*S)DBanka ANNUAL REPORT OF SID BANK AND SID BANK GROUP FOR 2010 - Annual Report of SID Bank and SID Bank Group for 2009 - 1 Company name: Address: ID Number: Tax Number: SID - Slovenska izvozna in razvojna banka, d.d., Ljubljana Ulica Josipine Turnograjske 6, SI-1000 Ljubljana, Slovenia 5665493 82155135 VAT Identification Number: BIC (SWIFT): Telephone: Management Board: Telefax: E-mail: Website: SI82155135 SIDRSI22 +386 1 200 75 00 +386 1 200 75 53 +386 1 200 75 75 info@sid.si http://www.sid.si Companies ofSID 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 46B, 10000 Zagreb, Croatia tel. +385 1 617 70 08, fax: +385 1 617 72 16 h ttp://ww w. 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.prokolekt-serbia.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 Čermelica 2, 71000 Sarajevo, Bosnia and Herzegovina tel.: +387 70 35 80, fax: +387 70 35 8 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 h ttp://ww w. prvifaktor.si PRVI FAKTOR, faktoring društvo, d.o.o., Hektoroviceva 2/V,10000 Zagreb, Croatia tel. : +385 1 617 78 05; fax: +385 1 617 66 29 h ttp://ww w. 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.prvifaktor.co.yu PRVI FAKTOR d.o.o., finansijski inžinjering, Džemala Bijedica bb, 71000 Sarajevo, Bosnia and Herzegovina tel.: +387 33 767 210, fax: +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 for 2009 - 2 Contents I. BUSINESS REPORT OF SID BANK AND SID BANK GROUP Statement by the President ofthe Board 4 Report ofthe Supervisory Board on the review and approval ofthe 2010 Annual Report ofSID Bank 6 and SID Bank Group 1. Highlights from the Business Operations of 2010 8 2. Corporate Profile ofSID Bank 11 3. SID Bank Group 14 4. International Economic Environment and Slovenian Economy in 2010 16 5. Development Strategy ofSID Bank and SID Bank Group 21 6. Business Operations ofSID Bank and SID Bank Group in 2010 24 6.1. Financial Review ofthe Operations ofSID Bank and SID Bank Group 24 6.2. Review ofSID Bank Operations by Business Activity 27 6.2.1. Financing 27 6.2.2. Asset Liability Management 31 6.2.3. Borrowing 32 6.2.4. Credit Rating and Other Credit Information 32 6.2.5. Operations under Special Authorization - Insurance against Non-Marketable Risks 33 6.2.6. Operations under Special Authorization - Interest Rate Equalization Programme (IREP) 35 6.2.7. Operations under Special Authorization - Guarantee Scheme for Enterprises 36 6.2.8. Operations under Special Authorization - Guarantee Scheme for Individuals 36 6.2.9. Operations under Special Authorization - Guarantee Scheme for Investments 36 6.3. Review ofSID Bank Group Operations in 2010 36 6.3.1. SID - Prva kreditna zavarovalnica d.d., Ljubljana 36 6.3.2. PRO KOLEKT Group 38 6.3.3. PRVI FAKTOR Group 38 6.3.4. Centre for International Cooperation and Development 38 6.4. Risk Management 39 6.5. Information System 45 6.6. Personnel 45 6.7. Corporate Social Responsibility ofSID Bank 47 6.8. Internal Audit 50 6.9. Compliance Management 51 7. Appendices 52 7.1. Management Bodies ofSID Bank as at 31 December 2010 52 7.2. Organisation Chart ofSID Bank as at 31 December 2010 53 7.3. Organisation Chart ofSID Bank Group as at 31 December 2010 54 7.4. Statement of Corporate Governance 55 II. FINANCIAL STATEMENTS OF SID BANK AND SID BANK GROUP 57 III. DISCLOSURES PURSUANT TO THE REGULATION ON DISCLOSURES OF BANKS AND SAVINGS 132 BANKS - Annual Report of SID Bank and SID Bank Group for 2009 - 3 Statement by the President of the Board Dear Ladies and Gentlemen, SID Bank, as an institution specialized in providing of financial services designed to address market gaps and foster sustainable development of Slovenia's economy, has further enhanced and strengthened its role in 2010. Moreover, the Bank has met all its strategic and operational objectives despite the ongoing economic crisis. Effectively performing its role Enduring the harshest economic conditions since Slovenia's independence, SID Bank managed to deliver growth, generating an average 40 percent increase in business volume, to EUR 3.9 billion in total assets and EUR 1.4 billion in non-marketable insurance, thereby mitigating the effects of the crisis and opening up new opportunities. SID Bank, a highly efficient and responsive specialized bank, has once again demonstrated ability to provide Slovenia's economy with financial services required to foster development even in adverse conditions when the financial markets were not functioning normally. In the period of market uncertainties, growing financial risks and weak regional growth, the importance of promotional and development banking has risen in comparison to commercial banking. The impact ofthe economic and financial crisis, such as the fall in GDP, exports, employment, as well as the limited options for bank refinancing on the financial markets, has limited the business opportunities, volume and number of transactions carried out by the Slovenian companies. The trend was particularly visible in the construction, transport, textiles, wood industry and trade. In light of the above, SID Bank continued to offer counter-cyclical financing mechanisms, through long-term loans to commercial banks and insurance against non-marketable risks ,both ofwhich have increased substantially due to market failure. In the four years of existence, SID Bank has acquired funds exclusively through borrowing on the international and domestic financial markets. Unlike comparable foreign promotional and development banks, SID Bank did not receive state funds. However, with competition for financing in international markets tightening due to crisis, the Bank is no longer able to provide favourable financing conditions for Slovenian companies. Determined to overcome this weakness and improve the existing mechanisms, instruments and conditions for financing the sustainable development, SID Bank reengineered its range of products and services and formed a new development promotion platform in cooperation with the Republic ofSlovenia. The aim ofthe platform is to introduce a special form offinancing also used elsewhere in the EU, namely combining loan funds provided by SID Bank with grants by the Republic of Slovenia. This mechanism would contribute to more efficient development promotion as it would enable financing of certain high-risk projects, e.g. research and development projects. Generating high growth in financing in insurance The ongoing economic and financial crisis in Slovenia had varied effects on the Bank's clients and the Bank had to adjust its operations accordingly. The primary focus was placed on financing new enterprise business models and completing several transactions and projects of development relevance, which had come to a halt due to the crisis. In financing operations the Bank increased its credit portfolio by 27 percent, allocating a total ofEUR 1.2 billion in loans to banks and companies. The loans were extended within the framework of a special scheme aimed at financing energy efficiency and reduction of CO2 emissions (with EIB) in the manufacturing and automotive industries and through several new forms of financing in the field of ecology, research and development, small and medium-sized enterprises, with particular emphasis on infrastructure and export financing that began to rise again as a result of a boost in Slovenia's exports. In conducting financing operations, special attention was paid to long-term financing and to more responsible lending achieved through the use of new risk assessment forms and methods. As for insurance against non-marketable risks, a sizeable increase in investment flow into southeastern Europe and reinsurance of short-term receivables from Russian entities, which private reinsurers declined to insure, resulted in a 51-percent increase in non-marketable insurance; to EUR 1.4 billion. Another outcome ofthe crisis was also growth in claims; in 2010 SID Bank paid EUR 3 million in claims arising from insurance against non-marketable risks, primarily for transactions in Russia and Kazakhstan. The growth in claims was even higher at SID Bank's subsidiary, SID - Prva kreditna zavarovalnica, active in marketable insurance business, which paid out EUR 25 million in claims. Balancing the claims result with a 21-percent rise in marketable insurance volume, PKZ managed to end the year 2010 successfully, reporting after tax net income of EUR 6.8 million. The Bank's other subsidiary, PRVI FAKTOR d.o.o., recorded a loss of EUR 3.9 million due to protracted crisis on the Southeastern European markets, its core region of operations. SID Bank's subsidiaries PRO KOLEKT and CMSR, however, were able to use these trends to their benefit, ending the year with a profit. The consolidated performance of SID Bank Group amounted to EUR 11.2 million in net profit on EUR 4.1 billion total assets. The positive result was also due to - Annual Report of SID Bank and SID Bank Group for 2009 - 4 increased cooperation between CMSR and the Bank on the regional markets, which allowed the Bank to combine lending and insurance products and services. Mitigating the effects of the crisis In order to mitigate the effects ofthe crisis, SID Bank, acting under authorization ofthe Republic ofSlovenia, continued to implement guarantee schemes for enterprises and individuals. On the basis of state guarantees in the amount ofEUR 310 million, 427 companies received EUR 841 million worth of credit facilities since the scheme was introduced in 2009. The guarantee scheme was also used to provide collateral to over one thousand individuals for bank loans in a total amount ofEUR 35 million. In accordance with the EU anti-crisis measures, the said two schemes expired in 2010. However, considering that the negative economic conditions continued to pervade Slovenia's economy and the lack of investments was recognized as one of the main problems hindering the recovery, SID Bank and the Republic of Slovenia started a new guarantee scheme to cover investments by Slovenian companies up to the maximum of 75 percent for individual investments. In 2010, as previously, internationalization was a vital part of SID Bank's operations. In addition to traditional financial instruments designed to support internationalization of enterprises, mostly SMEs, the Bank actively participated in government's initiative to expand the economic diplomacy services and also prepared an action plan for the post-crisis period. Financial position, risks, results, and international cooperation We wish to stress that despite the financial crisis and rapid growth SID Bank maintained its financial stability in 2010 and preserved comparable rating to development banks; Aa2 (Moody's). Appropriate policies, assessments and lending criteria have helped the Bank increase the quality of its credit portfolio with a 79 percent share of first-rate clients. Furthermore, impairments and provisions (standing at EUR 31 million at year-end) were increased to cover rapid growth, new business and risks assumed on account of crisis conditions. The Bank's stability was enhanced further, on the assets side, by diversification offinancial sources and, most importantly, by the first issue ofthe 5-year Eurobond in the amount of EUR 750 million. Capital adequacy stood at 13.5 percent at the end of 2010, well above the average for Slovenian banks and the revised capital requirement regulation. As a result, both regulatory and internal capital of the Bank were found to be above the Slovenian average, signaling good risk management by the Bank. All of the above was reflected on the business result of SID Bank, with profit after tax amounting to EUR 5.7 million. The ratio of operating costs to net revenues declined below 20 percent, which places the Bank at the top of the most cost efficient banks in Slovenia. It should be noted that non-marketable insurance services, which the Bank carries out on behalf and for the account of the State, delivered net income ofEUR 4 million from premiums earned despite increased claims paid which in turn strengthened the contingency reserves ofthe Republic ofSlovenia to EUR 124 million. Another very important factor contributing to the Bank's performance in 2010 was excellent international cooperation with peer banks and institutions (e.g. EIB, KfW), associations (EAPB, Berne Union, ISLTC, Prague Club, NEFI) and our joint operations within the European Union and wider. Acknowledgments and prospects None of the above results would have been possible without dedicated and professional employees of the Bank, their continuous growth and development, effective supervision and strong corporate governance. Therefore, we would like to extend our appreciation to all employees, owners and supervisory board, as well as business partners and the wider community for their unwavering trust and support in achieving the Bank's strategy and business results, which fills us with satisfaction and motivation for the future. With gradual improvement in the economy, the market gaps in Slovenia's economy are expected to narrow down, which will slow SID Bank's growth in the following years. The strategy for the period through 2014 has been adjusted accordingly, selecting new priorities and simplifications of certain key internal processes, values and the vision of the Bank. In the future, internal quality growth and enhanced risk management based on continuous improvement of processes and computerization will replace quantitative external growth. This will enable the Bank to take its qualitative development another step higher, helping it to promote higher value added, increased competitiveness ofthe Slovenian economy, creation of new jobs and, most importantly, sustainable development. Committed to promoting sustainable development and responsible operation for the benefit of our partners and other stakeholders, we look forward with optimism in the future, readily awaiting new challenges and opportunities for the Slovenian economy and SID Bank. 5 - Annual Report of SID Bank and SID Bank Group for 2009 - Report of the Supervisory Board on the review and approval of the 2010 Annual Report of SID Bank and SID Bank Group In 2010 SID Bank's operations were overseen by the Supervisory Board in the following composition: 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 Viljem Pšeničny, Ph.D. (until resignation on 4 August 2010 due to assuming the position ofState Secretary at the Ministry of Economy). As at 1 October 2010, the Government ofthe Republic ofSlovenia appointed Hugo Bosio as the new member ofthe Supervisory Board. The Supervisory Board comprehensively monitored and supervised the operations of the Bank against its set strategic goals and business objectives, working in accordance with the Rules of Procedure ofthe Supervisory Board, the Statute of SID Bank, and in line with the regulations stating the authorities ofthe 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 internal and external audits, accounting policies and accounting data, risk management, risk profile assessment, and internal controls. In 2010 the Audit Committee drew up the criteria and started the proceedings for selecting the auditor for 2011. In 2010 a Recruitment Committee of the Supervisory Board was established to provide the Supervisory Board with professional support in adopting the rules for concluding service agreements with members ofthe Management Board and assist the Supervisory Board in the organisation and execution of a public tender for the appointment of the President and Member ofthe Management Board ofSID Bank in the new term. In 2010, the Supervisory Board met at seven (7) regular and six (6) 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 of the company, and decided on the matters within its powers. In 2010 the Supervisory Board discussed and decided on the following important issues: - the Annual Report for 2009, the Independent Auditor's Report, and the proposal concerning the allocation of distributable profit, - the Bank's Action Strategy for the period ending in 2014, - the annual operations plan and financial plan for the years 2010 and 2011, - proposed changes to the Statute of SID Bank, - Internal Audit strategic plan for the years 2010 and 2011, - the annual internal audit report for 2009 and periodical internal audit reports for 2010, - risk management strategy and policies, - assessment ofthe Bank's risk profile for 2009, - Compliance Management reports and work plan, - the findings made by the Bank of Slovenia and other supervision bodies, - borrowings ofthe Bank and SID Bank's first Eurobond issue, - cooperation with development promotion financial institutions in the framework of the development promotion platform (DPP), - strategic orientations regarding the ownership in the companies ofthe SID Bank Group. 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 for 2009 - 6 At its meeting held on 20 April 2011, the Supervisory Board examined in detail the Annual Report of SID banka, d.d., Ljubljana and Skupina SID banka for 2010 together with the proposals regarding the allocation of distributable profit of SID Bank made by the Management Board of SID banka, d.d., Ljubljana. The Supervisory Board also examined the reports of certified auditors prepared by the auditing company Deloitte revizija d.o.o., which gave its positive opinion on the financial statements of SID Bank and the SID Bank Group for 2010. According to the Independent Auditor's Report, the financial statements give a true and fair view of the financial position of SID banka d.d., Ljubljana and Skupina SID banka as at 31 December 2010 and of its income statement and cash flow statement 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 of the Annual Report, the Supervisory Board had no reservations to and gave its approval to the 2010 Annual Report of SID banka d.d., Ljubljana and Skupina SID banka. - Annual Report of SID Bank and SID Bank Group for 2009 - 7 I.HIGHLIGHTS FROM THE BUSINESS OPERATIONS OF 2010 Introduction As at 31 December 2010, 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 and profit or loss of SID Bank Group, the PRO KOLEKT Group is not included in the consolidation (cf. Chapter II, points 2.1.2. and 2.1.3.). Business results of SID Bank and SID Bank Group in 2010 Key business data in EUR million 2008 2009 2010 SID SID Bank SID SID Bank SID SID Bank Bank Group Bank Group Bank Group Number of shareholders 1 1 1 Total assets 2,087.7 2,301.7 3,024.9 3,215.6 3,895.5 4,086.1 Equity 160.8 179.9 322.0 333.7 327.8 344.9 Loans given 1,952.2 2,112.4 2,922.4 3,049.5 3,714.4 3,835.7 Net interest 14.3 19.8 21.5 28.5 40.2 44.9 Net revenues from insurance - 3.6 operations - 6.3 - 2.1 Net profit/loss for the year 2.8 2.9 0.9 (5.4) 5.7 11.2 Return on equity after tax in % 2.28 1.86 0.42 (2.09) 1.76 3.29 Number ofemployees (31 Dec.) 76 287 87 306 94 303 International credit rating - Moody's - - Aa2 - Aa2 - SID Bank business results • Total assets: EUR 3.9 billion (up by 28.8%) • Equity: EUR 327.8 million (up by 1.8%) • Loans given : EUR 3.7 billion (up by 27.1%) • Net profit for the year: EUR 5.7 milion (up by 504.0%) • Return on equity after tax: 1.76% (in 2009: 0.42%) - Annual Report of SID Bank and SID Bank Group for 2009 - s 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: EUR 1,440.1 million of business insured (up by 51.2%) • Premiums: EUR 8.2 million (up by 74.2%) • Claims: EUR 3.0 million (down by 50.2%) • Contingency reserves: EUR 124.2 million (up by 3.5%>) • IREP funds: EUR 7.8 million (up by 2.7%) • Guarantee scheme for enterprises: EUR 300.4 million in loan guarantee quota distributed in 2010 (in 2009: EUR 509.0 million) • Guarantee scheme for individuals: EUR 50.5 million in loan guarantee quota distributed in 2010 (in 2009: EUR 38.4 million) Business results of SID Bank Group • Total assets: EUR 4.1 billion (up by 27.1%) • Equity: EUR 344.9 million (up by 3.3%) • Net profit for the year: EUR 11.2 million (in 2009: loss of EUR 5.4 million) • Return on equity after tax: 3.29% (in 2009: -1.92%) Business results of SID Bank Group companies in 2010 SID - Prva kreditna zavarovalnica d.d., Ljubljana • Equity: EUR 20.3 million (up by 120.9%), including credit risk equalisation reserve in the amount of EUR 1.7 million (up by 113.0%); • Business volume (domestic and export credit insurance against marketable risks): EUR 4.8 billion (up by 21.0%) • Gross claims paid: EUR 24.8 million (up by 117.5%) • Loss ratio: 126.0% (in 2009: 104.7%) • Total assets: EUR 72.6 million (up by 15.6%) • Net profit for the year: EUR 6.8 million (in 2009: loss of EUR 6.5 million) PRO KOLEKT, družba za izterjavo, d.o.o. • Equity: EUR 0.3 million (up by 41.9%) • Value ofdebts collected: EUR 8.3 million (down by 10.4%) • Total assets: EUR 0.5 million (up by 0.2%) • Net profit for the year: EUR 79 thousand (up by 79.6%). PRO KOLEKT Group • Consists of PRO KOLEKT, Ljubljana, and its subsidiaries in Zagreb, Belgrade, Sarajevo, Skopje, Bukarest, and Sofia • SID Bank's equity: EUR 284.3 thousand (up by 4.0%); minority owners' equity: EUR 85 thousand • Value ofdebts collected: EUR 15.0 million (up by 18.9%) • Total assets: EUR 4.3 million (down by 2.9%) • Net profit for the year: EUR 23 thousand (down by 88.5%). PRVI FAKTOR, faktoring družba, d.o.o. • Equity: EUR 3.2 million (down by 55.5%) • Value of receivables purchased: EUR 227.8 million (up by 5.0%) • Total assets: EUR 129.9 million (down by 3.0%) • Loss for the year: EUR 3.9 million (in 2009: net profit EUR 1.8 million) - Annual Report of SID Bank and SID Bank Group for 2009 - 9 PRVI FAKTOR Group • Consists of PRVI FAKTOR, Ljubljana, and its subsidiaries in Zagreb, Belgrade, Sarajevo, and Skopje • Equity: EUR 6.2 million (down by 45.2%) • Value ofreceivables purchased: EUR 862.1 million (up by 5.1%>) • Total assets: EUR 332.7 million (down by 1.1%) • Loss for the year: EUR 4.7 million (in 2009: net profit EUR 0.6 million) Centre for International Cooperation and Development • SID Bank co-founded the institution Centre for International Cooperation and Development • Operating income: EUR 0.6 million (up by 16.4%>) • Net revenue surplus in the business year: EUR 3 thousand (in 2009: EUR 0). - Annual Report of SID Bank and SID Bank Group for 2009 - 10 2. CORPORATE PROFILE OF SID BANK Legal status and history SID Bank was established on 22 October 1992 as 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 Act on Insurance and Finance of International Business Transactions (ZZFMGP), which became effective in February 2004, codifies the fundamental principles governing the insurance and financing ofinternational 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 behalfand 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 established an insurance company to which it transferred the portfolio of marketable insurance performed on own behalf and for own account up until the end of 2004. SID - Prva kreditna zavarovalnica d.d., Ljubljana, in which SID held a 100 percent equity interest, was entered into the Register of Companies on 31 December 2004. On 18 October 2006 the company obtained a license from the Bank of Slovenia to provide banking and other financial services. At the end ofthe same year it received the Decision ofthe District Court in Ljubljana on changing the company's name into SID - Slovenska izvozna in razvojna banka, or SID Bank, Inc., Ljubljana for short1, and on 1 January 2007 the company began formally operating as a specialized bank. On 21 June 2008 the Slovene Export and Development Bank Act (hereinafter ZSIRB) entered into force although it applies 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. The Act Amending the Banking Act - Zban-1E (Official Gazette of the RS, no. 79/10 of 8 October 2010), which came into effect on 9 October 2010, further specified the status ofthe Bank by stipulating that SID Bank is Slovenia's authorized and specialized promotional, export and development bank which is not allowed to receive deposits from the general public. Furthermore, the Act laid down that any licenses issued with regard to SID Bank pursuant to the Banking Act shall remain valid with except in the part which relates to receiving deposits from the general public. It also states that the provisions of other laws applicable to banks shall also apply for SID Bank unless otherwise stipulated by the law. Thus, SID Bank holds the authorization by the Bank of Slovenia to perform the following financial services: • receiving deposits from informed persons; • granting ofcredit, including: - mortgage credits, - factoring (with or without recourse), - financing of commercial transactions, including forfeiting; • issuance ofguarantees and other commitments; • trading for own account or for account of customers in: - foreign exchange, including currency exchange transactions, - financial futures and options, - exchange and interest-rate instruments; • trading for own account in: - money market instruments; • credit reference services: collection, analysis and provision ofinformation on creditworthiness. With the adoption of the Commission Directive 2010/16/EU of 9 March 2010 amending Directive 2006/48/EC of the European Parliament and of the Council, the status of SID Bank was also defined for the needs of the EU banking 1In the continuation of this Annual Report, regardless ofthe time ofoperation and the change ofcompany 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. 602 - Annual Report of SID Bank and SID Bank Group for 2009 - regulations. With the Directive, the European Commission, acting in accordance with the opinion of the European Banking Committee, confirms SID Bank as an institution involved in specific activities in the public interest and therefore eligible for inclusion in the list of institutions excluded from the scope ofapplication of Directive 2006/48/EC pursuant to Article 2 of that Directive. According to the Directive, SID Bank supports structural, social and other public policies of the Slovenian government, by providing financial services, counselling and education in areas such as international trade and international cooperation, economic incentives for small and medium enterprises, research and development, regional development and commercial and public infrastructures, among other things. The Republic of Slovenia is the sole shareholder ofSID Bank and is also the guarantor ofall the liabilities incurred by the bank. Capital Pursuant to the provisions of the Act Amending the Slovene Export and Development Bank Act (ZSIRB), at the General Meeting of Shareholders, held on 20 May 2009, the Republic of Slovenia as the single shareholder of SID Bank adopted a Decree on increase ofcapital 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 of Companies on 14 August 2009. Distributable profit of SID Bank may not be distributed to shareholders. In accordance with the ZSIRB, distributable profit shall be allocated to other profit reserves. In 2010 there were no changes in share capital; as at 31 December 2010 the share capital was EUR 300 million. The 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. At the General Meeting of SID Bank Shareholders held on 27 August 2010, a decision was taken that the distributable profit for the year 2009 totaling EUR 450 thousand shall be allocated to other profit reserves. Equity was EUR 327.8 million as at 31 December 2010. The audited book value per share was EUR 105.63 as at 31 December 2010 and EUR 103.75 as at 31 December 2009. Shareholders as at 31 December 2010 Number ofshares Ownership share in % Republic ofSlovenia 3,103,296 99.4 SID Bank - own shares 18,445 0.6 Total 3,121,741 100.0 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 ofSlovenia is the single shareholder ofthe SID Bank. Role, purpose and tasks ofSID Bank On the basis of, and in accordance with: • 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 Slovenia's specialized export and development bank authorized to engage in activities specified in the ZSIRB and as an authorised institution under the ZZFMGP and • 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 of the Republic of Slovenia 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: - Annual Report of SID Bank and SID Bank Group for 2009 - 12 • a balanced and sustainable economic development of the 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 ofprotection 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 comprehensive 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. The Act Amending the Public Finance Act (ZJF-F, Official Gazette of RS, no. 107/10, of 28 December 2010) further specifies, inter alia, that budget funds may be allocated to SID Bank for promotion oftechnological development projects through a direct agreement, without a call for tenders. In conducting its operations, SID Bank may use all financial instruments provided for in the existing financial legislation, namely loans, guarantees and other forms of collateral, purchase of receivables, financial leasing, concession credits and other international development cooperation instruments, other forms offinance, capital investments and other forms of risk assumption, and integrate these into promotional financing schemes. Activities In accordance with the above listed role, purpose and tasks of SID Bank, the Bank mainly provides financial services, within the authorizations issued by the Bank of Slovenia. These are primarily granting of loans, which are normally and to a large extent carried out through banks, in individual cases in cooperation with other commercial banks in bank syndicates, while on a lower scale, the Bank grants direct loan to final beneficiaries. With a view to managing its assets and liabilities and ensuring safety from risks arising from the banking book, SID Bank also conducts, for own account, certain investment services and transactions, e.g. purchase and sale of securities and/or interest rate and foreign exchange derivatives. SID Bank also performs these transactions for the account of SID - Prva kreditna zavarovalnica, d.d., Ljubljana. The activities ofthe Bank are presented in more detail in Point 6.2 SID Bank Operations by Business Activity. SID Bank operations for the account of the Republic of Slovenia 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 utilized 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. Under the Guarantee Scheme Act of the Republic of Slovenia (Official Gazette of RS, no. 59/09 of 30 April 2009), SID Bank was authorized to administer and for the account of the Republic of Slovenia, a guarantee scheme for enterprises. The Act was adopted as part ofthe EU stimulus package and was not extended after its expiry at the end of2010. - Annual Report of SID Bank and SID Bank Group for 2009 - 13 Under the Guarantee Scheme Act of the Republic of Slovenia (Official Gazette of RS, no. 59/09 of 30 April 2009), SID Bank was authorized to administer, on behalf and for the account of the Republic of Slovenia, a guarantee scheme for individuals. Under the Act on Guarantees ofthe Republic of Slovenia for Financing Investments of Enterprises (Official Gazette of RS, no. 43/10 of 31 May 2010), SID Bank is also authorized to conduct contracts relating to the issuance of guarantees on behalfand for the account ofthe Republic ofSlovenia as well as other operations under this Act. 2010 was also the year ofthe entry into force of the Act Amending Environment Protection Act (ZVO-1C; Official Gazette of RS, no. 108/2010 of 28 December 2009), which bestowed upon SID Bank additional authority to act as state auctioneer at emission allowance auctions and to carry out the Kyoto units and emission allowance trading scheme, and any related transactions, on behalfand for account ofthe Republic ofSlovenia. The activities ofthe Bank for the account ofthe Republic ofSlovenia are presented in more detail in Point 6.2 SID Bank Operations by Business Activity. 3. SID BANK GROUP SID - Prva kreditna zavarovalnica d.d., Ljubljana The harmonization 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 ofthe company, SID established a specialized credit insurance company SID - Prva kreditna zavarovalnica d.d., Ljubljana (hereinafter PKZ). In so doing, SID harmonized its legal status and insurance-related business on own account with the regulations governing the operation ofinsurance companies. PKZ started its business operations on 1 January 2005. On that date, the insurance portfolio of short-term insurance which SID had conducted for its own account up to the end of 2004, was transferred from SID onto the assuming insurance company, PKZ. PKZ provides insurance for short-term credits to private-law entities (normally, suppliers' credit for up to 180 days or, exceptionally, up to one year). It conducts 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 renewable, insurance cover extending to the entire turnover generated by the insured in the foreign and/or domestic markets. The company also concludes indirect insurance contracts: it uses facultative quota reinsurance to provide covers for insurance operations of loan collaterals, collateralized with export credit agencies. The principal characteristics of insurance transactions insured in such a manner are the same as for direct insurance transactions and were, also in 2010, negligible when compared with direct insurance transactions. The company is led by a two-member Management Board, represented by Mr. Ladislav Artnik, President ofthe 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, both from SID Bank, and Mr. Ivan Štraus, Employee Representative of PKZ. At its regular meeting held on 15 January 2010, the Supervisory Board of SID Bank approved an increase in the share capital of its subsidiary company SID-Prva kreditna zavarovalnica d.d., Ljubljana, in the amount of EUR 4.2 million. In January 2010 the increase of capital, which had been paid in full, was confirmed by the General Meeting of PKZ. The nominal value ofthe equity interest owned by SID Bank was EUR 8.4 million as at 31 December 2010. 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 2010 was EUR 418.8 thousand. The nominal value ofthe 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. 14 - Annual Report of SID Bank and SID Bank Group for 2009 - PRO KOLEKT Group is composed of the parent company PRO KOLEKT, Ljubljana, and a network of subsidiaries based in the countries of South East Europe, including: • PRO KOLEKT d.o.o., Zagreb, Croatia, specializing 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 2010, 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 Naumovski. The nominal value of the equity interest owned by PRO KOLEKT, Ljubljana, as at 31 December 2010 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 of the 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, Ljubljana. The nominal value ofthe equity interest owned by PRO KOLEKT, Ljubljana, as at 31 December 2010, 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, Ljubljana, as at 31 December 2010 equalled EUR 20.0 thousand. • PRO KOLEKT SOFIA OOD, 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 as at 31 December 2010 is EUR 40.0 thousand. PRO KOLEKT, Ljubljana owns 62.50 percent ofthe company, the remaining share of37.50 percent is owned by Ms. Mariana Ikonomova, who is also the General Manager of the company. The General Meeting of PRO KOLEKT SOFIA OOD 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, Ljubljana, as at 31 December 2010 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, Ljubljana. After the capital increase of EUR 10 thousand carried out in 2010 the nominal capital ofthe company is EUR 36 thousand. The General Manager ofthe company as of 1 December 2010 is Ms. Elzana Behric; the General Meeting of PRO KOLEKT, d.o.o, Sarajevo, 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 2010, 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, Ljubljana (hereinafter PRVI FAKTOR, Ljubljana), 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 receivables arising from the sale of goods and services with or without protection against the risk of non-payment; financing of purchased receivables; receivables management; encashment and collection of receivables; trading in claims; mediation and representation in factoring transactions in Slovenia and abroad. In 2002 SID acquired a 50 percent equity interest and halfofthe voting rights in the company PRVI FAKTOR, Ljubljana, the other shareholder being Nova Ljubljanska banka d.d., Ljubljana. The nominal value of the equity interest owned by SID Bank was EUR 3,1 million as at 31 December 2010. PRVI FAKTOR, Ljubljana, 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 December 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, Ljubljana. 15 - Annual Report of SID Bank and SID Bank Group for 2009 - • 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 Ms. Jelena Tanaskovic; the General Meeting is made up ofthe representatives from PRVI FAKTOR, Ljubljana. • 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. Denan Bogdanic; the General Meeting is made up ofthe representatives from PRVI FAKTOR, Ljubljana. • 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 2010, 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. The nominal value of the equity interests owned by PRVI FAKTOR, Ljubljana in the companies of the PRVI FAKTOR Group as at 31 December 2010 equaled the balance ofthe nominal capital ofthese enterprises on the same day. 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 which it had worked closely prior to the signing. 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 authorization 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. 4. INTERNATIONAL ECONOMIC ENVIRONMENT AND SLOVENIAN ECONOMY IN 20102 World economy in 2010 Whilst the global economic recovery continues, its pace remains uneven and has lost momentum compared to the first six months of 2010 as the influence of certain positive factors such as the inventory cycle and government incentives weakens. Public debt has risen close to the limit in a number of countries, due to recent fiscal interventions and reduced budget inflows. Additional limitations have also been imposed in response to weaker confidence in the euro area, brought about by the debt issues of PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain). In developed economies the recovery is sluggish, partly because said countries need to improve their public finances, cope with poor labour market prospects and weak consumer confidence. On the other hand, economic growth in emerging market economies remains dynamic despite a modest slowdown at the end of 2010. Recent surveys confirm that the global economic recovery continued in the second halfofthe year, but at a moderate degree. Germany's GDP grew by 3.6 percent in 2010, the highest rate since the unification, which is considered vital for the growth in the euro area. The USA recorded a 2.9 percent growth of GDP in 2010, Japan 3.1 percent, Russia 4.0 percent, China 10.3 percent, and India 9.1 percent. The growth of GDP in the euro area was about 1.6 percent. The indicators of global economic activity pointed to a deteriorating outlook for economic growth in the last quarter of 2010, but at the beginning of 2011 relevant institutions and agencies began revising their forecasts mainly because due to an upturn in household consumption and a rise in production volume, predominantly in the USA. Forecasts for economic growth were also revised for the euro area, mainly due to the expansion of German economy. Central and East European countries outside the euro area have been emerging from the biggest recession since their transition to market economy. Most ofthem have been recording positive quarterly growth rates since the second half of 2009. Economic recovery is expected to speed up in 2011 except in Bulgaria and Romania where the recovery will be 2The data presented is obtained from the following sources: Umar - Slovenian Economic Mirror; Bank of Slovenia - Price Stability Report (Oct 2010), Operation of Banks in 2010 (Jan 2011), Stability ofthe Slovenian Banking System (Dec 2010), Monthly Bulletin (Jan-Feb 2011); Economic Trends by SKEP group of the Chamber ofCommerce and Trade of RS (Nov 2010). 