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STOPANSKA BANKA AD - SKOPJE

Financial Statements and Independent Auditors’ Report for the year ended December 31, 2007


CONTENTS Page Independent Auditors’ Report 1 - 2 Income Statement 3 Balance Sheet 4 Statement of Changes in Equity 5 Statement of Cash Flows 6 - 7 Notes to the Financial Statements 8 – 60

STOPANSKA BANKA AD – SKOPJE

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INDEPENDENT AUDITORS’ REPORT TO THE MANAGEMENT AND SHAREHOLDERS OF STOPANSKA BANKA AD - SKOPJE We have audited the accompanying financial statements (page 3 to 60) of Stopanska Banka AD - Skopje (hereinafter referred to as the “Bank”), which comprise the balance sheet as of December 31, 2007 and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with the accounting standards applied in the Republic of Macedonia. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Audit Law of the Republic of Macedonia and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation and fair presentation of the financial statements of the Bank in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements of the Bank present fairly, in all material respects the financial position of Stopanska banka AD - Skopje as of December 31, 2007, and its financial performance, changes in equity and its cash flows for the year then ended in accordance with accounting standards applied in the Republic of Macedonia and accounting policies presented in Notes 2 and 3 to the financial statements.

Deloitte DOOEL Lidija Nanush Biljana Nasteska Chartered Accountant Chartered Accountant Manager Skopje January 25, 2008


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INCOME STATEMENT Year ended December 31, 2007 (Expressed in thousands of Denars) Note 2007 2006 Interest income 3.1, 5 3,362,413 2,565,016 Interest expense 3.1, 5 (1,194,464) (756,341) Net interest income

2,167,949 1,808,675

Fee and commission income 3.1, 6 969,173 833,590 Fee and commission expense 3.1, 6 (50,886) (43,541) Net fee and commission income

918,287 790,049

Dividend income 7,892 1,977 Foreign exchange gains, net 3.2 111,976 94,810 Net trading income 7 614 842 Impairment losses, net 8 (495,388) (477,455) Other operating income 9 121,176 124,330 Other operating expenses 10 (1,713,792) (1,559,463) PROFIT BEFORE TAXATION 1,118,714 783,765 Income tax 11 (11,587) (8,638) NET PROFIT 1,107,127 775,127

The accompanying notes are an integral part of these financial statements. The financial statements were approved by the management of the Bank on January 24, 2008 and shall be proposed on approval by the Bank’s Board of Directors. Signed on behalf of Stopanska banka AD - Skopje: Mr. Gligor Bishev Mr. Georgios Papanastasiou First General Manager Second General Manager


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BALANCE SHEET At December 31, 2007 (Expressed in thousands of Denars) Note 2007 2006 ASSETS Cash and cash equivalents 12 4,722,680 4,664,562 Treasury and other eligible bills 13 5,232,175 2,426,260 Financial instruments held for trading 14 253,301 147,765 Financial instruments available for sale 14 123,123 107,354 Financial instruments held to maturity 14 3,838,602 4,391,916 Placement with, and loans to, banks 15 5,443,514 6,001,414 Loans to customers 16 32,917,403 21,659,311 Other receivables 17 1,021,369 1,023,626 Investment property 18 110,334 153,987 Leasehold improvements 19 20,268 20,754 Intangible assets 20 89,589 149,853 Property and equipment 21 1,134,954 1,162,151 Deferred tax assets 11 1,789 2,102 Total assets 54,909,101 41,911,055 LIABILITIES AND EQUITY LIABILITIES Deposits from banks and financial institutions 22 3,750,252 2,232,155 Deposits from customers 23 43,280,888 32,962,368 Loans payable 24 320,207 377,980 Subordinated debt 25 1,224,032 1,223,482 Preferred shares obligations 26 90,978 90,978 Other liabilities 27 740,141 578,426 Income tax payable 11 2,747 8,929 Deferred tax liabilities 11 1,307 - Obligations toward employees 14,908 - Total liabilities 49,425,460 37,474,318 EQUITY 28 Share capital 3,511,242 3,511,242 Reserves 252,977 147,555 Retained earnings 612,295 2,813 Net profit for the year 1,107,127 775,127 Total equity 5,483,641 4,436,737

Total liabilities and equity 54,909,101 41,911,055 Commitment and contingencies 31 10,639,454 6,938,483

The accompanying notes are an integral part of these financial statements.


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STATEMENT OF CHANGES IN EQUITY Year ended December 31, 2007 (Expressed in thousands of Denars)

Share Capital

Revalued Reserve

Statutory Reserve

Special Fund

Retained Earnings

Total

Balance, January 1, 2006 3,511,242 22,610 1,911 1,083 124,764 3,661,610 Transfer to statutory reserve - - 121,951 - (121,951) - Profit for the year - - - - 775,127 775,127 Balance, December 31, 2006 3,511,242

22,610 123,862 1,083 777,940 4,436,737

Balance, January 1, 2007 3,511,242 22,610 123,862 1,083 777,940 4,436,737 Transfer to statutory reserve - - 116,269 - (116,269) - Paid dividends - - - - (71,986) (71,986) Transfer of revalued reserve to retained earnings -

(22,610) - - 22,610 -

Revalued reserve from reassessment of equity securities -

11,763 - - - 11,763

Profit for the year - - - - 1,107,127 1,107,127 Balance, December 31, 2007 3,511,242 11,763 240,131 1,083 1,719,422 5,483,641



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STATEMENT OF CASH FLOWS Year ended December 31, 2007 (Expressed in thousands of Denars) 2007 2006 Profit before taxation 1,118,714 783,765 Adjustments for: Depreciation and amortization of: - Property and equipment 149,700 170,014 - Intangible assets 68,948 69,055 - Investment property 3,919 4,608 - Leasehold improvements 4,819 1,230 Capital gain: - Sale of property and equipment (41,513) (67,939)Interest income (3,362,413) (2,565,016)Interest expense 1,194,464 756,341 Net trading income (614) (842)Write-offs - 6,933 Impairment losses 879,381 993,293 Impairment losses for: - Investment property 7,117 11,741 - Assets acquired through foreclosure procedure 39,294 - Release of impairment for balance sheet items (383,993) (428,279)Impairment/(release) of impairment for off-balance sheet items - (87,559)Interest receipts 3,309,409 2,553,276 Interest paid (1,134,860) (737,045) Operating profit before changes in operating assets: 1,852,372 1,463,576 (Increase)/decrease of operating assets: Purchase of bonds held-for-trading (102,325) (73,535)Placements with, and loans to, banks 10,134 7,835 Loans to customers (11,732,446) (6,050,935)Increase/(decrease) in other assets 55,248 129,100 Increase/(decrease) in other liabilities: Deposits from banks and financial institutions 1,517,234 166,012 Deposits from customers 10,242,646 5,746,738 Other liabilities 159,663 135,780 Net cash flows from operating activities before income tax 2,002,526 1,524,571 Income tax paid (8,527) (1,811)Net cash flows from operating activities 1,993,999 1,522,760


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STATEMENT OF CASH FLOWS (Continued) Year ended December 31, 2007 (Expressed in thousands of Denars) 2007 2006 Cash flows from investing activities Acquisition of property and equipment (202,969) (215,983)Acquisition of intangible assets (8,714) (16,998)Acquisition of investment property - (1,007)Net proceeds from investments 575,128 114,922 Proceeds from sale of property and equipment 55,780 219,612 Proceeds from sale of investment property 39,446 37,204 Investments in leasehold improvements (9,540) (16,851)Net cash flows from investing activities 449,131 120,899 Cash flows from financing activities Net decries/increase of borrowings (65,011) 531,253 Payment of dividend (71,986) - Subordinated debt - 1,223,482 Net cash flows from financing activities (136,997) 1,754,735 Net increase of cash and cash equivalents 2,306,133 3,398,394 Cash and cash equivalents, beginning of year 13,092,236 9,693,842 Cash and cash equivalents, end of year 15,398,369 13,092,236 Cash and cash equivalents, end of year: Cash and cash equivalents, end of year (Note 12) 4,722,680 4,664,562 Treasury bills and other eligible bills (Note 13) 5,232,175 2,426,260 Deposits with banks placed for up to 30 days (Note 15) 5,443,514 6,001,414 15,398,369 13,092,236



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1. PRINCIPAL ACTIVITIES

Stopanska banka AD - Skopje (further referred as “the Bank”) was established as a shareholding bank on December 29, 1989. The Bank is registered as universal type of commercial bank in accordance with Macedonian laws. The principal activities of the Bank are as follows:

- Collecting deposits and other recurrent sources of funds; - Financing in the country and abroad, including factoring and financing commercial transactions; - Issuance and administration of payment instruments (cards, checks, bills of exchange); - Domestic and international payment operations, including purchase/sale of foreign currency

funds; - Fast money transfer - Trading in instruments at the money market (bills of exchange, deposit certificates); - Trading in foreign currency funds, securities and financial derivatives; - Financial leasing; - Foreign exchange operations; - Purchase/sale, guaranteeing and placement of securities issue; - Economic and financial consulting; - Providing services in collection of invoices, keeping records; - Issuing payment guarantees, backing guarantees and other forms of security; - Managing assets and securities portfolio at order and for account of clients; - Rendering services to custody bank; - Intermediating in concluding agreements for loans and borrowings and in selling insurance

policies; - Providing services of renting safe deposit boxes, depositories and depot; - Other financial services defined by law which can be performed only by a bank.�

On December 21, 1999, Share Purchase Agreement (“the Agreement”) was signed between the Bank, National Bank of Greece, International Finance Corporation (“IFC”), and the European Bank for Reconstruction and Development (“EBRD”) (“the Investors”) from one side and the Bank Rehabilitation Agency of the Republic of Macedonia and the Ministry of Finance of the Republic of Macedonia on the other side. Pursuant to the Agreement, the investors acquired ordinary shares in the Bank in a total amount equal to 85% of the Bank’s issued and outstanding shareholders’ capital in the following proportion: National Bank of Greece 65%, IFC 10% and EBRD 10%. The total number of Bank’s employees as of December 31, 2007 is 1,080.

2. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS AND COMPARISON DATA

The Bank maintains its accounting records and prepares its financial statements in compliance with the Banking Law and by-laws prescribed by the National Bank of the Republic of Macedonia (“NBRM”), Company Law (Official Gazette of the Republic of Macedonia no. 28/2004 and no. 84/2005) and the Rules on Accounting Management (Official Gazette of the Republic of Macedonia nos. 94/2004, 11/2005 and 116/2005). According to these Rules, the accounting standards applied in the Republic of Macedonia are the International Accounting Standards (IAS) dated 2003 as prescribed by the International Accounting Standards Board (IASB). The supplement to these Rules dated February 10, 2005, refers to the application of the International Financial Reporting Standard (IFRS) 1, as well as the supplement dated December 29, 2005, for application of IFRS 2, 3, 4, 5, 6, and 7.

2. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS AND COMPARISON DATA (Continued)


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In the beginning of October 2007, several enactments from the scope of work of the National Bank of the Republic of Macedonia (NBRM) were published as follows:

1. Decision on the chart of accounts of banks; 2. Decision on the Methodology of Recording and Evaluating accounting entries and on the

preparation of financial statements; and 3. Instructions on the types and contents of financial statements of the banks.

Pursuant to the provisions of these enactments, the Bank is obliged to:

1.1. Perform a reposting of the balance on 31st December 2008 from the accounts determined by the Regulation and Decision for analytical accounts in the chart of accounts of banks, savings banks and other financial organizations to the accounts prescribed with the decision on the chart of accounts of banks;

2.1. Submit to the NBRM a detailed Methodology Implementation Plan, not later than 10th January 2008;

2.2. Harmonize the internal enactments with the requirements in the Methodology and the Chart of accounts of banks not later than 31st August 2008 and to accordingly notify NBRM until 10th September 2008;

2.3. Harmonize the IT systems with the Methodology requirements not later than 31st October 2008 and to accordingly notify NBRM until 10th November 2008;

3.1. Prepare initial Balance sheet and fill in the relevant notes related to the items in the Balance sheet, as at 1st January 2008 and submit them to NBRM not later than 20th November 2008, along with the opinion on the initial financial statements prepared by the audit company.

