ANNUAL REPORT 2014 BANKA CELJE, d.d., AND THE …44ef030c-0f8b-42d6-b35c-a65b77ad9f9… · 8.1...

ANNUAL REPORT 2014 BANKA CELJE, d.d.,

AND THE BANKA CELJE GROUP Celje, March 2015

Banka Celje, d.d., and the Banka Celje Group Annual Report 2014, prepared in accordance with International Financial Reporting Standards, as adopted by the European Union.

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Content

A WORD BY THE MANAGEMENT BOARD OF BANKA CELJE, D.D. .......................................................... 3

REPORT OF THE SUPERVISORY BOARD OF BANKA CELJE, D.D. .......................................................... 5

I BUSINESS REPORT ................................................................................................................................... 13

1 HIGHLIGHTS ......................................................................................................................................................... 13 2 PRESENTATION ................................................................................................................................................... 14 3 ACTIVITIES AIMED AT RAISING CAPITAL, STATE AID AND TRANSFER OF BAD ASSETS TO THE BAMC ..... 16 4 SINGNIFICANT EVENTS IN 2014 AND EVENTS AFTER REPORTING DATE ..................................................... 17 5 INFORMATION ON THE MEASURES AND PROCEDURES PERTAINING TO CLAIMS ...................................... 18 6 THE BANK’S OPERATIONAL PLAN FOR 2015 ..................................................................................................... 18 7 THE ECONOMIC AND BANKING ENVIRONMENT IN 2014 .................................................................................. 19 7.1 The economic environment in 2014 .............................................................................................................................. 19 7.2 Banking environment in 2014 ....................................................................................................................................... 20 8 REPORT ON OPERATIONS IN 2014 ..................................................................................................................... 21 8.1 Financial results............................................................................................................................................................ 21 8.2 Financial position .......................................................................................................................................................... 22 8.3 Operations according to key sectors ............................................................................................................................. 24 8.4 Assuming and managing banking risks ........................................................................................................................ 30 8.5 Internal organisation and human resources .................................................................................................................. 37 8.6 Information technology ................................................................................................................................................. 39 8.7 Sustainable development and social responsibility ....................................................................................................... 40 8.8 Marketing communications ........................................................................................................................................... 41 8.9 The operations of the Internal Audit .............................................................................................................................. 41 9 MANAGING BODIES OF THE BANK ..................................................................................................................... 44 10 ORGANISATIONAL STRUCTURE OF THE BANK .............................................................................................. 45 11 STATEMENT OF CORPORATE GOVERNANCE ................................................................................................ 46 12 STATEMENT OF MANAGEMENT’S RESPONSIBILITIES .................................................................................. 54 13 AUDITOR’S REPORT .......................................................................................................................................... 55

II FINANCIAL STATEMENTS ......................................................................................................................... 61

1 INCOME STATEMENT .......................................................................................................................................... 61 2 STATEMENT OF OTHER COMPREHENSIVE INCOME ....................................................................................... 62 3 STATEMENT OF FINANCIAL POSITION .............................................................................................................. 63 4 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY ................................................................................ 64 5 STATEMENT OF CASH FLOWS ........................................................................................................................... 66 NOTES TO THE FINANCIAL STATEMENTS ........................................................................................................... 68 1 GENERAL INFORMATION ............................................................................................................................................. 68 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES............................................................................................... 68 2.1 Basis for the preparation of financial statements .......................................................................................................... 68 2.2 Comparative figures ..................................................................................................................................................... 71 2.3 Subsidiary ..................................................................................................................................................................... 71 2.4 Consolidation ................................................................................................................................................................ 72 2.5 Foreign currency translation ......................................................................................................................................... 72 2.6 Interest income and expenses ...................................................................................................................................... 72 2.7 Fee and commission income ........................................................................................................................................ 73 2.8 Dividend income ........................................................................................................................................................... 73 2.9 Financial instruments .................................................................................................................................................... 73 2.10 Impairment of financial assets .................................................................................................................................... 76 2.11 Offsetting .................................................................................................................................................................... 78 2.12 Sale and repurchase agreements ............................................................................................................................... 78 2.13 Cash and cash equivalents ......................................................................................................................................... 78 2.14 Accounting for leases ................................................................................................................................................. 78 2.15 Investment property .................................................................................................................................................... 79 2.16 Property and equipment ............................................................................................................................................. 79 2.17 Intangible assets ......................................................................................................................................................... 80 2.18 Inventories .................................................................................................................................................................. 80 2.19 Taxes.......................................................................................................................................................................... 80 2.20 Employee benefits ...................................................................................................................................................... 81 2.21 Loans taken, deposits and debt securities issued ....................................................................................................... 81

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2.22 Provisions ................................................................................................................................................................... 81 2.23 Financial and performance guarantees....................................................................................................................... 82 2.24 Share capital .............................................................................................................................................................. 82 2.25 Segment reporting ...................................................................................................................................................... 82 2.26 Critical accounting estimates and judgements ............................................................................................................ 83 3 NOTES TO THE INCOME STATEMENT ............................................................................................................... 84 3.1 Net interest and similar income .................................................................................................................................. 84 3.2 Dividend income ........................................................................................................................................................ 84 3.3 Net fee and commission income ................................................................................................................................ 85 3.4 Gains less losses from financial assets and liabilities not classified at fair value through profit or loss ...................... 85 3.5 Gains less losses from financial assets and liabilities held for trading ....................................................................... 85 3.6 Gains less losses from financial assets and liabilities designated at fair value through profit or loss ......................... 86 3.7 Changes in fair value from hedge accounting ............................................................................................................ 86 3.8 Gains less losses from foreign exchange differences ................................................................................................ 86 3.9 Net other operating (loss) .......................................................................................................................................... 87 3.10 Administrative expenses ............................................................................................................................................ 87 3.11 Amortisation and depreciation ................................................................................................................................... 88 3.12 Provisions .................................................................................................................................................................. 88 3.13 Impairment charges ................................................................................................................................................... 88 4 NOTES TO STATEMENT OF FINANCIAL POSITION .............................................................................................. 89 4.1 Cash and balances with the Central Bank and demand deposits with banks ............................................................. 89 4.2 Held for trading financial assets ................................................................................................................................. 89 4.3 Available for sale financial assets .............................................................................................................................. 90 4.4 Loans and advances to banks (excluding demand deposits) ..................................................................................... 90 4.5 Loans and advances to customers ............................................................................................................................ 91 4.6 Other financial assets ................................................................................................................................................ 92 4.7 Hedging derivatives ................................................................................................................................................... 93 4.8 Property and equipment ............................................................................................................................................ 93 4.9 Investment property ................................................................................................................................................... 94 4.10 Intangible assets ........................................................................................................................................................ 95 4.11 Investments in subsidiaries, associates and joint ventures ........................................................................................ 95 4.12 Income tax assets ...................................................................................................................................................... 95 4.12.1 Deferred tax assets ................................................................................................................................................. 95 4.13 Other assets .............................................................................................................................................................. 96 4.14 Financial liabilities designated at fair value through profit or loss ............................................................................... 97 4.15 Financial liabilities at amortised cost – deposits from banks and central banks ......................................................... 97 4.16 Financial liabilities at amortised cost – due to customers ........................................................................................... 98 4.17 Financial liabilities, measured at amortised cost – borrowings from banks and central banks ................................... 99 4.18 Financial liabilities at amortised cost – borrowing from customers ............................................................................. 99 4.19 Debt securities ........................................................................................................................................................... 99 4.20 Other financial liabilities ........................................................................................................................................... 100 4.21 Provisions ................................................................................................................................................................ 100 4.22 Other liabilities ......................................................................................................................................................... 101 4.23 Share capital............................................................................................................................................................ 101 4.24 Dividend per share .................................................................................................................................................. 102 4.25 Contingent liabilities and commitments .................................................................................................................... 102 4.26 Cash and cash equivalents ...................................................................................................................................... 103 4.27 Related party transactions ....................................................................................................................................... 104 4.28 Information on the results of organisational units abroad ......................................................................................... 108 4.29 Events after reporting date ...................................................................................................................................... 108 5 RISK MANAGEMENT.............................................................................................................................................. 108 5.1 Credit risk ................................................................................................................................................................ 108 5.2 Market risk ............................................................................................................................................................... 124 5.3 Liquidity risk ............................................................................................................................................................. 129 5.4 Capital and capital adequacy ................................................................................................................................... 131 5.5 Fair value of financial assets and liabilities .............................................................................................................. 132 6 SEGMENT REPORTING ......................................................................................................................................... 135

III DISCLOSURES OF BANKA CELJE, D.D. ............................................................................................... 143

1 GENERAL INFORMATION .................................................................................................................................. 143 2 RISK MANAGEMENT OBJECTIVES AND POLICIES (ARTICLE 435 OF THE CRR REGULATION)............................. 143 3 SCOPE OF APPLICATION (ARTICLE 436 OF THE CRR REGULATION) ..................................................................... 159 4 OWN FUNDS - CAPITAL (ARTICLE 437 OF THE CRR REGULATION) ........................................................................ 160 5 CAPITAL REQUIREMENTS (ARTICLE 438 OF THE CRR REGULATION) ................................................................... 164 6 EXPOSURE TO COUNTERPARTY CREDIT RISK (ARTICLE 439 OF THE CRR REGULATION) ................................. 166 7 CREDIT RISK ADJUSTMENTS (ARTICLE 442 OF THE CRR REGULATION) .............................................................. 168 8 UNENCUMBERED ASSETS (ARTICLE 443 OF THE CRR REGULATION) .................................................................. 176 9 USE OF ECAIS (ARTICLE 444 OF THE CRR REGULATION) ........................................................................................ 176

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10 EXPOSURE TO MARKET RISK (ARTICLE 445 OF THE CRR REGULATION) ........................................................... 178 11 OPERATIONAL RISK (ARTICLE 446 OF THE CRR REGULATION) ........................................................................... 178 12 EXPOSURES IN EQUITIES NOT INCLUDED IN THE TRADING BOOK (ARTICLE 447 OF THE CRR REGULATION) ................................................................................................................................................................................ 178 13 EXPOSURE TO INTEREST RATE RISK ON POSITIONS NOT INCLUDED IN THE TRADING BOOK (ARTICLE 448

OF THE CRR REGULATION) ........................................................................................................................................ 179 14 REMUNERATION POLICY (ARTICLE 450 OF THE CRR REGULATION) ................................................................... 179 15 USE OF CREDIT RISK MITIGATION TECHNIQUES (ARTICLE 453 OF THE CRR REGULATION) ............................ 183

List of abbreviations used ALCO – Assets and Liabilities Committee ATM – Automated teller machine BAMC – Bank Asset Management Company Bank – Banka Celje d.d., Celje CDs – certificates of deposit CIR – Cost Income Ratio CISA – Certified Information System Auditor COREP – Common Reporting CRD IV – Capital Requirements Directive IV CRR – Capital Requirements Regulation EBA – The European Banking Authority EBA-DPM – The European Banking Authority Data Point Model EBITDA – Earnings before Interest, Taxes, Depreciation and Amortization EC – European Commission ECAI – External Credit Assessment Institutions ECB – European Central Bank EU – European Union EWS – Early warning system FINREP – Financial Reporting FX – Forex GDP – Gross domestic product Group – Skupina Banke Celje IAS – International Accounting Standards IASC – International Accounting Standards Committee ICAAP – The Internal Capital Adequacy Assessment Process ICR – Increased credit risk monitoring system IFRIC – International Financial Reporting Interpretations Committee IFRS – International Financial Reporting Standards IRB – Internal Rating Based Approach IRS – Interest Rate Swap IT – Information Technology LCR – Liquidity Coverage Ratio MRA – Master Restructuring Agreement MT – Monitoring Trustee NPL – non-performing loans NSFR – Net Stable Funding Ratio NSVS – National housing savings scheme SEE – South East Europe SEPA – Single Euro Payments Area SISBON – Slovene Information System on the Rating of Retail Clients SMEs – Small and medium-sized enterprises Subsidiary – Posest d.o.o., Celje VAT – value added tax ZBan-1 – Banking Act

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ZDavP-2 – Tax Procedure Act ZGD-1 – Companies Act ZTFI – Market in Financial Instruments Act ZUKSB – Bank Stability Measures Act

A WORD BY THE MANAGEMENT BOARD OF BANKA CELJE, d.d. This past year was a very active and intense year for the Bank, we were faced with one of the most significant challenges in its 150-year history. In addition to continuing to provide banking services and maintaining high liquidity reserves, we were faced with the need to reduce the capital deficit and ensure long-term stability of the Bank’s capital adequacy. In an otherwise difficult 2014, the Bank also successfully repositioned itself and focused on its primary, regional market. We had already begun activities aimed at increasing capital at the General Meeting of Shareholders in 2013. After the publication of stress test results at the end of 2013, we intensified these activities. We conducted interviews with major owners of the Bank then, spoke to representatives of Slovenian banks in foreign ownership and were looking for a potential investor outside of Slovenia. In the search for a strategic partner we cooperated with a foreign consulting company, which completed the project after testing the market. Unfortunately, the conditions in the first quarter of 2014 were too demanding for satisfactory interest in recapitalization to be expressed by potential investors. In accordance with the order by the regulator a recapitalization General Meeting of Shareholders was held in April 2014, while a program for the acquisition of state aid was being prepared simultaneously. The Bank was namely ordered to submit a detailed plan of measures for its reorganisation and to ask for the implementation of measures pertaining to state aid, should the recapitalization General Meeting of Shareholders prove unsuccessful. After the increase of capital from existing shareholders, the holders of subordinated capital instruments and other interested investors was not accomplished, we asked for state aid in the form of a transfer of certain assets to the Bank Asset Management Company (BAMC) and a capital increase at the end of April. During the deliberations on the submitted plan, the Government of the Republic of Slovenia added an additional covenant, namely that it would proceed with merger activities with Abanka in the event it acquires a majority share in Banka Celje. Based on this we prepared and submitted to the European Commission (EC) in October the restructuring program of the merged Banka Celje and Abanka. In parallel we continued searching for an option to increase the Bank’s share capital through private investors, which is why due diligence was being performed on the Bank during this period. At the end of the due diligence procedure, the private investor only exhibited interest to participate in a later phase of consolidation in the Slovenian banking system. With the objective to on again ensure conditions for the Bank’s long term operational success, taking into account the merger with Abanka and the preservation of the stability of the financial system in the Republic of Slovenia, we obtained the Decision on emergency measures by the Bank of Slovenia of 16 December. Based on the Decision all of the Bank’s qualified liabilities were written off and capital was increased in the amount of EUR 190 million. The state became the sole owner of the bank. With the increase of share capital, minimum capital requirements were also met and long term capital adequacy was ensured. In spite of the processes that took place at the Bank, the Bank was able to preserve the trust of its customers, which is reflected in the growth of retail and private entrepreneur deposits. In total it granted EUR 213 million of new loans to corporate customer, to private entrepreneurs and to retail. Loans to customer did however decrease as compared with the year before, also as a consequence of the transfer of bad assets to the BAMC, based on the state aid received. The decrease in lending, recorded in the whole banking system, is also the result of weak creditworthiness of companies, reflected in bankruptcy proceedings begun and the removals from the register of companies due to bankruptcies. In 2014 the Bank made a profit before impairments and provisions in the amount of EUR 38.7 million. After the transfer of bad assets to the BAMC and the creation of impairments and provisions in the amount of EUR 64.4 million, a loss in the amount of EUR 21.1 million was made after tax.

At the Bank we provided an undisturbed, seamless banking service to the customers, implemented new services and prepared special offers. In line with the modified business policy, we focused on offering traditional banking products, with lower use of capital, thus supporting small and medium sized enterprises and retail, which became the strongest segment in the Bank’s lending operations. The amended business model and the approved financial plan, compliant with the restructuring program of the merged bank, is being implemented in 2015 as well. In addition to focusing on the regional market and lending to small and medium sized enterprises and retail, the Bank will increase product placement activities and cross selling to customers, continue upgrading the risk management process and improving operational efficiency. As a trustworthy business partner it will continue to be socially responsible toward all of the participants in its environment and weave the values of tradition, know-how and expertise in the fabric of its operations.

REPORT OF THE SUPERVISORY BOARD OF BANKA CELJE, d.d. The framework of the Supervisory Board's operations and its responsibilities as well as its obligations is determined by the applicable legislation (the Banking Act, the Companies Act, the Regulation on the diligence of members of the management and supervisory boards of banks and savings banks) and the Bank's internal acts (the Articles of Association and the Rules of procedure related to the operations of the Supervisory Board and its committees) as well as other legal norms, which pertain to the Bank's operations. In its decision-making process during 2014, the Supervisory Board was supported by the Audit Committee, the Remuneration Committee and the Personnel Committee. Operations of the Supervisory Board The Supervisory Board of Banka Celje, d.d., was appointed at the 26th General Meeting of Shareholders on 24 May 2011. In 2014 it comprised: Jure Peljhan, Ph.D., as President, Barbara Smolnikar, M.Sc., as Vice-President, with the following members, namely: Tomaž Subotič, Ph.D., Melita Malgaj, Zdenko Zanoški, M. Sc., and Bojan Šrot. The Supervisory Board met at ten regular meetings in 2014, where it dealt with 104 items on the agenda and also held five correspondent sessions, where it addressed 11 agenda items. At its meetings the Supervisory Board acquainted itself with the Bank's interim results on the basis of reports prepared by the Management Board. It devoted extra attention to the consideration of measures that the Bank received from the Bank of Slovenia, together with the information on the Bank's activities addressing the identified irregularities. It kept itself constantly appraised of the activities taken in relation to the Bank’s recapitalization and the consolidation procedure of Banka Celje and Abanka in great detail. It reviewed and approved the audited annual report of the Bank and the Group for 2013, after the explanation of the auditor’s report by a certified auditor. The Supervisory Board was acquainted with all the key elements of the Bank's and the Group's Annual Report 2014 on an ongoing basis. The Supervisory Board acquainted itself with the Bank’s measures pertaining to the improvement of risk management (with special focus on credit risk) and gave consent to the Bank’s risk management policies and strategies and the risk profile for 2014. It also adopted the business policy and the Bank’s financial plan for 2014, while also monitoring the operations of the Internal Audit. At the initiative of the Supervisory Board an external contractor conducted a special review of the granting of loans to several significant customers of the Bank currently in default, from 2008 onwards; the findings of the review and the Bank’s activities aimed at improvement were presented to the members of the Supervisory Board in detail at several meetings. The Supervisory Board also approved the Policy of assessing the suitability of management and supervisory body members at Banka Celje, while also acquainting itself with the Policy on the suitability of key function holders at Banka Celje, d.d. The President of the Supervisory Board was in constant contact with the Management Board, which allowed for the Supervisory Board to constantly supervise the operations of the Management Board. The Supervisory Board invited the authorised auditor to its regular meetings, thus making it possible for the auditor to present it with findings related to audit of the Bank. The Supervisory Board ascertains that in 2014 its' members were not subject to conflict of interest and have performed their duties as Supervisory Board members autonomously and independently. The members attended the Supervisory Board meetings regularly, based on which it was able to meet in full composition, with all members actively participating in the creation of decisions by taking part in discussions related to individual items on the agenda.

Based on the scope of activities performed in 2014 the Supervisory Board deems its own operations in 2014 were performed with all due diligence, to the fullest extent possible in accordance with the Corporate Governance Code, without any deviation from good practice. Operations of the Audit Committee, the Remuneration Committee and the Personnel Committee The Audit Committee, comprising Tomaž Subotič, Ph.D., as President, Melita Malgaj as Vice-President, Barbara Smolnikar, M.Sc. as member and Blanka Vezjak, M.Sc., certified auditor, as the external independent member, met 8 times in 2014. It dealt with 67 items on the agenda. The materials it reviewed pertained to the adoption of the plan of the Audit Committee’s operations in 2014, to the report on the operations of the Internal Audit for 2013 and to the plan of the operations of the Internal Audit for 2014 as well as the report on the operations of the Internal Audit during the first half of 2014, the information on the audit by the Bank of Slovenia (ICAAP process) and all of the other open items toward the Bank of Slovenia, the risk management strategy and policies, the trading strategy and the Bank’s risk profile – all for 2015. In July it acquainted itself with the offers for the selection of the auditors and proposed the naming of the auditors for 2014 to the Supervisory Board. It monitored the Bank's interim results, the Bank's exposure to credit risk (on a quarterly basis), its five-year development plan and its business policies and financial plan for 2014. It actively (at every meeting) discussed the activities related to the process of the restructuring of receivables to 15 largest corporate customers, with the potential to survive. It reviewed reports on the legal options for the filing of claims (damages, criminal charges or other procedures) pertaining to loans granted during the 2004 – 2010 period in Slovenia and abroad. It was presented with the Agreement on the Audit of the Bank's Operations in 2014, with the findings of the external auditor after the completion of the initial phase of the audit for 2014 and with the report on the operations of Posest, d.o.o. The President of the Audit Committee kept the Supervisory Board informed of the Committee's activities on a regular basis through reports at the Supervisory Board meetings. The Committee was successful in the execution of all planned assignments in 2014, all the while offering the Supervisory Board advisory support in the areas for which it was established. The Remuneration Committee met at twice in 2014 and acquainted itself with the guidelines of the European Banking Authority on assessing the suitability of the members of management or supervisory bodies. It also discussed the Policy of assessing the suitability of management and supervisory body members at Banka Celje and agreed with its content. The Human Resources Committee met twice in 2014 and discussed and approved the criteria for the selection of the Bank’s President of the Management Board. It also considered the offers of human resource agencies and selected the agency to carry out the process of selecting the new President of the Management Board. With the Supervisory Board’s decision to suspend the process of selecting a new President of the Management Board, the Human Resources Committee concluded its tasks in 2014.

BUSINESS REPORT

Banka Celje d.d. and the Banka Celje Group Business Report 2014

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I BUSINESS REPORT 1 HIGHLIGHTS

- amounts in thousands of EUR

2014 2013 2012

1 2 3 4=1:2 5=2:3

1. Statement of financial position (on 31 December)

Total assets 1,711,982 1,815,228 2,270,076 94 80

Total deposits from the non-banking sector 1,251,321 1,274,152 1,416,899 98 90

- companies 580,748 616,295 716,570 94 86

- private individuals 670,573 657,857 700,329 102 94

Total amount of loans to the non-banking sector 891,629 1,240,057 1,590,853 72 78

- companies 600,212 930,480 1,265,826 65 74


Total equity 201,581 40,758 157,943 495 26Impairment of financial assets and provisions 162,997 360,139 166,432 45 216

Commitments and contingent liabilities 360,701 524,980 551,939 69 95

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

Net interest and similar income 39,012 37,291 46,589 105 80

Net non-interest income 32,022 94,680 24,714 34 383

Regular expenses (28,688) (30,610) (31,848)

Restructuring costs (1,052) - - 3 96

Depreciation and amortisation (2,593) (2,891) (3,392) 90 85

Impairment and provisions (64,352) (214,054) (63,600) 30 337

Loss before income tax (25,651) (115,584) (27,537) 22 420

Income tax expense 4,550 (10,673) 2,553 (43) (418)

3. Statement of comprehensive income

Other comprehensive income (8,135) 8,478 1,844 (96) 460Income tax relating to other comprehensive income (279) 586 (265) (48) (221)

4. Number of customers


- companies 6,596 6,936 7,423 95 93

5. Number of employees (on 31 December) 468 500 508 94 98

6. Shares

Number of shareholders 1 706 709 - 100

Number of shares 5,000,000 508,629 508,629 983 100

Nominal share value (in EUR) 10 33 33 100 100

Book value per share (in EUR) 38 80 311 48 26

7. Ratios in %

Capital

Capital adequacy ratio 18.22 2.49 13.01 732 19

Asset quality

Impairment charges on financial assets, measured at

amortised cost, and provisions for guarantees and

commitments / classified balance and off-balance

sheet asset items 13.01 21.61 7.96 60 271

Profitability

Interest margin 2.35 1.73 1.93 136 90

Financial mediation margin 4.28 6.13 2.95 70 208

Return on assets - before tax (1.27) (5.87) (1.03) 22 570

Return on equity - before tax (45.76) (81.59) (15.37) 56 531

Return on equity - after tax (37.64) (89.12) (13.95) 42 639

Operational costs

Operational expenses / average assets 1.95 1.56 1.46 125 107

Bank Index

Loans to and deposits from the non-banking sector also include private entrepreneur data, which is included in retail in

subsequent statements.

Source: Methodologies for the calculation of operational indicators from 1 January 2014 and The instructions on changes from 10

December 2014.


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2 PRESENTATION The Bank holds a 100% ownership stake in the company Posest, d.o.o, Celje (the Subsidiary), which is fully consolidated. The Subsidiary is immaterial with regard to the scope of its operations, with the significant items in its balance sheet presented in detail in the financial statements. About the Bank The beginnings of the Bank’s operations reach as far back as year 1864, when the Hranilnica mestne občine Celje (the Celje Municipal Savings Bank) was established. As Kreditna banka Celje (Celje Credit Bank) it joined Ljubljanska banka in 1971. It was converted into a joint-stock company at the end of 1989 and remained part of the Ljubljanska banka system as a subsidiary until 1994. Since 15 June 1994, the Bank has been operating independently under the name it holds today, namely Banka Celje, d.d. In line with the strategy of extending its operations outside the Celje region, the Bank acquired Banka Noricum, d.d., Ljubljana in 1996 and converted it into its main branch in Ljubljana, named Glavna Podružnica Ljubljana and then into a business unit in 2014. The Bank also acquired Hmezad banka, d.d., Žalec in 1998 and first converted it into a branch, namely Podružnica Hmezad (Hmezad branch), later making it a business unit at the start of 2011. In 1999 the Bank signed a Strategic partnership and business cooperation agreement with Nova Ljubljanska banka, d.d., thus becoming an associated member of its banking group. In February 2011, the consortium of the Bank's owners decided to offer the Bank's shares publicly, based on which due diligence of the Bank's operations was performed in May 2011 by a potential buyer. The owners then stopped the sale temporarily. In December 2014 the Bank obtained state aid due to the capital shortfall and after permission by the European Commission and committed to merging with Abanka by 1 January 2016 at the latest. In 2014 the Bank celebrated its 150th anniversary, which was represented to the public using the slogan “With you through generations, year by year, for 150 years”. Profile Name Banka Celje, d.d. Headquarters Vodnikova 2, 3000 Celje Transaction account 01000-0000600028 IBAN SI56 0100 0000 0600 028 SWIFT SBCESI2X Tax number 89734912 VAT ID number SI89734912 Registration number 5026121 Share capital 50,000,000.00 EUR District Court of Celje Entry No. Srg.3053/94 Telephone +386 3 422 10 00 Telefax +386 3 422 11 00 Homepage http://www.banka-celje.si E-mail address [email protected] Facebook Banka Celje

mailto:[email protected]


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Scope of operations The Bank is an independent financial institution, established as a joint-stock company to execute all banking and other financial services. Based on the authorisations it holds, it is licensed to perform the following mutually recognised financial services in accordance with Article 10 of the Banking Act (ZBan-1): - accepting deposits; - lending that also includes: consumer loans, mortgage loans, factoring with or without recourse,

financing of commercial transactions, including forfeiting; - payment services; - issuing and administering other payment instruments (for example, traveller's cheques and

bankers' drafts) insofar as this activity is not covered by services referred to in point 3; - issuing guarantees and other commitments; - trading for own account or for the account of customers in: foreign exchange, including currency

exchange transactions, financial futures and options, exchange and interest-rate instruments; - trading for own account in: money market instruments, transferable securities. The Bank may also perform the following other financial services in accordance with Article 11 of the ZBan-1: - insurance brokerage in accordance with the act governing insurance business; - marketing of mutual funds, sale of investment coupons or mutual fund shares; - tied agent services. The Bank complements the range of services it offers with the services offered through its specialist subsidiary company Posest, d.o.o., Celje, which was established in 1991 as a limited liability company. About the Group As at 31 December 2014 the Banka Celje Group (the Group) comprises: Banka Celje d.d. (the Bank) as the mother company and Posest, d.o.o., Celje (the Subsidiary). The Bank holds a 100% ownership stake in the Subsidiary. Subsidiary profile Name Posest d.o.o. Celje Headquarters Vrunčeva ulica 1, 3000 Celje Transaction account 06000-0004429610 open with Banka Celje VAT ID number SI72078537 Registration number 5509327 Share capital 2,124,486.00 EUR Telephone +386 3 428 25 50 Telefax +386 3 428 25 52 Homepage http://www.posest.si E-mail address [email protected] The company Posest was established on 6 September 1991, with its full name being: Posest, Podjetje za trgovino, inženiring in posredovanje, d.o.o., Celje. Subsidiary’s scope of operation The company is registered to perform a number of different types of activities, with its core business comprising: - marketing of real estate owned by the Subsidiary and the Bank; - property and equipment appraisals; - supervision of the purposeful use of loans granted to investors; - recovery activities pertaining to the Bank's bad debt;


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- property leasing; - owned and other property engineering; - advisory services to the Bank regarding real estate property financing. 3 ACTIVITIES AIMED AT RAISING CAPITAL, STATE AID AND TRANSFER OF BAD ASSETS

TO THE BAMC Due to the ascertained capital shortfall, at the end of January 2014 the Bank submitted to the regulator a plan of activities aimed at reducing or covering the shortfall by 2015. At the same time the Bank also selected a consulting company for the recapitalization and started actively searching for private strategic investors. The two-stage process of looking for a prospective buyer ended as the commitments given were not sufficiently strong. After receiving the Order by the Bank of Slovenia on additional measures to increase share capital in April 2014, a recapitalization General Meeting of Shareholders was called, however a capital increase was not realized in the required period. After having unsuccessfully attempted to raise capital from private investors at the end of April 2014 the Bank applied for state aid in the form of the transfer of certain assets to the BAMC and the increase of share capital in accordance with the Bank Stability Measures Act (ZUKSB) and state aid rules. In order to obtain state aid the Bank prepared its own independent restructuring program, which was forwarded to the European Commission in April. In October, the European Commission was sent a new restructuring program, prepared for the merged Abanka and Banka Celje. The state aid approval by the European Commission was granted on 16 December 2014 provided a merger with Abanka take place no later than 1 January 2016 and the merged be sold by 2019. On 16 December 2014 the Bank received the Decision on emergency measures issued by the Bank of Slovenia, on the basis of which all of the Bank's qualified liabilities, which were incurred up until the issue date of the Decision and represented the Bank's share capital and subordinated financial instruments, were written down at the same time increasing the Bank's capital. After the decrease of share capital to EUR zero (0), the Bank's capital increased by EUR 190 million at the same time, with the state becoming the Bank's sole owner. After the capital increase, the Bank's capital amounts to EUR 50 million and is divided into EUR 5 million of ordinary no par value shares at EUR 10, with the issue amount of a share at EUR 38. Half of the capital was increased with cash, with the receipt of government bonds representing the other. The consent of the European Commission for state aid was prerequisite for the transfer of bad assets to the BAMC. The transfer value of assets was set at EUR 369,092 thousand and includes the transfer of loans, financial investments and other related claims. For the assets it transferred, the Bank received government guaranteed BAMC bonds in the amount of EUR 125,795 thousand. The condition for the issue of the European Commission permission was the compliance with commitments, which the Bank must meet and which will be monitored by the Monitoring Trustee (MT) on an ongoing basis. The Bank's commitments pertain mostly to the improvement of cost efficiency, risk management, to the withdrawal of the Bank from high-risk markets and investments and to the improvement of corporate governance. In January 2015 a special work group was established to coordinate operations in connection with the fulfilment of commitments.


17

4 SINGNIFICANT EVENTS IN 2014 AND EVENTS AFTER REPORTING DATE Significant events in 2014 - preparation and submission of the plan of activities to decrease and cover for the capital

shortfall until 2015 to the Bank of Slovenia in compliance with the requirement from the order issued on 17 January 2014;

- the Bank’s cooperation with a foreign consulting company aimed at finding a strategic partner; - due diligence by a private investor, who upon completion, exhibited interest to cooperate in later

phases of the consolidation of the Slovenian banking system; - receipt of the Order on the elimination of violations with additional measures, which the

Bank of Slovenia issued on 11 March 2014, with a request for the convening of the recapitalization Meeting of Shareholders;

- the Decision by the Government of the Republic of Slovenia from 19 March 2014, stating the Bank meets the requirements for the implementation of stability strengthening measures (based on the ZUKSB) and that the Government of the Republic of Slovenia will act on its commitment to increase the Bank’s capital and transfer part of its risk bearing assets to the BAMC, should the recapitalization by private investors prove unsuccessful;

- recapitalization meeting of shareholders was held on 11 April 2014 and the decision on increasing share capital with cash in an amount of EUR 160 million by 25 April 2014 was adopted; recapitalization was not successful, none of the invited investors paid in new shares;

- the Bank’s independent restructuring program reviewed at the Ministry of Finance and at the Bank of Slovenia Council in April and submitted to the European Commission with subsequent amendments;

- receipt of the Decision and the Verdict of the Celje High Court in the dispute regarding the payment of remuneration due to inability of use pertaining to the headquarter building at Vodnikova 2, which was returned to its owners in the denationalization process and the payment of EUR 5 million to the denationalization beneficiaries on 30 September 2014, the Bank continues its activities in the procedure for the payment of remuneration in relation to the stated procedure;

- preparation and submission of the restructuring program of the merged Abanka and Banka Celje to the European Commission on 15 October 2014;

- receipt of the Order on special supervision measures by the Bank of Slovenia issued on 19 November 2014, based on which the payment of principal and interest from the Bank’s subordinated bonds was withheld pending the European Commission decision on state aid;

- receipt of the Bank of Slovenia Decision on emergency measures issued on 16 December 2014, aimed at reinstating conditions for Bank’s operational viability in the long-term, taking into account its merger with Abanka, and the preservation of the financial system stability in the Republic of Slovenia.

Events after reporting date - establishment of a work group for the coordination with the Monitoring Trustee on 12

January 2014, with its key tasks being the monitoring and reporting on the implementation of the commitments made to the European Commission;

- within the scope of activities in connection with the merger of Abanka and Banka Celje, in February the banks selected a company to carry out advisory services in relation to the merger;

- the conclusion of the Bank’s cooperation with the Financial Administration of the Republic of Slovenia in relation to horizontal monitoring with the implementation of amended legislation in April 2015 and the transfer to formal tax treatment of the Bank’s operations in accordance with the provisions of the Tax Procedure Act (ZDavP-2);

- in the merger process with Abanka Aleksander Vozel, M.Sc., will, after acquiring a licence from the Bank of Slovenia and after a new member of the Banka Celje Management Board has been named, join the Management Board of Abanka, where he will continue working on the merger of both banks.


18

5 INFORMATION ON THE MEASURES AND PROCEDURES PERTAINING TO CLAIMS To protect its interests and to recover its reputation the Bank is obligated to file claims pursuant to the order of the Bank of Slovenia in relation to compensation, labour and other relevant procedures, where this is legally possible, and claim damages and any benefits obtained in the violation of the applicable regulations. It is required to publicly disclose aggregated information. On the basis of the above, during the period from 1 January to 31 December 2014, the Bank in cooperation with external legal advisors notified of 43 suspicions of offences or brought criminal charges against 31 private individuals and 12 legal entities. A total of 32 property claims amounted to EUR 32.6 million in damages sought. At the same time, during the first half of 2014 external auditors carried out a review of the granting, monitoring and recovery activities related to loans to selected customers in terms of compliance with the statutory banking regulation, the Bank’s internal acts and international banking practices. 6 THE BANK’S OPERATIONAL PLAN FOR 2015 In November 2014, the Bank presented its Supervisory Board with bases for its planning, with the final document for 2015 presented after the adoption of the restructuring program at the European Commission and the acquisition of state aid. The strategic document in use for the period up to 2019 will be the restructuring program of the merged Banka Celje and Abanka. The Bank’s operational policies along with the financial plan for 2015 is based on the restructuring program of Banka Celje and Abanka, which was drawn up with the assistance of an external advisory company and sent to the EC on 15 October 2014 as part of the permitted state aid assessment process. The plan also adheres to the commitments the Bank made to the EC. In forming the business objectives and the financial plan for 2015, the Bank took into account: - ensuring long-term stability of capital adequacy; - the capital received; - the preservation of independent operations in 2015, with the target date for the merger of Banka

Celje and Abanka being 1 January 2016; - macroeconomic forecasts and changes in legislation. The Bank’s business plan for 2015 includes the following key objectives: - focus on the regional market and lending to small and medium sized enterprises (SMEs) and to

retail; - increased level of product placement to customers – cross selling; - upgraded risk management processes; - further improvements in operational efficiency. The Bank’s core market is Slovenia, especially the regions, where it is already present with through business units and branch offices. With an aim of increasing diversification, the Bank will promote lending to SMEs and to retail in 2015. Based on the planned marketing activities and the anticipated changes its sales processes the Bank plans to increase the average product placement to customers. The increased level of cross selling is to be carried out in all key segments in retail customer operations. In relation to risk management, 2015 will see the Bank upgrade its internal rating system of debtor classification and the setting of limits, set up an early increased risk warning system (EWS), upgrade liquidity risk management and stress testing to measure exposure to individual risk types.


19

7 THE ECONOMIC AND BANKING ENVIRONMENT IN 2014

7.1 The economic environment in 2014 The economic activity continued to recover in Slovenia during 2014. According to the initial assessment the real growth of the 2014 GDP (Gross domestic product) was 2.6%. The major share of the growth came from external demand and gross investments.Traditionally, exports are the major contributor, increasing by 6.3% in 2014, with imports gaining as well. In 2014 imports reached 4.1%, which should, in addition to the cooling economies of the main trade partners, result in a smaller contribution of net exports to the economic growth in the future. The main increase in investments pertains to infrastructure at the local level partially financed with the use of European funds. In total these increased by 3.6% in 2014. With the improving economic conditions in the country, 2014 saw a gradually decreasing unemployment rate. End 2014 there was 119,460 unemployed persons, with the unemployment rate recorded at 13.0%. A year ago the unemployment rate was 13.5%, with the number of unemployed persons exceeding 124,000. The annual inflation rate, measured by the harmonised index of consumer prices, was a negative 0.1% in Slovenia in 2014, with deflation mainly being the consequence of lower energy prices, as well as food and consumer durables. The average 12-month price increase was 0.4% and was 1.5 percentage points lower than it was in 2013. In the European Monetary Union member states the annual inflation rate according to the data from November amounted to 0.3% on average, while the European Union (EU) member states average was 0.4% and 0.1% in Slovenia. GROSS DOMESTIC PRODUCT real growth rates in %

Source: Economic mirror, January 2015, Institute of macroeconomic analysis and development

2,6

-1,0

-2,6-3,0

-2,0

-1,0

0,0

1,0

2,0

3,0

assessment 2014 2013 2012


20

7.2 Banking environment in 2014 The shrinking of total assets in the banking system continued in 2014 for the fifth year in a row, however it came at a slower pace in comparison to prior two years. The assets side of the bank balance sheet saw loans and advances to customers decrease the most, while less profitable investments to the more liquid asset classes and securities increased. Loans to the corporate sector within loans and advances to customers decreased due to the transfer of bad assets to the BAMC and also due to the weak creditworthiness of the sector itself. In 2014 bankruptcy proceedings began in 1,302 companies, while 850 companies were erased from the Slovenian Register of Companies due to the completion of bankruptcy proceedings. Lending to the retail sector was the only part on the increase, as it is considered less risky with the low rate of non-performing loans. Due to the relatively low indebtedness the forecast is that even more bank activities will be targeting the retail sector. The lending activity of banks was also impacted by instable funding. The amount of short-term funding is increasing and it represents a considerable limitation in funding long-term loans, which is why banks have been partially investing these in securities. Even the European Central Bank (ECB) funding is short-term and therefore suitable mainly for short-term liquidity management. Foreign currency loans, where the majority is represented by the Swiss franc, amounted to less than 5% of total loans end 2014. More than two thirds of the foreign currency loans are retail loans, which were mostly taken for residential purposes. The volume of Swiss franc loans decreased by about 60% as compared to its highest level in October 2008, mainly through debt redemption and swaps into euro denominated loans. Deposits from retail and the state increased in 2014, while bank liabilities from foreign funding decreased further. The retail sector primarily increased demand deposits in 2014, while inversely the state mainly increased short-term and long-term deposits. Liabilities to the ECB increased due to the second auction of the targeted long-term refinancing operations at the end of 2014, remained however significantly lower than in 2013. With the markedly improved capital adequacy after the execution of recapitalization activities in 2013 and 2014, it should be taken into account that the decline in lending activity and the adjustment of bank investment structure risk along with the related reduction of capital requirements is the prevailing way of maintaining and improving capital adequacy. Due to the low interest rate environment, the reduced volume of operations and the increased funding of foreign companies, income risk is going to increase in Slovenian banks in the future, as they will be hard pressed to generate sufficient income to cover for operational expenses and impairment costs. Credit growth and the volume of bad loans in the loan structure will have a key impact on the level of profitability risk in banks.


21

8 REPORT ON OPERATIONS IN 2014 8.1 Financial results In 2014 the Bank made a profit before impairment charges and provisions in an amount of EUR 38,701 thousand. After deducting the additional impairment charges and provisions, the pre-tax financial results were a negative by an amount of EUR 25,651 thousand. INTEREST AND NON-INTEREST INCOME, OPERATIONAL EXPENSES AND IMPAIRMENT CHARGES AND PROVISIONS in EUR thousands

Net interest was EUR 1,721 thousand higher as compared with 2013, with income coming in lower by EUR 21.120 thousand and expenses decreasing by EUR 22,841 thousand. The lower interest income was impacted most by the decrease in the average amount of interest bearing investments and lower interest rates. Mainly, the interest rates from purchased securities and loans to banks were lower. Lower expenditures were also the result of lower average interest-bearing liabilities and the lower deposit interest rates, while additionally less interest was paid for subordinated bonds and certificates of deposit (CDs) due to the suspended payment of due liabilities from these instruments and their write down after the Bank’s recapitalization by the state, in compliance with the decisions adopted by the Bank of Slovenia. The Bank’s interest margin amounted to 2.35% and was, due to the increase in net interest and a lower balance sheet, thus higher than the year before, when it came in at 1.73%. It also surpassed the interest margin attained by the banking system as a whole. Non-interest income amounted to EUR 32,022 thousand and include net fees and commissions and net gains from financial transactions. At EUR 14,944 thousand net fees and commissions lagged the 2013 figure by 5.5%, with the ratio net fees and commissions to operational expenses amounting to 46.2%. The Bank made most of its fees and commissions from card operations, payment operations and account maintenance.

