nlb prishtina sh.a. financial statements prepared in...

NLB PRISHTINA SH.A.

Financial Statements prepared in accordance withRules and Regulations of the Central Bank of Kosovo

For the year ended December 31, 2011

CONTENTS PAGE

INDEPENDENT AUDITOR’S REPORT 2-3

STATEMENT OF FINANCIAL POSITION 4

STATEMENT OF COMPREHENSIVE INCOME 5

STATEMENT OF CHANGES IN EQUITY 6

STATEMENT OF CASH FLOWS 7

NOTES TO THE FINANCIAL STATEMENTS 8 - 82

PricewaterhouseCoopers Kosovo,T: +386 (0) 43722 555/+377 (0) 45322 722, F:+386 (0)43722 276, www.pwc.com/ks

Registered with the Business Registration Agency in Kosovo with Business No. 70609711

INDEPENDENT AUDITOR’

To the Shareholders and Board of Directors of NLB Prishtina Sh. a.

We have audited the accompanying financial statements of NLB Prishtina sh.acomprise the statement of financial position as of 31 December 2011 and the statementof comprehensive income, statement of changes in equity and statement of cash flowsfor the year then ended and a summary of significant accounting policies and otexplanatory notes.

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these financialstatements in accordance withand for such internal control as management determines is necessary to enable thepreparation of financial statements that are free from material misstatement, whetherdue to fraud or error.

Auditor’s responsibility

Our responsibility is to express anaudit. We conducted our audit in accordance with International Standards on Auditing.Those Standards require that we comply with ethical requirements and plan andperform the audit to obtain reasonable asfree from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amountsand disclosures in the financial statements. The procedures selected depend on theauditor’s judgment, including the assessment of the risks of material misstatement ofthe financial statements, whether due to fraud or error. In making those riskassessments, the auditor considers internal control relevant to the entity’s preparationand fair presentation of the financial statements in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the entity’s internal control. An audit also includesevaluating the appropriateness of accounting policies used and the reasonableness ofaccounting estimates made by management, as well as evaluating the overallpresentation of the financial statements.

We believe that the audit evidence we have obtained is sufficientprovide a basis for our audit opinion.

PricewaterhouseCoopers Kosovo, Str. Mujo Ulqinaku, No. 5, Ap. 4, Qyteza Pejton, 10 000, Pristina, KosovoT: +386 (0) 43722 555/+377 (0) 45322 722, F:+386 (0)43722 276, www.pwc.com/ks

Registered with the Business Registration Agency in Kosovo with Business No. 70609711

INDEPENDENT AUDITOR’S REPORT


We have audited the accompanying financial statements of NLB Prishtina sh.acomprise the statement of financial position as of 31 December 2011 and the statementof comprehensive income, statement of changes in equity and statement of cash flowsfor the year then ended and a summary of significant accounting policies and ot

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these financialstatements in accordance with the Rules and Regulations of the Central Bank of Kosovoand for such internal control as management determines is necessary to enable thepreparation of financial statements that are free from material misstatement, whether

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on ouraudit. We conducted our audit in accordance with International Standards on Auditing.Those Standards require that we comply with ethical requirements and plan andperform the audit to obtain reasonable assurance whether the financial statements arefree from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amountsand disclosures in the financial statements. The procedures selected depend on the

judgment, including the assessment of the risks of material misstatement ofthe financial statements, whether due to fraud or error. In making those riskassessments, the auditor considers internal control relevant to the entity’s preparation

entation of the financial statements in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the entity’s internal control. An audit also includes

e appropriateness of accounting policies used and the reasonableness ofaccounting estimates made by management, as well as evaluating the overallpresentation of the financial statements.

We believe that the audit evidence we have obtained is sufficientprovide a basis for our audit opinion.

Qyteza Pejton, 10 000, Pristina, KosovoT: +386 (0) 43722 555/+377 (0) 45322 722, F:+386 (0)43722 276, www.pwc.com/ks


We have audited the accompanying financial statements of NLB Prishtina sh.a whichcomprise the statement of financial position as of 31 December 2011 and the statementof comprehensive income, statement of changes in equity and statement of cash flowsfor the year then ended and a summary of significant accounting policies and other

Management is responsible for the preparation and fair presentation of these financialRules and Regulations of the Central Bank of Kosovo,

and for such internal control as management determines is necessary to enable thepreparation of financial statements that are free from material misstatement, whether

opinion on these financial statements based on ouraudit. We conducted our audit in accordance with International Standards on Auditing.Those Standards require that we comply with ethical requirements and plan and

surance whether the financial statements are

An audit involves performing procedures to obtain audit evidence about the amountsand disclosures in the financial statements. The procedures selected depend on the

judgment, including the assessment of the risks of material misstatement ofthe financial statements, whether due to fraud or error. In making those riskassessments, the auditor considers internal control relevant to the entity’s preparation

entation of the financial statements in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the entity’s internal control. An audit also includes

e appropriateness of accounting policies used and the reasonableness ofaccounting estimates made by management, as well as evaluating the overall

We believe that the audit evidence we have obtained is sufficient and appropriate to

NLB PRISHTINA SH.A.STATEMENT OF COMPREHENSIVE INCOMEFor the year ended December 31, 2011

(All amounts expressed in EUR thousand, unless otherwise stated)

5

Note

Year endedDecember 31,

2011


2010

Interest income 19 23,584 21,251

Interest expense 20 (11,037) (8,719)

Net interest income 12,547 12,532

Fee and commission income 21 5,952 5,745

Fee and commission expense 22 (651) (685)

Net fee and commission income 5,301 5,060

Net foreign exchange gain 349 441

Other operating income 126 438

Impairment losses on loans to customers 7 (1,142) (2,553)

Other impairment losses and provisions 8 (989) (19)

Staff costs 23 (5,159) (5,269)

Depreciation and amortization (1,105) (1,061)

Administrative and other operating expenses 24 (4,910) (5,085)

Profit before tax 5,018 4,484

Income tax (expense) 25 (584) (462)

Net profit for the year 4,434 4,022

Other comprehensive income (loss):Net (loss) gain on change of fair value of AFSsecurities 26 (16) 1

Total comprehensive income for the year 4,418 4,023

The accompanying notes from 1 to 30 form an integral part of these financial statements.

NLB PRISHTINA SH.A.STATEMENT OF CHANGES IN EQUITYFor the year ended December 31, 2011


6

Sharecapital

Revaluationreserve for

AFS securitiesRetainedearnings Total

Balance as at January 1, 2010 20,498 9 10,429 30,936

Net profit for the year - - 4,022 4,022

Other comprehensive income - 1 - 1

Total comprehensive income - 1 4,022 4,023

Dividend paid during the year - - (2,421) (2,421)

Balance as at December 31,2010 20,498 10 12,030 32,538

Net profit for the year - - 4,434 4,434

Other comprehensive income - (16) - (16)Total comprehensive loss(income)

- (16) 4,434 4,418

Dividend paid during the year - - - -

Balance as at December 31,2011 20,498 (6) 16,464 36,956


NLB PRISHTINA SH.A.STATEMENT OF CASH FLOWSFor the year ended December 31, 2011


7

NotesYear ended

December 31,2011


2010

Cash flows from operating activities

Profit for the year before taxation 5,018 4,484

Depreciation 11 935 935

Amortization 12 170 126

Impairment losses on loans to customers 1,142 2,553

Write off of property, plant and equipment 30 81Interest income (23,584) (21,251)Interest expense 11,037 8,719

(5,252) (4,353)

(Increase)/decrease in balance with CBK 11,450 (5,020)

Decrease in due from other banks 5,679 1,634

Increase in loans to customers (23,471) (23,988)

(Increase)/decrease in other assets 203 225

Deacrese/Increase in due to other banks (308) -

Increase in customer accounts 33,141 44,359

Increase/(decrease) in other financial liabilities 1,290 -

(Decrease)/increase in accounts payable 599 (771)

23,331 12,086

Interest received 23,658 21,074

Interest paid (10,316) (7,977)

Income tax paid 25 (514) (424)

Cash inflows from operating activities 36,159 24,759

Cash flows from investing activities

Purchases of property and equipment (2,634) (1,529)

Purchases of intangible assets (171) (433)

Purchase of Non Equity Bonds (14,117) (20,262)

Net cash used in investing activities (16,922) (22,224)

Cash flows from financing activities

Proceeds from borrowings, net - 6,531

Dividend paid (4,201) (2,421)

Cash inflows from financing activities (4,201) 4,110

Increase in cash and cash equivalents 15,036 6,645

Cash and cash equivalents at January 1 107,272 100,627

Cash and cash equivalents at December 31 4.1 122,308 107,272


NLB PRISHTINA SH.A.NOTES TO THE CBK FINANCIAL STATEMENTSFor the year ended December 31, 2011


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1. GENERAL

NLB Prishtina sh.a.is a commercial bank (the “Bank”) registered with the Kosovo Registry underCertificate of Registration no. 70053484 dated December 18, 2007. The Bank was established by themerger of two banks, NLB Kasabank and NLB New Bank of Kosova (during 2007 both banks were incontrol of Nova Ljubljanska Banka d.d.), and it obtained the license for banking activities onDecember 19, 2008 from Central Bank of Kosovo (“CBK”).

The Bank is controlled by Nova Ljubljanska Banka d.d. Ljubljana incorporated in Slovenia (Parent),which owns 81.21% of the ordinary shares as at 31 December 2011 (31 December 2011: 81.21%ordinary shares). The largest shareholders of Nova Ljubljanska Banka d.d. Ljubljana are the Republicof Slovenia owning 45.62% of shares, and KBC Bank N.V. Brussels (hereinafter: KBC), owning25.00% of shares.

The Bank’s registered head office is located at Rr. Rexhep Luci Nr. 5, Prishtina, Kosovo. The Bankoperates as a commercial bank to all categories of customers, through its network of 10 branches inPrishtina, Gjakova, Peja, Ferizaj, Mitrovica, Gjilan, Besiana, Prizren, 52 sub-branches.

The financial statements of the Bank for the year ended 31 December 2011 were approved by theManagement Board on February 15, 2012.



9

2. ADOPTION OF NEW AND REVISED STANDARDS AND INTERPRETATIONS

2.1 Standards and Interpretations effective from January 1, 2011

The following amendments to the existing standards issued by the International Accounting StandardsBoard and interpretations issued by the International Financial Reporting Standards InterpretationsCommittee (IFRSIC) are effective for the current period:

Amendment to IAS 24, Related Party Disclosures (issued in November 2009 and effective forannual 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 eliminatinginconsistencies; and by (b) providing a partial exemption from the disclosure requirements forgovernment-related entities. As a result of the revised standard, the bank now also disclosescontractual commitments to purchase and sell goods or services to its related parties.

Improvements to International Financial Reporting Standards (issued in May 2010 and effectivefrom 1 January 2011). The improvements consist of a mixture of substantive changes andclarifications in the following standards and interpretations: IFRS 1 was amended (i) to allow previousGAAP carrying value to be used as deemed cost of an item of property, plant and equipment or anintangible asset if that item was used in operations subject to rate regulation, (ii) to allow an eventdriven revaluation to be used as deemed cost of property, plant and equipment even if the revaluationoccurs during a period covered by the first IFRS financial statements and (iii) to require a first-timeadopter to explain changes in accounting policies or in the IFRS 1 exemptions between its first IFRSinterim report and its first IFRS financial statements; IFRS 3 was amended (i) to require measurementat 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 aproportionate share of net assets in the event of liquidation, (ii) to provide guidance on the acquiree’sshare-based payment arrangements that were not replaced, or were voluntarily replaced as a result of abusiness combination and (iii) to clarify that the contingent considerations from business combinationsthat occurred before the effective date of revised IFRS 3 (issued in January 2008) will be accountedfor in accordance with the guidance in the previous version of IFRS 3; IFRS 7 was amended to clarifycertain disclosure requirements, in particular (i) by adding an explicit emphasis on the interactionbetween qualitative and quantitative disclosures about the nature and extent of financial risks, (ii) byremoving the requirement to disclose carrying amount of renegotiated financial assets that wouldotherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateralby a more general requirement to disclose its financial effect, and (iv) by clarifying that an entityshould disclose the amount of foreclosed collateral held at the reporting date, and not the amountobtained during the reporting period; IAS 1 was amended to clarify the requirements for thepresentation and content of the statement of changes in equity (this amendment was adoptedpreviously by the Bank in its prior year’s financial statements); IAS 27 was amended by clarifying thetransition rules for amendments to IAS 21, 28 and 31 made by the revised IAS 27 (as amended inJanuary 2008); IAS 34 was amended to add additional examples of significant events and transactionsrequiring disclosure in a condensed interim financial report, including transfers between the levels offair value hierarchy, changes in classification of financial assets or changes in business or economicenvironment that affect the fair values of the entity’s financial instruments; and IFRIC 13 wasamended to clarify measurement of fair value of award credits. The above amendments resulted inadditional or revised disclosures, but had no material impact on measurement or recognition oftransactions and balances reported in these financial statements. The financial effect of collateralrequired to be disclosed by the amendments to IFRS 7 is presented in these financial statements bydisclosing collateral values separately for (i) those financial assets where collateral and other creditenhancements are equal to, or exceed, carrying value of the asset (“over-collateralised assets”) and (ii)those financial assets where collateral and other credit enhancements are less than the carrying valueof the asset (“under-collateralised assets”).



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2. ADOPTION OF NEW AND REVISED STANDARDS AND INTERPRETATIONS(CONTINUED)

2.1 Standards and Interpretations effective from January 01, 2011 (continued)

Other revised standards and interpretations effective for the current period. IFRIC 19“Extinguishing financial liabilities with equity instruments”, amendments to IAS 32 on classificationof rights issues, clarifications in IFRIC 14 “IAS 19 - The limit on a defined benefit asset, minimumfunding requirements and their interaction” relating to prepayments of minimum funding requirementsand amendments to IFRS 1 “First-time adoption of IFRS”, did not have any impact on these financialstatements.

The adoption of these amendments to the existing standards and interpretations has not led to anychanges in the Bank’s accounting policies.

