Audited Financial Statements for NLB d.d. under Slovenian Accounting Standards

AUDITOR'S REPORT

TO THE SHAREHOLDERS OF NOVA LJUBLJANSKA BANKA D.D., LJUBLJANA

We have audited the accompanying financial statements of Nova Ljubljanska Banka d.d., Ljubljana, consisting of the balance sheet as of 31 December 2002, the income statement, the cash flow statement, the statement of changes in equity, and the notes to the financial statements for the year then ended. We have read the management's report on operations. These financial statements and the notes are the responsibility of the Bank's manangement. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing issued by International Federation of Accountants and other auditing regulations issued by Slovenian Institute of Auditors. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also included assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. It also includes an assessment of the compliance of the management's report on operations with the financial statements, which form a constituent part of the annual report. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above give a true and fair view of the financial position of the Bank as of 31 December 2002, the results of its operations, and the cash flows and the changes in equity for the year ended in conformity with the Slovenian Accounting Standards issued by Slovenian Institute of Auditors. The management's report on operations is in conformity with the audit financial statements.

1. NOTES TO FINANCIAL STATEMENTS

Nova Ljubljanska banka d.d., Ljubljana ("the Bank" or "NLB") is incorporated in Slovenia as a joint stock company providing universal banking services.

The majority shareholders of Nova Ljubljanska banka d.d. are the Republic of Slovenia, holding 35.71 % of the shares and KBC Bank N.V., Brussels ("KBC Bank"), holding 34 % of the shares.

The address of its registered office is:
Nova Ljubljanska banka d.d., Ljubljana, Trg republike 2, Ljubljana

The increase in the general price index for the year 2002 was 7.2 % (2001: 7 %). The exchange rate changed from 221.4 tolars to the euro at 31 December 2001 to 230.3 tolars to the euro at 31 December 2002, and from 250.9 tolars to the US dollar at 31 December 2001 to 221.1 tolars to the US dollar at 31 December 2002.

2. SIGNIFICANT ACCOUNTING POLICIES

The Bank's financial statements have been prepared in accordance with Slovenian Accounting Standards, and Bank of Slovenia's regulations, represented by the Decree on the Classification of Balance Sheet and Off-Balance Sheet Asset Items of Banks and Savings Banks and the Decree on Establishing Specific Provisions of Banks and Savings Banks and other Bank of Slovenia's regulations.

The principal accounting policies applied by the Bank for the preparation the financial statements are set out below:

a) Assets and liabilities in foreign currencies

Assets and liabilities in foreign currencies are converted into the tolar equivalent at the mid-market exchange rate of the Bank of Slovenia as at the last day of the accounting period. Foreign exchange gains and losses are included in the income statement.

b) Interest, fees and commissions

Interest, fees and commissions expenses are included in the income statement as soon as they are accrued, while interest, commissions and fees income is included in the income statement depending on the grading of the client. According to the Bank of Slovenia's regulations the income from performing assets (A and B grading groups) is included in the income statement as soon as it occurs, except for interest income from mortgage loans to clients classified in B grading group. Income from these loans and income from non-performing loans (C, D and E grading groups) is excluded until paid, and reported as allowances for bad and doubtful interest under other assets.

In the cash flow statement interest is presented as cash flows from operating activities.

c) Investments in securities

Investments in securities held for trading and investments in debt securities available for sale are initially recorded at cost. Subsequently they are stated at lower of the cost or fair value. The fair value is based on a quoted market price at the balance sheet date. If a quoted market price is not available, the fair value of the securities is calculated using discounted cash flow techniques or it is assessed in accordance with the grading group of the issuer. 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 a financial instrument with similar terms and conditions.

Held to maturity securities are initially measured at cost. After initial recognition they are stated in the balance sheet at the amount of the principal outstanding less any impairment.

The Bank uses FIFO method for determination of the profit or loss on derecognition of securities.

d) Own shares

Own shares constitute a part of the company's share capital, presented as assets in the balance sheet. Gains and losses on sale of own shares are credited or charged to reserves.

e) Investments in subsidiaries, associates, jointly controlled companies and investments in other companies

Investments in capital are initially measured at cost, being the amount of cash paid or the fair value of consideration given.

Investments in subsidiaries, associates and jointly controlled companies are accounted for using the equity method, while investments in other companies are accounted for using the cost method.

The bank's share of profits and losses of subsidiaries is included in the income statement as soon as it is accrued, while the share of the profits of associates and jointly controlled companies is until payment reported in the equity.

