5.2 Banking environment

The Slovene banking system maintained adequate liquidity in 2011, also with the assistance of increased use of funding from three-year refinancing auctions with the European Central Bank in December.

The worsening of economic conditions was very much reflected in the balance sheets of Slovene banks in 2011. These reduced the volume of lending to the non-banking sector, with factors having had a negative impact on credit activity for quite some time including the decreased credit ratings and high borrowing costs, deteriorating macroeconomic conditions and the position of some industries, high indebtedness and poor company solvency. Reduced lending also meant that the total assets of the Slovene banking system decreased by 3.0% in 2011.

The deterioration of economic conditions also affected the increased need to make additional impairments and provisions, which led the banking system to a loss after tax.

Credit risk, measured by the share of receivables in banks classified as being over 90 days overdue, remained high. Financing terms at banks abroad deteriorated both in size and maturity, with the banks adjusting to this by deleveraging at foreign banks and borrowing from the Eurosystem. This funding source will remain reliable and relatively favourable in 2012 as well.

5 ECONOMIC AND BANKING ENVIRONMENT

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Report on the operations in 2011, including assuming and managing banking risk is based on the Bank's operations, being the do-minant entity within the Group. Based on permission issued by the Bank of Slovenia the subsidiary company is not included in the consolidated supervision in accordance with the decision by the Bank of Slovenia on Supervision of Banks and Savings Banks on a Consolidated Basis, as from the aspect of the aim of supervision the Subsidiary does not represent any significant effect.

6.1 Financial results

6.1.1 The Bank’s financial result

Due to the global financial and economic crisis resulting in the subsequently greater requirement for additional impairments and provisioning, Slovene banks saw their performance deteriorate markedly in 2011.

The Bank was faced with similar problems afflicting the entire Slovene banking system. In 2011 it recorded a profit before impairments and provisions in the amount of EUR 34,676 thousand. After decreases by the impairments and provisions made, however, the result was a pre-tax loss in the amount of EUR 18,590 thousand and a net loss of EUR 14,875 thousand. Data shows that the decrease in gross profit mainly resulted from the requirement for additional impairments and provisions.

Analysis of the Bank’s net income and expenses in 2011:

Net interest came in at EUR 48,927 thousand, being 11% or EUR 6,140 thousand less than in 2010. Compared with 2010, interest income was 3% higher and interest expenses increased by 16%. The average lending rate rose by 0.13 percentage points, while the average deposit rate increased by 0.37 percentage points. The cumulative interest margin amounted to 1.95% for the year, having come in at 2.14% in 2010.

Dividend income reached EUR 876 thousand, increasing in comparison with the 2010 figure by 20% or by EUR 148 thousand. The Bank made 52% of all dividend income from investments in securities held for trading, with the other 48% coming from dividends on securities available for sale.

Net fee and commission income from banking services rendered amounted to EUR 16,386 thousand in 2011. The increase of EUR 125 thousand as compared with 2010 was mainly a consequence of higher net fees and commissions from card operations. The services accounting for the majority of the Bank’s net non-interest income from fees and commissions in 2011 have included payments and card operations, as has been the case for the past few years now.

Financial transactions resulted in a profit totalling EUR 6,253 thousand. Compared with the results from 2010 the profit increased by 45% or by EUR 1,946 thousand. The Bank generated most of the positive effects from the valuation of bonds issued and the related interest rate swaps, amounting in total to EUR 5,092 thousand. Positive effects also came from the sale of mutual funds, resulting in a profit of EUR 1,017 thousand.

6 REPORT ON THE OPERATIONS IN 2011

- amounts in thousands of EUR

NEt iNcomE aNd ExpENsEs Realization Realization change index

2011 2010

1 2 3=1-2 4=1:2

Net interest and similar income 48,927 55,067 (6,140) 89

dividend income 876 728 148 120

Net fee and commission income 16,386 16,261 125 101

Net gains from financial operations 6,253 4,307 1,946 145

Net other operating loss (344) (459) 115 75

administrative expenses (33,658) (35,992) 2,334 94

depreciation and amortisation (3,764) (3,757) (7) 100

impairment charges and provisions (53,266) (30,730) (22,536) 173

profit / loss from operations (18,590) 5,425 (24,015) (343)

income tax expense 3,715 (925) 4,640 (402)

Net profit / loss (14,875) 4,500 (19,375) (331)

other comprehensive income (2,687) (689) (1,998) 390

comprehensive income after tax (17,562) 3,811 (21,373) (461)

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The gross loss that the Group recorded was EUR 60 thousand lower than the gross loss recorded by the Bank, with the Group’s net loss lower by the same amount. The Group’s income statement differs from the Bank’s income statement under other net operating profit, mainly due to income from real estate sales. The Subsidiary sold part of the flats and parking spaces and a portion of the merchandise inventory.

- amounts in thousands of EUR

NEt iNcomE aNd ExpENsEs Realization Realization change index

2011 2010

1 2 3=1-2 4=1:2

Net interest and similar income 48,895 55,008 (6,113) 89

dividend income 876 728 148 120

Net fee and commission income 16,385 16,260 125 101

Net gains from financial operations 6,253 4,313 1,940 145

Net other operating loss 425 294 131 145

administrative expenses (34,298) (36,384) 2,086 94

depreciation and amortisation (3,791) (3,771) (20) 101

impairment charges and provisions (53,275) (30,763) (22,512) 173

profit / loss from operations (18,530) 5,685 (24,215) (326)

income tax expense 3,715 (926) 4,641 (401)

Net profit / loss (14,815) 4,759 (19,574) (311)

other comprehensive income (2,687) (689) (1,998) 390

comprehensive income after tax (17,502) 4,070 (21,572) (430)

Net other operating loss reached EUR 344 thousand, while amounting to EUR 459 thousand in 2010. The loss in 2011, for the most part, came from the implementation of tax on total assets, as the tax liability amounted to EUR 291 thousand. In 2010 the loss mainly came from the payment of refunds for withdrawals from ATMs of other banks in the Republic of Slovenia, totalling EUR 298 thousand.

Administrative expenses accounted for EUR 33,658 thousand in 2011, thus decreasing by EUR 2,334 thousand as compared with 2010. Labour costs amounted to EUR 18,752 thousand, being EUR 1,801 thousand lower than in 2010 and coming in EUR 957 thousand lower than the estimated figure for 2011. The decrease in labour costs is mainly a result of a decreased number of employees, lower severance payments from terminations for business reasons and a lower holiday bonus. Costs of materials and services at EUR 14,906 thousand were EUR 533 thousand less than in 2010, with IT, maintenance and advertising costs decreasing most.

Depreciation and amortization amounted to EUR 3,764 thousand, holding steady at the 2010 levels.

The Bank’s cost efficiency, measured with the share of operating costs in the Bank's assets, improved from 1.54% to 1.49% in 2011. The cost/income ratio (the CIR) came in at 51.90%, also improving on the 2010 figure of 52.37%.

Impairments and provisions were made in a total amount of EUR 53,266 thousand, being 73% higher than in 2010, when they amo-unted to EUR 30,730 thousand. In 2011 the Bank made a total of EUR 39,574 thousand of credit risk provisions, impaired EUR 13,510 thousand of financial assets, provisioned for the denationalisation procedure in an amount of EUR 108 thousand and made provisions for employees in an amount of EUR 74 thousand.

6.1.2 The Group’s financial result

Analysis of the Group’s net income and expenses in 2011:

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6.2 Financial position

6.2.1 Financial position of the Bank

End 2011 the Bank’s total assets amounted to EUR 2,490,913 thousand. As compared to 2010 the figure decreased by EUR 107,167 thousand or by 4%.

The Bank’s assets according to individual items:

The Bank’s most liquid assets increased by 31% or EUR 39,839 thousand in 2011. Cash fell by 4% to amount to EUR 10,241 thousand, while balances with the Central Bank increased from EUR 117,633 thousand to EUR 157,923 thousand and include obligatory deposits and overnight deposits as well as other short-term deposits with the Central Bank.

Investments in financial assets decreased by 17% or by EUR 106,350 in 2011 in line with business objectives, thus amounting to EUR 533,152 thousand end 2011. Their share in the Bank’s assets decreased from 25% to 22%. According to value the largest portion of the Bank’s portfolio consists of investments in financial assets held to maturity.

Loans and advances to banks decreased by 36% amounting to EUR 55,054 thousand end 2011. The decrease of EUR 30,854 thousand mainly came from short-term deposits with domestic banks with maturities up to 30 days.

Although loans and advances to customers dropped by 1% or EUR 16,689 thousand in 2011, reaching EUR 1,693,360 thousand, these still represent the strongest category in the Bank’s investment operations with a 68% share. The gross value of loans to customers came in at EUR 1,826,713 thousand, with impairments amounting to EUR 133,353 thousand having increased by EUR 36,402 thousand in a year. Loans to corporates, comprising loans to companies and private entrepreneurs, fell by 2%, while retail loans were up 2%. Across the board lender categories exhibited an increase in long-term loans.

Investments in property and equipment and intangible assets amounted to EUR 22,723 thousand, having decreased by 8% in 2011 due to amortisation in spite of new acquisitions and investments, primarily in computer equipment.

Investments in subsidiaries, associates and joint ventures include an investment in the Posest, d.o.o., company, 100-percent owned by the Bank. In 2011 the amount of the investment did not change.

Other assets include receivables from the valuation of derivative financial instruments in the amount of EUR 4,838 thousand, receivables for the payment of current advances and deferred taxes in the amount of EUR 9,208 thousand and other assets totalling EUR 2,158 thousand.

- amounts in thousands of EUR

Bank’s assEts 2011 str. 2010 str. Change Index

1 2 3 4 5=1-3 6=1:3

Cash and balances with Central Bank 168,163 7 128,324 5 39,839 131

Financial assets 533,152 22 639,502 25 (106,350) 83

Loans and advances 1,748,414 70 1,795,957 69 (47,543) 97

- loans and advances to banks 55,054 2 85,908 3 (30,854) 64

- loans and advances to customers 1,693,360 68 1,710,049 66 (16,689) 99

Fixed assets 22,723 1 24,827 1 (2,104) 92

Investments in subsidiaries, associates and joint ventures 2,257 - 2,257 - - 100

Other assets 16,204 - 7,213 - 8,991 225

total 2,490,913 100 2,598,080 100 (107,167) 96

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

Short-term financial liabilities from deposits from the European Central Bank increased by 29% to EUR 90,082 thousand. Of this, EUR 10,060 thousand pertains to a short-term loan, taken in August, while EUR 80,022 thousand are long-term liabilities maturing in three years.

Financial liabilities at fair value through profit or loss recorded EUR 36,146 thousand end 2011, thus falling by 10% due to interest payments and negative valuation. This item includes subordinated bonds issued in 2007 and maturing in 2017 as well as certificates of deposit maturing in 2012, which the Bank includes in the capital requirement and the capital adequacy ratio calculations in the amounts allowed.

Financial liabilities at amortized cost decreased by 3% compared to 2010 and their amount of EUR 2,159,994 thousand represents 87% of the Bank’s total liabilities.

Deposits and borrowings from banks amounted to EUR 417,028 thousand, which represents EUR 56,742 thousand less than the 2010 figure. Even though their share in the structure of the Bank’s liabilities has gradually been decreasing, it remains the second most important funding category with a 17% share. In 2011 access to long-term funding from abroad remained limited due to the euro debt crisis, in spite of this however, the Bank was able to acquire some new funding, while regularly repaying liabilities due. Due to a decrease in its rating the Bank also prepaid part of its loans.

Due to customers decreased by 2% or by EUR 22,779 thousand, amounting to EUR 1,485,029 thousand end 2011. Retail deposits increased by EUR 2,092 thousand, while deposits from corporates dropped by EUR 24,871 thousand. The ratio of net loans and deposits from the nonbanking sector was 1.15, which was favourable when compared with the average of the banking system.

Liabilities from debt securities in issue amounted to EUR 185,520 thousand end 2011 and include liabilities from issued plain vanilla bonds and certificates of deposit. In 2011 liabilities pertaining to this item increased by 16% or by EUR 25,084 thousand due the 15th bonds issue.

Subordinated liabilities decreased by 15% or by EUR 12,941 thousand due to the maturity of the eighth subordinated bonds issue. The Group did not issue any new subordinated bonds in 2011.

Financial liabilities associated with transferred assets, include interbank short-term repo transactions. At the end of 2010 liabilities from interbank repo transactions amounted to EUR 30,993 thousand, the Bank however did not enter into any interbank repo transactions end 2011.

End 2011 the Group made provisions amounting to a total of EUR 12,598 thousand. Compared with 2010 provisioning went down by 5% or EUR 639 thousand. Provisions for denationalization proceedings decreased by EUR 1,059 thousand amounting to EUR 7,110 thousand at the end of the year, due to the fact that the Bank used part of the provisions formed to pay compensation forthe use of the office building, which is the subject of the proceedings. Provisions for liabilities toward employees were made at the end of 2011 in a total amount of EUR 2,171 thousand while the remaining provisions pertained to commitments and contingent liabilities in an amount of EUR 3,042 thousand and the provisions from the National Housing Savings Scheme in the amount of EUR 275 thousand.

- amounts in thousands of EUR

Bank’s liaBilitiEs 2011 str. 2010 str. Change index

1 2 3 4 5=1-3 6=1:3

Deposits from Central Bank 90,082 4 70,013 3 20,069 129

Financial liabilities designated at fair value through profit or loss 36,146 1 40,050 2 (3,904) 90

Financial liabilities at amortised cost 2,159,994 87 2,227,372 85 (67,378) 97

- deposits and borrowings from banks 417,028 17 473,770 18 (56,742) 88

- due to customers 1,485,029 60 1,507,808 58 (22,779) 98

- debt securities in issue 185,520 7 160,436 6 25,084 116

- subordinated liabilities 72,417 3 85,358 3 (12,941) 85

Financial liabilities associated to transferred assets - - 30,993 1 (30,993) -

Provisions 12,598 1 13,237 1 (639) 95

Other liabilties 10,760 - 16,489 - (5,729) 65

total liabilities 2,309,580 93 2,398,154 92 (88,574) 96

total equity 181,333 7 199,926 8 (18,593) 91

total liabilities and equity 2,490,913 100 2,598,080 100 (107,167) 96

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Other liabilities include financial liabilities held for trading, liabilities from hedging derivative instruments and other liabilities. Compared with 2010 this item decreased by 35%, while in value liabilities from the valuation of derivatives decreased the most, namely by EUR 3,847 thousand.

The Bank’s capital decreased by EUR 18,593 thousand or 9% in 2011 and stood at EUR 181,333 thousand at the end of the year. Net loss achieved during the 2011 business year impacted the decrease the most.

6.2.2 Financial position of the Group

The Group’s assets according to individual items:

The Group’s total assets came in EUR 1,852 thousand higher than the total assets of the Bank, comparing the figure with 2010 when total assets were EUR 106,452 thousand higher.

Looking at Group assets, the higher total assets pertain mainly to the inventory and investment property of the Subsidiary. Investment property includes the net carrying value of land and buildings purchased for the purpose of an operating lease.

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

The liabilities of the Group are higher than the liabilities of the Bank mainly in the items of capital and other liabilities, wherein the majority pertains to the liability of the Subsidiary to the contractors.

- amounts in thousands of EUR

GRoUp’s assEts 2011 str. 2010 str. Change Index

1 2 3 4 5=1-3 6=1:3

Cash and balances with Central Bank 168,163 7 128,324 5 39,839 131

Financial assets 533,152 22 639,502 25 (106,350) 83

Loans and advances 1,745,215 70 1,793,275 69 (48,060) 97

- loans and advances to banks 55,054 2 85,908 3 (30,854) 64

- loans and advances to customers 1,690,161 68 1,707,367 66 (17,206) 99

Fixed assets 23,677 1 24,914 1 (1,237) 95

Investments in subsidiaries, associates and jointventures 3,270 - 1,807 - 1,463 181

total 19,288 - 11,395 - 7,893 169

skupaj 2,492,765 100 2,599,217 100 (106,452) 96

- amounts in thousands of EUR

GRoUp’s liabilitiEs 2011 str. 2010 str. Change index

1 2 3 4 5=1-3 6=1:3

Deposits from Central bank 90,082 4 70,013 3 20,069 129

Financial liabilities designated at fair value through profit or loss 36,146 1 40,050 2 (3,904) 90

Financial liabilities at amortised cost 2,159,991 87 2,227,369 85 (67,378) 97

- deposits and borrowings from banks 417,029 17 473,770 18 (56,741) 88

- due to customers 1,485,025 60 1,507,805 58 (22,780) 98

- debt securities in issue 185,520 7 160,436 6 25,084 116

- subordinated liabilities 72,417 3 85,358 3 (12,941) 85

Financial liabilities associated to transferred assets - - 30,993 1 (30,993) -

provisions 12,630 1 13,268 1 (638) 95

other liabilties 11,747 - 16,822 - (5,075) 70

total liabilities 2,310,596 93 2,398,515 92 (87,919) 96

total equity 182,169 7 200,702 8 (18,533) 91

total liabilities and equity 2,492,765 100 2,599,217 100 (106,452) 96

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6.3 Operations according to key areas

6.3.1 Corporate banking

Corporate banking, pertaining to businesses and individual entrepreneurs, represent a key area for the Bank, as it is the strongest segment of its operations.

The Group’s credit operations with corporates came in EUR 3,266 thousand lower than the Bank’s credit operations due to the elimination of mutual claims, while deposit operations with corporates were only lower by EUR 4 thousand.

Turning to the Bank’s credit operations the gross value of loans to corporates amounted to EUR 1,479,382 thousand, while impairments totalled EUR 123,918 thousand, having increased by EUR 35,411 thousand in a year. The net value of loans to corporates decreased by 2%, representing a decrease of EUR 23,066 thousand. With the net amount of EUR 1,355,464 thousand the share of loans to corporates increased within the structure of the assets from 53% to 54%.

In lending to corporates the Bank devoted special attention to the selection of borrowers, actively focusing on commercial and additional after-sales activities. Successful cooperation with SID banka continued, allowing the Bank to attain guarantees for certain projects as well as favourable long-term funding dedicated for lending activities.

As the procedures pertaining to compulsory settlement, bankruptcy and insolvency continued in the corporate sector, which holds a large share of outstanding liabilities toward the Bank, this meant that the Bank put a lot of effort into recovery activities. It carefully collected information on the business environment, monitored enforcement procedures and prepared proposals for the rehabilitation of companies.

The Subsidiary successfully continued the business cooperation it started in 2005 with a lessee, who is regularly paying off two financial leasings for the manufacturing facility in Prebold.

Deposit operations have seen deposits from the non-banking sector decrease by 3% or by EUR 24,871 thousand, thus amoun-ting to EUR 756,301 thousand end 2011. Deposits from the Cen-tral Bank remained at the level from 2010, representing 26% of all corporate deposits.

Loans to corporates

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

31 December 2009

in t

ho

usa

nd

s o

f E

UR

Deposits from corporates

31 December 2010

31 December 2011

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6.3.2 Retail operations

Alternative savings instruments are also something the Bank provides its savers with. It has been selling investment products and insurance services for a number of years now, thus complementing the traditional banking and financial transactions on offer. In relation to 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. Within the framework of insurance services it offers its clients a number of different insurance types, with insurance in the event of unemployment requiring special mention due to increased volumes, as well as tourist insurance and additional payment card holder insurance. The Bank holds a licence for insurance brokerage and cooperates with insurance companies NLB Vita, Zavarovalnica Maribor, Zavarovalnica Triglav and Adriatic Slovenica.

The Bank also puts a lot of emphasis on retail operations, having put in place a broadly diversified retail network, which it uses to bring its services to as many clients as possible.

The retail credit operations of the Group were larger than the credit operation of the Bank by EUR 67 thousand, while retail deposit operations of the Group did not differ from the operations of the Bank.

Retail loans increased by 2% in 2011 reaching EUR 337,896 thousand. The gross value of loans amounted to EUR 347,244 thousand, with impairments amounting to EUR 9,348 thousand, having increased during the year by EUR 904 thousand.

To promote retail loans, the Bank introduced new form of housing loans with a combined interest rate, it also added to its offer of NATUR housing and mobile loans. During the summer months it introduced special offer consumer loans dedicated to storm damage repair and special deals for university students. Throughout the year special retail loan offers were available with favourable interest rates.

Retail deposits increased in value by EUR 2,092 thousand in 2011, representing 29% of the Bank’s total liabilities. They are extremely important for the Bank’s stability, which is why it actively adapts its deposit services to cater for the needs and wishes of its clients.

The Bank provided its clients with numerous savings offers, based on which it attained a substantial number of new clients. It actively marketed the ''Prava odločitev'' (''Right Choice'') package, which in addition to free account management for the first year of operation also includes other more favourable or free services. The ''Plus paket'' (''Plus Package'') special offer enabled new clients to perform basic banking services at markedly lower costs. To further increase the amount of deposits and to sell other services, the Bank introduced the ''Novoletni paket'' (''New Year's Package') at the end of the year, while offering its clients favourable deposits of different maturities during the year.

Retail Loans

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

in t

ho

usa

nd

s o

f E

UR

Retail deposits

31 December 2009

31 December 2010

31 December 2011

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In addition to the classical counters, the Bank has been offering its clients more modern services that it continuously develops and has been upgrading for a number of years. These comprise non-cash and self-service operations, phone banking, bank letters and the ever more popular E-banking.

A modern E-banking branch has been available to clients since July 2000 and it enables quick, safe and simple performance of most of the services offered by the Bank. E-banking is constantly adapting to new modern technologies. Safety has been provided for with the use of the most modern internet technologies. In 2011 the Bank enabled users of the NLB Klik to perform electronic banking using mobile phones and tablet PCs, while all clients of the Bank have been enabled to use E-accounts from September onward.

In non-cash operations the Bank offers a wide spectrum of card services. It issues payment cards of the Activa Maestro, Activa / Mastercard and Activa / Visa brands, distinguished by recognition value and applicability in Slovenia and abroad. These may be used at numerous points of sale equipped with POS terminals, banks, post office counters, ATMs and over the internet

With regard to self-service operations clients had at their disposal 92 ATMs at the end of 2011, connected into the BA network across Slovenia. Constant monitoring of the number of transactions at ATMs allowed the Bank to correspondingly relocate existing ATMs to locations more accessible to clients, as well as enhance the safety of ATM transactions by upgrading the system of technical security and video surveillance as well as mechanical protection.

6.3.3 Banking operations

Operations with other banks are performed by the Bank, with the Subsidiary only dealing with the parent bank.

In 2011 the Bank was efficient in liquidity management and it adopted measures leading to the strengthening of the operational as well as structural liquidity. The Bank’s liquidity position in 2011 was good, with the trend continuing in 2012 as well. It maintain surplus operational short-term liquidity, while placing liquidity surpluses in the inter-bank market and the European Central Bank in the form of overnight deposits or weekly liquidity placements at bided interest rate, which should not be higher than the reference interest rate.

The Bank obtained liquid assets for banking operations from the European Central Bank on the basis of long-term funding operations, from the SID banka, the EIB and from the inter-bank market. It holds sufficient eligible financial assets to acquire funds from the European Central Bank or to enter into inter-bank repo transactions.

Liabilities to commercial banks decreased by 12% in 2011. The deepening of the euro debt crisis and the subsequent credit-rating downgrades of European countries and financial institutions resulted in limited access to long-term foreign funding and higher borrowing costs. In spite of this the Bank signed an agreement on a syndicated loan in the amount of EUR 65 million in June, it took new and renewed some existing bilateral loans and drew funds from the European Central Bank, dedicated to funding the long-term development of the economy and the public sector. New dedicated long-term funding sources were also attained from SID banka. At the same time the Bank was also regularly repaying instalments and the principal due and prepaid part of the loans to foreign banks in an amount of EUR 49 million on account of the credit rating downgrade, even though it holds EUR 133 million worth of loan agreements with a compulsory prepayment option within 30 days of notification that the credit rating dropped below BBB-.

Due to the reluctance for interbank lending, especially in the longer term, the Governing Council of the European Central Bank adopted additional measures for the stabilisation of the situation in the banking system and offered the banks the option of 36-month financing. The first operation was carried out on 21 December and it replaced the 13-month facility. In this operation the Bank replaced the EUR 40 million 13-month loan taken in October with a three-year facility, while also taken another three year EUR 40 million loan. Additionally, the Bank raised a short-term loan with the European Central Bank in August in an amount of EUR 10 million.

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6.3.4 Financial instrument operations

The Bank conducts transactions with securities and derivative financial instruments, while the Subsidiary does not.

The total volume of investments in securities fell in comparison with 2010 by 17%. Investments in all categories of financial assets decreased, with investments in financial assets held-to-maturity decreasing in value the most.

Held for trading financial assets include investments in equity and debt securities, which the Bank holds in its portfolio and the valuation of derivate financial instruments. In line with the busi-ness policies of the Bank 2011 saw investments in trading secu-rities decrease by 19%, with investments in shares decreasing as well as forwards agreements on certificates of deposit.

Financial assets designated at fair value through profit or loss include structured bonds and bonds hedged with interest rate swaps. This item decreased by 73%, being EUR 21,622 thousand in value, mainly as a consequence of bonds maturing.

Available for sale financial assets represent part of the secondary liquidity reserve and are used for the management of currency, exchange and interest rate risk. In 2011 investments in this cate-gory of financial assets fell by 14%, or by EUR 32,828 thousand. In-vestments in equity securities decreased due to impairments, the sale of an equity investment and the sale of mutual fund units. At the same time the Bank decided to buy shares of two companies in 2011, its stake in the companies’ capital is small. Investments in debt securities decreased due to the lessening of reinvestment from bonds due and sold.

The Bank classifies fixed income securities as held to maturity investments, which it provisionally expects to hold until final ma-turity. In 2011 the Bank reduced this investment category, as it did not reinvest all of the matured securities. The Bank predomi-nantly bought government bonds and treasury bills with a gover-nment guarantee as well as prime-rated bank bonds.

The Bank does not state any assets pledged in 2011, whereas the figure amounted to EUR 32,390 thousand in 2010. The Bank recorded pledged securities in its books, however in a separate item, with related repurchase obligations shown under financial liabilities associated with transferred assets.

Liabilities from securities in issue increased by a total of 3% in 2011.

Financial liabilities at fair value through profit or loss decreased by 10% in 2011 and include subordinated bonds at a nominal of EUR 37 million, issued in 2007 and maturing in 2017 as well as certificates of deposit at a nominal amount of EUR 1.5 million, maturing in 2012. The Bank has hedged these securities with in-terest derivatives.

Debt securities in issue increase by 16% and include regular bon-ds and certificates of deposit. In March the Bank issued a new series of long-term regular bonds in the amount of EUR 34.15 million with the intention of increasing its long-term assets, thus providing for an adequate structure of funding sources and sub-stituting matured subordinated BCE8 series bonds. The volume of certificates of deposit decreased due to larger maturities in 2011, even though the Bank regularly issued new series of long- and short-term certificates.

Loans and advances to banksand ECB

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

in t

ho

usa

nd

s o

f E

UR

Deposits and borrowings frombanks and ECB

31 December 2009

31 December 2010

31 December 2011

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Subordinated liabilities dropped by 15% in 2011 due to the maturing eighth series in the amount of EUR 12.5 million. In 2011 the Bank did not issue any new subordinated bonds.

In 2011 the Bank, in line with its business objectives, carried out foreign currency forward transactions and share futures transactions, dealt in certificates of deposit and bonds. To hedge its interest rate positions it entered into interest rate swap transactions. The total volume of derivative transactions at the end of 2011 was 1% higher than in 2010. It mainly increased on the basis of interest rate swaps.

in t

ho

usa

nd

s o

f E

UR

Securities investments

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Securities issued

6.3.5 Risk bearing commitments and contingent liabilities

Risk bearing commitments and contingent liabilities increased by 8% in 2011.

Commitments and contingent liabilities

220,000

230,000

240,000

250,000

260,000

270,000

280,000

Risk bearing commitments and contingent liabilities saw the volume of guarantees issued increase by 20% or by EUR 16,351 thousand. According to maturity the volume of shorter term guarantees grew more.

in t

ho

usa

nd

s o

f E

UR

31 December 2009

31 December 2010

31 December 2011

31 December 2009

31 December 2010

31 December 2011

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Assumed liabilities, having increased by 3% in 2011, include li-abilities from the undrawn stand-by credit lines and overdraft accounts, liabilities from approved and undrawn loans, liabilities from spot transactions, liabilities from issued letters of intent and liabilities from short-term loans to cover for letters of credit. Un-drawn loans to corporates increased the most in value for the year.

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

The total volume of risk bearing commitments and contingent liabilities of the Group was EUR 1,911 thousand less in 2011 as compared with the Bank due to an undrawn credit line granted to the Subsidiary.

6.3.6 Payment operations

The Bank performs international and domestic payment opera-tions, while the Subsidiary does not.

In 2011 the Bank put a lot of emphasis on activities related to SEPA payments (Single Euro Payments Area), namely the unified area for euro payments which includes payment instruments most frequently used in Europe, being credit payments, direct debits, payment cards and euro cash. The migration of credit payments to SEPA compliant was successfully concluded for most of the aforementioned payments. The processing of special payment orders and direct approvals through the processing centre was eliminated, with the special payment order and the BN02 order being entirely replaced by the new UPN payment order. In 2011 the Bank also prepared to migrate direct debits. For the purposes of migrating the direct debit authorisations, all mandatory testingwas completed.

On 1 June 2011 the Bank became part of the E-account system through the central Bankart processor, with limited functionality at first and with full functionality provided to its clients in Sep-tember. All integration testing as well as performance testing was completed successfully. Based on the prepared detailed report the E-account was introduced as a new service offered by the Bank, which is already working on the project of issuing own E-accounts.

In 2011 the Bank executed 8.6 million payment transactions total-ling EUR 58,841 million. The majority is represented by domestic payments, with Germany still standing out in international pay-ments according to number of orders and value with a 33% share of the total international payments flow.

End 2011 the Bank maintained 6,506 corporate transaction ac-counts and 5,793 transaction accounts belonging to private en-trepreneurs and to private undertakings, which represents a 2% increase as compared with the end of 2010. A total of 349 cor-porate accounts amounting to EUR 97.4 million as well as 396 private entrepreneur and private undertaking accounts in the amount of EUR 16.4 million were frozen. The Bank was also au-thorised to execute final court decisions in a total amount of EUR 48.5 million.

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The share capital of the Bank in the Group comprises 508,629 no par value shares after the increase of capital from approved capital completed in 2008. Changes in 2011 pertain to the net loss for the year, the fluctuation of the revaluation reserve and the distribution of profit for 2010. The revaluation reserve decreased by EUR 2,687 thousand to EUR 1,284 thousand in 2011 due to the valuation of most available for sale securities to a lower fair value. After the Meeting of Shareholders in May, the Bank paid dividends for 2010 total-ling EUR 1,068 thousand, with the remaining distributable profit for 2010 having been allocated to profit reserves. Unpaid dividends from previous years were also transferred to profit reserves in a total of EUR 37 thousand. 2011 saw a net loss in an amount of EUR 14,875 thousand, reducing the Bank’s capital.

The Group equity end 2011 amounted to EUR 182,169 thousand exceeding the Bank equity by EUR 836 thousand, with EUR 162 thou-sand of the figure pertaining to the share premium, EUR 614 thousand pertaining to the revaluation reserve and net profit representing EUR 60 thousand.

The book value of the Bank’s share amounted to EUR 357 as at 31 December 2011 and was the same for regular and preference shares. More detailed information on the structure of share capital and the rights and obligations based on the shares of an individual class are shown in Chapter I. 10.2.9 of this annual report.

End 2011 the share register of the Bank showed 704 shareholders, 220 of which were corporates while 484 were private individuals. Nova Ljubljanska banka remains the Bank’s largest shareholder, holding a 40.99% ownership share and a 49.42% share of the voting rights end of 2011.

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

- amounts in thousands of EUR

EqUity 2011 Str. 2010 Str. Change index

1 2 3 4 5=1-3 6=1:3

Share capital 16,980 9 16,980 7 - 100

Share premium 51,380 28 51,380 26 - 100

Revaluation reserve 1,284 1 3,971 2 (2,687) 32

Profit reserves 126,595 70 125,376 63 1,219 101

treasury shares (31) - (31) - - 100

Profit for the year (14,875) (8) 2,250 1 (17,125) (661)

total 181,333 100 199,926 100 (18,593) 91

- in %

10 largest shareholders as at 31 december 2011 ownership share

Nova ljubljanska banka d.d. ljubljana 40.99

slovenska odškodninska družba d.d. ljubljana 9.36

Vzajemni sklad NFd 1 delniški 9.21

abanka Vipa d.d. ljubljana 4.00

Unior d.d. Zreče 3.88

Zavarovalnica triglav d.d. ljubljana in Kritni sklad 3.75

Nova Kreditna banka Maribor d.d. Maribor 2.67

Juteks d.d. Žalec 2.43

opus Invest d.o.o. Velenje 1.79

Polzela d.d. Polzela 1.53

total 79.61

6.4 Shareholder information

The Bank’s equity comprises share capital, share premium, revaluation reserve, profit reserves and net profit, while own shares de-crease it. In 2011 the equity decreased by EUR 18,593 thousand to amount to EUR 181,333 thousand at the end of the year.

During the year the Bank did not acquire or dispose of own shares. As at 31 December 2011 it held 251 regular own share in an amount of EUR 31 thousand in its portfolio, representing in total only 0.05% of its share capital. The Bank did not hold any indirectly acquired own shares, while 1,354 shares were pledged as security.

Equity in 2011 is shown in the table below:

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6.5 Assuming and managing banking risks

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

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 Bank, is considered one of the most important banking risks.

