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					UPDATE OF THE INFORMATION CONTAINED IN THE PROSPECTUS OF




                     Bulgarian-American Credit Bank AD
                 (incorporated as a joint stock company with limited liability under the laws of Bulgaria)




This document contains the updated information from the prospectus of the Bulgarian-American Credit Bank AD (“BACB”
or the “Bank”) and is part of the 2006 financial statements of BACB.




                                                        30 March 2007




                                                                  1
Potential investors may receive a copy of this document at the following address:
     •    BACB headquarters in Sofia city, 16 Krakra str., tel: +359 (2) 9658 345, web page: http://www.bacb.bg/,
          Contact persons: Anna Petrova Tzankova-Boneva; Boyan Nikolov Ikonomov from 10 a.m. to 4 p.m.;
This document along with additional public information may be received from the Financial Supervision Commission and the
Bulgarian Stock Exchange – Sofia AD.


Certain terms used in this document, including certain capitalised terms, are defined in Definitions on p. 101


The contents of this document is not to be construed as legal, financial, business or tax advice. Each prospective investor should
consult his, her or its own legal adviser, financial adviser or tax adviser for legal, financial or tax advice. If you are in any
doubt about the contents of this document you should consult your stockbroker, bank manager, solicitor, accountant or other
financial adviser.
It should be remembered that the price of securities and the income from them can go down as well as up.
                                                                                     CONTENTS
MEMBERS OF THE SUPERVISORY AND MANAGEMENT BOARD OF THE BANK. MAJOR PARTNERS.
RESPONSIBLE FOR THE DOCUMENT. ............................................................................................................................. 5

INTRODUCTION ..................................................................................................................................................................... 7

    FORWARD LOOKING STATEMENTS................................................................................................................................ 7
    PRESENTATION OF FINANCIAL AND OTHER INFORMATION.................................................................................... 7
    CURRENCY PRESENTATION............................................................................................................................................. 7
    EXCHANGE RATES.............................................................................................................................................................. 8
    NO INCORPORATION OF WEBSITE INFORMATION...................................................................................................... 8

SUMMARY................................................................................................................................................................................ 9

    BUSINESS OVERVIEW ................................................................................................................................................................ 9
    STRENGTHS .............................................................................................................................................................................. 9
    STRATEGY ................................................................................................................................................................................ 9
    SUMMARY HISTORICAL FINANCIAL AND OPERATING INFORMATION ........................................................................................ 10
    CURRENT TRADING AND PROSPECTS ........................................................................................................................................ 11
    TRADING THE BACB SHARES ON THE BULGARIAN STOCK EXCHANGE .................................................................................... 11
    RISK FACTORS ........................................................................................................................................................................ 12

RISK FACTORS ..................................................................................................................................................................... 13

    RISKS RELATING TO THE BANK ............................................................................................................................................... 13
    RISKS RELATING TO THE SHARES ............................................................................................................................................ 17
    RISKS RELATING TO BULGARIA ............................................................................................................................................... 17
    GENERAL RISKS ..................................................................................................................................................................... 19

DIVIDENDS AND DIVIDEND POLICY.............................................................................................................................. 20

BUSINESS OVERVIEW ........................................................................................................................................................ 21

    OVERVIEW ............................................................................................................................................................................. 21
    STRENGTHS ............................................................................................................................................................................ 21
    STRATEGY .............................................................................................................................................................................. 22
    HISTORY................................................................................................................................................................................. 23
    IMPORTANT DEVELOPMENTS ................................................................................................................................................... 23
    BRANCH NETWORK AND MOBILE LENDING ............................................................................................................................. 24
      Branch Network ................................................................................................................................................................ 24
      Mobile Lending ................................................................................................................................................................. 24
      Banking Activities ............................................................................................................................................................. 24
      Lending Business .............................................................................................................................................................. 25
      Deposit-taking................................................................................................................................................................... 25
      Other Banking Activities ................................................................................................................................................... 26
      Management Structure...................................................................................................................................................... 26
    SOURCES OF FUNDING ............................................................................................................................................................. 28
      Fundraising Strategy ........................................................................................................................................................ 28
      Cost of Funding ................................................................................................................................................................ 28
      Debt Securities.................................................................................................................................................................. 29
      Shareholder Loans from the BAEF ................................................................................................................................... 29
      Loans from International Finance Institutions.................................................................................................................. 29
      Loans from International Banks........................................................................................................................................ 29
      Customer Deposits ............................................................................................................................................................ 29
    LOAN PORTFOLIO ................................................................................................................................................................... 30
      Loan Portfolio by Lending Programme ............................................................................................................................ 30
      Loan Portfolio by Industry Sector..................................................................................................................................... 30
      Large Loan Exposures ...................................................................................................................................................... 30
      Analysis of Loan Portfolio by Currency............................................................................................................................ 30
      Evaluation and Classification of Risk Exposures.............................................................................................................. 30
      Capital Adequacy.............................................................................................................................................................. 31
                                                                                              3
        Legal Proceedings ............................................................................................................................................................ 31
        Related Party Transactions............................................................................................................................................... 31
        Loans to Employees and Key Management Personnel...................................................................................................... 31
        Subsidiary Undertakings and Affiliates............................................................................................................................. 32
        Off-Balance Sheet Liabilities ............................................................................................................................................ 32
        Information Technology.................................................................................................................................................... 32
        Property ............................................................................................................................................................................ 32
        Employees ......................................................................................................................................................................... 33
        Long Term Employee Incentive Plan ................................................................................................................................ 33
        Insurance .......................................................................................................................................................................... 34
        Recent Developments ........................................................................................................................................................ 34

RISK MANAGEMENT, INTERNAL CONTROLS AND COMPLIANCE....................................................................... 35

    RISK MANAGEMENT ............................................................................................................................................................... 35

DIRECTORS AND SENIOR MANAGEMENT ................................................................................................................... 43

    MANAGEMENT BOARD ........................................................................................................................................................... 43
    SUPERVISORY BOARD MEMBERS ............................................................................................................................................ 43
    MANAGEMENT BOARD MEMBERS ........................................................................................................................................... 44
    OTHER SENIOR MANAGERS..................................................................................................................................................... 45
    EMPLOYEES AND MEMBERS OF THE MANAGEMENT AND SUPERVISORY BOARD OF BANK ........................................................ 45
    INTERESTS OF THE MEMBERS OF THE MANAGEMENT AND SUPERVISORY BOARDS ................................................................... 45
    MEETINGS OF THE MANAGEMENT AND SUPERVISORY BOARD ................................................................................................. 45
    CORPORATE GOVERNANCE ..................................................................................................................................................... 45

CAPITALISATION AND INDEBTEDNESS ....................................................................................................................... 47

SELECTED HISTORICAL FINANCIAL AND OPERATIONAL INFORMATION ...................................................... 50

OPERATING AND FINANCIAL REVIEW AND RESULTS OF OPERATIONS........................................................... 52

OVERVIEW............................................................................................................................................................................. 52

SIGNIFICANT FACTORS AFFECTING RESULTS OF OPERATIONS ........................................................................ 52

SELECTED STATISTICAL INFORMATION .................................................................................................................... 68

PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDER ............................................................................... 80

DESCRIPTION OF THE SHARES AND APPLICABLE BULGARIAN LEGISLATION ............................................. 85

GENERAL INFORMATION ................................................................................................................................................. 94

DEFINITIONS....................................................................................................................................................................... 102




                                                                                              4
   MEMBERS OF THE SUPERVISORY AND MANAGEMENT BOARD OF THE BANK.
  MAJOR PARTNERS. RESPONSIBLE FOR THE PREPARATION OF THIS DOCUMENT.



Bulgarian American Credit Bank AD, Sofia is a joint-stock company licensed by the Bulgarian National Bank under the
Bulgarian legislation.

Members of the Supervisory Board:
   •   Steven W. Fillo (US citizen) – Chairman;
     •    Marshall L. Miller (US citizen) – Deputy Chairman;
     •    Valentin St. Braykov (Bulgarian citizen)

Mr. Valentin Braykov has deposited his resignation as a member of the Supervisory Board with BACB due to personal
reasons related to his status as a lawyer.

The Supervisory Board has proposed to the General Meeting of the Shareholders, convened on April, 18th, 2007, Mr.
Valentin Braykov to be released as a member of the Supervisory Board and Mr. Kiril Aleksandrov Manov, with permanent
address: Sofia 1000, 39 Dondukov str., fl. 5, apt. 9 to be elected as a new member of the Supervisory Board. The proposal
shall be voted at the General Meeting of the Shareholders on April 18th, 2007 and the decision shall be subject to registration
with the Commercial Register.


Members of the Management Board:
   •   Frank L. Bauer (US citizen) – Chairman of the Management Board and Chief Executive Officer;
     •    Dimiter St. Voutchev (Bulgarian citizen) – Executive Director;
     •    Stoyan N. Dinchiiski (Bulgarian citizen) – Executive Director;
     •    Michael Hunsberger (US citizen)
     •    Dennis Fiehler (US citizen)

Auditors: for 2006 and 2005 - Deloitte Audit OOD, Sofia, 55 Al. Stamboliiski blvd; for 2004 – PriceWaterHouseCoopers
Audit OOD, Sofia, 9-1 M. Luisa blvd.




                                                               5
Responsible for the preparation of this document:

Anna Petrova Tsankova-Boneva, Treasurer; Silvia Kirilova Kirilova, General Councel, Katya Sevtoslavova Bineva, Chief
Accountant and Elena Tsvetanova Kamenova, Deputy Chief Accountant.

By signing the last page of this document the above mentioned persons declare that:

    (1) they have exercised the due care when preparing this document to comply with the legal requirements;
    (2) to their best knowledge the updated information in this document is not incorrect, misleading or incomplete and
         accurately presents the Bank and its shares to the investors.




                                                               6
                                                    INTRODUCTION


FORWARD LOOKING STATEMENTS


This document contains forward looking statements which reflect the current view of the Bank or, as appropriate, of the
members of the supervisory board of the Bank (the “Supervisory Board”) and the members of the management board (the
“Management Board”) of the Bank (together, the “Directors”) with respect to financial performance, business strategy,
plans and objectives of management for future operations (including development plans relating to the Bank’s products and
services).

These forward looking statements relate to the Bank and the sectors and industries in which the Bank operates. Statements
which include the words “expects”, “intends”, “plans”, “believes”, “projects”, “anticipates”, “will”, “targets”, “aims”,
“may”, “would”, “could”, “continue” and similar statements of a future or forward looking nature identify forward looking
statements.

All forward looking statements included in this document address matters that involve risks and uncertainties. Accordingly,
there are or will be important factors that could cause the Bank’s actual results to differ materially from those indicated in
these statements. These factors include but are not limited to those described in the part of this document entitled “Risk
Factors”, which should be read in conjunction with the other cautionary statements that are included in this document. Any
forward looking statements in this document reflect the Bank’s current views with respect to future events and are subject to
these and other risks, uncertainties and assumptions relating to the Bank’s operations, results of operations, growth strategy
and liquidity.

Any forward looking statements speak only at the date of this document. Subject to any obligations under the ordinances of
the Financial Securities Commission or the Rules of the Bulgarian Stock Exchange — Sofia, the Bank undertakes no
obligation to update publicly or review any forward looking statement, whether as a result of new information, future
developments or otherwise. All subsequent written and oral forward looking statements attributable to the Bank or individuals
acting on behalf of the Bank are expressly qualified in their entirety by this paragraph. Prospective investors should specifically
consider the factors identified in this document, which could cause actual results to differ before making an investment
decision.



PRESENTATION OF FINANCIAL AND OTHER INFORMATION


Unless otherwise indicated, the financial information in this document has been prepared in accordance with International
Financial Reporting Standards (“IFRS”).

The Accounting Act (2005) requires the application of the International Accounting Standards adopted by the EU
Commission. This means they should be officially translated in Bulgarian. As of 31 December 2006 the last official issue in
Bulgarian adopted by the Government on 7 August 2006 and promulgated in the State Gazette was the edition of 1 January
2005. That is why the consolidated financial statements for 2006 are prepared on the basis of the International Accounting
Standards in their edition of 1 January 2005.

Anyone considering acquiring Shares must rely on their own examination of the Bank and the financial information in this
document.

Certain figures contained in this document, including financial information, have been subject to rounding adjustments.
Accordingly, in certain instances, the sum of the numbers in a column or a row in tables contained in this document may not
conform exactly to the total figure given for that column or row.

The figures are presented in the document as follows: the figure “one thousand five hundreds” is “1,000.05”, the figure “one
thousand five tenth” is “1,000.50”; the figure “one million” is “1,000,000” or “1,000,000.00”. All other figures are presented
in the same way unless otherwise specified.

CURRENCY PRESENTATION


Unless otherwise indicated, all references in this document to “Euro”, “Euros” or “€” are to the lawful currency of the
European Union, all references to “$”, “US dollar” or “US dollars” are to the lawful currency of the United States and all
references to “BGN”, “Lev” or “Leva” are to the lawful currency of the Republic of Bulgaria.


                                                                7
EXCHANGE RATES


Since 1997, the Lev has been pegged to the Deutsche mark and, subsequently to the Euro. Currently, the exchange rate is fixed
by the Bulgarian National Bank at €1 = BGN 1.95583. Except as otherwise stated in this document, all translations from Leva
to Euro contained in this document are based on this exchange rate.




NO INCORPORATION OF WEBSITE INFORMATION


The contents of the Bank’s website do not form part of this document.




                                                              8
                                                          SUMMARY


Business Overview

The Bank is a specialist provider of secured finance to small- and medium-sized businesses (“SMEs”) in Bulgaria, with specific
lending programmes for financing SME companies in a variety of industries and companies in the tourism and construction
sectors. The Bank also provides mortgage loans to individuals, although this is not a primary focus of the Bank. The Bank lends
to its clients through its head office in Sofia and four other branches. Based on statistics published by the BNB, at 31 December
2006, the Bank was the 22nd largest bank in Bulgaria on the basis of total assets, the 10th largest in terms of total capital and had
the highest return on assets of all the Bulgarian banks included in the BNB’s statistics.

Strengths


Management believes the following key strengths enhance the Bank’s position:

•    the Bank focuses on offering customised products and services to SMEs;

•    the Bank competes in the quality of its services, speed, operational flexibility and innovation;

•    the Bank benefits from stable long-term funding;

•    the Bank benefits from a strong capital base;

•    the Bank benefits from considerable cost savings by operating though a limited network of branches;

•    the Bank benefits from firm shareholder support;

•    the Bank benefits from strong and stable management;

•    the Bank has a proven record for managing credit quality;

•    the Bank has a proven record of robust financial performance, including consistently high levels of profitability; and

•    the Bank is well placed to benefit from growth in Bulgarian GDP in general and growth in the SME sector in particular.

Strategy

The principal aspects of the Bank’s strategy are:
•    to continue to focus and specialize in lending to small- and medium-sized businesses;
•    to maintain sustained and profitable growth of its asset base; and
•    to maintain low operating costs.




                                                                 9
Summary Historical Financial and Operating Information

Unless otherwise stated, the summary information set out below has been derived from and should be read in conjunction with
the Bank’s historical audited balance sheets, statements of income and cash flows at and for the years ended 31 December 2004,
2005 and 2006, respectively, and the related notes thereto, included elsewhere in this document. The Annual Financial
Statement for 2006 is presented on consolidated basis.

                                                                                             Year ended 31 December
                                                                                         2006         2005         2004
                                                                                                     (€ 000)
Income Statement Data
Interest income                                                                         31,874        25,383      20,529
Interest expense                                                                        (7,495)      (6,912)      (6,092)

Net Interest Income                                                                      24,379       18,471       14,437

Fees and commission income, net                                                           1,830        2,345        1,306
Other non-interest income                                                                   729          834          236

Operating Income                                                                         26,938       21,650       15,979

Operating expenses                                                                      (5,259)      (4,828)      (4,055)
Provisions for impairment                                                               (2,152)      (3,098)      (3,523)

Income before taxation                                                                  19,527       13,724        8,401
Income taxes                                                                            (2,072)      (1,383)      (1,192)

Net income                                                                               17,455       12,341        7,209

Source: BACB




                                                                                                Year ended 31 December
Balance sheet data                                                                         2006         2005           2004
                                                                                                       (€ 000)
Assets
Cash and amounts due from banks                                                           43,795        39,764         30,372
Loans and advances to customers                                                          193,263       146,697        113,861
Investment securities                                                                      7,609         5,336          6,007
Other assets                                                                               1,363           805            443
Reputation                                                                                    80             -              -
Property, plant and equipment                                                              2,410         2,301          2,409
Total assets                                                                             248,520       194,903        153,092

Liabilities
Deposits from banks                                                                       15,342         9,975              -
Deposits from customers                                                                   54,098        33,786         25,531
Other liabilities                                                                          2,869         1,952          1,490
Other borrowed funds                                                                      31,804        55,258         59,029
Debt securities outstanding                                                               87,293        54,152         39,610
Total liabilities                                                                        191,406       155,123        125,660
Total shareholders’ equity                                                                57,114        39,780         27,432
Total liabilities and shareholders’ equity                                               248,520       194,903        153,092




                                                             10
                                                                                                                          At 31 December
                                                                                                                  2006         2005           2004

Key ratios
Return on average total assets (%)(1) ............................................................................... 7.9                    7.1      5.5
Return on average total equity (%)(2) .............................................................................. 36.0                  36.7      30.4
Earnings per share (€ per share)(3) ...........................................................................................1.38        0.98      0.57
Shares Outstanding ................................................................................................................. 12,624,725 12,624,725 12,624,725
Registered capital (BGN)......................................................................................................... 12,624,725 12,624,725 12,624,725
Declared dividend (BGN per share) (4).....................................................................................                 0.75         0         0
Cost/income ratio (%)(5)...........................................................................................................        19.3      22.9      24.8
Shareholders’ equity/Total assets (%)(6)...................................................................................                23.0      20.4      17.9
Tier 1 capital ratio(7) ................................................................................................................   18.5      25.6      23.9
Capital to risk-weighted assets ratio(7)......................................................................................             18.4      31.1      30.5

(1) Return on average total assets is calculated by dividing net income for the period by the average of total assets at the end of the period,
     and at the end of the previous period.
(2) Return on average total equity is calculated by dividing net income for the period by the average of total shareholders’ equity at the end
     of the period, and at the end of the previous period.
(3) Earnings per share is calculated by dividing net income for the period by the average number of shares outstanding during the period.
(4) The Supervisory Board has decided to propose to the Annual General Meeting of the Shareholders, to be held on April 18, 2007, to vote
a dividend of BGN 0.75 per share.
(5) Cost/income ratio is calculated by dividing operating expenses for the period by operating income for the period (excluding any losses or
     gains from foreign currency revaluation).
(6) Shareholder equity/Total assets is calculated by dividing total shareholders equity at the end of the period by total assets at the end of the
     period.
(7) The capital base used in the capital ratios as calculated does not include the 2006 net income. Assuming that 2006 net income, after
dividend of BGN 0.75 per share, is added to the Bank’s reserve account, the Tier 1 capital ratio and the capital to risk-weighted assets ratio as
of December 31, 2006 would have been 24.4% and 24.3% respectively.
The capital ratios are calculated according to the requirements of the Basel accord.

Source: BACB



Current trading and prospects

The Bulgarian banking sector is facing new challenges due to Bulgaria’s accession to the European Union, the increasing
competition and new regulatory environment, the implementation of the new capital standards BASEL II and the growing
demand for more sophisticated financial products. Management believes that the Bank is well prepared to face these
challenges. The Bank’s flexible management and swift decision-making will allow it to take advantage of its opportunities.
In particular, management believes that the Bank’s focused strategy and specialisation in serving its selected target market
and services, and its cost efficiency, prudent risk management and solid capitalisation will continue to allow for sustained
asset growth and profitability, resulting in growth in shareholder value.
The Bank’s objectives for the current financial year continue to be focused on sustaining growth in assets and earnings in
existing product lines, greater efficiency, and improving asset quality through enhanced risk management and successful
work-outs of non-performing loans.
As of 1 January 2007 BNB removed the limits on the Bank’s loan portfolio growth. BNB kept the restrictions for the last
quarter of 2006: any bank that has exceeded the prescribed limits for loan portfolio growth has to maintain additional reserves
for the period 4 February 2007 – 4 May 2007. Because of these restrictions the Bank maintains BGN 14 million in the form
of additional reserves for a period of three months – 4 February 2007 to 4 May 2007. The removal of the restrictions offers
better opportunities for lending growth for BACB and the other banks.

Since 31 December 2006 the Bank’s level of business activity and growth have continued to develop as expected.

Trading the BACB shares on the Bulgarian Stock Exchange


As of the date of this document all issued 12,624,725 ordinary, book-entry shares of the Bank with face value of BGN 1 each
are registered for trading on the BSE under a ticker: BACB

Trading on the stock exchange provides the opportunity to shareholders to trade on the Stock Exchange via investment
intermediary with the shares held.

The specific number of shares offered for sale on the stock exchange as well as the moment the shares are offered for sale

                                                                               11
depends on the wish of the shareholder. Shareholders and investors determine on their own the price at which they wish to sell
or buy shares of the Bank. The investment intermediaries who accept the buy and sell orders inform invertors about order
types, price levels of active orders and executed transactions as well as transaction costs (fees and commissions).

Risk Factors

Investing in Shares involves risks, including those relating to or arising from the regulatory regime to which the Bank is
subject, competition within the Bulgarian banking industry, dependence on key personnel and fluctuations in the market price
of the Shares. For more information on these and other risk factors which investors should consider, see “Risk Factors”.




                                                              12
                                                     RISK FACTORS


Before investing in the Shares, potential investors should carefully consider the following risk factors in addition to the other
information contained in this document. If any of the risks described below were to occur, it could have a material adverse
effect on the Bank’s business, results of operations or financial condition. If this were to lead to a decline in the trading price
of the Shares, investors may lose all or part of their investment. The risks and uncertainties described below are not the only
ones the Bank faces. In addition to the risks described below, the Bank is also subject to additional risks and uncertainties not
currently known or currently deemed immaterial. These risks may also have a material adverse effect on the Bank’s business,
results of operations or financial condition. Potential investors should read this document as a whole and not rely solely on
the information set out in this section.

Risks relating to the Bank


The Bank’s continued growth and success depend substantially on the health of the Bulgarian economy

Banking activity in Bulgaria is dependent on the overall level of economic activity in the country. As a result, the Bank’s
business, results of operations and financial condition largely depend on the condition of the Bulgarian economy, which in
turn affects loan growth, interest costs and customers’ ability to meet their obligations on time. Any negative change in one or
more macroeconomic factors, such as interest rates, inflation, wage levels, unemployment, foreign investment and
international trade, could have a material adverse effect on the Bank’s business, results of operations and financial condition.

Increased competition in the Bulgarian banking sector may reduce interest rate margins for market participants

Experience in other emerging markets suggests that as the banking sector in a particular country becomes more competitive,
the interest rate margins earned by banks in that country decline. If the Bulgarian banking sector becomes more competitive,
the Bank’s interest rate margins may fall. This could have a material adverse effect on the Bank’s business, results of
operation and financial condition.

A substantial percentage of the Bank’s customer base is particularly sensitive to adverse developments in the economy

Small- and medium-size companies are more likely to be negatively affected by adverse developments in the economy than
large companies. As a result, the Bank’s substantial lending to these types of companies causes the Bank to assume a relatively
higher degree of risk than if it were focused more heavily on lending to larger companies.

A substantial percentage of the Bank’s customer base is concentrated in a limited number of industry sectors
Customers involved in real estate construction and in the tourism sector accounted for 18.1% and 18.9% of the Bank’s total
loans and advances to customers at 31 December 2006 and each accounted for 17.0% at 31 December 2005.


The Bank has set various internal restrictions to limit the risk of over-exposure to a particular industry sector, including
limiting the Bank’s exposure to borrowers engaged in the tourism and hotel industry to 30% of the Bank’s loans and advances
to customers and its exposure to borrowers in any other single industry sector to 25% of its loans and advances to customers.
Notwithstanding these limits, a down-turn in any one or more of the key industry sectors in which the Bank’s customers are
involved may cause financial difficulties for the Bank’s customers in those sectors, increasing the risk of default, which may
have a material adverse effect on the Bank’s business, results of operations and financial condition.

A substantial percentage of the Bank’s loan portfolio is concentrated in a limited number of customers
At 31 December 2006 and 2005, the Bank’s largest 20 risk exposures (which includes exposures under loans, guarantees and
other instruments) comprised 30.2% and 25.3%, respectively, of the Bank’s total loans and advances to customers. A credit
exposure is the amount of the loans and advances to a single borrower or a related group of borrowers. Notwithstanding the
statuary limits for large exposures, there can be no assurance that Bank’s business, financial condition and results of
operations will not be adversely affected by a default by one or more of the Bank’s largest borrowers. In addition, this
concentration of the Bank’s loan portfolio in a limited number of customers means that the Bank’s business and financial
condition is largely dependant on the continuation and the increase of the Bank’s business with these large customers. If some
or all of these customers prepay their loans or refinance their loans with finance provided by the Bank’s competitors, it could
have a material adverse effect on the Bank’s business, results of operations and financial condition.

A substantial portion of the Bank’s loans are secured by property interests

More than 90% of the Bank’s total loans and advances to customers were secured by interests in Bulgarian real estate as at 31
December 2006. If the Bank were to experience a significant level of foreclosures, or there is a down-turn in the Bulgarian

                                                                13
real estate market, this could have a material adverse effect on the Bank’s business, results of operations and financial
condition.

At 31 December 2006 provisions for impairment of loans and advances to borrowers in the construction and tourism sector
comprised 14.6% and 6.0% respectively of the total provisions for impairment. As at 31 December 2005 those provisions
comprised 5.0% and 15.8% respectively.

Risks concerning borrower credit quality and general economic conditions are inherent in the Bank’s business

Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent
in a large part of the Bank’s business. Adverse changes in the credit quality of the Bank’s borrowers or a general deterioration
in Bulgarian, European or global economic conditions, or problems arising from systemic risks in the financial systems, could
reduce the recoverability and value of the Bank’s assets and require an increase in the Bank’s level of provisions for bad and
doubtful debts which could have a material adverse effect on the Bank’s business, results of operation and financial condition.

Failure to manage and monitor growth in the Bank’s loans and advances to customers adequately could have a material
adverse effect on the business

Loans and advances to customers by the Bank have increased significantly in recent years, growing, before provisions, by
30.8% in 2006 and 29.0% in 2005. This significant increase in credit exposure requires continued review by the Bank of the
quality of the credit and the adequacy of its provisioning levels, together with continued development of its risk management
strategies and systems. Failure to manage the growth of the Bank’s assets successfully or to develop and maintain the quality
of its assets could have a material adverse effect on the Bank’s business, results of operations and financial condition.

The Bank’s continued growth may be constrained by the BNB
Since 2004, the BNB has adopted certain measures aimed at restricting the growth of banks’ loan portfolios. In the BNB
increased the level of minimum required reserves to be maintained with the BNB by Bulgarian banks in respect of certain of
their liabilities by removing from the minimum reserve requirement the deductions for cash in vaults and in automated teller
machines and for liabilities with a maturity greater than two years. In 2005, the BNB introduced further minimum reserve
requirements for banks which experienced growth in their loan portfolios in excess of a specified rate. These restrictions were
cancelled by the BNB as of 1 January 2007.

In recent years loans and advances to customers by the Bank have increased significantly, growing, before provisions, by
30.8% in 2006 and 29.0% in 2005. In the event that loan portfolio growth of Bulgarian banks increases in the future or for
other reasons, BNB may introduce new restrictive measures and the Bank may be required to maintain additional reserves
with the BNB or the Bank may face other adverse consequences, which may result in an increased cost of funding and may
potentially have an adverse effect on the Bank’s net interest margin. There can be no assurance that the BNB will not
introduce further measures aimed at restricting loan portfolio growth in the future. Any further restrictions on growth of the
Bank’s lending portfolio, or restrictions on the introduction of stricter liquidity, reserves or foreign currency regulations could
have a material adverse effect on the Bank’s business, results of operations and financial condition.

Increased competition may adversely affect the Bank

Whilst there is currently no competitor that follows the same strategy as the Bank, the Bank competes with many Bulgarian
banks in lending to small- and medium-size companies and in lending to the construction and tourism sectors. Since 2002,
competition among banks in Bulgaria has increased significantly. The Bank believes that competition between banks in
Bulgaria is likely to increase, including in respect to lending to small- and medium-size companies, as the large foreign-
owned banks which already have operations in Bulgaria pursue aggressive growth strategies. In addition, competition may
increase if foreign banks, which currently do not operate in Bulgaria, enter the market. Increased competition may lead to,
amongst other things, increased prepayments by the Bank’s customers, loss of existing customers and a reduction in the
growth of the Bank’s loan portfolio. As a result, the Bank’s continued success in lending to small- and medium-size
companies will depend on its ability to remain competitive with other financial institutions. However, there can be no
assurance that increased competition will not adversely affect the Bank’s business, results of operations or financial condition.

The Bank faces a number of types of risk that could adversely affect it should its risk management policies not succeed

As with any bank, the Bank faces a number of types of risk that could adversely affect it. These include but are not limited to:
interest rate, liquidity, foreign exchange, credit, investment and operational risk. Although the Bank invests substantial time
and effort in its risk management strategies and systems, these strategies and systems may nevertheless fail in certain
circumstances, particularly when confronted with risks that the Bank did not identify correctly or in a timely fashion.
Furthermore, risk methodologies and techniques may not cover the entire spectrum of risks to which the Bank may be subject.
If any such risks materialize, the associated losses could be greater than the Bank may have anticipated which could have a
material adverse effect on the Bank’s business, results of operation and financial condition.

                                                                14
The interests of the Bank’s Controlling Shareholder, may conflict with the Bank’s interests, which could impede the
Bank’s development

As of the date of this document, the Controlling Shareholder holds 6,802,103 Shares, representing approximately 53.88% of
the Shares. As the Bank’s principal shareholder, it will be able to exercise substantial influence over all or substantially all
matters requiring approval by the Bank’s shareholders, including amending the Bank’s articles of association, appointing and
removing Directors and approving significant transactions other than transactions with the Controlling Shareholder or its
related parties. In addition, as the Bank has not entered into a non-compete agreement with the Controlling Shareholder, it
may expand its business lines or channels of distribution to compete with the Bank.

The Bank continues to have contractual and other business relationships with the Controlling Shareholder. Although the
management of the Bank expects that any future transactions and agreements will be on terms no less favourable to the Bank
than it could obtain in comparable contracts with unaffiliated third parties, conflicts of interest could arise between the Bank
and the Controlling Shareholder.

The Bank is a highly regulated entity and changes to applicable law or regulation, the interpretation or enforcement
of such law or regulation, or the failure to comply with such law or regulation could have a material adverse effect on
the Bank

The Bank is subject to a number of regulations designed to maintain the safety and soundness of banks, ensure their
compliance with economic and other obligations and limit their exposure to risk. These regulations include Bulgarian laws
and regulations, particularly those of the Bulgarian National Bank. These regulations may limit the Bank’s activities, and
changes in these regulations may increase the Bank’s cost of doing business. In addition, breach of regulatory guidelines
could expose the Bank to potential liabilities and sanctions, including, in extreme cases, loss of licence. Changes in these laws
and regulations may have a material adverse effect on the Bank’s business, results of operations and financial condition.

The Bank may need to raise additional capital in the future
The Bank’s capital requirements depend on numerous factors, including the growth of its balance sheet and earnings,
regulatory capital requirements, its credit ratings and potential acquisitions. The management of the Bank cannot accurately
predict the timing and amount of these requirements.

Notwithstanding that the Bank’s capital adequacy was above the minimum levels set by the Bulgarian National Bank at 31
December 2006, management intends to make use of securitization techniques to allow the Bank to grow its mortgage and
other loan assets while minimizing the incremental capital required to support these assets. Based on the Bank’s current
business plan and existing lines of business, the Bank will seek funds in the debt markets later in 2007. To the extent that the
Bank departs from its current business plan, such as through the development of additional products, the entry by the Bank
into new lines of business or the rapid growth of the Bank’s loan portfolio, or if the Bank fails to generate sufficient profit to
ensure consistent growth in equity through retained earnings, the Bank’s debt and equity capital requirements may be greater
than currently anticipated. Events outside the Bank’s control may also result in additional funding requirements, including the
requirement to comply with regulatory capital requirements.

Any additional equity financing may be dilutive to the Bank’s shareholders and debt or other forms of financing, if available,
may affect the Bank’s profitability and may involve restrictions on the Bank’s future financing and operating activities. In
addition, if adequate capital is not available, the Bank may be subject to increased regulatory supervision or even intervention,
and its business, operating results and financial condition could be adversely affected.

The Bank depends on experienced personnel and competition for such employees is intense
Certain members of the Bank’s current senior management team have been with the Bank since its incorporation in 1996 or
have been working for the BAEF (the Controlling Shareholder). Such persons are also heavily involved in the day-to-day
control and running of the business. The Bank’s continuing success depends, in part, on its ability to continue to retain and
motivate these individuals and other qualified and experienced banking and management personnel. Furthermore, to allow for
additional growth, the Bank must hire additional personnel on a regular basis. Competition in the Bulgarian labour market for
qualified operating, financial and technical personnel is intense due to the relatively small number of qualified personnel
available, and the Bank competes with other banks specifically, and other Bulgarian employers generally, to employ such
persons. The successful implementation of the Bank’s business plan will, in part, depend upon its ability to hire and retain such
personnel. Whilst the Bank has been successful to date in recruiting and retaining highly qualified personnel, if any key
members of management or certain other specialized staff become unwilling or unable to continue in their role, or if the Bank
is unable to attract, promote and retain other qualified personnel, it could have a material adverse effect on the Bank’s
business, results of operation and financial condition.

The Bank may not be able to motivate and retain its executive Director
The Bank’s future success depends in large part upon the continued service of key members of its senior management team.
                                                               15
In particular, the Executive directors of the Bank are critical to the overall management of the Bank as well as the
development of its culture and strategic direction. Following the Bank’s listing on the BSE and subsequent sale of shares by
the Controlling Shareholder, each of the Bank’s executive directors has received a payment from the Controlling Shareholder
under the BAEF 2001 Long-Term Equity Incentive Plan (the “BAEF Plan”) equal to his allocated pro rata interest in the
profit pool established under the BAEF Plan. Some of these payments are significant and there can be no assurance that, after
these payments are made, the Bank will be able to motivate, or retain the dedicated services of, those members of its senior
management who receive such payments. As the achievement of the Bank’s strategic and financial objectives is, in part,
dependent on the motivation and retention of its senior management, failure to motivate and retain such persons could have a
material adverse effect on the Bank’s business, results of operations and financial condition. For more information on the
BAEF Plan, see “General Information — Members of the Supervisory Board and Management Board”.

The Bank does not maintain any key-person life insurance policies
The Bank does not maintain any key-person life insurance policies and the loss of any of its senior management may have a
material adverse effect on the Bank’s business, results of operations and financial condition.

The Bank’s compliance systems might not be fully effective
The Bank’s ability to comply with all applicable laws and rules is largely dependent on the establishment and maintenance of
compliance, audit and reporting systems and procedures, as well as its ability to retain qualified compliance and other risk
management personnel. The management of the Bank cannot assure potential investors that these systems and procedures are
fully effective. The Bank is subject to extensive oversight by regulatory authorities, including regular examination activity. In
the case of actual or alleged non-compliance with regulations, the Bank could be subject to investigation and judicial or
administrative proceedings that may result in substantial penalties or civil lawsuits, including by customers for damages. Any
of these could have a material adverse effect on the Bank’s business, results of operations or financial condition.

The Bank depends on complex information technology systems
The Bank depends on sophisticated information technology systems, including its management information systems, to
conduct its operations and the failure, ineffectiveness or disruption of these systems could have a material adverse effect on
the Bank.

In February 2005, the Bank migrated to a new system which was integrated throughout the Bank’s operations during the
course of 2005. If these new management information systems fail to perform as anticipated, the Bank could experience
difficulties in conducting its operations or generating necessary financial and accounting information.

Information technology systems in general are vulnerable to a number of problems, such as computer virus infection,
malicious hacking, physical damage to vital information technology centres and software or hardware malfunctions. Any
failure or interruption or breach in security of these systems could result in failures or interruptions in customer relationship
management, risk management, general ledger, deposit, servicing and/or loan organisation systems. If the Bank’s information
technology systems were to fail, even for a short period of time, the Bank could be unable to serve some customers’ needs on
a timely basis and could thus lose their business. Likewise, a temporary shut down of the information systems could result in
extraordinary costs for information retrieval and verification. In addition, any failure to update and develop the existing
information systems as effectively as competitors do may result in a competitive disadvantage. Although the management of
the Bank believes that it has adequate security and continuity-of-business programmes and protocols in place, including
maintaining a fully equipped disaster recovery centre, no assurance can be given that these will be sufficient to prevent these
problems or to ensure that the Bank’s operations are not significantly disrupted as a consequence.
Any of these or other systems-related problems could have a material adverse effect on the Bank’s business, results or
operations or financial condition.

The Bank is substantially dependent on long-term funding sources
Unlike many other banks, a substantial portion of the Bank’s funding requirements are met through comparatively expensive,
long-term funding sources, including loans from the BAEF, its Controlling Shareholder, loans from international financial
institutions, loans from various European banks and by issuing bonds in the Bulgarian debt capital markets. The Bank only
has a limited branch network with which to accept deposits, and at 31 December 2006, only 28.3% and 8.1%, respectively, of
the Bank’s total non-equity funding was in the form of customer deposits and bank deposits. Whilst the Bank has been
successful to date in securing long-term funding on favourable terms from its Controlling Shareholder, from international
financial institutions or European banks or from the debt capital markets, there can be no assurance that the Bank will
continue to be able to do so. Failure to do so may result in the Bank’s liquidity and financial position being adversely affected,
and the Bank may be required to seek funding from more expensive sources or to expand its branch network to attract a higher
proportion of customer deposits, each of which could have a material adverse effect on the Bank’s business, results of
operations and financial condition.

