Union Bank of Israel Ltd.
Financial Statements
December 31, 2014
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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
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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.
The volume of issues in the primary equity market increased. Approximately NIS 7.6 billion were raised in the full year of 2014, versus approximately NIS 6.1 billion in 2013.
The bond market saw a positive trend on most indices in 2014. Government bonds stood out this year, primarily fixed-rate unlinked bonds, which were up by about 8%, while corporate bonds rose by 1.5% for the year.
Overall in 2014, the business sector raised approximately NIS 57.8 billion from the public and from institutional investors through bond issuance, compared with approximately NIS 36.7 billion in 2013.
Construction and Real Estate
Demand for new homes grew by approximately 30% in October-November, to a monthly average of 3,720 housing units, compared with a monthly average of 2,940 housing units in the same period of the preceding year. This increase was accounted for by the cancellation of the Zero VAT plan and by the expected elections in March. Meanwhile, the number of new homes for sale continued to rise, to 27,700 housing units by the end of November 2014.
Average monthly mortgage execution in the fourth quarter of 2014 stood at approximately NIS 4.35 billion, compared with an average of NIS 4.28 billion in the same period of the preceding year. Total new mortgages taken rose sharply in December, to NIS 5.5 billion, versus a monthly average of NIS 4.3 billion in 2014 and NIS 4.28 billion in 2013.
The balance of housing debt of households stood at approximately NIS 301 billion at the end of November, constituting approximately 69% of households' debt.
Global Economy
Worries over another global economic recession are mounting, following an increase in uncertainty and volatility in various markets. Against this backdrop, the International Monetary Fund lowered its global growth forecasts for 2015 and 2016, mainly due to the weakness in Europe and signs of impending weakness in the developing countries, and despite the improvement in the US economy and the decrease in energy prices. The Japanese economy is in recession as well, despite the enlarged scope of its quantitative expansion plan. As a result, the Japanese currency has continued to weaken, completing a 14% decline against the dollar over the last six months, following over two years of erosion. However, the forecast for the growth of the developing countries was adjusted upward by 0.1 percentage points, and the forecast for the increase in global trade was lowered by 1.1 percentage points. The price of a barrel of oil dropped by dozens of percentage points in 2014. Reasons for the falling prices include, on the supply side, an increase in production capacity from alternative sources, such as oil shales, and the OPEC decision in November to refrain from reducing its member countries'
-8- oil production despite the steep drop in the price of oil; and on the demand side, the deteriorated economic conditions in Europe, China, and Russia, which pushed demand downward.
US – The improvement in the job market has continued, with a rapid increase in the number of employed persons and further decrease in the unemployment rate. The unemployment rate in December was 5.6%, a 1.1 percentage point decrease year-on-year. The growth rate in the US in the fourth quarter was 2.6%, indicating continued recovery of growth. The increase in growth was mainly attributed to an increase in consumer spending, investments in inventory, and exports. Further growth is expected to be based on an increase in private consumption and on a continued monetary policy of a low interest environment. However, the dollar has continued to strengthen against the major currencies, which could threaten the recovery of the American economy, due to worse terms of trade with other countries. In the short term, inflation is expected to continue to decrease, later rising and gradually stabilizing at about 2% per annum. A press release from the American central bank in January 2015 noted that the current interest rate of 0% to 0.25% reflects the appropriate policy for today's economic data in the US. The beginning of an increase in the interest rate in the US will depend on attainment of the bank's objectives with regard to the unemployment rate, as well as the target inflation of 2% per annum. The quantitative expansion plan ended in 2014, and the Bank is now refraining from making purchases on the markets.
Europe – GDP growth in the third quarter amounted to 0.2%, in annualized terms, indicating continued substantial weakness in economic activity. The European Commission lowered its growth forecast for the Eurozone in 2015 to 0.8%. The background for the growth forecast is the lower-than-expected growth in the major countries, including Germany, France, and Italy. The unemployment rate remains high, at 11.4%. The rate of inflation for the last twelve months is negative; the European Central Bank has announced a quantitative expansion plan in which it will purchase government bonds at a volume of EUR 60 billion each month. The anchor interest rate on deposits at the ECB has been negative since June. This rate is updated on a monthly basis. Following the September update, the interest rate on deposits was at a negative 0.2%. Under these conditions, the euro weakened, reaching a more than ten-year low against the dollar.
Emerging markets – Expectations in China indicate that the government will revise its growth targets downward in the coming few months. The growth rate of the Chinese economy was 7.4% in 2014, below the government's target. The low growth rate was mainly influenced by a decrease in investments in assets and exports. Meanwhile, the decrease in real-estate prices has continued. In Brazil, instability has persisted, with GDP receding by 0.2% year-on-year in the third quarter of 2014. This decrease was mainly attributed to a decrease in investments and consumption. By contrast, the unemployment rate in December was 4.3%, the lowest level this year. In India, data pointed to a mixed trend, with third-quarter growth above forecasts but below the rate reported for the second quarter. The decrease in the growth rate was primarily accounted for by a decrease in the pace of industrial production.
-9- Activity of the Bank and Description of its Business Developments
Union Bank of Israel Ltd. (hereinafter – the "Bank") was founded in 1951. The Bank is a banking corporation and possesses a banking license under the provisions of the Banking Law (Licensing) - 1981. The Bank was founded by the Eretz Israel Economic Company (U.S.A.) of New York and the Economic Company Ltd. of London, which in fact continued the operations of the banking division of the Eretz Israel Union which had commenced its operations in Israel already in 1922. From 1983 until May 17, 1993, control of the Bank was held by the State of Israel (through BLL Securities) and by Bank Leumi Le-Israel B.M., which purchased the shares of the Bank in 1954 and 1961. Further to the agreement to sell the controlling interest in the Bank, the controlling interest was transferred in 1993 to Shlomo Eliyahu Holdings Ltd., Yeshayahu Landau Holdings (1993) Ltd., and David Lubinski Properties (Holdings) 1993 Ltd. On October 29, 2012, Shlomo Eliyahu Holdings Ltd. Ceased to be part of the controlling interest of the Bank following the completion of the acquisition of control of Migdal Insurance and Financial Holdings Ltd. By Mr. Shlomo Eliyahu through Eliyahu Insurance Company Ltd., as detailed in Section "Investments in the Bank’s Capital and Transactions in its Shares".
The Banks shares are registered for trade in Tel Aviv Stock Exchange.
The Bank has 36 branches and extensions across Israel and two centers for private banking customers (premium). The Bank provides its customers with a variety of banking services. According to the figures published in the consolidated financial statements of all of the Banks in Israel as of September 30, 2014, the Bank is the sixth largest in the banking system in Israel.
Following are details of the Bank's share in a number of areas in the banking system (in percentages):
September 30 December 31 December 31 2014* 2013 2012 % % %
Credit to the public 2.8 2.6 2.8 Deposits from the public 3.2 3.1 3.2 Shareholders' equity 2.6 2.6 2.7 Net profit 1.6 1.9 2.1
* Relates to the first nine months of 2014.
The Bank's business activities focus on a number of areas: - Financial brokerage between depositors and borrowers. The profit from this activity is reflected in the Bank's profit from financing activity and it constitutes the Bank's major source of income.
- Financial and banking services that generate fees, in a broad variety of activities, in the fields of foreign currency, international trade, securities, information services, banking and financial consultancy and management, derivative financial instruments, etc.
- Investment of the Bank's shareholders' equity and market and liquidity risk management.
-10- The Bank's Board of Directors, determines, in accordance with the risk appetite and risk tolerance that it establishes, the business policies of the Bank and guides and directs the management of the Bank in accordance with these policies. As part of this process, the Board of Directors discusses and approves goals, objectives, resource allocation for the work plan and the budget.
On June 5, 2014 Midroog Ltd. (hereinafter: "Midroog") published an updated report concerning the Bank's rating and rating horizon as follows: Internal financial stability rating A2 horizon: stable Short-term deposits P-1 Long-term deposits /bonds Aa3 horizon: stable Subordinated notes (lower Tier II capital) A1 horizon: negative Deferred capital notes (upper Tier II capital) A2 horizon: negative
For details, see Immediate Report from June 5, 2014 (reference 2014-01-084264). Likewise, on September 1, 2014 and on March 19, 2014 Midroog approved an Aa3 stable horizon rating for the bonds recruitment framework (series H and series G respectively) in the amount of NIS 500 million par value each, to be performed by Union Issuance Ltd. For details regarding the issuance of bonds by Union Issuance Ltd. see Note 10.
Set below is a diagram of the Bank's main investee companies (4) as at December 31, 2014:
Union Bank
Equity-basis investee (non-financial Consolidated auxiliary corporations Auxiliary corporation(1) Capital market (1) corporation) (2) in the Bank's reports(1) 10% holding
Union Investments and Enterprise (A.S.Y) Ltd. Union Leasing Ltd. Union Bank Trust Co. Ltd. Union Capital Markets and Investments Ltd. (2) Igudim Ltd. Union Issuances Ltd. Kukerman Investments Ltd. Union Underwriting and Fnances Ltd. Union Systems Ltd. Carmel Union Mortgages and (3) Investments Ltd. Igudim Insurance Agency (1995) Ltd. Livluv Insurance Agency (1993) Ltd.
(1) Held by 100%, excluding Union Underwriting and Finances Ltd. – see Note (3) below. On June 16, 2014 the Bank signed an agreement to sale all of its holdings in Impact Investment Portfolio Management Ltd. and on September 30, 2014 the sale was completed and the holding of Impact was transferred to the buyer. See details in Note 5 to the financial statements and Section "Activity of Investee Companies". (2) Held by Union Investments and Enterprise (A.S.Y.) Ltd. – during the year, the holding rate of a real corporation decreased from 20% to 10%. (3) Held by Union Capital Markets and Investments Ltd. at a rate of 80%. See details in Section "Activity of Investee Companies". (4) For details regarding the investee companies of the Bank, their areas of activity, and their contribution to the profitability of the Bank, see Section “Activity of Investee Companies” And Note 5. -11- The Bank's Organizational Structure
Set below is a diagram of the Bank's organizational structure as of December 31, 2014:
Chairman of the Board of Directors
Internal Audit Secretaryr of the Bank
C.E.O.
Resources Chief Financial Retail, Customer Corporate Controls and Legal Asset, and Division Accountant Management Division Risk Counsel and Advising Compliance Division Division Management Division Division Division
The Bank's Branches (36)
-12- Description of Areas of Responsibility A brief description of the distribution of areas of responsibility at the Bank, based on the current organizational structure of the Bank, is set out below. A. Retail, Customer Asset, and Advising Division - Responsible for the activity of all branches of the Bank with private customers (households and private banking) and small businesses (with a credit volume of up to NIS 500 thousand); supervises among other things, the branches array, marketing array, advertising and direct channels, mortgages array, and customer asset management and advising array.
B. Corporate Division - Responsible for the routine management of all of the credit (excluding credit to private customers, small businesses and mortgages, which are under the responsibility of the Retail, Customer Assets, and Advising Division), for classifying and handling problematic debts and implementing debt collection proceedings through the special credit array, for credit rating and for reports in the field of credit to various supervision entities. Furthermore, the Division monitors the activity of the subsidiary Union Leasing Ltd.
C. Financial Management Division - Responsible for the management of the Banks operating liquidity, in the trading rooms of Israeli and foreign securities, the foreign currency trading rooms, the Bank’s proprietary management activity, management of assets and liabilities in NIS, foreign currency, CPI and providing quotes for interest and original cost and for making a market with government bonds. The division supervises the, Back-Office systems, foreign currency, foreign and Israeli securities. In addition, it was decided to establish a Middle Office in 2014, which inter alia, will coordinate the first-line controls activity, currently performed at different Bank units. The division also monitors the activity of the following subsidiaries: Union Investments and Enterprise (A.S.Y.) Ltd., Union Capital Markets and Investments Ltd., Union Underwriting and Finances Ltd., Union Bank Trust Company Ltd. and Union Issuances Ltd.
D. Resources Division – Responsible for management of the Bank’s resources in the areas of human capital, information systems, procurement and logistics, information security, assets, construction and maintenance, and the Bank’s operational expense budget, in addition, the division is also responsible for updating, managing and preparing bank procedures and also for the emergency preparedness. The division also monitors the activity of the following subsidiaries: Igud Systems Ltd. and Igudim Ltd.
E. Chief Accountant Division – Responsible for the financial reports of the Bank and its subsidiaries (to the public, to the Board of Directors, to the management, and to the various supervisory agencies); financial analysis, including oversight of the Bank’s work plan and budget; for capital planning, for oversight of the system of internal control over financial reporting (SOX 404); and responsibility for the Israeli currency execution unit.
F. Controls and Risk Management Division – Responsible for the development of models and processes for the examination of risks, the execution of control processes over the various risks and the evaluation of risks in the Bank’s diverse areas of activity. This responsibility also includes submitting the quarterly risk document, and overseeing the processes involved in formulating the Bank’s ICAAP document. In addition,
-13- the division is responsible for operational risk management, for providing an opinion on material credit (in 2014 over NI 50 million), for examining the appropriateness of the classifications to problematic debt and the allowances for credit losses and for the policy documents in the business fields (credit, market and liquidity).
G. Legal Counsel and Compliance Division – Responsible for the Bank's legal risk management, provides support and an answer to all legal aspects of the Bank's and its subsidiaries activities. Legal support takes the form of routine legal advice, preparation of legal opinions, formulation and preparation of documents and agreements, and concentration of prosecutions against the Bank and the supervision of professional authorities handling them on behalf of the bank. Compliance and public inquiries branch, consisting of the prohibition of money laundering unit, the compliance unit and the public inquiries unit, is subject to the Legal Counsel and Compliance Division.
H. Secretariat – Responsible for assisting the work of the Board of Directors according to the requirements of the relevant regulatory directives for a public company and a banking corporation, and according to the procedures of the Bank, and the resolutions of the Board of Directors; Reports on behalf of the Bank immediate reports to the Securities Authority and to the Stock Exchange and reports to the Bank of Israel according to the directives of the Supervisor of Banks. The Secretariat also handles convening and preparing for general assemblies of the Bank and related reports required by law. The secretariat is also responsible for the secretarial services of the Banks' subsidiaries.
I. Internal Audit – Reports to the Chairman of the Board of Directors; responsible for internal audits of the units of the Bank and its consolidated subsidiaries at the frequency established in the multi-year work plan, based on a risk survey updated at least once a year. The internal audit is also responsible for the performance of independent review of ICAAP document.
-14- Profit and Profitability (Consolidated)
Net profit totaled NIS 50 million in 2014, compared with net profit of NIS 140 million in 2013, a 64% decrease.
Net profit return on equity (based on average capital base) amounted to 2.1% in 2014, compared to 6.2% in the corresponding period last year.
The net profit of 2014 included a relatively high allowance for credit losses mainly in respect of a single customer. If excluding the impact of this customer, the net profit return on equity would have amounted to 6.6%.
Following are the changes in the net profit in 2014 compared to 2013, in the main items: A decrease of NIS 95 million of the net interest income before allowance for credit losses. An increase of NIS 72 million of provision for credit losses. An increase of NIS26 million of non-interest income. A decrease of NIS 16 million of operating and other expenses. A decrease in tax provision rate from 24.7% to 18% (see details below).
The profit before taxes totaled NIS 61 million in 2014 compared to NIS 186 million in 2013, a 67% decrease.
The return of profit before taxes on capital (according to an average capital base) was 2.6% in 2014 compared to 8.3% in 2013.
The fourth quarter of 2014 – amounted to a loss of NIS 42 million compared to a net profit of NIS 37 million in the corresponding quarter of the previous year. The loss is mainly due to the increase in provisions for credit losses in the amount of NIS 129 million deriving mainly from the allowance in respect of a single client compared to the corresponding quarter last year.
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Developments in Income, Expenses and Provisions for Taxes
Net interest income – amounted in 2014 to NIS 567 million compared to NIS 662 million in 2013, a decrease of 14%,
Following is a concise analysis of the development of income and expense rates and interest spreads: For the year ended December 31 2014 2013 Interest Rate of Interest Rate of Average income income Average income income balance (expenses) (expenses) balance (expenses) (expenses) NIS millions % NIS millions %
Unlinked Israeli currency Total interest-bearing assets 25,250 585 2.32 25,214 782 3.10 Total interest-bearing liabilities 18,415 (155) (0.84) 19,736 (303) (1.54) Interest spread - - 1.48 1.56
Linked Israeli currency Total interest-bearing assets 6,768 170 2.51 5,535 318 5.75 Total interest-bearing liabilities 6,091 (118) (1.94) 4,517 (214) (4.74) Interest spread - - 0.57 - - 1.01
Foreign currency* Total interest-bearing assets 3,516 110 3.13 3,632 109 3.00 Total interest-bearing liabilities 4,316 (25) (0.58) 4,766 (30) (0.63) Interest spread - - 2.55 2.37
Total activity in Israel Total interest-bearing assets 35,534 865 2.43 34,381 1,209 3.52 Total interest-bearing liabilities 28,822 (298) (1.03) 29,019 (547) (1.88) Interest spread 567 1.40 662 1.64
* Including Israeli currency linked to foreign currency. The interest-rate environment was lower in 2014 than in the preceding year. Accordingly, interest-rate spreads in the unlinked and CPI-linked segments contracted. In the unlinked segment, the interest-rate spread was 1.48%, versus 1.56% in the same period in the preceding year.
In the CPI-linked segment, the interest-rate spread was 0.57%, versus 1.01% in the same period in the preceding year. Note that the known CPI decreased by approximately 0.1% in 2014, compared with a 1.9% increase in the CPI in the same period of the preceding year.
The interest-rate spread in foreign currency was 2.55%, versus 2.37% in the same period in the preceding year. This mainly resulted from changes in interest spreads due to the low interest environment in the international financial market. The overall interest-rate spread was 1.40%, versus 1.64% in the same period in the preceding year. The decrease in the rate of income in respect of total assets was partly offset by a decrease in the rate of expenses in respect of total liabilities; in addition, there was no material change in total average balances. -16-
Provisions for credit losses For the year ended December 31 2014 2013 NIS millions Individual provision for credit losses1 149 93 Recovery of debts for which allowances were recorded in the past (59) (119) Collective provision for credit losses2 5 49 Provision for credit losses 95 23
(1) Before offsetting recovery of debts for which allowances were recorded in the past, of which a total of NIS 130 million and NIS 43 million in respect of one client in 2014 and 2013 respecttively.
(2) The collective allowance in 2014 includes an allowance in the amount of NIS 14 million in respect of implementation of the guidelines of the Supervisor of Banks concerning crediitt to private individuals at a rate of no less than 0.75% of the balancee of unimpaired credit to private individuals, which was partly offset by a decrease in the credit portfolio, changes in the portfolio mix, changes in the classification of problematic debts, and updates of collective allowance coefficients. The colllective allowance in 2013 includes an allowance in the amount of NIS 12 million recorded in the first quarter for implementation of the Supervisor of Banks' guidelines concerning housing loans.
The provision for credit losses as a percentage of net credit to the public was 0.4% in 2014, compared with 0.1% in 2013. See additional details in the subsection "Development of Assets and Liiabilities," below.
-17- Net interest income after provision for credit losses – totaled NIS 472 million in 2014 compared to NIS 639 million in 2013, a decrease of 26%.
Non-interest income – totaled NIS 386 million in 2014 compared to NIS 360 million in 2013, an increase of 7%. Non-interest financing income totaled NIS 102 million in 2014 compared to NIS 78 million in 2013. Of which, NIS 82 million in respect of profits from realization and value adjustments of bonds compared with NIS 63 million in the corresponding period in the previous year and NIS 8 million in respect of profits from the investment in shares compared with NIS 16 million in the corresponding period in the previous year.
Income from fees totaled NIS 278 million in 2014 compared to NIS 280 million in 2013, a 1% decrease.
The other income totaled NIS 6 million in 2014 compared to NIS 2 million in 2013. The increase derives mainly from the sale of all of the Bank's holdings of Impact Investment Management Portfolio Ltd., see Note 5.
Operating and other expenses totaled NIS 797 million in 2014, compared with NIS 813 million in 2013, a decrease of 2%.
Payroll expenses in 2014 totaled NIS 432 million, compared with NIS 456 million in 2013, a 5% decrease.
According to the Bank's managements' assessment, the decrease derived mainly from the change in the forecast estimation of the increase in salaries rate for the calculation of actuarial reserves in respect of employee benefits.
Depreciation expenses and maintenance of buildings and equipment amounted to NIS 157 million in 2014, compared with NIS 153 million in 2013, an increase of 3% due mainly to an increase in computerization depreciation.
Other expenses amounted to NIS 208 million in 2014, compared with NIS 204 million in 2013, an increase of 2%.
The provision for taxes in 2014 was 18%, compared to 24.7% in the corresponding period last year. The statutory tax rate is 37.71% compared to 36.22% in the corresponding period last year. The tax provision in 2014 included tax income in respect of previous years, which derived mainly from the closure of tax assessments. In 2013 the tax provision included a decrease in tax expenses due to an increase in deferred tax as a result of the update of the VAT order regarding payroll tax and capital gains tax and the update of the corporation tax rate following the Budget Law and the Arrangements Law.
-18- Developments in Balance-Sheet Items The balance sheet of the Bank totaled NIS 40,853 million on December 31, 2014, compared with NIS 39,490 million at the end of 2013, a 3.5% increase.
Net credit to the public (after deduction of allowance for credit losses) totaled NIS 21,713 million as at December 31, 2014, compared with NIS 22,135 million at the end of 2013, a decrease of 2%. The average balance of credit to the public was NIS 23,640 million in 2014, compared with NIS 23,620 million in 2013, an increase of 0.1%.
The balance of allowance for credit losses totaled NIS 246 million as at December 31, 2014 compared with NIS 285 million at the end of 2013. The decrease compared to the end of 2013 derives mainly from write-offs in respect of a single client in the financial sector and collections of impaired debts. In addition, as at December 31, 2014 there is an allowance for credit losses in the amount of NIS 38 million in respect of off-balance-sheet credit, presented within the Other Liabilities item compared with NIS 54 million at the end of 2013.
A. Total problematic credit risk*: Balance as at December 31, 2014 December 31, 2013 NIS millions
Problematic commercial credit risk 688 1,178 Problematic credit risk in respect of private individuals 49 64
Total problematic credit risk 737 1,242 * The data presented after the deduction of accounting write-offs and before the deduction of allowance for credit losses and do not include deduction of collaterals deductible for the purpose of the indebtedness of a borrower and of a group of borrowers. B. Problematic credit risk*: December 31, 2014 December 31, 2013 Off- Off- Balance balance Balance balance sheet sheet Total sheet sheet Total NIS millions NIS millions
Impaired credit risk 276 26 302 675 4 679
Inferior credit risk 112 12 124 93 11 104 Credit under special 278 33 311 352 107 459 Supervision risk Total 666 71 737 1,120 122 1,242 From this: unimpaired debts with arrears of 90 days or more 1 42 - 42 70 - 70
Non-performing assets 2 215 - 215 610 - 610
* The decrease in the balance of problematic debts compared to December 2013 is mainly due to the increase in accounting write-offs in respect of a single client in the finance sector and to the removal of a problematic debt classification from clients in the communal public services sector and in the real estate sector.
1 Including in respect of housing loans for which there's a provision according to the extent of arrears and in respect of housing loans for which there isn't a provision according to the extent arrears, which are in an arrear of 90 days or more. 2 Non- accruing interest debts, including non-accruing interest bonds.
-19-
Risk indices: December 31, December 31, 2014 2013
Balance of impaired credit to the public as a percentage of the balance of credit to the public 1.1.% 2.7% Balance of unimpaired credit to the public, in arrears of 90 days or more, as a percentage of the balance of credit to the public 0.2% 0.3% Balance of allowance for credit losses in respect of credit to the public, as a percentage of the balance of creedit to the public 1.1% 1.3% Balance of allowance for credit losses in respect of credit to the public, as a percentage of the balance of impaired credit to the public 106.5% 46.7% Balance of allowance for credit losses in respect of credit to the public, as a percentage of the balance of impaired credit to the public, including the balance of credit to the public which is in an arrear of 90 days or more 90.1% 42.0% Problematic credit risk in respect of the public, as a percentage of the total credit risk in respect of the public 2.2% 3.4% Provision for credit losses as a percentage of the average balance of credit to the public 0.4% 0.1% Net accounting write-offs in respect of credit to the public As a percentage of the average balance of credit to the public 0.6% 0.1% Net accounting write-offs in respect of credit to the public As a percentage of the allowance for credit losses in respect of credit to the public* 60.8% 6.3% * The data is volatile due to fluctuations in the volume of accounting write-offs.
-20- Securities totaled NIS 6,789 million as at December 31, 2014, compared with NIS 4,810 million at the end of 2013, a 41.1% increase. The balance as at December 31, 2014 is distributed as follows: 70% government bonds. 13% bank bond. 10% corporate bonds, mainly of Israeli companies. 5% government companies bonds. 2% shares. Approximately 90% of the securities portfolio is classified as available for sale (See additional details in Note 3 to the financial statements). The securities in the available-for-sale portfolio are stated in the balance sheet at fair value, while the difference between the fair value and the depreciated cost allocated to a capital reserve, with the exception of impairments of other than a temporary nature, which are not allocated to a capital reserve but to the Profit and Loss Statement.
In 2014, other than temporary impairments in the amount of approximately NIS 2 million in respect of bonds and in the amount of approximately NIS 1.8 million in respect of shares were charged to profit and loss, compared to NIS 13 million and NIS 0.1 million in 2013, respectively.
The net capital reserve as at December 31, 2014, is positive and stands at approximately NIS 103 million (before tax effect), consisting of a positive capital reserve in the amount of NIS 132 million, offset by a negative capital reserve in the amount of NIS 29 million.
At the end of 2013, the net positive capital reserve stood at approximately NIS 122 million (before tax effect), consisted of a positive capital reserve in the amount of NIS 131 million, offset by a negative capital reserve in the amount of NIS 9 million.
The following table shows the distribution of the capital reserve and the fair value in the available-for-sale portfolio as of December 31, 2014 (in NIS millions): Balance sheet Negative Positive value capital fund capital fund (constituting (unrealized (unrealized Net capital fair value) losses) gains) fund8
Shares (1) 100 (4) 8 4 Israeli government bonds 3,605 (4) 59 55 Foreign government bonds 588 (4) 1 (3) Bonds of financial institutions in Israel (2) 778 - 12 12 Bonds of foreign financial institutions (3) 92 - 2 2 Corporate bonds: (4) Government companies (5) 311 (2) 22 20 The real estate branch (6) 140 (3) 5 2 (7) 492 (12) 23 11 Others Total corporate bonds 943 (17) 50 33
Total available-for-sale portfolio 6,106 (29) 132 103 1 Including 31 issuers; the highest balance is NIS 15 million. 2 Including 8 issuers; the highest balance is NIS 579 million in respect of bonds of Bank Hapoalim. 3 Including 6 issuers. The issuers are Banks mainly from U.S. and Germany. The highest balance is NIS 79 million. 4 All corporate bonds are of Israeli companies, with the exception of a balance on NIS 52 million issued by a foreign issuer. 5 Including 4 issuers; the highest balance is NIS 235 million. 6 Including 48 issuers; the highest balance is NIS 16 million. 7 Including 85 issuers; the highest balance is NIS 53 million. 8 This capital fund reflects net unrealized gains and is included in the financial statements under the Banks' equity, in the amount of NIS 69 million, after tax. See Statement of Changes in Equity – adjustments in respect of presentation of securities available for sale at fair value. -21- The following table shows the distribution of the negative capital reserve (unrealized losses), according to the rate of decrease below cost and to the periods of time* for which the fair value is lower than the cost as of December 31, 2014 (in NIS millions): From 6 From 9 Up to 6 months to months to Over 12 months 9 months 12 months months Total Bonds available for sale: Others - up to 20% (16) (6) - - (22) (2) - - - (2) up to 40% (18) (6) - - (24) Asset backed - up to 20% (1) - - - (1)
(1) - - - (1)
Total bonds (19) (6) - - (25) Shares - up to 20% (1) - - - (1) up to 40% (1) - - - (1) Above 40% - - (2) - (2) Total shares (2) - (2) - (4) (21) (6) (2) - (29) Total securities * The reference point for determining the amount of time in which the investment was in a position of unrealized loss is the balance-sheet date of the reported period during which the decline in value first occurred, regardless of the rate of the decline. The policies and procedures of the Bank regarding the examination of the need to perform provisions for other-than- temporary impairments are detailed in Section, “Critical Accounting Policies and Estimates”.
The following table shows the distribution of the capital reserve and the fair value in the available-for-sale portfolio as of December 31, 2013 (in NIS millions): Balance sheet Negative Positive value capital fund capital fund (constituting (unrealized (unrealized Net capital fair value) losses) gains) fund8
Shares (1) 92 - 16 16 Bonds of Israeli government 2,430 (4) 36 32 Bonds of financial institutions in Israel (2) 745 - 16 16 Bonds of foreign financial institutions (3) 149 - 2 2 Corporate bonds: (4) Government companies (5) 237 (1) 17 16 The real estate branch (6) 147 (1) 7 6 (7) 438 (3) 37 34 Others Total corporate bonds 822 (5) 61 56
Total available-for-sale portfolio 4,238 (9) 131 122 1 Including 25 issuers; the highest balance is NIS 17 million. 2 Including 10 issuers; the highest balance is NIS 590 million in respect of bonds of Bank Hapoalim. 3 Including 7 issuers. The issuers are Banks mainly from U.S. and Germany. The highest balance is NIS 71 million. 4 All corporate bonds are of Israeli companies, with the exception of a balance on NIS 36 million issued by a foreign issuer. 5 Including 3 issuers; the highest balance is NIS 201 million. 6 Including 59 issuers; the highest balance is NIS 15 million. 7 Including 58 issuers; the highest balance is NIS 62 million. 8 This capital reserve reflects net unrealized gains and is a part of the bank's equity, after tax effect, in the amount of approximately NIS 78 million, after tax; See the Statement of Changes in Equity - adjustments in respect of the presentation of securities available-for-sale at fair value. -22- The following table shows the distribution of the negative capital reserve (unrealized losses), according to the rate of decrease below cost and to the periods of time* for which the fair value is lower than the cost as of December 31, 2013 (in NIS millions): From 6 From 9 Up to 6 months to months to Over 12 months 9 months 12 months months Total Bonds available for sale: Others - (6) (2) - - (8) up to 20% (6) (2) - - (8) Asset backed - - - - (1) (1) up to 20% - - - (1) (1)
(6) (2) - (1) (9) Total bonds * The reference point, for determining the amount of time in which the investment was in a position of unrealized loss, is the balance-sheet date of the reported period during which the decline in value first occurred, regardless of the rate of the decline.
The following table shows details in respect of the tradable portfolio as at (in NIS millions): Balance sheet value (constitutes fair value) December 31, December 31, 2014 2013 Shares (1): Israeli companies 18 15 8 2 Foreign companies 26 17
Israeli Government bonds 572 548 85 7 Other bonds 657 555
683 572 Total trading portfolio (1) Mainly exchange traded funds.
Assets in respect of derivative instruments as at December 31, 2014 totaled NIS 504 million, compared to NIS 572 million at the end of 2013. The volatility of assets in respect of derivative instruments is mainly due to transactions in Maof and foreign exchange derivatives.
Other assets totaled NIS 1,413 million as at December 31, 2014, compared to NIS 1,140 million at the end of 2013. The volatility of other assets is due mainly to activity in the Maof market and in instruments which do not meet the definition derivative.
Deposits from the public as at December 31, 2014 totaled NIS 31,498 million compared to NIS 30,622 million at the end of 2013, a 3% increase. The average balance of deposits from the public was NIS 30,218 million in 2014, compared with NIS 30,797 million in 2013, a 2% decrease.
-23-
Liabilities in respect of derivative instruments as at December 31, 2014 totaled NIS 575 million compared to NIS 667 million at the end of 2013. The volatility of liabilities in respect of derivative instruments is due mainly to transactions in Maof and foreign exchange deerivatives.
Other liabilities totaled NIS 2,777 million as at December 31, 2014, compared to NIS 2,545 million at the end of 2013. The volatility in other liabilities is mainly the result of activities in the Maof market and in instruments that do not meet the definition of derivatives.
The Bank's equity totaled NIS 2,376 million as at December 31, 2014, compared with NIS 2,335 million at the end of 2013. The increase in equity is the result of the Banks' profits in the amount of NIS 50 million as well as from a decrease in the capital reserve under the item net adjustments in respect of presentation of securities available for sale at net fair value, after tax in the amount of NIS 9 million.
Ratio of Capital to Risk Components December 31, January 1, December 31, 2014 2014 2013 (Basel III) (Basel II)
Ratio of Tieer I capital to risk components 9.74% 9.48% 9.43% Ratio of overall capital to risk components 15.73% 15.34% 16.19%
-24-
For further details regarding the risk-weighted assets and the capital, including the effeect of Basel III - See Note 13 to the financial statements and the Section "Capital adequacy".
For details regarding the Bank's policy in respect of capital adequacy ratio see Sectioon "Capital adequacy", sub- section "Capital Adequacy Targets".
Objectives and Business Policy The Bank operates under a three-year ahead strrategic plan, which is updated near the end of every year. The strategy is based on the risk appetite, risk capacity, and capital targets defined by the Board of Directors (for details regarding the capital targets, see the Section “Capital Adequacy”). When determining the strategy for 2015-2017 the moderate growth of the GDP and the continuation of the current monetary policy, was taken into account. The current monetary policy is expressed, among other forms, by a very low interest rate environment, which inter alia, affects the risk level in the varrious economic sectors. In October 20014, the Board of Directors approved the three-year ahead strategic plan for these years.
The main issues covered by the three-year strateegy of the Bank are:
Retail - Continued expansion of retail activity, while increasing the income sources by increasing the recruitment rate of new customers, concurrent with customer retention and expansion of activity with existing customers. The expansion of the retail activity by increasing the volluume of consumer credit in appropriate spreads, directly and throughh joint ventures with factors in the field. Strengthening the customers' loyalty, by the way of integrated marketing moves, unique product development for preservation of customers and intensifying the activity with them, focusing on domains in which it's possible to accelerate the growth rate and leveraging of upgraded infrastructure of direct channels and improvement of the quality of the service. Another focus was put on preserving the quality of the mortgage portfolio and increasiing the yield, considering the markets' condition, limitation of the risk-weeiighted assets and the spread
-25- and concurrently on detection of potential domains for increasing the volume of consumer credit. In addition, emphasis was placed on building ongoing processes for increasing awareness and conservation and empowerment of the brand status.
Commercial Credit – Adjusting the volume of the credit portfolio to the capital planning and the market environment in Israel and abroad, while maintaining the activity level in the core sectors parallel to the enhancement of activity in the rest of the sectors, inter alia, by collaborating with other entities and realizing the potential to expand ancillary activities with existing customers. All while maintaining the high quality of the credit portfolio and increasing its diversification, both in sectorial terms and in terms of borrower size. In addition emphasize was given to strictly maintaining and improving the yields for all of the risks arising from the various activities.
Capital market - Expansion of the activity in the capital market, while expanding the advised customers infrastructure and increasing the activity among existing customers and potentially new customers, inter alia, by use of advanced trading systems, and increasing the existing product basket, subject to the regulatory requirements and the condition of the market. .