For the purpose of more efficient performance of assignments and proper implementation of obligations, the Bank established a Committee for management with the project for implementing chart of accounts and methodology for recording and assessment of accounting items and for preparing financial statements, as well as a Committee to supervise this project. In accordance with item 2 and sub-items 2.1., 2.2. and 2.3., the Committee for project management prepared and submitted to NBRM a plan that contains the following:

� Organization of the process of harmonization with the requirements in the Methodology for Recording and Evaluating the accounting entries and on the preparation of financial statements;

� Allocation of human resources that will work on implementing the Methodology; � Time schedule for harmonization of the Bank’s internal enactments with the requirements of

the Methodology and the Chart of accounts of banks; � Time schedule for harmonization of the Bank IT systems with the Methodology requirements,

with a special attention to the application systems, including the defined period for their testing.

On December 31, 2006, the Bank has a 100% ownership in Stoba Trejd Skopje (“the Entity”). In the course of 2007 (November 21, 2007), in compliance with the modifications to the Banking Law, the Bank passed a Decision on closing of and initiation of liquidation of the Entity.

The financial statements of the Bank are prepared in accordance with the accounting policies disclosed in Note 3 to the financial statements. The presented financial statements are expressed in thousands of Macedonian Denars.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


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3.1. Income and Expenses Recognition

Interest income and expense is recognized in the income statement for all interest-bearing instruments on a calculation basis, hence taking into account the unrepaid principal and using the method of effective interest rate based on amortized cost. Interest income involve as well coupons acquired on the basis of trading securities and securities held to maturity and calculated discount and premium on treasury bills and other discount bearing instruments. Fee and commission, except fee on approval of loans, is generally recognized on a calculation basis in the period of service rendering. Fees relating to loan origination are deferred and amortized to over the life of the loan using the effective interest rate method.

3.2. Foreign Exchange Translation

Transactions denominated in foreign currencies have been translated into Denars at rates set by the National Bank of the Republic of Macedonia (NBRM), which is the Central Bank of the Republic of Macedonia, at the dates of the transactions. Assets and liabilities denominated in foreign currencies are translated into Denars at the balance sheet date using official rates of exchange ruling on that date. Net foreign exchange gains or losses resulting from foreign currency translation are included in the income statement in the period in which they arose.

3.3. Loans originated by the Bank and allowances for Losses on Impairment and Uncollectability

Loans originated by the Bank are initially recognized at cost, when cash is advanced to customers. They are subsequently measured at amortized cost using the effective interest rate. Loans to customers and financial institutions are stated as net amount reduced by loss on impairment and uncollectability. Allowances for losses on impairment and uncollectability are determined if there are objective proofs that the Bank cannot collect all mature amounts upon receivables as per original agreed conditions. Allowance for losses on impairment and uncollectability is presented as reduction of carrying value of the claim in the balance sheet, while, regarding off-balance sheet items, such as financial liabilities, the allowance is presented within the other liabilities. Concurrently, allowances for losses on impairment and uncollectability are presented as well in the income statement as losses on impairment and uncollectability. The allowances for losses on impairment and uncollectability are determined on the basis of the degree (size) of the risk of uncollectability or specific country risk on the basis of the following principles: 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.3. Loans originated by the Bank and allowances for Losses on Impairment and

Uncollectability (continued)


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- Separate loan exposures (risks) are assessed on the basis of the type of loan applicant, his/her/its overall financial position, resources and payment records and recoverable value of collaterals. Allowances for losses on impairment and uncollectability are measured and determined for the difference between the carrying value of the loan and its estimated recoverable amount, which is, in fact, the present value of expected cash flows, including as well recoverable amounts from guarantees and collateral, discounted by effective loan interest rate.

- If there are objective proofs on uncollectability of loans in the loan portfolio that may not be identified

on a specific basis, the allowances for losses on impairment and uncollectability are determined at level of risk for overall loan portfolio. These losses are determined on the basis of historical data on loan classification of borrowers and express the current economic environment of the borrowers.

- Losses on impairment and uncollectability is termination of the calculation of interest income as per

agreed terms and conditions, while the loan is classified as non-performing since the contractual liabilities for payment of the principal and/or interest are on default, i.e. uncollected for a period longer than 90 days. All allowances for losses on impairment and uncollectability are reviewed and tested at least once a year, and any further changes in amounts and time of expected future cash inflows in comparison to previous assessments result in changes in allowances for losses on impairment and uncollectability recorded as debit/credit of losses on impairment and uncollectability recorded in the income statement.

- The loan which is believed that is impossible to be collected is written off against relevant allowance

for losses on impairment and uncollectability. Further collections are recorded as reduction of losses on impairment and uncollectability in the income statement.

- In case of granted loan to borrowers in countries with increased risk of difficulties for servicing

external debt, the political and economic circumstances are assessed and additional allowances for country risk are allocated.

In compliance with the Decision on modifying the Decision on classification of balance sheet and off-balance sheet asset positions of banks as per their risk degree risk published on June 29, 2006 (Official Gazette of the Republic of Macedonia no. 80/2006), starting as of March 31, 2007, the Bank allocates special reserve for potential losses at 1% of total loan exposure classified into risk category “A”.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4. Securities held for trading

Securities held for trading which comprise securities issued in local currency by the Ministry of Finance are securities included in the portfolio which is intended for realization of short-term profit. Securities held for trading are initially recognized at cost and are subsequently recognized as per their fair value on the basis of their market price. All of the respective realized and unrealized gains and losses are included under net trading income. Interest, if realized during management of securities held for trading, is recorded as interest income. The sale of securities held for trading is recognized on trading date, which is the date when the Bank obliges to buy/sell the asset.

3.5. Securities available for sale

Available for sale securities are those financial assets that are not classified as financial assets held for trading or held-to-maturity investments. This portfolio comprises quoted and unquoted equity investments in shares of banks and other financial institutions and enterprises, where the Bank does not exercise control. Available for sale financial assets are subsequently re-measured at fair value based on quoted prices or amounts derived from cash flow models.

Unrealized gains and losses arising from changes in fair value are recognized directly in equity, until the share is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognized in equity is included in net profit or loss for the period.

3.6. Investments in associates

An associate is an enterprise over which the Bank is in a position to exercise significant influence, but not control, through participation in the financial and operating policy decisions of the investee.

Investments in associates comprise unquoted equity investments in shares that are stated at equity method. The Bank’s management believes that the carrying amount of this investment is a reasonable estimate of their market value.

3.7. Held-to-maturity securities

Held-to-maturity investments are financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity. This portfolio comprises government bonds from old savings deposits, denationalization, government securities received in exchange for the Bank’s non-performing receivables as well as bonds issued by the Government of the Republic of Macedonia. These securities are measured at amortized cost using the effective interest rate method.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.8. Property, equipment and intangible assets

Property and equipment and intangible assets are recognized at cost or revalued amount reduced by accumulated depreciation. Before January 1, 2006, property and equipment and intangible assets were revalued in past years at end of year by application of ratios of growth of prices of industrial products of cost or revalued amount, as well as value adjustment. The revaluation effect was recorded into revaluation reserve. As per Paragraph 44 (b) of the announced IAS 8 Net gain or loss for the period, basic omissions and changes in accounting policies (Official Gazette of the Republic of Macedonia no. 94/2004), revalued amounts of intangible and tangible assets are treated as revaluation in compliance with IAS 16 or IAS 38, but not as change in accounting policy. As at December 31, 2007, in compliance with letter from NBRM no. 91 dated January 8, 2008, this revalued reserve was transferred to retained earnings. Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately is capitalized. Other subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property and equipment. All other expenditures are recognized in the income statements as an expense. Depreciation of property and equipment and intangible assets is computed on the straight-line basis so that to write off the cost or revalued amount of assets in the course of their estimated useful life. No depreciation is provided on construction in progress until the constructed assets are put into use. The annual depreciation rates are as follows:

Applied annual rates 2007-2006 Buildings 2.5% -5% Furniture and equipment 10% - 25% Intangible assets 20%

When assets subject to depreciation are put out of use, or, in any other way, are sold, the relevant revalued cost amount and adjustment of value are off-posted from relevant accounts. Capital gain or loss realized at sale is recorded as other income, i.e. other expense.

3.9. Investment property

Investment property includes buildings owned by the Bank with the intention of earning rentals or for the capital appreciation or both, and is initially recorded at cost, which includes transaction costs. The classification of the investment property is based on the criteria that the property is mostly held to earn rentals when compared to the property used by the Bank for own needs. Subsequent to the initial recognition, investment property is stated at cost less accumulated depreciation and any accumulated impairment losses. Such value represent the fair value of investment property at the date of balance sheet.

The depreciation of investment property is calculated on straight-line basis in a way to write off the cost value of assets over the estimated useful lives, which approximates the useful life of similar assets included in property, plant and equipment. The estimated annual depreciation rate is 2.5%. Rental income from investment property is recognized in the income statements on a straight-line bases over the term of the lease.


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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

3.10. Assets acquired through foreclosure procedures

In compliance with the Decision on the accounting and regulatory treatment of foreclosed assets (land, buildings, equipment and the like) published in the Official Gazette of the Republic of Macedonia no. 79/2007 dated June 26, 2007, the Bank is obligated to allocate special reserve for foreclosed assets, including as well the current foreclosed assets. On the foreclosure date, the foreclosed asset is recognized in the Bank’s financial statements at initial carrying value. The initial carrying value is the lower amount than the appraised value reduced by the expected sales costs to the debit of the Bank and the cost value of the foreclosed asset. The appraised value is determined by an authorized appraiser on the date of asset foreclosure, while the cost value is the value stated in an enactment passed by a competent body from where the legal grounds for acquiring ownership arises. If the appraised value is lower than the cost value, the Bank shall be obligated to present impairment loss (IAS 36) in the income statement in an amount of determined difference between both values. At least once a year in a period of 12 months, the Bank is obligated to provide appraisal of the value of foreclosed asset by three authorized appraisers, at least two of which are external appraisers not working for the Bank. Hence, the amount of the lowest appraisal out of the three ones is considered to be appraised value. Upon exception, the Bank may provide appraisal of the value of foreclosed assets by only one authorized appraiser if the initial carrying value of the foreclosed asset reduced by the total amount of impairment loss does not exceed MKD 2,000,000. If, as per the conducted appraisal, the appraised value reduced by the sales costs is lower than the amount of initial carrying value reduced by the total amount of impairment loss, the Bank is obligated to recognize in the income statement the additional impairment loss up to the amount of appraised value. When the appraised value is higher than the amount of initial carrying value reduced by the total amount of impairment loss, the Bank must not recognize this difference in the income statement. If the Bank fails to sell the foreclosed asset within 5 years following the foreclosure date, it is obligated to conduct full write-off of such asset, i.e. to bring its value down to zero. The Bank, within 3 months following the date of this decision’s enactment (26.07.2007), is obligated to provide appraisal of the value of current foreclosed assets. Hence, the date of this Decision’s enactment is considered the date of foreclosure of the current assets. If the appraised value is lower than the value upon which the foreclosed asset has been recorded until the date of this Decision’s enactment, the Bank is obliged to recognize in the income statement the impairment loss up to the amount of appraised value.

3.10. Cash and Cash Equivalents

Cash and cash equivalents include cash and nostro accounts, which represent unrestricted demand deposits and placements with other banks and financial institutions, with maturity up to three months, as well as unrestricted account balances with the NBRM.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


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3.11 Managed Funds

Assets managed on a fee basis on behalf of legal entities and citizens are included in the balance sheets on a net basis. Net asset or liability position as reported in the balance sheet reflects timing difference in collection of receivables or settlement of liabilities on behalf of the clients.