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

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

The problems faced by the domestic economy and the uncertain conditions in the European financial markets and economies further impact the deterioration of the credit portfolio. With the number of insolvency proceedings increasing and with rising unemployment in 2011, the share of defaulters and non-performing assets increased also. An economic recovery is not yet expected in 2012, which is why the Bank will continue to implement the measures to mitigate the negative effect of the crisis (regular monitoring of debtor operations and their rating, active recovery of receivables due, stricter lending conditions, acquiring additional collateral, granting new loans to financially stable companies and financing investments in core business, granting housing loans, etc.). It will also continue to follow the strategy of maximizing diversification of its credit portfolio and reducing exposure individual debtors and groups of related parties all the while limiting investments in sectors and regions it estimates as high risk.

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

In trading with financial instruments the Bank is predominantly active in the Slovene financial market, the European Union (securities transactions with prime banks and sovereigns) and, to a lesser extent, in other low risk countries (investment-grade countries). The Bank defines investments and trading in financial instruments by applying limits to a number of different factors (according to issuer, transaction type, region, etc.), which the Bank constantly adjusts to take into account the conditions in the financial markets and the Bank’s business strategy. Additionally, it has also adopted stop-loss limits.

The Bank enters into transactions with foreign currency and interest rate derivatives. Its basic policy in connection with derivatives trading is entering into transactions for the purpose of hedging own positions and client positions, whereby the latter transactions are hedged with counter positions. Transactions are entered into with prime foreign banks. In relation to foreign currency risk, the Bank’s policy is that of a closed position across individual foreign currencies. Managing the open currency positions is performed through prompt transactions and with the use of foreign currency derivatives in line with the limits set. Limits are low and are meant for the management of currency open positions within the scope of regular operations, not intended for speculative trading.

The Bank calculates market risk capital requirements using the standardised approach. At the same time it also calculates capital requirements with the use of advanced methods such as the statistical method of value-at-risk (VaR). Additionally, it calculates the internal estimated capital requirement to cover for unexpected

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loss from market risk by using the value-at-risk method (VaR) and performs stress tests. It also measures the effect of extraordinary, but probable, events on income and the financial position of the Bank.

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

Interest rate riskThe risk of change in interest rates pertains to the exposure of the Bank’s financial balances to unfavourable fluctuations in interest rate. It affects the Bank’s earnings and the economic value of its equity.

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

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

In the event that the implementation of measures to decrease interest risk is required, the Bank uses traditional balance sheet transactions, such as lending, securities purchases, deposit taking, issue of securities, etc. In addition to the aforementioned transactions, the Bank also enters into agreements based on interest derivatives to hedge individual transactions and close interest rate gaps. It does not enter into interest derivative transactions for speculative purposes.

The Bank will continue to close interest rate gaps in 2012 by using on-balance sheet instruments and by entering into interest derivatives, which will allow it to decrease the impact on the income statement resulting from a change in the fair value of an interest derivative with the use of hedge accounting.

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

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

The Bank provides for efficient management of operational and structural liquidity, representing the management of cash flows for a chosen time interval while taking 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 Bank has defined target value indicators and limits for the management of liquidity risk. Structural liquidity limits have been set up so as to ensure the required reserves on the basis of structural liquidity surpluses in accordance with the Decision on minimal requirements for ensuring adequate liquidity for banks and savings banks. Based on scenarios pertaining to extraordinary liquidity conditions, the Bank determined the structure of the liquidity reserve and set its minimum amount, while also defining the contingency plan for its actions at the first sign of a liquidity crisis. By employing a system of limits, the Bank is also following its goal of maximizing diversification of funding sources.

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

In line with its specific characteristic the Bank utilises the conservative approach to liquidity risk management, which is reflected through its system of limits, the spectrum and size of banking book investments in securities and in the methodology of monitoring liquidity flows.

In 2011 the Bank managed liquidity risk in line with adopted policies, however the conditions in relation to accessing liquidity changed. The Bank did not have any problem in relation to operational liquidity, as it provided for sufficient liquidity reserves (highly liquid assets, which are also eligible to be pledged as collateral pertaining to obligations toward the European Central Bank and in the interbank repo market) to manage the required level of operational liquidity.

More of its activities were aimed at providing adequate diversification of liquidity sources, which allowed it to follow the goal of an optimal structure of these while emphasizing stable liquidity sources. It also followed its objective of an adequate ratio of loans to the non-banking sector with deposits from the non-banking sector.

In 2011 the Bank started with preparations for the calculation of the value of the Liquidity Coverage Ratio (the LCR) as defined by Basel III. It will continue to intensively perform these activities in 2012. It also prepared a simulation of the LCR ratio calculation and ascertained that the amount of its high-quality liquid assets exceed the net liquidity outflows in extreme liquidity conditions (30 days), which is why it will continue to work toward ensuring an adequate amount of top-quality liquid assets in relation to the expected liquidity inflows and outflows.

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

Due to its fast development and the characteristics of the financial system, the importance of operational risk 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 Bank takes into consideration its size and development as well as the nature and complexity of its business activities. It has prepared a comprehensive review of its potential exposure to operational risk according to business processes, which is based on exposure according to category of operational risk, the frequency of an event occurring and the risk impacts.

The Bank has prepared a list of operational processes, which served as basis for the preparation of a profile of potential exposure to operational risk according to individual processes, for the Bank as a whole, for the preparation of a catalogue of all operational risk it identifies and for the preparation of a matrix of links between organisational units in the business processes.

It calculates operational risk capital requirements according to the basic indicator approach. The calculation of the internal capital assessment and the capital requirements to cover for unexpected loss from operational risk is done in line with adopted methodologies on a quarterly basis.

Continuous operation of the Bank is regulated by the rulebook defining procedures, activities and processes of operation and organisation in the event of a crisis, which are part of operational risk. The purpose of the plan for continuous operation is to ensure the safety of employees and clients and to set up smooth operation of key business processes in the shortest possible time at the existing and the alternate location. All business processes performed by the Bank have plans in place for their performance in the event of non-functional IT. The goal of organised operations is to reduce operating and financial damage, which would materialise should activities and procedures defined in the continuous operation plans for the Bank and in the recovery plan be suspended.

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

With an aim to provide for safe and profitable operations, the Bank maintains an adequate level of capital at all times along with its appropriate structure. With the intention of assessing the capacity for assuming risk, the Bank prepares a plan of movement in capital and capital requirements once a year as well as the plan of the internal capital assessment and capital requirements for a period of three years in line with its annual business plan and the three-year development plan, which shows the fluctuations of capital adequacy ratios in accordance with the planned volume of operations. In the event that planned fluctuations of capital adequacy ratios deviate from target values, the Bank will commence activities to decrease exposure to risk or increase regulatory capital.

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

In 2011 a proposal of the new capital directive CRD IV was published in response to Basel III, which provides the framework for amending and supplementing the legislation to improve the resilience of banks to risk. New legislation will come into effect with 2013. Key requirements of the new capital regulations pertain to increased amounts and quality of capital, the harmonisation of regulatory adjustments and detailed disclosures. The major features of the new regulation that will affect the calculation of Bank capital, relate to more stringent criteria on the inclusion of hybrid instruments in the calculation of capital, the consideration of unrealised profits and losses from securities at fair value and the introduction of capital buffers. A transitional period is provided for in relation to the introduction of these changes.

The Bank started to prepare for the changes in the capital regulations in 2011. To detect the need for a potentially required increase in capital in the coming years it prepared simulations of capital and capital ratios in line with the provisions of the new capital regulations.

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

The methodology of assessing profitability risk is based on determining the adequacy of the structure of the financial position, the income statement items, the interest margin, the return on assets and the capital and cost efficiency. The profitability risk management methodology includes measures and rules of assuming, reducing, dispersing, transferring and avoiding risk, which the Bank has identified and measured.

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The Bank prepares monthly quantitative and qualitative analyses of the statement of financial position, the income statement, the statement of comprehensive income and the statement of cash flows.

To assess the adequacy of internal capital the Bank calculates the internal estimate of capital requirements to cover for unexpected loss from profitability risk on a quarterly basis in line with the adopted methodology.

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

The management of strategic risk within the Bank is based on the definition of own vision, the clarity and conservative nature of strategy, on ensuring correct strategic policies and the required capital and personnel as well as technology to support the execution of strategic goals. Regular assessment of the elements of strategic risk ensures that the Bank implements high standards of internal culture and the corporate value system as well as a clear strategy, which is adequately supported with required calculations. To this aim the Bank prepares framework strategic documents and regularly verifies their implementation, which allows it to adapt to the changes in the internal and external business environments on time.

In line with its risk profile the Bank did not calculate any capital requirements in 2011.

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

The Bank manages reputation risk by ensuring safe and stable high quality operations, by having the Management Board and Supervisory Board conduct themselves with in accordance with professional prudence and the highest ethical standards of management, by providing for transparent operations, monitoring its media image, systematically communicating with the varied public groups, managing its human resources with utmost care and by being socially responsible.

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

ICAAP processIn line with the new Basel II capital accord the Bank has set up a process of assessing adequate internal capital (the ICAAP process), which:- is based on the identification, measurement and assessment

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 of the Bank;

- is appropriately included in the management process (decision-making, risk management, etc.).

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

In 2011 the Bank continued to perform a number of activities in relation to the implementation of the ICAAP process. It developed new methodologies and perfected existing methodologies for the calculation of internal capital requirement estimates, prepared and implemented stress tests, calculated the amount of internal capital assessment on a quarterly basis and planned an internal capital estimate as well as the internal capital requirements for the coming five-year period.

The Bank re-assessed the level of the exposure to individual risk types in major business lines and the quality of the control environment. It calculated the Bank’s risk profile and prepared a risk matrix. Based on the risk profile the Bank’s exposure to risk is acceptable, with it being most exposed to credit, liquidity, capital, profitability, market, operational, strategic and interest rate risk as well as profitability risk. The calculated risk profile minimally exceeds the desired risk profile, as defined in the Strategy of assuming and managing risk, it does however still allow for the Bank’s stable and safe operations in the ordinary and extraordinary course of business.

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6.6 Development

The Bank provides its clients with universal banking services. It has taken care of its further development during the entire co-urse of its operation by investing in efficient IT support systems, its business network and in its human resource potential.

Retail and internal organisationThe Bank only has business units in Slovenia. Through a well-developed business network it operates in all major towns of the Celje region as well as in Ljubljana, being the financial centre of Slovenia and has opened a business unit in Maribor in Septem-ber 2009 as well as one in Koper in July 2010. Within 8 business units operate 8 branch offices with 22 agencies for individuals and 6 branch offices for corporates and private individuals. The Bank follows modern trends and is adapting to individual client needs by investing in its retail network. Based on an analysis of the volume of operations the Bank closed a branch office in Celje in 2011 and the Vitanje agency in 2012. It also implemented some organisational changes in 2011. It reorganised its Main Branch in Ljubljana, the Public Relations Department and Secretarial Servi-ces Department as well as electronic banking, the coordination of inventory-taking and the monitoring of recovery activities.

The Subsidiary does not have any subsidiaries or affiliates.

InvestmentsThe Bank earmarked EUR 1,594 thousand for investments in 2011. Most of the funds were used for the ATM upgrades, POS termi-nal purchases and signal safety devices, application upgrades, licenses, external advisory services pertaining to the setting up of a data warehouse, the upgrading of retail IT and for equipment purchases.

IT supportMost of the activity in IT support pertained to the adjustments and upgrading of software related to the migration of card ope-rations to the eXcat within the Activa system, the streamlining of operations and to providing alternative solutions regarding IT support in the area of retail banking. Part of the software adjust-ments was related to legal requirements, the changes in the en-vironment and the provision of sufficient hardware and software capacities to support increased volumes of payment transacti-ons.

The development of a data warehouse, which the Bank started in line with the recommendations of the Bank of Slovenia as ear-ly as 2005, was completed in January 2011, with its upgrading continuing in 2011 due to the advantages that it brings in terms of improved quality of reporting and a better management of operations.

In 2011 the Bank also started a partial renovation of its own IT system, under which configurations of hardware and software were selected, a methodology for the management and super-vision of projects was prepared, with basic infrastructure of new application support under construction. A development enviro-nment is being prepared, the process however is comprehensive and lengthy due to its complexity.

Human resourcesIn 2011 the number of employees in the Bank decreased from 538 to a total of 530, with the average complement over the past year amounting to 535 employees. During the year there were 21 employment terminations and 13 new employees were taken on. At the end of the year 11 employees were employed on tempora-ry employment contracts.

The structure of employees by age shows the group of 51 to 55 years was dominant, followed by the group of 46 to 50 years of age. Younger employees, aged up to 30 years represented only 3.8%, which points to a relatively high average age at the bank, which was 44.8 years of age in 2011.

The educational structure of employees improved at the higher education and master’s levels in line with the personnel policy if compared with 2010, namely by 2.8%. The share of employees with at least university level education was 58.6%, while the se-condary education group held a 38.5% share.

The average work time efficiency was 80.2%, with absenteeism predominantly coming from use of annual leave.

Achievement of strategic goals requires investments focused in the development of employee skills and abilities. The Bank sub-sequently manages the quality of employee education. In 2011 employees attended 198 training events in all areas of banking operations. The Bank also encourages part-time study, which is why it has 29 education agreements in place with employees, 17 of those are acquiring university level education, while 12 are attending specialist studies and master’s degree studies.

The subsidiary company employed 4 people at the end of 2011. In addition to its regular employees the company also cooperates with external appraisers, is in a contractual relationship with a real-estate broker and has outsourced its accounting. One of the employees in the subsidiary company holds a Master's Degree in Economics, two have university degrees in finance and archi-tecture, while another holds a high school diploma. The head of projects and the head of property sales both have acquired in-dividual licenses in the field construction, real estate operations and real estate appraisal.

6.7 Social responsibility

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

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It is aware of the fact that its continued efficiency and success 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 responsi-bility 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. It is also an active partner in social and wel-fare activities.

The Bank enables it business partners to invest in environmental projects, the construction of treatment plants, the implementa-tion of welfare and socially responsible projects. It facilitates the procurement of environmentally safe materials, waste separation, collects waste paper and cartridges and uses a centrally controlled thermal heating to promote rational use of energy.

In its operations it show a special concern for underprivileged cu-stomer classes, as it offers special benefits to seniors, students, to humanitarian and other organisations.

6.8 Internal Audit Department operations

The operations performed by the Internal Audit are consistent with the internal audit standards of professional practice, the code of internal auditing principles and the internal auditor’s professional ethics code. In its operations the service also takes into account the provisions of the Banking Act pertaining to internal auditing and the Rulebook on the Operation of the Internal Audit. It is an independent department, which reports directly to the Manage-ment Board, at the Division General Manager level and the branch manager level. The aforementioned gives its employees the pos-sibility to give opinions, assessments and recommendations while relying on internationally established professional internal audit standards and to operate independently of other parts of the Bank.

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

The planned activities of the service are detailed in semi-annual operational plans, which the Management Board adopts. To mo-nitor the Internal Audit’s activities on an ongoing basis the Ma-nagement Board and the Supervisory Board endorse semi-annual reports on its activities, showing the significant activities perfor-med by it, as well as an overview of issued and implemented re-commendations. The reports are also considered at the Supervi-sory Board’s advisory body, the Audit Committee. In line with the legislation the Supervisory Board is regularly kept appraised of the audits conducted by external supervisory.

The assignments of Internal Audit are defined by the legislation and pertain foremost to quality 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 annual operational program has been set up comparing the plan and execution of internal audits. The Bank’s Management Board is made aware of the realization of all recommendations after inter-nal auditing has been performed on at least two levels: first after every internal audit has been completed and after that a compre-hensive annual report on the implementation of all the recom-mendations is given. The Internal Audit also coordinates activities in connection with the selection of the external auditors (through the Management Board, the Audit Committee and the Supervisory Board).

The annual operational program provided for audits of the Bank’s 23 business areas and the completion of 5 internal audits from 2010, with the assumption there would be no large scale extraor-dinary assignments (a total of 28 internal audits). Actually, 22 plan-ned internal audits were completed by end January 2011, with 2 extraordinary audits having been performed (a total of 24 audits); 5 internal audits were completed by end of March 2012 and one to be completed in the beginning of 2012 in accordance with the decision of the Management Board. The Internal Audit prepared 41 expert opinions pertaining to different areas of operation. There were a total of 65 instances where internal audits were performed and expert advice was given in 2011, 6 are still running.

The most significant areas of operation, which were audited in 2011 include: credit risk management, compliance with limits set pertaining to securities, management quality of continuous IT system operations, management quality of ATM and card opera-tions, compliance of the Bank’s operations in relation to the chan-ges in legislation, adequate usage of acquired funding.

In all internal audits and reviews special emphasis was given to: identification of procedures built-in for the management of risk, assessing the current situation, the quality of internal control systems, compliance with the legislation and internal rules, the possibilities for improvement of existing procedures, all aimed at further raising the quality of the Bank’s operations. Special atten-tion is directed at the areas subject to new regulations (external or internal), frequently in cooperation with the Compliance Depart-ment. The operations of the Subsidiary are usually audited every three years.

All of the Internal Audit’s assignments described were performed in 2010 by five employees (the figure includes the department’s 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 the university level at least. Additionally, 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 studies in 2011. As in previous years 2011 saw education and training of employees remain a constant mission, with additional knowledge attained in internal auditing, banking operations, IT skills, risk management and corporate governance.

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7 MANAGING BODIES OF THE BANK

Audit Committee

GENERAL MEETING OF SHAREHOLDERS

Credit Committee

MANAGEMENT BOARD

Management Committee

IT Committee

Remuneration Committee

SUPERVISORY BOARD

Liquidity Committee

Organisational units Assets and LiabilitiesCommittee - ALCO

Other committees and councils

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8 ORGANIZATIONAL STRUCTURE OF THE BANK

Member of the Management Board

Aleksander Vozel, M.Sc.President & CEO

Dušan Drofenik, M.Sc.Board & Deputy CEO

Davorin Leskovar

MANAGEMENT BOARD

EXECUTIVE DIRECTOR EXECUTIVE DIRECTOR

GENERAL AFFAIRS MAIN BRANCHLJUBLJANA

RETAIL DIVISION

INTERNAL AUDIT

LEGAL AFFAIRS, DEBTENFORCEMENT ANDCOMPLIANCEOPERATIONS DIVISION

CORPORATEDIVISION

PERSONNEL ANDORGANISATIONALSERVICES

PAYMENTS ANDOPERATIONALSUPPORT DIVISION

ACCOUNTINGDIVISION

IT DIVISIONFINANCIAL MARKETSDIVISON

CELJE BUSINESS UNIT

SLOVENSKE KONJICEBUSINESS UNIT

ŽALEC BUSINESS UNIT

ŠENTJUR BUSINESS UNIT

LAŠKO BUSINESS UNIT

ROGAŠKA SLATINABUSINESS UNIT

MARIBORBUSINESS UNIT

KOPER BUSINESS UNIT

RISKMANAGEMENTDIVISION

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9 STATEMENT OF CORPORATE GOVERNANCE

The Bank’s Corporate Governance statement is prepared in line with the provisions of the Companies Act (the ZGD-1) and per-tains to the year 2011. It includes the Statement on compliance with the Corporate Governance Code made by the Management Board and the Supervisory Board under item 10.1 and additional Notes in accordance with Paragraphs 5 and 6 of Article 70 of the Companies Act under item 10.2.

9.1 Statement of the Banka Celje d.d., Management Board and Supervisory Board on compliance with the Corporate Governance Code

As a public company Banka Celje, d.d., which has bonds listed on the Ljubljana Stock Exchange d.d., is compliant with the Banking Act (the ZBan-1) and the Companies Act as well as the Market in Financial Instruments Act (the ZTFI) and the Rules of the Ljublja-na Stock Exchange and with all the additional general rules, dea-ling 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 izdaja-telje/predpisi, brošure'').

Banka Celje, d.d., Celje complies with the Corporate Governan-ce Code dated 8 December 2009 (the Code) with the exception of some deviations or particularities, explained under individual item of the Code below.

The Posest, d.o.o., as a non-public company, is not subject to any code in its operations.

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

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

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

Clause 5.2 (second paragraph)The Bank does not publish data on the costs it incurred from the collection of powers of attorney, these are included in the cost of the organisation and execution of the annual General Meeting of Shareholders.

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

Clause 5.5The proposal to the General Meeting of Shareholders for the no-mination of Supervisory Board members includes all of the legal-ly required data, the rest is public domain data.

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

Clause 5.7The Supervisory Board sets the policy of remuneration of the Ma-nagement Board.

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

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

Clause 8Statements with which the Supervisory Board members would take a position on the fulfilment of each of the criteria pertaining to independence under item C.3 of Supplement C has not been signed as of yet, nor has there been any such announcement made on the website. In the future the Bank will endeavour to comply with the recommendation on this matter.

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

Clause 8.12In its report the Supervisory Board also includes all of the require-ments from the decision of the Bank of Slovenia pertaining to the due care and professional diligence of Management Board and Supervisory Board members and endeavours to include as much information as possible to adequately represent its activities du-ring the year. In the future the recommendations from Clause 8.12 of the Code will be observed as much as possible.

Clause 11In its operations until now the Supervisory Board has not yet no-minated a secretary. In accordance with consensus between the Management Board and the Supervisory Board this job is perfor-med by the expert department of the company.

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

Clause 13.1The Commission for Term Appointment finished its term on the day the new Supervisory Board was named.

Clauses 16.5 and 16.6The Bank has no option plan or comparable financial instruments in place which would provide for variable reimbursement of the Management Board members.

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

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

Clause 20.3The Bank has not special internal act in place in connection with the limitations and disclosures pertaining to treasury share tran-sactions, as it considers this to be sufficiently regulated by the existing legislation.

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

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

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

Clause 23The Statement of Corporate Governance forms part of the annual report, which is published on the Bank’s website.

9.2 Additional Notes in line with Paragraphs 5 and 6 of Article 70 of the ZGD-1

9.2.1 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 Management Board to conduct its operations in a manor ensuring an adequate risk management system in relation to all the business partners, owners and supervisory institutions. The system of internal controls is connected into a comprehensive whole in the sense of an umbrella act, determining all of the dimensions of control activities.

The internal control system at the Bank, must be 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 operational activities, which have the potential to increase the Bank's liabilities, must be approved by the authorized person, with a segregation of responsibilities clearly defined,

- assets must be secured appropriately, receivables insured, liabi-lities monitored,

- a strategy and policies for risk management must be prepared, special care must be given to the monitoring of the Bank's capi-tal adequacy, liquidity and credit risk, interest rate and operatio-nal risk, profitability and market risk,

- a system for the prevention of loss due to irregularities, especi-ally in connection with timely detection of fraud, abuse, anoma-lies 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 external insti-tutions must be set up,

- a supervised system for the introduction of new financial servi-ces and new banking products as well as entering new markets

needs to be provided for.

9.2.2 Significant direct and indirect ownership of the Bank’s securites

Qualifying holdings, as defined by the law dealing with the mar-ket in financial instruments, in the Bank's equity are held by three companies, namely:- Nova Ljubljanska banka, holding 201,096 regular shares, thus

having a 49.42% share in the voting rights,- NFD1 Investicijski sklad, holding 39,276 regular shares, thus ha-

ving 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 quali-fying shares as defined by the act dealing with the market in financial instruments.

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9.2.3 Holders of securities ensuring special rights of control

The Bank's shares do not give their holders any special rights of con-trol.

9.2.4 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.

The right to vote at the General Meeting of Shareholders is given to shareholders holding registered shares with voting rights ente-red 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 ri-ghts of an individual shareholder, which acquired shares contrary to the regulations.

Agreements, which, with the Bank's cooperation, would mean fi-nancial rights based on shares have been separated from owner-ship of the shares, do not exist.

9.2.5 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., Supervisory Board.

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

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

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 replacement is appointed until the end of the origi-nally appointed member's term. Each member of the Supervisory Board may resign prior to the expiry of their term on giving three months 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 General Meeting of Shareholders individual members of the Supervisory Board or the Supervisory Board collectively may be recalled early. Such a resolution shall be adopted with at least a three-quarter majority of votes present at the Meeting.

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

The president and members of the Bank's Management Board are appointed and discharged by the Supervisory Board. Only a candi-date, fulfilling all the conditions for appointment as defined by the Companies Act and the Banking Act may be appointed to the post of president or member of the 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.

The President and Members of the Bank's Management Board may be recalled early in line with the applicable legislation. Each member of the Bank's Management Board may resign prior to the expiry of their term on giving six months notice. A written letter of resignation is to be sent to the President of the Supervisory Board.The Articles of Association may be amended based on the decisi-on 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, given by way of a special resolution.

The General Meeting of the Bank's shareholders may authorize the Supervisory Board to amend the Articles of Association to harmo-nise the text with the adopted resolutions in effect.

9.2.6 Authorizations of the Management Board

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

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

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

The Bank's Management Board calls the Meeting of Shareholders. 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 Manage-

ment Board and Supervisory Board;- the adoption of the annual report in cases as defined by the

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

in accordance with the Companies Act;- other matters within the scope of its competencies in accordan-

ce with the Companies Act the Banking Act.

Shareholders, holding 20% of the share capital in total, may request, in writing, the General Meeting to be convened. Such a request must include a reason for the Meeting to be convened and the matter that the Meeting is to pass decision on. In such an event the Management Board is required to call the Meeting no later than 5 weeks after receiving a written request.

Shareholders, holding 20% of the share capital collectively, may request, in writing, for a certain item to be included in the agenda of the General Meeting of Shareholders. The Bank's Management Board must accede to such a request, if it includes a prepared pro-position of a decision falling under the responsibilities of the Ge-neral 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.

9.2.8 Data on the composition and activities of management and supervisory bodies and their committees

The Supervisory Board monitors and supervises the management of the Bank and its operations. It conducts its assignment in accordance with the provisions of the statutory acts dealing with the operations of banks and companies and in accordance with the Bank’s Articles of Association. It was elected at the General Meeting of Shareholders in May 2007 and acted in the following composition until 24 May 2011: Alojz Jamnik as President, Tadej Tufek, M.Sc. as Vice President, Ivan Ferme, Matej Narat, M.Sc., Borut Stanič, Štefan Špilak, Ph.D. and Bojan Šrot as members. At the General Meeting of Shareholders on 24 May new Supervisory Board members were elected: Jure Peljhan, M.Sc. as

President, Zvonko Ivanušič, M.Sc. as Vice President, Uroš Čufer, Ph.D., Melita Malgaj, Tomaž Subotič, Ph.D., Bojan Šrot, Zdenko Zanoški, Ph.D.

In 2008 the Supervisory Board of Banka Celje, d.d., established a consulting body, namely the Audit Committee of Banka Celje, d.d., with the following members: Borut Stanič, President, Tadej Tufek, M. Sc., Member and Marina Poboljšaj, Member – independent expert. Their term of office expired with the expiry of the Supervisory Board members’ term, namely at the General Meeting of Shareholders in 2011, when new members of the Audit Committee were named on 8 June 2011, namely: Uroš Čufer, Ph.D., President, Tomaž Subotič, Ph.D., Deputy and Zdenka Habe, Member, as an independent expert. The Supervisory Board named the Reimbursement Committee at its 3rd meeting on 19 October 2012. It comprises Jure Peljhan, M.Sc., as president, Zvonko Ivanušič, M.Sc., as vice president, Tomaž Subotič, Ph.D., as member and Bojan Salobir, Executive Director, as the Bank's representative with a standing invitation.

The Management Board represents and manages the Bank’s operations according to the principles of joint liability. In accordance with the Articles of Association it comprises three members: President of the Management Board, Dušan Drofenik, M. Sc., Vice President of the Management Board, Davorin Leskovar and Member of the Management Board, Aleksander Vozel, M.Sc. 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, a member of the Supervisory Board at the Slovene-German Chamber of Commerce and a member of the Supervisory Board at the Skupna pokojninska družba. Davorin Leskovar and Aleksander Vozel, M.Sc. are not members of any supervisory boards.

The Credit Committee comprises nine members and defines the conditions and criteria for acquiring and placement of assets, makes decisions on lending and guarantee transactions and decides on distribution in line with its operational rulebook. In 2011 it comprised: the President of the Management Board at the post of President of the Credit Committee, the Vice President of the Management Board at the post of Vice President of the Credit Committee and the following members: Member of the Management Board, both Executive Directors, General Manager of the Risk Management Division, General Manager of the Retail Division and the General Manager of the Financial Markets Division and the General Manager of the Corporate Division. The President of the Credit Committee may invite other General Managers to the Credit Committee meetings. When proposals from the Retail Division are being considered, business unit Heads are also invited.

The Liquidity Committee comprised seven members in 2011: Ge-neral Manager of the Financial Markets Division as Committee Pre-sident and the following members: President of the Management Board, Vice President of the Management Board, Member of the Ma-nagement Board, Executive Director, General Manager of the Retail Division and General Manager of the Risk Management Division. The Liquidity Committee meets at least three times a week and supervi-ses the Bank’s liquidity position. It performs its duties in line with the Liquidity Committee Working Rules.

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Aleksander Vozel, M.Sc.Member of the

Management Board

Davorin LeskovarMember of the

Management Board

Dušan Drofenik, M.Sc.President of the

Management Board

The Bank’s Management Committee operates as the Manage-ment Board’s advisory and informative body. In 2011 it comprised the Bank's Management Board, the Executive Directors, General Managers of the functionally independent organisational units, who in accordance with their operative functions answer direc-tly to the Management Board and the Director of the subsidiary company.

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

The Assets and Liabilities Committee – the ALCO monitors the conditions in the financial markets, analyzes the balances and changes in the Bank’s statements and prepares the decisions ai-med at the attainment of an adequate balance sheet structure. In line with the Working Rules on its operations the Committee meets once a month. The members: Vice President of the Mana-gement Board as President of the Committee, the President of the Management Board at the post of Vice President of the Commit-tee, Member of the Management Board, General Manager of the Accounting Division, General Manager of the Risk Management Division and the General Manager of the Financial Markets Di-vision.

The IT Committee is the Management Board’s counselling body in connection with the execution of its rights and obligations re-lated to IT. It meets once a month. In addition to the President of the Management Board, the Vice President of the Management Board and Member of the Management Board as the president of the IT Committee, it also comprises the General Manager of the IT Division and the Business Consultant for IT. Standing in-vitations were extended to the Assistant General Manager of the IT Division, the Business Consultant for the development of IT, the internal auditor in charge of IT and to the security systems engineer.

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

9.2.10 Share transfer restrictions, especially: - restriction of security ownership and - explanatory note on the requirement to acquire permission from the company or other holders of securities for the transfer

The Bank's shares are transferred in line with the regulations perta-ining to dematerialized securities. Current shareholders have priori-ty, in proportion with their portion of the share capital, to subscribe new shares from the authorized capital. There is no other sharehol-ding restrictions imposed by the Bank, whereas acquiring a quali-fying share requires the approval by the Bank of Slovenia. There is no requirement to get approval by the Bank or other shareholders to transfer shares.

9.2.11 Employee stock options

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

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

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

Celje, 18th April 2012

40

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Aleksander Vozel, M.Sc.Member of the

Management Board

Davorin LeskovarMember of the

Management Board

Dušan Drofenik, M.Sc.President of the

Management Board

Celje, 27th March 2012

10 STATEMENT OF MANAGEMENT’S RESPONSIBILITIES

The Management Board herewith confirms the financial statements of the Bank and the Group for the year ended 31 December 2011, on pages 47 to 52 and the accounting policies and notes to the accounting policies on pages 53 to 140 of the annual report.

The Management Board is responsible for the preparation of the annual report in a way as to be a true and fair representation of the Bank’s assets and the Group's assets and the results of their operations for the year ended 31 December 2011.

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

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

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

Managment Board:

Banka Celje, d.d., and the Banka Celje Group Business report 2011

41

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11 REPORT OF THE AUDITORS

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II FINANCIAL STATEMENTS

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II FINANCIAL STATEMENTS

The Notes form an integral part of these Financial Statements.

1 INCOME STATEMENT

Bank Group

note

1 January to31 December

2011

1 January to31 December

2010

1 January to31 December

2011

1 January to31 December

2010

Interest and similar income 3 115,799 112,663 115,778 112,628

Interest and similar expense 3 (66,872) (57,596) (66,883) (57,620)

net interest and similar income 3 48,927 55,067 48,895 55,008

Dividend income 4 876 728 876 728

Fee and commission income 5 18,772 18,812 18,771 18,811

Fee and commission expense 5 (2,386) (2,551) (2,386) (2,551)

net fee and commission income 5 16,386 16,261 16,385 16,260

net gains from financial assets and liabilities notclassified at fair value through profit or loss 6 551 1,397 551 1,397

net (losses) / gains from financial assets andliabilities held for trading 7 2,989 (6,818) 2,989 (6,818)

net (losses) from financial assets and liabilitiesdesignated at fair value through profit or loss 8 3,598 (53) 3,598 (53)

Changes in fair value from hedging 9 (200) 98 (200) 98

Foreign exchange translation net gains 10 (680) 9,663 (680) 9,663

net gains from derecognition of assets 11 (5) 20 (5) 26

net other operating income 12 (344) (459) 425 294

administrative expenses 13 (33,658) (35,992) (34,298) (36,384)

Depreciation and amortisation 14 (3,764) (3,757) (3,791) (3,771)

provisions 15 (596) 279 (597) 251

Impairment charges 16 (52,670) (31,009) (52,678) (31,014)

proFIT / (LoSS) BEForE InCoME TaX (18,590) 5,425 (18,530) 5,685

Income tax expense 17 3,715 (925) 3,715 (926)

proFIT / (LoSS) For THE YEar (14,875) 4,500 (14,815) 4,759

Basic and diluted earnings per share in Eur 18 (29) 9 (29) 9

- amounts in thousands of EUR

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2 STATEMENT OF COMPREHENSIVE INCOME

Bank Group

1 January to31 December

2011

1 January to31 December

2010

1 January to31 December

2011

1 January to31 December

2010

proFIT For THE YEar (14,875) 4,500 (14,815) 4,759

oTHEr CoMprEHEnSIVE InCoME (2,687) (689) (2,687) (689)

net (losses) / gains from available for sale financial assets (3,359) (861) (3,359) (861)

Valuation (losses) / gains taken to other comprehensive income (12,231) (8,041) (12,231) (8,041)

recycled to income statement 8,872 7,180 8,872 7,180

Income tax relating to other comprehensive income 672 172 672 172

ToTaL CoMprEHEnSIVE InCoME For THE YEar aFTEr TaX aTrIBuTaBLE To EQuITY HoLDErS oF THE parEnT (17,562) 3,811 (17,502) 4,070

The Notes form an integral part of these Financial Statements.

