Annual Report Gorenjska banka, d.d., Kranj and the Gorenjska banka Kranj Group

Transcription

1 Annual Report Gorenjska banka, d.d., Kranj and the Gorenjska banka Kranj Group Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 1

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3 Annual Report Gorenjska banka, d.d., Kranj and the Gorenjska banka Kranj Group

4 5 Management Report 46 Independent auditor s Report 62 Notes to financial statements 6 Key financial data 54 Financial Report of the Bank and the Group General information 8 Statement of the President of the Management Board of Gorenjska banka, d. d., Kranj 55 Statement of management s responsibilities Summary of significant accounting policies 10 Report of the Supervisory Board of Gorenjska banka, d. d., Kranj 56 Income statement Critical accounting estimates and judgements 13 Organizational Chart of the Bank 57 Statement of comprehensive income Notes to the income statement 14 Organizational Chart of the Group 58 Statement of financial position Notes to the statement of financial position 14 Top Management Strucure 59 Statement of changes in equity Other notes to the financial statements 15 Business Network 61 Cash flow statement Risk management 15 Rating 16 The economic environment and the banking sector 18 About the Gorenjska banka Group 20 Shareholders information 22 Strategic Orientations of the Bank and Group 24 Operations in Risk Management 34 Development projects 36 Organisational and HR changes 38 Social responsibility 39 Data and explanations pursuant to Paragraph 6 of Article 70 of the Companies act 43 Statement on Internal Governance Arrangements 4 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

5 Management Report Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 5

6 Key financial data Amounts in thousands of EUR Bank Group Statement of financial position, as at 31 December Total assets 1,871,944 1,512,629 1,451,179 1,870,881 1,513,694 1,451,959 Total deposits from the non-banking sector: 1,480,690 1,226,988 1,118,512 1,476,524 1,225,563 1,117,993 - corporates and other entities 549, , , , , ,378 - individual clients 931, , , , , ,615 Total amount of loans to the non-banking sector: 965, , , , , ,280 - corporates and other entities 735, , , , , ,729 - individual clients 229, , , , , ,551 Total equity 200, , , , , ,089 Impairment of financial assets and provisions 98, , ,042 98, , ,117 Total off-balance sheet operations 265, , , , , ,094 Income statement: Net interest income 33,801 28,500 30,992 33,014 27,849 30,418 Net non-interest income 13,033 14,576 11,099 15,911 15,939 12,543 Labour costs, general and administrative costs 29,666 27,935 24,574 30,121 27,985 24,867 Depreciation 1,596 1,760 1,737 2,364 1,872 1,738 Impairment and provisioning 5,520 5,910 11,619 5,766 5,985 11,473 Profit before income tax 10,052 7,471 4,161 10,674 7,947 4,883 Tax related to profit/loss from continuing operation 3,551 1, ,701 1,372 1,142 Statement of comprehensive income Other comprehensive gains/losses (2,782) (1,443) (5,623) (2,782) (1,443) (5,623) Tax related to other comprehensive gains/losses 230 (331) (331) 66 Number of employees, as at 31 December In the calculation of the book value per non-par share, treasury shares are not considered. Shares: Number of shareholders Number of shares 387, , , , , ,416 Nominal share value or an amount belonging to non-par share in registered capital (in EUR) Book value per non-par share (in EUR) Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

7 Bank Group Ratios (in %): Capital: - CET1 Capital ratio T1 Capital ratio Total Capital ratio Assets quality: - Impairment of financial assets at amortised cost and provisions / on-balance and off-balance sheet items classified Profitability: - Interest margin (net interest income to total assets) Financial mediation margin (net interest income and net non-interest income to total assets) Return on assets before tax Return on assets after tax Return on equity before tax Return on equity before tax (before impairment) Return on equity after tax Operational costs: - Operational costs / average assets Operational costs / income Liquidity: - Average liquid assets / average sight deposits from non-banking sector Average liquid assets / average assets Liquidity of Bank: Q Q Q Q Liquidity coverage ratio (in %) Liquidity buffer (in thousands of EUR) , ,538 Net cash outflows (in thousands of EUR) , ,145 Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 7

8 Statement of the President of the Gorenjska banka, d.d., Kranj Management Board The business year 2017 was the most successful year for Gorenjska banka in the period of the last five years. The achieved results have exceeded the planned ones as well as the 2016 results. In the fields of credit and deposit operations, the Bank s growth was faster than the growth of the Slovenian banking system. All income categories have increased, and the Bank concluded the 2017 financial year with profit and a stable capital, liquidity and market position. Gorenjska banka generated a profit EUR 15.6 million from regular operations in 2017, which is 17% more than in The profit before tax of EUR 10.1 million is 35% higher than in the previous year. The net profit has also increased by 3% compared to it amounted to EUR 6.5 million. The volume of operations measured with the balance sheet total has increased by 23.8% in 2017 to EUR 1.87 billion. Reasons for this are the almost 21% increase of deposits and the 19% credit portfolio growth in Gorenjska banka generated above-average growth levels withih the banking system in the credit and deposit areas. Its market share has increased from 4.1% to 4.7% in The Bank s capital adequacy has decreased due to the increased volume of operations by 1,8% compared to the end of 2016; it is, however, still high - it amounts to 16.09%. In the field of crediting, 2017 saw a new increase in the number of clients and concluded business deals; the amount of profitable loans also increased, while non-performing exposures were still resolved highly efficiently and successfully. The volume of company crediting was by 10% higher than in 2017; the retail crediting has increased by as much as 23.5% compared to the previous year. In both segments, the Bank grew faster than the Slovenian banking market, which strengthened the Gorenjska banka market position. The Bank s successful sales are mostly associated with a thorough renewal of the sale process, i.e. the changes implemented in the marketing area in 2017 within the project of optimising the business processes. This enables us to respond to the clients needs faster and more adequately. We have shortened and automatised the processes, improved the sale analytic, we find possibilities for improvement on a daily basis and we set the priorities in a more effective manner, and, most important, we allocate more time to directly working with clients. The changes were practically immediately reflected in improved sales results. 8 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

9 The Banks competitiveness was significantly increased by the implementation of the new IT support enabling retail banking. With implementation of this demanding development project, which took more than one year s preparations, we have achieved three important development goals: we have ensured independence in developing technological solutions, a significantly faster dynamic of implementing new banking services for natural persons and a bigger influence on the costs for developing and maintaining the IT support. All this is of great importance for the future successful operations. The reward system, meeting the current HR recommendations, is the third area in which a significant share of our development resources was allocated to in The job posts were defined and evaluated anew. Their number has been halved. The required competences and knowledge were updated. We have formed a new, transparent and flexible reward system, which is appropriately linked to the work performances of individuals and ensures a greater motivation and commitment. In 2018, the positive effects of the new reward system will reflect especially in a more successful achievement of the set goals. I would like to thank my co-workers for all their professionalism and commitment, to the clients and partners for their loyalty and trust, and to the Supervisory Board and owners for their support. We all have contributed to a further successful realisation of the Bank s strategy and to such surpassing of the planned results. Andrej Andoljšek Management Board President Thus, Gorenjska banka enters the 2018 business year in a very good business condition. As a profitable bank with high liquidity and capital and market stability, it has solid grounds for realisation of its ambitions for a controlled and sustainable growth. The goals for 2018 are accordingly demanding, yet feasible - considering our new offers, the achieved process flexibility and our competent and motivated employees. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 9

10 Report of the Supervisory Board of Gorenjska banka, d.d., Kranj The Supervisory Board Structure in 2017 At the end of 2017, the Supervisory Board of Gorenjska banka, d.d., Kranj operated with six members: Chairman Mr. David Benedek, Deputy Chairman Mr. Aleš Aberšek and members: Mr. Miran Kalčič, Mr. Matej Podlipnik, Mrs. Jelena Galić, and Mr. Gregor Rovanšek. The composition of the Supervisory Board did not change in The Audit Committee, the Risk Monitoring and Assets/Liabilities Committee, and the Remuneration, HR, and Organisational Affairs Committee were named for performing in-depth control over individual areas of the Bank s operation, who, in accordance with their authorities, have also been preparing professional bases and resolution proposals for the Supervisory Board. At the end of 2017, the Audit Committee consisted of: Chairman Mr. Gregor Rovanšek and members Mr. Miran Kalčič and Mrs. Jelena Galić. The Audit Committee held 7 regular meetings in At the end of 2017, the Remuneration, HR, and Organisational Affairs Committee consisted of: Chairman Mr. David Benedek and members Mr. Miran Kalčič, Mrs. Jelena Galić, and Mr. Aleš Aberšek. The Committee held 4 regular meetings and 1 correspondence meeting. The Risk Monitoring and Assets/Liabilities Committee consisted of: Chairman Mr. Aleš Aberšek (Committee Chairman since 24th January, 2017), and members Mr. Matej Podlipnik and Mr. Miran Kalčič. The latter was elected into the Committee after the resignation of member Mr. Domen Trobec on 13 January In 2017, the Committee held 7 regular meetings and 1 correspondent meeting. Overview of the Supervisory Board Activities in 2017 In 2017, the Supervisory Board held seven regular meetings and six correspondent meetings. The Supervisory Board monitored and supervised the Bank s operations and the Management Board s work in line with the powers, competences, and duties laid down in the Banking Act, the Bank of Slovenia Regulation on Internal Governance Arrangements, the Management body and the Internal Capital Adequacy Assessment Process for Banks and Savings banks, the Companies Act, and the Bank s Articles of Association. Members of the Supervisory Board worked in accordance with the Internal Governance Policy of Gorenjska banka, d.d., Kranj, and the Code of Business Ethics of Gorenjska banka, d.d., Kranj. The Bank s Management Board regularly, in due time, and fully informed the members of the Supervisory Board of achieved results and all important events related to Bank s operation, strategy, and risk management. The Bank was invited by the consortium of banks, representing 54% of the Bank s shares, to participate in the sales process of the majority package of shares. In this process, the Bank had the exclusive role of providing data and information for the preparation of presentation documents and executing detailed reviews performed by potential investors. In 2017, the Supervisory Board considered in detail and consented to the amendments of the Risk Management Strategy of Gorenjska banka, d.d., Kranj, and the Appetite for Risk Statement, in which the Bank defines on the highest level the risk types and tolerance towards individual risk types, which the Bank is prepared and capable of assuming to achieve the set goals. Furthermore, the Supervisory Board also discussed the amendments of the Capital Management Policy and the Investment Policy and acquainted itself with the Bank of Slovenia s assessment of the Recovery Plan of the Bank and discussed amendments of the Recovery Plan for Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

11 In 2017, the Supervisory Board also acquainted itself with the acquisition of the independent credit rating by the international agencies Fitch and Capital Intelligence. The last rating was acquired in The acquisition represents an independent analytical assessment of the efficiency of operations and management as well as an important prerequisite for performing international treasury transactions and transactions in document operation. The Supervisory Board monitored the work of the Internal Audit Department on the basis of quarterly reports. Based on the internal audit report for 2016, it found that the Service acted independently and in line with the adopted programme of work and internal audit rules of procedure. In addition, the increased intensity of the Supervisory Board s work in 2017 was mostly focused on familiarization with the introduction of own IT support in the field of retail banking support. The project was successfully concluded in In 2017, the Supervisory Board also discussed and accepted: materials for the 31st General Meeting of the bank, where it inspected, approved and accepted the audited annual report of the bank for 2016, accepted the report of the authorized auditor for the business year of 2016, to which it also provided its consensus, consented to the report of the internal audit for 2016 and the findings of the distributable profit; work effectiveness assessment of the Supervisory Board in 2016; quarterly reports on the work of the Internal Audit Department; semi-annual reports of the Compliance Department; amendments to the Remuneration policy; an indicative timetable of sessions in the individual plan of lowering NPE in the period In 2017, the Supervisory Board provided its consent to: the assessment process of the appropriate internal capital of the bank (ICAAP); the approximate annual programme of the work of the Internal Audit Department for 2018; the framework annual plan of the Compliance Service for 2017; the increase of large exposures and exposures towards persons in a special relationship with the bank; the Development Strategy; the Risk Management Strategy and Policy; the changes of the Rules on the work of the Internal Audit Department; the Business and financial plan of the bank and the Group for ; the conclusion of transactions, which represent transaction with persons in a special relationship with the bank; the conclusion of transactions, which represent increased large exposure to related parties; the conclusion of factoring transactions with the company Telekom Slovenije; In 2017, the Supervisory Board familiarized itself with: the quarterly reports on risk management; the additional disclosures that the bank publicly announced together with the annual report; the quarterly reports on bank`s operations; the report on operations of GB in 2016; the Analysis of the adequacy of coverage of non- -performing loans; the amendments of the Risk Claim Management Policy; the implementation of the Development Strategy of the Bank in ; the Information regarding the operations of the Bank with Bitstamp Ltd. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 11