Liquidity and dispersing of depositors – Formation of ways to cope with developments in the monetary field, both in the Israeli economy and globally, while examining the influence on customers. In addition, continued improvement of the structure of the resources and treatment of the concentration of the depositors while extending the average duration by raising retail deposits and reducing the dependence on large depositors, in accordance with the updated regulatory directives and the limitations of the Board of Directors for an effective management of the liquidity risk in the changing market conditions.
Preparedness for dealing with regulatory changes, inter alia, by using automated systems, work procedures and suitable products.
Continued establishment of the Banks' reputation and the positioning of its status, especially among the retail customer segment.
The work plan for 2015 is derived from the aforesaid three-year strategic plan. The objectives of the work plan are based, inter alia, on the capital requirements, and on the derived capital plan for 2015 - see details in Section "Capital Adequacy." For details regarding the main points in the Banks' work plan, see Section "Description of the Bank’s Business by Activity Segments".
The information in this paragraph is forward-looking information, as defined in the Securities Law, based on the business strategy and work plan of the Bank, which have been adjusted to the Israeli and global business environment, against the background of the continued slowdown in growth; the estimates of the business functions at the Bank regarding the probability and possibility of achieving goals and carrying out activities; and the regulatory and intra-organizational environment of the Bank’s operations. This information also relies on the macro-economic forecasts of the Bank of Israel and of the Research and Products Section of the Bank. The work plans and the objectives under the business strategy established may not materialize, in full or in part, or may materialize in a manner materially different than expected. The main factors influencing this are: changes
-26- in macro conditions in the markets relative to existing estimates; severe volatility in the capital and commodity markets; and regulatory changes affecting the activity of the Bank. Fulfillment of the work plan also depends on the success of marketing efforts, on competition, on the success of planned technological improvements, and on the degree of the Bank’s success in implementing its internal plans.
Controlling interests in the Bank
The major shareholders of the Bank as of the issuance of the financial statements are as follows: Shlomo Eliyahu Holdings Ltd. (1) 22.92% Yeshayahu Landau Holdings (1993) Ltd. (*)(2) 21.65% Yeshayahu Landau Properties (1998) Ltd (2) 3.12% David Lubinski Properties (Holdings) 1993 Ltd. (*)(3) 16.5% Cheroudar Properties Ltd. (3) 6.36% Eliyahu Insurance Company Ltd. 4.20%
(*) Constitute the controlling shareholders of the Bank, (which is 33% of the Banks' issued and paid-up share capital, as at the publication date of the financial statements, and is distributed evenly among its members, 16.5% of the Banks' issued and paid- up share capital each).
(1) On October 29, 2012 Shlomo Eliyahu Holdings Ltd. ceased to be part of the controlling interest of the Bank following the completion of the acquisition of control of Migdal Insurance and Financial Holdings Ltd. By Mr. Shlomo Eliyahu through Eliyahu Insurance Company Ltd., all as detailed in Section "Investments in the Bank’s Capital and Transactions in its Shares".
(2) Companies controlled by Mr. Yeshayahu Landau.
(3) Held equally by Dr. Yael Almog and Mrs. Ruth Manor.
Investments in the Bank's Capital and Transactions in its Shares
A. The Bank received notifications on January 8, 2014, from David Lubinski Properties (Holdings) 1993 Ltd. and from IDB Holding Corp. Ltd. (hereinafter: "IDB"), according to which the companies Manor Holdings BA Ltd. and Manor Investments IDB Ltd. had sold 4,819,550 shares of IDB on the Stock Exchange on January 7, 2014, and no longer had any holdings in IDB after the sale. Following the aforesaid sale of the shares, Ms. Ruth Manor, who is one of the controlling parties of the Bank due to her holdings, jointly with Dr. Yael Almog, in equal shares, in David Lubinski Properties (Holdings) 1993 Ltd. and in Cheroudar Properties Ltd., ceased to be an interested party of IDB. On February 5, 2014, a letter addressed to Ms. Ruth Manor by the Supervisor of Banks was submitted to the Bank by Ms. Ruth Manor. In the letter, the Supervisor of Banks confirmed that in light of Ms. Ruth Manor's notification that she no longer holds, directly or indirectly, means of control in IDB, which controls and holds means of control in management companies, the alleged violation of Section 27F of the Banking Law (Licensing), 1981 had ceased. Accordingly, the Supervisor of Banks affirmed to Ms. Ruth Manor that she is no longer required to comply with the terms detailed in Section 3 of the letter of the Supervisor of Banks of August 2, 2012 (as detailed in the Immediate Report of the Bank dated August 5, 2012, reference no. 2012-01-201465). With regard to this matter, see also the Immediate Reports of the Bank dated August 11, 2011 (reference no. 2011-01-237771), August 15, 2011 (reference
-27- no. 2011-01-240735), August 5, 2012 (reference no. 2012-01-201465), and August 11, 2013 (reference no. 2013- 01-113529). B. On October 29, 2012, the Bank received a message on behalf of Shlomo Eliyahu Holdings Ltd. (hereinafter: "Eliyahu Holdings") and Eliyahu Insurance Company Ltd. (hereinafter together with Eliyahu Holdings: "Eliyahu Group"), according to which, the acquisition of control of Migdal Insurance and Financial Holdings Ltd. (hereinafter: "Migdal"; hereinafter: "Migdal acquisition") was completed on October 29, 2012 by Eliyahu Insurance Company Ltd. (controlled by Mr. Shlomo Eliyahu). After the acquisition of Migdal, the following became valid:
1) The irrevocable deed of trust and deed of permission to the trustee Mr. Boaz Okon (a retired judge) (hereinafter: "the trustee"), signed by the Eliyahu Group on October 23, 2012 (hereinafter: "deed of trust"),
2) The agreement signed on October 23, 2012 between Eliyahu Holdings and Yeshayahu Landau Holdings (1993) Ltd. (hereinafter: "Landau Holdings") and David Lubinski Properties (Holdings) 1993 Ltd. (hereinafter: Lubinski Holdings"; hereinafter: "the agreement"); and entered into force
3) The permit to hold the Bank, given by the governor of the Bank of Israel to Mr. Shlomo Eliyahu and Mrs. Chaya Eliyahu on October 23, 2012 (hereinafter: "the permit to hold the Bank's controlling interest"); and
4) The Bank's revised control permit, given by the governor of the Bank of Israel to Mrs. Ruth Manor and Dr.Yael Almog and to Mr. Yeshayahu Landau and Mrs. Devorah Landau on October 23, 2012 (hereinafter: "The Banks' revised control permit").
According to the deed of trust and to the agreement, Mr. Shlomo Eliyahu (who controls the Eliyahu Group) entered into an agreement (by himself and/or by corporations in his control) to purchase the controlling interest of Migdal which controls Migdal Insurance Company Ltd.(hereinafter: Migdal Insurance) which is an "insurer corporation" which controls directly and indirectly, inter alia, "management companies" (meaning provident and pension funds) and "the manager of a mutual trust fund" (meaning joint trust funds). In light of the directives of the Banking (Licensing) Law 1981, prohibiting an entity controlling a banking corporation to hold more than 5% of any particular type of means of control in a "management company" or in the "manager of a mutual trust fund" and shall not hold more than 10% of any particular type of means of control in another corporation that controls one of the foregoing (hereinafter: "the directives of the Banking (Licensing) Law"). The completion of the acquisition of Migdal required Mr. Shlomo Eliyahu and Mrs.Chaya Eliyahu to retire from the Banks' controlling interest and to receive "a permit to hold a controlling interest" in the Bank from the governor of the Bank of Israel.
Therefore, according to the deed of trust, the agreement and the maintenance and control permit mentioned above, as of the completion of the acquisition of Migdal (hereinafter: "the effective date"), the Eliyahu Group ceased to be a party to the controlling and voting agreements system between the controlling shareholders of the Bank.
Furthermore, as of the effective date, and due to the retirement of Eliyahu Holdings from the agreements system between the controlling shareholders of the Bank, the following directives apply:
1. Regarding the Eliyahu Group shares that were deposited in accounts in the name of the trustee on August 1, 2012, and in total 27.12% of the Banks' issued share capital and paid-up share capital (hereinafter: the Eliyahu
-28- Groups' Bank shares), the deed of trusts' terms, attached to the Bank's Immediate Report from October 24, 2012 (reference 2012-01-262731) will apply.
2. Eliyahu Holdings will cease to be a party to the control arrangements between the controlling shareholders of the Bank in the framework of the agreements system among controlling shareholders. Eliyahu Holdings' rights, according to the agreements system among controlling shareholders of the Bank are considered "frozen" regarding all intents and purposes, and it won't be possible to activate them and/or to make any use of them, all subject to the terms and directives listed in the deed of trust and in the agreement. Without diminishing the aforesaid, during the trust periods (as detailed below and as defined in the deed of trust), the Eliyahu Group and/or the trustee:
a. Will not participate or vote in the general meetings of the Bank or in the separate meetings by virtue of the shares of the trust, which will be held by the trustee from time to time, and
b. Will not suggest any candidates for Union Bank's Board of Directors, but the Eliyahu Group companies will be entitled to receive any dividends distributed by the Bank, and to receive apposition for the sale of the shares in the trust.
3. As of the effective date, the amended control permit directives apply in the Bank and refer only to individuals controlling Landau Holdings and Lubinski Holdings (and not to individuals controlling the Eliyahu Group), and the continuation of the Eliyahu Groups' holding of the means of control of Union Bank, is by virtue of "permit to hold the Banks' means of control", as described above.
4. Landau Holdings and Lubinski Holdings, increased their share in the Banks' controlling interest shares, as defined in the agreement and in the deed of trust, (Landau Holdings on one hand and Lubinski Holdings on the other hand, in equal shares between them) by turning part of their free shares, as defined in the agreement and in the deed of trust, to controlling shares, while the controlling interest, as of the effective date, is 33% (thirty three from one hundred), of the Bank's issued share capital and paid-up share capital, in a manner in which Landau Holdings, on one hand, and Lubinski Holdings, on the other hand, hold 16.5% (sixteen and a half from one hundred) of the Banks' issued share capital and paid-up share capital, each, and all as detailed in the deed of trust, in the agreement and in the revised control permit of the Bank. Despite the aforesaid, it should be noted that according to the amendment of the Bank's revised control permit, Dr. Yael Almog and Mrs. Ruth Manor through Lubinski Holdings and Yeshayahu Landau and Mrs. Devorah Landau through Landau Holdings, are each entitled to pledge (Dr. Yael Almog and Mrs. Ruth Manor together and Mrs. Devorah Landau and Yeshayahu Landau together) no more than 2.5% of any kind of means of control of the Bank, held by them in the Bank which is part of the controlling share, and are permitted to agree to the unlimited sale of all or part of the means of control, as part of the limitless process of realizing the pledge (and subject to repurchasing the sold shares within 3 years, as aforesaid, so that Lubinski Holdings' and/or Landau Holdings' holding rate, will return to 16.5%). The revised control permit also states that the total cumulative holdings of the members of the Bank's controlling group must not exceed 61% of the Bank's means of control (the holding rates are of the Banks' issued share capital and paid-up share capital, without considering freezing part of the privileges in the Bank's shares held by the Eliyahu Group). Furthermore, according to the permit to
-29- hold the Bank's controlling interest, Mr. Shlomo Eliyahu and Mrs. Chaya Eliyahu were permitted to hold together 32.12% of the Banks' means of control of any kind, up to 27.12% of which (hereinafter: the relevant means of control) are held by the trustee according to the directives of the deed of trust and up to an additional 5% of any means of control of the Bank will be held indirectly by them through Migdal and/or through corporations directly or indirectly controlled by Migdal (hereinafter: "Migdal Group"). In addition: 5. Mr. and Mrs. Shlomo and Chaya Eliyahu are not permitted to purchase additional means of control of the Bank, excluding a purchase through the Migdal Group within the aforesaid condition, even if their holding rate of the means of control will be less than 27.12% for any reason whatsoever. 6. The relevant means of control will be sold by Mr. and Mrs. Shlomo and Chaya Eliyahu in the Stock Exchange or to an unrelated third party, subject to receiving permission from the governor of the Bank of Israel, as required by the law, until the end of a period of three years which began on the day in which the permit to hold the Banks' means of control became valid (hereinafter: the first trust period"). If all of the relevant means of control won't be sold up to that date, the remaining relevant means of control will be sold by the trustee in the Stock Exchange or to an unrelated third party, until the end of a period of one additional year which begins at the end of the first trust period (hereinafter: the second trust period), and all in accordance with the directives of the deed of trust. 7. The holders won't be permitted to commit any transaction or activity in the relevant means of control and/or won't be permitted to grant any kind of right to a third party in connection with them, excluding selling, as aforesaid, or encumbering, subject to receiving an approval in writing, in advance, from the Supervisor of Banks. This is in addition to the prohibition to attend the Banks' general meetings, to use the voting rights and to suggest candidates for the Board of Directors, as described above. 8. The holding permit will expire after four years from the date of commencement or at the time when the selling of the relevant means of control is complete, whichever comes first. It is further noted that within the framework of the agreement defined above, directives were determined regarding the use of voting rights by the Bank's current controlling shareholders in the Bank's general meetings. See more details in the Bank's Immediate Reports from October 24, 2012 (reference 2012-01-262731) and from October 29, 2012 (reference 2012-01-266469).
In accordance with the terms established in the permit to hold means of control in the Bank, as detailed in Paragraph 7 above, and after obtaining the approval of the Supervisor of Banks, as required in the permit (hereinafter: the "Supervisor Approval"), the holders (Shlomo and Haya Eliyahu) pledged 2.5% of the issued and paid-up share capital of the Bank (hereinafter: the "Pledged Means of Control") to a third party (hereinafter: the "Pledge Holder"). The pledge was performed subject to the terms established in the Supervisor Approval, including, among other matters, that the pledge shall expire no later than the end of the "second trust period," as defined above, and that the Pledge Holder shall undertake a commitment that at any time after July 28, 2016, he will release the lien on the Pledged Means of Control (to the extent that they have not been sold within realization of the pledge), and shall transfer them to the trustee, immediately upon demand in writing, for the purpose of selling the Pledged Means of Control. The Supervisor Approval also states that as long as the Pledged Means of Control have not been sold, the Pledge Holder shall not exercise the right to participate in the
-30- general assemblies of the Bank, the right to vote, the right to propose candidates for service as directors of the Bank, and other rights as granted to holders due to their holdings in the Pledged Means of Control, with the exception of: (a) the right to dividends distributed, if and as any are distributed, by the Bank; and (b) the right to the proceeds from the sale of the Pledged Means of Control. The holders were asked to sign an amendment of the trust letter formalizing the guidelines of the Supervisor of Banks with regard to the pledge. The pledged shares were deposited in trust in the name of Mishmeret Trust Services Company Ltd.
Dividend Distribution See details in Note 12 (2) and (3).
Material agreements
Except for agreements made in the normal course of business, and additional agreements mentioned in the financial statements, the agreements described below to which the Bank is a party or is entitled according to which, may be considered material agreements not in the normal course of business.
Collective labor agreements Labor relations and the wages of employees are regulated in collective labor agreements with the employees, the banks' employees committee, the management committee and the officials committee. The wage of the Bank employees is subject to labor agreements – see details in Section "Human Capital".
Agreement to receive computer services Regarding the agreement to receive computer services from Bank Leumi Le-Israel Ltd. from December 31, 2007, see Section "Fixed Assets and Facilities" sub-section "The Banks' Computing and Information Systems" as well as Note 18.C.(4). In addition, note that according to the agreements between the Bank and Bank Leumi, according to the computing and operations agreement provisions signed for a period of 10 years ending on December 31, 2016, it is agreed that "completion of attachment program" in the agreement will apply at the end of the agreement period and might last up to three years. As it may be necessary to renew the regulatory approvals concerning the agreement, the sides will work to achieve them, see also Immediate Report dated January 1, 2014 (reference no. 2014-01-000220). See Section "Licenses, Permits and Approvals" regarding additional exemption from the Antitrust Commissioner until December 31, 2016. Indemnification of Directors and Senior Officers A. Letter of commitment to indemnify Senior Officers of the Bank – for details, see Note 18.C.(13), Note 18.C.(14) and Section "Transactions with Controlling Shareholders".
B. With regard to the contractual engagement of the Bank for the purchase of an insurance policy for Directors and Senior Officers (D&O) at the Bank and its subsidiaries, see Note 18.C.(17) and the Banks' immediate report from September 10, 2014 (reference 2014-01-155259).
-31- Services and Areas of Activity Based in Agreements or Special Arrangements
1. Credit cards - The Bank has contractual arrangements with credit card companies. Inter alia, the agreements specify provisions regarding the allocation of responsibility between credit card companies and the Bank, in view of the provisions of the Charge Cards Law, as well as the relevant business, operational, and legal terms.
For more details regarding the agreements signed on July 1, 2010 with "CAL" and "Diners" see Note 18.C.(5), and for more details regarding the agreement signed on February 3, 2011 with "Isracard" see Note 18.C.(6).
2. Market making – The Bank serves as a market maker for government bonds, under the State Loans Law.
3. Pension advising –The Bank provides pension-advising services to customers, through investment advisors who were trained and licensed to provide such advice.
4. Purchase of rights in consumer loan portfolio – In accordance with the business strategy of the Bank, which includes an emphasis on retail banking, from time to time (as of 2010) the Bank enters agreements with Mimun Yashir of the Yashir Group (2006) Ltd. (hereinafter: “Mimun Yashir”). In these agreements, the Bank purchases from Mimun Yashir, through the assignment of rights and liabilities by way of a sale, portfolios of loans extended by Mimun Yashir to private customers for purchases of motor vehicles and all-purpose loans..
See Immediate Report from February 23, 2015 (reference 2015-01-037057) as well as Immediate Reports of the Bank from December 28, 2011 (reference 2011-01-378021); February 7, 2013 (reference 2013-01-033624) and from January 2, 2014 (reference 2014-01-001993).
5. An inter-bank agreement for the clearing of checks in diamond denominated accounts (DDA) see details in Note 18.C.(20).
6. For agreements related to the Bank’s overseas operations, including in foreign capital markets, see Section “Activity with Overseas Entities”.
Lien agreements - as detailed in Note 14 to the financial statements.
Licenses, Permits, and Approvals The Bank and its subsidiaries are subject to various legal directives especially applicable to banking corporations, including rules and guidelines arising from the Proper Conduct of Banking Business Directives of the Supervisor of Banks at the Bank of Israel, and from circulars and various guidelines applied from time to time by the Supervisor of Banks. Subject to compliance with these requirements, the Bank holds a license to manage its business in accordance with the Banking Law (Licensing) - 1981, and branch licenses for its branches. In addition to these, the Bank, which is a public company and a member of the Tel Aviv Stock Exchange Ltd., a member of the TASE Clearinghouse, and a member of the Maof Clearinghouse, and its subsidiaries, which
-32- operate in various areas of the capital market and in additional areas permitted to them by law, hold licenses, permits, and approvals from various authorized agencies, including the Israel Securities Authority, the Supervisor of the Capital Market, the Antitrust Commissioner, and others. The licenses, permits, and approvals pertaining to the various operating segments of the Bank are listed below. Thus the Securities Authority approved the registration in the Underwriters Registration according to Securities Regulations (Underwriting) – 2007 of an underwriting company in full control of the Bank, which is an underwriter as defined in the aforementioned regulations (in respect of the activity of the underwriter, see details in the Section "Activity of Investee Companies"). In addition, employees of the Bank who are authorized to engage in investment counseling received the relevant licenses by the Israel Securities Authority. The Bank holds a pension advisor’s license, as defined in the Supervision of Financial Services Law (Engaging in Pensions and Pension Marketing) - 2005, granted by the Supervisor of the Capital Market at the Ministry of Finance for the purposes of this activity, and its employees who provide pension advice also hold the appropriate licenses from the same agency. Two wholly owned subsidiaries of the Bank which are insurance agencies, under the Supervision of Financial Services Law (Insurance) - 1981 and the provisions of Section 11(B)(2) of the Banking Law (Licensing) - 1981, also hold insurance agents’ licenses which allow them to engage in their area of activity. Each of the CEOs of companies holds an insurance agents’ license, as required. The Bank was a participant in petitions for exemption from the duty to obtain the approval of the Restrictive Trade Practices Tribunal for restrictive arrangements, which were filed to the Antitrust Commissioner and approved by him, with regard to various areas of its activity, as follows:
1. On November 18, 2008, the Antitrust Commissioner announced the extension of the existing exemption for the arrangement among the banking corporations with regard to the operation of an automated risk- management database, for four years. This arrangement allows the continued maintenance and operation of a general database with market data which is required for the various banks in order to manage market risks; Namely to assess the risk to which the asset and liability portfolios of the various banks are exposed as a result of changes in the financial markets.
2. On February 13, 2008, the Commissioner extended the exemption he granted in the past for the agreement between Union Bank and Bank Leumi concerning the providing of computing and operational services to Union Bank by Bank Leumi, for seven additional years. On February 13, 2015 the Antitrust Commissioner gave an additional exemption from a restrictive arrangement approval of the computing agreement, until the end of the agreement period December 31, 2016, subject to the conditions he set. For details regarding the computing agreement with Bank Leumi, see the Section “Material Agreements”.
3. On September 3, 2013 the Antitrust Commissioner announced an exemption for a period of a year and a half, for an agreement between the banking corporations, regarding clearance of checks denominated in USD drawn on accounts of diamond merchants. For details see Note 18.C. (20).
Part of the terms for completing the acquisition of Migdal by Eliyahu Insurance Company Ltd., on October 25, 2012 the Antitrust Commissioner approved the move considered as a merger in the antitrust laws, between
-33- David Lubinski Properties (Holdings) 1993 Ltd., Cheroudar Properties Ltd., Yeshayahu Landau Holdings (1993) Ltd. and Union Bank of Israel Ltd. (the acquired party according to the Restrictive Trade Practices Law 1988) – See Section" Investments in the Bank’s Capital and Transactions in its Shares".
In addition, on March 8, 2007, the Commissioner notified the banks in Israel, including the Bank, of the conditions under which he does not intend to enforce the provisions of the Restrictive Trade Practices Law with regard to credit consortiums in which all parties are banks. Pursuant to this decision, credit consortiums between banks will be permitted under the following conditions: the joining of several banks in a consortium is essential, in that without such joining it is not possible to extend credit to the customer under reasonable terms; the customer consents to the consortium, in advance and in writing, on a separate form; the customer is given the opportunity to negotiate the terms of the credit extended with any of the banks which are members of the consortium, including through another person acting on the customer’s behalf; and more.
In addition to the foregoing, on March 2, 2008 the Commissioner announced the conditions under which the provisions of the Restrictive Trade Practices Law would not be enforced with regard to credit consortiums in which banks join insurance companies, and insurance companies join other insurance companies. These conditions are similar in essence to the conditions established with regard to credit consortiums wherein the parties are solely banks, with the exception of the condition regarding arrangements to which Bank Hapoalim and Bank Leumi are parties concerning the minimum credit requirement.
Since the Antitrust Commissioner renewed the exemption and the conditions to join a consortium arrangement on February 25, 2011, February 26, 2013, February 27, 2014 and June 30, 2014, the Antitrust Commissioner renewed the exemption on December 30, 2014 and the terms of the arrangement to which Leumi Bank and Bank Hapoalim are linked, require an individual approval from the supervision over the restrictive business practices array.
In December 2010, the Bank accepted the decision of the Antitrust Commissioner to grant an exemption from the approval of a restrictive arrangement, for five years, to the option granted by Cartisei Ashrai Leisrael Ltd. (hereinafter: “CAL”) within the contractual engagement between the Bank and CAL, and with regard to the agreement between the Bank and CAL and the additional agreement between the Bank and Diners Club Israel Ltd., a company under the control of CAL. The reasons noted in the decision, on which the Commissioner’s decision was based, include the consideration that the exclusivity stipulation contained in the agreement with regard to the option does not cause substantial damage to competition. It was further established that when the five-year period will elapse, it will be possible to request another extension for the exemption period, see Note 18.C.(5).
-34- Activity with Overseas Entities Activity with Banks and Financial Institutions Overseas The Bank’s activity with foreign banks and financial institutions overseas is conducted in several main areas: deposits of surplus liquidity, receiving guarantees, transactions in exchange rates (spots, forwards, options, etc.) and interest rates (IRS – interest-rate swaps, etc.) and other instruments, clearing activity, transfers of funds, and activity in foreign securities. The Bank establishes its exposure policy, from time to time, for banks and financial institutions according to various criteria for the assessment of risk in the activity with them. Credit risk arising from exchange-rate transactions and future transactions with some of the aforesaid foreign banks is addressed mainly through ISDA (International Swaps and Derivatives Association) agreements, which are the framework agreements for activity of the Bank with each of the foreign banks, and through CSA (Credit Support Annex) collateral agreements, which discuss and detail the collateral issue, their transfer and offset by the relevant side in case of an exposure. The version of the aforesaid agreements constitutes a customary international standard and the attachment in each of them – together or separately - helps the financial institutions, connected with them, to decrease the exposure to risks involved in the trading activity between them, first and foremost through the use of netting of transactions. Since the beginning of 2008, the bank has reduced the volume of its activity with bank overseas, both in terms of the number of banks with which it does business and in terms of the volume of approved exposures for activity with these banks. In addition, the Bank has entered into a CLS (Continuous Linked Settlement) agreement with one of the biggest banks in the world, which is designed to ensure receipts against payments in order to minimize clearing risks in foreign currency buying and selling transactions. In addition see Section "Description of the Bank’s Business by Activity Segments" sub-section "Financial Management Segment" regarding "Dodd Frank" and "Emir".
Agreements with Financial Institutions Overseas to Receive Trading and Custody Services in Securities and Financial Assets The Bank has entered into various agreements with brokers, banks and clearing-houses outside Israel (hereinafter: foreign financial entities), for the execution of trading activity in various securities and financial assets for the Bank and for its customers. In addition, the Bank has entered into a global custody agreement with a well-known international financial institution (and with other financial entities with which the aforesaid institution has agreements for this purpose), pursuant to which the Bank keeps foreign securities with the aforesaid financial institution, for itself and for its customers, and occasionally keeps monetary deposits in custody. The main services provided to the Bank under this agreement include custody, clearing of transactions in foreign securities, handling of relevant tax issues related to the transactions, providing alerts and updates, providing notifications from corporations whose securities are in custody (corporate actions), and executing related actions, such as receiving dividends, benefit shares, participation in rights offerings, etc. The financial institution executes the aforesaid actions in accordance with the instructions of the Bank, subject to the provisions of the relevant laws. In addition, from time to time, the Bank receives custody services from the foreign financial entities, while fulfilling their other functions. Within this activity, the Bank keeps most of its holdings in foreign bonds at a large European clearing house. -35- See section "Legislative Developments" regarding the letter concerning the adoption of the recommendations of the Inter-Ministerial Committee for the regulation of custody services.
Audit of Management of Exposure to Cross-Border Risks in the Activity of Foreign Resident Clients
On September 29, 2014, a letter was received from the Bank of Israel concerning "Management of exposure to cross-border risks in the activity of foreign resident clients." In this letter, the Bank of Israel requested an audit at the Bank to assess the level of exposure to cross-border risks and examine the management of such risks at the Bank. The audit is required to examine the adequacy of management of cross-border risks inherent in the activity of foreign resident clients, including risk identification and assessment, and examination of the adequacy of procedures, systems, and controls applied at the Bank. This includes an examination of the adequacy of policy, the functioning of corporate governance, and the quality of controls implemented in all three circles of control.
A draft letter from the Bank of Israel concerning the banking activity of foreign residents was received on November 19, 2014. The draft details the risks to which Israeli banking corporations are exposed due to the increase in activity in various countries aimed at locating moneys of their residents held outside the country of residence. In light of these risks, the Bank of Israel made a recommendation to the Board of Directors of the Bank to examine and update its policy and to ensure that its management updated its policies and controls accordingly, in connection with activity with existing and new foreign residents.
The audit was performed at the Bank by the Internal Audit Unit. As of the date of publication of the financial statements, internal audit has completed its work, but the findings have not yet been discussed by the management and Board of Directors of the Bank.
Legal Proceedings and Contingent Liabilities See details in Note 18.C.(18).
Fixed Assets and Facilities
Real estate assets by ownership and by rent
The Bank owns a number of real estate assets, which it holds himself or through its' subsidiary Igudim Ltd. (a wholly owned subsidiary whose financial statements are consolidated with those of the Bank). These assets serve the Bank's management and the various administrative units, the subsidiaries' offices and part of its branches. Part of the branches operate in assets rented by the Bank (or by Igudim Ltd.) for different periods. The Banks' real estate locations (by ownership or by rent) are operated through Igudim Ltd.
-36- The depreciated cost of buildings and equipment as of December 31, 2014 amounted to NIS 404 million, compared with NIS 405 million at the end of 2013. For information regarding the composition of the investment in buildings and equipment, see Note 6 to the financial statements.
The total area of the land owned by the Bank, or rented by the Bank for its use, is approximately sq.m. 32,365 as of December 31, 2014, as detailed in the following table (gross sq.m):
Type of property Owned * Leased Total area
Branches throughout Israel 9,283 7,729 17,012 Headquarters (including warehouse) 7,323 4,095 11,418
Subsidiaries offices and other properties 2,641 1,294 3,935 Total 19,247 13,118 32,365
* including leasing from the Israel Land Authority.
Information Systems and Information Technology at the Bank The banking activity at the Bank is heavily reliant and dependent upon the information systems and technology tailored to its needs. The Bank precisely maintains the quality of the systems and their proper functioning. The Bank, invests extensive resources in developing and adapting information systems and technologies (software, hardware, communication etc.) for its use and its' customers' use, according to the growing needs of its activity and according to the regulatory requirements, as well as in managing an appropriate system of information security, in emergency preparedness and in business continuity. The Bank regularly tracks innovations and updates in the different areas regarding information technology and invests extensive resources in improving and upgrading these systems and in optimal identification and correction of malfunctions Bank Leumi provides the Bank with the main computer and operation services by outsourcing – for more details see Note 18.C.(4). In addition the Bank operates independent computing systems self-developed or developed by software houses.
The Bank's investments and expenses regarding information technology (IT) array during 2014: a) The expenses recorded in the Statement of Profit and Loss amounted to NIS 191 million, of which: NIS 27 million recorded in "Salaries and Related Expenses", NIS 58 million in "Depreciation and Amortization Expenses" and NIS 106 million in "Other Expenses" (mainly outsourcing). Expenses allocated to profit and loss are mainly wages of employees who maintain and operate systems, maintenance and service agreements for hardware and software, information providing expenses and communication and telephony expenses. b) The IT array costs that were not recorded in the Statement of Profit and Loss as an expense, but recorded during the reported year as assets in the financial statement, amounted to NIS 62 million (before depreciation), the Bank implements IAS 38 regarding Intangible Assets. Software development costs and self-use software adjustment costs are capitalized only if the development costs are reliably measurable, if the software is technically and commercially applicable, if future economic benefits are expected and if the Bank has sufficient intention and sources to complete the development and to use the software. The costs -37- that were recognized as an intangible asset include direct costs of hardware and software and direct costs in respect of employees. These costs are measured at cost less accumulated depreciation and impairment losses. Overhead costs that can't be attributed directly to the development of the software and research costs are recognized as an expense with their formation. Subsequent costs regarding software are recognized as an asset only if they increase the future economic benefits embodied in the asset for which they were spent. The rest of the costs are charged to the Statement of Profit and Loss with their formation. c) The balance sheet balance of the assets regarding IT array, for the end of the reporting year, amounts to NIS 175 million – see Note 6.
Framework for Activity in the IT Area Characteristics of the information technology area include cross-organizational processes with a significant impact on the conduct of the Bank. The computing activity at the Bank is based on the Bank's IT management policy document (the “document”), which is derived from the directive of the Supervisor of Banks (Directive No. 357). As aforesaid, the Bank has a material long-term contractual engagement with Leumi concerning the provision of IT and operational services for a considerable part of the core banking systems. The updated terms of this engagement were established in an addendum to the agreement, signed in December 2007 and applied retroactively from January 1, 2007 (the “Leumi Agreement”). The main points of the signed addendum are: A. Extension of the Leumi Agreement for a period of ten years (until December 31, 2016); B. An update of the model for account settlement between the parties, including arrangements regarding specific systems; C. Improvement of the service level provided to the Bank, formalized in a detailed SLA (Service Level Agreement).
Following conclusions drawn from failures and malfunctions in the banking system, the Supervisor of Banks instructed the banks to take steps to reduce the potential for the materialization of risks arising from failures in the IT systems. In addition, the Supervisor of Banks instructed the banks to reexamine change management processes and malfunction management processes, in order to strengthen and improve the processes. The Bank prepares and works regularly according to those directives.
The branches of the Bank, as well as its executive and administrative units, are linked to an IT environment designated for the Bank within the Banking Service Center of Leumi; routine operations at the Bank’s branches are performed almost entirely within this framework. In order to evaluate the controls integrated in the operational services provided by Leumi to the Bank, examinations are performed by the Bank, by Leumi and by independent professionals.
Control actions on Leumis' activity regarding the agreement, are performed as part of the ISAE 3402 TYPE 2 process – report on controls integrated in Leumis' operational system and tests of the effectiveness of the controls (relating to controls on information systems' operation services in Bank Leumi given to Union Bank) and within the framework of the AUP process (relating to tests performed within procedures agreed upon the Bank, regarding computerization for Union Bank). -38- The Bank operates additional computing systems not included in the Leumi Agreement, which are handled by and are under the responsibility of the information systems units of the Bank, including the following: securities and foreign currency trading systems, the mortgage management system, diamond dealer's business management system, customer relationship management system, back office systems, and routine administrative and control systems of the Bank.
The Bank works regularly and continuously to upgrade the IT array, the quality and control array, the security of information and the emergency preparedness and business continuation. Among other means, the Bank is working in this area to provide advanced software. Hardware and communication solutions, matched to the various business, operational, and managerial needs, including in the area of risk management, while complying with regulatory requirements, with an emphasis on the Basel directives, including all pillars, and implementation of the relevant models required in these directives.
Since they are high in cost and in managerial and professional resources, these processes are performed by the Bank in a gradual manner, based on prioritization derived primarily from the imperative to comply with the relevant regulatory requirements, as well as the need to create a business advantage on the basis of cost/benefit considerations.
The Bank operates in this field while implementing quality in the work processes, in accordance with the quality standard requirements ISO 9001:2008. Nonetheless, despite the resources that the Bank invests in this field, since the systems are complex, it isn't possible to completely prevent the risks arising from malfunctions in them.
On the matter of backup systems and business continuity programs see Section "Risk Management" sub- section "Operational Risk".
Principal Suppliers and Dependence on Suppliers The Bank has several suppliers in the area of information systems and technology. The main suppliers are listed below; each supplier upon which the Bank is dependent is explicitly noted:
A. Bank Leumi – Supplies core banking systems and related operational services. The Bank is dependent upon Leumi, as there is no immediately available alternative to the systems which it provides, and damage to these systems may cause exposure or material damage to the Bank.
B. FMR – Supplies software services for execution and control of securities trading. The Bank is dependent upon the service supplied by FMR, because it is a material supplier of this service in Israel.
C. Matrix – Supplies a CRM (Customer Relation Management) system and maintenance and development services for the Bank’s mortgage system, as well as for the control system of Union Bank Trust Company Ltd.
D. Reuters – Supplies foreign-currency trading, financial information, and interest-rate transaction management systems.
E. Taldor – Activates service and authorization centers for users, support services for terminal equipment.
-39- F. Sivron – Supplies software services for securities trading.
