Union Bank of Israel Ltd. Financial Statements December 31, 2014

Union Bank of Israel Ltd. Financial Statements December 31, 2014 -1- The Board of Directors Mr. Zeev Abeles, Chairman of the Board of Directors Mr. Yeshayahu Landau, Vice Chairman of the Board of Directors Mr. Haim Almog Mr. Alberto Garfunkel Dr. Yaacov Lifshitz Mr. Yigal Landau Mr. Giora Morag Mr. Izaac Manor Mrs. Michal Marom Brikman, CPA Dr. Zalman Segal -2- Contents Page Board of Directors’ Report to the Shareholders’ General Meeting 4 Management Review of Bank’s Financial Position and Results of its Operations 249 Declarations of the CEO and of the Chief Accountant 268 Board of Directors’ and Senior Management’s Report About the Internal Control over Financial Reporting 270 Financial Statements for the Year Ended December 31, 2014 271 This is a translation of the Annual Report for 2014 to Hebrew, and has been prepared for convenience only. In case of any discrepancy, the Hebrew version will prevail. -3- Board of Directors' report to the general meeting of the shareholders Table of Contents Page 1. Forward-looking Information 5 2. Economic Developments 6 3. Activity of the Bank and Description of its Business Development 10 4. Profit and Profitability 15 5. Developments in Balance-Sheet Items 19 6. Objectives and Business Policy 25 7. Controlling Interests in the Bank 27 8. Investments in the Bank’s Capital and Transactions in its Shares 27 9. Dividend Distribution 31 10. Material Agreements 31 11. Licenses, Permits and Approvals 32 12. Activity with Overseas Entities 35 13. Legal Proceedings and Contingent Liabilities 36 14. Fixed Assets and Facilities 36 15. Activity of Investee Companies 40 16. Human Capital 47 17. Description of Tax Situation 57 18. Description of the Bank’s Business by Activity Segments 57 19. Capital Adequacy 85 20. Risk Exposure and Management 103 21. Critical Accounting Policies and Estimates 156 22. Legislative Developments 171 23. Transactions with Controlling Shareholders 193 24. Community activity and Donations 200 25. Disclosure Regarding the Internal Auditor 201 26. The Board of Directors 205 27. Members of Management and Senior Officials 227 28. Disclosure Regarding the Process of Approval of the Financial Statements 234 29. Controls and Procedures 235 30. Compensations for Interested Parties and Senior Officers at the Bank 239 31. Remuneration of Auditors 248 -4- Board of Directors’ Report to the Shareholders' General Meeting At the meeting of the Board of Directors of the Bank held on February 26, 2015, it was decided to approve the financial statements of the Bank and its subsidiaries as at December 31, 2014. The financial statements are prepared in accordance with generally accepted accounting principles in Israel (Israeli GAAP) and with the directives issued by the Supervisor of Banks. It is clarified that in general, the description in the Board of Directors' report refers to significant events and changes that occurred in the Banks' state of affairs until the date of publication of the report. However, in some cases, the Bank included a description that also includes information that it thinks is not material information, in order to complete the picture. Forward-looking Information Part of the information presented in the report of the Board of Directors, which does not relate to historical facts, constitutes forward-looking information as defined in the Securities Law - 1968. The actual results of the Bank may be significantly different from those that were included in the forward-looking information, as a result of many factors. These factors include, but are not limited to, changes in legislation and the directives of supervisory agencies, macro-economic developments, and in particular developments in the global financial crisis and the consequent uncertainty, extraordinary economic events, such as drastic changes in interest, exchange, and inflation rates, the behavior of competitors and specific changes to be detailed below. Forward-looking information is characterized by words or expressions such as "intend to", "expectation", "should", "forecast", "in the opinion of the Bank", "the Bank intends to", "plan", and similar expressions such as: "may", "will be". These forward-looking expressions involve risks and uncertainty since they are based on management assessment of future events which may not materialize or materialize differently than expected. The information presented below relies on, among other things, future forecasts regarding matters pertaining to economic developments in Israel and abroad and on the work plans and budgets of the Bank for 2015. The Bank makes no commitment to publish an update to the forward-looking information included in these reports, including in respect of the effect on such information of circumstances and events that may occur after the publication