Notes to the Consolidated Financial Statements

1. GENERAL INFORMATION

Nova Ljubljanska banka d.d. Ljubljana (“the Bank” or “NLB”) is incorporated in Slovenia as a joint stock company providing universal banking services. The largest shareholders of Nova Ljubljanska banka d.d. are the Republic of Slovenia, owning 35.41%of the shares, and KBC Bank N.V., Brussels (“KBC Bank”), owning 34%of the shares.

The address of its registered office is: Nova Ljubljanska banka d.d., Ljubljana, Trg republike 2, Ljubljana

The increase in the general price index for the year 2007 was 5.6% (2006: 2.8%). In the period from 1 January 2007 to 31 December 2007 the exchange rate for the US dollar changed from 1.3170 US dollars for 1 Euro to 1.4721 US dollars for 1 Euro. The functional and presentation currency of the Group in year 2006 was the tolar (note 2.29.).

All amounts in the financial statements and in the notes to the financial statements are expressed in thousands of euros unless otherwise specified.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of the consolidated financial statements are set out below.

2.1. Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

Single entity ultimate parent company financial statements have been prepared in accordance with International Financial Reporting Standards in addition to consolidated financial statements according to the requirements of local legislation

2.2. Basis of presentation of consolidated financial statements

The consolidated financial statements of NLB Group (“Group”) have been prepared under the historical cost convention as modified by the revaluation of available for sale financial assets, financial assets and financial liabilities at fair value through profit or loss, including all derivative contracts and investment property.

The preparation of consolidated financial statements in conformity with IFRS as adopted by the EU requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current events and actions, actual results may ultimately differ from those estimates. Critical accounting estimates are disclosed in note 2.31.

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented.

2.3. Consolidation

Subsidiary undertakings, which are those companies in which the Group, directly or indirectly, has an interest of more than half of the voting rights or otherwise has the power to exercise control over the operations, have been fully consolidated, except SIB banka. SIB banka is in the process of liquidation and the major part of its assets and liabilities were transferred to NLB. Subsidiaries are consolidated from the date on which effective control is transferred to the Group and are no longer consolidated from the date that control ceases. All inter-company transactions, balances and unrealized gains and losses on transactions between group companies have been eliminated. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group. Disclosure of minority interest is made in consolidated statement of changes in equity.

Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of impairment of the asset transferred.

The Group applies a policy of treating transactions with minority interests as transactions with equity owners of the Group. For purchases from minority interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is deducted from equity. Gains or losses on disposals to minority interests are also recorded in equity. For disposals to minority interests, differences between any proceeds received and the relevant share of minority interests are also recorded in equity.

For the needs of reporting in accordance with International Financial Reporting Standards, the use of full consolidation method is required for subsidiaries and the equity method for associate and joint venture companies is also required.

The Group’s subsidiaries are presented in note 47.

2.4. Associated undertakings

Investments in associated undertakings are accounted for using the equity method of accounting. These are undertakings where the Group generally has between 20% and 50% of the voting rights, and over which the Group exercises significant influence, but which it does not control.

The Group’s share of its associates’ post-acquisition profits or losses is recognized in the income statement, its share of post-acquisition movements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate.

The Group’s principal associated undertakings are presented in note 32.

2.5. Jointly controlled companies

Jointly controlled companies are those enterprises over whose activities the Group has joint control, established by contractual agreement. Investments in jointly controlled companies are accounted for using the equity method of accounting.

2.6. Goodwill and Excess of acquirer’s interest

On acquisition of a subsidiary, associated or jointly controlled companies, the Bank calculates the difference between its share in the fair value of the assets and liabilities acquired and the fair value of the consideration given. Where the consideration given exceeds the net assets acquired, goodwill arises. Goodwill is tested for impairment semi-annually.

Where the bank’s share of identifiable assets, liabilities and contingent liabilities exceeds the cost of acquisition, a reassessment is made of the completeness of identification and measurement, and any remaining excess (“negative goodwill”) is recognized immediately in the income statement.

2.7. Foreign currency translation

Functional and presentation currency
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates. The consolidated financial statements are presented in euros, which is the Group’s functional and presentation currency.

Transactions and balances
Foreign currency transactions are translated into functional currency using exchange rates prevailing at the dates 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 recognized in the income statement, except when deferred in equity as qualifying cash flow hedges.

Translation differences resulting from changes in the amortized cost of monetary items denominated in foreign currency and classified as available for sale financial assets, are recognized in profit or loss.

Translation differences on non-monetary items, such as equities at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available for sale, are included in the revaluation reserve in equity.

Gains and losses resulting from foreign currency purchases and sales for trading purposes are included in the income statement as gains less losses from financial assets and liabilities held for trading.

Group companies
The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

• Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of the balance sheet,
• Income and expenses for each income statement are translated at average exchange rates,
• All resulting exchange differences are recognized as a separate component of equity.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

On consolidation exchange differences arising from the translation of the net investment in foreign operations and of borrowings, are taken to shareholder’s equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognized in the income statement as part of gain or loss on sale.

2.8. Interest income and expense

Interest income and expense are recognized in the income statement for all interest-bearing instruments on an accruals basis using the effective yield method based on the actual purchase price. Interest income includes coupons earned on fixed income investment and trading securities and accrued discounts and premiums on securities. The calculation of effective interest rate includes all fees and points paid or received between parties to the contract and all transaction costs. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

Interest income and expenses from all financial assets and liabilities are disclosed as part of net interest income.

2.9. Fee and commission

Fees and commissions are generally recognized when the service has been provided. Fees and commissions consist mainly of fees received from payment and from the managing of funds on behalf of legal entities and individuals, together with commissions from guarantees.

2.10. Dividend income

Dividends are recognized in the income statement when the Group’s right to receive payment is established..

2.11. Financial instruments

a) Classification

Financial instruments at fair value through profit or loss
This category has two sub-categories: financial instruments held for trading and financial instruments designated at fair value through profit or loss at inception. A financial instrument is classified in this group if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorized as held for trading unless they are designated as hedging instruments.

The Group designates a financial instrument as at fair value trough profit or loss when:

• It eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities on different basis or
• A group of financial assets, financial liabilities or both is managed and its performance is evaluated on fair value basis, in accordance with documented risk management or investment strategy, and information about the group is provided internally on that basis to the Group’s key management or
• A financial instrument contains one or more embedded derivatives that can significantly modify the cash flows otherwise required by the contract.

Loans and receivables
Loans and receivables are non-derivative financial instruments with fixed or determinable payments that are not quoted in an active market, other than: (a) 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; (b) those that the Group upon initial recognition designates as available for sale; or (c) those for which the Group may not recover substantially all of its initial investment, other than because of credit deterioration.

Held to maturity investments
Held to maturity investments are non-derivative financial instruments with fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity.

Available for sale financial assets
Available for sale financial assets are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.

b) Measurement and recognition

Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit and loss are initially recognized at fair value, and transaction costs are expensed in the income statement.

Regular way purchases and sales of financial instruments at fair value through profit or loss, held to maturity and available for sale, are recognized on trade date. Loans are recognized when cash is advanced to the borrowers. All other purchases and sales are recognized as derivative forward transactions until settlement.

Financial assets at fair value through profit or loss and financial assets available for sale are subsequently measured at fair value. Gains and losses from changes in the fair value of the financial assets at fair value through profit or loss are included in the income statement in the period in which they arise. Gains and losses from changes in the fair value of available for sale financial assets are recognized in equity until the financial asset is derecognized or impaired, at which time the effect previously included in equity is recognized in the income statement. However, interest calculated using the effective interest method and foreign currency gains and losses on monetary assets classified as available for sale are recognized in the income statement. Dividends on available for sale equity instruments are recognized in the income statement when the Group’s right to receive payment is established.

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

c) Derecognition

A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire or the financial asset is transferred and transfer qualifies for derecognition. A financial liability is derecognized only when it is extinguished – i.e. when the obligation specified in the contract is discharged, cancelled or expires.

d) Fair value measurement principles

The fair value of financial instruments in active markets is based on current bid price at the balance sheet date. If there is no active market, the fair value of the instruments is estimated using discounted cash flow techniques or pricing models.

Where discounted cash flow techniques are used, estimated future cash flows are based on the management’s best estimates and the discount rate is a market-related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date.

e) Derivative financial instruments and hedge accounting

Derivative financial instruments, including forward and futures contracts, swaps and options, are initially recognized on the balance sheet at fair value. Derivative financial instruments are subsequently remeasured at their fair value. Fair values are obtained from quoted market price, discounted cash flow models or pricing models, as appropriate. All derivatives are carried at their fair value within assets when favourable to the Group, and within liabilities when unfavourable to the Group.