G. Bloomberg – Supplies foreign exchange trading systems, financial information and software services for securities trading.
Activity of Investee Companies The following is a general description of the principal activities of the investee companies of the Bank, their profits before and after provision for taxes, and details regarding dividends, interest, management fees, or other payments to which the Bank is entitled:
Union Bank Trust Company Ltd. (“Trust Company”)1 The Trust Company was established in 1963. The company provides trust services to mutual funds (under the Joint Trust Investment Law - 1994) and to holders of securities in public and private offerings, and provides private trust services (monetary trusts, stock custody, and more). Profits of the Trust Company in 2014 and 2013 were NIS 14,476 thousand and NIS 10,673 thousand, respectively, before provision for tax; and NIS 9,013 thousand and NIS 6,810 thousand, respectively, after provision for taxes; Most of the increase derives from an increase in income from the field of trust to mutual funds.
2 Union Leasing Ltd. (“Union Leasing”) Union Leasing was established in 1996, and finances vehicles and equipment using the financed leasing method for customers of the Bank and for other customers. The balance of financing provided by Union Leasing to its customers on December 31, 2014 amounted to NIS 316 million, compared with NIS 310 million at the end of 2013. Profits of Union Leasing in 2014 and 2013 were NIS 9,996 thousand and NIS 11,158 thousand, respectively, before provision for taxes; and NIS 6,844 thousand and NIS 8,300 thousand, respectively, after provision for taxes.
3 Union Investments and Enterprise (A.S.Y.) Ltd. (“ASY”) A.S.Y was established in 1998 and serves as the Bank’s non-financial investment arm. The volume of the investment portfolio is approximately NIS 54 million in various investment areas. In some of these investments, ASY retains the right to appoint a representative to serve as a director or an observer of the Board of Directors of the investee company. ASY owns the subsidiary Union Capital Markets and Investments Ltd., and the indirect subsidiary, Union Underwriting and Finance Ltd., described below. ASY’s profits (excluding the subsidiary's profits) in 2014 and 2013 were NIS 13,662 thousand and NIS 16,566 thousand, respectively, before provision for taxes; and NIS 18,244 thousand and NIS 15,634 thousand, respectively, after provision for taxes.
1 The Bank holds 9,599,999 ordinary shares, par value NIS 0.1 each. 2 The Bank holds 999,999 ordinary shares, par value NIS 1.00 each. 3 The Bank holds 8,622,075 ordinary shares, par value NIS 1.00 each. On share is held by Union Bank Trust Company Ltd. -40- Union Capital Markets and Investments Ltd. (“Union Capital Markets”)4 Union Capital Markets was established in 1965 and was primarily engaged in distribution and underwriting activity, as defined in Securities Regulations (Underwriting) - 2007 (hereinafter - "Underwriting Regulations"). On November 21, 2010, the Board of Directors of Union Capital Markets resolved on the cessation of its activity as an underwriter, pursuant to Regulation 3(E) of the Underwriting Regulations. Consequently, the company's status changed to “inactive”, as defined in the Underwriting Regulations. On January 10, 2010, a subsidiary of Union Capital Markets was established: Union Underwriting and Finance Ltd. (formerly, until the change of its name on December 15, 2010, Union Issuance Advising (2010) Ltd.). The profits of Union Capital Markets (excluding the subsidiary's profits) in 2014 and 2013 were NIS 84 thousand and NIS 75 thousand, respectively, before provision for taxes; and NIS 70 thousand and NIS 56 thousand, respectively, after provision for taxes.
Union Underwriting and Finance Ltd. ("Union Underwriting")5 Union Underwriting was established in 2011and engages in providing distribution and underwriting services as defined in Securities Regulations (Underwriting) - 2007 (hereinafter - "Underwriting Regulations"). 80% of Union Underwriting is held indirectly by the Bank (through Union Capital Markets and Investments Ltd., the Banks' subsidiary) and 20% is held by a company controlled by the C.E.O. of Union Underwriting. Following the realization of a put option in 2014, which was given to the a service provider in the company for the sale of his shares in the company to Capital Markets, the Bank indirectly increased its holdings of Union Underwriting (through Union Capital Markets) from 75% to 80%. The proceeds from the acquisition are NIS 0.2 million. The company's profits in 2014 and 2013 totaled NIS 1,372 thousand and NIS 1,362 thousand, respectively, before provision for taxes, and NIS 1,004 thousand and NIS 1,035 thousand, respectively, after provision for taxes.
Union Issuances Ltd. (“Union Issuances”)6 Union Issuances was established in 2005 in order to issue certificates of indebtedness and to deposit their proceeds at the Bank. Union Issuances is a reporting corporation, as defined in the Securities Law, as long as securities issued by it are held by the public.
For details regarding the issuing of bonds issued during the year and the approval of Midroog for the frameworks of bond recruitment, see Note 10 to the financial statements. For details regarding a deposits agreement between the Bank and Union Issuance – see Note 18.C.(16). The profit of Union Issuances in 2014 and 2013 was NIS 1,592 thousand and NIS 2,029 thousand, respectively. According to an arrangement with the Income Tax Commission, the company is not assessed for taxes, and its income and/or expenses for tax purposes are included in the Bank's income and/or expenses for tax purposes.
4 The Bank holds 1,750,002 ordinary shares, par value NIS 1.00 each. Holding through A.S.Y. (1,750,001 shares) and Union Bank of Israel (1 share). 5 The bank holds 2,720,100 ordinary shares, par value NIS 1.00 each. Held through Union Capital Markets at a rate of 80% (up until January 1, 2012, the holding rate was 85%). 6 The Bank holds 100 ordinary shares, par value NIS 1.00 each. -41- Carmel Union Mortgages and Investments Ltd. (“Carmel”) 7 Carmel Mortgage and Investment Bank Ltd. (“Carmel Bank”) engages in the area of mortgages. In 2001, an agreement was signed between the Bank and the Carmel Investments Ltd. Group, in which the Bank acquired the majority of the assets, liabilities, and banking activity of Carmel Bank, and concurrently the banking license of Carmel Bank was cancelled. Subsequent to the cancellation, the name of Carmel Bank was changed to its current name. Following the acquisition of its banking activity by the Bank, a debt balance bearing interest and linkage differentials was recorded at Carmel. The profits of Carmel mainly arise from this debt balance. Profits of Carmel in 2014 and 2013 were NIS 6,803 thousand and NIS 8,767 thousand, respectively, before provision for taxes; and NIS 4,472 thousand and NIS 5,758 thousand, respectively, after provision for taxes. Carmel does not engage in new activities; it maintains the loan portfolio acquired by the Bank.
Igudim Insurance Agency (1995) Ltd. (“Igudim Insurance Agency”)8 Igudim Insurance Agency provides life insurance to borrowers or home insurance executed in the course of housing loans granted to customers of the Bank, pursuant to Section 11 (B) 2 of the Banking Law. Profits of Igudim Insurance Agency in 2014 and 2013 were NIS 1,112 thousand and NIS 343 thousand, respectively, before provision for taxes; and NIS 819 thousand and NIS 251 thousand, respectively, after provision for taxes.
Livluv Insurance Agency (1993) Ltd. (“Livluv”) 9 Livluv was under the full ownership of Bank Carmel when it was acquired by the Bank in 2001. Livluv provides home insurance executed in the course of housing loans granted to customers of Carmel, pursuant to Section 11 (B) 2 of the Banking Law. Livluv does not engage in new activity, but maintains its existing activity until its conclusion. Monetary data of Livluv are consolidated with those of Carmel; see above.
Igudim Ltd. (“Igudim”)10 Igudim is engaged in acquisition, rent, maintenance, management, and construction of the real-estate properties of the Bank, for the Bank and for its subsidiaries. The monetary data of Igudim are consolidated with those of the Bank.
7 The bank holds 11,625,041 ordinary shares, par value NIS 1.00 each. 8 The Bank holds 99 ordinary shares, par value NIS 1.00 each. 9 The Bank holds 100 ordinary shares, par value NIS 1.00 each. Holding through Carmel Mortgage and Investment Bank Ltd. (99 shares) and through Union Bank Trust Company Ltd. (1 share) – subsidiaries fully owned. 10 The Bank holds 15,978,087 ordinary shares, par value NIS 0.0001 each. -42- Union Systems Ltd. (“Union Systems”)11 Union Systems provides computer services to the Bank and to its subsidiaries. The monetary data of Union Systems are displayed in the Bank's "solo" financial statements.
Union Finances Ltd. (formerly Union Mutual Funds (U.M.F.) Ltd.) (“Union Finances”) The Banks' Board of Directors approved the sale of Union Finances in his meeting on January 16, 2014(served as the Bank's auxiliary corporation, without any business activity, until 2006 was in the business of managing funds for joint investments in trust and its activity was sold during this year).
Union Balances Ltd. (formerly Union Provident Funds Management Ltd.) (“Union Balances”)12 The activity of Union Balances (which used to manage provident funds in the past) was sold in 2006 to Ayalon Provident Fund Management Company Ltd., a company under the control of Ayalon Insurance Company Ltd., in 2006, and it is currently an auxiliary corporation of the Bank. As of the report date, Union Balances has no business activity, and is solely engaged in holding funds received from the sale of its assets, holding funds of its equity capital, investing these funds and payments related to these investments. The profits of Union Balances in 2014 and 2013 were NIS 262 thousand and NIS 532 thousand, respectively, before provision for taxes; and NIS 195 thousand and NIS 406 thousand, respectively, after provision for taxes.
Union Bank Israel Records Ltd.13 Was established in 1954. At the report date, no business activity is conducted by this company.
Ahuzat Yehuda Ltd. The company owned a real-estate property in Tel Aviv which was used in the past as a branch of the Bank and was sold in 2009. The ownership of this property constituted the business activity of this company. On April 27, 2014 the company's status turned to "voluntary liquidation".
Impact Investment Portfolio Management Ltd. ("Impact Management")
On September 30, 2014, the Bank completed the sale of all of its holdings in Impact Investment Portfolio Management Ltd. (hereinafter: Impact Management), an investment portfolio management company, under the exclusive control of the Bank, to A.T Impact Gate Holding Ltd., a company owned by Mr. Albert Tubol (70%) and the C.E.O of Impact, Mr. Zachi Rodnik (30%). For details see the Bank's immediate reports from June 16, 2014 (reference 2014-01-092127), July 1, 2014 (reference 2014-01-103653) and from August 19, 2014 (reference 2014-01-136776) and Note 5 to the financial statements. The sale of Impact Management doesn't have a material effect on the Bank.
11 The Bank holds 99 ordinary shares, par value NIS 1.00 each. 12 The Bank holds 850,000 ordinary shares, par value NIS 1.00 each. The provident funds activity was sold in 2006. 13 The Bank holds 98 ordinary shares, par value (old Shekel) 0.0001 each. -43- Bank Safes Company 14 Established in 1968 in order to buy, hold, manage, and sell safes at the Diamond Exchange building in Ramat Gan, in order to rent safes to customers or other entities. The Bank holds 25% of the shares of the company; the other holders are Israel Discount Bank Ltd. (50%) and Bank Leumi LeIsrael Ltd. (25%). As of the report date, no business activity is conducted at this company.
The Bank's return on its investments in those investee companies during 2014 was 9.3%, compared with 8.7% in 2013.
Other investment In addition, the Bank holds approximately 14% of the share capital of the company Development HOF Hatehelet (Tel-Aviv - Herzliya) Ltd., which owns a land division in central Israel. The rate of holdings of the Bank in the Company may grow beyond the current rate, but in any case shall not exceed 20% of the share capital of the Company, as long as the limit on the maximum rate of holdings in non-financial corporations remains in effect, pursuant to Section C of the Banking Law. For further details regarding this holding, see Note 7 to the financial statements.
14 The Bank holds 150,000 ordinary B shares, par value NIS 0.01 each. -44- Dividends, Interest, and Management Fees Received by the Bank The following table lists dividends, management fees, participation in expenses and net financing income (expenses) received by the Bank, or which the Bank is entitled to receive, from its subsidiaries, for 2014 and 2013, in NIS thousands: Management fees and participation in Net financing income Name of company Dividend expenses (expenses) 2014 2013 2014 2013 2014 2013
Union Investments and Enterprise (A.S.Y.) - - 234 189 (2,071) (620) Union Capital Markets and Investments Ltd. * - - 12 12 (65) (106) Union Bank Trust company - - 90 90 (301) (467) Impact Union Investments Portfolios - - 68*** 90 (53)*** (264) Union Leasing - - 42 42 9,027 7,946 Carmel Union Mortgages and Investments 5,742 6,560 2,400 2,894 (6,497) (8,145) Union Issuances 43 42 (95,223) (140,815) Union Underwriting and Finance** - - 48 48 (2) (6) Igudim Insurance Agency - - 1,370 1,749 (13) (32) Igudim Consolidated with the “solo” reports of the Bank Union Systems Consolidated with the “solo” reports of the Bank Union Balances Ltd. - - - - (257) (525) Union Finances Ltd. - 37,468 - - - (315) Livluv Insurance Agency Consolidated with Carmel Union Mortgages and Investments
* Consolidated with the financial statements of Union Investments and Enterprise. ** Consolidated with the financial statements of Union Capital Markets. *** For a period of the first nine months of the year – see Note 5.
Agreements, Transactions, and Payments between the Group Companies A. Deposit Agreements with Union Issuances The Bank and Union Issuances Ltd. signed deposit agreements in connection with offerings of bonds and/or notes and/or commercial securities. For details see Note 18.C.16.
B. Account Settlement Agreements The Bank routinely provides managerial and operational services to its subsidiaries, such as legal services, office services, bookkeeping, and internal audit. In order to regularize the contractual relationships between itself and these companies, the Bank has entered into agreements under which the subsidiaries pay certain amounts to the Bank for the services, or indemnify the Bank for the operational expenses paid by the Bank in respect of the provision of such services.
-45- C. Capital Notes From 2000 to 2005, the Bank provided capital notes to its subsidiaries against the provision of equity capital, under the following terms:
1. A.S.Y. – It was agreed that the capital note was issued against an amount of NIS 139 million which the Bank would transfer to A.S.Y. at rates and dates to be agreed upon by A.S.Y. and the Bank from time to time, by crediting the account of A.S.Y. at the main branch of the Bank. Each of the said amounts shall be presented for settlement, at the demand of the Bank, not before one year has elapsed from the end of the year in which the amount was provided. The capital note has a preferred repayment priority rank over all other debts of A.S.Y. It was agreed that the aforesaid amount would not bear interest and would not be linked in any way.
2. Union Issuances - It was agreed that the capital note was issued against an amount of NIS 16 million which the Bank would transfer to Union Issuances, through a one-time credit of the account of Union Issuances with the full amount.
It was agreed that the aforesaid amount would not bear interest and would not be linked in any way. It was further agreed that the capital note would be presented for settlement only upon the liquidation of Union Issuances, and only after the settlement of all of its liabilities to all of its other creditors.
3. Impact Management investment portfolios – The capital note issued by the Bank to the company was repaid by the company.
For further details regarding the capital notes, see Note 5 to the financial statements.
D. Indemnification Letters The Board of Directors of the Bank approved the granting of irrevocable and unconditional indemnification letters, which took effect on June 30, 2009, to the consolidated companies, for details see Note 18.C.15.
E. Agreements Regarding Employees On August 4, 1996, a collective agreement was signed, to which the Bank and Union Systems are a party, according to which the Bank undertook a commitment to employ under personal contracts only workers in specific professions at Union Systems.
F. Additional Contractual Engagements The Bank regularly and routinely, and in return, receives services from its subsidiaries, as follows: 1. Igudim (maintenance, rental, management, and construction of real-estate properties of the Bank). 2. Union Systems (computer services).
The activity of Igudim and Union Systems consists mainly from providing services to the Bank.
G. Credit Facilities for the Subsidiaries The Bank occasionally provides credit facilities to subsidiaries in the group, for their routine operations. As of December 31, 2014, the Bank provided credit facilities to subsidiaries in the amount of approximately NIS 332 million, either in the form of financing or of financial guarantees. -46- Human Capital
Labor relations at the Bank are based on the labor constitution, collective agreements updated from time to time, and various arrangements primarily formulated through discussions between the management of the Bank and representatives of the employees.
The Bank's regular employees are divided into three categories, functionally, as well as in terms of the applicability of labor agreements, to three: clerks, managers and authorized signatures, and employees under personal contracts.
The principal agreements signed with the representatives of the clerks and with the representatives of the managers and authorized signatories are summarized below:
A. Clerks Labor relations with the clerks are based on a special collective agreement for employees of the Bank (the "Labor Constitution"), which is updated by routine wage agreements. The Labor Constitution was formed between the Bank and the Histadrut General Labor Federation in 1990, and establishes the infrastructure for labor relations with the clerks, such as the procedure for hiring employees, workplace discipline, procedure for promotion of employees, rights to vacation and sick leave, various increments paid to employees and terms for such payments, social rights, procedures for resignation and dismissal, severance pay, etc.
The Constitution is in effect as long as neither party gives notice of its desire to revoke or amend it.
A special collective agreement with regard to the clerks joining the "Amit" pension fund was signed on August 22, 1996. Under this agreement, the Bank's payments to the pension fund starting April 1, 1995 shall replace the obligation to pay the full severance pay to which a clerk may be entitled by law for a given period.
In addition to the foregoing, periodic agreements are formulated in which updates of clerks' wages and related terms according to their ranks, are addressed, as well as other specific issues requiring arrangement.
The New General Labor Federation and the Labor Federation of Clerks /Bank Workers Division, are a party to all of the agreements.
-47- B. Managers and authorized signatories Labor relations with managers and authorized signatories are organized in a special collective agreement from 1979, which links the wage terms of the managers and authorized signatories to the wage terms of managers and authorized signatories at Bank Leumi (hereinafter: the "Implementation Agreement"). The Implementation Agreement also refers to the right of managers and authorized signatories to choose, when they reach retirement age and have accumulated 15 years of work at the Bank (or, in the event of disability or death, has accumulated 5 years of work at the Bank), between receiving severance pay and the savings in the compensation fund or receiving a pension from the Bank.
Pursuant to a special collective agreement of February 24, 1997, the insurance benefits of managers and authorized signatories at the Bank were transferred to the pension fund "Amit", as of April 1, 1995, as was also done for the clerks, as detailed above. This agreement organizes the pension rights of long-standing managers and authorized signatories, according to the terms at Bank Leumi, integrated with the pension from "Amit". Pension rights of new managers and authorized signatories are accumulated at "Amit" only. The agreement also states that payments to "Amit" in respect of new managers and authorized signatories replace the payment of full severance pay to such managers and authorized signatories. In addition to the foregoing, agreements on specific issues are executed from time to time.
After the balance sheet date, a new wage agreement was signed at Leumi Bank for a period of four years. The agreement mainly reduces the annual salary update mechanism and changes pension rights and jubilee grants - for details sees Note 15.G.
C. Employees under personal contracts The Chairperson of the Board of Directors, the Chief Executive Officer, all members of management, and other employees have personal employment contracts with the Bank.
Details regarding developments in manpower are set out below: Employee Positions* Average Annual as of December 31 Employee Positions*
2014 2013 2014 2013
The Bank 1,238 1,233 1,233 1,241 Consolidated companies 25 37 31 37 1,263** 1,270** 1,264 1,278
* Position - A full-time position including specific overtime, working hours of contractors and others. ** Of which, managers and authorized signatories, as of December 31, 2014 - 262 (December 31, 2013 - 267).
In 2014, the Bank continued to place special emphasis on employee training and on development of human resources at the various levels. Training and professional instruction are carried out at the Bank’s training center or at the workplaces, and are provided through the Bank’s professional staff. The team of internal instructors and content experts is composed of approximately 50 instructors who are employees and executives at the Bank. -48- Guidance and training in the areas of management, sales, personalized counsel for managers and organizational development are provided by external instructors and organizational consultants. Training expenses totaled NIS 2 million in 2014 similar to the corresponding period last year. Training focused on the following main issues in 2014: Compliance and enforcement, development of executives at all levels of management at the Bank, training of a pool of potential candidates for junior management;, absorption and assimilation of information systems and capital-market systems; broad professional training for the entire segment of private customers and business customers; and training sessions on various regulatory issues.
There is an ethical code in the Bank which was formulated in a comprehensive process, with the participation of various parties, including shareholders, directors, managers, employees, customers, and suppliers, based on a deep understanding of the responsibility of the Bank – in its capacity as a bank, and as an organization operating within Israeli society. The ethical code is a set of values and rules of conduct that serve as a compass for ethical behavior for all employees and managers. The principles of the code should provide a framework for appropriate ethical behavior. The ethical code is composed of five key values: professionalism; service, excellence, fairness and integrity, mutual respect and individual treatment. In 2014 the Bank continued the integration and comprehensive assimilation of the ethical code in the work processes and the procedures of the Bank. Concurrently, work processes of ethics institutions in the Bank, including The Bank's Ethics Committee which convenes once a quarter, took place.
Retirement Plan and Change in Retirement Policy - On June 28, 2012, the Board of Directors of the Bank approved the framework for a preferred-terms retirement program, the program ended at the end of 2013 - for details, see Note 15.A.5.
The Companies Law (Amendment 20), 2012 (hereinafter: "Amendment 20") took effect on December 12, 2012. Pursuant to Amendment 20, public companies must establish a policy concerning the terms of service and employment of officers, in accordance with sections 267A and 267B of the Companies Law, 1999 (hereinafter: the "Companies Law").
Proper Conduct of Banking Business Directive 301A, Remuneration Policy at Banking Corporations (hereinafter: the "Banking Corporations Remuneration Directive") was published and took effect on November 19, 2013. Among other matters, the directive establishes rules aimed at ensuring that remuneration arrangements at banking corporations are consistent with the risk-management framework and long-term goals of the banking corporations, further to Amendment 20. The Banking Corporations Remuneration Directive will apply to all employees of the Bank and to all types of remuneration. The directive includes requirements applicable to "key employees" of a banking corporation, as defined in the Banking Corporations Remuneration Directive, which include senior officers; for details, see the Section "Legislative Developments." Therefore, following the publication of the Banking Corporations Remuneration Directive, the Bank adjusted its policy on the terms of service and employment of officers, which was formulated prior to Amendment 20, to the Banking Corporations Remuneration Directive, as necessary
-49- Remuneration Disclosure
The Bank's policy concerning the terms of service and employment of officers of the Bank (Chairman, Chief Executive Officer, members of management, Legal Counsel, and Internal Auditor) was approved at the general assembly of the Bank on February 6, 2014, in accordance with Section 267A of the Companies Law, 1999 (hereinafter: the "Companies Law"), following approval by the Board of Directors of the Bank on December 31, 2013, and approval by the Remuneration Committee on December 26, 2014 (hereinafter: the "Officers' Terms of Service and Employment Policy"). In addition, the Officers' Terms of Service and Employment Policy includes a bonus plan, which is used to determine the annual bonus for senior officers of the Bank; this plan replaced the bonus plan for senior officers of the Bank approved in 2011. For details regarding the Officers' Terms of Service and Employment Policy, see the Immediate Report dated December 31, 2013 (reference no. 2013-01-115228) and Note 15D to the Financial Statements.
In June 2014, the Board of Directors of the Bank, after considering the recommendations of the Remuneration Committee, approved a remuneration policy applicable to all employees of the Bank, which includes reference to the terms of service and employment of other key employees (as detailed below) who are not officers of the Bank, and adjusted the remuneration policy for employees of the Bank, as approved by the Board of Directors in the past, to Proper Conduct of Banking Business Directive 301A, Remuneration Policy at Banking Corporations (hereinafter: "Banking Corporation Remuneration Directive").
The main entity that supervises remuneration is the Remuneration Committee, which is authorized by the Board of Directors to, among other matters, discuss and make recommendations to the Board of Directors regarding remuneration policy for employees and officers of the Bank, and examine the compliance of the policy with legal directives, the effect of the remuneration policy on the Bank's risk profile, and its congruence with the risk appetite of the Bank, on at least an annual basis. The Remuneration Committee also discusses the approval of remuneration mechanisms for key employees and officers, and contractual engagements with officers of the Bank concerning their remuneration, with reference to matters specified in the remuneration policy, in order to ensure that the agreements are balanced and do not jeopardize the robustness and stability of the Bank; its recommendations are presented to the Board of Directors.
The Remuneration Committee consists of external directors and independent directors only; all of the external directors appointed in accordance with the Companies Law who serve on the Board of Directors are members of the committee.
As of the date of approval of the annual financial statements, the following directors serve on the Remuneration Committee: Mr. Zalman Segal, Mr. Yaacov Lifshitz, and Alberto Garfunkel (note that Mr. Uzi Vardi-Zer served on the Remuneration Committee until August 21, 2014, and Ms. Miri Lent-Sharir served on the Remuneration Committee until January 31, 2015, the dates of the end of their terms of service on the Board of Directors of the Bank).
-50- The Remuneration Committee and the Board of Directors of the Bank were aided by accountants from the accounting firm E&Y in 2014 in formulating and implementing remuneration mechanisms.
Within the remuneration policy approved by the Board of Directors of the Bank in June 2014, a list was established of positions of key employees whose activity may have a material effect on the risk profile of the Bank, pursuant to Proper Conduct of Banking Business Directive 301A. Employees defined as key employees, in addition to the senior officers of the Bank, as defined in Directive 301A, include system heads at the Bank, if they are not employed under the collective agreement applicable to managers at the Bank, and certain dealers in proprietary trading and in the dealing room.
The remuneration policy shall be presented for discussion and approval by the authorized organs of the Bank once every three years. The Board of Directors and Remuneration Committee of the Bank shall supervise and monitor, on at least an annual basis, the actual implementation of the policy, and shall examine the need for adjustment of the policy if material changes have occurred in the circumstances that prevailed when it was established, or for other reasons; this shall include an examination to determine whether the policy is advancing the goals and objectives that it is aimed at fulfilling.
With regard to officers and other key employees, the remuneration policy applies to the terms of service and employment to be approved for these employees as of the date of approval of the remuneration policy by the authorized organs of the Bank, and the remuneration policy shall not impair contractual engagements (or remuneration formulas for employees or groups of employees) that exist when the remuneration policy is approved between the Bank and the aforesaid employees with respect to the terms of their service and employment at the Bank, subject to the transitional directives established by the Supervisor of Banks concerning the application of the requirements of the Banking Corporation Remuneration Directive to individual remuneration agreements approved prior to the publication of the Banking Corporation Remuneration Directive.
The remuneration policy also establishes the goals and principles on which it is founded, according to which the remuneration policy is designed to create a system of incentives for the Bank's employees, within the existing wage agreements at the Bank, in order to encourage achievement of the Bank's objectives and of its long-term strategic plan, while complying with its risk appetite and avoiding exceptional risks beyond its risk tolerance, and while maintaining a solid capital base and incentivizing employees in control and supervision positions, with due attention to the importance and sensitivity of these roles.
Furthermore, in formulating and establishing the Bank's "Policy on Terms of Service and Employment of Officers," members of the Remuneration Committee and the Board of Directors also considered the matters, data, and considerations detailed in Section 267B(a) and in the First Appendix A to the Companies Law, including matters required to be addressed in the remuneration policy and directives required to be established in the remuneration policy, all in congruence of the principles of the remuneration policy with the goals and objectives which the Bank's remuneration policy is designed to achieve, the size of the Bank, the scope of its operations, the nature of its business, and its results over time. -51- The remuneration policy takes into consideration, among other matters, the appropriateness of remuneration to the employee's education, skills, professional experience, and achievements.
In establishing the remuneration policy, the Bank's wish to retain and develop its management tier and to ensure its ability to recruit excellent executives in the future, while maintaining an appropriate remuneration structure, was taken into consideration, all while considering organizational factors, such as the costs of remuneration and the desired gaps in remuneration between different ranks at the Bank; the nature of the Bank's activity; the work plan; the Bank's risk management policy; its business results over time; the competition in the banking industry; the size of the Bank; and a comparison to the banking system.
The remuneration policy also formalizes the principles underlying the variable remuneration mechanisms for key employees, pursuant to which, among other matters, variable remuneration shall be granted for achievement of performance targets that refer to general organizational goals; performance targets that entitle the employee to variable remuneration shall be set in such a manner that they do not encourage risk taking beyond the risk tolerance of the Bank. The remuneration policy also establishes a maximum ratio between the rate of variable remuneration and fixed remuneration for employees (100% in respect of a calendar year, except in exceptional conditions, subject to the directives of all laws), principles for spreading a bonus approved in respect of a particular year and for denying a bonus, and terms for the payment of remuneration in respect of the termination of employment that are not a fixed component.
With regard to officers engaged in risks and compliance, including the Internal Auditor, the Chief Risk Officer, and the General Counsel of the Bank, a mechanism for variable remuneration has been established to ensure non-dependence of the amount of remuneration on the business which they oversee. Thus, first and foremost, specific parts of the total remuneration allocated to all senior officers were allocated in advance to each of these officers; this total amount is also established in accordance with measurable parameters established in advance by the Board of Directors of the Bank. This ensures that these officers receive a specified part of the total remuneration to which all senior officers of the Bank are entitled, but also that the main component factored into the score assigned to the aforesaid officers, which is used to determine their actual variable remuneration (within the boundaries of the "normative" share allocated to them out of the total remuneration), is attributed to their individual BSC15, which depends on their performance, rather than to the business that they oversee.
As of the date of this report, other employees of the Bank who are involved with risks and compliance are employed under the terms of the collective agreement for managers at the Bank.
15 A scorecard reflecting quantitative measurement of parameters established in advance by the Board of Directors of the Bank, used for evaluation. -52- The principal risks taken into consideration in implementing remuneration metrics for senior officers include, among others, deviation from the risk appetite established by the Board of Directors for the capital adequacy of the Bank, credit risks, concentration risks with respect to borrowers and depositors, operational risk, liquidity risks, and compliance risks. The Board of Directors of the Bank has established metrics derived from objectives in the area of conformity with the risk tolerance of the Bank, with respect to the risks noted above; these metrics are included in the score used at the Bank to determine the remuneration itself and the volume of remuneration for officers. In addition, metrics designed to ensure stability and conformity with the risk tolerance, with respect to the risks noted above, were integrated into the BSC of the relevant officers, as relevant. These metrics are included in the bonus plan for senior officers approved in 2014. It is further clarified that the bonus plan for officers establishes minimum threshold conditions (including a minimum rate of return and a minimum target ratio of capital to risk- adjusted assets), which must be met in order for the officers to be entitled to a bonus.
It is clarified that the score for the performance of the Bank, in accordance with the metrics and rules established in the bonus plan for officers of the Bank, constitutes the main part of the score of the Chairman of the Board of Directors and the Chief Executive Officer of the Bank (80%) in connection with their entitlement to a bonus. For other officers, the Bank's score constitutes 20% of the officer's score; 60% reflects the BSC established for that area (the BSC includes objectives in the area of activity of the officer, compliance and control objectives, and conformity with operational risk tolerance, to the extent relevant to the officer's activity). An additional 20% of the score of the Chairman of the Board, the Chief Executive Officer, and the other officers is a personal evaluation score based on a list of qualitative parameters established in advance and approved by the Remuneration Committee and the Board of Directors of the Bank. With regard to qualitative parameters for the evaluation of the Chairman, the Chief Executive Officer, and the members of management, see the bonus plan, in Note 15D to the financial statements.
The performance of the Bank is measured based on three main parameters, for each of which scores are assigned on a scale of 70-130. In extreme cases of failure to attain threshold objectives, a score of zero is assigned. Parameters and weights: return on equity 40%; BSC score (consists of parameters related to stability, efficiency, growth, compliance, and control, as well as a comparison to returns in the banking system) 45%; capital adequacy 15%. The size of the total annual bonus for officers of the Bank is determined based on the "standardized return" derived by multiplying the actual return by the Bank's score, which is based on a weighted average of the aforesaid parameters, in accordance with the rules set forth in the bonus plan. In cases in which the standardized return of the Bank, as described above, is lower than the threshold of 4%, a negative bonus shall be allocated as a debit to the senior officers, according to the terms set forth in the bonus plan.
In addition, in accordance with the terms of the bonus plan for officers, the Board of Directors shall be entitled to decide to reduce the amounts of the bonuses to which the officers of the Bank, or some of these officers, are entitled, and to set the rate of the reduction, and to determine that in exceptional cases of a
-53- general crisis in the economy, the system, or the Bank, to be explained in the decision, bonuses will not be granted to senior executives in the relevant year.
The remuneration policy for officers of the Bank further states that an officer shall reimburse the Bank for sums of variable remuneration paid to the officer, if the sums were paid based on data later found to be erroneous and restated in the financial statements of the Bank, in the manner and method to be determined by the Remuneration Committee.
If, pursuant to the terms of the bonus plan for officers of the Bank, an officer is entitled to a positive bonus in respect of a particular year, an amount constituting 50% of this bonus shall be paid to the officer following the approval thereof. The payment of the remaining bonus (50%) to which the officer is entitled shall be deferred, and shall be paid in equal parts in each of the three years following the calendar year in which the bonus was approved. The deferred payments are linked to the consumer price index, from the date of approval of the bonus, and are subject to a netting mechanism, as detailed in the bonus plan.
The Bank does not have variable remuneration plans involving shares or share-based instruments.
For further details, and with regard to the ratios of maximum variable remuneration to fixed remuneration considered appropriate, as established by the Bank in accordance with Directive 301A, see the description of remuneration policy and the bonus plan for officers in Note 15D to the Financial Statements.
The remuneration plan for proprietary trading employees is based on risk-adjusted profit, which dictates a parallel between the return attained in proprietary investing activity and the risk level to which the Bank is exposed in terms of risk-adjusted assets. The plan includes a component of the BSC control score (conformity with risk-management limits; internal audit scores, and compliance with laws, standards, and regulatory guidelines) and a CEO evaluation. The plan also includes a negative bonus when proprietary trading performance is below the threshold defined in advance relative to the minimum performance target, and a long-term remuneration component (50% of the bonus is paid at the end of the current year, and the remainder is paid over the course of two years). Entitlement to a bonus under this plan is contingent upon attainment of excess returns over the returns of the business division.
The remuneration plan for dealers in the dealing room includes metrics that create a link with the business results of the dealing room and the various desks, based on objectives set in advance in the work plan, and in comparison to the average of the dealing room and desks in the last three years. The dealer's evaluation score is also based on qualitative criteria established in advance. In addition, the plan includes a long-term remuneration component (50% of the bonus is paid at the end of the current year, and the remainder is paid over the course of two years). In years in which negative parameters are obtained with respect to the performance of the Bank, such as a low return on equity, the distribution of incentives shall be considered according to the Chief Executive Officer's judgment. The remuneration plans for dealers and proprietary traders will be updated, subject to the Banking Corporation Remuneration Directive.
-54- The following is a quantitative disclosure of the remuneration policy for key employees (including senior officers) in respect of 2014:
- The Remuneration Committee convened 8 times during the year, and remuneration in the amount of approximately NIS 0.2 million was paid to its members.
- 29 key employees, including officers, received variable remuneration.
- No secured bonuses, not dependent upon performance, were granted.
- A signing bonus in the amount of approximately NIS 0.3 million was granted to one employee.
- Compensation above 100%, in the amount of approximately NIS 3 million, was paid to one key employee.
- The total balance of deferred remuneration not yet paid in cash was approximately NIS 3.2 million.
- Total deferred remuneration paid in cash was approximately NIS 2.8 million.
