(unofficial translation from bulgarian)

MUNICIPAL BANK AD

AUDITOR'S REPORT ANDANNUAL FINANCIAL STATEMENTS

December 31, 2005

(Unofficial translation from Bulgarian)

Deloitte Audit Ltd. Делойт Ogum ООД55, Al. Stambolijski Blvd. бул. „Ал. Стамболийски" 55Sofia 1000 София 1000Bulgaria България

Tel. +359 (0) 2 980 8500 фирмено дело 10638/96Fax +359 (0) 2 980 0436 при Софийски градски съдwww.deloitte.bg банкова сметка: ИНГ БАНК код 14591458

сметка в лева: 1000270610

(Unofficial translation from Bulgarian)

AUDITOR'S REPORT

To the shareholders ofMunicipal bank AD

We have audited the accompanying balance sheet of Municipal bank AD ("the Bank") as of December 31,2005, and the related statements of income, cash flows and changes in shareholders' equity for the yearthen ended. These financial statements are the responsibility of the Bank's management. Ourresponsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financialstatements presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material respects, the financial position of theBank as of December 31, 2005, and the results of its operations, cash flows and changes in shareholders'equity for the year then ended, in accordance with the statutory accounting legislation, applicable for thebanks in Bulgaria, as stated in note 2 to the accompanying financial statements.

March 1, 2006Sofia

MUNICIPAL BANK AD, SOFIA

BALANCE SHEETAS OF DECEMBER 31, 2005All amounts are in thousand BGN, unless otherwise stated

ASSETS

Cash, balances with the Central Bank and nostro accountswith other banks

Placements and deposits with other banksReceivables under repurchase agreementsTrading securitiesSecurities available for saleLoans and advances to customersOther assetsFixed assets

TOTAL ASSETS

LIABILITIES

Deposits from banksDue to other depositorsLiabilities under repurchase agreementsLong-term borrowingsShort-term borrowingsOther liabilities

TOTAL LIABILITIES

Net assets

SHAREHOLDERS' EQUITY

Share capitalCurrent year profitReserves

TOTAL SHAREHOLDERS' EQUITY

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

Note

4

567891011

12136141415

17

17

As of31.12.2005

58,547

72,20211,644

150,6892,070

157,6371,191

10,855

464,835

8,553349,817

20055,0106,9103,079

423,569

41,266

25,0003,565

12,701

41,266

464,835

As of31.12.2004

53,082

62,7237,712

153,411939

179,4061,571

12,080

470,924

8,488360,271

-53,6486,7052,792

431,904

39,020

25,0002,974

11,046

39,020

470,924

These financial statements have been accented by the Board of Directors and approved by the SupervisoryBoard of Municipal Bank AD.


INCOME STATEMENTFOR THE YEAR ENDED DECEMBER 31, 2005All amounts are in thousand BGN, unless otherwise stated

Interest and similar incomeInterest expenses and similar chargesNet interest margin

Net fee and commission incomeNet gains from dealings with trading securitiesNet gains from dealings in foreign currencyNet other incomeGeneral and administrative expensesAllowances for impairment and uncollectability

Profit before tax

Taxation

Net profit for the year

Note

1818

192021222324

16

Year ended31.12.2005

18,521(7,708)10,813

6,59213,164

810129

(23,558)(3,645)

4,305

(740)

3,565


15,393(5,355)10,038

6,08711,980

730887

(22,883)(3.087)

3,752

(778)

2,974

These financial statements have been accepted by the Board of Directors and approved by the SupervisoryBoard of Municipal Bank AD.


STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITYAS OF DECEMBER 31, 2005All amounts are in thousand BGN, unless otherwise stated

Balance as of January 1, 2004Dividends paid of the profit for

2003Transformation of net profit into

statutory reservesTransformation of net profit into

general reservesDecrease in revaluation reserve

from disposal of fixed assetsNet profit for the year ended

December 31,2004

Balance as of December 31, 2004

Dividends paid of the profit for2004

Transformation of net profit intostatutory reserves

Transformation of net profit intogeneral reserves

Decrease in revaluation reservefrom disposal of fixed assets

Donation at the expense of generalreserves

Net profit for the year endedDecember 31,2005

Balance as of December 31, 2005

Sharecapital

25,000

-

-

-

-

-

25,000

-

-

-

-

-

-

25,000

Revaluationreserve

306

-

-

-

(28)

-

278

-

-

-

(43)

-

-

235

Statutoryreserves

4,576

-

214

-

-

-

4,790

-

1,718

-

-

-

-

6,508

Generalreserves

5,522

-

-

428

-

-

5,950

-

-

-

-

(35)

-

5,915

Retainedearnings

1,874

(1,232)

(214)

(428)

28

2,974

3,002

(1,284)

(1,718)

-

43

-

3,565

3,608

Total

37,278

(1,232)

-

-

-

2,974

39,020

(1,284)

-

-

-

(35)

