Supervisor of Banks: Public Reporting Directives [11] (6/09) of a Banking Corporation Page 620- 1

Annual Report of a Banking Corporation

1. Introduction The board of directors of a banking corporation will submit to the annual general meeting of shareholders the annual financial report approved by it, which will include a report and explanations regarding the events and changes that have occurred in the statement of affairs of the banking corporation and that have affected the statements, in accordance with the details mentioned in these provisions (hereinafter: “the report of the board of directors”).

2. Rules for preparing the annual report of a banking corporation (a) The annual report of a banking corporation is to be prepared in accordance with the Public Reporting Directives and the directives of the Supervisor of Banks. (b) The provisions of these directives do not detract from the duty to perform any other provisions applicable to these matters.

3. Content of the annual report (a) A banking corporation, as defined in the provisions concerning the preparation of annual financial statements of a banking corporation, will publish an annual report, which shall include: (1) The report of the board of directors (see Chapter 630); (2) The management review of the financial condition of the banking corporation and the results of its operations (hereinafter - the Management Review) (see Chapter 640); (3) Certification regarding disclosure (see Chapter 645); (4) The report of the board of directors and the management regarding internal over financial reporting (see Chapter 650) (5) Reports of the auditor (See Chapter 655); (6) Annual financial report (see Chapter 660 and thereafter). (b) The scope of the basic information to be incorporated in the abovementioned reports is set out in the provisions attached.

4. Attaching reports of associate companies (1/03) (a) For the purpose of this paragraph:

“foreign rules" - means a system of accounting principles and reporting rules which is not than that required according to the Securities Regulations (Preparation of Annual Financial Statements), 5753-1993, and is not international accounting standards;

“auditor” - includes persons qualified to practice accounting abroad;

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“gain (or )” - profit within the meaning of paragraph 74A.(a) of the provisions regarding the preparation of the annual financial statements of a banking corporation, including the items enumerated in sub-paragraphs (1) and (2), but excepting the items enumerated in sub-paragraphs (3A) to (5) of the same paragraph.

“international accounting standards” - the international accounting standards published by the International Accounting Standards Board (IASB), including the standards adopted by it;

“international auditing standards” - the international auditing standards published by the International Auditing Practices Committee (IAPC), which is subject to the International Federation of (IFAC).

“foreign auditing standards” - auditing standards that are not generally accepted auditing standards in Israel, and are not international auditing standards.

(b) The financial statements of an associate company for the reported year, as stated in sub- paragraphs (e) to (j) will be attached to the statements of the banking corporation, if any of the following exist: (1) The amount of the investment by the banking corporation in securities, loans and debit balances in respect thereof, of the associate company, constitutes, in absolute values, 10% or more of the total in the banking corporation's , in absolute values; (2) The amount included in the profit and loss statement by reason of the investment of the banking corporation in the investee company, pursuant to paragraph 74A(a)(1) of the Provisions regarding the preparation of the annual financial statements of a banking corporation, constitutes, in absolute terms, 10% or more of the profit of the banking corporation, in absolute values; (3) The associate company is significantly important to the banking corporation's business or its activity in their present format, or in their future planned format; (4) Either of the conditions specified in sub-paragraphs (1) or (2) existed during the preceding reporting year and it is anticipated that such condition (as specified in either of those sub-paragraphs) will continue to exist in the ensuing reporting year; (5) The company has become an associate company of the banking corporation after the balance sheet date, and that stated in sub-paragraph (3), was fulfilled; The conditions specified in this sub-paragraph will be examined in relation to the consolidated financial statements of the banking corporation.