- amounts in thousands of EUR

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Aleksander Vozel, M.Sc.Member of the

Management Board

Davorin LeskovarMember of the

Management Board

Dušan Drofenik, M.Sc.President of the

Management Board

3 STATEMENT OF FINANCIAL POSITION

Note

BANK GROUP

31 December 2011

31 December 2010

31 December 2011

31 December 2010

Cash and balances with Central Bank 19 168,163 128,324 168,163 128,324

Financial assets held for trading 20 52,817 65,365 52,817 65,365

Financial assets designated at fair value through profit or loss 21 7,823 29,445 7,823 29,445

Available for sale financial assets 22 203,201 236,029 203,201 236,029

Loans and advances 1,748,414 1,795,957 1,745,215 1,793,275

- loans and advances to banks 23 55,054 85,908 55,054 85,908

- loans and advances to customers 24 1,693,360 1,710,049 1,690,161 1,707,367

Held to maturity investments 25 269,311 276,273 269,311 276,273

Assets pledged 21, 22, 25 - 32,390 - 32,390

Derivatives - hedging 26 4,838 - 4,838 -

Property and equipment 27 17,802 19,576 18,752 19,658

Investment property 28 - - 3,270 1,807

Intangible assets 29 4,921 5,251 4,925 5,256

Investments in subisidiaries, associates and joint ventures 30 2,257 2,257 - -

Income tax assets 31 9,208 4,994 9,211 4,997

- current tax assets 1,409 1,582 1,409 1,582

- deferred tax assets 31,2 7,799 3,412 7,802 3,415

Other assets 32 2,158 2,219 5,239 6,398

TOTAL ASSETS 2,490,913 2,598,080 2,492,765 2,599,217

Deposits from Central Bank 33 90,082 70,013 90,082 70,013

Financial liabilities held for trading 34 2,167 6,014 2,167 6,014

Financial liabilities designated at fair value throughprofit or loss 35 36,146 40,050 36,146 40,050

Financial liabilities at amortised cost 2,159,994 2,227,372 2,159,990 2,227,369

- deposits from banks 36 21,005 54,435 21,005 54,435

- due to customers 37 1,478,805 1,498,961 1,478,801 1,498,958

- borrowings from banks 38 396,023 419,335 396,023 419,335

- borrowings from other customers 39 6,224 8,847 6,224 8,847

- debt securities in issue 40 185,520 160,436 185,520 160,436

- subordinated liabilities 41 72,417 85,358 72,417 85,358

Financial liabilities associated to transferred assets 42 - 30,993 - 30,993

Derivatives - hedging 43 8 348 8 348

Provisions 44 12,598 13,237 12,630 13,268

Other liabilities 45 8,585 10,127 9,573 10,460

TOTAL LIABILITIES 2,309,580 2,398,154 2,310,596 2,398,515

Share capital 46 16,980 16,980 16,980 16,980

Share premium 46 51,380 51,380 51,542 51,542

Revaluation reserve 46 1,284 3,971 1,284 3,971

Profit reserves (including retained earnings) 46 126,595 125,376 127,209 125,731

Treasury shares 46 (31) (31) (31) (31)

Profit / loss for the year 46 (14,875) 2,250 (14,815) 2,509

TOTAL EQUITY 181,333 199,926 182,169 200,702

TOTAL LIABILITIES AND EQUITY 2,490,913 2,598,080 2,492,765 2,599,217

The Notes form an integral part of these Financial Statements. These Financial Statements have been approved for Issue by the Management Board on 27th March 2012 and signed on its behalf by:

- amounts in thousands of EUR

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4 STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

BankShare

capitalShare

premiumRevaluation

reserveProfit

reserves

Retained earnings(including net

profit for the year)Treasury

sharesTotal

equity

BaLanCE aT 1 JanUaRY 2010 16,980 51,380 4,660 122,499 3,385 (31) 198,873

Comprehensive income for the year after tax - - (689) - 4,500 - 3,811

Dividends paid - - - - (2,796) - (2,796)

allocation of net profit to profit reserves - - - 2,839 (2,839) -

Other - - - 38 - - 38

BaLanCE aT 31 DECEMBER 2010 16,980 51,380 3,971 125,376 2,250 (31) 199,926

BaLanCE aT 1 JanUaRY 2011 16,980 51,380 3,971 125,376 2,250 (31) 199,926

Comprehensive income for the year after tax - - (2,687) - (14,875) - (17,562)

Dividends paid - - - - (1,068) - (1,068)

allocation of net profit to profit reserves - - - 1,182 (1,182) -

Other - - - 37 - - 37

BaLanCE aT 31 DECEMBER 2011 16,980 51,380 1,284 126,595 (14,875) (31) 181,333

GROUPShare

capitalShare

premiumRevaluation

reserveProfit

reserves

Retained earnings(including net

profit for the year)Treasury

sharesTotal

equity

BALANCE AT 1 JANUARY 2010 16,980 51,542 4,660 122,697 3,543 (31) 199,391

Comprehensive income for the year after tax

- - (689) - 4,759 - 4,070

Dividends paid - - - - (2,796) - (2,796)

Allocation of net profit to profit reserves

- - - 2,839 (2,839) - -

Other - - - 37 - - 37

BALANCE AT 31 DECEMBER 2010 16,980 51,542 3,971 125,573 2,667 (31) 200,702

BALANCE AT 1 JANUARY 2011 16,980 51,542 3,971 125,573 2,667 (31) 200,702

Comprehensive income for the year after tax

- - (2,687) - (14,815) - (17,502)

Dividends paid - - - - (1,068) - (1,068)

Allocation of net profit to profit reserves

- - - 1,182 (1,182) - -

Other - - - 37 - - 37

BALANCE AT 31 DECEMBER 2011 16,980 51,542 1,284 126,792 (14,398) (31) 182,169

The Notes form an integral part of these Financial Statements.

- amounts in thousands of EUR

- amounts in thousands of EUR

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5 STATEMENT OF CASH FLOWS

BANK GROUP

1 January to31 December

2011

1 January to31 December

2010

1 January to31 December

2011

1 January to31 December

2010

A. CASH FLOWS FROM OPERATING ACTIVITIES

Interest received 96,569 106,790 96,548 106,470

Interest paid (60,991) (53,203) (60,980) (53,168)

Dividends received 876 728 876 728

Fee and commission received 18,640 18,829 18,640 18,829

Fee and commission paid (2,383) (2,562) (2,383) (2,562)

Realized gains from financial assets and financial liabilitiesnot classif ied as fair value through profit or loss 1,358 2,416 1,358 2,416

Realized (losses) from financial assets and financialliabilities designated at fair value through profit or loss (199) (574) (199) (574)

Gains / (losses) from financial assets and financial liabilities held for trading 6,387 (6,773) 6,387 (6,773)

Payments to employees and suppliers (34,928) (35,708) (34,928) (36,100)

Operating income 296 301 388 355

Operating expenses (1,875) (1,203) (1,875) (1,203)

a) Cash flows from operating activities before changesin operating assets and liabilities 23,750 29,041 23,832 28,418

b) Decreases / (increases) in operating assets 29,938 11,600 30,509 9,187

Net decrease in trading assets 12,367 22,016 12,367 22,016

Net decrease in financial assets, designated at fair valuethrough profit or loss 21,025 348 21,025 348

Net decrease in available for sale financial assets 13,730 13,051 13,730 13,051

Net (increase) in loans and advances (10,739) (23,740) (9,914) (28,272)

Net (increase) of hedging derivative financial liabilities (4,838) - (4,838) -

Net (increase) in other assets (1,607) (75) (1,861) 2,044

c) Decreases / (increases) in operating liabilities (73,731) 45,863 (73,513) 48,901

Net (decrease) in deposits from Central Bank (10,992) (29,008) (10,992) (29,008)

Net (decrease) / increase in financial liabilities held fortrading (3,361) 227 (3,361) 227

Net (decrease) / increase in financial liabilities designated atfair value through profit or loss (2,054) 28 (2,054) 28

Net (decrease) / increase in deposits and loans measured atamortised cost (81,770) 48,828 (82,085) 51,646

Net increase of debt securities issued measured atamortised cost 25,185 25,662 25,185 25,662

Net (decrease) / increase of hedging derivative financialliabilities (340) 348 (340) 348

Net (decrease) / increase in other liabilities (399) (222) 134 (2)

č)Cash flow generated from operating activities(a + b + c) (20,043) 86,504 (19,172) 86,506

d) Income tax returned / (paid) 42 (1,121) 42 (1,121)

e) Net cash flow from operating activities (d + e) (20,001) 85,383 (19,130) 85,385

- amounts in thousands of EUR

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BANK GROUP

Note

1 January to31 December

2011

1 January to31 December

2010

1 January to31 December

2011

1 January to31 December

2010

B. CASH FLOWS FROM INVESTING ACTIVITIES

a) Receipts from investing activities 163,309 132,042 163,309 132,042

Proceeds from sale of property and equipment andinvestment property 15 71 15 71

Redemption of held to maturity investments 163,294 131,971 163,294 131,971

b) Payments from investing activities (113,526) (114,408) (114,397) (114,410)

(Purchase of property and equipment and investmentproperty) (1,109) (728) (1,980) (730)

(Purchase of intangible assets) (1,022) (1,461) (1,022) (1,461)

(Purchase of held to maturity investments) 25 (111,395) (112,219) (111,395) (112,219)

c) Net cash provided by investing activities (a - b) 49,783 17,634 48,912 17,632

C. CASH FLOWS FROM FINANCING ACTIVITIES

a) Proceeds from financing activities - - - -

Issue of subordinated liabilities - - - -

b) Expenditure from financing (18,850) (18,278) (18,850) (18,278)

(Dividends paid) (1,068) (2,796) (1,068) (2,796)

(Subordinated liabilities repayed) (17,782) (15,482) (17,782) (15,482)

c) Net cash used in financing activities (a - b) (18,850) (18,278) (18,850) (18,278)

D. Effects of exchange rate changes on cash andcash equivalents 178 850 178 850

E. Net increase in cash and cash equivalents(Ae+Bc+Cc) 10,932 84,739 10,932 84,739

F. Cash and cash equivalents at beginning of year 212,038 126,449 212,038 126,449

G. Cash and cash equivalents at end of year (D + E + F) 223,148 212,038 223,148 212,038

The Notes form an integral part of these Financial Statements.

- amounts in thousands of EUR

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NOTES TO THE FINANCIAL STATEMENTS

1 GENERAL INFORMATION

The Banka Celje, d.d., Group (the Group) is comprised of the bank and its subsidiary Posest, d.o.o. (the Subsidiary).

Banka Celje d.d. (“the Bank”) is a Slovene joint stock company, pro-viding universal banking services. Its largest shareholders 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%.

The Posest subsidiary company was established in 1991 as a limited liability company. The Bank is a 100% owner of the Subsidiary.

Based on permission issued by the Bank of Slovenia the subsidiary company is not included in the consolidated supervision in accor-dance with the decision by the Bank of Slovenia on Supervision of Banks and Savings Banks on a Consolidated Basis, as from the as-pect of the aim of supervision the Subsidiary does not represent any significant effect. Notes to the Financial Statements refer to the Bank and the Group.

After the annual report has been approved by the Supervisory Board, standalone and consolidated Financial Statements can no longer be amended.

Amounts in these standalone and consolidated Financial State-ments and the Notes thereto are expressed in thousands of euros, except where stated otherwise.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these standalone and consolidated financial statements are set out below and have been consistently applied to both years presented.

The disclosures in accordance with the Regulation on disclosures by banks and saving banks are presented in a separate document.

2.1 Basis for the presentation of financial statements

Standalone and consolidated financial statements for 2011 have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union. Where requi-red, notes comply with the requirements of local regulations.

The standalone and consolidated financial statements comprise the income statement and the statement of comprehensive income shown as two independent statements, the statement of financial position, the statement of changes in shareholder’s equity, the sta-tement of cash flows and the principal accounting policies and the notes.

The 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 and all derivative contracts, which have been measured at fair value.

The Group classifies its expenses, recognized in standalone and consolidated income statements, by nature of the expense.

The standalone and consolidated statements of cash flows show the changes in cash and cash equivalents arising from financial flows during the period classified according to operating activities, investment activities and financing activities. Cash and cash equi-valents include highly liquid investments and are shown in Note 49.The standalone and consolidated statements of cash flows have been prepared using the direct method, by amending the appropri-ate items from the consolidated income statement with income and expenses or changes in operating assets and liabilities from invest-ments 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 financial statements in accordance with IFRS requires the use of certain estimates and assumptions, which in-fluence the value of reported assets and liabilities as well as the di-sclosure of potential assets and liabilities on the reporting date and the amount of income and expenses during the reported period. Estimates and judgements are evaluated on a continuing basis and are based on past experience and other factors, including expecta-tions with regard to future events. The most significant policies and estimates are disclosed in Note 2.26.

In 2011 the Group implemented all of the new and revised Stan-dards and Interpretations, issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) and adopted by the EU, the use of which is mandatory for the accounting period beginning on 1 January 2011.

a) Adoption of New or Revised Standards and Interpretations

The following new standards and interpretations became effec-tive for the Group from 1 January 2011:

Amendment to IAS 24, Related Party Disclosures (issued in No-vember 2009 and effective for annual periods beginning on or af-ter 1 January 2011). IAS 24 was revised in 2009 by: (a) simplifying the definition of a related party, clarifying its intended meaning and eliminating inconsistencies; and by (b) providing a partial exemption from the disclosure requirements for government-re-lated entities. As a result of the revised standard, the Group now also discloses contractual commitments to purchase and sell go-ods or services to its related parties, and provided disclosures of only individually significant transactions with government-rela-ted entities.

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Improvements to International Financial Reporting Stan-dards (issued in May 2010 and effective from 1 January 2011). The improvements consist of a mixture of substantive chan-ges and clarifications in the following standards and inter-pretations:IFRS 1 was amended (i) to allow previous GAAP carrying va-lue to be used as deemed cost of an item of property, plant and equipment or an intangible asset if that item was used in operations subject to rate regulation, (ii) to allow an event driven revaluation to be used as deemed cost of property, plant and equipment even if the revaluation occurs during a period covered by the first IFRS financial statements and (iii) to require a first-time adopter to explain changes in accoun-ting policies or in the IFRS 1 exemptions between its first IFRS interim report and its first IFRS financial statements;IFRS 3 was amended (i) to require measurement at fair value (unless another measurement basis is required by other IFRS standards) of non-controlling interests that are not present ownership interest or do not entitle the holder to a propor-tionate share of net assets in the event of liquidation, (ii) to provide guidance on the acquiree’s share-based payment arrangements that were not replaced, or were voluntarily re-placed as a result of a business combination and (iii) to cla-rify that the contingent considerations from business com-binations that occurred before the effective date of revised IFRS 3 (issued in January 2008) will be accounted for in ac-cordance with the guidance in the previous version of IFRS 3;IFRS 7 was amended to clarify certain disclosure requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and quantitative disclosures about the natu-re and extent of financial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by clarifying that an entity should disclose the amount of foreclosed collateral held at the reporting date, and not the amount obtained during the reporting period;IAS 1 was amended to clarify the requirements for the presentati-on and content of the statement of changes in equity;IAS 27 was amended by clarifying the transition rules for amendments to IAS 21, 28 and 31 made by the revised IAS 27 (as amended in January 2008);IAS 34 was amended to add additional examples of significant events and transactions requiring disclosure in a condensed in-terim financial report, including transfers between the levels of fair value hierarchy, changes in classification of financial assets or changes in business or economic environment that affect the fair values of the entity’s financial instruments;and IFRIC 13 was amended to clarify measurement of fair value of award credits.

The above amendments resulted in additional or revised disclo-sures, but had no material impact on measurement or recogniti-on of transactions and balances reported in these financial sta-tements.

Other revised standards and interpretations effective for the current period:IFRIC 19 “Extinguishing financial liabilities with equity instru-ments”, amendments to IAS 32 on classification of rights issues, clarifications in IFRIC 14 “IAS 19 - The limit on a defined bene-fit asset, minimum funding requirements and their interaction” relating to prepayments of minimum funding requirements and amendments to IFRS 1 “First-time adoption of IFRS”, did not have any impact on these financial statements.

b) New Accounting Pronouncements

Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 Ja-nuary 2012 or later, and which the Group has not early adopted.IFRS 9, Financial Instruments Part 1: Classification and Measure-ment. IFRS 9, issued in November 2009, replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities. Key fe-atures of the standard are as follows:- Financial assets are required to be classified into two measu-

rement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The clas-sification depends on the entity’s business model for managing its financial instruments and the contractual cash flow charac-teristics of the instrument.

- An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset’s contractual cash flows represent payments of principal and interest only (that is, it has only “ba-sic loan features”). All other debt instruments are to be measu-red at fair value through profit or loss.

- All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be me-asured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial re-cognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an in-strument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment.

- Most of the requirements in IAS 39 for classification and measu-rement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income.

While adoption of IFRS 9 is mandatory from 1 January 2015, ear-lier adoption is permitted. The Group is considering the implica-tions of the standard, the impact on the Group and the timing of its adoption by the Group.

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IFRS 10, Consolidated Financial Statements (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), replaces all of the guidance on control and consolidation in IAS 27 “Consolidated and separate financial statements” and SIC-12 “Consolidation - special purpose entities”. IFRS 10 changes the definition of control so that the same criteria are applied to all entities to determine control. This definition is supported by extensive application guidance. This interpretation holds no si-gnificance to the Group.IFRS 11, Joint Arrangements, (issued in May 2011 and effective for annual periods beginning on or after 1 January 2013), replaces IAS 31 “Interests in Joint Ventures” and SIC-13 “Jointly Controlled Entities—Non-Monetary Contributions by Ventures”. Changes in the definitions have reduced the number of types of joint arran-gements to two: joint operations and joint ventures. The existing policy choice of proportionate consolidation for jointly control-led entities has been eliminated. Equity accounting is mandatory for participants in joint ventures. This interpretation holds no si-gnificance to the Group.IFRS 12, Disclosure of Interest in Other Entities, (issued in May 2011 and effective for annual periods beginning on or after 1 Ja-nuary 2013), applies to entities that have an interest in a sub-sidiary, a joint arrangement, an associate or an unconsolidated structured entity. It replaces the disclosure requirements curren-tly found in IAS 28 “Investments in associates”. IFRS 12 requires entities to disclose information that helps financial statement re-aders to evaluate the nature, risks and financial effects associated with the entity’s interests in subsidiaries, associates, joint arran-gements and unconsolidated structured entities. To meet these objectives, the new standard requires disclosures in a number of areas, including significant judgements and assumptions made in determining whether an entity controls, jointly controls, or si-gnificantly influences its interests in other entities, extended di-sclosures on share of non-controlling interests in group activities and cash flows, summarised financial information of subsidiaries with material non-controlling interests, and detailed disclosures of interests in unconsolidated structured entities. This interpre-tation holds no significance to the Group.IFRS 13, Fair value measurement, (issued in May 2011 and effecti-ve for annual periods beginning on or after 1 January 2013), aims to improve consistency and reduce complexity by providing a revised definition of fair value, and a single source of fair value measurement and disclosure requirements for use across IFRSs. The Group is currently assessing the impact of the standard on its financial statements.IAS 27, Separate Financial Statements, (revised in May 2011 and ef-fective for annual periods beginning on or after 1 January 2013), was changed and its objective is now to prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate finan-cial statements. The guidance on control and consolidated finan-cial statements was replaced by IFRS 10, Consolidated Financial Statements. The Group is currently assessing the impact of the amended standard on its financial statements.IAS 28, Investments in Associates and Joint Ventures, (revised in May 2011 and effective for annual periods beginning on or af-ter 1 January 2013). The amendment of IAS 28 resulted from the

Board’s project on joint ventures. When discussing that project, the Board decided to incorporate the accounting for joint ventu-res using the equity method into IAS 28 because this method is applicable to both joint ventures and associates. With this excep-tion, other guidance remained unchanged. The amendments are of no relevance to the Group.Disclosures—Transfers of Financial Assets – Amendments to IFRS 7 (issued in October 2010 and effective for annual periods beginning on or after 1 July 2011.). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. The amendment includes a requi-rement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party, yet remain on the entity's balance sheet. Disclosures are also required to enable a user to understand the amount of any associated liabilities, and the re-lationship between the financial assets and associated liabilities. Where financial assets have been derecognised, but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclosure is required to enable the effects of those risks to be understood. The Group is currently assessing the impact of the amended standard on disclosures in its financial statements.Amendments to IAS 1, Presentation of Financial Statements (is-sued June 2011, effective for annual periods beginning on or after 1 July 2012), changes the disclosure of items presented in other comprehensive income. The amendments require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be reclassified to profit or loss in the future. The suggested title used by IAS 1 has changed to ‘statement of profit or loss and other comprehensive income’. The Group expects the amended standard to change presentation of its financial statements, but have no impact on measurement of transactions and balances.Amended IAS 19, Employee Benefits (issued in June 2011, effec-tive for periods beginning on or after 1 January 2013), makes significant changes to the recognition and measurement of de-fined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all changes in the net defined benefit liability (as-set) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. This interpretation holds no significance to the Group.Disclosures—Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7 (issued in December 2011 and effec-tive for annual periods beginning on or after 1 January 2013). The amendment requires disclosures that will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off. The amendment will have an impact on disclosures but will have no effect on measurement and recognition of financial instrument-sof the Group.Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (issued in December 2011 and effective for annual pe-riods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria.

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This includes clarifying the meaning of ‘currently has a legally enforceable right of set-off’ and that some gross settlement sy-stems may be considered equivalent to net settlement. The Gro-up is considering the implications of the amendment, the impact on the Group and the timing of its adoption by the Group.Other revised standards and interpretations: The amendments to IFRS 1 “First-time adoption of IFRS”, relating to severe hype-rinflation and eliminating references to fixed dates for certain exceptions and exemptions, will not have any impact on these financial statements. The amendment to IAS 12 “Income taxes”, which introduces a rebuttable presumption that an investment property carried at fair value is recovered entirely through sale, will not have any impact on these financial statements. IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, consi-ders when and how to account for the benefits arising from the stripping activity in mining industry.

Unless otherwise described above, the new standards and inter-pretations are not expected to affect significantly the Group’s fi-nancial statements.The Group did not early-adopt new or amen-ded standards.

Except for the amendment to IFRS 7 (disclosures – transfers of financial assets), none of the new accounting announcements described above have been endorsed by the EU.

2.2 Comparative information

The standalone and consolidated financial statements for 2011 did not feature any adjustments or reclassifications in relation to 2010, except in the case of comparative data for reporting by segments, which is adjusted to the changes in accordance with the data for the current year.

2.3 Consolidation

The financial statements of the Subsidiary, used for the prepa-ration of consolidated financial statements, were prepared as of the Bank’s reporting date. The consolidation principles remained unchanged in comparison with the previous year.The subsidiary has been fully consolidated since the day of the set-up and will be excluded from consolidation on the date con-trol is lost. Where necessary, accounting policies of the Subsidi-ary have been adjusted to ensure consistency with the policies adopted by the Bank.In the process of consolidation all intercompany claims and liabi-lities as well as revenues and expenditures within the Group have been eliminated.

2.4 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting to the body that makes decisions on funding, investments and the operating performance of the Bank and its segments. The criterion for the definition of the Bank’s and the Group’s segments is represented by services, which are allocated based on similar characteristics to retail operations, corporate

operations and the financial markets. The Assets and Liabilities Committee (ALCO) was organized as the decision-making body.

2.5 Foreign currency translation

a) Functional and presentation currencyItems, reported in these standalone and consolidated financial statements, are measured using the currency of the primary eco-nomic environment in which the Bank and the Group operates (the functional currency). The financial statements are reported in euros, which is the Bank’s and the Group's functional and pre-sentation currency.

b) Transactions and balancesForeign currency transactions are translated into the functional currency according to the exchange rates prevailing on the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translati-on of monetary assets and liabilities denominated in foreign cur-rencies are recognised in the income statement.

Translation differences resulting from changes in amortised costs of monetary items denominated in foreign currency clas-sified as available for sale financial assets are recognized in the income statement.

Translation differences on non-monetary items, such as equities at fair value through profit or loss, are reported as part of fair va-lue gain or loss in the income statement.

Translation differences on non-monetary items, such as equities classified as available for sale, are included together with valua-tion reserves at fair value within other comprehensive income.Gains and losses from foreign exchange trading are shown in the income statement under »Net gains/(losses) from financial assets and liabilities held for trading«.

2.6 Interest income and expenses

Interest income and expenses are recognised for all debt instru-ments using the effective interest rate method. The aforemen-tioned method serves the calculation of amortised cost of a fi-nancial asset or financial liability and distributes interest income and expenses across the expected life of a financial instrument. Interest income includes interest from fixed income investments and investments in securities held at fair value through profit or loss and from discounts and premiums on bonds. The effective interest rate calculation includes all fees paid between parties as well as transaction costs, however excluding future losses due to credit risk. Once a financial asset or a group of related assets is impaired, the interest revenue is recognised on the basis of the interest rate used to discount future cash flows to calculate impairment.

The interest income and expenses from all financial assets and liabilities are shown in the income statement as part of net in-terest.

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2.7 Fee and commission income

Fees and commissions are generally recognised as the service is provided. Fee and commission income includes fees and com-missions from guarantees to companies issued by the Bank, from payment operations and foreign exchange as well as from credit card operations. Fees and commissions included in the calcula-tion of the effective interest rate are shown in interest income and expenses.

2.8 Dividend income

Dividend income is recognised in the income statement when the Group’s right to receive payment has been established.

2.9 Financial instruments

2.9.1 Classification

The classification of financial instruments on initial recogniti-on depends on the purpose of acquisition and the instruments’ characteristics. The Group classifies financial instruments in the following categories: financial instruments at fair value through profit or loss, loans and advances, held to maturity investments and available for sale financial assets.

a) Financial instruments at fair value through profit or lossThis category includes financial instruments held for trading and financial instruments designated at fair value through profit or loss at inception.

A financial asset is classified in the held for trading category if acquired principally for the purpose of selling in the short term or for the creation of short-term profits. Derivatives are always categorised as held for trading unless they are designated as hedging instruments in the application of accounting rules for hedge accounting.

Financial assets and liabilities are designated at fair value through profit or loss when the following conditions are met:- with such a classification the Group eliminates or significan-

tly reduces measurement or recognition inconsistencies that would arise from the valuation of financial assets and liabilities on different bases or

- a financial instrument contains one or more embedded deriva-tives, which may significantly modify its cash flows.

b) Loans and advancesLoans and advances are non-derivative financial assets with fixed or determinable payments, which are not quoted in an ac-tive 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, for reasons other than the deterioration of creditworthiness.

c) Held to maturity investmentsHeld to maturity investments are non-derivative financial instru-ments with fixed or determinable payments and a fixed maturity, which do not meet the definition of loans and receivables and whi-ch the Group intends to hold until maturity and is able to do so.

d) Available for sale financial assetsAvailable for sale financial assets are those non-derivative finan-cial assets, which the Group intends to hold for an indefinite peri-od of time and which it may sell in response to liquidity needs or due to changes in interest rates, exchange rates or prices.

2.9.2 Measurement and recognition

Financial assets, except financial assets at fair value through pro-fit or loss, are initially recognised at fair value increased by tran-saction costs.

Financial instruments at fair value through profit or loss are ini-tially recognised at fair value with transaction costs recorded in the income statement.

Purchases and sales of financial instruments at fair value through profit or loss, held to maturity investments and available for sale financial assets are recognized on trade date. Loans are recogni-zed when cash is advanced to the borrowers.

Financial assets at fair value through profit or loss and available for sale financial assets are measured at fair value. Gains and los-ses from financial assets at fair value through profit or loss are included in the income statement in the period in which they arise. Gains and losses from changes in the fair value of available for sale financial assets are recognized in other comprehensive income until the financial asset is derecognized or impaired, at which time the cumulative amount previously included in other comprehensive income is transferred to the income statement. Interest calculated using the effective interest rate method and foreign currency gains and losses on monetary assets classified as available for sale are recognized directly in the income state-ment.

Dividends on available for sale equity instruments are recogni-zed in the income statement when the Group’s right to receive payment is established.

Loans and held to maturity investments are carried at amortized cost.

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2.9.3 Reclassification

If due the a change in the purpose of an instrument, it is no lon-ger eligible for classification as held for trading and is eligible for classification as loans and advances, it may be reclassified. Financial assets that are not eligible for classification as loans and receivables may be transferred from the held for trading catego-ry only in rare circumstances. For instruments designated at fair value through profit and loss and held to maturity instruments reclassification is not permitted.

2.9.4 Derecognition

Financial assets are derecognised when the contractual rights to receive cash flows from these assets have ceased to exist or the assets have been transferred in the transfer that fulfills the crite-ria for derecognition. Financial liabilities are derecognised when they have been discharged, cancelled or have expired.

Collateral (shares and bonds) provided by the Group under stan-dard repurchase agreements and securities lending and bor-rowing transactions is not derecognised because the Group re-tains substantially all the risks and rewards on the basis of the predetermined repurchase price, and the criteria for derecogniti-on are therefore not met.

2.9.5 Fair value measurement principles

The fair value of financial instruments traded on active markets is based on the current best bid price at the statement of financial position date, excluding transaction costs. If a market price is not available, fair value is determined using discounted future cash flow or a pricing model.

When using discounted future cash flow models, these are de-termined based on the most probable estimate and the discount rate is a market based rate of an instrument with similar cha-racteristics on the last day of the reporting period. If the pricing model is used market data at the reporting date is used.

The fair value hierarchy is disclosed under 2.25.5.b).

2.9.6 Derivative financial instruments and hedge accounting

Derivatives, including forwards, futures and swaps, are initially reco-gnised in the statement of financial position at fair value. The fair va-lue valuation is determined on the basis of a listed market price, the model of discounted future cash flows and with the use of pricing models. Interest accruals on interest rate derivatives are recorded separately from fair value measurement in the income statement.

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

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

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in the income state-ment, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Effective changes in fair value of hedging instruments and the related hed-ged items are reflected in the income statement under ‘fair value adjustments in hedge accounting’’.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is transferred to profit or loss over the period to maturity. The adjustment in the carrying amount of the hedged equity investment is included in operating profit at the moment of sale.

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

2.10 Impairment of financial assets

2.10.1 Assets measured at amortised cost

The Group assesses impairments of financial assets individually for all individually significant assets where there is objective evidence of impairment, while all other financial assets are impaired collecti-vely. According to the Regulation on credit risk loss assessment by the Bank of Slovenia a financial asset or off-balance sheet liability is individually significant if total exposure to the client exceeds EUR 650 thousand or 0.5% of the bank’s equity. The Bank defines as individually significant all exposures to banks and other exposure to legal entities, rated A through C and all legal entities rated C2, D and E. If the Group determines that no objective evidence of impa-irment exists in an individually significant financial asset, it includes this asset in a group of financial assets with similar credit risk cha-racteristics and collectively assess them for impairment.

At each reporting date of the statement of financial position the Group assesses whether there is objective evidence that an indi-vidually significant financial asset is impaired as a consequence of one or more events that occurred after initial recognition of the asset and that event has an impact on the asset’s future cash flows, which can be reliably estimated.

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The criteria the Group uses to determine the existence of objecti-ve evidence on an impairment loss pertaining to a financial asset or asset class include:- late payment of contractual interest or principal;- debtor’s significant liquidity problems;- breach of contract;- start of bankruptcy proceedings, compulsory settlement pro-

ceedings or a different form of financial restructuring;- deterioration of the borrower’s competitive position;- deterioration in the value of collateral; and- credit rating downgraded below investment grade.

The Group estimates that the period between the occurrence of problems, which prevent the client from fulfilling his obligations to the Group, and identification of these problems by the Group typi-cally varies from between one to three months. Junior manage-ment determines the assessment period on a case by case basis.

If there is objective evidence that an impairment loss on loans and advances or held to maturity investment has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced through an allowance account and the amount of the loss is recognized in the income statement. The calculation of the present value of the estimated future cash flows of collateralized financial assets reflects the current value of future cash flows from foreclosure, less cost of obtaining and selling the collateral. Assumed off-ba-lance sheet liabilities are also assessed individually and where necessary related provisions are recognized as liabilities.

For the purpose of collective impairment evaluation the Group uses migration matrices, which illustrate the expected migration of customers between internal rating classes. The probability of migration is assessed on the basis of past experience, namely the annual migration matrices for different types of customers. This data is then adjusted to the predicted future trends, since histo-ric experience does not necessarily reflect the actual economic conditions. The Bank includes the estimates in the impairment percentages with an estimate of the general risk factor. Expo-sure to retail clients is analysed additionally from the aspect of transaction type. For corporates impairments are assessed on the basis of expected client transitions and with it the transition of good debt to C, D and E rating classes with individually estimated average recovery rates from C2 (bad debt class), D and E clients. In retail the expected migrations from good rating classes to C, D and E are assessed for individual transaction types, the average recovery is subsequently calculated on the basis of actual loss from bad debt for individual transaction type.

If the amount of the impairment subsequently decreases due to an event occurring after the write down, the reversal of loss is recognized as a reduction of an allowance for loan impairment.When a loan is uncollectible, it is written off against the related allowance 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. Subsequent recoveries of amo-unts previously written off decrease the amount of the provision for loan impairment in the income statement.