The bank's share of losses of associates and jointly controlled companies is included in the income statement immediately.

Profits of other companies are recognised in the income statement only to the extent of dividends received.

If there is an indication that investments may be impaired each individual investment is assessed. Any impairment is recognised immediately in the income statement.

f) Derivative financial instruments

For the accounting purposes derivative financial instruments are designated for hedging or for trading purposes. The contract and notional amount of derivative financial instruments is recorded in the off - balance sheet, while their fair values are presented as other assets when favourable to the Bank or other liabilities when unfavourable to the Bank.

Fair values are obtained from quoted market prices, discounted cash flow models and pricing models as appropriate.

Loss on derivative financial instruments, treated as held for trading, is recognised in the income statement immediately. Gains are recognised in the income statement only when they are realized.

Changes in the fair value of derivative financial instruments that are designated as the fair value hedge are recognised in the income statement on the same basis as the corresponding change in the fair value of the hedged item.

Changes in the fair value of derivative financial instruments that are designated as cash flow hedges and that prove to be highly effective in relation to the hedged risk, are presented in the equity as specific capital revaluation adjustment, while the ineffective portion is immediately reported in the income statement.

Certain derivative instruments, while providing effective economic hedges, do not qualify for hedge accounting under the specific accounting rules and are therefore treated as derivatives held for trading.

g) Loans and borrowings

Loans and borrowings are initially recognised at the amount of the cash given or received.

Loans are stated in the balance sheet at the amount of the principal outstanding, increased by interest capitalised where appropriate, less any provision for unrecoverable amounts. Borrowings in the balance sheet are presented at the amount of the principal outstanding, increased by interest capitalised where appropriate.

h) Provisions

In accordance with Bank of Slovenia's regulation the Bank is required to establish specific risk provisions and provisions for general banking risks.

Specific provisions are established on loans, advances and offbalance sheet items in respect of credit risk on the basis of provisioning rates specified by the Bank of Slovenia's Decree on the Classification of Balance Sheet and Off-Balance Sheet Asset Items of Banks and Savings Banks. Specific credit risk provisions on loans and advances to customers classified in the rating group B, C, D or E are stated on the asset side of the balance sheet as allowances for bad and doubtful loans, while specific credit risk provisions for A rating group are stated on the liability side. Specific credit risk provisions established on off - balance sheet items and specific country risk provisions are also stated on the liability side of the balance sheet.

Specific provisions for other foreseeable risks, stated on the liability side of the balance sheet, are established in respect of interest rate risk and foreign exchange risk.

General banking risk provisions, stated on the liability side of the balance sheet, are established for the purpose of protecting against risks arising from the Bank's overall operations.

i) Uncollectable loans and advances

Uncollectable loans and advances are written off, according to internal written procedures of the Bank, after all necessary procedures for recovery have been completed. Any eventual subsequent repayments of loans and advances previously written off are recognised as income from loans and advances written off.

j) Provisions for liabilities and charges

Provisions for obligations that are expected to occur in the period exceeding one year are recognised in the financial statements when:

- there is a present obligation (legal or constructive) as a result of a past event,
- it is probable that an outflow of resources embodying economic benefits will be required to
  settle the obligation,
- a reliable estimate can be made of the amount of the obligation.

k) Negative goodwill

Negative goodwill presents excess of the fair values of the net identifiable assets over the cost of acquisition. Negative goodwill is presented as part of provisions for liabilities and charges and it is amortised over a period of five years.

l) Accruals and deferred income and expenses

Income and expenses are recognised when they occur and not as cash is received or paid. They are presented as accruals in a separate balance sheet position.

m) Property and equipment

All property and equipment is initially recorded at cost. The cost of property and equipment comprises purchase price including import duties, initial delivery and installation costs.

At each balance sheet date the Bank assesses whether there is any indication that assets may be impaired. If any such indication exists the recoverable amount is estimated. Recoverable amount is higher of net selling price and value in use. When value in use exceeds carrying amount that indicates that assets are not impaired. The Bank examines whether to revalue the property in case of significant increase in market values.

Depreciation of property and equipment 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.

Land and works of art are not depreciated.


Property and equipment is depreciated from the first day of next month after it was brought into use.

Subsequent expenditures result in an increase of an asset's carrying amount when it is probable that future economic benefits will exceed the originally assessed benefits or in an extension of the useful life of an asset.

