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Statement of Management's Responsibilities

The management are responsible for preparing financial statements for each financial year that present fairly the state of affairs of the Bank and its subsidiaries as at the end of the financial year and of the profit or loss for that period.

The management confirm that suitable accounting policies have been used and applied consistently and reasonable and prudent judgements and estimates have been made in the preparation of the financial statements for the year ended 31 December 2001. The management also confirm that applicable International Accounting Standards have been followed and that the financial statements have been prepared on the going concern basis.

The management are responsible for keeping proper accounting records, for taking reasonable steps to safeguard the assets of the Bank and its subsidiaries and to prevent and detect fraud and other irregularities.


Management Board

Alojz Jamnik
Deputy President &
Deputy CEO
Boris Zakrajšek
Deputy President &
Deputy CEO
Marko Voljč
President & Chief
Executive Officer

 

Audit Report

Report of the Auditor to the Shareholders of Nova Ljubljanska banka d.d., Ljubljana

We have audited the accompanying consolidated balance sheet of Nova Ljubljanska banka d.d. (Ôthe Group') as at 31 December 2001 and the related consolidated statements of income, cash flows and changes in shareholder's equity for the year then ended (collectively Ôthe consolidated financial statements'). The consolidated financial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing as promulgated by the International Federation of Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2001 and the results of its operations and its cash flows for the year then ended in accordance with International Accounting Standards adopted by the International Accounting Standards Board.

Ljubljana, 26 April 2002

KPMG SLOVENIJA,
podjetje za revidiranje in poslovno svetovanje, d.o.o.


John Varsanyi
Partner

 

Consolidated Income Statement for the Year Ended 31 December 2001

The accompanying notes form an integral part of these consolidated financial statements.

Consolidated Balance Sheet as at 31 December 2001

The accompanying notes form an integral part of these consolidated financial statements.

The Management Board approved the financial statements and notes to the financial statements.

Alojz Jamnik
Deputy President &
Deputy CEO
Boris Zakrajšek
Deputy President &
Deputy CEO
Marko Voljč
President & Chief
Executive Officer

 

Consolidated Statement of Changes in Equity for the Year Ended 31 December 2001

The accompanying notes form an integral part of these consolidated financial statements.

Consolidated Cash Flow Statement for the Year Ended 31 December 2001

Notes to the Consolidated Financial Statements

1. General information

Nova Ljubljanska banka ('the Bank' or 'NLB') is incorporated in Slovenia as a share company providing universal banking services. The address of its registered office is:
Nova Ljubljanska banka d.d., Ljubljana, Trg republike 2, Ljubljana.

The increase of the general price index for the year 2001 was 7.0% (year 2000: 8.9%). The exchange rate changed from 108.1 tolars to the Deutschemark at 31 December 2000 to 113.2 tolars to the Deutschemark at 31 December 2001, from 227.4 tolars to the US dollar to 250.9 tolars to the US dollar, and from 211.5 tolars to the Euro at 31 December 2000 to 221.4 tolars to the Euro at 31 December 2001.

All amounts are expressed in million of tolars except otherwise specified.

2. Summary of significant accounting policies

The principal accounting policies adopted for the preparation of the financial statements are set out below:

a) Basis of presentation of financial statements
The financial statements have been prepared in accordance with International Accounting Standards (IAS) adopted by the International Accounting Standards Board (IASB).

For the purposes of these financial statements, the statutory financial statements of the Bank and its subsidiaries (together: "the Group") have been adjusted, where necessary, for the purpose of fair presentation in accordance with International Accounting Standards.

Assets and liabilities are categorised into short-term (up to one year) and long-term (more than one year) groups concerning their original maturity.

b) Consolidation
Subsidiary undertakings, which are those companies in which the Bank, directly or indirectly, has an interest of more than half of the voting rights or otherwise has power to exercise control over the operations, have been fully consolidated. Subsidiaries are consolidated from the date on which effective control is transferred to the Bank and are no longer consolidated from the date of disposal. All intercompany transactions, balances and unrealised surpluses and deficits on transactions between group companies have been eliminated. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Bank. Separate disclosure is made of minority interest (see Note 37).
A listing of the Bank's subsidiaries is set out in Note 45.

c) Associated undertakings
Investments in associated undertakings are accounted for using the equity method of accounting. These are undertakings over which the Group has between 20% and 50% of the voting rights, and over which the Group exercises significant influence, but which it does not control. Provisions are recorded for long-term impairment in value.

Equity accounting involves recognising in the income statement the Group's share of the associates' profit or loss for the year. The Group's interest in the associate is carried in the balance sheet at an amount that reflects its share of the net assets of the associate and includes goodwill on acquisition.

In respect of associates, negative goodwill is included in the carrying amount of investment in an associate over a period of five years.

