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Annual Report 2010

NLB tutuNska BaNka annual report 2010 2

Contents page

Bank’s profile ...................................................................................................................................................3

Financial Highlightstable 1: selected financial data for the Bank, derived on the basis of its non-consolidated audited financial statements, prepared in accordance with the International Financial Reporting standards ...............................4

Financial Highlights table 2: selected financial data for the Bank, derived on the basis of its non-consolidated audited financial statements, prepared in accordance with the International Financial Reporting standards.................................5

address of the President of the Management Board ........................................................................................7

Menagement structure ....................................................................................................................................9

Corporate management, share capital and ownership structure .................................................................11-13

Business Ethics ...............................................................................................................................................14

Bank’s business environment ..........................................................................................................................15

Overview of the financial results of the Bank for 2010 ............................................................................... 17-19

Retail banking ...........................................................................................................................................20-21

Net of affiliates of NLB tutunska banka aD skopje ....................................................................................22-23

Corporate banking and activities considering small and medium enterprises (sME) ....................................24-26

Financial markets ...........................................................................................................................................27

Risk management .....................................................................................................................................29-30

Information technology ..................................................................................................................................31

Human resources management ......................................................................................................................33

Work organisation .........................................................................................................................................34

Financial statements .................................................................................................36-98


NLB tutunska banka aD skopje is one of the leading banking institutions in the Republic of Macedonia with a constant growing trend and positive results since it’s foundation until today. It is founded in 1985, and since 1993 it operates as a commercial bank that provides all financial and banking services for domestic and international customers. the bank ranks among the big banks and represents the third biggest bank in the Republic of Macedonia according to the net assets.

the Bank is a member of the NLB Group. strategic shareholders are Nova Ljubljanska Banka d.d. Ljubljana and NLB InterFinanz aG Zurich that posess 86.97% of the Bank’s total capital. the membership in the Group and the corporate brand of NLB imply a special quality of the Bank’s operation that connotes transfer of knowledge, experience and technology among the Group’s members, as well as easy access to forein markets.

NLB tutunska banka is one of the most successful banks within NLB Group. the success is a result of the Bank’s established corporate culture and tradition combined with modern information technology, professional personnel and successful market strategy, supported by the NLB brand. the Bank sees the whole public society as partly responsible for it’s success, so it pays special attention to it’s corporate social responsibility.

One of the basic strategic commitments of the Bank is to support and finance the development of small and medium enterprises as carrier of the economic development in the Republic of Macedonia, and the Bank itself is significantly involved in all financial events and promotes the Macedonian business on international markets.

the Bank pays special attention to the enrichment and adjustment of the offer of products and services according to the needs of the different market segments, as well as facilitation of the access to them by investing in the modern business network that is consisted of 48 modern affiliates organized as small banks, as well as by investments in modern access channels to the Bank and its products and services.

NLB tutunska banka together with Nova Ljubljanska Banka d.d. Ljubljana is the owner and founder of the Company for pension funds management - NLB Nov Penziski Fond aD skopje.

awards and tributes

Numerous international and national awards referring to business results, positive image and recognition value, as well as to highly developed corporate social responsibility certify the successful work of NLB tutnska banka. among them:

• the tribute for Bank of the year 2003, 2006, 2007, 2008 and 2009 in the republic of Macedonia awarded by the financial magazine „the Banker”,

• the tributes from „Finance Central Europe“ for Bank with the highest realized profit in Macedonia for 2002, 2003, 2004 and 2006 and Best bank according the return of equity (roe) for the year 2005,

• the tribute for Best investment bank in Macedonia for the year 2008 from the financial magazine „Euromoney“,

• Certificate for good corporate management from transparentnost nulta korupcija for 2007 and 2008,

• tributes from Deutsche Bank London for outstanding quality of Euro sWIFt payments to Deutsche Bank for 2006, 2007, 2008 and 2009,

• tribute for superbrand of Macedonia for 2009,

• award for Development of the philantrophy in the Republic of Macedonia for 2008, and

• award from the Financial Markets association of the Republic of Macedonia - aCI Macedonia for the most active participant in the inter-bank trade in the country.

Bank’s mission

Our goal is to become one of the leading financial institutions in the country.

to provide a higher level of service quality, a modern offer of new products and to develop the Bank’s tradition.

to draw profit through efficiency and cost-effectiveness of our activities.

Bank’s profile


in thousands of MkD

Income (for the period) 2010 2009 2008

Net income from interest 1,833,317 1,750,956 1,834,502

Net income from fees and commission 717,976 639,779 610,687

Profit before provisions and taxes 1,161,798 1,066,253 1,412,362

Profit before taxes 470,766 444,486 741,204

Net profit for the period 470,766 432,758 676,262

Balance (end of year) 2010 2009 2008

total assets 62,705,219 55,006,631 51,049,359

Loans to non-banking customers 32,930,213 29,850,704 30,171,505

Non-bank customer deposits 45,754,892 40,382,830 36,461,227

Borrowings from banks 7,433,334 5,747,748 6,030,487

Capital and reserves 4,394,282 4,330,896 4,560,815

Equity 3,057,117 3,057,117 3,057,117

total qualifying tier 1 capital 3,845,352 3,797,454 3,749,311

total qualifying tier 2 capital 1,818,561 1,402,044 1,610,027

operational ratios1 2010 2009 2008

ROa return on total assets (before taxes) 0.80% 0.84% 1.59%

ROa return on total assets (after taxes) 0.80% 0.82% 1.45%

ROE return on equity (before taxes) 12.06% 11.54% 21.35%

ROE return on equity (after taxes) 12.04% 11.12% 19.09%

Equity/total assets 7.41% 8.38% 8.89%

Capital adequacy 13.16% 13.05% 13.57%

Cost/Income Ratio 58.94% 59.80% 47.24%

Facts and figures 2010 2009 2008

Number of shareholders 830 807 554

Number of shares 854,061 854,061 854,061

Dividend per share (in MkD) - 430 786

Dividend /Nominal value per share - 43% 79%

Dividend/Equity - 12.01% 20.38%

Net profit/Number of shares 551 507 853

Number of employees 764 705 699

Number of Branches and Counters 48 48 43

official Central Bank rate (at year end) 2010 2009 2008

EuR 1=MkD 61.51 61.17 61.41

usD 1=MkD 46.31 42.67 43.56

Financial Highlights

table 1: selected financial data for the Bank, derived on the basis of its non-consolidated audited financial statements, prepared in accordance with the International Financial Reporting standards

note:

1) Operational ratios have been calculated on the average balance of the Bank’s capital and assets


in thousands of MkD

Income (for the period) 2010 2009 20081

Net income from interest - 1,757,634 1,840,665

Net income from fees and commission - 643,703 622,005

Profit before provisions and taxes - 1,098,444 1,463,232

Profit before taxes - 468,380 792,074

Net profit for the period - 456,466 725,525

Balance (end of year) 2009 20081

total assets - 55,128,083 51,182,889

Loans to non-banking customers - 29,850,704 30,171,505

Non-bank customer deposits - 40,388,538 36,469,855

Borrowings from banks - 5,747,748 6,030,487

Capital and reserves - 4,504,722 4,721,245

operational ratios2 2009 20081

ROa return on total assets (before taxes) - 0.88% 1.69%

ROa return on total assets (after taxes) - 0.86% 1.55%

ROE return on equity (before taxes) - 11.76% 21.88%

ROE return on equity (after taxes) - 11.35% 19.65%

Facts and figures 2010 2009 20081

Number of employees 764 712 707

Number of Branches and counters 48 48 43

official Central Bank rate (at year end) 2010 2009 20081

EuR 1=MkD 61.51 61.17 61.41

usD 1=MkD 46.31 42.67 43.56

Financial Highlights

table 2: selected financial data for the Bank, derived on the basis of its non-consolidated audited financial statements, prepared in accordance with the International Financial Reporting standards

note:

1) according to the application of IFRs in Macedonia, certain items of the income statement were reconciled

2) Operational ratios have been calculated on the average balance of the Bank’s capital and assets

Vision


Dear shareholders,

the recovery of the European economies in the last year had a positive impact on the real sector in the Republic of Macedonia. the increased activities of the most significant trade partners initiated an upward increase of the Macedonian export, and an additional export stimulus was also the rise of the metal prices, which in total reflected positively on the payment balance, the foreign exchange reserves and the whole macroeconomic stability. the realized increase of the GDP by 0.7% in 2010 raises hope for finalization of the last recession stages, but the risks of illiquidity are still present in the real sector. the equilibration of the monetary and fiscal policies enabled partial relaxation of the monetary policy through descent of the bills interest rate from 8.5% to 4.0%. the banking sector was stable all the year round and had a high liquidity. the money supply rose by 12.2%, while the rise of the total deposits amounts 13.7% (2009: 7.1%). the credit growth amounts 7.1%, so it is double as high as in 2009 (3.5%). Despite the decrease of the macroeconomic risks, the NBRM kept the rate of the obligatory reserve in Denar at 10%, in Denar with currency clause at 20% and in foreign currency at 13%. the total assets rose by 14%, while the net profit rose by 37% compared to the previous year, which shows that the Bank had successfully softened the economic crisis blow. the capital adequacy amounts 16%.

Last year was successful for the Bank. as in the previous year, the primary commitments were strengthening of the deposit basis, maintenance of the structural liquidity and keeping the credit portfolio quality. Reservations in a total amount of 11.2 million EuR were sorted out, which enabled coverage of the reserves portfolio of 10.1%. the net profit amounts 7.4 million EuR with a return on capital rate of 11.3%. the guarantee capital of the Bank reached 90.5 million EuR while the capital adequacy amounts 13.16%.

the balance sheet total was increased by 14%, and the number of customers rose by 12%. the total deposit basis rose by 12.3%. On the other hand, because of the improvement of the economic conditions in the second half of the year, the credit activity of the Bank rose by 10.1%, while the time structure of the loans changed in direction of increase of the long-term loans portion.

On the field of Corporate Banking, in direction of stimulation of the new investment cycle at the enterprises, the Bank lowered the interest rates for loans to legal entities. In addition to the current credit lines, new credit lines from the International Finance Corporation (IFC) and new credit products from the Macedonian Enterprice Development Foundation (MEDF) were ensured, namely: loans for financing of information and communication technologies, loans for financing of tourism, loans for organic production and loans to business-beginners, as well as new funds from the program of the European Investment Bank (EIB) via the Macedonian Bank for Development Promotion. additionally hereto, were issued new guarantees worth 141.5 million EuR for export arrangements and participation of domestic enterprises in tendering procedures for domestic and international projects. the deposits from legal entities decreased by 6.8% as a reflection of the prolonged liquidity problems the economy and the public society had to deal with.

On the field of Retail Banking, it was recorded an increase of the civil crediting by 13.2%, in line with which new credit products were promoted, and relaxation of the credit approval conditions and decrease of the interest rates of credits

address of the president of the Management Board


and deposits were realized, with the goal to decrease the general level of the interest rates and intensify the crediting. Including the successful realization of the promotional campaigns for the NLB super deposit, the total civil deposits at the Bank rose by 27.1%.Regarding the electronic services of the Bank, new functionalities for bank cards and e-banking for individuals were introduced, and also more significant investments for increase of their security were realized.

Furthermore, under conditions of interest margine reduction and limited possibilities for a bigger market expansion, the Bank realized activities for rationalization of the operational costs and increase of the cost-effectiveness as a part of the adopted NLB Group strategy, that in line with the improvement of the operational efficiency will lead to continuous profitability increase.

the successful operations of the Bank in 2010 are supported by a strengthened market position through a bigger market share in several segments: we realized a market share of 18.9% on the field of civil crediting, a market share of 20.1% on the field of savings, on the field of bank cards operations of 25.8% and a record-breaking share of the foreign exchange market of 26.7%.

Dear shareholders,

Finally, I would conclude that last year was a year of challenges, but also a successful year, in which we exceed the figure of 1 billion EuR balance sheet total, although the negative effects of the economic recession were still present. Our priorities in the future time period are to ensure stable long-term financing sources, to keep the high liquidity of the Bank, to maintain the credit portfolio quality, to offer customer services with higher quality than the competition does, to improve the operative efficiency and to harmonize with the NLB Group.

Yours truly,

Gjorgji Janchevski President of the Management Board


Menagement structure

Menagement board

Gjorgji Janchevski - President of the Management Board

ljube rajevski - Member of the Management Board

tome perinski - Member of the Management Board

Councelors of the management board

Dushan Spikovski, Counselor of the Management Board on the field cash operations and depot radovan trpkoski, Counselor of the Management Board on the field of investments, purchasing and general activities trajko Mateski, Counselor of the Management Board for Bank’s security systems management Dragi tasevski, Counselor of the Management Board for human resources management and cost management of the Bank

Internal revision division

liljana nastoska, Manager

Coordination centre for cooperation with members of the nlB group and their customers

Damir Kuder, Manager

legal, compliance and problematic loans division

nadica Ceneva, Manager

risk management division

Bogoja Kitanchev, Manager

logistics division

Jordanka Grujoska, Manager

Financial markets and means management business division

Stojna Stojkoska, Manager

Corporate banking business division

Strasho pupulkovski, Manager

Business network - business division

antonio argir, Manager

Sales logistics division

Slagjana Beleva, Manager

Cash operations and depot division

Dragan panovski, Manager

Information technology division

aleksandar Misovski, Manager

payment systems division

Igor Davchevski, Manager

Corporate management


Corporate management

the corporate management in a bank as a sum of mutual relations between the Management Board, the supervisory Board, other individuals with special rights and responsibilities, who have a managerial position in the Bank, the Bank’s shareholders and other interested subjects, is based on the principles of responsibility, transparency and control at decision making, in the daily business and at reporting about the situations in the Bank.

the Bank has a clear organisational structure, which precisely defines the rights and responisibilities of the members of the supervisory and management bodies and the Bank’s employees, as well as the control and check structure during the daily realization of the tasks.

the corporate management of the Bank is represented by the bodies with a key role in the Bank’s efficient operating:

• Shareholders assembly. In 2010 was held one session.

the annual shareholders assembly was held on 22.4.2010 and besides the regular items about the assembly’s work, was adopted a Decision for amendment and supplement of the Rules on Working Procedures of the shareholders assembly of NLB tutunska banka aD skopje with the goal of adjustment to the statute of NLB tutunska banka aD skopje.

• Supervisory Board of the Bank. the supervisory Board held 12 sessions in 2010. In 2010 the supervisory Board was active in a structure of six members, in particular:

1. Matej narat - President of the supervisory Board and assistant of the Management of NLB d.d. Ljubljana, Master of Economics;

2. alojz Jamnik - Deputy President of the supervisory Board and assistant of the Management of NLB d.d. Ljubljana, Bachelor of Economics;

3. Janko Gedirh - Member of the supervisory Board, Bachelor of Law;

4. andrej Hazabent - Member of the supervisory Board, Master of Economics;

5. abdulmenaf Bedjeti - Independent Member of the supervisory Board and Prorector of the south East European university, tetovo, Doctor of Economics;

6. Borislav atanasovski - Independent Member of the supervisory Board and Manager of Revision, evaluation and financial consulting - B I LJ BORO I LJuPCHO DOO skopje, Bachelor of Economics.

• Management Board. the Management Board held 43 regular sessions in 2010. until 2.6.2010 the Management Board was active in a structure of three members, in particular:

1. Gjorgji Janchevski, President of the Management Board;

2. ljube rajevski, Member of the Management Board;

3. tome perinski, Member of the Management Board.

Over the year the number of members was downsized to two members representing the legal minimum.

• auditing Board. the auditing Board held six sessions in 2010. the Board is consisted of five members, in particular:

1. alojz Jamnik - President of the auditing Board and assistant of the Management of NLB d.d. Ljubljana

Corporate management, share capital and ownership structure


(Member of the supervisory Board);

2. Matej narat - Member of the auditing Board and assistant of the Management of NLB d.d. Ljubljana (Member of the supervisory Board);

3. Janko Gedrih - Member of the auditing Board (Member of the supervisory Board);

4. abdulmenaf Bedjeti - Member of the auditing Board and Prorector of the south East European university, tetovo (Member of the supervisory Board) and

5. Stojan Jordanov - Member of the auditing Board, Manager of the Company for auditing Censum DOOEL skopje, Bachelor of Economics and authorized auditer.

• Information System Supervisory Board. Founded based on the regulations of the NBRM, the Basel Principles and the international standards for information system safety. the members of the Information system supervisory Board are chosen from the individuals with special rights and responsibilities including the person responsible for information system safety. President of the Information system supervisory Board is the President of the Management Board, Mr. Gjorgji Janchevski.

Because of the higher efficiency of the daily management, the Management Board of the Bank operated through following Boards, by which individual fields of the Bank’s operations are monitored more closely, in particular:

• Development Board - members of the Development Board are the members of the Management Board, the Manager of the Coordination Center for Cooperation with Members of the NLB Group and their Customers and the Manager of the Logistics Division of the Bank. the President of the Development Board is the President of the Management Board, Mr. Gjorgji Janchevski.

• risk Management Board - the members of the Risk Manangement Board are chosen from the individuals with special rights and responsibilities employed in the Bank. the President of the Risk Management Board is the President of the Management Board, Mr. Gjorgji Janchevski.

• Management Board for assets and liabilities - the members of the Management Board for assets and Liabilities are chosen from the individuals with special rights and responsibilities employed in the Bank. Member of the Board is also a representative of NLB d.d. - Ljubljana. the President of the Management Board for assets and Liabilities is the President of the Management Board, Mr. Gjorgji Janchevski.

Corporate Management Code

the Corporate Management Code in the Bank defines the management and leading standards of the Bank’s bodies. Respecting the standards, the Bank has determined a transparent and understandable manangement system that increases the trust level of domestic and international investors, employees and public.

the Principles of good corporate management are completely incorporated in the Corporate Management Code, meaning:

• the members of the supervisory Board have appropriate qualifications, understand their role in the corporate management of the Bank and are capable of realistic evaluation of the Bank’s work;

• the management and supervision bodies of the Bank determine and monitor the fulfillment of the strategic goals and corporate values of the Bank and inform all their employees about them;

• the supervisory and management bodies determine appropriately defined responsibilities and the reporting strucute among all employees in the Bank;

• the supervisory Board of the Bank has to be sure that the Management Board and other individuals with special rights and responsibilities realise appropriate supervision and monitoring of the Bank’s work;

• the supervisory Board, the Management Board and other individuals with special rights and responsibilities that hold a managerial position in the Bank, shall efficiently make use of the Bank’s Internal audit Division, as well as the audit association;

• the supervisory Board and the Management Board should be sure that the awarding policy and the appropriate procedures are in accordance with the corporate culture, the long-term goals and the strategy, as wall as with the Bank’s monitoring environment;

• Provision of transparency of the coprorative management.


the Corporate Management Code is evaluated once a year on the Bank’s shareholders assembly.

Internal audit

the internal audit of NLB tutunska banka aD skopje is organized as a separate organizational part, functionally and organizationally separated from the other parts of the Bank, directly responsible to the supervisory Board. In 2010, the Department for internal audit realized 15 functional checks, as well as 13 unannounced checks of affiliates. Besides regular checks, in 2010 were also realized two irregular audits.

Corporate social responsibility

the care for the public good represents one of the highest ranking priorities of the Bank’s value system and an integral part of the strategy, because of which the Bank pays special attention to the social responsibility and interest protection of all interested parties. By supporting projects of humanitarian character and on the field of culture, sport, science, education and ecology, kids and youngsters, the Bank makes efforts to contribute for improvement and modernization of the whole life quality of infividuals, families, institutions and organizations of the environment it is active in.