The same accounting policies are applied for assets held by the Bank under a finance lease.

n) Investment property

Investment property includes land and buildings owned by the Bank and leased out under operating lease. Investment property is accounted for using the same accounting policies adopted by the Bank for property and equipment.

According to the Bank of Slovenia's methodology investment property is in the balance sheet presented as other assets.

o) Intangible assets

Intangible assets are initially recognised at cost including any directly attributable costs. Intangible assets are subsequently impaired if their carrying amount exceeds their value in use.

Amortisation is provided on a straight-line basis at rates designed to write off the cost of intangible assets over its estimated useful life.

Intangible assets are not amortised until they are brought into use.

p) Cash and cash equivalents

For the purpose of the cash flow statement, cash and cash equivalents comprise cash and balances with the Central Bank, securities held for trading, loans to banks and debt securities not held for trading with maturity up to 90 days.

q) Tax on profit and balance sheet tax

Slovenian corporate 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 2002 the Slovenian balance sheet tax is calculated as a 3 % levy on certain balance sheet items. 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.

r) Funds managed on behalf of third parties

Assets and liabilities managed on behalf of third parties are in the balance sheet stated on a net basis.

3. NEW SLOVENIAN ACCOUNTING STANDARDS

New Slovenian Accounting Standards became operative for financial statements covering periods beginning after 1 January 2002. The main changes resulting from the adoption of the new Slovenian Accounting Standards and amended regulations of the Bank of Slovenia are:

- the revised Slovenian Accounting Standards abandoned the system of maintaining the
  capital in constant purchasing power units if exchange rate euro/tolar doesn't exceed the
  growth of 5.5 % in previous year,
- investments in associates and jointly controlled companies are, under the renewed
  Slovenian Accounting Standards accounted for using the equity method,
- the previous requirements of the Bank of Slovenia to establish provisions on investments in
  securities and investments in other companies have been replaced with principles and rules
  for measurement and valuation in accordance with the new Slovenian Accounting
  Standards.

New methodology rules for the preparation of financial statements resulted in the following changes in the presentation of the balance sheet:

- provisions established on overdrafts are presented on the assets side,
- suspended income is presented as allowances for bad and doubtful interest under other
  assets,
- provisions for country risks are presented on the liability side,
- fair values of derivative financial instruments are presented as other assets or other
   liabilities,
- investment property and property acquired for debt repayment is presented as other
  assets.

Changes in presentation of the income statement are:

- revaluation interest is presented as interest income or expenses,
- foreign exchange differences are presented as gains or losses from financial transactions,
- interest income from debt securities held for trading is presented as income from capital
  and other investments.

In accordance with the official conclusion of The Slovenian Institute of Auditors items of the balance sheet and the income statement for the year 2001 are not restated but are adjusted to the new methodology for the presentation of financial statements.

Items of the revaluation income statement are presented as part of income or expenses to which they relate, except for the revaluation of capital, property and equipment, intangible assets and capital investments, which is presented in the income statement as extraordinary expense due to capital revaluation.

Cash flow statement for the year 2001 is restated due to the conceptually new methodology.

4. POST BALANCE SHEET EVENTS

In September 2002 Banca Antoniana Populare filed a lawsuit against LB InterFinanz AG in the amount of DEM 10 million (= 5,113 million euro) plus interest rate of 5 % since the year 1996. The plaintiff contests the authenticity of a document that granted LB InterFinanz AG to utilize a guarantee. LB InterFinanz's lawyers do not assess the plaintiff's rationale as compelling and expect the District Court to rule in favour of LB InterFinanz AG in the year 2003, otherwise LB InterFinanz AG will appeal the decision at the Supreme Courts. Due to favourable expectations of the LB InterFinanz's lawyers, the Bank issued in April 2003 a guarantee on behalf of LB InterFinanz AG.

Interest income from loans to foreign banks and to other foreign customers amounted to 2,999,773 thousand tolars as at 31 December 2002, while interest expenses from borrowings and deposits from foreign banks and other foreign customers amounted to 6,736,538 tolars as at 31 December 2002.

Fees and commissions income for the year 2002 includes the amount of 3,028,993 thousand tolars received from a major multinational company for providing tolars for the purchase of shares of a major Slovenian company.

The increase in income and expenses from derivative financial instruments in the year 2002 results from the increased volume of transactions in currency swaps with the Bank of Slovenia (see note 38b).