3,565

41,266


CASH FLOW STATEMENTFOR THE YEAR ENDED DECEMBER 31, 2005All amounts are in thousand BGN, unless otherwise stated

Cash flows from operationsProfit after taxAllowances for impairment and uncollectability for the periodRevaluation of trading securitiesDepreciation and amortization

Change in operating assetsIncrease/(decrease) in loans and advances to customersIncrease/(decrease) in trading securitiesIncrease/(decrease) in receivables under repurchase agreementsIncrease in other assets

Change in operating liabilitiesIncrease/(decrease) in deposits from banks(Decrease)/increase in amounts due to other depositors(Increase)/decrease in liabilities under repurchase agreementsIncrease/(decrease) in other liabilitiesNet cash provided by operations

Cash flows from investing activities(Decrease)/increase in securities available for salePurchase of property and other fixed assetsNet cash used for investing activities

Cash flows from financing activitiesProceeds from long-term and short-term financingDividends paid and donation at the expense of reservesNet cash provided by financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Note

28


3,5653,645

(1,555)2,2027,857

18,1244,277

(5,575)380

65(10,454)

200287

15,161

(1,131)(977)

(2,108)

1,567(1,319)

248

13,301

123,345

136,646


2,9743,087

(2,727)2,1215,455

(62,210)(9,348)

2,331609

(2,329)87,017(2,023)(1,434)18,068

358(2,352)(1,994)

31,298(1,232)30,066

46,140

77,205

123,345


NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2005All amounts are in thousand BGN, unless otherwise stated

1. Organization and operations

Municipal Bank AD (the Bank) is a joint stock company registered in the Republic of Bulgaria in April1996. The Bank's registered address is 6, Vrabcha Street, Sofia 1000, Bulgaria.

The Bank was granted a license by the Bulgarian National Bank (the BNB), which is the Central bank ofthe Republic of Bulgaria, to perform all banking activities both locally and internationally, includingtaking deposits in local and foreign currency, granting of loans, dealing with foreign currencies andprecious metals, dealing in securities and transactions under Art. 54, par. 1 of the Public Offering ofSecurities Act, and other.

The Bank's operations are conducted through a Head Office, 4 branches in Sofia, 15 branches in thecountry, 25 bank offices and 11 supporting offices.

2. Basis for preparation of the financial statements and accounting convention

General

These financial statements have been prepared for the year ended December 31, 2005. The financialstatements are stated in thousand Bulgarian Levs (BGN'000). Comparative figures for the prior year arepresented in the accompanying financial statements.

These financial statements are prepared for general purposes.

Accounting convention

These financial statements are prepared in compliance with Bulgarian national accounting legislation,applicable for banks in Bulgaria. In accordance with the Accountancy Act (AA), effective January 1, 2005on the territory of the Republic of Bulgaria shall be effective International Financial Reporting Standards(IFRS), endorsed by the European Union Commission. Those standards shall be translated officially intoBulgarian language, adopted also by the Council of Ministers of the Republic of Bulgaria andpromulgated in the State Gazette (SG). As of the date of approval of the financial statements by theBank's management, the IFRS endorsed by the European Union Commission have not yet been adoptedby the Council of Ministers of the Republic of Bulgaria and have not been promulgated in the SG inBulgarian language. For this reason these financial statements are prepared based on the coreInternational Accounting Standards (IAS), edition 2002, approved by decision of the Council ofMinisters 21/4.02.2003 and published in SG, issue 13/2003. Furthermore, the Banking Law stipulatesthat banks shall periodically assess loans and other risk assets, including their off-balance sheet liabilities,and shall allocate allowances to cover the risk of losses, according to criteria set by an ordinance of theCentral Bank. According to the Banking Law these allowances are part of accounting expenses and acorrective of the carrying amount of the assets.

Management believes, that the chosen basis for preparation of the financial statements for 2005 providesusers with useful and fair information about the financial position and operating results of the Bank.

(Unofficial translation from Bulgarian) 5


NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)FOR THE YEAR ENDED DECEMBER 31, 2005

All amounts are in thousand BGN, unless otherwise stated

2. Basis for preparation of the financial statements and accounting convention (continued)

Accounting convention (continued)When preparing the financial statements the Bank uses as a basis for reporting of assets and liabilities thehistorical cost method, except for securities held for trading and derivative financial instruments, whichare revalued at fair value.

The presentation of financial statements requires management to apply certain accounting estimates andreasonable assumptions that affect some of the reported amounts of carrying amount of assets andliabilities as of the date of the financial statements, as well as the amount of revenues and expenses duringthe reporting period and to disclose contingent assets and liabilities. These estimates and assumptions arebased on the information available as of the date of the financial statements and the future actual resultscould differ from those estimates.

3. Summary of significant accounting policies

Cash and cash equivalents

Cash and cash equivalents for the purposes of the cash flow statements include cash, unrestricted balanceswith the Central Bank, nostro accounts, placements with, loans and advances to other banks andreceivables under repurchase agreements with banks with remaining maturity up to 3 months.