39.012

32.022

-31.281

-64.352

37.291

94.680

-33.501

-214.054-230.000

-200.000

-170.000

-140.000

-110.000

-80.000

-50.000

-20.000

10.000

40.000

70.000

100.000

Interest income Non-interestincome

Expenses Impairmentcharges andprovisions

2014 2013


22

Financial transaction resulted in a gain of EUR 17,078 thousand, as compared with the 2013 figure of EUR 78,862 thousand. In 2013 it was mainly the result of the valuation of issued subordinated liabilities to fair value, while 2014 saw the majority of the gains come from the sale of investments in shares and mutual funds and from the sale of the Republic of Slovenia bonds. Regular expenses with depreciation and amortization accounted for EUR 31,281 thousand, thus decreasing by EUR 2,220 thousand or by 6.6% as compared with 2013. Labour costs amounted to EUR 15,062 thousand. The Bank continued decreasing the number of employees in accordance with the plan, 32 employees in 2014, and discontinued paying supplementary pension insurance. Cost of materials and services amounted to EUR 13,628 thousand, with the majority coming from IT services and debit card costs. Depreciation and amortization decreased by 10.4% in 2014 and amounted to EUR 2,593 thousand end of the year. Restructuring costs amounted to EUR 1,052 thousand and represent a one-off expense in the process of merger with Abanka in accordance with the commitments given to the European Commission. 72.6% of the planned costs for 2014 were achieved and included severance pay, audit and advisory services, costs of monitoring the restructuring process and the costs of moving from the headquarters at Vodnikova street. The Bank’s cost efficiency, measured by the share of operational costs in the average assets, amounted to 1.95% in 2014, with the cost to income ratio (CIR) coming in at 45.52%. Impairment charges and provisions amounted in total to EUR 64,352 thousand, being lower than in the previous year. Impairment charges and provisions in an amount of EUR 58,133 thousand pertain to credit risk, while impairment charges of EUR 5,761 thousand come from investments in available for sale financial instruments and additional provisions of EUR 458 thousand from the unresolved dispute related to the denationalization proceedings. 8.2 Financial position The total volume of operations in the Bank decreased by EUR 103,246 thousand in 2014 or by 5.7%. The Bank’s total assets amounted to EUR 1,711,982 thousand end of December 2014. ASSETS in EUR thousands

26.884

306.049

487.420

891.629

26.453

209.862

338.856

1.240.057

15.000 215.000 415.000 615.000 815.000 1.015.000 1.215.000

Other assets

Loans andadvances tobanks, cash

and balances…

Financial assets

Loans andadvances tocustomers

2013

2014


23

Net loans and advances to customers dropped by EUR 348,428 thousand or by 28.1% and accounted for 52% of the assets with EUR 891,629 thousand. The largest drop came in December, when bad assets were transferred to the BAMC. Net loans and advances to large corporate customers decreased the most, namely by 40.6% or by EUR 155,349 thousand, with their share in the Bank’s assets falling from 21% to 13%. Loans and advances to SMEs decreased by 31.1% or by EUR 120,542 thousand, while loans and advances to other customers dropped by 36.0%, being EUR 42,495 thousand. Retail loans and loans to private entrepreneurs decreased the least, namely by 8.6% or by EUR 30,042 thousand. Holding at 19% of the assets, their share remained unchanged and simultaneously became the strongest segment of the Bank’s lending activities. Investments in financial assets amounted to EUR 487,420 thousand end December 2014 and increased by 43.8% or a total of EUR 148,564 thousand during the year. In 2014 the Bank decreased investments in held for trading financials assets and the existing investments in available for sale financial assets. The increase mainly came as a result of the capital increase and the transfer to bad assets to the BAMC in December. In the recapitalization the Bank obtained Republic of Slovenia bonds in the amount of EUR 94,998 thousand, while also receiving government guaranteed BAMC bonds after the transfer of bad assets to the BAMC equal to the amount of the transfer value. Loans and advances to banks, cash and balances with the Central Bank increased by 45.8% or by EUR 96,187 thousand in 2014 due to high operational liquidity and the liquidity reserve. The increase is mainly down to the partial cash recapitalization in December, being EUR 95,002 thousand. LIABILITIES in EUR thousands

Due to customers decreased by 1.8% or by EUR 22,831 thousand, with the share in total liabilities increasing from 70% to 73%. Compared to 2013 deposits from large corporate customers fell the most, namely by 36.9% or by EUR 33,076 thousand. Deposits from SMEs dropped by 4.6% or by EUR 6,061 thousand, with deposits from other customers decreasing by 0.9% or EUR 3,197 thousand. Within the latter, more than half is represented by the deposits from the Ministry of Finance, amounting to EUR 221,152 thousand in 2014. Retail deposits and deposits from private entrepreneurs are the only segment that actually grew in 2014, namely by 2.9%, with the share of these increasing in the structure of total liabilities from 38% to 41%.

15.260

106.776

137.044

201.581

1.251.321

17.975

134.841

347.502

40.758

1.274.152

10.000 210.000 410.000 610.000 810.000 1.010.000 1.210.000

Other liabilities

Securities inissue

Deposits andborrowingsfrom banks…

Capital

Due tocustomers

2013

2014


24

The Bank followed the objective of ensuring an adequate ratio of loans to deposits from customers, which decreased from 0.97 to 0.72 in 2014. Deposits and borrowings from banks and the ECB fell by 60.6% amounting to EUR 137,044 thousand end December 2014. Most of the deposits and borrowings from banks are long-term. At the end of 2014 the Bank recorded no liabilities in the form of borrowings from the ECB, as these have been fully repaid in June. Capital amounted to EUR 201,581 end December 2014, thus increasing by EUR 160,823 thousand for the year. The existing share capital in the amount of EUR 16,980 thousand was decreased to EUR zero (0) on 16 December 2014, followed by a recapitalization of the Bank in the amount of EUR 190 million. Further, the change in capital in 2014 was negatively impacted by a net loss in the amount of EUR 21,101 thousand and the decrease of the revaluation reserve of available for sale financial assets in the amount of EUR 8,413 thousand. An increase in the share premium from simplified reduction of share capital by withdrawing shares in an amount of EUR 17,274 thousand and the transfer EUR 9 thousand in unpaid dividends as well as the EUR 34 thousand of unpaid bonuses to the members of the Supervisory Board from previous years to other profit reserves. As all of the Bank’s qualified liabilities had been written down, it held no treasury shares as at 31 December 2014. Liabilities from securities in issue dropped by 20.8% or by EUR 28,065 thousand. The change is mainly the result of due certificates of deposit of different maturities and the payment of interest from issued bonds. 8.3 Operations according to key sectors 8.3.1 Corporate banking Corporate banking comprises three segments, being large enterprises, SMEs and other customers. Other customers include the state and other financial organisations. Loans and advances to corporate customers Lending to corporates fell by 35.8% in 2014 or by EUR 318,386 thousand, amounting in total net to EUR 570,411 thousand end 2014. The largest drop came in December when bad assets were transferred to the BAMC. Even though loans to all segments decreased in value, the share of loans to SMEs recorded the smallest drop in the structure of the Bank’s assets and became the strongest segment of corporate borrowers with a 15% share in line with the Bank’s operational goals. In 2014 the Bank granted EUR 113,352 thousand new loans to corporates, while renewing a total of EUR 97,756 thousand gross loans. At the same time gross loans to corporates became due in an amount of EUR 726,032 thousand, wherein matured loans also include prepayments and the transfer of assets to the BAMC.


25

NET CORPORATE LOANS in EUR thousands

In 2014 the Bank approved a rescheduling of loans in a total amount over EUR 150 million, mainly on the basis of legally binding forced settlements and commitments from agreements of financial restructuring (MRA, Master Restructuring Agreement). It obtained a total of EUR 45 million in repayment of claims from bad debtors. Due to customers Customer deposits went down by 7.2% or by EUR 42,334 thousand in value, reaching EUR 548,287 thousand end 2014. The share in total liabilities amounted to 32%. The largest share within the item is represented by deposits from other customers, with deposits from the Ministry of Finance. Other deposits from customers show the largest share of SMEs deposits, coming in at EUR 125,566 thousand. 8.3.2 Retail operations and private entrepreneurs The Bank puts great emphasis on retail operations and on operations with private entrepreneurs, which is why it has a broad business unit and ATM (Automated teller machine) network in the Celje region, which it uses to bring its services to as many customers as possible. The Bank will continue to promote this segment of operations. Loans to retail and private entrepreneurs Loans to retail went down by 5.9% or EUR 18,160 thousand in 2014, amounting to EUR 291,417 thousand end 2014. In spite of the decrease their share in the asset structure increased by 17%, thus remaining unchanged and becoming the strongest segment of the Bank’s credit operations at the same time. Loans to private entrepreneurs fell by 28.5% or by EUR 11,882 thousand to a total of EUR 29,801 thousand. To a large extent the decrease is the result of private entrepreneurs restructuring into limited liability companies. In 2014 the Bank granted EUR 99,676 thousand new loans to retail and private entrepreneurs, while renewing a total of EUR 7,199 thousand gross loans. At the same time gross loans became due in

214.436

262.432

93.542

378.461 370.568

139.895

0

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

Large enterprises SMEs Other customers

31.12.2014

31.12.2013


26

a total amount of EUR 133,790 thousand, wherein matured loans also include prepayments. Over 90% of all gross loans was granted to retail. LOANS TO RETAIL in EUR thousands

Retail and private entrepreneur deposits Retail and private entrepreneur deposits are the segment in the non-banking sector that grew in 2015, with their share in the structure of liabilities increasing from 38% to 41%. The increase in deposits by 2.9% points to the fact the in spite of the protracted recapitalization process, the Bank still enjoys the trust of the retail sector. Savings from retail increased by 1.9% in 2014 to a total of EUR 672,071 thousand, with private entrepreneur deposits going up by 26.4% to EUR 32,460 thousand. Even though demand deposits from retail increased by 8.2% in 2014 and term deposits fell by 3.3% retail saving still remains the strongest and most stable funding source for the Bank. DEPOSITS FROM RETAIL in EUR thousands

164.172

91.914

35.330

170.269

102.893

36.415

0

20.000

40.000

60.000

80.000

100.000

120.000

140.000

160.000

180.000

Housing loans Consumer loans Other

31.12.2014

31.12.2013

326.613

345.458

301.983

358.008

270.000

280.000

290.000

300.000

310.000

320.000

330.000

340.000

350.000

360.000

370.000

Demand deposits Term deposits

31.12.2014

31.12.2013


27

Introduction of new services and special offers With the intention of promoting operations with retail, the Bank implemented new, commercially interesting products and worked on improving the existing services on offer. The significant new services of offer comprised: - the introduction of lending to housing stocks; - the introduction of the family loan; - the introduction of progressive short-term savings; - the ’’Right Choice’’ package, targeting new customers; - the option of making domestic currency deposits using the online “Klik” application; - the introduction of a special offer for the promotion of annuity savings with a more favourable

interest rate for new customers; - the ’’Summer Package’’ special offer; - the special housing loans offer, featuring an adjusted interest rate and lower loan approval costs. Bancassurance The Bank also provides its savers with alternative savings instruments. It has been marketing insurance services for a number of years now, thus complementing the traditional banking and financial transactions on offer. Within the scope of insurance services, it offers its clients a number of different insurance types in cooperation with the following insurance companies based on the licence for insurance brokerage it holds: NLB Vita, Zavarovalnica Maribor, Zavarovalnica Triglav, Adriatic Slovenica and Zavarovalnica Tilia. It also offers its customers insurance in the event of unemployment, an accident or permanent disability, life insurance, accident insurance, property insurance, tourist insurance and card holder insurance. Modern services In addition to classical counter services, the Bank has also been offering its clients more modern services, comprising non-cash and self-service operations, e-banking, phone banking, bank letters and transaction monitoring with the use of text messaging services. In non-cash operations, the Bank offers a wide spectrum of card services. It issues payment cards of the Maestro, MasterCard, Visa and Visa Electron brands. End 2014 the Bank had 165,753 cards in issue, with Maestro being the most frequent, followed by MasterCard. To promote deferred payment card use the Bank introduced a special offer, giving new deferred payment card users free first year membership for the issue of a regular or gold payment card Activa/MasterCard and/or Activa/Visa and free security text messages in the first year informing the user of transactions done using one or all payment cards. End of June 2014 the Bank outsourced it POS terminal network for card payments. End 2014 the Bank added hotel bookings to its card services and the service of automatic cash deposits, which allows customers immediate disposal over funds deposited in the transaction account. With regard to self-service operations, clients had at their disposal 79 ATMs at the end of 2014. The Bank constantly monitors the safety of ATM operations and is working towards expanding the applicability of these as well as on their accessibility. Users gain 24 hour a day access to cash withdrawals, UPN payment orders, cash deposits, mobile phone account charging and also available a mini print-out of transactions for the past 90 days.


28

Modern e-banking has been available to customers through “Klik” application for the past 15 years and enables quick, safe and simple performance of most of the services offered by the Bank. E-banking is constantly adapting to new technologies. Safety has been provided for with the use of the most up-to-date online technologies. The Klik users have the option of performing electronic banking using mobile phones and table PCs to review account activity and card transaction details as well as operations with e-invoices. 8.3.3 Bank operations Loans and advances to banks and balances with the central bank Due to high operational liquidity and liquidity reserves loans and advances to banks increased by EUR 137,336 thousand in 2014, coming up to EUR 155,203 thousand by the end of the year. The increase is mainly the result of transaction account balances abroad and other short-term investments in foreign banks. Balances with the central bank on the other hand decreased, namely by EUR 41,588 thousand, as the Bank redirected operational liquidity surpluses to the interbank market with the aim of improving profitability. Deposits and borrowings from banks and the ECB Liabilities to banks decrease by 29.9% and amounted to EUR 137,044 thousand end December 2014. Interbank funding sources were acquired from the SID banka. In 2014 the Bank repaid loans in the total amount of EUR 55 million, entered into a new loan agreement for the unused part of the funding and thus acquired new long-term, five year dedicated funding. In June 2014 the Bank repaid the total amount of funding taken from the ECB. 8.3.4 Financial instrument operations Securities investments Securities investments amounted to EUR 487,420 thousand end 2014, representing 28% of the Bank’s total assets, having increased by 43.8% compared with 2013. In December 2014 the Bank received state aid, half of which came in the form of bonds, and transferred bad assets to the BAMC, receiving government guaranteed bonds in exchange. End 2014 the Bank only held about 1 percent of investments in held for trading financial assets totalling EUR 4,636 thousand, with the remaining part of EUR 482,784 thousand represented by investments in available for sale financial assets.


29

SECURITIES INVESTMENTS in EUR thousands

In line with its business policies the Bank sold all investments in held for trading financial assets in 2014. This category only showed receivables from derivatives in their fair value amounts. Available for sale financial assets are used for the management of liquidity, currency and interest rate risk. Investments in ECB eligible securities form part of the Bank’s liquidity reserves. Equity securities investments amounted to EUR 3,350 thousand, being less than 1 percent of all available for sale securities investments. The investments in shares dropped by 66.4% in 2014 due to sales and the transfer to the BAMC. Debt securities investments amounted to EUR 479,434 thousand end 2014, having increased by EUR 161,513 thousand or by 50.8% compared with 2013. In addition to the receipt of recapitalization bonds in the amount of EUR 95 million and BAMC bonds in the amount of EUR 125.8 million, the Bank also invested in prime securities due to excess liquidity. Securities in issue Liabilities from securities in issue decreased by 20.8% in 2014, amounting to a total of EUR 106,776 thousand end 2014, representing 6% of the Bank’s liabilities. These comprised regular bonds and regular certificates of deposit. Subordinated liabilities were revalued to fair value in 2013, being completely eliminated at the Bank’s recapitalization by the state in December 2014 (The Decision by the Bank of Slovenia on emergency measures). At the end of 2014 the Bank held three regular bond issues, two maturing in 2015 and one that matures in 2016. The Bank’s liabilities in this respect amounted to EUR 98,524 thousand and decreased by EUR 761 thousand in the last year due to interest payments. Liabilities from issued regular certificates of deposit amounted to EUR 8,253 thousand end 2014 and dropped by EUR 26,304 thousand as compared with 2013. The Bank renewed a small part of the due regular certificates of deposit in 2014 with the issue of new long-term certificates of deposit in the amount of EUR 2,687 thousand.

4.636

482.784

10.961

327.895

0

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

450.000

500.000

Held for trading Available for sale

31.12.2014

31.12.2013


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8.3.5 Payments The Bank continued monitoring and implementing the changes brought about by the legislation and meeting its customers’ operational requirements in 2014 in relation to payment operations. In the technological aspects of SEPA (Single Euro Payments Area) it implemented all requirements in accordance with the Directive 260/2012, also fully implementing the ISO 20022 xml standard for data exchange between the Bank and its customers. Considering the fact that the banks are key in the development and processing of e-invoices, the Bank performed numerous activities to that end in 2014. To promote the use of the product it continued actively marketing it. Customers were provided with the option of manually entering e-invoices, as the Bank is aware that some do not have their own capabilities for the issue of e-invoices. In spite of the diversity of services and the competitive prices offered by other Slovenian banks, the Bank increased the number of open transaction accounts in 2014 by some 500 as compared to 2013. At the end of the year the Bank maintained 13,035 transaction accounts, representing a 5.7% of accounts held with banks in Slovenia. The Bank executed 12.5 million payment transactions totalling EUR 38,654 million for its customers in 2014. Despite its somewhat lower share (3.44%) in the total number of outflow transactions from Slovenia as compared with 2013 (3.47%), the total volume of payments still increased by 3%. 8.4 Assuming and managing banking risks In its operations, the Bank is exposed to a number of different risks which is why it developed a number of different procedures and methods for their management. The quality of assessing all risk types and responding to them in a timely manner as well as decreasing exposure to risk are important factors for the attainment of the Bank’s strategic goals. It has prepared a strategy of assuming and managing risk together with nine policies, which feature detailed descriptions of procedures in connection with identifying, measuring or assessing, managing and monitoring risk. The strategy and policies of assuming and managing risk are updated annually, whereby environmental conditions and their effect on the Bank’s operations are taken into consideration as well as the newly acquired experience and know-how in the area of risk management. In spite of the aforementioned risk types, the Bank also provides it is capable of managing all other significant types of risk, which it assumes in the course of its operations. In the event of new risk types being encountered, these are also included in comprehensive risk management activities. The Bank’s largest exposure pertains to credit risk, followed by profitability, strategic, liquidity, operational, reputation risk, interest rate and capital risk as well as market risk. The Bank has prepared and implements the Banka Celje, d.d., Remuneration Policy to assess the suitability of key personnel at Banka Celje, d.d., and the Policy of assessing the suitability of Management and Supervisory Body members at Banka Celje, d.d.


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On January 1, 2014 a new capital accord came into force as a result of Basel III requirements. The content of the new capital accord has been transferred to the European banking environment in the form of two documents:

- Regulation (EU) No. 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012 (hereinafter referred to as ‘’Regulation CRR’’ - Capital Requirements Regulation);

- Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013 on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (hereinafter referred to as ‘’CRD IV’’ - Capital Requirements Directive).

The new capital accord – Basel III, having been transferred to the banking environment through the abovementioned directive and regulation, has been implemented in the operations of the Bank on 1 January 2014. All the activities pertaining to the implementation of the provisions from the new legislation within the Bank are performed by the Basel II Project Group, with the goal of satisfying the legal requirements with respect to reporting to the regulator and improving risk monitoring as a basis for the further decision making process. The new legislation affects the area of capital and liquidity risk management the most with significant changes in credit risk management as well. The following includes definitions of individual bank risk types. Credit risk Credit risk, representing the risk of loss resulting from a debtor's inability to meet its obligation to the Bank, is considered one of the most important banking risks. The aim of assuming and managing credit risk is for the Bank to ensure up-to-date management and assessment of debtor risk or the risk related with investments and the credit portfolio. The Bank measures the risk associated with a debtor prior to granting a loan as accurately as possible and measures the exposure to credit risk for the entire duration of the credit relationship thereafter. It directs investments toward debtors with a high rating and toward less risky sectors and regions. It builds the risk associated with the investment into the interest rate and ensures the best possible collateral. The Bank limits portfolio concentration by setting up limits toward debtors or toward groups of related entities, by setting limits in connection with portfolio structure (according to sector, region, type of transaction and activity). Most of the transactions are entered into within the Republic of Slovenia, with treasury transactions being performed in other EU members, while decreasing exposure to the SEE region (South East Europe). The Bank has set up a system of early increased credit risk detection and is actively working on recovery of receivables past due. It approaches the restructuring of funding, where the company exhibits a sustainable model and sufficient cash flow to repay the loans under the new, restructured conditions. In the event of objective evidence on increased credit risk, the Bank assesses loss from credit risk and recognises impairment charges and provisions in line with international financial reporting standards (IFRS), while ensuring their adequacy on an ongoing basis later on. The Bank calculates credit risk capital requirements using the standardised approach. It also calculates an internal assessment of capital requirements to cover for unexpected loss from credit risk on a quarterly basis. It estimates the assessed internal capital requirements based on external factors and performs stress tests as well, while also measuring the effect that extraordinary, but probable, events have on profit and the Bank’s financial position.


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In 2014 the transfer of claims to the BAMC resulted in a decrease in exposure to credit risk. Non-performing loans and loans to sectors with higher risk (real estate, financial brokerage, professional, scientific and sales activities) decreased significantly. The share of debtors in rating classes A and B (investment grade classes) increased to 67.20% (2013: 57.12%), rating class C (substandard) decreased to 10.97% (2013: 11.39%), while the share in the rating classes D and E (bad debtors or non-performing loans) decreased to 21.83% (2013: 31.49%). In 2014 the Bank applied additional impairment charges and provisions to cover for losses from credit risk in the amount of EUR 58,591 thousand (2013: EUR 207,897 thousand). The impairment charges for the year resulted from the new insolvency proceedings and the preventive corporate restructuring proceedings, decreased fair values of collateral, lengthy recovery procedures, further negative events effecting debtors, toward which the bank had restructured its claims. The new capital accord (Regulation CRR and Directive CRD IV) introduces changes in the field of credit risk management pertaining to capital requirement for credit risk, with an aim to limit investments in exposures with a higher rate of risk and directing these into retail banking, especially into SMEs, where an additional incentive of decreased capital requirements has been introduced. It determines a unified definition of default and the standards for the monitoring of defaulting exposures. The definition of restructured exposures has also been unified and requirements set regarding their monitoring after restructuring has been done. Thus, the goal is to achieve more transparency in banking operations and a higher level of comparability between banks. In 2015 credit risk remains one of the more significant risks the Bank faces, which is why it will continue to carefully monitor the exposure to it and implement measures to mitigate losses. Slovenia remains the target market, which is why the Bank will continue to decrease exposure to companies abroad, while maintaining its operations with foreign banks from lower risk markets. Market risk Market risk is the risk of loss due to changes in interest rates, currency rates and market prices of financial instruments. The most significant risk type within market risk is positional risk in equity and debt financial instruments and derivatives. Exposure to currency risk is low. In trading with financial instruments, the Bank is predominantly active in the financial market of the EU (securities transactions with prime banks and sovereigns in order to ensure an adequate liquidity reserve). The Bank defines investments and trading in financial instruments by applying limits to a number of different factors (according to issuer, transaction type, region, etc.), which the Bank constantly adjusts to take into account the conditions in the financial markets and its own business strategy. Additionally, it has also adopted stop-loss limits. The Bank enters into transactions with foreign currency and interest rate derivatives. Its basic policy in connection with derivatives trading is entering into transactions for the purpose of hedging own positions and client positions, whereby the latter transactions are hedged with counter positions. Transactions are entered into with prime foreign banks, thus allowing for low exposure to market risk from these instruments. In relation to foreign currency risk, the Bank’s policy is that of a closed position across individual foreign currencies. Managing the open foreign exchange positions is performed through prompt transactions and with the use of foreign exchange derivatives in line with the limits set. Limits are low and are meant for the management of open foreign exchange positions within the scope of regular operations, not intended for speculative trading. The Bank calculates market risk capital requirements using the standardised approach. In 2015 the Bank will purchase financial instruments with the sole purpose of managing interest rate and liquidity risk.


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Interest rate risk The risk of change in interest rates pertains to the exposure of the Bank’s financial balances to fluctuations in interest rates, mainly due to the mismatch between the maturities of investments and the Bank's funding sources or to the mismatch between the type of interest rate or period, in which the interest rate is fixed. Exposure to interest rate risk may influence the amount of the Bank's net interest income as well as the economic value of its capital. To decrease interest rate risk, the Bank uses traditional balance sheet transactions, such as lending, securities purchases, deposit taking, issue of securities etc. In addition to these traditional banking transactions, it also enters into interest rate derivative transactions, not for speculative purposes, but to hedge for individual operations. In accordance with the IFRS the Bank measures such interest rate derivatives at fair value, which may have a significant impact on the income statement. This is why it introduced hedge accounting, which decreases the instability of operational results caused by adjustments in the fair value of derivatives intended for hedging. On a quarterly basis, the Bank calculates internal capital requirement estimates to cover for unexpected loss from banking book interest rate risk in line with internal methodologies. With the use of the above measures, the Bank was successful in decreasing exposure to interest rate risk. It will continue to close interest rate gaps using balance sheet instruments and interest derivative agreements in 2015, mitigating the effects on the income statement with hedge accounting. Liquidity risk Liquidity risk is the risk type that includes the risk of providing liquidity funding, when the Bank is unable to settle all of its due obligations or is forced to obtain sources of liquidity at significantly higher costs. It also includes market liquidity risk, pertaining to positions in financial instruments which cannot be sold or replaced in a short period of time without significantly affecting the market price. From the aspect of time, liquidity risk management is separated into operational liquidity management and structural liquidity management. The Bank provides for efficient management of operational and structural liquidity, representing the management of cash flows in a chosen time frame while taking into consideration the liquidity of available assets and the stability of asset sources. Operational and structural liquidity cash flow management is based on simulations done in relation to the maturity of asset sources and the maturity of assets according to their capacity for prompt realisation. For the purposes of operational liquidity the Bank has at its disposal an adequate amount of liquidity reserves, which enable it to settle matured liabilities in the shortest possible period in cases when usual liquidity sources are not available, or when these do not provide for the adequate liquidity required. For structural liquidity, the Bank provides for an adequate liquidity ratio in accordance with the Decision on minimal requirements for ensuring adequate liquidity for banks and savings banks, thus ensuring required reserves in the form of the structural liquidity surplus. In accordance with the Decision on risk management and the implementation of internal capital adequacy for banks and savings banks, the Bank performs quarterly stress test scenarios pertaining to liquidity. Based on the results of these stress tests, it defines target ratios and liquidity risk management limits. The tests allow it to determine the structure and minimal amount of the liquidity reserve. It also defines a contingency plan for the Bank to follow at the onset of the first signs of a liquidity crisis.


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By employing a system of limits, the Bank also follows the objective of maximising funding source diversification. By maximising the diversification of liquidity sources with an emphasis on long-term liquidity, the Bank works towards the objective of an optimal liquidity gap, being the difference between assets and liquidity sources in a certain time interval. In 2014, the Bank managed liquidity risk in line with adopted policies, however the conditions in relation to accessing liquidity changed. The Bank did not have any problem with operational liquidity, as it provided for sufficient liquidity reserves (highly liquid assets, which are also eligible to be pledged as collateral for obligations toward the ECB and in the interbank repo market) to manage the required level of operational liquidity. More of its activities were aimed at providing adequate diversification of liquidity sources, which allowed it to follow the objective of an optimal structure of these, while emphasising stable liquidity sources. It also followed its objective of an adequate ratio of loans to the non-banking sector with deposits from the non-banking sector. The Regulation on prudential requirements for credit institutions and investment firms in the area of liquidity risk introduces the following new features: meeting the Liquidity Coverage Ratio (LCR), the Net Stable Funding Ratio (NSFR) and additional liquidity monitoring metrics. In 2014 the Bank reported a set of items for the LCR and the NSFR, while reporting liquidity metrics will be introduced within the year 2015. Operational risk Operational risk pertains to the risk of loss as a consequence of the inadequate or unsuccessful execution of internal processes, the actions of individual persons or the functioning of systems, or due to external factors. Due to its fast development and the characteristics of the financial system, the importance of operational risk is growing. It requires the setting up of a solid and reliable system for assuming and managing this risk type. In defining the way it assumes and manages operational risk, the Bank takes into consideration its size and development as well as the nature and complexity of its business activities. It has prepared a comprehensive review of its potential exposure to operational risk according to business processes, which is based on exposure according to category of operational risk, the frequency of an event occurring, the risk impacts and control environment. The Bank has prepared a list of operational processes, which served as the basis for the preparation of a profile pertaining to potential exposure to operational risk according to individual processes, for the Bank as a whole, for the preparation of a catalogue of all operational risk it identifies and for the preparation of a matrix of links between organisational units within the business processes. It calculates operational risk capital requirements according to the basic indicator approach. The calculation of the internal capital assessment and the capital requirements to cover unexpected loss from operational risk is done in line with adopted methodologies on a quarterly basis. Continuous operation of the Bank is regulated by the rulebook defining procedures, activities and processes of operation and organisation in the event of a crisis, which are part of operational risk. The purpose of the plan for continuous operation is to ensure the safety of employees and clients and to set up the smooth operation of key business processes in the shortest possible time at the existing and at an alternate location. All business processes performed by the Bank have plans in place for their performance in the event of non-functional IT. The goal of organised operations is to reduce operating and financial damage, which would materialise should activities and procedures defined in the continuous operation plans for the Bank and in the recovery plan be suspended.


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Capital and capital adequacy In its operations, the Bank must always have at its disposal an adequate amount of capital, which depends on the volume and types of services the Bank provides and its strategy. An adequate capital base represents a contingency reserve pertaining to different risk types, which the Bank is exposed to in its operations. To cover unexpected loss, the capital of any bank must always amount to at least the sum of the capital requirements for the credit, market and operational risk, while capital adequacy, representing the ratio between capital and the sum of risk-weighted items, must always amount to at least 8%. The management of capital and capital adequacy within the Bank is based on adopted policies of assuming and managing capital risk and is in line with annual business plans, also expressed in the need for adequate regulatory capital. With the intention of assessing the capacity for assuming risk, the Bank prepares projections of the dynamics of capital and capital requirements as well as projections of the internal capital assessment and capital requirements for a period of five years in line with its restructuring plan. The Bank provides for a decrease in investments with higher capital expenditure (in the area of credit and market risk capital requirements), while also decreasing credit risk capital requirements by including property (residential and commercial) into the calculation of risk-weighted exposure. In 2014 the Bank continued with the activities aimed at decreasing capital risk and was successful in increasing capital. With the increase of its share capital, the Bank has provided for long-term capital adequacy. As at 31 December 2014 the Bank’s capital adequacy after the capital increase amounts to 18.22%. More details are included under item 5.4 in Financial Statements. The Bank calculates an internal estimate of capital requirements on a quarterly basis to cover for unexpected losses from capital risk in accordance with the adopted methodologies. Profitability risk Profitability risk pertains to an inadequate structure or to the Bank’s inability to provide ample and constant levels of profitability. The methodology of assessing profitability risk is based on determining the adequacy of the structure of the statement of financial position, the income statement items, the interest margin, cost efficiency, the profitability of new business and the return on assets and capital. This is why the Bank prepares monthly quantitative and qualitative analyses of the statement of financial position, the income statement, the statement of comprehensive income and the statement of cash flows, with the findings taken into account in the operational decision-making process. In line with the Bank’s risk profile, profitability risk is one of the more significant risk types it faces, for which capital requirements are calculated in accordance with the prescribed methodology. Strategic risk The objective of strategic risk management is to reduce the risk of loss from erroneous operational decisions, the inappropriate implementation of decisions made or due to insufficient responsiveness to the changes in the operating environment. In accordance with the adopted commitment on the merger with Abanka, the Bank has only prepared strategic policies for the year 2015, while the strategy for the following four years has been prepared for the merged bank. The implementation of these strategic policies will be regularly monitored with the aim of adopting the right operational decisions and to recognise increased risk on time. These


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strategic policies are implemented across all levels within the Bank and are adequately supported with all the required calculations and human and technological resources. Reputation risk Reputation risk represents the risk of loss due to a negative image, which the Bank has in the eyes of its clients, business partners, owners, investors and supervisors. To ensure the reputation of the Bank, as perceived by the interested public, is adequate for the attainment of operational goals, the management of its reputation is a strategic task for the Bank as a whole, not only its respective parts. The utmost attention is paid to operations with customers and to the contacts with supervisory institutions, potential investors and other public groups. The Bank manages reputation risk by ensuring safe and stable high quality operations, by having the Management Board and Supervisory Board conduct themselves in accordance with professional prudence and the highest ethical standards of management, by providing transparent operations, monitoring its media image, systematically communicating with various public groups, managing its human resources with the utmost care and by being socially responsible. It pays special attention to communicate to its customers, business partners, owners, investors and other interested groups. ICAAP process The Bank has set up a process of assessing adequate internal capital (the ICAAP process), which: - is based on the identification, measurement and assessment of risk, the preparation of an

aggregate risk estimate and the monitoring of significant risk types; - allows for ensuring adequate internal capital levels in relation to the risk profile of the Bank; - is appropriately included in the management process (decision-making, risk management, etc.). For the purpose of assessing internal capital, the Bank calculates internal capital requirement estimates for risks it deems significant on the basis of its risk profile or it determines through the procedure of risk identification, measurement or assessment, management and monitoring that these might significantly impact its operations, thus requiring it to ensure appropriate capital levels. The Bank calculates the internal capital assessment and capital requirements on a quarterly basis, with the calculation being confirmed at the Risk Committee and then forwarded for consideration and approval at the ALCO (Assets and Liabilities Committee). The Bank re-assessed the level of exposure to individual risk types in major business lines and the quality of the control environment. It calculated the Bank’s risk profile and prepared a risk matrix. Based on the risk profile, prepared in December 2014, the Bank is mostly exposed to credit risk, followed by profitability, strategic, liquidity, operational risk, reputation risk, interest rate rand capital risk and market risk. The risk profile deterioration trend stopped in 2014, however the calculated risk profile still deviates from the desired risk profile, as defined in the Strategy of assuming and managing risk. In spite of the positive economic trends the merger with Abanka Vipa, d.d., planned for the coming year, brings with it a certain level of uncertainty and risk.


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8.5 Internal organisation and human resources

The Bank has taken care to develop further during the entire course of its operation by investing in efficient IT support systems, its business network and in its human resource potential. Internal organisation Organisational structure The Bank is organised into a comprehensive organisational system. There are for main decision-making levels in place, namely the Managemet Board, both executive directors, the general managers of divisions and the heads of services, business units and departments. Its well-developed business network allows it to be present in all the major towns in the Celje region as well as in Ljubljana, being the financial centre of Slovenia, in Maribor and in Koper. End 2014 there were 8 branch offices with 20 agencies for individuals and 5 branch offices for corporates (micro, SMEs) and private entrepreneurs in operation within the Bank’s 9 business units. Organisational changes In 2014, organisational changes mainly adhered to the restructuring plan, which was submitted to the European Commission. To unburden the business network a separate department was formed for direct support activities to sales operations. An independent support department was formed for marketing, the development of products and services, which took over the development and marketing assignments in relation to sales. With an aim of cutting down on the managerial levels and the Main Branch in Ljubljana and the Maribor Business Unit were also reorganised to achieve a greater focus on sales. The telephone switchboard was outsourced. Job systematisation To provide for a more efficient performance of business processes jobs within the business network were unified with the aim of forming the post of a universal personal banking advisor. The condition for the placement of staff to the new post was a successfully passed internal test, which was passed by 27 of the 45 potential candidates. Document management In 2014 the Bank also introduced an electronic document management system. During the initial stage activities were carried out in relation to the payment of invoices and the receipt of court mail and judicial enforcements in electronic form. Both processes were implemented in February 2015. Property management Due to discontinued operations at some of its business units during the past few years, the Bank is in the process of selling the empty offices. In December 2014 it sold its offices in Prebold. It acquired energy performance certificates for all the offices it leases or which are being sold. By the end of 2014 the energy performance certificates were also fitted in most of the other properties held by the Bank, with a few put in place by the end of March 2015 at the latest. Human resources Number of employees Human resources adjusted to the operational environment in 2014. The number of employees decreased gradually, going down 6.4% in comparison with 2013. On 31 December 2014 the Bank employed a staff of 468, with the average complement for the year being 497. There were 33 employment terminations in 2014, 29 of those were permanent basis and 4 temporary employment contracts. A new employee was hired on a temporary employment basis. Most of the causes for the


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termination of employment were operational. The fluctuation rate was 6.25% in 2014, being 1.53 percentage points above the 2013 figure. Employees according to age and gender The average age at the Bank was 46.6 years in 2014, having increased in comparison with 2013 when it was 46.0. The age group of 51 to 55 years was dominant. The high average age is due to the Bank’s long tradition on the one hand and the result of restrictive human resource policy in recent years. The average length of service at the Bank was 21.4 years, with the average total employment period being 24.5 years. Women are dominant according to gender structure, representing 78% of all employees in 2014. The gender structure has not changed in any significant way during the past few years. Employee education structure The Bank puts a great deal of emphasis on knowledge and education, also shown in the fact that 4.9% of employees have completed their post-graduate studies and 60.7% have been educated at post-secondary school level at least. The Bank promotes improvement of the education structure by partly funding educational studies and providing the possibility of placing employees to posts that allow for further personal and professional development after they have completed their chosen studies. Compared with 2013 the share of employees holding higher education degrees increased by 2.8%. Employees with disabilities The share of employees with disabilities (category II. and III. disabled persons) is 2.1% and has gone down by 1.3 percentage point compared with 2013, mainly due to termination of employment. Two thirds of the employees with limited work abilities work in the retail network. The funds from exemptions and benefits in payment of contributions due to employment of people with disabilities are used to cover part of the cost of salaries paid to the employees with disabilities. Employee monitoring, development and promotion Annual interviews were performed in 2014, serving as the basis for the assessment of an individual’s development potential, the determination of key personnel and for the preparation of an educational plan, for the individual employees as well as for employee groups. Based on the assessment of annual performance about 2% of employees were promoted (both vertically and horizontally). Employee testing was also performed with the objective of career potential assessment and the building of a human resource data base for the placement of employees to suitable posts. Testing included 10% of the employees. Based on the assessed personnel potential and the assessment of past performance about 1% of employees were promoted, while part of the employees were reassigned to different posts. Based on internal governance and in accordance with requirements from the European Banking Authority (EBA) guidelines policies for the assessment of the suitability of management and supervisory body members as well as key function holders were adopted during the past year. Employee training In 2014 employees attended 147 internally organised and external training programs. The Bank promoted internal training more to facilitate tailor-made know-how transfer between employees, as this meant more employees were able to participate. Training sessions featured know-how pertaining to products on offer, software skills, legislation, finance as well as practical skills.


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Motivation and reward The Bank’s internal documents also feature a policy on employee rewarding. The salary system includes a fix and a variable part. The variable part is intended for rewarding employees’ above average performance. It is performed every month on the basis of employee assessment in line with the criteria defined in the internal documents (quality, quantity, resource efficiency, inventiveness, diligence). The Bank rewards its best sales employees from the retail division in line with the model, which is adapted to the Bank’s operations as well as the individual’s performance. Rewards are given on a quarterly basis, with 16 employees receiving it on average in 2014. Project management and participation in working groups is rewarded also. Student and temporary work 5 employees, all for the retail division, were hired through an employment agency. Student work saw an average of 7 students working at the Bank at any one time, mainly performing secretarial and other administrative jobs. ’’Family friendly company’’ certificate The Bank is proud of the fact it holds the ’’Family friendly company’’ certificate. This is why it focuses its attention on families and the balancing of the employees’ family and work-life. Among the 15 measures it adopted, it emphasizes the children time bonus, New Year’s gifts for children and gifts for the new-born. Taking care of the employees The Bank systematically monitors the health status of employees, which is a legal obligation as well. In 2014 the periodical medical examination was passed by more than 40% of the employees. This past year saw the preparation of instructions and criteria for granting solidarity aid to the employees. It was awarded to 4 employees. In October an in-house collective agreement was signed as well. 8.6 Information technology The core objective of IT (Information Technology) is to ensure continuous IT support. Activities were also directed at the programing of single new solutions, the cooperation on some of the larger projects and the performance of upgrades and adaptations of the existing hardware and software communications equipment. Projects The project of optimising the processes pertaining to card operations was completed in January 2015, with further development to be executed according to respective lines. Other major projects included the setup of the COREP and FINREP reports in accordance with the EBA-DPM methodology (European Banking Authority Data Point Model). The new reports have already been successfully sent out. In compliance with the requirement by the Bank of Slovenia a new software application was set up for liquidity flow reporting purposes. These too are being successfully reported since 1 April 2014. A new solution was set up for a more accurate record on real estate properties, including their revaluation. A milestone development process with continuous testing is being implemented, with an interactive data entry set as the goal. As a result, a comprehensive overhaul of the collateral determination module was required in the data warehouse.


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Due to the level of interest for including a larger number of e-invoice issuers, the support for the receipt of e-invoices through multiple channels was set up in 2014. Outsourcing of operations Rationalisation of operations in 2014 meant that printing and enveloping was outsourced. Support for the preparation and exchange of documents was set up for this purpose. The project was fully completed mid-year. POS terminals were also. IT risk mitigation activities To mitigate IT risk regular monthly reports are being prepared on successful installation of security patches on banking equipment, with regular weekly reporting also done on the disturbances in the operation of key computing and communication systems with the announcement of the planned interventions. The Bank will continue introducing the monitoring system, which among other things provides direct communication to the custodians in the event of a malfunction or an overload in the systems being monitored. 8.7 Sustainable development and social responsibility The sound foundations of successful banking operations, which the Bank laid almost one and a half century ago, are a strong basis for its cooperation with its partners and the environment. In times when the world is characterized by rapid change, strategically placed communication is key to success in the market, which is why the Bank’s Management Board takes special care to actively and transparently communicate with the interested public, while also having established all risk management mechanisms. Well thought out and quick decisions of the management with the professional and motivated employees enable the Bank to meet all expectations. It adapts to the market conditions and the different needs of individuals and companies. Simply a dependable banking service provider with a broad network of offices and modern banking channels, providing a range of services that customers expect. Being part of the environment is an important component of successful operations, quality development and progress for the Bank, which is why it is actively and responsibly involved in the social environment. In accordance with its vision and strategy, it invests in the environment in which it operates. It supports sports and culture with sponsorships, takes part in a number of charity projects and is actively involved in social projects, as it deems its further efficiency and success to be dependent on the support of its environment and the trust of different interest groups. In addition to cooperating with various cultural, humanitarian and sports societies, the Bank also supports the Muzej novejše zgodovine (Museum of Modern History) in Celje and its Hermanov Brlog (Herman’s Den) project, the only Slovenian museum for children, the Pelikan Studio, while also being a long-term supporter of the Slovensko ljudsko gledališče Celje (Slovenian People’s Theatre in Celje) and of the Zavod Celeia (Celeia Institute) as well as other institutions and companies that organise numerous cultural and sports events. In its operations, it shows special concern for underprivileged customer classes, offering special benefits to retirees, students and humanitarian and other organisations, while also still maintaining savings at primary schools. In doing so it hopes to contribute to the development of banking related values.


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The Bank also helps its partners invest in environmental projects, construct waste water treatment plants and carry out other socially responsible projects. It purchases environmentally safe materials, separates waste, collects waste paper and ink cartridges and utilises a centrally controlled heating system to use energy rationally. 8.8 Marketing communications The Bank’s marketing activities in 2014 were marked by two key topics: the celebration of its 150th anniversary and the intensified communication regarding its new strategic position in the second half of the year. Especially the second half of the year saw the Bank’s marketing activities aimed at the broader Celje region, more specifically at the towns and the surroundings, where it holds business units, branch offices and ATMs. Most of the Bank’s activity was thus directed at the Savinjska region, where its recognition level and market share are the highest. The shift of the focus to the regional area was even more prominent in marketing, as the Bank’s promotional campaigns were aimed at the area with more intensity in the second half of 2014. Increased attention to the region was first and most clearly reflected through the changes in the Bank’s corporate slogan – from ’’Traditionally well done’’ (emphasizing tradition, 150 years and quality), to the new ’’Close to you’’, which completely changed the communication focus. With the new slogan the Bank took to emphasizing its geographic proximity to customers, while at the same time being able to externally and internally commit to changes and improvement, which will bring its services even closer to the customer. There have been many, also internal, communication activities, focusing on the desire and the will to change services, conditions and the Bank’s behaviour in relations with customers. The new direction was supported by a marketing and communications campaign in autumn. Towards the end of the year the Bank started to intensify the addition of product messages with the clear intention of informing customers, that is not only close to them geographically, it also intends to improve its services and conditions. 8.9 The operations of the Internal Audit Internal Audit performs its duties in accordance with the international standards of professional practice in its capacity of an independent department reporting directly to the Management Board, at the second level of management. It is in constant contact with the Audit Committee and the Supervisory Board. When employees contribute opinions, assessments and recommendations, they can rely on internationally established professional internal audit standards and operate independently of other parts of the Bank. It works in accordance with the internal audit code and the internal auditor’s professional ethics. The latest assessment of the Internal Audit Service's compliance with standards was performed in the period from November 2012 to January 2013 (the assessment period interval is 5 years). The information on the assessment was made public at the Slovenian Audit Institute’s homepage. The two basic planning documents of the Internal Audit for 2014 comprised the dynamic three-year strategic plan and the annual operational program, which the Management Board adopts annually


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with approval given by the Supervisory Board after due discussion at the Audit Committee. Both documents are based on the Bank’s risk profile, its annual and development plan, it strategy and the fundamental characteristics of the environment in which it operates. The planned activities of the department are detailed in semi-annual operational plans, which the Management Board adopts. To monitor the Internal Audit’s activities on an ongoing basis the Management Board endorses semi-annual and annual reports on its activities, showing the activities performed by it with emphasis given to the most significant findings, including an overview of the recommendations issued and implemented. The Supervisory Board reviewed the reports and they were considered at the Audit Committee, its advisory body, which was regularly kept appraised of the department’s activities. The Supervisory Board was regularly kept informed of the audits conducted by external supervisory institutions and with the Bank’s activities based on the requirements by the Bank of Slovenia. The annual Banka Celje, d.d., internal audit report, with the opinion of the Supervisory Board of Banka Celje, d.d., is also reviewed at the Meeting of Shareholders. The assignments of Internal Audit are defined by law and pertain to quality assessment in connection with the management of all types of risk (including the setting up of an adequate system of internal controls) and to the monitoring of compliance of the Bank’s operations with regulations and internal rules as well as the principles of rational operations. To monitor the implementation of recommendations after internal audits have been completed the Bank’s Management Board is made aware on at least two levels: first after every internal audit has been completed and after that a comprehensive annual report on the implementation of all the recommendations is given. A framework system for comprehensive monitoring of implementation of the annual operational programme has been set up comparing the plan and execution of internal audits. The Internal Audit also coordinates activities in connection with the selection of external auditors (through the Management Board, the Audit Committee and the Supervisory Board) to be decided upon at the General Meeting of Shareholders. The indicative annual plan of operations envisaged auditing 22 business areas in the Bank and the completion of four internal audits left over from 2013, under the assumption there will be no extraordinary large scale tasks (a total of 26 internal audits). Emphasis was placed on the auditing of credit and liquidity risks. Actually, 17 planned internal audits were completed by end February 2015, the 4 internal audits carried over from 2013 have been completed, with 6 extraordinary audits having been performed also (a total of 27 audits); an internal audits is still running and one was not completed as the internal audit employee’s employment was terminated in November and two were not performed, as the execution made no sense due to the change in the circumstances of the Bank’s operations. An audit of the implementation of new banking products is mandatory at their introduction, however there was no new banking product introduced in 2014. The department also informally advised in 20 instances with the intention of contributing to the better operations of the Bank. The most significant areas of operation, which were audited in 2014 include: credit risk management in its broadest sense, capital risk management, the quality of IT systems management from different points of view and compliance with new, amended legislation. In all internal audits and reviews, special emphasis was put on: the identification of procedures built-in for the management of risk, assessing the current situation as compared to the recorded data, the


43

quality of internal control systems, timely commencement of recovery procedures and the adequacy of collateral, compliance of operations with legislation and internal rules, operational risks related to IT and the possibilities for improving existing procedures; all aimed at further raising the quality of the Bank’s operations, thus contributing to added value. In the performance of their duties internal auditors frequently cooperated with the Compliance Department. The Internal Audit’s tasks were performed by five employees until November 2014 (including the department’s General Manager). End November an employment relationship with an employee with the title of certified auditor was terminated. After the expiration of the term of office at the end of 2014, the post of the department’s General Manager was taken over on 1 January 2015 by a new employee, with a Master of Science degree. One of the employees is a certified internal auditor, another is a certified information systems auditor (CISA) and is a Master of Science. All five employees have been educated at university level at least. Additionally, one employee holds an insurance broker licence and two employees hold the European Banking Certificate. Education and training of employees remained a constant in 2014, with additional knowledge being acquired in internal auditing, banking operations, IT skills, anti-money laundering, risk management and corporate governance.