In accordance with the changes to the Slovenian Accounting Standards and amended regulations of the Bank of Slovenia, the Bank changed the presentation of impairment losses on investments in securities and investments in other companies in the year 2002. Prior to adoption of the renewed accounting standards the Bank was, according to the Bank of Slovenia's regulations, required to establish provisions in respect of losses on financial investments. In the income statement for the year 2002 impairment losses on financial investments are presented as losses from financial transaction. Provisions established in previous periods were released and presented as income in the year 2002 (see note 14, 19, 20, 21, 22 and 28).

In the year 2002 the Bank changed its accounting policy in respect of determination of the profit or loss on derecognition of securities from HIFO to FIFO method. The change in accounting policy resulted in an increase in net profit from financial transactions by 240,312 thousand tolars for the year 2002.

In the year 2002 the Bank decreased depreciation rates from 25 % to 14.3 % for automated teller machines and from 20 % to 10 % for communication equipment due to extension of their estimated useful lives. The adoption of the new deprecation rates resulted in a decrease in depreciation expenses by 230,599 thousand tolars.

In the year 2002 the Bank established additional provisions for the employment-restructuring program in the amount of 500,000 thousand tolars. According to realized profit for the year 2002 the Bank provided for employee costs in the amount of 181,120 thousand tolars with the purpose of remunerations to key management.

Provisions for country risk were in the year 2001 established within specific provisions and stated on the asset side of the balance sheet as allowances for bad and doubtful assets.

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:

- 7 % of time deposits up to 90 days,
- 2 % of time deposits from 91 days to 2 years and deposits in foreign currency up to 2
  years.

In December 2002, the obligatory reserve of the Bank amounted to 39,704,380 thousand tolars.

A detailed maturity analysis of loans to banks is given in Note 44 - Balance sheet maturity analysis.

The total amount of non-performing loans (C, D and E grading groups) amounted to 38,097,569 thousand tolars as at 31 December 2002, while loans overdue amounted to 18,014,584 thousand tolars. Interest income from non- performing loans, not recognised as income, amounted to 3,758,349 thousand tolars as at 31 December 2002.

Other securities include Factor bank d.d. bonds with a total value of 150,000 thousand tolars which have the nature of a subordinate debt. Other than interest entitlement (at an annual rate of TOM + 6 per cent) and the right to repayment of the principal the Bank does not have any other rights deriving from these bonds.
The market value of debt securities available for sale exceeds their carrying value by 35,812 thousand tolars as at 31 December 2002 (636,395 thousand tolars as at 31 December 2001).

At 31 December 2002 debt securities not held for trading amounting to 30,086,346 thousand tolars were listed on the stock exchange (27,266,116 thousand tolars as at 31 December 2001).

At 31 December 2002 the securities held for trading amounting to 87,799,497 thousand tolars were listed on the stock exchange (58,922,966 thousand tolars as at 31 December 2001)

The market value of securities held for trading exceeds their carrying value by 4,556,394 thousand tolars as at 31 December 2002 (1,131,946 thousand tolars as at 31 December 2001).

Other securities include Factor bank d.d. bonds with a total value of 251,300 thousand tolars, which have the nature of a subordinate debt. Other than its interest entitlement and the right to repayment of the principal the Bank doesn't have any other rights deriving from these bonds. Other securities include also NLB bonds in the amount of 3,401 thousands tolars.

Investments in Koroška banka d.d, Slovenj Gradec , Banka Domžale d.d., Domžale and Banka Zasavje d.d., Trbovlje are treated as investments in subsidiaries due to specific contractual agreement, which ensures control by NLB, while Tutunska Banka was treated as a subsidiary due to the majority share held by the NLB Group.

In April 2002 NLB acquired 100 % share of the company LB Factoring CZ, a.s., Ostrava, Czech Republic which provides factoring and forfeiting services

In the year 2002 the Bank sold its wholly owned subsidiary LBS Bank, New York to KBC Bank at the price of 4,930,082 thousand tolars and with the carrying value of 4,989,672 thousand tolars as at the date of the sale. Due to contractual agreement the Bank assumed the obligation to cover expenses related to the liquidation process of LBS Bank. Expenses of the subsidiary liquidation process in the amount of 663,212 thousand tolars are presented as accrued expenses. The Bank also redeemed investments in the amount of 60,079 thousand US dollars from LBS Bank.

In the year 2002 the Bank increased its voting share in Banka Celje to 36.56 %.

