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9 1. CORPORATE INFORMATION Univerzal banka a.d. Beograd (hereinafter referred as to 'the Bank') was established in Until 1997 the Bank operated under the name Mesovita banka "Asi banka" a.d. Beograd. The Bank is registered for providing all types of banking services in the Republic of Serbia. The Bank is registered to provide a wide range of banking services associated with deposit, loan, cash, guarantees, foreign currency, foreign exchange, issue and deposit, clearing and settlement activities in accordance with the Law, activities of mediation in trade with securities, purchase and collection of receivables and other banking and financial activities in accordance with the Law on banks. The Bank's headquarter is in Belgrade, 29 Francuska St. The Bank's identification number is The Bank's tax identification number is As of 31 December 2010 the Bank had 475 employees (2009: 469 employees). The Bank comprises 16 branches and 51 sub-branches. 2. ACCOUNTING POLICIES 2.1. Basis of preparation and presentation of the financial statements The financial statements have been prepared in accordance with the accounting regulations in the Republic of Serbia. Financial statements for 2010 for all obligators shall be submitted within the timeframe and manner specified by the Law on Accounting and Auditing, the Law on Amending Accounting and Auditing Law and other legislation. Changes made in connection with the submission of financial statements and consolidating the status registers and the register of financial statements in one institution - the Agency, and public disclosure of financial statements on the Agency s website has been done to comply with the EU practice, and the EU Directive and Art. 47. and 48 IV of the EU. Banks, stock exchanges and broker dealers, insurance companies, pension funds and companies managing pension funds, companies managing investment funds submit financial statements on forms specific prescribed for that particular group Significant accounting judgments and estimates In the process of applying the Bank's accounting policies, management has used its judgments and made estimates in determining the amounts recognized in the financial statements. The most significant use of judgments and estimates are as follows: 1) Fair value of financial instruments In the Republic of Serbia does not exist sufficient market experience, stability and liquidity for the purchase and sale of loans and other financial assets and liabilities, and the official information is not readily available. Therefore, fair value may not be reliably determined in the absence of an active market, as required by IAS / IFRS. 7

10 2) Losses on impairment of loans The Bank s management considers the loans and placements as of financial reporting date in order to estimate whether it is necessary to recognize impairment losses in the income statement. Assessment of impairment of loans and other placements that are in terms of IAS / IFRS may be regarded as financial instruments, the Bank is determines individually for each placement, or financial instrument applying discounting method of expected future flows to their present value. The amount of loss determined by discounting, the Bank is determines as the difference between the reported nominal value of assets and the net value of expected future cash flows. Determined loss (provision), the Bank records in its books against expenses. The amount of estimated reserve for potential losses from guarantees and other off-balance sheet items is recorded against income statement and discloses as a liability in the balance sheet. 3) Impairment of equity investments and other securities available for sale Securities available for sale (equity investments and other securities available for sale) are stated at cost less provision, or at market value, whichever is lower. Securities for which there is no active market are carried at recoverable value. The Bank considers equity investments and other securities available for sale impaired when there is a significant or prolonged decrease in the fair value of these assets below their cost or when there are other objective evidence of impairment. The Bank s management are weighed what is considered significant or prolonged decrease in the fair value. In addition, the Bank estimates other factors, such as oscillations in the stock market. 4) Deferred tax assets The Bank recognizes deferred tax assets arising from unused tax losses and transferable tax credits to the extent that it is probable that the level of expected future taxable profit will allow transferable unused tax credits and unused transferable tax losses are used. 5) Long-term employee benefits Liabilities and costs of long-term employee benefits are determined using actuarial valuation. Actuarial valuation involves assumptions about discount rates, future wage increases, staff departures and mortality rates. Due to the long-term nature of these obligations, their estimates are subject to significant uncertainty. The Bank does not have its own pension funds or options to pay employees in the form of shares and the identified obligations. For retirement benefits, the Bank has booked adequate provisions. 2.3 Summary of significant accounting policies The most important accounting policies used in preparation of the financial statements are as follows: (1) Foreign currency translation Foreign currency transactions are translated into dinars at the official exchange rate of the National Bank of Serbia, prevailing at the transaction date. 8