2.2 Standards and interpretations issued but not early adopted by the bank

IFRS 9, Financial Instruments Part 1: Classification and Measurement. IFRS 9, issued inNovember 2009, replaces those parts of IAS 39 relating to the classification and measurement offinancial assets. IFRS 9 was further amended in October 2010 to address the classification andmeasurement of financial liabilities and in December 2011 to (i) change its effective date to annualperiods beginning on or after 1 January 2015 and (ii) add transition disclosures. Key features of thestandard are as follows:

• Financial assets are required to be classified into two measurement categories: those to bemeasured subsequently at fair value, and those to be measured subsequently at amortised cost. Thedecision is to be made at initial recognition. The classification depends on the entity’s business modelfor 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 andboth (i) the objective of the entity’s business model is to hold the asset to collect the contractual cashflows, and (ii) the asset’s contractual cash flows represent payments of principal and interest only (thatis, it has only “basic loan features”). All other debt instruments are to be measured at fair valuethrough profit or loss.

• All equity instruments are to be measured subsequently at fair value. Equity instruments thatare held for trading will be measured at fair value through profit or loss. For all other equityinvestments, an irrevocable election can be made at initial recognition, to recognise unrealised andrealised 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 madeon an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as theyrepresent a return on investment.

• Most of the requirements in IAS 39 for classification and measurement of financial liabilitieswere carried forward unchanged to IFRS 9. The key change is that an entity will be required to presentthe effects of changes in own credit risk of financial liabilities designated at fair value through profitor loss in other comprehensive income.

While adoption of IFRS 9 is mandatory from 1 January 2015, earlier adoption is permitted.



11

2. ADOPTION OF NEW AND REVISED STANDARDS AND INTERPRETATIONS(CONTINUED)

2.2 Standards and interpretations issued but not early adopted by the bank (continued)

IFRS 10, Consolidated Financial Statements (issued in May 2011 and effective for annualperiods beginning on or after 1 January 2013), replaces all of the guidance on control andconsolidation in IAS 27 “Consolidated and separate financial statements” and SIC-12 “Consolidation -special purpose entities”. IFRS 10 changes the definition of control so that the same criteria areapplied to all entities to determine control. This definition is supported by extensive applicationguidance.

IFRS 11, Joint Arrangements, (issued in May 2011 and effective for annual periods beginning onor after 1 January 2013), replaces IAS 31 “Interests in Joint Ventures” and SIC-13 “JointlyControlled Entities—Non-Monetary Contributions by Venturers”. Changes in the definitions havereduced the number of types of joint arrangements to two: joint operations and joint ventures. Theexisting policy choice of proportionate consolidation for jointly controlled entities has beeneliminated. Equity accounting is mandatory for participants in joint ventures.

IFRS 12, Disclosure of Interests in Other Entities, (issued in May 2011 and effective for annualperiods beginning on or after 1 January 2013), applies to entities that have an interest in asubsidiary, a joint arrangement, an associate or an unconsolidated structured entity. It replaces thedisclosure requirements currently found in IAS 28 “Investments in associates”. IFRS 12 requiresentities to disclose information that helps financial statement readers to evaluate the nature, risks andfinancial effects associated with the entity’s interests in subsidiaries, associates, joint arrangementsand unconsolidated structured entities. To meet these objectives, the new standard requires disclosuresin a number of areas, including significant judgements and assumptions made in determining whetheran entity controls, jointly controls, or significantly influences its interests in other entities, extendeddisclosures on share of non-controlling interests in group activities and cash flows, summarisedfinancial information of subsidiaries with material non-controlling interests, and detailed disclosuresof interests in unconsolidated structured entities.

IFRS 13, Fair Value Measurement, (issued in May 2011 and effective for annual periodsbeginning on or after 1 January 2013), aims to improve consistency and reduce complexity byproviding a revised definition of fair value, and a single source of fair value measurement anddisclosure requirements for use across IFRSs.

IAS 27, Separate Financial Statements, (revised in May 2011 and effective for annual periodsbeginning on or after 1 January 2013), was changed and its objective is now to prescribe theaccounting and disclosure requirements for investments in subsidiaries, joint ventures and associateswhen an entity prepares separate financial statements. The guidance on control and consolidatedfinancial statements was replaced by IFRS 10, Consolidated Financial Statements.

IAS 28, Investments in Associates and Joint Ventures, (revised in May 2011 and effective forannual periods beginning on or after 1 January 2013). The amendment of IAS 28 resulted from theBoard’s project on joint ventures. When discussing that project, the Board decided to incorporate theaccounting for joint ventures using the equity method into IAS 28 because this method is applicable toboth joint ventures and associates. With this exception, other guidance remained unchanged.



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2. ADOPTION OF NEW AND REVISED STANDARDS (CONTINUED)

2.2 Standards and interpretations issued but not early adopted by the bank (continued)

Disclosures—Transfers of Financial Assets – Amendments to IFRS 7 (issued in October 2010and effective for annual periods beginning on or after 1 July 2011.). The amendment requiresadditional disclosures in respect of risk exposures arising from transferred financial assets. Theamendment includes a requirement to disclose by class of asset the nature, carrying amount and adescription of the risks and rewards of financial assets that have been transferred to another party, yetremain on the entity's balance sheet. Disclosures are also required to enable a user to understand theamount of any associated liabilities, and the relationship between the financial assets and associatedliabilities. Where financial assets have been derecognised, but the entity is still exposed to certain risksand rewards associated with the transferred asset, additional disclosure is required to enable the effectsof those risks to be understood.

Amendments to IAS 1, Presentation of Financial Statements (issued in June 2011, effective forannual periods beginning on or after 1 July 2012), changes the disclosure of items presented inother comprehensive income. The amendments require entities to separate items presented in othercomprehensive income into two groups, based on whether or not they may be reclassified to profit orloss in the future. The suggested title used by IAS 1 has changed to ‘statement of profit or loss andother comprehensive income’. The Group expects the amended standard to change presentation of itsfinancial statements, but have no impact on measurement of transactions and balances.

Amended IAS 19, Employee Benefits (issued in June 2011, effective for periods beginning on orafter 1 January 2013), makes significant changes to the recognition and measurement of definedbenefit pension expense and termination benefits, and to the disclosures for all employee benefits. Thestandard requires recognition of all changes in the net defined benefit liability (asset) when they occur,as follows: (i) service cost and net interest in profit or loss; and (ii) re-measurements in othercomprehensive income.

Disclosures—Offsetting Financial Assets and Financial Liabilities - Amendments to IFRS 7(issued in December 2011 and effective for annual periods beginning on or after 1 January2013). The amendment requires disclosures that will enable users of an entity’s financial statements toevaluate the effect or potential effect of netting arrangements, including rights of set-off. Theamendment will have an impact on disclosures but will have no effect on measurement andrecognition of financial instruments.

Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (issued inDecember 2011 and effective for annual periods beginning on or after 1 January 2014). Theamendment added application guidance to IAS 32 to address inconsistencies identified in applyingsome of the offsetting criteria. This includes clarifying the meaning of ‘currently has a legallyenforceable right of set-off’ and that some gross settlement systems may be considered equivalent tonet settlement.

Other revised standards and interpretations: The amendments to IFRS 1 “First-time adoption ofIFRS”, relating to severe hyperinflation and eliminating references to fixed dates for certainexceptions and exemptions, will not have any impact on these financial statements. The amendment toIAS 12 “Income taxes”, which introduces a rebuttable presumption that an investment property carriedat fair value is recovered entirely through sale, will not have any impact on these financial statements.IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, considers when and how toaccount for the benefits arising from the stripping activity in mining industry.The Bank has elected not to adopt these standards, revisions and interpretations in advance of theireffective dates. The Bank anticipates that the adoption of these standards, revisions and interpretationswill have no material impact on the financial statements of the Bank in the period of initial application.The Bank is considering the impact of IFRS 9 and date of its initial application.



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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3.1. Statement of compliance

The Bank maintains its accounting records and prepares its statutory financial statements inaccordance with the rules and regulations of the Central Bank of Kosovo (“CBK Rules”) applicablefor banks. The CBK Rules are based on the relevant legal decision defining the mandatory applicationof International Financial Reporting Standards (“IFRS”) in Kosovo, but CBK rules also specificallyrequire the application of certain accounting treatments which are not in accordance with the specificrequirements of IFRS. Consequently, these financial statements should be read as being prepared inaccordance with the accounting standards and regulations prevailing in the Territory of Kosovo asdisclosed in the significant accounting policies set out in Note 3 below.

The Bank’s CBK financial statements comprise the statement of financial position, statement ofcomprehensive income, the statement of changes in equity, the statement of cash flows, significantaccounting policies and the notes to the financial statements

3.2 Basis of preparation

The financial statements have been prepared on the historical cost basis except for the revaluation offinancial instruments. The principal accounting policies are set out below .

3.3 Functional Currency

In accordance with IAS 21 the Bank’s functional currency is EUR as it is the currency of the primaryeconomic environment in which the Bank operates and it reflects the economic substance of theunderlying events.

3.4 Interest income and expense

Interest income and expense are recognised in the profit and loss for all interest bearing instruments onan accrual basis using the effective yield method.

3.5 Fee and commission

The fee and commission income and expenses arisen from providing, i.e. using of banking services arerecorded in the profit and loss as incurred, i.e. at the moment the services are provided, i.e. used.

Loan management fees for loans that are likely to be drawn down are deferred (together with relateddirect costs) and recognised as an adjustment to the effective interest rate on the loan.

Fee and commission income and expenses also include fees from letters of guarantees and letters ofcredit issued by the Bank in favour of the clients, fees arising from domestic and international bankcharges, and other services provided by the Bank.

3.6 Financial instruments

i. Classification

Financial assets are classified in the following categories: financial assets available-for-sale and loansand receivables. The classification of financial assets is determined at their initial recognition, dependson the instrument’s characteristics and management’s intention.

Loans and receivables are non-derivative financial instruments with fixed or determinable paymentsthat are not quoted on active markets.



14

3.6 Financial instruments (continue)

i. Classification (continued)

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

ii. Measurement

Financial assets are measured initially at its fair value plus transaction costs, if any. Loans andreceivables are initially recognized at fair value plus transaction costs, if any. After initial recognitionthese are subsequently measured at amortized costs using the effective interest rate method. Amortizedcost is calculated using the effective interest rate method. Premiums and discounts, including initialtransaction costs, are included in the carrying amount of the related instrument and amortized based onthe effective interest rate of the instrument, when applicable.

The effective interest method is a method of calculating the amortised cost of a financial asset and ofallocating interest income over the relevant period. The effective interest rate is the rate that exactlydiscounts estimated future cash receipts (including all fees on points paid or received that form anintegral part of the effective interest rate, transaction costs and other premiums or discounts) throughthe expected life of the financial asset, or, where appropriate, a shorter period.

iii. Specific instruments

Cash and cash equivalentsCash and cash equivalents are items which can be converted into cash at short notice (with less thanthree months original maturity) and which are subject to an insignificant risk of changes in value.Amounts which relate to funds that are of a restricted nature are excluded from cash and cashequivalents. Cash and cash equivalent are carried at amortized cost.

Mandatory liquidity reservesIn accordance with the CBK rules, the Bank should meet the minimum average liquidity requirement.The liquidity requirement is calculated on a weekly basis as 10% of the deposit base, defined as theaverage total deposit liabilities to the non-banking public in EUR and other currencies, over thebusiness days of the maintenance period. The assets with which the Bank may satisfy its liquidityrequirement are the EUR deposits with the CBK and 50% of the EUR equivalent of cash denominatedin readily convertible currencies. Deposits with the CBK must not be less than 5% of the applicabledeposit base. As the respective liquid assets are not available to finance the Bank’s day to dayoperations, they have been excluded from cash and cash equivalents for the purposes of the cash flowstatement.

Financial assets available for saleAt initial recognition, available-for-sale financial assets are recorded at fair value plus transactioncosts, if any. Subsequently they are carried at fair value. The fair values reported are either observablemarket prices or values calculated with a valuation technique based on current observable market.Gains and losses arising from changes in fair value of available-for-sale financial assets are recognizedthrough other comprehensive income in the position “revaluation reserve from available-for-salefinancial instruments”, until the financial asset is derecognized or impaired. At this time, thecumulative gain or loss previously recognized in other comprehensive income is transferred to profitor loss through reclassification. Interest calculated using the effective interest rate method and foreigncurrency gains and losses on monetary assets classified as available-for-sale are recognized in theprofit or loss.



15

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

3.6 Financial instruments (continued)

Loans and advancesLoans and advances are classified as loans and receivables. Loans and receivables are measured atamortized cost. The amortized cost of a financial asset or financial liability is the amount at which thefinancial asset or financial liability is measured at initial recognition minus principal repayments, plusor minus the cumulative amortization using the effective interest method of any difference betweenthat initial amount and the maturity amount, and minus any reduction (through the use of an allowanceaccount) for impairment or un-collectability. Loans and advances are reported net of allowances forloans impairment to reflect the estimated recoverable amounts.

iv. Derecognition

Financial assets are derecognized when the contractual rights to the cash flows from the financialassets expire or financial assets are transferred and transfer qualifies for derecognition. The transactionis treated as a transfer of a financial asset, where substantially all risks and rewards of ownership aretransferred. When the bank neither transfers nor retains substantially all the risks and rewards ofownership of the financial asset, it shall determine whether it has retained control of the financialasset. A financial liability is derecognized from statement of financial position when, and only when, itis extinguished. When the obligation specified in the contract is discharged or cancelled or expires, i.e.when the obligation specified in the contract is discharged, cancelled or expires.

v. Impairment of financial assets

An assessment is made at each balance sheet date to determine whether there is objective evidence thata financial asset or group of financial assets may be impaired. If such evidence exists, the estimatedrecoverable amount and any impairment loss of that asset is determined and is recognized for thedifference between the recoverable amount and the carrying amount as follows:

Loans and advances to customers are reported at amortized cost net of provision (allowances) toreflect the estimated recoverable amounts.