Securities

Trading securities

Trading securities are securities, which were either acquired for generating profit from short-termfluctuations in price or dealer's margin, or are securities included in a portfolio in which a pattern of short-term profit taking exists. Trading securities are initially recognized at cost and subsequently re-measuredat fair value. The trading securities are carried at fair value based on quoted prices. All related realized andunrealized gains and losses are included in net gains or losses from trading securities.

Differences between the carrying amounts of securities sold and their selling price are recorded in theincome statement as net gain or loss from sale of trading securities. Any changes in the carrying amount ofthe trading securities, in result of their presentation at quoted market prices, are reported in the incomestatement as gains or losses on revaluation of trading securities. Interest earned whilst holding tradingsecurities is reported as net gain from dealings with trading securities.

Securities available for sale

Securities available for sale are those securities that are not classified as trading securities or held tomaturity. Securities available for sale represent debt bonds and equity investments in entities, in which theBank does not have a controlling interest.

Such assets are valued at fair value, based on quoted market prices in an active market. When quotedmarket prices are not readily available or the market does not meet the requirements for active market,these securities are presented at acquisition cost or their fair value is estimated using other applicablevaluation models to reflect the specific circumstances of the issuer.

Dividends from equity investments are reported as income when reasons for their receipt arise.



NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)FOR THE YEAR ENDED DECEMBER 31, 2005All amounts are in thousand BGN, unless otherwise stated

3. Summary of significant accounting policies (continued)

Receivables and payables under repurchase agreements

Receivables and payables under repurchase agreements are valued at cost, which represents the fundsplaced with/received by the Bank, secured by the value of the corresponding collateral securities alongwith the respective receivables/payables on accrued interest up to date.

Loans and advances, originated by the Bank and allowances for impairment and uncollectability

Loans and advances originated by the Bank through direct providing of money to a borrower, arecategorized as loans and advances, originated by the Bank and are measured at amortized cost, lessallowances for impairment and uncollectability.

Allowances for impairment and uncollectability are measured having regard to specific risk. The riskrelates to those amounts receivable that have been specifically identified as bad or doubtful. Indetermining the level of the impairment required, management considers numerous factors includingdomestic economic conditions, the composition of the loan portfolio and prior bad debt experience.

Allowances for impairment and uncollectability are determined as the difference between the carryingamount of a financial asset and its estimated recoverable amount.

The Bank has adopted a methodology for calculation of loan allowances based on the requirements ofbanking legislation in Bulgaria. The Bank classifies loans in several groups. Outside the Standard loansgroup are applied rates, exceeding the minimum required by regulators, and with these rates are decreasedthe contractual cash flows, which subsequently are discounted by the effective interest rate, as statedabove. Cash flows, related to short-term loans are not discounted.

Other specific requirements of regulators are related to terms for reclassification of Substandard loansback to the group of Standard loans and recognition of liquid collaterals for the purposes of determining ofallowances for impairment of loans.

Any difference between the carrying amount and recoverable amount of the financial assets (loss onimpairment and uncollectability of loans) is charged to the income statement for the period it occurs. Areversal of any loss on impairment and uncollectability is taken to income for the respective period.Recoveries of amounts previously written off are treated as income.

The net book value of uncollectible loans and advances is nil as a result of accrued provisions forimpairment and uncollectability amounting to hundred percent. Such loans are written off upon decisionof the competent body of the Bank after all required legal procedures have been completed and the amountof the loss has been determined.





Fixed assets

Fixed assets are carried at cost less accumulated depreciation. Depreciation on fixed assets is calculated ona straight-line basis designed to write off the assets over their estimated useful lives. The Bank applies thefollowing depreciation and amortization rates for 2005:

BuildingsPlant and equipmentOffice equipment - computersMotor vehicles - carsFixtures and fittingsSoftwareIntangible fixed assets, for which thereare legal restrictions on the exploitationterm/leasehold improvements

4%20%30%20%15%30%

According to the legally restrictedexploitation term, but not higher than 25%

(25 years)(5 years)(3 years)(5 years)(7 years)(3 years)

(more than 4years)

Interest income and expense

Interest income and expense is recognized on a time proportion basis using effective interest rate methodas amortization of any difference between the amount at initial recognition of the respective asset orliability and the amount at maturity.

For loans originated by the Bank and liabilities to depositors, where the interest is calculated on a dailybasis by applying contracted interest rate to the outstanding balance, the effective interest rate isconsidered to be equal to the contracted interest rate.

The recognition of interest income ceases when payment of interest or principal is overdue for more than90 days. Interest is included in income only when it is received. Loans are returned to the accrual basisonly when doubt about collectability is removed and when the outstanding arrears of interest and principalare received.

Interest earned whilst holding trading securities is reported as net gain from dealings with tradingsecurities.