A listing of the Group's principal associated undertakings is shown in Note 22.

d) Goodwill and negative goodwill
On acquisition of a subsidiary the Bank calculates the difference between the fair value of the assets and liabilities acquired and the fair value of the consideration given. Where the consideration given exceeds the net assets acquired, goodwill arises; this is amortised to the income statement over its estimated useful life of five years. The carrying value of goodwill is reviewed annually and written down for permanent impairment where considered necessary.

Negative goodwill arising on acquisition represents the excess of the fair value of the net identifiable assets acquired over the cost of acquisition. Negative goodwill is amortised to the income statement over a period of five years. However in the case of significant acquisitions made by the Group to expand its product or geographical market coverage, such negative goodwill is amortised to the income statement over a period of not exceeding eight years.

e) Foreign currencies
Assets and liabilities denominated in foreign currencies are translated into tolars at the mid-market exchange rate as at the last day of the accounting period, and are included in the income statement as net foreign exchange gains or losses. Gains and losses resulting from the translation of the opening net assets of foreign subsidiaries and associated companies are taken directly to reserves.

Income and expenditure arising in foreign currencies are translated at the official rates of exchange as at the transaction date.

Gains and losses resulting from foreign currency purchases and sales for trading purposes are included in the income statement as net gains or losses from dealing in foreign currencies.

f) Interest and discount income and expense
Interest income and expense are recognised on an accruals basis. Recognition of interest income ceases when the payment of interest or principal is in doubt. Any interest previously accrued but not received on a loan placed on a non-accrual basis is reversed. Loans are returned to the accrual basis only when doubt about recoverability is removed and when the outstanding arrears of interest and principal are received. Interest income includes coupons earned on fixed income securities and accrued discounts on discounted securities.

g) Fees and commission income
Fees and commissions consist mainly of fees received from payment and from the managing of funds on behalf of legal entities and citizens, together with commissions from loans and guarantees.

Fees receivable that represent a return for services provided are credited to income when the related service is performed.

h) Financial instruments

i) Classification
Trading instruments include investments that the Group principally holds for the purpose of short-term profit taking.

Originated loans and receivables are loans and receivables created by the Group providing money to a debtor other than those created with the intention of short-term profit taking. Originated loans and receivables are stated in the balance sheet at the amount of principal outstanding, less any provision for unrecoverable amounts.
Held-to-maturity assets are financial assets with fixed or determinable payments and fixed maturity that the Group has the intent and ability to hold to maturity.

Available-for-sale assets are financial assets that are not held for trading purposes, originated by the Group, or held to maturity. Available-for-sale instruments include and certain debt and equity investments.

ii) Measurement and recognition
All regular purchases and sales are recognised using trade date accounting. All trading instruments and available-for-sale assets are measured at fair value, except where an instrument that do not have a quoted market price in an active market and whose fair value can not be reliably measured, is stated at cost.

iii) Fair value measurement principles
The fair value of financial instruments is based on their quoted market price at the balance sheet date. If a quoted market price is not available, the fair value of the instruments is estimated using pricing models or discounted cash flow techniques.

Where discounted cash flow techniques are used, estimated future cash flows are based on management's best estimates and the discount rate is a market related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date.

iv) Gains and losses on subsequent measurement
Gains and losses arising from a change in the fair value of trading and available-for-sale assets are recognised in the income statement.

v) Derivative financial instruments
Derivative financial instruments, including forward and futures exchange contracts, swaps and options, are marked to market. All derivatives are carried at their fair value in assets when favourable to the Bank, and in liabilities when unfavourable to the Bank. Fair values are obtained from quoted market prices.

Gains and losses on trading derivative instruments, together with any associated hedging thereof used in dealing activities, are included in net losses / gains arising from dealing in foreign currencies as they arise.

i) Provisions for impairment of originated loans and receivables
A specific credit risk provision for loan impairment is established on those loans that have been individually reviewed and specifically identified by management as doubtful including those existing losses that, although not yet specifically identified, are known from experience to be present in the lending portfolio as at balance sheet date. In determining the level of the provisions required, management considers numerous factors, including (but not limited to) domestic economic conditions, the composition of the loan portfolio, and prior bad debt experience.

j) Accounting for leases - where a group company is the lessee
Leases entered into by the Group are all operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.

When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.

k) Accounting for leases - where a group company is the lessor
When assets are sold under a finance lease the present value of the lease payments is recognised as a receivable. Income from finance leasing transactions is apportioned systematically over the primary lease period, reflecting a constant periodic return on the lessor's net investment outstanding.