12 Operations of Gorenjska banka in 2017 The Bank is focused on business cooperation with non-bank clients whose deposits represent a reliable, stable, dispersed, and sustainable source of funding. Gorenjska banka places special attention on maintaining high current liquidity and providing secondary liquidity in the form of first-rate government securities and loans. In 2017, the Bank generated a pre-tax profit of 15.6 million or a net profit of 6.5 million. Successful operations also reflected in increased balance sheet total, which was in 2017 increased by 23.8% to 1.9 billion. In 2017, 5.5 million of impairments and provisions were made, 3.1 million of which were impairments to the credit portfolio. The cumulative amount of financial asset impairments and provisions amounted to 98.5 million at the end of Of those, 90.4 million of impairments related to the credit portfolio, which was covered by provisions and impairments at the rate of 5.53%. The Bank s capital adequacy has decreased and reached 16.09% at the end of 2017 mainly due to the increase in capital requirements which resulted from the increased scope of the credit portfolio. Information on the approval and adoption of the 2017 Annual Report The Bank s Management submitted the 2017 Annual Report to the Audit Committee, which gave a positive opinion thereon. The Management submitted the audited 2017 Annual Report to the Supervisory Board for verification within the statutory deadline, along with the audited financial statements of the Bank and Group and the certified auditor s reports as prepared by the audit firm Deloitte revizija d.o.o., Ljubljana. Based on the performed audit of the non-consolidated financial statements of Gorenjska banka d.d., Kranj (the Bank) and the consolidated financial statements of Gorenjska banka d.d., Kranj, and its subsidiaries (the Group) as at 31 December 2017, which include the balance sheet, income statement, statement of comprehensive income, statement of changes in equity, cash flow statement, and a summary of significant accounting policies and other notes, the auditing firm issued opinions (separately for non-consolidated and consolidated statements) stating that the financial statements presented a true and fair view of the financial standings of the Bank and Group as at 31 December 2017 as well as their profit or loss and cash flows for the then finished year pursuant to the international financial reporting standards as adopted by the EU. The reports made by the auditing firm also include a positive opinion on the compliance of indications in the business report with the audited financial statements. The Supervisory Board believes that the Bank s Management and Supervisory Boards met all legal requirements in the 2017 financial year. Based on the above, the Supervisory Board approved and adopted the Annual Report of Gorenjska banka d.d., Kranj, and the Gorenjska banka Kranj Group for 2017, and adopted the reports of the certified auditor for the 2017 financial year and agreed with them. David Benedek Supervisory Board Chairman 12 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

13 Organisational Chart of the Bank Management of the Bank Management Board President: Andrej Andoljšek 2 Management Board Member: Mojca Osolnik Videmšek Internal Audit Marija Hejja Compliance Božo Jašovič Legal Office Dejan Kmetec Administrative & Human Vesna Pungeršek Žalig Market division Risk division Support division Executive Director: Executive Director: Executive Director: Miha Resman Stanka Šarc Majdič Katarina Knapič Lapajne Commercial Banking Credit Risk Assessment Accounting & Operating Support Mojca Peternelj Stanka Šarc Majdič 3 Marjana Hočevar Retail Banking Risk Controlling Financial Controlling Igor Poljšak Nataša Veselinović Katarina Knapič Lapajne Treasury Risk Claim Management Information Systems Mladen Jovandić Aleš Rutar Jure Vehovec 2 On 31 March 2018, Andrej Andoljšek is to be early recalled from the post of the bank s Management Board President. 3 On 15 February 2018, Karmen Kordiš took over the role of Director of the Credit Risk Assessmentš. Leasing Aleš Zrinski Marketing communications Irena Čebulj Real estate Management Mojca Šircelj Middle-office Matej Zajec Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 13

14 Organisational Chart of the Group Gorenjska banka, d. d., Kranj Subsidiaries Imobilia-GBK, d. o. o., Kranj 100 % Mersteel nepremičnine, d. o. o., Naklo 100 % GB Leasing, d. o. o., Ljubljana 100 % Hypo Alpe-Adria-Leasing, d. o. o., Ljubljana 100 % Top Management Structure General Meeting of Shareholders Supervisory Board Audit Committee Management Board David Benedek President Aleš Aberšek Deputy President Jelena Galić Member Miran Kalčič Member Matej Podlipnik Member Gregor Rovanšek Member Gregor Rovanšek President Jelena Galić Member Miran Kalčič Member Risk Monitoring and Assets and Liabilities Committee 7 Aleš Aberšek President Matej Podlipnik Member Miran Kalčič Member Andrej Andoljšek Management Board President Mojca Osolnik Videmšek Management Board Member Nomination and Remuneration Committee David Benedek President Jelena Galić Member Miran Kalčič Member Aleš Aberšek Member 14 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

15 Poslovna mreža Agency Address Telefon Bleiweisova cesta Bleiweisova cesta 1, Kranj Globus Koroška cesta 4, Kranj Šenčur Kranjska cesta 4, Šenčur Cerklje Trg Davorina Jenka 10, Cerklje Primskovo Cesta Staneta Žagarja 69, Kranj Savski otok Stara cesta 25 b, Kranj Jesenice Cesta maršala Tita 8, Jesenice Plavž Cesta Cirila Tavčarja 8, Jesenice Kranjska Gora Borovška cesta 95, Kranjska Gora Ljubljana Center Dalmatinova ulica 4, Ljubljana Ljubljana Celovška Celovška cesta 268, Ljubljana Kamnik Domžalska cesta 3, Kamnik Radovljica Gorenjska cesta 16, Radovljica Bled Kajuhova cesta 1, Bled Bohinjska Bistrica Trg svobode 2b, Bohinjska Bistrica Lesce Rožna dolina Rožna dolina 51, Lesce Škofja Loka Kapucinski trg 7, Škofja Loka Gorenja vas Poljanska cesta 65a, Gorenja vas Železniki Na Kresu 26, Železniki Žiri Trg svobode 1, Žiri Grenc Grenc 54, Škofja Loka Tržič Trg svobode 1, Tržič Bistrica pri Tržiču Ste Marie aux Mines 36, Tržič info@gbkr.si Website Ratings Fitch Ratings Long-Term Issuer Default Rating BB- Short-Term Issuer Default Rating B Vitability Rating bb- Support Rating 5 Outlook Stabilna Capital Inteligence Long-Term Issuer Default Rating BB Short-Term Issuer Default Rating B Financial Strength BB Support Rating 4 Outlook Stable Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 15

16 The economic environment and the banking sector Economic environment The first estimates of the Institute for Macroeconomic Analysis and Development of the Republic of Slovenia show that the gross domestic product in 2017 increased by 4.4% and did not deviate from the autumn predictions. The export of goods in 2017 increased by 13.1 % compared to 2016, while imports increased by 14.2 %. The coverage of imports by exports was 102.6%. According to the Statistical Office of the Republic of Slovenia, the value of industrial production in 2017 increased by 5.8% compared to The increase was largely contributed by companies pursuing processing activities; the value of industrial production in these activities increased by 6.6%. According to the latest data provided by the Employment Service of Slovenia, there were 85,060 unemployed persons registered at the end of December 2017, which is 14.6% less than in December On average, there were 88,648 unemployed persons registered with the Service in 2017, which is 14.1% less than in There were 82,379 newly registered unemployed persons in 2015, which is 8.4% less than in 2016, while a total of 96,934 unemployed persons deregistered from the employment records, 68,602 of whom due to employment, which is 8.4% less than in The annual price growth measured using a harmonised index of consumer prices was 1.9% in 2017 (compared to 0.6% in the same period of last year), the average 12-month price growth was 1.6% (compared to -0.2% in the same period of last year). In December 2017 we had a 1.7% annual inflation (compared to 0.5% in the same month of last year), the average 12-month price growth was 1.4% (compared to -0.1% in the same period last year). The table below shows the more important macroeconomic indicators of Slovenia s development in the period Gross domestic product, in % (F) 4.4 Private consumption (in %) (F) 3.3 Gross fixed capital formation (in %) 1.0 (3.6) (F) 9.0 Export of goods and services, in % (F) 8.8 Unemployment rate, ILO, in % (F) 6.8 Inflation, annual average, in % (0.5) (0.1) 1.4 Current account balance (as % of GDP) (F) 4.7 The key interest rate of the European Central Bank remained unchanged in 2017 at 0%. The value of the 6-month EURIBOR decreased in 2017 by 5.0 basis points. The Slovenian stock exchange index SBI TOP increased by 12.39% in High economic growth and fiscal consolidation measures in 2017 contributed to an improved credit rating score for Slovenia with two credit rating agencies. Moody s improved Slovenia s credit rating score from Baa3 to Baa1, and downgraded the outlooks from positive to stable, while Standard & Poor s raised Slovenia s credit rating score by one level, i.e. from A to A plus. Outlooks are also stable. In 2017, Fitch kept the rating score for Slovenia s longterm debt at A minus, with stable outlooks. (F) - forecast Source: Autumn economic trends for the year 2017, September 2017, Analysis and Development of the Republic of Slovenia; The Statistical Office of the Republic of Slovenia. 16 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

17 Banking environment In 2017, bank profitability continued to improve for the third year in a row. Banks operated at a profit that surpassed that of the previous year. The more than solid profits were the result of minor credit risks or the fact that banks reversed impairments and provisions at the level of the entire banking system. The banks gross revenue reduced in the mentioned period, mostly as a result of decreased net interest income, but also due to decreased net non-interest income. At the end of 2016, the banks witnessed the end of a several-year-long shrinkage of credit activity. The growth of corporate loans brought an increasing aggregate of loans to the non-banking sector. In 2017, lending activity strengthened the most in volume and dynamics in the retail and corporate segments. Loans to households grew the most in the segment of consumer loans. Due to the previous several-year-long downward trend, these still fell behind those achieved between 2008 and 2010 by a fifth. Residential loans grew at a stable pace most of the year, i.e. slightly over 5%. Despite the relatively quick growth of borrowing from banks, household debt indicators remain favourable or even lower than in previous years. When approving residential loans, banks are said to have remained within the scope of the Bank of Slovenia recommendations. Banks kept the credit standards at the achieved elevated levels. The price increase on the real estate market has, therefore, caused no excessive risk yet from the banks perspective. Risks in the banking system were subject to no major changes in 2017 with respect to the year before. Banks were still faced with the challenge of achieving certain profits in a low-interest-rate environment. Further lending growth through increased capital requirements implied increased pressure on the banks capital adequacy, which was only maintained by banks through the generation of capital from the profits realised. Due to the further shortening of the maturity of sources and prolonged maturity of investments, the gap between the average maturity of sources and investments has increased and posed requirements for banks as regards adequate liquidity management. Due to the increased newly approved long-term loans at a fixed interest rate, the interest rate risk at banks further increased. In 2017, bank liquidity was favourable. Furthermore, secondary liquidity strengthened. With a changed investment structure, in which the share of investments in Slovenian government bonds has reduced, the average return on investments in securities has fallen. Banks retained their capital strength at slightly decreased capital adequacy ratios in Increased lending was the result of the increased scope of capital requirements. With positive operating results, capital also increased in 2017, but relatively less than capital requirements. The capital adequacy of the Slovenian banking system reduced in 2017, but still remains at a solid level. It reduced due to the increased capital requirements, which were the result of strengthened lending activity. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 17