Fees and commissions

Fees and commissions consist mainly of fees for transactions in Bulgarian Levs and foreign currency, feesfor granting of loans, opening of letters of credit and guarantees issuing. The fees and commissions forgranting and handling of long-term loans, which represent an integral part of the effective income, aredeferred over the life of the loan and are recognized as a correction of the interest income, using thecontracted interest rate.

Foreign exchange transactions

Transactions denominated in foreign currencies have been translated into BGN at the rates of the BNB onthe date of transaction. Receivables and payables denominated in foreign currencies are translated intoBGN at balance sheet date using closing exchange rates of the BNB on that date.





Foreign exchange transactions (continued)

Significant exchange rates at the balance sheet dates include:

Currency December 31,2005 December 31,2004USD 1.65790 1.43589EUR 1.95583 1.95583

Effective from January 1, 1999 and following the introduction of the Euro, the exchange rate of theBulgarian Lev is fixed to the Euro by law at a rate of EUR 1 = BGN 1,95583.

Net gains or losses from foreign exchange rate differences as a result of revaluation of receivables,payables and FX deals, are included in the income statement for the period, in which they arise.

Taxation

Taxes currently due are calculated in accordance with the Bulgarian legislation. Income tax is computedon the basis of taxable profit, calculated by adjusting the statutory financial result for certain income andexpenditure items, as required under Bulgarian law and IFRS.

Tax effect, related to transactions or other events, which are reported in the income statement, is alsoreported in the income statement, and the tax effect related to transactions or other events, which arereported directly to equity, is also reported directly to equity.

A deferred tax liability is recognized for all taxable temporary differences unless it arises from the initialrecognition of an asset or liability in a transaction, which at the time of the transaction, affects neitheraccounting profit nor taxable profit (tax loss).

Deferred tax assets are recognized for all deductible temporary differences to the extent that is probablethat taxable profit will be available against which the deductible temporary difference can be utilized,unless the deferred asset arises from the initial recognition of an asset or liability in a transaction, which atthe time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

Deferred taxes are recognized as income or expense and are included in the net profit for the period exceptto the extent that the tax arises from a transaction or event which is recognized in the same or differentperiod, directly in equity. Deferred taxes are charged or credited directly to equity when the tax relates toitems that are credited or charged in the same or a different period, directly to equity.

As of December 31, 2005 and 2004, the Bank does not have deferred tax liabilities and assets.

Financial instruments

The Bank uses derivative financial instruments both to meet the financial needs of its customers, acting asan agent, and in its proprietary transactions. These instruments include, inter alia, open market foreigncurrency FX transactions, open market security purchase and sale transactions, open market forwardexchange rate agreements and currency swaps. Subsequent to initial recognition and measurement,financial instruments are remeasured at each balance sheet date and reported at their fair value. Changes inderivatives held for trading are included in the income statement.

As of December 31, 2005 there are no derivative transactions that qualify for hedge accounting under thespecific rules of IAS 39 and are thereafter treated as derivatives held for trading where gains and losses inresult of the changes in their fair value are reported in the income statement. As ofDecember 31, 2005 there are no open derivative contracts outstanding.





Financial instruments (continued)

Contracts for purchase or sale of financial assets that require settlement within the time frame generallyestablished by regulation or convention in the market place (the so-called "regular way" contracts) arerecognized in the balance sheet on the settlement date. Changes in the fair value of assets to be received,are recognized as income for the period.

A financial asset is derecognized on the value date when the Bank loses control of the contractual rightsthat comprise the financial asset. This results when the Bank realizes the rights, the rights expire, or whenthe Bank surrenders those rights. A financial asset is derecognized when it is paid off.

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when the Bankhas a legally enforceable right to set off the recognized amounts and the transactions are intended to besettled on a net basis.

In the normal course of business, the Bank has formed off-balance sheet financial instruments comprisingfinancial guarantees. Such financial instruments are reported in the balance sheet when they are funded.

Fair value of financial assets and liabilities

International Accounting Standard 32 "Financial Instruments: Disclosure and Presentation", provides forthe disclosure in the notes to financial statements of information about fair value of financial assets andliabilities. Fair value for this purpose is defined as the amount for which an asset can be exchanged, or aliability settled, between knowledgeable, willing parties in an arms length transaction. It is the policy ofthe Bank to disclose the fair value information on those assets and liabilities for which published marketinformation is readily available and whose fair value is materially different from their reported carryingamounts.

Most of the Bank's assets, such as cash, nostro accounts and accounts with the Central Bank, placementswith, and deposits to other banks, trading securities, the sum of which represents approximately 60% of allassets of the Bank, are presented at market prices, which are considered to be their fair value.

Sufficient market experience, stability and liquidity do not currently exist for purchases and sales of loansand advances to customers, other assets and all liabilities of the Bank, for which published marketinformation is readily available. Accordingly, their fair values cannot be reliably determined. In theopinion of management, the reported recoverable amounts of such assets and the amounts required forsettlement of such liabilities at the balance sheet date, are useful for the purpose of the financialstatements, in the circumstances.