11 Receivables and assets denominated in foreign currencies, at the balance sheet date, are translated into dinars at official middle exchange rate of the National Bank of Serbia prevailing at the balance sheet date. Exchange rate differences originating from foreign currency translation, as well as from translation of monetary assets and liabilities denominated in foreign currency, are taken to "Foreign exchange gains and losses" in the income statement. Contingencies and commitments denominated in foreign currency are translated into dinars at the official middle exchange rate of the National Bank of Serbia prevailing at the balance sheet date. (2) Financial instruments (i) Date of initial recognition Purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place are recognized on the trade date, i.e. the date that the Bank commits to receive or transfer the assets. (ii) Initial recognition of financial instruments The classification of financial instruments at initial recognition depends on the purpose for which the financial instruments were acquired and their characteristics. All financial instruments are measured at their fair value plus any directly attributable costs of acquisition or issue, except in the case of securities and other placements held for trading. (iii) Derivatives Derivatives are measured at fair value and recorded as assets when fair value is positive, or liabilities, if their fair value is negative. Changes in fair value of derivatives are recognized in the income statement. Derivatives embedded in other financial instruments are specifically identified and treated as separate derivatives and measured at fair value, if their economic characteristics and risks are not closely related to the economic characteristics and risks of the parent contract and if the parent contract is not hold for trading and stated at fair value. (iv) Securities and other investments held for trading Securities and other investments held for trading comprise all financial instruments held for trading and derivatives that are recognized in the balance sheet at fair value. Changes in fair value are recognized in the income statement. Interest and dividend income from on these instruments are recognized in interest income and income from dividends in accordance with the defined contractual terms, or when the right to receive the dividend.... If negative effects, or decrease in the value of securities available for sale (mostly stocks), do not represent a permanent impairment, but fluctuations from extraordinary circumstances which caused the fall in stock prices and consequently, impairment losses on impairment of securities available for sale are not transferred to the income statement, but are included within the balance sheet as a deduction from capital. 9

12 (v) Financial liabilities held for trading The Bank has no financial liabilities held for trading. (vi) Financial assets or financial liabilities designated at fair value through income statement The management did not classify financial instruments, on initial recognition, into the category of the financial assets or liabilities recorded at fair value through profit or loss. (vii) Gains on first day When the transaction price in inactive market is different than the fair value based on other current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Bank immediately recognized a difference between the transaction price and fair value (gain on the first day) in the income statement. In cases where the use of data that are comparable to market information, the difference between the transaction price and the value determined using the model is recognized in the income statement when the input parameters become comparable with market information, or when the instrument is derecognised. (viii) Investments in securities held-to-maturity Securities held-to-maturity are those which carry fixed or determinable payments and have fixed maturities and which the Bank has the intention and ability to hold to maturity. After initial measurement, investments in securities held-tomaturity are measured at amortized cost which is calculated by taking into account any discount or premium on acquisition, less allowance for impairment. Fees which are part of the effective income from these instruments are accrued and recorded as deferrals in the income statement during the useful life of the instrument. (ix) Securities acquired under repo transactions with the National Bank of Serbia The securities acquired by the Bank purchase from National Bank of Serbia, with a contractual obligation to their resell, on the basis of the Framework Agreement on the sale of securities with the obligation to purchase such securities, on the balance sheet measured at depreciated cost. (x) Due from banks and loans to customers Loans are stated at the balance sheet at the amount of approved loan, deducted by repaid principal and a provision that is based on an estimate of the value of particular risks identified for individual investments and risks to that experience shows that are contained in the portfolio. In assessing the risks the Bank s management is applied internally adopted methodology as disclosed in Note Provisions and Provisions for uncollectible receivables. In 2010 the Bank calculated the provision as the difference between the receivable of principal and interest showed in records and amount of receivable that can be collected, calculated as the present value of expected cash flows, discounted using the effective interest rate, in accordance with IAS 39- Financial Instruments: Recognition and Measurement The Bank s management asses credit risk, or allowance for impairment losses on the basis of individual assessments of risky loans. Expected cash flow is estimated by taking into account the regularity of the payment, the financial situation of the debtor and the quality of collateral. 10

13 Thus calculated provision of balance sheet assets and provisions for losses on off-balance sheet items are booked as expenses of the Bank. Specific reserve for potential losses is estimated in accordance with regulations of the National Bank of Serbia. Loans, deposits and other exposure is classified in category A, B, C, D, and D, in accordance with the evaluation of collectibility of loans and other investments, depending on the number of days the level of overdue payments ar e in arrears, the financial position of the client and quality of collaterals. The difference amount of specific reserves for potential losses calculated in accordance with the National Bank of Serbia on the classification of balance sheet assets and off-balance and the amount of correction of balance sheet assets and provision for off balance sheet items, which were calculated at the internal methodology is distinguished from retained earnings. Write-offs of uncollectible receivables is based on court decisions, settlement of interested parties or based on decisions of the Management Board. (xi) Determination of fair value The fair value of financial instruments traded in active markets at the balance sheet date is based on their quoted market price, without any deduction for transaction costs. For all other financial instruments not listed in an active market, the fair value is determined u sing appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable price exist and other relevant valuation models. (xii) Financial assets impairment The Bank assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred "loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Investments in securities held-to-maturity For held-to-maturity investments the Bank assesses individually whether there is objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows. The carrying amount of the asset is reduced and the amount of the loss is recognized in the income statement. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, any amounts formerly recognized is reduced and the effects are recognized in the income statement. 11