The Group decides to write receivables off on the basis of the following criteria:- the debtor no longer performs his regular activities (terminati-

on of the legal entity);- the Group has no adequate collateral, which it could liquidate,

at its disposal; and- legal recovery proceedings have been concluded.

2.10.2 Assets available for sale

At the reporting date the Group assesses whether there is objec-tive evidence that available for sale financial assets are impaired. A significant or prolonged decrease in the fair value of an equity instrument below its cost may provide objective evidence of im-pairment. If any such evidence exists for available for sale assets, the cumulative loss is removed from equity and recognized in the income statement as an impairment loss. A subsequent dere-cognition of loss due to impairment of an equity instrument as a result of an increase in its fair value is recognised through other comprehensive income.

If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized, the impairment loss is reversed through the income statement.

The criteria the Group uses to determine whether a debt instru-ment is impaired:- late payment of contractual interest or principal;- issuer’s significant liquidity problems;- breach of contract;- start of bankruptcy proceedings at issuer;- deterioration of the issuer’s competitive position;- credit rating downgraded below investment grade.

Impairment losses recognized in the income statement are me-asured as the difference between the carrying amount of the financial asset and its current fair value. The current fair value of the instrument is its market price or discounted future cash flows, when the market price is not obtainable.

2.10.3 Repossessed assets

In certain cases assets are repossessed in payment of outstan-ding obligations. Repossessed assets are initially recognised in the Group statements at fair value. They are sold as soon as pos-sible. After initial recognition, repossessed assets are measured and accounted for in accordance with policies relating to the adequate asset category.

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2.10.4 Renegotiated loans

Loans that are either subject to collective impairment asses-sment or individually significant and whose terms have been re-negotiated, due to a deterioration of the debtor’s solvency, are no longer considered to be past due, but are treated as new loans. These loans continue to be measured in accordance with the original effective interest rate. In subsequent years, the asset is considered as restructured and is disclosed only if renegotiated.

2.11 Offsetting

Financial assets and liabilities are offset when a legally enforcea-ble right to offset the recognised amounts exists and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

2.12 Sale and repurchase agreements

Securities sold under sale and repurchase agreements (repos) are retained in the financial statements and the related liabilities are included in financial liabilities associated with the transfer-red assets. Securities sold subject to sale and repurchase agre-ements are reclassified in the financial statements as pledged assets when the counterparty has the right by contract to sell or re-pledge the collateral. The difference between the sale and repurchase price is treated as interest and accrued over the life of the repo agreements using the effective interest rate method.

2.13 Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents comprise cash and balances with the Central Bank, debt securities held for trading and loans to banks with a maturi-ty of less than 90 days.

2.14 Accounting for leases

A lease is an agreement whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time. Lease agreements are acco-unted for in accordance with their classification as finance leases or operating leases at the inception of the lease. The key classi-fication factor is the extent to which the risks and rewards inci-dental to ownership of a leased asset lie with the lessor or lessee.

a) the Group is the lesseeThe leases entered into by the Group are operating leases. The total payments made under operating leases are included in the income statement on a straight line basis over the period of the lease and are recorded in administrative expenses.

When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor is recognised as an expense for the period in which termination takes place.

b) the Group is the lessorIn operational leasing the Group transfers the right to use an as-set for a contractually agreed amount of time to the lessee in exchange for a payment or a string of payments.

Payments 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 consolidated statement of financial position as investment property or as property and equipment.

Assets are leased under finance lease when the risks and rewards related to ownership of a leased asset are transferred to the les-see. When assets are leased out under a finance lease, the pre-sent value of the lease payments is recognised as a receivable. Income from finance leasing transactions is apportioned syste-matically over the lease period. Receivables from a financial lease are shown as net investments in the finance lease including the unguaranteed residual value.

2.15 Investment property

Investment property includes buildings held for leasing and not occupied by the Group.

Investment property is initially recognized at cost. Direct tran-saction costs are included in the initial measurement. Sub-sequently it is measured at cost less accumulated depreciation and any accumulated impairment loss. When there is a change in use the Group makes transfers to or from investment property.Investment property is later measured using cost model. Depre-ciation is provided for on a straight-line basis using depreciation rate of 1.0%.

2.16 Property and equipment

All property and equipment is initially recognized at cost. Sub-sequently it is measured at cost less accumulated depreciation and any accumulated impairment loss.

Each year the Group assesses whether there are any indications that assets may be impaired. If such an indication exists, the Gro-up estimates the recoverable amount. The recoverable amount is the higher of the fair value less cost to sell and value in use. If the recoverable amount exceeds the carrying value, the assets are not impaired. As at 31 December 2011 no property or equipment item was impaired.

Depreciation is provided for on a straight-line basis over their estimated useful lives.

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The following are approximations of the annual rates used:

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

The assets' residual value and useful life are reviewed, and adju-sted if appropriate, on each statement of financial position date.

Gains and losses on disposal of property and equipment are de-termined as a difference between the sale proceeds and their car-rying amount and are recognized in the income statement. Main-tenance and repairs are charged to the income statement during the financial period in which they are incurred.

Day-to-day servicing costs are recognized in profit or loss as in-curred. Subsequent costs that increase future economic benefits are recognized in the carrying amount of a property and equi-pment item.

2.17 Intangible assets

Intangible assets comprise computer software and software li-cences. They are initially recognised at cost, decreased by the accumulated amortization and impairment losses.

Intangible assets with a definite useful life are amortized using the straight-line method over their estimated useful economic life. At each reporting date intangible assets are reviewed for indications of impairment or changes in estimated future economic bene-fits. 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.

Amortization of intangible assets with a finite useful life is calcu-lated on a straight-line basis at rates designed to write down the cost of intangible asset over its estimated useful life. Software and licences are amortised over a period of three to five years.Intangible assets begin to be amortised when they are available for use.

2.18 Inventories

Inventories are measured at the lower of cost or net realizable value. The Group uses the weighted average cost method to de-termine inventories.

2.19 Taxes

2.19.1 Corporate income tax

Corporate income tax is calculated using the provisions of the Corporate Income Tax Act at a tax rate of 20% and is recorded together with the changes in deferred taxes as tax expense in the income statement.

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

Deferred tax assets are recognised on all temporary differences, if there is a probability that a taxable profit will be available, against which the temporary differences can be utilised.

Deferred tax related to fair value remeasurement of available for sale investments is charged or credited directly to other compre-hensive income and subsequently recognized in the income sta-tement together with the deferred gain or loss from sale.

In 2011 the Group made a loss. The basis for the recognition of deffered tax assets according to the reporting date is planned future profits. Should the planned result not be obtainable, the Group will adjust the deffered tax assets accordingly.

2.19.2 Tax on total assets

In 2011 the Tax on bank total assets law was implemented, intro-ducing the obligation to declare and pay tax on the total assets of banks. The tax liability is represented by the difference between the tax base and the tax relief, while the basis for tax in levied at a rate of 0.1% of the bank’s total assets in the reporting period and the tax relief at a rate of 0.167% from loans granted to non-fi-nancial companies and private entrepreneurs during the period.

2.20 Employee benefits

Employee benefits include: jubilee benefits and retirement in-demnity bonuses. In accordance with the legislation employees retire after 35 to 40 years of service and are entitled to a lump sum severance pay out at such a time. Employees are also en-titled to long service bonuses for every ten years of service at the Group.

The valuation of the provisions for these obligations is carried out by independent qualified actuaries. These obligations are measured in the amount of the present value of future expenses, taking into consideration future salary increases and other con-ditions apportioned to past and future period of employment. All gains and losses due to the changes in assumptions are im-mediately recognised in the income statement.

The Bank and The Group %

Buildings 1.9 – 3.0

Furniture and equipment 7.0 – 20.0

Computer equipment 10.0 – 33.0

Leasehold improvements 10.0 – 20.0

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The Group contributes to the State Pension Scheme (8.85% of gross salaries) in accordance with the legislation. Once contri-butions have been paid, the Bank has no further payment obliga-tion. The regular contributions constitute net periodic costs for the year in which they are due and are disclosed under labour costs in the income statement.

2.21 Loans taken, deposits and debt securities issued

Loans taken, deposits and debt securities issued are initially re-cognised at fair value decreased by the transaction costs. Loans taken, deposits and debt securities issued are usually measured at cost, with the difference between initial recognition and final value recognised in the income statement under interest income with the use of the effective interest rate. A debt security issued, where the interest rate risk is hedged with an interest rate swap is recognised at fair value.

Purchases of own debt reduce the liabilities in the statement of financial position. The difference between the carrying amount and the price of the own debt is shown in the income statement.

2.22 Provisions

Provisions are recognised when the Group exhibits current obli-gations due to a past event (legally or indirectly) and it is likely that in the settlement of the liability an outflow of factors will be required, which shall enable the inflow of economic benefits and the amount of the obligation is reliably measurable.

When there is a number of similar obligations, the likelihood of an outflow of funds in their settlement is determined by considering the class of obligations as a whole. A provision is recognized even though the likelihood of outflow for any item is small, but it is quite likely that outflows will be required to settle the obligation as a whole.

he Bank and the Group uses the provisions to directly cover costs or expenses for which they were established. The justification of their size or existence as related to the current value of expenses, which are assumed to be required for the settlement of obliga-tions, for which the provisions were formed is assessed on the reporting date.

2.23 Financial guarantees

Financial guarantees are agreements that require the issuer to make specific payments to reimburse the holder for a loss it in-curs because a specific debtor fails to make payments when due, in accordance with the terms of debt instruments at the initial or adjusted due date. Such financial guarantees are given to banks, other financial institutions and other parties as a form of collateral on loans, overdrafts and other banking facilities.

Financial guarantees are initially recognized at fair value, which is normally evidenced by the fees received. The fees are transferred

to the income statement over the contract term using the strai-ght-line method. After initial recognition the guarantees issued are shown in the statement of financial position in the amount of undivided fees or the estimated expenditure, which is required for the settlement of liabilities in accordance with the agreement. The greater of the two values is taken into account.

2.24 Share capital

a) Share issue costsExpenses, directly connected with the issue of new shares are re-cognized in equity as a decrease in share premium.

b) Dividends on sharesDividends on shares are recognised in equity in the period in whi-ch they are approved by the Bank’s owners.

c) Treasury sharesShould the Bank purchase treasury shares, the proceeds are sho-wn as a decrease in share capital. In the event of a subsequent sale of the acquired treasury shares the amount is shown as an increase in share capital. The Group formed share reserves for the acquired treasury shares.

2.25 Management of bank risks

In its operations the Bank and the Group assume a number of different types of risk, the amount of which depends on the type of transaction and the preparedness to assume risk. The Bank and the Group mainly focus on the performance of traditional banking operations and they provide their clients with services pertain-ing to treasury and other financial transactions to a lesser extent. Most of their operations are conducted in the Republic of Slo-venia, whereas they are present in interbank market of other EU member states as well as other low credit risk exhibiting countries throughout the world. They are also active, to a limited extent, in the countries of the South East Europe, lending to corporate and retail clients.

To achieve strategic goals in operations and risk management the Bank and the Group are putting a lot of emphasis on credit, liquidity and capital risk, profitability risk, market risk, operational risk as well as strategic, interest rate and reputation risk. The or-ganisation of the Bank and the Group ensures the separation of commercial organisational units or the units that enter into tran-sactions and assume risk (front office) from the back office, which books the transactions and keeps accounts. The risk monitoring and management function is also separated from the aforementi-oned two. The organisation of the Bank and the Group is such as to provide for independent operations of individual organisational units up to the managerial level and for an adequate flow of infor-mation up and down as well as between the organisational units.

The Bank and the Group have prepared a strategy and a policy of assuming and managing risk per respective risk type. The stra-tegy of assuming and managing risk reflects the Bank’s and the Group's core relationship toward risk within the framework of operations and includes the objectives and general principles or

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policies pertaining to assuming and managing risk, the approa-ch to the management of individual risk types and the approach to the process of assessing adequate internal capital. A policy on assuming risk and risk management has been prepared for each individual risk type, detailing the capability to assume risk, the risk management process (organization rules on the implementation of the process, the procedures of identifying, measuring or eva-luation, the management and monitoring, the system of internal controls), the responsibility of the Management Board and senior management and other. The strategy and policies updated annu-ally are confirmed by the Management Board and the Supervisory Board.

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

Risk management is directly monitored:- in the Risk Management Division: all risks;- at Credit Committees (once a week): credit risk;- at the Liquidity Committees (three times a week): liquidity risk;- on a monthly basis at the Assets and Liabilities Committee

(ALCO): credit, market, liquidity, interest rate, capital and pro-fitability risk;

- at the Management Board level or the Management Committee: operational and strategic risk as well as reputation risk;

- at the Risk Committee: all types of risk.

2.25.1 Credit risk

Credit risk is the risk of loss resulting from a debtor’s inability to meet, for any reason, its financial or contractual obligations en-tirely. This type of risk includes subcategories, namely country risk, risk of concentration and residual risk. The Risk Management Division, being an organizationally independent unit in relation to commercial units and 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 Divi-sion. Granting loans and other transactions are subject to authori-zations and legal limitations. Authorizations 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 within the Group.

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

2.25.1.1 Measuring and managing credit risk

The Bank and the Group measure credit risk for active on-balan-ce sheet items and for commitments and contingent liabilities. Credit risk is assessed for financial assets measured at amortised cost, for financial assets designated at fair value and for assumed liabilities from commitments and contingent liabilities. Credit risk is the result of business, commercial and housing loans, credit card operations, transaction account overdrafts, guarantees and granted but still undrawn loans, as well as a consequence of the investments in debt securities and the exposure from transacti-ons with derivatives.

Loans and advances to customersExposure to credit risk depends on three elements: (1) The proba-bility of default or exposure to the debtor’s rating class, (2) Current exposure from statement of financial position and commitment and contingent liability items, and (3) The amount of outstanding debt paid off, in case of default.

(1) The probability of default or exposure to the debtor’s rating classInternal rating systems have been developed for the classification of the Bank’s debtors into rating classes and for the measurement of probability of default for different debtor groups (legal entities, individual entrepreneurs and banks). Debtor classification is ba-sed on the estimated qualitative and quantitative elements. In the classification of banks and sovereigns (state) external ratings are usually considered (Moody’s Investor Service, Fitch Ratings, Stan-dard & Poor’s). Prior to every individual private loan or investment approval each individual’s creditworthiness is assessed and the settlement of existing liabilities checked. Before approving a loan, as a rule, an inquiry is made with the use of the SISBON system (Slovenski informacijski sistem bonitet fizičnih oseb – the Slovene Information System on the Rating of Retail Clients), which inclu-des data on indebtedness and settlement of liabilities by retail cli-ents in the Slovene banking environment.

Prior to approving a transaction the Bank classifies a debtor into a rating class, measuring the probability of default and loss. On an ongoing or at least on a quarterly basis, the Group verifies the adequacy of a classification in relation to the debtor’s financial standing, the settlement of due liabilities and the assessment of qualitative factors, on the basis of which the classification is retai-ned or the debtor is classified into a higher or lower rating class. Transitional matrices are prepared regularly, showing the transiti-ons between rating classes and measuring the number of defaults in an individual period. On the basis of data on defaults, estimates on the probability of default for an individual rating class are ad-justed.

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(2) Current exposure from statement of financial position and commitment and contingent liability items The level exposure in items of the statement of financial position (loans) and the level of commitment and contingent liability exposures equal their carrying amount.

(3) The amount of outstanding debt paid off, in case of defaultThe loss amount in case of default depends on the amount of exposure and the collateral obtained. The Bank and the Group strive toward securing their receivables to minimize loss. It is important for the Bank and the Group to begin procedures for the settlement of overdue, unpaid receivables as soon as possible.

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

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

DerivativesThe exposure to credit risk from derivatives pertains to exposure to counterparty risk, namely the risk of a counterparty defaulting prior to final settlement of cash flow from the transaction. The exposure to credit risk equals the credit replacement value, calculated on the basis of the current exposure method. The Bank enters into derivative instrument agreements with prime debtors mainly in foreign currency transactions, interest rate swaps. In the event of increased credit risk, the Bank tries to acquire additional collateral. The exposure to credit risk is managed within the framework of limits pertaining to lending agreements, which are confirmed by the Credit Committee.

* comparison prepared for banks

Internal rating classInternal 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 Afrom 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 B3

C1, C2 Substandard Sub-investment grade C from Caa1 and lower

D Default Default D Default

E Default - recovery Default E Default

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

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Limit definition and monitoringThe Bank calculates limits for loans to individual debtors and to groups of related entities on the basis of data on the existing and future operations. In doing so it takes into consideration the legal requirements in connection with the largest exposure limits re-lated to an individual entity or a group of related entities, which must not exceed 25% of the Bank’s capital, while taking into acco-unt its policies as well. The diversification of exposure to individu-al debtors or groups of related entities is one of the objectives the Bank is working toward, which is why it is reducing the number and value of exposures that exceed 10% of its capital. Limits are monitored on an ongoing basis and are adjusted in relation to the risk profile of the debtor or a group of related entities and the sector the debtor is active in. Total limits and their possible increases or decreases are confirmed by the Bank’s Credit Com-mittee. Exposures exceeding 10% of the Bank's capital require the approval of the Supervisory Board. The Bank has prepared a me-thodology of indebtedness ceiling calculation for corporate and bank clients as well.

In addition to limits set for individual debtors or groups of related entities, the Bank 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 con-ditions and exposure to risk, these limits may also be adjusted.

CollateralThe Bank and the Group’s exposure to credit risk is reduced with the implementation of policies regarding collateral. To minimi-ze loss in the event of default, the Banka and the Group tend to acquire adequate 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 in-surance by an adequate provider. The Bank and the Group consider other forms of collateral such as physical collateral, inventories and cash claims to be of lesser quality. Usually long-term loans are col-lateralized, 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 Bank and the Group would negotiate additional colla-teral or a reduction in exposure.

The significant types of appropriate collateral the Banka and the Group utilise and the related valuation:- financial assets used as collateral (bank deposits with the Group

or cash assimilated instruments, debt securities, issued by sove-reigns, the central bank or institution, equity and other securities, listed on stock exchanges), which is valued at market and is reva-luated on a daily basis;

- pledged commercial or residential property, valued at fair value;- personal assurances given by: sovereigns and central banks, re-

gional or local authorities, public sector entities, institutions, in-surance companies and companies with a high credit rating (100 % percent of the value).

The macroeconomic conditions and the circumstances prevailing in the real estate and capital markets in 2011 dictate that a great

deal of attention was directed at monitoring the fair value of colla-teral and toward ensuring the contractually agreed ratios between exposure and collateral coverage.

To reduce credit risk the Bank and the Group do 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 least once a year and adapted to the economic conditions. Continuously or at least on a quarterly basis estimations are made, whether there is objective evidence of impairment relating to financial assets and liabilities assumed on the basis of commitments and contingent liabilities. Should such evidence exist, the Bank must calculate the amount of loss due to impairment and make provisions for com-mitments and contingent liabilities. The methodology of estima-ting impairment charges is set up according to type of debtor: le-gal entities and individual entrepreneurs, retail clients, banks and savings banks and prime debtors. The methodology of assessing impairment charges for exposure to retail clients was supplemen-ted in 2010.

(1) Assessment of impairment charges for exposure to legal entiti-es and private entrepreneursThe impairment charge may be calculated individually on the ba-sis 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 con-ditions, thus reflecting the effects of recent operating conditions. Individual estimates pertain to assets individually exhibiting signi-ficant characteristics (exposures above EUR 650,000) and showing signs of impairment (exposures classified lower than A3). If there are no signs of impairment, the exposure is classified into a group of financial assets with similar characteristics and the impairment is assessed collectively. Individually impairment is also assessed for financial assets, which have already been recognized as impaired (exposures classified C2, D and E). Impairment is appraised on the basis of estimated future cash flow, including expected repayment from realization of collateral.

For exposures not exhibiting signs of impairment or exhibiting individually insignificant impairment (exposures classified A1, A2, A3 and exposures under EUR 650,000), the charge is as-sessed collectively on the basis of historical default data and loss estimates. The Bank estimation percentage includes a general risk factor, reflecting the deterioration 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 fluc-tuations in the general 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.

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(2) Assessment of impairment charges for exposure to retailThe Bank and the Group classify financial assets in rating groups A, B, C, D, E on the basis of the settlement of liabilities. Individu-ally significant financial assets (exposures above EUR 400,000), where there is objective evidence to suggest there is a need for the establishment of an impairment, are impaired individually. The same applies to financial assets already recognised as im-paired (exposures classified C, D and E). For the purpose of col-lective impairment financial assets are divided into homogenous groups on the basis of the settlement of liabilities and in accor-dance with product groups (housing loans, consumer loans, quick loans, account overdrafts). Impairment charge percent-ages are based on past data and adjusted to current conditions, thus differing for every product group and every rating class. Impairment charge percentages are reestimated once a year.

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

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

Managing credit risk during the crisisThe slow and unstable recovery of the domestic economy and uncertainty in the European financial markets require the Banka and the Group to continue to implement measures aimed at re-ducing the effect of the crisis on the financial position and the profitability of the Bank and the Group.

It limits lending to financially unstable debtors and to debtors from riskier industries and regions. The Bank and the Group tries to obtain additional collateral, keep in contact with borrow-ers, monitor their operations and cash flow for the repayment of debt, adjust debtor classification and limits. It works on the recovery of outstanding receivables and liquidates collateral in some cases. New investments are granted to debtors mainly for the financing of regular business operations with good quality. In the area of retail lending stricter criteria for the assessment of creditworthiness were applied. The Bank and the Group con-tinued to follow their goal of diversifying the credit portfolio ac-cording to debtor or groups of related entities and activity.

It is the Bank’s and the Group’s assessment that the number of insolvency proceedings and defaults might increase in 2012, as it expects the economy not to improve. A positive impact on the do-mestic economy is expected to come from government measures to increase payment discipline, stimulate investment activity and raise the competitiveness of the domestic economy, as well as from economic activity in the European countries and the stabilisation of conditions in the financial markets. The Bank and the Group will continue to closely monitor debtor rating and the credit portfolio while adapting the lending policy and credit risk management to the current conditions. They will also reduce exposure to individual clients or groups of related parties and limit investments in high risk industries and regions. They will continue to actively work on recovery and foreclose on bad debt.

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2.25.1.2 Maximum credit risk exposure

Bank

31 December 2011 31 December 2010

Maximumexposure to

credit riskFair value of

collateral3

Maximumexposure to

credit riskFair value of

collateral3

Statement of financial position assets 2,248,103 1,738,162 2,375,897 1,803,495

Loans 1,748,414 1,656,544 1,795,957 1,680,720

Loans and advances to state1 2,705 - 5,409 -

Loans and advances to banks 55,054 10,002 85,908 -

Loans and advances to private individuals 337,896 496,476 331,518 479,726

- overdraft accounts and cards 35,000 21,110 34,032 20,049

- housing loans 168,963 330,106 154,993 312,632

- consumer and other loans 133,484 145,047 142,009 146,792

- unauthorised account overdrafts 449 213 484 253

Loans to companies2: 1,352,759 1,150,066 1,373,122 1,200,994

- large companies 617,730 435,944 652,615 453,577

- small and medium sized enterprises (SME) 655,483 672,590 677,209 729,332

- other 79,546 41,532 43,298 18,086

Financial assets held for trading 37,562 - 44,668 -

Derivatives 17,153 - 12,645 -

Debt securities 20,409 - 32,023 -

Financial assets designated at fair value through P&L 7,823 - 29,445 1,845

Debt securities 7,823 - 29,445 1,845

available for sale financial assets 177,997 66,534 194,954 48,372

Debt securities 177,997 66,534 194,954 48,372

Held to maturity investments 269,311 15,084 276,273 72,558

Debt securities 269,311 15,084 276,273 72,558

assets pledged - - 32,390 -

Debt securities - - 32,390 -

Derivative financial intruments designated for hedging 4,838 - - -

Other financial assets 2,158 - 2,209 -

Off-balance sheet exposures 269,683 116,575 248,860 122,616

Guarantees 95,360 48,778 79,289 49,966

Other off-balance sheet exposures 174,323 67,797 169,571 72,651

Total 2,517,786 1,854,737 2,624,757 1,926,112

- amounts in thousands of EUR

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GROUP

31 December 2011 31 December 2010

Maximumexposure to

credit riskFair value of

collateral3

Maximumexposure to

credit riskFair value of

collateral3

Statement of financial position assets 2,247,985 1,738,162 2,377,403 1,803,495

Loans 1,745,215 1,656,544 1,793,275 1,680,720

Loans and advances to state1 2,705 - 5,409 -

Loans and advances to banks 55,054 10,002 85,908 -

Loans and advances to private individuals 337,963 496,476 331,589 479,726

- overdraft accounts and cards 35,000 21,110 34,032 20,049

- housing loans 169,030 330,106 155,064 312,632

- consumer and other loans 133,484 145,047 142,009 146,792

- unauthorised account overdrafts 449 213 484 253

Loans to companies2 1,349,493 1,150,066 1,370,369 1,200,994

- large companies 626,594 435,944 661,968 453,577

- small and medium sized enterprises (SME) 643,353 672,590 665,103 729,332

- other 79,546 41,532 43,298 18,086

Financial assets held for trading 37,562 - 44,668 -

Derivatives 17,153 - 12,645 -

Debt securities 20,409 - 32,023 -

Financial assets designated at fair value through P&L 7,823 - 29,445 1,845

Debt securities 7,823 29,445 1,845

Available for sale financial assets 177,997 66,534 194,954 48,372

Debt securities 177,997 66,534 194,954 48,372

Held to maturity investments 269,311 15,084 276,273 72,558

Debt securities 269,311 15,084 276,273 72,558

Assets pledged - - 32,390 -

Debt securities - - 32,390 -

Derivative financial intruments designated for hedging 4,838 - - -

Other financial assets 5,239 - 6,398 -

Off-balance sheet exposures 267,771 116,575 248,637 122,616

Guarantees 95,360 48,778 79,289 49,966

Other off-balance sheet exposures 172,411 67,797 169,348 72,651

Total 2,515,756 1,854,737 2,626,041 1,926,112

1 State (sovereigns) includes direct beneficiaries of the Republic of Slovenia budget and foreign central state level units (sovereigns).

2 Size of companies defined in accordance with the Companies Act; the micro, small and medium size enterprises (SME) comprise those, which fulfil two of the following criteria:

- average number of employees is less than 250, - net sales income does not exceed EUR 35,000 thousand, - the value of assets does not exceed EUR 17,500 thousand.

Large companies are all those companies, which do not fit the SME criteria.

’’Other’’ shows regional and local state levels, public sector entities, new companies, companies in receivership, societies and other debtors, which do not provide information on their size.

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

- amounts in thousands of EUR

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Bank Group

31 December 2011 31 December 2010 31 December 2011 31 December 2010

Loans Loans Loans Loans

Collateral:

- deposits 8,958 8,199 8,958 8,199

- government guarantee 65,782 59,149 65,782 59,149

- insurance company and bank guarantee 124,780 125,001 124,780 125,001

- securities 82,074 132,074 82,074 132,074

- residential real estate 174,446 153,418 174,446 153,418

- commercial real estate 620,574 620,349 620,574 620,349

- other* 55,753 58,510 55,753 58,510

Secured loans - carrying amount 1,132,367 1,156,700 1,132,367 1,156,700

unsecured loans - carrying amount 616,047 639,257 612,848 636,575

Loans - carrying amount 1,748,414 1,795,957 1,745,215 1,793,275

The table shows the Group’s maximum gross credit risk exposure from loans, investments in securities and commitments and contingent liabilities as at 31 December 2011 and 2010. In 2011 the exposure to credit risk decreased in comparison with the previous year. Loans decreased by 3% due to a drop in lending to corporates and banks, while exposures from debt financial instruments fell by 16%. Commitments and contingent liabilities increased by 8% and the exposure from derivatives grew by 36%.

The continuation of the economic and financial crisis also had an impact on the credit portfolio. By carefully managing investment policy during the crisis and responsibly managing credit risk, the Group achieved the following results in 2011:- as at 31 December 2011 loans that were classified into the highest of investment grade rating classes, namely A and B, represented

79.27% of all loans (2010: 85.26%), impairment charge coverage increased to 7.10% (2010: 5.13%);- in spite of a drop in the fair value of collateral the coverage of exposure with adequate collateral stayed similar due to additional

collateral applied to existing loans as well as collateral obtained for new loans, thus 65% of all loans was collateralised as at 31 December 2011;

- the Group holds 87% of debt security investments rated at least A;- the consolidated income statement shows impairment charges amounting to EUR 52,678 thousand (2010: EUR 31,014 thousand),

wherein impairment charges for loans measured at amortized cost represented EUR 39,160 thousand (2010: EUR 23,496 thousand) and securities impairment charges amounted to EUR 13,510 thousand (2010: EUR 7,518 thousand). Provisions for commitments and contingent liabilities were made in an amount of EUR 415 thousand (2010: decrease of EUR 67 thousand). Increased impairment charges reflect the economic and financial crisis, which resulted in increased defaults and in the drop in the fair value of collateral and financial assets.

2.25.1.3 Exposure to credit risk according to type of collateral

Exposure from loans

The table below lists loans according to type of collateral. Secured loans are the ones where the fair value of collateral is greater or equal to the carrying amount of the loan. Unsecured loans are represented by loans, which are entirely unsecured and by the parts of loans, where the fair value of collateral is not sufficient for their repayment.

* Other collateral mainly refers to guarantees by guarantors - companies, rated A and to physical collateral to a lesser extent.

For the most part, loans are secured with commercial real estate followed by residential real estate as well as insurance company and bank guarantees. The latter are mainly used to secure retail loans. In 2011 the value of loans, where securities are used for collateral, has decreased the most due to loans being repaid and due to decreased fair value of collateral. Increases mainly come from loans secured with residential real estate.

- amounts in thousands of EUR

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According to loan type

Bank31 December 2011

Loans to private individuals Loans to companies

Overdraftaccounts

and cardsHousing

loansConsumer

loans

Unau-thorisedaccount

overdraftsLarge

companies SME Other

Loansand

advancesto state

Loansand

advancesto banks Total

Collateral:

- deposits 19 107 2,702 - 3,071 3,035 24 - - 8,958

- government guarantee - - - - 53,214 504 2,062 - 10,002 65,782

- insurance company and bank guarantee 26,921 19,482 75,354 196 2 2,815 10 - - 124,780

- securities 8 100 2,503 - 30,060 40,547 8,856 - - 82,074

- residential real estate 7 126,313 9,990 - 392 36,596 1,149 - - 174,447

- commercial real estate - 8,713 7,377 - 248,550 342,492 13,442 - - 620,574

- other - 526 4,759 - 14,298 31,197 4,973 - - 55,753

Secured loans - carrying amount 26,955 155,241 102,685 196 349,587 457,186 30,516 - 10,002 1,132,368

Unsecured loans - carrying amount 8,045 13,722 30,799 253 268,143 198,297 49,030 2,705 45,052 616,046

Loans - carrying amount 35,000 168,963 133,484 449 617,730 655,483 79,546 2,705 55,054 1,748,414

31 December 2010

Secured loans - carrying amount 25,530 139,037 105,623 231 374,312 501,376 10,591 - - 1,156,700

Unsecured loans - carrying amount 8,502 15,956 36,386 253 278,303 175,833 32,707 5,409 85,908 639,257

Loans - carrying amount 34,032 154,993 142,009 484 652,615 677,209 43,298 5,409 85,908 1,795,957

- amounts in thousands of EUR

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- amounts in thousands of EUR

GROUP31 December 2011

Loans to private individuals Loans to companies

Overdraftaccounts

and cardsHousing

loansConsumer

loans

Unau-thorisedaccount

overdraftsLarge

companies SME Other

Loansand

advancesto state

Loansand

advancesto banks Total

Collateral:

- deposits 19 107 2,702 - 3,071 3,035 24 - - 8,958

- government guarantee - - - - 53,214 504 2,062 - 10,002 65,782

- insurance company and bank guarantee 26,921 19,482 75,354 196 2 2,815 10 - - 124,780

- securities 8 100 2,503 - 30,060 40,547 8,856 - - 82,074

- residential real estate 7 126,313 9,990 - 392 36,596 1,149 - - 174,447

- commercial real estate - 8,713 7,377 - 248,550 342,492 13,442 - - 620,574

- other - 526 4,759 - 14,298 31,197 4,973 - - 55,753

Secured loans - carrying amount 26,955 155,241 102,685 196 349,587 457,186 30,516 - 10,002 1,132,368

Unsecured loans - carrying amount 8,045 13,789 30,799 253 277,007 186,167 49,030 2,705 45,052 612,847

Loans - carrying amount 35,000 169,030 133,484 449 626,594 643,353 79,546 2,705 55,054 1,745,215

31 December 2010

Secured loans - carrying amount 25,530 139,037 105,623 231 374,312 501,376 10,591 - - 1,156,700

Unsecured loans - carrying amount 8,502 16,027 36,386 253 287,656 163,727 32,707 5,409 85,908 636,575

Loans - carrying amount 34,032 155,064 142,009 484 661,968 665,103 43,298 5,409 85,908 1,793,275

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2.25.1.4 Credit risk exposure according to rating classes

Exposure from loans

Gross exposure to loans as at 31 December 2011 amounted to EUR 1,878,854 thousand, representing a 1% drop as compared with the previous year (2010: EUR 1,890,271 thousand). After accounting for impairment charges the loan carrying amount is EUR 1,745,215 thousand, 3% less in comparison to the previous year (2010: EUR 1,793,275 thousand). Portfolio quality deteriorated due to the continuing unfavourable economic conditions, with the percentage of highest rated loans (classes A and B) decreased to 79.27% (2010: 85.26%). Exposure to loans, classified as substandard and default increased to 20.73% (2010: 14.74%), with the Group establishing additional impairment charges on these loans.