                                                               16
Risks relating to the Shares


Risks relating to the Bulgarian securities market

There may be less information available for investors in the Bulgarian securities markets than is available on companies in
other securities markets.
There is a difference in the regulation and monitoring of the Bulgarian securities markets, and the activities of investors,
brokers and other participants, compared with markets in Western Europe and the United States. The Financial Supervision
Commission is responsible for disclosure and other regulatory standards for the Bulgarian securities markets. The Financial
Supervision Commission monitors compliance with laws, and issues regulations and guidelines on disclosure requirements,
insider trading and other matters. There may, however, be less publicly available information about Bulgarian companies than
is regularly made available by public companies in other securities markets, which could affect the market for the Shares.

The Bulgarian Stock Exchange is substantially smaller and less liquid than securities markets in certain other countries

The Bulgarian Stock Exchange is substantially smaller and less liquid than securities markets in certain other countries, such
as those in the United States or the United Kingdom. At 28 February 2007, equity securities representing 350 companies and a
market capitalisation of approximately BGN 18.5 billion were registered for trading on the Bulgarian Stock Exchange. In
February 2007, 40% of the transactions on the Bulgarian Stock Exchange have been executed with the shares of five
companies. During the same month, the average number of transactions per day was 1,970 number of transactions, compared
with 2,024 transactions on average daily basis in January.

There is no guarantee that the Shares, even though quoted on the Bulgarian Stock Exchange, will be actively traded, and if
they are not, this is likely to increase price volatility.

Substantial future sales of Shares could impact their market price
If a substantial number of the Shares are offered for sale, the trading price of the Shares may be depressed. Sales of additional
Shares on the market could adversely affect the market price of the Shares. As of the date of this document the Controlling
Shareholder holds 6,802,103 Shares, representing approximately 53.88% of the issued Shares. The rest of the Shares are held
by a considerable number of investors, which have acquired the Shares on the Bulgarian Stock Exchange market.
Sales of substantial amounts of Shares, or the expectation that such sales may occur could adversely affect the prevailing
market price of the Shares. These sales also may make it difficult for the Bank to issue equity securities in the future at a time
and at a price that the Bank deems appropriate.

The Bank may not pay cash dividends on the Shares
The Bank has never declared or paid any cash dividends on its ordinary shares although up to the date of this document the
Supervisory Board has offered the the General Meeting of the Shareholders, which will be held on 18 April 2007, to vote on
the payment of a cash dividend of BGN 0.75 per Share. Nevertheless, the General Meeting of the Shareholders may not vote
in favor of this decision or it may vote not to pay cash dividends in the future.

Risks relating to Bulgaria
Political Risks

Since 1989, Bulgaria has pursued a programme of political and economic structural reform designed to establish a free market
economy through the privatisation of state enterprises and deregulation of the economy. As with any transition economy,
there can be no assurance that such reforms will continue or that such reforms will achieve their intended aims.
Bulgaria was invited to join the North Atlantic Treaty Organisation (“NATO”) at the NATO summit in Prague on 22
November 2002. On 18 March 2004, the Bulgarian Parliament ratified the North Atlantic Treaty and Bulgaria was officially
recognised as a member of the alliance on 29 March 2004.
In 2004, Bulgaria completed negotiations to join the European Union (“EU”). The accession treaty was signed in Luxembourg
on 25 April 2005 and Bulgaria became a member of the EU on 1 January 2007. The current coalition government of Bulgaria
was formed by negotiation between the parliamentary parties on 16 August 2005, and is formally under the mandate of the
Movement for Rights and Freedoms party (the “MRF”). The governing coalition is one of the most fragmented in recent
history and was not finalised until almost two months after the election. The Prime Minister is Sergey Stanishev, the leader of
the Bulgarian Socialist Party (the “BSP”). The BSP is the main partner in the governing coalition and holds eight of the
seventeen ministries.
Bulgaria’s accession into the European Union was a major priority of the new government and to achieve this goal, it was
focusing on further reforms of Bulgaria’s judicial system, improving the functioning of Bulgarian markets, and fighting
corruption. The government’s ability to implement reforms will depend on the extent to which the members of the
government can continue to co-operate in promoting a common agenda. No assurance can be given that a change of
                                                           17
administration would not result in a significant and rapid change in the political and economic conditions in the country which
may have a material adverse effect on the Bank’s business, results of operations and financial condition.
The current Bulgarian political system is vulnerable to economic hardship, popular dissatisfaction with reform, social
instability and changes in government policies, any of which could have a material adverse effect on the Bank’s business,
results of operations and financial condition. The next scheduled presidential elections are due in the last quarter of 2011 and
the next parliamentary elections are due in 2009.

Social Risks
In past years, Bulgaria has seen significant labour and social unrest, as well as a high level of organised crime and corruption.
Although the political and social environment has generally improved since early 1997, such issues could have consequences,
such as increased support for a renewal of centralised authority and increased nationalism, with accompanying restrictions on
foreign involvement in the Bulgarian economy.

Economic Risks
Until 1989, the Bulgarian economy was administered by the central authorities. Following the end of Communist rule in 1989,
the government implemented policies of economic reform and stabilisation. These policies involved liberalising prices,
reducing defence expenditure and subsidies for state-owned enterprises, privatising state-owned enterprises, reforming the tax
and bankruptcy systems, introducing legal structures designed to facilitate private, market-based activities, stabilising the
currency and encouraging foreign trade and investment. The scope, speed and nature of any future economic reforms remain
uncertain. Certain measures intended to improve the country’s economic condition, such as increases in utility prices to
market level (a measure included in Bulgaria’s agreement with the International Monetary Fund (the “IMF”)) and the
imposition of indirect taxes, have been and are expected to remain unpopular. Accordingly, levels of popular and political
support for the government have tended to vary.

Continued economic reform will also depend in part on presidential support for the reform programme. The current President
is a member of the Coalition for Bulgaria, in which the Bulgarian Socialist Party plays a leading role.

Like other transition countries, Bulgaria runs trade and current account deficits. Bulgaria is an importer of crude oil and an
exporter of electricity; accordingly, increases in oil prices reduce the competitiveness of the Bulgarian economy, and
dependence on oil imports subjects the economy to additional US dollar currency risk. Privatisation revenues, an important
source of foreign direct investment, are expected to decrease upon completion of the privatisation programme.

In the period from 1992 to 1997, the problems faced by banks in Bulgaria included low capitalisation, bad debts, a shortage of
qualified bank personnel, problems in the feasibility and credibility of policies and the insufficient ability of the BNB to
enforce regulations. The problems in the banking sector culminated in massive withdrawals of deposits from banks in 1996.
During the banking crisis of 1996-1997, approximately one-third of all Bulgarian banks were found to be insolvent by the BNB
and were subsequently closed. However, following this crisis, considerable progress has been made in strengthening the
Bulgarian banking system.

Many businesses in Bulgaria have a limited operating history in free market conditions. Accordingly, when compared to
Western companies, such businesses are characterised by a lack of management experience in responding to the market, and
limited capital resources with which to develop their operations. In addition, Bulgaria has a limited infrastructure to support a
market system. In recent years, there has been some development of Bulgaria’s communications and financial systems, but
more work is required to bring these systems to levels prevalent in most other EU countries. Since 1989, Bulgaria has
generally experienced limited liquidity of domestic savings that can result in businesses experiencing difficulty in obtaining
working capital facilities and have consequences for the domestic banking system.

Legal Risks and Enforcement of Judgments
Bulgaria’s legal system is in the process of transformation, matching that of the developing market economy of Bulgaria. The
practice of the judiciary remains problematic and parties seeking to rely on the Bulgarian courts for effective redress in respect
of a breach of law or regulation, or in an ownership dispute, may find that it is difficult to obtain. The majority of Bulgarian
law has been brought in line with that of the EU member states, although Bulgarian law continues to evolve, occasionally in
ways that do not always coincide with market developments, resulting in ambiguities and inconsistencies and ultimately in
investment risk that would not be a consideration when investing in a bank located in a jurisdiction with a more developed
legal system. However, civil and banking legislation has become relatively comprehensive and complete in the last five years.
The adoption of further new laws and the expected introduction of new legislation in areas such as corporate and securities
laws, aimed at bringing Bulgarian laws even closer in line with EU laws and regulations as part of the process of Bulgaria’s
accession to the EU, is expected to contribute to the more consistent development of civil legislation in the near future.

There are, as a result, two major legal threats to the development of the legal system in Bulgaria: (i) the possible failure of the
development of the Bulgarian legal system to keep pace with rapidly developing commercial practices may create
uncertainties; and (ii) flaws in the legal infrastructure may result in doubt arising in relation to corporate actions, compliance

                                                                18
and other matters, performance of which may be taken for granted in other jurisdictions.

Exchange Rates and the Currency Board
Since 1997, a currency board arrangement has been in place under which the Bulgarian currency, the Lev, has been pegged,
initially to the Deutsche mark and subsequently, on creation of the Euro zone, to the Euro. Maintenance of the currency board
arrangement is considered to be a critical element of economic reform in Bulgaria and requires continuous political support
for non-inflationary policies. The rigidity of the currency board which rules out both devaluation and independent monetary
policy may not be responsive to the future needs of the Bulgarian economy. It is widely expected that the currency board
arrangement will be kept until Bulgaria joins the Euro zone in 2009, but there can be no assurance that this will be achieved.
Any significant devaluation of the Lev could have a material adverse effect on the Bank’s customers and, as a result, on the
Bank’s business, results of operations and financial condition.

Taxation

Taxes payable by Bulgarian companies include corporate profit tax, property tax and other municipal taxes, value-added tax
(“VAT”), excise duties, and export and import duties. The taxation system in Bulgaria is still developing, which may result in
inconsistent enforcement at both state and municipal levels.
Investors should also be aware that the value of an investment in the Shares may be adversely affected by changes in, and the
application and interpretation of, current tax laws and regulations.

Bulgaria’s accession to the European Union may result in increased competition and additional and more onerous
regulations

Bulgaria is a member of the European Union since 1 January 2007. The initial association agreement was signed with the
European Union in April 1992 and the Europe Agreement was signed in 1995. Bulgaria concluded negotiations on its
accession to the European Union on 15 June 2004, and signed the Accession Treaty on 25 April 2005.
Accession to the European Union could result in increased competition for the Bank as new competitors may enter the market
in Bulgaria. It could also result in downward pressure on the Bank’s margins and revenues as competition increases, and
compliance with European Union competition laws and other regulations is required and enforced. Any changes in the law
could require the Bank to comply with additional and more onerous regulations and could have a material adverse effect on
the Bank’s business, results of operations and financial condition.

General Risks


Emerging markets
Investors in emerging markets such as Bulgaria should be aware that these markets are subject to greater risks than more
developed markets, including in some cases significant legal, economic and political risks. In addition, adverse political or
economic developments in other countries could have a significant negative impact on, among other things, Bulgaria’s GDP,
foreign trade and economy in general. Investors should exercise particular care in evaluating the risks involved and must
decide for themselves whether, in the light of those risks, an investment is appropriate. Generally, investment in emerging
markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved. Investors
should also note that a feature of emerging markets is that they are subject to rapid change and the information contained in
this document may become outdated relatively quickly.




                                                             19
                                     DIVIDENDS AND DIVIDEND POLICY


Since its formation, the Bank has adopted a policy of retaining earnings rather than paying dividends or making distributions
to shareholders. Partly as a result of this policy, the Bank has historically maintained a capital position well in excess of the
requirements of the BNB and the international framework adopted by the Basel Committee on Banking Regulations and
Supervisory Practice for capital measurement and capital standards of banking institutions (the “Basel Accord”). The
combination of retaining earnings and maintaining a strong capital position has been instrumental in allowing the Bank to
attract increasing amounts of funds on ever more favourable terms as the Bank’s creditors and international rating agencies
have recognised that this provides a level of security consistent with the Bank’s risk profile as a specialist provider of finance
to small- and medium-sized businesses in Bulgaria.

The Bank constantly analyses the alternatives for efficient use of its capital and considers distributing excess capital to
shareholders through payment of a dividend and/or through the repurchase of the Bank’s Shares in the open market in order to
maximize the profit for its shareholders.

Due to the strong financial results for 2006 and to the shareholders’ interests the Supervisory Board proposed to the General
Meeting of the Shareholders, convened for 18 April 2007, to vote on the distribution of BACB profit for 2006 and the
payment of dividends as follows:



“The audited unconsolidated financial result /net profit/ of BACB for 2006 in the amount of BGN 33,685,750.36 (BGN Thirty
Three Million Six Hundred and Eighty Five Thousand Seven Hundred and Fifty and 36/100) shall be distributed as follows:

(a) BGN 24,217,206.61 (Twenty Four Million Two Hundred and Seventeen Thousand Two Hundred and Six and 61/100)
shall be allocated to the BACB Reserve Fund; and

(b) BGN 9,468,543.75 /Nine Million Four Hundred and Sixty Eight Thousand Five Hundred and Forty Three and 75/100)
shall be used for payment of dividends to shareholders which pursuant to article 115b of POSA shall be entitled to receive
dividends. The gross dividend per share is BGN 0.75 /zero point seventy five/. Pursuant to article 115b of POSA dividends
shall receive shareholders registered as such on the ex-divident date – 14 days after the date the General Meeting of the
shareholders approved the annual financial statement and decided on distribution of the net profit.”

If the General Meeting of the Shareholders decides on distribution of the net profit as per the above proposal this shall lead to
the first dividend payment in the history of BACB. The amount meant for distribution shall not limit the future growth of the
Bank and in the meantime shall provide current income to the shareholders.




                                                               20
                                               BUSINESS OVERVIEW


Overview

The Bank is a specialist provider of secured finance to small- and medium-sized businesses in Bulgaria, with specific lending
programmes for financing SME companies in a variety of industries, and companies in the tourism and construction sectors.
The Bank also provides mortgage loans to individuals, although this is not a primary focus of the Bank. The Bank lends to its
clients through its head office in Sofia and four other branches. Based on statistics published by the BNB, at 31 December
2006, the Bank was the 22nd largest bank in Bulgaria on the basis of total assets, the 10th largest in terms of total capital and
had the highest return on assets of all the Bulgarian banks included in the BNB’s statistics.

Strengths

Management believes the following key strengths enhance the Bank’s position:

The Bank focuses on offering customised products and services to its target market
The Bank’s primary focus is on offering customised loan products to small- and medium-sized companies in a variety of
industries in Bulgaria. The Bank has specific lending programmes for firms in the tourism and construction sectors. Loans are
often highly tailored to a particular borrower’s needs and credit is extended based on an in-depth understanding of the client
and its business, rather than relying on standardised credit scoring criteria. The Bank also offers a limited range of general
banking services to these customers, including accepting deposits, offering payment services and issuing letters of credit and
guarantees. The Bank does not target large corporate customers or the retail market, and does not offer retail products such as
credit cards, personal loans or motor vehicle loans.


The Bank competes in the quality of its services, speed, operational flexibility and innovation
The Bank faces competition in its core target market from large domestic and foreign-owned banks. In serving this market,
the Bank benefits from a streamlined operational and management structure which permits the operational flexibility and swift
decision-making that is often required by small- and medium-sized businesses. The Bank does not target large, established
corporate clients or retail customers as competition for these customers is intense.


The Bank benefits from stable long-term funding
The Bank’s funding comes mostly from long-term bilateral loans from international financial institutions, syndicated loans
from European banks and from bonds issued in the Bulgarian debt capital markets. Although these funding sources can carry
a higher interest rate than customer deposits, the spread between the Bank’s funding costs and those of its competitors who
rely more on customer deposits for funding has narrowed as a result of the sustained stability of the Bulgarian economy and the
resulting improvement of the government’s and the Bank’s credit ratings. In addition, the Bank’s emphasis on long-term
funding permits the Bank to make long-term loans to its customers. The Bank is also not as exposed to the liquidity risks
associated with funding from customer deposits, which can typically be withdrawn on demand or on a short-term basis.


The Bank benefits from a strong capital base
As a result of the Bank’s high profitability and its policy of retaining earnings rather than paying dividends or making
distributions to shareholders, the Bank benefits from a strong capital base which considerably exceeds the minimum capital
ratios required by the BNB or the Basel Accord. At 31 December 2006, the Bank’s total capital ratio and Tier 1 capital ratio
were 18.4% and 18.5%, respectively, compared to an average of 15.2% and 12.7% for the Bulgarian banking sector (according
to statistics published by the BNB at 30 September 2006). The Bank’s strong capital base provides protection against some of
the risks associated with being a specialist lender to small- and medium-sized businesses, which are often perceived to present
a higher credit risk, and provides the Bank with a strong platform for continuing to grow its asset base in the future.


The Bank benefits from considerable cost savings by operating through a limited network of branches
Since the Bank does not compete with other banks in Bulgaria for retail customers, it has chosen to operate through a limited
number of branches rather than a large and expensive network of branches. The cost savings associated with a limited branch
network permit the Bank to offset, at least in part, the higher interest costs associated with its wholesale funding.




                                                               21
The Bank benefits from firm shareholder support
The controlling shareholder in the Bank is the BAEF, a US corporation established pursuant to the United States Support for
East European Democracy Act of 1989, the primary aim of which is to encourage entrepreneurialism and to promote
development in the former communist countries of Central and Eastern Europe. Historically, the BAEF has provided, and
continues to provide, long-term funding to the Bank. For more information, see “Principal Shareholders and Controlling
Shareholder — Bulgarian American Enterprise Fund”.


The Bank benefits from strong and stable management
Certain members of the Bank’s management have been with the Bank since its incorporation in 1996 and worked for the BAEF
prior to that date. Leveraging off this extensive experience in lending to small- and medium-sized business in Bulgaria, the
Bank’s management has a proven record of delivering profitable growth. The Bank believes that the experience and depth of
expertise of the Bank’s management team has been a key factor in achieving this growth.


The Bank has a proven record for managing credit quality
As a long-term participant in the Bulgarian banking sector, the Bank believes it has demonstrated its ability to manage the
credit quality of its assets effectively, especially the credit quality of assets relating to small- and medium-sized businesses,
which are perceived to have a higher risk than assets relating to large companies. In each of the past three years, the total
amount of loans written off by the Bank was less than 1% of its total loan portfolio.


The Bank has a proven record of robust financial performance, including consistently high levels of profitability
Over the past five years, the financial performance of the Bank has been strong and the Bank has generated high levels of
profit on a consistent basis. During the three years ended 31 December 2006, the Bank achieved a compound annual growth in
net income of 52.5%. In 2006, 2005 and 2004, respectively, the Bank’s return on average assets was 7.9%, 7.1% and 5.5%,
and its return on average equity was 36.0%, 36.7% and 30.4%. Based on statistics published by the BNB in each of the last
three years, the Bank had the highest return on assets of all Bulgarian banks included in the BNB statistics.


The Bank is well placed to benefit from growth in Bulgarian GDP in general and growth in the SME sector in particular
Since 1998, Bulgaria’s gross domestic product has grown steadily, mainly as a result of increased consumer demand,
domestic and foreign direct investments, and increased exports. Real gross domestic product increased by 5.6%, 4.0% and
6.5% in 2004, 2005 and 2006 respectively. Small- and medium-sized businesses played an important part in this growth. In
2004, businesses with no more than 250 employees accounted for approximately 99.3% of the total number of non-financial
businesses; approximately 36.6% of all employment, 72.7% of turnover and 58.4% of the gross value added (Source: Center
for Economic Development, Annual Report on Small- and Medium-sized Businesses in Bulgaria for 2006). As the Bank is a
specialist provider of finance to small- and medium-sized businesses, it is well placed to benefit from continued growth in the
Bulgarian economy and in the small- and medium-sized business sector in particular.

Strategy

The Bank’s strategy is to be a highly profitable specialist bank, providing secured loans to small- and medium-sized
businesses. The Bank does not intend to compete with other commercial banks in Bulgaria by offering a comprehensive range
of retail banking products or by targeting large corporate clients. The Bank’s funding strategy, which is designed around the
longer-term funding requirements of its target markets, is to raise wholesale funds from domestic and foreign debt capital
markets and international banks. As a result, the Bank does not plan to develop a large network of branches as many of its
larger competitors have done. Accordingly, the Bank does not actively seek deposits from its clients and it does not intend to
rely on deposits for funding its growth. Although the Bank accepts deposits and selectively offers other commercial banking
services to its core customers, the Bank does not actively promote these services outside its target customer base.

In addition, the Bank focuses on maximising the efficiency of its operations so that it can compete and grow without taking on
excessive fixed costs. One example is that the Bank employs a network of sales agents (known as “Mobile Lending
Consultants”), who originate loans in approximately ten cities outside of the Bank’s existing branch system.




                                                               22
In pursuit of its strategy, the Bank seeks to achieve the following:

To maintain sustained and profitable growth of its asset base
The Bank intends to maintain its focus on achieving sustained and profitable asset growth through managed growth of its
existing operations rather than creating an extensive branch network. To continue to achieve profitable growth, the Bank
intends to continue to develop its core market of small- and medium-sized businesses by, among other things, establishing new
structured products aimed at that market. In addition, the Bank is considering whether to expand the range of services it offers
to its target customers by acquiring or developing a leasing business in Bulgaria and/or a non-bank financial institution.

To maintain low operating costs
As the Bank focuses on its continued growth, the Bank’s management continues to maintain a strong emphasis on cost
control. The Bank’s operating costs as a percentage of its operating income over the last three years have decreased from
24.8% in 2004 to 22.9% in 2005 and 19.3% in 2006.

The Bank does not actively seek retail customers and its liquidity is only partially dependent on short-term customer deposits.
As a result, the Bank benefits from considerable cost savings by operating only a limited branch network of five branches in
Bulgaria. The Bank believes that these cost savings compensate, at least in part, for the higher interest rates payable on its
long term funding. The Bank also employs a network of Mobile Lending Consultants who originate mortgage loans and loans
to small- and medium-sized businesses. The Bank intends to expand its network of Mobile Lending Consultants in 2007 and
2008 with a view to increasing loan origination capacity without increasing the fixed costs associated with expanding its
branch network.

History


The Bank was incorporated in 1996 by the BAEF, a US corporation established pursuant to the United States Support for East
European Democracy Act of 1989 (the “SEED Act”), the primary aim of which is to encourage entrepreneurialism and
promote development in Bulgaria and the other former communist countries of Central and Eastern Europe. Under the SEED
Act, the BAEF was granted $57.8 million to invest in Bulgaria for the purposes of promoting the development of the private
sector by supporting small- and medium-sized businesses in different sectors of the economy. The Bank is currently the
BAEF’s largest asset. For more information on the BAEF, see “Principal Shareholders and Controlling Shareholder —
Bulgarian American Enterprise Fund”.

The BAEF began its commercial operations in 1992 by providing debt and equity financing to developing businesses in
Bulgaria. Each investment was tailored to the particular needs of the applicant’s business by a small team of investment
officers, who would undertake a thorough review of the applicant’s business, including meetings with the managers and site
visits, before funds were disbursed or invested.

Due to restrictions on the provision of cross-border finance into Bulgaria, in 1996 the BAEF decided to incorporate a bank
and obtain a limited banking licence from the BNB. The Bank’s limited licence restricted the aggregate amount of all loans
made by the Bank to the amount of the debt and equity funds provided by its shareholders. The Bank’s first two lending
programmes were targeted at small- and medium-sized businesses and at the tourism sector. In 1998, the Bank was granted a
substantially full banking licence. In 1999, the Bank created its third lending programme, providing mortgage loans to
individuals. In 2002, the Bank established its fourth lending programme, providing construction loans to residential property
developers. In that year, the Bank also became an investment intermediary and a member of the Central Depository and the
Bulgarian Stock Exchange.

Important developments


Since the Bank’s incorporation no mergers or transformations, transfers or pledges on the Bank and no claims for insolvency
procedures have been executed. For the last three years the Bank has not carried out any acquisitions (except for the purchase
of Kapital Direct EAD in 2006) nor has it made significant expenses other than those made in the due course of its business
nor has it made essential changes to the services it provides.




                                                                 23
Branch Network and Mobile Lending

Branch Network

The Bank serves its clients through five branches. Its head office is in Sofia, and it maintains branches in the cities of Varna,
Plovdiv, Bourgas, and Stara Zagora, which are the next four largest cities in Bulgaria.
The locations of the Bank’s five branches are indicated below.




               Source—BACB

The Bank’s larger loans to medium-sized businesses and to the tourism and construction sectors are conducted through the
head office in Sofia and the offices in the country. The branches also provide standard banking services the Bank’s clients
outside Sofia by taking deposits, making payments and performing other transactions and account administration. Although
the Bank does not have any international branches, it has relationships with several correspondent international banks through
which it provides international banking services.

Mobile Lending

To increase loan origination capacity without expanding its branch network, the Bank created the Mobile Lending Group in
2004. This group is made up of a network of Mobile Lending Consultants who operate in 15 cities, including the cities in
which the Bank’s branches are located. These consultants originate business mortgage loans with the assistance and under the
supervision of dedicated personnel within the head office of the Bank. Loan proposals and collateral valuations are reviewed
internally by the Bank’s employees (or by external third party collateral appraisers) according to the lending procedures and
underwriting criteria of the Bank. The Mobile Lending Consultants are often professional advisers or business consultants and
are remunerated by the Bank based on the volume and quality of the loans which they originate.

Banking Activities

The Bank’s core business is providing secured finance which till the end of 2006 was carried out under four principal lending
programmes:
     •    the SME Lending Programme, under which the Bank makes loans to small- and medium-sized businesses;
     •    the Tourism Lending Programme, under which the Bank makes investment loans to the tourism sector;
     •    the Construction Lending Programme, under which the Bank makes construction loans for residential and
          commercial property developers; and
     •    the Mortgage Lending Programme, under which the Bank makes mortgage loans to individuals.
Since the beginning of 2007 with a view to improve the flexibility and swiftness of decision making, and in order to reflect
the increasing focus of the Bank on business lending, the Mortgage Lending Programme was decentralized and the employees
                                                             24
have been relocated to the other lending programmes.
The Bank also provides a limited range of general banking services to its clients.

Lending Business

Whilst the Bank organises its lending business in a few lending programmes, it customises each loan it makes to the
borrower’s individual business circumstances. Accordingly, the Bank is able to tailor pricing, repayment schedules and other
terms to the particular circumstances of each borrower. As such the Bank only offers a limited number of standardised
products and provides primarily custom-made loans to its customers.

SME Lending Programme
Under the SME Lending Programme, the Bank makes medium- and long-term investment loans to small- and medium-sized
businesses in a variety of industries. The Bank particularly targets small- and medium-sized businesses that have highly
specialised financing needs and require more flexible funding than most mainstream banks would provide. The majority of
loans made under this programme are to businesses that have existing operations, although loans are also made to start-up
businesses in exceptional circumstances. The amount of principal loaned is generally between €300,000 and €1,500,000 (but
on occasion, as much as €5 million or more), typically repayable over a term of five to eight years. However, the size, pricing,
term and amortisation schedule of each loan is customised to meet the circumstances of the borrower and its projected cash
flows. Each loan typically finances a specific expansion project undertaken by the borrower, such as acquiring equipment or
property. The Bank also makes some working capital loans. Security is usually taken over the assets of the borrower and its
shareholders, and personal guarantees are required. The Bank provides unsecured loans only in exceptional circumstances.

Tourism Lending Programme
Under the Tourism Lending Programme, the Bank makes loans to companies in the tourism and entertainment industries. The
majority of these loans are for the construction, refurbishment or, occasionally, the acquisition of hotels. Loans are also made
for the purchase of green-field sites on which a hotel or other asset is to be built. Under this lending programme, the Bank
seeks to agree repayment schedules which reflect the hotel’s projected cash flows. Loans in the programme are typically of up
to 70% of the market value of the asset secured and are repaid over a term of between six and ten years. Loans are secured by
mortgages over the financed hotel and land, and security is often taken over other assets of the borrower and its shareholders.

Construction Lending Programme
Under the Construction Lending Programme, the Bank lends to experienced developers of residential apartment complexes
and, on a selective basis, developers of commercial premises. The Bank typically finances up to 75% of the cost of any given
project. Construction loans are disbursed in stages as construction progresses and are structured to meet a funding schedule
for paying building and other contractors as various project milestones are reached. Each construction loan is secured by a
mortgage over the financed property and security is often granted over other assets of the borrower and its shareholders.

Mortgage Lending Programme
The Mortgage Lending Programme, which was established in 1999, was initially intended to finance the purchase of residential
properties by private individuals. However, as the real estate market boomed in 2002, many Bulgarian banks entered the
residential mortgage market, resulting in intense competition.

Whilst the Bank continues to provide mortgage loans to individuals, including loans to finance the purchase of apartments
built with funds provided under the Construction Lending Programme, the primary focus of the Bank’s lending business is its
SME Lending Programme, Tourism Lending Programme, and its Construction Lending Programme, rather than its Mortgage
Lending Programme. As a result in the beginning of 2007 with a view to improve the flexibility and swiftness of decision
making, and in order to reflect the increasing focus of the Bank on business lending the Mortgage Lending Programme was
decentralized and the employees have been relocated to the other lending programmes

Deposit-taking

The Bank accepts deposits from its clients but does not actively pursue deposits as a major funding source or “cross-sell” its
deposit-taking services. The bank principally offers two types of deposit: current accounts (or “demand deposits”) and fixed-
term deposit accounts (or “time deposits”). Either type of account can be denominated in Leva, Euros, or US dollars. For time
deposits, clients must deposit a minimum of BGN 2,000, €2,000 or $2,000. The majority of deposit accounts are demand
deposits although the total value of time deposits is significantly higher. Demand deposits bear a low interest rate and may be
withdrawn at any time. Time deposits are offered for fixed terms at higher interest rates. Notwithstanding the fixed term,
under current Bulgarian law, time deposits may be withdrawn at any time, but if this occurs before maturity, the interest rate is
reduced. For certain large deposits, the Bank’s treasury department negotiates rates on a case-by-case basis and offers
                                                               25
customised deposit terms. There are currently no legislative restrictions on the holding of foreign currency in Bulgaria. At 31
December 2006, the Bank had 1,175 active customer time deposit accounts (holding a total of €37.7 million in deposits) and
6,992 demand deposit accounts (holding a total of €16.4 million in deposits). At the same date, 97% of the Bank’s time deposit
accounts and 71% of its demand deposit accounts were opened by retail customers.


Other Banking Activities

In response to requests from borrowers for further banking services, the Bank also provides a limited range of general banking
services including:
     •    payment services: making domestic and international payments through international correspondent banks;
     •    documentary credit services: issuing guarantees and letters of credit;
     •    foreign exchange transactions: entering into spot and forward foreign exchange transactions for clients. The Bank
          does not take speculative foreign exchange positions and generally keeps its client-driven open positions within set
          limits. The Bank generally closes its client-driven open positions at the end of each day; and
     •    brokerage services: the Bank is a member of the BSE and the Bulgarian securities clearing organisation. As such,
          the Bank offers standard brokerage services to its clients but currently does not actively market this capability.
These non-core operations are currently viewed by the Bank as ancillary services.

Management Structure

The following chart sets out the Bank’s internal management structure:



                                                       SUPERVISORY BOARD
                                     AUDIT COMMITTEE                                     CONSULTATIVE COMMITTEE

                                                                                             INTERNAL AUDITOR

                                                         MANAGEMENT BOARD


                                                       CHIEF EXECUTIVE OFFICER



                     EXECUTIVE DIRECTOR                                CHIEF OPERATING OFFICER                     EXECUTIVE DIRECTOR



                    LENDING DEPARTMENT                              CUSTOMER OPERATIONS
                                                                                                                         TREASURY

                                                                          FRONT OFFICE
                                                                                                                   INVESTORS RELATIONS

                                                                         TELLER DESK
                                                                                                                           LEGAL
                        APPRAISERS
                                                                          BACK OFFICE

                                                                                                                  STRATEGIC PLANNING and
                                                                     LOAN ADMINISTRATION                           STRUCTURED FINANCIAL
                                                                                                                        PRODUCTS
                   CREDIT RISK MANAGEMENT
                                                                               HR
                                                                                                                        WORKOUTS AND
                                                                                                                        FORCLOSURES
                                                                        ADVERTISING & PR

                                                                                                                   IT
                                                                 CREDIT PROCESS DEPARTMENT

                               ACCOUNTING                                                                GENERAL ADMINISTRATION
                                                                                                             AND SECURITY




Source—BACB
The activities of the major departments are described below.

Lending Department
The Lending Department is responsible for the Bank’s lending programmes, namely the SME Lending Programme, Tourism
Lending Programme, and the Construction Lending Programme. The department contains a separate team for each
programme. Each team is responsible for managing all aspects of the lending process, including generating new business.
Since the beginning of 2007 with a view to improve the flexibility and swiftness of decision making, and in order to reflect
the increasing focus of the Bank on business lending the Mortgage Lending Programme was decentralized and the employees
                                                                  26
have been relocated to the other lending programmes.

Credit Risk Management Department
This department carries out an independent review of certain loan proposals before they are submitted to the respective credit
committee. This is a discrete step in the loan approval process, and is only required for loans in excess of certain materiality
thresholds, depending on the lending programme under which the loan is to be made. For more information, see “Risk
Management, Internal Controls.” The department is also responsible for updating, modifying and monitoring the Bank’s
lending policies and procedures.

Credit Process Department
The Credit Process Department is located at the Bank’s head office in Sofia. The department reports to the Chief Operating
Officer and is responsible for preparing loan documentation /together with the Legal Department/, processing disbursements
and arranging for the safekeeping of original documentation. When processing a disbursement, the Credit Process Department
checks that all documentation is in place and is properly signed and that all internal procedures have been complied with. The
Credit Process Department also verifies that any drawdown conditions have been satisfied, any security has been registered if
necessary and any required insurance policies are in place. Once this is complete, the Head of the Credit Process Department
and an Executive Director both sign a funding request which is then implemented by the Loan Administration Department.
The Credit Process Department also ensures that all original documents are correctly categorised and archived.

Loan Administration Department
The Loan Administration Department is responsible for the day-to-day book-keeping and transaction processing of the loan
portfolio after loan funds have been authorised for disbursement. Its role includes making the appropriate accounting entries
and disbursing funds, and performing the ongoing administration of borrowers’ accounts. This includes such activities as
producing periodic statements and notifying borrowers of the repayments due each period. The Loan Administration
Department also generates reports on the Bank’s loan portfolio for analysis by management.

Operations Department
The Operations Department processes transactions on behalf of clients. It processes transactions on current accounts, deposit
accounts, domestic and international payments, cash and foreign exchange operations, documentary operations and securities
transfers. The Operations Department employs customer service specialists and cashiers in each of the Bank’s head office and
four branches and a team of back-office staff and other specialists based at the head office in Sofia. The execution of
international payments and securities transfers is processed through head office only. The Operations Department is headed
by an Operations Manager who reports to the Chief Operating Officer, who reports in turn to the Chief Executive Officer. The
Operations Department employed 24 people at 31 December 2006.

Treasury Department
The Treasury Department is responsible for raising funds for the Bank and managing the Bank’s liquidity within the limits set by
its Asset and Liability Management Committee (“ALCO”). Treasury also manages the foreign exchange, interest rate and
securities positions of the Bank, and controls the foreign exchange, brokerage and other services offered by the Bank to its
clients. Providing these services to clients generated revenue of approximately €0.43 million in 2006 compared to €0.27 million
in 2005. The Treasury is headed by the Treasurer, who reports to an Executive Director.

Internal Audit Department
In compliance with Bulgarian regulations and the Bank’s Internal Audit Charter, the Internal Audit Department periodically
reviews the adequacy and effectiveness of the Bank’s internal control systems, the application and effectiveness of its risk
management procedures, the accuracy and the reliability of its accounting records and financial reports, and the Bank’s
compliance systems. Under Bulgarian law, the appointment of the head of Internal Audit requires the approval of the Bank’s
shareholders in general meeting. The Internal Audit Department reports directly to the Supervisory Board and the General
Meeting of the Shareholders. In addition, the internal audit department prepares an annual audit report and quarterly audit
report. These reports are circulated to the Heads of Departments, the Supervisory Board and the Management Board.

Internal Committees
The Bank has established a number of committees to oversee certain parts of its operations. Some of these committees are
described below.

Credit Committee
As the Bank’s credit approval process is centralised, credit committees in Sofia are responsible for approving new loans and
resolving problem loans. There are no discretionary lending limits: every loan made by the Bank must be approved by a credit
committee. Under the Bank’s credit approval policies, the composition of the credit committee depends on the lending department
which is processing the loan. Increasing levels of authority within the Bank are required depending on the amount of credit sought,
                                                                  27
with the thresholds applying as if the amount of credit sought by a single borrower is aggregated with those of any affiliated
borrowers. For more information on these thresholds, see “Risk Management, Internal Controls”. As a credit committee is formed
for every loan, the frequency of credit committee meetings depends on the Bank’s deal flow. Generally, a credit committee meets
at least once a week.

Loan Loss Reserve Committee
The Bank’s Loan Loss Reserve Committee monitors and classifies problem loans by reference to the BNB’s classifications
and international standards and sets aside appropriate provisions for impairment. The committee meets monthly, and
comprises an Executive Director, the Chief Accountant, the Deputy Chief Accountant and the Loan Administration
Supervisor. For more information, see “Business Overview — Loan Portfolio”.

Asset and Liability Committee
The ALCO monitors and manages the Bank’s asset and liability mix, and its liquidity, interest rate, exchange rate and other
risks. The ALCO is chaired by the Chief Executive Officer, and its members include one non-executive member of the
Management Board, two Executive Directors, the Chief Operating Officer and the Treasurer. The ALCO typically meets
monthly.

Anti Money Laundering Committee
This committee oversees the implementation of measures for the prevention of money laundering and monitors the Bank’s
anti money laundering procedures. The committee comprises the Deputy Chief Accountant, an internal legal counsel and the
Operations Manager, and meets whenever there is a change in law or internal policy, or when a potentially suspicious
transaction is identified.