of the reports. -5- Economic Developments Israel's Economy The gross domestic product (in fixed prices and after deduction of the influence of seasonality) increased during the second half of 2014 by 2.6% on an annual calculation, after a 2.7% increase in the first half and 3.4% increase in the second half of 2013. The growth figures of the third quarter of 2014 were affected, inter alia, by "Tzuk Eitan" operation. The Bank of Israel's Research Division estimates that the operation detracted approximately 0.3% of the annual GDP, especially due to the harm to export of tourism services and private consumption. In December the Bank of Israel's Research Division updated the macroeconomic forecast, according to which, the GDP growth in 2014 is expected to total 2.5% compared to 3.3% in 2013. According to the forecast, the growth in 2015 and 2016 is expected to total 3.2% and 3.0%, respectively. Employment and Private Consumption According to the manpower survey of the Central Bureau of Statistics, the average unemployment rate in the fourth quarter of 2014 was 5.7%, compared with 6.2% in the previous quarter. The rate of participants in the workforce, among aged 15 and up, in the fourth quarter of 2014 was 64.2% similar to the previous quarter. The Central Bureau of Statistics' data indicates that the number of job vacancies in December 2014 decreased by 3.6% compared to the previous month. There's been an increase of over 20% in the number of job vacancies, compared with December 2013. In 2014 as a whole, there has been an increase of 1.8% in the total revenues of retail chains compared with the previous year, following an increase of 0.9% in 2013. Foreign Trade, Capital Movements and Exchange Rates The trade deficit for 2014 amounted to NIS 49.1 billion, compared with NIS 51.3 billion in all of 2013, and compared with NIS 70.4 billion in all of 2012. In 2014, the New Israeli Shekel (NIS) strengthened (average rate) compared to the Euro and the JPY, and weakened compared to the Dollar, the CHF and the GBP. Compared to end-of-period exchange rates, the Shekel strengthened compared to the Euro and the JPY, by 1.0% and 1.6%, respectively. In contrast, the local currency weakened compared to the Dollar, the GBP and the CHF by 11.6%, 5.2% and 1.2% respectively. Fiscal Policy State budget execution data for 2014 indicate a total budget deficit of approximately NIS 29.9 billion, or 2.8% of GDP. The planned deficit in the original 2014 budget was approximately NIS 31.1 million, which would have been 3.0% of GDP according to the forecasts in the original budget. The deviation is accounted for by lower expenses than planned in the original budget, and by an actual GDP higher than the forecast in the budget. Tax collection increased at a nominal rate of 5.9% year-on-year in 2014. A significant part of the increase in tax -6- collection during this period resulted from the iincrease in corporation tax and in vaalue-added tax (corporation tax as of Jaanuary 1, 2014, and VAT as of September 1, 2013), as well as an increase in tax collection from the capital market and in property taxes, but also nonrecurring receipts and a steep decrease in tax rebates. Prices and Monetary Policy The general consumer price index decreased by 0.2 percentage points in 2014. The index excluding housing was down by 1.4 percentage points. The CPI for January 2015 indicated a decrease of 0.9 percentage points, continuing the downward trend of prices in recent months. The Bank of Israel interest rate continued to decrease in 2014. In September, the Bank of Israel announced a reduction of the interest raate to 0.25%, its lowest rate ever. Factors contributing to the policy of lowering the interest rate: the inflation environment, below the midpoint of the target range; the aim of encouraging growth; support for currency depreciation in order to boost exports, concurrent with the Bank of Israel's intervention in the foreign-currency market; and the interest-rate reductions by many central banks around the world, primarily the European Central Bank. Capital Market Overall in 2014, average daily turnovers on the TASE showed a mixed trend in comparison to 2013. The average daiily turnover in stocks in 2014 was approximately NIS 1.2 billion, about 44% higher than the average daily turnover in 2013. The average daily turnover in bonds in 2014 was NIS 4.2 billlion, slightly lower than the average daily turnover in 2013. The TA-25 index rose by about 10% in 2014, following a 12% increase in the preceding year. Positive factors influencing the trading trend on the TASE included the low interest rate environment in 2014 and the global -7- trend of rising share prices. In addition, monetary expansion plans of central banks around the world generated large liquidity surpluses in the financial system.

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