In the year 2001 the unearned finance income from finance leasing is not reported as deferred income as it was reported in the year 2000; the comparative figures for the year 2000 are restated accordingly.

l) Offsetting
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

m) Sale and repurchase agreements
Securities sold under sale and repurchase agreements (repos) are retained in the financial statements, and the counterparty liability being included in deposits from banks or customers as appropriate. Securities purchased under agreements to resell (reverse repos) are recorded as loans and advances to other banks or customers as appropriate. The difference between the sale and repurchase price is treated as interest and accrued evenly over the life of the repo agreements.

n) Property and equipment
All property and equipment is initially recorded at cost. The carrying value of property and equipment equals to the approximate market value. The effects of revaluation of property and equipment are credited to the revaluation reserve in shareholders' equity.
Depreciation is provided on a straight-line basis at rates designed to write off cost or valuation of buildings and equipment over their estimated useful lives. The following are approximations of the annual rates used:

Assets in the course of transfer or construction are not depreciated until they are brought into use.

Where the carrying amount of property and equipment is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit. Maintenance and repairs are charged to the income statement when the expenditure is incurred and renewals capitalised.

o) Intangible assets
Intangible assets that relate solely to software licences are stated at cost, less accumulated amortisation.

Amortisation is provided on a straight-line basis at rates designed to write off cost of software over their estimated useful lives. The current system software and the new information technology system are amortised over a period of ten years and other software over a period of five years.

Assets in the course of transfer or construction/implementation are not amortised until they are brought into use.

p) Investment property
Investment property is stated at fair value determined by an independent registered valuer. Fair value is based on current market prices. Any gain or loss arising from a change in fair value is recognised in the income statement.

q) Cash and cash equivalents
For the purpose of the cash flow statement, cash and cash equivalents comprise balances with less than 90 days' maturity from the date of acquisition including: cash and balances with Central Bank, placement with and loans to other banks and investment and dealing securities.

r) Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

s) Taxation
Slovenian corporation tax is provided on taxable profits at the rate of 25%. Foreign taxes are provided for in accordance with local tax laws and accounting principles.
In 1998 a new tax was introduced on Slovenian banks. In 1998 this was calculated as a 2% levy on certain balance sheet items. This rate was increased to 2.5% in 1999 and to final 3% in 2000. Therefore in 2001 the balance sheet tax is calculated at the rate of 3%. According to Slovenian legislation the maximum balance sheet tax is limited to 50% of pre-tax profit. Where the 3% levy exceeds 50% of profits, the lower tax charge is payable.

Deferred income tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Tax rates currently enforced are used to determine deferred income tax.

t) Managed funds
The Bank manages a significant amount of assets on behalf of legal entities and individuals. A fee is charged for this service. These assets are not shown in the Bank's balance sheet.

u) Pensions
In 2001 the Bank and most of its subsidiaries contribute to the State Pension Schemes (8.85% on gross salaries). The Bank and its Slovenian subsidiaries make contributions to defined contribution plan according to Slovenian legislation.

3. Risk management policies of the Group

The strategy of the risk management system in the Group is to maintain stable performance in the future. The Risk Management Department has an independent and centralised role in controlling risks.

The Bank prepares credit and market risks policies and strategies working closely with its subsidiaries. The Bank therefore has a centralised role over controlling the different risks regarding the data structure, methodologies adopted, reporting, and the limits placed within the decision-making process.

The Group has an internal risk management model. The most important roles of the model are to decrease information asymmetry (between the Bank and its environment), and orient the process towards estimating the future ("marked to future") and not only the present. The most important tools and methods used by the internal risk management model are: diversification, internal credit grading system standard (for corporates, banks, countries etc.), migration matrices with internal credit rating system, collaterals, internal cover ratio provisions/bad debts, etc. The use of risk management tools has a great impact on asset quality, structural liquidity, performance ratios, early warning signals and they minimise the Group's exposure to all types of risks.

a) Credit risk management
The Group's Risk Management Department is responsible for assessing credit risk for the Group as a whole. Credit risk has three aspects: specific risk for each counterparty, portfolio risk and country risk.

The main goal of Group risk management is to maintain the highest possible asset quality. Asset quality ratios are consequently mentioned in all other Group risk management policies and measures. In structural liquidity policy, asset liquidity is defined as a key factor. Cash inflow from the maturity of existing assets is the first source of liquid funds.

The credit portfolio includes loans (to corporates, retail and the public sector), exposures to other banks and financial institutions, and corporate bonds and other banking products, (such as guarantees, derivative instruments, etc).
The Group complies with all Central Bank risk management requirements, but it is more important to comply with the standards of the Group's internal credit risk system, which is oriented towards ex ante credit risk assessment. Migration matrices for previous years show that the assets qualities of the Group are relatively stable.
The Group's loan portfolio breakdown by industries reflects its diversification.