The method of recognizing 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 designates certain derivatives as either:

• Hedges of the fair value of recognized assets or liabilities or firm commitments (fair value hedge) or
• Hedges of highly probable future cash flows attributable to a recognized asset or liability, or a forecasted transaction (cash flow hedge).

Hedge accounting is used for derivatives designated in this way provided certain criteria are met.

The Group documents, at the inception of the transaction, the relationship between hedged items and hedging instruments, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Effective changes in fair value of hedging instruments and related hedged items are reflected in “fair value adjustments in hedge accounting”. Any ineffectiveness is recorded in “gains and losses on financial assets and liabilities held for trading”.

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 amortized to profit or loss over the period to maturity. The adjustment to the carrying amount of a hedged equity security remains in retained earnings until the disposal of the equity security

Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity. The gain or loss relating to the ineffective portion is recognized immediately in the income statement – “gains and losses on financial assets and liabilities held for trading”.

Amounts accumulated in equity are recognized in the income statement in the periods when the hedged item affects profit or loss.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.

Derivatives that do not qualify for hedge accounting
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of such derivative instruments are recognized immediately in the income statement within gains and losses on financial assets and liabilities held for trading.

2.12. Impairment of financial assets

a) Assets carried at amortized cost

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that event has an impact on the future cash flows of the financial asset or group of financial assets that can be reliably estimated.

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

• Delinquency in contractual payments of principal or interest,
• Cash flow difficulties experienced by the borrower
• Breach of loan covenants or conditions,
• Initiation of bankruptcy proceedings,
• Deterioration of the borrower’s competitive position,
• Deterioration in the value of collateral and
• Downgrading below investment grade level.

The estimated period between a loss occurring and its identification is determined by local management for each identified portfolio. In general, the periods used vary between three and six months.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. The Group regards all exposures to A, B and C rated customers over Euro 1,500 thousand and exposures to D and E rated customers over Euro 10 thousand as individually significant financial assets. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristic and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment.

If there is objective evidence that an impairment loss on loans and receivables 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 discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through an allowance account and the amount of the loss is recognized in the income statement. If a loan or held to maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

The calculation of the present value of the estimated future cash flows of collateralized financial assets reflects the cash flows that may result from foreclosure, less costs of obtaining and selling the collateral, whether or not foreclosure is probable.

For the purpose of collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (on the basis of the Group’s internal grading process that considers all relevant factors). Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows and historical loss experience for assets with credit risk characteristics similar to those in the group. The methodology and assumptions used for estimating future cash flows are reviewed regularly.

If the amount of the impairment subsequently decreases due to an event occurring after the write down, the reversal of loss is recognized as a reduction of an allowance for loan impairment.

When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement.

Objective criteria that Group uses to determine that a loan should be written off include:

• The debtor no longer performs his regular activities (termination of the legal entity),
• The Group holds no adequate collateral to be used for repayment and
• Judicial recovery proceeding have concluded.

b) Assets classified as available for sale

The Group assesses at each balance sheet date whether there is objective evidence that financial assets available for sale are impaired. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available for sale financial assets, the cumulative loss is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the income statement.

c) Renegotiated loans

Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated due to deterioration of the borrower’s financial position, are no longer considered to be past due but are treated as new loans. In subsequent years, the asset is considered to be past due and disclosed only if renegotiated.

2.13. Offsetting

Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously.

2.14. Sale and repurchase agreements

Securities sold under sale and repurchase agreements (repos) are retained in the financial statements and the counterparty liability is included in financial liabilities associated to the transferred assets. Securities sold subject to sale and repurchase agreements are reclassified in the financial statements as pledged assets when the transferee has the right by contract or custom to sell or repledge the collateral. Securities purchased under agreements to resell (reverse repos) are recorded as loans and advances to banks or customers, as appropriate.

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.

2.15. Property and equipment

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

The Group assesses each year whether there are indications that assets may be impaired. If any such indication exists, the Group estimates the recoverable amount. Recoverable amount is the higher of net selling price and value in use. If value in use exceeds the carrying value, the assets are not impaired.

Depreciation is provided on a straight-line basis at rates designed to write off the cost of buildings and equipment over their estimated useful lives. The following are approximations of the annual rates used:

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

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit. Maintenance and repairs are charged to the income statement during the financial period in which they are incurred.

Day-to-day servicing costs are recognized in profit or loss as incurred. Subsequent costs which increase future economic benefits are recognized in the carrying amount of an asset.

2.16. Intangible assets

Intangible assets include software, goodwill (note 2.6.) and customer relationships. Intangible assets are stated at cost, less accumulated amortization and impairment losses.

Amortization is provided on a straight-line basis at rates designed to write off the cost of software over its estimated useful life. Core banking systems are amortized over a period of 10 years, other software over a period of 3 - 5 years and customer relationships over a period of 12 - 15 years.

Assets in the course of transfer or construction/implementation are not amortized until they are available for use.

2.17. Investment property

Investment property includes buildings held for rental yields and not occupied by the Group. Investment property is stated at fair value determined by an independent registered valuer. Fair value is based on current market prices. Any gain or loss arising from a change in fair value is recognized in the income statement. If there is a change in use due to the commencement of owner occupation, investment property is transferred to owner occupied property.

2.18. Non-current assets held for sale

Non-current assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets classified as held for sale are measured at the lower of the assets’ previous carrying amount and fair value less costs to sell. The effects of sale and valuation are included in the income statement as profit or loss from non-current assets held for sale.

2.19. Accounting for leases

• where a Group company is the lessee
  Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which termination takes place.
  
  Leases of property and equipment where the Group has substantially all of the risks and rewards of ownership are classified as finance leases. Financial leases are recognized as an asset and liability at amounts equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payments. Leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Lease payments are apportioned between finance charge and the reduction of the outstanding liability.
  
  
• where a group company is the lessor
  Payments under operating lease are recognized as an income on a straight-line basis over the period of the lease. Assets leased under operating leases are presented in the balance sheet as an investment property.
  
  When assets are leased out under a finance lease, the present value of the lease payments is recognized as a receivable. Income from finance leasing transactions is apportioned systematically over the primary lease period, reflecting a constant periodic return on the lessor’s net investment outstanding.

2.20. Cash and cash equivalents

For the purpose of the cash flow statement, cash and cash equivalents comprise cash and balances with Central Banks except for obligatory reserve, securities held for trading, loans to banks and debt securities not held for trading with original maturity of 90 days.

2.21. Borrowings

Borrowings are recognized initially at fair value, that is their issue proceeds (fair value of consideration received) net of transaction cost incurred. Borrowings are subsequently stated at amortized cost and any difference between net proceeds and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method.

If the Group purchases its own debt, it is removed from the balance sheet. Difference between the carrying amount of the purchased debt and the amount paid is recognized immediately in the income statement.

2.22. Provisions

Provisions are recognized 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.

2.23. Financial guarantee contracts

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of debt instruments. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customer to secure loans, overdrafts and other banking facilities.

Financial guarantee contracts are initially recognized at fair value which is equal to the fee received. Fee is amortized to the income statement by using the straight-line method. The Group’s liabilities under guarantees are subsequently measured at the higher of the initial measurement, less amortization calculated to recognize fee income and the best estimate of the expenditure required to settle the obligation.

2.24. Inventories

Inventories are measured at the lower of cost and net realizable value. Cost is determined using the weighted average cost method.

2.25. Taxation

Income tax is provided on taxable profits at the rate prescribed by the Corporate Income Tax Law.

Deferred income tax is provided in full, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The principal temporary differences arise from the valuation of financial assets and liabilities including derivatives, valuation of investment property and provisions.

Deferred tax assets are recognized where it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred tax related to fair value re-measurement of available for sale investments and cash flow hedges is charged or credited directly to equity and subsequently recognized in the income statement together with the deferred gain or loss.

Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realized or the liability is settled. The applied rate for the calculation of deferred tax assets and liabilities was 23% in 2006 and 22% in 2007.

As at 1 January 2007 a new Corporate Income Tax Law came into force in Slovenia. The new law eliminates temporary differences relating to the financial instruments at fair value through profit or loss and impairment of tangible and intangible assets, but it retains temporary differences associated with provisions and depreciation. Temporary differences relating to valuation of financial instruments at fair value through profit or loss prior to 1 January 2007 still affect the balance of deferred taxes and also income statement when these securities are sold or derivatives settled. In the future deferred taxes will be calculated by using decreasing rates: 21% in 2008 and 20% in 2009.

2.26. Fiduciary activities

The Group manages a significant amount of assets on behalf of legal entities and individuals and charges fees for such services. These assets are not shown in the consolidated balance sheet but details of the funds under management are given in note 45.

