*S)DBanka ANNUAL REPORT OF SID BANK AND SID BANK GROUP FOR 2009 Company name: Address: ID Number: VAT Identification Number: Telephone: Management Board: Telefax: E-mail: Website: SID - Slovene Export and Development Bank, Inc., Ljubljana Ulica Josipine Turnograjske 6, SI-1000 Ljubljana, Slovenia 5665493 SI 82155135 +386 1 200 75 00 +386 1 200 75 53 +386 1 200 75 75 info@sid.si http://www.sid.si Companies of SID Bank Group SID - Prva kreditna zavarovalnica d.d., Ljubljana Ulica Josipine Turnograjske 6, SI-1000 Ljubljana, Slovenia tel.: +386 1 200 58 00; fax: +386 1 425 84 45 http://www.sid-pkz.si PRO KOLEKT, družba za izterjavo, d.o.o. Ulica Josipine Turnograjske 6, SI-1000 Ljubljana, Slovenia tel.: +386 1 200 75 90, fax: +386 1 421 06 21 http://www.prokolekt.si PRO KOLEKT d.o.o., Rapska cesta 46B, 10000 Zagreb, Croatia tel.: +385 1 617 70 08, fax: +385 1 617 72 16 http://www.prokolekt.hr PRO KOLEKT d.o.o. Bulevar Goce Delčev 11, 1000 Skopje, Macedonia tel./fax: +389 2 312 18 13 http://www.prokolekt.com.mk PRO KOLEKT d.o.o., Bulevar Mihajla Pupina 10Ž/222, 11070 Novi Beograd, Serbia tel.: +381 11 213 93 81 http://www.pJokolekt-seJbia.com S.C. Pro Kolekt Credit Management Services Bucuresti s.r.l. Prof. George Murgoci Str. 2, District 4, 040526 Bucuresti, Romania tel.: +40 21 335 90 30, fax: +40 21 337 03 43 Pro Kolekt Sofia EOOD, 65, Shipchenski prohod Blvd., 1574 Sofia, Bulgaria tel./fax: +359 2 971 44 63 Pro Kolekt d.o.o. Sarajevo, Ulica Hamdije Čermeliča 2, 71000 Sarajevo, Bosnia and Herzegovina, tel.: +387 70 35 80, fax: +387 70 35 81 PRVI FAKTOR, faktoring družba, d.o.o., Slovenska cesta 17, SI-1000 Ljubljana, Slovenia tel.: +386 1 200 54 10; fax: +386 1 426 07 47 http://www.prvifaktor.si PRVI FAKTOR, faktoring društvo, d.o.o., Hektorovičeva 2/V,10000 Zagreb, Croatia tel.: : +385 1 617 78 05; fax: +385 1 617 66 29 http://www.prvifaktor.hr PRVI FAKTOR - faktoring d.o.o., Bulevar Mihajla Pupina 165/v, 11070 Novi Beograd, Serbia tel.: +381 11 2225 400; fax: +381 11 2225 444 http://www.pJvifaktoJ.co.yu PRVI FAKTOR d.o.o., finansijski inžinjering, Džemala Bijediča bb, 71000 Sarajevo, Bosnia and Herzegovina tel.: +387 33 767 210, faks: +387 33 767 211 http://www.prvifaktor.ba Center za mednarodno sodelovanje in razvoj (Centre for International Cooperation and Development) Kardeljeva ploščad 1, SI-1000 Ljubljana, Slovenia tel.: +386 1 568 13 96, fax: +386 1 568 15 85 http://www.cmsr.si Annual Report of SID Bank and SID Bank Group - 2009 2 Contents I. BUSINESS REPORT Statement by the President ofthe Board 4 Statement by the Supervisory Board 6 1. Highlights from the Business Operations of2009 8 2. Corporate Profile ofSID Bank 11 3. SID Bank Group 14 4. International Economic Environment and Slovenian Economy in 2009 17 5. Development Strategy ofSID Bank and SID Bank Group 22 6. Business Operations ofSID Bank and SID Bank Group in 2009 25 6.1. Financial Review ofthe Operations ofSID Bank and SID Bank Group 25 6.2. Review of SID Bank Operations by Business Activity 29 6.2.1. Loans and Guarantees 29 6.2.2. Treasury 32 6.2.3. Borrowing 33 6.2.4. Credit rating and Other Credit Information 33 6.2.5. Operations under Special Authorisation - Insurance against Non-Marketable Risks 34 6.2.6. Operations under Special Authorisation - Interest Rate Equalization Programme (IREP) 37 6.2.7. Operations under Special Authorisation - Guarantee Schemes 37 6.3. Review of SID Bank Group Operations in 2009 38 6.3.1. SID - Prva kreditna zavarovalnica d.d., Ljubljana 38 6.3.2. PRO KOLEKT Group 38 6.3.3. PRVI FAKTOR Group 39 6.3.4. Centre for International Cooperation and Development 39 6.4. Risk Management 40 6.5. Information System 46 6.6. Personnel 47 6.7. InternalAudit 49 6.8. Compliance Management 49 7. Appendices 51 7.1. Management Bodies ofSID Bank as at 31 December 2009 51 7.2. Organisation Chart ofSID Bank as at 31 December 2009 52 7.3. Organisation Chart of SID Bank Group as at 31 December 2009 53 7.4. Statement of Corporate Governance 54 II. FINANCIAL STATEMENTS OF SID BANK AND SID BANK GROUP 56 III. DISCLOSURES PURSUANT TO THE REGULATION ON DISCLOSURES OF BANKS AND SAVINGS 131 BANKS Annual Report of SID Bank and SID Bank Group - 2009 3 Statement by the President of Management Board Dear Ladies and Gentlemen, In 2009, activities were heavily impacted by the crisis in economic and financial markets, though SID Bank performed strongly and was successful in demonstrating its importance and generating high value added to the Slovenian economy and the Bank's owner. The set of strategic objectives were met in all the Bank's activities and even exceeded in several. The Bank's total asset growth rate totalled 45 percent, rising to EUR 3 billion. According to these figures, SID Bank ranks fifth among Slovenian banks in business volume and equity, and first in direct and indirect new financing extended to the Slovenian banks and companies. The main drivers behind the success were SID Bank's action strategy and business model (both have proved appropriate in the harsh conditions), sound risk management and, in particular, the employees who played the major role in adapting the Bank to face the challenges brought by the crisis. The crisis forced economic entities, in particular financial institutions, to adjust their market position and modify their financial structures. Consequently, the cash flows from investing and financing were utilized differently than before the downturn. This created an opportunity for SID Bank, whose core task is filling the market gaps, to expand its activities by focusing on anti-crisis measures. Working to ease the liquidity and credit crunch that hit Slovenia's banking/financial system hard, SID Bank issued another bond at the beginning of 2009 worth EUR 250 million in an attempt to enhance the liquidity and creditworthiness of both banks and companies. Throughout the year, the Bank maintained high lending and insurance levels that it set in the last quarter of 2008 when the crisis intensified. Its intensive response to the credit crunch resulted in a 44 percent growth in loans to Slovenian banks and corporate clients, totalling EUR 1.5 billion gross and in a rise in export credit insurance against both non-marketable and marketable risks. In 2009 SID Bank provided the Slovenian corporate sector with numerous credit lines intended for export financing, research and development, environmental protection, energy efficiency, and financing of municipalities and infrastructure projects. The Bank's funds were extended, in one form or another, to over 1500 Slovenian companies. Special attention was paid to financing small and medium-sized enterprises (SMEs) and automotive industry. Based on the findings that in the time of crisis Slovenian industry in dire need of a capital injection, SID Bank worked with the European Investment Bank (EIB) to provide a special credit line for the financing ofautomotive industry. These long-term loans were designed to enable local suppliers to make a "development breakthrough" in the manufacture of components for the new generation ofautomotive technology with lower CO2 emissions and higher energy efficiency. In view of the fact that in 2009 business was done in considerably more demanding conditions with increased liquidity and credit risks, the Bank closed the year with a slightly lower profit than planned (EUR 0.9 million). The operating result for the year reflected the higher credit involvement and higher risks SID Bank had assumed as a result of the crisis. Accordingly, the Bank created impairments and provisions totalling EUR 21 million (in 2008: EUR 11 million), arising mostly from impairments for new transactions. The quality of loan portfolio, however, showed no considerable change or deterioration. Capital adequacy remained high above the regulatory and internal minimum. Transactions conducted on behalfand for the account ofthe state, pertaining to insurance against non-marketable risks, reached EUR 953 million, up from EUR 914 million in 2008). As private insurers and reinsurers started to withdraw from the market, SID Bank introduced several anti-crisis products (e.g., insurance of non-shareholders' loans) and assumed additional non-marketable risks. However, a sizeable increase in claims paid (EUR 5 million) and a crisis-induced decline in exports (down by 20 percent) reduced the Bank's operating result from this activity to EUR 0.1 million in 2009 from EUR 6.9 million in 2008.). Potential claims rose as well, pushing the figure for 2009 to EUR 36.2 million (2008: EUR 8.7 million). An important part ofthe Bank's activities in 2009 was the crisis- related mandate from the Government to jointly prepare appropriate guarantee schemes for the banking and corporate sector. The guarantee schemes were implemented, on behalf and for the account of the state, first for corporate clients and then also for natural persons. Striving to secure financial support for the implementation of guarantee schemes and to refinance banks and companies, SID Bank intensified efforts in launching new products. At the point when the country's market was hamstrung by the lack of new funding, SID Bank was still able to provide financing to the economy, and was Slovenia's only bank which continued, and was successful in, obtaining funds on the international markets. The Bank carried out efficient risk management for existing and newly emerging risks and adapted its risk portfolio accordingly. The risk portfolio was modified to reflect the changes in operational risks and portfolio quality, as well as the reputation risk arising from a series of new tasks the Bank had undertaken in 2009. It is important to note that despite the newly introduced activities the Bank managed to enhance its cost efficiency, with the ratio of operating costs to net revenues (CIR) totalling 22 percent at the end of 2009. Implementation of certain other projects, aimed at optimizing processes, costs and IT solutions, was limited due to the dispersal of activities and the intensity of operations conducted under crisis conditions. Completion ofsaid projects is now expected in 2010. Due to intensive operations in the domestic market, SID Bank's international involvement decreased slightly in 2009. However, the Bank continues to exchange experiences on anti-crisis measures with other partners within the framework 4 Annual Report of SID Bank and SID Bank Group - 2009 ofthe ISLTC (Club of Institutions ofthe European Union Specialising in Long-Term Credit), EAPB (European Association of Public Banks), NEFI (Network of European Financial Institutions for Small and Medium Sized Enterprises), and in particular the Berne Union (International Union of Export Credit and Investment Insurers). Adverse conditions in 2009 were the primary reason for weaker operating results at most Group companies. The Most negatively affected was SID - Prva kreditna zavarovalnica, whose low results are related to the specific nature of a operations that insures receivables against the risk of non-payment. Payment default risk and insolvency have increased dramatically during the crisis but the long-term relations with clients and the long-term importance of insurance for the Slovenian economy have made withdrawal of insurance largely impossible, pushing the company's result for the year 2009 in the negative, with the estimated claims paid totalling EUR 44 million. However, harsh conditions have clearly pointed out the advantages and synergies of the Group's structure, in particular with regards to insurance against marketable and non-marketable risks and debt collection, in which PRO KOLEKT played a crucial role. In addition to the suitability of SID Bank's business model, the crisis has also affirmed the effectiveness of the Bank's HR policies; despite the extraordinary circumstances the employees in both SID Bank and SID Bank Group managed to achieve the expected results. Therefore, we would like to extend our thanks to all employees, and also to the owners and business partners, for their unwavering trust and support. The future economic trends and developments in financial markets are uncertain. It is our assumption that the economic conditions will improve very slowly and at a varying rate ofintensity, which will enhance the role ofSID Bank in the future years. To cope with the challenge, the Bank is developing new financial products and services for the sustainable development of Slovenia. Also, we are certain that the only answer to the current development paradigm is a fresh, comprehensive development model with SID Bank as one of its financial pillars. We eagerly await the challenge, equipped with our knowledge, financial strength and ability to assume risks. In 2009, SID Bank Strategy and business model for the period up to 2013 were adapted to incorporate the recent developments. Therefore, we hold a cautiously optimistic stance; we intend to implement the planned strategic objectives and continually adapt to the changing demands of the environment. We are aware of our responsibility and willing to act in support of the sustainable development of Slovenia's economy. This is our mission. In these times, it is even more important to be aware of the fact that the only way to mitigate risks and finance a better future is through a comprehensive, innovative and long-term approach. We are sure that in the next couple ofyears, which will be crucial for Slovenian economy, we will again prove this to you. Yours faithfully, 5 Annual Report of SID Bank and SID Bank Group - 2009 Report of the Supervisory Board on the review and approval of the 2009 Annual Report of SID bank and SID bank Group In 2009 SID Bank's operations were overseen by the Supervisory Board in the following compositions: From 1 January to 23 April 2009 the Supervisory Board consisted of the following members: Mitja Gaspari, M.Sc., Chairperson; Franc Križanič, Ph.D., Deputy Chairperson; Gregor Golobič; Maja Klun, Ph.D.; Matej Lahovnik, Ph.D.; Zlata Ploštajner, M.Sc.; Ivan Svetlik, Ph.D., and Stanislava Zadravec Caprirolo, M.Sc. From 23 April 2009 the Supervisory Board's composition was as follows: Andreja Kert, Chairperson; Samo Hribar Milič, M.Sc., Deputy Chairperson; Aleš Berk-Skok, Ph.D.; Marko Jaklič, Ph.D.; Gregor Kastelic, M.Sc.; Peter Kraljič, Ph.D., and Vilj'em Pšeničny, Ph.D. The Supervisory Board comprehensively monitored and supervised the operations ofthe Bank against its set strategic goals and business objectives, working in accordance with the Rules of Procedure of the Supervisory Board, the Statute of SID Bank, and in line with the regulations stating the authorities of the Supervisory Board. Professional support for the work of the Supervisory Board was provided by the Audit Committee, which studied the issues and drew up opinions mainly with regard to the accounting policies and accounting data, risk management, internal audit and controls, and external audit. In 2009, the Supervisory Board met at seven (7) regular and five (5) correspondence meetings where it studied periodical reports on the operations of SID Bank and the companies of the SID Bank Group, reports prepared by the Internal Audit and other departments of the Bank, and other general and specific issues related to the business operations ofthe company, and decided on the matters within its powers. In 2009 the Supervisory Board discussed and decided on the following important issues: - the Annual Report for 2008, the Independent Auditor's Report, and the proposal concerning the distribution ofaccumulated profit, - the Bank's Action Strategy for the period ending in 2013, - the annual operational plan and financial plan for the year 2010, - internal audit report for 2009 and quarterly internal audit reports for 2009, - the findings made by the Bank ofSlovenia and other supervision bodies, - risk management strategy and policies, and the Bank's risk profile, - Compliance Management Work Plan, - code ofethics and professional standards ofthe Bank, - borrowings ofthe Bank, - implementation ofanti-crisis measures, including the review offinancial plan for 2009, - increase in capital ofSID - Prva kreditna zavarovalnica. In monitoring and supervising the business operations of SID Bank, the Supervisory Board obtained all the information necessary for continuous evaluation of results achieved and of the performance of the Management Board, and adopted decisions within its powers. Annual Report of SID Bank and SID Bank Group - 2009 6 At its meeting held on 22 April 2010, the Supervisory Board examined in detail the Annual Report of SID -Slovenska izvozna in razvojna banka d.d., Ljubljana and group SID - Slovenska izvozna in razvojna banka d.d., Ljubljana for 2009 together with the reports ofcertified auditors prepared by the auditing company Deloitte revizija d.o.o., which gave its positive opinion on the financial statements ofSID Bank and the SID Bank Group for 2009. According to the Independent Auditor's Report, the financial statements give a true and fair view of the financial position ofSID - Slovenska izvozna in razvojna banka d.d., Ljubljana and group SID - Slovenska izvozna in razvojna banka d.d., Ljubljana as of 31 December 2009 and of its financiral performance and its cash flows for the year then ended in accordance with the International Financial Reporting Standards as adopted by the EU, and the Bank's business report is consistent with the audited financial statements. The Supervisory Board had no comments as to the Independent Auditor's Report of Deloitte revizija d.o.o. Upon examination ofthe Annual Report, the Supervisory Board had no reservations to and gave its approval to the 2009 Annual Report of SID - Slovenska izvozna in razvojna banka d.d., Ljubljana and group SID -Slovenska izvozna in razvojna banka d.d., Ljubljana. Annual Report of SID Bank and SID Bank Group - 2009 7 1. HIGHLIGHTS FROM THE BUSINESS OPERATIONS OF 2009 Introduction As at 31 December 2009, SID Bank Group consisted ofthe following companies: Relationship Ownership share ofSID Bank SID banka, d.d., Ljubljana Parent company - SID - Prva kreditna zavarovalnica d.d., Ljubljana Subsidiary company 100% PRO KOLEKT, družba za izterjavo, d.o.o. Subsidiary company 100% PRVI FAKTOR, faktoring družba, d.o.o. Joint venture 50% Centre for International Cooperation and Development Co-foundation - Notes in the continuation of this report refer to SID Bank and SID Bank Group and shall be read together as one. The consolidated statements ofSID Bank Group include SID-Prva kreditna zavarovalnica d.d., Ljubljana by the method offull consolidation and the PRVI FAKTOR Group by the proportional consolidation method. Due to its immateriality for the financial position of SID Bank Group, the PRO KOLEKT Group is not included in the consolidation (cf. Notes, Chapter II, points 2.1.2. and 2.1.3.). Business results of SID Bank and SID Bank Group in 2009 or as at 31 December 2009 Business results of SID Bank from operations on own account • Total assets: EUR 3.0 billion (up by 44.9%) • Loans given: EUR 3.0 billion (up by 46.8%) • Net profit for the year: EUR 0.9 million (down by 65.7%) • Guarantees and assumed risks: EUR 38.8 million (down by 46.3%) SID Bank Key Figures in EUR million_2007 2008 2009 Number of shareholders_85_1_1 Totalassets 1,248.7 2,087.7 3,024.9 Loans given_1,164.1 1,952.2 2,922.4 Nominal capital_89.6 140.0 300.0 Equity_107.6 160.8 322.0 Net profit for the year_3.6_2.8_0.9 Return on equity after tax (ROE)_3.72% 2.28% 0.54% International credit rating (Moody's)_-_-_Aa2 Number ofemployees (31 Dec.)_69_76_87_ Business volume and results from operations on behalf and for the account of the Republic of Slovenia • Export credit and investment insurance against non-marketable risks on behalf and for the account of the state: EUR 952.5 million (an increase of 4.2%), broken down into: short term export credit insurance EUR 227,9 million, medium term export credit insurance EUR 22,8 million, and outward investment insurance EUR 701,8 million. • Premiums: EUR 4.8 million (up by 18.1%); claims: EUR 4.9 million (2008: EUR 13 thousand) • Contingency reserves: EUR 120 million (up by 9.2%) • IREP funds: EUR 7.6 million (up by 13.7%) • Guarantee Scheme for enterprises: EUR 509 million in loan guarantee quota distributed in 2009 • Guarantee Scheme for individuals: EUR 38 million in loan guarantee quota distributed in 2009 Annual Report of SID Bank and SID Bank Group - 2009 8 Consolidated financial statements of SID Bank Group • Total assets: EUR 3.2 billion (up by 39.7%) • Equity: EUR 333.7 million (up by 85.5%) • Loss for the year: EUR 5.4 million (in 2008: net profit EUR 2.9 million) • Return on equity after tax: - 2.09% (in 2008: 1.86%) SID Bank Group Key Figures in EUR million 2007 2008 2009 Number of shareholders 85 1 1 Total assets 1,437.0 2,301.7 3,215.6 Loans given 1,312.3 2.112,4 3.049,5 Equity 127.6 179.9 333.7 Net profit/loss for the year 6.7 2.9 -5.4 Return on equity after tax (ROE) 5.45% 1.86% -2.09% Number ofemployees (31 Dec.) 241 287 306 Business results of SID Bank Group companies in 2009 or as at 31 December 2009 SID - Prva kreditna zavarovalnica d.d., Ljubljana • Equity: EUR 9.2 million (down by 45.7%), including credit risk equalisation reserve in the amount of EUR 0.8 million (down by 91.6%) • Business volume (domestic and export credit insurance against marketable risks): EUR 4.0 billion (down by 23.0%) • Gross claims paid: EUR 11.4 million (up by 149.6%) • Loss ratio: 104.7% (in 2008: 32.8%) • Total assets: EUR 62.7 million (up by 21.7%) • Loss for the year: EUR 6.5 million (in 2008: net profit EUR 0.4 million) PRO KOLEKT, družba za izterjavo, d.o.o. • Equity: EUR 1.9 million (up by 30.4%) • Value of debts collected: EUR 9,2 million (up by 235,9%) • Total assets: EUR 0.5 million (up by 57.7%) • Net profit: EUR 44.1 thousand (in 2008: loss of EUR 0.1 million) PRO KOLEKT Group • Made up of PRO KOLEKT, Ljubljana, and its subsidiaries in Zagreb, Belgrade, Sarajevo, Skopje, Bukarest, and Sofia • SID Bank's equity: EUR 222.9 thousand (up by 91.8%); minority owners' equity: EUR 67 thousand • Value ofdebts collected: EUR 12,4 million (up by 100,0%) • Total assets: EUR 4.2 million (up by 7.7%) • Net profit: EUR 0.1 million (in 2008: loss of EUR 56.6 thousand) PRVI FAKTOR, faktoring družba, d.o.o. • Equity: EUR 7.2 million (down by 28.3%) • Value of receivables purchased: EUR 217.0 million (down by 27.8%) • Total assets: EUR 134.0 million (down by 14.4%) • Net profit: EUR 1.8 million (in 2008: EUR 4.7 million) Annual Report of SID Bank and SID Bank Group - 2009 9 PRVI FAKTOR Group • Made up of PRVI FAKTOR, Ljubljana, and its subsidiaries in Zagreb, Belgrade, Sarajevo, and Skopje • Equity: EUR 11.0 million (down by 24.5%) • Value of receivables purchased: EUR 819.0 million (down by 20.7%) • Total assets: EUR 336.0 million (down by 8.8%) • Net profit: EUR 1.1 million (in 2008: EUR 3.0 million) Centre for International Cooperation and Development • SID Bank co-founded the institution Centre for International Cooperation and Development • Operating income: EUR 0.5 million (up by 10.4%) • Net revenue surplus in the busines year: EUR 0 (in 2008: EUR 5 thousand). Annual Report of SID Bank and SID Bank Group - 2009 10 2. CORPORATE PROFILE OF SID BANK Legal status and history • SID Bank was established on 22 October 1992 under the name of Slovenska izvozna družba, družba za zavarovanje in financiranje izvoza Slovenije, d.d., Ljubljana (hereinafter referred to as SID), a specialised private-law financial institution for insurance and financing of exports of the Republic of Slovenia. The operation of SID Bank was governed by the Export Insurance and Finance Corporation of Slovenia Act, adopted in 1992. • The Corporation was entered into the Register of Companies at the District Court of Ljubljana with Decision No. SRG 8096/92 of27 October 1992, under record entry number 1/19966/00. • The Act on Insurance and Finance of International Business Transactions (ZZFMGP), which entered into force in February 2004, codifies the fundamental principles governing the insurance and financing of international business transactions as Slovenia's trade policy instruments, and defines the role of the Republic of Slovenia in such transactions. Pursuant to the ZZFMGP, SID was obligated to harmonise its insurance-related operations which it had conducted on its own behalf and for its own account with the regulations governing the operation of insurance companies by 31 December 2004, and to harmonise its non-insurance related operations (i.e. operations not regulated by the ZZFMGP) with the regulations governing the operation of banks by 31 December 2006. Acting in accordance with the law, SID: - signed an agreement with the Ministry of Finance on the regulation of mutual relations concerning implementation ofChapter II of the ZZFMGP on 1 December 2004; - established an insurance company to which it transferred the portfolio of marketable insurance performed on its own behalf up until the end of 2004; SID - Prva kreditna zavarovalnica d.d., Ljubljana, wholly-owned by SID held a 100 percent ownership share, was entered into the Register ofCompanies on 31 December 2004; - in 2006 completed the project of transforming into a bank in compliance with the deadlines specified in the Decision on Harmonising Business Operations ofSlovenska izvozna družba, d.d., Ljubljana with the Regulations Governing the Operation of Banks, issued by the Bank of Slovenia pursuant to the ZZFMGP, by obtaining a banking license to provide banking and other financial services from the Bank ofSlovenia on 18 October 2006. Upon entry into the Register of Companies on 29 December 2006, the company was renamed SID - Slovenska izvozna in razvojna banka, or SID Bank, Inc., Ljubljana for short1, and - began formally operating as a specialised bank on 1 January 2007. • On 23 May 2008 the National Assembly ofthe Republic ofSlovenia passed the Slovene Export and Development Bank Act (hereinafter ZSIRB). The Act entered into force on 21 June 2008 and, pursuant to the provisions ofArticle 21 ofthe ZSIRB, became applicable from the date when the Republic of Slovenia became the single shareholder of SID Bank, namely from 18 September 2008. The ZSIRB bestows upon SID Bank two mandates: firstly, SID Bank shall be Slovenia's specialized promotional, export and development bank authorized to promote and pursue the activities under the ZSIRB and, secondly, the Bank shall have the authority to perform all transactions under the ZZFMGP. • On its own behalf and for its own account SID Bank acts in accordance with the ZSIRB by performing mainly financial services in segments where market gaps occur or have been observed. In conducting its operations, SID Bank uses all financial instruments provided for by the existing legislation. As a national export credit agency (ECA), SID Bank performs insurance against non-marketable risks and conducts the Interest Rate Equalization Programme (IREP) on behalfand for the account ofthe Republic ofSlovenia. Capital • On 16 March 2009 the National Assembly of RS adopted the Act Amending the Slovene Export and Development Bank Act (ZSIRB). The amendments included Article 4 ofthe ZSIRB which stipulates the amount ofshare capital of SID Bank. The minimum amount of the share capital of SID Bank after the amendment shall be equal to EUR 300 million. Further, the amended Article 4 ofthe ZSIRB states that the distributable profit ofthe SID Bank shall not be utilized for distribution to the shareholders and shall be transferred to other profit reserves. • In consideration of the above amendments, at the General Meeting of Shareholders, held on 20 May 2009, the Republic of Slovenia as the single shareholder of SID Bank endorsed a decision to increase the share capital from EUR 140 million to EUR 300 million through the issue of 1,664,933 new ordinary no-par value shares in a total value of EUR 160 million. All the newly issued shares are held by the single shareholder, Republic of Slovenia. The capital increase was entered into the Register ofCompanies on 14 August 2009. • At the Annual General Meeting ofSID Bank held on 28 July 2009, a decision was taken that the distributable profit for the year 2008 totalling EUR 657 thousand shall be transferred to other profit reserves. The capital was EUR 300 million as at 31 December 2009 compared to EUR 140 million as at 31 December 2008. 1 In the continuation of this Annual Report, regardless of the time of operation and the change of company name, SID Bank, Inc., Ljubljana, and prior to 29 December 2006 Slovene Export Corporation, Inc. Ljubljana, are referred to as SID Bank or SID, whereas all capital-linked SID Bank companies are referred to as SID Bank Group or SID Group. 11 Annual Report of SID Bank and SID Bank Group - 2009 • The nominal capital is divided into 3,121,741 ordinary registered no-par value shares issued in uncertificated form. The central securities register and all securities trading procedures are managed by the Central Securities Clearing Corporation in Ljubljana. • Equity was EUR 322.0 million as at 31 December 2009. The audited book value per share as at 31 December 2009 was EUR 103.75 and EUR 111.76 as at 31 December 2008. Shareholders as at 31 December 2009 Number of Shareholders shares Ownership share Republic ofSlovenia 3,103,296 99.4% SID banka - own shares 18,445 0.6% Total 3,121,741 100.00% The voting rights of the shareholders of SID Bank are not limited, and the one share-one vote principle is applied. Financial rights attached to shares are linked to share ownership. Pursuant to the provisions of Article 4 of the ZSIRB, the Republic of Slovenia is the single shareholder of SID Bank. Role, purpose and tasks ofSID Bank On the basis of, and in accordance with the following: • the Slovene Export Insurance and Finance Corporation Act, on the basis ofwhich SID was established in 1992 as a financial institution for insurance and financing of exports and for performance of other transactions aimed at encouragement and promotion ofeconomic relations with foreign countries; • the Act on Insurance and Financing of International Business Transactions (ZZFMGP), which regulates the fundamentals of insurance and financing of international business transactions as Slovenia's trade policy instruments; • the Slovene Export and Development Bank Act (ZSIRB), which designates SID Bank as a specialised Slovene export and development bank authorised to engage in activities specified in the ZSIRB and as an authorised institution under the ZZFMGP; • other laws and individual documents governing the promotional and development forms and instruments of the Slovenian, European and international economic activities in covering market gaps and other (permitted) forms of interventions and assistance, in particular international development cooperation, through exercising individual rights and obligations and the role ofthe Republic ofSlovenia and its institutions in actively pursuing the objectives set forth in the development strategy ofthe Republic ofSlovenia; the role, purpose and tasks of SID Bank are to promote, in the general economic and public interests, in particular through appropriate financial instruments and services: • a balanced and sustainable economic development ofthe Republic of Slovenia, through financing and insurance for international business transactions and cooperation as well as other forms of operation of economic operators, in particular SMEs, in Slovenia; research and innovation, along with other forms of economic and development cooperation which increase competitiveness and excellence ofeconomic operators in the territory ofthe Republic of Slovenia; • a sustainable development ofthe environment characterized by a high degree of protection ofthe environment and habitat, public and utility infrastructure, and in particular energy efficiency, with special stress on voluntary restraint and quality as well as local factors; • social progress, education and employment and other diverse forms and methods of significance in these areas in the Republic of Slovenia and abroad through international development cooperation; and other forms of economic activities contributing to the growth, development and prosperity, whereby the management and supervision bodies ofSID Bank will, within the framework ofthe Bank's strategic policies, strive to meet the requirements of the users of such services and exercise as well as progressively improve the same by way of introducing and implementing: • systems for overall assessment and management of specific development risks, • quality management systems, and • corporate and social responsibility. Furthermore, the ZSIRB authorizes SID Bank to pursue its activities concerning deployment of EU funds and other assets from the EU budget. In so doing, SID Bank may, under agreements concluded with the competent Ministries and other national authorities, entities and persons, extend diverse types of development finance and carry out various measure packages of the Republic of Slovenia as well as other schemes and projects compliant with EU rules, and for this purpose participate in various ways with European financial institutions. In conducting its operations, SID Bank may use all financial instruments provided for in the existing legislation, namely loans, guarantees and other forms of collateral, purchase of receivables, financial leasing, concession credits and other _12_ Annual Report of SID Bank and SID Bank Group - 2009 international development cooperation instruments, other forms of finance, grants, subsidies, capital investments and other forms of risk assumption, with particular emphasis on combining the financial engineering instruments. Activities Financial services which SID Bank, in accordance with the law and with the approval of the competent authority, provided for own account in 2009, include: • granting credits, financing of business transactions, • issuing guarantees and other warranties, • trading for its own account or for the account of clients in foreign currencies, including foreign exchange transactions, currency and interest financial instruments, transferable securities, • trading for its own account with monetary market instruments, • credit rating services: collection, analysis and provision ofinformation on creditworthiness of legal entities. Pursuant to the provisions of ZSIRB and after its date of implementation SID Bank used the above indicated services and financial instruments for to support economic, structural, social and other policies in the areas specified in Article 11, point 1, ofthe Act, as follows: • international business transactions and international economic cooperation, • economic incentives, with particular emphasis on small and medium-sized enterprises, entrepreneurship, and venture capital, • research and development, • education and employment, • preserving the environment and energy efficiency, • regional development, • commercial and public infrastructure. Under a legal authorisation provided for in the ZSIRB, SID Bank enjoys a status of an authorised institution under the ZZFMGP. For the account ofthe Republic ofSlovenia, SID Bank carries out the following activities: • short-term export credit insurance and reinsurance against non-commercial and other non-marketable risks, • investment insurance against non-commercial risks, • medium-term export credit insurance against commercial and/or non-commercial risks, • Interest Rate Equalization Programme (IREP). In performing its activities, SID Bank uses all financial instruments available to provide various forms of financing or related activities, also with an intent to promote international development cooperation. In the framework of international development cooperation that includes development and/or official assistance schemes of the Republic of Slovenia, SID Bank may also act in the role of an agent. With consideration to its status and legal nature, the Bank may perform other tasks and activities under a special agreement concluded with the Republic of Slovenia or with other public-law entities. SID Bank operations for the account of the Republic ofSlovenia SID Bank performs insurance of international business transactions against non-marketable risks and conducts the Interest Rate Equalization Programme on behalf and for the account of the Republic of Slovenia, as an agent of the state. The funds needed to ensure efficient provision of insurance under the ZZFMGP were guaranteed by the Republic of Slovenia in form of contingency and special contingency reserves, primarily utilised to settle liabilities to the insureds (claims payments), cover the cost of prevention and mitigation of future or reported losses, and to cover losses incurred. If the losses cannot be indemnified from the contingency reserves, the funds for claims payments are supplied by the Republic of Slovenia. Contingency reserves are set aside primarily from paid premiums, fees and commissions, recourses from paid claims and other revenues from insurance and reinsurance against non-marketable risks. SID Bank manages contingency reserves under the agreement signed with the Ministry of Finance on 1 December 2004. In insurance operations a special role is played by the government-appointed International Trade Promotion Commission. The operations which SID Bank as the national export credit agency (ECA) performs on behalf and for the account of the Republic of Slovenia are kept separate, in terms of management and accounting, from the operations which SID Bank performs for its own account. In 2009 SID Bank, acting on authorisation by the Republic of Slovenia provided for in the Guarantee Scheme Act ofthe Republic ofSlovenia (Official Gazette of RS 59/09 of30 April 2009) and Guarantee Scheme Act ofthe Republic ofSlovenia for Individuals (Official Gazette of RS, 33/09, of 30 July 2009), started a guarantee scheme for companies and a guarantee scheme for individuals (for more information, see 6.2.7.). _13_ Annual Report of SID Bank and SID Bank Group - 2009 3. SID BANK GROUP SID Bank is a constituent part ofSID Bank Group, which also includes: • SID - Prva kreditna zavarovalnica d.d., Ljubljana • PRO KOLEKT, družba za izterjavo, d.o.o., with its subsidiaries • PRVI FAKTOR, faktoring družba, d.o.o., with its subsidiaries SID Bank is also a co-founder ofthe institute Centre for International Cooperation and Development. SID - Prva kreditna zavarovalnica d.d., Ljubljana The harmonisation of Slovenian legislation with the acquis communautaire and the adoption of new legislation, in particular the ZZFMGP, have led to changes in the organisational structure of SID and seen the expansion of the SID Group. As the sole owner of the company, SID established a specialised credit insurance company SID - Prva kreditna zavarovalnica d.d., Ljubljana (hereinafter PKZ), in 2004, thus harmonising its legal status and insurance-related business on own account with the regulations governing the operation ofinsurance companies. PKZ was entered into the Register of Companies on 31 December 2004 and started operating on 1 January 2005. On that date, the insurance portfolio ofshort-term insurance which SID had conducted for its own account up to the end of2004, was transferred from SID onto the assuming insurance company, PKZ. The registered principal business activity of PKZ is the conclusion and execution of property insurance in the insurance class of credit insurance. The company provides insurance for short-term credits to private-law entities (normally, suppliers' credit for up to 180 days or, exceptionally, up to one year). PKZ provides insurance against commercial and non-commercial risks for companies selling abroad and/or in Slovenia on deferred payment, normally on open account. Insurance contracts are normally made on a whole turnover revolving basis covering the risks of non-payment on foreign and/or domestic markets. In 2007 PKZ started and in 2008 and 2009 continued to conclude indirect insurance contracts used to provide coverage, based on facultative quota reinsurance, for insurance operations of loan collateral, collateralised with export credit agencies. The principal characteristics of insurance transactions insured in such a manner were the same as for direct insurance transactions. The company is led by a two-member Management Board, represented by Mr. Ladislav Artnik, President of the Board, and Dr. Rasto Hartman, Member of the Board. The Supervisory Board is composed of three members: Mr. Jožef Bradeško, President, and Mr. Leon Lebar, Deputy President (since 27 July 2009; prior to that the position was held by Ms. Alenka Ferjančič) of SID Bank, and Mr. Ivan Štraus, Employee Representative of PKZ. The nominal value ofthe equity interest owned by SID Bank was EUR 4.2 million as at 31 December 2009. PRO KOLEKT, družba za izterjavo, d.o.o. PRO KOLEKT, družba za izterjavo d.o.o., with registered offices at Ulica Josipine Turnograjske 6, Ljubljana (hereinafter PRO KOLEKT, Ljubljana), was established in 2004 by SID as its sole owner. The nominal capital of the company as at 31 December 2009 was SIT 418.8 thousand. The nominal value of the equity interest of SID Bank in PRO KOLEKT, Ljubljana, was also EUR 418.8 thousand. PRO KOLEKT, Ljubljana, specializes in out-of-court debt collection. Originally, the company was established as a debt collection service for SID Group. Today it handles debt collection cases for creditors in Slovenia and abroad. Among foreign clients, the principals of PRO KOLEKT increasingly include export credit agencies and debt collection agencies. For foreign creditors, PRO KOLEKT, Ljubljana, performs representation in court proceedings (recovery of debt through court action, voluntary compositions, bankruptcy proceedings, etc.) and provides credit rating information. Aware of the importance of South East European markets for the Slovenian economy and the comparative benefits associated with the presence in the regional market, PRO KOLEKT, Ljubljana, began setting up a network of subsidiaries in 2006 and has established six affiliates to date: • PRO KOLEKT d.o.o., Zagreb, Croatia, specialising in entrepreneurial consulting, was founded on 1 February 2006 by PRO KOLEKT, Ljubljana, as its sole owner. The nominal capital of the company is EUR 23.8 thousand. The General Manager of the company is Mr. Ivica Balenovic; the General Meeting of PRO KOLEKT d.o.o., Zagreb, is represented by the General Manager of PRO KOLEKT, Ljubljana. The nominal value of the equity interest owned by PRO KOLEKT, Ljubljana, as at 31 December 2009, equalled the balance ofthe nominal capital on the same day. • PRO KOLEKT d.o.o., Skopje, Macedonia, specializing in entrepreneurial consulting, was founded on 6 July 2006 and is 80 percent owned by PRO KOLEKT, Ljubljana, and 20 percent owned by Mr. Vlado Naumovski. The nominal capital of the company is EUR 10.0 thousand. The General Manager of the company is Mr. Goran Markovski; the General Meeting of PRO KOLEKT, d.o.o, Skopje is represented by the General Manager of PRO KOLEKT, Ljubljana and Mr. Vlado 14 Annual Report of SID Bank and SID Bank Group - 2009 Naumovski. The nominal value of the equity interest owned by PRO KOLEKT, Ljubljana, as at 31 December 2009 equalled EUR 8.0 thousand. • PRO KOLEKT, društvo za izterjavo dolga, d.o.o., Beograd, Serbia, specializing in other financial activities, was founded on 18 December 2006, and is wholly-owned by PRO KOLEKT, Ljubljana. The nominal capital ofthe company is EUR 25.0 thousand. The General Manager of the company is Mr. Nikola Debač; the General Meeting of PRO KOLEKT, društvo za izterjavo dolga, d.o.o., Beograd is represented by the General Manager of PRO KOLEKT, Ljublana. The nominal value of the equity interest owned by PRO KOLEKT, Ljublana, as at 31 December 2009, equalled the balance ofthe nominal capital on the same day. • PRO KOLEKT CREDIT MANAGEMENT SERVICES BUCURESTI S.R.L., Bukarest, Romania, specializing in business consulting, was founded on 6 April 2007, with a nominal capital of EUR 25.0 thousand. The nominal capital of the company is EUR 39.2 thousand. PRO KOLEKT, Ljubljana holds a 51.02 percent ownership share ofthe company, Mr. Teodor Gigea 25.51 percent, and Roexpert S.R.L. Bucaresti 23.47 percent. The General Manager of the company is Mr. Teodor Gigea; the General Meeting of the company is represented by the General Manager of PRO KOLEKT, Ljubljana, the Director of Roexpert S.R.L.Bucuresti, and Mr. Teodor Gigea. The nominal value of the equity interest owned by PRO KOLEKT, Ljublana, as at 31 December 2009 equalled EUR 20.0 thousand. • PRO KOLEKT SOFIA EOOD, Sofia, Bulgaria, specializing in business consulting, was founded on 9 May 2007, with a nominal capital of EUR 25.0 thousand. The nominal capital of the company is EUR 40.0 thousand. PRO KOLEKT, Ljublana owns 62.50 percent of the company, the remaining share of 37.50 percent is owned by Ms. Mariana Ikonomova, who is also the General Manager of the company. The General Meeting of PRO KOLEKT SOFIA EOOD is represented by the General Manager of PRO KOLEKT, Ljubljana, and Ms. Mariana Ikonomova. The nominal value of the equity interest owned by PRO KOLEKT, Ljublana, as at 31 December 2009 equalled EUR 25.0 thousand. • PRO KOLEKT d.o.o. Sarajevo, Bosnia and Herzegovina, specializing in business consulting, was founded on 13 July 2007 and is wholly-owned by PRO KOLEKT, Ljublana. The nominal capital of the company is EUR 25.0 thousand. The General Manager of the company is Mr. Vedad Tuzovic; the General Meeting of PRO KOLEKT d.o.o., Sarajevo, is represented by the General Manager of PRO KOLEKT, Ljublana. In 2009 the owner carried out a capital increase in the amount of EUR 10.0 thousand, which was entered into the Register of Companies in February 2010. After the capital increase, the nominal value ofthe equity interest owned by PRO KOLEKT, Ljublana, as at 31 December 2009, equalled the balance ofthe nominal capital on the same day. The General Manager of PRO KOLEKT is Mr. Miloš Varga. The General Meeting of the company is represented by the Management Board of SID Bank. PRVI FAKTOR, faktoring družba, d.o.o. PRVI FAKTOR, faktoring družba d.o.o., with registered offices at Slovenska cesta 17, Ljublana (hereinafter PRVI FAKTOR, Ljublana), is the leading factoring company in Slovenia. The principal business activity of the company is the performance offactoring services for clients with registered offices in the Republic ofSlovenia and abroad with regard to claims arising from the sale of goods and services. The company mainly provides the following services: repayment assumption or purchasing of claims arising from the sale of goods and services with or without protection against the risk of non-payment; financing of purchased claims; claims management; encashment and collection of claims; trading in claims; mediation and representation in factoring transactions in Slovenia and abroad. In 2002 SID acquired a 50 percent equity interest and half of the voting rights in the company PRVI FAKTOR, the other shareholder being Nova Ljublanska banka d.d., Ljublana. The nominal value ofthe equity interest owned by SID Bank was EUR 1.6 million as at 31 December 2009. PRVI FAKTOR, Ljublana, has founded and is the sole owner offour enterprises: • PRVI FAKTOR, faktoring društvo, d.o.o., Zagreb, Croatia, specializing in factoring. The company was founded on 17 March 2003 with a nominal capital of EUR 2.6 million. The General Manager of the company is Mr. Tomaž Kačar; the General Meeting is made up ofthe representatives from PRVI FAKTOR, Ljublana. • PRVI FAKTOR, faktoring d.o.o., Beograd, Serbia, specializing in factoring, was founded on 24 February 2005. The nominal capital ofthe company is EUR 1.3 million. The General Manager ofthe company is Mr. Dmitar Polovina; the General Meeting is made up ofthe representatives from PRVI FAKTOR, Ljublana. • PRVI FAKTOR d.o.o., financijski inženiring, Sarajevo, Bosnia and Herzegovina, specializing in other types of financial intermediation, was founded on 27 February 2006. The nominal capital of the company is EUR 451.0 thousand. The General Manager ofthe company is Mr. Nedim Rizvanovic; the General Meeting consists ofrepresentatives from PRVI FAKTOR, Ljublana. • On 22 September 2006, PRVI FAKTOR d.o.o., Skopje was entered into the Register of Companies; the founding capital ofthe company is EUR 5.0 thousand. The company has not begun operating yet. The company's bodies are the General Meeting and General Manager, Mr. Ernest Ribič. In 2009, SID Bank was represented at the General Meeting of PRVI FAKTOR, faktoring družba, d.o.o. , by Mr. Sibil Svilan (MSc) and Mr. Leon Lebar (since 22 May 2009; prior to that the position was held by Ms. Alenka Ferjančič). The nominal value of the equity interests owned by PRVI FAKTOR, Ljublana in the companies of the PRVI FAKTOR Group as at 31 December 2009 equalled the balance ofthe nominal capital ofthese enterprises on the same day. 15 Annual Report of SID Bank and SID Bank Group - 2009 Centre for International Cooperation and Development Upon signing the second Amendment to the Agreement Concerning the Restructuring of the Centre for International Cooperation and Development (hereinafter CMSR) on 28 December 2006, SID Bank became a co-founder of CMSR with whom it had worked closely prior to the signing. The other co-founder is the Republic of Slovenia. The key activities of the institute are macroeconomic and political analyses of various countries, country risk assessments and similar macroeconomic and other analyses and public relations work. In recent years CMSR has become Slovenia's central institute to perform technical and operational tasks linked to international development cooperation on the basis ofan authorisation issued by the Government ofthe Republic ofSlovenia. The CMSR management bodies are Director and Council of the Centre. The institute is represented by Mr. Gašper Jež, temporarily appointed Acting Director. The CMSR Council is made up of seven members; SID Bank's representatives sitting on the Council are Mr. Sibil Svilan (MSc), who is also the President ofthe Council, and Mr. Bojan Pecher. Annual Report of SID Bank and SID Bank Group - 2009 16 4. INTERNATIONAL ECONOMIC ENVIRONMENT AND SLOVENIAN ECONOMY World Economy in 2009 2009 was the year of continued slowdown in economic growth in the European Union (4.0 percent compared to 2008); the euro area faced a 2.1 decline in the fourth quarter of2009 compared to the fourth quarter of2008. Besides, there was a significant drop in the value of trade exchange, which was, in particular at the beginning of the year, the main reason for the economic insecurity. According to Eurostat, GDP growth in the EU and in the euro area was negative in the first half of 2009 against the previous quarter while in the second half of the year 2009 minimal growth was recorded, namely 0.3 percent in the third and 0.1 percent in the fourth quarters. At the start of 2009 all EU member states experienced a large contraction of GDP among which Lithuania's, Latvia's and Estonia's GDP dropped most. Slovenia's GDP declined by 6.2 percent in the first quarter, placing Slovenia among the countries that were hit hardest by the crisis. In the second half of 2009 the majority of countries reported positive GDP growth or at least some weakening ofthe decline. China's year-on-year GDP growth increased quarterly in 2009, reaching 10.7 percent in the last quarter with the annual growth rate amounting to 8.7 percent. According to the fist estimates, the annual growth rate in the USA in the last quarter of 2009 was 5.7 percent, and for the first time in four quarters the year-on-year GDP growth stood at 0.1 percent. In 2009 the USA experienced the biggest drop in GDP (-2.4 percent) since 1946. In the countries of South East Europe, the largest drops in GDP were observed in Romania and Bulgaria (with 7.0 and 4.8 percent, respectively) and Albania with 2.3 percent. Serbia's economy contracted by 3.1 percent, the economy of Montenegro shrank by 4.3 percent, of Bosnia and Herzegovina by 4.4 percent and that of Macedonia by 1.2 percent. According to the latest EBRD estimates, the Russian economy weakened by 8.7 percent, Ukrainian by 14.5 percent and the economy ofTurkey by 5.6 percent. The indicators in the international environment suggest continued economic growth. The expected recovery of economy in the year 2010 will vary from region to region while the fastest growth is to be expected in Asia. In its January report the International Monetary Fund expects a 1 percent GDP growth rate in the euro area and a 2.7 percent rise in the USA in 2010. Inflation in the euro area has been increasing moderately in the last months mainly as a result ofthe gradual fading ofthe effect ofincreased energy prices. The prices ofoil and other raw materials are increasing, partly as a result of the global recovery. Slovenian Economy in 2009 Slovenia's GDP dropped by 7.5 percent in 2009 and is expected to grow by 0.9 percent in the coming year while a strong economic upswing and a 2.5 percent increase of GDP is expected to begin only in 2011. The year-on-year export par value in the first eleven months of2009 was 20.3 percent lower, bringing the figure close to the average