Country risk is managed using maximum risk levels for investments in different countries, including emerging market limits. Assessment of the risk level of a given country is carried out by reviewing the country's major macroeconomic data, its political situation and the rating attributed by major international specialised companies.

b) Foreign exchange risks
The foreign exchange exposure can be seen as the result of the macroeconomic environment and the Group's dominant role in the market (savings in foreign currencies, export financing, intervening in capital flows, borrowing abroad and financing corporate in domestic currency). Open foreign exchange positions (primarily EUR, USD, AUD, SEK, CHF) represent a constant source of foreign exchange risk.
In 1997 the Bank started monitoring foreign exchange risks using Value-at-Risk (VaR) methodology, observing the Basle Committee amendment criteria for internal approach to measuring foreign exchange exposure capital requirement. After an assessment of technology and methods it was decided to implement a VaR model based on correlation matrices. The approach provides for a daily revaluation of the Bank's foreign exchange portfolio on the basis of the historical trend in market prices and their correlation over the past year. The resulting distribution of profits and losses is used to determine the possible losses in the value of the foreign exchange portfolio as a result of market changes. VaR methodology is therefore one of the most important tools in an active management of open positions.

The foreign exchange risk measurement model has following characteristics (VaR parameters):

- VaR is calculated daily, based on the end of the previous working day's exposure (whole trading and banking book);
- the holding period is 10 days;

- the period of observation is 250 working days;
- the level of confidence is 99%;

the historical series is updated daily.

Internal model is strictly used for internal purposes. Publicly the Group follows all Central Bank regulations.

c) Interest rate risks
The measurement of interest rate risk exposure is based on the following:

- within gap analysis, assets, liabilities, and off-balance sheet instruments are categorised by interest rate sensitivity according to their maturities and/or repricing characteristics; consequently, data is sorted according to contractually conditioned parameters, i.e. type of interest rate (fixed vs. variable), rate index, or currencies;

- an assessment of interest rate exposure based on the specific characteristics of different interest rates prevailing in different balance sheet segments;

- duration of the bond portfolio.

d) Structural liquidity
The Group's liquidity situation cannot be viewed solely from the liability side as a set of activities for meeting required cash outflows, but also as the availability of liquid assets at a fair price that at all times assures immediate fulfilment of matured financial obligations towards its clients. At the operational level it reflects ability either to liquidate positions or to acquire additional financing sources at the appropriate price.

With respect to solvency, the liquidity risk does not necessarily relate directly to financial loss or write-offs but is mostly a consequence of unbalanced cash flows.

e) Securities
At the level of the Group, the major part of the portfolio consists of domestic (Government, banks) and foreign bonds, eurobonds and Central Bank certificates of deposit. Bond investments abroad are limited to investment grade countries.

The measurement and management of market risks of the portfolio are based on VaR and duration methodologies, limits and a stop-loss system. Both macro and micro hedges of those risks are used.

f) Country risk
Country risk represents guarantees provided by the Group towards certain countries. Appropriate provision is set aside for these risks on the basis of management decision.

4. Merger of subsidiary banks

On 1 October 2001 Banka Velenje d.d., Velenje (Banka Velenje), Pomurska banka d.d., Murska Sobota (Pomurska Banka) and Dolenjska banka d.d., Novo mesto (Dolenjska banka) were merged with the NLB. The purchase method of accounting in which the merger is reflected in the consolidated financial statements is explained as follows.
Even before their merger with the NLB, Banka Velenje and Pomurska banka were included in its consolidated financial statements and their merger did not have any particular effect on the financial statements of the Group. The share capital was increased by tolars 1,554 million and the share premium was increased by tolars 12,651 million.The remaining part of the capital of the minority shareholders was accounted for as negative goodwill in accordance with the share exchange ratio achieved. According to IAS 22 the restructuring provision in amount of tolars 1,400 million was charged against the negative goodwill. The Bank will amortise the remaining part of the negative goodwill over a period of three years.

Negative goodwill calculated for Banka Velenje and Pomurska Banka at the time of their first consolidation is amortised through the income statement for nine months and the unamortised negative goodwill was released into reserves.
However the merger of Dolenjska banka, which in accordance with the merger agreement was accounted for in the consolidated financial statements as from 1 January 2001, affected both the balance sheet and the income statement of the Group since in the previous year it was recorded as an associate of NLB. The transaction increased the capital of the Group in a way similar to the merger of the first two banks. As a result of the acquisition of Dolenjska banka, the Group's total assets rose by tolars 107,301 million as follows:

5. Change in the scope of consolidation

In the financial statements of NLB Group for 2001 LHB Internationale Handelsbank AG Group, Frankfurt/Main (LHB Bank), Tutunska Banka AD, Skopje (Tutunska banka) and Commercebank d.d., Sarajevo (Commercebank) are consolidated for the first time.
LHB Bank became a subsidiary of NLB on 29 December 2001 when NLB increased its share in the company to 50.41%. Consequently, LHB Bank is included in the consolidated financial statements as a subsidiary bank for the first time on 31 December 2001. Only the balance sheet of LHB Bank is fully consolidated; the income statement includes only the proportional share of its operating result. The following subsidiaries of the LHB Bank are also included in the consolidated financial statements of NLB Group: LHB Finance d.o.o., Ljubljana, LHB Immobilien GmbH, Frankfurt/Main and VB Banka AD, Banja Luka. Due to its immateriality the sub-subsidiary VB Inter Invest AD, Banja Luka is not included in the consolidated financial statements (its total assets accounts for 0.01% of the Group's total assets).

Tutunska banka was also consolidated in the Group's financial statements. On consolidation, goodwill amounting to tolars 248 million was accounted for, which will be amortised over a period of five years. Due to its immateriality the subsidiary Tutunskabroker AD, Skopje is not included in the consolidated financial statements (its total assets accounts for 0.01% of the Group's total assets).

Commercebank became a subsidiary bank of the NLB at the beginning of 2001, and in the financial statements of the NLB Group for 2001 both its balance sheet and income statement are fully consolidated. On consolidation, goodwill amounting to tolars 263 million was accounted for, which will be amortised over a period of five years.

The consolidation of the new subsidiaries increased the Group's assets and liabilities as follows:

6. Changes in the accounting policies

a) Additional provisions due to Bank of Slovenia regulations
In 2001, pursuant to the Decree on the Supervision of Banks and Savings Banks on a Consolidated Basis and additional instructions from the Bank of Slovenia, and taking into account the criteria based on the specific regulations of the Bank of Slovenia, the NLB also set aside additional specific provisions in the consolidated financial statements for the balance sheet and off-balance sheet asset items of its subsidiaries.

The additional provisions for the existing subsidiaries LBS Bank-New York,New York and LB InterFinanz AG, Zürich are recorded in the financial statements as a change in the accounting policy. In accordance with this, the provisions that refer to previous years adjusted the retained profits of the Group, and the provisions that refer to 2001 are shown in the income statement.

The provisions which, in accordance with the Bank of Slovenia's regulations, the NLB had itself already set aside for its direct investments and loans to in Commercebank and Tutunska banka were also retained on a consolidated basis in accordance with the Bank of Slovenia's instructions, and they are shown as provisions for country risk on the liabilities side of the balance sheet.

b) IAS 39 adoption
The adoption of IAS 39 has resulted in the Group's recognising available-for-sale investments at fair value (refer to note 20 - Investment securities). Such changes have been accounted for by adjusting the opening balance of equity (retained profits) at 1 January 2001 amounting to tolars 2,320 million; comparatives have not been restated.

c) IAS 40 adoption
The adoption of IAS 40 has resulted in separate recognition of the investment property at fair value. According to the transitional provisions of IAS 40 (70.b) comparative information were not restated. Opening balance of retained profits were adjusted for the reclassification of revaluation surplus for investment property.

7. Significant events after the balance sheet date

In the privatisation process of the Bank an important progress has been achieved. The Republic of Slovenia's share in the Bank equity decreased by the merger of three banks on the 1 October 2001. On 19 April 2002 Government confirmed a sale of 34% equity share to KBC bank and Insurance Holding Company, that will further reduce the Republic of Slovenia's share.

8. Interest income/expense

Interest relates to the following types of borrower and depositor:

Interest relates to the following types of assets and liabilities:

9. Other operating income


10. Charge for bad and doubtful debts (net)

11. Provisions for investments

In the year 2001 investments are accounted in accordance with IAS 39 and no provisions are established accordingly.

12. General administrative expenses

The number of persons employed by the Group as at 31 December 2001 was 5,379 (2000: 4,271) and increased mainly due to merger of Dolenjska banka and acquisitions of new subsidiaries.

13. Other operating expenses

14. Tax

15. Earnings per share

Basic earnings per share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue.

Subordinated loans and debt securities in issue have no future conversion rights and consequently there are no dilutive potential ordinary shares.

16. Cash and balances with the Central Bank

The Bank is required to maintain an obligatory reserve with the Bank of Slovenia, relative to the volume and structure of its customer deposits. The current requirement of the Bank of Slovenia regarding the calculation of the amount to be held as obligatory reserve is as follows:
- 12% of sight deposits and time deposits up to 30 days
- 6% of time deposits from 31 to 90 days
- 2% of time deposits from 91 to 180 days
- 1% of time deposits from 181 days and up to one year.