3.12. Employment Benefits

In accordance with local regulations, the Bank is obligated to pay pension and social security contributions for its employees to the Pension & Social Security Fund calculated by applying the specific percentages stipulated under the relevant regulations. These contributions are recognized as expenses in the income statement at the moment of their generation. In accordance with the local regulations the employee is entitled to receive benefits upon retirement of at least two average monthly salaries paid to the employee in the Republic of Macedonia within the period of three preceding months. In addition, according to the collective agreement with the Bank’s employees, the employees are entitled to receive benefits of two average salaries paid to the employee in the Republic of Macedonia within the period of three preceding months. These benefits are considered defined pension benefit plans. The retirement benefit obligations is recognized in the balance sheet on the basis of actuary assessment and represents the present value of the defined benefit obligation to employees as adjusted for all unrecognized actuarial gains and losses less unrecognized past service cost.

3.13 Income Tax

Income tax is calculated in accordance with the provisions of the relevant legislation of the Republic of Macedonia based on the profit or loss recognized in the income statement prepared pursuant to Macedonian fiscal regulations. The estimated tax on monthly profit is paid in advance as determined by the tax authorities. Final taxes on profit of 12% are payable based on the annual profit shown in the statutory profit and loss account. Deferred income taxes if any are provided using the balance sheet liability method for temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred income tax. A deferred tax liability is recognized for all taxable temporary differences unless it arises from the initial recognition of an asset or liability in a transaction, which at the time of the transaction affects neither accounting profit nor taxable profit (tax loss). Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that 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 at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

3.14. Fair Value

The accompanying financial statements are prepared on a cost basis and subsequently reduced in order to obtain their estimated recoverable amounts.

4. FINANCIAL INSTRUMENTS 4.1. Financial risk management


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The Bank’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank’s financial performance.

The Bank’s risk management policies are designed to identify and analyze these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice.

The Bank’s risk management organization structure ensures existence of clear lines of responsibility, efficient segregation of duties and prevention of conflicts of interest at all levels, including the Board of Directors, Executive and Senior Management, as well as between SB and the NBG Group, its customers and any other stakeholders. Within the Bank, risk management activities broadly take place at the following levels:

• Strategic level encompasses risk management functions performed by the Supervisory Board. These include the approval of risk and capital strategy, ascertaining the Bank’s risk definitions, profile and appetite, as well as, the risk reward profile and other high-level risk related policies and internal guidelines.

• Tactical level encompasses risk management functions performed by the Board of Directors, Executive and Senior Management. These include the approval of risk policies and procedure manuals for managing specific risks and establishing adequate systems and controls to ensure that the overall risk and reward relation remains within acceptable levels. Generally, the risk management activities performed by the Risk Management department of SB, as well as, other critical support functions fall into this category.

• Operational (business line) level – It involves management of risks at the point where they are actually created. The relevant activities are performed by individuals who undertake risk on the organization’s behalf. Risk management at this level is implemented by means of appropriate controls incorporated into the relevant operational procedures and guidelines set by the management.

The most important types of risk are credit risk, liquidity risk, market risk and operational risk.

4.2. Credit risk

The Bank takes on exposure to credit risk, which is the risk to earnings arising from an obligor’s failure to meet the terms of any contract with the bank or otherwise fail to perform as agreed. Credit risk is the most important risk for the Bank’s business; management therefore carefully manages its exposure to credit risk. Credit exposures arise principally in lending activities that lead to loans and advances. There is also credit risk in off-balance sheet financial instruments, such as loan commitments, letters of guarantees and credits.

4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued)


17

4.2.1. Credit risk measurement, limits and mitigation policies

Initially, when approving loans and loan commitments, different Credit Committees assess creditworthiness of the clients depending on the type and size of the exposure. The credit risk management, which encompasses measurement, monitoring and control of credit risk, is performed by Risk Management Committee and Committee for classification of assets and provisioning for potential losses, commitments and contingencies and it is mainly based on reports and analyses prepared by Research, Statistics and Risk Management Division. The Board of Directors is regularly informed concerning the credit risk that Bank is exposed to. The Bank monitors compliance with the legally and internally established limits and controls concentrations of credit risk. Credit risk limits regarding an individual borrower, internal persons, shareholders with over 5% of the voting shares, firms in which SB owns capital share as well as large exposures are set in the SB Risk Strategy which is approved and revised by the Board of Directors, and are in line with the regulatory requirements. The Bank structures the levels of credit risk that undertakes towards domestic and foreign banks by placing limits on the amount of risk accepted subject to an annual or more frequent review, when considered necessary. The concentration risk is monitored regularly for product, geographical and industry segments.

The Bank employs a range of practices to mitigate credit risk. Common practice is accepting suitable collateral for approved loans. The main collateral types for loans and other credit exposures are:

• Mortgages over residential properties; • Charges over business assets such as premises, inventory and accounts receivable; • Charges over financial instruments such as debt securities and equities.

4.2.2. Impairment and provisioning policies

The internal rating systems focus more on credit-quality mapping from the inception of the lending and investment activities. In contrast, impairment provisions are recognised for financial reporting purposes only for losses that have been incurred at the balance sheet date based on objective evidence of impairment.

The impairment provision shown in the balance sheet at year-end is derived from each of the five internal rating grades. However, the majority of the impairment provision comes from the bottom two gradings. The table below shows the Bank’s credit rating categories:


18

4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) 4.2.2. Impairment and provisioning policies (continued)

Credit rating Criteria Mapping Risk category A Debtor not likely to default and who repays on time, or with delay of

15 days. Credit exposure secured by first-class collateral. Satisfactory risk

Risk category B Debtor who repays its obligation with a delay of 30 days, occasionally 31-90 days. Regardless the temporary weak financial position, no signs of further deterioration.

Watch list

Risk category C Debtor who repays its obligation with a delay of 31-90 days, occasionally 91-180 days. Debtor is assessed to have inadequate cash flows to fulfilled its obligations.

Watch list

Risk category D Debtor who repays its obligation with a delay of 91-180 days, occasionally 181-365 days. Debtor is illiquid and insolvent, and have acceptable collateral.

Substandard

Risk category E Debtor who repays its obligation with a delay of more than 365 days or do not repay its obligation at all. Usually credit exposure to debtor under bankruptcy or liquidation procedure. Without or with bad collateral.

Substandard

The internal rating tool assists management to determine whether objective evidence of impairment exists under IAS 39, based on the following criteria set out by the Bank:

Delinquency in contractual payments of principal or interest:

• Cash flow difficulties experienced by the borrower (e.g. equity ratio, net income percentage of

sales);

• Breach of loan covenants or conditions;

• Initiation of bankruptcy proceedings;

• Deterioration of the borrower’s competitive position; and Deterioration in the value of collateral

The Bank’s policy requires the review of individual financial assets that are above materiality thresholds at least annually or more regularly when individual circumstances require. Impairment allowances on individually assessed accounts are determined by an evaluation of the incurred loss at balance-sheet date on a case-by-case basis, and are applied to all individually significant accounts.

The assessment normally encompasses collateral held (including re-confirmation of its enforceability) and the anticipated receipts for that individual account.

Collectively assessed impairment allowances are provided for portfolios of homogenous assets that are individually below materiality thresholds.

4. FINANCIAL INSTRUMENTS (continued)


19

4.2. Credit risk (continued) 4.2.3. Maximum exposure to credit risk before collateral held or other credit enhancements

Maximum exposure in thousands

denars

31 December

2007 31 December

2006 Credit risk exposure relating to on balance sheet Treasury bills 5,232,175 2,426,260 Loans and advances to banks 5,443,514 6,001,414 Trading securities 253,301 147,765 Loans and advances to customers 32,917,403 21,659,311 Investment securities- available for sale 123,123 107,354 Investment securities- held to maturity 3,838,602 4,391,916 Other assets 329,562 230,681 Credit risk exposure relating to off -balance sheet Financial guarantees 2,019,165 1,619,601 Standby letters of credits 1,001,711 696,623 Commitments to extend credits 7,332,304 4,303,044 Total credit risk exposure 58,490,860 41,583,969

Deposit, property, cars, government bonds, pledge over machines and other movables are accepted as collateral in order to secure the credit exposures.

Mortgages and consumer loans in the amounts over EUR 5.000 are fully secured by property (residential and business premises) with LTV up to 75%. Also, deposits and government bonds are accepted as valid collateral.

Auto loans (included in category-consumer loans) are secured by cars.

The corporate loans and small business lines are secured with different types of collaterals: residential mortgage, commercial premises, cars, pledge over machines and other movables, L/Gs from first-class banks, corporate L/Gs and personal bills of exchange taking into consideration the quality of the collateral and the LTV ratio.

4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued)


20

4.2.4. Loans and advances

Loans and advances are summarised below:

Neither past due

nor impaired

Past due but not

individually impaired

Individually impaired

Total Gross

Allowance for


loans

Allowance for

collectively impaired

loans

TOTAL Allowance for impairment

Total net

31 December

2007

Cards 1,519,095 406,184 - 1,925,279 - (61,504) (61,504) 1,863,775 Consumer 10,455,370 2,515,643 - 12,971,013 - (490,334) (490,334) 12,480,679 Mortgage 2,500,311 821,733 - 3,322,044 - (62,018) (62,018) 3,260,026 Small Business Loans 3,909,233 2,215,964 1,941,339 8,066,536 (1,517,340) - (1,517,340) 6,549,196 Corporate Loans 5,555,020 3,024,479 4,138,081 12,717,580

(3,953,853) - (3,953,853) 8,763,727

Total 23,939,029 8,984,003 6,079,420 39,002,452 (5,471,193) (613,856) (6,085,049) 32,917,403 Due from banks 5,392,146 77,435 - 5,469,581 - (26,067) (26,067) 5,443,514 29,331,175 9,061,438 6,079,420 44,472,033 (5,471,193) (639,923) (6,111,116) 38,360,917

4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) 4.2.4. Loans and advances (continued)

Neither past due

nor impaired

Past due but not

individualy impaired

Individually impaired

Total Gross

Allowance for


loans

Allowance for

collectively impaired

loans

TOTAL Allowance for impairment

Total net

31 December 2006 Cards 1,001,630 277,272 - 1,278,902 - (31,772) (31,772) 1,247,130 Consumer 5,168,387 2816,803 - 7,985,190 - (381,404) (381,404) 7,603,786 Mortgage 1,576,416 880,773 - 2,457,189 - (15,819) (15,819) 2,441,370 Small Business Loans 2,061,894 2,839,958 2,030,337 6,932189 (1,583,395) - (1,583,395) 5,348,794 Corporate Loans 3,867,931 638,364 4,826,604 9,332,899 (4,314,668) - (4,314,668) 5,018,231

Total 13,676,258 7,453,170 6,856,941 27,986,369

(5,898,063) (428,995) (6,327,058) 21,659,311 Due from banks 5,949,205 89,010 - 6,038,215 - (36,801) (36,801) 6,001,414

19,625,463 7,542,180 6,856,941 34,024,584 (5,898,063) (465,796) (6,363,859) 27,660,725


21

(a) Loans and advances neither past due or impaired

Satisfactory

risk Watch list Substandard Total

31 December 2006 Cards 1,001630 - - 1,001,630 Consumer 5,168,387 - - 5,168,387 Mortgage 1,576,416 - - 1,576,416 Small Business Loans 2,061,894 - - 2,061,894 Corporate Loans 3,867,931 - - 3,867,931 Total 13,676,258 - - 13,676,258 Due from banks 5,949,205 - - 5,949,205 19,625,463 - - 19,625,463

(b) Loans and advances past due but not individually impaired

Loans and advances which are past due 90 days doesn’t have a impaired treatment, except when exist nformation which is opposite. Gross amount of the loans are summarised bellow. 4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) 4.2.4. Loans and advances (continued)

(b) Loans and advances past due but not individually impaired (continued)

Satisfactory risk

Watch list Substandard Total

31 December 2007 Cards 1,519,095 - - 1,519,095 Consumer 10,455,370 - - 10,455,370 Mortgage 2,500,311 - - 2,500,311 Small Business Loans 3,909,233 - - 3,909,233 Corporate Loans 5,555,020 - - 5,555,020 Total 23,939,029 - - 23,939,029 Due from banks 5,392,146 - - 5,392,146 29,331,175 - - 29,331,175