export figures in 2006. The imports show sharp fluctuations since they are affected not only by the export but also by domestic demand. Average year-on-year import value in the first eleven months of 2009 was 27.7 percent lower. Year-on-year trade in services figures fell less (-11,5 percent) than trade in goods in the eleven months of2009 (with the exception of November) by 24.3 percent. Similarly, the year-on-year par value of the export of services went down by 15.8 percent in November. A similar drop was reported for the period January-November 2009 (-15.4 percent), caused mainly by the reduction in exports related to road transport, travelling and construction services. The import of services in the eleven months of last year was lower by 5.7 percent. As much as 85 percent ofthe year-on-year decrease in goods deficit was attributable to improved terms oftrade. In the ten months of 2009 the average import prices dropped significantly more (9.4 percent) than the export prices (4.0 percent) while the conditions of trade experienced a year-on-.year improvement of 6.2 percent. In the eleven months of last year the trade surplus from travelling and road transport dropped most. The accumulated surplus in services trade balance was EUR 1,013.6 million, posting a drop of EUR 537.9 million over the same period previous year. In the eleven months ofthe year 2009 the current account deficit reached EUR 114.2 million compared to EUR 1,952.8 million in the same period of 2008. Net outflow from international financial transactions in the eleven months of last year was EUR 218.0 million while the in the same period of 2008 the figures show net inflows of EUR 1,910.2 million. The banking sector sold money market instruments and increased investments in capital market instruments. Gross external debt stood at EUR 40.5 billion at the end of November last year with gross debt claims totalling EUR 30.1 billion. Slovenia's total gross external debt increased by EUR 1.2 billion by November compared to the end of2008. Net external debt was EUR 10.4 billion (28.9 percent ofestimated GDP) at the end of November and had increased by EUR 0.5 billion or 2.3 percent compared to the end of 2008. Public debt and publicly guaranteed debt increased significantly in the eleven months of last year by EUR 4.7 billion to EUR 13.8 billion (34.2 percent of estimated GDP). Private non- 17 Annual Report of SID Bank and SID Bank Group - 2009 guaranteed debt dropped by EUR 3.5 billion in the same period mostly due to deleveraging of domestic banks abroad (EUR 2.8 billion) and reached EUR 26.6 billion at the end ofNovember 2009 (65.8 percent ofestimated GDP). Net flows in the entire year of2009 were EUR 896.7 million, which is less than a fifth ofthe 2008 figure, two thirds ofthe figure linked to net household borrowing. Such downturn is mostly the result of a significant decline in corporate borrowing. The weakening ofthe year-on-year growth rate for loans to domestic customers other than banks stabilized significantly towards the end of the year, with annual growth rate reaching 2.8 percent. Harsh economic conditions pushed the share of unprofitable loans up to 2.3 percent, which is 0.5 percent more than at the end of 2008. Net household indebtedness in the year 2009 reached EUR 585.9 million, a drop of over 40 percent compared to the year before. In mostly export-oriented sectors the production activity in the eleven months of 2009 experienced the lowest average drop against the same period of 2008 (16.3 percent) while the decline in the production activity in the processing industry averaged 19.7 percent and was down at the level of2004. Construction activity declined by 18.1 percent year-on-year, which is almost the average of eleven months. Even more, there was a plunge of 39 percent in new contracts for construction of residential buildings in the eleven months of 2009 compared to the year before. In the year 2009 there were 60,951 new private cars and commercial vehicles that were licensed for the first time, which is 20.9 percent less than in 2008. The Slovenian automotive industry, which employs more than 24,500 workers and more than 100,000 people indirectly, contributes more than a fifth ofthe total Slovenia's export of goods and services and produces EUR 32,563 of value added per worker and 6 percent of GDP. The production of private cars represents about 9 percent (EUR 1.2 billion) of total export of goods and services. The production of spare parts or components (and accessories) for the automotive industry represents the value of more than EUR 1.5 billion, of which 80 percent are exported, and amounts to 12 percent of Slovenia's export of goods and services. Slovenian suppliers were hit hard by the crisis because ofthe strong connections that exist between them and the West European automotive industry. Insolvency of legal entities increased greatly in 2009. According to AJPES (Agency ofthe Republic ofSlovenia for Public Legal Records and Services), 5,252 legal entities had overdue financial obligations outstanding for more than five days in a month in the average daily amount of EUR 257 million. In 2009 (comparing December 2009 with December 2008) the number of such entities increased by 53.8 percent and the average daily amount of outstanding overdue financial obligations rose by 74.3 percent. In 2009 the average unemployment rate was 86,354 persons, which is 23,139 or 36.6 percent higher than in 2008. A total of 90,528 persons lost their job in 2009, which is 37,484 or 70.7 percent more than in 2008 Year-on-year growth of total gross wages levelled off (1.3 percent) as well as the average annual growth rate, which reached 3.5 percent nominally in the eleven months of last year (8.3 percent in 2008). With low inflation rate the 2.7 percent real increase ofgross salaries and wages exceeded the 2008 rise (2.2 percent). Inflation rate in Slovenia in 2009 was among the highest in the euro area. The consumer prices rose on average by 0.9 percent in the euro area while in Slovenia they rose by 2.1 percent; despite the relatively modest increase, it was the third largest rise of prices ofall the countries in the euro area. Core inflation, not including the prices ofenergy products, food, alcohol and tobacco, was also reduced by 2.1 percentage points (to 1.7 percent), mostly due to stagnation of the industrial products prices and lower growth of services prices. After the banks had, in the preceding three months, recorded EUR 0.6 billion of net outflow of foreign investments, they posted net inflow in the amount of EUR 356.6 million in November, the highest since April 2008. In the eleven months of last year banks recorded net outflow offoreign loans and deposits in the amount of EUR 2.8 billion. In December higher expenses from impairments and provisions in comparison with the month before brought the profit before taxation of banks (according to unaudited data) down to EUR 161 million, 47.5 percent less than in 2008. According to the latest information available, the differences between the lending interest rates for businesses and deposits in Slovenia and the average rates of the euro area remain high. The difference in lending interes rates for businesses was reduced at the end of2009 and reached the lowest level in the last ten months at 249 basis points. On the other hand, the borrowing rates exceeded the average euro area value of short term deposits by approximately 45 basis points. There was a somewhat bigger difference with interest rates for new long term deposits which were on average on the level of 130 basis points which is significantly less than the difference with active interest rates for businesses and NFIs. Slovenian interest rates were the highest in the euro area. The value of three-month EURIBOR interest rate remained on the same level in December as in the previous three months and was on average 0.71 percent. On an annual basis the value ofthe turnover on Ljubljana Stock Exchange was EUR 904.0 million, nearly 30 percent less than in the year 2008. Considering the large drop in shares trading and the practically stagnating market capitalisation of shares, the liquidity on Ljublj'ana Stock Exchange, measured as the ratio between the turnover and market capitalisation, dropped to 0.08 in the year 2009, the lowest level in the last three years. The net position of Slovenia's budget to the budget of the European Union was again positive in 2009, in the amount of EUR 155.7 million. The disbursement ofallocated funds was 73 percent and is comparable to 2006, which was, with the planned 77 percent disbursement offunds, the most successful year for Slovenia so far. Annual Report of SID Bank and SID Bank Group - 2009 18 In the eleven months of last year the national budget ofSlovenia in relation to the EU budget achieved budgetary surplus in the amount of EUR 62.0 million. In 2009 Slovenia paid EUR 439.3 million into the EU budget which is almost EUR 13 million less than it was planned in the national budget with the second amending budget. The Fitch Ratings agency confirmed the current 'AA' credit rankings for Slovenia's long-term debt in foreign and local currency (IDR); prospects are stable. The agency also confirmed the 'F1+' credit ranking for short-term operations in foreign currency and 'AAA' ranking for the general limitation on transfers of payments abroad (Country Ceiling). In their latest report Dun & Bradstreet kept Slovenia's DB2c rating, which means low level risk. In the annual report on Slovenia, Moody's Investor Service determines that the Aa2 rating of the country and government bonds with stable prospects indicate a predictable government framework of economic policy, a relatively low debt and the benefits of European Union and the euro area membership. Influences on SID Bank Operations in 2009 • Loans and guara ntees The continuation of the financial and economic crisis affected profoundly the dynamics and the structure of SID Bank's loans to the economy. The year 2009 was marked by extreme reluctance of the banking sector towards providing corporate financing; as a result, loans to businesses dropped and were limited to short-term transactions. Banks became considerably more conservative in assessing risks and tightened their credit insurance requirements. Enhanced risk monitoring and risk assessment was also reflected in the evaluation of the risks in financing costs which, together with limited sources, contributed to the increase in interest margins above the reference interest rates. In 2009 SID Bank, aiming to help alleviate the credit crunch and provide the much-needed long term finance in support of new, development-oriented projects in Slovenian economy, secured a hefty EUR 1.5 billion worth of long-term earmarked funds and extended it to the Slovenian corporate sector through commercial banks and direct loans. Also, the Bank carefully monitored utilisation of funds in accordance with the contractually agreed dynamics and criteria, and carried out monitoring offinancial institutions and companies. In its efforts to mitigate the effects of the financial crisis, SID Bank, acting on behalf and for the account of the state, met the technical requirements to established two guarantee schemes in 2009, one for enterprises and the other for individuals (cf. point 6.2.7). Both schemes have facilitated access to funding of commercial banks, as borrowers were now able to obtain a guarantee of the Republic of Slovenia for a part of their loan-related obligations, thereby lowering the requirements for credit insurance by commercial banks. • Treasury and borrowing The global financial crisis pushed the key interest rates of central banks worldwide to all time low in 2008, and the trend continued, at full force, in 2009. Following the bankruptcy of Lehman Brothers in September 2008 and the bankruptcies of Iceland's three biggest banks at the end of the same year, the crisis plummeted to new depths and hit the bottom at the end of the first quarter 2009. Mistrust among economic agents continued to pervade financial markets, which led to an almost complete paralysation of both the money market and the market od syndicated loans. At the beginning of 2009, the only way to access fresh funds was in international capital markets, and the issuers were mainly countries with higher credit ratings and transnational organisations and banks that issued bonds with state guarantees. SID Bank was not significantly exposed to changed (reduced) euro interest rates due to the composition of its Statement of Financial Position. Variable-rate investments and variable-rate liabilities linked to Euribor take up a significant portion of assets and liabilities, respectively. SID Bank conducted most of its transactions in euro, and most of the Statement is also denominated in euro. The changes in currency markets had no marked effect on SID Bank as its open foreign currency position was cut back. • Insurance against non-marketable risks In 2009 SID Bank saw continued growth in its business performed on behalf and for the account of the Republic of Slovenia in the field of investment insurance as well as short-term and medium-term export credit insurance, extending its support largely to exports and investments to the CIS markets and the markets of South East Europe. Russia remains the leading market for medium-term export credit insurance although in 2009 the country, like all other states, was faced with the effects of the global crisis. The political situation in Russia is estimated as stable, though its stability may be compromised in the future by a further deterioration in the standard of living which may hit the population if the economic recovery is slower than expected. Russia's anti-crisis measures in 2009 were judged by the International Monetary Fund as appropriate and timely, and the country expects the econony to recover in 2010 mainly due to a re-start ofthe privatization process expected to restrain the budgetary deficit. Continuation ofthe crisis led to a decline in domestic demand for products and services, causing the production and sales volumes to drop, and negatively affected the volume of investment insurance provided by SID Bank. Nevertheless, in 2009 SID Bank conducted the first insurance of an investment project in Russia, which is related to ownership shares and non-shareholder loans. Exports 19 Annual Report of SID Bank and SID Bank Group - 2009 transactions and investments insured in Russia chiefly cover construction sector, exports of high technology equipment, and logistics. Exporters showed no increased interest for medium-term export credit insurance to the markets of former Yugoslavia; the trade in goods was largely related to exports of goods on short-term payment, these primarily covered by SID Bank's subsidiary, PKZ (insurance of marketable risks), and in the face of the crisis the volume of business insured in 2009 was lower than in 2008. The low demand for medium-term export credit insurance was exceeded by the demand for insurance of outward investments. To a large extent, the situation was triggered by a relatively unstable political environment which continues to characterize the Balkan countries despite their moving closer to the EU. As a result, risk exposure for investment insurance in the area ofthe Balkans is increasing, with the majority ofinvestments insured being placed in Serbia and Bosnia and Herzegovina. Influence on the operations of other companies within SID Bank Group • PKZ Owing to the characteristics ofcredit insurance, national economic conditions in Slovenia and in the markets where PKZ clients perform their business activities have a decisive influence on the operations of PKZ. The most important economic indicators include the scope of economic activity (economic growth, exports and imports of products and services), inflation, liquidity (number ofinsolvency cases and payment incidents) and the trend observed in corporate credit ratings in individual markets. PKZ insures risks in a number of countries. However, its operations are most sensitive to the economic situation in the countries that form the largest part of the total PKZ portfolio in terms of premiums, business insured or exposure. According to, and in the order of, the above mentioned criteria, PKZ main markets include Slovenia as the most important market, followed by Germany, Italy, Croatia, Russia, Austria, France, and the Netherlands. All these countries experienced negative economic growth in 2009. Slovenia's total exports decreased compared to 2008, considerably also to the above mentioned countries. In all ofthe above, the number of bankruptcies rose in 2009 and the liquidity situation worsened, much like in most other countries where PKZ insures risks. The economic crisis that spurred the slowdown in Slovenia's economic activity in the domestic market and, more so, in exports, was also reflected in a decline in business insured by PKZ. Although PKZ managed to retain most of its clients, these clients' business volume dropped significantly, leading to a weakening of potential for insurance. In part, lower volume of business insured is attributable to a deteriorating risk quality and the number of insurable risks (deterioration in risk credit rating for most markets and industries). At the same time, tightened liquidity situation led to a significant increase in claims and lowered the recoveries forecasts. Such economic conditions in Slovenia and PKZ's most important markets resulted in lower business insured by PKZ, lower premium and a considerable increase in claims volume, both factors pushing PKZ's the result from the technical account into the negative range. Ofall the companies in the Group, PKZ is most exposed to the effects ofthe economic crisis and it is also PKZ's operations that are the first to feel and show the full impact of the crisis. PKZ is a specialized credit insurance company, dealing exclusively in insurance of short-term credits to private-law entities against commercial and non-commercial risks. This class of insurance was most severely affected by the crisis: on the one hand, the decline in economic activity led to a reduction in business insured, and, on the other hand, it increased the probability of claims due to lower liquidity of companies. Both led to a negative operational result of PKZ. Other classes of insurance are not as exposed to the effects of the crisis in the same manner and the same intensity in both components (premiums and claims) so their result was not so severely affected. As per persons insured, PKZ is a local insurance company, operating mainly in the Slovenian market. Its portfolio structure by risk (country, industry) depends on the structure of sales of its clients (Slovenian exports and domestic sales). In order to maintain an appropriate portfolio volume and long-term relations with its clients, as well as to ensure its long-term position on the market, PKZ must closely observe these trends and act accordingly, of course in compliance with the risk management regulations, also concerning the accumulation of risks. The specifics of its insurance class, dependence upon the given market and the relatively small size, along with significantly worse economic conditions in PKZ's most important markets were the factors that contributed to decrease to the result for the year 2009. • PRO KOLEKT Group In 2009 the worsening of the economic and financial crisis led to increased payment risk which fuelled the demand for the services of the PRO KOLEKT Group. Liquidity problems are most pronounced in the economies of South East Europe, where large importers of Slovenian goods and services operate and where Slovenia's companies find the majority of its _20_ Annual Report of SID Bank and SID Bank Group - 2009 business partners. In 2009 the PRO KOLEKT Group saw increased demand in SEE markets and rising demand for services in the Italian market. In 2009 all companies of the PRO KOLEKT Group reported a rise in the number of applications for debt collections and rise in the value of debt collections assumed. The number of new cases grew mainly in the first half of 2009, whereas the second half of the year was marked by a rise in individual debt collection cases. Thin overall liquidity makes debt collection much more demanding and in order to be successful, collection agents need to invest much more knowledge, be more resourceful and creative in their activities. • PRVI FAKTOR Group Harsh economic climate in South East Europe also affected the operations of PRVI FAKTOR Group. In 2009 all markets where the companies of PRVI FAKTOR Group are based experienced a significant drop in GDP and, more importantly, a contraction of industrial production and exports. The last two categories had the greatest effect on the business volume of PRVI FAKTOR Group, which was lower in 2009 also due to a decline in the creditworthiness of debtors. The operations of PRVI FAKTOR Group were also affected by deteriorating economic conditions in the region. In Croatia, the government's efforts were centred on the financing ofexternal debt. Contraction in industrial production led to a fall in government liquidity, forcing the government to impose a "crisis tax" in July 2009 to fight the debt problem. Low lending activity of banks enabled other financial market participants, provided they had no liquidity problems of their own, to achieve their set goals despite the poor economic climate. PRVI FAKTOR, Zagreb, managed to do just that. In Serbia the economic environment was relatively stable despite the decline in industrial activity. Serbia's National Bank kept the exchange rate of the dinar relatively stable whereas the Serbian government managed to sign an agreement enabling the country to conduct duty-free trade with EU member states, at the same time looking to secure new sources of funding to cover the budget and finance small and medium-sized enterprises and infrastructure. PRVI FAKTOR Beograd operated within these stable conditions. Acquiring access to financial sources provided by international financial institutions was the primary task of the government of Bosnia and Herzegovina. Deteriorating economic conditions were reflected in an increase in unemployment figures, pushing the unemployment rate to over 40 percent at the end of 2009. The situation had a negative influence on the operations of PRVI FAKTOR Sarajevo, which was his harder by the crisis than the other companies of the PRVI FAKTOR Group due to a slow economic recovery and the resultingly low volume of business operations. Annual Report of SID Bank and SID Bank Group - 2009 21 5. DEVELOPMENT STRATEGY OF SID BANK AND SID BANK GROUP The Action Strategy of SID Bank for the period up to 2013 reflects the changed conditions resulting from the global financial and economic crisis and also considers other factors which have a significant influence on SID Bank's operations. To this aim, three scenarios (pessimistic, realistic, and optimistic scenario) were developed on the basis of an assessment ofthe development ofkey factors by the year 2013. The concrete activities which SID Bank intends to carry out by the year 2013 as part of its Action Strategy are based on the realistic scenario, although the company has also prepared stress scenarios including impact assessments and a set of measures prepared in advance. An integral element of the Action Strategy is SID Bank's Risk Profile, which is the basis for risk management, mainly at strategic level. In developing the Action Strategy, the Bank considered the institutional framework within which SID Bank operates as a specialized export and development bank, institutionalised (through the ZSIRB) operating principles and areas ofwork and the established business model and modes of operation. Mission We develop, promote and provide innovative, long-term financial services designed to complement financial markets for the sustainable development ofSlovenia. Vision Through dedication to its mission, acquisition of new knowledge and skills and development of optimal solutions tailored to the needs of Slovenian companies and banks, SID Bank will become a main Slovenian promotional institution by the year 2013 whose comprehensive range of services complementary to the financial market and the integrating role in the field of Slovenian development financing will continue to be an important factor in Slovenia's economic growth. Using development promotion instruments, SID Bank intends to nearly double its total assets by the year 2013, while at the same time maintaining the Bank's financial stability. By assisting clients in all phases of their business transactions, supporting development projects, ensuring safety in internationalization of operations and positioning itself as a one-stop-shop for modern financial services, SID Bank will encourage Slovenian companies to exploit the opportunities opening up in the international economic and development cooperation. The Bank will strive to achieve its objectives largely through the provision of long-term financing and insurance facilities. Transparent, efficient and socially responsible SID Bank operations, sensitive to the needs of its employees and customers, in particular SMEs, performed at a high technological level and to high quality standards, and implementation of the objectives of Slovenia's development strategy will be the framework on which SID Bank will base its efforts - to be seen as an effective and valued development partner. Values SID Bank's corporate values, a set of basic principles guiding the Bank's operations, which employees should embrace and demonstrate in their daily work, relations with colleagues and contacts with customers and other interest groups, include: - the ability to identify and satisfy the needs ofcustomers and the environment, - responsibility and sustainable development, - loyalty and commitment, - openness and creativity, - professionalism and teamwork, - trustworthiness and transparency, - cooperation and efficiency. Strategy The core of SID Bank's future operations will be long-term promotion and integration, aimed largely at raising the innovation and competitive ability of Slovenia's economy, effective protection and development of the environmental, energy, infrastructure and other components of sustainable development and at providing efficient and high-quality finance for sustainable development. In this way, SID Bank wishes to become the hub and a pillar ofthe new Slovenian development model. 22 Annual Report of SID Bank and SID Bank Group - 2009 Market aspect From the market aspect, SID Bank will, in the period up to 2013, actively develop its range of support instruments in line with the "one-stop-shop" principle (supporting the companies through their entire life cycle), introduce new products and financial instruments (mainly in promotional and development financing), adapt these to the needs of the economy and use them, along with advisory services for clients, in the current and emerging business areas. The development of new products and business operations will be based on identified market gaps, positive externalities, and value added. SID Bank will continue to pursue its above-average lending and investment growth, striving to achieve high growth rates mainly in new products of development banking. Also, SID Bank intends to extend an increasingly larger share of funds available to small and medium-sized companies (SMEs) and their projects. For SID Bank, inclusion in the EU funding schemes and the use of these funds in conjunction with integrated budgetary resources through promotion and development funding instruments, coupled with an appropriate pricing policy and implementation of state aid schemes, will be seen as important factors in strengthening SID Bank's position as a main Slovenian development institution for financing and promotion and helping the Bank integrate the current fragmented development-support system and optimize its functions. Within its national economic system, SID Bank will continue to conduct anti-cyclical activities and strive to obtain the knowledge and skills to carry out other forms ofintervention, taking due care not to let the anti-crisis measures shade its development-oriented activities. In defining its financing conditions, the Bank will, in the future even more than so far, pay close attention to the impacts of individual projects or programs on sustainable development, that is to their social benefits. As regards individual business areas and associated companies, particular emphasis will be placed on strengthening direct lending to non-residents and project financing and the Bank will strive to achieve at least 15 percent insurance coverage of exports at SID Bank Group's level. The key orientation in the field of internationalization of Slovenia's economy will be to ensure competitive funding comparable in terms to international sources offinance and to support the efforts of Slovenian economy to enter new markets, thereby reducing its dependence on traditional export destinations. One ofthe key strategic goals of PKZ in the next strategic period is to retain its position as the leading regional credit insurance company by maintaining the largest market share in the domestic market; CMSR's priority goal is to expand its international development cooperation operations in terms ofvolume and area ofactivity. Also, SID Bank will continue to expand its network of associates with an aim to provide Slovenian companies abroad with a comprehensive range of services, and will continue the construction ofa South East Europe Information Centre. Financial aspect From the financial aspect, SID Bank will strive to retain the same international rating as the rating of the Republic of Slovenia, keep the Bank's capital adequacy at the set internal capital adequacy ratio and hold its capital valuation at the grade of risk-free long term investments in the Republic of Slovenia. In due consideration to the tightened operating conditions brought about by the financial and economic crisis and continued above-average business volume growth, SID Bank will place greater emphasis in the period up to 2013 on ensuring high-quality investments on the one hand and improving bad debt management practices in SID Bank Group and strengthening the control over the risks of individual investments on the other. Additionally, the Bank will strive to secure appropriate long-term sources of funding to achieve planned business growth (in terms of volume and conditions). In export credit and investment insurance against non-marketable risks the financial aspect relates to pursuing a key strategic objective, namely to meet the minimum rate of return (threshold rate) and retain the first-class quality ofinsurance instruments. Internal aspect As regards SID Bank's internal processes, the key strategic orientations will be the following: to continue the development ofinformation technology and support in line with the adopted information system development strategy; to ensure comprehensive and efficient risk management; to further develop the corporate culture of the Bank by promoting the ethical values and high professional standards; to ensure the needed organizational and process dynamics through continuous adaptation to global changes; and to implement further optimization of business processes. A particular challenge will be to maximize the synergies within SID Bank Group, adapt the Group's corporate culture and HR policy to effectively respond to the challenges arising from the Group's expansion and rapid social development, and to focus in the development of business and other information on implementation of a comprehensive business intelligence system, which includes setting up a data warehouse and CMR and MIS systems as well as upgrading of the credit-rating-based decision making process. Annual Report of SID Bank and SID Bank Group - 2009 23 Learning and development aspect The key strategic objectives associated with the learning and development aspect relate mainly to exploitation of rich Slovenian and international connections for transfer of knowledge, experience and contemporary trends in insurance as well as promotional and development financing, in particular with regard to acquisition and pooling of comprehensive expertise that will enable the Bank's employees to conduct, quickly and effectively, the Bank's new and existing activities. The latter has been recognized as an important goal by several associated companies, in particular CMSR, which will develop towards a think-tank institution specializing in international development cooperation. Additionally, SID Bank will proceed with its implementation ofthe "Learning Organisation and Knowledge Management" and strive to translate the principles of sustainable development into the internal operations of the Bank. Also, the Bank will attempt to modify its innovation management system and pay particular attention to communications with external and internal stakeholders, in line with its special Communications Strategy. Strategic and operational business process In accordance with its strategic and operational system in place SID Bank will in 2010 run regular checks, at least quarterly, of the performance of planned activities undertaken to achieve long-term strategic goals in 2010 (annual operational plan) and consequently the Action Strategy; it will take corrective measures, whenever necessary, and promptly amend the Action Strategy when the change in conditions, in particular external conditions, is so significant that insistence on keeping the text unchanged would be unreasonable or even detrimental to the interests ofthe Bank. As regards its strategic business process, SID Bank will pay particular attention in 2010 to cascading strategic goals and will enhance its focus on delivering top priorities for a given period as well as ensuring a more effective way to manage new initiatives. Annual Report of SID Bank and SID Bank Group - 2009 24 6. BUSINESS OPERATIONS OF SID BANK AND THE SID BANK GROUP IN 2009 6.1. Financial Review of the Operations of SID Bank and the SID Bank Group The operations and business results ofSID Bank and the SID Bank Group in the year 2009 were profoundly affected by the financial and economic crisis. Through its participation in the anti-crisis measures, SID Bank extended corporate lending through commercial banks and as direct loans to clients other than banks. The total assets ofthe SID Bank Group at year-end exceeded EUR 3 billion, thereby meeting the planned objectives for the year 2009. Owing to the changed business conditions, higher growth and the effects of the crisis, the net profit of SID Bank for the year 2009 is slightly below the plan, mainly due to a rise in impairment expenses. The SID Bank Group ended the year 2009 with a loss that is largely attributable to the loss incurred by its subsidiary company, PKZ. All the other companies of the SID Bank Group ended the year with a net profit. In the continuation we present the Statement of Financial Position and the Statement of Comprehensive Income for 2009 for SID Bank and the SID Bank Group. The consolidated statements of the SID Bank Group include PKZ according to the full consolidation method and the PRVI FAKTOR Group according to the proportional consolidation method. Owing to its insignificant impact on the financial position and business results of the SID Bank Group, the PRO KOLEKT Group is not included in the consolidation. Statement of Financial Position Summary as at 31 December 2009 - Assets SID Bank SID Bank Group in EUR as % of Index in EUR as % of Index thousand total 09/08 thousand total 09/08 Available-for-sale financial assets 50,051 1.7 81.6 72,390 2.3 91.1 Loans to banks 2,292,668 75.8 151.2 2,306,883 71.7 150.0 Loans to clients other than banks 662,284 21.9 132.4 784,616 24.4 120.1 Tangible fixed assets and intangible long-term assets 4,836 0.2 91.0 5,923 0.2 90.6 Long-term investments in equity of SID Bank Group companies 7,712 0.3 100.0 419 0.0 100.0 Other assets 7,343 0.2 927.1 45,402 1.4 187.5 - reinsurers' assets and receivables form insurance business - - - 32,228 1.0 159.7 Total assets 3,024,894 100.0 144.9 3,215,663 100.0 139.7 Investments of contingency reserves 125,428 110.8 125,428 110.8 Investments from IREP 7,627 113.7 7,627 113.7 As at 31 December 2009, total assets ofSID Bank stood at EUR 3.0 billion, showing an increase of 44.9 percent compared to 31 December 2008. Contingency reserves for insurance performed on behalfand for the account of the state and the corresponding liabilities rose by 10.8 percent in 2009 to EUR 125.4 million. The increase in contingency reserves of EUR 10 million is related to additional contingency reserve funds which the Ministry of Finance of RS transferred to SID Bank in December 2009. The Ministry of Finance of RS transferred a further EUR 0.5 million for investments from IREP, which rose by a total of EUR 0.9 million in the year 2009. In 2009 the increase in the total assets of SID Bank was, like in the previous years, a result of intensive financing activities. Loans to banks (including deposits totalling EUR 32.5 million) went up 51.2 percent, and loans to clients other than banks saw a 32.4 percent upturn. Loans to banks represent 75.8 percent of total assets, their share as at 31 December 2008 was 71.7 percent. The composition ofassets ofthe SID Bank Group is similar to the composition ofassets ofSID Bank. Annual Report of SID Bank and SID Bank Group - 2009 25 Statement of Financial Position Summary as at 31 December 2009 - Liabilities SID Bank SID Bank Group in EUR thousand as % of total Index 09/08 in EUR thousand as % of total Index 09/08 Deposits 246,936 8.2 656.9 246,936 7.7 656.9 Loans 1,899,056 62.8 116.2 2.020,460 62.8 112.7 Debt securities 547,142 18.1 218.7 547,142 17.0 218.7 Provisions 4,382 0.1 191.4 56,695 1.8 160.8 - obligations from insurance contracts - - - 50,295 1.6 162.8 Other liabilities 5,396 0.2 179.9 10,674 0.3 162.9 Equity 321,982 10.6 200.3 333,726 10.4 185.5 Total liabilities 3,024,894 100.0 144.9 3,215,633 100.0 139.7 Contingency reserves 125,428 110.8 125,428 110.8 IREP 7,627 113.7 7,627 113.7 SID Bank's loans rose by 62.8 percent, totalling EUR 1.9 billion at the end of2009. Debt securities, including the SI01 bond issued at the end of 2008 and at the beginning of 2009, with a total value of EUR 500 million, and promissory notes and registered bonds issued in 2009 make up 18.1 percent oftotal liabilities. The Bank's increase in equity of 100.3 percent resulted mainly from the capital increase implemented in 2009 in total amount of EUR 160 million. In view of the dominating influence of SID Bank in the SID Bank Group and the specific nature of the Group, and considering the inter-company relations within the Group, the total assets ofthe SID Bank Group were only 6.3 percent higher than those ofSID Bank, standing at EUR 3.2 billion end ofyear. The composition structure ofassets and liabilities in the consolidated financial statements of the SID Bank Group is therefore very similar to that of the Statement of Financial Position ofSID Bank. Statement of Comprehensive Income Summary for 2009 SID Bank SID Bank Group in EUR Index in EUR Index thousand 09/08 thousand 09/08 Net interest 21,502 150.3 28,471 143.7 Net non-interest income 6,939 127.8 8,934 100.9 Net income from insurance - - 2,078 32.9 Operating costs -6,372 110.3 -11,852 101.3 Impairments and provisions -20,891 190.7 -34,152 177.2 - change in insurance contract liabilities - - -8,618 229.1 Pre-tax profit/loss 1,178 39.2 -6,521 162.8 Corporate income tax -230 97.5 1,137 99.0 Net profit/loss of the year 948 34.3 -5,384 188.5 Net interest totalled EUR 21.5 million in SID bank rising 50.3 percent over 2008, mainly as a result of strong growth in loans. Net non-interest income of SID Bank was EUR 6.9 million, the 27.8 percent increase from the 2008 levels largely attributable to higher realized net fees and commissions. Income from net fees and commissions from loans, guarantees and treasury transactions was up 96.6 percent year-on-year, contributing EUR 1.6 million to the total net non-interest income. Income from dividends of SID Bank's subsidiaries PKZ and PRVI FAKTOR, Ljubljana, was EUR 2.5 million in 2009, compared to EUR 2.3 million in 2008. Income from the reimbursement SID Bank receives from the state for performing transactions on behalfand for the account ofthe Republic ofSlovenia, totalled EUR 2.3 million (in 2008: EUR 2.1 million). The largest share in the structure of net income generated by the SID Bank Group is taken up by net interest, which totalled EUR 28.5 million in 2009 and was up 43.7 percent from the previous year. At 72.1 percent, however, the share of net interest as of net income for the SID Bank Group was considerably lower than that of SID Bank. Net income from insurance dropped significantly in 2009: it was EUR 6.3 million in 2008 and EUR 2.1. million in 2009. The share of net income from insurance as of net income of the SID Bank Group is also down from the previous year: in 2009 it was 5.2 percent while in 2008 its value was 18.0 percent. In 2009 SID Bank continued its successful management of operating costs. The operating costs ofthe SID Bank Group totalled EUR 6.4 million and were 10.3 percent higher compared to 2008, due to a growth in business volumes. Costs of services rose by 23.7 percent, and costs of material were up 24.3. percent. The increase in costs ofservices was largely due 26 Annual Report of SID Bank and SID Bank Group - 2009 to higher costs of advisory services. Labour costs went up 5.9 percent as a result of increased recruitment carried out in 2009 to cope with the expansion of SID Bank's activities. The number of SID Bank employees rose from 76 at the end of 2008 to 87 at the end of 2009 (up by 14.5 percent). In the structure of operating costs, labour costs accounted for 61.2 percent (in 2008: 63.8 percent), costs of services 26.5 percent, depreciation and amortization 10.1 percent, and material costs 2.2 percent. The percentage ofoperating costs as ofassets lowered from 0.4 percent in 2008 to 0.3 in 2009. Efficient cost management was also reflected in the ratio between the operating costs and net income (CIR), falling from 29.3 percent to 22,4 percent. The operating costs ofthe SID Bank Group totalled EUR 11.9 million in 2009 and were 1.2 percent higher compared to 2008. Labour costs maintained the 2008 level while the material and services costs recorded a rise of 3.4 percent. Operating costs as ofassets lowered from 0.6 percent in 2008 to 0.4 percent in 2009. SID Bank's net expenses from impairments and provisions totalled EUR 20.9 million (EUR 11.0 million in 2008). The rise in expenses from impairments is attributable to the growth in loans given, changes in the industry-based structure of loans to clients other than banks (automotive industry), and additional impairments of loans required due to the effects ofthe financial crisis. For the SID Bank Group, expenses from impairments and provisions totalled EUR 34.2 million at the end of 2009; the figure includes changes in insurance contract liabilities of EUR 8.6 million. High expenses from impairments and provisions in the SID Bank Group were largely attributable to the effects ofthe financial and economic crisis. In 2009 pre-tax profit of SID Bank amounted to EUR 0.9 million, whereas the SID Bank Group reported a loss in the amount of EUR 5.4 million related to the loss made by its subsidiary, PKZ. All the other companies of the SID Bank Group report a net profit for the year 2009. Key figures of SID Bank and SID Bank Group in EUR thousand 2007 2008 2009 SID Bank Group SID Bank Group SID Bank Group Statement of Financial Position Summary Total assets 1,248,717 1,437,034 2,087,717 2,301,654 3,024,894 3,215,633 Loans of banks 1,069,125 1,211,554 1,633,867 1,792,105 1,799,948 1,921,338 Deposits from non-bank sectors 32,880 32,878 22,376 22,376 91,870 91,870 Equity 107,554 127,590 160,757 179,928 321,982 333,726 Loans to banks 915,674 922,927 1,512,381 1,534,606 2,292,668 2,306,883 Loans to clients other than banks 276,822 423,099 500,183 653,075 662,284 784,616 Impairments of financial assets measured at amortised cost, and provisions 16,530 21,324 26,414 33,220 47,424 56,081 Off-balance-sheet operations (B1 to B4) 176,304 187,324 162,921 169,257 566,747 580,129 Statement of Comprehensive Income Summary Net interest 8,737 13,021 14,308 19,809 21,502 28,471 Net non-interest income 3,834 6,600 5,428 8,853 6,939 8,934 Net income from insurance - 6,793 - 6,317 - 2,078 Labour, general and administrative costs (5,240) (10,036) (5,161) (10,843) (5,729) (10,971) Depreciation and amortisation (562) (746) (617) (860) (643) (881) Impairments and provisions (2,678) (7,382) (10,955) (19,272) (20,891) (34,152) - change in insurance contract liabilities - (2,803) - (3,761) - (8,618) Pre-tax profit or loss 4,091 8,250 3,003 4,005 1,178 (6,521) Corporate income tax (475) (1,514) (236) (1,149) (231) 1,137 Net profit/loss for the year 3,616 6,736 2,767 2,856 948 (5,384) Shares - number of shareholders 85 1 1 - number ofshares 932,354 1,456,808 3,121,741 - nominal value per share ( in EUR) 96.10 96.10 96.10 - book value ofa share (in EUR) 117.69 111.76 103.75 Annual Report of SID Bank and SID Bank Group - 2009 27 Selected indicators* Equity: - capital adequacy** 12.8% 8.6% 11.1% 9.9% 16,7% 15,7% Quality assets ofthe statementoffinancial position and contingent liabilities: - impairments of financial assets measured at amortised cost, and provisions for contingent liabilities/classified on-balance-sheet items and classified off-balance-sheet items 1.36% - 1.19% - 1.46% - Profitability: - interest margin*** 0.93% 1.10% 0.93% 1.06% 0.87% 1.03% - financial intermediation margin 1.34% 1.65% 1.29% 1.53% 1.15% 1.50% - return on assets before tax 0.44% 0.70% 0.20% 0.21% 0.05% - - return on equity before tax 4.21% 6.67% 2.48% 2.60% 0.53% - - return on equity after tax 3.72% 5.45% 2.28% 1.86% 0.42% - Operating costs: - operating costs / average assets 0,62% 0,91% 0,38% 0,63% 0,26% 0,43% - operating costs / net income 46.15% 40.82% 29.28% 33.46% 22,40% 28,57% Liquidity: - liquid assets / short-term deposits to non-bank sectors 1.42% 1.43% 2.49% 1.57% 1,04% 6,19% - liquid assets / average assets 0.02% 0.01% 0.03% 0.02% 0.02% 0.13% Number ofemployees ****_69_241_76_287_87_306 * The indicators are calculated following the methodology ofthe Bank ofSlovenia. ** The computations of capital adequacy for 2007 as well as for 2008 and 2009 considered, for SID Bank: investment from own SID Bank assets, investments from sources backed by the guarantees of the Republic of Slovenia and additionally, for the SID Bank Group, 50 percent of investments made by the PRVI FAKTOR Group. *** The computations of financial intermediation margin for the SID Bank Group do not consider income from PKZ insurance business. **** The figure also includes all employees ofthe PRVI FAKTOR Group, PRO KOLEKT Group and CMSR. Events after the statement of financial position date There were no business events after the statement of financial position date that would influence the separate and consolidated financial statements of SID Bank and SID Bank Group. However, the following business events were important for SID Bank: Activities for the issuing of Eurobond on international capital market, which is expected to be realized in April 2010, are taking place in SID Bank. On its regular session dated 15 January 2010, the Supervisory Board ofSID Bank consented to increase in capital of the subsidiary PKZ in the amount ofEUR 4,2 milion. General Meeting of PKZ confirmed the increase in capital in January 2010, which has been paid-in since. On its regular session dated 17 March 2010, the Supervisory Board of SID Bank allocated the profit from 2009 in the amount of EUR 225 thousand to other profit reserves, in accordance with the 3rd paragraph of Article 230 of The Companies Act. After the statement of financial position date, the company Vegrad d.d. stated publicly that it is in financial difficulties. SID Bank Group has exposure towards Vegrad d.d. in the amount of EUR 4,7 milion due to issued service guarantees, in the amount of EUR 5,0 milion due to repurchased receivables and in amount of EUR 2,8 milion due to credit insurance. Annual Report of SID Bank and SID Bank Group - 2009 28 6.2. Review of SID Bank Operations by Business Activity 6.2.1. Loans and Guarantees In 2009 SID Bank used the financial instruments mainly to support economic, structural, social and other policies in the areas specified in Article 11, point 1, of the ZSIRB and in accordance with the provisions of the ZZFMGP, with special emphasis on the following: • international business transactions and international economic cooperation, • economic incentives, with particular emphasis on small and medium-sized enterprises, and entrepreneurship, • research and development, • preserving the environment and energy efficiency, • regional development, • commercial and public infrastructure. Also in 2009, SID Bank's financing activities focused on extending loans in support of international business transactions, mainly provided under indirect exporter financing schemes, through banks and other financial institutions, in particular by refinancing loans and co-financing international business transactions. In addition, 2009 saw an expansion in the funds intended for project financing associated with entrepreneurship, research and development, protecting the environment and energy efficiency, infrastructure, and similar areas. With a view to meeting the required geographic distribution, leverage and other eligibility criteria, the funds were extended to final beneficiaries largely through commercial banks. As of 1 June 2009, the Loans and Guarantees reorganized into two independent departments - the Department of Export and Project Financing and the Department of Promotional and Development Financing. The field of promotional and development financing comprises the development and marketing functions of banking products and services aimed at providing promotional and development financing for residents, mainly for projects associated with entrepreneurship, research, development and innovations, environment conservation, efficient energy use, regional development, and infrastructure, which includes products with elements of state aid and grants (i.e. financial engineering), advisory services and certain agency services for the Republic of Slovenia. Export and project financing comprises the development and marketing functions of banking products and services aimed at providing export and project financing for residents and non-residents, focusing mainly on the projects of Slovenian exporters abroad, their international business transations and support to internationalisation, as well as certain agency services for the Republic of Slovenia. Within the scope of both fields, the financing facilities offered by SID Bank included loans, purchase of receivables, project financing, participation in syndicated loans, purchase of assets, and unfunded risk taking, in the provision of which SID Bank actively cooperated with most Slovenian banks. Business results in the field offinancing Outstanding loans of SID bank as at 31 December, by year, in EUR million The Bank's outstanding loan portfolio at the end of 2009 was EUR 2,922.4 million and was up 49.7 percent from the end of 2008 when it stood at EUR 1,952.2 million. The share of loan portfolio in total assets of SID Bank was 97.7 percent. Annual Report of SID Bank and SID Bank Group - 2009 29 The growth of SID Bank's loan portfolio in 2009 mainly reflects the Bank's participation in the anti-crisis measures. Throughout the year the Bank ensured EUR 1.1 billion to be extended to businesses through commercial banks and EUR 409.5 million in direct loans to clients other than banks. Despite the effects ofthe financial crisis the growth ofSID Bank financing enabled the banking sector to achieve a similar financial volume that had been loaned to the corporate sector in 2008. The annual growth ofall loans extended to the Slovenian corporate sector recorded a drop of 1 percent over the year 2008 whereas the share of SID Bank financing in all loans extended to the Slovenian corporate sector in 2009, directly or through commercial banks, reached 14.6 percent (in 2008: 5.9 percent). Portfolio structure • By maturity The maturity structure of SID Bank loan portfolio confirms the orientation of SID Bank towards the activities specified in the ZZFMGP and ZSIRB; the share of long-term financing amounted to 97.0 percent of SID Bank loan portfolio at the end of 2009, with short-term loans taking up a low 3 percent of the total loan portfolio. Long-term loans went up 4.9 percentage points over the previous year. Most loans extended in 2009 were long-term in nature. In 2009 loans to clients other than banks at the entire banking system level were mostly short-term; as a result, SID Bank's year-round provision of earmarked long-term funds through commercial banks contributed significantly to the alleviation of the credit crunch and provision of the much need long-term funds to the corporate sector. • By borrower In 2009 commercial banks remained the most important SID Bank's partner, their share in SID Bank loan portfolio reaching 77.3 percent, compared to 74.4 percent in 2008. The demand for cofinancing and direct financing by SID Bank of projects by Slovenian exporters abroad, their international business transactions as well as demand for financial support to internationalization and development and environmental projects of the Slovenian economy rose steadily throughout 2009, showing a 32.4 percent increase for loans extended to clients other than banks compared to the year 2008. Despite a significant growth in loans to clients other than banks, this segment only took up 22.7 percent of the total loan portfolio as at 31 December 2009 (in 2008: 25.6 percent). The share of loans to non-residents in SID Bank's loan portfolio remains a low 6.1 percent, as most placements were performed indirectly, through commercial banks. Compared to 2008, the share of loans to non-residents went down 1.1 percentage points. Oustanding amounts ofSID bank by maturity and borrower as at 31 December 2009 ■ Banks • By risk The sizeable increase in the volume of direct financing extended to Slovenian exporters, their buyers and investors abroad in 2009 did not affect the high quality of the Bank's loan portfolio as the assets classified in classes lower than A and B only take up 2.4 percent of SID Bank's loan portfolio (in 2008: 3.0 percent). For more information on portfolio classification and risk in accordance with IFRS see point 6.4. Annual Report of SID Bank and SID Bank Group - 2009 30 Income from SID Bank's financing In 2009 SID Bank generated 78.7 million in interest income from financing, a 4.4 percent rise on the year before, despite the negative trend observed in the Euribor reference interest rates in the European market throughout the year. Income from fees and commissions rose 61.8 percent on the year 2008 and totalled EUR 1.9 million largely as a result of loan portfolio growth. Guarantees Guarantees are a welcome supplement to the range of services SID Bank provides in the field of financing and insurance. In issuing guarantees, SID Bank is focused on providing support for the international business transactions and activities that are consistent with the purposes set forth in Article 11, point 1, of the ZSIRB. SID Bank uses the following forms of guarantees: • Service and payment guarantees • Unfunded risk sharing Guarantees and unfunded risk sharing as at 31 December 2009 80 60 40 72,2 52,5 20 0 38,8 2007 2008 2009 The balance of issued guarantees and unfunded risk sharing arrangements as at 31 December 2009 amounted to EUR 38.8 million, posting a 46.3 percent decrease over the year before as a result of the decline in service and payment guarantees. The 2009 volume of newly issued guarantees was EUR 16.0 million (in 2008: EUR 51.9 million). The negative trend was also observed in liabilities arising from unfounded risk sharing, which went down 11.2 percent over the year 2008. New developments in 2009 concerning loans and guarantes The year 2009 brought about the following new developments in the field of investments: • SID Bank participated in the measures aimed at containing the crisis, especially by increasing the amount of funds placed through commercial banks and by taking a more active approach to direct financing and co-financing of companies. • Benefiting from European Investment Bank (hereinafter EIB) funding, SID Bank was granted EUR 380 million and at the end of 2009 provided, through commercial banks, three credit lines for long-term finance particularly aimed at: - small and medium-sized companies, in the amount of EUR 150 million; - infrastructure investments mounted by public sector authorities and companies providing municipal utility services (or public services at municipal level) for infrastructure projects in the amount of EUR 63.5 million; - investments in the field of environment protection and environmental investments, in the amount of EUR 35 million. • Part of the funds (EUR 80 million and a further EUR 56 million from other SID Bank funds) was allocated to development projects concerning investments in the field of research, development and innovation activities for use in the automotive sector, targeting the EU requirements on CO2 emissions and other emission regulations, notably the development of new generation technologies that aim for emissions reduction and higher efficiency. In 2009 SID Bank received applications for financing from 15 companies applying for finance for 31 development projects. Following a comprehensive technological and financial assessment of the projects, SID Bank signed agreements with six companies to finance 13 projects worth a total ofEUR 104 million; funds allocated by the end of 2009 reached 74 million. • SID Bank intends to extend a part of the EIB loan to the Slovenian corporate sector in 2010 through the EKO Fund, notably for the purpose of financing infrastructure investments in the total value of EUR 37 million and investments concerning the environment and environment protection in the amount of EUR 15 million. • Under the new Environment Protection Act (hereinafter ZV0-01), adopted in December 2009, SID Bank has become an authorised agency which will, on behalf and for the account of the state, perform a part of the activities (largely 31 Annual Report of SID Bank and SID Bank Group - 2009 provision of flexible mechanisms and trading in emission coupons) within the framework of the Kyoto Protocol, thereby working towards a reduction of greenhouse gas emissions in the future. SID Bank also participates in the international SEE-IFA Network Programme, which has been selected at a EU tender within the framework of the South East Europe Transnational Cooperation Programme. The project is financed by the European Regional Development Fund (ERDF). The aim of the project, which will run up until 2011, is to build up the support for innovation and patent financing, primarily in SMEs, in the countries of South East Europe. 