- Total value of remuneration in respect of the reporting year (in NIS millions):
Un-deferred Deferred Officers Cash-based fixed remuneration 18.9 - Cash-based variable remuneration 0.3 - Key employees Cash-based fixed remuneration 8.5 - Cash-based variable remuneration 0.8 0.8
- The total balance of deferred remuneration not yet paid in cash and exposed to explicit adjustments was approximately NIS 3.2 million.
- Write-downs during 2014 due to explicit adjustments totaled approximately NIS 1.5 million.
In October 2013, a collective agreement with respect to bonuses was signed by the union of managers and authorized signatories, for 2013-2016. The agreement is identical in monetary volume to the agreement that ended in 2012. The formula for the amounts of the bonuses is based on the annual rate of return on equity; the bonuses are contingent on the rate of return, and are paid beginning with a return of 6%. In addition, a collective agreement has been signed stating that an employee appointed to a senior management position at the Bank shall be employed under personal contract only. Another agreement has been signed in connection -55- with the dispute with the union of managers and authorized signatories concerning budget-based pensions; see Note 15.F. Note that in 2014 a wage agreement was signed, with the clerks' committee, for one year concerning the salary update for this year. Note 15.A.7 provides details regarding provisions for severance pay, retirement, and pensions. Provisions for pensions and excess compensation included in "total provisions, net" are calculated according to actuarial estimates. In addition, Note 15.B provides details of liabilities for bonuses in respect of employee seniority (jubilee bonuses). This liability is also calculated according to an actuarial estimate. See Note 1.F.1. regarding the influence of the implementation of the American standardization concerning employee benefits, as of January 1, 2015. The following table details the change in these reserves in 2014 and 2013, as well as details of the change in "amounts funded" in the same years.
Change in current value of actuarial liabilities – 2014 (NIS millions): Pensions and Excess Compensation Jubilee Bonuses Total
Current value of liability, January 1, 2014 233.2 33.1 266.3 Current service cost(1) 9.4 3.6 13.0 Financial expenses(2) 21.9 2.1 24.0 Net benefits paid (3) (17.8) (0.8) (18.6) Expected return on the programs' assets(4) (8.3) - (8.3) Net actuarial loss (profit)(5) (34.4) (2.6) (37.0)
Current value of liability, December 31, 2014 204.0 35.4 239.4
Change in current value of actuarial liabilities - 2013 (NIS millions): Pensions and Excess Compensation Jubilee Bonuses Total
Current value of liability, January 1, 2013 207.5 27.3 234.8 Current service cost(1) 9.2 3.4 12.6 Financial expenses(2) 17.5 1.6 19.1 Net benefits paid (3) 10.7 (0.1) 10.6 Expected return on the programs' assets(4) (7.2) - (7.2) Net actuarial loss (profit)(5) (4.5) 0.9 (3.6)
Current value of liability, December 31, 2013 233.2 33.1 266.3 (1) Current service cost constitutes of the pension rights cost, the increased compensation cost and the cost of Jubilee bonuses which the employees "purchased" in return for their services in the current year. (2) Financial expenses constitute the increase of the current value of the reserves, arising from the fact that the date of settlement of "the benefit" became a year closer. (3) This item includes paid benefits: pension payments to retirees, payments of Jubilee bonuses, payments for employers which retired and relinquished their right for pension, excess compensation payments and deposits and withdrawals from the assets of the program. (4) Expected return on the assets of the program takes into account the changes in the fair value of the assets of the program, which are held during the period as a result of actual deposits and actual benefits which have been paid. The expected return is based on the market forecasts at the beginning of the period. The difference between the expected return and actual return on the assets of the program, was included in an actuarial loss or profit. (5) Net actuarial loss/profit arises from adjustments based on experience (the effect of differences between actuarial assumptions and actual outcomes) and from the effect of changes in actuarial assumptions. The actuarial profit in 2014 derives mainly from the update of the real wage increase estimation when calculating the actuarial liabilities according to the estimation of the Bank's management and following a new wage agreement at Leumi Bank from January 2015. In addition, see sub-section "Critical Accounting Policies and Estimates”.
-56- Change in funds for the year ended December 31(in NIS millions): 2014 2013
Opening balance 88 90 Withdrawals (3) (8) Profit * 7 6
Closing balance 92 88
* Profit arising from the revaluation of the central severance pay fund, recorded according to the balance conformation, received from the external entity in which the money is deposited.
Description of the Tax Situation
A. Regarding a letter from the Israel Tax Authority (VAT Audit Department) asking to change the classification of the Banks' subsidiary, Union Systems Ltd. from "practitioner" to "financial institution" – see Note 18.C.(19). B. The Bank and its subsidiaries have final tax assessments or assessments considered to be final until and including the tax year 2010. C. The Bank has the status of a Qualified Intermediary (Q.I.) as defined in the rules of the income tax authorities in the U.S.A. The significance of this status is that the Bank has entered into an agreement with the tax authorities in the U.S.A. regarding certain reporting and tax deduction processes, as required under the U.S. law. D. Regarding the letter of the Supervisor of Banks concerning preparation for the implementation of the FATCA directives, see Section "Legislative Developments". E. For additional information regarding the Bank's policy for recording taxes and the provision for taxes, see Notes 1.E.10 and Note 28 to the financial statements.
Description of the Bank's Business by Activity Segments The characterization of the segments is derived mainly from the customers' line of business. The accounting principles implemented in the editing of this data are described in Note 31 to the financial statements. The Bank’s activity focuses on the hence for the activity segments:1 Private segment – the segment provides various banking services and financial products to households and private customers who are financially secure, including investment consulting services. In addition, the segment also includes small businesses, which are managed at the retail department with a credit volume that does not exceed NIS 0.5 million, and housing financing activities.
Business segment - the segment provides a range of banking services and financial products to business customers (with a credit volume that exceeds NIS O.5 million), from a variety of economic sectors - whilst the core sectors are construction and real estate (with an emphasis on escorting residential construction) and customers who are active in the capital market.
Diamond Segment - the segment consists of customers operating in the diamond industry, most of whom are members of the Diamond Exchange in Ramat-Gan.
-57- Financial Management Segment – This segment coordinates all of the Banks' assets and liabilities management in NIS and in foreign currency and the management of liquidity. The segment includes the Bank’s activity for itself in securities (in the available for sale portfolio and the trading portfolio) and in derivative financial instruments, including interest and currency positions. Also, costs arising from the need to maintain business liquidity level and an adequate level of dispersion of the depositors, are loaded on this segment, which is expressed by a gap in transfer prices between credits and deposits.
Others and adjustments –includes activities which cannot be classified to any specific segment. ______
1 Note that each bank classifies its customers to segments according to different parameters and allocates income and expenses to segments according to different parameters.
The following are the main rules applied in the division of results of operations among the different segments:
Net interest income – In segments in which activity focuses on customers, this item includes a financial spread on customers’ loans and deposits. The spread is calculated above a transitional price determined for each loan and deposit, according to average life duration, to the relevant linkage channel and while taking into account the Bank's strategic objectives. This item also includes risk-free interest on capital calculated on the basis of the risk-weighted assets associated with each segment. In the Financial Management segment, this item includes income from interest in respect of bonds and expenses arising from the need to maintain a business liquidity level and an adequate level of dispersion of the depositors, which are expressed by a gap in transfer prices between credits and deposits. In 2014 a change was made in the transfer prices method in NIS and in foreign currency. According to the methodology approved during the second half of the year, net interest income includes an inter-segment settlement in respect of retained earnings of deposits. A positive/negative amount is added to each sub-segment which represents the multiplication of the gap between the balance of the deposits and the credit balance in an annual rate of 0.25%. At the Bank, an inter-segment charge in respect of retained earnings of deposits is recorded under the Financial Management Segment. Comparative figures haven't been restated because of lack of materiality.
Non-interest income – are attributed to the segment to which the customer belongs. In the Financial Management segment this item includes: income (expenses) in respect of fair value of derivative instruments (as required by the accounting principles), income from the Banks' actions in derivatives for itself, income from realization and adjustment of bonds and income from realization and adjustments of shares.
-58- Allowance for credit losses – The allowance for credit losses, is recorded against the indebtedness of the customer and is charged to the segment to which the customer belongs.
Operating and other expenses - Direct expenses that can be identified with a specific segment are attributed to that segment. The rest of the expenses are classified to the different segments according to an allocation methodology based on various criteria.
Taxes on income - The provision for taxes on the business results of each activity segment is calculated according to the effective tax rates, with the exception of certain cases in which specific attributions can be made.
Return on equity - This constitutes the ratio between the net income of each of the segments and the capital resources that are allocated to the segment. Capital resources are allocated to the segments according to average risk-weighted assets of each segment.
Reclassification - The data base and methodology used to report the results of the activity segments of the Bank is in a continual process of reclamation; accordingly, results for comparison periods are reclassified, if possible. The Bank is towards the end of assimilating a BAM system (banking, accounting, management) – a system of Bank Leumi which includes, among other things, the adjustment of the information systems' data to the data in the books as of the level of the transaction.
The following is a summary of development of the net profit and total assets, by activity segment:
A. Net profit for the year ended December 31 2014 2013 Segment NIS millions
Private customers 6 19 Business (5) 79 Diamonds 29 15 Financial management 16 27 Others and Adjustments 4 - Total 50 140
B. Total Assets (Average Balance) 2014 2013 Segment NIS millions
Private Customers 9,745 9,171 Business 12,846 12,632 Diamonds 1,310 1,363 Financial Management 14,703 14,396 Others and adjustments 1,544 1,726
Total 40,148 39,288 -59- Private Segment
Segment Structure
The Private Segment of the Bank provides banking services and financial products including advisory services to all households and financially wealthy private customers, including investment advisory services and including housing loan activity and vehicle credit financing. In addition, the segment includes small businesses with a volume of credit which does not exceed NIS 0.5 million, which are managed in the Retail Division. The services to customers of the segment are provided through the branches of the Bank, through Union Premium Private Banking Centers, as well as through direct banking channels: the Internet site, the cellular applications and the Bank's call center – Union Direct. The main products of the segment include current account management services, security investment consultancy, deposits, credit including vehicle credit, credit cards and granting of loans for the purchase, leasing, expansion, renovation or construction of residential housing, and the granting of loans for any purpose which are secured by a mortgage on the residential houses.
The segment also includes the activity of subsidiaries in respect of private customers and small businesses. According to the strategic plan for 2015-2017, the Bank will continue its retail expansion, with an emphasis on consumer credit and recruitment of customers with high salaries, concurrently with the retention and expansion of the activity with existing customers, while maintaining the quality, volume and yields of the mortgage portfolio, considering the state of the market, the risk-weighted assets limitations and the spread. Following are the activities and objectives planned for 2015: To accelerate the growth rate and the weight of the Bank's retail customers while maximizing the revenue potential against the risk-weighted assets, while continuing to develop and improve the branch layout, inter alia, by complementary measures. To expand the activity in the area of the various passive products especially to recruit deposits, inter alia, in order to increase the diversification in the resources domain and to extend the average life duration, and to expand the advised customer infrastructure and to intensify the activity among the capital market activists as well as, to expand income sources that don't consume risk-weighted assets. To expand the volume of consumer credit, while maintaining the planned limit on risk-weighted assets, inter alia, by deepening and creating collaborations in credit projects (see also Section "Material Agreements" regarding the Banks' engagement with "Mimun Yashir") and establishing a unit dedicate to treat this matter. To moderately increase the volume of the mortgage portfolio, while maintaining the required minimum yield, and to strengthen the connection between mortgage customers and other banking products. To continue establishing the status and positioning of the Bank and to strengthen the awareness to it in the retail field.
The information in this section is forward-looking information, as defined in the Securities Law, and is based on the work plans of the Bank in the area of marketing and computing, and on estimates of the business functions at the Bank regarding the probability and possibility of achieving objectives and executing activities in these areas. The information in this section relies, among other things, on the relevant macro-economic estimates of the Bank of Israel and of the Research and Products Division of the Bank. This information and the expectations
-60- regarding such information may not materialize, in full or in part, or may materialize in a manner materially different than expected, mainly due to the following factors: the degree of success in recruiting new customers, and the chance of attaining improvement of technological capabilities (including in the area of the Internet). Additional main factors that may affect the materialization of this information are: macro-economic changes, regulatory changes, the Bank’s degree of success in realizing its intra-organizational plans, the success of marketing efforts, and the success of planned technological improvements.
Legislative Restrictions, Supervision, Regulations, and Special Constraints Applicable to the Segment The Bank's operations are subject to laws, regulations, and regulatory guidelines that apply to the Israeli banking system through entities such as: the Supervisor of Banks, the Commissioner of the Capital Market, Insurance and Savings, the Antitrust Commissioner, the Israeli Securities Authority, etc. Following regulatory changes, including the recommendations of the committee for increasing competition and the directives of the Supervisor of Banks, updates were made during the year to various fees including account management fees, credit card clearing fees and various fees concerning securities and distribution fees. In addition, as of April, the Bank charges a uniform price for managing a current account according to two courses – a basic course and an expanded course. Concurrently, the Bank is preparing to implement the directive of the Supervisor of Banks regarding opening accounts through the internet and this is also as part of the implementation of the recommendations of the committee for increasing competition in the banking sector. For further details see also Section "Legislative Developments". In addition, see in Section "Legislative Developments" Proper Conduct of Banking Business Directive No. 329 regarding limitations for granting housing loans and an amendment to the Banking Order (Early Repayment of Housing Loans) from August 27, 2014.
Developments in the segment's markets The moderate growth in the Israeli economy continued during 2014. The growth in 2015 is expected to be affected mainly by the moderate global growth and the current monetary policy (see also Section "Economic Developments"). The publics' share in the capital market and financial markets remained the same but concurrently, there was an increase in the indices. In order to give additional support to the economic activity in the absence of inflationary pressures, this year, the Bank of Israel continued its expansionary monetary policy, which is reflected in the interest rate reduction policy by a total of 0.75 percentage points to a level of 0.25% at the end of January 2015. This process negatively affects the Banks' spreads from deposits.
Part of the information in this section is forward-looking information, as defined in the Securities Law, and is based on macro-economic estimates of the Bank of Israel and of the Research and Products Division of the Bank. Expectations regarding the composition of the asset portfolio and the spreads of the banks are based on estimates by the business functions at the Bank. This information may not materialize, in full or in part, or may materialize in a manner materially different than expected, if macro estimates - including expectations regarding the increase in the Bank of Israel interest rate – do not materialize.
-61- Technological Changes with a Potential Material Effect on the Segment In 2014, the Bank continued the assimilation of advanced IT systems related to most of its core banking activities in order to improve processes with customers and reduce paperwork at the branches. During 2015, the Bank expects to continue building advanced infrastructures to integrate additional applications to address advanced services and sale processes while deepening direct channel solutions, inter alia, as a tool to deepen the activity and to prevent abandonment.
Additional tools were assimilated in the customer relationship management system during 2014, to improve and streamline the recruitment process, to intensify the activity and to preserve the customer. During 2015 the improvements and additions to the system will be expanded.
The expansion of the range of services offered by the Bank through direct channels, inter alia, as a recruitment supporting tool, preservation and intensification of the activity with the existing customers, is expected to continue also in 2015 while continuing to update the infrastructure and developing the Banks' systems. In addition, during 2015, a closed system for depositing deposits is expected to come into use, subject to regulatory restrictions and economic viability. And in addition, a system for opening accounts through the internet will come into use.
During 2014, improvements were implemented in the control and commerce systems in respect of securities. This process is expected to continue in 2015 parallel to the examination of advanced commerce systems in the foreign currency and securities field.
Part of the information in this section is forward-looking information, as defined in the Securities Law, and is based on the work plans of the Bank. These expectations may not materialize, in full or in part, or may materialize in a manner materially different than expected, mainly as a result of the degree of the Bank’s success in realizing its intra-organizational plans and assimilating the various technological systems.
Critical Success Factors and Main Entry and Exit Barriers in the segment
Credit risks management and control – credit risk is the significant risk factor in the segments' activity. Educated management and control of credit risks and the determination of an appropriate rating, are essential to minimize the risks and to obtain an adequate profitability for the segment.
A variety of banking products and their adaptation to the customer, including unique products and services not offered by competitors.
Fair products and competitive prices.
A broad deployment of branches in line with the business strategy of the Bank, as well as development of direct channels.
Maintaining an adequate level of service.
Recruitment and training of suitable personnel.
-62- Establishment and maintenance of information and technology systems, which address the strategic needs of the segment.
Allocation of marketing and advertising budgets to strengthen the brand.
Alternatives to the segment's products and services and changes thereto
Competition from non-bank entities, credit card companies and other companies in the area of investment, such as investment house, private brokers and insurance companies, exists for the majority of banking products and services. However, there is no competition for current-account services, for the payment array services and for the acceptance of comprehensive financial services under one roof.
As mentioned above, the implementation of the recommendations of the competitiveness increasing team continued during 2014. This move is expected to increase the services provided in a non-banking framework, especially financial services given to small businesses and households, as well as improving the ability of small banks to compete.
In addition, on June, the Knessets' Finance Committee approved the fund, deposits and loans regulations which allow to exclude the early retirement funds from the Counseling Law, so that not only the investment consultants at banks will sell them, but also other factors, such as bank tellers, and this is with the aim to encourage the activity in the capital market.
In addition, the process of implementing the reform for easing the capital markets and encouraging activity in it, will continue. The process which began at the end of December 2013, might harm the Banks' income, as mentioned above, however, it may also ease and positively affect the activity in the capital market and the activity of the Bank.
Structure of Competition in the Segment Competition in the private customers segment has grown in recent years and it's mainly due to the competition between the banks and non-bank entities, (insurance companies, investment house etc.) which offer retail products, as detailed above. Steps taken by the various entities include the opening of new branches and providing varied benefits and the expansion of services given in the direct channels among other things as a means to increase access and availability to customers. Competition in the area of mortgages has intensified in recent years due to the banks’ recognition of this product as an anchor product and a lever for the recruitment of customers for activity in additional retail areas. The assessment is that this trend will continue during 2015 also as a result of the implementation of the competitiveness increasing team, whose objective is to ease customers' transition barriers between banks, to improve the existing information regarding potential customers and to increase the competitive infrastructure between the banks, two of which hold the main market share. During the last years the Bank has been using various marketing measures to recruit customers, as detailed in the subsection "Marketing and Distribution" below, while creating differentiation from competitors in response to the competition in the industry. These measures are expected to enable the Bank to increase the proportion of activity in this segment at the Bank.
-63- Part of the information in this section is forward-looking information, as defined in the Securities Law, and is based on internal estimates by the business functions at the Bank. This information and these expectations may not materialize, in full or in part, or may materialize in a manner materially different from expectations, mainly due to the following factors: an increase in the intensity of competition in this customer segment; the degree of success of the Bank in realizing its intra-organizational plans; and the degree of success of the marketing measures applied by the Bank, as well as regulatory changes.
New Services and Products in the Segment Recruitment of new customers and increasing the customers’ activity share are performed, inter alia, by the development of new products and the adaptation of activity to customers’ needs. Development of services: The Bank operated to expand its network of branches, activities, infrastructures and computer systems, in order to deepen and broaden the activity among the private customers and households:
Branch deployment - Continued implementation of the branching strategy.
Union Premium - In the area of private banking, the Bank mainly operates through its Premium centers in Ramat Gan and Haifa. The premium-centers' activity supports increasing activity and focus among private- banking customers of net worth greater than NIS 1 million while offering services of the highest quality to customers. Top professional advisors were hired for the premium centers in order to provide professional, personal and flexible service. Customer service at the center is grounded in a philosophy of providing professional solutions to the full range of customers’ needs. When providing service to customers in this sector, special emphasis is placed on creating close long-term relationships.
Websites and trading systems – During 2014 the marketing support of the assimilation and the expansion of the digital banking web and mobile services continued, concurrently to the continued upgrading of the trade infrastructure. In 2015, more applications will be implemented alongside the use of the existing digital infrastructure (websites, cellular and trading systems) as an additional tool for strengthening loyalty and recruiting customers, in part by increasing usability.
Products development: The Bank develops and markets innovative products in the different areas of banking activity for private customers, including the area of deposits, which allow the customers to diversify investments and spread risks.
The Bank is continuing a large-scale effort to recruit private customers. As part of this effort, the Bank is leading a marketing campaign in recent years, at the center of which is a "Reverse Account" which offers customers who join Union Bank to enjoy preferred conditions in the management of their account during the benefit period. The Bank believes that the "Reverse Account" package gives an optimal solution for the needs of the salary receiving customers: exemption from compulsory interest, automatic credit interest and exemption from the main current account fees – clerk fee and direct channel fee through an allowance mechanism. The benefits are given to new customers who transfer their salary to the Bank. Concurrently,
-64- the Bank offers its longtime clients the "constant reverse account" course, which includes an exemption from the main current account fees through an allowance mechanism and an interest benefit on their current account balance These benefits are contingent upon the transfer of a salary in a minimum amount and on the volume of activity in the account. This process is unique and addresses the core activity of the private customer with the Bank and constitutes another step in the implementation of the Banks' business strategy.
Some of the information in this section is forward-looking information, as defined in the Securities Law, and is based on the Bank’s work plans, which are prepared according to the estimates of the business functions of the Bank, and which include, among other things, reliance on segmentation of data of the Bank. This information may not materialize, in full or in part, or may materialize in a manner materially different from expectations, depending upon the following key factors: macro-economic conditions, regulatory changes affecting revenues in this segment, the degree of success of the Bank in realizing its intra-organizational plans and the implementing of the technological systems.
Marketing and Distribution In 2014, the Bank has continued to invest marketing efforts and resources to recruit new customers, in particular from the population of paycheck recipients and the private banking segment. Efforts to recruit new salary- receiving customers will continue during 2015, with an emphasis on the cultivation of loyalty, customer retention, and reduction of desertion, along with continued development of the direct banking channels, with the aim of improving the availability and accessibility of the Bank's services.
Marketing is performed through advertising in various media: billboards, television, radio, and Internet, including electronic screens and informational brochures at branches, while maintaining an effective media mix and maximizing utilization of the advertising budget as well as realizing the potential of the Banks' customers. In addition, activities are conducted locally in the vicinity of the branches, on the Bank's website, and through direct mail to customers. In Union Bank there are two call centers – Union Direct center and the sales center. Union Direct serves as a complementary banking channel to the Bank's deployment of branches and focuses on giving banking service to the Banks' customers. During 2014, proactive sales activity at the sales center and its support of the customer and sales recruitment campaign, were expanded, while increasing its part in handling customer activity and the business activity, all while increasing efficiency and optimum utilization of human resources. The Bank plans to continue this trend during 2015, while striving to improve the service and the availability to customers and as backup for branches during an emergency.
At the beginning of 2015, a loans center, which coordinates the treatment of loan giving to customers who aren't clients of the Bank, was established
The information regarding the objectives of the Bank appearing in this section is forward-looking information, as defined in the Securities Law, and is based on the work plan of the Bank and on estimates by the business functions at the Bank. This information may not materialize, in full or in part, or may materialize in a manner
-65- materially different from expectations, depending on the following key factors: regulatory changes affecting revenues in this segment, and the degree of success of the Bank in realizing its intra-organizational plans and in implementing technological systems.
Human Capital Ongoing training and instruction are provided in the fields of sales, marketing, and service, as well as in other professional fields. In 2014, planning and preparing management reserves, expanding the professional knowledge and implementation of programs to strengthen the knowledge and qualification, were emphasized. In addition, the process of absorption of the ethical code and strengthening of awareness to the Bank's principles for anti-money laundering and compliance, was continued. In 2015, the Bank intends to continue the establishment of the human capital infrastructure, with an emphasis on its improvement and streamlining, inter alia, as a result of the implemented retirement plan (for details see Section "Human Capital"), while concurrently, developing an management reserve data base. In 2014 the average number of positions, whose cost was charged to the segment, amounted to 664 positions.
Legal Proceedings For further details regarding legal proceedings related to private customers' activity and to housing loan in particular, see the Section "Legal Proceedings" and the opinion of the auditors.
Special Agreements or Arrangements See details in the Section “Material Agreements,” in the subsection “Services and Areas of Activity Fixed in Special Agreements or Arrangements,” regarding credit cards, pension advising, and the acquisition of rights to a portfolio of consumer loans.
-66- Following is a summary of the activity results of the private segment
for the year ended December 31, 2014 for the year ended December 31, 2013 Business Business Private Current Housing Private Current Housing Customers Accounts(1) Finance Total Customers Accounts(1) Finance Total NIS million NIS million Net interest income: - From outsiders 155 17 96 268 163 23 96 282 - Inter-segment 8 1 (5) 4 - - - -
Non-interest income: - From outsiders 96 11 10 117 97 13 13 123 - Inter-segment 1 *- - 1 1 - - 1 Total income 260 29 101 390 261 36 109 406 Provision for credit losses 11 2 (3) 10 (5) 1 12 8 Operating and other expenses - From outsiders 262 34 76 372 266 35 72 373 - Inter-segment ------Profit (loss) before taxes (13) (7) 28 8 **- **- 25 25 Provision for taxes on profit (3) (1) 6 2 **- **- 6 6 Net profit (loss) (10) (6) 22 6 **- **- 19 19
Return on equity (4.6%) (29.7%) 6.8% 1.1% - - 6.9% 3.9% Average balance of assets 1,837 272 7,636 9,745 1,466 322 7,383 9,171 Average balance of liabilities 15,273 1,405 443 17,121 15,019 1,636 370 17,025 Average balance of risk-weighted assets 2,266 209 3,330 5,805 2,019 240 2,988 5,247 Average balance of securities 10,512 2,639 - 13,151 9,393 2,905 - 12,298 Average balance of managed securities 3 - - 3 239 - - 239
Net interest income: Margin from credit granting activity 77 4 87 168 59 6 80 145 Margin from deposit receipt activity 78 5 - 83 105 9 - 114 Other 8 9 4 21 (1) 8 16 23 Total net interest income 163 18 91 272 163 23 96 282
* Less than NIS 500 thousand. (1) Business customers with indebtedness of up to NIS 500 thousand.
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Changes in the Volume of Activity and Net Profit of the Segment
Net profit totaled NIS 6 million in 2014, compared with NIS 19 million in 2013. Net return on equity in 2014 was 1.1%, compared with 3.9% in 2013.
Total revenues of the segment totaled NIS 390 million in 2014, compared with NIS 406 million in 2013. Net interest income totaled NIS 272 million, compared with NIS 282 million in the same period in the previous year. Financing income in the area of credit increased in 2014, as a result of an increase in volumes and an increase in spreads; the increase was offset by a decrease in income from deposits, mainly due to a decrease in the Bank of Israel interest rate. Non-interest income totaled NIS 118 million, compared with NIS 124 million in 2013. The decrease mainly resulted from the implementation of an accounting standard concerning measurement of interest income (for details see Note 1.D.2) and from the effect of the implementation of the conclusions of the competition increasing team and fee packages as of April 1, 2014. Expenses totaled NIS 372 million, compared with NIS 373 million in 2013, a decrease of approximately 0.3%. Provisions for credit losses totaled NIS 10 million in 2014, compared with NIS 8 million in 2013. In the fourth quarter of 2014 an increase in the amount of NIS 14 million was recorded in the collective allowance (as a result, there was a decrease of NIS 10 million in the net profit) following the implementation of the directive of the Bank of Israel from January 19, 2015. According to directive, the banks are required to adjust the collective allowance coefficient in respect of consumer credit in a rate of no less than 0.75% (for additional details see Note 1.E.5), This is compared with a one-time increase of approximately NIS 12 million in the collective allowance due to the initial implementation of the Bank of Israel's directive concerning allowances beyond the amount required based on the extent of arrears, at a rate of no less than 0.35% of total housing loans. The provision for tax on the business results of the segments of activity was calculated according to the effective tax rate, except in certain cases where specific attribution was possible. The average volume of liabilities of the segment (primarily deposits from the public) totaled approximately NIS 17 billion in 2014, similar to the average volume in 2013. The average volume of assets of the segment (primarily credit to the public) totaled approximately NIS 9.7 billion in 2014, compared with approximately NIS 9.2 billion in 2013, an increase of approximately 5%.
Housing Finance – Net profit totaled NIS 22 million in 2014, compared with a net profit of NIS 19 million in the corresponding period last year. The income amounted NIS 101 million compared with NIS 109 million in the corresponding period last year. In expenses there was an increase of approximately 6% (approximately NIS 4 million), of which, about half as a result of the update of the number of jobs related to the segment. The income from credit losses in 2014 amounted NIS 3 million compared with provision for credit losses in the amount of NIS 12 million in the corresponding period last year, due to the initial implementation of allowance beyond the extent of arrear as mentioned above.
- 68 -
The balance of balance-sheet credit of housing loans totaled approximately NIS 7.7 billion on December 31, 2014 (including mortgage for buying groups), an increase of approximately 3.0%, compared to December 31, 2013. The total of new loans granted in 2014 amounted to approximately NIS 1,666 million, compared with NIS 1,724 million in 2013. For further details regarding the risks in the housing loan portfolio see also Section" Risk Exposure and Management" subsection "Credit Management". For details regarding legislative developments and legislation and arrangement initiatives regarding housing loans – see Section "Legislative Developments".
Information regarding new loans for the purchase of residential apartments, secured by mortgages, and the scope of refinanced loans For the year ended December 31 2014 2013 NIS millions
Bank funds 1,326 1,417 Finance Ministry funds -* 1 Standing loans 2 2
Total new loans 1,328 1,420 Refinanced loans 338 304
Total loans granted 1,666 1,724
* Less than NIS 500 thousand
Private customers - A loss of NIS 10 million was recorded in 2014 compared to a negligible profit in 2013. The income totaled NIS 260 million in 2014, compared to NIS 261 in 2013. An increase was recorded in credit from income which was offset mainly by a decline in income from deposits, due to the decline of the interest rate of the Bank of Israel. The provision for credit losses totaled NIS 11 million compared to income from credit losses in the amount of NIS 5 million recorded in the corresponding period. The increase derives from the initial implementation of the collective allowance coefficient in respect of consumer credit in a rate of no less than 0.75% as noted above. There was a decrease of approximately 2% in operating and other expenses.
- 69 -
Business Segment Segment Structure The Bank's business segment comprises business customers in a variety of industries. The borrowers that belong to this segment are business borrowers with a volume of credit above NIS 0.5 million. The Bank renders a variety of banking services and financial products to the business customers. The core industries in which the segment specializes are: construction and real estate (with an emphasis on financing of residential construction) and customers engaged in the capital market. The segment also includes subsidiaries' activities regarding business customers (including trust services for funds). Banking services to customers of the segment are provided in most of the Bank's branches. The products and services of the segment are adapted to customer needs and include mainly financing current activity, investment financing, project accompaniment in the real estate sector mainly residential, financial services, foreign-trade activity, derivative financial instruments transactions and investment consulting services given at the Bank's branches and dealing rooms.
Objectives and Business Strategy According to the strategic plan for 2015-2017, the Bank intends to continue to maintain the activity level of its core sectors and to deepen its activity in the other potential fields not-core activities including through collaborations with other entities, while maintaining the high quality of the credit portfolio and increasing its diversification, both in sectorial terms and in terms of borrower size. In addition, the Bank will place an emphasis on ensuring the connection between the return and the totality of risks arising from the various activities and on exploiting the potential of income from old and from new customers, while maintaining the framework of risk-weighted assets established in the Bank's capital planning, and subject to the risk appetite and risk tolerance established by the Bank's Board of Directors.
Following are the activities and objectives planned for 2015:
To adjust the volume of the business credit portfolio and its composition, in order to comply with the risk appetite and risk tolerance that were determined, including the capital objectives set, while improving and adapting the risk margin to the customer.
To continue to specialize in core areas, while expanding to additional business sectors, while addressing the variable market changes in Israel and globally.
To reduce sectoral concentration and borrower concentration, while maintaining the high quality of the credit portfolio.
To adjust the credit policy and the work processes to the updated regulatory requirements.
To exploit the potential of income from old and from new customers while focusing on the areas that don't consume risk-weighted assets in order to increase the income.
- 70 -
The information in this section is forward-looking information, as defined in the Securities Law, and is based on the work plans of the Bank and on estimates by the business functions at the Bank with regard to the probability and possibility of achieving objectives and executing activities in these areas. The information in this section relies, among other things, on the relevant macro-economic estimates of the Bank of Israel and of the Research and Products Division of the Bank. This information and the expectations regarding such information may not materialize, in full or in part, or may materialize in a manner materially different than expected, mainly due to the following factors: macro-economic conditions, the level of interest rates, the level of competition in the economy, regulatory changes affecting revenue in this segment, and the degree of the Bank’s success in realizing its intra-organizational plans.
Legislative Restrictions, Regulations, and Special Constraints Applicable to the Segment The Bank carries out its operations in accordance with laws, regulations, and regulatory guidelines that apply to the Israeli banking system through the Supervisor of Banks, the Commissioner of the Capital Insurance and Savings Market, the Antitrust Commissioner and the Israeli Securities Authority. The following represent specific restrictions that apply to the segment: according to Proper Conduct of Banking Business Regulation there is a restriction as to the amount of indebtedness of an individual borrower, a group of borrowers, a banking group of borrowers, and the net total indebtedness of the borrowers, a group of borrowers and banking groups of borrowers that their net indebtedness exceeds the rate of 10% of the Bank's capital, and customers who are defined as "related persons" to the Bank and the indebtedness in respect of transactions to finance the acquisition of means of control of corporations. In addition the permitted credit rate for each sector of the economy is limited relative to the Bank's total credit. These restrictions may have ramifications on the manner and volume of activity in the business segment of the Bank with those same customers.
The balance of credit and the credit risk attributable to the customers of this segment, are sensitive to exogenous changes, such as: the global and local growth rate, sectorial crises, changes in exchange rates, the Israeli Consumer Price Index, changes in interest rates, mergers and acquisitions of companies, changes in agreements between shareholders pertaining to characteristics of their control of companies etc.
The volume of activity in this segment is also affected by the Banks' capital objectives and capital planning (for details see Section "Capital Adequacy") and also by the risk appetite and risk capacity (for details see Section "Risk Exposure and Management"), as established by the Bank's Board of Directors.
The implementation of the amendment to Proper Conduct of Banking Business Directive 301, "Board of Directors" (which concerns the involvement of the Board of Directors of a banking corporation in the approval of credit) continued during 2014, and during 2015 additional tools will be developed in order to support the implementation of the directive. During 2014, the Bank also began to implement Proper Conduct of Banking Business Directive 311, "Credit Risk Management", and Proper Conduct of Banking Business Directive 310 inasmuch as it concerns the preparation of an opinion by the control and risk-management division with regard to credit above a certain amount. The implementation and absorption of these directives is expected to continue during the course of 2015, concurrently with the continued implementation of the credit policy and the update of - 71 -
rules, metrics, parameters, and additional processes pertaining to the approval of credit and the management and control of credit processes at the Bank.
With regard to additional legislative restrictions, see details in Section "Legislative Developments".
Developments in the Segment’s Markets The activity of the Corporate Segment of the Bank is influenced by the growth rate of the economy, monetary and fiscal policy, the level of demand in the domestic and global economy, the fluctuation in the capital market, the security situation, security-related events that mainly affect the tourism industry and on investments by non- residents. The moderate global growth during 2014 was reflected also on the economic growth rate of the Israeli economy as reflected in the key economic parameters, including the increase rate in GDP, private consumption, fixed-asset investments, exports of goods and services. As a result, the macro-economic forecast of the Bank of Israel was updated for 2015, according to which, the GDP growth will stand on a rate of 3.2%. For further details see Section "Economic Developments".