14 Investment in shares and other available-far-sale investments For investment in shares and other available-for-sale investments, the Bank assesses at each balance sheet date whether there is objective evidence that an investment or a group of investments is impaired. In the case of other legal entities' equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss-measured as the difference between the acquisition cost and the current fair values, less any impairment loss on that investment previously recognized in the income statement- is removed from equity and recognized in the income statement. Impairment losses on equity investments are not reversed through the income statement; increases in their fair value after impairment are recognized directly in equity. Allowance for impairment of investments in shares that are not listed on the active market and whose value cannot be determined with certainty, is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows and recognized in the income statement and not reversed until derecognition. In the case of debt instruments that are classified as available for sale, impairment is assessed on the same criteria as financial assets carried at amortized cost. If, in a subsequent year, the fair value of the debt instrument increases and if this growth can be related objectively to an event occurring after the impairment loss recognized in the income statement, the impairment loss is reversed in the income statement. (xi) Renegotiated loans When possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan's original effective interest rate. (xii) Offsetting financial assets and liabilities Financial assets and liabilities are offset and the net amount reported in the balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. (xv) Hedge accounting The Bank does not use hedge accounting. (3) Lease Consideration of whether a particular contract is lease or contains a lease element is based on the essence of the contract and requires an assessment of whether fulfilment of the contract depends on the use of a specific asset or group of assets and whether the contract involves the transfer of rights to use assets. The Bank does not have a contract that can be regarded as leasing contracts. 12

15 (4) Recognition of income and expenses Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be measured. (i) Interest and similar interest and expense For all financial instruments measured at amortized cost and interest bearing financial instruments classified as available-for-sale financial instruments, interest income or expense is recorded using the effective interest rate. The calculation of the effective interest rate takes into account all contractual terms of the financial instrument. (ii) Fee and commission income The Bank earns fee and commission income from a diverse range of services it provides to its customers. Commission income may be classified into two categories: (iii) Fee for services provided at the appropriate time Fees received for rendering services during a specified period are deferred during this period. (iv) Fee income from certain performances Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria. (v) Dividend income Dividend income is recognized when the bank's right to receive the payment is established. (vi) Rental income Rental income related to investment property and recognized evenly over the lease period and disclosed in the income statement within other operating income. (5) Cash and cash equivalents For purpose of the cash flows statement, "Cash and cash equivalents" include cash and balances on gyro and current accounts held with other banks and funds to the bank account and other funds. (6) Property and equipment Property and equipment are stated at cost, excluding daily maintenance expenses, less accumulated depreciation and accumulated allowance for impairment. Depreciation is calculated using the straight-line method to write down the cost of property and equipment to their residual value over their useful lives. The estimated useful lives are as follows: 13

16 Buildings Computer equipment Other equipment up to 77 years from 3 to 5 years from 6 to 14 years Changes in expected useful life of assets are considered as changes in accounting estimations. Any item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in "Other operating income" or "Other operating expenses/revenues" in the income statement in the year the asset is derecognized. (7) Investment Property The bank holds a property as an investment with a view to rental income and / or increase the property value. The Bank applies the same accounting treatment for investment property as well as other property. (8) Intangible assets Intangible assets are carried at cost less accumulated amortization and accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the income statement in the "Other operating income". Amortization is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful lives as follows: Software licences from 3 to 5 years Other intangible assets from 3 to 5 years (9) Impairment of non-financial assets The Bank assesses at each reporting date if events or changes in circumstances indicate that the carrying value may be impaired, whether there is an indication that non-financial asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Bank makes an estimate of the assets' recoverable amount. Where the carrying amount of an asset (or group of asset, cash-generating units) exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. 14

17 (10) Financial guarantees The Bank gives financial guarantees, consisting of payable and performance guarantees, letters of credit, acceptances and other warranties. Financial guarantees are initially recognized in the balance sheet at fair value, upon fee inflow from financial guarantee approval. Subsequent to initial recognition, the bank's liability under each guarantee is measured at the higher of the amortized premium and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating the financial guarantees is taken to the income statement in "Expenses in indirect placements write-off and provisions". The premium received is recognized in the income statement in "Fees and commission income" on a straight-line basis over the life of the guarantee. (11) Employees benefits Defined benefit plan The Bank's calculates and pays contributions for pension and health insurance and contributions for unemployment insurance at the rates prescribed by the law on the basis of the gross salaries. The contributions expenses are recognized in the income statement in the same period as appropriate salary expenses. The Bank has no further liabilities for contributions in this respect. Long-term benefits to employees In accordance with Labour Law there is a mandatory retirement indemnity equal to 3 gross monthly salaries, based on the average salary in the Republic of Serbia in the month prior to retirement. Expenses and liabilities for these plans are not provided by funds. Liabilities from the benefits and related expenses are recognized at future cash flows present value using actuarial valuation using the projected cost unit method. Actuarial gains and losses and expenses of previous services rendered are recognized in the income statement when incurred. (12) Provisions Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. (13) Income tax Current tax Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Current tax relating to items recognized directly in equity is also recognized in equity. 15

