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Annual Report 2007

Index

2007 in Brief .................................................................................................................................................................................... 5

Review by the CEO ..................................................................................................................................................................... 6

Review by the Chairman of the Board ....................................................................................................................... 8

The local government sector’s own credit institution .................................................................................... 10

Municipal Guarantee Board ................................................................................................................................................ 11

Funding from near and far .................................................................................................................................................... 12

Financial products for customer needs..................................................................................................................... 13

Financial Advisory Services Inspira Ltd .................................................................................................................... 14

Report on Operations ............................................................................................................................................................... 16

Group organization ............................................................................................................................................... 16

Summary of the financial year .................................................................................................................... 16

Trend In Business Operations ..................................................................................................................... 16

Post balance sheet events ............................................................................................................................ 18

Credit ratings ............................................................................................................................................................. 18

Risk management and internal control ............................................................................................... 19

Capital adequacy and own funds ............................................................................................................. 24

Key indicators ........................................................................................................................................................... 25

Municipality Finance group personnel and management ................................................... 26

Consolidated balance sheet (Municipality Finance group) ............................................... 27

Consolidated income statement (Municipality Finance group) ..................................... 28

Consolidated statement of cash flows (Municipality Finance group) ...................... 29

Consolidated statement of changes in equity (Municipality Finance Group) ....... 30

Notes to the consolidated financial statement ............................................................................ 31

Municipality Finance transfers to international financial reporting Standards (IFRS) 47

Measurement of financial assets and liabilities ........................................................................... 49

Report on the balance sheet and profit and loss items adjusted in the

Transition from FAS to IFRS .......................................................................................................................... 50

Balance sheet (Municipality Finance Plc parent company) .............................................. 54

Income statement (Municipality Finance Plc parent company) ..................................... 56

Statement of cash flows (Municipality Finance Plc parent company) ..................... 57

Notes to the parent company financial statements ................................................................. 58

Financial result for the year and distribution of profit ............................................................ 71

Auditors´ report........................................................................................................................................................ 73

3

2007 In brIef

4

The Municipality Finance Group formed in the 2007 ffinancial period comprises the parent company Municipality Finance Plc and its subsidiary Financial Advisory Services Inspira Ltd. The balance sheet of the Municipality Finance Group rose fto EUR 8,913 million, an increase of 23% (31.12.2006: EUR 7,235 million). The Group’s capital adequacy stood at 23.8% at the end fof the year (31.12.2006: 27.1%) . The lending portfolio of Municipality Finance Plc totalled fEUR 5,849 million at the end the year, a rise of 15% (31.12.2006: EUR 5,100 million). EUR 1,314 million were withdrawn in new loans (2006: fEUR 1,010 million). Long-term funding acquired by the parent company came fto EUR 2,145 million (2006: EUR 1,312 million).

9 Municipal Bonds were issued in Finland. f The parent company’s profit for the financial year totalled fEUR 2,655,620.40. The parent company’s distributable funds total EUR f2,659,746.80, of which EUR 2,633,164.60, or EUR. 0.10 per share, is proposed to be distributed as dividend for 2007. The financial statements of the Municipality Finance Group fhave been prepared in accordance with the International Financial Reporting Standards (IFRS). The parent company’s financial statements have been fprepared in accordance with the Finnish Accounting Standards (FAS). The consolidated comparison figures for 2006 are fpresented in accordance with the IFRS.

2007 In brIef

5

The company succeeded in

improving its good market position

in spite of increasing competition.

”

revIew by the CeOMunicipality Finance Plc’s financial year 2007 was good and exceeded the goals set for it. The company’s financial performance, measured in terms of euros, was the best of all time. Other key indicators for the year were good. In spite of the general uncertainty still being felt on financial markets, prospects for the following year look promising because of the stronger market position.

The Municipality Finance Group, which was formed during the financial year with Municipality Finance Plc as its parent company, comprises the parent company and its subsidiary, Financial Advisory Services Inspira Ltd. The 2007 financial statements are the first consolidated financial statements and they have been drawn up in accordance with the International Financial Reporting Standards (IFRS). The parent company s financial statements have been prepared in accordance with the Finnish Reporting Standards (FAS).

On the road towards controlled growth

The Municipality Finance Group’s operating profit rose to EUR 8.8 million (31.12.2006: EUR 7.1 million). The balance sheet increased by some 23% on the previous year, totalling EUR 8,913 million. New loans granted by the parent company were withdrawn to an amount well over a billion euros.

Borrowing is expected to remain at the present level at least. The proportion of lending accounted for by housing corporations was 30% in the financial period, but this proportion may grow in the future as the pressure for municipalities to build rented housing increases.

Stronger market position

The company succeeded in improving its good market position in spite of increasing competition. The number of tenders received did not rise significantly in the period, but the number of offers won grew substantially. In the financial period the parent company won 65% of all competitive tendering.

Tailored product development

In the financial period the company intensified its input to product development in order to serve its customers in the best possible manner. Our new innovative products have been designed to meet the special needs of municipalities, and our stronger market position is evidence that we have been successful in this respect. The popularity of Municipality Finance’s own reference

rate grew during the financial period, and the use of various interest rate structures increased compared with the previous year. The company monitors the market situation actively, with the aim of developing its product range to meet customers’ expectations.

New solutions to meet local government investment needs

Towards the end of 2007 Municipality Finance’s subsidiary, Financial Advisory Services Inspira Ltd, was corporatised. The company specialises in problems relating to project funding, competitive tendering, corporatisation and outsourcing in the municipal sector by developing innovative solutions. There is a demand for new investment models, for instance in the Helsinki Metropolitan Area and in other major Finnish growth centres, which are the scene of significant regional centre projects that call for new ways of handling large-scale investment pressures on an economically sustainable basis.

Future challenges

The global economic turmoil that has been going on for some time now continues to cause confusion on the financial markets and to divide financial institutions into two categories on the basis of credit ratings. Municipality Finance will continue to improve its position by strengthening its capital, thus preparing for the possible continuation of the uncertainty which we hope will gradually return to normal.

In the next few years, major changes are expected in the local government sector as a result of the restructuring of the municipalities and services. Investment pressures may be released dramatically if tax revenues do not continue to remain at the present good level. The availability of expert personnel will be a problem throughout the local government sector as the work force ages.

Municipality Finance is well placed to survive these challenges with the help of its stronger capital structure, good credit ratings, capital adequacy, significant market position and professionally skilled personnel.

I would like to express my warm thanks for the profitable financial year to our customers, owners, co-partners and personnel.

Helsinki 28.2.2008Pekka AverioCEO

6

Municipality Finance serves the needs of the local government sector

In the past financial year Municipality Finance continued to carry on operations successfully and according to plan. The figures in the financial statements reflect good competitiveness and an improved market position. Today, well over a year after the share issue carried out in the previous financial period, we can see that the issue was well-timed and successful, for which we would like thank all our owners once more. Strengthening the company’s capital structure improved our prospects of doing well. Our good financial performance makes it possible for us to distribute an even better dividend this year than in the year before.

Nationwide funding

The funding acquisition system set up jointly by Municipality Finance and the Municipal Guarantee Board continued to consolidate its position and to gain increased importance nationwide during the financial year. Together these two companies form a solid foundation for operations covering nearly all the Finnish municipalities today. On the map there are only five municipalities, which have a combined population of under 5,000 people, that are not yet members of the Municipal Guarantee Board.

Local government in a state of transition

The ongoing project to restructure municipalities and services means a major change for local government administration. Finnish municipalities have, however, a strong traditional culture of survival that will help them deal with the transitional process. On average, the municipalities have done well, but the economic challenges and the resources required to tackle them vary between individual municipalities. On top of the macro-level restructuring, the future promises substantial pressures for investment and the need for basic renovation.

Views expressed in public concerning the future borrowing needs of municipalities vary. From Municipality Finance’s perspective, borrowing by municipalities would appear to be

on the rise. Municipality Finance’s increased share capital, good market share and ability to offer more favourable funding services provide good potential for coming through this challenge.

Uncertainty on financial markets creates debate

The financial crisis that started in the United States has been felt acutely in many European countries, too, and it is a topic for debate at financial institutions throughout the world, including Municipality Finance. The crisis has weakened the credit ratings of many financial institutions. On the other hand, the situation has facilitated funding acquisition by financial institutions that can show a faultless credit rating. Municipality Finance’s best possible Aaa/AAA rating is a good recommendation on the financial markets and opens up channels that have been closed to many, at least momentarily.

The return on Municipality Finance Plc’s own investment portfolio was satisfactory in the financial year even though the vigorous growth in credit risk margins reduced the levels for measuring the company’s fixed-interest investments. Since the company’s liquidity has remained excellent, however, thanks to the successful funding acquisition, there will be no need to realise investments in the current unsatisfactory market situation in the foreseeable future.

The company’s mission is to promote the needs of the local government sector in the spirit of the original idea behind its establishment and to serve its owners, rain or shine. On behalf of the Municipality Finance’s Board of Directors, I would like to thank the company’s owners, customers, co-operation partners and personnel, all of whom have placed their trust in the company and given it their support.

Helsinki, 28.2.2008Asko KoskinenChairman of the Board

The ongoing project to restructure

municipalities and services

means a major change for local

government administration.

revIew by the ChaIrmanOf the bOard

”

8

the lOCal gOvernment

seCtOr’s Own CredIt InstItutIOn

Municipality Finance is a credit institution owned by fthe local government sector with a mission of being the most preferred and active partner in funding services for its owners. The company wants to ensure advantageous funding fservices for its customers, to operate efficiently and to grow profitably, while meeting the capital requirements set for credit institutions, primarily through income from its own operations. The company invests actively in serving its customers fby continuously developing functional, innovative and competitive products and forms of service for their needs. Municipality Finance’s capital adequacy and competitive fpricing are based on the best possible credit ratings. The company has the highest possible ratings for long-term funding, i.e. AAA from both Moody’s and Standard & Poor’s.

10

the lOCal gOvernment

seCtOr’s Own CredIt InstItutIOn

munICIpal

guarantee bOard

In accordance with the Act on the Municipal Guarantee Board, the purpose of the Guarantee Board is to safeguard joint funding for municipalities and develop it. The Guarantee Board may also grant guarantees to credit institutions owned or administered by municipalities, such as Municipality Finance, whose funding is targeted at lending to the local government sector.

In 2007, a new Act on the Municipal Guarantee Board entered into force. It gives a clearer definition to the receivables for which the Municipal Guarantee Board’s guarantees can be used as security. The Act allows also those municipalities that are not members of the Guarantee Board to become members.

The credit ratings for the Municipal Guarantee Board’s long-term funding are the same as those for Municipality Finance and the Finnish government: Aaa from Moody’s and AAA from Standard & Poor’s.

11

fundIng frOm near

and farMunicipality Finance acquires its funding for local government from both international and domestic financial markets, with foreign countries accounting for 90%. The company’s highest possible credit rating facilitates funding acquisition and lowers its cost. Municipality Finance has the same highest possible credit ratings for long-term funding as the Finnish government: Aaa from Moody’s and AAA from Standard & Poor’s.

Successful funding requires an efficient and fast international contact network. A significant proportion of all funding comes from the Asian market, particularly Japan, where investors include both major institutions and small private investors. Municipality Finance was the first Finnish issuer to enter the Australian ‘Kangaroo’ market. In Europe, funding has been acquired from countries such as Switzerland, Germany, Norway and Denmark. The company’s good name guarantees that the local government sector will obtain the funding it needs.

Domestic funding is based on issuing Finnish bonds and Municipal Bonds. Municipal Bonds are targeted at both the general public and wholesale investors.

12

fInanCIal prOduCts fOr CustOmer needs

One of the key operating principles of Municipality Finance is complete focus on the needs of the company’s own clients. The company wants to be at the forefront of product development in the financing sector in order to be able to offer municipalities the innovative products needed on a fast-developing market. The company’s growth of annual 10% shows that the right solutions have been found, and our market share of over 50% confirms that we are heading in the right direction.

In 2004, Municipality Finance adopted its own advantageous reference rates which are priced below the corresponding Euribor levels. Their popularity with customers has been growing steadily. More than 50% of the loans granted by the company in 2007 were floating-rate loans, and in about 30% of them the customer chose Municipality Finance’s own reference rate.

Long-term reference rates and fixed rates were chosen in nearly 40% of all the loans granted. The popularity of different interest rate structures is increasing, and they accounted for 11% in 2007. Various interest rate floor concepts not requiring high minimums have been developed for the needs of smaller municipalities.

Municipality Finance aims at transparency in lending and keeps its customers informed of its methods for calculating the rates and the potential structural risks. All lending is market-based.

Ethical lender

A significant part of lending by Municipality Finance is used for various socially important investments, such as municipal building and development projects aimed at increasing welfare services and improving the quality of life. Our funding is used for schools, day care centres, old people’s homes and care institutions, hospitals, health care centres and housing.

1313

InspIraFinancial Advisory Services Inspira Ltd

Municipality Finance’s Financial Advisory Services unit, founded in 2004, was turned into a subsidiary under the name Inspira Ltd in November 2007. The new subsidiary focuses on independent advisory services for public-sector administration in various areas of finance. Our aim is to assist clients in assessing alternative financing solutions and in meeting their investment needs. Inspira’s clients consist of the public sector and companies offering their services to the public sector. The public sector clients include central government units, cities, and companies owned by cities.

Some examples of the services we provide: Project finance; alternative implementation and ffinancing models, and risk analyses Financial structures; financial engineering and fcompetitive tendering Mergers and acquisitions; feasibility studies, fvaluations, and fairness opinions Analyses; cash flow and financial statement fanalyses, risk analyses, and asset manager evaluations and tendering

Our aim is to assist clients

in assessing alternative

financing solutions and in

meeting their investment

needs.

”

14

16

GROUP ORGANIZATION The Municipality Finance Group was formed when on November 1, 2007 Municipality Finance Plc corporatized its Financial Advisory Service unit into a separate subsidiary called Financial Advisory Services Inspira Ltd.

The role of Municipality Finance Plc (parent company) is to offer market-based funding to municipalities, municipal federations, municipality-controlled entities and non-profit corporations by acquiring funding from capital markets at competitive cost.

Financial Advisory Services Inspira Ltd (Inspira) offers expert financial services to the public sector. Its services include various forms of funding related advisory services for public sector investment, their analysis and arrangement. Inspira also offers its services for various public sector ownership arrangements by planning, making value assessments and assisting in contract negotiations. Inspira helps the public sector to arrange its services more efficiently and to implement its investment needs more economically.

Inspira’s first financial period is 14 months and it will end on December 31, 2008. Its figures 1.1. - 31.12.2007 are included in the consolidated financial statements.

The Municipality Finance consolidated financial statements have been drawn up in accordance with the International Financial Reporting Standards (IFRS). The parent company’s financial statements have been drawn up in accordance with the regulations in force in Finland (FAS). The comparison figures in the Municipality Finance Group’s financial statements for 2006 are presented in accordance with the International Financial Reporting Standards (IFRS).

SUMMARY OF THE FINANCIAL YEARNet operating profit

The trend in the Group’s operating result was better than expected. The net operating profit for the financial year (January 1 –December 31, 2007) before taxes was EUR 8.8 million (2006: EUR 7.1 million). Taxes accounted for EUR 1.7 million, leaving the profit at EUR 7.1 million. The favourable trend in the profit was due to the company’s increased market share in lending, successful of funding and risk management.