2.27. Employee benefits

Employee benefits include jubilee benefits, retirement indemnity bonuses and other long-service benefits. Valuations of these obligations are carried out by independent qualified actuaries. The main actuarial assumptions included in the calculation of the obligation for other long-term employee benefits are:

• Applicable discount rate,
• Number of employees eligible for benefits and
• Future salary increases using general salary inflation index, promotions and increases in salaries according to past years of service.

According to legislation, employees retire after 35-40 years of service, when, if they fulfill certain conditions, they are entitled to an indemnity paid in lump sum. Employees are also entitled to a long service bonus for every ten years of service.

These obligations are measured at the present value of future cash outflows. All gains and losses are recognized in the income statement.

The Group contributes to the State Pension Scheme. The Group makes payments to a contribution plan according to legislation. Once contributions have been paid, the Group has no further payment obligation. The regular contributions constitute net periodic costs for the year in which they are due and are included in employee costs as they are incurred.

Provisions for termination benefits are provided as a result of an offer made to employees in order to encourage retirements before normal retirement date.

2.28. Share capital

Dividends on ordinary shares
Dividends on ordinary shares are recognized in equity in the period in which they are approved by the Bank’s shareholders.

Treasury shares
Where the Bank or other member of the consolidated Group purchases the Bank’s shares, the consideration paid is deducted from total shareholders’ equity as treasury shares until they are cancelled. Where such shares are subsequently sold, any consideration received is included in shareholders’ equity.

If some of the Bank's shares are held by the Bank or its subsidiaries, the Bank is obliged to have reserves for treasury shares.

Share issue costs
Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds.

2.29. Comparatives

Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current year. Consolidated financial statements are prepared on schemes, prescribed by the Bank of Slovenia. Since these schemes have changed in 2007, the Group has adjusted comparative figures. This had no material impact on the financial statements, nor did it affect total assets or net profit for the year.

The Euro became the functional and presentation currency of the Group at 1 January 2007. In previous years the Group’s financial statements were presented in tolars. Comparatives have been converted from tolars to euros using the official conversion rate applied at the adoption of the Euro, which was 239.64 tolars for 1 Euro.

2.30. Segment reporting

Business segments provide products or services that are subject to risks and returns different from those of other business segments.Geographical segments provide products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments

2.31. Critical accounting estimates and judgments in applying accounting policies

a) Impairment losses on loans and advances

The Group reviews its loan portfolio to assess impairment on a quarterly basis. In determining whether an impairment loss should be recorded in the income statement, the Group makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. Individual estimates are based on future cash flows assessed by accounting officers using all relevant information on counterparty and its ability to meet specific obligations. Scheduled cash flows are reviewed by independent bodies. Low-value exposures are reviewed on the pool basis. This includes all loans to individuals. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

b) Fair value of financial instruments

The fair values of quoted investments in active markets are based on current bid prices (financial assets) or offer prices (financial liabilities). The fair values of financial instruments that are not quoted in active markets are determined by using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. The valuation models reflect current market conditions at the measurement date which may not be representative of market conditions either before or after the measurement date. As at the balance sheet date management has reviewed its models to ensure they appropriately reflect current market conditions, including the relative liquidity of the market and credit spreads. Changes in assumptions about these factors could affect reported fair values of trading assets and liabilities and available for sale financial assets.

c) Impairment of available for sale equity investments

The Group determines that available for sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. The determination of what is significant or prolonged requires judgment. In making this judgment, the Group evaluates among other factors, the normal volatility in share price. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. At the end of both presented years there are no available for sale equity investments with fair value below cost.

d) Held to maturity investments

The Group classifies non-derivative financial assets with fixed or determinable payments and fixed maturity as held to maturity investments. Before making this classification the Group evaluates its intention and ability to hold such investments to maturity. If the Group fails to keep these investments to maturity other than for the specific circumstances it will be required to reclassify the entire class as available for sale. The investments would therefore be measured at fair value not amortized cost. If the entire class of held to maturity investments is tainted, the fair value would decrease by Euro 8,270 thousand (31 December 2006: Euro 492 thousand), with a corresponding entry in the fair value reserve in shareholders’ equity.

2.32. Adoption of new and revised International Financial Reporting Standards

In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are effective for accounting periods beginning on 1 January 2007. The adoption of new and revised Standards and Interpretations has affected mostly the Group’s disclosures relating to financial instruments and did not have any impact on the classification and valuation of the Group’s financial instruments.

Amendments to IAS 1 – Capital Disclosures were already early adopted in 2006.

IFRS 7 – Financial instruments: The standard introduces new disclosures relating to financial instruments and does not change the recognition and measurement of financial instruments. It has no effect on net profit and equity. The new standard requires entities to make enhanced quantitative and qualitative risk disclosures for all major categories of financial instruments in their financial statements. IFRS 7 is effective from 1 January 2007 and supersedes IAS 30 and the disclosure requirements of IAS 32.

IFRIC 8 – Scope of IFRS 2, requires consideration of transactions involving the issuance of equity instruments, where the identifiable consideration received is less than the fair value of the equity instruments issued in order to establish whether or not they fall within the scope of IFRS 2. This standard does not currently have any impact on the Group’s financial statements.

IFRIC 9 – Reassessment of embedded derivatives, concludes that an entity must assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. This standard does not have a material effect on the Group’s financial statements.

IFRIC 10 – Interim financial reporting and impairment, prohibits the impairment losses recognized in an interim period on goodwill and investments in equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. This standard does not have any impact on the Group’s financial statements.

The following standard and interpretation are mandatory for accounting periods beginning on or after 1 January 2007, but they are not relevant to the Group’s operations:

• IFRS 4 – Insurance contracts (effective from 1 January 2005) and
• IFRS 7 – Applying the restatement approach under IAS 29, Financial reporting in hyperinflationary economies (effective from 1 January 2007).

2.33. IFRS issued but not yet effective

The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2008 or later periods, but the Group has not early adopted them:

• IAS 1 (Amendment), Presentation of financial statements (effective from 1 January 2009). The amendment to the standard requires entities to present all non-owner changes in equity either in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). It also requires presenting a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting policy retrospectively or makes a retrospective restatement.
• IAS 23 (Amendment), Borrowing costs (effective from 1 January 2009). The amendment to the standard is still subject to endorsement by the European Union. It requires an entity to capitalize borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. The Group will apply IAS 23 (Amended) from 1 January 2009 but currently it would have a material effect on the Group’s financial statements.
• IAS 27 (Amendment), Consolidated and Separate financial statements (effective from 1 July 2009). The objective of IAS 27 is to enhance the relevance, reliability and comparability of the information that a parent entity provides in its separate financial statements and in its consolidated financial statements for a group of entities under its control. This amendment will not have a material impact on the Group's financial statements.
• IAS 32 (Amendment), Puttable financial instruments and obligations arising on liquidation (effective from 1 January 2009. The amendments result from proposals that were contained in an exposure draft of proposed amendments to IAS 32 and IAS 1 Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation published in June 2006. The amendment will not have a material impact on the Group's financial statements.
• IFRS 3 (Amendment), Business combination (effective from 1 July 2009). The objective of the IFRS is to enhance the relevance, reliability and comparability of the information that an entity provides in its financial statements about a business combination and its effects. The application of these new amendments will not have a material impact on the Group’s financial statements.
• IFRS 8, Operating segments (effective from 1 January 2009). IFRS 8 replaces IAS 14. It requires a “management approach” under which segment information is presented on the same basis as that used for internal reporting purposes. It will not effect the Group’s operations, but only the required disclosures about its operating segments.
• IFRIC 11, IFRS 2, Group and treasury share transactions (effective from 1 March 2007) provides guidance on whether share-based transactions involving treasury shares or involving group entities should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and Group companies. This interpretation does not have an impact on the Group’s financial statements.
• IFRIC 12, Service concession arrangements (effective from 1 January 2008). IFRIC 12 applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services. IFRIC 12 is not relevant to the Group’s operations.
• IFRIC 13, Customer loyalty programs (effective from 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive, the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement in using fair values. IFRIC 13 is not relevant to the Bank’s operations.
• IFRIC 14, IAS 19, The limit on a defined benefit asset, minimum funding requirements and their interaction (effective from 1 January 2008). IFRIC 14 provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognized as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. IFRIC 14 is not relevant to the Group’s financial statements.

3. RISK MANAGEMENT POLICIES OF THE GROUP

The Group’s approach to risk management is the goal to achieve planned results with minimal risk taking and to optimize the use of regulatory and internal capital of the Group.

In 2007 there has been a sharp rise in foreclosures in the US supreme mortgage market. The effects have spread beyond the US housing market as global investors have reevaluated their exposure to risks, resulting in increased volatility and lower liquidity in the fixed income, equity, and derivative markets and increased pressure on interest margins.

NLB regularly monitors and analyses exposuresto risks on the Group level and takes appropriate actions if needed.