6.2.2. Treasury A function of SID Bank Treasury is to manage the liquidity of SID Bank's accounts and close deals with instruments of the monetary, currency and capital markets and derivative financial instruments with the purpose ofasset management. In closing deals in the financial market, the Treasury operates as a business field; on the other hand, the role of the Treasury is of particular importance in balance sheet management and mitigation of liquidity, interest rate and currency risks and provision ofcertain special products. The Treasury manages, in part or in total, three portfolios: besides SID Bank's own funds it also manages contingency reserves and IREP reserves on behalfand for the account ofthe state. The procedure for entering into stated transactions is governed by the Bank's internal acts, which specify the decisionmaking process, authorisations and the potential risks SID Bank may encounter in treasury transactions. SID Bank's investments are held in the banking book, with securities investments classified as available-for-sale financial assets. Transactions in derivatives are held in the trading book, given that the volume ofthese transactions does not exceed EUR 15 million or five percent ofall transactions conducted by SID Bank. In 2009 SID Bank took an active approach to interest rate management. To contain the potential loss of the Bank arising from changes in market interest rates, SID Bank introduced hedging against interest rate risk occurring as a result of the difference between the interest-bearing receivables and interest-bearing liabilities ofthe Bank (for more information see point 6.4.). Treasury investments from SID Bank's own funds amounted to EUR 83.6 million as at 31 December 2009, representing 2.8 percent of the Bank's total own assets . The Treasury conducted transactions with partners rated BBB- or higher and with certain unrated Slovenian banks whose credit rating under the methodology of SID Bank was not lower than B (for more information see point 6.4.). For the purpose of liquidity control, the Treasury mainly held investments in short-term deposits with Slovenian and foreign commercial banks and investments in other short-term and medium-term debt instruments issued by high-rated issuers. In liquidity control, the Treasury followed the strategy aimed at limiting the risk concentration, which means that excess liquidity was placed with banks to which SID has a low exposure in terms offinancing transactions. The currency structure of investments corresponded with the currency structure of SID Bank's assets and was closely coordinated with the adopted limits. The policy of closed foreign exchange positions was followed in this area. In this segment of SID Bank's operations, currency denominated derivative instruments were only used to a limited extent, solely to close open foreign exchange positions. The Treasury also coordinated the maturity structure of assets and liabilities. As at 31 December 2009, 88 percent of all Treasury investments were taken up by fixed rate investments. SID Bank is not an authorised participant in the securities market. Transactions in securities were concluded as an investment option supplementing the Bank's core activities and a way to control the Bank's liquidity and not for the purpose oftrading. Normally, the Treasury does not hold investments that are not settled by an independent institution. Priority is given to investments which can be used in concluding REPO transactions as well as investments which, on the basis of the existing decisions of the Bank of Slovenia, can be considered as category one investments in the calculation of liquidity ratios or can be considered as ECB eligible. On account of lower transaction costs, primary market investments are preferred slightly over secondary market investments. SID Bank operates in the financial markets of EEA and OECD member states Treasury investments from SID Bank's own funds include mainly Slovenian and foreign government bonds, market bonds issued by other issuers, and deposits. All the investments are denominated in euro. In accordance with its investment policy, SID Bank's investments in this segment are to investments rated investment-grade or higher. Just under 50 percent ofall investments are rated A- or higher (S&P), and 47 percent are held in investments to unrated issuers, mainly in the form of deposits to unrated Slovenian commercial banks. SID Bank Treasury also undertakes technical activities concerning the management of assets covering the technical provisions and own assets for a Bank's subsidiary, PKZ. In 2009 SID Bank 's Treasury performed control of liquidity and 32 Annual Report of SID Bank and SID Bank Group - 2009 currency risks for PKZ. These services are carried out on the basis of the Agreement on Excluded Treasury Transactions and in accordance with the decisions taken by the Management Board of PKZ by placing orders with authorised market players on behalf of PKZ. 6.2.3. Borrowing SID Bank, as an authorised institution under the ZZFMGP and ZSIRB, strives to obtain favourable sources of long-term financing in Slovenia and in international markets, and is Slovenia's only bank that has in the previous years continuously raised funds in the international markets. In raising funds SID Bank focuses on selecting flexible borrowing instruments that can be fully tailored to meet various customers' needs. Accordingly, it has a diversified portfolio of borrowings, funds obtained varying in maturity, size and the dynamics of disbursements. The Bank aims to obtain long-term sources of funding with a maturity ofup to 20 years, comparable in rates to funds secured by the Republic of Slovenia, with due consideration paid to the mark-up over the government borrowing. Working to provide businesses and their commercial banks with favourable long-term sources of financing for the operations under the ZSIRB, SID Bank raised funds through diverse financial instruments in Slovenia and international financial markets. At the beginning of the year 2009 SID Bank, acting in response to the ongoing financial crisis and the pressing need of the Slovenian banking and economic sectors for fresh long-term finance, issued the second series of long-term bonds in the total amount of EUR 250 million and with a maturity of 3 years, in the domestic capital market. The buyers of these bonds were mainly Slovenian commercial banks SID Bank used the collected funds to finance long-term earmarked loans extended through commercial banks for the purposes specified in the ZSIRB. The whole emission of the first SID Bank bond labelled SI01 totalled EUR 500 million. Furthermore, SID Bank and the European Investment Bank (EIB) signed four long-term loan agreements worth a total of EUR 380 million. In December 2009 SID Bank drew EUR 190 million from this agreement, and the remaining amount of EUR 190 million is to be disbursed in 2010. In foreign capital markets SID Bank has issued several emissions of debt instruments (i.e. Schuldscheindarlehen) and registered bonds (i.e. Namensschuldverschreibung) in a total value of EUR 256 million and a maximum maturity of20 years. Several bilateral loan agreements worth EUR 110 million were concluded. In 2009 SID Bank obtained a limited amount of short-term fixed interest rate funds in the domestic inter-bank money market, in particular from commercial banks and the Ministry of Finance of the Republic of Slovenia. The total amount of SID Bank's long-term borrowings amounted to EUR 0,7 billion in 2009. Already in 2009, SID Bank started preparations to place its debut Eurobond on the international capital market; the issue is expected to be completed in April 2010. 6.2.4. Credit Rating and Other Credit Information Enterprises and financial institutions operate in a highly competitive, dynamic, rapidly changing and uncertain environment, which requires from them to be well-informed and to respond quickly and adequately to the ever-changing situation on the market in order to carry out effective risk management. Aware of these requirements, SID Bank continued to develop its own Credit Rating System in 2009. In its work, the department uses cutting-edge risk assessment methodology recommended by Basel II, which is further upgraded to consider SID Bank's vast experience in the area and is supported by the Bank's own information system. SID Bank has put in place a number of internal databases which are updated daily to include reliable up-to-date information and analyses ofSlovenian and foreign data providers. In assessing risks of foreign markets SID Bank works closely with other relevant institutions, in particular with the Centre for International Cooperation and Development, which provides basic country risk reports for selected markets. For internal use, within SID Bank and SID Bank Group, the Credit Rating Department prepares credit rating reports and credit information on domestic and foreign companies and banks. With a view to ensuring efficient credit risk management in financing, issuing guarantees and in certain classes of insurance and for the Bank's business partners, the department prepares corporate credit rating reports along with recommended credit and short-term exposure limits. For the needs of SID Bank Group companies and other clients SID Bank prepares and acquires credit rating information on Slovenian companies (companies and sole proprietors), Slovenian banks and banks and companies based in South East Europe, etc. In 2009 clients were most interested in the information on individual markets, companies and banks in Slovenia and in those SEE countries that represent Slovenia's traditional markets. Annual Report of SID Bank and SID Bank Group - 2009 33 SID Bank's internal company assessment methodology is also used by the Bank's subsidiary, PRO KOLEKT, which prepares, for the needs of SID Bank Group companies and other clients, credit rating reports on enterprises from Croatia, Serbia, Bosnia and Herzegovina, Macedonia, Hungary, Romania and Bulgaria. 6.2.5. Operations under Special Authorisation - Insurance against Non-Marketable Risks Certain commercial and non-commercial or political risks (non-marketable risks) ofthe nature and level for which private reinsurance market lacks either willingness or capacity to cover are insured by SID Bank as an authorised institution on behalfand for the account of the Republic of Slovenia. According to the EU legislation, non-marketable risks are defined as commercial and political risks ofa time horizon exceeding two years in the OECD countries, and all risks in countries which are not OECD members. The role of the Republic of Slovenia is of key importance as without an insurance cover most such business transactions, especially medium-term, would not be carried out. Furthermore, it is in insurance of such transactions that export promotion as one ofthe core activities ofSID Bank is most expressed. The operations which SID Bank as the national export credit agency (ECA) performs on behalf and for the account of the Republic of Slovenia are in terms of management and accounting clearly separated from the operations performed on SID Bank's own account. Review ofoperations in 2009 Insurance against non-marketable risks on behalf and for the account of the state 2007-2009 in EUR million 2007 2008 2009 Business insured 530.2 914.3 952.6 Exposure (31 Dec.) - net 631.9 932.8 962.0 Premiums 4.0 4.1 4.8 Claims 0.4 0.01 4.9 Number ofclaims 5 0 1 Recoveries 0.1 0.1 0.00 Business insured by class ofinsurance (2007-2009), in EUR million 2007 2008 2009 ■ ' Short-term export credits ' ■ Medium-term export credits i i Outward investments — — Growth in insurance volume - Total Business insured The volume of business insured against non-marketable risks reached EUR 952.5 million in 2009, posting a 4.2 percent rise on the previous year. The realized volume represents 11.5 percent ofthe maximum amount of new yearly obligations as defined in the ZZFMGP. At 73.7 percent, the largest share in the structure of generated business insured was taken up by insurance ofoutward investment, totalling EUR 701.8 million, and reinsurance ofshort-term export credits (renewable insurance against non-marketable risks), generating EUR 227.9 million or 23.9 percent oftotal business insured. Outward investment insurance rose 38.5 percent over the previous year; the figure includes new insurance for outward investments and insurance renewals for insured investments which are actually treated as new insurance covers 34 Annual Report of SID Bank and SID Bank Group - 2009 considering the right of investors to terminate their contracts after a lapse of a 3-year period. The growth in business insured can be partly attributed to the introduction ofa new insurance product, namely insurance of non-shareholder loans or loans to subsidiaries of Slovenian investors abroad, which covers commercial as well as non-commercial risks. In 2009 new insurance covers were made for investments into trade, finance, automotive, construction, and wood processing industries, mainly for the area of South East Europe and Russia. The 2009 insurance figures indicate that the demand for insurance of investment abroad is likely to continue. The positive trend is driven largely by significant risk arising from the global financial and economic crisis and the ownership structure of Slovenian companies, which has been increasing the demand for insurance of ownership shares. Another contributing factor is the experience Slovenian managers have gained in their business operations with foreign entities. In export credit (re)insurance (oftrade receivables), short-term insurance totalled EUR 227.9 million in 2009, experiencing a drop of approximately 41 percent over the 2008 figure in the aftermath of the global financial and economic crisis. In the light of adverse economic conditions, the private (re) insurance market was also affected by a series of changes. Reinsurance of non-marketable short-term credits which SID bank reinsures on behalf of Slovenian insurance companies when they are unable to obtain reinsurance cover in the private market went down due to the crisis and the related decrease in sales volume. In part, the decrease in reinsurance against non-marketable risks resulted from lower capacity of insurers and their apparent inability to approve credit limits to the amounts required by Slovenian exporters. The major part of reinsurance volume realized in 2009 was linked to supporting export transactions in the area of Russia. In view ofthe relevant market conditions and the circumstances which led to the shortage in reinsurance capacity that made it temporarily impossible to obtain cover for market risks from private reinsurers (and in accordance with the European Commission's Memorandum), SID Bank as a publicly held insurer and a state authorised agency filed a proposal with the Commission to introduce a scheme aimed at reinsuring risks in the private insurance market as a temporary state aid measure to fight the current financial and economic crisis. In 2010, pending approval from the European Commission, SID Bank will start implementing a new reinsurance scheme covering reinsurance against marketable risks which have temporarily been rendered non-market or non-marketable. Insurance of medium-term export credits rose by 5.8 percent compared to 2008, with the relatively low increase in insurance volume largely attributable to the global financial turmoil that led to a decrease in medium-term export transactions and made access to funds to finance these transactions much harder. Other factors contributing to this situation include: less favourable insurance conditions for the markets of South East Europe resulting largely from unfavourable classification of these markets into risk categories (consistent with OECD classification) and, finally, the fact that the financing options provided to Slovenian exporters by potential Slovenian lending banks are still less competitive than those provided by foreign banks. Medium-term export credit insurance holds a 2.4 percent share in the total business insured. The majority of export credits (trade receivables), investments and medium-term credits insured in 2009 were linked to exports to Russia, Serbia, and Bosnia and Herzegovina. Exposure Total exposure due to insurance transactions for the account of the Republic of Slovenia and from valid offers of insurance amounted to EUR 962,0 million at the end of2009. Exposure from business insured for the account of the Republic of Slovenia stood at EUR 956,5 million at the end of 2009, posting a rise of 15.8 percent over the year 2008. The amount ofexposure represents 32.1 percent ofthe limit as defined in the Republic of Slovenia Budget for 2009 Implementation Act and 3.8 percent of the limit as defined in the ZZFMGP. The growth was driven by a 41.2 percent rise in exposure from outward investment insurance while exposure from insurance against medium-term commercial and non-commercial risks dropped 8.9 percent below the 2008 figure. Exposure from short-term export credit (re)insurance also decreased compared to 2008, dropping 11,4 percent as a result ofthe emerging global financial and economic crisis. Exposure on valid offers ofinsurance, counted under total net exposure pursuant to the ZZFMGP, decreased 94.8 percent to reach EUR 5.5 million at the end ofthe year. Annual Report of SID Bank and SID Bank Group - 2009 35 Exposure ofbusiness insured, by class of insurance (2007-2009) - in EUR million 1200 962,0 1000 400 800 600 200 0 9,3 268,7 2007 2008 2009 I I Short-term export credits/claims Medium-term export credits 1=1 Investments abroad-Trend Insurance technical figures Insurance premium from insurance against non-marketable risks amounted to EUR 4.8 million in 2009, up 18.1 percent from the 2008 figure. The premium growth, largely attributable to outward investment insurance, pushed the 2009 figure 52.3 percent above the year 2008. Income from handling fees was negligible because SID Bank, in conformity with its business policy and valid price lists, returns the amount charged to exporters and other persons insured, or considers it in the premium charged, ifthe project is implemented. Claims paid in 2009 posted a significant increase over the year 2008, amounting to EUR 4.9 million at the end ofthe year (in 2008: EUR 13 thousand). The volume of claims under consideration showed no increase against the previous year and was EUR 0.2 million as at 31 December 2009. As a result ofthe financial crisis, processing of potential claims in particular in the area ofthe Russian Federation and Kazakhstan (financial sector) pushed the volume of potential claims up to EUR 36.1 million (in 2008: EUR 8.7 million). The current business result from insurance made for the account of the state recorded a drop from the 2008 levels, totalling EUR 143 thousand at the end ofthe year (in 2008: EUR 6.9 million). Contingency reserves The contingency reserve fund constitutes an important capacity of SID Bank and the Republic of Slovenia for insurance against non-marketable risks before claims arising from insurance for the account ofthe Republic ofSlovenia are paid out ofthe state budget. Investment policy aims at contingency reserve management, which is the capacity to settle insurance claims. Contingency reserve funds are invested in liquid instruments to the amount representing the sum ofall potential claims and claims under consideration from non-marketable risks insurance, or not less than 20 percent of investments from contingency reserve funds. Liquid investments include debt securities traded on a regulated market and all other debt documents with residual maturity of under one year. As at 31 December 2009, contingency reserves utilized for financing were comprised of long-term domestic currency loans extended to A-rated financial institutions, totalling EUR 72.1 million, securities in a total value of EUR 18.3 million, and short-term deposits in banks amounting to EUR 29.7 million and other assets of EUR 5.3 million. At the end of2009 the Ministry of Finance of the Republic ofSlovenia deposited additional contingency reserves funds in the amount ofEUR 10 million as part ofSlovenia's anti-crisis measures. Annual Report of SID Bank and SID Bank Group - 2009 36 New developments relating to insurance on behalfand for the account ofthe state In 2009 the department for credit and investment insurance introduced a new product to complement the scope of insurance services for the account of the state. The product is aimed at providing banks with insurance of (service) guarantees to protect them from the risk offorfeiture for any reason (expansion ofinsurance cover including an option to cover the exporter's performance risk). In the context of temporary state aid measures SID Bank started activities to conduct reinsurance of risks in the market of private insurers. 6.2.6. Operations under Special Authorisation - Interest Rate Equalization Programme (IREP) In accordance with the ZZFMGP and on behalfand for the account of the Republic of Slovenia, SID Bank implements the Interest Rate Equalization Programme (IREP) for export credits falling within the scope of the OECD Arrangement on Officially Supported Export Credits. SID Bank and the Ministry of Finance of RS have concluded an Agreement on Implementation ofthe Interest Rate Equalization Programme and Management of IREP Funds. The primary objective of IREP is to offer export credits at fixed interest rates which are lower than commercial interest rates. In so doing, SID Bank enters into interest rate swaps with participating banks, providing them with fixed interest rate finance. SID Bank covers the interest rate risks linked to IREP through reverse interest rate swaps into which the Bank enters with foreign banks not rated lower than BBB- by Standard & Poor's. The purpose of interest rate swaps is to reduce the exposure of the participating bank to interest rate risks arising from approvals offixed-rate export credits. As the participating bank needs to observe the fixed interest rate component in defining its margin, it is entitled to a compensation factor ofup to 1 percent of the loan (expressed as the annual interest rate and subject to loan maturity), though the compensation factor can be transferred to the end borrower in full. For final borrowers (foreign buyers of Slovenian goods or services) the interest rate is not lower than the Commercial Interest Reference Rates (CIRR), and it has a set maximum. More favourable financing enhanced the competitiveness of Slovenian exporters in foreign markets. 6.2.7. Operations under Special Authorisation - Guarantee Schemes The authorisation under which SID Bank has implemented guarantee schemes for companies and individuals arises from the Guarantee Scheme Act of the Republic of Slovenia (Official Journal of RS 33/09 of 30 April 2009) and the Guarantee Scheme Act of the Republic of Slovenia for Individuals (Official Journal of RS 59/09 of 30 July 2009). Through the above Acts, the Republic ofSlovenia authorizes SID Bank to implement, on behalfand for the account ofthe state, all operations related to the issue, supervision, forfeiture and collection of loan guarantees as well as control over the use of loans funds guaranteed under these Acts. The Guarantee Scheme Act ofthe Republic ofSlovenia (hereinafter ZJShem) set up a system for the issue of government-backed guarantees to assume liabilities ofA-, B- or C- rated companies which arise from long-term loans acquired with commercial banks. The purpose ofthe Act was to relieve the credit crunch resulting from the global financial crisis that has reduced access to liquid assets of commercial banks, thereby decreasing the flow of funds into Slovenia's economy. According to the ZJShem, the total guarantee quota amounting to EUR 1.2 billion is to be assigned to banks by the end of 2010. By the end of2009, banks were granted a total of EUR 509 million in guarantee quota at seven auctions. By the end of2009, the banks profiting from the guarantee quota distributed at the first six auctions had granted 353 corporate loans worth a total amount of EUR 535 million. Although the implementation of the guarantee scheme for corporate loans started later than originally expected, it has proved an efficient tool to mitigate the effects of the global financial crisis that also shook Slovenian economy. The Guarantee Scheme for Individuals (hereinafter ZJShemFO) enabled individuals to obtain guarantees ofthe Republic of Slovenia for loans up to EUR 100,000 or EUR 10,000, depending on the category of borrower. The guarantee scheme for individuals lists four categories of borrowers, namely employees on fixed-term contracts, persons seeking to resolve their housing issue for the first time, young families and people who have lost their jobs. The total guarantee quota to be assigned by the end of2010 under the ZJShemFO is EUR 350 million, ofwhich EUR 50 million ofthe quota is held for the category of unemployed borrowers. By the end of2009, SID Bank held two auctions at which it assigned EUR 38 million of guarantee quota. Annual Report of SID Bank and SID Bank Group - 2009 37 6.3. Review of SID Bank Group Operations in 2009 6.3.1. SID - Prva kreditna zavarovalnica d.d., Ljubljana After a period of strong growth extending from the company's establishment to the end of 2007, the situation changed considerably in 2008 and 2009. While in 2008 the company still managed to achieve a 9 percent growth in business insured, insurance volume decreased by 23 percent in 2009 due to the effects ofthe economic crisis. Although PKZ has managed to retain the majority of its existing clients and even acquired new ones, the volume oftheir business activity shrank considerably, thereby reducing the insurance potential of these companies. As most PKZ's insurance transactions involve insurance of risks abroad, the decline in Slovenia's exports had a significant impact on its operations. With the clients' credit rating worsening on most markets, the number of insurable risks dropped as well, both in number and amount. Furthermore, all PKZ's important markets saw a drop in liquidity, which contributed to an increase in insolvency cases and late payments. Despite the measures taken to mitigate the consequences of the crisis, the impact of the crisis on the operating results of PKZ was two-fold: the company reported a decline in premium written (in 2009: EUR 11.1 million; in 2008: EUR 14.0 million, down by 21 percent) and a considerable rise in claims (claims paid in 2009: EUR 11.6 million, claims paid in 2008: EUR 4.8 million, posting an increase of 142 percent; gross claims outstanding in 2009: EUR 44 million, gross claims outstanding in 2008: EUR 26 million, an increase of 69 percent). The result for insurance technical account was negative for the fist time since the company was founded (EUR 8.3 million). For use in such cases, PKZ had formed equalization provisions (provisions for credit risks). To cover its loss from the technical account, PKZ used up most of its credit risk/equalization provisions (i.e. EUR 8.3 million of the total EUR 9.0 million, ending the year with EUR 0.7 million). The equity of the insurance company declined accordingly since equalization provisions (provisions for credit risks) are included in this item (in 2009: EUR 9.1 million, in 2008: EUR 16.9 million). The net profit or loss for the period was negative (EUR 6.5 million); however, after the use of equalization provisions (provisions for credit risks) PKZ did not report a loss to be covered by allocation from other equity components. By the end of 2009, PKZ managed to renew over 95 percent of insurance contracts under the conditions consistent with the current economic situation, which stresses the fact that the insurance company has managed to build long-term partnership relations with its clients. The measures aimed at mitigating the consequences of market uncertainties were first adopted in 2008 and adapted in 2009. In the adoption and implementation of these measures PKZ sought to maintain the balance between tightening its insurance conditions in the light of the changed economic environment and catering, to the highest extent possible, to the transactions performed by its clients. Therefore, PKZ chose not to withdraw from certain markets or industries or drastically reduce its exposure to these market or industries. Instead it opted for individual approach to insurance limits and tightened its risk control. Even if the company had withdrawn from problem markets/industries in 2009, such action would not have improved its operating results for the year but would weaken PKZ's competitive position in the future and reduce the support available to its clients in the harsh economic conditions. In an effort to enable PKZ to continue fulfilling its mission in 2010 and catering to the needs of its clients, SID Bank approved a capital increase of EUR 4.2 million, in full consideration ofthe risk management regulations, and carried it out in January 2010. The capital increase will enable PKZ to service its clients in the face of economic uncertainty and to maintain the level of its activity paying due attention to the risk management rules. To streamline its business operations, PKZ has transferred some of its activities to SID Bank based on contracts for outsourced transactions. In terms of ownership and business performance, the operations of PKZ remain an integral part ofthe SID Bank Group, thus ensuring synergetic effects ofthese complementary facilities. 6.3.2. PRO KOLEKT Group In 2009 business operations ofthe PRO KOLEKT Group were focused on active marketing ofthe Group's services and its recognisability in the markets of South East Europe. The PRO KOLEKT Group performs debt collection services (in-court and out-of-court) in almost all countries across the globe, on the basis of contracts or agreements concluded with over a hundred debt collection agencies. In 2009 the PRO KOLEKT Group maintained fruitful cooperation with renowned worldwide debt collection agencies such as Atradius, Intrum Justitia, and the Hermes Group. In 2009 the Group resolved its business and liquidity problems of previous years. The business indicators of the PRO KOLEKT Group saw a marked upturn in the same period. In that year particular attention was paid to corporate organisation ofthe PRO KOLEKT Group. In 2009, 3,152 debt collection cases in the total value of EUR 75.5 million were referred to the PRO KOLEKT Group. In 2008, the number ofassigned claims was 3,063, with their total value reaching EUR 32.2 million. In 2009 the Group resolved 770 debt collections in the total value of EUR 12.4 million, whereas in the year 2008 the number of resolved claims was 627, their total value amounting to EUR 6.2 million. The 2009 results show a 3 percent rise in the number of resolved cases, 38 Annual Report of SID Bank and SID Bank Group - 2009 and a 100 percent rise in the value of debt collected. In 2009 the PRO KOLEKT Group continued to conduct marketing and preparation ofcredit rating reports. In 2009 the PRO KOLEKT Group acquired most of its business from clients insured by PKZ and expects the growth of business cooperation to continue in 2010 mainly as a result of the general efforts to combat the effects of the financial and economic crisis. The PRO KOLEKT Group also performs debt collection services for other insurance companies who are members ofthe Berne Union. In 2009 the Group generated EUR 1.9 million in revenues from sale of services, whereas in 2008 the end-of-year figure amounted to EUR 772 thousand. The PRO KOLEKT Group ended the business year 2009 with a profit of EUR 137 thousand. In 2010, the Group plans to successfully handle debt collections in the total amount of EUR 14.9 million, an increase of20 percent compared to 2009. Furthermore, it plans to sell EUR 443 thousand worth of credit rating reports, 21 percent above the 2009 figure. All in all, the PRO KOLEKT Group intends to generate EUR 2.0 million in revenue from sale of services and a profit of EUR 197 thousand. 6.3.3. PRVI FAKTOR Group In 2009 the value of accounts receivable purchased by the PRVI FAKTOR Group was EUR 818 million. The 2009 figures are 21 percent lower than the value of receivable purchased in 2008 and fall 8 percent below the plan for the year 2009. Subsidiaries contributed more than 80 percent to the total turnover of the PRVI FAKTOR Group. The 2009 turnover target was only surpassed by PRVI FAKTOR Zagreb whose share in the total volume of receivables purchased by the PRVI FAKTOR Group was 41 percent. The PRVI FAKTOR Group finances most receivables arising from deliveries ofgoods or services among the entities within the country. In 2009, factoring ofdomestic receivables accounted for 91.0 percent ofthe total business volume (in 2008: 86.6 percent), export factoring for 6.2 percent and import factoring for 2.8 percent. PRVI FAKTOR is a member of several networks of factoring companies (Factors Chain International and International Factors Group) and through these networks it generated EUR 34.5 million of business (insurance and financing of export-import related receivables), accounting for 3.3 percent ofthe Group's total turnover. The drop in business volume led to a decrease in consolidated total assets which stood at EUR 336.4 million as at 31 December 2009, marking a year-on-year fall of9 percent. In terms oftotal assets, the largest company in the PRVI FAKTOR Group is PRVI FAKTOR, Zagreb, whose total assets amounted to EUR 157,5 million at the end ofthe year. The total assets of PRVI FAKTOR, Ljubljana stood at EUR 134 million at the end of the year 2009, posting a drop of 14 percent over the previous year. The company allocated EUR 4.8 million in dividends to its stakeholders; the equity ofthe company was decreased by the dividend amount. The drop in business volume resulting from harsh business conditions was also reflected in the operating results for the year with the Group's profit lagging behind the 2008 figure. The generated net profit totalled EUR 1.2 million. The objectives of PRVI FAKTOR Group for the year 2010 are to maintain the Group's share in the existing markets and to further improve the services the Group delivers to its clients. PRVI FAKTOR Group plans to acquire receivables in the amount of EUR 814 million and generate pre-tax profit of EUR 2.6 million. In 2010, the PRVI FAKTOR Group will pay particular attention to upgrading its information support for most back office and management processes. 6.3.4. Centre for International Cooperation and Development In 2009 the Centre for International Cooperation and Development (hereinafter CMSR) positioned itself as Slovenia's central institution in the field of knowledge and implementation of international development cooperation which has become the Centre's core activity. Over the three years of its operations, the Centre has standardized its procedures for assessment, selection and monitoring of development projects. In 2010 CMSR plans to expand its contact network of Official Development Assistance (ODA) recipient countries to the selected countries of sub-Saharan Africa and East Europe (Moldova, Ukraine, Belarus). In the period 2007-2009 CMSR extended to the ODA beneficiary states a total of EUR 4.8 million of donations of the Republic of Slovenia. Funds granted were used to support implementation of projects worth a total of EUR 20.5 million. CMSR continued its long and fruitful coperation with SID Bank, its co-founder and an important business partner, in preparing risk analyses and short-form reports on foreign markets and sectors. Together with the Ministry of Foreign Affairs of RS, CMSR implemented the "Cost of Living Abroad" project. Apart from preparing an indexed bill of costs, CMSR also provides the Ministry with relevant advisory services. In 2009 CMSR continued its cooperation with Nova Ljubyanska banka d.d., for which CMSR prepares short-form risk analysis reports, monographs, and other studies. CMSR continued its publishing activity in 2009 by publishing the magazine Mednarodno poslovno pravo and regularly updating the contents of Doing Business in Slovenia with relevant legislation changes and publishing it on Slovenia's Electronic Portal. Annual Report of SID Bank and SID Bank Group - 2009 39 Although increasingly oriented towards international development cooperation, CMSR remains a professional research institution which can continue to actively cooperate with partners in economic and legal research. 6.4. Risk Management SID Bank manages and controls risk in conformity with all risk management regulations. The principal riskes faced by SID Bank are credit, currency, liquidity, interest rate and operational risks. In assuming risks, the Bank pays particular attention to credit risk, while minimising other types of risk (currency, liquidity and interest rate risk). SID Bank's risk management practices need to reflect the Bank's distinctive character derived from its public role and the division of its business into transactions involving the Bank's own assets and activities performed for the account of the state, including the management of contingency reserves. The primary objective of risk management is to reduce the probability of risk incidents and to mitigate loss when a loss event occurs. Risk management is concerned with identifying, measuring and reducing risks, thus ensuring a safe and stable operation which is also SID Bank's priority risk management objective as in the long term it leads to increased equity value, helps the Bank maintain its reputation, and maximises the benefits for the Bank's clients and other stakeholders. The risk management process starts with establishing an appropriate organisational structure and regulated work processes, which facilitate the achievement of business objectives accompanied by the implementation of safe business operations in compliance with existing regulations. The key objective in the implementation of risk management measures is to ensure an appropriate level of risk awareness at all levels ofthe Bank's operation. The identification of risks starts in commercial organisational units and continues within organisational units separated from commercial units up to the level of the Management Board, which ensures independence of the process. Responsibility for the direct implementation of risk management lies with the following bodies and organisational units: • Credit Risk Committee: management of credit risk and large exposures, • Liquidity Risk Committee: liquidity and currency risks, • Asset - Liability Committee: balance sheet structure, capital adequacy, aggregate risks, • Risk Management Department, preparation of risk management policies, risk monitoring, • Credit Rating Department: assessment ofthe clients' financial posiiton, • Back Office and Payment Transactions: daily follow-up ofcurrency and liquidity risk within the limits set. In accordance with the Basel II guidelines, SID Bank assessed its risk profile and set up a portal for reviewing and evaluating the internal capital adequacy assessement process. Under its risk management strategy and capital risk and capital management policy, SID Bank established an appropriate process ofassessing the adequacy ofits internal capital, which: • is based on the identification and measurement or assessment of risks, preparation ofan aggregate risk assessment, and monitoring of material risks assumed by the Bank during the course of its operations, • provides for adequate internal capital consistent with the Bank's risk profile, • is appropriately integrated in the management system. A comprehensive process of assessing the adequacy of internal capital, adapted to the risks assumed, ensures that the risks assumed remain within the limits of SID Bank's capacity to assume risks. SID Bank also performs stress tests based on its own scenarios and scenarios provided by the regulator. By considering the results ofthese tests, SID Bank is able to identify the most exposed areas in time and well in advance, and improve its performance by taking appropriate measures. The risk management aspect is particularly important in credit and investment insurance as these operations are conducted on behalf and for the account of the Republic of Slovenia. While the loss ratio can be offset using the contingency reserve, higher losses from these operations could bring contingency funds down to a level at which the Act Governing Insurance and Financing of International Commercial Transactions (ZZFMGP) requires additional funds to be appropriated from the budget ofthe Republic ofSlovenia. At SID Bank, effective risk management starts with a proper organisational structure. Credit and investment insurance transactions are carried out by a special department, which is separated from banking operations up to the level ofthe Management Board. Similar to the banking segment, the authorisation to conclude transactions is clearly defined, with all transactions of EUR 5 million or more requiring an approval from the International Trade Promotion Commission. The Commission also holds ultimate authority over other risk management issues, such as approving insurance policies for certain countries or groups of countries which, in addition to the insurance limits specified in the ZZFMGP, limit the potential amount of loss. Moreover, SID Bank addresses the issues relating to the classification of risks, establishment of premium rates, etc., through a special analysis of fiscal sustainability of insurance transactions conducted for the account of the Republic of Slovenia in cooperation with the competent ministry and the International Trade Promotion _40 Annual Report of SID Bank and SID Bank Group - 2009 Commission. The initial findings revealed and the subsequent findings confirmed that even if worst-case scenarios were to materialise, the state budget would not suffer direct consequences, and any subsequent impacts would not be significant. Capital and capital adequacy Adequate amount ofcapital is the key element to ensuring the solvency and liquidity ofthe Bank and to providing a basis for its uninterrupted operation and financial resources needed for the expansion of its business activities. Capital adequacy, expressed in relative terms with regard to the volume of business and the risks assumed, creates trust in the Bank's operations and ensures its stable development in line with the set goals. SID Bank's capital as calculated in accordance with the Regulation on the Capital Adequacy of Banks and Savings Banks (CABSB), which covers all SID Bank's transactions conducted for its own account (i.e. all operations except transactions involving the insurance of international business transactions, the management of contingency reserves and IREP), amounted to EUR 313.9 million as at 31 December 2009, an increase of EUR 163.4 million compared to the end of2008. The increase in the capital largely stems from the EUR 160 million paid in capital ofthe Bank in August 2009. SID Bank's capital requirements for credit and currency risks are calculated using the standardized approach, and the capital requirement for operational risk is calculated using the basic indicator approach. The capital adequacy ratio is the ratio between the capital and the capital requirements relating to credit, currency, and operational risks. In accordance with the Regulation on Reporting on the Capital and Capital Requirements of Banks and Saving Banks, SID Bank was not required to form capital requirements for currency risks at the end of2009. Capital adequacy as calculated based on Basel II requirements for all transactions that SID Bank conducted for its own account (i.e. all operations except transactions involving the insurance of international business transactions, contingency reserve management and IREP), stood at 16.7 percent as at 31 December 2009 (in 2008: 11.1 percent). Credit risk Credit risk is the risk of loss arising from a debtor's failure to settle its financial obligations. Credit risk management starts prior to entering into a contractual relationship by determining the credit rating of a client and by securing appropriate collateral. The credit exposure is approved by the Credit Risk Committee. During the course of a transaction, credit risk is managed by closely monitoring and managing the credit portfolio, limiting credit risk concentration to a client, group of clients, sector or country, by classifying and creating impairments for expected losses, and providing sufficient capital for cases when losses exceed expectations. In credit and guarantee transactions, credit risk includes risk of losses arising from credit transactions and risk arising from the geographic location of the debtor's country. In securities invetsments risks arising from a securities issuer are considered. Counterparty credit risk is considered in settlements and derivative financial instruments. Notwithstanding SID Bank's introduction of individual assessment of losses and the calculation of impairments under IFRS, as a result of which it did not have to monitor impaired financial assets agains the Bank of Slovenia classification into categories A to E, SID Bank Group continued maintaining such classification2. The clients with the highest credit ranking are rated 'A' while the clients with the worst credit rating are rated 'E'. The quality of credit portfolio can thus be monitored continuously against these rating classes and compared with other banks. 