Sources of funding

Summary
Until 2001 the Bank obtained the bulk of its funding from shareholder loans from the BAEF and term loans from international
financial institutions including the International Finance Corporation (“IFC”) and the European Bank for Reconstruction and
Development (“EBRD”). Prior to 2000, there was no market for corporate bonds issued by domestic issuers in Bulgaria.
Since 2001, whilst the Bank has continued to work closely with and obtain funding from those sources, it has also sought to
diversify its funding sources. As part of this strategy, in 2001 the Bank closed its first mortgage bond issue, which was the first
such issue in Bulgaria under the Mortgage Bonds Act 2000. Since 2001, the Bank has issued a number of corporate bonds and
mortgage bonds, established a securitisation programme, which was the first loan securitisation in Bulgaria, and arranged a
syndicated loan. The securitisation transaction completed by the Bank was the first to take place in Bulgaria. Management
expects that the increasing sophistication and liquidity of Bulgaria’s debt capital markets will allow it to obtain an increasing
proportion of its funding from these sources in the future.

By the end of 2003, funds raised from bond issues had become the Bank’s main funding source. This reflects the expansion of
the Bank and growing acceptance of its bonds in Bulgarian capital markets.

Fundraising Strategy

At 31 December 2006, the Bank had total liabilities of approximately €191.4 million, compared to liabilities of €155.1 million
at 31 December 2005. Unlike many of its local competitors, the Bank does not fund itself primarily with deposits, but borrows
long-term wholesale funds from international financial institutions, international banks and the capital markets. This strategy
results in relatively higher interest expenses for the Bank, but these are offset, at least in part, by lower operating expenses.
This approach does not require a costly branch network or substantial marketing campaigns, and fits with the Bank’s lending
strategy. An additional benefit of this strategy is that the maturity mismatch between the Bank’s funding and its expected cash
inflow from client loans and other revenue-generating activities is minimal. This allows the Bank to maintain a strong
liquidity position using fewer on-balance sheet liquid assets. For further information on the Bank’s funding sources, see
“Selected Statistical Information — Non-Equity Funding: Sources of Non-Equity Funding by Category, Amount and
Percentage”.

Cost of Funding

Overall, the Bank’s average cost of funding has been declining since its formation in 1996. The Bank issued its first mortgage
bond in 2001 at a fixed interest rate of 7.75%, which was approximately 330 basis points over the three-year swap rate. In
contrast, the Bank’s most recent mortgage bond was issued in March 2006 at 64 basis points over the six-month EURIBOR.
Likewise, during 2006, the Bank continued to refinance or renegotiate much of its debt at significantly lower rates. For more
                                                             28
information on the Bank’s average cost of funding, see “Selected Statistical Information”.

Debt Securities

Debt securities are currently the Bank’s largest single source of funding, and the Bank is currently one of the leading bond
issuers in Bulgaria. At 31 December 2006, debt securities comprised 45.6% of the Bank’s total liabilities, compared to 34.9%
of total liabilities at 31 December 2005. For more information on the Bank’s outstanding debt securities, see “Selected
Statistical Information”.
All of the Bank’s mortgage bonds were issued under the Mortgage Bonds Act of 2000 and are collateralised by a lien on the
receivables from a pool of mortgage loans. The aggregate outstanding principal amount of loans pledged as security for the
Bank’s mortgage bonds was €54.0 million and €23.1 million at 31 December 2006 and 2005, respectively. Currently, all of the
Bank’s outstanding mortgage bonds and two of the corporate bonds issues are listed on the Bulgarian Stock Exchange.

Shareholder Loans from the BAEF

When the Bank was formed in 1996, its initial funding came solely from equity and loans made by the BAEF. Since that time,
the Bank has steadily reduced the proportion of its funding from the BAEF, although some shareholder loans remain in place.
In 2006, the Bank fully repaid the $15 million loan to the BAEF, $10 million of which the BAEF provided in the form of a
debt/capital hybrid instrument. The Bank replaced this finance by issuing a €12 million, seven-year unsecured corporate bond
purchased by the BAEF on an arm’s length basis and at market rates.


In May 2006 the BAEF provided to Kapital Direct, a non-banking financial institution fully consolidated by the Bank, a short-
term revolving line of credit in the amount of EUR 6 million, increased in November by additional EUR 10 million. The
credit line is used to finance the lending activity of the entity.
At 31 December 2006 and 2005 loans from the BAEF amounted to 14.3 million Euro and 18.1 million US dollars
respectively.
At 31 December 2006, loans from the BAEF comprised 7.5% of the Bank’s total liabilities as compared with 9.9% of total
liabilities at 31 December 2005.

Loans from International Finance Institutions

Between 1999 and 2004, international financial institutions such as the IFC and the EBRD advanced a number of loans to the
Bank. The first of these loans in 1999 represented the Bank’s first funding source other than loans from the BAEF. As
Bulgarian debt capital markets have developed, the Bank has placed less emphasis on borrowing from international financial
institutions and this source of funding is declining as a percentage of the Bank’s total liabilities.
At 31 December 2006, loans from international financial institutions comprised 6.6% of total liabilities, compared to 16.1% of
total liabilities at 31 December 2005.

Loans from International Banks

Since 2001, various international banks have advanced loans to the Bank. In 2004, the Bank agreed a syndicated term loan of
€12 million with several European banks which was repaid on its maturity date in September 2006. Loans from international
banks comprised 2.6% of total liabilities at 31 December 2006 compared to 9.7% of total liabilities at 31 December 2005.


Customer Deposits

The Bank started accepting institutional deposits in 2000, and retail deposits in 2001. The Bank views customer deposits as an
additional service provided to its clients rather than as a major funding source and it does not advertise or attempt to “cross-
sell” its deposit facilities actively. At 31 December 2006, non-bank deposits held by the Bank comprised 28.3% of total
liabilities, compared to 21.8% of total liabilities on 31 December 2005. For more information on the Bank’s deposits, see
“Selected Statistical Information”.




                                                              29
Loan Portfolio

Loan Portfolio by Lending Programme

The total value of outstanding loans in the Bank’s loan portfolio grew by €48.6 million in 2006. Loan volumes grew in each
of the Bank’s Lending Programmes during 2005 and 2006. In 2006, the Tourism Lending Programme grew by €14.3 million,
the Construction Lending Programme grew by €9.5 million, and the SME Lending Programme (which includes mortgage
loans to small business entrepreneurs) grew by €24.5 million. The mortgage loans to individuals grew by €0.4 million.

Loan Portfolio by Industry Sector

The Supervisory and the Management Board set limits on the Bank’s exposure to particular industry sectors as a percentage of
the total loans and advances to customers. According to these limits at 31 December 2006, the maximum aggregate exposure
to clients in the tourism industry must be no more than 30% of total loans and advances to customers. The maximum
aggregate exposure to clients in any other sector is limited to 25% of total loans and advances to customers. These limits were
not exceeded during 2004, 2005 or 2006. For more information on the Bank’s loan portfolio by industry sector, see “Selected
Statistical Information”.
Although the Bank has internal limits on its exposure to particular industry sectors, it does not set aside a minimum amount
for lending to particular sectors. If a potential loan is approved according to the Bank’s credit assessment processes, that loan
will be funded unless this would breach the Bank’s internal limits. There have been no material breaches to date.

Large Loan Exposures

Under current BNB regulations relating to large loan exposures, the total amount of credit extended by a bank to a single
customer (and its related or connected parties taken together) must not exceed 25% of that bank’s total Tier 1 and Tier 2
capital. The aggregate amount of all large exposures of a bank must not exceed 800% of that bank’s total capital. The Bank
has not breached these regulations to date.
The Bank has not breached any of its internal limits or the related BNB regulations during 2004, 2005 or 2006. At 31 December
2006, the Bank’s aggregate exposure to its largest single client was 23.2%, its aggregate exposure to its top five client groups
was 83.2%, and its aggregate exposure to its top twenty client groups was 194.9%, in each case, of its total equity. For more
information on the Bank’s exposure to large client groups, see “Selected Statistical Information”.

Analysis of Loan Portfolio by Currency

The majority of the Bank’s loans are denominated in Euros. A small percentage of loans are made in US dollars. The value of
loans made in Leva is not significant.
Initially, the Bank mainly originated loans in US dollars because its funding was almost entirely denominated in US dollars
and the demand for US dollars was high amongst the Bank’s clients. From 2000, demand for Euro loans significantly
outpaced demand for US dollar loans and accordingly the percentage of the Bank’s loan portfolio denominated in US dollars
has declined steadily.
At 31 December 2006, loans denominated in Euros accounted for 96.0% of the total loan portfolio of the Bank. Loans
denominated in US dollars and in Leva accounted for 3.9% and 0.1% of the total loan portfolio, respectively. For more
information on the Bank’s loan portfolio by currency, see “Selected Statistical Information”.

Since the US dollar is not fixed to either the Lev or the Euro, fluctuations in currency markets may have credit risk
implications for a borrower who receives revenue in a different currency to the currency in which it makes loan repayments.
The Bank has policies in place to manage this risk by making US dollar loans only to those borrowers whose cash inflows are
also in US dollars (unless special circumstances exist).

Evaluation and Classification of Risk Exposures

On a monthly basis, the Loan Loss Reserve Committee of the Bank evaluates and classifies each loan where there is objective
evidence of impairment. For each loan which is “classified” (i.e. which is categorised as other than “Regular”), the Loan Loss
Reserve Committee considers the arrears history, financial results and business prospects of the borrower and any other issues
that might materially impact on the expected future cash flows of the borrower or the Bank’s ability to recover the loan
monies.
                                                              30
As required by IAS 39, the amount of provision in each case will be the difference between the carrying amount and the
recoverable amount, being the present value of expected cash flows including amounts recoverable from guarantees and
collateral, discounted based on the effective interest rate at inception. The BNB requires all Bulgarian banks to make
provisions for impairment of at least 10% in the case of “Watch” loans (and at least 20% in the case of “Watch” loans
extended to individuals), at least 50% in the case of “Irregular” loans (and at least 75% in the case of “Irregular” loans
extended to individuals) and 100% in the case of all “Non-performing” loans.
At 31 December 2006, loans totalling €5.7 million (or 2.8% of the Bank’s total loan portfolio) were classified “Watch”. A
further €4.0 million of loans (1.9% of the total loan portfolio) were classified as “Irregular” and €9.9 million (or 4.8% of the
total loan portfolio) were classified as “Non-performing”. For more information on the Bank’s loan portfolio by default
classification, see “Risk Management, Internal Controls and Compliance — Risk Management — Credit Risk”.
The Bank’s total provisions for impairment were €12.9 million at 31 December 2006 (representing 6.3% of its gross loan
portfolio) and €10.9 million at 31 December 2005 (representing 6.9% of its gross loan portfolio).
The Bank believes it has a conservative classification and provisioning policy. In 2003, following the adoption of IFRS for
statutory purposes and the amendment of BNB regulations, banks were only permitted to make general provisions for loans
where no evidence of impairment existed if: (i) the loans were grouped together into a portfolio of loans with similar features
(i.e. car loans or credit card receivables); and (ii) the historical experience of losses in respect of loans in the portfolio was
sufficiently stable to be used as the basis for a general loss provision for the portfolio. As the Bank’s highly customised loans
cannot be segregated or modelled in this way, the Bank released provisions which it had previously set aside for Regular
loans. Notwithstanding this change, the Bank intends to retain its conservative provisioning policy in the future.
Where the Bank does not believe that a loan can be recovered, it is written off and charged against the provision for
impairment. In the year ended 31 December 2006, the Bank wrote off loans with a total value of €0.14 million, as compared
to €0.5 million in the year ended 31 December 2005.

Capital Adequacy

The Bank is subject to, and is in compliance with, the capital adequacy requirements of the BNB. Among other things, these
regulations require the Bank to maintain a capital adequacy ratio of 12% (including Tier 1 and Tier 2 capital) and a Tier 1
capital ratio of 6%. These regulations are stricter than the ratios required under the New Basel Accord (of 8% and 4%
respectively).
The Bank’s total capital adequacy ratio at 31 December 2006 was 18.4% (the 2006 profit is not included in the calculations)
and at 31 December 2005 was 31.1%, and its Tier 1 capital adequacy ratio at 31 December 2006 was 18.5% and at 31
December 2005 was 25.6%. As required under Bulgarian law, the Bank reports on a quarterly basis to the BNB on its risk
weighted assets and capital adequacy.

Legal Proceedings

The Bank is involved in litigation that has arisen in the ordinary course of its banking business. However, the Bank is not
involved in any litigation or arbitration proceedings that may have a significant effect on its financial position (or that has had
such an effect during the 12 months preceding the date of this document). The Bank is not aware of any such proceedings
which are pending or threatened.


Related Party Transactions

The Bank enters into transactions with related parties only in the ordinary course of its business. These transactions are carried
out on arm’s length terms and typically consist of lending or deposit taking.
For more information, see “Description of the Shares and Applicable Bulgarian Legislation — Major Transactions and
Transactions with Interested Parties”, and the Bank’s financial statements for years ended 31 December 2004, 2005, and
2006 included elsewhere in the document.

Loans to Employees and Key Management Personnel

The Bank provides mortgage loans and consumer loans in Euros and US dollars to its employees at interest rates ranging from
6% to 10% per annum. The Bank’s internal policies for such loans are in compliance with the Bulgarian banking legislation.
The aggregate outstanding principal balance of all such loans at 31 December 2006 was €0.870 million compared to €0.578

                                                                31
million and €0.523 million at 31 December 2005 and 2004, respectively.

Subsidiary Undertakings and Affiliates

On 13 April 2006 BACB purchased from the BAEF 100% of the shares of Kapital Direct EAD – a non-bank financial
institution registered in 2005. BACB bought all 100,000 outstanding shares at nominal value of BGN 1. Immediately after the
acquisition the Bank increased the total capitalization of the company to EUR 1,534 by issuing additional 2.9 million new
shares. Kapital Direct is a non-bank financial institution used by the Bank as a vehicle for generating business loans and
increased interest and fee income, expected to result in better utilization of Bank’s capital. The contribution of the company to
the Bank’s consolidated income after taxation amounts to 342 Euro for the period 13 April 2006 – 31 December 2006.

The details of the fair value of the assets and liabilities acquired and goodwill arising are as follows:

                                                                                       2006
  Cash and cash equivalents                                                                3
  Borrowed funds                                                                        (30)
  Other liabilities                                                                      (2)
  Goodwill                                                                                80
  Total purchase consideration paid                                                       51

 Cost of acquisition                                                                       51
 Less: acquired cash and cash equivalents                                                 (3)
 Cash outflow on acquisition                                                               48


There were no acquisitions in 2005.

Off-Balance Sheet Liabilities

The Bank’s off-balance sheet liabilities consist of unutilised loan commitments and potential liabilities under letters of credit
and letters of guarantee, the most significant of which are unutilised loan commitments. Unutilised commitments are only
released to clients once any periodic or ongoing contractual conditions precedents have been satisfied. The total value of the
Bank’s off-balance-sheet exposure to customers amounted to €50.9 million at 31 December 2006. For more information on the
type and maturity of the Bank’s off-balance sheet liabilities, see “Selected Statistical Information”.

Information Technology

The Bank operates one primary computer centre located in its head office in Sofia and maintains a fully equipped disaster
recovery centre outside the Sofia central business district. The locations are connected via an encrypted metropolitan area
network connection.
The core banking system is based on Oracle database applications and is extensively customised to meet the Bank’s needs.
The new system produces a number of standard and on-demand management reports, and includes additional security
measures. The system can be expanded and new features can be added without further coding.
The final phase of the upgrade completed in 2006 allowed the system to produce an expanded range of management reports to
meet the Bank’s expected needs in the next few years.
In addition, the Bank has a separate HR/payroll system and a system which produces a series of templates for loan documents.
The additional security measures in the new system include a series of firewalls and specialised routers to screen unwanted
data and admit special feeds from Reuters, the BNB and others. This is supplemented by increased monitoring of company
computers, automatic coding restrictions and transaction limits, strong virus protection and physical security measures (for
example to prevent the making of CD copies). The Bank has backup plans in the event of power or computer failure. The
Bank uses clustered servers so that the failure of one server does not interrupt the system. The Bank also runs a real-time
backup server. The head office in Sofia is supported by a diesel generator for use in case of power failure. This runs for 4
hours without refuelling. Branches have backup units that can sustain office operations for up to half an hour. The Bank has
procedures in place which allow it to continue to process transactions when power fails by resorting to physical processing
systems.

Property

The Bank owns its headquarters in Sofia and leases its offices in Varna, Plovdiv, Bourgas and Stara Zagora. In 2006 the Bank

                                                                 32
purchased a real estate in Bourgas representing a separate unit in a building under construction. After the building is
completed the office shall be moved to that unit.
The Bank also owns the following real estate:
       •       12,194 square metres of land on the shore of the Black Sea on which is built a hotel with a total area of 7,520 square
               metres. The hotel and land are leased to a third party under a 10-year financial lease agreement.
       •       52,096 square metres of agricultural land near the city of Plovdiv. The land was acquired by the Bank in the process
               of a loan foreclosure and the Bank has concluded a preliminary agreement for sale.

       •       2,465 square metres of land in Sofia on which is built a seven-floor office building. The building contains around
               4,175 square metres of floor area. The building and land are leased to a third party under a long-term financial lease
               agreement.

       •       a 15% interest in 1,000 square metres of land in Bourgas containing a house and an adjacent building which are to
               be demolished. The Bank has granted certain conditional rights to purchase its interest in this property to the co-
               owner under a contract concluded in late 2005.

       •       10,831 square metres of land in Chepelare. The Bank has granted certain conditional rights to purchase its interest in
               this property to the co-owner under a contract concluded in late 2005.

       •       Ten apartments and an office in a hotel in Primorsko.

Employees

At 31 December 2006, the Bank had 137 full-time employees.
For the past three years the number of employees has changed as follows:
                                                                                                                                       Year ended 31 December
Personnel turnover                                                                                                                     2006        2005          2004
New hires ....................................................................................................................         12           34            39
Left .............................................................................................................................     14           12            27
Source: BACB

The following table summarises the number of staff and the Bank’s salary and training expenses for each of the last 3 years
ended 31 December 2006.
                                                                                                                                       Year ended 31 December
Personnel expenses                                                                                                                    2006         2005          2004
Number of staff (at31December) ................................................................................                        137         139            117
Personnel cost (€ 000 for year ending 31 December) ..................................................                                2,884       2,550          2,110
Training expense (€ 000 for year ending 31 December) ..............................................                                     74          41             29
Source: BACB



As far as the Bank is aware, none of its employees are members of a trade union. The Bank has not experienced any industrial
action on the part of its own staff.
In compliance with Bulgarian legislation, the Bank is required to pay a certain amount into public and private pension funds.
These payments are made on a “defined contribution” basis and are therefore fully funded.

Long Term Employee Incentive Plan

As part of management’s strategy to promote a performance-driven culture within the Bank, the Bank adopted a Long Term
Employee Incentive Plan (the “Plan”) on 1 January 2002. Under the Plan, a certain amount is allocated to be distributed as a
bonus if certain financial ratios are reached. Distributions are calculated according to a formula which takes into account each
employee’s gross salary. In 2003, the bonus was paid in cash. In 2004 and 2005 the bonuses were also paid in cash but the
employees had the opportunity to purchase with half of their bonus newly-issued shares in the Bank at a price based on the
Bank’s book value.

The bonus distribution in 2006 was calculated on the basis of the financial ratios and the Bank’s profit for 2005 and the option
to purchase shares was removed. Accordingly all distributions in 2006 were paid in cash.
In 2006 the Management Board taking into consideration the new status of the Bank as a public company made changes to the
                                                                                               33
Plan and the financial ratios related to it. The 2006 bonuses are payable in 2007 and shall be calculated according to a formula
based on the asset growth and return on assets and are planned to be paid in cash.
The bonus is reported as personnel expense in the financial statements for the respective year and is proportionally allocated
to the gross monthly remuneration of the employees.

Insurance

The Bank maintains the following insurance policies: (1) a bankers blanket bond in respect of employee misfeasance; on
premises; in transit; forged cheques; counterfeit currency; damage to office and contents; securities; electronic computer
crime; (2) public liability insurance in respect of premises/operations liability and tenants liability; (3) property and building
insurance in respect of material damage (all risks policy) covering all of the Bank’s branches in the country; and (4) felonious
assault. The Bank’s insurance policies are arranged through AIG Bulgaria Insurance & Reinsurance Co. EAD.
Management believes that the Bank’s insurance policies contain standard terms, are consistent with industry practice in
Bulgaria, and are appropriate to protect the Bank from material losses in light of the activities it conducts.

Recent Developments

At a meeting of the Supervisory Board of BACB a decision for convening a General Meeting of the Shareholders on April 18,
2007 was adopted. The agenda shall include changes to the Supervisory Board, dividend distribution for 2006, etc.

On 1 March 2007 BACB signed a third Revolving Credit Facility Agreement with and Raiffeisen Zentralbank Oesterreich
Aktiengesellschaft. As per the agreement BACB can borrow up to 7 million Euro for general financing. The agreement term
is 1 year with a possibility for two 1-year extensions.
On 8 March 2007 BACB concluded a loan agreement with DEG for a loan of up to 20 million Euro for financing small-and-
medium sized businesses in Bulgaria. This is the third agreement of the same kind between the institutions.




                                                               34
                RISK MANAGEMENT, INTERNAL CONTROLS AND COMPLIANCE


Risk Management

The Bank has established risk management policies and procedures to identify, monitor and manage the levels of risk to
which it is exposed. The policies and procedures are approved by the Management Board and subsequently approved by the
Supervisory Board. The risk management policy sets standards for various types of risks, including strategic risk, credit risk,
liquidity risk, interest rate risk, exchange rate risk, investment risk and counterparty risk. The main objective of the Bank’s
risk policy is to impose clearly defined parameters on the Bank’s operations to limit the Bank’s exposure. Compliance with
the various requirements of the risk policy is reviewed on a regular basis, depending on the level of risk and potential impact
on the Bank’s operations. Any variances from the Bank’s standards are reported to the Bank’s management for remedial
action. The Bank also reviews its risk policy on an annual basis based on an analysis of the economic trends and operating
environment in Bulgaria for small- and medium-sized businesses and in particular business sectors, such as the construction
and tourism sectors.

Strategic Risk
Due to the inherent risks of being a specialist provider to small- and medium-sized businesses in an emerging economy, the
Bank is particularly focused on maintaining a high level of capital adequacy. Accordingly, the Bank’s policy is to ensure that
it always has sufficient capital to cover the risks arising in the ordinary course of its business and to cover unforeseen
emergencies. The Bank, therefore, has historically exceeded the BNB’s capital adequacy requirements, which in turn are more
stringent than the recommendations of the Basel Accord.

Credit Risk
Credit risk is the potential loss resulting from the failure of a borrower or counterparty to honour its financial or contractual
obligations.
The Bank’s lending policy is developed by the credit risk, legal and credit process units, and is approved by the Management
Board and subsequently by the Supervisory Board. The lending policy is a comprehensive document which outlines the credit
analysis and approval process, defines who has authority to approve loans, states when loans should be classified into one of
the default categories specified by the BNB, regulates loan loss provisioning (including provisioning for off-balance sheet
exposures), sets rules on the loan documentation required by the Bank and prescribes processes for disbursing loan funds and
for the ongoing monitoring of loans.

Credit Approval Procedures
When a loan application is received from a potential borrower, it is allocated to a loan officer, who oversees the loan
application process. This involves researching the borrower’s business, negotiating terms and pricing, performing a credit
analysis, preparing a credit proposal, drafting the loan documents and making an initial check that all of the Bank’s
requirements have been satisfied before disbursement of the loan funds. Once a loan has been made, the loan officer is
responsible for managing the ongoing relationship with the client, monitoring its financial results, and dealing with arrears,
problems, restructurings and work-out situations.
Once a loan application has passed through the credit analysis process, a credit proposal has been prepared by the relevant loan
officer, it may be reviewed by the Credit Risk Management Department, which carries out an independent review of loan
proposals which exceed the thresholds set out below, which vary according to the lending programme under which the loan is
to be made.
                                                                                                                                 Review threshold (€)
           Tourism Lending Programme ...................................................................................            250,000
           Construction Lending Programme .............................................................................             500,000
           SME Lending Programme (except for construction and tourism loans) ....................                                   250,000
           Mobile Lending Group ..............................................................................................       50,000

           Source: BACB

Once this review is completed (if required), a credit committee is formed. Under the Bank’s credit approval policies, the
composition of the credit committee depends on the lending department that is processing the loan. Increasing levels of
authority within the Bank are required depending on the amount of credit sought and the size of the exposition to the borrower
and related parties after full disbursement.



The Bank forms the credit committees based on the following rules:

                                                                                 35
                             CREDIT APPROVAL AUTHORITIES
                                    as of 1 March 2007

A     SME and HOTEL                                  Up to €100k           €101k to        €251k to €1MM          €1MM to €5MM    Over €5MM
      LENDING                                                               €250k
A1    • Approval of new
                                                                                                                                   The highest
        deals, or additional
                                                                                                                                    required
        funds to existing                              CRM +                1 ED +                                  2 EDs + CEO
                                                                                           2 EDs or 1ED +                         level of CC +
        customers, the                               Investment           Investment                               1 ED + COO +
                                                                                               COO                                Managеment
        cumulative exposure of                        manager              manager                                      CEO
                                                                                                                                    Board of
        which will not exceed
                                                                                                                                     BACB
        the respective limits
B     MLG                                                Up to            €101k to         €251k to €1MM          €1MM to €5MM    Over €5MM
                                                         €100k             €250k
B1    • Approval of new
                                                                                                                                   The highest
        deals, or additional
                                                                                                                                    required
        funds to existing                                                                                           2 EDs + CEO
                                                                                           2 EDs or 1ED +                         level of CC +
        customers, the                                           1 ED + CRM                                        1 ED + COO +
                                                                                               COO                                Managеment
        cumulative exposure of                                                                                          CEO
                                                                                                                                    Board of
        which will not exceed
                                                                                                                                     BACB
        the respective limits
C     CONSTRUCTION                                                                                    €1MM to €5MM                Over €5MM
                                                                 Up to €1MM
      LENDING
C1    • Approval of new
        deals, or additional                                                                                                       The highest
        funds to existing                                                                                                           required
                                                                                                       2 EDs + MH +CEO
        customers, the                                       2 EDs + MH or                                                        level of CC +
                                                                                                               or
        cumulative exposure of                             1 ED + COO+ MH                                                         Management
                                                                                                    1 ED + MH+COO+CEO
        which will not exceed                                                                                                       Board of
        the respective limits                                                                                                        BACB

Abbreviations used: ED – Executive director, COO – Chief Operations Officer; CRM – Credit Risk Manager, MH - Michael
Hunsberger

      1.    Investment manager signing the loan approval should be different from the one that has either personally or through
            his/her team originated the deal
      2.    For all deals that the loan funds partially or entirely will be used for financing of construction works, a construction
            budget will be required. The construction budget should be revised and approved by authorized personnel. Waiver
            of this requirement should be done by Credit Committee of highr competence.
      3.    For all construction type deals (loan repayment is realized from sale proceeds of units the construction of which is
            financed with the loan) that are originated by SME or Hotels Lending departments, the loans should be presented for
            approval JOINTLY by loan officers both form SME/HOTELS and CONSTRUCTION LEDING DEPARTMENT.
      4.    For all construction type loans the approval of Michael Hunsberger as Member of the Management Board of BACB
            and Managing Director of RE with BAEF is required.
      5.    In the absence of the Credit Risk Manager , he can be replaced by an Executive Director or the Chief Operations
            Officer
Source: BACB

At the credit committee meeting, the loan officer responsible for originating the proposed loan presents a report to the
committee and answers any questions. As a credit committee is formed for every loan, the frequency of credit committee
meetings depends on the Bank’s deal flow. Generally, a credit committee is formed at least once a week. Due to the nature of
the Bank’s lending strategy and target customer base, under the credit risk policy, no loans can be automatically approved
under a credit scoring system.

Other limitations
The other limitations on the Bank’s lending operations are summarised in the table below.
Exposure                                                          Limit
Tourism sector ........................................           30% of the Bank’s total loans and advances to customers
To any other sector ..................................            25% of the Bank’s total loans and advances to customers
                       (1)
Single borrowers             .................................    25% of the Bank’s total equity
Large client groups(2) .................................          300% of the Bank’s total equity




                                                                                     36
Source: BACB
(1) Total exposure of a borrower includes all exposures of the Bank to related or connected parties.

Collateral Valuation
Loans advanced by the Bank are normally secured by all or certain of the borrower’s assets and, in some cases, security is
taken over assets of third parties such as the directors or shareholders of a corporate borrower.
Prior to advancing a loan, the Bank values the loan collateral at both fair market and liquidation value taking into account
comparable market values, the cost/replacement value of an asset and the capitalisation of income method, as applicable.
Typically, the Bank will lend up to 75% of the appraised value of residential or prime commercial real estate, up to 65% of
the appraised value of other commercial or industrial real estate and up to 50% of the appraised value of other assets. In some
cases, the Bank lends at higher loan-to-value ratios to prime clients and/or against highly liquid collateral, and with the
approval of the relevant internal credit committee. All real estate is valued by specialised internal and/or external real estate
appraisers.

Post-Approval Process
Once a loan is approved, it passes to the Credit Process Department which checks that all documentation is in order and all
internal procedures have been complied with and then obtains the internal sign-offs required for drawdown and arranges for
all documentation to be safely stored. Once the disbursement documents are signed, they are sent to the Loan Administration
Department, which makes the disbursement and the appropriate accounting entries, and inputs the details of the borrower and
the loan into the Bank’s computer system.

Loan Portfolio Monitoring
In the case of loans processed by the Big Investments Department, the loan officer who completed the credit analysis is
responsible for the ongoing monitoring of the loan, which includes reviewing regular reports and watch lists generated by the
Bank’s systems, reviewing the borrower’s quarterly and annual financials, and carrying out any required site visits. Reports
noting the results of these reviews are placed on the borrower’s credit file. The loan officer who originated the loan remains
the Bank’s point of contact with the borrower throughout the life of the loan.

In the Big Investments Department, weekly meetings of loan officers and an appropriately constituted credit committee are
held to discuss significant developments and problem loans. If any potential problems are identified (during these meetings or
otherwise), the loan officer will prepare a report to the relevant credit committee recommending what future action to take. If
necessary, the loan officer may also order a fresh collateral valuation.

Non-Performing Loans
Restructuring and renegotiation of delinquent loans occurs on a case-by-case basis, as directed by the relevant credit
committee based on the recommendation of the responsible loan officer. Wherever debt restructuring is undertaken, the Bank
attempts to re-work the debt in a way that keeps the loan in place and allows the borrower to continue its business. Because
the Bank has considerable experience of lending to riskier, non-conforming borrowers and because the loan officer
responsible for monitoring a loan gains a detailed understanding of the borrower’s business and industry during the credit
analysis process and the ongoing relationship with the borrower, the Bank’s efforts to restructure to avoid foreclosure are
often successful. As part of the restructuring process, the Bank may demand additional collateral, or require the borrower to
sell non-core assets and repay part of the loan.




                                                                    37
The Bank, in compliance with BNB regulations, has established quantitative risk classification parameters for commercial
loans. The following table summarises these parameters:

Classification                     Parameters                                                             Discount applied by the Bank(1)

Regular                            Principal and interest are being repaid in accordance with             Not required
                                   the contract, or remain past-due up to 30 days, provided
                                   the delay is justified or accidental
                                   The debtor is using the funds for the purposes stipulated in
                                   the contract
                                   The Bank has sufficient updated information on the
                                   debtor’s financial state, its financial activity, and the
                                   sources for its fund for repaying its liabilities
Watch                              The debtor has committed defaults or breaches in                       10-20%
                                   servicing its obligations, but these are not significant;
                                   there is possibility that the debtor’s financial state has
                                   deteriorated, and the Bank cannot be certain that principal
                                   amounts outstanding will be rapaid in full; principal or
                                   interest arrears payments have been past due 31 to 60 days
                                   The debtor is using the funds provided for purposes other
                                   than those specified in the contract
Irregular                          The debtor has committed significant defaults or breaches              50-75%
                                   in servicing its obligations; the available information
                                   indicates that the debtor’s financial state is unstable, and
                                   that its current and expected assets are insufficient for the
                                   full repayment of its obligations to the Bank and to other
                                   creditors; weaknesses have been found in the debtor’s
                                   ability to meet its repayment obligations, and there is a
                                   distinct possibility that the bank will sustain some loss;
                                   principal or interest arrears payments have been past-due
                                   61 to 90 days
                                   The debtor’s financial state has substantially deteriorated
                                   and may result in an inability to meet its obligations
Non-performing                     The debtor’s financial state has deteriorated to the point             100%
                                   where the Bank assesses that the principal amounts
                                   outstanding are uncollectable, even though some funds
                                   may be recovered in the future; principal or interest
                                   arrears payments have been past-due over 90
                                   The debtor suffers a permanent shortage of cash
                                   The debtor has been declared bankrupt or is in a
                                   liquidation procedure, and there is a risk that some
                                   creditors will not be repaid in full
                                   the obligation is subject to court proceedings, or a court
                                   has ordered that the debtor repay the bank, but these
                                   moneys have not been collected;
                                   the bank concludes on other grounds that it may not
                                   recover the principal amount outstanding as a result of
                                   the debtor’s non- repayment



(1) The discount made by the Bank to the contractual cash flows in respect of an impaired loan to calculate the recoverable
    amount of the loan. This discount does not include any discount at the effective interest rate at the inception of the loan.


Source: BACB




                                                                       38
The BNB regulations set the minimum limits for discounting the cash flows depending on the respective risk classifications of
the loans. IAS 39 “Financial Instruments: Recognition and Measurement” requires a provision for impairment relating to a
loan to be measured based on an assessment of the amount recoverable under that loan determined by reference to the expected
cash flows from the debtor and the fair value of the collateral if foreclosure is probable. Although the IAS 39 requirements are
different from those of BNB the Bank determines its provisions for impairment according to the BNB regulations.

Debt Recovery Procedures
If the decision is taken to terminate any exposure to a borrower, the Bank’s actions are co-ordinated by the responsible loan
officer or branch manager under the supervision of the relevant credit committee. The loan officer is assisted by the Bank’s
legal department and any external legal or insolvency specialists retained by the legal department.

The Bank evaluates all available methods for terminating its exposure to a borrower, including selling the debt to another
creditor, enforcing security and selling the collateral or commencing bankruptcy proceedings. Of these options, selling the
collateral is the most common. Where the collateral mainly consists of marketable property, the sale process is often completed
within six to twelve months. More complicated loans involving less liquid assets generally take more time to resolve. In
circumstances where the Bank believes the assets securing a loan will be less liquid, it typically takes as security an “enterprise
pledge” over the business, which under Bulgarian law allows the Bank to sell the business as a going concern or sell each of its
assets individually if a default occurs.

The Bank rarely institutes bankruptcy proceedings against a borrower. Firstly, the Bank is generally a secured creditor and
therefore is in a position to realise the collateral without commencing bankruptcy proceedings. Secondly, bankruptcies usually
take at least three to four years to resolve.

Liquidity Risk
Liquidity risk is the risk that the Bank will be unable to meet its obligations to its various counterparties when those obligations
mature. Liquidity risk management seeks to ensure that the Bank has the ability, under varying scenarios, to fund increases in
assets and meet maturing obligations as they arise. The Bank’s Treasury Department is responsible for liquidity management
under the guidance and supervision of the ALCO. The Treasury Department produces weekly liquidity reports on the liquidity
position of the Bank and prepares monthly forward-looking liquidity reports. Both types of report are sent to the ALCO and
discussed at monthly meetings.

The Bank believes that it has a conservative liquidity policy. At any time, the Bank maintains liquid assets (including cash,
short-term deposits with banks and liquid securities) in excess of all deposits maturing within one month. The Bank also
maintains a positive twelve-month maturity gap, so that short-term assets match or exceed short-term liabilities. The Bank
typically uses interbank deposits only to bridge temporary funding mis-matches rather than to fund loans.

The Bank’s liquidity ratio (i.e. the ratio of liquid assets to total deposits) was 74.0% at 31 December 2006, compared to
103.1% and 142.5% at 31 December 2005 and 2004, respectively. Unlike many other Bulgarian banks, whose funding bases
generally contain a greater proportion of customer deposits, the majority of the Bank’s liabilities have fixed maturity dates
because these liabilities are in the form of bonds and term loans.

The following table sets out the Bank’s liquidity ratios at 31 December 2004, 2005 and 2006.
                                                                                                                                                  At 31 December
                                                                                                                                           2006       2005         2004
                                                                                                                                                       (%)
Loans/assets ...........................................................................................................................     77.8       75.3        74.4
Loans/equity ..........................................................................................................................     338.4      368.8       415.1
Liquid assets/total assets ........................................................................................................          20.7       23.1        23.8
Liquid assets/total deposits .....................................................................................................           74.0      103.1       142.5
Source: BACB

Securities Portfolio
The Bank began investing in debt securities in 2002, principally to optimise its liquidity management. The Bank typically
invests in Bulgarian government securities and has made some limited investments in Bulgarian corporate bonds in order to
enhance the yield earned on its liquid funds. Such investments are approved by ALCO on a case-by-case basis. The Bank’s
debt securities are generally booked as “available for sale” in its investment portfolio. The Bank aims to keep no more than
50% of its liquid funds in the form of debt securities and, to date, has kept below this limit.

At 31 December 2006, the Bank’s portfolio of debt securities comprised €4.62 million of Euro and US dollar denominated
Bulgarian government bonds, currently rated by Standard & Poors as BBB+, €0.522 million of Lev denominated bonds issued
by the European Investment Bank, currently rated by Standard & Poors as AAA, €0.515 million of Lev denominated bonds
issued by Raiffeisenbank, Bulgaria, and €0.745 million of corporate bonds issued by two Bulgarian companies, which are
unrated.
                                                                                             39
                Besides debt securities, as of 31 December 2006, the Bank had some limited investments in shares, mainly two real estate
                investment trusts, traded on the BSE. The size of these investments was €1.23 million and the purpose is to increase the yield
                on liquid funds.

                Interest Rate Risk
                Interest rate risk arises from the possibility of changes in interest rates and mis-matches or gaps in the amounts of assets or
                liabilities and off-balance sheet instruments that mature or reprice in a given period. An asset (or positive) gap position exists
                when assets reprice more quickly or in a greater proportion than liabilities in a given period and tend to benefit net interest
                income in a rising interest rate environment. A liability (or negative) gap position exists when liabilities reprice more quickly or
                in greater proportion than assets during a given period and tends to benefit net interest income in a declining interest rate
                environment. The Bank manages this risk by matching the repricing of assets and liabilities to the extent possible.