18 Income tax represents the amount of tax calculated using tax rates of 10% on the profit before tax, after deduction of the effects of permanent differences that the prescribed tax rate reduced to an effective tax rate. The final amount of liabilities for income taxes determined by applying the statutory income tax rate on the tax base established Tax returns. Law on Profit Tax of the Republic of Serbia does not allow any tax losses in the current period to be used to recover taxes paid in previous periods. However, losses of the items reported in the income tax can be used to reduce the tax base in future periods, but not more than five years. Deferred tax Deferred tax is provided on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Applicable tax rate on the balance sheet date or the tax rates that are after that date in effect, are used to determine deferred income tax expense. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax receivables are recognized for all deductible temporary differences and the effects of tax losses and tax credits, which can be used in future fiscal periods, to the extent that is likely to be taxable profits from which are transferred tax losses and credits can be utilized. Taxes and contributions independent of the results Taxes and contributions independent of the results include property taxes, taxes and contributions paid by employers, as well as other taxes and contributions in accordance with the republic, tax and general regulations. These taxes and contributions are included in other operating expenses. Funds managed on behalf of third parties Funds managed on behalf of third parties, managed by the Bank for a fee, are included in the balance sheet. Fair value The financial statements are prepared on a historical cost basis, including adjustments and provisions made to reduce assets to their recoverable amounts. Policy of the Bank is to disclose information about the fair value of assets and liabilities for which published market information that is obtained on the basis of alternative valuation techniques and are readily significantly different from book value. As Management beleives, amounts in the financial statements reflect the real value in the circumstances the most accurate and useful financial reporting in accordance with the Law on Accounting and Auditing of the Republic of Serbia and National Bank of Serbia regulations governing financial reporting of banks. (14) Comparative data Reclassification of comparative data was done, when it was necessary, for the purpose of reconciliation with the current year presentation. 16

19 3. INTEREST INCOME AND EXPENSES Interest income 3,846,416 3,964,279 Other banks 56,778 53,388 National Bank of Serbia 473, ,718 Corporate 2,970,164 3,068,758 Public sector 57,542 22,819 Retail sector 135, ,488 Other customers 2,005 32,955 Securities 150, ,153 Interest expenses 1,725,742 1,858,051 Other banks 294, ,595 Corporate 959,167 1,060,502 Public sector 26,946 67,886 Retail sector 411, ,517 Foreign entities 692 6,678 Other customers 33,459 33,873 Net interest income 2,120,674 2,106,228 Interest income and expenses according to financial instruments classes: Interest income 3,846,416 3,964,279 Cash and short-term assets 51,853 78,393 Deposits with the National Bank of Serbia 421, ,325 Due from banks 56,778 53,388 Placements to customers 3,029,627 3,124,532 Securities held-to-maturity 150, ,153 Other-retail 135, ,488 Interest expenses 1,725,742 1,858,051 Deposits with other banks 294, ,595 Deposits to customers 1,019,572 1,162,261 Retail sector 411, ,195 Net interest income 2,120,674 2,106,228 17

20 4. FEE AND COMMISSION INCOME AND EXPENSES Fee and commission income 487, ,870 Domestic clearing and settlement 247, ,377 Foreign clearing and settlement ,198 Sales and purchase of foreign currencies 45,858 67,338 Credit cards operations 23,118 17,954 Guarantees and other off-balance sheet items 84,834 65,094 Funds managed on behalf of third parties 47,485 44,472 Other fees and commissions 38,646 11,437 Fee and commission expenses 37,370 34,431 Domestic clearing and settlement 15,074 16,849 Foreign clearing and settlement 2,356 2,756 Sales and purchase of foreign currencies 4,766 3,550 Credit cards operations - - Fees and commissions for brokers Other fees and commission 14,886 10,545 Net fee and commission income 450, , NET FOREIGN EXCHANGE LOSSES Foreign exchange gains 2,292,394 1,773,760 Foreign exchange losses 2,881,865 1,964,051 Net foreign exchange losses (589,471) (190,291) 6. DIVIDENDS AND INVESTMENTS INCOME Total income from dividends and investments 4, Income from equity investments Income from dividends 4,707-18