22

Past due

up to 30 days

Past due 31-60 days

Past due 61-90 days

Past due 91-180 days

Past due 180-365

days

Past due 1-2 years

Past due over 2 years

Total

31 December 2007 Cards 295,992 46,674 10,743 52,775 - - - 406,184 Consumer 1,413,448 370,391 189,390 283,450 159,307 99,657 - 2,515,643 Mortgage 545,417 147,659 35,316 70,824 1,957 - 20,560 821,733 Small Business Loans 1,510,646 473,205 232,113 - - - - 2,215,964 Corporate Loans 2,332,594 265,340 426,545 - - - - 3,024,479 Total 6,098,097 1,303,269 894,107 407,049 161,264 99,657 20,560 8,984,003 Due from banks - - - - - - 77,435 77,435 6,098,097 1,303,269 894,107 407,049 161,264 99,657 97,995 9,061,438 Past due

up to 30 days

Past due 31-60 days

Past due 61-90 days

Past due 91-180 days

Past due 180-365

days

Past due 1-2 years

Past due over 2 years

Total

31 December

2006 Cards 179,330 35,105 8,572 54,265 - - - 277,272 Consumer 1,915,977 274,197 160,473 200,136 116,561 149,459 - 2,816,803 Mortgage 654,706 100,029 81,581 26,002 18,455 - - 880,773 Small Business Loans 2,369,436 330,612 139,490 420 - - - 2,839,958 Corporate Loans - - 638,364 - - - - 638,364 Total 5,119,449 739,943 1,028,480 280,823 135,016 149,459 - 7,453,170 Due from banks - - - - - - 89,010 89,010 5,119,449 739,943 1,028,480 280,823 135,016 149,459 89,010 7,542,180 4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) 4.2.4. Loans and advances (continued)

(b) Loans and advances past due but not individually impaired (continued)


23

The fair value of collateral is based on valuation techniques which are used for similar assets. Total fair value of collateral for consumer loans is: 7.103.970 thousands denars (2006-4.769.612 thousands denars), while for mortgage s8.529.484 thousands denars (2006-6.558.566 thousands denars)

The fair value of collateral for corporate portfolio is summarised bellow:

2007 2006 Cash and balances with central banks

297,633

217,619

Financial guarantees 2,719,217 2,850,350 Movable property 8,573,319 6,261,905 Real estate 28,621,092 22,000,474 Total 40,211,261 31,330,348

4.2.5. Foreclosed assets during the year During 2007, the Bank engaged two external appraisal companies in order to determine the fair value of the foreclosed assets. In this period, the Bank sold 30 assets at total value of MKD 121,124 thousand, whereas it foreclosed 10 facilities at total value of MKD 18,987 thousand. Activities have been undertaken for preparing the assets foreclosed during 2007 for sale because the general policy of the Bank is these facilities to be sold within a period of 3 years. The Bank utilizes such facilities for its own activities very rarely.


24

4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) 4.2.6. Concentration of risks of financial assets with credit risk exposure

(a) Geographical sectors The following table breaks down the Bank’s main credit exposure at their carrying amounts, as categorized by geographical region as of 31 December 2007. For this table, the Bank has allocated exposures to regions based on the country of domicile of the counterparties.

Greece

Macedonia

West

European countries

United States

and Canada

SE Europe

Australia

and Japan

Total

Treasury bills - 5,232,175 - - - - 5,232,175 Loans and advances to banks 5,075 45 4,028,047 510,741 236,034 663,572 5,443,514 Trading securities - 226,690 - - 26,611 - 253,301 Loans and advances to customers - 32,917,403 - - - - 32,917,403 Investment securities- available for sale - 92,066 31,057 - - - 123,123 Investment securities- held to maturity - 3,838,602 - - - - 3,838,602 Other assets - 329,562 - - - - 329,562 31 December 2007 5,075 42,636,543 4,059,104 510,741 262,645 663,572 48,137,680 31 December 2006 3,687 30,968,667 2,948,538 371,002 190,787 482,020 34,964,701


25

4. FINANCIAL INSTRUMENTS (continued) 4.2. Credit risk (continued) 4.2.6. Concentration of risks of financial assets with credit risk exposure (continued)

(b) Industry sector The following table breaks down the Group’s main credit exposure at their carrying amounts, as categorised by the industry sectors of the counterparties.

Financial Institutions

Tobacco, food and beverage industry

Trade

Steel

Industry

Building Industry

Clothing Industry

Agriculture, Fishery

and Mining engeneerig industry

Transport

Services

Electricity

Public sector

Retail

Other

Total

Treasury bills 5,232,175 - - - - - - - - - - - - 5,232,175 Loans and advances to banks 5,443,514 - - - - - - - - - - - - 5,443,514 Trading securities 26,611 - - - - - - - - - 226,690 - - 253,301 Loans and advances to customers 451 1,754,913 3,861,295 1,975,969 1,038,436 691,738 675,861 641,516 - 1,199,157 504,226 17,466,151 3,107,690 32,917,403 Investment securities-

available for sale 72,016 - 2,919 6,728 - 14,742 - 227 - - - - 26,491 123,123 Investment securities-

held to maturity - - - - - - - - - - 3,838,602 - - 3,838,602 Other assets - - 148,515 - 22,389 - 20,125 - 43,177 - 62 82,759 12,535 329,562 31 December 2007 10,774,767 1,754,913 4,012,729 1,982,697 1,060,825 706,480 695,986 641,743 43,177 1,199,157 4,569,580 17,548,910 3,146,716 48,137,680

31 December 2006 7,826,804 1,274,771 2,914,851 1,440,234 770,585 513,188 505,565 466,163 31,364 871,069 3,319,349 12,727,282 2,303,477 34,964,702


26

4. FINANCIAL INSTRUMENTS (continued) 4.3. Market risk

The Bank takes on exposure to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices (such as interest rates, credit spreads foreign exchange rates and equity prices).

4.3.1 Foreign exchange risk

The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Bank sets limits on the level of exposure by currency and in aggregate for both overnight and intra-day positions, which are monitored on a regular basis. The table below summarises the Bank’s exposure to foreign currency exchange rate risk at 31 December 2007.

In thousands of denars

31 December 2007

EUR

USD Other

currency Total

foreign curency

In reporting currency

Total

ASSETS Cash and cash equivalents 1,998,978 66,191 159,992 2,225,161 2,497,519 4,722,680 Treasury bills - - - - 5,232,175 5,232,175 Financial instruments held for trading 88,562 - - 88,562 164,739 253,301

Investment securities- available for sale 11,787 - - 11,787 111,336 123,123

Investment securities- held to maturity 3,838,602 - - 3,838,602 - 3,838,602

Loans and advances to banks 3,844,560 995,795 603,159 5,443,514 - 5,443,514

Loans to customers 20,158,122 701,707 229,480 21,089,309 11,828,094 32,917,403 Other receivables 340 - - 340 329,222 329,562 Total assets 29,940,951 1,763,693 992,631 32,697,275 20,163,085 52,860,360 LIABILITIES Deposits from banks and

financial institutions 3,038,788 10,904 65,927 3,115,619 634,633 3,750,252 Deposits from customers 15,310,075 1,265,391 661,700 17,237,166 26,043,722 43,280,888 Loans payable 1,296,179 57,403 - 1,353,582 281,635 1,635,217 Other liabilities 105,803 2,371 7,344 115,518 643,585 759,103 Total liabilities 19,750,845 1,336,069 734,971 21,821,885 27,603,575 49,425,460 Net currency gap: 31 December 2007 10,190,106 427,624 257,660 10,875,390 (7,440,490) 3,434,900 31 December 2006 8,417,282 (19,077) 2,230 8,400,435 (5,361,565) 3,038,870


27

4. FINANCIAL INSTRUMENTS (continued) 4.3. Market risk (continued) 4.3.1. Foreign exchange risk (continued)

At 31 December 2007 and 2006, loans approved to customers, accrued interest and other assets due to banks and customers and other liabilities denominated according exchange rate denars/eur are presented as assets and liabilities in EUR.

4.3.2. Interest rate risk

The Bank is exposed to various risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flow.

Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Board of Directors sets limits on the level of mismatch of interest rate re-rating that may be undertaken and monitors this on a regular basis. In general, the Bank is assets sensitive because of the majority of the interest-bearing assets and liabilities and the Bank has right simultaneously to change the interest rates. The Bank strives to maintain the interest margin at the same level. However, the actual effect will depend on various factors, including stability of the economy, environment and level of the inflation.

The table below summarises the Bank’s interest bearing and non-interest bearing assets and liabilities as of 31 December 2007.

In thousands of denars 31 December 2007

Interest bearing Non Interest

bearing Total ASSETS Cash and cash equivalents 2,372,070 2,350,610 4,722,680 Treasury bills 5,232,175 5,232,175 Financial instruments held for trading 226,421 26,880 253,301 Investment securities- available for sale - 123,123 123,123 Investment securities- held to maturity 3,838,602 - 3,838,602 Loans and advances to banks 5,443,514 - 5,443,514 Loans to customers 32,917,403 - 32,917,403 Total assets 50,030,185 2,500,613 52,530,798 LIABILITIES Deposits from banks and financial

institutions 3,750,252 - 3,750,252 Deposits from customers 43,280,888 - 43,280,888 Loans payable 1,474,115 161,102 1,635,217 Total liabilities 48,505,255 161,102 48,666,357 Net interest gap: 31 December 2007 1,524,930 2,339,511 3,864,441 31 December 2006 148,418 2,234,010 2,382,428


28

4. FINANCIAL INSTRUMENTS (continued) 4.3. Market risk (continued) 4.3.2. Interest rate risk (continue)

The table bellow summarizes interest rates on the major financial instruments.

In foreign currency In Denars Assets Obligatory reserve held with Central Bank - 2% Treasury bills - 5.47%-5.82% Held-for trading securities - 2%-9% Placements with, and loans to, banks 3.54%-6.18% 4.15% Short-term loans:

- enterprises

8.75%-11.5% 9.75% - 1 � EURIBOR

+5.5%-6.25% - retail customers 11,5%-14.5% 13.5%-16.5% Long-term loans: - enterprises 9.5%-17.9% 9.75%-14.5% - retail customers 5.5%-14.5% 12%-16.5% Government bonds - 2%-8.89% Liabilities Demand deposits from banks 0.001%-1% 0.4% Short-term deposits from banks 1.6%-3.61% 4%-6.35% Demand deposits: - enterprises 0.001%-1% 0.4% - retail customers 0.001%-1.7% 0.65%-1% Short-term deposits: - enterprises 0.001%-5.71% 4%-7.23% - retail customers 0.75%-4.3% 5.5%-7.76% Long-term deposits: - enterprises 6.5%-8.85% 0.001%-5.57% - retail customers 1.75%-4.5% 8%-8.58% Loans payable 3.9%-6.73% 3.9% Subordinated debt 3� EURIBOR +0.85% -

4.4. Liquidity risk

Liquidity risk is defined as the current or prospective risk to earnings and capital arising from the institution’s inability to meet its liabilities when they come due without incurring unacceptable losses. The consequence may be the failure to meet obligations to repay depositors and fulfil commitments to lend.

4.4.1. Liquidity risk management process

The Bank’s liquidity risk management process encompasses:

� Appliance of operating standards relating to the Bank’s liquidity risk, including appropriate policies, procedures and resources for controlling and limiting liquidity risk.

� Maintenance of stock of liquid assets appropriate for the cash flow profile of the Bank which can be readily converted into cash without incurring undue capital losses.

� Measurement, control and scenario testing of funding requirements, as well as access to funding sources.


29

4. FINANCIAL INSTRUMENTS (continued) 4.4. Liquidity risk (continued) 4.4.1. Liquidity risk management process (continued)

� Preparing contingency plans of the Bank for handling liquidity disruptions by means of the ability to fund some or all activities in a timely manner and at a reasonable cost.

� Monitoring liquidity risk limits and ratios (e.g. maturity mismatch ratio, liquid asset ratio) taking into account the Bank’s risk appetite and profile.

The basic tool for measuring, monitoring and evaluating liquidity needs and liquidity sources is the cash flow gap report. Cash flow or liquidity gap reports reflect the liquidity provided by cash inflows and the liquidity needed to fund cash outflows. They incorporate cash flows associated with assets and liabilities into time buckets.