Provisions for guarantees and other off-balance sheet credit related commitments

The amount of provisions for guarantees and other off-balance sheet credit related commitments isrecognized as an expense and a liability when the Bank has present legal or constructive obligations,which have arisen in result of a past event and it is probable that an outflow of resources embodyingeconomic benefits will be required to settle that obligation and a reasonable estimate of the amount of theresulting liability can be made. Any loss resulting from recognition of provision for liability is recognizedin the income statement for the period.

As of December 31, 2005 and 2004 the Bank has no allocated provisions for off-balance sheet creditrelated commitments, because there is no reason for this.

{Unofficial translation from Bulgarian) 10




Bank regulators, established by the Central Bank (legal framework)

The Bank's activities and operations are governed by the Law on Banks, Regulation No 8 on the CapitalAdequacy of Banks, Regulation No 9 on the Evaluation and Qualification of Risk Exposures of Banks andthe respective allocation of allowances for impairment and uncollectability, Regulation 11 on theLiquidity Management and Supervision of Banks, and in compliance with other regulations issued by theBNB. In addition, the BNB supervises Municipal Bank's compliance with banking laws and regulations.

4. Cash, balances with the Central bank and nostro accounts with other banks

Cash on handCurrent account with the Central BankNostro accounts with local banksNostro accounts with foreign banks

Total

As of31.12.2005

16,30336,160

4745,610

58,547

As of31.12.2004

14,54135,890

5552,096

53,082

Balances with the Central Bank include minimum, non-interest bearing reserves, amounting to BGN32,556 thousand and BGN 32,995 thousand, as of December 31, 2005 and 2004, respectively, and ReserveGuarantee Fund to ensure the settlement of payments through the Real Time Gross Settlement SystemRINGS as required by the Central Bank regulations, amounting to BGN 28 thousand and BGN 56thousand, as of December 31, 2005 and 2004, respectively. No restrictions have been imposed by theCentral Bank for using the minimum reserves. Such reserves are determined based on deposits held at theBank.

5. Placements and deposits with other banks

In Bulgarian LevsPlacements with local banks

In foreign currencyPlacements with foreign correspondentsPlacements with local banks

Total

As of31.12.2005

1,300

68,2492,653

70,902

72,202

As of31.12.2004

10,301

47,7134,709

52,422

62,723

As of December 31, 2005 the Bank has placements in BGN provided to one commercial bank, registeredin the Republic of Bulgaria (Investbank AD).

As of December 31, 2004 the Bank has placements in BGN provided to five commercial banks, registeredin the Republic of Bulgaria (BNP Parisbas Bulgaria, Bulgarian Post Bank AD, ProCredit Bank AD, SGExpressbank, Encouragement Bank AD), where approximately 48% of the placements are provided to onebank (Bulgarian Post Bank AD) with international credit rating of Fitch: BB+: B.




5. Placements and deposits with other banks (continued)

As of December 31, 2005 the Bank has placements in foreign currency provided to one commercial bank,registered in the Republic of Bulgaria (BACB AD) with international credit rating of Standard & Poor's:BB-: B.

As of December 31, 2004 approximately 94% of the placements to local banks in foreign currency areconcentrated in two local banks (First Investment Bank AD and Eurobank AD) with international creditrating Standard & Poor's: B+ and Moody's: В1: E+.

As of December 31, 2005 the Bank has placements provided to three foreign banks (Bank Austria Vienna,Unicredito Italiano Milano, DZ Bank London), with rating higher than A according to the internationalrating organizations Standard & Poor's and Fitch.

As of December 31, 2004 the Bank has placements provided to three foreign banks (Bank Austria Vienna,ING Amsterdam, Unicredito Italiano Milano), with rating higher than A according to the internationalrating organizations Standard & Poor's and Fitch.

The average interest rate on placements with and loans to banks in USD and in EUR for the year endedDecember 31, 2005 is 3.04% and 2.04%, respectively.

The average interest rate on placements with and loans to banks in USD and in EUR for the year endedDecember 31, 2004 is 2.25% and 2.12%, respectively.

Placements of deposits to banks as of December 31, 2005 and 2004 are with less than three monthsmaturity.

6. Receivables/payables under repurchase agreements

The receivables under repurchase agreements as of December 31, 2005 and 2004 amount to BGN 11,644thousand and BGN 7,712 thousand, respectively. As of December 31, 2005 and 2004 these receivablesrepresent sell-buy repurchase agreements with local banks (BGN 5,897 thousand and BGN 7,540thousand) and other financial institutions (BGN 5,747 thousand and BGN 172 thousand).

The remaining maturity of repurchase agreements as of December 31, 2005 and 2004 is within 1 month.

As of December 31, 2005 the Bank has liabilities under repurchase agreements at the amount of BGN 200thousand, with remaining maturity within 1 month.

As of December 31, 2004 the Bank has no liabilities under repurchase agreements.