3.1. Credit risk management

In individual credit risk management, members of the Group in addition to local legislation and standards, reasonably consider NLB documents, that define credit process, customer and advances classification, impairment of investments or making the provisions.

Member of the Group report quarterly to NLB the amount of credit exposure (by customers and rating system) and the amount of provisions made in accordance with the local standards. For the purposes of preparing the consolidation they also calculate and report the amount of impairment losses and provisions in accordance with the International Financial Reporting Standards. For this calculation the method prescribed from NLB is used.

The Group’s credit portfolio includes balance sheet items (loans, securities, interest, fees, commission, etc.) as well as off-balance sheet items (guarantees, letters of credits, commitments and contingencies, derivatives, etc.) towards corporate customers, banks, financial institutions, public sector, entrepreneurs, retail customers and other customers. By entering into any of the above-mentioned transactions the Group exposes itself to credit risk, which is the risk that counterparty will cause a financial loss for the Group by failing to discharge an obligation.

Prior to credit approval or entering into a contract, which exposes the Group to credit risk, every customer receives a rating and individual limit. The rating of a customer depends on its financial position, business performance, relationship with the Group to date, the ability to provide sufficient finance to meet future obligations, taking into account also country risk exposure.

Risk of individual credit is additionally considered in connection to the whole credit portfolio. Trends in the movements, risks and concentrations of credit portfolio as a whole and separately for different segments of customers and loans or advances are considered based on the analysis of time series.

Impairment losses and provisions are measured in accordance with the International Financial Reporting Standards as adopted by the European Union, according to the risk of a loan and existence of objective signs of impairment. The amount of impairment loss is also influenced by the collateral if it represents a successful means of repaying the debt in the event of customer’s default. The majority of loan portfolio is assessed for impairment on individual basis and only minor part of exposure is reviewed in groups, based on historical information.

a) Derivatives

The Group maintains limits on net open derivative positions, i.e. the difference between purchase and sale contracts, both by amount and term. The Group enters mostly into currency, interest rate and equity derivative contracts. The amount subject to a credit risk is limited to the credit replacement value of instrument which is determined in accordance with the regulations (based on the sum of current and potential exposure). This credit risk exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements.

b) Credit related commitments

The primary purpose of these instruments is to ensure that funds are available to customers when required. Guarantees and standby letters of credit, which represent irrevocable assurance that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Group on behalf of a customer authorizing a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipments of goods to which they relate and therefore carry less risk than direct borrowing. Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of losses is less than total unused commitments, since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.

c) Group’s internal rating system

d) Maximum exposure to credit risk before collateral held or other credit enhancements

Maximum exposure to credit risk represents a worst case scenario relating to credit risk exposure, which is the maximum possible loss of the Group without taking into account any of collateral held. For on-balance sheet assets, the exposures set out above are based on net carrying amounts as reported in the balance sheet and for off-balance sheet items they are based on nominal values.

According to internal methodology for loan impairment, all individually significant customers are individually assessed for impairment. This represents almost 90% of all corporate customers and entrepreneurs and all banks. 40% of loans and advances are neither past due or impaired and 2.8% of loans and advances are past due but not impaired.

In-debt analysis of customers and due risk management result in a high quality of the credit portfolio. The coverage of portfolio with allowances for impairment has been steadily decreasing and has stabilized at 3.54% at the end of 2007. 91% of portfolio is regarded as quality portfolio.

e) Loans and advances neither past due nor impaired

f) Loans and advances past due but not impaired

The Group accepts different types of collateral to mitigate credit risk. The decision about the type and value of collateral depends on customer’s analysis.

The Group is trying to receive high quality collateral, which among other things also strengthen the Group’s capital and results in lower allowances for loan losses. Especially long-term loans in particular are collateralized, mostly with mortgages and charges over business assets such as premises, inventory and accounts receivable. The value of collateral is regularly reviewed and in the event of its decrease the Group requires from the customer to provide additional collateral.

g) Loans and advances individually determined to be impaired

h) Loans and advances renegotiated

Restructuring activities include extended payment arrangements, approved external management plans, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgment of management, indicate that payment will most likely continue.

Renegotiated loans that would otherwise be past due or impaired totaled Euro 81,574 thousand as at 31 December 2007 (31 December 2006: Euro 104,408 thousand).

i) Repossessed collateral

The Group obtained assets by taking possession of collateral (value at cost) held as security, as follows:

j) Analysis of loans and advances by industry sectors

k) Analysis of loans and advances by geographical sectors

l) Analysis of debt securities, treasury bills, other eligible bills and derivative financial instruments by geographical sectors

m) Debt securities in the Group’s portfolio that represent subordinated liabilities for the issuer

The majority of these securities in the amount of Euro 4,910 thousand (31 December 2006: Euro 0) represent subordinated bonds of domestic issuer with Fitch LT Issuer Default Rating BBB.

Other issuers (Slovenian banks and financial institutions) don’t have external ratings. Internally they are all rated as A, except for one issuer with B rating. Subordinated liabilities of this issuer in the Group’s portfolio amounted to Euro 2,189 thousand as at 31 December 2007 (31 December 2006: Euro 2,228 thousand).

3.2. Market risk management

In accordance with the regulations of the Bank of Slovenia NLB is the only bank with trading book among the members of the Group. In this way NLB is thus only member obligated to report capital requirements for market risks in the trading book. Other members observe exposure to currency and interest risk as a consequence of structural movements and macro economical conditions in accordance with guidelines on risk management in the Group. Monitoring and managing exposure to market risk of the Group does not function at centralized level. Members of the Group regularly report to the Asset/Liabilities Management Committee of NLB Group (ALCO of NLB Group).

The methodology of monitoring currency risk is based on the closing of open FX positions (see note 3.2.c) and nominal limits (for separate currencies and the whole open position). Interest rate exposure is monitored using the simplified methodology of interest rate gaps (see note 3.2.d) and linked limits. The methodology is in accordance with the regulators requirements on individual and consolidation level. Current reporting to the regulator is in accordance with the standardized approach.

Trading book includes financial instruments held for trading and all other financial instruments are in banking book.

a) Management of market risk in 2007

For the Group’s exposure to market risks the VAR methodology is in the process of the implementation. NLB presents the vast majority of the Group’s market risks, since it is the only Group member that classifies financial instruments into trading book. Therefore it is only member of the Group which carries and manage market risk of trading book.

The Bank’s exposure to market risks is shown through “Value at Risk” (VAR) methodology for currency and other market risks in the trading book (interest rate risk and equity risk). The Bank uses VAR methodology on a daily basis for monitoring and managing these risks. The Bank regularly monitors and manages interest rate exposure in the banking book by sensitivity analysis based on the »Basis Point Value« (BPV) method, the figures of which are presented below.

Currency risk
For currency risk the Bank uses an internal »Value at Risk« (VAR) model based on open FX positions. Calculation of the VAR value is adjusted to Basel standards (99% confidence interval, monitored period of 300 business days, 10-day of holding a position) and based on the historical simulation method. VAR is calculated for exchange risk for the whole open bank position (position of trading and banking book together) as the position is managed at the whole level by the Treasury department.

Currency exposure in 2007 was low, as evident in the relatively low average VAR value which was Euro 75.7 thousand. The maximum VAR value in the amount of Euro 207 thousand was reached on 30 May 2007 as a consequence of an extraordinary event (long position in USD). The position was closed the next day and the VAR value decreased to Euro 49 thousand. In November 2007 the Bank extended the monitored period from 250 days to 300 business days. The extension of monitoring did not essentially influence the result of the VAR.

Other market risks in trading book
The Bank uses an internal VAR model based on the variance-covariance method for other market risks. The daily calculation of the VAR value is adjusted to Basel standards (99% confidence interval, monitored period of 250 business days, 10-day of holding a position).

Interest rate risk in the trading book varied from Euro 161.6 thousand to 1,650.9 thousand. The bulk of the exposure arose from the portfolio of debt securities while the minor part of exposure came from derivatives and money market repos. At the beginning of August, interest rate exposure decreased by deals for hedging as a response to the financial crisis in quite volatile markets.

The equity risk in the trading book in 2007 moved from Euro 2,886.8 to 5,197.6 thousand. The maximum amount of VAR was reached at the beginning of 2007 and in February when there was more volatility on the domestic and foreign market.

The amount of VAR gradually decreased as a result of the decreasing value of existing portfolios particularly in the last quarter of the year.

Interest rate risk in the banking book
Interest rate exposure is monitored and managed by using the methodology of interest rate gaps as a foundation for further analysis of interest rate sensitivity by individual time periods. On the basis of BPV methodology one estimates the change in the market value of the banking book position as a result of parallel movement of yield curves by +/- 10 base points. As at 31 December the effect of a change in interest rates by +/- 10 basis points is Euro 5.9 million.

b) Management of market risks in 2006

At the end of 2006 the Bank established VAR calculation for all types of market risks as well as for separate calculations concerning the banking and trading books.