The monitoring of the SB’s liquidity is performed by the Liquidity Department. The Liquidity Department reconciles all inflows and/or outflows in all currencies along with money orders, checks, bank transfers and account transfers.


31 December 2007

Up to 1 month

From 1 to 3 months

From 3 months to 1

year From 1 to 5

years

Over 5 years

Total

ASSETS Cash and cash equivalents 4,722,680 - - - - 4,722,680 Treasury bills 4,894,572 337,603 5,232,175 Financial instruments held for trading 253,301 - - - - 253,301 Investment securities- available for sale 123,123 - - - - 123,123 Investment securities- held to maturity - 212,064 745,617 2,873,138 7,783 3,838,602 Placement with, and loans to, banks 5,443,514 - - - - 5,443,514 Loans to customers 9,482,223 1,706,348 5,970,088 11,030,008 4,728,736 32,917,403

�� 308,234 - 11,195 10,133 691,807 1,021,369 Investment property - - - - 110,334 110,334 Leasehold improvements - - - - 20,268 20,268 Intangible assets - - - - 89,589 89,589 Property and equipment - - - - 1,134,954 1,134,954 Deferred tax assets - - - - 1,789 1,789 Total assets 25,227,647 2,256,015 6,726,900 13,913,279 6,785,260 54,909,101 LIABILITIES AND EQUITY Deposits from banks and financial

institutions 3,296,311 350,310 82,604 21,027 - 3,750,252 Deposits from customers 21,906,393 11,084,920 9,255,696 933,703 100,176 43,280,888 Loans payable 34,955 2,892 18,345 85,727 1,493,298 1,635,217 Other payable 758,459 644 - - - 759,103 Equity - - - - 5,483,641 5,483,641 Total liabilities and equity 25,996,118 11,438,766 9,356,645 1,040,457 7,077,115 54,909,101 Net liquidity gap December 31, 2007 (768,471) (9,182,751) (2,629,745) 12,872,822 (291,855) - December 31, 2006 (8,510,259) (3,715,788) 2,901,196 9,671,684 (346,833) -


30

4. FINANCIAL INSTRUMENTS (continued) 4.4. Liquidity risk (continued) 4.4.1. Liquidity risk management process (continued)

The structure of the Bank’s assets and liabilities as classified into their relevant maturities as of December 31, 2007. Indicates the existence of a significant discrepancy in the period from 1 years. The primary reason for the aforementioned unreconciled amounts lies in the fact that the short-term sources of funds with maturities from 3 months have been committed for longer periods of time.

According to the management estimation, based on the different analysis based on evaluation of the deposit level on corporate and retail, there is a deposit core in the amount of Denar 28,020,000 thousand (2006 – Denar 21,181,000 thousand) which helps the liquidity gap to be overcome. Items with indefinite maturities are included in the over five year’s category.


31

4. FINANCIAL INSTRUMENTS (continued) 4.4. Liquidity risk (continued) 4.4.2. Contractual maturity analysis for financial liabilities (undiscounted cash flow)

The table below presents the cash flows payable by the Bank by remaining contractual maturities of financial liabilities at the balance sheet date. The amounts disclosed in the table are the contractual undiscounted cash flows, whereas the Bank manages the inherent liquidity risk based on expected undiscounted cash inflows.

Sight Up to 1

month From 1 to 3

months From3 to 12

months From 1to 2

years From 2- 3

years From 3- 4

years From 4- 5

years Over 5 years In thousands

of denars

31 December 2006 LIABILITIES Deposits from banks and financial institutions 1,832,241 182,898 95,861 125,924 - - - - - 2,236,924 Deposits from customers 14,710,948 8,099,317 5,587,226 4,181,692 256,230 179,743 30,444 41,226 25,132 33,111,958 Loans payable 10,150 20,144 15,746 79,482 105,087 85,526 72,607 71,597 1,768,165 2,228,504 Liabilities for income tax - - - 8,929 - - - - - 8,929 Deferred tax� - - - - - - - - - - Liabilities for salaries - - - - - - - - - - Other liabilities 258,203 202,947 126,205 - - - - - - 587,355 Total Liabilities 16,811,542 8,505,306 5,825,038 4,396,027 361,317 265,269 103,051 112,823 1,793,297 38,173,670

Sight Up to 1 month

From 1 to 3 months

From3 to 12 months

From 1to 2 years

From 2- 3 years

From 3- 4 years

From 4- 5 years

Over 5 years In thousands of denars

31 December 2007 LIABILITIES Deposits from banks and financial institutions 3,152,002 144,009 357,876 88,598 21,469 - - - - 3,763,954 Deposits from customers 17,941,836 4,095,460 11,277,478 9,607,703 377,211 411,756 19,466 36,382 120,323 43,887,615 Loans payable 5,573 22,585 26,427 77,581 96,938 83,775 82,815 81,853 1,746,104 2,223,651 Liabilities for income tax - - - 2,747 - - - - - 2,747 Deferred tax� - - - 1,307 - - - - - 1,307 Liabilities for salaries - - - 14,908 - - - - - 14,908 Other liabilities 214,216 449,779 87,261 7,847 - - - - - 759,103 Total Liabilities 21,313,627 4,711,833 11,749,042 9,800,691 495,618 495,531 102,281 118,235 1,866,427 50,653,285


32

4. FINANCIAL INSTRUMENTS (continued) 4.3. Liquidity risk (continued) 4.3.3. Off-balance sheet items

(a) Commitments to extend credit

The commitments to extend credits are summarised in the table below.

(b) Financial guarantees and other financial facilities

Financial guarantees are also included below based on the earliest contractual maturity date. Sight Up to 1

month From 1 to 3

months From3 to 12

months From 1to 2

years From 2- 3

years From 3- 4

years From 4- 5

years Over 5

years In thousands

of denars

31 December 2007 Commitments to extend credits

7,332,304 -

-

-

-

-

-

-

-

7,332,304

Financial guarantees 5,447 165,286 620,908 1,148,748 160,912 811,885 101,320 - 6,370 3,020,876 Total 7,337,751 165,286 620,908 1,148,748 160,912 811,885 101,320 - 6,370 10,353,180

Sight Up to 1 month

From 1 to 3 months

From3 to 12 months

From 1to 2 years

From 2- 3 years

From 3- 4 years

From 4- 5 years

Over 5 years


31 December 2007 Commitments to extend credits 4,303,044 - - - - - - - - 4,303,044 Financial guarantees 4,110 515,138 418,011 871,072 295,389 27,208 5,019 71,044 109,233 2,316,224 Total 4,307,154 515,138 418,011 871,072 295,389 27,208 5,019 71,044 109,233 6,619,268


33

4. FINANCIAL INSTRUMENTS (continued) 4.5. Fair value of financial assets and liabilities

Carrying amount Fair value 2007 2006 2007 2006 Financial Assets Placement with, and loans to, banks 5,443,514

6,001,414

5,443,375

6,001,398

Loans to customers 32,917,403 21,659,311 32,917,403 21,659,311 Investment securities- available for sale 123,123

107,354

123,123

107,354

Investment securities- held to maturity 3,838,602

4,391,916

3,838,602

4,391,916

Financial Liabilities Deposits from banks and financial institutions 3,750,252

2,232,155

3,750,252

2,232,155

Deposits from customers 43,280,888 32,962,368 43,285,866 32,962,460 Loans payable 1,635,217 1,692,440 1,635,217 1,692,440

(a) Placement with, and loans to, banks

In 2007, the overnight deposits represent the major part of this position, i.e. MKD 4,096,833 (2006 – null). The fair value of the overnight deposits and sight placements to banks is their carrying amount. The remain fixed interest bearing deposits are time deposits from 7 to 90 days. The estimated fair value of such deposits is based on discounted cash flow using interest rates for similar placements.

(b) Loans to customers

Loans are net of provision for impairment. The major part of the loans to customers is with floating interest rate (over 95%). The remaining part of the loans with fixed interest rate relates to “teaser loans”, for which the fair value is estimated based on the discounted cash flow.

(c) Financial instruments available for sale

Available for sale financial assets are measured at fair value based on quoted prices or amounts derived from cash flow models. Consequently, the fair value is their carrying amount.

(d) Financial instruments held to maturity

Held-to-maturity investments are financial assets with fixed or determinable payments and fixed maturity that the Entity has the positive intend and ability to hold to maturity. This portfolio comprises government bonds from old savings deposits, decentralization, government securities received in exchange for the Bank’s non-performing receivables as well as bonds issued by the Government of the Republic of Macedonia. Taking into consideration the nature of these instruments, as well as the existing market information, the management’s opinion is that the fair value of such instruments approximates their carrying amount.



34

4.5. Fair value of financial assets and liabilities (continued)

(e) Deposits from banks and other financial institutions The fair value of the sight deposits to banks and other financial institutions, i.e. MKD 3,089,659 (2006 – MKD 1,763,918), as well as the fair value of the deposits with floating interest rate is their carrying amount. The remaining part of these deposits represents restricted deposits (Note 22).

(f) Deposits from customers

The fair value of the sight deposits and the deposits with floating interest rate is their carrying amount. The estimated fair value of the deposits with fixed interest rate is based on discounted cash flows using the interest rate for similar deposits with similar maturity.

(g) Loans payable

Subordinated debt in amount of MKD 1,224,032 (2006 – MKD 1,223,482) represents the major part of this position. This loan is with floating interest rate. The remaining part relates to the loans from specific sources for which the market interest rate can not be reliably determined, taking into consideration the fact that there are no similar instruments on the market.

4.6. Capital management

The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of balance sheets, are:

• To comply with the capital requirements set by the regulator; • To safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and • To maintain a strong capital base to support the development of its business.

Capital adequacy and the use of regulatory capital are monitored regularly by the Bank’s management, employing techniques based on the directives required by the regulator, for supervisory purposes. The required information is filed with the NBRM on a quarterly basis.

The Bank’s regulatory capital is divided into two tiers:

• Tier 1 capital: share capital (net of any book values of the treasury shares), retained earnings

and reserves created by appropriations of retained earnings. The bank’s uncovered loss from previous years, the current loss, the book value of goodwill are deducted in arriving at Tier 1 capital; and

• Tier 2 capital: qualifying subordinated loan capital, cumulative preferred shares and premium from cumulative preferred shares sold revaluation reserves from fixed assets, hybrid capital instruments. Investments in financial institutions are deducted from Tier 1 and Tier 2 capital to arrive at the regulatory capital.

The risk-weighted assets are measured by means of a hierarchy of four risk weights classified according to the nature of – and reflecting an estimate of credit risk associated with – each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off-balance sheet exposure, with some adjustments to reflect the more contingent nature of the potential losses.



35

4.7. Sensitivity analysis 4.7.1. Sensitivity analysis (foreign currency)

The currency risk management, performed by monitoring the assets and liabilities in foreign currencies, is supplemented by conducting sensitivity analysis of the Bank’s foreign currencies assets and liabilities. Therefore, appropriate scenario (change of the exchange rates by +10% i.e. -10%, with respect to the MKD) is used.

In thousands denars 2007 Change in exchange rate Total 10% -10% ASSETS Cash and cash equivalents 4,722,680 222,516 (222,516) Treasury bills 5,232,175 - - Financial instruments held for trading 253,301 8,856 (8,856) Investment securities- available for sale 123,123 1,179 (1,179) Investment securities- held to maturity 3,838,602 383,860 (383,860) Placement with, and loans to, banks 5,443,514 544,351 (544,351) Loans to customers 32,917,403 2,108,931 (2,108,931) Other receivables 329,562 34 (34) Total assets 52,860,360 3,269,727 (3,269,727) LIABILITIES 3,750,252 311,562 (311,562) Deposits from banks and financial institutions

Deposits from customers 43,280,888 2,222,831 (2,222,831) Loans payable 1,635,217 135,358 (135,358) Other liabilities 759,103 11,552 (11,552) Total liabilities 49,425,460 2,681,303 (2,681,303) Net currency gap: 31 December 2007 588,424 (588,424) 31 December 2006 840,044 (840,044)

At 31 December2007, if MKD had weakened 10% against the EUR (and all other currencies) with all other variables held constant, the profit for the year would have been MKD 588,425 thousands higher (2006, MKD 840,044 thousands). Conversely, if the MKD had strengthened 10% against the EUR (and all other currencies) with all other variables held constant, the profit for the year would have been MKD 588,425 thousands millions lower (2006, MKD 840,044 thousands). The lower sensitivity of SB’s assets and liabilities in case of change in foreign exchange rates compared to the previous year is a result of the lower open currency position as at end of 2007.