18 About the Gorenjska banka Group Composition of the group The Gorenjska banka Group (hereinafter Group ) includes Gorenjska banka d.d., Kranj and four subsidiaries: Imobilia-GBK, d.o.o., Kranj, Mersteel nepremičnine, d.o.o., Naklo, GB Leasing, d.o.o., Ljubljana, and Hypo Alpe Adria leasing. The latter is inoperable and is not generating revenue or expenses. The table below shows data on the shares of Gorenjska banka d.d., Kranj, in the capital of the subsidiaries and on the companies share capital as at The table below shows data on the shares of Gorenjska banka d.d., Kranj, in the capital of the subsidiaries and on the companies share capital as at Company Equity holdings (in %) Nominal amounts (in thousands of EUR) Imobilia-GBK, d. o. o., Kranj 100 4,496 Mersteel nepremičnine, d. o. o., Naklo GB Leasing, d. o. o., Ljubljana 100 1,300 Hypo Alpe-Adria- Leasing, d. o. o., Ljubljana Gorenjska banka d.d., Kranj, has no controlling company. Presentation of the bank Gorenjska banka d.d., Kranj (hereinafter: bank ) is an independent public limited company with its head office in Kranj, at the address Bleiweisova cesta 1 (statistics number: , tax number SI , share capital EUR 16,188,366.33). The bank was established in the 19th century when the first seeds of organised banking were formed in the Gorenjska region. On , the first municipal bank in the Gorenjska region was formed in Kranj, followed by the bank in Škofja Loka and banks in Radovljica, Tržič and Bled the year after. Eventually, a joint bank was formed, which joined the Ljubljanska banka system in 1972, first as a subsidiary and later, as of , as a limited company in the system of sister banks of Ljubljanska banka with capital links with one another. In 1994 the separation process from the Ljubljanska banka system was initiated, namely with the purchase of shares that Nova Ljubljanska banka d.d., Ljubljana had in Gorenjska banka d.d., Kranj. The process was concluded in 1996 when the bank cancelled the shares. Gorenjska banka d.d., Kranj has the authorisation to perform banking services as per Article 5 of the Banking Act (Official Gazette of RS No. 25/15, with Amendments; hereinafter: ZBan-2). Banking services are services of accepting deposits and other repayable funds from the general public, as well as granting credits on its own account. The bank has an authorisation to perform mutually recognised and addtional financial services. The bank may perform the following mutually recognised financial services, pursuant to Article 5 of the ZBan-2: 1. Receiving deposits and other repayable funds; 2. Granting of loans, including: consumer loans, mortgage loans, purchase of receivables with or without recourse (factoring), financing of commercial transactions, including export financing based on the purchase of non-current nonpast-due receivables at a discount and without recourse, secured by financial instruments (forfeiting); 3. Financial leasing; 4. Payment services; 5. Issuance and management of other payment instruments (i.e. travellers cheques and bankers drafts) in the part in which this service is not included in service of former point 4; 6. Issuing of guarantees and other commitments; 7. Trading for own account or for account of customers in: foreign exchange, including exchange transactions; trading for own account in: money market instruments, financial futures and options, exchange and interest-rate instruments and transferable securities; 8. Other services related to safekeeping of securities; 9. Leasing of safe deposit boxes. 18 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

19 The bank may also carry out additional financial services as per Article 6 of ZBan-2, which includes the sale of insurance policies as per the law governing the insurance market and the marketing units of investment funds. In the period for which the respective business report has been drafted, the bank performed those banking services and additional financial services for which it received authorisation from the Bank of Slovenia. Presentation of subsidiaries Imobilia-GBK, d.o.o., Kranj Gorenjska banka d.d., Kranj holds a 100% stake in the subsidiary company Imobilia-GBK, promet z nepremičninami in hipotekarnimi posli d.o.o., Kranj, with its head office in Kranj at Bleiweisova cesta 1. The principal activities of the company include the management of a real estate portfolio and the realisation of procedures for the brokerage of the founder s real estate, movables (especially equipment and machines), as well as securities and shares in companies, which places the company among the companies for ancillary services as per Article 4(1) (18) of the Regulation (EU) No. 575/2013 of the European Parliament and of the Council of on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012 (Off. Gaz. 176, , Off. Gaz. 208, , Off. Gaz. 321, hereinafter: CRR regulation). Based on the permit issued by the regulatory body, the subsidiary company is not included in supervision on a consolidated basis. For the purposes of credit rating requirements or equity calculation, the company is considered a financial sector entity as per the provisions of Article 4(1)(27) of the CRR regulation. The company has no employees with specialised knowledge and competencies for the real estate trade, for real estate project development or for preparing project documentation. The company is hiring external contractors to perform such and similar services. Mersteel nepremičnine, d.o.o., Naklo Gorenjska banka d.d., Kranj holds a 100% stake in the subsidiary company Mersteel nepremičnine, d. o. o., Naklo, with its head office in Naklo at Cesta na Okroglo 7. The company Mersteel nepremičnine, d. o. o., Naklo was established as a result of the confirmed judicial settlement against Mersteel d. o. o., Naklo, whose plan of financial restructuring (NFP) predicted as one of the measures the carving out of the healthy core by establishing two new companies. The plan for carving out is an integral part of NFP, which states that the real estates the company is leasing out (which is its sole activity) are to be transferred to the newly established company Mersteel nepremičnine, d. o. o., Naklo. GB Leasing, d.o.o., Ljubljana Gorenjska banka d.d., Kranj holds a 100% stake in the subsidiary company GB Leasing, d. o. o., Ljubljana. The company is operating at the address Dunajska cesta 152, 1000 Ljubljana, with affiliates in Koper and Maribor. The company is carrying out non-financial maintenance services for the bank in the area of the financial leasing of movables. It began operating in 2016 when the bank received a consensus from the Bank of Slovenia for financial leasing operations. Hypo Alpe Adria leasing, d.o.o., Ljubljana Gorenjska banka d.d., Kranj holds a 100% stake in the subsidiary company Hypo Alpe Adria leasing d. o. o., Ljubljana as of The company has no employees and no portfolio (in 2016 the majority has been transferred to Gorenjska banka). The company is inoperable and will shut down at the end of all its leasing contracts because it is only necessary up to the conclusion of the purchased portfolio. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 19

20 Shareholders information At the end of 2017, the bank s capital stock was distributed to 387,938 ordinary shares. As at , 432 shareholders were registered in the bank s share register (461 as at ) The top ten biggest shareholders by the number of shares had 78.7% of the bank s subscribed share capital (75.7% as at ). On , the Bank of Slovenia issued the Decision on the suspension of the authorisation for the qualified holding acquisition and the Decision on the disposal of shares (hereinafter: decision) to the company Sava, družba za upravljanje in financiranje d.d., Ljubljana (hereinafter: Sava d.d., Ljubljana). The decision issued on prohibits Sava d.d., Ljubljana to exercise their voting rights since their authorisation for the acquisition of the qualified holding in Gorenjska banka d.d., Kranj has been suspended for the entirety of the voting rights and holding of capital in Gorenjska banka. At the same time, with the decision, the Bank of Slovenia ordered the company Sava d.d., Ljubljana, to dispose of the shares held contrary to the provisions of ZBan-2 within 6 months of receiving the decision of the Bank of Slovenia and to report back to the Bank of Slovenia regarding the disposal of the shares. Sava d.d., Ljubljana failed to dispose of the shares within the set timeframe of 6 months. Gorenjska banka was then notified via a letter from the Bank of Slovenia on that Sava d.d., Ljubljana had been handed the decision on the prohibition of exercising rights from the shares on This decision prohibited Sava d.d., Ljubljana exercising their rights from the shares of Gorenjska banka d.d., Kranj. On the basis of the notification of the consortium of sellers dated regarding the intention to sell the majority package of GB d.d. shares (54.57%) and the notification regarding the selection of Unicredit as the financial adviser in the sale process, the management board of Gorenjska banka d.d., Kranj signed a non-disclosure agreement (NDA). The management board of Gorenjska banka allowed the disclosure of data that was reasonably necessary for the realisation of the joint sale process to potential investors within the statutory limitations and in accordance with and in the way determined in the NDA. AIK Bank published the takeover intention of Gorenjska banka d.d., Kranj in the final phase of the sale process of 54.57% of shares. However, AIK Bank did not submit a takeover bid within the additional 30 day legal period. On the assembly of Sava d.d., Ljubljana confirmed that the sale of the 37.6% of shares to AIK Bank can only be realised if the latter sends the required consents of the National Bank of Serbia, the Bank of Slovenia and the European Central Bank within 45 days. As at , approximately 52.4% of the share owners were domestic companies in the area of financial and insurance activities, 6.8% were domestic companies of other various business activities, 6.3% were domestic companies in processing activities, while other activities were represented on a smaller scale. The shareholder structure included 22.6% of foreign entities. The 2017 net profit amounting to 6,501k was used for legal reserves amounting to 325k and for statutory reserves amounting to 618k. The net profit of the year after its use for legal and statutory reserves is 5,558k. Distributable profit, which includes net profit for 2017 after its use for legal and statutory reserves and retained earnings amounting to 2,061k, stands at 7,619k. 20 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

21 Shareholders of Gorenjska banka, d.d., Kranj, as at 31 December 2017: Name of shareholder Number of ordinary shares Share in capital, in % Share in voting rights, in % Sava, d. d., Ljubljana 146, AIK banka, a. d., Beograd 81, DUTB, d. d., Ljubljana 26, Zavarovalnica Triglav, d. d., Ljubljana 15, Iskratel, d. o. o., Kranj 10, Telekom Slovenije, d. d., Ljubljana 6, Hipotekarna banka, a.d., Podgorica 6, Domel, Elektromotorji in gospodinjski aparati, d. d., Železniki 5, Turistično društvo Lesce 4, Banka Intesa Sanpaolo, d. d., Koper 3, TOTAL top ten major shareholders 305, Drugi delničarji 50, Gorenjska banka, d. d., Kranj lastne delnice 32, TOTAL 432 shareholders 387, * Of the total of 146,060 shares owned by the company Sava d.d., Ljubljana, the latter transferred 34,287 to the fiduciary ownership of fiduciary Abanka Vipa d.d., Ljubljana, which keeps them to the benefit of the holders of bonds issued by Sava d.d., Ljubljana, as security for liabilities deriving from bonds. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 21

22 Strategic orientations of the Bank and Group In the years of the economic and financial crisis, which shrank economic activities and made conditions on financial markets difficult, the fundamental guidance in the development of strategic policies of Gorenjska banka was the provision of safe and stable operations. Numerous activities in the previous years were intended to strengthen the bank in terms of capital and aimed at eliminating a potential deficit in internal capital, established on the basis of stress tests. With the successful recapitalisation of the Bank amounting to EUR 13 million completed in January 2016, the last measure to eliminate a potential capital deficit was realised, thus providing the Bank with further growth and development upon the safe operations and management of all types of risks. The Bank s vision Using a wide range of services, the Bank will strengthen its presence and visibility across Slovenia, and will continue to be robust, reliable, and flexible for its clients, business partners, and owners. The Bank s strategy in the 5-year strategic period ( ) is to pursue the strategy of accelerated growth through organic growth, asset and portfolio acquisition, and capital integration with other banks and financial institutions, thus becoming a pan-slovenian bank. The Bank s mission The Bank provides quality banking services with its expertise and modern technology which are constantly improved and tailored to the needs and wishes of its clients. It provides a high level of security throughout its operations. The Bank s values The expectations of clients, business partners, and owners are realised by the Bank through its motivated employees, while taking into account the fundamental legal and moral rules of the society. The fundamental values are: responsibility and cooperation; fairness and trust; courtesy and patience; sincerity and truthfulness; the Bank s reputation and success; care and diligence. 22 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

23 The Bank s strategic goals until 2020 The Bank s strategic frame comprises interconnected and interdependent elements strategic goals, a balance between risks, liquidity, business efficiency and sources that the bank needs for its operations capital, financing, human resources and technology. The key strategic goals of the Bank for the medium term are: transformation from a regional into a pan-slovenian bank; gradual change of the portfolio structure reducing the portfolio concentration, growth in the segments of small and medium enterprises and retail; The development of new products and sales channels in corporate and retail operations; Internal restructuring of the Bank, which includes all segments of operation - organisation, processes, HR, and technology; Keeping a moderate appetite for risks and the upgrade of the risk management system; Ensuring the capital amount and structure which, in addition to all regulatory requirements, also provides a safety reserve for unforeseen risks and optimised return; Upgrade of the corporate governance system at the Gorenjska banka Group level; Upgrade of control environment (business compliance, internal audit, jurisprudence). The key performance indicators for the implementation of the strategy have been defined for the market position in Slovenia, the rate of return and cost efficiency. After implementing the strategy for two year, it has been established that the Bank s activities and operations were in line with the adopted strategic goals and strategic framework and that no deviation was identified that would require additional actions or a modification of strategic orientations. Sustainable development and corporate social responsibility The key links in the value chain constituting our ongoing responsibility and, hence, our corporate identity are: financial capital or economic strength as a prerequisite for fulfilling sustainability commitments and facing sustainable challenges; human capital or, rather, qualified, healthy, satisfied, motivated, and engaged associates with all competences and responsibilities as the only assurance for the sustainable success of Gorenjska banka; social capital, which makes us deeply rooted in our living and economic environment through local, social, intergenerational, and business integration; intellectual capital, which drives our quality, efficiency, responsiveness, and, most of all, development dynamics and thus long-term existence; environmental capital, which may lead to immense development opportunities through efforts for a more efficient utilisation of natural resources. Policies of subsidiaries The subsidiary, Imobilia GBK, d.o.o., Kranj, will manage the real estate, which it has acquired or will acquire from debtors in bankruptcy that sell the real estate in order to meet their obligations to the bank, on its own behalf and for its own account and shall in doing so observe the principle of economy and pursue the objective of maximisation of the Group s profit, which includes the preservation and increasing of the value of properties. The subsidiary, Mersteel nepremičnine, d.o.o., Naklo, will also pursue the objective of maximisation of the Group s profit, i.e. by letting properties. The GB Leasing, d.o.o., Ljubljana subsidiary will continue with its aggressive market coverage. 95% of the business will be generated through credit intermediaries and other partners involved with supplying vehicles and equipment. It will continue to pursue cost effectiveness. The subsidiary, Hypo Alpe-Adia-Leasing, d.o.o., Ljubljana is not operational. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 23