The parent company’s net operating profit for the financial year was EUR 10.4 million (2006: EUR 6.1 million). The parent company’s net operating profit differs from that of the Group as far as the net result of hedge accounting is concerned.

Expenses

The Group’s administrative expenses came to EUR 6.2 million (2006: EUR 5.1 million), of which personnel expenses accounted for EUR 4.1 million, i.e. 66%, (2006: EUR 3.2 million and 63%). Other operating expenses came to EUR 2.1 million (2006: EUR 2.0 million). The proportion accounted for personnel expenses grew with an increase in the number of personnel and incentive pay items and a general rise in pay levels.

Balance sheet

The consolidated balance sheet total on December 31, 2007 was EUR 8,913 million, compared with EUR 7,235 million at the end of the previous year, an increase of 23%.

TRENd IN bUSINESS OPERATIONSLending

The parent company’s customers comprise municipalities, municipal federations, municipality-controlled entities and non-profit corporations designated by the Housing Finance and Development Centre of Finland (ARA). Over the years the company has succeeded in increasing its market share and it is now clearly the biggest single player in its customer segment.

Long-term lending

In spite of the increasingly hard competition, the parent company succeeded in consolidating its market position further through its customer-responsive and innovative operations. The overall number of requests for tenders received remained at its 2006 level, but the number of offers won increased substantially. The parent company won EUR 1,529 million or 65% of all its competitive bidding. Tenders worth EUR 870 million were won in the biggest customer group, municipalities and municipal federations. Winning offers to municipal enterprises stood at EUR 260 million and to housing corporations at EUR 399 million.

The Municipality Finance loan portfolio increased to EUR 5,849 million during 2007 (2006: EUR 5,100 million), an increase of 15%. A record number of new loans totalling EUR 1,314 million were withdrawn (2006: EUR 1,010 million).

In loans withdrawn, customers favoured long-term reference rates and fixed interest rates to an increasing extent. In floating reference rates, Municipality Finance’s own reference rates were popular with customers. Use of different interest rate structures continued to be lively in 2007.

repOrt On OperatIOns

1717

Short-term lending

For short-term funding, municipalities and municipal federations and enterprises controlled by municipalities or municipal federations issue municipal commercial papers through the parent company.

At the end of 2007, municipal commercial paper programmes came to a total of EUR 1,498 million. At the end of the year issued papers amounted to EUR 250 million and during the whole year they were used to raise a total of EUR 1,938 million, i.e. slightly more than in the previous year (2006: EUR 1,796 million).

Funding

The parent company has the best possible international credit rating, Aaa/AAA, from Moody’s and Standard & Poor’s. The basis of the funding is speed, flexibility and operating on several main capital markets. Most of the arrangements are carried out within the framework of the following debt programmes:

Euro Medium Term Note EUR 8,000,000,000 (EMTN) programme

Domestic debt programme EUR 800,000,000Treasury Bill Programme EUR 800,000,000AUD debt programme (Kangaroo) AUD 500,000,000

The EMTN programme is listed in London Stock Exchange. The Domestic debt programme is listed in OMX-Helsinki.

During the first half of 2007, the EMTN programme was increased by EUR 3,000,000,000, and the Domestic debt programme and the Treasury Bill programme were each raised by EUR 300,000,000.

The parent company uses credit limits agreed with the European Investment Bank (EIB) and the Council of Europe Development Bank (CEB) as part of its refinancing.

The Municipal Guarantee Board, which guarantees the funding of the parent company, also has the best possible credit ratings from the two above-mentioned credit rating institutions. It has given guarantees for the parent company’s debt programmes and funding arrangements outside the programmes so the debt instruments that the company issues are weighted as zero-risk in the capital adequacy accounting of financial institutions in Finland and in addition in many European countries.

The parent company’s funding totalled EUR 7,550 million on the balance sheet data (2006: EUR 6,243 million), of which 43% (2006: 52%) was denominated in euros and 57% (2006: 48%) in other currencies.

Long-term funding

The parent company acquired a total of EUR 2,145 million (2006: EUR 1,312 million) in long-term funding during the financial year. Of this, EUR 2,052 million was carried out on international markets and EUR 93 million in Finland.

International funding

A total of 192 arrangements were made on international funding markets. The average borrowing time for new funding was approximately five years.

The Asian markets were still the most important market area, with Japan the most important single source of funding. In addition to structured loan arrangements, Uridashi loans targeted at private investors in Japan and one arrangement directly with Japanese institutional counterparty were made there. Outside Asia, the parent company carried out in the spring of 2007 the first loan arrangement ever on the Australian ‘Kangaroo’ market by a Finnish issuer. The parent company also succeeded in strengthening its position on the Danish and German capital markets significantly, and arrangements were made in Switzerland and Norway, too.

Domestic funding

Within the domestic debt programme, the parent company issued nine Municipal Bonds in 2007, all of them targeted at the general public. The parent company also carried out two loan arrangements directly with domestic investors.

Investment

Through adequate advance funding acquisition, Municipality Finance seeks to ensure continued good liquidity and lending in all market situations. Funding is invested in financial instruments and deposits with good credit ratings.

At the end of 2007, 64.6% of the advance funding portfolio had an AA- or higher credit rating and 30.9% had a rating between A+ and A-. The aim is to keep the size of the advance funding portfolio at some 20-25% of the balance sheet total. In the financial statements, the securities are classified as available-for-sale financial assets that are not actively traded.

In terms of investment volumes, 2007 was a record year. As a result of the plentiful of funding, new investments worth EUR 1,372 million were made – nearly twice the amount in the previous year. Total investment reached EUR 1,917 million by the end of the year, an increase of some EUR 244 million on 2006. Sales of investments were carried out predominantly in the early part of the year, when profits could be realized.

The credit and liquidity crisis that started towards the end of July on the US financial markets and spread rapidly through

out the world is not showing signs of abatement. Uncertainty will continue to dominate the markets for a long time to come. Investors fear bad news, which means that most market demand focuses on short-term securities with a maximum maturity of a few years.

The returns on the parent company’s investment portfolio were satisfactory in a market situation in which the poor availability of market prices and lower valuation levels resulting from substantially higher credit risk margins had a negative impact on returns.

The parent company’s view is that there is no major credit risk to the investment portfolio. Changes in the fair value reserve are due to the difficult market situation and lack of confidence between financial institutions. The company’s liquidity continues to be excellent as a result of successful funding acquisition during early 2008 and there is no need to sell investments at a loss.

The difficult market situation towards the end of the year caused Municipality Finance to shift the main emphasis in making new investments clearly towards those of an very liquid, short-term nature.

POST bALANCE SHEET EvENTS

Municipality Finance Plc has authorized Citigroup, Deutsche Bank and Nordea to act as lead managers for its one-billion-euro Benchmark loan. Depending on the market situation, the aim is to issue the loan immediately after the marketing tour scheduled for the spring is completed.

Municipality Finance Plc will raise its Australian (Kangaroo) debt programme from AUD 500 million to AUD one billion in February-March.

Compared with previous years, funding acquisition has been lively on all markets in early 2008. New funding acquired during January and February comes to EUR 579 million.

The parent company’s aim is to reinforce secondary own funds in 2008 in order to further strengthen the company’s operating conditions.

Prospects for 2008

The financial situation in local government improved in 2007, boosted by growth in local government tax revenues, some 7.5% in 2007. The growth was due to the good trend in employment and earnings. Corporate tax revenues also increased substantially. On the other hand, according to advance information on the financial statements, the operating expenses of municipalities and municipal federations increased

by 5.3% in the past year, while the local government loan portfolio continued to grow and interest rate expenses increased considerably.

Cost pressures on local government will continue to be high in future years. The restructuring of local government and services will increase local government expenses in its early phases. The ageing of the population will cause pressure in the form of growing demand for welfare services, thus increasing local government expenses. The local government financial situation is also threatened by the uncertainty factors in the international financial situation. The loan portfolio of municipalities and municipal federations is expected to increase by slightly under EUR one billion in 2008 and exceed EUR nine billion.

The restlessness will probably continue for some time on the international financial markets, but its impacts are expected to be minor in terms of the Group’s competitiveness and operations. The parent company’s excellent credit rating will facilitate the acquisition of funding particularly on international markets.

CREdIT RATINGSMunicipality Finance Plc’s credit ratings

The credit ratings of the company’s long-term funding are the best possible:

Moody’s Investors Service Aaa (stable) Standard & Poor’s AAA (stable)

The credit ratings of the company’s short-term funding have been verified as the best possible:

Moody’s Investors Service P1 (stable)Standard & Poor’s A-1+ (stable)

The Municipal Guarantee Board credit ratings

The Municipal Guarantee Board, which guarantees the parent company’s funding, has the best possible ratings for long-term funding:

Moody’s Investors Service Aaa (stable)Standard & Poor’s AAA (stable)

18

19

RISk MANAGEMENT ANd INTERNAL CONTROL

The general principles, limits and benchmarks for risk management at the Municipality Finance Group are decided by the Board of Directors of the parent company. The purpose of risk management is to ensure that the risks in lending, funding acquisition, investment and other business operations remain within the confirmed limits.

The Treasury unit is responsible for using the counterparty limits in the parent company’s investment operations and for the practical implementation of risk management practices relating to market and financial risk.

Management of the supervision and reporting relating to investment, counterparty risks and market risks has been separated and put totally under the control of the Risk Assessment and Financial Planning unit. Regular reports on the parent company’s risk standing and limit utilization are made to the Board of Management and the Board of Directors.

Municipality Finance Plc applies very conservative principles to its risk management. The aim is to minimize open risk positions and keep the overall risk status at a low level so as not to endanger the company’s good credit rating (Aaa/AAA). In its lending, the parent company has undertaken to grant only loans that do not include a legal requirement about the amount of own funds in order to guarantee the company’s capital adequacy. Advanced methods are used to assess and measure risk.

The Group carries out analyses of various risk areas at regular intervals with the aim of identifying changes that have taken place after the previous charting and new risks, and of prioritizing risks and their management on the basis of the results of the analyses.

Capital management plan

Municipality Finance Plc’s own funds were reinforced through a share issue in autumn 2006 that increased the share capital by EUR 26 million. Secondary own funds will be reinforced in 2008, which will further improve the parent company’s operating conditions.

The parent company has set its capital adequacy ratio target higher than the minimum required by the authorities. Since the parent company’s advance funding is invested in debt securities, investment decisions and the selection of counterparties play a major role in the development of the trend in the capital adequacy ratio. The 2007 market

turbulence showed how sensitive the fair value fund under secondary own funds is to fluctuations in market values even though no major changes took place in the counterparty credit risk.

The equity objectives of Municipality Finance Plc relating to the company’s risk taking and operating environment are defined in connection with annual planning. The planning horizon is approximately three years. The Board of Directors approves the capital management plan and monitors it.

Strategic risks

A strategic risk means that the company has chosen the wrong strategy for financially profitable operations or that the company is unable to adapt the chosen strategy to changes in the operating environment.

The Group’s strategic risk management is based on continuous monitoring and analyses of customer needs, forecasts of market trends, and changes in the competition and operating environment. Risks and their importance are assessed annually in connection with drawing up the business operations plan. The Group’s current strategy extends to 2012.

Credit risk

A credit risk means that the counterparty may not be able to answer for its commitment to the company.

The parent company may grant loans without separate security only directly to municipalities and municipal federations. For other loans, only an absolute guarantee or deficiency guarantee issued by a municipality or a municipal federation, or a State deficiency guarantee, is acceptable. Because such security reducing the credit risk is required, the loans granted are all classified as zero-risk in calculating Basel II capital adequacy.

Credit risks are caused by financial and investment instruments, interest rate and currency forwards, and interest rate and exchange rate swaps and other derivative financial instruments. In terms of credit risk assessment, principles and limits approved by the Board of Directors and based on external ratings are applied in the selection of counterparties. Credit risk is monitored according to the fair value method.

The company has not had any non-performing assets or credit losses during its operations.

19

Credit riskValues of credit commitments in the balance sheet and binding credit commitments

Parent company

EUR 1,000 TotalLoans and advances to the public

and public sector entitiesLoans and advances to

credit institutions debt securities

binding credit commitments

december 31, 2007 IFRS IFRS IFRS IFRS IFRS

Total 9,320,184 5,848,664 1,024,966 1,916,729 529,824

Public sector entities 3,420,656 3,070,411 0 270,172 80,074

Enterprises and housing corporations

3,114,226 2,650,869 0 13,606 449,751

Non-profit organizations 127,384 127,384 0 0 0

Credit institutions 2,657,918 0 1,024,966 1,632,952 0

Parent company





december 31, 2006 IFRS comp. IFRS comp. IFRS comp. IFRS comp. IFRS comp.

Total 7,473,937 5,100,467 331,660 1,672,713 369,096



2,574,042 2,275,096 0 3,140 295,806


Credit institutions 1,710,222 0 331,660 1,378,562 0

Distribution of derivative financial instruments according to counterparty credit rating

Parent company december 31, 2007

december 31, 2006

EUR 1,000 Nominal value Nominal value

AAA 2,643,539 2,213,379

AA 9,233,688 7,240,752

A 684,351 1,551,537

Finnish municipalities 90,512 96,663

Total 12,652,090 11,102,331

A credit countervalue is calculated for each derivatives counterparty using the fair value method, taking netting into account. The parent company limits the credit risk with ISDA Credit Support Annexes in the case of major derivatives counterparties. The parent company has 34 Credit Support Annexes in force.

Market risk

A market risk means that the company suffers a loss, when the market price or its volatility follow a trend unfavourable to the company. Market risks include those related to interest rates, exchange rates, share prices and other prices.

For hedging against interest rate risks, the parent company uses derivative financial instruments to change the fixed-rate cash flows from lending and funding acquisition into floating-rate ones. A 55% share of the parent company’s lending and 80% of all funding acquisition fall within the sphere of fair value hedge accounting.

A 57% share of the parent company’s funding is foreign currency-denominated. In order to hedge against exchange rate risks, all foreign currency-denominated funding is translated into euros through derivative financial instruments.

Derivative financial instruments are also used to hedge against other price risks, but derivative financial instruments may only be made for hedging purposes.

The Board of Directors of the parent company has set the following limits on market risks:• Currencyposition• Interestrateriskbasedonduration• Value-at-Risk

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21

Credit riskValues of credit commitments in the balance sheet and binding credit commitments

Parent company





december 31, 2007 IFRS IFRS IFRS IFRS IFRS

Total 9,320,184 5,848,664 1,024,966 1,916,729 529,824



3,114,226 2,650,869 0 13,606 449,751


Credit institutions 2,657,918 0 1,024,966 1,632,952 0

Parent company





december 31, 2006 IFRS comp. IFRS comp. IFRS comp. IFRS comp. IFRS comp.