Sponsorships and donations

In 2010, the Bank sponsored following projects: We travel to Europe - organized by the civil organization MOst; shar Planina ski Cup - Popova shapka - tetovo; Macedonian Opera and Ballet; Festival Ohrid summer - Ohrid 2010; Band “synthesis“; NLB League (Basketball); Project for construction of bus stations in the Municipality of kichevo; Municipal project for beautification of the City of Prilep; ZOO - skopje. Following donations were made: computer equipment for the P.H.I. Clinical Centre tetovo; „First donator auction of chocolate“ - for the Children’s Clinic for pulmonary diseases - kozle.


the Bank supports organizations and initicatives that campaign for equal treatment, business ethics and humanism, that adds value to the society and contributes to strengthening of the public tissue and social cohesion.

the Bank accepts completely and applies in its work the International Declaration on Human Rights, the Declaration of Ecology and the International treaties regarding social care and ecology.

prevention of money laundering

the Bank has adopted and applies consistently the Programm for Prevention of Money Laundering and internal acts that regulate this field. Furthermore, it cooperates with responsible institutions and correspondent banks. the Bank implemented completely all instruments that arise from the legal regulations referring to efficient detection and pre-vention of money laundering.

Share capital and ownership structure

the share capital of the Bank on 31.12.2010 is consisted from 854,061 ordinary shares with nominal value of 1,000 MkD per share or 854,061,000 MkD in total. the shares are registered and recorded at the Central securities Deposi-tary of the Republic of Macedonia.

the ordinary shares give the owners the right on payout of dividend and voting right on the shareholders assembly session. One vote in the Bank’s assembly is an equivalent to one ordinary share.

the Bank hasn’t realized an acquisition of own shares in 2010.

Inclusive 31.12.2010, the number of shareholders of the Bank is 830 (2009: 807) that represents an increase by 3% compared to the previous year. 688 of them are individuals (2009: 667) and 142 are legal entities (2009: 140).

Based on the agreement on transfer of the Voting Rights upon shares and annex 1, 2, 3, 4 and 5 to the agreement concluded between NLB InterFinanz aG Zurich and Nova Ljubljanska Banka d.d. Ljubljana, the voting rights of the shareholder NLB InterFinanz aG Zurich (26.71%) based on the shares of NLB tutunska banka, are transfered to Nova Ljubljanska Banka d.d. Ljubljana. according hereto, the participation of Nova Ljubljanska Banka d.d. Ljubljana in the total voting rights amounts 86.97% on 31.12.2010.

In May 2010, a dividend from the profit for 2009 in a total amount of 367,246,230 MkD was paid to the shareholders, which represents 92% of the realized net profit for 2009. the dividend per share amounted 430 MkD or 43% of the shares nominal value.

the Bank is registered with special reporting responsibilities in the Registry of Joint stock Companies, which is a part of the security and Exchange Commission of the Republic of Macedonia. Pursuant to the Law on securities and the bylaws, the Bank regulary submits to the Commission information about its activities, the members of the manage-ment bodies, the management and the legal relations with third parties and events of interest for the Bank’s operation.

Business ethics

Shareholders with over 5% participation on 31.12.2010% participation according

the amount of ordinary shares

Nova Ljubljanska Banka d.d. Ljubljana 60.26

NLB InterFinanz aG Zurich 26.71


In 2010 the economic condition in Macedonia improved. although the healing process was not as fast as expected, the improved external conditions, the positive trend in the construction industry and the credit support of the banking sector enabled a GDP rise of 0.7% compared to the previous year. But, besides the high export rise by 32.4% and the final consumption rise by 0.3%, the industrial production recorded a descent of 4.3% p.a. (2009: -7.7%). the current account deficite was significantely decreased under the impact of the stable transfers from abroad and the positive flows of the external trade exchange, while the lack of capital inflows is still representing one of the main problems for more significant growth of the Macedonian economy.

the average inflation rate in 2010 amounts 1.6%. In this year the pricing level was stable, in a frame from 0.7% to 1.6%, and the biggest growth was recorded at the regulatory feedstock energy prices. Regarding the internal turnover, the wholesale increased in the fourth quarter by 10.4%, while the retail trade increased by 5.8% in comparison with the same time period in 2009. the unemployment, although still high, declined to 30.9%. the real net salaries were 1.4% higher, which had an impact on saving the net available civil income.

In the beginning of 2010, the budget of the central government was not balanced, as a result of the lower income from Vat and contributions (Pension and Disability Insurance Fund of Macedonia), because of what the state ran up depts on the domestic market by issuing of state bonds. On the end of the year the deficite amounts 171.4 million Euros (2009: 178.1 million EuR or 2.8% of GDP). at the end of the year the Government signed an agreement on Precaution Credit Line Facility with the IMF with an amount of 480 million Euros, intended for dealing with potential risks of the budgetary and payment-balance illiquidity.

the total external trade exchange in 2010 increased by 22.2%, in line with a higher rise of the export (32.4%) as of the import (16.7%). the rate of the coverage of the import by export is 60.6% (2009: 53.4%). this resulted with a descent of the external trade deficite on annual basis by 1.3% (calculated at market prices in Euro) and it equals 1,618.1 million Euros (2009: 1,640.1 million Euros) while the payment balance deficite on the end of the year amounts 191.1 million Euros.

the exchange rate of the Denar was stable over the year, without significant oscillations, which enabled keeping the inflation level low. the initiation of the new calculation model for the foreign exchange rate of the Denar via quotation of exchange rates of domestic banks (market makers), resulted with a small depreciation (0.5%) of the Macedonian Denar (MkD) compared to the Euro, by which the exchange rate displayed the real market price of the domestic currency. Over the year, NBRM appeared on the foreign currency market as a net buyer of foreign currencies that enabled an increase of the foreign exchange reserves level to 1,14.51 million Euros (+117 million Euros or + 7.3%).

the liquidity of the banking sector in the Republic of Macedonia remained strong, mainly supported by the stabile private saving. On the end of 2010, the money mass rose by 12.2% compared to the previous year, while the increase of the total deposits equals 13.7% (2009: 7.1%). the credit rise amounts 7.1% what’s double as high as in 2009 (3.5%). Besides the decrease of the macroeconomic risks, the NBRM kept the rate of obligatory reserve in Denar at 10%, in Denar with clause at 20% and in foreign currencies at 13%. In the same time, in direction of monetary policy relaxation and stimulation of crediting activities, NBRM decreased the interest rate of the central bank bills several times, which rate was lowered from 8.5% in 2009 at 4.0% at the end of 2010. In the same time, the referent interest rate for Denar decreased at 5% (2009: 9%).

the total net external debt of the Republic of Macedonia on 31.12.2010 amounted 1,417.79 million Euros (2009: 1,281.86 million Euros). In the following period the main risks of the economic growth of the Republic of Macedonia arise from the incertainity of the economies in the countries, which are trade partners and of the international financial markets, and the dealing with possible effects from them will very much depend on the coordination of the economic, fiscal and monetary measures of the Government and the NBRM and their on-time adjustment. this coordinated economic policy will have to stimulate the external stability and in the same time to stimulate the domestic investments via tax, legal, regulatory and political relaxation measures.

Bank’s business environment

Financial results


overwiev of the financial results of the Bank for 2010

In 2010 the Bank realized the planned goals defined in the Business Policy for 2010, the strategic Directions for Development and Operation of the Bank for 2010-2012 and the Directions for 2010 defined by the NLB Group. Over the year, because of the change of the economic conditions under which the Bank was operating and based on the realized projections, it accordingly adjusted the current activities and the financial policy. under the conditions of prolonged recession in the first half of the year and relatively healing in the second half, accompanied by the relaxed monetary policy, the Bank kept and improved its market position in different segmets, securing at the same time a high structural liquidity, stable financing sources, high portfolio quality and high profitability.

record of success

the net profit for 2010 amounts 470.8 million MkD and is 8.8 % higher than last year. Over the year 689.0 million MkD were sorted out for reservation for risky loans, which is 10.8% more than in 2009 and 37.8% more than the planned amount, according to the assets quality and the directions of the NLB Group regarding the risk management strategy. the coverage of the portfolio by reservations amounts 10.1% (2009: 9.4%).

the Return of Equity (ROE) amounts 12.0% (2009: 11.12%).

the net profit per share amounts 551 MkD (2009: 507).

net profit (000) MKD return of equity roe and per share profit

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

432,758432,758 470,766470,766

2008 2009 2010

676,262676,262

0

100

200

300

400

500

600

700

800

900

0%

5%

10%

15%

20%

25%

11.1%11.1% 12.0%12.0%

2008 2009 2010

19.1%19.1%

Profit per share (in denars)

tne net interest earnings amount 1,833.3 million MkD or 4.7% more than in 2009. the earnings from interest are higher as a result of investments in securities and the credit portfolio rise of legal entities. at the end of 2010, the average net interest margine was 3.11% (2009: 3.30%). the average net interest assets were increased by 12.8% in comparison to 2009.


Interest assets and liabilities

net balance sum (000) MKDDeposits of the non-financial sector

(000) MKD

the net non-interest earnings amount 885.9 million MkD or 1.7% less than last year, wherefrom 81.0% represent net earning from commission.

the net earnings from commission amount 718.00 million MkD, which is 12.2 % more than in 2009. the earnings from dividend upon capital investments in financial and non-financial legal entities, amount 2.6 million MkD, which is 33.0 % less than in 2009. the Bank realized net positive exchange differences of 105.6 million MkD or 34.9% less than in 2009, while the net earnings from securities amount 81.4 million MkD.

the expenditures in the general bussiness in 2010 amount 1,647.9 million MkD, in doing so the spending was done extraordinary racional. the participation of the costs in the business earnings in 2010 amounts 58.94%, while the participation of the operative costs in the total assets of the Bank amounts 2.80% (2009: 2.99%).

Balance sheet

the Bank realized a net balance sum of 62,705 million MkD that shows an annual rise of 14.0% and a market share of 20.5%. the rise was mostly supported by the increase of the civil deposits. the total deposits from the non-financial sector rose by 13.3% and amounted 45,754.90 million MkD on 31.12.2010.

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

55,006,63155,006,63162,705,21962,705,219

2008 2009 2010

51,049,35951,049,359

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

40,382,83040,382,83045,754,89245,754,892

2008 2009 2010

36,461,22736,461,227

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2008 2009 2010

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

average net interest-bearing assets (in 000 denars)

average net interest-bearing liabilities (in 000 denars)

average net interest margin in %


the liabilities upon loans increased by 36.5% compared to 2009 as a result of the use of funds from new and present credit lines.

the total Bank’s capital amounts 4,394.3 million MkD and represents 7% of the Bank’s total sources.

In 2010 the Bank increased the dynamics of crediting of the non-banking sector which resulted with increase of the credit portfolio of the non-financial sector by 10.3%, while the credit time structure changed in advantage of the long-term credits which participated in the total credit sum with 67.3% in 2010 (2009: 61.2%).

a part of the sources of funds was invested in short-term securities and short-term deposits in banks, by which the participation of these highly liquid instruments in the Bank’s assets amounts 26.8% (2009: 24.5%)

Regarding the currency structure, 63.7% of the financial sources and 59.33% of the financial investments are in foreign currency and in Denars with currency clause.


the retail banking is realized by the Bank via its business network consisted of 48 affiliates accessible in 21 cities in the Republic of Macedonia. the affiliates are organized as small banks and enable direct access to the whole range of Bank’s products with fast, quality and efficient service provided by the commercial team. the clients can access through modern sale channels (atM network, POs network, e-banking), for which significant investments for increase of the capacities were realized in the year 2010. the clients can use 154 atMs and 5.370 POs over the whole country, if they own the Bank’s cards.

In 2010, the number of clients in this segment amounted 41,309 and rose by 11.8%.

the crediting of the civil society means credit products adjusted to the needs and possibilities of different groups of customers. the credit offer for the civil society is segmented and separated in: purpose consumer loans, non-purpose consumer loans, automobile loans, housing loans, loans upon credit cards and permitted limits on transactional accounts.

In 2010, the credit portfolio was enriched by a new Revolving credit for individuals in MkD, a Promotional touristic credit and a Violet consumer loan in Euro, and in the same time the interest rates were reduced and the conditions for credit approval were facilitated.

the civil credit portfolio was increased by 13.5% compared to 2009 and reached 13,269.3 million MkD.

retail banking

net civil loans (000) MKD

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

11,692,72611,692,726

13,269,30213,269,302

2008 2009 2010

11,688,22111,688,221

the civil deposits represent to the Bank the biggest source of means. there is a variety of offered saving products which enable investing of financial means in a variety of time periods.

In 2010 the deposits rose by 27.2% and reached 29,692.3 million MkD. a rise was recorded at all saving-deposit products of the Bank. From the total civil deposits, 83.8% represent invested deposits. the participation of the civil deposits in the total deposits from clients in 2010 increased to 64.9% (2009:57.8%).

Promotional deposit products were iniciated: spring NLB super deposit and NLB super deposit.


Civil deposits (000) MKD

total number of Bank’s cards

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

23,348,14023,348,140

29,692,33329,692,333

2008 2009 2010

18,073,21718,073,217

10,000

60,000

110,000

160,000

210,000

260,000

310,000

360,000318,730318,730

366,942366,942

2008 2009 2010

271,496271,496

the number of cards of the Bank that are used by customers increased by 15.1% in 2010, while the realized turnover with cards increased by 16.8%. the Bank modernized it’s cards from the VIsa program by a chip technology, by which was achieved an security level upgrade for the credit card users.

the credit cards of the Bank were extended by one functionality - a possibility for payment by installments without interest at purchase of products from the traders with which the Bank has concluded an agreement on Loyality shemas.

the Bank promoted a new type of a credit card standing order, which enables automatically payment of the monthly liabilities from the account of the credit card issued by the Bank.

In 2010 on the field of e-banking for individuals, it was enabled the customers to have an overview over the credit situation and payment of liabilities upon credits by pre-defined orders.

Besides the electronic services, the client can also use Personal Banking, a service that is consisted of professional consultion by their personal banker, information about the maturity of deposits, consulting about investing in securities, information about all news regarding the work of the Bank and a big amount of advantages. the service Personal Banking is provided by 29 affiliates of the Bank. In 2010 the service Personal Banking was expanded by an additional functionality – free of charge consulting for investment in securities and three free of charge technical analysis of securities that admit to official quotation on the Macedonian stock exchange.


net of affiliates of nlB tutunska banka aD Skopje

Head officeVodnjanska 1Т: 02 / 3105 - 674Е: [email protected]

DrachevoRatko Mitrovic 75 bТ: 02 / 2785 - 110Е: [email protected]

Karposh 4Partizanski odredi 88-6/1Т: 02 / 3091 - 310 Е: [email protected]

SobranieGradski dzid blok 2Т: 02 / 3107 - 630Е: [email protected]

ulica MakedonijaMarshal tito 45Т: 02 / 3203 - 197Е: [email protected]

aerodromJane sandanski 26/9Т: 02 / 2403 - 627Е: [email protected]

Gjorce petrovIsaija Madzhovski 42Т: 02 / 2034 - 902Е: [email protected]

Kisela Vodasava kovachevic 1Т: 02 / 2786 - 755Е: [email protected]

Star aerodrom12 Makedonska Brigada 20Т: 02 / 3105 - 833Е: [email protected]

univerzalna salaPartizanski odredi 43Т: 02 / 3248 - 911Е: [email protected]

GtC13 Noemvri 3 GtCТ: 02 / 3297 - 575E: [email protected]

KapishtecFranklin Ruzvelt 1Т: 02 / 3089 - 090Е: [email protected]

Klinichki CentarVodnjanska 17Т: 02 / 3203 - 181Е: [email protected]

Stara CharshijaBitpazarska 58Т: 02 / 3293 - 053Е: [email protected]

CentarVasil Glavinov 3/5Т: 02 / 3219 - 535Е: [email protected]

avtokomandaJani Lukrovski 2Т: 02 / 3103 - 450Е: [email protected]

Karposh 3Partizanski odredi 66, LeptokarijaТ: 02 / 3069 - 814Е: [email protected]

novo lisicheVidoe smilevski Bato 55 -1/1Т: 02 / 2445 - 991Е: [email protected]

tri BiseriJane sandanski, tC tri BiseriТ: 02 / 2403 - 890Е: [email protected]

ChairFerid Bajram 43Т: 02 / 2601 - 668Е: [email protected]

Skopje

sveti Nikole

Resen

tetovo

Gostivar

kichevo

struga

Ohrid

Bitola

skopje

kumanovo

kriva Palankakochani

shtipVeles

Radovish

strumicaNegotino

kavadarci

Valandovo

Gevgelija

Prilep


Bitola Josif Hristovski bbТ: 047 / 202 - 756Е: [email protected]

Bitola - Shirok SokakMarshal tito 45 , shirok sokakТ: 047 / 208 - 647Е: [email protected]

ValandovoMosha Pijade 2Т: 034 / 383 - 355Е: [email protected]

Veles Marshal tito 80Т: 043 / 221 - 282Е: [email protected]

Veles 2Goce Delchev 26Т: 043 / 214 - 450Е: [email protected]

Gevgelija Marshal tito bbТ: 034 / 215 - 441Е: [email protected]

Gevgelija 2Marshal tito zgrada 1Т: 034 / 210 – 404Е: [email protected]

GostivarBorche Jovanovski bbТ: 042 / 221 - 330Е: [email protected]

Gostivar 2Goce Delchev 104/1Т: 042 / 219 - 060Е: [email protected]

Kavadarci Ilindenska 81Т: 043 / 400 - 436Е: [email protected]

Kichevo Bul. Osloboduvanje bbТ: 045 / 224 - 460Е: [email protected]

Kochanitrgovski centar blok 17 Т: 033 / 276 - 910Е: [email protected]

Kriva palankaMarshal tito 172Т: 031 / 475 - 280Е: [email protected]

Kumanovo Ploshtad Marshal tito bbТ: 031 / 475 - 240Е: [email protected]

Kumanovo 2 Oktomvriska Revolucija 24Т: 031 / 475 - 274Е: [email protected]

negotinoMarshal tito bbТ: 043 / 364 - 010Е: [email protected]

ohridPartizanska bbТ: 046 / 251 - 360, 251 – 350Е: [email protected]

prilepGoce Delchev bbТ: 048 / 419 - 758Е: [email protected]

prilep 2Marksova 44Т: 048 / 400 - 570Е: [email protected]

radovish22 Oktomvri bbТ: 032 / 633 - 771Е: [email protected]

resen11 Oktomvri bbТ: 047 / 455 - 071Е: [email protected]

Sveti nikoleVera Ciriviri 1Т: 032 / 226 - 770Е: [email protected]

Struga Proleterski brigadi bbТ: 046 / 788 - 640Е: [email protected]

StrumicaMarshal tito bbТ: 034 / 326 - 780Е: [email protected]

Strumica 2 Blagoj Mucheto 4Т: 034 / 334 - 463Е: [email protected]

tetovo tC Merdzhan, vlez 1, kat 1Т: 044 / 356 - 705Е: [email protected]

ShtipVancho Prke bbТ: 032 / 391 - 663Е: [email protected]


Corporate banking and activities considering small and medium enterprises (SMe)

the offer for legal entities for the big corporate customers is prepared centralized, according the model of intergrated management of customer relations, and for the small and medium enterprises (sME) - detached via the Business network.

activities related to legal entities represent the biggest part of the Bank’s activities and are the main carrier of the business growth. they include short-term crediting for current needs, short-term loans in domestic and foreign currencies for support of export arrangements, revolving loans, long-term loans in domestic and foreign currencies for financing of investment projects, loans for purchase of business premises, loans for motor vehicles for business purpose, micro-crediting, purpose loans for construction of residental and business space, commissional loans, issuance of letters of credit and guarantees, depositary activities, domestic and international payment operations and activities for transfer and keeping of funds. For financing of big projects of strategic clients, the Bank enables also a joint crediting with Nova Ljubljanska banka d.d. Ljubljana through the agreement for Risk Participation.

In 2010, the offer for the legal entities was expanded by short-term and long-term loans from the credit line of the International Financial Corporation (IFC) and new credit products from the MEDF, in particular: loans for financing of information-communication technologies, loans for tourism financing, loans for organic production and loans for business-beginners.

the crediting of micro, small and medium enterprises was executed through crediting of development projects for micro and small businesses from the credit lines aCDF, MEDF, EFsE, agricultural loans, automobile business loans and short-term loans from own sources.