24 Operations in 2017 Financial operations In 2017, the Gorenjska banka Group disclosed a 10,674k profit before tax, which is 6.2% higher than the profit in the bank. The positive difference in the financial results of the group compared to the financial results of the bank is mostly due to the rent income from subsidiaries. There are no other significant differences between the bank and the group, so the record below focuses only on the bank. In 2017, the bank disclosed a 10,052k profit before tax (2016: EUR 7,471k profit before tax). It achieved a 4.99% return on equity before tax and a 0.60% return on assets before tax. The table below shows the key elements of the Bank and the Group s income statements. (in thousands of EUR) Bank Group Net interest income 33,801 28,500 33,014 27,849 Net non-interest income 13,033 14,576 15,911 15,940 Total income 46,834 43,076 48,925 43,789 Labour costs, general and administrative costs 29,666 27,935 30,121 27,985 Depreciation 1,596 1,760 2,364 1,872 Total operational cost 31,262 29,695 32,485 29,857 Impairment and provisioning 5,520 5,910 5,766 5,985 Profit before income tax 10,052 7,471 10,674 7,947 Tax related to profit 3,551 1,172 3,701 1,373 Net profit 6,501 6,299 6,973 6,574 The net interest amounted to 33,801k, which is 18.6% more than in The net interest growth is especially due to leasing activities, which fully covered the loss of interest revenue in other categories. Interest expenses, which were 29.5% lower than in 2016, also made a mark on the net interest growth. Under interest income, the bank does not recognise the interest accounted for and recovered for non-performing exposures, whereby it consistently takes into account the adopted accounting policy in this area. Non-interest income amounted to 13,033k, which was lower by 11% compared to The drop in non-interest income is related to the drop in income from financial assets. In that same segment, the bank had 1,549k profit (2016: 4,089k profit). The majority is due to the received payment od writeoff receivables from bankruptcy estate. The most important part of the non-interest income in the bank is represented by commissions. Net commissions amounted to 11,275k, which is 17.0% more than in Commission income amounted to 12,283k, which is 19.9% more than in 2016, while commission expenses amounted to 1,008k, which is 65.8% more than in The total operating costs amounted to 31,276k, which is 5.3% more than in The largest share of operating costs is accounted for by labour costs (50.0%), followed by costs of materials and services (44.8%), and depreciation/amortisation costs (5.1%). Labour costs were 5.3% higher than in The costs of materials and services increased by 7.0%; depreciation costs decreased by 9.3%. The higher costs are especially related to the development activities of the bank (new modules of applications, the increased number of transactions), card 24 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

25 operations (the increased number of transactions) and labour costs. Compared to the average assets, the operating costs amounted to 1.86%. Due to higher average assets, the indicator was reduced by 0.17 percentage points compared to Expenses for provisions and impairments of the credit portfolio, investment property and equity stakes exceeded the income from the suspension of provisions and impairments by 5,520k in 2017 (in 2016: 5,909k). In 2017, comprehensive income, i.e. net profit or loss and other comprehensive income after tax showed a profit of 3,948k (2016: 4,525k profit). It includes 6,501k net profit (2016: 6,299k net profit), 2,733k loss due to accumulated other comprehensive income (2016: 1,374k loss), 50k actuarial net losses (2016: 69k loss), and 230k liabilities for tax (2016: 331k liabilities). The bank s balance sheet total increased by 359,315k or 23.8% in 2017 and amounted to 1,871,944k at the end of The main factor in the growth of the balance sheet in 2017 is the growth of deposits of legal entities and the acquisition of additional sources from the ECB. Most of the balance sheet growth is reflected in the investment side in the increase of the so-called treasury positions - money on accounts and placements on the interbank sector, as well as the increase in credits to the non-banking sector. The table below shows the key elements of the Bank s and the Group s statements of financial position. (in thousands of EUR) Bank Group 31/12/ /12/ /12/ /12/2016 Cash, balances at central banks and other demand deposits 310, , , ,640 Loans to banks 107,049 62, ,049 62,646 Investments in securities 423, , , ,546 Loans to non-banking sector 965, , , ,150 Fixed assets 12,866 10,408 18,528 13,434 Investment property 21,371 24,371 45,734 48,048 Investments in subsidiaries 6,314 4, Other assets 25,009 21,428 27,299 25,230 Total assets 1,871,944 1,512,629 1,870,881 1,513,694 Due to non-banking sectro 1,480,690 1,226,988 1,476,523 1,225,563 Borrowings from banks and central banks 101,194 63, ,194 63,915 Other liabilities 200, , , ,000 Equity 90,002 20,893 91,468 22,216 Total liabilities and equity 1,871,944 1,512,629 1,870,881 1,513,694 Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 25

26 Placement of funds Balances on hand, in accounts at the Central Bank, and demand deposits at banks increased by 168,897k or 119.2%. Their share in assets was 16.6% at the end of Loans to banks, which include deposits at banks, increased by 44,403k or 70.9%. At the end of December 2017, their share in assets amounted to 5.7%. The total value of the bank s security portfolio amounted to 429.9m as at and was increased by 32.6m by the end of 2016, when it amounted to 397.3m. 74.3% of securities are classified as financial resources available for sale. A large number of investments into securities ( 314.6m) are classified as suitable financial assets for insuring liabilities at the ECB. The image below shows the credit rating structure of investments in debt securities (credit rating scale of Fitch Rating Ltd). At the end of 2017, the bank participated in the capital of fourteen companies. In addition to investments into subsidiaries, these are mostly investments the bank acquired in the process of resolving non-performing loans or investments related to the performance of the bank s activities (SWIFT, Bankart, bank resolution fund). Participation in the capital, 31 December 2017: Company % in equity GB Leasing, d.o.o., Ljubljana Imobilia-GBK, d.o o., Kranj Mersteel nepremičnine, d.o.o., Naklo Hypo leasing d.o.o., Ljubljana Intereuropa, d.d., Koper Merkur nepremičnine, d.d., Naklo Istrabenz, d.d., Koper Bankart, d.o.o., Ljubljana Informatika, d.d., Ljubljana Bank Resolution Fund Košaki TMI, d.d., Maribor Bernardin arcade, d.d., Portorož regular shares Bernardin arcade, d.d., Portorož preferred shares Zavarovalnica Triglav, d.d., Ljubljana SWIFT, La Hulpe, Belgija Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

27 Loans to corporates Loans to SME Loans to government Loans to individuals Loans to banks Credit, unless syndicated Repurchased receivables Deposits Finance lease receivables Syndicated loans Loans to non-bank clients increased by 110,385k or 12.9%. Their share in the bank s asset structure amounted to 51.6% at the end of December The image below shows the structure of loans by clients. The scope of the gross credit portfolio increased by 14.4% in 2017 to 1,161.5m, where the scope of credits to the non-banking sector was increased by 10.7% to 1,054.5m. The image below shows the structure of loans of the bank by credit types. In 2017, very heavy price competition continued in the area of crediting non-banking legal entities, which, considering the surplus liquidity of banks, again reflected in a hard competition battle for clients among companies and individual persons. Regardless, Gorenjska banka managed to increase the number of clients and concluded transactions in 2017, as well as the range of performing loans. Consequently, the bank also managed to increase its market share in the crediting area. The key reason for the successful sales is the renewal of the sale process, which enabled the bank to have more time to work with clients and a better responsiveness and adaptability to the clients needs. Compared to the year before, Gorenjska banka managed to increase its range of performing loans to companies by 19 percent. Such a growth rate is the reflection of an individual approach to business clients, which allowed the bank to increase its range of operations in all segments. As an agent it managed or, together with other banks, financed larger companies and successfully financed various development projects, while it increased the credit portfolio in the segment of middle-sized and small companies. A multi-year growth trend in gross retail crediting (without leasing) continued, where the bank recorded an 8.5% growth in 2017 compared to the year before. In addition to the competitive conditions, concluded partnerships with complementary service providers also played a role in this, as well as the implementations of new and more effective communications and marketing channels and the continued professional training of loan advisers. Gorenjska banka also continued to increase its leasing range in 2017, which was mostly due to the wide and well-organised brokerage or partner network, through which it effectively responded to demand. Compared to 2016, it recorded a staggering 39% growth in this area. At the end of 2017, the bank had 21,371k of investment properties. This amount was 45,734k on the level of the group. These are properties that the bank received in the process of cashing in collaterals of bad loans. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 27

28 Due to corporates and other customers Due to individuals Due to banks Obtaining sources of financing Debts to non-bank clients increased by 253,702k or 20.7%. Their share in the liability structure amounted to 79.1% at the end of Deposits in the non-bank sector predominantly include retail deposits, which increased by 52,582k or 6.0%. They account for 49.7% in the liability structure. As at , debts to non-bank legal entities included 29.4% asset sources and were 201,120k or 57.7% higher compared to the end of the previous year. Due to the ECB s continued expansive money policy, ensuring adequate levels of structural liquidity indicators and maintaining a competitive position, the bank maintained its interest rates for the deposits of clients at low levels in The image below shows the structure of due to customers. Debts to banks, which include deposits and loans of commercial banks and liabilities to the Central Bank, increased in 2017 by 37,279k or 58.3%. At the end of 2017, their share in the liabilities structure amounted to 5.4%. The excess short-term liquidity is being regulated by the bank primarily by approving short-term liquidity loans on the interbank money market, with high balances on accounts, net outflows on the wholesale funding market, and by investing in securities. The bank did not have any liquidity requirements in acquiring current assets on the interbank money market. The state of the assets on the settlement account increased by 100.6m in 2017 compared to the end of 2016, to 198.4m, the account increase was due to the increase in demand deposits and the acquisition of assets in March 2017 under the second series of the targeted operation of longterm refinancing in ECB in the amount of 70m, with the maturity date being in March In 2017 the bank did not acquire any new long-term loans on the interbank market, however it did repay 32.4m of matured long-term loans and thus the long-term indebtedness to commercial banks in 2017 was reduced to 31.4m. Capital and capital adequacy The total capital was reduced in 2017 by 775k or 0.4%. It grew by 6,501k due to net profit, but reduced by 4,724k due to the dividends disbursed and by 2,552k due to negative revaluation effects. The book value of one share, calculated from the total capital, amounted to at the end of 2017 (31 December 2016: ). At the end of December 2017, the risk management capital amounted to 168,670k (2016: 171,662k). It is fully composed of top-quality common equity tier 1 capital (CET1). The capital adequacy ratio and the Common Equity Tier 1 capital ratio, i.e. the CET1 capital ratio, was reduced in 2017 by 1.77 percentage points and amounted to 16.09% at the end of December 2017 (2016: 17.86%). The reduction is mostly due to the higher capital demand for credit risks, which is the consequence of a higher range of the credit portfolio. To calculate capital requirements for credit risks, the bank uses the standardised approach. The calculation of the capital requirements was positively affected by a reduced capital requirement for operational risks, where the bank uses the basic indicator approach (2017: 6,313k, 2016: 6,360k). 28 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