16 - Annual Report of SID Bank and SID Bank Group for 2009 - more moderate. Biggest growth is predicted for the Baltic countries, with exports continuing to be the main driver of economic activity in the region. The economic situation in other EU member states outside the euro area has generally improved in the second quarter of 2010. Real year-on-year GDP growth rate in Russia was 5.2 percent in the second quarter but slowed down to 2.7 percent in the third quarter, which is also the estimation for the future. Inflationary pressure remained weak in advanced economies although inflation has risen over the last few months. In OECD countries the year-on-year headline inflation rate increased by 1.9 percent in this year by October. On the other hand, the emerging economies are still facing major inflationary pressure caused by higher energy and food prices (reaching highest levels so far). The 2010 increase in raw materials prices in international markets was significant, similar to 2007 and 2008. On average, the rise was 29 percent compared to 2009. oil prices were 22.8 percent higher year-on-year in December; the rise in oil prices is mainly attributable to global economic recovery and increased demand. International trade witnessed even greater fluctuations than GDP during the economic crisis. It declined by 11 percent in 2009 only to strengthen considerably in 2010, by a good 12 percent, mainly between the third quarter of 2009 and second quarter of2010. In the second half of2010 world trade activities seemed to ease gradually. In the third quarter of 2010 the international trade grew by a low 0.9 percent at a quarterly level, which is significantly less than in the second quarter (3.2 percent). Evidently, international trade growth rate will remain steady at around 6 percent in the coming years, pushing to above average figures in developing countries and remaining below 5 percent in the developed economies. Commercial trade among developing countries is expected to gain greater importance. During the crisis, the central banks lowered their interest rates to almost zero through monetary policy instruments aiming to revitalize the economic activity. This has helped stimulate the lending activities and improve corporate liquidity. However, low interest rates cannot be applied over the long term. Based on the analyses and data published in November, the Governing Council of the European Central Bank assessed that the key interest rates of ECB were at an appropriate level and left them unchanged. The main interest rate of ECB has been unchanged at 1 percent since mid-May 2009. In the interbank lending market, interest rates have been growing since May 2010. On average, the value of the three-month EURIBOR stood at 1.025 percent in December 2010, 34 basis points higher than in January 2010. Certain countries devalued its currency in order to increase market competitiveness and raise foreign demand. This new-age "money printing" through buying bonds was publicly announced by the USA in October and ever since the U.S. dollar has been weakening gradually. Due to the strengthening euro, the competitive position ofthe euro area could also have weakened; however, continued debt crisis in Europe again put pressure on euro's decline. The euro declined against the dollar until the end ofJune, strengthened in July and then declined again at the end of 2010. In the coming months, fluctuations in the value of the euro are to be expected due to the situation on the global market; according to analysts, the euro should reach USD 1.30 or higher in 2011. Risks affecting the global economic growth are weakening, but the level of uncertainty remains high. Positive trends can be observed in trade balance which might grow faster than expected. However, there are still reasons for concern, namely the possibility of increased tensions in some segments of financial markets, repeated rise in the price of oil and other raw materials, rising protectionist pressures and potentially uncontrollable adjustments ofthe global imbalances. Slovenian economy in 2010 The latest figures from the national accounts indicate a return to moderate economic growth. There are still, however, significant macroeconomic imbalances, in particular high unemployment and the general government deficit. After stagnating at the beginning of the year, GDP in Slovenia rose more sharply in the second quarter, by 1.1 percent in current terms. Growth was driven primarily by the response of the manufacturing sector to a sharp increase in foreign demand and a partial renewal in inventories, the decrease in which contributed significantly to the decline in economic activity last year. In the third quarter of2010, GDP quarterly growth rate was already 0.3 percent. GDP growth is expected to be 1.7 percent in 2011. In 2010 consumer prices measured by HICP increased by 2.2 percent, the same figure as in the euro area. Relatively modest price growth was mainly a result of weak economic activity, which influenced moderate core inflation, and certain one-offfactors related to changes in taxation and higher prices ofenergy. After slowing down in autumn 2010, the production volume in manufacturing increased again in November 2010. It recorded a year-on-year rise of 7.1 percent, but remained below the average for 2008. The value of realized projects in the construction sector posted a 16.9 percent drop compared to 2009. In the second half of2010 the year-on-year growth in high and medium-high-technology industries was more modest than in the first half of the year, as a result of anticipated growth slowdown in certain industries (motor vehicle 17 - Annual Report of SID Bank and SID Bank Group for 2009 - manufacturing industry). The growth of production in medium-high and low-technology industries was higher in the second half of 2010 than in the first six months, mainly because these industries are more export oriented. In eleven months of the year, the production volume achieved in the year before was exceeded in both groups of industries, in contrast to low-technology-industries. Exports in goods were 13.6 percent higher year-on-year in 2010 but still below the absolute value ofexports in the pre-crisis year 2008. The imports of goods were 14.6 percent higher year-on-year in 2010, largely under the impact of higher import prices rises (higher prices ofoil and other primary commodities). In 2010 exports ofservices were only 1.2 percent higher year-on-year (instead of 4.7 percent, as according to October's data ), with the greatest contribution to growth coming from higher exports oftransport, particularly road and railway transport services. Imports ofservices were up 3.5 percent year-on-year in nominal terms in 2010. The terms oftrade deteriorated considerably last year, with the growth of import prices (6.5 percent) considerably higher than the growth ofexport prices (3.1 percent). Exports to the EU were EUR 12 billion in the eleven months of 2010, and imports amounted to EUR 14 billion. In the same period, Slovenia exported EUR 2.4 billion to the countries of former Yugoslavia and imported EUR 1.4 billion. Exports to the CIS markets were EUR 0.8 billion in the eleven months of2010, and imports amounted to EUR 0.3 billion. Over the same period, exports to EFTA countries was EUR 0.2 billion, with imports coming to EUR 0.3 billion. The number of insolvent business entities increased once again in 2010. AJPES (The Agency of the Republic of Slovenia for Public Legal Records and Related Services) records show that among the business entities with outstanding matured liabilities for more than five consecutive days in a month, the number of legal entities increased by more than one fifth in the second half of the year. The increase in the average daily amount of outstanding matured liabilities was much higher (almost 70 percent) and thus similarly high as in 2009. In 2010, 1.5 times more compulsory settlement procedures were filed than in 2009 and there were 65 percent more bankruptcy procedures against legal entities. On average, 100,504 persons registered as unemployed in 2010, which is 14,151 persons, or 16.4 percent, more than in 2009. Due to insuffiecient job creation, the number of long-term unemployed persons and the number of first-time job seekers also rose in 2010, compared with 2009 (by 35.8 percent and by 17.9 percent, respectively). General government revenue amounted to EUR 13.1 billion and expenditure to EUR 14.9 billion in the first eleven moths of 2010. The deficit thus totaled approximately EUR 1.8 billion. Over the same period, revenue increased by 0.7 percent year-on-year and expenditure rose by 2.4 percent. The total balance of local government budgets recorded a deficit in the amount of EUR 109 million and a 4.7 percent growth in expenditure while the deficit ofthe health fund stood at EUR 31 million. In the eleven moths of2010, the transfer from the state budget into the pension fund amounted to EUR 1,284 million, up 5.5 percent from the year before. In 2010 Slovenia received EUR 0.7 billion from the EU budget, close to 70 percent of funds envisaged in the supplementary budget for 2010. Around half of all receipts (50.4 percent) came from structural funds (68.6 percent of anticipated reecipts). The bulk of funds were allocated for regional development (74.1 percent). Slovenia paid EUR 0.4 billion into the EU budget, 96.1 percent of funds envisaged in the supplementary budget. Slovenia thus recorded a positive net budgetary position against the EU budget in 2010, in the amount of EUR 0.3 billion, a much higher figure than in 2009 (EUR 0.2 billion). The interest rates in Slovenia in 2010 were, similarly to the rest ofthe euro area, fairly flat with minimal changes, however, an upward trend can be observed. Interest rates on corporate loans were 2 percentage points above the average for the euro area. Interest rates on housing loans in Slovenia decreased slightly in 2010 compared with 2009. The rates were slightly over 3 percent throughout the year, which is still higher than the euro area where the interest kept below 3 percent throughout the year. Total asset size of banks decreased by EUR 1.3 billion in 2010. In December only, the year-on-year growth rate of total assets was -2.6 percent. The decline is largely attributable to a reduction in claims abroad, which the banks expanded from mid-November in order to use the funds collected to pay their financial obligations towards the Eurosystem. In 2010 foreign liabilities decreased overall by EUR 1.3 billion (in 2009 by EUR 3.1 billion). On the financing side, the non-banking sector deposits decreased as the government withdrew its deposits from the banking sector again; in 2010 these funds amounted to EUR 863.5 billion, while the year before the government deposited EUR 2.1 billion with banks. The maturity breakdown of deposits by non-banking sector is changing in favour of long-term deposits. Net loans to non-banking sector decreased in December 2010 as well. Companies were attempting to deleverage most with majority foreign-owned banks where the negative year-on-year growth dynamic of loans of non-financial corporations increased over 7 percent in December 2010; whereas with the banks in domestic ownership the growth was only modestly negative. Corporate borrowing abroad started to pick up in the second half of the year, largely due to the credit crunch by domestic banks. At the same time, enterprises were also taking advantage ofthe still much lower loan interest rates abroad. The share of short-term loans in total loans by non-banking sector grew in the last year and exceeded 73 percent in December 2010. 18 - Annual Report of SID Bank and SID Bank Group for 2009 - Net interest income was up 11.2 percent on the year before. The rise in net interest income was more a result of a faster decline in interest expenses than the growth of interest income. Net non-interest expenses were 12 percent lower in 2010 compared with 2009, the decline resulting from losses from trading in financial assets. Growth in net fees and commissions was nevertheless positive (1.3 percent), and operating costs decreased slightly. The quality of banks' assets continues to deteriorate. In December 2010 unprofitable receivables represented 3.7 percent ofall banks' receivables, which is 1.5 percent more than at the end of 2009. Yearly costs ofimpairments and provisions of the banking system that reflect the increase of the credit risk amounted to EUR 757 million and were more than a half higher than in 2009. Consequently, the banking system recorded a pre-tax loss in the amount of EUR 48.4 million in 2010. Influences on SID Bank Operations in 2010 • Financing Slow and unstable economic growth, deteriorating payment discipline, shrinking total assets of banks, decrease in loans to companies, fall in bank portfolio quality, tightened financing conditions and increasing borrowing costs are just a few factors that profoundly affected the dynamics and composition of SID Bank loans extended to the corporate sector in 2010. The year continued to show extreme reluctance of the banking sector towards providing corporate financing; as a result, loans to corporates dropped while the structure of loans to clients other than banks pointed to a rise in the share of long-term loans. 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; given a limited supply ofsources offinance, this pushed interest margins above the reference interest rates. In 2010 SID Bank, aiming to assist the recovery ofSlovenia's economy and provide the much-needed long term finance in support of new, development-oriented projects in the Slovenian corporate sector, secured a hefty EUR 0.9 billion of long term earmarked funds, of which EUR 0.3 million was allocated to enterprises in direct loans. Also, the Bank carefully monitored utilization of funds in accordance with the contractually agreed dynamics and criteria, and carried out monitoring offinancial institutions and companies. • Asset-liability management and borrowing In 2010 the crisis in international capital markets took on new dimensions, especially in Europe. Several countries in the euro area, i.e. the PIIGS countries, were no longer able to service their debt and ensure the stability of their banking systems. Their problems have impacted the credit risk of other euro area countries, including the Republic of Slovenia. The yields on government bonds of the Republic of Slovenia are the benchmark, or the basis, for calculating the cost of funding raised by SID Bank in international financial markets. At the beginning of2010, the easiest way to access fresh funds was in international capital markets, and the issuers were mainly countries with higher credit ratings, and transnational organizations and banks issuing state guarantee backed bonds. In its December 2010 Report, Standard & Poor's cited a weakening commitment to budgetary consolidation by the Government of the Republic of Slovenia and noted the fast accumulation of the country's debt burden. This increased the possibility that Slovenia's credit rating might be reduced over the medium term, which would have adverse effects on the cost of government borrowing and the cost for bond issuers based in the Republic of Slovenia. SID Bank was not significantly exposed to 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 considerable portion of assets and liabilities, respectively. SID Bank conducted most of its transactions in euros. 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 2010 SID Bank's main partner in the field of insurance was Serbia although its economy had been hit hard by the crisis. The Serbian Government was forced to tighten public spending in order to trim its budgetary deficit, which made it eligible to receive IMF funds. The European Investment Bank also launched a programme to grant Serbia a loan for investments ofsmall and medium-sized enterprises (SMEs) and priority projects by the National Bank ofSerbia. The aftermath of the global crisis was also felt in Russia, as in all other countries. The political situation in Russia is estimated as stable, and so are the country's relations with the West. GDP growth in Russia picked up in 2010 as a result of the government's stimulus package, the rise in export demand, and low interest rates. Russia's oil production rose to a new high after the collapse ofthe Soviet Union. With the country's natural gas production up 12 percent, the exports of energy products contributed to the improvement of macroeconomic indicators. In 2011 Russia is expected to join the group of 153 countries in the World Trade Organization. Despite an overall improvement, domestic demand for products and services weakened, causing production and sales volumes to drop, which negatively affected the volume of 19 - Annual Report of SID Bank and SID Bank Group for 2009 - investment insurance provided by SID Bank. Exports transactions and investments insured in Russia chiefly cover construction sector, exports of high technology equipment, and logistics. Recovery of the economic and financial sectors was slow, making it increasingly hard for exporters to acquire new export transactions. As a result, there was no marked rise in demand for medium-term export credit insurance to the markets of South East Europe. Merchandise trade 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 the volume of business insured climbed considerably in 2001, mainly in the pharmaceuticals sector. The low demand for medium-term export credit insurance was exceeded by the demand for investment insurance. The key reason is 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 of the Balkans is increasing, with the majority ofinvestments insured being placed in Serbia and Bosnia and Herzegovina. • Guarantee schemes Aiming to mitigate the effects of the financial crisis, SID Bank, acting as an agent of the Republic of Slovenia, ran three guarantee schemes: for enterprises, for individuals, and for investments ofenterprises into development projects. These schemes have facilitated access to funds acquired with commercial banks. By way of guarantee schemes, banks enabled borrowers to acquire guarantees ofthe Republic ofSlovenia to back up a part oftheir loan related liabilities and meet the requirements for loan reinsurance by commercial banks. As the banks took a conservative approach to risk assessment and tightened their conditions for insurance, the volume of guarantees issued in 2010 increased considerably compared with the 2009 figure. The demanding conditions that pervade the international business environment have also increased the pressure on the demands for payment ofthe guarantees on behalfand for the account ofthe state. Influence on the operations of other companies within SID Bank Group • PKZ Owing to the characteristics of credit insurance, 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 of insolvency cases and payment incidents) and the trend observed in corporate credit ratings in individual markets. In most markets which are important for PKZ the economic activity increased when compared to 2009 although growth remained unstable and began to show signs of a slowdown towards the end of the year. Slovenia's exports rose once again and this, together with the increased awareness ofthe importance ofcredit insurance, brought business insured by PKZ in 2010 above the 2009 result. However, liquidity situation in most countries and markets remained tight and payment incidents were frequent, which is why claims paid by PKZ in 2010 climbed considerably as well. 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 is characterized by severe fluctuations which are in close connection with the economic cycles, and can be mitigated with appropriate measures, but not eliminated. Compared to other classes of insurance that are not as exposed in terms of premiums and claims, the effects of the crisis on the insurance of credits in 2009 were much more severe. With credit insurance heavily dependent on economic trends, the economic recovery of 2010 had a profound effect on PKZ operations, even when compared with other insurance classes. In 2010 the liquidity situation in most main PKZ markets was still tight, which led to an increase in claims paid although mostly to cover the risks insured in past years. However, the year 2010 was also positive in terms of claims, with the exception of claims paid in the Slovenian market. It also became evident that claims payments for the most critical years 2008 and 2009 will be lower than foreseen at the end of 2009. In short, despite tight liquidity and extremely high claims paid in 2010, the claims segment as well is beginning to show signs of improvement. • PRO KOLEKT Group The economic and financial crisis has led to a reduction in trading activity in the economies of South East Europe. As a result, there was a drop in the number of applications for debt collections and credit rating reports, with tight liquidity further reducing the possibility of collection. 20 - Annual Report of SID Bank and SID Bank Group for 2009 - PRVI FAKTOR Group Harsh economic climate in South East Europe continued to affect the operations of PRVI FAKTOR Group in 2010. Following a significant drop observed in GDP, industrial production and exports in 2009, the situation improved slightly in 2010 although in certain segments negative trends still persist. In terms of liquidity and credit risk portfolio, the overall situation saw a turn for the worse in 2010, which is also reflected in the results ofthe PRVI FAKTOR Group. In Croatia, exports picked up in 2010 while GDP continued to drop slightly. Croatia was also troubled by its high foreign debt and current account balance deficit. In spite of the above, PRVI FAKTOR, Zagreb succeeded in meeting the set objectives thanks to its good market position and appropriate client structure. Serbia's economy is slowly recovering. In 2010 it saw a considerable rise in exports, which still take up a relatively low share in the country's GDP. The country is burdened by large external debt and high general government deficit. In this situation, PRVI FAKTOR Beograd managed to generate a minimal positive operating result. Of all the markets where the PRVI FAKTOR Group is present the situation was most demanding in Bosnia and Herzegovina. In addition to high foreign exposure, low GDP and large budget deficit, operating conditions are further tightened by a complex administrative system. The adverse effects of the crisis in this economically-weakened country were also reflected in the poor results of PRVI FAKTOR Sarajevo. 5. DEVELOPMENT STRATEGY OF SID BANK AND SID BANK GROUP In accordance with the strategic planning process in place, which also foresees implementation of the sliding mode strategy, strategic plans of SID Bank were reviewed and revised at the end of2010, and used as the basis for the adoption of SID Bank Action Strategy 2011 -2014. In the course of the process, the operations and orientations strategy matrix was reviewed and reformulated in terms of both content and form, changes in form aimed at greater efficiency and operability. In reply to the fundamental strategy-and business-related dilemmas, key strategic orientations of SID Bank were also revised and, consequently, so were the key strategic indicators and strategic projects the implementation of which is crucial for the future development of SID Bank. In redesigning its strategy, SID Bank paid due consideration to the expectations of the European Commission concerning the scope of operations of SID Bank and other comparable institutions in the EU as well as the response of the regulator and banking sector to SID Bank's recent growth. Also, the Bank needed to respond appropriately to the operating conditions which have changed markedly in the light of weak economic growth and high leverage of the Slovenian economy. Having already achieved its break-even point, SID Bank's revised corporate strategy placed greater emphasis on the Bank's internal growth and gradual abandonment of crisis intervention measures on the one hand and on the strengthening ofthe Bank's development elements and management ofspecific internal risks on the other. Furthermore, the Bank has decided to restructure its range of development-oriented schemes and instruments, aiming to facilitate access to development funding by SID Bank to final beneficiaries and financial intermediaries. Also, it plans to implement a development promotion platform (hereinafter DPP), which is based on the concept offinancial engineering (as defined in the Public Finances Act) and aligned with the characteristics of the EU's New Financial Perspective. The key elements to mark the next strategic period include the development of the concepts of responsible lending and management by objectives. The concrete activities which SID Bank intends to carry out by the year 2014 as part of its Action Strategy are based on the realistic scenario of its external environment, which considers the existing phase of the economic cycle as well as official macroeconomic forecasts. An integral element ofthe Action Strategy is SID Bank's Risk Profile, which is the basis for risk management, mainly at strategic level. Mission We develop, promote and provide innovative, long-term financial services designed to complement financial markets for the sustainable development ofSlovenia. Annual Report of SID Bank and SID Bank Group - 2010 21 Values SID Bank's corporate values, a set of basic principles which guides the Bank's operations and which employees should embrace and demonstrate in their daily work, relations with colleagues and contacts with customers and other interest groups include, first and foremost, responsibility, professionalism, commitment, cooperation, and creativity. Vision Through dedication to its mission SID Bank will retain its position of a main Slovenian promotional institution by the year 2014 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 sustainable development. 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 the company's internal growth; increased financial value of services for final beneficiaries, in particular SMEs, performed at a high technological level and to high quality standards; implementation of the objectives of Slovenia's development strategy; and efficient execution of mandates will be the framework on which SID Bank will base its efforts - to be seen as an effective and valued development partner. Through provision of development promotional instruments, SID Bank's growth will follow the growth of Slovenia's banking sector while maintaining its financial stability. Strategy Market aspect From the market aspect, SID Bank will, in the following strategic period, work to gradually adjust its growth to the banking sector's average growth rates and to strengthen the element of development at the expense ofthe intervention element. To this aim, SID Bank will expand its activities to cover all four pillars of its development strategy: development of the knowledge society and innovative entrepreneurship, development of an eco-friendly society and eco-friendly manufacturing; development of competitive economy and internationalization; and regional and social development. This also means that the Bank's development will be oriented towards one of the pillars of Slovenia's post-crisis development model. The Bank will pay special attention to increasing lending volumes to support the development ofthe knowledge society and innovative entrepreneurship, while also ensuring a suitable degree offlexibility in channeling the funds to other uses and the appropriate response to the changed conditions and/or demand for such funds. Another important issue will be usage of product synergies within SID Bank Group. As regards its business model, SID Bank will continue to focus on indirect financing extended through banks on the basis of specifically-designed development and promotional schemes. To facilitate access to funds and ensure sustainability, the Bank will restructure its range of products and services both in terms of content as well as in the products available. Particular attention will also be paid to developing project financing products, their promotion in Slovenia and abroad, and to the development of customer consulting services. SID Bank's key orientation in the field of internationalization processes will be to support the efforts of Slovenia's enterprises to enter new markets with high export potentials, thereby reducing their dependence on traditional export destinations. Additionally, the Bank plans to increase the number of its insurance scheme users, volume of export transactions, and premiums paid. In its dealings with business partners, SID Bank will promote quality and excellence with an aim to strengthen its image and enhance its reputation with key stakeholders. Financial aspect From the financial aspect, SID Bank will primarily strive to meet its financial stability objectives, retain the same international rating as the rating of the Republic of Slovenia, and keep the Bank's capital adequacy at the set internal capital adequacy ratio. 22 - Annual Report of SID Bank and SID Bank Group for 2009 - In due consideration to the tightened operating conditions brought about by the economic crisis (weak economic growth), SID Bank will place great emphasis in the period 2011-2014 on ensuring high-quality investments on the one hand and improving bad debt management practices on the other. Additionally, the Bank will pay special attention to maintaining risk management at a level that meets the security requirements while it also ensures the desired business result, as well as on increasing the Bank's distribution offunds and investments and using new liquidity management instruments and long-term funds. In this respect, the Bank will implement the concept of combining public and private funds and grants (SRP), bringing in favourable direct funds, including fiscal funds (national and EU), which will enable entities to assume larger risks and more favourable financing conditions, thereby increasing the financial value of SID Bank services for final beneficiaries. 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 of insurance instruments. In terms of capital investments, SID Bank Strategy is open both towards the possibility of selling-offindividual shares and the possibility of expanding its network abroad; ultimately, the decision will depend on the suitability and benefits of such an intervention, or on the conditions of sale, which are characteristic ofan option-based strategy. Internal aspect The growth break-even point which SID Bank has reached through its counter-cyclical measures taken at the time of the crisis, requires a shift from quantitative increase to qualitative improvement of distributed funds (efficiency) and incompany balance achieved through a mitigation of operational risks. The specific development risks which SID Bank is undertaking call for an integral structured approach, risk assessment and management. Further optimization of business processes, efficient change management and management offast growth will continue to be major challenges facing the entire organisation. In the period 2011-2014, SID Bank will also continue to adapt its organisation to modern corporate governance forms, preservation of synergies (also in terms of processes) within the Group, modern objective-based management, quality assurance, further development of the corporate culture of the Bank by promoting the ethical values and high professional standards; and efficient management of SID Bank Group. 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 financing and insurance, and, most importantly, to acquisition and pooling of comprehensive expertise that will enable SID Bank employees to conduct the Bank's new and existing activities quickly and effectively. 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. In this respect, particular attention will be paid to the creation and maintenance of SID Bank's expert networks (financial, technical/technological, and institutional networks). SID Bank will apply the novel concept of responsible lending, including upgrades of the credit-rating based decision model and the price-based decision model, and put in place a system for evaluating the effects of SID Bank's activities, which will help it identify the value added of certain products and enhance their efficiency. Additionally, SID Bank will proceed with its implementation ofthe "Learning Organisation and Knowledge Management" and the Key Competencies model. Also, the Bank will attempt to modify its innovation management system and develop a comprehensive decision-making system. Strategic and operational business process In accordance with its strategic and operational system in place, SID Bank will in the future continue to run regular checks, at least quarterly, of the performance of planned activities undertaken to achieve long-term strategic goals (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 severe that any insistence on keeping the text unchanged would be unreasonable or even detrimental to the interests ofthe Bank. - Annual Report of SID Bank and SID Bank Group for 2009 - 23 6. BUSINESS OPERATIONS OF SID BANK AND SID BANK GROUP IN 2010 6.1. Financial Review of the Operations of SID Bank and SID Bank Group Total assets of SID Bank were EUR 3.9 billion at the end of 2010; with net profit for the year totaling EUR 5.7 million. The net profit of SID Bank Group amounted to EUR 11.2 million in 2010; in 2009, the Group ended the year with a loss in the amount of EUR 5.4 million attributable to the loss incurred by its subsidiary company, PKZ. In the continuation we present the Statement of Financial Position and the Statement ofComprehensive Income for 2010 for SID Bank and SID Bank Group. The consolidated financial statements of 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 2010 - Assets SID Bank SID Bank Group in EUR thousand as % oftotal Index 10/09 in EUR thousand as % oftotal Index 10/09 Available-for-sale financial assets 110,956 2.8 221.7 132,638 3.2 183.2 Loans to banks 2,955,894 75.9 128.9 2,976,328 72.8 129.0 Loans to clients other than banks 796,980 20.5 120.3 913,201 22.4 116.4 Other assets 31,711 0.8 159.4 63,913 1.6 123.5 - reinsurers' assets and receivables from insurance business 38,313 0.9 118.9 Total assets 3,895,541 100.0 128.8 4,086,080 100.0 127.1 Investments ofcontingency reserves 129,400 103.2 129,400 103.2 Investments from IREP 7,830 102.7 7,830 102.7 As at 31 December 2010, total assets of SID Bank stood at EUR 3.9 billion, 28.8 percent higher than as at 31 December 2009. The growth in SID Bank total assets in 2010, as well as in the previous years, was a result of intensive financing activities. Loans to banks (including deposits totaling EUR 38.4 million) went up 28.9 percent, and loans to clients other than banks saw a 20.3 percent upturn. Loans to banks represent 75.9 percent ofall assets; their share as at 31 December 2009 was 75.8 percent. Contingency reserves for insurance performed on behalfand for the account ofthe state and the corresponding liabilities rose by 3.2 percent in 2010 to EUR 129.4 million. Investments from IREP went up 2.7 percent, totaling EUR 7.8 million. The composition ofassets ofthe SID Bank Group is similar to the composition ofassets ofSID Bank. Statement of Financial Position Summary as at 31 December 2010 - Liabilities and Equity SID Bank SID Bank Group in EUR as % Index in EUR as % Index thousand oftotal 10/09 thousand oftotal 10/09 Deposits 1,006 0.0 0.4 1,006 0.0 0.4 Loans 2,123,691 54.5 111.8 2,243,571 54.9 111.0 Debt securities 1,436,166 36.9 262.5 1,436,166 35.2 262.5 Provisions 2,761 0.1 63.0 48,426 1.2 85.4 - obligations from insurance contracts - - - 45,515 1.1 90.5 Other liabilities 4,101 0.1 76.0 12,056 0.3 112.9 Equity 327,816 8.4 101.8 344,855 8.4 103.3 Total liabilities and equity 3,895,541 100.0 128.8 4,086,080 100.0 127.1 Contingency reserves 129,400 103.2 129,400 103.2 IREP 7,830 102.7 7,830 102.7 - Annual Report of SID Bank and SID Bank Group for 2009 - 24 SID Bank's loans rose by 11.8 percent, totaling EUR 2.1 billion at the end of2010. Debt securities, including issued bonds, promissory notes and registered bonds, make up 36.9 percent oftotal liabilities, having risen 162.5 percent since the end of2009. 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, total assets of SID Bank Group were only 4.9 percent higher than those of SID Bank, standing at EUR 4.1 billion end of year. The composition structure of assets 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 2010 SID Bank_SID Bank Group_ in EUR Index in EUR Index thousand 10/09 thousand 10/09 Net interest 40,149 186.7 44,875 157.6 Net non-interest income 4,322 62.3 8,071 90.3 Net income from insurance - - 3,554 171.0 Operating costs (6,717) 105.4 (12,430) 104.9 Impairments and provisions (30,576) 146.4 (29,649) 86.6 - change in insurance contractliabilities - - 7,465 - Pre-tax profit/loss 7,178 609.3 14,421 - Corporate income tax (1,452) 631.3 (3,272) - Net profit/loss of the year 5,726 604.0 11,149 - Net interest of SID Bank was EUR 40.2 million, rising 86.7 percent over 2009, mainly as a result of strong growth in loan portfolio. In 2010 net non-interest income of SID Bank was EUR 4.3 million, 37.7 percent below the 2009 figure. In 2009 net non-interest income totaled EUR 6.9 million, with income from dividends of SID Bank's subsidiaries amounting to EUR 2.5 million and other non-interest income generating EUR 4.4 million. In 2010 SID Bank generated no income from dividends. Income from the reimbursement SID Bank receives from the state for performing transactions on behalf and for the account ofthe Republic of Slovenia totaled EUR 2.6 million (in 2009: EUR 2.3 million). Income from fees and commissions was EUR 1.5 million (2009: EUR 1.5 million) and other non-interest income totaled EUR 0.2 million (2009: EUR 0.6 million). The largest share in the structure of net income generated by the SID Bank Group is taken up by net interest, which came to EUR 44.9 million in 2009 and was up 57.6 percent from the previous year. At 79.4 percent, 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 rose by 51.9 percent in 2010 to EUR 12.0 million; the end-of-year figure for 2009 was EUR 7.9 million. The share of net income from insurance as of net income of the SID Bank Group also rose: in 2010 it was 21.2 percent while in 2009 its value was 19.9 percent. In 2010 SID Bank continued its successful management of operating costs. The operating costs of SID Bank totaled EUR 6.7 million in 2010 and were 5.4 percent higher compared to 2009. Labour costs went up 11.3 percent as a result of increased recruitment carried out in 2010 to cope with the expansion of SID Bank's activities. The number of SID Bank employees rose from 87 at the end of 2009 to 94 at the end of 2010. In the structure of operating costs, labour costs accounted for 64.5 percent (2009: 61.2 percent), costs of services 24.1 percent, depreciation and amortization 9.2 percent, and material costs 2.2 percent. The percentage of operating costs as of assets lowered from 0.3 percent in 2009 to 0.2 in 2010. Efficient cost management was also reflected in the ratio between the operating costs and net income, falling from 22.4 percent to 15.1 percent. The operating costs of the SID Bank Group totaled EUR 12.4 million in 2010 and were 4.7 percent higher compared to 2009. Labour costs were up 6.5 percent, and there was a 1.2 percent rise in the costs of material, services, and depreciation and amortization. Operating costs as ofassets lowered from 0.4 percent in 2009 to 0.3 percent in 2010. SID Bank's net expenses from impairments and provisions were EUR 30.6 million (EUR 20.9 million in 2009). The rise in expenses from impairments is attributable to the growth in loans given and assumptions of risks due to financial crisis. For the SID Bank Group, expenses from impairments and provisions totaled EUR 29.6 million; the figure includes changes in insurance contract liabilities of EUR 7.5 million. Expenses from impairments and provisions not including this item were EUR 37.1 million (2009: EUR 25.5 million). High expenses from impairments and provisions in the SID Bank Group were largely attributable to the effects ofthe financial and economic crisis. 25 - Annual Report of SID Bank and SID Bank Group for 2009 - In 2010 SID Bank generated pre-tax profit of EUR 5.7 million, and the SID Bank Group reported profit of EUR 11.2 million. Within SID Bank Group, the PRO KOLEKT Group and the PKZ Group reported profit, whereas the PRVI FAKTOR Group reported a loss in the amount of EUR 4.7 million, which is recognized in its proportionate part of EUR 2.4 million in the consolidated financial statements of SID Bank (for more information refer to Chapter II, point 2.1.3). Key figures of SID Bank and SID Bank Group in EUR thousand 2008 2009 2010 SID Bank Group SID Bank Group SID Bank Group Statement of Financial Position Summary Total assets 2,087,717 2,301,654 3,024,894 3,215,633 3,895,541 4,086,080 Loans of banks 1,633,867 1,792,105 1,799,948 1,921,338 2,023,693 2,143,572 Deposits from non-bank sectors 22,376 22,376 91,870 91,870 5 5 Equity 160,757 179,928 321,982 333,726 327,816 344,855 Loans to banks 1,512,381 1,534,606 2,292,668 2,306,883 2,955,894 2,976,328 Loans to clients other than banks 500,183 653,075 662,284 784,616 796,980 913,201 Impairments offinancial assets measured at amortised cost, and provisions for off-balance-sheet liabilities 26,414 33,220 47,424 56,081 77,305 90,305 Off-balance-sheet operations (B1 to B4) 162,921 169,257 566,747 580,129 802,473 803,798 Statement of Comprehensive Income Summary Net interest 14,308 19,809 21,502 28,471 40,149 44,875 Net non-interest income 5,428 8,853 6,939 8,934 4,322 8,071 Net income from insurance - 6,317 - 2,078 - 3,554 Labour, general and administrative costs (5,161) (10,843) (5,729) (10,971) (6,101) (11,582) Depreciation and amortization (617) (860) (643) (881) (616) (848) Impairments and provisions (10,955) (19,272) (20,891) (34,152) (30,576) (29,649) - change in insurance contract liabilities - (3,761) - (8,618) - 7,465 Pre-tax profit/loss 3,003 4,005 1,178 (6,521) 7,178 14,421 Corporate income tax (236) (1,149) (231) 1,137 (1,452) (3,272) Net profit/loss for the year 2,767 2,856 948 (5,384) 5,726 11,149 Shares - number of shareholders 1 1 1 - number ofshares 1,456,808 3,121,741 3,121,741 - nominal value per share (in EUR) 96.10 96.10 96.10 - book value ofa share (in EUR) 111.76 103.75 105.63 Number of employees* 76 287 87 306 94 303 The total headcount ofthe SID Bank Group includes all employees ofSID Bank as well as the employees of PKZ, PRVI FAKTOR Group, PRO KOLEKT Group, and CMSR. * - Annual Report of SID Bank and SID Bank Group for 2009 - 26 in % 2008 2009 2010 SID SID Bank SID SID Bank SID SID Bank Bank Group Bank Group Bank Group Selected indicators* Equity: - capital adequacy** 11.08 9.94 16.65 15.70 13.53 13.08 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 1.19 - 1.46 - 2.03 - classified off-balance-sheet items Profitability: - interest margin 0.93 1.06 0.87 1.03 1.14 1.23 - financial intermediation margin*** 1.29 1.53 1.15 1.50 1.27 1.78 - return on assets before tax 0.20 0.21 0.05 (0.24) 0.20 0.40 - return on equity before tax 2.48 2.60 0.53 (2.54) 2.20 4.25 - return on equity after tax 2.28 1.86 0.42 (2.09) 1.76 3.29 Operating costs: - operating costs / average assets 0.38 0.63 0.26 0.43 0.19 0.34 - operating costs / net income 29.28 33.46 22.40 28.57 15.10 23.48 The indicators are calculated using the Bank of Slovenia methodology. The computations of capital adequacy for the SID Bank Group considered the assets of SID Bank and 50 percent of assets of the PRVI FAKTOR Group. The computations of financial intermediation margin for SID Bank Group do not consider income from PKZ insurance business. * 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 the SID Bank Group. However, the following business event was important for SID Bank: • In March 2011 SID Bank realized the issue of Eurobond on the international capital market in the amount of EUR 350 million. 