Some of the information in this section constitutes forward-looking information, as defined in the Securities Law, and is based on macro-economic estimates by the Bank of Israel and by the Research and Products Sector at the Bank. Such information may not materialize, in full or in part, or may materialize in a materially different manner than expected, if the macro estimates are not realized, inter alia, as a result of changes in the domestic and global economy.
Technological Changes with a Potential Material Effect on the Segment The information systems used by the Corporate Segment are designed to assist analysis, control, and marketing processes. The Corporate Segment routinely works to improve and update its technological systems.
A continuous process of improvement and reclamation of the information systems exists in the Bank. Its objective is to improve the service, while allowing a tighter management option of the risk-weighted assets in the credit field and tracking the adjustment of the credit spread and the return on risk-weighted assets. All parallel to the examination of the effect on the concentration indices. During 2015 additional mechanization will be performed for supporting and optimizing the credit extension process and monitoring the concentration indices.
The Bank works to improve tools and upgrade systems that support control processes and their assimilation, inter alia, in order to examine the correlation between the ranking, spread and total return from the customer, as part of the extraction of the customer's business potential. During 2015, additional improvements in tools and additional systems that are meant to support control processes, are expected. In addition, the Bank intends to continue improving and adjusting the models, for supervision and control purposes of the credit activity for the customers who are active in the capital market.
Some of the information in this section is forward-looking information, as defined in the Securities Law, and is based on the work plans of the Bank. These expectations may not materialize, in full or in part, or may materialize in a manner materially different than expected, mainly due to the degree of success of the Bank in realizing its intra-organizational plans and the success of the planned technological improvements.
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Critical Success Factors/Main Entry and Exit Barriers in the Segment
Management and control of credit risks - credit risk is the most significant risk in the segment's activity. Wise management and control of the credit risks and determining the appropriate rating, are vital for reducing the risks and achieving satisfactory profitability for the segment.
Maximizing returns from a customer according to the required capital confinement in respect thereof, and to the customers' risk level.
Compliance with regulatory limits applicable to the segment.
Long term relationship with the customers.
Recruitment and training of suitable personnel.
Setting up and maintaining systems and technology.
Identification and detection, as soon as possible, of potential for problems among existing customers.
Alternatives to the Segment's Products and Services and Changes thereto There are alternative financing sources, offered by non-banking financial institutions, to existing business banking credit: public and private issuances of shares, bonds, and other securities in capital markets in Israel and abroad as well as corporate credit granted by insurance companies and institutional factors. For additional details see section "Economic Developments" sub-section "The Capital Market".
Structure of Competition in the Segment Most of the competition in this segment is against the banks operating in Israel, but also against foreign banks and non-bank institutions, as described above. Institutional entities such as insurance companies and pension funds have become more involved in this sector in recent years, and competition exists due to credit substitutes in the form of public and private bond offerings. In 2014 there was a reduction in the demand for the business credit, within the banking system in light of the low interest rate environment and lower debt raising costs in the capital market and in light of this, a decrease was created in the interest margins. This trend is expected to continue also in 2015 as long as there will be no significant change in the monetary policy.
Some of the information in this paragraph is forward-looking information, as defined in the Securities Law, and is based on internal estimates by business functions at the Bank. This information and these expectations may not materialize, in full or in part, or may materialize in a manner materially different than expected, mainly due to the following factors: an increase in the intensity of competition in this customer segment; the degree of the Bank's success in realizing its intra-organizational plans and the Bank's degree of success to fulfill its intra- organizational plans and the level of success of the marketing steps taken by the Bank; and regulatory changes.
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Marketing and Distribution The activity of the Business Segment with customers is executed in the Business Division and the branches, which are in constant contact with the customers in order to adapt finance solutions for various transactions, to respond to banking requirements and to market the products of the Bank. The Bank also holds periodic conventions for its business customers. During the year, the activity of the joint operation of the Business Division and the marketing system, has continued in order to recruit new business customers from various areas of activity, with an emphasis on non-core sectors, in order to increase diversification. The activity has focused on the achievement of three main objectives:
To recruit new business customers, which aren't from the core sectors;
To expand the activity among the target populations that were determined;
To expand activity with existing customers.
Human Capital Employees regularly receive appropriate professional training at the Bank, including training in business areas as well as on the periodically updated regulatory directives. In their work, employees are required to display analytical capabilities, handle complex transactions, while ensuring the level of control and credit considerations according to the customer quality, concurrently to providing a high quality service to the segment’s customers. Activity in the areas of the capital market and business credit requires in-depth knowledge and familiarity with these fields. Due to the growing professional expertise in this area, there is competition for employees in these areas; accordingly, resources are invested in employee cultivation and retention. In 2014 the average number of positions, whose cost was charged to the segment, amounted to 450 positions
Legal Proceedings For further details regarding a legal procedure relating to the customers of the business segment and the Trust Company, see the Section "Legal Proceedings" and the opinion of the auditors.
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Following is a summary of the results of the corporate segment
for the year ended December 31, 2014 for the year ended December 31, 2013 Businesses Construction Capital Total Businesses Construction Capital Total & Real estate(1) Market (2) & Real estate(1) Market (2) NIS Million NIS Million Net interest income: - From outsiders 187 61 37 285 229 78 39 346 - Inter-segment (1) - 3 2 - - - -
Non-interest income: - From outsiders 65 32 43 140 57 33 38 128 - Inter-segment 3 -* 9 12 1 - 11 12 Total income 254 93 92 439 287 111 88 486 Provision (income) for credit losses (1) (36) 134 97 (8) (24) 49 17 Operating and other expenses: - From outsiders 226 53 69 348 236 63 65 364 - Inter-segment ------Profit (loss) before taxes 29 76 (111) (6) 59 72 (26) 105 Provision for taxes on profit 6 14 (21) (1) 14 18 (6) 26 Net profit (loss) 23 62 (90) (5) 45 54 (20) 79
Return on equity 2.8% 16.4% (44.5%) (0.4%) 5.5% 13.7% (10.9%) 5.6% Average balance of assets 7,224 2,575 3,047 12,846 7,922 2,988 1,722 12,632 Average balance of liabilities 8,193 1,876 6,010 16,079 8,270 1,922 6,230 16,422 Average balance of risk-weighted assets 8,573 3,908 2,092 14,573 8,949 4,297 1,989 15,235 Average balance of securities 5,969 466 43,339 49,774 4,839 361 35,463 40,663 Average balance of managed securities - - 59 59 - - 202 202
Net interest income: Margin from credit granting activity 159 55 17 231 180 66 16 262 Margin from deposit receipt activity 17 5 13 35 32 9 17 58 Other 10 1 10 21 17 3 6 26 Total net interest income 186 61 40 287 229 78 39 346
* Less than NIS 500 thousand. (1) Customers that operate in the construction and real estate sector. (2) Customers that operate in the capital market sector.
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Changes in the Volume of Activity and Net Profit of the Segment
Loss totaled NIS 5 million in 2014, compared with a net profit of NIS 79 million in 2013. The return on capital loss was -0.4% in 2014, compared with a net profit return on equity 5.6% in 2013. The segment’s revenues totaled NIS 439 million in 2014, compared with NIS 486 million in 2013, a decrease of approximately 9.7%. Net interest income totaled NIS 287 million, compared with NIS 346 million in 2013, a decrease of approximately 17%, which resulted mainly from a decrease in credit income as a result of a decrease in volume and a decrease in income from deposits as a result of a decrease in volume and margins, mainly due to a decrease in the interest of the Bank of Israel. Non-interest income totaled NIS 152 million compared with NIS 140 million in 2013, an 8.6% increase. The segment's expenses totaled NIS 348 million in 2014, compared with NIS 364 million in 2013, a 4.4% decrease. Provision for credit losses (net, less collections) totaled NIS 97 million in 2014, compared with NIS 17 million in 2013. There was an increase in the individual allowances (especially from a single customer) and a decrease in the volume of collections, which was partially offset by an increase in the collective allowances. The average balance of assets in the segment (primarily credit to the public) totaled NIS 12.9 billion in 2014, compared with NIS 12.6 billion in 2013, a 2.4% increase. The average scope of the segments' liabilities (mainly deposits from the public) totaled NIS 16.1 billion in 2014, compared with NIS 16.4 billion in 2013, a decrease of 1.8%.
Business customers – the net profit totaled NIS 23 million in 2014, compared with NIS 45 million in 2013. The segment's revenues totaled NIS 254 million compared with NIS 287 million in 2013, a decrease of approximately 11%, mainly as a result of a decrease in income from credit and deposits in light of the decrease in volume and in margins. In 2014 net income from credit losses in the amount of NIS 1 million was recorded, compared with an income of NIS 8 million in the corresponding period due from a decrease in collections relative to the corresponding period. There was a decrease in expenses from NIS 236 million to NIS 226 million in 2014, mainly as a result of a decrease of expenses in respect of maintenance of buildings and equipment and legal services.
Customers that operate in the construction and real-estate sector - net profit from activity in the construction and real-estate sector totaled NIS 62 million in 2014, compared to NIS 54 million in 2013. Revenues totaled NIS 93 million in 2014, compared to NIS 111 million in 2013. Interest income totaled NIS 61 million in 2014, compared to NIS 78 million in 2013, the decrease is mainly due to a decrease in income in the credit sector (as a result of the decrease in volume). Non-interest income totaled NIS 32 million in 2014 compared to NIS 33 million in 2013. The expenses totaled NIS 53 million compared to NIS 63 million in the corresponding period last year, a 16% decrease. The decrease is mainly as a result of an update of the number of jobs attributed to the segment.
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In 2014 net income in respect of credit losses in the amount of NIS 36 million was recorded, compared to net income in the amount of NIS 24 million in 2013, mainly as a result of the increase in the volume of collections and a decrease in the collective allowance. The volume of the balance-sheet credit for construction and real estate totaled NIS 2.5 billion on December 31, 2014, similar to the corresponding period last year (not including credit to buying groups). The volume of guarantees to home buyers totaled NIS 2.0 billion on December 31, 2014, compared to NIS 2.1 billion on December 31, 2013. The Bank routinely monitors the condition of credit in general, and the condition of the credit in the real-estate industry in particular. The Banks' management holds quarterly discussions regarding escorting real estate projects in an extensive professional forum headed by the CEO. In these discussions all of the Bank's escorting projects are reviewed on an individual basis with an emphasis on the status of the projects from the sales and the project stages aspect, fulfillment of the forecast and the condition of the exposure. Projects, which the parameters that require tracking exist in them, are transmitted for discussion at the Monitored Borrowers Committee and are discussed and reported in the Board of Directors' various committees.
Customers that that are active in the capital market sector - In 2014 a loss of NIS 90 million was recorded, compared to a loss of NIS 20 million in 2013. The segments' income totaled NIS 92 million compared to NIS 88 million in 2013, a 4.5% increase. The expenses totaled NIS 69 million compared to NIS 65 million in 2013. In 2014 provisions for credit losses in the amount of NIS 134 million were recorded (of which an individual allowance in respect of a single customer totaled NIS 130 million) compared to provisions for credit losses in the amount of NIS 49 million in 2013 (of which an individual allowance for credit losses in respect of a single customer in the amount of NIS 42 million).
Diamond Segment
Segment Structure
The segment includes customers operating in the diamond industry, most of whom are members of the Diamond Exchange in Ramat-Gan. This activity is conducted at the Bank’s branch in Ramat-Gan and granting credit constitutes most of the activity. The products and services of the segment are suited to customer's needs: foreign-trade activity, investment financing, financial services at the branch and the Bank’s dealing rooms.
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Objectives and Business Strategy The Bank’s policy is to remain dominant in the area of financing the diamond industry, while examining and adapting its credit policy and volume of credit, on a routine basis, according to the risks derived from the industry and the economic environment in which it operates, and with regard to foreign currency funding sources. All this while further enhancing and streamlining the work processes.
Some of the information in this section is forward-looking information, as defined in the Securities Law, and is based on import and export data in the diamond industry in 2014, on macro-economic estimates of the International Monetary Fund (IMF), on the recovery of the global economy, and on estimates by business functions, according to the experience accumulated at the Bank in this area. This information may not materialize, in full or in part, or may materialize in a manner materially different from expectations, in the event of material changes in macro conditions in the markets.
Legislative Restrictions, Regulations, and Special Constraints Applicable to the Segment The Bank's operations are subject to the laws, regulations, and regulatory guidelines that apply to the Israeli banking system from the Supervisor of Banks, and the Supervisor of Diamonds in the Ministry of Trade and Industry. See details in the section on legislative restrictions, regulations, and special constraints applicable to the segment in the review of the corporate customer segment, above.
Development in the Segment's Markets
The year 2014 began with a positive trend in the sectors' activity but as of the end of the third quarter of the year, there is a negative trend due to the margin erosion which is due to the increase in the rough prices while eroding the profitability of polished prices. The slow recovery in the global volume of activity in the industry was also reflected in activity in the diamond industry in Israel. Overall for the year, export of (polished and raw) diamonds amounted to NIS 33.3 billion, same as 2013, and import of (polished and raw) diamonds amounted NIS 30.8 billion in 2014, a 3.3% increase compared to 2013.
Some of the information in this section is forward-looking information, as defined in the Securities Law, which is based in part on the import and export data in the diamond industry during 2014, on the relevant macro-economic estimates of the worlds' International Monetary Fund (IMF) and the global economic recovery, and on the estimates of the business entities according to the Banks' accumulated experience in this area. This information may not materialize, in full or in part, or may materialize in a manner materially different than expected if material changes in the macro-economic conditions occur.
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Critical Success Factors/Main Entry and Exit Barriers in the Segment
An in-depth knowledge of the diamond industry in Israel and around the world. Acquaintance with the customer and a long-term experience with working with him. Risk control and management.
Recruitment and training of suitable personnel.
Economic growth in diamond export destination's countries. Setting up and maintaining information systems.
Alternatives to the Segment's Products and Services and Changes thereto
There are no non-bank credit alternatives in the segment.
Structure of Competition and Developments in the Segment When this industry flourishes, the competition is intense between banks financing it. In 2014 Bank Leumi completed the process of closing its activity in this domain so that currently, the main competitors of the Bank are Discount Bank and Bank Mizrahi. Total volume of credit for a sector from the banking system in Israel at the end of 2014 is estimated at USD 1.3 billion, compared with USD 1.5 billion at the end of 2013. The Bank’s share in credit to the diamond industry, out of total credit in the banking system, is 30.6% at the end of 2014, compared to 27.4% at the end of 2013 (the increase in the Banks' share derives mainly from the decrease in Bank Leumis' share). As mentioned above, the Bank’s credit policies is currently adapted to the economic environment in which this industry operates and to the risk appetite and risk tolerance which was determined by the Bank's Board of Directors relative to the segment's sectorial composition of the Bank's credit portfolio and to the cost of foreign currency sources. As of the end of December 2014, the rate of total credit for diamonds out of the total credit at the Bank was approximately 6.0%, compared to approximately 5.5% in December 2013.
Marketing and Distribution The diamond segment activity is concentrated in the Ramat Gan branch, located in the Diamond Exchange. The segment's employees maintain constant contact with customers in order to provide tailored financing solutions and supplementary banking services. The Bank hosts periodic seminars for customers of the industry, and maintains constant contact with the customers in Israel and abroad.
Human Capital The employees’ work requires analytical capabilities for the examination of applications and examination the financial stability of customers, while ensuring a current and tight control, as well as the ability to handle complex transactions and provide a high level of service with the aim of supplying the full range of services to
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customers at a single point of contact with the branch. The employees who specialize in this area receive appropriate training, as well as on business and regulatory issues as detailed in the Business Segment above. In 2014, the average number of employee positions in the segment was 43; the cost of these positions was charged to the segment.
Collaboration Agreements Regarding the formulation of a dedicated clearing arrangement in the field – see Note 18.C.(20).
Changes in the Volume of Activity and Net Profit of the Segment
Net profit totaled NIS 29 million in 2014, compared with NIS 15 million in 2013. Net profit return on equity from ordinary activities regarding the equity was 22.1% in 2014, compared with 12.2% in 2013.
The revenues totaled NIS 51 million, compared with NIS 50 million in the corresponding period last year. It should be noted that the segments' income is influenced by the exchange rate volatility of the NIS against the USD. In 2014 there was a net income from credit losses in the amount of NIS 12 million compared with an income of NIS 2 million in the corresponding period last year, mainly as a result of an increase in collections and a decrease in collective allowance. The segment's expenses totaled approximately NIS 28 million compared with NIS 32 million in 2013. The volume of the balance-sheet credit for diamonds totaled NIS 1.3 billion on December 31, 2014, compared with NIS 1.2 billion in the corresponding period last year (in terms of dollars the volume of credit to the diamond segment was NIS 342 million in December 31, 2014, compared to NIS 359 million in December 31, 2013). Off-balance sheet risk volume totaled NIS 0.8 billion on December 31, 2014, compared to NIS 0.6 billion on December 31, 2013.
Financial Management Segment
Segment Structure
This segment centralizes all asset and liability management at the Bank, in local and foreign currency. The segment includes the Banks' activity in securities for itself (in the available for sale portfolio and the trading portfolio) and in derivative financial instruments, including base and interest positions. Also, costs are loaded on this segment. These costs arise from the need to maintain an appropriate business liquidity level and an adequate dispersing level of the depositors, which are expressed, inter alia, by a gap between transfer prices of credits and deposits and market prices, which are derived, inter alia, from the deposit of the retained earnings in deposits in the Bank of Israel, banks and government bonds. In addition, manages market making activities in government bonds, in trading, in foreign currency, market exposures and liquidity management and the activity of the subsidiaries Union Investments and Enterprises Ltd., Union Underwriting and Finances Ltd. and Union Issuances Ltd.
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Objectives and Business Strategy Management of assets and liabilities, market and liquidity risks in accordance with the risk appetite and risk tolerance defined by the Board of Directors, as detailed in Section “Exposure to Risks and Risk Management”. In addition, the segment provides services to the Bank and to its branches in the area of dealing rooms, the capital market, raising deposits, etc. Following are the activities and objectives planned for 2015: To deal with developments mainly in the monetary field due to the low interest rate environment, both in the Israeli economy and globally while examining the influence on the customers. To continue improving the structure of sources while giving attention to stable customers, while extending the average life duration, by continuing to recruit retail deposits and reducing reliance on big short-term depositors for efficient and effective management of the liquidity risk in the changing market conditions, this is in accordance with the regulatory directives and the limitations of the Board of Directors. To continue to improve and strengthen command and control tools in the area of liquidity, in when it comes to the qualitative and quantitative management of liquidity risk, with reference to the Basel III directives and the required changes for implementation following the change in the inner liquidity model. To complete the implementation of the control and work processes following a re-organization in the structure of the division, and assimilation of regulatory updates, while continuing to improve and streamline the work processes. To expand the activity of the dealing rooms subject to the risk appetite and risk tolerance as determined by the Board of Directors. Proprietary Activity - the adjustment of the portfolios' structure and composition to the business environment, to the condition of the capital market in Israel and globally, to the limit of risk- weighted assets, while maintaining an adequate level of income and creating an anchor for long- term future income, while complying with the risk appetite and risk tolerance determined by the Board of Directors.
The information in this section is forward-looking information, as defined in the Securities Law, and is based on the work plans of the Bank and on estimates by the business functions at the Bank regarding the probability and possibility of achieving objectives and executing activities in these areas. The information in this section relies, among other things, on the relevant macro-economic estimates of the Bank of Israel and of the Research and Products Division of the Bank. This information and the expectations regarding such information may not materialize, in full or in part, or may materialize in a manner materially different than expected, mainly due to the following factors: macro-economic conditions of the market, interest rates, the level of competition in the economy, regulatory changes affecting revenue in this segment, and the degree of the Bank’s success in realizing its intra- organizational plans. - 81 -
Legislative Restrictions, Regulations and Special Constraints Applicable to the Segment The Bank's operations are subject to laws, regulations, and regulatory guidelines that apply to the Israeli banking system through entities such as: the Supervisor of Banks, the Supervisor of Capital, Insurance, and Savings Markets, the Antitrust Commissioner, the Israeli Securities Authority, etc. In addition, the Bank's activity is conducted subject to the risk appetite and risk tolerance, established by the Board of Directors of the Bank.
Developments in the segment's Markets In 2014 price gains were recorded in the global capital markets. There were price gains in the local market as well, excluding the downtrend in the second third of the year, in light of the economic slowdown and later on in light of "Tzuk Eitan" operation. However, as of the third quarter, the positive trend returned, inter alia because of the low interest rate environment. Meanwhile, the local volume of trade remained substantially unchanged relative to 2013. For details, see the Section "Economic Developments" subsection "The Capital Market." The Bank continued to apply a conservative policy with regard to foreign currency, including a liquidity level congruent with the needs and risks confronted by the Bank. The Bank also continued to apply a cautious, conservative policy in its exposure to foreign banks and countries. The Board of Directors of the Bank establishes its risk appetite and liquidity risk management policy, including limits on the minimum liquidity ratio, which is calculated based on an internal model. For further details, see the Section "Risk Exposure and Management", subsection "Liquidity Risk."
Technological Changes with a Potential Material Effect on the Segment During 2014, additional mechanisms were developed in order to improve the command and control systems in regard of liquidity and during 2015 the development of additional control mechanisms is expected to continue. Some of the information in this section is forward-looking information, as defined in the Securities Law, and is based on the work plans of the Bank. This information may not materialize, in full or in part, or may materialize in a manner materially different than expected, mainly due to the degree of the Bank’s success in realizing its intra-organizational plans.
Critical Success Factors/Main Entry Barriers in the Segment
Recruitment and training of suitable personnel.
Computerized systems, both in the area of transaction performance and in the area of information, analysis and risk control.
A well-developed network of cooperation with banks and financial institutions around the world. These contacts enable the segment to serve a variety of customers and to carry out a large volume of transactions.
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Alternatives to the Segment's Products and Services and Changes thereto There are alternatives to most of the products and services rendered by the segment.
Structure of the Competition and Developments in the Segment The segment competes with the dealing rooms of the banks operating in Israel. There is also competition with banks and other financial entities abroad who allow customers to operate in a direct manner. As a consequence of the economic and financial crisis of 2008, which exposed the vulnerability of the global economy in general and of the US economy in particular to systemic risks arising from failures of risk management at financial institutions, the G20 countries reached an agreement to carry out a wide- ranging reform of the global derivatives market, aimed at increasing transparency and supervision over this activity. The reform is part of the more general Dodd Frank reform addressing the activity of the US banking system. The reform entered into force gradually in the U.S. as of the second half of 2013. The essence of the reform is imposing the obligation for mandatory clearing by a central clearinghouse for part of the derivative transactions performed by financial institutions, subject to the applicability of the law for themselves and for their customers, matching transaction terms with counter-party and reporting transactions in derivatives to databases. As the Bank's derivatives activity is primarily conducted with entities in Europe, no significant impact of the Dodd Frank legislation on the Banks' activity was recorded. On the other hand, parallel to the Dodd Frank reform published in the U.S., a reform with similar principles, known as EMIR, was published in Europe. This reform applies to European entities and therefore is expected to affect the Banks' mode of operation regarding derivative instruments, since the Bank has a significant volume of activity with European entities. The reform will be implemented gradually as of 2015 (the guidelines concerning the reporting obligation were already implemented during 2014) however, since the legislative procedures involved in its implementation have not been completed yet, a final implementation schedule hasn't been determined yet. Although according to these foreign provisions, the Bank isn't subject to them, in order to continue with the business activity with derivatives with foreign financial institutions, which are required to comply with the aforesaid regulatory directives, the Bank will have to adjust certain processes concerning its activity with derivatives to the financial institutions' requirements, with which it operates, inter alia, to contact clearing entities as required.
Human Capital There is significant competition for the services of part of the employees in this segment, from local and foreign banks, other financial entities, and business companies. Accordingly, the Bank invests in the cultivation and development of human resources in this segment. During 2015 special training sessions, are planned for deepening the knowledge with an emphasis on the commerce field in the dealing room.
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In 2014, the average number of employee positions in the segment, whose cost was charged to the segment, amounted to 57 positions.
Collaboration Agreements During the normal course of its business, the Bank and its financial management seegment maintain broad contacts with the leading banks and investment houses in the world. The business connections between the Bank and these entities are based on, among other things, standard international arrangements such as: framework agreements that support dealing activities (ISDA). The Bank is signed on most of these agreements with the banks he works with and aims to increase the number of banks with which he is connected by related collateral agreements such as CSA agreements. In addition, the Bank is represented in an international clearing house (CLS), whose main goal is to minimize clearing risks in foreign-currency transactions. The Bank centralizes most of securities clearing activity in USA stockk exchanges in one big bank, which serves as the main provider of custody services. The main purpose of this agreement is to reduce clearing risks, while promoting the level of service to the customers.
Changes in the volume of activity and net profit of the segment
Net profit totaled NIS 16 million in 2014, compared with a net profit of NIS 27 million in 2013. Revenues amounted to NIS 68 million, compared to NIS 80 million in the corresponding period in the previous year. The average balance of securities of the Bank amounted to appproximately NIS 5.7 billion in 2014, compared with NIS 5.1 billion in 2013.
Amounts Not Allotted and Adjustments The segment includes activities that cannot bee classified to any specific segment. On September 30, 2014 the Bank completed the sale of all of its holdings in Impact Investment Portfolio Management Ltd. Due to the sale, a net profit of NIS 4 million was reccorded in 2014.
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Capital Adequacy The capital adequacy of a banking corporation is a key element in the assessment of its stability. The capital adequacy is examined through the ratio of capital to the weighted amount of risk components in the Bank’s business as defined in the Basel directives.
The Basel III directives were published within the amendment of Proper Conduct of Banking Business Directives 201-211, published by the Supervisor of Banks in May 2013 (hereinafter: the "Basel III Directive"). The Basel III Directive emphasizes risk management, while linking the risk profile of the Bank and the quality of risk management with the required capital allocation. The goal of these directives is to reinforce the resilience of the banking system during times of crisis. The directive poses stricter standards for the achievement of capital adequacy, as well as new requirements in the area of liquidity, new requirements regarding the composition of exposures and the capital required in respect of exposures, an expansion of risk management methods, and more.
The amendment establishes a capital-adequacy requirement for the banking system, according to which banking corporations in Israel are required to maintain a minimum common equity Tier 1 capital ratio of 9% (in Basel III terms) by January 1, 2015. Large banking corporations whose total consolidated balance-sheet assets constitute at least 20% of the total balance-sheet assets in the banking system in Israel will be required to maintain a minimum common equity Tier 1 capital ratio of 10% by January 1, 2017. This requirement replaces the requirement for a minimum core capital ratio of 7.5% (in Basel II terms).
Main Guidelines of Basel III - The directive is based on three pillars:
A. Pillar I: Allocation of the minimum capital against credit risks, market risks and operational risks, using a method that links the volume of exposures to the various risks to the regulatory capital requirements.
B. Pillar II: Capital requirements in respect of additional potential risks to which the banking corporation is exposed, beyond the minimum capital requirement of Pillar I. This includes the expansion and refinement of supervision, control, and risk management mechanisms, and a requirement to allocate capital internally, based on the ICAAP (Internal Capital Adequacy Assessment Process).
C. Pillar III: Expansion of reporting and disclosure to the public on risk management and controls.
The directives of Basel, as adopted by the Bank of Israel, permit three approaches to the allocation of capital in respect of credit risks: the standardized approach, and two internal ratings-based approaches: fundamental - FIRB and advanced - AIRB.
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In the standardized approach, the capital allocation is determined according to weights established by the Bank of Israel and adjusted to risk levels while ratings by approved external rating agencies can be used. In the internal-ratings-based approaches, the banks assess the credit risk of individual borrowers based on models. In the FIRB approach, the bank generates an estimate of the probability of default by the customer (PD). In the AIRB approach, the bank additionally generates estimates of the loss given default (LGD) and the extent of exposure at default (EAD). From these figures, the bank derives the volume of regulatory capital it must hold in respect of the credit exposure to a given borrower. According to the instructions of the Supervisor of Banks, banking corporations must ensure compliance with the requirements of the standardized approach for Pillar I and the requirements of Pillar II and Pillar III of the Proper Conduct of Banking Business Directives 201-211.
Implementation at the Bank – The Bank acts on implementation of the standardized approach in the area of credit risk and market risk, and the basic indicator approach for operational risks. The Basel III directives are implemented on a consolidated basis and applies to the Bank and its subsidiaries (for details regarding the principal investee companies and their areas of activity, see the Section “Activity of Principal Investee Companies”). In addition, with regard to investee companies to which the Bank has provided indemnity letters pursuant to the Basel directives, no obstacle exists or is foreseen to the immediate transfer of capital resources or to the return of liabilities of the investee companies of the Bank.
Pillar I - In accordance with the directive of the Supervisor of Banks and the instructions of the Board of Directors, the Bank applies the standardized approach to credit risks, in which capital allocation is determined by weights established by the Supervisor of Banks, adjusted to the risk levels of groups of assets.
In Pillar II, the Bank is required to establish an internal process to assess the risks and capital allocation in order to ensure that the Bank allocates sufficient capital against all risks (hereinafter: ICAAP). In the ICAAP, the Bank performs a proactive process of identifying and assessing each of the material risks in each of the main activities of the Bank. This process also surveys the components of the existing policies and restrictions, measurement and tracking tools, reporting systems, main processes and products, and components of corporate governance. The assessment is aided by a qualitative review and an analysis of quantitative data, while examining the ability to rely on internal models.
The approach adopted by the Bank considers the ICAAP to consist of two main processes: A. An internal process of identification, measurement, management, and reporting of the main risks to which the Bank is currently exposed and to which it may be exposed to in the future. - 86 -
B. An internal process for establishing the appropriateness of the capital objective to ensure a proper capital ratios, taking into consideration the risk profile of the Bank, including capital planning and management.
The ICAAP is a comprehensive process pertaining to various levels of the processes of risk management, and capital management. The Bank’s three-year strategy for 2015-2017 and the work plan for 2015 bring into account the results of the ICAAP.
As part of the implementation process, according to the instructions of the Supervisor of Banks, a draft ICAAP report based on consolidated data as at the end of 2013 was submitted to the Bank of Israel in April, 2014. An independent review of the internal audit was attached to that report.
As of this date, the Bank hasn't received a response to that report yet or a reference letter to the Supervisory Review and Evaluation Process (SREP) of the Supervision of banks. The updated ICAAP process was postponed to the fourth quarter of 2015.
The disclosure policy under Pillar III is discussed and approved by the management and Board of Directors of the Bank once a year. This policy includes a reference to the Bank’s approach regarding the disclosure to be given in the financial statements, including the frequency of such disclosure and its location in the reports, and internal controls on the disclosure process.
The following table lists references to the qualitative and quantitative disclosures required under Pillar III, according to the policy established, as noted above. Qualitative disclosures:
Topic Subtopic Location Section Subsection Page Applicability of Brief description Board of Activity of the Implementation of entities in the Directors’ report Bank and group Description of the 11 Development of its Business Restrictions on Board of Capital Adequacy Principle transfers of money Directors’ report directives - Basel or supervisory – the 85 capital within the implementation at group the Bank Structure of Terms and Board of Capital adequacy Instruments Capital conditions of Directors’ report included in the 92 capital capital base instruments * Internet site Capital Adequacy The corporation’s Board of Capital Adequacy approach to the Directors’ report 85-87 assessment of its capital adequacy Risk Exposure Risk management Board of Exposure to Risks and Assessment policy for each Directors’ report and Risk separate risk area Management 103
* At the Bank's website: http://unionbank.co.il/1378-he/UnionBank.aspx - 87 -
Topic Subtopic Location Section Subsection Page
General Board of Exposure to risks Credit risks qualitative Directors’ report and risk 106 disclosure management
Credit risk Portfolios handled Board of Capital Adequacy Credit risk in the according to the Directors’ report standardized standardized approach 92 approach
Credit risk Board of Capital Adequacy Credit risk in the mitigation (CRM) Directors’ report standardized 96 approach Counterparty Board of Capital Adequacy Credit risk in the credit risk Directors’ report standardized 98 approach Market risk General Board of Exposure to Risks Market risks qualitative Directors’ report and Risk 124 disclosure Management
Operational risk General Board of Exposure to Risks Operational Risk qualitative Directors’ report and Risk disclosure, Management 140 including the use of insurance to mitigate the risk General Board of Exposure to Risks Positions in qualitative Directors’ report and Risk shares in the disclosure Management 134 Shares in the banking book banking book Accounting policy Financial Note 1 – Principal fair value for valuation Statement Accounting determination of 304 Policies financial instruments Interest-rate risk General Board of Exposure to Risks Market risks / in the banking qualitative Directors’ report and Risk interest-rate risk 127 book (IRBB) disclosure Management
Remuneration General Board of Human Capital Remuneration qualitative Directors’ report Policy 49-54 disclosure
Liquidity General Board of Exposure to Risks Liquidity Risk Coverage Ratio qualitative Directors’ report and Risk 136 disclosure Management
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Quantitative disclosures:
Topic Subtopic Location Section Subsection Page Board of Capital Adequacy The capital ratio Directors’ report according to Basel Directives 90
Structure of Details of tiers Capital of capital structure Financial Note 13 – Capital Statement Adequacy 361
* Internet site
Capital Risk-weighted Board of Capital Adequacy The capital ratio Adequacy assets and capital Directors’ report according to Basel 91 requirements Directives Total exposures and Board of Capital Adequacy Credit risk in the average exposure Directors’ report standardized 94
approach
Portfolio Board of Capital Adequacy Credit risk in the distribution by Directors’ report standardized counterparty / approach 93-94 remaining Credit Risk contractual period for redemption Portfolio Financial Appendix F – distribution by Statements Management 263 geographical region Review Information Board of Development of regarding Directors’ report Assets and 18 problematic debts Liabilities Credit risk Board of Capital Adequacy Credit risk in the mitigation in the Directors’ report standardized 97 standardized approach approach Counterparty credit Board of Capital Adequacy Credit risk in the risk Directors’ report standardized 98 approach Market Risk Capital Board of Capital Adequacy The capital ratio Requirement Directors’ report according to Basel 90-91 Directives Shares in the Balance of Board of Capital Adequacy Credit risk in the banking book investment, Directors’ report standardized 100 including capital approach requirement Interest-rate risk Increase/decrease in Board of Exposure to risks Market in the banking profits or economic Directors’ report and risk risks/Interest-rate 130-131 book (IRBB) value due to change management risk in interest rates Remuneration Board of Human Capital Remuneration 54 Directors’ report Policy
* At the Bank's website: http://unionbank.co.il/1378-he/UnionBank.aspx
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Capital Adequacy Targets
Within the Board of Directors' discussions of the three-year strategy for 2015-2017, it was resolved that the common equity Tier 1 capital ratio in these years would stand at 9.3% (risk tolerance 9.1%).
It was further resolved that the total capital ratio would not fall below 13%, and that in extreme scenarios the target total capital ratio would not fall below 9%, and the target common equity Tier 1 capital ratio would not fall below 6.5%.
On September 14, 2014, the Supervisor of Banks issued a circular entitled "Limits on Housing Loans," pursuant to which banks are required to increase their common equity Tier 1 capital target at a rate reflecting 1% of the balance of housing loans. Pursuant to the transitional directives, the common equity Tier 1 capital target will rise at fixed quarterly rates, from April 1, 2015 to January 1, 2017.
Full implementation of this directive is expected to increase the capital requirement of Union Bank by approximately 0.29 percentage points, such that the capital target at the end of 2017 will stand at 9.59%.