29 Total Capital ratio CET 1 Capital ratio The image below shows the trends of the bank s capital adequacy ratios. At the end of 2017, the balance sheet total of the group was 1,063k (0.1%) lower than the balance sheet total of the bank. Upon the expiry of 2017, 5,377 legal entities, sole proprietors, private and other entities had business accounts opened at the bank, which is about the same as in The number of accounts of natural persons was lower by 1.2% compared to the year before. By further optimising bank charges for users, the reasons for such a trend include the ever increasing presence of other non-bank providers of payment services. In 2017, the bank was again successful in marketing services related to business and personal accounts. The activities of accelerating sales and cross sales reflected in the further increase of users in the online bank Link for the general public and the online bank Link c for companies. Compared to the year before, the bank also achieved its 11.6% growth in the segment of payment cards, which, consequently, also reflected in the pronounced increase of concluded insurances for card abuse. The number of users using SMS services was also higher by 45% by the end of 2017 compared to Payment services and payment instruments In 2017, the volume of payment transactions executed via Gorenjska banka more than doubled the volume achieved by the bank in The total value of the domestic payment transactions, which amounted to 5.3b in 2017, was somewhat lower than the total value of the year before, however the value of international payment transactions was more than 4 times higher compared to It amounted to 11.1b. This is due to the more intensive international operations of the bank. Furthermore, the number of payment orders executed by Gorenjska banka in 2017 exceeded that achieved in In the area of domestic payment transactions, the increase was only minimal, however the growth in the number of international payment orders was 150%. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 29

30 Risk management Due to the development and characteristics of the financial system and significant changes in the economy and the environment, the identification, assumption, measurement and management of risks is an important element of the Bank s business strategy and performance. The Bank pursues a conservative bank profile with a low to moderate risk appetite. In the process of enhancing its internal capital, the Bank is firmly focused on achieving an adequate return, although its security and liquidity remain of the utmost importance. In 2017, the Bank thoroughly audited, upgraded and detailed its risk management and risk-taking strategy pursuant to the recommendations and good banking practices within the scope of upgrading the overall risk management system. The risk-taking and risk management strategy, together with the Risk Appetite Statement of Gorenjska banka d. d., Kranj, are the umbrella documents of a comprehensive risk management system that is aimed at ensuring the attainment of the set strategic objectives as laid down in the current Development Strategy of the Bank. The Risk Appetite Statement defines, at the highest level possible, the risk types and the tolerance of individual risk types that the Bank is prepared and capable of taking in order to achieve the set goals, and presents incentives and limitations in the business decision-making process at the Bank. In addition to a qualitative focus on the most important areas, the Bank also defines its risk appetite in a quantitative manner through a set of key risk indicators. The definitions and key indicators defined in the risk appetite are also the starting point for defining internal policies and methodologies for monitoring individual risk types, as well as a basis for establishing a detailed limit system in all the risk segments that refer to: the quality of investments, credit portfolio structure and business limits in specific segments and types of exposure, the concentration of credit risk, the limitation of large exposures, sectoral concentration and country risk, operational and structural liquidity indicators, financing risks, the structure of financing sources, and the structure of the securities portfolio, market, interest-rate, currency, and operational risks. In the past year, the Bank renewed and upgraded its Capital Management Policy and system. The goal of capital management is to spend the available capital efficiently ensuring: the safety and profitability of operations at the level of the Bank, a high level of trust by all stakeholders, the fulfilment of regulatory requirements relating to capital adequacy, the attainment of proper capital adequacy in the ICAAP process. 30 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

31 Furthermore, the goal of capital management is to ensure long-term and stable profitability of the owners investments through dividend payments based on the pre-defined criteria of the dividend policy, which ensures the Bank stable operations, growth and the achievement of strategic goals in the long run, as well as the satisfaction of all stakeholders and a stable ownership structure of the Bank. Below are detailed descriptions of the key elements of the Bank s credit, market and liquidity risks in Detailed information on the risk management and exposure of the Bank to individual risks is disclosed in the financial report of the Bank and Group (Chapter 7) and in a separate document entitled Gorenjska banka d. d. Disclosure of additional information for 2017, containing disclosures pursuant to Section 8 of Regulation (EU) 575/2013 and the provisions of the Banking Act. that it ensures stable operations and prudent management of the risk-return ratio. The central risk-related development project of the Bank last year was the implementation of IFRS 9. Within the scope of the transfer to the new International Financial Reporting Standard, the Bank developed a complex model for assessing the probability of default (PD) and a model for managing exposure to default (EAD), while upgrading its model to calculate the loss given default (LGD), both for legal entities and natural persons. In the future, the Bank will upgrade the existing model for calculating the loss given default (LGD) and set up a model for calculating conversion factors (CCF). An important development goal in risk management for the current year is also a comprehensive renovation of the in-house credit rating model for legal entities and natural persons. Credit risks Credit risk is a risk of financial loss incurred as a result of a debtor s inability to meet its financial or contractual obligations to the Bank, in part or in full, for any reason. Credit risk management is vital for the safe operations of the Bank. Prudent credit risk management includes credit risk control and reduction through various aspects, such as the quality and structure of investments, concentration, investment security, maturity, currency, type of loan, country risk and other risks. The goal of credit risk management at Gorenjska banka d.d., Kranj, is to achieve and maintain the quality and diversification of the credit portfolio, so Pursuant to the Risk Management Strategy and Risk Appetite Statement of Gorenjska banka d.d., Kranj, the Bank defines its risk appetite upon assuming a credit risk, whereby using the goals and limitations pertaining to the quality of the investment portfolio, its structure by business segment and type of transactions, exposures to foreign markets and credit portfolio concentration. In the past year, the Bank renewed and upgraded the limit system for the mentioned risk indicators, implementing it in its Credit Risk Management Policy and including it in its internal reporting system and in reports for the Bank s Supervisory Board. The table below reveals the key credit risk indicators at the Bank. In EUR thousand 31/12/ /12/2017 Change in the year In EUR thousand In %, p.p. Gross loan portfolio 1 1,043,389 1,257, , % Loans to non-banking sector 952,926 1,054, , % Non-performing loans (NPL) 2 195, ,274 (39,036) % Portfolio coverage by impairments and provisions 5.7% 4.2% -1.5 p.p. Share of non-performing exposures (NPE) % 7.4% -4.0 p.p. Coverage rate of non-performing exposures (NPE) % 43.3% -0.4 p.p. p.p. Percentage point. 1 Gross loan portfolio: Gross loans to banks and to non-banking sector, deposits with banks and central banks. 2 Nonperforming loans by individual claim. 3 The base for the calculation of the NPE share is exposure under EBA definition. 4 Balance of impairments for NPE compared to NPE. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 31

32 The figure below shows the credit rating structure of loans to non-bank clients as at 31 December The credit portfolio structure remains suitable also according to the client segment - almost two thirds of the portfolio is allocated to the claims in retail and towards small- and middle-sized companies. C, D, E D, E The share of D and E loans decreased by 5.7 percentage points in 2017 as a result of the active recovery of non-performing loans, rescheduled loans, activities for the early detection of increased credit risk (EWS), and monitoring increased credit risk indicators (KI). Due to a selective approach to the approval of new loans to companies, which complies with the investment policy of Gorenjska banka d.d., Kranj, the credit rating structure in A and B performing categories has improved, raising its share from 70.7% of loans to the non-bank sector at the end of 2016 to 75.5% at the end of The share of A loans stands at 48.2%. Liquidity risks Liquidity risk management includes the coordination of cash flows deriving from the operations of the Bank and its clients, as well as the provision of an adequate volume and structure of financing sources and liquidity reserves. In 2017, the Bank s liquidity was primarily subject to changes in the volume and structure of the Bank s liabilities, characterised by the exceptionally dynamic growth of non-bank deposits and their shortened average maturity due to an increased share of demand deposits, which has characterised the entire banking system in response to low interest rate conditions. The Bank s financial sources are diversified and practically all derive from deposits made by the non-bank sector, which ensures a stable financial position for the Bank, increases the reliability of the Bank s business model and enables the long-term growth of the Bank s credit portfolio. Based on monitoring the balance sheet structure, the Bank calculates the necessary volume on a monthly basis and assesses the adequacy of the liquidity reserve structure with respect to the adopted methodology and based on the results of the stress tests for a period of one month and for a one-week period of the most adverse liquidity conditions. Throughout 2017, the Bank disposed of an adequate volume and structure of liquidity reserves. In 2017, the Bank operated in excess liquidity conditions, which was the result of a notable increase in deposits by the non-bank sector. The Bank balanced it by placing short-term liquidity loans on the interbank money market, high account balances, net deleveraging on the wholesale market and by investing in securities. The Bank has the option to use central-bank liquidity operations, under which it acquires short-term and long-term assets required for maturity reconciliation of the Bank s assets and liabilities based on a pledge of securities with the status of eligible assets. As at the end of 2016, the Bank had no borrowings from the ECB under short-term and long-term 32 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

33 financing operations, but raised a long-term source of 70 million from the ECB in March 2017 based on TLTRO (Targeted Long-Term Refinance Operation), which falls due in 2021, in order to ensure an adequate structure of financing sources. The Bank significantly surpassed all liquidity-related regulatory requirements. Throughout 2017, the Bank achieved and surpassed the minimum reserve requirements and liquidity scale ratios in the class prescribed by the Bank of Slovenia in its Decision on the minimum requirements regarding the calculation of a suitable liquidity position. Furthermore, it considerably exceeded the regulatory level of the LCR value and maintained suitable NSFR values. Market Risks The Bank deems interest rate risk to be the most important non-credit risk. The Bank monitors and manages exposure to interest rate risks based on a methodology of interest rate spreads and a test of the impact of extreme situations for various scenarios of interest rate changes on the Bank s revenues and capital value. In 2017, the system and methodologies for monitoring, measuring and managing interest rate risks were significantly upgraded and updated based on the guidelines for interest rate risk management in the non-trading book. Low interest rate conditions and notable changes mostly in the structure of the Bank s liabilities somewhat increased the mismatch of positions according to the criterion of the interest rate redefinition period in 2017; however, the interest rate risks remain under control and the effects of stress tests involving adverse interest rate changes on equity remain within the limits set. The Bank is minimally exposed to foreign exchange risks, as the nature of its operations enables low exposure limits by currency and a common open position, whereby the Bank manages balances on a daily basis, which is why foreign exchange risks are insignificant in terms of the effects on the Bank s operations. The Bank has adopted a trading policy for market risk laying down the trading instruments and method, while the Bank has practically no trading positions. Operational risks The system and processes related to operational risk management are based on an internally established methodology, which the Bank upgraded in 2017 taking into account the Bank s characteristics as a whole, its size, organisation and volume of business. Within the scope of the operational risk management system, the Bank has laid down responsibilities, listed the key identification, monitoring, assessment, management and control processes for operational risks, and defined their reporting system at the Bank and its subsidiaries. The operational risk management process comprises two fundamental processes: the process of the identification and management of potential operational risks for their timely detection, the assessment of possible effects and the definition of the method to control potential operational risks, the process of loss event management from realised operational risks that enables the detection, reports on and assessment of the damage caused by the realised operational risks. The core of it is their communication with a uniform database of loss events. The process is integrated in all business functions and major Bank processes, and covers all employees. The Bank supplements the described identification system for potential operational risks by defining a set of key operational risk indicators that show the possibility of increased operational risks in the Bank s operations with their trends, and by monitoring the publicly available information on the operational risks and loss events experienced by institutions in the financial sector or in related activities that could also pose a threat to the Bank s operations. The established operational risk management system at the Bank ensured that the net losses realised in 2017 accounted for less than 0.1% of the capital reserve for operational risk, which the Bank calculates using the simple approach pursuant to the provisions of the Capital Requirements Regulation. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 33

34 Development projects In 2017, the development projects in Gorenjska banka were mostly related to the update of the technological support for retail operations, renewals of business processes or increasing the sales efficiency of the bank, as well as the implementation of the new rewarding system. All three projects, for which the bank allocated an important part of its resources for development in 2017, are vital for ensuring the future business performance and competitiveness of the bank. Information technology upgrade With the implementation of its own IT support for operations with natural persons, the bank fulfilled three key goals: the bank is no longer dependent on a competitor bank for the development and maintenance of IT support for natural persons, the bank ensured the option for the faster implementation of new services and greater competitiveness on the retail market, and the bank has a higher impact and better control over the costs of IT support. Good preparations allowed the bank to successfully migrate to the new support at the end of 2017 without any problems for the clients. At the same time as the renovation took place, the bank also took care of the unification of the hardware and software platforms that host all the applications supporting the bank s operations, which will allow further cost rationalisations in this area. Following the end of 2017, the entire bank s operations are supported by the Oracle database and runs on Intel servers, which visibly simplified the maintenance and further upgrades. The renovation of the central application for retail operations also required some small updates to the online bank Link, while a full renovation of the system is planned for In addition, the bank also renovated the comprehensive virtual environment and disk arrays in 2017, thus it s hardware now has enough capacity for the further expansion of its operations. In accordance with the modern security requirements, new fire enclosures were also implemented, which ensure the safety of operations of internal bank applications, as well as the online and mobile banking. Many updates were also carried out, which were mostly related to regulatory requirements and supplements in the area of payment systems. All such applications are the result of the bank s own development. 34 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