7. Trading securities

Bulgarian government securitiesIn Bulgarian LevsIn foreign currency

Total

As of31.12.2005

126,81023,879

150,689

As of31.12.2004

116,22037,191

153,411




7. Trading securities (continued)

Trading securities are stated at fair value, which represents their market value.

As of December 31, 2005 and 2004 various issues of Bulgarian government securities amounting to BGN127,760 thousand and BGN 141,831 thousand were pledged with the Central Bank as a collateral formaintaining of State Budget accounts.

As of December 31, 2005 the amount of government securities pledged as collateral under repurchaseagreements is BGN 201 thousand.

As of December 31, 2004 the Bank has no government securities pledged as collateral under repurchaseagreements.

As of December 31, 2005 the interest rate of Bulgarian government bonds in Bulgarian Levs and foreigncurrency varies from 3.5% to 9% and from 5.75% to 7.5%, respectively.

As of December 31, 2004 the interest rate of Bulgarian Government bonds in Bulgarian Levs and foreigncurrency varies from 4.7% to 9% and from 5.75% to 8.25%, respectively.

8. Securities available for sale

Shares in companiesBonds, issued by Bulgarian issuersCompensatory bonds and compensatory bills

Total

As of31.12.2005

1,254617199

2,070

As of31.12.2004

702230

7

939

9. Loans and advances to customers

a) Analysis by type of customer

Households and individualsPrivate enterprisesState owned enterprisesState Budget

Allowances for impairment and uncollectability

Total

As of31.12.2005

22,846134,78613,0075,707

176,346(18,709)

157,637

As of31.12.2004

17,510162,55712,546

1,857194,470(15,064)

179,406




9. Loans and advances to customers (continued)

(b) Analysis by industry

ManufacturingAgricultureConstructionTradeTransportServicesState BudgetIndividuals

Allowances for impairment and uncollectability

Total

As of31.12.2005

33,5584,7928,223

36,58421,36443,2725,707

22,846176,346

(18,709)

157,637

As of31.12.2004

42,7193,802

11,82351,50022,88642,546

1,85717,337

194,470

(15,064)

179,406

In 2005 there are no written-off receivables under granted loans.

In 2004, following a decision of the Bank's Board of Directors, receivables under granted loans at theamount of BGN 47 thousand have been written-off at the expense of allocated provisions.

The contracted interest rates for loans granted in BGN are variable and are calculated on the basis of baseinterest rate of the Central Bank plus a set margin. The margin is stipulated in the contract and rangesbetween 5 and 12 per cent.

The weighted average contracted interest rates on loans in USD and EUR for the year endedDecember 31, 2005 are variable and are approximately 10.06% and 8.37%, respectively, and for the yearended December 31, 2004 - 11% and 9.8%.

10. Other assets

PrepaymentsDeferred expensesMaterialsOther

Total

As of31.12.2005

214350160467

1,191

As of31.12.2004

192227300852

1,571

In 2004 other receivables at the amount of BGN 10 thousand have been written-off at the expense ofallocated provisions.




11. Fixed assets




12. Deposits from banks

As of December 31, 2005 approximately 72% of the deposits in BGN represent term deposit from onelocal bank (Investbank AD). Approximately 78% of the deposits in foreign currency are from one localbank (Tokuda Bank AD) and represent term deposits in USD and EUR and current accounts balances. Allterm deposits received from banks as of December 31, 2005 mature within one month.

As of December 31, 2004 approximately 96% of the deposits represent term deposits in USD from fourlocal banks. Approximately 52% of the deposits received from banks as of December31, 2004 mature within one month and 48% mature within three months.

The average interest rate for deposits from banks in USD and EUR for the year ended December 31, 2005,is 2.67% and 1.90%, respectively, and for the year ended December 31, 2004 - 0.4% and 0.7%,respectively. The average interest rate for deposits from banks in BGN is 0.95% and 0.10% for the yearsended December 31, 2005 and December 31, 2004, respectively.

13. Due to other depositors




13. Due to other depositors (continued)

The average interest rates on various types of deposits for the year ended December 31, 2005 are asfollows:

As of December 31, 2005 approximately 13% of the total amount due to other depositors represent bankaccounts of one customer and his related parties.

The average interest rates on different types of deposits for the year ended December 31, 2004, are asfollows:

As of December 31, 2004 approximately 10% of the total amount due to other depositors represent bankaccounts of one customer.

14. Long-term and short-term borrowings

As of December 31, 2005 and 2004, the Bank has received long-term and short-term financing under loanagreements for the purpose of using such funds to provide long-term and short-term loans to Bank'scustomers. Long-term loans are reported at amortized cost. Fees paid on the loans received by the Bank,which represent an integral part of the effective income, are amortized for the period to maturity of therespective credit lines, by applying effective interest rate. The amount of unamortized fees under theseloans as of December 31, 2005 and 2004 is BGN 604 thousand and BGN 574 thousand, respectively.




15. Other liabilities

Bank transfers not processed represent liabilities for transfers in foreign currency ordered by customers onthe last day of 2005, with value date for bank transfer within two days, reported on the first working dayof 2006.