                The Bank’s interest rate position is monitored and managed by the Treasury Department, which reports to the ALCO on a
                monthly basis. The ALCO takes an integrated view of the interest rate risk across all of the Bank’s operations.

                For several years after the Bank was formed in 1996, most of the Bank’s assets and liabilities were at fixed rates. In recent
                times, the market has shifted towards floating rate loans, and in response the Bank has moved the majority of its funding to
                floating rates. In late 2005, the Bank commenced using interest rate derivatives to hedge against an interest rate mis-match
                resulting from the issue of a fixed rate bond in 2005. The Bank does not trade in interest rate derivatives.

                The Bank manages its interest rate risk using an asset/liability repricing gap model which limits the Bank’s six-month open
                position to 10% of total assets and its twelve-month open position to 10% of total assets. An open position for a period of time
                is the difference between the assets and the liabilities that are due to be repriced during that time. The Bank has not materially
                breached these limits to date.

                The following table sets out the Bank’s interest rate sensitivity based on the contractual repricing or maturity date, whichever
                is the earlier, at 31 December 2006.

                                                                                       At 31 December 2006

                                                  On
                                      demand/ up to 3
                                             months        3 to 6 months       6 months              1 to 5     Over 5 years      Non- interest
                                                                               to 1 year             years                             bearing           Total

Cash and balances with the
Central Bank                                       -                   -               -                  -                 -          17,490           17,490
Due from other banks                          26,152                   -               -                  -                 -             153           26,305
Loans and advances to
customers                                     74,204            65,824           20,776            27,625              4,834                 -         193,263
Trading portfolio                                  -               240                -               505                  -             1,203           1,948
Investment securities available-
for-sale                                       4,675                   -               -              522                464                 -           5,661
Other assets                                       -                   -               -              524                  -               839           1,363
Goodwill                                           -                   -               -                -                  -                80              80
Property, plant and equipment                      -                   -               -                -                  -             2,410           2,410

Total assets                                 105,031            66,064           20,776            29,176              5,298           22,175          248,520

Deposits from banks                           14,052                 -            1,290                 -                  -                 -          15,342
Deposits from customers                       46,707             2,505            1,796             1,632                 20             1,438          54,098
Other liabilities                                  -                 -               57                 -                  -             2,812           2,869
Other borrowed funds                          13,257             4,287           14,260                 -                  -                 -          31,804
Debt securities outstanding                   25,214            22,080                -            39,999                  -                 -          87,293

Total liabilities                             99,230            28,872           17,403            41,631                 20             4,250         191,406

Interest Sensitivity Gap                       5,801            37,192            3,373          (12,455)              5,278           17,925           57,114

Interest rate derivatives net
position                                            -          (20,000)                -           20,000                   -                 -              -

Total Interest Sensitivity gap
                                               5,801            17,192            3,373             7,545              5,278           17,925           57,114

                                                                                40
Source: BACB

Exchange Rate Risk
The exchange rate risk arises from the fluctuation in the Lev to foreign currencies exchange rate. Those fluctuations in the
exchange rates change (increase or decrease) the volume of planned cash flows in national currency which in turn leads to
changes in the financial results.
Whilst the Bank operates in Euros, US dollars and Leva, the Bank has relatively limited foreign exchange exposure because
the Lev is pegged to the Euro through a currency-board system which has been in operation since 1997 (when the Lev was
pegged to the Deutsche mark). The Treasury Department monitors and manages the Bank’s exchange rate risk and reports to
the ALCO on a monthly basis. Compliance with foreign exchange limits is monitored daily by the Treasury Department and
is reviewed by the ALCO.

The exchange rate risk management policy aims to maintain an open US dollar position that is as close as practicable to
neutral by attempting to match the amounts and terms of its US dollar liabilities with its US dollar denominated loan
receivables and other assets. The Bank maintains a limit on its US dollar open position of 15% of its total US dollar assets
and this limit was not exceeded at any time during the three year period ended 31 December 2006. The Bank maintains a long
Euro position (i.e. its Euro-denominated assets are greater than its Euro-denominated liabilities), which reflects the fact that
the Bank’s equity is denominated in Euro. The Bank does not trade in foreign exchange for its own account.

The Bank only offers foreign exchange services to its clients upon demand. The limit for such open overnight foreign
exchange positions in all currencies is €100,000. In special circumstances, this limit may be exceeded with the approval of an
Executive Director. Due to the currency board arrangement, the position of the Euro against the Lev is not considered to be
an open position.

The following table shows the Bank’s net exposures denominated in different currencies at 31 December 2006:

                                                           USD            EUR             BGN        Other              Total

 Cash and balances with the Central Bank                    290         13,192           3,981           27           17,490
 Due from other banks                                    11,876         14,349              31           49           26,305
 Loans and advances to customers                          6,757        186,418              88            -          193,263
 Trading portfolio                                            -            745           1,203            -            1,948
 Investment securities-available-for-sale                 1,427          3,197           1,037            -            5,661
 Other assets                                                 1            595             767            -            1,363
 Goodwill                                                     -              -              80            -               80
 Property, plant and equipment                                -              -           2,410            -            2,410
Total assets                                             20,351        218,496           9,597           76          248,520

 Deposits from banks                                      4,148          9,904           1,290            -           15,342
 Deposits from customers                                 14,261         33,110           6,692           35           54,098
 Other liabilities                                           96            959           1,814            -            2,869
 Other borrowed funds                                         -         31,804               -            -           31,804
 Debt securities outstanding                                  -         87,293               -            -           87,293
Total liabilities                                        18,505        163,070           9,796           35          191,406

Foreign currency gap                                       1,846         55,426          (199)           41            57,114


Source: BACB


Counterparty Risk
As part of its treasury operations, the Bank has interbank lines with around one-third of the banks operating in Bulgaria
(including branches of foreign banks), and with its main Euro and US dollar correspondent banks. Limits on each of these
lines are approved by the ALCO on the basis of proposals from the Treasury Department. Compliance with these limits is
monitored on a daily basis by the Treasury Department. Limits can be exceeded temporarily with the approval of an
Executive Director.

Exposure limits for the Bank’s interbank lines are approved based on a review of the capital strength, liquidity position and
shareholding structure of the counterparty bank. The list of approved counterparties is reviewed and updated at least once a
year.


                                                               41
Investment Risk
The Bank’s investments in securities are approved by the ALCO after a review of the credit risk of the issuer. At 31
December 2006, the main part of the Bank’s securities portfolio consists of debt securities issued by the Republic of Bulgaria
and bonds issued by the European Investment Bank.

Internal Controls
The Bank maintains clearly defined operating procedures with respect to its internal controls, which are updated as and when
necessary to cope with the growth in the Bank’s business. The Bank’s organisational structure and human resources policies
are designed to ensure that all areas of the Bank’s operations are managed and supervised effectively by competent and well-
qualified staff. The Internal Audit Department also reviews the operation of the Bank’s internal control systems and reports
the results of this review directly to the Supervisory Board and to the general meeting of the shareholders. Management is
confident that the Bank’s internal control systems are adequate and the Bank continues to refine its systems to ensure that this
remains the case.

Compliance

Money Laundering
In compliance with the regulations of the Act for Measures Against Money Laundering and the Measures Against Financing
Terrorism Act passed in 2006 the Bank adopted new Internal Rules for Control and Prevention of the Money Laundering and
Terrorism Financing as of 29 November 2006. In order to combat money laundering and/or terrorism financing the Bank has
established a Specialized Unit for Operations, Transactions, and Customer Identification /Specialized Unit/. The Bank’s
Specialized Unit has the primary responsibility for overseeing the operation of this policy and monitoring the Bank’s anti-
money laundering procedures. The unit comprises the Deputy Chief Accountant, internal legal counsel and the Operations
Manager and meets whenever there is a change in law or internal policy, or when a suspicious transaction is identified.


The Bank employs know-your-customer policies and procedures to screen customers and transactions both at the time
accounts are opened and customers accepted and when transactions are carried out. Under Bulgarian law, the Act for
Measures Against Money Laundering and the Measures Against Financing Terrorism Act require banks to record and verify
certain information in respect of customers and customers’ transactions and to report suspicious transactions to the Bulgarian
Financial Intelligence Agency (“FIA”). The FIA is an office of the Ministry of Finance comprising, among others, members
of the BNB, the Ministry of Internal Affairs and the Ministry of Justice. All customers are required to declare the origin of the
funds for any transaction which exceeds the regulatory thresholds, which are currently BGN 30,000, or BGN 10,000 for cash
transactions. All cash transactions in excess of BGN 30,000 must also be reported to the authorities. Any employee who
encounters a suspicious transaction is required to report that transaction to the Bank’s Specialized Unit prior to its execution.
The transaction is then registered in the register of suspicious transactions and checked to determine whether it needs to be
reported to the FIA.




                                                               42
                                         DIRECTORS AND SENIOR MANAGEMENT


On 13 February 2006, the Bank adopted a two-tier management structure comprising a Supervisory Board and a Management
Board.

Supervisory Board
The current composition of the Supervisory Board is as follows:
Name                                             Age            Position             Date appointed to      Date of expiry of
                                                                                          Board              current office
Stephen W. Fillo .............................    69   Chairman                      13 February 2006      13 February 2009
Marshall L. Miller ..........................     64   Deputy Chairman               13 February 2006       13 February 2009
Valentin Braykov ...........................      54   Independent Member            13 February 2006    Mr. Braykov has
                                                                                                         deposited          his
                                                                                                         resignation    as    a
                                                                                                         member      of     the
                                                                                                         Supervisory Board




The Supervisory Board has proposed to the General Meeting of the Shareholders convened on April, 18th, 2007 Mr. Valentin
Braykov to be released as a member of the Supervisory Board and Mr. Kiril Aleksandrov Manov, with permanent address:
Sofia 1000, 39 Dondukov str., fl. 5, apt. 9 to be elected as a new member of the Supervisory Board. The proposal shall be
voted at the General Meeting of the Shareholders on April 18th, 2007 and the decision shall be subject to registration with the
Commercial register.

Each of the members of the Supervisory Board may be contacted through the Bank’s principal place of business at 16 Krakra
Street, 1504, Sofia, Bulgaria.

Management Board

The current composition of the Management Board is as follows:

Name                                                                                 Date appointed to      Date of expiry of
Frank L. Bauer ..............................    Age            Position                  Board              current office
                                                 65    Chief Executive Officer and   13 February 2006      13 February 2009
                                                       Chairman of Management
Dimiter Stoyanov Voutchev ...........                  Board
Stoyan Nikolov Dinchiiski .............          47    Executive Director            13 February 2006      13 February 2009
Michael Hunsberger .......................       36    Executive Director            13 February 2006      13 February 2009
                                                 44    Non-Executive                 13 February 2006      13 February 2009
Dennis E. Fiehler                                      Member
                                                 60    Non-Executive                 13 February 2006      13 February 2009
                                                       Member
Each of the members of the
Management Board can be contacted through the Bank’s principal place of business at 16 Krakra Street, 1504 Sofia,
Bulgaria.

Supervisory Board Members

Stephen W. Fillo, Chairman of the Supervisory Board
Mr. Fillo has served on the Bank’s board of directors since its incorporation in 1996 and served as Chairman of the board of
directors from August 2004 until his appointment as the Chairman of the Supervisory Board in January 2006. Mr Fillo has
been chairman of the board of directors of the BAEF, the controlling shareholder of the Bank, since 1993. He is a former
director of the National Venture Capital Association in the United States. From 1981 to 1990 Mr. Fillo was a Partner and
member of the operating committee of Warburg, Pincus & Co. Since 1990 he has been President of Fillo & Co. Mr. Fillo
holds a BS from Cornell University, United States, and an MBA from the Harvard Graduate School of Business, United
States.



                                                                   43
Marshall L. Miller, Deputy Chairman of the Supervisory Board
Mr. Miller served on the Bank’s board of directors from its incorporation in 1996 until July 2001 and from June 2002 until
his appointment as Deputy Chairman of the Supervisory Board in January 2006. Mr Miller has been a member of the Board
of Directors of the BAEF since 1991. Since 1995 he has been a partner in the Washington, D.C. law firm Baise & Miller, the
United States. Previously he has worked in various government positions in the United States, including as: Special Assistant
to the Administrator and Chief Judicial Officer of the US Environmental Protection Agency; Associate Deputy Attorney
General, US Department of Justice; Administrator of the Occupational Safety and Health Administration and Assistant
Secretary of Labor. Mr Miller has written several books on environmental law. Mr. Miller holds a degree from Harvard
University, and a Master’s degree from the Faculty of Law, Yale University, United States.

Valentin Braykov, Independent Member of the Supervisory Board
Mr. Braykov was appointed to the Supervisory Board in January 2006 as an independent non-executive director. Mr Braykov
has been an honorary president of the British Bulgarian Law Association and has published fourteen research articles in law
journals. He joined the Law Office for Foreign Legal Matters in 1985. In 1990, Mr. Braykov set up and was senior partner at
the law firm Braykov’s Legal Office. Mr. Braykov holds a degree from the Faculty of Law, Sofia University, Bulgaria, and
was admitted to the Sofia Bar Association in 1976.


Management Board Members

Frank L. Bauer, Chairman of the Management Board and Chief Executive Officer
Mr. Bauer has served on the Bank’s board of director’s since its incorporation in 1996 and has acted as Chief Executive
Officer since July 1997 until his appointment as Chief Executive Officer and Chairman of the Management Board in February
2006. Mr. Bauer has served as President and Chief Executive Officer of the BAEF since the BAEF’s inception in November
1991. Prior to joining the BAEF, Mr. Bauer was Vice-President at Booz, Allen & Hamilton, consulting in strategy and
operations in the marketing intensive group. Previously he directed DeKalb Corporation’s financial services, principally in
equipment leasing and secured term lending. Earlier Mr. Bauer was a Senior Associate with McKinsey & Company. Mr.
Bauer holds a BA from the University of Iowa. United States, and an MBA from Harvard Graduate School of Business,
United States.

Dimiter Stoyanov Voutchev, Executive Director
Mr. Voutchev was appointed as a member of the board of directors and has served as an Executive Director of the Bank since
July 1997 until his appointment as Executive Officer and Chairman of the Management Board in February 2006. He also
served as Chief Executive Officer of the Rodina Pension Funds (an investment of BAEF). Mr. Voutchev joined BAEF in
1993 as an Investment Officer and Executive Director of the Kompass lending programme of BAEF. In 1997 he was
promoted to Deputy Managing Director of BAEF. From 1991 to 1993 he was Financial Director of Hamoor Investment
Group, Kuwait. From 1985 to 1990 Mr. Voutchev was employed by the Lesokomplekt Engineering State Company as an
expert in the International Trade Division, and later as Head of the International Trade Division and a Representative of the
company in Kuwait. Mr. Voutchev holds a Master’s degree in Economics from the faculty of International Economic
Relations of the University of National and World Economy, Sofia, Bulgaria, and has studied at the English Language School
in Sofia, Bulgaria.

Stoyan Nikolov Dinchiiski, Executive Director
Mr. Dinchiiski joined the Bank in January 1998 as a General Counsel. Between June 2001 and June 2002 he was appointed
Procurator of the Bank. In June 2002, Mr. Dinchiiski was appointed as a member of the board of directors and an Executive
Director until his appointment as Executive Officer and Chairman of the Management Board in February 2006. Prior to
joining the Bank, Mr. Dinchiiski worked for Hyundai Bulgaria (including as a member of the Board) and spent two years with
the Bulgarian Investment Bank (an investment of the European Bank for Reconstruction and Development) originally as
Legal Advisor and later as General Counsel. Mr. Dinchiiski holds an LLM from the Faculty of Law, Sofia University,
Bulgaria, and has studied at the Mathematics School, Stara Zagora, Bulgaria.

Michael Hunsberger, Non-Executive Member
Mr. Hunsberger has served on the board of directors of the Bank since July 1997 until his appointment as a member of the
Management Board in February 2006. Mr. Hunsberger joined BAEF in 1997 as Senior Investment Manager. Currently he is
Managing Director of Real Estate and Mortgage Finance. Previously he worked for eight years as a Vice President at First
Chicago NBD Bank in commercial lending. Mr. Hunsberger holds a BA in Business Administration from Goshen College,
Indiana, United States, and an MBA from the University of Indiana, United States.

Dennis E. Fiehler, Non-Executive Member
Mr. Fiehler has served on the board of directors of the Bank since May 1998 until his appointment as a member of the
Management Board in February 2006. Mr. Fiehler joined BAEF in 1997 as Chief Financial Officer. He has extensive
                                                          44
experience in public accounting (at Coopers & Lybrand) and in industry. He worked previously for General Dynamics Corp.
and McDonnell Douglas Corp. in financial management roles that included chief financial officer and board member of
venture capital funds in Greece and Turkey. Prior to joining BAEF, Mr. Fiehler was a consultant for Baring Private Equity
Partners on organising and raising a private equity fund in Finland. Mr. Fiehler holds a BS in Accounting from the Florida
State University, United States, and is a Certified Public Accountant.




Other Senior Managers

Name                                                                              Age   Position
Maria Sheytanova .............................................................    36    Chief Operating Officer
Ms. Sheytanova can be contacted through the Bank’s principal place of business at 16 Krakra Street, 1504, Sofia, Bulgaria.

Maria Sheytanova, Chief Operating Officer
Ms. Sheytanova joined the Bank in 2004 as Chief Operating Officer. Prior to joining the Bank, she worked as Manager of
Management Consulting at Deloitte & Touche, Sofia, being involved in consulting for financial institutions. During the period
from 2001 to 2003, she worked for Bulgarian Post Bank where she managed the project for the implementation of a new
information system and later she served as a manager of projects and reorganisation of the branch network of the bank.
Between September 1995 and January 2001, Mrs. Sheytanova worked in United Bulgarian Bank, and was involved in
restructuring the bank following its privatisation. Her last position at the bank was as the Manager of Strategic Planning.
Earlier, Ms. Sheytanova worked in the International Department of Balkanbank, Sofia. Ms. Sheytanova holds a master’s
degree in trade and commerce from the University of National and World Economy, Sofia.

Employees and Members of the Management and Supervisory Board of Bank

As part of management’s strategy to promote a performance-driven culture within the Bank, the Bank adopted a Long Term
Employee Incentive Plan (the “Plan”) on 1 January 2002. Under the Plan, up to 5% of the Bank’s profit is shared amongst its
employees and certain consultants as a bonus if the Bank’s return on equity for the year exceeds a certain percentage.
Distributions are calculated according to a formula which takes into account each employee’s gross salary. In 2003, half of
each employee’s bonus amount was paid in cash and the other half was placed into a special account held with the Bank. In
2004, the funds in the special account were distributed to the eligible employees in respect of profits earned in 2002 and 2003.
Those employees could choose to be paid in cash or to use these funds to purchase new shares in the Bank at a price based on
the Bank’s book value in its audited financial statements for 2003. In 2005, a distribution was made according to the same
rules to the eligible employees in respect of profits earned in 2004. The Plan was revised in 2005 and the option to purchase
shares was removed. Accordingly all distributions in 2006 were paid in cash.
In 2006 the Management Board taking into consideration the new status of BACB as a public companie adopted changes to
the Plan and the related financial ratios. The bonuses shall be paid in cash and no Programs for preferential purchase of shares
by the employees are planned.
For additional information for the Directors’ remuneration see “General Information – Members of the Management and
Supervisory Boards”.

Interests of the Members of the Management and Supervisory Boards


As at the date of this document, the following members of the Management Board hold Shares in the Bank:

     Dimiter Stoyanov Voutchev, Executive Director, holds 14,291 ordinary shares in the Bank.

     Stoyan Nikolov Dinchiiski, Executive Director, holds 13,780 ordinary shares in the Bank.

The Bank has not granted any share options to any employee or Member of the Management Board or Supervisory Board.

Meetings of the Management and Supervisory Board

The articles of association of the Bank and the Commercial Act 1991 require that meetings of the Management and
Supervisory Board take place at least once every three months.

Corporate Governance

The Bank adopted a corporate governance program which is designed to meet the corporate governance principles of the
Economic Cooperation and Development Organisation as adopted by the Financial Supervision Commission.
                                                                                 45
The aim of the Bank’s corporate governance program is to protect the rights of its shareholders and to ensure their equal
treatment, including the rights of minority shareholders. In addition, the program will be designed to ensure the recognition of
the rights of other stakeholders, for example employees, suppliers, clients, banks, creditors and government entities and to
encourage cooperation between the Bank and any such interested parties. The Bank’s intention is to make full and accurate
disclosure of information about its corporate affairs in accordance with the Bulgarian Public Offer of Securities Act 2000 and
related regulations.

Information about the program, its application and the Bank’s compliance with the program is included in the Bank’s annual
management report which is publicly released at the same time each year as the Bank’s annual report.




                                                              46
                                                   CAPITALISATION AND INDEBTEDNESS

The following table sets forth the unaudited capitalisation of the Bank on consolidated basis at 28 February 2007 as derived
from the Bank’s unaudited financial information. The following information should be read in conjunction with the Bank’s
audited financial information and the related notes thereto included elsewhere in this document.
                                                                                                                                                                      At 28
                                                                                                                                                                 February 2007
                                                                                                                                                                    (€ 000)
Short-term indebtedness ..........................................................................................................................                      108,113
Deposits from banks ..................................................................................................................................                    7,216
Deposits from customers ............................................................................................................................                     59,693
Other liabilities ...........................................................................................................................................             2,483
Other borrowed funds ................................................................................................................................                    17,567
Debt securities issued ................................................................................................................................                  21,153
Long-term indebtedness ...........................................................................................................................                       77,337
Deposits from banks ..................................................................................................................................                         0
Deposits from customers ............................................................................................................................
                                                                                                                                                                           3,397
Other liabilities ...........................................................................................................................................
                                                                                                                                                                             601
Other borrowed funds ................................................................................................................................
                                                                                                                                                                           6,802
Debt securities issued ................................................................................................................................
                                                                                                                                                                          66,537
Shareholders’ equity ................................................................................................................................
                                                                                                                                                                          61,698
Share capital ...............................................................................................................................................
                                                                                                                                                                           6,455
Share premium ...........................................................................................................................................
                                                                                                                                                                             435
Retained earnings .......................................................................................................................................
                                                                                                                                                                          54,873
Revaluation reserve ...................................................................................................................................
                                                                                                                                                                            (65)
Total capitalisation and indebtedness .....................................................................................................
                                                                                                                                                                        247,148
Source: BACB
The following table sets forth the unaudited indebtedness of the Bank on consolidated basis at 28 February 2007 as derived
from the Bank’s unaudited financial information. This information should be read in conjunction with the Bank’s audited
financial information and the related notes thereto included elsewhere in this document.
                                                                                                                                                                      At 28
                                                                                                                                                                February 2007
                                                                                                                                                                    (€ 000)
Cash and balances with Central Bank (1) ...................................................................................................                               24,038
Due from other banks (2) ...........................................................................................................................                      11,100
Trading portfolio (3) ..................................................................................................................................                   2,054
Investment securities-available-for-sale (4) ................................................................................................                              6,034
Liquidity (1+2+3+4) .................................................................................................................................                    43,227
Loans and advances to customers ...............................................................................................................                          70,700
Other assets ................................................................................................................................................                341
                                                                                                                                                                         71,041
Short-term receivables ............................................................................................................................
Deposits from banks ..................................................................................................................................                    7,216
Deposits from customers ............................................................................................................................                     59,693
Other liabilities ...........................................................................................................................................             2,483
Other borrowed funds ................................................................................................................................                    17,567
Debt securities issued ................................................................................................................................                  21,153
                                                                                                                                                                         108,113
Short-term indebtedness ..........................................................................................................................
                                                                                                                                                                        (6,155)
Net short-term indebtedness (1) ...............................................................................................................
Deposits from banks ..................................................................................................................................                         0
                                                                                                                                                                           3,397
Deposits from customers ............................................................................................................................
                                                                                                                                                                             601
Other liabilities ...........................................................................................................................................
                                                                                                                                                                           6,802
Other borrowed funds ................................................................................................................................
                                                                                                                                                                          66,537
Debt securities issued ................................................................................................................................
Long-term indebtedness ...........................................................................................................................                       77,337
Net indebtedness (2) ..................................................................................................................................                  71,182

Source: BACB
(1) Net short-term indebtedness is short-term indebtedness less short-term receivables less liquidity.
(2) Net indebtedness is net short-term indebtedness plus long-term indebtedness.

                                                                                             47
45




48
Save as disclosed above, the Bank did not, at the close of business on 28 February 2006, have any material indebtedness in the
nature of borrowing, including bank overdrafts, liabilities under acceptances (other than normal trade bills) or acceptance
credits, mortgages, charges, hire purchase commitments or obligations under finance leases.

Capital Adequacy
The following table sets forth the Bank’s capital adequacy ratios calculated in accordance with                                                             At 31 December
the capital adequacy guidelines of the Bank for International Settlements as at 31 December                                                              2006              2005
2006 and 2005.                                                                                                                                          (€ 000, except percentages)
Type of Capital                                                                                                                                              39,715        39,715
Tier 1(1) ..........................................................................................................................................
Tier 2(2) (4)........................................................................................................................................           (56)        8,542
Deductions ..................................................................................................................................                     80            -
                                                                                                                                                             39,579        48,257
Total capital base...........................................................................................................................

Risk-Weighted Assets
Balance sheet items .....................................................................................................................                   195,302       143,599
Off-balance sheet item ................................................................................................................                      19,274        11,419
Total risk-weighted items ............................................................................................................                      214,576       155,018

Capital Adequacy Ratios
Tier 1 capital adequacy (3).............................................................................................................                    18.5%
                                                                                                                                                          25.6%             25.6%
                                                                                                                                                                            25.6%
Total capital adequacy (3) (4) (5) ........................................................................................................                 18.4%
                                                                                                                                                          31.1%             31.1%
                                                                                                                                                                            31.1%


(1) Tier 1 capital is share capital plus share premium plus general reserves;
(2) The Bank’s Tier 2 capital consists of other reserves, e.g. the revaluation reserve, unrealized gains from instruments, available for
      sale, provisions, debt/equity hybrid instruments and subordinated short term debt;
(3) The calculation of the capital ratios for 2005 assumes that net income for the year is retained;
(4) Includes $10 million of debt/equity hybrid instrument (a line of credit from the BAEF). Based on BNB approval dated January 27, 2006
this amount is no longer considered a debt/equity hybrid instrument and is no longer included in the additional capital reserves. If this had
happened prior to the end of fiscal year 2005, the total capital adequacy ratio would have been approximately equal to the Tier 1 capital
adequacy ratio of 25.6%;
(5) The calculation of the capital adequacy ratios for 2006 does not include net income for 2006. Assuming that net income for 2006 after
payment of the proposed dividend of BGN 0.75 per share is taken to the reserve fund, Tier 1 capital adequacy ratio and total capital adequacy ratio
as of December 31, 2006 would have been 24.4% and 24.3% respectively;
Capital adequacy calculations are done based on the Basel accord.


Source: BACB



For more information on the Bank’s capital adequacy and its funding and associated risk management policies, see
“Operating and Financial Review and Results of Operations — Capital Resources” and “Risk Management, Internal Controls
and Compliance”.




                                                                                                 49
             SELECTED HISTORICAL FINANCIAL AND OPERATIONAL INFORMATION

Other than the “Key ratios” set out below (which has been extracted without material adjustment from the Bank’s consolidated
unaudited financial information), the selected information set out below has been derived from and should be read in
conjunction with the Bank’s historical audited balance sheets, statements of income and cash flows at and for the years ended
31 December 2004 and 2005 respectively, and consolidated balance sheets, statements of income and cash flows for 2006,
included elsewhere in this document.

The Bank’s historical financial information has been prepared in accordance with IFRS. The following information should be
read in conjunction with “Operating and Financial Review and Results of Operations”, the related historical financial
information and the accompanying notes thereto included elsewhere in this document.

The Bank’s consolidated financial statements for 2006 include the information for its subsidiary Kapital Direct EAD.

Since 31 December 2006, the Bank’s level of business activity and growth have continued to develop as expected. Overall,
the outlook for the Bank’s trading for 2007 remains in line with management’s expectations and they are confident of the
Bank’s prospects for the year.
                                                                                                                                     Year ended 31 December
                                                                                                                                 2006          2005             2004
                                                                                                                                             (audited)
                                                                                                                                              (€ 000)
Income Statement Data
Interest income ............................................................................................................    31,874      25,383           20,529
Interest expense ...........................................................................................................     (7,495)     (6,912)          (6,092)
Net Interest Income ...................................................................................................         24,379      18,471           14,437
Fees and commission income, net ...............................................................................                    1,830             2,345         1,306
Gains/(losses) from securities ......................................................................................                161                38            59
Gains/(losses) from foreign currency dealings .............................................................                          264               230           172
Gains/(losses) from foreign currency revaluation ........................................................                          (280)               525         (369)
Other operating income ...............................................................................................               584                41           374
Operating Income .....................................................................................................           26,938      21,650           15,979
Operating expenses .....................................................................................................          (5,259)     (4,828)         (4,055)
Provisions for impairment ...........................................................................................             (2,152)     (3,098)         (3,523)
Income before taxation .............................................................................................            19,527          13,724            8,401
Income taxes ...............................................................................................................      (2,072)     (1,383)         (1,192)
Net income .................................................................................................................    17,455          12,341            7,209
Balance sheet data
Cash and balances with the Central Bank ....................................................................                       17,490        7,481            8,109
Due from other banks ..................................................................................................            26,305       32,283           22,263
Loans and advances to customers ................................................................................                  193,263      146,697          113,861
Trading portfolio .........................................................................................................         1,948          323               —
Investment securities — available-for-sale ..................................................................                       5,661        5,013            6,007
Other assets .................................................................................................................      1,363          805              443
Goodwill………………………………………………………………………                                                                                            80      —            —
Property, plant and equipment .....................................................................................                 2,410        2,301             2,409
Total assets ................................................................................................................   248,520     194,903          153,092
Deposits from banks ....................................................................................................          15,342         9,975               —
Deposits from customers .............................................................................................             54,098        33,786           25,531
Other liabilities ...........................................................................................................      2,869         1,952            1,490
Other borrowed funds .................................................................................................            31,804        55,258           59,029
Debt securities outstanding ..........................................................................................            87,293        54,152           39,610
Total liabilities ...........................................................................................................   191,406     155,123          125,660
Share capital ...............................................................................................................      6,455         6,455            6,432
Share premium ............................................................................................................           435           435              359
Retained earnings ........................................................................................................        50,280        32,825           20,484
Revaluation reserve .....................................................................................................           (56)            65              157
Total shareholders’ equity .......................................................................................               57,114      39,780          27,432

                                                                                            50
Total Liabilities and Shareholders’ equity ..............................................................      248,520       194,903      153,092



                                                                                                            At 31 December
                                                                                          2006                   2005             2004
Key ratios
Return on assets (%)(1)                                                                         7.9                 7.1                   5.5
Return on equity (%)(2)                                                                       36.03                36.7                  30.4
Earnings per share (€ per share)(3)                                                            1.38                0.98                  0.57
Cost/income ratio (%)(4)                                                                       19.3                22.9                  24.8
Shareholders’ equity/Total assets (%)(5)                                                       23.0                20.4                  17.9
Tier 1 capital ratio (6)                                                                       18.5                25.6                  23.9
Capital to risk-weighted assets ratio (6)                                                      18.4                31.1                  30.5


(1) Return on assets is calculated by dividing net income for the period by the average of total assets at the end of the period, and at the end
of the previous period.
(2) Return on equity is calculated by dividing net income for the period by the average of total shareholders’ equity at the end of the
      period, and at the end of the previous period.
(3) Earnings per share is calculated by dividing net income for the period by the average number of shares outstanding during the period.
(4) Cost/income ratio is calculated by dividing operating expenses for the period by operating income for the period (excluding any losses or
      gains from foreign currency revaluation).
(5) Shareholder equity/Total assets is calculated by dividing total shareholders equity at the end of the period by total assets at the end of the
      period.
(6) 2006 capital ratios are calculated without accounting for 2006 profits. Under an assumption for retention of the 2006 profits after dividend
     (0.38 eur per share) Tier I and the Capital to risk-weighted assets ratio as of 31 December 2006 would have been respectively 24.4% and
     24.3%. Capital adequacy calculated under BIS Basel requirements.




                                                                             51
           OPERATING AND FINANCIAL REVIEW AND RESULTS OF OPERATIONS


The following is a discussion of the results of operations and financial condition of the Bank for the years ended 31 December
2004, 2005 and 2006. Prospective investors should read this discussion together with the whole of this document, including the
section headed “Risk Factors”, the Bank’s historical financial statements and the related notes included elsewhere in this
document and should not rely just on the key summarised information contained in this section. The Bank has prepared its
historical financial statements for the years ended 31 December 2004, 2005 and 2006 in accordance with IFRS. The financial
information in this section has been extracted without material adjustment from the Bank’s historical financial statements for
the years ended 31 December 2003, 2004 and 2005 and the related notes thereto included elsewhere in this document or from the
Bank’s accounting records that formed the underlying basis of the financial information in those financial statements.

The 2006 financial information contained in this section has been extracted without material adjustments from the consolidated
financial statements of the Bank.
This section contains forward looking statements. These statements are subject to risks, uncertainties and other factors that
could cause the Bank’s future results of operations or cash flows to differ materially from the results of operations or cash
flows expressed or implied in such forward looking statements.

Overview

The Bank is a specialist provider of secured finance to small- and medium-sized businesses in Bulgaria, with specific lending
programmes for financing SME companies in a variety of industries, and companies in the tourism and construction sectors.
The Bank also provides mortgage loans to individuals, although this is not a primary focus of the Bank. The Bank lends to its
clients through its head office in Sofia and four other branches. Based on statistics published by the BNB, at 31 December 2006,
the Bank was the 22nd largest bank in Bulgaria on the basis of total assets, the 10th largest bank on the basis of total capital and
had the highest return on assets of all the Bulgarian banks included in the BNB’s statistics.
The Bank’s net loan portfolio comprised 77.8% of the Bank’s total assets at 31 December 2006. At that date, loans to small- and
medium-sized businesses and individuals represented approximately 90.1% and 9.9%, respectively, of the Bank’s total loans
and advances to customers before provisions for impairment.
The principal sources of the Bank’s funding have been the Bulgarian debt capital markets and long-term loans from the BAEF,
international financial institutions and European banks, with these four categories of funding sources accounting for 62.2% of
the Bank’s total liabilities at 31 December 2006. At that date, deposits from customers and bank deposits comprised 36.3% of
the Bank’s total liabilities. For more information on the Bank’s funding, see “Selected Statistical Information”.
At 31 December 2006, the Bank had a customer base of approximately 1,600 corporate customers and 4,800 retail customers,
and employed 137 people.
The Bank reports its results of operations in Euros and Leva.

Significant Factors Affecting Results of Operations

Effect of Growth Policy
Since its formation in 1996, the Bank has pursued a policy of managed growth. At 31 December 2006, the Bank had total assets
of €248.5 million, compared to total assets of €194.9 million and €153.1 million at 31 December 2005 and 2004, respectively.
Loans and advances to customers comprise the Bank’s principal asset on its balance sheet and increased by 28.8% €113.9 million
at 31 December 2004 to €146.7 million at 31 December 2005, and increased 31.7% to €193.3 million at 31 December 2006.
The Bank seeks to manage its loan portfolio growth at sustainable levels. However, growth in any given month varies with the
flow of new business and the rate of loan repayments. The Bank’s average loan portfolio, taken on a monthly basis, was €137.7
million in 2005. In 2006 the average monthly loan portfolio increased by 29.2% to €177.8 million.
The Bank has also achieved consistent growth in profitability during the three years ended 31 December 2006. For the year
ended 31 December 2006, the Bank’s net income was approximately €17.5 million, an increase of 41.4% from €12.3 million for
the year ended 31 December 2005, which was an increase of 71.2% over net income of €7.2 million for the year ended 31
December 2004.


Net interest income for the year ended 31 December 2006 increased to €24.4 million, an increase of 32.0% from €18.5 million
in 2005. Net interest income in 2004 was €14.4 million. The increase was due to the Bank’s growing loan portfolio and sustained
margins on loans, which the Bank was able to achieve despite increasing competition.



                                                                52
Effect of Diversification of Funding Base
At 31 December 2006, the Bank had total liabilities of €191.4 million, compared to liabilities of €155.1 million and €125.7
million at 31 December 2005 and 2004, respectively. Credit lines and long-term loan facilities from international financial
institutions, international banks and the BAEF are among the Bank’s principal sources of funding. At 31 December 2006, these
sources of funding comprised 16.6% of the Bank’s total liabilities, compared to 35.6% and 47.0% of total liabilities at 31
December 2005 and 2004, respectively. During the three years ended 31 December 2006, the Bank has gradually diversified its
funding from the Bulgarian debt capital markets through the issue of unsecured and mortgage bonds, from international banks,
through syndicated loans, and from customer and bank deposits. At 31 December 2006, debt securities comprised 45.6% of the
Bank’s total liabilities, compared to 34.9% and 31.5% of the Bank’s total liabilities at 31 December 2005 and 2004. At 31
December 2006, loans from international banks, excluding loans from international financial institutions and from the BAEF,
comprised 2.6% of the Bank’s total liabilities, compared to 9.7% and 9.5% of Bank’s total liabilities at 31 December 2005 and
2004. At 31 December 2006, retail and institutional deposits, excluding inter-bank deposits, comprised 28.3% of the Bank’s
total liabilities, compared to 21.8% and 20.3% of the Bank’s total liabilities at 31 December 2005 and 2004, respectively.