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(c) The financial statements of an associate company will not be attached to those of the banking corporation, notwithstanding that stated in sub-paragraph (b), if any of the following exists: (1) The statements of the associate company are meaningless with regard to those of the banking corporation; (2) That stated in sub-paragraphs (3) to (5) of sub-paragraph (b) did not exist and, in the previous reporting year, that stated in sub-paragraphs (1) or (2) of sub- paragraph (b) did not exist either, and it is expected that the matters related to in such sub-paragraphs will not exist in the ensuing reporting year; (3) After the balance sheet date, the company ceased to be an associate company of the banking corporation. (d) The names of the associate companies whose reports were attached to those of the banking corporation will be specified in the statements of the banking corporation. If the statements of an associate company were not attached by reason of that stated in sub- paragraph (c), the name of the associate company and the sub-paragraph in sub- paragraph (c) on account of which the statements of the associate company were not attached, will be set out. (e) The statements of an associate company drawn up in accordance with the Securities Regulations (Preparation of Annual Financial Statements), 5753-1993, or prepared in accordance with international accounting standards will be attached, pursuant to the accounting principles on the basis of which the banking corporation included its investment in the associate company. In this sub-paragraph “the Securities Regulations (Preparation of Annual Financial Statements), 5753-1993” - excepting the duty to attach statements of an associate company according to this paragraph and excepting the duty to attach statements of a company which have been prepared in accordance with paragraph 47(b)(2)(b) of the Provisions regarding the preparation of annual financial statements of a banking corporation. (f) Notwithstanding that stated in sub-paragraph (e) with respect to the form of attachment, the statements of an associate company prepared pursuant to foreign accounting rules may be attached, provided all of the following exist: (1) The system of accounting rules according to which the statements were prepared is comprehensive; (2) The content of the information in the statements is similar in principle to that required according to the Securities Regulations (Preparation of Annual Financial Statements), 5753-1993 or to that required according to international accounting standards; (3) In the statements of the associate company or in those of the banking corporation, an adjustment note will be included to the accepted accounting standards in Israel or international accounting standards, pursuant to the accounting principles on the basis of which the banking corporation included its investment in the associate company. For this purpose “adjustment” - means the adjustment to profit and capital. (g) Notwithstanding that stated in sub-paragraph (e), if the currency of the associate company’s statements is other than new shekels, the exchange rate in new shekels of the currency of the statements as of the balance sheet date will be specified, and the change that occurred therein in the reporting year stated. (h) The statements of an associate company will be audited pursuant to generally accepted auditing standards in Israel, or pursuant to international auditing standards or pursuant to a set of foreign auditing standards that is comprehensive. (i) The report of an auditor on the statements of the included company will be attached thereto, specifying, inter alia, the accounting rules pursuant to which the statements were prepared and indicating the auditing standards pursuant to which the statements were audited.

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(j) If the language of the statements of the associate company is other than Hebrew or English, a translation into Hebrew of the statements will similarly be attached, including the translator's confirmation of the correctness of the translation, with his consent to such translation and confirmation being attached. Where the translated statements into Hebrew have been duly signed, the statements in the original language need not be attached. For this purpose, “statements”, includes the report of an auditor. (k) Where the Supervisor of Banks is satisfied that on the publication date of the statements, a particular banking corporation was constrained from attaching statements of a company fulfilling that stated in sub-paragraph (b)(5), he may order it to publish the statements of such company in an immediate report, within such period as he will prescribe. If the banking corporation is subjected to the duty to make an immediate report as provided by the Securities Regulations (Periodic and Immediate Reports), 5730-1970, publication will be carried out by way of an immediate report and publication in the press. If such duty to report does not apply - it will be brought to the notice of the public by way of publication in the press only. For this purpose “publication date of the statements” - means the date prescribed for publishing the statements in paragraph 4 of the provisions concerning the presentation and publication of annual financial statements by a banking corporation. (l) The provisions of this paragraph will not apply to an associate company which is a reporting corporation as defined by the Securities Law, 5728-1968 or which is a corporation to which the provisions of Chapter E3 of this law apply.