It is due to this reason that the data concerning the VAR for interest rate risks and the VAR for the risk represented by the change in the price of securities (equities) in the trading book is represented only for the end of 2006. VAR for interest rate risks in the trading book amounted to Euro 1,236 thousand while VAR for the risk represented by the change in the price of securities (equities) in the trading book amounted to Euro 5,596 thousand as at 31 December 2006.

When calculating “Value at Risk” (VAR) for currency risk, the Bank supervises and monitors the entire Bank position and does not conduct it separately for the banking and the trading book. Subsequently, the average, high and low values of VAR for currency rate risk for the entire Bank position for the financial year 2006 business year are presented as follows:

In the last quarter of 2006 the Bank implemented a system, which enabled it to monitor VAR and BPV figures for interest risk in trading Book. During 2006, the exposure of the Bank to interest rate risks was supervised, monitored and managed on the basis of interest rate gap methodology. In assessing the exposure to interest rate risks, the Bank also implemented additional sensitivity analyses.

The assessment of the change in the market value of the banking book position as a consequence of a parallel shift of the yield curve by +/- 10 basis points was done on the basis of the BPV (Basis Point Value) methodology. The BPV method represents the measure of sensitivity of the value of financial instruments to market interest rates - that is the change in the required yield. Basis Point Value is a measure of the potential change in the market value of a specific position due to an anticipated change in the interest rates by 10 basis points and is expressed in monetary units. The usual approach is to discount the expected cash flows with their required market rates and subsequently modify them by the perceived change in market interest rates (that is by +/- 10 basis points). This method presumes a parallel shift in the yield curve.

The effect of a change in interest rates by +/- 10 basis points as at 31 December 2006 is Euro 5.6 million.

c) Currency Risks (FX)

Members of the Group are responsible for the establishment of effective risk management procedures. In managing market risks, members of the Group take into consideration local regulation, minimum standards for managing risks in the Group and directives which are approved by the Management Board of the NLB for each individual type of risks. Accordingly, internal risk management policies, organization and procedures for managing risks should be prepared.

The amount of assets and liabilities denominated in euros and in foreign currency as at 31 December 2007 is analyzed below:

d) Interest Rate Risks

The tables below summarize the Group’s exposure to interest rate risks. They include the Group’s financial instruments at carrying amounts, categorized by the earlier of contractual repricing or maturity dates.

e) Structural Liquidity

Members of the Group are calculating structural liquidity ratios (concerning assets, liabilities and relationship among them) and their boundary values, which are liquidity indicator of structural disproportionate in managing liquidity. Limits, which are confirmed from management, are also established.

The Group’s liquidity management process, as carried out within the Group and monitored by a special department, includes:

• Day to day funding, managed by monitoring future cash flows to ensure that requirements can be met. This includes replenishment of funds as they mature or are borrowed by customers. The Group maintains an active presence in global money markets to enable this to happen;
• Maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any unforeseen interruption to cash flow;
• Monitoring balance sheet liquidity ratios against internal and regulatory requirements; and
• Managing the concentration and profile of debt maturities.

Monitoring and reporting take the form of cash flow measurement and projections for the next day, week and month respectively, as these are key periods for liquidity management. The starting point for those projections is an analysis of the contractual maturity of the financial liabilities and the expected collection date of the financial assets.

The Group also monitors unmatched medium-term assets, the level and type of undrawn lending commitments, the usage of overdraft facilities and the impact of contingent liabilities such as standby letters of credit and guarantees.

Non-derivative cash flows
The tables below present the cash flows payable by the Group under non-derivative financial liabilities by remaining contractual maturities at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows, prepared on the basis of spot rates at the balance sheet date.

Subordinated liabilities with no contractual maturity are included in the maturity group based on periods when the call options can be exercised according to the characteristics described in note 36.

Derivative cash flows
All the Group’s derivatives are settled on a gross basis. The table below analyses the Group’s derivative financial liabilities into relevant maturity groupings based on the remaining contractual maturity at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows, prepared on the basis of spot rates, as at 31 December 2007.

g) Equity risks

In equity investments, policies for investment strategies in members of the Group are prepared. The investment limits for business strategies on local markets, with the intention of efficient managing of portfolio within risk limitation, are established.

3.3. Information about the quality of financial assets

Debt securities are classified either into trading book or into banking book, according to the purpose of acquisition and how they are going to be managed. Securities that the Group acquires principally for generating profits between purchase price and selling price are classified into trading book. Securities within trading book are in financial statements always classified as financial assets held for trading. Securities for which the Group has intention to hold to maturity are part of the banking book. In financial statements they are classified as financial assets available for sale or held to maturity investments.

The portfolio of debt securities in banking book ensures secondary liquidity and manages interest rate risk of the Group. When managing the portfolio, the Group uses conservative principles, especially with respect to issuers’ ratings and maturity of the portfolio.

The portfolio of bonds in the trading book amounted to Euro 169 million as at 31 December 2007 (31 December 2006: Euro 290 million). Bonds of the Republic of Slovenia (rating RS AA-S&P and Aa2-Moddy’s) in the amount of Euro 80 million and bonds of DARS (Company for construction of highways in Republic of Slovenia) in the amount of Euro 60 million form the majority of the portfolio. These bonds are guaranteed by the Republic of Slovenia (guarantee on the basis of applicable law). The remaining part of the portfolio comprises financial institutions bonds. The average duration of the portfolio is 0.98 years, since some bonds are hedged against risk. The Group also has some short-term securities (certificates of deposits from domestic banks and commercial papers issued by foreign banks). As at 31 December 2007 these securities amounted to Euro 280.6 million, comprising:

• Euro 3.3 million certificates of deposits from domestic banks (31 December 2006: Euro 6.5 million),
• Commercial papers issued by banks with high (only A) ratings Euro 277.3 million (31 December 2006: 0).

As at 31 December 2006 Group’s portfolio included also treasury bills in the amount of Euro 5.5 million.

4. SEGMENTAL ANALYSIS

a) Business segments

The Group's operations can be divided into four main business segments:

• Banking
• Factoring and forfeiting
• Leasing
• Asset management.

Other operations of the Group comprise insurance and support activities (providing services relating to card and ATM processing as well as POS terminals, managing the Group's real estate, maintaining its real estate and equipment, providing bookkeeping services, catering and tourism).

Structure of business segments is based on the Group's system of internal financial reporting to the management board of directors. Transactions between business segments are on normal commercial terms and conditions. The Group's aggregate share of the results of associates and the aggregate investments in those associates are disclosed by reportable segments.

b) Geographical segments

5. CHANGES IN SUBSIDIARY HOLDINGS

In 2007 and 2006 the following changes occurred which had impact on the consolidated financial statements.

Changes in 2007

a) Acquisitions

The most important acquisitions in 2007:

• 50.14% of NLB Kasabank sh.a., Priština in April and an additional 25.10% in December
• 87.33% of NLB New Bank of Kosova, sh.a., Priština in July.

NLB Kasabank contributed loss of Euro 981 thousand to the Group for the period from 1 May to 31 December 2007, while the loss for the whole year would have been Euro 1,520 thousand.

NLB New Bank of Kosova contributed profit of Euro 507 thousand to the Group for the period from 1 July to 31 December 2007, while profit for the whole year would have been Euro 1,171 thousand.

The total assets of NLB Kasabank and NLB New Bank of Kosova amounted to Euro 225,541 thousand at the end of 2007, which represents 1.23% of the total assets of the Group.

Goodwill on acquisition in the amount of Euro 4,982 thousand for NLB Kasabank and Euro 4,756 thousand for NLB New Bank of Kosova was calculated.

The goodwill is attributable to the high profitability of the acquired business and the significant synergies expected to arise. The fair value of assets and liabilities acquired is based on the discounted cash flow model.

The details of the fair value of the assets and liabilities acquired and goodwill arising are as follows:

The process of mergering NLB Kasabank and of NLB New Bank of Kosova was completed on 1 January 2008. New bank officiates under the name NLB Priština.

b) Acquisitions in existing banks

NLB increased its ownership interest in following banks:

• NLB Banka Domžale from 74.41% to 100%, consideration given amounted to Euro 18,985 thousand;
• NLB Banka Zasavje from 75.75% to 100%, consideration given amounted to Euro 13,644 thousand;
• NLB Koroška banka from 65.75% to 100%, consideration given amounted to Euro 37,130 thousand;
• NLB Tutunska banka from 81.36% to 85.84%, consideration given amounted to Euro 3,311 thousand;
• NLB LHB Frankfurt from 56.01% to 81.02%, consideration given amounted to Euro 19,356 thousand;

c) Other changes

• The increase of share capital was registered in NLB Leasing Ljubljana and in the majority of its subsidiaries, NLB Leasing Maribor, NLB Leasing Koper, NLB Continental banka, NLB Tutunska banka, Prvi faktor Ljubljana and in the majority of its subsidiaries, Skupna pokojninska družba and NLB Vita. The increase in capital in Tutunska banka was performed only by NLB which resulted in the increase of minority interest in the amount of Euro 1,582 thousand;
• Disposal of NLB InterFinanz Zürich’s 100% ownership interest in NLB Leasing Skopje to NLB;
• NLB InterFinanz Beograd transferred its 100% ownership interest in NLB Beograd to NLB;
• NLB Penzija Podgorica was established with 51% ownership interest in the amount of Euro 128 thousand. The company is not consolidated since it is still not operating;
• NLB Leasing Ljubljana founded subsidiary OL Nekretnine Zagreb with 75.1%;
• WEB Services was sold;
• BTB and Texiba were liquidated.