35 Optimisation of processes The goal of the optimisation of business processes, which started at the beginning of 2017 with the help of external advisers, was to find unused internal potential, to activate it and thus increase the productivity, effectiveness and competitive advantage of the bank. The impacts of the project were already reflected in 2017 in the improved sale; the bank recorded a growth in operations in practically all segments. The credit process was simplified, shortened and automatised, which was especially reflected in the faster response time to the clients needs. Analytical, administrative and other support activities were assumed in full by the back-office services, while the roles of individual services were clearly defined. The time the bank can allocate to directly working with clients was thus significantly increased. 3-member sales teams were formed for marketing services to companies, the role of the managers of retail offices is increased, and we also established the function of a regional sales manager. A new way of planning and accepting sales was also formed, which ensures a clear and very tight connection between achieving goals and awarding. The sale goals were set individually, with clear benchmarks. In addition, the bank is also planning the activities, techniques and tools for achieving the sale goals. New reward system In 2017 the bank implemented a new payment model and reward system. It thoroughly examined and renewed the labour area and brought it closer to modern HR trends. The related changes were also included in the new collective agreement of Gorenjska banka, which was accepted in November 2016 and entered into force on Due to the organisational, staffing and process changes the bank had been exposed to in previous years, all positions of employment were enumerated and evaluated anew. The number of positions of employment has been halved. Job descriptions have been updated and the required competences and skills were adjusted accordingly. A new, transparent and more flexible reward system was formed for job posts in the sales and infrastructure areas, which appropriately links the work performances with rewarding the respective individual, thus ensuring greater commitment and motivation of employees. The new model was fully automatised and supported by IT in A new way of monitoring and managing sales was also implemented, which ensures on-going insight into the implementation of activities, the performance in achieving goals and the allocation of the employees time. This allows the bank to find potential for improvements and set the priorities more effectively. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 35

36 Organisational and HR changes Organisational interventions Most of the organisational reformations that Gorenjska banka implemented in 2017 were connected to the findings of the business process analyses or measures necessary for their optimisation. Most of the changes were implemented in the market area or in the organisation of the sales function. They were primarily intended for the simplification and automatisation of the crediting process, the increase of the time allowed for working with clients, and for a clear distribution of roles assumed by individual services in the sales process. The bank did not interfere with the formal organisation of the commercial banking sector in 2017, however it did visibly change their work methods. It established 3-member sales teams, which are efficiently supporting the needs of companies. At the same time, the analytical or back-office viewpoints of commercial transactions are also adequately supported. Such work methods ensure a high level of adaptability and responsiveness in Gorenjska banka to micro, small-sized and middle-sized companies. The network offices were connected to two regional departments in 2017, modelled on comparable banks, where the bank also named regional sales managers. A new position of employment was formed, namely for the sales network coach who will take care of the coaching of office managers, of the mutual exchange of knowledge and of the support in implementing innovations. The area for supporting operations and risks was reorganised. A new financial control department was established. A new department for managing properties that have been placed in the risk area was also established in 2017 with the purpose of the centralised management and optimisation of all properties, both investment and those the bank is using within the scope of its operations. Number and structure of employees On the last day of 2017, there were 403 persons employed in Gorenjska banka, which is two less than at the end of On average, there were 398 people employed in the bank in 2017, which is 2% less than in The dynamics in HR was highly noticeable in 2017 due to organisational, economic and technological changes. 55 new employees joined the bank while 56 left, mostly due to retirement and business reasons. 73 transfers or career changes were internal. New employments were mostly due to newly established positions of employment in These were established especially in the market area with the purpose of strengthening the sales function of the bank. Consequently, the number of employees in the risk area was increased, while the number of employees in support functions was decreased. HR movements were also reflected in the lower average age and better educational structure of employees. The average age of employees decreased somewhat in 2017, i.e. from 46.5 to 44.5 years. The share of employees whose attained formal level of education is VI. or higher increased from 48.8% in 2016 to 53.8% in The average number of employees in 2017, broken down into groups with respect to the education acquired: Level of education VIII VII VI V IV Total Average number of employees Subsidiary companies employ 54 people. 36 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

37 Education The bank has been increasing the resources intended for education for quite some years now. Their amount was 23% higher in 2017 compared to Every employee in the bank spent 2.02 days on average on education or 5.8% more than the year before; the average input into education was / employee in 2017, which is about the same as in Education sessions were organised mainly in Slovenia, some even abroad. A couple of programs were carried out in e-form. The content of these educations was mostly adjusted to the specific needs of the bank; there was less general educational content in External education was regularly supplemented with internal education by the bank, with which the bank ensured the suitable internal transfer of knowledge. Such practice has proved very effective in the last couple of years. In education, the bank mostly focused on increasing the effectiveness and performance of sales in 2017, which is why there were series of targeted sale educations. There was also a program for acquiring coaching skills for sale unit managers. 173 employees took part in these educations in Employees in the retail network also underwent training in 2017 for the acquisition of the certificate for marketing investment funds. By the end of the year, 60% of retail staff had acquired such a licence. In the second half of the year, one fifth of the employees in the sales network participated in education on the consumer crediting of properties, which was organised in cooperation with the Bank Association of Slovenia. Even bank advisers for companies updated their knowledge in the area of balance and the wider financial analysis of companies. In the last quarter, an important part of education was intended for the preparations for the implementation of the new IT support for retail operations. Employees in leadership and managerial positions, as well as professionals from various fields, regularly participated in professional consultations and conferences, both at home and abroad. Even in 2017, the bank made sure that employees were up-todate with the current and new information in the banking, legal and wider economic area. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 37

38 Social responsibility Responsibility to the social environment is the basis of sustainable development in Gorenjska banka. The bank wishes to actively contribute to positive changes and, therefore, it is attentive to the needs of the wider community and is responding to them actively. Through sponsorships, donations and other forms of partnerships with volunteers, sport, business, humanitarian and other non-governmental organisations, the bank has participated in numerous projects in 2017, which contributed to the mutual and sustainable growth, as well as to preserving health, nature and safety. It continued to support the activities and development of the Planica Nordic Centre, a project of national significance that, in addition to the achievements in sports, also provides numerous business opportunities. It successfully concluded the long-standing sponsorship cooperation with the Radovljica swimming club and supported the realisation of 2017 World Rowing Masters Regatta at Bled. The bank continues to be fond of basketball, which is evidenced in the support for the Celje and Petrol Olimpija basketball clubs. It also responded to the needs of several other sport and recreation clubs, from hockey to golf, swimming and running. Among other things, Gorenjska banka also participated, for the third time in a row, in the popular Bled run race Nočna 10ka. In order to provide a friendly environment for entrepreneurs, the bank further developed its online community Banka za podjetnike, through which it regularly spreads knowledge to entrepreneurs, thus smoothing their business path. For this purpose, the bank carried out 12 free entrepreneurship education sessions in As the general sponsor, it also supported the choice of Delo s star entrepreneur and participated in several other activities and events that highlight positive entrepreneurial stories and examples. As an important co-creator of social image in the wider region, the bank was involved, through cooperation with hospitals, mountain rescue services, firefighters, clinics, schools, libraries, and various other humanitarian institutions, in a number of activities that were intended to aid socially vulnerable persons or persons disadvantaged in any other way. Furthermore, employees in Gorenjska banka actively cooperated in the action Očistimo Kranj for the third time in a row, which the bank also supported financially. 38 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

39 Data and explanations pursuant to Paragraph 6 of Article 70 of the Companies Act Gorenjska banka, d.d., Kranj is a privately held company with over 250 shareholders and more than EUR 4 million in total equity, and is therefore bound by the law which governs acquisitions. Share capital structure The Bank s share capital comprises 387,938 ordinary shares (2016: 387,938). Ordinary shares confer voting rights, whereby each share confers one vote at the general meeting of shareholders. Shareholders exercise their voting rights at the Bank s general meeting of shareholders with respect to the proportion of their shares in the share capital and with respect to the type of shares and in accordance with the Bank s articles of association. Treasury shares have no voting rights. Restrictions to share transfers Bank shares are transferable in accordance with the regulations that govern dematerialised securities. Current shareholders have pre-emptive rights to new share issues corresponding to their proportion of share capital held. The Bank has no other restrictions on shareholding, while approval from the Bank of Slovenia is required for the acquisition of a qualifying holding. There is no requirement of obtaining the consent of the Bank or other shareholders for the transfer of shares. Significant direct and indirect holdings of securities by the Bank The significant direct and indirect holdings of securities by the Bank in terms of achieving a qualifying holding as laid down by the act regulating acquisitions (5% of voting rights) was achieved by three companies at the Bank in 2017 (2016: 3 companies). Shareholder 31 December December 2016 Number of ordinary shares Share in voting rights, in % Number of ordinary shares Share in voting rights, in % AIK banka, a. d., Beograd 81, , DUTB, d.d., Ljubljana 26, , Zavarovalnica Triglav, d. d., Ljubljana 15, , Sava d.d., Ljubljana, which holds 146,060 shares of the Bank, has no voting rights. Restrictions of voting rights Shareholders voting rights are exercised with respect to the number of shares and are not restricted by the Articles of Association to a certain proportion or a certain number of votes. Shareholders who are the holders of registered shares with voting rights, who are entered in the central register of book-entry securities and who notify their participation at a General Meeting of Shareholders by the end of the fourth day preceding the meeting (cut-off date) are entitled to participate and exercise the voting right at the meeting. Bank rules on the appointment and replacement of members of management and supervisory bodies and on amendments to the articles of association The Bank s rules on the appointment and replacement of members of management and supervisory bodies and on amendments to the articles of association are defined in the articles of association of Gorenjska banka, d.d., Kranj. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 39

40 The supervisory board appoints and recalls members of the Bank s general meeting of shareholders. Persons who do not fulfil the conditions for membership of the Bank s supervisory board pursuant to the Companies Act or the Banking Act may not be appointed to the supervisory board. Members of the supervisory board are appointed for a five year term and may be reappointed. Members of the supervisory board may terminate their terms early through recall or on the basis of a written resignation from the member. The president and members of the Bank s management board appoint and discharge or recall the supervisory board. Only persons who fulfil the conditions for appointment pursuant to the Companies Act or the Banking Act may be appointed president of the Bank s management board. The president of the management board and the members of the management board are appointed for a five year term and may be reappointed. The articles of association may be amended through a resolution of the Bank s general meeting of shareholders. The Bank s general meeting of shareholders may authorise the supervisory board to make amendments to the articles of association, which comprise the harmonisation of the wording with currently adopted resolutions. Management authorisations The Bank may acquire and dispose of treasury shares pursuant to the Companies Act. The Bank s management board decides on the conditions for acquisition and disposal of treasury shares, and must notify the Bank s general meeting of shareholders about transactions involving treasury shares. The Bank s management board may increase the Bank s share capital up to a total amount of EUR 4,556, within five years from the day of entry of thirteen amendments to the articles of association of Gorenjska banka, d.d., Kranj in the court register. Preference shares without voting rights may also be issued within the scope of this capital increase, and the management board may, with the consent of the supervisory board, fully or partially exclude the shareholders pre-emptive right to new shares. Thirteenth amendments and supplements to the Articles of Association were entered in the Court Register on 9 September Diversity policy and representation in management and supervisory bodies The Bank follows the principle of gender balance according to the Internal Governance Policy of Gorenjska banka d.d., Kranj, under the assumption that the management body (Management Board, Supervisory Board) consists of minimum 20% members of each gender. The management body composition reflects diversity of theoretic expert knowledge and experience from different fields, thus ensuring: the expected (required) qualification member structure according to the size, demanding level and bank risk profile, and the basis (background) for encouraging different views (opinions) on the discussed matters (issues). At least one half of the supervisory body members should consist of independent members. This includes those members with no conflict of interests and who act and decide independently and objectively in favour of the Bank, having no close economic connection to the Bank, the Management Board or more shareholders. The management body structure (and the sufficient number of independent directors) itself can ensure effective making of substantiated, objective and independent decisions in favour of the Bank. Last but not least, the diversity policy also requires certain acting by the members of the Bank s Supervisory Board; namely to carry out the assessment of effectiveness of their work and a self-assessment of the collective suitability once a year and to adopt a programme of measures to improve the effectiveness of their work. 40 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