2 For its internal use, SID Bank uses more detailed credit rating classes expressed in three-letter codes. Annual Report of SID Bank and SID Bank Group - 2009 41 SID Bank credit portfolio by credit rating class as at 31 December 2009: The balance of SID Bank's credit portfolio as at 31 December 2009 shows that 76.1 percent of all loans, other claims and off-balance sheet liabilities are classified in the highest credit rating class, 'A', further 21.5 percent of the portfolio falls into the 'B' credit rating class, 1.6 percent in 'C', whereas classes 'D' and 'E' together acccount for 0.8 percent. SID Bank credit portfolio by debtor country as at 31 December 2009: Claims and off-balance sheet liabilities from Slovenian debtors account for slightly less than 94 percent of the credit portfolio, followed by exposure to the countries of South East Europe (Croatia, Bosnia and Herzegovina, Serbia), the Netherlands and Russia. Impairments and provisions constitute an important element of managing the risk of loss arising from credit transactions. (The impairments and provision creation policy is described in more detail in item 2.2.5. of Notes to the Financial Statements.) As at 31 December 2009, SID Bank's impairments and provisions totalled EUR 43.1 million, which was EUR 19.0 million more than as at 31 December 2008. Impairments and provisions are derived from group and individual assessments of losses, with losses arising from exposures in credit rating classes 'C', 'D' or 'E' assessed on an individual basis. The ratio between total provisions and impairments and total exposure classified in these classes is 1.5 percent (in 2008: 1.2 percent). Issuer risk arises from the credit portfolio which is managed by SID Bank with an aim of ensuring liquidity and managing assets and liabilities. SID Bank does not conduct trading transactions. The Bank manages credit risk mainly by setting limits regarding the issuer credit rating and by monitoring the market values of securities. Annual Report of SID Bank and SID Bank Group - 2009 42 Securities portfolio by issuer credit rating as at 31 December 2009 Detailed breakdown of the securities portfolio by issuer credit rating as at 31 December 2009 is available in point 2.4.3. of Notes to the Financial Statements. Liquidity risk Liquidity risk, in the narrow sense of the word, is the risk which arises if SID Bank is unable to offset its liabilities with its investments. Therefore, liquidity is the capacity ofa company to hold and secure sufficient resources to meet its (balancesheet or off-balance-sheet) obligations when they are due. These liabilities are normally settled using cash inflows, liquid assets and borrowed funds. The larger the mismatch between the principal and interest flows on the side of assets, and liabilities and off-balance-sheet items, the larger the liquidity risk. SID Bank does not accept deposits, meaning it is not exposed to liquidity risk in the conventional sense. Nevertheless, problems could occur should SID Bank be unable to draw on the funds promised. If circumstances so require, SID Bank performs a stress test scenario. In accordance with the adopted liquidity management policy, SID Bank ensured that all its financial liabilities were met regularly. Liquidity management is based on the planning the inflows and outflows, which is performed separately for the Bank's own account and for the account of contingency reserves. SID Bank also monitors its exposure to liquidity risk by means of liquidity ratios (ratios between outflows and inflows over one- to six-month periods). The Bank of Slovenia set the minimum value of one for this ratio for the period of up to 30 days. With SID Bank, the mentioned ratio mostly exceeded 2.0. Despite the worsening financial and economic conditions, SID Bank has not experienced liquidity-related difficulties, thanks to the long maturity of its liabilities and adequate secondary liquidity. Liquidity risk in its broader sense, that is the risk ofthe Bank having to acquire additional funding at a higher interest rate (funding risk) and the risk that due to its liquidity needs the Bank will have to sell non-monetary investments at a discount (market liquidity risk), is low thanks to an excess short-term liquidity position and adequate secondary liquidity. Secondary liquidity contains a relatively high proportion of government and other securities of high quality and liquidity. The liquidity ratio for the periods up to 30 days, calculated following the methodology of the Bank of Slovenia, was 1.64 as at 31 December 2009. Statement of Financial Position by maturity showss a connection between liquidity risk management in connection with credit risk. The items are given in net values, which means that the value of investmentsreduced by impairments. Statement of financial position ofSID Bank by maturity as at 31 December 2009 Assets Liabilities Gap Ratio* Maturity class in EUR million % oftotalassets in EUR million % oftotal assets in EUR million in % Sight 9.0 0.3 0.3 0.0 8.7 30.00 Up to 1 month 51.4 1.7 41.5 1.4 9.9 1.44 1 month to 3 months 12.5 0.4 41.0 1.3 -28.5 0.88 3 months to 1 year 218.2 7.2 250.5 8.3 -32.3 0.87 1 year to 5 years 1,593.6 52.7 931.7 30.8 661.9 1.49 Over 5 years 1,140.2 37.7 1.759.9 58.2 -619.7 1.00 Total 3,024.9 100.0 3.024.9 100.0 0.0 Note: The ratio is the sum ofall assets items up to, and including, this maturity class and the sum ofliabilities items up to, and including, this maturity class. 43 Annual Report of SID Bank and SID Bank Group - 2009 Detailed breakdown of assets and liabilities items as at 31 December 2009 by maturity is available in point 3.1.1. of Notes to the Financial Statements. Currency risk When managing currency risk, SID Bank determines the potential loss which could arise as a result of changes in foreign exchange rates, through the application ofan open foreign currency position, that is the difference between the sum of all investments denominated in a foreign currency and liabilities in a foreign currency. Open foreign currency position, constrained by internal limits, was minimal throughout the year 2009. At the end of2009, SID Bank had a single foreign-currency forward contract amounting to USD 1 million to hedge against currency risk it encounters in its daily operations on financial markets. Statement of financial position ofSID Bank by currency as at 31 December 2009 Assets Liabilities Gap in EUR million % oftotalassets in EUR million % of totalassets in EUR million % of capital* EUR 3,010.4 99.5 3,010.9 99.5 -0.5 0.2 USD 14,5 0.5 14.0 0.5 0.5 0.2 Other currencies 0,0 0.0 0.0 0.0 0.0 0.0 Total 3,024,9 100.0 3,024.9 100.0 0.0 0.0 * Note: Capital taken into account is in accordance with the Regulation ofthe Bank ofSlovenia on the Calculation ofCapital Adequacy ofBanks and Saving Banks. Detailed presentation ofthe balance sheet by currency structure as at 31 December 2009 is available in point 3.2.1. of Notes to the Financial Statements. Interest rate risk In the conduct of its business operations, SID Bank encounters two types of interest rate risks. The first type arises from the difference between the SID Bank lending and borrowing interest rates or the difference in the sensitivity of these interest rates to changes in the overall level of market interest rates. The second type arises from the interest rate sensitivity of investments financed from SID Bank's capital. SID Bank manages exposure to interest rate risk mainly through a coordinated interest accrual on assets and liabilities. Euro-denominated instruments with Euribor-linked interest rates account for the biggest share ofassets and liabilities, which means the only remaining risk is the risk arising from the timing differences of repricing to the reference rate and incomplete coordination in selecting the reference interest rate (three- or six-month Euribor). During the year, in addition to coordinating the accrual of interest, SID Bank also used, to a limited extent, derivative financial instruments (interest rate swaps) as an additional tool to mitigate interest risk. At the end of2009, SID Bank held two derivative financial instruments (interest rate swaps). Assets and liabilities items by period remaining to interest rate repricing as at31 December2009 Assets Liabilities Gap Maturity class in EUR million % oftotalassets in EUR million % of totalassets in EUR million Non-interest bearing 26.0 0.9 332.1 11.0 -306.0 Demand 94.8 3.1 0.0 0.0 94.8 Up to 1 month 376.0 12.4 0.0 0.0 376.0 1 month to 3 months 484.3 16.0 15.2 0.5 469.1 3 months to 1 year 2,007.7 66.4 813.4 26.9 1,194.3 1 year to 5 years 28.1 0.9 427.4 14.1 -399.4 Over 5 years 7.9 0.3 1,436.7 47.5 -1,428.8 Total 3,024.9 100.0 3,024.9 100.0 0.0 Detailed presentation of the balance sheet by exposure to interetst rate risk as at 31 December 2009 is available in point 3.3.1. of Notes to the Financial Statements. Operational risk Operational risk refers to the risk of occurrence of loss resulting from the company's failure to perform or perform effectively its internal processes, from deficiencies in human action or system operation, or from external factors. The degree of operational risk depends on the company's internal organisation, business process management, functioning 44 Annual Report of SID Bank and SID Bank Group - 2009 of internal controls, effectiveness of internal and external audits, etc. The main factors affecting operational risk are human resources, business processes, information technology and other infrastructure, organisational structure and external events. Streghtening of the role of SID Bank as a main Slovenian development institution for financing and promotion increases the probability of operational risk. Provision of planned new activities is to be accompanied with recruitment of appropriate qualified staff and introduction of new information technologies for providing the required data and application support. SID Bank has put in place an operational risk management policy according to the recommendations of the Basel standards. The Bank monitors its operational risk using the basic indicator approach. The management of operational risk is based on the established system of internal controls, the decision-making and authorisation system, appropriate substitution for absent workers, suitable staff qualifications and investments in information technology. System risks inherent in information technology are increasing in line with the level of computerisation. They were managed through additional measures such as an established business continuity plan and other measures aimed at increasing information security. Risk management in SID Bank Group Consolidated risk management reflects the heterogeneous nature of SID Bank Group, which consists of the parent company authorised and supervised under banking regulations; a subsidiary insurance company authorised and supervised under the Insurance Supervision Agency; a factoring company, which assumes risks similar to those assumed by the Bank, but is not regulated, and PRO KOLEKT, a non-financial company which does not assume any greater financial risks. Business relationships among the Group companies affect the type and volume of shared risks. Particular attention is paid to areas in which the nature oftransactions performed could lead to a concentration ofthe same risk, which is of particular importance in cases of concentration of credit and insurance risks to the same debtor (taking into account the risk/debtor relationship). Similar to SID Bank, the primary objective of risk management in SID Bank Group is to reduce the likelihood of risk incidents and mitigate losses when a loss event occurs. Particular attention is given to the measurement and management of credit risk at SID Bank Group level as well as to the exposure of SID Bank Group to a client, sector or country. All Group companies have in place an appropriate organisational structure which enables effective risk management based on the determination of risk assumption procedures as well as procedures aimed at identifying, measuring and mitigating risks. SID Bank Group has adopted adequate policies and guidelines relating to risk management and protection against risk. The parent company has upgraded its policies and guidelines to specify risk management instructions for particular risks. Furthermore, the parent has coordinated the operations of the subsidiaries in the Group so as to ensure relevant and efficient risk management at the level ofthe entire Group. In accordance with its risk management strategy, SID Bank Group pays particular attention to the following risks: capital, credit, liquidity, currency, interest rate, operational, securities and derivatives, strategic, reputation, and profitability risks as well as other types of risk related to the probability ofan event which is contrary to what is expected and may lead to losses from business operations. Responsibility for the management of risks which SID Bank Group members assume in the scope of their business operations lies primarily with the management body ofa certain Group member, which is obliged to pursue the business and strategic risk management objectives for the whole SID Bank Group. The Management Board, or the management bodies, of the Group member concerned transfer their authority-based risk management powers to lower levels of management. All the supervisory bodies of subsidiary companies contain employees of the parent company who through their opinions and activities contribute to a balanced and coordinated risk management in SID Bank Group. SID Bank Group places great emphasis on credit risk, as it is the most significant risk at the level of the Group. In its organisational structure SID Bank Group has in place a hierarchical model for determination of credit limits depending upon the amount of the required credit limit and the type of transaction. In factoring transactions, the lowest limits are approved by commercial units, higher credit limits are approved by the credit committee of the subsidiary company and the highest limits are approved by the credit committee of the parent company. The highest limits are classified as limits exceeding EUR 2 million. All these transactions are reassessed and evaluated by the Credit Rating Department of the parent company. These transactions are carefully inspected at SID Bank Credit Committee Meetings, taking account of the economic and legal aspects, with special attention paid to credit insurance. 45 Annual Report of SID Bank and SID Bank Group - 2009 The companies of SID Bank Group make regular monthly reports on their operating results, which include reports on exposure and bad investments. The submitted reports are regularly discussed at the meetings of SID Bank's Credit Committee, which reviews them and, when appropriate, gives instructions for activities. Risk profile and internal capital adequacy assessment SID Bank has prepared a risk profile which documents and categorizes a set of quantitative and qualitative assessments of risks which the Bank assumes in the course ofits operation, and the control environment used to manage those risks. The risk profile is used as a basis for: • a comprehensive risk management process, • internal capital adequacy assesment, • planning internal audit procedures, • direct supervision by the Bank of Slovenia. In accordance with the Regulation on Risk Management and Implementation of the Internal Capital Adequacy Assessment Process for Banks and Savings Banks, the risk profile is assessed for the entire SID Bank Group. The following risks and factors are taken into account in assessing internal capital adequacy assessment process: • Pillar I risks (credit risk, market risk, operational risk), • Pillar II risks (concentration risk, transfer risk, interest rate risk, liquidity risk, profitability risk, settlement risk, reputation risk, strategic risk, capital risk), • other elements and external factors (regulatory changes, impact ofeconomic cycles, stress tests). In the internal capital adequacy assessment, capital requirements for credit risks hold a 82 percent share, followed by 2 percent share for operational risks, and 16 percent for strategic risk, concentration risk and external factors. Risk management in SID Bank Group based on the Bank's consolidation is presented in detail in Chapter III on disclosures. 6.5. Information system A banking information system must ensure safe and controlled access to timely, integral and available information. In addition to supporting business processes, the information system must enable reporting to banking regulators and other external institutions and help users in the decision-making process. In response to the constantly changing and increasing business needs of SID Bank and regulatory requirements, the information system needs to be regularly updated and improved. In 2008 SID Bank adopted a renewed information system development strategy which served as the basis for conducting numerous activities in the field of IT and technological development also in 2009. In 2009 particular attention was paid to the continuation of activities aimed at renewing, updating, standardizing and optimizing server infrastructure to integrate virtual environment technologies as well as to the introduction of a composite data field. As part of the package of measures designed to ensure business continuity, activities were underway to test the disaster recovery plans. In terms of security, several improvements and upgrades on various system segments were made, including upgrade offirewalls, etc. The activities to unify and standardize the system software continued throughout 2009, as did standardization of work with outsource providers and expansion of IT support to software change management. The primary document information system was upgraded and supplemented with a transaction-based and relational database system. In the field ofapplication software, particular attention was given to IT support to the entire process of guarantee scheme implementation, optimization of work processes and work on the process for supporting loan transactions. Certain activities were carried out in relation to preparing the groundwork for projects and tasks to be implemented in 2010. One of SID Bank's crucial ongoing tasks associated with the information system is to provide the basis for high-quality and timely reporting. In this respect, 2009 saw execution of a number of activities aimed both at supplementing and upgrading the Bank's external reporting processes in line with the requirements from external institutions and the Bank's internal reporting, which is becoming increasingly complex and extensive in response to the growing business needs. In this context, SID Bank continued its work on the construction of a data warehouse. In addition to the above, the Bank ran other activities relating to development and maintenance of the information system in compliance with the IS027001 (ISO/BS17799) standard. Given the role of SID Bank in SID Bank Group, the activities performed in line with the Strategy were focused on coordinating the development of information systems of all companies of the Group. The operations of PRO KOLEKT 46 Annual Report of SID Bank and SID Bank Group - 2009 were fully informatized in 2009, applying a site-independent system and re-establishing a local information system. In PKZ, IT support activities resulted in implementing a secure change management system. To enhance its efficiency, risk management and business strategy, the Bank also worked on the optimization of its processes, aware that the business strategy and risk management strategy are the main construction elements of the strategy for future development ofthe SID Bank information system. 6.6. Personnel Recruitment - structure and trends Personnel recruitment in 2009 was conducted in accordance with the annual recruitment plan and the orientations of the Action Strategy, based primarily on balancing recruitment against the growth of business volume and development of new products, hiring professionals who possess industry-specific knowledge and experience, and on retaining competent and high-potential staffworking for SID Bank or SID Bank Group. In 2009, 20 new employees were engaged. SID Bank ended the year with 87 employees (59 women and 28 men) with the average number ofemployees in 2009 totalling 79.75. Personnel structure ofSID bank by education level as at 31 December 2009 master of science 6% university education 64% 51 - 60 yrs 14% 41 - 50 yrs 19% 21 - 30 yrs 31 - 40 yrs 37% Employee development SID Bank is committed to promoting employee development to ensure the education and qualification structure comparable to the development level and strategic goals ofthe Bank and successful adaptation ofthe employees to the changes and challenges oftheir work environment. Annual appraisal interviews and semi-annual interviews were conducted with all employees in order to determine the achievement of set goals. Annual appraisal interviews provide the basis for an assessment ofan individual's development potential, the identification of key personnel (managers and specialists - responsible for the development of new activities) and the preparation ofan annual training plan, as they point to requirements for new knowledge and facilitate targeted training and education ofindividual employees and employee groups. Training In line with the SID Bank Action Strategy, the Bank encourages acquisition of the needed knowledge and skills and their transfer into practice. In 2009 SID Bank employees acquired knowledge required for specific expert fields. Training took the form of in-house training and participation in conferences, workshops, seminars, postgraduate studies and the like, both in Slovenia and abroad. Employees also acquired certain general skills, especially with regard to foreign languages, information technology, presenting and public speaking, etc. More specific target areas included banking topics, financial markets and financial instruments, risk management, legal matters, prevention of money laundering, corporate financial and business analyses, project finance, international financial reporting standards, tax legislation, payment systems, and public procurement. 47 Annual Report of SID Bank and SID Bank Group - 2009 In 2009 eighty-five employees (98 percent of all employees) attended various forms of training. The number of hours spent on training averaged at 43 per employee. Remuneration The remuneration and promotion scheme put in use at SID Bank was designed to reward and motivate highperformance personnel and utilize their capabilities to achieve ambitious business plans. The payment of salaries and other remuneration complies with the provisions ofexisting legislation and the Collective Agreement of Banks and Savings Banks in Slovenia, whereas promotion and performance benefits are regulated with an internal SID Bank Act. Performance incentives are awarded to the employees by their superiors on a monthly basis as a variable component of pay, amounting to no more than 10 percent of ther employee's salary, or, not more than 20 percent of the salary for special achievements. The grounds for promotion at the same job position are established on the basis ofthe appraisal report drawn up by the superior following the conduct ofannualand semi-annual interviews. In 2009, 25 employees were promoted through this process. Project work is subject to special rewards and forms the basis of individual development and development of team-work and cooperation. In accordance with its pension scheme, SID Bank covered, also in 2009, part of the premium for the voluntary supplementary pension insurance and the premiums for the voluntary supplementary health insurance for all employees. Internal communications As SID Bank performs a highly-specialized activity, it is critical for its performance that the employees understand and support the Bank's activities, and this can also be ensured through efficient and open communication. The Bank ensures exchange of information and communication with its employees through numerous well-established tools and applications, including direct communication between the management and the employees (regular internal meetings and meetings with the Board), access to a number of databases (e.g., memos on business meetings, minutes and decisions of corporate bodies, internal rules and regulations, expert library, descriptions of processes and procedures, proposals and ideas, and clippings), internal e-newsletter and quarterly publications of SID Bank's newsletter Cekin. In 2009 SID Bank, with the consent of the Supervisory Board, adopted the Code of Ethics Values and Professional Standards, which is, in a large part, a record of the existing good practice of the Bank and its employees. To ensure implementation of those Code provisions which represent a novelty with regard to the current practice, the Bank adopted a special action plan specifying concrete measures and deadlines for responsible persons. The Code is a formal confirmation ofthe established practice for promoting sound corporate culture and positive action and attitude from the employees in the performance oftheir tasks, both with regard to the customers and wihin the Bank environment. The Code places special emphasis on social responsibility and a responsible attitude to the environment. Employees of SID Bank Group Company 2007 2008 2009 SID BANK 69 76 87 PKZ 40 51 52 PRO KOLEKT Group 15 19 25 PRVI FAKTOR Group 108 130 131 CMSR 9 11 11 Total 241 287 306 At the end of 2009, PRO KOLEKT Group employed 25 people, seven of whom work in Ljubljana, six in Zagreb, two in Belgrade, four in Bukarest, two in Skopje, three in Sarajevo and one in the Sofia affiliate. The PRVI FAKTOR Group ended the year 2009 with a total of 131 employees, 38 ofwhom work in the Ljubljana company whereas another 45 work in Zagreb, 34 in Belgrade and 14 in Sarajevo. Annual Report of SID Bank and SID Bank Group - 2009 48 Education structure of SID Bank Group employees as at 31 December 2009 master of science doctor of science secondary education and lower 3% 1% university education 63% higher professional education 13% 20% 6.7. Internal Audit The Internal Audit of SID Bank is organised as a service directly responsible to the Management Board. It provides audit assurances and advisory services consistent with the applicable legislation of the Republic of Slovenia and the International Standards for the Professional Practice of Internal Auditing, the code of internal auditing principles and the code of professional ethics for internal auditors. The key purpose of its operations is to increase the benefits and improve the overall performance of the Bank. The Internal Audit helps SID Bank accomplish its set goals by supporting a conceptually sound and consistent method for assessing and improving the efficiency of risk management and mitigation procedures. The operations of the Internal Audit in 2009 were conducted in accordance with the annual plan, which had been approved by the Management Board and the Supervisory Board. The basis for planning the areas subject to Internal Audit reviews in 2009 was the SID Bank Risk Profile for 2008; risk profile analyses lay the groundwork for identifying the business activities and risk areas within certain business activities which were to be reviewed. Throughout 2009, the Internal Audit conducted 19 reviews, 15 regular reviews and four ad hoc reviews. All reports on conducted reviews were discussed by the Management Board. The recommendations made by the Internal Audit following reviews were oriented towards further improvements of internal controls by individual organisational units and business processes and towards a further reduction of risks in various segments of the Bank's operation. The Internal Audit continuously monitored the implementation of recommendations made, as well as the recommendations made by the Bank of Slovenia and external auditors, and reported on the status ofthese in its quarterly reports to the Management Board. Another important segment of the Internal Audit activities was provision of advisory services related to various fields of work within SID Bank, in particular the preparation ofthe Bank's internal acts and coordination ofexternal audit. The Internal Audit drew up quarterly reports of its operations and relevant findings. All the reports were discussed by the Management Board, Audit Committee, and the Supervisory Board of SID Bank. 6.8. Compliance Management At the beginning of the second half of the business year 2009, the Compliance Management started provision of the independent compliance function, which had previously been implemented in a decentralized manner. The compliance function is responsible for identifying, assessing and monitoring the compliance risk, and includes relevant reports. As part of the Bank's internal control system, the compliance function is one of the interrelated elements of a comprehensive, stable and reliable bank management system. The operations ofCompliance Management, which holds special authorisations, responsibilities and tasks stated in the internal acts ofthe Bank that have been agreed upon by the Supervisory Board, are mainly focused on preventive action. Apart from advising the Management Board on the implementation of suitable internal controls devised to ensure compliance risk management, Compliance Management carries out periodic and ad hoc business reviews, focusing on areas which the risk profile analyses have singled out as those bearing the highest compliance risk. In conducting reviews, the Compliance Management cooperates with the Internal Audit, for example by exchanging information and findings to ensure synergy effects and avoid doubling of operations performed by the two departments. 49 Annual Report of SID Bank and SID Bank Group - 2009 Notwithstanding the new (centralized) form of compliance implementation, the Management Board retains primary responsibility for compliance risk management and for the compliance of SID Bank's business practices with the relevant regulations. Moreover, the responsibility to ensure compliance of business practices rests with all SID Bank's employees, with due consideration given to their role and accountability. This means that all staff have to undergo training related to the oversight and management of compliance risk. Additionally, heads of organizational units shall closely monitor the implementation of compliance risk in their respective areas and report to the Management Board and Compliance Management accordingly. The Compliance Management prepares a half-yearly report and hands it over it to the Management Board, which submits it to the Supervisory Board for consideration. Such a report is made up of a report on the activities conducted in the past period, findings regarding the daily compliance against the required standard, potential recommendations for the management, and comments on the status of compliance recommendations made in the previous periods. Annual Report of SID Bank and SID Bank Group - 2009 50 7. APPENDICES 7.1. Management Bodies of SID Bank as at 31 December 2009 Supervisory Board ofSID Bank • Andreja Kert, President • Samo Hribar Milič, M.Sc., Deputy President • Aleš Berk Skok, Ph.D. • Marko Jaklič, Ph.D. • Gregor Kastelic, M.Sc. • Peter Kraljič, Ph.D. • Viljem Pšeničny, Ph.D. International Trade Promotion Commission • Metka Jerina, Chairperson, Ministry ofthe Economy of RS • Janko Burgar, M.Sc. - Deputy Chairperson, Ministry ofthe Economy of RS • Robert Kokalj Ph.D., Ministry of Foreign Affairs of RS • Janez Krevs, Bank ofSlovenia • Monika Pintar Mesarič, Ministry of Finance of RS • Jože Renar, M.Sc., Chamber of Commerce and Industry of Slovenia Management Board • Sibil Svilan, M.Sc., President • JožefBradeško, Member Annual Report of SID Bank and SID Bank Group - 2009 51 7.2. Organisation Chart of SID Bank as at 31 December 2009 7-\ Management Board Sibil Svilan - president Jožef Bradeško - member Assistant to the Management Board Bojan Pecher Risk Management Matejka Kavčič f \ Information Protection Research and Strategy Roman Rojc Internal Audit Alenka Ferjančič Compliance Management Goran Katusin Promotional and Development Financing Saša Keleman Export and Project Financing Borut Müller Credit and Investment Financing Back Office and Payments Gašper Mramor Group Management and Distressed Investment Management Danilo Grašič Credit Rating Vesna Zorman Planning and Controlling Bojana Kolenc Accounting Leon Lebar Legal and Claims Department Barbara Bracko General Affairs and Human Resources Vida Zabukovec Annual Report of SID Bank and SID Bank Group - 2009 52 7.3. Organisation Chart of SID Bank Group as at 31 December 2009 Annual Report of SID Bank and SID Bank Group - 2009 53 7.4. Statement of Corporate Governance In the business year 2009 SID Bank as a public company followed the Corporate Governance Code for Joint-Stock Companies (hereinafter the Code), which was jointly phrased and adopted by the Ljubljana Stock Exchange, Inc., Ljubljana, the Association of Supervisory Board Members of Slovenia, and the Managers' Association of Slovenia on 18 March 2004, agreeing on adopting its amendments on 14 December 2005 and 5 February 2007. The Code is available online at http://www.lse.si . In terms of the corporate governance data which go beyond the requirements of the Companies Act, special emphasis is to be given to the regulations applicable to corporate governance in banks. These are contained in the provisions of the Banking Act (Chapter 2) and the Decision regulating due care of management board and supervisory board members of banks and savings banks, the latter summarizing the relevant recommendations derived from the Code. Another act to be considered is the Slovene Export and Development Bank Act (ZSIRB), which contains several specific corporate management provisions, also regarding the composition of the Supervisory Board. All the above regulations are published in the Official Gazette of the Republic of Slovenia. Corporate governance shall also abide by SID Bank's Statute (also available at SID Bank's website http://www.sid.si/sidslo.nsf, strategy and policies adopted by the Bank's management or supervisory bodies. Corporate governance ofSID Bank does not abide by the following recommendations ofthe Code: • Point 1.1.1 (Company goals): Unlike other joint-stock companies, the key goal ofSID Bank is not to maximize the company's value, but rather to perform promotional and development tasks aiming to retain or increase the value of capital without pursuing the goal ofprofit maximization (cf. primarily Article 9 ofZSIRB); • Points 1.2 and 1.3 (Equal treatment of shareholders and protection of their rights and General Meeting of Shareholders): The recommendations are applied as appropriate since the Republic of Slovenia is the single shareholder ofthe Bank (cf. Article 4 ofZSIRB). • Point 2.3.2 (Remuneration, compensations and other benefits, and the ownership of company shares): The management board remuneration policy has not formalized in one document; however, in line with the employment contracts of management board members, the amount of the remuneration depends on the achievement of goals set in the company strategy and upon the annual business policy and financial plan. A positive operating result of the company is just one of the criteria to assess job performance; all the other criteria deriving from the aforementioned documents are time-defined and measurable. In accordance with the employment contract, performance-related earnings may in no case exceed two monthly salaries of a management board member. Moreover, SID Bank also pays due regard to the decree passed by the Government ofRS in January 2009, which lays out recommendations which the representatives of the Republic of Slovenia on supervisory bodies of companies whose majority owner is the Republic of Slovenia shall observe in closing agreements with managers. • Points 3.1.9 and 3.1.12 (Duties and responsibilities): With a view to distributing materials and convening Supervisory Board meetings, we need to point out that information technology is only used for holding correspondence meetings. The company does not publicly release the Supervisory Board's report. • Point 3.3.3 (Composition of Supervisory Board): SID Bank does not organize or finance training and education for supervisory board members. • Point 3.4.6 (Remuneration, compensations and other benefits, and the ownership of company shares) SID Bank does not cover supervisory board members' liability insurance for the performance of their tasks. • Point 8.2 (Communicating in English): Public announcements in English are only provided for the most important information on the company, e.g. Annual Report. • Point 8.4 (Annual document): The list of all the information pertaining to the company that was publicly announced, pursuant to the law, during the previous 12 months, is not published. • Point 8.6 (Financial calendar): The financial calendar is not published. • Point 8.12.1 (Rumours and the press): SID Bank does not comment on misleading rumours and articles in the press related to its business operations in all such cases. SID Bank has adopted internal acts regulating accounting reporting procedures and through these put in place various internal controls. The functioning of internal controls and risk management practices is subject to internal audit reviews conducted by a special organisational unit. To enhance the efficiency of its operation, the Supervisory Board has set up an Audit Committee, whose work is mainly concerned with accounting reporting and risk management. As part of the 54 Annual Report of SID Bank and SID Bank Group - 2009 internal control system within the organization, SID Bank has also established a compliance function, performed by a separate organisational unit. Since September 2008, the Republic of Slovenia has been the single shareholder of SID Bank. The Bank's management and supervisory bodies are appointed in accordance with the regulations, and in consideration of the specific conditions and procedures set forth in Article 18 of ZSIRB. The authority of the General Meeting of Shareholders is exercised by the Government ofthe Republic ofSlovenia or its representative holding a written authorisation. In adopting decisions, the two-member Board shall endeavour to act by mutual agreement and shall not issue or purchase the Bank's shares within the scope oftheir authorization. In 2009 the Management Board was composed of Sibil Svilan, MSc, as President of the Board, and Jožef Bradeško, as Member ofthe Board. The members of the Supervisory Board, nominated by a decree from the Government of the Republic of Slovenia on 23 April 2009, as at 31 December 2008 were: • Andreja Kert, President, • Samo Hribar Milič, M.Sc., Deputy President, • Aleš Berk Skok, Ph.D. • Marko Jaklič, Ph.D. • Gregor Kastelic, M.Sc., • Peter Kraljič, Ph.D. • Viljem Pšeničny, Ph.D. The members ofthe Audit Committee as at 31 December 2009 were: • Gregor Kastelic, M.Sc., Chairperson, • Aleš Berk Skok, Ph.D. • Blanka Vezjak, M.Sc. Annual Report of SID Bank and SID Bank Group - 2009 55 II. FINANCIAL STATEMENTS OF SID BANK AND SID BANK GROUP Contents Page Statement ofthe Management Board on the financial statements ofSID Bank and SID Bank Group 57 Statement ofthe independent auditor on the financial statements ofSID Bank and SID Bank Group 58 1. Financial statements ofSID Bank and SID Bank Group 60 2. Notes to the financial statements 67 3. Risk management and other disclosures 109 4. Segmented reporting 124 5. Appendices 129 Annual Report of SID Bank and SID Bank Group - 2009 56 Statement of the Management Board on the financial statements of SID Bank and SID Bank Group On 26 February 2010 the Management Board confirmed the Financial statements and Annual report of SID Bank and Consolidated financial statements of SID Bank Group for the year ended 31 December 2009. Financial statements have been compiled in line with the International Financial Reporting Standards (IFRS) as adopted by the EU. The Management Board reasonably believes that SID Bank and SID Bank Group have sufficient business resources to continue their operations. The management is responsible for the following: ■ Appropriate accounting policies which are applied consistently, ■ Business estimates and judgements that are reasonable and prudent, ■ Any material deviations from the applied accounting standards are appropriately disclosed and explained, ■ Financial statements are prepared on a going concern basis for the SID Bank Group, unless there are substantiated reasons to anticipate discontinuation of operation. The Management Board is responsible for maintaining bookkeeping documents and records which disclose the financial status of SID Bank and SID Bank Group with reasonable accuracy at all times. Furthermore, the Management Board is responsible for the preparation of financial statements in accordance with the legislation and regulations of the Republic of Slovenia. The Management Board must take all necessary steps to protect the assets of SID Bank and SID Bank Group and carry out all the required procedures to prevent or discover potential fraud or violation. SID-Slovenska izvozna in razvojna banka, d-d, Ljubljana J Member ol 57 Annual Report of SID Bank and SID Bank Group - 2009 Statement of the independent auditor on the financial statements of SID Bank and SID Bank Group Deloitte. Tel' +3Bfi (0) 1 3072 300 Faks: +336 (0) 1 3072 900 ww. deloitte. »i INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS OF SID - Slovenska izvozna in razvojna banka d.d., Ljubljana Report on the Financial Statements We have audited the accompanying financial statements of the SID - Slovenska izvozna in razvojna banka d.d., Ljubljana and group SID - Slovenska izvozna in razvojna banka d.d., Ljubljana which comprise the statement of the financial position as at December 31, 2009. and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by EU. This responsibility includes; designing, Implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement, An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. DELOITTE REVIZIJA D.O.O. Davčna ulica 1 1000 Ljubljana Slovenija 58 Annual Report of SID Bank and SID Bank Group - 2009 Opinion In our opinion, the financial statements give a true and fair view of the financial position of SID - Slovenska izvozna in razvojna banka d.d., Ljubljana and group SID - Slovenska izvozna in razvojna banka d.d., Ljubljana as of December 31, 2009, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by EU. Report On Other Legal and Regulatory Requirements Pursuant to Article 57(1) of the Companies Act (ZGD-1), we have reviewed the Company's business report. In our opinion, the business report is consistent with the audited financial statements. Andreja Bajuk Mušič DELOITTE REVIZIJA d.o.o. Deloitte Ljubljana, 18 March 2010 DELOITTE REVIZIJA D.O.O. Ljubljana, Slovenija 1 Annual Report of SID Bank and SID Bank Group - 2009 59 1. Financial statements of SID Bank and SID Bank Group Accounting policies and notes are an integral part ofthe financial statements and should be consulted together. 1.1. Statement of financial position 31 December 2009 SID Bank_SID Bank Group In EUR thousand Notes 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Cash and balances of transaction accounts with the state and the central bank 2.3.1. 1,073 112 3,636 3,437 Financial assets held for trading 2.3.2. 248 125 248 125 Financial assets held for hedging 2.3.3. 2,101 0 2,101 0 Available-for-sale financial assets 2.3.4. 50,051 61,332 72,390 79,450 Loans 2.3.5. 2,954,952 2,012,539 3,091,499 2,187,680 - Loans to banks 2,292,668 1,512,356 2,306,883 1,534,606 - Loans to clients other than banks 662,284 500,183 784,616 653,074 Property, plant and equipment 2.3.6. 4,441 4,749 4,845 5,230 Investment property 0 0 80 0 Intangible assets 2.3.7. 395 568 1,078 1,306 Long-term investments in equity of subsidiaries, associates and joint ventures 2.3.8. 7,712 7,712 419 419 Corporate income tax assets 2.3.9. 1,019 328 2,155 1,213 - Assets for corporate income tax 656 0 1,180 255 - Assets for deferred taxes 363 328 975 958 Other assets 2.3.10. 2,902 252 37,182 22,794 - Insurers assets 0 0 32,228 20,177 - Otherassets 2,902 252 4,954 2,617 TOTAL ASSETS 3,024,894 2,087,717 3,215,633 2,301,654 Financial liabilities held for trading 2.3.11. 271 172 271 172 Derivative financial instruments held for hedging 2.3.12. 1,202 0 1,202 0 Financial liabilities measured at amortized cost 2.3.13. 2,693,134 1,921,672 2,814,538 2,079,910 - Bank deposits 155,066 15,216 155,066 15,216 - Deposits ofclients other than banks 91,870 22,376 91,870 22,376 - Loansofbanks 1,799,948 1,633,867 1,921,338 1,792,105 - Loans ofclients other than banks 99,108 0 99,122 0 - Debtsecurities 547,142 250,213 547,142 250,213 Provision 2.3.14. 4,382 2,289 56,695 35,265 - Bank provision 4,250 2,165 4,250 2,165 - Liabilities from insurance contracts 0 0 50,294 30,896 - Otherprovision 132 124 2,151 2,204 Corporate income tax liabilities 2.3.9. 138 1,939 138 2,321 - Tax liabilities 0 1,904 0 2,284 - Non-current deferred tax liabilities 138 35 138 37 Other liabilities 2.3.15. 3,785 888 9,063 4,058 TOTAL LIABILITIES 2,702,912 1,926,960 2,881,907 2,121,726 Share capital 2.3.16. 300,000 140,000 300,000 140,000 Capital reserves 2.3.17. 1,139 1,139 1,139 1,139 Revaluation surplus 2.3.18. (18) (295) 126 (838) Reserves from profit (including retained profit) 2.3.19. 21,735 19,923 39,667 38,095 Treasury shares 2.3.20. (1,324) (1,324) (1,324) (1,324) Net profit/loss for the year 450 1,314 (5,882) 2,856 EQUITY 321,982 160,757 333,726 179,928 TOTAL LIABILITIES AND EQUITY 3,024,894 2,087,717 3,215,633 2,301,654 CONTINGENCY RESERVES 2.3.22. 125,428 113,186 125,428 113,186 INTEREST RATE EQUALIZATION PROGRAMME 2.3.22. 7,627 6,709 7,627 6,709 Contingency reserves and the Interest Rate Equalization Programme (IREP) refer to transactions performed by SID Bank on behalfand for the account of the Republic of Slovenia, which are not a part of the assets and the liabilities side of the sources of SID Bank. They are kept in separate accounts, which were defined by the Bank of Slovenia for keeping of transactions pursuant to special authorization. Transactions pursuant to special authorization are presented in item 2.3.22. 60 Annual Report of SID Bank and SID Bank Group - 2009 1.2. Statement of comprehensive income for the year 2009 SID Bank SID Bank Group In EUR thousand Notes 2009 2008 2009 2008 Interest income and similar income 82,256 82,491 95,779 97,238 Interest expense and similar expense (60,754) (68,183) (67,308) (77,429) Net interest 2.4.1. 21,502 14,308 28,471 19,809 Dividend income 2.4.2. 2,474 2,273 0 0 Fees and commissions received 2,006 1,209 6,456 5,398 Fees and commissions paid (437) (411) (1,233) (1,412) Net fees and commissions 2.4.3. 1,569 798 5,223 3,986 Realized profits/losses from financial assets and liabilities not measured at fair value through profit or loss 2.4.4. 330 (184) 605 (255) Net profits/losses from financial assets and liabilities held for trading 2.4.5. 24 (59) 24 (58) Changes in fair value when calculating risk insurance 2.4.6. (40) 0 (40) 0 Net foreign exchange gains/losses 2.4.7. 44 97 1,073 2,866 Net profits/losses from derecognition of assets, excluding non-current assets held for sale (4) 2 (2) 2 Other net operating profits/losses 2.4.8. 2,542 2,501 4,129 8,629 - Income from non-banking services 2,542 2,501 2,051 2,312 - Revenues from insurance operations 0 0 7,876 9,077 - Expenses for insurance operations 0 0 (5,798) (2,760) Administrative costs 2.4.9. (5,729) (5,161) (10,971) (10,843) Depreciation, amortization 2.4.10. (643) (617) (881) (860) Provision 2.4.11. (1,985) (1,526) (10,556) (5,088) - Bank provision (2,085) (1,387) (2,085) (1,387) - Liabilities from insurance contracts 0 0 (8,618) (3,761) - Other provision 100 (139) 147 60 Impairments 2.4.12. (18,906) (9,429) (23,596) (14,183) Profits/losses on ordinary activities 1,178 3,003 (6,521) 4,005 Corporate income tax on ordinary activities 2.4.13. (231) (424) (755) (1,463) Deferred taxes 1 188 1,892 314 Net profit/loss for the year 948 2,767 (5,384) 2,856 Net profit/loss for the year 948 2,767 (5,384) 2,856 Net profits/losses derecognized from revaluation surplus from available-for-sale financial assets 347 48 1,206 (629) Corporate income tax on other comprehensive income (70) (12) (242) 124 Post-tax comprehensive income for the year 1,225 2,803 (4,420) 2,351 Of owners of the parent company (4,420) 2,351 Annual Report of SID Bank and SID Bank Group - 2009 61 1.3. Cash flow statement for the financial year 2009 SID Bank SID Bank Group In EUR thousand 2009 2008 2009 2008 A. CASH FLOWS FROM OPERATING ACTIVITIES a) Net profit or loss before tax 1,178 3,003 (6,521) 4,005 Depreciation, amortization 643 617 881 860 Impairments oftangible fixed assets, investment property, intangible long-term assets and other assets 18,905 970 23,596 1,700 Net foreign exchange (gains)/losses (44) (97) (1,073) (2,866) Net (profits)-losses due to sales oftangible fixed assets and investment real estate 4 (2) 4 (2) Other (profits)/losses from investment activities (2,474) (2,273) 0 0 Other net profit and loss adjustments before tax 3,735 9,985 10,572 17,096 Cash flows from operating activities before changes in operating assets and liabilities 21,947 12,203 27,459 20,793 b) (Increase)/decrease in operating assets (973,655) (822,222) (959,791) (840,097) Net (increase)/decrease in financial assets recognized at fair value through profit and loss (2,101) 3 (2,101) 3 Net increase/(reduction) in available-for-sale financial assets 11,628 (21,538) 8,304 (18,571) Net (increase)/reduction in loans (980,531) (800,610) (951,924) (819,760) Net (increase)/reduction in deferred costs (383) 49 (427) 0 Net (increase)/reduction in other assets (2,268) (126) (13,643) (1,768) c) Increase/(decrease) in operating liabilities 774,137 784,530 752,370 805,307 Net increase/(reduction) in financial liabilities held for trading 295 (14) 295 (14) Net increase/(decrease) in deposits and loans measured at amortized cost 770,838 784,534 736,199 806,158 Net (increase)/reduction in deferred income 1,801 23 1,300 0 Net increase/(reduction) in other liabilities 1,203 40 14,576 (837) d) Cash flows from operating activities (a+b+c) (177,571) (25,436) (179,962) (13,997) e) (Paid)/refunded corporate income tax (2,793) 546 (3,967) (28) f) Net cash flows from operating activities (d+e) (180,364) (24,890) (183,929) (14,025) B. CASH FLOWS FROM INVESTING ACTIVITIES a) Inflows from investing activities 2,476 2,313 2 242 Proceeds from the sale of property, plant and equipment and investment property 2 12 2 196 Proceeds from the sale of intangible long-term assets 0 28 0 46 Other inflows from investment activities 2,474 2,273 0 0 b) Outflows from investing activities (168) (281) (354) (830) (Outflows for the acquisition of tangible fixed assets and investment property) (157) (121) (317) (462) (Outflows for the acquisition of intangible long-term assets) (11) (160) (37) (368) c) Net cash flows from investing activities (a-b) 2,308 2,032 (352) (588) C. CASH FLOWS FROM FINANCING ACTIVITIES a) Inflows from financing activities 160,000 50,400 160,000 50,400 Inflows from the issue of shares and other capital instruments 160,000 50,400 160,000 50,400 b) Net cash flows from financing activities (a) 160,000 50,400 160,000 50,400 D. Effect ofexchange rate fluctuations on cash and cash equivalents 2 2 2 2 E. Net increase in cash assets and cash equivalents (Af+Bc+Cb) (18,056) 27,542 (24,281) 35,787 F. Cash and cash equivalents at the beginning of the period 40,129 12,585 58,384 22,595 G. Cash and cash equivalents at the end of period (D+E+F)* 22,075 40,129 34,105 58,384 * The item includes cash on transaction accounts, cash in hand and bank deposits up to 90 days. Annual Report of SID Bank and SID Bank Group - 2009 62 1.3.1. Cash equivalents In EUR thousand SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Cash in hand 0 0 0 1 Cash in business accounts 69 25 2.632 2,593 Bank deposits, ofwhich: 22,205 40,104 31,473 55,790 - Unicredit banka Slovenija d.d. 12,820 15,313 12,820 15,354 - Sparkasse d.d. 6,855 0 6,855 0 - Adria BankA.G. 2,000 2,003 2,000 2,003 - Factorbanka d.d. 330 0 2,242 2,547 - Hypo Bank d.d. 0 11,617 0 11,617 - Banka Celje d.d. 0 5,303 0 7,909 - Volksbank d.d. 0 5,152 0 7,229 - NLB d.d. 0 465 2,484 2,088 - Lon d.d. 0 251 0 251 - Probanka d.d. 0 0 1,881 1,608 - NLB LHB banka a.d. Beograd 0 0 1,161 2,425 - Gorenjska banka d.d. 0 0 2,030 2,191 - NLB Tuzlanska banka d.d. 0 0 0 555 - Societe General - Splitska banka d.d. 0 0 0 13 Total 22,074 40,129 34,105 58,384 Cash flows from operating activities amount to EUR -180,364 thousand. The negative amount is principally the result of the increase of loan placements in the year 2009. SID Bank financed the increased credit activity mainly with an increase of raised loans and partly with an increase in capital. SID Bank compensated for the deficit of cash flow from operating activities to a large extent by cash flow from financing, and to a lesser extent with cash flow from investing activities. Cash flow from investing activities in content represents the received dividends from affiliated companies. In SID Bank Group cash flows from operating activities amount to EUR -183,929 thousand. The negative amount is principally the result of the increase of placed loans of SID Bank Group and to a lesser extent the result of negative operation ofSID Bank Group. SID Bank Group financed the increased credit activity with additional borrowing in the form of raised loans. The deficit of cash flow from operating activities was compensated for by cash flow from financing. Cash flow from financing in content represents the increase in capital. Annual Report of SID Bank and SID Bank Group - 2009 63 1.4. Statement of changes in equity 1.4.1. SID Bank For the 2009 financial year Retained earnings (including Share Capital Revaluation Reserves net profit Treasury In EUR thousand capital reserves surplus from profit of fin. year) shares EQUITY OPENING BALANCE FOR THE PERIOD (1 January 2009) 140,000 1,139 (295) 19,923 1,314 (1,324) 160,757 Post-tax comprehensive income for the year 0 0 277 0 948 0 1,225 New share capital subscribed (paid) 160,000 0 0 0 0 0 160,000 Allocation of net profit to profit reserves in accordance with a decision of General Meeting ofShareholders 0 0 0 1,314 (1,314) 0 0 Allocation of net profit to statutory reserves 0 0 0 47 (47) 0 0 Allocation of net profit to reserves under articles of association 0 0 0 451 (451) 0 0 CLOSING BALANCE FOR THE PERIOD (31 December 2009) 300,000 1,139 (18) 21,735 450 (1,324) 321,982 DISTRIBUTABLE PROFIT FOR THE FINANCIAL YEAR 450 For the 2008 financial year Retained earnings (including Share Capital Revaluation Reserves net profit Treasury In EUR thousand capital reserves surplus from profit offin. year) shares EQUITY OPENING BALANCE FOR THE PERIOD (1 January 2008) 89,600 1,139 (331) 17,566 904 (1,324) 107,554 Post-tax comprehensive income for the year 0 0 36 0 2,767 0 2,803 New share capital subscribed (paid) 50,400 0 0 0 0 0 50,400 Allocation of net profit to reserves from profit in accordance with a decision of General Meeting ofShareholders 0 0 0 904 (904) 0 0 Allocation of net profit to statutory reserves 0 0 0 139 (139) 0 0 Allocation of net profit to reserves under articles of association 0 0 0 1,314 (1,314) 0 0 CLOSING BALANCE FOR THE PERIOD (31 December 2008) 140,000 1,139 (295) 19,923 1,314 (1,324) 160,757 DISTRIBUTABLE PROFIT FOR THE FINANCIAL YEAR_1,314 Annual Report of SID Bank and SID Bank Group - 2009 64 1.4.2. SID Bank Group For the 2009 financial year Retained earnings (including net profit Share Capital Revaluation Reserves of fin. Treasury In EUR thousand capital reserves surplus from profit year) shares EQUITY OPENING BALANCE FOR THE PERIOD (1 January 2009) 140,000 1,139 (838) 34,850 6,101 (1,324) 179,928 Post-tax comprehensive income for the year 0 0 964 0 (5,384) 0 4,420 New share capital subscribed (paid) 160,000 0 0 0 0 0 160,000 Allocation of net profit to profit reserves in accordance with a decision of General Meeting ofShareholders 0 0 0 1,314 (1,314) 0 0 Allocation of net profit to statutory reserves 0 0 0 47 (47) 0 0 Allocation of net profit to reserves under articles of association 0 0 0 451 (451) 0 0 Other changes of net profit* 0 0 0 77 (1,859) 0 (1,782) CLOSING BALANCE FOR THE PERIOD (31 December 2009) 300,000 1,139 126 36,739 (2,954) (1,324) 333,726 * Other changes of profit reserves include changes in profit reserves and retained earnings due to consolidation entry in accounts. The largest portion of the amount EUR 1,736 thousand is due to changes of equalization provisions. EUR 45 thousand is due to currency differences which occurred in the course of consolidation and EUR 77 thousand is the result of harmonization of profit reserves and net profit for the year in the consolidation process. For the 2008 financial year Retained earnings (including net profit Share Capital Revaluation Reserves of fin. Treasury In EUR thousand capital reserves surplus from profit year) shares EQUITY OPENING BALANCE FOR THE PERIOD (1 January 2008) 89,600 1,139 (396) 30,547 8,024 (1,324) 127,590 Post-tax comprehensive income for the year 0 0 (506) 0 2,856 0 2,350 New share capital subscribed (paid) 50,400 0 0 0 0 0 50,400 Allocation of net profit to reserves from profit in accordance with a decision of General Meeting ofShareholders 0 0 0 940 (940) 0 0 Allocation of net profit to statutory reserves 0 0 0 139 (139) 0 0 Allocation of net profit to reserves under articles of association 0 0 0 1,314 (1,314) 0 0 Other changes of net profit* 0 0 64 1,910 (2,386) 0 (412) CLOSING BALANCE FOR THE PERIOD (31 December 2008) 140,000 1,139 (838) 34,850 6,101 (1,324) 179,928 * Other changes of profit reserves include changes in profit reserves and retained earnings due to consolidation entry in accounts. The majority portion ofthe amount of EUR 1,189 thousand is represented by elimination offormed loan impairments in the group from the previous years, while EUR 478 thousand result from the change of credit risk provision. Retained earnings were adjusted due to paying out of the dividends inside the group, which were correspondingly excluded during the consolidation process. The remaining amount refers to adjustment values between the consolidated statement offinancial position and the consolidated statement of comprehensive income. Annual Report of SID Bank and SID Bank Group - 2009 65 Distributable profit In EUR thousand_2009_2008 Net profit for the year 948 2,767 Portion ofnet profit allocated to statutory reserves (47) (139) Portion ofnet profit allocated to reserves under articles ofassociation (451) (1,314) Portion ofnet profit allocated to other profit reserves 0 (657) Distributable profit_450_657. In accordance with Article 60 of The Companies Act (ZGD-1) the proposal for the use of distributable profit has to be annexed to the annual report. Distributable profit of SID Bank may not be distributed to shareholders. In accordance with Act Amending the Slovene Export and Development Bank Act (ZSIRB-A), distributable profit shall be allocated to other profit reserves. When compiling the annual report, the Management Board formed statutory reserves in the amount of EUR 47 thousand from net profit totalling EUR 948 thousand pursuant to the 3rd and 4th paragraph ofArticle 64 or 2nd item ofthe 1st paragraph ofArticle 230 of the Companies Act (ZGD-1). In accordance with the 4th item of the 1st paragraph ofArticle 230 ofthe Companies Act (ZGD-1), the Management Board formed reserves under articles ofassociation in the amount of 50% or EUR 451 thousand. As at 31 December 2009, distributable profit amounted to EUR 450 thousand, including the unused profit for the year 2009. The Management Board proposes to Supervisory Board that 50% ofthe net profit ofyear 2009 in the amount of EUR 225 thousand is allocated to other profit reserves in accordance with 3rd paragraph ofArticle 230 ofThe Companies Act. In accordance with 3rd paragraph of Article 4 of the Slovene Export and Development Bank Act and Article 27 of the Articles of Association, Management Board and Supervisory Board propose that the General Meeting of SID Bank allocates the distributable profit for 2009 in the total amount of EUR 225 thousand to other profit reserves. Annual Report of SID Bank and SID Bank Group - 2009 66 2. Notes to the financial statements Items 1 to 4 of this report present the statement of financial position as at 31 December 2009, the statement of comprehensive income for the year 2009, the cash flow statement for the year 2009 and the statement of changes in equity for the year 2009 of SID Bank (separate statements) and SID Bank Group (consolidated statements). Statements also include comparable data as at 31 December 2008 or for the 2008 financial year Financial statements are presented in EUR thousand. Assets and liabilities, denominated in foreign currencies, are translated into EUR at the mean exchange rate ofthe European Central Bank as at the date of the statement of financial position. Revenues and expenses, denominated in foreign currencies, are translated into EUR at the mean exchange rate ofthe European Central Bank as at the day they occur or are recorded. Consolidated financial statements are financial statements of the group, presented as statements of a uniform corporation. 