Changes in 2006

a) Acquisitions of additional interests in existing banks

NLB increased its ownership interest in following banks:

• In NLB Banka Domžale from 65.98% to 74.41%, cost of investment was Euro 4,121 thousand;
• In NLB Banka Zasavje from 70.80% to 75.75%, cost of investment was Euro 1,551 thousand;
• In NLB Koroška banka from 62.54% to 65.76%, cost of investment was Euro 2,373 thousand;
• In NLB LHB Banka Beograd from 66.95% to 75.90%, cost of investment was Euro 1,990 thousand, goodwill in the amount of Euro 1,986 thousand was recognized;
• In NLB Tuzlanska banka from 83.54% to 95.83%, cost of investment was Euro 3,155 thousand;
• In NLB Razvojna banka after the merger from 79.57% to 81.50%, cost of investment was Euro 1,073 thousand;
• In NLB West East Bank, previously consolidated as an associate, from 24.50% to 97.01%, cost of investment was Euro 11,982 thousand;
• In Banka Celje from 30.62% to 41.02%, cost of investment was Euro 20,316 thousand;
• NLB InterFinanz increased its ownership interest in NLB Tutunska banka, increasing the ownership interest of the Group in NLB Tutunska banka therefore increased from 74.19% to 81.36, goodwill in the amount of Euro 3,109 thousand was recognized;
• NLB InterFinanz Beograd acquired 100% ownership interest in NLB d.o.o., Beograd.

b) Mergers

• On 1 January 2006 Euromarket banka merged with NLB Montenegrobanka;
• On 1 April 2006 Razvojna banka merged with LHB banka Banja Luka and was renamed to NLB Razvojna banka;
• On 1 July 2006 CBS banka merged with NLB Tuzlanska banka.

Mergers of subsidiaries under common control were performed in line with merger accounting principals.

c) Other changes

• LB Maksima ceased operating and its ownership interest in NLB West East Bank was transferred to NLB;
• NLB InterFinanz transferred its 100% ownership interest in NLB Lizing Skopje to NLB;
• Prvi faktor, Ljubljana established the subsidiary Prvi faktor Sarajevo and Prvi faktor Skopje with 100% interest;
• NLB Leasing, Ljubljana established the subsidiary NLB Real Estate, Beograd with 100% interest;
• Additional paid in capital in NLB Leasing Ljubljana and NLB Leasing Koper was registered by NLB and three Slovenian banks – members of the Group;
• An increase of capital for NLB Leasing Murska Sobota, NLB Vita, Nov penziski fond, Skopje and Prvi faktor, Beograd was also registered;
• NLB acquired 100% ownership interest in NLB Factor Bratislava from NLB Factoring Ostrava, there were no intercompany profits;
• NLB Banka Domžale acquired 60% ownership interest in CBS bank from LHB bank, Frankfurt before it’s merger, there were no intercompany profits recognized;
• NLB Propria sold its 50.6% ownership interest in Golf Arboretum out of the Group, the gain from derecognition in the amount of Euro 150 thousand was recognized in the income statement;
• NLB Razvojna banka sold its 30% ownership interest in Krajina promet, Banja Luka out of the Group, derecognition gain in the amount of Euro 75 thousand was recognized in the income statement;
• LB InterFinanz Italia was cancelled from the register, the loss from derecognition in the amount of Euro 41 thousand was recognized in the financial statements of NLB InterFinanz;
• Nova Penzija Beograd was established. The cost of establishing the company amounted to Euro 735 thousand. The company has not been consolidated since, it is still in the process of registration and it is not operating.

6. SIGNIFICANT EVENTS AFTER THE BALANCE SHEET DATE

In May 2008 NLB Banka Domžale, d.d. Domžale, NLB Banka Zasavje, d.d., Trbovlje and NLB Koroška banka d.d., Slovenj Gradec will officially be merged with NLB. These three banks are currently included into the consolidated financial statements as subsidiaries.

The strategy of the Bank is based on future growth of the Bank as well as the Group. To succeed in it’s goal, the Bank must actively manage its capital and sustain an appropriate capital adequacy ratio according to the requirements of regulators and risks that the Bank is exposed to. One of the means for achieving this is with a share capital increase. In the beginning of 2008 the Bank initiated a process of issuing new shares in the amount of Euro 300 million. Existing shareholders will have the priority right to buy new shares, the rest will be offered to the public. New shares will have the same rights as existing ordinary shares of NLB. The Bank expects the transaction to be completed by the end of June 2008.

In 2007 new legislation regarding capital management and capital adequacy calculation, based on European capital directive (CAD), was enacted in Slovenia. NLB already adjusted its calculation of capital requirements for market risk in 2007. In line with new directive the Bank will also calculate capital requirements for credit risk as well as additional capital requirements for operational risk. First calculation according to these new requirements will be performed as at 31 March 2008.

Foreign exchange translation losses on financial assets and liabilities not classified as at fair value through profit or loss, that are included within foreign exchange translation gains less losses, amounted to Euro 12,719 thousand (2006: Euro 11,241 thousand).

Gains from derivatives in 2007 include Euro 14,600 thousand gains from currency derivatives which were entered into for the purpose of hedging foreign currency risk exposure (2006: Euro 2,641 thousand). These derivative financial instruments provide effective economic hedges but hedge accounting is not used for them. They are treated as derivatives held for trading.

Income from non-banking services relates to income from IT services, income from operating leasing of movable property and income from disposal of assets given to lease. In 2007 other operating income include change in value of inventories products and unfinished production in the amount of Euro 4,322 thousand.

The number of employees in the Group as at 31 December 2007 was 8,260 (31 December 2006: 7,256).

 

External audit services include payments to statutory auditor for audit assignments and reporting to the regulator in the amount of Euro 1,618 thousand (2006: Euro 1,280 thousand).

The tax authorities may at any time inspect the books and records within 5 years subsequent to the reported tax year, and may impose additional tax assessments and penalties. The management of members of the Group is not aware of any circumstances that may give rise to a potential material liability in this respect.

Slovenian banks are required to maintain an obligatory reserve with the Central Bank, relative to the volume and structure of its customer deposits, other banks in the Group maintain an obligatory reserve according to local legislation.

The current requirement of the Bank of Slovenia regarding the calculation of the amount to be held as obligatory reserve is 2% of all time deposits with maturity up to 2 years.

As at 31 December 2007 securities held for trading amounting to Euro 272,297 thousand were listed on the stock exchange (31 December 2006: Euro 396,695 thousand).

Trading assets in the amount of Euro 64,366 thousand (31 December 2006: Euro 6,424 thousand) have original maturity up to three months and are included within cash equivalents.

Bonds from other issuers include bonds with a total value of Euro 5,421 thousand (31 December 2006: Euro 510 thousand) which have the nature of subordinated debt. Bonds do not include any equity conversion option or any other derivative feature.

As at 31 December 2006 securities held for trading at fair value of 1,179 thousand euros had been pledged to third parties in sale and repurchase agreements. These securities have been reclassified as pledged assets on the face of the balance sheet. No securities held for trading had been pledged to third parties as at 31 December 2007.

The total amount of the change in fair value estimated using a valuation technique that was recognised in profit or loss during 2007 was positive in the amount of Euro 20,764 thousand (2006: negative in the amount of Euro 3,566). There are no financial instruments measured at fair value using a valuation technique that is not supported by observable market prices or rates.

The value of financial assets held for trading that the Group obtained by taking possession of collateral held as security and recognized them in the balance sheet as at 31 December 2007 is Euro 196 thousand (31 December 2006:0).

Notional amounts of derivative financial instruments are disclosed in note 44 c.

As at 31 December 2007 other securities include commercial papers in the amount of Euro 277,277 thousand.

Financial assets designated at fair value through profit or loss include private equity fund in the form of venture capital investments. These investments are managed and evaluated in accordance with the investment strategy which among other terms also defines the required return and exit strategy.