According to loan class

Bank Group

31 December 2011 31 December 2010 31 December 2011 31 December 2010

rating class Loanamount

Impairmentamount

Loanamount

Impairmentamount

Loanamount

Impairmentamount

Loanamount

Impairmentamount

Total 1,881,779 (133,365) 1,892,948 (96,991) 1,878,584 (133,369) 1,890,271 (96,996)

Str. Str.

prime (a) 51.33% 2.03% 55.25% 3.70% 51.22% 2.03% 55.16% 3.70%

Standard (B) 28.00% 9.67% 30.05% 22.12% 28.05% 9.67% 30.10% 22.12%

Substandard (C) 9.17% 24.17% 8.36% 22.91% 9.19% 24.17% 8.38% 22.91%

Default (D) 4.13% 19.13% 2.71% 10.51% 4.15% 19.13% 2.72% 10.51%

Default (E) -recovery 7.38% 45.01% 3.64% 40.76% 7.39% 45.01% 3.64% 40.77%

BANK31 December 2011

Rating class

Loans to private individuals Loans to companies

Overdraftaccounts

and cardsHousing

loansConsumer

loans

Unau-thorisedaccount

overdraftsLarge

companies SME Other

Loansand

advancesto state

Loansand

advancesto banks Total

Prime (A) 35,205 163,300 123,324 296 376,688 166,079 48,024 2,705 50,212 965,833

Standard (B) - 2,051 2,135 98 158,955 349,654 9,150 - 4,853 526,896

Substandard (C) - 3,942 10,634 96 29,948 127,922 13 - - 172,555

Default (D) - 891 1,345 39 48,279 26,799 320 - - 77,673

Default (E) - recovery - 1,842 1,682 364 37,152 59,636 38,146 138,822

Impairments (205) (3,063) (5,636) (444) (33,292) (74,607) (16,107) - (11) (133,365)

Total 35,000 168,963 133,484 449 617,730 655,483 79,546 2,705 55,054 1,748,414

- amounts in thousands of EUR

- amounts in thousands of EUR

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Loans to retail increased by 2% as compared to the previous year. Housing loans increased most, namely by 9%, overdraft accounts increased by 3%, whereas consumer loans went down. Loan quality remained high like the previous year (2011: 94% of loans was classified prime).

Lending to corporates decreased by 2% compared with the previous year, with the quality of these loans decreasing on account of the increase in insolvency proceedings and defaults.

Credit exposure to banks and sovereigns decreased in 2011. The Bank mainly deals with low risk sovereign entities and banks.

BANK31 December 2010

Rating class

Loans to private individuals Loans to companies

Overdraftaccounts

and cardsHousing

loansConsumer

loans

Unau-thorisedaccount

overdraftsLarge

companies SME Other

Loansand

advancesto state

Loansand

advancesto banks Total

Prime (A) 34,264 152,060 132,937 310 433,187 165,043 36,898 5,409 85,664 1,045,772

Standard (B) - 1,800 1,801 118 156,205 402,888 5,651 - 284 568,747

Substandard (C) - 1,960 10,502 112 60,555 85,072 18 - - 158,220

Default (D) - 222 311 32 11,895 38,789 80 - - 51,328

Default (E) - recovery - 1,086 2,043 403 11,112 48,752 5,484 - - 68,881

Impairments (232) (2,135) (5,586) (491) (20,340) (63,335) (4,832) - (40) (96,991)

Total 34,032 154,993 142,009 484 652,615 677,209 43,299 5,409 85,908 1,795,957

GROUP31 December 2010

Rating class

Loans to private individuals Loans to companies

Overdraftaccounts

and cardsHousing

loansConsumer

loans

Unau-thorisedaccount

overdraftsLarge

companies SME Other

Loansand

advancesto state

Loansand

advancesto banks Total

Prime (A) 34,264 152,097 132,938 310 442,540 152,578 36,897 5,409 85,663 1,042,696

Standard (B) - 1,834 1,801 118 156,205 403,129 5,651 - 285 569,023

Substandard (C) - 1,960 10,502 112 60,556 85,192 18 - - 158,340

Default (D) - 222 311 32 11,894 38,789 80 - - 51,328

Default (E) - recovery - 1,086 2,043 403 11,112 48,756 5,484 - - 68,884

Impairments (232) (2,135) (5,586) (491) (20,339) (63,341) (4,832) - (40) (96,996)

Total 34,032 155,064 142,009 484 661,968 665,103 43,298 5,409 85,908 1,793,275

- amounts in thousands of EUR

- amounts in thousands of EUR

GROUP31 December 2011

Rating class

Loans to private individuals Loans to companies

Overdraftaccounts

and cardsHousing

loansConsumer

loans

Unau-thorisedaccount

overdraftsLarge

companies SME Other

Loansand

advancesto state

Loansand

advancesto banks Total

Prime (A) 35,205 163,367 123,324 296 385,429 153,728 48,025 2,705 50,212 962,291

Standard (B) - 2,051 2,135 98 158,955 349,724 9,149 - 4,853 526,965

Substandard (C) - 3,942 10,634 96 29,948 127,922 13 - - 172,555

Default (D) - 891 1,345 39 48,402 26,950 320 - - 77,947

Default (E) - recovery - 1,842 1,682 364 37,152 59,640 38,146 138,826

Impairments (205) (3,063) (5,636) (444) (33,292) (74,611) (16,107) - (11) (133,369)

Total 35,000 169,030 133,484 449 626,594 643,353 79,546 2,705 55,054 1,745,215

- amounts in thousands of EUR

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2.25.1.5 Credit risk exposure according to maturity

Loans according to maturity

The increase in defaulting loans is the result of unfavourable economic conditions and the increase in insolvency proceedings.

Loans and advances past due and individually impaired

Bank

31 December 2011 31 December 2010

Loans toprivate

individualsLoans to

companiesLoans to

stateLoans to

banks

Loans toprivate

individualsLoans to

companiesLoans to

stateLoans to

banks

Loans neither pastdue nor impaired 340,866 1,264,650 2,705 55,064 335,138 1,354,975 5,409 85,947

Loans past due - individually impaired 5,437 202,495 - 1 3,773 105,283 - 1

Loans past due - not impaired 941 9,620 - - 1,051 1,371 - -

Impairments (9,348) (124,006) - (11) (8,444) (88,507) - (40)

Total 337,896 1,352,759 2,705 55,054 331,518 1,373,122 5,409 85,908

Bank

31 December 2011 31 December 2010

Loans toprivate

individualsLoans to

companiesLoans to

state Total

Loans toprivate

individualsLoans to

companiesLoans to

state Total

Receivables up to 30 overdue 45 2,112 - 2,157 60 2,782 - 2,842

Receivables over 30 to 90 days overdue 1,387 20,336 - 21,723 212 13,098 - 13,310

Receivables over 90 days overdue 4,005 180,047 1 184,053 3,500 89,403 1 92,904

Total 5,437 202,495 1 207,933 3,773 105,283 1 109,057

Fair value of collateral 5,385 135,758 - 3,021 88,264 -

GROUP

31 December 2011 31 December 2010

Loans toprivate

individualsLoans to

companiesLoans to

stateLoans to

banks

Loans toprivate

individualsLoans to

companiesLoans to

stateLoans to

banks

Loans neither pastdue nor impaired 340,932 1,261,347 2,705 55,064 335,208 1,352,204 5,409 85,947

Loans past due - individually impaired 5,437 202,536 - 1 3,773 105,305 - 1

Loans past due - not impaired 942 9,620 - - 1,052 1,372 - -

Impairments (9,348) (124,010) - (11) (8,444) (88,512) - (40)

Total 337,963 1,349,493 2,705 55,054 331,589 1,370,369 5,409 85,908

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

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Loans and advances past due but not impaired

GROUP

31 December 2011 31 December 2010

Loans toprivate

individualsLoans to

companiesLoans to

state Total

Loans toprivate

individualsLoans to

companiesLoans to

state Total

Receivables up to 30 overdue 45 2,114 - 2,159 60 2,782 - 2,842

Receivables over 30 to 90 days overdue 1,387 20,339 - 21,726 213 13,098 - 13,311

Receivables over 90 days overdue 4,005 180,083 1 184,089 3,500 89,425 1 92,926

Total 5,437 202,536 1 207,974 3,773 105,305 1 109,079

Fair value of collateral 5,385 135,758 - 3,021 88,264 -

Bank

31 December 2011 31 December 2010

Retail loansCorporate

loansLoans to

banks Total Retail loansCorporate

loansLoans to

banks Total

Receivables up to 30 overdue 336 6,598 - 6,934 696 1,040 - 1,736

Receivables over 30 to 90 days overdue 479 2,346 - 2,825 354 221 - 575

Receivables over 90 days overdue 126 676 - 802 - 110 - 110

Total 941 9,620 - 10,561 1,051 1,371 - 2,422

Fair value of collateral 912 7,215 - 1,093 1,421 -

GROUP

31 December 2011 31 December 2010

Retail loansCorporate

loansLoans to

banks Total Retail loansCorporate

loansLoans to

banks Total

Receivables up to 30 overdue 337 6,598 - 6,935 697 1,041 - 1,738

Receivables over 30 to 90 days overdue 479 2,346 - 2,825 355 221 - 576

Receivables over 90 days overdue 126 676 - 802 - 110 - 110

Total 942 9,620 - 10,562 1,052 1,372 - 2,424

Fair value of collateral 1,093 7,215 - 1,093 1,421 -

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

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2.25.1.6 Credit risk exposure according to impairment approach

Exposure from loans

According to loan type

The Bank and the Group recognize impairment charges in accordance with the internal methodology on the formation of impairment charges and provisions in line with IFRS. Individually significant exposures and exposures where there is objective evidence for impairment are impaired individually on the basis of estimated future cash flows, while other exposures are impaired collectively. As at 31 December 2011 27% of the loan portfolio was assessed individually, representing 83% of impairment provisions (2010: 30% of the loan portfolio or 76% of impairment charges).

Bank 31 December 2011 31 December 2010

Group approach Individual approach Group approach Individual approach

Rating class Loans Impairments Loans Impairments Loans Impairments Loans Impairments

Prime (a) 915,621 (2,702) 50,212 - 960,108 (3,585) 85,664 -

Standard (B) 433,671 (8,984) 93,225 (3,917) 339,717 (8,553) 229,031 (12,900)

Substandard (C) 11,386 (1,555) 161,169 (30,674) 9,681 (1,687) 148,539 (20,536)

Default (D) 2,425 (1,217) 75,248 (24,292) 3,138 (1,788) 48,190 (8,404)

Default (E) - recovery 8,283 (7,879) 130,539 (52,145) 6,825 (6,721) 62,055 (32,817)

Total 1,371,386 (22,337) 510,393 (111,028) 1,319,469 (22,334) 573,479 (74,657)

Fair value of collateral 1,325,120 331,424 1,254,627 426,093

Bank31 December 2011

Retail loans Corporate loans

Overdraftaccountsand card

limitsHousing

loansConsumer

loans

Unauthorisedaccount

overdrafts

Largecompa-

nies SME Other

Loansand

advancesto state

Loansand

advancesto banks Total

Group approach 35,205 171,549 129,038 893 519,807 453,247 58,942 2,705 - 1,371,386

- Impairments (205) (2,946) (3,017) (444) (3,526) (10,308) (1,891) - - (22,337)

Individual approach - 477 10,082 - 131,215 276,843 36,711 - 55,065 510,393

- Impairments - (117) (2,619) - (29,766) (64,299) (14,216) - (11) (111,028)

Impairment com-pared to loan value 0,58% 1,78% 4,05% 49,72% 5,11% 10,22% 16,84% - 0,02% 7,09%

Total 35,000 168,963 133,484 449 617,730 655,483 79,546 2,705 55,054 1,748,414

- amounts in thousands of EUR

- amounts in thousands of EUR

GROUP 31 December 2011 31 December 2010

Group approach Individual approach Group approach Individual approach

Rating class Loans Impairments Loans Impairments Loans Impairments Loans Impairments

Prime (A) 912,079 (2,702) 50,212 - 957,032 (3,585) 85,664 -

Standard (B) 433,740 (8,984) 93,225 (3,917) 339,992 (8,553) 229,031 (12,900)

Substandard (C) 11,386 (1,555) 161,169 (30,674) 9,681 (1,687) 148,659 (20,537)

Default (D) 2,576 (1,217) 75,371 (24,292) 3,138 (1,788) 48,190 (8,404)

Default (E) - recovery 8,287 (7,883) 130,539 (52,145) 6,829 (6,725) 62,055 (32,817)

Total 1,368,068 (22,341) 510,516 (111,028) 1,316,672 (22,338) 573,599 (74,658)

Fair value of collateral 1,325,120 331,424 1,254,627 426,093

- amounts in thousands of EUR

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

Bank31 December 2010

Retail loans Corporate loans

Overdraftaccountsand card

limitsHousing

loansConsumer

loans

Unauthorisedaccount

overdrafts

Largecompa-

nies SME Other

Loansand

advancesto state

Loansand

advancesto banks Total

Group approach 34,264 157,128 138,187 975 522,508 416,866 44,132 5,409 - 1,319,469

- Impairments (232) (2,135) (3,257) (491) (3,324) (11,169) (1,726) - - (22,334)

Individual approach - - 9,408 - 150,447 323,678 3,998 - 85,948 573,479

- Impairments - - (2,329) - (17,016) (52,166) (3,106) - (40) (74,657)

Impairment com-pared to loan value 0.68% 1.36% 3.78% 50.36% 3.02% 8.55% 10.04% - 0.05% 5.12%

Total 34,032 154,993 142,009 484 652,615 677,209 43,298 5,409 85,908 1,795,958

- amounts in thousands of EUR

GROUP31 December 2011

Retail loans Corporate loans

Overdraftaccountsand card

limitsHousing

loansConsumer

loans

Unauthorisedaccount

overdrafts

Largecompa-

nies SME Other

Loansand

advancesto state

Loansand

advancesto banks Total

Group approach 35,205 171,616 129,038 893 528,548 441,121 58,942 2,705 - 1,368,068

- Impairments (205) (2,946) (3,017) (444) (3,526) (10,308) (1,891) - - (22,337)

Individual approach - 477 10,082 - 131,338 276,843 36,711 - 55,065 510,516

- Impairments - (117) (2,619) - (29,766) (64,303) (14,216) - (11) (111,032)

Impairment com-pared to loan value 0.58% 1.78% 4.05% 49.72% 5.05% 10.39% 16.84% - 0.02% 7.10%

Total 35,000 169,030 133,484 449 626,594 643,353 79,546 2,705 55,054 1,745,215

- amounts in thousands of EUR

GROUP31 December 2011

Retail loans Corporate loans

Overdraftaccountsand card

limitsHousing

loansConsumer

loans

Unauthorisedaccount

overdrafts

Largecompa-

nies SME Other

Loansand

advancesto state

Loansand

advancesto banks Total

Group approach 34,264 157,199 138,187 975 531,859 404,647 44,132 5,409 - 1,316,672

- Impairments (232) (2,135) (3,257) (491) (3,324) (11,173) (1,726) - - (22,338)

Individual approach - - 9,407 - 150,449 323,797 3,998 - 85,948 573,599

- Impairments - - (2,329) - (17,016) (52,167) (3,106) - (40) (74,658)

Impairment com-pared to loan value 0.68% 1.36% 3.78% 50.36% 2.98% 8.70% 10.04% - 0.05% 5.13%

Total 34,032 155,064 142,009 484 661,968 665,104 43,298 5,409 85,908 1,793,275

- amounts in thousands of EUR

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2.25.1.7 Concentration of exposures according to region and activity

Credit risk exposure according to region

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

Exposure according to region remains at the similar level as in the previous year. The Bank enters the SE Europe markets with due care and only on the basis of good collateral. Loans are mainly granted to corporates owned by Slovene parent companies or to corporates that Slovene companies cooperate with. A limit is in place for the largest exposure to the region.

* EU stands for countries included in European Union, except Slovenia.

- amounts in thousands of EUR

BANK 31 December 2011 Slovenia EU* SE Europe Other regions Total

Loans and advances to state 2,705 - - - 2,705

Loans and advances to banks 10,931 39,093 782 4,259 55,065

Loans and advances to retail 340,580 487 6,177 - 347,244

Loans to corporates: 1,343,849 1,563 124,769 6,584 1,476,765

- large companies 633,509 - 14,317 3,196 651,022

- small and medium sized enterprises (SME) 614,687 1,563 110,452 3,388 730,090

- other 95,653 - - - 95,653

Impairments (122,442) (21) (10,783) (119) (133,365)

Total 1,575,623 41,122 120,945 10,724 1,748,414

31 December 2010

Loans and advances 1,713,222 40,858 129,879 8,989 1,892,948

Impairments (86,406) (20) (10,381) (184) (96,991)

Total 1,626,817 40,837 119,497 8,805 1,795,957

31 December 2010

Loans and advances 1,710,547 40,858 129,878 8,988 1,890,271

Impairments (86,411) (20) (10,381) (184) (96,996)

Total 1,624,136 40,838 119,497 8,804 1,793,275

- amounts in thousands of EUR

GROUP 31 December 2011 Slovenia EU* SE Europe Other regions Total

Loans and advances to state 2,705 - - - 2,705

Loans and advances to banks 10,931 39,093 782 4,259 55,065

Loans and advances to retail 340,647 487 6,177 - 347,311

Loans to corporates: 1,340,587 1,563 124,769 6,584 1,473,503

- large companies 642,373 - 14,317 3,196 659,886

- small and medium sized enterprises (SME) 602,561 1,563 110,452 3,388 717,964

- other 95,653 - - - 95,653

Impairments (122,446) (21) (10,783) (119) (133,369)

Total 1,572,424 41,122 120,945 10,724 1,745,215

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Credit risk exposure according to industry

In term of exposure by industry the exposure remains highest toward manufacturing, being quite a diversified group in itself, as it inclu-des several types of production. In 2011 exposure to finance decreased the most. The Bank and the Group will continue to pursue the objective of diversified investments according to industry and limit or reduce investments in the higher risk industries in 2012.

- amounts in thousands of EUR

Bank31 December 2011

Manufacturing

Commerceand motor

vehiclerepairs Construction Finance Real estate

Professional,scientific and

businessindustry Other

Privateindi-

viduals TotalLoans and advancesto state - - - - - - 2,705 - 2,705

Loans and advancesto banks - - - 55,065 - - - - 55,065

Loans and advancesto retail - - - - - - - 347,244 347,244

Loans to corporates: 300,958 250,490 166,007 197,244 102,787 167,000 292,279 - 1,476,765

- large companies 191,090 119,373 45,606 103,100 10,492 34,087 147,274 - 651,022

- small and medium sized 103,220 129,062 110,361 94,144 90,333 105,959 97,011 - 730,090

- other 6,648 2,055 10,040 - 1,962 26,954 47,994 - 95,653

Impairments (14,689) (8,540) (23,524) (34,600) (14,709) (18,212) (9,743) (9,348) (133,365)

Total 286,269 241,950 142,483 217,709 88,078 148,788 285,241 337,896 1,748,414

- amounts in thousands of EUR

GROUP31 December 2011

Manufacturing

Commerceand motor

vehiclerepairs Construction Finance Real estate

Professional,scientific and

businessindustry Other

Privateindi-

viduals TotalLoans and advancesto state - - - - - - 2,705 - 2,705

Loans and advancesto banks - - - 55,065 - - - - 55,065

Loans and advancesto retail - - - - - - - 347,311 347,311

Loans to corporates: 309,855 250,490 166,130 197,244 90,505 167,000 292,279 - 1,473,503

- large companies 199,831 119,373 45,729 103,100 10,492 34,087 147,274 - 659,886

- small and medium sized 103,376 129,062 110,361 94,144 78,051 105,959 97,011 - 717,964

- other 6,648 2,055 10,040 - 1,962 26,954 47,994 - 95,653

Impairments (14,693) (8,540) (23,524) (34,600) (14,709) (18,212) (9,743) (9,348) (133,369)

Total 295,162 241,950 142,606 217,709 75,796 148,788 285,241 337,963 1,745,215

31 December 2010

Loans and advances 306,101 246,004 155,617 297,202 94,929 152,987 300,146 339,962 1,892,948

Impairments (13,893) (9,044) (19,071) (14,987) (9,601) (13,686) (8,265) (8,444) (96,991)

Total 292,208 236,960 136,546 282,215 85,328 139,301 291,881 331,518 1,795,957

31 December 2010

Loans and advances 315,622 246,004 155,737 297,202 82,541 152,987 300,146 340,033 1,890,271

Impairments (13,897) (9,044) (19,071) (14,987) (9,602) (13,686) (8,265) (8,444) (96,996)

Total 301,725 236,960 136,666 282,214 72,939 139,301 291,881 331,589 1,793,275

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2.25.1.8 Exposure to credit risk from debt financial instruments

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

* All unrated securities has been classif ied into the highest rating class A in accordance with internal methodology. A quarter of the investments is gover-nment guaranteed and rated A1.

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

The Bank holds 89% of investments in sovereign and bank debt securities with a rating no lower than Baa3. As at 31 December 2011 in-vestments in EU countries represent 99% of all investments, with exposure to more risky European Union countries (Italy, Spain, Greece)amounting to EUR 15,201 thousand.

In 2011 the Bank additionally recognised impairment charges on debt financial instruments due to increased credit risk of the Republic of Greece. The carrying amount of impaired financial instruments as at 31 December 2011 amounted to EUR 1,261 thousand (2010: EUR 2,466 thousand).

- amounts in thousands of EUR

31 December 2011 Bank anD GRoUp

IssuerRating byMoody's

Financialassets held for trading

Financial assetsdesignated at fair

value through p&Lavailable for sale

financial assetsHeld to maturity

investments

Totalfinancial

assets

Governments aaa do aa3 - - 21,818 31,415 53,233

a1 do a3 - - 23,212 190,342 213,554

Ca - - - 1,261 1,261

Banks aaa do aa3 1,148 3,956 34,136 23,195 62,435

a1 do a3 - 2,048 65,603 7,821 75,472

Baa1 do Baa3 - - 7,458 - 7,458

Ba1 do Ba3 11,406 606 4,822 - 16,834

B2 535 1,213 - - 1,748

other aaa do aa1 - - 5,736 5,072 10,808

unrated * 7,320 - 15,212 10,205 32,737

Total 20,409 7,823 177,997 269,311 475,540

- amounts in thousands of EUR

31 December 2010 Bank anD GRoUp

IssuerRating byMoody's

Financialassets held for trading

Financial assetsdesignated at fair

value through p&Lavailable for sale

financial assetsHeld to maturity

investmentsassets

pledged

Totalfinancial

assets

Governments aaa do aa3 1 12,255 45,659 190,447 32,390 280,753

Ba1 do Ba3 - - 2,901 - - 2,901

Banks aaa do aa3 - 9,337 81,333 75,623 - 166,293

a1 do a3 3,193 1,984 39,615 - - 44,792

Baa1 do Baa3 18,446 3,831 7,460 - - 29,737

Ba1 do Ba3 2,885 2,038 1,874 - - 6,797

other neocenjeni * 7,498 - 16,111 10,203 - 33,812

Total 32,023 29,445 194,954 276,273 32,390 565,085

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2.25.1.9 Exposure to credit risk from derivatives

Exposure to credit risk in derivatives is based on the possibility of counterparty failure to deliver. The Bank enters into interest rate swap transactions with foreign banks (rating A1 or better), with the volume of these transactions increasing in 2011, also having a positive impact from valuation. Currency swaps are also done with foreign banks and, to a lesser extent, with corporates.

The Bank enters into securities forwards with corporate clients. In the event of increased credit risk the Bank collateralizes its receivables additionally with appropriate types of collateral. The fair value was up in 2011 due to a drop in the fair value of the underlying instrument.

2.25.1.10 Exposure to credit risk from Credit Linked Notes (CLN)

On 31 December 2011 the Bank held 3 bonds in an amount of EUR 6,852 thousand (2010: EUR 8,465 thousand) with Credit Linked Note characteristics.

An overview of structured debt securities as at 31 December 2011:

Two pertain to subordinated debt and another is a ‘’Credit Inverse Note Floater’’, meaning that the assumed credit risk of the state is reflected in the price of the issued security.

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

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

The Bank evaluates positions in these securities in accordance with the principle of ensuring an available market price. All of the securi-ties that are quoted on the Reuters and Bloomberg terminals are valued at the quoted price.

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

Bank and Group31 december 2011 31 december 2010

Fair value Fair value

derivatives - trading

Futures and forwards 9,313 6,965

Interest rate swaps 6,517 5,203

Currency swaps 1,314 443

option 9 34

Total 17,153 12,645

derivatives - hedging

Interest rate swaps 4,838 -

Total 4,838 -

CLNAssumed credit risk CLN type

Moody's rating2011 Book value

ING AMSTERDAM ‘CLN on Subordinated Loan’ - 3,137

Bank I. -

AFINANCE B. V. ‘CLN on Subordinated Loan’ Caa1 1,748

Bank II. -

UBS ZURICH ‘Credit Inverse Note Floater’ - 1,967

Country I. Baa3

- amounts in thousands of EUR

- amounts in thousands of EUR

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2.25.2 Market risk

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

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

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

2.25.2.1 Measuring and managing market risk

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

The Bank manages exposure to positional risk by also utilising a system of limits, which it regularly updates. These are basically separated into trading and banking book limits and further from the aspect of financial instrument type, region and issuer. The Group measures exposure to positional risk at the level of individual transactions, which is why it has put in place stop limits within its limit system, defi-ned on the basis of the Group’s preparedness to assume risk.

Currency risk is measured daily by monitoring net positions according to individual foreign currencies, while also calculating daily exposure to currency risk with the use of the VaR method. The exposure to currency risk is monitored with the use of foreign currency position limits, which define the maximum level of an open net position according to an individual currency.

The Bank also enters into currency and interest rate derivative transactions. Its basic policy in the area of derivative trading is to enter into transactions to hedge own positions and the positions of clients, whereby the latter transactions are hedged with counter positions. Transactions are entered into with prime foreign banks.

In measuring market risk the Bank calculates the capital requirements pertaining to market risk for all items held for trading in line with the Decision on the calculation of market risk capital requirements for banks and savings banks. The Group also calculates the capital requirement for currency risk when the total open position exceeds 2% of regulatory capital.

On 31 December 2011 the Bank performed a potential stress scenario, where it simulated the effect a decrease of the carrying amo-unts of all equity instruments from the trading book by 20% and all debt instruments from the trading book by 10% would have on the income statement an the capital. The simulation did not include instruments sold forward. The results of the stress scenario are shown in the table below.

Bank and Group31 december 2011 31 december 2010

debtsecurities

Equitysecurities Total

debtsecurities

Equitysecurities Total

Effect on income statement (1,286) (604) (1,890) (1,838) (131) (1,968)

Effect on equity (474) (4,405) (4,880) (400) (5,967) (6,366)

Total (1,760) (5,009) (6,770) (2,237) (6,097) (8,335)

- amounts in thousands of EUR

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2.25.2.2 Value-at-Risk analysis

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

For foreign currency and positional risk related to equity instruments (net trading position) the Bank utilises historical simulation. Both models feature market data for 1 year, a 99% level of confidence and a 10 day holding period. Testing in extreme situations, the so-called ’’stress testing’’ is undertaken periodically.

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

2.25.2.3 Sensitivity analysis for financial instruments included in the banking book

The interest rate sensitive financial instruments 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. Based on these two methods different analyses of interest rate sensitivity are performed, including stress scenarios.

The sensitivity analysis of all interest rate sensitive financial instruments in the banking book as at 31 December 2011 shows that with a parallel increase of the interest curve by 50 basis points the net present value of financial instruments would increase by EUR 1,930 tho-usand. The effect on the net present value of financial instruments is calculated using the method of duration gaps between financials assets and liabilities in the banking book.

The simulation of the effect of a change in the interest rate on the income statement shows than an increase of the interest rate by a 50 basis points increases the asset side interest income by EUR 6,880 thousand per year, while the liabilities side interest expenses increase by EUR 5,621 thousand per year. The net interest income thus increases by EUR 1,259 thousand should the interest rate increase by fifty basis points. The analysis included all interest sensitive transactions maturing or subject to interest fixing within a one year interval. The liabilities side excludes at sight deposits as the Bank or the Group estimate these pertain to liabilities not sensitive to interest rates. A change in the interest rate is anticipated, not however in the credit premium.

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.

Notes:

EQ VaR Tradable equity securities VaR

FX VaR Foreign currency VaR

The VaR of equity securities from the trading book fluctuated between EUR 1,270 thousand and EUR 4,259 thousand in 2011. The Bank follows the closed currency position policy, which is why the value-at-risk for currency risk remained low throughout the year, fluctua-ting between EUR 2 thousand and EUR 31 thousand.

31 December 2010Average

value in 2011Maximum

value in 2011Minimum

value in 2011 31 December 2011

Total VaR 1,781 2,767 4,290 1,272 3,177

EQ VaR 1,779 2,761 4,259 1,270 3,172

FX VaR 2 6 31 2 5

- amounts in thousands of EUR

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2.25.2.4 Foreign currency risk

Foreign currency risk is financial risk and represents the danger of financial loss due to changes in currency rates. It is based on the positions open in foreign currency. A change in rates thus directly affects asset value as well as foreign currency denominated liabilities, expressed in the reporting currency. The Bank encounters foreign currency risk in international operations, being the result of:- the assets and the liabilities of the Group are denominated in different currencies;- the Group trades foreign currencies for its own account.

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

The table below shows exposure to currency risk on 31 December 2011. It shows the carrying amounts of assets and liabilities according to currency.

Exposure to foreign currency risk- amounts in thousands of EUR

Bank31 December 2011 USD CHF Other EUR Total

Cash and balances with Central Bank 112 212 450 167,389 168,163

Financial assets held for trading - - - 52,817 52,817

Financial assets designated at fair value through P&L - - - 7,823 7,823

available for sale financial assets - - - 203,201 203,201

Derivative financial instruments designated for hedging - - - 4,838 4,838

Loans and advances 8,253 40,624 5,057 1,694,480 1,748,414

- loans and advances to banks 3,692 570 4,629 46,163 55,054

- loans and advances to customers 4,561 40,054 428 1,648,317 1,693,360

Held to maturity investments - - - 269,311 269,311

assets pledged - - - - -

Other financial assets 1 - 3 2,154 2,158

TOTaL aSSETS 8,366 40,836 5,510 2,402,013 2,456,725

Deposits from Central Bank - - - 90,082 90,082

Financial liabilities held for trading - - - 2,167 2,167

Financial liabilities designated at fair value through P&L - - - 36,146 36,146

Financial liabilities at amortised cost 8,431 8,160 5,303 2,138,100 2,159,994

- deposits from banks 356 165 275 20,209 21,005

- due to customers 8,075 7,995 5,028 1,457,707 1,478,805

- borrowings from banks - - - 396,023 396,023

- borrowings from other customers - - - 6,224 6,224

- debt securities in issue - - - 185,520 185,520

- subordinated liabilities - - - 72,417 72,417

Derivative financial instruments designated for hedging - - - 8 8

Other financial liabilities 2 - - 8,583 8,585

TOTaL LIaBILITIES 8,433 8,160 5,303 2,275,086 2,296,982

net balance sheet position on 31 December 2011 (67) 32,676 207 126,927 159,743

Off-balance sheet position on 31 December 2011 - Derivatives - 32,797 485 287,014 320,296

31 December 2010

TOTaL aSSETS 21,285 53,819 5,376 2,485,374 2,565,854

TOTaL LIaBILITIES 8,611 13,140 2,730 2,357,718 2,382,199

net balance sheet position on 31 December 2010 12,674 40,679 2,646 127,656 183,655

Off-balancesheet position on 31 December 2010 - Derivatives 13,027 40,699 2,286 41,685 97,697

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The table makes the high level of the open long CHF position evident. The Bank manages it using foreign currency derivatives (e.g. foreign currency swaps).

Taking into account the foreign currency derivative transactions currency positions are nearly+ closed, which is why the effects of chan-ges in foreign exchange rates are negligible.

- amounts in thousands of EUR

GROUP31 December 2011 USD CHF Other EUR Total

Cash and balances with Central Bank 112 212 450 167,389 168,163

Financial assets held for trading - - - 52,817 52,817

Financial assets designated at fair value through P&L - - - 7,823 7,823

Available for sale financial assets - - - 203,201 203,201

Derivative financial instruments designated for hedging - - - 4,838 4,838

Loans and advances 8,253 40,624 5,057 1,691,281 1,745,215

- loans and advances to banks 3,692 570 4,629 46,163 55,054

- loans and advances to customers 4,561 40,054 428 1,645,118 1,690,161

Held to maturity investments - - - 269,311 269,311

Assets pledged - - - - -

Other financial assets 1 - 3 5,235 5,239

TOTAL ASSETS 8,366 40,836 5,510 2,401,895 2,456,607

Deposits from Central Bank - - - 90,082 90,082

Financial liabilities held for trading - - - 2,167 2,167

Financial liabilities designated at fair value through P&L - - - 36,146 36,146

Financial liabilities at amortised cost 8,431 8,160 5,303 2,138,097 2,159,991

- deposits from banks 356 165 275 20,209 21,005

- due to customers 8,075 7,995 5,028 1,457,703 1,478,801

- borrowings from banks - - - 396,024 396,024

- borrowings from other customers - - - 6,224 6,224

- debt securities in issue - - - 185,520 185,520

- subordinated liabilities - - - 72,417 72,417

Derivative financial instruments designated for hedging - - - 8 8

Other financial liabilities 2 - - 9,570 9,572

TOTAL LIABILITIES 8,433 8,160 5,303 2,276,070 2,297,966

Net balance sheet position on 31 December 2011 (67) 32,676 207 125,825 158,641

Off-balance sheet position on 31 December 2011 - Derivatives - 32,797 485 287,014 320,296

31 December 2010

TOTAL ASSETS 21,285 53,819 5,376 2,482,829 2,563,309

TOTAL LIABILITIES 8,611 13,140 2,730 2,357,890 2,382,371

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

Off-balance sheet position on 31 December 2010 - Derivatives 13,027 40,699 2,286 41,685 97,697

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2.25.2.5 Interest rate risk

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

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

The interest rate risk the Bank and the Group were exposed to in 2011, was based on the unmatched maturities and renewed interest rate fixing between interest rate sensitive assets and liabilities. This was the result of acquiring long-term fixed interest rate funding and its use for variable interest rate investments as well as fixed ones with different maturities. The Bank and the Group reduced exposure to interest rate risk with interest rate derivatives, using hedge accounting, to close larger transactions which had a significant effect on the size of the interest rate gap. They plan to continue closing interest rate gaps in 2012 with the use of balance sheet instruments and interest rate derivatives, whereby they will decrease the effect on the income statement due to a change in the fair value of the interest rate derivative with the use of hedge accounting.