On the field of depositing activities, the activities were directed to stimulation of the deposit work of the corporate clients by offering of deposit products in Denar and foreign currencies including different possibilities regarding the time frame, the interest rates and the purpose.

Investment credit activities

In 2010 were provided two new credit lines for financing of projects of micro, small and medium enterprises, in particular:

• a credit line of the International Finance Corporation in an amount of 25 million Euros;

• a credit line of the Macedonian Enterprice Development Foundation in an amount of 4.4 million Euros.

In 2010 in comparison to 2009, the investments upon loans were increased by 8.3% on the field of non-financial legal entities and amount 19,660.9 million MkD. the biggest part of the means was approved for current needs of the companies.

net loans to companies (000) MKD

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

18,158,97818,158,97819,660,91119,660,911

2008 2009 2010

18,483,28418,483,284


net loans to companies according the customer’s size (000 MKD)

Regarding the activities, the loans were invested in quality projects of present and new clients in the sectors production (18.9%), trade (36.9%), real estate (11.7%), social sector (0.01%) and other activities (32.5%).

Regarding loans of legal entities, 23.2% (2009: 22.5%) represent loans to big enterprises (classified pursuant to the Company Law). the loans given to small and medium enterprises represent 76.8% (2009: 77.5%) of the total loans to legal entities.

Deposit operations

the total deposits of non-financial legal entities deposited in the Bank in 2010 amount 16,062.6 million MkD.

real estate 11,7%real estate 11,7%

social sector 0,0%social sector 0,0%

production 18,9%production 18,9%

other activities 32,5%other activities 32,5%

trade 36,9%trade 36,9%

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

4,089,4304,089,430

2009 2010

14,068,54714,068,547

4,555,2214,555,221

15,105,68915,105,689

net credits of enterprises per spheres of activities

Deposits from non-financial legal entities (000) MKD

0

5,000,000

10,000,000

15,000,000

20,000,000

17,034,69017,034,69016,062,55916,062,559

2008 2009 2010

18,388,01018,388,010


operations regarding documents and guarantees

additional to the funds that the Bank provides for direct financing, the legal entities had access to bank guarantees and letters of credit for export arrangements, as well as assistance at participation in tendering procedures in international and domestic projects.

In 2010 were issued new quarantees in an amount of 6,206.4 million MkD and letters of credit in an amount of 2,533.5 million MkD.

Domestic and international payment operations and cash payments

On the field of the domestic payment operations, the Bank significantly raised its market share in 2010 by 20.1%, while the number of accounts in the total turnover was increased by 8.2%.

the international payment operations via the Bank decreased compared to 2009, because of the lower economic activity of the legal entities with foreign countries.

the Bank offers its clients also a service for purchase and sale, transport and provision of cash in the home country and from/to abroad for other banks and legal entities via the only cash center in Macedonia.

e-banking

On the field of e-banking, the total turnover (Denar and foreign currencies) realized in 2010 through е-banking for legal entities increased by 18.9%, and the number of clients using this service increased by 31.4% p.a.

the orders realized via e-banking participate in the total orders realized in the domestic payment operations of the Bank with 14.9% (2009: 13.0%) based on the number of orders and 21.0% (2009: 21.3%) based on the turnover.

Commissional services

the Bank manages funds on behalf and for account of legal entities and individuals, which funds are invested as loans to enterprises with no specific purpose, as loans for self-employment of individuals – a project of the Employment agency and as securities for clients. these means are operated separately of the Bank’s means.

the total commissial activities at the end of 2010 amounted 1,945.4 million MkD, that represents a descent of 28.8% compared to 2009.


liquidity management

Over 2010 the bank managed the liquidity respecting the legal prescriptions and limitations pursuant to the Decision for Obligatory Reserve and the Decision for Bank Liguidity Risk Management prescribed by the National Bank of the Republic of Macedonia and the internal limitations and directions of the Bank and the NLB Group.

the surplus of funds was invested in central bank bonds, in state bonds and on the inter-bank deposit market. the mode, type and the instruments used for investment of the funds surplus depended on the current and planned time structure of the funds and short-term and logn-term liabilities, the general economic situation in the environment and the flows on the money and securities markets.

the interest rate of the central bank bonds in 2010 amounted 5.7% (2009: 8.5%).

In 2010 the Bank realized a total turnover on the foreign exchange market of 2,021.6 million us Dollars, via 67,761 transactions, whereby the Bank’s turnover was increased by 4.3% (2009: 1,938.0 million us Dollars). Herewith was reached a record market share of 26.68% (2009: 26.04%).

On the international foreign currency market was traded with 537.4 million Euros, via 10,909 transactions, which represents an increase of 17.3% compared to the previous year. the turnover upon the concluded forward agreements for the clients amounts 2.6 million Euros.

Broker services

In 2010 the Bank received a permit for realization of securities services by the securities and Exchange Commission of Republic of Macedonia. In total were concluded 776 brokerage agreements with domestic and foreign legal entities.

In October 2010 we received the consent by the NBRM for starting the realization of financial activities: investment consulstation, acting as patron at admitting to official quotation, realizing of transactions and activities on account of third parties needed for overtaking of joint stock companies according the Law on the takeover of Joint stock Companies.

Custody services and services of the Bank - property Guardian (Depositary bank)

since 2010, besides for non-residents, the Bank started to realize custody services for residents as well, pursuant to the Law on Foreign Currencies Operations

Over 2010, the Bank realized the services – the Bank – Property Guardian for:

• Open investment funds;

• Private investment funds;

• Open obligatory pension fund;

• Open voluntary pension fund.

Financial markets

Risk management


the Bank applies a highly conservative policy of anticipation of operative risks, by maintenance of an efficient system of integrated risk management. this enables realization of high collection of investments, a satisfactory level of capital adequacy, protection from unpredictable events and possible non-realisation of the planned policy.

Credit risk management

the credit risk management includes a permanent analysis of the credit portfolio of the Bank, with regards to the sectoral diversification and concentration on the portfolio, analysis and evaluation of the financial performances of the customers, monitoring of the regularity at attention of the liabilities and separation of a satisfactory level of reservations for investments.

the total exposure of the Bank in 2010 increased by 4,299.0 million MkD (10.6%) and amounts 44,999.0 million MkD. the total reservation fund on 31.12.2010 amounts 4,537.9 million MkD, wherewith the possibility of portfolio coverage is realized with 10.1% (2009: 9.4%).

Credit portfolio quality

the participation of the a and B investments in the total portfolio on the end of 2010 amounts 92.4% (2009: 92.9%). the coverage of the investments classified in the C, D and E risk categories with total separated reservations amounts 132.6% (2009: 132.7%).

risk management

Credit portfolio on which reservations are calculated (000 MKD)

0,000,000

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

40,700,00040,700,00044,999,03344,999,033

2008 2009 2010

40,838,76140,838,761

Structure of the credit portfolio

per categories of risk

A 65,7%A 65,7%

B 26,7%B 26,7%

C 2,4%C 2,4%

D 0,8%D 0,8%

E 4,4%E 4,4%


non-credit risk management

the Bank has defined policies for monitoring of the non-credit risks. In the Bank are monitored and managed the liquidity, foreign currency, interest, operative, legal, strategic and reputational risk and in the same time is monitored and managed the information system safety.

In 2010 were concluded stress-tests on a half-year basis, which show how exposed the bank is to a liquidity risk, foreign currency risk and interest risk, which show the stable position of the Bank.

operative risk management

the operative risk management understands implementation of a system for recording, monitoring, control and finding solutions for possible and real events causing damage, which result from the daily business of the Bank and external factors, and have a negative impact on the financial result.

In 2010 was realized a repeated identification and analysis of the operative risks for the most processes in the Bank. the analysis of the operative risks and the status of the realized measures were submitted to the Committee for operative risks.

Capital management and adequacy of capital

Over 2010 the adequacy of the Bank’s funds was kept on a level above 12.0%. In september, the present subordinary loans from NLB InterFinanz aG Zurich were prolonged, by which the guarantee capital of the Bank was increased to 5,567.9 million MkD (2009: 5,103.5 million MkD), which leaded to increase of the capital adequacy coefficient to 13.16% (2009: 13.05%).

Capital adequacy in %

10

12

14

16

18

20

13.013.0

2009 20102008

13.613.613.213.2


In 2010 were realized several activities from the aspect of expansion and maintenance of the information infrastructure, system adjustments and implementation of new software solutions, which enables development and maintenance of an effective and efficient information system. Herewith, the Bank has the possibility to easily monitor the increase of the work load, the organizational changes, the changes of the regulations, the introduction of new innovative products and services and can easily adapt to them, supporting at the same time unhindered and not decreased realization of the profitability.

Information system safety

the information safety of NLB tutunska banka aD is realized pursuant to the Circular No. 9 of the National Bank of the Republic of Macedonia, the Decision on Information system safety of the bank and is corresponding with the international standards IsO 27001 and IsO 17799-2005 (IsO 27002). Pursuant to these standards an information safety system was established in the Bank, that is consisted of following chapters:

• risk management - the Bank has established a continuous process of identification of the weaknesses and dangers to its information systems;

• policy on information systems safety;

• Implementation of safety controls - By following of the events and operative controls, the Bank realizes administrative, physical and technical controls, by which a protection of the information and systems safety is realised on several levels;

• Monitoring and upgrade - the Bank has established a process of continuous collection and analysis of information regarding the occurrence of new dangers and weaknesses of the information system

Information technology

Human resources


the work and the success of the Bank are based on a modern systematic approach of the human resources management. the activities for strengthening of the Bank’s capacities by adequate recruiting and allocation of employees, the valuation of their performances and working results, the promotion and awarding process, the systematical approach at realization of professional education and training of the employess represent the main tasks and activities on the field of Bank’s personnel management.

Structure and number of employees

Including 31.12.2010, the Bank has a total of 764 employees, from which 82.2% posess university education. the biggest part of the employees or 68.2% are younger than 35.

Human resources management

Structure of the employees based on the real professional education on 31.12.2010

Structure of the employees based on the age on 31.12.2010

Development and training of the employees

Over 2010 were realized 106 trainings, wherefrom 23 internal and 83 external trainings. the topics arised from the identified needs for training and the legal requirements for a concrete specialistiaon and knowledge. Most of the realized trainings had the purpose to improve the skills for sale and communication of the sales personnel, to implement new products, services and development solutions, new legal requirements, risk management, procedures for care and development of human resources, prevention of money laundering and financing of terrorism, personal data protection, safety of the Bank’s information systems, safety and protection at work, It revision, Ethical Code and conflict of interests (information in case of illegal and unethical behavior) and similar.

Student trainings

as a result of the permanent cooperation with domestic and international universities on the field of professional development and providing work experience for young people, who are interested at work in the banking sector in the Republic of Macedonia, in 2010 were realized 216 work trainings in the organizational units of the Bank, wherefrom 117 trainings though the Project: My Carreer – usaID.

до 25 години 4,7%до 25 години 4,7%

од 25 до 35 години 68,2%од 25 до 35 години 68,2%

од 35 до 45 години 15,1%од 35 до 45 години 15,1%

над 45 години 12,0%над 45 години 12,0%

ВСС 82,2%ВСС 82,2%

ССС 15,6%ССС 15,6%

НСС 0,3%НСС 0,3%

ВШС 2,0%ВШС 2,0%


Work organisation

the supervisory Board of the Bank adopted in 2010 a new Rulebook for Organisation and systematisation of the Working Positions in NLB tu-tunska banka aD skopje, whereby an organizational structure with the goal to improve the efficiency and to optimize the working processes in line with the principle of a customer-orientated work organization was introduced.

risk management board

Development board

assets and liabilities committee

audit committee

General Secretariat

logistics DivisionFinancial Market and

treasury DivisionCorporate Banking

DivisionBranch network

DivisionSales logistics

DivisionCash Services & Depot

Division

Operational accounting Department





Management of General secretariatOffice of the Management board

Human Resources Management servicetechnology and Organization service






Customer Relationship Management Department Industry and agriculture

sector

Control, Coordination and Marketing Department

Private Customers administration Department

Cash and Depot services Department

Project Finance Department

Customer Relationship Management Department

transport, services and Construction sector

Customer Relationship Management Department

trade and Other sector

small and Micro-business Department

trade Finance Department Department for security and Cash transportation

BranchesBusiness Customers

administration DepartmentАТМ administration

Department

legal, Compliance and management

of problematic loans Division

risk Management Division

Information technology Division

payment System Division

Financial Institution and treasury administration

Department

Legal Consulting Department

Credit Risk Management Department

Compliance DepartmentNon-credit Risk Management Department

Management of problematic loans

Department

Information technology Maintenance and

Information Infrastructure Management Department

Customers Helpdesk Department

Enforced collection and pleading Department

Information system Development Department

Risk Monitoring, Blockades and Distribution

Department

Payment systems’ Management and

Development Department

Financial accounting and Reporting Department

assets and Liabilities Management Department

Business Planning and analysis Department

Custody Department

Investments, Procurement F/X, Money market & Derivates Department

General affairs Department securities services Department

Customer Relationship Management Department Financial Institutions and

International Finance

It steering committee

Internal audit Division


assembly

Supervisory board

Managing board

President of Managing BoardMember of Managing BoardMember of Managing Board

Financial results


nlB tutunska Banka aD Skopje

Financial statements prepared in accordancewith International Financial reporting Standards

For the year ended 31 December 2010


page Content

Independent auditor’s report ................................................................................................................... 38-39

Income statement ..........................................................................................................................................40

statement of comprehensive income ..............................................................................................................41

statement of financial position (balance sheet) ...............................................................................................42

statement of changes in equity ......................................................................................................................43

Cash flow statement ................................................................................................................................ 44-45

Notes to the financial statements ............................................................................................................. 46-98


to the Shareholders of nlB tutunska Banka aD - Skopje

We have audited the accompanying financial statements of NLB tutunska Banka aD - skopje, which comprise the statement of financial position as of 31 December 2010 and the income statement and the statement of comprehensive income, statement of changes in equity and cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes.

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting standards. this responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International standards on auditing. those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. the procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. an audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

Independent auditor’s report


We believe that the audit evidence we have obtained is sufficient and appropriate to provide basis for our audit opinion.

opinion

In our opinion, the accompanying financial statements give a true and fair view of the financial position of NLB tutunska Banka aD skopje as of 31 December 2010 and of its financial performance and its cash flows for the year than ended in accordance with International Financial Reporting standards.

.

pricewaterhouseCoopers reVIZIJa doo

Skopje,

XX February 2011


Year ended 31 December

Notes 2010 2009

Interest and similar income 5 3,852,505 3,509,573

Dividend income 6 2,648 11,000

Interest and similar expenses 5 (2,019188) (1,751,939)

net interest income 1,835,965 1,768,634

Loan impairment charges 7 (757,475) (710,232)

net interest income after loan impairment charges 1,078,490 1,058,402

Fee and commission income 8 912,382 796,443

Fee and commission expense 8 (194,406) (152,740)

net fee and commission income 717,976 643,703

Net gains/(losses) on financial instruments classified as held for trading 9 76,521 53,148

Net gains/(losses) on investment securities 12 4,877 14,901

Net foreign exchange gain 10 105,578 162,133

Personnel expenses 13 (607,689) (602,949)

General and administrative expenses 14 (268,351) (271,878)

Depreciation and amortisation expense 15 (198,849) (177,262)

Gains less losses on revaluation of investment property 17 - (8,297)

Other operating expenses 16 (594,128) (549,564)

Other operating income 11 144,466 135,483

Other tax expense 18 (2,056) -

operating profit 456,835 457,820

share of profit of associates and joint ventures accounted for using the equity method 25 13,931 10,560

profit before income tax 470,766 468,380

Income tax expense 18 - (11,914)

profit for the year 470,766 456,466

all amounts in MkD thousands unless otherwise stated

Income statement

the notes on pages 46 to 98 are an integral part of these financial statements.



Notes 2010 2009

profit for the year 470,766 456,466

net gains on available-for-sale financial assets

• unrealised net gains arising during the period, before tax (3,263) (40,513

• Net reclassification adjustments for realised net losses, before tax (4,877) (14,901)

Income tax relating to components of other comprehensive income 3,132 5,535

other comprehensive income for the year, net of tax 19 (5,008) (49,879)

total comprehensive income for the year 465,758 406,587

Statement of comprehensive income




as at 31 December

Notes 2010 2009

assets

Cash and balances with central banks 20 8,909,474 8,553,400

Loans and advances to banks 21 5,011,584 7,133,066

Loans and advances to customers 23 32,930,213 29,850,704

Financial assets held for trading 22 10,117 370,325

Investment securities:

• available for sale 24 13,656,363 7,341,741

• Held to maturity 24 227,937 317,030

Investments in associates for using the equity method 25 79,739 65,200

Investment properties 26 70,471 70,471

Property, plant and equipment 27 804,543 874,351

Intangible assets 28 115,288 93,951

Current income tax assets 38 - 572

Deferred income tax assets 29 - 2,178

Foreclosed collateral 30 493,005 83,753

Other assets 31 365,621 371,341

assets classified as held for sale 32 30,864 -

total assets 62,705,219 55,128,083

liabilities

Deposits from banks 33 3,867,711 3,176,495

Deposits from customers 34 45,754,892 40,388,538

Other borrowed funds 35 5,633,172 4,127,402

Debt securities in issue 36 616,928 631,786

Provisions 37 198,906 287,004

Deferred income tax liabilities 30 - 5,310

subordinated debt 39 1,800,162 1,620,346

Other liabilities 40 439,166 386,480

total liabilities 58,310,937 50,623,361

equity

Capital and reserves attributable to equity of parent entity

share capital 44 854,061 854,061

share premium 44 2,203,056 2,203,056

Revaluation reserve 44 41,026 28,184

Retained earnings 685,110 786,533

Other reserves 611,029 632,888

total equity 4,394,282 4,504,722

total equity and liabilities 62,705,219 55,128,083

Statement of financial position (balance sheet)




Statement of changes in equity

attributable to owners of the parent entityshare

capitalshare

premium Revaluation

reserveRetained earning

Otherreserves

total equity

Balance at 1 January 2009 854,061 2,203,056 78,063 1,006,602 579,463 4,721,245

Profit - - - 456,466 - 456,466Fair value gains on available for sale financial assets, net of tax - - (49,879) - - (49,879)

total comprehensive income - - (49,879) 456,466 - 406,587

Dividends income to 2008 - - - (623,110) - (623,110)

transfer to statutory reserve - - - (53,425) 53,425 -

Balance at 31 December 2009 854,061 2,203,056 28,184 786,533 632,888 4,504,722

Balance at 1 January 2010 854,061 2,203,056 28,184 786,533 632,888 4,504,722

Profit - - - 470,766 - 470,766Fair value gains on available for sale financial assets, net of tax - - (5,008) - - (5,008)

total comprehensive income - - (5,008) 470,766 - 465,758Dividends income to 2009 - - - (408,051) - (408,051)

transfer to statutory reserve - - - (35,203) 35,203 -Loss of control of the investment in subsidiary - - 17,850 (128,935) (57,062) (168,147)

Balance at 31 December 2010 854,061 2,203,056 41,026 685,110 611,029 4,394,282

Detailed information is provided in Note 44.