6.2. Review of SID Bank Operations by Business Activity 6.2.1. Financing At SID Bank the services of financing are provided by two separate departments, The Promotional and Development Financing Department , and The Export and Project Financing Department. Promotional and Development Financing carries out the development and marketing functions of banking products and services aimed at providing promotional and development financing for residents, mainly for projects associated with the development ofthe knowledge society and innovative entrepreneurship, development ofan eco-friendly society and eco-friendly manufacturing; competitive economy and internationalization; and regional and social development. Export and Project Financing carries out the development and marketing functions of banking products and services aimed at providing export and project financing for residents and non-residents, mainly supporting projects of Slovenian exporters abroad, their international business transactions and more active approach to direct financing or co-financing of companies and support to internationalization. Furthermore, it provides its clients and Slovenian banks with project financing consulting as well as certain agency services it carries out 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 worked with most Slovenian banks with an aim to provide, as a bank, the comprehensive range of products and services to cater for the entire life or business cycle of all target groups of final beneficiaries as well as their geographic distribution, regardless of sector policy. - Annual Report of SID Bank and SID Bank Group for 2009 - 27 In 2010 SID Bank used 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 ofthe 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. In accordance with its legally stipulated operations, its mission to carry out development and promotional activities in the segments where market gaps occur or have been observed, and in line with its transition role, SID Bank, acting directly on its own behalf and for its own account and indirectly through commercial banks, provided the Slovenian corporate sector with funds intended for favourable long-term development and promotional financing of projects associated with the development ofthe knowledge society (innovation projects, including research and development, education, recruitment), eco-friendly society (nature conservation, renewable energy sources, efficient energy use; eco-friendly products), competitive enterprises (entrepreneurial projects in all development stages, internationalization of operations), and regional and social development (infrastructure, housing). In financing of international business transactions, greater emphasis was placed on comprehensive promotion of business internationalization carried out through international trade financing in the form of long-term loans which enable the market participants to enter new markets and start business there. SID bank's activities in this segment include support for related import transactions, pre-shipment financing, investments and incentives for sustainable growth of exports and internationalization of business operations and activities, extended with an aim to promote and conduct business transactions under concession conditions and to promote joint performance on third markets with domestic, foreign or international markets players. Also, SID Bank lay the foundations for the upgrade and redesign of its range of financing products in 2011 to establish a comprehensive set of development financing instruments. During the crisis, the Bank introduced new development and promotional schemes which contained the elements of state aid, and focused on its role to secure appropriate sources of funding and take the correct anti-crisis measures which would continue after the crisis through the expansion of the set of development financing instruments and introduction of new development and promotional schemes, including the elements of state aids. SID Bank financing operations SUSTAINABLE DEVELOPMENT Supplementary lervfces •S)DBanka~" Financial institutions (banks) IndliKlllnanElq Internat lo na I b us Iness t la nra ctl □ ns Small»* nd mrrflum enterprises + targe enterprises Resea nil, de ve lo p me nt and Innovation Infrastra dure Energy efficient Infrastru dure Envlionme ntally friendly projectji Education Employment Housing Municipalities Regions - Annual Report of SID Bank and SID Bank Group for 2009 - 28 Business results in the field offinancig Outstanding loans as at 31 December, by year The Bank's outstanding loan portfolio at the end of 2010 was EUR 3,714.4 million and was up 27.1 percent from the end of 2009, when it stood at EUR 2,922.4 million. The share of loan portfolio in total assets of SID Bank was 95.4 percent (2009: 96.6 percent). The growth of SID Bank's loan portfolio in 2010 mainly reflects the Bank's participation in the anti-crisis measures and helped keep the volume of loans to the corporate sector at a level similar to that of2009. In 2010 SID Bank ensured EUR 845.4 million to be extended to businesses through commercial banks and granted EUR 337.5 million in direct loans to clients other than banks. The growth of all loans extended to the Slovenian banking system recorded a rise of approximately 29.1 percent over the year 2009 whereas the share of SID Bank financing in all loans extended to the Slovenian corporate sector, directly or through commercial banks, went up 20.3 percent in 2010 compared to 2009. The maturity structure of the SID Bank loan portfolio confirms the orientation ofSID Bank towards the activities specified in the ZZFMGP and ZSIRB; the share of long-term financing amounted to 99.7 percent of SID Bank loan portfolio at the end of 2010, with short-term loans taking up a low 0.3 percent of the Bank's total loan portfolio. Most loans extended in 2010 were long-term in nature. In 2010 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 ofthe credit crunch and provision ofthe much needed long-term funds to the corporate sector. Commercial banks remained SID Bank's most important partner also in 2010, their share in SID Bank's loan portfolio reaching 78.5 percent, compared to 77.3 percent in 2009. The demand for cofinancing and direct financing by SID Bank of development projects by the automotive industry, 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 2010, posting a 20.3 percent increase in loans to clients other than banks compared to the year 2009. Despite significant growth in loans to clients other than banks, this segment only took up 21.5 percent of the total loan portfolio as at 31 December 2010 (in 2009: 22.7 percent). The share of loans to non-residents in SID Bank's loan portfolio remains a low 5.3 percent, reporting a relative decline of0.8 percentage points from 2009. The sizeable increase in the volume of direct financing extended to Slovenian exporters, their buyers and investors abroad in 2010 did not affect the high quality of SID Bank's loan portfolio as the assets classified in classes lower than A and B only take up 2.5 percent of the Bank's loan portfolio. For more information on portfolio classification and risk refer to Point 6.4. In 2010 SID Bank generated EUR 89.6 million in interest income from financing, a 13.8 percent rise on the year before. Income from fees and commissions rose 12.5 percent on the year 2009, totaling EUR 2.3 million, largely as a result of loan portfolio growth. - Annual Report of SID Bank and SID Bank Group for 2009 - 29 The balance of issued guarantees and unfunded risk sharing arrangements as at 31 December 2010 amounted to EUR 31.9 million, posting a 17.9 percent decrease over the year before. The 2010 volume of newly issued guarantees was EUR 16.0 million (in 2009: EUR 16.0 million). The negative trend was also observed in liabilities arising from unfunded risk sharing, which went down 56.9 percent to EUR 6.3 million as at 31 December 2010. New developments in 2010 concerning financing The year 2010 brought about the following important developments in the field offinancing: • SID Bank revised its offer offinancing through financial institutions with an aim to simplify, modernize, and expand its range of products. To this aim, the Bank: - reclassified the purposes of financing into four areas: 1) development of competitive economy and internationalization, with emphasis on SMEs, development of the eco-friendly society and eco-friendly manufacturing; 2) environmental and energy management projects, regional and social development; 3) infrastructure and housing and development of the knowledge society and innovative entrepreneurship; 4) research, development, innovation, education and recruitment; - expanded the range offinancing purposes; - expanded the list ofeligible final beneficiaries, etc. • With an intent to spur the economic recovery, SID Bank increased the amount of funds to be placed through commercial banks in 2010, offering the banks two large credit lines: - In April 2010 SID Bank launched EUR 250 million in long-term finance to be extended to final beneficiaries. In that amount, loans to SMEs with a maturity of 5 years took up EUR 160 million; a further EUR 44 million was intended for the financing of structural investments and regional development investments over a 10-year term, EUR 36 million went to financing of investments in nature conservation, including the measures aimed at efficient energy use and use of renewable energy sources over a 10-year term; and EUR 10 million was allocated to the financing of innovation and new technologies over an 8-year term. - In November 2010 SID Bank launched a credit line of EUR 385 million as part of its new range of financing options aimed at posting funds to final beneficiaries through commercial banks. In that amount, EUR 215 million was intended for the financing of competitive economy and internationalization over a 5-year term; EUR 125 million for the development of eco-friendly society and eco-friendly manufacturing over a 15-year term, EUR 36 million for regional and social development over a 15-year term; and EUR 9 million was intended for the development ofthe knowledge society and innovative entrepreneurship over an 8-year term. - SID Bank also took a more active approach to direct financing and cofinancing of companies, and provided its clients and Slovenian banks with project financing consulting. • In securing long-term special-purpose funds from foreign/international development banks/institutions (for transfer oftheir schemes to SID Bank financing schemes), SID Bank: - took out a long-term loan with the German Kreditanstalt für Wiederaufbau (KfW) in the amount of EUR 80 million to acquire the finance for environmental investment projects and long-term investments undertaken by SMEs; - started the procedure aimed at borrowing EUR 40 million for the Council of Europe Development Bank (CEB); the funds acquired will be allocated to financing ofenvironment protection and regional development projects; - signed a Loan Agreement in 2010 with the European Investment Bank (EIB) in the amount of EUR 50 million. The funds were used to extend a successful credit line started in 2009, through which SID Bank provided long-term finance for development projects concerning investments in the field of research, development and innovation for use in the automotive sector, which target 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 the framework of the scheme for financing development projects mounted by companies in the automotive sector, SID Bank, benefiting from EIB funding and other sources, extended a total of EUR 211 million to support 27 development projects proposed by 14 Slovenian companies ofvarying sizes, with a total amount of costs eligible for financing reaching EUR 278 million. The funds were extended to companies that operate in the sector which is characterized by a high level of innovation and long development cycles, especially as car manufacturers transfer the development of certain components on their suppliers. The credit line has helped the Slovenian automotive industry to improve its competitive position, acquire new business and orders, create new jobs, and retain the status of a development supplier. The collective corporate-level effects include business effects (a EUR 500 million rise in revenue; orders involving higher value added, retention and creation ofjobs - 20,014; maintaining the status ofa development supplier, exporters' share in GDP), development effects (31 new patents, RDI investments, cooperation between the corporate sector and research institutions), and environmental effects (decrease in CO2 emissions of4.7 million tones per year). As this is the first case of the so-called decentralized performance of an EIB credit line (EIB normally provides direct financing to the automotive industry) and it marks a beginning of a long-term cooperation between EIB and SID Bank, the success of the scheme is ever more important. Also, it points to the capabilities of SID 30 - Annual Report of SID Bank and SID Bank Group for 2009 - Bank as a development promotion institution, which can combine various sources offinancing and thus contribute to the survival, restructuring and progress ofindividual companies and industries. • SID Bank started cooperation with the EKO Fund; the two signed a loan agreement in the amount ofEUR 15 million for financing ofinvestments into the environment and environment protection. • Implementation of project financing principles in Slovenia. Besides dealing with concrete projects, SID Bank also focused on conceptual project financing issues, transfer of related knowledge and experience, and alerting the parties involved to the importance of starting up project financing and ensuring cooperation among stakeholders. To this aim, SID Bank held a congress for companies and banks, titled the Hub of Knowledge (Stičišče znanja). The congress was attended by around 100 invited participants from a variety of backgrounds and featured presentations from reputable Slovenian and foreign experts on various aspects of project financing. By holding such an event, SID Bank, which had already acquired international experience in banking and project financing insurance, has set off to evolve into a hub of knowledge and the enabler and promotor of project financing in Slovenia. In so doing, SID Bank helps create the good practice of project financing and harmonize the relations among Slovenian partners in individual project financing cases. • Activities were underway to set up a new concept of a development model, i.e. a new development promotion platform (DPP): - January 2010: inclusion of SID Bank (and its activities) into Slovenia's Exit Strategy (in the final version of the Strategy the activities are included in a slightly more limited scope than originally agreed, due to inter-sectoral arrangements); - July 2010: DDP initiative was presented and debated at the Government of RS Session; the Working Group to prepare the implementation and monitor the operation ofthe DPP was formed and began working; - October 2010 - December 2010: Activities to carry out a DPP pilot project. 6.2.2. Asset Liability Management In 2010 SID Bank continued its active approach to interest rate management. To contain the potential loss ofthe Bank arising from changes in market interest rates, SID Bank introduced at the end of 2009 hedging against interest rate risk occurring as a result ofthe difference between the interest-bearing receivables and interest-bearing liabilities ofthe Bank (for more information see point 6.4.). In 2010 SID Bank, striving to control its liquidity, 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 Bank followed the strategy aimed at limiting the risk concentration, which means that excess liquidity was placed largely with banks to which SID has a low exposure in terms offinancing transactions. Normally, SID Bank 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 given slight preference over secondary market investments. SID Bank operates in the financial markets of EEA and OECD member states, conducting transactions with partners rated BBB- or higher and with certain unrated Slovenian banks whose credit rating under the methodology of SID Bank is not lower than B (for more information see point 6.4.). SID Bank is not an authorized participant in the securities market. In 2010 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. Investments from SID Bank's own funds for the purpose of liquidity control amounted to EUR 149.4 million as at 31 December 2010, representing 3.8 percent of the Bank's total assets. The majority of investments, namely EUR 110.9 million, is held in securities; the remaining funds totaling EUR 38.5 million as at 31 December 2010 were placed in deposits. The investments include mainly Slovenian and foreign government bonds, market bonds by other issuers, and deposits. All the investments are denominated in euro. In accordance with its policy, SID Bank's placements in this segment are to investments rated investment-grade or higher. More than 83 percent of all investments are rated A- or higher (S&P), and 10 percent are held in investments to unrated issuers, only from the Republic of Slovenia. Deposits were placed with Slovenian commercial banks whose credit rating, according to SID Bank methodology, was not lower than B. As at 31 December 2010, 91 percent of all investments for the purpose of managing liquidity were taken up by fixed rate investments. 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 appropriately followed. In this 31 - Annual Report of SID Bank and SID Bank Group for 2009 - segment of SID Bank's operations, currency denominated derivative instruments were only used to a limited extent, solely to close open foreign exchange positions. 6.2.3. Borrowing SID Bank, as an authorised institution under the ZZFMGP and ZSIRB, strives to obtain sources of long-term financing in Slovenia and in international financial markets, and is Slovenia's only bank that has in the previous years continuously acquired funds in the international markets. In raising funds, SID Bank focuses on selecting flexible instruments that can be tailored to meet investment 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 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 continued to raise funds through diverse financial instruments in Slovenia and international financial markets. SID Bank's long-term borrowings in 2010 amounted to EUR 1.1 billion. In April 2010 SID Bank, acting in response to the ongoing financial crisis and the pressing need of the Slovenian banking and corporate sectors for fresh long-term finance, issued its first Eurobond on the international capital market in a total amount of EUR 750 million and with a maturity of 5 years. The majority of buyers were commercial banks, monetary funds, and insurance companies, over a half of them from Slovenia and Germany. SID Bank used the collected funds to finance long-term, special-purpose loans extended through commercial banks for the purposes specified in the ZSIRB. Additionally, in 2010 SID Bank drew a total of EUR 130 million under two loan agreements concluded with the European Investment Bank (EIB) and Kreditanstalt fur Wiederaufbau (KfW); furthermore, it concluded three long-term bilateral loan agreements with other foreign banks in the total amount of EUR 60 million. In foreign capital markets SID Bank has issued several emissions of debt instruments (i.e. Schuldscheindarlehen) in a total amount of EUR 57 million, increased the issue of its SI01 bond in the domestic market by EUR 69 million and realized a private bond issue totaling EUR 50 million. In 2010 the Bank obtained a limited amount of short-term fixed interest rate funds in the inter-bank money market, in particular from commercial banks in Slovenia. In 2010 borrowing through the Eurobond proved to be most effective, in other words, the type of borrowing which provided SID Bank with most favourable long-term finance at the time of the crisis. Also, the Bank has gained enhanced visibility, secured a competitive source of funding, increased borrowing transparency, and was able to use secondary bond trading as an indicator of credit risk on future borrowing. 6.2.4. Credit Rating and Other Credit Information SID Bank continued to perfect its own Credit Rating System in 2010. 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 of Slovenian and foreign data providers. Striving to provide an excellent all-round service, SID Bank has developed its internal methodology to consider soft indicators, which means that the credit rating report also includes: • the company's overall and market position (track record, business operations, industry position and prospects, rank in industry) • ownership and corporate management (ownership and loyalty, company management, recruitment policy, processes, medium-term development plan); • social responsibility (reputation, inclusion in the social environment, transparency, energy and environmental impact), • company ethics (integrity of executives and staff, ethics code, violations of law, e.g. corruption, money laundering), • cooperation to date, etc. 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 use internally, 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. - Annual Report of SID Bank and SID Bank Group for 2009 - 32 In 2010 clients were most interested in the information on individual markets, companies and banks in Slovenia and in those South East European countries that represent Slovenia's traditional markets. 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 South East Europe. 6.2.5. Operations under Special Authorization - Insurance against Non-Marketable Risks Select commercial and non-commercial or political risks (non-marketable risks) of the nature and level which private reinsurance market lacks either willingness or capacity to cover are insured by SID Bank as an authorized institution operating on behalf of and for the account of the Republic of Slovenia. According to the EU legislation, non-marketable risks are defined as commercial and political risks 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. By ensuring appropriate insurance, exporters and investors in higher-risk countries are able to mitigate risks arising from business operations, thereby creating a sense ofeconomic safety. In 2010 SID Bank reported continued growth in its business performed on behalf and for the account of the Republic of Slovenia in the field of export credit insurance, extending its support largely to exports and investments to the CIS markets and the markets of South East Europe. The operations which SID Bank as the national export credit agency (ECA) performs on behalf of and for the account of the Republic of Slovenia are in terms of management and accounting separated from the operations performed on SID Bank's own account. Review of operations in 2010 Insurance against non-marketable risks on behalf and for the account of the state 2008-2010 in EUR million 2008 2009 2010 Business insured 914.3 952.5 1,440.1 Exposure (31 Dec.) - net 932.8 962.0 1,032.3 Premiums 4.1 4.8 8.2 Claims (0.0) (4.9) (3.0) Number ofclaims 0 1 2 Recoveries 0.1 0.0 0.1 ^Exposure also considers offers of insurance, in accordance with the ZZFMGP and with regard to their nature (binding). Business insured The volume of business insured against non-marketable risks reached EUR 1,440.1 million in 2010, a 51.2 percent increase on the previous year. The realized volume represents 21.1 percent of the maximum amount of new yearly obligations as defined in the ZZFMGP. At 71.0 percent, the largest share in the structure of generated business insured was taken up by insurance of outward investment, totaling EUR 1,022.9 million, and reinsurance of short-term export credits (renewable insurance against non-marketable risks), generating EUR 405 million, or 28.1 percent oftotal business insured. Outward investment insurance rose 45.7 percent over the previous year; the figure includes new insurance for outward investments and insurance renewals which are treated as new insurance covers because of the investors' right to terminate the contract after three years period. The growth in business insured can be partly attributed to insurance of non-shareholder loans or loans to subsidiaries of Slovenian investors abroad, which covers commercial as well as noncommercial risks. In 2010 new insurance covers structured made for investments into construction, metal processing, manufacturing, food processing, and tourism sectors, focused primarily on South East Europe and Russia. The 2010 insurance figures indicate continued demand for insurance of foreign investments. The positive trend is driven largely by limited access to funds due to higher risk arising from the financial and economic crisis, and by the ownership structure of Slovenian companies, which has fueled increased demand for insurance of ownership shares. Another contributing factor is the experience Slovenian investors have gained in their business operations with foreign entities. Export credit (re)insurance (oftrade receivables) against non-marketable risks, short-term insurance amounted EUR 405 million in 2010, an increase of 77.7 percent over the 2009 figure. The main growth driver is directly linked to financial crisis and due to the decision of private insurers to withdraw from certain markets and/or sectors. In the light of adverse economic conditions, the private (re)insurance market was also affected by a series of changes. Withdrawal of private 33 - Annual Report of SID Bank and SID Bank Group for 2009 - reinsurers and/or the decrease in the capacities available in the credit insurance market facilitated SID Bank to reinsures Slovenian insurance companies when they are unable to obtain reinsurance cover in the private market. The major part of reinsurance volume realized in 2010 was linked to supporting export transactions in Russia. The changed market conditions were responsible for a shortage in reinsurance capacity and the withdrawal of private reinsurers from certain countries and industries, causing the reinsurers to reduce or cancel reinsurance cover limits. In turn, this made it impossible for credit insurance companies to provide sufficient insurance cover for companies, which further constrained sales in the already harsh economic conditions. In accordance with the European Commission's Memorandum, SID Bank as a publicly held insurer and a state authorized 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 and fill the market gap in the credit insurance market. In March 2010 SID Bank, acting in accordance with the Commission Decision, started implementing the new reinsurance scheme covering reinsurance of export credits in the so-called marketable markets (EU member states and certain OECD members), where the private reinsurance market exists but is in the time of crisis unable to provide sufficient insurance cover. Given that private credit insurance market still does not operate as efficiently as desired, SID Bank has extended the implementation of the scheme through 2011 based on EU Commission decision of18 January 2011. Tightert supply of financing has also negatively affected the demand of exporters for medium-term export credit insurance, mostly to South East Europe, which is the traditional market for Slovenian exporters, given reduced capital investments in the region. Other factors affecting the volume of business insured also includeless favourable insurance conditions for South Eastern European markets stemming from their unfavourable risk classification (consistent with OECD classification) and that terms offered by Slovenian banks are less competitive than those provided by foreign banks. The majority of export credits (trade receivables), investments and medium-term credits insured in 2010 were linked to exports to Serbia, Russia, and Bosnia and Herzegovina. Exposure Total exposure from insurance transactions, including binding insurance offers, executed for the account of the Republic of Slovenia amounted to EUR 1,032.3 million at the end of 2010, an increase of 7.8% over 2009 result.The growth was driven by a 12.9 percent rise in exposure from outward investment insurance while exposure from insurance against medium-term commercial and non-commercial risks dropped 17.2 percent below the 2009 figure. Exposure from short-term export credit (re)insurance increased by 15.9 percent compared to 2009. Limited geographic diversification (exposure to Serbia 39.3 percent, Russia 30.3percent) required additional monitoring of the political and economic situations in the countries concerned. In Russia, where the political situation is considered stable, economic recovery is already under way. The Russian authorities spurred the growth with a combination of government incentives and low interest rates, which was complemented with increasing demand for raw materials. In line with positive trends, OECD upgraded Russia to risk category 3 in January 2011. The political situation is also improving in Serbia, though the coalition government's inability to establishing a dialogue with Priština has negatively affected the political risk in the region. In terms of economy, Serbia is only slowly recovering from the crisis and, according to analysts, no speedy GDP growth can be expected before 2012. As a result, Serbia made no progress on the OECD risk classification, staying in risk category 6 (out of 7). Exposure from binding insurance offers, counted under total net exposure pursuant to the ZZFMGP, decreased 80 percent to EUR 1.1 million at the end ofthe year. Exposure represents 41.3 percent ofthe limit as defined in the Republic of Slovenia Budget for 2010 Implementation Act and 5 percent ofthe limit as defined in the ZZFMGP. Insurance technical figures Insurance premium against non-marketable risks amounted to EUR 8.2 million in 2010, up by 70.6 percent from the 2009 figure. The premium growth in 2010 is largely attributable to (re)insurance premiums arising from short-term export credit (re)insurance, which increased more than five-fold from the 2009 figure. Income from fees was negligible because SID Bank, in conformity with its business policy and valid price lists, returns the amount charged to exporters and other insured entities, includes it in the premium charged, provided the project is implemented. - Annual Report of SID Bank and SID Bank Group for 2009 - 34 Claims paid in 2010 recorded a drop from the year before, amounting to EUR 3.0 million at the end of2010 (in 2009: EUR 4.9 million). A large part of claims paid is related to medium-term business transactions (Russia, Kazakhstan) while the share of claims arising from short-term export credit (re)insurance remained low at 4.4 percent (Kyrgyzstan). As a result of the financial crisis, reports of payment defaults, mainly with regard to Kazakhstan (financial sector), pushed up the volume of claims under consideration (claims filed) to a total ofEUR 4 million at the end of2010 (in 2009: EUR 0.2 million). The volume of potential claims dropped by 14.2-times in 2010, to a low EUR 0.4 million. The business result for the account of the State recorded a rise from the 2009 levels despite the claims paid, amounting to EUR 4.2 million at the end of the year (in 2009: EUR 0.1 million). Consequently, contingency reserves rose by 3.5 percent to EUR 124.4 million at the end of2010. 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. The volume of liquid investments is changing subject to expected claims payments and the related liquidity position of contingency reserves. As at 31 December 2010, contingency reserves were largely composed of long-term domestic currency loans extended to commercial banks based in the Republic of Slovenia, totaling EUR 75.3 million (58.2 percent ofall assets); investments in securities of A-rated Slovenian and foreign issuers in a total value of EUR 25.3 million (19.5 percent ofall assets), short-term deposits in banks amounting to EUR 23.8 million (18.4 percent ofall assets), and other assets of EUR 5.0 million (3.9 percent ofall assets). New developments relating to insurance on behalfand for the account ofthe state In 2010 the department for credit and investment insurance, having introduced an insurance product aimed at providing banks with insurance of (service) guarantees (expansion of insurance cover including an option to cover the exporter's performance risk), prepared the guidelines governing introduction of a new SID Bank insurance product to complement the existing offer in 2011. The new product will cover credit insurance used to facilitate pre-shipment financing. Within the framework of new product, SID Bank will cover purpose loans to provide exporters with operating capital for pre-shipment activities or investments into manufacturing activities, as preconditions for successful realization of an export transaction. 6.2.6. Operations under Special Authorization - Interest Rate Equalization Programme (IREP) In accordance with ZZFMGP and on behalf and for the account of the Republic of Slovenia, SID Bank manages the Interest Rate Equalization Programme (IREP) for export credits, which falls 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 final 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). - Annual Report of SID Bank and SID Bank Group for 2009 - 35 6.2.7. Operations under Special Authorization - Guarantee Scheme for Enterprises The Guarantee Scheme Act ofthe Republic ofSlovenia (hereinafter ZJShem) set up a system for the issue ofgovernment-backed guarantees to assume liabilities ofA-, B- or C- rated companies arising 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 ofcommercial banks, thereby decreasing the flow offunds into Slovenia's economy. By 31 December 2010, when the deadline for the issue ofguarantees expired, EUR 809.4 million ofthe total guarantee quota of EUR 1.2 billion was granted at a total of15 auctions; EUR 509.0 million ofthe guarantee quota was used in 2009, and additional EUR 300.4 million in 2010. The banks awarded the guarantee quota granted 578 corporate loans worth a total of EUR 831.8 million. The Guarantee Scheme for Enterprises has thus helped Slovenian companies access the finance needed to cope with the unyielding global economic and financial crisis. On the basis ofguarantees issued, SID Bank received 26 claims under the guarantees in 2010. In close consideration of the conditions stated, the Ministry of Finance of RS honored 12 guarantee claims. Ifthe guarantee is honored and the conditions are met, SID Bank initiates a collection procedure for guarantees paid. 6.2.8. Operations under Special Authorization - Guarantee Scheme for Individuals The Guarantee Scheme for Individuals Act (hereinafter ZJShemFO) enabled individuals to obtain guarantees ofthe Republic ofSlovenia for loans up to EUR 100,000 or EUR 10,000, depending on the category of borrower. The guarantee scheme for individuals persons 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 unemployed persons. The total guarantee quota to be distributed in the period 2009-2010 under the ZJShemFO is EUR 350 million, ofwhich EUR 50 million is held for the category of unemployed borrowers. By the end of2010 SID Bank held six auctions and awarded the banks a total of EUR 88.9 million; EUR 38.4 million ofthe guarantee quota was used in 2009, and EUR 50.5 million in 2010. The banks awarded the guarantee quota granted 1,025 individual loans worth a total of EUR 35.4 million. The deadline for the issue ofstate guarantees under the ZJShemFO expired on 31 December 2010. In addition to guarantees issued, SID Bank received 38 claims under the guarantees in 2010. In close consideration ofthe conditions stated, the Ministry of Finance of RS honored 27 guarantee claims. Ifthe guarantee is honored and the conditions are met, SID Bank initiates a collection procedure for guarantees paid. 6.2.9. Operations under Special Authorization - Guarantee Scheme for Investments The aim ofthe Guarantee Scheme for Corporate Investments Act (hereinafter ZPFIGD) was to facilitate access to finance for corporate investments intended to strengthen the development and enhance the competitiveness of Slovenian companies. Backed by state guarantees, which are classified as first-class insurance, companies obtain funds needed to finance their investment projects more easily. In 2010 SID Bank published its first invitation related to the issue of guarantees of the Republic of Slovenia to cover liabilities arising from loans acquired from first-class commercial banks and savings banks which are intended for the financing of development projects. The total guarantee quota to be distributed was EUR 50 million. By the end of 2010, SID Bank received 4 guarantee applications. 