Effect of Managing Foreign Exchange Position
The Bank’s profitability is influenced by gains or losses resulting from foreign exchange revaluations. The Bank does not incur
any material gains or losses on account of positions arising from operations with clients as these positions are closed within a
short period. However, the Bank does maintain an open position in US dollars, due to the fact that it makes US dollar loans. The
Bank aims to minimise the effect of any changes in the US dollar/ Euro exchange rate by maintaining a long position in US
dollars that is approximately equal to the provisions for impairment made in respect of its US dollar denominated loans. In this
way, any gains or losses upon revaluation of currency are matched by revaluations of provisions for impairment and the impact
on net income is minimal. The percentage of assets in US dollars, calculated over the Euro equivalent of total assets, has
decreased in the three years ended 31 December 2006 and comprised 8.2% of the Bank’s total assets at 31 December 2006,
compared with 15.7% and 19.5% at 31 December 2005 and 2004, respectively. Part of the decrease is due to the depreciation of
the US dollar against the Euro, but is mainly due to the sharp decrease in the demand for US dollar denominated loans.
Management expects that the Bank will continue to have a long balance sheet position in US dollars that matches its provisions
for impairment for US dollar denominated loans.

Critical Accounting Policies
The preparation of financial statements in conformity with IFRS requires estimates and assumptions that affect the reported
amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. Although the
management of the Bank believes that its estimates, assumptions and judgments are reasonable, they are based upon the
information currently available. The Bank’s actual results may differ from these estimates.

Below the main elements from the Bank’s accounting policy are presented. For more information on these accounting policies,
as well as the Bank’s other accounting policies, see the Bank’s historical financial statements for the years ended 31 December
2004, 2005 and 2006, which are included elsewhere in this document.

Principles of Consolidation

Subsidiaries are entities over which the Bank has the power to govern the financial and operating policies generally
accompanying a shareholding of more than 50% of the voting rights, or otherwise has power to exercise control over the
operations.

Subsidiaries are fully consolidated from the date on which effective control is transferred to the Bank and are no longer
consolidated from the date on which control ceases.

At acquisition the subsidiaries are accounted for by applying the purchase method. The cost of an acquisition is measured as the
fair value at the date of exchange, of assets given, liabilities incurred or assumed and equity instruments issued, plus any costs
directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the Bank’s share in the
identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the
subsidiary acquired, the difference is recognised directly in the income statement.

The goodwill arising from business combinations is estimated once a year or more often if there are indications it me be
devaluated.

Upon consolidation all transactions balances and unrealized profit between the group members are eliminated.




                                                                   53
Loans and Advances to Customers
Loans and advances to customers are carried at amortised cost, reflecting provisions for impairment. All loans and advances are
recorded when cash is disbursed to borrowers.

Impairment of Loans and Advances to Customers
IAS 39 “Financial instruments: Recognition and measurement” (“IAS 39”) requires impairment provisions to be measured
based on an assessment of the recoverable amount of individually significant assets or portfolios of assets with similar risks,
determined as the expected future cash flows from the instrument, including the fair value of collateral if foreclosure is
probable, discounted to the balance sheet date using the original effective interest rate implicit in the loan.
A credit risk provision for loan impairment is established if there is objective evidence that the Bank will not be able to collect
all amounts due. The amount of provision is the difference between the carrying amount and the recoverable amount, being the
present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted based on the
effective interest rate at inception. If the amount of the impairment subsequently decreases due to an event occurring after the
initial provision, the release of provisions is credited to the provision for impairment in the Bank’s income statement.

The Bank has adopted a methodology for calculation of the provisions for impairment on the basis of the Bulgarian banking
regulations. The Bank classifies its loans in several groups. For all loans classified in groups other than regular the Bank applies
percentage exceeding the regulative requirements to decrease the cash flows and thus determines the expected cash flows which
are then discounted based on the effective interest rate at inception. Other specific requirements are related to the conditions for
reclassification of irregular loans back to the regular group and determining the liquid collateral for the purposes of determining
the provisions for impairment.

The amount of potential losses not specifically identified, but which experience indicates are present in the portfolio of loans
and advances, is also recognised as an expense and deducted from the total carrying amount of loans and advances as a
provision for impairment on loans and advances. The potential losses are estimated based upon historical patterns of losses, the
credit risk associated with the borrowers and the economic climate in which the borrowers operate.

When loans and advances cannot be recovered, they are written off and charged against the provision for impairment. Loans
and advances are not written off until all necessary legal procedures have been completed or the amount of the loss has been
determined. The collected amounts under written off loans are booked as other operating income in the income report for the
current period.

Assets Held for Resale
Real estate and other tangible fixed assets acquired from realisation of collateral or exclusively with a view to disposal in the
near future are stated at their fair value and no depreciation is accrued. Such assets are included in other assets in the balance
sheet.

Finance Leases
Assets transferred under finance leases are recognised as a receivable at their present value and included in loans and advances
to customers in the balance sheet. Lease income is recognised over the term of the lease using the net investment method, which
reflects a constant periodic rate of return.

Taxation
Income tax expense is based on taxable profit for the year and includes deferred taxation. Taxes other than on income are
recorded as operating expenses. Deferred taxes are calculated using the balance sheet liability method and reflect the net effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The measurement of deferred
tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the Bank
expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and
liabilities are recognised regardless of when the temporary differences are likely to reverse.

Deferred tax assets are recognised when it is probable that sufficient taxable profits will be available against which the deferred
tax assets can be utilised. At each balance sheet date, the Bank assesses unrecognised deferred tax assets and the carrying amount
of deferred tax assets. The Bank recognises a previously unrecognised deferred tax asset to the extent that it has become
probable that future taxable profit will allow the deferred tax asset to be recovered. The Bank conversely reduces the carrying
amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow
the benefit of part or the entire deferred tax asset to be utilised. A deferred tax liability is recognised for all taxable temporary
differences.

Deferred tax related to fair value revaluation of available-for-sale investments, which are charged or credited directly to equity,
is also credited or charged directly to equity and is subsequently recognised in the income statement together with the deferred
gain or loss when securities are sold.
                                                                 54
Interest Income and Expense
Interest income and expense are recognised in the income statement for all interest bearing instruments on an accrual basis
using the effective yield method. Interest income includes interest earned on investment securities and accrued discount on other
discounted instruments. When collection of a loan becomes doubtful, it is written down to its recoverable amount and interest
income is thereafter recognised based on the rate of interest that was used to discount the future cash flows for the purpose of
measuring the recoverable amount.

Fee and Commission Income
Fees and commissions are generally recognised on an accrual basis. Loan management fees are deferred and recognised as an
adjustment to the effective interest rate on the loan.

Borrowings
Borrowings are recognised initially at “cost”, being their issue proceeds (i.e. the fair value of consideration received) net of
transaction costs incurred. Borrowings are subsequently stated at amortised cost and any difference between net proceeds and
the redemption value is recognised in the income statement over the period of the borrowings using the effective yield method.


Results of Operations for the Years Ended 31 December 2006, 2005 and 2004
The following table sets out the Bank’s net income and the principal components thereof for the years ended 31 December
2006, 2005 and 2004, as well as the percentage variation within each line item.



                                                             Year ended 31 December                         Variation
                                                      2006             2005         2004           2006/2005         2005/2004
                                                                     (€ 000)                                  (%)
Income Statement Data
Interest income                                      31,874            25,383        20,529              25.6               23.6
Interest expense                                     (7,495)          (6,912)       (6,092)               8.4               13.5

Net Interest Income                                   24,379          18,471         14,437              32.0               27.9

Fees and commission income, net                        1,830           2,345          1,306             (22.0)              79.5
Other non-interest income                                729             834            236             (12.6)             254.6

Operating Income                                      26,938          21,650         15,979              24.4               35.5

Operating expenses                                   (5,259)          (4,828)       (4,055)                8.9              19.1
Provisions for impairment                            (2,152)          (3,098)       (3,523)             (30.5)            (12.1)

Income before taxation                                19,527          13,724          8,401              42.3               63.4

Income taxes                                         (2,072)          (1,383)       (1,192)              49.8               16.0

Net income                                            17,455          12,341          7,209              41.4               71.2

Cash Flow Statement Data
Net cash (used in) operating activities             (39,366)         (18,034)      (23,351)             118.3             (22.8)
Net cash (used in)/provided by investing
activities                                           (1,450)             760        (1,291)            (290.8)            158.9
Net cash provided by financing activities            37,478           25,057         38,113               49.6            (34.3)

Net (decrease)/increase in cash and cash
equivalents                                          (4,383)           9,910         12,970            (144.2)            (23.6)
Source: BACB



Net Interest Income
A number of factors affect the Bank’s net interest income. It is primarily determined by the volume of interest earning assets,
such as loans and advances to customers, interest-earning securities which the Bank holds and loans to other credit institutions,
and the volume of interest bearing liabilities, such as debt securities issued, loan facilities from international financial
institutions, deposits from other credit institutions and customer deposits, as well as the difference between rates it earned on
interest earning assets, on the one hand, and rates it paid on interest-bearing liabilities on the other.

The following table sets out the principal components of the Bank’s net interest income for each of the years ended 31

                                                                55
December 2006, 2005 and 2004, as well as the percentage variation within each line item.


                                                                                        Year ended 31December                    Variation
                                                                                 2006           2005            2004       2006/2005        2005/2004
                                                                                               (€ 000)                                (%)
Interest income .........................................................        31,874          25,383         20,529         25.6              23.6
Interest expense ........................................................        (7,495)         (6,912)        (6,092)        8.4               13.5
Net interest income .................................................            24,379          18,471          14,437        32.0              27.9

Source: BACB

Interest Income
Interest income is comprised of interest and deferred loan management fees paid to the Bank. It also includes interest earned on
inter-bank placements and debt securities held by the Bank for its own account.
The following table sets out the principal components of Bank’s interest income for the years ended 31 December 2006, 2005
and 2004.
                                                                                        Year ended31December                     Variation
                                                                                 2006           2005            2004      2006/2005         2005/2004
                                                                                               (€ 000)                                (%)
Interest Income
Loans ........................................................................    30,474          24,627         20,074          23.7           22.7
Due from banks ........................................................            1,076             446            127         141.3          251.2
Securities ...................................................................       324             310            328           4.5           (5.5)
Total interest income ..............................................             31,874          25,383          20,529          25.6            23.6

Source: BACB

Interest income increased by €6.5 million, or 25.6%, from €25.4 million in the year ended 31 December 2005 to €31.9 million
in the year ended 31 December 2006. Interest income increased by €4.9 million, or 23.6%, from €20.5 million in the year ended
31 December 2004 to €25.4 million in the year ended 31 December 2005. These increases were primarily a result of the loan
portfolio growth and sustained interest margins during the three years ended 31 December 2006, 2005 and 2004, but were also
influenced by the variations in the timing of when new loans and advances to customers were made during the course of these
years.

Interest Income from Loans
During the year ended 31 December 2006, interest income from loans increased by €5.9 million, or 23.7%, from €24.6 million
during the year ended 31 December 2005 to €30.5 million in the year ended 31 December 2006. This increase was attributable
to the increase in the Bank’s loans and advances to customers over the period. During the year ended 31 December 2005,
interest income from loans increased by €4.6 million, or 22.7%, from €20.1 million during the year ended 31 December 2004 to
€24.6 million during the year ended 31 December 2005.

Interest Income from Deposits
During the year ended 31 December 2006, interest income from deposits increased by €0.63 million or 141%, from €0.45
million during the year ended 31 December 2005 to €1.08 million during the year ended 31 December 2006. The increase
resulted from the increase in the volume of deposits placed and from the increase in the money market rates in US dollars and
Euro. During the year ended 31 December 2005, interest income from deposits increased by €0.319 million or 251.2%, from
€0.127 million during the year ended 31 December 2004 to €0.446 million during the year ended 31 December 2005.


Interest Income from Securities
During the year ended 31 December 2006, interest income from securities increased by 4.5%, from €0.310 million during the
year ended 31 December 2005 to €0.324 million during the year ended 31 December 2005. The increase resulted from several
new investments in securities made by the Bank as well as from the increase in the market rates of securities with floating
coupon. The Bank mainly invests in long-term securities with low sensitivity to interest rate changes, issued by the Bulgarian
government as a means of liquidity management. The Bank also holds some corporate bonds, which it purchased in 2005 to
enhance its yield. During the year ended 31 December 2005, interest income from securities decreased by €0.018 million, or
5.5%, from €0.328 million during the year ended 31 December 2004 to €0.310 million during the year ended 31 December
2005.

Interest Expense
Interest expense comprises amounts paid by the Bank as interest on funds deposited or lent by customers and as interest on debt
                                                                                    56
securities issued and other borrowed funds. The following table sets out the principal components of the Bank’s interest expense
for the years ended 31 December 2006, 2005 and 2004, as well as the percentage variation within each line item.


                                                                                       Year ended 31 December                      Variation
                                                                                2006            2005            2004        2006/2005         2005/2004
                                                                                               (€ 000)                                  (%)
Interest expense
Deposits ....................................................................     (1,386)           (751)           (701)         84.6             7.1
Debt securities issued ................................................           (3,815)         (2,316)         (2,105)         64.7           10.0
Other borrowed funds ...............................................              (2,294)         (3,845)         (3,286)       (40.3)           17.0
Total interest expense ...............................................            (7,495)         (6,912)         (6,092)         8.4            13.5

Source: BACB

Interest expense increased by €0.6 million, or 8.4%, from €6.9 million in the year ended 31 December 2005 to €7.5 million in
the year ended 31 December 2006. Interest expense increased by €0.8 million, or 13.5%, from €6.1 million in the year ended 31
December 2004 to €6.9 million in the year ended 31 December 2005. The increase resulted from the increase in the volume of
interest-bearing liabilities, although the average effective interest on the interest-bearing liabilities decreased.

Interest Expense on Deposits
Interest expense on deposits increased by €0.635 million, or 84.6%, from €0.751 million in the year ended 31 December 2005 to
€1.386 million in the year ended 31 December 2006. Interest expense on deposits increased by €0.050 million, or 7.1%, from
€0.701 million in the year ended 31 December 2004 to €0.751 million in the year ended 31 December 2005. The increase was
due to the increase in the volume of attracted deposits.

Interest Expense on Debt Securities
Interest expense on debt securities issued increased by €1.5 million, or 64.7%, from €2.3 million in the year ended 31 December
2005 to €3.8 million in the year ended 31 December 2006. Interest expense on debt securities issued increased by €0.211
million, or 10.0%, from €2.1 million in the year ended 31 December 2004 to €2.3 million in the year ended 31 December 2005.
The increases resulted from increases in debt securities issued by the Bank over the relevant periods, and were partially offset
by lower interest rates on the new issues. Debt securities issued increased by €33.2 million, or 61.2%, from €54.1 million at 31
December 2005 to €87.3 million at 31 December 2006 and increased by €14.5 million, or 36.7%, from €39.6 million at 31
December 2004 to €54.1 million at 31 December 2005.

Interest Expense on Other Borrowed Funds
Interest expense on other borrowed funds decreased by €1.5 million, or 40.3%, from €3.8 million in the year ended 31
December 2005 to €2.3 million in the year ended 31 December 2006. Interest expense on other borrowed funds amounted to
€3.3 million in the year ended 31 December 2004. The decrease in 2006 resulted from decrease in average amounts of borrowed
funds from international financial institutions and international banks over the respective period, and also by lower interest rates
on the borrowings. The monthly average amount of other borrowed funds for 2006 was €37.2 million in comparison to €59.6
million in 2005 and €47.5 million in 2004. The total principal amount of the Bank’s other borrowed funds decreased by €23.5
million, or 42.4%, from €55.3 million at 31 December 2005 to €31.8 million at 31 December 2006 and respectively by €3.7
million, or 6.3%, from €59.0 million at 31 December 2004 to €55.3 million at 31 December 2005.

Net Interest Income and Interest Margin
Net interest income increased by €5.9 million, or 32.0%, from €18.5 million in the year ended 31 December 2005 to €24.4
million in the year ended 31 December 2006 and by €4.0 million, or 27.9%, from €14.4 million in the year ended 31 December
2004 to €18.5 million in the year ended 31 December 2005. Increases in net interest income were caused by the growth in
interest income exceeding the growth in interest expense, which was the result of the increase of the loan portfolio combined
with steady interest margins and decreased funding costs.

Operating Income
The operating income of the Bank increased by €5.25 million or 24.4% from €21.65 million for the year ended 31 December
2005 to €26.9 million for the year ended 31 December 2006, and by €5.7 million or 35.5% from €16.0 million for the year
ended 31 December 2004 to €21.7 million for the year ended 31 December 2005. A number of factors affect the Bank’s
operating income, the most important being net interest income. Net interest income represented 90.5%, 85.3% and 90.3% of
operating income for the years 2006, 2005 and 2004 respectively.

Net Fees and Commission Income
Fees and commission income is composed of fees in connection with current accounts, such as maintenance and transfer fees;
                                                                                   57
certain loan fees, such as prepayment, appraisal and guarantee fees; asset servicing fees; and fees and commissions on
settlement and brokerage operations. The following table sets out the principal components of the Bank’s fees and commission
income for the years ended 31 December 2006, 2005 and 2004, as well as the percentage variation within each line item.


                                                                                          Year ended 31 December                     Variation
                                                                                   2006            2005            2004       2006/2005         2005/2004
                                                                                                  (€ 000)                                 (%)
Fees and commission income ....................................                      2,022           2,621          1,351       (22.9)               94.0
Fees and commission expense ...................................                      (192)           (276)            (45)      (30.4)              513.3
Fees and commission income, net .............................                        1.830           2,345          1,306      (22.0)                79.6

Source: BACB
Net fee and commission income decreased by €0.5 million, or 22.0%, from €2.3 million during the year ended 31 December
2005 to €1.8 million during the year ended 31 December 2006, and increased by €1.0 million, or 79.6%, from €1.3 million
during the year ended 31 December 2004 to €2.3 million during the year ended 31 December 2005. The decrease resulted from
higher than the usual income from prepayment fees in 2005 as a result from the limitations enforced by BNB at the time.

Other Non-interest Income
Other non-interest income consists of realised gains or losses from foreign currency and securities trading, gains or losses from
foreign currency revaluation and other operating income. Other operating income over the period consists of rental income and
loan recoveries.
Historically, other non-interest income has not been a material part of the operating income of the Bank and comprised €0.729
million in 2006, €0.834 million in 2005 and €0.236 million in 2004. The results from foreign currency revaluation in the years
ended 31 December 2006, 31 December 2005 and 31 December 2004 were caused by the long US dollar balance sheet position
of the Bank. The long US dollar balance sheet position was approximately equal to the provisions on US dollar denominated
loans. As a result the gains or losses from foreign currency revaluation were approximately offset by more or less provisions
for impairment expense. The pre-tax net effect of foreign currency revaluation after accounting for the effect of the movements
in the Euro to US dollar exchange rate on the provisions for impairment expense was a loss of €0.124 million, gain of €0.278
million in the year ending 31 December 2005 and a loss of €0.265 million in the year ending 31 December 2004.

Operating Expenses
Operating expenses comprised salaries and benefits and other administrative expenses. Total operating expenses increased by
€0.43 million, or 8.9%, from €4.83 million during the year ended 31 December 2005 to €5.26 million during the year ended 31
December 2006, and by €0.773 million, or 19.1%, from €4.06 million during the year ended 31 December 2004 to €4.83 million
during the year ended 31 December 2005. The following table sets out the principal components of the Bank’s consolidated
general expenses for the years ended 31 December 2006, 2005 and 2004.
                                                                                          Year ended 31 December                     Variation
                                                                                   2006            2005            2004       2006/2005         2005/2004
                                                                                                  (€ 000)                                 (%)
Personnel ...................................................................        2,884            2,550           2,110          13.1             20.9
Rent ...........................................................................        60               65              69         (7.7)            (5.8)
Utilities and telecommunications ..............................                        246              255             243         (3.5)              4.9
Professional services .................................................                525              527             459         (0.4)             14.8
Depreciation and amortization ...................................                      339              387             431        (12.4)           (10.2)
Other expenses ..........................................................            1,205            1,044             743          15.4             40.5
Operating expenses ...................................................               5,259            4,828           4,055              8.9         19.1

Source: BACB

Personnel
Personnel expenses include wages, staff bonuses and social security contributions. Personnel expenses increased by €0.33
million, or 13.1%, from €2.6 million during the year ended 31 December 2005 to €2.9 million during the year ended 31
December 2006, and by €0.440 million, or 20.9%, from €2.1 million during the year ended 31 December 2004 to €2.6 million
during the year ended 31 December 2005. The subsequent increases were due to higher staff costs associated with the continued
growth of the Bank’s business and the substantially increased amount of employee bonuses, following the increased
profitability of the Bank in accordance with the Bank’s Long Term Employee Incentive Plan. For more information on the
Bank’s Long Term Employee Incentive Plan, see “Business Overview — Employees — Long Term Employee Incentive Plan”.
Net of the employee bonuses, personnel expenses increased by €0.236 million, or 12.1%, from €1.9 million during the year
ended 31 December 2005 to €2.2 million during the year ended 31 December 2006, and by €0.275 million, or 16.5%, from €1.7
million during the year ended 31 December 2004 to €1.9 million during the year ended 31 December 2005. The Bank employed
                                                            58
137 people at 31 December 2006, as compared with 139 people and 117 people at 31 December 2005 and 2004, respectively.

Contribution to and Payment under the Long Term Employee Incentive Plan
The Bank’s contribution to and payment under the Long Term Employee Incentive Plan increased by €0.098 million, or 16.1%,
from €0.607 million in 2005 to €0.705 million in 2006 and increased by €0.165 million, or 37.3%, from €0.442 million in 2004
to €0.607 million in 2005.

Depreciation and Amortisation
The Bank’s depreciation and amortisation expense decreased by €0.048 million, or 12.4%, from €0.387 million in the year
ended 31 December 2005 to €0.339 million in the year ended 31 December 2006 and decreased by €0.044 million, or 10.2%,
from €0.431 million in the year ended 31 December 2004 to €0.387 million in the year ended 31 December 2005. During 2006
there were no significant investments in fixed assets, which resulted in a decrease in the depreciation and amortisation expense.

Other Operating Expenses
Other operating expenses consist of general and administrative expenses, employee training, travel related expenses, the annual
contribution to the Deposit Insurance Fund and marketing expenses and other expenses related to operations. Other operating
expenses increased by €0.161 million, or 15.4%, from €1.044 million in the year ended 31 December 2005 to €1.205 million in
the year ended 31 December 2006 and by €0.301 million, or 40.5%, from €0.743 million in the year ended 31 December 2004 to
€1.044 million in the year ended 31 December 2005. The main causes of the increase were the increases in equipment
maintenance, marketing expenses and contributions to the Deposit Insurance Fund, following an increase in customer deposits.

Provisions for Impairment
The following table sets out the Bank’s provisions for impairment for the years ended in 31 December 2006, 2005 and 2004
respectively.

                                                                Provisions for loans
Balance at 31 December 2004                                                    8,309

 Increase in Provisions in 2005                                               3,098
 Reductions for loans written-off                                             (500)

Balance at 31 December 2005                                                   10,907

 Increase in Provisions in 2006                                               2,152
 Reductions for loans written-off                                             (140)

Balance at 31 December 2006                                                   12,919

Source: BACB

Recoveries on previously written-off exposures are recognised directly in the income statement as other income and do not
change provisions for impairment. €0.5 million was recovered in 2006 and €0.250 million in 2004. Recoveries were zero in
2005.

As a percentage of total loans and advances to customers, provisions for impairment were 6.3% at 31 December 2006, 6.9% and
6.8% at 31 December 2005 and 2004 respectively. However, the aggregate amount of all classified loans fell from 10.3% of the
Bank’s total portfolio at 31 December 2004 to 10.3% and 9.5% at 31 December 2005 and 2006, respectively. Management
believes that the increase in the Bank’s provisions for impairment reflects the dynamics of the Bank’s overall loan portfolio
quality and its conservative provisioning policy.

Income Taxes
Income tax expense comprises the current tax expense and the deferred tax expense. The following table sets out the Bank’s
income tax expense for each of the years ended 31 December 2006, 2005 and 2004, as well as the percentage variation within
each line item.




                                                               59
                                                                                              Year ended 31 December                        Variation
                                                                                          2006         2005         2004             2006/2005     2005/2004
                                                                                                      (€ 000)                                  (%)
Current tax expense .........................................................              2,079           1,456          1,150             42.8            26.6
Deferred tax expense/(income) .........................................                       (7)            (73)             42            NA               NA
Incomes taxes ..................................................................           2,072           1,383          1,192             49.8            16.0

Source: BACB

The Bank’s income taxes increased by €0.69 million, or 49.8%, to €2.07 million for the year ended 31 December 2006, as
compared to €1.38 million for the year ended 31 December 2005 and increased by €0.19 million, or 16.0%, to €1.38 million for
the year ended 31 December 2005, as compared to €1.19 million for the year ended 31 December 2004. From 1 January 2004,
this rate decreased to 19.5% and from 1 January 2005, this rate decreased to 15% and from 1 January 2007 this rate decreased to
10%. Due to certain exemptions explained in the Bank’s financial statements, the Bank’s effective tax rates were 10.6%, 10.1%
and 14.2% for 2006, 2005 and 2004, respectively. The increase in the Bank’s income tax expense was attributable to an increase
in taxable operating profits for each year, even though positively affected by the decrease in the effective tax rates.

Net Income
The increase in net income over the three-year period ended 31 December 2006 was caused by a combination of the factors
discussed above, including the higher rate of growth of income compared to the rate of growth of expenses, fluctuations in the
provisions for impairment expense and the reduction of the effective tax rate in each of these years. In particular, the Bank’s
operating income grew by €5.3 million or 24.4% to €26.9 million for the year ended 31 December 2006, as compared to €21.6
million for the year ended 31 December 2005 and grew by €5.7 million or 35.5% to €21.7 million for the year ended 31
December 2005, as compared to €16.0 million for the year ended 31 December 2004. The Bank’s operating expenses grew by
€0.4 million or 8.9% to €5.2 million for the year ended 31 December 2006, as compared to €4.8 million for the year ended 31
December 2005, and increased by €0.7 million or 19.1% to €4.8 million for the year ended 31 December 2005, as compared to
€4.1 million for the year ended 31 December 2004. The ratio of operating expenses to operating income fell in each of the last
three years, falling from 25.4% to 22.3% and then to 19.5% at 31 December 2004, 2005 and 2006, respectively.

Analysis of Financial Condition at 31 December 2006, 2005 and 2004

Assets
The following table sets forth the key asset categories of the Bank at 31 December 2006, 2005 and 2004.
                                                                                               At 31 December                         Variation
                                                                                   2006              2005          2004       2006/2005      2005/2004
                                                                                                   (€ 000)                              (%)
Assets
Cash and balances with the Central Bank                                              17,490            7,481          8,109        133.8            (7.7)
Due from other banks                                                                 26,305           32,283         22,263        (18.5)            45.0
Loans and advances to customers                                                     193,263          146,697        113,861          31.7            28.8
Trading portfolio                                                                     1,948              323             —         503.1                -
Investment securities—available-for-sale                                              5,661            5,013          6,007          12.9          (16.5)
Other assets                                                                          1,363              805            443          69.3            81.7
Goodwill                                                                                 80               —              —              -               -
Property, plant and equipment                                                         2,410            2,301          2,409           4.7           (4.5)

Total Assets                                                                        248,520          194,903        153,092         27.5            27.3


Source: BACB

Total Assets
The Bank had total assets of €248.5 million at 31 December 2006, an increase of €53.6 million, or 27.5%, from its total assets
of €194.9 million at 31 December 2005, and total assets increased by €41.8 million, or 27.3%, from its total assets of €153.1
million at 31 December 2004. This substantial increase in assets over the three-year period ended 31 December 2006 was
principally due to the increase in loans and advances to customers and the increase in amounts due from other banks.




Cash and Balances with the Central Bank
The following table sets out the Bank’s cash and balances with the BNB at 31 December 2006, 2005 and 2004.
                                                                                          60
                                                                                         At 31 December                          Variation
                                                                             2006              2005         2004          2006/2005     2005/2004
                                                                                             (€ 000)                                (%)

Cash on hand                                                                   1,416            1,125          1,234             25.9         (8.8)
Balances with the Central Bank                                                16,074            6,356          6,875            152.9         (7.5)

Cash and balances with the Central Bank                                       17,490            7,481          8,109            133.8         (7.7)

Source: BACB

The Bank’s balances with the BNB include the minimum required reserve, amounting to €14.8 million, €6.4 million and €6.9
million at 31 December 2006, 2005 and 2004, respectively. The minimum required reserve is calculated as a percentage of the
Bank’s attracted funds from non-banks and does not bear interest. In 2004, the BNB and the Ministry of Finance undertook
measures that were aimed at decreasing the liquidity in the Bulgarian banking system, including withdrawing some
government deposits from the banking system. In addition, the BNB imposed minimum reserves on attracted funds, excluding
deposits from banks, with maturities of over two years, initially setting a minimum reserve of 4% and then raising this
minimum reserve to 8%. Along with the increase in the attracted funds, this resulted in the Bank’s minimum required reserve
increasing significantly during 2004.
In 2005, the BNB set loan portfolio growth limits applicable from the second quarter of the year. Additional reserves were
required if a bank exceeded these limits. As the Bank’s loan portfolio growth was within the target range in the second and
third quarters of 2005, the Bank was not required to maintain any additional reserves with the BNB during 2005.
In 2006, however, the Bank’s loan portfolio growth exceeded the BNB’s growth target which resulted in the Bank being
required to maintain an additional €5.1 million in reserves for the period from 1 July 2006 to 3 February 2007.
As of 1 January 2007 BNB removed the portfolio growth limits. However, BNB kept the portfolio growth limits for the last
quarter of 2006 and if a bank exceeded these limits it was required to maintain additional reserves for the period from 4
February 2007 to 4 May 2007. As the Bank’s loan portfolio growth exceeded the limits it shall maintain additional €7.2
million in reserves for the period from 4 February 2007 to 4 May 2007.
Amounts Due from Other Banks
Amounts due from other banks includes current accounts and short-term deposits with local banks and foreign
correspondent banks. The following table sets out amounts due from other banks at 31 December 2006, 2005 and
2004:
                                                                                              At 31 December                            Variation
                                                                                    2006           2005            2004         2006/2005         2005/2004
                                                                                                  (€ 000)                                   (%)
Current accounts with other banks ..................................                   603            607              874          (0.7)             (30.5)
Deposits with other banks ...............................................           25,702          31,676         21,389          (18.9)              48.1
Due from other banks .....................................................          26,305          32,283         22,263          (18.5)              45.0

Source: BACB
Amounts due from other banks decreased by €6.0 million, or 18.5%, from €32.3 million at 31 December 2005 to €26.3 million
at 31 December 2006, and increased by €10.0 million, or 45.0%, from €22.3 million at 31 December 2004 to €32.3 million at 31
December 2005. The increase in amounts due from other banks at 31 December 2005 was in line with the growth in the Bank’s
total assets but was also influenced by the Bank’s issuance of unsecured bonds in December 2005, as part of the proceeds of
the bond issues were not invested in loans by the end of the year, but instead were placed with other banks. The decrease in
amounts due from other banks at 31 December 2006 reflects the business dynamics of the Bank and the increased amount
invested in loans.
Loans and Advanced to Customers
Loans and advances to customers increased by €46.6 million, or 31.7%, from €146.7 million at 31 December 2005 to €193.3
million at 31 December 2006, and by €32.8 million, or 28.8%, from €113.9 million at 31 December 2004 to €146.7 million at
31 December 2005. The growth in loans and advances to customers reflects increased demand for the Bank’s lending products.
However, the growth in loans and advances to customers has been affected by increased competition in the Bulgarian banking
sector and, more recently, by the various measures introduced by the BNB to limit the growth of lending.
Investment Securities Available for Sale
Investment securities available for sale increased by €0.66 million, or 12.9%, from €5.0 million at 31 December 2005 to €5.66
million at 31 December 2006. The Bank invests in securities as a liquidity management instrument, investing part of its liquid
funds in short-duration liquid securities, mainly Bulgarian government issues. In 2006 the Bank invested in Bulgarian
government eurobonds denominated in US dollars and in bonds issued by a Bulgarian bank with good credit rating due to the
high yield of the investments
                                                                                    61
Investment in Associate
In September 2003, the Bank and the BAEF registered Kapital Direct-1 ADSIC, a special purpose investment company
registered under the Bulgarian Special Purpose Investment Companies Act. As of the inception date the Bank held a 30%
interest and the BAEF a 70% interest. In January 2004, Kapital Direct-1 was granted a licence by the Financial Supervision
Commission to operate. The Bank sold three loans in the amount of €2.9 million in aggregate to Kapital Direct-1. Kapital
Direct-1 financed the purchase of the loans through the issue of €0.332 million of shareholders’ equity and the issue of €2.6
million of secured bonds to institutional investors. In December 2004, the Bank sold all of its shares in Kapital Direct-1 to the
BAEF through the BSE. The Bank receives a fee for servicing the assets for Kapital Direct-1 ADSIC.
Other Assets
Other assets include prepaid income tax, assets held for resale and prepayments and other receivables. The
following table sets out the Bank’s other assets at 31 December 2006, 2005 and 2004.

                                                                                                                      At 31 December                                          Variation
                                                                                                              2006                 2005             2004         2006/2005             2005/2004
                                                                                                                                (€ 000)                                          (%)
Assets held for resale .......................................................                                467                    237              242                 97.0             (2.1)
Prepayments and other receivables ..................................                                          892                    568              201                 57.0            182.6
Deferred tax assets ..........................................................                                  8                      -                -                    -                 -
Other assets .....................................................................                       1,363                       805              443                 69.3               81.7

Source: BACB

Assets held for resale represent land acquired by the Bank in June 2001 and a small parcel of real estate received in 2004 as a
part of foreclosure action against one of the Bank’s borrowers as well as vacation apartments acquired in 2006. In 2005, the
real estate acquired in 2004 was sold. In 2006 the Bank sold most of the land acquired in 2001 and concluded a preliminary
agreement for the rest of the land. The sale is expected to be executed in the first half of 2007. The Bank expects to sell the
vacation apartments in 2007.
At 31 December 2006, the Bank had a €0.46 million interest bearing receivable under preliminary agreement for sale of land
owned by the Bank, which is included in other assets.

Property, Plant and Equipment
The following table sets out the Bank’s property, plant and equipment at 31 December 2006, 2005 and 2004.

                                                                                                                                       Other
                                                                                                          Land and                    Tangibles              Intangible
                                                                                                          buildings                    Assets                  Assets                  Total
                                                                                                                                                   (€ 000)
Cost
31 December 2004 .............................................................................                       2,019                 1,795                    237                    4,051
Additions ...........................................................................................                   32                    193                     61                       286
Disposals ............................................................................................                      -              (20)                           -                    (20)
31 December 2005 .............................................................................                       2,051                 1,968                    298                    4,317
Additions ...........................................................................................            305 99                       44                      448
Disposals ............................................................................................                  -                     (4)                         -                     (4)
31 December 2006 .............................................................................                       2,356                 2,063                     342                   4,761
Accumulated Depreciation and Amortization
31 December 2004 .............................................................................                         313                 1,191                    138                    1,642
Charge for 2005 .................................................................................                       81                    255                     51                       387
Disposals ............................................................................................                      -                (13)                         -                    (13)

31 December 2005 .............................................................................                         394                 1,433                    189                    2,016
Charge for 2006 .................................................................................                       82                    217                     40                       339
Disposals ............................................................................................                      -                 (4)                         -                    (4)

31 December 2006 .............................................................................                         476                 1,646                    229                    2,351

Net book value
31 December 2006 .............................................................................                       1,880                    417                   113                    2,410
31 December 2005 .............................................................................                       1,657                    535                   109                    2,301
31 December 2004 .............................................................................                       1,706                    604                    99                    2,409

                                                                                                         62
Source: BACB

The Bank had property, plant and equipment of €2.4 million at 31 December 2006, increase of 4.5%, or €0.11 million, from
€2.3 million at 31 December 2005. The Bank’s property, plant and equipment decreased by €0.1 million, or 4.5%, from €2.4
million at 31 December 2004 to €2.3 million at 31 December 2005.

Liabilities and Shareholders’ Equity
The following table sets out the structure of liabilities and equity of the Bank at 31 December 2006, 2005 and 2004.

                                                                     At December 31                    Variation
                                                         2006             2005        2004       2006/2005    2005/2004
                                                                         (€ 000)                          (%)
Liabilities
Deposits from banks                                        15,342           9,975          —             53.8         —
Deposits from customers                                    54,098          33,786      25,531            60.1       32.3
Other liabilities                                           2,869           1,952       1,490            47.0       31.0
Other borrowed funds                                       31,804          55,258      59,029          (42.4)       (6.4)
Debt securities outstanding                                87,293          54,152      39,610            61.2       36.7

Total Liabilities                                         191,406          155,123     125,660          23.4           23.4

Shareholders’ Equity
Share capital                                               6,455           6,455       6,432              —            0.4
Share premium                                                 435             435         359              —           21.1
Retained earnings                                          50,280          32,825      20,484            53.2          60.2
Revaluation reserve                                          (56)              65         157         (186.2)          58.6

Total Shareholders’ Equity                                 57,114          39,780      27,432           43.6           45.0

Total Liabilities and Shareholders’ Equity                248,520          194,903     153,092          27.5           27.3

Source: BACB

Liabilities
The Bank had total liabilities of €191.4 million at 31 December 2006, an increase of €36.3 million, or 23.4%, from €155.1
million at 31 December 2005. The Bank’s total liabilities increased by €29.5 million, or 23.4%, from €125.7 million at 31
December 2004 to €155.1 million at 31 December 2005.

Deposits from Banks
At 31 December 2006, the Bank had deposits from banks, denominated in Leva, Euros and US dollars, in the amount of €15.3
million, which were repayable with maturities between overnight to one year. At 31 December 2005, the Bank had deposits
from banks, denominated in Leva, Euros and US dollars, in the amount of €10.0 million, which were repayable within one day
to three months. At 31 December 2004, the Bank had no deposits from banks. The amount of deposits from banks fluctuates
during the course of any year depending on the Bank’s liquidity needs and, as such, the variations in the amounts of deposits
from banks at 31 December in each year reflect changes in short-term borrowing by the Bank on the interbank market as part
of the Bank’s liquidity management operations at that time.