Note 2010 2009

Cash flows from operating activities

Profit before tax 470,766 468,380

adjustments for non cash items:

Depreciation of property and equipment 27 163,472 146,218

amortization of intangible assets 28 35,377 31,045

Losses on revaluation of investment property 17 - 8,297

Capital loss on sale of property and equipment (643) 5,359

Impairment loss 688,977 621,767

Decrease in value of assets acquired through foreclosure procedure 19,172 13,826

Dividends income 6 (2,648) (11,000)

Interest income 5 (3,852,505) (3,509,573)

Interest expense 5 2,019,188 1,751,939

Interest received 3,851,440 3,516,049

Interest paid (1,984,276) (1,624,994)

share of net profits from equity method investments (13,931) (10,560)

Other non-cash items 193,820 (8,004)

operating profit before changes in operating assets 1,588,209 1,398,749

(Increase)/decrease in operating assets:

Balances with NBRM (389,372) (177,032)

Loans and advances to banks 1,028,055 (176,574)

Loans and advances to customers (3,835,669) (391,283)

Foreclosed collateral (427,781) (3,275)

Other assets (15,411) (225,975)

assets classified as held for sale (30,864) -

Increase/(decrease) in operating liabilities:

Deposits from banks and other financial institutions 708,654 547,922

Deposits from customers 5,320,413 3,791,559

Other liabilities 51,636 67,368

net cash (used in)/ from operating activities before income tax 3,997,870 4,831,459

Statement of cash flow




taxation paid

Income tax paid 572 (13,954)

net cash (used in)/ from operating activities 3,998,442 4,817,505

Cash flows from investing activities

Purchase of property and equipment 27 (123,540) (282,953)

Purchase of intangible assets 28 (57,298) (26,656)

Purchase of investments (15,371,120) (3,999,473)

Loss of control of the investment in subsidiary (27,391) -

Proceeds from sale of securities held for trading 360,208 238,191

Disposal of investments 10,532,071 1,516,445

Proceeds from sale of property and equipment 702 1,730

Dividends received 6 2,648 11,000

net cash (used in)/ investing activities (4,683,720) (2,541,716)

Cash flows from financing activities

Proceeds from borrowed funds and debt securities 25,444,622 20,707,673

Repayment of borrowings funds and debt securities (23,958,238) (20,982,929)

Dividends paid (408,051) (623,110)

net cash (used in)/ from financing activities 1,078,333 (898,366)

Net (decrease)/increase in cash and cash equivalents 393,055 1,377,423

Cash and cash equivalents at 1 January 14,077,215 12,699,792

Cash and cash equivalents at 31 December 45 14,470,270 14,077,215

Statement of cash flow (continued)




1. General information

1.1 Intoduction

NLB tutunska Banka aD skopje (“the Bank”) is a joint stock company incorporated and domiciled in the Republic of Macedonia. the Bank is a subsidiary of NLB Group, which controls 86.97% (2009: 86.97%) of the voting shares of the Bank.

the address of its registered office is as follows:

st. Vodjanska br. 1, p.fax. 702,skopje, principal Centar1000 skopje, Republic of Macedonia

the Bank is licensed to perform all banking activities in accordance with the law. the main activities include commercial lending, receiving of deposits, foreign exchange deals, and payment operation services in the country and abroad and retail banking services. In addition, it provides trade finance facilities to companies for export and import purposes.

these financial statements have been approved for issue by the supervisory Board on 23 February 2011.

Directors

the names of the Members of the Management Board of the Bank serving during the financial year and to the date of this report are as follows:

President of Management Board Gjorgji Jancevski

Member of Management Board Ljube Rajevski

Member of Management Board tome Perinski

Manager of Financial Market and treasury Division stojna stojkoska

Manager of Logistic Division Jordanka Grujoska

Manager of Cash services and Depot Division Dragan Panovski

Manager of Internal audit Division Ljiljana Nastoska

Manager of sales Logistics Division slagjana Beleva

Manager of Branch Network Division antonio argir

Manager of Corporate Banking Division straso Pupulkovski

Manager of Center for coordination and cooperation between NLB Group members and their clients Damir kuder

Manager of Risk Management Division Bogoja kitancev

Manager of Legal, Compliance and Menagment of problematic loans division Nadica Ceneva

Payment system Division Igor Davchevski

Information technology Division aleksandar Misovski

1.2 operating environment of the Company

recent volatility in global and Macedonian financial markets

the ongoing global financial and economic crisis has prolonged effects resulting in a lower level of capital market funding, higher inter-bank lending rates and high volatility in stock and currency markets. While liquidity levels of real sector in Republic of Macedonia decreased on lower levels, the liquidity across the banking sector remained high three years in row. It is expected that there will be no liquidity shocks in domestic banking in 2011.

the full extent of the impact of the ongoing global financial and economic crisis is providing to be difficult to anticipate or completely guard against.

Impact on liquidity

the funding of the Bank is mostly dependant on stable deposit base which has been continuously growing. the Bank does not expect any


significant negative influence on stability of deposit base and thus on liquidity. However the overall market pressure towards decreasing interests on loans, and short term securities, may influence on possible alternative ways of funding.

Impact on customers/borrowers

the bank’s clients, both the borrowers and depositors, may be adversely affected by the financial and economic environment which could in turn impact their liquidity and their ability to repay the amounts owed. additionally, significant amount of loans pleaced with FX clause impose direct foreign currency risk and indirect credit risk for customers, although the official middle exchange rate of Denar calculated by the means of quotations made by banks - market makers in Macedonia is considered to represent the real price of the domestic currency. Possible deteriorating operating conditions for borrowers may also have an impact on management’s cash flow forecasts and assessment of the impairment of financial and non-financial assets. to the extent that information is available, management has properly reflected revised estimates of expected future cash flows in its impairment assessments.

Impact on collateral (especially real estate)

the amount of provision for impaired loans is based on management’s appraisals of these assets at the balance sheet date after taking into consideration the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. the market in Macedonia for many types of collateral, especially real estate, has not been severely affected by the recent volatility in global financial markets since the supply of real estate especially residential is still lower than demand. Never the less, possible prolonged lower liquidity of companies in 2011 may decrease liquidity for certain types of assets. as a result, the actual realisable value on foreclosure may differ from the value ascribed in estimating allowances for impairment.

Fair value of financial assets and liabilities (excluding financial assets and liabilities directly affected by the credit crunch (e.g. mortgage backed securities) for which specific disclosures would be required)

the fair values of quoted investments in active markets are based on current bid prices (financial assets) or ask prices (financial liabilities). If there is no active market for a financial instrument, the Group establishes fair value 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.

2. Summary of significant accounting policies

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, unless otherwise stated.

2.1 Basis of preparation

the financial statements have been prepared in accordance with International Financial Reporting standards (IFRs) and are stated in Macedonian Denars (MkD).

the Bank owns 49% of Nov Penziski Fond aD skopje, which is incorporated and domiciled in the Republic of Macedonia and represents an investment in an associate.

supervisory Board of the Bank on 28 January 2010 approved contractual liquidation of NLB tutunska Broker aD - skopje (NLB tutunska Broker), as its sole founder and the only shareholder. Based on the securities Law and Company trade Law, during the liquidation procedures, an external liquidator is appointed. after the appointment of external liquidator, the Bank has neither control nor significant influence over NLB tutunska broker. the investment in NLB tutunska broker is presented as non-current assets held for sale (see Note 32). the management expects that liquidation procedures will be completed by the end of 2011.

the financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets.

the preparation of financial statements in conformity with IFRs requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Bank’s accounting policies. the areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4.

(a) adoption of new or revised Standards and Interpretations

- Standards effective for annual periods beginning on or after 1 January 2010

the following new standards and interpretations became effective for the Bank from 1 January 2010:

IFrIC 17, Distributions of non-Cash assets to owners (effective for annual periods beginning on or after 1 July 2009). the interpretation clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. an entity should measure a liability


to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. a gain or loss on disposal of the distributed non-cash assets should be recognised in profit or loss when the entity settles the dividend payable. IFRIC 17 did not have an impact on these financial statements.

IFrIC 18, transfers of assets from Customers (effective for annual periods beginning on or after 1 July 2009). the interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. IFRIC 18 did not have an impact on these financial statements.

IaS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). the revised Ias 27 requires an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously “minority interests”) even if this results in the non-controlling interests having a deficit balance (the previous standard required the excess losses to be allocated to the owners of the parent in most cases). the revised standard specifies that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. at the date when control is lost, any investment retained in the former subsidiary has to be measured at its fair value.

IFrS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). the revised IFRs 3 allows entities to choose to measure non-controlling interests using the previous IFRs 3 method (proportionate share of the acquiree’s identifiable net assets) or at fair value. the revised IFRs 3 is more detailed in providing guidance on the application of the purchase method to business combinations. the requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in a business combination achieved in stages, the acquirer has to remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss for the year. acquisition-related costs are accounted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. an acquirer has to recognise a liability for any contingent purchase consideration at the acquisition date. Changes in the value of that liability after the acquisition date are recognised in accordance with other applicable IFRss, as appropriate, rather than by adjusting goodwill. the revised IFRs 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. the revised IFRs 3 did not have a material impact on these financial statements.

Group Cash-settled Share-based payment transactions - amendments to IFrS 2, Share-based payment (effective for annual periods beginning on or after 1 January 2010). the amendments provide a clear basis to determine the classification of share-based payment awards in both consolidated and separate financial statements. the amendments incorporate into the standard the guidance in IFRIC 8 and IFRIC 11, which are withdrawn. the amendments expand on the guidance given in IFRIC 11 to address plans that were previously not considered in the interpretation. the amendments also clarify the defined terms in the appendix to the standard. the amendments did not have a material impact on these financial statements.

eligible Hedged Items - amendment to IaS 39, Financial Instruments: recognition and Measurement (effective with retrospective application for annual periods beginning on or after 1 July 2009). the amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. the amendment did not have a material impact on these financial statements.

Improvements to International Financial reporting Standards (issued in april 2009; amendments to IFrS 2, IaS 38, IFrIC 9 and IFrIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFrS 5, IFrS 8, IaS 1, IaS 7, IaS 17, IaS 36 and IaS 39 are effective for annual periods beginning on or after 1 January 2010). the improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: clarification that contributions of businesses in common control transactions and formation of joint ventures are not within the scope of IFRs 2; clarification of disclosure requirements set by IFRs 5 and other standards for non-current assets (or disposal groups) classified as held for sale or discontinued operations; requiring to report a measure of total assets and liabilities for each reportable segment under IFRs 8 only if such amounts are regularly provided to the chief operating decision maker; amending Ias 1 to allow classification of certain liabilities settled by entity’s own equity instruments as non-current; changing Ias 7 such that only expenditures that result in a recognised asset are eligible for classification as investing activities; allowing classification of certain long-term land leases as finance leases under Ias 17 even without transfer of ownership of the land at the end of the lease; providing additional guidance in Ias 18 for determining whether an entity acts as a principal or an agent; clarification in Ias 36 that a cash generating unit shall not be larger than an operating segment before aggregation; supplementing Ias 38 regarding measurement of fair value of intangible assets acquired in a business combination; amending Ias 39 (i) to include in its scope option contracts that could result in business combinations, (ii) to clarify the period of reclassifying gains or losses on cash flow hedging instruments from equity to profit or loss for the year and (iii) to state that a prepayment option is closely related to the host contract if upon exercise the borrower reimburses economic loss of the lender; amending IFRIC 9 to state that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within its scope; and removing the restriction in IFRIC 16 that hedging instruments may not be held by the foreign operation that itself is being hedged. In addition, the amendments clarifying classification as held for sale under IFRs 5 in case of a loss of control over a subsidiary published as part of the annual Improvements to International Financial Reporting standards, which were issued in May 2008, are effective for annual periods beginning on or after 1 July 2009. the amendments did not have a material impact on these financial statements.

unless otherwise stated above, the amendments and interpretations did not have any significant effect on the Group’s financial statements.

(b) new accounting pronouncements

Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2011 or later and which the Bank has not early adopted.


Classification of rights Issues - amendment to IaS 32 (issued on 8 October 2009; effective for annual periods beginning on or after 1 February 2010). the amendment exempts certain rights issues of shares with proceeds denominated in foreign currencies from classification as financial derivatives. the Bank does not expect the amendments to have any material effect on its financial statements.

amendment to IaS 24, related party Disclosures (issued in November 2009 and effective for annual periods beginning on or after 1 January 2011). Ias 24 was revised in 2009 by: (a) simplifying the definition of a related party, clarifying its intended meaning and eliminating inconsistencies; and by (b) providing a partial exemption from the disclosure requirements for government-related entities. the Bank does not expect the amendments to have any material effect on its financial statements.

IFrIC 19, extinguishing Financial liabilities with equity Instruments (effective for annual periods beginning on or after 1 July 2010). this IFRIC clarifies the accounting when an entity renegotiates the terms of its debt with the result that the liability is extinguished through the debtor issuing its own equity instruments to the creditor. a gain or loss is recognised in profit or loss based on the fair value of the equity instruments compared to the carrying amount of the debt. the Bank does not expect IFRIC 19 to have any material effect on its financial statements.

prepayments of a Minimum Funding requirement – amendment to IFrIC 14 (effective for annual periods beginning on or after 1 January 2011). this amendment will have a limited impact as it applies only to companies that are required to make minimum funding contributions to a defined benefit pension plan. It removes an unintended consequence of IFRIC 14 related to voluntary pension prepayments when there is a minimum funding requirement. the Bank does not expect the amendments to have any material effect on its financial statements.

IFrS 9, Financial Instruments part 1: Classification and Measurement. IFRs 9 issued in November 2009 replaces those parts of Ias 39 relating to the classification and measurement of financial assets. IFRs 9 was further amended in October 2010 to address the classification and measurement of financial liabilities. key features of the standard are as follows:

• Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. the decision is to be made at initial recognition. the classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument.

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

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

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

While adoption of IFRs 9 is mandatory from 1 January 2013, earlier adoption is permitted. the Bank is considering the implications of the standard, the impact on the Bank and the timing of its adoption by the Group.

Disclosures - transfers of Financial assets - amendments to IFrS 7 (issued in october 2010 and effective for annual periods beginning on or after 1 July 2011.). the amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. the amendment includes a requirement to disclose by class of asset the nature, carrying amount and a description of the risks and rewards of financial assets that have been transferred to another party yet remain on the entity’s balance sheet. Disclosures are also required to enable a user to understand the amount of any associated liabilities, and the relationship between the financial assets and associated liabilities. Where financial assets have been derecognised but the entity is still exposed to certain risks and rewards associated with the transferred asset, additional disclosure is required to enable the effects of those risks to be understood. the Bank does not expect the amendments to have any material effect on its financial statements.

Improvements to International Financial reporting Standards (issued in May 2010 and effective from 1 January 2011). the improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: IFRs 1 was amended (i) to allow previous GaaP carrying value to be used as deemed cost of an item of property, plant and equipment or an intangible asset if that item was used in operations subject to rate regulation, (ii) to allow an event driven revaluation to be used as deemed cost of property, plant and equipment even if the revaluation occurs during a period covered by the first IFRs financial statements and (iii) to require a first-time adopter to explain changes in accounting policies or in the IFRs 1 exemptions between its first IFRs interim report and its first IFRs financial statements; IFRs 3 was amended (i) to require measurement at fair value (unless another measurement basis is required by other IFRs standards) of non-controlling interests that are not present ownership interest or do not entitle the holder to a proportionate share of net assets in the event of liquidation, (ii) to provide guidance on acquiree’s share-based payment arrangements that were not replaced or were voluntarily replaced as a result of a business combination and (iii) to clarify that the contingent considerations from business combinations that occurred before the effective date of revised IFRs 3 (issued in January 2008) will be accounted for in accordance with the guidance in the previous version of IFRs 3; IFRs 7 was amended to clarify certain disclosure requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and quantitative disclosures about the nature and extent of financial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by clarifying that an entity should disclose the amount of foreclosed collateral held at the reporting date and not the amount obtained during the reporting period; Ias 27 was amended by clarifying the transition rules for amendments to Ias 21, 28 and 31 made by the revised Ias 27 (as amended in January 2008); Ias 34


was amended to add additional examples of significant events and transactions requiring disclosure in a condensed interim financial report, including transfers between the levels of fair value hierarchy, changes in classification of financial assets or changes in business or economic environment that affect the fair values of the entity’s financial instruments; and IFRIC 13 was amended to clarify measurement of fair value of award credits. the Bank does not expect the amendments to have any material effect on its financial statements, except the amendment.

unless otherwise described above, the new standards and interpretations are not expected to significantly affect Bank’s financial statements.

2.2 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements are measured using the currency of the primary economic environment in which the Bank operates (‘the functional currency’). the financial statements are presented in MkD thousands, which is the Bank’s functional and presentation currency.

(b) transactions and balances

Foreign currency transactions are translated into the functional currency using the 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 at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

Changes in the fair value of monetary securities denominated in foreign currency classified as available for sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. translation differences related to changes in the amortised cost are recognised in profit or loss, and other changes in the carrying amount are recognised in equity.

translation differences on non-monetary items, such as equities held 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 financial assets, are included in the fair value reserve in equity.

the foreign currencies the Bank deals with are predominantly Euro (EuR) and united states Dollars (usD) based. the exchange rates used for translation at 31 December 2010 and 2009 were as follows: 2010 2009 MkD MkD1 EuR 61.51 61.171 usD 46.31 42.67

2.3 Financial assets

the Bank classifies its financial assets in the following categories: loans and receivables; financial assets held for trading, available-for-sale financial assets and held to maturity investments. Management determines the classification of its investments at initial recognition.

(a) loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. they arise when the Bank provides money to a debtor with no intention of trading the receivable. Loans and receivables are initially recognized when cash is advanced to the borrowers and subsequently are carried at amortized cost using the effective interest method.

(b) Held for trading

a financial asset is classified as held for trading if it is acquired principally for the purpose of selling or repurchasing it in the near term and for which there is evidence of a recent actual pattern of short-term profit-taking. trading assets held by the Bank are government and corporate bonds.

Held for trading assets are initially recognised at fair value and transaction costs are expensed in the income statement.

Gains and losses arising from changes in the fair value are included in the income statement in the period in which they arise. Interest income and expense and dividend income and expense are included together with gains and losses arising from changes in the fair value.

(c) available-for-sale financial assets

available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity.

available-for-sale financial assets are initial recognised at fair value, which is the cash consideration including any transaction costs and measured subsequently at fair value. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in equity, until the financial asset is derecognised or impaired. at this time, the cumulative gain or loss previously recognised in equity is recognised in profit or loss. However, interest calculated using the interest method and foreign currency gains and losses on monetary assets classified as available for sale are recognised in the income statement. Dividends on available-for-sale equity instruments are recognised in the


income statement when the entity’s right to receive payment is established.

the fair values of quoted investments in active markets are based on current bid prices, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at cost, less impairment losses.

(d) Held - to - maturity financial assets

Held - to - maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank’s management has the positive intention and ability to hold to maturity. If the Bank were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be reclassified as available for sale.

these are initially recognised at fair value including direct and incremental transaction costs and measured subsequently at amortised cost, using the effective interest method.

(e) recognition

Regular-way purchases and sales of financial assets at fair value through profit or loss, held to maturity and available for sale are recognised on trade - date - the date on which the Bank commits to purchase or sell the asset.

(f) Derecognition

Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognised when they are extinguished − that is, when the obligation is discharged, cancelled or expires.

2.4 offsetting financial instrumentsFinancial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

2.5 Interest income and expenseInterest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognised within ‘interest income’ and ‘interest expense’ in the income statement using the effective interest method.

the effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. the effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. the calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

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 recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

2.6 Fee and commission incomeFees and commissions consist mainly of fees received from enterprises arising from guarantees and letter of credits and fees arising from domestic and foreign payment traffic. Fees and commissions are generally recognised on an accrual basis when the service has been provided. Fees and commissions from guarantees and letter of credit and credit cards are recognised rateably over the period in which the service is provided.

2.7 Dividend incomeDividends are recognised in the income statement when the entity’s right to receive payment is established and inflow of economic benefits is probable.

2.8 Impairment of financial assets

(a) assets carried at amortised cost

the Bank 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 a group of financial assets is impaired and impairment losses are incurred 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 (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

the criteria that the Bank 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 (for example, equity ratio, net income percentage of sales);

• Breach of loan covenants or conditions;

• Initiation of bankruptcy proceedings;

• Deterioration of the borrower’s competitive position;

• Deterioration in the value of collateral; and

• Legal and other difficulties in enforcing the bank’s rights to repossess collateral.

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

the Bank 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. If the Bank 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 characteristics and collectively assesses them for impairment. assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.

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 (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. the carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised 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 a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Bank’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.