17. Placements with, and loans to, other banks

a) Analysis by type of loan

b) Geographical analysis

c) Maturity analysis

d) Movements in provisions

18. Securities held for trading

19. Loans and advances to customers

a) Analysis by type of customer

b) Analysis by sector

c) Analysis by type of advance

d) Analysis of movements

e) Movements in provisions

f) Finance leases
The loans and advances to customers include finance lease receivables:

The allowance for unrecoverable finance lease receivables included in the provision for loan losses amounted to tolars 942 million (2000: 487 million).

g) Guaranteed loans
Loans which are guaranteed by the Republic of Slovenia or non Group Slovenian banks and have not been specifically provided against are as follows:

Loans and advances are further analysed in the following notes: Currency risk Note 46, Liquidity risk Note 47, Interest rate risk Note 48, Fair values of loans and deposits Note 40 and Related party transactions Note 44.


20. Investment securities

a) Analysis by type: available-for-sale portfolio

At 31 December 2001 the Bank held tolars 83,142 million of bonds of the Republic of Slovenia (rehabilitation bonds). The bonds are divided among 10 different series with maturities ranging from 2004 to 2010. These bonds receive revaluation interest based on the revaluation index and interest at rates of between 5.3% and 6.5% depending on maturity. Certain series of these bonds allow the holder to elect to receive revaluation interest based on the movement of the deutschemark (from 1 January 2002 euro) against the tolar rather than the revaluation index. Such elections have to be made by 15 October of the preceding year. The Bank did not make any such elections for 2002. In 2001 the Bank opted for a further sale of these bonds amounting to tolars 2,382 million and transferred them from the available-for-sale portfolio to the trading portfolio.
The bonds of the Republic of Slovenia totalling tolars 29,953 million represent amounts taken over by the Republic of Slovenia under the law on the settlement of liabilities from unpaid foreign currency deposits. The bonds amounting to tolars 22,882 million are denominated in tolars with a real interest rate of 4.5% per annum and mature in 2007. Other bonds amounting to tolars 7,071 million are denominated in deutschemark (from 1 January 2002 euro) with an interest rate of 8% per annum and mature in 2022.

Pursuant to a law regulating the settlement of the liabilities of Slovenian Steelworks the Slovenian Steelworks bonds were exchanged on 31 December 2001 for Republic of Slovenia bonds denominated in euro with the maturity date on the 20 July 2022 and at the interest rate of 8%. They are included in other Bonds of Republic of Slovenia in foreign currency clause in amount of tolars 4,758 million (2000: 3,344 million).

b) Analysis by type: held-to-maturity portfolio

The bonds of the Republic of Slovenia in foreign currency were obtained as a result of the contracts of the Republic of Slovenia concerning the New Financial Agreement (NFA) during 1996. These eurobonds are listed on the Stock Exchange in Luxembourg and are due to mature on 27 December 2006. They were issued with a call option and interest is paid twice a year. The market value of bonds exceeds the carrying value in amount of tolars 26 million.

The bonds of the Republic of Slovenia totalling tolars 26,922 million represent amounts taken over by the Republic of Slovenia under the law on the settlement of liabilities from paid foreign currency deposits. In 1996 the Republic of Slovenia issued the bonds with a maturity of 20 years and revaluation interest of 90% of the general price index and an interest rate of 3% per annum.

The fair value of the bonds for paid foreign currency deposits is tolars 20,552 million. Their fair value has been calculated by discounting their cash flows considering expected (required) return of a compared market bonds. Due to their lower interest rate against expected market bonds return the fair value of these bonds is lower than the carrying value. This will not affect the Group's result as the Group has intent to hold them to maturity.

21. Investment property

22. Investments in associated companies

The principal associated companies are:

In December 2001 the Bank increased its capital share in LHB Bank over 50% and therefore no longer treated as an investment in associated company. Dolenjska Banka was merged with NLB.

The investments in associated companies comprise:

The movements on investments in associated companies comprise:

The management considers that the fair value of the investments in associated companies is not less than the carrying value.

23. Other assets, including tax assets

a) Analysis by type of asset

b) Movements in provisions

24. Deferred income taxes

The components of the net deferred tax asset at 31 December 2001 and 2000 are as follows:

A deferred tax liability amounting to tolars 197 million which relates to the Republic of Slovenia Bonds (previously the Slovenian Steelworks bonds) has been charged directly to retained earnings according to the transitional provisions of IAS 39. In the disclosure above it is included in IAS 39 fair value revaluation.

25. Accrued income and deferred expenses

Negative goodwill which arose on the acquisition of five Slovenian banks in the year 1997 and 1998 decreased in the year 2001 due to merger of Banka Velenje and Pomurska banka. The unamortised negative goodwill at the 1 October 2001 for these two banks was released directly to reserves.