44

9 MANAGING BODIES OF THE BANK

GENERAL MEETING OF

SHAREHOLDERS

SUPERVISORY BOARD

MANAGEMENT BOARD

CREDIT COMMITTEE

LIQUIDITY COMMITTEE

MANAGEMENT COMMITTEE

ASSETS AND LIABILITIES

COMMITTEE - ALCO

ORGANISATIONAL UNITS

OTHER COMMITTEES AND

COUNCILS

AUDIT COMMITTEE

REMUNERATION COMMITTEE


45

10 ORGANISATIONAL STRUCTURE OF THE BANK

MANAGEMENT BOARD

President & CEO Member of the Management Board

Davorin Leskovar Aleksander Vozel, M.Sc

ACCOUNTING DIVISION

IT DIVISION

RISK MANAGEMENT

DIVISION

PAYMENTS AND

OPERATIONAL

SUPPORT DIVISION

LEGAL AFFAIRS AND

COMPLIANCE

OPERATIONS DIVISION

GENERAL AFFAIRS

PERSONNEL AND

ORGANISATIONAL

SERVICES

CORPORATE DIVISION

INTERNAL AUDIT

FINANCIAL MARKETS

DIVISION

RETAIL DIVISION

Celje Business Unit for

companies

Slovenske Konjice

Business Unit

Hmezad Žalec Business

Unit

Šentjur Business Unit

Laško Business Unit

Rogaška Slatina

Business Unit

Koper Business Unit

EXECUTIVE

DIRECTOR

EXECUTIVE

DIRECTOR

RESTRUCTURING

AND RECOVERY

DIVISION

Celje Business Unit for

private individuals

MARKETING SUPPORT,

PRODUCT AND

SERVICES

DEVELOPMENT DEP.

AML&CTF Officer

Debt Restructuring Officer

IT Consultant

Ljubljana Business Unit


46

11 STATEMENT OF CORPORATE GOVERNANCE The Bank’s Corporate Governance statement is prepared in line with the provisions of the Companies Act (ZGD-1) and pertains to the financial year 2014, while also featuring the significant changes that have been recorded since the day of the signing of the statement. It includes the Statement on compliance with the Corporate Governance Code made by the Management Board and the Supervisory Board under item 11.1 and additional Notes in accordance with Paragraphs 5 and 6 of Article 70 of the ZGD-1 under item 11.2. 11.1 Statement of the Banka Celje, d.d., Management Board and Supervisory Board on Compliance with the Corporate Governance Code As a public company Banka Celje, d.d. (the Bank), which has bonds listed on the Ljubljana Stock Exchange d.d., is compliant with the ZBan-1 and the ZGD-1 as well as the Market in Financial Instruments Act (ZTFI) and the Rules of the Ljubljana Stock Exchange and with all the additional general rules, dealing with topics that are dealt with in the Corporate Governance Code. Corporate Governance Code is in the public domain, attainable at the Ljubljana Stock Exchange website at http://www.ljse.si/ under “for issuers/downloads”. The Bank complies with the Corporate Governance Code dated 8 December 2009 (the Code) with the exception of some deviations or particularities, explained under individual items of the Code below. The Bank’s subsidiary, Posest, d.o.o., as a non-public company and as such not subject to the provisions of the Code. Clause 1 The Bank's goals are defined in its annual and development plan, both of which are approved by the Supervisory Board and are not separately defined in its Articles of Association.

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

Clause 4.2 The Bank would like to see large and institutional shareholders inform the public of their management policies pertaining to their investment in the Bank; this decision, however, is up to them. Since 16 December 2014 the Bank has a sole owner, the Republic of Slovenia, which does inform the interested public of its investment status. Clause 5.2 (second paragraph) The Bank does not publish specific data on the costs it incurred from the collection of powers of attorney; these are included in the cost of the organisation and execution of the annual General Meeting of Shareholders. Since 16 December 2014 the Bank has a sole owner, the Republic of Slovenia. Clause 5.4 The Bank’s shares are currently not listed on the stock exchange.

http://www.ljse.si/


47

Clause 5.5 The recent proposal to the General Meeting of Shareholders for the nomination of Supervisory Board members includes all of the legally required data; the rest is public domain data. Clause 5.6 The Bank, in line with general practice, as a rule, nominates the members of the Supervisory Board collectively. Clause 5.7 The remuneration policies concerning the Bank's Management Board are defined by the Supervisory Board on the basis of a proposal by the Remuneration Committee. Clause 5.8 The General Meeting of Shareholders of Banka Celje decides on the use of distributable profit separately, however it decides on the discharge of the Management Board and the Supervisory Board by single unified vote. Clause 5.9 Financial statements form part of the annual report, which together with the auditor’s opinion is presented to the General Meeting of Shareholders. A representative of the Bank’s authorised auditor is not invited to the Meeting. Were, however, the Meeting authorised to adopt annual financial statements, a representative of the authorised auditor would be invited. Clause 8.12 In its report, the Supervisory Board includes all of the requirements from the decision of the Bank of Slovenia pertaining to the due care and professional diligence of Management Board and Supervisory Board members and endeavours to include as much information as possible to represent adequately its activities during the year. The recommendations from Clause 8.12 of the Code will be observed as much as possible. Clause 11 In its operations until now the Supervisory Board has not yet nominated a secretary. In accordance with the consensus between the Management Board and the Supervisory Board this job is performed by the expert department within the Bank. Clauses 16.5 and 16.6 The Bank has no option plan or comparable financial instruments in place which would provide for variable reimbursement of the Management Board members. Clause 20.2 Individual areas of communication have been regulated by individual internal acts until now, however the Bank will endeavour to comply with this recommendation in the future. Clause 20.3 The Bank has not had a special internal act in place in connection with the limitations and disclosures pertaining to treasury share transactions until 16 December 2014. It holds no treasury shares. Clause 20.4 In making significant shareholder and public announcements, the Bank considers statutory time limits, which is why it does not prepare a calendar of significant announcements. It will endeavour to comply with this recommendation in the future.


48

Clause 22.2 The Bank does not prepare a separate sustainability report as this area forms part of the annual report. Clause 22.3 In line with the ZGD-1, the ZBan-1 and the ZTFI, the Bank informs the competent authorities on any qualifying share acquisitions. Clause 23 The Statement of Corporate Governance forms part of the annual report, which is published on the Bank’s website. 11.2 Additional Notes in line with Paragraphs 5 and 6 of Article 70 of the ZGD-1 11.2.1 The main characteristics of internal controls and risk management in connection with

financial reporting The Bank has always had a system of internal controls set up during its operations, as it is the duty of the Bank's Management Board to conduct its operations in a manner ensuring an adequate risk management system in relation to all the business partners, owners and supervisory institutions. The system of internal controls is connected to a comprehensive whole in the sense of an umbrella act, determining the total extent of monitoring activities. The internal control system at the Bank must be set up in a way as to provide adequate assurances on the following activities: - the Bank's operations must be managed with great care and conducted on the basis of the

approved development plan as well as the Bank's approved annual policies and financial plan aimed at ensuring profitable operations;

- all operational activities, with the potential of increasing the Bank's liabilities, must be approved by the authorised person, with a segregation of responsibilities clearly defined;

- assets must be secured appropriately, claims collateralized, liabilities monitored; - a strategy and risk management policies must be prepared, special care must be given to the

monitoring of the Bank's capital adequacy, liquidity and credit risk, interest rate and operational risk, profitability and market risks;

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

- the system of financial records needs to provide reliable, timely, up-to-date and complete information;

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

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

11.2.2 Significant direct and indirect ownership of the Bank’s securities Qualifying holdings, as defined by the law dealing with the market in financial instruments, in the Bank's equity were held by three companies, namely: - Nova Ljubljanska banka, holding 208,499 regular shares, thus having a 40.99% share in the

voting rights; - Slovenska odškodninska družba, holding 47,592 regular shares, thus having a 9.36% share in

the voting rights; - NFD1 Investicijski sklad, holding 46,820 regular shares, thus having a 9.21% share in the voting

rights.


49

The voting rights of the Bank's other owners did not exceed the qualifying shares as defined by the act dealing with the market in financial instruments. On 16 December 2014 the Republic of Slovenia acquired a 100% stake in the Bank and has been the sole shareholder since the aforementioned date. 11.2.3 Holders of securities ensuring special rights of control The Bank's shares do not give their holders any special rights of control. 11.2.4 Restrictions related to voting rights The shareholder's voting right depends on the number of shares held and is not limited to a certain share or a certain number of votes. Each share provides one vote at the Meeting of Shareholders. Voting at the Meeting of Shareholders is a right given to shareholders - persons holding registered shares with voting rights entered in the central register for book entry securities at the end of the fourth day prior to the Meeting. The convenor of the General Meeting may restrict the voting rights of an individual shareholder, who acquired shares contrary to the regulations. Agreements, which - with the Bank's cooperation - would mean financial rights based on shares being separated from ownership of the shares, do not exist. 11.2.5 The Bank's rules on: - appointment and replacement of the management or supervisory body members - changes in the Articles of Association The Bank's rules on appointment and replacement of the members of its management or supervisory body and on the changes in the Articles of Association are defined in the Banka Celje, d.d., Articles of Association and in the Working Rules on the Operations of the Supervisory Board of Banka Celje, d.d. In accordance with the Articles of Association, the Supervisory Board comprises seven members appointed and discharged at the Meeting of Shareholders. To be appointed a Supervisory Board member, one must meet membership conditions for bank supervisory boards as defined by the ZGD-1, the ZBan-1 and other applicable legislation. Supervisory Board members are appointed for a period of 4 years and may be re-appointed. The term for Supervisory Board members expires on the day of the General Meeting held in the fourth year after appointment. In the event of an early termination of appointment of Supervisory Board members that have been appointed at the General Meeting of Shareholders, replacements are appointed at the following General Meeting. The replacement is appointed until the end of the originally appointed member's term. Each member of the Supervisory Board may resign prior to the expiry of their term on giving three months’ notice. A written letter of resignation must be sent to the President of the Supervisory Board and in the event of the resignation of the President of the Supervisory Board, it must be sent to his deputy and the Bank's Management Board.


50

At the General Meeting of Shareholders, individual members of the Supervisory Board - or the Supervisory Board collectively - may be recalled early. Such a resolution shall be adopted with at least a three-quarter majority of votes present at the Meeting. Supervisory Board members appoint the Audit Committee, the Remuneration Committee and the Human Resources Committee serving as the bodies of the Supervisory Board. The president and members of the Bank's Management Board are appointed and discharged by the Supervisory Board. Only a candidate who meets all the conditions for appointment as defined by the ZGD-1 and the ZBan-1 may be appointed to the post of president or member of the Management Board. The President and Members of the Bank's Management Board are appointed for a term of five years and may be re-appointed. The President and Members of the Bank's Management Board may be recalled early in line with legislation in force. Each member of the Bank's Management Board may resign prior to the expiry of their term on giving six months’ notice. A written letter of resignation must be sent to the President of the Supervisory Board. The Articles of Association may be amended based on the decision made at the General Meeting of Shareholders, such a decision having been adopted by a majority of at least three quarters of votes present. The latest amendment to the Bank’s Articles of Association having been entered on 16 December 2014. The General Meeting of the Bank's Shareholders may authorise the Supervisory Board to amend the Articles of Association to harmonise the text with the adopted resolutions in effect. 11.2.6 Authorisations of the Management Board Based on the amendment to the Articles of Association having been entered into the Court's Companies Register on 12 June 2013 during a five year period following the entry, the Management Board, under approval by the Bank's Supervisory Board, is authorised to increase share capital once or multiple times by no more than EUR 16,979,769.65 (authorised capital) by issuing no more than 508,629 new shares. The Bank may acquire and dispose of treasury shares in line with the ZGD-1. The Management Board decides on the conditions of the acquisition and disposal of treasury shares and must report treasury share transactions to the General Meeting. 11.2.7 Data on the activity of the General Meeting of the Bank’s shareholders, its key responsibilities, description of shareholder rights and how these are exercised The Bank's Management Board calls the Meeting of Shareholders. It convenes at least once a year. The Supervisory Board calls the Meeting in the following cases: - if the Management Board does not call it at least once a year; - if the Management Board does not call it upon request of the minority as stipulated in the Articles

of Association and the ZGD-1. The General Meeting of Shareholders passes decisions on: - the use of distributable profit and the discharge to the Management Board and Supervisory

Board; - the adoption of the annual report in cases as defined by the ZGD-1;


51

- the appointment and recall of Supervisory Board members; - amendments to the Articles of Association; - measures taken to increase or decrease capital; - changes in status; - the winding up of the Bank; - the appointment of an auditor; - authorisation to the Management Board to acquire treasury shares in accordance with the ZGD-

1; - other matters within the scope of its competencies in accordance with the ZGD-1 and the ZBan-

1. Shareholders holding 5% of the share capital in total may request, in writing, the General Meeting to be convened. Such a request must include a reason for the Meeting to be convened and the matter on which the Meeting is to pass a decision. In such an event, the Management Board is required to call the Meeting no later than 2 months after receiving a written request. Shareholders holding 5% of the share capital collectively may request, in writing, for a certain item to be included in the agenda of the General Meeting of Shareholders after it has been announced. The Bank's Management Board must accede to such a request, if it includes a prepared proposition of a decision falling under the responsibilities of the General Meeting and if the request was made in writing seven days after the call of the General Meeting at the latest, so that the item may be made public at least 14 days before the General Meeting. 11.2.8 The composition and activities of management and supervisory bodies and their committees The Supervisory Board monitors and supervises the management of the Bank and its operations. It conducts its assignment in accordance with the provisions of the statutory acts dealing with the operations of banks and companies and in accordance with the Bank’s Articles of Association. At the Meeting of Shareholders in May 2011, new Supervisory Board members were elected: Jure Peljhan, Ph.D. as President, Zvonko Ivanušič, M.Sc. as Vice President, Uroš Čufer, Ph.D., Melita Malgaj, Tomaž Subotič, Ph.D., Bojan Šrot, Zdenko Zanoški, M.Sc. In March 2013 Uroš Čufer, Ph.D. resigned from his post and was replaced by Barbara Smolnikar, M.Sc., who was named to the post of Supervisory Board member at the 29th General Meeting of Shareholders on 30 May 2013. On 27 November 2013 the Bank received a resignation from Zvonko Ivanušič, M.Sc., with Barbara Smolnikar, M.Sc. stepping in as Vice President in December 2013. In 2008, the Supervisory Board of Banka Celje, d.d., established a consulting body, namely the Audit Committee of Banka Celje, d.d. At the inaugural meeting of the Supervisory Board on 8 June 2011, new members of the Audit Committee were appointed, namely: Uroš Čufer, Ph.D., President, Tomaž Subotič, Ph.D., Deputy and Zdenka Habe, Member, as an independent expert. The Audit Committee continued to perform its activities in a slightly modified composition during 2013, these changes remained in effect through 2014, with members Tomaž Subotič, Ph.D., President, Melita Malgaj and Barbara Smolnikar, M.Sc. as members and Blanka Vezjak, M.Sc., as member and independent expert. At its 3rd Meeting on 19 October 2011 the Supervisory Board named the Remuneration Committee. It comprises Jure Peljhan, Ph.D., as President, Zvonko Ivanušič, M.Sc., as Vice President, Tomaž Subotič, Ph.D., as member and Bojan Salobir, Executive Director, as the Bank's representative with a standing invitation. The Committee remained unchanged in 2013 until November, when Zvonko Ivanušič, M.Sc. resigned. In January 2014 the Supervisory Board appointed Mrs. Melita Malgaj in his stead; the Committee then remained unchanged through 2014. The Management Board represents and manages the Bank’s operations according to the principles of joint and several liability. The Bank’s Management Board usually meets once a week and


52

considers materials from areas as defined by the ZBan-1 and the Banka Celje, d.d., Management Board Working Rules at its meetings. According to the Articles of Association it comprises at least two members, which in 2014 were: Davorin Leskovar as President of the Management Board and Member of the Management Board, Aleksander Vozel, M.Sc. Davorin Leskovar is a member of the Supervisory Board at The Bank Association of Slovenia, while Aleksander Vozel, M.Sc. is a member of the supervisory board of NLB Prishtina. The Credit Committee comprises eight members and defines the conditions and criteria for acquiring and the placement of assets, makes decisions on lending and guarantee transactions and decides on distribution in line with its operational rulebook. In 2014, it comprised: the President of the Management Board at the post of President of the Credit Committee, the Vice President of the Management Board at the post of Vice President of the Credit Committee and the following members: the Executive Director for the Corporate Division and the Retail Division, the General Manager of the Risk Management Division, the General Manager of the Retail Division, the General Manager of the Financial Markets Division, the General Manager of the Corporate Division and the General Manager of the Legal Affairs and Compliance Division. The President of the Credit Committee may invite other General Managers to the Credit Committee meetings. The Head of the Internal Audit and Authorised Representative of the Management Board holds a standing invitation. Credit committee for debt restructuring and the monitoring of bad debt was established with the aim of efficiently monitoring the operations of the Restructuring and Recovery Division on an ongoing basis and to provide for efficient communication with the external public, operating in the field of recovery activities (bankruptcies, execution proceedings) and debt restructuring. The nine member committee was represented by: the President of the Management Board, member of the Management Board, the Executive Director for the Corporate Division and the Retail Division, Authorised Representative of the Management Board, the General Manager of the Restructuring and Recovery Division, the General Manager of the Retail Division, the General Manager of the Legal Affairs and Compliance Division, the General Manager of the Risk Management Division and the General Manager of the Corporate Division, with the Head of the Internal Audit holding a standing invitation. The Committee for debt restructuring and the monitoring of bad debt is chaired by the member of the management board, who, in accordance with the functional division between the Management Board members, covers the field of risk management, while the President of the Management Board chairs the meetings in his absence. The Liquidity Committee comprised five members in 2014: the General Manager of the Financial Markets Division as Committee President and the President of the Management Board, the Vice President of the Management Board, the Executive Director for the Corporate Division and the Retail Division and the General Manager of the Risk Management Division as members. The Liquidity Committee meets at least three times a week and supervises the Bank’s liquidity position. It performs its duties in line with the Liquidity Committee Working Rules. The Bank’s Management Committee operates as the Management Board’s advisory and informative body. In 2014 it comprised the Bank's Management Board, the Executive Directors, General Managers, Authorised Representative of the Management Board, the Heads of independent functional organisational units, who, in accordance with their operative functions, answer directly to the Management Board and the Director of the subsidiary company. The Management Board may also appoint other attendees to the Management Committee’s meetings. Operational rules are set with the Management Committee Working Rules and meetings are usually held once a month and are intended for the presentation of the financial and income position of the Bank as well as the consideration of project execution, all the while allowing for discussion on other significant decisions to be made in relation to the Bank’s operations.


53

The Assets and Liabilities Committee – the ALCO monitors the conditions in the financial markets, analyses the balances and changes in the Bank’s statements, and prepares decisions aimed at the attainment of an adequate balance sheet structure. In line with the Working Rules on its operations, the Committee meets once a month. The members were: the President of the Management Board as President of the Committee, the Member of the Management Board, General Manager of the Accounting Division, General Manager of the Risk Management Division and the General Manager of the Financial Markets Division. 11.2.9 Structure of share capital, with special reference to: - rights and obligations, provided by shares or shares from individual classes, and - should multiple share classes exist, the proportion of share capital represented by an individual class The Bank's share capital is represented by 508,629 ordinary registered no par value shares until 16 December 2014, however it has been divided into 5,000,000 ordinary registered shares after the recapitalization by the Republic of Slovenia on 16 December 2014. Shareholders exercise their rights in the matters of the Bank's operations at the General Meeting of Shareholders. Regular shares are voting right shares, whereby each share ensures one vote at the Meeting. 11.2.10 Share transfer restrictions, especially: - restriction on security ownership and - requirement to acquire permission from the company or other holders of securities for a transfer The Bank's shares are transferred in line with the regulations pertaining to dematerialised securities. Current shareholders have priority, in proportion with their portion of the share capital, to subscribe new shares from authorised capital (the right expires on 12 June 2018) in the event of recapitalization. There are no other shareholding restrictions imposed by the Bank, whereas acquiring a qualifying share requires the approval of the Bank of Slovenia. There is no requirement to get the approval of the Bank or other shareholders to transfer shares. 11.2.11 Employee stock options The Bank does not have an employee stock option scheme in place. 11.2.12 Shareholder agreements that could result in the restriction of the transfer of shares or voting rights Agreements between shareholders that could result in the restriction of the transfer of shares or voting rights are not in force. Celje, 20 March 2015


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12 STATEMENT OF MANAGEMENT’S RESPONSIBILITIES The Management Board herewith confirms the financial statements of the Bank and the Group for the year ended 31 December 2014 on pages 61 through 67 and the accounting policies and notes to the financial statements on pages 68 through 139 of the annual report. The Management Board is responsible for the preparation of the annual report in a way as to be a true and fair representation of the Bank’s assets and the Group's assets and the results of their operations for the year ended 31 December 2014. The Management Board additionally confirms that appropriate accounting policies were consistently used and that the accounting estimates were prepared according to the principles of prudence and good management. The Management Board furthermore confirms that the financial statements together with the notes have been prepared on the basis of the assumption of continued operations of the companies in the Group and in line with the applicable legislation in force and the IFRS, as adopted by the EU. The Management Board is also responsible for appropriate accounting practices, for the adoption of appropriate measures for the insurance of property and for the prevention and identification of fraud and other irregularities or unlawfulness. The tax authorities may at any time within 5 years from the day of the tax charge examine the operations of the company, which in turn may cause the obligation of an additional tax payment, default interest payment and penalty from Corporate Income Tax or other taxes or duties. Management Board: Celje, 20 March 2015


55

13 AUDITOR’S REPORT


56


57


58

FINANCIAL STATEMENTS

Banka Celje d.d. and the Banka Celje Group Financial Statements 2014

(amounts in tables in thousands of euros)

61

II FINANCIAL STATEMENTS 1 INCOME STATEMENT

Note

1 January to 31

December 2014

1 January to 31

December 2013

1 January to 31

December 2014

1 January to 31

December 2013

Interest and similar income 3.1 67,159 88,279 67,131 88,232

Interest and similar expense 3.1 (28,147) (50,988) (28,147) (50,988)

Net interest and similar income 3.1 39,012 37,291 38,984 37,244

Dividend income 3.2 346 387 346 387

Fee and commission income 3.3 16,438 17,344 16,437 17,343

Fee and commission expense 3.3 (1,494) (1,526) (1,494) (1,526)

Net fee and commission income 3.3 14,944 15,818 14,943 15,817

Net gains from financial assets and liabilities not

classified at fair value through profit or loss 3.4 18,466 55,224 18,466 55,224

Net (losses) from financial assets and liabilities

held for trading 3.5 (482) (5,777) (482) (5,777)

Net gains from financial assets and liabilities

designated at fair value through profit or loss 3.6 - 31,430 - 31,430

Changes in fair value from hedging 3.7 12 34 12 34

Foreign exchange translation net gains / (losses) 3.8 562 (490) 562 (490)

Net (losses) / gains from derecognition of assets (12) (11) 174 6

Net other operating (loss) 3.9 (1,814) (1,935) (1,579) (1,575)

Administrative expenses 3.10 (29,740) (30,610) (30,045) (31,005)

Depreciation and amortisation 3.11 (2,593) (2,891) (2,602) (2,924)

Provisions 3.12 (3,555) (57) (3,555) (57)

Impairment charges 3.13 (60,797) (213,997) (60,828) (213,999)

(LOSS) BEFORE INCOME TAX (25,651) (115,584) (25,604) (115,685)

Income tax credit / (expense) 4.12 4,550 (10,673) 4,544 (10,673)

(LOSS) FOR THE YEAR (21,101) (126,257) (21,060) (126,358)

Bank Group

The Notes form an integral part of these Financial Statements.



62

2 STATEMENT OF OTHER COMPREHENSIVE INCOME

1 January to 31

December 2014

1 January to 31

December 2013

1 January to 31

December 2014

1 January to 31

December 2013

(LOSS) FOR THE YEAR (21,101) (126,257) (21,060) (126,358)

OTHER COMPREHENSIVE INCOME AFTER TAX (8,414) 9,064 (8,414) 9,064

ITEMS THAT WILL SUBSEQUENTLY NOT BE RECLASSIFIED

TO PROFIT OR LOSS (91) 74 (91) 74

Actuarial net gains from pension plans, recognised in retained

(loss) / profit (91) 74 (91) 74

ITEMS THAT MAY SUBSEQUENTLY BE RECLASSIFIED TO

PROFIT OR LOSS (8,323) 8,990 (8,323) 8,990

Net gains from available for sale financial assets (8,044) 8,404 (8,044) 8,404

Valuation gains taken to other comprehensive income 4,318 2,471 4,318 2,471

Recycled to income statement (12,362) 5,933 (12,362) 5,933

Corporate income tax from items, that may be reclassified

subsequently to profit or loss (279) 586 (279) 586

TOTAL COMPREHENSIVE INCOME FOR THE YEAR AFTER

TAX (29,515) (117,193) (29,474) (117,294)

Bank Group




63

3 STATEMENT OF FINANCIAL POSITION

Note

2014 2013 2014 2013

Cash and balances with Central banks and demand

deposits with commercial banks 4.1 254,049 204,040 254,049 204,040

Financial assets held for trading 4.2 4,636 10,961 4,636 10,961

Available for sale financial assets 4.3 482,784 327,895 482,784 327,895

Loans and advances 945,562 1,248,168 940,683 1,243,007

- loans and advances to banks (excluding demand

deposits) 4.4 52,000 5,822 52,000 5,822

- loans and advances to customers 4.5 891,629 1,240,057 886,605 1,234,457

- other financial assets 4.6 1,933 2,289 2,078 2,728

Derivatives - hedging 4.7 1,424 3,437 1,424 3,437

Property and equipment 4.8 13,006 14,165 13,132 14,174

Investment property 4.9 - - 3,946 4,432

Intangible assets 4.10 3,487 4,108 3,492 4,113

Investments in subsidiaries, associates and joint

ventures 4.11 2,257 2,257 - -

Income tax assets 4.12 4,271 - 4,274 3

- deferred tax assets 4.12.1 4,271 - 4,274 3

Other assets 4.13 506 197 4,646 4,326

TOTAL ASSETS 1,711,982 1,815,228 1,713,066 1,816,388

Financial liabilities held for trading 796 1,125 796 1,125

Financial liabilities designated at fair value through

profit or loss 4.14 - 1,000 - 1,000

Financial liabilities at amortised cost 1,501,340 1,760,915 1,501,416 1,761,066

- deposits from banks and central banks 4.15 753 11,276 753 11,276

- due to customers 4.16 1,249,823 1,272,018 1,249,822 1,272,015

- borrowings from banks and central banks 4.17 136,291 336,226 136,291 336,226

- borrowings from other customers 4.18 1,498 2,134 1,498 2,134

- debt securities in issue 4.19 106,776 133,841 106,776 133,841

- other financial liabilities 4.20 6,199 5,420 6,276 5,574

Provisions 4.21 8,092 9,903 8,130 9,940

Other liabilities 4.22 173 1,527 341 1,737

TOTAL LIABILITIES 1,510,401 1,774,470 1,510,683 1,774,868

Share capital 4.23 50,000 16,980 50,000 16,980

Share premium 4.23 166,221 51,380 166,383 51,542

Accumulated other comprehensive income 4.23 3,513 11,927 3,513 11,927

Profit reserves 4.23 2,948 86,759 3,147 86,958

Treasury shares 4.23 - (31) - (31)

Retained net loss (including net loss of the current

financial year) 4.23 (21,101) (126,257) (20,660) (125,856)

TOTAL EQUITY 201,581 40,758 202,383 41,520

TOTAL LIABILITIES AND EQUITY 1,711,982 1,815,228 1,713,066 1,816,388

31 December

Bank Group

31 December

The Notes form an integral part of these Financial Statements. These Financial Statements have been approved for issue by the Management Board on 20 March 2015 and signed on its behalf by:



64

4 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

Bank

Note

Share

capital

Share

premium

Revaluation

reserve

Profit

reserves

Retained earnings

(including net profit

for the year)

Treasury

shares Total equity

BALANCE AS AT 1 JANUARY 2013 16,980 51,380 2,863 111,735 (24,984) (31) 157,943

Comprehensive income for the year after tax - - 9,064 - (126,257) - (117,193)

Coverage of loss brought forward - - - (24,984) 24,984 - -

Other - - - 8 - - 8

BALANCE AS AT 31 DECEMBER 2013 16,980 51,380 11,927 86,759 (126,257) (31) 40,758


Comprehensive income for the year after tax - - (8,414) - (21,101) - (29,515)

Expropriation of shareholders (16,980) 16,980 (31) - 31 -

Subscription (paying-up) of fresh capital 50,000 140,000 - - - - 190,000

Coverage of loss brought forward - (42,433) - (83,824) 126,257 - -

Other - 294 - 44 - - 338

BALANCE AS AT 31 DECEMBER 2014 4.23 50,000 166,221 3,513 2,948 (21,101) - 201,581



65

Group

Note

Share

capital

Share

premium

Revaluation

reserve

Profit

reserves

Retained earnings

(including net profit

for the year)

Treasury

shares Total equity


Comprehensive income for the year after tax - - 9,064 - (126,358) - (117,294)

Coverage of loss brought forward - - - (24,984) 24,984 - -

Other - - - 6 - - 6

BALANCE AS AT 31 DECEMBER 2013 16,980 51,542 11,927 86,958 (125,856) (31) 41,520


Comprehensive income for the year after tax - - (8,414) - (21,060) - (29,474)

Expropriation of shareholders (16,980) 16,980 (31) - 31 -

Subscription (paying-up) of fresh capital 50,000 140,000 - - - - 190,000

Coverage of loss brought forward - (42,433) - (83,824) 126,257 - -

Other - 294 - 44 (1) - 337

BALANCE AS AT 31 DECEMBER 2014 4.23 50,000 166,383 3,513 3,147 (20,660) - 202,383




66

5 STATEMENT OF CASH FLOWS

1 January to

31 December

2014

1 January to

31 December

2013

1 January to

31 December

2014

1 January to

31 December

2013

A. CASH FLOWS FROM OPERATING ACTIVITIES

Interest received 64,904 77,598 64,876 77,551

Interest paid (35,002) (47,586) (35,002) (47,586)

Dividends received 346 387 346 387

Fee and commission received 16,866 17,294 16,865 17,293

Fee and commission paid (1,497) (1,522) (1,497) (1,522)

Realized gains from financial assets and f inancial

liabilities not classif ied as fair value through profit or loss 19,454 871 19,454 871

Realized (losses) from financial assets and f inancial

liabilities designated at fair value through profit or loss (8) (235) (8) (235)

(Losses) from financial assets and f inancial liabilities

held for trading (470) (6,917) (470) (6,917)

Payments to employees and suppliers (29,718) (30,731) (30,023) (31,125)

Operating income 305 305 648 703

Operating expenses (7,268) (2,311) (7,283) (2,349)

a) Cash flows from operating activities before

changes in operating assets and liabilities 27,912 7,153 27,906 7,071

b) Decreases in operating assets 229,816 250,424 229,492 251,178

Net decrease in trading assets 6,331 15,359 6,331 15,359

Net decrease in f inancial assets, designated at fair value

through profit or loss - 4,887 - 4,887

Net (increase) / decrease in available for sale f inancial

assets (73,518) 81,184 (73,518) 81,184

Net decrease in loans and advances 295,299 145,421 294,986 145,785

Net decrease in hedging derivative f inancial assets 2,013 3,455 2,013 3,455

Net (increase) / decrease in other assets (309) 118 (320) 508

c) (Decreases) in operating liabilities (253,881) (248,389) (253,998) (248,392)

Net (decrease) in f inancial liabilities held for trading (329) (757) (329) (757)

Net (decrease) in deposits and loans measured at

amortised cost (226,745) (212,269) (226,820) (212,272)

Net (decrease) of debt securities issued measured at

amortised cost (26,221) (35,639) (26,221) (35,639)

Net (decrease) / increase in other liabilities (586) 276 (628) 276

d) Cash flow generated from operating activities

(a+b+c) 3,847 9,188 3,400 9,857

e) Income tax refund - - - -

f) Net cash flow from operating activities (d+e) 3,847 9,188 3,400 9,857

Bank Group



67

Note

1 January to

31 December

2014

1 January to

31 December

2013

1 January to

31 December

2014

1 January to

31 December

2013

B. CASH FLOWS FROM INVESTING ACTIVITIES

a) Receipts from investing activities 111 91,265 615 91,566

Proceeds from sale of property and equipment and

investment property 111 93 615 394

Redemption of held to maturity investments - 91,172 - 91,172

b) Payments from investing activities (787) (34,860) (844) (35,830)

(Purchase of property and equipment and

investment property) (383) (807) (440) (1,777)

(Purchase of intangible assets) (404) (872) (404) (872)

(Purchase of held to maturity investments) - (33,181) - (33,181)

c) Net cash provided by investing activities (a-b) (676) 56,405 (229) 55,736

C. CASH FLOWS FROM FINANCING ACTIVITIES

a) Proceeds from financing activities 95,000 - 95,000 -

Proceeds from issued shares and other equity

instruments 95,000 - 95,000 -

b) Expenditure from financing (2,798) (4,782) (2,798) (4,782)

(Dividends paid) - - - -

(Subordinated liabilities repayed) (2,798) (4,782) (2,798) (4,782)

c) Net cash used in financing activities (a-b) 92,202 (4,782) 92,202 (4,782)

D. EFFECTS OF EXCHANGE RATE CHANGES ON

CASH AND CASH EQUIVALENTS 814 (478) 814 (478)

E.

NET INCREASE IN CASH AND CASH

EQUIVALENTS (Ae+Bc+Cc) 95,373 60,811 95,373 60,811

F. CASH AND CASH EQUIVALENTS AT BEGINNING

OF YEAR 209,862 149,529 209,862 149,529

G. CASH AND CASH EQUIVALENTS AT END OF

YEAR (D+E+F) 4.26 306,049 209,862 306,049 209,862

Bank Group




68

NOTES TO THE FINANCIAL STATEMENTS 1 GENERAL INFORMATION Banka Celje d.d. (the Bank) is a Slovene joint stock company, providing universal banking services. The Banka Celje Group (the Group) comprises the Bank and its subsidiary, Posest, d.o.o., wherein the Bank holds a 100% interest (the Subsidiary), conducting mainly banking services for retail and corporate customers as well as other financial services. The Bank is not a public joint stock company. End 2014 it had 468 employees (2013: 500). It was managed in 2014 by a two-member Management Board, chaired by Mr Davorin Leskovar. The address of the Bank's headquarters is Banka Celje, d.d., Vodnikova 2, Celje. The beneficial owner of Banka Celje, d.d. is the Republic of Slovenia, being the sole shareholder as at 31 December 2014 (as at 31 December 2013: Nova Ljubljanska banka d.d. - 40.99%, Slovenski državni holding, d.d., Ljubljana - 9.36% and NFD 1 Delniški podsklad - 9.21%). Based on permission issued by the regulator, the subsidiary company is not included in the consolidated supervision in accordance with the decision by the Bank of Slovenia on Supervision of Banks and Savings Banks on a Consolidated Basis, as from the aspect of the aim of the supervision, the Subsidiary does not represent any significant effect. Notes to the financial statements refer to the Bank and the Group in cases where consolidated amount exceed the amount in the Bank’s financial statements by 5% or more. The Bank’s Management Board approves standalone and consolidated financial statements. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies, used in the preparation of standalone and consolidated financial statements are presented below and have been consistently applied to the presented years. 2.1 Basis for the preparation of financial statements Standalone and consolidated financial statements have been prepared in accordance with the IFRS as adopted by the EU and under the assumption of continued operations. Where required notes have been added in line with the requirements of local legislation. On the basis of the revised restructuring plan, prepared for the merged Abanka and Banka Celje, the European Commission gave its consent to state aid on 16 December 2014. The merger is planned by the end of 1 January 2016 at the latest. Taking into consideration the merger with Abanka, in accordance with the approved merged restructuring plan of Abanka and Banka Celje and the Bank’s recapitalization in December 2014, conditions for its long-term operations have been established again. The Bank intends to remain independent in 2015, while activities for an operational and financial merger with Abanka will continue until 1 January 2016. The financial statements include: the income statement and the comprehensive income statement, shown in two separate interlinked statements, the statement of financial position, the statement of changes in shareholder equity, the cash flow statement and notes. The statements are shown in euros, which are the functional and presentation currency of the Group. All amounts in the financial statements are shown in thousands of euros.



69

Disclosures related to individual risks, the Group is exposed to in its operations, are shown in Chapter 5 Risk management. In the process of using accounting policies the management must use its own judgement. Changes in assumptions can have a significant effect on financial statements for the period of the change. Management is convinced that the basic assumptions are suitable and that the Bank’s financial statements therefore are a fair representation of its financial position and results. More complex areas, which require a greater degree of judgement or areas where assumptions and estimates are significant to the financial statements, are shown in Note 2.26. 2.1.1 Standards and interpretations applicable in 2014 For the current period the following standard, amendments to the existing standards and interpretations issued by the International Accounting Standards Committee (IASC) and adopted by the EU:

IFRS 10 'Consolidated Financial Statements’, endorsed by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014),

IFRS 11 'Joint Arrangements', endorsed by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014),

IFRS 12 'Disclosure of Involvement with Other Entities', endorsed by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014),

IAS 27 (amended in 2011) ‘Separate Financial Statements’, endorsed by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014),

IAS 28 (amended in 2011) ‘Investments in Associates and Joint Ventures’, endorsed by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014),

Amendments to IFRS 10 'Consolidated Financial Statements’, IFRS 11 'Joint Arrangements' and IFRS 12 'Disclosure of Involvement with Other Entities' – Transition guide endorsed by the EU on 4 April 2013 (effective for annual periods beginning on or after 1 January 2014),

Amendments to IFRS 10 'Consolidated Financial Statements’, IFRS 12 'Disclosure of Involvement with Other Entities', and IAS 27 (amended in 2011) ‘Separate Financial Statements’ – investment companies, endorsed by the EU on 20 November 2013 (effective for annual periods beginning on or after 1 January 2014),

Amendments to IAS 32 ‘Financial Instruments: Presentation’ – Asset and liability offsetting, endorsed by the EU on 13 December 2012 (effective for annual periods beginning on or after 1 January 2014),

Amendments to IAS 36 ‘Impairment of Assets’ – Recoverable amount disclosures for non-financial assets, endorsed by the EU on 19 December 2013 (effective for annual periods beginning on or after 1 January 2014),

Amendments to IAS 39 ‘Financial Instruments: Recognition and Measurement’ – Novation of OTC derivatives and continuing designation for hedge accounting, endorsed by the EU on 19 December 2013 (effective for annual periods beginning on or after 1 January 2014).



70

The endorsement of these amendments to the existing standards did not result in any changes in the accounting policies of the Group. 2.1.2 Standards and interpretation issued by the IASC and endorsed by the EU, not yet effective On the approval date of these financial statements, the following standards, amendments to existing standards and interpretations issued by the IASC and endorsed by the EU, were issued, but not yet in effect:

Amendments to different standards ‘IFRS Improvements (period 2010 – 2012)’, based on the annual project for the improvement of IFRS (IFRS 2, IFRS 3, IFRS 8, IFRS 13, IFRS 16, IFRS 24 and IFRS 38), with the purpose of removing inconsistencies and giving an interpretation of the wording, which the EU endorsed on 17 December 2014 (effective for annual period beginning on or after 1 February 2015),

Amendments to different standards ‘IFRS Improvements (period 2011 – 2013)’ based on the annual project for the improvement of IFRS (IFRS 1, IFRS 3, IFRS 13 and IFRS 40), with the purpose of removing inconsistencies and giving an interpretation of the wording, which the EU endorsed on 18 December 2014 (effective for annual periods beginning on or after 1 February 2015),

Amendments to IAS 19 ‘Employee Benefits’ – Employee contributions to defined benefit plans, endorsed by the EU on 17 December 2014 (effective for annual periods beginning on or after 1 February 2015),

IFRIC 21 ‘Levies’, endorsed by the EU on 13 June 2014 (effective for annual periods beginning on or after 1 February 2015).

2.1.3 Standards and interpretations issued by the IASC, not yet endorsed by the EU Currently the IFRS, as endorsed by the EU, are not significantly different from the regulations adopted by the IASC, with the exception of the following standards, amendments to the existing standards and interpretations, which as at 31 December 2014 (the below stated dates of coming into effect pertain to the entire IFRS) have not been endorsed by the EU:

IFRS 9 ‘Financial Instruments’ (effective for annual periods beginning on or after 1 January 2018),

IFRS 14 'Regulatory Deferral Accounts‘ (effective for annual periods beginning on or after 1 January 2016),

IFRS 15 'Revenue from Contracts with Customers‘‘ (effective for annual periods beginning on or after 1 January 2017),

Amendments to IFRS 10 'Consolidated Financial Statements' and IAS 28 'Investments in Associates and Joint Ventures' – Sales or contributions of assets between an investor and its associate/joint venture (effective for annual periods beginning on or after 1 January 2016),

Amendments to IFRS 10 'Consolidated Financial Statements‘, IFRS 12 'Disclosure or Interests in Other Entities’, and IAS 28 'Investments in Associates and Joint Ventures' – Investment Entities: Applying the Consolidation Exception (effective for annual periods beginning on or after 1 January 2016),



71

Amendments to IFRS 11 ‘Joint Arrangements' – Accounting for Acquisitions of Interests in Joint Operations (effective for annual periods beginning on or after 1 January 2016),

Amendments to IAS 1 'Presentation of Financial Statements' – Disclosure Initiative (effective for annual periods beginning on or after 1 January 2016),

Amendments to IAS 16 'Property, Plant and Equipment' and IAS 38 'Intangible Assets' –Clarification of Acceptable Methods of Depreciation and Amortization (effective for annual periods beginning on or after 1 January 2016),

Amendments to IAS 16 'Property, Plant and Equipment' and IAS 41 'Agriculture' – Agriculture: Bearer Plants (effective for annual periods beginning on or after 1 January 2016),

Amendments to IAS 27 'Separate Financial Statements' – Equity Method in Separate Financial Statements (effective for annual periods beginning on or after 1 January 2016),

Amendments to different standards ‘IFRS Improvements (period 2012 – 2014), based on the annual project for the improvement of IFRS (IFRS 5, IFRS 7, IFRS 19 and IFRS 34), with the main aim of removing inconsistencies and giving an interpretation of the wording (effective for annual periods beginning on or after 1 January 2016).