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 of the assets in the Bank and historical loss experience for assets with credit risk characteristics similar to those in the Bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist.

Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the Bank and their magnitude). the methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience.

When a loan is uncollectible, it is written off against the related provision 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.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. the amount of the reversal is recognised in the income statement in impairment charge for credit losses.

(b) assets classified as available for sale

the Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the 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 – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised 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 recognised 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 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.


2.9 Investment property

Investment property is property held either to earn rental income or for capital appreciation or both. the Bank holds investment property that has been acquired through the enforcement of security over loans and advances and property acquired from transfer of property to investment. Rental income from investment property is recognized in the income statement on a straight- line basis over the term of the lease.

Investment property is measured at fair value, which reflects market conditions at the date of the statement of financial position. Gains or losses arising from changes in the fair value of investment properties are included in the income statement in the year in which they arise.

When the Bank makes a decision to use the assets for its own purposes, they are reclassified to property and equipment.

2.10 Intangible assets

Intangible assets that are acquired by the Bank are stated at cost less accumulated amortisation and impairment losses.

subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific assets to which it relates. all other expenditure is expensed as incurred.

amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. Intangible assets are amortised from the date they are available for use. 2010 2009software 5 years 5 yearsPatents and licenses 5 years 5 yearsOther 5 years 5 years

2.11 property and equipment

Property and buildings comprise mainly branches and offices. all property and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. all other repairs and maintenance are charged to other operating expenses during the financial period in which they are incurred.

Land is not depreciated. Depreciation of other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:

2010 2009Buildings 40 years 40 yearsFurniture and equipment 4-10 years 4-10 years

the assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. an asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. the recoverable amount is the higher of the asset’s fair value less costs to sell and value in use.

Gains and losses on disposals are determined by comparing proceeds with carrying amount. these are included in other operating expenses in the income statement.

2.12 leases

(a) Bank is the lessee

the leases entered into by the Bank are primarily operating leases. the total payments made under operating leases are charged to other operating expenses in 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 recognised as an expense in the period in which termination takes place.

2.13 Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition, including cash and non-restricted balances with central banks, treasury bills and other eligible bills and placements to banks.


2.14 provisions

a provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

a provision for onerous contracts is recognised when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. the provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognises any impairment loss on the assets associated with that contract.

2.15 employee benefits

a) Defined contribution plans

the Bank contributes to its employees’ post retirement plans as prescribed by the national legislation. Contributions, based on salaries, are made to the national organisations responsible for the payment of pensions. there is no additional liability in respect of these plans. Obligations for contributions to defined contribution pension plans are recognised as an expense in profit and loss when they are due.

b) Short-term benefits

short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

a provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

c) long-term employee benefits

the Bank’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. any actuarial gains or losses are recognised in profit or loss in the period in which they arise. Long term employee benefits include jubilee awards and retirement indemnity bonuses. Valuations of these obligations are carried out by independent qualified actuaries. the main actuarial assumptions included in the calculation of the obligation for long-term employee benefits are:

• Discount rate of 10%

• Number of employees eligible to claim benefits and

• Future salary increases using general salary inflation index, promotions and increases in salaries according to past years of services.

2.16 taxation

Income tax

Companies do not have to pay income tax on their profit before tax (earned since 1 January 2009) until that profit is distributed in a form of dividend or other forms of profit distributions. If dividends are paid, 10% income tax was payable at the moment of the dividend payment, regardless of whether in monetary or non-monetary form. as of 7 July 2010 dividends distributed by Companies to resident legal entities are exempt from corporate income tax at the level of the distributing entity. Dividends distributed to individuals and foreign legal entities are not exempt from corporate income tax and are subject to 10% at the level of the distributing entity and the corporate income tax liability arises at the time of the dividend payment. Provided the tax arises from retained earnings, such tax is recorded in equity.

apart from distribution of dividends, the tax is still payable on the non-deductable expenses incurred in that fiscal year, decreased by the amount of tax credits and other tax relief’s (see the following paragraph).Deferred income tax

tax on non-deductible expenses

Due to the changes in the Macedonian tax legislation effective from 1 January 2009, and additional changes during 2010 at the end of fiscal year the Companies are liable to pay tax on non deductible expenses, regardless of their financial results. the basis is expenses which are not within the scope of the company business i.e. non deductible expenses (representation expenses, provisions, gifts etc) less tax credits and other tax reliefs.

the tax on non-deductible expenses is recognized in the profit or loss for the year in other tax expense.

Deferred income tax

Due to the changes in the Macedonian tax legislation effective from 1 January 2009, and additional changes during 2010 the tax rate for undistributed profits was effectively reduced to zero, as tax is only payable when profits are distributed. according Ias 12.52a, deferred tax assets and liabilities should be measured using the undistributed rate. Deferred tax assets and liabilities as at 31 December 2009 were


recognized to the extent that, and only to the extent that, it was probable that the temporary difference will reverse in the future and items will be available against which the temporary difference can be utilized. the additional changes in Macedonian tax legislation during 2010 resulted in a reversal of all deferred tax assets and liabilities as of 31 December 2010.

2.17 Deposits, borrowings, subordinated liabilities and debt securities in issue

Deposits, borrowings, subordinated liabilities and debt securities in issue are the Bank’s sources of debt funding.

the Bank classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument.

the Bank initially recognises deposits, borrowings, subordinated liabilities and debt securities in issue on the date that they are originated.

Deposits, borrowings, subordinated liabilities and debt securities are initially measured at fair value net of transaction costs, and subsequently measured at their amortised cost using the effective interest method, except where the Bank chooses to carry the liabilities at fair value through profit or loss where certain conditions are met.

2.18 Share capital

(a) non voting shares

Non voting share capital that is non-redeemable is classified as equity.

(b) Share issue costs

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

(c) Dividends on ordinary shares

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

Dividends for the year that are declared after the balance sheet date are dealt with in the subsequent events note.

(d) treasury shares

Where the Bank purchases the Bank’s equity share capital, the consideration paid is deducted from total shareholders’ equity as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders’ equity.

2.19 Fiduciary activities

the Bank acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. these assets and income arising thereon are excluded from these financial statements, as they are not assets of the Bank.

2.20 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. such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities.

Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. subsequent to initial recognition, the bank’s liabilities under such guarantees are measured at the higher of the initial measurement, less amortization of fees and the best estimate of the expenditure required to settle any financial obligation arising at the balance sheet date.

these estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgment of Management. the fee income earned is recognised on a straight-line basis over the life of the quarantee. any increase in the liability relating to guarantees is taken to the income statement under other operating expenses.


3. Financial risk management

the Bank’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. the Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Bank’s financial performance.

the Bank’s risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. the Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice.

Risk management is carried out by a Risk management division in the Bank under policies approved by the supervisory Board. the Board provides written principles for overall risk management, as well as written policies covering specific areas, such as, credit risk, foreign exchange risk, interest rate risk and liquidity risk. In addition, internal audit is responsible for the independent review of risk management and the control environment.

the most important types of risk are credit risk, liquidity risk, market risk and other operational risk. Market risk includes currency risk, interest rate and other price risk.

3.1 Credit risk

the Bank takes on exposure to credit risk, which is the risk that counterparty will cause a financial loss for the Bank by failing to discharge an obligation. Credit risk is the most important risk for the Bank’s business; management therefore carefully manages its exposure to credit risk. Credit exposures arise principally in lending activities that lead to loans and advances, and investment activities that bring debt securities and other bills into the Bank’s asset portfolio. there is also credit risk in off-balance sheet financial instruments. the credit risk management and control are centralised in credit risk management department of Risk management division and reported to the Management Board.

3.1.1 Credit risk measurement

(a) loans and advances

In measuring credit risk of loan and advances to customers and to banks at a counterparty level, the Bank reflects three components (i) the ‘probability of default’ by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its likely future development, from which the Bank derive the ‘exposure at default’; and (iii) the likely recovery ratio on the defaulted obligations (the ‘loss given default’).

these credit risk measurements, which reflect expected loss (the ‘expected loss model’) and are required by the Basel Committee on Banking Regulations and the supervisory Practices (the Basel Committee), are embedded in the Bank’s daily operational management. the operational measurements can be contrasted with impairment allowances required under Ias 39, which are based on losses that have been incurred at the balance sheet date (the ‘incurred loss model’) rather than expected losses (Note 3.1.3).

(i) the Bank assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. they have been developed internally and combine statistical analysis with credit officer judgment and are validated, where appropriate, by comparison with externally available data. Clients of the Bank are segmented into four rating classes. the Bank’s rating scale, which is shown below, reflects the range of default probabilities defined for each rating class. this means that, in principle, exposures migrate between classes as the assessment of their probability of default changes. the rating tools are kept under review and upgraded as necessary. the Bank regularly validates the performance of the rating and their predictive power with regard to default events.

Bank’s internal ratings scale

Bank’s rating Description of the gradea Investment gradeB standard monitoringC special monitoringD+E sub-standard

Criterion for classification of Financial assets or Contingent liabilities into groups a, B, C, D and E are as follows:

Financial assets or Contingent liabilities are classified into Group a if they are towards:

• National Bank of the Republic of Macedonia and the Republic of Macedonia

• debtors which is not likely to default and who repays its obligations within the maturity, or with a delay of 30 days;

• exposures secured by pledging collateral graded as first class collateral.

Financial assets or Contingent liabilities are classified into Group B if they are towards debtors:

• whose cash flows are assessed as adequate to duly fulfil its due obligations, regardless its present financial position is assessed as weak,


without signs of further deterioration in the future;

• who settle their liabilities with delay between 31 and 60 days.

Financial assets or Contingent liabilities are classified into Group C if they are towards debtors:

• for which it is assessed, that cash flows will not be sufficient for regular repayment of matured liabilities,

• that settle their liabilities with delay between 61 to 120 days,

• that are clearly undercapitalized,

• that do not have sufficient long term capital resources for financing long term investments,

• from whom bank does not receive currently satisfactory information or adequate documentation concerning repayment of liabilities.

Financial assets or Contingent liabilities are classified into Group D and E if they are towards debtors:

• for which exists a strong likelihood of loss of part of financial asset or of payment for Contingent liabilities,

• that settle their liabilities with delay of more than 121 to 270 days, occasionally with delay between 271 to 360 days or more than 360 days,

• which are insolvent,

• for which a motion for commencement of process of liquidation or declaration of bankruptcy began and was filed at the provisional court,

• that are in the process of reform or in the process of liquidation,

• that declared bankruptcy,

• from whom no repayment is expected,

• with questionable legal grounds.

(ii) Exposure at default is based on the amounts the Bank expects to be owed at the time of default. For example, for a loan this is the face value. For a commitment, the Bank includes any amount already drawn plus the further amount that may have been drawn by the time of default, should it occur.

(iii) Loss given default or loss severity represents the Bank’s expectation of the extent of loss on a claim should default occur. It is expressed as percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigation.

(b) Debt securities and other bills

For debt securities and other bills, Risk management division for managing of the credit risk exposures uses ratings depending on of the issuer: Central bank of the Republic of Macedonia, Republic of Macedonia and Banks. the investments in those securities and bills are viewed as a way to gain a better credit quality mapping and maintain a readily available source to meet the funding requirement at the same time.

Investment is allowed only in liquid securities that have high credit rating. Given their high credit ratings management of the Bank does not expect any counterpart to fail to meet its obligations. the maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.

3.1.2 risk limit control and mitigation policies

the Bank manages, limits and controls concentrations of credit risk wherever they are identified − in particular, to individual counterparties and groups, and to industries and countries.

the Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to geographical and industry segments. such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product and industry sector are approved by the Board of Directors.

Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate.

some other specific control and mitigation measures are outlined below.

(a) Collateral

the Bank employs a range of policies and practices to mitigate credit risk. the most traditional of these is the taking of security for funds advances, which is common practice. the Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. the principal collateral types for loans and advances are:

• Cash, bank’s and first class companies’ guarantees,

• Mortgages over residential properties;

• Charges over business assets such as premises, inventory and accounts receivable;

• Charges over financial instruments such as debt securities and equities.

Loans to corporate entities and individuals are generally secured; over drafts and credit cards issued to individuals are secured by bills of exchange at the full amount of principal, interest and other charges. In addition, in order to minimise the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances.


Debt securities, treasury and other eligible bills are generally unsecured.

b) Credit-related contingencies

the primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans and are secured with same collateral as loans.

3.1.3 Impairment and provisioning policies

the internal rating systems described in Note 3.1.1 focus more on credit-quality mapping from the inception of the lending and investment activities. In contrast, impairment provisions are recognised for financial reporting purposes only for losses that have been incurred at the balance sheet date based on objective evidence of impairment (see Note 2.8).

the impairment provision shown in the balance sheet at year-end is derived from each of the four internal rating grades. However, the majority of the impairment provision comes from bottom two gradings. the table below shows the percentage of the Bank’s on - and off - balance sheet items relating to loans and advances and the associated impairment provision for each of the Bank’s internal rating categories:

Bank’s rating 2010 2009 Loans and advances (%) Impairment provision (%) Loans and advances (%) Impairment provision (%)1.Investment grade 92 5 93 52.standard monitoring 2 27 3 263.special monitoring 1 62 1 524.sub-standard 5 99 3 93 100 10.2 100 8.7

the internal rating tool assists management to determine whether objective evidence of impairment exists under Ias 39, based on the following criteria set out by the Bank:

• Delinquency in contractual payments of principal or interest;

• Cash flow difficulties experienced by the borrower (e.g. equity ratio, net income percentage of sales);

• Breach of loan covenants or conditions;

• Initiation of bankruptcy proceedings;

• Deterioration of the borrower’s competitive position;

• Deterioration in the value of collateral.

the Bank’s policy requires the review of individual financial assets that are above materiality thresholds at least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of the incurred loss at balance-sheet date on a case-by-case basis, and are applied to all individually significant accounts. the assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.

Collectively assessed impairment allowances are provided for: (i) portfolios of homogenous assets that are individually below materiality thresholds; and (ii) losses that have been incurred but have not yet been identified, by using the available historical experience, experienced judgment and statistical techniques.


the above table represents a worse case scenario of credit risk exposure to the Bank at 31 December 2010 and 2009, without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the balance sheet.

as shown above, 63% of the total maximum exposure is derived from loans and advances to banks and customers (2009: 69%); 23% represents investments in debt securities (2009: 15%).

Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan and advances portfolio and debt securities based on the following:

• 94% of the loans and advances portfolio is categorised in the top two grades of the internal rating system (2009: 96%);

• Loans to sMEs, which represents the biggest group in the portfolio, are backed by collateral;

• 85% of loans to individuals are backed by collateral;

• 89% of the loans and advances portfolio are considered to be neither past due nor impaired (2009: 90%);

• the incrensement of loan portfolio has resulted in a higher impairment charge in the income statement, showing a 6.7% increase;

• the Bank has introduced a more stringent selection process upon granting loans and advances; and

• 100% of the investments in debt securities and other bills are in securities issued by the Republic of Macedonia and Central bank.

Maximum exposure

2010 2009

Credit risk exposures relating to on-balance sheet assets are as follows:

Loans and advances to banks 5,011,584 7,133,066

Loans and advances to customers:

Loans to individuals:

• Overdrafts 737,403 659,904

• Credit cards 1,249,899 1,114,508

• term loans 7,654,612 6,787,170

• Mortgages 3,627,389 3,131,147

Loans to corporate entities:

• Large corporate customers 4,555,221 4,089,430

• small and medium size enterprises (sMEs) 15,105,689 14,068,545

Financial assets held for trading 10,117 355,713


• Debt securities 13,864,360 7,587,970

Other assets 365,621 371,341

Credit risk exposures relating to off-balance sheet items are as follows:

Financial guarantees 8,225,083 7,741,082

at 31 December 60,406,978 52,039,876

3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements


loans and advances

loans and advances are summarised as follows:

31 December 2010 31 December 2009Loans and advances

to customersLoans and advances

to banksLoans and advances

to customersLoans and advances

to banks

Neither past due nor impaired 33,348,354 4,359,529 29,940,192 6,417,672

Past due but not impaired 589,782 659,868 597,617 723,947

Impaired 3,274,102 317 2,822,760 350

Gross 37,212,238 5,019,714 33,360,569 7,141,969

Less: allowance for impairment (8,130) (3,509,865) (8,903)

net 32,930,213 5,011,584 29,850,704 7,133,066

Individually impaired 2,406,558 79 1,514,123 350Portfolio allowance 1,875,467 8,051 1,995,742 8,553

total 4,282,025 8,130 3,509,865 8,903

the total impairment provision for loans and advances is MkD 4,290,155,000 (2009: MkD 3,518,768,000). Further information of the impairment allowance for loans and advances to banks and to customers is provided in Notes 21 and 23.

During the year ended 31 December 2010, the Bank’s total net loans and advances increased by 2.6%. When entering into new markets or new industries, in order to minimise the potential increase of credit risk exposure, the Bank focused more on the business with large corporate enterprises or banks with good credit rating or retail customers providing sufficient collateral.

(a) loans and advances neither past due nor impaired

the credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Bank.

31 December 2010

loans and advances to customers

Individual (retail customers) Corporate entities total

Over-drafts Credit cards term loans Mort-gagesLarge corpo-

rate customers sMEs

Loans and advances to

customers


banks

Grades:

1.Investment rade 733,961 960,326 7,636,373 3,672,923 4,616,515 15,728,256 33,348,354 4,359,529

total 733,961 960,326 7,636,373 3,672,923 4,616,515 15,728,256 33,348,354 4,359,529

31 December 2009


Individual (retail customers) Corporate entities total

Over-drafts Credit cards term loans Mort-gages

Large corporate customers sMEs


customers


banks

Grades:

1.Investment rade 692,877 873,974 6,794,524 3,099,688 3,875,611 14,603,517 29,940,192 6,417,672

total 692,877 873,974 6,794,524 3,099,688 3,875,611 14,603,517 29,940,192 6,417,672


(b) loans and advances past due but not impaired

Gross amount of loans and advances by class to customers and banks that are past due but not impaired is as follows:

(i) Loans and advances to customers

31 December 2010

Individual (retail customers)

Over-drafts Credit carts term loans Mortgages total

Past due up to 30 days 10,330 191,642 24,925 8,589 235,486

Past due 30-60 days 263 66,955 3,710 2,319 73,247

Past due 60-90 days 253 21,234 1,642 680 23,809

total 10,846 279,831 30,277 11,588 332,542

Fair value of collateral - - 70,061 33,045 103,106

31 December 2010

Corporate entities

Large corporate customers sMEs total

Past due up to 30 days 18,215 157,077 175,292

Past due 30-60 days 7,458 52,911 60,369

Past due 60-90 days 2,318 19,261 21,579

total 27,991 229,249 257,240

Fair value of collateral 63,175 834,214 897,389

31 December 2009

Individual (retail customers)Over-drafts Credit carts term loans Mortgages total

Past due up to 30 days 804 68,143 14,665 4,829 88,441

Past due 30-60 days 378 24,406 3,529 814 29,127

Past due 60-90 days 10,950 192,657 14,273 3,372 221,252

total 12,132 285,206 32,467 9,015 338,820

Fair value of collateral - - 109,727 22,264 131,991

31 December 2009

Corporate entities

Large corporate customers sMEs total

Past due up to 30 days 8,760 133,442 142,202

Past due 30-60 days 6,776 71,446 78,222

Past due 60-90 days 96 38,277 38,373

total 15,632 243,165 258,797

Fair value of collateral 46,600 705,214 751,814


(ii) Loans and advances to banks

the total gross amount of past due but not impaired loans and advances to banks as at 31 December 2010 is MkD 659,868,000 (2009: 723,947,000). Generally no collateral is held by the Bank.