21 7. OTHER OPERATING INCOME Other operating income and refund of legal fees Gains from sales of fixed assets and received asset ,124 Reversals of allowances for impairment 2, Collected insurance premiums - 34,019 Other income 6,499 2,952 Total other operating income 8,993 61, LOSSES ON IMPAIRMENT AND PROVISIONS Releases of allowances for impairment losses: 1,466,830 1,651,811 On-balance sheet items 1,174,253 1,548,472 Off-balance sheet items 222, ,460 Income from collected suspended interest 70,538 1,879 Losses on contingent liabilities 2,041,428 2,463,394 On-balance sheet items 1830,409 2,300,179 Off-balance sheet items 187, ,437 Provision for retirement benefits 840 4,096 Expenses from interest suspension 22,415 21,682 Loss on impairment and provisions, net 574, , OPERATING AND OTHER EXPENSES Material costs 53,604 63,712 Production cots 272, ,070 Non-material costs 229, ,201 Tax duties 32,284 17,346 Contribution costs 116, ,450 Other 32,327 17,286 Losses on disposal of fixed and intangible assets 9,888 1,083 Subsequently determined interest expenses - enforced collection 34, ,261 Total operating and other expenses 780, ,409 19

22 10. COST OF SALARIES, FRINGE BENEFITS AND OTHER PERSONAL EXPENSES Net salaries Troškovi neto zarada i naknada 502, ,887 Tax and contributions payable 80,298 79,234 Tax and contributions payable 112, ,331 Other staff costs 37,432 42,270 Total costs of salaries, fringe benefits and other personal expenses 733, , INCOME FROM CHANGES IN VALUE OF ASSETS AND LIABILITIES Income from changes in value of loans and advances 1,105, ,103 Income from changes in value of other assets Total income from changes in value of assets and liabilities 1,105, , EXPENSES FROM CHANGES IN VALUE OF ASSETS AND LIABILITIES Expenses from changes in value of placements 497, ,344 Expenses from changes in value of securities Total expenses from changes in value of assets and liabilities 498, , INCOME TAX Deferred income tax relating to amounts recorded directly in the equity are as follows: Deferred tax benefit recorded in/against equity (2,788) (68) Total deferred tax benefit recorded in/against equity (2,788) (68) 20

23 14. EARNINGS PER SHARE Basic earnings per share are calculated as follows: annual net gains or losses, which can be attributed to the owners of the Bank's ordinary shares, is divided by weighted average number of ordinary shares that were in circulation during the period. Diluted earnings per share is calculated by dividing the annual net gain or loss that is attributable to owners of the Bank's ordinary shares (after adjusting for interest on convertible preferred shares and interest on convertible bonds, not including tax), divided by the weighted average number of ordinary shares that were outstanding during the period and increase by the weighted average number of ordinary shares that would result from the conversion of all potential ordinary shares. The Bank does not need to calculate the diluted earnings per share, given that its share capital consists exclusively of ordinary shares. The following table shows information related to income and number of shares, which were used in the calculations of basic earnings per share: Net gains or losses, which can be attributed to the owners of the Bank's ordinary shares Net gains or losses, which can be attributed to the owners of the Bank's ordinary shares adjusted for the effects of convertible financial instruments CASH AND CASH EQUIVALENTS In dinars 2,203,115 3,286,149 Gyro account Žiro račun 1,629,919 2,429,033 Cash on hand Gotovina u blagajni 264, ,116 Blagajnički zapisi Trezora 309, ,000 In foreign currencies 2,330, ,392 Accounts with domestic banks 15,844 10,044 Accounts with foreign banks 2,180, ,222 Cash on hand in foreign currencies 133, ,126 Balance at 31 December 4,533,173 3,614,541 21

24 16. CALLABLE DEPOSITS AND CREDITS In dinars 4,306,142 5,620,439 Repo placements with the National Bank of Serbia 3,606,142 5,620,439 Other cash assets 700,000 - In foreign currency 3,613,259 2,936,175 Obligatory reserve in foreign currency 3,612,936 2,935,467 Callable deposits Balance at 31 December 7,919,401 8,556, INTEREST, FEES AND COMMISSIONS RECEIVABLES In dinars 657, ,038 Other banks National Bank of Serbia 1,555 1,879 Corporate 641, ,007 Public sector Retail sector 13,525 11,999 Other customers 74 9,692 In foreign currency 19,130 20,985 Corporate 19,130 20,985 Allowance for impairment (173,745) (118,694) Balance at 31 December 503, ,329 22