Total 7,473,937 5,100,467 331,660 1,672,713 369,096



2,574,042 2,275,096 0 3,140 295,806


Credit institutions 1,710,222 0 331,660 1,378,562 0

Distribution of derivative financial instruments according to counterparty credit rating

Parent company december 31, 2007

december 31, 2006

EUR 1,000 Nominal value Nominal value

AAA 2,643,539 2,213,379

AA 9,233,688 7,240,752

A 684,351 1,551,537

Finnish municipalities 90,512 96,663

Total 12,652,090 11,102,331

Exchange rate riskBreakdown of funding according to denomination of currency

Parent company

EUR 1,000 domestic currency Foreign currency Total

december 31, 2007

Claims on credit institutions 306,887 82,417 389,304

Claims on the public and public sector entities 444,153 151,808 595,961

Debt securities 2,499,682 4,065,466 6,565,148

Total 3 250,722 4 299,691 7 550 413

Parent company

EUR 1,000 domestic currency Foreign currency Total

december 31, 2006

Liabilities to credit institutions 320,725 75,171 395,896

Liabilities to the public and public sector entities

359,939 141,479 501,418

Debt securities issued to the public 2,552,408 2,793,007 5,345,415

Total 3 233,072 3 009,657 6 242,729

Lending is euro-denominated.

Currency positionThe currency position is calculated in euros as the difference between claims and liabilities denominated in different currencies.

Parent Company Currency position EUR 1,000 Currency 31.12.2007 USD -131.12.2006 USD -2

DurationDuration means interest rate risk in terms of time illustrating the average remaining duration at current rate level.

ParentCompany Claims Liabilities Difference31.12.2007 1.239 years 1.254 years -5 days31.12.2006 1.325 years 1.277 years +17 days

Value-at-riskThe VAR margin represents the maximum negative change in the balance sheet market value in euros (1,000) taking place at a 99% probability over 10 days.

Parent CompanyEUR 1,000 31.12. Average Year’s lowest Year’s highest2007 1,060 1,090 900 1,3002006 1,312 837 365 1,312

In addition to the above benchmarks, the management receives monthly reports on the parent company’s sensitivity to interest rates and calculations concerning changes in the balance sheet market value.

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Financial risk

A financial risk means the eventuality that the company cannot handle its payment obligations arising from implementation of funding agreements or other funding operations.

Maturity breakdown of financial liabilities

Parent company

1 000 euroa

december 31, 2007 Under 1 year 1-5 years Over 5 years Total

Liabilities to credit institutions 69,933 224,855 94,516 389,304

Liabilities to the public andpublic sector entities

83,967 38,297 473,697 595,961

Debt securities issued to the public 2,630,732 2,468,944 1,465,472 6,565,148

Subordinated liabilities 0 44,091 1,154 45,245

Total 2,784,632 2,776,187 2,034,839 7,595,658

december 31, 2006 Under 1 year 1-5 years Over 5 years Total


Liabilities to the public andpublic sector entities 19,815 129,517 352,086 501,418

Debt securities issued to the public 1,690,605 2,280,544 1,374,266 5,345,415

Subordinated liabilities 12,733 10,052 36,364 59,149

Total 1,832,577 2,622,320 1,846,981 6,301,878

Loans that can be recalled prematurely are placed in the table according to the first possible maturity date.

Municipality Finance’s Board of Directors has set the following limits on financial risks:• refinancing/sustainabilityoffinancing• refinancinggap• minimumandmaximumamountsofliquidassets

The company has access altogether to EUR 140 million in liquidity back-up facilities in the form of credit limit arrangements.

Market liquidity risk

A market liquidity risk means that the company may not be able to realize or cover its position at the current market price, because there is not enough market depth or the market is not functioning because of disruption.

The parent company monitors market and product liquidity on a continuous basis. Otherwise, the market’s own standards are observed when derivative financial instruments are concluded.

Operational risk

An operational risk means risk of loss arising from insufficient or failed internal processes, personnel, systems or external factors.

The parent company has dealt with operational risk management by separating trading, risk management, risk monitoring, back-office work, documentation and bookkeeping duties and by creating a system of staff substitution.

Key work duties and processes have been charted and described. The descriptions are updated on a regular basis at least once a year. The professional skill of the personnel is maintained and improved by drawing up a training plan in connection with the annual development discussions.The company monitors the materialization of operational risks with systematic loss reporting on the basis of which processes are

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updated where necessary. Reports on loss notifications are submitted to the Board of Management and the Board of Directors. The impact of operational risks on profits was insignificant during the financial year.

The parent company has a plan for the continuation of business operations for situations where business operations are interrupted. The plan will ensure that the company can go on operating and is able to limit its losses in various disruptive situations.

Internal audit

Internal auditing has been outsourced to Deloitte & Touche. Its tasks include monitoring the reliability and authenticity of Municipality Finance’s financial and other management information. They also involve ensuring that the company has adequate and properly organized manual and IT systems for its operations and that there is adequate control over the risks associated with the operations. The internal audit reports to the audit committee and Board of Directors.

Corporate Governance

The Board of Directors of the parent company confirmed its Corporate Governance rules on February 11, 2005. They comply with the Helsinki Stock Exchange Recommendation in all material parts. The Recommendation is aimed at listed share issuers and does not therefore concern the parent company directly, as it issues bonds. The Company shares are not subject to public trading and can be owned only by the parties referred to in the Articles of Association. Nevertheless, the Company wished to compile its own Corporate Governance rules based on the Stock Exchange Recommendation. The Board of Directors is responsible for ensuring that the parent company complies with the Corporate Governance rules and is committed to developing them further.

The purpose of Corporate Governance is to create a framework for responsible operations that produce added value for customers and owners and reinforce the confidence of all stakeholders in the organizations’ management and operating methods.

The Corporate Governance rules can be accessed on the company’s website at www.munifin.fi.

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CAPITAL AdEqUACY ANd OwN FUNdSConsolidated own funds and capital adequacy IFRS

EUR 1,000 december 31, 2007 december 31, 2006

(IFRS) (FAS)

basel II basel I

Group parent

Own fundsEquity capital 42,608 16,522

Share issue 0 26,486

Reserve fund 277 277

Retained profit 30,654 929

Profit for the financial year 4,485 -925

Capital loans 11,177 23,846

Voluntary provisions 0 28,912

Share issue receivables 0 -25,364

Intangible assets -643 -742

Total primary own funds 88,558 69,940

Fair value reserve -15,259 -2,603

Subordinated liabilities 35,000 35,000

Total secondary own funds 19,741 32,397

Total own funds 108,299 102,337

Riskipainotetut saamiset

Luottoriski, standardimenetelmä 426,045 377,648

Minimum own funds requirementCredit risk, standard method

Claims from credit institutions and investment services companies

24,947 25,374

Covered bonds 312 274

Securitized items 5,873 1,229

Investment fund investments 418 82

Other items 2,534 3,253

Total credit risk, standard method 34,084 30,212

Market risk 0 0

Operational risk, basic method 2,251 0

Total minimum own funds requirement 36,335 30,212

Capital adequacy ratio, primary capital, % 19.50% 18.52%

Capital adequacy ratio, % 23.84% 27.10%

The December 31, 2006 and December 31, 2007 calculations are not comparable, as a result of adoption of the new capital adequacy standards (Basel II) and the IFRS (Group level).

Total own funds

Capital adequacy ratio % = -------------------------------------------------- * 8

Total minimum own funds requirement

2525

The Group’s capital adequacy ratio was 23.84% on December 31, 2007. The company’s share capital came to EUR 42.6 million on December 31, 2007. Own funds totalled EUR 108.3 million.

The primary own funds at December 31, 2007 include the profit for the year reduced by the dividend proposed by the Board of Directors. Detailed information on capital and debenture loans is given in the Notes to the financial statements, section 16.

As of the beginning of 2007, the Group moved over to Basel II in its capital adequacy accounting. The capital requirement relating to credit and counterparty risk is calculated using the standard method and that relating to the operations risk using the basic method. The capital adequacy accounting for market risk takes into account only exchange rate risks, since the Group has no trading stock and no share or commodity positions. Funding acquired in advance has been invested in debt securities. The adoption of Basel II increased the capital requirement for the operational risk.

kEY INdICATORS Municipality Finance Group 2007 2006 2005

Turnover, EUR m 308.0 198.5 142.7

Net operating profit, EUR m 8.8 7.1 5.6

% of turnover 2.9 3.6 3.9

Return on equity (ROE), % 15.2 15.3 8.8

Return on assets (ROA), % 0.13 0.13 0.1

Equity ratio, % 0.73 1.02 1.1

Expense-yield-ratio 0.56 0.59 0.62

The 2007 and 2006 figures have been calculated in accordance with International Financial Reporting Standards (IFRS). The 2005 indicators have been calculated in accordance with the Finnish Accounting Standards (FAS).

The turnover comprises interest income, commission income net income securities and foreign exchange transactions, net income from available-for-sale financial assets, net income from hedge accounting and other operating income. The net operating profit is taken directly from the income statement. The profit before appropriations and taxes is taken directly from the income statement.

net operating profit – taxes

Return on equity ratio (%) (ROE) = ------------------------------------------------------------------------------------* 100

equity and minority interest +appropriations - deferred tax liabilities (average of year beginning and year end)

net operating profit - taxes

Return on assets ratio (%) (ROA) = --------------------------------------------------------------------------------- * 100

balance sheet total (average of year beginning and year end)

equity and minority interest + appropriations – deferred tax liabilities

Equity ratio % = ------------------------------------------------------------------------------------* 100

balance sheet total

administrative expenses + depreciation + other operating expenses + (commission expenses)

Expence-yield-ratio = -----------------------------------------------------------------------------------

net financial income + dividends received + commission income + net income from securities and foreign exchange transactions + net income from available-for-sale financial assets + net income from hedge accounting + other operating income

MUNICIPALITY FINANCE GROUP PERSONNEL ANd MANAGEMENT

The Municipality Finance Group personnel totals 37. The parent company personnel totals 33.

In accordance with the Articles of Association, the parent company’s Board of Directors has nine members.

• AskoKoskinen,Chairman,(Director,CityofTampere)• JariSokka,ViceChairman,(PlanningDirector,LocalGovernmentPensionsInstitution)• JuhaniAlanen(M.Sos.Sc)• TapioKorhonen(FinanceDirector,CityofHelsinki)• EvaLiljeblom(Professor,SwedishSchoolofEconomicsandBusinessAdministration,Helsinki)• SimoLämsä(PresidentofProvincialGovernment,Helsinki)• KariNars(D.Sc.(Econ&Bus.Adm.)Helsinki)• MikkoPukkinen(CityManager,CityofTurku)• SiskoSeppä(SecretaryGeneral,SocialDemocraticParliamentaryGroup)

TheBoardofDirectorsselectedKariNarsasChairmanof theauditcommittee.TapioKorhonenandSimoLämsäwereselected to be members.

The Board of Directors meeting held on May 29, 2007 decided to establish a reward committee, and to select Asko Koskinen (Chairman), Jari Sokka and Eva Liljeblom as members.

The company’s Board of Management comprises:

• PekkaAverio,PresidentandCEO• EsaKallio,PresidentandCEO’ssubstitute,DeputyCEO• ToniHeikkilä,Director• MarjoTomminen,Director• JarkkoVuorenmaa,Director

The parent company’s auditors are KPMG Oy Ab with APA Raija-Leena Hankonen as accountable auditor.

The CEO of Financial Advisory Services Inspira Ltd is Kimmo Lehto. The subsidiary’s personnel numbers 4.

Board of Directors (main job outside the company given in brackets):

• PekkaAverio(PresidentandCEO,MunicipalityFinancePlc)• MarjoTomminen(Director,MunicipalityFinancePlc)• KimmoLehto

Inspira’s auditors are KPMG Oy Ab with APA Riitta Pyykkö as accountable auditor.

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CONSOLIdATEd bALANCE SHEET (MUNICIPALITY FINANCE GROUP)

Note December 31, 2007 December 31, 2006

ASSETS

Liquid assets 11,525,120.31 5,236,095.51

Loans and advances to credit institutions (3) 36,092,355.00 35,867,567.92

Loans and advances to the public and public sector entities 5,848,664,214.62 5,100,467,395.70

Debt securities (4) 1,916,729,381.68 1,672,713,291.87

Shares and participations (5) 5,247,118.80 5,126,058.26

Derivative contracts (6) 983,653,986.11 290,693,884.85

Intangible assets (7,9) 643,427.31 741,944.28

Tangible assets (8,9) 1,366,371.61 1,321,122.16

Share issue receivables 0.00 25,364,307.60

Other assets (10) 1,440,566.03 617,774.95

Accrued income and prepayments (11) 101,662,594.74 95,830,973.41

Deferred tax assets (12) 6,214,482.14 647,612.01

TOTAL ASSETS (2) 8,913,239,618.35 7,234,628,028.52

LIAbILITIES ANd EqUITY

LIABILITIES

Liabilities to credit institutions 389,303,737.99 395,895,644.50

Liabilities to the public and public sector entities 595,960,927.76 501,417,635.46

Debt securities issued (13) 6,565,148,179.86 5,345,415,359.03


Other liabilities (14) 558,482.83 692,324.38

Accrued expenses and deferred income (15) 324,331,210.87 111,019,553.15

Subordinated liabilities (16) 45,245,234.90 59,149,455.50

Deferred tax liabilities (12) 12,329,160.95 10,768,921.88

TOTAL LIABILITIES (2) 8,847,833,683.68 7,161,113,975.44

EqUITY

Share capital (17) 42,583,195.49 42,583,195.49

Reserve fund (17) 276,711.01 276,711.01

Fair value reserve -15,259,104.73 -1,843,203.41

Retained earnings 37,768,728.21 32,497,349.99

Total equity attributable to equity holders 65,369,529.98 73,514,053.08

Minority interest 36,404.69 0.00

TOTAL EQUITY 65,405,934.67 73,514,053.08

TOTAL LIABILITIES AND EQUITY 8,913,239,618.35 7,234,628,028.52

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CONSOLIdATEd INCOME STATEMENT (MUNICIPALITY FINANCE GROUP)

Ref Jan 1 - dec 31, 2007 Jan 1 - dec 31, 2006

Interest income 308,865,295.99 198,092,407.99

Interest expense -287,558,596.11 -181,908,554.44

NET INTEREST INCOME (21) 21,306,699.88 16,183,853.55

Commission income (22) 368,655.15 178,861.00

Commission expense (23) -2,441,411.94 -2,461,677.03

Net income from securities and foreign exchangetransactions (24) 284 861.77 -63 527.08

Net income from available-for-sale financial assets (25) -1,535,181.83 182,992.62

Net income from hedge accounting (26) -497,860.23 551,874.54

Other operating income (27) 28,504.96 111,925.26

Administrative expenses (28) -6,207,564.51 -5,104,937.90

Depreciation and impairment on tangible and intangible assets (9) -384 690.19 -513 041.94

Other operating expenses (29) -2,087,607.28 -2,012,679.13

NET OPERATING PROFIT 8,834,405.78 7,053,643.89

Income taxes (30) -1,708,407.65 -1,871,458.03

PROFIT FOR THE FINANCIAL PERIOd 7,125,998.13 5,182,185.86

Attributable to:

Equity holders of the parent company 7,114,593.44 5,182,185.86

Minority interest 11,404.69 0.00

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CONSOLIdATEd STATEMENT OF CASH FLOwS (MUNICIPALITY FINANCE GROUP)

Jan 1 - dec 31, 2007 Jan 1 - dec 31, 2006

CASH FLOw FROM OPERATING ACTIvITIES 356,444,451.04

Profit for the financial period 7,125,998.13 5,182,185.86

Adjustments 16,212,452.33 -25,654,704.78

Change in loans and advances to customers -750,947,138.33 -529,338,529.45

Change in long term funding 953,331,477.95 594,357,458.03

Change in short term funding -4,966,520.30 78,618,183.61

Change in exchange rates, funding 87,368,481.00 233,279,857.77

CASH FLOw FROM INvESTING ACTIvITIES -205,548,574.44 -234,979,118.06

Acquisition of tangible items -276,579.00 -501,146.00

Acquisition of intangible items -114,845.00 -360,596.00

Change in debt securities -205,217,151.77 -229,121,562.15

Change in shares and participations 0.00 -5,101,839.20

Proceeds from sale of tangible items 60,001.33 106,025.29

CASH FLOw FROM FINANCING ACTIvITIES -14,486,403,15 27,667,251,55

Change in capital loans -12,668,187.93 1,181,207.35

Dividends paid -1,843,215.22 0.00

Change in share capital 25,000.00 26,486,044.20

NET INCREASE IN CASH FUNdS 88,089,773.19 149,132,584.53

CASH FUNdS AT JANUARY 1 422,157,975.73 273,025,391.20

CASH FUNdS AT dECEMbER 31 510,247,748.92 422,157,975.73

Cash funds include following balance sheet items:Liquid assets, loans and advances to credit institutions and debt securities maturing within the next three months.