4.7.2. Sensitivity analysis (interest rates)

As a part of interest rate risk management, the Bank analyzes the sensitivity of the balance sheet items. The sensitivity analysis is performed taking into account assets and liabilities with floating interest rates. Hence, it was tested what would happen, if MKD and foreign currencies interest rates decreased/increased by 0.4 b.p. and 0.3 b.p respectively. The assumptions concerning the above mentioned changes are based on the volatility of the Central Bank bills’ interest rates (for the MKD) and the volatility of the one month EURIBOR (for the foreign currencies) during 2007.

. 4. FINANCIAL INSTRUMENTS (continued)


36

4.7. Sensitivity analysis (continued) 4.7.2. Sensitivity analysis (interest rates) (continued)

If interest rates had been 0.4 b.p. for MKD and 0.3 b.p. for foreign currencies higher with all other variables held constant, taking into account the average balances of assets and liabilities for 2007, profit for the year would have been MKD 15,131 thousands lower. Conversely, if the interest rates had been 0.4 b.p. for MKD and 0.3 b.p. for foreign currencies lower with all other variables held constant, profit for the year would have been MKD 15,131 thousands higher. Such an effect arises as a result of higher sensitivity of liabilities compared to the sensitivity of the assets when experiencing a change of the interest rates

In thousands of denars Net effect over IS as result of interest rates change

ASSETS

Total 31.12.2007

+0.4 bp MKD IR

+0.3 bp FX IR

-0.4 bp MKD IR

-0.3 bp FX IR

Cash and cash equivalents Treasury bills 4,722,680 - - Financial instruments held for trading 5,232,175 15,259 (15,259) Investment securities- available for sale 253,301 - - Investment securities- held to maturity 123,123 Placement with, and loans to, banks 3,838,602 12,343 (12,343) Loans to customers 5,443,514 17,156 (17,156) Total assets 32,917,403 78,925 (78,925) 52,530,798 123,684 (123,684) LIABILITIES Deposits from banks and financial institutions Deposits from customers 3,750,252 2,537 (2,537) Loans payable 43,280,889 132,606 (132,606) Total liabilities 1,635,217 3,671 (3,671) 48,666,358 138,815 (138,815) Net interest rates gap: 31 December 2007 (15,131) 15,131


37

5. INTEREST INCOME AND EXPENSES

Interest income and expense can be analyzed by the sectors to which loans and advances have been granted, and the related sources of deposits or borrowings obtained, as follows:

In thousands of Denars Year ended Year ended December 31, 2007 December 31, 2006 Income Expense Income Expense

- Citizens 1,709,537 702,908 1,325,467 404,658 - Enterprises 1,018,906 384,052 692,670 318,987 - Investments securities 244,859 - 210,379 - - Due from other banks 174,985 442 165,587 19,957 - Treasury bills and other Eligible bills 176,321 -

142,739 -

- Balances with central bank 37,805 - 28,174 - - Other - 80,470 - 12,739 3,362,413 1,194,464 2,565,016 756,341

6. FEE AND COMMISSION INCOME AND EXPENSES

In thousands of Denars Year ended Year ended December 31, 2007 December 31, 2006 Income Expense Income Expense

- Citizens 302,471 - 275,128 - - Enterprises 642,629 - 539,787 - - NBRM - 28,782 - 22,829 - Banks and financial

institution 17,946 9,024

12,453 10,771 - Government and local

authorities 6,127 -

6,222 - - Clearing house - 13,080 - 9,941 969,173 50,886 833,590 43,541

7. NET TRADING INCOME

In thousands of Denars

Year ended December 31, 2007 2006

Government Bonds 614 842 Bonds in foreign currencies - - 614 842

8. IMPAIRMENT LOSSES


38

�) Charge for the year


Year ended December 31,2007 2006

Placement with, and loans to banks - 8,964 Loans to customers 790,598 982,165 Investments in available-for-sale securities - 2,164 Off-balance sheet items 88,783 - 879,381 993,293

b) Release of impairment losses In thousands of Denars

Year ended December 31,2007 2006

Release of impairment losses for: - loans to customers 369,725 424,960 - banks 10,734 1,440 - other receivables 937 103 - investments in available-for-sale securities 2,597 1,776 - off-balance sheet receivables - 87,559 383,993 515,838

c) Movements in the balance of allowance for impairment and provisions for off-balance sheet items

In thousands of Denars Cash and

cash equivalents

Placement with, and loans to banks

Loans to customers

Other receivables

Investments in available-

for-sale securities

Off-balance sheet items

Total

Balance, beginning of year

36,801

6,327,058

39,834

284,262 71,780 6,759,735

Charge for the year - 790,598 - - 88,783 879,381 Release - (10,734) (369,725) (937) (2,597) - (383,993) Charge for the year, net of release - (10,734)

420,873

(937)

(2,597)

88,783

495,388 Accrued penalties on bad and doubtful receivables -

-

3,141,155

-

-

-

3,141,155 Write-off - - (3,804,037) - (4,355) - (3,808,392) - Balance, end of year 26,067 6,085,049 38,897 277,310 160,563 6,587,886 9. OTHER OPERATING INCOME


39

In thousands of Denars Year ended December 31,

2007 2006 Income from previous years 114 437 Capital gains 41,513 67,938 Rent income 6,499 7,157 Income from early withdrawal term deposits and work with non residences 18,805 10,468 Shares from JUBMES bank Belgrad - Srbija 26,880 - Other 26,365 38,330 121,176 124,330

10. OTHER OPERATING EXPENSES

In thousands of Denars Year ended December 31,

2007 2006

Gross salaries and other personnel costs: - salaries and personal income tax 350,327 319,617 - obligatory contributions 169,537 167,814 - other costs 62,084 68,124 - bonuses 21,421 - Personnel costs based on defined pension plans 1,580 14,015 Material and services 429,079 356,570 Depreciation of property and equipment 149,700 170,014 Amortization of intangible assets 68,948 69,055 Depreciation of investment property under lease 3,919 4,608 Depreciation of leasehold improvements 4,819 1,230 Marketing costs 135,776 89,212 Consulting services 18,049 62,632 Other tax and contributions 5,920 3,414 Court claims 40,014 18,958 Insurance premia 153,202 123,534 Expenses from past years 22,796 49,728 Impairment for assets acquired through foreclosure procedures 46,411 11,741 Other expenses 30,210 29,197 1,713,792 1,559,463

11. INCOME TAX

�) Income tax components

In thousands of Denars 2007 2006 Current tax 13,377 10,740 Deferred tax assets based on recognized liabilities upon defined

pension plans (1,790) (2,102) 11,587 8,638

11. INCOME TAX (continued)

b) Reconciliation of the income tax amount before taxation and prescribed tax rates


40


2007 2006 Profit before taxation 1,118,714 783,765 Income tax of 12% (2006 - 15%) 134,246 117,565 Tax effect of expenses that are not deductible in determining taxable result 6,067 40,112 Tax exempt revenue (1,450) (3,480)Tax incentives for investments in fixed assets - (17,714)Decrease of tax base proportionally to the participation of the

foreign entity in the total capital (127,276) (127,845) 11,587 8,638

12. CASH AND CASH EQUIVALENTS

In thousands of Denars December 31, December 31, 2007 2006 Cash on hand 616,836 581,848 Balances with Central Bank 4,105,645 4,082,515 Precious metals 199 199 4,722,680 4,664,562

As of December 31, 2007, obligatory reserves held with the Central Bank in foreign currency in the amount of MKD 1,733,575 thousand (2006 – MKD 1,630,166 thousand) included in balances with Central Bank represent the minimum deposits set aside in accordance with the Central Bank Decision on the “Obligatory Reserves of Banks to be Held with the Central Bank”. The obligatory reserve is to be calculated on the basis of the average amount of deposits in foreign currencies existing during one calendar month. The obligatory reserve in foreign currency with the Central Bank earns no interest. Balances with Central Bank cover as well MKD obligatory reserve at MKD 2,301,448 thousand (2006 – MKD 1,691,954 thousand) which represents reserve obligatory reserve in MKD. The obligatory reserve in MKD bears an annual interest rate of 2% (2006 – 2%). Interest earned on the aforementioned obligatory reserves is charged to the income statement as interest income

The major part of foreign currency accounts at call as of December 31, 2007 in the amount of MKD 146,032 thousand is held with banks from EU countries.

13. TREASURY BILLS AND OTHER ELIGIBLE BILLS

Treasury bills in the amount of MKD 4,894,572 thousand (2006 – MKD 1,999,378 thousand) are issued by the Central Bank with maturity of 28 days. Depending on maturity, interest rates on these securities range from 4.58% to 5.89% per annum.

13. TREASURY BILLS AND OTHER ELIGIBLE BILLS (continued) Government bills in amount of MKD 337,603 thousand (2006 – MKD 426,882 thousand) are issued by the Ministry of finance of Republic of Macedonia with maturity of three mantes up to


41

one year. Depending on maturity, interest rates, interest rates on these securities range from 5.00% to 5.30% per annum.

14. FINANCIAL INSTRUMENTS 14.1. FINANCIAL INSTRUMENTS HALD FOR TRADING

Investments in trading securities in the amount of MKD 253,301 thousand (2006 – MKD 147,765 thousand) comprise quoted bonds issued by the Government in the amount of MKD 226,421 thousand, with which the Bank trades in order to generate profit from the short-term fluctuations in the price and investments in shares of JUBMES Banka Belgrade – Serbia, in the amount of MKD 26,880 thousand recognized at fair value.

14.2. FINANCIAL INSTRUMENTS AVAILABLE FOR SALE

In thousands of Denars December 31, December 31, 2007 2006 Investments in subsidiaries: - Stoba Trejd, Skopje 249 249 Investments in associates: - MZT Otpresoci, Strumica 12,852 12,852 Foreign legal entities 149,603 153,289 Domestic banks and financial institution 44,848 41,680 Domestic enterprises 192,881 183,546 400,433 391,616 Less: Allowance for impairment (277,310) (284,262) 123,123 107,354

Investments in subsidiaries refer to 100% investment in Stoba Trejd, Skopje. This investment is fully provided for as of December 31, 2007. In compliance with the modifications to the Banking Law, the Bank passed a Decision on closing of and initiation of liquidation of the Entity.

14.3. FINANCIAL INSTRUMENTS HELD TO MATURITY

In thousands of Denars December 31, December 31, 2007 2006 Government securities with variable interest rate: - Debt securities in exchange for the Bank’s non-performing

receivables 3,678,060 4,201,699 Government securities with fixed interest rate: - Debt securities from denationalization 27,250 30,050 - Debt securities from old savings deposits 133,292 160,167 3,838,602 4,391,916

14. FINANCIAL INSTRUMENTS (continued) 14.3. FINANCIAL INSTRUMENTS HELD TO MATURITY (continued)

Government securities with variable interest rate in the amount of MKD 3,678,060 thousand (2005 – MKD 4,201,699 thousand) represent debt securities issued by the Republic of Macedonia


42

in exchange for the Bank’s non-performing receivables from four major debtors in accordance with the Law for guaranteeing the investment of strategic investors and taking over certain receivables by the Republic of Macedonia from Stopanska Banka AD – Skopje. These debt securities bears an interest rate of three month EURIBOR plus a margin of 1 percentage point, which equals to 5.69% p.a. as of December 31, 2006 (2005 – 3.6% p.a.). The principal is repayable in 56 quarterly installments commencing from 2001 to 2014. Part of government securities with fixed interest rate in the amount of MKD 133,292 thousand (2005 – MKD 160,167 thousand) represent debt securities from old savings deposits issued by the Republic of Macedonia in May 2000. These securities mature up to October 2011 with repayment set in semi annual installments commencing on April 2002 and fixed annual interest rate of 2%. The remaining amount of government securities with fixed interest rate in the amount of MKD 27,250 thousand (2005 – MKD 30,050 thousand) refer to denationalization securities issued by the Republic of Macedonia on February 2004, with maturity in June 2014 and annual interest rate of 2%. The repayment of these securities is set on annual installments starting from June 2005 to June 2014.