A credit risk provision for loan impairment is established if there is objective evidence that the Bankwill not be able to collect the amounts due according to original contractual terms. The amount of theprovision is the difference between the carrying amount and estimated recoverable amount.The allowances are made against the carrying amount of loans and advances that are identified asbeing impaired based on regular reviews of outstanding balances to reduce these loans and advances totheir recoverable amounts. The allowance for loan impairment also covers losses where there isobjective evidence that probable losses are present in components of the loan portfolio at the balancesheet date. These have been estimated based upon historical patterns of losses in each component andthe credit ratings assigned to the borrowers reflect the current economic environment in which theborrowers operate.

The Bank first assesses whether objective evidence of impairment exists individually for financialassets that are individually significant, and individually or collectively for financial assets that are notindividually significant. If the Bank determines that no objective evidence of impairment exists for anindividually assessed financial asset, whether significant or not, it includes the asset in a group offinancial assets with similar credit risk characteristics and collectively assesses them for impairment.

When a loan is uncollectible, it is written off against the related provision for loan impairment. Suchloans are written off after all the necessary procedures have been carried out and the amount of theloss has been determined. Subsequent recoveries of amounts previously written off are credited to theprofit and loss.



16



If the amount of the provision for loan impairment subsequently decreases due to an event occurringafter the write-down, the decrease of the provision is credited to the provision for loan impairment inthe income statement.

Following are the loan classification categories and minimum provision rates as defined by the CBK.

Categories Provision rated

Standard Based on history analysisWatch Based on history analysisSubstandard Based on history analysis with minimum of 20%Doubtful 50%Loss 100%



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v. Impairment of financial assets (continued)

Assets that are individually assessed for impairment and for which an impairment loss is or continuesto be recognized 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 thepresent value of estimated future cash flows (excluding future credit losses that have not beenincurred) discounted at the financial asset’s original effective interest rate. The carrying amount of theasset is reduced through the use of an allowance account and the amount of the loss is recognized inthe profit or loss.

For the purposes of the evaluation of impairment, financial assets are grouped on the basis of similarcredit 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). Thosecharacteristics are relevant to the estimation of future cash flows for groups of such assets by beingindicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assetsbeing evaluated.

Ranking of categories is as follows:

Category A- Standard

All direct loans or facilities and off-balance sheet exposures of the bank that carry normal bankingrisk. Available information concerning the credit exposure, the performance of the customer’saccount, and the financial data all indicate that the settlement of the exposure is reasonably certainwithout difficulties, (or the obligation is fully secured by eligible collateral). The loan is current, ordelinquency is less than thirty days from the date of due payment or maturity. Overdraft facilitieswould be within established limits or only temporarily exceeding the limit by less than 5% or for lessthan thirty days, and cash flow into the account is sufficient to liquidate the overdraft balance within30 days of the expiration date of the facility.

Category B- Watch

Special Attention (or Watch) - This classification is used to identify and monitor exposures whichcontain weaknesses or potential weaknesses that, at the time of review, do not jeopardize therepayment of the credit or reflect a potential for loss, but which, if not addressed or corrected couldresult in the deterioration of the credit to a substandard or more severe classification. Absent anydocumented evidence to the contrary, the bank classifies as “special attention” those exposures that areoverdue more than 30 days but less than 60 days or those with continuous indebtedness in excess of5% of approved lines for more than 30 days but less than 60 days. This category of classification isintended to identify and address potentially weak relationships at an early stage.



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Category C-Substandard

Substandard - Exposures which, based upon a review of all factors attendant to the credit, have welldefined credit weaknesses that jeopardize repayment of the credit in the normal course. A substandardcredit is one which, by an analysis of financial data and other factors, is not currently protected by thesound worth and paying capacity of the borrower or guarantors or the value of the collateral, if any.Recourse to a responsible and able guarantor for repayment that would involve prolonged negotiationsbefore liquidation of the credit would invoke a substandard classification. The need for recourse to thecollateral as the means of satisfying the obligation also would be the basis for a substandardclassification. Absent any documented evidence to the contrary, an exposure is classified at leastsubstandard if any of the following criteria apply:

(a) If deposits/cash flows into the customer’s overdraft account are insufficient to liquidate theoutstanding balance within 60 days from the expiration date of the facility.

(b) If the customer exceeded the authorized limit of the facility by 5% or more for over 60 dayswithout paying this excess or without bank management formally raising the authorized limit.

(c) If the customer is overdue in repaying contractual instalments (including interest) for over 60 days.

(d) If the maturity of the loan or facility is over 60 days past due without repayment.

Category D-Doubtful

Doubtful - Exposures which, based upon a review of all factors attendant to the credit, contain all theweaknesses that are inherent in a substandard credit, but which are so pronounced that there is a strongprobability that a significant portion of the principal amount will not be paid. There is a likelihood ofloss, but the exact amount cannot be clearly defined at the time of review or is dependent upon theoccurrence of a future act or event. Although the possibility of loss is thus extremely high, because ofsignificant pending factors, reasonably specific, which could be expected to work to the advantage andstrengthening of the asset, its classification as an estimated loss is deferred until more exact status maybe determined. Such pending factors include but are not limited to mergers, acquisitions, capitalrestructuring, the furnishing of new collateral or realistic refinancing plans. Uncooperative guarantorsor those who are in weak financial condition should not be considered as being able to providestrength to the credit.

Recourse to any available collateral that would not be sufficient to cover the amount owing may alsojustify a doubtful classification.

Absent any documented evidence to the contrary, an exposure is classified at least doubtful if any ofthe following criteria apply:

(a) If deposits/cash flows into the customer’s overdraft account are insufficient to liquidate theoutstanding balance within 90 days from the date of expiration of the overdraft facility.

(b) If the customer exceeded the authorized limit of the facility by 5% or more for over 90 dayswithout paying this excess or without bank management formally raising the authorized limit.



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(c) If the customer is overdue in repaying any contractual instalment (including interest) for over90 days.

(d) If there are deficiencies in the customer’s financial condition that have caused negative equity.(e) If the maturity/expiration date of the loan or facility is over 90 days past due without

repayment.

Category E- Loss

Bad (Loss) - Exposures which, based upon a review of all factors attendant to the credit are of suchlittle value or will require such an extended period to realize any value, are no longer justifiable forcarrying on the active books of the bank.

An exposure is classified bad (loss) if any of the following criteria apply:

(a) If deposits/cash flows into the customer’s overdraft account are insufficient to liquidate thebalance of the outstanding overdraft within 180 days from the expiration date of the overdraftfacility.(b) If the customer exceeded the authorized limit of the facility by 5% or more for over 180days without paying the excess or without bank management formally raising the authorizedlimit.(c) If the customer fails to repay a contractual instalment (including interest) for over 180days.(d) If the maturity/expiration date of the loan or facility is over 180 days past due withoutrepayment.

Impairments and provisions for the remaining part of the portfolio of companies, sole proprietors andretail clients (receivables from clients which are not individually relevant) and for the receivables fromindividually significant clients (except banks) for which there is no evidence of impairment iscalculated on group basis (portfolio approach). Loans in group are further divided in categories, ascompanies and sole proprietors group of retail clients on balance sheet. All the three groups are furtherdivided in to five sub categories A, B, C, D, and E.

When a loan is considered to be uncollectible, it is written off against the related provision for loanimpairment. Such loans are written off after all the necessary procedures have been completed and theamount of the loss has been determined. Subsequent recoveries of amounts previously written off arecredited to the profit or loss.

If the amount of the provision for loan impairment subsequently decreases due to an event occurringafter the write down, the release of the provision is credited to the profit of loss.

Financial assets available for sale - the Bank assesses at each balance sheet date whether there isobjective evidence that financial assets available for sale are impaired. In case of equity investmentsclassified as available for sale, significant or prolonged decline in the fair value of the security belowits cost is considered an objective evidence of impairment. If any such evidence exists, the cumulativeloss is removed from other comprehensive income and recognised in the profit and loss. Impairmentlosses recognised in the profit and loss on equity instruments are not reversed through the profit andloss; subsequent increases in fair value after impairment are recognized in other comprehensiveincome.



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If, in a subsequent period, the fair value of a debt instrument classified as available for sale increasesand the increase can be objectively related to an event occurring after the impairment loss wasrecognised in the profit and loss, the impairment loss is reversed through the profit and loss.

The following factors are considered in determining impairment losses on debt instruments:

- Default or delinquency in interest or principal payments;- Liquidity difficulties of the issuer;- Breach of contract covenants or conditions;- Bankruptcy of the issuer;- Deterioration of economic and market conditions; and- Deterioration in the credit rating of the issuer below the acceptable level.

Impairment losses recognized in the profit and loss are measured as the difference between thecarrying amount of the financial asset and its current fair value. The current fair value of theinstrument is its market price or discounted future cash flows, when the market price is not obtainable.



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3.7 Foreign currencies

Transactions denominated in currencies other than Euro are translated in the functional currency at theexchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resultingfrom the settlement of such transactions and from the translation of monetary assets and liabilitiesdenominated in foreign currencies are recognized in the profit and loss (as foreign exchangetranslation gains and losses).

Non-monetary items that are measured in terms of historical cost in a foreign currency are notretranslated.

3.8 Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulatedimpairment loss, where required. Each year, the Bank assesses whether there are indications that assetsmay be impaired. If any such indication exists, the recoverable amounts are estimated. The estimatedrecoverable amount is the higher of an asset’s fair value less costs to sell and its value-in-use. Whenthe carrying amount of an asset is greater than its estimated recoverable amount, it is written down toits recoverable amount and the difference is charged to the profit and loss.

Gains and losses on disposal of property, plant and equipment are determined by reference to theircarrying amount and are taken into account in determining the operating result for the period. Repairsand maintenance are charged to the profit or loss when the expenditures are incurred.

Depreciation is charged using the straight line method, over the estimated useful lives of each part ofan item of property and equipment. For additions depreciation is charged subsequent to the month ofpurchase while for disposals up to the month of disposal. Depreciation does not begin until the assetsare available for use.

The annual depreciation rates used for each category of property, plant and equipment are as follows:

Category of assets Depreciation rates used

Buildings 5%

Leasehold improvements Lower of the lease term or 20%

Furniture, fixtures and equipment 20%

Computers and related equipment 20%

Motor vehicles 20%

3.9 Intangible assets

Intangible assets acquired by the Bank are stated at cost less accumulated amortisation and impairmentlosses, when required. Amortisation is provided on a straight-line basis at an annual rate of 20 %.

Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the futureeconomic benefits embodied in the specific assets to which it relates. All other expenditure isexpensed as incurred. Amortization does not begin until the assets are available for use.



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3.10 Non – current assets held for sale

Non-current assets are classified as held for sale if their carrying amount will be recovered principallythrough a sale transaction rather than through continuing use. This condition is regarded as met onlywhen the sale is highly probable and the asset is available for immediate sale in its present condition.Management must be committed to the sale, which should be expected to qualify for recognition as acompleted sale within one year from the date of classification.

Non-current assets classified as held for sale are measured at the lower of their previous carryingamount and fair value less costs to sell.

3.11 Seized assets

Seized assets represent financial and non-financial assets acquired by the Bank in settlement ofoverdue loans. The assets are initially recognised at fair value when acquired and included in premisesand equipment, other financial assets or inventories within other assets depending on their nature andthe Bank's intention in respect of recovery of these assets, and are subsequently re-measured andaccounted for in accordance with the accounting policies for these categories of assets.

3.12 Impairment of non-financial assets

An impairment loss is recognised whenever the carrying value of an asset exceeds its recoverableamount. Recoverable amount of an asset is the higher of its fair value less costs to sell and value inuse. Value in use of an asset is the present value of estimated future cash flows expected from thecontinuing use of an asset and from its disposal.

3.13 Due to banks

Due to banks are recorded when money or other assets are advanced to the bank by counterpartybanks. The non-derivative liability is carried at amortised cost.

3.14 Due to customers

Due to customers are non-derivative liabilities to individuals, state or corporate customers and arecarried at amortized cost.

3.15 Borrowings

Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings aresubsequently stated at amortized cost. Any interest or fee related to the borrowed funds is expensedusing the effective interest method and presented in the profit and loss for the period.

Borrowing costs that are directly attributable to the acquisition, construction or production of aqualifying asset are recognised as part of the cost of that asset. All other borrowing costs arerecognised as an expense in the period in which they were incurred.



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3.16 Taxation

Current income tax is calculated based on the income tax regulations applicable in Kosovo, using taxrates enacted at the balance sheet date. Effective from January 1, 2010, the tax rate on corporateincome is set at 10% in accordance with Kosovo tax regulations currently in force, Law no. 03/L-162“On Corporate Income Tax”.

The income tax charge in the profit and loss for the year comprises current tax and changes in deferredtax. Current tax is calculated on the basis of the expected taxable profit for the year using the tax ratesenforced or substantially enacted at the balance sheet date. Taxable profit differs from profit asreported in the profit and loss because it excludes items of income or expense that are taxable ordeductible in other years and it further excludes items that are never taxable or deductible. Taxes otherthan income taxes are recorded within operating expenses.

Deferred income tax is accounted for using the balance sheet liability method for temporarydifferences arising between the tax base of assets and liabilities and their carrying amounts forfinancial reporting purposes. Deferred tax assets are recognised to the extent that it is probable thatfuture taxable profit will be available against which the temporary differences can be utilised.Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefitwill be realised.

Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the periodwhen the asset is realised or the liability is settled based on tax rates that have been enacted orsubstantively enacted at the balance sheet date. Deferred tax assets and liabilities are offset when thereis legally enforceable right to set off current tax assets against tax liabilities and when they relate toincome taxes levied by the same taxation authority.



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3.17 Off-balance sheet commitments and contingencies

In the ordinary course of its business, the Bank has entered into off-balance sheet commitments suchas guarantees, commitments to extend credit and letters of credit and transactions with financialinstruments. The provision for losses on commitments and contingent liabilities is maintained at alevel adequate to absorb probable future losses. Management determines the adequacy of the provisionbased upon reviews of individual items, recent loss experience, current economic conditions, the riskcharacteristics of the various categories of transactions and other pertinent factors.