The Group anticipates that the adoption of these standards, amendments to the existing standards and interpretations will not have a significant impact on its financial statements in the initial period of use. At the same time hedge accounting in relation to the financial assets and liabilities portfolio, the principles of which the EU has not yet endorsed, remains unregulated. The Management of the Bank anticipates that the application of IFRS 9 in the future may have a significant impact on amounts reported in respect of the Bank's financial assets and financial liabilities (e.g. the Bank's investments in redeemable notes that are currently classified as available-for-sale investments will have to be measured at fair value at the end of subsequent reporting periods, with changes in the fair value being recognised in profit or loss). However, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 until a detailed review has been completed. 2.2 Comparative figures The standalone and consolidated financial statements feature data disclosed using comparative figures. Due to the amendment in the Decision on books of account and annual reports by banks and savings banks the Bank as at 31 December 2014 reclassified demand deposits from banks in an amount of EUR 103,203 thousand from ‘’Loans and advances’’ to ‘’Cash and balances with central banks and demand deposits with banks’’ in the statement of financial position (as at 21 December 2013 in the amount of EUR 12,045 thousand). 2.3 Subsidiary In the separate financial statements, investment in the capital of the Subsidiary is accounted for at cost. Dividends from the Subsidiary are recognised in the income statement, when the right to receive cash flow is established.



72

2.4 Consolidation The financial statements of the Subsidiary, used for the preparation of consolidated financial statements, were prepared as of the Bank’s reporting date. The consolidation principles remained unchanged in comparison with the previous year. The subsidiary has been fully consolidated since the day of the set-up and will be excluded from consolidation on the date control is lost. Where necessary, accounting policies of the Subsidiary have been adjusted to ensure consistency with the policies adopted by the Bank. In the process of consolidation, all intercompany transactions, balances and unrealized gains have been eliminated. 2.5 Foreign currency translation a) Functional and presentation currency Items reported in these standalone and consolidated financial statements are measured using the currency of the primary economic environment in which the Bank and the Group operate (the functional currency). Assets and liabilities denominated in foreign currency, have been translated in the financial statements using the ECB reference exchange rate, as published on by the Bank of Slovenia on 31 December 2014 (for 2013 the ECB reference exchange rate from 31 December 2013 was used). The effects of the translation are shown in the income statement as net gains or losses from exchange rate differences. The financial statements are reported in euros, which is the Bank’s functional and presentation currency. b) Transactions and balances Foreign currency transactions are translated into the functional currency according to the exchange rates prevailing on the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Translation differences resulting from changes in amortised costs of monetary items denominated in foreign currency classified as available for sale financial assets are recognised in the income statement. Translation differences on non-monetary items, such as equities at fair value through profit or loss, are reported as part of fair value gain or loss in the income statement. Translation differences on non-monetary items, such as equities classified as available for sale, are included together with valuation reserves at fair value within other comprehensive income. Gains and losses from foreign exchange trading are shown in the income statement under “Net gains / (losses) from financial assets and liabilities held for trading”. 2.6 Interest income and expenses Interest income and expenses are recognised for all debt instruments, measured at amortised cost, using the effective interest rate method. The aforementioned method serves the calculation of amortised cost of a financial asset or financial liability and distributes interest income and expenses across the expected life of a financial instrument. Interest income includes interest from fixed income investments and investments in securities held for trading and from discounts and premiums on bonds. The effective interest rate calculation includes all fees paid between parties at the conclusion of the transaction, as well as transaction costs, however excludes future losses due to credit risk. Once a financial asset or a group of related assets is impaired, the interest revenue is recognised on the basis of the interest rate used to discount future cash flows to calculate impairment.



73

2.7 Fee and commission income Fees and commissions are generally recognised as the service is provided, in accordance with the Tariff or based on contractual provisions as negotiated between the Bank and the customer. Fee and commission income includes fees and commissions from guarantees to companies issued by the Bank, from payment operations and foreign exchange as well as from credit card operations. Fees and commissions included in the calculation of the effective interest rate are shown in interest income and expenses. 2.8 Dividend income Dividend income is recognised in the income statement when the Group’s right to receive payment has been established. All dividend income is realised in Slovenia. 2.9 Financial instruments 2.9.1 Classification The classification of financial instruments on initial recognition depends on the purpose of acquisition and the instruments’ characteristics. The Group classifies financial instruments in the following categories: financial instruments at fair value through profit or loss, loans and receivables, held to maturity investments and available for sale financial assets. a) Financial instruments at fair value through profit or loss This category includes financial instruments held for trading and financial instruments designated at fair value through profit or loss at inception. A financial asset is classified in the held for trading category if acquired principally for the purpose of selling in the short-term or for the creation of short-term profits. Financial assets and liabilities are designated at fair value through profit or loss when the following conditions are met: - with such a classification the Group eliminates or significantly reduces measurement or

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

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

Derivatives are always categorised as held for trading unless they are designated as hedging instruments in the application of accounting rules for hedge accounting. b) Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments, which are not quoted in an active market, other than: - those that the Group intends to sell immediately or in the short-term, which are classified as held

for trading, and those that the Group upon initial recognition designates as at fair value through profit or loss;

- those that the Group upon initial recognition designates as available-for-sale; or - those for which the holder may not recover substantially all of its initial investment, for reasons

other than the deterioration of creditworthiness.

c) Held to maturity investments Held to maturity investments are non-derivative financial instruments with fixed or determinable payments and a fixed maturity which do not meet the definition of loans and receivables and which



74

the Group intends to hold until maturity and is able to do so. The Bank does not hold any held to maturity investments for 2014 or the comparable reporting period. d) Available for sale financial assets Available for sale financial assets are those non-derivative financial assets, designated as available for sale or not classified into loans or receivables, hold to maturity investments or financial assets at fair value through profit or loss. As available for sale financial assets the Bank classifies those financial assets, which it intends to hold for an indefinite period of time and which it may sell in response to liquidity needs or due to changes in interest rates, exchange rates or prices of financial instruments. 2.9.2 Measurement and recognition Financial assets, except for financial assets at fair value through profit or loss, are initially recognised at fair value increased by transaction costs. Financial instruments at fair value through profit or loss are initially recognised at fair value with transaction costs recorded in the income statement. Purchases and sales of financial instruments at fair value through profit or loss, held to maturity investments and available for sale financial assets are recognised on trade date. Loans are recognised when cash is advanced to the borrowers. Financial assets at fair value through profit or loss and available for sale financial assets are measured at fair value. Gains and losses from financial instruments at fair value through profit or loss are included in the income statement in the period in which they arise. These are included in other comprehensive income and are transferred to the income statement, when the asset is sold or impaired, at which time the cumulative gain or loss, previously included in other comprehensive income is transferred to the income statement. Interest calculated and foreign currency gains and losses sale are recognised directly in the income statement. Dividends on available for sale equity instruments are recognised in the income statement when the Group’s right to receive payment is established. Loans and held to maturity investments are carried at amortised cost. 2.9.3 Profit or loss at initial recognition The best evidence of fair value at initial recognition is the transaction price, representing the fair value of consideration given or received, unless where it is possible to prove fair value through other comparable market transactions or on the basis of a valuation technique, whose variables are exclusively based on market assumptions. When the transaction price of a financial instrument on a non-active market differs from the price in other observable current market transactions in the same instrument, or from the price ascertained using a valuation technique whose variables include data from observable markets exclusively, the Group immediately recognises the difference between the transaction price and the fair value in the income statement. If the entry data, required for valuation are not market based, the profit or loss at initial recognition is not immediately recognised in the income statement. The decision on initial recognition of deferred profit or loss is made on a case-to-case basis. In some, the initial profit or loss is transferred to the income statement gradually through the life of the transaction, in others it is recognised the moment that fair value is determinable, while in some it is only recognised at maturity or at redemption.



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2.9.4 Reclassification Financial assets that are eligible for classification as loans and advances can be reclassified out of the held for trading category if they are no longer held for the purpose of selling or repurchasing them in the near-term. Financial assets that are not eligible for classification as loans and receivables may be transferred from the held for trading category only in rare circumstances. Additionally, instruments designated at fair value through profit and loss cannot be reclassified. 2.9.5 Derecognition Financial assets are derecognised when the contractual rights to receive cash flows from these assets have ceased to exist, or the assets have been transferred in a transfer that meets the criteria for derecognition. In line with its policy on financial asset write-offs, the Bank also derecognises a financial asset in cases, where it assess in the recovery process that a financial asset measured at amortised cost will not be reimbursed. In the stated cases the Bank, in line with the Decision on the Amendment of the Decision on the assessment of credit risk losses in banks and savings banks (Official Gazette of the Republic of Slovenia, 29/2012), derecognises the financial asset from the statement of financial position and continues to record it off-balance sheet until it obtains legal grounds to conclude recovery proceedings in the amount due. Financial liabilities are only derecognised, when the contractual obligation has been met, is cancelled or it expires. 2.9.6 Fair value measurement principles The fair value of financial instruments traded on active markets is based on the current best bid price at the statement of financial position date, excluding transaction costs. If a market price is not available, fair value is determined using discounted future cash flow or a pricing model. When using discounted future cash flow models, these are determined based on the most probable estimate and the discount rate is a market based rate of an instrument with similar characteristics on the last day of the reporting period. If the pricing model is used, market data at the reporting date is used. The fair value hierarchy is disclosed under 5.5 b). 2.9.7 Derivative financial instruments and hedge accounting Derivatives, including forwards, futures and swaps, are initially recognised in the statement of financial position at fair value. Fair value is determined on the basis of a listed market price, the model of discounted future cash flows and with the use of pricing models. The fair values are recognised in assets (positive valuation) or liabilities (negative valuation) in the statement of financial position. Interest accruals on interest rate derivatives are recorded separately from fair value measurement in the income statement. The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group uses derivatives to hedge the fair value of recognised assets and liabilities. Hedge accounting is used provided certain criteria are met. When a hedge is introduced a formal document is prepared, describing the relationship between hedged items and hedging instruments, as well as its risk management purpose and strategy and the valuation methodology. The Group also documents the effectiveness assessment of hedging instruments at exposure to changes in the fair value of a hedged instrument, which are attributable to hedging. The Group assesses the effectiveness of a hedge at its inception and then on an ongoing basis during the duration of the hedge, where the hedge effectiveness must always fall within a range of 80 to 125 percent. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the income statement, together with any changes in the fair value of the hedged asset



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or liability that are attributable to the hedged risk. Effective changes in fair value of hedging instruments and the related hedged items are reflected in the income statement under ’’Changes in fair value from hedging’’. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is transferred to profit or loss over the period to maturity. The adjustment in the carrying amount of the hedged equity investment is included in operating profit at the moment of sale. Individual derivative financial instruments that provide effective economic hedges which, however, do not qualify for hedge accounting under the specific accounting rules, are treated as derivatives held for trading. Changes in the fair value of those derivative instruments are recognised immediately in the income statement under “Net gains / (losses) from financial assets and liabilities held for trading”. 2.10 Impairment of financial assets 2.10.1 Assets measured at amortised cost The Group assesses impairments of financial assets individually for all individually significant assets where there is objective evidence of impairment, while all other financial assets are impaired collectively. According to the Regulation on credit risk loss assessment by the Bank of Slovenia, a financial asset or off-balance sheet liability is individually significant if total exposure to the client exceeds EUR 650 thousand or 0.5% of the Bank’s equity. The Bank defines individually significant assets to be total exposures to banks and total exposures to other corporate customers, which are classified A through C as well as the corporate customers classified D and E. If the Group determines that no objective evidence of impairment exists in an individually significant financial asset, it includes this asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. At each reporting date of the statement of financial position, the Group assesses whether there is objective evidence that an individually significant financial asset is impaired as a consequence of one or more events that occurred after initial recognition of the asset and that event has an impact on the asset’s future cash flows, which can be reliably estimated. The criteria the Group uses to determine the existence of objective evidence on an impairment loss pertaining to a financial asset or asset class include: - late payment of contractual interest or principal; - breach of other contractual provisions; - debtor’s liquidity problems; - financial restructuring of the debtor, with material losses recognised; - start of bankruptcy or insolvency proceedings; - deterioration in the value of collateral; and - credit rating downgraded below investment grade. The Group estimates that the period between the occurrence of problems, which prevent the client from fulfilling his obligations to the Group, and identification of these problems by the Group typically varies from between one to three months. Junior management determines the assessment period on a case by case basis. If there is objective evidence that an impairment loss on loans and advances or held to maturity investment has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The carrying amount



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of the asset is reduced through an allowance account and the amount of the loss is recognised in the income statement. The calculation of the present value of the estimated future cash flows of collateralised financial assets reflects the present value of future cash flows from foreclosure, less cost of obtaining and selling the collateral. Assumed off-balance sheet liabilities are also assessed individually, and where necessary related provisions are recognised as liabilities. For the purpose of collective impairment evaluation, the Group uses migration matrices, which illustrate the expected migration of customers between internal rating classes. The probability of migration is assessed on the basis of past experience, namely the annual migration matrices for different types of customers. This data is then adjusted to the predicted future trends, since historic experience does not necessarily reflect the actual economic conditions. The Bank includes the estimates in the impairment percentages with an estimate of the general risk factor. Exposure to private individuals is analysed additionally from the aspect of transaction type. For corporate clients, impairments are assessed on the basis of expected client transitions and with it the migration of good debt (A-C) to D and E rating classes and individually estimated average recovery rates from D and E clients (bad debt class). The expected migrations for private individuals from good rating classes to D and E are assessed for individual transaction types, the average recovery is subsequently calculated on the basis of actual loss from bad debt per individual transaction type. The amount of impairment loss is recorded in the allowance account. If the amount of the impairment subsequently decreases due to an event occurring after the write down, the reversal of loss is recognised as a reduction of an allowance for loan impairment. When a loan becomes irrecoverable, it is written off with the use of a previously formed value adjustment. Irrecoverable assets are written off after all recovery options have been attempted and after the loss amount is set. Should a written off asset be subsequently repaid, the income is shown in the income statement. 2.10.2 Assets available for sale At the reporting date, the Group assesses whether there is any evidence of impairment for available-for-sale financial assets. A significant or prolonged decrease in the fair value of an equity instrument below its cost may provide objective evidence of impairment. If any such evidence exists for available for sale assets, the cumulative loss is removed from other comprehensive income and recognised in the income statement as an impairment loss. A reversal of impairment on an equity instrument is not recognised through the income statement. A subsequent increase in its fair value is recognised in other comprehensive income. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be directly related to an event occurring after the impairment loss was recognized, the impairment loss is reversed through the income statement. The criteria the Group uses to determine whether a debt instrument is impaired: - late payment of contractual interest or principal; - issuer’s significant liquidity problems; - breach of contract; - start of bankruptcy proceedings at issuer; - deterioration of the issuer’s competitive position; - credit rating downgraded below investment grade. Impairment losses recognised in the income statement are measured as the difference between the carrying amount of the financial asset and its present fair value. The present fair value of the instrument is its market price or discounted future cash flows, when the market price is not obtainable.



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2.10.3 Repossessed assets The Group did not record any assets, received in payment of receivables through repossession of assets pledged. 2.10.4 Renegotiated loans Renegotiated loans are investments with amended initial repayment conditions, due to a deterioration of the customer’s economic or financial position, which results in irregular repayment of liabilities to the Bank. Renegotiated loans no longer represent receivables past due, rather these are deemed to be new loans, designated as renegotiated. These continue to be measured in accordance with the original effective interest rate. Loans, which have been renegotiated, the Group derecognises. A new asset is recognised at fair value, when there has been a material change in the risks and benefits of the renegotiated asset. 2.11 Offsetting Financial assets and liabilities are offset when a legally enforceable right to offset the recognised amounts exists and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 2.12 Sale and repurchase agreements Securities sold under sale and repurchase agreements (repos) are retained in the financial statements and the related liabilities are included in financial liabilities associated with the transferred assets. Securities sold subject to sale and repurchase agreements are reclassified in the financial statements as pledged assets when the counterparty has the right by contract to sell or re-pledge the collateral. The difference between the sale and repurchase price is treated as interest and accrued over the life of the repo agreements using the effective interest rate method. 2.13 Cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents comprise cash and balances with the Central Banks and demand deposits with commercial banks, government debt securities held for trading and loans to banks with an original maturity of less than 90 days. 2.14 Accounting for leases A lease is an agreement whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time. Lease agreements are accounted for in accordance with their classification as finance leases or operating leases at the inception of the lease. The key classification factor is the extent to which the risks and rewards incidental to ownership of a leased asset lie with the lessor or lessee. a) the Group is the lessee Leases entered into by the Group are operating and financial leases. The total payments made under operating leases are included in the income statement on a straight line basis over the period of the lease and are recorded in administrative expenses. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor is recognised as an expense for the period in which termination takes place. A financial lease is a lease, in which the lessee takes on nearly all the risks and rewards of ownership. Assets, acquired through a financial lease, are recognised at fair value or at present value of the minimum lease payments, decreased by depreciation costs and loss due to impairment charges. Lease payments are recognised as interest expenses. Leased assets are depreciated over



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the useful life of the asset. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, such assets are depreciated over the shorter of the lease term or the useful life of the asset. b) the Group is the lessor In operational leasing, the Group transfers the right to use an asset for a contractually agreed amount of time to the lessee in exchange for a payment or a string of payments.

Payments received under operating leasing are recognised as other operating income in the income statement on a straight line basis over the period of the lease. Assets leased out under operating leases are presented in the consolidated statement of financial position as investment property or as property and equipment. Assets are leased under a finance lease when the risks and rewards related to ownership of a leased asset are transferred to the lessee. When assets are leased out under a finance lease, the present value of the minimum lease payments is recognised as a receivable. Income from finance leasing transactions is apportioned systematically over the lease period. Receivables from a finance lease are shown as net investments in the finance lease including the unguaranteed residual value. 2.15 Investment property Investment property includes buildings held for leasing and not occupied by the Group. Investment property is initially recognised at cost. Direct transaction costs are included in the initial measurement. Subsequently, it is measured at cost less accumulated depreciation and any accumulated impairment loss. When there is a change in use, the Group makes transfers to or from investment property. Depreciation is provided for on a straight line basis using a depreciation rate of 1.0%. 2.16 Property and equipment All property and equipment is initially recognised at cost. Subsequently, it is measured at cost less accumulated depreciation and any accumulated impairment loss. Each year the Group assesses whether there are any indications that assets may be impaired. If such an indication exists, the Group estimates the recoverable amount. The recoverable amount is the higher of the fair value less cost to sell and value in use. If the recoverable amount exceeds the carrying value, the assets are not impaired. As at 31 December 2014 no property or equipment item was impaired. Depreciation is provided for on a straight line basis over their estimated useful lives. Assets in the course of transfer or construction are not depreciated until they are available for use. The following are approximations of the annual rates used:

Bank and Group %

Buildings 1.9 - 6.0

Furniture and equipment 7.0 - 20.0

Computer equipment 10.0 - 33.3

Leasehold improvements 10.0 - 20.0



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The assets' residual value and useful life are reviewed, and adjusted if appropriate, on each statement of financial position date. Gains and losses on disposal of property and equipment are determined as a difference between the sale proceeds and their carrying amount and are recognised in the income statement. Maintenance and repairs are charged to the income statement during the financial period in which they are incurred. Subsequent costs that increase future economic benefits are recognised in the carrying amount of a property and equipment item. Annual depreciation rates, shown in range, did not change in 2014. 2.17 Intangible assets Intangible assets comprise computer software and software licences. They are initially recognised at cost, decreased by the accumulated amortisation and impairment losses. Amortisation of intangible assets with a finite useful life is calculated on a straight-line basis at rates designed to write down the cost of the intangible asset over its estimated useful life. Software and licences are amortised over a period of three to ten years. Intangible assets begin to be amortised when they are available for use. 2.18 Inventories Inventories are measured at the lower of cost or net realisable value. The Group uses the weighted average cost method to determine inventories. 2.19 Taxes 2.19.1 Corporate income tax During the past four years the Bank made a loss. As at the income statement date during the past years, it has estimated that the following years of operation are probable to ensure a sufficient amount of profit to cover for tax loss and eliminate deferred tax assets. However, out of prudence on the basis of its position, the Bank recognised impairment charges for the total amount of deferred tax assets on 31 December 2013, while not forming deferred tax assets for the year 2013 at all. Based on planned profits for the coming years, the Bank formed deferred tax assets from part of the tax loss on 31 December 2014. The Bank also records deferred tax liabilities related to fair value measurement of available for sale investments, which is shown in other comprehensive income. 2.19.2 Balance sheet tax The Bank's total asset tax liability is shown under net other operating gains / (losses) (Note 3.9) and is calculated in accordance with Slovenian legislation. The tax liability is represented by the difference between the tax base and the tax relief, where the tax base is calculated as 0.1% of the Bank’s total assets in the current calculation period and is reduced by 0.1% of the loans granted to non-financial companies and private entrepreneurs during the same period. 2.19.3. Financial services tax The liability to pay financial services tax is recognised in net other operating gains / (losses) (Note 3.9). In accordance with the legislation financial services, which in accordance with the Value Added Tax Act, are exempt from VAT payment, are taxed.



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The basis for the financial services tax is the remuneration (fee or commission), which the Bank receives in payment for a financial service it has provided. 2.20 Employee benefits Employee benefits include: jubilee benefits and retirement indemnity bonuses. In accordance with legislation, employees retire after 40 years of service and are entitled to a lump sum severance pay out at such time, if certain conditions have been fulfilled. Employees are also entitled to long service bonuses for every ten years of service at the Bank. The valuation of the provisions for these obligations is carried out by independent qualified actuaries. The significant assumptions used in the actuarial calculation for the Bank are:

2014 2013

Discount rate 2.60% 3.10%

Number of employees entitled to benefits 469 494

Wage growth based on inflation, promotions and seniority 2.00% 2.00% All gains and losses arising from changes in assumptions are immediately recognised in the income statement, except for actuarial gains in the amount of EUR 91 thousand based on severance pay, which have been recognised in the revaluation reserve on the basis of IAS 19 The effect of the amended IAS 19 on the recognition of changes in provisioning is immaterial, which is why the Bank did not carry out a retrospective restatement. The Bank contributes to the State Pension Scheme (8.85% of gross salaries) in accordance with Slovenian legislation. Once contributions have been paid, the Bank has no further payment obligation. The regular contributions constitute net periodic costs for the year in which they are due and are disclosed under labour costs in the income statement. 2.21 Loans taken, deposits and debt securities issued Loans taken, deposits and debt securities issued are initially recognised at fair value decreased by the transaction costs. Loans and deposits are usually measured at cost, with the difference between initial recognition and carrying value recognised in the income statement under interest income with the use of the effective interest rate. A debt security issued is measured at cost or at fair value. Purchases of own debt reduce the liabilities in the statement of financial position. The difference between the carrying amount and the price of the own debt is shown in the income statement. 2.22 Provisions Long-term provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. The Bank creates provisions for post-employment benefits, for commitments and contingent liabilities, for legally unresolved claims and on the basis of the national housing savings scheme (NSVS). For instruments carrying off-balance sheet risk provisions are formed for estimated loss from the items, which are based on similar criteria as those set for loans. To form provisions for legitimate obligations from past events a reliable estimate of the obligation amounts is required.



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2.23 Financial and performance guarantees Financial guarantees are agreements that require the issuer to make specific payments to reimburse the holder for a loss it incurs because a specific debtor fails to make payments when due, in accordance with the terms of debt instruments at the initial or adjusted due date. Such financial guarantees are given to banks, other financial institutions and other parties as a form of collateral on loans, overdrafts and other banking facilities. Performance guarantees are agreements, based on which the issuer is obligated to pay a consideration, which compensates the holder for loss resulting from the contractor’s failure to fulfil contractual obligations. Mainly these are issued to construction investors in the name of the contractor, to secure the conditions, as defined in the agreement. Financial and performance guarantees are initially recognised at fair value, which is recorded as the amount of fees and commissions received. The fees are transferred to the income statement over the contract term using the straight line method. The Group’s liabilities under guarantees are subsequently measured at the greater of: - the initial measurement, less amortisation calculated to recognise fee income over the period of

guarantee; or - the best estimate of the expenditure required to settle the obligation. 2.24 Share capital Ordinary shares and preference shares are both classified as equity. a) Share issue costs Costs, directly attributed to the issue of new shares are recognised in equity as a reduction in share premium. b) Dividends on shares Dividends on shares are recognised in equity in the period in which they are approved by the Bank’s owners. c) Treasury shares Should the Bank purchase treasury shares, the consideration paid is deducted from total shareholder’s equity as treasury shares. In the event of a subsequent sale of the acquired treasury shares, the amount is shown as an increase in share capital. 2.25 Segment reporting The preparation of financial statements in accordance with the IFRS requires accounting policies, assumptions and estimates, which affect the reported amount of assets and liabilities, the disclosure of contingent liabilities and commitments at the reporting date and the amount of income and expenses for the period ended on the reporting date. The estimates and assumptions are based on the going concern principle, on past experience and other factors, including expectations related to future events. Estimates are used for: impairment of loans and receivables, impairment of available for sale financial assets, the fair value of financial assets and liabilities, provisions for commitments and contingent liabilities, the depreciation period of property and equipment and intangible assets, deferred taxes and provisions for liabilities to employees. Changes in impairment estimates have a significant impact on the financial position and on operational performance. These may change in the future due to changes in economic conditions



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and the changes in the repayment ability of debtors and due to changes in the value of collateral for bad loans at their redemption. 2.26 Critical accounting estimates and judgements All the estimates and judgements used represent the best judgements in accordance with IFRS, made in line with the applicable standards and are based on the principles of an active company, on past experience and other factors, including expectations with regard to future events. a) Impairment losses on loans and advances With the objective of determining impairment charges, the Bank and the Group review their credit portfolio on a quarterly basis at the least. Prior to making the decision on recognising loss through the income statement, they make judgements if any information exists which could signify a drop in the estimated cash flows from loans. Such evidence includes the information on deterioration of debtor creditworthiness or on deterioration of economic conditions and circumstances. Future cash flows from financial assets are estimated on the basis of past experience and loss from credit risk bearing assets. The estimated future cash flows reflect also the effects related to the current circumstances. Individual estimations are prepared on the basis of projected future cash flows including all relevant information in relation to the financial position and debtor creditworthiness as well as collateral. The methodology and assumptions, used in estimating future cash flow are based on regular reviews aimed at decreasing the differences between the estimated and actual losses. Should the present value of future cash flows decrease by 1 percentage point, it would result in additional impairment charges in the amount of EUR 1,576 thousand for the Bank (2013: EUR 2,080 thousand). b) Fair value of financial instruments The fair value of financial instruments traded on an organised market is determined using observable market prices on the reporting date, being the price, representing the best bid for the financial instrument. Fair values of financial instruments not traded on organized markets are determined using valuation models. These include comparisons with the prices from the most recent transactions, the use of discounted future cash flows and other frequently used valuation methods. All models in use have been verified to ensure that the results offer an adequate representation of actual market conditions, including the relative liquidity of the market and the use of adequate market surpluses. Changes in the estimates of these factors would impact the reported fair value of held for trading investments and available for sale financial assets. The fair values of derivatives are determined on the basis of market data, in line with the adopted methodology of the valuation of financial instruments. Market foreign currency rates, market interest rates, the yield curve and the volatility curves are used in the valuation. c) Deferred tax assets The recognised deferred tax assets represent tax amounts from deductible temporary differences incurred in 2014, which will be chargeable to future taxable profit and reported in the statement of financial position. Deferred tax assets are recognized to the extent that can be set-off against future taxable profit. Future taxable profit and the amount of likely future tax benefits are based on the medium term plan prepared by the Management Board. The medium-term financial plan is based on management’s expectations, which are warranted in the given circumstances.



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3 NOTES TO THE INCOME STATEMENT 3.1 Net interest and similar income

2014 2013

Interest and similar income 67,159 88,279

Loans and advances to customers 55,732 68,556

Loans and advances to banks 10 77

Securities 9,937 13,006

- held for trading 2,978 138

- financial assets designated at fair value

through profit or loss - 16

- available for sale financial assets 6,959 4,000

- held to maturity investments - 8,852

Deposits with Central Bank 17 114

Derivatives - interest rate swap 1,463 6,526

Interest and similar expense (28,147) (50,988)

Loans and advances from customers (16,139) (30,999)

Loans and advances from banks (4,393) (5,844)

Loans and deposits from Central Bank (153) (660)

Issued securities and CDs (6,311) (12,126)

Derivatives - interest rate swap (1,151) (1,359)

Net interest and similar income 39,012 37,291

Under loans and advances to customers in the amount of EUR 55,732 thousand, the Bank realised EUR 11,655 thousand of income from individually impaired loans (2013: EUR 11,216 thousand). 3.2 Dividend income

2014 2013

Dividends from available for sale financial assets 346 379

Dividends from financial assets held for trading - 8

Total 346 387



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3.3 Net fee and commission income

2014 2013

Fee and commission income 16,438 17,344

Payment services 6,286 6,441

Card operations 4,807 5,020

Current account 3,330 3,307

Guarantees and credit insurance 1,752 2,316

Other services 263 260

Fee and commission expenses (1,494) (1,526)

Payment services (622) (680)

Card operations (650) (654)

Brokerage commissions and other securities transactions (94) (129)

Other services (128) (63)

Net fee and commission income 14,944 15,818

3.4 Gains less losses from financial assets and liabilities not classified at fair value through

profit or loss

2014 2013

Available for sale financial assets 16,901 545

Equity securities 8,024 364

Debt securities 8,877 181

Financial assets recognised at amortised cost 1,550 (108)

Financial liabilities recognised at amortised cost 15 54,787

Total 18,466 55,224

Gains from financial assets available for sale were higher in 2014 than in 2013 and were mainly generated with the sale of government bonds and with the sale of certain shares and mutual funds in line with business policies. Under financial liabilities at amortised cost the Bank did not attain significant gains in 2014 compared with the previous year. Gains in 2013 were mostly due to valuation of subordinated bonds and certificates of deposit, which were cancelled in December 2014. 3.5 Gains less losses from financial assets and liabilities held for trading

2014 2013

Equity securities 497 (1)

Foreign currency trading 279 262

Debt securities 112 (104)

Currency derivative financial instruments (159) 443

Forwards and futures with underlying securities (346) (4,838)

IRS and options (865) (1,539)

Total (482) (5,777)



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A reduced loss from financial assets and liabilities held for trading in 2014 as compared with the previous year is foremost the result of a smaller loss recorded from futures and forwards and the underlying securities due to the winding-up of forward and futures and securities operations. The loss from interest rate swaps (IRS) recorded in 2014 pertains to the valuation of IRS to a lower fair value, mostly due to approaching final maturities. 3.6 Gains less losses from financial assets and liabilities designated at fair value through

profit or loss

2014 2013

Gains from valuation of securities in issue - 32,604

(Losses) from bond valuation - (1,174)

Total - 31,430

The profit from the valuation of issued securities in 2013 is the result of the valuation of subordinated bonds, which were written down in December 2014. 3.7 Changes in fair value from hedge accounting

2014 2013

Net profit from hedged instruments 1,408 3,487

Net (loss) from hedging derivatives (1,396) (3,453)

Total 12 34

Using hedge accounting, the Bank hedged the fair value of some of its financial liabilities related to a change in interest rates. Hedging derivatives are disclosed in detail in Note 4.7. 3.8 Gains less losses from foreign exchange differences

2014 2013

Positive exchange rate differences 2,726 4,904

Negative exchange rate differences (2,164) (5,394)

Total 562 (490)

Net profit / (loss) from foreign exchange differences must be assessed with the effects of currency derivatives shown in Note 3.5 as the Bank has in place a managed FX exposure policy through the use of derivatives. Subsequently, the effects on its income are immaterial.



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3.9 Net other operating (loss) 2014 2013

Income 305 306

Rental income 179 198

Income from the sale of real estate - -

Other operating income 126 108

Expenses (2,119) (2,241)

Taxes and other duties (1,928) (2,076)

Membership fees (78) (92)

Contributions to humanitarian organisations (54) (63)

Other operating expenses (59) (10)

Total (1,814) (1,935)

Taxes and other duties feature the expense for balance sheet tax in an amount of EUR 687 thousand (2013: EUR 952 thousand) and the expense for financial services tax amounting to EUR 1,130 thousand (2013: EUR 1,013 thousand). 3.10 Administrative expenses

2014 2013

Labour costs (15,427) (16,892)

Gross salaries and compensations (11,903) (12,361)

Defined contribution scheme (1,043) (1,436)

Social security (868) (904)

Employee benefits 191 (589)

- post-employment benefits 80 (132)

- other employee benefits 111 (457)

Other labour expenses (1,804) (1,602)

General and administrative expenses (14,313) (13,718)

IT (3,431) (3,441)

Maintenance (1,759) (2,005)

Credit cards (1,601) (1,557)

Rent (882) (842)

- property (472) (488)

- equipment (386) (331)

- software (24) (23)

Material and energy costs (569) (637)

Advertising (568) (593)

Office stationery costs (391) (408)

Audit and consultancy (871) (312)

Other services (4,241) (3,923)

Total (29,740) (30,610)



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Future operating lease payments

- up to 1 year 948

- 1 to 5 years 2,156

- over 5 years 761

Total 3,865

The audit and advisory service expenses for 2014 include EUR 53 thousand (2013: EUR 53 thousand) of expenses for the annual audit of financial statement. Employee data are presented in Chapter 8.5 of the Business report. 3.11 Amortisation and depreciation

Note 2014 2013

Depreciation of property and equipment 4.8 (1,551) (1,855)

Amortisation of intangible assets 4.10 (1,042) (1,036)

Depreciation of investment property 4.9 - -

Total (2,593) (2,891)

3.12 Provisions

Note 2014 2013

Provisions for guarantees and commitments 4.21 (3,555) (57)

Total (3,555) (57)

In 2014 the Bank made additional provisions to cover for guarantees and commitments mostly. 3.13 Impairment charges

Note 2014 2013

Impairment of loans measured at amortised cost (50,683) (196,181)

Impairment of other assets (4,353) (11,657)

Impairment of available for sale financial assets 4.3 (5,761) (6,159)

Impairment of equity securities (5,261) (5,659)

Impairment of debt securities (500) (500)

Total (60,797) (213,997)

Detailed data on impairment of loans are disclosed in Note 5.1.



89

4 NOTES TO STATEMENT OF FINANCIAL POSITION 4.1 Cash and balances with the Central Bank and demand deposits with banks

31 December 2014 31 December 2013

Balances with Central Bank 137,155 178,744

Demand deposits with banks 103,203 12,045

Cash in hand 13,691 13,251

Total 254,049 204,040

During the first half of 2014 the Bank placed surplus liquidity with the Central bank in the form of term deposits with a maturity of 7 days, while placing surplus funds with other commercial banks in the second half of the year. 4.2 Held for trading financial assets

Note

Assets Liabilities Assets Liabilities

Derivatives 4.2a 4,636 796 5,934 1,125

Equity securities - - 3,040 -

Debt instruments - - 1,987 -

Total 4,636 796 10,961 1,125


In accordance with its investment policy, as at 31 December 2014 the Bank only holds derivatives in its held for trading financial assets and liabilities. Financial assets held for trading did not form part of assets pledged in 2014 nor in 2013, and no debt securities with original maturities below three months are held. 4.2a Derivative assets and liabilities

31 December

2014

31 December

2013

Derivatives Assets Liabilities Assets Liabilities

IRS 117,661 120,424 4,573 698 5,782 1,049

Currency swaps 18,570 23,351 63 98 26 76

Futures and forwards - 9,733 - - 126 -

Option (Interest rate cap) 10,500 11,000 - - - -

Total 146,731 164,508 4,636 796 5,934 1,125

Contractual amount


Fair value

In 2014 the Bank reduced the volume of derivatives trading. The fair values of receivables and liabilities from IRS decreased due to lower contractual values and approaching maturities. Mainly the Bank has entered in IRS, where it pays a variable interest, while receiving fixed. A decrease in assets was attained from these transactions. On the other hand, the transactions where it pays fixed and receives variable interest, from which it achieved a reduction in liabilities, are less frequent.



90

4.3 Available for sale financial assets

Balance Impairment Balance Impairment

Debt instruments 479,434 - 318,435 (514)

Equity instruments 4,467 (1,117) 33,354 (23,380)

Total gross 483,901 (1,117) 351,789 (23,894)

Total net 482,784 327,895


As at 31 December 2014 the Bank held EUR 81,222 thousand of securities eligible for ECB funding in the Financial Property Fund with the Bank of Slovenia (2013: EUR 263,089 thousand). Changes in available for sale financial assets:

Equity securities Debt securities

Total available for sale

financial assets

Balance as at 1 January 2013 16,591 170,167 186,758

Purchase 1,487 41,267 42,754

Sale (2,538) (57,940) (60,478)

Realization at maturity - (63,079) (63,079)

Reclassification from held to maturity - 221,051 221,051

Change in fair value 94 6,955 7,049

Impairment (5,660) (500) (6,160)

Balance as at 31 December 2013 9,974 317,921 327,895

Purchase 4,829 133,264 138,093

Recapitalization - 94,998 94,998

BAMC bond - 125,795 125,795

Sale (13,216) (43,995) (57,211)

Realization - (151,017) (151,017)

Change in fair value 7,024 2,968 9,992

Impairment (5,261) (500) (5,761)

Balance as at 31 December 2014 3,350 479,434 482,784

4.4 Loans and advances to banks (excluding demand deposits)


Short-term loans 52,000 - 5,822 -

Total gross 52,000 - 5,822 -

Total net 52,000 5,822


Cash and cash equivalents (Note 4.26) include loans to banks with a maturity up to 90 days.



91

4.5 Loans and advances to customers 4.5.1 Analysis by types of borrowers and currency:


Local currency 1,031,262 (151,235) 1,555,159 (337,007)

Loans to the state and local communities 69,745 (2,034) 65,883 (258)

Loans to private individuals 295,934 (15,348) 308,835 (12,498)

- overdraft accounts and cards 34,774 (196) 36,102 (206)

- housing loans 161,908 (6,680) 164,789 (4,903)

- consumer loans 98,474 (8,103) 107,060 (7,024)

- unauthorised account overdrafts 778 (369) 884 (365)

Loans to private entrepreneurs 33,941 (4,449) 46,272 (5,049)

Loans to companies 631,642 (129,404) 1,134,169 (319,202)

- large companies 259,530 (32,323) 457,877 (80,420)

- SME 356,049 (88,921) 515,481 (128,302)

- other 16,063 (8,160) 160,811 (110,480)

Foreign currency 14,827 (3,225) 32,770 (10,865)

Loans to private individuals 13,989 (3,158) 15,701 (2,461)

- housing loans 9,145 (201) 10,736 (353)

- consumer loans and other 4,844 (2,957) 4,965 (2,108)

Loans to private entrepreneurs 323 (14) 481 (21)

Loans to companies 515 (53) 16,588 (8,383)

- large companies - - 5,184 (85)

- SME 446 (12) 1,016 (91)

- other 69 (41) 10,388 (8,207)

Total gross 1,046,089 (154,460) 1,587,929 (347,872)

Net total 891,629 1,240,057


The decrease is mainly the result of the transfer of bad assets to the BAMC in accordance with the ZUKSB and the reduced lending volume. The Bank transferred loans in the amount of EUR 349,240 thousand to the BAMC, impairments of these are disclosed in table 4.5.2.



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4.5.2 Impairments and write-offs for customers, by types of credit facilities:

Housing

loans

Consumer

and other

loans

Loans to

private

individuals

Loans to private

entrepreneurs

Loans to

companies Total

Balance as at 1 January 2013 4,222 7,347 11,569 4,202 138,987 154,758

Impairment charges 2,441 3,838 6,279 1,922 198,387 206,588

Reversal of impairments (1,407) (1,372) (2,779) (997) (6,631) (10,407)

Write-offs - (110) (110) (57) (2,900) (3,067)

Balance as at 31 December 2013 5,256 9,703 14,959 5,070 327,843 347,872

Impairment charges 2,303 2,652 4,955 2,045 69,713 76,713

Reversal of impairments (665) (600) (1,265) (436) (24,329) (26,030)

Sale of receivables - - - - (3,684) (3,684)

Transfer to the BAMC - - - (1,627) (226,229) (227,856)

Write-offs (13) (130) (143) (589) (11,823) (12,555)

Balance as at 31 December 2014 6,881 11,625 18,506 4,463 131,491 154,460

4.6 Other financial assets

31 December

2014

31 December

2013

31 December

2014

31 December

2013

Credit card receivables 1,055 1,107 1,055 1,107

Receivables on the course of collection 504 2,525 504 2,525

Fees and commissions receivables 206 666 206 666

Other 613 355 811 816

Impairment (445) (2,364) (498) (2,386)

Total 1,933 2,289 2,078 2,728

Bank Group

Movements in impairment provisions:

Bank Group

Balance as at 1 January 2013 2,098 2,119

Impairment 1,250 1,251

Reversal of impairments (873) (873)

Write-offs (111) (111)

Balance as at 31 December 2013 2,364 2,386

Impairment 898 929

Reversal of impairments (239) (239)

Release of provisions due to transfer to BAMC (2,544) (2,544)

Write-offs (34) (34)

Balance as at 31 December 2014 445 498



93

4.7 Hedging derivatives

31 December

2014

31 December

2013

Assets Liabilities Assets Liabilities

Hedging derivatives (IRS) 54,150 164,150 1,424 - 3,437 -

Total 54,150 164,150 1,424 - 3,437 -

Contractual amount


Fair value

Hedge accounting rules (fair value hedge) were applied in the hedging of interest rate risk using IRS. These hedge relationships are created in such a way that the characteristics of the hedge instrument and those of the hedged item match (e.g. the principal terms match). The fair value of hedging instruments decreased compared with the previous year, mainly due to the decrease of contractual values. 4.8 Property and equipment

Note

Land and

buildings

Property held

under finance

lease

Computer

hardware

Other

equipment

Assets in

course of

construction Total

Cost as at 1 January 2013 27,045 - 11,986 7,688 - 46,719

Additions - - - - 1,286 1,286

Removal of Vodnikova (784) - - - - (784)

Transfer from assets in course of

construction 78 669 480 59 (1,286) -

Disposals - - (773) (291) - (1,064)

Cost as at 31 December 2013 26,339 669 11,693 7,456 - 46,157

Depreciation

Balance as at 1 January 2013 16,169 - 9,740 5,892 - 31,801

Depreciation charge 3.11 514 8 897 436 - 1,855

Removal of Vodnikova (644) - - - - (644)

Disposals - - (773) (247) - (1,020)

Balance as at 31 December 2013 16,039 8 9,864 6,081 - 31,992

Net carrying value as at 31 December 2013 10,300 661 1,829 1,375 - 14,165

Cost as at 1 January 2014 26,339 669 11,693 7,456 - 46,157

Additions - - - - 497 497

Transfer from assets in course of

construction 238 - 114 145 (497) -

Disposals (90) - (1,794) (250) - (2,134)

Cost as at 31 December 2014 26,487 669 10,013 7,351 - 44,520

Depreciation

Balance as at 1 January 2014 16,039 8 9,864 6,081 - 31,992

Depreciation charge 3.11 515 13 682 341 - 1,551

Disposals (75) - (1,704) (250) - (2,029)

Balance as at 31 December 2014 16,479 21 8,842 6,172 - 31,514

Net carrying value as at 31 December 2014 10,008 648 1,171 1,179 - 13,006

The larger purchase of computer equipment in 2014 pertains to safety data copying equipment and the electronic banking environment update. Decreases are mostly the result of the sale of POS terminals, which the Bank outsources and the destruction of obsolete computer and other equipment.