Deposits from Customers
The following table sets out deposits from customers at 31 December 2006, 2005 and 2004 by currency.
                                                                     At 31 December                     Variation
                                                         2006              2005       2004       2006/2005     2005/2004
                                                                         (€ 000)                           (%)
Demand deposits from customers
in Euros                                                    9,959            6,752       4,210          47.5         60.4
in US dollars                                               1,016            1,218       1,366        (16.6)       (10.8)
In pounds sterling                                             35               29          14          20.7       107.1
in Leva                                                     4,772            4,212       2,739          13.3         53.8
Total                                                      15,782           12,211       8,329          29.2         46.6

Term deposits
in Euros                                                   23,151           13,353      8,813          73.4         51.5
in US dollars                                              13,245            7,062      7,296          87.6         (3.2)
in Leva                                                     1,920            1,160      1,093          65.5           6.1
Total                                                      38,316           21,575     17,202          77.6         25.4

Deposits from customers                                    54,098           33,786     25,531          60.1            32.3
Source: BACB

Deposits from customers increased by €8.3 million, or 32.3%, from €25.5 million at 31 December 2004 to €33.8 million at 31
December 2005, and increased by €20.3 million, or 60.1%, to €54.1 million at 31 December 2006. The increase over the three-

                                                                63
year period ended 31 December 2006 was principally as a result of the increase in deposits in Euros.


Other Liabilities
At 31 December 2006, 2005 and 2004, other liabilities consisted of the following.

                                                                                                                    At 31 December                                         Variation
                                                                                                    2006                2005                        2004           2006/2005     2005/2004
                                                                                                                       (€ 000)                                               (%)

Income tax payable                                                                                          546                  322                    326                 69.6         (1.2)
Deferred tax liability                                                                                       —                    21                    110                   —         (81.0)
Hedging derivative                                                                                          417                   55                     —                 658.2            —
Other liabilities                                                                                         1,906                1,554                  1,054                 22.7          47.4

Other liabilities                                                                                         2,869                1,952                  1,490                 47.0            31.0

Source: BACB

Other Borrowed Funds
At 31 December 2006, 2005 and 2004, other borrowed funds consisted of the following.


                                                                                                                                                                       At 31 December
                                                                                                                                                           2006             2005              2004
                                                                                                                                                                          (€ 000)
BAEF ...........................................................................................................................................                  14,260          15,343           14,243
EBRD ...........................................................................................................................................                   4,287            4,978           3,136
FMO .............................................................................................................................................                    —              9,578          11,158
Raiffeisen Bank Austria ...............................................................................................................                            5,006            3,001             —
DEG .............................................................................................................................................                  8,251           10,359           8,571
BSTDB .........................................................................................................................................                      —                —            10,009
Syndicated loan ...........................................................................................................................                          —             11,999          11,912
Other borrowed funds ..................................................................................................................                           31,804           55,258          59,029




                                                                                                              64
Source: BACB

Debt Securities Outstanding
At 31 December 2006, 2005 and 2004, the Bank had issued the following debt securities.


                  Debt securities in issue                                        Due            2006        2005          2004

    Euro fixed rate mortgage bonds                                            2005                —           —            5,595
    Euro fixed rate mortgage bonds                                            2008               10,270      10,249        10,228
    Euro fixed rate mortgage bonds                                            2009               10,121      10,111        10,102
    Euro floating rate mortgage bonds                                         2011               25,214       —             —
    US dollars fixed rate unsecured bonds                                     2006                —          5,209         4,509
    Euro floating rate unsecured bonds                                        2007               7,999       7,982         7,969
    Euro fixed rate unsecured bonds                                           2008               19,608      19,944         —
    Euro floating rate unsecured bonds                                        2013               12,062       —             —
    Euro fixed rate promissory notes                                          2005                —           —             70
    Euro fixed rate promissory notes                                          2006                —           657          1,137
    Euro fixed rate promissory notes                                          2007               2,019        —             —
Total                                                                                               87,293    54,152        39,610

Source: BACB


Off-Balance Sheet Liabilities
The Bank is counterparty to financial instruments with off-balance sheet risk in the normal course of business to meet the
financial needs of its customers. Those instruments involve, to various degrees, elements of credit risk. The following table
shows the Bank’s off-balance sheet liabilities at 31 December 2006, 2005 and 2004.
                                                                                                          At 31 December                         Variation
                                                                                                   2006         2005                 2004    2006/2005       2005/2004
                                                                                                              (€ 000)                                  (%)
Bank guarantees ......................................................................           4,006               969             1,159     313.4           (16.4)
Lettersofcredit .........................................................................          210              365                 85    (42.5)           329.4
Unutilised commitments on loans ............................................                     46,645        28,428               13,199     64.1            115.4
Total ........................................................................................   50,861        29,762               14,443     70.9             106.1

Source: BACB

The Bank’s off-balance sheet liabilities comprised unutilised commitments on loans, guarantees issued and letters of credit. At
31 December 2006, the Bank had €50.9 million in off-balance sheet commitments, compared to €29.8 million at 31 December
2005, and €14.4 million at 31 December 2004. At 31 December 2006, the Bank had €46.6 million of unutilised commitments
on loans outstanding, compared to €28.4 million at 31 December 2005, and €13.2 million at 31 December 2004. The increases
in unutilised commitments on loans were primarily caused by the growth in loan originations, mostly term loans where loans
are disbursed upon fulfilment of contractual conditions precedent. At 31 December 2006, the Bank had €4.0 million of
guarantees outstanding, compared to €1.0 million at 31 December 2005, and €1.2 million at 31 December 2004.

Capital Resources
The international standard for measuring capital adequacy is set by the Bank for International Settlements (“BIS”) capital
adequacy rules, which relates capital to balance sheet assets and off-balance sheet exposures weighted according to broad
categories of risk. In Bulgaria, the required total capital adequacy ratio set by the BNB for banks is 12% whereas under the
Basel Accord the requirement is 8%. The Tier 1 capital ratio set by BNB is 6%, whilst the BIS requirement is 4%.

Capital Adequacy Strategy
Historically, due to the high level of the Bank’s profitability and its policy of retaining earnings the Bank’s capital adequacy
has considerably exceeded the limits set by BNB and those of the Basel Accord. Management believes that the high capital
ratios which result from this policy have enabled the Bank to attract funding on favourable terms, in part because investors
and rating agencies assess the Bank’s capitalisation to be consistent with its risk profile as a specialist provider of finance to
small- and medium-sized businesses in Bulgaria.

In March 2000, following the approval of the BNB, $10 million of the credit line extended to the Bank by the BAEF was
converted from senior debt into a debt/ capital (hybrid) instrument and was included in the Bank’s capital base as Tier II
                                                                                                  65
capital.

In January 2006 the Bank requested permission from BNB to repay the debt/ capital (hybrid) instrument and to remove it from
the additional capital reserves. On 27 January 2006 BNB gave its written consent, and as a result the $10 million is no longer
reported as debt/ capital (hybrid) instrument and is not included in the additional capital reserves respectively.

As of 1 January 2007 the new Basel Capital Accord (“Basel II”) was implemented and all Bulgarian banks calculate the
capital adequacy according to the new requirements set by the amends to Regulation 8 of BNB.

The most recent analysis of the Bank on the effect of the new capital adequacy requirements show that the Basel II
implementation decreases the Tier 1 and Tier 2 capital adequacy ratios by approximately 2 points.

The expected effect of the Basel II implementation is mainly due to the implementation of additional capital requirements for
the operations risk which is a part of the new approach as well as some changes in the risk appointed to some types of assets.

Regardless of the Basel II implementation the capital adequacy of the Bank remains way above the regulatory limits.




                                                              66
The table below sets out the Bank’s capital adequacy positions as calculated in accordance with the capital adequacy
guidelines of the Bank for International Settlements.

                                                                                         At 31 December (€ 000)
                                                                           2006                 2005 (3)                   2004
Tier 1
Paid in Share capital/common stock                                              6,890                   6,890                   6,791
Disclosed reserves                                                             32,825                  32,825                  20,483
Total Tier 1                                                                   39,715                  39,715                  27,274
Tier 2
Undisclosed reserves
Asset revaluation reserves                                                        (56)                     65                      157
General provisions/general loan loss
Hybrid capital instruments                                                           -                  8,477                     7,342
Subordinated term debt
Total Tier 2                                                                                            8,542                   7,499
Gross available Capital                                                        39,659                  48,257                  34,773
Deduct:
Good will                                                                          80                       -                       -
Investment in unconsolidated banking/financial subsidiary                           -                       -                       -
Investment in capital of other banks/financial institutions                         -                       -                       -
Total deductions(1)                                                                80                       -                       -
Net available Capital (2)                                                      39,579                  48,257                  34,773
Tier 1 Capital Ratio (3)                                                       18.5%                   25.6%                   23.9%
Capital to Risk Weighted Assets Ratio (3)                                      18.4%                   31.1%                   30.5%

Source: BACB

(1) Total deductions is the sum of goodwill, investment in unconsolidated banking/financial subsidiary and investment in capital of other
    banks/financial institutions.
(2) Net available capital is gross available capital less total deductions.

(3) 2006 capital ratios are calculated without accounting for 2006 profits. Under an assumption for retention of the 2006 profits after dividend
    (0.38 eur per share) Tier I and the Capital to risk-weighted assets ratio as of 31 December 2006 would have been respectively 24.4% and
    24.3%. Capital adequacy calculated under BIS Basel requirements




                                                                      67
                                                  SELECTED STATISTICAL INFORMATION


Average Balances and Related Interest Rates: Assets
                                                                                     Year ended 31 December
                                                           2006                                   2005                                    2004
                                            Average        Interest    Average    Average           Interest Average Average                Interest Average
                                            Balances(1)    Income      Interest     Balances(1)     Income   Interest   Balances(1)         Income Interest
                                                                       Rate(2)                              Rate(2)                                  Rate(2)
                                             (€ 000)       (€ 000)       (%)       (€ 000)          (€ 000)  (%)      (€ 000)               (€ 000)   (%)
Due from banks ..................             29,294          1,076        3.3        27,273           446        2.4   15,580               127       1.5
Loans, net ...........................      169,980        30,474        17.1       130,279        24,627         17.9        101,735      20,074     17.7
Trading portfolio ................                489            21       7.4              162              3      3.1           0           70        3.0
Investment securities,
  available-for-sale ...                       5,337          303         6.1            5,510        307          5.3         5,458        258        4.9
Total interest
  earning assets .................          205,100        31,874        14.8       163,224        25,383         15.7        122,773      20,529     16.0
Non interest earning
  assets ................................     16,612             0           0          10,774              0           0      8,442         0          0
Total assets ........................       221,712        31,874        13.6       173,998        25,383         14.6        131,215      20,529     15.1


Source: BACB

(1) Average balance is the arithmetic average of the opening and closing balances for each year. Note that the average balance calculated
    on a daily basis, monthly basis, or weighted average basis may be different to the average balance calculated on an annual basis, and
    these differences may be substantial.
(2) Average interest rates were calculated on the basis of management accounts using average monthly balances.

Average Balances and Related Interest Rates: Liabilities
                                                                                      Year ended 31 December
                                                            2006                              2005                                        2004
                                             Average        Interest   Average    Average     Interest Average              Average       Interest   Average
                                             Balances(1)    Expense    Interest   Balances(1) Expense Interest              Balances(1)   Expense    Interest
                                                                       Rate(2)                          Rate(2)                                      Rate(2)
                                              (€ 000)       (€ 000)      (%)       (€ 000)        (€ 000)       (%)          (€ 000)      (€ 000)     (%)
Deposits from banks ...                         12,659           48        3.3       4,988             60         2.9           2,711          57       2.1
Deposits from
  customers ..........................         43,942          1,338       2.5      29,658           691          2.2         21,886        644         2.9
Other borrowed
  funds .................................      43,531       2,294          6.2      57,144         3,845          6.4         49,252      3,286         6.9
Debts securities
  outstanding ........................         70,722       3,815          4.8      46,881         2,316          6.5         32,403      2,105         6.8
Total interest
  bearing
  liabilities ...........................    170,854        7,495          4.4    138,671          6,912          5.4       106,252       6,092         5.9
Non interest bearing
  liabilities ...........................       2,411           —           —           1,721          —          —            1,234          —          —
Shareholders’ equity ...                       48,447           —           —       33,606             —          —           23,729          —          —
Total liabilities and
  shareholders’
  equity ................................    221,712        7,495           —     173,998          6,912          —         131,215       6,092          —

Source: BACB

(1) Average balance is the arithmetic average of the opening and closing balances for each year. Note that the average balance calculated
    on a daily basis, monthly basis, or weighted average basis may be different to the average balance calculated on an annual basis, and
    these differences may be substantial.
(2) Average interest rates were calculated on the basis of management accounts using average monthly balances.




                                                                                   68
Volume and Rate Analysis
                                                                                    Year ended 31 December
                                                       2006                                  2005                                       2004
                                               Net Change Due To                      Net Change Due To                       Net Change Due To
                                           Volume      Rate        Total       Volume       Rate          Total       Volume            Rate         Total
                                                                                            (€ 000)
Cash and due from
  banks ..............................        467          163       630          243           76           319           26               5                 31
Loans, net ..........................       6,880       (1,033))   5,847        4,289          264         4,553       5,720              239              5,959
Trading portfolio ..............               14           4         18           (68)           1           (67)         70               0                 70
Investment securities
  — available for
  sale .................................       (47)       43           (4)            26        23               49          76            (43)               33
Change in interest
  income ...........................        7,314        (823)     6,491        4,490          364         4,854       5,892              201              6,093
Deposits from
 banks ..............................         (20)        8            (12)          (17)       20                3          20                (3)            17
Deposits from
 customers .......................            546       101            647           203      (156)              47      147               (72)               75
Other borrowed
 funds ..............................        (1,381)    (170)        (1,551)         782      (223)             559      849              (398)              451
Debt securities
 outstanding .....................            2,098     (599)        1,499           315      (104)             211      782               (67)              715
Change in interest
  expense ..........................        1,243       (660)        583        1,283         (463)             820    1,798              (540)            1,258
Net change in
 interest income ....                       6,071        (163)     5,908        3,207          827         4,034       4,094              741              4,835

Source: BACB


(1) The net change due to a change in volume is the change in the average monthly outstanding balance multiplied by the average interest
    rate for the current period.
(2) The net change due to a change in interest rate is the change in the average interest rate multiplied by the average monthly outstanding
    balance for the prior period.



Return on Assets and Equity

                                                                                                             Year ended 31 December
                                                                                                2006                  2005                        2004
                                                                                                            (€ 000, except percentages)

Net Income                                                                                             17,455                12,341                       7,209
Average Total Assets                                                                                  221,712            173,998                     131,215


Average Shareholders’ Equity                                                                           48,448                33,606                      23,729
Net Income as a Percentage of Average Total Assets (%)                                                    7.9                     7.1                       5.6


Net Income as a Percentage of Average Shareholders’ Equity (%)                                          36.03                  36.7                        30.4


Average Shareholders’ Equity/Average Total Assets (%)                                                    21.9                  19.3                        18.1


Source: BACB




                                                                               69
Average Interest Earning Assets, Yields, Margins and Spreads
                                                                                                    Year ended 31 December
                                                                                     2006                      2005                        2004
                                                                                                       (€ 000, except percentages)

Average Interest Earning Assets                                                             205,100                163,224                     122,773
Interest Income                                                                              31,874                   25,383                      20,529
Net Interest Income                                                                          24,379                   18,471                      14,437
Average Yield (1)                                                                            14.8%                    15.7%                       16.0%
                  (2)
Average Margin                                                                               11.3%                    11.4%                       11.3%
Average Spread (3)                                                                           10.4%                    10.3%                       10.1%

Source: BACB
(1) Average yield is interest income expressed as a percentage of average monthly interest earning assets for the period.
(2) Average margin is net interest income divided by average monthly interest earning assets for the period.
(3) Average spread is average yield minus interest expense, expressed as a percentage of average monthly interest bearing liabilities for the
    period.

Loan Portfolio: By Lending Programme

                                                    At 31 December                                                      Variation

                                  2006                   2005                        2004                    2006/2005                 2005/2004
                                                                                                                 %                         %
                        (€ 000)          (%)       (€ 000)      (%)        (€ 000)            (%)
Tourism Lending
Programme                48,205             23.4    33,821        21.5        28,439            23.3                    42.5                      18.9
Construction
Lending Programme        31,202             15.1    21,768        13.8         5,236             4.3                    43.3                   315.7
SME Lending
Programme               106,029             51.4    81,627        51.8        69,807            57.1                    29.9                      16.9
Mortgage Lending
Programme                20,746             10.1    20,388        12.9        18,688            15.3                     1.8                       9.1


Total                   206,182           100.0    157,604       100.0       122,170           100.0                    30.8                      29.0



Loan Portfolio: By Industry

                                                                                         At 31 December
                                                    2006           % of total           2005        % of total                  2004           % of total
                                                                   portfolio                        portfolio                                  portfolio
                                                   (€ 000)           (%)               (€ 000)        (%)                      (€ 000)           (%)
Hotels                                                 38,886              18.9           26,862           17.0                   27,014              22.1
Construction                                           37,376              18.1           26,856           17.0                    5,850               4.8
Small business commercial property loans               24,060              11.7           17,794           11.3                    9,258               7.6
Retail trade                                           18,718               9.1           11,076            7.0                    8,020               6.6
Residential loans — individuals                        14,730               7.1           17,473           11.1                   16,225              13.3
Small business residential property loans              10,308               5.0           10,530            6.7                    6,120               5.0
Wholesale trade                                         9,389               4.6            4,676            3.0                    3,872               3.2
Other light industry                                    8,934               4.3            6,936            4.4                   12,272              10.0
Entertainment and recreation                            7,758               3.8            6,075            3.8                    2,930               2.4
Property and management services                        6,972               3.4            5,006            3.2                    2,917               2.4
Garments and textiles                                   4,921               2.4            5,162            3.3                    4,185               3.4
Professional and other services                         4,746               2.3            3,561            2.3                    4,484               3.7
Primary agriculture and farming                         3,983               1.9            3,405            2.2                    2,041               1.7
Restaurants                                             3,184               1.5            3,574            2.3                    2,608               2.1
Commercial property loans – individuals                 3,169               1.5            2,915            1.8                    2,017               1.6
Heavy manufacturing                                     1,704               0.8            1,120            0.7                      313               0.3
Bread baking and confections                            1,699               0.8            1,287            0.8                    4,692               3.8
Transportation                                          1,687               0.8              869            0.5                      162               0.1
Furniture and woodcraft                                 1,583               0.8              417            0.3                      396               0.3
Other                                                   2,375               1.2            2,010            1.3                    6,794               5.6

Total                                                206,182               100.0        157,604                100.0            122,170                  100.0




                                                                      70
Loan Portfolio: By Currency
                                                                                                          At 31 December
                                                                  2006             % of total            2005        % of total            2004             % of total
                                                                                   portfolio                         portfolio                              portfolio
                                                                 (€ 000)             (%)                (€ 000)        (%)                (€ 000)             (%)
Euros                                                              197,879               96.0%           143,937          91.4%            104,132               85.2%
US dollars                                                            8,097               3.9%             13,290          8.4%              17,183              14.1%
Leva                                                                    206               0.1%                377          0.2%                 855               0.7%

Total                                                                 206,182             100.0%         157,604          100.0%           122,170              100.0%
Source: BACB



Loan Portfolio: By Size

                                                                                                   At 31 December
                                                   2006                                            2005                                         2004
                             No. of          Loan               % of Loan        No. of       Loan           % of Loan          No. of     Loan               % of Loan
                             loans           Portfolio          portfolio        loans        Portfolio      portfolio          loans      Portfolio          portfolio
                                                                                       (€ 000, except percentages)
0 to 10,000                     642                 3,050                 1.5        797            4,079           2.6           945              4,966               4.0
10,000 to 100,000               806                29,219                14.2        873           28,970          18.4           852             26,364              21.6
100,000 to
1,000,000                       363              109,156                 52.9        341             93,548           59.3        255             69,110              56.6
Over 1,000,000                   38               64,757                 31.4         20             31,007           19.7         14             21,730              17.8

Total                         1,849              206,182                100.0      2,031            157,604          100.0      2,066            122,170             100.0


Source: BACB

Loan Portfolio: Large Exposures
                                                                                                           At 31 December
                                                               2006              % of Total           2005           % of Total          2004              % of Total
                                                                                 Amount                              Amount                                Amount
                                                               (€ 000)                (%)              (€ 000)           (%)             (€ 000)               (%)
Largest total exposure to a single client                             9,167                   3.6           4,158             2.3             3,953                 2.9
Aggregate of five largest exposures                                 32,922                   12.9          17,255             9.3            18,220                13.5
Aggregate of ten largest exposures                                  51,743                   20.3          28,666            15.4            30,657                22.6
Aggregate of twenty largest exposures                               77,133                   30.2          47,087            25.3            46,598                34.4




Loan Portfolio: By Remaining Term to Maturity


                                                                                          At 31 December 2006
                                             Amount at          Maturity          Maturity       Maturity    Maturity               Maturity          Maturity
                                             31                 Within 1          after 6        after 6     after 1                after 3           After 5
                                             December           Month             Months         Months      Years but              Years but         Years
                                             2006                                 but Before     but Before  Before 3               Before 5
                                                                                  6 Months       12 Months   Years                  Years
                                                                                                 (€ 000)
Tourism Lending Programme                                267               502          5,134          9,998      11,354                  10,592            10,358
Construction Lending
Progremme                                           1,288                  649             8,107        12,657          8,166                119               216
SME Lending Programme                               5,492                2,761            14,639        13,307         31,323             19,876            18,631
Mortgage Lending
Programme                                           1,056                  628             1,822          1,932         4,822              3,388             7,098

Total                                               8,103                4,540            29,702        37,894         55,665             33,975            36,303


                                                                                             At 31 December 2005
                                                                                 Maturity           Maturity       Maturing         Maturing
                                                                                   After               after         After           After
                                              Amount at          Maturity        1 Month            6 Months        1 Year          3 Years           Maturing
                                             31 December          Within         but Before         but Before     but Before       but Before        After 5
                                                 2005            1 Month         6 Months           12 Months       3 Years         5 Years            Years
                                                                                                    (€ 000)
Tourism Lending
 Programme ...............................          252                  181          1,713             7,268        11,115              7,369              5,923
Construction Lending
 Programme ...............................         1,377                    0         2,506             8,798          8,907                 64               116

                                                                                    71
SME Lending
 Programme ...............................               4,007             2,028       10,415         11,658           26,334            14,531           12,654
Mortgage Lending
 Programme ...............................                417                432         1,365         2,306             4,591            3,794               7,483

Total ...........................................        6,053             2,641       15,999         30,030           50,947            25,758           26,176

                                                                                             At 31 December 2004

                                                                                     Maturity     Maturity                        Maturing
                                                                                       After         after           Maturing      After
                                                     Amount at       Maturity        1 Month      6 Months           After 1 Year 3 Years           Maturing
                                                    31 December       Within         but Before   but Before         but Before   but Before         After
                                                        2004         1 Month         6 Months     12 Months           3 Years     5 Years           5 Years
                                                                                                  (€ 000)
Tourism Lending
 Programme ...............................                337                212         1,080         4,627           11,510             5,429               5,244
Construction Lending
 Programme ...............................                  0                170         1,060         2,237             1,559               54                 156
SME Lending
 Programme ...............................                935              3,638         7,828         8,538           23,088            12,547           13,233
Mortgage Lending
 Programme ...............................                446                296         1,295         1,597             4,096            3,765               7,193
Total ...........................................        1,718             4,316       11,263         16,999           40,253            21,795           25,826

Source: BACB

Loan Portfolio: Sensitivity of Loans to Changes in Interest Rates

                                                                                          At 31 December 2006
                                                          Due Before 1 Year              Due After 1 Year and                   Due After 5 Years
                                                                                             Up to 5 Years
                                                        Floating            Fixed        Floating         Fixed           Floating              Fixed
                                                                                                  (€ 000)
Tourism Lending Programme                                   3,005              8,100        10,477           2,987              19,514              4,122
Construction Lending
Programme                                                       0             22,618             0          8,088                    0                496
SME Lending Programme                                      11,283             10,969        29,859         12,629               36,717              4,572
Mortgage Lending Programme                                    391              1,902         2,675          2,274                9,462              4,042

Totals                                                     14,679             43,589        43,011         25,978               65,693             13,232


Source: BACB

Loan Portfolio: Off-balance sheet Interest(1) Accrued on Non-Performing Loans


                                                                                             At 31 December 2006
                                                                    2006                           2005                                  2004
                                                                                                    (€ 000)
Watch                                                                          155                            131                                         0
Irregular                                                                       43                            356                                       126
Non-Performing                                                               1,738                          1,199                                       373

Total                                                                        1,936                             1,686                                    499



Source: BACB




                                                                                       72
Loan Portfolio: By Credit Quality                                                                                               At 31 December



                                                                                                      2006                              2005                         2004
                                                                                                            % of Total                    % of Total                        % of Total
                                                                                Amount                      Portfolio     Amount          Portfolio        Amount            Portfolio
                                                                                 (€ 000)                      (%)          (€ 000)           (%)           (€ 000)            (%)
Total Performing loans ........................................................ 186,591                         90.5      141,293          89.7                109,582            89.7
Classified loans
Watch ..................................................................................      5,720              2.8            3,889           2.5                  804           0.7
Irregular ...............................................................................     3,982              1.9            3,068           1.9                 9,207          7.5
Non-Performing ..................................................................             9,889              4.8            9,354           5.9                 2,577          2.1
Total classified loans ...........................................................           19,591              9.5        16,311             10.3                12,588         10.3

Total loans .......................................................................... 206,182                 100.0      157,604          100.0                  122,170        100.0


   Source: BACB

  Loan Portfolio: Provisions for Impairment

                                                                                                           At 31 December
                                                              2006                                                2005                                                2004
                                      Aggregate              Provisi-            Provision        Aggregat      Provisi-     Provision                Aggregat      Provisi-      Provision
                                        Loan                   on                 as % of          e Loan         on          as % of                  e Loan         on           as % of
                                       Value                                       Loan            Value                       Loan                    Value                        Loan
                                                                                 Portfolio                                   Portfolio                                            Portfolio
                                                                                                      (€ 000, except percentages)
  Regular Loans                            186,591                      0                    0     141,293             0              0                109,582              0               0
  Classified Loans
  Watch                                       5,720              1,508                      0.7        3,889              787                  0.5         804          165               0.1
  Irregular                                   3,982              2,910                      1.4        3,068            2,096                  1.3       9,207        6,433               5.3
  Non-Performing                              9,889              8,501                      4.1        9,354            8,024                  5.1       2,577        1,711               1.4

  Total Classified
  Loans                                      19,591            12,919                       6.3        16,311          10,907                  6.9      12,588        8,309               6.8

  Total Credit
  Exposures                                206,182             12,919                       6.3       157,604          10,907                  6.9     122,170        8,309               6.8




  Source: BACB




  Loan Portfolio: Analysis of Movement in Provisions for Impairment

                                                                                                                                           Year ended 31 December
                                                                                                                           2006                     2005                        2004
                                                                                                                                                   (€ 000)
  Balance at beginning of period                                                                                                 10,907                8,309                           4,910
  Gross write-offs                                                                                                                (140)                 (500)                          (124)
  Provisions for impairment for the period                                                                                        2,152                3,098                           3,523
  Balance at end of period                                                                                                       12,919               10,907                           8,309

  Ratio of write-offs during the period to average loans outstanding during
  the periosd(1)                                                                                                                    0.1                     0.4                           0.1
  Recoveries(2)                                                                                                                    500                        -                          250

  Source: BACB

  (1) Average loans outstanding during the period is defined as the average of period beginning and period ending net customer loans.
  (2) Recoveries on previously written-off credit exposures are recognised directly as other income and do not affect the provision
      impairment.




                                                                                                       73
Loan Portfolio: Type of Collateral
                                                                                                                         At 31 December
                                                                                                      2006                   2005                     2004
                                                                                            Amount            %       Amount        %       Amount            %
                                                                                            (€ 000)          (%)       (€ 000)     (%)      (€ 000)          (%)
Real Estate ..........................................................................      186,633            90.5   143,591        91.1    90,223            73.8
Inventory.............................................................................          646             0.3       834         0.5     2,039             1.7
Equipment ..........................................................................          3,109             1.5     1,710         1.1    17,782           14.6
Other Assets........................................................................        15,201              7.4   11,270          7.2    11,935             9.8
Unsecured ...........................................................................           593             0.3       199         0.1       191             0.1
Total ...................................................................................   206,182          100.0    157,604      100.0    122,170          100.0


Source: BACB




                                                                                                 74
Loan Portfolio: Collateralisation

                                                                                                                                At 31 December
                                                                                                2006                                 2005                         2004
                                                                                                        % of Loan                             % of Loan             % of Loan
                                                                                      Amount           Portfolio  Amount                     Portfolio  Amount      Portfolio
                                                                                      (€ 000)            (%)      (€ 000)                      (%)      (€ 000)       (%)
Tourism Lending Programme ....................................                         48,205                      33,821                                    28,439
Collateralised ................................................................        48,166                  99.9%         33,821                100.0%     28,439     100.0%
Uncollateralised............................................................                    39             0.1%                   0              0.0%          0      0.0%
Construction Lending Programme ...........................                             31,202                                21,768                             5,236
Collateralised ................................................................        31,202                  100%          21,768                100.0%       5,236    100.0%
Uncollateralised............................................................                    0                   0%                0              0.0%          0      0.0%
SME Lending Programme.........................................                         106,029                               81,627                           69,807
Collateralised ................................................................        105,884                99.9%          81,608                100.0%     69,807     100.0%
Uncollateralised............................................................                 145               0.1%              19                  0.0%          0      0.0%
Mortgage Lending Programme..................................                           20,746                                20,388                           18,688
Collateralised ................................................................        20,337                 98.0%          20,208                 99.1%     18,497     99.0%
Uncollateralised............................................................                409                2.0%             180                  0.9%        191      1.0%

Total .............................................................................   206,182                       NA 157,604                           NA   122,170       NA

Total Collateralised ....................................................             205,589                 99.7% 157,405                          99.9     121,979    99.8%

Total Uncollateralised ................................................                     593                0.3%             199                  0.1%        191      0.2%




                                                                                                                     At 31 December
                                                                                      Due                 2006               2005                 2004
                                                                                                          (€ 000)
                                                                                2005
Euro fixed rate mortgage bonds ...............................................................................     —                        —        5,595
                                                                                2008
Euro fixed rate mortgage bonds .............................................................................   10,270                 10,249        10,228
                                                                               2009
Euro fixed rate mortgage bonds ............................................................................. 10,121                   10,111        10,102
                                                                               2011
Euro floating rate mortgage bonds......................................................................... 25,214                           —            —
                                                                             2006
US dollars fixed rate unsecured bonds ..................................................................                 —                5,209      4,509
                                                                             2007
Euro floating rate unsecured bonds........................................................................           7,999                7,982      7,969
                                                                               2008
Euro fixed rate unsecured bonds ............................................................................ 19,608                   19,944             —
                                                                               2013
Euro floating rate unsecured bonds ....................................................................... 12,062                           —            —
                                                                               2005
Euro fixed rate promissory notes ...........................................................................     —                          —            70
                                                                               2006
Euro fixed rate promissory notes ...........................................................................             —                 657       1,137
                                                                               2007
Euro fixed rate promissory notes ...........................................................................         2,019                  —            —

Total ............................................................................                                  87,293            54,152        39,610



Source: BACB




                                                                                                     75
Non-Equity Funding: Sources of Non-Equity Funding by Category, Amount and Percentage
                                                                                                                           Year ended 31 December
                                                                                                    2006                           2005                  2004
                                                                                          Amount            % of            Amount        % of    Amount      % of
                                                                                                            Total                         Total               Total
                                                                                                                            (€ 000) 9,975 (%)              (€ 000)        (%)
Deposits from Banks ...........................................................             15,342                   8.1    33,786                   6.5     0 25,531           0.0
Deposits from Customers ....................................................                54,098                  28.7    15,000               22.0          11,912          20.6
Loans from International Banks ..........................................                   5,006                    2.6                             9.8                        9.6
Loans from International Financial
                                                                                           12,538                    6.7    24,915            16.3         32,874          26.5
    Institutions .....................................................................
                                                                                           14,260                    7.6    15,343            10.1         14,243          11.5
Loans from the BAEF .........................................................
                                                                                           87,293                   46.3    54,152            35.3         39,610          31.9
Debt Securities ...................................................................
Total Funding ....................................................................              188,537         100.0 153,171          188,537100.0         124,170        100.0



Source: BACB

Non-Equity Funding: Average Cost of Non-Equity Funding by Source
                                                                                                                                                Average for year ended
                                                                                                                                                    31 December
                                                                                                                                             2006        2005         2004
                                                                                                                                                      (%)
Deposits from Banks..........................................................................................................                  3.3             2.9        2.1
Deposits from Customers ..................................................................................................                     2.5             2.2        2.9
Other Borrowed Funds ......................................................................................................                    6.2             6.4        6.9
Debt Securities...................................................................................................................             4.8             6.5        6.8
Total ..................................................................................................................................        4.4            5.4              5.9

Source: BACB

Non-Equity Funding: Term Deposits by Original Term to Maturity


                                                                                                                At 31 December
                                                                                         2006                                 2005                                      2004
                                                                                                                            (€ 000)
Less than 1 month                                                                                  14,629                                  11,318                                     3,349
Between 1 and 3 months                                                                             21,646                                  10,053                                     2,404
Between 3 and 12 months                                                                            15,240                                   5,927                                     8,596
Between 1 and 3 years                                                                               2,123                                   4,252                                     2,853
Between 3 and 5 years                                                                                   -                                        -                                        -
Over 5 years                                                                                           20                                        -                                        -

Total                                                                                              53,658                                   31,550                                 17,202


Source: BACB




                                                                                                           76
Non-Equity Funding: Deposits by Type, Currency and Maturity


                                                                      At 31 December
                                                          2006                          2005                  2004
                                                                          (€ 000)
Demand deposits
in EUR                                                   9,959                         6,752                 4,210
in USD                                                   1,016                         1,218                 1,366
in GBP                                                      35                            29                    14
in BGN                                                   4,772                         4,212                 2,739

Total                                                   15,782                        12,211                 8,329


Term deposits
in EUR                                                  33,055                        18,865                 8,813
in USD                                                  17,393                         8,418                 7,296
in BGN                                                   3,210                         4,267                 1,093

Total                                                   53,658                        31,550                17,202


Demand deposits
Bank                                                         0                             0                     0
Institutional                                            9,951                         7,689                 5,532
Individual                                               5,831                         4,522                 2,797

Total                                                   15,782                        12,211                 8,329

Term deposits
Bank                                                    15,342                         9,975                     0
Institutional                                           28,166                         9,672                 6,908
Individual                                              10,150                        11,903                10,294

Total                                                   53,658                        31,550                17,202




Off-Balance Sheet Liabilities: By Type



                                                                       At 31 December
                                          2006           %          2005             %           2004        %
                                         (€ 000)        (%)        (€ 000)          (%)         (€ 000)     (%)
Unutilised Loan Liabilities                 46,645        91.7        28,428          95.5         13,199     91.4
Letters of Credit                              210          0.4          365            1.2            85       0.6
Bank Guarantees                              4,006          7.9          969            3.3         1,159       8.0

Total                                        50,861      100.0       29,762            100.0      14,443      100.0


Source: BACB

Off-Balance Sheet Liabilities: By Maturity
                                                                      At 31 December 2006
                                     Less than 1      Between     Between 3         Between    Over1year    Total
                                       month           1and 3       and 6           6 and 12
                                                       months      months           months
                                                                              (€ 000)
Unutilised Loan Liabilities                   2,026      2,213        5,336          16,990       20,080    46,645
Letters of Credit                               132         68            0              10            0       210
Bank Guarantees                                 212        112          248           3,143          291     4,006

Total                                         2,370      2,393        5,584           20,143      20,371    50,861




                                                          77
Source: BACB




               78
Debt Securities Held: By Term to Maturity

                                                                      31 December 2006
                      Less Than One         One to Five Years       Five to Ten Years        Over Ten Years
                           Year                                                                                            Total
                     Book Average            Book        Average     Book        Average     Book       Average        Book Average
                     Value      Yield        Value         Yield     Value         Yield     Value        Yield        Value      Yield
                                                                                                                             (EUR ‘000)
Bulgarian
Government
Eurobonds(1)           3,197     3.90%               -          -            -         -           -           -        3,197      3.90%
BG ZUNK FRN(2)
                           -           -             -          -            -         -        963       5.20%           963      5.20%
BGN EIB bonds(3)
                           -           -         522      4.32%              -         -           -           -          522      4.32%
Bulgarian
Government
Eurobonds in
USD (4)                    -           -             -          -        464      5.40%            -           -          464      5.40%
Raiffeisenbank
Bonds(5)                   -           -         515      4.31%              -         -           -           -          515      4.31%
Bulgarian
Corporate(6)
                           -           -         745      7.42%              -         -           -           -          745      7.42%

Total                  3,197           -       1,782            -        464           -        963            -        6,406          -

Source: BACB

(1)      Bulgarian government bonds denominated in Euros. Fixed rate, final maturity, March 2007.
(2)      Bulgarian government bonds issued in exchange for the non-performing foreigh currency debts of state owned enterprises.
Denominated in USD. Floating rate, amortising, final maturity January 2019.
(3)      Euro Medium Term Note denominated in BGN, issued by the EIB. Fixed rate, final maturity November 2009.
(4)      Bulgarian government bonds denominated in USD. Fixed rate, final maturity, January 2015.
(5)      Unsecured corporate bonds, denominated in BGN, floating rate, final maturity October 2009.
(6)      Euro denominated corporate bond issued by a private Bulgarian company. Floating rate final maturity December 2010.




                                                                    79
                            PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDER


The following table sets out details, insofar as they are known to the Bank, of the interests in Shares held by persons who are
directly or indirectly interested in five per cent or more of the Bank’s issued share capital at the date of this document.