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

Financial guarantees at the date of issue are recognised at fair value which is equal to the amount ofthe fee received. The fee is amortized to the profit and loss during the contract period using thestraight line method. The Bank’s liabilities under guarantees are subsequently measured at the greaterof: the initial measurement, less amortization calculated to recognize fee income over the period ofguarantee; or the best estimate of the expenditure required to settle the obligation.

Guarantee for completion - are contracts that require the issuer to make specified payments toreimburse the holder for a loss it incurs because a specified debtor fails to complete the work whendue, in accordance with the terms of contract.

Guarantees at the date of issue are recognised at fair value which is equal to the amount of the feereceived. The fee is amortized to the profit and loss during the contract period using the straight-linemethod. The Bank’s liabilities under guarantees are subsequently measured at the greater of:

• The initial measurement, less amortization calculated to recognize fee income over the periodof guarantee; or• The best estimate of the expenditure required to settle the obligation

3.18 Provisions

Provisions are recorded when the Bank has a present legal or constructive obligation as a result of pastevents and it is probable that an outflow of resources embodying economic benefits will be required tosettle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions aremeasured at the management’s best estimate of the expenditure required to settle the obligation at thebalance sheet date and are discounted to present value where the effect is material.

3.19 Employee benefits

The Bank pays contributions to the publicly administered pension plan (KPST) on a mandatory basis.The Bank has no further payment obligations once the contributions have been paid. The contributionsare recognized as employee benefit expense when they are due.

3.20 Operating leases

Payments made under operating leases are charged to expenses on a straight-line basis over the term ofthe lease. When an operating lease is terminated before the lease period has expired, any paymentrequired to be made to the lessor by way of penalty is recognized as an expense in the period in whichtermination takes place.



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3.21 Comparatives

Comparative figures have been adjusted in order to correct the mistakes from previous year and thefollowing adjustments have been made

Description2010 after the

change Description2010 beforethe change

Other assets 1,119 Other assets 1,029Non - current assets heldfor sale 90

The comparatives have been adjusted due to fact Non - current assets held for sale in amount of EUR90 have been reclassified on other assets. These assets were seized collateral that the bank intended todispose off.

3.22 Critical judgements in applying the accounting policies and key sources of estimationuncertainty

In the application of the Bank’s accounting policies, which are described in note 3, the management isrequired to make judgments, estimates and assumptions about the carrying amounts of assets andliabilities that are not readily apparent from other sources. The estimates and associated assumptionsare based on historical experience and other factors that are considered to be relevant. Actual resultsmay differ from these estimates. The estimates and underlying assumptions are reviewed on anongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate isrevised if the revision affects only that period or in the period of the revision and future periods if therevision affects both current and future periods .

a) Impairment of loans to customers

In determining, whether the loans to customers are impaired on individual basis requires theestimation of the present value of expected cash flows from loans to customers including amountsrecoverable from guarantees. The management of the Bank is using judgment in estimating expectedcash flow from the loans portfolio. Actual results may differ significantly. Key assumptions used inthe evaluation of client’s credit worthiness are based on the financial positions, profitability, marketshare, and the value of collateral. Similarly circumstances prevailing in the region of the client aretaken in to consideration, such as the court efficiency etc. Were the net present value of estimated cashflows to differ by +/-1%, the impairment loss would be estimated EUR 201 thousand lower or EUR201 thousand higher (2010: EUR 192 thousand).



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4. CASH ON HAND AND BALANCES WITH BANKS

December 31,2011

December 31,2010

Cash on hand 9,250 10,846Cash at banks – current accounts with correspondentbanks 11,077 5,557

Cash on hand and at banks 20,327 16,403

As at December 31, 2011 the current accounts amounting to Euro 11,077 thousand and are carryingvarying interest from 0.15% to 0.299%.

4.1 CASH AND CASH EQUIVALENTS

Cash and cash equivalents in the statement of cash flows comprise:

December 31,2011

December 31,2010

Cash on hand and at banks 20,327 16,403

Unrestricted balance with CBK 9,810 2,264

Deposits with maturity with less than 3 months (note 6) 92,171 88,605

Cash and cash equivalents 122,308 107,272

5. BALANCE WITH THE CENTRAL BANK OF KOSOVO

Balance with Central Bank of Kosovo (“CBK”) of Euro 21,872 thousand as at December 31, 2011 (asat December 31, 2010: Euro 26,049 thousand) represents the mandatory reserve under the CBKregulations. The CBK pays interest up to the whole amount of the minimum liquidity reserverequirement (as defined in note 3.6(iii)). During 2011 the interest was paid at the rate varying from0.1% and 0.6% per annum (2010: 0.1% p.a.). The restricted liquidity reserves balance with CBK isexcluded from cash and cash equivalents for the purpose of cash flow statement. The Central Bank ofKosovo does not possess external credit rating. The accrued interest as of December 31, 2011 is EUR4 thousand (2010: EUR 2 thousand) included in the total balance with CBK.



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6. LOANS AND ADVANCES TO BANKS

December 31,2011

December 31,2010

Term deposits 92,103 94,401

Other deposits - 83

Deposits at liquidated bank 742 780

Provision for impairment (742) (780)

Accrued interest 68 73

Total loans and advances to banks 92,171 94,557

Current 92,171 94,557

Deposits at liquidated bank represent the amount of deposits at Credit Bank of Prishtina which onMarch 13, 2006 went into liquidation following the withdrawal of license by CBK. During 2011, theBank has received an amount of Euro 38 thousand (2010: Euro 10 thousand).

Term deposits earned annual interest at the following rates varying between:

2011 2010

for Euro 0.15% to 1.85% for Euro 0.01% to 2.00%for USD 0.04% to 1.57% for USD 0.01% to 0.34%

for CHF 0.01% to 0.02%

As at December 31, 2011 included in the total term deposits are 7,166 thousand which are pledgedfunds for Trade Finance activities (December 31, 2010: EUR 5,796 thousand).



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7. LOANS AND ADVANCES TO CUSTOMERS

December 31,2011

December 31,2010

Loans to customers 172,833 159,480

Overdrafts 55,085 45,270

Credit cards 235 -

228,153 204,750

Provision for impairment on loans to customers (20,115) (19,204)

Total loans to customers 208,038 185,546

Current 64,307 95,203

Non-current 143,731 90,343

Overdraft facilities represent short term revolving facility and consumer loans.

As at December 31, 2011 Loans and advances to customers include accrued interest income of EUR1,060 thousand (31 December 2010: EUR 1,128 thousand).

The movement in the provision for impairment on loans to customers is as follows:

December 31,2011

December 31,2010

Provision for loan impairment at January 1 19,204 16,651

Charge during the year 1,142 2,553

Transfer to other liabilities (231) -

Provision for loan impairment at December 31 20,115 19,204

Impairment charge to profit and loss is detailed below:

December 31,2011

December 31,2010

Impairment charge for the year 1,265 2,553

Recovery of previously written off loans (123) -

Charge to profit and loss 1,142 2,553



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7. LOANS AND ADVANCES TO CUSTOMERS (CONTINUED)

December 31,2011

December 31,2010

Provision charged to individuals:

Housing loans 309 367Consumer loans (7) 18Other loans to individuals 203 120

505 505Provision charged to corporate entities:

Loans to legal entities

Loans to small and medium entities 551 1,911Loans to large entities 86 137

637 2,048

Total 1,142 2,553

An industry analysis of the gross portfolio of loans to corporate customers before provisions is asfollows:

December 31,2011

December 31,2010

%age %age

Trade and commerce 49 52

Services & Production 19 20

Construction 17 5

Other 15 23

100 100

As at December 31, 2011, the ten major borrowers accounted for 14.9% (2010: 12.8%) of the totalloan portfolio.



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7. LOANS AND ADVANCES TO CUSTOMERS (CONTINUED)

An analysis of the net balance of loans to customers at December 31, 2011 is as follows:

Loan category Period overdueProvision

rate applied

Outstandingprincipal

and accruedinterest

Provisionfor

impairmentNet

balance

Standard 0 – 30 days 1% 202,211 3,189 199,022

Watch 31 – 60 days 5% 1,363 70 1,293

Sub-standard 61 – 90 days 20% 11,489 4,353 7,136

Doubtful 91 – 180 days 50% 1,519 932 587

Loss Over 180 100% 11,571 11,571 -

Provision for guarantees 42,588 318 42,270

Loans to customers, net 270,741 20,433 250,308

An analysis of the net balance of loans to customers at December 31, 2010 is as follows:

Loan category Period overdueProvision

rate applied

Outstandingprincipal

and accruedinterest

Provisionfor

impairmentNet

balance

Standard 0 – 30 days 1% 178,661 2,427 176,234

Watch 31 – 60 days 5% 3,732 245 3,487

Sub-standard 61 – 90 days 20% 8,940 3,540 5,400

Doubtful 91 – 180 days 50% 1,724 1,001 723

Loss Over 180 100% 11,957 11,957 -

Provision for guarantees 38,224 235 37,989

Other provisions 65 65 -

Loans to customers, net 243,303 19,470 223,833

Based on Credit Risk Management Committee of the Bank, loan classification and provisioning forthe two first categories (standard and watch) is continuing to calculate at 1% and 5%. This is madebased on client’s historical experience.



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8. OTHER IMPAIRMENT LOSSES AND PROVISIONS

Impairment charge to profit and loss is detailed below.

December 31,2011

December 31,2010

Impairment charge for misappropriated funds 998 -

Impairment charge for seized assets (written off) 35 19

Provision for guarantees 29 -

Provisions for legal cases 185 -

Release of previous years provision (258) -

Charge to profit and loss 989 19

The impairment charge for misappropriate funds represents a fraud resulting from collusion betweenemployees in three branches Prizren (sub-branch Theranda), Gjilan and Prishtine. A claim has beensent to court for ex-employees due to such fraud. As of December 31, 2011 the misused amount isaround EUR 998 thousands. The bank is insured for “Employee dishonesty” at the “Sigkos” insurancecompany, which is re-insured at the Lloyds insurance company. The bank expects that in 2012 toclaim back such losses and such recoveries will recorded as income in the moment of recovery.

A provision for legal cases represents provisions for ex-employees of the bank. The appeal was heldon February 14, 2012 and filed on behalf of the plaintiff. The Municipal Court of Prishtina engagedthe court financial expert to evaluate the claim and based on this the legal department of the Bankbelieves the court will probably decide in favour of the plaintiff and therefore the Bank recognised aprovision of EUR 185 thousand.



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9. FINANCIAL ASSETS AVAILABLE FOR SALE

Financial assets available for sale of EUR 35,615thousand as at December 31, 2011 (2010: Euro21,402 thousand) represent government T bills (Dutch, Belgium and French) including debt securitiesissued by NLB Montenegro Bank and government of Slovenia. The government treasury discount billshave maturities ranging from January 19, 2012 to July 15, 2012 with yields ranging from 0.55% to1.161%. The bond of Slovenia amounts to EUR 10,000 thousand (2010: nill) yields an interest of1.14% and has a maturity until February 05, 2012. Whereas the bond of NLB Montenegro amountingof EUR 500 thousand has a maturity till November 22, 2013 with fixed interest rate of 6.5% p.a.Revaluation reserve as at December 31, 2011 is EUR 6 thousand (2010: EUR 10 thousand).

Out of the total investments, the bonds of EUR 15,000 thousand are pledged in favour of KosovoPension Savings Trust (KPST) for their deposit base with the Bank. This pledge serves as a security infavour of KPST for existing and future claims, if any, until all claims are settled.

10. OTHER ASSETS

December 31,2011

December 31,2010

Prepaid expenses 522 532

Seized collateral on irrecoverable loans - 90

Interest on deposits paid in advance 316 267

Other receivable 78 230

Total other assets 916 1,119

Current 916 1,119



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12. INTANGIBLE ASSETS

Software

Cost:

As at January 1, 2010 1,460

Additions 433

Write offs during the year (269)

As at December 31, 2010 1,624

Additions 171


Accumulated amortization:

As at January 1, 2010 1,202

Charge for the year 126

Write offs during the year (269)


Charge for the year 170


Net book value:

As at December 31, 2011 566

As at December 31, 2010 565

All intangible assets are acquired assets and are amortized during its useful life.

13. DUE TO BANKS

December 31,2011

December 31,2010

Current accounts 379 437

Term deposits - 250

Total due to banks 379 687

Current 379 687



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14. DUE TO CUSTOMERS

December 31,2011

December 31,2010

Demand Deposits

Enterprises 62,259 73,869

Citizens 55,717 51,030

Financial organizations 850 -

Governments 43 767

118,869 125,666

Term Deposits

Enterprises 47,268 36,375

Citizens 163,019 134,408

Financial organizations 1,205 -

211,492 170,783

Total due to customers 330,361 296,449

Current 280,155 261,757

Non-Current 50,206 34,692

As at 31 December 2011, customer accounts include accrued interest expense of EUR 4,429 thousand (31December 2010: EUR 3,659 thousand).

Analysis by class of business for term deposits and current accounts is as follows:

December 31, 2011 December 31, 2010

Sector % of total due tocustomers

% of total due tocustomers

Individuals 66% 63%Enterprises and other legal entities 34% 37%

100% 100%



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15. OTHER FINANCIAL LIABILITIES

December 31,2011

December 31,2010

Accrued expenses 240 363

Due to suppliers 258 50

Pending clients transfers 3,286 2,035

Deferred disbursement fee 1,417 1,463

Total other financial liabilities 5,201 3,911

Current 5,201 3,911

Pending client’s transfers represents the payments collected on behalf of third parties through the clearingsystem, which remained unpaid to the intended recipients at the year end. In this amount is included amountof EUR 2,478 thousands (2010: EUR 1,332 thousands) payable to customs authorities, which wastransferred on January 01, 2012 to the customs authorities bank account. The remaining balance representsamounts payable to other recipients.