94

The cost of equipment and property, that has already been fully depreciated, but is still in use by the Bank, amounts to EUR 10,705 thousand (2013: EUR 10.414 thousand). Property and equipment have not been pledged in 2014 or 2013. 4.9 Investment property Group Note Land Buildings Total

Cost as at 1 January 2013 38 2,720 2,758

Additions 461 1,074 1,535

Transfer to inventory - 540 540

Disposals - (296) (296)

Cost as at 31 December 2013 499 4,038 4,537

Depreciation

Balance as at 1 January 2013 - 79 79

Depreciation charge 3.11 - 30 30

Disposals - (4) (4)

Balance as at 31 December 2013 - 105 105

Net carrying value as at 31 December 2013 499 3,933 4,432

Cost as at 1 January 2014 499 4,038 4,537

Additions 1 55 56

Transfer from inventory (5) (91) (96)

Disposals (6) (452) (458)

Cost as at 31 December 2014 489 3,550 4,039

Depreciation

Balance as at 1 January 2014 - 105 105

Depreciation charge 3.11 - 35 35

Disposals - (47) (47)

Balance as at 31 December 2013 - 93 93

Net carrying value as at 31 December 2014 489 3,457 3,946 Investment property includes land and buildings acquired to be leased out under an operating lease. Rental income of EUR 180 thousand (2013: EUR 186 thousand) is included in Net other operating (loss) of the Group. Maintenance costs related to investments property of EUR 12 thousand (2013: EUR 9 thousand) are included in General and Administrative Expenses of the Group. The fair value of investment property was assessed by authorised appraisers using the comparative sales method and the capitalisation of income. The fair value of investment property (level 3) as at 31 December 2014 amounts to EUR 4,548 thousand (2013: 5,802 thousand).



95

4.10 Intangible assets

Note Software licenses

Assets in course of

installation and

other Total

Cost as at 1 January 2013 14,619 338 14,957

Additions - 729 729

Transfer from fixed assets in installation 907 (907) -

Cost as at 31 December 2013 15,526 160 15,686

Depreciation

Balance as at 1 January 2013 10,542 - 10,542

Amortisation charge 3.11 1,036 - 1,036

Balance as at 31 December 2013 11,578 - 11,578

Net carrying value as at 31 December 2013 3,948 160 4,108

Cost as at 1 January 2014 15,526 160 15,686

Additions - 421 421

Transfer from fixed assets in installation 386 (386) -

Cost as at 31 December 2014 15,912 195 16,107

Depreciation

Balance as at 1 January 2014 11,578 - 11,578

Amortisation charge 3.11 1,042 - 1,042

Balance as at 31 December 2014 12,620 - 12,620

Net carrying value as at 31 December 2014 3,292 195 3,487

The cost of intangible long-term assets, that have been fully depreciated, but are still used by the Bank, amounts to EUR 7,237 thousand (2013: EUR 7.004 thousand). 4.11 Investments in subsidiaries, associates and joint ventures

Posest, d.o.o., Celje

Investment

amount

% of

ownership

% voting

rights

Basic equity

capital

Operating

result

31 December 2014 2,257 100.00 100.00 2,124 11

31 December 2013 2,257 100.00 100.00 2,124 (137)

4.12 Income tax assets 4.12.1 Deferred tax assets


Deferred tax 4,271 -

Balance of assets as at 31 December 4,271 -


Tax loss 4,550 -

Available for sale securities (279) -

Deferred tax assets 4,271 -



96

Changes in deferred tax:


Balance as at 1 January - 10,087

Income statement changes in deferred taxes:

Available for sale instruments - impairment

- derecognition of assets - (5,235)

Provisions for liabilities to employees

- derecognition of assets - (222)

Tax loss

- recognition of assets 4,550 -

- derecognition of assets - (5,141)

Investment tax relief

- recognition of assets - (75)

Income statement changes in deferred taxes as at

31 December 4,550 (10,673)

Changes in deferred taxes in the statement of comprehensive income:

Available for sale securities

- valuation to fair value (4,674) -

- elimination 4,395 586

Changes in deferred taxes recorded in other

comprehensive income as at 31 December (279) 586

Statement of financial position on 31 December 4,271 - 4.13 Other assets

31 December 2014 31 December 2013 31 December 2014 31 December 2013

Claims against the Tax

Administration of the Republic

of Slovenia 264 1 264 -

Deferred expenses 231 177 241 177

Inventories 8 16 4,141 4,138

Other receivables 3 3 - 11

Total 506 197 4,646 4,326

Bank Group

The inventory of the Group end 2014 pertains to houses, flats and property. The carrying amount of inventory as at 31 December does not exceed its realizable value.



97

4.14 Financial liabilities designated at fair value through profit or loss

Maturity

Contractual

amount

Interest rate as at

31 December 2014

31 December

2014

31 December

2013

Subordinated bonds BCE10 - 409




Certificates of deposit - 30

Certificates of deposit - 3

Total - 1,000

Based on the Decision on emergency measures by the Bank of Slovenia, all of the Bank’s qualified liabilities were written down on 16 December 2014, including a total of EUR 92,020 thousand of the Bank’s liabilities from issued financial instruments representing the Bank’s subordinated liabilities. These included: - subordinated, registered bonds designated BCE11, with an outstanding qualified liability of the

Bank from the instrument as at the day of the Decision of EUR 15,145 thousand plus accumulated interest;

- subordinated, registered bonds designated BCE10, with an outstanding qualified liability of the Bank from the instrument as at the day of the Decision of EUR 37,000 thousand plus accumulated interest;



- subordinated certificates of deposit dated 29 November 2007 and 20 December 2012, with an outstanding qualified liability of the Bank from the instruments as at the day of the Decision of EUR 3,250 thousand plus accumulated interest.

4.15 Financial liabilities at amortised cost – deposits from banks and central banks 4.15.1 Analysis by currency and maturity


At sight 498 1,023

In local currency 6 100

In foreign currency 492 923

Short-term 255 10,253

In local currency 255 10,253

Total 753 11,276



98

4.15.2 Analysis by region


Slovenia 747 11,175

Other countries 6 101

Total 753 11,276

4.16 Financial liabilities at amortised cost – due to customers 4.16.1 Analysis by currency and maturity and by type of customer

At sight Short-term Long-term At sight Short-term Long-term

State and local

communities 27,038 157,740 80,364 15,884 91,100 165,444

In local currency 27,038 157,740 80,364 15,884 91,100 165,444

Companies 133,781 87,641 19,089 92,195 158,587 26,839


In foreign currency 1,790 1 - 2,576 120 -

Private entrepreneurs 29,356 2,554 550 22,535 1,477 1,662

In local currency 29,309 2,554 550 22,493 1,477 1,662

In foreign currency 47 - - 42 - -

Private individuals 326,613 138,141 205,819 301,983 170,442 185,432


In foreign currency 10,499 1,209 2,543 9,633 1,852 1,939

Other financial

institutions 886 7,443 32,808 558 6,798 31,082

In local currency 886 7,443 32,808 557 6,798 31,082

In foreign currency - - - 1 - -

Total 517,674 393,519 338,630 433,155 428,404 410,459

Total at sight, short-term

and long-term


1,249,823 1,272,018



Slovenia 1,236,745 1,257,073

EU 9,111 10,181

Other countries 3,967 4,764

Total 1,249,823 1,272,018



99

4.17 Financial liabilities, measured at amortised cost – borrowings from banks and central banks

4.17.1 Analysis by currency and maturity

Interest rate as at

31 December 2014 31 December 2014 31 December 2013

Local currency 136,291 336,226

Long-term loans 2.36% 136,291 336,226

Total 136,291 336,226



Slovenia 136,291 336,226

Total 136,291 336,226

4.18 Financial liabilities at amortised cost – borrowing from customers

Interest rate as at

31 December 2014

Short-term Long-term Short-term Long-term

Local currency 2.89% - 1,498 - 2,134

Total


2,1341,498

4.19 Debt securities

Maturity

Interest rate as at

31 December 2014 31 December 2014 31 December 2013

Certificates of deposit in local currency 8,253 34,557

CDs - maturity in 2014 - 28,569

CDs - maturity in 2015 3.44% 7,844 5,604

CDs - maturity in 2016 4.40% 409 384

Bonds in local currency 98,523 99,284

Bonds BCE13 30.3.2015 4.75% 41,409 41,380

Bonds BCE14 1.10.2015 4.55% 20,472 20,699

Bonds BCE15 15.2.2016 5.00% 36,642 37,205

Total 106,776 133,841

In March 2010 the Bank issued the 13th issue bonds in a total amount of EUR 40,000 thousand, in October 2010 it issued the 14th issue bonds in an amount of EUR 20,000 thousand and the 15th issue bonds in a total issue amount of EUR 34,150 thousand. The issues pertain to registered, EUR denominated, non-materialised bonds. Interest is paid out annually, with bullet repayment at maturity. The liabilities from the bonds are not secured nor otherwise guaranteed. The Bank guarantees the obligations from the bonds it issues with all its assets without limit.



100

The BCE13, BCE14 and BCE15 series bonds are all listed on the Ljubljana stock exchange, while certificates of deposit are not. 4.20 Other financial liabilities


Suppliers 1,543 1,191

Debit or credit card payables 1,433 1,619

Payroll liabilities 1,316 1,216

Accruals 487 516

Items in course of payment 460 179

Other 960 699

Total 6,199 5,420 4.21 Provisions

Note 31 December 2014 31 December 2013

Provisions for guarantees and commitments 4.25d 5,284 2,299

Employee benefits provision 2,726 2,885

Other provisions 82 121

Pending legal cases 4.25a - 4,598

Total 8,092 9,903

Provisions for liabilities toward employees include future severance pay at retirement, jubilee benefits and unpaid salaries. Other provisions relate to the national housing savings scheme (NSVS). Changes in provisions:

Provisions for

pending legal

cases

Provisions for

guarantees and

commitments

Employee

provisions

Other

provisions Total

Balance as at 1 January 2013 4,738 2,242 2,412 184 9,576

Provisions made / (released) - 57 588 - 645

Release of provisions to accumulated

other comprehensive income - - (74) - (74)

Direct use of provisions (140) - (41) (63) (244)

Balance as at 31 December 2013 4,598 2,299 2,885 121 9,903

Provisions made / (released) 458 3,097 (192) - 3,363

Provisions from accumulated other

comprehensive income - - 91 - 91

Direct use of provisions (5,056) (112) (58) (39) (5,265)

Balance as at 31 December 2014 - 5,284 2,726 82 8,092



101

Provisions for unresolved legal proceedings, have been formed for the costs of the denationalization of the management building at Vodnikova, have been fully used for the payment to denationalization beneficiaries in line with the court’s decision. 4.22 Other liabilities

31 December 2014 31 December 2013 31 December 2014 31 December 2013

Taxes payable 126 711 294 922

Accruals 47 816 47 815

Total 173 1,527 341 1,737

Bank Group

4.23 Share capital The capital of Banka Celje, d.d., after the increase of capital with state aid in the amount of EUR 190 million, amounted to EUR 201,581 thousand on 31 December 2014 (31 December 2013: 40,758 thousand). 4.23.1 Subscribed capital The Bank’s subscribed capital after the capital increase from 16 December 2014 comprised 5,000,000 dematerialised ordinary registered no par value shares. All shares, representing the qualified first grade liability of the Bank prior to the capital increase, being 508,629 ordinary no par value shares, were fully written down on the day of the capital increase. The Subsidiary is registered as a limited liability company. After the capital increase, the state is the Bank’s sole owner. Number of shares and amount of share capital:

Ordinary shares Preference shares Total

Balance as at 31 December 2012 508,629 16,980 - 16,980

Balance as at 31 December 2013 508,629 16,980 - 16,980

Balance as at 31 December 2014 5,000,000 50,000 - 50,000

Share capital in thousands of EURNumber of

shares

4.23.2 Treasury shares After all the shares have been eliminated on 16 December 2014, the Bank as at 31 December 2014 no longer held any treasury shares in its portfolio (31 December 2013: 251 ordinary treasury shares in a total amount of EUR 31 thousand). 4.23.3 Share premium With the capital increase the Bank’s share premium increased by a total of EUR 166,221 thousand (amounting to EUR 51,380 thousand in the years 2011, 2012 and 2013). The increase in the amount of EUR 140,000 thousand is the result of payments, which exceeded the nominal value of the shares paid in. The appropriate amount of one new ordinary no par share is EUR 10, with the share’s issue



102

value being EUR 38. At the same time capital reserves decreased by EUR 42,433 thousand as well, due to the cover for the loss from 2013 and increased by EUR 16,980 from a simplified decrease of share capital as a result of the elimination of shares and by EUR 294 thousand due to the transfer of liabilities from unconverted shares of Banka Noricum to the shares of Banka Celje, d.d. 4.23.4 Reserves

As at 31 December 2014 the Bank’s reserves amount to EUR 2,948 thousand (Group: EUR 3,147 thousand), comprising statutory reserves in the amount of EUR 2,905 thousand (Group: EUR 3,005 thousand) and other profit reserves in the amount of EUR 43 thousand (Group: EUR 142 thousand). 4.23.5 Revaluation reserve The accumulated comprehensive income, forming part of the capital, amounted to EUR 3,513 thousand as at 31 December 2014, wherein the Bank shows the revaluation of available for sale assets to a fair value of EUR 3,531 thousand and net actuarial losses from severance pay in the amount of EUR 18 thousand. Changes in the accumulated other comprehensive income are shown in the statement of comprehensive income. 4.24 Dividend per share Dividends payable are not accounted for until they have been ratified at the Bank's annual General Shareholders’ Assembly. The dividends for 2012 and 2013 were not confirmed and not paid out. 4.25 Contingent liabilities and commitments a) Legal proceedings In 2014 the bank received the decision and the verdict by the High Court in Celje in the dispute concerning the payment of compensation on the basis of the inability to use the management building at Vodnikova 2, which was returned in the denationalization process. On 30 September 2014 the Bank thus paid EUR 5 million to two denationalization beneficiaries, namely the Kapitalska zadruga and the Deželna banka Slovenije. To this aim it formed additional provisions to ensure their total is sufficient for the payment of all liabilities. As at 31 December 2014 the Bank no longer records any provisions from legally unresolved disputes (31 December 2013: EUR 4,598 thousand). At the same time, the Bank is continuing the proceedings for the reimbursement of the costs of the denationalization. In the proceedings it has received an interim decision by the District Court in Ljubljana, being the court of first instance, case no. 459/2011 from 6 March 2015, which states that the Bank is entitled to reimbursement on the basis of Article 73 of the Denationalization Act. The court will decide on the amount of the reimbursement after the final decision in the matter. b) Capital commitments As at 31 December 2014 and 31 December 2013, the Group did not exhibit any future obligations to acquire property or equipment or intangible assets. c) Contingent liabilities and commitments Documentary (and standby) letters of credit constitute a written and irrevocable commitment of the issuing (opening) bank, on behalf of the issuer (importer) to pay the beneficiary (exporter) the value set out in the documents by a defined deadline: - if the letter of credit is payable on sight; and



103

- if the letter of credit provides for deferred payment – to be paid at maturity, provided that the beneficiary (exporter) presents documents that are in line with the conditions and deadlines set out in the letter of credit.

A commitment may also take the form of a letter of credit confirmation, which is usually done at the request or authorisation of the issuing (opening) bank and constitutes a firm commitment by the confirming bank, in addition to that of the issuing bank, which independently assumes a commitment to the beneficiary under certain conditions. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, letters of intent and letters of credit. With respect to credit risk on commitments to extend credit, the Bank is exposed to loss in an amount equal to the total unused commitments. d) Breakdown of contractual amounts relating to bank guarantees and assumed liabilities


Guarantees 81,758 103,844

- performance guarantees 62,992 77,069

- financial guarantees 18,766 26,775

Commitments to extend credits 83,967 99,152

Total 165,725 202,996

Provisions 4.21 (5,284) (2,299)

Total 160,441 200,697

4.26 Cash and cash equivalents Cash and cash equivalents in the statement of cash flows represent instruments with an original maturity of less than 90 days.


Cash and cash balances with central banks and demand

deposits 4.1 254,049 204,040

Loans to banks (without demand deposits) 4.4 52,000 5,822

Total 306,049 209,862



104

4.27 Related party transactions Related parties comprise key management personnel (Management Board members, Supervisory Board members, senior management and their immediate family members), companies with significant impact on the Bank and the Subsidiary until 16 December 2014. Gross amounts paid out to key management personnel

commercial

business units

other business

units Total

Fixed income 241 - 372 714 1,327

Variable income - - - - -

Other income 11 - 9 10 30

Cost reimbursement 5 6 10 22 43

Meeting fees - 56 - - 56

Total 257 62 391 746 1,456

2014

Senior management

Supervisory

Board members

Management

Board members

commercial

business units

other business

units Total

Fixed income 362 - 506 649 1,517

Variable income - - - - -

Other income 55 - 30 29 114

Cost reimbursement 6 8 11 21 46

Meeting fees - 62 - - 62

Total 423 70 547 699 1,739

Management

Board members

Supervisory Board

members

Senior management

2013

The Bank’s Management Board comprised 2 members in 2014. The senior management comprised 13 members since April. In 2014 salaries paid out to the Management Board and the senior management were aligned with the legislation governing the remuneration of management in companies under majority ownership of the Republic of Slovenia. Gross amounts paid out to Management Board and Supervisory Board members

Management Board Members Fixed Variable Other

Cost

reimbur-

sement Total Fixed Variable Other

Cost

reimbur-

sement Total

Davorin Leskovar 124 - 9 1 134 121 - 22 1 144

Aleksander Vozel, M.Sc. 117 - 2 4 123 114 - 12 4 130

Dušan Drofenik, M.Sc. - - - - - 127 - 21 1 149

Total 241 - 11 5 257 362 - 55 6 423

Revenue

2014 2013

Revenue



105

Fixed remuneration includes gross salary, other pertains to holiday pay and accrued bonuses.

Supervisory Board membersFix

remuneration

Cost

reimbursement Total

Fix

remuneration

Cost

reimbursement Total

Jure Peljhan, Ph.D. 11 1 12 11 1 12

Zvonko Ivanušič, M.Sc. - - - 10 1 11

Zdenko Zanoški, M.Sc. 9 - 9 9 - 9

Bojan Šrot 9 - 9 9 - 9

Tomaž Subotič, Ph.D. 9 4 13 9 6 15

Melita Malgaj 9 1 10 9 - 9

Barbara Smolnikar, M.Sc. 9 - 9 3 - 3

Uroš Čufer, Ph.D. - - - 2 - 2

Total 56 6 62 62 8 70

2014 2013

Related party transactions 2014 Management and

Supervisory Board

members with related

parties

Senior

management

with related

parties

Shareholders

with more

than 20% of

shares

Posest,

d.o.o. Total

RECEIVABLES

Loans 110 273 8,639 12,701 21,723

Securities and derivatives - 151 - - 151

Liabilities assumed 51 58 - 149 258

Other financial assets - - 9 - 9

Total 161 482 8,648 12,850 22,141

Impaired loans - (1) - (141) (142)

Loan repayments during the year 16 47 65,801 2,424 68,288

LIABILITIES

Deposits 923 941 - 1 1,865

Debt securities and derivatives in

issue 92 102 957 - 1,151

Other financial liabilities - 39 365 41 445

Total 1,015 1,082 1,322 42 3,461

Interest income 3 15 16 220 254

Interest expense (31) (23) (199) - (253)

Impairment charges and provisions - - 68 (128) (60)



106

2013 Management and

Supervisory Board

members with related

parties

Senior

management

with related

parties

Shareholders

with more

than 20% of

shares

Posest,

d.o.o. Total

RECEIVABLES

Loans 55 260 3,711 14,220 18,246

Securities and derivatives - 151 1 - 152

Liabilities assumed 15 34 - 110 159

Performance guarantees and

counter guarantees - - 1,917 21 1,938

Other financial assets - - 7 2 9

Total 70 445 5,636 14,353 20,504

Impaired loans - (1) (68) (14) (83)

Loan repayments during the year 79 179 62,578 2,784 65,620

LIABILITIES

Deposits 915 1,057 - 3 1,975

Debt securities and derivatives in

issue 248 138 1,575 - 1,961

Other financial liabilities - 1 96 - 97

Total 1,163 1,196 1,671 3 4,033

Interest income - 5 104 269 378

Interest expense (3) (20) (777) - (800)

Impairment charges and provisions - - (1,544) (14) (1,558)

Shareholders holding more than 20% of interest are represented by companies, which met the conditions until the decision by the Bank of Slovenia on emergency measures was passed on 16 December 2014 and remain the same as in 2013. In line with the decision by the Bank of Slovenia on 16 December 2014 all qualified liabilities of the Bank were written down and the share capital was decreased to zero. Based on Article 262a. of the ZBan-1, the Bank of Slovenia implemented an emergency measure of increasing share capital, thus having the Republic of Slovenia increase the capital of the Bank by EUR 190 million and becoming its 100% owner. As at 31 December 2014 the Bank’s investments include debt securities of the Republic of Slovenia in the amount of EUR 272,796 thousand (31 December 2013: EUR 176,576 thousand), loans to the state and the Republic of Slovenia in the amount of EUR 11,980 thousand (31 December 2013: EUR 10,136 thousand), under liabilities the deposits taken from the state in the amount of EUR 221,152 thousand (31 December 2013: EUR 215,467 thousand). From the transactions with the Republic of Slovenia in 2014 the Bank attained interest income in the amount of EUR 5,515 thousand (EUR 8,737 thousand in 2013), interest expenses in the amount of EUR 3,863 thousand (EUR 7,003 thousand in 2013) and gains from financial operations in the amount of EUR 9,498 thousand (EUR 2,686 thousand in 2013). The Bank also maintains contractual relations with state related companies, for which individually significant transactions are disclosed. As at 31 December 2014 the Bank only recorded on individually significant transaction in the amount of EUR 125,800 thousand from debt securities purchased. As at 31 December 2013 the amount of individually significant loans and deposits amounted to EUR 31,000 thousand (2 transactions).



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The effects of the significant transactions above have been recorded in the income statement under interest income and expenses mainly. Interest income amounted to EUR 57 thousand in 2014, while interest expenses came in at EUR 8 thousand, while the 2013 figure stood at EUR 43 thousand. Related party transaction contractual interest rates (including government and government related entities) in % p.a.:

31 December 2013

RECEIVABLES Interest Rate Premium

Loans and advances to customers

- Reference Interest Rate Euribor 1 Month - 6 Months 0.3% to 5.5%

- Nominal Interest Rate 1.2% to 8.2%

Securities

- Reference Interest Rate Euribor 3 Months - 6 Months 0.1% to 0.2%

- Nominal Interest Rate 0% to 4.9%

LIABILITIES

Due to customers

- Reference Interest Rate Euribor 6 Months -0.1% to 2.2%


Borrowings

- Reference Interest Rate Euribor 6 Months 0.6% to 3.1%

- Nominal Interest Rate 6.3%

Bonds and Certificates of deposit


31 December 2013

RECEIVABLES Interest Rate Premium

Loans and advances to customers

- Reference Interest Rate Euribor 1 Month - 6 Months 0.3% - 5.5%

- Nominal Interest Rate 1.3% - 8.5%

Securities

- Reference Interest Rate Euribor 3 Months - 6 Months 0.1% - 0.2%


LIABILITIES

Due to customers

- Reference Interest Rate Euribor 6 Months 0.1% - 2.2%


- Base Interest Rate Base Interest Rate 0.0% - 3.0%

Deposits from banks


Borrowings

- Reference Interest Rate Euribor 6 Months 0.6% - 3.1%


Bonds and Certificates of deposit

- Reference Interest Rate Euribor 6 Months 2.0%




108

4.28 Information on the results of organisational units abroad The Group has no subsidiaries or associated companies abroad. 4.29 Events after reporting date On 12 January 2015 a work group was established to perform coordination activities with the Monitoring Trustee, with its key tasks being the monitoring and reporting on the implementation of the commitments made to the European Commission. Activities in connection with the merger of Abanka and Banka Celje were also set in motion in 2015. The banks selected an advisory company for the merger and formed task groups, which are to ascertain how the merged bank is to operate without disruption to the customers. The implementation of amended legislation in April 2015 will see the conclusion of the Bank’s cooperation with the Financial Administration of the Republic of Slovenia in relation to horizontal monitoring and the Bank will again be transferred to formal tax treatment in accordance with the provisions of the ZDavP-2. In the merger process with Abanka Aleksander Vozel, M.Sc., will, after acquiring a licence from the Bank of Slovenia and after a new member of the Banka Celje Management Board has been named, join the Management Board of Abanka, where he will continue working on the merger of both banks. 5 RISK MANAGEMENT In its operations, the Bank assumes a number of different types of risk, the amount of which depends on the type of transaction and the willingness to assume risk. The Bank mainly focuses on the performance of traditional banking operations and provides its clients with services pertaining to treasury and other financial transactions in a limited capacity. It conducts most of its operations within the Republic of Slovenia, whereas it is also present in the interbank markets of other EU member states as well as other low credit risk countries. In lending to corporate and retail clients, it is gradually withdrawing from foreign markets. To achieve strategic goals pertaining to its operations and risk management, the Bank pays particular attention to credit, liquidity and capital risks. The Bank decreased its exposure to market and interest rate risks by implementing investment policies and management processes for individual risk types. 5.1 Credit risk Credit risk is the risk of loss resulting from a debtor’s inability to meet, for any reason, its financial or contractual obligations in their entirety. This type of risk includes subcategories, namely country risk, risk of concentration and residual risk. The Risk Management Division, being an organisationally independent unit in relation to commercial units and answering directly to the Bank's Management Board, manages the implementation of the policy of assuming and managing credit risk, and regularly reports to the ALCO on the exposure to credit risk and limit consideration. The granting of loans includes commercial organisational units, the Restructuring and Recovery Division, the Risk Management Division and the Operational Support Division. Granting loans and other transactions is subject to authorisations and legal limitations. Authorisations depend on the rating of the debtor, the size of the total exposure, loan size, the total limit, collateral and deviation



109

from other conditions. The loan granting process includes different decision-making levels within the Bank. The Bank manages credit risk related to a single debtor or an investment (standalone risk), as well as the risk related to the entire credit portfolio (portfolio risk). 5.1.1 Measuring and managing credit risk The Bank measures credit risk for active on-balance sheet items and for commitments and contingent liabilities. Credit risk is assessed for financial assets measured at amortised cost, for financial assets designated at fair value and for assumed liabilities from commitments and contingent liabilities. Credit risk is the result of business, commercial and housing loans, credit card operations, transaction account overdrafts, guarantees and granted undrawn loans, as well as a consequence of the investments in debt securities and the exposure from transactions with derivatives. Loans and advances to customers Exposure to credit risk depends on three elements: (1) The probability of default or exposure to the debtor’s rating class, (2) Current exposure from statement of financial position and commitment and contingent liability items, and (3) The amount of outstanding debt paid off, in case of default. (1) The probability of default or exposure to the debtor’s rating class Internal rating systems have been developed for the classification of the Bank’s debtors into rating classes and for the measurement of probability of default for different debtor groups (legal entities, individual entrepreneurs, banks and private individuals). Debtor classification is based on the estimated qualitative and quantitative elements. In the classification of banks and sovereigns (states), external ratings are usually considered (Moody’s Investor Service, Fitch Ratings, Standard & Poor’s). Prior to every individual private loan or investment approval, each individual’s creditworthiness is assessed and the settlement of existing liabilities checked. Before approving a loan, as a rule, an inquiry is made with the use of the SISBON system (Slovene Information System on the Rating of Retail Clients), which includes data on indebtedness and settlement of liabilities pertaining to retail clients in the Slovenian banking environment. Prior to approving a transaction, the Bank classifies a debtor into a rating class, determining the probability of default and expected loss. On an ongoing – or at least on a quarterly basis – it verifies the adequacy of an individual classification in relation to the debtor’s financial standing, the settlement of due liabilities and the assessment of qualitative factors, on the basis of which the classification is retained or the debtor is classified into a higher or lower rating class. Transitional matrices are prepared regularly, showing the transitions between rating classes and measuring the number of defaults in an observed period. Estimates on the probability of default for an individual rating class are then adjusted on the basis of data pertaining to defaults.



110

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

Internal rating class

Internal rating description Risk level

Comparison with the Bank of Slovenia ratings Comparison with Moody’s Investors Service*

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

B1, B2, B3 Standard Investment grade B from Ba1 to Ba3, from B1 to B3

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

D Default** Default D Default

E

Default -

recovery** Default E Default

* Comparison prepared for banks. ** Borrowers in default are debtors who are more than 90 days overdue on any significant liability and debtors, for which the Bank estimates a small probability of the settlement of the credit liability toward the Bank in full, without it having to employ other measures to achieve repayment. Defaulting counterparties are classified as non-performing assets.

(2) Current exposure from statement of financial position and commitment and contingent liability

items The level exposure in items of the statement of financial position (loans) and the level of commitment and contingent liability exposures equal their carrying amount. (3) The amount of outstanding debt paid off, in case of default The loss amount in case of default depends on the amount of exposure and the collateral obtained. The Bank strives toward securing receivables to minimise loss. It is important for the Bank to begin procedures for the settlement of overdue, unpaid receivables as soon as possible. Debt securities In managing credit risk from debt securities, the Bank utilises the external ratings (Moody's Investor Service, Fitch Ratings, Standard & Poor's) of securities and issuers. In cases where the fair value of an individual security is significantly lower than the original cost and the drop in value is attributable to reasons pointing to objective evidence of impairment, the Bank recognises the impairment charge on the investment. Assumed commitments and contingent liabilities Assumed commitments and contingent liabilities (off-balance sheet items) include the undrawn part of loans granted, guarantees and letters of credit. By issuing these instruments, the Bank commit to providing cash to the counterparty, when so instructed. The potential exposure to loss from these instruments pertains to credit risk. The same methodologies are applied in measuring credit risk from assumed commitments and contingent liabilities as are used in measuring credit risk pertaining to loans. Derivatives The exposure to credit risk from derivatives pertains to exposure to counterparty risk, namely the risk of a counterparty defaulting prior to final settlement of cash flow from the transaction. The exposure to credit risk equals the credit replacement value, calculated on the basis of the current exposure method. The Bank enters into derivative instrument agreements with prime debtors, mainly in foreign currency transactions and IRS. In the event of increased credit risk, the Bank tries to acquire additional collateral. The exposure to credit risk is managed within the framework of limits pertaining to lending agreements, as approved by the Credit Committee. Limit definition and monitoring The Bank calculates limits for loans to individual debtors and to groups of related entities on the basis of data on the existing and future operations. In doing so, it takes into consideration the legal



111

requirements in connection with the largest exposure limits related to an individual entity or a group of related entities, which must not exceed 25% of the Bank’s capital, while taking into account its own policies as well. The diversification of exposure to individual debtors or groups of related entities is one of the objectives the Bank is working toward, which is why it is reducing the number and value of exposures to individual debtors or groups of related entities. Limits are monitored on an ongoing basis and are adjusted in relation to the risk profile of the debtor or a group of related entities and the sector in which the debtor is active. It focuses on the debtor’s cash flow, available for the repayment of debt. Total limits and their possible increases or decreases are approved by the Bank’s Credit Committee. Exposures exceeding 10% of the Bank's capital require the approval of the Supervisory Board. The Bank has prepared an indebtedness ceiling calculation methodology for corporates, for banks and for large exposures to private entrepreneurs. For lower exposures to private entrepreneurs and for exposures to private individuals, creditworthiness is assessed prior to the approval of a new loan. In addition to limits set for individual debtors or groups of related entities, the Bank also implements structural limits according to sector or category of debtor, according to geographic area and according to industry - thus limiting the risk of portfolio concentration and of exposure to high risk industries or regions. Structural limits are usually confirmed annually at ALCO meetings, with their consideration and trends monitored on the basis of monthly reports. If required, due to economic conditions and exposure to risk, these limits may also be modified. Collateral The Bank’s exposure to credit risk is reduced with the implementation of policies regarding collateral. To minimise loss in the event of default, the Bank tends to acquire adequate collateral from the borrower, such as a mortgage on commercial or residential real estate, pledges of financial property (bank deposits, securities) or the acquisition of personal credit insurance by an adequate provider. Other forms of collateral, such as physical collateral, inventories and cash claims, are considered to be of lesser quality. Usually long-term loans are collateralised, with a large portion of short-term loans collateralised as well, while the only ones not requiring collateral being those granted to borrowers exhibiting a higher credit rating. Should a borrower's credit rating deteriorate or the fair value of collateral decrease, the Bank begins negotiations to obtain additional collateral or to decrease exposure. The significant types of appropriate collateral that the Bank utilises and the related valuation: - financial assets used as collateral (bank deposits at the Bank or cash-assimilated instruments,

debt securities, issued by sovereigns, central banks or institutions, equity and other securities, listed on stock exchanges), valued at market and revalued on a daily basis;

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

sector entities, institutions, insurance companies and companies with a high credit rating (100% percent of the value is considered).

The macroeconomic conditions and the circumstances prevailing in the real estate and capital markets in 2014 required a great deal of attention to be directed at monitoring the fair value of collateral, especially commercial and residential real estate. Exposures collateralised with securities continued to decrease with loans maturing and collateral being liquidated in the collection process. To reduce credit risk, the Bank does not execute balance sheet netting or use credit derivatives. Estimating credit risk losses A methodology for the estimation of credit risk losses has been prepared in accordance with the IFRS, which is updated at least once a year and adapted to the economic conditions. Continuously, or at least on a quarterly basis, estimations are made as to whether there is objective evidence of



112

impairment relating to financial assets and liabilities assumed on the basis of commitments and contingent liabilities. Should such evidence exist, the Bank must calculate the amount of loss due to impairment and make provisions for commitments and contingent liabilities. The methodology of estimating impairment charges is set up according to type of debtor: legal entities and private entrepreneurs, retail clients, banks and savings banks and prime debtors. (1) Assessment of impairment charges for exposure to legal entities and private entrepreneurs The impairment charge may be calculated individually on the basis of the estimated future cash flows or collectively on the basis of historical data on defaults and losses for groups of exposures with similar characteristics, adjusted to account for the current situation, thus reflecting the effects of recent operating conditions. Individual estimates pertain to assets individually exhibiting significant characteristics (exposures above EUR 650,000) and showing signs of impairment (exposures classified lower than D and E). If there are no sign of impairment, the exposure is classified into a group of financial assets with similar characteristics and the impairment is assessed collectively. Impairment is also assessed individually for financial assets which have already been recognised as impaired (exposures classified D and E). Impairment is appraised on the basis of estimated future cash flows, including expected repayment from liquidation of collateral. For exposures not exhibiting signs of impairment (exposures classified A1, A2 and A3, B2 and B3, C1 and C2), the charge is assessed collectively on the basis of historical default data and loss estimates. The estimation percentage includes a general risk factor, reflecting current economic conditions and thus impacting the probability of defaults. The value of the general risk factor is assessed at least once a year on the basis of fluctuations in the general price levels, interest rates, the settlement of liabilities, fluctuations in the financial and capital markets as well as the real estate market conditions, economic activity, conditions in the job market and the trends in the energy and raw material markets. (2) Assessment of impairment charges for exposure to retail The Bank classifies financial assets into rating groups A, B, C, D and E on the basis of the settlement of liabilities. Individually significant financial assets (exposures above EUR 400,000), where there is objective evidence to suggest there is a need for the establishment of an impairment, are impaired individually. The same applies to financial assets already recognised as impaired (exposures classified C, D and E). For the purpose of collective impairment, financial assets are divided into homogenous groups on the basis of the settlement of liabilities and in accordance with product groups (housing loans, consumer loans, quick loans, account overdrafts). Impairment charge percentages are based on past data and adjusted to reflect current conditions, thus differing for every product group and each rating class. Impairment charge percentages are reviewed once a year.

(3) Assessment of impairment charges for exposures to banks and prime debtors For banks, impairment is estimated solely on an individual basis. Exposures to prime debtors (sovereigns and central banks) are assessed using the collective or individual approaches. Increased credit risk monitoring system (ICR) The Bank has set up a loan monitoring system, which allows for a timely detection of increased credit risk. Based on the assessment of qualitative and quantitative criteria, pointing to increased credit risk, the Bank rates debtors in five groups (ICR1 – watch list, ICR2 – problem exposure, ICR3 – debtors in recovery procedure, bankruptcy, erasure, ICR4 – renegotiated exposure and ICR5 – comprehensive restructuring). Determining the group of increased credit risk is the basis for defining the Bank’s further activities aimed at reducing exposure to credit risk. In the event of default, the Bank then ascertains direct and indirect responsibility.



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Managing credit risk in 2015 Credit risk remains one of the most significant risk types faced by the Bank. We estimate that the recovery of the domestic economy and the economies of European members will be slow, which is why the exposure to credit risk remains high. The Bank will continue implementing measures to mitigate the effects of the crisis on its financial position and its operational results. The Bank will continuously monitor debtor operations and their creditworthiness, the value of the collateral and continuously determine adequate impairments. It will actively attract new clients with a higher rating and creditworthiness, all the while financing investments in the core business of companies and export oriented companies, using an appropriate investment policy to stimulate lending activities to retail. The Bank will work on financial restructuring where it positively assesses the business model. With timely identification of increased credit risk and with continued active recovery of overdue claims and the collateral called it will attempt to decrease the value and the share of overdue non-performing loans. The Bank will continue to follow its goal of diversifying the credit portfolio according to debtors, activities and regions. It will limit investments in the activities and regions with higher risk levels. Slovenia remains the core market. It will continue to decrease exposure to the SEE region.



114

5.1.2 Maximum credit risk exposure

Maximum

exposure to

credit risk

Fair value of

collateral2

Maximum

exposure to

credit risk

Fair value of

collateral2

Statement of financial position assets 1,431,056 1,344,555 1,577,447 1,491,620

Loans 945,562 1,204,509 1,248,168 1,418,398

Loans to the state or local communities 67,711 13,922 65,625 13,611

Loans and advances to banks 52,000 - 5,822 5,000

Loans and advances to private individuals 291,417 468,505 309,577 522,960

- overdraft accounts and cards 34,578 27,137 35,896 28,457

- housing loans 164,172 326,584 170,269 366,158

- consumer and other loans 92,258 114,559 102,893 128,092

- unauthorised account overdrafts 409 225 519 253

Loans to private entrepreneurs 29,801 67,315 41,683 61,015

Loans to companies1

502,700 654,767 823,172 815,812

- large companies 227,207 237,332 382,556 304,612

- small and medium sized enterprises (SME) 267,562 399,731 388,104 456,316

- other 7,931 17,704 52,512 54,884

Other financial assets 1,933 - 2,289 -

Financial assets held for trading 4,636 - 7,921 -

Derivatives 4,636 - 5,934 -

Debt securities - - 1,987 -

Available for sale financial assets 479,434 140,046 317,921 73,222

Debt securities 479,434 140,046 317,921 73,222

Derivative financial intruments designated for

hedging 1,424 - 3,437 -

Commitments and contingent liabilities 100,608 36,644 117,796 44,740

Financial guarantees 17,865 7,265 26,003 14,180

Other off-balance sheet exposures 82,743 29,379 91,793 30,560

Total 1,531,664 1,381,199 1,707,288 1,551,371


1 Size of companies defined in accordance with the ZGD-1; the micro, small and medium size enterprises (SME) comprise those which

fulfil two of the following criteria: - average number of employees is less than 250, - net sales income does not exceed EUR 35,000 thousand, - value of assets does not exceed EUR 17,500 thousand. Large companies are defined as those which do not fit the SME criteria. ’’Other’’ shows regional and local state levels, public sector entities, new companies, companies in receivership, societies and other

debtors, which do not provide information on their size. 2

Fair value of collateral equals:

- market value of financial assets held as collateral, - 100% of the value of insurance company guarantees, bank guarantees, state and municipal guarantees and prime rated companies, - values of residential and commercial real estate are equal to market values of comparable real estate.

The table shows the Bank’s maximum credit risk exposure from loans, investments in securities and commitments and contingent liabilities as at 31 December 2014 and 31 December 2013. In 2014, the exposure to credit risk decreased in comparison with the previous year due to the transfer of assets to the BAMC, due to regular repayment of loans, recovery activities, write-off and additional impairment charges. The transfer of assets to the BAMC resulted in an improved credit portfolio, the decreased exposures to corporates, to Slovenia and to the riskier sectors. Loans decreased by 24%, mainly loans to corporates and to a lesser extent to retail and private entrepreneurs. Loans to banks and exposures from debt securities increased. Commitments and contingent liabilities went down by 19% due to a reduced volume of unused loan commitments and financial guarantees.



115

By carefully implementing investment policies in the harsher economic conditions and by managing credit risk, the Bank achieved the following results in 2014: - as at 31 December 2014 loans that were classified into the highest of investment grade rating

classes, namely A and B, represented 67.20% of all loans (31 December 2013: 57.12%), impairment charge coverage dropped to 14.07% (31 December 2013: 21.83%);

- the coverage of exposure with adequate collateral decreased and reached 60% of all loans as at 31 December 2014 (31 December 2013: 69%);

- 70% of the Bank’s investments in debt instruments is rated at least Ba1; - the income statement shows impairment charges amounting to EUR 60,797 thousand (2013:

EUR 213,997 thousand), wherein impairment charges for loans measured at amortised cost represent EUR 55,036 thousand (2013: EUR 207,838 thousand) and securities impairment charges amount to EUR 5,761 thousand (2013: EUR 6,159 thousand). Provisions for commitments and contingent liabilities amounted to EUR 3,555 thousand (2013: EUR 57 thousand). Impairment charges were created due to the deteriorated financial position of the debtors, the liabilities due, as well as the decrease in the fair values of collateral and financial assets.

5.1.3 Exposure to credit risk according to type of collateral The following is a disclosure of all loans (to the state and local communities, to banks, to retail, to private entrepreneurs and to corporates), except other financial assets. Exposure from loans The table below lists loans according to type of collateral. Secured loans are the ones, where the fair value of collateral is greater or equal to the carrying amount of the loan. Unsecured loans are represented by loans, which are entirely unsecured and by the parts of loans, where the fair value of collateral is not sufficient for their repayment.


Collateral:- deposits 2,959 4,524

- government guarantee 41,841 52,498

- insurance company and bank guarantee 119,104 120,256

- securities 16,335 40,867

- residential real estate 158,554 188,168

- commercial real estate 277,114 443,391

- other* 12,953 19,877

Secured loans - carrying amount 628,860 869,581

Unsecured loans - carrying amount 314,769 376,298

Loans - carrying amount 943,629 1,245,879

*Other collateral mainly refers to guarantees by A rated guarantors - corporates and to physical collateral to a lesser extent.