(c) loans and advances individually impaired

(i) Loans and advances to customers

the individually impaired loans and advances to customers before taking into consideration the cash flows from collateral held is MkD 2,406,558,000 (2009: MkD 1,514,123,000)

the breakdown of the gross amount of individually impaired loans and advances by class, along with the fair value of related collateral held by the Bank as security, are as follows:

the disclosed fair value of collateral is determined by local certified valuers and represents value realisable by the legal owners of the assets. Management considers the loans covered by collateral as impaired because experience shows that a significant proportion of the collateral cannot be enforced due to administrative and legal difficulties. the impairment provisions reflect the probability that management will not be able to enforce its rights and repossess collateral on defaulted loans. Despite difficulties in enforcing repossession of collateral, the Bank’s management will vigorously pursue the outstanding debts with all possible means at their disposal.

(ii) Loans and advances to banks

the total gross amount of individually impaired loans and advances to banks as at 31 December 2010 is MkD 317,000 (2009: MkD 350,000). Generally no collateral is held by the Bank.

3.1.5 Debt securities, treasury bills and other eligible bills

the table below presents an analysis of debt securities, treasury bills and other eligible bills.

Issuer of the investment securities is the National Bank of the Republic of Macedonia and Republic of Macedonia.

standard & Poor’s Ratings services assigned its foreign currency ratings of ‘BB and ‘BB+’ for local currency sovereign credit ratings to the Republic of Macedonia.

Individual Corporate entities

total


banksOverdrafts Credit cards term loans MortgagesLarge corpo-

rate customers sMEs

31 December 2010

Gross amount 52,235 169,669 542,663 126,874 323,831 2,058,830 3,274,102 316

Individually impaired loans 45,027 125,969 370,913 79,534 170,706 1,614,409 2,406,558 79

Fair value of collateral - - - 293,994 415,782 2,876,808 3,586,584 -

Individual Corporate entities

total


banksOverdrafts Credit cards term loans MortgagesLarge corpo-

rate customers sMEs

31 December 2009

Gross amount 53,076 159,022 497,049 159,515 1,113,895 840,199 2,822,755 -

Individually impaired loans 43,791 98,135 156,332 35,194 677,259 503,412 1,514,123 350

Fair value of collateral - - - 56,578 1,109,224 777,324 1,943,126 -


2010

trading securities Investment securities total

NBRM - 3,894,681 3,894,681

RM 10,117 9,969,679 9,979,796

total 10,117 13,864,360 13,874,477

2009

trading securities Investment securities total

NBRM - 2,288,009 2,288,009

RM 135,956 5,299,961 5,435,917

Banks 219,757 - 219,757

total 355,713 7,587,970 7,943,683

3.1.6 repossessed collateral

During 2010, the Bank obtained assets by taking possession of collateral held as security, as follows:

2010 2009Nature of assets Carrying amount Carrying amountBuildings 258,140 5,658Residential buildings - 3,950Equipment 99,689 -Other 60,940 -

Repossessed collateral include apartments, equipment and business premises which are not used by the Bank for its core operations. Repossessed properties are sold as soon as practicable with the proceeds used to reduce the outstanding indebtedness.

3.1.7 Concentration of risks of financial assets with credit risk exposure

(a) Geographical sectors

the following table breaks down the Bank’s main credit exposure at their carrying amounts, as categorised by geographical region as of 31 December 2010. For this table, the Bank has allocated exposures to regions based on the country of domicile of its counterparties.

Eu countriesNon Eu countries

in EuropeRepublic of Macedonia Other countries total

Loans and advances to banks 3,153,630 506,439 1,273,995 77,520 5,011,584



• Overdrafts 1 - 737,374 28 737,403

• Credit cards 123 74 1,249,549 153 1,249,899

• term loans - - 7,654,354 258 7,654,612

• Mortgages - - 3,627,389 - 3,627,389


• Large corporate customers - - 4,555,221 - 4,555,221

• sMEs - - 15,105,689 - 15,105,689

Financial assets held for trading - - 10,117 - 10,117

Investment securities - - 13,864,360 - 13,864,360

Other assets - - 365,621 - 365,621

as at 31 December 2010 3,153,754 506,513 48,443,669 77,959 52,181,895


Eu countriesNon Eu countries

in EuropeRepublic of Macedonia Other countries total

Loans and advances to banks 5,151,117 6,411 1,504,053 471,485 7,133,066



• Overdrafts 194 - 659,678 32 659,904

• Credit cards 23 17 1,114,468 - 1,114,508

• term loans - - 6,786,883 287 6,787,170

• Mortgages - - 3,131,147 - 3,131,147


• Large corporate customers - - 4,089,430 - 4,089,430

• sMEs - - 14,068,545 - 14,068,545

Financial assets held for trading - - 355,713 - 355,713

Investment securities - - 7,587,970 - 7,587,970

Other assets - - 371,341 - 371,341

as at 31 December 2009 5,151,334 6,428 39,669,228 471,804 45,298,794

(b) Industry sectors

the following table breaks down the Bank’s main credit exposure at their carrying amounts, as categorised by the industry sectors of our counterparties.

31 December 2010Financial

institutionsManu-

factoring Real estate

Whole-sale and retail

trade Public sectorOther in-dustries Indivi-duals total

Loans and advances to banks 5,011,584 - - - - - - 5,011,584



• Overdrafts - - - - - - 737,403 737,403

• Credit cards - - - - - - 1,249,899 1,249,899

• term loans - - - - - - 7,654,612 7,654,612

• Mortgages - - - - - - 3,627,389 3,627,389


• Large corporate customers - 508,013 21 1,800,083 367 2,246,737 - 4,555,221

• sMEs - 3,209,305 2,312,287 5,446,452 1,180 4,136,465 - 15,105,689

Financial assets held for trading - - - - 10,117 - - 10,117

Investment securities 3,894,681 - - - 9,969,679 - - 13,864,360

Other assets - - - - - 159,643 205,978 365,621

as at 31 December 2010 8,906,265 3,717,318 2,312,308 7,246,535 9,981,343 6,542,845 13,475,281 52,181,895


31 December 2009Financial

institutionsManu-

factoring Real estate

Whole-sale and retail

tradePublic sector

Other industries Individuals total

Loans and advances to banks 7,133,066 - - - - - - 7,133,066



• Overdrafts - - - - - - 659,904 659,904

• Credit cards - - - - - - 1,114,508 1,114,508

• term loans - - - - - - 6,787,170 6,787,170

• Mortgages - - - - - - 3,131,147 3,131,147

Loans to corporate entities: - - - - - - - -

• Large corporate customers - 1,140,103 50,406 1,139,698 - 1,759,223 - 4,089,430

• sMEs - 3,397,965 1,829,268 5,525,075 16,247 3,219,514 80,476 14,068,545

Financial assets held for trading 219,757 - - - 135,956 - - 355,713

Investment securities 2,288,009 - - - 5,299,961 - - 7,587,970

Other assets - - - - - 371,341 - 371,341

as at 31 December 2009 9,640,832 4,538,068 1,879,674 6,664,773 5,452,164 5,350,078 11,773,205 44,298,794


Concentrations of currency risk - on and off-balance sheet financial instruments:

as at 31 December 2010 EuR usD MkD Other total

assets

Cash and balances with central banks 3,427,340 60,611 5,023,049 398,474 8,909,474

Loans and advances to banks 2,325,028 1,748,306 622 937,628 5,011,584

Loans and advances to customers 20,539,756 21,799 11,834,960 533,698 32,930,213

Financial assets held for trading 10,117 - - - 10,117


• available for sale 6,067,559 - 7,588,804 - 13,656,363

• Held to maturity 227,937 - - - 227,937Investment in associates and joint ventures accounted for using the equity method - - 79,739 - 79,739

Other assets 8,776 827 355,957 61 365,621

total financial assets 32,606,513 1,831,543 24,883,131 1,869,861 61,191,048

liabilities

Deposits from banks 2,259,316 235,674 1,170,907 201,814 3,867,711

Deposits due to customers 24,489,094 1,548,243 19,347,180 370,375 45,754,892

Other borrowed funds 5,251,480 43,352 138,009 200,331 5,633,172

Debt securities in issue 616,928 - - - 616,928

Other liabilities 4,085 108 434,917 56 439,166

subordinated debt 749,006 - - 1,051,156 1,800,162

total financial liabilities 33,369,909 1,827,377 21,091,013 1,823,732 58,112,031

net on-balance sheet financial position (763,396) 4,166 3,792,118 46,129 3,079,017

Contingencies and commitments 3,159,478 315,774 5,051,789 (103,143) 8,423,898

at 31 December 2009

total financial assets 30,135,629 1,519,770 20,850,842 1,499,316 54,005,557

total financial liabilities 30,348,411 1,511,016 16,935,238 1,541,692 50,336,357

net on-balance sheet financial position (212,782) 8,754 3,915,604 (42,376) 3,669,200

Contingencies and commitments 2,758,677 406,674 4,915,388 (34,772) 8,045,967

at 31 December 2010, if the MkD had weakened 5 per cent against the foreign currencies with all other variables held constant, the pre-tax profit for the twelve month period ended 31 December 2010 would have been approximately 34,000,000 MkD (2009: 13,200,000 MkD) lower. Conversely, if the MkD had strengthened 5 per cent against the foreign currencies with all other variables held constant, pre-tax profit would have been approximately 37,500,000 MkD (2009: 16,070,000 MkD) higher.

3.2 Market risk

Market risk is the risk that changes in market prices, such as interest rate, equity prices, foreign exchange rates and credit spreads (not relat-ing to changes in the obligor’s / issuer’s credit standing) will affect the Bank’s income or the value of its holdings of financial instruments. the objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

3.2.1 Foreign exchange risk

the Bank is exposed to currency risk through transactions in foreign currencies. the Bank ensures that the net exposure is kept to an accept-able level by buying or selling foreign currency at spot when necessary to address short-term imbalances.


up to1 month 1-3 months

3-12 months 1-5 years Over 5 years

Non- interest bearing total

as at 31 December 2010

assets

Cash and balances with central banks 6,590,580 - - - - 2,318,894 8,909,474

Loans and advances to banks 3,660,735 123,300 761,518 441,402 - 24,629 5,011,584

Loans and advances to customers 9,867,027 3,776,620 7,214,107 8,060,641 3,434,818 577,000 32,930,213

Financial assets held for trading 10,117 - - - - - 10,117


• available for sale 3,894,682 3,674,783 5,677,665 386,726 50,576 (28,069) 13,656,363

• Held to maturity - - 102,703 139,298 780 (14,844) 227,937

Investment in associates and joint ventures accounted for using the equity method - - - - - 79,739 79,739

Other assets - - - - - 365,621 365,621

total financial assets 24,023,141 7,574,703 13,755,993 9,028,067 3,486,174 3,322,970 61,191,048

liabilities

Deposits from banks 979,183 120,990 2,158,641 529,810 15,309 63,778 3,867,711

Deposits due to customers 21,162,702 5,126,842 10,832,424 7,466,930 399,895 766,099 45,754,892

Other borrowed funds 907,035 1,443,749 1,975,779 1,268,752 16,062 21,795 5,633,172

Debt securities in issue - - 615,050 - - 1,878 616,928

Other liabilities - - - - - 439,166 439,166

subordinated liabilities - 1,785,740 - - - 14,422 1,800,162

total financial liabilities 23,048,920 8,477,321 15,581,894 9,265,492 431,266 1,307,138 58,112,031

total interest reprising gap 974,221 (902,618) (1,825,901) (237,425) 3,054,908 2,015,832 3,079,017


total financial assets 20,389,981 7,152,265 11,013,680 8,217,416 3,264,979 3,967,236 54,005,557

total financial liabilities 23,589,577 10,212,371 9,478,143 5,563,777 492,431 1,000,058 50,336,357

total interest reprising gap (3,199,596) (3,060,106) 1,535,537 2,653,639 2,772,548 2,967,178 3,669,200

3.2.2 Interest rate risk

the Bank’s operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets (including investments) and interest-bearing liabilities mature or reprice at different times or in differing amounts. In the case of floating rate assets and liabilities, the Bank is also exposed to basis risk, which is the difference in reprising characteristics of the various floating rate indices, such as the savings rate, LIBOR and different types of interest.

Risk management activities are aimed at optimising net interest income, given market interest rate levels consistent with the Bank’s business strategies.

asset-liability risk management activities are conducted in the context of the Bank’s sensitivity to interest rate changes. In general, the Bank is asset sensitive because of the majority of the interest-earning assets and liabilities, the Bank has the right simultaneously to change the inter-est rates.

In decreasing interest rate environments, margins earned will narrow as liabilities interest rates will decrease with a lower percentage com-pared to assets interest rates. However the actual effect will depend on various factors, including stability of the economy, environment and level of the inflation.

analysis of the total assets and liabilities of the Bank into relevant maturity groupings based on the remaining period to the next date at which interest rates may be changed, is set out below:


the interest rate sensitivity analysis has been determined based on the exposure to interest rate risk at the reporting date. at 31 December 2010, if interest rates had been 50 basis points higher/lower with all other variables were held constant, the Bank’s pre-tax profit for the twelve month period ended 31 December 2010 would respectively increase/decrease by approximately 39,800,000 MkD (2009: 16,873,000 MkD) and other equity components would respectively decrease/increase by 4,100,000 MkD (2009: 5,585,000 MkD).

3.3 liquidity risk

Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. the consequence may be the failure to meet obligations to repay depositors and fulfil commitments to lend.

3.3.1 liquidity risk management process

the Bank’s liquidity management process, as carried out within the Bank and monitored by a department in Risk management division, 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 Bank maintains an active presence in 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 (Notes 3.3.3-3.3.4).

Risk management division also monitors unmatched medium-term assets, the level type and the usage of overdraft facilities and the impact of contingent liabilities such as standby letters of credit and guarantees

3.3.2 Funding approach

sources of liquidity are regularly reviewed by a department in Risk management division to maintain a wide diversification by currency, geography, provider, product and term.

3.3.3 non-derivative cash flows

the table below presents the cash flows payable by the Bank 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, whereas the Bank manages the inherent liquidity risk based on expected undiscounted cash inflows. In determining the cash flow for variable rate instruments the Bank has used spot rate.


as at 31 December 2010 up to 1 month 1-3 months 3-12 months 1-5 years 5 years total

liabilities

Deposits from banks 1,027,483 122,113 2,173,107 622,239 15,671 3,960,613

Deposits due to customers 18,865,465 6,998,305 11,590,997 8,693,465 542,161 46,690,393

Other borrowed funds 307,108 313,288 660,595 4,302,033 183,187 5,766,211

Debt securities in issue - - 616,928 - - 616,928

subordinated debt - 14,421 - 501,248 2,256,288 2,771,957

Other liabilities 334,656 8,534 83,765 - 12,211 439,166

total liabilities

(contractual maturity dates) 20,534,712 7,456,661 15,125,392 14,118,985 3,009,518 60,245,268

total assets



liabilities

Deposits from banks 927,835 1,452,854 384,092 590,892 9,713 3,365,386

Deposits due to customers 17,754,144 7,820,123 9,523,283 5,450,682 855,725 41,403,957

Other borrowed funds 372,236 246,199 591,044 2,725,885 387,259 4,322,623

Debt securities in issue 1,702 - - 663,871 - 665,573

subordinated debt - 12,541 - 1,239,966 1,017,877 2,270,384

Other liabilities 248,952 9,237 115,254 - 13,038 386,481

Deferred income tax liabilities 5,310 - - - - 5,310

total liabilities


total assets


assets available to meet all of the liabilities include cash, central bank balances, items in the course of collection and treasury and other eligible bills; loans and advances to banks; and loans and advances to customers. the Bank would also be able to meet unexpected net cash outflows by selling securities and accessing additional funding sources such as asset-backed markets.

3.3.4 off-balance sheet items

No later than 1 year 1-5 years Over 5 years total

at 31 December 2010

acceptances and other financial facilities 4,414,628 1,255,531 320,903 5,991,062Limits of credit cards 1,282,057 1,005,740 145,130 2,432,927

total 5,696,685 2,261,271 466,033 8,423,989

at 31 December 2009

acceptances and other financial facilities 4,561,996 1,186,898 524,686 6,273,580Limits of credit cards 1,107,939 646,567 - 1,754,506

total 5,669,935 1,833,465 524,686 8,028,086


3.4 Financial instruments

a. Fair value of financial assets and liabilities

Financial instruments not measured at fair value

the table below summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s balance sheet at their fair value.

(i) Due from other banks

Due from other banks includes inter-bank placements.

the fair value of floating rate placements and overnight deposits is their carrying amount. the estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity.

(ii) 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.

(iii) Due to other banks and customers, other deposits, other borrowings and subordinated liabilities.

the estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the amount repayable on demand.

the estimated fair value of fixed interest-bearing deposits and other borrowings not quoted in an active market is based on discounted cash flows using interest rates for new debts with similar remaining maturity.

the fair value of the term deposits at variable interest rates approximates their carrying values as of the balance sheet date.

subordinated liabilities carry variable interest rates and the fair value approximates their carrying value as of the balance sheet date.

B. Fair value hierarchy

IFRs 7 specifies a hierarchy of valuation techniques on whether the inputs to those valuation techniques are observable or unobservable. these two types of inputs have created the followings fair value hierarchy:

• Level 1 - Quoted prices (unadjusted) in active markets for identical assets and liabilities. this level includes listed equity securities and debt instruments on exchanges and exchanges traded derivatives like futures.

• Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).

• Level 3 - inputs for the assets or liability that are not based on observable market data (unobservable inputs). this level includes equity investments and debt instruments with significant unobservable components.

Carrying value Fair value2010 2009 2010 2009

Financial assets

Loans and advances to banks 5,011,584 7,133,066 5,075,895 7,245,052

Loans and advances to customers 32,930,213 29,850,704 34,055,423 30,896,830

• Retail customers (individual) 13,269,303 11,692,729 13,922,166 12,487,420

• Large corporate customers 4,555,221 4,089,430 4,934,567 4,136,864

• sMEs 15,105,689 14,068,545 15,198,690 14,272,546

Financial liabilities

Deposits from banks 3,867,711 3,176,495 3,867,711 3,176,495

Due to customers 45,754,892 40,388,538 45,754,892 40,388,538

• Retail customers 29,692,333 23,348,140 29,692,333 23,348,140

• Large corporate customers 8,764,164 7,689,933 8,764,164 7,689,933

• sMEs 7,298,395 9,350,465 7,298,395 9,350,465

Other borrowed funds 5,633,172 4,127,402 5,633,172 4,127,402

Debt securities in issue 616,928 631,786 616,928 631,786

subordinated liabilities 1,800,162 1,620,346 1,800,162 1,620,346


3.4.1 assets and liabilities measured at fair value

31 December 2010 Ниво 1 Ниво 2 Ниво 3 Вкупно

Financial assets held for trading

• Debt securities 10,117 - - 10,117

• Equity securities - - - -

• Derivatives - - - -

Financial assets designated at fair value - - - -

• Debt securities - - - -

• Equity securities - - - -

available for sale financial assets:

• Investment securities - debt 557,946 - 13,078,477 13,636,423

• Investment securities - equity - - - -

total assets 568,063 - 13,078,477 13,646,540

3.5 Capital management

the Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of balance sheets, are:

• to comply with the capital requirements set by the regulator;

• to safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders and

• to maintain a strong capital base to support the development of its business.

Capital adequacy and the use of regulatory capital are monitored monthly by the Bank’s management, employing techniques based on the guidelines developed by the Basel Committee and the European Community Directives, as implemented by the Central bank of the Republic of Macedonia, for supervisory purposes. the required information is filed with Central Bank of the Republic of Macedonia on a quarterly basis.

the Central Bank of the Republic of Macedonia requires each bank or banking Group to: (a) hold the minimum level of the regulatory capital of 5,000,000 EuR and (b) maintain a ratio of total regulatory capital to the risk - weighted asset (the ‘Basel ratio’) at or above the internationally agreed minimum of 8%.

the Bank’s regulatory capital as managed by its Risk management division is divided into two tiers:

• tier 1 capital: share capital (net of any book values of the treasury shares), retained earnings and reserves created by appropriations of retained earnings and

• tier 2 capital: qualifying subordinated loan capital, collective impairment allowances and unrealised gains arsing on the fair valuation of equity and debt instruments held as available for sale.