Adjustments include depreciation on tangible and intangible assets and the change in acrrued items.

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CONSOLIdATEd STATEMENT OF CHANGES IN EqUITY (MUNICIPALITY FINANCE GROUP)

EUR 1,000

Attributable to equity holders of the parent company Minority interest Total equity

Sharecapital

Reservefund

Fair valuereserve

Retainedearnings

Total

EqUITY AT dECEMbER 31, 2005 16,522 277 -668 27,315 43,446 - 43,446

Share issue 26,061 26,061 26,061

Profit for the financial period 5,182 5,182 5,182

Net change in available-for-sale financial assets

-1,175 -1,175 -1,175

EqUITY AT dECEMbER 31, 2006 42,583 277 -1,843 32,497 73,514 - 73,514

Share issue 25 25

Dividends paid for 2006 -1,843 -1,843 -1,843

Profit for the financial period 7,115 7,115 11 7,126

Net change in available-for-sale financial assets

-13,416 -13,416 -13,416

EqUITY AT dECEMbER 31, 2007 42,583 277 -15,259 37,769 65,370 36 65,406

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Basic information on the Group

The Municipality Finance Group consists of Municipality Finance Plc (parent company) and Financial Advisory Services Inspira Ltd (subsidiary). Municipality Finance is a financial institution owned by the local government sector. The company’s aim is to ensure the economical funding services for the local government sector.

The Group’s parent company is a Finnish public limited liability company established according to Finnish law and domiciled in Helsinki with the registered address Antinkatu 3 C, 00100 Helsinki. The subsidiary’s domicile is Helsinki and its registered address is Antinkatu 3 C, 00100 Helsinki.

Copies of the consolidated financial statements are available at www.munifin.fi from the Group’s parent company at Antinkatu 3 C, 00100 Helsinki.

Principles for drawing up the consolidated financial accounts

The consolidated financial accounts have been drawn up in accordance with the International Financial Reporting Standards (IFRS), and the IAS and IFRS standards and SIC and IFRIC interpretations in force on December 31, 2007 have been applied to it. International financial reporting standards refer to the standards approved for application in the EU in accordance with the Finnish Accounting Act and provisions issued under it complying with EU (EC) Regulation 1606/2002 and their interpretations. The notes to the consolidated financial statements also comply with the requirements of Finnish accounting and corporate legislation that complement the IFRS rules.

Transition to International Financial Reporting Standards

Municipality Finance transferred to IFRS financial reporting on January 1, 2007. The transition date for the first consolidated financial statements under IFRS was January 1, 2006 and it applied the IFRS 1 First-time Adoption of International Financial Reporting Standards. The first reconciliations concerning equity and profit between the previous financial statements rules and the IFRS Transition to International Financial Reporting Standards required by the IFRS are presented after the notes to the consolidated financial statements.

The consolidated financial reporting principles are affected the most by standards IAS 39 [Financial Instruments: Recognition and Measurement] and IAS 37 [Provisions, Contingent Liabilities and Contingent Assets].

The most significant change caused by the IAS 39 [Financial Instruments: Recognition and Measurement] standard in the financial reporting principles is the measurement of all derivative financial instruments at fair value. Municipality Finance applies fair value hedging to fixed-interest lending, lending tied to long-term reference rates and funding, which were recognized under periodized acquisition cost in the FAS financial statements. In hedge accounting the item hedged (loan or funding arrangement) is measured at fair value in the same way as the hedging instrument.

The voluntary credit loss provision under FAS does not meet the recognition requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which is why the provision has been dissolved and recognized under equity. In the opening balance sheet, a deferred tax liability has been recognized on the dissolved credit loss provision in accordance with IAS 12 Income Taxes.

The arrangement fees relating to the 2006 share issue are recognized under the Finnish financial reporting practice under “Other operating expenses” in the income statement (profit and loss account) in the 2006 financial statements. In the IFRS consolidated financial statements these expenses have been deducted directly from equity. On December 31, 2006 the impact was EUR -0.4 million.

The presentation of the financial statements has also been affected by IFRS 7 Financial Instruments: Disclosures and the amendment Capital Disclosures to IAS 1 Presentation of Financial Statements that came into force on January 1, 2007.

The consolidated financial statements have been drawn up on the basis of original cost not including available-for-sale financial assets, financial assets and liabilities recognized at fair value through profit and loss, derivative financial instruments and items hedged in fair value hedging.

Drawing up financial statements in accordance with the IFRS requires certain assessments and consideration from the Group management in applying the drawing-up principles. The section entitled ‘Principles for drawing up the financial statements requiring management consideration and key uncertainty factors relating to assessment’ provides information on the sub-sections where the management’s consideration or uncertainty factors may have the most impact on the figures presented.

The notes to the financial statements are presented in thousands of euros. All figures in the notes have been rounded, which means that the sums total of figures added up may differ from the sum presented.

NOTES TO THE CONSOLIdATEd FINACIAL STATEMENTS

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Consolidation principles

The consolidated financial statements comprise the financial statements of Municipality Finance Plc, which is the parent company, and its directly-owned subsidiary Financial Advisory Services Inspira Ltd.

Mutual shareholdings have been eliminated using the acquisition method. Intra-Group transactions and internal receivables and liabilities have been eliminated. The distribution of the profit for the financial year between the parent company and the minority interest has been presented in connection with the income statement. The minority interest share of the equity is presented as a separate item under equity in the balance sheet.

Items denominated in foreign currency

Receivables and liabilities denominated in foreign currencies have been translated into euros using the average rate of the European Central Bank on the balance sheet date. The exchange rate differences arising from measurement are included under ‘Net income from foreign exchange transactions’ in the income statement.

Classification of financial instruments and measurement principles

On the basis of IAS 39 Financial Instruments: Recognition and Measurement the company’s financial assets and liabilities have been classified and measured as follows:

Loans and receivables

The items are measured at effectively amortized cost. Loans included in hedge accounting are measured at fair value as far as they are hedged against risk.

Available-for-sale financial assets

Investment of advance funding in debt certificates comes under this item.

Debt certificates are measured at fair value and a change in fair value is recognized in the fair value reserve under equity in the balance sheet. Realized sales profit and loss and impairment recognized through profit and loss are recorded in the income statement under net income from available-for-sale financial assets.

Investments held to maturity

Investments in debt certificates to be held to maturity are classified under this item. These financial assets are handled in bookkeeping at amortized cost.

Financial assets and liabilities measured at fair value through profit and loss

Derivative financial instruments are measured at fair value through profit and loss and recognized in the balance sheet. Positive changes in the fair value recognized in the balance sheet on derivative financial instruments are recognized in balance sheet assets and negative changes in fair value in balance sheet liabilities, both under ‘Derivative contracts’. Changes in fair value for other than the derivative financial instruments in hedge accounting are recognized under ‘Net income from securities and foreign exchange transactions’ in the income statement.

The fair value option applies to debt instruments hedged with interest rate derivatives, charges in the value of which are recognized under ‘Net income from securities and foreign exchange transactions’ in the income statement.

Financial liabilities

The items are measured at effectively amortized cost. Funding acquisition covered by hedge accounting is meas-ured at fair value for hedged risk.

All lending to companies, public entities and non-profit organizations is given a guarantee or deficiency guarantee by a municipality or municipal federation or a State deficiency guarantee. There is no objective evidence of impairment of the value of loans and other claims, and the Group has no non-performing assets. Therefore no write-downs have been made.

The company practice in recognizing commissions resulting from borrowing is as follows: If the amount of a loan on a subscription date is less or more than the amount the company is required to repay on the maturity date under the loan terms, the amount of debt on the subscription date adjusted by direct commission expenses resulting from borrowing is recognized in the balance sheet. Differences between the issue price and nominal value are broken down on a time basis over the maturity of the debt.

The difference between annual interest received and paid on derivative financial instruments is recognized as an adjustment to interest expenses arising from the hedged liability or to interest income from the hedged asset for the financial year in which it occurred.

Determination of fair value

The market value of debt instruments measured at fair value is calculated on the basis of price quotations from the market. Publicly quoted interest and exchange rates and measurement practices established on the market are used

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to measure the fair value of financial assets, liabilities and derivative financial instruments.

The company has funding arrangements in which the financial characteristics of the linked derivative financial instrument are not closely connected with the financial characteristics of the principal contract. Derivative financial instruments linked to such hybrid instruments are recognized in the balance sheet, while changes in the fair value of the derivative financial instrument are recognized through profit and loss. The principal financial instrument is recognized in the balance sheet at current value. The company has provided full derivative hedging for each hybrid instrument requiring separation.

Hedge accounting

In addition to derivative contracts, items coming under hedge accounting measure lending at fixed rates, lending tied to long-term reference rates and lending based on structured interest rate conditions hedged with derivatives, and funding hedged with derivative contracts at fair value through profit/loss. The hedging performance is calculated as the ratio of the change in the value

The result of hedging is calculated as the ratio of the change in the value of the hedging instrument to the change in the value of the hedged item. For effective hedging this ratio should range between 80% and 125%. The effectiveness of hedging is verified when an instrument is recognized in fair value hedge accounting and subsequently at six-month intervals or more.

Changes in the fair value of derivative financial instruments covered by hedge accounting and balance sheet items hedged with them are recognized in the income statement under ‘Net income from hedge accounting’.

Recognition and derecognition of financial assets and liabilities

Loans and receivables are recognized in the balance sheet when a customer withdraws a loan, available-for-sale financial assets and derivative financial instruments on the settlement date and financial liabilities when the consideration is received. Financial assets are derecognized when the contract-based right to the assets is terminated or when the rights have been transferred to another party. Financial liabilities are derecognized when the obligations have been fulfilled.

Leases

Leases are classified as financial leases and other leases depending on whether the essential risks and benefits of ownership are transferred to the lessee. Municipality Finance has no leases classified as financial.

In the case of other leases, Municipality Finance is the lessee. The rents payable and receivable on the basis of agreements are recognized as expenses in the income statement in equal instalments over the duration of the lease. Other leases are primarily related to operating premises.

Intangible and tangible assets

Intangible and tangible assets are recognized in the balance sheet at original cost with accumulated depreciation and impairment deducted.

Machinery and equipment are depreciated according to plan on a straight-line basis over five years. Capitalized IT equipment and software are depreciated primarily on a straight-line basis over four years. The IT software developed for the management of the lending procedure and CRM is depreciated over a period of seven years. Office renovation costs are depreciated on a straight-line basis until the lease expires. Real estate is depreciated on a straight-line basis over 25 years.

Impairment of intangible and tangible fixed assets

An assessment of any signs of impairment concerning intangible and tangible fixed assets is made on each balance sheet date. If such signs are detected, the recoverable amount is measured for the items concerned. If the book value of an asset item is higher than the recoverable amount, an impairment loss is recognized in the income statement.

Recognition of income and expenses

Net interest income

Interest received and paid is recognized under the effective interest rate method. Commissions and fees received and paid, transaction expenses and any premiums and discounts are taken into account in calculating the effective interest rate.

Commission income and expense

Commission income includes commission and fees received from financial advisory services. Commission include paid guarantee fees, custodian fees and programme updating fees. Commission income and expense are recognized principally when the service is provided.

Net income from hedge accounting

The net hedge accounting income includes the net income from measuring at fair value the financial assets and liabilities and derivative financial instruments hedging them.

Income taxes

Accrual-basis taxes and changes in deferred tax items determined on the basis of the profits made by Group companies are recognized under the item ‘Income taxes’ in the consolidated income statement in accordance with IAS 12 Income Taxes. The taxes have been adjusted by taxes relating to previous periods.

Deferred tax assets consist of the negative changes in the fair value of financial instruments. Deferred tax liabilities consist of the positive changes in the fair value of financial instruments and of the release of the credit loss reserve made in the parent company in the consolidated financial statements.

Principles for drawing up the financial state-ments requiring management consideration and key uncertainty factors relating to assessment

At Municipality Finance, key assessments relate to the determination of fair values for financial instruments. In accordance with the principle of prudence, the values for

some financial assets are lower than the price quoted on the market might have been.

Application of new standards

The following interpretations to be introduced in 2008 are not expected to affect the consolidated financial statements of Municipality Finance. IFRIC 11 IFRS 2 – Group and Treasury Share TransactionsIFRIC 12 Service Concession ArrangementsIFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

In addition, the following standards and interpretations will come into force in 2009:IAS 1 – Presentation of financial statements (revised)IFRS 8 – Operating Segments IAS 23 – Borrowing costs (revised) IFRIC 13 – Customer Loyalty Programmes

The presentation of the financial statements will affect the content and presentation of the related calculations. The impact of the standard Operating Segments on the Group is being assessed. Other standards are not expected to be of major importance to the Group.

Notes to the balance sheet

1. The Municipality Finance Group’s sector of operations consists of credit institution operations and the provision of financial services, and the market area for its lending operations is Finland.