Loans

For the most part, loans are secured with commercial real estate, followed by residential real estate as well as insurance company and bank guarantees. The latter are mainly used to secure retail loans. In 2014 the share of loans, secured with commercial and residential real estate decreased due to the transfer of assets to the BAMC and on account of a reduced fair value of property and the share of loans secured with bank deposits, government guarantees by the Republic of Slovenia and with securities. In 2014 the Bank redeemed collateral (securities, real estate property, etc.) to ensure repayment of loans granted. Securities were sold on the regulated market, while property and other assets were



116

sold in the recovery process (court and out-of-court proceedings, bankruptcies). The Bank does not have repossessed collateral in its books of accounts. According to loan type

31 December 2014

Loans to the

state and local

communities

Loans to

banks

Loans to

private

individuals

Loans to

private

entrepreneurs

Large

companies SME Other

Collateral:

- deposits - - 1,508 139 - 1,312 - 2,959

- government

guarantee 11,050 - - - 30,008 783 - 41,841

- insurance company

and bank guarantee - - 117,821 1,252 - 5 27 119,105

- securities - - 1,487 - 13,120 1,728 - 16,335

- residential real

estate 266 - 132,740 5,097 3,619 16,338 494 158,554

- commercial real

estate 304 - 6,590 16,996 97,116 149,620 6,488 277,114

- other - - 580 432 858 11,061 22 12,953

Secured loans -

carrying amount 11,620 - 260,726 23,916 144,721 180,847 7,031 628,861

Unsecured loans -

carrying amount 56,091 52,000 30,691 5,885 82,486 86,715 900 314,768

Loans - carrying

amount 67,711 52,000 291,417 29,801 227,207 267,562 7,931 943,629

31 December 2013

Secured loans -

carrying amount 11,625 5,000 278,640 31,110 231,551 267,531 44,124 869,581

Unsecured loans -

carrying amount 54,000 822 30,937 10,573 151,005 120,573 8,388 376,298

Loans - carrying

amount 65,625 5,822 309,577 41,683 382,556 388,104 52,512 1,245,879

Loans to companies

Total

5.1.4 Credit risk exposure according to rating class Exposure from loans

Loan amount

Impairment

amount Loan amount

Impairment

amount

Total 1,098,089 (154,460) 1,593,751 (347,872)

Prime (A) 47.47% 0.91% 35.78% 0.33%

Standard (B) 19.73% 2.57% 21.34% 1.68%

Substandard (C) 10.97% 10.97% 11.39% 6.74%

Default (D) 10.89% 33.73% 10.51% 24.11%

Default (E) - recovery 10.94% 51.82% 20.97% 67.14%

Total 100% 100% 100% 100%

Structure


Gross exposure to loans as at 31 December 2013 amounted to EUR 1,098,089 thousand, representing a 31% drop as compared with the previous year (31 December 2013: EUR 1,593,751 thousand). After accounting for impairment charges, the loan carrying amount is EUR 943,629 thousand, being 24% less than in the previous year (31 December 2013: EUR 1,245,879 thousand). Portfolio quality improved due to the transfer of assets to the BAMC, with the percentage of loans in



117

the highest rating classes (classes A and B) increasing to 67.20% (31 December 2013: 57.12%). Impairment charge coverage decreased to 14.07% (31 December 2013: 21.83%). Gross exposure to non-performing loans as at 31 December 3014 amounted to EUR 243,637 thousand (22% of the credit portfolio) or a net of EUR 111,159 thousand (31 December 2013: gross exposure EUR 527,023 thousand or 33% of the credit portfolio and a net of EUR 206,845 thousand). The stated net exposure from non-performing assets is secured with collateral, the fair value of which amounted to EUR 197,889 thousand on 31 December 2014. According to loan class

Rating class

Loans to the

state and local

communities

Loans to

banks

Loans to

private

individuals

Loans to

private

entrepreneurs

Large

companies SME Other Total

Prime (A) 66,733 52,000 280,350 9,449 52,154 60,120 494 521,300

Standard (B) 136 - 2,384 12,264 87,534 112,969 1,395 216,682

Substandard (C) - - 9,355 4,403 73,625 33,080 1 120,464

Default (D) - - 3,336 3,581 46,217 66,339 58 119,531

Default (E) -

recovery 2,876 - 14,498 4,567 - 83,987 14,184 120,112

Impairments (2,034) - (18,506) (4,463) (32,323) (88,933) (8,201) (154,460)

Total 67,711 52,000 291,417 29,801 227,207 267,562 7,931 943,629

Loans to companies31 December 2014

Rating class

Loans to the

state and local

communities

Loans to

banks

Loans to

private

individuals

Loans to

private

entrepreneurs

Large

companies SME Other Total

Prime (A) 62,894 5,822 293,351 13,279 114,591 79,404 984 570,325

Standard (B) 171 - 7,109 18,645 144,717 167,205 2,218 340,065

Substandard (C) 2,818 9,204 5,973 81,476 70,560 11,494 181,525

Default (D) 4,974 1,109 102,439 59,049 (1) 167,570

Default (E) -

recovery 9,898 7,747 19,838 140,279 156,504 334,266

Impairments (258) - (14,959) (5,070) (80,505) (128,393) (118,687) (347,872)

Total 65,625 5,822 309,577 41,683 382,556 388,104 52,512 1,245,879

Loans to companies31 December 2013

Loans to retail decreased by 6% as compared to the previous year due to the decrease of personal consumption and housing loans. Loan quality remains high (31 December 2014: 91.23% of loans were classified A and B; 31 December 2013: 92.58%). Loans to private entrepreneurs decreased by 28%, with their quality also having dropped somewhat. The share of loans classified A and B fell to 63.37% (31 December 2013: 68.28%). Lending to the corporate sector decreased by 39% compared with the previous year, with the quality having improved. The share of loans classified A and B increased to 49.78% (31 December 2013: 44.24%).



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Credit exposure to banks increased in 2014 due to interbank operations, with exposure to the state and local communities increasing also. The Bank mainly deals with low risk sovereign entities and banks. 5.1.5 Credit risk exposure according to impairment and maturity Loans according to impairment and maturity

Loans to the

state and local

communities

Loans to

banks

Loans to

private

individuals

Loans to

private

entrepreneurs

Loans to

companies Total

Loans neither past due -

nor impaired 66,858 52,000 291,257 25,831 417,537 853,483

Loans not past due -

impaired - - 2,416 3,414 96,097 101,926

Loans past due - nor

impaired 11 - 833 285 3,833 4,962

Loans past due -

individually impaired 2,876 - 15,417 4,734 114,690 137,718

Impairments (2,034) - (18,506) (4,463) (129,457) (154,460)

Total 67,711 52,000 291,417 29,801 502,700 943,629

31 December 2014

Loans to the

state and local

communities

Loans to

banks

Loans to

private

individuals

Loans to

private

entrepreneurs

Loans to

companies Total

Loans neither past

due - nor impaired 63,071 5,822 308,355 37,131 647,026 1,061,405

Loans not past due -

impaired - - 1,246 813 117,535 119,594

Loans past due - not

impaired 2,812 - 1,313 767 25,639 30,531

Loans past due -

individually impaired - - 13,622 8,042 360,557 382,221

Impairments (258) - (14,959) (5,070) (327,585) (347,872)

Total 65,625 5,822 295,955 33,641 462,615 863,658

31 December 2013

The decrease pertaining to loans due and to unmatured impaired loans is the result of assets having been transferred to the BAMC.



119

Loans and advances neither past due nor impaired

Rating class

Loans to the

state and local

communities

Loans to

banks

Loans to private

individuals

Loans to private

entrepreneurs

Loans to

companies

Prime (A) 66,722 52,000 279,873 9,414 111,910

Standard (B) 136 - 2,294 12,092 201,518

Substandard (C) - - 9,090 4,325 104,110

Total 66,858 52,000 291,257 25,831 417,538

31 December 2014

Rating class

Loans to the

state and local

communities

Loans to

banks

Loans to private

individuals

Loans to private

entrepreneurs

Loans to

companies

Prime (A) 62,882 5,822 292,789 13,180 194,893

Standard (B) 171 - 6,691 18,207 312,651

Substandard (C) 18 - 8,875 5,744 139,482

Total 63,071 5,822 308,355 37,131 647,026

31 December 2013

Loans and advances not past due but impaired


Rating class

Loans to

private

individuals

Loans to

private

entrepreneurs

Loans to

companies

Loans to

private

individuals

Loans to

private

entrepreneurs

Loans to

companies

Default (D, E) 2,416 3,414 96,097 1,246 813 117,535

Total 2,416 3,414 96,097 1,246 813 117,535

The item mainly includes restructured loans, where the Bank recognised significant impairment (loss). Loans and advances past due but not impaired

Loans to the

state and

local

communities

Loans to

priv ate

indiv iduals

Loans to

priv ate

entrepreneurs

Loans to

companies

Loans to the

state and

local

communities

Loans to

priv ate

indiv iduals

Loans to

priv ate

entrepreneurs

Loans to

companies

Receivables up to

30 overdue 11 496 175 2,422 12 656 472 9,181

Receivables over 30

to 90 days overdue - 337 105 1,368 - 412 260 11,045

Receivables over 90

days overdue - - 5 43 2,800 245 35 5,413

Total 11 833 285 3,833 2,812 1,313 767 25,639




120

Loans and advances past due and individually impaired

Loans to the

state and local

communities

Loans to

private

indiv iduals

Loans to

private

entrepreneurs

Loans to

companies

Loans to

private

indiv iduals

Loans to

private

entrepreneurs

Loans to

companies

Receivables up to 30

overdue 2,876 1,564 367 6,580 2,402 592 30,531

Receivables over 30

to 90 days overdue - 420 54 8,806 116 180 22,216

Receivables over 90

days overdue - 13,433 4,313 99,304 11,104 7,270 307,810

Total 2,876 15,417 4,734 114,690 13,622 8,042 360,557


5.1.6 Credit risk exposure according to impairment approach Exposure from loans

Loans Impairments Loans Impairments Loans Impairments Loans Impairments

Prime (A) 469,300 (1,411) 52,000 - 564,502 (1,153) 5,822 -

Standard (B) 216,682 (3,963) - - 340,087 (5,854) - -

Substandard (C) 116,091 (16,942) 4,373 - 165,558 (22,982) 15,969 (460)

Default (D) 6,426 (2,804) 113,105 (49,303) 3,700 (1,477) 163,871 (82,386)

Default (E) -

recovery 15,091 (12,402) 105,021 (67,635) 12,640 (10,471) 321,602 (223,089)

Total 823,590 (37,522) 274,499 (116,938) - 1,086,487 (41,937) 507,264 (305,935)

Fair value of

collateral

Rating class

Collective approach Individual approach Collective approach Individual approach

1,046,017 158,492 1,180,694 237,704


The Bank recognises impairment charges in accordance with the internal methodology on creation of impairment charges and provisions in line with the IFRS. Individually significant exposures and exposures, where there is objective evidence of impairment are impaired individually on the basis of estimated future cash flows, while other exposures are impaired collectively. As at 31 December 2014, individual assessment was conducted on 25% of the Bank’s credit portfolio, representing 76% of impairment charges (31 December 2013: 32% of the credit portfolio or 88% of impairment charges).



121

5.1.7 Concentration of exposures according to region and industry Credit risk exposure according to region The table below shows credit exposure according to geographical regions. The exposure according to region is determined in accordance with the address of the debtor's headquarters.

31 December 2014 Slovenia EU SE Europe Other regions Total

Loans and advances to the state

and local communities 69,745 - - - 69,745

Loans and advances to banks - 52,000 - - 52,000

Loans and advances to private

individuals 305,719 3,983 146 75 309,923

Loans to private entrepreneurs 34,264 - - - 34,264

Loans to companies: 536,097 67,235 23,811 5,014 632,157

- large companies 250,143 4,373 - 5,014 259,530

- small and medium sized

enterprises (SME) 269,822 62,862 23,811 - 356,495

- other 16,132 - - - 16,132

Total loans 945,825 123,218 23,957 5,089 1,098,089

Impairments (106,012) (31,696) (16,552) (200) (154,460)

Total net loans 839,813 91,522 7,405 4,889 943,629

31 December 2013

Loans and advances 1,481,404 82,197 26,130 4,020 1,593,751

Impairments (314,829) (21,692) (11,299) (52) (347,872)

Total net loans 1,166,575 60,505 14,831 3,968 1,245,879

From the regional point of view, exposure to Slovenia decreased in 2014, while credit exposure to the EU increased due to the increased exposure to banks. The exposure to the SEE continues to decrease, with the Bank having created additional impairment charges. A target limit is in place for the highest allowed exposure to the region.



122

Credit risk exposure according to industry

31 December 2014 Manuf acturing

Commerce

and motor

v ehicle

repairs Construction Finance Real estate

Prof essional,

scientif ic and

business

industry Other

Priv ate

indiv iduals Total

Loans and advances

to the state and local

communities - - - 10,048 764 136 58,797 - 69,745

Loans and advances

to banks - - - 52,000 - - - - 52,000

Loans and advances

to private individuals - - - - - - - 309,923 309,923

Loans to private

entrepreneurs 7,648 3,141 8,950 77 622 2,058 11,768 - 34,264

Loans to companies: 169,792 126,573 43,214 29,812 71,835 84,693 106,238 - 632,157

- large companies 98,275 58,328 2,990 13,346 8,938 31,072 46,581 - 259,530

- small and

medium sized 65,983 65,039 37,929 16,466 61,966 52,233 56,879 - 356,495

- other 5,534 3,206 2,295 - 931 1,388 2,778 - 16,132

Total loans 177,440 129,714 52,164 91,937 73,221 86,887 176,803 309,923 1,098,089

Impairments (22,164) (25,105) (21,246) (4,485) (29,003) (21,151) (12,800) (18,506) (154,460)

Total net loans 155,276 104,609 30,918 87,452 44,218 65,736 164,003 291,417 943,629

31 December 2013

Loans and advances 263,562 191,490 131,996 167,369 96,059 165,297 253,441 324,537 1,593,751

Impairments (54,538) (39,217) (67,147) (83,621) (26,787) (47,072) (14,531) (14,959) (347,872)

Total net loans and

advances 209,024 152,273 64,849 83,748 69,272 118,225 238,910 309,578 1,245,879

In terms of exposure by industry, exposure to the manufacturing industry remains highest, being quite a diversified group in itself. In 2014, the Bank was able to decrease exposure to construction, financial mediation and professional, scientific activities and commerce the most. In 2015, the Bank will continue to pursue the objective of diversified investments according to industry and limit or reduce investments in the higher risk sectors.



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

31 December 2014

Issuer Rating by Moody's

Available for sale

financial assets

Governments Aaa to Aa3 41,179

Ba1 272,795

Multilateral development

banks Aaa 8,101

Regional units and public

sector entities Aaa to Aa1 2,005

unrated * 13,274

Banks Aaa to Aa3 8,008

Ba1 4,697

Baa1 4,979

Companies unrated * 124,396

Total 479,434

* All unrated exposures have been classif ied into the highest rating class A in accordance w ith internal methodologies.

Unrated exposures to corporates are collateralised w ith the guarantee of the Republic of Slovenia.

31 December 2013

Issuer

Rating by

Moody's

Financial assets

held for trading

Available for sale

financial assets Total financial assets

Governments Aaa to Aa3 - 47,388 47,388

Baa1 - 176,576 176,576

Multilateral development

banks Aaa - 8,173 8,173

Regional units and public

sector entities Aaa to Aa1 - 12,088 12,088

unrated * - 13,523 13,523

Banks Aaa to Aa3 - 46,646 46,646

A3 - 4,840 4,840

Ba1 - 4,651 4,651

Caa2 1,987 - 1,987

Companies unrated * - 4,037 4,037

Total 1,987 317,921 319,907

* All unrated exposures have been classif ied into the highest rating class A in accordance w ith internal methodologies, w ith

the exception of one bond, w hich has been impaired.

The Bank impaired one debt financial instrument in 2014 due to increased credit risk (a corporate bond, which at the end of 2014 was no longer part of the Bank’s financial instruments). All exposures from debt financial instruments are unmatured. The Bank holds 70% of investments in sovereign, bank and public sector debt securities with a rating no lower than Ba1. As at 31 December 2014 the Bank holds investments in Slovenia (84% of all investments) and in the low risk EU countries as well as Norway (16% of all investments).



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5.1.9 Exposure to credit risk from derivatives


Fair value Fair value

Derivatives - trading

Futures and forw ards - 126

Interest rate sw aps 4,573 5,782

Currency sw aps 63 26

Total 4,636 5,934

Derivatives - hedging

Interest rate sw aps 1,424 3,437

Total 1,424 3,437

Exposure to credit risk from derivatives is based on the possibility of a counterparty failing to deliver. The Bank enters into IRS transactions with prime rated foreign banks (at least Baa2 according to Moody’s ratings). The volume of these transactions decreased in 2014. Currency swaps are also done with foreign banks and, to a lesser extent, with corporates. The Bank no longer enters into new securities forward agreements. 5.2 Market risk Market risk is the risk of change in the fair value of financial instruments due to changes in risk factors, being interest rates, currency rates and financial instrument prices. The most significant risk type within market risk is positional risk pertaining to equity and debt financial instruments and derivatives. Exposure to currency risk is low. The Bank assesses market risk as the risk it is exposed to when performing trading activities and the risks it is exposed to in non-trading activities pertaining to market risk factors. Monitoring and reporting on the amount of exposure to market risk is done using limit systems and using a number of different methods to measure market risk. 5.2.1 Measuring and managing market risk The monitoring of positional risk (the risk of change in value) pertaining to equity and debt securities is performed at the level of the entire portfolio as well as at the individual transaction level. The Bank performs scenarios based on extraordinary conditions, which reflect the effect that extraordinary, but plausible, conditions in the financial markets have on the value of financial instruments. The Bank manages exposure to positional risk by also utilising a system of limits. These are basically separated into trading and banking book limits and then further according to financial instrument type, region and issuer. Exposure to positional risk is also measured at individual transaction level, which is why stop limits have been put in place within the limit system, defined on the basis of the Bank’s willingness to assume risk. Currency risk is measured daily by monitoring net positions according to individual foreign currencies. The exposure to currency risk is monitored with the use of foreign currency position limits, which define the maximum level of an open net position according to an individual currency.



125

The Bank enters into currency and interest rate derivative transactions. Its basic policy in the area of derivatives’ trading is to enter into transactions to hedge own positions and the positions of customers, whereby the latter are hedged with counter positions. Transactions are entered into with prime foreign banks. In measuring market risk, the Bank calculates capital requirements pertaining to currency risk and market risk for all items held for trading in line with CRR/CRD IV. On 31 December 2014, the Bank prepared a simulation of the effect that a decrease of 20% in the market prices of all equity instruments from the trading and banking book and an increase in interest rates by 100 basis points for all debt securities from the trading and banking book would have on the income statement and on capital. Results of the analysis are shown in the table below:

Debt

securities

Equity

securities Total

Debt

securities

Equity

securities Total

Effect on income statement - - - (70) (64) (134)

Effect on equity (9,907) (592) (10,499) (6,226) (1,917) (8,143)

Total (9,907) (592) (10,499) (6,296) (1,981) (8,277)


5.2.2 Sensitivity analysis for financial instruments included in the banking book The interest rate sensitive financial instruments in the banking book are analysed using the method of interest rate gaps, where the amount of the gap in an individual time frame is also limited. Exposure to interest rate risk is also measured using sensitivity analyses and stress tests, prepared on the basis of the estimated duration gap. Based on these two methods, different analyses of interest rate sensitivity are performed, including stress scenarios. The sensitivity analysis of all interest rate sensitive financial instruments in the banking book as at 31 December 2014 shows that with a parallel increase of the interest curve by 50 basis points, the net present value of the said financial instruments would increase by EUR 85 thousand (31 December 2012: EUR 2,789 thousand). The effect on the net present value of financial instruments is calculated using the method of duration gaps between financials assets and liabilities in the banking book. On 31 December 2014 the Bank prepared a simulation of the effect of a change in the interest rate on the income statement, where it assumed an immediate increase of interest rates by 50 basis points. The analysis included all interest sensitive transactions maturing or are subject to interest fixing within a one year interval. On the liabilities side, demand deposits have been excluded as the Bank estimates that these pertain to liabilities not sensitive to interest rates. Floating interest rate transactions assume a change in the reference interest rate, however not in the credit premium. In the simulation of a parallel increase in the interest curve by 50 basis points, the effect on the amount of interest is EUR 1,777 thousand.



126

The results of the analysis are shown in the table below.

31 Dec 2014 31 Dec 2013

Effect on interest income 5,398 6,546

Effect on interest expenses 3,621 5,493

Net effect 1,777 1,053

5.2.3 Currency risk Foreign currency risk is a financial risk and represents the danger of financial loss due to changes in currency rates. It is based on the open foreign currency positions. Thus a change in rates directly affects asset value as well as foreign currency denominated liabilities, expressed in the reporting currency. The Bank encounters foreign currency risk in international operations, being the result of: - the assets and the liabilities of the Group are denominated in different currencies; - the Group trades foreign currencies for its own account. The risk of foreign currency exposure depends on the net foreign currency positions, on portfolio structure, the volatility of foreign currencies and on the correlation between these variables. The table below shows exposure to currency risk on 31 December 2014. It shows the carrying amounts of assets and liabilities according to currency.



127

Exposure to foreign currency risk

31 December 2014 USD CHF Other EUR Total

Cash and balances w ith Central Banks and demand deposits

w ith commercial banks 5,563 1,218 3,644 243,624 254,049

Financial assets held for trading - - - 4,636 4,636

Available for sale f inancial assets - - - 482,784 482,784

Loans and advances 1,867 9,740 1 933,954 945,562

- loans and advances to banks (excluding demand deposits) - - - 52,000 52,000

- loans and advances to customers 1,867 9,739 - 880,023 891,629

- other f inancial assets - 1 1 1,931 1,933

Derivative f inancial instruments designated for hedging - - - 1,424 1,424

TOTAL ASSETS 7,430 10,958 3,645 1,666,422 1,688,455

Financial liabilities held for trading - - - 796 796

Financial liabilities at amortised cost 7,670 5,842 3,609 1,484,219 1,501,340

- deposits from banks and central banks 302 127 63 261 753

- due to customers 7,096 5,715 3,278 1,233,734 1,249,823

- borrow ings from banks and central banks - - - 136,291 136,291

- borrow ings from other customers - - - 1,498 1,498

- debt securities in issue - - - 106,776 106,776

- other f inancial liabilities 272 - 268 5,659 6,199

TOTAL LIABILITIES 7,670 5,842 3,609 1,485,015 1,502,136

Net balance sheet position on 31 December 2014 (240) 5,116 36 181,407 186,319

Net off-balance sheet position on 31 December 2014 - FX

Derivatives 20 (5,071) 321 4,699 (31)

31 December 2013

TOTAL ASSETS 6,725 19,683 3,518 1,764,575 1,794,501

TOTAL LIABILITIES 8,029 6,103 3,111 1,745,797 1,763,040

Net balance sheet position on 31 December 2013 (1,304) 13,580 407 18,778 31,461

Net off-balance sheet position on 31 December 2013 - FX

Derivatives 1,361 (13,733) (95) 12,412 (55)

The table makes evident the relatively high level of the open long CHF position. The Bank manages it using foreign currency derivatives (e.g. foreign currency swaps) and by FX trading. On 31 December 2014, the off-balance sheet position in CHF derivatives was short in the amount of EUR 5,071 thousand. Taking into account the foreign currency derivative transactions and the purchases and sales, currency positions are nearly closed, which is why the effects of changes in exchange rates are negligible. 5.2.4 Interest rate risk Interest rate risk represents the exposure of the Bank’s to unfavourable interest rate fluctuations, thus impacting the income statement as well as the economic value of receivables, liabilities and commitments and contingent liabilities or the economic value of the Bank's capital. For the most part, exposure is derived from interest rate sensitive assets with different maturities and dynamics of interest rate changes as compared to interest sensitive liabilities. The interest rate risk the Bank was exposed to in 2014 was based on the unmatched maturities and interest rate fixings between interest rate sensitive assets and liabilities. The Bank is reducing exposure to interest rate risk with interest rate derivatives using hedge accounting to close larger



128

transactions, which had a significant impact on the size of the interest rate gap. The plan is to continue closing interest rate gaps in 2015 with the use of balance sheet instruments and interest rate derivatives, while maintaining low levels of exposure to interest rate risk. Exposure to interest rate risk

31 December 2014

Up to 1

month

1 - 3

months

3 - 12

months

1 - 5

years

Over 5

years

Non-

interest

bearing Total

Cash and balances w ith Central Banks and

demand deposits w ith commercial banks 240,358 - - - - 13,691 254,049

Financial assets held for trading - - 242 4,331 - 63 4,636

Available-for-sale f inancial assets 21,425 62,126 81,766 266,102 48,015 3,350 482,784

Loans and advances 244,879 244,944 401,528 44,663 1,958 7,590 945,562

- loans and advances to banks 52,000 - - - - - 52,000

- loans and advances to customers 192,448 244,944 401,528 44,663 1,958 6,088 891,629

- other f inancial assets 431 - - - - 1,502 1,933

Derivative f inancial instruments designated

for hedging - - 325 1,099 - - 1,424

TOTAL ASSETS 506,662 307,070 483,861 316,195 49,973 24,694 1,688,455

Financial liabilities held for trading - - 241 457 - 98 796

Financial liabilities designated at fair value

through P&L - - - - - - -

Financial liabilities at amortised cost 693,579 301,319 376,104 123,307 314 6,717 1,501,340

- deposits from banks and central banks 498 255 - - - - 753

- due to customers 673,597 228,068 265,690 82,124 314 30 1,249,823

- borrow ings from banks 15,055 30,000 85,589 5,647 - - 136,291

- borrow ings from other customers 5 900 - - - 593 1,498

- debt securities in issue 4,319 42,096 24,825 35,536 - - 106,776

- other f inancial liabiltities 105 - - - - 6,094 6,199

TOTAL LIABILITIES 693,579 301,319 376,345 123,764 314 6,815 1,502,136

GAP on 31 December 2014 (186,917) 5,751 107,516 192,431 49,659 17,879 186,319

31 December 2013

TOTAL ASSETS 593,766 346,851 610,331 152,131 62,925 28,497 1,794,501

TOTAL LIABILITIES 688,692 266,260 462,688 338,153 1,812 5,435 1,763,040

GAP on 31 December 2013 (94,926) 80,591 147,643 (186,022) 61,113 23,062 31,461

The Bank sorts its positions into different time intervals depending on the time remaining until repricing for floating interest rate transactions and in accordance with remaining maturities for fixed interest rate transactions. In the up-to 1 month interval, the Bank includes all demand deposits on the liabilities side, which is why the interest rate gap is negative. By entering into IRS, the Bank reduces exposure to interest rate risk. The sensitivity analysis of reasonably possible shifts and the impact on the income statement and the Bank’s capital is included in Note 5.2.2.



129

5.3 Liquidity risk Liquidity risk is the risk that the Bank will not be able to settle all due liabilities or is forced to acquire funding at significantly higher cost and the market liquidity risk, which arises when it is not possible to sell a position in a financial instrument or replace it in a short period of time without significantly influencing market prices. From a timing point of view, it is possible to distinguish between the management of operational liquidity and the management of structural liquidity. For banks, the duration gaps in assets and liabilities are common, as transforming short-term funding into long-term loans is a core role they play, however the Bank is exposed to liquidity risk in doing so. Due to this fact, the Bank has set up an efficient liquidity management system, which includes: - analysis and planning of future cash flows; - maintaining very liquid assets within liquidity reserves; - monitoring target values and limits pertaining to operational and structural liquidity through the

system of internal and external reporting; - ensuring an adequate diversification of liquidity sources; and - preparing scenarios simulating extraordinary liquidity conditions. On a quarterly basis, the Bank prepares three different scenarios of extraordinary liquidity conditions, which are based on a dynamic analysis of liquidity gaps: - a scenario adapted to its own liquidity position, which assumes the impossibility of renewing

liquidity sources; - a scenario based on the market situation, which provides for a drop in the liquidity of assets; and - scenarios based on a combination of the above two scenarios. Based on the results of the scenarios dealing with extreme liquidity conditions, the Bank determines the minimum amount of liquidity reserves and its structure. The Bank has set up procedures of early liquidity shortage detection, whereby it also regularly monitors the trends related to individual products and the market situation. Additionally, it pays special attention to warning signals pointing to extreme liquidity conditions. At the onset of possible warning signs, the Bank implements a crisis plan which defines the most efficient ways of managing the positions in extraordinary liquidity conditions. In such conditions, the Bank's activity would be twofold, namely it would work to acquire additional, alternative funding and communicate with the public in an appropriate way. The Regulation on rating requirements for credit institutions and investments firms introduces the following to the field of liquidity risk: meeting the Liquidity Coverage Ratio – LCR, the Net Stable Funding Ration – NSFR, and additional liquidity monitoring metrics. In 2014 the Bank reported the set of LCR and NSFR items on a monthly and quarterly basis, while the reporting on liquidity metrics will be introduced during the course of 2015.



130

Exposure to liquidity risk

31 December 2014 Carrying

amount

Total cash flow

(undiscounted)

Up to 1

month

1 - 3

months

3 - 12

months 1 - 5 y ears

Ov er 5

y ears

Cash and balances w ith Central Banks

and demand deposits w ith commercial

banks 254,049 254,049 254,049 - - - -

Financial assets held for trading 4,636 10,060 168 250 2,487 7,155 -

Available for sale f inancial assets 482,784 517,868 18,531 63,462 88,995 296,644 50,236

Loans and advances 945,562 1,036,098 135,553 70,678 259,424 394,172 176,271

- loans and advances to banks 52,000 52,000 52,000 - - - -

- loans and advances to customers 891,629 982,156 81,880 70,409 259,424 394,172 176,271

- other f inancial assets 1,933 1,942 1,673 269 - - -

Derivative f inancial instruments

designated for hedging 1,424 2,930 89 232 1,278 1,331 -

TOTAL ASSETS 1,688,455 1,821,005 408,390 134,622 352,184 699,302 226,507

Financial liabilities held for trading 796 1,826 71 251 761 743 -

Financial liabilities at amortised cost 1,501,340 1,530,440 668,901 259,094 371,880 195,048 35,517

- deposits from banks and central

banks 753 753 498 255 - - -

- due to customers 1,249,823 1,261,613 659,986 205,619 306,253 87,610 2,145

- borrow ings from banks and central

banks 136,291 147,528 1,166 4,447 39,180 69,649 33,086

- borrow ings from other customers 1,498 1,542 6 327 362 574 273

- debt securities in issue 106,776 112,806 1,138 48,368 26,085 37,215 -

- other f inancal liabilities 6,199 6,198 6,107 78 - - 13

TOTAL LIABILITIES 1,502,136 1,532,266 668,972 259,345 372,641 195,791 35,517

GAP on 31 December 2014 186,319 288,739 (260,582) (124,723) (20,457) 503,511 190,990

31.12.2013

TOTAL ASSETS 1,794,501 1,962,029 463,514 142,536 447,081 632,079 276,819

TOTAL LIABILITIES 1,763,040 1,817,812 656,661 218,586 447,090 447,510 47,965

GAP on 31 December 2013 31,461 144,217 (193,147) (76,050) (9) 184,569 228,854

The above table discloses non-discounted cash flow in relation to residual maturity on 31 December 2014, which, in addition to the carrying values of financial instruments, includes the anticipated future interest cash flows. The amounts disclosed are based on spot rates and on interest rates at the reporting date. The liquidity gap within the up-to-one month time frame is negative, however the fact must be taken into account that it includes all demand deposits under financial liabilities, even though the main portion of the deposits exhibits a high level of stability. Financial assets feature securities included in liquidity reserves recorded at remaining maturity, not in the up-to-one month interval. Considering the aforementioned, the Bank actually recorded a liquidity surplus in the up-to-one month interval. Liquidity gaps changed as compared with 31 December 2013 due to a number of reasons, with the most significant being the decreasing total assets, the transfer of assets to the BAMC and due to the increase in the Bank’s capital. The cumulative liquidity gap is greater than in the previous year.



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5.4 Capital and capital adequacy The Bank's capital risk management activities include the following: - developing medium- and long-term projections of capital, capital requirements, and the relevant

capital adequacy ratios, and updating such projections in case of major changes in operations, in order to identify and monitor future capital requirements;

- running quarterly scenarios of extraordinary situations considering the specific position; - notifying the Bank's managerial and supervisory bodies on relevant capital risk taken by the Bank

in the course of its operations; - establishing and maintaining a system of capital risk management and establishing and

controlling the limits of capital adequacy ratio, core capital ratio, and ratio between the internal capital assessment and capital requirements according to the 1st pillar of Basel II.

In connection with capital risk, the Bank has specified limit and target ratios presented in the following table:

in %

Limit value Target value

Total capital ratio 13.9 15.0

Tier 1 capital ratio 11.1 13.0

Common equity ratio - 11.0

On 16 December 2014 the Bank received the Decision on emergency measures issued by the Bank of Slovenia, with which the EUR 190 million capital increase was approved. At the same time all of the Bank’s qualified liabilities, pertaining to its share capital and the liabilities from subordinated debt liabilities in issue, were written down also. The aforesaid capital increase was performed on the basis of cash and in-kind contributions, which the Republic of Slovenia provided for the Bank in the form of bonds. Simultaneously bad assets were also transferred to the BAMC for which the Bank received their bonds with the Republic of Slovenia guarantee. In line with the commitment given to the European Commission by the Government of the Republic of Slovenia, stating that after potentially acquiring the majority share in Banka Celje it is prepared to conduct the process of merging Abanka and Banka Celje, the merger procedure has also already begun. With the increase in share capital the Bank’s long-term capital adequacy has been provided for, while at the same time meeting the minimum capital requirements. Since 1 January 2014 new banking legislation is in effect, based on uniform BASEL III banking standards. Changes in capital relate to its composition and the calculation of capital and capital requirements. The new legislation also brings stricter requirements pertaining to the inclusion of equity instruments in the calculation of capital, deductions from capital, additional disclosures in connection with capital and the implementation of capital buffers. In ensuring an adequate level of capital the new legislation emphasizes Common Equity Tier 1, comprising capital instruments, which meet the required criteria, stock surplus from capital instruments, retained earnings decreased by anticipated expenditure and dividends, accumulated other comprehensive income, other reserves and provisions for general banking risks. It is the highest quality and serves to cover losses from a bank’s regular activities. Tier 2 capital comprises equity instruments and subordinated debt and the share premium from equity instruments and serves to cover losses in the event of bankruptcy or a bank’s liquidation.



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Capital and capital requirements

31 December

2014

31 December

2013

I. TOTAL CAPITAL for capital adequacy 193.345 34.298

1. TIER 1 CAPITAL (T1) 193.345 24.656

Common Equity Tier 1 capital (CET1) 193.345 24.495

Paid-up capital instruments 50.000 16.980

Share premium 166.221 51.380

Retained profit (21.101) (126.257)

Other reserves 2.948 86.759

Accumulated other comprehensive income 3.531 -

Regulatory adjustments to Common Equity Tier 1 capital (8.254) (4.367)

- own CET1 instruments - (91)

- other intangible assets (3.487) (4.108)

- deferred tax assets that rely on future profitability and do not

arise from temporary differences (4.550) -

- excess of deduction from AT1 items over AT1 Capital (19.670) -

- other transitional adjustments to CET1 19.453 -

- other deductions from CET1 - (168)

Additional Tier 1 Capital (AT1) - 161

2. TIER 2 CAPITAL (T2) - 9.642

II. TOTAL EXPOSURE TO RISK 1.061.409 1.374.688

- credit risk and counterparty risk 887.409 1.174.550

- market risk 574 63.075

- operational risk 172.113 137.063

- credit valuation adjustments 1.313 -

III. CAPITAL RATIOS

CET1 ratio 18,22% 1,78%

T1 ratio 18,22% 1,79%

Total capital ratio 18,22% 2,49%

The capital and capital adequacy data as at 31 December 2013 has been restated to the new Basel III standards solely for comparison purposes. As at 31 December 2014 the Bank only holds Common Equity Tier 1 capital (CET1). In 2014 the amount of total exposure to risk decreased due to a decrease in credit risk (transfer of assets to the BAMC, loan repayments) and market risk (sale of financial instruments, transfer of financial instruments from the trading to the banking book). 5.5 Fair value of financial assets and liabilities Fair value hierarchy The Bank defines a hierarchy of valuation techniques based on whether the input parameters for those valuations are published or not. Published input parameters reflect market data obtained from independent sources; non-published parameters reflect the Bank's market assumptions. These abovementioned types of input parameters are the basis for the following fair value hierarchy: Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes equity securities and debt instruments listed on exchanges (e.g. the Ljubljana Stock Exchange).



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Level 2 – input parameters based on published market data. This level includes most OTC derivatives contracts, certain debt instruments and financial liabilities measured at amortised cost. The sources of input parameters like the EURIBOR yield curve or forward FX rates are Bloomberg and Reuters. Level 3 – input parameters other than published market data for assets or liabilities. This level includes investments in equity securities with significant, non-published components and granted loans. To assess the market values of investments the Bank used the income approach (discounting future cash flows). This hierarchy requires the use of published market data when available. When available the Bank considers relevant and published market prices in its valuation. a) Assets and liabilities measured at fair value

31 December 2014 Level 1 Level 2 Level 3 Total

Financial assets measured at fair value:

Financial assets held for trading

Derivatives - 4,636 - 4,636

Available for sale financial assets 357,822 124,396 566 482,784

Debt instruments 355,038 124,396 - 479,434

Equity instruments 2,784 - 566 3,350

Derivatives - hedging - 1,424 - 1,424

Total assets 357,822 130,456 566 488,844

Financial liabilities measured at fair value:

Financial liabilities held for trading (Derivatives) - 796 - 796

Financial liabilities at amortised cost:

Total liabilities - 796 - 796

31 December 2013 Level 1 Level 2 Level 3 Total

Financial assets measured at fair value:

Financial assets held for trading 5,027 5,934 - 10,961

Debt instruments 1,987 - - 1,987

Equity instruments 3,040 - - 3,040

Derivatives - 5,934 - 5,934

Available for sale financial assets 323,958 414 3,523 327,895

Debt instruments 316,994 414 513 317,921

Equity instruments 6,964 - 3,010 9,974

Derivatives - hedging - 3,437 - 3,437

Financial assets at amortised cost:

Total assets 328,985 9,785 3,523 342,293

Financial liabilities measured at fair value:

Financial liabilities held for trading (Derivatives) - 1,125 - 1,125

Financial liabilities designated at fair value through profit or

loss - - 1,000 1,000

Financial liabilities at amortised cost:

Total liabilities - 1,125 1,000 2,125



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Reconciliation for Level 3 items: Available for sale financial assets

Financial assets held for trading

Balance as at 1 January 2013 8,132

Transfer between levels 1,027

(Loss) (171)

Impairments (5,465)

Balance as at 31 December 2013 3,523

Valuation (13)

Investment acquisition 4,829

Sale (transfer) (2,012)

Impairments (5,761)

Balance as at 31 December 2014 566

The Bank acquired financial assets in the restructuring process in 2014 (the restructuring of debt into equity). The sale of financial instruments pertains to the transfer of assets to the BAMC and sales to investors. The Bank performed a sensitivity analysis, where it simulated the effect a 3rd level decrease in the carrying amount of equity instruments has on the income statement. Should the fair value of these financial instruments decrease by 50%, this would have a negative effect on the income statement in the amount of EUR 283 thousand (2013: EUR 1,762 thousand). b) Financial instruments not measured at fair value

31 December

2014

31 December

2013

31 December

2014

31 December

2013

Financial assets

Loans 945,561 1,260,213 1,019,691 1,325,716

- loans and advances to banks 52,000 17,867 52,000 17,867

- loans and advances to customers 891,629 1,240,057 965,655 1,305,560

- other f inancial assets 1,932 2,289 2,036 2,289

TOTAL 945,561 1,260,213 1,019,691 1,325,716

Financial liabilities

Financial liabilities at amortised cost 1,501,339 1,760,915 1,494,732 1,753,319

- deposits from banks 752 11,276 751 11,189

- due to customers 1,249,823 1,272,018 1,246,981 1,280,059

- borrow ings from banks 136,291 336,226 129,441 317,593

- borrow ings from costumers 1,498 2,134 1,416 2,073

- debt securities in issue 106,776 133,841 109,963 137,310

- other f inancial liabilities 6,199 5,420 6,180 5,095

TOTAL 1,501,339 1,760,915 1,494,732 1,753,319

Carrying amount Fair value

To determine the fair value of financial assets the Bank used the discounted future cash flow methodology. The discount factors for financial assets have been calculated on the basis of a reference zero-coupon interest curve according to individual currencies without a mark-up, while the discount factors for financial liabilities were based on the interest curve with a mark-up of 4 basis points, which reflects issuer risk.



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The statement of financial position shows loans and other receivables in the net amounts, meaning these have been decreased for impairment. 6 SEGMENT REPORTING The Group's operations comprise three segments: - retail and private entrepreneurs incorporating transaction accounts, savings, deposits, insurance

brokerage products, credit and debit cards and loans; - corporates, incorporating transaction accounts, deposits, loans and other credit facilities and

payment operations; - financial markets and other, incorporating trading in financial instruments, securities issued and

interbank relations.

In its operations, the Bank primarily performs credit and deposit operations. Segments are disclosed according to the methodology used in the preparation of an internal report and are discussed at the ALCO, which also comprises Management Board members. The heads of individual areas of operation receive detailed reports on the operation of their units during the year. During the year there have been no significant changes in reportable segments. Liabilities and assets are shown according to segment, based on the segment they were acquired from or the segment in which they were invested. Transactions between segments for the purpose of internal accounting are based on harmonised transfer bases (internal transfers of income effects between segments, keys for the transfer of service costs and administrative unit costs to profit centres). Net interest is included in the report in accordance with transfer prices from the market, whereby transfer income is applied to some transactions and transfer expenses to others as well as transfer interest margins, indicating the contribution of an individual transaction to the net interest of the Bank. The transfer pricing system for the allocation of net interest revenue was methodologically designed and confirmed by the ALCO which receives, together with individual segment heads, reports on the transfer prices of interest bearing assets and liabilities on a monthly basis.



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The report on operations according to segments for 2014:

Financial

2014 markets

Retail Corporates and others Not allocated Total

Total income 23,683 47,490 29,502 - 100,675

- external income 23,683 47,258 29,502 - 100,443

- income from other segments - 232 - - 232

Net interest and similar income 13,005 25,080 927 - 39,012

Net fee and commission income 7,397 6,661 886 - 14,944

Income from financial transactions - 1,565 17,327 - 18,892

Net other operating (loss) (449) (543) (822) - (1,814)

Administrative expenses with

depreciation and amortisation (12,542) (7,446) (12,345) - (32,333)

Provisions 2 (3,095) (458) - (3,551)

Impairment charges (5,647) (49,389) (5,761) - (60,797)

(Loss) before income tax 1,762 (27,167) (246) - (25,651)

Deferred tax - - - 4,550 4,550

Net (loss) (21,101)

Segment assets 485,592 569,575 646,210 - 1,701,377

Not allocated - - - 10,605 10,605

Total assets 1,711,982

Segment liabilities 749,166 513,023 239,303 - 1,501,492

Not allocated - - - 8,909 8,909

Equity - - - 201,581 201,581

Total liabilities and equity 1,711,982

Other segment items

Investments in property and equipment 117 234 146 - 497

Investments in intangible assets 99 199 123 - 421

Depreciation 146 461 222 - 829

Amortisation 94 298 144 - 536



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The report on operations according to segments in 2013:

Financial

2013 markets

Retail Corporates and others Not allocated Total

Total income 43,031 126,728 15,233 - 184,992

- external income 43,031 126,459 15,233 - 184,723

- income from other segments - 269 - - 269

Net interest and similar income 15,670 14,573 7,048 - 37,291

Net fee and commission income 10,463 5,572 (217) - 15,818

Income from financial transactions 8,762 73,438 (1,403) - 80,797

Net other operating (loss) (1,051) (504) (380) - (1,935)

Administrative expenses with

depreciation and amortisation (16,478) (3,916) (13,107) - (33,501)

Provisions (138) (315) 396 - (57)

Impairment charges (14,863) (192,986) (6,148) - (213,997)

(Loss) before income tax 2,365 (104,138) (13,811) - (115,584)

Deferred tax - - - (10,673) (10,673)

Net (loss) (126,257)

Segment assets 496,023 888,031 422,446 - 1,806,500

Not allocated - - - 8,728 8,728

Total assets 1,815,228

Segment liabilities 739,813 554,046 468,644 - 1,762,503

Not allocated - - - 11,967 11,967

Equity - - - 40,758 40,758

Total liabilities and equity 1,815,228

Other segment items

Investments in property and equipment 290 893 103 - 1,286

Investments in intangible assets 164 507 58 - 729

Depreciation 418 1,291 148 - 1,857

Amortisation 234 719 83 - 1,036



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Reconciliation of results by geographic area: 2014 Revenues Non current assets

Slovenia 93,265 1,040,862

Croatia 2,251 20,672

Germany 2,084 23,181

Austria 520 10,820

Belgium 432 12,403

Serbia 407 3,605

USA 387 68

Bosnia and Herzegovina 346 3,790

Switzerland 295 1,924

Netherlands 165 5,135

France 106 10,420

Sweden 69 -

Italy 49 867

Australia 46 -

United Kingdom 45 4,979

Luxembourg 36 8,101

Finland 36 -

Denmark 35 -

Norway 29 3,101

Greece 17 322

Poland 14 -

Canada 12 -

Kosovo 7 1

Slovakia 6 96

Romania 6 -

Other - EU countries 5 1

Other 5 1

Total 100,675 1,150,349



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2013 Revenues Non current assets

Slovenia 171,855 1,031,126

Croatia 3,801 27,361

Cyprus 3,492 -

Germany 1,371 36,506

Belgium 872 12,669

Austria 800 27,319

Serbia 572 7,406

Bosnia and Herzegovina 488 6,979

France 404 16,051

Netherlands 318 15,586

Sweden 237 9,366

Switzerland 166 1,976

Russia 156 -

Denmark 150 -

United Kingdom 132 4,840

Finland 100 3,128

Luxembourg 66 12,590

Italy 56 1,046

Poland 26 -

Greece 21 435

Slovakia 11 224

USA 8 -

Norway 6 3,021

Japan (8) -

Kosovo (21) -

Canada (32) -

Jersey (34) -

Australia (37) -

Other - EU countries 4 2

Other 12 8

Total 184,992 1,217,639

The total income and non-current assets are classified according to the customer’s residence. The Bank makes the structurally largest portion of its revenue in the domestic market. It made more than 10% of total revenue from operations with the Republic of Slovenia and the Ministry of Finance, amounting to EUR 15,012 thousand and shown in the financial markets and other segment and in the corporate segment. In the previous reporting period the Bank did not make 10% or more of total revenue with any one single client.