- amounts in thousands of EUR

Bank 31 December 2011

Up to 1month

1 - 3months

3 -12months

1- 5years

Over 5years

noninterestbearing Total

Cash and balances with Central Bank 157,922 - - - - 10,241 168,163

Financial assets held for trading 1,796 530 2,630 13,472 1,980 32,409 52,817

Financial assets designated at fair value through P&L 2,099 1,200 - 3,929 595 - 7,823

available for sale financial assets 11,462 45,716 21,535 95,858 3,426 25,204 203,201

Loans and advances 489,945 396,590 772,849 67,069 21,961 - 1,748,414

- loans and advances to banks 54,988 - 66 - - - 55,054

- loans and advances to customers 434,957 396,590 772,783 67,069 21,961 - 1,693,360

Held to maturity investments 6,884 15,212 10,406 183,397 53,412 - 269,311

Derivative financial instruments designated for hedging 4,838 - - - - - 4,838

Other financial assets - - - - - 2,158 2,158

TOTaL aSSETS 674,946 459,248 807,420 363,725 81,374 70,012 2,456,725

Deposits from Central Bank 82 10,000 - 80,000 - - 90,082

Financial liabilities held for trading - - - - - 2,167 2,167

Financial liabilities designated at fair value through P&L 1,385 33,270 1,491 - - - 36,146

Financial liabilities at amortised cost 814,053 515,050 657,159 169,283 4,449 - 2,159,994

- deposits from banks 15,520 5,075 410 - - - 21,005

- due to customers 685,916 364,216 329,944 98,515 214 - 1,478,805

- borrowings from banks 101,320 52,000 232,821 5,647 4,235 - 396,023

- borrowings from other customers 24 2,700 3,500 - - - 6,224

- debt securities in issue 11,253 91,059 30,234 52,974 - - 185,520

- subordinated liabilities 20 - 60,250 12,147 - - 72,417

Derivative financial instruments designated for hedging 8 - - - - - 8

Other financial liabilities - - - - - 8,585 8,585

TOTaL LIaBILITIES 815,528 558,320 658,650 249,283 4,449 10,752 2,296,982

GaP on 31 December 2011 (140,582) (99,072) 148,770 114,442 76,925 59,260 159,743

31 December 2010

TOTaL aSSETS 698,710 494,247 885,216 329,204 71,297 87,180 2,565,854

TOTaL LIaBILITIES 879,804 402,234 669,186 397,810 19,742 13,423 2,382,199

GaP on 31 December 2010 (181,094) 92,013 216,030 (68,606) 51,555 73,757 183,655

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- amounts in thousands of EUR

GROUP 31 December 2011

Up to 1month

1 - 3months

3 -12months

1- 5years

Over 5years

Noninterestbearing Total

Cash and balances with Central Bank 157,922 - - - - 10,241 168,163

Financial assets held for trading 1,796 530 2,630 13,472 1,980 32,409 52,817

Financial assets designated at fair value through P&L 2,099 1,200 - 3,929 595 - 7,823

Available for sale financial assets 11,462 45,716 21,535 95,858 3,426 25,204 203,201

Loans and advances 489,910 395,022 771,439 66,883 21,961 - 1,745,215

- loans and advances to banks 54,988 - 66 - - - 55,054

- loans and advances to customers 434,922 395,022 771,373 66,883 21,961 - 1,690,161

Held to maturity investments 6,884 15,212 10,406 183,397 53,412 - 269,311

Derivative financial instruments designated for hedging 4,838 - - - - - 4,838

Other financial assets - - - - - 5,239 5,239

TOTAL ASSETS 674,911 457,680 806,010 363,539 81,374 73,093 2,456,607

Deposits from Central Bank 82 10,000 - 80,000 - - 90,082

Financial liabilities held for trading - - - - - 2,167 2,167

Financial liabilities designated at fair value through P&L 1,385 33,270 1,491 - - - 36,146

Financial liabilities at amortised cost 814,049 515,050 657,159 169,283 4,449 - 2,159,990

- deposits from banks 15,520 5,075 410 - - - 21,005

- due to customers 685,912 364,216 329,944 98,515 214 - 1,478,801

- borrowings from banks 101,320 52,000 232,821 5,647 4,235 - 396,023

- borrowings from other customers 24 2,700 3,500 - - - 6,224

- debt securities in issue 11,253 91,059 30,234 52,974 - - 185,520

- subordinated liabilities 20 - 60,250 12,147 - - 72,417

Derivative financial instruments designated for hedging 8 - - - - - 8

Other financial liabilities - - - - - 9,573 9,573

TOTAL LIABILITIES 815,524 558,320 658,650 249,283 4,449 11,740 2,297,966

GAP on 31 December 2011 (140,613) (100,640) 147,360 114,256 76,925 61,353 158,641

31 December 2010

TOTAL ASSETS 698,636 492,172 884,685 329,204 71,296 87,316 2,563,308

TOTAL LIABILITIES 879,801 402,234 669,186 397,810 19,742 13,598 2,382,371

GAP on 31 December 2010 (181,165) 89,937 215,499 (68,605) 51,554 73,718 180,937

In the up-to 1 month interval the Bank included all at sight deposits on the liabilities side, which is why the interest rate gap is negative. In 2011 it entered into interest rate swap transactions on bonds issued and deposits taken, which also affected the size of the interest rate gap. By entering into interest rate swaps the Bank and the Group decreased its exposure to interest rate risk.

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2.25.3 Liquidity risk

Liquidity risk is the risk of ensuring liquidity, when the Bank and the Group are not able to settle all due liabilities or they are for-ced to acquire funding at significantly higher cost and the market liquidity risk, which arises when it is not possible to sell a position in a financial instrument or replace it in a short period of time wi-thout significantly influencing market prices. From the time point of view it is possible to distinguish between the management of operational liquidity and the management of structural liquidity.

In banks the duration gaps in assets and liabilities are common, as transforming short-term funding into long-term loans is a core role they play, however the Bank and the Group expose themselves to liquidity risk in doing so. Due to this fact the Bank and the Gro-up have set up an efficient liquidity management system, which includes:- analysis and planning of future cash flows,- maintaining very liquid assets within liquidity reserves,- monitoring target values and limits pertaining to operational and

structural liquidity through the system of internal and external reporting,

- ensuring an adequate diversification of liquidity sources and- preparing scenarios simulating extraordinary liquidity conditi-

ons.

The Bank prepares three different scenarios of extraordinary liqui-dity conditions, which are based on a dynamic analysis of liquidity gaps:- a scenario adapted to its own liquidity position (an idiosyncratic

scenario), which assumes the impossibility of renewing liquidity sources,

- a scenario based on the market situation (market scenario), whi-ch provides for a drop in the liquidity of assets, and

- scenarios based on a combination of the above two scenarios.

Based on the results of scenarios dealing with extreme liquidity conditions the Bank determined the minimum amount of liquidity reserves and its structure. The Bank has set up procedures of ear-ly liquidity shortage detection, whereby it also regularly monitors the trends related to individual products and the market situation. Additionally, it pays special attention to warning signals pointing to extreme liquidity conditions. At the onset of possible warning signs the Bank has set up a crisis plan, which defines the most effi-cient ways of managing the positions in the event of extraordinary liquidity conditions. In such an event the Bank would be active in two ways, namely in the acquisition of additional, alternative funding and in the appropriate communication with the public.

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Exposure to liquidity risk- amounts in thousands of EUR

Bank31 December 2011 Carrying

amountTotal cash flow(undiscounted)

Up to 1month

1 - 3months

3 - 12months

1 - 5 years

Over 5years

Cash and balances with Central Bank 168,163 168,170 168,170 - - - -

Financial assets held for trading 52,817 63,285 32,707 6 3,749 16,180 10,643

Financial assets designated at fairvalue through profit or loss 7,823 9,101 61 196 182 4,875 3,787

available for sale financial assets 203,201 219,337 28,885 20,039 43,207 123,164 4,042

Loans and advances 1,748,414 1,944,846 315,157 140,017 505,679 674,963 309,030

- loans and advances to banks 55,054 55,070 55,003 - 67 - -

- loans and advances to customers 1,693,360 1,889,776 260,154 140,017 505,612 674,963 309,030

Held to maturity investments 269,311 327,064 3,688 20,172 17,226 212,543 73,435

Derivative financial instruments designated for hedging 4,838 4,838 4,838 - - - -

Other financial assets 2,158 2,158 2,158 - - - -

TOTaL aSSETS 2,456,725 2,738,799 555,664 180,430 570,043 1,031,725 400,937

Deposits from Central Bank 90,082 92,686 - 10,144 - 82,542 -

Financial liabilities held for trading 2,167 2,167 2,167 - - - -

Financial liabilities designated at fairvalue through profit or loss 36,146 46,484 - 2,537 2,455 7,405 34,087

Financial liabilities at amortised cost 2,159,994 2,278,310 711,618 286,461 569,442 602,388 108,401

- deposits from banks 21,005 21,218 15,580 5,218 420 - -

- due to customers 1,478,805 1,519,386 674,433 232,332 377,676 233,526 1,419

- borrowings from banks 396,023 433,909 13,661 6,228 150,674 207,868 55,478

- borrowings from other customers 6,224 6,591 - 377 2,781 3,433 -

- debt securities in issue 185,520 208,770 7,888 42,258 34,560 124,064 -

- subordinated liabilities 72,417 88,436 56 48 3,331 33,497 51,504

Derivative financial instruments designated for hedging 8 8 8 - - - -

Other financial liabilities 8,585 8,585 8,585 - - - -

TOTaL LIaBILITIES 2,296,982 2,428,240 722,378 299,142 571,897 692,335 142,488

GaP on 31 December 2011 159,743 310,559 (166,714) (118,712) (1,854) 339,390 258,449

OFF-BaLanCE SHEET

Guarantees 96,612 96,612 96,612 - - - -

Other commitments 176,113 176,113 176,113 - - - -

TOTaL on 31 December 2011 272,725 272,725 272,725 - - - -

31 December 2010

TOTaL aSSETS 2,565,854 2,825,408 578,232 255,161 684,630 967,514 339,871

TOTaL LIaBILITIES 2,382,199 2,516,734 787,598 306,585 607,621 664,982 149,948

GaP on 31 December 2010 183,655 308,675 (209,366) (51,424) 77,009 302,532 189,923

OFF-BaLanCE SHEET

Guarantees 80,261 80,261 80,261 - - - -

Other commitments 171,227 171,227 171,227 - - - -

TOTaL on 31 December 2010 251,488 251,488 251,488 - - - -

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- amounts in thousands of EUR

GROUP31 December 2011 Carrying

amountTotal cash flow(undiscounted)

Up to 1month

1 - 3months

3 - 12months

1 - 5 years

Over 5years

Cash and balances with Central Bank 168,163 168,170 168,170 - - - -

Financial assets held for trading 52,817 63,285 32,707 6 3,749 16,180 10,643

Financial assets designated at fairvalue through profit or loss 7,823 9,101 61 196 182 4,875 3,787

Available for sale financial assets 203,201 219,337 28,885 20,039 43,207 123,164 4,042

Loans and advances 1,745,215 1,941,608 315,200 137,592 505,159 674,920 308,737

- loans and advances to banks 55,054 55,070 55,003 - 67 - -

- loans and advances to customers 1,690,161 1,886,538 260,197 137,592 505,092 674,920 308,737

Held to maturity investments 269,311 327,064 3,688 20,172 17,226 212,543 73,435

Derivative financial instruments designated for hedging 4,838 4,838 4,838 - - - -

Other financial assets 5,239 5,239 5,239 - - - -

TOTAL ASSETS 2,456,607 2,738,642 558,788 178,005 569,523 1,031,682 400,644

Deposits from Central Bank 90,082 92,686 - 10,144 - 82,542 -

Financial liabilities held for trading 2,167 2,167 2,167 - - - -

Financial liabilities designated at fairvalue through profit or loss 36,146 46,484 - 2,537 2,455 7,405 34,087

Financial liabilities at amortised cost 2,159,990 2,278,305 711,613 286,461 569,442 602,388 108,401

- deposits from banks 21,005 21,218 15,580 5,218 420 - -

- due to customers 1,478,801 1,519,381 674,428 232,332 377,676 233,526 1,419

- borrowings from banks 396,023 433,909 13,661 6,228 150,674 207,868 55,478

- borrowings from other customers 6,224 6,591 - 377 2,781 3,433 -

- debt securities in issue 185,520 208,770 7,888 42,258 34,560 124,064 -

- subordinated liabilities 72,417 88,436 56 48 3,331 33,497 51,504

Derivative financial instruments designated for hedging 8 8 8 - - - -

Other financial liabilities 9,573 9,573 9,573 - - - -

TOTAL LIABILITIES 2,297,966 2,429,223 723,361 299,142 571,897 692,335 142,488

GAP on 31 December 2011 158,641 309,419 (164,573) (121,137) (2,374) 339,347 258,156

OFF-BALANCE SHEET

Guarantees 96,612 96,612 96,612 - - - -

Other commitments 174,202 174,202 174,202 - - - -

TOTAL on 31 December 2011 270,814 270,814 270,814 - - - -

31 December 2010

TOTAL ASSETS 2,563,309 2,823,541 578,348 251,932 684,139 968,277 340,845

TOTAL LIABILITIES 2,382,371 2,516,906 787,770 306,585 607,621 664,982 149,948

GAP on 31 December 2010 180,938 306,635 (209,422) (54,653) 76,518 303,295 190,897

OFF-BALANCE SHEET

Guarantees 80,261 80,261 80,261 - - - -

Other commitments 171,004 171,004 171,004 - - - -

TOTAL on 31 December 2010 251,265 251,265 251,265 - - - -

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The table discloses undiscounted cash flow on 31 December 2011, which in addition to the carrying amounts of financial instruments includes the anticipated future cash flows from interest. The amounts disclosed are based on spot rates and interest rates at the reporting date. Innovative subordinated bonds do not mature at any certain date, are however callable in 2017. This is the reason these instruments have been included in the ‘’over 5 years’’ category. The interest cash flow has been calculated for 6 years.

The liquidity gap within the up to one month time interval is negative, however the fact must be taken into account that it includes all at sight deposits within financial liabilities, even though the Central Bank, in line with the regulation, only considers at sight deposits 60% weighted for stability. Financial assets though feature securities included in liquidity reserves recorded at remaining maturity, not in the up to one month interval. Taking into account the group stated in the interval up to one month, the Bank and the Group actually recorded a liquidity surplus.

Liquidity gaps changed as compared with 31 December 2010, especially in the 1 to 3 month and the 3 to 12 month intervals, both namely saw a decrease in asset side transactions, which was higher than the decrease in the liabilities side transactions. The Bank and the Group liquidity gaps in the over 1 year interval are positive and have exceeded the surpluses from the previous year.

2.25.4 Capital and capital adequacy

In its operations the Bank and the Group must always exhibit an appropriate 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 Bank and the Group are exposed to in their ordinary course of business. They must have sufficient capital to suit the risk of their operations and their business strategy.

In accordance with the provisions of Basel II and the Decision on the calculation of bank and savings bank capital, it is divided into three categories:- Tier 1 capital,- Tier 2 capital,- Tier 3 capital.

Tier 1 capital represents the highest quality of capital and may be used, together with Tier 2 capital, for the fulfilment of capital requirements relating to credit, market and operational risk. Tier 3 capital may only be used for the fulfilment of capital requirements relating to market risk, except the capital requirements for settlement risk and counterparty credit risk.

The Bank and the Group must fulfil certain ratios and adhere to certain limits in connection with individual capital components at all times. The more significant ratios and limits comprise:- Tier 2 capital may not exceed the level of Tier 1 capital,- the sum of preferential cumulative shares with a fixed return and

subordinated debt included in the Tier 2 capital may not exceed 50% of the Tier 1 capital.

Despite the abovementioned ratios and limits between individual categories or capital components, hybrid instruments, which may be included in Tier 1 capital, carry additional limitations.

Potential surpluses in individual categories or capital components above the limits set may not be considered in the calculation of capital.

Tier 1 capitalThe components of Tier 1 capital:- paid up share capital and capital reserves from regular shares,

except share capital, paid in on the basis preferred cumulative shares of related capital reserves,

- reserves and retained profit, free from potential future liabilities and approved at the General Meeting of Shareholders in the amount, which is assumed to remain part of capital and will not be distributed; retained loss is included under this item as well,

- hybrid instruments based on Tier 1 capital within limits, namely: ∞ transitional period hybrid instruments without incentive for

pay-out (preferred non-cumulative shares) and ∞ transitional period hybrid instruments with incentive for pay-

out (subordinated registered bond).

Deductibles from the Bank’s and the Group’s Tier 1 capital:- own shares, with the characteristics of Tier 1 capital,- other negative effects from (net) revaluation surpluses, namely

the negative effects from revaluation surpluses in connection with equities and shares, available-for-sale and designated at fair value (included in the banking and trading book) and available-for-sale debt securities as well as those recognised at fair value (included in the trading book).

- intangible long-term assets,- hybrid instrument surpluses above the prescribed Tier 1 limit.

Tier 2 capitalThe Bank’s and the Group’s Tier 2 capital comprises:- 80% of the amount of positive effects from surplus from the

revaluation of available-for-sale equities and interests as well as those designated at fair value (included in the banking and trading book) and available-for-sale debt securities as well as those recognised at fair value (included in the trading book),

- surplus from hybrid instruments in the part exceeding the limit for inclusion in Tier 1 capital (subordinated registered bond),

- subordinated debt for inclusion in Tier 2 capital (which is gradually discounted from Tier 2 capital at a 20% cumulative discount during the last five years prior to maturity).

Deductions from Tier 1 and Tier 2 capitalAs at 31 December 2011 and 31 December 2010 the Bank and the Group did not exhibit any deduction from Tier 1 and Tier 2 capital, as stipulated under Article 30 of the Decision on the calculation of own funds, capital requirements and capital adequacy of banks and savings banks.

Tier 3 capitalAs at 31 December 2011 and 31 December 2010 the Bank and the Group did not have any debt instruments in issue, which would merit inclusion into Tier 3 capital.

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- amounts in thousands of EUR

Capital and Capital REqUiREmEntsBank GROUp

2011 2010 2011 2010

i. tOtal Capital for capital adequacy requirements (1+2) 277,717 297,629 278,489 298,141

1. tiER 1 capital 205,101 219,859 206,009 220,461

paid-up share capital (regular shares) 13,584 13,584 13,584 13,584

share premium (regular shares) 36,658 36,658 36,820 36,820

profit reserves and retained profit 111,720 125,376 112,334 125,731

Hybrid instruments 68,102 68,067 68,102 68,067

transitory period hybrid instruments, without pay-out incentives 18,102 18,067 18,102 18,067

transitory period hybrid instruments, with pay-out incentives 50,000 50,000 50,000 50,000

deductibles from tiER 1 capital: (24,963) (23,826) (24,831) (23,741)

(-) Own shares (401) (401) (401) (401)

(-) intangible long-term assets (4,921) (5,251) (4,925) (5,256)

(-) Revaluation reserves (RR) - available for sale - prudential filters (406) (1,153) (406) (1,153)

(-) Hybrid instrument surplus (19,235) (17,021) (19,099) (16,931)

2. tiER 2 capital 72,616 77,770 72,480 77,680

surplus of individual capital compnents, distributable to tier 2 capital (Hybrid instruments surplus) 19,235 17,021 19,099 16,931

tier 1 capital adjustments, transferable to tier 2 capital - prudential filter 2,563 5,452 2,563 5,452

subordinated debt 50,818 55,297 50,818 55,297

ii. Capital REqUiREmEnts 154,092 156,784 154,073 156,778

Capital requirements for credit and counterparty risks 136,834 138,638 136,935 138,715

Capital requirements for position and foreign exchange risks 5,822 6,548 5,822 6,548

Capital requirement for operational risk 11,436 11,598 11,316 11,515

iii. Capital adEqUaCY RatiO (i / ii x 8) (in %) 14.42% 15.19% 14.46% 15.21%

iV. tiER 1 Capital adEqUaCY RatiO (i.1. / ii x 8) (in %) 10.65% 11.22% 10.70% 11.25%

The capital for capital adequacy purposes decreased in comparison the year before due to the loss the Bank and the Group made in 2011. Lower capital requirements are the consequence of additional impairment costs in 2011, which decreased the Bank’s and the Group’s exposure to credit risk. The drop in capital also impacted the decrease of the capital adequacy and Tier 1 capital ratios.

In 2011 a proposal of the new capital directive CRD IV was adopted, with new legislation coming into effect in 2013. In preparing for the changes brought about by the new legislation, the Bank has been analysing the movements in capital and the fluctuations in capital ratios in line with the provisions of the new capital accord.

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BankCarrying amount Fair value

2011 2010 2011 2010

Financial assets

Loans 1,748,414 1,795,957 1,785,761 1,827,052

- loans and advances to banks 55,054 85,908 55,063 85,917

- loans and advances to customers 1,693,360 1,710,049 1,730,698 1,741,135

Held to maturity investments 269,311 276,273 268,132 286,636

assets pledged - 32,390 - 33,574

Total financial assets 2,017,725 2,104,620 2,053,893 2,147,262

Financial liabilities

Deposits from the Central bank 90,082 70,013 85,031 69,964

Financial liabilities at amortised cost 2,159,994 2,227,372 2,158,343 2,241,468

- deposits from banks 21,005 54,435 21,171 54,433

- due to customers 1,478,805 1,498,961 1,483,804 1,505,400

- borrowings from banks 396,023 419,335 393,997 421,940

- borrowings from costumers 6,224 8,847 6,192 8,858

- debt securities in issue 185,520 160,436 181,422 163,861

- subordinated liabilities 72,417 85,358 71,757 86,976

Financial liabilities associated to transferred assets - 30,993 - 30,995

Total financial liabilities 2,250,076 2,328,378 2,243,374 2,342,427

2.25.5 Fair value of financial assets and liabilities

a) Financial instruments not measured at fair value

- amounts in thousands of EUR

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To calculate the fair values of held-to-maturity financial assets the Bank and 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 individual 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 assigned to the Bank.

The statement of financial position shows loans and other receivables in net amounts, meaning that these have been decreased by the impairment charges.

b) Fair value hierarchyThe Bank defines a hierarchy of valuation techniques based on whether the inputs for those valuations are published or not. Published inputs reflect market data obtained from independent sources; non-published 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, certificates of deposit and financial liabilities issued by the Group (subordinated bonds BCE 10 and certificates of deposit). The sources of input parameters like EURIBOR yield curve or counterparty credit risk are Bloomberg and Reuters.

Level 3 - inputs for an asset or liability that are not based on published market data. This level includes equity investments with significant components not based on observable market data.

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

GROUPCarrying amount Fair value

2011 2010 2011 2010

Financial assets

Loans 1,745,215 1,793,275 1,782,544 1,824,375

- loans and advances to banks 55,054 85,908 55,063 85,917

- loans and advances to customers 1,690,161 1,707,367 1,727,481 1,738,458

Held to maturity investments 269,311 276,273 268,132 286,636

Assets pledged - 32,390 - 33,574

Total financial assets 2,014,526 2,101,938 2,050,676 2,144,585

Financial liabilities

Deposits from the Central bank 90,082 70,013 85,031 69,964

Financial liabilities at amortised cost 2,159,990 2,227,369 2,158,339 2,241,466

- deposits from banks 21,005 54,435 21,171 54,433

- due to customers 1,478,801 1,498,958 1,483,800 1,505,398

- borrowings from banks 396,023 419,335 393,997 421,940

- borrowings from costumers 6,224 8,847 6,192 8,858

- debt securities in issue 185,520 160,436 181,422 163,861

- subordinated liabilities 72,417 85,358 71,757 86,976

Financial liabilities associated to transferred assets - 30,993 - 30,995

Total financial liabilities 2,250,072 2,328,375 2,243,370 2,342,425

- amounts in thousands of EUR

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- amounts in thousands of EUR

- amounts in thousands of EUR

31 December 2011 Level 1 Level 2 Level 3 Total

Financial assets measured at fair value:

Financial assets held for trading 19,771 27,690 5,356 52,817

Debt securities 9,872 10,537 - 20,409

Equity securities 9,899 - 5,356 15,255

Derivatiaves - 17,153 - 17,153

Financial assets designated at fair value through profit or loss 5,834 1,989 - 7,823

Debt securities 5,834 1,989 - 7,823

Total assets 25,605 29,679 5,356 60,640

Financial liabilities measured at fair value:

Financial liabilities designated at fair value through profit or loss - 36,146 - 36,146

Derivatives - 2,167 - 2,167

Total liabilities - 38,313 - 38,313

31 December 2010 Level 1 Level 2 Level 3 Total

Financial assets measured at fair value:

Financial assets held for trading 26,075 31,091 8,199 65,365

Debt securities 13,576 18,446 - 32,023

Equity securities 12,498 - 8,199 20,698

Derivatiaves - 12,645 - 12,645

Financial assets designated at fair value through profit or loss 27,460 1,985 - 29,445

Debt securities 27,460 1,985 - 29,445

Total assets 53,534 33,077 8,199 94,810

Financial liabilities measured at fair value:

Financial liabilities designated at fair value through profit or loss - 40,050 - 40,050

Derivatives - 6,014 - 6,014

Total liabilities - 46,064 - 46,064

Assets and liabilities measured at fair value (Bank and Group)

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Financial assets measured at fair value:

Financial assets held for trading

Equity instruments

As at 1 January 2010 17,841

Profit / Loss (9,642)

Sale -

Settlements -

As at 1 January 2011 8,199

Profit / Loss (2,843)

Sale -

Settlements -

As at 31 December 2010 5,356

Reconciliation of Level 3 items (Bank and Group)

The Bank performed a sensitivity analysis, wherein it simulated the effect a 3rd level decrease in the carrying amount of equity financial instruments has on the income statement. Should the fair value of these financial instruments decrease by 20%, this would have a negative effect on the income statement in the amount of EUR 1,071 thousand (2010: EUR 1,640 thousand).

2.26 Critical accounting estimates and judgements

All the estimates and judgements used represent the best judge-ments in accordance with IFRS, made in line with the applicable standards and are based on the principles of an active company, on past experience and other factors, including expectations with regard to future events.

a) Impairment losses on loans and advancesWith the objective of determining impairment charges the Bank and the Group are constantly (or at least on a quarterly ba-sis) reviewing their loan portfolio. Prior to making the decision on recognising loss through the income statement, they make judgement if any information exists, which could signify a drop in the estimated cash flows from loans. Such evidence includes theinformation on deterioration of debtor creditworthiness or on deterioration of economic conditions and circumstances. Future cash flows from financial assets are estimated on the basis of pastexperience and loss from credit risk bearing assets, like assets within the group. In estimating future cash flow data is also con-sidered, which reflects the effects of current circumstances. Indi-vidual estimations are prepared on the basis of projected future cash flows including all relevant information in relation to the fi-nancial position and debtor creditworthiness as well as collateral. The methodology and presumptions, used in estimating future cash flow are based on regular reviews aimed at decreasing the differences between the estimated and actual losses. Should the current value of future cash flows decrease by 1 percentage point, it would result in additional impairment charges in the amount of EUR 3,994 thousand for the Bank and EUR 3,995 thousand for the Group.

b) Fair value of financial instrumentsThe fair value of financial instruments traded on an organised market is determined using observable market prices on the reporting date, being the price, representing the best bid for the financial instrument.

Fair values of financial instruments not traded on organized mar-kets are determined using valuation models. These include com-parisons with the prices from the most recent transactions, the use of discounted future cash flows and other frequently used valuation methods. All models in use have been verified to ensure that the results offer an adequate representation of actual marketconditions, including the relative liquidity of the market and the use of adequate market surpluses. Changes in the estimates of these factors would impact the reported fair value of held for trad-ing investments and available for sale financial assets.

c) Available for sale equity instrumentsAvailable for sale equity instruments are impaired when a sub-stantial or long-term drop in their fair value below original cost has been recorded. The determination of what represents a sub-stantial and long-term decrease in fair value is based on estimates. In setting these estimates, in addition to other factors, the Group takes into account share price volatility. The impairment is desig-nated by evidence on the deterioration of the financial position of the instrument’s issuer, the deterioration in the industry and a decrease in operational and financial cash flows. If all decreases of fair value below original cost were significant or long-term the Bank and the Group would realize additional losses from impair-ment charges in the amount of EUR 2,781 thousand, with the re-classification from the statement of comprehensive income to the income statement for the year.

d) Held to maturity investmentsThis group of investment features non-derivative financial instru-ments with fixed payments and a fixed maturity. Prior to classi-fication the intention and capacity to hold such an investment until maturity is verified. Should the Group not be able to hold the investment until maturity, the entire group would have to be reclassified as available for sale financial assets. In this case the investments are required to be revalued at fair value, which would result in an increase of the value of investments, subsequently increasing equity by EUR 1,605 thousand.

- amounts in thousands of EUR

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2.27 Segment reporting

The Bank's operations comprise three segments:- retail, incorporating private client accounts, savings, deposits,

certificates of deposit, insurance brokerage products, credit and debit cards, loans, mainly small businesses and private individuals;

- corporates, incorporating current accounts, deposits, loans and other credit facilities and payment operations, mainly small and large corporates;

- financial markets, incorporating financial instruments trading, securities issued and interbank relationships.

In its operations the Bank primarily performs credit and deposit operations. Segments are disclosed according to the methodology used in the preparation of internal report and are discussed at the ALCO, which also comprises Management Board members. The heads of individual areas of operation receive detailed reports on the operation of their units during the year. Throughout the year there have been no significant changes in reportable segments.

Liabilities and assets are shown according to segment based on the segment they were acquired from or the segment they were invested in.

Transactions between segments for the purpose of internal accounting are based on harmonized transfer bases (internal transfers of income effects between segments, keys for the transfer of service and administrative unit costs to profit centres). Net interest is included in the report in accordance with the market transfer prices, whereby transfer income is applied to some transactions and transfer expenses to others as well as transfer interest margins, pointing to the contribution of an individual transaction to the net interest of the Group.

The transfer pricing system for the allocation of net interest revenue has been methodologically designed and confirmed by the Assets and Liabilities Management Committee, which receives, together with individual segment heads, reports on the transfer prices of interest bearing assets and liabilities on a monthly basis.

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Bank 31 December 2011 Retail Corporates Financial markets Total

Total income 43,402 65,579 32,300 141,281

- external income 43,402 65,248 32,300 140,950

- income from other segments - 331 - 331

net interest and similar (loss) 24,596 22,451 1,880 48,927

net fee and commission income 10,937 5,717 (268) 16,386

net gains from financial transactions 364 (403) 7,168 7,129

net other operating income (129) (113) (102) (344)

Depreciation and amortisation expenses (26,654) (8,115) (2,653) (37,422)

Provisions (137) 112 (571) (596)

Impairment charges (1,563) (35,939) (15,168) (52,670)

Profit before income tax 7,414 (16,290) (9,714) (18,590)

Deferred tax - - - 3,715

net loss (14,875)

Segment assets 538,305 1,178,496 740,999 2,457,800

Subisidiary - 12,340 - 12,340

not allocated - - - 20,773

Total assets 2,490,913

Segment liabilities 796,641 706,512 792,628 2,295,781

not allocated - - - 13,799

Equity - - - 181,333

Total liabilities and equity 2,490,913

Other segment items

Investments in property and equipment and in intangible assets 515 777 383 1,675

Depreciation and amortisation 1,156 1,747 861 3,764

31 December 2011 Total segmentreporting

Consolidation andadjustments Total consolidated

Net interest and similar income 48,927 (32) 48,895

Net fee and commission income 16,386 (1) 16,385

Net gains from financial transactions 7,129 - 7,129

Net other operating income (344) 769 425

Amortisation (37,422) (667) (38,089)

Provisions (596) (1) (597)

Impairment charges (52,670) (8) (52,678)

Profit before income tax (18,590) 60 (18,530)

Income tax expense 3,715 - 3,715

Profit for the year (14,875) 60 (14,815)

Total assets 2,490,913 1,852 2,492,765

Segment liabilities 2,309,580 1,016 2,310,596

Equity 181,333 836 182,169

Total liabilities and equity 2,490,913 1,852 2,492,765

The report on operations according to segments in 2011:

Reconciliation of segment results to consolidated financial statements:

- amounts in thousands of EUR

- amounts in thousands of EUR

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Bank 31 December 2010 Retail Corporates Financial markets Total

Total income 37,475 68,489 30,086 136,050

- external income 37,475 68,169 30,086 135,730

- income from other segments - 320 - 320

net interest and similar (loss) 19,584 30,697 4,786 55,067

net fee and commission income 10,247 6,288 (274) 16,261

net gains from financial transactions 543 118 4,375 5,036

net other operating income (270) (156) (33) (459)

Depreciation and amortisation expenses (27,428) (9,559) (2,763) (39,750)

Provisions 272 (131) 127 268

Impairment charges (1,827) (21,650) (7,521) (30,998)

Profit before income tax 1,121 5,607 (1,303) 5,425

Deferred tax - - - (925)

net loss 4,500

Segment assets 508,981 1,225,707 830,470 2,565,158

Subisidiary - 14,697 - 14,697

not allocated - - - 18,225

Total assets 2,598,080

Segment liabilities 800,812 725,525 855,751 2,382,088

Subisidiary - 13 - 13

not allocated - - - 16,053

Equity - - - 199,926

Total liabilities and equity 2,598,080

Other segment items

Investments in property and equipment and in intangible assets 761 1,389 611 2,761

Depreciation and amortisation 1,035 1,891 831 3,757

31 December 2010 Total segmentreporting

Consolidation andadjustments Total consolidated

Net interest and similar income 55,067 (59) 55,008

Net fee and commission income 16,261 (1) 16,260

Net gains from financial transactions 5,035 6 5,041

Net other operating income (459) 753 294

Amortisation (39,749) (406) (40,155)

Provisions 279 (28) 251

Impairment charges (31,009) (5) (31,014)

Profit before income tax 5,425 260 5,685

Income tax expense (925) (1) (926)

Profit for the year 4,500 259 4,759

Total assets 2,598,080 1,137 2,599,217

Segment liabilities 2,398,154 361 2,398,515

Equity 199,926 776 200,702

Total liabilities and equity 2,598,080 1,137 2,599,217

Reconciliation of segment results to consolidated financial statements:

- amounts in thousands of EUR

- amounts in thousands of EUR

The report on operations according to segments in 2010:

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Bank31 December 2011 Revenues non current assets

Slovenia 113,517 1,441,482

European Union 18,664 205,079

Former Yugoslav countries 7,779 43,433

Other 1,321 28,357

Total 141,281 1,718,351

Bank31 December 2010 Revenues non current assets

Slovenia 123,827 1,445,199

European Union 6,576 260,433

Former Yugoslav countries 6,940 28,946

Other (1,293) 50,748

Total 136,050 1,785,326

Structurally, the Group makes the major share of revenue in the domestic market. During the reported period in 2011 the Group did not make 10% or more of total revenue from operations with any single client. The same applies to the previous reporting period.