Movement on goodwill/negative goodwill account:

26. Property and equipment

27. Intangible assets

28. Deposits from banks

29. Borrowings from banks

a) Analysis by type of borrowing

b) Maturity analysis

 

30. Deposits from other customers

31. Borrowings from other customers

a) Analysis by type of customer

b) Maturity analysis

32. Debt securities

a) Analysis by type of liability

b) Maturity analysis

33. Other liabilities

34. Accruals and deferred income

35. Provisions for liabilities and charges

36. Subordinated liabilities

37. Minority interest

Minority interests were substantially affected by the consolidation of LHB Bank, Tutunska Banka and Commercebank in the year 2001.

38. Share capital

At 31 December 2001 there were 883 entities having the status of Bank's shareholders. With a holding of 5,739,270 shares, being 74.71% of the share capital, the Republic of Slovenia remained the majority shareholder of the Bank.

As at 31 December 2001 the capital was represented by 7,682,015 ordinary shares, each with a nominal value of tolars 2,000. Through the merger of the banks four subsidiaries became the shareholders of the Bank with a holding of 50,698 ordinary shares.

39. Reserves

Dividends are accounted for in the period in which they were declared. A dividend of tolars 296.3 per share was declared at the Bank's Annual General Meeting in June 2001.

40. Fair values of loans and deposits

The fair values of the following financial instruments differ from their carrying amounts shown in the balance sheet:


Due from other banks
The estimated fair value of the deposits is based on discounted cash flows using prevailing money market interest rates for debts with similar credit risk and remaining maturity.

Loans and advances to customers
Loans and advances are net of specific provisions for impairment. Bank uses a discount rate adjustment approach. In other words the stream of contracted cash flows forms the basis for the present value computation, and the rates used to discount those cash flows reflect the uncertainties of the cash flows.

Deposits and borrowings
The fair value to the depository institution of a demand deposit depends on the expectations of the timing and amounts of withdrawals of the existing balance, the level of prevailing interest rates with similar terms, the costs of servicing the deposit and the bank's own credit risk. This is essentially important for core demand deposits, which have a positive fair value.

The estimated fair value of other deposits is based on discounted cash flows using interest rates for new debts with similar remaining maturity.

41. Capital ratios

The capital adequacy ratios are calculated in accordance with Bank of International Settlements guidelines. These guidelines are intended to apply to major international banks based in OECD countries. In order to make comparisons with other major banks, Slovenia has been treated as a member of OECD. The principal effect of this is to apply counterparty risk weights of 0% to Slovenian government debt and 20% to debts of other Slovenian banks.

42. Contingent liabilities and commitments

a) Legal proceedings.
The Bank has a legal proceeding with Tržaška kreditna banka (TKB) due to deposits withdrawal performed in a year before the liquidation process of TKB. The first appointed day was agreed on the 15 April 2002. The Bank has established a provision against potential claims in amount of tolars 500 million.

b) Credit related commitments.
Documentary (and standby) letter of credit constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated or the issuing bank and that the terms and conditions of the credit are complied with:

- if the credit provides for sight payment - to pay at sight

- if the credit provides for deferred payment - to pay on the maturity date determinable in accordance with the stipulations of the credit.

Such undertakings can be issued also for the credits received in the form of confirmation. It is usually done at the request or authorisation of the opening bank and constitutes a definite undertaking of the confirming bank, in addition to that of the issuing bank.

Foreign exchange derivatives allow the Group and its customers to transfer, modify or reduce their foreign exchange risks. Foreign exchange exposure associated with derivatives are normally offset by entering into counterbalancing positions, thereby minimising the foreign exchange risk and cash amounts required to liquidate the contracts. The Group maintains strict control limits on net open positions, i.e. the difference between purchase and sale contracts, by both currency and term. Unless otherwise indicated, the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Group (i.e. assets), which is only a small fraction of the contract or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed by collateral (initial margin or good faith deposits) or as part of the overall borrowing limits granted to customers.

c) Credit related commitments
The following table indicates the contractual amounts of the Group's off-balance sheet financial instruments that commit it to extend credit to customers.

Derivative financial instruments

Fair values of the above derivative financial assets and liabilities are included in accrued income and deferred expenses, and accruals and deferred income, respectively.
Guarantees which are counter-guaranteed by the Republic of Slovenia or non-Group Slovenian banks have not been specifically provided against and amount to tolars 13,303 million (2000: 9,773 million).

d) Movements in provisions

e) Assets pledged
Assets are pledged mainly as collateral for deposits and borrowings.

f) Operating lease commitments
Where a group company is the lessee the future minimum lease payments under non cancellable building operating leases are as follows:

43. Funds managed on behalf of third parties

The Group manages assets totalling tolars 115,938 million (2000: 69,414 million) on behalf of third parties. Managed funds' assets are accounted for separately from those of the Group. Income and expenses of these funds are for the account of the respective fund and no liability falls on the Group in connection with these transactions. The Group is compensated for its services by fees chargeable to the funds.