The lower tolerance is 0.2 percentage points below the risk appetite, which constitutes the target.
Some of the information in this section is forward-looking information, as defined in the Securities Law, and is based on the work plans of the Bank with regard to compliance with the requirements and improvement of the capital adequacy ratio and composition, including the reduction of risk components or the increase of primary capital through profit accrual and/or the issuance of secondary capital. This information may not materialize, in full or in part, or may materialize in a manner materially different than expected, depending mainly on the following factors: regulatory changes (if any) in the area of the capital ratio requirements which the Bank must meet, damage to the profitability of the Bank, and the degree of the Bank’s success in raising capital through issuances.
Capital Ratio under Basel III Directives Note 13 to the financial statements provides detailed information regarding capital measurement and risk weighting.
The following table provides a summary1 of the data in the Note (in NIS millions): December 31, December 31, 2014 2013
Tier I capital 1 2,372 2,257 Tier II capital 1 1,458 1,616 Tier III capital - -
Total capital 3,830 3,873
Credit risk-weighted assets2 22,339 21,916 Market risk-weighted assets 280 235 Operational risk-weighted assets 1,736 1,774
Total risk-weighted assets 24,355 23,925 1 For more details, see Note 13. 2 Prior to deduction of a collective allowance in the amount of NIS 252 million (in 2013 – prior to a deduction of a general allowance in the amount of NIS 52 million). - 90 -
The following table provides details of the capital ratio of the Bank: December 31, 2014 December 31, 2013 Basel III Basel II Overall Capital Overall Capital Risk-Weighted Requirements Risk-Weighted Requirements Assets (12.5%) Assets (9%) Credit risk 1 Sovereign debt 71 9 47 4 Debts of public sector entities 216 27 214 19 Debts of banking corporations 610 76 671 60 Debts of corporations 2 12,168 1,521 15,081 1,357 Debts secured by commercial real estate 2 2,958 370 408 37 Retail exposure to individuals 1,815 227 1,829 165 Small businesses 3 139 17 78 7 Housing mortgages 3,051 381 2,798 252 Other assets 1,268 159 790 71 CVA Risk 43 5 - -
22,339 2,792 21,916 1,972 Market risks Interest-rate risk 166 21 125 11 Share risk 53 6 42 4 Foreign currency exchange rate risk 40 5 60 5 Option risk 21 3 8 1
280 35 235 21
Operational risk 1,736 217 1,774 160 Total risk-weighted assets in 24,355 3,044 23,925 2,153 respect of the different risks Total capital base 3,830 3,873
Ratio of tier I capital to risk components 9.74% 9.43% Ratio of overall capital to risk components 15.73% 16.19% The minimal Tier I equity ratio required by the Supervisor of Banks 9.0%** 7.5% The minimal total capital ratio required by the Supervisor of Banks 12.5%** 9.0% * The capital ratio the Bank will be required to meet as of January 1, 2015. ** The capital ratio the Bank will be required to meet as of January 1, 2015. In addition, according to the directives of the supervision of banks regardin "limitations for granting housing loans", the Bank will be required to increase the Tier I equity objective in a rate that expresses 1% of the housing loans balance. Tier I equity objective will increase in fixed quarterly rates from April 1, 2015 until January 1, 2017. 1. Prior to deduction of a collective allowance in the amount of NIS 252 million (in 2013 – prior to a deduction of a general allowance in the amount of NIS 52 million).. 2. As of June 30, 2014, the Bank classified construction accompaniment credit for residential apartments from "exposure to corporations" to "exposure secured by commercial real estate", as required by the Proper Conduct of Banking Business Directives. The comparative figures in this Section have not been reclassified. 3. Small businesses managed by the Retail Division with an indebtedness of up to NIS 500 thousand.
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Instruments Included in the Capital Base The following is the composition of the capital instruments comprising the capital base of the Bank:
Capital instruments that qualify for inclusion in the capital base under the Basel III directives – not issued by the Bank.
Capital instruments that qualify for inclusion in the capital base under the transitional directives – the ceiling that determines inclusion of subordinated notes in the capital base is NIS 1,508 million (total subordinated notes recognized in capital on December 31, 2013, according to the Basel II directives). During the entire year of 2014, these instruments were recognized at a rate of 80%, i.e. a total of NIS 1,206 million. This ceiling will be lowered by an additional 10% in each subsequent year, up to January 1, 2022. As of January 1, 2015, the balance of these instruments will stand at NIS 1,055 million.
Additional disclosures regarding the principal characteristics of the supervisory capital instruments issued – see the Bank's website.
Credit Risk in the Standardized Approach The risk of monetary loss as a result of default or a decline in the quality of credit of borrowers who fail to meet their obligations towards the Bank, and the lack of adequate collateral to cover the debts of such customers. The allocation of capital in Pillar I in respect of credit risk in the portfolio is calculated according to the standardized approach. Concentration of credit risk and collateral, as well as the credit quality risk are estimated within the Tier II. For the purposes of determination of fair value, the Bank performs valuations for non-marketable bonds, based, inter alia, on ratings by rating agencies as published in public information sources. See also details in Section "Critical Accounting Policies and Estimates". In order to meet pillar I of Basel directives according to the standardized approach, the Bank uses only country ratings (also for the assessment of Banks' risk) from approved sources that present ratings of international rating agencies acknowledged by the directive. The Bank does not use information from export credit agencies.
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The following table shows portfolio exposure* development according to the remainder of contractual term to maturity: As at December 31, 2014 (Basel III) More than 1 Less than 1 year less More than 5 year than 5 years years1 Total NIS millions
Credit and deposits with banks and government 16,188 4,490 10,928 31,606 Securities2 1,088 2,714 2,188 5,990 Derivative financial instruments3 190 44 16 250 Unutilized credit facilities 6,129 2,087 23 8,239 Other off-balance sheet exposures4 671 728 2,465 3,864 Other assets 775 - 404 1,179
Total 25,041 10,063 16,024 51,128
As at December 31, 2013 (Basel II) More than 1 Less than 1 year less More than 5 year than 5 years years1 Total NIS millions
Credit and deposits with banks and government 17,136 4,503 10,958 32,597 Securities2 1,027 1,242 1,877 4,146 Derivative financial instruments3 93 84 27 204 Unutilized credit facilities 6,696 2,401 39 9,136 Other off-balance sheet exposures4 845 766 2,396 4,007 Other assets 633 - 405 1,038
Total 26,430 8,996 15,702 51,128
* Exposure in terms of recorded debt balance, meaning after accounting write-offs and before deduction of allowances for credit losses. 1. Including balances with no repayment period. 2. Not including shares in the portfolio held for trading and non-monetary items such as activity in the Maof market, which is included in other off-balance-sheet exposures and as of 2014 – without investments in supervisory capital components of financial corporations. 3. As calculated according to Appendix C of Proper Conduct of Banking Business Directive 203. 4. Including customers' activity in the Maof market that does not meet the definition of a derivative.
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The following is the distribution of exposures* of the portfolio by products and counter-party: As at December 31, 2014 (Basel III) Credit1 Securities2 Derivatives3 Unutilized Other Off- Other Assets Gross credit Average gross Credit Balance Sheet exposure credit 4 Facilities Exposures exposure5 NIS Million
Sovereignties 9,284 4,193 - - - - 13,477 10,898 Public sector entities 133 300 9 77 27 - 546 578 Banking corporations 436 849 69 - 108 - 1,462 1,639 Corporations secured by real estate 6 10,859 648 172 5,433 1,469 - 18,581 21,879 Commercial 6 1,575 - - 1,199 2,220 - 4,994 3,441 Retail to individuals 2,308 - - 991 9 - 3,308 3,422 Small businesses 180 - - 112 31 - 323 247 Housing mortgages 6,831 - - 427 - - 7,258 7,126 Other assets - - - - - 1,179 1,179 1,035 Total 31,606 5,990 250 8,239 3,864 1,179 51,128 50,265
As at December 31, 2013 (Basel II) Credit1 Securities2 Derivatives3 Unutilized Other Off- Other Assets Gross credit Average gross Credit Balance Sheet exposure credit 4 Facilities Exposures exposure5 NIS Million
Sovereignties 9,592 2,430 - - - - 12,022 10,750 Public sector entities 124 265 - 149 31 - 569 524 Banking corporations 583 882 135 - 108 - 1,708 1,880 Corporations secured by real estate 12,889 569 69 7,225 3,713 - 24,465 25,729 Commercial 426 - - 134 90 - 650 713 Retail to individuals 2,361 - - 1,078 33 - 3,472 3,150 Small businesses 86 - - 123 32 - 241 244 Housing mortgages 6,536 - - 427 - - 6,963 6,961 Other assets - - - - - 1,038 1,038 1,025 Total 32,597 4,146 204 9,136 4,007 1,038 51,128 50,976
* Exposure in terms of recorded debt balance, meaning after accounting write-offs and before deduction to allowances for credit losses. 1. Including credit to the public, deposits with banks and the government. 2. Not including shares in the portfolio held for trading and non-monetary items such as activity in the Maof market, which is included in other off-balance-sheet exposures and as of 2014 – without investments in supervisory capital components of financial corporations. 3. The credit risk regarding transactions in derivative financial instruments presented in terms of credit equivalent (after the netting effect and multiplication by Add-on). 4. Including customers' activity in the Maof market that does not meet the definition of a derivative. 5. Quarterly average for the period. 6. As of June 30, 2014 the Bank classified construction accompaniment credit for residential apartments from "exposure to corporations" to "exposure secured by commercial real estate", as required by the Proper Conduct of Banking Business Directives. The comparative figures in this section weren't reclassified.
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Set out below is the credit exposure1,2 according to the standardized approach by weights of risk (in NIS millions): As at December 31, 2014 (Basel III) 0% 20% 35% 50% 75% 100% 150%3 250% 4 Total
Sovereignties 13,123 354 ------13,477 Public sector entities - - - 546 - - - - 546 Banking corporations - 440 - 1,021 - 1 - - 1,462 Corporations - - - - - 18,508 41 - 18,549 Secured by commercial real estate - - - - - 4,978 16 - 4,994 Retail to individuals - - - - 3,252 38 18 - 3,308 Small businesses - - - - 318 4 1 - 323 Housing mortgages - - 4,926 675 1,508 141 8 - 7,258 Other assets 268 - - - - 642 32 237 1,179 Total before credit risk mitigation 13,391 794 4,926 2,242 5,078 24,312 116 237 51,096 Credit risk mitigation 6 46 34 - (34) (123) (2,391) (2) - (2,470) Total after credit risk mitigation 13,437 828 4,926 2,208 4,955 21,921 114 237 48,626
As at December 31, 2013 (Basel II) 0% 20% 35% 50% 75% 100% 150%3 Total
Sovereignties 11,785 237 - - - - - 12,022 Public sector entities - - - 569 - - 569 Banking corporations - 655 - 1,051 - 2 - 1,708 Corporations - - - - - 24,118 66 24,184 Secured by commercial real estate - - - - - 647 - 647 Retail to individuals - - - - 3,436 25 6 3,467 Small businesses - - - - 239 - 1 240 Housing mortgages - - 5,072 398 1,364 79 1 6,914 Other assets 254 - - - - 771 13 1,038 Total before credit risk mitigation 12,039 892 5,072 2,018 5,039 25,642 87 50,789 Credit risk mitigation 6 23 46 - (8) (171) (2,934) - (3,044) Total after credit risk mitigation 12,062 938 5,072 2,010 4,868 22,708 87 47,745
1. Exposure after accounting write-offs and allowances for credit losses. 2. Not including the portfolio held for trading. Presentation of derivative financial instruments according to the standardized approach, before multiplying by conversion coefficients of off-balance- sheet exposures. 3. Including loans in arrears of 90 days or more, or investments in hedge/ venture-capital/ private equity funds (see also subsection "Shares in the Banking Portfolio" further in this section) and as of January 1, 2014 – also including non-accruing interest impaired debts. 4. Deferred taxes balance not exceeding 10% of Tier I equity. 5. As of June 30, 2014 the Bank classified construction accompaniment credit for residential apartments from "exposure to corporations" to "exposure secured by commercial real estate", as required by the Proper Conduct of Banking Business Directives. The comparative figures in this section weren't reclassified. 6. Credit risk reducing collateral and guarantees, see also the following table.
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Collateral evaluation and collateral management - Under Basel III, collateral can be recognized by the Bank according to the comprehensive approach, as defined in the directive. In that approach the net value of the collateral is deducted in accordance with coefficients stemming from type of asset, incongruence's in currency or term to maturity. The types of eligible financial collateral used by the Bank in order to calculate capital adequacy are listed below, with the manner of evaluation of such collateral for risk mitigation purposes:
‐ Securities - Securities pledged in favor of their owners or of a third party. In order for a security to be eligible to serve as a risk reducer, it must be a government or bank security or a rated security listed for trading on a recognized stock market; the shares must belong to a recognized share index, as detailed in the directive. The evaluation of collateral is based on the market price of the pledged security, and according to the coefficients for deduction from the value of the collateral which are affected by factors including the number of days of holding and the nature of the customer’s activity. The deduction rate is implemented by the Bank, so that in some cases the rate is 50% in accordance with the alternative in item 151A.C of Proper Conduct of Banking Business Directive 203. In the other cases, the Bank implements a specified ratios deduction mechanism, in accordance a with the customers' activity, agreements and under directives of item 151.A.b.
‐ Deposits and savings plans - Liquid means taken as collateral by way of an offsetting letter or pledge, as necessary, and which cannot be withdrawn until they cease to serve as collateral. The value of the collateral is established according to the revaluation in respect of withdrawal prior to the stated maturity date.
‐ Third party guarantees - Guarantees provided by third parties against customers’ exposures. With the provision of the guarantee, the guarantor becomes the counterparty to the exposure, which changes the risk weight in respect of the exposure. A guarantee of this type allows a mitigation of the risk-weighted assets arising from the exposure, according to the risk of the guarantor factor. Regarding guarantees provided by foreign banks against the customers' exposure, the use is carried out subject to an individual legal examination as for the validity of the guarantee in accordance with the laws that apply to it (mostly, the law of the country in which the Bank that provided the guarantee, was associated).
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The following table shows credit exposure* covered by eligible financial collateral and/or guarantees or credit derivatives: As at December 31, 2014 (Basel III) Total Total exposure exposure covered by covered by eligible Total gross subtracted Total added financial Net total exposure guaranties1 amounts1 collateral2 exposure NIS millions
Sovereign debts 13,477 - 46 - 13,523 Debts of public sector entities 546 (46) 1 - 501 Debts of banking corporations 1,462 - 45 - 1,507 Debts of corporations 4 18,549 (39) - (2,118) 16,392 Debts secured by commercial real Estate 4 4,994 (7) - (221) 4,766 Retail exposure to individuals 3,308 - - (84) 3,224 Small businesses 3 323 - - (47) 276 Housing mortgages 7,258 - - - 7,258 Other assets 1,179 - - - 1,179
Total 51,096 (92) 92 (2,470) 48,626
As at December 31, 2013 (Basel II) Total Total exposure exposure covered by covered by eligible Total gross subtracted Total added financial Net total exposure guaranties1 amounts1 collateral2 exposure NIS millions
Sovereign debts 12,022 - 23 - 12,045 Debts of public sector entities 569 (23) 12 (6) 552 Debts of banking corporations 1,708 - 55 - 1,763 Debts of corporations 4 24,184 (63) - (2,699) 21,422 Debts secured by commercial real Estate 4 647 (3) - (169) 475 Retail exposure to individuals 3,467 - - (132) 3,335 Small businesses 3 240 (1) - (38) 201 Housing mortgages 6,914 - - - 6,914 Other assets 1,038 - - - 1,038
Total 50,789 (90) 90 (3,044) 47,745
* Exposure after accounting write-offs, less allowance for credit losses and before converting off-balance sheet components to credit. 1. The amount of exposure covered by guarantees transferred to the counterparty that gave the guarantee. 2. After multiplication by safety coefficients (haircuts), including positive adjustments added to the exposure. 3. Small businesses with indebtedness which does not exceed NIS 500 million that are managed as part of the retail department. 4. As of June 30, 2014 the Bank classified construction accompaniment credit for residential apartments from "exposure to corporations" to "exposure secured by commercial real estate", as required by the Proper Conduct of Banking Business Directives. The comparative figures in this section weren't reclassified.
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Counterparty credit risk - The Bank is exposed to credit risk, resulting from a market risk of a counterparty, as a result of the activity of its customers in over-the-counter derivatives and stock- exchange derivatives (for further details, see the Section “Risk Exposure and Management”). The capital allocated in the report is calculated according to the principles detailed in appendix C to Proper Conduct of Banking Business Directive 203. Beyond the capital allocation performed for a counterparties' credit risk in Pillar I, performed in accordance with the directives of the regulator, the Bank examined in detail the economic risk and the need to allocate additional capital for this risk, as part of Pillar II. Credit exposures to counterparty were mapped to several economic sectors and a proper maintenance period was set for each one of them until the closure of the position exposed to the same sector. Counterparty credit risk estimating scenarios, within Pillar II of the ICAAP document, were performed on data from December 31, 2013 and according to the operation of general scenarios that take into account the joint variability of the various underlying assets in foreign currency and the counterpartys' position composition. According to the exposure of the counterparty in these scenarios, the additional capital allocation, regarding this risk, was defined. The following table lists counterparty credit risk exposures under the standardized approach: As of December 31 As of December 2014 (Basel III) 31, 2013 (Basel II) NIS millions NIS millions
Positive gross fair value 306 264 Par value (after conversion coefficient to credit) 181 185 Deduction offsetting benefits 237 264
Total credit exposures after offsetting 250 203
Deducting collateral: Cash and deposits 13 20 Government bonds 1 3 Shares (including convertible bonds) 3 6
Total net credit exposure in respect of derivatives 233 174
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The following table lists counterparty credit risk exposures arising from the sale or purchase of credit protections: As of December 31, 2014 As of December 31, 2013 (Basel III) (Basel II) Protections Protections Protections Protections purchased sold purchased sold NIS millions NIS millions ALM: Credit linked notes (CLN) /credit - 78* - 121* default swaps (CDS) Total return swaps (TRS) - - - - Credit options - - - - Other - - - -
Mediation activity: - - - - Credit linked notes (CLN) / credit default swaps (CDS) - - - - Total return swaps (TRS) - - - - Credit options - - - - Other - - - -
Total credit derivatives (par value) - 78 - 121
* Arising from CLN (Credit Linked Note) only, in which protection was sold against risk of the state of Israel.
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Offsetting - As at December 31, 2014, the volume of balance-sheet offsets (offsets between assets and liabilities) is immaterial (similarly to December 31, 2013).
Shares in the banking book - The Bank has holdings in shares in the banking book, as detailed in the Section “Risk Exposure and Management”. The following are the positions in shares in the banking book: As at December 31, 2014 (Basel III) As at December 31, 2013 (Basel II) Balance- Capital Balance- Capital Sheet Requirements Sheet Requirements Balance Fair Value (12.5%*) Balance Fair value (9%) NIS millions NIS millions
Shares 47 47 7 54 54 5 Index certificates on shares ------Index certificates on index funds ------Hedge funds/venture-capital funds/private-equity funds ------Others ------
Traded by the public 47 47 7 54 54 5
Shares 24 24 2 17 17 2 Index certificates on shares ------Index certificates on index funds ------Hedge funds/venture-capital funds/private-equity funds1 29 29 4 21 21 2 Others2 - - - 1 1 -
Held privately3 53 53 6 39 39 4 * The total capital ratio the Bank will be required to meet as of January 1, 2015. 1. Capital requirements in respect of venture-capital funds and private-equity funds are calculated in accordance with risk-weighted assets in the amount of 150% of the fair value of the holding. 2. Investment in an equity-basis investee company. 3. Non-tradable.
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Capital Planning
Capital planning for 2015 was established within the discussions of the work plan for 2015 held by the Board of Directors in late December 2014. The annual capital planning is derived from capital targets established in the three-year strategic plan for 2015-2017 (for further details, see the subsection "Capital Adequacy Targets").
Capital planning for 2015 was mainly influenced by the following parameters:
An increase in Tier 1 capital due to an expected increase in the retained earnings item.
In order to be conservative, a gradual reduction of the positive capital reserve balance was taken, in respect of securities available for sale.
A decrease in Tier 2 capital as a result of the reduction of subordinated notes in accordance with the transitional directives (an annual reduction of the ceiling for recognition of liability deeds by 10% annually) which was offset by an expected increase in the collective allowance balance.
The assumption that there will be no need for the issuance of Tier 2 capital, recognized under Basel III, during 2015.
Implementation of a new directive concerning employee benefits as of January 1, 2015 (see Note 1.F.1). This implementation will decrease the Tier I equity and increase the risk-weighted assets in respect of deferred taxes (weighted at a risk weight of 250%).
The implementation of a new directive regarding additional capital allocation in respect of housing loans. The implementation of this directive will increase the minimal capital rate required from the Bank by 0.11 percentage points in 2015.
As part of the capital planning for 2015, the Bank has prepared a plan for the reduction of risk- weighted assets, which may be necessary in order to cope with possible changes, as a result of the potential effects of economic conditions on the Bank's capital base (profitability and capital reserve), as well as possible effects of new regulatory directives which were uncertain at the preparation of capital planning stage, including in connection with a change in the directives regarding capital requirements deriving from a credit risk of a counter party, which at the time of preparation of capital planning there was no certainty regarding its implementation, and which was assumed that it might have material effect on the future capital planning.
As noted, in October 2014, the Board of Directors adopted a three-year business strategy for 2015- 2017, which included a discussion of key guidelines for capital planning for those years (also see the subsection "Capital Adequacy Targets"). Within the discussions over the next ICAAP document, in the fourth quarter of 2015, the Bank's degree of compliance with the capital targets will be examined also under stress scenarios.
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On February 2015 the Bank completed a uniform stress scenario calculation, as required by the guidelines of the Bank of Israel. The results of the stress scenario show that the Bank meets its capital objectives, and doesn't fall from the minimal ratio set, even with additional required completions for risk components that aren't included in the scenario, in respect of liquidity and operational risk (see also Section "Risk Exposure and Management", subsection "Stress Scenarios"). The Bank measures its capital-adequacy ratios, risk-weighted assets, and capital base on a monthly basis. In the Bank there is a planning forum headed by the CEO, in which senior executives at the Bank are members. The forum convenes at least once a quarter, with the aim of efficiently managing risk-weighted assets, while maintaining the risk appetite. A summary of the forum's discussions is reported to management. In addition, once a quarter, an examination of compliance with capital targets under a stress scenario, is performed, which was defined by the Board of Directors of the Bank as part of the ICAAP.
Some of the information in this section is forward-looking information, as defined in the Securities Law, and is based on the work plans of the Bank and on its estimates with regard to market conditions, the extent of the public’s response to issuances, and the existence of suitable market conditions for issuances. This information and the expectations regarding such information may not materialize, in full or in part, or may materialize in a manner materially different than expected, depending on the following main factors: market conditions, the extent of the public’s response to issuances, the absence of market conditions supporting issuances, damage to the profitability of the Bank, and regulatory changes.
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Exposure to Risks and Risk Management The Bank’s business activity entails credit risks, market risks and liquidity risks, operational risks including legal risks, compliance risks and also goodwill risks and strategic risks.
The Bank's risk management policy is aimed at meeting the business and strategic objectives that were determined while assimilating the risk management culture and their control. The Banks' risk management policy helps the Bank reach those objectives, while defining risk types and their scope, and compliance with risk appetite and risk tolerance set by the Board of Directors. For this, suitable operating report systems and control and monitoring mechanisms are operated.
Corporate Governance Risk-management and capital adequacy processes at the Bank are regulated and supervised by the Board of Directors and its committees, the CEO of the Bank and the management, management committees, the business sectors generating the risk, Control and Risk Management Division, Chief Accountant Division, Legal Counsel system, Resources Division and the internal audit.
The Board of Directors of the Bank establishes the Bank's strategy and business policy, and guides the Bank's Management regarding the objectives and the principles of the Bank's activity. The Board of Directors expresses the overall exposure policy within the definition of the risk appetite and risk tolerance and within specific policy documents. The Board of Directors supervises the implementation of the strategy and the policy, meeting the set targets, and meeting the limits of risk appetite and risk tolerance, all these, while ensuring the existence of three defense lines and a strict separation between risk generators, risk managers and the independent control processes in respect of them.
The tracking of the development of risks is done by the ICAAP document and the quarterly risk document.
The Board of Directors and its committees hold discussions regarding the nature and characteristics of the various risks to which the activity of the Bank is exposed, risk assessment methods, and the effectiveness of risk supervision, including discussions of the tools and manner of use of tools, and of risk assessment, measurement and monitoring.
The Board of Directors establishes the risk exposure policy of the Bank based on its discussion regarding the mix of exposures reflecting the risk profile of the Bank, and the required volume of capital, while allocating such capital to the various business activities. When planning the activity of the Bank for the following three years, the Board of Directors of the Bank established its risk appetite and risk tolerance in all areas of activity and exposures to risk. These areas include capital ratios, credit risks, market risks, liquidity risk, operational risks including legal risks and compliance risks, concentration risks, goodwill risks and strategic risk.
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Monitoring of the compliance with the risk appetite and risk tolerance for all of the activities is performed by using the quarterly risk document discussed by the Risk Management Committee of the Board of Directors and by the plenum of the Board of Directors. In addition, monitoring tools were developed in order to routinely test for compliance with the risk appetite and risk tolerance and examine the development of the exposure to risks over time.
In addition, the Board of Directors has approved a framework for the application of extreme scenarios to the different exposures and their effects on the capital ratios, while defining principles for the establishment of the extreme scenarios and reporting of their results.
The Board of Directors has defined the areas of responsibility, duties and authority of the CEO, who, among other things, is responsible for the implementation of the strategy and business policy of the Bank, the routine business and organizational management of the Bank, while securing its stability and profitability; the preparation of an annual work plan and budget, including an investment budget, and the presentation thereof for discussion and approval by the Board of Directors; maintaining managerial supervision and control over the organizational system of the Bank and the execution of the work plan; in accordance with the Bank's risk management policy and its risk appetite. Special attention is devoted to compliance, including all of the various components of this field. The Bank ensures that an appropriate system of procedures is maintained, that violations and other failures are prevented, and that conclusions are drawn as necessary.
The first line of defense of risk managers and generators of exposures are separate from the second line of defense of those responsible for risk control at the Bank. In the third quarter of 2014 the organizational process, for implementing a clear separation between the defense lines to the control over the activity in the market and liquidity risks, was completed. Some members of the management of the Bank are generators of the various risks, who realize the risk policy and risk appetite established by the Board of Directors. For the purpose of performing their duties, the CEO and the members of management receive daily and periodic reports allowing them to monitor the exposure to risks at the Bank, in addition to discussions in various forums and committees. These discussions are attended by regular members, as determined by the CEO, and other office holders, as necessary.
Management of business credit exposures at the Bank, environmental risks and credit concentration risks are the responsibility of the Head of the Corporate Division, Mrs. Shevy Shemer. (In addition, see reference to the changes in the composition of board members in Section "Members of Management and Senior Officials").
Management of credit exposure risks in the consumption sector and mortgages sector, are the responsibility of the Head of the Retail Banking, Customer Assets and Investment Advice Division Mrs. Edna Press-Lachisch.
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The management of exposures to market and liquidity risks is the responsibility of the Head of the Financial Management Division, Mr. Efraim Avraham. Exposures are created primarily through the dealing rooms, the Asset and Liability Management Unit and the Proprietary Investments Unit in the division. In addition, the division is responsible for the management of credit risks arising from the Bank’s investments in corporate bonds, as well as for credit risks in respect of countries and banks and the clearing risks.
Legal risks and compliance risks are managed by the Chief Legal Advisor of the Bank, Dr. Moriah Hoftman Doron, Adv.
The CEO of the Bank, Mr. Israel Trau, serves as the Goodwill Risk and Strategic Risk Manager.
The head of the Controls and Risks Management Division, Mrs. Netta Avrahamov-Bitan, serves as the Bank’s Chief Risk Officer (CRO). Mrs. Avrahamov serves also as Operational Risks manager. The risk management activity is carried out in accordance with Proper Conduct of Banking Business Directive No. 310 "Risk Management', which defines the risk management processes and the roles of the Chief Risk Officer.
Risk Management Array – Responsible for the identification, definition, mapping and measuring of the various risks, and formulation of a general risk overview and reporting in respect of it served to the management of the Bank and the Board of Directors both in the quarterly risk document and in the annual ICAAP document. In addition, the array is also responsible for the risk examination forum of new products. This role includes the development and implementation of internal methodology and models for risk measurement and assessment of the various risks. As of January 1, 2014 the system is also responsible for giving an independent opinion regarding credit requests exceeding in total NIS 50 million. (As of January 1, 2015 credit requests exceeding in total NIS 25 million). In addition, as of 2014, the array is also responsible for writing the business policy documents (credit, market and liquidity).
Credit control branch is responsible for performing credit controls, encompassing the major borrowers of the Bank, including evaluation of the quality of the borrower, the quality of the fundamental documents and collateral in the customer’s portfolio, the quality of the credit portfolio, and the examination of the reliability of the credit rating at the Bank. The credit control unit works within an annual and multi-year work plan, which is submitted for approval to the Credit Committee of the Board of Directors. As of the financial statement for the first quarter of 2014, the branch is also responsible for examining the appropriateness of classifications and allowances for credit losses according to Proper Conduct of Banking Business Directive No. 311 "Credit Risk Management".
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Validation and Control – Responsible for validating the Banks' developed models and for periodic reporting of the validation results to the Board of Directors. It is also responsible for second defense line controls for trading units and for the presentation of a daily updated picture, development over time of all of the risks the Bank is exposed to and compliance with risk appetite and risk tolerance.
Credit Risks Credit risk is the most significant risk the Bank is exposed to in the scope of its activity, mainly because of its range in comparison to the other risks. The risk may cause financial loss to the Bank as a result of insolvency or a decline in the repayment ability of a counterparty of the Bank in a transaction, while failing to meet his obligations regarding the conditions agreed upon.
A. Credit Portfolio Quality Risk: The Board of Directors holds a discussion and approves the Bank’s overall credit policy at least once a year. When necessary, this policy discussed in full or in part during the year. The aim of the credit policy is to limit the abovementioned risk in accordance with the Bank's risk appetite and risk tolerance determined by the Board of Directors and by establishing principles to manage it.
Within the risk management processes on the quality of the credit portfolio, as of January 1, 2014, the risk management function gives an independent opinion for requests exceeding NIS 50 million. As of January 1, 2015, the process will be performed also on requests exceeding NIS 25 million.
The policy document refers to principles and rules for rating borrowers and for granting, managing, and controlling credit, with the aim of improving the quality of the portfolio and reducing the risk inherent in managing it. As part of this process, rates of reliance upon collateral received by the Bank are established. In addition, the policy document presents the methodology for the regularization of the activity of the Bank in the area of credit granting, including operational aspects, reporting, and control, with an emphasis on the credit risk management principles detailed in the Basel Committee's recommendations. The policy also addresses the manner of locating, identifying, and treating potentially problematic borrowers and of handling doubtful debts, as well as the methodology for calculating the allowance for credit losses. During the year, compliance with this policy is examined through monthly and quarterly reports to the management and to the Board of Directors on the credit position. Concurrently, extensive means and resources are invested in updating and developing automated control tools and in improving information systems in the area of credit, in order to adjust them to the changing business environment and to the regulatory directives. - 106 -
Credit management: Considerations in granting credit mainly concern the nature of the customer and the customer’s repayment capability, financial stability, liquidity, reliability, time in the industry, time with the Bank, the quality of the collateral which the customer can provide, and more. The Bank endeavors to match the type of credit to the customer’s needs and activity.
As part of the implementation of internal models to improve the Banks' credit risks assessment, the Bank improved its processes for rating corporate and retail customers, and acts to adjust the total spread to the customer and transaction risk.
Credit-granting authority: Credit granting is based on credit authority at the various levels, up to the level of the Board of Directors’ Credit Committee. Credit-granting decisions that are beyond the personal authority of branch managers and the management of the Corporate Division are made at the level of credit committees, in order to minimize the risk involved in reliance on the judgment of a single individual. Within the credit authority, limits were established regarding the volume of credit without collateral that any person in authority may approve. During the third quarter of 2014, the business credit management policy for 2015 was approved. The approved policy gives expression to the economic developments in the economy and in the world and to relevant regulatory directives. In addition, the policy determines that the Bank must continue to take steps to reduce the sectorial concentration and the concentration of the borrowers and to adjust the credit limits to economic developments as aforesaid.
Credit control: The Bank operates numerous, varied automated control tools, at its branches and headquarters, aimed at the earliest possible detection of changes in customer behavior, formation of collateral gaps, exceptions from approved credit limits, and breaches of authority. The Bank integrates information from external sources with its control tools in order to identify activities and events that may influence customers’ ability to repay their debts.
Automated systems that identify potential problems with customers, who are not classified as having problematic debts, is used for early detection of such problems (see details in the section treatment of problematic credit and debt collection, further on).
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In addition, a process of examination of borrowers, based on Proper Conduct of Banking Business Directives, is performed at the Credit Control Unit in the Control and Risk Management Division and also additional populations of borrowers defined from time to time.
Training: The Bank invests extensive resources in training employees including employees involved in the area of credit, which includes training new employees in specially designated courses, advanced courses for experienced employees in this area, a forum of business department managers, analysis of lessons learned from various events, etc. In addition, training and refresher courses are provided on the subject of credit-related regulation.
Credit risk in granting housing loans
Housing loan policy: The policy details the ways of achieving the business objectives derived from the strategic plan and the methodology for granting and managing credit. The policy establishes risk appetite and risk tolerance with regard to both the specific transaction and the overall portfolio risk, in order to limit the exposure to credit risks in this type of credit, maintain the quality of the credit portfolio and minimize risk inherent in it. The credit policy is translated to detailed procedures and instructions for granting credit, managing the credit portfolio, and applying control processes. The implementation of the procedures and instructions allows controlled management of the risks involved in granting housing loans. The policy is examined by the Board of Directors, at least once a year, and is adjusted to the economic conditions and the developments in the business environment, while examining the risks and the changes in regulatory directives. In order to express such changes, the Bank updates its product mix, business criteria, limits, and pricing of housing credit, from time to time.
The Bank provides housing credit only in cases in which the information regarding the borrowers and the collateral is whole, updated, verified and in accordance to policy, at the date of granting the loan and does not provide credit for mortgages secured by a secondary lien, when the collateral right of the Bank is not guaranteed.
In light of the economic environment of the housing and real estate market, it was decided to exacerbate certain parameters regarding the granting of housing loans.
On September 2014 the Bank of Israel published Proper Conduct of Banking Business Directive No. 329 regarding limitations for granting of housing loans, which came into
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force as of October 1, 2014 – see details regarding the directive in Section "Legislative Developments". The Bank meets all of the renewed guidelines while making the necessary adjustments. Credit granting authority: The decision-making process regarding credit granting is based on a hierarchy of authority for holders of positions at different levels, until the rank of the Credit Committee headed by the CEO, in accordance with the risk appetite and risk tolerance established by the Board of Directors. Control tools and risk management: Various mechanisms of control exist in the Bank, both internal, in the chain of management of the mortgages array and external to the credit processes. The control tools include detailed definitions of the components of risk management and their control, determining risk appetite and risk tolerance to the various activity components, implementation of automated systems at the branch level and at the headquarters level, designated training activity and a reporting and monitoring format in all levels of the Bank.