4A. Attaching valuations (a) Where a material has been used as a basis for determining the value of data in the annual report, including a determination that there is no need to change the value of that data, the banking corporation will attach the material valuation to the annual report. (b) Expression will be given, inter alia, to the following in the valuation: (1) Particulars of the organ in the banking corporation that has decided on the engagement with the valuer; for the purpose of this paragraph, “organ” bears the meaning contained in section 46 of the Companies Law, including an audit committee, financial manager and any other office-holder in the banking corporation; (2) The existence of dependence between the banking corporation and the valuer; and if such dependence exists, the banking corporation will specify the nature thereof and explain why the particular valuer has been preferred as against other, independent valuers. The provisions of this sub-paragraph will not apply to a valuation that has been made by the banking corporation itself. (c) A banking corporation may also include by way of reference in an annual report, a material valuation that has been published to the public in a separate electronic report (as that term is defined in the Securities Law) of the banking corporation, or in an electronic report of another corporation, provided that all of the following conditions have been satisfied: (1) The material valuation has been prepared according to Provisions of the Supervisor of Banks or the Securities Regulations (Periodic and Immediate Reports), 5730-1970;

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(2) Details have been included relating to the valuation in a note on the financial statements of the banking corporation; (3) An appropriate note appears on the binding of the annual report.

(c1) A banking corporation, not being a public company, may also include, by way of reference in the annual report, a material valuation that has been published to the public separately on the banking corporation’s website, providing all the conditions specified above in paragraphs (1) to (3) of sub-paragraph (c) have been satisfied, in addition to the two following conditions: (1) The banking corporation will publish on its website on a regular basis, every annual report and quarterly report to the public of the banking corporation, on the date on which the report is published to the public; (2) On the binding of the banking corporation’s printed annual report, the precise location within the banking corporation’s website in which the valuation may be found will be mentioned. (d) A valuation that is attached to the annual report will include all the matters that have been set out in the appendix, as well as any other material detailed that is important for a reasonable user of the annual report. Should all those details not have been included in the valuation, the banking corporation will complete those details in the annual report. (e) If the language of the valuation is other than Hebrew, a translation into Hebrew will be included of the valuation, and the translator’s confirmation of the correctness of the translation included, as well as his consent to the inclusion of the translation and the confirmation in the annual report. A valuation that is in English may be attached in the original language. (f) If the validity date of the valuation precedes the publication date of the annual report by more than 90 days, each of the following will be specified in the annual report: (1) The period that has elapsed from the validity date to the date of the publication of the annual report, specifying the fact that it exceeds 90 days; (2) The changes that have occurred after the validity date, which may change the conclusions of the valuation, and the banking corporation’s reasons for including it, (notwithstanding these changes) in the annual report. For the purpose of this sub-paragraph “the validity date” means the date to which the valuation relates. (g) The provisions of sub-paragraph (a) will not apply to a material valuation that has been made in connection with legal actions or customer debit balances, and to a material valuation that has been used as a basis for determining the value of data in the report of an associate company. In addition, the provisions of sub-paragraph (a) will not apply to valuations that relate to credit granted by a banking corporation. (h) The Supervisor of Banks may exempt a banking corporation from attaching a material valuation, in whole or in part, if he is satisfied, after hearing the arguments of the banking corporation, that such an exemption will not prejudice the interest of those from amongst the public who use the banking corporation’s annual report.

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(i) Where the banking corporation has, during the two years following the date on which its report of the valuation was first attached (including a professional opinion) entered into a transaction from which a significantly different valuation derives as opposed to that determined in that valuation, the banking corporation will submit to the Supervisor of Banks an immediate report which will set out the details of the difference between the value deriving from the transaction, on the one hand, and the value that was determined in the valuation, accompanied by explanations for this difference.