DISCLOSURES

pursuant to the Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012 (the CRR Regulation)

Banka Celje d.d. Disclosures 2014


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III DISCLOSURES OF BANKA CELJE, D.D. 1 GENERAL INFORMATION The basis for the disclosures is the Regulation (EU) No. 575/2013 of the European Parliament and the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012 (the CRR Regulation). The Bank does not disclose data in connection with: - capital buffers – Article 440 of the CRR Regulation; in effect from 1 January 2016; - indicators of global systemic importance – Article 441 of the CRR Regulation; as defined by the

regulator; - exposure to position securitisation positions – Article 449 of the CRR Regulation; the Bank does

not record any securitisation positions; - leverage – Article 451 of the CRR Regulation; in effect from 1 January 2015; - information on the IRB (Internal Rating Based Approach), as the Bank uses the standardised

approach for the calculation of risk adjusted exposures. 2 RISK MANAGEMENT OBJECTIVES AND POLICIES (Article 435 of the CRR Regulation) a) Strategies and processes for managing risk In its operations the Bank assumes a number of different risk types. Exposure depends on the type and size of a transaction and the willingness to assume risk. Banka Celje d.d. is a universal bank, focusing on traditional transactions, while executing client driven treasury transactions to a lesser extent. The majority of its operations is done in the Republic of Slovenia. It is also present in the markets of other EU states through interbank transactions. Exposure to south-eastern European markets, where it lends to corporates and retail customers in a limited extent, is decreasing. To achieve strategic goals related to operations and risk management, the Bank pays special attention to credit risk, profitability risk, strategic, liquidity and operational risk, reputation risk, interest rate and capital risk and market risk. The Bank classifies risk types into two categories: - quantifiable risk: credit, market, liquidity, operational, capital and profitability risk; and - non-quantifiable risk: strategic risk and reputation risk. The strategy of assuming and managing risks shows the Bank's fundamental relationship to risk related to its operations and includes: - objectives and general principles or policies on assuming and managing risk; - the approach to the management of individual risk types; - the approach to the execution of the internal capital adequacy assessment process; and - the plan of significant activities and changes to the Bank's business strategy. The Bank has prepared policies for assuming and managing nine types of risk: - credit risk; - market risk; - interest rate risk; - liquidity risk; - operational risk; - capital risk; - profitability risk; - strategic risk; and



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- reputation risk. The policy of assuming and managing individual risk types includes the following: - risk assumption capacity; - risk management process (organisational rules for process execution, identification procedures,

measuring or assessment, management and monitoring, system of internal controls); - calculation of capital requirement and the process of internal capital adequacy assessment

process; and - Management Board and senior management responsibility. The strategy and policies are updated annually. The preparation and adoption of the strategy and policies is performed as follows: - the employees responsible for the management of individual risk types prepare the documents; - the Risk Management Committee reviews the documents in detail, harmonises them and

endorses them; - the Management Board of Banka Celje, d.d., endorses them; - the Audit Committee of Banka Celje, d.d., reviews the documents, acquaints itself with them and

proposes to the Supervisory Board to endorse them; - the Supervisory Board of Banka Celje, d.d., reviews and endorses the documents. Due to the development and the characteristics of the financial system, assuming and managing risk is a significant element of a bank's comprehensive strategy. Risk in the banking sector is subject to the regulation below: - ZBan-1; - Regulation (EU) No. 575/2013 of the European Parliament and the Council of 26 June 2013 on

prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012 (the CRR Regulation);

- Directive 2013/36/EU of the European Parliament and the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (the CRD IV Directive);

- regulatory and implementing standards; - IFRS; and - minimum standards for trading in banks and other related services, summarizing the rules of the

so-called ''good business practices''. b) Structure and organisation of risk management, its hierarchy and status The Bank’s organisational structure ensures the separation of sales organisational units, being units that enter into transactions and assume risk (front office) from the back office, which books and manages these transactions, and from the risk monitoring and management function. The Bank is organised in a way as to ensure independent operations of individual organisational units up to the management level and to allow for a suitable upstream and downstream communication flow as well as between respective organisational units. The Bank’s organisational chart forms part of its annual report. c) Scope and nature of reporting and risk measurement systems By developing internal reporting and preparing and adopting decisions at a number of the Bank’s bodies, the Bank’s Management Board and the entire senior management (senior management comprises executive directors and the managers of the Bank’s independently functional organisational units) are actively taking part in the risk management process. By managing risk well the Bank aims to react more quickly and more effectively to the changes in the environment, get closer to client needs and ensure its own long-term financial stability.



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Risk management as a function is directly monitored at: - credit committees and at restructuring and bad asset monitoring credit committees (once a

week): credit risk; - liquidity committees (three times a week, in conditions of emergency every day: liquidity risk; - the Asset and Liabilities Committee (the ALCO, once a month): credit, market, interest rate,

liquidity, capital and profitability risk; - the Management Board and the Management Committee: operational and strategic as well as

reputation risk; - the Risk Committee: all of the risk types the Bank encounters. The Risk Committee plays an important role in the assumption and management of risk. It serves as the coordinating and consultative to the Bank’s Management Board holding a comprehensive overview of all risks. The Risk Committee met four times in 2014. On 1 January 2014 the Bank implemented the new capital accord – Basel III, which was transferred into the banking environment in the form of the abovementioned CRD IV Directive and the CRR Regulation. Further implementation activities with regard to the new legislation are done through the Basel III Project Group, which has been tasked with meeting the legal requirements for reporting to the regulator and the improvement of risk monitoring as the basis for the further decision-making process. The new legislation mainly deal with the management of capital and liquidity risks, while bringing significant changes to credit risk management as well.

Credit risk Credit risk represents the most significant risk type in banking. It is the risk of loss resulting from a debtor’s inability to meet, for any reason, its financial or contractual obligations in their entirety. This type of risk includes subcategories, namely country risk, risk of concentration and residual risk after the realisation of collateral and to credit risk from securitisation. Banka Celje, d.d., is exposed to all risk types, except the risk from securitisation. The main objective of credit risk management is to maintain the quality and diversification of the credit portfolio as well as the creation of adequate impairments and provisions to cover for losses. The Bank directs investments toward less risky customers, industries and countries, secures its receivables with adequate types of collateral, renegotiates financial assets, where it positively assesses the business model and cash flow, and actively works on the recovery of receivables past due. Lending and risk management includes the Risk Management Division, sales organisational units, the Restructuring and Recovery Division, the Operations Monitoring Department and the Legal and Compliance Division. The Risk Management Division works independently of the commercial organisational units and the Restructuring and Recovery Division, which manages credit risk at debtor and credit portfolio levels. Prior to granting a loan, credit risk is assessed, the debtor is classified into a rating group and a limit is set on the total exposure of the Bank to the debtor or to a group of related entities. In determining a limit the financial debt/EBITDA ratio (Earnings before Interest, Taxes, Depreciation and Amortization) is emphasized. After the loan is granted exposure to credit risk is monitored and the required impairment charges and provisions are calculated in compliance with the IFRS. Loans are granted in the Bank’s sales organisational units. For the entire time of the credit relationship debtor operations are monitored as well as the settlement of liabilities and the quality and value of collateral. The Operations Monitoring Department, organised separately from the other units, performs the monitoring, recording and administration activities in relation to loans. Credit risk is assessed for financial assets measured at amortised cost, for financial assets designated at fair value and for assumed liabilities from commitments and contingent liabilities. Credit risk is the result of business, commercial and housing loans, credit card operations,



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transaction account overdrafts, guarantees and granted undrawn loans, as well as investments in debt securities and the exposure from transactions with derivatives. Credit risk measurement is done at debtor level and at the level of the entire portfolio. Exposure to credit risk depends on the exposure amount, probability of default and the amount of loss in the event of default, which further depends on the collateral and on the recovery procedures. Market risk Market risk is the risk of loss due to changes in interest rates, currency rates and market prices of financial instruments. The most significant risk type within market risk is positional risk in debt financial instruments. Exposure to currency risk is low, as the Bank continuously closes open positions. In trading with financial instruments, the Bank is predominantly active in the financial market of the EU (securities transactions with government securities and prime bank issues in order to ensure an adequate liquidity reserve). The Bank defines investments and trading in financial instruments by applying limits to a number of different factors (according to issuer, transaction type, region, etc.), which the Bank constantly adjusts to take into account the conditions in the financial markets and its own business strategy. Additionally, it has also adopted stop-loss limits. The Bank enters into transactions with foreign currency and interest rate derivatives. Its basic policy in connection with derivatives trading is entering into transactions for the purpose of hedging own positions and client positions, whereby the latter transactions are hedged with counter positions. Transactions are entered into with prime foreign banks, thus allowing for low exposure to market risk from these instruments. In relation to foreign currency risk, the Bank’s policy is that of a closed position across individual foreign currencies. Managing the open foreign exchange positions is performed through prompt transactions and with the use of foreign exchange derivatives in line with the limits set. These are low and are meant for the management of open foreign exchange positions within the scope of regular operations, not intended for speculative trading. The Bank calculates market risk capital requirements using the standardised approach. Based on the calculated risk profile, market risk is one of the three lowest risk estimations in all nine risk types that are assessed, which is why the Bank did not calculate capital requirements in 2014, only assessing required internal capital levels by conducting stress tests and measuring the effect of extraordinary, but probable events, on the profits and the financial position of the Bank. In 2014 the Bank did not buy financial instruments with the aim of making profits from the difference between the sale and purchase price. Market risk identification is done at purchase or issue of financial instruments, taking into account all risks related to the individual financial instrument. The Financial Markets Division executes purchases in accordance with the adopted policies and in line with the limits in place. When a new financial instrument is purchased it is reviewed in relation to market risk and processes for comprehensive management and control of market risk are implemented. Positional risk is measured at the level of the entire portfolio and at individual transaction level. Exposure to positional risk is monitored from the perspective of capital requirements for market risk, which are calculated according to the standardised approach and with the use of sensitivity analysis, measuring the effect of changes in different risk factors (e.g. interest rates, currency rates) on the value of a financial instrument. The Bank measures currency risk daily by monitoring net positions per individual foreign currencies.



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Interest rate risk The risk of change in interest rates pertains to the exposure of the Bank’s financial balances to fluctuations in interest rates, mainly due to the mismatch between the maturities of investments and the Bank's funding sources or to the mismatch between the type of interest rate or period, for which the interest rate is fixed. Exposure to interest rate risk may influence the amount of the Bank's net interest income as well as the economic value of its capital. The Bank analyses exposure to interest rate risk using the method of interest rate gaps, calculating the effect of a change in interest rates on net interest income (income-based metrics). The Bank also analyses interest rate risk using the duration model, thereby assessing the impact of the changes in interest rate on the economic value of capital (economic value-based metrics). In relation to interest rate risk, the Bank implements the policy of a closed position, with the objective being the smallest possible interest rate gaps. In 2014 the Bank attained a low level of exposure to interest rate risk. To decrease interest rate risk, the Bank uses traditional balance sheet transactions, such as lending, securities purchases, deposit taking, issue of securities etc. In addition to these traditional banking transactions, it also enters into interest rate derivative transactions, not for speculative purposes, but to hedge individual operations. In accordance with the IFRS the Bank measures such interest rate derivatives at fair value, which may have a significant impact on the income statement. This is why it introduced hedge accounting, which decreases the instability of operational results caused by adjustments in the fair value of derivatives intended for hedging. The Risk Management Division is included in the monitoring and management of interest rate risk, monitoring, measuring and managing the exposure. The Division also defines and adjusts limits and performs sensitivity analyses and administers stress tests. The Financial Markets Division is tasked with the operational management of interest rate risk, executing purchases and sales of derivatives to decrease exposure to interest rate risk. The process also includes sales organisational units, which enter into interest rate sensitive transactions and assume interest rate risk and the Operations Monitoring Department, which records and performs administration activities related to the transactions. The process of identifying interest rate risk is carried out so as to determine the interest rate sensitivity of all existing transactions. Measuring interest rate risk in the banking book is done with the interest rate gap method, meaning that all items are classified into different time intervals depending on their final maturity or the repricing date. Using this method the effect of a shift in the interest rate curves on net interest income is calculated. Exposure to interest rate risk is also measured using the method of maturity gaps, estimating the change in economic value of the Bank’s capital at a parallel change in the interest rate curve. The Bank also calculates the impact of a change in the interest rate curve by 200 basis point on the economic value of capital, which complies with the guidelines of the second pillar of Basel III. The Bank has established a limit system aimed at limiting exposure to interest rate risk in the banking book. The interest rate risk in the trading book is represented by interest rate sensitive financial instruments classified as trading book. To measure exposure to interest rate risk, modified duration is calculated and analyses of interest rate sensitivity on debt securities in the trading book are conducted.



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Liquidity risk Liquidity risk is the risk type that includes the risk of providing liquidity funding and market liquidity risk. The risk of providing liquidity sources occurs, when the Bank is unable to settle all of its due obligations or is forced to obtain sources of liquidity at significantly higher costs. Market liquidity risk pertains to the inability to sell or replace financial instruments in a short period of time without significantly impacting the market price. From the aspect of time, liquidity risk management is separated into operational liquidity management and structural liquidity management. Liquidity and liquidity risk management is reflected in a defined limit system, the range and size of investments in financial instruments and the methodology of monitoring liquidity flows. It pursues the policies of funding source diversification and ensuring an optimal structure of these in the long-term. The Bank has defined the structure and the minimum amount of liquidity reserves, based on emergency scenarios in relation to liquidity conditions. Based on the preparation of emergency scenarios in relation to liquidity conditions, it has also defined a liquidity risk contingency plan. The Bank has established methodologies for the distribution of costs, benefits and risks involved in providing liquidity (the Methodology of internal transfer prices), which encompasses all the important asset and liability items, commitments and contingent liabilities and all costs related to liquidity (liquidity surcharge). The methodology includes suitable incentives in relation to the contribution of individual operational areas to liquidity risk. Its methodologies for identifying, measuring, managing and monitoring liquidity, allow the Bank to coordinate actual and potential liquidity sources with the actual and potential use of liquid assets in the same period. To this aim, liquidity management ensures compliance with actual and projected significant cash flows arising from assets, liabilities, commitments and contingent liabilities.

Liquidity management is conducted by the Financial Markets Division, which performs all the basic liquidity management processes. The Risk Management Division measures liquidity risk, sets and monitors limits or target values related to liquidity and the concentration of deposits taken. The Operations Monitoring Department, which records transactions and provides administrative activities as well as preparing liquidity ratios, and the Accounting Division (preparation of the methodologies and reports on transfer prices) are also included. The senior management and the Bank’s Management Board are also included in liquidity and liquidity risk management through their different bodies. The methodology of identifying liquidity risk is based on the processes of identifying and classifying transactions related to the Bank’s liquidity positions in the internally implemented simulations. Measuring or estimating liquidity risk is based on daily simulations of open liquidity positions in relation to operational and structural liquidity for a selected time interval, which is usually longer than three months. Liquidity risk is also measured by analysing liquidity gaps, using liquidity ratio reports and other liquidity risk indicators. At least once every three months the Bank prepares various scenarios of exceptional liquidity conditions, which are based on a dynamic analysis of liquidity gaps. Operational risk Operational risk is the risk of loss due to: - inadequate or unsuccessful execution of internal processes, - actions by individual persons, - functioning of systems and - external factors.



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By defining and upgrading operational processes and through an adequate control environment, the Bank aims to attain the lowest possible estimate of its potential exposure profile in relation to operational risk and to decrease loss from loss events to the lowest possible level. The identification of operational risk takes into account internal and external factors and means the identification, definition and categorisation of loss events, their causes and consequences or effects. New products, activities, processes and systems are subjected to suitable assessment procedures related to operational risk prior to their implementation. The Bank carried out identification activities related to operational risk by cataloguing operational processes and thus provided a foundation for a high quality of own exposure monitoring. The measurement comprises los events that have a certain gross effect on the income statement. The Bank has defined the criteria for the valuation of small and large losses as well as the value and quality aspects of defining significant operational risk. Capital and capital adequacy An adequate amount of capital represents a safety reserve for different types of risk the Bank faces in its operations. To cover unexpected loss, the capital of any bank must always amount to at least the sum of the capital requirements for the credit, market and operational risk, while capital adequacy, representing the ratio between capital and the sum of risk-adjusted items, must always amount to at least 8%. The management of capital and capital adequacy within the Bank is based on adopted policies of assuming and managing capital risk and is in line with annual business plans, also expressed in the need for adequate regulatory capital. With the intention of assessing the capacity for assuming risk, the Bank prepares projections of the dynamics of capital and capital requirements as well as projections of the internal capital assessment and capital requirements for a period of five years in accordance with the annual business policies and its financial plan and five-year strategy. These show the dynamics of capital adequacy ratios in relation to the planned volume of the Bank’s operations. The new capital accord (CRR Regulation and Directive CRD IV) introduced a new definition of capital based on Tier 1 and Tier 2 capital. Tier 1 comprises Common Equity Tier 1 and Additional Tier 1 capital, with emphasis on Common Equity Tier 1 or share capital, intended to cover for losses from the Bank’s regular operations. Capital ratios are tied to the structure of capital. The innovations of the new legislation, impacting the calculation of the Bank’s capital, also pertain to the stricter criteria on the inclusion of capital instruments in the calculation of capital, capital deductions, additional disclosures on capital and the implementation of capital buffers. To mitigate the effects of stricter capital standards, which will influence the calculation of capital, a transitional period for a gradual implementation of the new rules has been introduced. The process of capital risk management includes the Risk Management Division, which regularly calculates regulatory capital and capital requirements, defines limits and target values, which it forwards to ALCO meetings for approval, and monitors compliance with them, and the Financial Markets Division, which manages capital increases and the issue of financial instruments, eligible for inclusion into regulatory capital. The Accounting Division is part of capital risk management through the planning process. The identification of capital risk is based on identifying capital components, capital requirements and the ratios of capital adequacy over a longer period of time. By regularly measuring it, the Bank ensures compliance with legislative requirements, internally defined limits and target values as well as compliance with other assumed risks.



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Profitability risk Profitability risk pertains to an inadequate structure or diversification of income or the inability to ensure an adequate and constant level of profitability. The main objective of profitability risk is to ensure the quality and stability of net financial and operative income. This risk type is managed by the Accounting Division, with the cooperation of other organisational units, which are exposed to profitability risk, in the risk management processes. Important decisions are adopted at the ALCO meetings. Identification of profitability risk is based on determining the structure of the statement of financial position, the income statement items and their quality, the interest margin, cost efficiency, the profitability of new business and the return on assets and equity over a longer period of time with the analysis of changes. By regularly measuring the elements of profitability risk, the Bank ensures these are suitable for the attainment of an adequate financial result. Strategic risk Strategic risk is the risk that arises due to inadequate business decisions, the improper implementation of decisions and a lack of responsiveness to the changes in the operating environment. The main objective of strategic risk management is to ensure coherence between strategic policies and objectives and the Bank’s business strategy for the implementation of policies, between assets engaged and the quality of performance. Strategic risk is managed through the Bank’s management and supervisory bodies, while all strategic units that produce strategic risk cooperate in the process of its management. All major decisions related to strategic risk are taken at Supervisory Board meetings, at Management Board meetings, at ALCO or at the Bank’s Management Committee meetings. Reputation risk Reputation risk represents the risk of loss due to a negative image, which the Bank has in the eyes of its clients, business partners, owners, investors and supervisors. This image impacts the establishment of new business relationships and services as well as the maintenance of existing ones. This risk type may lead to legal disputes, financial loss, liquidity problems and may cause a decline in the number of customers. To ensure the reputation of the Bank, as perceived by the interested public, is adequate for the attainment of operational goals, the management of its reputation is a strategic task for the Bank as a whole, not only its respective parts. The utmost attention is paid to operations with customers and to the contacts with supervisory institutions, potential investors and other public groups. The indicators for the identification of reputation risk are monitored according to respective interested groups (owners, personnel, supervisory institutions, customers, business partners, the general public, etc.). These indicators may differ, e.g. an assessment by the Bank of Slovenia, the auditor’s report, operational results, monitoring media exposure, internal culture. Reputation risk is a non-measurable risk type, which is why there indicators are mainly assessed for their quality, adjusted for each individual criteria, empirically, in accordance with time, in different intervals, at the onset. The measurable indicator pertains to the Bank’s operational results, which



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are reviewed on a monthly, quarterly, semi-annual and annual basis, internally and by an auditor, the Bank of Slovenia, the Supervisory Board and by other supervisory institutions and interest parties. d) The policies for hedging and mitigating risk and the strategies and process for monitoring

the continuing efficiency of hedges and mitigants Credit risk The Bank has developed a number of processes and methodologies for the management of credit risk. Prior to granting a loan it measures the risk associated with a debtor and classifies the debtor in a rating class on the basis of quantitative and qualitative elements. It monitors the risk the debtor represents for the entire duration of the credit relationship and adjusts debtor rating accordingly. The Bank aims to secure its claims as best possible, which is why it regularly monitors the risk of collateral. To limit large concentrations it has defined limits for the indebtedness of individual debtors and groups of related parties as well as structural limits for the credit portfolio (according to sector, industry, region). The loan monitoring process it implements, allows for early detection of increased credit risk and for early start of activities for the settlement of receivables overdue. The Bank has set up a loan monitoring system, which allows for a timely detection of increased credit risk. Based on the assessment of qualitative and quantitative criteria, pointing to increased credit risk (ICR), the Bank rates debtors in five groups (ICR1 – watch list, ICR 2 – problem exposure, ICR3 – debtors in recovery procedure, bankruptcy, erasure, ICR4 – renegotiated exposure and ICR5 – comprehensive restructuring). Determining the group of increased credit risk is the basis for defining the Bank’s further activities aimed at reducing exposure to credit risk. In the event of default, the Bank then ascertains direct and indirect responsibility. Continuously or at least once every three months, the Bank assesses whether there is objective evidence on impairment of financial assets or assumed off-balance sheet liabilities. Should such evidence exist, it must calculate the amount of impairment loss or create provisions for commitments and contingent liabilities in accordance with the internal methodologies of credit risk loss assessment under IFRS, which it updates and adapts to the economic situation at least once a year. The monitoring of the Bank’s exposure to credit risk, compliance with limits and the adoption of different measures aimed at mitigating credit risk are all performed on the basis of numerous analyses and reports, which are forwarded to senior management and to different bodies of the Bank (Credit Committee, ALCO, Management Committee, etc.). Exposure to individual debtors or groups of related parties and overdue receivables are monitored daily, while reports on the credit portfolio, including the reports on collateral received, are produced on a monthly basis. Market risk The management of this risk type is based on a system of limits, which reflects the Bank’s willingness to accept potential losses. The Risk Management Division prepares limit proposals, which are endorsed by the ALCO. The Financial Markets Division executes purchases of financial instruments on the basis of the defined limits, authorisations and other adopted rules. The Bank manages exposure to positional risk by also utilising a system of limits. These are basically separated into trading and banking book limits. In their content trading book limits comply with the Minimum standards for trading and related services in banks. Managing risk from derivatives is based on the closed position policy. This implies that the market risk of derivatives is secured through a counter transaction.



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Currency risk management is based on foreign currency position limits, which define the maximum open amount (net position) per individual currency. Currency limits are low, as the Bank does not expose itself to currency risk for speculative purposes. Market risks are monitored through reports, which show the amount of exposure to market risks, compliance with limits, the attained gains and losses from trading in financial instruments and the like. Reporting to the ALCO is done once a month, while compliance with limits is monitored by the Risk Management Division on a daily basis and separately from the front office and violations are reported to the Management Board and the Bank’s senior management. Interest rate risk The management of risk as a process is headed by the ALCO, which adopts decisions and policies on the amount of interest rate risk that the Bank is willing to accept. It provides guidelines to the Financial Markets Division and to other sales divisions on the types of transactions to be entered into, which will keep interest rate risk within the agreed amounts. These decisions are based on interest rate risk analyses, which include reports on exposure to interest rate risk from the income perspective (changes in net interest income) and the economic perspective (changes in the net present value), being produced by the Risk Management Division. The Risk Management Division conducts the monitoring of interest rate risk through reports showing exposure to interest rate risk and compliance with limits, which are reviewed once a month at ALCO meetings. The Financial Markets Division is also included in the monitoring process through the purchases and sales of derivatives and as the coordinator in agreements on large interest rate sensitive transactions. Irrespective of the above, the Bank also monitors interest rate risk from the aspect of profitability. Liquidity risk The management liquidity risk encompasses closing open liquidity positions using defined instruments in compliance with the set limits or ratios according to individual positions. The Bank closes open positions using treasury or short-term commercial transactions. The selection of instruments depends on their prices and the limits in place. Limits or target values are set in accordance with the following: - size of the bank, - ownership structure, - the bank’s regional character. The Bank has defined limits or target values, which it uses to limit exposure to liquidity risk by ensuring an adequate level of liquidity reserves and a suitable diversification of funding sources. Limits or targets in relation to liquidity risk management are set be the Risk Management Division as part of the scenarios of extreme liquidity risk conditions and are adopted by the ALCO. In addition to own limits, the limits of other customers are also important for entering into transactions with the Bank. The monitoring of liquidity risk includes the internal control system, the system of internal and external reports, the verification of the limit system and the reporting system in the event of violations. Through a detailed definition of the reporting system, where a number of regular and special reports are produced, and through authorisations given to decision-making levels, the Bank provides for the monitoring and control of the implementation of measures for liquidity risk management. Operational risk The operational risk management system defines measures and rules or the plan for the implementation of measures for assuming, mitigating, diversification, transfer or avoidance of operational risk. Activities include assessing the probability of loss events in relation to identified causes and the estimated effects. The Bank also monitors and assesses potential loss events, which it sees as an opportunity for improvement, as these include all operational deviations, which may



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potentially have an effect on or cause a loss event. The list of operational processes is a good basis for the management. Based on these the Bank produced: a matrix of connections between organisational units in the operational processes within the Bank, the potential profile of the Bank’s exposure to operational risk for an individual operational process and the Bank as a whole and the catalogue of all operational risks, which the Bank has identified. The Risk Management Division conducts the monitoring of operational risk. It prepares analyses and reports on the basis of reports from all organisational units and informs the Management Board or the Management Committee and the senior management on all major realized losses. Continuous monitoring of the implementation of the measures adopted for the management of this risk type is provided for. The Bank has prepared rules of operation in conditions of severe business disruption. IT provides for support to operational processes from a backup location. The Bank has prepared a recovery plan of operation after a catastrophe, continuous operation plans have also been prepared. The Bank has prepared manual procedures for activities, which can be carried out without the IT system. It regularly prepares informational risk analyses for these processes. Capital and capital adequacy For the purposes of capital risk management the Bank has set the limit for the capital adequacy ratio at above 13.9%, the limit for the capital adequacy ratio, calculated from Tier 1, at above 11.1%, the ratio between the internal capital assessment and capital requirements from pillar 1 above 173.6% and provided measures for the mitigation of capital risk. The Bank mitigates capital risk by implementing measures to increase capital and to decrease exposure to risk, subsequently lowering capital requirements. Prior to implementing measures to increase capital, the Bank endeavours to decrease capital risk using risk exposure mitigation measures, mainly in relation to credit and market risk exposures. Monthly reports are prepared for capital risk monitoring purposes, which are reviewed at ALCO and include, in addition to the calculation itself, the analyses of changes in comparison to the previous period. Besides the changes in the capital accord and legislation, the report also includes projections of the effect of changes to the Bank’s exposure to capital risk. The Bank prepares and, at major changes in the operations, updates mid-term and long-term capital projections, capital requirements projections and the related capital adequacy ratios, with an aim of identifying and monitoring future capital requirements. On a quarterly basis it executes extreme situation scenarios taking into account its own specific position. Once a quarter the Bank reports its calculation of capital and capital requirements to the Bank of Slovenia in accordance with the statutory reporting requirements. To monitor the Bank’s capital adequacy in view of the assumed risk from operations, the ALCO also reviews the calculation of the internal capital assessment and the internal assessment of capital requirements on a quarterly basis. Profitability risk The core objective of profitability risk management is to ensure the quality and stability of net financial and operative income. The Accounting Division manages profitability risk, with other organisational units, which are exposed to profitability risk, participating in the risk management process. All important decisions are adopted at the ALCO meetings.



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Identification of profitability risk is based on determining the structure of the statement of financial position, the income statement items and their quality, the interest margin, cost efficiency, the profitability of new business and the return on assets and equity over a longer period of time with the analysis of changes. In 2014 the Bank was recapitalised with state aid after approval by the European Commission, additionally the major part of bad assets was transferred to the BAMC, on the basis of which it is expected that the future volume of additional impairments and provisions should be significantly lower than in the past few years. This will have a major impact on the financial result of the Bank in 2015. By regularly measuring the elements of profitability risk, the Bank ensures these are suitable for the attainment of an adequate financial result. To manage profitability risk the Bank follows the rule, on the basis of which it begins implementing risk mitigation measures, if individual income statement items are not reaching planned results and the Bank does not expect an improvement. If a single income statement item lags the planned results, the Bank will aim to replace the income shortfall by changing the structure of business activities first, however only in the risk assumption capacity allowed by the commitments to the EC. Should this not suffice, it will begin activities to improve the quality of investments and strengthen cost rationalization. Due to the process of obtaining state aid the Bank’s plan for 2014 was amended several times and on 16 June 2014 the Bank’s Supervisory Board discussed the Business policies and the financial plan of the Bank for 2014 including the projection of operations until 2018, prepared on the basis of the restructuring plan, forwarded to the European Commission to acquire state aid. The monitoring of profitability risk is performed with the preparation of monthly reports in the form of quantitative and qualitative analysis, which are then reviewed at ALCO meetings. The reporting system provides for the dissemination of information on profitability risk to all of the Bank’s organisational units. Strategic risk The main objective of strategic risk management is to ensure coherence between strategic policies and objectives and the Bank’s business strategy for the implementation of policies, between assets engaged and the quality of performance. The management of strategic risk is done by the Bank’s management and supervisory bodies, whereby all of the Bank’s organisational units, exposed to strategic risk, are involved in the process. The major decision in relation to strategic risk are adopted at the Bank’s Supervisory Board meetings, the Bank’s Management Board meetings, at ALCO meetings or at Management Committee meetings. The identification of strategic risk is based primarily on determining the Bank’s own vision, the clarity and conservative nature of the strategy, the correctness of strategic objectives and the support of the strategy with the necessary capital, management personnel and human and technological resources. Strategic risk decreased in 2014, as the Bank was recapitalized, with the state becoming its sole owner. This provides for long-term stability of the Bank’s capital adequacy. In spite of the aforementioned, strategic risk remains considerable, as the Bank will have to strictly adhere to the commitments it gave to the European Commission and also merge with Abanka, which must be concluded by 1 January 2016.



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Strategic risk is a non-measurable risk type; by regularly assessing its elements in the sense of monitoring strategic policies and objectives, the Bank provides for their adequacy. In relation to the management of strategic risk, the Bank has prepared measures to mitigate it, which it will implement, should strategic objectives not be realized to the suitable extent and the Bank did not expect an improvement in the future. Based on the analysis of deviations, the Bank will try to implement appropriate operational measures to promote activites necessary for the realization of strategic objectives. Should, however, the Bank find that the deviations of actual operations from strategic objectives are significant, it will prepare an analysis of these deviations with arguments. For 2015 the Bank has prepared a business policy and a financial plan, which comply with the restructuring program, sent to the EC. The strategy for the period until 2018 was prepared for the merged bank. Both documents are reviewed and approved by the Bank’s supervisory bodies. The monitoring of the implementation of its business policy and the realization of the financial plan is conducted with the preparation of interim reports, which include qualitative analyses of operations. Reputation risk The Bank manages reputation risk by ensuring safe and stable high quality operations, by having the Management Board and Supervisory Board conduct themselves in accordance with professional prudence and the highest ethical standards of management, by providing transparent operations, monitoring its media image, systematically communicating with various public groups, managing its human resources with the utmost care and by being socially responsible.



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e) Declarations of the Bank’s Management Board and Supervisory Board Declaration of the Management Board and the Supervisory Board on the adequacy of risk management arrangements of Banka Celje, d.d. The Bank’s Management Board confirms, reviews and provides up to date strategies and policies of assuming and managing risk in relation to the changes in its internal and external environment. It ensures that the strategies and policies are comprehensive in terms of proportional consideration of risks, which the Bank assumes in its operations. The Bank’s Management Board monitors and regularly assesses the efficiency of the risk management system and adapts it to changes, ensures a transparent and documented process of making important decisions, a clear division of responsibilities and tasks to comply with internal decisions and procedures and it promotes an organisational culture, which gives the highest priority to honest and irreproachable execution of business activities. The Risk Committee plays a significant role in risk management at the Bank, as it functions as a coordinating and advisory body the Bank’s Management Board, with a comprehensive overview of all risk types. The Supervisory Board regularly monitors and assesses the suitability of the Bank’s organisational structure. With the help of the Audit Committee and the Remuneration Commission it monitors the adequacy and implementation of the strategies and policies of assuming and managing risks and the adequacy of the Bank’s reporting. With its supervision it contributes to the establishment and implementation of an adequate and stable organisation of risk management and the operation of the internal control system at the Bank. The Supervisory Board also regularly monitors and assesses the adequacy of the Bank’s risk profile. The Bank’s Management Board and the Supervisory Board believe that the Bank has set up an appropriate risk management system, which, according to its risk profile, allows it to perform all activities for the implementation of the adopted business strategy. Celje, 20 March 2015



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The risk statement of the Management Board and the Supervisory Board of Banka Celje, d.d. The Bank conducts its operations in accordance with the business strategy, which also includes its core objectives in relation to risk management. It defines its own risk profile that is adapted to the risk management quality and the Bank’s risk appetite, while complying with the commitments to the European Commission. The preferred risk profile of the Bank, which is submitted to its Supervisory Board for endorsement on an annual basis, is between low and acceptable risk as defined in the Strategy of assuming and managing risk. The determination of the risk appetite is an important part of the decision-making process. Clearly set limits in relation to assuming risk are monitored by the Bank and the Supervisory Board in accordance with the limit systems in place and the values of individual risk types. The objective of limiting risk appetite is to ensure that the Bank operates with an appropriate return even in the event of an emergency and to ensure long-term financial stability. The risk management function in the Bank is set up in a way as to enable timely monitoring of risk and reporting for simultaneous action and compliance with the defined limits and targets. The policies of assuming and managing the Bank’s risks define the main objectives of risk management, which ensure that the exposure to risk complies with the Bank’s preferred risk profile. Details in connection with the Bank’s objectives are set out in the policies of assuming and managing risk, with the following being the Bank’s core policies: - long-term stability of capital adequacy, - the core lending market is Slovenia, reducing exposures abroad, particularly to SE Europe, - lending to creditworthy borrowers, targeting investments in SMEs and private individuals, - securing loans with suitable property and in the correct proportion, - ensuring diversification of investments according to industry, core exposure to a single branch

up to 10% of the credit portfolio, - active collection of overdue loans and reducing non-performing loans (NPL), - in restructuring programs the Bank follows the Slovenian principles of corporate debt

restructuring and assesses the debt in terms of the business model and in terms of ensuring sufficient cash flow for the repayment of debt,

- decreasing the amount of investments in debt and equity financial instruments and reinvestment in debt financial instruments for liquidity management, new equity financial instrument purchases are not planned,

- entering into currency and interest rate transactions to close own and customer positions, - ensuring adequate liquidity reserves and liquidity ratios, - ensuring diversification of funding with an optimal structure of sources, while focusing on stable

liquidity sources. Celje, 20 March 2015



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Governance arrangements a) Number of directorships held by members of the management body The Bank’s Management Board comprises two members, with the Supervisory Board comprising 6 members. The Bank’s Supervisory Board is comprised of external members. b) The recruitment policy for the selection of members of the management body and their

actual knowledge, skills and expertise The Bank’s Management Board adopted the Policy for the assessment of suitability of key function holders at Banka Celje, d.d. in October 2014. The policy has been prepared in accordance with EBA guidelines, which refer to the assessment of suitability of management or supervisory body members as well as key function holders and define procedures, criteria and requirements for the assessment of the adequacy of management personnel in relation to corporate governance. The suitability assessment of both Management Board members has been completed, however it has not yet been reviewed by the Supervisory Board. As the ownership structure of the Bank changed at the end of 2014 and due to the fact that the term of Supervisory Board members ends in 2015, the Bank will take the provisions of the policy into consideration in the appointment of new Supervisory Board members. The policy also determines the criteria, on the basis of which the suitability of Management Committee members is assessed. These include experience and reputation criteria. Management and specific criteria are also considered. The criteria on expertise, on the basis of which the Bank assesses the members, pertain to the education level and profile, practical experience, acquired in past jobs, dating back 10 years, data on education, training and recommendations. The criteria also include criminal and other records relating to proceedings against members, meeting professional and ethical standards, involvement in past business relationships and the member’s financial situation. The Bank also includes past jobs and functions in the criteria, personal, business and other relations with the members of the Supervisory Board or the Management Board and collective professional qualifications. Special criteria pertain to social and personal skills, action competence and cultural skills. The Bank has a zero tolerance toward the political activity of members. In the re-appointment of the Management Board criteria is taken into account that relate to past work and the conduct of a member in connection with operational results, organisational culture, employee turnover, mobbing, the number of labour disputes and the like. c) Risk Committee

The Risk Committee also operates within the Bank. It is the coordinating and advisory body to the Management Board holding a comprehensive overview of all risks. It met four times in 2014.



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d) The description of the information flow on risk to the management body

The strategy and policies of assuming and managing risk are prepared by the individual risk type managers. The Risk Committee reviews them in detail, harmonises them and endorses them. The Bank’s Management Board approves them, the Audit Committee reviews them and acquaints itself with them, while the Supervisory Board considers the strategy and the policies and approves them. Risk management is directly monitored at credit committees and at credit committees for restructuring and the monitoring of bad debt, at liquidity committees, at the ALCO, at the Management Board or the Management Committee and at the Risk Committee. The Management Board of the Bank and the ALCO are appraised on the risks on a monthly basis, while the Audit Committee and the Supervisory Board deal with materials in relation to risk at their respective meetings. 3 SCOPE OF APPLICATION (Article 436 of the CRR Regulation)

Name of the bank, to which disclosures pursuant to the Regulation apply Disclosures pursuant to the Regulation apply to Banka Celje, d.d. Banka Celje, d.d., is a Slovenian joint stock company, performing universal banking services. The Bank does not trade in shares in an organised capital market. The Bank’s business address is: Banka Celje, d.d., Vodnikova 2, Celje. An outline of the differences in the basis of consolidation for accounting and for the purpose of supervision on consolidated basis The Bank owns 100% of its subsidiary Posest, d.o.o., Celje. The Subsidiary in not included in supervision on consolidated basis pursuant to the approval by the Bank of Slovenia, as it does not represent any significant effect in terms of the objective of the Bank’s supervision. The subsidiary wholly owned by the Bank is consolidated in the Bank’s consolidated financial statements for financial reporting using the full consolidation method. It is fully consolidated from the date of the acquisition of control and will be excluded from consolidation on the date that control ceases. Any current or foreseen material practical or legal impediment to the prompt transfer of own funds or the repayment of liabilities among the parent undertaking and its subsidiaries The Banka Celje Group sees no current or foreseen practical or legal impediment for the prompt transfer of own funds or the repayment of liabilities among the parent undertaking and its subsidiary. The aggregate amount by which the actual own funds are less than required in all subsidiaries not included in the consolidation, and the name or names of such subsidiaries The Bank’s subsidiary, not included in the consolidation in accordance with Article 19 of the CRR Regulation, meets the minimum capital requirement.



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4 OWN FUNDS - CAPITAL (Article 437 of the CRR Regulation)

a) Full reconciliation of regulatory capital items and the balance sheet in the audited financial statements of the Bank

In the Bank the reconciliation of regulatory capital with the audited financial statement is based on the statement of financial position, which includes all the items comprising regulatory capital, including share capital and deductions. The reconciliation of regulatory capital items with the audited financial statements is performed in three steps. In the first step the Bank discloses the differences between accounting and prudential consolidation. The second step sees the Bank disclose accounting data from the statement of financial positions and reference items of regulatory capital. In the third step it matches regulatory capital items with statement of financial position items. Step 1 The Bank is not included in supervision on a consolidated basis.



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Step 2 Statement of financial position on 31 December 2014 and matching with the items of regulatory capital.

STATEMENT OF FINANCIAL POSITION 31 December 2014

Reference to

regulatory capital

Cash and balances with the Central banks and demand deposits

with commercial banks 254,049

Financial assets held for trading 4,636

Available for sale financial assets 482,784

from these: investments in financial sector entities, where the

Bank holds no significant interestpomembne naložbe 174 a

Loans and advances 945,562

Derivatives - hedging 1,424

Property and equipment 13,006

Intangible assets 3,487 b

Long-term investments in the capital of subisidiaries, associated

companies or joint ventures 2,257 c

Income tax assets 4,271

from these: long-term deferred tax assets from tax loss 4,550 d

from these: long-term deferred tax assets from available for

sale financial assets -279 e

Other assets 505

TOTAL ASSETS 1,711,982

Financial liabilities held for trading 796

Financial liabilites at amortised cost 1,501,340

Provisions 8,092

Income tax liabilties

from these: deferred tax liabilties from available for sale

assets f

Other liabilities 173

TOTAL LIABILITIES 1,510,401

Share capital 50,000 g

Share premium 166,221 h

Accumulated other comprehensive income 3,513

from these: revaluation reserve related to available for sale

financial assets 3,531 i

Profit reserves 2,948 j

Retained net loss (including net loss of the current financial year) -21,101 k

TOTAL EQUITY 201,581

TOTAL LIABILITIES AND EQUITY 1,711,982



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Step 3 Disclosure of regulatory capital from the previous period

Transitional own funds disclosure template Amount

Amount

subject to

transitional

treatment

Reference to

balance

sheet

1 Capital instruments and the related share premium accounts 219.169 g, h, j

3 Accumulated other comprehensive income 3.531 -3.857 i

6 CET1 before regulatory adjustments 222.700

8 (-) Intangible assets (net of related tax liability) -697 -2.790 b

10

(-) Deferred tax assets that rely on future profitability excluding

those arising from temporary differences (net of related tax

liability) -910 -3.640 d

21

(-) Deferred tax assets arising from temporary differences

(amount above 10% threshold, net of related tax liability) e - f

25a (-) Losses for the current financial year -4.220 -16.880 k

26a Regulatory adjustments relating to unrealised gains and losses -3.857 i

of which: 100 % filter for unrealised loss on exposures to central

governments 903 i

of which: 80 % filter for unrealised loss on other exposures 1.304 i

of which: 100 % filter for unrealised gain on exposures to central

governments -4.576 i

of which: 100 % filter for unrealised gain on other exposures -1.489 i

27

(-) Qualifying AT1 deductions that exceed the AT1 capital of the

institution -19.670

28 Total regulatory adjustments to CET1 capital -29.354

29 CET1 capital 193.345

41a

Residual amounts deducted from AT1 capital with regard to

deduction from CET1 capital during the transitional period -19.670

od which: residual amount of losses of the current year -16.880 k

of which: residual amount of intangible assets -2.790 b

43 Total regulatory adjustment to AT1 capital -19.670

44 AT1 capital

45 Tier 1 capital (T1 = CET1 + AT1) 193.345

59 Total capital (TC = T1 + T2) 193.345

59a

Risk weighted assets in respect of amounts subject to

transitional treatments 3.640 d

of which: deferred tax assets that rely on future profitability (net of

related tax liability) not deducted from CET1capital 3.640 d

60 Total risk weighted assets 1.061.409

61 CET1 (as a percentage of risk exposure amount) 18,22

62 T1 (as a percentage of risk exposure amount) 18,22

63 Total capital (as a percentage of risk exposure amount) 18,22

72

Direct and indirect holdings of the capital of financial sector

entities where the institution does not have a significant

investment in those entities (amount below 10% threshold) 174 a

73

Direct and indirect holdings by the institution of the CET1

instruments of financial sector entities where the institution has a

significat investment in those entities (amount below 10%

threshold) 2.257 c

Common Equity Tier 1 (CET1) capital: instruments and reserves

Common Equity Tier 1 (CET1) capital: regulatory adjustments

Additional Tier 1 (AT1) capital: regulatory adjustments

Capital ratios

Amounts below the thresholds for deduction (before risk weighting)



163

b) A description of the main features of regulatory capital A description of the main features of regulatory capital instruments is shown in the Main features of capital instruments table. As at 31 December 2014 Banka Celje, d.d., only exhibits share capital.