25 18. LOANS, ADVANCES AND DEPOSITS Shortterm Longterm Short- Longterm Total term Total In dinars -Banking sector 100, , , ,975 -Corporate 15,535,897 2,117,656 17,653,553 13,401,619 2,270,049 15,671,668 -Retail 238,786 1,103,771 1,342, , , ,574 -Public sector ,611 23, ,466 18,466 -Foreign entities Total in dinars 15,875,222 3,244,038 19,119,260 14,604,761 3,037,922 17,642,683 In foreign currency - Banking sector 317, , Corporate 224, , , , ,531 - Retail Public sector Foreign banks 548, , , ,368 Total in foreign currency 1,091, ,302 1,557,350 1,304, ,304,858 Total placements 16,966,270 3,710,340 20,676,610 15,909,617 3,037,922 18,947,541 Allowance for impairment: (1,854,321) (1,353,518) Balance at 31 December 18,822,289 17,594, EQUITY INVESTMENT In dinars -banks 2,062 2,062 - corporate 15,100 10,393 Total in dinars 17,162 12,615 In foreign currency -banks 3,193 3,311 Balance at 31 December 20,355 15,766 23

26 20. OTHER LENDING In dinars 507, ,085 - Receivables for the amounts paid by the Bank on the basis of issued guarantees 500, ,207 - Other placements 7,414 19,878 In foreign currency 545, ,595 - Receivables for the amounts paid by the Bank on the basis of issued guarantees 518, ,244 - Other placements 27,600 14,351 Allowances for impairment (207,442) (206,487) Balance at 31 December 846, ,193 VISA-CARD and DINA-CARD credit card placements in 2009 are reclassified from other placements to other loans 21. SECURITIES In dinars Securities avaliable for sale 23, Securities held to maturity 582, ,279 Blagajnički zapisi Trezora 319,640 60,000 Deviation from nominal value (86) (44) Allowances for impairment (44,172) (24,646) Balance at 31 December 881, ,054 24

27 22. PROPERTY, PLANT AND EQUIPMENT, INVESTMENT PROPERTY AND INTANGIBLE ASSETS Changes in fixed assets, investment property and intangible asset are: Land and buildings Equipme nt Total fixed assets Investment property Intangible assets Cost Opening balance 431, , ,910 78,170 Aditions ,317 48,749 14,295 Disposals 19,006 30, ,049 Other Balance at the end of the year 413, , ,431 79,416 Accumulated depreciation and impairment Stanje na početku godine 34, , ,389 14,183 Aditions 5,557 77,344 82,901 14,620 Disposals 1,381 27,289 28,670 5,803 Balance at the end of the year 38, , ,619 23,000 Net book value 31 December , , ,812 56, December , , ,521 63,987 The Bank has no buildings under mortgage in order to secure loan liabilities repayment. As of 31 December 2010 net present value was comprised mostly of computer and telecommunication equipment, office furniture and motor vehicles. 25

28 23. OTHER ASSETS Receivables from employees 10,014 9,265 Receivables for corporate tax prepayment, except income tax Advances placed 2, Other receivables from business relationships 47,863 66,803 Stock 2,941 2,461 Tangibles received from collection of receivables 699,560 10,918 Other assets - income tax prepayment receivables 62,780 80,735 Accrued expenses for calculated interest: - in dinars 45,282 6,732 - in foreign currency 1,097 Other accruals: - in dinars - u dinarima 17,434 8,115 Total other assets and accruals 889, ,039 Allowance for impairment (45,728) (40,550) Balance at 31 December 843, , TRANSACTION DEPOSITS In dinars 2,942,522 2,995,659 Banking sector 144, ,638 Public entities 545, ,400 Corporate 2,034,426 1,985,786 Public sector 30,236 - Retail 188, ,582 Foreign entities In foreign currency 760, ,171 Banking sector 35,388 32,612 Public entities 49,600 26,624 Corporate 454, ,494 Retail 135, ,798 Foreign entities 85,528 35,653 Balance at 31 December 3,702,955 3,706,830 26