41 Diversity is important also in following the measures for experience assessment. If during such assessment of a candidate for a member of the management body and the higher bank management the quantitative criteria thresholds (previous work experience) are not achieved, the candidate can still be regarded as appropriate if they provide a suitable justification after the supplementary assessment and interview. The adequate diversity and a broad range of experience from the view point of the management body as a whole are also considered. Significant events after the date of the statement of financial position On 31 March 2018, Andrej Andoljšek is to be early recalled from the post of the Chairman of the Management Board of Gorenjska banka d.d., Kranj. In accordance with lesislaion, The Bank s Supervisory Board has appointed David Benedek, the present member of the Bank s Supervisory Board, for the alternate member and Chairman of the Bank s Management Board, for a six-month term. The Delo newspaper published the takeover intent of the AIK Banka, d. d., Bulevar Mihajlo Pupin 115d, Novi Beograd, the Republic of Serbia, to buy shares of Gorenjska banka, d.d., Kranj on 16 December and 22 December 2017; however, the takeover offer was not published in the period determined by the Takeovers Act. In February 2018, in accordance with the provision of the Decision of the Bank of Slovenia on credit risk management in banks and savings banks, based on the assessment of the criteria for individual loss evaluation for individually significant assets and based on the new information and facts on their operations and financial position, the Bank has reclassified the claims against three clients who jointly represent one group of related parties among non-performing exposures. The total exposure against the clients of this group amounted to EUR 27.5 million on 31 December The reclassification of this group of related parties among non-performing exposures (NPEs) does not have a material impact on the financial statements; the capital adequacy ratio remains unchanged. Had the Bank reclassified and treated the aforementioned exposures as non-performing at the end of 2017, the NPE share of the Bank s assets as on 31 December 2017 would increase from 7.4% to 8.7%. There were no other significant events after the balance sheet date. Other explanations Shareholders in Gorenjska banka, d.d., Kranj do not have any special controlling rights. Bank is not known is there are any agreements between shareholders which may result in restrictions on the transfer of securities and voting rights. The Bank have agreements between the Bank and management board or Bank employees which foresee compensation if they were dismissed without grounds or their employment relations terminated because of a bid as defined by the law that governs acquisitions. In the event of a recall or termination of the employment contract without good reason, management board, executive directors and directors are entitled to severance pay. In the event that the term of office of the President of the management board terminates on his request (resignation), the severance pay can be paid based on a positive assessment of its work by the Supervisory Board. A Code of Business Ethics is put in place at the Bank that represents a set of fundamental values and principles guiding our conduct in relation to associates, partners, and clients. The Code is available on the Bank s website: Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 41

42 Statement on internal governance arrangements In order to achieve a high level of transparency in governance and based on the exception from point 2 of paragraph 5 of Article 70 of the Companies Act, Gorenjska banka d.d., Kranj, provides within the scope of the business section of its Annual Report the following STATEMENT ON INTERNAL GOVERNANCE ARRANGEMENTS 4 The Banking Act (ZBan-2), Official Gazette of the Republic of Slovenia, No. 25/15, 44/16, 77/16 and 41/17 5 The Bank of Slovenia s Decision on internal governance arrangements, the management body and internal capital adequacy assessment process for banks and savings banks, Official Gazette of the Republic of Slovenia, No. 73/15, 49/16 and 68/ bsi.si/financnastabilnost/ predpisi/ seznampredpisov/ licenciranje Gorenjska banka d.d., Kranj, realises internal governance arrangements, including corporate governance, in line with the legislation applicable in the Republic of Slovenia, while observing its internal acts, especially the Policy of internal governance in Gorenjska banka d.d., Kranj and the Employee Business Ethics Code for Gorenjska banka d.d., Kranj. In doing so, Gorenjska banka d.d., Kranj, fully observes the acts from paragraph 2 of Article 9 of the Banking Act. In order to strengthen the internal governance arrangements, the Bank observes in particular: 1) the provisions of the applicable Banking Act laying down internal governance arrangements, particularly the provisions of chapter 3.4 (Bank governance system) and chapter 6 (Internal governance arrangements and adequate internal capital), in the part of the requirements applicable to the bank/savings bank or to members of the management body, 2) the Decision on internal governance arrangements, the management body and the internal capital adequacy assessment process for banks and savings banks 5, and 3) the EBA guidelines regulating internal governance, assessment of the suitability of members of the management body and key function holders, and the remuneration policy and practice based on the relevant decisions adopted by the Bank of Slovenia on the use of the guidelines 6. At the same time, we also strive to observe non-binding recommendations from the Bank of Slovenia letter (No /15-TR as of 23 October 2015). The Bank provides the description of the main features of internal control and risk management systems in the Bank, information on the functioning of the general meeting, management and supervisory bodies and their committees in additional disclosures in accordance with Part 8 of Regulation 575/2013 and Article 88 of the Banking Act 2, which are available on the Bank s website. The Bank keeps books and other records, which enable financial reporting and ongoing monitoring of the Bank s effectiveness and the compliance of risk management. The Bank keeps books and other records in accordance with the legislation and internal regulations governing this area. By signing this Statement, we also undertake to proactively strengthen and promote suitable internal governance arrangements and corporate integrity in the wider expert, financial, economic and other public. Kranj, 14 March 2018 Mojca Osolnik Videmšek Management Board Member Andrej Andoljšek Management Board President David Benedek Supervisory Board Chairman 42 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

43 A Concise Risk Statement Approved by the Management Body In accordance with Article 17 of the Regulation on Internal Governance Arrrangements, the Management Body and the Internal Capital Adequacy Assessment Proces for Banks ank Saving Banks (Official Gazette of the Republic of Slovenia, No. 73/15 and 49/16) and Article f of Regulation (EU) 575/2013, the Management Board and the Supervisory Board of Gorenjska banka, d.d., Kranj provide the following STATEMENT ON THE MANAGEMENT OF RISK Due to the development and characteristics of the financial system and significant changes in the economy and the environment, the determination, take over, measurement and management of risk have become an important element of the Bank s strategy and performance. Primary objectives pursued by the Bank in the context of the risk management system are: Ensure compliance with regulatory frameworks (legislation, Basel standards, internal capital adequacy assessment process (ICAAP), accounting standards); Minimise potential losses; Provide support in the process of defining strategic objectives; Improve profitability; Manage relationships with all stakeholders; The establishment of a suitable organisational and management structure of the Bank. In accordance with the strategy and policies of the Bank s operation, risk management is a key component in business decision-making. Risk management is integrated into all business processes in the Bank, and has two main aspects, the first being the assessment of risk-taking in the Bank and the optimisation of decision in terms of risk-taking, and the second aspect is connected with a quantitative assessment of assumed risks. In so doing, the Bank pursues the following principles: The delimitation of powers, which prevent errors, fraud and irregularities, and in particular eliminates conflicts of interest in the greatest possible extent. The separation of commercial function and units that enter into transactions and take risk (front office) from the back office function, which monitors and manages transactions (back office), and function, which monitors and manages risks. The establishment of an independent control system. The internal audit independently assesses the controls. The Bank has organised a Business Compliance Department, which has the primary function to act preventively with targeted organisational measures in order to avoid the realisation of risks due to non- -compliance, to which the Bank could be exposed. This involves the risk of legal or regulatory sanctions, material financial loss or loss of the Bank s reputation due to the non-compliance of the Bank s operation with the relevant regulations and standards of good practice. In accordance with these principles, the Bank has established a so-called three-step model of risk management. 1. Defence line taking risk and risk ownership 2. Defence line risk management 3. Defence line monitoring and control Sales services Risk management Audit and compliance Enter into transactions The ongoing monitoring of business The optimisation of the investment portfolio The awareness of the importance of risk The risk management policy The principle of»get to know your customer«the process for approving investments The monitoring process The assessment of new business initiatives The periodic inspections of the implementation of the principles and policies Implementing and monitoring the implementation of the provisions of conformity Considering the business model (universal commercial bank), risks, to which the Bank is exposed to, are mainly traditional banking risks. The most important is credit risk, followed by liquidity risk, while the exposure to market risk and other types of risk is reduced. Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 43

44 Risk Assessment low medium high Trend Risk increased Risk at the same level Risk lowered Same stage, increase Same stage, decrease Risk Assessment Trends Q2017 Y2017 Capital Risk Credit Risk Liquidity Risk Market Risk Interest Rate Risk FX Risk Operational Risk The Bank s risk profile The Bank has upgraded and updated its system for measuring risks and monitoring the risk profile in such a way that, on the basis of the defined risk appetite and internal limit system, it defined for each risk type a range of key indicators, as well as the limit values for every one of them in order to review the risk assessment and its importance. The calculated weighted assessments of risk levels by individual segments and their trends are reflected in the so-called risk dashboard of the Bank, which is shown in the image on the left as per the state on 31 December 2017: No major changes in the risk profile of Gorenjska banka, d.d. were detected in The most notable is the exposure of the bank to interest risk, which the bank is monitoring closely. With regard to this, the bank is also assessing the changes and trends of its risk profile from the point of view of macroeconomic conditions, as well as developments in the corporate environment, which were favourable in Slovenia and the wider area in The projections of further global economic growth keep increasing the conjuncture and are also reflected in more intense investment activities in the economy, thus increasing the demand for bank loans. At the same time, the growth in bank loans and the changes in the structure of the non-banking sector role are significantly influenced by the ongoing low interest rates, due to which the share of sight deposits of the non-banking sector in all roles in 2017 kept growing with a slight stabilization in the last months of the year. The Bank is also measuring the risk profile through the exposure to risks, measured with the capital demand for individual risk types and internally set methodologies and indicators for monitoring and measuring risks. The entire capital demand of the Bank amounted to EUR 83.88m at the end of 2017 and has increased by EUR 6.98m compared to the year before. The increase is due to the increase of the capital demand, which is originating from the larger range of corporate loans and retail banking. Exposures insured with mortgages and high risk exposures are also larger, which stems from the limited but increased (compared to the previous year) range of project financing of real estate transactions. On the other hand, the Bank reduced the capital demand for unpaid exposures, which is due to the successful restructuring of the portfolio and the reduction of the range of non-performing loans. The exposure of the Bank to operational risk, measured through capital demand, was somewhat lower in 2017 compared to the year before. The table below shows the Bank s position as at 31 December 2017 compared to the previous period. (In thousands of EUR) 31 Dec Structure Dec Structure 2016 Change Credit risk 77,563 92% 70,539 92% 7,024 Market risk - 0% - 0% - Operational risk 6,313 8% 6,360 8% (47) Total capital requirements 83, % 76, % 6, Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Management Report

45 The Bank is carefully monitoring and managing other risks as well which originate from the Bank s operations and the dynamic business environment, e.g. compliance risk, reputational risk, strategic risk, capital risk, and risk of profitability. For all of the listed risk types, the Bank has defined internal approaches to promptly detect, measure and prepare measures for their management and control. Readiness to assume risk and capability to assume risks The readiness to assume risks is reflected by the level of risks which the Bank is prepared to accept, considering its capability to assume risks with the purpose of achieving the strategic goals of the Bank. The defined readiness to assume risks is the integral part of the planning process, which is shown in the planned ranges and structure of investments and sources, including the capital plan. The Bank has, in order to ensure a clear definition and transparent monitoring, defined its most important criteria for the risk appetite through a range of key indicators, namely in those areas which are the most important for the Bank in terms of risk types. The values of key risk indicators are set as target values or limit values, arising from, in both cases, the current and expected risk profile of the Bank and good banking practice, as well as the generally-known criteria of banking. In addition to the qualitative focus on the most important areas the Bank also defines its risk appetite in a quantitative manner through a set of key risk indicators. The definitions and key indicator defined in the risk appetite are also the starting point to define internal policies and methodologies for monitoring individual risk types, as well as a basis for establishing a more detailed limit system in all the risk segments, which will be defined in the policies by individual risk types. The image below shows relative achievement of the most important risk appetite criteria as at the end of Risk apetite Exposure Limit The limit and critical values of risk appetite indicators are defined as targeted (capital adequacy ratio, quality of investments, structure of the credit portfolio, loan-to-deposit ratio, tolerance towards internal frauds and abuses) or limit (concentration of the credit portfolio, liquidity coverage ratio, net stable funding ratio, impact of interest rate changes on the capital). In 2017 the values of all the aforementioned indicators were within normal frameworks, the target value at the end of the year was not achieved only under the criterion of the credit portfolio quality, where the Bank, despite unfavourable starting values, had set ambitious criteria for the target investment structure, under which it wishes to reduce the share of non-performing exposures to under 7%. Kranj, 14 March 2018 Mojca Osolnik Videmšek Management Board Member Andrej Andoljšek Management Board President David Benedek Supervisory Board Chaiman Management Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 45