In 2007 the Group reclassified available for sale financial assets in the amount of Euro 293,419 thousand to held to maturity investments, since it has the positive intention and ability to hold these investments to maturity. Reclassification was done at fair value at the date of transfer.

As at 31 December 2007 available for sale securities amounting to Euro 2,068,704 thousand (31 December 2006: Euro 1,464,607 thousand) were listed on the stock exchange.

As at 31 December 2007 the Group has available for sale financial assets in amount of Euro 122,058 thousand with original maturity up to three months and are included within cash equivalents (31 December 2006: Euro 774,909 thousand).

Securities available for sale at fair value of Euro 170,135 thousand (31 December 2006: Euro 10,589 thousand) had been pledged to third parties in sale and repurchase agreements for periods not exceeding one month. These have been reclassified as pledged assets on the face of the balance sheet.

The value of financial assets available for sale that the Group obtained by taking possession of collateral held as security and recognized them in the balance sheet is Euro 262 thousand (31 December 2006: Euro 18 thousand).

Available for sale financial assets in the amount of Euro 849,739 thousand (31 December 2006: Euro 1,183,904 thousand) have a remaining contractual maturity of more than twelve months.

The Group decided to swap interest rate on hedged item by entering into interest rate swap with the same characteristics. Hedging is based on harmonization of cash flows from hedged item and hedging instrument. This enables the Group to decrease positive interest gap in particular periods and to decrease exposure to interest rate risk.

Net losses on hedging instruments amounted to Euro 2,084 thousand in 2007 (2006: 0) and gains on hedged items were Euro 2,014 thousand (2006: 0).

With cash flow hedge the Group hedges three balance sheet items (issued securities and loans). The common characteristic of all three deals is fixation of interest rate for the whole period. Due to the specific structure of the balance sheet according to interest maturity the Group needed to extend interest maturity for some liabilities in order to ensure efficient interest rate risk management.

Cash flows are harmonized (quarterly or semiannually) in all cases of cash flow hedges based on interest rate swaps. With the fixation of the interest rate for these items the Group decreased it exposure to interest rate risk at the macro level.

A gain on hedging instrument in the amount of Euro 699 thousand (2006: 0) was recognized directly in equity, as well as the corresponding deferred income tax asset in the amount of Euro 154 thousand (2006: 0). There was no ineffectiveness that the Group should have recognized in the income statement.

Loans and advances to banks in the amount of Euro 193,788 thousand (31 December 2006: Euro 108,680 thousand) are expected to be recovered after more than twelve months.

Loans and advances to banks in the amount of Euro 796,865 thousand (31 December 2006: Euro 458,571 thousand) have original maturity up to three months and are included within cash equivalents.

The allowance for unrecoverable finance lease receivables included in the provision for loan losses amounted Euro 10,115 thousand (31 December 2006: Euro 8,475 thousand).

As at 31 December 2007 investment securities amounting to Euro 479,211 thousand (31 December 2006: Euro 36,102 thousand) were listed on the stock exchange.

Held to maturity investments in the amount of Euro 401,551 thousand (31 December 2006: Euro 25,073 thousand) have a remaining contractual maturity of more than twelve months.

Non-current assets held for sale include business premises which are in the course of sale and assets received as collateral. The value on non-current assets held for sale that the Group obtained by taking possession of collateral held as security and recognized them in the balance sheet is Euro 6,539 thousand (31 December 2006: Euro 6,400 thousand).

The sale of an office building in Ljubljana in the net carrying in the amount of Euro 8,066 thousand is also included in disposals.

In 2007 the Group sold office building in Ljubljana with the total carrying amount of Euro 17,530 thousand. The building was partly treated as an investment property and partly as property, plant and equipment. 59% of the carrying amount was included under investment property and other as property, plant and equipment. The gains from the sale in the amount of Euro 14,692 thousand are included in income statement in line Gains less losses on derecognition of assets other than held for sale.

Assets leased under finance leases as at 31 December 2007 amounted to Euro 229 thousand for motor vehicles (31 December 2006: Euro 54 thousand), Euro 1,187 thousand for land (31 December 2006: 0) and Euro 0 for computers (31 December 2006: Euro 7 thousand).

The value of property and equipment that the Group obtained by taking possession of collateral held as security and recognized them in the balance sheet is Euro 356 thousand (31 December 2006: Euro 759 thousand).

The Group has no property interests held under operating leases classified and accounted for as investment property. In the income statement for 2007, the amount of operating income from rented out investment properties was Euro 414 thousand (31 December 2006: Euro 250 thousand). Disposals include effect of sale of office building in Ljubljana in the amount of Euro 11,493 thousand (see note 29).

In 2007 in the process of the purchase price allocation relating to business combinations in NLB Kasabank and NLB New Bank of Kosova the Group identified additional intangible assets in the amount of Euro 14,494 thousand that represent customer relationships and were valuated by using the income approach method (excess income). The factor used for discounting future profits from target intangible assets is cost of equity determined with use of the CAPM model. Future profits relate to existing customers at the valuation date while future benefits from new customers are attributed to goodwill. The Group also allocated purchase prices from previous acquisitions and recognized it as transfer from goodwill to other intangible assets. Amortization period for customer relationships intangibles is between 12 and 15 years.

All other assets, except for inventories and claims for taxes and other dues, are financial assets and are measured at amortized cost.

Receivables in the course of collection are temporary balances which, according to the functionality of the information support system, are transferred to the appropriate item of other assets within next few days after the occurrence.

As at 31 December 2007 other assets include receivables in the amount of Euro 13,066 thousand, relating to sold securities. In 2006 other assets in the amount of Euro 37,966 thousand related to Euro cash delivered in advance to Slovenian banks and other companies. Other assets as at 31 December 2006 include receivables of the Trieste branch relating to documentary letters of credit in the amount of Euro 20,320 thousand.

The value of other assets that the Group obtained by taking possession of collateral held as security and recognized them in the balance sheet is Euro 67 thousand (31 December 2006: Euro 57 thousand).

Loans in the amount of Euro 1,945,344 thousand (31 December 2006: Euro 2,342,655 thousand) are expected to be settled after more than twelve months.

c) Debt securities in issue

Debt securities in issue relate to issued bonds and certificate of deposits and are denominated in Euro. 71.4% of them have fixed interest rates (31 December 2006: 74.6%) and 28.6% have floating interest rates (31 December 2006: 25.4%). As at 31 December 2007 debt securities in issue in amount of Euro 392,743 are quoted on active markets (31 December 2006: Euro 392,538) and debt securities in issue in amount of Euro 11,010 thousand are not quoted on active markets (31 December 2006: Euro 13,244 thousand). Issued securities in the amount of Euro 364,181 thousand (31 December 2006: Euro 338,025 thousand) have remaining maturity of more than 12 months.

During the presented years there were no defaults on the securities in issue.

In accordance with the Regulation on capital adequacy of banks and savings banks, subordinated long-term loans and issued subordinate securities are included in the Bank’s Tier 2 capital. The issued subordinate securities do not contain any provisions on conversion to capital or any other liabilities.

In 2007 the Bank issued hybrid instrument (as defined with Regulation on capital adequacy of banks and saving banks) in the form of a loan amounting Euro 120 millions. The characteristics of the instrument are compliant with the Regulation on capital adequacy of banks and savings banks. The main characteristics are:

• The instrument is perpetual, the withdrawal or redemption of the instrument is first possible only after minimum of five years after issue and with prior approval of the Bank of Slovenia. Approval is contingent on the Bank replacing the instrument with another form of capital of the same or better quality, unless the Bank can prove that even without the hybrid instrument the capital is adequate according to the risks assumed by the Bank and its commercial strategy.
• Claims of the lender under or in connection with the hybrid instrument rank junior to liabilities to ordinary creditors and liabilities on the basis of subordinated debt,
• Claims of the lender under or in connection with the hybrid instrument rank equal to existing and possible future hybrid instruments,
• In the event of a winding-up of the Bank the claims of the lender are senior to all classes of shares of the Bank and innovative instruments, if any,
• The loan is neither insured nor covered by a guarantee of the Bank or by any related entity of the Bank, nor any other form of arrangement that legally or economically enhances the seniority of the claim under the loan compared to other creditors of the Bank,
• The loan is available to the Bank to cover its losses in the ordinary operations of the Bank,
• The Bank has the right to defer payment of interest under the loan in the event that the Bank has not declared dividends and has not paid its liabilities arising from hybrid instruments.