(j) For the purpose of this paragraph: “report” means - (1) In banking corporations that are public companies: a report to the public that is published according to Directives of the Supervisor of Banks, a prospectus and any other report pursuant to the Securities Law, except pursuant to Regulation 36 of the Securities Regulations (Periodic and Immediate Reports), 5730-1970, as well as a memorandum of a bid within the meaning of the Securities Regulations (Takeover Bids), 5760-2000, and a memorandum, within the meaning of the Securities Regulations (Particulars of a Memorandum of Offer of Securities to Employees), 5760-2000; (2) In banking corporations that are not public companies: an annual report and quarterly report that is published according to the Public Reporting Directives of the Supervisor of Banks.

“material valuation” means – An valuation that has been made by the banking corporation itself or another party (hereinafter: “valuer”) of a property, liability, engagement, capital, activity, income or that is material to the banking corporation’s business, that has been used as a basis for determining the value of data in a report, including adjustment of a previous valuation, as well as a determination that no change is needed in the value of data in the report;

“professional opinion”– within the meaning of Regulation 15 of the Securities Regulations ( of Securities of a Listed Company), 5760-2000, or within the meaning of Regulation 9 of the Securities Regulations (Transactions between a Company and its Controlling Party), 5761-2001;

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5. Publication date

(a) The annual statement in all its sections, as detailed above, is to be published in a single bound volume no later than 2 months after the balance sheet date, providing it is published within three days of the date of signing the opinion of the banking corporation’s auditor on the audited financial statements of the banking corporation. The date of signature by the banking corporation on the annual report shall not be earlier than three days after the date on which the annual report is published. (b) Notwithstanding that stated in sub-paragraph (a), a bank which heads a banking group that includes which are mortgage banks, investment finance banks or banks outside of Israel, may publish the annual report no later than three months after the balance sheet date, providing it is published within three days of the date of signing the opinion of the banking corporation’s auditor on the audited financial statements of the banking corporation. The signature date of the banking corporation on the annual report will not be earlier than three days after the date on which the annual report is published.

6. Date of Submission The annual report is to be forwarded in at least three copies, to the secretariat of the Information and Reporting Unit of the Banking Supervision Department in Jerusalem on the date of publication thereof. A computer file containing all the data set out in the tables comprised in the statement, and such further information in a format previously sent to each banking corporation will be sent together with the statement via communication between computers through Bezeq Gold [Bezeq Zahav]”.

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Appendix

Matters to be referred to in a valuation that has been attached:

Identification of the Subject Matter of the Valuation

1. Particulars and identification of the subject matter of the valuation;

Details of the engagement

2. Details of the engagement between the party commissioning the valuation and the appraiser, including the following particulars:

(a) The identity of the corporation that has commissioned the valuation and the identity of the organ within that organization that decided on the engagement with the valuer. (b) The date of the engagement between the commissioning party and the valuer. (c) The reasons motivating the corporation to commission the valuation; (d) The valuer’s name, his signature to the agreement of engagement and the date of signing. If the valuer is a body corporate, details of the party providing the valuation and his signature will also be attached; (e) Details of the valuer’s education; (f) The prior agreement of the valuer for attaching the valuation; (g) The stipulations (if any) with regard to the professional fee to which the valuer is entitled. In addition, the extent of the effect that such stipulations have on the results of the valuation; (h) Consent (if any) to indemnify the valuer for his work. In the event of such consent, the terms of the indemnity and the identity of the party providing the indemnity will be specified in the valuation.

The Value Determined

3. The appraisal of the value (for this purpose, “value” includes minimum value) will include particulars relating to the value that has been set therein, including the following: (a) The value that has been determined by the valuer; (b) The validity date of the valuation; (c) Sensitivity analyses of the value, pursuant to the very material assumptions in the valuation; (d) If the subject matter of the valuation is an item that is stated in the corporation’s financial statements, the value thereof as it appears in the financial statements concurrently with the validity date of the valuation will be specified. If the subject matter of the valuation is a body corporate, the shareholders' equity of the corporation that has been valued, will be specified in the financial statements; (e) If the subject matter of the valuation is an that is traded on a exchange, the highest, lowest, and average price of the value of the asset during the six months preceding the validity date will be specified, taking into account any distribution, split or during that period. For this purpose “stock exchange” is as defined in section 50A(a) of the Securities Law. (f) If, to the best of the corporation’s knowledge, previous transactions relating to the valuation have been effected during the two years preceding the validity date, the value of these transactions will be set out;