6.3. Review of SID Bank Group Operations in 2010 6.3.1. SID - Prva kreditna zavarovalnica d.d., Ljubljana The business operations of2010 were significantly affected by the onset ofeconomic recovery coupled with persistently low liquidity situation in most PKZ markets. As a result, the business operations of persons insured picked up after the severe slowdown of2009 and the demand for PKZ services remained high, making it possible for the company to acquire new clients. Besides, PKZ had limited possibility to assume risks due to a general decrease in its clients' credit ratings (risks), and the frequency and volume of claims paid rose as well. In 2010 PKZ continued its measures taken to mitigate the effects of the economic crisis. As part of the measures, PKZ revised its insurance conditions to reflect the changed economic environment, introduced more intensive monitoring and speeded up and intensified other procedures for the prevention of claims and recovery collection. In the adoption and implementation of these crisis mitigation 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. A welcome contribution to this aim was the increase in capital carried out at the 36 - Annual Report of SID Bank and SID Bank Group for 2009 - beginning of 2010. Hit hard by uncertain economic conditions and a year of poor business results, the capital injection strengthened the firm and sent positive signals to PKZ partners (insured and reinsurers). The effects of these measures were most clearly seen in the increase in premium written. The volume of business recorded a rise of 21 percent to EUR 4.8 billion (in 2009: a drop of 23 percent), and premiums written surged by 80 percent (after a 21 percent fall in 2009) to a total of EUR 19.9 million (the highest annual premium written in the company's history, compared to EUR 14 million in 2007 and 2008). PKZ retained most of its clients and acquired new ones, some ofthem large companies which made it to the TOP 25 list immediately. Claims paid also hit an all-time high of EUR 24.8 million, pushing the total amount of insurance claims paid in 2010 116 percent above the 2009 figure. A considerable part of claims paid was related to risks insured in the previous years (2008 and 2009). However, the highest claim in the Slovenian market occurred and was partly paid in 2010 but as it was covered in a large part with reinsurance, it did not have a marked effect on the business result of PKZ. As for other risks insured in 2010, the trend in terms of claims shows a significant improvement over the past two, crisis-laden, years. The full effect of the measures taken to mitigate the effects of the crisis on the claims result will only be felt in the following years due to the time delay in the reporting of claims. Provisions for claims decreased in 2010 as a result of high claims paid and the upward trend. Largely, this was attributable to the favourable outcome ofthe claims cases in 2008 and 2009 which ended up much better for PKZ than we were able to estimate at the end of 2009. Due to positive trends, net income from premium written in 2010 exceeded net expenses for claims by EUR 6.8 million (in 2009 expenses for claims exceeded income from premium written by EUR 7.5 million). The result for insurance technical account was also positive at EUR 8.6 million (in 2009 it was negative at EUR 8.3 million). The generated net profit totaled EUR 6.8 million (in 2009: negative result EUR 6.5 million). The equalization provisions (provisions for credit risks) went up by EUR 0.9 million, to EUR 1.7 million. The annual increase in equalization provisions is limited (the lower of the amounts in a percentage of net premium or insurance-technical account). In 2009 the provisions for credit risk (equalization provisions) were used to cover the loss arising from the negative technical-insurance result (EUR 8.3 million). The net profit or loss for 2010 was used in the preparation ofthe annual report to increase the legal and statutory reserves (total increase of EUR 2.4 million). The increase in capital and high profit generated in the current year caused the equity to rise from EUR 9.2 million at the end of2009 to EUR 20.3 million as at 31 December 2010. In 2010 the expectations for the year were strongly exceeded in terms ofvolume of insurance business and, in particular, premium written. Claims paid also pushed above the expectations, while the total claims load remained below the expected amount for the previous years as well as for 2010. By the end of 2010 and at the beginning of 2011, PKZ managed to renew the majority of insurance contracts under the conditions consistent with the current economic situation, which points to the fact that PKZ has managed to build long-term partnerships with its clients. Provided the economic recovery continues, PKZ expects to maintain the moderate growth in business insured and premiums paid also in 2011. Clients are becoming increasingly aware of the importance of credit insurance, also as a result of the crisis, which confirms the expectations that high demand for insurance will continue. Nevertheless, the risks to be insured will continue to impose certain limitations on the growth of PKZ. Besides, 2011 is likely to see stronger activity from competitive insurance companies which have practically withdrawn from the markets or have at least significantly reduced their activities. PKZ expects high payments from claims insured in the previous years to continue in 2011, but the loss ratio for the currently insured transactions is likely to improve on account of an upturn in economic conditions and continued development of PKZ's risk management policy. To balance claims paid, PKZ will enhance its recovery collection activity, both internally and through cooperation with other companies ofSID Bank Group. In 2011 PKZ will continue to adapt its operations to the changed conditions. It will explore market opportunities for new and supplementary forms of credit insurance (also in combination with reinsurance schemes that started to run in 2009 and continued in 2010) which it could acquire through its parent company. PKZ will support its clients in their traditional markets and in entering emerging markets. In pursuing this aim, the insurance company will benefit from its membership in specialized credit insurance agencies as it will be able to assess risks quickly and more reliably, which constitutes an important competitive advantage in traditional and, even more so, in new markets, in particular at times of uncertainty. To cater to increased needs, PKZ will purchase business premises at another location, and this will be the company's main investment in 2011. Also, it will assume full responsibility for IT, and system, support, which had been the responsibility of SID Bank in the past and until the move, pursuant to the agreement on excluded transactions entered into by the two companies. Another investment to be undertaken by PKZ in 2011 is the implementation of IT system management. PKZ already performs and will continue to perform a part ofthe Human Resources tasks. To ensure rationalization of business operations, certain functions of PKZ will continue to be carried out by SID Bank. In terms of ownership and business performance, the operations of PKZ remain an integral part of SID Bank Group, thus ensuring synergetic effects ofthese complementary facilities. In 2011 PKZ will intensify its efforts to meet the new requirements laid down in the EU Solvency Directive II. 37 - Annual Report of SID Bank and SID Bank Group for 2009 - 6.3.2. PRO KOLEKT Group In 2010 business operations ofthe PRO KOLEKT Group were focused on active marketing ofthe Group's services and its visibility in the markets of South East Europe. In response to the needs of its clients, 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 local debt collection agencies. In 2010, 2,347 new debt collection cases in the total value of EUR 50 million were referred to the PRO KOLEKT Group. The Group resolved 874 debt collections in a total value of EUR 15.5 million. In 2010 the PRO KOLEKT Group continued to conduct marketing and preparation ofcredit rating reports, generating revenue in the amount of EUR 0.3 million. In 2010 the PRO KOLEKT Group generated EUR 2.0 million in revenues and ended the business year with a profit of EUR 23 thousand. 6.3.3. PRVI FAKTOR Group In 2010 the value ofaccounts receivable purchased by the PRVI FAKTOR Group was EUR 862 million. The 2010 figures are 5 percent higher than the value of receivable purchased in 2009 and rise 8 percent above the plan for the year 2010. Subsidiaries contributed more than 74 percent to the total turnover ofthe PRVI FAKTOR Group. The 2010 turnover target was surpassed by PRVI FAKTOR Belgrade whose share in the total volume of receivables purchased by the PRVI FAKTOR Group had risen by 4 percentage points compared to the 2009 figure, to 28 percent. PRVI FAKTOR Zagreb continues to generate the highest share in the revenue in the PRVI FAKTOR Group: it was 41 percent in 2010, down 5 percentage points from the year before. The majority of receivables financed by the PRVI FAKTOR Group arose from deliveries of goods or services among the entities within the country. In 2010, factoring of domestic receivables accounted for 91 percent of the total business volume (in 2009: 91 percent), export factoring for 4 percent and import factoring for 5 percent. Consolidated total assets stood at EUR 332.7 million as at 31 December 2010, marking a year-on-year fall of 1 percent. In terms of total assets, the largest company in the PRVI FAKTOR Group is PRVI FAKTOR, Zagreb, whose total assets amounted to EUR 158.1 million at the end of the year. Lower total assets at higher business volume indicate that there has been an increase in the efficiency ofasset management. The total assets of PRVI FAKTOR, Ljubljana stood at EUR 129.9 million at the end of the year 2010, posting a drop of 3.0 percent over the previous year. Harsh business conditions are reflected in the business result: the PRVI FAKTOR Group generated a negative result of EUR 4.7 million. The reason lies mainly in expenses from impairments and provisions, which totaled EUR 14.1 million. The objectives of PRVI FAKTOR Group for the year 2011 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 862.7 million and generate profit of EUR 2 million. 6.3.4. Centre for International Cooperation and Development In 2010 the Centre for International Cooperation and Development (hereinafter CMSR) met most of the goals set for the year. CMSR maintained and expanded its contact network of Official Development Assistance (ODA) recipient countries, in particular the sectoral ministries and municipalities, Slovenia's representatives in these countries, and with Slovenian contractors, companies as well as individual experts, who are potential providers of development assistance. Furthermore, CMSR has positioned itself as an institution that is able to invest budgetary funds by means of ODA instruments into development projects abroad, thereby securing exports transactions for Slovenian companies, which in turn generates economic growth, recruitment, and increase in budgetary income. CMSR continued its publication of the magazine Mednarodno poslovno pravo. The publication Doing Business in Slovenia, available in paper form and as an e-book, was its source ofincome from sales and advertising. - Annual Report of SID Bank and SID Bank Group for 2009 - 38 6.4. Risk Management SID Bank manages and controls risk in conformity with all risk management regulations. The principal risks faced by SID Bank are credit, currency, liquidity, interest rate, and operational risks. In assuming risks, the Bank's 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 operations 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 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 position, • Back Office and Payment Transactions: daily follow-up ofcurrency and liquidity risks 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 adequate internal capital assessment 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. On behalf and for the account of the Republic of Slovenia, SID Bank carries out credit and investment insurance. 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. To maximize the efficiency of these operations, credit and investment insurance transactions are carried out by a special department, which is separated from banking operations up to the level of the Management Board. Similar to the banking segment, the authorization 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 are used in addition to the insurance limits specified in the ZZFMGP to limit the potential amount of loss. Moreover, SID Bank addresses the issues concerning 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 Ministry of Finance and the International Trade Promotion Commission. The initial 39 - Annual Report of SID Bank and SID Bank Group for 2009 - findings revealed and the subsequent findings confirmed that even if worst-case scenarios were to materialize, the state budget would not suffer direct consequences, and any subsequent impacts would not be significant. Capital and capital adequacy Adequate amount of capital is the key element to ensuring the solvency and liquidity of the Bank and providing a basis for its uninterrupted operation, and the primary condition 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, amounted to EUR 316.0 million as at 31 December 2010, and was EUR 2.1 million higher than at the end of2009. 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 sum of 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 Savings Banks, SID Bank was not required to form capital requirements for currency risks at the end of2010. Capital adequacy, as calculated base don the Basel II requirements, stood at 13.53 percent as at 31 December 2011 (in 2009: 16.65 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 monitoring and managing the credit portfolio; by limiting credit risk concentration to a client, group of clients, sector or country; by classifying and creating impairments for expected losses; and by 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. Risk arising from a securities issuer is considered in securities investments. 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 against the Bank of Slovenia classficiation into categories A to E, SID Bank Group continued to maintain such classification3. The clients with the highest credit rating 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. SID Bank credit portfolio by credit rating category as at 31 December 2010: 3 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 for 2009 - 40 The balance of SID Bank's credit portfolio as at 31 December 2010 shows that 78.5 percent of all loans, other claims and off-balance sheet liabilities are classified in the highest credit rating class, 'A', further 18.9 percent of the portfolio falls into the 'B' credit rating class, 1.7 percent in 'C', whereas classes 'D' and 'E' together account for 0.8 percent. SID Bank credit portfolio by debtor country as at 31 December 2010: Claims and off-balance-sheet liabilities from Slovenian debtors account for the major part, 94.7 percent, of the credit portfolio, followed by exposure to the countries of South East Europe (Croatia, Bosnia and Herzegovina, Serbia), and the Netherlands. Impairments and provisions are an important element of managing the risk of loss arising from credit transactions (impairment and provision creation policy is described in more detail in item 2.2.6, Chapter II, of Notes to the Financial Statements). As at 31 December 2010, SID Bank's impairments and provisions totaled EUR 77.3 million, which was EUR 29.9 million more than as at 31 December 2009. Impairments for loans granted were EUR 74.7 million and provisions for off-balance-sheet liabilities amounted to EUR 2.6 million. 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 33.8 percent. Issuer risk arises form 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. Securities portfolio by issuer credit rating as at 31 December 2010 Detailed breakdown ofthe securities portfolio by issuer credit rating as at 31 December 2010 is available in item 2.3.4. of Notes to the Financial Statements. 41 - Annual Report of SID Bank and SID Bank Group for 2009 - 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 replace these funds with new sources upon the maturity of its existing liabilities. If circumstances so require, SID Bank follows 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 planning of 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 normally exceeded 2.0 during the year. Despite the worsening financial and economic conditions, SID Bank does not experience 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 using the Bank of Slovenia methodology, was 13.72 as at 31 December 2010. Statement of Financial Position by maturity shows liquidity risk management in connection with credit risk. The items are given in net values, which means that the value ofinvestments is reduced by impairments. Statement of financial position of SID Bank by maturity as at 31 December 2010 Assets Liabilities Gap Ratio* Maturity class in EUR million % of total assets in EUR million % oftotal assets in EUR million in % Sight 5.3 0.1 0.0 0.0 5.3 - Up to 1 month 35.8 0.9 0.6 0.0 35.1 5570 1 month to 3 months 21.2 0.5 42.3 1.1 (21.1) 145 3 months to 1 year 549.7 14.1 595.4 15.3 (45.7) 96 1 year to 5 years 1,684.4 43.2 1,382.8 35.5 301.6 114 Over 5 years 1,599.1 41.0 1,874.3 48.1 (275.2) 100 Total 3,895.5 100.0 3,895.5 100.0 0.0 The ratio is the sum of all assets items up to, and including, this maturity class and the sum of liabilities items up to, and including, this maturity class. Detailed breakdown of assets and liabilities items as at 31 December 2010 by maturity is available in item 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 2010. Statement of financial position of SID Bank by currency structure as at 31 December 2010 Assets Liabilities Gap in EUR million % of total assets in EUR million % oftotal assets in EUR million % of capital* EUR 3,880.3 99.6 3,880.4 99.6 (0.1) 0.0 USD 15.2 0.4 15.1 0.4 0.1 0.0 Other currencies - - - - - Total 3,895.5 100.0 3,895.5 100.0 0.0 0.0 * Note: Capitaltaken into accountin accordance with the Regulation ofthe Bank ofSlovenia on the Calculation ofCapitalAdequacy ofBanks and Saving Banks. 42 - Annual Report of SID Bank and SID Bank Group for 2009 - Detailed presentation ofthe Statement of Financial Position by currency structure as at 31 December 2010 is available in item 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 of assets 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). Taking advantage of more favourable conditions than applicable for variable-rate instruments, the Bank took out borrowing and acquired funds at a fixed interest rate. In 2010 it also concluded the first contracts related to IREP, which the Bank conducts on behalfand for the account of the Republic of Slovenia. To that aim and to reduce interest rate risk from these operations, SID Bank increased its use of derivative financial instruments (interest rate swaps) and implemented hedge accounting. At the end of 2010, SID Bank held ten derivative financial instruments (interest rate swaps) in a total amount of EUR 736 million. As these instruments are included in the off-balance-sheet records, the effect oftheir use is not considered in the table below. Assets and liabilities items by period remaining to interest rate repricing as at 31 December 2010 Assets Liabilities Gap Maturity class in EUR million % of total assets in EUR million % oftotal assets in EUR million Non-interest bearing 50.9 1.3 334.6 8.6 (283.7) Demand 7.6 0.2 - - 7.6 Up to 1 month 459.7 11.8 511.2 13.1 (51.5) 1 month to 3 months 688.8 17.7 217.7 5.6 471.0 3 months to 1 year 2.537.9 65.1 1.905.4 48.9 632.5 1 year to 5 years 94.8 2.4 815.1 20.9 (720.3) Over 5 years 55.9 1.5 111.4 2.9 (55.6) Total 3,895.5 100.0 3,895.5 100.0 0.0 Detailed presentation of the Statement of Financial Position by exposure to interest rate risk as at 31 December 2010 is available in item 3.3. 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 organization, business process management, functioning 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. Strengthening of the role of SID Bank as a main Slovenian development institution for financing and promotion, growth of the Bank's business volume and gradual increase in complexity of its products are the factors that contribute towards higher operational risk exposure. Notably, planned new activities will require recruitment of appropriate qualified staff and introduction of new information technologies for providing the required data and application support. SID Bank has 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 authorization 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 computerization. They were managed through additional measures such as the establishment ofa business continuity plan and other measures aimed at increasing information security. - Annual Report of SID Bank and SID Bank Group for 2009 - 43 Risk management in SID Bank Group Consolidated risk management reflects the heterogeneous nature of SID Bank Group, which consists of the parent company authorized and supervised under banking regulations; a subsidiary insurance company authorized 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 institution 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 of transactions performed could lead to a concentration of the 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 minimize 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, industry, 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 a particular risk class. Furthermore, the parent has coordinated the operations ofthe 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. Primary responsibility for the management of risks assumed by the companies of SID Bank Group lies with the management body of a particular Group member, which is obligated to pursue the business and strategic goals of SID Bank Group risk management policy. The management and the bodies of a subsidiary transfer their risk management authorizations to lower management levels. 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. The 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. The companies of SID Bank Group make regular monthly reports on their operating results, which include reports on exposure to various risk types. Reports on exposure to currency and interest rate risks are made quarterly, while reports on credit, liquidity, and operational risks are prepared monthly. The submitted reports are regularly discussed at the meetings of SID Bank's competent bodies, which review them and, when appropriate, give instructions for activities to be taken. 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 assessment, • planning internal audit procedures, • direct supervision by the Bank of Slovenia. - Annual Report of SID Bank and SID Bank Group for 2009 - 44 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 Chapter III on Disclosures made under the Decree on Disclosures of Banks and Savings Banks. 6.5. Information System In 2010 SID Bank adopted a revised information system development strategy, which provides the basis upon which numerous activities associated with IT and technological development were carried out. In the field of application software, great emphasis was placed on introducing a unified and standardized code system and implementing a new solution for business partners and other legal entities. Other achievements of 2010 include partial implementation of a new credit rating system and its ability to be used across the SID Bank Group; optimization of work processes; and an upgrade ofthe credit operations system. As regards payments, SID Bank joined the new Target2 system and implemented a data archiving system to support S.W.I.F.T. transactions. In terms of server infrastructure and virtual environment technologies SID Bank continued its activities at the central and back-up servers. As part of the package of measures designed to ensure business continuity, SID Bank regulated its documentation and several policies, and successfully tested its disaster recovery plan at the remote centre. In terms of security, several improvements and upgrades on various system segments were made. Standardization of work with outsource providers continued in 2010 as did the expansion of IT support to software change management. SID Bank continued and completed the upgrade of its mailing system and reengineered certain applications from the document information system to the transaction-based system. 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, 2010 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. One ofthe major changes undertaken in 2010 was a renewal of matrix reporting (ECB Report) for the Bank ofSlovenia. Given the role of SID Bank in the SID Bank Group, the activities arising from the Strategy were focused on coordinating the development and information systems ofall companies ofthe Group, aimed primarily at the maintenance of server, system and network infrastructure of PRO KOLEKT, Ljubljana, and PKZ, and the virtualization of server infrastructure of PKZ. 6.6. Personnel Recruitment - structure and trends Personnel recruitment in 2010 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 staff. In 2010, 10 new employees were engaged. SID Bank ended the year with 94 employees (64 women and 30 men), with the average number ofemployees in 2010 totalling 91. 45 - Annual Report of SID Bank and SID Bank Group for 2009 - Number of employees of SID Bank and the companies of SID Bank Group as at 31 December 2010 Company 2008 2009 2010 SID Bank 76 87 94 PKZ 51 52 53 PRO KOLEKT Group 19 25 24 PRVI FAKTOR Group 130 131 122 Centre for International Cooperation and Development 11 11 10 Total 287 306 303 At the end of 2010, PRO KOLEKT Group employed 24 people, seven of whom work in Ljubljana, six in Zagreb, two in Belgrade, four in Bukarest, one in Skopje, two in Sarajevo, and two for the Sofia affiliate. PRVI FAKTOR Group ended the year 2010 with a total of122 employees, 36 ofwhom work in the Ljubljana company, whereas another 43 work in Zagreb, 30 in Belgrade, and 13 in Sarajevo. Personnel structure by education level as at 31 December 2010 SID Bank SID Bank Group Level ofeducation Number % oftotal Number % oftotal Secondary or less 16 17.0 64 21.1 Higher professional education 9 9.5 38 12.5 University education 62 66.0 190 62.7 Master ofscience 6 6.4 9 3.0 Doctor ofscience 1 1.1 2 0.7 Total 94 100.0 303 100.0 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, support successful adaptation ofthe employees to the changes and challenges inside the organization and in the environment, and create a stimulating work environment that will offer sufficient professional challenges also in the future. Annual appraisal interviews and semi-annual interviews were conducted with all employees in order to determine the achievement of set goals. Annual appraisal interviews are the basis for the assessment of an individual's development potential, identification of key personnel (managers and specialists - responsible for the development of new activities) and preparation of an annual training plan, as they point to requirements for new knowledge and facilitate targeted training and education ofindividual employees and employee groups. Training As a company specializing in the provision offinancial services, also in several highly specific areas, SID Bank considers personnel its key resource, and the development of human resources a key factor in ensuring the Bank's future development and existence. Fully aware of these facts, the Bank strives to promote progress, supports systematic professional education and training ofits staffand facilitates exchange of knowledge and experience. In line with the SID Bank Action Strategy, the Bank encourages acquisition of the needed knowledge and skills and their transfer into practice. In 2010 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 attended various forms of training to acquire the needed general and specific skills related to banking and other topics. In 2010 ninety-three employees (99 percent of all employees) attended various forms of training. The figure does not include the employees who were absent from work throughout 2010 due to maternity leave. The number of hours spent on training averaged at 46 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 _46 Annual Report of SID Bank and SID Bank Group - 2010 internal SID Bank Act. Performance incentives are awarded to the employees by their superiors on a monthly basis as a variable component of pay, which can amount to a maximum of 20 percent of the salary for special achievements. The grounds for promotion at the same job position are established on the basis of an appraisal report drawn up by the superior following the conduct of annual and semi-annual interviews. Project work is assigned special value in performance assessments as it forms the basis for further development ofindividual employees and team work. In accordance with its pension scheme, SID Bank covered, also in 2010, part of the premium for the voluntary supplementary pension insurance and the premiums for the voluntary supplementary health insurance for all employees. Internal communication 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 events, meeting minutes and decisions of corporate bodies, internal rules and regulations, expert library, descriptions of work processes and procedures, proposals and ideas, and clippings), internal e-newsletter, and quarterly publications of SID Bank's newsletter Cekin. The Code of Ethics Values and Professional Standards is a formal confirmation ofthe established practice for promoting sound corporate culture and proactive and committed attitude ofemployees towards performance oftasks, both with regard to the customers and within the Bank environment. The Code places special emphasis on corporate social responsibility and maintains a responsible attitude towards the environment. At the end of 2010, SID Bank contracted an outsource firm to conduct a survey on organisational climate and employee satisfaction using the questionnaire on the Organisational Climate in Slovenian Companies (SiOK). In addition to measuring the organisational climate, the survey also facilitates comparisons with other Slovenian companies and the findings obtained in previous years. The results obtained showed that the Bank achieved its strategic goal, namely 70-percent satisfaction, and will form a sound basis for improvement for all employees, in particular executive staff. 6.7. Corporate Social Responsibility of SID Bank Mission and social benefits SID Bank has the balanced and sustainable development of Slovenia at the heart of its mission, identity and activities, and is dedicated to further this mission by complying with the principles of corporate social responsibility (CSR), which seeks to balance economic growth, social well-being, and the protection ofthe environment. In conducting its business as well as in decision-making, SID Bank is guided by the pursuit of expected social benefits arising from projects supported by the Bank. The basis for its operations is provided in the long-term development documents of the European Union and Republic of Slovenia which specify priority areas and the appropriate social consensus. More importantly, SID Bank regards all the time, assets and efforts invested to be a permanent contribution to the implementation of its vision and mission on the one hand and to the development of the knowledge society, competitive entrepreneurship, and reduction of environmental impacts on the other. All in pursuit of the ultimate goal: to preserve equal opportunities for future generations to satisfy their needs. Personal responsibility SID Bank is fully aware that corporate responsibility can only be effected through development of personal responsibility of all people in the organization. To achieve this, SID Bank fosters the advance of social awareness at all levels and the promotion of social responsibility as a life-style option for the whole organization in all its operational aspects. In 2010 SID Bank adopted the SID Bank Corporate Social Responsibility Policy, which defines CSR in the broadest sense of the term. This formally binding document stresses the role of all Bank staff in the enforcement of the policy and lays the foundations for systematic management of its contents. Another factor that fosters further development, upgrade, and monitoring of corporate social responsibility is it being a vital part of the Bank's strategic planning processes. Also, SID Bank started monitoring the examples of good practice in this field to learn from and use in the future development of its corporate social responsibility. 47 - Annual Report of SID Bank and SID Bank Group for 2009 - Bank management SID Bank has put in place contemporary corporate governance models befitting a well-organised financial institution and has committed itself to further adjust its organisational structure to good business practices. The Bank places great emphasis on comprehensive risk management and on maintaining a high level of corporate culture. Owing to rapid growth in the past years, all the employees ofthe Bank have had to contemplate future development and attempt to balance the Bank's external success with its internal growth. With these points in mind, SID Bank drew up the Strategic Plan for 2011-2014, which was adopted by the Supervisory Board of SID Bank in December 2010. In the next development period, the Bank will therefore focus on responsible growth, working to achieve business excellence. Given the contents of its business, the Bank's focus is two-fold: transparency of all services on the one hand and transparent operations and business results on the other. In pursuing this goal, SID Bank pays close consideration to the relevant guidelines and good practice cases by EU-based benchmark institutions. One of SID Bank's key strategic orientations is to keep the favourable cost effectiveness ratio at the levels achieved despite the continuous growth and expansion of the Bank's activities. Besides, SID Bank works to enhance its responsibility towards the society through proactive cost management since it is fully aware that the funds which it manages come, directly or indirectly, from taxpayers money. Under the legal requirement stipulating mandatory allocation of profit for appropriation to reserves, every euro saved increases the financial stability of the Bank, sustainability ofits operations and its financial self-sufficiency while also increasing the volume offunds which the Bank is able to allocate to the sustainable development schemes ofthe wider community. Business ethics The key objective ofSID Bank as a promotional and development bank is not to maximize the company's value but rather to provide social benefits while ensuring preservation and growth of capital. Despite this underlying business objective, the Bank is fully aware that as an institution operating a number of public authorizations it is obliged to uphold a high standard of business ethics, both formally and informally, and most importantly, by example. On the one hand, the Bank's key focus shall be compliance management and high-level information management whereas on the other, it shall promote a comprehensive, sustainable and ethical attitude to business operations carried out in the course ofthe Bank's tasks or authorizations. In support of these goals, SID Bank adopted the Code of Ethics Values and Professional Standards in 2009, which lays down detailed principles and rules to be observed by the Bank, its bodies and staffin carrying out the activities and tasks relating to clients, other banks, economic environment, and Bank's internal environment. In 2010 the Bank also adopted and put in place the Action Plan for the implementation ofthe code and implementation ofthe values set in the SID Bank Action Strategy: Special emphasis was placed on prevention of corruption which, in Slovenia as well as elsewhere in the world, threatens the rule of law and undermines the trust of people in state institutions, and on prevention of money laundering and terrorism. Appropriate measures are also taken on fighting the corruption of foreign public officials in international business transactions. SID Bank will continue to implement the principles of responsible lending, namely by assessing each transaction in terms of economic and financial viability, comprehensive risk assessment and management study, and by enforcing other advanced principles of responsible lending. Given the status of SID Bank, any attempt by the Bank to distort free competition in areas where it exists would be irresponsible. Therefore in conducting its activities, the Bank does normally not compete with other financial organizations in the market but works instead to supplement the existing market to the highest degree possible. In 2010 SID Bank refused to respond to any initiatives related to services which, according to the Bank, could be carried out by other market players. Another important topic to be addressed in the light ofthe global economic crisis is the incomes of managers, which SID Bank harmonized, fully and timely, with the Act Regulating the Incomes of Managers of Companies owned by the Republic of Slovenia and Municipalities (ZPPOGD), and did the same for the incomes of other employees. Customer relationship In conducting its range of services, SID Bank seeks to create value added, direct or indirect, for its clients. When operating indirectly, through financial intermediaries, the Bank ensures transfer of financial value onto the final beneficiaries using appropriate leverage. Normally, investments into sustainable development projects take longer to pay for themselves. The role of SID Bank is therefore much more expressed in long-term transactions, and the Bank considers this fact in shaping its offer for final beneficiaries. With a view to facilitating access of users to promotional and development services, SID Bank has put the one-stop-shop principle at the heart of its development focus, choosing to offer the products and services that will contribute to a balanced regional accessibility and allocation of funds. In 2010 the Bank undertook to reengineer its development-oriented products and schemes to improve access to SID Bank's development funds both for final beneficiaries and financial intermediaries. 48 - Annual Report of SID Bank and SID Bank Group for 2009 - In particular in the light of its public promotional operations, the Bank implements the principles of equal access and equal treatment for all bank users, which means that it provides the same services under the equal conditions to all equally eligible persons, while also paying close attention to ensuring regional distribution of development funds. SID Bank also ensures protection of the rights and benefits of its clients, fosters client confidentiality, effective information transfer and raises client awareness on relevant business policy changes, in which it is guided by the principle of reality and proportionality. SID Bank employees working towards these goals use a carefully designed mix of communication activities and channels, in particular the Bank's website, public presentations and lectures, attendance at conferences, regular education and training programmes, participation at various professional events, and sponsorship of events (e.g. Gazelles) which are related to SID Bank's business activities, as well as other events aimed at raising the awareness of the general public about development banking, a relatively new and poorly known term. In line with its internal Acts, the Bank handles customers' comments and complaints about their dealings with the Bank, within a reasonable period of time, and considers them in its operations whenever possible. Written complaints are replied to in written form. Care for employees Family, free time, and work are complementary and overlapping elements of life. In consideration of this fundamental principle, SID Bank organizes its working environment in a constructive and innovative way. Furthermore, the Bank places strong emphasis on the fundamental rights ofthe employees, their safety and health, conditions ofwork, social security, personal and professional development, social dialogue, and interpersonal relationships. With regard to care for the employees, training, remuneration and internal communications, we need to stress the following: • In view of safety and health of employees, SID Bank continued to pay for voluntary health insurance, regular medical examinations for all employees, and regular ophthalmological exams. Employees undergo regular health and safety at work training, which is obligatory for all employees and all new employees of SID Bank. The Bank paid for voluntary influenza vaccination, and a set of preventive measures was implemented at the novel flu pandemic. SID Bank implements flexitime, as it enables more flexible balance between life and work. • In recruitment, the Bank has committed itself to ensuring complete absence of discrimination, based on nationality, race, or ethnic origin, national and social origin, sex, colour of skin, health status, disability, religion or belief, age, sexual orientation, family situation, trade union membership, wealth, and any other circumstance. • In 2010 the executive management team strengthened its team spirit at a team building training. The Bank also organized the traditional SID Bank Day, which is a get-together ofthe employees ofthe entire SID Bank Group. • SID Bank has an active trade union movement (section ofthe Trade Union of Banking Slovenia) with which the management ofthe bank has led a constructive dialogue. The Union is consulted and its approval obtained for every change to internal rules and acts prior to their adoption. Environment friendly society Environment protection and energy efficiency are two of the core areas of SID Bank operation and an element of the Bank's mission. SID Bank develops schemes that are focused on achieving the sustainable objectives set for these areas, mainly those related to nature protection, waste management, use of natural resources, promotion of investment in nature protection infrastructure, renewable sources ofenergy and efficient energy use. In 2010 SID Bank supported the construction ofa photovoltaic power station in Slovenia. The Bank also pursues its corporate responsibility sustainable development objectives in the field of export credits, on the basis of a special nature protection policy. Thus, it prevents support to international business transactions with highly adverse effects on the environment. Apart from providing external support to nature protection measures, SID Bank wishes to act in a socially responsible manner also on the inside. To achieve this, the Bank is committed to strict adherence to nature protection regulations to which is adjusts its equipment and technological processes. One of the first measures to be implemented was the use of environment-friendly materials and environment-friendly waste management, focused on waste separation and recycling. SID Bank has discontinued its practice of corporate gifts for business partners and decided to allocate the funds to the preservation of biodiversity ofthe Slovenian landscape. The funds which had previously been spent on corporate gifts are now donated to Umanotera, the Slovenian foundation for sustainable development. The funds are used to plant rare native Slovenian tree species to increase the diversity offorests and fields and protect natural ecosystems and the typical Slovenian landscape (Magical Tree Crowns Project). Another argument in favour of this practice in 2010 was the declaration of the year as the International Year of Biodiversity. Furthermore, SID Bank employees took part in several campaigns which concern their way of living and have a positive impact on reducing CO2 emissions. SID Bank Team attended an eco-sports event called "Cycling in Threes." Although the weather was not ideal for cycling, SID Bank Team managed to put in 39 cycling days in a month, cycling a total of468 km. The campaign attracted 200 teams, which cycled 67,524 kilometres in 19 days, i.e. more than 100 km per participant, generating 10 tones ofCO2 less than they would had they driven to work by car. 49 - Annual Report of SID Bank and SID Bank Group for 2009 - Other areas ofactivity SID Bank also supports transactions and pursues social benefits in the areas which form the core of sustainable development of every society together with environmental issues. These areas are related to research and development, innovation, innovative entrepreneurship, education, recruitment, growth and development of SMEs, internationalization ofSlovenia's economy, provision ofeconomic and public infrastructure, housing and regional development in general. With its entire operations oriented towards sustainable development, SID Bank supported a number of projects related to these areas in 2010. Peer commitments and cooperation Since inter-bank agreements and guidelines promote good practice, rules and principles of the banking industry and sound business performance, thereby contributing to sound business results, security and liquidity in the banking sector and wider, the Bank places great emphasis on agreements with financial institutions at the national and transnational level and actively participates in the exchange ofinformation, good business practices and industry peer values. SID Bank considers particularly important the agreements made by the Bank Association of Slovenia and agreements with other Slovenian and foreign bank associations of which it is a member. SID Bank acts as a responsible member of these associations, promotes the agreed standards and addresses and works proactively to resolve the issues that may hinder or prevent implementation, never failing to be constructive and cooperative. Furthermore, SID Bank is a member ofseveral international associations offinancial institutions which operate in equal or similar areas (e.g. European Association of Public Banks (EAPB), Club of Institutions of the European Union Specializing in Long-Term Credit (ISLTC Club), Network of European Financial Institutions for SMEs (NEFI), the Berne Union). SID Bank is an active member of the Berne Union, international union of credit and investment insurers, which supports with its services over 10 percent ofthe total world trade. The Bank values the technical support provided by the Union and is committed to forward this inexhaustible source of experience, good practice and knowledge to other export credit agencies which are in their initial stages of development. To this aim, SID Bank upheld its membership in the Prague Club, a waiting room for the entry to the Berne Union, together with the Czech (EGAP) and Polish (KUKE) export-credit agencies it shared its experience with other members, responsibly fostering their development. By signing a special declaration on Berne Union Values, SID Bank, as well as 50 other members, undertook to conduct its activities in a professional and financially accountable manner which is respectful to the environment and to high ethical standards. Apart from intensive cooperation in these international organizations, SID Bank maintains and develops a close bilateral cooperation with many other, mostly foreign, financial institutions, at the national and transnational levels (e.g. German KfW). 