Reconciliation of results by geographic area:- amounts in thousands of EUR

- amounts in thousands of EUR

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- amounts in thousands of EUR

- amounts in thousands of EUR

NOTES TO INDIVIDUAL ITEMS INCLUDED IN CONSOLIDATED FINANCIAL STATEMENTS

3 NET INTEREST AND SIMILAR INCOME

Bank GROUP

2011 2010 2011 2010

Interest and similar income 115,799 112,663 115,778 112,628

Loans and advances to customers 90,858 89,639 90,837 89,604

Loans and advances to banks 671 404 671 404

Securities 18,108 19,837 18,108 19,837

- held for trading 1,266 1,374 1,266 1,374

- financial assets designated at fair value through profit or loss 386 971 386 971

- available for sale financial assets 5,915 5,680 5,915 5,680

- held to maturity investments 10,541 11,812 10,541 11,812

Deposits with Central Bank 559 374 559 374

Derivatives - interest rate swap 5,603 2,409 5,603 2,409

Interest and similar expense (66,872) (57,596) (66,883) (57,620)

Loans and advances from customers (34,201) (30,844) (34,212) (30,868)

Loans and advances from banks (15,820) (12,188) (15,820) (12,188)

Loans and deposits from Central Bank (334) (974) (334) (11,792)

Issued securities and CDs (13,347) (11,792) (13,347) (1,798)

Derivatives - interest rate swap (3,170) (1,798) (3,170) (974)

net interest and similar income 48,927 55,067 48,895 55,008

In 2011 the Bank and the Group realized EUR 23,853 thousand of revenue from individually impaired loans (2010: EUR 28,709 thousand).

The Bank and the Group accounted for EUR 4,608 thousand interest from subordinated bonds (of which EUR 125 thousand are dis-counts from bond sales) and EUR 262 thousand is interest from the subordinated certificates of deposit included in interest expense.

4 DIVIDEND INCOME

Bank and Group 2011 2010

dividends from financial assets held for trading 453 441

dividends from available for sale financial assets 423 287

Total 876 728

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5 NET FEE AND COMMISSION INCOME

Bank Group

2011 2010 2011 2010

Fee and commission income 18,772 18,812 18,771 18,811

Card operations 6,954 7,006 6,954 7,006

payment services 6,794 6,597 6,793 6,596

Guarantees 1,741 1,662 1,741 1,662

account maintenance 3,012 3,142 3,012 3,142

other services 271 405 271 405

Fee and commission expenses (2,386) (2,551) (2,386) (2,551)

Card operations (1,496) (1,639) (1,496) (1,639)

payment services (619) (600) (619) (600)

Brokerage commissions and other securities transactions (178) (172) (178) (172)

other services (93) (140) (93) (140)

net fee and commission income 16,386 16,261 16,385 16,260

6 GAINS LESS LOSSES FROM FINANCIAL ASSETS AND LIABILITIES NOT CLASSIFIED AT FAIR VALUE THROUGH PROFIT OR LOSS

In 2011 a small profit was attained from financial assets not classified at fair value through profit or loss. It was mainly the result of the sale of mutual fund units.

Bank and Group2011 2010

available for sale financial assets 1,085 1,637

debt securities (14) 706

Equity securities 1,099 931

Financial assets recognised at amortised cost (534) (240)

Total 551 1,397

- amounts in thousands of EUR

- amounts in thousands of EUR

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7 GAINS LESS LOSSES FROM FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING

The Group uses currency derivatives to economically hedge open currency positions, therefore their effects must be considered together with the effects of foreign exchange differences (Note 10).

Bank and Group2011 2010

Equity securities (573) (296)

debt securities (163) (10)

Forwards and futures with underlying securities 599 740

Currency derivative financial instruments 924 (8,884)

IrS and options (Interest rate cap) 1,815 1,303

Foreign currency trading 387 329

Total 2,989 (6,818)

8 GAIN LESS LOSSES FROM FINANCIAL ASSETS AND LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS

Income from the valuation of bonds is the result of the fair value valuation of bonds purchased. The Group provides fair value on the basis of quotes available from information platforms (Reuters or Bloomberg).

In 2011 the Group recognized a profit of EUR 3,930 thousand from securities issued based on valuation in accordance with its internal model.

Bank and Group2011 2010

(Losses) / gains from bond valuation (332) 108

Gains / (losses) from valuation securities in issue 3,930 (161)

Total 3,598 (53)

9 CHANGES IN FAIR VALUE FROM HEDGE ACCOUNTING

Using hedge accounting the Group hedged the fair value of some of its financial liabilities related to a change in interest rates.

Bank and Group2011 2010

net profit / (loss) from hedging derivatives 4,906 (390)

net profit / (loss) from hedged instruments (5,106) 488

Total (200) 98

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

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10 GAINS LESS LOSSES FROM FOREIGN EXCHANGE DIFFERENCES

Compared with the previous year, 2011 saw a substantially lower result from foreign exchange differences.

Bank and Group2011 2010

positive exchange rate differences 13,967 24,460

negative exchange rate differences (14,647) (14,797)

Total (680) 9,663

11 GAINS LESS LOSSES FROM DERECOGNITION OF ASSETS

Loss from derecognition of assets other than held for sale in 2011 pertains to disposal of obsolete computer and other equipment.

Bank GROUP

2011 2010 2011 2010

Sale of office space and housing - 18 - 24

Sale of computer and other equipment (5) 2 (5) 2

Total (5) 20 (5) 26

12 OTHER NET OPERATING PROFIT / LOSS

Taxes and other duties in 2011 pertain to expenses from tax on total assets.

Bank GROUP

2011 2010 2011 2010

Income 296 301 1,065 1,058

Income from property sales - - 769 757

Income from leases 182 186 182 186

Other operating income 114 115 114 115

Expenses (640) (760) (640) (764)

Taxes and other duties (448) (108) (448) (111)

Fees and commissions reimbursed - (298) - (298)

Membership fees (91) (119) (91) (120)

Contributions to humanitarian organisations (79) (112) (79) (112)

Other expenses (22) (123) (22) (123)

Total (344) (459) 425 294

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

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14 AMORTISATION AND DEPRECIATION

13 ADMINISTRATIVE EXPENSES

On 31 December 2011 the Bank had 530 employees (2010: 538 employees), of which 39.10% were educated at the university level at least, 19.60% were held post-secondary school education, 38.50% held secondary school diplomas, while 2.80% were educated at a lower level. The average complement in 2011 was 535 employees. Data on employees is given in more detail under item 6.6 of the business report.

The Subsidiary employed 4 workers as at 31 December 2010 and 2011.

In the amount of auditing and consultancy costs for 2011 the figure of EUR 53 thousand comes from the auditing of the annual report, with the rest of the costs represented by the payment for supervision and other consultancy services.

NoteBANK GROUP

2011 2010 2011 2010

Depreciation of property and equipment 27 (2,364) (2,527) (2,367) (2,531)

Amortisation of intangible assets 29 (1,400) (1,230) (1,401) (1,231)

Depreciation of investment property 28 - - (23) (9)

Total (3,764) (3,757) (3,791) (3,771)

Bank GROUP

2011 2010 2011 2010

Labour costs (18,752) (20,553) (19,022) (20,819)

Gross salaries and compensations (13,486) (14,357) (13,694) (14,553)

Pension insurance (1,903) (2,047) (1,918) (2,072)

Social security (1,022) (1,097) (1,048) (1,111)

Other labour expenses (2,341) (3,052) (2,362) (3,083)

General and administrative expenses (14,906) (15,439) (15,276) (15,565)

IT (3,516) (4,125) (3,516) (4,125)

Business cards (2,383) (2,365) (2,383) (2,365)

Maintenance (1,771) (1,885) (1,784) (1,901)

advertising (787) (893) (787) (893)

Rent (719) (740) (720) (740)

Material and energy costs (658) (668) (675) (696)

Office stationery costs (564) (399) (569) (407)

audit and consultancy (244) (237) (440) (358)

Other services (4,264) (4,127) (4,402) (4,080)

Total (33,658) (35,992) (34,298) (36,384)

- amounts in thousands of EUR

- amounts in thousands of EUR

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15 PROVISIONS

16 IMPAIRMENT CHARGES

Most of the provisions in 2011 were made for contingent liabilities from granted undrawn loans and from guarantees, while provision were released in 2010.

In 2011 the Group saw loans and securities impaired more than in the previous year. The deterioration of economic conditions and increased lack financial discipline increased the volume of impairment charges on financial investments of the Bank and Group by 70%.

NoteBANK GROUP

2011 2010 2011 2010

Provisions for contingent liabilities 43 (414) 85 (415) 67

Provisions for liabilities to employees 43 (74) 462 (74) 452

Provisions for pending legal action 43 (108) (268) (108) (268)

Total (596) 279 (597) 251

BANK GROUP

2011 2010 2011 2010

Impairment of loans measured at amortised cost (39,160) (23,491) (39,160) (23,496)

Impairment of available for sale financial assets (9,758) (7,518) (9,758) (7,518)

Impairment of equity securities (9,782) (7,518) (9,782) (7,518)

Impairment of debt securities 92 - 92 -

Impairment of mutual funds (68) - (68) -

Impairment of held to maturity investments (3,752) - (3,752) -

Impairment of other assets - - (8) (5)

Total (52,670) (31,009) (52,678) (31,019)

- amounts in thousands of EUR

- amounts in thousands of EUR

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17 INCOME TAX EXPENSE - amounts in thousands of EUR

- amounts in thousands of EUR

18 BASIC AND DILUTED EARNINGS PER SHARE

Deferred tax receivables result from the loss and the valuation of available for sale financial assets to a lower fair value.

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.

Basic loss or earnings per share are calculated by dividing net profit by the weighted average number of ordinary shares issued, decreased by the treasury shares. Issued subordinated debt securities are not convertible to equity, which is why they do not represent potential new shares.

NoteBANK GROUP

2011 2010 2011 2010

Current tax - (1,409) - (1,409)

Deferred tax 31,2 3,715 484 3,715 483

Income tax expense 3,715 (925) 3,715 (926)

Pre-tax loss (18,590) 5,425 (18,530) 5,455

Tax calculated at 20% 3,717 (1,085) 3,733 (1,091)

Expenses not deductible for tax purposes (169) (248) (172) (250)

Tax relief / (utilization of unrecognized tax losses) - 222 (13) 224

Income not assessable for tax purposes 167 186 167 191

Total 3,715 (925) 3,715 (926)

BANK GROUP

2011 2010 2011 2010

Net loss - holders of preference shares (2,976) 900 (2,964) 952

Net loss - holders of regular shares (11,899) 3,600 (11,851) 3,807

Number of regular shares 406,653 406,653 406,653 406,653

Basic and diluted net earnings per share (EUR per share) (29) 9 (29) 9

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19 CASH AND BALANCES WITH THE CENTRAL BANK

20 FINANCIAL ASSETS HELD FOR TRADING

The Group increased deposits with the Central Bank in 2011 on the basis of the balance of overnight deposits.

The average minimum reserve requirement amounted to EUR 25,696 thousand in 2011 (2009: EUR 26,535 thousand).

The Bank 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% on all deposits and debt securities with maturities up to 2 years. The Bank was able to fulfil the reserve requirement in 2010without difficulty.

The minimum reserve requirement funds are usually at the full disposal of the Bank for daily operations, that is why they are included in cash and cash equivalents in full (Note 49).

The Group reduced the held for trading financial assets in 2011 in the debt as well as equity instruments segment.

Financial assets held for trading did not form part of assets pledged in 2010 nor in 2011, and no debt securities with original maturities up to three months are held.

Bank and Group note2011 2010

derivatives 20a 17,153 12,645

debt instruments 20,409 32,023

Bonds 11,019 14,722

- listed on stock exchange 11,019 14,722

- oTC - -

Certificates of deposit 9,390 17,301

Equity securities 15,255 20,697

Shares 15,255 20,697

- listed on stock exchange 9,899 12,498

- oTC 5,356 8,199

Total 52,817 65,365

Bank and Group2011 2010

Cash in hand 10,240 10,691

Balances with Central Bank 157,923 117,633

Total 168,163 128,324

- amounts in thousands of EUR

- amounts in thousands of EUR

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20a Derivatives

21 FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS

In 2011 the Group decreased the volume of forward agreements, the fair value of which amounted to EUR 9,313 at the end of the year (2010: EUR 6,965 thousand). The higher fair value for the segment is the result of a decrease in the market prices of securities.

Interest rate swaps for the hedging of a bond issued have the largest effect on the fair value recorded pertaining to interest rate swaps. Here the Group paid lower variable interest to receive higher fixed interest thus achieving a net positive result. The positive valuation of interest rate swaps increased, mainly due to an increase in their volume.

In 2011 the Group reduced the volume of currency swap transactions, whereby the fair value increased due to the fluctuation of foreign currency rates.

The decrease in investments in financial assets at fair value through profit or loss in 2011 is the result of securities maturing, with a negative impact totalling EUR 332 thousand coming from the loss from valuation of bonds to a higher fair value (Note 8).

Under financial instruments recognized at fair value through profit or loss, the Group reports particularly bonds with built-in derivative financial instruments that may have a significant impact on expected cash flows. The Group has prepared a policy for these investments, which also defines the required return and the investment period.

In 2011 and 2010 the Group did not pledge any financial assets designated at fair value through profit and loss.

Bank and GroupContractual amount Fair value

2011 2010 2011 2010

derivatives

Futures and forwards 33,611 46,140 9,313 6,965

IrS 131,724 75,303 6,517 5,203

Currency swaps 56,766 75,306 1,314 443

option (Interest rate cap) 12,000 10,000 9 34

Total 234,101 206,749 17,153 12,645

Bank and Group2011 2010

debt instruments

Bonds 7,823 29,445

Total 7,823 29,445

- amounts in thousands of EUR

- amounts in thousands of EUR

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22 AVAILABLE FOR SALE FINANCIAL ASSETS

Investments in equity securities comprise investments in shares and interests shown at fair value and at cost. The investments at cost include investments in the amount of EUR 3,172 thousand, comprising investments in Bankart, d.o.o., Ljubljana, Kreditni biro Sisbon, d.o.o., Skupna pokojninska družba, d.d., Ljubljana, KDD, d.d., Ljubljana, Regionalna razvojna agencija, d.o.o., Celje and in Swift La Hulpe, Belgium. With the exception of the Regionalna razvojna agencija, d.o.o., Celje, where the Bank holds an interest of 15.7%, the Bank’s other investments represent a smaller equity interests.

Bank and Group2011 2010

Balance Impairment Balance Impairment

debt instruments 177,997 - 195,046 (92)

Bonds 177,997 - 191,098 (92)

Bills and treasury bonds - - 3,948 -

Equity instruments 49,716 (26,663) 50,699 (16,881)

Shares 46,758 (24,953) 47,742 (16,881)

Interests 2,958 (1,710) 2,957 -

Mutual funds 3,015 (864) 10,403 (3,146)

Total gross 230,728 (27,527) 256,148 (20,119)

Total net 203,201 236,029

Equity securities Debt securitiesTotal

available for salefinancial assetsShares Interests

Mutualfunds

Bonds and certificates of deposit

Bills and treasury notes

Balance on 1 January 2011 30,861 2,957 7,257 191,006 3,948 236,029

Purchase 892 - 350 50,305 - 51,547

Sale (26) - (5,974) - - (6,000)

Investments - - - (5,001) - (5,001)

Realization at maturity - - - (57,815) (4,000) (61,815)

Change in fair value (1,849) - 587 (591) 52 (1,801)

Transfer to impairment (8,071) (1,711) (68) 92 - (9,758)

Balance on 31 December 2011 21,807 1,246 2,152 177,996 - 203,201

Equity securities Debt securitiesTotal

available for salefinancial assetsShares Interests

Mutualfunds

Bonds and certificates of deposit

Bills and treasury notes

Balance as at 1 January 2010 48,859 506 6,539 191,307 9,950 257,161

Purchase 6,606 2,451 - 44,469 3,944 57,470

Sale (16,478) - - (13,113) - (29,591)

Investments - - - (31,504) (9,997) (41,501)

Realization at maturity (608) - 718 (987) (13) (890)

Change in fair value (7,518) - - - - (7,518)

Transfer to impairment - - - 834 64 898

Balance as at 31 December 2010 30,861 2,957 7,257 191,006 3,948 236,029

Changes in available for sale financial assets:

Impairments of shares amounted to EUR 8,071 in 2011.

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

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23 LOANS AND ADVANCES TO BANKS

Cash and cash equivalents (Note 49) include loans to banks with maturity up to 90 days, in the amount of EUR 54,985 thousand (2010: EUR 83,714 thousand).

In 2010 and 2011 impairments were reported for loans to one foreign commercial bank.

Bank and Group2011 2010

Balances Impairment Balances Impairment

at sight 19,418 - 22,027 -

Short-term loans 35,569 - 61,687 -

Long-term loans 78 (11) 2,234 (40)

Total gross 55,065 (11) 85,948 (40)

Total net 55,054 85,908

24 LOANS AND ADVANCES TO CUSTOMER

24.1 Analysis by types of borrowers, by transactions, maturity and currency:

Bank 31 December 2011 Short-term

Impairment ofshort-term Long-term

Impairment oflong-term

Local currency 582,295 (82,703) 1,196,783 (48,058)

Loans and advances to public sector - - 2,705 -

Loans to private individuals 49,310 (3,080) 275,915 (5,128)

- overdraft accounts and cards 35,205 (205) - -

- housing loans - - 156,050 (2,747)

- consumer loans 13,212 (2,431) 119,865 (2,381)

- unauthorised account overdrafts 893 (444) - -

Loans to companies 532,985 (79,623) 918,163 (42,930)

- large companies 186,326 (20,930) 456,182 (12,289)

- SME 313,792 (47,259) 399,484 (25,974)

- other 32,867 (11,434) 62,497 (4,667)

Foreign currency 7,255 (92) 40,381 (2,501)

Loans to private individuals - - 22,019 (1,140)

- housing loans - - 15,976 (316)

- consumer loans and other - - 6,043 (824)

Loans to companies 7,255 (92) 18,362 (1,361)

- large companies 5,103 (58) 3,411 (14)

- SME 2,152 (34) 14,662 (1,341)

- other - - 289 (6)

Total 589,550 (82,795) 1,237,164 (50,559)

net total according to maturity 506,755 1,186,605

net total according to total maturity 1,693,360

- amounts in thousands of EUR

- amounts in thousands of EUR

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BanK 31 December 2010 Short-term

Impairment ofshort-term Long-term

Impairment oflong-term

Local currency 670,128 (57,174) 1,060,270 (37,232)

Loans and advances to public sector - - 5,409 -

Loans to private individuals 50,574 (3,318) 265,282 (4,338)

- overdraft accounts and cards 34,264 (232) - -

- housing loans - - 139,151 (2,003)

- consumer loans 15,335 (2,595) 126,131 (2,335)

- unauthorised account overdrafts 975 (491) - -

Loans to companies 619,554 (53,856) 789,579 (32,894)

- large companies 264,125 (13,726) 397,940 (6,523)

- SME 350,960 (37,389) 348,935 (24,288)

- other 4,469 (2,741) 42,704 (2,083)

Foreign currency 16,677 (400) 59,925 (2,145)

Loans to private individuals - - 24,107 (788)

- housing loans - - 17,978 (132)

- consumer loans and other - - 6,129 (656)

Loans to companies 16,677 (400) 35,818 (1,357)

- large companies 5,753 (58) 5,137 (32)

- SME 10,924 (342) 29,724 (1,317)

- other - - 957 (8)

Total 686,805 (57,574) 1,120,195 (39,377)

net total according to maturity 629,231 1,080,818

net total according to total maturity 1,710,049

GROUP 31 December 2011 Short-term

Impairment ofshort-term Long-term

Impairment oflong-term

Local currency 578,645 (82,703) 1,197,238 (48,062)

Loans and advances to public sector - - 2,705 -

Loans to private individuals 49,310 (3,080) 275,982 (5,128)

- overdraft accounts and cards 35,205 (205) - -

- housing loans - - 156,117 (2,747)

- consumer loans 13,212 (2,431) 119,865 (2,381)

- unauthorised account overdrafts 893 (444) - -

Loans to companies 529,335 (79,623) 918,551 (42,934)

- large companies 186,326 (20,930) 465,045 (12,289)

- SME 310,138 (47,255) 391,009 (25,978)

- other 32,871 (11,438) 62,497 (4,667)

Foreign currency 7,255 (92) 40,381 (2,501)

Loans to private individuals - - 22,019 (1,140)

- housing loans - - 15,976 (316)

- consumer loans and other - - 6,043 (824)

Loans to companies 7,255 (92) 18,362 (1,361)

- large companies 5,103 (58) 3,411 (14)

- SME 2,152 (34) 14,662 (1,341)

- other - - 289 (6)

Total 585,900 (82,795) 1,237,619 (50,563)

Net total according to maturity 503,105 1,187,056

Net total according to total maturity 1,690,161

- amounts in thousands of EUR

- amounts in thousands of EUR

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GROUP 31 December 2010 Short-term

Impairment ofshort-term Long-term

Impairment oflong-term

Local currency 667,081 (57,171) 1,060,640 (37,240)

Loans and advances to public sector - - 5,409 -

Loans to private individuals 50,578 (3,318) 265,348 (4,338)

- overdraft accounts and cards 34,264 (232) - -

- housing loans 4 - 139,217 (2,003)

- consumer loans 15,335 (2,595) 126,131 (2,335)

- unauthorised account overdrafts 975 (491) - -

Loans to companies 616,503 (53,853) 789,883 (32,902)

- large companies 264,820 (13,726) 406,597 (6,523)

- SME 347,214 (37,386) 340,582 (24,296)

- other 4,469 (2,741) 42,704 (2,083)

Foreign currency 16,677 (400) 59,925 (2,145)

Loans to private individuals - - 24,107 (788)

- housing loans - - 17,978 (132)

- consumer loans and other - - 6,129 (656)

Loans to companies 16,677 (400) 35,818 (1,357)

- large companies 5,753 (58) 5,137 (32)

- SME 10,924 (342) 29,724 (1,317)

- other - - 957 (8)

Total 683,758 (57,571) 1,120,565 (39,385)

Net total according to maturity 626,187 1,081,180

Net total according to total maturity 1,707,367

- amounts in thousands of EUR

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24.2 Impairments and write-offs for customers, by types of credit facilities:

Bankaccount

overdraftsand creditcard limits

Housingloans

Consumerloans

Unauthorisedaccount

overdrafts OthersLoans to

individualsLarge

companies SME OthersLoans to

companies Total

Balance on 1 January 2010 323 2,988 3,825 546 49 7,731 14,298 47,192 4,535 66,025 73,756

Changes inimpairments (91) (825) 1,812 76 (49) 923 7,198 16,437 297 23,932 24,855

Write-offs - (28) (51) (131) - (210) (1,157) (293) - (1,450) (1,660)

Balance on 31 December 2010 232 2,135 5,586 491 - 8,444 20,339 63,336 4,832 88,507 96,951

Changes inimpairments (27) 932 221 27 - 1,153 12,952 12,885 11,275 37,112 38,265

Write-offs - (4) (171) (74) - (249) - (1,613) - (1,613) (1,862)

Balance on 31 December 2011 205 3,063 5,636 444 - 9,348 33,291 74,608 16,107 124,006 133,354

GROUPAccount

overdraftsand creditcard limits

Housingloans

Consumerloans

Unauthorisedaccount

overdrafts OthersLoans to

individualsLarge

companies SME OthersLoans to

companies Total

Balance on 1 January 2010 323 2,988 3,825 546 49 7,731 14,298 47,196 4,535 66,029 73,760

Changes inimpairments (91) (825) 1,812 76 (49) 923 7,198 16,438 297 23,933 24,856

Write-offs - (28) (51) (131) - (210) (1,157) (293) - (1,450) (1,660)

Balance on 31 December 2010 232 2,135 5,586 491 - 8,444 20,339 63,341 4,832 88,512 96,956

Changes inimpairments (27) 932 221 27 - 1,153 12,952 12,880 11,279 37,111 38,264

Write-offs - (4) (171) (74) - (249) - (1,613) - (1,613) (1,862)

Balance on 31 December 2011 205 3,063 5,636 444 - 9,348 33,291 74,608 16,111 124,010 133,358

- amounts in thousands of EUR

- amounts in thousands of EUR

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25 HELD TO MATURITY INVESTMENTS

25a Analysis by type of held to maturity investments

25b Securities pledged

Bank and Group2011 2010

Balance Impairment Balance Impairment

Bonds 221,058 (3,752) 276,273 -

Treasury bills 52,005 - - -

Total 273,063 (3,752) 276,273 -

Total 25a 269,311 276,273

Bank and Group2011 2010

Balance Impairment Balance Impairment

Government bonds - - 32,390 -

Total 25b - - 32,390 -

Total 25a and 25b 269,311 308,663

The Bank did not have any government bonds held to maturity pledged in 2011 (2010: EUR 32,390 thousand).

Changes in held to maturity investments:

Bank and Groupdebt instruments

Total held to maturityinvestmentsBonds Treasury bills

Balance on 1 January 2011 308,663 - 308,663

purchase 59,533 51,862 111,395

Transfer from aFS 5,025 - 5,025

Impairment (3,752) - (3,752)

realization at maturity (150,557) - (150,557)

accrued interest 11,130 143 11,273

Interest paid (12,736) - (12,736)

Balance on 31 december 2011 217,306 52,005 269,311

Bank and Groupdebt instruments

Total held to maturityinvestmentsBonds Treasury bills

Balance on 1 January 2010 231,849 83,346 315,195

purchase 112,218 - 112,218

realization at maturity (36,498) (83,346) (119,844)

accrued interest 12,090 102 12,192

Interest paid (10,996) (102) (11,098)

Balance on 31 december 2010 308,663 - 308,663

During 2011 the Bank reclassified Greek Government bonds from available for sale financial assets to held to maturity investments.

In 2011 the Bank purchased bonds of the Republic of Slovenia as well as bonds issued by prime banks.

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

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Bank and GroupContractual amount Fair value

2011 2010 2011 2010

Hedge accounting 189,150 20,000 4,838 -

Total 189,150 20,000 4,838 -

26 HEDGING DERIVATIVES

The Bank hedged issued bonds and some deposits from interest rate risk by entering into an interest rate swap in 2011. These instru-ments are accounted for in accordance with hedge accounting practices as fair value hedges.

27 PROPERTY AND EQUIPMENT

Banknote

Land andbuildings

Computerhardware

Otherequipment

assets incourse of

construction Total

Cost on 1 January 2010 33,508 12,885 8,316 1 54,710

additions - - - 1,617 1,617

Transfer from assets in course of construction 11 1,344 218 (1,573) -

Disposals (144) (997) (475) - (1,616)

Cost on 31 December 2010 33,375 13,232 8,059 45 54,711

Revaluation on 1 January 2010 19,761 9,238 5,167 - 34,166

Depreciation charge 14 645 1,232 650 - 2,527

Disposals (125) (974) (459) - (1,558)

Revaluation on 31 December 2010 20,281 9,496 5,358 - 35,135

net present value on 31 December 2010 13,094 3,736 2,701 45 19,576

Cost on 1 January 2011 33,375 13,232 8,059 45 54,711

additions - - - 605 605

Transfer from assets in course of construction 61 316 144 (521) -

Disposals - (1,188) (283) - (1,471)

Cost on 31 December 2011 33,436 12,360 7,920 129 53,845

Revaluation on 1 January 2011 20,281 9,496 5,358 - 35,135

Depreciation charge 14 515 1,247 602 - 2,364

Disposals - (1,179) (277) - (1,456)

Revaluation on 31 December 2011 20,796 9,564 5,683 - 36,043

net present value on 31 December 2011 12,640 2,796 2,237 129 17,802

- amounts in thousands of EUR

- amounts in thousands of EUR

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GROUPNote

Land andbuildings

Computerhardware

Otherequipment

Assets incourse of

construction Total

Cost on 1 January 2010 33,584 12,902 8,378 1 54,865

Additions - - - 1,619 1,619

Transfer from assets in course of construction 11 1,344 220 (1,575) -

Disposals (144) (998) (477) - (1,619)

Cost on 31 December 2010 33,451 13,248 8,121 45 54,865

Revaluation on 1 January 2010 19,766 9,248 5,222 - 34,236

Depreciation charge 14 645 1,236 650 - 2,531

Disposals (125) (974) (461) - (1,560)

Revaluation on 31 December 2010 20,286 9,510 5,411 - 35,207

Net present value on 31 December 2010 13,165 3,738 2,710 45 19,658

Cost on 1 January 2011 33,451 13,248 8,121 45 54,865

Additions - - - 1,475 1,475

Transfer from assets in course of construction 61 317 145 (523) -

Disposals - (1,196) (286) - (1,482)

Cost on 31 December 2011 33,512 12,369 7,980 997 54,858

Revaluation on 1 January 2011 20,286 9,510 5,411 - 35,207

Depreciation charge 14 515 1,248 604 - 2,367

Disposals - (1,188) (280) - (1,468)

Revaluation on 31 December 2011 20,801 9,570 5,735 - 36,106

Net present value on 31 December 2011 12,711 2,799 2,245 997 18,752

Larger purchases in 2011 are represented by purchases of computer equipment totalling EUR 316 thousand (POS terminals, ATMs, personal computers) and the purchases of other equipment.

Property and equipment have not been pledged in 2011 or 2010.

The Group’s fixed assets in acquisition amounting to EUR 868 thousand pertain to the building of a new manufacturing facility in Prebold that is intended to be leased.

- amounts in thousands of EUR

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28 INVESTMENT PROPERTY

GroupLand Buildings Total

Cost on 1 January 2010 33 295 328

Additions - - -

Transfer from inventory - 1,539 1,539

Disposals - (29) (29)

Cost on 31 December 2010 33 1,805 1,838

revaluation on 1 January 2010 - 22 22

Depreciation charge - 9 9

Disposals - - -

revaluation on 31 December 2010 - 31 31

Net present value on 31 December 2010 - 1,774 1,807

Cost on 1 January 2011 33 1,805 1,838

Transfer from inventory - 1,609 1,609

Disposals - (123) (123)

Cost on 31 December 2011 33 3,291 3,324

revaluation on 1 January 2011 - 31 31

Depreciation charge - 23 23

Disposals - - -

revaluation on 31 December 2011 - 54 54

Net present value on 31 December 2011 33 3,237 3,270

The total value of investment property pertains to the carrying amount of land and buildings acquired to be sold or leased out under operating lease. The increase is the result of housing transferred from completed product inventories.

On 31 December 2011 estimated fair value of investment property amounted to EUR 3,695 thousand (2010: EUR 2,004 thousand).

- amounts in thousands of EUR

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29 INTANGIBLE ASSETS

Banknote

Softwarelicenses

assets in course ofinstallation Total

Cost on 1 January 2010 11,814 368 12,182

additions - 1,144 1,144

Transfer from fixed assets in installatin 1,247 (1,247) -

Cost on 31 December 2010 13,061 265 13,326

Value adjustments on 1 January 2010 6,845 - 6,845

amortisation charge 14 1,230 - 1,230

Value adjustments on 31 December 2010 8,075 - 8,075

net present value on 31 December 2010 4,986 265 5,251

Cost on 1 January 2011 13,061 265 13,326

additions - 1,070 1,070

Transfer from fixed assets in installatin 1,175 (1,175) -

Disposals (122) - (122)

Cost on 31 December 2011 14,114 160 14,274

Value adjustments on 1 January 2011 8,075 - 8,075

amortisation charge 14 1,400 - 1,400

Disposals (122) - (122)

Value adjustments on 31 December 2011 9,353 - 9,353

net present value on 31 December 2011 4,761 160 4,921

- amounts in thousands of EUR

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Larger purchases in 2011 are represented by investments in the completion of the data warehouse and investments in software, mainly for retail operations, amounting to EUR 466 thousand, for payment operations in an amount of EUR 91 thousand and for E-account issues in the amount of EUR 77 thousand. EUR 234 thousand was spent for the purchasing of software licences (Microsoft).