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(g) Where the value determined in the valuation has deviated by twenty-five percent or more from the average value on the stock exchange during the six months preceding the validity date or the value derived from previous transactions (as stated in sub-paragraph (f), that difference between that value and the valuation and the justification for this will be explained. (h) Where the value determined in the valuation deviates by forty percent or more from the value determined in other valuations that have been published to the public within the scope of a report relating to the valuation during the two years preceding the valuation, the data from the other valuations and their underlying assumptions will be reported. (i) Material changes in the valuation that have been made following requests for disclosure or clarifications made by the Securities Authority or by an employee that it has empowered, or of the Supervisor of Banks.

Valuation method

4. The valuation will contain details relating to the method by which it was made, including: (a) A description of the property which is the subject matter of the valuation; if the subject matter of the valuation is an activity, an analysis of the sector and the business environment in which the subject matter of the valuation operates and an analysis of the possibilities and the risks that it faces will be set forth; (b) The facts, assumptions, calculations and projections on which the valuer relied; (c) The key factors that may influence the projections; (d) Assumptions and projections that the body corporate has provided, and on which the valuation is based. The valuer will specify in the valuation if has made material changes in these assumptions and projections in order to make the valuation, and will also set out the probability tests that he has made in relation to such assumptions and projections; (e) The method used by the valuer in preparing the valuation and the reasons for choosing that method; if the calculation method chosen by the appraiser is different to the discounting of flows method, the appraiser will explain why such method was chosen; (f) The sources of information available to the appraiser; if, in the valuer’s opinion, it would have been appropriate to use other sources of information for the purpose of the valuation, but he was constrained from receiving or obtaining them, the valuer will disclose such fact, and mention the reason for this. (g) If the valuer has chosen to use a discount rate, the discount rate that has been selected, including detailed reasons for choosing such discount rate and the manner of its calculation, will be detailed and provided.

Previous valuations made by the appraiser

5. The valuation will contain details of previous valuations of the subject matter of the valuation that the said valuer has made, including the following details: (a) If a previous valuation has been given during the three years preceding the validity date of the valuation, the valuer will specify the validity date of previous valuations, the value determined therein and the reasons as to why they were made. (b) Where the value determined in the previous valuations deviates by thirty percent or more from the value set in the valuation, or the valuation method in the valuation was different to that used in the previous valuations, the appraiser will provide disclosure thereof and

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explain the main differences lying in the material assessments and assumptions, specifying the facts that led to those changes. (c) In the event of their being differences between the financial results underlying the previous valuations and the actual financial results, these differences will be specified and an explanation provided for them.

Reliance on experts -

6. Where the valuation has relied on material valuations of additional experts - (a) The valuations of the additional experts will be attached to the valuation; (b) All of the details required in this Appendix also in relation to the valuations of the additional experts will be reported, mutatis mutandis.

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Corporate Responsibility

1. Corporate responsibility is a business world-view that leads to business success, while assimilating socio-environmental considerations in the decision-making process of the banking corporation. The adoption of this concept is intended to create a business advantage, while creating positive effects for society and the environment, for the sustainability of the world in future generations.

Corporate Responsibility Report

2. A banking corporation will provide disclosure for those matters that are relevant to its activity in the area of corporate responsibility for the period of up to two years ending on the date of the report (the reporting period). The Corporate Responsibility Report is likely to relate to matters, such as commitment to involvement in the community, the environment, to employee welfare and the work environment, fairness to customers and business ethics. It is recommended to provide disclosure of relevant quantitative indices and relevant standards in accordance with which the banking corporation operates in this field.

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