16. OTHER LIABILITIES

December 31,2011

December 31,2010

Withholding tax payable 167 105

Pension and tax payable on payroll 77 78

VAT and other tax payable 296 259

Provisions for guarantees 318 -

Other payables 247 446

Provisions for legal cases 185 -

Total other liabilities 1,290 888

Current 1,290 888



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17. BORROWINGS

December 31,2011

December 31,2010

Current portionEFSE loan 1 48 48EFSE loan 2 326 252EFSE loan 3 - -EFSE loan 4 2,448 -European Bank for Reconstruction and Development - 2,424Nova Ljubljanska Banka (NLB) Slovenia 1,005 996

3,827 3,720

Non- current portionEFSE loan 1 180 225EFSE loan 2 625 937EFSE loan 4 7,500 10,000European Bank for Reconstruction and Development - 500Nova Ljubljanska Banka (NLB) Slovenia 500 1,500

8,805 13,162

Total borrowings 12,632 16,882

Loan 1 from EFSEThe Bank inherited this loan from NLB New Bank of Kosova, which was signed with Kreditanstalt furWiederaufbau Frankfurt (KfW) under a Framework agreement dated April 26, 2006 for a total loan of Euro450 thousand for the purpose of obtaining loans from European Funds for Kosovo (EFK). The loan carriesinterest at the rate of 3% plus 6 months EURIBOR and is repayable on bi-annual instalments basis. Theloan matures on September 30, 2016. KfW is managing the EFK which has been funded by EuropeanAgency for Reconstruction (EAR) and the purpose of the fund is to refinance sub-loans to borrowers inKosovo for housing activities and small and medium enterprises (SME) and according to the criteriaestablished by EFK.

Loans 2 &3 from EFSEBased on the Framework agreements, the loan agreements were signed between EFSE and NLB-New Bankof Kosova and EFSE and NLB-Kasabank for EUR 2,500 thousand and EUR 1,000 thousand, respectively.The loans bear interest at the rate of 6 month EURIBOR plus 4% p.a and 3% respectively. These loans ofEUR 2,500 will be repaid in equal consecutive semi-annual instalments with maturity date of September 30,2014, while loan of EUR 1,000 is already matured and fully repaid by the Bank by December 31, 2010.

Loan 4 from EFSEPursuant to a framework agreement dated October 12, 2010 and under an Individual Loan Agreement, theBank obtained a loan of EUR 10,000 thousand from EFSE. This loan is repayable on semi –annualinstalment basis with first instalment starting from June 15, 2012 and last instalment on December 15,2015. The loan carries interest of EURIBOR plus 4% margin and is secured by a soft letter of comfort byNLB d.d.



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17. BORROWINGS (CONTINUED)

Loans from EBRDThe Bank entered into a loan agreement (”Agreement”) with European Bank for Reconstruction andDevelopment (EBRD) on May 19, 2005 and November 14, 2006 amended and restated September 9, 2009.According to the Agreement, the Bank agrees to borrow from EBRD an amount Euro 2,000 thousandrelated to Ex KSB plus Euro 3,000 thousand related Ex BRK, carrying interest in principal amount of eachdisbursement from the time to time outstanding every six months at a rate equal to 6 months EURIBORplus 4.5% p.a. Based on the amendment of Agreement, from September 9,2009, the margin shall be 3.8%p.a. plus 6 months EURIBOR, adjusted from time to time after the Bank has fulfilled the condition set forthin the agreement. During 2009, the Bank obtained three more tranches of loans totaling to Euro 3,000thousand with maturity dates varying from November 25, 2010 to January 8, 2012.

Loan from NLBThe Bank entered into an agreement with NLB dated June 18, 2008 for a loan amount of Euro 5,000thousand. The loan carries interest as EURIBOR plus 2.25% p.a and is repayable in ten (10) equalconsecutive semi-annual instalments, where the last instalment will be due on June 24, 2013.

18. SHARE CAPITAL


Authorised share capital

42,739 Ordinary shares at par value of EUR 479.61 each 20,498 20,498

Paid up share capital

42,739 Ordinary shares at par value of EUR 479.61 each 20,498 20,498

All shares have rights to dividends and carry equal voting rights. There are no restrictions attached to theshares. A summary of share ownership of the Bank after merger is as follows:



39

18. SHARE CAPITAL (CONTINUED)

ShareholdersPercentageownership

December31, 2011

Percentageownership

December31, 2010

Nova Ljubljanska Banka d.d 81.21 16,647 81.21 16,647

NPQ"LESNA"Sh.p.k. - - 4.35 892

Agjencioni I Turizmit " MCM" 4.63 949 4.63 949Mr. Hashim Deshishku 2.48 508 - -

Mr.Rizah Deshishku 1.24 254 0.36 74

Mr. Bashkim Deshishku 1.24 254 0.35 72

Mr.Remzi Ejupi 1.16 238 1.16 238

Mr.Nerimane Ejupi 1.22 250 1.22 250

Mr.Naim Ejupi 1.21 248 1.21 248

Mr.Metush Deshishku 0.9 185 0.8 164

"Dardania" - 2" Sh.p.k. 0.63 129 0.63 129

Ndërmarrje Tregtare "Vam - Trade" 0.6 124 0.6 124

NPTSh"Jehona" 0.6 123 0.6 123

Mr.Blerina Ejupi 0.51 104 0.51 104

Others 2.36 485 2.36 484

100 20,498 100 20,498

In 2010 the Bank paid out dividends from profit gained in 2009, in accordance with the Decision on profitallocation in 2010 (EUR 56.6 per share), that is total amount of EUR 2,421 thousand. No dividend was paid in2011.



40

19. INTEREST INCOME

Year endedDecember 31, 2011


Income from loans and advances to customers 22,599 20,795Income on loans and advances to banks 941 416

Income from investment securities 44 40

Total interest income 23,584 21,251

Interest income includes 2011 EUR 827 thousand (2010: EUR 772 thousand) accrued on impaired financialassets.

20. INTEREST EXPENSE



Interest on term deposits 9,212 7,417Interest on saving deposits 1,001 807Interest on borrowed funds 824 495

Total interest expense 11,037 8,719

21. FEE AND COMMISSION INCOME



Disbursement fee 1,373 1,300

International payments 1,042 1,003

Domestic payments 645 612

Guarantees and letters of credit 1,181 1,100

Credit Cards 434 400

Account service fees 369 582

Account maintenance fee for retirees 565 350

Others 343 398

Total 5,952 5,745

Account maintenance fee from retirees represents fee income paid by the Ministry of Labour of Kosovo forretirees based on the Memorandum of Understanding concluded between the bank and Ministry of Labourof Kosovo for all retirees having a bank account with the Bank.



41

22. FEE AND COMMISSION EXPENSES



International payments 110 115

Domestic payments 49 50

Guarantees and Letters of Credit 202 200

Credit Card fees 195 200

Central bank fees 85 85

Other fees 10 35

Total 651 685

23. STAFF COSTS



Salaries and wages 4,580 4,656

Mandatory staff pension contributions 264 240

Other staff costs 315 373

Total staff costs 5,159 5,269



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24. ADMINISTRATIVE AND OTHER OPERATING EXPENSES


2011


2010

Charge for professional services 252 334

Marketing and sponsorship 275 308

Utilities 254 262

Representation 55 41

Travel 90 100

Maintenance 399 336

Office supplies 325 353

Security and insurance costs 1,072 1,130

Write off of fixed assets 30 64

Operating lease expenses 1,085 1,089

Telecommunications 313 353

ATM, Visa Card and E-Banking 303 204

Fuel (Generators and Cars) 141 108

Taxes and commissions 118 156

Fee for insurance of deposits 133 -

Others 65 247

Total Administrative and other operating expense 4,910 5,085



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25. INCOME TAX EXPENSES



Current income tax expense 811 388

Deferred tax expense/(credit) (227) 74

Tax expense 584 462

Detailed below is the calculation of current income tax expense.



Profit before taxation 5,018 4,484

Add: expenses not deductible for tax purposes 3,947 43

Less: accelerated expenses allowable for tax purpose (856) (643)

Taxable profit for the year 8,109 3,884

Profit tax expense at 10% 811 388

Included in expenses not deductible for tax purposes are interest expenses on deposits in amount of EUR2,624 thousand which are not allowed for tax purposes until the related withholding tax is paid to the taxauthorities. These expenses will be allowable expenses for tax purposes at the moment when withholdingtax on interest is deducted, which is the date when the deposits contracts will mature. This is based on thedecision issued by the Tax Authorities of Kosovo, dated December 7, 2011.



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25. INCOME TAX EXPENSE (CONTINUED)



Profit for the year before taxation 5,018 4,484

Profit tax on profit at the rate of 10% 502 448

Tax effect of expenses not deductible for tax purposes 395 4

Tax effect of deductable expenses (86) (3)

Impact of deferred tax (227) 13

Tax expense 584 462

Effective from January 1, 2010, the tax rate on corporate income is set at 10% in accordance with Kosovotax regulations currently in force, Law no. 03/L-162 “On Corporate Income Tax”.

Movement of current tax receivable is as follows.


Current income tax liability at January 1, 202 179Income tax expense (811) (388)Income tax expense paid during the year 514 424Payable to tax authorities related to previous years - (13)

Current income tax (liability)/ receivableat December 31, (95) 202



45

25. INCOME TAX EXPENSE (CONTINUED)

Deferred tax asset has been recognised as follows:


Property, plant and equipment and intangible assets 762 1,460Interest expense on deposits 2,624 -Other expenses 348 -

Total deductible temporary difference 3,734 1,460

Total net deferred tax asset @ 10% 373 146

The movement in the deferred tax asset account is as follows:


Deferred tax asset as at January 1, 146 185Deferred tax charge 227 (74)Prior year adjustment - 35

Deferred tax asset as at December 31,373 146

26. OTHER COMPREHENSIVE INCOME



Gain on change of fair value of AFS securities - 68Loss on change of fair value of AFS securities (16) (67)

Credit/Debit to other comprehensive income (16) 1



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27. RELATED PARTY DISCLOSURES

In determination of related parties Bank applies IAS 24 requirements. Related parties include:

The parties which directly, or indirectly through one or more intermediaries, control, or arecontrolled by, or are under common control with the entity,Parties in which the Bank has an interest that gives it significant influence or joint control over theentity,private individuals who directly or indirectly have voting power in the Bank that gives themsignificant influence over the Bank, and entities controlled or jointly controlled by such individuals,members of the key management personnel, i.e. individuals with authority andresponsibilities for planning, managing and controlling the Bank’s operations, includingdirectors.When taking into account each possible transaction with a related party, attention isfocused on the substance of the relationship not just the legal form.

The Bank is controlled by Nova Ljubljanska Banka d.d. Ljubljana incorporated in Slovenia (Parent), whichowns 81.21% of the ordinary shares as at 31 December 2011 (31 December 2010: 81.21% ordinary shares).The remaining shares are held by other small shareholders (18.79 %).

The Bank performs a number of related party transactions in the course of its regular operations. Thetransactions include investments, deposits, borrowings, and foreign currency transactions. Thesetransactions were carried out on normal commercial terms and market prices.

The Bank entered into an agreement with NLB dd Ljublana dated June 18, 2008 for a loan amount of Euro5,000 thousand. The loan carries interest as EURIBOR plus 2.25% p.a and is repayable in ten (10) equalconsecutive semi-annual instalments, where last instalment will be due on June 24, 2013. The outstandingbalance as of 31 December 2011 is EUR 1,500 thousand (2010: EUR 2,500 thousand).



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27. RELATED PARTY DISCLOSURES (CONTINUED)

The following table summarizes the scope of related party transactions, balances of assets and liabilities at31 December 2011 and related income and expenses for the year then ended.

December 31, 2011NLB d.d.

Ljubljana

NLBTutunska

BankaNLB

MontenegroNLB

Leasing

LHBInternational

Handelsbank,

Keymanagement

personnel Total

Receivables

Loans and advances tobanks 2,463 1,687 103 - 372 - 4,625Loans and advances tocustomers - - - - - 34 34Securities - - 505 - - - 505Other receivables - - - 1 - - 1

Total Receivables 2,463 1,687 608 1 372 34 5,165

Liabilities

Deposits - - - - - 1,148 1,148Borrowings 1,500 - - - - - 1,500Other liabilities 23 - - 9 - - 32

Total Liabilities 1,523 - - 9 - 1,148 2680

NetReceivables/(Liabilities) 940 1,687 608 (8) 372 (1,114) (2,485)

Confirmed guarantees 8,840 4,064 - - - - 12,904

IncomeInterest income 1 5 33 - - 53 92Fees - - - - - - -Foreign exchange gain 418 - - - - - 418

Total Income 419 5 33 53 510

ExpensesInterest expenses (84) - - - - - (84)Fee expenses (113) (5) - - - - (118)Foreign exchange loss (281) - - - - - (281)Salaries rents and otherexpenses (163) - - (17) - (318) (498)

Total Expenses (641) (5) - (17) - (318) (981)

Net income/(expense) (222) - 33 (17) - (265) (471)

On February 13, 2009 the Bank issued two cash covered Guarantees on behalf of ECO TRADE and infavour of KEK (Kosovo Energy Corporation) as follows: Advance Payment Guarantee G0008/2464 forEuro 14,995 thousand reduced to Euro 2,690 thousand under several amendments and PerformanceGuarantee G0008/2463 for Euro 5,000 thousands valid until 13.03.2013. Both guarantees are confirmed byNLB d.d. as security for the capital investment project “Refurbishment of the belt Conveyers (1,800mm)for Overburden Systems II and III” in KEK.



48


On January 13, 2010 NLB d.d. issued payment guarantee on behalf of Exclusive sh.p.k.in favour of KRKA,based on our counter-guarantee, for EUR 1,000 thousand for supply of pharmaceutical products. Theguarantee is covered with collateral and expires on March 31, 2013.

On June 17, 2011 NLB d.d. issued payment guarantee on behalf of Intercoop Group in favour of Eta,Slovenija, based on our counter-guarantee, for EUR 50 thousand for supply of food products. The guaranteeis covered with collateral and expires on June 17, 2012.

On November30, 2011 NLB d.d. issued payment guarantee on behalf of Inter Eminex in favour of Pinar,Diary, Turkey, based on our counter-guarantee, for EUR 100 thousand for supply of meat and milkproducts. The guarantee is covered with collateral and expires on 26.11.2012.

