Landeskreditbank Baden-Württemberg - L-Bank

securities portfolio. In accordance with German law and generally accepted accounting principles in Germany,
the foregoing reserves are created by reducing the loan and securities balances reserved against and are not
separately reflected as a reserve in the balance sheet. On the liabilities side of our balance sheet, we are permitted
according to section 340g German Commercial Code, as a credit institution, to establish reserves against general
banking risks in a special item called “Fund for general bank risks”. Allocations to, or withdrawals from, this
item must be reflected in our income statement. See “—Summary of Certain Differences Between Generally
Accepted German and United States Accounting Principles.”
Loans and payments made under guaranties are written off when our management determines that there is
no chance of recovery.
The following table sets forth the aggregate amount of interest and principal payments in arrears on claims
with an original maturity of four years or more, the aggregate amount of loans and guaranty payments (and
housing-related loans and guaranty payments) written off by us and the aggregate amount of recoveries on loans
and guaranty payments previously written off for each of the years indicated:
Credit Arrears, Write-Offs and Recoveries
2004 2003 2002
(in millions of EUR)
Arrears (1) ................................................................. 76.7 68.0 57.6
Write-offs (2) : ..............................................................
Total ................................................................ 190.8 116.8 95.6
Housing-related ....................................................... 174.1 106.0 88.8
Recoveries (3) .............................................................. 1.8 2.2 3.0
(1) Aggregate amount of principal and interest payments in arrears on claims at December 31 of the year
indicated.
(2) Aggregate amount of loans and guaranty payments written off during the year indicated.
(3) Aggregate amount received during the year indicated in connection with loans and guaranty payments
written off in previous years.
In connection with our establishment on December 1, 1998, all assets of the state development agency
business of the former Landeskreditbank Baden-Württemberg were transferred to us. Part of those assets was a
large portfolio of housing-related loans in eastern Germany, primarily in the federal state of Saxony, which are
secured by junior mortgages. The table above therefore includes loan loss reserves with respect to commercial
properties and building projects in eastern Germany, established in accordance with generally accepted German
accounting principles. Except for the extension of loans in connection with the restructuring of existing loans, we
have not extended new loans relating to real estate located in eastern Germany since our establishment and are
merely servicing those loans currently in our portfolio. Due to the deterioration of recovery values in the East
German housing market, we decided to increase the amount of our write-offs in 2004 compared to previous
years.
Reserves for Interest Subsidies
We also maintain reserves to support interest rate subsidies, which is the difference between the prevailing
market interest rate and the interest rate we charge our customers under the public economic and social assistance
programs that we administer. These reserves are calculated on the basis of an amount representing the difference
between a fictitious yield over the entire term of the subsidized loan, which is based on the market interest rate at
the time that the loan is being made, and the actual aggregate interest payments to be made by the customer over
the term of the loan. The reserves for interest subsidies are funded by Baden-Württemberg and the German
federal government, other public authorities and by us. See “—Glossary—Deferred items” and “—Contingency
reserves.”
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