6.8. 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 basis for planning the areas subject to Internal Audit reviews in 2010 was the SID Bank Risk Profile for 2009; risk profile analyses lay the groundwork for identifying the business activities and risk areas within certain business activities which were to be reviewed. Throughout 2010, the Internal Audit conducted 12 reviews, one of which related to the internal audit of information systems and was carried out by two certified information systems auditors. All reports on conducted reviews were discussed by the Management Board. The recommendations which the Internal Audit made after conducting the 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 monitors the implementation of recommendations made, as well as the recommendations made by the Bank of Slovenia and external auditors, and reports on the status ofthese in its quarterly reports to the Management Board. In addition, Internal Audit draws up quarterly reports of its operations and relevant findings. All the reports are discussed by the Management Board, Audit Committee, and the Supervisory Board of SID Bank. - Annual Report of SID Bank and SID Bank Group for 2009 - 50 6.9. Compliance Management In 2010 the Compliance Management continued full provision ofthe independent compliance function. The compliance function is responsible for identifying, assessing and monitoring the compliance risk to which the Bank might be exposed, which can be defined as the risk of legal or regulatory sanctions, financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with all applicable laws, regulations, codes of conduct and standards of good practice. The compliance function also covers monitoring and reporting on compliance risk, as well as advising and training related to compliance risk management. Compliance also has a supervisory function: in particular, it regularly checks the use of internal control mechanisms introduced by the Bank to ensure compliant management. 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. Compliance Management performs its supervisory function by conducting 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. Notwithstanding the enforcement and implementation of the compliance function, the Management Board retains primary responsibility for compliance risk management and for the compliance of SID Bank's business practices with the relevant regulations. By establishing the independent compliance function, the Management Board has, above all, acted with due care as stipulated by the banking regulations. Under the Bank's internal acts, however, the responsibility to ensure compliance of business practices rests with all SID Bank's employees, with regard 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 six-month period, findings on the actual 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 for 2009 - 51 7.APPENDICES 7.1. Management Bodies of SID Bank as at 31 December 2010 Supervisory Board ofSID Bank • Andreja Kert, President • Samo Hribar Milič, M.Sc., Deputy President • Aleš Berk Skok, Ph.D. • Hugo Bosio • Marko Jaklič, Ph.D. • Gregor Kastelic, M.Sc. • Peter Kraljič, Ph.D. International Trade Promotion Commission • Alfred Killer, Chairperson, Ministry ofthe Economy of RS • Janko Burgar, M.Sc., Deputy President, Ministry ofthe Economy of RS • Vladimir Gasparič, 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 for 2009 - 52 7.2. Organisation Chart of SID Bank as at 31 December 2010 - Annual Report of SID Bank and SID Bank Group for 2009 - 53 7.3. Organisation Chart of SID Bank Group as at 31 December 2010 - Annual Report of SID Bank and SID Bank Group for 2009 - 54 7.4. Statement of Corporate Governance In the business year 2010 SID Bank as a public company followed the Corporate Governance Code for Joint-Stock Companies (hereinafter the Code), which was jointly phrased and adopted in revised form by the Ljubljana Stock Exchange, Inc., Ljubljana, the Association of Supervisory Board Members of Slovenia, and the Managers' Association of Slovenia on 8 December 2009. The Code is available online at http://www.ljse.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), 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: • Points 1 and 2 (Corporate Governance Framework): Unlike other joint-stock companies, the key objective of SID 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 of profit maximization (cf. Article 9 of ZSIRB, and SID Bank Statute). Another difference lies in the fact that SID Bank's Corporate Governance Policy as a single document has not yet been drawn up and adopted and is therefore not published on the corporate website, the reason for which lies in the peculiarities of the company (single shareholder) and the specific legal organization as specified in the ZSIRB. • Points 4 and 5 (Relations with Shareholders): The recommendations are applied mutatis mutandis since the matter is regulated by the law. As it follows, the Republic of Slovenia is the single shareholder of SID Bank (cf. Article 4 of ZSIRB), and the election of members of the supervisory board is stipulated by law (Article 18 of ZSIRB). • Point 7 (Supervisory Board): The selection procedure for supervisory board members is carried out in accordance with the provisions ofZSIRB and other legal acts which regulate the appointment into supervisory bodies ofcompanies in majority ownership ofthe state. • Point 8 (Supervisory Board) and point 17.1 (Independence and Loyalty): Members of the supervisory board sign a special statement disclosing their meeting of the criteria of independence from Appendix C of the Code, but such statements are not posted on the company's website since they also contain confidential data the company requires pursuant to the banking regulations. • Point 8.4 (Supervisory Board): To distribute materials and convene meetings, the supervisory board makes use of information technology only in case of correspondence sessions, and only under exceptional circumstances for regular meetings. • Point 20.4 (Transparency of Operations): The financial calendar is not published on the company website. • Point 21.2 (Transparency of Operations): The company's website does not include the name and contact information of its Investment Relations officer. However, it includes the contact details of heads of organisational units, including Head ofTreasury. • Point 21.2 (Transparency of Operations): The company does not disclose information on the shares of voting rights in the companies which it acquires in the process of managing poor investments for resale, which are not of material consequence. 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 ofthe internal control system within the organization, SID Bank has also established a compliance function, performed by a separate organisational unit. 55 - Annual Report of SID Bank and SID Bank Group for 2009 - 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 endeavor to act by mutual agreement and shall not issue or purchase the Bank's shares within the scope oftheir authorization. In 2010 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 2010 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. • Hugo Bosio (appointed on 1 October 2010;up to 1 August 2010, the positon was held by Viljem Pšeničny). The members ofthe Audit Committee as at 31 December 2010 were: • Gregor Kastelic, M.Sc., President, • Aleš Berk Skok, Ph.D. • Blanka Vezjak, M.Sc. Members ofthe Recruitment Committee as ta 31 December 2010 were: • Andreja Kert, President • Samo Hribar Milič, M.Sc., • Alenka Stanič, M.Sc. - Annual Report of SID Bank and SID Bank Group for 2009 - 56 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 59 Statement ofthe independent auditor on the financial statements ofSID Bank and SID Bank Group 60 1. Financial statements ofSID Bank and SID Bank Group 61 2. Notes to the financial statements 69 3. Risk management and other disclosures 111 4. Segmented reporting 125 5. Appendices 130 - Annual Report of SID Bank and SID Bank Group for 2009 - 57 Statement of the Management Board on the financial statements of SID Bank and SID Bank Group On 31 January 2011 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 2010. 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 bankard.d.H Ljubljana Jožef Bradesko Member of Managemenî Board President of Management Board - Annual Report of SID Bank and SID Bank Group for 2009 - 58 Deloitte DELOITTE REVIZIJA D.O.O. Davčna ulica 1 1000 Ljubljana Slovenija Tel: + 386 (0)1 3072 800 Faks: + 386 (0)1 3072 900 www.deloitte.si 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, 2010, 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. 59 - Annual Report of SID Bank and SID Bank Group for 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, 2010, 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. DELOITTE REVIZIJA d.o.o. Andrcja Bajuk Music Certified auditor Yuri Sidorovich Ljubljana, 12 April 2011 De VW 6 DELOITTE REVIZIJA D.O.O. Ljubljana, Sloventja 1 FOR TRANSLA TION PURPOSES ONLY- ORIGINAL PREVAILS 60 - Annual Report of SID Bank and SID Bank Group for 2009 - 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 2010 SID Bank_SID Bank Group In EUR thousand Notes 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Cash and balances with the central bank 2.3.1. 12 1,004 13 1,004 Financial assets held for trading 2.3.2. 0 248 0 248 Financial assets held for hedging 2.3.3. 14,563 2,101 14,563 2,101 Available-for-sale financial assets 2.3.4. 110,956 50,051 132,638 72,390 Loans 2.3.5. 3,752,874 2,955,021 3,889,529 3,094,132 - Loans to banks 2,955,894 2,292,737 2,976,328 2,309,516 - Loans to clients other than banks 796,980 662,284 913,201 784,616 Property, plant and equipment 2.3.6. 4,135 4,441 4,435 4,845 Investment property 0 0 157 80 Intangible assets 2.3.7. 252 395 882 1,078 Long-term investments in equity of subsidiaries, associates and joint ventures 2.3.8. 8,831 7,712 419 419 Corporate income tax assets 2.3.9. 426 1,019 2,230 2,155 - Assets for corporate income tax 0 656 416 1,180 - Assets for deferred taxes 426 363 1,814 975 Other assets 2.3.10. 404 2,902 41,213 37,182 - Assets from insurance operations 0 0 38,313 32,228 - Other assets 404 2,902 2,900 4,954 Non-current assets held for sale 3,088 0 1 0 TOTAL ASSETS 3,895,541 3,024,894 4,086,080 3,215,633 Financial liabilities with the central bank 2.3.11. 1,001 0 1,001 0 Financial liabilities held for trading 2.3.12. 29 271 29 271 Derivative financial instruments held for hedging 2.3.13. 0 1,202 0 1,202 Financial liabilities measured at amortized cost 2.3.14. 3,559,862 2,693,134 3,679,742 2,814,538 - Bank deposits 0 155,066 0 155,066 - Deposits ofclients other than banks 5 91,870 5 91,870 - Loans ofbanks 2,023,693 1,799,948 2,143,572 1,921,338 - Loans ofclients other than banks 99,998 99,108 99,999 99,122 - Debtsecurities 1,436,166 547,142 1,436,166 547,142 Provision 2.3.15. 2,761 4,382 48,426 56,695 - Bank provision 2,577 4,250 2,577 4,250 - Liabilities from insurance contracts 0 0 43,933 50,294 - Other provision 184 132 1,916 2,151 Corporate income tax liabilities 2.3.9. 1,472 138 3,524 138 - Tax liabilities 1,349 0 3,401 0 - Non-currentdeferred tax liabilities 123 138 123 138 Other liabilities 2.3.16. 2,600 3,785 8,503 9,063 TOTAL LIABILITIES 3,567,725 2,702,912 3,741,225 2,881,907 Share capital 2.3.17. 300,000 300,000 300,000 300,000 Capital reserves 2.3.18. 1,139 1,139 1,139 1,139 Revaluation surplus 2.3.19. 90 (18) 273 126 Reserves from profit (including retained profit) 2.3.20. 25,191 21,735 39,023 39,667 Treasury shares 2.3.21. (1,324) (1,324) (1,324) (1,324) Net profits/losses for the year 2,720 450 5,744 (5,882) EQUITY 327,816 321,982 344,855 333,726 TOTAL LIABILITIES AND EQUITY 3,895,541 3,024,894 4,086,080 3,215,633 CONTINGENCY RESERVES 2.3.23. 129,400 125,428 129,400 125,428 INTEREST RATE EQUALIZATION PROGRAMME 2.3.23. 7,830 7,627 7,830 7,627 - Annual Report of SID Bank and SID Bank Group for 2009 - 61 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 2.3.24. - Annual Report of SID Bank and SID Bank Group for 2009 - 62 1.2. Statement of comprehensive income for the year 2010 SID Bank SID Bank Group In EUR thousand Notes 2010 2009 2010 2009 Interest income and similar income 106,283 82,256 117,436 95,779 Interest expense and similar expense (66,134) (60,754) (72,561) (67,308) Net interest 2.4.1. 40,149 21,502 44,875 28,471 Dividend income 2.4.2. 0 2,474 0 0 Fees and commissions received 2,256 2,006 6,314 6,456 Fees and commissions paid (796) (437) (1,686) (1,233) Net fees and commissions 2.4.3. 1,460 1,569 4,628 5,223 Realized profits/losses from financial assets and liabilities not measured at fair value through profit or loss Net profits/losses from financial assets and liabilities held for trading 2.4.4. 2.4.5. 439 (47) 330 24 444 (47) 605 24 Changes in fair value when calculating risk insurance 2.4.6. (449) (40) (449) (40) Net foreign exchange gains/losses 2.4.7. 6 44 958 1,073 Net profits/losses from derecognition of assets, excluding non-current assets held for sale (6) (4) 8 (2) Other net operating profits/losses 2.4.8. 2,919 2,542 6,083 4,129 - Net income from non-banking services 2,919 2,542 2,529 2,051 -Net revenues from insurance operations 0 0 11,962 7,876 - Net expenses for insurance operations 0 0 (8,408) (5,798) Administrative costs 2.4.9. (6,101) (5,729) (11,582) (10,971) Depreciation, amortization 2.4.10. (616) (643) (848) (881) Provision 2.4.11. 1,616 (1,985) 9,339 (10,556) - Bank provision 1,667 (2,085) 1,667 (2,085) - Liabilities from insurance contracts 0 0 7,465 (8,618) - Other provision (51) 100 207 147 Impairments 2.4.12. (32,192) (18,906) (38,988) (23,596) Profits/losses on ordinary activities 7,178 1,178 14,421 (6,521) Corporate income tax on ordinary activities 2.4.13. (1,557) (231) (4,163) (755) Deferred taxes 105 1 891 1,892 Net profits/losses for the year 5,726 948 11,149 (5,384) Net profits/losses for the year 5,726 948 11,149 (5,384) Net profits/losses derecognized from revaluation surplus from available-for-sale financial assets 135 347 183 1,206 Corporate income tax on other comprehensive income (27) (70) (202) (287) Post-tax comprehensive income for the year 5,834 1,225 11,130 (4,465) Of owners of the parent company 11,130 (4,465) - Annual Report of SID Bank and SID Bank Group for 2009 - 63 1.3. Cash flow statement for the financial year 2010 SID Bank_SID Bank Group In EUR thousand 2010 2009 2010 2009 A. CASH FLOWS FROM OPERATING ACTIVITIES a) Net profit or loss before tax 7,178 1,178 14,421 (6,521) Depreciation, amortization 616 643 848 881 Impairments oftangible fixed assets, investment property, intangible long-term assets and other assets 32,171 18,905 38,988 23,596 Net foreign exchange (gains)/losses (6) (44) (958) (1,073) Net (profits)-losses due to sales oftangible fixed assets and investment real estate 6 4 (8) 4 Other (profits)/losses from investment activities 0 (2,474) 0 0 Other net profit and loss adjustments before tax 4,108 3,735 5,724 10,572 Cash flows from operating activities before changes in operating assets and liabilities 44,073 21,947 59,015 27,459 b) (Increase)/decrease in operating assets (879,719) (973,655) (883,832) (959,791) Net (increase)/decrease in financial assets recognized at fair value through profit and loss 2,349 (2,101) 2,349 (2,101) Net increase/(reduction) in available-for-sale financial assets (61,176) 11,628 (60,609) 8,304 Net (increase)/reduction in assets held for hedging (8,823) 0 (8,823) 0 Net (increase)/reduction in loans (811,479) (980,531) (812,718) (951,924) Net (increase)/reduction in deferred costs 134 (383) 120 (427) Net (increase)/reduction in other assets 2,364 (2,268) (4,150) (13,643) Net (increase)/reduction in assets held for sale and discontinued operations (3,088) 0 (1) 0 c) Increase/(decrease) in operating liabilities 852,521 774,137 843,670 752,370 Net increase/reduction in assets with the central bank 1,001 0 1,001 0 Net increase/(reduction) in financial liabilities held for trading (489) 295 (490) 295 Net increase/(decrease) in deposits and loans measured at amortized cost 860,291 770,838 859,076 736,199 Net increase/reduction in derivative financial liabilities held for hedging (7,096) 0 (7,096) 0 Net increase/(reduction) in deferred income (2,002) 1,801 1,443 1,300 Net increase/(reduction) in other liabilities 816 1,203 (10,264) 14,576 d) Cash flows from operating activities (a+b+c) 16,875 (177,571) 18,853 (179,962) e) (Paid)/refunded corporate income tax 348 (2,793) 39 (3,967) f) Net cash flows from operating activities (d+e) 17,223 (180,364) 18,892 (183,929) B. CASH FLOWS FROM INVESTING ACTIVITIES a) Inflows from investing activities 52 2,476 66 2 Proceeds from the sale of property, plant and equipment and investment property 52 2 66 2 Proceeds from the sale of intangible long-term assets 0 0 0 0 Other inflows from investment activities 0 2,474 0 0 b) Outflows from investing activities (1,344) (168) (377) (354) (Outflows for the acquisition of tangible fixed assets and investment property) (194) (157) (316) (317) (Outflows for the acquisition of intangible long-term assets) (31) (11) (61) (37) Outflows for the acquisition of equity investments in subsidiaries, associates and joint ventures (1,119) 0 0 0 c) Net cash flows from investing activities (a-b) (1,292) 2,308 (311) (352) C. CASH FLOWS FROM FINANCING ACTIVITIES a) Inflows from financing activities 0 160,000 0 160,000 Inflows from the issue of shares and other capital instruments 0 160,000 0 160,000 b) Net cash flows from financing activities (a) 0 160,000 0 160,000 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) 15,931 (18,056) 18,581 (24,281) F. Cash and cash equivalents at the beginning ofthe period 22,075 40,129 34,105 58,384 G. Cash and cash equivalents at the end of period (D+E+F)* 38,008 22,075 52,688 34,105 * The item includes cash in hand, cash on settlement accounts with Bank of Slovenia, cash on business account and bank deposits up to 90 days. Annual Report of SID Bank and SID Bank Group - 2010 64 1.3.1. Cash equivalents SID Bank SID Bank Group In EUR thousand 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Cash in hand and balances on settlement account with the central bank 12 0 13 0 Cash in business accounts 52 69 2,355 2,632 Bank deposits, ofwhich: 37,944 22,006 50,320 31,473 - Gorenjska banka d.d. 9,992 0 11,626 0 - Banka Koper d.d. 8,282 0 8,282 0 - Banka Celje d.d. 7,075 0 10,039 0 - Unicredit banka Slovenija d.d. 3,987 12,821 3,987 12,820 - Sparkasse d.d. 0 6,855 602 6,855 - Adria Bank A.G. 1,999 2,000 1,999 2,000 - Probanka d.d. 1,998 0 3,663 0 - Factorbanka d.d. 1,279 330 3,288 2,242 - NLB d.d. 1,813 0 4,168 2,484 - Abanka d.d. 989 0 1,493 0 - Banka Volksbank d.d. 530 0 530 0 - Probanka d.d. 0 0 0 1,881 - NLB LHB banka a.d. Beograd 0 0 368 1,161 - Gorenjska banka d.d. 0 0 0 2,030 - NLB Tuzlanska banka d.d. 0 0 275 0 Total 38,008 22,075 52,688 34,105 - Annual Report of SID Bank and SID Bank Group for 2009 - 65 1.4. Statement of changes in equity 1.4.1. SID Bank For the 2010 financial year In EUR thousand Share capital Capital reserves Revaluation surplus Reserves from profit Retained earnings (including net profit offin. year) Treasury shares Equity OPENING BALANCE FOR THE PERIOD (1 January 2010) 300,000 1,139 (18) 21,735 450 (1,324) 321,982 Post-tax comprehensive income for the year 0 0 108 0 5,726 0 5,834 Allocation of net profit to profit reserves in accordance with a decision of the Supervisory Board and the General Meeting ofShareholders 0 0 0 450 (450) 0 0 Allocation of net profit to statutory reserves 0 0 0 286 (286) 0 0 Allocation of net profit to reserves under articles of association 0 0 0 2,720 (2,720) 0 0 CLOSING BALANCE FOR THE PERIOD (31 December 2010) 300,000 1,139 90 25,191 2,720 (1,324) 327,816 DISTRIBUTABLE PROFIT FOR THE FINANCIAL YEAR_2,720 For the 2009 financial year In EUR thousand Share capital Capital reserves Revaluation surplus Reserves from profit Retained earnings (including net profit offin. year) Treasury 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 the Supervisory Board and the 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 - Annual Report of SID Bank and SID Bank Group for 2009 - 66 1.4.2. SID Bank Group For the 2010 financial year_ Retained earnings (including net profit Share Capital Revaluation Reserves of fin. Treasury In EUR thousand_capital_reserves_surplusl from profit_year)_shares_Equity OPENING BALANCE FOR THE PERIOD (1 January 2010) 300,000 1,139 126 36,739 (2,954) (1,324) 333,726 Post-tax comprehensive income for the year 0 0 (19) 0 11,149 0 11 ,130 Allocation of net profit to profit reserves in accordance with a decision of the Supervisory Board and the General Meeting ofShareholders 0 0 0 (2,955) 2,955 0 0 Allocation of net profit to statutory reserves 0 0 0 582 (582) 0 0 Allocation of net profit to reserves under articles of association 0 0 0 4,823 (4,823) 0 0 Currency changes in the consolidation 0 0 166 (166) (1) 0 (1) CLOSING BALANCE FOR THE PERIOD (31 December 2010) 300,000 1,139 273 39,023 5,744 (1,324) 344,855 For the 2009 financial year Retained earnings (including net profit Capital Revaluation Reserves offin. Treasury In EUR thousand Share 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 the Supervisory Board and the 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. - Annual Report of SID Bank and SID Bank Group for 2009 - 67 Distributable profit In EUR thousand_2010_2009 Net profit for the year 5,726 948 Portion of net profit allocated to statutory reserves (286) (47) Portion of net profit allocated to reserves under articles of association (2,720) (451) Distributable profit_2,720_450 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 5,726 thousand from net profit totalling EUR 286 thousand pursuant to the 3rd and 4th paragraph ofArticle 64 or 2. item ofthe 1st paragraph ofArticle 230 ofthe Companies Act (ZGD-1). In accordance with the 4th item ofthe 1st paragraph ofArticle 230 ofthe Companies Act (ZGD-1), the Management Board formed reserves under articles ofassociation in the amount of 50 percent or EUR 2,720 thousand. As at 31 December 2010, distributable profit amounted to EUR 2,720 thousand, including the unused profit for the year 2010. In accordance with paragraph 3 ofthe Article 4 ofSlovene Export and Development Bank Act (ZSIRB) and Article 28 ofthe Articles of Association, Management Board and Supervisory Board propose that the General Meeting of SID Bank allocates the distributable profit for 2010 in the total amount of EUR 2,720 thousand to other profit reserves. - Annual Report of SID Bank and SID Bank Group for 2009 - 68 2. Notes to the financial statements Items 1.1. to 1.4. of this report present the statement of financial position as at 31 December 2010, the statement of comprehensive income for the year 2010, the cash flow statement for the year 2010 and the statement of changes in equity for the year 2010 of SID Bank (separate statements) and SID Bank Group (consolidated statements). Statements also include comparable data as at 31 December 2009 or for the 2009 financial year. All the amounts in the financial statements and their notes are expressed in thousands of EUR, unless otherwise indicated. Assets and liabilities, denominated in foreign currencies, are translated into EUR at the mean exchange rate of the European Central Bank as at the date of the statement offinancial position. Revenues and expenses, denominated in foreign currencies, are translated into EUR at the mean exchange rate of the 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). - Companies guarantee scheme pursuant to the Republic of Slovenia Guarantee Scheme Act, - Guarantee scheme for individuals pursuant to the Act on the Guarantee Scheme for Individuals of the Republic ofSlovenia and - Guarantee scheme for financing investments of enterprises pursuant to the Act on Guarantees of the Republic ofSlovenia for financing investments ofenterprises Notes on operations due to realization ofguarantee schemes are presented in the business report, in Items 6.2.7. to 6.2.9. - Annual Report of SID Bank and SID Bank Group for 2009 - 69 In view of the above, the financial statements ofSID 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 2010, SID Bank had 94 employees (as at 31 December 2009 there were 87). SID Bank is a large company pursuant to Article 55 ofThe Companies Act (ZGD-1). 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 percent ownership share, • PRO KOLEKT, družba za izterjavo, d.o.o. , Ljubljana, registered at Josipine Turnograjske 6, 1000 Ljubljana, Slovenia (hereinafter: PRO KOLEKT Ljubljana or PK Ljubljana) in which SID Bank holds a 100 percent 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 or PK Zagreb), ■ PRO KOLEKT d.o.o. Skopje, registered at Bulevar Goce Delčev 11, 91000 Skopje, Macedonia (hereinafter: PRO KOLEKT Skopje or PK 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 or PK 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 or PK Bucharest), ■ PRO KOLEKT SOFIA EOOD, Sofia, registered at 65, Shipchenski prohod Blvd.,1574 Sofia, Bulgaria (hereinafter: PRO KOLEKT Sofia or PK Sofia), ■ PRO KOLEKT d.o.o., Sarajevo, registered at Ulica Hamdije Čemerlica 2, 71000 Sarajevo, Bosnia and Herzegovina (hereinafter: PRO KOLEKT Sarajevo or PK Sarajevo). Joint ventures: • PRVI FAKTOR, faktoring družba, d.o.o., Ljubljana, Slovenija, registered at Slovenska cesta 17, 1000 Ljubljana, Slovenia (hereinafter: PRVI FAKTOR Ljubljana or PF Ljubljana), in which SID Bank holds a 50 percent ownership share and which has four affiliated companies: ■ PRVI FAKTOR, faktoring društvo, d.o.o., Zagreb, registered at Hektoroviceva 2/V, 10000 Zagreb, Croatia hereinafter: PRVI FAKTOR Zagreb or PF Zagreb), ■ PRVI FAKTOR - faktoring d.o.o., Beograd, registered at Bulevar Mihajla Pupina 165/v, 11070 New Belgrade, Serbia (hereinafter: PRVI FAKTOR Belgrade or PF Belgrade), ■ PPRVI FAKTOR d.o.o., finansijski inžinjering, d.o.o., Sarajevo, registered at Džemala Bijedica bb, 71000 Sarajevo, Bosnia and Herzegovina (hereinafter: PRVI FAKTOR Sarajevo or PF Sarajevo), ■ PRVI FAKTOR d.o.o. Skopje, registered at Mito Hasivasilev-Jasmin 20, 91000 Skopje, Macedonia (hereinafter: PRVI FAKTOR Skopje or PF Skopje). Basic data on companies in SID Bank Group as at 31 December 2010 In EUR thousand Ownership share of SID Bank (in percent) Voting rights (in percent) Nominal value of investment Capital Assets Liabilities Sales revenues * Net profit/loss No. of employees SID Bank 327,816 3,895,541 3,567,725 108,539 5,726 94 SID-PKZ 100 100 8,413 20,256 72,551 52,295 12,624 6,844 53 PK Ljubljana 100 100 419 268 496 228 675 79 7 PK Zagreb 100 100 24 58 3,660 3,602 431 1 6 PK Skopje 80 80 8 8 13 5 29 3 1 PK Belgrade 100 100 25 7 41 34 96 1 2 PK Bucharest 51.02 51.02 20 110 153 43 283 38 4 PK Sofia 62.5 62.5 26 80 93 13 101 24 2 PK Sarajevo 100 100 36 (22) 51 73 52 (42) 2 70 Annual Report of SID Bank and SID Bank Group - 2010 PF Ljubljana 50 50 3,087 3,246 129,918 126,672 3,462 (3,924) 36 PF Zagreb 50 50 2,651 5,710 158,050 152,340 5,224 1,364 43 PF Belgrade 50 50 1,250 2,069 95,478 93,409 4,893 3 30 PF Sarajevo 50 50 225 (963) 12,929 13,892 827 (1,508) 13 PF Skopje 50 50 5 5 5 0 0 0 0 Basic data on companies in SID Bank Group as at 31 December 2010 In EUR thousand Ownership share of SID Bank (in percent) Voting rights (in percent) Nominal value of investment Capital Assets Liabilities Sales revenues * Net profit/loss No. of employees SID Bank 321,982 3,024,894 2,702,912 84,262 948 87 SID-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 * Revenues ofSID 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 2010 Ownership Voting Nominal Capital Assets Liabilities Sales Net No. of share of rights (in value of revenues profit/loss employees SID Bank percent) invest- In EUR (in ment thousand percent) CICD 0 29 0 97 2,934 2,837 459 3 11 Basic data on other companies in SID Bank Group as at 31 December 2009 Ownership Voting Nominal Capital Assets Liabilities Sales Net No. of share of rights (in value of revenues profit/loss employees SID Bank percent) invest- In EUR (in ment thousand percent) CICD_0_29_0_97_2,861_2,764_371_0_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 percent stake, - Annual Report of SID Bank and SID Bank Group for 2009 - 71 • By the proportional consolidation method the PRVI FAKTOR Group. SID Bank holds a 50 percent 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 percent. There is no minority stake. 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 ofall companies of the PRO KOLEKT Group account for less than 1 percent 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 percent 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 they are not included in the consolidation. The CIDC institute and companies of PRO KOLEKT GROUP are excluded from consolidation also in accordance with provisions of the Decree on Supervision of Banks and Savings Banks on Consolidated Basis. SID Bank has a majority stake (100 percent) 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 ofSID Bank (separate statements), ofSID 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 and - Consistent constancy. 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. Estimations were used for classification offinancial assets. - Annual Report of SID Bank and SID Bank Group for 2009 - 72 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 of SID 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 in hand, statutory deposits with central bank, balances on settlement account with the central bank, cash in bank accounts at banks and cash in transit. Cash assets are disclosed separately for the local and foreign currencies. Cash in hand, settlement account with the central bank and mandatory reserve are a constituent part of the item Cash and balances with the central bank. 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, as well as available-for-sale securities. 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 and liabilities held for trading are measured at fair value through the statement of comprehensive income. This item comprises derivative financial instruments, for which hedging against risk is not applied. This group also comprises equities and debt securities, which the bank earmarked for active trading and makes use of short-term fluctuations in the price. 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 and interest swaps, used primarily for hedging against currency 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 offinancial position. As a rule, the fair value is determined on the basis of published market prices. In the case when market prices offinancial instruments are not published, the fair value is calculated based on discounted cash flows prepared by the bank for the evaluation of each financial instrument. When using the mentioned model, data from active market on the statement offinancial position date are used. Apart from derivative financial instruments the bank has no equities or debt securities, for active trading. In the statement offinancial position, fair values are denominated in assets in the case of positive valuation or in liabilities in the case of negative valuation. 2.2.3. Derivative financial instruments held for hedging This item comprises those derivative financial instruments, which fulfil all the criteria for the application of accounting treatment of hedging against risk. The term hedge accounting is understood as bookkeeping of the hedging relationship of the hedging instrument (in most cases derivative financial instrument) and the hedged item (an asset, a liability, a group of assets or a group of liabilities with similar risk characteristics) with the aim of mutual neutralization of the effects of measurement of both instruments in the statement of comprehensive income, which would not be recognized simultaneously in the profit or loss in the opposite case (IAS 39.85). The hedging relationship has to be formally denoted and appropriately documented. When the bank introduced hedging against risk, it compiled a formal document which describes the relation between the hedged item and the hedging instrument, the purpose of risk management, methodology of valuation and the hedging strategy. Estimation of effectiveness of the hedging instruments, 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 of 80 to 125 percent. 73 - Annual Report of SID Bank and SID Bank Group for 2009 - SID Bank actively manages interest rate risk with the concluded hedging operations. 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 aim of possession for an indefinite period, since they are purchased with the aim of balancing the current liquidity. Securities are initially recognized at fair value, which usually equals the purchase price. Purchases and sales of the mentioned assets are recognized on the date of transaction (trade 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 (accrued). The usual dates of purchase/sale of securities are set at T + 3 days for foreign securities and T + 2 days for treasury bills. Domestic securities are usually settled on the date of the contract on the purchase/sale of securities. In all securities, interest is paid until the day the contractual amount is settled. The amortized 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 revaluation surplus from available-for-sale financial assets and in deferred taxes. 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. It is assumed that objective evidence of impairment occurs when the fair value falls by more than 40 percent below the original cost or when fair value is lower than the purchase value for more than 9 months. In case the criteria ofimpairment assessment are not fulfilled, but enough information reporting conclusive and objective proof of impairment of equities and debt instruments exist according to the opinion of the Credit Committee, an impairment according to individual assessment ofindividual financial assets is implemented. 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. 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 from principal and interest of debt instruments are recognized in the statement of comprehensive income, while exchange rate differences arising from evaluation (the effect ofchange ofthe market price in foreign currency) to fair value are recognized in the revaluation surplus. 74 - Annual Report of SID Bank and SID Bank Group for 2009 - 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, bank deposits and factoring receivables. They are initially measured at fair value plus the cost ofapproval. Loans and deposits are recognized when cash is transferred to the client. In the statement offinancial position 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. In this item, financial assets include loans to banks, loans to clients other than banks, banks deposits and factoring receivables. 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 proofofeventual impairment ofloans, guarantees and factoring receivables. Assets are impaired when events occur, which affect the decrease ofestimated future cash flows, and if the decrease can be reliably estimated. Objective proofs ofthe impairment offinancial assets are: important information concerning the financial difficulties of the principal, breach of contract, i.e. a breach or violation in paying interest and principal, the likelihood of bankruptcy or financial reorganization of the principal, adverse economic conditions in the local environment. 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. 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. 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. 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. Total exposures which are not individually impaired are classified into groups on the basis ofthe type offinancial asset and the debtor's credit rating. 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. - Annual Report of SID Bank and SID Bank Group for 2009 - 75 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 loss is the difference between the carrying amount ofthe 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. The amount ofadjustment or impairment is assessed on the basis individual assessment ofindividual debtor. Restructured loans Loans, which for the purposes of assessing impairment losses are individually assessed and for which due to deterioration of the debtor's solvency, the terms of payment were renegotiated, are no longer considered as overdue receivables, but are treated as new loans and are impaired in accordance withthe Regulations on the assessment of credit risk losses. 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 ofthe asset. 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. 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: Buildings Computer equipment Passenger cars Other equipment Furniture Small tools SID Bank Group in percent Up to 5.0 Up to 50.0 12.5-20.0 Up to 25.0 11.0-25.0 25.0-100.0 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-off, at the end of each financial year, it is assessed whether there are any signs ofimpairment ofan 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. 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. If the useful life is definite, the asset is amortized at amortization rate which is 20 to 25 percent for software and 12 to 20 percent for other property rights. Depreciation is calculated individually on a straight-line basis. - Annual Report of SID Bank and SID Bank Group for 2009 - 76 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 ofeach financial year, it is assessed whether there are any signs ofimpairment ofan 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 of a subsidiary or an associated company is disclosed at purchase value in the statement of financial position ofthe parent company. 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 percent and 50 percent of the voting rights. SID Bank holds a 50 percent stake in the parent company of the PRVI FAKTOR Group; therefore PRVI FAKTOR Group is consolidated proportionally. Please consult chapter 2.2.11. 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. It is assumed that objective proof of impairment occurs when the amount of of total equity of the subsidiary falls for more than 40 percent below the purchase value of the investment, or when the fair value of the subsidiary calculated on the basis of discounted cash flows is less than the purchase value of the investment. The planned financial statements for the next five year period are the input data for the calculation. Dividends received are disclosed among the income from dividends in the separate statement of comprehensive 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. 