In November 2002 Slovenska izvozna družba d.d., Ljubljana (SID) purchased additional capital in LB Factors d.o.o., Ljubljana, a subsidiary of the NLB Group. Due to the contractually agreed sharing of control over business activities, LB Factors d.o.o., Ljubljana, became a jointly controlled company by both NLB and SID. LB Factors is now 50 % owned by the NLB Group.

According to the new Slovenian Accounting Standards the Bank adjusted the carrying amount of investments in associated and jointly controlled companies to its share of the fair values of the net identifiable assets. Adjustment resulted in an increase of value of investments by 3,824,199 thousand tolars. Investments were also adjusted for the Bank's share of profits and losses by the amount of 788,908 thousand tolars. Positive effects arising from the use of the equity method of accounting were reported under a specific capital revaluation adjustment in the balance sheet, while negative effects were reported in the income statement as expenses from revaluation.

Under intangible assets the Bank´s new information system is presented with the carrying value of 7,673,919 thousand tolars.

Due to adoption of new Slovenian Accounting Standards the Bank tested the property's value in use by the independent qualified valuer in the year 2002. The value in use exercise was based on estimating present value of the future cash flows from continuing use and disposal. The exercise results proved that property is not impaired.

There are no assets held under finance lease in the Bank's financial statements for the year 2002 (31 December 2001: 3,995 thousand tolars).

25. OWN SHARES

In accordance with the amended Companies Act the Bank disposed 3,944 own shares in the nominal value of 7,888 thousand tolars at price of 106,388 thousands tolars in the year 2002. Gain on the sale of own shares, amounting to 56,134 thousand tolars, was recorded in equity reserves.

There were no contractual agreements in the year 2002 between the Bank and third parties for the acquisition or disposal of NLB's shares on behalf of NLB no there were any contractual agreements for pledge of NLB's shares as collateral on behalf of NLB.

In accordance with information from the Clearing House 635 own shares at the end of the year 2002 were pledged on behalf of NLB at nominal value 1,270 thousand tolars, which presents 0.01 % of the subscribed capital of NLB.

Shares of the Bank held by its subsidiaries LB Trading d.o.o, Ljubljana, LB Hipo d.o.o., Ljubljana and Korođka Banka d.d., Zasavje amounted to 490,828 thousand tolars as at 31 December 2002. In respect of these shares the Bank formed an own shares fund.

In the year 2002 due to adoption of new Slovenian Accounting Standards and the Bank of Slovenia's methodology for the presentation of financial statements the Bank transferred investment property and property acquired for debt repayment from property and equipment to other assets.

A detailed maturity analysis of bonds is given in Note 44 - Balance sheet maturity analysis.

Other provisions include:

- restructuring provisions and provisions for pensions amounting to 1,179,308 thousand tolars   ( 31 December 2001: 1,478,013 thousand tolars),
- provisions for resolving the issues of unconfirmed transactions of debt conversion under
  the New Financial Agreement in the amount of 110,464 thousand tolars
  (31 December 2001: 110,464 thousand tolars).

In the year 2001 the Bank had a legal proceeding with Tržaška Kreditna Banka (TKB) due to deposits withdrawal performed the year before the start of liquidation process of TKB. In the year 2001 and in the beginning of the year 2002 the Bank established a provision against potential claims in the amount of 1,000,000 thousand tolars. Due to out of court settlement at the end of the year 2002 in the amount of 951,385 thousand tolars, the unused provision was released to income.

In accordance with the Decree on the calculation of capital, capital requirements and capital adequacy of Banks and Savings Banks, four subordinated long-term loans are included in the Bank's Tier 2 capital. The loan agreements do not contain any provisions on conversion to capital or any other liabilities.

In the year 2002, interest and commission expenses of the Bank on the basis of these loans amounted to 1,364,224 thousand tolars.

Subordinate liabilities include a loan received by KBC bank with the contractual provision that gives NLB the right to prepay the whole or any part of the loan (being a minimum amount of 5,000 thousand euro) at any time beyond five years after the date of contractual agreement.

As at 31 December 2002 7,682,015 ordinary shares represented the capital of the Bank, each with a nominal value of 2,000 tolars. Shares are issued in non-material form and registered in the Clearing House. All shares are ordinary and inscribed.

At 31 December 2002 there were 959 shareholders. The Bank's shareholders are 265 corporate entities, 691 citizens and 3 non - residents. In September 2002 in the privatisation process of the Bank the Republic of Slovenia sold 34 % equity share to KBC bank and a 5 % equity share to EBRD. At the end of the first phase of privatisation process the Republic of Slovenia remains the majority shareholder with a holding of 2,743,284 shares being 35.71 % of equity share as at 31 December 2002.