When examining the risks during the approval process of a housing loan, the Bank's policy establishes clear criteria for the examination of the quality of the customer and transaction risks characteristic of the mortgage sector, while referring to regulative instructions, to risk limits and to the market conditions that vary from time to time.
Following are the main parameters taken in to account when discussing the credit request:
‐ Examination of borrowers' repayment capability from the borrower's disposable income, financial wealth and the financing rate relative to the value of the property, with regard to the internal and regulatory restrictions.
‐ Liens on the property and its legal status.
‐ Financing of homes purchased for investment purposes.
‐ Location of the property and its marketability.
‐ Examination of the ration of return to risk weighted assets according to the objectives set forth by the Bank.
For all credit applications, automatic soundness tests are performed based on various databases, and presented to the credit officer as a preliminary parameter for the examination and approval of the transaction.
Housing loans with significant risk attributes are examined according to specific criteria. For example, in loans with a variable interest track, the customer's repayment capability is
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examined using a simulation of an increase in the interest rate exceeding the average interest offered to the customer in all tracks containing a variable interest component. The examination of the risks of the portfolio is done by examining various sectors and cross- sections (such as purchasing groups, homes purchased as investments), examining borrower quality, and examining risks in a range of extreme scenarios. The mortgage system routinely and continuously monitors developments in housing credit, as well as developments and changes in mortgage repayments, both at the level of the branch and at the level of the overall portfolio, and examines the various implications thereof.
- Quality of the portfolio and borrower rating: The Bank periodically examines the assessment of credit risk in the mortgage portfolio, based on 11 risk levels. The quarterly risk document, which is presented to the management of the Bank, the Board of Directors' Risk Management Committee, and the Board of Directors of the Bank for discussion each quarter, contains an examination and report on mortgage credit, including the development of the portfolio, compliance with risk appetite and risk tolerance components of individual mortgages, examination of the quality of management of mortgages, examination of the ability of the portfolio to withstand a series of extreme scenarios specific to the mortgage sector, analysis of the distribution of the mortgage portfolio by rating groups, changes in comparison to the preceding period, provisions, and data on problematic debts.
- Exposure to extreme scenarios: Every six months, the mortgage portfolio is examined, using extreme scenarios, in order to assess the development of risk in the portfolio. For the examination of the results of the scenarios, a definition has been established according to which borrowers affected by a scenario in the mortgage sector are those borrowers who meet 3 cumulative conditions with regard to the rate of financing, the level of monthly income, and the ratio of the monthly payment to income. The assumption is that the higher the borrower's income, the borrower will be able to meet loan payments at a higher proportion to income, as a function of the LTV ratio.
In order to examine the sensitivity of the mortgage portfolio to various scenarios, the Bank defined 7 extreme scenarios. The number of customers and the volume of loans expected to be influenced by the materialization of each scenario, were examined.
The semiannual test of the extreme scenarios, as of June 30, 2014, indicated that the exposure to extreme scenarios is immaterial and does not expose the mortgage portfolio to material risks.
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- Addressing problematic housing credit and collecting debts: The treatment of problematic housing credit is centralized in a separate sector, which is not connected to the level that approves or treats credit granting and collateral receiving. More details see below in the subsection "Treatment of problematic credit and debt collection".
‐ Resources: The Bank invests constant efforts in improving the professional skill and expertise of employees in this area, through banking courses and training. Concurrently, extensive means are invested in mapping work processes and improving and enhancing control tools and computerized information systems available to mortgage clerks and decision-makers in this area.
‐ Development of the portfolio: Following is the developments of balances in the Bank's housing loan portfolio* and the Bank's share from the entire banking system (in NIS millions): As at December 31 2014 2013 2012
Volume of credit 7,737 7,525 7,233 Increase compared with the previous year-end 2.8% 4.0% 6.9% Credit volume of the entire system 287,438 268,856 246,070 The Bank's rate from the entire system 2.7% 2.8% 2.9%
* The volume of housing credit includes purchasing groups in the process of construction.
The Bank's average share of the overall banking system in the last three years stood at approximately 2.8%, similar to its share of the banking system in total credit.
‐ Geographical distribution: Approximately 70% of mortgages are granted in the regions of Tel Aviv, Jerusalem, and central Israel (where most of the Bank's branches are concentrated). This geographical distribution indicates relatively low risk, due to the level of employment in these areas, supply and demand data, and the fact that the population in this region is more financially stable.
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‐ Loans at a financing rate greater than 60% (the calculation is in accordance with the Supervision Reporting Directive 876): The execution of housing loans at a financing rate greater than 60% in the last three years is set out below (in NIS millions): 2014 2013 2012
Total executions of housing loans for period 1,326 1,417 1,487 Executions for period at a financing rate greater than 60% 137 250 326 The rate of executions for housing greater than 60% from total executions of housing 10% 18% 22%
An analysis of mortgage execution in 2014 indicates that in the group of mortgages granted at a financing rate of more than 60% (based on Supervision Reporting Directive 876), most of the mortgages had financing rates of 60%-75%. The rate of executions with a financing rate greater than 75% is immaterial. Pursuant to the guidelines of the Bank of Israel, new loans with a financing ratio exceeding 75% are no longer approved at the Bank as of November 1, 2012.
Segmentation of mortgages granted at a financing rate lower than 60% in 2014 indicates that 38% of these mortgages had financing rates of 45%-60%, while others were at rates of up to 45%.
- Details of average mortgage payments as a percentage of disposable income (in accordance with Supervision Reporting Directive 876) An analysis of mortgage execution in 2014, segmented by the rate of the payment as a percentage of disposable income (in accordance with Supervision Reporting Directive 876), indicates that the rates for most mortgages are 20%-30%. The percentage of housing loans executed at a payment ratio higher than 40% was only 0.96% in 2014. Pursuant to the guidelines of the Bank of Israel, as of August 1, 2013, new loans with payments at a percentage of disposable income exceeding 50% are no longer approved at the Bank and loans given at a percentage of income exceeding 40%, are weighted by 100% risk-weighted assets.
- Long-term loans: As a rule, the Bank does not grant loans with a term to maturity of more than 25 years. Loans for longer periods will be granted with the approval of the mortgage system, but in any case for no more than 30 years.
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- Floating-rate loans: As at the end of 2014, the balance of floating-rate housing loans constituted 66% of all housing loans at the Bank. (68.7% as of 31.12.2013)
Exposure to linkage segments - Mortgage executions over each year, by linkage segments, are set out below: Permanent Floating Permanent Floating Foreign CPI-linked CPI-linked Unlinked Unlinked Prime* Currency 2010 18.26% 9.39% 3.77% 1.58% 62.64% 4.36% 2011 15.68% 30.45% 11.15% - 40.70% 2.02% 2012 12.73% 23.02% 18.34% 0.18% 44.17% 1.56% 2013 12.17% 9.12% 27.19% 8.09% 42.91% 0.52% 2014 14.63% 6.86% 36.83% 5.62% 35.44% 0.57%
* As of 2011, there has been a downward trend in the execution of loans based on the Prime interest rate, following the Bank of Israel's directive of May 4, 2011, which restricts the proportion of loans at a floating interest rate for up to five years to 33% of the loan, for new loans. A high execution rate regarding loans based on the Prime interest rate derives from portfolios that were approved before the Bank of Israel's directive, as aforesaid above, such as: purchasing groups, self-construction in stages, buying from a contractor and payment by the progress of construction, loans for business purposes and refinanced loans.
- Allowance for credit losses: The decision regarding allowance for credit losses is performed based on a review of the entire housing credit portfolio, according to a structured procedure, which among other matters determines the authority to examine and decide upon such allowances. The allowance for credit losses in housing loans is performed according to the extent of arrears, with the exception of loans to which special circumstances apply, as defined in the Proper Conduct of Banking Business Directives; for such loans, an allowance is made based on an individual or group examination, according to the impaired debts directive.
Developments in balances in arrears and in allowance for credit losses across periods are set out below (in NIS millions): As at December 31 2014 2013 2012 Gross balance in arrears (including interest in arrears) 26 31 36 Rate from the portfolio 0.34% 0.4% 0.5% Balance of allowance according to the extent of arrears 1 10 25 29 2 Balance of a collective allowance 27 26 15 Total balance of allowance for credit losses 37 51 44 Rate from the portfolio 0.48% 0.68% 0.61%
1. As of the reports of December 31, 2014, an accounting write-off was performed for the first time in loans examined according to the extent of arrears method in a total amount of NIS 9 million – see Note 1.E.5. 2. Including purchasing groups. In the first quarter of 2013 the collective allowance was increased according to the directives of the Supervisor of Banks, according to which, the balance of the collective allowance for credit losses held in respect of housing loans, shall be no less than 0.35% of the balance of the aforesaid loans at the reporting date.
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Additional credit risks Collateral
Collateral policy includes principles and rules regarding the types and volume of collateral. Collateral requirements and rates are derived from the risk level which the Bank is willing to undertake when providing credit. Special emphasis is placed on borrower ranking and customers’ repayment capability as criteria for granting credit, in addition to the weight accorded to the accepted collateral. Collateral is matched to the type of credit it is supposed to secure, with reference to the timeframe, type of linkage, and nature and purpose of the credit. The security value of the different types of collateral is derived from their nature, liquidity, quality, and speed of realization, including changes in value as a result of slowdowns or growth in the borrower’s business environment. The Bank examines the value of collateral as necessary and according to the type of collateral, by obtaining current assessor estimates or valuations. The Bank uses a computerized system to manage collateral which allows tracking of their value, validity, production of various types of alert reports, and production of information.
Treatment of problematic credit and debt collection The Special Credit line at the Corporate Division coordinates the handling of most of the problematic customers at the Bank. The process is aimed first and foremost at improving his ability to repay the debt and in the absence of such capability, the line acts to collect the debt, by attempting to reach an arrangement with the debtor, or by initiating legal collection proceedings to collect the debt and minimize the damage to the Bank. In order to identify borrowers whose risk and exposure level has increased, as early as possible, the Bank operates two processes, which their objective is to frequently examine and treat an extensive as possible customer population, and to monitor and properly treat these customers. The first processes use an automated system to detect potential problems with borrowers of up to a certain amount, according to different parameters. Customers flagged by the system are thoroughly investigated and discussed by an internal -forum, which considers the measures required in dealing with these customers and examines the need for follow ups or for classification as problematic debts, including the need to perform allowance for credit losses in respect of those customers. In the second process an automated system is used to elevate borrowers of a certain amount with a potential to include them in a watch list. Customers whose debt is defined as a debt on the watch list as a result of the review, in accordance with the classification rules that have been established, as well as customers added to this list within routine reports of the credit committees, are discussed quarterly by a special committee established for that purpose. The committee will discuss borrowers included in the customer watch list, both from an operational and control perspective and from a credit perspective. The discussion of these borrowers also
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includes a discussion of the existing credit structure, decisions regarding the status and classification of the debt, credit applications of these customers, and extension of existing credit facilities. Customers on the watch list under the authority of the Board of Directors are discussed by the Board of Directors' Credit Committee. In addition, problematic customers above a certain amount are discussed on a quarterly basis by the Board of Director's Audit Committee. As of 2014, examination of the classification appropriateness to problematic debts and the allowances for credit losses are the responsibility of the Credit Control Branch in the Controls and Risk Management Division.
As of January 1, 2011 the Bank implemented the directive of the Supervisor of Banks concerning "Measurement and Disclosure of Impaired Debts Credit Risk and Provision for Credit Losses". The change in the balance of the allowance for credit losses is detailed in Note 4.A to the financial statements. For more details about the directive and its implementation at the Bank – See Note 1.(E).(5) to the financial statements.
Stress scenarios
The Bank applies a variety of stress scenarios to its exposures to credit risks, with reference to sensitivity analyses and tests of macro-economic scenarios and scenarios specific to various business lines. These stress scenarios help the Bank in analyzing its exposure to risks and in planning capital. As part of this process, the Bank examines the degree of its sensitivity to events in the various business lines, and the effect of stress scenarios on the volume of risk- weighted assets, the income, and the compliance with the capital targets and the capital required.
The capital planning included within the application of the ICAAP constitutes a three-year plan, according to which, the stress scenarios also refer to a three-year horizon. The results of the extreme scenarios are presented quarterly to the management and to the Board of Directors. The scenarios used in capital planning are presented in detail as follows: - Basic assumptions of each scenario; - Details of the effect of the scenario on the profitability of the business line; - Calculation of the capital ratio in the scenario; - Managerial and business conclusions derived from the analysis of the extreme scenarios.
In addition, background data regarding the macro-economic environment are presented, in order to examine whether crisis conditions are developing. In order to formulate basic assumptions for the stress scenarios, the changes in the growth rates on the quality of the credit portfolio and as a result, on the rates of the allowance for credit losses (at the overall level of the Bank and various sectors), were examined. Also, the Bank - 115 -
examines the probability of the results of the stress scenarios against various benchmarks indices. Due to the uncertainty regarding the timing of the materialization of stress scenarios during the three years of the plan, an estimate is performed of the capital ratios in the scenarios used in capital planning, with different assumptions regarding the timing of the materialization of the scenario, in each of the years of the plan (the coming three years). In addition to the aforesaid stress scenarios, the Bank calculated a reverse stress scenario designed to test the intensity of events that may lead to damage to the financial results of the Bank, such that the core capital ratio would fall below the risk appetite and risk tolerance established by the Bank for stress scenarios. During the process of examination of the appropriateness of capital allocation and according to the guidance of the Bank of Israel, the Bank calculates an additional stress scenario based on a macro-economic scenario characterized by a severe local recession caused by a security crisis with serious consequences on the housing and real estate branch. The non-financial harm is reflected in a sharp decline of the GDP and the private consumption and as a result, severe damage to the labor and housing market. The examination of this scenario is done for a two year horizon. In November 2014, the Bank of Israel published a new stress scenario, characterized by a severe local shock as a result of the deterioration of Israel's geo-political situation, alongside with a global shock, originated from a significant slowdown in Europe's economy and a certain slowdown in the economy of the U.S. The duration of the scenario is three years. The results of the scenario were transferred to the Bank of Israel on February 20, 2014 and will be integrated in the next ICAAP document.
Exposure to corporate bonds The bank views part of its proprietary investment in corporate bonds as a substitute for granting credit. The limits and rules for this investment are discussed and approved by the Board of Directors and include the volume of the exposure, the permitted types of bonds, bond ratings, maximum exposure to a single issuer, diversification limits, and minimum spread by rating.
The decision-making process regarding investments in this area is performed at the Financial Management Division, according to the hierarchy of authorizations. The limits on investment in corporate bonds are controlled routinely, and the Bank's policy in this area is adjusted to market developments.
For additional information with regard to the composition of the corporate-bond portfolio, see the Section "Developments in Assets and Liabilities," under the analysis of the "securities item".
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Also see the reference in the Section "Critical Accounting Policies and Estimates" with regard to the examination of the need to perform provisions for impairment of an other-than-temporary nature.
Counterparty credit risk in respect of a market risk The risk that the counterparty to an OTC (over the counter) transaction may default before the final settlement of cash flows in the transaction. Loss results if, when the counterparty defaults, there are transactions with the customer with a positive economic value. These exposures are concentrated in the Bank’s activity with customers, banks in Israel, and banks overseas. The action is performed after activity limits are set for customers, and compliance with these limits is monitored routinely. This monitoring includes current revaluation of transactions with customers at market prices (mark to market), assessments of potential risk according to the type of instruments and market risks, and suitable collateral requirements. Limits and collateral are examined routinely. Procedures and rules have been established for control and for working with customers. The Bank applies the historical scenarios method and additional internal models, at the level of the transaction and the customer, to determine the required collateral. These scenarios periodically undergo validation processes, such as tests of their validity in periods of financial crisis.
The activity in derivative instruments is presented in Note 19 to the financial statements. Further details of the item “Gross fair value of derivative instruments” are set out below:
Counterparty: “Banks,” as at December 31, 2014: The total balance in respect of the counterparty “Banks” is in the amount of NIS 177 million; the highest balance for a single entity is in the amount of NIS 59 million.
Counterparty: “Others,” as at December 31, 2014: The total balance in respect of the counterparty “Others” is in the amount of NIS 259 million; the highest balance for a single entity is in the amount of NIS 35 million.
Activity with banks abroad Credit exposure in activity with banks overseas mainly derives from the following activities: deposits of surplus liquidity, receiving guarantees as collateral for customers, FX activity, activity in derivatives, clearing activity and purchases of bonds of banks.
The Bank’s activity with banks abroad is based on limits of exposure approved annually, examined routinely, and updated as necessary. The Bank acts in derivatives mainly with banks with which it has ISDA agreements and CSA agreements. The Bank has clearing arrangements in transactions in foreign currency against CLS (Continuous Linked Settlement) through a big international Bank with a high rating.
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In addition, the Bank works with a number of foreign financial institutions in order to receive custodian services in activity in foreign securities.
Credit exposure to foreign financial institutions Credit exposure to foreign financial institutions1 on a consolidated basis as of December 31, 2014 (in NIS millions): Balance- Off-balance- Sheet Credit Sheet Credit Credit External credit rating* Risk 2 Risk 3 Exposure
AAA - AA 43 19 62 A + - A 476 14 490 BBB + - BBB- 19 - 19 B 4 - 4 Unrated - - - Total exposure 4 542 33 575
Credit exposure to foreign financial institutions1 on a consolidated basis as of December 31, 2013 (in NIS millions): Balance- Off-Balance- Sheet Credit Sheet Credit Credit External credit rating* Risk 2 Risk 3 Exposure
AAA - AA 34 - 34 A + - A 583 43 626 BBB + - BBB 35 - 35 B 2 - 2 Unrated - 17 17 Total exposure 4 654 60 714
1. Foreign financial institutions include banks, bank's holding companies, investment banks and custodians. 2. Deposits and current-account balances with banks, investments in bonds, and other assets in respect of the fair value of derivative instruments presented before bilateral offsetting as defined in Appendix C to Proper Conduct of Banking Business Directive No. 203. 3. Guarantees to secure debts of third parties. 4. There are no financial institutions that are classified as an impaired, substandard or under special supervision debt and there is no allowance for credit losses. * The rating is at the consolidated banking group level. For details regarding the extent of the exposure to a group of bank borrowers see sub- section "Borrowing Concentration"
Notes: A. Credit exposures do not include investments in asset-backed securities (see details in Note 3.A to the financial statements).
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B. For further information regarding the composition of credit exposures in respect of derivative instruments with banks and broker/dealers (local and foreign), see Note 19.B to the financial statements.
The institutions included in the table above are banks and brokers operating in OECD countries. Most of the exposures as of December 31, 2014 are to institutions operating in the United States, Great Britain and Germany. The Bank has no exposure to banks operating in Greece, Ireland, Portugal, or Spain. There is an exposure of less than NIS 2.1 million to Banks and financial institutions operating in Italy. There is no exposure to foreign financial institutions exceeding 15% of the Banks' capital, as defined in Proper Conduct of Banking Business Directive No. 202, Constituents of Capital. The Bank monitors changes in the ratings of these institutions issued by the rating agencies Moody's and S&P. Due to the financial crisis and the rapid developments in the condition of various financial institutions, the Bank is monitoring additional parameters indicative of these institutions' condition. Such parameters include rapid changes in share prices, changes in bond spreads and credit default swap, resource raising costs, and additional information published regarding the financial institutions. Based on the aggregate information collected, the Bank adjusts its policy with regard to the extent of its exposure to the various financial institutions. The Bank has set limits on its exposure to the various financial institutions, addressing direct credit exposure as well as exposure arising from derivative financial instruments and clearance risk. These exposure limits are updated once a year at least, and according to developments in the financial markets and the condition of the various financial institutions. The majority of the direct credit exposure is short term, constituting part of the management of the Bank's liquidity surpluses in foreign currency. The exposure arising from derivative financial instruments mainly derives from activity with customers, and is mostly for terms of up to one year. The Bank examines the exposure policy to banks and countries at least once a year and according to various developments, makes adjustments if necessary.
Leveraged Financing The Bank occasionally provides credit to its customers for financing the acquisition of means of control of corporations, sometimes in large amounts or at high financing rates, where the ability to repay the credit is primarily based on the acquired corporation. The credit granted allows, among other things, the financing of mergers and acquisitions, business expansions, etc. Each application for credit of this type is examined individually, taking into consideration the nature of the customer, the repayment capability, and the collateral offered. This credit is granted subject to regulatory limits and to the Banks' policy (which is more conservative than the regulatory restrictions).
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The Bank expanded the definition of leveraged financing so that it also includes transactions with a leverage rate which materially exceeds the norms of the relevant industry. The report according to the broad definition will be reflected as of the first quarter of 2015.
The following table shows the distribution of the exposure for leveraged financing transactions by economic sector and geographical region (in NIS millions):
December 31, 2014 December 31, 2013 Off- Off- Balance Balance Balance Balance Sheet (1) Sheet Total (2) Sheet (1) Sheet Total (2)
Israel: Trading* 199 - 199 226 - 226 Communication - - - 98 - 98 Financial services (3) 182 - 182 182 - 182 Total 381 - 381 506 - 506
Europe: Construction and real estate 35 33 68 36 34 70
Total leveraged financing 416 33 449 542 34 576
(1) Net balance-sheet balance after deducting liquid collateral deductible under Section 5 of Proper Conduct of Banking Business Directive No. 313. (2) Net indebtedness balance in excess of the indebtedness amount detailed in Section 2(A) of Proper Conduct of Banking Business Directive No. 323, in the amount of NIS 25 million linked to June 1998 CPI. (3) One of the shareholders, indirectly, in a company that's in Israel, holds an Irish passport. There is no exposure to Portugal, Greece, Spain and Italy. * There is a single customer in the Trading Sector whose debt in the amount of NIS 104 million was classified under special supervision. The rest of the borrowers, who were given credit to finance acquisition of means of control, aren't classified as impaired, inferior or under special supervision debts.
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Allowance for credit losses, impaired credit to the public, in arrears and write-offs by counterparty (in NIS millions): As of December 31, 2014 Governments Banks Public Total
Impaired credit to the public - - 231 231 Unimpaired credit to the public, in arrears of 90 days or more - - 42 42 Unimpaired credit to the public, in arrears of 30 days to 89 days - - 124 124 Balance of allowance for credit losses (balance- sheet and off- balance- sheet) - - 284 284 Individual provision for credit losses in the Statements of Profit and Loss - - 149 149 Net accounting write-offs during the period - - 150 150
B. Credit Portfolio Concentration Risk: Concentration risk is one of the types of risk faced by banking corporations in their business activities. In contrast to other risk components, which are usually defined at the level of the individual transaction or single counterparty, the exposure to concentration risk arises from the composition of the portfolio of risk-weighted assets of the Bank or from the composition of its exposures.
Portfolio risks can be divided into two types: systematic risk factors and idiosyncratic risk factors.
The systematic risk represents the effect of macro-economic and financial events on the quality of the asset portfolio of the banking corporation, and in particular the quality of its credit portfolio. The sensitivity of borrowers to macro-economic events may be different, but the basic assumption is that no borrower is entirely immune to events of this type. Consequently, systematic risk is unavoidable, by definition, and cannot be mitigated by management or by effective hedging. By contrast, the idiosyncratic risk is defined at the level of the specific borrower, and depends on the quality of management and business performance of the firm. As a result, the lower the relative weight of the exposure to a single borrower, the smaller the idiosyncratic component of the portfolio risk. The more diversified the credit portfolio, the lower the exposure of the Bank to idiosyncratic risk; however, the exposure to systematic risk remains unchanged.
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The Bank’s credit policy is based on the diversification and controlled management of credit risks. This is reflected in the striving for diversification of the credit portfolio among the different economic sectors, and in diversification among a large number of borrowers and in the different linkage segments. The Bank's Board of Directors determined a risk appetite and a risk tolerance for credit concentration in various cross-sections.
Sectorial Concentration In general, the Bank’s credit policy is to increase the diversification of the credit portfolio among the different economic sectors. The Board of Directors of the Bank conducts discussions at least once a year regarding credit to certain sectors, particularly sectors sensitive to fluctuations and sectors in which sectorial risk is high compared to other sectors of the economy, and establishes policy based on the expected developments in these sectors. Credit to sectors, in which the Bank’s activity is focused, such as residential real estate, finance, and diamonds, is handled by professional units specializing in these sectors. Specific working procedures and special controls have been set for these sectors in addition to the usual procedures and controls, in order to address the credit risks unique to these sectors. The Bank complies with the directives of the Bank of Israel concerning limits on credit to a specific sector, and actively manages the concentration of its exposure to the sectors, while adjusting the volume of credit in each sector to the changing map of risks. The Board of Directors of the Bank set the risk appetite and the risk capacity to the sectorial concentration metrics. See also Appendix E to the Management’s Review regarding overall credit risk to the public by sectors of the economy.
Borrowers concentration In general, the Bank's credit policy is to increase the diversification of the credit portfolio among the different borrowers. According to Proper Conduct of Banking Business Directive No. 313, total credit to a single borrower shall not exceed 15% of the capital of the Bank; total credit to a group of borrowers and to a group of banking borrowers shall not exceed 25% of the capital of the Bank; and the exposure of total net indebtedness (after deduction of the amounts specified in Section 5 of the directive) of "borrowers," "groups of borrowers," and "groups of banking borrowers" with a net indebtedness exceeding 10% each, of the capital of the Bank shall not exceed 120% of the capital of the Bank. The Board of Directors of the Bank has established a risk appetite and tolerance that include a certain margin to be maintained relative to the aforesaid limits of the Bank of Israel. The Bank complies with and does not deviate from these instructions.
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The Bank routinely examines its compliance with the risk appetite and tolerance established by the Board of Directors for exposures to single borrowers and groups of borrowers, including compliance with the limits on the level of concentration, through various metrics and scenarios. As noted, these limitations are lower than the limits established in Proper Conduct of Banking Business Directive No. 313. The Bank routinely monitors the borrowers' business situation, especially the big borrowers. However, due to the recent economic events and developments in the non-financial and financial markets in the world, and due to the increase in uncertainty in these markets, the possible implications of insolvency of one of the Banks' top ten largest borrowers are being examined.
There are no Balances of credit to the public and off-balance-sheet credit risk as at December 31, 2014, to groups of borrowers of the Bank whose net indebtedness, on a consolidated basis, after the permitted deductions under Section 5 of Proper Conduct of Banking Business Directive No. 313, exceeds 15% of the capital of the banking corporation according to Proper Conduct of Banking Business Directive No. 202. There is an exposure to a group of borrowers of the Bank in the amount of NIS 618 million, which exceeds 15% of the Banks' capital and is mainly due to investment in bonds. The following table lists balances of credit to the public and off-balance-sheet credit risk to borrowers with debt balances greater than NIS 200 million, by economic sector, as at December 31, 2014 in NIS millions: Balance- Off-balance- Number of sheet sheet credit Sector borrowers credit* risk Total
Construction and Real Estate 2 201 305 506 Financial Services 4 1,221 91 1,312
Total 6 1,422 396 1,818
* Credit to the public and assets arising from derivative financial instruments.
Notes: 1. Balance-sheet credit and off-balance-sheet credit risk were classified before deduction of allowance for credit losses (recorded debt balance).
2. Credit risk in off-balance-sheet financial instruments was calculated according to definitions established for the purpose of the calculation of limits on the indebtedness of a borrower.
3. The data is presented before the deduction of the guaranties which are permitted to be offset in order to set limits for single borrower and group of borrowers.
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The following table lists balances of credit to the public and off-balance-sheet credit risk to the
Banks' six biggest borrower groups by economic sectors, as at December 31, 2014 in NIS millions: Balance- Off-balance- Number of sheet sheet credit Sector borrowers credit* risk Total
Financial Services 4 1,770 100 1,870 Diamonds 1 295 146 441 Electricity and Water 1 236 144 380
Total 6 2,301 390 2,691
* Net indebtedness due to balances of credit to the public and off-balance sheet credit risk to groups of borrowers, on a consolidated basis, after deducting the permitted deductions according to Section 5 to Proper Conduct of Banking Business Directive No. 313.
Concentration of Collateral The risk of concentration of collateral is defined as the risk of potential losses in the credit portfolio as a result of excessive concentration or dependence of the composition of the collateral portfolio of the Bank on a small number of specific assets or types of collateral. This risk is analyzed as part of the implementation of the second pillar of Basel II, and included in the annual ICAAP document and in the quarterly risk document.
Geographical Concentration The main activity of the Bank is with Israeli customers. The Bank has no branches outside Israel. The Bank has not extended direct credit to customers whose primary operations are in LDCs (less developed countries), where it relies on assets in these countries as the source for repayment of the credit. In addition there is no direct exposure to customers which are mainly active in Greece, Portugal, Spain, Italy and Ireland. For more details regarding the exposures by geographical region see also Appendix F to the Managements' Review regarding the exposure to country risk.
Market Risks
Market risks are risks to the Bank’s revenues and equity arising from changes in prices and rates in the financial markets, primarily changes in interest rates, exchange rates, inflation, and share prices, and in the volatility of movements in these areas.
During the fourth quarter of 2014, the Board of Directors updated part of its exposure limitations to market risks within the market risk management policy, while determining the methodology for separating the trading portfolio and the banking portfolio and determining the limitations for each of the portfolios including limitations in stress scenarios, respectively. Within this process exposure limits to market risks, inter alia, were updated, which include the risk appetite and risk tolerance to - 124 -
market risks (linkage base, interest rate, options, and shares), while expanding them. The new limitations are expected to come into effect in the first quarter of 2015, concurrently to completing the upgrade of the computing systems meant for reclamation of the risk measurement. Total market risk tolerance is NIS 85 million.
In addition, a risk document is presented for discussion each quarter to the risk management committee of the Board of Directors and to the plenum of the Board of Directors, which among other matters addresses market risks, the results of back tests performed to examine the validity of market risk assessment models, and the results of stress tests, in addition to an annual periodic report on the status of the model validating at the Bank, including market risk management models.
The market-risk situation is examined in detail on a weekly basis in the Management Forum for Financial Matters, headed by the head of the Financial Management Division, and the members of the administration and other relevant holders of positions participate also in this Forum. As part of this process, there is a discussion regarding all of the Bank's market exposures and liquidity exposures, and also a review and recommendation of a new financial products or new activities. In addition the Forum establishes internal frameworks which were established by the Board of Directors. The Forums' discussions and recommendations are submitted for approval of the management of the Bank. The decisions are made only after their discussion and approval by the weekly Management Forum, headed by the General Manager of the Bank. These decisions are discussed and approved also by the Board of Directors of the Bank if necessary. The members of the administration are responsible for the implementation of these decisions (each one in his area of responsibility).
Exposures to market risks are created at the Financial Management Division, primarily by the dealing room and the proprietary unit, within the limits established by the Board of Directors. In addition, the asset and liability management unit of the Bank performs actions aimed at handling positions arising from the routine banking activity of the Bank.
The dealing room creates market exposures (linkage base, interest rate, options), based on the limits set by the Board of Directors.
The proprietary unit within the division has a material effect on the market risks of the Bank, mainly with regard to the CPI-linked position, interest-rate risks, and share risks. The activity of this unit is examined on a daily basis by a middle branch, and on a weekly basis by the financial issues forum.
The ALM unit is responsible for establishing and publishing benchmark prices in NIS (in the linked and unlinked segments), and in foreign currency and managing the gap (exposure) between assets and liabilities arising from the routine operations of the Bank.
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Middle Branch in the Financial Management Division is used a first line of defense for market risks, including inter alia, checking the compliance and the adaption of the activity and risks of the Bank within the exposure limits determined and approved by the Board of Directors as well as measuring and reporting about the business activity of the division. The middle branch is responsible for creating an overall risk view and for reporting it to the financial issues management forum.
The Validation and Control Section within the Controls and Risk Management Division is a second line of defense for the trading units, market risk stress scenarios and post examining and validating market risk models.
The risk-management array is responsible for identifying, defining, and mapping market risks, including the developing internal models for risk measurement in all sectors of market risk, and for controls for market risks and their compliance with limits set within the second line of defense.
The Bank measures market risks, inter alia, by using the value-at-risk (VAR) model which displays the potential risk (possible decline in value during a given period of time). The calculation is performed based on the parametric method, for a holding period of ten days, at a confidence level of at least 99% and is performed on a daily or intra-daily level.
The Board of Directors of the Bank has set VAR limits for each component of market risk (linkage- base risk, interest-rate risk, and option risk), as detailed below.
It is emphasized that all VAR tests are performed on a daily level and in certain areas (including options), the compliance with the VAR limits is measured at an intraday resolution. During 2014, no immaterial deviations from the VAR limits were observed.
The Bank applies a range of stress scenarios concerning the various market risks and includes references to linkage-base risks, interest-rate risks, and option risks, and is based on fluctuations in currencies and markets in which the Bank operates. The stress scenarios are designed to test the Bank's sensitivity to possible exceptional events in the financial markets and the effects of such events on the profitability of the Bank.
The Bank conducts regular measurements of several stress scenarios in the area of market risks:
Scenarios reflecting changes in market values during actual historical events, based on data from 1998 forward, for a holding period of one year.
A scenario examining the effect of extension of the holding period of positions at the Bank.
A scenario based on an extreme event as defined by the European Central Bank (ECB).
The "worst case" scenario, which tests the maximum market exposure to risk factors.
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The list of scenarios is examined at least once a year, and is also updated from time to time based on developments in the markets. The scenarios are submitted for discussion to the management and to the Board of Directors, for examination and approval. During the fourth quarter a number of deviations from stress scenarios were observed which were solved within a few days.
The running of the scenarios is conducted at least on a weekly basis and there is a quarterly discussion in the Forum of Management for Financial Matters, management of the Bank, Risk Management Committee of Board of Directors and the Board of Directors;' plenary regarding the list of the stress scenarios, values of the scenarios, actual result of the scenarios versus the established limits and administrative and business conclusions that arise from the scenarios.
In addition, data on market risk factors tendency is presented. This data can exhibit the market tendency and the potential development of stress scenarios which can affect the value of the Bank's market positions.
As a supplement to the VAR testing and validation of this model, the Bank performs back tests. These tests are designed to examine the adequacy and reliability of the VAR model for the measurement of risks, by matching the forecasts of the VAR model against actual observed changes over a period of time.
The following table presents the overall market risks and the actual exposure in terms of VAR in NIS millions: Actual Exposure Segment Type of limit Limit 31.12.2014 31.12.2014 31.12.2013
Total Total market VAR 85 54.9 42.8 Interest Offset VAR 75 42 25.3 Basis VAR 30 1.1 6.1 Shares VAR 25 9.9 9.4 Options VAR 7.5 m $ 0.5 m $ 0.6 m $
Interest-rate risk - Arises from possible effect of changes in the interest-rate curves on the fair value of assets and liabilities and on interest exposures. Changes in the interest rates affect the Bank's profits as a result of change in the interest income. Changes in the interest rates affect also the Banks' asset value, liabilities and off-balance sheet instruments, since the present value of the future cash flows (and in certain cases the cash flows themselves) changes when there's a change in the interest rates. Interest-rate risks to the overall portfolio of the Bank constitute the principal market risk to which the Bank is exposed. The instruments composing interest-rate risk at the Bank are divided into products in the banking book, which the Bank has no intention to trade, and products in the trading book, which includes instruments held with the intention to trade or with the intention to hedge other components of the trading portfolio. Holdings in the trading book are at a higher level of liquidity than in the banking book.