16. Taxation

Current income tax expense represents the amount of tax due under Bulgarian law at statutory tax rates of15% as of December 31, 2005 and 19.5% as of December 31, 2004. Deferred tax income or expenseresults from change in the carrying amount of deferred tax assets and deferred tax liabilities. No deferredtax liabilities are accrued in 2005 and 2004.

The relationship between tax expense and accounting profit is as follows:

17. Share capital and reserves

Share capital

The Bulgarian legislation requires that companies register their share capital at court. As of December 31,2005 the issued and registered share capital of the Bank amounts to BGN 25,000 thousand, fully paid-in.

The share capital of the Bank comprises 2,500,000 ordinary voting shares with a par value of BGN 10each.




17. Share capital and reserves (continued)

Reserves

Reserves comprise statutory reserves, revaluation reserves, general reserves and retained earnings fromprior periods.

The revaluation reserves comprise the revaluation surplus of assets.

Under the local legislation Municipal bank AD is required to allocate minimum 20 percent of its currentyear profit to statutory reserves to reach the amount of 1.25% of assets and off-balance sheetcommitments. Every year these reserves are replenished to the amount required by Bulgarian law bydecision of the BNB Bank Supervision and upon decision of the General Meeting of Shareholders of theBank.

The general reserves are allocated according to Art. 246 § 2, item 4 of the Commercial Act upon decisionof the General Meeting of Shareholders.

18. Interest income and interest expenses




19. Net fee and commission income

20. Net gains from dealing with trading securities

21. Net gains from dealing with foreign currency

22. Net other income




23. General and administrative expenses

24. Allowances for impairment and uncollectability

Movements in allowances for impairment and uncollectability in 2005 is as follows:

25. Related parties

During the reporting period the following companies are related parties:

Related party

Sofia MunicipalityLizingovo Drujestvo OOD

Type of relation

Major shareholder of the BankShare participation in Bank's equity of 9.8%

The major shareholder of the Bank - Sofia Municipality, owns 67% of the Bank's registered capital.Approximately 13% of the amounts due to non-financial institutions represent funds of the majorshareholder of the Bank and its related parties. There are no preferential terms provided for servicing theseaccounts. As of December 31, 2005 the Bank has an exposure on issued bank guarantees to related partiesof the major shareholder, representing 0.42% of total issued bank guarantees.

As of December 31, 2004 the Bank has an exposure on granted loans and issued guarantees to thecompanies related to the major shareholder representing 0.15% of the total loans and 1.09% of the totalguarantees issued.




25. Related parties (continued)

As of December 31, 2005 and 2004 the granted loans and received deposits from companies - relatedparties are as follows:

All loans of employees and administrators are collaterised wholly by mortgages, cash or other collaterals.

As of December 31, 2005 the amount of the remuneration of the management represents short-termincome of hired persons as salaries, social and health securities, paid annual leave, paid sick leave andpremiums at the total amount of BGN 698 thousand.

26. Risk management

Liquidity and interest rate risk

The liquidity risk measures the ability of the Bank to perform its obligations at maturity, to manage theunexpected decreases or changes in the financing resources and to convert its assets into cash as fast aspossible and with minimum loss of their value.

The Bank maintains its liquidity profile in compliance with the regulations of the Central Bank. The tablesbelow analyze assets and liabilities of the Bank into relevant maturity groupings based on the remainingperiod to the balance sheet date and to the contractual maturity date.




26. Risk management (continued)

The assets and liabilities of the Bank mature over the following periods as of December 31, 2005 based onremaining maturity:





The assets and liabilities of the Bank mature over the following periods as of December 31, 2004 based onremaining maturity:

The dynamics of the liquidity exposures of the Bank is analyzed and monitored on a daily basis. Differenttechniques and models are applied for liquidity management. Management believes that the diversificationof deposits by number and type of depositors, and the past experience of the Bank provide reason tobelieve that the deposits ensure a long-term and sustainable source of funding for the Bank.

The Bank is exposed to the effects of changes in the prevailing levels of market interest rates on itsfinancial position and cash flows. The Bank's interest rate exposures are managed using interest ratesensitivity time gap models, as well as by day-to-day monitoring and analysis of the structure of theinterest rate balance sheet and off-balance sheet exposures and the net interest income.





The table below summarizes the effective interest rates by major currencies for monetary financialinstruments:

Credit risk

The Bank is exposed to a credit risk, which is the risk in case a counterparty fails to pay amounts in fullwhen due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount ofrisk accepted in relation to one borrower or a group of borrowers. To manage the level of credit risk, theBank deals with counterparties of high credit standing and always ensures adequate collateral. Exposure tocredit risk is also managed through regular analysis of the ability of borrowers to meet interest andprincipal repayment obligations. To avoid concentration of loans to non-financial institutions the Bank hasestablished and observes industry limits. For transactions with other banks without collateral, limits fordeposits, FX transactions and portfolio limits, approved by management are observed. The limits aredetermined using the method of internal rating, based on international credit ratings of foreigncorrespondent banks and the financial position of local banks.