All guarantees are confirmed by NLB d.d.

Below are guarantees issued by NLB Tutunska Banka:

On June 11, 2008 NLB Tutunska Banka issued payment guarantee for USD 1,500 thousand (EUR 1,164thousand) on behalf of Hib Petroll shpk, in favour of OKTA, Skopje, based on our counter-guarantee, forsupply with oil. The guarantee is covered with collateral and expires on March 14, 2012.

On November 10, 2010 NLB Tutunska Banka issued payment guarantee for USD 1,400 thousand (EUR1,086 thousand) on behalf of Ex Fis shpk, in favour of OKTA, Skopje, based on our counter-guarantee, forsupply with oil. The guarantee is covered with collateral and expires on October 25, 2012.

On June 10, 2008 NLB Tutunska Banka issued payment guarantee for USD 800 thousand (EUR 621thousand) on behalf of Fitorja shpk, in favour of OKTA, Skopje, based on our counter-guarantee, for supplywith oil. The guarantee is covered with collateral and expires on March 29, 2012.

On July 20, 2009 NLB Tutunska Banka issued payment guarantee for USD 713 thousand (EUR 553thousand) on behalf of Al Pterol shpk, in favour of OKTA, Skopje, based on our counter-guarantee, forsupply with oil. The guarantee is covered with collateral and expires on May 09, 2012.

On June 17, 2010 NLB Tutunska Banka issued payment guarantee for USD 300 thousand (EUR 233thousand) on behalf of Al Petrol shpk, in favour of OKTA, Skopje, based on our counter-guarantee, forsupply with oil. The guarantee is covered with collateral and expires on May 17, 2012.

On December 17, 2010 NLB Tutunska Banka issued payment guarantee for USD 150 thousand (EUR 116thousand) on behalf of Racional Commerc shpk, in favour of OKTA, Skopje, based on our counter-guarantee, for supply with oil. The guarantee is covered with collateral and expires on December 02, 2012.

On February 15, 2008 NLB Tutunska Banka issued payment guarantee for USD 195 thousand (EUR 151thousand) on behalf of Ex Fis, in favour of OKTA, Skopje, based on our counter-guarantee, for supply withoil. The guarantee is covered with collateral and expires on October 25, 2012.



49


On August 17, 2011 Tutunska Banka issued payment guarantee for EUR 100 thousand on behalf of LimiPlast, in favour of TD Konti Hidroplast, based on our counter-guarantee, for supply with water supply andsewage pipes. The guarantee is covered with collateral and expires on January 14, 2012.

On April 12, 2010 NLB Tutunska Banka issued payment guarantee for EUR 30 thousand on behalf ofAgroprodukt, in favour of Rehau Dooel, based on our counter-guarantee, for supply with PVC Materials.The guarantee is covered with collateral and expires on April 08, 2012.

On May 25, 2011 NLB Tutunska Banka issued payment guarantee for EUR 10 thousand on behalf of LindiMedia Group, based on our counter-guarantee, for supply with water supply and sewage pipes. Theguarantee is covered with collateral and expires on August 7, 2012.

All guarantees are confirmed by NLB Tutunska Banka.



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The following table summarizes the scope of related party transactions, balances of assets and liabilities at31 December 2010 and related income and expenses for the year then ended.

December 31, 2010NLB d.d.

Ljubljana

NLBTutunska

BankaNLB

MontenegroNLB

Leasing

LHBInternational

Handelsbank,

Keymanagement

personnel TotalReceivables

Loans and advances tobanks 1,603 3,193 105 - 183 - 5,084Loans and advances tocustomers - - - - - 48 48Securities - - 503 - - - 503Other receivables - - - 2 - - 2

Total Receivables 1,603 3,193 608 2 183 48 5,637

Liabilities

Deposits - - - - - 480 480Borrowings 2,500 - - - - - 2,500Other liabilities 21 - - 16 - 37Total Liabilities 2,521 - - 16 - 480 3,017

NetReceivables/(Liabilities) (918) 3,193 608 (14) 183 (432) 2,620

Confirmed guarantees 11,198 50 - - - - 11,248

IncomeInterest income 45 3 43 - 5 1 97Fees - 1 - - - - 1Foreign exchange gain 427 - - - - - 427

Total Income 472 4 43 - 5 1 525

ExpensesInterest expenses (109) - - (1) - - (110)Fee expenses (177) (1) - - - - (178)Foreign exchange loss (263) - - - - - (263)Salaries rents and otherexpenses (168) - - (12) - (318) (498)Total Expenses (717) (1) - (13) - (318) (1,049)

Net income/(expense) (245) 3 43 (13) 5 (317) (524)

On February 13, 2009 the Bank issued the highest amount of cash covered Guarantees on behalf of ECOTRADE in favour of KEK (Kosovo Energy Corporation) as follows: Advance Payment Guarantee for Euro14,995 thousand reduced to Euro 4,398 thousand and extended until February 13, 2012 under severalamendments and Guarantee for completion for Euro 5,000 thousand valid until March 13, 2013. Bothguarantees are confirmed by NLB d.d. as security for the capital investment project “Refurbishment of thebelt Conveyers (1,800mm) for Overburden Systems II and III” in KEK.



51


On January 13, 2010 the Bank issued an International payment guarantee on behalf of Exclusive sh.p.k.infavour of KRKA, for EUR 1,000 thousand for supply of pharmaceutical products. The guarantee has thematurity on March 31, 2013. The guarantee is confirmed by NLB d.d and covered with collateral.

On March 09, 2009 the Bank issued a guarantee on behalf of Exclusive sh.p.k.in favour of Henkel, asfollows: International guarantee for EUR 800 thousand for supply of detergents and cosmetic products. Theguarantee has the maturity on March 31, 2011. The guarantee is confirmed by NLB d.d and covered withcollateral.

Key management Compensation


Year EndedDecember 31, 2010

ManagementBoard

ManagementBoard

Salaries 254 254

Costs refund 28 28

Bonus 36 36

Total 318 318



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28. OFF BALANCE SHEET, COMMITMENTS AND CONTINGENCIES

a. Guarantees and letters of credit

Credit related commitments include commitments to extend credit, letters of credit and guarantees given,which are designed to meet the requirements of the Bank’s customers. Letters of credit and guaranteesgiven to customers commit the Bank to make payments on behalf of customers contingent upon the failureof the customer to perform under the terms of the contract. Commitments to extend credit representcontractual commitments to make loans and revolving credits. Commitments generally have fixedexpiration dates, or other termination clauses. Since commitments may expire without being drawn upon,the total amounts do not necessarily represent cash requirements.

The aggregate outstanding amount of guarantees and letters of credit issued by the Bank are as follows:


Customs 7,884 5,643Guarantees for payments 19,225 17,794Public tenders guarantees 4,114 3,675Letters of Credit 300 338

31,523 27,450

Guarantees for completion of work 11,066 10,775

42,589 38,225

Committed loans to customers not yet issued 31,265 27,301

Total 73,854 65,526


Guarantees:

Secured

Secured by cash deposits 16,859 16,899Secured by other collateral 53,248 44,794

70,107 61,693

Unsecured 3,747 3,495

Total 73,854 65,188

On February 13, 2009 the Bank issued the highest amount of cash covered Guarantee on behalf of ECOTRADE in favour of KEK as follows: Advance Guarantee for Euro 14,995 thousand and PerformanceGuarantee for Euro 5,042 thousand. Both guarantees are confirmed by NLB dd.



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28. OFF BALANCE SHEET, COMMITMENTS AND CONTINGENCIES (CONTINUED)

b. Legal cases

From time to time and in the normal course of business, claims against the Bank may be received. On thebasis of its own estimates and both internal and external professional advice, management is of the opinionthat no material losses will be incurred in respect of claims, and accordingly no provision has been made inthese financial statements.

c. Operating lease commitments

The Bank has outstanding commitments under non-cancellable rental contracts which fall due as follows:


Within one year 1,152 1,151Within two to five years 2,969 2,986

Total 4,121 4,137

During 2010, the Bank signed a contract to build new headquarter for the Bank. Total contract amount isEuro 8.5 million, while as at December 31, 2011 Euro 2,634 thousand is already paid to the contractor.

29. EVENTS AFTER THE END OF THE REPORTING PERIOD

No material events subsequent to the date of the statement of financial position have occurred which requiredisclosure in the financial statements.



54

30. FAIR VALUES AND RISK MANAGEMENT

a. Capital Risk Management

The Bank manages its capital to ensure that the Bank will be able to continue as a going concern whilemaximising the return to shareholders through the optimisation of the debt and equity balance. The Bank’soverall strategy remains unchanged from 2009.

The capital structure of the Bank consists of debt, which includes the borrowings, and the equityattributable to equity holders, comprising paid up capital and retained earnings.

Tier I capital means a bank’s permissible permanent paid-in capital which may be comprised of anyor all of the following:

(i) common equity shares and their related surplus.(ii) perpetual preferred shares (being those which, in the event of liquidation of the bank, are not paid

any amounts until all depositors and other creditors have been fully addressed, but are paid in full,(preferred) before any common shareholder is paid and which have rights to agreed dividendpayments but which have no maturities or options of their holders to redeem).

(iii) such other instruments as may be approved by the Central Bank of Republic of Kosovo aspermissible permanent capital from time to time by rule or order.

(iv) earnings which have not been distributed.

Tier II capital INCLUDES A BANK’S:

(i) reserves for loan losses up to a maximum of 1.25 % of its risk weighted assets at any one time orsuch other percentage as may be established by the Central Bank of Republic of Kosovo from timeto time by rule or order.

(ii) ordinary preferred shares (being preferred shares which have maturities or are redeemable at theoption of their holders and which are cumulative (have the right to payment of past dividendsmissed ) if the bank has the option to defer payment of dividends.

(iii) term preferred shares (shares whose holders have the right to redeem them and which have terms of5 years or more). These shares are subject to approval as capital from time to time throughout theirterms by the Authority. The amount of long-term preferred shares (shares with maturities in excessof 10 years) eligible to be included in Tier II capital will be reduced by 20% of their originalamounts at the beginning of each of the last 5 years of their terms.

(iv) term debt instruments which are fully subordinated to the rights of depositors (those which, in theevent of liquidation of the bank, are not paid any amounts until all depositors have been paid. Theamount of long-term subordinated debt instruments (those with maturities in excess of ten years)eligible to be included in Tier II capital will be reduced by 20% of their original amounts at thebeginning of each of the last 5 years of the instrument’s life.

(v) debt instruments which are mandatorily convertible into common shares and which are unsecuredand fully paid-in.



55

30. FAIR VALUES AND RISK MANAGEMENT (CONTINUED)

a. Capital Risk Management (continued)

Minimum Risk-Based Capital Ratios

The bank maintains a minimum total capital to risk-weighted asset ratio of 12% and a Tier I capital to risk-weighted asset ratio of 8 % in accordance with the rule I on Capital Adequacy issued by the Central Bankof Republic of Kosovo.

i. A bank’s risk adjusted capital is obtained by dividing its capital base by its risk weighted assets.ii. The minimum ratio set forth above may be increased by the CBK by rule or order from time to time

December 31,2011

December 31,2010

Total capital to risk-weighted asset ratio 16.4% 16.3%

Tier I capital to risk- weighted asset ratio 9.5% 9.3%

As of reporting period, the capital adequacy ratios in accordance with CBK are as follows:

December 31,2011

December 31,2010

Tier 1 capitalShare capital 20,498 20,498Reserves (6) 10Retained earnings 16,464 12,030less: Intangible assets

Total qualifying Tier 1 capital 36,956 32,538

Tier 2 capitalSubordinated liabilityProvisions for loan losses (limited to 1.25% of RWA) 2,167 1,973

Total qualifying Tier 2 capital 2,167 1,973

Total regulatory capital 39,123 34,511

Risk-weighted assets:

On-balance sheet 211,585 190,491Off-balance sheet 26,029 21,325

Total risk-weighted assets 237,614 211,816

Tier I capital to risk- weighted asset ratio 9.5% 9.3%

Total capital to risk-weighted asset ratio 16.4% 16.3%



56


b. Categories of Financial Instruments

The table below is reconciliation of financial instruments classes to IAS39 measurement categories. As atthe year end the Bank has the following financial instruments:

31-Dec-11 31-Dec-10

Loans and advances

Cash and balances with Central bank 42,199 42,452

Loans and advances to banks 92,289 94,474

Loans and advances to customers 208,038 185,546

Financial assets available for sale 35,615 21,402

Total financial assets 378,141 343,874

Financial liabilities at amortized cost

Due to banks 379 687

Due to customers 330,361 296,449

Borrowings from banks 1,505 2,500

Borrowing from other financial institutions 11,127 14,382

Other financial liabilities 5,201 3,911

Total financial liabilities 348,573 317,929



57


c. Financial Risk Management Objectives

The Bank’s corporate treasury function provides services to the business, coordinates access to domesticand international financial markets, monitors and manages the financial risks relating to the operations ofthe Bank through internal risk reports which analyse exposures by degree and magnitude of risks. Theserisks include market risk (including currency risk, interest rate risk), credit risk and liquidity risk.

Compliance with policies and exposure limits is reviewed by the management committees and internalauditors on a continuous basis. The Bank does not enter into or trade significant derivative financialinstruments.

d. Market Risk

The Bank’s activities expose it primarily to the financial risks of changes in foreign currency exchangerates and interest rates. The market risk is not concentrated to currency risk or interest rate risk, as majortransactions of the Bank are in local currency and majority of the interest rates are fixed.

e. Foreign Currency Risk

The Policy on Management of the currency risk of NLB Prishtina, defines the methods of currency riskmanagement in the bank. The purpose of currency risk management policy is the management andlimitation of the potential loss, which is created as a result of changes on the foreign currency rates and,reflected on the business results and capital adequacy of the bank. The currency risk presents the probabilityof realizing the losses as per on balance and off balance sheet items, as a result of changes on the currencyrates and/or non-harmonization on the level of assets, liabilities and off balance items in the same currency.The Bank manages foreign currency risk through managing currency structure of assets and liabilities inline with expected changes in foreign currency rates. Foreign exchange rate risk is managed and governedaccording to the policies of the NLB group. As such NLB Prishtina continuously monitors exchange ratemovements and foreign currency markets, and determines its currency positions on a daily basis. Anyexception to the policy shall be subject of approval by the Supervisory Board of NLB Prishtina and the RiskManagement Department of NLB group. The bank and group policy forbids the bank to maintain opencurrency position for speculative purposes. Nevertheless, foreign exchange derivatives may be used forhedging purposes to close certain positions, in which case they are closely monitored at both local andgroup level.