2.1. Basic information 2.1.1. SID Bank SID - Slovenska izvozna in razvojna banka d.d., Ljubljana (hereinafter: SID Bank or the bank) with registered office at Ulica Josipine Turnograjske 6, 1000 Ljubljana, Slovenia. SID Bank's share capital stood at EUR 300,000,090.70 divided into 3,121,741 ordinary registered no-par value shares issued in several issues. The Republic ofSlovenia is the sole shareholder ofthe bank. Financial services performed by SID Bank for own account pursuant to the acquired authorization, are mainly: • granting of loans, financing of business transactions, • issuing of bonds and other guarantees, • dealing for its own account or for the account of clients with foreign currencies, including exchange transactions, futures contracts and options, currency and interest financial instruments, transferable securities, • dealing for its own account with money market instruments, • credit rating services: collection, analysis and provision ofinformation on credit status of legal entities. In accordance with Slovene Export and Development Bank Act (ZSIRB) and after its applicability, SID Bank used the above indicated services and financial instruments for the promotion of economic, structural, social and other policies in the areas defined in the 1st item ofArticle 11 ofthis act; for example: - international business transactions and international business cooperation - business incentives with a special emphasis on small and medium enterprises, entrepreneurship and risk capital, - research and development, - education and employment, - environmental protection and energy efficiency, - regional development, - commercial and public infrastructure. Pursuant to a statutory authorization (Slovene Export and Development Bank Act - ZSIRB), SID Bank has a status of authorized institution in accordance with Act Governing Insurance and Financing of International Commercial Transactions (ZZFMGP). For the account ofthe Republic ofSlovenia SID Bank carries out the following activities: • short-term export credit insurance and reinsurance against non-commercial and other non-marketable risks, • investment insurance against non-commercial risks, • medium-term export credit insurance against commercial and/or non-commercial risks, • Interest Rate Equalization Programme (IREP). In accordance with authorizations pursuant to the Republic of Slovenia Guarantee Scheme Act and the Act on the Individuals Guarantee Scheme ofthe Republic ofSlovenia, in 2009 SID bank began to carry out transactions in relation to issuing, monitoring, realization and recovery of guarantees, as well as supervision of expenditure of loans insured by guarantees pursuant to these two acts, for companies as well as individuals. In view of the above, the financial statements of SID Bank comprise the assets and liabilities and the results of operations for its own account. Transactions carried out by SID Bank on behalf of the Republic of Slovenia are recorded in separate accounts, which were defined by the Bank ofSlovenia for keeping oftransactions pursuant to special authorization. As at 31 December 2009, SID Bank had 87 employees (as at 31 December 2008 there were 76). SID Bank is a large company pursuant to Article 55 ofZGD-1. 67 Annual Report of SID Bank and SID Bank Group - 2009 2.1.2. SID Bank Group Parent company SID - Slovenska izvozna in razvojna banka, d.d., Ljubljana (SID Bank, Inc., Ljubljana) Subsidiary companies: - SID - Prva kreditna zavarovalnica d.d., Ljubljana (SID - First Credit Insurance Company Inc., Ljubljana; hereinafter: PKZ), registered at Josipine Turnograjske 6, 1000 Ljubljana, Slovenia, in which SID Bank holds a 100% ownership share. - PRO KOLEKT, družba za izterjavo, d.o.o. , Ljubljana , registered at Josipine Turnograjske 6, 1000 Ljubljana, Slovenia (hereinafter: PRO KOLEKT Ljubljana) in which SID Bank holds a 100% ownership share and which has six affiliated companies:. • PRO KOLEKT d.o.o. Zagreb, registered at Rapska 46B, 10000 Zagreb, Croatia (hereinafter: PRO KOLEKT Zagreb), • PRO KOLEKT d.o.o. Skopje, registered at Bulevar Goce Delčev 11, 91000 Skopje, Macedonia ( hereinafter: PRO KOLEKT Skopje), • PRO KOLEKT, društvo za naplatu duga, d.o.o. Beograd, registered at Bulevar Mihajla Pupina 10ž, 11070 New Belgrade, Serbia (hereinafter: PRO KOLEKT Belgrade), • S.C. PRO KOLEKT Credit Management Services Bucuresti s.r.l., Bukarešta , registered at Prof. George Murgoci Str.2, District 4, 040526 Bucharest, Romania (hereinafter: PRO KOLEKT Bucharest), • PRO KOLEKT SOFIA EOOD, Sofija, registered at 65, Shipchenski prohod Blvd.,1574 Sofia, Bulgaria (hereinafter: PRO KOLEKT Sofia), • PRO KOLEKT d.o.o., Sarajevo, registered at Ulica Hamdije Čemerliča 2, 71000 Sarajevo, Bosnia and Herzegovina (hereinafter: PRO KOLEKT Sarajevo). Joint ventures: - PRVI FAKTOR, faktoring družba, d.o.o., Ljubljana, Slovenija, registered at Slovenska cesta 17, 1000 Ljubljana, Slovenia (hereinafter: PRVI FAKTOR Ljubljana), in which SID Bank holds a 50% ownership share and which has four affiliated companies: • PRVI FAKTOR, faktoring društvo, d.o.o., Zagreb, registered at Hektorovičeva 2/V, 10000 Zagreb, Croatia (hereinafter: PRVI FAKTOR Zagreb), • PRVI FAKTOR - faktoring d.o.o., Beograd, registered at Bulevar Mihajla Pupina 165/v, 11070 New Belgrade, Serbia (hereinafter: PRVI FAKTOR Beograd), • PRVI FAKTOR d.o.o., finansijski inžinjering, d.o.o., Sarajevo, registered at Džemala Bijediča bb, 71000 Sarajevo, MBosnia and Herzegovina (hereinafter: PRVI FAKTOR Sarajevo), • PRVI FAKTOR d.o.o. Skopje, registered at Mito Hasivasilev-Jasmin 20, 91000 Skopje, Macedonia (hereinafter: PRVI FAKTOR Skopje). Basic data on companies in SID Bank Group as at 31 December 2009 In EUR thousand Ownership share of SID Bank Voting rights Nominal value of investment Capital Assets Liabilities Net sales revenues* Net profit/ loss No. of employees SID Bank 321,982 3,024,894 2,702,912 84,262 948 87 PKZ 100% 100% 4,206 9,168 62,741 53,572 9,364 (6,529) 52 PK Ljubljana 100% 100% 419 189 495 192 702 44 7 PK Zagreb 100% 100% 24 95 3,760 3,667 520 60 6 PK Skopje 80% 80% 8 4 6 2 19 2 2 PK Belgrade 100% 100% 25 7 25 18 66 0 2 PK Bucharest 51.02% 51.02% 20 124 202 78 284 111 4 PK Sofia 62.5% 62.5% 26 59 73 14 82 38 1 PK Sarajevo 100% 100% 26 19 45 22 114 12 3 PF Ljubljana 50% 50% 3,087 7,171 134,015 126,844 4,867 1,837 38 PF Zagreb 50% 50% 2,651 5,534 157,478 151,944 10,024 1,403 45 PF Belgrade 50% 50% 1,250 2,336 94,332 91,996 4,212 43 34 PF Sarajevo 50% 50% 451 545 10,643 10,098 584 (273) 14 PF Skopje 50% 50% 5 5 5 0 0 0 0 Annual Report of SID Bank and SID Bank Group - 2009 68 Basic data on companies in SID Bank Group as at 31 December 2008 In EUR thousand Ownership share of SID Bank Voting rights Nominal value of investment Capital Assets Liabilities Net sales revenues* Net profit/loss No. of employees SID Bank 160,757 2,087,717 1,926,960 83,700 2,767 76 PKZ 100% 100% 4,206 16,884 51,560 34,676 11,145 345 51 PK Ljubljana 100% 100% 419 145 314 169 354 (114) 6 PK Zagreb 100% 100% 24 33 3,676 3,643 311 46 6 PK Skopje 80% 80% 8 3 5 2 14 1 1 PK Belgrade 100% 100% 25 7 23 16 66 0 2 PK Bucharest 51.02% 51.02% 20 13 25 12 70 (1) 2 PK Sofia 62.5% 62.5% 26 21 34 13 27 (9) 1 PK Sarajevo 100% 100% 26 (3) 31 34 44 (9) 2 PF Ljubljana 50% 50% 3,087 10,005 156,704 146,699 4,243 4,748 38 PF Zagreb 50% 50% 2,651 5,909 168,708 162,799 6,945 2,385 44 PF Belgrade 50% 50% 1,250 2,441 91,814 89,373 3,876 43 34 PF Sarajevo 50% 50% 451 817 15,971 15,154 970 242 14 PF Skopje 50% 50% 5 5 5 0 0 0 0 * Net revenues of SID Bank include income from interest and commissions as its principal activity. Co-foundation: Centre for International Cooperation and Development, Ljubljana, registered at Kardeljeva ploščad 1, 1000 Ljubljana, Slovenia (hereinafter: CICD), a public institute for business and entrepreneurial consulting. Basic data on other companies in SID Bank Group as at 31 December 2009 Ownership share of In EUR thousand SID Bank Voting rights Nominal value of investment Capital Assets Liabilities Net sales revenues Net profit/loss No. of employees CICD 0 29% 0 97 2,861 2,764 371 0 11 Basic data on other companies in SID Bank Group as at 31 December 2008 Ownership share of In EUR thousand SID Bank Voting rights Nominal value of investment Capital Assets Liabilities Net sales revenues Net profit (loss) No. of employees CICD 0 29% 0 97 2,556 2,455 460 2 11 2.1.3. Consolidation Companies included in consolidation Consolidated financial statements include the following companies: - By the method offull consolidation: - Parent company - SID Bank, - Subsidiary - PKZ, in which SID Bank holds a 100% stake, - By the proportional consolidation method the PRVI FAKTOR Group. SID Bank holds a 50% stake (joint venture) in PRVI FAKTOR Ljubljana, the parent company of the PRVI FAKTOR Group. PRVI FAKTOR Ljubljana compiles consolidated financial statements for the PRVI FAKTOR Group. The PRVI FAKTOR Group consists of: • PRVI FAKTOR Ljubljana, • PRVI FAKTOR Zagreb, • PRVI FAKTOR Belgrade, • PRVI FAKTOR Sarajevo. In the consolidation process, all mutual receivables and liabilities between the companies of the SID Bank Group were excluded, as well as revenues and expenses generated within the SID Bank Group. There were no unrealized profits or losses arising from mutual transactions. In the case of the PRVI FAKTOR Group, all accounting relationships are included and mutual relationships are excluded, accounting for 50%. There is no minority stake. _69_ Annual Report of SID Bank and SID Bank Group - 2009 Companies excluded from consolidation Due to immateriality for the true and fair representation of its financial position, profit or loss, cash flows and changes in equity, SID Bank excluded from consolidation the CIDC institute and PRO KOLEKT Group, which consists of: • PRO KOLEKT Ljubljana, • PRO KOLEKT Zagreb, • PRO KOLEKT Skopje, • PRO KOLEKT Belgrade, • PRO KOLEKT Bucharest, • PRO KOLEKT Sofia, • PRO KOLEKT Sarajevo. The total assets the CIDC institute and of all companies of the PRO KOLEKT Group account for less than 1% of the total assets of SID Bank. Consolidated income of the CIDC institute and of all companies of the PRO KOLEKT Group also account for less than 1% of the income of SID Bank. Pursuant to the indicated key figures the CIDC institute and PRO KOLEKT Group are immaterial in SID Bank Group; therefore it is not necessary to consolidate them. The CIDC institute and companies of PRO KOLEKT GROUP are excluded from consolidation also in accordance with provisions ofthe Decree on Supervision of Banks and Savings Banks on Consolidated Basis. SID Bank has a majority stake (100%) in the parent company PRO KOLEKT Ljubljana. The investment in the subsidiary PRO KOLEKT Ljubljana was included in the consolidated financial statements using the cost method. SID Bank is a co-founder ofthe CIDC institute with the Republic ofSlovenia, but has no investments in it. 2.2. Accounting policies The financial statements of SID Bank (separate statements), of SID Bank Group (consolidated statements) are compiled in accordance with the International Standards of Financial Reporting, as adopted by the European Union (hereinafter: the IFRS), also taking into account regulations ofthe Bank ofSlovenia. In compiling these financial statements the basic accounting assumptions were taken into account: - Accrual basis, - Going concern, - True and fair presentation under the circumstances of a fluctuating value of the Euro and of individual prices, disregarding hyperinflation. Accounting policies shall only change ifthe change: • Is required by a standard or an interpretation; or • Results in the financial statements providing more reliable and relevant information. SID Bank or SID Bank Group also made use of estimations and assessments when compiling financial statement. Estimations were used for impairments of loans to clients, provisions for off-balance-sheet risks, deprecation period of plant, property and equipment and intangible assets, potential tax items, provisions for liabilities to employees and for legal actions. Finally, estimations were used for classification offinancial assets. Although the estimations used are based on the best knowledge of current events and activities, actual results may differ from the estimations. SID Bank or SID Bank Group regularly update the estimations and suppositions; their adjustments are recognized in the period of change. The most important accounting policies which serve as the measurement basis used for the compilation of financial statements ofSID Bank and SID Bank Group and other accounting policies that are relevant to the understanding of the financial statements, are indicated bellow. 2.2.1. Cash and cash equivalents Cash assets consist of cash and cash equivalents. Cash comprises cash on hand, transaction accounts at banks and cash in transit. Cash assets are disclosed separately for the local and foreign currencies. In the balance sheet, cash on hand, mandatory reserve, balances oftransaction accounts with banks and cash items in the process ofcollection are a constituent part ofthe item Cash and balances oftransaction accounts with the state and the central bank. Annual Report of SID Bank and SID Bank Group - 2009 70 In the cash flow statement, all cash items and deposits with banks with original maturity of less than 90 days after acquisition are disclosed as cash and cash equivalents. This item comprises all cash assets, bank deposits and loans. All items of cash equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash. 2.2.2. Financial assets held for trading Financial assets held for trading, as one ofthe two types offinancial assets measured at fair value through profit and loss, include derivatives. Fair value of financial instruments, published on the statement of financial position date, is used in valuation. As a rule, market prices are determined on the basis of quoted market prices. If market price is not known fair value is determined based on the model offuture discounted cash flows. When using price model, data from active market on the statement offinancial position date are used. SID Bank concludes derivatives contracts which represent a small initial contribution compared to the nominal value of the contract. Derivative financial instruments are currency forwards, agreements, interest rates and interest swaps, used primarily for hedging against foreign exchange and interest risks encountered daily during operations on financial markets. Derivative financial instruments, including forward contracts and interest rate swaps, are initially recognized at fair value in the statement of financial position. In the statement of financial position, fair values are denominated in assets in the case of positive valuation or in liabilities in the case of negative valuation. The manner of recognizing profit and loss from changes of the fair value depends on whether the derivative financial instrument has been subjected to accounting treatment as an instrument for hedging against risk. Accounting treatment of hedging against risks is used when certain conditions have been fulfilled. Please consult item 2.2.3. In case financial instruments do not fulfil these conditions, realized profits or losses are stated in the statement of comprehensive income in the item profits or losses from financial assets. 2.2.3. Derivative financial instruments held for hedging This item is comprised of those derivative financial instruments, which fulfil all the criteria for the application of accounting treatment of hedging against risk. When introducing hedging against risk, the bank compiles a formal document which describes the relation between the hedged item and the instrument of hedging against risk, the purpose of risk management, methodology ofvaluation and the strategy of hedging. Estimation ofeffectiveness ofthe instruments for hedging against risks, when facing exposure to changes in fair value of the hedged item, is also recorded. The bank estimates the effectiveness of hedging when concluding the transaction and then in the period of continuation of hedging relation; effectiveness of hedging always moving in the span of80 to 125%. In the year 2009 SID Bank has started to actively manage interest rate risk. The purpose of hedging is to limit the risks pursuant to possible loss due to changes in market interest rate, since the bank sourced funds at fixed interest rate, but it places loans at floating interest rate. With the instrument of interest rate swap the bank changed the interest rate of the sourced funds into a floating rate. This way it minimized interest rate risk, which arises due to inconsistency between interest sensitive receivables and interest sensitive liabilities ofthe bank. The bank uses derivative financial instruments for hedge offair value of recognized assets and liabilities. Changes in fair value of derivative financial instruments for hedge of fair value against risk are recognized in the statement of comprehensive income together with the change of fair value with the hedged item, which might be the result of hedged risk. In the case of successful hedging the changes of fair values of the hedging instruments and items connected to it in the statement of comprehensive income are disclosed under the item "Fair value adjustments in hedge accounting". 2.2.4. Available-for-sale financial assets This item discloses debt securities and equity instruments. They are classified under this item with the plan of possession for an indefinite period, since they are purchased with the aim of balancing its current liquidity. Securities are initially recognized at fair value, which usually equals the purchase price, taking into account date of the transaction (trading date). The purchase cost includes additional costs directly attributable to the acquisition, and increase the purchase value. Purchase price is divided to "net" purchase price and the interest paid. Annual Report of SID Bank and SID Bank Group - 2009 71 The usual dates of purchase/sale of securities are set at T + 3 days for securities and T + 2 days for treasury bills. In all securities, interest is paid until the day the contractual amount is settled. The amortised cost of debt instruments (bonds) is calculated upon initial recognition according to the effective interest rate method which equally distributes the revenues over the entire period for which the debt instrument is held, i.e. from the purchase until maturity - the calculation is based on yield until maturity. After the initial recognition, debt and equity securities are disclosed on the basis ofquoted market prices. The differences between the market price and the amortized cost (unrealized profits/losses) of debt instruments and the differences between the fair value and the acquisition cost in capital instruments are recognized in the statement of comprehensive income, as the item net profit/loss, recognized in revaluation surplus from available-for-sale financial assets and in the item corporate income tax on other comprehensive income. Upon elimination of recognition the above mentioned items are closed, while their effects are transferred to the item Realized profits/losses from financial assets and liabilities not measured at fair value through profit or loss. In case there is objective proof ofimpairment due to an event or events which occurred after the initial recognition, debt and equity instruments have to be permanently impaired. In case the criteria ofimpairment assessment are not fulfilled, but enough information reporting conclusive and objective proof of impairment of equity instruments exist according to the opinion of the Credit Committee, an impairment according to individual assessment ofindividual financial assets is implemented. Individual assessment ofimpairment is also used for debt instruments. Conclusive and objective proof of impairment comprise: failure to pay interest or principal, material financial difficulties ofthe issuer, probability of bankruptcy or financial reorganization ofthe issuer, disappearance ofan active market due to financial difficulties and other important information showing a measurable decrease in estimated future cash flows including economic situation in the country or local environment ofthe issuer. Credit Committee is the body assessing whether important events recognizable as conclusive and objective proof of impairment have occurred. Losses due to impairment recognized in comprehensive income for equity instruments cannot be cancelled through the comprehensive income. In case the fair value of a debt instrument increases in the next period and the increase can be impartially connected to an event occurring after recognizing the loss due to impairment in the statement of comprehensive income, the loss due to the impairment has to be cancelled, and the amount of cancellation be recorded in the statement of comprehensive income. Exchange rate differences arising from debt instruments are recognized in the statement of comprehensive income, while exchange rate differences arising from revaluation to fair value are recognized in the revaluation surplus. Exchange rate differences arising from capital instruments are recognized together with the effects of revaluation to the market value. 2.2.5. Loans The item includes loans to banks, loans to clients other than banks, banks deposits and factoring receivables. Loans and deposits are recognized when cash is transferred to the client. They are disclosed at amortized cost comprising the initial value of the principal reduced by eventual repayments and increased by accrued interest for the period and charged loan approval fees. Revenues from charged loan approval fees are evenly distributed over the entire period of loan repayment. The Management Board believes that the even distribution of revenues arising from these commissions over the loan repayment period is a good approximation for the recognition ofthese revenues using the effective interest rate method. Factoring receivables are receivables with fixed or determinable payments and are not quoted on an active market. Financing of receivables is possible with or without the right to return the receivable back if not paid. Factoring receivables are measured at amortized cost using the effective interest rate method reduced potential value adjustments due to impairment. Factoring receivables are derecognized when the rights to receive cash flows from the financial assets have expired or where the Company has transferred substantially all the risks and rewards of ownership. Annual Report of SID Bank and SID Bank Group - 2009 72 2.2.6. Impairment of loans, guarantees and factoring receivables SID Bank and SID Bank Group regularly, at least per statement of financial position date, check for the existence of objective proof on eventual impairment of loans, guarantees and factoring receivables. Assets are impaired when events occur, which affect the decrease ofestimated future cash flows, and ifthe decrease can be reliably estimated. Objective proof of impairment of financial assets are important information on financial difficulties of the associated subject, non-payment interest or principal, possibility of bankruptcy or financial reorganization of the associated subject, economic situation in the local environment, which coincide with the non-payment. We also take into account major changes with unfavourable effect, which occurred in technological, market, economic or legal environment of operation of the associated subject, and which indicate that the value of given financial assets will not be reimbursed. In this item, financial assets include loans to banks, loans to clients other than banks, banks deposits and factoring receivables. Impairment of loans and guarantees Financial assets from loans and guarantees are classified into assets impaired on individual or group basis. Individually impaired balance-sheet and off-balance-sheet items comprise: • Individually significant items, ofwhich joint exposure for classification to one client exceeds EUR 200 thousand, • Balance-sheet items which represent minimal risk. Total exposures which are not individually impaired are classified into groups on the basis ofthe type offinancial asset and the debtor's credit rating. The estimate of losses for group impairment is based on a three year average of estimated losses from financial assets in individual groups, adjusted to current economic situation. Ifduring the individual assessment offinancial assets objective proof ofimpairment exists, the recoverable amount ofthe financial asset must be estimated. Impairment is measured for each individually significant financial asset. Impairment of financial assets that are not individually significant may be measured collectively. In the calculation of losses from credit risk of an individually significant financial asset, prime and adequate security are taken into account as well as other collateral which fully meets the conditions stipulated under Item 9 of the Regulation on the Assessment of Credit Risk Losses of Banks and Savings Banks. If financial assets are assessed individually but impairment is not necessary and consequently not recognized, these assets are subject to collective assessment in the full amount. Impairment offactoring receivables Impairments for financial assets arising from factoring (factored receivables, bills of exchange, supplier factoring receivables - hereinafter: factoring receivables) are created whenever it is assessed that it will not be possible to realize certain receivables in accordance with contractual provisions and that losses will be incurred. The amount of adjustment or impairment is assessed on the basis individual assessment of individual debtor. When creating impairments ofindividually significant receivables, the estimated recoverable amount ofthe receivable is taken into account. 2.2.7. Property, plant and equipment Property, plant and equipment include real estate, equipment, and small tools. Property, plant and equipment are initially recognized at purchase value. The purchase value consists of the purchase price, import duties and non-refundable purchase taxes as well as directly attributable costs of bringing the asset to the condition necessary for the intended use. Subsequent costs incurred in connection with a component of property, plant and equipment may be disclosed as maintenance costs or an increase in the purchase cost of the asset. Current maintenance and repairs are included in the statement of comprehensive income when the expenses arise. Investment in the existing construction works and equipment, which increases future economic benefits, increases the value of property, plant and equipment. After initial recognition an item of property, plant and equipment is carried at its purchase cost reduced by any accumulated depreciation and any accumulated impairment losses. Annual Report of SID Bank and SID Bank Group - 2009 73 Land and buildings are accounted for separately, even when they are acquired together. Depreciation of an item of property, plant and equipment begins when the item has become available for use. Depreciation is calculated individually on a straight-line basis. The following depreciation rates are used: Tangible fixed assets are impaired, when their carrying amount exceeds their recoverable amount. The value of impairment loss is recognized as expenses in the statement of comprehensive income. At the balance sheet cut-offat the end ofeach financial year it is assessed ifthere are any signs of impairment ofan asset. Ifsuch signs exist, the recoverable value ofthe asset is estimated, equalling: • Fair value reduced by costs of sale or • Value in use, whichever is higher. The carrying amount of an item of tangible fixed assets is derecognized upon disposal or when no future economic benefits are expected from its future use or disposal. 2.2.8. Intangible assets Intangible assets with a definite useful life The item includes investments in software and other property rights. Ifthe useful life is definite, the asset is amortized at amortization rate which is 20% to 25% for software and 12% to 20% for other property rights. Depreciation is calculated individually on a straight-line basis. Intangible assets with a definite useful life are impaired when their carrying amount exceeds their recoverable amount. The value of impairment loss is recognized as expenses in the statement of comprehensive income. At the balance sheet cut-off at the end of each financial year, it is assessed if there are any signs of impairment of an intangible asset. If such signs exist, the recoverable value ofthe asset is estimated, equalling: • Fair value reduced by costs of sale or • Value in use, whichever is higher. After initial recognition an intangible asset with a definite useful life is carried at its purchase cost reduced by any accumulated depreciation and any accumulated impairment losses. Amortization shall cease at the earlier of: the date that the asset is classified as held for sale or the date that the asset is derecognized. Intangible assets with indefinite useful life The item includes goodwill. At the end ofeach financial year, at the balance sheet cut-offdate, the impairment ofgoodwill is tested by comparing the total carrying amount of the asset consisting of equity interest and goodwill with the recoverable value - value in use. The value in use is the present value of future cash flows calculated by using the discounted rate which reflects the required rate of return on investment. Future cash flows are expected dividends. 2.2.9. Long-term investments in equity of subsidiaries, associates and joint ventures An investment in the equity ofa subsidiary or an associated company is disclosed at purchase value. Subsidiaries are those companies in which SID Bank directly or indirectly holds more than one half of the voting rights or in any other way controls their operations. Associated companies are companies in which the parent company directly or indirectly holds between 20% and 50% of voting rights. SID Bank holds a 50% stake in the parent company of the PRVI FAKTOR Group; therefore PRVI FAKTOR Group is consolidated proportionally. SID Bank Group Buildings Computer equipment Passenger cars Other equipment Up to 5.0% Up to 50.0% 12.5-20.0% Up to 25.0% 11.0-25.0% 25.0-100.0% Furniture Small tools 74 Annual Report of SID Bank and SID Bank Group - 2009 If there is evidence which indicates the need for impairment ofan investment in a subsidiary or associated company, the recoverable value is assessed for each individual investment. Dividends received are disclosed among the income from dividends in the separate statement ofcomprehensive income. Income is also booked in case dividends have not been paid out, but there is the appropriate decree of supervisory bodies ofthe company, which substantiates that their remittance will be realized in the near future. In the consolidated financial statements an investment in the equity of a subsidiary not included in consolidation is disclosed at purchase value. The investment in the parent company of PRO KOLEKT Group is disclosed at purchase value. 2.2.10. Other assets Assets from insurance operations The item includes share of reinsurers in unearned premiums, share of reinsurers in reserves for outstanding claims, share of reinsurers in reserves for bonuses and discounts, share of reinsurers in reserves for unexpired risks and other receivables. Concluded reinsurance contracts transfer significant insurance risk to reinsurance companies and meet the conditions from the IFRS for classification among insurance contracts; therefore they are valued, recorded and disclosed as such in the relevant statements. The reinsurers' assets (shares oftechnical provisions) are calculated on the basis ofthe reinsurance contract and disclosed under the reinsurance assets. On the balance sheet date the insurer verifies if the reinsurance assets are impaired. If the impairment is confirmed, the carrying amount of reinsurance assets is reduced and loss disclosed in relation to impairment in the income statement. Impairment is established individually for each reinsurer on the contract, taking into account credit rating, monitoring offinancial situation of reinsurers and their general situation, particularly on the specialized market of credit insurance/reinsurance. The reinsurance contract contains a provision on the reinsurance commission which depends on the claims ratio. In the quarterly statements, the reinsurers pay fees accounting for 33%. In revenues the lowest commission from the sliding scale (24.5%) is recognized, which is in accordance with the assessed claims ratio for the current year in the provisions for outstanding claims. The difference between the commission according to reinsurance statements and the commission recognized in revenues is deferred until the first settlement to the provisions for deferred revenues. Other assets Receivables are recognized as an asset in the amounts arising from the relevant documents under the assumption that they will be repaid. The fair, i.e. realizable value is checked on the balance sheet date for various types of receivables according to different methods. If there is objective proof that an impairment loss has been incurred on an item of receivables carried at amortized cost, the amount of the impairment loss is disclosed under revaluation operating expenses related to receivables; the carrying amount ofthe receivable is decreased through the allowance account. Receivables due from policyholders arising from insurance premiums and benefits, and other receivables Fair, i.e. realizable value of these receivables and their adjustments are assessed on the basis of individual assessment of the insurer's solvency, taking into account also the financial position of the insurer and its fulfilment of insurer's obligations in the previous periods. Receivables due from policyholders are not secured, and thus not taken into account in the assessment ofvalue adjustments. Recourse receivables Recourse receivables are recorded as exercised upon the payment of the insurance premium in the amount when it is reasonable to expect that they will lead to cash receipts. The difference between this amount and the paid insurance premium is disclosed in the off-balance-sheet record until the closing ofthe recourse case. Adjustments ofthe value of recourse receivables are formed on the basis ofindividual assessment of realizable value. Recourse receivables are divided into three groups based on the cause of damage: liquidation procedures, rehabilitation procedures and payment of insurance premium due to extended non-payment. In the case of bankruptcy, the estimate of realizable value of a recourse receivable can be up to 1%, in the case of other insolvency procedures specific written information is material. Ifthere is no such information, the estimate ofthe realizable value may not exceed 5%. In rehabilitation procedures also information is material. If there is no such information, the estimate of the realizable value may not exceed 20%. In the payment of insurance premium in the event of extended non-payment, the important factors are debtor/guarantor credit rating, age of receivables, estimated recoverability of receivables submitted by authorized outside bodies. As a rule, the estimate ofa recourse receivable may not exceed 50%. _75_ Annual Report of SID Bank and SID Bank Group - 2009 2.2.11. Financial liabilities measured at amortized cost The item includes liabilities to banks and clients other than banks. The items are disclosed at amortized cost comprising the initial value of the principal reduced by eventual repayments and increased by accrued interest for the period and eventual expenses for fees related to the raising of loans. Expenses for fees related to the raising of loans are equally distributed over the loan repayment period. The Management Board of SID Bank believes that even distribution of expenses over the loan repayment period is a good approximation for the recognition ofexpenses using the effective interest rate method. 2.2.12. Provision Provisions are established for potential losses related to risks arising from off-balance-sheet items (guarantees, approved undrawn credit facilities and credit lines), provisions for loyalty bonuses, provisions for retirement severance pay and liabilities arising from insurance contracts. Bank provision This item includes impairments for issued guarantees, approved undrawn credit facilities and credit lines, calculated according to procedures shown in the item 2.2.6. ofthis report. Liabilities from insurance contracts - Unearned premiums Provisions for unearned premiums are the unearned amounts of premiums written. Gross provisions for unearned premiums are calculated for each invoice separately (i.e. invoice issued by the policyholder to the buyer). The calculation of unearned premiums takes into account the assessed distribution ofthe probability ofoccurrence ofa loss event, which is even for the risk of non-payment due to the buyer's permanent insolvency or bankruptcy and uneven for the risk of extended non-payment (upon invoice maturity). The provisions for unearned premiums also foresee that operating costs are evenly distributed during the insurance period. The reinsurance part ofthe unearned premium is formed on the basis ofa quota and facultative reinsurance protection. For the part of the premium estimated (sold in December, for which the insurer is already covered, but not yet reported), the unearned premium is calculated on the basis of the flat rate method in proportion to the premium written by individual levels of reinsurance classes and in view of the past statistical data; the reinsurance portions for this part of unearned premium were calculated taking into account the adequate shares ofindividual classes. - Provisions for outstanding claims Provisions for claims outstanding are formed in the amount of estimated liabilities that the insurer is obliged to pay out on the basis of insurance contracts on which an insurance event arises before the end of the accounting period, irrespective ofwhether the insurance event has already been reported, including all the costs borne on the basis ofthese contracts. Provisions for claims reported and not yet settled as at the balance sheet date are inventoried separately for each loss event on the basis offoreseen costs arising from the liquidation ofsuch losses. Provisions for claims incurred and not yet reported as at the balance sheet date are determined on the basis of past experience using the Chain Ladder method. The method is adjusted according to particularity of each financial year. Insurer has not discounted gross provisions for outstanding claims as at the balance sheet date. Provisions for appraisal costs have also been formed. - Provisions for bonuses Provisions for bonuses are calculated for contracts signed with those insurers which include a clause on refunding part of the premium in the case of low claims ratio or in if the insurers do not incur loss events within the deadline defined by the contract. Provisions for bonuses are calculated independently and the calculation comprises all contracts containing the clause on the bonus; for each ofthe contracts, the fulfilment ofcontractual provisions for obtaining the right to bonuses is checked before the balance sheet date. When calculating provisions for bonuses, the insurer took into account the premium written for an individual calendar year, the claims paid in individual years, reported claims and potential claims as at the balance sheet date. _76_ Annual Report of SID Bank and SID Bank Group - 2009 Reinsurance part of provisions for bonuses is calculated as part of gross provisions for bonuses by shares arising from reinsurance contracts from the relevant years. - Provisions for unexpired risks Provisions are formed for risks which will be realized in future, for coverage of losses and costs related to the existing insurance contracts. The amount ofthese provisions represents the difference between the amount needed for coverage of unexpired risks and provisions for unearned premiums. Other provisions - Long-term accrued expenses and deferred revenue arising from reinsurance commissions The reinsurance contract defines the sliding scale of commission levels. The minimum rate is 24.5%, reinsurers pay temporary commission at the rate of 33%, which shall be charged in the period stated by the contract and disclosed in the statements when the reinsurers confirm it. The difference between the calculations at the two rates is temporarily deferred until the accounts are compiled, and posted under long-term provisions for deferred revenues. - Provisions for loyalty bonuses These provisions were calculated on the basis of the amounts of bonuses specified by the relevant collective agreement as at the balance sheet day. The calculation takes into account the difference between the period for which the bonus was earned and the period that has yet to pass in order to meet the conditions for receiving the jubilee bonus. - Provisions for retirement severance pay These provisions were calculated on the basis of the provisions of collective agreement, the contribution rates paid by the employers and the conditions for retirement applicable as at the balance sheet day, assuming that all current employees will meet the conditions for retirement in SID Bank or SID Bank Group and that they will meet and exercise the age related retirement condition. In accordance with Slovene legislation, social security and pension insurance contributions for their employees, which are accounted on the basis of gross salaries and recognized in profit or loss under labour costs for the period, are being paid. Compensations for short-term absences (paid annual leave) are included in the costs ofthe period. 2.2.13. Other liabilities Liabilities are initially recognized at the amounts stated in the relevant documents concerning their origin, which usually prove, in the scope of operating debt, the acceptance of goods or services or the work performed or the charged costs, expenses or share in the statement of comprehensive income. Liabilities may subsequently be increased directly or may, irrespective ofamounts paid or potential other settlements, also be decreased on the basis ofa contract concluded to that effect with the creditors. Liabilities arising from insurance transactions are settled in accordance with the reinsurance contracts, as a rule by the end of the first or second quarter after the quarter in which the statement was issued. According to the provisions of the reinsurance contract, only the balance arising from the reinsurance contract is paid so that the receivables and liabilities to individual reinsurer are mutually offset. Through concluding contracts for short-term credit insurance the company assumes important insurance risks, which fulfil the conditions of the IFRS 4 for classification under insurance contracts. All the contracts for short-term credit insurance are valued, recorded and disclosed as insurance contracts in the relevant statements. No interest is accrued on other liabilities. 2.2.14. Capital Capital includes share capital, capital reserves, profit reserves, revaluation surplus from financial assets, capital revaluation - own shares and net profit for the year. Share capital is disclosed in nominal value and has been paid up by the shareholders. In accordance with legislation, capital reserves may be used for the coverage of losses and for increase in capital. Profit reserves are recognized when determined by the body preparing the annual report and/or by a resolution adopted by the competent body and used in accordance with the Articles ofAssociation and applicable law. Reserves under articles of association may be used for covering net losses for the financial year, for covering the losses brought forward from previous years, for increasing the share capital, for establishing reserves for own interests and for the rehabilitation of _77_ Annual Report of SID Bank and SID Bank Group - 2009 major losses arising from the operations or extraordinary business events. Other profit reserves are intended for strengthening the capital adequacy. Acquired own shares are disclosed in the amount ofthe paid purchase price debited against share capital. Revaluation surplus includes the revaluation ofavailable-for-sale financial assets. Profit reserves in the consolidated financial statements also include credit risk equalization provisions (equalization provisions). In accordance with the Insurance Act, equalization provisions and their changes are disclosed in a separate item credit risk equalization provisions. If the credit insurance technical result is positive, equalisation provisions are created in the amount of 75% of the former, but may not exceed 12% ofthe written net premium for the year. 2.2.15. Off-balance-sheet items Off-balance-sheet records discloses in separate financial statements the issued guarantees, undrawn approved loans and credit lines, undrawn raised loans, nominal value of derivative financial instruments and guarantees received. In the consolidated financial statements are also disclosed contingent liabilities, which comprise unclaimed recourse receivables. Assumed financial liabilities for issued guarantees, both financial and service, represent SID Bank's irrevocable payment liability, ifa client fails to meet its liabilities to a third person. The principal aim of assumed and irrevocable liabilities arising from approved undrawn credit facilities and credit lines is to provide assets for SID Bank's client in accordance with the concluded contract. Guarantees received for approved loans represent the value of insurances and guarantees received from creditors and third persons for the insurance of receivables in case of non-payment of contractual obligations. Risks related to contingent liabilities and assumed financial liabilities are estimated on the basis ofapplicable accounting policies and internal provisions concerning risk control. 2.2.16. Operations under Special Authorization Operations carried out on behalfofthe Republic ofSlovenia are kept in separate accounts, which were defined by the Bank ofSlovenia for keeping oftransactions pursuant to special authorization. 