46 Independent Auditor s Report 46 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Independent auditor s Report

47 Independent auditor s Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 47

48 48 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Independent auditor s Report

49 Independent auditor s Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 49

50 50 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Independent auditor s Report

51 Independent auditor s Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 51

52 52 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Independent auditor s Report

53 Independent auditor s Report Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 53

54 Financial Report of the Bank and the Group 54 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Financial Report of the Bank and the Group

55 Statement of management s responsibilities The Management Board of the bank hereby confirms the Financial Statements of Gorenjska banka, d.d., Kranj and the Gorenjska banka Group for the year ended on 31 December 2017 as well as the accounting policies applied and the Notes to the Financial Statements. The Management Board is responsible for the preparation of the Annual Report so that it presents a true and fair view of the bank s and Group s financial position and operating results for the year ended on 31 December The Management Board hereby confirms that they have consistently applied the accounting policies and made the accounting estimates according to the principles of prudence and due diligence. The Management Board also confirms that the Financial Statements have been prepared on the basis of the assumption of going concern of the company and in line with the applicable legislation as well as the International Financial Reporting Standards adopted by the EU. The Management Board is also responsible for the appropriate keeping of accounting records, implementation of suitable measures for the protection of assets, and for the prevention and detection of abuse and other irregularities or illegal acts. The Tax Office may review the books of account of Group companies at any time within the period of five years of the day the tax needed to be levied, which can subsequently cause the imposition of an additional tax liability or penalty. The Bank s Management Board is not aware of any fact or circumstance that could cause significant liabilities of this type. Kranj, 14 March 2018 Andrej Andoljšek predsednik uprave Mojca Osolnik Videmšek Management Board Member Financial Report of the Bank and the Group Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 55

56 Income statement The notes are an integral part of these financial statements. (in thousands of EUR) Notes Bank Group Interest income 38,202 34,740 37,415 34,088 2 Interest expense 4,401 6,240 4,401 6,239 3 Net interest income (1-2) ,801 28,500 33,014 27,849 4 Dividend income Fee and commission income 12,283 10,242 12,277 10,240 6 Fee and commission expense 1, , Net fee and commission income (5-6) ,275 9,634 11,269 9,632 8 Net gains/losses on financial assets and liabilities not measured at fair value through profit and loss ,332 2,783 1,332 2,783 9 Net gains/losses on financial assets and liabilities held for trading , , Net gains on financial assets and liabilities designated at fair value through profit or los Exchange differences 4.7. (139) 632 (139) Net gains on disposals of assets other than held for sale 4.8. (95) (60) 2,789 1, Other operating net loss/profit ,666 27,935 30,121 27, Administration costs ,596 1,760 2,364 1, Depreciation Provisions ,839 5,351 5,085 5, Impairment (57) - (57) - 18 TOTAL PROFIT BEFORE TAX ( ) 10,052 7,471 10,674 7, Tax ,551 1,172 3,701 1, TOTAL PROFIT AFTER TAX (18-19) 6,501 6,299 6,973 6, PROFIT FOR THE YEAR (20) 6,501 6,299 6,973 6, Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Financial Report of the Bank and the Group

57 Statement of comprehensive income The notes are an integral part of these financial statements. (in thousands of EUR) Bank Group PROFIT FOR THE YEAR AFTER TAX 6,501 6,299 6,973 6,575 2 OTHER COMPREHENSIVE INCOME AFTER TAX (3+4) (2,552) (1,774) (2,552) (1,774) 3 ITEMS THAT WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS (50) (69) (50) (69) 3.1. Actuarial gains/losses on defined benefit pension plans (50) (69) (50) (69) 4 ITEMS THAT MAY BE RECLASSIFIED TO PROFIT OR LOSS (2,502) (1,705) (2,502) (1,705) 4.1 Available-for-sale financial assets (2,732) (1,374) (2,732) (1,374) Valuation gains/losses taken to equity (1,213) 483 (1,213) Transferred to profit of loss - (10) - (10) Other reclassifications (1,519) (1,847) (1,519) (1,847) 4.2 Income tax relating to items that may be reclassified to profit or loss 230 (331) 230 (331) 5 TOTAL COMPREHENSIVE INCOME FOR THE YEAR AFTER TAX (1+2) 3,949 4,525 4,421 4,801 Financial Report of the Bank and the Group Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 57

58 Statement of financial position The notes are an integral part of these financial statements. (in thousands of EUR) Notes Bank Group 31/12/ /12/ /12/ /12/ Cash, balances at central banks and other demand deposits , , , ,640 2 Available-for-sale financial assets , , , ,266 3 Loans and receivables 1,080, ,794 1,053, ,451 - loans and receivables to banks ,049 62, ,049 62,646 - loans and receivables to customers , , , ,150 - other financial assets ,297 6,286 8,538 6,655 4 Held-to-maturity investments ,105 95, ,105 95,280 5 Non-current assets held for sale ,450-3,450-6 Property and equipment ,023 6,764 14,434 9,594 7 Investment property ,371 24,371 45,734 48,048 8 Intangible assets ,843 3,644 4,094 3,840 9 Investments in subsidiaries, associates ,314 4, Deferred income tax assets ,825 14,479 11,405 14, Other assets , ,906 4, Total assets (from 1 to 11) 1,871,944 1,512,629 1,870,881 1,513, Financial liabilities held for trading Financial liabilities measured at amortised cost 1,662,711 1,303,087 1,658,687 1,302,615 - due to customers ,480,690 1,226,988 1,476,523 1,225,563 - borrowings from banks and central banks ,194 63, ,194 63,915 - other financial liabilities ,827 12,184 80,970 13, Provisions ,364 3,065 3,364 3, Tax liabilities ,412 2,146 2,477 2,189 - current income tax liabilities deferred income tax liabilities 1,873 2,146 1,873 2, Other liabilities ,393 3,498 4,651 3, Total liabilities (from 13 to 17) 1,671,886 1,311,796 1,669,185 1,311, Paid up capital 16,188 16,188 16,188 16, Share premium 20,023 20,023 20,023 20, Accumulated other comprehensive income 10,571 13,124 10,571 13, Reserves from profit 171, , , , Treasury shares (26,007) (26,007) (26,007) (26,007) 24 Retained earnings (including income from the current year) 7,619 6,784 9,257 7, Total equity (from 19 to 24) , , , , Total equity and liabilities (18+25) 1,871,944 1,512,629 1,870,881 1,513, Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Financial Report of the Bank and the Group

59 Statement of changes in equity The notes are an integral part of these financial statements. Bank (in thousands of EUR) Notes Paid up capital Share premium Accumulated other comprehensive income (AFS) Accumulated other comprehensive income (HTM) Accumulated other comprehensive income (actuarial gains on pension schemes) Reserves from profit Retained earnings (including income from the current year) Treasury shares Total equity 1 1 January ,830 9,381 8,103 6, ,327 2,770 (26,007) 184,198 2 Total compre hensive income for the year (2,088) (69) - 6,299-4,525 3 Subscription (payingup) of fresh capital 2,359 10, ,000 4 Transfer of net profit to reserves (913) Other (1) (1,372) - (890) 5.1 The cost of recapitalization (903) - - (903) 5.2. Transfer of actuarial gains to retained earnings Allocation of net profit of the previous year ,385 (1,385) Rounding (1) (1) (1) - (1) 6 31 December ,188 20,023 8,487 4, ,721 6,784 (26,007) 200,833 7 Profit for appropriation for the year ended 31 December ,784-6, January ,188 20,023 8,487 4, ,721 6,784 (26,007) 200,833 2 Total compre hensive income for the year (983) (1,519) (50) - 6,501-3,949 3 Appropriation of dividends (4,724) - (4,724) 4 Transfer of net profit to reserves (943) Other (2) Transfer of actuarial gains to retained earnings Rounding (2) (1) 6 31 December ,188 20,023 7,504 3,106 (39) 171,664 7,619 (26,007) 200,058 7 Profit for appropriation for the year ended 31 December ,619-7,619 Financial Report of the Bank and the Group Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 59

60 The notes are an integral part of these financial statements. Group (in thousands of EUR) Notes Paid up capital Share premium Accumulated other comprehensive income (AFS) Accumulated other comprehensive income (HTM) Accumulated other comprehensive income (actuarial gains on pension schemes) Reserves from profit Retained earnings (including income from the current year) Treasury shares Total equity 1 1 January ,830 9,381 8,103 6, ,327 3,661 (26,007) 185,089 2 Total comprehensive income for the year (2,088) (69) - 6,575-4,801 3 Subscription (payingup) of fresh capital 2,359 10, ,000 4 Transfer of net profit to reserves (913) Other (1) (1,372) - (890) 5.1 The cost of recapitalization (903) - - (903) Transfer of actuarial 5.2. gains to retained earnings Allocation of net profit of the previous year ,385 (1,385) Rounding (1) (1) (1) - (1) 6 31 December ,188 20,023 8,487 4, ,721 7,951 (26,007) 202, January ,188 20,023 8,487 4, ,721 7,951 (26,007) 202,000 2 Total comprehensive income for the year (983) (1,519) (50) - 6,973-4,421 3 Appropriation of dividends (4,724) - (4,724) 4 Transfer of net profit to reserves (943) Other (2) (1) 5.1. Transfer of actuarial gains to retained earnings Rounding (2) 1 - (1) - (2) 6 31 December ,188 20,023 7,504 3,106 (39) 171,664 9,257 (26,007) 201, Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Financial Report of the Bank and the Group

61 Cash flow statement The notes are an integral part of these financial statements. (in thousands of EUR) Notes Bank Group A. Operating activities a) Interest received Interest paid (4.401) (6.240) (4.401) (6.241) Dividend received Fee and commission receipts Fee and commission paid 4.3. (1.008) (608) (1.008) (608) Realised gains on financial assets not measured at fair value through profit or loss Realised losses on financial assets not measured at fair value through profit or loss (120) (4) (120) (4) Net trading incomes Cash payments to employees and suppliers 4.9. (29.666) (27.935) (30.121) (27.984) Other incomes Other expenses (2.042) (1.541) (2.042) (1.541) Cash flows from operating profits before changes in operating assets and liabilities (a) b) (Increase)/decrease in operating assets ( ) ( ) ( ) ( ) Increase in financial assets available for sale (28.228) ( ) (28.228) ( ) (Increase)/decrease in loans ( ) (76.623) ( ) (72.030) Decrease in other assets (1.434) (3.507) c) Increase/(decrease) in operating liabilities Decrease in financial liabilities held for trading - (431) - (431) Decrease in deposits and borrowed funds, measured at amortised cost Increase/(decrease) in other liabilities (1.589) (1.574) (1.686) (1.692) č) Cash flow from operating activities (a+b+c) ( ) ( ) d) Income tax refund (793) - (793) - e) Net cash flow from operating activities (č+d) ( ) ( ) B. Investing activities a) Cash proceeds related to investing activities Cash receipts from the sale of property and equipment Cash receipt at maturity from held-to-maturity investments b) Cash payments related to investing activities (37.331) (18.655) (38.632) (20.393) Cash payment to acquire property and equipment (4.792) (5.566) (8.622) (11.308) Cash payment to acquire intangible assets (1.069) (1.139) (1.124) (1.335) Cash payment to acquire investment in subsidiaries (2.584) (4.200) - - Cash payment to purchase held-to-maturity investments (28.886) (7.750) (28.886) (7.750) c) Net cash flow from investing activities (a-b) (16.686) (17.987) C. Financing activities a) Cash proceeds related to financing activities Proceeds from issued shares and other equity instruments b) Cash payments related to financing activities (4.724) - (4.724) - Appropriation of dividends (4.724) - (4.724) - c) Net cash flow from financial activities (a-b) (4.724) (4.724) D. Effect of exchange rate changes on cash and cash equivalents (16.518) (16.518) E. Net increase / (decrease) in cash and cash equivalents (Ae+Bc+Cc) (1.456) (1.456) F. Cash and cash equivalents at beginning of year G. Cash and cash equivalents at end of year (D+E+F) Financial Report of the Bank and the Group Annual Report 2017 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group 61

62 Notes to financial statements 62 Gorenjska banka, d. d., Kranj and the Gorenjska banka Group Annual Report 2017 Notes to financial statements