15. PLACEMENTS WITH, AND LOANS TO, BANKS

In thousands of Denars December 31, December 31, 2007 2006 Placements up to 90 days: - with domestic banks 45 45 - with foreign banks 5,469,536 6,038,170 5,469,581 6,038,215 Less: Allowance for impairment and uncollectability (26,067) (36,801) 5,443,514 6,001,414


43

15. PLACEMENTS WITH, AND LOANS TO, BANKS (continued) Analysis by interest rates

In thousands of Denars December 31, December 31, 2007 2006 Short-term loans to domestic banks with fixed interest rate of 4.15% (2006 – 4.15 %) p.a. 412 963 Foreign banks: EUR deposits with fixed interest rate 2.60% - 4.50% (2006 – 3.54% to

3.65%) p.a. 3,763,147 3,817,624 USD deposits with fixed interest rate 4.25% - 5.70% (2006 – 5.23% -

5.28%) p.a. 1,050,312 1,420,320 GBP deposits without interest 1,996 12,617 AUD with fixed interest rate 5.73% - 6.90% (2006 – 6.06% - 6.18%)

p.a. 441,879 432,310 CHF with fixed interest rate 1.80% - 2.00% (2006 – 2%) p.a. 9,186 102,975 GBP with fixed interest rate 4.97% - 6.25% (2006 – 5% - 5.16%) p.a. 129,988 131,215 CAD with fixed interest rate 4.05% - 475% (2006 – 4.12% ) p.a. 45,812 30,162 SEK with fixed interest rate 2.85% - 3.65% (2006 – 2.85%) p.a. 17,536 27,751 NOK with fixed interest rate 3.50 % - 4.00% (2006 – 3.55%) p.a. 1,619 23,156 DKK with fixed interest rate 3.50% - 3.85% (2006 – 3.5%) p.a. 6,887 38,731 JPY 807 841 5,469,169 6,037,252 5,469,581 6,038,215 Less: Allowance for impairment and uncollectability (26,067) (36,801) 5,443,514 6,001,414

Part of restricted accounts in the amount of MKD 75,283 thousand (2006 – MKD 77,092 thousand) represent accounts held with banks in Serbia and Montenegro (former Federal Republic of Yugoslavia), which went into bankruptcy in January 2002. Allowance for impairment and uncollectability of MKD 26,067 thousand (2006 – MKD 36,801 thousand) is charged by the Bank against this exposure. The amount of special allowance is a net exposure determined as difference between Bank’s deposited funds and deposits taken from the corresponding foreign banks (Note 22).

According to independent legal opinion, the Bank is entitled to net the accepted and held deposits at a same bank. Part of restricted accounts in the amount of MKD 21,034 thousand (2006 – MKD 19,042 thousand) represent deposits held with JP Morgan Chase Manhattan Bank New York, as a collateral for transactions performed with VISA payment cards. These funds are not available for the Bank’s daily business.

16. LOANS TO CUSTOMERS


44

a) Analyses of loans by type of customer

In thousands of Denars December 31, 2007 December 31, 2006

Up to one year

Over one year

Total Up to one year

Over one year

Total

Enterprises 11,050,792 9,395,626 20,446,418 9,787,356 6,274,696 16,062,052 Government 56,424 281,274 337,698 51,646 151,390 203,036 Citizens 8,920,361 9,297,975 18,218,336 4,657,259 7,064,022 11,721,281 20,027,577 18,974,875 39,002,452 14,496,261 13,490,108 27,986,369 Current maturity of long-term loans 2,701,944 (2,701,944) - 2,859,204 (2,859,204) -

22,729,521

16,272,931 39,002,452 17,355,465 10,630,904 27,986,369 Less: Allowance

for impairment (5,570,862) (514,187) (6,085,049) (5,920,227) (406,831) (6,327,058) 17,158,659 15,758,744 32,917,403 11,435,238 10,224,073 21,659,311

During 2007, the Bank has extended its retail banking services especially with respect to consumer loans, household loans, payment cards operations and deposits from citizens with bonuses interest rate. The bank charges interest on loans to customers at the following rates per annum:

2007 2006 Up to one year Over one year Up to one year Over to one

year Citizens: - in Denars:

- mortgage loans - 11.9%-12.9% - 12.9%-14.12%

- consumer loans 13.5%-16.5% 13.5%-16.5% 14.5% 6.9%-12.9% - in foreign currency: - mortgage loans - 5.50%-9.50% - 6.5%-9.5% - vehicles loans - 7%-7.5% - 7%-7.21%

- consumer loans 11.5%-14.5% 7.0%-7.5% 11.9%-13.73%

11.9%-13.73%

Enterprises: - In Denars 8.75%-11.5% 9.45%-14.5% 8.75%-11.5% 9.5%-17.9% - in foreign currency 1 �

�� + 5.5%-6.25%

1 � �� + 9.75%-14.5%

9.75%-1� ��+5.

5%-6.25% 9.75%-14.5% 16. LOANS TO CUSTOMERS (continued)


45

b) Analysis of loans by sectors

The following loans granted by the Bank to customers by industry sector of the borrower, as of December 31, 2007 and 2006 are considered significant: In thousands of Denars December 31, December 31, 2007 2006 Tobacco, food and beverage 2,456,348 2,383,425 Trading 5,072,294 4,041,883 Metal industry 2,783,821 2,016,864 Construction 1,531,174 1,501,791 Textile and leather 1,087,276 900,060 Agriculture, forestry and fishing 1,017,002 850,111 Chemical industry 469,149 459,049 Transport 816,933 613,121 Mining 461,187 257,094 Machine industry 80,917 284,081 Hotels and restaurants 689,611 267,962 Wood, paper and cellulose 254,265 178,441 Vehicles 14,263 58,930 Other processing industry 160,076 203,818 Other non-metal industry 1,041,982 810,461 Electric and optic plants 158,942 131,984 Electricity supply 1,410,620 636,796 Citizens 18,218,336 11,721,281 Other 1,278,256 669,217 39,002,452 27,986,369 Less: Allowance for impairment losses (6,085,049) (6,327,058) 32,917,403 21,659,311 c) Risks and uncertainties

Management of the Bank has recorded provisions for impairment losses for all known and estimated risks as of the date of the financial statements. The bank’s portfolio contains a number of debtors whose ability to service and repay their debts has been impacted by economic developments in the Republic of Macedonia The portfolio also contains a number of debtors that are involved in restructuring processes that are expected to lead to either partial or complete recoveries of the Bank’s receivables. The receivables from such debtors were classified on the latest available information and the expected course of the restructuring process. The Bank continues to be collateralized primarily by real estate, industrial land, buildings and equipment for corporate loans and in case of retail loans depending on the type of loan product. Depending on the classification of loans, the management is maximizing efforts to realize collateral on a timely basis. In the event that this proves to be unsuccessful, additional provisions will need to be made in the future to provide for any possible shortfall.

17. OTHER RECEIVABLES



46

December 31, December 31, 2007 2006 Assets acquired through foreclosure procedure 691,807 792,945 Trade receivables 139,093 79,245 Advances 3,629 1,280 Other receivables 225,737 189,990 1,060,266 1,063,460 Less: Allowance for impairment losses (38,897) (39,834) 1,021,369 1,023,626

Assets acquired trough foreclosure procedures include business premises, apartments and buildings which are not used by the Bank for its core operations. During 2007, the Bank recorded impairment losses of the assets acquired through foreclosure procedure in total amount of MKD 46,411 thousand (2006 – MKD 11,741 thousand) (Note 10), from which, amount of MKD 7,717 thousands (2006 - MKD 11,741 thousand) are related to impairment losses of Investments property (Note 18).

18. INVESTMENT PROPERTY

Movements of investment property in 2007 Cost Balance, January 1, 2007 212,072 Transfer from assets acquired through foreclosure procedure 4,352 Transfer from property and equipment (Note 23) 3,084 Disposals (47,005) Balance, December 31, 2007 172,503 Accumulated depreciation Balance, January 1, 2007 21,031 Charge for the year 3,919 Transfer from leased property 127 Transfer from property and equipment 782 Disposals (7,559) Other (302) Balance, December 31, 2007 17,998 Impairment Balance, January 1, 2007 37,054 Charge for the year 7,117 Balance, December 31, 2007 44,171 Net carrying amount December 31, 2007 110,334 Net carrying amount December 31, 2006 153,987

18. INVESTMENT PROPERTY (continued)

Investment property comprises a number of commercial properties that are leased to third parties. Each of these leases contains an initial cancelable period from one to five years.


47

Subsequent renewals are negotiated with the lessee. 19. LEASEHOLD IMPROVEMENTS

Movements in leasehold improvements in 2007

In thousands of DenarsCost Balance, January 1, 2007 48,351 Additions 9,540 Transfer from construction in progress (Note 23) 358 Transfer from intangible assets (Note 22) 20 Transfer from property and equipment (Note 21) (5,712) Balance, December 31, 2007 52,557 Accumulated depreciation Balance, January 1, 2007 27,597 Charge for the year 4,819 Transfer to leased property (127) Balance, December 31, 2007 32,289 Net carrying amount December 31, 2007 20,268 Net carrying amount December 31, 2006 20,754

20. INTANGIBLE ASSETS

Movements in intangible assets in 2007

Software Investments

in progress Total

Cost Balance, January 1, 2007 405,277 15,858 421,135 Additions during the year 1,798 6,916 8,714 Transfer from construction in progress (Note 22 - (20) (20) Balance, December 31, 2007 407,075 22,754 429,829 Accumulated amortization Balance, January 1, 2007 271,282 - 271,282 Charge for the year 68,948 - 68,948 Other 10 - 10 Balance, December 31, 2007 340,240 - 340,240 Net carrying amount December 31, 2007 66,837 22,752 89,589 Net carrying amount December 31, 2006 133,995 15,858 149,853

21. PROPERTY AND EQUIPMENT

Movements in property and equipment in 2007



48

Buildings Furniture and

equipment

Construction in progress

Total

Cost Balance, January 1, 2007 1,133,458 1,293,058 87,756 2,514,272 Additions during the year 21,273 42,968 63,003 127,244 Transfer to construction in progress 30,480 36,328 (67,166) (358) Transfer to leasehold improvements

(Note 21) 5,712 - - 5,712Transfer from foreclosed assets put into use 6,474 - - 6,474Transfer to leasehold improvements

(Note 20) (3,084) - - (3,084)Disposals (21,990) (48,611) (70,601) Balance, December 31, 2007 1,172,323 1,323,743 83,593 2,579,659 Accumulated depreciation Balance, January 1, 2007 304,935 1,047,186 - 1,352,121 Charge for the year 28,467 121,233 - 149,700 Disposals (9,822) (46,512) - (56,334) Transfer to leasehold improvements (782) (782) Balance, December 31, 2007 322,798 1,121,907 - 1,444,705 Net carrying amount December 31, 2007 849,525 201,836 83,593 1,134,954 Net carrying amount December 31, 2006 828,523 245,872 87,756 1,162,151

All buildings are the property of the Bank and are used as business premises for its own activities.

The Bank’s property as of December 31, 2007 includes the property in the net carrying amount of MKD 185,886 thousand, for which the Bank does not possess appropriate ownership titles due to incomplete cadastral books. As of December 31, 2007 the Bank does not have real estate mortgaged as security.


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22. DEPOSITS FROM OTHER BANKS AND FINANCIAL INSTITUTIONS

In thousands of Denars December 31, 2007 December 31, 2006 Up to one

year Over one

year Up to one

year Over one

year Demand deposits Domestic banks and other

financial institutions 94,701 - 116,591 - Foreign banks 2,994,958 - 1,647,327 - 3,089,659 - 1,763,918 - Time deposits Domestic banks and other financial institutions 577,223 21,027 403,347 27 577,223 21,027 403,347 27 Restricted deposits Foreign banks 62,343 - 64,863 - 62,343 - 64,863 - 3,729,225 21,027 2,232,128 27

Restricted deposits of foreign banks in the amount of MKD 62,343 thousand (2006 – MKD 64,863 thousand) represent deposits from banks in Serbia and Montenegro (the former Federal Republic of Yugoslavia) which went into bankruptcy in January 2002 (Note 12). Part of the deposits in amount of MKD 4,580 thousand (2006 – 6,413 thousand) bear variable interest rate of 20% according to movements in EURIBOR or LIBOR.