2. Classification of financial assets and liabilities


Available for sale

Held to maturity

Fair value through profit

and lossHedging

derivatives Total Fair value

December 31, 2007

Financial assets

Liquid assets 11,525 - - - - 11,525 11,525

Loans and advances to credit institutions 36,092 - - - - 36,092 36,092

Loans and advances to the public and public sector entities 2,630,430 - - 3,218,234 - 5,848,664 5,848,664

Debt securities 248,865 1,619,334 9,504 39,026 - 1,916,729 1,916,729

Shares and participations - 5,247 - - - 5,247 5,247

Derivative contracts - - - 232,182 751,472 983,654 983,654

Intangible assets 643 - - - - 643 643

Tangible assets 1,366 - - - - 1,366 1,366

Other assets 1,441 - - - - 1,441 1,441

Accrued income and prepayments 101,663 - - - - 101,663 101,663

Deferred tax assets 6,214 - - - - 6,214 6,214

Total 3,038,239 1,624,581 9,504 3,489,442 751,472 8,913,238 8,913,238

34

35


Other financial liabilities


and lossHedging


Liabilities to credit institutions 256,053 133,251 - 389,304 389,304

Liabilities to the public and public sector entities 109,967 485,994 - 595,961 595,961

Debt securities issued 1,297,392 5,267,756 - 6,565,148 6,565,148

Derivative contracts - 230,839 684,118 914,957 914,957

Other liabilities 558 - - 558 558

Accrued expenses and deferred income 324,331 - - 324,331 324,331

Subordinated liabilities 11,177 34,068 - 45,245 45,245

Deferred tax liabilities 12,329 - - 12,329 12,329

Total 2,011,807 6,151,908 684,118 8,847,833 8,847,833


Available for sale

Held to maturity


and lossHedging


December 31, 2006

Financial assets

Liquid assets 5,236 - - - - 5,236 5,236

Loans and advances to institutions

35,868 - - - - 35,868 35,868

Loans and advances the public and public sector entities

2,258,880 - - 2,841,587 - 5,100,467 5,100,467

Debt securities 267,071 1,359,415 10,294 35,933 - 1,672,713 1,672,713

Shares and participations - 5,126 - - - 5,126 5,126

Derivative contracts - - - 4,720 285,974 290,694 290,694

Intangible assets 742 - - - - 742 742

Tangible assets 1,321 - - - - 1,321 1,321

Share issue receivables 25,364 - - - - 25,364 25,364

Other assets 618 - - - - 618 618

Accrued income and prepayments

95,831 - - - - 95,831 95,831

Deferred tax assets 648 - - - - 648 648

Total 2,691,579 1,364,541 10,294 2,882,240 285,974 7,234,628 7,234,628

35

Financial liabilitiesOther financial

liabilities


and lossHedging


Liabilities to credit institutions 269,991 125,905 - 395,896 395,896

Liabilities to the public and public sector entities - 501,418 - 501,418 501,418

Debt securities issued 786,825 4,558,590 - 5,345,415 5,345,415

Derivative contracts - 4,159 732,596 736,755 736,755

Other liabilities 692 - - 692 692

Accrued expenses and deferred income 111,020 - - 111,020 111,020

Subordinated liabilities 23,845 35,304 - 59,149 59,149

Deferred tax liabilities 10,769 - - 10,769 10,769

Total 1,203,142 5,225,376 732,596 7,161,114 7,161,114

Fair value hedge accounting or a fair value option is applied to lending and funding for interest rate and foreign exchange risk and other risks; thus the book values are equivalent to the fair values of these assets and liabilities.

3. Loans and advances to credit institutions

December 31, 2007 Total Repayable on demand Other than repayable on demand

Domestic credit institutions 35,783 3,952 31,831

Foreign credit institutions 309 309 -

Total 36,092 4,261 31,831


Domestic credit institutions 35,868 304 35,564

Total 35,868 304 35,564

36

37

4. Debt securities

December 31, 2007 Publicly quoted Other Total

Debt securities issued by public entities 30,478 239,767 270,245

Held to maturity - 4,507 4,507

Bonds issued by other public entities - 4,507 4,507

Available for sale 30,478 235,259 265,737

Municipal commercial papers - 235,259 235,259

Government bonds 30,478 - 30,478

Debt securities issued by other thanpublic sector entities - 1,646,485 1,646,485


Bank bonds - 4,996 4,996

Available for sale - 1,641,488 1,641,488

Banks’ certificates of deposit - 169,059 169,059

Commercial papers - 13,606 13,606

Bank bonds - 965,201 965,201

Other debt securities - 493,623 493,623

Total debt securities 30,478 1,886,251 1,916,729

eligible for central bank refinancing 30,478 1,195,929 1,226,407

total non-interest-bearing - 21,677 21,677

December 31, 2006 Publicly quoted Other Total

Debt securities issued by public entities22,184 269,229 291,413


Government bonds - - -





Debt securities issued by other than public entities - 1,381,300 1,381,300


Bank bonds - 4,996 4,996

Other debt securities - - -




Bank bonds - 1,122,954 1,122,954





37

5. Shares and participations

December 31, 2007 Publicly quoted Other In credit institutions

Available for sale - 5,247 -

Total - 5,247 -

December 31, 2006 Publicly quoted Other In credit institutions


Total - 5,126 -

6. Derivative contracts

December 31, 2007Nominal value of underlying instrument Fair value

Remaining maturity

Contracts made for other thanhedging purposes Under 1 year 1 – 5 years Over 5 years Total Positive Negative

Interest rate derivativesInterest rate swaps 165,000 311,600 195,500 672,100 18,883 17,453

Currency derivativesInterest rate and currency swaps - - 116,946 116,946 1,044 1,131

Equity derivatives 78,768 247,536 296,149 622,453 201,246 201,246

Other derivatives 1,838 4,100 195,000 200,938 11,009 11,009

Total 245,606 563,236 803,595 1,612,437 232,182 230,839

For hedging purposes

Interest rate derivativesInterest rate swaps 2,037,336 2,964,703 2,135,320 7,137,359 76,725 60,649

Currency derivativesInterest rate and currency swaps 1,340,479 1,349,628 1,212,187 3,902,294 674,747 623,469

Total 3,377,815 4,314,331 3,347,507 11,039,653 751,472 684,118

All total 3,623,421 4,877,567 4,151,102 12,652,090 983,654 914,957

38

39

December 31, 2006 Nominal value of underlying instrumentRemaining maturity

Fair value

Contracts made for other thanhedging purposes Under 1 year 1 – 5 years Over 5 years Total Positive Negative

Interest rate derivativesInterest rate swaps 280,000 245,800 207,500 733,300 3,859 3,163

Currency derivativesInterest rate and currency swaps - - 137,060 137,060 861 996

Equity derivatives - 143,978 87,113 231,091 27,523 7,456

Other derivatives - 6,550 20,000 26,550 - 6,372

Total 280,000 396,328 451,673 1,128,001 32,243 17,987


Interest rate derivativesInterest rate swaps 1,243,783 3,428,665 1,890,139 6,562,587 91,749 39,466

Currency derivativesInterest rate and currency swaps 1,425,467 836,281 1,149,995 3,411,743 166,702 679,302

Total 2,669,250 4,264,946 3,040,134 9,974,330 258,451 718,768

All total 2,949,250 4,661,274 3,491,807 11,102,331 290,694 736,755

7. Intangible assets December 31, 2007

December 31, 2006

IT expenses 467 550

Other intangible assets 176 192

Total 643 742

8. Tangible assets December 31, 2007

December 31, 2006

Real estate 1,034 926

Other tangible assets 332 395

Total 1,366 1,321

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40

9. Changes in intangible and tangible assets during the financial period

December 31, 2007 Intangible assets Tangible assets

Real estate Other tangible assets

Total

Acquisition cost Jan.1 1,474 1,004 1,182 2,186

+ Increase for financial period 115 141 136 277

– Decrease for financial period - - 133 133

Acquisition cost Dec. 31 1,589 1,145 1,185 2,330

Accumulated depreciation Jan. 1 732 78 787 865

– Accumulated depreciation on decrease - - 72 72

+ Depreciation for the financial period 214 33 138 171

Accumulated depreciation Dec. 31 946 111 853 964

643 1,034 332 1,366


Real estate Other tangible assets

Total

Acquisition cost Jan.1 1,762 740 1,168 1,908


– Decrease for financial period 649 - 223 223


Accumulated depreciation Jan. 1 1,064 60 726 786

– Accumulated depreciation on decrease 649 - 117 117



Book value Dec. 31 742 926 395 1,321

10. Other assets December 31,

2007December 31,

2006

Other 1,441 618

11. Accrued income and prepaymentsDecember 31,

2007December 31,

2006

Interest 101,341 95,657

Other 322 174

Total 101,663 95,831

4141

12. Deferred tax assets and liabilities

December 31, 2006

Recognized in income

statement

Recognized in equity

December 31, 2007

Deferred tax assets

On fair value reserve 648 - 4,714 5,362

On impairment - 436 - 436

On net income from securities transactions - 288 - 288

On net income from hedge accounting - 128 - 128

Total 648 852 4,714 6,214

Deferred tax liabilities

On net income from securities transactions 289 109 - 398

On net income from hedge accounting 212 -212 - -

On change in voluntary provisions 10,158 1,760 - 11,918

Other items 110 -97 - 13

Total 10,769 1,560 - 12,329

December 31, 2005

Recognized in income

statement

Recognized in equity

December 31, 2006

Deferred tax assets

On fair value reserve 235 - 413 648

Total 235 - 413 648


On net income from securities transactions 287 2 - 289

On net income from hedge accounting 69 143 - 212

On change in voluntary provisions 8,915 1,243 - 10,158

Other items 110 - 110

Total 9,271 1,498 - 10,769

13. Debt instruments

December 31, 2007 December 31, 2006

Book value Nominal value Book value Nominal value

Bonds 6,108,142 7,089,892 4,883,443 6,241,420

Other 457,006 462,600 461,972 464,450

Total 6,565,148 7,552,492 5,345,415 6,705,870

All funding by the parent company is guaranteed by the Municipal Guarantee Board.

14. Other liabilities December 31,

2007December 31,

2006

Payment transfer 139 57

Other 419 635

Total 558 692

15. Accrued expenses and deferred incomeDecember 31,

2007December 31,

2006

Interest 322,258 109,796

Other 2,073 1,224

Total 324,331 111,020

16. Subordinated liabilities

December 31, 2007 Currency Nominal value Book value Interest-tied Earliest

repayment

Debentuurilainat

1) Debenture loan 1/06 EUR 35,000 34,068 Fixed 9.5.2016

Capital loans

2) Capital loan 1/03 EUR 10,000 10,000 Euribor 6mths 10.12.2010

3) Capital investments EUR 1,177 1,177 Euribor 12mths

Total 46,177 45,245


repayment

Debenture loans


Capital loans




Part to be converted EUR 169 169 (no interest)

Total 58,846 59,149

Debenture loans

1) The maturity date for the loan is May 9, 2021. The company has the right to pay the loan capital including the accumulated interest prematurely on the interest payment date May 9, 2016, earlier only with the written consent of the Finnish Financial Supervision Authority. A debenture loan and the interest accumulated on it may be paid in the event of the company being in dissolution procedures or bankruptcy only in subordination to all other debts. The loan has at least the same priority status as any debenture loans with a maturity date and equivalent commitments potentially issued or subscribed by the company in the future.

Capital loans

2) The loans do not have maturity dates. The company has agreed to pay interest only if the sum to be paid is distributable according to the balance sheet approved for the company’s previous financial year. The loans involve no cumulative right to interest. The loans may be repaid on condition that the restricted equity and other non-distributable assets in the approved balance sheet for the company’s previous financial year provide full coverage and that the Financial Supervision Authority grants permission to repay the loans.

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43

Interest accumulated by the end of the financial year is recognized under interest expenses in the financial statements.In dissolution procedures and bankruptcy, capital loan principals and their accumulated interest are subordinated to all other debts. The

company’s capital loans have the same priority status as any capital loans and equivalent commitments potentially issued or subscribed in the future. The loans have priority over the company’s shares.

3) The capital loans cannot be recalled, but the company may repay them with permission from the Finnish Financial Supervision Authority on condition that the company’s own funds do not fall below the minimum level. Interest may be paid insofar as the credit company’s profit distribution allows and distributable funds are adequate, and the Board of Directors of the credit company so decides. Entitlement to pay interest is not carried over to future financial periods if no interest is paid on earlier periods. By permission from the Finnish Financial Supervision Authority (Dnro 1/310/2007), part of the capital investments were converted into shares. The Board of Directors has decided that interest according to the terms and conditions will be paid on capital investments (EUR 1,177,000) for 2007. and conditions will be paid on capital investments (EUR 1,177,000) for 2007.

17. Notes on equity capital

Effect for the change of the number of shares:

Number of shares

(1,000 shares)

Share capital Reserve fund Total

December 31, 2005 16,522 16,522 277 16,799

Share issue at parent company 9,810 26,061 - 26,061

December 31, 2006 26,332 42,583 277 42,860

December 31, 2007 26,332 42,583 277 42,860

The shares of the parent company have not been divided into different types. The nominal value of the shares is one euro. Each share carries one vote. Acquisition of shares is restricted through the consent and redemption clauses in the Articles of Association. All the shares issued have been paid for in full.

Equity reserves:

The reserve fund comes under restricted equity referred to in chapter 8, ection 1 of the Limited Liability Companies Act.

Changes in the value of available-for-sale financial assets are recognized in the fair value reserve.

After the balance sheet date the Board of Directors proposed that a dividend of EUR 0.10 per share be distributed.

18. Contingent liabilities

Liabilities and collateralDecember 31,

2007December 31,

2006

Bonds pledged to the Local Government Pensions Institution

- 35,000

Bonds pledged to the Municipal Guarantee Board 5,880,898 5,063,679

Debt securities pledged to the Municipal Guarantee Board 1,699,322 1,412,073

Total 7,580,220 6,510,752

Off-balance-sheet commitmentsDecember 31,

2007December 31,

2006

Binding credit commitments 529,824 369,096

43

19. Leasing and other rental liabilitiesDecember 31,

2007December 31,

2006

Maturing within one year 527 508

Maturing in one to five years 1,735 1,725

Maturing in more than five years 276 672

Total 2,538 2,905

20. Related parties

Salaries and fees for the management (EUR)

CEO 339,208

Executive Vice-President 238,141

The members of the Board of Directors are paid an annual remuneration and meeting remuneration. The annual remuneration of the Chairman of the Board is EUR 13,500, that of the Vice Chairman EUR 10,000 and that of the other members EUR 8,000. The annual fee of the chairmen of the audit and rewarding committees is EUR 10,000. The fee per meeting is EUR 250.

Loan and other financial receivables from related parties of the credit institution:

Municipality Finance has no loan or other financial receivables or other liabilities from related parties under section 140(2) of the Credit Institutions Act.

Notes to the income statement

21. Breakdown of interest income 2007 2006

Loans and advances to credit institutions and central banks

1,622 1,367

Loans and advances to the public and public sector entities

226,162 172,075

Debt instruments 70,407 44,585

Derivative contracts 6,842 -23,634

Other interest income 3,832 3,699

Total 308,865 198,092

Breakdown of interest expenses 2007 2006

Liabilities to the public 14,422 13,338

Liabilities to credit institutions and central banks 16,756 14,509

Debt instruments issued to the public 239,534 218,546

Derivative contracts 13,863 -67,025

Subordinated liabilities2,685 2,488

Other interest expenses 299 53

Total 287,559 181,909

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45

22. Commission income 2007 2006

Financial advisory services 369 179

Total 369 179

23. Commission expense 2007 2006

Commission fees paid 87 69

Other 2,354 2,393

Total 2,441 2,462

The item ‘Other’ includes paid guarantee fees, custodian fees and programme updating fees.

24. Net income from securities and foreign exchange transactionsSales profit and

loss (net)Changes in fair

valueTotal

2007

Measured at fair value through profit and loss

Debt securities - - 473 - 473

Derivative contracts - 784 784

Total net income from securities transactions - 311 311

Net income from foreign exchange transactions - -26 - 26

Total - 285 285

Sales profit and loss (net)

Changes in fair value

Total

2006

Measured at fair value through profit and loss

Debt securities - 659 659

Derivative contracts - - 718 - 718

Total net income from securities transactions - - 59 - 59

Net income from foreign exchange transactions - - 5 - 5

Total - - 64 - 64

25. Net income from available-for-sale financial assets 2007 2006

From disposal of financial assets 141 183

From impairment -1,676 -

Total -1,535 183

26. Net income from hedge accounting 2007 2006

Net income from hedging instruments 602,687 -109,994

Net income from items hedged -603,185 110,546

Total - 498 552

45

27. Other operating income 2007 2006

Profit on the sale of fixed assets 12 2

Other income from actual credit

institution operations 17 110

Total 29 112

28. Administrative expenses 2007 2006

Personnel expenses

Salaries and fees 3,223 2,503

Pension expenses 625 518

Other personnel-related expenses 256 208

Total 4,104 3,229

Other administrative expenses 2,104 1,876

Total 6,208 5,105

Personnel 2007 2006

Average End of period Average End of period

Permanent full-time 37 36 34 34

Permanent part-time 1 1 1 1

Total 38 37 35 35

The pension cover is arranged via an outside employment pension insurance company.