                                                                  At the date of this
                                                                      document
                                                               Number of     % of issued
                                                                Shares      share capital
Bulgarian American Enterprise Fund....                         6,802,103           53.88
Balkan Ventures OOD                                            1,262,042            9.99
Gramercy Emerging Markets ................                     1,179,792            9.35
Others .....................................................   3,380,788           26.78
Total ....................................................     12,624,725            100



Save as disclosed in the table above, the Bank is not aware of any person who is holding directly or indirectly, 5% or more of
the Bank’s registered share capital.

None of the Bank’s shareholders have different voting rights from any other holder of Shares in respect of any Shares held by
them.

Bulgarian American Enterprise Fund
The BAEF is a US corporation, established pursuant to the SEED Act, the primary aim of which is to encourage
entrepreneurialism and promote development in the former communist countries of Central and Eastern Europe. Under the
SEED Act, the BAEF was granted $57.8 million to invest in Bulgaria for the purposes of promoting the development of the
private sector by supporting small- and medium-sized businesses in different sectors of the economy.

The Bank is currently the BAEF’s largest asset. The BAEF anticipates that it will retain a majority interest in the Bank in the
short term. Historically, the BAEF has provided the Bank with long term funding, although it is not required to continue doing
so in the future.

Controlling Shareholders
Save for the BAEF, the Bank is not aware of any person who could directly or indirectly, jointly or severally, exercise control
over the Bank.

As per the POSA a person exercises control over the Bank if they directly or indirectly: (a) hold more than 50% of the votes at
the general meeting of the shareholders or (b)could elect more than half of the members of the Bank’s management bodies; or
(c) could in any other way have considerable influence over the dicision making process related to the Bank’s business.



Economic group of BAEF

The Bank is part of the economic group of its controlling shareholder. Save for its interest in the Bank BAEF holds directly
more than 25% of the shares of the following companies:

Bulgarian American Property Management EOOD, registered under company file No: 14941/1995 of the Sofia City Court,
headquartered in Sofia, Sofia region, 3 Shipka str., scope of activities: real estate management, acquisition of rights on real
estate, construction and any other business permitted by law. 100% of the company’s capital is owned by BAEF.

Preslav Enterprise EOOD, registered under company file No: 5724/2002 of the Sofia City Court, headquartered in Sofia,
Sofia region, 3 Shipka str., scope of activities: consultancy, trade, management and transactions with real estate, production of
industrial, food, agricultural products, mediation and commission services, trade mediation, restaurant and hotel business,
marketing and advertising, construction and any other commercial activities permitted by law. 100% of the company’s capital
is owned by BAEF.

Sredetz Enterprise EOOD, registered under company file No: 5725/2002 of the Sofia City Court, headquartered in Sofia,
Sofia region, 3 Shipka str., scope of activities: consultancy, trade, management and transactions with real estate, production of
industrial, food, agricultural products, mediation and commission services, trade mediation, restaurant and hotel business,
marketing and advertising, construction and any other commercial activities permitted by law. 100% of the company’s capital
is owned by BAEF.

Ameta Holding AD, registered under company file No: 466/1996 of the Veliko Tarnovo Regional Court, headquartered in Pavlikeni,
Pavlikeni Municipality, Veliko Tarnovo region, 5 Tosho Katev str., marketing, engineering, production, processing and trade of fodder
and vegetable oils, as well as all other activities permitted by law. 28% of the company’s capital is owned by BAEF. The Board of
                                                                    80
Directors of the company comprises of three members: BAEF; BAPM EOOD (100% owned by BAEF) and Sredets Eterprise EOOD
(100% owned by BEAF).

Lozenets Development Company EOOD, registered under company file No: 12557/2004 of the Sofia City Court,
headquartered in Sofia, Oborishte region, 3 Shipka str., scope of activities: purchase of goods for resale or for processing,
consultancy, trade, management and transactions with real estate, hotel and restaurant business, trade representation and
mediation, advertising and information services as well as any other activities permitted by law. 100% of the company’s
capital is owned by BAEF.

Shipka Enterprise EOOD, registered under company file No: 10178/2006 of the Sofia City Court, headquartered in Sofia,
Oborishte region, 3 Shipka str. 100% of the company’s capital is owned by BAEF;

Kapital Direct – 1 ADSIC, registered under company file No: 9585/2003 of the Sofia City Court, headquartered in Sofia,
Oborishte region, 3 Shipka str., scope of activities: fundraising by issuing securities and investing the raised funds in
receivables (securitization of receivables), purchase and sale of receivables as well as any other activities directly related to
purchase and sale and securitization of receivables. As of the date of this document BAEF owns directly 76.92% of the
company’s capital; the remaining 23.08% of the company’s capital are woned by BAPM EOOD – subsidiary of BAEF.

ERG Capital – 1 ADSIC, registered under company file No: 8835/2004 of the Sofia City Court, headquartered in Sofia,
Oborishte region, 3 Shipka str., scope of activities: fundraising by issuing securities and investing the raised funds in
receivables (securitization of receivables), purchase and sale of receivables as well as any other activities directly related to
purchase and sale and securitization of receivables. As of the date of this document the shares of the company are listed on the
BSE – Sofia AD.

ERG Capital – 2 ADSIC, registered under company file No: 6675/2005 of the Sofia City Court, headquartered in Sofia,
Oborishte region, 3 Shipka str., scope of activities: fundraising by issuing securities and investing the raised funds in real
estate (securitization of real estate), purchase of ownership and other rights over real estate, their construction and repairs in
order that be managed, leased and/or sold as well as any other activities directly related to the abovementioned. As of the date
of this document the shares of the company are listed on the BSE – Sofia AD.

ERG Capital – 3 ADSIC, registered under company file No: 8244/2006 of the Sofia City Court, headquartered in Sofia,
Oborishte region, 3 Shipka str., scope of activities: fundraising by issuing securities and investing the raised funds in real
estate (securitization of real estate), purchase of ownership and other rights over real estate, their construction and repairs in
order that be managed, leased and/or sold as well as any other activities directly related to the abovementioned. BAEF
subscribed 70% of the incorporation issue.

Kapital Direct EAD, registered under company file No: 6181/2005 of the Sofia City Court, headquartered in Sofia, Oborishte
region, 3 Shipka str., scope of activities: project financing, management, administrating and collection of loans, purchase and
sale of and other transactions with receivables, leasing and other financial services, commercial representation and mediation,
marketing and any other activities permitted by law. 100% of the company’s capital is owned by BACB which is controlled
by BAEF.
Furazh – Rositsa EOOD, registered under company file No: 1044/1998 of the Veliko Tarnovo regional court, headquartered
in Pavlikeni, Pavlikeni municipality, Veliko Tarnovo region, 5 Tosho Katev str. 100% of the company’s capital is owned by
Ameta Holding AD which is controlled by BAEF.

Pilko EOOD, registered under company file No: 4/1999 of the Razgrad regional court, headquartered in Razgrad,
municipality of Razgrad, Industrial zone Razgrad – Pticeklannica. 100% of the company’s capital is owned by Ameta Holding
AD which is controlled by BAEF.

Ludogorsko pile EOOD, registered under company file No: 242/2001 of the Razgrad regional court, headquartered in
Razgrad, municipality of Razgrad, Industrial zone Razgrad – Pticeklannica. 100% of the company’s capital is owned by
Ameta Holding AD, which is controlled by BAEF.

Svinevadstvo Asparuhovo OOD, registered under company file No: 809/1998 of the Pleven regional court, headquartered in
Asparuhovo. 100% of the company’s capital is owned by Ameta Holding AD which is controlled by BAEF.

Transactions with Interested Parties
The Bank may not, without prior shareholder approval, enter into certain transactions as a result of which the Bank acquires,
transfers, receives or grants for use or creates a security interest over any kind of fixed assets exceeding by 2% the lower of
the value of the Bank’s assets as per the last audited or its last prepared financial sheet. Upon taking decisions the interested
shareholders cannot exercise their right to vote. Except for the abovementioned the Bank’s transaction with participation of
interested parties are subject to approval of the Management Board and in some cases by the Supervisory Board as well.
For the purposes of the above, the following are considered to be “interested persons” (A) the members of the Management
Board and the members of the Supervisory Board of the Bank, (B) any procurator of the Bank and (C) any person who
directly or indirectly is entitled to at least 25% of the votes at a general meeting of the Bank’s shareholders or who otherwise

                                                               81
controls the Bank, when such person or a group of persons “related” to such person:
      •   is a party or an intermediary to the transaction, or the transaction is carried out for its benefit; or
      •   is entitled, directly or indirectly, to at least 25% of the votes at a general meeting of shareholders of a person who is a
          party or an intermediary to the transaction, or the transaction is carried out for its benefit, or
      •   controls a legal entity, which is a party or an intermediary to the transaction, or to the transaction is carried out for
          its benefit; or
      •   is a member of the management or supervisory board, or a procurator of a legal person falling within the preceding
          paragraph.
For the purposes of paragraph (C) of the definition of “interested persons”, a person is “related” to another if: (a) it controls
the other person or any of its subsidiaries; (b) the activity of both persons is controlled by a third person; (c) both persons
jointly control a third person; or (d) that person is a spouse, or one of certain relatives by birth or marriage of the person.


Transactions with Related Persons
“Related persons” of the Bank for the purposes of Ordinance No. 2 of the FSC are:
(a)   persons who, directly or indirectly, through one or more companies, control, are controlled by or are under joint control
      with the Bank;
(b)   persons who, directly or indirectly, control the exercise of at least five percent of the votes able to be cast at a general
      meeting of shareholders of the Bank;
(c)   the directors of the Bank and their relatives who could exercise influence over or who could be influenced by the
      persons under the previous sentence in respect of their relations with the Bank;
(e)   companies which are controlled by persons who meet the requirements of paragraphs (a) and (b).


The Bank executes transactions with related parties on an arms length. These transactions are concluded at market prices and
mainly include providing loans and taking deposits.

Major and Unusual Transactions with Related Persons

For the last three financial years and up to the date of this document no unusual transactions with related persons in terms of
type and condition have been concluded. No major transactions other than the ones listed in Loans from the Bank and BAEF
to related persons. Obligation to Related Persons below have been made between the Bank and its related persons.

Major transactions shall mean: (a) a transaction whose value exceeds 5% of more of the Bank’s assets as per the last audited
financial statement; or (b) transactions which the Directors consider may influence the potential investors when making their
investment decisions.


Loans from the Bank and BAEF to Related Persons as of 31 December 2006. Obligations to related persons.

Loans from BAEF to related persons as of 31 December 2006.


Creditor/       Borrower               Currency      PBO               Type of Loan /      Purpose of Loan             Interest rate
Warrant                                                                Warrant

BAEF            Kapital      Direct    Euro          14,200,000        Credit line         Long-term financing         5.061%
                EAD

BAEF            Pilko EOOD             Euro          545,399.41        Term loan           Working capital             8%

BAEF            Pilko EOOD             Euro          328,306.44        Term loan           Working capital             8%

BAEF            Pilko EOOD             Euro          497,017.91        Term loan           Acquisition of fixed        8%
                                                                                           assets

BAEF            Pilko EOOD             Euro          142,477.40        Term loan           Acquisition of fixed        8%
                                                                                           assets

BAEF            Pilko EOOD             Euro          551,935.48        Term loan           Working capital             8%

BAEF            BAPM EOOD              Euro          27,960,000        Loan                Investment     in    real   5.5%
                                                                                           estate



                                                                  82
Loans from the Bank to related persons as at the end of the last three years to the date of this document:



2004

Creditor/      Borrower               Currency        PBO        at      Type of Loan      Purpose of Loan        Interest rate
Warrant                                               31.12.2004         / Warrant

BACB           Sanita Franchising     Euro            2,170,920          Term loan         Investments            8%
               AD

BACB           Sanita Franchising     Euro               25,060          Term loan         Working capital        8%
               AD

BACB           Sanita Franchising     Euro               65,159          Term loan         Working capital        8%
               AD

BACB           Sanita Franchising     Euro               40,098          Term loan         Working capital        8%
               AD

BACB           Furazh      Rositsa    Euro               76,694          Bank              Bank guarantee         -
               AD                                                        guarantee

BACB           ERG Capital -1         Euro              387,800          Term loan         Short-time             10%
               ADSIC                                                                       financing of VAT

BACB           Loans            to    Euro/      US       55,013         Term loan         Purchase          of   6%
               employees       and    dollars/ lev                                         housing
               management



2005

Creditor/      Borrower               Currency        PBO        at      Type of Loan      Purpose of Loan        Interest rate
Warrant                                               31.12.2005         / Warrant

BACB           Sanita Franchising     Euro                  25,060       Term loan         Working capital        8%
               AD

BACB           Sanita Franchising     Euro                  65,159       Term loan         Working capital        8%
               AD

BACB           Sanita Franchising     Euro                  40,098       Term loan         Working capital        8%
               AD

BACB           Sanita Franchising     Euro                  30,073       Term loan         Working capital        8%
               AD

BACB           Furazh      Rositsa    Euro                  76,694       Bank              Bank guarantee         -
               AD                                                        guarantee

BACB           ERG Capital -2         Euro                  522,592      Term loan         Short-time             10%
               ADSIC                                                                       financing of VAT

BACB           Loans            to    Euro/    US           71,005       Term loan         Purchase       of      6%-10%
               employees       and    dollars/                                             housing      and
               management                                                                  consumer loans




                                                               83
2006

Creditor/     Borrower              Currency       PBO        at     Type of Loan     Purpose of Loan       Interest rate
Warrant                                            31.12.2006        / Warrant

BACB          Loans            to   Euro/                33,077      Term loan        Purchase         of   6%
              employees       and                                                     housing
              management

BACB          Furazh      Rositsa   Lev                  76,694      Bank             Bank guarantee        -
              AD                                                     guarantee

BACB          ERG Capital -3        Lev                  95,931      Bank             Bank guarantee        -
              ADSIC                                                  guarantee



Obligations of the Bank to Related Persons

BAEF and other related persons and employees have time and current deposits opened with the Bank for their regular term of
business. At 31 December 2006 and 2005 the obligations under transactions with related persons and the expenses related to
them are:



Related persons                                                    2006                    2005

Loans and debt securities - BAEF                                  26,322                 15,343
Deposits of BAEF                                                  12,590                  4,531

Deposits of other related persons                                 12,815                    903

Deposits of employees and management                                170                      81

Total                                                             51,897                 20,858

Interest expenses                                                  1,840                  1,702




                                                           84
     DESCRIPTION OF THE SHARES AND APPLICABLE BULGARIAN LEGISLATION


Introduction
The following is a description of the principal rights attaching to the Shares, certain material provisions of the Bank’s articles
of association, the Bulgarian Public Offer of Securities Act 2000 and the Commercial Act 1991 in effect at the date of this
document. It should be noted that the Supervisory Board has proposed the General Meeting of the Shareholders to vote on a
decision for changes and amendments of the Bank’s By-laws according to the requirements of the Act on Financial
Institutions, effective sine January 1, 2007. After their adoption, any such changes must be approved by the BNB and
registered at the Commercial Registry.
The Public Offer of Securities Act 2000 requires the Shares to be in registered and uncertificated form. The issue and transfer
of the Shares takes effect on the registration of the issue or transfer, as the case may be, with the Central Depository, which is
the Bulgarian registrar of book-entry securities.

Description of the Shares

Type and class of Shares

The Bank’s shares are ordinary, book-entry shares, with each share giving a right to one vote at the General Meeting of the
Shareholders; each of the shares rank pari passu amongst themselves, with no preferential rights attached to any of the shares.
The shareholders’ book is kept by the Central Depository AD.

Shareholders’ rights and manner of exercise
According to the By-laws of the Bank, the Commercial Act and the other applicable regulations each share provides the
following basic rights:

Right to one vote at the General Meeting of the Shareholders. Each share gives the right to one vote at the General Meeting of
the Shareholders of the Bank. The right to vote at the General Meeting is exercised by shareholders registered with the Central
Depository AD at least 14 days prior to the General Meeting date;

Right to dividend upon profit distribution. The right to dividend becomes effective after the General Meeting of the
Shareholders adopts a decision for dividend distribution. The right to receive dividends belongs to each person registered with
the Central Depository AD as shareholder on the 14th day after the General Meeting that adopted the annual financial report
and the decision for dividend distribution at the latest;

Right to liquidation quota in case of liquidation of the Bank. Each share provides the right to liquidation quota pro rata to the
liquidation quota of the share. The right to liquidation quota of the shareholders is irrevocable and cannot be restricted. The
right to liquidation quota can be exercised after the liquidation of the Bank, the satisfaction or collateralization of the claims
of the bank’s creditors and the expiration of the 6 month period following the promulgation of the invitation by the Bank’s
liquidators to the Bank’s creditors to present their claims. The rights to liquidation quota belongs to the persons registered as
shareholders with the Central Depository AD as of the Bank’s liquidation date.

Each share provides additional rights as follows:

The right of each shareholder to subscribe new shares in case of capital increase pro rata to the existing shareholdings before
the increase;

The right of each shareholder to participate in the management, to elect and to be elected as a member of the management
bodies;

Right to information. Including the right to receive upon request the written materials on the agenda of the General Meeting of
the Shareholders prior to the Meeting date; the right to read the minutes of the General Meeting held and to receive a copy of
these Minutes from the Bank or the FSC; as well as the right to ask the members of the management and supervisory bodies
of the Bank about its economic and financial condition and its activities, except for the circumstances which are inside
information no matter whether they are related to the agenda of the General Meeting;

The right to appeal decisions of the General Meeting that are not in compliance with the law and the Bank’s By-laws.
The Bank’s By-laws do not envisage any other rights and privileges arising from the Shares; neither does it envisage any
limitations and other conditions for the transfer of shares.

According to the By-laws and the Bulgarian legislation, the Bank may issue preferred shares that entitle the shareholders to a
guaranteed or additional dividend, preferred shares with a buy-back option or other privileges permissible by law. The Bank is
not allowed to issue preferential shares entitling the shareholder to a more than one vote or to additional liquidation quota.
Currently, the Bank does not have any preferred shares.

Scope of Activity of the Bank
According to the new Act on Financial Institutions, effective since January 1, 2007, the Bank has to align the description of its
                                                               85
scope of activity to the new requirements of the law.

The Supervisory Board has proposed to the General Meeting of the Shareholders, to be held on April 18, 2007, to vote on a
decision to amend the description of the scope of activity of the Bank in accordance with the requirements of the Act on
Financial Institutions.

The Bank is engaged in the business of publicly accepting money on deposits and other repayable funds and lending or other
forms of financing for its own account and for its own risk. The Bank may also perform the following activities:
          1. funds transfers and other means of payment such as letter of credits and documentary collections;
          2. issuing and administering means of payment such as travellers’ cheques, electronic payment instruments, except
          bank payment cards and instruments for electronic money;
          3. acceptance of valuables on deposit;
          4. depository and custodian activities;
          5. funds transfers in cases other than those under item 1;
          6. financial leasing;
          7. guarantee transactions;
          8. trading for own account or for account of customers in:
                a) money market instruments – cheques, bills, certificates of deposit, etc;
                b) foreign exchange;
                c) financial futures and options, exchange and interest-rate instruments, as well as other derivatives;
          9. trading for own account or for account of customers in transferable securities, participation in securities issues, as
          well as other services and activities under article 54, par. 2 and 3 of the Public Offering of Securities Act;
          10. financial brokerage;
          11. advice on portfolio investments;
          12. purchase of accounts receivable for the delivery of goods or services rendered and assumption of the risk related
          to collection of these claims (factoring);
          13. equity acquisition and management;
          14. collection and distribution of information and references on customers’ creditworthiness;
          15. such other activities as specified in Ordinance of the Bulgarian National Bank (“the Central Bank”).




Share Capital
As of the date of this document, the Bank’s issued and outstanding share capital is BGN 12,624,725 comprising 12,624,725
Shares, each with a nominal value of BGN 1. All the issued and outstanding Shares are fully paid-up.
The following table shows the issued and outstanding share capital of the Bank at the dates indicated:
                                                                                                                                            Number of     Paid-up share
                                                                                                                                          issued Shares   capital (BGN)
31 December 2004 ......................................................................................................................   12,578,991 12,578,991
31 December 2005 ......................................................................................................................   12,624,725 12,624,725
31 December 2006 ......................................................................................................................   12,624,725 12,624,725
Source: BACB

Issuance of Shares
Under Bulgarian law, a company may increase its capital by a shareholder resolution. The company’s Articles of Association
may authorize its Board of Directors, respectively the Management Board to increase the share capital by issuing new shares
up to a certain amount for 5 years as of the authorization date.

The issued share capital of a Bulgarian public company may be increased in the following ways:



       •      the issue of new shares pursuant to a rights issue;

       •      the issue of shares on conversion of a convertible bond; or

       •      the payment of a dividend in specie in the form of new shares in the company.

       To increase the bank’s share capital, the Articles of Association require a shareholder resolution to be passed by the
       holders of at least two-thirds of the shares present at the meeting. At the general meeting of the shareholders held on 16
       January 2006 the shareholders adopted new Articles of Association which authorize the Management Board to
       unanimously pass decision for increase of the Bank’s share capital for the amount of up to 100 million leva for 5 years.
       The decision of the Management Board for increase of the share capital is subject to approval of the Supervisory Board.


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     As of the date of this document the Bank’s Management Board has not passed decisions for increase of its share capital.

Issue of new shares by way of rights issue
In Bulgaria, new share issues of public companies are effected by way of a rights issue. Where a company intends to issue
new shares pursuant to a rights issue authorised by a shareholder resolution, the company must publish a prospectus
containing detailed information relating to both the company and the shares offered. The prospectus is required to be
approved by the Financial Supervision Commission.

A Bulgarian public company may conduct a rights issue without a prospectus if the notice convening the general meeting of
shareholders to approve the share capital increase complies with certain requirements, for example it must include the draft
resolution, and information on: (i) the proposed use of proceeds of the subscription monies, (ii) the risks relating to the issue
of the shares, (iii) general information relating to the company and its prospects for the current financial year, (iv) the rights
attaching to the shares to be issued, (v) the subscription ratio of the rights issue, (vi) the terms and conditions of the transfer of
rights, (vii) the terms and conditions for subscription of shares of the new issue and (viii) the issuance value. The notice must
be approved by the Financial Supervision Commission.

Following approval of the prospectus or notice by the Financial Supervision Commission and the passing of the shareholder
resolution authorising the share capital increase, the company is required to publish an announcement of the public offering of
the new shares and the related pre-emption rights in the Bulgarian State Gazette and in one national daily newspaper at least
seven days before the initial subscription date.

For more information, see “Description of the Shares and Applicable Bulgarian Legislation — Pre-emption Rights”.

Issue of Convertible Bonds
The procedure set out above for a rights issue also applies to an issue of convertible bonds by a public company.

A resolution of the shareholders in general meeting approving a new issue of convertible bonds is effective only upon the
approval of the new issue of shares by any holders of existing convertible bonds. Pursuant to the Bank’s articles of association,
only shareholders in general meeting are empowered to pass resolutions authorising the issue of convertible bonds. The Bank
may issue other types of corporate bonds and debt instruments following a decision of the General Meeting of the
Shareholders or the Management Board as per the Bank’s Articles of Association. The Articles of Association authorize for a
period of 5 years the Management Board to pass decisions for issue of bonds in the amount of up to EUR 100 million (or its
equivalence in leva and/or other currency) for each calendar year of the 5-year period. The terms and conditions of the bond
debt are specified in the decision of the Management Board in compliance with the regulations of the current legislation and
the Articles of Association. If the total nominal value of the bond issue exceeds 1/3 of the Bank’s capital the decision to issue
the bond debt is subject to approval by the Supervisory Board.


Increase of Share Capital with Own Funds by Way of Capitalizing Profits
Within three months after the adoption of the audited annual financial statement for the previous fiscal year, the General
Meeting of the Shareholders may decide on increasing the share capital by way of capitalizing profits and reserves within the
limits proscribed by law. Such decision must be taken with a ¾ majority of the shareholders present at the meeting. The newly
issued shares are to be distributed to shareholders in proportion to their participation in the Bank’s capital prior to the
increase. The right to receive new shares belongs to shareholders, registered as such in the book of shareholders, kept by the
Central Depository, on the 14-th day following the decision of the shareholders for the capital increase..


Registration of Increases in Share Capital
An increase of share capital effected by any of the above methods is effective at the date of the registration of the share capital
increase at the Bulgarian commercial court. The new shares are issued at the date of the registration of the capital increase at
the Central Depository.

Pre-emption Rights
Each holder of Shares has pre-emptive rights to subscribe for any new shares or convertible bonds issued by the Bank pro
rata to its existing holding of Shares. The number of Shares required to subscribe for one new share or convertible bond must
be specified in the shareholder resolution approving the share capital increase. Under Bulgarian law, pre-emption rights may
not be removed in any way, unless those pre-emption rights are automatically removed by operation of Bulgarian law, which
occurs whenever shares are issued for the following purposes: (i) to be allotted to holders of interests in another company as
part of a merger or a non-cash tender offer for the shares in that company; (ii) to be allotted to holders of convertible bonds or
warrants due to the conversion of those instruments; or (iii) in order to increase a bank’s share capital at the direction of the
BNB if its capital adequacy is insufficient, but only so long as that bank is unable to raise share capital in a rights issue.
If the capital increase is authorised by a shareholder resolution, the pre-emption rights accrue to those persons registered as
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shareholders at the Central Depository on the ex-dividend date. If the capital increase is authorised by a unanimous resolution
of the Management Board, the pre-emption rights accrue to those persons registered as shareholders at the Central Depository
on the seventh day after the publication of the announcement of the rights issue in the Bulgarian State Gazette. On the
business day following the ex-dividend date (or the seventh day after the announcement, as appropriate) the Central
Depository opens rights accounts in the name of the relevant shareholders based on the register at the Central Depository at
such date.
The first date on which pre-emption rights may either be: (1) exercised to subscribe for new shares or convertible bonds; or (2)
traded on the BSE is required to be specified in the announcement of the rights issue. The final date for the exercise of pre-
emption rights must be between fourteen and thirty days from the date set for the first exercise of such rights. All rights not
exercised within this time must be offered to the public by means of an auction organised by the BSE five business days after
the final date on which rights may be traded. This auction is open for a period of one day. Any right acquired pursuant to the
auction must be exercised within ten business days of the auction.
The shareholders have the rights to subscribe for convertible bonds issued by the Bank pro rata to their existing holding of
Shares.

Share Buy-backs
The Bank may buy back its shares subject to the approval of two thirds of the votes cast at a general meeting of shareholders
and the prior written approval of the BNB. The details of the redemption (including the maximum number of shares to be
redeemed, the procedure for redemption and the timetable, which may be up to 18 months) must be specified in the resolution.
The shareholder resolution must be registered at the Bulgarian commercial court and published in the State Gazette.
The BNB may refuse to approve a buy-back in any of the following circumstances:
     •    if the resolution of shareholders is illegal in any respect;
     •    if the buy back would cause the liquidity of the Bank to deteriorate; or
     •    if the buy-back would result in a breach of the BNB rules on large exposures, the limitations on granting credit to
          directors or employees, or any other legislative provisions in the Banks Act 1997.
The BNB must complete its approval process within three months. If BNB refuses to approve the transaction, the buy-back
must be cancelled.
A share buy-back may only take place if the Bank’s net asset value as set out in its audited annual financial statements less the
book value of any shares to be redeemed would be equal to or higher than the total of the Bank’s issued capital, the reserves
which the Bank is required to maintain pursuant to the law or its Articles of Association.

As a public company, the Bank may only buy back more than 3% of its issued shares during any calendar year by way of a
tender offer. In any event, the aggregate nominal value of the shares repurchased may not exceed 10% of the Bank’s issued
share capital, except where the Bank transfers or cancels any excess shares above the 10% limit within three years.

Reduction of Share Capital
The shareholders in general meeting may resolve to reduce the Bank’s issued share capital only by way of cancelling issued
shares. The Bank’s articles of association require a resolution to be passed by a majority of two-thirds of holders of all shares
present at the meeting. Any reduction of share capital of the Bank’s shares requires the approval of the BNB. The grounds on
which the BNB may refuse to approve a reduction in share capital are similar to the grounds for refusing a buy-back.
To reduce the Bank’s share capital, a shareholder resolution must be published in the State Gazette, explaining that the Bank
is obliged to repay or secure its obligations towards any creditor which objects to the reduction in writing within three months.
The reduction of share capital is required to be registered at the Bulgarian commercial court after the end of this three-month
period and is effective at the date of such registration. Payments to shareholders resulting from the reduction of share capital
may be made only after this registration and the repayment or creation of security in favour of any objecting creditors. These
requirements do not apply if the reduction of share capital is effected: in order to cover losses; by redemption of fully paid-up
shares for no consideration; or against payment not exceeding the sum of earnings for the relevant year, accumulated retained
earnings and excess of reserves over mandatory requirements less retained losses and instalments which the Bank is obliged to
pay as reserves.

Transfer of Shares
A transfer of the Shares is effective at the registration of the transfer at the Central Depository. Sales and purchases of shares
issued by a Bulgarian public company, other than sales and purchases by individuals, may only be made on a regulated
securities market (i.e. by way of a transaction conducted on the BSE) through a broker-dealer, licensed by the Financial
Securities Commission. The BSE Rules permit some transactions to be concluded “off market” and declared to the BSE by a
broker-dealer, for example: “block trades” of more than 5% of a company’s capital; repurchase or reverse repurchase
transactions; and purchases of shares subject to a tender offer. Individuals may carry out off market transactions directly,
although a broker-dealer is required to declare the transaction to the regulated securities market and arrange for registration of
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the transaction at the Central Depository. Similar rules apply to the transfer of shares by way of donation or inheritance.
Shares may be pledged through registration of a special pledge at the Central Depository.

Issues of Non-Convertible Bonds
The Bank may issue corporate bonds with the approval of the shareholders in general meeting or as provided by the Bank’s
articles of association. The Bank’s articles of association give the Management Board the power to authorise issues of
corporate bonds of up to €100 million in each calendar year during a five-year period. If the nominal value of a bond issue
will exceed one-third of the Bank’s capital base, the Management Board approval must be ratified by the Supervisory Board.

Major Transactions and Transactions with Interested Parties
Under the Public Offer of Securities Act, the Bank may not, without prior shareholder approval, enter into transactions as a
result of which (1) the Bank acquires, transfers, receives or grants for use or creates a security interest over the Bank’s fixed
assets, (2) the Bank incurs obligations to a person or a group of related persons or (3) receivables are due to the Bank from a
person or a group of related persons, in each case, where the value exceeds:
     •    one third of the lower of the value of the Bank’s assets in its last audited or its last prepared balance sheet; or
     •    in the case of a transaction with an “interested person”, 2% of the lower of the value of the Bank’s assets in its last
          audited or its last prepared balance sheet;
For the purposes of the above, the following are considered to be “interested persons” (A) the members of the Management
Board and the members of the Supervisory Board of the Bank, (B) any procurator of the Bank and (C) any person who
directly or indirectly is entitled to at least 25% of the votes at a general meeting of the Bank’s shareholders or who otherwise
controls the Bank, when such person or a group of persons “related” to such person:
     •    is a party or an intermediary to the transaction, or the transaction is carried out for its benefit; or
     •    is entitled, directly or indirectly, to at least 25% of the votes at a general meeting of shareholders of a person who is a
          party or an intermediary to the transaction, or the transaction is carried out for its benefit, or
     •    controls a legal entity, which is a party or an intermediary to the transaction, or to the transaction is carried out for
          its benefit; or
     •    is a member of the management or supervisory board, or a procurator of a legal person falling within the preceding
          paragraph.
For the purposes of paragraph (C) of the definition of “interested persons”, a person is “related” to another if: (a) it controls
the other person or any of its subsidiaries; (b) the activity of both persons is controlled by a third person; (c) both persons
jointly control a third person; or (d) that person is a spouse, or one of certain relatives by birth or marriage of the person.
In the case of a transaction to acquire or dispose of fixed assets which exceed the thresholds described above, a majority of
three quarters or more of the votes cast at the general meeting of shareholders is required and, in all other cases, a simple
majority of the votes cast is required. In either case, any interested parties are not permitted to vote.
Transactions between the Bank and interested persons which do not require prior shareholder approval, are subject to prior
approval by the Bank’s Management Board, with any interested members of the Management Board not permitted to vote. In
determining whether prior shareholder approval is required, individual transactions with a person or related group of persons
which individually are below the threshold for requiring shareholder approval are aggregated with other transactions with the
same person or group of related persons in the previous three calendar years. Any transaction requiring prior shareholder
approval may only be entered into on arm’s length terms and the Management Board, or where the transaction is with an
interested person, an independent expert, is required to undertake a valuation of the transaction in question.
Prior shareholder approval is not required, amongst other things:
     •    for transactions effected in the ordinary course of the Bank’s business, including agreements for bank credits and
          collateral unless an interested person is a party or otherwise participates in such agreements; or
     •    for loans from the Bank’s holding company where the terms are no less favourable that those available in the
          domestic market.
If a transaction requires prior shareholder approval, the Management Board of the Bank is required to provide a report to the
general meeting which sets out the way the transaction will operate, the rationale for the transaction and an explanation of
how the transaction will benefit the company.
Any transaction which is entered into in breach of Article 114 of the Public Offer of Securities Act is void.

Meetings of Shareholders
Convening a General Meeting of Shareholders
The Management Board and the Supervisory Board of the Bank each has the power to convene a general meeting of
shareholders. In addition, shareholders holding at least 5% of the Shares for at least a three month period are entitled to require
the Bank to convene a general meeting and to add items to the agenda for a general meeting. In the event the Bank were to fail
to call a general meeting on the request of the required number of shareholders, the regional court is empowered to convene
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the general meeting or allow shareholders holding at least 5% of the Shares to do so. An annual general meeting of
shareholders is required to be held within six months of the end of the Bank’s fiscal year. An extraordinary general meeting of
shareholders may be convened at any time by giving the requisite notice to shareholders. This notice must contain the Bank’s
name and headquarters, the place, date and time of the meeting, the type of the meeting (i.e. annual or extraordinary),
information of the formalities that must be complied with for participation at the meeting and for exercise of voting rights, an
agenda and draft resolutions. The notice and other documents related to the agenda of the general meeting must be filed at the
Financial Supervision Commission, the BSE and the Central Depository no later than 45 days prior to the date of the general
meeting. Any items added to the agenda at the request of a shareholder holding more than 5% of the shares must also be filed
at the Financial Supervision Commission. Following the approval of the notice by the Financial Supervision Commission
(which may not take more than fourteen days), the Financial Supervision Commission and the BSE make the notice and the
other documents related to the agenda available to the public, typically by publishing these documents on their respective
websites. The notice is also required to be published in the State Gazette and in one central daily newspaper at least 30 days
before the date of the general meeting and the other documents related to the agenda made available to shareholders at the
Bank on the same day. General meetings are required to be held in Sofia, the city in which the Bank’s headquarters are
located. At a general meeting, shareholders must also be given the opportunity to ask questions and these must be answered
even if not related to the agenda items.
Each Share confers the right to cast one vote at a general meeting. Public companies are prohibited from issuing preference
shares entitling their holders to more than one vote per share. The right to vote at a general meeting is conferred on those
persons registered at the Central Depository as shareholders 14 days prior to the date of the meeting (the “Voting Record
Date”). A purchaser of shares registered at the Central Depository after the Voting Record Date is not entitled to vote. The
Central Depository submits a list of the shareholders at the Voting Record Date to the Bank. The entry of the persons in this
list is the only prerequisite to their participation in the general meeting of shareholders and to the exercise of the voting rights
attaching to their shares. Persons entitled to vote may attend the meeting in person or through an authorised proxy who is
granted a power of attorney. The power of attorney to the proxy must be explicit, certified by a notary public and comply with
a number of Bulgarian legal formalities. No member of either the Supervisory Board or the Management Board may act as a
proxy. Members of the Management Board and Supervisory Boards may attend and speak at a general meeting of shareholders
but do not have voting rights, unless they are also shareholders. The Bank must provide any shareholder with a copy of the
minutes of any general meeting upon demand.

Quorum
The Bank’s articles of association provide that the shareholders in general meeting can pass resolutions if the holders of at
least one half of all issued shares plus one share are represented at the meeting. In the event a quorum is not present, the
meeting is adjourned and a new meeting may be scheduled not earlier than 14 days from the date of the adjourned meeting.
The re-convened meeting may pass resolutions irrespective of the number of shares represented at the meeting.

Majority
The Bank’s articles of association provide that the following shareholder resolutions require the approval of two-thirds of the
voting shares present at the meeting:
     •    any amendment or supplement to the articles of association;
     •    an increase or reduction of share capital;
     •    winding-up of the Bank; and
     •    appointment and dismissal of members of the Supervisory Board.
The approval of three-quarters of the shares represented at a general meeting of shareholders is required for the approval of
significant transactions with fixed assets like real estate or financial assets held for more than one year (amounting to one third
of the assets of the Bank as set out in its latest audited annual financial statement or interim financial statements, whichever is
the lower) or transactions with interested parties of a value representing over 2% of the assets of the Bank. However,
shareholder approval is not required for such a transaction if it does not involve interested parties and is effected in the
ordinary course of the Bank’s business. Also, the approval of three-quarters of the shares voted at a general meeting of
shareholders is required to resolve to pay a dividend in specie in the form of new shares, and for resolutions in relation to
transformation, merger, acquisition, split-off, or split-up of the Bank (“transformation transactions”).
All other shareholder resolutions may be passed by a simple majority of the shares voted at the shareholders meeting.
Any amendment or supplement to the Bank’s articles of association, any appointment of a new member to the Management
Board or appointment of another member of the Bank’s senior management, any transformation transaction and the winding-
up of the Bank require the prior written approval of the BNB. In addition, any transformation transaction requires the prior
written approval of the Financial Supervision Commission. The BNB and the Financial Supervision Commission each has the
power to issue a “stop order” or a compulsory instruction or injunction to the Bank if any resolution of the shareholders in
general meeting or resolution of the Management Board or Supervisory Board is found to be illegal. The BNB alone may
issue such an order if a resolution would be detrimental to interests of the Bank or its depositors, or would be detrimental to
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the stability of the payment system. The Financial Supervision Commission alone may make such an order if a resolution of
the Management Board or Supervisory Board would be detrimental to the interests of shareholders or other investors.
Amendments and supplements to the articles of association and the winding-up of the Bank are only effective at the date of
the registration of the resolution at the Bulgarian commercial court and the approval of the BNB. Any increase or reduction of
capital, transformation transaction, appointment or removal of a member of the Management Board or the Supervisory Board
or the appointment of a liquidator only takes effect for third parties at the date of the registration of the relevant resolution at
the Bulgarian commercial court and following the approval of the BNB, where it is required.