29 25. OTHER DEPOSITS Shortterm Longterm Short- Longterm Total term Total In dinars 10,569, ,731 10,795,326 11,464,729 73,034 11,537,763 Banking sector 1,677,857-1,677,857 2,882,288-2,882,288 Public utilities 1,524,603 7,511 1,532,114 1,520,000 1,000 1,521,000 Corporate 6,867, ,571 7,072,158 6,365,223 70,039 6,435,262 Public sector 428,751 13, , ,751 1, ,731 Retail 70,789-70, , ,486 Foreign entities ,997-11,997 In foreign currencies 12,904, ,454 13,191,110 8,563, ,620 9,124,981 Banking sector 701, ,826 1,322,389-1,322,388 Public utilities 2,177,576-2,177,576 1,285,459-1,285,459 Corporate 784,053 48, , ,461 18, ,497 Public sector Retail 8,172, ,986 8,410,490 4,906, ,584 5,449,886 Foreign banks 1,002,233-1,002, Foreign entities 66, , ,751 Balance at 31 December 23,474, ,185 23,986,436 20,028, ,654 20,662, BORROWINGS In dinars 59,941 93,395 Liabilities for student loans 57,562 90,342 Other liabilities 2,379 3,053 In foreign currency 37,982 27,961 Liabilities for student loans 36,184 27,402 Liabilities for student loans 1, Balance at 31 December 97, , INTEREST, FEES AND COMMISSIONS PAYABLE Interest payables 69,342 24,050 Banking sector 13,416 4,227 Public utilities 16,990 3,107 Corporate 37,561 16,245 Public sector 1, Fees payable Balance at 31 December 69,444 24,050 27

30 28. TAX DUTIES Tax on interest payable on individuals' savings accounts VAT duties Taxes and contributions 812 Balance at 31 December 1, LIABILITIES FROM PROFIT Dividends 6,332 6,475 Balance at 31 December 6,332 6, PROVISIONS Provisions for losses on guaranties 67,228 92,270 Provisions for losses on acceptances Provisions for long-term employee benefits 22,235 23,124 Balance at 31 December 89, , OTHER LIABILITIES AND DEFFERALS In dinars 537, ,744 Liabilities to suppliers 40,789 62,912 Liabilities for student loans 261, ,660 Liabilities for deposits for incorporation 2,170 1,830 Liabilities for other corporate deposits 7,996 5,784 Other liabilities Ostale obaveze 38,196 18,872 Deferred interest liabilities 24, Deferred interest income 80,221 63,151 Deferred fee income 82,505 65,256 In foreign currency 108,138 78,077 Donations 16,204 11,731 Other liabilities Deferred interest liabilities 11,072 7,637 Deferred interest on savings accounts 80,826 58,537 Balance at 31 December 645, ,821 28

31 32. EQUITY Share capital Share capital - ordinary shares 3,404,886 3,404,886 Share premium 1,238,175 1,238,175 Statutory reserves - un realized losses (448) (406) Reserves from retained earnings 1,290,604 1,090,670 Retained earnings 378, ,934 Legal reserves 135, ,755 Balance at 31 December 6,447,903 6,069,034, On 31 December 2010 authorized share capital comprised ordinary shares with nominal value of RSD 6.000,00 (2009: ordinary shares with a nominal value of RSD 6.000,00). Share repurchase On 31 December 2010, as well as on 31 December 2009, Bank had no repurchased own shares. Share premium Share premium comprises positive difference between achieved selling value of shares and their nominal value, as well as gains and losses on sales and repurchases of own shares. Revalorisation reserves Revalorisation reserves comprise of fair value change effects within financial instruments available for sale. Reserves from retained earnings Reserves from profit are formed in accordance with regulations for the estimated losses, reserves for general bank risks and other reserves from allocation of profit, in accordance with the law, statute and other Bank's records. 33. OFF-BALANCE SHEET ITEMS Funds managed on behalf of third parties 4,682,251 4,072,647 Guarantees, other contingent liabilities and commitments 3,524,686 2,515,506 Other off-balance sheet items 2,457,394 1,473,382 Balance at 31 December 10,664,331 8,061,535 29

32 Funds managed on behalf of third parties Student loans 4,672,602 4,058,037 Short-term placements - agriculture 8,705 13,143 Long-term placements - Retail 944 1,468 Balance at 31 December 4,682,251 4,072,647 Guarantees and other commitments and contingencies Guarantees, bills of guarantee and acceptances Issued payable guarantees for loan repayment 994, ,761 Issued other payable guarantees 1,874, ,136 Performance guarantees 637,651 1,032,945 Placed bills of guarantee and acceptances 18,020 32,714 Total guarantees, bills of guarantee and acceptances 3,524,686 2,515,506 Other off-balance sheet items Revocable commitments Preuzete opozive obaveze 889, ,821 Guarantees received from foreign banks and other financial institutions 668, ,941 Suspended interest 836, ,928 Other 63,455 69,692 Balance at 31 December 2,457,394 1,473, RELATED PARTY TRANSACTIONS The Bank enters business relationships and arrangements with members of the Executive Board and other employees in its regular operations, based on usual market terms 35. FINANCIAL INSTRUMENTS FAIR VALUE Assets for which fair value approximates carrying value For liquid or financial assets and liabilities with short maturity (up to 12 months) it is assumed that the carrying values approximate to their fair values. This assumption is also relevant for demand deposits, savings accounts without specified maturity and financial instruments with variable interest rates. 30