Ризично пондерираната актива се пресметува применувајќи хиерархија од пет пондери на ризичност. класифицирани според нивната природа и одразувајќи ја проценката за кредитниот, пазарниот и другите ризици поврзани со секое средство и договорна страна, земајќи го предвид секој правен колатерал или гаранции. Сличен третман е прифатен и за вонбилансната изложеност, со некои прилагодувања за да ја одразат природата на потенцијалните загуби.

Табелата подолу го резимира составот на сопствените средства и показателите на Банката за годините кои завршуваат со 31 декември. За време на тие две години, Банката се придржува до сите пропишани капитални барања.

the risk-weighted assets are measured by means of a hierarchy of five risk weights classified according to the nature of − and reflecting an estimate of credit, market and other risks associated with − each asset and counterparty, taking into account any eligible collateral or guarantees. a similar treatment is adopted for off-balance sheet exposure, with some adjustments to reflect the more contingent nature of the potential losses.

the table below summarises the composition of regulatory capital and the ratios of the Bank for the years ended 31 December. During those two years, the Bank complied with all of the externally imposed capital requirements to which they are subject.


Capital investments in other bank or other financial institutions, exceeding 10% of the capital of such institutions, and bank’s direct capital investments in insurance and reinsurance company and in pension fund management companies represent deductions from tier 1 and tier 2 capital.

the increase of the tier 2 capital in 2010 is mainly due to extension of existing subordinated liabilities for additional 7 years.

2010 2009

tier 1 capital

share capital (net of the treasury shares) 3,057,117 3,057,117

statutory reserve 611,029 575,826

Retained earnings 226,232 226,232

Less intangible assets (licenses ,patents) (49,026) (61,721)

total qualifying tier 1 capital 3,845,352 3,797,454

tier 2 capital

subordinated liability 1,785,740 1,365,217

Revaluation reserve 32,821 36,827

total qualifying tier 2 capital 1,818,561 1,402,044

Deductions from regulatory capital (95,988) (96,039)

total regulatory capital 5,567,925 5,103,459

Risk-weighted assets:

• On-balance sheet 35,533,680 32,421,572

• Off-balance sheet 6,773,234 6,701,472

total risk-weighted assets 42,306,914 39,123,044

Basel ratio 13.16% 13.04%


4. Critical accounting estimates and judgments

the Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

(a) Impairment losses on loans and advances

the Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the income statement, the Bank 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 Bank, or national or local economic conditions that correlate with defaults on assets in the Bank.

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. 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. to the extent that the net present value of estimated cash flows differs by +/-5%, the provision would be estimated 217,000,000 MkD higher or lower (2009: MkD 177,000,000).

(b) Impairment of available for-sale equity investments

the Bank 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. this determination of what is significant or prolonged requires judgment. In making this judgment, the Bank 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. Had all the declines in fair value below cost been considered significant or prolonged, the Bank would suffer an additional MkD 1,944,000 loss in its 2010 financial statements, being the transfer of the total fair value reserve to the income statement (2009: MkD 1,869,000).

(c) Impairment of foreclosed assets

the process of calculating impairment loss requires that the management make significant and complex assumptions regarding the projected period of sale of foreclosed assets, their estimated net sales value and the corresponding discount rate, in order to discount to net present value the expected cash flow from sale of specific items of foreclosed properties.

Management of the Bank are confident that the foreclose assets will be sold in a reasonable time frame, with no loss. On the contrary, adjustments will be made in future periods if future market activity indicates that such adjustments are appropriate.


5. net interest income

6. Dividend income

2010 2009

Interest income

Loans and advances:

• to banks 78,485 140,172

• to customers 3,038,761 2,853,990

Cash and balances with central banks 67,864 49,061


• available for sale 648,864 318,838

• Held to maturity 18,531 147,512

3,852,505 3,509,573

Interest expense 136,838 121,028

Deposits from banks 1,653,397 1,389,381Deposits due to customers

14,016 23,439

Debt securities in issue 136,874 136,458

Other borrowed funds 78,063 81,467

subordinated debt - 166

2,019,188 1,751,939

2010 2009

available-for-sale securities 2,648 11,000

2,648 11,000

Interest income on impaired financial assets is MkD 191,526,000 (2009: MkD 228,632,000).


7. loans impairment charges

8. net fee and commission income

2010 2009

loans and advances to banks

Increase in impairment 1,451 26,630

Reversal of impairment (2,417) (33,059)


Increase in impairment 1,225,209 1,262,106

Reversal of impairment (466,768) (545,445)

757,475 710,232

the Bank provides custody, trustee, corporate administration, investment management and advisory services to third parties, which involve the Bank making allocation and purchase and sale decisions in relation to a wide range of financial instruments. those assets that are held in a fiduciary capacity are not included in these financial statements. some of these arrangements involve the Bank accepting targets for benchmark levels of returns for the assets under the Bank’s care. these services give rise to the risk that the Bank will be accused of malad-ministration or under-performance.

2010 2009

Fee and commission income

Letters of credit and guarantees 119,084 123,523

Payment transaction 367,118 308,247

trust and other fiduciary fees 8,103 10,062

administrative service 192,754 172,581

Brokerage services 2,412 4,335

Other fees 222,911 177,695

912,382 796,443

Fee and commission expense

Banking service 7,659 10,381

Letters of credit and guarantees 11,486 7,550

Payment transaction 63,856 39,565

Other fees paid 111,405 95,244

194,406 152,740


9. net gains/(losses) on financial instruments classified as held for trading

2010 2009

Net trading income 53,539 30,414

Interest income from assets held for trading 22,982 22,734

76,521 53,148

2010 2009

Foreign exchange gains 79,117,133 32,822,630

Foreign exchange losses (79,011,555) (32,660,497)

105,578 162,133

2010 2009

Financial assets classified as available for sale 4,877 14,901

4,877 14,901

2010 2009

Rental income 13,036 10,088

Capital gain 643 -

Provisions for contingencies 89,612 97,752

Other 41,175 27,643

144,466 135,483

Net trading income includes gains and losses from bonds. Interest rate instruments include the results of making markets in instruments in government bonds.

10. net foreign exchange gain

11. other operating income

12. net gains/(losses) on investment securities


13. personnel expenses

14. General and administrative expenses

15. Depreciation and amortisation

2010 2009

Wages and salaries 406,264 369,746

social security costs 135,124 130,992

Pension costs:

• Defined contribution plans 11,054 2,822

Holiday allowances 15,510 12,372Compensation benefits to the members of the Managing Board, management and employees 34,945 69,800

unused annual leaves 2,036 1,508

Other 2,756 15,709

607,689 602,949

2010 2009

It and software costs 15,517 10,872

Occupancy, furniture and equipment 104,391 97,142

Marketing and public relations 18,510 28,902

travel and entertainment 11,079 13,444

telecommunication and postage 51,813 59,192

Other administrative expenses 67,041 62,326

268,351 271,878

2010 2009

Depreciation and impairment of property and equipment 163,472 146,217

amortisation of software and other intangible assets 35,377 31,045

198,849 177,262


16. other operating expenses

2010 2009

Loss/(gains) on sale of intangible assets and property and equipment - 5,359

Insurance premiums for deposits 181,000 135,801

Insurance premiums for assets and other 14,675 21,048

actuarial benefits 940 805

Consulting and auditing costs 2,995 5,320

Charges under court decision 1,807 5,202

Rental expense 202,149 204,714

Decrease in value of assets acquired through foreclosure procedure 19,172 13,826

Impairment of other assets 21,113 9,287

E-banking 22,574 61,202

securing property 47,406 42,997

Other 80,297 44,003

594,128 549,564

2010 2009

Gains less losses on revaluation of investment property - 8,297

- 8,297

17. Gains less losses on revaluation of investment property

18. Income tax expense

2010 2009

Current taxes on income for the reporting period 2,056 11,914

2,056 11,914

a) Current income tax


2010 2009

tax on non deductible expenses 2,056 -

2,056 -

2,056 11,914

2010 2009

Profit before tax - 468,316

tax calculated at a tax rate of 0% (2009:10%) - -

Effect of:

• Income not subject to tax - -

• Expenses not deductible for tax purposes - 11,914

• utilisation of previously unrecognised tax losses -

Income tax expense - 11,914

b) other tax expense

the tax on the Bank’s profit before tax differs from the theoretical amount that would arise using the basic tax rate of the parent as follows:

Commencing from 1 January 2009 and during 2010 the Government of the Republic of Macedonia has introduced several modifications and changes in the Profit tax Law. according to these changes, the base for computation of tax is non-deductible expenses incurred during the fiscal year. therefore as of 31 December 2010 the tax computed on non-deductable expenses are presented as part of Other tax expense in the profit or loss for the year. Due to the changes in the Macedonian tax legislation, income tax was payable at the moment of the profit (earned since 1 January 2009) was distributed in a form of dividend. as of 7 July 2010 dividends distributed by Companies to resident legal entities are exempt from corporate income tax at the level of the distributing entity.

subsequently, as long as the undistributed profits are retained within the company the profit tax would not be applied. If the Bank pays all the net profit earned in 2010 in form of dividends, the potential current income tax excluded from the impact of the non-deductable expenses would be MkD 47,077,000.

the tax authorities may at any time inspect the books and records up to 5 to 10 years subsequent to the reported tax year, and may impose additional tax assessments and penalties. the Bank’s management is not aware of any circumstances, which may give rise to a potential material liability in this respect.

19. Income tax effects relating to components of other comprehensive income

2010 2009

Before tax amount

tax (expense) benefit

Net-of-tax amount

Before tax amount

tax (expense) benefit

Net-of-tax amount

Fair value gains on available-for-sale financial assets (8,140) 3,132 (5,008) (55,414) 5,535 (49,879)

other comprehensive income for the year (net presentation) (8,140) 3,132 (5,008) (55,414) 5,535 (49,879)


20. Cash and balances with central banks

2010 2009

Cash in hand 1,617,113 1,736,111

Balances with central banks other than mandatory reserve deposits 4,291,278 4,205,578

Included in cash and cash equivalents (note 45) 5,908,391 5,941,689

Mandatory reserve deposits with central banks 3,001,083 2,611,711

8,909,474 8,553,400

the Bank has to provide obligatory reserve in MkD and in foreign currencies with the National Bank of the Republic of Macedonia.

the obligatory reserve in MkD in amount of MkD 3,593,864,882.00 as at 31 December 2010 presents prescribed percent of the average monthly amount of demand and time deposits with maturity up to 3 months and maturity over 3 months. the effective interest rate on the obligatory reserve in MkD is 2% (2009: 2%). Obligatory reserve funds are maintained on the current account with NBRM.

the obligatory reserve in foreign currency as at 31 December 2010 presents prescribed percent of the average monthly amount of sight and time deposits expressed in Euros at NBRM’s middle exchange rate ruling on the balance sheet date. Interest rate on the obligatory reserve in foreign currency is 0.10% (from November 2009: 0.10%). the Bank is obliged to transfer the Euro amount of the calculated obligatory reserve to NBRM’s account with Deutsche Bundesbank Zentrale.

21. loans and advances to banks

2010 2009

Placements with other banks 3,477,128 4,559,581

Included in cash and cash equivalents ( Note 45) 3,477,128 4,559,581

Placements with other banks with maturity over 3 months 888,093 1,689,534

Loans and advances to other banks 654,493 892,854

Less: allowance for impairment (8,130) (8,903)

5,011,584 7,133,066

Current 4,379,368 5,870,509

Non-current 632,216 1,262,557

2010 2009specific impairment

allowance for impairment

Collective impairment allowances for

impairment

specific impairment allowance for

impairment


impairment

Balance at 1 January 350 8,553 15,439 -

Reversal of impairment (464) (502) (14,982) -

Increase in impairment allowances - - - 8,553Foreign currency translation and other adjustments 193 - (107) -

at 31 December 79 8,051 350 8,553

Reconciliation of allowance account for losses on loans and advances to other banks


22. Financial assets held for trading

2010 2009

Other government bonds 10,117 135,956

Corporate bonds - 219,757

total debt securities 10,117 355,713

total trading derivatives - 14,612

total assets held for trading 10,117 370,325

Loans and advances to banks and other financial institutions are with effective interest rates from 3.5% to 10% (2009: 2.51% to 10%) per annum. the placements with foreign banks are with effective interest rates of 0.10% to 4.76% (2009: 0.05% to 3.90%) per annum, and the placements with domestic banks are with an effective rate of 1.48% (2009: 1.19%) per annum.

as at 31 December 2010 a part of the Bank’s placements with foreign banks in the amount of MkD 334,397,000 (2009: MkD 1,423,167,000) represents a pledge deposits held with foreign banks as a collateral.

the fair values of derivative instruments are set out below:

2010 2009Notional contract amount

Fair values Notional contract amount

Fair values

assets Liabilities assets Liabilities

Foreign exchange derivatives - -

Curency swaps - - 629,592 14,612 -

total otC derivatives 14,612

total derivative assets held for trading - 14,612 -

Other government bonds held for trading are with maturity of 1 month and with an effective interest rate of 2% (2009: 2%) per annum.


23. loans and advances to customers

Loans are with effective rates from 2.5 % to 15.68 % (2009: 2.8 % to 19.5 %) per annum.


Reconciliation of allowance account for losses on loans and advances by class is as follows:

2010 2009

Individual (retail customers):

• Overdrafts 797,042 705,877

• Credit cards 1,409,826 1,370,371

• term loans 8,209,313 7,324,082

• Mortgages 3,811,385 3,268,218

14,227,566 12,668,548

Corporate entities:

• Large corporate customers 4,968,337 5,005,138

• sMEs 18,016,335 15,686,883

22,984,672 20,692,021

Gross loans and advances 37,212,238 33,360,569

Less: allowance for impairment (4,282,025) (3,509,865)

net 32,930,213 29,850,704

Current 14,224,609 15,227,003

Non-current 18,705,604 14,623,701

Loans to individuals 2010 2009specific impairment



impairment


impairment


impairment

Balance at 1 January 333,452 642,367 904,830 -

Reversal of impairment - (308,539) (570,718) -

Increase in impairment allowances 282,163 - - 642,531Foreign currency translation and other adjustments 5,828 2,993 (660) (164)

at 31 December 621,443 336,821 333,452 642,367

Loans to corporate entities 2010 2009specific impairment



impairment


impairment


impairment

Balance at 1 January 1,180,671 1,353,375 1,893,065 -

Reversal of impairment - - (708,719) -

Increase in impairment allowances 599,824 184,993 - 1,353,567Foreign currency translation and other adjustments 4,620 278 (3,675) (192)

at 31 December 1,785,115 1,538,646 1,180,671 1,353,375


24. Investment securities

2010 2009

Securities available for sale included in cash equivalents

Debt securities - at fair value:

• unlisted 5,084,751 3,575,945

total securities available for sale included in cash equivalents (note 45) 5,084,751 3,575,945

Securities available for sale

Debt securities - at fair value:

• Listed 557,946 763,109

• unlisted 7,993,726 2,931,886

Equity securities - at fair value:

• Listed - 39,398

Equity securities - at cost:

• unlisted 19,940 31,403

total securities available for sale 13,656,363 7,341,741

Securities held to maturity included in cash equivalents

Debt securities - at amortised cost:

• unlisted - -

Securities held to maturity

Debt securities - at amortised cost:

• Listed 227,937 317,030

total securities held to maturity 227,937 317,030

total investment securities 13,884,300 7,658,771

Current 13,341,491 6,773,233

Non-current 542,809 885,538

treasury bills are debt securities issued by the National bank of the Republic of Macedonia with maturity of up to 28 days. the Bank receives an effective interest at the rates from 4% - 8% (2009: 7% - 9%) per annum. Government bills are with maturity up to 90 days and over 90 days, issued in MkD and MkD with EuR clause, and with effective interest rates from 4.15% to 5.2% (2009: 5.25% to 9.5%).

terms and conditions of government bonds available-for-sale are as follows:

• Bonds issued by the government on the old saving deposits in foreign currency in the amount of MkD 49,885,000 (2009: МkD 96,566,000), with an interest rate of 2% (2009: 2%) per annum. the principal amount is paid in 20 semi-annual instalments on each 1 april and 1 October starting from 1 april 2002 until 1 October 2011.

• Bonds for denationalisation (02) in the amount of MkD 69,722,000 (2009: MkD 100,438,000), with an interest rate of 2% (2009: 2%) per annum. the principal amount is paid in 10 equal annual instalments on each 1 June, starting from 1 June 2004 until 1 June 2013.

• Bonds for denationalisation (03) in the amount of MkD 116,890,000 (2009: MkD 140,386,000), with an interest rate of 2% (2009: 2%) per annum. the principal amount is paid in 10 equal annual instalments on each 1st June starting from 1 June 2005 until 1 June 2014.

• Bonds for denationalisation (04) in the amount of MkD 140,852,000 (2009: MkD 219,985,000), with an interest rate of 2% (2009: 2%) per annum. the principal amount is paid in 10 equal annual instalments on each 1 June starting from 1 June 2006 until 1 June 2015.

• Bonds for denationalisation (05) in the amount of MkD 56,805,000 (2009: MkD 70,815,000), with interest rate of 2% (2009: 2%) per annum. the principal amount is paid in 10 equal annual instalments on each 1 June, starting from 1 June 2007 until 1 June 2016.

• Bonds for denationalization (06) in the amount of MkD 97,765,000 (2009:MkD 105,589,000), with interest rate 2% (2009: 2%) per annum. the principal amount is paid in 10 equal annual instalments on each 1 June, starting from 1 June 2009 until 1 June 2017.

• Bonds for denationalization (07) in the amount of MkD 19,263,000 (2009:19,820,000) with interest rate 2% (2009:2%) per annum. the principal amount is paid in 10 equal annual instalments on each 1 June, beginning from 1 June 2009 until 1 June 2018.


available for sale Held to maturity total

at 1 January 2010 7,341,741 317,030 7,658,771

additions 79,058,214 29,883 79,088,097

Disposals (72,629,331) (118,976) (72,748,307)

Loss of control of the investment in subsidiary (109,015) - (109,015)

Gains from changes in fair value (5,246) - (5,246)

at 31 December 2010 13,656,363 227,937 13,884,300

at 1 January 2009 1,244,499 7,131,889 8,376,388

additions 6,785,125 414,410 7,199,535

Disposals (647,370) (7,229,269) (7,876,639)

Gains from changes in fair value (40,513) - (40,513)

at 31 December 2009 7,341,741 317,030 7,658,771

Тhe total amount of the bonds on old foreign currency deposits and denationalisation bonds includes an interest in the amount of MkD 6,764,000 (2009: МkD 9,127,000).

terms and conditions of investment securities held to maturity are as follows:

Investment securities held to maturity consist of Government bonds with maturity over 90 days, that have effective interest rates of 2 % per annum. the total amount of the government bonds includes the interest in the amount of MkD 2,486,000 (2009:3,311,000).

the movement in investment securities may be summarised as follows:

25. Investment in associates (equity method)

2010 2009

Nov Penziski Fond 79,739 65,200

79,739 65,200

% of participation

Country 2010 2009

Nov Penziski Fond aD - skopje Republic of Macedonia 49% 49%

2009

assets Liabilities Income Profit / (Loss)

Nov Penziski Fond aD - skopje 142,773 10,233 120,867 21,551

142,773 10,233 120,867 21,551

2010

Nov Penziski Fond aD - skopje 170,660 9,160 123,684 28,430

170,660 9,160 123,684 28,430

summary financial information for equity accounted investee, not adjusted for percentage ownership held by the Bank:


26. Investment property

2010 2009

Investment property at fair value as at 1 January 70,471

transfer from/to property and equipment - 78,768

Net losses/gains from a fair value adjustment - (8,297)

Investment properties at fair value as at 31 December 70,471 70,471

27. property, plant and equipment

Land and buildings

Furniture & equipment

assets in course of construction Other total

at 1 January 2009

acquisition cost 546,836 662,590 50,271 30,309 1,290,006

accumulated depreciation (92,574) (366,782) - (12,466) (471,822)

net book value 454,262 295,808 50,271 17,843 818,184

Year ended 31 December 2009

Opening net book value 454,262 295,808 50,271 17,843 818,184

additions 63,665 207,273 4,969 7,046 282,953

transfer - 23,955 (38,027) 14,072 -

transfer to investment property (78,768) - - - (78,768)

Disposals - (1,801) - - (1,801)

Depreciation charge (13,209) (124,962) - (8,046) (146,217)

Closing net book value 425,950 400,273 17,213 30,915 874,351

at 31 December 2009



net book value 425,950 400,273 17,213 30,915 874,351

Year ended December 2010

Opening net book value 425,950 400,273 17,213 30,915 874,351

additions 78,095 42,522 - 2,923 123,540

transfer - - (449) 449 -

transfer to investment property - - - - -

Disposals - (177) - (525) (702)

Loss of control of the investment in subsidiary (26,777) (2,397) - - (29,174)

Depreciation charge (13,586) (140,875) - (9,011) (163,472)

Closing net book value 463,682 299,346 16,764 24,751 804,543

at 31 December 2010



net book value 463,682 299,346 16,764 24,751 804,543

as at 31 December 2010 the Bank does not have any property pledged as collateral (2009: nil).