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 77 - Annual Report of SID Bank and SID Bank Group for 2009 - into account credit rating, monitoring of financial 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 percent. In revenues, the lowest commission from the sliding scale (24.5 percent) 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 percent, in the case of other insolvency procedures specific written information is material. If there is no such information, the estimate of the realizable value may not exceed 5 percent. In rehabilitation procedures also the information is material; if there is none, the estimate of the realizable value may not exceed 20 percent. 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 percent. 2.2.11. Non-current assets held for sale Non-current assets held for sale are those, whose book value will be settled primarily by sale and not by further use. This condition is fulfilled only when the sale is very likely to happen and the asset is available for immediate sale in its present condition. Non-current asset is reallocated into the mentioned group when a written intention of the owner to sell the assets exists and the timeline of the progress of sales is attached. The sale has to be realized in one year from the reallocation ofthe asset. Non-current assets held for sale are carried at book value before allocation or at fair value decreased by the costs of sale; whichever is lower. Effects of sale in the statement of comprehensive income are presented in the net gains/losses on non-current assets held for sale and related liabilities. 2.2.12. Financial liabilities This item includes liabilities to central bank and financial liabilities measured at amortized cost. Financial liabilities measured at amortised cost are liabilities for deposits and loans from banks and clients other than banks, as well as debts for the issued debt securities. Financial liabilities measured at amortized cost are recognized in the amount of the cash received, decreased by the direct transaction costs. 78 - Annual Report of SID Bank and SID Bank Group for 2009 - After the initial recognition, the financial liabilities are measured by amortized cost; the difference between the initially recognized amount and the amount at maturity is recognized in the comprehensive income statement using the effective interest rate method. 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. Derecognition is made when the liability is discharged, cancelled or expired. The difference between the carrying amount ofthe financial liability and the paid compensation is recognized in the statement ofcomprehensive income. 2.2.13. 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. ofthe financial section ofthe annual 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 ofthe 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 of whether the insurance event has already been reported, including all the costs borne on the basis of these 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. 79 - Annual Report of SID Bank and SID Bank Group for 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 percent, reinsurers pay temporary commission at the rate of 33 percent, 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. 2.2.14. 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. 2.2.15. 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 80 - Annual Report of SID Bank and SID Bank Group for 2009 - 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 major losses arising from the operations or extraordinary business events. Other profit reserves are intended for the strengthening of 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, equalization provisions are created in the amount of 75 percent of the former, but may not exceed 12 percent ofthe written net premium for the year. 2.2.16. 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. The consolidated financial statements also disclose 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. 2.2.17. 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. 2.2.18. 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 statement of comprehensive income, the income and expenses arising from granted and received loans and other interest are recognized in the relevant period using the effective 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. 2.2.19. Fees and commissions received and paid Revenues from fees and commissions comprise commissions from granted loans and guarantees. The recognition method is presented in Item 2.2.5. Expenses for fees and commissions mainly comprise commissions for raised loans. Expenses for fees and commissions are also evenly distributed over the loan repayment period. - Annual Report of SID Bank and SID Bank Group for 2009 - 81 2.2.20. Other net operating profits/losses Other net operating profits/losses in the statement of comprehensive income 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. 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. 2.2.21.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, related to valuation ofavailable-for-sale financial instruments at fair value, is 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/losses from exchange rate differences. 2.2.23. Significant amounts Significant items in the separate statement of financial position are those which exceed 1 percent of the total assets of the separate statement offinancial position on the balance sheet date, i.e. EUR 38,955 thousand as at 31 December 2010. Significant items in the separate statement of comprehensive income are those, which exceed 0.5 percent of the total 82 - Annual Report of SID Bank and SID Bank Group for 2009 - assets of the separate balance sheet on the balancing date, i.e. EUR 19,478 thousand in the separate statement of comprehensiveincomefor 2010. Significant items in the consolidated statement offinancial position are those which exceed 1 percent of the total assets of the consolidated statement of financial position on the balance sheet date, i.e. EUR 40,861 thousand as at 31 December 2010. Significant items in the consolidated statement of comprehensive income are those, which exceed 0.5 percent of the total assets of the separate balance sheet on the balancing date, i.e. EUR 20,430 thousand in the consolidated statement of comprehensive income for 2010. 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. Treasury 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 1 First time Adoption of International Financial Reporting Standards; IFRS 3 Business Combinations; IFRS 2 Share-based Payment. Cash-settled Share-based Payment Transactions; IAS 39 Financial Instruments: Recognition and Measurement (items that qualify for 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 of Assets from Customers. The adoption of these interpretations did not result in a change of accounting policies applied by the bank. 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: IAS 24 Related 83 - Annual Report of SID Bank and SID Bank Group for 2009 - Party Disclosures (simplification ofdisclosure requirements for stake related companies and explanation ofthe definition of related party); IAS 32 Financial Instruments: Presentation; IFRS 1 First time Adoption of International Financial Reporting Standards (limited exemption from comparative IFRS 7 disclosures for first-time adopters of IFRS); IFRIC 14 IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction; 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 of the requirements concerning minimal financing); IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments. Standards and interpretations issued by the International Accounting Standards Board, which are not yet adopted in the EU, are the following: IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1.1.2013), IFRS 7 Financial Instruments: Disclosures (effective for annual periods of2011 and later). The IFRS 24 from the field of disclosure of related party transactions, that are in direct and indirect ownership of the Republic of Slovenia were implemented early by the bank. Other not yet applicable standards, interpretations and amendments will not be used by the bank until they become applicable. The bank anticipates that the beginning ofapplicability ofother standards, amendments and interpretations will have no fundamental impact on its financial statements. - Annual Report of SID Bank and SID Bank Group for 2009 - 84 2.3. Notes to the Statement of financial position (In EUR thousand) 2.3.1. Cash and balances with the central bank SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Cash in hand 0 0 1 0 Settlement account 12 0 12 0 Mandatory reserves 0 1,004 0 1,004 Total 12 1,004 13 1,004 By opening a settlement account with the Bank of Slovenia and the inclusion in the pan-European payment system TARGET2 (gross settlement in real time, payments in Euros) from 1 January 2010, the bank carried out through business accounts with commercial banks only retail payments (accounts payable, etc.). As at 31 December 2010 the bank was not required to provide the mandatory reserves. Given the structure and scope of applications, which are the basis for the calculation of mandatory reserves, the bank does not meet the criteria for their formation. 2.3.2. Financial assets held for trading SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Derivative financial instruments held for trading under currency forward 0 248 0 248 Total 0 248 0 248 2.3.3. Financial assets held for hedging SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Derivative financial instruments held for hedging under interest rate swaps 14,563 2,101 14,563 2,101 Total 14,563 2,101 14,563 2,101 In December 2009 the bank already concluded two interest rate swaps in the amount of EUR 58 million (a bond issue and a loan raise), and three more in April 2010, totalling EUR 675 million. As at 31 December 2010 the total amount ofinterest rate swaps intended fixed interest rate hedging amounted to EUR 733 million; they are recorded in the off-balance-sheet item derivative financial instruments. The item in the amount of EUR 14,563 thousand includes accrued interest balance in the amount of EUR 9,730 thousand recorded in the net way, which means that on 31 December 2010 the bank has larger claims than liabilities due to interest, and the fair value of derivative financial instruments in the amount of EUR 4,833 thousand. The effects of interest rate hedging in 2010 were negative in the amount of EUR 449 thousand (due to the fair value of interest rate swaps a profit in the amount of EUR 5,740 thousand was realized; due to the fair value of hedged items -issued bonds, loans raised: a loss in the amount of EUR 6,189 thousand) and are fully recognized in the statement of comprehensive income (see Chapter 2.4.6. ofthe financial section ofthe annual report). 2.3.4. Available-for-sale financial assets SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Short-term debt securities 10,030 0 10,030 3,733 Long-term debt securities 100,788 49,921 122,246 68,341 Equity instruments 138 130 362 316 Total 110,956 50,051 132,638 72,390 - Annual Report of SID Bank and SID Bank Group for 2009 - 85 Debt securities by type of issuer SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Government bonds of the Republic of Slovenia 36,047 22,205 42,782 31,625 Bonds of foreign countries 13,444 33 14,466 1,055 - Centralgovernmentbonds 13,418 0 14,440 1,022 - Localgovernmentbonds 26 33 26 33 Bank bonds 44,165 23,718 53,619 30,748 - Domestic banks 24,946 12,920 31,821 17,811 - Domestic banks- subordinate bonds 1,837 1,714 2,282 2,711 - Foreign banks 4,086 4,027 4,218 5,169 - Multilateral and developmentbanks 5,024 5,057 7,025 5,057 - First-rate foreign banks 8,272 0 8,272 0 Bonds of other foreign financial organizations 0 190 0 964 Domestic unit central government bonds 2,879 304 2,879 304 Bonds of other domestic financial organizations 0 0 1,251 1,282 Bonds of non-financial companies 4,253 3,471 7,250 6,096 - Domestic non-financial companies 1,655 1,704 2,084 2,133 - Foreign non-financial companies 2,598 1,767 5,166 3,963 Certificates ofdeposit 10,030 0 10,030 0 - Domestic financial institutions 3,029 0 3,029 0 - Foreign financial institutions 7,001 0 7,001 0 Capital investment 138 130 362 316 Total_110,956_50,051_132,638_72,390 Debt securities by interest accrual method SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 At fixed interest rate 96,145 38,353 107,830 53,722 At variable interest rate 12,674 11,538 22,447 18,322 Interest free 2,137 160 2,360 346 Total_110,956_50,051_132,638_72,390 Breakdown of securities by issuer rating SID Bank SID Bank Group Fair value as at Fair value as at 31 December Structure 31 December Structure Rating 2010 in percent 2010 in percent Rating according to S&P AAA 22,861 20.6 24,863 18.8 AA+ 259 0.2 746 0.6 AA 37,110 33.5 49,393 37.2 AA- 2,014 1.8 2,014 1.5 A+ 4,825 4.4 4,825 3.6 A 0 0.0 1,656 1.3 A- 8,784 7.9 10,652 8.0 BBB+ 8,654 7.8 9,705 7.3 BBB 2,458 2.2 2,705 2.0 BBB- 1,010 0.9 1,010 0.8 D 0 0.0 41 0.0 No rating 22,981 20.7 25,029 18.9 Total 110,956 100.0 132,638 100.0 - Annual Report of SID Bank and SID Bank Group for 2009 - 86 Changes in debt securities and equity instruments SID Bank SID Bank Group 2010 2009 2010 2009 Balance as at 1 January 50,051 61,332 72,390 79,450 Purchases 88,872 53,237 92,956 71,507 Foreign exchange differences 0 0 0 37 Sale, realization (27,461) (64,518) (32,250) (79,454) Change in fair value - impairment (506) 0 (458) 850 Balance as at 31 December 110,956 50,051 132,638 72,390 In the year 2010 SID Bank permanently impaired two securities in total amount of EUR 506 thousand. Debt securities of SID Bank include EUR 1,837 thousand in subordinated securities. Exposure to interest rate risk is presented in Items 2.4.1. and 3.3.1. ofthe financial section ofthe annual report. Ofthe total portfolio ofSID Bank as at 31 December 2010, debt securities in total amount of EUR 2,198 thousand were not listed on the stock exchange. Total value of securities not listed on the stock exchange in SID Bank Group was EUR 2,420 thousand. In 2010, SID Bank Group in addition to the impairment of securities of SID Bank has not further impaired or abolished impairment ofany securities. SID Bank Group has subordinated securities in total amount of EUR 2,826 thousand. 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. of the financial section ofthe annual report. 2.3.5. Loans SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Loans to banks 2,955,894 2,292,737 2,976,328 2,309,516 Loans to clients other than banks 796,980 662,284 913,201 784,616 Total 3,752,874 2,955,021 3,889,529 3,094,132 Loans to banks SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Short-term loans 0 0 5,020 4,747 Long-term loans 2,917,458 2,260,130 2,917,458 2,260,130 Deposits 38,384 32,538 50,832 42,007 Sight 52 69 3,018 2,632 Total 2,955,894 2,292,737 2,976,328 2,309,516 In 2010 commercial banks remained the most important clients of SID Bank, with their share in SID Bank loan portfolio amounting to 78.8 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 21.2 percent share in SID Bank loan portfolio is represented by loans to Slovene companies and their foreign buyers. The maturity structure ofSID Bank's loan portfolio confirms the orientation ofSID 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 98.7 percent at the end of2010. Loans to banks represent a 76.5 percent share in SID Bank Group. The majority of assets are placed as long-term loans. Direct financing of companies represents the minor share of the 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 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Loans in EUR 0 0 4,467 2,009 Loans with currency clause 0 0 542 2,738 Loans in foreign currency 0 0 11 0 Total 0 0 5,020 4,747 87 Annual Report of SID Bank and SID Bank Group - 2010 Short-term loans to banks issued by SID Bank Group in foreign currency amount to HRK 166 thousand. Long-term loans to banks SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Loans in EUR 2,908,400 2,249,743 2,908,400 2,249,743 Loans in foreign currency 12,639 13,535 12,639 13,535 Value adjustments of loans (3,581) (3,148) (3,581) (3,148) Total 2,917,458 2,260,130 2,917,458 2,260,130 Long-term loans to banks issued by SID Bank or SID Bank Group in foreign currency amount to USD 16,784 thousand. Deposits to banks SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Short-term in EUR 36,419 32,298 48,867 41,767 Short-term in foreign currency 2,003 272 2,003 272 Value adjustments of deposits (38) (32) (38) (32) Total 38,384 32,538 50,832 42,007 Short-term deposits to banks issued by SID Bank or SID Bank Group in foreign currency amount to USD 2,660 thousand. Changes in loans - gross exposure SID Bank SID Bank Group 2010 2009 2010 2009 Balance as at 1 January 2,295,848 1,513,488 2,310,063 1,535,738 New loans and deposits 3,877,085 3,529,276 4,544,169 4,326,197 Repayments (3,213,420) (2,746,916) (3,874,285) (3,551,872) Balance as at 31 December 2,959,513 2,295,848 2,979,947 2,310,063 Changes in adjustments (impairments) of loans of banks SID Bank SID Bank Group 2010 2009 2010 2009 Balance as at 1 January 3,180 1,133 3,180 1,133 Value adjustments of loans 2,597 2,716 2,597 2,716 Elimination of value adjustments of loans (2,158) (669) (2,158) (669) Balance as at 31 December 3,619 3,180 3,619 3,180 Additional notes regarding the method for forming impairments are presented in Item 6.4. ofthe 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. Interest rate for loans and deposits to banks in domestic currency, attained by SID Bank, consisted of1, 2, 3, 4 or 6-month EURIBOR and the margin of between 0.18 percent p.a. and 3.75 percent p.a. The fixed interest rate moves between 0.13 percent p.a. and 6.85 percent p.a. Fixed interest rate in SID Bank Group also moves between 0.13 percent p.a. and 6.85 percent p.a. Interest rate for loans and deposits to banks in foreign currency, attained by SID Bank, consisted of 2, 3, 4, 5 or 6-month LIBOR and the margin of between 0.425 percent p.a. and 3.00 percent p.a. Fixed interest rate moves between 0.10 percent p.a. and 0.80 percent p.a. Fixed interest rate in SID Bank Group moves between 0.10 percent p.a. and 6.50 percent 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 Item 3.2.1. ofthe financial section ofthe annual report. Exposure of SID 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 Item 3.2.2. ofthe financial section ofthe annual report. Exposure of SID Bank and SID Bank Group to credit risk is presented in Item 3.4. of the financial section of the annual report. - Annual Report of SID Bank and SID Bank Group for 2009 - 88 Loans to clients other than banks SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Short-term loans 9,171 80,695 30,473 71,811 Long-term loans 784,076 574,695 748,832 573,721 Claims arising from guarantees 3,733 6,894 3,733 6,894 Factoring 0 0 130,163 132,190 Total 796,980 662,284 913,201 784,616 Short-term loans to clients other than banks SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Foreign currency loans to non-financial companies 0 0 0 77 Domestic currency loans to non-financial companies 6,182 13,602 6,425 13,738 Domestic currency loans to other financial organizations 60 44,825 22 22,413 Domestic currency loans to foreign entities 5,052 26,790 2,526 14,891 Foreign currency loans to foreign entities 0 0 23,410 22,289 Value adjustments of short-term loans (2,123) (4,522) (1,910) (1,597) Total 9,171 80,695 30,473 71,811 Long-term loans to clients other than banks SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Foreign currency loans to non-financial organizations 700 834 700 3,028 Domestic currency loans to non-financial organizations 581,400 415,971 581,400 415,971 Domestic currency loans to other financial organizations 94,617 54,190 72,241 54,190 Domestic currency loans to central level state units 9,995 0 9,995 0 Domestic currency loans to local level state units 13,472 13,967 13,472 13,967 Domestic currency loans to subordinate clients 0 25 0 25 Domestic currency loans to foreign entities 143,978 121,333 126,850 118,805 Value adjustments of long-term loans (60,086) (31,625) (55,826) (32,265) Total 784,076 574,695 748,832 573,721 Long-term loans to clients other than banks issued by SID Bank in foreign currency amount to USD 929 thousand. Claims arising from guarantees SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Claims arising from realized guarantees 12,632 10,609 12,632 10,609 Value adjustments of realized guarantees (8,899) (3,715) (8,899) (3,715) Total 3,733 6,894 3,733 6,894 Claims arising from factoring operations SID Bank Group 31.12.2010 31.12.2009 Domestic factoring 111,349 101,919 Export factoring 6,370 5,630 Import factoring 6,007 5,502 Domestic factoring - loan 23,997 27,894 Export factoring - loan 157 169 Value adjustments of short-term receivables - factoring (17,717) (8,924) Total 130,163 132,190 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 2010 2009 2010 2009 Balance as at 1 January 702,146 523,177 831,117 679,898 New loans and deposits 399,679 425,696 802,830 818,856 Repayment (233,737) (246,727) (636,636) (667,637) Balance as at 31 December 868,088 702,146 997,311 831,117 - Annual Report of SID Bank and SID Bank Group for 2009 - 89 Changes in adjustments (impairments) of loans of clients other than banks SID Bank SID Bank Group 2010 2009 2010 2009 Balance as at 1 January 39,862 22,994 46,501 26,824 Value adjustments of loans (impairments) 45,743 25,787 50,536 27,907 Elimination of value adjustments of loans (elimination of impairments) (14,497) (8,919) (12,927) (8,230) Balance as at 31 December 71,108 39,862 84,110 46,501 Notes to impairments are presented in Item 6.4. in the business section of the 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 of 1, 3, or 6-month EURIBOR and the margin of between 0.48 percent p.a. and 6.79 percent p.a. The fixed interest rate moves between 1.60 percent p.a. and 8.06 percent p.a. Floating rates ofSID Bank Group for clients, other than banks in domestic currency consisted of1, 3, or 6-month EURIBOR and the margin of between 0.48 percent p.a. and 6.79 percent p.a., as well as 3-month LIBOR and the margin of 7.00 percent p.a. Fixed interest rates of SID Bank Group for loans to clients, other than banks in domestic currency ranged between 1.60 percent p.a. and 11.0 percent p.a. Floating rates of SID Bank and SID Bank Group for clients, other than banks in foreign currency for direct financing of legal entities consisted of6-month LIBOR and the margin of between 1.20 percent p.a. As at 31 December 2010 the bank has no loans in foreign currency at fixed interest rate. SID Bank Group operates on various markets; therefore the range of interest rates is large, particularly in factoring activities. 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. of the financial section of the annual report. 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 Item 3.2.2. ofthe financial section of the annual report. Exposure of SID Bank and SID Bank Group to credit risk is presented in Item 3.4. of the financial section ofthe annual report. 2.3.6. Property, plant and equipment Changes in property, plant and equipment in 2010_ SID Bank_SID Bank Group Equipment Real Equipment Total Equipment Real estate Equipment Total in estate in acquisition acquisition Purchase value Balance as at 1 January 0 2010 6,589 1,586 8,175 0 6,589 2,601 9,190 Other changes 0 0 0 0 0 0 (18) (18) Transfer (166) 0 166 0 (166) 0 166 0 Increase 194 0 0 194 222 0 97 319 Decrease 0 0 (289) (289) (16) 0 (406) (422) Balance as at 31 28 December 2010 6,589 1,463 8,080 41 6,589 2,439 9,068 Value adjustments Balance as at 1 January 2010 0 (2,484) (1,250) (3,734) 0 (2,484) (1,861) (4,345) Other changes 0 0 0 0 0 0 16 16 Transfer 0 0 0 0 0 0 (7) (7) Depreciation, amortization 0 (316) (125) (441) 0 (316) (274) (590) Decrease 0 0 230 230 0 0 293 293 Balance as at 31 December 2010 0 (2,800) (1,145) (3,945) 0 (2,800) (1,833) (4,633) Net book value as at 1 January 2010 0 4,105 336 4,441 0 4,105 740 4,845 Net book value as at 31 December 2010 28 3,789 318 4,135 41 3,789 606 4,435 90 - Annual Report of SID Bank and SID Bank Group for 2009 - 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 6,588 1,484 8,072 6,588 2,460 9,048 Opening-balance adjustment 0 0 0 0 17 17 Transfer 0 0 0 0 (51) (51) Increase 0 158 158 0 288 288 Decrease 0 (55) (55) 0 (113) (113) Balance as at 31 December 2009 6,588 1,587 8,175 6,588 2,601 9,189 Value adjustments Balance as at 1 January 2009 (2,168) (1,155) (3,323) (2,168) (1,650) (3,818) Opening-balance adjustment 0 0 0 0 (16) (16) Transfer 0 0 0 0 21 21 Depreciation, amortization (315) (143) (458) (315) (296) (611) Increase 0 0 0 0 (1) (1) Decrease 0 47 47 0 81 81 Balance as at 31 December 2009 (2,483) (1,251) (3,734) (2,483) (1,861) (4,344) Net book value as at 1 January 2009 4,420 329 4,749 4,420 810 5,230 Net book value as at 31 December 2009 4,105 336 4,441 4,105 740 4,845 SID Bank and SID Bank Group have no pledged property, plant and equipment. 2.3.7. Intangible assets SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Property rights Goodwill 252 0 395 0 394 488 590 488 Total 252 395 882 1,078 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 ofa share in capital of PRVI FAKTOR, Ljubljana. Pursuant to a test of impairments performed as at 31 December 2010, it was established that an impairment of goodwill is not necessary. Changes in intangible assets in 2010 SID Bank SID Bank Group In acquisition In use Total In acquisition In use Total Purchase value Balance as at 1 January 2010 0 1,005 1,005 0 1,441 1,441 Other changes 0 0 0 0 (6) (6) Transfer (23) 23 0 (23) 23 0 Increase 31 0 31 31 29 60 Decrease 0 0 0 0 (1) (1) Balance as at 31 December 2010 8 1,028 1,036 8 1,486 1,494 Value adjustments Balance as at 1 January 2010 0 (610) (610) 0 (851) (851) Other changes 0 0 0 0 (1) (1) Transfer 0 0 0 0 7 7 Depreciation, amortization 0 (174) (174) 0 (256) (256) Decrease 0 0 0 0 1 1 Balance as at 31 December 2010 0 (784) (784) 0 (1,100) (1,100) Net book value as at 1 January 2010 0 395 395 0 590 590 Net book value as at 31 December 2010 8 244 252 8 386 394 91 - Annual Report of SID Bank and SID Bank Group for 2009 - Changes in intangible assets in 2009 SID Bank_SID Bank Group In acquisition In use Total In acquisition In use Total Purchase value Balance as at 1 January 2009 O 996 996 O 1,4O8 1,4O8 Adjustments O O O O (42) (42) Transfer (11) 11 O (11) 62 51 Increase 11 O 11 11 16 27 Decrease O O O O O O Balance as at 31 December 2009 O 1,OO7 1,OO7 O 1,444 1,444 Value adjustments Balance as at 1 January 2009 O (428) (428) O (59O) (59O) Opening-balance adjustment O O O O 25 25 Transfer O O O O (21) (21) Depreciation, amortization O (184) (184) O (268) (268) Decrease O O O O O O Balance as at 31 December 2009 O (612) (612) O (854) (854) Net book value as at 1 January 2009 O 568 568 O 818 818 Net book value as at 31 December 2009 O 395 395 O 59O 59O SID Bank and SID Bank Group have no pledged intangible assets. 2.3.8. Long-term investments in equity of subsidiaries, associates and joint ventures SID Bank SID Bank Group 31.12.2O1O 31.12.2OO9 31.12.2O1O 31 .12.2OO9 Investment in PKZ Ljubljana 8,412 4,2O6 O O Investment in PRO KOLEKT Ljubljana 419 419 419 419 Investment in PRVI FAKTOR Ljubljana O 3,O87 O O Total 8,831 7,712 419 419 SID Bank increased the capital in subsidiary PKZ Ljubljana in the amount of EUR 4,206 thousand; the increase in capital was entered in registry on 18 February 2010. Data on companies in SID Bank Group_ PRVI FAKTOR Group_SID-PKZ 31.12.2O1O 31.12.2OO9 31.12.2O1O 31.12.2OO9 Participating interest of the group in capital in percent 5O 5O 1OO 1OO Portion of voting rights in percent 5O 5O 1OO 1OO Assets 166,373 168,154 72,551 62,741 Liabilities 163,295 162,54O 52,295 53,572 Capital 3,O78 5,614 2O,256 9,168 Income 16,478 18,112 12,624 9,364 Profit/loss (2,371) 587 6,844 (6,529) 2.3.9. Corporate income tax assets and liabilities Tax assets SID Bank SID Bank Group 31.12.2O1O 31.12.2OO9 31.12.2O1O 31.12.2OO9 Receivables for prepaid corporate income tax O 656 416 1,18O Long-term deferred tax assets 426 363 1,814 975 Total 426 1,O19 2,23O 2,155 Annual Report of SID Bank and SID Bank Group - 2010 92 As at 31 December 2010, 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 assets. As at 31 December 2010, SID Bank Group had long-term 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. Tax liability SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Income tax liabilities 1,349 0 3,401 0 Long-term deferred tax liabilities 123 138 123 138 Total 1,472 138 3,524 138 The long-term deferred tax liability represents a liability arising from the revaluation adjustment of available-for-sale financial assets. Deferred taxes SID Bank_SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Deferred tax liability - Value adjustments of receivables 0 0 1,293 385 - Provisions for fees and loyalty bonuses 30 27 61 53 - Revaluation expense due to impairments, available-for-sale financial assets 295 194 295 304 - Revaluation surplus, available-for-sale financial assets 101 142 55 106 - Expenses for deferred taxes from tax loss 0 0 0 36 - Delimited costs or income 0 0 110 91 Total deferred tax liability 426 363 1,814 975 Deferred tax liability - Available-for-sale financial assets 123 138 123 138 Total deferred tax liability 123 138 123 138 Included in the statement of comprehensive income 105 1 891 1,892 Included in capital (27) (70) (202) (287) 2.3.10. Other assets SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Insurers assets 0 0 38,313 32,228 Other assets 404 2,902 2,900 4,954 Total 404 2,902 41,214 37,182 Insurers' assets SID Bank Group 31.12.2010 31.12.2009 Reinsurers' assets in unearned premiums 2,230 839 Reinsurers' assets in claims provisions 25,376 24,513 Reinsurers' assets in bonuses and discounts 1,465 1,016 Reinsurers' assets in provision for unexpired risks 0 1,599 Receivables from premiums 3,671 2,096 Value adjustments of receivables from premiums (578) (170) Grant receivables 7,598 2,677 Value adjustments of receivables from premiums (1,900) (1,430) Receivables from credit ratings 154 135 Other value adjustments (94) (14) Receivables arising from reinsurance 391 967 Total 38,313 32,228 - Annual Report of SID Bank and SID Bank Group for 2009 - 93 Other assets SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Inventories 0 0 3 4 Fees and commissions receivables 37 35 985 1,032 Advances to suppliers for operating assets 3 5 15 277 Trade receivables 56 69 1,331 1,047 Other receivables 11 2,340 561 2,379 Value adjustments of other receivables (24) (2) (427) (336) Deferred costs and accrued revenues 321 455 432 551 - Deferred costs and accrued revenues 321 455 377 499 - Othershort-term deferred costs 0 0 7 10 - Other accrued revenues and deferred expenses 0 0 48 42 Total 404 2,902 2,900 4,954 2.3.11. Financial liabilities with the central bank SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Short-term debt from the primary emission credits at the pledge of securities 1,001 0 1,001 0 Total 1,001 0 1,001 0 By entering the TARGET2 payment system, the bank may use monetary policy instruments of the Bank of Slovenia and the European Central Bank. On 31 December 2010 the bank has used the credit from the primary emission at the pledge of securities. 2.3.12. Financial liabilities held for trading SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Derivative financial instruments held for trading, valuation of interest rate swaps/currency forwards 29 271 29 271 Total 29 271 29 271 The item discloses fair value of interest rate swaps, the contract value of which as at of 31 December 2010 amounted to EUR 3,056 thousand and are disclosed in Item 2.3.23. ofthe financial section ofthe annual report. 2.3.13. Derivative financial instruments held for hedging SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Derivative financial instruments held for interest rate changes hedging 0 1,202 0 1,202 Total 0 1,202 0 1,202 2.3.14. Financial liabilities measured at amortized cost SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Bank deposits Deposits of clients other than banks Loans of banks Loans of clients other than banks Debt securities 0 5 2,023,693 99,998 1,436,166 155,066 91,870 1,799,948 99,108 547,142 0 155,066 5 91,870 2,143,572 1,921,338 99,999 99,122 1,436,166 547,142 Total 3,559,862 2,693,134 3,679,742 2,814,538 Bank deposits SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Deposits 0 155,066 0 155,066 Total 0 155,066 0 155,066 - Annual Report of SID Bank and SID Bank Group for 2009 - 94 Deposits ofclients other than banks SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Deposits 5 91,870 5 91,870 Total 5 91,870 5 91,870 Loans of banks SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Short-term in EUR 19,948 19,966 151,537 133,571 Short-term in foreign currency 0 0 3,872 0 Long-term in EUR 1,988,682 1,766,031 1,973,100 1 ,773,816 Long-term in foreign currency 15,063 13,951 15,063 13,951 Total 2,023,693 1,799,948 2,143,572 1 ,921,338 Loans of clients other than banks SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Short-term in EUR 0 0 1 14 Long-term in EUR 99,998 99,108 99,998 99,108 Total 99,998 99,108 99,999 99,122 Debt securities SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Debt securities 1,436,166 547,142 1,436,166 547,142 Total 1,436,166 547,142 1,436,166 547,142 In April 2010, SID Bank successfully sold on international capital markets the first issue of Eurobond. The bond was issued at par of EUR 750 million with a fixed coupon rate of3 percent per year. In November 2010 SID Bank realized its third consecutive issue of the SI01 bond on the domestic capital market. The bond was issued at par of EUR 69 million with a coupon of6-month EURIBOR + 1 percentage point per year. A private issue of bonds in the amount of EUR 50 million was also realized in November. Changes in financial liabilities measured at amortized cost SID Bank SID Bank Group 2010 2009 2010 2009 Balance as at 1 January 2,693,134 1,921,672 2,814,538 2,079,910 New loans and deposits 1,496,381 1,169,551 1,630,128 1,400,586 Repayment (629,653) (398,089) (764,925) (665,958) Balance as at 31 December 3,559,862 2,693,134 3,679,741 2,814,538 Float rates of SID Bank for received long-term loans from foreign banks range between 3 or 6-month EURIBOR/LIBOR + 0.01 percent p.a. and 3 or 6-month EURIBOR/LIBOR + 1.85 percent p.a. Float rates of SID Bank Group for received loans range between 3 or 6-month EURIBOR/LIBOR + 0.01 percent p.a. and 3 or 6-month EURIBOR/LIBOR + 5.50 percent p.a. Interest rates for loans in foreign currency for SID Bank Group range between 3-month ZIBOR + 3.50 percent p.a. and 3-month ZIBOR + 5.50 percent p.a. and 1-month BELIBOR + 3.15 percent p.a. 2.3.15. Provision SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Bank provision 2,577 4,250 2,577 4,250 Liabilities from insurance contracts 0 0 43,933 50,294 Other provisions 184 132 1,916 2,151 Total 2,761 4,382 48,426 56,695 Bank provisions include provisions for covering contingent losses arising from issued guarantees and undrawn credit facilities and credit lines. - Annual Report of SID Bank and SID Bank Group for 2009 - 95 SID Bank SID Bank Group 31.12.2010 31 .12.2009 31. 12.2010 31. 12.2009 Provisions for guarantees 1,420 2,044 1,420 2,044 Provisions for undrawn credit facilities and credit lines 1,157 2,206 1,157 2,206 Total 2,577 4,250 2,577 4,250 Changes in bank provisions SID Bank SID Bank Group 2010 2009 2010 2009 Balance as at 1 January 4,250 2,165 4,250 2,165 Provisions formed 9,468 8,502 9,468 8,502 Provisions released (11,141) (6,417) (11,141) (6,417) Balance as at 31 December 2,577 4,250 2,577 4,250 Liabilities from insurance contracts SID Bank Group 31 .12.2010 31 .12.2009 Unearned premiums 3,278 1,445 Provisions for outstanding claims 37,719 43,855 Provisions for bonuses and discounts 2,752 1,853 Provisions for unexpired risks 184 3,141 Total 43,933 50,294 Liabilities from insurance contracts show gross technical reserves including reinsurers' share. Provisions for outstanding claims SID Bank Group 31 .12.2010 31 .12.2009 Provisions for incurred and reported loss events 13,689 14,482 Provisions for incurred and unreported loss events 23,399 28,522 Provisions for appraisal costs 631 851 Total 37,719 43,855 Changes in liabilities from insurance contracts SID Bank Group 2010 2009 Balance as at 1 January 50,294 30,896 Changes (6,361) 19,398 Balance as at 31 December 43,933 50,294 Other provisions SID Bank SID Bank Group 31.12.2010 31 .12.2009 31 .12.2010 31. 12.2009 Long-term provisions to employees 184 132 333 283 Deferred income from reinsurance premiums 0 0 1,583 1,868 Total 184 132 1,916 2,151 Provisions to employees SID Bank SID Bank Group 31.12.2010 31 .12.2009 31 .12.2010 31. 12.2009 Long-term provisions for loyalty bonuses 24 17 58 49 Long-term provisions for retirement severance pay 160 115 275 234 Total 184 132 333 283 Changes in provisions for pensions and similar liabilities to employees SID Bank SID Bank Group 2010 2009 2010 2009 Balance as at 1 January 132 124 283 285 Provisions formed 52 22 101 63 Provisions released 0 (14) (48) (62) Foreign exchange differences 0 0 (3) (3) Balance as at 31 December 184 132 333 283 The calculation for loyalty bonuses was based on the assumption that all beneficiaries are still the employees ofSID 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 96 - Annual Report of SID Bank and SID Bank Group for 2009 - government debt securities published by the Ministry of Finance for the purpose of calculating the returns of voluntary supplementary pension insurance. For the calculation an interest rate of 3.325 percent was taken into account. The following input parameters were used: loyalty bonuses for 10 years EUR 400; for 20 years EUR 600; for 30 or 40 years EUR 800. 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. For the calculation an interest rate of 3.325 percent was taken into account. 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. Some of companies in SID Bank Group calculate 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 2010 2009 Balance as at 1 January 1,868 1,919 Provisions formed 399 537 Provisions released (684) (588) Balance as at 31 December 1,583 1,868 Receivables and liabilities due to deferred taxes are presented in detail in Item 2.4.11. of the financial section of the annual report. 2.3.16. Other liabilities SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Liabilities for salaries and other liabilities to employees 369 378 651 634 Liabilities to suppliers 231 184 427 368 Liabilities from insurance operations 0 0 58 19 Other liabilities 1,634 984 2,427 4,674 Accrued costs and deferred income 365 2,239 4,940 3,368 - Accrued costs 256 170 431 341 - Accrued costs ofreinsurers for recourses 0 0 4.390 948 - Short-term deferred revenues 109 317 119 327 - Deferred income 0 1,752 0 1,752 Total 2,599 3,785 8,503 9,063 2.3.17. Share capital 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 ofthe same class; each ordinary registered no-par value share has a corresponding amount in share capital. 2.3.18. Capital reserves SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 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 2.3.19. Revaluation surplus SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Revaluation surplus from available-for-sale financial assets 90 (18) 273 126 Total 90 (18) 273 126 - Annual Report of SID Bank and SID Bank Group for 2009 - 97 Revaluation surplus from available-for-sale financial assets SID Bank SID Bank Group 2010 2009 2010 2009 Balance as at 1 January (18) (295) 126 (838) Revaluation 135 347 183 1,206 Deferred taxes (27) (70) (36) (242) Balance as at 31 December 90 (18) 273 126 2.3.20. Reserves from profit (including retained profit) SID Bank SID Bank Group 31.' 12.2010 31.12.2009 31.12.2010 31. 12.2009 Reserves from profit 25,191 21,735 35,671 36,739 - Statutory reserves 8,366 8,080 9,021 8,439 - Reserves for treasury shares 1,324 1,324 1,324 1,324 - Reserves under articles ofassociation 11,620 8,900 15,826 11,003 - Other reserves from profit 3,881 3,431 8,737 15,210 - Credit risk equalization provisions 0 0 763 763 Retained earnings 0 0 3,352 2,928 Total 25,191 21,735 39,023 39,667 In accordance with a decree of the General Meeting of Shareholders of SID Bank dated 27 August 2010, the net distributable profit ofthe year 2009 in the amount of EUR 450 thousand was allocated to other profit reserves. When compiling the annual report, from net profit in the amount of EUR 5,726 thousand the Management Board formed statutory reserves totalling EUR 286 thousand and reserves under articles of association in the amount of EUR 2,720 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. Due to positive underwriting outcome, credit risk equalization provisions of SID Bank Group were formed again in the year 2010, in the amount of EUR 917 thousand. 