1Issuer

Banka Celje d.d. (based on the Bank of Slovenia

Decision on emergency measures)

2 ISIN ISIN: SI0021116858

3 Governing law(s) of the instrument Slovenian legislation

Regulatory treatment

4 Transitional CRR rules Common Equity Tier 1 capital

5 Post-transitional CRR rules Common Equity Tier 1 capital

6

Eligible at solo/(sub-)consolidated/ solo & (sub-

)consolidated Individual and consolidated basis

7 Intrument type Regular shares

8 Amount recognised in regulatory capital EUR 190 mln

9 Nominal amount of instrument No par value shares

9a Issue price EUR 38

9b Redemption price

Redemption not allowed without consent of the

European Commision

10 Accounting classification Equity

11 Original date of issuance 17.12.2014

12 Perpetual or dated Fixed

13 Original maturity date No maturity

14 Issuer call subject to prior supervisory approval No

15

Optional call date, contingent call dates and

redemption amount N/A

16 Subsequent call dates, if applicable N/A

Coupons/dividens

17 Fixed or floating dividend/coupon Floating

18 Coupon rate and any related index N/A

19 Existence of a dividend stopper No

20a

Full discretionary, partially discretionary or

mandatory (in terms of timing)

Payment of dividends prohibited in 2014 and 2015.

Mandatory in the following years, expect when the

payment would jeopardise the Bank's solvency.

20b

Full discretionary, partially discretionary or

mandatory (in terms of amount)

Payment of dividends prohibited in 2014 and 2015.

Mandatory in the following years, expect when the

payment would jeopardise the Bank's solvency.

21 Existence of step up or other incentive to redeem No

22 Noncumulative or cumulative Non-cumulative

23 Convertible or non-convertible N/A

24 If convertible, conversion trigger(s) N/A

25 If convertible, fully or partially N/A

26 If convertible, conversion rate N/A

27 If convertible, mandatory or optional conversion N/A

28If convertible, specify intrument type convertible into

N/A

29

If convertible, specify issuer of instrument it converts

into N/A

30 Write-down features Yes

31 If write-down, write-down trigger(s) Based on applicable legislation

32 If write-down, full or partial Full or partial

33 If write-down, permanent or temporary Permanent

34

If temporary write-down, description of write-up

mechanism N/A

35Position in subordination hierarchy in liquidation

N/A

36 Non-compliant transitioned features N/A

37 If yes, specify non-compliant features N/A

Capital instruments main features template



164

c) Terms and conditions of all regulatory capital instruments

As at 31 December 2014 Banka Celje, d.d., only has share capital. All the terms and conditions of regulatory instruments are shown in the table entitled Main features of capital instruments. d) Separate disclosure of nature and the amounts of the following:

a. each prudential filter applied pursuant to Articles 32 to 35, b. each deduction made pursuant to Articles 36, 56 and 66, c. items not deducted in accordance with articles 47 (significant investment in a financial sector

entity), 48 (threshold exemptions from deduction from CET1 items), 56 (deductions from AT1 items), 66 (deductions from T2 items) and 79;

The separate disclosure of nature and the amounts of specific items of capital is shown in the table Disclosures of regulatory capital in the previous period, from disclosures of capital in point a).

e) Restrictions applied to the calculation of capital in accordance with this Regulation and

the instruments, prudential filters and deductions to which these filters apply Disclosure of all restrictions applied to the calculation of capital is shown in Disclosures of Regulatory Capital in the previous period, from disclosures of capital in point a).

f) Explanation of the basis on which capital ratios are calculated

The Bank calculates capital ratios in accordance with the CRR Regulation. 5 CAPITAL REQUIREMENTS (Article 438 of the CRR Regulation) a) A summary of the Bank’s approach to assessing internal capital

The Bank has set up a process of assessing adequate internal capital (the ICAAP process), which: - is based on the identification, measurement and assessment of risk, the preparation of an

aggregate risk estimate and the monitoring of significant risk types; - allows for ensuring adequate internal capital levels in relation to the risk profile of the Bank; - is appropriately included in the management process (decision-making, risk management, etc.). For the purpose of assessing internal capital, the Bank calculates internal capital requirement estimates for risks it deems significant on the basis of its risk profile or it determines through the procedure of risk identification, measurement or assessment, management and monitoring that these might significantly impact its operations, thus requiring it to ensure appropriate capital levels. The Bank calculates the internal capital assessment and capital requirements on a quarterly basis, with the calculation being confirmed at the Risk Committee and then forwarded for consideration and approval at the ALCO. The Bank re-assessed the level of exposure to individual risk types in major business lines and the quality of the control environment. It calculated the Bank’s risk profile and prepared a risk matrix. Based on the risk profile, prepared in December 2014, the Bank is mostly exposed to credit risk, followed by profitability, strategic, liquidity, operational risk, reputation risk, interest rate rand capital risk and market risk. The risk profile deterioration trend stopped in 2014, however the calculated risk profile still deviates from the desired risk profile, as defined in the Strategy of assuming and managing risk. In spite of positive economic trends, the Bank is still in the process of dealing with the consequences of the recent crisis, with a certain level of uncertainty and risk also stemming from the merger with Abanka Vipa, d.d., planned for the coming year.



165

b) Result of the Bank’s internal capital adequacy assessment process, including the composition of additional capital requirements, based on the supervisory review process

In the process of assessing the adequacy of internal capital, the Bank defines and assesses significant risks, which it is or could be exposed to in its operations. On this basis it then makes an internal assessment of capital requirements and an internal assessment of capital as the most important elements (in addition to the risk management system) of maintaining the capacity to assume risk. The key objective of the ICAAP process is the maintenance of the Bank’s adequate risk profile and early detection of internal and external factors, which might negatively impact the Bank’s operations. Pursuant to the guidelines of the Adequate internal capital assessment process and the Instructions for the submission and fulfilment of the Report on the ICAAP process implementation, the Bank submits a report to the Bank of Slovenia every year, which the regulator then evaluates and provides observations on. Considering the observations from the report for 2013, the Bank of Slovenia expects the Bank to: - in relation to the existing risk profile, maintain an internal capital assessment of at least 173.6%

of capital requirements from pillar I as recognized by the regulator or the capital adequacy ratio of at least 13.9%;

- provide at least 80% of share capital to cover for the recognized capital requirement assessment or to maintain a Tier 1 ratio of capital adequacy of at least 11.1%.

The Bank’s capital requirements comprise: - element 1: capital requirement for credit, operational and market risks, - element 2: residual risk from credit and market risks, - element 3: interest rate risk in the banking book and strategic risk, - element 4: supplement due to the general condition of the business cycle (procyclicality), - supplement according to the assessment of the control environment. c) Capital requirements for credit risk according to individual exposure categories The Bank calculates credit risk capital requirements using the standardised approach. The capital requirement equals 8% of risk-weighted exposures. The table below shows credit risk capital requirements according to exposure categories.



166

31 December

2014

31 December

2013

Central government and central banks - -

Regional government or local authorities 571 607

Public sector entities 169 204

Multilateral development banks - -

Institutions 7,029 1,646

Corporate entities 22,993 42,463

Retail banking 21,252 25,501

Exposure to mortgages 1,349 1,294

Defaulted exposures 7,540 (a)

Overdue items (a) 2,807

High risk exposures 7,044 (a)

Regulatory high risk exposures (a) 17,289

Covered bond investments - -

Institutions and companies with a short-term rating 872 33

Exposures from equity instruments 697 (a)

Investment funds (a) -

Other items 1,477 (a)

Other exposures (a) 2,120

Total 70,993 93,964

(a) due to amended regulations the item is not reported

Capital requirements for positional risk, currency risk and settlement risk The capital requirement for positional risk, which the Bank calculates using the standardised approach amounted to EUR 46 thousand on 31 December 2014 (2013: EUR 5,046 thousand). In 2013 and 2014 the Bank did not include currency risk capital requirements in the calculation of capital requirements as the currency risk exposure did not exceed 2% of regulatory capital. In 2013 and 2014 the Bank did not record capital requirements from settlement risk. d) Capital requirements for operational risk For the calculation of capital requirements for operational risk the Bank uses the simple approach. Capital requirement for operational risk as at 31 December 2014 was EUR 13,769 thousand (2013: EUR 10,965 thousand).

6 EXPOSURE TO COUNTERPARTY CREDIT RISK (Article 439 of the CRR Regulation) a) The methodology used to assign internal capital and credit limits for counterparty credit

exposure Exposure form derivatives, sale and repurchase agreements and lending operations to increase the trading portfolio, where the Bank is exposed to counterparty credit risk is small, which is why the Bank did not develop a specific methodology for determining internal capital. The Bank has set up a system of limits, which allows it to limit exposure to counterparty credit risk. Compliance with these limits is monitored on a daily basis. A limit depends on the counterparty’s rating and the type of financial instrument.



167

b), d) Policies of securing collateral and the impact on the amount of collateral to be provided given a rating downgrade The Bank enters into derivatives with counterparties with a good credit rating. Interest rate derivatives and currency swaps are primarily entered into with prime banks, which is why exposure to credit risk is low. c) Wrong-Way risk exposure policy The Bank hedges all derivative transactions with counter positions. e) The method of exposure calculation for derivatives and sale and repurchase agreements

Derivatives give rise to credit exposure from the counterparty’s inability to deliver. The Bank calculates counterparty credit risk from foreign currency derivatives (forwards and prop trading as well as customer trading to a lesser extent) and interest rate derivatives. To calculate the value of credit exposure the Bank utilises the current exposure method, as follows: - replacement costs are calculated of positive value agreements, so that all agreements are

revalued to their current market value using current prices; negative value agreements exhibit a current exposure of zero;

- the potential credit exposure for the remaining time to maturity of the agreement is calculated by multiplying the nominal amount or the value of the underlying financial instruments with an adequate conversion factor according to the residual maturity;

- the exposure value is the sum of replacement costs and the potential future credit exposure. Gross positive fair value of agreements and net derivatives credit exposure The table below show the net value of agreements and the net exposures according to type of derivative.

Fair value

Potential

exposure

Net credit

exposure Fair value

Potential

exposure

Net credit

exposure

Trading derivatives

Securities forwards - - - 126 - -

Interes rate derivatives4,573 278 4,851 5,782 628 6,410

Currency derivatives63 122 185 26 234 260

Total 4,636 400 5,036 5,934 862 6,796

Hedging derivatives

Interes rate derivatives 1,424 171 1,595 3,437 271 3,708

Total 1,424 171 1,595 3,437 271 3,708


g), h), i) The Bank does not enter into transactions with credit derivatives. It calculates exposure to counterparty credit risk using the standardised approach, which is why it does not estimate the α.



168

7 CREDIT RISK ADJUSTMENTS (Article 442 of the CRR Regulation) a) Definitions of ’’past due’’ and ’’impaired’’ for accounting purposes For accounting purposes ’’past due’’ pertains to all items, where the debtor has not settled his liabilities in the contractually agreed period and in the contractually agreed amount. For accounting purposes ’’impaired’’ pertains to all items, where there is objective evidence on the impairment of financial assets, which the Bank has impaired individually or collectively. b) The description of the approaches and methods, adopted for determining specific and

general credit risk adjustments At every statement of financial position date, the Bank assesses whether there is objective evidence on impairment of a financial asset or a group of financial assets. A financial asset or a group of financial assets is only impaired, when there is objective evidence on impairment as a result of one or multiple events, which have occurred after the assets initial recognition and which affect future cash flows. Objective evidence on the impairment of a financial asset or a group of assets is represented by: - serious financial problems experienced by the debtor; - breach of contract with the Bank (principal and/or interest not paid or a violation of other

contractual provisions); - the probability that the debtor will declare bankruptcy, compulsory settlement or another form of

financial restructuring; - the absence of a functioning market for the financial asset due to financial problems of the

securities issuer; - the existence of a measurable decrease in expected future cash flows of the group of financial

assets from their initial recognitions, even though the decrease may not yet be recognised for individual financial assets in the group, including: - adverse changes in the payment status of borrowers in the group and

- changes in the economic conditions in the country or local environment, which correlate with defaults on assets in the group; - due to the economic and financial position of the debtor the Bank has renegotiated the loan

terms (such as e.g. extending the repayment period, decreasing the amount of the receivables, etc.), which it would not have done were the debtor’s economic and financial position normal.

The Bank first assesses whether there is objective evidence on impairment in individually significant financial assets and collectively for financial assets, which are not significant individually. If the Bank ascertains there is no evidence of impairment in an individually significant asset, it then includes it in a group of financial assets with similar credit characteristics. Individual impairments are assessed on the basis of estimated future cash flows, which also include the realization of collateral. Financial assets that have already been recognised as impaired are also assessed for impairment individually. Assets which have been assessed for impairment individually and have recorded a loss are not included in the group assessment. The amount of loss is measured as the difference between the asset’s carrying amount and the present value of expected future cash flows, which also include guarantees and collateral, discounted using the financial asset’s original effective interest rate. If a loan or a held to maturity investment is based on a variable interest rate, the discount rate for the measurement of loss from impairment is the current effective interest rate, as defined in the contract. The asset’s carrying amount is decreased with the use an allowance account, with the amount of the loss recorded in the income statement.



169

The methodology of estimating impairment charges on assets and off-balance items is set up separately for legal entities and private entrepreneurs, retail clients, banks and savings banks and prime debtors (central government), which is presented in detail later on in this chapter. (1) Assessment of impairment charges for exposure to legal entities and private entrepreneurs The impairment charge may be calculated individually on the basis of the estimated future cash flows or collectively on the basis of historical data on defaults and losses for groups of exposures with similar characteristics, adjusted to account for the current situation, thus reflecting the effects of recent operating conditions. Individual estimates pertain to assets individually exhibiting significant characteristics (exposures above EUR 650,000) and showing signs of impairment (exposures classified D and E). If there are no signs of impairment, the exposure is classified into a group of financial assets with similar characteristics and the impairment is assessed collectively. Impairment is also assessed individually for financial assets which have already been recognised as impaired (exposures classified D and E). Impairment is appraised on the basis of estimated future cash flows, including expected repayment from liquidation of collateral. For exposures not exhibiting signs of impairment or those that are individually insignificant (exposures classified A1, A2, A3, B1, B2 B3, C1 and C2 at an amount lower than EUR 650 thousand), the charge is assessed collectively on the basis of historical default data and loss estimates. For collective assessment of impairment financial assets are combined on the basis of similar credit characteristics, taking into account mainly the financial position of the borrower, the settlement of liabilities in the past, the capacity to ensure cash flow in the future, the industry, regional characteristics, etc. The methodology of collectively assessing impairments is based on: - the transitional matrix between rating groups, namely the transition to classes D and E inside of

a year (a multi-year average is used); - the calculation of the recovery share in classes D and E (taking into account debtors, which are

impaired individually, with a multi-year average taken into account); - a general risk factor, reflecting current economic conditions and thus impacting the probability of

defaults. The value of the general risk factor is assessed at least once a year on the basis of fluctuations in the general price levels, interest rates, the settlement of liabilities, fluctuations in the financial and capital markets as well as the real estate market conditions, economic activity, conditions in the job market and the trends in the energy and raw material markets.

The methodology and assumptions, used to assess future cash flows are reviewed at least once a year to decrease the differences between loss estimations and actual losses. The impairment percentages are assessed separately for rating classes, which include exposures to legal entities and separately for rating classes, which include exposures to private entrepreneurs. (2) Assessment of impairment charges for exposure to retail The Bank classifies financial assets into rating groups A, B, C, D and E on the basis of the settlement of liabilities. Individually significant financial assets (exposures above EUR 400,000), where there is objective evidence to suggest there is a need for the establishment of an impairment, are impaired individually. The same applies to financial assets already recognised as impaired (exposures classified D and E). For the purpose of collective impairment, financial assets are divided into homogenous groups on the basis of the settlement of liabilities and in accordance with product groups (housing loans, consumer loans, quick loans, account overdrafts). Impairment charge percentages are based on past data and are different for every product group and each rating class.



170

The methodology is based on: - the transitional matrix between rating groups, namely the transition of financial asset to overdue

items or the classes C, D and E (a multi-year average is used for every product group); and - the percentage of actual loss from default or the share of economic loss of financial assets in

recovery (rated E), which the Bank establishes annually on the basis of historical repayment data (the percentage is determined for each product group).

(2) Assessment of impairment charges for exposures to banks, savings banks and prime debtors For banks, impairment is estimated solely on an individual basis. Exposures to prime debtors (sovereigns and central banks) are assessed using the collective and individual approaches. (3) Assessment of impairment charges for exposures to banks, savings banks and prime debtors (central government)

For banks, impairment is estimated solely on an individual basis. Exposures to prime debtors (sovereigns and central banks) are assessed using the collective and individual approaches. c) The total amount of exposures, decreased by impairments and provisions, without taking

into account the effects of credit risk mitigation and the average amount of exposures over the reporting period, broken down by exposure classes

On

31 December

2014

2014 average

On

31 December

2013

2013 average

Central government and central banks 467,691 302,828 263,364 379,364

Regional government or local authorities 50,952 45,016 42,977 49,846

Public sector entities 13,224 14,921 24,029 28,652

Multilateral development banks 8,101 8,100 8,173 8,168

Institutions 147,461 73,928 73,305 123,485

Corporate entities 484,898 460,228 611,804 783,263

Retail banking 436,996 455,393 490,739 513,772

Exposure to mortgages 42,504 35,556 34,359 8,590

Defaulted exposures 87,854 86,292 (a) (a)

Overdue items (a) (a) 24,512 24,834

High risk exposures 58,952 166,213 (a) (a)

Regulatory high risk exposures (a) (a) 208,207 254,943

Covered bond investments - - - 3,737

Institutions and companies with a short-term rating 32,000 8,000 821 1,212

Exposures from equity instruments 5,329 7,689 (a) (a)

Investment funds (a) (a) - 321

Other items 35,934 34,828 (a) (a)

Other exposures (a) (a) 44,383 45,258

Total 1,871,896 1,698,992 1,826,673 2,225,445




171

d) The geographic distribution of the exposures, broken down in significant areas by exposure classes

31 December 2014Slovenia EU SE Europe

Other

countriesTotal

Central government and central banks 426,512 41,179 - - 467,691

Regional government or local authorities 35,673 15,279 - - 50,952

Public sector entities 13,224 - - - 13,224

Multilateral development banks - 8,101 - - 8,101

Institutions 18,554 121,895 51 6,961 147,461

Corporate entities 462,727 17,357 - 4,814 484,898

Retail banking 433,402 2,463 1,048 83 436,996

Exposure to mortgages 42,504 - - - 42,504

Defaulted exposures 79,005 3,586 5,263 - 87,854

High risk exposures 41,724 16,115 1,113 - 58,952

Institutions and companies with a short-term rating - 32,000 - - 32,000

Exposures from equity instruments 5,311 18 - - 5,329

Other exposures 23,582 301 - 12,051 35,934

Total 1,558,636 257,993 7,475 11,858 1,871,896

31 December 2014Slovenia EU SE Europe

Other

countriesTotal

Central government and central banks 226,567 36,797 - - 263,364

Regional government or local authority 37,961 5,016 - - 42,977

Public sector entities 13,950 10,079 - - 24,029

Mulitlateral development banks - 8,173 - - 8,173

Institutions 7,634 61,493 43 4,135 73,305

Corporate entities 577,202 23,045 7,600 3,957 611,804

Retail banking 485,948 4,373 405 13 490,739

Exposure to mortgages 32,689 1,670 - - 34,359

Defaulted exposures 21,963 2,549 - - 24,512

Regulatory high risk exposures 173,618 27,748 6,841 - 208,207

Institutions and companies with a short-term rating - 821 - - 821

Other exposures 31,463 920 - 12,000 44,383

Total 1,608,995 182,684 14,889 20,105 1,826,673



172

e) The distribution of exposures by counterparty type, including the specification of exposure to SMEs, broken down by exposure classes

31 December 2014

State Banks RetailPrivate

entrepreneurs

Corporate

customersTotal SMEs

Central government and central

banks 330,536 137,155 - - - 467,691 -

Regional government or local

authorities 50,952 - - - - 50,952 -

Public sector entities 13,170 - - - 54 13,224 -

Multilateral development banks - 8,101 - - - 8,101 -

Institutions - 147,461 - - - 147,461 -

Corporate entities 132,322 - - 3,798 348,778 484,898 253,490

Retail banking 1 - 322,039 23,805 91,151 436,996 111,202

Exposure to mortgages - - 3,884 3,534 35,086 42,504 23,420

Defaulted exposures 897 - 3,631 4,787 78,539 87,854 49,074

High risk exposures - - - 1,302 57,650 58,952 49,579

Institutions or companies with a

short-term rating - 32,000 - - - 32,000 -

Exposures from equity

instruments - - - - 5,329 5,329 2,431

Other items - 16,501 7,331 - 12,102 35,934 51

Total 527,878 341,218 336,885 37,226 628,689 1,871,896 489,247

31 December 2013

State Banks RetailPrivate

entrepreneurs

Corporate

customersTotal SMEs

Central government and central

banks 84,620 178,744 - - - 263,364 -

Regional government or local 42,977 - - - - 42,977 -

Public sector entities 19,555 - - - 4,474 24,029 -

Multilateral development banks - 8,173 - - - 8,173 -

Institutions - 73,305 - - - 73,305 -

Corporate entities 3,971 - - 7,909 599,924 611,804 228,995

Retail banking 7 - 344,058 33,905 112,769 490,739 140,018

Exposure to mortgages - - 174 3,900 30,285 34,359 31,836

Overdue items 2,581 - 2,284 1,001 18,646 24,512 17,254

Regulatory high risk exposures - 1 3,487 4,449 200,270 208,207 93,956

Institutions and companies with a

short-term rating - 821 - - - 821 -

Other exposures - 18,291 8,469 - 17,623 44,383 2,471

Total 153,711 279,335 358,472 51,164 983,991 1,826,673 514,530



173

f) The residual maturity breakdown of exposures

Up to 1 year Over 1 year Up to 1 year Over 1 year

Central government and central banks 281,813 185,878 237,670 25,694

Regional government or local authorities 14,011 36,941 3,147 39,830

Public sector entities 11,191 2,033 11,565 12,464

Multilateral development banks 5,082 3,019 80 8,093

Institutions 142,334 5,127 65,619 7,686

Corporate entities 151,857 333,041 325,478 286,326

Retail banking 190,928 246,068 220,617 270,122

Exposure to mortgages 21,993 20,511 15,144 19,215

Defaulted exposures 57,044 30,810 (a) (a)

Overdue items (a) (a) 16,997 7,515

High risk exposures 45,720 13,232 (a) (a)

Regulatory high risk exposures (a) (a) 177,004 31,203

Covered bond investments - - - -

Institutions and companies with a short-term rating 32,000 - 821 -

Exposures from equity instruments 5,329 - (a) (a)

Investment funds (a) (a) - -

Other items 32,835 3,099 (a) (a)

Other exposures (a) (a) 40,638 3,745

Total 992,137 879,759 1,114,780 711,893



g) Exposures by counterparty type Not yet due exposures, impaired exposures and overdue exposures according to debtor category

Loans to

government

and local

authorities

Loans and

advances to

banks Retail loans

Loans to

private

entrepreneurs

Corporate

loans

Outstanding loans - unimpaired 66,858 52,000 291,257 25,831 417,537

Outstanding loans - impaired - - 2,416 3,414 96,097

Overdue loans - individually impaired 2,876 - 15,417 4,734 114,690

Overdue loans - unimpaired 11 - 833 285 3,833

Impairments (2,034) - (18,506) (4,463) (129,457)

Total 67,711 52,000 291,417 29,801 502,700

31 December 2014



174

Loans to

government

and local

authorities

Loans

and

advances

to banks Retail loans

Loans to

private

entrepreneurs

Corporate

loans

Outstanding loans - unimpaired 63,071 5,822 308,355 37,131 647,026

Outstanding loans - impaired - - 1,246 813 117,535

Overdue loans - individually impaired - - 13,622 8,042 360,557

Overdue loans - unimpaired 2,812 - 1,313 767 25,639

Impairments (258) - (14,959) (5,070) (327,585)

Total 65,625 5,822 309,577 41,683 823,172

31 December 2013

Specific and general credit risk adjustments, according to debtor category

Charges for specific and general credit risk adjustments during the reporting period The balances and dynamics of impairments are disclosed in the financial statements of this annual report. Impairments for loans and advances to customers are disclosed in item 4.5.2, while impairments for other financial statements are shown under 4.6. Provisions for contingent liabilities are shown in item 4.21 of the financial statements.

Loans to

government

and local

authorities

Loans and

advances to

banks Retail loans

Loans to

private

entrepreneurs

Corporate

loans

Individual impairments 1,978 - 6,127 2,293 106,540

Collective impairments 56 - 12,379 2,170 22,917

Total 2,034 - 18,506 4,463 129,457

31 DEC 2014

Loans to

government

and local

authorities

Loans and

advances to

banks Retail loans

Loans to

private

entrepreneurs

Corporate

loans

Individual impairments - - 5,373 3,148 297,414

Collective impairments 258 - 9,586 1,921 30,172

Total 258 - 14,959 5,070 327,586

31 DEC 2013



175

h) Impaired exposures and past due exposures, broken down by significant geographical areas

Slovenia EU SE Europe Other countries

Outstanding loans 772,438 74,828 1,127 5,089

Outstanding loans - impaired 90,550 147 11,230 -

Overdue loans - impaired 78,151 47,968 11,599 -

Overdue loans - unimpaired 4,685 276 1 -

Impairments (106,011) (31,696) (16,552) (200)

Net exposure 839,813 91,522 7,405 4,888

31 December 2014

Slovenia EU SE Europe Other countries

Outstanding loans 1,017,029 32,132 8,197 4,020

Outstanding loans - impaired 132,770 231 6,568 -

Overdue loans - impaired 303,909 47,130 11,235 -

Overdue loans - unimpaired 27,696 2,705 129 -

Impairments (314,829) (21,693) (11,299) (52)

Net exposure 1,166,575 60,505 14,831 3,968

31 December 2014



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8 UNENCUMBERED ASSETS (Article 443 of the CRR Regulation)

9 USE OF ECAIs (Article 444 of the CRR Regulation) a), b) The names of the nominated ECAI (External Credit Assessment Institutions) and the exposure classes, for which each ECAI is used Pursuant to Article 138 of the CRR Regulation the Bank nominated the following external credit assessment institutions for risk weighting: - Moody's Investors Service and Fitch Ratings for exposures to central government and - Moody's Investor Service for exposures to institutions.

Disclosure on asset encumbrance

Template A-Assets

Assets of the reporting institution 16,612 1,695,370

Equity instruments - - 3,350 3,350

Debt securities 16,612 16,612 462,822 462,822

Other assets - 43,278

Template B-Collateral received

Collateral received by the reporting institution - -

Own debt securities issued other than own

covered bonds or ABSs - -

Template C-Encumbered assets/collateral received and associated liabilities

Matching liabilities,

contingent liabilities

or securities lent

Assets, collateral

received and own

debt securities

issued other than

covered bonds and

ABSs encumbered

Carrying amount of selected financial liabilities,

contingent liabilities or securities lent745,469 16,612

D - Information on importance of encumbrance

As at 31 December 2014 the Bank held EUR 16,612 thousand in bonds of the Republic of Slovenia, which it has pledged as a

deposit guarantee. With these assets the Bank covers for 2.2% of liabilities for liquid investments from the guarantee scheme.

The Banking act (Zban-1) and the Decision on the deposit guarantee system represent the basis for the encumbrance of assets

from deposit guarantees.

The carrying amounts of unencumbered assets from the Other assets item (Annex A) represent intangible assets and property

and equipment, deferred tax assets and derivative assets 62%.

Fair value of

unencumbered

assets

Fair value of

encumbered

collateral received

or own debt

securities issued

Carrying amount of

encumbered assets

Fair value of

encumbered assets

Carrying amount of

unencumbered

assets

Fair value of

collateral received

or own debt

securities issued

available for

encumbrance



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c) Description of the risk weighting process for exposures

To determine risk weights the Bank uses available ratings. If a financial instrument or an issuer has been rated by two of the nominated ECAI and different weights suit the respective ratings, the rating is used, which requires higher risk weighting. For exposure to the central government and central banks and for exposure to institutions ratings for financial instruments are used as well as debtor or issuer ratings. If a rating of a financial instrument is available, it is used to determine the risk weight. Should it not be available, a long term rating of other comparable financial instruments is used or the rating of the issuer or debtor. In the event there is no rating available whatsoever, exposure to central governments and central banks is weighted at 100%. Ratings and related credit quality steps for exposure to central government are used to determine the risk weights of financial instruments and debtors from other exposures, for which there is no other rating of a nominated ECAI available or for which the Bank did not nominate any ECAI d) The association of external ratings of each nominated ECAI with the credit quality steps

The association of ratings with credit quality steps complies with the standard association published by the EBA. The Bank does not associate ratings of individual ECAI, which the EBA does not publish. Pursuant to the provisions of Article 114(4) of the CRR Regulation exposure to Member States’ central governments and central banks denominated and funded in the domestic currency of that central government and central bank, may be assigned a risk weight of 0%, being equivalent to the credit quality step 1. e) Exposure values and exposure values after credit risk mitigation effects, associated with

each credit quality step The table below shows exposure values and exposure values after the effects of credit protection, broken down according to credit quality steps

Net amount of

exposures

Exposures taking

into account

collateral

Net amount of

exposures

Exposures taking

into account

collateral

Credit quality step 1 492,699 489,848 304,981 286,432

Credit quality step 2 15,000 15,000 5,661 5,661

Credit quality step 3 4,979 4,979 - -

Credit quality step 4 4,697 - - -




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10 EXPOSURE TO MARKET RISK (Article 445 of the CRR Regulation) The Bank discloses capital requirements (calculated in accordance with items (b) and (c) of Article 93(3)) separately per risk type (trading book).

31 December

2014

31 December

2013

Capital requiremet for positional risk from debt financial instruments 32 4,350

- general positional risks 32 3,740

- specific positoinal risk - 610

Capital requiremet for positional risk from equity financial instruments 14 696

- general positional risks 7 348

- specific positoinal risk 7 348

- for positions in CIU property - -

Currency risk capital requirement - -

Total 46 5,046 11 OPERATIONAL RISK (Article 446 of the CRR Regulation) The Bank discloses the approach to the calculation of capital requirements for operational risk, for which it qualifies; methodologies from Article 312(2) are described in the event of the use of different approaches. The Bank calculates capital requirements for operational risk using the simple approach in accordance with article 315 of the CRR Regulation. The capital requirement equals 15% of the three year average of the relevant ratio defined in Article 316 of the aforementioned Regulation. As 31 December 2014 the capital requirement stood at EUR 13,769 thousand (2013: EUR 10,965 thousand). 12 EXPOSURES IN EQUITIES NOT INCLUDED IN THE TRADING BOOK (Article 447 of the CRR

Regulation) The Bank does not disclose details on exposures that are immaterial, basing the decision on the definition that a materially insignificant exposure represents less than 3% of the total exposure of the

bank. Exposure from equity instruments, not included in the banking book, amounted to EUR 3,250 thousand on 31 December 2014 (2013: EUR 5,944 thousand), with investments into stock exchange traded equity instruments accounting for EUR 2,685 thousand (2013: EUR 2,934 thousand). An investment is valued at market, which reflects its fair value. Exposure from investments in non-public companies amounted to EUR 566 thousand on 31 December 2014 (2013: EUR 3,010 thousand). Details on the realized and unrealized gains and losses from non-exchange traded securities are disclosed in the financial statements.



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13 EXPOSURE TO INTEREST RATE RISK ON POSITIONS NOT INCLUDED IN THE TRADING BOOK (Article 448 of the CRR Regulation)

Banks are usually exposed to interest rate risk, as their core objective is attaining funds at a specific interest rate and investing these funds at a higher interest rate, which generally also means a mismatch in the term structure of an investment as opposed to the funding. Exposure to interest rate risk is mainly derived from the mismatch in the maturity or interest fixing dates between investments, liabilities and off-balance sheet items. Additionally, interest rate risk can also be based on the risk of a yield curve shift, basic risk and embedded options. The Bank assesses exposure to interest rate risk on a monthly basis, taking into account all of the abovementioned risk sources. Special focus it put on the fluctuations of demand deposits, where the stable part of these is calculated, which the Bank estimates to be an interest rate insensitive source in the short term. Exposure to interest rate risk may manifest itself through changes in net interest income and through changes in the economic value of the Bank’s equity. The impact on earnings or another measure of value used in the management of interest rate risk in the event of a sudden increase or decrease in interest rates. The table below shows the effects on net interest income and the economic value of equity for items, not included in the trading book in the event of an immediate change in interest rates by 100 basis points.


Effect on net interest income 3,555 2,105

Effect on the economic value of equity 172 5,578

14 REMUNERATION POLICY (Article 450 of the CRR Regulation) The Bank has modelled and prepared its remuneration policy in accordance with the ZBan-1 and the Decision on risk management and the implementation of internal capital adequacy assessment for banks and savings banks. The policy has been aligned with the business strategy, the organisational structure and the Bank’s planned operational and financial objectives. The Bank’s Management Board, the Remuneration Committee and its Supervisory Board all operated in line with the remuneration policy in 2014. The Remuneration Committee met twice in 2014, at its 3rd meeting in October and at its 4th meeting in November. The Supervisory Board appointed Melita Malgaj to the Remuneration Committee in January. It comprises: - Jure Peljhan, Ph.D. (President of the Supervisory Board) – committee president; - Melita Malgaj (member of the Supervisory Board) – committee member; - Tomaž Subotič, Ph.D. (member of the Supervisory Board) – committee member; - Bojan Salobir – representative of the Bank with a standing invitation. The Remuneration Committee monitors and verifies the effects and the adequacy of the remuneration policy. Its assignment are: - preparation of proposals pertaining to the general principles of the remuneration policy; - assessment of existing methodologies of the remuneration system; - preparation of recommendations to the Supervisory Board on the implementation of the

remuneration policy; - preparation of proposals on the remuneration of employees; - reviewing the adequacy of the general remuneration policies and their implementation;



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- verifying compliance of the remuneration policy with the Bank’s business policies and direct monitoring of the remuneration of those categories of employees, working in the internal monitoring system and holding other monitoring functions.

The Committee prepares proposals for the decisions of the Supervisory Board in relation to the remuneration of Management Board members and the categories of top ranking employees as well as ensuring that the decisions adopted by the Supervisory Board are implemented. A number of the Bank’s expert departments have been included in the preparation of the Remuneration policy of Banka Celje, d.d. External advisors were not used. Top ranking employees are the ones who have a significant impact on the Bank’s risk profile (the Management Board, senior management) within the scope of their assignments and tasks. The remuneration received by these individuals include a fixed and a variable part. The condition for the payment of the variable part is the attainment of set business goals at the level of the Bank and an organisational unit and the fulfilment of other obligations written in the individual employment agreement within a business year. The performance of an individual top ranking employee is assessed on the basis of financial and non-financial performance criteria. Financial performance criteria are assessed at the level of the Bank and an organisational unit. Non-financial criteria pertain to an individual top ranking employee and take into account their attained development goals.



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The table below shows target indicators for the evaluation of performance by top ranking employees, which may be used ad hoc and are defined in the remuneration policy.

I. FINANCIAL CRITERIA

Indicator Assessment estimates THE OBJECTIVE IS:

I.1. at the level of the Bank Target indicators are set every year by the Management Board and approved by the Supervisory Board. The shown indicators may be selected, these are however not exclusive, as new indicators may be defined for an individual business year.

Capital adequacy ratio exceeded achieved not achieved

Attaining a net profit after impairment and taxes

exceeded achieved not achieved

Attaining the planned result before impairments


An adequate ratio between costs and revenues


Ratio between net loans to customers and deposits from customers with certificates of deposit


Variable part of the remuneration for the attainment of target indicators at bank level: the highest possible amount of variable remuneration for the attainment of target indicators at the level of the Bank is 15% of the annual remuneration of a top ranking employee.

I.2. at organisational unit level Target indicators are set and approved by the Management Board every year.

Business goal of an organisational unit


Financial goals of an organisational unit (where measurable)


Variable part of the remuneration for the attainment of target indicators at an organisational unit level: the highest possible amount of variable remuneration for the attainment of target indicators at the organisational unit level 10% of the annual remuneration of a top ranking employee.

II. NON-FINANCIAL CRITERIA

II.1. per top ranking employee For each business year target indicators per top ranking employee are defined together with their superiors according to their post and approved by the Bank’s competent authority.

Reached development goals of the top ranking employee (compliance with adopted policies, compliance with the requirements of the regulator, compliance with authorisations, consideration of integrity and taking care to comply with legislation, development and care for employees, etc.)

Descriptive evaluation

Variable part of the remuneration for the attainment of non-financial criteria for a top ranking employee: the highest possible amount of variable remuneration for the attainment of non-financial criteria per employee is 5% of the annual remuneration of a top ranking employee.

The assessment of the Management Board is the responsibility of the Supervisory Board, while the assessment of other top ranking employees falls under the competencies of the Management Board.



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The payment method and structure of the variable part of remuneration of the Management Board with suspended payment is carried out according to the following model: - 40% paid at confirmation of results at the Bank’s General Meeting; - 60% is paid out over a period of 3 years. For other top ranking employees the payment of the variable part of remuneration with suspended payment is carried out according to the following model: - 60% paid at confirmation of results at the Bank’s General Meeting; - 40% is paid out over a period of 3 years. In the event of the onset of restrictive conditions as set out in the Decision on risk management (e.g. a deterioration of capital and liquidity positions), the Bank will immediately implement a conservative remuneration policy. In accordance with the remuneration policy, the Bank does not pay out the variable part in financial instruments. The significant characteristics of the remuneration policy The purpose of the remuneration policy is ensuring its compliance with the recommendations and principles of the remuneration policies in the financial sector. It is an umbrella act of the Bank in the area of the definition of rights on the basis of work, management and supervision and it provides the starting point and determines the types of remuneration at the Bank. The remuneration policy is harmonised with the Bank’s business strategy, its objectives and values as well as the organisational structure. The aim of the remuneration policy is to provide a reward system, which promotes employee motivation and maximises performance, provides for transparency of remuneration and efficient monitoring of remuneration, while at the same time ensuring efficient risk management and promoting it. The remuneration policy provides for a clear connection between work performance, managerial skills and the variable part of remuneration. Employee remuneration is defined in proportion with their authority, tasks, experience and responsibilities as well as the Bank’s financial positions, all in accordance with legislation and regulation in the field, which defines remuneration ceilings. Top ranking employee remuneration comprises a fix and variable part. The Bank provides a balance of ratios between the two parts, which eliminates a significant dependency of total remuneration of top ranking employees on the variable part, while still representing an efficient motivation of these employees to reach or exceed planned performance results. The fixed part still represents a high enough share in an employee’s total remuneration to allow the Bank to be completely flexible in its variable remuneration policy, including the option of non-payment. The remuneration of the Management Board and senior management are arranged in accordance with the Act Regulating the Incomes of Managers of Companies owned by the Republic of Slovenia and Municipalities (Official Gazette of the Republic of Slovenia, No. 21/10, 8/11, the ZPPOGD). The performance criteria, based on which an employee is entitled to shares, options or other forms of variable remuneration and the main rules and basis for the decision-making process on the use of possible types of variable remuneration and other non-cash benefits for employees Variable remuneration may represent a maximum of 30% of the annual fixed remuneration received by a top ranking employee. Such an employee may only be awarded a fixed variable part of remuneration for in the first year of employment.



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In line with the remuneration policy the payment of variable remuneration for the Management Board and the top ranking employees is carried out with a suspension of three year, whereby each year of suspension may see a maximum of 20% of the variable part paid out to the Management Board and a maximum of 13.33% annually to top ranking employees. Prior to the payment the Bank must verify that the conditions for the payment of the deferred part of variable remuneration have been met. Information on the total gross amount of remuneration paid out in 2014 Information on remuneration is shown in item 4.27 of the Financial statements. 15 USE OF CREDIT RISK MITIGATION TECHNIQUES (Article 453 of the CRR Regulation) a) Policies and processes for balance sheet and off-balance sheet netting The Bank does not utilise balance sheet netting and credit derivatives to mitigate credit risk. b) The policies and processes for collateral valuation and management The Bank mitigates exposure to credit risk by implementing policies regarding collateral. To minimise loss in the event of default, the Bank tends to acquire adequate collateral from the borrower, such as a mortgage on commercial or residential real estate, pledges of financial property (bank deposits, securities) or the acquisition of personal credit insurance by an adequate provider. Other forms of collateral, such as physical collateral, inventories and cash claims, are considered to be of lesser quality. Usually long-term and short-term loans are collateralised, with the only ones not requiring collateral being those granted to borrowers exhibiting a higher credit rating. Should a borrower’s credit rating deteriorate or the fair value of collateral decrease, the Bank begins negotiations to obtain additional collateral or to decrease exposure. The Bank manages market and credit risk from collateral by regularly monitoring the fair value and liquidity of individual types of collateral. It has defined minimum collateral coverage ratios, set according to the type of collateral and borrower risk. The Bank regularly monitors these collateral coverage ratios and requires the borrower to put up additional collateral in the event of a drop in the value and quality of collateral and the deterioration of a borrower’s creditworthiness. The concentration of market and credit risk, based on use of collateral is managed by the Bank with regular (monthly) reviews and analyses of received collateral. When taking collateral the Bank exposes itself to residual risk, which is why it has prepared a policy for assuming and managing collateral risk. It assesses and monitors the risk of inefficiency or reduced efficiency of collateral, the risk in relation to collateral valuation, the risk of concentrations of individual types of collateral and the risk associated with the termination of collateral. c) The description of the main types of collateral taken by the Bank The main types of adequate collateral that the Bank takes and their valuation are shown below: - financial collateral (bank deposits or cash equivalents, debt securities issued by central

governments, central banks or institutions, equity and other securities listed on stock exchanges), which is valued at market prices and revalued on a daily basis;

- commercial or residential real estate at fair value; - personal credit insurance by the following: central governments and central banks,

municipalities, public sector entities, institutions, insurance companies and prime rated companies.



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d) Main types of guarantee issuers and counterparties in derivative transactions and their credit rating

Rating

amount share amount share

1. Central government 42,086 16.3% 58,314 18.9%

2. Public sector entities 0 0.0% 0 0.0%

3. Institutions and insurance company 135,254 52.3% 151,876 49.3%

A 131,864 150,862

B 3,390 1,013

4. Companies 39,357 15.2% 58,230 18.9%

A 9,342 14,864

B 30,015 43,367

5. Private entrepreneurs 4,017 1.6% 3,163 1.0%

A 1,559 1,832

B 2,458 1,331

6. Private individuals and personal

guarantees 37,665 14.6% 36,766 11.9%

Total 258,379 100.0% 308,349 100.0%

20132014

e) Information on market or credit risk concentrations within the collateral taken

2014 2013

Type of collateral share share

Deposits 1.0% 0.7%

Republic of Slovenia guarantee 4.4% 3.6%

Insurance company 13.7% 10.9%

Securities 1.8% 3.0%

Mortgages 64.0% 67.2%

Other types of collateral 15.2% 14.6%

Total 100.0% 100.0%

f) Total exposure after adjustment for instability, adequately covered by financial property

amount share amount share

Retail banking 7,044 63.5% 6,545 33.8%

Corporate entities 3,180 28.7% 7,275 37.6%

Other items 542 4.9% - 0.0%

Defaulted exposures 297 2.7% - 0.0%

Public sector entities 34 0.3% 34 0.2%

Regulatory high risk exposures - 0.0% 4,965 25.6%

Other exposures - 0.0% 539 2.8%

Total 11,097 100.0% 19,358 100.0%

In other exposure categories the Bank has no exposures secured with financial property.




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g) Total exposure, covered by collateral or credit derivatives

amount shares amount shares

Corporate entities 154,636 89.1% 36,314 47.2%

Public sector entities 11,004 6.3% 16,953 22.0%

Institutions 7,549 4.3% 23,549 30.6%

Defaulted exposures 393 0.2% - 0.0%

Retail banking - 0.0% 122 0.2%

Total 173,582 100.0% 76,938 100.0%

In other exposure categories the Bank is not exposed to personal guarantees.


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