2.2.17. Interest income and expense Interest income and expenses comprise interest income and expenses arising from granted or received loans, interest from available-for-sale financial assets and other interest. In the income statement, income and expenses arising from granted and received loans and other interest are recognized in the relevant period on the basis ofapplicable interest method. In available-for-sale financial assets, interest income is evenly distributed over the period for which the security is held, on the basis ofthe calculation ofamortized cost according to the effective interest rate method. 2.2.18. Fees and commissions received and paid Revenues from fees and commissions comprise commissions from granted loans and guarantees. As stated in the item 2.2.5, revenues from loan approval fees are evenly distributed over the entire period of loan repayment. Expenses for fees and commissions comprise commissions for loans raised abroad. Expenses for fees and commissions are also evenly distributed over the loan repayment period. 2.2.19. Other net operating profits/losses Other net operating profits/losses in the income statement include income from non-banking services, revenues from insurance operations and expenses for insurance operations. Income from non-banking services include revenues for preparation of credit rating, commission charged for operation on special authorization, rents charged and other services. _78_ Annual Report of SID Bank and SID Bank Group - 2009 Insurance premiums are recognized under revenues upon the issue of invoices to third parties and have already been reduced by insurance contract tax. Premiums also include an estimate of uncharged premium for assumed risks (sales carried out by the insurers in December, which were reported in January). Part ofthe gross unearned premiums written is transferred to the reinsurers with the aim of spreading and managing risks. The reinsurers' share of gross premiums written reduces gross premiums written. Revenues from insurance premiums also include fees for credit rating charged to policyholders. Expenses for insurance operations include settled claims, recourse receivables and bonuses. Settled claims include insurance premiums paid to the insured, which arise from the occurrence of loss event. Amounts of net claims settled are reduced by enforced recourse receivables. Settled bonuses represent the payment of bonuses to the insured in the current year. 2.2.20. Impairment of loans and factoring receivables, measured at amortized cost Losses arising from impairment of loans are recognized if there is objective evidence that the client will not be able to repay the total amount of an approved loan and accrued interest. The amount of loss is the difference between the carrying amount of the loan and its recoverable value which consists of expected future payments, including the amounts of payments from guarantees and collateral, discounted by the interest rate applicable upon the raising ofthe loan. The basis for the impairment of loans is the borrower's creditworthiness and performance, taking into account the value of received third-party collateral and guarantees. 2.2.21. Taxation Corporate income tax is calculated based on the revenues and expenses reported in the statement of comprehensive income in accordance with all relevant legislation. Corporate income tax on ordinary activities is calculated according to applicable tax rate ofthe taxable base. Deferred corporate income taxes are fully disclosed using the method ofa liability on the statement offinancial position for the temporary differences arising between the tax values ofassets and liabilities and their book values in the financial statements. Deferred corporate income taxes are determined based on the tax rates that are applicable as at the statement of financial position date and that are expected to be in use when the deferred tax asset is realized or the deferred tax liability is settled. The most important temporary differences arise from valuation of available-for-sale financial assets and from provisions. Deferred tax assets are recognized for all deduction temporary differences, if it is probable that available taxable profit might arise, to which deduction temporary differences may be charged. Deferred tax is related to valuation ofavailable-for-sale financial instruments at fair value are recorded directly in capital. 2.2.22. Effect of changes in foreign exchange rates The functional currency used in presenting these separate financial statements is the Euro (EUR). All foreign currency assets and liabilities are recorded, on initial recognition in the functional currency, by applying to the foreign currency amount at spot exchange rate between the functional currency and the foreign currency on the date of the transaction (the mean exchange rate ofthe European Central Bank. At each statement offinancial position date: - Foreign currency cash items are translated using the closing rate; - Non-cash items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date ofthe transaction; and - Non-cash items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was determined. Exchange differences arising from the settlement of cash items or when translating cash items at rates different from those at which they were translated on initial recognition or in the previous financial statements are recognized in the statement of comprehensive income for the period in which they arise. They are disclosed under the item gains and losses from exchange rate differences. 2.2.23. Significant amounts Significant items in the separate statement of financial position are those which exceed 1% of total assets of separate statement offinancial position on the balance sheet date, i.e. EUR 30,249 thousand as at 31 December 2009. Significant _79_ Annual Report of SID Bank and SID Bank Group - 2009 items in the separate statement of comprehensive income are those, which exceed 0.5% of total assets of the separate balance sheet on the balancing date, i.e. EUR 15,124 thousand in the separate statement of comprehensive income for 2009. Significant items in the consolidated statement of financial position are those which exceed 1% of total assets of consolidated statement offinancial position on the balance sheet date, i.e. EUR 32,156 thousand as at 31 December 2009. Significant items in the consolidated statement of comprehensive income are those, which exceed 0.5% oftotal assets of the separate balance sheet on the balancing date, i.e. EUR 16,078 thousand in the consolidated statement of comprehensive income for 2009. 2.2.24. Cash flow statement The separate cash flow statement was compiled on the basis ofthe indirect method or Version II. Pursuant to this method, cash flows from operations are first calculated on the basis of broken down data from the separate statement of financial position and separate statement of comprehensive income. All effects related to financing, i.e. property, plant and equipment, investment property, intangible assets, investments in the capital of associates, joint ventures and subsidiaries, fixed assets or liabilities held for sale, financial assets held to maturity, subordinated liabilities, issued capital instruments and own shares are deducted from the net profit for the financial year. All unrealized exchange rate differences and unrealized effects from the change in the fair value, which are transferred to cash equivalents are also deducted, while the effects of the change in the fair value of financial instruments from the revaluation surplus before tax, related to the operating items, i.e. available-for-sale financial assets and derivatives held for hedging cash flows are added. The resulting amount of the effects of the separate statement of comprehensive income and the revaluation surplus needs to be further adjusted for net increase or decrease in operating assets and liabilities and paid or refunded corporate income tax. The result is net cash flows from operating activities. In the section relating to cash flows from financing, the direct method is used, based on inflows and outflows. Cash assets are taken into account in line with the definition stated in Item 2.2.1. 2.2.25. Statement of changes in equity Statement of changes in equity discloses the changes in individual equity components during the accounting period. The form is based on the requirements of IAS 1.96. The change in each equity item, as disclosed in the statement of financial position, is presented in the form. The statement of changes in equity is compiled by entering in the relevant items the balances of individual equity components from the previous financial year, the amounts of changes in individual equity components during the accounting period, including the utilization of net profit and the coverage of loss during the accounting period, and the balances of individual equity components at the end of the accounting period. In a separate row, amounts are disclosed by equity components which comprise net distributable profit or balance sheet loss for the accounting period, for which a change in equity statement is compiled. The consolidated statement of changes in equity also includes the alignment of differences, consolidation entries and elimination in separate financial years. 2.2.26. Calculation of net profit per share It is calculated as the ratio of net profit recorded in the bank's statement of comprehensive income per the number of shares that comprise the share capital ofthe bank. Own shares are not included in this calculation. 2.2.27. The newly applicable standards and interpretations in the reporting period and not as yet applicable but already issued/adopted standards and interpretations In the reporting year the following standard and interpretations issued by the International Accounting Standards Committee and adopted by the EU have changed: IFRS 8 Operating Segments; IFRS 1 First time Adoption of International Financial Reporting Standards and IAS 27 Consolidated Financial Statements (purchase value of investment into a subsidiary company, joint venture or associated enterprise); IFRS 4 Insurance Contracts and IFRS 7 Financial Instruments: Disclosures (enhanced financial instruments disclosure); IAS 32 Financial Instruments: Presentation (puttable instruments and obligations arising on liquidation); IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures (reclassification of financial assets); IAS 1 Presentation of Financial Statements (amended presentation); IAS 23 Borrowing Costs; IFRS 2 Share-based Payment (required conditions and recalls); IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement (embedded derivatives); IFRIC 11 IFRS 2 Group and Treasury Share Transactions; IFRS 13 Customer Loyalty Programmes; IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. Annual Report of SID Bank and SID Bank Group - 2009 80 The adoption ofthese interpretations did not result in a change ofaccounting policies applied by SID Bank; however they influenced the outlines of statements, which changed due to the changes of IAS 1. A new statement (Statement of comprehensive income) and an adjusted Statement of changes in equity are presented. In accordance with provisions of the IFRS 8 Operating Segments the company has disclosed the structure of its group in accordance with its internal reporting system. This way, the company recorded business sources and effectiveness of separate segments of operation Not yet applicable and unused but already issued/adopted standards and interpretations As at the date of approval of these statements, the following standards and interpretations had been issued by the International Accounting Standards Board and which had been adopted by the EU, but not yet applicable: IFRS 1 First time Adoption of International Financial Reporting Standards; IFRS 3 Business Combinations; IAS 27 Consolidated Financial Statements; IAS 32 Financial Instruments: Presentation (accounting ofthe issue of subscription rights); IAS 39 Financial Instruments: Recognition and Measurement (items which fulfil conditions for risk hedging); IFRIC 12 Service Concession Arrangements; IFRIC 15 Agreements for the Construction of Real Estate; IFRIC 16 Hedges ofa Net Investment in a Foreign Operation; IFRIC 17 Distributions of Non-cash Assets; IFRIC 18 Transfers ofAssets from Customers. SID Bank has decided to not use the not yet applicable standards, interpretations and amendments until they become applicable. The bank estimates that the beginning of applicability ofthese standards, amendments and interpretations will have no fundamental impact on its financial statements. The issued standards which are not yet adopted in the EU The IFRS, which were adopted by the EU, currently do not differ essentially from the regulations adopted by the International Accounting Standards Committee, with the exception of: IFRS 9 Financial Instruments; IAS 24 Related Party Disclosures (simplification of disclosure requirements for stake related companies and explanation of the definition of related party);IFRS 1 First time Adoption of International Financial Reporting Standards (additional exceptions on the first adoption); IFRS 2 Share-based Payment (share transactions in the group paid in cash);IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (payments in advance ofthe requirements concerning minimal financing); IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments. 2.3. Notes to the Statement of financial position (In EUR thousand) 2.3.1. Cash and balances in transaction accounts with the state and mandatory reserves with the central bank SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Cash in hand 0 0 0 1 Transaction accounts 69 25 2.632 3.349 Mandatory reserves 1,004 87 1,004 87 Total 1,073 112 3,636 3,437 The amount of mandatory reserves of banks and savings banks with the Bank of Slovenia is stipulated by the Decree on Mandatory Reserve of Banks and Savings Banks. Increase in mandatory reserve in 2009 results from the increase of up to 2-year maturity lease with non-financial organizations, which are included in the base for calculation of mandatory reserve. Assets received from banks and savings banks are not included in the base. 2.3.2. Financial assets held for trading SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Derivative financial instruments held for trading under forward contracts 248 125 248 125 Total 248 125 248 125 The item indicates receivables due to positive valuation offorward in the amount of USD 1 million. Annual Report of SID Bank and SID Bank Group - 2009 81 2.3.3. Financial assets held for hedging SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Derivative financial instruments held for hedging under swap contracts 2,101 0 2,101 0 Total 2,101 0 2,101 0 Effects due to interest rate hedging amounted to EUR 907 thousand. They are recognized in aggregate in the statement of comprehensive income. 2.3.4. Available-for-sale financial assets _SID Bank_SID Bank Group _31.12.2009 31.12.2008 31.12.2009 31.12.2008 Short-term debt securities 0 992 3,733 6,410 Long-term debt securities 49,921 60,248 68,341 72,654 Equity instruments_130_92_3J6_386 Total_50,051_61,332_72,390_79,450 Debt securities by type of issuer_ _SID Bank_SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Government securities 22,205 32,106 31,625 38,660 - Republic ofSlovenia bonds 22,205 31,114 31,625 35,683 - Republic ofSlovenia treasury bills 0 992 0 2,977 Bonds offoreign countries 33 8,069 1,055 8,331 - Central governmentbonds 0 8,029 1,022 8,291 - Local government bonds 33 40 33 40 Bank bonds 23,718 7,147 30,748 10,765 - Domestic banks 12,920 2,542 17,811 3,478 - Domestic banks- subordinate bonds 1,714 2,271 2,711 3,678 - Foreign banks 4,027 2,334 5,169 3,609 - Multilat. and developmentbanks 5,057 0 5,057 0 Bonds of other foreign financial organizations 190 620 964 1,267 Domestic unit central government bonds 304 333 304 333 Bonds of other domestic financial organizations 0 0 1,282 1,412 Bonds of non-financial companies 3,471 12,965 6,096 18,296 - Domestic non-financial companies 1,704 10,271 2,133 10,699 - Foreign non-financial companies 1,767 2,694 3,963 7,597 Capital investment 130 92 316 386 Total 50,051 61,332 72,390 79,450 The disclosed balance of long-term securities of SID Bank as at 31 December 2009 includes interest calculated at effective interest rate in the amount of EUR 797 thousand. The interest calculated at effective interest rate equally distributes the interest revenues over the entire period for which the debt instrument is held, i.e. from the purchase until maturity - the calculation is based on yield until maturity. Interest calculated at effective interest rate for SID Bank Group amounts to EUR 1,202 thousand. Debt securities by interest accrual method SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 At fixed interest rate 38,353 54,091 53,722 66,242 At variable interest rate 11,538 6,156 18,322 11,829 Non-interest 160 1,085 346 1,379 Total 50,051 61,332 72,390 79,450 Annual Report of SID Bank and SID Bank Group - 2009 82 Breakdown of securities by issuer rating SID Bank SID Bank Group Fair value as Fair value as at at 31 31 December Structure December Structure Rating 2009 in % 2009 in % Rating according to S&P AAA 6,120 12.2 7,131 9.8 AA+ 253 0.5 730 1.0 AA 26,814 53.6 40,296 55.7 AA- 2,001 4.0 2,001 2.8 A+ 998 2.0 1,828 2.5 A 0 0.0 1,613 2.2 A- 7,100 14.1 8,390 11.6 BBB+ 3,929 7.9 4,723 6.5 BBB 858 1.7 1,648 2.3 BB+ 0 0.0 416 0.6 D 0 0.0 41 0.1 No rating 1,978 4.0 3,573 4.9 Total 50,051 100 72,390 100 Changes in debt securities and equity instruments SID Bank SID Bank Group 2009 2008 2009 2008 Balance as at 1 January 61,332 40,728 79,450 63,035 Purchases 53,237 53,810 71,507 59,693 Foreign exchange differences 0 0 37 (78) Sale, realization (64,518) (32,236) (79,454) (41,500) Change in fair value - impairment 0 (970) 850 (1,700) Balance as at 31 December 50,051 61,332 72,390 79,450 Debt securities of SID Bank include EUR 1,714 thousand in subordinated securities, namely BDM, NovakrFloat49 and NLB13 bonds. Exposure to interest rate risk is presented in items 2.4.1. and 3.3.1. Of the total portfolio of SID Bank as at 31 December 2009, TallinFloat bond in the amount of EUR 33 thousand and the mutual fund MP Plus in the amount ofEUR 130 thousand were not listed on the stock exchange. Besides these, from the portfolio of SID Bank Group as at 31 December 2009, NLB Dinamični mutual fund was also not listed on the stock exchange. Total value of securities not listed on the stock exchange in SID Bank Group was EUR 348 thousand. In the year 2009 SID Bank Group in addition permanently impaired the NLB Dinamični mutual fund in the amount of EUR 10 thousand as well as abolished impairment of KAUPTFloat security in the amount of EUR 37 thousand due to sale. SID Bank Group owns EUR 3,507 thousand in subordinated securities beside the ones in SID Bank, namely FB15, AB08, BCE7 and ZT01. Exposure to interest rate risk is presented in items 2.4.1. and 3.3.2., while exposure to foreign exchange risk is presented in item 3.2.2. 2.3.5. Loans SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Loans to banks Loans to clients other than banks 2,292,668 662,284 1,512,356 500,183 2,306,883 784,616 1,534,606 653,074 Total 2,954,952 2,012,539 3,091,499 2,187,680 Loans to banks SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Short-term loans Long-term loans Deposits 0 2,260,130 32,538 39,762 1,412,279 60,315 4,747 2,260,130 42,007 47,083 1,412,278 75,245 Total 2,292,668 1,512,356 2,306,884 1,534,606 Loans to banks, granted by SID Bank in foreign currency, amount to USD 19,406 thousand, deposits in foreign value amount to USD 390 thousand. Annual Report of SID Bank and SID Bank Group - 2009 83 In 2009 commercial banks remained the most important clients of SID Bank, with their share in SID Bank loan portfolio amounting to 77.6 percent. Majority of investments are thus represented by loans to Slovene commercial banks and to banks of foreign buyers of Slovene goods and services. The remaining 22.4% share in SID Bank loan portfolio is represented by loans to Slovene companies and their foreign buyers. The maturity structure of SID Bank's loan portfolio confirms the orientation of SID Bank towards operations in accordance with Slovene Export and Development Bank Act (ZSIRB) and the Act Governing Insurance and Financing of International Business Transactions (ZZFMGP), with the share of long-term loans amounting to 98.6 percent at the end of2009. Loans to banks represent a 74.6 percent share in SID Bank Group. The majority of assets are placed as long-term loans. Direct financing of companies represents the minor share ofthe loan potential of SID Bank Group. Factoring services are mainly aimed at financing of companies. A part of deposits in commercial banks, are allocated by SID Bank Group to coverage of liabilities from insurance contracts and liquidity control. Short-term loans to banks SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Loans in EUR 0 39,762 2,009 39,762 Loans with currency clause 0 0 2,738 7,321 Value adjustments of loans 0 0 0 0 Total 0 39,762 4,747 47,083 Long-term loans to banks SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Loans in EUR 2,249,743 1,399,124 2,249,743 1,399,123 Loans in foreign currency 13,535 14,287 13,535 14,287 Value adjustments of loans (3,148) (1,132) (3,148) (1,132) Total 2,260,130 1,412,279 2,260,130 1,412,278 Long-term loans to banks issued by SID Bank or SID Bank Group in foreign currency amount to USD 19,406 thousand. Deposits to banks SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Short-term in EUR 32,298 59,850 41,767 74,780 Short-term in foreign currency 272 465 272 465 Value adjustments of special purpose deposits (32) 0 (32) 0 Total 32,538 60,315 42,007 75,245 Short-term deposits to banks issued by SID Bank or SID Bank Group in foreign currency amount to USD 390 thousand. Changes in loans - gross exposure SID Bank SID Bank Group 2009 2008 2009 2008 Balance as at 1 January 1,513,488 916,932 1,535,738 918,895 New loans and deposits 3,529,276 2,762,923 4,326,197 2,905,341 Repayments (2,746,916) (2,166,366) (3,551,872) (2,288,497) Balance as at 31 December 2,295,848 1,513,489 2,310,063 1,535,739 Changes in adjustments (impairment) SID Bank SID Bank Group 2009 2008 2009 2008 Balance as at 1 January 1,133 1,321 1,133 1,321 Value adjustments of loans 2,716 384 2,716 384 Elimination ofvalue adjustments of loans (669) (572) (669) (572) Balance as at 31 December 3,180 1,133 3,180 1,133 Notes to impairments are presented in Chapter I., item 6.4.; notes to expenditure for impairments and income from impairment elimination are presented in item 2.4.12. ofthe financial section ofthe annual report. Interest rate for loans and deposits to banks in domestic currency, attained by SID Bank, consisted of 3 or 6-month EURIBOR and the margin of between 0.18% p.a. and 3.75% p.a. Fixed interest rate of moves between 0.20% p.a. and _84_ Annual Report of SID Bank and SID Bank Group - 2009 6.25% p.a. Fixed interest rate in SID Bank Group moves between 0.20% p.a. and 8.06% p.a., in some separate cases even up to 40%, due to the markets on which the companies ofthe group operate. Interest rate for loans and deposits to banks in foreign currency, attained by SID Bank, consisted of 6-month LIBOR and the margin of between 0.18% p.a. and 3.00% p.a. Fixed interest rate of moves between 0.10% p.a. and 5.23% p.a. The same applies for SID Bank Group. Exposure of SID Bank to interest rate risk is presented in items 2.4.1. and 3.3.1., while exposure to foreign exchange risk is presented in item 3.2.1. Exposure ofSID Bank Group to interest rate risk is presented in items 2.4.1. and 3.3.2., while exposure to foreign exchange risk is presented in detail in item 3.2.2. Exposure ofSID Bank and SID Bank Group to credit risk is presented in items 3.4. Loans to clients other than banks SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Short-term loans 80,695 113,948 71,811 124,352 Long-term loans 574,695 385,044 573,721 383,091 Claims arising from guarantees 6,894 1,191 6,894 1,191 Factoring 0 0 132,190 144,440 Total_662,284_500,183_784,616_653,074 Short-term loans to clients other than banks SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Foreign currency loans to non-financial companies 0 0 77 0 Domestic currency loans to non-financial companies 13,602 68,978 13,738 69,251 Domestic currency loans to other financial organizations 44,825 14,547 22,413 7,274 Domestic currency loans to foreign entities 26,790 34,197 14,891 27,164 Foreign currency loans to foreign entities 0 0 22,289 23,243 Value adjustments of short-term loans (4,522) (3,774) (1,597) (2,580) Total 80,695 113,948 71,811 124,352 Long-term loans to clients other than banks SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Foreign currency loans to non-financial organizations 834 1,044 3,028 1,044 Domestic currency loans to non-financial organizations 415,971 293,169 415,971 293,306 Domestic currency loans to other financial organizations 54,190 46,399 54,190 46,399 Domestic currency loans to local level state units 13,967 13,974 13,967 13,974 Domestic currency loans to subordinate clients 25 29 25 29 Domestic currency loans to foreign entities 121,333 48,427 118,805 45,846 Value adjustments of long-term loans (31,625) (17,998) (32,265) (17,507) Total 574,695 385,044 573,721 383,091 Long-term loans to clients other than banks, issued by SID Bank in foreign currency, amount to USD 1,196 thousand. Claims arising from guarantees ofSID Bank SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Claims arising from realized guarantees 10,609 2,412 10,609 2,412 Value adjustments of realized guarantees (3,715) (1,221) (3,715) (1,221) Total_6,894_1,191_6,894_1,191 Annual Report of SID Bank and SID Bank Group - 2009 85 Claims arising from factoring operations SID Bank Group 31.12.2009 31.12.2008 Domestic factoring 101,920 98,822 Export factoring 5,630 14,060 Import factoring 5,502 6,889 Domestic factoring - loan 27,894 30,169 Export factoring - loan 169 15 Value adjustments ofshort-term receivables - factoring (8,924) (5,515) Total 132,190 144,440 A predominant part ofexport factoring and a part ofdomestic and import factoring are insured against non-payment. Changes in loans to clients other than banks - gross exposure SID Bank SID Bank Group 2009 2008 2009 2008 Balance as at 1 January 523,177 291,149 679,898 438,734 New loans and deposits 425,696 399,229 818,856 914,874 Repayment (246,727) (167,201) (667,637) (673,710) Balance as at 31 December 702,146 523,177 831,117 679,898 Changes in adjustments (impairment) SID Bank SID Bank Group 2009 2008 2009 2008 Balance as at 1 January 22,994 14,327 26,824 15,637 Value adjustments of loans (impairments) 25,787 15,235 27,907 19,213 Elimination ofvalue adjustments of loans (elimination ofimpairments) (8,919) (6,568) (8,230) (8,026) Balance as at 31 December 39,862 22,994 46,501 26,824 Notes to impairments are presented in item 6.4. in the business section ofthe annual report, notes to expenditure for impairments and income from impairment elimination are presented in item 2.4.12. ofthe financial section ofthe annual report. Floating rates of SID Bank for clients, other than banks in domestic currency for direct financing of legal entities consisted ofl, 3, 4, 5 or 6-month EURIBOR and the margin of between 0.18% p.a. and 5.50% p.a., while the fixed interest rate moves between 3.25% p.a. and 8.06% p.a. Floating rates of SID Bank and SID Bank Group for loans to clients, other than banks in foreign currency for direct financing of legal entities consisted of 2, 3, 4 or 6-month LIBOR and the margin of between 0.60% p.a. and 2.25% p.a., while the fixed interest rate is 5% p.a. SID Bank Group operates on various markets; therefore the range of interest rates is large, particularly in factoring activities. Floating rates of SID Bank Group for clients, other than banks in domestic currency consisted of 1, 3, 4, 5 or 6-month EURIBOR and the margin of between 0.18% p.a. and 13% p.a., as well as 3-month LIBOR and the margin of 7% p.a. Fixed interest rates ofSID Bank Group for loans to clients, other than banks in domestic currency ranged between 3.0% p.a. and 14.0% p.a. Exposure of SID Bank to interest rate risk is presented in items 2.4.1. and 3.3.1., while exposure to foreign exchange risk is presented in detail in item 3.2.1. Exposure ofSID Bank Group to interest rate risk is presented in items 2.4.1. and 3.3.2., while exposure to foreign exchange risk is presented in detail in item 3.2.2. Exposure ofSID Bank and SID Bank Group to credit risk is presented in items 3.4. Annual Report of SID Bank and SID Bank Group - 2009 86 2.3.6. Property, plant and equipment Changes in property, plant and equipment in 2009 SID Bank SID Bank Group Real estate Equipment Total Real estate Equipment Total Purchase value Balance as at 1 January 2009 Opening-balance adjustment Transfer Increase Decrease 6,588 0 0 0 0 1,484 0 0 158 (55) 8,072 0 0 158 (55) 6,588 0 0 0 0 2,468 17 (51) 288 (113) 9,056 17 (51) 288 (113) Balance as at 31 December 2009 6,588 1,587 8,175 6,588 2,609 9,197 Value adjustments Balance as at 1 January 2009 Opening-balance adjustment Transfer Depreciation, amortization Increase Decrease (2,168) 0 0 (315) 0 0 (1,155) 0 0 (143) 0 47 (3,323) 0 0 (458) 0 47 (2,168) 0 0 (315) 0 0 (1,658) (16) 21 (296) (1) 81 (3,826) (16) 21 (611) (1) 81 Balance as at 31 December 2009 (2,483) (1,251) (3,734) (2,483) (1,869) (4,352) Net book value as at 01 January 2009 Net book value as at 31 December 2009 4,420 4,105 329 336 4,749 4,441 4,420 4,105 810 740 5,230 4,845 SID Bank and SID Bank Group have no pledged property, plant and equipment. Changes in property, plant and equipment in 2008 SID Bank SID Bank Group Real estate Equipment Total Real estate Equipment Total Purchase value Balance as at 1 January 2008 Transfer Increase Decrease 6,588 0 0 0 1,404 0 122 (32) 7,992 0 122 (32) 6,588 0 0 0 2,259 (40) 337 (88) 8,847 (40) 337 (88) Balance as at 31 December 2008 6,588 1,484 8,072 6,588 2,468 9,056 Value adjustments Balance as at 1 January 2008 Depreciation, amortization Decrease (1,852) (316) 0 (1,049) (138) 32 (2,901) (454) 32 (1,852) (316) 0 (1,425) (302) 69 (3,277) (618) 69 Balance as at 31 December 2008 (2,168) (1,155) (3,323) (2,168) (1,658) (3,826) Net book value as at 01 January 2008 Net book value as at 31 December 2008 4,736 4,420 355 329 5,091 4,749 4,736 4,420 834 810 5,570 5,230 Annual Report of SID Bank and SID Bank Group - 2009 87 2.3.7. Intangible assets SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Property rights 395 568 590 818 Goodwill 0 0 488 488 Total 395 568 1,078 1,306 Property rights are represented by investments in software used in the course of operation by SID Bank and SID Bank Group. Goodwill in SID Bank Group occurred as a result of purchase of a share in capital of PRVI FAKTOR, Ljubljana. Pursuant to a test of impairments performed as at 31 December 2009, it was established that an impairment of goodwill is not necessary. Changes in intangible assets in 2009 SID Bank SID Bank Group In In use Total In acquisition In use Total acquisition Purchase value Balance as at 1 January 2009 0 996 996 0 1,408 1,408 Adjustments 0 0 0 0 (42) (42) Transfer (11) 11 0 (11) 62 51 Increase 11 0 11 11 16 27 Decrease 0 0 0 0 0 0 Balance as at 31 December 2009 0 1,007 1,007 0 1,444 1,444 Value adjustments Balance as at 1 January 2009 0 (428) (428) 0 (590) (590) Opening-balance adjustment 0 0 0 0 25 25 Transfer 0 0 0 0 (21) (21) Depreciation, amortization 0 (184) (184) 0 (268) (268) Decrease 0 0 0 0 0 0 Balance as at 31 December 2009 0 (612) (612) 0 (854) (854) Net book value as at 01 January 2009 0 568 568 0 818 818 Net book value as at 31 December 2009 0 395 395 0 590 590 SID Bank and SID Bank Group have no pledged intangible assets. Annual Report of SID Bank and SID Bank Group - 2009 88 Changes in intangible assets in 2008 SID Bank SID Bank Group In In use Total In acquisition In use Total acquisition Purchase value Balance as at 1 January 2008 36 834 870 51 1,040 1,091 Transfer (197) 197 0 (197) 238 41 Increase 161 0 161 161 167 328 Decrease 0 (35) (35) (15) (37) (52) Balance as at 31 December 2008 0 996 996 0 1,408 1,408 Value adjustments Balance as at 1 January 2008 0 (270) (270) 0 (342) (342) Depreciation, amortization 0 (164) (164) 0 (254) (254) Decrease 0 6 6 0 6 6 Balance as at 31 December 2008 0 (428) (428) 0 (590) (590) Net book value as at 01 January 2008 36 564 600 51 698 749 Net book value as at 31 December 2008 0 568 568 0 818 818 2.3.8. Long-term investments in equity of subsidiaries, associates and joint ventures SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Investment in PKZ Ljublja na 4,206 4,206 0 0 Investment in PRO KOLEKT Ljubljana 419 419 419 419 Investment in PRVI FAKTOR Ljubljana 3,087 3,087 0 0 Total 7,712 7,712 419 419 Basic data on companies in the group_ PRVI FAKTOR Group_PKZ 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Participating interest ofthe group in capital in percent 50% 50% 100% 100% Portion ofvoting rights in percent 50% 50% 100% 100% Assets 168,154 184,399 62,741 51,560 Liabilities 162,540 176,992 53,572 34,676 Capital 5,614 7,407 9,168 16,884 Income 18,122 18,668 9,364 11,145 Profit/loss 587 1,521 (6,529) 345 2.3.9. Corporate income tax assets and liabilities Tax assets SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Receivables for prepaid corporate income tax 656 0 1,180 255 Deferred tax assets 363 328 975 958 Total 1,019 328 2,155 1,213 As at 31 December 2009, SID Bank had long-term deferred receivables for taxes arising from the provisions for severance pay upon retirement and loyalty bonuses of bank employees, and from the impairment of available-for-sale financial asset - LANISL Float 09 bond. As at 31 December 2009, SID Bank Group had deferred receivables for taxes arising from impairment of available-for-sale financial assets, the provisions for severance pay upon retirement and loyalty bonuses of bank employees, for impaired operating receivables and tax loss. 89 Annual Report of SID Bank and SID Bank Group - 2009 Tax liability SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Income tax liabilities 0 1,904 0 2,284 Non-current deferred tax liabilities 138 35 138 37 Total 138 1,939 138 2,321 The deferred liability for tax represents a liability arising from the revaluation adjustment of available-for-sale financial assets. Deferred taxes SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Deferred tax liability - Value adjustments of receivables 0 0 385 118 - Deferred income from reinsurance premium 0 0 0 118 - Provisions for fees and loyalty bonuses 27 25 53 44 - Revaluation expense due to impairments, available- for-sale financial assets 194 194 304 342 - Revaluation surplus, available-for-sale financial assets 142 109 106 245 - Expenses for deferred taxes from tax loss 0 0 36 0 - Delimited costs or income 0 0 91 91 Total deferred tax liability 363 328 975 958 Deferred tax liability - Available-for-sale financial assets 138 35 138 37 Total deferred tax liability 138 35 138 37 Included in the statement of comprehensive income 1 188 1,892 314 Included in capital (70) (12) (242) 124 2.3.10. Other assets SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Insurers assets 0 0 32,228 20,177 Other assets 2,902 252 4,954 2,617 Total 2,902 252 37,182 22,794 Insurers' assets SID Bank Group 31.12.2009 31.12.2008 Reinsurers' assets in unearned premiums 839 1,011 Reinsurers' assets in claims provisions 24,515 14,388 Reinsurers' assets in bonuses and discounts 1,016 1,060 Reinsurers' assets in provision for unexpired risks 1,599 729 Receivables from premiums 2,096 1,979 Value adjustments of receivables from premiums (170) (121) Grant receivables 2,677 2,025 Value adjustments of receivables from premiums (1,430) (971) Receivables from credit ratings 135 87 Other value adjustments (14) (10) Receivables arising from reinsurance 967 0 Other accrued revenues and deferred expenses 0 0 Total 32,228 20,177 _90_ Annual Report of SID Bank and SID Bank Group - 2009 Other assets SID Bank_SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Inventories 0 0 5 5 Fees and commissions receivables 35 39 1,032 1,709 Advances to suppliers for operating assets 5 5 277 34 Trade receivables 69 55 1,047 500 Other receivables 2,340 83 2,380 109 Value adjustments of other receivables (2) (2) (336) (27) Deferred costs and accrued revenues 455 72 499 72 Other short-term deferred costs 0 0 10 182 Other accrued revenues and deferred expenses 0 0 42 33 Total 2,902 252 4,954 2,617 2.3.11. Financial liabilities held for trading SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Derivative financial instruments held for trading, forward contract valuation 271 172 271 172 Total 271 172 271 172 The item discloses liabilities due to negative valuation of currency forward in the amount ofUSD 1 million. 2.3.12. Derivative financial instruments held for hedging SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Long-term in EUR 1,202 0 1,202 0 Total 1,202 0 1,202 0 The item includes effects ofinterest rate hedging in the amount of EUR 907 thousand and interest liability in the amount of EUR 295 thousand. 2.3.13. Financial liabilities measured at amortized cost SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Bank deposits 155,066 15,216 155,066 15,216 Deposits ofclients other than banks 91,870 22,376 91,870 22,376 Loans of banks 1,799,948 1,633,867 1,921,338 1,792,105 Loans of clients other than banks 99,108 0 99,122 0 Debt securities 547,142 250,213 547,142 250. 213 Total 2,693,134 1,921,672 2,814,538 2,079,910 Bank deposits SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Deposits 155,066 15,216 155,066 15,216 Total 155,066 15,216 155,066 15,216 Deposits ofclients other than banks SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Deposits 91,870 22,376 91,870 22,376 Total 91,870 22,376 91,870 22,376 _91 Annual Report of SID Bank and SID Bank Group - 2009 Loans of banks SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Short-term in EUR 19,966 0 133,571 146,137 Short-term in foreign currency 0 0 0 803 Long-term in EUR 1,766,031 1,619,673 1,773,816 1,630,971 Long-term in foreign currency 13,951 14,194 13,951 14,194 Total 1,799,948 1,633,867 1,921,338 1,792,105 Loans of clients other than banks SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Short-term in EUR 0 0 14 0 Long-term in EUR 99,108 0 99,108 0 Total 99,108 0 99,122 0 Debt securities SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Debt securities 547,142 250,213 547,142 250,213 Total 547,142 250,213 547,142 250,213 In January 2009 SID Bank or SID Bank Group issued a bond in the amount of EUR 250 million on the domestic market. Changes in financial liabilities measured at amortized cost SID Bank SID Bank Group 2009 2008 2009 2008 Balance as at 1 January 1,921,672 1,137,069 2,079,910 1,274,967 New loans and deposits 1,169,551 1,247,196 1,400,586 1,420,696 Repayment (398,089) (462,593) (665,958) (615,753) Balance as at 31 December 2,693,134 1,921,672 2,814,538 2,079,910 As a specialized institution pursuant to Slovene Export and Development Bank Act, SID Bank acquires long-term funds principally in international financial markets; namely long-term loans, bilateral credit lines, issuing of debentures and registered bonds. Float rates of SID Bank for received long-term loans from foreign banks range between 2, 3 or 6-month EURIBOR/LIBOR + 0.115% p.a. and 2, 3 or 6-month EURIBOR/LIBOR + 1.85% p.a. Float rates ofand SID Bank Group for received loans range between 1, 2, 3 or 6-month EURIBOR/LIBOR + 0.115% p.a. and 1, 2, 3 or 6-month EURIBOR/LIBOR + 5.5% p.a. Interest rates for loans in foreign currency are fixed and range between 5.3% and 6.5% p.a. for SID Bank Group. 2.3.14. Provision SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Bank provision 4,250 Liabilities from insurance contracts 0 Other provisions 132 2,165 0 124 4,250 50,294 2,151 2,165 30,896 2,204 Total 4,382 2,289 56,695 35,265 Bank provisions include provisions for covering contingent losses arising from issued guarantees and undrawn credit facilities and credit lines. SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Provisions for guarantees 2,044 Provisions for undrawn credit facilities and credit lines 2,206 1,374 791 2,044 2,206 1,374 791 Total 4,250 2,165 4,250 2,165 Annual Report of SID Bank and SID Bank Group - 2009 92 Changes in bank provisions SID Bank SID Bank Group 2009 2008 2009 2008 Balance as at 1 January 2,165 778 2,165 778 Provisions formed 8,502 2,770 8,502 2,770 Foreign exchange difference 0 (1) 0 (1) Provisions released (6,417) (1,382) (6,417) (1,382) Balance as at 31 December 4,250 2,165 4,250 2,165 Liabilities from insurance contracts SID Bank Group 31.12.2009 31.12.2008 Unearned premiums 1,445 1,577 Provisions for outstanding claims 43,855 26,079 Provisions for bonuses and discounts 1,853 1,878 Provisions for unexpired risks 3,141 1,362 Total 50,294 30,896 Liabilities from insurance contracts show gross technical reserves including reinsurers' share. Provisions for outstanding claims SID Bank Group 31.12.2009 31.12.2008 Provisions for incurred and reported loss events 14,482 2,303 [Provisions for incurred and unreported loss events 28,522 23,177 Provisions for appraisal costs 851 599 Total 43,855 26,079 Changes in liabilities from insurance contracts SID Bank Group 2009 2008 Balance as at 1 January 30,896 23,803 Changes 19,398 7,093 Balance as at 31 December 50,294 30,896 Other provisions SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Long-term provisions to employees 132 124 283 285 Deferred income from reinsurance premiums 0 0 1,868 1,919 Total 132 124 2,151 2,204 Provisions to employees SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Long-term provisions for loyalty bonuses 17 9 49 27 Long-term provisions for retirement severance pay 115 115 234 258 Total 132 124 283 285 Changes in provisions for pensions and similar liabilities to employees_ _SID Bank_SID Bank Group _2009_2008_2009_2008 Balance as at 1 January 124 105 285 245 Provisions formed 22 20 63 32 Provisions released (14) (1) (62) (2) Foreign exchange differences 0 0 (3) 10 Balance as at 31 December 132 124 283 285 The calculation for loyalty bonuses was based on the assumption that all beneficiaries are still the employees of SID Bank when the conditions are established for the payment of this bonus. The amounts of bonuses were discounted to the present value, taking into account the time schedule of the payment of loyalty bonuses and the average interest rate of government debt securities published by the Ministry of Finance for the purpose of calculating the returns of voluntary supplementary pension insurance. The full interest rate calculated in such way was taken into account (4.225%). The following input parameters were used: loyalty bonuses for 10 years EUR 382.58, for 20 years EUR 573.87, for 30 years EUR 765.16 and for 40 years EUR 956.45. 93 Annual Report of SID Bank and SID Bank Group - 2009 The calculation of severance pay takes into account the difference between the period for which the severance pay was earned and the period that has yet to pass in order to meet the conditions for retirement. The amounts of severance pay were discounted to the present value, taking into account the time schedule of the payment of bonuses and the average interest rate of government debt securities published by the Ministry of Finance for the purpose of calculating the returns of voluntary supplementary pension insurance. The full interest rate calculated in such way was taken into account (4.225%). The following input parameters were used: amount based on the Employment Relationship Act (two average monthly salaries of the employee for the past three months), increased by the achieved growth in salaries in the banking sector in the last five years, a length of service upon retirement for men 40 years and for women 38 years. SID Bank Group has a unified methodology of calculating provision for severance pay and loyalty bonuses. A part of companies in SID Bank Group calculates provisions based on actuarial calculation. The calculation takes into account suppositions included in the calculations of other companies in SID Bank Group. Changes in deferred revenues from reinsurance commissions_ SID Bank Group 2009 2008 Balance as at 1 January 1,919 2,129 Provisions formed 537 645 Provisions released (588) (855) Balance as at 31 December 1,868 1,919 Receivables and liabilities due to deferred taxes are presented in detail in items 2.4.11. 2.3.15. Other liabilities SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Liabilities for salaries and other liabilities to employees 378 310 633 570 Liabilities to suppliers 184 120 368 1,025 Liabilities from insurance operations 0 0 19 69 Other liabilities 984 20 4,674 326 Accrued costs and deferred income 2,239 438 3,368 2,068 - Accrued costs 170 348 341 692 - Accrued reinsurance statement 0 0 0 616 - Accrued costs ofreinsurers forrecourses 0 0 948 666 - Short-term deferred revenues 317 90 327 94 - Deferred income 1,752 0 1,752 0 Total 3,785 888 9,063 4,058 2.3.16. Share capital At the General Meeting of Shareholders held on 20 May 2009, a Decree on increase in capital in the amount of EUR 160,000,061.30 was adopted. After the deposit of newly issued shares on 25 May 2009 and 5 August 2009, the increase in capital was entered in registry on 14 August 2009. All ofthe entered capital, which amounts to EUR 300,000,090.70 and is divided into 3,121,741 ordinary registered no-par value shares, is deposited. All the shares are ordinary registered shares of the same class; each ordinary registered no-par value share has a corresponding amount in share capital. 2.3.17. Capital reserves SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Payments exceeding nominal amounts of paid-up shares 1,139 1,139 1,139 1,139 Total 1,139 1,139 1,139 1,139 Annual Report of SID Bank and SID Bank Group - 2009 94 2.3.18. Revaluation surplus SID Bank_SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Revaluation surplus from available-for-sale financial assets (18) (295) 126 (838) Total (18) (295) 126 (838) Revaluation surplus from available-for-sale financial assets SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Balance as at 1 January (295) (331) (838) (333) Revaluation 347 48 1,206 (629) Deferred taxes (70) (12) (242) 124 Balance as at 31 December (18) (295) 126 (838) 2.3.19. Reserves from profit (including retained profit) SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Reserves from profit 21,735 19,923 36,739 34,850 - Statutory reserves 8,080 8,033 8,439 8,392 - Reserves for treasury shares 1,324 1,325 1,324 1,325 - Reserves under articles ofassociation 8,900 8,449 11,003 10,552 - Other reserves from profit 3,431 2,116 15,210 5,548 - Credit risk equalization provisions 0 0 763 9,033 Retained earnings 0 0 2,928 3,245 Total 21,735 19,923 39,667 38,095 In accordance with a decree of the Supervisory Board of SID Bank dated 29 May 2009, the net distributable profit in the amount of EUR 657 thousand was allocated to other profit reserves. In accordance with a decree of the General Meeting of Shareholders of SID Bank dated 28 July 2009, the net distributable profit in the amount of EUR 657 thousand was allocated to other profit reserves. When compiling the annual report, from net profit in the amount of EUR 948 thousand the Management Board formed statutory reserves totalling EUR 47 thousand and reserves under articles of association in the amount of EUR 451 thousand. Capital (revenues and expenses recognized directly in capital) is directly influenced by revaluations ofavailable-for-sale financial assets and changes in credit risk equalization provisions. Credit risk equalization provisions of SID Bank Group decreased for EUR 8,269 thousand in 2009. Tax effect due to this change amounts to EUR 1,737 thousand (current tax), net effect amounting to EUR 6,532 thousand. 2.3.20. Treasury shares SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Repurchased treasury shares (1,324) (1,324) (1,324) (1,324) Total (1,324) (1,324) (1,324) (1,324) Annual Report of SID Bank and SID Bank Group - 2009 95 2.3.21. Off-balance-sheet items Off-balance-sheet items SID Bank_SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Off-balance-sheet receivables 1,047,805 50,852 1,068,394 61,837 - Raised undrawn loans 235,000 25,000 235,000 25,000 Derivative financial instruments (swap, forward) 58,678 678 58,678 678 - Guarantees received 754127 25,174 754,127 25,174 - Unclaimed recourse receivables 0 0 20,589 10,985 Off-balance-sheet liabilities 222,022 137,243 237,280 143,594 - Guarantees 38,804 72,192 39,686 72,812 - Approved undrawn loans 182,521 64,342 195,021 68,592 Derivative financial instruments (forward) 697 709 697 709 - Guarantees given 0 0 34 15 - Other financial liabilities assumed 0 0 1,842 1,466 Total 1,269,827 188,095 1,305,674 205,431 Off-balance-sheet receivables - raised undrawn loans SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Raised undrawn loans 235,000 25,000 235,000 25,000 Total 235,000 25,000 235,000 25,000 As at 31 December 2009 SID Bank has not drawn loans granted by European Investment Bank Luxemburg in the amount ofEUR 190 million and EUR 30 million with Hypo Investment Bank AG Austria, as well as credit lines raised with Hypo Alpe - Adria Bank International AG Austria in the amount of EUR 15 million. Off-balance-sheet receivables - derivative financial instruments SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Currency forward 678 678 678 678 Interest swap 58,000 0 58,000 0 Total 58,678 678 58,678 678 As at 31 December 2009, SID Bank had a concluded currency forward in the amount of USD 1 million and two interest swaps in total amount of EUR 58 million. Off-balance-sheet receivables - Guarantees received SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Guarantees received 754,127 25,174 754,127 25,174 Total 754,127 25,174 754,127 25,174 In comparison with the balance as at 31 December 2008, the balance of guarantees received of SID Bank as at 31 December 2009 shows a large increase, which resulted from implementation of bookkeeping records in 2009 also in general ledger (balances of guarantees received as at 31 December 2008 amounted to EUR 381,971 thousand). By types of insurance the largest portion is represented by pledge of commercial real estate, followed by other corporate guarantees (disposal ofclaims, pledge ofshare in capital, insurance policies ofSID Bank for the account ofthe Republic of Slovenia, fiduciary transfer of real estate ownership right, pledge of receivables for insurance, bills and other insurances). Balance of guarantees received of SID Bank Group as at 31 December 2009 amounts to EUR 808,437 thousand (bookkeeping records in companies of SID Bank Group has not been fully implemented), while it amounted to EUR 409,022 thousand as at 31 December 2008. The most important issuers of personal guarantees are banks, insurance companies, companies with good credit rating (joint and several guarantee) and individuals. Unclaimed recourse receivables SID Bank Group 31.12.2009 31.12.2008 Unclaimed recourse receivables 20,589 10,984 Total 20,589 10,984 Annual Report of SID Bank and SID Bank Group - 2009 96 Off-balance-sheet liabilities - guarantees SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Short-term 114 8,902 996 9,522 Long-term 38,690 63,290 38,690 63,290 Total 38,804 72,192 39,686 72,812 The breakdown ofguarantees by type SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Guarantees 24,144 55,682 25,026 56,302 - Waste export 11,281 21,640 11,281 21,640 - Advance repayment 2,096 15,324 2,096 15,324 - Performance 6,308 9,293 6,308 9,293 - Paymentbonds 2,858 4,951 3,740 5,571 - Warranty 1,601 2,045 1,601 2,045 - Customs bonds 0 2,317 0 2,317 - Bid bonds 0 112 0 112 Assumed risk 14,660 16,510 14,660 16,510 Total 38,804 72,192 39,686 72,812 The breakdown ofguarantees by currency SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 EUR 37,806 69,906 38,688 70,526 HRK 976 2,260 976 2,260 EGP 22 26 22 26 Total 38,804 72,192 39,686 72,812 Off-balance-sheet liabilities - approved undrawn loans SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Approved undrawn loans 182,521 64,342 195,021 68,592 Total 182,521 64,342 195,021 68,592 In this item SID bank or SID Bank Group discloses the value of undrawn loans granted to domestic banks and companies as at 31 December 2009. Drawing date is in 2010. Other guarantees given SID Bank Group 31.12.2009 31.12.2008 Guarantees given for factoring operations 34 15 Total 34 15 2.3.22. Operations under Special Authorization The operations which SID Bank as the national export credit agency (ECA) performs on behalf and for the account of the Republic of Slovenia are in terms of accounting clearly separated from the operations performed for SID Bank's own account. In accordance with the Act Governing Insurance and Financing of International Business Transactions (ZZFMGP) and on behalf and for the account of the Republic of Slovenia, SID Bank implements the Interest Rate Equalization Programme (IREP) for export credits in euro and American dollars falling within the scope of the OECD Arrangement on Officially Supported Export Credits. Operations carried out on behalf and for the account of the Republic of Slovenia are kept in separate accounts, which were defined by the Bank ofSlovenia for keeping oftransactions pursuant to special authorization. Transactions pursuant to special authorization are presented in detail in the business report, in items 6.2.5. and 6.2.6. Annual Report of SID Bank and SID Bank Group - 2009 97 Investments ofcontingency reserves SID Bank 31.12.2009 Cash in business accounts Loans to banks Available-for-sale financial assets Other assets 43 101,859 18,258 5,268 31.12.2008 2 91,811 17,647 3,726 Total 125,428 113,186 In other assets, receivable on PRO KOLEKT Zagreb in the amount of EUR 3,726 thousand is disclosed. Liabilities for contingency reserves_ SID Bank 31.12.2009 31.12.2008 Contingency reserves Revaluation surplus from available-for-sale financial assets Accrued (costs) and deferred income 120,039 208 5,181 109,896 (362) 3,652 Total 125,428 113,186 Changes in contingency reserves_ SID Bank _2009_2008 Balance as at 1 January 109,896 102,965 Surplus ofincome over expenses 143 6,931 Remittance 10,000 0 Balance as at 31 December_120,039_109,896 Contingency reserves in 2009 increased by EUR 143 thousand, which equalled the surplus of operating income over expenses on behalf of and for the account of the state, pursuant to a remittance by the Ministry of Finance of the Republic ofSlovenia as at 21 December 2009 in the amount of EUR 10.0 million. Investments from the interest rate equalization programme SID Bank 31.12.2009 Cash in business accounts Loans Available-for-sale financial assets Other assets 1 2,843 4,782 1 31.12.2008 7 3,038 3,663 0 Total 7,627 6,708 Liabilities from the interest rate equalization programme SID Bank 31.12.2009 31.12.2008 Liabilities from the interest rate equalization programme 7,585 6,907 Revaluation surplus from available-for-sale financial assets 42 (199) Total 7,627 6,708 Changes in liabilities from the interest rate equalization programme_ SID Bank _2009_2008 Balance as at 1 January 6,907 5,401 Surplus ofincome over expenses 178 276 Remittance 500 1,230 Balance as at 31 December 7,585 6,907 The assets from the interest rate equalization programme in 2009 increased by EUR 178 thousand, which equalled the surplus of operating income over expenses on behalf ofand for the account of the state, pursuant to a remittance of the Ministry of Finance ofthe Republic ofSlovenia as at 21 December 2009 in the amount of EUR 500 thousand. Annual Report of SID Bank and SID Bank Group - 2009 98 2.4. Notes to the Statement of comprehensive income (In EUR thousand) 2.4.1. Net interest SID Bank 2009 2008 Income Expenses Income Expenses Interest from financial assets held for hedging 97 (27) 0 0 Interest from financial assets held for trading 0 0 90 (48) Interest from available-for-sale assets 1,760 0 1,799 0 Interest from granted loans and deposits made 80,391 (44,371) 80,445 (67,906) Interest for issued securities 0 (16,356) 0 (229) Interest from other financial assets 8 0 157 0 Total 82,256 (60,754) 82,491 (68,183) Net interest 21,502 14,308 Income from overdue interest amounts to EUR 311 thousand. There are no expenses for overdue interest in the year 2009. SID Bank Group 2009 2008 Income Expenses Income Expenses Interest from financial assets held for hedging 97 (27) 0 0 Interest from financial assets held for trading 0 0 90 (48) Interest from available-for-sale assets 2,493 0 2,664 0 Interest from granted loans and deposits made 93,181 (50,925) 94,327 (77,152) Interest for issued securities 0 (16,356) 0 (229) Interest from other financial assets 8 0 157 0 Total 95,779 (67,308) 97,238 (77,429) Net interest 28,471 19,809 2.4.2. Dividend income SID Bank 2009 2008 Dividend income 2,474 2,273 Total 2,474 2,273 Dividend was paid by the subsidiary PKZ Ljubljana in the amount ofEUR 138 thousand. PRVI FAKTOR Ljubljana adopted a decree on due share in the profits in the amount of EUR 2,336 thousand for which the remittance will be realized in the year 2010. 