33 Fixed rate financial instruments The fair value of fixed rate financial assets and liabilities carried at amortized cost are estimated by comparing market interest rates when they were first recognized with current market rates for similar financial instruments. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing moneymarket interest rates for debts with similar credit risk and maturity. For quoted debt instruments the fair values are calculated based on quoted market prices. For those instruments issued where quoted market prices are not available, a discounted cash flow model based on a current interest rate yield curve appropriate for the remaining term to maturity is used. 31

34 36. RISK MANAGEMENT Introduction Risk is inherent in the Bank's activities but it is managed through a process of ongoing identification, measurement and monitoring subject to risk and other controls. This process of risk management is critical to the Bank's continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. The Bank is exposed to credit risk, liquidity risk and market risk. It is also subject to operating risks. The independent risk control process does not include business risks such as changes in the environment, technology and industry. They are monitored through the Bank's strategic planning process. Risk management structure comprise the Board of Directors and the Executive Board, Audit Committee, Internal Audit, Solvency and risk management department, and other organizational units of the Bank in different stages of risk management processes, whose authority and responsibilities in risk management of the Bank, are defined by legal and regulatory provisions, as well as documents of the Bank.. Solvency and risk management department Solvency and risk management department in the organizational structure is a function of organizational separation of the two functions of the Bank and performing operational tasks on the one hand, and risk management processes related to the provision of such services, on the other side. Solvency and risk management department deals with all risks to which the Bank is exposed, paying particular attention primarly present risk or credit risk, liquidity risk, interest rate risk, currency risk and exposure. Risk management by the Department of solvency and risk management involve the implementation of procedures to identify risks, measure, assess and monitor, control the compliance status of certain positions of the Bank to the applicable limits, reporting, organizational units and organs of governance and management of the Bank about it and propose measures to minimizing risk in Bank operations Risk management adequacy In accordance with the provisions of the Banking Law and its Implementing Regulations for the implementation of this Act the Bank has adopted policies and procedures and organizational structure, risk managem ent tailored to the requirements stemming from regulations pertaining to the segment of risk management and enables the achievement of stated objectives and principles for risk management. In 2010 the Bank has managed risk in accordance with the prudential requirements of regulatory authorities in accordance with internal regulations adopted for better risk management. Financial risk management is consistent with the size and organizational structure of the Bank, the scope of activities and type and complexity of tasks performed by the bank Risk management and reporting systems Monitoring and controlling risks is primarily based on the establishment of limits. These limits reflect the business strategy and market environment of the Bank, and the level of risk that the Bank is willing to accept. The Bank monitors and measures the capacity of the overall risk by taking into account the overall exposure to all types of risk. 32

35 Board of Directors, Executive Committee, Audit Committee and the Department of Interna l Audit quarterly presents a overall report on risk management that includes all the necessary information to evaluate and draw conclusions about the risks to which the Bank is exposed. Given their importance, are compiled monthly reports on credit, intere st rate and liquidity risk, to be submitted to the competent authorities for consideration Credit risk Credit risk is the risk of adverse effects on the financial result and equity due to failure to fulfill obligations toward th e Bank as a client. Identification of credit risk is performed at the stage of establishing initial contact the client with the Bank, in the process of forming a client file in the course of the Bank s placements. Credit risk measurement is done: 1) calculating the values of certain indicators of financial condition of the client, whereas species using these indicators depends on the client and the specifics of his legal status, activities and other characteristics of the condition. 2) analyzing the data collected about the client and his current business of the client application, which must be correct, complete and updated to provide quality information on the financial condition and creditworthiness of the borrower. The assessment of credit risk is expressed categorization receivables and is subject to: - Provisions of the decision of the National Bank of Serbia s governing classification of balance sheet assets and offbalance bank accounts to reserves for potential losses, and - Approved the Bank s internal model for risk assessment in order to accounts for impairment of balance sheet assets and provisions for losses on off-balance sheet items. Sector Solvency and risk management is, in years, conducted an analysis of current data supplied by clients, Sector placements and corporate sector for retail and on the basis of all quantitative and qualitative criteria, the categorization of loans in accordance with the said decision of the NBS and the Bank s internal model for risk assessment. Risk mitigation measures include establishing rules for the implementation of these measures, relating to taking, reduction, diversification, risk transfer and avoidance by the Bank identify, measure and evaluate. Risk mitigation is achieved by: - Consistent application of procedures of identifying, measuring and risk assessment by the competent organizational unit of the Bank and the Bank s bodies - Using an information system that provides information for timely and continuous analysis and monitoring changes status and structure, ie. quality of the loan portfolio of the Bank Credit risk monitoring is done at both the individual client, and total loan portfolio of the Bank. 33