2.3.21.Treasury shares SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Repurchased treasury shares (1,324) (1,324) (1,324) (1,324) Total (1,324) (1,324) (1,324) (1,324) 2.3.22. Off-balance-sheet items Off-balance-sheet items SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Off-balance-sheet receivables 1,955,822 1,047,805 1,994,875 1,068,394 - Raised undrawn loans 170,000 235,000 170,000 235,000 Derivative financial instruments (interest rate swap, currency 736,056 58,678 736,056 58,678 forward) - Agent transactions (interest rate swaps) 11,949 0 11,949 0 - Securities accountfor insurance with the Bank ofSlovenia 29,168 0 29,168 0 (undrawn) - Financial assets for hedging with the Bank ofSlovenia 1,001 0 1,001 0 - Guarantees received 1,007,648 754,127 1,007,648 754,127 - Unclaimed recourse receivables 0 0 39,053 20,589 Off-balance-sheet liabilities assumed 66,417 222,022 67,742 237,280 - Guarantees 31,852 38,804 33,177 39,686 - Approved undrawn loans 34,565 182,521 34,565 195,021 - Derivative financial instruments (currency forward) 0 697 0 697 - Guarantees given 0 0 0 34 - Other financial liabilities assumed 0 0 0 1,842 Total 2,022,239 1,269,827 2,062,617 1,305,674 - Annual Report of SID Bank and SID Bank Group for 2009 - 98 Off-balance-sheet receivables - raised undrawn loans SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Raised undrawn loans 170,000 235,000 170,000 235,000 Total 170,000 235,000 170,000 235,000 As at 31 December 2010 SID Bank has not drawn loans granted by: Kreditanstalt fur Wiederaubau Germany in the amount of EUR 80 million, European Investment Bank Luxembourg in the amount of EUR 50 million, Erste Group Bank AG Austria in the amount of EUR 20 million and Hypo Alpe - Adria Bank International AG Austria in the amount of EUR 20 million. Off-balance-sheet receivables - derivative financial instruments SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Interest rate swaps 736,056 58,000 736,056 58,000 Currency forward 0 678 0 678 Total 736,056 58,678 736,056 58,678 As at 31 December 2010, SID Bank had concluded currency forwards in total amount of EUR 736 million. The value of interest rate swaps that meet the criteria ofthe accounting treatment of hedge amounts to EUR 733 million and is used to hedge interest rate risk. The difference in the amount ofEUR 3 million is represented by the market interest rate swaps. Notes on interest rate risk management are presented in the business report, in Item 6.4. The fair values of derivative financial instruments are disclosed in Items 2.3.3. and 2.3.12. of the financial section of the annual report. Off-balance-sheet receivables - Guarantees received SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Guarantees received 1,007,648 754,127 1,007,648 754,127 Total 1,007,648 754,127 1,007,648 754,127 Majority portion is represented by the following types of insurance: pledge of commercial real estate (cession of claims, pledge of ownership share, insurance policy of SID bank for the account of the Republic of Slovenia, fiduciary transfer of real estate ownership rights, pledge of receivables for insurance, bills and other insurances). Unclaimed recourse receivables SID Bank Group 31.12.2010 31 .12.2009 Unclaimed recourse receivables 39,053 20,589 Total 39,053 20,589 Off-balance-sheet liabilities - guarantees SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Short-term 684 114 2,009 996 Long-term 31,168 38,690 31,168 38,690 Total 31,852 38,804 33,177 39,686 The breakdown ofguarantees by type SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31. 12.2009 Guarantees 25,536 24,144 31,852 25,026 - Waste export 0 11,281 0 11,281 - Advance repayment 1,397 2,096 1,397 2,096 - Performance 2,387 6,308 2,387 6,308 - Paymentbonds 20,756 2,858 22,081 3,740 - Warranty 996 1,601 996 1,601 Assumed risk 6,316 14,660 6,316 14,660 Total_31,852_38,804_33,177_39,686 - Annual Report of SID Bank and SID Bank Group for 2009 - 99 The breakdown ofguarantees by currency SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 EUR 20,606 37,806 21,931 38,688 CHF 10,416 0 10,416 0 HRK 806 976 806 976 EGP 24 22 24 22 Total 31,852 38,804 33,177 39,686 Off-balance-sheet liabilities assumed - approved undrawn loans SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31 .12.2009 Approved undrawn loans 34,565 182,521 34,565 195,021 Total 34,565 182,521 34,565 195,021 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 2010. Drawing date is in 2011. 2.3.23. Operations under Special Authorization The operations, which SID Bank as the national export credit agency 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 Euros 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. Investments ofcontingency reserves SID Bank 31.12.2010 31.12.2009 Cash in business accounts 32 43 Loans to banks 99,095 101,859 Available-for-sale financial assets 25,288 18,258 Other assets 4,985 5,268 Total 129,400 125,428 In other assets, receivable on PRO KOLEKT Zagreb in the amount of EUR 3,726 thousand is disclosed. Liabilities for contingency reserves SID Bank 31.12.2010 31.12.2009 Contingency reserves 124,219 120,039 Revaluation surplus from available-for-sale financial assets 286 208 Accrued (costs) and deferred income 4,895 5,181 Total 129,400 125,428 Changes in contingency reserves SID Bank 2010 2009 Balance as at 1 January 120,039 109,896 Surplus of income over expenses 4,180 143 Remittance 0 10,000 Balance as at 31 December 124,219 120,039 Contingency reserves in 2010 increased by EUR 4.180 thousand, which equalled the surplus of income over operating expenses on behalfand for the account ofthe state. - Annual Report of SID Bank and SID Bank Group for 2009 - 100 Investments from the interest rate equalization programme SID Bank 31.12.2010 31.12.2009 Cash in business accounts 2 1 Loans 3,481 2,843 Available-for-sale financial assets 4,286 4,782 Other assets 1 1 Total 7,830 7,627 Liabilities from the interest rate equalization programme SID Bank 31.12.2010 31.12.2009 Financial liabilities held for trading 60 0 Liabilities from the interest rate equalization programme 7,732 7,585 Revaluation surplus from available-for-sale financial assets 37 42 Other liabilities 1 0 Total 7,830 7,627 Changes in liabilities from the interest rate equalization programme SID Bank 2010 2009 Balance as at 1 January 7,585 6,907 Surplus of income over expenses 147 178 Remittance 0 500 Balance as at 31 December 7,732 7,585 The assets of the interest rate equalization programme in 2010 increased by EUR 147 thousand, which equalled the surplus ofincome over operating expenses on behalfand for the account of the state. - Annual Report of SID Bank and SID Bank Group for 2009 - 101 2.4. Notes to the Statement of comprehensive income (In EUR thousand) 2.4.1.Net interest SID Bank 2010 2009 Income Expenses Income Expenses Interest from financial assets held for hedging 13,406 (5,505) 97 (27) Interest from financial assets held for trading 28 (64) 0 0 Interest from available-for-sale assets 2,258 0 1,760 0 Interest from loans and deposits 90,557 (31,765) 80,391 (44,371) Interest for issued securities 0 (28,800) 0 (16,356) Interest from other financial assets 34 0 8 0 Total 106,283 (66,134) 82,256 (60,754) Net interest 40,149 21,502 Income from overdue interest amounts to EUR 1,065 thousand. Expense for overdue interest amounts to EUR 1,300 thousand. Expenditure for interest on late payments is due to revenue recognized in 2009, of which the likelihood of liquidity has become uncertain in 2010. SID Bank Group 2010 2009 Income Expenses Income Expenses Interest from financial assets held for hedging 13,406 (5,505) 97 (27) Interest from financial assets held for trading 28 (64) 0 0 Interest from available-for-sale assets 2,827 0 2,493 0 Interest from loans and deposits 101,141 (38,192) 93,181 (50,925) Interest for issued securities 0 (28,800) 0 (16,356) Interest from other financial assets 34 0 8 0 Total 117,436 (72,561) 95,779 (67,308) Net interest 44,875 28,471 2.4.2. Dividend income SID Bank 2010 2009 Dividend income 0 2,474 Total 0 2,474 2.4.3. Net fees SID Bank 2010 2009 Income Expenses Income Expenses Fees and commissions on banking services 0 (17) 0 (20) Fees and commissions from loans 1,855 (486) 1,337 (192) Fees and commissions for guarantee transactions 401 (9) 528 (4) Fees and commissions for stock and other securities transactions 0 (123) 0 (92) Other fees and commissions 0 (161) 141 (129) Total 2,256 (796) 2,006 (437) Net fees 1,460 1,569 SID Bank Group 2010 2009 Income Expenses Income Expenses Fees and commissions on banking services 0 (147) 0 (77) Commissions for payment transactions 8 (87) 16 (77) Fees and commissions from loans 5,901 (791) 5,523 (497) Fees and commissions for guarantee transactions 401 (351) 528 (345) Fees and commissions for stock and other securities transactions 0 (123) 0 (92) Other fees and commissions 4 (187) 389 (145) Total 6,314 (1,686) 6,456 (1,233) Net fees 4,628 5,223 Annual Report of SID Bank and SID Bank Group - 2010 2.4.4. Realized profits/losses from financial assets and liabilities not measured at fair value through profit or loss SID Bank 2010 2009 Income Expenses Income Expenses Available-for-sale financial assets 459 (20) 680 (350) Total Realized profits/losses from financial assets and liabilities not measured at fair value through profit or loss 459 439 (20) 680 330 (350) SID Bank Group 2010 2009 Income Expenses Income Expenses Available-for-sale financial assets 470 (26) 960 (355) Total Realized profits/losses from financial assets and liabilities not measured at fair value through profit or loss 470 444 (26) 960 605 (355) 2.4.5. Net profits/losses from financial assets and liabilities held for trading SID Bank 2010 2009 Income Expenses Income Expenses Derivative financial instruments under currency forward Derivative financial instruments under interest rate swaps 0 0 (19) (28) 123 0 (99) 0 Total Net profits/losses from financial assets and liabilities held for trading 0 (47) (47) 123 24 (99) SID Bank Group 2010 2009 Income Expenses Income Expenses Derivative financial instruments under currency forward Derivative financial instruments under interest rate swaps 0 0 (19) (28) 123 0 (99) 0 Total Net profits/losses from financial assets and liabilities held for trading 0 (47) (47) 123 24 (99) 2.4.6. Change in fair value when calculating hedging against risk SID Bank 2010 2009 Income Expenses Income Expenses Change in fair value when calculating hedging against risk 5,740 (6,189) 867 (907) Total Net profit/loss from financial assets held for hedging 5,740 (6,189) (449) 867 (907) (40) SID Bank Group 2010 2009 Income Expenses Income Expenses Change in fair value when calculating hedging against risk 5,740 (6,189) 867 (907) Total Net profit/loss from financial assets held for hedging 5,740 (6,189) (449) 867 (907) (40) - Annual Report of SID Bank and SID Bank Group for 2009 - 103 2.4.7. Net foreign exchange profits/losses SID Bank 2010 2009 Income Expenses Income Expenses Foreign exchange differences 6,380 (6,374) 5,091 (5,047) Total Net foreign exchange profits/losses 6,380 6 (6,374) 5,091 44 (5,047) SID Bank Group 2010 2009 Income Expenses Income Expenses Foreign exchange differences 14,343 (13,385) 12,862 (11,789) Total Net foreign exchange profits/losses 14,343 958 (13,385) 12,862 1,073 (11,789) 2.4.8. Other net operating profits/losses Net income from non-banking services SID Bank 2010 2009 Income Expenses Income Expenses Income from non-banking services Subscriptions Other operating expenses 3,076 0 0 0 (122) (35) 2,709 0 0 0 (108) (59) Total Other net operating profits/losses 3,076 2,919 (157) 2,709 2,542 (167) 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 pursuant to the agreement concluded with the Ministry of Finance regulating mutual relations associated with the implementation of Chapter II of the said Act dated 1 December 2004 in the amount of EUR 2,075 thousand (2009: EUR 2,075 thousand). In 2010 the bank earned revenues of EUR 88 thousand for transactions pursuant to special authorization - the Interest Rate Equalization Programme. In 2010, the bank earned revenues of EUR 528 thousand for transactions pursuant to special authorization for implementation of legislation concerning guarantee schemes ofthe Republic ofSlovenia. The remainder consists of revenues from rents and services provided to subsidiaries in the amount of EUR 203 thousand, as well as income from the credit information service in the amount of EUR 182 thousand. SID Bank Group 2010 2009 Income Expenses Income Expenses Income from non-banking services 2,828 0 2,382 0 Other operating profits/losses 80 0 166 0 Subscriptions 0 (217) 0 (158) Other operating expenses 0 (161) 0 (339) Total 2,908 (379) 2,548 (497) Other net operating profits/losses 2,529 2,051 Net revenues from insurance operations SID Bank Group 2010 2009 Income Expenses Income Expenses Gross insurance premiums written 19,716 0 10,884 0 Reinsurance commissions 3,495 0 2,283 0 Reinsurance premiums written 0 (12,237) 0 (6,238) Credit rating information written 988 0 947 0 Total 24,199 (12,237) 14,114 (6,238) Net insurance premiums written 11,962 7,876 Annual Report of SID Bank and SID Bank Group - 2010 104 Net expenses for insurance operations SID Bank Group 2O1O 2OO9 Income Expenses Income Expenses Gross claims settled O (24,833) O (11,414) Settled bonuses O (345) O (341) Credit rating information expenses O (84O) O (1,O8O) Settled gross recourses 6,O25 O 1,642 O Reinsurance share in claims and recourses 11,4OO O 5,193 O Reinsurance share in bonuses 185 O 2O2 O Total 17,610 (26,O18) 7,O37 (12,835) Net expenses for insurance operations (8,4O8) (5,798) 2.4.9. Administrative costs SID Bank SID Bank Group 2O1O 2OO9 2O1O 2OO9 Labour costs (4,342) (3,9O1) (8,357) (7,829) General and administrative costs (1,759) (1,828) (3,225) (3,142) Total (6,1O1) (5,729) (11,582) (1O,971) Labour costs SID Bank SID Bank Group 2O1O 2OO9 2O1O 2OO9 Gross salaries (3,151) (2,781) (6,177) (5,747) Costs of pension insurance (2SO) (25O) (465) (41O) Social security costs (23O) (2O5) (657) (52O) Payroll tax O O (9) (134) Other labour costs (681) (665) ( 1 ,O49) (1,O18) Total (4,342) (3,9O1) (8,357) (7,829) In 2010, SID Bank had 91 employees on average; as at 31 December 2010, there were 94 employees, of which 17.0 percent had finished secondary school, 9.5 percent had finished post-secondary vocational studies (level VI), 66.0 percent had finished higher education (level VII), 6.4 percent had a master's and 1.1 percent a doctor's degree. In SID Bank the costs of pension insurance (EUR 280 thousand) together with the costs of voluntary supplementary pension insurance (EUR 138 thousand) totalled EUR 418 thousand in 2010. As at 31 December 2010, SID Bank Group (including PRO KOLEKT Group and the CIDC institute) had 303 employees. 21.1 percent of the employees in SID Bank Group had finished secondary school, 12.5 percent had finished post-secondary vocational studies (level VI), 62,7 percent had finished higher education (level VII), 3.0 percent had a master's and 0.7 percent a doctor's degree. In SID Bank Group the costs of pension insurance totalled EUR 641 thousand and the costs of voluntary supplementary pension insurance EUR 271 thousand in 2010. The General Meeting of Shareholders of SID Bank has not set a policy on the remuneration of the management employees, since the said policy in majority state-owned companies is already largely determined by the Act Regulating the Incomes of Managers of Companies owned by the Republic of Slovenia and Municipalities (ZPPODG; OJ. RS, No 21/10) and the regulation issued pursuant to the ZPPODG. In this context, the Supervisory Board within the prescribed period, in accordance with the rules and practices and in accordance with its powers, adopted Rules for the Employment Contracts of Members of Management Board (the Rules) and in accordance with Article No 6 of the ZPPODG introduced the Rules to the General Meeting of Shareholders. After discussing the Rules, the Government adopted directives for the Supervisory Board regarding the content of the Rules, which were confirmed by a notarial record of the General Meeting ofShareholders ofSID Bank. The Supervisory Board took notice ofthese directives in the revision ofthe Rules. Members of managements in the companies of SID Bank Group realized the following revenues in 2010: President of Management Board ofSID Bank Mr. Sibil Svilan M.Sc. EUR 166 thousand, Member ofManagement Board ofSID Bank Mr. Jožef Bradeško EUR 150 thousand, President of Management Board of PKZ Mr. Ladislav Artnik EUR 113 thousand, Member of Management Board of PKZ Dr. Rasto Hartman EUR 96 thousand, Director of PRVI FAKTOR Ljubljana Mr. Ernest Ribič EUR 114 thousand, Director of PRVI FAKTOR Sarajevo Mr. Nedim Rizvanovič EUR 6 thousand, Directors of PRVI FAKTOR Beograd Mr. Dmitar Polovina EUR 8 thousand and Ms Jelena Tanaskovič EUR 56 thousand, Director of PRVI FAKTOR Zagreb Mr. Tomaž Kačar EUR 130 thousand. Annual Report of SID Bank and SID Bank Group - 2010 1O5 In 2010 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. The revenues of independent member of the Audit Committee, Ms Blanka Vezjak, M.Sc, for attendance fee amounted to EUR 0.7 thousand. Revenues pursuant to attendance fees and travel reimbursement of members of Supervisory Board and Audit Committee of SID Bank in 2010 amounted to: Dr. Aleš Berk Skok: EUR 6.1 thousand (of which travel reimbursement in the amount of EUR 0.1 thousand); Mr. Samo Hribar Milič, M.Sc.: EUR 4.7 thousand; Dr. Marko Jaklič: EUR 3.6 thousand; Mr. Gregor Kastelic, M.Sc.: EUR 9.6 thousand (of which travel reimbursement in the amount of EUR 4.1 thousand); Ms. Andreja Kert: EUR 6,5 thousand; Dr. Peter Kraljič: EUR 5.0 thousand (of which travel reimbursement in the amount of EUR 1.4 thousand); Dr. Viljem Pšeničny: EUR 2.0 thousand; Ms. Blanka Vezjak, M.Sc.: EUR 4.5 thousand (of which travel reimbursement in the amount of EUR 0.6 thousand); Ms. Alenka Stanič, M.Sc.: EUR 0.7 thousand and Mr. Hugo Bosio: EUR 0.9 thousand. In SID Bank in 2010, the earnings of other employees with service contracts amounted EUR 534 thousand; in SID Bank Group they amounted to EUR 1,479 thousand. General and administrative costs SID Bank SID Bank Group 2010 2009 2010 2009 Material costs (149) (143) (287) (263) Service costs (1,610) (1,685) (2,938) (2,879) Total (1,759) (1,828) (3,225) (3,142) Costs of payments to auditors (part ofthe service costs item - in net amount) SID Bank SID Bank Group 2010 2009 2010 2009 Auditing of the annual report (64) (46) (117) (112) Other auditing services (11) (1) (12) (1) Total (75) (47) (129) (113) 2.4.10. Depreciation, amortization SID Bank SID Bank Group 2010 2009 2010 2009 Depreciation of tangible fixed assets (442) (459) (591) (614) Amortization of intangible assets (174) (184) (257) (267) Total (616) (643) (848) (881) 2.4.11. Dividend income/expenses SID Bank SID Bank Group 2010 2009 2010 2009 Income/Expenses for banking operations 1,667 (2,085) 1,667 (2,085) Income/expenses for liabilities from insurance contracts 0 0 7,465 (8,618) Income/Expenses for other operations (51) 100 207 147 Total 1,616 (1,985) 9,339 (10,556) Income/Expenses for banking operations SID Bank SID Bank Group 2010 2009 2010 2009 Net changes in provisions for guarantees 634 (685) 634 (685) - Provision expenses (5,322) (3,623) (5,322) (3,623) - Revenues from the release of provisions 5,956 2,938 5,956 2,938 Net change in provisions for undrawn loans 1,033 (1,400) 1,033 (1,400) - Provision expenses (4,144) (4,877) (4,144) (4,877) - Revenues from the release of provisions 5,177 3,477 5,177 3,477 Total_1,667_(2,085)_1,667_(2,085) - Annual Report of SID Bank and SID Bank Group for 2009 - 106 Income/expenses for liabilities from insurance contracts SID Bank Group 2010 2009 Changes in gross unearned premiums (1,833) 133 Changes in unearned premiums - reinsurers' share 1,391 (172) Changes in gross provisions for outstanding claims 6,137 (17,777) Change in provisions for outstanding claims - reinsurers' share 862 10,127 Changes in gross provision for bonuses and rebates (899) 25 Reinsurers' share in expenses for bonuses and rebates 449 (44) Changes in provisions for unexpired risks 2,957 (1,779) Change in provisions for outstanding claims - reinsurers' share (1,599) 869 Total 7,465 (8,618) Income/Expenses for other operations SID Bank SID Bank Group 2010 2009 2010 2009 Net changes in provisions for legal issues 0 108 0 108 - Provision expenses 0 108 0 108 Net change in provisions for pensions and similar liabilities (51) (8) (75) (12) - Provision expenses (51) (136) (78) (140) - Revenues from the release of provisions 0 128 3 128 Net deferred revenues from reinsurance commissions 0 0 286 51 - Provision expenses 0 0 (399) (537) - Revenues from the release of provisions 0 0 685 588 Net changes in provisions for factoring 0 0 (4) 0 Total (51) 100 207 147 Provision balance is presented in detail in Item 2.3.13. ofthe financial section ofthe annual report. 2.4.12. Impairments SID Bank SID Bank Group 2010 2009 2010 2009 Impairment of loans, guarantees and receivables measured at amortized cost (49,228) (28,457) (57,648) (36,478) Impairment of available-for-sale financial assets (506) 0 (506) (10) Impairments of other assets (94) (4) (749) (328) Adjustment to impairments of loans granted to companies of the group 0 0 948 2,084 Income from loans, guarantees and receivables measured at amortized cost 17,563 9,552 18,894 11,096 Income from the elimination of impairments of available- for-sale financial assets 0 0 0 37 Income from the elimination of impairments of other assets 73 3 73 3 Total (32,192) (18,906) (38,988) (23,596) 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. 2.4.13. Corporate income tax on ordinary activities SID Bank SID Bank Group 2010 2009 2010 2009 Income tax (1,557) (231) (4,163) (755) Deferred taxes 105 1 891 1,892 Total 1,452 (230) (3,272) 1,137 Receivables and liabilities due to deferred taxes are presented in detail in Item 2.3.9. ofthe financial section ofthe annual report. Income tax and tax calculated according to applicable tax rates (difference between accounting profit and tax profit) differ as shown bellow. 107 Annual Report of SID Bank and SID Bank Group - 2010 SID Bank SID Bank Group 2010 2009 2010 2009 Profit/loss 7,178 1,178 14,421 (6,521) Tax profit (according to applicable tax rates in respective countries) (1,436) (247) (3,398) (647) Tax base increasing revenues 5 31 1,504 620 Expenditures not recognized in tax (157) (50) (7,417) (786) Expenditures recognized in tax 0 0 5,076 26 Increase in tax base (9) (3) (38) (13) Tax reliefs 40 38 110 45 Tax (1,557) (231) (4,163) (755) Current tax represents the tax amount which has to be paid according to the Corporate Income Tax Act at the prescribed tax rate. Statutory tax rate for 2010 was 20 percent; effective tax rate was 21.7 percent. In SID Bank Group the statutory tax rate for the companies in Slovenia and Croatia amounted to 20 percent; for the companies in Serbia and Bosnia and Herzegovina it amounted to 10 percent. The effective tax rate for SID Bank Group for 2010 was 28.9 percent. The largest part of non-deductible expenditures refer to unrecognized expenditure due to permanent impairment of two securities in the amount of EUR 506 thousand, provisions for retirement severance pay and loyalty bonuses, which in the amount of 50 percent offormed are non-deductible, and to 50 percent ofexpenses for Supervisory Board, representation and unrecognized expenses for donations. Deferred tax income or expense results from the change of carrying amounts of deferred tax assets or deferred tax liabilities. SID Bank had EUR 303 thousand due to deferred taxes as at 31 December 2010. SID Bank had no outstanding tax liabilities as at 31 December 2010. In SID Bank Group corporate income tax liability for 2010 amounted to EUR 4,163 thousand. The liability in income statement was reduced by deferred tax for tax from unused tax losses, impairment of debt securities, from receivables adjustments formed and from the demarcation ofexpenses and revenues in total amount ofEUR 891 thousand. Deferred tax income or expense results from the change of carrying amounts of deferred tax assets or deferred tax liabilities. SID Bank Group had net receivables in the amount of EUR 1,691 thousand due to deferred taxes as at 31 December 2010. SID Bank Group had no outstanding tax liabilities on 31 December 2010. 2.4.14 Net profit per share SID Bank 2010 2009 Number of ordinary registered no-par value shares 3,121,741 3,121,741 Treasury shares 18,445 18,445 Net profit for the period 5,726 948 Net profit per share 1.85 0.31 2.5. Geographical structure Revenues and long-term assets in Slovenia and abroad are disclosed in detail in Chapter 4. of the financial section of the annual report. - Annual Report of SID Bank and SID Bank Group for 2009 - 108 2.6. Relations with subsidiaries (In EUR thousand) 2.6.1. Loans given SID Bank Subsidiary companies Total associated companies and subsidiaries 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Loans given 0 25 88,308 81,116 Value adjustments 0 (1) (5,036) (4,314) Total 0 24 83,272 76,802 2.6.2. Other receivables Other receivables - receivables for services 2.6.3. Net interest _SID Bank_ Subsidiary companies Total associated companies and _subsidiaries_ 31.12.2010_31.12.2009_31.12.2010_31.12.2009 0 39 0 0 SID Bank Subsidiary companies Total associated companies and subsidiaries 2010 2009 2010 2009 Income 0 5 4,120 2,467 Total 0 5 4,120 2,467 Interest rate risk - realized interest rates in percent SID Bank Subsidiary companies Total associated companies and subsidiaries 2010 2009 2010 2009 Assets: Interest rate risk - realized interest rates in percent / 5.00 2.077-5.453 4.00 - 6.31 2.6.4. Dividend income SID Bank Subsidiary companies Total associated companies and subsidiaries 2010 2009 2010 2009 Dividend income 0 138 0 2,336 2.6.5. Net fees SID Bank Subsidiary companies Total associated companies and subsidiaries 2010 2009 2010 2009 Income 0 0 101 81 Total 0 0 101 81 - Annual Report of SID Bank and SID Bank Group for 2009 - 109 2.6.6. Other net operating profits/losses SID Bank Subsidiary companies Total associated companies and subsidiaries 2010 2009 2010 2009 Income 276 319 0 0 Expenses (3) (11) 0 0 Total 273 308 0 0 2.6.7. Guarantees SID Bank Subsidiary companies Total associated companies and subsidiaries 2010 2009 2010 2009 Guarantees issued by the parent company to subsidiaries 0 0 0 950 Total 0 0 0 950 By the end of 2010, 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. ofthe financial section ofthe business report. 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 ofSID Bank and SID Bank Group. However, the following business event was important for SID Bank: In March 2011 an increase in the amount of EUR 350 million ofthe Eurobond issue in the international capital market was realized in SID Bank. - Annual Report of SID Bank and SID Bank Group for 2009 - 110 3. Risk management and other disclosures (In EUR thousand) Risk management for SID Bank and SID Bank Group is also presented in section 6.4. of business section of the annual report. 3.1. Liquidity Risk Managing liquidity risk means maintaining sufficient liquidity sources to settling current liabilities. The companies ofthe 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. 3.1.1.SID Bank - Assets and liabilities items according to residual maturity as at 31 December 2010 Up to 1 1 - 3 3 months Over 5 Sight month months - 1 year 1 - 5 years years Total Cash and balances with the central bank 12 0 0 0 0 0 12 Financial assets held for hedging 0 0 0 9,730 3,625 1,208 14,563 Available-for-sale financial assets 169 2,088 0 14,093 83,064 11,542 110,956 Loans 5,127 33,470 21,115 525,852 1,597,597 1,569,713 3,752,874 Property, plant and equipment 0 0 0 0 0 4,135 4,135 Intangible assets 0 0 0 0 0 252 252 Long-term investments in equity of subsidiaries, associates and joint ventures 0 0 0 0 0 8,831 8,831 Corporate income tax assets 0 1 3 0 71 351 426 Other assets 0 295 55 54 0 0 404 Non-current assets held for sale 0 0 0 3,088 0 0 3,088 TOTAL ASSETS 5,308 35,854 21,173 552,817 1,684,357 1,596,032 3,895,541 Financial liabilities with the central bank 0 0 1,001 0 0 0 1,001 Financial liabilities held for trading 0 0 0 0 29 0 29 Financial liabilities measured at amortized cost 0 5 40,195 591,736 1,382,362 1,545,564 3,559,862 Provision 1 604 344 713 255 844 2,761 Corporate income tax liabilities 0 0 0 1,357 79 36 1,472 Other liabilities 0 131 721 1,712 36 0 2,600 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 (2) 0 21 34 37 90 Reserves from profit (including retained profit) 0 0 0 0 0 25,191 25,191 Treasury shares 0 0 0 0 0 (1,324) (1,324) Net profit for the year 0 0 0 0 0 2,720 2,720 TOTAL LIABILITIES 1 738 42,261 595,539 1,382,795 1,874,207 3,895,541 INCONSISTENCY IN FINANCIAL ASSETS AND FINANCIAL LIABILITIES_5,307 35,116 (21,088) (42,722) 301,561 (278,174)_0 - Annual Report of SID Bank and SID Bank Group for 2009 - 111 3.1.2. SID Bank Group - Assets and liabilities items according to residual maturity as at 31 December 2010 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 13 0 0 0 0 0 13 Financial assets held for hedging 0 0 0 9,730 3,625 1,208 14,563 Available-for-sale financial assets 392 2,088 683 16,364 95,763 17,348 132,638 Loans 32,160 77,311 85,417 561,525 1,563,403 1,569,713 3,889,529 Property, plant and equipment 0 0 0 0 0 4,435 4,435 Investment property 0 0 0 0 0 157 157 Intangible assets 0 0 0 0 0 882 882 Long-term investments in equity of subsidiaries, associates and joint ventures 0 0 0 0 0 419 419 Corporate income tax assets 0 1 418 0 1,458 353 2,230 Other assets 6,783 11,505 7,178 6,319 9,428 0 41,213 Non-current assets held for sale 0 0 0 1 0 0 1 TOTAL ASSETS 39,348 90,905 93,696 593,939 1,673,677 1,594,515 4,086,080 Financial liabilities with the central bank 0 0 1,001 0 0 0 1,001 Financial liabilities held for trading 0 0 0 0 29 0 29 Financial liabilities measured at amortized cost 0 1,166 78,724 687,083 1,367,205 1,545,564 3,679,742 Provision 1 8,400 10,987 9,320 18,807 911 48,426 Corporate income tax liabilities 0 0 2,052 1,357 79 36 3,524 Other liabilities 0 1,371 5,318 1,778 36 0 8,503 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 68 23 34 148 273 Reserves from profit (including retained profit) 0 0 0 0 0 39,023 39,023 Treasury shares 0 0 0 0 0 (1,324) (1,324) Net profit for the year 0 0 0 0 0 5,744 5,744 TOTAL LIABILITIES 1 10,937 98,150 699,561 1,386,190 1,891,241 4,086,080 INCONSISTENCY IN FINANCIAL ASSETS AND FINANCIAL LIABILITIES 39,347 79,968 (4,454) (105,622) 287,487 (296,726) 0 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 of SID Bank 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 ofguarantee and credit potential etc.). - Annual Report of SID Bank and SID Bank Group for 2009 - 112 3.2. Foreign exchange risk In order to neutralise as much as possible the effects of exchange 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 ofassets covering technical provisions with currency structure ofexposure. 3.2.1.SID Bank - Assets and liabilities items according to foreign currencies as at 31 December 2010 EUR USD Other currencies Total Cash and balances with the central bank 12 0 Financial assets held for hedging 14,563 0 Available-for-sale financial assets 110,956 0 Loans 3,737,677 15,197 Property, plant and equipment 4,135 0 Intangible assets 252 0 Long-term investments in equity of subsidiaries, associates and joint ventures 8,831 0 Corporate income tax assets 426 0 Other assets 404 0 Non-current assets held for sale 3,088 0 TOTAL ASSETS 3,880,344 15,197 12 14,563 110,956 3,752,874 4,135 252 8,831 426 404 3,088 3,895,541 Financial liabilities with the central bank Derivative financial instruments held for trading Financial liabilities measured at amortized cost Provision Corporate income tax liabilities Other liabilities Share capital Capital reserves Revaluation surplus Reserves from profit (including retained profit) Treasury shares Net profit for the year TOTAL LIABILITIES 1,001 29 3,544,799 2,723 1,472 2,600 300,000 1,139 90 25,191 (1,324) 2,720 3,880,440 0 0 15,063 0 0 0 0 0 0 0 0 0 15,063 0 0 0 38 0 0 0 0 0 0 0 0 38 1,001 29 3,559,862 2,761 1,472 2,600 300,000 1,139 90 25,191 (1,324) 2,720 3,895,541 INCONSISTENCY IN FINANCIAL ASSETS AND FINANCIAL LIABILITIES (96) 134 (38) 0 - Annual Report of SID Bank and SID Bank Group for 2009 - 113 3.2.2. SID Bank Group - Assets and liabilities items according to foreign currencies as at 31 December 2010 EUR With currency clause EUR USD GBP Other currencies Total Cash and balances with the central bank 13 0 0 0 0 13 Financial assets held for hedging 14,563 0 0 0 0 14,563 Available-for-sale financial assets 132,638 0 0 0 0 132,638 Loans 3,751,457 115,060 15,213 19 7,780 3,889,529 Property, plant and equipment 4,339 0 0 0 96 4,435 Investment property 0 0 0 0 157 157 Intangible assets 845 0 0 0 37 882 Long-term investments in equity of subsidiaries, associates and joint ventures 419 0 0 0 0 419 Corporate income tax assets 1,953 1 0 0 276 2,230 Other assets 38,852 984 0 0 1,377 41,213 Non-current assets held for sale 1 0 0 0 0 1 TOTAL ASSETS 3,945,080 116,045 15,213 19 9,723 4,086,080 Financial liabilities with the central bank 1,001 0 0 0 0 1,001 Financial liabilities held for trading 29 0 0 0 0 29 Financial liabilities measured at amortized cost 3,642,819 17,988 15,063 0 3,872 3,679,742 Provision 48,335 0 0 0 91 48,426 Corporate income tax liabilities 3,313 0 0 0 211 3,524 Other liabilities 8,112 54 3 0 334 8,503 Share capital 300,000 0 0 0 0 300,000 Capital reserves 1,139 0 0 0 0 1,139 Revaluation surplus 273 0 0 0 0 273 Reserves from profit (including retained profit) 37,159 0 0 0 1,864 39,023 Treasury shares (1,324) 0 0 0 0 (1,324) Net profit for the year 6,153 0 0 0 (409) 5,744 TOTAL LIABILITIES 4,047,009 18,042 15,066 0 5,963 4,086,080 INCONSISTENCY IN FINANCIAL ASSETS AND FINANCIAL LIABILITIES (101,929) 98,003 147 19 3,760 0 Other currencies represent the functional currency of subsidiaries where we believe there is no currency risk. - Annual Report of SID Bank and SID Bank Group for 2009 - 114 3.3. Interest Rate Risk In assets, available-for-sale assets, given loans and cash in settlement and business accounts are exposed to interest rate risk. In liabilities, borrowed loans and issued securities are exposed to interest rate risk. 3.3.1. SID Bank - Assets and liabilities items according to exposure to interest rate risk as at 31 December 2010 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 with the central bank 12 0 12 12 0 0 0 0 0 Financial assets held for hedging 14,563 14,563 0 0 0 0 0 0 0 Available-for-sale financial assets 110,956 2,137 108,819 30 5,015 9,822 15,561 68,751 9,640 Loans 3,752,874 17,049 3,735,825 7,525 454,724 678,940 2,522,339 24,082 48,215 Property, plant and equipment 4,135 4,135 0 0 0 0 0 0 0 Intangible assets 252 252 0 0 0 0 0 0 0 Long-term investments in equity of subsidiaries, associates and joint ventures 8,831 8,831 0 0 0 0 0 0 0 Corporate income tax assets 426 426 0 0 0 0 0 0 0 Other assets 404 404 0 0 0 0 0 0 0 Non-current assets held for sale 3,088 3,088 0 0 0 0 0 0 0 TOTAL ASSETS 3,895,541 50,885 3,844,656 7,567 459,739 688,762 2,537,900 92,833 57,855 Financial liabilities with the central bank 1,001 0 1,001 0 0 0 0 0 0 Financial liabilities held for trading 29 29 0 0 0 0 0 0 0 Financial liabilities measured at amortized cost 3,559,862 0 3,559,862 0 511,213 216,712 1,905,351 815,143 111,443 Provision 2,761 2,761 0 0 0 0 0 0 0 Corporate income tax liabilities 1,472 1,472 0 0 0 0 0 0 0 Other liabilities 2,600 2,600 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 90 90 0 0 0 0 0 0 0 Reserves from profit (including retained profit) 25,191 25,191 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 2,720 2,720 0 0 0 0 0 0 0 TOTAL LIABILITIES 3,895,541 334,678 3,560,863 0 511,213 217,713 1,905,351 815,143 111,443 Net exposure to interest rate risk 0 (283,793) 283,792 7,567 (51,474) 471,049 632,549 (722,310) (53,588) - Annual Report of SID Bank and SID Bank Group for 2009 - 115 3.3.2. SID Bank Group - Assets and liabilities items according to exposure to interest rate risk as at 31 December 2010 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 13 0 13 13 0 0 0 0 0 Financial assets held for hedging 14,563 14,563 0 0 0 0 0 0 0 Available-for-sale financial assets 132,638 2,401 130,237 30 5,015 10,505 17,832 80,801 16,054 Loans 3,889,529 33,059 3,856,470 20,689 540,764 713,459 2,509,261 24,082 48,215 Property, plant and equipment 4,435 4,435 0 0 0 0 0 0 0 Investment property 157 157 0 0 0 0 0 0 0 Intangible assets 882 882 0 0 0 0 0 0 0 Long-term investments in equity of subsidiaries, associates and joint ventures 419 419 0 0 0 0 0 0 0 Corporate income tax assets 2,230 2,230 0 0 0 0 0 0 0 Other assets 41,213 41,132 81 0 27 54 0 0 0 Non-current assets held for sale 1 1 0 0 0 0 0 0 0 TOTAL ASSETS 4,086,080 99,279 3,986,801 20,732 545,806 724,018 2,527,093 104,883 64,269 Financial liabilities with the central bank 1,001 0 1,001 0 0 1,001 0 0 0 Financial liabilities held for trading 29 29 0 0 0 0 0 0 0 Financial liabilities measured at amortized cost 3,679,742 621 3,679,121 0 593,628 245,139 1,913,768 815,143 111,443 Provision 48,426 48,426 0 0 0 0 0 0 0 Corporate income tax liabilities 3,524 3,524 0 0 0 0 0 0 0 Other liabilities 8,503 8,503 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 273 273 0 0 0 0 0 0 0 Reserves from profit (including retained profit) 39,023 39,023 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 5,744 5,744 0 0 0 0 0 0 0 TOTAL LIABILITIES 4,086,080 405,958 3,679,121 0 593,628 246,140 1,913,768 815,143 111,443 Net exposure to interest rate risk 0 (306,679) 306,679 20,732 (47,822) 477,878 613,325 (710,260) (47,174) - Annual Report of SID Bank and SID Bank Group for 2009 - 116 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 percent 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 ofSID Bank would increase by EUR 3,219 thousand in 2011 (by EUR 1,118 thousand in 2010). 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. The higher impact is mostly due to the increase in the assets and liabilities items sensitive to interest rate. Ifthe market interest rates change for less or more, the calculated results are proportional. If the market interest rates increased by 100 basis points, net interest income of SID Bank Group would increase by EUR 3,481 thousand in 2011 (by EUR 1,500 thousand in 2010). 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 of the securities portfolio carried out by SID Bank was based on the change in of 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. 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 percent p.a.). SID Bank 2010 2010 2009 2009 In EUR thousand +100 bps -100 bps +100 bps -100 bps BONDS AT FIXED INTEREST RATE Fixed - change of portfolio -2,048 2,048 -1,200 1,200 Increase or decrease in capital -2,048 2,048 -1,200 1,200 BONDS AT FLOATING INTEREST RATE Floating - change of portfolio 105 -105 106 -106 Impact on the statement of comprehensive income 105 -105 106 -106 TOTAL Total - change of portfolio -1,943 1,943 -1,094 1,094 Increase or decrease in capital -2,048 2,048 -1,200 1,200 Impact on the statement of comprehensive income 105 -105 106 -106 SID Bank Group 2010 2010 2009 2009 In EUR thousand +100 bps -100 bps +100 bps -100 bps BONDS AT FIXED INTEREST RATE Fixed - change of portfolio -2,376 2,376 -1,521 1,521 Increase or decrease in capital -2,376 2,376 -1,521 1,521 BONDS AT FLOATING INTEREST RATE Floating - change of portfolio 166 -166 172 -172 Impact on the statement of comprehensive income 166 -166 172 -172 TOTAL Total - change of portfolio -2,210 2,210 -1,349 1,349 Increase or decrease in capital -2,376 2,376 -1,521 1,521 Impact on the statement of comprehensive income 166 -166 172 -172 - Annual Report of SID Bank and SID Bank Group for 2009 - 117 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 ofclassification ofclients and investments. Items included in credit risk are: loans and deposits given, guarantees and approved undrawn loans. Total credit exposure SID Bank_SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Gross exposure 3,922,185 3,231,575 4,074,389 3,391,414 Individual impairments (40,982) (18,594) (59,343) (30,479) Group impairments (38,524) (28,701) (34,127) (24,933) Delimited fees and commissions (6,275) (4,939) (7,096) (6,732) Net exposure 3,836,404 3,179,341 3,973,823 3,329,270 SID Bank 31.12.2010 31.12.2009 Gross exposure Impairments Gross exposure Impairments Undue/group impaired 3,761,296 (38,523) 3,193,260 (28,672) Undue/individually impaired 110,515 (15,978) 16,662 (7,530) Undue/unimpaired 19,923 0 7,299 0 Due impaired 30,451 (25,005) 14,354 (11,093) Total 3,922,185 (79,506) 3,231,575 (47,295) SID Bank Group 31.12.2010 31.12.2009 Gross exposure Impairments Gross exposure Impairments Undue/group impaired 3,822,326 (34,072) 3,156,176 (24,904) Undue/individually impaired 120,002 (16,806) 25,476 (8,383) Undue/unimpaired 50,853 0 146,923 0 Due/unimpaired 1,815 0 19,851 0 Due impaired 79,393 (42,593) 42,988 (22,125) Total 4,074,389 (93,470) 3,391,414 (55,412) Aging receivables are insured by real estate mortgage, liens on property, assignment of debts, guarantees, bonds and other insurances. Loan rescheduling As at 31 December 20010, the carrying amount of rescheduled loans in SID Bank amounted to EUR 22,384 thousand (in 2009: EUR 103,683 thousand). A new agreement on the repayment conditions was reached for 6 Slovene and 1 foreign company. As at 31 December 2010, the carrying amount of rescheduled loans in SID Bank Group amounted to EUR 26,552 thousand (in 2009: EUR 112.853 thousand). Loan reschedules of significant value in SID Bank Group were concluded with 29 companies. New loan reschedules in SID Bank Group were concluded with 22 Slovene and 7 foreign companies. 