2.4.3. Net fees SID Bank 2009 2008 Income Expenses Income Expenses Fees and commissions on banking services 0 (208) 0 (152) Fees and commissions from loans 1,337 0 763 0 Fees and commissions for guarantee transactions 528 0 390 0 Fees and commissions for securities 0 (92) 0 (13) Other fees and commissions 141 (137) 56 (246) Total 2,006 (437) 1,209 (411) Net fees 1,569 798 Annual Report of SID Bank and SID Bank Group - 2009 99 SID Bank Group 2009 2008 Income Expenses Income Expenses Fees and commissions on banking services 0 (265) 0 (152) Commissions for payment transactions 16 (77) 0 (123) Fees and commissions from loans 5,523 (305) 4,970 (334) Fees and commissions for guarantee transactions 528 (340) 372 (544) Fees and commissions for securities 0 (93) 0 (13) Other fees and commissions 389 (153) 56 (246) Total 6,456 (1,233) 5,398 (1,412) Net fees 5,223 3,986 2.4.4. Realized profits/losses from financial assets and liabilities not measured at fair value through profit or loss SID Bank 2009 2008 Income Expenses Income Expenses Available-for-sale financial assets 680 (350) 102 (286) Total 680 (350) 102 (286) Realized profits/losses from financial assets and liabilities not measured at fair value through profit or loss 330 (184) SID Bank Group 2009 2008 Income Expenses Income Expenses Available-for-sale financial assets 960 (355) 108 (363) Total 960 (355) 108 (363) Realized profits/losses from financial assets and liabilities not measured at fair value through profit or loss 605 (255) 2.4.5. Net profits/losses from financial assets and liabilities held for trading SID Bank 2009 2008 Income Expenses Income Expenses Derivative financial instruments under forward transactions 123 (99) 207 (257) Derivative financial instruments under swap transactions 0 0 0 (9) Total 123 (99) 207 (266) Net profits/losses from financial assets and liabilities held for trading 24 (59) SID Bank Group 2009 2008 Income Expenses Income Expenses Derivative financial instruments under forward transactions 123 (99) 208 (257) Derivative financial instruments under swap transactions 0 0 0 (9) Total 123 (99) 208 (266) Net profits/losses from financial assets and liabilities held for trading 24 (58) Annual Report of SID Bank and SID Bank Group - 2009 100 2.4.6. Change in fair value when calculating hedging against risk SID Bank 2009 2008 Income Expenses Income Expenses Change in fair value when calculating hedging against risk 867 907 0 0 Total 867 907 0 0 Net profit/loss from financial assets held for hedging (40) 0 SID Bank Group 2009 2008 Income Expenses Income Expenses Change in fair value when calculating hedging against risk 867 907 0 0 Total 867 907 0 0 Net profit/loss from financial assets held for hedging (40) 0 2.4.7. Net foreign exchange profits/losses SID Bank 2009 2008 Income Expenses Income Expenses Foreign exchange differences 5,091 (5,047) 7,797 (7,700) Total 5,091 (5,047) 7,797 (7,700) Net foreign exchange profits/losses 44 97 SID Bank Group 2009 2008 Income Expenses Income Expenses Foreign exchange differences 12,862 (11,789) 18,746 (15,880) Total 12,862 (11,789) 18,746 (15,880) Net foreign exchange profits/losses 1,073 2,866 2.4.8. Other net operating profits/losses SID Bank SID Bank Group 2009 2008 2009 2008 Income from non-banking services 2,542 2,501 2,051 2,312 Revenues from insurance operations 0 0 7,876 9,077 Expenses for insurance operations 0 0 (5,798) (2,760) Total 2,542 2,501 4,129 8,629 Income from non-banking services SID Bank 2009 2008 Income Expenses Income Expenses Income from non-banking services 2,709 0 2,528 0 Other operating profits/losses 0 0 115 0 Subscriptions 0 (108) 0 (98) Other operating expenses 0 (59) 0 (44) Total 2,709 167 2,643 (142) Other net operating profits/losses 2,542 2,501 The majority of income from non-banking services is accounted for by the service fee according to the Act Governing Insurance and Financing of International Commercial Transactions under the agreement concluded with the Ministry of Finance regulating mutual relations associated with the implementation ofChapter II ofthe said Act dated 1 December 2004 in the amount of EUR 2,075 thousand (2008: EUR 2.075 thousand). In the year 2009 SID Bank as the authorized institution for implementing the Republic of Slovenia Guarantee Scheme Act realized income in the amount of EUR 81 thousand. The rest is represented by income from credit rating information, income from rents and services performed for subsidiary companies. _ Annual Report of SID Bank and SID Bank Group - 2009 SID Bank Group 2009 2008 Income Expenses Income Expenses Income from non-banking services 2,382 0 2,257 0 Other operating profits/losses 166 0 657 0 Subscriptions 0 (158) 0 (112) Other operating expenses 0 (339) 0 (490) Total 2,548 (497) 2,914 (602) Other net operating profits/losses 2,051 2,312 Revenues from insurance operations SID Bank Group 2009 2008 Income Expenses Income Expenses Gross insurance premiums written 10,884 0 13,661 0 Reinsurance commissions 2,283 0 3,026 0 Reinsurance premiums written 0 (6,238) 0 (8,420) Credit rating information written 947 0 810 0 Total 14,114 (6,238) 17,497 (8,420) Net insurance premiums written 7,876 9,077 Expenses for insurance operations SID Bank Group 2009 2008 Income Expenses Income Expenses Gross claims settled 0 (11,414) 0 (4,576) Settled bonuses 0 (341) 0 (868) Credit rating information expenses 0 (1,080) 0 (709) Settled gross recourses 1,642 0 1,064 0 Reinsurance share in claims and recourses 5,193 0 1,819 0 Reinsurance share in bonuses 202 0 510 0 Total 7,037 (12,835) 3,393 (6,153) Net expenses for insurance operations (5,798) (2,760) 2.4.9. Administrative costs SID Bank SID Bank Group 2009 2008 2009 2008 Labour costs (3,901) (3,684) (7,829) (7,804) General and administrative costs (1,828) (1,477) (3,142) (3,039) Total (5,729) (5,161) (10,971) (10,843) Labour costs SID Bank SID Bank Group 2009 2008 2009 2008 Gross salaries (2,781) (2,560) (5,747) (5,569) Costs of pension insurance (250) (230) (410) (390) Social security costs (205) (189) (520) (501) Payroll tax 0 (79) (134) (280) Other labour costs (665) (626) (1,018) (1,064) Total (3,901) (3,684) (7,829) (7,804) In 2009, SID Bank had 79.75 employees on average; as at 31 December 2009, there were 87 employees, of which 16 (18.4%) had finished secondary school, 9 (10.3%) had finished post-secondary vocational studies (level VI), 56 (64.4%) had finished higher education (level VII), 5 (5.7%) had a master's and 1 (1.1%) a doctor's degree. In SID Bank the costs of pension insurance (EUR 250 thousand) together with the costs of voluntary supplementary pension insurance (EUR 133 thousand) totalled EUR 383 thousand in 2009. As at 31 December 2009, SID Bank Group (including PRO KOLEKT Group and the CIDC institute) had 306 employees. 20% of the employees in SID Bank Group had finished secondary school, 13% had finished post-secondary vocational studies (level VI), 63% had finished higher education (level VII), 3% had a master's and 1% a doctor's degree. Annual Report of SID Bank and SID Bank Group - 2009 102 In SID Bank Group the costs of pension insurance totalled EUR 410 thousand and the costs of voluntary supplementary pension insurance EUR 234 thousand in 2009. Members of managements in the companies of SID Bank Group realized the following revenues in 2009: President of Management Board of SID Bank Mr. Sibil Svilan M.Sc. EUR 169 thousand, Member ofManagement Board of SID Bank Mr. Jožef Bradeško EUR 148 thousand, President of Management Board of PKZ Mr. Ladislav Artnik EUR 127 thousand, Member of Management Board of PKZ Dr. Rasto Hartman EUR 106 thousand, Director of PRVI FAKTOR Ljublana Mr. Ernest Ribič EUR 129 thousand, Director of PRVI FAKTOR Sarajevo Mr. Nedim Rizvanovič EUR 14 thousand, Director of PRVI FAKTOR Beograd Mr. Dmitar Polovina EUR 66 thousand, Director of PRVI FAKTOR Zagreb Mr. Tomaž Kačar EUR 110 thousand. In 2009 the representatives of SID Bank in Supervisory Boards of affiliated companies received no bonuses or other revenues (attendance fees) from performing supervisory functions in the companies of SID Bank Group. Revenues pursuant to attendance fees and travel reimbursement of members of Supervisory Board and Audit Committee of SID Bank in 2009 amounted to: Dr. Aleš Berk Skok: EUR 4.1 thousand (ofwhich travel reimbursement in the amount of EUR 0.1 thousand); Mr. Samo Hribar Milič, M.Sc.: EUR 3.3 thousand; Dr. Marko Jaklič: EUR 2.8 thousand; Mr. Gregor Kastelic, M.Sc.: EUR 7.4 thousand (of which travel reimbursement in the amount of EUR 3.6 thousand); Ms. Andreja Kert: EUR 4,3 thousand; Dr. Maja Klun: EUR 2.1 thousand; Dr. Peter Kraljč: EUR 3.6 thousand (ofwhich travel reimbursement in the amount of EUR 0.5 thousand); Dr. Franc Križanič: EUR 2.4 thousand; Ms. Romana Logar: EUR 1.3 thousand; Dr. Vilem Pšeničny: EUR 3.3 thousand; Dr. Ivan Svetlik: EUR 2.4 thousand; Ms. Blanka Vezjak, M.Sc.: EUR 1.6 thousand (ofwhich travel reimbursement in the amount of EUR 0.3 thousand); Mr. Andrej Vizjak, M.Sc.: EUR 0.9 thousand; Ms. Stanislava Zadravec-Caprirolo, M.Sc: EUR 2.5 thousand. In SID Bank in 2009, the earnings of other employees with service contracts amounted EUR 255 thousand; in SID Bank Group they amounted to EUR 541 thousand. General and administrative costs SID Bank SID Bank Group 2009 2008 2009 2008 Material costs (143) (115) (263) (202) Service costs (1,685) (1,362) (2,879) (2,837) Total (1,828) (1,477) (3,142) (3,039) Costs of payments to auditors (part ofthe service costs item ■ ■ in net amount) SID Bank SID Bank Group 2009 2008 2009 2008 Auditing ofthe annual report (46) (38) (112) (99) Other auditing services (1) (6) (1) (12) Advice on taxation 0 0 0 (7) Total (47) (44) (113) (118) 2.4.10. Depreciation, amortization SID Bank SID Bank Group 2009 2008 2009 2008 Depreciation oftangible fixed assets (459) (454) (614) (607) Amortization ofintangible assets (184) (163) (267) (253) Total (643) (617) (881) (860) 2.4.11. Dividend income/expenses SID Bank SID Bank Group 2009 2008 2009 2008 - Income/expenses for banking operations (2,085) (1,387) (2,085) (1,387) - Income/expenses for liabilities from insurance contracts 0 0 (8,618) (3,761) - Income/expenses for other operations 100 (139) 147 60 Total (1,985) (1,526) (10,556) (5,088) Annual Report of SID Bank and SID Bank Group - 2009 103 - Income/expenses for banking operations SID Bank SID Bank Group 2009 2008 2009 2008 Net changes in provisions for guarantees (685) (618) (685) (618) - Provision expenses (3,623) (1,037) (3,623) (1,037) - Revenues from the release of provisions 2,938 419 2,938 419 Net change in provisions for undrawn loans (1,400) (769) (1,400) (769) - Provision expenses (4,877) (1,732) (4,877) (1,732) - Revenues from the release of provisions 3,477 963 3,477 963 Total (2,085) (1, 387) (2,085) (1,387) Income/expenses for liabilities from insurance contracts SID Bank Group 2009 2008 Changes in gross unearned premiums 133 275 Changes in unearned premiums - reinsurers' share (172) (115) Changes in gross provisions for outstanding claims (17,777) (6,150) Change in provisions for outstanding claims - reinsurers' share 10,127 2,842 Changes in gross provision for bonuses and rebates 25 144 Reinsurers' share in expenses for bonuses and rebates (44) (124) Changes in provisions for unexpired risks (1,779) (1,362) Changes in provisions for unexpired risks - reinsurers' share 869 729 Total (8,618) (3,761) Income/expenses for other operations SID Bank SID Bank Group 2009 2008 2009 2008 Net changes in provisions for legal issues 108 (99) 108 (110) - Provision expenses 0 (99) 0 (110) - Provision expenses 108 0 108 0 Net change in provisions for pensions and similar liabilities (8) (40) (12) (40) - Provision expenses (136) (138) (140) (138) - Revenues from the release of provisions 128 98 128 98 Net deferred revenues from reinsurance commissions 0 0 51 210 - Provision expenses 0 0 (537) (645) - Revenues from the release of provisions 0 0 588 855 Total 100 (139) 147 60 Provision balance is presented in detail in item 2.3.13. 2.4.12. Impairments SID Bank SID Bank Group 2009 2008 2009 2008 Impairment of loans, guarantees and receivables measured at amortized cost (28,457) (15,419) (36,478) (20,262) Impairment ofavailable-for-sale financial assets 0 (970) (10) (1,704) Impairments of other assets (4) (2) (328) (13) Adjustment to impairments of loans granted to companies ofthe group 0 0 2,084 496 Income from loans, guarantees and receivables measured at amortized cost 9,552 6,962 11,096 7,284 Income from the elimination ofimpairments of available-for-sale financial assets 0 0 37 4 Income from the elimination ofimpairments of other assets 3 0 3 12 Total (18,906) (9,429) (23,596) (14,183) Notes to impairments are presented in item 6.4. in the business section of the annual report, while changes in impairments are presented in item 2.3.4. ofthe financial section ofthe annual report. _104_ Annual Report of SID Bank and SID Bank Group - 2009 2.4.13. Corporate income tax on ordinary activities SID Bank SID Bank Group 2009 2008 2009 2008 Income tax Deferred taxes (231) 1 (424) 188 (755) 1,892 (1,463) 314 Total (230) (236) 1,137 (1,149) Receivables and liabilities due to deferred taxes are presented in detail in item 2.3.9. Income tax and tax calculated according to applicable tax rates (difference between accounting profit and tax profit) differ as shown bellow. SID Bank SID Bank Group 2009 2008 2009 2008 Profit/loss 1,178 3,003 (6,521) 4,005 Tax profit (according to applicable tax rates in respective countries) (247) (661) (647) (1,684) Tax base reducing revenues 31 489 620 1,280 Expenditures not recognized in tax (50) (260) (786) (1,164) Expenditures recognized in tax 0 0 26 31 Increase in tax base (3) (25) (13) (48) Tax reliefs 38 33 45 122 Tax (231) (424) (755) (1,463) Current tax represents the tax amount which has to be paid according to the Corporate Income Tax Act at the prescribed tax rate. Effective tax rate for SID Bank for 2009 was 21% and average effective tax rate was 19.61%. Despite the disclosed loss ofSID Bank Group at the end of 2009, corporate income tax liability for the year 2009 amounts to EUR 755 thousand, since the majority of companies in the group operated viably. Tax rate for the companies in Slovenia amounted to 21%, for the companies in Croatia it amounted to 20%, for those in Serbia 10%, while the company in Bosnia and Herzegovina realized loss. SID Bank Group discloses losses on ordinary activities in 2009; consequently the average effective tax rate is negative and amounts to -11.58%. The majority part of revenues not subject to tax charge is referred to revenues from dividends, which the bank may exclude from tax base, because all the conditions oftax legislation have been fulfilled. The majority part of expenditures not recognized in tax refer to provisions for retirement severance pay and loyalty bonuses, which in the amount offormed 50% are not recognized in tax, and to 50% ofexpenses for Supervisory Board and the expenses for donations not recognized in tax. SID Bank had no outstanding tax liabilities on 31 December 2009. In SID Bank Group corporate income tax liability for 2009 amounted to EUR 755 thousand. The liability in income statement was reduced by deferred tax assets arising from drawing from the credit risk provision, impairment of debt securities, from receivables adjustments formed and from the demarcation ofexpenses and revenues in total amount of EUR 1,892 thousand, which increases the net loss for the year 2009. Deferred tax income or expense results from the change of carrying amounts of deferred tax assets or deferred tax liabilities. SID Bank Group had EUR 837 thousand in net receivables arising from deferred taxes as at 31 December 2009. SID Bank Group had no outstanding tax liabilities on 31 December 2009. 2.4.14 Net profit per share SID Bank 2009 2008 Number ofordinary registered no-par value shares ofthe parent bank 3,121,741 1,456,808 Treasury shares 1,324 1,324 Net profit of majority shareholders for the period 948 2,767 Net profit per share 0.31 1.92 Annual Report of SID Bank and SID Bank Group - 2009 105 2.5. Geographical structure Revenues and long-term assets in Slovenia and abroad are disclosed in detail in item 4. Annual Report of SID Bank and SID Bank Group - 2009 106 2.6. Relations with subsidiaries (In EUR thousand) 2.6.1. Loans given SID Bank Subsidiary companies Total associated companies and subsidiaries 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Loans given - principal Value adjustments 25 (1) 29 (1) 81,116 43,679 (4,314) (2,209) Total 24 28 76,802 41,470 2.6.2. Other receivables SID Bank Subsidiary companies Total associated companies and subsidiaries 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Other receivables - receivables for services 39 54 0 0 2.6.3. Net interest SID Bank Subsidiary companies Total associated companies and subsidiaries 2009 2008 2009 2008 Income 5 0 2,467 2,537 Expenses 0 (195) 0 0 Total 5 (195) 2,467 2,537 Interest rate risk - realized interest rates in % SID Bank Subsidiary companies Total associated companies and subsidiaries 2009 2008 2009 2008 Assets: Interest rate risk - realized interest rates in % 5.00 4.15 4.00 - 6.31 5.50 - 6.46 ^including the syndicated loan (7-58/7) with NLB 2.6.4. Dividend income _SID Bank_ Subsidiary companies Total associated companies _and subsidiaries_ _2009_2008_2009_2008 Dividend income_138_1.498_2,336_775 2.6.5. Net fees SID Bank Subsidiary companies Total associated companies and subsidiaries 2009 2008 2009 2008 Income 0 0 81 40 Total 0 0 81 40 Annual Report of SID Bank and SID Bank Group - 2009 107 2.6.6. Other net operating profits/losses SID Bank Subsidiary companies Total associated companies and subsidiaries 2009 2008 2009 2008 Income 319 320 0 0 Expenses (11) (7) 0 0 Total 308 313 0 0 2.6.7. Guarantees SID Bank Subsidiary companies Total associated companies and subsidiaries 2009 2008 2009 2008 Guarantees issued by the parent company to subsidiaries 0 0 950 0 Total 0 0 950 0 By the end of 2009, the parent company issued to the subsidiary non-binding comfort letters in the amount of EUR 64.9 million. The majority of revenues from non-banking services relates to rents charged for business premises, services provided for the compilation of credit rating information, information support services, treasury, accounting and human resources services. All legal transactions in the group were conducted in such manner, that under circumstances known to contract partners at the time oftransaction, no deprivation among the companies occurred. All the transactions were carried out at market conditions and in accordance with the arms length principal. Transactions with the employees (members of the management, employees and representatives of the supervisory bodies) are recorded in item 2.4.9. 2.7. Events after the statement of financial position date There were no business events after the statement of financial position date that would influence the separate and consolidated financial statements of SID Bank and SID Bank Group. However, the following business events were important for SID Bank: Activities for the issuing of Eurobond on international capital market, which is expected to be realized in April 2010, are taking place in SID Bank. On its regular session dated 15 January 2010, the Supervisory Board ofSID Bank consented to increase in capital of the subsidiary PKZ in the amount ofEUR 4,2 milion. General Meeting of PKZ confirmed the increase in capital in January 2010, which has been paid-in since. On its regular session dated 17 March 2010, the Supervisory Board of SID Bank allocated the profit from 2009 in the amount of EUR 225 thousand to other profit reserves, in accordance with the 3rd paragraph of Article 230 of The Companies Act. After the statement of financial position date, the company Vegrad d.d. stated publicly that it is in financial difficulties. SID Bank Group has exposure towards Vegrad d.d. in the amount of EUR 4,7 milion due to issued service guarantees, in the amount of EUR 5,0 milion due to repurchased receivables and in amount of EUR 2,8 milion due to credit insurance. Annual Report of SID Bank and SID Bank Group - 2009 108 3. Risk management and other disclosures (In EUR thousand) Risk management is presented in Chapter I., item 6.4. 3.1. Liquidity Risk Managing liquidity risk means maintaining sufficient liquidity sources to settling current liabilities. The companies of the SID Bank Group manage liquidity risk by planning inflows and outflows and by ensuring an appropriate balance of highly liquid financial investments. Therefore, part ofthe investments ofthe SID Bank Group is short-term, which reduces the liquidity risk. Each company in the SID Bank Group is responsible for its liquidity; occasional surpluses and deficits of liquid assets within the SID Bank Group are bridged by intra-group placement of assets. SID Bank monitors its exposure to liquidity risk by means of liquidity indicators (ratios between outflows and inflows over one- to six-month periods). 3.1.1. SID Bank - Assets and liabilities items according to residual maturity as at 31 December 2009 Sight Up to 1 month 1 - 3 months 3 months - 1 year 1 - 5 years Over 5 years Total Cash and balances of transaction accounts with the state and the central bank 69 0 0 0 0 1,004 1,073 Financial assets held for trading 0 0 0 248 0 0 248 Financial assets held for hedging 0 0 0 0 0 2,101 2,101 Available-for-sale financial assets 130 0 0 2,854 32,603 14,464 50,051 Loans 8,818 51,330 10,194 213,940 1,560,734 1,109,936 2,954,952 Property, plant and equipment 0 0 0 0 0 4,441 4,441 Intangible assets 0 0 0 0 0 395 395 Long-term investments in equity of subsidiaries, associates and joint ventures 0 0 0 0 0 7,712 7,712 Corporate income tax assets 0 0 0 677 236 106 1,019 Other assets 0 90 2,346 466 0 0 2,902 TOTAL ASSETS 9,017 51,420 12,540 218,185 1,593,573 1,140,159 3,024,894 Financial liabilities held for trading 0 0 0 271 0 0 271 Derivative financial instruments held for hedging 0 0 0 295 0 907 1,202 Financial liabilities measured at amortized cost 328 40,937 39,519 248,168 927,439 1,436,743 2,693,134 Provision 0 0 0 0 4,266 116 4,382 Corporate income tax liabilities 0 0 0 0 0 138 138 Other liabilities 0 596 1,437 1,752 0 0 3,785 Share capital 0 0 0 0 0 300,000 300,000 Capital reserves 0 0 0 0 0 1,139 1,139 Revaluation surplus 0 0 0 0 0 (18) (18) Reserves from profit (including retained profit) 0 0 0 0 0 21,735 21,735 Treasury shares 0 0 0 0 0 (1,324) (1,324) Net profit for the year 0 0 0 0 0 450 450 TOTAL LIABILITIES 328 41,533 40,956 250,486 931,705 1,759,886 3,024,894 DIFFERENCE BETWEEN ASSETS AND LIABILITIES_8,689_9,887 (28,416) (32,301) 661,868 (619,727) 0 Annual Report of SID Bank and SID Bank Group - 2009 109 3.1.2. SID Bank Group - Assets and liabilities items according to residual maturity as at 31 December 2009 Sight Up to 1 month 1 - 3 months 3 months - 1 year 1 - 5 years Over 5 years Total Cash and balances of transaction accounts with the state and the central bank 2.632 0 0 0 0 1,004 3,636 Financial assets held for trading 0 0 0 248 0 0 248 Financial assets held for hedging 0 0 0 0 0 2,101 2,101 Available-for-sale financial assets 130 0 3,191 3,397 44,141 21,531 72,390 Loans 51,327 87,252 58,496 221,379 1,563,109 1,109,936 3,091,499 Property, plant and equipment 0 0 0 0 0 4,845 4,845 Investment property 0 0 0 0 0 80 80 Intangible assets 0 0 0 0 0 1,078 1,078 Long-term investments in equity of subsidiaries, associates and joint ventures 0 0 0 0 0 419 419 Corporate income tax assets 0 0 485 783 782 106 2,155 Other assets 2,155 6,729 4,270 5,428 18,600 0 37,182 TOTAL ASSETS 56,244 93,981 66,442 231,235 1,626,631 1,141,100 3,215,633 Financial liabilities held for trading 0 0 0 271 0 0 271 Derivative financial instruments held for hedging 0 0 0 295 0 907 1,202 Financial liabilities measured at amortized cost 328 41,855 59,420 341,575 934,618 1,436,743 2,814,538 Provision 0 5,966 3,460 7,421 39,732 116 56,695 Corporate income tax liabilities 0 0 0 0 0 138 138 Other liabilities 0 4,841 2,470 1,752 0 0 9,063 Share capital 0 0 0 0 0 300,000 300,000 Capital reserves 0 0 0 0 0 1,139 1,139 Revaluation surplus 0 0 (1) 1 105 21 126 Reserves from profit (including retained profit) 0 0 0 0 0 39,667 39,667 Treasury shares 0 0 0 0 0 (1,324) (1,324) Net profit for the year 0 0 0 0 0 (5,882) (5,882) TOTAL LIABILITIES 328 52,662 65,349 351,314 974,455 1,771,525 3,215,633 DIFFERENCE BETWEEN ASSETS AND LIABILITIES 55,916 41,319 1,093 (120,079) 652,176 (630,425) 0 SID Bank does not hire or place redeemable deposits. With all transactions due date and fixed interest rate are stipulated. Internal procedures for liquidity management of SID Bank Group portfolios proceed in accordance with the Policy of Liquidity Risk Management, which defines manners of management of assets and funds on a daily level, as well as on a long-term level. These procedures ensure regular daily fulfilment ofall the monetary liabilities ofthe bank and the whole group, as well as quality management of operational and structural liquidity. For the purpose of monitoring and measuring of liquidity risk, the bank calculates liquidity ration in the manner stipulated by a Bank of Slovenia decree. Due to precautionary principle, there is an internally determined liquidity ratio, which must be fulfilled by SID Bank, and which is higher than the one stipulated by the Bank of Slovenia, thus ensuring additional safety measure against liquidity risk. Treasury in cooperation with other organizational units plans weekly and monthly liquidity flows, as well as simulates in advance the first class liquidity ratio. In case of need for improvement of operational or structural liquidity Treasury proposes to Liquidity Committee adoption of certain measures for control of these risks (extension of maturity of passive transactions, shortening of maturity of active transactions, hiring of deposits and monetary market lines, reduction of guarantee and credit potential etc.). The bank is bound to fulfilling the liquidity ratio in accordance with provisions of the Bank of Slovenia For more information on this matter please consult Chapter I., item 6.4. Annual Report of SID Bank and SID Bank Group - 2009 110 In order to achieve the agreed upon business results, the bank has made additional requirements beside the usual credit requirements to some borrowers when approving credits. In the event of failure them, the bank has a right to recall its receivables. The value of such credits amounts to EUR 2,437 thousand. In the event of the above mentioned business facts their repayment would be faster than it is disclosed in the liquidity risk table. 3.2. Foreign exchange risk When monitoring foreign exchange risk, potential losses which might arise due to change of exchange rates are determined. They were calculated through the application of an open foreign currency position, which is the difference between the sum ofall investments in foreign currency and all liabilities in foreign currency. At the end ofyear 2009 SID Bank and SID Bank Group had one currency forward contract in the amount of USD 1 million, with the aim of hedging against foreign exchange risk. In order to neutralise as much as possible the effects ofexchange rate differences on loans in EUR, SID Bank Group terms advances oftransferors of receivables to EUR. In the insurer sector SID Bank Group harmonizes as much as possible the currency structure of assets covering technical provisions with currency structure ofexposure. 3.2.1. SID Bank - Assets and liabilities items according to foreign currencies as at 31 December 2009 EUR USD Other currencies Total Cash and balances of transaction accounts with the state and the central bank 1,046 25 2 1,073 Financial assets held for trading 248 0 0 248 Financial assets held for hedging 2,101 0 0 2,101 Available-for-sale financial assets 50,051 0 0 50,051 Loans 2,940,528 14,424 0 2,954,952 Property, plant and equipment 4,441 0 0 4,441 Intangible assets 395 0 0 395 Long-term investments in equity of subsidiaries, associates and joint ventures 7,712 0 0 7,712 Corporate income tax assets 1,019 0 0 1,019 Other assets 2,902 0 0 2,902 TOTAL ASSETS 3,010,443 14,449 2 3,024,894 Financial liabilities held for trading 271 0 0 271 Derivative financial instruments held for hedging 1,202 0 0 1,202 Financial liabilities measured at amortized cost 2,679,183 13,951 0 2,693,134 Provision 4,366 0 16 4,382 Corporate income tax liabilities 138 0 0 138 Other liabilities 3,785 0 0 3,785 Share capital 300,000 0 0 300,000 Capital reserves 1,139 0 0 1,139 Revaluation surplus (18) 0 0 (18) Reserves from profit (including retained profit) 21,735 0 0 21,735 Treasury shares (1,324) 0 0 (1,324) Net profit for the year 450 0 0 450 TOTAL LIABILITIES 3,010,927 13,951 16 3,024,894 DIFFERENCE BETWEEN ASSETS AND LIABILITIES (484) 498 (14) 0 - Annual Report of SID Bank and SID Bank Group for 2009 - 111 3.2.2. SID Bank Group - Assets and liabilities items according to foreign currencies as at 31 December 2008 EUR EUR With currency clause USD GBP Other currencies Total Cash and balances of transaction accounts with the state and the central bank 1,704 15 57 20 1,840 3,636 Financial assets held for trading 248 0 0 0 0 248 Financial assets held for hedging 2,101 0 0 0 0 2,101 Available-for-sale financial assets 72,390 0 0 0 0 72,390 Loans 2,960,576 112,601 14,424 0 3,898 3,091,499 Property, plant and equipment 4,659 0 0 0 186 4,845 Investment property 0 0 0 0 80 80 Intangible assets 1,073 0 0 0 5 1,078 Long-term investments in equity of subsidiaries, associates and joint ventures 419 0 0 0 0 419 Corporate income tax assets 1,630 0 0 0 526 2,155 Other assets 35,290 1,137 0 0 756 37,182 TOTAL ASSETS 3,080,089 113,753 14,481 20 7,290 3,215,633 Financial liabilities held for trading 271 0 0 0 0 271 Derivative financial instruments held for hedging 1,202 0 0 0 0 1,202 Financial liabilities measured at amortized cost 2,800,587 0 13,951 0 0 2,814,538 Provision 56,634 0 0 0 61 56,695 Corporate income tax liabilities 138 0 0 0 0 138 Other liabilities 8,379 442 1 0 241 9,063 Share capital 300,000 0 0 0 0 300,000 Capital reserves 1,139 0 0 0 0 1,139 Revaluation surplus 126 0 0 0 0 126 Reserves from profit (including retained profit) 38,225 0 0 0 1,442 39,667 Treasury shares (1,324) 0 0 0 0 (1,324) Net profit for the year (6,468) 0 0 0 586 (5,882) TOTAL LIABILITIES 3,198,909 442 13,952 0 2,330 3,215,633 DIFFERENCE BETWEEN ASSETS AND LIABILITIES (118,820) 113,311 529 20 4,960 0 - Annual Report of SID Bank and SID Bank Group for 2009 - 112 3.3. Interest Rate Risk First part of interest rate risk is represented by the difference between interest rate used by SID Bank when lending, and interest rate of borrowed funds, or rather the difference in sensitivity of these interest rates to the change of general level of market interest rates. In assets, available-for-sale assets, given loans and cash in accounts are exposed to interest rate risk. In liabilities, borrowed loans are exposed to interest rate risk. At the end ofyear 2009 SID Bank and SID Bank Group had two interest rate swaps in the amount of EUR 58 million, with the aim of hedging against interest rate risk. Second part of interest rate risk is represented by sensitivity of investments to the change of interest rate (notes on interest rate risk are in Chapter I., item 6.4.). - Annual Report of SID Bank and SID Bank Group for 2009 - 113 3.3.1. SID Bank - Assets and liabilities items according to exposure to interest rate risk as at 31 December 2009 Total Interest Up to 1 1 - 3 3 - 12 Total Interest free accrued Sight month months months 1 - 5 years Over 5 years Cash and balances oftransaction accounts with the state and the central bank 1,073 0 1,073 0 1,073 0 0 0 0 Financial assets held for trading 248 248 0 0 0 0 0 0 0 Financial assets held for hedging 2,101 2,101 0 0 0 0 0 0 0 Available-for-sale financial assets 50,051 0 50,051 130 0 0 13,951 28,056 7,914 Loans 2,954,952 7,230 2,947,722 94,689 374,908 484,327 1,993,798 0 0 Property, plant and equipment 4,441 4,441 0 0 0 0 0 0 0 Intangible assets 395 395 0 0 0 0 0 0 0 Long-term investments in equity of subsidiaries, associates and joint ventures 7,712 7,712 0 0 0 0 0 0 0 Corporate income tax assets 1,019 1,019 0 0 0 0 0 0 0 Other assets 2,902 2,902 0 0 0 0 0 0 0 TOTAL ASSETS 3,024,894 26,048 2,998,846 94,819 375,981 484,327 2,007,749 28,056 7,914 Financial liabilities held for trading 271 271 0 0 0 0 0 0 0 Derivative financial instruments held for hedging 1,202 1,202 0 0 0 0 0 0 0 Financial liabilities measured at amortized cost 2,693,134 327 2,692,807 0 0 15,200 813,425 427,439 1,436,743 Provision 4,382 4,382 0 0 0 0 0 0 0 Corporate income tax liabilities 138 138 0 0 0 0 0 0 0 Other liabilities 3,785 3,785 0 0 0 0 0 0 0 Share capital 300,000 300,000 0 0 0 0 0 0 0 Capital reserves 1,139 1,139 0 0 0 0 0 0 0 Revaluation surplus (18) (18) 0 0 0 0 0 0 0 Reserves from profit (including retained profit) 21,735 21,735 0 0 0 0 0 0 0 Treasury shares (1,324) (1,324) 0 0 0 0 0 0 0 Net profit for the year 450 450 0 0 0 0 0 0 0 TOTAL LIABILITIES 3,024,894 332,087 2,692,807 0 0 15,200 813,425 427,439 1,436,743 Net exposure to interest rate risk 0 (306,039) 306,039 94,819 375,981 469,127 1,194,324 (399,383) (1,428,829) Cumulative exposure 0 (306,039) 0 94,819 470,800 939,927 2,134,251 1,734,868 306,039 - Annual Report of SID Bank and SID Bank Group for 2009 - 114 3.3.2. SID Bank Group - Assets and liabilities items according to exposure to interest rate risk as at 31 December 2009 Total Interest free Total Interest accrued Sight Up to 1 month 1 - 3 months 3 - 12 months 1 - 5 years Over 5 years Cash and balances of transaction accounts with the state and the central bank 3,636 0 3,636 2,563 1,073 0 0 0 0 Financial assets held for trading 248 248 0 0 0 0 0 0 0 Financial assets held for hedging 2,101 2,101 0 0 0 0 0 0 0 Financial assets measured at amortized cost 72,390 186 72,204 130 2,575 5,737 16,116 33,951 13,695 Loans 3,091,499 11,107 3,080,392 133,405 447,240 504,347 1,995,259 143 0 Property, plant and equipment 4,845 4,845 0 0 0 0 0 0 0 Investment property 80 80 0 0 0 0 0 0 0 Intangible assets 1,078 1,078 0 0 0 0 0 0 0 Long-term investments in eq uity of subsidiaries, associates and joint ventures 419 419 0 0 0 0 0 0 0 Corporate income tax assets 2,155 2,155 0 0 0 0 0 0 0 Other assets 37,183 35,774 1,409 1,409 0 0 0 0 0 TOTAL ASSETS 3,215,633 57,992 3,157,641 137,506 450,888 510,084 2,011,375 34,094 13,695 Financial liabilities held for trading 271 271 0 0 0 0 0 0 0 Derivative financial instruments held for hedging 1,202 1,202 0 0 0 0 0 0 0 Financial liabilities measured at amortized cost 2,814,538 619 2,813,919 0 1,137 36,700 911,900 427,439 1,436,743 Provision 56,695 56,695 0 0 0 0 0 0 0 Corporate income tax liabilities 138 138 0 0 0 0 0 0 0 Other liabilities 9,063 9,063 0 0 0 0 0 0 0 Share capital 300,000 300,000 0 0 0 0 0 0 0 Capital reserves 1,139 1,139 0 0 0 0 0 0 0 Revaluation surplus 126 126 0 0 0 0 0 0 0 Reserves from profit (including retained profit) 39,667 39,667 0 0 0 0 0 0 0 Treasury shares (1,324) (1,324) 0 0 0 0 0 0 0 Net profit for the year (5,882) (5,882) 0 0 0 0 0 0 0 TOTAL LIABILITIES 3,215,633 401,714 2,813,919 0 1,137 36,700 911,900 427,439 1,436,743 Net exposure to interest rate risk 0 (343,722) 343,722 137,506 449,751 473,384 1,099,475 (393,345) (1,423,048) Cumulative exposure_0 (343,722)_0 137,506 587,257 1,060,640 2,160,115 1,766,770_343,722 - Annual Report of SID Bank and SID Bank Group for 2009 - 115 3.3.3. Sensitivity analysis SID Bank and SID Bank Group yearly compile a sensitivity analysis of all assets and liabilities to sources of funds, which pay interest, to the change ofinterest rate. Separately an analysis ofavailable-for-sale financial assets is compiled. Sensitivity analysis of all assets and liabilities items sensitive to interest rate is based on the assumption that the market interest rate would change by 100 basis points (1% p.a.). The impact on net interest income in the first year of change has also been calculated. If the market interest rates increased by 100 basis points, net interest income of SID Bank would increase by EUR 1,118 thousand in 2010 (by EUR 1,148 thousand in 2009). The change would be reflected as higher revenues in the statement of comprehensive income. If the market interest rates dropped by 100 basis points, the changes would be the same in absolute terms as in the case ofincrease, only reversed. If the market interest rates increased by 100 basis points, net interest income of SID Bank Group would increase by EUR 1,434 thousand in 2010 (by EUR 1,524 thousand in 2009). The change would be reflected as higher revenues in the statement ofcomprehensive income. Ifthe market interest rates dropped by 100 basis points, the changes would be the same, in absolute terms, as in the case ofincrease, only reversed. Ifthe market interest rates change for less or more, the calculated results are proportional. Available-for-sale financial assets The sensitivity analysis ofthe securities portfolio carried out by SID Bank was based on the change in the interest rate. The analysis shows how the fair values of securities or future cash flows of financial instruments would fluctuate due to the changes in market interest rates on the reporting date. The analysis does not include deposits given, which are typically ofa very short-term nature and placed at a pre-arranged fixed interest rate, as well as mutual funds, which do not respond to the changes in interest rates to the same extent as debt financial instruments - bonds with fixed or variable interest rate. The analysis separately calculates the responsiveness of bonds with variable and those with fixed interest rates in view of the changes in the market interest rate. The analysis is based on the assumption ofa change in the market interest rate by 100 basis points (1% p.a.). SID Bank In EUR thousand BONDS AT FIXED INTEREST RATE Fixed - change of portfolio Increase or decrease in capital BONDS AT FLOATING INTEREST RATE Floating - change ofportfolio Impact on the statement of comprehensive income TOTAL Total - change of portfolio Increase or decrease in capital Impact on the statement of comprehensive income 2009 + 100 bps 2009 -100 bps 2008 +100 bps 2008 -100 bps -1,200 -1,200 1,200 1,200 -1,047 -1,047 1,047 1,047 106 106 -106 -106 61 61 -61 -61 -1,094 -1,200 106 1,094 1,200 -106 -986 -1,047 61 986 1,047 -61 SID Bank Group In EUR thousand BONDS AT FIXED INTEREST RATE Fixed - change of portfolio Increase or decrease in capital BONDS AT FLOATING INTEREST RATE Floating - change ofportfolio Impact on the statement of comprehensive income TOTAL Total - change of portfolio Increase or decrease in capital Impact on the statement of comprehensive income 2009 + 100 bps 2009 -100 bps 2008 +100 bps 2008 -100 bps -1,521 -1,521 1,521 1,521 -1,399 -1,399 1,399 1,399 172 172 -172 -172 109 109 -109 -109 -1,349 -1,521 172 1,349 1,521 -172 -1,290 -1,399 109 1,290 1,399 -109 _116_ Annual Report of SID Bank and SID Bank Group - 2009 3.4. Credit Risk SID Bank and SID bank Group have compiled adequate guidelines concerning credit rating classification of clients, determination of transactions' limits and processes of investment approval. The guidelines include all the data, criteria and model of classification of clients and investments (see Chapter I., item 6.4.). Items included in credit risk are: loans and deposits given, guarantees and approved undrawn loans. Total credit exposure SID Bank_SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Gross exposure 3,224,259 2,175,921 3,384,098 2,361,605 Individual impairments (17,187) (9,052) (29,072) (14,631) Other impairments (25,856) (15,073) (22,088) (13,389) Delimited fees and commissions (4,939) (2,722) (6,732) (4,501) Net exposure 3,176,277 2,149,073 3,326,206 2,329,084 SID Bank 31.12.2009 31.12.2008 Balance Impairments Balance Impairments Undue/group impaired 3,193,244 (25,827) 2,134,509 (13,519) Undue/individually impaired 16,660 (6,123) 39,292 (10,274) Undue/unimpaired 0 0 0 0 Due/unimpaired 0 0 0 0 Due impaired 14,354 (11,093) 2,120 (333) Total 3,224,259 (43,043) 2,175,921 (24,126) SID Bank Group 31.12.2009 31.12.2008 Balance Impairments Balance Impairments Undue/group impaired 3,156,156 (22,059) 2,117,622 (11,834) Undue/individually impaired 25,474 (6,976) 40,243 (10,568) Undue/unimpaired 139,624 0 168,104 0 Due/unimpaired 19,851 0 20,372 0 Due impaired 42,988 (22,125) 15,264 (5,618) Total 3,384,097 (51,159) 2,361,605 (28,020) Aging receivables are insured by real estate mortgage, liens on property, assignment of debts, guarantees, bonds and other insurances. Total fair value of insurance of SID Bank for aging receivables surmounts EUR 30 million. Aging receivables of SID Bank Group in total fair value of over EUR 70 million are also insured with similar insurances. Loan rescheduling As at 31 December 2009, the carrying amount of rescheduled loans in SID Bank amounted to EUR 103,683 thousand (in 2008: EUR 4,501 thousand). The new agreement on the repayment conditions was reached for ten Slovene companies. As at 31 December 2009, the carrying amount of rescheduled loans in SID Bank Group amounted to EUR 112.853 thousand (in 2008: EUR 6,883 thousand). Loan reschedules of significant value in SID Bank Group were concluded with 16 companies. Most of them are from Slovenia, one is from Serbia and one from Bosnia and Herzegovina. Beside these, several loan reschedules of minor values with other companies were also concluded. SID Bank or SID Bank Group took into account the expected cash flow when establishing ofthe amount ofimpairments. Individually impaired loans SID Bank SID Bank Group 2009 2008 2009 2008 Gross exposure 28,779 37,391 66,228 51,422 Individual impairments (17,187) (9,052) (29,072) (14,567) Delimited fees and commissions (11) (50) (11) (96) Net exposure 11,581 28,289 37,145 36,759 - Annual Report of SID Bank and SID Bank Group for 2009 - 117 Value of collateral for granted and received loans Total value of loan collateral in SID Bank as at 31 December 2009 was EUR 754,127 thousand (in 2008: EUR 381,971 thousand). Given the type of insurance, pledge of commercial real estate, followed by other guarantees of companies without rating or rating of less than A-, cession of claims for insurance, guarantees of companies without credit rating, guarantees of companies categorized as A class, pledging of ownership share in the company, insurance policy of SID bank for the account ofthe Republic ofSlovenia, fiduciary transfer of real estate ownership rights, pledging of receivables for insurance and other insurances. Total fair value of loan collateral in SID Bank Group as at 31 December 2009 was EUR 808,437 thousand (in 2008: EUR 409,022 thousand). Given the type of insurance, pledge of commercial real estate, followed by other guarantees of companies without rating or rating of less than A-, cession of claims for insurance, guarantees of companies without credit rating, guarantees of companies categorized as A class, pledging of ownership share in the company, insurance policy of SID bank for the account of the Republic of Slovenia, fiduciary transfer of real estate ownership rights, pledging of receivables for insurance, bills and other insurances. Debt collection procedures or procedures of collection of receivables and liabilities are laid down in the internal company rules ofthe bank. Debt collection is carried out case by case in accordance with procedures ofthe bank. Each debt collection, irrespective of manner and executor of the recovery, starts with oral and written reminder of the debtor. Start of debt collection is classified in the group of regular recovery. Regular recovery includes monitoring of claims on debtors, regular monthly written reminders of debtors to overdue unpaid receivables, contacts with debtors in writing and in person, execution of set offs, as well as performance of other necessary actions which may contribute to faster, more effective and successful repayment ofoverdue receivables. Subsequently, procedures of extraordinary recovery begin. These include repayment of overdue receivables from insurance instruments, which are realisable with no preceding procedures, as well as concluding agreements with debtors on manners of repayment of debts, which differ from the ones agreed upon in the basic investment contract. If the dialogue with the debtor is not successful, court collection begins under the direction of Legal and Claims Department. Court recovery begins with the sending of reminders before lawsuit, contacts with debtors, filing of claims and/or propositions for enforcement and carrying out of other activities in court collection, as well as registering claims ofthe company in the compulsory settlement procedure, bankruptcy, liquidation or other procedures. Type of recovery or collection depends on duration of overdue, amount of overdue and unpaid receivables and the extent ofexposure ofthe company towards the debtor. Overdue, unpaid receivables The carrying amount of overdue, unpaid receivables in SID Bank and SID Bank Group is shown in the Total credit exposure table. SID Bank has overdue, unpaid receivables of nine Slovenian companies. SID Bank Group discloses most ofoverdue, unpaid receivables (close to 90 percent) of27 companies. 