29. Other operating expenses 2007 2006

Rental expenses 889 793

Other expenses from actual credit

institution operations 1,199 1,220

Total 2,088 2,013

30. Income taxes 2007 2006

Tax based on the profit for the financial period 1,001 361

Tax on previous financial periods - 12

Deferred tax items 707 1,498

Total 1,708 1,871

Profit before income taxes 8,834 7,054

Taxes at domestic tax rate 2,297 1,834

Non-deductible expenses -589 25

Taxes on previous years - 12

Taxes in income statement 1,708 1,871

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MUNICIPALITY FINANCE TRANSFERS TO INTERNATIONAL FINANCIAL REPORTING STANdARdS (IFRS)

1. Municipality Finance transition to IFRS

Under the EU Commission Regulation on financial reporting, companies issuing bonds must start applying the International Financial Reporting Standards at the latest in the financial period beginning on January 1, 2007 or following this date. Municipality Finance made the transition as of the beginning of 2007 and will draw up a six-month interim report on June 30, 2007 in accordance with the IFRS approved by the EU.

The principal impact of the transition to IFRS on Municipality Finance is caused by the fair value measurement of derivative financial instruments. In line with the risk management principles approved by the company’s Board of Directors, the company uses derivative financial instruments for hedging against financial risk. The changes in the fair value of derivative financial instruments are a hedge against changes in the fair value of balance sheet items. Fair value hedge accounting illustrates the company’s operations in the best possible way for investors and other stakeholders. It is for this reason that the company applies fair value hedge accounting in its IFRS financial statements.

Principal impacts of the transition

The standards having the greatest effect on the company’s financial statement principles are IAS 39 Financial Instruments: Recognition and Measurement and IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

The most significant change in the financial statement principles caused by IAS 39 Financial Instruments: Recognition and Measurement is the fair value measurement of all derivative financial instruments. Municipality Finance applies fair value hedging to fixed-interest lending, lending tied to long-term reference rates and funding, which were recognized under periodized acquisition cost in the FAS financial statements. In hedge accounting, the hedged item (loan granted or funding arrangement) is measured at fair value in the same way as the hedging instrument.

The voluntary credit loss provision under FAS does not meet the recognition requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which is why the provision has been dissolved and recognized under equity. In the opening balance sheet, a deferred tax liability has been recognized on the dissolved credit loss provision in accordance with IAS 12 Income Taxes.

Income statement and balance sheet reporting has not changed significantly compared with previous presentation methods. According to the opening balance sheet of the comparative period on January 1, 2006, the transition to the IFRS increases Municipality Finance’s equity by EUR 26.9 million, of which EUR 25.4 million is due to the transfer of the credit loss provision to equity and EUR 1.5 million to other IFRS adjustments.

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48

2. Balance sheet

Assets Jan 1, 2006 Jun 30, 2006 dec 31, 2006

EUR million Ref FASIFRS-

adjustmentsIFRS FAS

IFRS-

adjustmentsIFRS FAS

IFRS-

adjustmentsIFRS

Liquid assets 3.3 3.3 4.2 4.2 5.2 5.2

Loans and advances to credit institutions 23.5 23.5 103.8 103.8 35.9 35.9

Loans and advances to the public and public

sector entities1 4,593.6 74.3 4,667.9 4,801.5 24.9 4,826.4 5,104.6 -4.1 5,100.5

Debt securities 2 1,291.4 2.9 1,294.3 1,361.5 1.3 1,362.8 1,672.0 0.7 1,672.7

Shares and participation 0.0 0.0 5.0 5.0 5.1 5.1

Derivative contracts 3 44.4 226.4 270.8 65.1 162.6 227.7 85.8 204.9 290.7

Intangible assets 0.7 0.7 0.6 0.6 0.7 0.7

Tangible assets 1.1 1.1 1.0 1.0 1.3 1.3

Share issue receivables 0.0 0.0 0.0 0.0 25.4 25.4

Other assets 0.0 0.0 0.0 0.0 0.6 0.6

Accrued income and prepayments 92.3 92.3 73.7 73.7 95.8 95.8

Deferred tax assets 4 0.0 0.2 0.2 0.0 0.7 0.7 0.0 0.6 0.6

TOTAL ASSETS 6,050.3 303.8 6,354.1 6,416.4 189.5 6,605.9 7,032.4 202.1 7,234.5

1.1.2006 30.6.2006 31.12.2006

LIAbILITIES ANd EqUITY FASIFRS-

adjustmentsIFRS FAS

IFRS-

adjustmentsIFRS FAS

IFRS-

adjustmentsIFRS

LIAbILITIES

Liabilities to credit institutions 5 421.5 2.5 424.0 400.4 1.2 401.6 395.0 0.8 395.8

Liabilities to the public and public sector

entities6 440.4 39.4 479.8 479.0 1.0 480.0 483.7 17.6 501.3

Debt instruments issued 7 4,915.8 -60.6 4,855.2 5,156.8 -254.8 4,902.0 5,571.8 -226.3 5,345.5

Derivative contracts 3 55.1 320.7 375.8 177.6 438.5 616.1 329.8 406.9 736.7

Other liabilities 2.7 2.7 5.6 5.6 0.7 0.7

Accrued expences and deferred income 106.3 106.3 85.9 85.9 111.0 111.0

Subordinated liabilities 8 57.6 57.6 58.8 58.8 58.8 0.3 59.1

Deferred tax liabilities 4 0.0 9.3 9.3 0.0 10.4 10.4 0.0 10.8 10.8

TOTAL LIAbILITIES 5,999.4 311.3 6,310.7 6,364.1 196.3 6,560.4 6,950.8 210.1 7,160.9

ACCUMULATEd APPROPRIATIONS

Voluntary provisions 9 34.3 -34.3 0.0 37.4 -37.4 0.0 39.1 -39.1 0.0

EQUITY

Share capital 10 16.5 16.5 16.5 0.0 16.5 43.0 -0.4 42.6

Reserve fund 0.3 0.3 0.3 0.3 0.3 0.3

Fair value reserve 11 -1.1 0.4 -0.7 -2.8 0.9 -1.9 -2.6 0.8 -1.8

Retained profit (loss) 13 0.9 26.4 27.3 0.9 26.4 27.3 0.9 26.4 27.3

Profit (loss) for the financial period 0.0 0.0 0.0 3.3 3.3 0.9 4.3 5.2

TOTAL EqUITY 16.6 26.8 43.4 14.9 30.6 45.5 42.5 31.1 73.6

TOTAL LIAbILITIES ANd EqUITY 6,050.3 303.8 6,354.1 6,416.4 189.5 6,605.9 7,032.4 202.1 7,234.5

4949

3. Income statement

INCOME STATEMENT FAS Jan 1 - IFRS- FAS Jan 1 - FAS Jul 1 - IFRS- IFRS Jul 1 - FAS Jan 1 - IFRS- IFRS Jan 1 -

EUR million Ref Jun 30, 2006adjust-

mentsJun 30, 2006 dec 31, 2006

adjust-

mentsdec 31, 2006 dec 31, 2006

adjust-

mentsdec 31, 2006

Interest income 85.7 0.0 85.7 112.3 0.0 112.3 198.0 0.0 198.0

Interest expense -78.1 0.0 -78.1 -103.8 0.0 -103.8 -181.9 0.0 -181.9

NET INTEREST INCOME 7.6 0.0 7.6 8.5 0.0 8.5 16.1 0.0 16.1

Comission expense -1.2 0.0 -1.2 -1.3 0.0 -1.3 -2.5 0.0 -2.5

Net income from available-for-sale

financial assets3 0.1 0.6 0.7 0.1 -0.6 -0.5 0.2 0.0 0.2

Net income from hedge accounts 12 0.0 0.7 0.7 0.0 -0.1 -0.1 0.0 0.6 0.6

Other operating income 0.1 0.0 0.1 0.2 0.0 0.2 0.3 0.0 0.3

Administrative costs -2.3 0.0 -2.3 -2.9 0.0 -2.9 -5.1 0.0 -5.1

Depreciation and impairment on tangible

and intangible assets-0.3 0.0 -0.3 -0.2 0.0 -0.2 -0.5 0.0 -0.5

Other operating expences 10 -0.9 0.0 -0.9 -1.5 0.4 -1.1 -2.4 0.4 -2.0

NET OPERATING PROFIT 3.1 1.3 4.4 2.9 -0.3 2.6 6.1 1.0 7.1

Appropriations 9 -3.1 3.1 0.0 -1.6 1.6 0.0 -4.8 4.8 0.0

Income taxes 4 0.0 -1.1 -1.1 -0.4 -0.3 -0.7 -0.4 -1.5 -1.9

PROFIT FOR THE FINANCIAL PERIOd 13 0.0 3.3 3.3 0.9 1.0 1.9 0.9 4.3 5.2

4. Significant changes in financial reporting principles and explanation of adjustments made

The principal impact of the transition to IFRS on the balance sheet and profit of Municipality Finance is caused by the market value measurement of derivative financial instruments, application of fair value hedge accounting and the release of the credit loss reserve to equity and deferred tax liabilities.

MEASUREMENT OF FINANCIAL ASSETS ANd LIAbILITIES Measurement

The market value of debt securities measured at fair value is calculated on the basis of price quotations from the market. Publicly quoted interest and exchange rates and measurement methods established on the markets are used for calculating the fair value of financial assets and liabilities and derivative financial instruments.

Hedge accounting

In addition to derivative contracts, items coming under hedge accounting measure lending at fixed rates, lending tied to long-term reference rates and lending based on structured interest rate conditions hedged with derivatives, and funding hedged with derivative contracts at fair value through profit/loss. The hedging performance is calculated as the ratio of the change in the value of the derivative instrument to the change in the value of the hedged item. Hedging is effective if the hedging performance is at least 80% and at most 125%. The effectiveness of hedging is verified when a contract is recorded as a fair value hedge accounting item and subsequently at least semi-annually. Changes in the fair value of derivative contracts covered by hedge accounting and the balance sheet items hedged with them are recognized in the income statement under the item Net income from hedge accounting.

Changes in the fair value of derivative financial instruments are covered by hedge accounting and balance sheet items hedged with them are recognized in the income statement under the item Net income/loss from hedge accounting.

The company’s financial assets and liabilities are classified and measured as follows on the basis of the IAS 39 standard Financial instruments: Recognition and Measurement:


The items are measured at effectively amortized cost. However, loans granted under hedge accounting are measured at fair value for the hedged risk.

Available-for-sale financial assets

Investment of the company’s advance funding in debt securities comes under this item. Debt securities are measured at fair value and a change in fair value is recognized in the fair value

reserve under equity in the balance sheet.

Held-to-maturity investments

Investments in debt securities to be held to maturity are classified under this item. These financial assets are handled in the bookkeeping at amortized cost.

Financial assets and liabilities measured at fair value through profit/loss

Derivative financial instruments are measured at fair value through profit and loss. Derivative financial instruments are recognized in the balance sheet. Positive changes in the fair value recognized in the balance sheet for derivative financial instruments are recognized in balance sheet assets and negative changes in the fair value in balance sheet liabilities, both under ‘Derivative contracts’.

The fair value option applies to debt securities hedged with interest rate derivatives.


The items are measured at effectively amortized cost. Funding covered by hedge accounting is measured at fair value for hedged risk.

REPORT ON THE bALANCE SHEET ANd PROFIT ANd LOSS ITEMS AdJUSTEd IN THE TRANSITION FROM FAS TO IFRS

1. Loans and advances to the public and public sector entities

Floating-rate loans granted are recognized at amortized cost in the accounts. Other loans granted are hedge items in fair value hedge accounting and are hedged for risk at fair value through profit/loss.

The impact of hedged loans granted on the balance sheet was

January 1, 2006 EUR 74.3 millionJune 30, 2006 EUR 24.9 millionDecember 31, 2006 EUR –4.1 million

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51

2. Debt securities

Investments in debt securities have been classified under available-for-sale debt securities and held-to-maturity debt securities. Fair value changes on available-for-sale investments are recognized in the fair value reserve under equity. Impact of debt securities on the balance sheet

January 1, 2006 EUR 2.9 millionJune 30, 2006 EUR 1.3 millionDecember 31, 2006 EUR 0.7 million


In the transition to the IFRS all derivative contracts are measured at fair value and changes in the value are recognized through profit.

Impact of fair value measurement on assets in the balance sheet


Impact of fair value measurement on liabilities in the balance sheet



The increase in deferred tax assets is due to the negative changes in value caused by the fair value measurement.

Impact of deferred tax assets on the balance sheet


The increase in deferred tax liabilities is due to the dissolution of the credit loss provision in the transfer to IFRS and the positive changes in value caused by fair value measurement.

51

Impact of deferred tax liabilities on the balance sheet


The change in deferred tax liabilities caused by the dissolution of the credit loss provision and the fair value measurement of balance sheet items has a negative effect of EUR 1.5 million on the 2006 profit.

5. Liabilities to credit institutions

The adjustment includes the fair value measurement of hedged liabilities.

Impact of measurement on the balance sheet


6. Liabilities to the public and public sector entities




7. Debt instruments issued



January 1, 2006 EUR - 60.6 millionJune 30, 2006 EUR -254.8 millionDecember 31, 2006 EUR -226.3 million


The adjustment includes the fair value measurement of the hedged debenture loan issued in May 2006.

The impact of the measurement on the balance sheet as at December 31, 2006 was EUR 0.3 million.

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9. Voluntary provisions

The voluntary unallocated credit loss provision has been dissolved and transferred to retained profit in the opening balance sheet.The impact of the measurement on the balance sheet as at December 31, 2006 was EUR 0.3 million.

January 1, 2006 EUR -34.3 millionJune 30, 2006 EUR -37.4 millionDecember 31, 2006 EUR -39.1 million

The effect on the profit of EUR 4.8 million from the dissolution is seen as an adjustment to appropriations in the 2006 profit.

10. Share capital

Under FAS, arrangement fees relating to the share issue were recorded under ‘Other operating expenses’ in the income statement (profit and loss account) in 2006. In the IFRS financial statements these expenses were deducted directly from equity with an impact of EUR –0.4 million at December 31, 2006.

11. Fair value reserve

The recognition of the amortized acquisition cost of available-for-sale debt securities has been changed from the linear to effective in the IFRS financial statements. The fair value reserve has been adjusted by the change caused by the periodization method.

Impact of periodization differences on the balance sheet


12. Net income from hedging

The net income from hedging includes the net profit from the fair value measurement of financial assets and liabilities and derivative financial instruments hedging them under the hedge accounting. The profit for 2006 was EUR 0.6 million.