44. Related party transactions

A number of banking transactions are entered into with related parties in the normal course of business. These include loans and deposits. These transactions were carried out on commercial terms and conditions and at market rates. The volumes of related party transactions, outstanding balances at the year end, are as follows:

45. Subsidiaries

46. Currency risk

The amount of consolidated assets and liabilities denominated in tolars and in foreign currency as at 31 December 2001 is analysed below:


47. Liquidity risk

The amount of consolidated assets and liabilities analysed over the remaining period at 31 December 2001 to the contractual maturity date is as follows:

The previous table analyses assets and liabilities of the Group into relevant maturity groupings based on the remaining period at balance sheet date to the contractual maturity date.

The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks ever to be completely matched since business transacted is often of uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses.

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates.

48. Interest rate risk

The period of notice required to change interest rates at 31 December 2001 is set out below:

48. Interest rate risk (continued)

The period of notice required to change interest rates at 31 December 2000 is set out below:

The previous tables summarise the Group's exposure to interest rate risks. Included in the tables are the Group's assets and liabilities at carrying amounts, categorised by the earlier of contractual repricing or maturity dates.

The effective interest rates (EIR) for monetary financial instruments are as follows:

EIR are calculated on the net basis of NLB daily averages of each item and yearly averages for the rest of the Group. These averages are totalled and compared with income and expenses of each item of asset and liability balance.

49. Segmental analysis

49. Segmental analysis (continued)

The Group is organised into three main business segments:

- Private banking, including: loans to and deposits from private individuals, balances on their current accounts, credit and payment cards etc.

- Corporate business, including: commercial loans given to business companies and state owned entities (Òpublic sectorÓ), deposits received from them, giro accounts etc.

- Financial markets, including: relations with banks and other financial institutions, treasury activities, investment banking.

Other operations of the Group comprise capital investments, institutional finance and providing computer services, none of which constitutes a separately reportable segment.

Transactions between the business segments are on normal commercial terms and conditions. There are no material items of income or expense between the business segments. Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet and excluding items such as taxation and borrowings.

Geographical segments

No individual country, apart from Slovenia, accounts for greater than 10% of the Group's total assets, total liabilities, credit commitments, operating income and capital expenditure.

50. Reconciliation of net profit, total assets and equity between Slovenian accounting standards (sas) and International accounting standards (ias)

a) Revaluation of tangible and intangible assets, investments, capital and general banking risks provision
Under Slovenian accounting standards (SAS) the revaluation effect of tangible and intangible assets, investments, capital and general banking risk provision is included in the income statement. Under IAS the revaluation of intangible assets and capital is reversed while the revaluation of tangible assets and investments is credited directly to the revaluation reserve in shareholders equity.

b) Negative goodwill
The negative goodwill under IAS arose on the consolidation of subsidiaries in 1998 while under SAS no negative goodwill arose from these transactions, since the equity method of accounting for investments in subsidiaries was applied in the Bank's stand alone financial statements.

Under SAS the negative goodwill arising from the merger of subsidiary banks is presented among provisions for liabilities and charges while under IAS both negative goodwill on consolidation and negative goodwill on mergers are presented as a deduction of accrued income and deferred expenses.

c) General banking risks provision
Under SAS general banking risks provision is charged to the income statement and it is presented as a separate item on the liability side of the balance sheet. Under IAS it is accounted as an appropriation of retained earnings among shareholders equity.

d) Measurement of the financial instruments
Under SAS dealing securities and derivative financial instruments are stated in the balance sheet at the lower of cost or market value, but under IAS they are stated at their fair value.

e) Transfer of provisions from liabilities to assets
Under SAS specific provisions for 'A'classified assets are presented in the liability side of the balance sheet, but under IAS they are presented as a deduction of a principal outstanding.

f) Netting of suspended income against assets
Under SAS interest on non-accrual loans is suspended until payment and presented as accruals and deferred income, but under IAS treatment suspended income is netted against assets.

g) Transfer of unearned income on finance leases from liabilities to assets
Under SAS unearned income on finance leases is reported as deferred income and under IAS they are netted against finance lease receivables.

h) Netting of own shares
Under SAS own shares are presented as a separate item among assets while under IAS they are netted against the capital.

i) Minority interest
The IAS adjustment to minority interest reflects the portion of the previous mentioned adjustments that are allocated to minority interest.

j) Other
This item includes the provisions for pensions and deferred taxes concerning IAS adjustments and the reversal of provisions which don't meet the recognition criteria in accordance with IAS 37.

Income Statement for the Year Ended 31 December 2001 (Parent Bank)

Balance Sheet as at 31 December 2001 (Parent Bank)