The fair value of intangible assets at the end of the business year does not deviate from their carrying value.

GROUPNote

Softwarelicenses

Assets in course ofinstallation Total

Cost on 1 January 2010 11,819 368 12,187

Additions - 1,145 1,145

Transfer from fixed assets in installatin 1,248 (1,248) -

Cost on 31 December 2010 13,067 265 13,332

Value adjustments on 1 January 2010 6,845 - 6,845

Amortisation charge 14 1,231 - 1,231

Value adjustments on 31 December 2010 8,076 - 8,076

Net present value on 31 December 2010 4,991 265 5,256

Cost on 1 January 2011 13,067 265 13,332

Additions - 1,070 1,070

Transfer from fixed assets in installatin 1,175 (1,175) -

Disposals (122) - (122)

Cost on 31 December 2011 14,120 160 14,280

Value adjustments on 1 January 2011 8,076 - 8,076

Amortisation charge 14 1,401 - 1,401

Disposals (122) - (122)

Value adjustments on 31 December 2011 9,355 - 9,355

Net present value on 31 December 2011 4,765 160 4,925

- amounts in thousands of EUR

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30 INVESTMENTS IN SUBSIDIARIES

31 INCOME TAX ASSETS

31.1 Current tax assets

31.2 Deferred tax assets

Posest d.o.o., Celje Investmentamount

% ofownership

% votingrights equity

operatingresult

31 December 2010 2,257 100.00 100.00 2,124 29

31 December 2011 2,257 100.00 100.00 2,124 56

Bank Group

2011 2010 2011 2010

Current tax 1,409 1,582 1,409 1,582

Deferred tax 7,799 3,412 7,802 3,415

Balance of assets as at 31 December 9,208 4,994 9,211 4,997

Bank Group

2011 2010 2011 2010

available-for-sale securities 5,935 3,030 5,935 3,030

provisions for liabilities to employees 343 372 346 375

Tax loss 1,521 - 1,521 -

Marketable securities - 10 - 10

Deferred tax assets 7,799 3,412 7,802 3,415

Current tax assets represent the tax paid in advance in an amount of EUR 1,409 thousand. Deferred tax in the amount of EUR 7,802 thousand (the Bank EUR 7,799 thousand) is detailed under item 31.2.

The major part of deferred taxes is represented by receivables for deferred tax from impairment of available for sale instruments. Due to the decrease in their fair value and the recorded revaluation expenses the Bank formed deferred tax assets. Based on the loss it made and the planned profits for the coming five-year period, the Bank established deferred tax assets.

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

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Changes in deferred tax:

Bank GROUP

2011 2010 2011 2010

Balance as at 1 January 3,412 2,756 3,415 2,760

IncOme statement chanGes In defeRRed taxes:

trading securities

- elimination of assets (10) - (10) -

available for sale instruments - impairment

- establishment of assets for impairment 2,720 1,504 2,720 1,504

- derecognition on disposal (488) (893) (488) (893)

Provisions for liabilities to employees

- establishment of assets 1 3 1 4

- elimination of assets (29) (130) (29) (132)

tax loss

- establishment of assets 1,521 - 1,521 -

changes in deferred taxes recorded in income statement as at 31 december 3,715 484 3,715 483

chanGes In defeRRed taxes RecORded In OtheR cOmPRehensIVe IncOme:

available for sale securities

- valuation by fair value 502 (1,453) 502 (1,453)

- elimination 170 1,625 170 1,625

changes in deferred taxes recorded in other comprehensive income as at 31 december 672 172 672 172

statement of financial position on 31 december 7,799 3,412 7,802 3,415

- amounts in thousands of EUR

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- amounts in thousands of EUR

Bank Group

2011 2010 2011 2010

Financial assets 1,987 2,071 2,264 2,208

other retail claims 2,021 2,045 2,021 2,045

receivables from forwards 1,637 - 1,637 -

receivables for credit / debit cards 550 734 550 734

Fee and commission due 413 281 413 281

Due from clients - - 310 145

other claims 112 79 98 82

Impairment (2,746) (1,068) (2,765) (1,079)

non-financial assets 171 148 2,975 4,190

Deferred operating expenses 130 141 130 146

Inventories 41 7 2,732 4,027

Input VaT receivables - - 113 17

Total 2,158 2,219 5,239 6,398

The decrease of other assets is the result of the decrease in inventories at the subsidiary company due to the sale of flats in the amount of EUR 646 thousand and the transfer to investment property in the amount of EUR 1,353 thousand.

Changes in other asset impairments:

32 OTHER ASSETS

33 DEPOSITS FROM CENTRAL BANK

Bank Group

Balance 1 January 2010 1,078 1,084

Impairments 42 47

Impairments release (52) (52)

Balance 31 December 2010 1,068 1,079

Impairments 1,739 1,747

Impairments release (61) (61)

Balance 31 December 2011 2,746 2,765

Bank and Group 2011 2010

Short-term loans from ECB in local currency 10,060 70,013

Long-term loans from ECB in local currency 80,022 -

Total 90,082 70,013

- amounts in thousands of EUR

- amounts in thousands of EUR

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34 FINANCIAL LIABILITIES HELD FOR TRADING

35 FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS

Bank and GroupContractual amount Fair value

2011 2010 2011 2010

Futures and forwards 33,611 46,140 609 1,679

IrS 131,724 75,303 814 1,691

Foreign currency swaps 56,766 75,306 735 2,610

options (interest rate cap) 12,000 10,000 9 34

Total 234,101 206,749 2,167 6,014

Bank and Group Interest rate as at 31 december 2011 2011 2010

Certificates of deposit with maturity 2012 5.00 % 1,491 1,547

Subordinated bonds BCE10, with maturity 2017 5.00 % 34,655 38,503

Total 36,146 40,050

In securities forward transactions the fair value represents negative valuations due to forward sale price differences.

In 2011 the Group reduced the volume of currency swaps and subsequently the liabilities from these.

Financial liabilities designated at fair value include those securities that are economically hedged, consistently with the risk management policy, by a derivative – interest rate swap. Within the interest rate swap, the Group swapped the nominal interest rate with a variable one, thus hedging the risk of a - decrease in long-term interest rates.

The nominal value of the BCE10 subordinated bond amounts to EUR 37,000 thousand, while the fair value amounted to EUR 34,655 thousand on 31 December 2011 (2010: EUR 38,503 thousand).

Based on the Decision on the calculation of capital in banks and savings banks the BCE10 bonds represent the Group’s subordinated debt, thus being included in Tier 2 capital up to an amount representing 50% of the Group’s Tier 1 capital and exhibiting the following characteristics:- the bonds are not especially insured or guaranteed, the Group’s property being the only collateral;- liabilities from bonds are subordinated to plain debt instruments in the event of bankruptcy or winding up procedures and are

only redeemed, once all non-subordinated liabilities to creditors and subordinated liabilities included in Tier 3 capital have been redeemed, therefore they represent a high risk instrument;

- subordinated bonds paid in are only disposable to cover the Group’s loss in the event of bankruptcy or winding up procedures 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 measurement inconsistencies that would otherwise result from the recognized gains and losses on different bases. In this way the Bank acquires more appropriate information about liabilities and the related derivatives on financial liabilities carried at amortized cost and interestrate swaps carried at fair value.

Subordinated bonds BCE10 are listed on stock exchange and certificates of deposit are not.

- amounts in thousands of EUR

- amounts in thousands of EUR

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36 FINANCIAL LIABILITIES AT AMORTISED COST – DEPOSITS FROM BANKS

36.1 Analysis by currency and maturity

36.2 Analysis by region

Bank and Group2011 2010

at sight 1,044 955

In local currency 248 439

In foreign currency 796 516

Short-term 19,961 53,480

In local currency 19,961 53,480

Total 21,005 54,435

Bank and Group2011 2010

Slovenia 12,727 34,986

Former Yugoslav countries 3,220 14,395

Eu 5,058 5,054

Total 21,005 54,435

- amounts in thousands of EUR

- amounts in thousands of EUR

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GROUP2011 2010

at sight short-term long-term at sight short-term long-term

Corporate 121,659 311,007 317,407 120,797 320,668 330,857

domestic currency 118,317 310,783 317,317 118,878 320,539 330,857

foreign currency 3,342 224 90 1,919 129 -

Retail 326,207 204,420 198,101 321,012 245,655 159,969

domestic currency 313,712 201,421 196,152 313,165 241,377 158,245

foreign currency 12,495 2,999 1,949 7,847 4,278 1,724

Total 447,866 515,427 515,508 441,809 566,323 490,826

Total at sight, short-termand long-term 1,478,801 1,498,958

37.2 Analysis by region

Bank Group

2011 2010 2011 2010

Slovenia 1,461,024 1,485,663 1,461,020 1,485,660

Former Yugoslav countries 7,305 7,086 7,305 7,086

Eu 8,222 4,550 8,222 4,550

other 2,254 1,662 2,254 1,662

Total 1,478,805 1,498,961 1,478,801 1,498,958

37 FINANCIAL LIABILITIES AT AMORTISED COST – DUE TO CUSTOMERS

37.1 Analysis by currency and maturity and by type of customer

Bank 2011 2010

at sight short-term long-term at sight short-term long-term

Corporate 121,663 311,007 317,407 120,800 320,668 330,857

domestic currency 118,321 310,783 317,317 118,881 320,539 330,857

foreign currency 3,342 224 90 1,919 129 -

Retail 326,207 204,420 198,101 321,012 245,655 159,969

domestic currency 313,712 201,421 196,152 313,165 241,377 158,245

foreign currency 12,495 2,999 1,949 7,847 4,278 1,724

Total 447,870 515,427 515,508 441,812 566,323 490,826

Total at sight, short-termand long-term 1,478,805 1,498,961

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

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Bank and Group2011 2010

short-term long-term short-term long-term

domestic currency - 6,224 - 8,847

Total 6,224 8,847

38 FINANCIAL LIABILITIES AT AMORTISED COST – BORROWINGS FROM BANKS

38.1 Analysis by currency and maturity

39 FINANCIAL LIABILITIES AT AMORTISED COST – BORROWING FROM CUSTOMERS

38.2 Analysis by region

Bank and Group2011 2010

domestic currency 396,023 411,267

Short-term loans 15,046 32,110

Long-term loans 380,977 379,157

Foreign currency - 8,068

Long-term loans - 8,068

Total 396,023 419,335

Bank and Group2011 2010

Slovenia 223,533 198,256

Eu 172,490 221,079

Total 396,023 419,335

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

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40 DEBT SECURITIES

Bank and Group Interest rate as at31 december 2011 2011 2010

Certificates of deposit in local currency 86,540 99,405

up to 1 year 3.85 % 11,681 6,555

above 1 year up to 2 years 4.05 % 29,021 28,988

above 2 year up to 3 years 5.00 % 42,164 18,739

above 3 year up to 4 years - - 41,454

above 4 year up to 5 years 4.97 % 3,674 3,669

Bonds in local currency 98,980 61,031

bonds BCE13 and BCE14, maturity 2015 4.68 % 61,755 61,031

bonds BCE15, maturity 2016 5.00 % 37,225 -

Total 185,520 160,436

To increase long-term funding and ensure an adequate structure of funding sources and replace matured BCE8 series bonds, the Bank issued 15th series bonds in February 2011 in a total of EUR 34,150 thousand at an interest rate of 5% annually. The issue pertains to regular euro denominated non-materialized bonds designated BCE15. Interest is paid on an annual basis, with final maturity falling on 15 February 2016. The Bank is liable for all obligations from its bonds. The liabilities from bonds are not hedged or guaranteed in any other way.

The BCE13, BCE14 and BCE15 series bonds are all listed on the stock exchange, while certificates of deposit are not.

- amounts in thousands of EUR

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41 SUBORDINATED LIABILITIES

Bank and Group Interest rate as at31 december 2011 2011 2010

Subordinate bonds BCE8 due in 2011 (Eur) - - 13,032

Subordinate certificates of deposit due in 2014 (Eur) 2.75 % 10,284 10,278

Subordinate bonds BCE12 due in 2016 (Eur) 6.50 % 12,511 12,497

Subordinate bonds BCE11 due in 2017 (Eur) 3.66 % 49,622 49,551

Total 72,417 85,358

In October and November of 2007 the Group issued subordina-ted certificates of deposit in a total amount of EUR 10.25 million at an interest rate of 6M EURIBOR increased by 1 percentage point, maturing in 7 years. Interest is paid on a semi-annual basis.

To improve capital adequacy and ensure further growth of opera-tions the Bank again issued subordinated bonds in 2007 (BCE11). 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 Tier 1 capital in accordance with the decision of the Bank of Slovenia dated 4 December 2007, with any eventual surplus included in Tier 2 capital. The following are the main characteristics of the issued innovative subordinated bonds:- the instrument does not have a set maturity, it can however be

called, but no earlier than 10 years after the date of issue, in full, not in part with the approval of the Bank of Slovenia;

- payment of all liabilities from bonds is guaranteed by the Bank’s property without limitation;

- they are neither secured nor covered by a guarantee of the issuing bank or related entity or any other form of arrange-ment that legally or economically enhances the seniority of the claim;

- liabilities from these bonds are subordinated in full to liabilities toward regular creditors and to liabilities based on subordina-ted debt instruments, meaning that in an event of bankruptcy or winding up procedures they are redeemed only after the non-cumulative preferential shares and regular shares, making them a high risk instrument;

- 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 du-ring regular operations;

- the Group has the option of withholding interest payments from bonds, should it not have record distributable profit in the previous year, interest payments are non-cumulative, which is why any holder of the bond no longer has any claim to the interest withheld.

The Bank issued the aforementioned innovative perpetual su-bordinated 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 cal-lable. Should it not be called the interest margin step-up will be 1 percentage point. The first interest payment was due on 28 June 2008, with the following coupons paid on semi-annual basis.

To ensure additional capital for the management of risk and to secure the funding for the Group's long-term investments, the Management Board of the Bank, on May 13, 2009, adopted the decision to issue subordinated registered bonds – 12th issue (de-signated BCE12). As at December 31, 2011 the amount subscribed was EUR 12,511 thousand at a fixed nominal interest rate of 6.5%, maturing on 15 June 2016. Interest is paid out annually, with the first interest coupon having matured on 15 June 2010 and the final coupon maturing on 15 June 2016.

The subordinated BCE12 bonds have the characteristics of su-bordinated debt and the Group includes them in the calculation of Tier 2 capital. The subscribed subordinated bonds will only be available to cover the Group’s loss in the event of bankruptcy or winding up procedures and are not available to cover for loss coming from the Group’s regular operations. The bonds neither secured nor covered by a guarantee of the issuing bank or related entity or any other form of arrangement that legally or economi-cally enhances the seniority of the claim. The Bank is fully liable for the obligations from bonds without limit. Liabilities from the bonds are subordinated to regular debt instruments in the event of bankruptcy or winding up and are only paid once all unsubor-dinated liabilities to regular creditors have been settled and the liabilities based on subordinated debt included in Tier 3 capital have been settled as well.

Subordinated bonds of the BCE11 and BCE12 series are listed on the stock exchange.

- amounts in thousands of EUR

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42 FINANCIAL LIABILITIES ASSOCIATED WITH TRANSFERRED ASSETS

As at 31 December 2011 provisions were made amounting to EUR 7,110 thousand for pending legal action from the denationalization proceedings pertaining to the office building at its headquarters. Additionally, the Group formed EUR 108 thousand worth of provisi-ons to this effect during the year and spent EUR 1,167 thousand worth of provisions for payments to denationalization beneficiaries.

The significant assumptions, used in the actuarial calculation, are:- salary growth, in line with the inflation index, taking into account promotions and with respect to the period of employment, was

assumed equal to 4% annually (2010: 3.50%);- a discount rate of 5.20% (2010: 3.90%);- 534 (530 at the Bank) employees eligible to claim benefits (2010: 542 employees at the Group, 538 employees at the Bank).

Other provisions pertain to the national housing savings scheme (NSVS). Should a saver in the scheme not use the option to take a housing loan according to the conditions of the NSVS, the Group must return all of the premiums that the saver received in during the saving period to the Republic of Slovenia Housing Fund.

Bank and Group2011 2010

Short-term financial liabilities to foreign banksin domestic currency - 30,993

Total - 30,993

- amounts in thousands of EUR

43 DERIVATIVES - HEDGE ACCOUNTING

In 2011 the Group hedged issued bonds and some deposits taken from interest rate risk with an interest rate swap (IRS). The mentioned instruments are accounted for by the Group in accordance with the rules of Hedge Accounting as a fair value hedge.

Bank and GroupContractual amount Fair value

2011 2010 2011 2010

Fair value hedging - hedge accounting 189,150 20,000 8 348

Total 189,150 20,000 8 348

- amounts in thousands of EUR

44 PROVISIONS

NoteBaNk Group

2011 2010 2011 2010

unresolved legal proceedings 48a 7,110 8,169 7,110 8,169

provisions for commitments and contingent liabilities 48d 3,042 2,628 3,043 2,628

Employee related provisions 2,171 2,128 2,202 2,159

other provisions 275 312 275 312

Total 12,598 13,237 12,630 13,268

- amounts in thousands of EUR

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45 OTHER LIABILITIES

All other liabilities, except for taxes payable and liabilities from salaries are financial liabilities, carried at amortized cost.

Changes in provisions:

Bank Group

2011 2010 2011 2010

Liabilities from card operations 3,261 3,584 3,261 3,584

Liabilities from salaries 1,534 2,369 1,574 2,412

Liabilities toward suppliers 1,478 1,913 2,051 2,020

accrued expenses 708 727 770 794

Taxes payable 538 349 628 464

Fees and commissions 63 60 63 60

other 1,003 1,125 1,226 1,126

Total 8,585 10,127 9,573 10,460

BankProvisions or

unsettleddisputes

Provisions foroff-balance

sheet liabilities

Retirementbenefit

provisionsOther

provisions Total

Balance 1 January 2010 7,901 2,713 2,743 602 13,959

Provisions made / (released) 268 (85) (462) - (279)

Provisions (utilized) - - (153) (290) (443)

Balance 31 December 2010 8,169 2,628 2,128 312 13,237

Provisions made / (released) 108 414 74 - 596

Provisions (utilized) (1,167) - (31) (37) (1,235)

Balance 31 December 2010 7,110 3,042 2,171 275 12,598

Groupprovisions or

unsettleddisputes

provisions foroff-balance

sheet liabilities

retirementbenefit

provisionsother

provisions Total

Balance 1 January 2010 7,901 2,695 2,783 602 13,981

provisions made / (released) 268 (67) (471) - (270)

provisions (utilized) - - (153) (290) (443)

Balance 31 December 2010 8,169 2,628 2,159 312 13,268

provisions made / (released) 108 415 74 - 597

provisions (utilized) (1,167) - (31) (37) (1,235)

Balance 31 December 2010 7,110 3,043 2,202 275 12,630

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

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46 SHARE CAPITAL

46.1 Subscribed capital

The Bank’s share capital comprises 508,629 dematerialized no par value registered shares. 80 % are regular voting right shares, with 20 % represented by preferred shares. The latter carry the right to preferential treatment in relation to fix dividend payments. They are non-cumulative and do not bear the right to cumulative dividend payments.

The Subsidiary is a registered limited liability company.

At the 23rd Regular Annual Meeting of Shareholders on May 22, 2008 the Bank's owners authorized the Management Board to increase share capital during the next 5 years by issuing new shares. The amount of authorized capital may not exceed 50% of the ordinary shares the time when the authorization was given, meaning 211,061 shares. The Bank may only issue new shares upon consent of the Supervisory Board.

In October 2008 the Bank successfully increased capital from authorised capital by selling 86,506 shares, the value of the issue reaching EUR 35 million. The Bank did not issue any new shares in 2009, 2010 or 2011.

Bank shareholders with shareholdings exceeding 3% are listed in the following table:

46.2 Treasury shares

As at 31 December 2011 and as at 31 December 2010 the Bank’s portfolio included 251 regular treasury shares in total amount of EUR 31 thousand; these shares are recorded as a deduction of the capital.

46.3 Share premium

During 2009, 2010 and 2011 the share premium stood unchanged at EUR 51,380.

The Group share premium amounted to EUR 51,542 exceeding the Bank’s total by EUR 162 thousand.

Shareholding rights Voting rights

Nova Ljubljanska banka d.d. Ljubljana 40.99 % 49.42 %

Slovenska odškodninska družba d.d. Ljubljana 9.36 % 6.70 %

Vzajemni sklad NFD 1 Delniški 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 %

- in %

Number of shares and amount of share capital:

Banknumber of

shares

Share capital

Ordinary shares

Preference shares Total

Balance 31 December 2009 508,629 13,584 3,396 16,980

Balance 31 December 2010 508,629 13,584 3,396 16,980

Balance 31 December 2011 508,629 13,584 3,396 16,980

- amounts in thousands of EUR

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46.4 Reserves

Changes in reserves:

Based on the stipulations in Article 64 of the Companies Act, the Bank must form statutory reserves in an amount, which allows for the sum of statutory reserves and capital reserves to reach 10% of the share capital. As at 31 December 2010 the Group’s statutory reserves amounted to 17% of the share capital.

Other profit reserves are formed for unidentified risk. Loss for the year is chargeable to their account and the difference is included in the calculation of Tier 1 capital in accordance with the Decision on the calculation of capital in banks and savings banks.

In line with the Articles of Association only retained profit may be paid out.

bank Statutoryreserves

Other reservesfrom profit

Retainedearnings Total

at 1 January 2010 2,904 119,595 - 122,499

Increase from part of net profit for the year - 2,839 - 2,839

Increase from past dividends not paid - 38 - 38

at 31 December 2010 2,904 122,472 - 125,376

Increase from part of net profit for the year - 1,182 - 1,182

Increase from past dividends not paid - 37 - 37

at 31 December 2011 2,904 123,691 - 126,595

GROUP Statutoryreserves

Other reservesfrom profit

Retainedearnings Total

At 1 January 2010 2,904 119,793 377 123,074

Increase from part of net profit for the year - 2,839 (220) 2,619

Increase from past dividends not paid - 38 - 38

At 31 December 2010 2,904 122,670 157 125,731

Increase from part of net profit for the year - 1,182 259 1,441

Increase from past dividends not paid - 37 - 37

At 31 December 2011 2,904 123,889 416 127,209

- amounts in thousands of EUR

- amounts in thousands of EUR

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46.5 Revaluation reserve

Changes in the revaluation reserve:

Bank and Group

at 1 January 2010 4,660

profits from changes in fair value of available-for-sale (8,041)

Transfer to income statement due to impairment 7,518

Sale / disposal of available-for-sale securities (166)

at 31 december 2010 3,971

Losses from changes in fair value of available-for-sale (11,559)

recycled to income statement due to impairment 9,758

Sale / recycled to income statement of available-for-sale securities (886)

at 31 december 2011 1,284

47 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 2010 in the amount of EUR 2.10 per ordinary and preference share was confirmed at the Bank's 26th Meeting of Shareholders on 24 May 2011 and paid out in May 2011.

48 CONTINGENT LIABILITIES AND COMMITMENTS

a) Legal proceedingsAs at 31 December 2011 the Group’s provisions for pending legal actions amounted to EUR 7,110 thousand from the denationalization process (31 December 2010: EUR 8,169 thousand), which according to the estimation of the Group are sufficient for the settlement of all potential denationalization liabilities. Part of the provisions made was used in 2011 to pay the denationalization beneficiaries. The Bank in the Group filed a constitutional complaint in objection to the decision of the Supreme Court of the Republic of Slovenia stating that a judicial review of the process in connection with the return of business premises in denationalization proceedings is dismissed. At the same time, a claim was made against the Slovenska odškodninska družba (Slovenian Restitution Fund), as the property subject to being so returned, was acquired at cost. The proceedings have not yet been concluded.

b) Capital commitmentsAs at 31 December 2011 the Group did not exhibit any future obligations to acquire property or equipment or intangible assets.

c) Potential and assumed liabilitiesThe basic aim of these instruments is to ensure, that assets are made available when so requested by the clients. Guarantees and stand-by letters of credit represent irrevocable guarantees, that the Group will effect payment, should the client not be able to fulfil its obligation to a third party. Cash requirements for guarantees and stand-by letters of credit are lower than the amount of the liabilities in question, as, based on the data from the past years, the Group does not expect to see a third party claim fulfilment of obligation in cash, which is why these are low risk instruments.

Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, 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.

- amounts in thousands of EUR

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The guarantees total in 2011 include EUR 70,287 thousand performance guarantees (2010: EUR 52,338 thousand).

Commission and fee income from service guarantees amounted to EUR 1,026 thousand in 2011 (2010: EUR 883 thousand).

Cash and cash equivalents in the statement of cash flows represent instruments with an original maturity of less than 90 days.

d) Breakdown of contractual amounts relating to bank guarantees, documentary letters of credit and assumed liabilities

e) Changes in service guarantees

NoteBaNk Group

2011 2010 2011 2010

Guarantees and stand-by LCs 96,612 80,261 96,612 80,261

Commitments to extend credits 176,113 171,227 174,202 171,004

- maturity up to 1 year 139,345 140,411 137,434 140,188

- maturity over 1 year 36,768 30,816 36,768 30,816

Total 272,725 251,488 270,814 251,265

provisions for off-balance sheet risk 44 (3,042) (2,628) (3,043) (2,628)

Total net 269,683 248,860 267,771 248,637

Bank and Group

as at 1 January 2009 47,476

approved guarantees 50,230

Guarantees due (45,368)

as at 31 december 2009 52,338

approved guarantees 69,750

Guarantees due (51,806)

as at 31 december 2010 70,282

Bank and Groupnote 2011 2010

Cash and balances with the Central Bank 19 168,163 128,324

Loans to banks 23 54,985 83,714

Total 223,148 212,038

49 CASH AND CASH EQUIVALENTS

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

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Related parties comprise key management personnel (Management Board members, Supervisory Board members, senior management and their immediate family members), companies with significant impact and the Subsidiary.

Gross amounts paid out to key management personnel

Gross amounts paid out to Management Board and Supervisory Board members

The Bank’s Management Board comprise 3 members in 2011. The senior management comprised 13 members (Group: 14 members). After the change of status of the Bank’s largest owners in mid- 2011, the Bank is indirectly owned by the Republic of Slovenia. Consequently the gross amounts paid out to Management Board members and to senior management were coordinated with legislation governing the salaries of management in companies majority-owned by the Republic of Slovenia.

Fix remuneration includes gross salary, variable remuneration pertains to part of the salary based on performance during the previous year, other pertains to holiday pay and premiums pertain to additional pension insurance and annuity savings and accrued bonuses.

50 RELATED PARTY TRANSACTIONS

Bank

2011 2010

ManagementBoard

members

SupervisoryBoard

membersSenior

management Total

ManagementBoard

members

SupervisoryBoard

membersSenior

management Total

Fix revenue 428 - 1,142 1,570 385 - 1,302 1,687

Variable revenue 132 - 110 242 94 - 194 288

Other revenue 89 - 133 222 85 - 196 281

Meeting fees - 56 - 56 - 36 - 36

Total 649 56 1,385 2,090 564 36 1,692 2,292

GROUP

2011 2010

ManagementBoard

members

SupervisoryBoard

membersSenior

management Total

ManagementBoard

members

SupervisoryBoard

membersSenior

management Total

Fix revenue 428 - 1,246 1,673 385 - 1,385 1,770

Variable revenue 132 - 113 245 94 - 199 293

Other revenue 89 - 142 231 85 - 204 289

Meeting fees - 56 - 56 - 36 - 36

Total 649 56 1,500 2,205 564 36 1,788 2,388

BANK

2011 2010

Revenue Revenue

Fixed Variable Other Total Fixed Variable Other Total

Management Board Members

President & CEO 158 50 38 246 151 48 37 236

Member of the Management Board & Deputy CEO 139 42 27 208 129 41 27 197

Member of the Management Board 131 40 25 195 105 5 21 131

Total 428 132 89 649 385 94 85 564

- amounts in thousands of EUR

- amounts in thousands of EUR

- amounts in thousands of EUR

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Banka Celje, d.d., and the Banka Celje Group Financial statements 2011

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In May 2011 a new Supervisory Board was named at the Banka Celje, d.d., Meeting of Shareholders.

2011 2010

Fixremuneration

Costreimbursement Total

Fixremuneration

Costreimbursement Total

Supervisory Board members

Old Supervisory Board

President of the Supervisory Board 4 - 4 - - -

Member of the Supervisory Board &Deputy CEO 5 - 5 10 - 10

Member of the Supervisory Board 4 - 4 - - -

Member of the Supervisory Board 4 - 4 9 - 9

Member of the Supervisory Board 4 1 5 8 - 8

New Supervisory Board

President of the Supervisory Board 5 - 5 - - -

Member of the Supervisory Board &Deputy CEO 5 - 5 - - -

Member of the Supervisory Board 4 - 4 - - -

Member of the Supervisory Board 4 - 4 - - -

Member of the Supervisory Board 4 2 7 - - -

Member of the Supervisory Board 4 - 4 - - -

Member of the Supervisory Board 4 - 4 9 - 9

Total 53 3 57 36 - 36

- amounts in thousands of EUR

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BANK2010

Management andSupervisory Board members

with related parties

Seniormanagement with

related parties

Shareholders with more than

20% of shares Posest d.o.o. Total

RECEIVABLES

Loans 195 318 14,077 12,470 27,060

Securities and derivatives - - 43,924 - 43,924

Liabilities assumed 19 29 - 223 271

Guarantees issued - - 2,575 - 2,575

Total 214 347 60,576 12,693 73,830

Loan repayments during the year 31 185 80,509 4,220 84,945

LIABILITIES

Deposits 779 1,009 10,552 - 12,340

Bonds and certificates of deposit - - 6,635 - 6,635

Total 779 1,009 17,187 - 18,975

Interest income 5 16 1,733 320 2,074

Interest expense 48 48 611 - 707

BANK2011

Management andSupervisory Board members

with related parties

Seniormanagement with

related parties

Shareholders with more than

20% of shares Posest d.o.o. Total

RECEIVABLES

Loans 147 380 8,576 12,340 21,443

Securities and derivatives - - 17,515 - 17,515

Liabilities assumed 25 31 - 1,912 1,968

Guarantees issued - - 2,351 - 2,351

Total 172 411 28,442 14,252 43,277

Loan repayments during the year 54 84 71,224 3,930 75,292

LIABILITIES

Deposits 1,358 1,335 11,203 - 13,896

Bonds and certificates of deposit 451 157 8,729 - 9,337

Total 1,809 1,492 19,932 - 23,233

Interest income 5 16 1,056 331 1,408

Interest expense 94 77 550 - 721

Related party transactions- amounts in thousands of EUR

- amounts in thousands of EUR

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Group2011

Management andSupervisory Board members

with related parties

Seniormanagement with

related parties

Shareholders with more than

20% of shares Total

rECEIVABLES

Loans 147 380 8,576 9,103

Securities and derivatives - - 17,515 17,515

Liabilities assumed 25 32 - 57

Guarantees issued - - 2,351 2,351

Liabilities from derivatives 172 412 28,442 29,026

Total 54 90 71,224 71,368

LIABILITIES

Deposits 1,358 1,511 11,203 14,072

Bonds and certificates of deposit 451 157 8,729 9,337

Total 1,809 1,668 19,932 23,409

Interest income 5 16 1,056 1,077

Interest expense 94 83 550 727

Group2010

Management andSupervisory Board members

with related parties

Seniormanagement with

related parties

Shareholders with more than

20% of shares Total

rECEIVABLES

Loans 195 318 14,077 14,590

Securities - - 43,924 43,924

Liabilities assumed 19 29 - 48

Guarantees issued - - 2,575 2,575

Total 214 347 60,576 61,137

Loan repayments during the year 31 185 80,509 80,725

LIABILITIES

Deposits 779 1,141 10,552 12,472

Bonds and certificates of deposit - - 6,635 6,635

Total 779 1,141 17,187 19,107

Interest income 5 16 1,733 1,754

Interest expense 48 53 611 712

The Bank in the Group is since mid-2011 indirectly owned by The Republic of Slovenia, as more than 50% share is owned by 2 of the government related companies, NLB d.d. Ljubljana and SOD d.d. Ljubljana. Individually significant transactions with government related entities present loans and borrowings.

As at December 31, 2011 the total amount of individually significant transactions for loans (11 transactions) in the amount of EUR 115,000 thousand (31 December 2010: EUR 328,653 thousand, 23 transactions).

- amounts in thousands of EUR

- amounts in thousands of EUR

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As at December 31, 2011 the total amount of borrowings (28 transactions) in the amount of EUR 471,264 thousand (31 December 2010: EUR 376,000 thousand, 23 transactions) and for interest rate swaps in the amount of EUR 30,000 thousand (2010: none).

For loans, the Bank recognized interest income in the amount of EUR 16 thousand (2010: EUR 816 thousand) and for borrowings interest expense in the amount of EUR 7,322 thousand (2010: EUR 1,648 thousand). The Bank recognized loss from interest rate swap in the amount of EUR 97 thousand.

The Bank in the Group conducts transactions with related parties, including government related entities in accordance with Terms and Conditions of Banka Celje d.d. and the Banka Celje Decision on Interest Rates, which is also used for other clients.

51 INFORMATION ON THE RESULTS OF ORGANIZATIONAL UNITS ABROAD

The Group has no subsidiaries or associated companies abroad.

52 EVENTS AFTER THE REPORTING DATE

After end 2011 there were no significant events that would have effect in the Group’s financial position, its profit for the year and on the disclosures in this annual report.

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Banka Celje, d.d., and the Banka Celje Group Financial statements 2011