28. Intangible assets

29. Deferred income tax assets/liability

Computer software licenses Other intangible assets total

acquisition cost 72,115 86,729 158,844

accumulated depreciation (30,185) (30,319) (60,504)

net book amount 41,930 56,410 98,340


Opening net book value 41,930 56,410 98,340

additions 2,506 24,150 26,656

Disposals

amortization charge (12,725) (18,320) (31,045)

acquisitions through business combination

Closing net book amount 31,711 62,240 93,951

at 31 December 2009



net book amount 31,711 62,240 93,951


Opening net book value 31,711 62,240 93,951

additions 49,567 7,731 57,298

Loss of control of the investment in subsidiary (65) (519) (584)

amortization charge (14,951) (20,426) (35,377)

acquisitions through business combination

Closing net book amount 66,262 49,026 115,288

at 31 December 2010



net book amount 66,262 49,026 115,288

2010 2009

at 1 January 3,132 8,667

Income statement charge - -

available for sale securities:

• Fair value (3,132) (5,535)

at 31 December - 3,132

Deferred income tax assets

available for sale securities - 2,178

- 2,178

Deferred income tax liabilities

available for sale securities - 5,310

- 5,310


30. Foreclosed collateral

2010 2009

Buildings 319,188 70,095

Residential buildings 13,188 13,658

Equipment 99,689 -

Other 60,940 -

493,005 83,753

2010 2009

Pre-payments 21,543 97,734

Other 177,764 144,657

Pensions paid in advance 205,978 147,483

Less: allowance for impairment (39,664) (18,533)

365,621 371,341

Current 365,621 371,341

Non-current - -

2010 2009specific impairment



impairment


impairment


impairment

Balance at 1 January 18,533 - 9,269 -

Reversal of impairment - - - -

Increase in impairment allowances 21,045 68 9,287 -Foreign currency translation and other adjust-ments 18 - (23) -

at 31 December 39,596 68 18,533 -

31. other assets

Reconciliation of allowance account for losses on other assets

assets acquired through foreclosure procedure include apartments, equipment and business premises which are not used by the Bank for its core operations.

the market for certain types of collateral in Republic of Macedonia is in an early stage of development. Management has made an estimate of the expected recoverable amount net of cost to realise the assets, based on a number of factors, including independent assessment. However, given the foregoing, actual amounts realised may differ from the estimates made.


32. assets classified as held for sale

33. Deposits from banks

2010 2009

Investment in NLB tutunska Broker 30,864 -

30,864 -

2010 2009

Demand deposit:

• Banks and saving houses 445,650 319,584

• Insurance companies 42,016 95,170

• Other financial institutions 146,297 150,982

term deposits:

• Banks and savings houses 1,899,042 1,415,907



Restricted deposits:

• Banks and savings houses 189,170 3,138



3,867,711 3,176,495

Current 3,322,703 2,706,942

Non-current 545,008 469,553

the effective interest rates on deposits from banks and other financial institutions are from 0.04% to 0.5% (2009: 0.2% - 0.6%) per annum, while the effective interest rates on term deposits are from 0.6 % to 9.5% (2009: 0.1% - 9.5%) per annum.


34. Deposits from customers

2010 2009

Companies

• Current/settlement accounts 7,180,222 6,342,827

• term deposits 6,042,456 7,598,637

• Restricted deposits 2,031,554 2,526,576

Public institutions

• Current/settlement accounts 808,005 566,650

• term deposits 322 -

Retail customers

• Current / demand accounts 4,503,012 4,184,094

• term deposits 23,453,096 17,501,674

• Restricted deposits 1,736,225 1,668,080

45,754,892 40,388,538

Current 37,454,767 35,155,390

Non-current 8,300,125 5,233,148

the effective interests rates of current accounts are from 0.1% to 4% (2009: from nil to 1.8%) per annum, while the effective interests rate of term deposits are from nil to 13.5 % (2009: 0.02% to 14%) per annum.


35. other borrowed funds

Interest rate (%) 2010 2009

Domestic borrowings:

Macedonian Bank for development Promotion (MBDP) 3m EuRIBOR+2.5%; 1-5% 1,438,435 636,397

Macedonian Enterprise Development Foundation (MEDF) 4.25%-6.3% 153,773 186,946

Ministry of Finance (PsDL) 3m EuRIBOR+0.25%; 0.5-1% 526,965 701,447

National Bank of the Republic of Macedonia (ICDF taiwan)6m usDLIBOR-0.5%;

0,39-4% 43,352 51,319

Central Cooperative Bank 6.2% - 20,003

Ohridska Banka 6.2% - 150,026

komercijalna Banka 6.2% - 100,017

Eurostandard Banka 2% 40,002 40,007

universal Investment Bank 2% 40,002 -

ttk Bank 2% 30,002 -

Foreign borrowings:

EuROPEaN INVEstMENt BaNk (EIB)

3m EuRIBOR +0.073; 3m EuRI-BOR +0.078; 3m EuRIBOR+0.061;

3m EuRIBOR +0.044; 3m EuRI-BOR+0.0740; 3m EuRIBOR+1.318; 3m EuRIBOR+0.516; 3m EuRIBOR

+0.39; 1.06%-1.55% 980,278 1,078,002

LHB INtERNatIONaLE HaNDELsBaNk 3m EuRIBOR + 0.75% - 941

NLB INtERFINaNZ aG ZuRICH 3m CHFLIBOR+2.5%; 3.4%-2.51% 510 29,391

NOVa LJuBLJaNska D.D

3m EuRIBOR +2%; 3m EuRI-BOR+2.25%;

6m EuRIBOR+1.8%; 1m CHFLI-BOR+2.25%; 1.5%-3.28% 352,461 641,415

EFsE WEstERN BaLkaN B.V. (EFsE) 6 m EuRIBOR 4% 499,064 491,491

INtERNatIONaL FINaNCE CORPORatION (IFC) 6m EuRIBOR+4 1,528,328 -

5,633,172 4,127,402

Current 1,280,991 1,209,479

Non-current 4,352,181 2,917,923

the loans granted by the MBDp, Ministry of Finance, MeDF, nBrM (ICDF taiwan) are secured with bills of exchange of NLB tutunska Banka aD. the EIB credit line through MBDP is secured with bills of exchange and bill of exchange in form of a Notary act.

For the EFsE credit line, EFsE subordinated loan and IFC long term credit line, NLB tutunska Banka has secured Comfort Letters issued by NLB D.D.

the EIB Loan from 2006 is secured with Bank Gaurantee issued by NLB d.d. Ljubljana and the EIB Loan from 2008 is secured with Bank Gaurantee issued by COMMERZBaNk FRaNkFuRt aG with a Counter-Guarantee issued by NLB d.d. Ljubljana.

the loans granted from LHB during 2010 were fully repaid.

loan from InternatIonal FInanCe CorporatIon (IFC)

On March 31st, 2010, NLB tutunska Banka signed a Loan agreement with INtERNatIONaL FINaNCE CORPORatION in the amount of 25 million EuR, under which the whole loan was disbursed in 2 tranches as follows:

• On 04.02.2010 the amount of 15 million EuR was disbursed;

• On 30.06.2010 the amount of 10 million EuR was disbursed.

loans from Macedonian Bank for Development promotion (MBDp)

During 2010 the following tranches were withdrawn under the credit line arranged through MBDP with funds from European Investment Bank:


• EuR 1,521,000.00 with 1% p.a. interest rate on 17.02.2010





loans from Macedonian enterprise Development Fondation (MeDF)

On Jaunary 15th, 2010, NLB tutunska banka aD skopje signed new Framework Financial agreement with Macedonian Enterprise Development Fondation (MEDF) in the amount of 4.4 mio EuR, for further financing of the micro and small enterprises, and specific sectors.

During 2010, the Bank has withdrawn several tranches under this MEDF credit line in the total amount of 625 thousand EuR, aimed for further financing of micro and small eneterpises, specific projects, as well as individual entreupreneurs.

the Bank issued debt securities – bonds through public offer on 17 November 2008. Issued debt securities represent non-convertible, transferable bonds with the right of interest and right of disbursement of the nominal value of the bonds. the cumulative quantity of the bonds is 10.663 bonds each with currency structure in the amount of EuR 1.000.

the interest rate is 6 month Euribor +1,2%per year, with semi - annual payment of the interest. the nominal value of the bonds shall be disbursed on the maturity date of the bond.

the total amount of the debt securities in issue includes the interest in the amount of MkD 1,877,000 (2009: MkD 1,702,000).

36. Debt securities in issue


Debt securities in issue 6 month EuRIBOR +1,2% 616,928 631,786

total 616,928 631,786

Current 616,928 1,702

Non-current - 630,084

37. provisions

2010 2009

at 1 January 287,004 386,658

Charged to income statement (Note 11)

• additional provisions 61,408 149,786

• unused amounts reversed (151,020) (247,537)

Exchange differences 1,514 (1,903)

at 31 December 198,906 287,004

Current 134,736 192,803

Non-current 64,170 94,201


38. Current income tax assets/liabilities

39. Subordinated debt

2010 2009

Current income tax assets - 572

- 572


European Fund for southest Europe6 months EuRIBOR+4.2% after

22.09.2013 + 6.3% 749,006 744,754

NLB INtERFINaNZ aG ZuRICH 3 months CHFLIBOR + 5.5% 1,051,156 875,592

1,800,162 1,620,346

Current 14,421 12,541

Non-current 1,785,741 1,607,805

the subordinated loans from NLB Interfinanz were granted with an interest rate of 3 month CHF Libor + 3.25%, and maturity of 7 years. In september 2010 the maturity of the loans was extended for additional 7 years and the interest margin was increased from 3.25% p.a. to 5.5% p.a.. Conversion into capital will be determined according fulfillment of certain terms.

the EFsE (European Fund for southeast Europe) subordinated loan in amount of EuR 12.000.000 was granted with an interest rate of 6 months Euribor + 4.20% p.a. (from 22nd september 2013, 6 months Euribor + 6.30 %) with maturity of 10 years. Conversion into capital will be determined in accordance with terms given in the agreement signed between EFsE (European Fund for southeast Europe) and NLB tutunska Bank.

40. other liabilities

2010 2009

Dividends declared and payable 5,949 5,702

accruals 47,119 36,392

Prepayment of liabilities 175,253 149,217

suppliers payables 54,581 41,603

advances received 24,782 6,608Compensation benefits to the members of the Man-aging Board, management and employees 34,945 71,241

Long-term employee benefits 12,211 13,038

Liabilities for unused annual leaves 14,514 12,672

Other 69,812 50,007

439,166 386,480


41. Contingencies

2010 2009

Balance 1 January 13,038 12,771

Benefits paid (1,767) (538)

actuarial losses (Note 16) 940 805

Balance at 31 December 12,211 13,038

2010 2009

Guarantees

• in MkD currency 3,528,765 3,151,524

• in foreign currency 1,903,716 2,014,100

Letters of credit

• in foreign currency 558,581 1,107,956

Limits on cheques and cards 2,432,927 1,754,506

8,423,989 8,028,086

Less: Provision for impairment (198,906) (287,004)

8,225,083 7,741,082

Movement in long-term employee benefits is presented below:

the Bank issues bank guarantees and letters of credit on behalf of its customers to third parties. these agreements have fixed limits and are generally extended for a period of up to three years. Expirations are not concentrated in any period.

the following table indicates the contractual amounts of the Bank contingencies by category:

Long-term employee benefits include jubilee awards and retirement indemnity bonuses.

these contingent liabilities have off balance-sheet credit risk because only origination fees and accruals for probable losses are recognized in the balance sheet until the contingencies are fulfilled or expire. Many of the contingent liabilities will expire without being advanced in whole or in part. therefore, the amounts do not represent expected future cash flows.


42. related party transactions

according to the Bank’s articles of association, the supreme body is the assembly of the Bank, constituted of all the holders of the Bank’s registered ordinary shares. the overall control of the Bank is with the non-executive Board of Directors (“the supervisory Board”) who are appointed by shareholders.

the Bank is controlled by Nova Ljubljanska Bank Group (“NLB”) which owns 86.97%(2009: 86.97%) of the voting shares.

the volumes of related party transactions, and outstanding balances at the year-end, are as follows:

Fellow subsidiaries associate Other related parties

Income statement

Interest income 5,428 - 3,394

Fee and commission income 3,363 262 2,978

Interest expense (91,659) (9,854) (20,463)

Fee and commission expense (24,276) - -Net gains/(losses) on financial instruments classified as held for trading (17,423) - -

Other operating income 22 2,425

Other operating expences (146,733) - (149,583)

Balance sheet

Cash and cash equivalents

Balance at 1 January 552,326 - -

Loans issued during the year 99,439,877 - -

Loan repayments during the year (99,676,632) - -

Balance at 31 December 315,571 - -

loans

Balance at 1 January 925,934 - 37,472

Loans issued during the year - - 113,824

Loan repayments during the year (925,934) - (109,554)

Balance at 31 December - - 41,742


Balance at 1 January 14,612 - -

trading assets issued during the year - - -

trading assets repayments during the year (14,612) - -

Balance at 31 December - - -

other assets

Balance at 1 January 75 (57) (46)

Other assets issued during the year 33,959,002 70 46

Other assets repayments during the year (33,896,031) - -

Balance at 31 December 63,046 13 -

Deposits

Balance at 1 January 1,254,130 190,041 370,187

Deposits received during the year 3,545,348 851,065 6,589,632

Deposits repaid during the year (2,909,013) (915,800) (6,562,780)

Balance at 31 December 1,890,465 125,306 397,039


Borrowings

Balance at 1 January 1,546,398 - -

Loans issued during the year 656,599 - -

Loans repayments during the year (798,869) - -

Balance at 31 December 1,404,128 - -

other liabilities

Balance at 1 January 606 - -

Other liabilities issued during the year 24,946 - 128,219

Other liabilities repayments during the year (20,160) - (98,897)

Balance at 31 December 5,392 - 29,322

For the year ended on 31 December 2009:

Fellow subsidiaries associate Other related parties

Income statement

Interest income 21,800 40 6,228

Fee and commission income 1,505 262 2,243

Interest expense (94,147) (17,230) (18,907)

Fee and commission expense (15,356) - -Net gains/(losses) on financial instruments classified as held for trading (14,658) - -

Other operating income - - -

Other operating expences - - -

Balance sheet

Cash and cash equivalents



Loan repayments during the year (354,274,056) - -- -


Loans

Balance at 1 January 723,047 - 35,601

Loans issued during the year 495,894 - 275,929

Loan repayments during the year (293,007) - (274,058)

Balance at 31 December 925,934 - 37,472


Balance at 1 January - - -

trading assets issued during the year 14,612 - -

trading assets repayments during the year - - -


other assets


Other assets issued during the year 136,097 565 6,166

Other assets repayments during the year (136,022) (622) (6,212)

Balance at 31 December 75 (57) (46)


transaction with key management personnel

the total compensation to the key management personnel are as follows:

2010 2009

Executive directors 21,850 47,228

Non-executive directors 742 2,439

22,592 49,667

2010 2009

Companies 1,888,031 2,009,855

Citizens 4,244 4,483

other 53,141 718,535

1,945,416 2,732,873

all compensation to the key management are short-term employee benefit.

the Bank manages assets on behalf of third parties, which are mainly in the form of loans to various clients. the Bank receives fee income for providing these services. trust assets are not assets of the Bank and are not recognised in the balance sheet. the Bank is not exposed to any credit risk relating to such placements, as it does not guarantee these investments.

43. trust activities

Deposits

Balance at 1 January 1,144,836 187,563 467,471

Deposits received during the year 32,541,828 1,390,243 19,431,210

Deposits repaid during the year (32,432,534) (1,387,765) (19,528,494)

Balance at 31 December 1,254,130 190,041 370,187

Borrowings



Loans repayments during the year (2,519,477) - -

Balance at 31 December 1,546,398 - -

other liabilities


Other liabilities issued during the year 21,610,258 - -

Other liabilities repayments during the year (21,609,652) - -

Balance at 31 December 606 - -


44. Share capital

Number of shares Ordinary shares share premium Non voting shares total

at 1 January 2009 854,061 854,061 2,203,056 - 3,057,117

at 31 December 2009 854,061 854,061 2,203,056 - 3,057,117

at 31 December 2010 854,061 854,061 2,203,056 - 3,057,117

the authorized share capital of the Bank consists of 854,061 ordinary shares (2009: 854,061 ordinary shares). Ordinary shares have a par value of MkD 1,000 (2009: MkD 1,000). all issued shares are fully paid.

the holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Bank.

the below stated shareholders have more than 5% of the Bank’s issued voting share capital:

Based on the Contract and annex No, 1, 2, 3, 4 and 5 of the contract for transfer of the voting rights that are owned by NLB InterFinanz aG Zurich in NLB tutunska banka, the voting rights belonging to NLB InterFinanz aG Zurich (26.7%), were transferred to Nova Ljubljanska banka d.d. Ljubljana, by which the share in the Bank’s total voting rights of Nova Ljubljanska banka d.d. on 31 December 2010 is 86.97%.

Statutory reserve

under the local statutory legislation, the Bank is required to set aside 15% of its net profit for the year in the statutory reserve until the level of the reserve reaches 1/5 of the court registered capital. until reaching the minimum required level statutory reserve could only be used for loss recovery.

When the minimum level is reached, statutory reserve can also be used for distribution of dividends, based on a decision of the shareholders’ meeting, but only if the amount of the dividends for the current business year has not reached the minimum for distribution as stated in the trade Company Law or by the Bank’s statute.

revaluation reserve

the revaluation reserve includes the cumulative net effect of the changes in the fair value of investments available-for-sale until the moment of their de-recognition or damaging.

% of voting share capital

shareholders 2010 2009

NLB Interfinanz aG - Zurich 26.7% 26.7%

Nova Ljubljanska banka a.D. - Ljubljana 60.3% 60.3%

2010 2009

Revaluation reserve available for sale securities 41,026 28,184

41,026 28,184


Movements in revaluation reserve were as follows:

Dividends

after the balance sheet date there no dividends were declared.

For the cash flow purposes, cash, as well as the cash equivalents comprise the following balances with less than three months maturity from the date of acquisition:

No material events subsequent to the balance sheet date have occurred which require disclosure in the financial statements.

2010 2009

revaluation reserve for available for sale securities

at 1 January 28,184 78,063

Net gains/(losses) from changes in fair value (Note 24) (3,263) (40,513)

Recycled to income statement on realization (Note 12) (4,877) (14,901)

Deferred income tax (Note 29) 3,132 5,535

Loss of control of the investment in subsidiary 17,850 -

at 31 December 28,184

2010 2009

Cash and balances with the NBRM (Note 20) 5,908,391 5,941,689

Government bonds (Note 24) 5,084,751 3,575,945

Placements with other banks ( Note 21) 3,477,128 4,559,581

14,470,270 14,077,215

45. Cash and cash equivavents

46. Subsequent events

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