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 2010 2009 2010 2009 Gross exposure 140,932 28,781 190,600 66,230 Individual impairments (40,982) (18,594) (59,343) (30,479) Delimited fees and commissions (350) (11) (1,171) (11) Net exposure 99,600 10,176 130,086 35,740 Value of collateral for granted and received loans Total value of loan collateral in SID Bank as at 31 December 2010 was EUR 977,441 thousand (in 2009: EUR 741,215 thousand). Given the type of insurance, the largest volume consists of pledges of commercial real estate, followed by 118 - Annual Report of SID Bank and SID Bank Group for 2009 - 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, pledge of receivables for insurance and other insurances. Total fair value of loan collateral in SID Bank Group as at 31 December 2010 was EUR 1,050,008 thousand (in 2009: EUR 795,525 thousand). Given the type of insurance, the largest volume consists of pledges 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, pledge 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, pledge 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 ofthe recovery, starts with oral and written reminder ofthe 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 Gross exposure of overdue, unpaid receivables as at 31 December 2010 in SID Bank amounted to EUR 30,451 thousand; they amounted to EUR 81,208 thousand in SID Bank Group. SID Bank has overdue, unpaid receivables of14 Slovene companies. SID Bank Group discloses most of overdue, unpaid receivables of 46 companies. 18 of these are in Slovenia, 8 in Croatia, 11 in Serbia, 8 in Bosnia and Herzegovina and 1 in the United Kingdom. Due loans and receivables and impairments The structure ofexposure of loans, guarantees and derivative financial instruments by maturity Year 2010 SID Bank Outstanding Overdue up Overdue 1 - 3 Overdue 3 - Overdue Total to 1 month months 12 months more than 1 year Loans to banks 2,955,894 0 0 0 0 2,955,894 Loans to clients other than banks 791,534 37 4,149 404 856 796,980 Approved undrawn loans 33,409 0 0 0 0 33,409 Guarantees 30,442 0 0 0 0 30,442 Derivative financial instruments 19,679 0 0 0 0 19,679 Total 3,830,958 37 4,149 404 856 3,836,404 - Annual Report of SID Bank and SID Bank Group for 2009 - 119 Year 2009 SID Bank Outstanding Overdue up Overdue 1 - 3 Overdue 3 - Overdue Total to 1 month months 12 months more than 1 year Loans to banks 2,292,737 0 0 0 0 2,292,737 Loans to clients other than banks 659,023 39 592 2,629 1 662,284 Approved undrawn loans 180,330 0 0 0 0 180,330 Guarantees 36,760 0 0 0 0 36,760 Derivative financial instruments 7,230 0 0 0 0 7,230 Total 3,176,080 39 592 2,629 1 3,179,341 Year 2010 SID Bank Group Outstanding Overdue up to Overdue 1 - 3 Overdue 3 - Overdue more Total 1 month months 12 months than 1 year Loans to banks 2,975,767 0 0 0 0 2,975,767 Loans to clients other than banks 874,586 13,695 8,587 5,579 10,754 913,201 Approved undrawn loans 33,409 0 0 0 0 33,409 Guarantees 31,767 0 0 0 0 31,767 Derivative financial instruments 19,676 0 0 0 0 19,679 Total 3,935,207 13,695 8,587 5,579 10,754 3,973,823 Year 2009_ SID Bank Group Outstanding Overdue up to Overdue 1 - 3 Overdue 3 - Overdue more Total 1 month months 12 months than 1 year Loans to banks 2,306,952 0 0 0 0 2,306,952 Loans to clients other than banks 743,902 9,910 6,395 22,333 2,076 784,616 Approved undrawn loans 192,830 0 0 0 0 192,830 Guarantees 37,642 0 0 0 0 37,642 Derivative financial instruments 7,230 0 0 0 0 7,230 Total 3,288,556 9,910 6,395 22,333 2,076 3,329,270 Concentration of credit portfolio risks by activity SID Bank Group assesses concentration of risks by activity 2010 2009 value in percent value in percent Banks 3,023,555 74.2 2,323,314 68.5 Non-financial organizations 925,108 22.7 956,489 28.2 Other financial institutions 125,727 3.1 111,611 3.3 Total 4,074,389 100.0 3,391,414 100.0 3.5. Other disclosures for the insurance sector of the SID Bank Group Insurance risk Short-term receivables from private law buyers (as a rule, these are the claims of suppliers with a maturity of up to 180 days, exceptionally up to 1 year) for commercial and non-commercial risks for sales of goods and/or services at home and/or abroad on deferred payment and usually on an open account. The contracts are renewable and as a rule, the total turnover of policy holders on the foreign and/or domestic markets is insured. The contracts are usually concluded for the period of one year, exceptionally up to three years. The contracts contain a clause on retention, which is determined by percentage of claim. The policyholder obtains insurance coverage for an individual buyer 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 120 - Annual Report of SID Bank and SID Bank Group for 2009 - amount of loss. Furthermore, the insurance company may reduce or cancel 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 tool for 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. The manager 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 are authorized, based on their experience, to assess risks on the basis ofwhich the receivables due from individual debtor or the debtors belonging to the same group (companies associated in terms of ownership or management) are insured. Depending on the amount of exposure to the debtor or the group of debtors, signatures ofthe employees with appropriate authorizations must be provided. Insurance of large exposures to debtors is decided by the Management Board and, when a certain amount is exceeded, also 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 that the subsidiary, which engages in insurance, regularly reports 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 separate risks, industries and geographical regions. Reinsurance The insurance sector of SID Bank Group protects its portfolio of insured risks by several reinsurance contracts. The majority of operations are secured by means of a quota reinsurance contract, which is multilevel, with a controlling interest of 50 percent. In claims, where the amount of its retention exceeds the maximal own share, SID-PKZ further protected its retention with an excess of loss reinsurance. The reinsurance contract covers all risks of the insurance portfolio (insurance against commercial and non-commercial risks). The insurance risks were further protected by a contract between SID Bank as the authorized institution representing the Republic of Slovenia (reinsurer) and SID-PKZ (cedant). 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. By means of two special contracts with SID Bank, which implements the program for the Republic of Slovenia, the so-called "Top-up 1 and 2" scheme for risks, which the private market was only willing to reinsure up to a certain amount, was introduced. 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 - 121 3.6. Assets carried at fair value and liabilities to fund sources SID Bank_SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Book Fair Book Fair Book Fair Book Fair In EUR thousand value value value value value value value value Cash and balances with the central bank 12 12 1,004 1,004 13 13 1,004 1,004 Financial assets held for trading 0 0 248 248 0 0 248 248 Financial assets held for hedging 14,563 14,563 2,101 2,101 14,563 14,563 2,101 2,101 Available-for-sale financial assets 110,956 110,956 50,051 50,051 132,638 132,638 72,390 72,390 Loans 3,752,874 3,759,149 2,955,022 2,959,891 3,889,529 3,897,446 3,094,131 3,099,041 - Loans to banks 2,955,894 2,960,090 2,292,738 2,296,171 2,976,328 2,980,524 2,309,515 2,313,018 - Loans to clients other than banks 796,980 799,059 662,284 663,720 913,201 916,922 784,616 786,023 Property, plant and equipment 4,135 4,525 4,441 4,895 4,435 4,825 4,845 5,299 Investment property 0 0 0 0 157 157 80 80 Intangible assets 252 252 395 395 882 882 1,078 1,078 Long-term investments in equity of subsidiaries, associates and joint ventures 8,831 8,831 7,712 7,712 419 419 419 419 Corporate income tax assets 426 426 1,019 1,019 2,230 2,230 2,155 2,155 - Assets for corporate income tax 0 0 656 656 416 416 1,180 1,180 - Assets for deferred taxes 426 426 363 363 1,814 1,814 975 975 Other assets 404 404 2,902 2,902 41,213 41,213 37,182 37,182 Non-current assets held for sale and discontinued operations 3,088 3,088 0 0 1 0 0 0 TOTAL ASSETS 3,895,541 3,902,206 3,024,895 3,030,218 4,086,080 4,094,386 3,215,633 3,220,997 Financial liabilities with the central bank 1,001 1,001 0 0 1,001 1,001 0 0 Financial liabilities held for trading 29 29 271 271 29 29 271 271 Derivative financial instruments held for hedging 0 0 1,202 1,202 0 0 1,202 1,202 Financial liabilities measured at amortized cost 3,559,862 3,561,779 2,693,134 2,694,289 3,679,742 3,682,069 2,814,538 2,815,664 - Bank deposits 0 0 155,066 155,066 0 0 155,066 155,066 - Deposits ofclients other than banks 5 5 91,870 91,870 5 5 91,870 91,870 - Loans ofbanks 2,023,693 2,025,361 1,799,948 1,800,827 2,143,572 2,145,240 1,921,338 1,922,188 - Loans to clients other than banks 99,998 100,247 99,108 99,384 99,999 100,658 99,122 99,398 - Debtsecurities 1,436,166 1,436,166 547,142 547,142 1,436,166 1,436,166 547,142 547,142 Provision 2,761 2,761 4,382 4,382 48,426 48,426 56,695 56,695 Corporate income tax liabilities 1,505 1,505 138 138 3,524 3,524 138 138 - Tax liabilities 1,382 1,382 0 0 3,401 3,401 0 0 - Non-currentdeferred tax liabilities 123 123 138 138 123 123 138 138 Other liabilities 2,478 2,478 3,785 3,785 8,503 8,503 9,063 9,063 TOTAL LIABILITIES 3,566,635 3,568,552 2,702,912 2,704,067 3,741,225 3,742,551 2,881,907 2,883,033 EQUITY 327,946 321,982 344,855 333,726 TOTAL LIABILITIES AND EQUITY 3,894,541 3,568,552 3,024,894 2,704,067 4,086,080 3,742,551 3,215,633 2,883,033 - Annual Report of SID Bank and SID Bank Group for 2009 - 122 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 held for hedging and available-for-sale financial assets. 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. All listed financial instruments are initially recognized at fair value. Upon initial recognition, the fair value of a financial instrument is typically the cost oftransaction. 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 2010 and the accrued interest for the period. The fair value of property, plant and equipment as at 31 December 2010 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 of the carrying amount from the fair value are checked at least once a year. It was assessed that the carrying amount is a good approximation of the fair value. The same applies for investment property. However, they are subject to an evaluation by an independent valuer every second year. 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 31.12.2010 31.12.2009 Share capital 300,000 300,000 Treasury shares (1,324) (1,324) Capital reserves 1,139 1,139 Profit reserves and retained earnings 27,911 21,735 Core capital deduction items (252) (396) Core capital 327,474 321,154 Tier I additional capital 56 63 Deduction items from core capital and Tier I additional capital (11,500) (7,294) Tier II additional capital 0 0 Equity 316,029 313,923 Capital adequacy ratio (in percent) 13.53 16.65 SID Bank Group 31.12.2010 31.12.2009 Share capital 300,000 300,000 Treasury shares (1,324) (1,324) Capital reserves 1,139 1,139 Profit reserves and retained earnings 33,106 28,183 Core capital deduction items (825) (992) Core capital 332,096 327,006 Tier I additional capital 56 63 Deduction items from core capital and Tier I additional capital (8,412) (4,206) Tier II additional capital 0 0 Equity 323,740 322,863 a) Core capital deduction items SID Bank SID Bank Group 31.12.2010 31.12.2009 31 .12.2010 31.12.2009 Intangible assets (252) (396) (825) (992) - Annual Report of SID Bank and SID Bank Group for 2009 - 123 b) Deduction items from core capital and additional capital SID Bank SID Bank Group 31.12.2010 31.12.2009 31.12.2010 31.12.2009 Investments in other financial institutions that individually exceed 10 percent ofthe institution's capital Share in insurance companies (3,088) (8,412) (3,088) (4,206) (8,412) (4,206) Total (11,500) (7,294) (8,412) (4,206) 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 percent. Capital management policy is presented in Item 6.4. ofthe business section ofthe annual report. - Annual Report of SID Bank and SID Bank Group for 2009 - 124 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. ofthe financial section ofthe annual report. 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 SID-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. 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 long-term assets, interest income and income from fees SID Bank 2010 2009 Slovenia Abroad Slovenia Abroad Balance of long-term assets as at 31 December 3,074,924 205,466 2,648,413 85,319 Interest income and income from fees 89,125 19,414 83,488 774 SID Bank Group 2010 2009 Slovenia Abroad Slovenia Abroad Balance of long-term assets as at 31 December 3,070,241 197,949 2,680,305 87,426 Interest income and income from fees 91,782 31,969 86,698 15,537 - Annual Report of SID Bank and SID Bank Group for 2009 - 125 Statement of financial position by segments as at 31 December 2010 31.12.2010 SID Bank SID-PKZ PF Group Eliminations SID Bank Group Cash and balances with the central bank 12 0 1 0 13 Financial assets held for hedging 14,563 0 0 0 14,563 Available-for-sale financial assets 110,956 21,681 1 0 132,638 Loans 3,752,874 12,273 161,734 (37,352) 3,889,529 Property, plant and equipment 4,135 96 204 0 4,435 Investment property 0 0 157 0 157 Intangible assets 252 58 84 488 882 Long-term investments in equity of subsidiaries, associates and joint ventures 8,831 0 0 (8,412) 419 Corporate income tax assets 426 80 1,724 0 2,230 Other assets 404 38,363 2,468 (22) 41,213 - Assets from insurance operations 0 38,313 0 0 38,313 - Otherassets 404 50 2,468 (22) 2,900 Non-current assets held for sale 3,088 0 0 (3,087) 1 TOTAL ASSETS 3,895,541 72,551 166,373 (48,385) 4,086,080 Financial liabilities with the central bank 1,001 0 0 0 1,001 Financial liabilities held for trading Financial liabilities measured at amortized cost 29 3,559,862 0 0 0 161,948 0 (42,068) 29 3,679,742 Provision 2,761 45,595 70 0 48,426 - Bank provision 2,577 0 0 0 2,577 - Liabilities from insurance contracts 0 43,933 0 0 43,933 - Otherprovision 184 1,662 70 0 1,916 Corporate income tax liabilities 1,472 1,841 211 0 3,524 Other liabilities 2,600 4,859 1,006 (22) 8,503 EQUITY 327,816 20,256 3,078 (6,295) 344,855 TOTAL LIABILITIES AND EQUITY 3,895,541 72,551 166,373 (48,385) 4,086,080 CONTINGENCY RESERVES INTEREST RATE EQUALIZATION PROGRAMME 129,400 7,830 129,400 7,830 In the course of consolidation for 2010 loans given in the amount of EUR 42,068 thousand have been eliminated. Loans received in the same amount have been eliminated. Accordingly, impairments formed for these loans in the amount of EUR 4,716 thousand have been eliminated. On the other side, due provision adjustments in the amount of EUR 3,768 thousand have been made. For the remaining amount of EUR 948 thousand an adjustment was made in net profit for the period. Furthermore, other assets in the amount of EUR 22 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 11,500 thousand have been eliminated. Accordingly, appropriate eliminations from the item share capital in the amount of EUR 9,997 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 for the difference in intangible assets. Furthermore, in the item net profit for the year there was an increase in the amount of EUR 917 thousand (transfer of credit risk equalization provisions) and a reduction in profit reserves 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. A detailed presentation is in Item 2.1.2. ofthe financial section ofthe annual report. - Annual Report of SID Bank and SID Bank Group for 2009 - 126 31.12.2009 SID Bank SID-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 2,037 (34) 37,182 - Assets from insurance operations 0 32,228 0 0 32,228 - Otherassets 2,902 49 2,037 (34) 4,954 TOTAL ASSETS 3,024,894 62,741 168,154 (40,156) 3,215,633 Financial liabilities held for trading 271 0 0 0 271 Derivative financial instruments held for hedging 1,202 0 0 0 1,202 Financial liabilities measured at amortized cost 2,693,134 0 158,489 (37,085) 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 125,428 125,428 INTEREST RATE EQUALIZATION PROGRAMME 7,627 7,627 - Annual Report of SID Bank and SID Bank Group for 2009 - 127 Statements of comprehensive income by segments for the year 2010 2010 SID Bank SID-PKZ PF Group Eliminations Total Interest income and similar income 106,283 778 12,371 (1,996) 117,436 Interest expense and similar expense (66,134) 0 (8,423) 1,996 (72,561) Net interest 40,149 778 3,948 0 44,875 Fees and commissions received 2,256 0 4,107 (49) 6,314 Fees and commissions paid (796) (15) (924) 49 (1,686) Net fees and commissions 1,460 (15) 3,183 0 4,628 Realized profits/losses from financial assets and liabilities not measured at fair value through profit or loss 439 5 0 0 444 Net profits/losses from financial assets and liabilities held for trading (47) 0 0 0 (47) Changes in fair value when calculating risk insurance (449) 0 0 0 (449) Net foreign exchange gains/losses 6 4 948 0 958 Net profits/losses from derecognition of assets, excluding non-current assets held for sale (6) 0 14 0 8 Other net operating profits/losses 2,919 3,528 (56) (308) 6,083 Administrative costs (6,101) (2,638) (3,151) 308 (11,582) Depreciation, amortization (616) (65) (167) 0 (848) Provision 1,616 7,736 (13) 0 9,339 Impairments (32,192) (616) (7,128) 948 (38,988) Profits/losses on ordinary activities 7,178 8,717 (2,422) 14,421 Corporate income tax on ordinary activities (1,557) (1,841) (765) (4,163) Deferred taxes 105 (32) 818 891 Net profits/losses for the year_5,726_6,844_(2,369)_11,149 Net profits/losses for the year_5,726_6,844_(2,369)_11,149 Net profits/losses derecognized from revaluation surplus from available-for-sale financial assets 135 48 0 183 Corporate income tax on other comprehensive income_(27)_(10)_(165)_(202) Post-tax comprehensive income for the year Of owners of the parent company 5,834 6,882 (2,534) 11,130 11,130 In the course of consolidation for the year 2010 impairments in the amount of EUR 948 thousand have been eliminated. These impairments were formed for the loans ofthe parent company granted to a subsidiary in 2010. Furthermore, interest income in the amount of EUR 1,996 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 49 thousand and have been eliminated from the consolidation accordingly. 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 169 thousand have been eliminated from the consolidation. Administrative costs in the same amount have been eliminated. 128 - Annual Report of SID Bank and SID Bank Group for 2009 - Other operating profits/losses in the amount of EUR 249 thousand have also been eliminated. On the other side, expenses for insurance operations in the amount of EUR 74 thousand, administrative costs in the amount of EUR 139 thousand and operating losses in the amount of EUR 36 thousand have been eliminated accordingly. Statements of comprehensive income by segments for the year 2009 2009 SID Bank SID-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 (39) 6,456 Fees and commissions paid (437) (14) (821) 39 (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 0 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) (2,530) (3,063) 351 (10,971) Depreciation, amortization (643) (66) (172) 0 (881) Provision (1,985) (8,571) 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 profits/losses for the year 948 (6,529) 587 (5,384) Net profits/losses for the year 948 (6,529) 587 (5,384) Net profits/losses derecognized from revaluation surplus from available-for-sale financial assets 347 859 0 1,206 Corporate income tax on other comprehensive income (70) (172) (45) (287) Post-tax comprehensive income for the year 1,225 (5,842) 542 (4,465) Of owners of the parent company (4,465) - Annual Report of SID Bank and SID Bank Group for 2009 - 129 5.APPENDICES 5.1. Financial statements of insurance against non-marketable risks (on behalf and for the account of the Republic of Slovenia) Statement of financial position In EUR thousand 31.12.2010 31.12.2009 Cash in business accounts with banks in the country 32 43 Loans to banks 99,095 101,859 Available-for-sale financial assets 25,288 18,258 Other assets 4,985 5,268 TOTAL INVESTMENTS OF CONTINGENCY RESERVES 129,400 125,428 In EUR thousand 31.12.2010 31.12.2009 Contingency reserves 124,219 120,039 Revaluation surplus from available-for-sale financial assets 286 208 Other liabilities 4,895 5,181 TOTAL LIABILITIES FOR CONTINGENCY RESERVES 129,400 125,428 Statement of comprehensive income In EUR thousand 2010 2009 Interest income and similar income 2,219 3,101 - Loans and deposits 1,581 2,570 - Securities 638 531 - Other 0 0 Net interest 2,219 3,101 Technical items - Insurance and reinsurance premiums 8,227 4,754 - Reinsurance and processing commissions (1,038) (445) - Claims (2,990) (4,899) - Recourses 90 6 - Bonuses (1) 0 Total technical items 4,288 (584) Other net fees 16 13 Gains/losses from sale/realization of securities 147 103 Other operating profits/losses 0 0 Operating costs (2,490) (2,490) Surplus of income over expenses 4,180 143 Net profit/loss in surplus from revaluation of available-for-sale financial assets 286 208 Comprehensive income for the year 4,466 351 _130 Annual Report of SID Bank and SID Bank Group - 2010 5.2. Financial statements of the IREP programme (on behalf and for the account of the Republic of Slovenia) Statement of financial position In EUR thousand_31.12.2010_31.12.2009 Cash in business accounts with banks in the country 2 1 Loans to banks 3,481 2,843 Available-for-sale financial assets 4,286 4,782 Financial assets held for trading 60 0 Other assets_1_1 TOTAL INVESTMENTS OF IREP PROGRAMME_7,830_7,627 In EUR thousand 31.12.2010 31.12.2009 Liabilities from the interest rate equalization programme 7,732 7,585 Financial liabilities held for trading 60 Revaluation surplus from available-for-sale financial assets 37 42 Other liabilities 1 42 TOTAL LIABILITIES OF IREP PROGRAMME 7,830 7,627 - Agent transactions (interest rate swaps) 11,949 0 Statement of comprehensive income In EUR thousand 2010 2009 Interest income and similar income 352 197 - Loans and deposits 55 59 - Securities 114 138 - Other (interest rate swaps) 183 0 Interest expense 238 0 - Loans (interest rate equalization) 54 0 - Other (interest rate swaps) 184 0 Net interest 114 197 Other net fees (5) (4) Gains/losses from sale/realization of securities 38 (15) Surplus of income over expenses 147 178 Net profit/loss in surplus from revaluation ofavailable-for-sale financial instruments 37 42 Comprehensive income for the year 184 220 - Annual Report of SID Bank and SID Bank Group for 2009 - 131 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, of which NLB d.d., faktoring is the joint owner. In the field of factoring, processes of risk management of two 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 the 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 presented in Item 6.4 ofthe business section ofthe annual report. 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 - 132 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 ofthe annual report. 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 percent of the total assets of SID Bank and their income accounts for less than 1 percent 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 of full 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 SID-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 - 133 Capital, minimal capital requirements and the process of assessment of necessary internal capital Capital adequacy of SID Bank Group In EUR thousand 31.12.2010 31.12.2009 Paid-up share capital 300,000 300,000 Treasury shares (1,324) (1,324) Capital reserves 1,139 1,139 Profit reserves and retained earnings 33,106 28,183 Other core capital deduction items (824) (992) - Intangible assets (824) (992) - Difference between the reported impairments and provisions according to IFRS and the regulation on loss assessment 0 0 Core capital 332,096 327,006 Tier I additional capital 56 63 Total core and additional capital I 332,152 327,069 Deduction items from core capital and Tier I additional capital (8,412) (4,206) - Interest in insurance companies (8,412) (4,206) Total capital - for the purpose of capital adequacy 323,740 322,863 Tier II additional capital 0 0 Capital requirements (198,070) (164,511) - For credit, settlement and counterparty risks (193,816) (161,391) Central governments and central banks (160) (197) Regional governments and local authorities (120) (162) Public sector en tities (1,094) (571) Multilateral developmentbanks 0 0 Institutions (122,151) (95,917) Corporate (67,596) (60,077) Pastdue items ( 1,897) (3,082) Items belonging to regulatory high-risk categories (344) (896) Positions in investmentfunds (11) (10) Other exposure classes (444) (479) - For foreign exchange risk 0 0 - For market risks 0 0 - For operational risk (4,253) (3,120) Share premium 125,670 158,352 Capital adequacy ratio (in percent) 13.08 15.70 In the calculation of the capital adequacy of SID Bank banking group, 50 percent of the assets of PRVI FAKTOR Group were included besides the assets of SID Bank. Capital requirements for credit and foreign exchange risks are calculated under standardized approach, while capital requirements for operational risks are calculated under simple approach. Summary of approach to assessment of adequate internal capital is presented in Item 6.4. of the business section of the annual report. - Annual Report of SID Bank and SID Bank Group for 2009 - 134 Credit risk and risk of reduction of value of repurchased claims on money Credit risk is presented in Item 6.4 ofthe business section and in Item 3.4. ofthe financial section of the annual report. Definition of past due items and impaired items for accounting purposes 31.12.2010 31.12.2009 In EUR thousand Balance Impairments Balance Impairments Undue/group impaired 3,822,326 (34,072) 3,156,176 (24,904) Undue/individually impaired 120,002 (16,806) 25,476 (8,383) Undue/unimpaired 39,142 0 139,243 0 Due/unimpaired 1,815 0 19,851 0 Due impaired 79,393 (42,593) 42,988 (22,125) Total 4,062,678 (93,470) 3,383,734 (55,412) Data in the table includes deposits, granted loans, guarantees, derivative financial instruments 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 2010 (In EUR thousand) Original exposure Impairments and value before the provisions related Average net application of to original Net exposure exposure value in EXPOSURE CLASS conversion factors exposure value 2010 Central governments and central banks 48,692 4 48,687 41,030 Regional governments and local authorities 1,961 6 1,955 2,614 Public sector entities 31,883 943 30,941 25,970 Multilateral development banks 5,024 0 5,024 5,022 Institutions 3,104,553 4,300 2,100,253 2,880,256 Corporate 935,397 44,778 890,619 860,079 Past due items 33,732 12,915 20,817 21,769 Items belonging to regulatory high-risk categories 35,120 30,923 4,197 7,319 Positions in investment funds 138 0 138 138 International organizations 0 0 0 798 Other exposures 5,545 0 5,545 5,288 Total 4,202,045 93,868 4,108,176 3,850,283 Data in the table includes all assets and risky off-balance-sheet items Year 2009 (In EUR thousand) Original exposure Impairments and value before the provisions related Average net application of to original Net exposure exposure value in EXPOSURE CLASS conversion factors 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 - Annual Report of SID Bank and SID Bank Group for 2009 - 135 Distribution of exposure by important geographical areas, segmented by important exposure classes Six major geographical areas are disclosed in detail in a given year. Year 2010 (In EUR thousand)_ Bosnia and Switzerlan EXPOSURE CLASS Slovenia Croatia Serbia Herzegovina Netherlands d Other countries TOTAL Central governments and central banks 38,590 1,997 6 0 0 0 8,094 48,687 Regional governments and local authorities 1,076 606 46 201 0 0 26 1,955 Public sector entities 30,677 130 60 74 0 0 0 30,941 Multilateral development banks 0 0 0 0 0 0 5,024 5,024 Institutions 3,023,375 6,634 10,235 10,513 3,411 0 46,084 3,100,253 Corporate 653,867 110,677 56,584 29,152 17,506 11,956 10,878 890,619 Past due items 9,966 4,993 5,796 59 0 0 3 20,817 Items belonging to regulatory high-risk categories 1,216 2,926 0 0 0 0 55 4,197 Positions in investment funds 138 0 0 0 0 0 0 138 Other exposures 1,140 5 1 11 0 0 4,388 5,545 Total 3,760,047 127,969 72,728 40,009 20,917 11,956 74,551 4,108,176 Data in the table includes all assets and risky off-balance-sheet items at net value. Year 2009 (In EUR thousand)_ Bosnia and EXPOSURE CLASS Slovenia Croatia Serbia Herzegovina Netherlands Russia 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 12,085 253 15,866 22,717 2,481,909 Corporate 567,061 101,050 59,198 34,133 20,145 1,988 11,573 795,148 Past due items 11,205 7,353 8,618 402 31 0 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 20,429 17,854 39,596 3,373,512 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 - 2010 136 Distribution of exposure according to industry or type of clients segmented by exposure classes Seven major economic sectors are disclosed in detail in a given year. Year 2010 (In EUR thousand) DOMESTIC EXPOSURES OFFSHORE TOTAL Market; Expert, maintenance scientific Financial and and repairs of Public Transport and insurance Processing motor administrati and technical Building Total Total EXPOSURE CLASS activities industry vehicles on activity storage activities sector Other domestic offshore Total Central governments and central banks 12 0 0 38,578 0 0 0 1 38,590 10,097 48,687 Regional governments and local authorities 0 0 0 1,076 0 0 0 0 1,076 879 1,955 Public sector entities 2,879 0 21 27,526 0 1 0 251 30,677 263 30,940 Multilateral development banks 0 0 0 0 0 0 0 0 0 5,024 5,024 Institutions 3,023,375 0 0 0 0 0 0 0 3,023,375 76,878 3,100,253 Corporate 76,998 306,509 78,111 112 65,475 30,316 28,553 67,793 653,867 236,752 890,619 Past due items 3,548 184 176 12 2 1,079 2,049 2,916 9,966 10,851 20,817 Items belonging to regulatory high-risk categories 0 1,050 0 0 0 0 166 0 1,216 2,981 4,197 Positions in investment funds 138 0 0 0 0 0 0 0 138 0 138 Other exposures 320 0 0 1 0 0 0 818 1,140 4,405 5,545 Total 3,107,271 307,743 78,308 67,305 65,477 31,396 30,768 71,779 3,760,047 348,129 4,108,176 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 - 2010 137 Year 2009 (In EUR thousand) DOMESTIC EXPOSURES OFFSHORE TOTAL Market; maintenance IT and Financial and and repairs of Public Transport communica insurance Processing motor administrat and tion Cultural Total Total EXPOSURE CLASS activities industry vehicles ion activity storage activities activities Other domestic offshore Total Central governments and central banks 1,004 0 0 26,046 0 0 8 0 27,058 2,464 29,522 Regional governments and local authorities 0 0 0 1,757 0 0 0 347 2,104 908 3,012 Public sector entities 305 0 0 13,659 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 90,996 239,803 81,799 17 41,719 21,135 19,842 71,749 567,060 228,088 795,148 Past due items 1 6,960 45 135 10 4 0 4,049 11,204 16,482 27,686 Items belonging to regulatory high-risk categories 6,714 1,503 0 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 2,511,117 248,266 81,844 41,614 41,729 21,139 19,850 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. Annual Report of SID Bank and SID Bank Group - 2010 138 Remaining maturity exposure breakdown In EUR thousand 2010 2009 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 9,858 38,834 7,528 21,994 Regional governments and local authorities 1,935 26 2,489 523 Public sector entities 537 31,346 156 14,272 Multilateral development banks 0 5,024 0 5,057 Institutions 601,771 2,502,782 215,891 2,269,794 Corporate 168,548 766,851 294,083 527,013 Past due items 25,346 8,386 33,001 2,393 Items belonging to regulatory high-risk categories 34,838 282 22,335 7,883 Positions in investment funds 138 0 130 0 Other exposures 382 5,163 680 5,306 Total 843,351 3,358,694 576,293 2,854,235 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 for 2009 - 139 Past due and impaired exposures Seven major economic sectors are disclosed in detail in a given year. Year 2010 (In EUR thousand) DOMESTIC PAST DUE EXPOSURES OFFSHORE TOTAL Market; Professional, maintenance scientific and and repairs of Financial and Processing technical motor insurance Total industry Agriculture activities Building sector vehicles activities Catering Other domestic Total offshore Total Past due exposures Impairments and provisions 10,599 6,176 3,823 6,284 959 4,436 797 406 33,480 9,369 6,176 2,744 6,090 783 887 731 288 27,068 24,970 12,248 58,450 39,317 Table includes past due exposures over 90 days at gross value. Year 2009 (In EUR thousand) DOMESTIC PAST DUE EXPOSURES OFFSHORE TOTAL Market; Professional, maintenance scientific and and repairs of Financial and Processing technical motor insurance Real estate Total industry Agriculture activities Building sector vehicles activities activities Other domestic Total offshore Total Past due exposures Impairments and provisions 10,281 6,368 3,835 2,526 1,291 8,392 570 290 33,553 6,753 5,794 2,785 365 238 1,678 202 68 17,883 26,695 9,934 60,248 27,817 Table includes past due exposures over 90 days at gross value. Annual Report of SID Bank and SID Bank Group - 2010 140 Changes of revaluations and presentation of adjustments in provisions by types of assets Changes in adjustments (impairment)_ 2010 2009 Adjustments Adjustments Adjustments of Adjustments ofloansto of loans to loans to clients Total ofloansto clients other Total In EUR thousand banks other than banks adjustments banks than banks adjustments Balance as at 1 January 3,180 46,501 49,681 1,133 26,824 27,957 Adjustments formed 2,596 50,536 53,132 2,716 27,907 30,623 Elimination of adjustments (2,158) (12,927) (15,085) (669) (8,230) (8,899) Balance as at 31 December 3,618 84,110 87,728 3,180 46,501 49,681 Changes in provisions 2010 2009 Provisions for off- Provisions for off- balance-sheet balance-sheet In EUR thousand liabilities liabilities Balance as at 1 January 4,250 2,165 Provisions formed 9,468 8,502 Elimination of provisions (11,141) (6,417) Balance as at 31 December 2,577 4,250 Changes in adjustments (impairments) and provisions 2010 2009 In EUR thousand Impairments Provision Total Impairments Provision Total Balance as at 1 January 49,681 4,250 53,931 27,957 2,165 30,122 Increase 53,132 9,468 62,600 30,623 8,502 39,125 Decrease (15,085) (11,141) (26,226) (8,899) (6,417) (15,316) Balance as at 31 December 87,728 2,577 90,305 49,681 4,250 53,931 - Annual Report of SID Bank and SID Bank Group for 2009 - 141 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 2010 2009 EXPOSURE CLASS Risk weight (in percent) 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 48,687 131,334 29,523 99,749 0 46,684 129,331 27,058 97,284 50 0 0 0 0 100 2,003 2,003 2,465 2,465 Regional governments and local authorities 1,955 1,955 3,011 3,011 50 1,102 1,102 2,137 2,137 100 652 652 717 717 150 201 201 157 157 Public sector entities 30,941 30,941 14,120 14,120 50 30,677 30,677 13,964 13,964 100 264 264 156 156 Multilateral development banks 5,024 5,024 5,057 5,057 0 5,024 5,024 5,057 5,057 Institutions 3,100,253 3,061,517 2,481,909 2,452,336 20 57,896 57,896 22,974 22,974 50 2,999,462 2,971,505 2,393,102 2,381,615 100 28,725 21,776 34,537 21,573 150 14,170 10,340 31,296 26,174 Corporate 890,619 849,601 795,148 754,495 100 861,454 844,374 712,494 705,259 150 29,165 5,228 82,654 49,236 Past due items 20,817 17,924 27,686 27,686 100 9,229 6,336 6,008 6,008 150 11,588 11,588 21,678 21,678 Items belonging to regulatory high-risk categories 4,197 4,197 10,943 10,943 100 3,989 3,989 10,420 10,420 150 208 208 523 523 Positions in investment funds 138 138 130 130 100 138 138 130 130 Other exposures 5,545 5,545 5,985 5,985 100 5,545 5,545 5,985 5,985 Total 4,108,176 4,108,176 3,373,512 3,373,512 A risk weight is determined according to the level ofcredit quality, which can be different for the same level ofcredit quality, depending on the class of each exposure. - Annual Report of SID Bank and SID Bank Group for 2009 - 142 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 2010 amounted to EUR 138 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 percent 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 3,420 thousand in 2011 (by EUR 1,434 thousand in 2010). 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 percent p.a.). - Annual Report of SID Bank and SID Bank Group for 2009 - 143 SID Bank banking group 2010 2009 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 -2,048 -2,048 2,048 2,048 -1,200 -1,200 1,200 1,200 BONDS AT FLOATING INTEREST RATE Floating - change of portfolio Impact on income statement 105 105 -105 -105 106 106 -106 -106 TOTAL Total - change of portfolio Increase or decrease in capital Impact on the statement of comprehensive income -1,943 -2,048 105 1,943 2,048 -105 -1,094 -1,200 106 1,094 1,200 -106 Liquidity Risk The methodology of for liquidity risk management is defined in the Policy of Liquidity Risk Management, where the manners of management ofthe assets and liabilities ofassets in domestic and foreign currencies on a daily basis and also in the long run are defined. Daily/operational liquidity and structural/long-term liquidity are determined, measured and managed on a regular basis. SID Bank monitors and measures the exposure to liquidity risk on the basis of calculating the liquidity ratios in the manner determined by the applicable banking legislation, through careful planning of liquidity and implementation of internal liquidity measures prescribed for the management of liquidity risk. A calculation of liquidity gaps is performed on a monthly basis. SID Bank has no off-balance-sheet liabilities exceeding the contractually specified. Identification, measurement, control and monitoring of liquidity is regulated by numerous regulations, including the Rules on Comprehensive Treatment ofthe Treasury Transactions, which defines different position limits, and the Rules on authorization and signing, which defines personal limits of the traders in treasury. Reduction of liquidity risk is also implemented through the established limits to domestic and foreign commercial banks, with which the excess liquidity facilities are placed. Limits are set based on international credit ratings and expert evaluation Risk Management. Limits are prescribed in a similar manner for to investments in securities, mainly bonds. SID Bank has internally set higher minimum liquidity ratios of the first and second grade than is prescribed by the central bank. In case these two ratios reach internally set limits, the Liquidity Risk Management provides measures, which are implemented to improve the ratios ofboth classes. The bank mainly provides liquidity reserve by a portfolio of debt securities, which exceeds the value of EUR 100 million and represents a sufficient secondary liquidity. Most of the bonds are ECB eligible, which enables our access to liquidity on the interbank market and with the central bank. Diversification of liquidity sources is provided through the use ofvarious financing instruments; raising ofassets in the money market, drawing of concluded bilateral loan agreements and issues of debentures and bonds on the domestic and international capital markets. Stress scenarios and contingency plan are defined in the Policy of Liquidity Risk Management. SID Bank does not accept bank deposits and is therefore not exposed to liquidity risk in the conventional sense. In case of anticipated problems with actual and/or structural liquidity, the bank appoints a crisis committee, which seeks appropriate measures to resolve the crisis in a given situation. The baseline scenario and liquidity stress scenario are usually considered weekly at the Liquidity Committee meetings. Credit insurance 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. - Annual Report of SID Bank and SID Bank Group for 2009 - 144 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.> The most important issuers of personal guarantees are banks, insurance companies, companies with good credit rating (joint and several guarantees) and individuals - creditworthy joint and several guarantors. 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. Total value of loan collateral in SID Bank banking group as at 31 December 2010 was EUR 1,080,215 thousand. Insurance value and concentration of credit risk In EUR thousand 31.12.2010 31.12.2009 INSURANCE TYPES: Insurance value in percent Insurance value in percent Pledge ofcommercial real estate 366,003 33.9 313,854 38.8 Other guarantees of companies without credit rating 237,206 22.0 165,909 20.5 Pledging of receivables for insurance 78,251 7.2 71,030 8.8 Guarantees of companies without credit rating 88,700 8.2 56,314 7.0 Insurance policy of SID Bank for the account of the RS 52,221 4.8 43,821 5.4 Pledge of capital share in the company 79,392 7.4 43,836 5.4 Other 178,443 16.5 113,673 14.1 TOTAL 1,080,215 100.0 808,437 100.0 Total exposure value by classes, insured by property In EUR thousand EXPOSURE CLASS 31.12.2010 31.12.2009 Corporate 2,430 906 Total_2,430_906 Total exposure value by classes, insured by personal guarantees or credit derivative financial instruments In EUR thousand EXPOSURE CLASS 31.12.2010 31.12.2009 Institutions 567 839 Corporate 1,852 917 Past due items 152 0 Total 2,571 1,756 - Annual Report of SID Bank and SID Bank Group for 2009 - 145