The Bank accrues interest on deposits at the following rates per annum:

2007 2006 Demand deposits: - foreign currencies 0.001%-1,3% 0.001%-1% - Denars 0.4% 0.4% Up to one year time deposits: - Denars 4%-7% 4%-6.35% - foreign currencies 0,001%-6,53% 1.6%-3.61%


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23. DEPOSITS FROM CUSTOMERS

In thousands of Denars December 31, 2007 December 31, 2006 Up to one year Over one year Up to one year Over one year Demand deposits Citizens: - in Denars 5,551,477 - 4,486,468 - - in foreign currencies 4,537,697 - 4,932,950 - Enterprises - in Denars 4,026,377 - 3,559,799 - - in foreign currencies 1,608,611 - 1,253,122 - Foreign entities - in Denars 13,059 - 20,155 - - in foreign currencies 466,161 - 333,127 - Public sector - in Denars 91,527 - 78,607 - - in foreign currencies 1,471 - 817 - 16,296,380 - 14,665,045 - Time deposits Citizens: - in Denars 7,968,575 610,357 3,257,099 582,346 - in foreign currencies 8,083,304 270,286 5,854,031 197,140 Enterprises - in Denars 7,514,665 206,391 5,989,783 75,977 - in foreign currencies 2,269,232 404 2,293,231 404 Public sector - in Denars 61,294 - 47,312 - 25,897,070 1,087,438 17,441,456 855,867 42,193,450 1,087,438 32,106,501 855,867

The Bank accrues interest on deposits at the following rates per annum:

2007 2006 Up to one year Over one year Up to one year Over one year Demand deposits Citizens: - in Denars 0.65%-1% - 0.65%-1% - - in foreign currencies 0.001%-1.7% - 0.001%-1.7% - Enterprises: - in Denars 0.4% - 0.4% - - in foreign currencies 0.001%-1% - 0.001%-1% - Time deposits Citizens: - in Denars 5,5%-7,75% 8%-8.5% 5.5%-7.76% 8%-8.58% - in foreign currencies 0.075%-4.3% 0.001%-4.5% 0.75%-4.3% 1.75%-4.5% Enterprises: - in Denars 0.001%-5.71% 0.001%-5.57% 0.001%-5.71% 0.001%-5.57% - in foreign currencies 4%-7,23% 6,5%-8,85% 4%-7.23% 6.5%-8.85%

24. LOANS PAYABLE


51


December 31, 2007 December 31, 2006 Up to one

year Over one

year Up to one

year Over one

year Domestic sources: Agency for assets management- part of the long-term loans MKD 11,703 thousand (2006- 35,106 thousand) is repaid in 10 equal semi-annual installments commencing from June 2003, while the remaining amount of MKD 152,983 thousand (2006 – MKD 153,593 thousand) matures and is payable in 2020 on a one-time basis. Related fees for these loans are 1.5% per annum (2006 – 1.5%) - 164,686 - 188,699 Agency for undeveloped regions –matures in 2009. The interest rate equals to 60% of the discount rate. In 2007 the interest rate is equal to 3.9% per annum (2006 – 3.9%). 1,446 28,109 1,447 45,468 Obligations for dividend of preference shares 7,847 - - - 9,293 192,795 1,447 234,167 Foreign sources: Council of Europe Social Development Fund - matures in 2014 and bears fixed interest rate of 6.73% per annum (2006 – 6.73%). - 54,760 - 62,554 ICDF Taiwan - to be repaid in 20 equal semi-annual installments until 2014 and bears interest rate of six month LIBOR decreased by 0.5% (2006 – six month LIBOR reduced by 0.5%) per annum. - 57,402 - 73,856 Other banks - 5,957 - 5,957 - 118,119 - 142,366 Current maturity of long-term loans 46,899 (46,899) 51,850 (51,850) 56,192 264,015 53,297 324,683

25. SUBORDINATED DEBT

Subordinated debt in the amount of MKD 1,224,032 thousand (2006 - MKD 1,223,482 thousand) refers to received funds from the National Bank of Greece in the equivalent amount of EUR 20,000,000 based on the Subordinated debt agreement signed on December 20, 2006. Based on the terms of the agreement the aforementioned funds are aimed for strengthening the guarantee capital of the Bank, realization of the Bank’s projected goals in accordance to the Business plan of the Bank, increase of the competitive and market position of the Bank, its profitability as well as for the increase of Tier two coefficient of the capital adequacy and other qualitative and quantitative indicators of the Bank. The entire amount of subordinated debt matures on ten years anniversary from the date of signing of the aforementioned agreement and bears an interest rate of three month EURIBOR plus margin of 0.85%.

26. PREFERRED SHARES OBLIGATIONS


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Preferred non-redeemable cumulative shares of the Bank on 31 December 2007 amounted to 227,444 preferred shares with nominal value of MKD 400. Preferred non-redeemable cumulative shares give preference right for disbursement of dividend and do not have voting rights. Preferred shares participate equally in the division of the rest of the bankrupt’s, i.e. liquidation estate of the Bank. On 31 December 2007 the Bank allocated an amount of MKD 7,847 thousand as dividend for the holders of non-redeemable cumulative preferred shares for 2007.

27. OTHER LIABILITIES

In thousands of Denars December 31, December 31, 2007 2006 Liabilities to suppliers 86,617 126,149 Due for taxes and contributions 152 5 Liabilities to NBRM for state-owned apartments sold 16,635 6,173 Accrued expenses for defined pension plans 36,329 14,015 Deferred loan origination fees 123,174 56,547 Liabilities for managed funds, net 18,244 11,866 Accrued expenses 54,377 34,406 Provisions for off-balance sheet items 160,563 71,780 Liabilities for salaries 30,275 29,121 Other liabilities 213,775 228,364 740,141 578,426

28. EQUITY

�. Share capital The share capital of the Bank as of December 31, 2007 consists of 17,460,180 ordinary shares with a nominal value of MKD 201.1.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the Bank’s General Assembly meetings, as well as right to equally participate in the division of bankrupt’s, i.e. liquidation estate of the Bank. he structure of shareholders with participation which exceeds 5% of the issued voting share capital as of December 31, 2007 and 2006, officially announced and accepted by the Central Securities Depository of the Republic of Macedonia is as follows:

28. EQUITY (continued)

�. Share capital (continued)


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December 31, 2007 December 31, 2006

% of

participation In thousands

of Denars % of participation

In thousand of Denars

National Bank of Greece 73.04% 2,564,602 73.04% 2,564,602 International Finance Corporation 10.80% 379,246 10.80% 379,246 European Bank for reconstruction and

development 10.80%

379,246

10.80%

379,246 Others 5.36% 188,148 5.36% 188,148 100% 3,511,242 100% 3,511,242

b. Revalued reserves Revaluation reserves include unrealized gains and losses that come from changes in fair value of available for sale investments, until they are not sold or it is assessed that they are impaired, in which case cumulative unrealized gains or losses previously recognized in the revaluation reserve are recognized in net profit or loss for the period. Part of the Revaluation reserve in amount of 22.610 mkd thousand refers to increase of caring amount of tangible and intangible assets as a result of increase of prices of industrial commodities in the time when the revaluation is performed. The last revaluation of the tangible and intangible assets is performed by the Bank in year 2003. As at 31 December 2007, in accordance with letter from NBRM no. 91 dated January 8, 2008, these revaluation reserves are transferred to accumulated earnings. The revalued reserve is increase in carrying amount of intangible assets and property and equipment as the result of growth of prices of industrial products at moment of revaluation. As of 31 December 2007, according to the recommendations of NBRM, these revalued reserves in the amount of MKD 22,610 thousand have been transferred to retained earnings. c. Statutory reserve

In accordance with the local law regulation the Bank is required to set aside 15 percent of its net profit for the previous year in a statutory reserve until the level of the reserve reaches 1/5 of the court-registered capital. Until reaching the minimum required level, the statutory reserve could be used only for loss recovery. When the statutory reserve exceeds the minimum level even after recovery of all losses upon annual financial statements, it can also be used for distribution of dividends, based on a decision of the Shareholder’s assembly, but only if, for the current year, it has not reached the minimum for distribution as prescribed by the Company Law or by the Bank’s Statute.

29. RELATED PARTY TRANSACTIONS

Related parties are considered to include major shareholders, affiliates and entities under common ownership, control/management with the Bank, or whose activities the Bank has an ability to control. All transactions with related parties arise in the normal course of business and their value is not materially different from the terms and conditions that would prevail in arms-length transactions. The significant related party balances and transactions are presented as follows:


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29. RELATED PARTY TRANSACTIONS (continued)


December 31,

2007

December 31,

2006 ASSETS Current accounts in foreign currency National Bank of Greece, Athens 5,075 14,174 United Bulgarian Bank, Sofia 4,013 9,872 Total assets 9,088 24,046 LIABILITIES Demand deposits of foreign Banks National Bank of Greece, Athens - 6,986 United Bulgarian Bank, Sofia 4,205 4,186 4,205 11,172 Time deposits National Bank of Greece, Athens 2,754,072 1,529,353 Subordinated debt National Bank of Greece, Athens 1,224,032 1,223,482 Interest payable National Bank of Greece, Athens 933 962 Consultants services NBG Management 85,672 85,644 Other liabilities NBG Management 5,121 13,254 Total liabilities 4,074,045 2,863,867 INCOME STATEMENT Interest income National Bank of Greece, Athens 51 51 United Bulgarian Bank, Sofia 24 26 Interest expense 26National Bank of Greece, Athens 62,751 1,236 United Bulgarian Bank, Sofia - 13 Other expenses: NBG Management 7,160 39,763 Ethnoplan S.A. 599 630

The Bank’s exposure towards its management and employees and their related entities as of December 31, 2007 amounts to MKD 92,237 thousand.

30. MANAGED FUNDS

The Bank manages assets on a fee basis on behalf of customers and these funds are included in the balance sheets on a net basis. Managed funds are not Bank’s assets and are not recognized in its financial statements. The Bank is not exposed to any credit risk regarding to such placements, as it does not guarantee for this placements.


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31. COMMITMENTS AND CONTINGENCIES �. Commitments and contingencies

In thousands of Denars December 31, December 31, 2007 2006 Payment guarantees: - in Denars 920,858 776,995 - in foreign currency 539,661 425,225 Performance guarantees: - in Denars 177,156 92,198 - in foreign currency 381,490 325,183 Letters of credit in foreign currency 1,001,711 696,623 Unused current account overdrafts 1,049,058 917,062 Credit cards commitments 6,283,246 3,385,982 Other 286,274 319,215 10,639,455 6,938,483

The provision for off-balance sheet items as of December 31, 2007 amounts to MKD 157,363 thousand (2006 – MKD 71,780 thousand).

b. Litigations The Bank is involved in legal proceedings in its regular operations. At December 31, 2007 the legal proceedings filed against the Bank amounted to potential damages in the amount of MKD 278,596 thousand. This amount does not include any penalty interest. The Bank’s management judges that the final outcome of the filed legal proceedings will be favorable, and that no material losses will result from the settlement of the aforementioned litigation. The Bank allocated provisions for impairment losses upon litigation in the amount of MKD 3,200 thousand.

32. TAXATION RISK

The tax authorities may at any time inspect the books and records within 5 years subsequent to the reported tax year, and may impose additional tax assessments and penalties. The Bank's management is not aware of any additional circumstances, which may give rise to a potential material liability in this respect.

33. EXCHANGE RATES Official exchange rates used in the translation of the balance sheet items denominated in foreign currencies were as follows:

In Denars 2007 2006 1 USD 41.6564 46.4496 1 EUR 61.2016 61.1741

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