In 2007 the Bank also issued subordinated debt in the form of a loan amounting to Euro 190 million. The characteristics of the instrument are compliant with the Regulation on capital adequacy of banks and savings banks. The main characteristics are:

• Claims under or in connection with this subordinated debt rank junior to liabilities of ordinary creditors and liabilities on the basis in the subordinated debt included in Tier II Additional Capital,
• Claims under or in connection with this subordinated debt rank equal to existing and future subordinated debt for inclusion in Tier I Additional Capital,
• In the event of a winding-up of the Bank the claims of the lender are senior to the ordinary shares of the Bank, hybrid instruments and innovative instruments, if any,
• The maturity date of the loan is greater than five years and one day from the utilisation date,
• The loan is neither insured nor covered by a guarantee of the Bank or by any related entity of the Bank, nor any other form of arrangement that legally or economically enhances the seniority of the claim under the loan compared to other creditors of the Bank,
• The loan may not be repaid prior to the stated maturity date without the consent of the Bank of Slovenia, except in the event of the winding-up of the Bank or in the event of the Bank ceasing to provide banking services. The Bank of Slovenia will issue the approval under the condition that the Bank will replace the subordinated debt with another form of capital of the same or better quality, unless the Bank can prove that even without the subordinated debt the capital is adequate according to the risks assumed by the Bank and its commercial strategy.

According to definitions of the Regulation on capital adequacy of banks and saving banks loans amounting to Euro 120 million and Euro 100 million are hybrid instruments and securities in the amount of Euro 130 million have the nature of innovative instruments.

Paid interest and commissions relating to subordinated liabilities in 2007 amounted to Euro 44,522 thousand (2006: Euro 24,996 thousand).

Subordinated liabilities in the amount of Euro 867,463 thousand (31 December 2006: Euro 639,470 thousand) have remaining maturity of more than 12 months.

During the presented years there were no defaults on subordinated liabilities.

The most important change in 2007 was the increase of subscribed capital with the issue of new ordinary shares. The Bank increased its subscribed capital by Euro 2,718 thousand by issuing 325,733 new shares, which represent a 4.24% increase in subscribed capital. Prior to the issue of new shares, subscribed capital amounted to Euro 64,113 thousand and was divided into 7,682,015 shares. As of 31 December 2007 subscribed capital amounts to Euro 66,831 thousand and is divided into 8,007,748 shares. The increase was entered into the Court Register on 8 November 2007.

The shares are no-par value. All shares are ordinary, freely transferable, with voting rights, issued in non-material form and registered in the accounts of shareholders at the Central Securities Clearing Corporation. All shares are of the same class and inscribed. Shareholders have the right to participate in the governance of the Bank, to receive dividends and they are entitled to part of the assets in the event of a winding-up of the Bank, as determined by law.

As at 31 December 2007 there were 859 (31 December 2006: 887) shareholders. The Bank's shareholders include 226 corporate entities, 621 individuals and 12 non – residents. The number of shareholders decreased in comparison with last year by 28 persons. 34,925 shares are held by the Bank’s subsidiaries (31 December 2006: 34,925 shares).

According to the decision of the Annual General Meeting, the Bank paid in 2007 a dividend for 2006 of Euro 4.11 per share amounting to total dividends payments of Euro 31,574 thousand (2006: Euro 19,419 thousand).

The share premium consists of the paid up premiums in the amount of Euro 154,031 thousand (31 December 2006: Euro 56,766 thousand) and the revaluation of subscribed capital from previous years in the amount of Euro 49,205 thousand (31 December 2006: Euro 49,205 thousand).

Profit reserves represent undistributable retained earnings which were in accordance with the decision of the Group’s Annual General Meeting transferred to reserves.

Loans and advances to banks
The estimated fair value of the deposits is based on discounted cash flows using prevailing money market interest rates for debts with similar credit risk and remaining maturities.

Loans and advances to customers
Loans and advances are net of provisions for impairment. The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value.

Deposits and borrowings
The fair value to the depository institution of a demand deposit depends on the expectations of the timing and amounts of withdrawals of the existing balance, the level of prevailing interest rates with similar terms, the costs of servicing the deposit and the bank’s own credit risk.

The estimated fair value of other deposits is based on discounted cash flows using interest rates for new deposits with similar remaining maturities.

Debt securities held to maturity and debt securities in issue
The fair value of securities held to maturity and debt securities in issue is based on their quoted market price or value calculated by using discounted cash flows techniques.

Loan commitments
All credit facilities are drawn soon after the Group grants a loan. There fore they are drawable at market rates and their fair value in close to zero.

Other financial assets and liabilities
Carrying amount of other financial assets and liabilities is a reasonable approximation of fair value, as they relate mainly to short-term receivable and payables.

Additional own funds consist of hybrid instruments, subordinated debt and innovative instruments exceeding the limitations for inclusion in original own funds, as well as effects from valuation of AFS financial assets and investment property. Main characteristics of subordinated instruments are described in Note 36 (Subordinated liabilities). Amount of subordinated debt to include in additional own funds I (Tier 2 capital) is gradually decreasing with 20% cumulative discount rate in the last 5 years before the maturity.

Deduction item “Difference between the reported impairments and provisions according to IFRS and according to prescribed methodology in regulation on loss assessment” is not directly required in European capital legislation, but was introduced by Bank of Slovenia as a national discretion. To assure the international comparability, NLB also calculates the Capital adequacy ratio excluding the impact of national discretion, which amounted to 10.76% at the end of the year 2007 (11.77% at the end of 2006).

The Group’s objective when managing capital is to ensure optimum extent, structure and sources of capital to ensure:

• Compliance with the risk management requirements set by regulators,
• To provide optimal return and
• To accomplish the strategic goals of the Group.

Capital adequacy calculations are based upon the consolidated financial reports, prepared in line with the Regulation on the Supervision on a Consolidated Basis, which differs from the consolidation made in line with IFRS. According to IFRS, all the Group’s subsidiaries, associates and joint ventures are included in consolidation: subsidiaries using full consolidation method whereas associates and joint ventures using equity method. The list of NLB’s subsidiaries, associates and joint ventures is stated in Notes 32 and 47.

According to the Regulation on the supervision on a consolidated basis, insurance companies and pension funds (in case of NLB: Nov Penziski fond, NLB Nova Penzija Beograd, Skupna pokojninska družba and NLB Vita) are completely excluded from the consolidated financial reports. Furthermore, joint ventures (in case of NLB: Prvi faktor Group) are included in consolidated reports using proportional method of consolidation.

a) Contingent liabilities and commitments

Documentary (and stand by) letter of credit constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated or the issuing bank and that the terms and conditions of the credit are complied with:

• If the credit provides for sight payment – to pay at sight
• If the credit provides for deferred payment – to pay on the maturity date determinable in accordance with the stipulations of the credit.

Such undertakings can also be issued for credits received in the form of confirmation. It is usually done at the request or authorization of the opening bank and constitutes a definite undertaking of the confirming bank, in addition to that of the issuing bank.

Foreign exchange derivatives allow the Group and its customers to transfer, modify or reduce their foreign exchange risks. Foreign exchange exposure associated with derivatives is normally offset by entering into counterbalancing positions, thereby minimizing the foreign exchange risk and cash amounts required to liquidate the contracts. The Group maintains strict control limits on net open positions, (i.e. the difference between purchase and sale contracts) by both currency and term. Unless otherwise indicated, the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Group (i.e. assets), which is only a small fraction of the contract or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed by collateral (initial margin or good faith deposits) or as part of the overall borrowing limits granted to customers.

b) Contractual amounts of the Group’s off-balance sheet financial instruments

Commitments to extend credit can all be realized within one year. The Group also has no financial guaranties, for which the first possible payment date would be later than within one year.

c) Analysis of derivative financial instruments by notional amounts

Some derivative financial instruments provide effective economic hedges under the risk management strategy of the Group, but not all qualify for hedge accounting under the specific accounting rules. Such derivative financial instruments are treated as financial instruments held for trading.

Fair values of derivative financial instruments are disclosed in notes 21 and 34.

d) Pledged assets

e) Operating lease commitments

The future minimum lease payments under non cancelable building operating leases are as follows:

f) Capital commitments

As at 31 December 2007 the Group had capital commitments in the amount of Euro 2,230 thousand (31 December 2006: Euro 0 thousand) in respect of property and equipment in the amount of Euro 10,458 thousand (31 December 2006: Euro 17,401 thousand) in respect of implementation of a new information technology system.

The Group manages assets totaling Euro 5,801,844 thousand (31 December 2006: Euro 3,742,013 thousand) on behalf of third parties. Managed funds' assets are accounted for separately from those of the Group. Income and expenses of these funds are for the account of the respective fund and no liability falls on the Group in connection with these transactions. The Group is compensated for its services with fees. Commissions from these activities in 2007 amounted to Euro 10,177 thousand (Euro 9,527 thousand in 2006).

A number of banking transactions are entered into with related parties in the normal course of business. These transactions were carried out on commercial terms and conditions and at market rates. The volumes of related party transactions and the outstanding balances at year-end are as follows:

Key management compensation

NLB Group
Annual Report 2007