The Bank undertakes transactions in both Euro and foreign currencies. The Bank has not entered intosignificant forward exchange or any embedded derivative transactions during the year ended December 31,2011 and 2010.

The Bank is exposed to currency risk through transactions in foreign currencies. As the currency in whichthe Bank presents its financial statements is Euro, the Bank’s financial statements are effected bymovements in the exchange rates between the Euro and other currencies.

The Bank’s transactional exposures give rise to foreign currency gains and losses that are recognized in theprofit and loss. These exposures comprise the monetary assets and monetary liabilities of the Bank that arenot denominated in the functional currency of the Bank.



58


f. Foreign Currency Risk (continued)

Foreign currency sensitivity analysis

The Bank is mainly exposed to US Dollar (USD) and Swiss Franc (CHF). The following table details theBank’s sensitivity to the respective increase and decrease in the value of Euro against the foreigncurrencies. The percentage used is the sensitivity rate used when reporting foreign currency risk internallyto key management personnel and represents management’s assessment of the reasonably possible changein foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominatedmonetary items and adjusts their translation at the period end for a respective change in foreign currencyrates. The Bank has applied a 10 basis points increase or decrease to the current currency exchange rates. Apositive number below indicates an increase in profit and other equity where the Euro strengthens withrespective percentages against the relevant currency.

+10% of Euro -10% of EuroDecember 31, 2011

Assets:Impact on cash and due from banks 1,588 (1,588)

Liabilities:Impact on due to banks and customers 1,564 (1,564)

Net impact on profit and loss and equity (24) 24

December 31, 2010

Assets:Impact on cash and due from banks 1,040 (1,040)

Liabilities:Impact on due to banks and customers 1,023 (1,023)

Net impact on profit and loss and equity (17) 17



59



The following table summarises the bank’s currency position as at December 31, 2011:

EURO USD CHF Others Total

Financial assets

Cash on hand and at banks 12,171 4,606 2,895 655 20,327

Balances with CBK 21,872 - - - 21,872

Due from banks 84,563 7,608 - - 92,171

Loans to customers – net 208,038 - - - 208,038

Financial assets available for sale 35,497 118 - - 35,615

Total assets 362,141 12,332 2,895 655 378,023

Financial liabilities

Due to banks 338 12 28 1 379

Due to customers 314,766 12,871 2,358 366 330,361

Borrowings 12,632 - - - 12,632

Other financial liabilities 5,201 - - - 5,201

Total liabilities 332,937 12,883 2,386 367 348,573

Net currency position as at December 31, 201129,204 (551) 509 288 29,450



60



The following table summarises the bank’s currency position as at December 31, 2010:

EURO USD CHF Others Total

Financial assets

Cash on hand and at banks 12,177 1,610 1,941 674 16,402

Balances with CBK 26,049 - - - 26,049

Due from other banks 88,382 6,175 94,557

Loans to customers – net 185,546 - - - 185,546

Financial assets available for sale 21,402 - - 21,402

Total assets 333,556 7,785 1,941 674 343,956


Due to banks 586 57 44 - 687

Due to customers 286,320 8,521 1,281 327 296,449

Borrowings 16,882 - - - 16,882

Other financial liabilities 3,911 - - - 3,911

Total liabilities 307,699 8,578 1,325 327 317,929

Net currency position as at December 31, 2010 25,857 (793) 616 347 26,027



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The table below summarizes the gross open currency position of the Bank as at December 31, 2011. As perNLB group policies, individual open currency position should not be more than 3% of equity at any specificpoint of time, while as per CBK requirements, open currency position for any single currency should not bemore than 30% of capital.

December 31, 2011Spot position Total

positionTotal

position Limit

Currency

Assets inoriginal

currency

Liabilitiesin original

currency Net in Euro% of

capital (% of capital)

3%USD 12,285 12,734 (449) (449) (1.2%)CHF 2,901 2,439 462 462 1.2%Others 655 357 298 298 0.8%

15,841 15,530 311 311 0.8% 3%

December 31, 20110Spot position Total

positionTotal

position Limit

Currency

Assets inoriginal

currency

Liabilitiesin original

currency Net in Euro% of

capital (% of capital)

3%

USD 10,521 11,462 (941) (704) (2.08%)CHF 2,427 1,657 770 616 1.82%

Others 3,498 315 3,183 343 1.01%

16,446 13,434 3,012 255 0.75% 3%

The exchange rates applied for principal currencies against the Euro were as follows:

December 31,2011

December 31,2010

United States Dollar (USD) 0.7758 0.7484

British Pound (GBP) 1.1971 1.1617

Swiss Franc (CHF) 0.8206 0.7997



62


g. Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in marketinterest rates and the risk that the maturities of interest bearing assets differ from the maturities of theinterest bearing liabilities used to fund those assets (re-pricing risk). The length of time for which the rate ofinterest is fixed on a financial instrument therefore indicates to what extent it is exposed to interest rate risk.The assets and customer term deposits of the bank carry fixed interest rates while borrowings are at variableinterest rate. The interest rates applicable to financial assets and liabilities are disclosed in relevant note tothese financial statements. Interest rate risk management policy of the bank defines the method ofidentification, measurement, following up and controlling the risk in the event of interest rate modification.The purpose of policy is management on the exposure to interest rate risk and limitation of potential loss,which is created as a result of modification of levels of interest rates in the market and the effect of thosechanges on business results and the market value of bank capital.

With the policy are defined methodologies of risk assessment from the interest rate:

Gap analysisBasis Point Value (“BPV”) methodology

The risk management department monitors exposure to interest-rate risk using the interest-rate gap analysismethodology. To that end, NLB Prishtina defines a set of input data that are based on cash flows byindividual time interval. The principle of residual maturity is applied to agreements with a fixed interestrate, while the interest rate repricing date is taken into account for agreements with a variable interest rate.

All balance sheet and off balance sheet positions which are sensitive to interest rate risk are classified in thebanking book and trading book. Positions are observed pursuant to these segments:

Interest rate sensitive positions in EurosInterest rate sensitive positions in other currencies (aggregate base and as per each currencyseverally)

At the current stage trading activities are not applicable for NLB Prishtina, as per required criteria of NLBGroup policies. As part of NLB group NLB Prishtina is subject to NLB policies and procedures.

The Bank is not obliged to calculate and meet capital requirements in respect of market risk provided thatthe following conditions are met simultaneously:

- the trading book business does not normally exceed 5% of its total business;- its total trading book positions do not normally exceed EUR 15 million; and- the trading book business never exceeds 6% of its total business and its total trading book

positions never exceed EUR 20 million.

Management believes that the Bank is not exposed to interest rate risk on its financial instruments exceptborrowings which are at variable interest rates. Funds and obligations which do not have definedmaturity (such as deposits due on demand) or which have variable maturities in relation withoriginal achievement specified with contract, are classified in the category as demand to depositsfor the purpose of gap analysis.



63


g. Interest rate risk (continue)

Interest rate risk management in the Bank’s book is carried out based on Gap analysis and Basis PointValue methodology.

Gap analysis relates to an interest rate risk measurement technique by means of which asset, liabilities andoff-balance sheet assets are categorized into corresponding time buckets by the earlier of contractual re-pricing (for instruments with floating interest rate) or maturity date (for instruments with fixed interestrate).

Assets and liabilities with no maturity date (e.g. on demand deposits) or with maturity dates which may bedifferent from the original maturity dates defined by the contracts are categorised into corresponding timebuckets based on the Bank’s estimate and considering its previous experience.

With a view to more adequate interest rate risk management and measurement, BPV (Basis Point Value)methodology is used, measuring the financial instruments’ sensitivity to changes of market interest rates.Based on this method, it is estimated how the position value will change if the market interest rates changeby +/- 200 basis points.

The main tool for management of interest rate exposure is gap analysis, i.e. gap analysis for interest bearingassets and liabilities. The Assets and Liabilities Committee (ALCO) based on the proposal suggested byexpert services, adopts the strategy of adjusting the assets and liabilities items based on the estimatedchanges in market interest rates.

Sensitivity analysis

Interest rate risk management is supplemented by monitoring the sensitivity of the Banks profit or loss andequity to various floating interest rate scenarios. The interest rate sensitivity analysis has been determinedbased on the exposure to interest rate risk at the reporting date. The analysis assumes a parallel increase ofinterest rates of 200 basis points (± 2%) on the level of net profit and equity.

Exposure to interest rate risk and its impact on the bank’s statement of changes in equity and profit and lossis measured through Basis Point Value methodology. Results presented bellow represent the changes inprofit and loss and equity, which would occur if interest rates will increase or decrease by 200 basis points.



64


g. Interest rate risk (continued)

Analysis of the sensitivity of profit or loss and equity to changes in interest rates is as follows:

Sensitivity of the profit and loss

Interest rate sensitivity 2011 2010

Increase in basic points

+200 bps parallel shift (253) (268)

Sensitivity of the profit and loss

Interest rate sensitivity 2011 2010

Decrease in basic points

-200 bps parallel shift 253 268

The impact as at December 31, 2011 on the fair value of AFS securities on equity if the movements ofinterest rates increase /decreased for 200bp , the results will change by Euro 712 thousands.(2010: EUR505).

Basis Point Value (BPV) results as at December 31, 2011 is 7.16% of capital (2010: 8.93 %).



67


h. Credit risk

The Bank is subject to credit risk through its lending activities and in cases where it acts as an intermediaryon behalf of customers or other third parties or issues guarantees. In this respect, the credit risk for the Bankstems from the possibility that different counterparties might default on their contractual obligations. Themanagement of the credit risk exposures to borrowers is conducted through regular analysis of theborrowers’ credit worthiness. Exposure to credit risk is also managed in part by obtaining collateral andguarantees.

The Bank’s primary exposure to credit risk arises through its loans and advances to customers. The amountof credit exposure in this regard is represented by the carrying amounts of the assets on the balance sheet. Inaddition, the Bank is exposed to off-balance sheet credit risk through guarantees issued.

Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist forcounterparties when they have similar economic characteristics that would cause their ability to meetcontractual obligations to be similarly affected by changes in economic or other conditions. The majorconcentrations of credit risk arise by type of customer in relation to the Bank’s loans and advances, andguarantees issued.

For subsequent measurement and impairment of assets the bank assesses whether objective evidence ofimpairment exists individually for financial assets that are individually significant, and individually orcollectively for financial assets that are not individually significant. If it is determined that no objectiveevidence of impairment exists for an individually assessed financial asset, whether significant or not, itincludes the asset in a group of financial assets with similar credit risk characteristics and collectivelyassesses them for impairment. Assets that are individually assessed for impairment and for which animpairment loss is or continues to be recognized are not included in a collective assessment of impairment.



68


h. Credit risk (continued)

a) Maximum exposure to credit risk:

As at December 31, 2011

31.12.2011

Gross Impairment Net Fair value

Maximum provision maximum of

Exposure exposure collateral

Cash and balances with central bank 42,199 - 42,199 -

Loans and advances to banks 92,913 (742) 92,171 -

Loans to individuals 71,295 (2,226) 69,069 165,060

Housing loans 48,168 (1,625) 46,543 128,792

Consumer loans 978 (88) 890 2,028

Other loans to individuals 22,149 (513) 21,636 34,240

Loans to legal entities 156,858 (17,889) 138,969 425,921

Loans to small and medium entities 141,202 (17,465) 123,737 391,013

Loans to large entities 15,656 (424) 15,232 34,908

Total loans and advances to customers 228,153 (20,115) 208,038 590,981

Financial assets available for sale 35,615 - 35,615 -

Letters of credit 300 - 300 -

Short-term guarantees 35,677 - 35,677 -

Long-term guarantees 6,612 - 6,612 -

Loan commitments 31,265 - 31,265 -

Contingent liabilities 73,854 - 73,854 -

All the financial assets are evaluated individually for impairment as prescribed by rule IX of theCentral Bank of Kosova.



69



a) Maximum exposure to credit risk(continued)

As at December 31, 2010

31.12.2010

Gross Impairment Net Fair value

maximum provision maximum of

exposure exposure collateral

Cash and balances with central bank 42,452 - 42,452 -

Loans and advances to banks 95,337 (780) 94,557 -

Loans to individuals 63,089 (1,717) 61,372 174,922

Housing loans 45,645 (1,314) 44,331 140,943

Consumer loans 989 (94) 895 2,808

Other loans to individuals 16,455 (309) 16,146 31,171

Loans to legal entities 141,661 (17,487) 124,174 394,816

Loans to small and medium entities 127,455 (17,150) 110,305 364,689

Loans to large entities 14,206 (337) 13,869 30,127

Total loans and advances to customers 204,750 (19,204) 185,546 569,738

Financial assets available for sale 21,402 - 21,402 -

Letters of credit 338 - 338 -

Short-term guarantees 32,044 - 32,044 -

Long-term guarantees 5,842 - 5,842 -

Other commitments and contingencies 27,301 - 27,301 -

Contingent liabilities 65,525 - 65,525 -



70



i. Loans and advances

Category A

All direct loans or facilities and off-balance sheet exposures of the bank that carry normal banking risk.Available information concerning the credit exposure, the performance of the customer’s account, and thefinancial data all indicate that the settlement of the exposure is reasonably certain without difficulties, (orthe obligation is fully secured by eligible collateral). Similarly within A graded clients/exposures are alldirect loans or facilities and off-balance sheet exposures of the bank which are risk free. Exposures whichhave as collateral cash deposit or a guarantee issued by a bank which has an external credit rating of graterthe BBB, grade evaluated by Moody’s or S&P credit rating agencies.