12 ofthese are in Slovenia, 10 in Croatia and 5 in Serbia. Due loans and receivables and impairments The structure ofexposure of loans and receivables by maturity Year 2009_ SID Bank Outstanding Overdue up Overdue 1 - Overdue 3 - Overdue Total to 1 month 3 months 12 months more than 1 year Loans to banks 2,292,668 0 0 0 0 2,292,668 Loans to clients other than banks 659,023 39 592 2,629 1 662,284 Approved undrawn loans 182,521 0 0 0 0 182,521 Guarantees 38,804 0 0 0 0 38,804 Total 3,173,016 39 592 2,629 1 3,176,277 - Annual Report of SID Bank and SID Bank Group for 2009 - 118 Year 2008 SID Bank Outstanding Overdue up Overdue 1 - Overdue 3 - Overdue Total to 1 month 3 months 12 months more than 1 year Loans to banks 1,512,356 0 0 0 0 1,512,356 Loans to clients other than banks 498,396 406 14 176 1,191 500,183 Approved undrawn loans 64,342 0 0 0 0 64,342 Guarantees 72,192 0 0 0 0 72,192 Total 2,147,286 406 14 176 1,191 2,149,073 Year 2009 SID Bank Group Outstanding Overdue up Overdue 1 - Overdue 3 - Overdue Total to 1 month 3 months 12 months more than 1 year Loans to banks 2,306,883 0 0 0 0 2,306,883 Loans to clients other than banks 743,902 9,911 6,395 22,333 2,076 784,616 Approved undrawn loans 195,021 0 0 0 0 195,021 Guarantees 39,696 0 0 0 0 39,686 Total 3,285,492 9,911 6,395 22,333 2,076 3,326,206 Year 2008 SID Bank Group Outstanding Overdue up Overdue 1 - Overdue 3 - Overdue Total to 1 month 3 months 12 months more than 1 year Loans to banks 1,534,606 0 0 0 0 1,534,606 Loans to clients other than banks 623,056 14,890 6,547 6,545 2,036 653,074 Approved undrawn loans 68,592 0 0 0 0 68,592 Guarantees 72,812 0 0 0 0 72,812 Total 2,299,066 14,890 6,547 6,545 2,036 2,329,084 Concentration of credit portfolio risks by activity SID Bank Group assesses concentration of risks by activity 2009 2008 Banks 2,316,015 68.4% 1,541,169 65.3% Non-financial organizations 956,472 28.3% 725,764 30.7% Other financial institutions 111,611 3.3% 94,672 4.0% Total 3,384,098 100.0% 2,361,605 100.0% SID Bank also assesses risks by debtors' countries (Chapter I., item 6.4.). - Annual Report of SID Bank and SID Bank Group for 2009 - 119 3.5. Other disclosures for the insurance sector of the SID Bank Group Insurance risk Short-term receivables from private buyers (as a rule, these are the loans of suppliers with a maturity of up to 180 days, exceptionally up to 1 year) are insured against commercial and non-commercial risks for sales abroad and/or at home on deferred payment and usually on an open account. The contracts are renewable and as a rule, the total turnover of the insured on the foreign and/or domestic markets is secured. The policyholder obtains insurance coverage for an individual buyer/debtor when the limit for such coverage is granted. The limits of individual buyers represent an important tool for managing risks, which is used for determining the maximum amount of loss. The insurance contract allows reduction or cancellation of the granted limit for any buyer at any time. By cancelling or reducing the limit for a client exposure to such that client is reduced. Risks can also be managed by limiting exposure by individual activities. The common exposure limits by country can be determined in the same way or by completely excluding coverage for an individual country, which represents an important toolfor managing political risks. The competences and management of insurance risks and tools for managing insurance risks Insurance contracts can only be signed by the Management Board of PKZ. The director authorized to assume risks has the Management Board's authorization to make agreements on credit insurance up to a certain amount of the annual premium, while only the Management Board is authorized to assume risks above the amount ofthe annual premium. The insurance offers and contracts are prepared according to the "four-eye" principle. The employees ofthe Risk Department of PKZ are authorized, based on their experience, to assess risks on the basis of which the receivables due from individual buyer/debtor or the debtors belonging to the same group (companies associated in terms of ownership or management) are insured. Depending on the amount ofexposure to the debtor or the group of debtors, the employee signatures with appropriate authorizations must be provided. Insurance of large exposures to debtors is decided by the Management Board of the insurance company and, when a certain amount is exceeded, also the leading reinsurers. For most of receivables to be insured, the debtor's assessment is required as well as approval of insurance by (at least) two expert colleagues or management with appropriate authorizations (four-eye principle). Management of parent company requires the subsidiary, which engages in insurance, to report regularly concerning concluded aggregate-based insurance transactions. At the same time it reports, how insurances change in connection with important events, which affect the risk of operation (industries, country level credit rating information, industry level credit rating information and important market information). The subsidiary discloses exposure in breakdown of individual policy holders, levels of limit amounts, industries and geographical regions. Reinsurance The insurance sector of the SID Bank Group protects its portfolio of insured risk with several reinsurance contracts. The majority of operations are secured by means of a quota reinsurance contract which is multi-level, with a controlling interest of 50%. Since retention amount exceeds the maximal own share, PKZ additionally protected its retention with damages by excess of loss reinsurance. The reinsurance contract covers all risks ofthe insurance portfolio (insurance against commercial and non-commercial risks). The insurance sector of the SID Bank Group further protected its portfolio with a contract made between SID Bank as the authorized institution representing the Republic of Slovenia (reinsurer) and the insurer (cedant). For the insurance sector of the SID Bank Group, this contract represents additional protection of own share in countries where non-commercial risks are also insured, and for which private market reinsurer contract is concluded, and reinsurance coverage for countries where coverage from private market reinsurers cannot be obtained. Frequency of and scope of losses The business process of the insurance sector of the SID Bank Group is structured so as to manage the impact of as many factors that affect the scope and frequency of losses as possible. Several factors affect the frequency and scope of losses which otherwise affect credit risks. The economic situation has the strongest impact. The actions ofthe insured can also have a significant impact on the scope and frequency of losses - on the one hand through the inherent risk related to policy holder's activity and on the other hand by the method of managing risks used by the policy holder. - Annual Report of SID Bank and SID Bank Group for 2009 - 120 3.6. Assets carried at fair value and liabilities to fund sources SID Bank_SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Book value Fair Book value Fair Book value Fair Book value Fair In EUR thousand value value value value Cash and balances oftransaction accounts with the state and the central bank 1,073 1,073 87 87 3,636 3,636 88 88 Financial assets held for trading 2,349 2,349 125 125 2,349 2,349 126 126 Available-for-sale financial assets 50,051 50,051 61,332 61,332 72,390 72,390 79,449 79,449 Loans 2,954,952 2,959,891 2,012,564 2,015,282 3,091,499 3,096,409 2,191,029 2,191,636 - Loans to banks 2,292,668 2,296,171 1,512,381 1,514,492 2,306,883 2,310,386 1,537,955 1,537,955 - Loans to clients other than banks 662,284 663,720 500,183 500,790 784,616 786,023 653,074 653,681 Property, plant and equipment 4,441 4,895 4,749 6,028 4,845 5,299 5,230 6,509 Investment property 0 0 0 0 80 80 0 0 Intangible assets 395 395 568 568 1,078 1,078 1,306 1,306 Long-term investments in equity of subsidiaries, associates and joint ventures 7,712 7,712 7,712 7,712 419 419 419 419 Corporate income tax assets 1,019 1,019 328 328 2,155 2,155 1,213 1,213 - Assets for corporate income tax 656 656 0 0 1,180 1,180 255 255 - Assets for deferred taxes 363 363 328 328 975 975 958 958 Other assets 2,902 2,902 252 252 37,182 37,182 22,794 22,794 TOTAL ASSETS 3,024,894 3,030,287 2,087,717 2,091,714 3,215,633 3,220,997 2,301,654 2,303,540 Financial liabilities held for trading 566 566 172 172 566 566 172 172 Derivative financial instruments held for hedging 907 907 0 0 907 907 0 0 Financial liabilities measured at amortized cost 2,502,156 2,694,289 1,921,672 1,922,267 2,814,538 2,815,664 2,079,910 2,080,508 - Bank deposits 155,066 155,066 15,216 15,216 155,066 155,066 15,216 15,216 - Deposits ofclients otherthan banks 91,870 91,870 22,376 22,376 91,870 91,870 22,376 22,376 - Loans ofbanks 1,799,948 1,800,827 1,633,867 1,634,499 1,921,338 1,922,188 1,792,105 1,792,756 - Loans to clients otherthan banks 99,108 99,384 0 0 99,122 99,398 0 0 - Debtsecurities 547,142 547,142 250,213 250,176 547,142 547,142 250,213 250,160 Provision 4,382 4,382 2,289 2,289 56,695 56,695 35,265 35,265 Corporate income tax liabilities 138 138 1,939 1,950 138 138 2,321 2,332 - Tax liabilities 0 0 1,904 1,915 0 0 2,284 2,295 - Non-current deferred tax liabilities 138 138 35 35 138 138 37 37 Other liabilities 3,785 3,785 888 888 9,063 9,063 4,058 4,058 TOTAL LIABILITIES 2,702,912 2,704,067 1,926,960 1,927,566 2,881,907 2,883,033 2,121,726 2,122,335 EQUITY 321,982 160,757 333,726 179,928 TOTAL LIABILITIES AND EQUITY 3,024,894 2,704,067 2,087,717 1,927,566 3,215,633 2,883,033 2,301,654 2,122,335 The financial instruments in SID Bank's statement of financial position disclosed at fair value include financial assets and liabilities held for trading, financial assets available for sale and issued debt securities. The fair values of loans, property, plant and equipment and financial liabilities measured at amortized cost differ from their book values disclosed in the statement offinancial position. 121 - Annual Report of SID Bank and SID Bank Group for 2009 - All listed financial instruments are initially recognized at fair value. Upon initial recognition, the fair value of a financial instrument is typically the cost of transaction. In any subsequent measurement offinancial instruments, the market price ofthe financial instrument is used (purchase or offer price). The fair value of loans given to banks and clients other than banks, and raised loans is the principal as at 31 December 2009 and the accrued interest for the period. The fair value of property, plant and equipment as at 31 December 2009 was only calculated for the construction facility. The assessment was prepared on the basis of inquiries for the purchase of similar facilities comparable by size, activity and location. The material bases for all other items of property, plant and equipment and intangible assets that would justify the reasons for the deviation ofthe carrying amount from the fair value are checked at least once a year. It was assessed that the carrying amount is a good approximation ofthe fair value. 3.7. Capital Pursuant to the Banking Act, SID Bank calculates its capital and capital adequacy for transactions carried out on its own behalfand for its own account from its own resources. SID Bank Equity 31.12.2009 31.12.2008 Share capital 300,000 140,000 Treasury shares (1,324) (1,324) Capital reserves 1,139 1,139 Profit reserves and retained earnings 21,735 19,923 Core capital deduction items (396) (568) Core capital 321,154 157,717 Tier I additional capital 63 93 Deduction items from core capital and Tier I additional capital (7,294) (7,294) Tier II additional capital 0 0 EQUITY 313,923 150,516 SID Bank Group 31.12.2009 31.12.2008 Share capital 300,000 140,000 Treasury shares (1,324) (1,324) Capital reserves 1,139 1,139 Profit reserves and retained earnings 28,183 23,722 Core capital deduction items (992) (1,190) Core capital 327,006 162,347 Tier I additional capital 63 93 Deduction items from core capital and Tier I additional capital (4,206) (4,206) Tier II additional capital 0 0 EQUITY 322,863 158,234 In accordance with Slovene Export and Development Bank Act, when calculating capital adequacy, total operations of SID Bank for its own account were taken into account, while transactions on behalfand for the account ofthe Republic of Slovenia have been excluded. Higher share capital of SID Bank and SID Bank Group is the result of increase in capital of SID Bank in the amount of EUR 160 million in August 2009. Capital management policy is presented in detail in Chapter I., item 6.4. a) Core capital deduction items SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Intangible assets (396) (568) (992) (1,190) - Annual Report of SID Bank and SID Bank Group for 2009 - 122 b) Deduction items from core capital and additional capital SID Bank SID Bank Group 31.12.2009 31.12.2008 31.12.2009 31.12.2008 Investments in other financial institutions that individually exceed 10% ofthe institution's capital (3,088) (3,088) - - Share in insurance companies (4,206) (4,206) (4,206) (4,206) Total (7,294) (7,294) (4,206) (4,206) - Annual Report of SID Bank and SID Bank Group for 2009 - 123 4. Segmented reporting (In EUR thousand) Distribution and segmented disclosures is done based on business characteristics of separate activities of SID Bank Group. When disclosing information in segments, we have taken into consideration supervisory approach and contents of reports used by the management of the bank for the management of SID Bank Group. It is based on the system of internal financial reporting of SID Bank Group to members of representatives of SID Bank in supervisory bodies of the companies in SID Bank Group. Business operation in segments of operation is monitored on the basis of accounting policies as presented in item 2.2. Reports are compiled in compliance with the IFRS. Activities ofthe SID Bank Group can be divided into three separate segments: • Banking, • Credit insurance, • Factoring. Each segment is organized into a legal entity in the form of independent business company. In SID Bank Group the banking activity is conducted in the parent company - SID Bank, credit insurance activity is conducted in PKZ and factoring is conducted in PRVI FAKTOR Group. Separate business segments include products and services, which differ from other segments in their risk and profitability. Transactions between the segments are conducted under usual business conditions. NLB d.d., Abanka d.d., Nova KBM d.d. and other Slovenian commercial banks are the important clients of the banking segment. Larger Slovenian companies (Gorenje d.d., Acroni d.d., Hidria and others) are the important clients of the credit insurance segment. Larger companies from the area of Croatia, Serbia and Slovenia (Agrokor Group, Delta Group, Petrol d.d., Zito d.o.o., Hidrogradnja d.d.), as well as Slovenian and Croatian state institutions are the important clients of the factoring segment. The majority portion of assets is bound to the geographic area of Slovenia. Also, the majority portion of income is realized on Slovenian market. Consequently the geographical segments are prepared accordingly. Geographical structure of proceeds and long-term assets SID Bank 2009 2008 Slovenia Abroad Slovenia Abroad Balance of long-term assets as at 31 December 2,648,413 85,319 1,713,548 33,000 Interest income and income from fees 83,488 774 83,394 306 SID Bank Group 2009 2008 Slovenia Abroad Slovenia Abroad Balance of long-term assets as at 31 December 2,680,305 87,426 1,733,686 34,935 Interest income and income from fees 86,698 15,537 87,307 15,330 - Annual Report of SID Bank and SID Bank Group for 2009 - 124 Statement of financial position by segments as at 31 December 2009 31.12.2009 SID Bank PKZ PF Group Eliminations SID Bank Group Cash and balances of transaction accounts with the state and the central bank 1,073 102 2,461 0 3,636 Financial assets held for trading 248 0 0 0 248 Financial assets held for hedging 2,101 0 0 0 2,101 Available-for-sale financial assets 50,051 22,338 1 0 72,390 Loans 2,954,952 7,680 162,184 (33,317) 3,091,499 Property, plant and equipment 4,441 94 310 0 4,845 Investment property 0 0 80 0 80 Intangible assets 395 88 107 488 1,078 Long-term investments in equity of subsidiaries, associates and joint ventures 7,712 0 0 (7,293) 419 Corporate income tax assets 1,019 162 974 0 2,155 Other assets 2,902 32,277 2,038 0 37,182 - Insurers assets 0 32,228 0 0 32,228 - Otherassets 2,902 49 2,038 (34) 4,954 TOTAL ASSETS 3,024,894 62,741 168,154 (40,156) 3,215,633 Financial liabilities held for trading Derivative financial instruments held for hedging Financial liabilities measured at amortized cost 271 1,202 2,693,134 0 0 0 0 0 158,489 0 0 (37,085) 271 1,202 2,814,538 Provision 4,382 52,227 86 0 56,695 - Bank provision 4,250 0 0 0 4,250 - Liabilities from insurance contracts 0 50,295 0 0 50,294 - Otherprovision 132 1,932 86 0 2,151 Corporate income tax liabilities 138 0 0 0 138 Other liabilities 3,785 1,347 3,965 (34) 9,063 EQUITY 321,982 9,167 5,614 (3,037) 333,726 TOTAL LIABILITIES AND EQUITY 3,024,894 62,741 168,154 (40,156) 3,215,633 CONTINGENCY RESERVES INTEREST RATE EQUALIZATION PROGRAMME 125,428 7,627 125,428 7,627 In the course of consolidation for 2009 loans given in the amount of EUR 37,085 thousand have been eliminated. Loans received in the same amount have been eliminated. Accordingly, impairments formed for these loans in the amount of EUR 3,768 thousand have been eliminated. On the other side, due provision adjustments in the amount of EUR 1,684 thousand have been made. For the remaining amount of EUR 2,084 thousand an adjustment was made in net profit for the period. Furthermore, other assets in the amount of EUR 34 thousand and other liabilities in the same amount have been eliminated. Other assets or other liabilities represent in content short-term operating receivables or short-term operating liabilities. Investments in subsidiary and associated companies in the amount of EUR 7,293 thousand have been eliminated. Accordingly, appropriate eliminations from the item share capital in the amount of EUR 5,790 thousand and in capital reserves in the amount of EUR 945 thousand have been made. Profit reserves in the amount of EUR 70 thousand have been eliminated. Goodwill in the amount of EUR 488 thousand was formed in intangible assets. Finally, dividend income in total amount of EUR 2,474 EUR has also been eliminated from the item net profit ofthe year in the consolidation process. Accordingly, profit reserves have been increased for the same amount. Furthermore, income (credit risk equalization provisions) in the amount of EUR 6,533 thousand has been eliminated from the item net profit for the year and profit reserves have been increased in the same amount. In consolidation procedures the matter of proportionality ofownership interest ofthe parent company in the associated company was taken into account appropriately. For more information on this matter see Chapter II., item 2.1.2. - Annual Report of SID Bank and SID Bank Group for 2009 - 125 31.12.2008 SID Bank PKZ PF Group Eliminations SID Bank Group Cash and balances of transaction accounts with the state and the central bank 112 37 3,287 0 3,437 Financial assets held for trading 125 0 0 0 125 Available-for-sale financial assets 61,332 18,117 1 0 79,450 Loans 2,012,539 12,550 177,794 (15,202) 2,187,680 Property, plant and equipment 4,749 110 371 0 5,230 Intangible assets 568 117 133 488 1,306 Long-term investments in equity of subsidiaries, associates and joint ventures 7,712 0 0 (7,293) 419 Corporate income tax assets 328 414 471 0 1,213 Other assets 252 20,215 2,342 (15) 22,794 - Insurers assets 0 20,177 0 0 20,177 - Otherassets 252 38 2,342 (15) 2,617 TOTAL ASSETS 2,087,717 51,560 184,399 (22,022) 2,301,654 Financial liabilities held for trading 172 0 0 0 172 Financial liabilities measured at amortized cost 1,921,672 0 175,125 (16,888) 2,079,910 Provision 2,289 32,877 99 0 35,265 - Bank provision 2,165 0 0 0 2,165 - Liabilities from insurance contracts 0 30,896 0 0 30,896 - Otherprovision 124 1,981 99 0 2,204 Corporate income tax liabilities 1,939 0 336 0 2,321 Other liabilities 888 1,753 1,432 (15) 4,058 EQUITY 160,757 16,884 7,407 (5,119) 179,928 TOTAL LIABILITIES AND EQUITY 2,087,717 51,560 184,399 (22,022) 2,301,654 CONTINGENCY RESERVES 113,186 113,186 INTEREST RATE EQUALIZATION PROGRAMME 6,709 6,709 Non-cash items on the level ofSID Bank Group in value terms are represented mainly by the formed impairments and provisions. In 2009, expenses for newly formed impairments amounted to EUR 23,596 thousand, while for the newly formed provisions they amounted to EUR 10,556 thousand. Expenses for amortization and depreciation amounted to EUR 881 thousand, revenues for revaluated available-for-sale financial assets amounted to EUR 964 thousand, deferred taxes due to revaluation offinancial assets amounted to EUR 242 thousand. Other non-cash items are of minor values; in content they represent expenses from revaluation of financial instruments and foreign exchange differences in total amount of EUR 52 thousand. - Annual Report of SID Bank and SID Bank Group for 2009 - 126 Statements of comprehensive income by segments for the year 2009 2009 SID Bank PKZ PF Group Eliminations Total Interest income and similar income 82,256 985 13,633 (1,094) 95,779 Interest expense and similar expense (60,754) 0 (7,648) 1,094 (67,308) Net interest 21,502 985 5,985 0 28,471 Dividend income 2,474 0 0 (2,474) 0 Fees and commissions received 2,006 0 4,489 0 6,456 Fees and commissions paid (437) (14) (821) 0 (1,233) Net fees and commissions 1,569 (14) 3,668 0 5,223 Realized profits/losses from financial assets and liabilities not measured at fair value through profit or loss 330 274 0 0 605 Net profits/losses from financial assets and liabilities held for trading 24 (59) 0 0 24 Changes in fair value when calculating risk insurance (40) 0 0 0 (40) Net foreign exchange gains/losses 44 29 1,000 0 1,073 Net profits/losses from derecognition of assets, excluding non-current assets held for sale (4) 0 2 0 (2) Other net operating profits/losses 2,542 2,039 (101) (351) 4,129 Administrative costs (5,729) (66) (3,063) (351) (10,971) Depreciation, amortization (643) (617) (172) 0 (881) Provision (1,985) (8,517) 0 0 (10,556) Impairments (18,906) (292) (6,482) (2,084) (23,596) Profits/losses on ordinary activities 1,178 (8,146) 837 (6,521) Corporate income tax on ordinary activities (230) 0 (525) (755) Deferred taxes 1 1,617 274 1,892 Net profit/loss for the year 948 (6,529) 587 (5,384) Net profit/loss for the year_948 (6,529)_587_(5,384) Net profits/losses derecognized from revaluation surplus from available-for-sale financialassets 347 859 0 1,206 0 Corporate income tax on other comprehensive income_(70)_(172)_0_(242) Post-tax comprehensive income for the year Of owners of the parent company 1,225 (5,842) 587 (4,420) (4,420) In the course of consolidation impairments in the amount of EUR 2,084 thousand have been eliminated. These impairments were formed for the loans ofthe parent company granted to a subsidiary in 2009. Furthermore, interest income in the amount of EUR 1,094 EUR has been eliminated with the parent company. Interest expenses in the same amount have been eliminated with the subsidiary. Intra-group revenues from fees and commissions amounted to EUR 39 thousand and have been appropriately eliminated from the consolidation. Also, expenses for fees and commissions in the same amount have been eliminated with the subsidiary. Furthermore, revenues from insurance premiums in the amount of EUR 210 thousand have been eliminated from the consolidation. Administrative costs in the same amount have been eliminated. - Annual Report of SID Bank and SID Bank Group for 2009 - 127 Other operating profits/losses in the amount of EUR 281 thousand have also been eliminated. On the other side, expenses for insurance operations in the amount of EUR 114 thousand, administrative costs in the amount of EUR 141 thousand and operating losses in the amount of EUR 36 thousand have been eliminated accordingly. Finally, dividend income in total amount of EUR 2,474 EUR has been eliminated in the consolidation process. 2008 SID Bank PKZ PF Group Eliminations Total Interest income and similar income 82,491 1,419 14,461 (1,134) 97,238 Interest expense and similar expense (68,183) 0 (10,378) 1,134 (77,429) Net interest 14,308 1,419 4,083 0 19,809 Dividend income 2,273 0 0 (2,273) 0 Fees and commissions received 1,209 0 4,207 (18) 5,398 Fees and commissions paid (411) (14) (1,005) 18 (1,412) Net fees and commissions 798 (14) 3,202 0 3,986 Realized profits/losses from financial assets and liabilities not measured at fair value through profit or loss (184) (72) 1 0 (255) Net profits/losses from financial assets and liabilities held for trading (59) 0 0 0 (58) Net foreign exchange gains/losses 97 (82) 2,851 0 2,866 Net profits/losses from derecognition of assets, excluding non-current assets held for sale 2 0 0 0 2 Other net operating profits/losses 2,501 6,379 255 (506) 8,629 Administrative costs (5,161) (2,607) (3,580) 506 (10,843) Depreciation, amortization (617) (57) (186) 0 (860) Provision (1,526) (3,562) 0 0 (5,088) Impairments (9,429) (899) (4,352) 496 (14,183) Profits/losses on ordinary activities 3,003 505 2,274 4,005 Corporate income tax on ordinary activities (236) (160) (753) (1,149) Net profit/loss for the year 2,767 345 1,521 2,856 Net profit/loss for the year 2,767 345 1,521 2,856 Net profits/losses derecognized from revaluation surplus from available-for-sale financial assets 48 (677) 0 (629) Corporate income tax on other comprehensive income (12) 135 0 124 Post-tax comprehensive income for the year 2,803 (198) 1,521 2,351 Of owners of the parent company 2,351 In the course of consolidation for the year 2009, revenues and expenses in total amount of EUR 4,059 thousand have been eliminated. Transactions among the companies of SID Bank Group amount to the same value. Consolidated financial statements in Chapter II., item 1, disclose transactions with third persons expressed in terms of value. - Annual Report of SID Bank and SID Bank Group for 2009 - 128 5. Appendices 5.1. Financial statements of insurance against non-marketable risks (on behalf of the Republic of Slovenia) Statement of financial position In EUR thousand 31.12.2009 31.12.2008 Cash in transaction accounts with banks in the country 43 2 Loans to banks 101,859 91,811 Available-for-sale financial assets 18,258 17,647 Other assets 5,268 3,726 TOTAL INVESTMENTS OF CONTINGENCY RESERVES 125,428 113,186 In EUR thousand 31.12.2009 31.12.2008 Contingency reserves 120,039 109,896 Revaluation surplus from available-for-sale financial assets 208 (362) Other liabilities 5,181 3,652 TOTAL LIABILITIES FOR CONTINGENCY RESERVES 125,428 113,186 Profit or loss In EUR thousand 2009 2008 Interest income and similar income 3,101 6,376 Loans and deposits 2,570 4,563 - Securities 531 1,811 - Other 0 2 Net interest 3,101 6,376 Technical items - Insurance and reinsurance premiums 4,754 4,083 - Reinsurance and processing commissions (445) (354) - Claims (4,899) (13) - Recourses 6 71 Total technical items (584) 3,787 Other net fees 13 142 Profits/losses from securities 103 (885) - Sale 103 (423) - Impairment 0 (462) Other operating profits/losses 0 2 Operating costs (2,490) (2,491) Surplus of income over expenses 143 6,931 _129_ Annual Report of SID Bank and SID Bank Group - 2009 5.2. Financial statements of the IREP programme (on behalf of the Republic of Slovenia) Statement of financial position In EUR thousand 31.12.2009 31.12.2008 Cash in transaction accounts with banks in the country Loans to banks Available-for-sale financial assets Other assets 1 2,843 4,782 1 7 3,038 3,663 0 TOTAL INVESTMENTS OF IREP PROGRAMME 7,627 6,708 In EUR thousand 31.12.2009 31.12.2008 Liabilities from the interest rate equalization programme Revaluation surplus from available-for-sale financial assets 7,585 42 6,907 (199) TOTAL LIABILITIES OF IREP PROGRAMME_7,627_6,708 Profit or loss In EUR thousand 2009 2008 Interest income and similar income 197 280 Loans and deposits 59 86 - Securities 138 194 Net interest 197 280 Other net fees (4) (4) Profits/losses from securities (15) 0 - Sale (15) 0 Surplus of income over expenses 178 276 - Annual Report of SID Bank and SID Bank Group for 2009 - 130 III. DISCLOSURES IN ACCORDANCE WITH THE DECREE ON DISCLOSURES BY BANKS AND SAVINGS BANKS Disclosures in this chapter are compiled in accordance with the Decree on Disclosures by Banks and Savings Banks. In accordance with capital legislation of the EU, SID Bank has the status of parent undertaking, therefore it is obliged to publish disclosures in accordance with this decree based on consolidated financial position. Policy and goals of risk management Strategy and processes of risk management Risk management with the relation to risks, while taking into account business goals of the company, represent one of the main challenges of any bank or other financial institution. SID Bank banking group is not a homogeneous group. Business activity ofthe parent company is financing or crediting of legal persons, while factoring is the business activity of PRVI FAKTOR Group, ofwhich NLB d.d. is the joint owner. In the field offactoring, processes of risk management oftwo owners are therefore intertwined. In risk management of SID Bank banking group these particularities need to be taken into account. Risk management strategy and policies of SID Bank are approved by its management board, while the policies of PRVI FAKTOR are approved by its supervisory body - General Meeting of Shareholders, which consists of representatives of both companies. This method ensures harmonization of risk management rules on the level of SID Bank banking group. In order to achieve strategic goals ofSID Bank banking group, special attention is paid to credit risk on the group level. Strategy and policies of risk management are recorded in item 6.4 ofthe business section. Structure and organization Structure and organization of risk management are described in item Risk Management in SID Bank Group of item 6.4 in the business section ofthe annual report. Extent and characteristics of risk reporting and risk measuring systems Organization and demarcation of competences of risk management are devised in a way which prevents development of conflict of interests, as well as ensure transparent and documented process of decision making along with an adequate upward and downward information flow. SID Bank banking group has an established system of regular reporting. On consolidated basis it prepares reports on exposure, insurances, bad investments and ongoing recovery procedures. These reports are discussed by the Credit Committee, and also acquainted with by the management board ofthe bank. Risk measuring systems are integral parts of risk management policies; for the needs of supervision on consolidated basis they also comply with regulatory requirements ofthe Bank ofSlovenia. Hedging against risks policies, policies for reduction of risks, strategies and processes for monitoring of effectiveness of types of hedging against risks and their reduction For the purpose of hedging against risks in SID Bank, the following documents are the most important: - Risk Management Strategy - Operational Risk Management Policy - Interest Rate Risk Management Policy - Liquidity Risk Management Policy - Foreign Exchange Risk Management Policy - Credit Risk Management Policy - Capital Risk and Capital Management Policy - Rules on Limits of Exposure to Credit Risk - Rules on Monitoring of Exposure to Credit Risk - Rules on Assessment of Credit Risk Losses - Annual Report of SID Bank and SID Bank Group for 2009 - 131 For the more significant types of risk, PRVI FAKTOR Group also has policies, which supplement risk management on the level ofSID Bank banking group: - Non-credit Risk Management Policy (Interest rate, Foreign Exchange, Liquidity Risk) - Operational Risk Management Policy (OR) - Policy ofinvestment insurance in company PRVI FAKTOR Ljubljana and PRVI FAKTOR Group - Policy of restricting big exposure in PRVI FAKTOR Group Policy and objectives of risk management for each type of risk are presented in more detail in item 6.4 of the business section, and in item 3 ofthe financial section. Information on persons included in disclosures Pursuant to Decree on Supervision on the Basis of Consolidation (Bank Consolidation), the consolidated financial statements include SID Bank and PRVI FAKTOR Group by the method of proportional consolidation. PRO KOLEKT Group and the CIDC institute were excluded, since their total assets account for less than 1% ofthe total assets ofSID Bank and their income accounts for less than 1% of the income of SID Bank. Investment in PRO KOLEKT Group is also not a deduction when calculating capital of the SID Bank banking group. In accordance with the IFRS, beside SID Bank the consolidated financial statements include insurance company PKZ by the method offull consolidation and PRVI FAKTOR Group by the method of proportional consolidation. The difference between banking and accounting consolidation is therefore in the latter also including insurance company PKZ. Companies ofSID Bank Group are presented in detail in the business section ofannual report, in items 2 and 3. There are no obstacles to transfer of capital or settlement of liabilities between parent and subsidiary companies of SID Bank banking group. All the companies of SID Bank Group, which are excluded from consolidation in accordance with the Decree on Supervision of Banks and Savings Banks on Consolidated Basis, fulfil the required capital minimum. Total amount of capital deficit is 0. - Annual Report of SID Bank and SID Bank Group for 2009 - 132 Capital, minimal capital requirements and the process of assessment of necessary internal capital Capital adequacy of SID Bank Group In EUR thousand 31.12.2009 31.12.2008 Paid-up share capital 300,000 140,000 Treasury shares (1,324) (1,324) Capital reserves 1,139 1,139 Profit reserves and retained earnings 28,183 23,722 Other core capital deduction items (992) (1,190) - Intangible assets (992) (1,190) - Difference between the reported impairments and provisions according to IFRS and the regulation on loss assessment 0 0 Core capital 327,006 162,347 Tier I additional capital 63 93 Total core and additional capital I 327,069 162,440 Deduction items from core capital and Tier I additional capital (4,206) (4,206) - Interest in insurance companies (4,206) (4,206) Total capital - for the purpose ofcapital adequacy 322,863 158,234 Tier II additional capital 0 0 Capital requirements (164,511) (127,310) - For credit, settlement and counterparty risks (161,391) (124,237) Centralgovernments and central banks (197) (123) Regional governments and localauthorities (162) (50) Public sector entities (571) (581) Multilateral development banks 0 0 Institutions (95,917) (62,529) Corporate (60,077) (59,372) Past due items (3,082) (734) Items belonging to regulatory high-risk categories (896) (367) Positions in investment funds (10) (7) Other exposure classes (479) (474) - For foreign exchange risk 0 (722) - For market risks 0 0 - For operational risk (3,120) (2,351) Share premium 158,352 30,924 Capital adequacy ratio 15.7 9.9 In accordance with Slovene Export and Development Bank Act, when calculating capital adequacy, total operations of SID Bank for its own account were taken into account, while transactions on behalfand for the account ofthe Republic of Slovenia have been excluded. Higher share capital of SID Bank and SID Bank Group is the result of increase in capital of SID Bank in the amount of EUR 160 million in August 2009. In accordance with Slovene Export and Development Bank Act, the whole distributable profit is allocated to other profit reserves. Tier I additional capital includes adjustment of revaluation of available-for-sale financial assets (debt securities). Deduction items of core capital and Tier I additional capital includes investment in insurance company PKZ. Pursuant to Banking Act, in 2008 SID Bank for the first time fully calculated capital requirements in accordance with the requirements of Basel II. Capital requirements for credit and foreign exchange risks are calculated under standardized approach, while capital requirements for operational risks are calculated under simple approach. In accordance with requirements of the Bank of Slovenia, the lowest amount of share capital of a bank is EUR 5,000 thousand, while the requisite capital adequacy ratio is 8%. In accordance with Slovene Export and Development Bank Act, the lowest amount of share capital of SID Bank is EUR 300,000 thousand, while the requisite capital adequacy ratio is 4%. _133_ Annual Report of SID Bank and SID Bank Group - 2009 Summary of approach to assessment of adequate internal capital is presented in item 6.4 of the business section of annual report. Credit risk and risk of reduction of value of repurchased claims on money Credit risk is presented in item 6.4 ofthe business section ofannual report and in item 3.4 ofthe financial section. Definition of past due items and impaired items for accounting purposes 31.12.2009 31.12.2008 In EUR thousand Balance Impairments Balance Impairments Undue/group impaired 3,156,159 (22,059) 2,117,622 (11,834) Undue/individually impaired 25,474 (6,976) 40,243 (10,568) Undue/unimpaired 131,945 0 155,554 0 Due/unimpaired 19,851 0 20,372 0 Due impaired 42,988 (22,125) 15,264 (5,618) Total 3,376,417 (51,159) 2,349,055 (28,020) Data in the table includes deposits, granted loans, guarantees and approved undrawn loans. Items are disclosed at gross value. The policy ofadjustment forming is presented in item 2.2.6 ofthe financial section ofthe annual report. Aggregate amount of exposure, reduced by impairments or provisions, without notice of effects of credit insurance and average amount of exposure in the reporting period broken down by all exposure classes Year 2009 (In EUR thousand) Original exposure value before the Impairments and Average net application of provisions related to Net exposure exposure value in EXPOSURE CLASS conversion factors original exposure value 2009 Central governments and central banks 29,522 0 29,522 27,849 Regional governments and local authorities 3,012 0 3,012 1,366 Public sector entities 14,428 308 14,120 14,181 Multilateral development banks 5,057 0 5,057 2,272 Institutions 2,485,686 3,777 2,481,909 2,071,238 Corporate 821,096 25,948 795,148 720,127 Past due items 35,394 7,708 27,686 41,039 Items belonging to regulatory high-risk categories 30,218 19,275 10,943 12,348 Positions in investment funds 130 0 130 115 Other exposures 5,985 0 5,985 5,857 Total 3,430,528 57,016 3,373,512 2,896,390 Data in the table includes all assets and risky off-balance-sheet items Year 2008 (In EUR thousand) Original exposure value before the Impairments and Average net application of provisions related to Net exposure exposure value in EXPOSURE CLASS conversion factors original exposure value 2008 Central governments and central banks 42,098 0 42,098 15,599 Regional governments and local authorities 1,082 0 1,082 1,108 Public sector entities 14,862 349 14,513 13,152 Multilateral development banks 0 0 0 375 Institutions 1,561,436 3,255 1,558,181 763,587 Corporate 787,735 19,909 767,826 517,655 Past due items 14,139 7,480 6,659 6,549 Items belonging to regulatory high-risk categories 7,290 3,557 3,733 2,049 Positions in investm ent funds 92 0 92 174 Other exposures 5,929 0 5,929 7,178 Total 2,434,663 34,550 2,400,113 1,327,425 Data in the table includes all assets and risky off-balance-sheet items - Annual Report of SID Bank and SID Bank Group for 2009 - 134 Distribution of exposure by important geographical areas, segmented by important exposure classes Year 2009 (In EUR thousand)_ Bosnia and EXPOSURE CLASS Slovenia Croatia Serbia Herzegovina Russia Netherlands Other countries TOTAL Central governments and central banks 27,057 2,465 0 0 0 0 0 29,522 Regional governments and local authorities 2,105 717 0 157 0 0 33 3,012 Public sector entities 13,964 50 90 16 0 0 0 14,120 Multilateral development banks 0 0 0 0 0 0 5,057 5,057 Institutions 2,411,508 5,612 13,868 12,085 15,866 253 22,717 2,481,909 Corporate 567,061 101,050 59,198 34,133 1,988 20,145 11,573 795,148 Past due items 11,205 7,353 8,618 402 0 31 77 27,686 Items belonging to regulatory high-risk categories 8,790 2,009 0 5 0 0 139 10,943 Positions in investment funds 130 0 0 0 0 0 0 130 Other exposures 5,325 468 192 0 0 0 0 5,985 Total 3,047,145 119,724 81,966 46,798 17,854 20,429 39,596 3,373,512 Data in the table includes all assets and risky off-balance-sheet items at net value. Year 2008 (In EUR thousand)_ Bosnia and EXPOSURE CLASS Slovenia Croatia Serbia Herzegovina Russia Netherlands Other countries TOTAL Central governments and central banks 32,960 1,110 0 0 0 0 8,028 42,098 Regional governments and local authorities 885 157 0 0 0 0 40 1,082 Public sector entities 14,513 0 0 0 0 0 0 14,513 Multilateral development banks 0 0 0 0 0 0 0 0 Institutions 1,483,210 403 17,555 14,210 18,833 2 23,968 1,558,181 Corporate 529,041 127,525 74,791 8,481 703 1,196 26,089 767,826 Past due items 3,108 1,527 821 257 719 0 227 6,659 Items belonging to regulatory high-risk categories 2,760 962 0 0 0 0 11 3,733 Positions in investment funds 92 0 0 0 0 0 0 92 Other exposures 4,889 0 0 0 0 0 1,040 5,929 Total 2,071,458 131,684 93,167 22,948 20,255 1,198 59,403 2,400,113 Data in the table includes all assets and risky off-balance-sheet items at net value. Annual Report of SID Bank and SID Bank Group - 2009 Distribution of exposure according to industry or type of clients segmented by exposure classes Year 2009 (In EUR thousand) DOMESTIC EXPOSURES OFFSHORE TOTAL Sale, Public maintenance IT and Financial and administratio Processing Transport Cultural and repairs of communication Total Total EXPOSURE CLASS insuring activities n activity industry and storage activities vehicles activities Other domestic offshore Total Central governments and central banks 1,004 26,046 0 0 8 0 0 0 27,058 2,464 29,522 Regional governments and local authorities 0 1,757 0 0 0 0 0 347 2,104 908 3,012 Public sector entities 305 13,659 0 0 0 0 0 0 13,964 156 14,120 Multilateral development banks 0 0 0 0 0 0 0 0 0 5,057 5,057 Institutions 2,411,508 0 0 0 0 0 0 0 2,411,508 70,401 2,481,909 Corporate 90,996 17 239,803 41,719 19,842 81,799 21,135 71,749 567,060 228,088 795,148 Past due items 1 135 6,960 10 0 45 4 4,049 11,204 16,482 27,686 Items belonging to regulatory high-risk categories 6,714 0 1,503 0 0 0 0 574 8,791 2,152 10,943 Positions in investment funds 130 0 0 0 0 0 0 0 130 0 130 Other exposures 459 0 0 0 0 0 0 4,867 5,326 659 5,985 Total 2,511,117 41,614 248,266 41,729 19,850 81,844 21,139 81,586 3,047,145 326,367 3,373,512 Data in the table includes all assets and risky off-balance-sheet items at net value. Year 2008 (In EUR thousand) DOMESTIC EXPOSURES OFFSHORE TOTAL Sale, Public maintenance Financial and administratio Processing Transport Cultural and repairs of Power, gas and Total Total EXPOSURE CLASS insuring activities n activity industry and storage activities vehicles water supply Other domestic offshore Total Central governments and central banks 87 32,873 0 0 0 0 0 0 32,960 9,138 42,098 Regional governments and local authorities 0 885 0 0 0 0 0 0 885 197 1,082 Public sector entities 509 13,937 0 0 19 0 0 48 14,513 0 14,513 Multilateral development banks 0 0 0 0 0 0 0 0 0 0 0 Institutions 1,483,210 0 0 0 0 0 0 0 1,483,210 74,971 1,558,181 Corporate 77,462 0 192,790 31,570 21,975 107,338 41,788 56,118 529,041 238,785 767,826 Past due items 0 62 298 3 3 100 0 2,642 3,108 3,551 6,659 Items belonging to regulatory high-risk categories 0 0 1,223 0 0 347 0 1,190 2,760 973 3,733 Positions in investment funds 92 0 0 0 0 0 0 0 92 0 92 Other exposure classes 141 0 0 0 0 0 0 4,748 4,889 1,040 5,929 Total 1,561,501 47,757 194,311 31,573 21,997 107,785 41,788 64,746 2,071,458 328,655 2,400,113 Data in the table includes all assets and risky off-balance-sheet items at net value. 136 Annual Report of SID Bank and SID Bank Group - 2009 Remaining maturity exposure breakdown In EUR thousand 2009 2008 Short-term Long-term Short-term Long-term EXPOSURE CLASS (Up to 1 year) (Over 1 year) (Up to 1 year) (Over 1 year) Central governments and central banks 7,528 21,994 30,882 11,216 Regional governments and local authorities 2,489 523 842 240 Public sector entities 156 14,272 516 14,346 Multilateral development banks 0 5,057 0 0 Institutions 215,891 2,269,794 225,997 1,335,439 Corporate 294,083 527,013 358,892 428,843 Past due items 33,001 2,393 14,126 13 Items belonging to regulatory high-risk categories 22,335 7,883 7,263 27 Positions in investment funds 130 0 92 0 Other exposures 680 5,306 139 5,789 Total 576,293 2,854,235 638,749 1,795,913 Data in the table includes all assets and risky off-balance-sheet items at gross value. Annual Report of SID Bank and SID Bank Group - 2009 137 Past due and impaired exposures Year 2009 (In EUR thousand) DOMESTIC PAST DUE EXPOSURES OFFSHORE TOTAL Processing industry Agriculture Professional, scientific and technical activities Building sector Sale, maintenance and repairs of vehicles Financial and insuring activities Real estate activities Total Other domestic Total offshore Total Past due exposures Impairments and provisions 10,281 6,753 6,368 5,794 3,835 2,785 2,526 365 1,291 238 8,392 1,678 570 202 290 33,553 68 17,883 26,695 9,934 60,248 27,817 Table includes past due exposures over 90 days at gross value. Year 2008 (In EUR thousand) DOMESTIC PAST DUE EXPOSURES OFFSHORE TOTAL Processing industry Agriculture Professional , scientific and technical activities Building sector Sale, maintenance and repairs of vehicles Other various business activities Public administration Total Other domestic Total offshore Total Past due exposures Impairments and provisions 1,432 330 6,123 4,576 2,412 1,221 873 213 194 99 166 0 67 5 101 11,368 14 6,458 8,591 4,998 19,959 11,456 Table includes past due exposures over 90 days at gross value. Annual Report of SID Bank and SID Bank Group - 2009 138 Changes of revaluations and presentation of adjustments in provisions by types of assets Changes in adjustments (impairment) 2009 2008 Adjustments of Adjustments Adjustments of Adjustments of loans to clients Total ofloansto loans to clients Total In EUR thousand loans to banks other than banks adjustments banks other than banks adjustments Balance as at 1 January 1,133 26,824 27,957 1,321 15,637 16,958 Adjustments formed 2,716 27,907 30,623 384 19,213 19,597 Elimination of adjustments (669) (8,230) (8,899) (572) (8,026) (8,598) Balance as at 31 December 3,180 46,501 49,681 1,133 26,824 27,957 Changes in provisions 2009 2008 In EUR thousand Provisions for off-balancesheet liabilities Provisions for offbalance-sheet liabilities Balance as at 1 January 2,165 778 Provisions formed 8,502 2,770 Foreign exchange differences 0 (1) Elimination of provisions (6,417) (1,382) Balance as at 31 December 4,250 2,165 Total changes in adjustments (impairments) and provisions 2009 2008 In EUR thousand Impairments Provision Total Impairments Provision Total Balance as at 1 January 27,957 2,165 30,122 16,958 778 17,736 Increase 30,623 8,502 39,125 19,597 2,770 22,367 Foreign exchange differences 0 0 0 0 (1) (1) Decrease (8,899) (6,417) (15,316) (8,598) (1,382) (9,980) Balance as at 31 December 49,681 4,250 53,931 27,957 2,165 30,122 Annual Report of SID Bank and SID Bank Group - 2009 139 Additional disclosures of the bank, which uses the standardized approach Exposure value and exposure values with effects of credit insurances broken down by credit quality steps In EUR thousand 2009 2008 EXPOSURE CLASS Risk weight Net exposure value Net exposure after allowing for credit insurance and before the application of conversion factors Net exposure value Net exposure after allowing for credit insurance and before the application of conversion factors Central governments and central banks 29,523 99,749 42,098 66,372 0% 27,058 97,284 40,136 64,410 50% 0 0 852 852 100% 2,465 2,465 1,110 1,110 Regional governments and local authorities 3,011 3,011 1,082 1,082 50% 2,137 2,137 925 925 100% 717 717 157 157 150% 157 157 0 0 Public sector entities 14,120 14,120 14,513 14,513 50% 13,964 13,964 14,513 14,513 100% 156 156 0 0 Multilateral development banks 5,057 5,057 0 0 0% 5,057 5,057 0 0 Institutions 2,481,909 2,452,336 1,558,181 1,553,452 20% 22,974 22,974 49,741 49,741 50% 2,393,102 2,381,615 1,461,752 1,457,023 100% 34,537 21,573 11,780 11,780 150% 31,296 26,174 34,908 34,908 Corporate 795,148 754,495 767,826 748,281 100% 712,494 705,259 684,540 684,470 150% 82,654 49,236 83,286 63,811 Past due items 27,686 27,686 6,659 6,659 100% 6,008 6,008 1,622 1,622 150% 21,678 21,678 5,037 5,037 Items belonging to regulatory high- risk categories 10,943 10,943 3,733 3,733 100% 10,420 10,420 2,013 2,013 150% 523 523 1,720 1,720 Positions in investm ent funds 130 130 92 92 100% 130 130 92 92 Other exposures 5,985 5,985 5,929 5,929 100% 5,985 5,985 5,929 5,929 Total 3,373,512 3,373,512 2,400,113 2,400,113 A risk weight us determined according to the level of credit quality, which can be different for the same level of credit quality depending on the class of each exposure. _140 Annual Report of SID Bank and SID Bank Group - 2009 Operational risk The approach used for calculation of capital requirement for operational risk is presented in detail in the business section ofannual report, in item 6.4, segment Operational risk. Investments in equity shares not included in the trading book Carrying amount of investments in equity shares not included in the trading book as at 31 December 2009 amounted to EUR 131 thousand. Interest rate risk from items not included in the trading book Interest rate risk from items not included in the trading book arises from time discrepancy of items sensitive to interest rate and from different types of interest rates. SID Bank banking group decreases interest rate risk through coordination of investments and liabilities by their maturity, due date, types of interest rate and through use of derivative financial instruments. SID Bank banking group measures interest rate risk with the method of interest gaps. Items are included in interest gaps according to due date or the date of first resumed determination of interest rates. Interest rate risk monitoring is conducted monthly. SID Bank banking group measures exposures to sudden changes of interest rates by calculating the effect of change of level ofinterest rates on interest income and on capital value. Effect on income or other measure of value used when managing interest rate risk in case of sudden increase or decrease of interest rate Sensitivity analysis of all assets and liabilities items sensitive to interest rate is based on the assumption that the market interest rate would change by 100 basis points (1% p.a.). The impact on net interest income in the first year of change has also been calculated. Ifthe market interest rates increased by 100 basis points, net interest income of SID Bank banking group would increase by EUR 1,434 thousand in 2010 (by EUR 1,524 thousand in 2009). The change would be reflected as higher revenues in the income statement. If the market interest rates dropped by 100 basis points, the changes would be the same, in absolute terms, as in the case ofincrease, only reversed. Ifthe market interest rates change for less or more, the calculated results are proportional. Available-for-sale financial assets SID Bank banking group carried out a sensitivity analysis of the securities portfolio to the change of interest rate. The analysis shows how the fair values of securities or future cash flows of financial instruments would fluctuate due to the changes in market interest rates on the reporting date. The analysis does not include deposits given, which are typically of a very short-term nature and placed at a pre-arranged fixed interest rate, as well as mutual funds, which do not respond to the changes in interest rates to the same extent as debt financial instruments - bonds with fixed or variable interest rate. Only SID Bank has securities in its portfolio. The analysis separately calculates the responsiveness of bonds with variable and those with fixed interest rates in view of the changes in the market interest rate. The analysis is based on the assumption ofa change in the market interest rate by 100 basis points (1% p.a.). - Annual Report of SID Bank and SID Bank Group for 2009 - 141 SID Bank banking group 2009 2008 In EUR thousand + 100 bps -100 bps +100 bps -100 bps BONDS AT FIXED INTEREST RATE Fixed - change of portfolio Increase or decrease in capital -1,200 -1,200 1,200 1,200 -1,047 -1,047 1,047 1,047 BONDS AT FLOATING INTEREST RATE Floating - change ofportfolio 106 -106 61 -61 Impact on the statement of comprehensive income 106 -106 61 -61 TOTAL Total - change of portfolio Increase or decrease in capital Impact on the statement of comprehensive income -1,094 -1,200 106 1,094 1,200 -106 -986 -1,047 61 986 1,047 -61 Credit insurance SID Bank Group uses set-off of receivables as a form of credit insurance only to a lesser extent. Set-off of receivables can be made by a unilateral statement on the basis of stipulations by Code of Obligations. Beside this, PRVI FAKTOR Group additionally regulates this option in its factoring contracts. This way, the problem of set-off in different currencies and set-off of past due and outstanding receivables is solved with contract clauses. Types of insurances, used as a rule by SID bank, are defined in Rules on insurance of investment operations. The Rules define general categories and principles of insurance, criteria for separate types of insurances, as well as operational procedures of establishing, documenting, monitoring/valuation and realization of insurance. The Rules also include rules on valuation of separate types ofinsurance and procedures of handling the property which is used as insurance. In SID Bank banking group valuation of pledged property is carried out at market value. If the property is listed, current rate is used for valuation. Unlisted property is valued on the basis of comparable transactions. Real estate is valued by independent and qualified asset appraiser, taking into consideration the international standards of value assessment. Real estate valuation is prepared by market and mortgage value. Transaction price, which is not older than one year and is achieved in transactions among unrelated persons, may also be used. All the insurances are evidenced in analytical evidences of operational support. During the whole time of repayment period of investment SID Bank banking group monitors credit rating of the receivable and insurance coverage of the investment. In the event of reduction in value of insurance, SID Bank Group takes out an additional insurance ifnecessary. Total value of loan collateral in SID Bank banking group as at 31 December 2009 was EUR 808,437 thousand. Majority portion is represented by the following types of insurance: pledge of commercial real estate, followed by other guarantees of companies without rating or rating of less than A-, cession of claims for insurance, guarantees of companies without credit rating, guarantees of companies categorized as A class, pledging of ownership share in the company, insurance policy of SID bank for the account of the Republic of Slovenia, fiduciary transfer of real estate ownership rights, pledging of receivables for insurance, bills and other insurances. The most important issuers of personal guarantees are banks, insurance companies, companies with good credit rating (joint and several guarantee) and individuals - creditworthy joint and several guarantors. - Annual Report of SID Bank and SID Bank Group for 2009 - 142 Insurance value and concentration of credit risk In EUR thousand 2009 2008 INSURANCE TYPES: Insurance value % Insurance value % Pledge ofcommercial real estate 313,854 39% 114,845 28% Other guarantees of companies without credit rating 165,909 21% 41,928 10% Pledging of receivables for insurance 71,030 9% 144,148 35% Guarantees of companies without credit rating 56,314 7% 11,066 3% Insurance policy ofSID Bank for the account ofthe RS 43,821 5% 23,777 6% Pledge ofcapital share in the company 43,836 5% 765 0% Other 113,673 14% 72,493 18% TOTAL 808,437 100% 409,022 100% Total exposure value by classes, insured by property (In EUR thousand) EXPOSURE CLASS 31.12.2009 31.12.2008 Corporate 906 282 Total 906 282 Total exposure value by classes, insured by personal guarantees or credit derivative financial instruments (In EUR thousand) EXPOSURE CLASS 31.12.2009 31.12.2008 Institutions 839 858 Corporate 917 787 Total 1,756 1,645 - Annual Report of SID Bank and SID Bank Group for 2009 - 143