According to the decision of the Assembly, in the year 2002 the Bank paid a dividend of 428.52 tolars per share for the year 2001 amounting to 3,291,962 thousand tolars and remunerations to the Management Board amounting to 5,273 thousand tolars.

The Management board of NLB is authorized to issue additional capital with the previous consensus of Supervisory board at amount not exceeding 2,306,124 thousand tolars in the period of 6 months following the date of entry in the register of companies.

Basic earnings per share at 31 December 2002 amounted to 822.15 tolars. The weighted average number of ordinary shares outstanding during the year ended 2002 was 7,638,662.

Due to a change in valuation principles under the new Slovenian Accounting Standards the Bank didn't maintain capital at the rate of the general price index. If the Bank had maintained capital at the rate equal to the general price index in the year 2002, profit before tax would amount to 4,962,735 thousand tolars. If instead of the general prices index the growth rate for euro in the year 2002 was used it would result in a profit before tax in the amount of 8,475,995 thousand tolars.

c) Distributable net profit for the year 2002

As at 31 December 2002 the Bank formed own shares fund in respect of NLB's shares held by its subsidiaries. Net profit for the year 2002 in the amount of 2,649,240 thousand tolars was transferred to other profit reserves, while the retained earnings and remaining part of net profit for the year 2002 in the amount of 3,195,767 thousand tolars represent distributable net profit for the year 2002.

According to the Bank of Slovenia's methodology the total off-balance sheet items amounted to 1,410,118,309 thousand tolars. In accordance with the Decree on the Classification of Balance Sheet and Off-Balance Sheet Asset items of Banks and Savings Banks the total contingent liabilities with risk exposure amounted to 325,377,924 thousand tolars.

The total amount of all guarantees issued by the Bank to its subsidiaries amounted to1,663,503 thousand tolars as at 31 December 2002. The total amount of letters of awareness written on behalf of the Bank's subsidiaries amounted to 37,193,684 thousand tolars as at 31 December 2002.

Certain derivative financial instruments, while providing effective economic hedges under the risk management strategy of the Bank, do not qualify for hedge accounting under the specific accounting rules and are therefore treated as derivatives held for trading.

39. FUNDS MANAGED ON BEHALF OF THIRD PARTIES

The Bank manages assets totalling 113,319,955 thousand tolars (as at 31 December 2001: 114,873,153 thousands tolars) on behalf of third parties. Managed funds' assets are accounted for separately from those of the Bank. Income and expenses of these funds are for the account of the respective fund and no liability falls on the Bank in connection with these transactions. The Bank is compensated for its services by fees chargeable to the funds.

40. FOREIGN BRANCHES

The Bank has a branch in Triest, which total assets amounted to 23,220,696 thousand tolars as of 31 December 2002 and net profit for the year 2002 17,966 thousand tolars.

Placements with and loans to other bank

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. The 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 cash flows.

Deposits

The fair value to the depository institution of a demand deposits 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.

Debt securities held to maturity

The fair value of the bonds of the Republic of Slovenia for paid foreign currency deposits is calculated using discounted cash flows techniques. Due to their lower contractual interest rate against market interest rate of comparable market bonds the fair value of these bonds is lower than the carrying value. These bonds represent first-class securities and according to the Bank's positive intention to hold them to maturity they will be, irrespective of their momentary fair value, settled at maturity at their carrying value.

The fair value of other securities held to maturity is based on their quoted market price or calculated by using discounted cash flows techniques and it is not lower than the carrying value of these securities.

The Bank's organisational structure is from the beginning of the year 2003 based on 3 major business segments (value generation centres). This business segments are used for segment reporting for the year 2002:

1. Financial markets, including: treasury, investment banking and capital investments,
2. Corporate business, including: large companies and state companies (public sector),
3. Retail network, including: payment and credit cards, loans to and deposits from individual     clients, balances on their accounts etc.

Other operations comprise support centre (information technology and administration) and management centre, none of which constitutes a separately reportable segment.

Intersegment transfers are determined under normal commercial terms and conditions. Segment balance sheet items comprise operating assets and liabilities of reportable segments.

Effective interest rates are calculated on the basis of daily averages for each interest bearing balance sheet item (separately for tolars and foreign currencies). Interest income from loans to banks and loans to other customers are increased by commitment fees and commissions related to these loans.