13. Retained profit and profit for the financial year

The impact of the transition to IFRS practice on the retained profit was EUR 26.4 million, of which the dissolution of the credit loss dissolution accounted for EUR 25.4 million. The impact on the 2006 profit was EUR 4.3 million, of which the dissolution of the credit loss dissolution accounted for EUR 4.8 million, deferred taxes EUR –1.5 million and other items EUR 1.0 million.

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ASSETS Note december 31, 2007 december 31, 2006

Liquid assets

Cash 1,996.75 599.45

Liquid assets 11,523,123.56 5,235,496.06

Debt securities eligible for refinancing with central banks

(3) 1,226,406,842.15 1,087,031,163.26

Loans and advances to credit institutions (1)

Repayable on demand 4,149,557.1731,830,987.17

304,041.0935,563,526.83 Other 35,980,544.34 35,867,567.92

Loans and advances to the public and public sector entities

(2) 5,884,973,885.51 5,104,564,788.08

Debt securities (3)

Public sector entities 239,767,056.71450,555,482.82

269,229,015.81315,794,309.31 Other 690,322,539,53 585,023,325.12

Shares and participations (4) 5,247,118.80 5,126,058.26

Shares and participations in group entities (4) 100,000.00 0.00


Intangible assets (7,9) 643,427.31 741,944.28

Tangible assets (8,9)

Other tangible assets 1,360,051.78 1,321,122.16

Share issue receivables 0.00 25,364,307.60

Other assets (10) 1,306,462.56 617,774.95

Accrued income and prepayments (11) 101,662,594.74 95,830,973.41

Deferred tax assets (12) 5,797,093.07 0.00

TOTAL ASSETS (18) 8,112,128,043.07 7,032,559,765.88

bALANCE SHEET (MUNICIPALITY FINANCE PLC PARENT COMPANY)

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55

LIAbILITIESLiabilities to credit institutions

Credit institutions

Other 395,593,934.93 395,062,099.80

Liabilities to the public and public sector entities

Other liabilities 655,554,880.24 483,778,939.23

Debt securities issued to the public (13)

Bonds 5,890,788,458.34 5,109,764,756.53

Other 457,005,785.63 6,347,794,243.97 461,972,305.93 5,571,737,062.46


Other liabilities (14) 492,802.17 692,324.38

Accrued expenses and deferred income (15) 111 430 795.40 111 019 553.15

Subordinated liabilities (16) 46,177,315.51 58,845,503.44

Deferred tax liabilities (12) 397,444.29 0.00

APPROPRIATIONSVoluntary provisions 45,840,000.00 39,070,000.00

EqUITY (20-22)

Share capital

Share capital 43,008,044.20 16,522,000.00

Share issue 0.00 43,008,044.20 26,486,044.20 43,008,044.20

Other restricted reserves

Reserve fund 276,711.01 276,711.01

Fair value reserve -15,259,104.73 -14,982,393.72 -2,602,844.05 -2,326,133.04

Retained earnings 4,126.40 929,389.03

Profit for the period 2,655,620.40 2,659,746.80 917,952.59 1,847,341.62

TOTAL LIAbILITIES (18) 8,112,128,043.07 7,032,559,765.88

OFF bALANCE SHEET COMMITMENTS (34)

Irrevocable commitments given in favour of a customer

529,824,490.00 369,096,038.00

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INCOME STATEMENT (MUNICIPALITY FINANCE PLC PARENT COMPANY)

Note 1.1. - december 31, 2007

1.1. - december 31, 2006

Interest income 308,754,630.30 198,027,837.18

Interest expense -287,558,596.11 -181,908,554.44

NET INTEREST INCOME (23) 21,196,034.19 16,119,282.74

Commission expense (24) -2,441,387.49 -2,461,677.03

Net income from securities and foreign exchange (25)

transactions

Net income from securities 1,528,631.88 0.00

Net income from foreign exchange transactions -25,622.06 1,503,009.82 -4,710.43 -4,710.43

Net income from available-for-sale financial assets (26) -1,535,181.83 182,992.62

Other operating income (27) 267,113.11 290,786.26

Administrative expenses

Personnel costs

Salaries and fees -3,164,705.16 -2,503,349.05

Personnel-related costs

Pension costs -615,730.75 -517,681.70

Other personnel-related costs -252,033.97 -207,601.99

Other administrative expenses -2,096,990.28 -6,129,460.16 -1,895,812.42 -5,124,445.16

Depreciation and impairment on tangible and intan-gible assets

(29) -384,398.02 -513,041.94

Other operating expenses (28) -2,087,107.28 -2,418,020.58

OPERATING PROFIT 10,388,622.34 6,071,166.48

Appropriations -6,770,000.00 -4,780,000.00

Income taxes -963,001.94 -373,213.89

PROFIT FOR THE PERIOd 2,655,620.40 917,952.59

5757

STATEMENT OF CASH FLOwS (MUNICIPALITY FINANCE PLC PARENT COMPANY)

1.1.-december 31, 2007 1.1.-december 31, 2006

Cash flow from operating activities 308,131,328.12 356,444,451.04Profit for the financial period 2,655,620.40 917,952.59

Change in loans and advances to customers -750,947,138.33 -529,338,529.45

Change in long term funding 953,331,477.95 594,357,458.03

Change in short term funding -4,966,520.30 78,618,183.61

Change in exchange rates, funding 87,368,481.00 233,279,857.77

Adjustments 20,689,407.40 -21,390,471.51

Cash flow from investing activities -205,641,962.44 -234,979,118.06Acquisition of tangible items -276,579.00 -501,146.00

Acquisition of intangible items -114,845.00 -360,596.00

Change in debt securities -205,217,151.77 -229,121,562.15

Change in shares and participations -100,000.00 -5,101,839.20

Proceeds from sale of tangible items 66,613.33 106,025.29

Cash flow from financing activities -14,511,403.15 27,667,251.55Change in capital loans -12,668,187.93 1,181,207.35

Dividends paid -1,843,215.22 0.00

Change in share capital 0.00 26,486,044.20

Net increase in cash funds 87,977,962.53 149,132,584.53

Cash funds at January 1 422,157,975.73 273,025,391.20

Cash funds at december 31 510,135,938.26 422,157,975.73

Cash funds include following balance sheet items:Liquid assets, loans and advances to credit institutions, debt securities eligible for refinancing with centralbanks maturing within three months and other debt securities maturing within three months.

Adjustments include the change in voluntary provisions, depreciation on tangible and intangible assets and the change in acrrued items.

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS

Principles for drawing up the accounts

Municipality Finance Plc, which is the parent company of the Municipality Finance Group, draws up its financial statements in accordance with the Act on Credit Institutions, the Ministry of Finance Decree on Credit Institutions and Financial Supervision Authority standard 3.1 Financial statements and annual report. The company reports regularly on its operations to the Financial Supervision Authority, the Bank of Finland, the European Central Bank, the Municipal Guarantee Board and Statistics Finland.

Under section 36(4) of the Act on Credit Institutions (1607/1993), derivative contracts defined as hedge instruments may be measured at acquisition cost in accordance with the conditions concerning hedge accounting procedure when the financial instrument being hedged is measured at cost. The transitional provision on hedge accounting in section 184 of the Act on Credit Institutions has been applied in the parent company’s financial statements. According to this, financial instruments held in accordance with the conditions concerning hedge accounting may be recognized in the financial statements of December 31, 2007 at their hedge accounting value under the provisions and regulations issued in and under Act 1607/1993 that was in force when the act entered into force. On this basis, the derivative contracts defined as the parent company’s hedging instrument and the financial instruments that are being hedged have been valued at acquisition cost.

The drawing-up principles are described in more detail in the notes to the consolidated financial statements.

Notes to the balance sheet

The Company has not combined balance sheet items on the basis of chapter 2, section 14(4) of the Ministry of Finance Decree.

1. Loans and advances to credit institutions


Domestic credit institutions 35,672 3,841 31,831

Foreign credit institutions 309 309 -

Total loans and advances to credit institutions 35,981 4,150 31,831


Domestic credit institutions 35,868 304 35,564

Total loans and advances to credit institutions 35,868 304 35,564

2. Balance sheet item ‘Loans and advances to the public and public sector entities’ broken down in accordance with the official sector classification of Statistics Finland.


Enterprises and housing corporations 2,650,869 2,275,046

Public sector entities 3,106,721 2,720,162

Non-profit organizations 127,384 109,357

Total 5,884,974 5,104,565

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3. Debt securities

December 31, 2007 Publiclyquoted

Other Total







Debt securities issued by other than public sector entities

- 1,646,485 1,646,485


Bank bonds - 4,996 4,996




Bank bonds - 965,201 965,201




Total non-interest-bearing - 21,677 21,677

December 31, 2006 Publiclyquoted Other Total


Held to maturity 20,277 5,298 25,574






Debt securities issued by other than public sector entities

- 1,381,047 1,381,047


Bank bonds - 13,994 13,994





Bank bonds - 1,113,703 1,113,703





59

4. Shares and participations

December 31, 2007 Publicly quoted Otherin credit

institutions


Group companies - 100 -

Total - 5,347 -

December 31, 2006 Publicly quoted Otherin credit

institutions



derivative contracts recognized in the balance sheet

December 31, 2007Nominal value of

underlying instrumentFair value

Remaining maturity

Contracts made for other thanhedging purposes Under 1 year 1–5 years Over 5 years Total Positive Negative

Interest rate derivatives

Interest rate swaps 165,000 311,600 195,500 672,100 18,883 17,453

Currency derivatives

Interest rate and currency swaps - - 116,946 116,946 1,044 1,131

Total 165,000 311,600 312,446 789,046 19,927 18,584

Foreign exchange measurement of off-balance-sheet

Contracts recognized in the balance sheet - 126 875 459 577

Total 165,000 311,600 312,446 789,046 146,802 478,161

Off-balance-sheet contracts

December 31, 2007Nominal value of

underlying instrumentFair value

Remaining maturity

Contracts made for other thanhedging purposes Under 1 year 1–5 years Over 5 years Total Positive Negative

Equity derivatives 78,768 247,536 296,149 622,453 201,246 201,246

Other derivatives 1,838 4,100 195,000 200,938 11,009 11,009



Interest rate swaps 2,037,336 2,964,703 2,135,320 7,137,359 76,725 60,649


Interest rate and currency swaps 1,340,479 1,349,628 1,212,187 3,902,294 547,872 163,892

Total 3,458,421 4,565,967 3,838,656 11,863,044 836,852 436,796

All total 3,623,421 4,877,567 4,151,102 12,652,090 983,654 914,957

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Off-balance-sheet contractsDecember 31, 2006 Nominal value of underlying instrument Fair value

Remaining maturity

Contracts made for other than

hedging purposes Under 1 year 1–5 years Over 5 years Total Positive Negative


Interest rate swaps 280,000 245,800 207,500 733,300 3,859 3,163


Interest rate and currency swaps - - 137,060 137,060 861 996

Equity derivatives - 143,978 87,113 231,091 27,523 7,456

Other derivatives - 6,550 20,000 26,550 - 6,372

Total 280,000 245,800 344,560 870,360 32,243 17,987



Interest rate swaps 1,243,783 3,428,665 1,890,139 6,562,587 91,749 39,466


Interest rate and currency swaps 1,425,467 836,281 1,149,995 3,411,743 80,867 346,669

Foreign exchange measurements of off-balance-sheet contracts recognized in the balance sheet

- - - - 85,835 332,633

Total 2,669,250 4,415,474 3,147,247 10,231,971 258,451 718,768

All total 2,949,250 4,661,274 3,491,807 11,102,331 290,694 736,755

Breakdown of derivative contracts by counterparty credit rating


Nominal value

Credit countervalue

Nominal value

Credit countervalue

AAA 2,643,539 -209,366 2,213,379 19,014

AA 9,233,688 -195,032 7,240,752 103,403

A 684,351 -25,604 1,551,537 25,992

Finnish municipalities 90,512 6,770 96,663 4,921

Total 12,652,090 -423,232 11,102,331 153,330

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6. Loan and other financial receivables from related parties of the credit institution

Municipality Finance has no loan or other financial receivables or other liabilities in accordance with section 140(b) of the Act on Credit Institutions from related parties.

7. Intangible assets December 31, 2007 December 31, 2006

IT expenses 467 550

Other intangible assets 176 192

Total 643 742

8. Tangible assets December 31, 2007 December 31, 2006

Real estate

Buildings 600 492

Land 135 135

Real estate corporation shares 299 299

Other tangible assets 326 395

Total 1,360 1,321

9. Changes in intangible and tangible assets during the financial period

December 31, 2007Intangible assets Tangible assets

Other real estate and real estate corporation shares

Other tangibleassets

Total

Acquisition cost Jan.1 1,474 1,004 1,182 2,186


– Decrease for financial period - - 140 140


Accumulated depreciation Jan. 1 732 78 787 865

– Accumulated depreciation on decrease - - 73 73



Book value Dec. 31 643 1,034 326 1,360


Real estate and real estate corporation shares

Other tangibleassets

Total

Acquisition cost Jan.1 1,762 740 1,168 1,908


– Decrease for financial period 649 - 223 223


Accumulated depreciation Jan.1 1,064 60 726 786

– Accumulated depreciation on decrease 649 - 117 117

+ Depreciation for financial period 317 18 178 196


Book value Dec. 31 742 926 395 1,321

10. Other assets December 31, 2007 December 31, 2006

Other 1,306 618

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11. Accrued income and prepayments December 31, 2007 December 31, 2006

Interest 101,341 95,657

Other 322 174

Total 101,663 95,831


Recognized in income statement

Recognized in equityDeferred tax assets December 31, 2006 December 31, 2007

On fair value reserve - - 5,361 5,361

On impairment - 436 - 436

Total - 436 5,361 5,797


On measurement of available-for-sale financial assets - 48 - 48

On measurement of derivative contracts at fair value - 349 - 349

Total - 397 - 397

Voluntary provisions include EUR 11,918 in unrecognized deferred tax liabilities.

13. Debt instruments issued to the public


Book value Nominal value Book value Nominal value

Bonds 5,890,788 7,089,892 5,109,765 6,241,420

Other 457,006 462,600 461,972 464,450

Total 6,347,794 7,552,492 5,571,737 6,705,870

14. Other liabilities December 31, 2007 December 31, 2006

Payment transfer 139 57

Other 354 635

Total 493 692

15. Accrued expences December 31, 2007 December 31, 2006

Interest 109,368 109,796

Other 2,063 1,224

Total 111,431 111,020

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repayment

Debenture loans


Capital loans



Total 46,177 46 177


repayment

Debenture loans


Capital loans




Part to be converted EUR 169 169 (no interest)

Total 58,846 58,846

Debenture loans

1) The maturity date for the loan is May 9, 2021. The company has the right to pay the loan capital including the accumulated interest prematurely as of the interest payment date May 9, 2016, earlier only with the written consent of the Finnish Financial Supervision Authority. A debenture loan and the interest accumulated on it may be paid in the event of the company being in dissolution procedures or bankruptcy only in subordination to all other debts. The loan has at least the same priority status as any debenture loans with a maturity date and equivalent commitments potentially issued or subscribed by the company in the future.

Capital loans

2) The loans do not have maturity dates. The company has agreed to pay interest only if the sum to be paid is distributable according to the balance sheet approved for the company’s previous financial year. The loans involve no cumulative right to interest. The loans may be repaid on condition that the restricted equity and other non-distributable assets in the approved balance sheet for the company’s previous financial year provide full coverage and that the Financial Supervision Authority grants permission to repay the loans. Interest accumulated by the end of the financial year is recognized under interest expenses in the financial statements.