Category B- Watch

Special Attention (or Watch) - This classification is used to identify and monitor exposures which containweaknesses or potential weaknesses that, at the time of review, do not jeopardize the repayment of thecredit or reflect a potential for loss, but which, if not addressed or corrected could result in the deteriorationof the credit to a substandard or more severe classification. Absent any documented evidence to thecontrary, the bank classifies as “special attention” those exposures that are overdue more than 30 days butless than 60 days or those with continuous indebtedness in excess of 5% of approved lines for more than 30days but less than 60 days. This category of classification is intended to identify and address potentiallyweak relationships at an early stage.

Category C-Substandard

Substandard - Exposures which, based upon a review of all factors attendant to the credit, have well definedcredit weaknesses that jeopardize repayment of the credit in the normal course. A substandard credit is onewhich, by an analysis of financial data and other factors, is not currently protected by the sound worth andpaying capacity of the borrower or guarantors or the value of the collateral, if any. Recourse to aresponsible and able guarantor for repayment that would involve prolonged negotiations before liquidationof the credit would invoke a substandard classification. The need for recourse to the collateral as the meansof satisfying the obligation also would be the basis for a substandard classification. Absent any documentedevidence to the contrary, an exposure is classified at least substandard if any of the following criteria apply:

(a) If deposits/cash flows into the customer’s overdraft account are insufficient to liquidate the outstandingbalance within 60 days from the expiration date of the facility.

(b) If the customer exceeded the authorized limit of the facility by 5% or more for over 60 days withoutpaying this excess or without bank management formally raising the authorized limit.

(c) If the customer is overdue in repaying contractual instalments (including interest) for over 60 days.

(d) If the maturity of the loan or facility is over 60 days past due without repayment.



71



i. Loans and advances (continued)

The financial effect of collateral as of 31 December 2011 is presented below:

Loans tolarge

corporatecustomers

Loans tosmall and

mediumsize

enterprisesCreditcards

Loansfor

housesand flats

Consumerloans

Otherloans Total

Loanscollateralized by:- residential real

estate - - - 23,420 80 333 23,833

- other real estate 15,623 122,781 - - - - 138,404

- cash deposits 4,488 - - 80 - 7,577 12,145

- other assets 11,832 - - 24,205 885 13,751 50,673

Total 31,943 122,781 - 47,705 965 21,661 225,055

Unsecuredexposures - 1,657 234 89 11 77 2,068

Total loans andadvances tocustomers 31,943 124,438 234 47,794 976 21,738 227,123



72




The financial effect of collateral as of 31 December 2010 is presented below:

Loans tolarge

corporatecustomers

Loans tosmall and

mediumsize

enterprisesCreditcards

Loansfor

housesand flats

Consumer loans

Otherloans Total

Loans collateralizedby:- residential realestate - - - 24,213 102 - 24,315

- other real estate 14,160 110,062 - - - 315 124,537

- cash deposits - 3,749 - 89 - 6,238 10,076

- other assets 11 11,287 - 20,902 873 9,695 42,768

Total 14,171 125,098 - 45,204 975 16,248 201,696

Unsecured exposures - 1,822 - 46 10 164 2,042

Total loans andadvances tocustomers 14,171 126,920 - 45,250 985 16,412 203,738

The effect of collateral at 31 December 2011:

Over-collateralized Under-collateralized

assets assets

Carrying valueof the assets

Fair value ofcollateral



Loans to individuals 51,073 158,689 17,909 6,371Credit cards

Loans for houses and flats 38,677 126,080 7,960 2,712Consumer loans 458 1,869 435 159Other loans 11,938 30,740 9,514 3,500Loans to large corporate customers 14,873 34,566 353 342Loans to small and medium sizeenterprises 119,877 388,320 3,659 2,693

Total 185,823 581,575 21,921 9,406



73




The effect of collateral at 31 December 2010:

Over-collateralized Under-collateralized

assets assetsCarrying

value of theassets



Fair valueof collateral

Loans to individuals 54,012 171,353 7,237 3,569Credit cards

Loans for houses and flats 42,092 139,912 2,155 1,031Consumer loans 733 2,708 160 100Other loans 11,187 28,733 4,922 2,438Loans to large corporate customers 13,716 30,127 - -Loans to small and medium sizeenterprises 108,336 362,437 2,466 2,252

Total 176,064 563,917 9,703 5,821

The collaterals taken in consideration for the mitigation of the credit risk consists of immoveable propertiessuch as land and buildings and pledge on moveable properties such as stocks and any other moveableproperty which could be converted in to liquid assets on an arm's length transaction. As prescribed by thecredit policy the exposure of the Bank should be covered at least 100% in correlation with the market valueof the collateral. Risk free items include loans covered by cash or any other easily converted asset into liquidassets in an arms’ length transaction, as defined by the Credit risk management policy of the Bank and theCBK Rule II.

Collateral security is taken into consideration in the impairment loss calculation process. The fair marketand liquidation values of the collateral are documented by a current appraisal made by a competent party.The Bank’s ability to access and liquidate the collateral within a reasonable period also is considered.Within the collaterals are included movable and immovable properties of the counterparties, in order tocover the exposure towards the credit risk and the risk of failure to repay the loan.



74


j. Financial assets available for sale

The table below presents the whole portfolio of debt securities, and their credit grade assigned by Moody’sor Fitch credit rating agencies:

December 31, 2011

RatingsAvailable for sale

financial assetsTotal

AAA 8,129 8,129AA+ 16,522 16,522AA- 10,340 10,340

Not-rated 624 624

Total 35,615 35,615

December 31, 2010

Ratings Available for sale financial assets Total

AAA 11,941 11,941

AA+ 8,969 8,969

Not-rated 492 492

Total 21,402 21,402



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k. Loans and advances to banks

Loans and advances to banks are neither past due not impaired and are granted without collateral. Tablebelow presents current account and time deposits with corresponding banks (also refer to note 4 and note6).The table below presents credit grade assigned by Moody’s or Fitch credit rating agencies:

December 31, 2011

Ratings Current accounts Deposits with banks

Long term Ratings

A- - 7,012

A+ 516 26,497

A1 7,190 18,717

AA- - 7,003

BAA1 2,566 13,504

BB - 3,000

BB- - 7,008

BBB 53 900

Not rated 752 8,530

Total 11,077 92,171

December 31, 2010

Lon term Ratings Current accounts Deposits with banks

A 1,893 26,800

A- 215 18,300

A+ 752 19,343

AAA 1 6,500

BBB 1,040 -

BBB- 1 6,500

Not rated 1,655 17,114

Total 5,557 94,557



76


k. Loans and advances to banks (continued)

Not Rated December 31, 2011 Current accounts Deposits with banks

Long term Ratings

Local bank 47 6,000

Member of NLB Group 58 2,529

Other bank (International banks) 647 -

Total 752 8,529

Not Rated December 31, 2010Currentaccounts

Deposits with banks

Long term Ratings

Local bank 813 4,700

Member of NLB Group 662 3,831

Other bank (International banks) 180 8,583

Total 1,655 17,114



77

30. FAIRVALUES AND RISK MANAGEMENT (CONTINUED)

l. Concentrations

The following table breaks down the Bank’s main credit exposure at their net amounts, as categorized bythe industry sectors of our counterparties.

As of December 31, 2011 and 2010, an analysis of loans to customers and banks by industry sectors was asfollows:

Industry concentration


Net loans % Net loans %

Banks 103,248 33% 100,030 35%

Citizens 69,069 22% 61,372 21%

Electricity, gas, water 1 - 61 -

Construction industry 25,414 8% 20,549 7%

Industry 12,118 4% 15,328 5%

Agriculture 226 - 337 -

Services 29,854 10% 26,795 9%

Hospitality 1,942 1% 1,528 1%

Transport and communications 2,646 1% 2,824 1%

Trading 66,768 21% 56,752 20%

Total 311,286 100% 285,576 100%



78


m. Liquidity risk

Liquidity risk arises in the general funding of the Bank’s activities and in the management of positions. Itincludes both the risk of being unable to fund assets at appropriate maturity and rates and the risk of beingunable to liquidate an asset at a reasonable price and in an appropriate time frame to meet the liabilityobligations. The Bank monitors its liquidity on a daily basis in order to manage its obligations as and whenthey fall due.

Funds are raised using a broad range of instruments including deposits, borrowings and share capital. Thisenhances funding flexibility, limits dependence on any one source of funds and generally lowers the cost offunds. The Bank makes its best efforts to maintain a balance between continuity of funding and flexibilitythrough the use of liabilities with a range of maturities. The Bank continually assesses liquidity risk byidentifying and monitoring changes in funding required for meeting business goals and targets set in termsof the overall Bank strategy. In addition the Bank holds a portfolio of liquid assets as part of its liquidityrisk management strategy. The amount disclosed in tables below is contractual undiscounted cash flows.

December 31, 2011

On demandand less than

one month

One monthto threemonths

Threemonths to

twelvemonths

One yearto fiveyears

Fiveyears

onwardTotal

Financial assetsCash on hand and atbanks 20,327 - - - - 20,327

Balances with the CBK 21,872 - - - - 21,872

Due from other banks 68 92,103 - - - 92,171

Loans to customers net 20,478 23,601 82,312 107,985 8,267 242,643

Financial assets availablefor sale 520 22,014 12,582 500 - 35,616

Total financial assets 63,265 137,718 94,894 108,485 8,267 412,629


Customer accounts 129,319 52,995 109,886 55,469 347,669

Borrowings - 159 4,079 9,374 13,612

Other financial liabilities 5,201 - - - - 5,201

Loan Commitments 20,558 10,707 - - - 31,265

Financial guarantees 31,521 - - - - 31,521

Total financial liabilities 186,599 63,861 113,965 64,843 429,268

Liquidity gap as atDecember 31, 2011 (123,334) 73,857 (19,071) 43,642 8,267 (16,639)



79


m. Liquidity risk (continued)

December 31, 2010

On demandand less than

one month

One monthto threemonths

Threemonths to

twelvemonths

One yearto fiveyears

Fiveyears

onwardTotal

Financial assetsCash on hand and atbanks 16,403 - - - - 16,403

Balances with the CBK 26,049 - - - - 26,049

Due from other banks 58,557 36,000 - - - 94,557

Loans to customers net 19,187 24,570 77,216 98,980 5,845 225,798

Financial assets availablefor sale 86 - 20,816 500 - 21,402

Total financial assets 120,282 60,570 98,032 99,480 5,845 384,209


Customer accounts 151,303 25,327 95,692 39,048 - 311,370

Borrowings 691 190 3,085 13,738 - 17,704

Other financial liabilities 3,911 - - - - 3,911

Loan Commitments 21,657 5,644 - - - 27,301

Financial guarantees 27,413 - - - - 27,413

Total financial liabilities 204,975 31,161 98,777 52,786 - 387,699

Liquidity gap as atDecember 31, 2011 (84,693) 29,409 (745) 46,694 5,845 (3,490)



80


n. Fair value of financial instruments

(a) Fair values of financial instruments carried at amortised cost

Fair value represents the amount at which an asset could be replaced or a liability settled on an arm’s lengthbasis. Fair values have been based on management assumptions according to the profile of the asset andliability base.

The following table summarizes the carrying amounts and fair values to those financial assets and liabilitiesnot presented on the statement of financial position at their fair value.

31 December 2011 31 December 2010

Carryingamount

Fair value Carryingamount

Fair value

Loans and advances to banks 103,248 103,248 100,114 100,114

Loans and advances to customers 208,038 221,404 185,546 186,552

Due to banks 379 379 687 687

Due to customers 330,361 326,446 296,449 296,270

Borrowing 12,632 12,632 16,882 16,882

Other financial liabilities 5,201 5,201 3,911 3,911

Loans to banks

Loans and advances to other banks comprise inter-bank placements. The fair value of placements andovernight deposits is their carrying amount due to their short-term nature.

Loans to customers

Loans to customers in the balance sheet are presented in net amount, i.e. net of allowances for impairment.For the purpose of calculating the fair value, the Bank used discounted cash flow method. Thus, thecalculation is based on contractual cash flows. Credit risk of individual clients is taken into considerationthrough the expected impairment.

Deposits and borrowings

The estimated fair value of deposits and borrowings is based on discounted contractual cash flows, takinginto consideration market interest rates, which would have been payable by the Bank in need of replacingthe old sources with the new ones of equal remaining maturity.



81


n. Fair value of financial instruments (continued)

b) Analysis by fair value hierarchy of financial instruments carried at fair value

The Bank measures fair values using the following fair value hierarchy that reflects the significance of theinputs used in making the measurements:

a) Level 1: Quoted market price (unadjusted) in an active market for an identical instrument

b) Level 2: Valuation techniques based on observable inputs other than quoted prices, either directly(i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valuedusing: quoted market prices in active markets for similar instruments; quoted prices for identical orsimilar instruments in markets that are considered less than active; or other valuation techniqueswhere all significant inputs are directly or indirectly observable from market data.

c) Level 3: Valuation techniques using significant unobservable inputs. This category includes allinstruments where the valuation technique includes inputs not based on observable data and theunobservable inputs have a significant effect on the instrument’s valuation. This category includesinstruments that are valued based on quoted prices for similar instruments where significantunobservable adjustments or assumptions are required to reflect differences between theinstruments.



82


n. Fair value of financial instruments (continued)

The following table shows the distribution of fair values over the different fair value hierarchies.

December 31, 2011:

Total FairValue Level 1 Level 2 Level 3

Financial Assets

Available for sale financial assets 35,615 35,115 500 -

Total 35,615 35,115 500 -

December 31, 2010:

Total FairValue Level 1 Level 2 Level 3

Financial Assets

Available for sale financial assets 21,402 20,995 407 -

Total 21,402 20,995 407 -

The availability of observable market prices and model inputs reduces the need for management judgmentand estimation and also reduces the uncertainty associated with determination of fair values. Theavailability of observable market prices and inputs varies depending on the products and markets and isprone to changes based on specific events and general conditions in the future markets.

nlb prishtina sh.a. financial statements prepared in...

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