Market risk

All market instruments are subject to market risk. The instruments are recognized at fair value and allchanges in market conditions directly affect net trading income. Exposure to market risk is managed bythe Bank in accordance with risk limits set by management.




27. Foreign currency exposures

The financial exposure of the Bank and its cash flows are subject to exchange rates fluctuations. The Bankmonitors on a daily basis its foreign currency exposure for compliance with the regulatory requirements ofthe Central Bank for observing the limits for open positions by currencies and net open position.

The table below summarizes the exposure to foreign currency exchange rate risk as of December 31,2005. Included in the table are the Bank's assets and liabilities at carrying amounts in thousand BulgarianLevs, distributed by type of currency.

Assets

Cash and balances with the Central Bank andnostro accounts with other banks

Placements with, and loans and deposits toother banks

Receivables under repurchase agreementsTrading securitiesSecurities available for saleLoans and advances to customersOther assetsFixed assets

Total assets

Liabilities

Deposits from banksAmounts due to other depositorsLiabilities under repurchase agreementsLong-term borrowingsShort-term loansOther liabilities

Total liabilities

EUR

3,484

52,820-

21,4234

47,8796

10,855

136,471

1,31138,309

-54,299

6,910770

101,599

USD

1,920

18,082-

2,45621

8,726--

31,205

1,97128,389

---

552

30,912

BGN

48,304

1,30011,644

126,8102,045

101,0321,183

-

292,318

1,802282,445

200711

-1,743

286,901

Other

4,839

-----2-

4,841

3,469674

---

14

4,157

Total

58,547

72,20211,644

150,6892,070

157,6371,191

10,855

464,835

8,553349,817

20055,010

6,9103,079

423,569




27. Foreign currency exposures (continued)

The table below summarizes the exposure to foreign currency exchange rate risk as of December 31,2004.

Assets

Cash and balances with the Central Bank andnostro accounts with other banks

Placements with, and loans and deposits to otherbanks

Receivables under repurchase agreementsTrading securitiesSecurities available for saleLoans and advances to customersOther assetsFixed assets

Total assets

Liabilities

Deposits from banksAmounts due to other depositorsLong-term borrowingsShort-term loansOther liabilities

Total liabilities

EUR

2,887

46,688-

31,378-

55,12727

-

136,107

15437,33152,7975,911

758

96,951

USD

1,629

5,457-

5,81318

23,164--

36,081

8,21326,755

--

888

35,856

BGN

47,152

10,3017,712

116,220921

101,1151,542

12,080

297,043

121295,252

851794

1,146

298,164

Other

1,414

277----2-

1,693

-

933---

933

Total

53,082

62,7237,712

153,411939

179,4061,571

12,080

470,924

8,488360,27153,6486,7052,792

431,904

As of December 31, 2005 over 29% of the assets denominated in foreign currency and 24% of theliabilities denominated in foreign currency of the Bank are in EUR, which bears no foreign exchange raterisk, since from January 1, 1999 a fixed exchange rate of the EUR to the BGN was officially introduced inBulgaria, as disclosed in Note 3.




28. Cash and cash equivalents

Cash and cash equivalents as of the end of the reporting period comprise the following balances:

Cash in handBalances with the Central Bank (unrestricted amount)Nostro accounts with local banksNostro accounts with foreign banksPlacements with, and advances to banksReceivables under repurchase agreements

Total

As of31.12.2005

16,30336,160

4745,610

72,2025,897

136,646

As of31.12.2004

14,54135,890

5552,096

62,7237,540

123,345

29. Commitments and contingencies

Commitments and contingencies of the Bank comprise issued guarantees, unutilized amounts undercontracted loans and liabilities under commercial letters of credit.

As of December 31, 2005 and 2004 the Bank has issued guarantees to its clients in favor of third parties,amounting to BGN 32,974 thousand and BGN 34,804 thousand, respectively, including BGN 16,749thousand (2004: BGN 11,842 thousand) for performance bonds, collateralized by blocked deposits at theBank or by other assets of the customers.

The unutilized amounts under contracted loans and overdrafts as of December 31, 2005 andDecember 31, 2004 amount to BGN 11,592 thousand and BGN 14,870 thousand, respectively.

As of December 31, 2005 and December 31, 2004 the Bank has a liability under commercial letters ofcredit at the amount of BGN 145 thousand and BGN 71 thousand, respectively.

As of December 31, 2005 and as of the date of approval of these financial statements there are three newcommercial lawsuits filed against the Bank as co-litigant. The claims bear no property interest regardingMunicipal Bank AD. There are three litigations against the Bank in process - a labour dispute, civil suitand an administrative suit. The amount of claims is not material. Management believes that no provisionshould be accrued, as there is no reason to believe that any loss will arise for the Bank.


(unofficial translation from bulgarian)

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