In dissolution procedures and bankruptcy, capital loan principals and their accumulated interest are subordinated to all other debts. The company’s capital loans have the same priority status as any capital loans and equivalent commitments potentially issued or subscribed in the future. The loans have priority over the company’s shares.

3) The capital loans cannot be recalled, but the company may repay them with permission from the Finnish Financial Supervision Authority on condition that the company’s own funds do not fall below the minimum level. Interest may be paid insofar as the credit company’s profit distribution allows and distributable funds are adequate, and the Board of Directors of the credit company so decides. Entitlement to pay interest is not carried over to future financial periods if no interest is paid on earlier periods. By permission from the Finnish Financial Supervision Authority (Dnro 1/310/2007), part of the capital investments were converted into shares. The Board of Directors has decided that interest according to the terms and conditions will be paid on capital investments (EUR 1,177,000) for 2007.

17. Maturity breakdown of financial assets and liabilities

December 31, 2007 0-3 months 3-12 months 1-5 years 5-10 years over 10 years Total

Debt securities eligible for refinancing with central banks 73,245 104,826 872,924 83,323 92,089 1,226,407

Loans and advances to credit institutions

35,981 - - - - 35,981

Loans and advances to the public and public sector entities 48,675 299,154 1,999,552 1,815,058 1,722,535 5,884,974

Debt securities 388,607 57,539 175,451 23,706 45,020 690,323

Total 546,508 461,519 3,047,927 1,922,087 1,859,644 7,837,685

6565

Liabilities to credit institutions 41,081 29,982 228,488 59,061 36,982 395,594

Liabilities to the public 6,000 86,364 42,126 221,612 299,453 655,555

Debt instruments issued 774,239 1,776,633 2,388,318 999,402 409,202 6,347,794

Subordinated liabilities - - 10,000 35,000 1,177 46,177

Total 821,320 1,892,979 2,668,932 1,315,075 746,814 7,445,120

December 31, 2006 0-3 months 3-12 months 1-5 years 5-10 years over 10 years Total

Debt securities eligible for refinancing with central banks 104,275 153,469 764,297 56,709 8,281 1,087,031

Loans and advances to credit institutions

35,868 - - - - 35,868

Loans and advances to the public and public sector entities 67,472 409,138 1,718,655 1,589,267 1,320,033 5,104,565

Debt securities 276,730 97,794 192,806 17,693 - 585,023

Total 484,344 660,401 2,675,759 1,663,669 1,328,314 6,812,487

Liabilities to credit institutions 68,078 41,116 201,780 84,088 - 395,062

Liabilities to the public - 19,117 124,961 45,000 294,701 483,779

Debt instruments issued to the public

741,603 1,007,548 2,378,262 1,031,396 412,928 5,571,737

Subordinated liabilities 169 12,500 10,000 35,000 1,177 58,846

Total 809,850 1,080,281 2,715,003 1,195,484 708,806 6,509,424

18. Breakdown of balance sheet items in terms of denomination

December 31, 2007 Domestic currency Foreign currency Total

Debt securities eligible for refinancing with central banks 1,226,407 - 1,226,407

Loans and advances to credit institutions 35,965 16 35,981

Loans and advances to the public and public sector entities 5,884,974 - 5,884,974

Debt securities 690,323 - 690,323

Derivative contracts 146,802 - 146,802

Other assets, incl. ‘Liquid assets’ 127,641 - 127,641

Total 8,112,112 16 8,112,128


Liabilities to the public and public sector entities 503,976 151,579 655,555

Debt instruments issued 2,608,879 3,738,915 6,347,794

Derivative contracts 478,161 - 478,161

Subordinated liabilities 46,177 - 46,177

Other liabilities 129,543 59,304 188,847

Total 4,084,856 4,027,272 8,112,128

December 31, 2006 Domestic currency Foreign currency Total

Debt securities eligible for refinancing with central banks 1,087,031 - 1,087,031

Credit institutions 35,855 13 35,868

Public and public sector entities 5,104,565 - 5,104,565

Debt securities 585,023 - 585,023

Derivative financial instruments 85,835 - 85,835

Other assets incl. ‘Cash and cash equivalents’ 134,238 - 134,238

Total 7,032,547 13 7,032,560


Liabilities to the public and public sector entities 337,217 146,562 483,779

Debt instruments issued 2,509,488 3,062,249 5,571,737

Derivative 329,825 - 329,825

Subordinated liabilities 58,846 - 58,846

Other liabilities 193,311 - 193,311

Total 3,748,678 3,283,882 7,032,560

19. Fair and book values of financial assets and liabilities


Book value Fair value Book value Fair value

Financial assets

Liquid assets 11,525 11,525 5,236 5,236

Debt securities eligible for central bank financing 1,226,407 1,226,407 1,087,031 1,088,132

Credit institutions 35,981 35,981 35,868 35,868

The public and public sector entities 5,884,974 5,848,664 5,104,565 5,100,467

Debt securities 690,323 690,323 585,023 584,581

Shares and participations 5,247 5,247 5,126 5,126

Shares and participations in Group companies 100 100 - -

Derivative contracts 146,802 983,654 85,835 260,694

Total 8,001,359 8,801,901 6,908,684 7,080,104



Liabilities to the public and public-sector entities 655,555 595,961 483,779 501,418

Debt instruments issued 6,347,794 6,565,148 5,571,737 5,345,415

Derivative contracts 478,161 914,957 329,825 736,755

Subordinated liabilities 46,177 45,245 58,846 59,149

Total 7,923,281 8,510,615 6,839,249 7,038,633

20. Equity items

December 31, 2007 Share capital Share issue Reserve fund Fair value reserve

Book value at beginning of financial period Jan.1, 2007

16,522 26,486 277 -2,603

+ increase 26,486 - - -

- decrease - 26,486 - 12,656

-------------------------------------------------------------

Book value December 31, 2007 43,008 - 277 -15,259

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67

December 31, 2006 Share capital Share issue Reserve fundFair value

reserve

Book value at beginning of financial period Jan.1, 2006

16,522 - 277 -1,080

+ increase - 26,486 - -

- decrease - - - 1,523

-------------------------------------------------------------

Book value December 31, 2006 16,522 26,486 277 -2,603

21. Share capital

The shares of Municipality Finance Plc have not been divided into different types. The nominal value of the shares is one euro. Each share carries one vote. Acquisition of shares is restricted through the consent and redemption clauses in the Articles of Association. At the end of 2007 the company’s share capital, paid-up and registered in the Trade Register, totalled EUR 43,008,000.

22. Largest shareholders

The ten largest shareholders/subscribers in terms of voting rights and the number of shares held/subscribed by them, their proportions of all Municipality Finance shares and of all votes attached to them, and the total number of shareholders.

December 31, 2007

number percentage

1. Local Government Pensions Institution 10,726 40.73

2. City of Helsinki 3,175 12.06

3. City of Espoo 1,171 4.45

4. City of Tampere 722 2.74

5. VAV Asunnot Oy (Vantaa) 658 2.50

6. City of Oulu 624 2.37

7. City of Turku 616 2.34

8. City of Kuopio 394 1.50

9. City of Joensuu 380 1.44

10.JyväskylänVuokra-asunnotOy 351 1.33

The total number of shareholders is 301.

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Notes to the income statement

The Company has not combined income statement items on the basis of chapter 2, section 14(4) of the Ministry of Finance Decree.

23. Breakdown of interest income 2007 2006

Credit institutions and central banks 1,622 1,367

Public and public sector entities 226,162 172,075

Debt securities 70,297 44,521

Derivative 6,842 -23,634

Other interest income 3,832 3,699

Total 308,755 198,028

Breakdown of interest expense 2007 2006

Liabilities to the public 14,422 13,338

Liabilities to credit institutions and central banks 16,756 14,509

Debt instruments issued to the public 239,534 218,546

Derivative 13,863 -67,025

Subordinated liabilities

Other interest expenses 2,685 2,488

Total 299 53

Total 287,559 181,909

24. Commission expence 2007 2006

Commission fees paid 87 69

Other 2,354 2,393

Total 2,441 2,462

25. Net income from securities and foreign exchange transactions

Sales profit and Changes in fair Total

2007 loss (net) value

Debt securities - 186 186

Items recognized on the basis of the fair value option - 1,343 1,343

Total net income from securities transactions - 1,529 1,529

Net income from foreign exchange transactions - -26 -26

Total - 1,503 1,503

Sales profit and Changes in fair Total

2006 loss (net) value

Net income from foreign exchange transactions - -5 -5

Total - -5 -5

26. Net income from available-for-sale financial assets 2007 2006

From disposal of financial assets 141 183

From impairment -1,676 -

Total -1,535 183

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27. Other operating income 2007 2006

Profit on the sale of fixed assets 12 2

Income from financial advisory services 238 179

Other income from actual credit institution operations 17 110

Total 267 291

28. Other operating expenses 2007 2006

Rental expenses 889 793

Other expenses from actual credit institution operations 1,198 1,625

Total 2,087 2,418

29. ‘Depreciation and impairment on tangible and intangible assets’ consists of depreciation according to plan.

30. Municipality Finance Plc’s sector of operations consists of credit institution operations and the market area for lending is Finland.

Notes on collateral, contingent liabilities and derivative financial instruments

31. Collateral given

For own liabilities December 31, 2007 December 31, 2006

Pledges

Balance sheet item

Liabilities to credit institutions 375,294 363,262

Liabilities to the public and public sector entities 655,555 483,779

Debt instruments issued to the public 5,890,788 5,109,765

Total given for own liabilities 6,921,637 5,956,806

The collateral given is presented in accordance with the figures on the balance sheet.


Liabilities and collateral

Bonds pledged to the Local Government Pensions Institution

- 35,000

Bonds pledged to the Municipal Guarantee Board 5,880,898 5,063,679

Debt securities pledged to the Municipal Guarantee Board

1,699,322 1,412,073

Total 7,580,220 6,510,752

32. The company’s pension cover is arranged via an outside employment pension insurance company.

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33. Leasing and other rental liabilities December 31, 2007 December 31, 2006

Maturing within one year 527 508

Maturing in one to five years 1,735 1,725

Maturing in more than five years 276 672

Total 2,538 2,905

34. Off-balance-sheet commitments December 31, 2007 December 31, 2007

Binding credit commitments 529 824 369 096

Notes on auditing fees

35. Auditing and other fees paid to auditing corporations

2007 2006

Auditing 32 32

Tax advice 11 1

Other services 76 48

Total 119 81

Notes on personnel and management

36. Municipality Finance Plc personnel

2007 2006

Average End of year Average End of year

Permanent full-time 37 32 34 34

Permanent part-time 1 1 1 1

Total 38 33 35 35

On November 1, 2007 four employees transferred to the service of Financial Advisory Services Inspira Ltd.

Salaries and fees for the management in 2007 (EUR)

CEO 339,208

Executive Vice-President 238,141

The members of the Board of Directors are paid an annual remuneration and remuneration for each meeting. The annual remuneration of the Chairman of the Board is EUR 13,500, that of the Vice Chairman EUR 10,000 and the fee paid to the other members of the Board EUR 8,000. The annual fee of the chairmen of the audit and rewarding committees is EUR 10,000. The fee per meeting is EUR 250.

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FINANCIAL RESULT FOR THE YEAR ANd dISTRIbUTION OF PROFIT

The company’s distributable fund total EUR 2,659,746.80 of which the profit for the financial period is EUR 2,655,620.40.

The board of Municipality Finance Plc will propose to the Annual General Meeting that the distributable funds be used as follows:

- distributed as dividend of EUR 0,10/share i.e. a total of EUR 2,633,164.60

- retained shareholders’ equity EUR 26,582.20

The amount of the shares entitled to dividend is 26,331,646.

No material changes have taken place in the company’s financial position subsequent to the balance sheet date. The company’s liquid is

good and, in the Board’s opinion, the proposed dividend distribution will not jeopardize the company’s solvency.

Helsinki, February 28, 2008

MUNICIPALITY FINANCE PLC

Asko Koskinen Jari Sokka

Chairman of the Board Vice Chairman of the Board

Juhani Alanen Tapio Korhonen

Board member Board member

EvaLiljeblom SimoLämsä


Kari Nars Mikko Pukkinen


SiskoSeppä

Board member

Pekka Averio

CEO and Managing Director

AUDITOR’S NOTE

The financial statements and the report on operations have been drawn up in compliance with good accounting practice and a report on the

audit carried out has been submitted today.

Helsinki, February 28, 2008

KPMG OY AB

Raija-Leena Hankonen

APA

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the bOard Of dIreCtOrs

TOP ROW FROM LEFT: JariSokka(ViceChairmanoftheBoard),SimoLämsä,MikkoPukkinen,KariNars,TapioKorhonen,JuhaniAlanen

BOTTOM ROW FROM LEFT: SiskoSeppä,AskoKoskinen(ChairmanoftheBoard),EvaLiljeblom

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audItOrs´ repOrtTo the General Meeting of Municipality Finance Plc

We have audited the accounting records, the report of the Board of Directors, the financial statements and the administration of Municipality Finance Plc for the period 1.1.-31.12.2007. The Board of Directors and the Managing Director have prepared the consolidated financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, containing the consolidated balance sheet, income statement, cash flow statement, statement on the changes in equity and notes to the financial statements, as well as the report of the Board of Directors and the parent company’s financial statements, prepared in accordance with prevailing regulations in Finland, containing the parent company’s balance sheet, income statement, cash flow statement and notes to the financial statements. Based on our audit, we express an opinion on the consolidated financial statements, as well as on the report of the Board of Directors, the parent company’s financial statements and the administration.

We conducted our audit in accordance with Finnish Standards on Auditing. Those standards require that we perform the audit to obtain reasonable assurance about whether the report of the Board of Directors and the financial statements are free of material misstatement. An audit includes examining on a test basis evidence supporting the amounts and disclosures in the report and in the financial statements, assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. The purpose of our audit of the administration is to examine whether the members of the Board of Directors, the Managing Director and the deputy Managing Director of the parent company have complied with the rules of the Limited Liability Companies Act and the Finnish Credit Institutions Act.

Consolidated financial statements

In our opinion the consolidated financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view, as defined in those standards and in the Finnish Accounting Act, of the consolidated results of operations as well as of the financial position.

Parent company’s financial statements, report of the Board of Directors and administration

In our opinion the parent company’s financial statements have been prepared in accordance with the Finnish Credit Institutions Act, the Finnish Accounting Act and other applicable Finnish rules and regulations. The parent company’s financial statements give a true and fair view of the parent company’s result of operations and of the financial position.

In our opinion the report of the Board of Directors has been prepared in accordance with the Finnish Accounting Act and other applicable Finnish rules and regulations. The report of the Board of Directors is consistent with the consolidated financial statements and the parent company’s financial statements and gives a true and fair view, as defined in the Finnish Accounting Act, of the result of operations and of the financial position.

The consolidated financial statements and the parent company’s financial statements can be adopted and the members of the Board of Directors, the Managing Director and the deputy Managing Director of the parent company can be discharged from liability for the period audited by us. The proposal by the Board of Directors regarding the disposal of distributable funds is in compliance with the Limited Liability Companies Act.

Helsinki, 28 February 2008KPMG Oy Ab

Raija-Leena HankonenAuthorized Public Accountant

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