Dividends and Distributions
A resolution relating to the distribution of earnings in the form of dividends is subject to the approval of shareholders in
general meeting following the approval of the audited annual financial statements for the relevant financial year. The payment
of interim dividends is not permitted.
Dividends may only be paid if the Bank’s net asset value as set out in its annual financial statements less the proposed
dividend would be equal to or higher than the total of the Bank’s issued capital and all reserves which it is required to
maintain pursuant to the law and its Articles of Association. Payment of dividends may be made up to the sum of earnings for
the relevant financial year, accumulated retained earnnoings and the excess of reserves over mandatory requirements less
retained losses and instalments which the Bank is obliged to pay to reserves. A Bulgarian public company is obliged to
commence payment of approved dividends to its shareholders within three months from the date of the general meeting of
shareholders at which the resolution approving the annual financial statements and for distribution of the earnings in the form
of a dividend is passed.
Each Share entitles its holder to a dividend based on the Share’s nominal value. The right to receive a dividend is held by each
person registered at the Central Depository as a shareholder at the ex-dividend date. The Central Depository submits a list of
the shareholders at this date to the Bank. The entry of the persons in this list is the only prerequisite to payment of a dividend.
Persons who are entitled to receive dividends but who fail to exercise their right within five years from the due date for
payment forfeit their right to payment.

Liquidation
The Bank may be wound-up by:
     •    the approval of the holders of two-thirds of all issued shares present at a general meeting (subject to the approval of
          the BNB);
     •    revocation of its banking licence by the BNB, including where the Bank has been declared bankrupt; or
     •    a resolution of the court of a procedure initiated by the public prosecutor if (i) the objects of the Bank are illegal, (ii)
          the Bank’s total assets less long-term and current liabilities are less than the issued capital for a period of one year
          during which no resolution for a reduction of the issued capital, transformation or winding-up is passed by the
          shareholders in general meeting, or (iii) the number of members of the Supervisory Board or the Management Board
          falls below the minimum legal requirement for six consecutive months.
Following the winding-up of the Bank (other than in the case of bankruptcy proceedings) a liquidation procedure is followed.
A liquidator is appointed and its remuneration is approved by the shareholders in general meeting. A liquidator is obliged to
give effect to the Bank’s current transactions, to collect in receivables of the Bank, to sell the Bank’s assets and to satisfy the
claims of creditors. A liquidator is obliged to invite creditors to claim against the Bank by an announcement in the State
Gazette and by a notice sent to all known creditors. Distribution of the Bank’s assets, if any, to its shareholders may be made
only after six months from the date of this announcement and the satisfaction of all creditors’ claims.
Each Share entitles its holder to participate in the liquidation pro rata to the Share’s nominal value. This right arises only if,
after the liquidation of the Bank and satisfaction of all other creditors’ claims, assets are available for distribution to the
shareholders. Bulgarian public companies are not permitted to issue preference shares entitling their holders to preferential
rights on liquidation.

Supervisory Board and Management Board
The articles of association of the Bank provide for a two-tier management system consisting of a Supervisory Board and a
Management Board. Members of the Supervisory Board may be either individuals or legal entities. Only individuals are able
to serve on the Management Board, not legal entities.

Supervisory Board
Bulgarian law and the Bank’s articles of association provide that a Supervisory Board must consist of at least three and not
more than seven persons. The members of the Supervisory Board may be appointed and dismissed by a resolution passed by a
two-thirds vote of the shareholders in general meeting. The shareholders in general meeting set their remuneration and approve
the financial guarantee which each member of the Supervisory Board must give as a security for his or her obligations. Under
Bulgarian law at least one third of the members of the Supervisory Board should be independent (i.e. not related to the Bank,
its majority shareholder, another board member or to a person in a long-term commercial relationship with the Bank).
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The Supervisory Board supervises the activities of the Management Board and approves the Bank’s annual and three-year
business plans. The Supervisory Board also monitors the Bank’s risk control mechanisms and its management information
systems. The Supervisory Board has the power to appoint and dismiss members of the Management Board, and it must
approve any resolutions of the Management Board to delegate the power to represent the Bank. The approval of the
Supervisory Board is also required for resolutions of the Management Board for:
     •    changing the internal and organisational structure of the Bank and substantial organisational changes;
     •    changing the internal regulations and rules which set down procedures for the Bank’s operations and transactions;
     •    opening and closing of branches;
     •    increasing the Bank’s capital under the powers given to the Management Board in the articles of association;
     •    acquiring and disposing of equity interests;
     •    amending of the articles of association;
     •    real estate transactions, other than in relation to foreclosing security granted in connection with a loan, but only if
          the value of the transaction exceeds certain internal thresholds;
     •    authorising a procurator;
     •    extending credits which form a large exposure over 15% of the Bank’s capital and credits to board members and
          employees; and
     •    approving a bond issue with a total nominal value of more than one-third of the Bank’s capital base.
The Bank’s articles of association require a quorum of at least half of all members of the Supervisory Board and provide for
resolutions to be passed by simple majority unless the law or the articles of association require otherwise.

Management Board
Bulgarian law and the Bank’s articles of association provide that the Management Board should consist of at least three and
not more than nine persons. Subject to the requirements for BNB consent, the members of the Management Board may be
appointed and dismissed by the Supervisory Board. The shareholders in general meeting have the power to approve the
remuneration of members of the Management Board and the level of the financial guarantee which each member of the
Management Board is required give as a security for his or her obligations.

The Bank’s articles of association provide that a quorum of at least half of all Management Board members is necessary for a
valid meeting and for passing of resolutions. A simple majority is sufficient for passing resolutions unless the law or the
articles of association require otherwise. The Management Board has, with the approval of the Supervisory Board, authorised
the Executive Directors to represent the Bank and to take responsibility for its daily operations. Board members may be re-
elected without limitation and may be dismissed at any time by the Supervisory Board. A board member may resign on six
months’ written notice.

The Credit Institutions Act sets down minimum requirements which must be met by any member of the managing board of a
Bulgarian bank. These standards require a director to have a Master’s level degree and five years of managerial experience in
a bank or similar organisation. In addition, a director must not have been convicted of certain crimes; must not have been a
manager or director of a company at the time of its insolvency if there were any unsatisfied creditors (and must not have held
such positions in a Bank which was declared insolvent for the five year period before that declaration): and a director must not
have certain family relationships with other members of the Bank’s management and control group. Compliance with these
criteria must be certified by the BNB. A person who is appointed as a director but who does not meet these minimum
requirements must be removed by the organisation, or otherwise the person will be removed by the BNB.

Certain Disclosure Requirements under Bulgarian Law
Pursuant to the Public Offer of Securities Act 2000, each shareholder is required to inform the Bank, the Financial
Supervision Commission and the BSE in the event that his or her interest in the Bank reaches or falls below 5% or increases
or decreases by 5% or a multiple of 5%. For these purposes an “interest” includes shares, convertible bonds and warrants. The
disclosure notice must be served within seven days from the date at which the interest is acquired or transferred. However, if
the change is price-sensitive information, e.g. a change of control, it must be disclosed not later than the next business day
following the change. This information is disseminated to the public by means of the public register kept by the Financial
Supervision Commission and a stock exchange bulletin. The notification to the Bank, the Financial Supervision Commission
and the BSE must, if the interest is held by a legal entity rather than an individual, also disclose the persons who control it
directly or indirectly and the manner in which they exercise control. Indirect holdings of interests are also subject to disclosure
if: (i) the interest is held by a spouse or minor, (ii) the interest is held by a company controlled by the relevant person, (iii) the
interest is held by other persons on their own behalf but for the account of the relevant person, (iv) the interest is held by
another person with whom there is a written voting agreement, (v) the interest is conceded by another person with whom the
person has concluded a written agreement stipulating temporary transfer of the voting rights attached to the shares, (vi) the

                                                                 92
interest is pledged by the person as collateral (unless the secured creditor exercises a voting right) or (vii) the interest is
deposited with the person by a transfer of voting rights without any special instructions from the shareholder.

The above disclosure requirements do not apply if interests are acquired by a broker-dealer for its own account or for a client’s
account in the course of a normal trading or investment activity and the votes attached to the acquired interests are not
intended to be cast and they are disposed of on a regulated market within 14 days of their acquisition. Irrespective of the
above thresholds, each manager and board member must disclose in the annual report of a Bulgarian public company
information about the type and number of shares he or she owns in the company and the proportion these shares represent of
the relevant class of shares, as well as ownership of any options for acquisition of securities issued by that public company.
The annual report is disseminated to the public through the public register kept by the Financial Supervision Commission and
through the stock exchange bulletin.

The board members of a Bulgarian public company are obliged to declare to the company, the Financial Supervision
Commission and the BSE: (i) the legal entities in which they own, directly or indirectly, 25% or more of the voting rights or
over which they exercise control; (ii) the legal entities in which they participate in the supervisory or management bodies or
are appointed as procurators; and (iii) the present and future transactions in respect of which they believe that they could be
qualified as “interested” persons. Failure to comply with the above requirements is an administrative offence under Bulgarian
law. For more information, see “Description of the Shares and Applicable Bulgarian Legislation — Major Transactions and
Transactions with Interested Parties.”




                                                               86




                                                               93
                                            GENERAL INFORMATION


1.      The Bank
1.1     The foundation meeting of the Bank’s shareholders was held on 22 December 1995. After being granted a banking
        licence by the BNB, the Bank was registered with the Sofia City Court pursuant to a court resolution dated 3
        December 1996 under court file No. 12587/1996, batch No. 35659, volume 397, register I, page 180 as a joint stock
        company under the Commercial Act 1991. The Bank is registered in the BULSTAT unified register under code
        121246419. The Bank is registered as an issuer of publicly traded bonds with the Bulgarian Financial Supervision
        Commission’s Public Companies and other Securities Issuers register pursuant to resolution No. 296-E /2001 under
        batch No. 05-1082. The Bank is duly incorporated and validly existing under the laws of Bulgaria. The existence of
        the Bank is not limited by term.

1.2     The Bank is a public company and the Bank’s shares are registered with the FSC and are listed on the BSE-Sofia.

1.3     The registered, head office and principal place of business in Bulgaria of the Bank is at 16 Krakra Street, 1504 Sofia,
        Bulgaria, phone number: +(3592) 9658 345, fax number: +(3592) 9445 010, email: bacb@baefinvest.com, and web
        page: www.bacb.bg). The contents of the Bank’s web site do not form part of this document.

1.4     The principal legislation under which the Bank operates is the Credit Institutions Act 2007, the Public Offer of
        Securities Act 2000 and the Commercial Act 1991. Issues related to the public offering of shares of the Bank and
        important to the investors are settled in the following legislative acts: Ordinance No 2 on the prospectuses in the case
        of public offering of securities and on the disclosure of information by the public companies and other issuers of
        securities; Corporate Tax Act; Personal Income Tax Act; Currency Act. The regulations of Section I, Chapter 11 of
        the POSA and the Ordinance on disclosure of share capital participation in a public or investment company specify
        the disclosure requirements for the Bank. The transactions of the Bank with own shares are settled in art. 111, par. 2
        and 5 of the POSA and in the Commercial Act. Takeover bids are regulated with Art.149, Art. 150-157a of the Public
        Offer of Securities Act 2000, the Regulation on requirements for the contents of the memorandum on the price of the
        shares of a public company, including valuation methods applied to corporate transformations, joint ventures and
        takeover bids, as well as Regulation 13/22.12.2003 on takeover bids for the purchase and exchange of shares. The
        requirements for delisting the Bank as a public company from the registry kept under the requirements of Art.30.(1).3
        of the Act on FSC are set out in the Public Offer of Securities Act 2000 and FSC Regulation 22 on the requirements
        and procedure for listing and delisting public companies, other issuers of securities and issues of securities in the FSC
        registry.

1.5




 2.    Principal establishments
 2.1   All material properties owned or leased by the Bank are:
       Address                                       Description                       Tenure                     Area (m2)

       16 Krakra Street 1504                 Head office and land         Freehold                                         2,321
       Sofia, Bulgaria

       20-22 Oborishte Street                Offices                      Leasehold                                           264
       4000 Plovdiv                                                       expiring August 2012

       Business Park Sofia                   Storage facility             Leasehold expiring April                             66
                                                                          2007

       6 Ruski Blvd 6000                     Offices                      Leasehold expiring May                              109
       Stara Zagora                                                       2012

       2 Slavianska Street                   Offices                      Leasehold expiring July                              87
       8000 Bourgas                                                       2007

       91-93 Slivnitza Street                Offices                      Leasehold expiring May                              171
       9000 Varna                                                         2012

       7 Democracy Street                    Offices                      Freehold                                        156.83
       8000 Bourgas




                                                                94
       Sunny Beach(1)                              Hotel and land                 Freehold                                      (hotel) 7,520
       Bourgas                                                                    (subject to a financial lease)                (land) 12,194

       Stamboliiski region                         Agricultural land              Freehold                                              50,096
       Plovdiv

       21 Srebarna Street(1)                       Office building                Freehold                                               4,175
       Hladilnika region Sofia                                                    (subject to a financial lease)


       Sea Garden/Morska Gradina                   Land and buildings             Freehold                                  15% ideal parts of
       Bourgas                                                                                                                          1,000

       Chepelare                                   Land                           Freehold                                              10,831
       Bulgaria

       Primorsko                                   10 apartments and one          Freehold
       Bulgaria                                    office in an apartment
                                                   house
                   (1) These properties do not appear on the Bank’s balance sheet. Each of these properties was acquired either in as part of a
                financial leasing transaction.

2.2 The material encumbrances over these properties, apart from any encumbrances in favour of the Bank, are as follows:

        2.2.1 A mortgage over the land at Sunny Beach, Bourgas, in favour of Sunny Beach AD as security for the deferred
                payment of the purchase price. The mortgage is registered at the Land Register of Nesebar Regional Court
                with registration number 28, volume I, Reg. 608 of the Land Register to the Nesebar Regional Court.

3.      Share capital
3.1     The Bank’s registered and issued and fully paid up capital at the date of this document is as follows:
         Number                           Class               Amount (BGN)                   Nominal Value
       12,624,725                      Ordinary                 12,624,725                    BGN1each
3.2     On incorporation, the Bank’s registered share capital was BGL 450,000,000 divided into 450,000 shares of BGL
        1,000 nominal value. By 7 June 2000, the Bank’s capital had been increased to BGL 12,500,000,000. On 7 June
        2000, due to the redenomination of the Bulgarian Lev, and in compliance with Bulgarian law, the Bank’s share
        capital was revalued from BGL 12,500,000,000 in shares of BGL 1,000 nominal value to BGN 12,500,000 in shares
        of BGN 1 nominal value each.
3.3     The changes to the registered and issued share capital of the Bank were as follows:
                                                                                                 Change in      Nominal    Share
                                                                                                  registered      share premium
                                                                                                 and issued       value      per
                                                                                               share capital     (BGN)     share
                                                                                                of the Bank               (BGN)
                                                                                                    (Shares)

Balance as at 1 January 2003 and 31 December 2003                                               12,500,000             —           —
Issue of Shares (8 December 2004)                                                                   78,991              1       3.114
Balance as at 31 December 2004                                                                  12,578,991             —           —
Issue of Shares (2 November 2005)                                                                   45,734              1       4.241
Balance as at 31 December 2005                                                                  12,624,725             —           —

        There have been no changes to the registered and issued share capital of the Bank since 31 December 2005.
3.4     Save as disclosed in the paragraph in 3.3 above:
        3.4.1      since 1 January 2003, there has been no issue of the Bank’s share capital for cash or other consideration;

        3.4.2      since 1 January 2003, the Bank has not granted any commissions, discounts or brokerages as other special
                   terms in connection with the issue, conversion of sale of any of the Bank’s share capital; and

        3.4.3      none of the Bank’s share capital is under option or is agreed conditionally or unconditionally to be put under
                   option.
3.5     The Shares are in dematerialised form and are capable of being held in uncertificated form.



                                                                      95
4.      Litigation

The Bank is not and has not been involved in any governmental, legal or arbitration proceedings (including any such
proceedings which are pending or threatened of which the Bank is aware) during the 12 months preceding the date of this
document which may have, or have had, a significant effect on the financial position or profitability of the Bank.




                                                            96
5.    Members of the Supervisory Board and Management Board and Senior Management
5.1   Interests in share capital
      The table below sets out the interests of the Members of the Supervisory Board, the Management Board and senior
      managers of the Bank in the Share capital of the Bank at the date of this document and immediately following
      Admission.

                                                        At the date of this document

                                                 Number of Shares         % of issued share
                                                  currently held               capital
              Stephen Fillo                                       -                        -
              Marshall L. Miller                                  -                        -
              Valentin Braykov                                    -                        -
              Frank Bauer                                         -                        -
              Dimiter Stoyanov Voutchev                      14,291                     0.11
              Stoyan Nikolov Dinchiiski                      13,780                     0.11
              Michael Hunsberger                                  -                        -
              Dennis E. Fiehler                                   -                        -
              Maria Sheytanova                                4,159                     0.03




                                                      97
5.2 Save as set out in 5.1., no Member of the Supervisory Board, the Management Board or senior manager of the Bank has
no other interest in the share capital of the Bank.

5.3 Service contracts and letters of appointment
           5.3.1. The Bank has entered into service agreements with each of Stoyan Nikolov Dinchiiski and Dimiter Stoyanov
           Vouchev as summarised below.

      a)     Dimiter Stoyanov Voutchev entered into a contract with the Bank, which provides for him to act as an Executive
             Director of the Bank. Mr. Voutchev shall receive remuneration in the amount of €113.5 thousand for 2007.

      b)     Stoyan Nikolov Dinchiiski entered into a contract with the Bank, which provides for him to act as an Executive
             Director of the Bank. Mr. Dinchiiski shall receive remuneration in the amount of €113.5 thousand for 2007.


           5.3.2. Remuneration paid for 2006

      During the year ended 31 December 2006 the Bank paid a total of €309.3 thousand to the members of the Management
      Board. Each of the following members of the Management Board received remuneration for 2006 as follows:

      Dimiter Voutchev received remuneration in the amount of €154,570, part of which in the form of bonus payment for
      2005, paid in 2006.

      Stoyan Dinchiiski received remuneration in the amount of €154,567, part of which in the form of bonus payment for
      2005, paid in 2006.

      Save as set out above no other amounts for social security or benefits installments for the members of the Supervisory
      and the Management Board have been spent.

      Save as set out above there are no existing or proposed service agreements between any Member of the Supervisory
      Board, the Management Board or senior manager of the Bank and the Bank providing for benefits upon termination of
      employment.

      Save as disclosed in this paragraph 5, no other members of the Supervisory Board or the Management Board received
      any remunerated from the Bank in 2006.


5.4        Other directorships and deals with interested parties (information disclosed under Art. 114b of the Public Offering
             of Securities Act)


           5.4.1    Other directorships
           In addition to their directorships of the Bank, the Members of the Supervisory Board, Management Board and senior
           managers hold or have held the following directorships, and are or were members of the following partnerships,
           within the past five years.

Director’s Name                                Current directorships /               Current partnerships / other interests
                                               management roles                      (at least 25% or control)


Stephen Fillo                                  BAEF – Board member                   Fillo & Co. – partner
Marshall L. Miller                             BAEF – Board member;                  Baise & Miller P.C. – partner
                                               Electronic Warfare Associates, Inc.
                                               – Board member

Valentin Braykov                                                                     Braykov’s Legal Office
Frank L. Bauer                                 BAEF – President and CEO;             SEGA 21 EOOD, Sofia -
                                               Serdika Capital Advisors LLC,         Sole owner;
                                               USA – Executive Director              Serdika Capital Advisors LLC, USA –
                                               Enterprise Realty Group EOOD,         Partner
                                               Sofia – Manager
                                               SEGA 21 EOOD, Sofia – Manager;


Dimiter Stoyanov Voutchev                      Partners Bulgaria Foundation –
                                               Board member;
                                               Zarnobazi AD, Dobrich -

                                                                   98
                                          Board member
Stoyan Nikolov Dinchiinski                Fen Consult EOOD, Sofia –             Fen Consult EOOD, Sofia – Sole owner
                                          Manager
Michael Hunsberger                        EVCHE EOOD, Sofia – Manager;          EVCHE EOOD, Sofia – Sole owner




                                          Bulgarian-American Property
                                          Management EOOD, Sofia –
                                          Manager;
                                          Enterprise Realty Group EOOD,
                                          Sofia – Manager;
                                          Lozenets Development Company
                                          EOOD, Sofia- Manager;

                                          Shipka Enterprise EOOD, Sofia –
                                          Manager
Dennis E. Fiehler                         Bulgarian-American Property           Serdika Capital Advisors LLC, Delaware,
                                          Management EOOD, Sofia –              USA – partner
                                          Manager
                                          Preslav Enterprise EOOD, Sofia –
                                          Manager;
                                          Kapital Direct EAD, Sofia –
                                          Executive Director;
                                          Sredets Enterprise EOOD, Sofia –
                                          Manager;
                                          Shipka Enterprise EOOD, Sofia –
                                          Manager;



          5.4.2.   Interest of the major shareholder BAEF in other companies:

BAEF owns directly or indirectly at least 25% of the shares of:

     1.     Ameta Holding AD, registered under company file No: 466/1996 of the Veliko Tarnovo Regional Court,
            headquartered in Pavlikeni, Pavlikeni Municipality, Veliko Tarnovo region, 5 Tosho Katev str.;

     2.     Bulgarian American Property Management EOOD, registered under company file No: 14941/1995 of the Sofia
            City Court, headquartered in Sofia, Sofia region, 3 Shipka str.;

     3.     Preslav Enterprise EOOD, registered under company file No: 5724/2002 of the Sofia City Court, headquartered in
            Sofia, Sofia region, 3 Shipka str.;

     4.     Sredets Enterprise EOOD, registered under company file No: 5725/2002 of the Sofia City Court, headquartered in
            Sofia, Sofia region, 3 Shipka str.;

     5.     Shipka Enterprise EOOD, registered under company file No: 10178/2006 of the Sofia City Court, headquartered in
            Sofia, Oborishte region, 3 Shipka str.;

     6.     Kapital Direct – 1 ADSIC, registered under company file No: 9585/2003 of the Sofia City Court, headquartered in
            Sofia, Oborishte region, 3 Shipka str.;

     7.     ERG Capital – 1 ADSIC, registered under company file No: 8835/2004 of the Sofia City Court, headquartered in
            Sofia, Oborishte region, 3 Shipka str.;

     8.     ERG Capital – 2 ADSIC, registered under company file No: 6675/2005 of the Sofia City Court, headquartered in
            Sofia, Oborishte region, 3 Shipka str.;

     9.     ERG Capital – 3 ADSIC, registered under company file No: 8244/2006 of the Sofia City Court, headquartered in
            Sofia, Oborishte region, 3 Shipka str.;

     10. Kapital Direct EAD, registered under company file No: 6181/2005 of the Sofia City Court, headquartered in Sofia,
         Oborishte region, 3 Shipka str.;

                                                              99
      11. Lozenets Development Company EOOD, registered under company file No: 12557/2004 of the Sofia City Court,
          headquartered in Sofia, Oborishte region, 3 Shipka str.;

BAEF has control over the following as per the Additional Provisions of the POSA:

     1.    Furazh-Rositsa EOOD, registered under company file No: 1044/1998 of the Veliko Tarnovo Regional Court,
           headquartered in Pavlikeni, Pavlikeni Municipality, Veliko Tarnovo region, 5 Tosho Katev str.;

     2.    Pilko EOOD, registered under company file No: 4/1999 of the Razgrad Regional Court, with seat and management
           address: Razgrad, Razgrad municipality, Industrial Zone Razgrad - Pticeklannica;


     3.    Ludogorsko Pile EOOD, registered under company file No: 242/2001 of the Razgrad Regional Court, with seat and
           management address: Razgrad, Razgrad municipality, Industrial Zone Razgrad - Pticeklannica;

     4.    Svinevudstvo Asparuhovo OOD, registered under company file No: 809/1998 of the Pleven Regional Court, with seat
           and management address in Asparuhovo;

BAEF participates in the management and control bodies of the following:

           Ameta Holding AD, registered under company file No: 466/1996 of the Veliko Tarnovo Regional Court, headquartered in
           Pavlikeni, Pavlikeni Municipality, Veliko Tarnovo region, 5 Tosho Katev str.;

        5.4.3.   Current and future transactions for which the Bank’s and the BAEF’s management believe they may be
considered interested parties as per art. 114, par. 5 of the POSA.

As of the date of this document the transactions described and listed in ”Major Shareholder – Transactions with Related
Parties” are binding to the Bank.
In 2006, the Bank fully repaid the $15 million loan to the BAEF, $10 million of which the BAEF provided in the form of a
debt/capital hybrid instrument. The Bank replaced this finance by issuing a €12 million, seven-year unsecured corporate bond
purchased by the BAEF on an arm’s length basis and at market rates.

In April 2006 BACB purchased from the BAEF 100% of the shares of Kapital Direct EAD – a non-bank financial institution.
The Bank purchased from the BAEF 100,000 shares of the capital of Kapital Direct EAD at a price equal to the nominal price:
BGN 1 per share.

As of the date of this document the BAEF’s management is not aware of future transactions in which they may be considered
interested parties as per art, 114, par. 5 of the POSA.

          5.5.   Convictions, directorships of bankrupt companies, official public sanctions

          Within the period of five years preceding the date of this document none of the Members of the Supervisory Board or
          Management Board or senior managers of the Bank:

     •     has any convictions in relation to fraudulent offences;

     •     has been a director of any company at the time of any bankruptcy, receivership or liquidation of such company; or

     •     has received any official public incrimination and/or sanction by any statutory or regulatory authorities (including
           designated professional bodies) or been disqualified by a court from acting as a director of a company or from
           acting in the management or conduct of the affairs of a company.

          5.6.   BAEF 2001 Long-Term Equity Incentive Plan

In May 2001, the BAEF adopted a long term incentive plan (“the BAEF Plan”) as a mean to provide incentives to key
persons responsible for managing and growing its assets. Under the BAEF Plan, certain specified employees and consultants
of BAEF and its subsidiaries, including certain employees of the Bank, are able to benefit from any increase realised by the
BAEF in the value of its equity portfolio, including any increase which the BAEF realises in the value of its investment in the
Bank.

Participants’ interests vest over a four-and-a-half year period and employees of the Bank who participate in the plan are
vested in the range of 0% to 100%. However, to the extent that the BAEF sells an investment or a portion of an investment for
a gain over the investment’s fair market value on the date of grant of participant’s interest, vesting for each participant is
accelerated to 100% for the portion of the investment that is sold. Therefore, each participant is entitled to receive a specified
percentage of the gain realised on such sale. The rights for the existing investments of BAEF will continue until April 2010
according to the BAEF Plan.

Approximately 30 of the Bank’s directors and employees, including Messrs. Bauer, Voutchev, Dinchiiski, Fiehler and
Hunsberger and Ms. Sheytanova are participants in the BAEF Plan. As a result, upon execution of sale of shares of BACB by
                                                               100
the BAEF they, together with the other participants, are entitled to a specified percentage of the amount by which the net
proceeds of such sale exceed the fair market value (as of the date of granting the rights to the respective participant) of the
BAEF investment is the Bank in proportion to the number of shares sold.

        5.7.    Conflicts of interest

In accordance with Art.116b.(1).2. of POSA and the Bank’s Articles of Association the members of the Management Board
and the Supervisory Board should avoid any direct or indirect conflicts of interest and if such conflicts arise they should
disclose it in writing before the respective authority and should not participate in and should not try to influence the other
Board members when taking a decision.

Save as set out below, none of the Directors or the senior management of the Bank has any potential conflicts of interest
between his or her duties to the Bank and his or her private interests or other duties.

Certain of the Bank’s directors and employees, including Messrs. Bauer, Voutchev, Dinchiiski, Fiehler and Hunsberger and
Ms. Sheytanova are participants in the BAEF Plan. As a result, to the extent that the BAEF sells an investment or a portion of
an investment for a gain, these directors and employees are each entitled to receive a specified percentage of the gain realised
on the sale of the investment. As a result, upon the completion of sale of shares of BACB by BAEF each of Messrs. Bauer,
Voutchev, Dinchiiski, Fiehler and Hunsberger and Ms. Sheytanova will receive a payment from BAEF as participants in the
BAEF Plan.

Conflicts of interest of the herein listed experts and consultants

The persons listed as experts who have prepared this document own insignificant number of shares of the Bank: Anna
Tsankova-Boneva – 2,150 shares; Silvia Kirilova – 1,242 shares; Katya Bineva – 3,792 shares; and Elena Kamenova – 1,030
shares. They participate in the BAEF plan. As a result, upon the completion of sale of shares of BACB by BAEF they will
each receive a payment from BAEF as a participant in the BAEF Plan. Anna Tsankova-Boneva, Katya Bineva and Elena
Kamenova are employees of the Bank. Silvia Kirilova is attorney at law and legal counsel to the Bank.

6.        Subsidiaries


On 13 April 2006 BACB purchased from the BAEF 100% of the shares of Kapital Direct EAD – a non-bank financial
institution registered in 2005 at nominal value for EUR 51. Following the acquisition the Bank increased the total
capitalization of the company to EUR 1,534 by issuing additional 2.9 million new shares.

Kapital Direct is the only subsidiary of BACB and its results are consolidated with the financial statements of the Bank.

The participation of the company in the consolidated profit of the bank for the period from 13 April 2006 to 31 December
2006 amounts to 342 Euro.

7.      Share purchases by Members of the Management Board in 2006

As of 1 January 2006 the members of the Management, Supervisory Boards and the senior management have not purchased
shares of the Bank.

8.      Significant changes

Save as disclosed in this document, there has been no significant change in the financial or trading position of the Bank, since
31 December 2006, the end of the last financial year.




                                                                101
                                                                           DEFINITIONS

The following definitions apply throughout this document unless the context requires otherwise.
“Admission” .....................................................         admission of the Shares to the Unofficial Market of the BSE
“ALCO”.............................................................       the Asset and Liability Committee of the Bank
“BACB” .............................................................      the Bulgarian-American Credit Bank AD
“BAEF”..............................................................      the Bulgarian American Enterprise Fund
“BAEF Option Agreement” .............................                     the option agreement to be signed on or around 3 April 2006 between the
                                                                          BAEF and HVB Biochim
“BAEF Plan”.....................................................          the BAEF 2001 Long-Term Equity Incentive Plan described in “General
                                                                          Information”
“Bank” ...............................................................    the Bulgarian-American Credit Bank AD
“Basel Accord”..................................................          the international framework for capital measurement and capital standards
                                                                          of banking institutions adopted by the Basel Committee on Banking
                                                                          Regulations and Supervisory Practices
“BCC” ...............................................................     the Bulgarian Bank Consolidation Company
“BGL” ...............................................................     the lawful currency of the Republic of Bulgaria prior to the
                                                                          redenomination of the currency on 7 June 2000, at which time the currency
                                                                          code became “BGN”. The redenomination was at the conversion rate of
                                                                          BGL 1,000 = BGN 1.
“BGN”................................................................
                                                                          the lawful currency of the Republic of Bulgaria after the redenomination of
                                                                          the BGL on 7 June 2000. See also “Lev” and “Leva”.
                                                                          Bank for International Settlements
“BIS”..................................................................
                                                                          the Bulgarian National Bank
“BNB”................................................................
                                                                          the Bulgarian Stock Exchange-Sofia AD
“BSE”.................................................................
                                                                          the Bulgarian Socialist Party
“BSP”.................................................................
                                                                          holders of Shares who are either legal entities and organizations registered
“Bulgarian Holders”.........................................
                                                                          in Bulgaria or individuals whose permanent residence is Bulgaria or who
                                                                          reside in Bulgaria for more than 183 days in each 365-day period
                                                                          the Bulgarian Stock Exchange-Sofia AD

“Bulgarian Stock Exchange” ...........................                    the Bulgarian Central Depository

“Central Depository” .......................................              on or around 4 April 2006

“Closing Date” ..................................................         Client Order-Book Online System described in “Bulgarian Securities
                                                                          Market Information — Official Market and Unofficial Market — The
“COBOS” ..........................................................
                                                                          COBOS System”
                                                                          the Council for Mutual Economic Assistance

“COMECON” ..................................................              the Commission for the Protection of Competition

“CPC” ...............................................................     the Bank Deposit Insurance Fund in Bulgaria

“DIF” .................................................................   the European Bank for Reconstruction and Development

“EBRD” ............................................................       the European Union

“EU” ..................................................................   the lawful currency of the European Union

“Euro”, “Euros” or “€” .....................................              in relation to a shareholder resolution to increase share capital, the date
                                                                          which is fourteen days after the shareholder resolution
“ex-dividend date” ...........................................
                                                                          gross domestic product
“GDP” ...............................................................     the Bulgarian Financial Intelligence Agency
“FIA” .................................................................
                                                                          the Financial Supervision Commission in Bulgaria
“Financial Supervision Commission” or
                                                                          the United Kingdom Financial Services and Markets Act 2000
  “FSC” ............................................................
“FSMA” .............................................................      means each of CA IB Corporate Finance Limited and HVB Bank Biochim
                                                                          AD
“Global Co-Ordinators” ..................................



                                                                                    102
“Global Offer” ..................................................         the offer of Shares to institutional and certain other investors described in
                                                                          this document
“HVB Biochim” ...............................................             HVB Bank Biochim AD
“HVB Biochim Option Agreement” ................                           the option agreement to be signed on or around 3 April 2006 between
                                                                          HVB Biochim and the Stabilising Manager
“IAS” .................................................................   International Accounting Standards
“IAS 39” ............................................................     IAS 39 “Financial instruments: Recognition and measurement”
“IFC” .................................................................   International Finance Corporation
“IFRS” ...............................................................    International Financial Reporting Standards
“IMF” ................................................................    the International Monetary Fund
“Lead Managers” ..............................................            CA IB Corporate Finance Limited and HVB Bank Biochim AD
“Lev” or (plural) “Leva” ...................................              the lawful currency of the Republic of Bulgaria. See also “BGN”
“Manager” ........................................................        each of CA IB Corporate Finance Limited and HVB Bank Biochim AD
                                                                          the management board of the Bank
“Management Board” ......................................
                                                                          independent contractors who originate loans to small- and medium-sized
                                                                          businesses and to individuals for the Bank
“Mobile Lending Consultants” ........................
                                                                          the “Movement for Rights and Freedoms,” a political alliance in Bulgaria
“MRF” ...............................................................     the North Atlantic Treaty Organisation
                                                                          the new international framework for capital measurement and capital
“NATO” ............................................................       standards of banking institutions to be adopted by the Basel Committee on
“New Basel Accord” .........................................              Banking Supervision to replace the 1988 Basel Accord
                                                                          holders of Shares who are either corporate entities not registered in
                                                                          Bulgaria or individuals whose permanent residence is not Bulgaria and
                                                                          who reside in Bulgaria for less than 183 days in each 365-day period
“Non-Bulgarian Holders” ................................                  the price per Share at which Shares are to be made available under the
                                                                          Global Offer
                                                                          Up to 378,740 Shares representing up to approximately 11% of the total
                                                                          number of Shares to be made available in the Global Offer
“Offer Price” .....................................................       the arrangements pursuant to which the Stabilising Manager may, acting as
                                                                          principal, acquire or procure acquirers for such number of additional
“Over-allotment Shares” ..................................                Shares, representing additional Shares made available by the Selling
                                                                          Shareholder, as represents up to approximately 11% of the total number of
“Over-allotment Arrangements”.....................                        Shares to be made available in the Global Offer at the Offer Price to cover
                                                                          over-allotments and/or to generate proceeds for funding stabilisation
                                                                          transactions
                                                                          the placement agreement to be signed on or about 3 April 2006 between
                                                                          the Bank, the Lead Managers and the Selling Shareholder
                                                                          the Long Term Employee Incentive Plan of the Bank described in
                                                                          “Business Overview — Employees — Long Term Employee Incentive
“Placement Agreement” ...................................                 Plan”
                                                                          Regulation S under the US Securities Act
“Plan” ................................................................   the relevant Member State of the European Economic Area which has
                                                                          implemented the Prospectus Directive
                                                                          the Real-Time Interbank Gross Settlement System described in “Bulgarian
“RegulationS” .........................................
                                                                          Securities Market Information — Settlement”
“Relevant Member State” ................................                  the United States Support for East European Democracy Act of 1989
                                                                          the Bulgarian American Enterprise Fund
“RINGS”............................................................       Ordinary shares of BGN 1 nominal value in the Bank


“SEED Act”.......................................................

“Selling Shareholder”.......................................
“Shares”.............................................................

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“SME Programme” ..........................................              the lending programme under which the Bank makes medium- and long-
                                                                        term investment loans to small- and medium-sized businesses in a variety
                                                                        of industries
“SMEs” ..............................................................   small- and medium-sized businesses
“SNM” ...............................................................   the Simeon II National Movement, a political party in Bulgaria
“Stabilising Manager” ......................................            CA IB Corporate Finance Limited as stabilising manager
“Supervisory Board” ........................................            the supervisory board of the Bank
“transformation transactions” .........................                 transactions relating to the transformation, merger, acquisition, split-off, or
                                                                        split-up of the Bank
“UDF” ...............................................................   the Union Democratic Forces, a broad coalition in Bulgaria which was in
                                                                        government between 1997 and 2001
“US dollar”, “US dollars” or “$” ......................                 the lawful currency of the United States
“US Securities Act” ..........................................          the United States Securities Act of 1933, as amended
“VAT” ...............................................................   value-added tax
“Voting Record Date” ......................................             in relation to a general meeting of shareholders, the date which is fourteen
                                                                        days prior to the date of the general meeting
In this document, words denoting any gender                             include all genders (unless the context otherwise requires).




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