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The Bank measures and manages interest-rate risk for its overall portfolio, encompassing instruments in the banking portfolio and the trading portfolio with reference to the risks deriving from ALM activity, as a result of proprietary activity and the dealing room.
Interest-rate exposure management policy is aimed at maintaining desirable exposure levels in each of the linkage segments to which the Bank is exposed, according to market forecasts and the targeted risk levels, and based on the limits set by the Board of Directors. The main exposures are taken in the unlinked shekel segment and in the CPI-linked shekel segment. There are immaterial interest-rate exposures in the major foreign currencies.
Interest-rate exposure is measured on a daily basis for the principal currency segments: unlinked shekel, CPI-linked shekel, U.S. dollar, Euro, JPY, Swiss Franc, and Pound Sterling.
On July 1, 2014, an update to directive 333 concerning interest risk management, came into force. In light of the Bank's preparations for implementing the updated directive, an updated market risk management policy was approved, which expresses new required limitations including separate limitations in respect of the trading portfolio and the banking portfolio as well as separate stress scenarios. Concurrently the Bank is upgrading the computer systems to improve the risk measurement, and is expected to be assimilated in the first quarter of 2015 and will enable to activate these changes.
Interest-rate exposure is measured using two main techniques:
A. DV1% (Delta Value 1%) - An estimate of the possible change in the portfolio given a 1% parallel shift in the interest-rate curve. B. VAR (Value at Risk) - Measures the potential risk to the portfolio at a confidence level that is no less than 99% and for a holding period of 10 days.
Measuring interest-rate exposure takes into account, among other factors, working assumptions regarding the rate of early settlements in mortgages in fixed interest rate, and working assumptions regarding the rate of withdrawals at optional exit points in saving plans based on past experience. In addition there are working assumptions regarding the average duration in Gilon bonds and working assumptions regarding the volume and duration of current-account products without defined maturity dates (the existence of a stable balance of some current accounts, while the other part of current accounts is defined as having no maturity date, and calculated as having a duration of a day).
The assumptions detailed above are approved by the Risk Management Committee of the Board of Directors and in the Board of Director's plenum, and are an element of the exposure calculation method.
The Board of Directors of the Bank has set limits in terms of value at risk with regard to the possible effect of changes in interest rates. A limit has been set for total interest-rate risk, as well as for each linkage base, including each foreign currency separately. In the CPI-linked shekel and unlinked shekel currency segments, a limit in terms of DV1% was set in addition to the VAR limit. Details of the limits and - 128 -
actual exposures at the balance-sheet date are presented in the table below. Actual exposure as at December 31, 2014 was a value at risk (VAR including correlation) of NIS 42 million (December 31, 2013 - NIS 25.3 million). The highest value at risk (at the end of the business day) in 2014 was NIS 42 million (2013 - NIS 29.1 million).
While carrying out the back test process during 2014, deviations that occurred in following dates in the unlinked shekel segment and a number of deviations in the CPI-linked and foreign currency- linked shekel segment, were observed in the fourth quarter. The deviations lasted a few days and derived from the gap between the expected interest and the actual interest observed in the market.
In December 2014, the methodology for performing back tests, including the method for counting deviations, which examines the quality of the examined model, was updated. The quality of the model will be examined after accumulating a year of observations.
Following is the risk appetite and the actual exposure, in NIS million: Segment Type of limit Limit Actual exposure 31.12.2014 31.12.2014 31.12.2013
Total VAR interest offset * 75 42 25.3 CPI-linked VAR 40 35.2 12.1 CPI-linked DV1% 80 68.1 38.6 Unlinked VAR 40 16.1 13.6 Unlinked DV1% 140 63.9 37.5 Foreign currency VAR for all currencies 30 14.3 8.1
* In calculating the total, reductions of interest-rate risks due to correlations in interest-rate exposures between different currencies, by periods, are taken into account.
** See above regarding the update of new limitations as of 2015.
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The table below shows details on the fair value of the financial instruments of the Bank and its subsidiaries, excluding non-monetary items (before the effect of hypothetical changes in interest rates): December 31, 2014 2 Israeli currency Foreign Currency CPI- Unlinked Linked USD EUR Other Total In NIS million
Financial assets 1 29,561 6,000 3,311 382 221 39,475 Amounts receivable in respect of derivative and off-balance-sheet financial instruments3 17,605 182 13,806 3,502 1,239 36,334 Financial liabilities1 24,610 5,423 5,935 1,304 543 37,815 Amounts payable in respect of derivative and off-balance-sheet 3 financial instruments 20,930 757 11,207 2,607 909 36,410 Net fair value of financial instruments 1,626 2 (25) (27) 8 1,584
December 31, 2013 2 Israeli currency Foreign Currency CPI- Unlinked Linked USD EUR Other Total In NIS million
Financial assets 1 28,486 6,466 2,505 296 268 38,021 Amounts receivable in respect of derivative and off-balance-sheet financial instruments3 16,467 306 12,453 2,223 2,978 34,427 Financial liabilities1 23,500 6,022 5,175 1,186 458 36,341 Amounts payable in respect of derivative and off-balance-sheet 3 financial instruments 20,357 304 9,725 1,356 2,786 34,528 Net fair value of financial instruments 1,096 446 58 (23) 2 1,579
For more details regarding the assumptions and parameters used to calculate the fair value, see Note 20.C to the financial statements.
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The effect of hypothetical changes in interest rates on the net fair value of the financial instruments of the Bank and its subsidiaries, excluding non-monetary items: December 31, 2014 Net fair value of financial instruments, after the effect of changes in interest rates4 Israeli Currency Foreign Currency2 Change in Fair Value The Change in CPI- Offsetting Interest Rates Unlinked Linked USD EUR Other Effects Total Total Total In NIS million In NIS million Percent 1% immediate parallel increase 1,556 (46) (74) (23) 7 - 1,420 (164) (10.4%) 0.1% immediate parallel increase 1,620 (1) (29) (26) 7 - 1,571 (13) (0.8%) 1% immediate parallel decrease 5 1,679 79 31 (32) 7 - 1,764 180 11.4%
December 31, 2013 Net fair value of financial instruments, after the effect of changes in interest rates4 Israeli Currency Foreign Currency2 Change in Fair Value The Change in CPI- Offsetting Interest Rates Unlinked Linked USD EUR Other Effects Total Total Total In NIS million In NIS million Percent 1% immediate parallel increase 1,058 412 56 (21) 3 - 1,508 (71) (4.5%) 0.1% immediate parallel increase 1,095 442 60 (23) 2 - 1,576 (3) (0.2%) 1% immediate parallel decrease 5 1,144 500 70 (26) 2 - 1,690 111 7.0%
1. Includes complex financial instruments; does not include balance-sheet balances of derivative financial instruments and the fair value of off-balance-sheet financial instruments. 2. Including Israeli currency linked to foreign currency. 3. Amounts receivable (payable) in respect of derivative financial instruments and in respect of off-balance-sheet financial instruments, capitalized at the interest rates used to calculate the fair value presented in Note 20 to the financial statements. 4. The net fair value of financial instruments presented in each linkage segment is the net fair value in that segment, assuming that the change noted in all interest rates in the linkage segment, occurs. The total net fair value of financial instruments is the net fair value of all of the financial instruments (excluding non-monetary items), assuming that the change noted in all interest rates in all linkage segments, occurs. 5. Up to an interest rate level of zero (a negative interest rate wasn't taken into account).
Note: No cumulative weekly change occurred in the last ten years, which had it occurred at the reporting date, would have hurt the going concern assumption based on which the financial statements were prepared.
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Linkage-base risk – Refers to possible loss arising from changes in rates of currencies, linkage bases, or shares, when the linkage base of the assets is not parallel to the linkage base of the liabilities. Linkage-base risk management aims, inter alia, to maximize the Bank’s profitability while taking advantage of opportunities in the various markets. As part of this activity, the Bank creates exposures in the local and international currency markets, as well as exposures in the CPI-linked market.
Risk appetite and tolerance to the total currency exposures are in terms of value at risk (VAR) which measures the potential risk in a currency position at the Bank at an assurance level of no less than 99% and for a holding period of 10 days. A. Foreign currency exposures: The Bank’s activity as a market maker in the field of foreign currency requires an exposure to the foreign exchange risk in the course of trading. Working procedures and restrictions have been defined for the volume of the exposures and the method of managing them in the course of trading. In addition, from time to time, decisions are taken to initiate exposures on the basis of assessments of developments in the relative prices of different currencies. These exposures are conducted within the frameworks set by the Board of Directors, while determining interest loss limitations. The Bank has a computerized system that provides an indication of all foreign currency exposures at any given time. The Board of Directors’ restriction on the total foreign currency/NIS exposure at the end of the day was set in terms of value at risk, at a total of NIS 13 million. The actual exposure on December 31, 2014, was a value at risk of NIS 0.6 million (December 31, 2013 - NIS 1.9 million). The highest value at risk (at the end of the business day) in 2014 was NIS 4.3 million (2013 - NIS 4.9 million). The Bank's activity in foreign currencies is carried out mainly in U.S. Dollar, Euro, JPY, Sterling and CHF.
In addition, additional limits on value at risk were set for foreign currency (excluding USD) - NIS and for non-major currencies, as well as intraday and end-of-day position limits.
A quantitative limit on surpluses/shortages of assets over liabilities was also set at USD 40 million, of which USD 15 million in foreign currency excluding USD, and USD 10 million in non-major currencies (the major currencies, according to the decision of the Bank are: USD, EUR, GBP, CHF, JPY).
Within the back tests for linkage base risks in foreign currencies during 2014, a few immaterial deviations were observed in a number of currencies.
B. CPI-linked exposure: The limit on CPI linkage base exposure in terms of value at risk is NIS 10 million. Actual exposure as at December 31, 2014, was a value at risk of NIS 0.5 million (December 31, 2013: NIS 4.2 million). The highest value at risk (at the end of a business day) during 2014 was NIS 7.0 million (2013: NIS 8.2 million). In addition a quantitative limit was set so that excess assets over liabilities shall not exceed 100% of the capital of the Bank, and the
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excess of liabilities over assets shall not exceed 35% of the capital of the Bank. The measurement is after neutralizing a position which is not affected by the near index. As at December 31, 2014, the excess of assets over liabilities stood at approximately 2.2% of the Bank's capital.
The following table shows sensitivities to changes in foreign-currency exchange rates and in the CPI, in NIS millions (parentheses denote loss): (Measurements include both balance-sheet and off-balance-sheet activity)
As at December 31, 2014 CPI USD EUR GBP JPY CHF Other FX
5% increase 11.4 8.9 (14.4) * (0.1) (*) 0.5 10% increase 22.8 25.4 (34.4) * (0.2) (0.1) 0.9 5% decrease (11.4) (3.5) 13.3 (*) 0.1 * (0.5) 10% decrease (22.8) (0.5) 31.0 (*) 0.2 0.1 (0.9)
As at December 31, 2013 CPI USD EUR GBP JPY CHF Other FX
5% increase 22.3 0.1 2.5 (0.1) 1.3 (*) (0.9) 10% increase 44.6 1.8 5.5 (0.3) 2.6 (0.1) (1.9) 5% decrease (22.3) 0.6 (2.2) 0.1 (1.3) * 0.9 10% decrease (44.6) 1.9 (2.8) 0.3 (2.6) 0.5 1.9
* Less than 0.1.
The following table shows the condensed linkage balance-sheets in NIS millions:
As at December 31, 2014 Foreign Currency, Including Foreign Non-Monetary Unlinked CPI-Linked Currency Linked Items Total
Assets 28,580 6,129 4,179 1,965 40,853 Liabilities 23,601 5,329 8,108 1,439 38,477 4,979 800 (3,929) 526 2,376 Net future transactions (2,450) (575) 3,025 Options (delta value) (881) - 881 1,648 225 (23)* * Of which: EUR - NIS (30) million, other currencies – NIS 7 million.
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As at December 31, 2013 Foreign Currency, Including Foreign Non-Monetary Unlinked CPI-linked Currency Linked Items Total
Assets 27,880 6,535 3,304 1,771 39,490 Liabilities 22,860 5,934 7,100 1,261 37,155 5,020 601 (3,796) 510 2,335 Net future transactions (3,662) 2 3,660 Options (delta value) (128) - 128 1,230 603 (8) * * Reclassified. ** Of which: USD - NIS 4 million; EUR - NIS (14) million, other currencies – NIS 2 million.
For additional details of the division of the Bank’s assets and liabilities by linkage bases and maturity periods - see Note 16 to the financial statements.
C. Linkage-base exposure in shares and index certificates:
The Bank is exposed to a volatility risk in share prices in respect of holdings in the banking portfolio and in the trading portfolio. Separate risk limits in terms of volume and in terms of VAR, have been set by the Board of Directors of the Bank for the Maof index and for Israeli index certificates on indices, as well as for index certificates on foreign indices or ETFs.
The risk tolerance of the Maof index, the Israeli index certificates and the Israeli shares is NIS 15 million. Actual utilization as at December 31, 2014 was a value at risk of NIS 7.8 million (December 31, 2013 - NIS 8.5 million).
The risk tolerance for the index certificates and ETFs in foreign markets is NIS 12 million. Actual utilization as at December 31, 2014 was a value at risk of NIS 2.1 million (December 31, 2013 - NIS 0.9 million).
Additional VAR limits have been set by the Board of Directors at the level of a single ETF and at the level of ETF portfolios, divided into sectors and markets. The total risk tolerance for exposure to shares in the markets and in instruments approved by the Board of Directors, including Union Investments and Enterprise, is a total value at risk of NIS 25 million.
Positions in Shares in the Banking Portfolio - As at December 31, 2014, the Bank has two main types of holdings in shares in its banking portfolio:
A. Investments in a variety of shares, most of which are tradable on the Israeli Stock Market through the Proprietary Unit of the Bank, via the available-for-sale portfolio. This activity is
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performed within the limits and facilities approved by the Board of Directors of the Bank, and are aimed at improving the Bank's return. This investment is recorded in the balance sheet as of December 31, 2014 at a total of NIS 46 million (December 31, 2013: NIS 34 million).
B. Investments through the subsidiary -Union Investments and Enterprise (A.S.Y.), which invests in companies in various fields of activity other than banking and complementary activities to banking. Accordingly, the company carries out investments with the intention of participating in the investee companies’ profits over the long term, and in certain cases realizing the investment at a profit within a certain period. Investments are carried out in accordance with investment policies and work plans that establish limits and objectives, including preferred fields. A limit of up to 20% of the capital of a single company and up to 15% of the capital of the Bank in non-financial investments applies by law for these kinds of investments, with certain exceptions.
A decision of the Board of Directors is currently in effect according to which the Bank’s subsidiary (A.S.Y) investment in non-financial corporations shall not exceed NIS 120 million. In addition, any individual investment greater than NIS 5 million and up to NIS 15 million, requires additional approval by the Investment Committee of the Board of Directors of the Bank. Any individual investment greater than this amount, requires additional approval by the Board of Directors of the Bank.
As at December 31, 2014 the company has no investment in equity-basis investee companies (as at December 31, 2013 - NIS 1 million). The balance-sheet balance of the investment in other companies through A.S.Y. as of December 31, 2014 totaled NIS 54 million (December 31, 2013 - NIS 58 million). These investments are classified as shares in the available-for-sale portfolio.
For further details regarding positions in shares in the banking portfolio, also see the Section “Capital Adequacy”.
Option portfolio risk - Most of the Bank’s activity in foreign currency/foreign currency options is performed with back-to-back coverage in trading, without the creation of market risks over time. This portfolio is included in “other derivatives” in Note 19 to the financial statements as of December 31, 2014 (the face value totaled NIS 592 million, and the balance of the fair value totaled NIS 13 million, presented both under the "assets in respect of derivatives instruments" item and under the "liabilities in respect of derivatives instruments" item).
In foreign currency/NIS options, and to a limited extent in foreign currency/foreign currency options, the Bank manages its option portfolio and is thereby also exposed to the risk of changes in volatility in the various currencies (this exposure is not of a material scope). This portfolio also includes certain activity in options for the coverage of linkage-base exposures, which constitutes a small part - 135 -
of the portfolio. This portfolio is included in “ALM derivatives” in Note 19 to the financial statements as of December 31, 2014.
The following table shows the distribution of the portfolio by currency, as of December 31, 2014 (in NIS millions): Par value EUR/USD EUR/NIS USD/NIS Other Total
Purchased options 433 1,033 3,282 - 4,748 Written options 307 1,147 3,355 - 4,809
Total 740 2,180 6,637 - 9,557
Fair value EUR/USD EUR/NIS USD/NIS Other Total
Purchased options 2 10 86 - 98 Written options 8 12 57 - 77
The risks in the option portfolio managed by the Bank are examined using the Value at Risk (VAR) model, based on simultaneous scenarios for currency exchange rates and volatility. These scenarios are based on a historical simulation of changes in volatility and exchange rates, going one year back, over ten business days, locating the 99% percentile. The option portfolio is managed using a computerized system that allows for analysis and examination of risks in the portfolio according to changes in the market. The overall limit as approved by the Board of Directors for the management of the option portfolio is NIS 7.5 million. The actual exposure on December 31, 2014, was a VAR of USD 0.5 million (December 31, 2013 - USD 0.6 million). The highest value at risk (at the end of the business day) in 2014 was USD 2.0 million (USD 1.2 million in 2013). In addition, a limit of USD 1.5 million in terms of VAR was approved for activity in exotic options, and a limit of USD 2 million for activity in foreign currency/foreign currency options. There was no exposure of exotic options in the portfolio as at the end of 2014 (USD 0.1 million in 2013). The value at risk for the end of 2014 in respect of foreign currency/foreign currency options was USD 0.1 million (USD 0.2 million in 2013).
Liquidity Risk
The risk that the Bank may be unable to finance its assets in the short term, or may be unable to allow customers to withdraw their deposits upon demand. This risk may develop as a result of internal management and control processes that do not take all risk factors into consideration, or that fail to properly estimate the liquidity level of assets or the availability of resources and depositors in various market situations. In addition, liquidity risk may materialize as a result of changes in - 136 -
estimates of deposit owners regarding the risk level of the Bank, or as a result of changes in their estimates regarding the risk level of the banking and financial system as a whole.
The Board of Directors determines the risk appetite and the risk tolerance within the liquidity risk management policy, while setting limits to the minimal liquidity ratio required according to the internal model and to stress scenarios and to the structure of sources while tracking variables such as depositors' concentration, depositors' character, cash flow gaps, etc.
The Bank implements a comprehensive liquidity risk management policy, based on the requirements of Proper Conduct of Banking Business Directive No. 342, “Liquidity Risk Management".
During the third quarter of 2014, the Board of Directors approved an update to the liquidity risk management policy of the Bank while updating the limits for the Banks' structure of sources. In addition, limits for the stable financing ratio in stress scenarios, as defined in Proper Conduct of Banking Business Directives No. 342, concerning liquidity risk management, were approved.
The liquidity risk management policy discussed and approved by the Board of Directors is aimed at achieving the following key objectives: Routine financing of the activity of the Bank. Assurance that customers will be able to withdraw deposits, during the ordinary course of business and during certain stress situations. Maintaining a level of diversification of deposits, both in terms of size and in terms of maturity dates.
In addition, the policy defines processes required during extreme changes in liquidity or during the development of a liquidity crisis.
The Bank examines on an ongoing basis the exposure limits according to developments in the various markets.
The Banks' Board of Directors determined the a risk appetite and risk tolerance for the liquidity ratio, and for additional main parameters including for the structure of sources, the business liquidity volume, depositors' concentration, weight of short-term deposits, weight of private depositors, scope of balance sheet financing by foreign currency, excess liquidity investment policy in foreign currency and more. The structure of resources and compliance with the limits are discussed in the financial issues management forum, on a monthly basis, and reported to and discussed by the Risk Management Committee of the Board of Directors and the plenum of the Board of Directors, within the quarterly risk document.
In addition, the Board of Directors holds discussions of the overall liquidity position and the management of liquidity in foreign currency, according to the developments in the markets and the
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derived needs, including the establishment of general and specific limits for the management of liquidity surpluses at banks in foreign currency.
The Financial Management Division is responsible for routine daily liquidity management, reporting on the liquid asset position, and examining trends in the liquidity position in order to ensure that appropriate capital is held by the Bank. As part of this role, the division is responsible for the management of balances at the Bank of Israel, raising resources and participation in credit auctions or deposit auctions of the Bank of Israel, investing the liquidity surpluses of the Bank (deposits with banks, deposits with the Bank of Israel, or purchases of short-term bonds), and calculating the cumulative daily and monthly liquidity position. Furthermore, the division is responsible for management of sources structure and maintaining compliance with the depositors' dispersion ratios. The division performs daily measurements of the current liquidity ratio and the stress scenarios ratio, according to the model, while examining compliance with the liquidity limits established, and monitoring trends in the structure of resources on a monthly basis. The liquidity ratio and the structure of resources are routinely reported to management and to the financial issues forum.
The Chief Accountant Division is responsible for reporting data to the Financial Management Division with regard to the required liquidity to be deposited with the Bank of Israel.
The Controls and Risk Management Division is responsible for the development of the internal liquidity model, including validation of the model and development of stress scenarios. The division is responsible for second line of defense controls regarding liquidity.
Internal liquidity model The Bank manages its liquidity level based on an internal model derived from its liquidity risk management policy.
The objective of the internal liquidity model is to examine the Bank’s ability to withstand the maturation of deposits, even if no substitute depositors are added, or when the realization of assets is difficult. The ratio of liquid assets that can be realized in practice in all sectors to liabilities expected to mature within one month, is calculated. The model takes into account the cash in hand and deposits with banks, the actual realization capacity of the Bank’s bond portfolio and the ability to call in on-call credit from credit card companies upon request, and assumes a withdrawal forecast based on recent withdrawal history, taking into consideration the distinction between the different bond types and their liquidity the level of concentration in the deposits portfolio and the characteristics of the activity of the depositors.
The basic assumptions of the liquidity model are established conservatively, while referring to the realization ability of the assets comprising the liquidity pillow. The models' assumptions are
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examined at least once a year according to developments in the markets and/or at the Bank, and are discussed and approved at the Risk Management Committee of the Board of Directors and at the Board of Directors' plenum.
The liquidity ratio according to the internal model is measured daily, and reported to the managements of the Bank, examined weekly by the Management Forum on Financial Matters, and included in the monthly report to the Board of Directors in addition to the monthly report regarding the deposits concentration and significant changes in the liquidity situation. In addition, compliance with the limits for stress scenarios is tested.
As at the date of the report, the volume of deposits of the three large depositors groups amounted to NIS 956 million and constitutes 3% of all of the deposits of the public.
In 2014 the liquidity ratio did not fall from the limits set, except for a few immaterial deviations in stress scenarios, which were resolved within a few days.
On September 2014, the Bank of Israel published directive 221 regarding liquidity risk management according to Basel III, which determines a minimal liquidity level for banking corporations (LCR). The directive adopts the recommendations of Basel III in the Israeli banking system regarding liquidity coverage ratio, and was formulated, inter alia, after a quantitative impact survey for measuring its impact on the banking system in Israel. According to the transitional directives stated in the directive, banking corporations must comply with a minimum ratio of 60% of the new limitations as of April 1, 2015, 80% as of January 1, 2016 and 100% as of January 1, 2017. The Bank is preparing to implement the directive. Proper Conduct of Banking Business Directives No. 342 concerning liquidity risk management will continue to exist parallel to the Basel III directive. The directive will be updated after the end of the transitional period for the implementation of the liquidity coverage ratio.
Extreme Scenarios The Bank examines liquidity risk by examining the effect of various extreme scenarios on its internal liquidity model, among other means. Extreme scenarios include systemic scenarios, scenarios focused on the Bank, integrated scenario and reverse scenario (which examine the intensity of an event which brings the liquidity ratio to the lowest risk tolerance). The scenarios include a business description, quantification of the effect of the scenarios on cash flows and on the liquidity ratio, responsibility for identifying the development of a crisis situation, and ways of coping in the event of materialization of an extreme scenario. In addition, a measurement of extreme scenarios, up to month and above month, is executed. Such extreme scenarios are measured on a daily basis, and are presented to the Management Forum on Financial Matters as background material for its weekly meeting. In addition, a discussion is conducted each quarter by management, by the Risk Management Committee of the Board of Directors and by the
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plenum of the Board of Directors regarding the list of extreme scenarios, values of the scenarios, and a comparison of the results of actual scenarios to the limits established.
The systemic scenarios include problems in the interbank market, including unwillingness of banks to trade in interbank liquidity and loss of confidence of investors in the stability of the banking system.
The scenarios focused on the Bank include a downgrade of its rating or a change for the worse in the assessment of the Bank’s financial position and stability. The integrated scenario regards to a change for the worse in assessment of Israel's financial position and difficulty with rising sources in foreign currency. Additionally, the Bank examines a reverse extreme scenario.
In addition, the overall liquidity position of the Bank is examined, as well as indices pointing to the possible development of crisis conditions concerning the Bank or the banking system.
The Bank has an emergency plan describing modes of action aimed at coping with the materialization of extreme scenarios, including various actions to be taken by the management and branches of the Bank.
The liquidity ratio in extreme scenarios, and compliance with the limits for such scenarios, are reported routinely to management and to the financial issues forum, and discussed by the Risk Management Committee of the Board of Directors and by the plenum of the Board of Directors as part of the discussion of the quarterly risk document.
Operational Risk Operational risk is defined as the risk of loss that may arise of inadequate or failed internal processes, human or system failures, or external events. This definition includes legal risk and compliance risks but does not include strategic risk or goodwill risk. The head of the Controls and Risk Management Division is the manager of operational risks at the Bank. Operational risk management includes responsibility for the formulation of operational risk management policy, planning and developing tools and methods for identifying and assessing the operational risk, execution of periodic risk mapping by business line and risk type, training and guidance of the various units, monitoring of the work plan for the correction of gaps identified, and establishment of procedures for monitoring, reporting, and control. The operational risk management is performed from an extensive systematic perspective, which includes the subsidiaries, using a consistent and systematic methodology which the Controls and Risk Management Division outlines. The operational risk management is based on an active process of identification, assessment, measurement, monitor, report and control performed in all of the Banks' lines of business. In light of the sensitivity of the processes related to the management of information systems, information security, safety and security and business continuity, it has been established that the - 140 -
Resources Division has direct responsibility for the management of risks in these activities. In addition, the Head Legal Council is responsible for the legal risk management and the compliance risk.
During the second quarter of the year, the Board of Directors approved the operational risk management policy of the Bank. The policy establishes risk management principles and the division of duties and authority to address the mapping and minimization of operational risks at the Bank, including the use of supplementary tools to mitigate risks, such as insurance policies, when internal controls do not provide an adequate solution to the risk and avoidance of the risk is not a reasonable option. The goal of the Bank's policy is to minimize operational risks to the extent possible, while drawing conclusions from events of failure and near-failure in order to reduce the risk of recurrence of failure events in the future. Based on the established policy, working procedures were formulated for the management of operational risk, with a working framework established in accordance with the organizational structure, authority, assessment tools, assessment processes, and reports.
Within the discussion of the overall risk appetite of the Bank, risk appetite and risk tolerance for operational risks were defined, with reference to the types of activities, increase in the volume of activity and the possible exposures.
In addition, the management establishes priorities for the mitigation of risks indicated by the risk survey according to the principles established by the Board of Directors. In addition, priorities have been established with regard to residual risk and the process of addressing risks with medium and high residual risk levels.
The management receives reports regarding the volume of cumulative damages from actual failure events. Failure events of more than NIS 100,000 are also reported individually to the Board of Directors of the Bank.
The Bank has an operational risk management forum, which convenes each quarter, and constitutes, among other things, a forum for knowledge sharing, discussion of failure events and almost bank failures, including external events from the past period, presentation of the work plan in this field, monitoring of the execution of risk surveys and treatment of the findings related to operational risks.
In order to provide a full overview of the exposure to operational risks, during 2009-2010 a comprehensive survey of mapping of organizational risks was performed at the Bank and at its subsidiaries, including details of processes, description of the types of risks, controls, evaluation of residual risk (after the operation of the controls), and recommendations for improvement or addition of controls in order to minimize risks. The mapping process was performed based on methodology formulated jointly with external advisors, which was approved by the management and Board of Directors of the Bank. Within this survey, the main business processes based on quality of controls and the evaluation of the severity of risks and quality of controls were documented.
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- Survey of operational risks in principal work processes A rolling three-year survey began during the third quarter of 2013, to assess risks in business work processes, in accordance with the methodology for the assessment of operational risks, which was formulated in collaboration with external advisors and approved by the Board of Directors. The survey covers the material business processes at the Bank, including a description of types of risks, quality of controls, assessment of residual risk, and recommendations for improvement aimed at minimizing risks.
As a supplement to the survey, the Bank defined key risk indicators (KRIs) for operational risk management in business processes. KRIs are performance indicators (beyond the established targets) that can point out developments in the Bank's activity that may affect its exposure to operational risks. The indicators are established based on trends in business activity, taking into consideration potential operational risks that may arise from such trends. Sample tests of the main processes are performed based on the KRI measurements.
- Survey of operational risks in the independent information systems of the bank A survey to assess operational risks in the independent information systems of the Bank began in the fourth quarter of 2013. The survey is being conducted in accordance with the methodology approved by the Board of Directors for the examination of operational risks in the area of information systems. The survey will be completed during the second half of 2015.
- Survey of information security in the independent information systems of the bank During the first quarter of 2014 an information security risk survey was conducted on the independent systems of the Bank. (The previous survey was approved in 2009 and since then. additional survey processes have been performed frequently, with an emphasis on high-risk systems, to update the risk map). The survey findings are regularly integrated in the risk assessment and are treated within the reduction plan of information security risks. Quality management in information systems has been adjusted to the ISO 9001 standard and examined by the Israel Standards Institute, which granted the Bank its seal. In 2012, the Bank completed a comprehensive survey, through a professional consulting company, of information security threats in the cybernetic space. As part of the survey, the adaptation of the information security management system to the dynamics of cyber threats was examined, and the system was found to be suitable for the professional needs of the Bank and compliant with regulatory requirements.
In order to fortify and expand the information security management system, the Bank operates an information security center (SOC) and regularly examines the monitoring and control mechanisms and the security alignment in accordance with the outline of threats.
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The results of the operational risk surveys help the management of the Bank and the Board of Directors evaluate the degree of exposure to these risks and determine the volume of capital required under Pillar II. In addition to the surveys detailed above, the Bank performs additional supplementary surveys as required. Within this framework, a survey was performed with regard to the implications on business continuity in the event of damage to the headquarters of the Bank (a disaster recovery plan), including mapping of key processes and systems of the Bank and the establishment of priorities for disaster recovery.
The Bank examines the exposure to operating risk also by extreme scenarios in order to address a variety of events while relying on the internal data history and report of realization of operational failure events in the local and international banking system.
Business Continuity - Emergency Preparedness - Events of various types may damage or cause shutdowns of material activities of the Bank and its customers, harm the continuity of its business, expose the Bank to a variety of risks, and cause significant damage to the Bank and/or to its customers. The Bank of Israel, which coordinates the activity of the financial system during emergencies through the Emergency Economy system, has established new guidelines for the formulation of policies allowing business continuity of the banking system during disasters. The guidelines are detailed in Proper Conduct of Banking Business Directive No. 355 and 357 and specific requirements distributed to the banks by the Bank of Israel from time to time. The Bank is in the process of preparing to cope with the events of this kind. This preparation includes: preparedness for various types of potential disaster situations, in order to allow business continuity even in case of disaster; preparation for a disaster recovery process, in order to return to routine work efficiently and within a brief timeframe; and proper management of information technology assets supporting processes with a material effect on the conduct of the Bank’s business. Mr. Menachem Morag, senior Vice President and head of the Resources Division, was appointed to be in charge of activity in emergencies, and as such, he is the head of a Crisis Management Team, which consists of management members of the Bank. The business continuity management, emergency preparedness and the contact with the different regulatory factors are conducted within the Information Security, Purchasing and Logistics System in the Resources Division. Within this process, a specialized unit was established to address the treatment of the business continuity. The unit is working to implement the new requirements of the Supervisor of Banks, regarding management of business continuity, as detailed in the Proper Conduct of Banking Business Directive No. 355.
The business continuity management strategy of the Bank encompasses all of its banking services, based on an analysis of the behavior of environmental variables such as employees, customers,
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government agencies, national infrastructures, etc., under various scenarios. Within this strategy, banking services have been prioritized and recovery targets have been established, using parameters of time and volume.
A recovery plan has been formulated at the Bank, adapted to the emergency scenarios defined in the business continuity strategy. The plan details the manner of operation of services during an emergency, and the resources required for that. An extensive drill schedule has also been established, aimed at absorption of the emergency plan by employees of the Bank and examination of its effectiveness.
In 2013, the Bank was authorized to amend business continuity standard ISO 22301. In addition to the establishment of the business continuity management framework, projects were carried out for the improvement of the Bank's preparedness for emergencies. This includes the protection of buildings at the Bank's core branches and other branches and the adjustment to working continuously during times of emergency. In addition, the Bank is prepared with vendors who support services and processes essential to ensuring the survivability of services they provide during emergencies.
As part of the Bank's preparations for business continuity in emergencies, and in accordance with the instructions of the Bank of Israel and the Home Front Command, the setup of a backup site for the Bank's central computer was completed in the fourth quarter of 2013, and a contract was signed for the setup of an emergency site for the Bank's administrative units.
The Bank works within a multi-year program for exercising all of the emergency array which includes the business units and the computer systems.
The Bank implements an information security policy, within which it conducts a wide range of activities in the areas of technology, operations, and processes. The information security policy has been adjusted to the information security standard ISO 27001 and examined by the Standards Institution of Israel, which granted the Bank a Standard Mark. Information security activities in aggregate are aimed at responding to the dynamic range of threats present in the technological environment in which modern-day banking information systems operate, and at allowing compliance with regulatory directives.
The Bank’s information security system is based on the following elements: Continuous, ongoing mapping and management of information security risks - the Bank’s methodology in this area is derived directly from the regulatory directives applicable to the Bank on this matter, in particular Directive 357 of the Supervisor of Banks.
Development, installation, and maintenance of a variety of automated tools for the security of the computer and data systems of the Bank (including software and hardware), using tools for the analysis, control, and identification of exceptional events in the area of information security.
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Increasing and instilling awareness of information security at the Bank through training for the Bank’s employees and customers.
A continuous process of evaluation and reduction of information security risks through gradual resolution of faults and safety surveys performed by external professionals, and reexamination and resolution of such faults over time.
Periodic examination of the ability of the Bank's information systems to withstand various types of cybernetic attacks, and update of the protective systems as necessary. This examination includes safety surveys, penetrability tests, and consultation with professionals, to ensure technological precedence.
Further to the decision of the management of the Bank to expand the activity of the information security operations center (SOC) the Bank's capabilities in this area improved, and the center is an additional layer in upgrading its preparedness to prevent cybernetic attacks.
The number and intensity of attempted attacks of various types has increased recently, including cybernetic attacks on information systems of business organizations, financial organizations, and others, aimed at obtaining unauthorized access to computerized systems in order to make illegal use of assets or of sensitive information, damage information, disrupt activity, and more. The Bank of Israel therefore issued instructions aimed at protecting against cybernetic attacks and strengthening control and security mechanisms, in order to prevent or identify the penetration of systems by hostile code as early as possible, and report to the public, when the issue is material, on the implications of such risks for the Bank.
Potential negative consequences for banking corporations as a result of cybernetic attacks include, among other things: theft of financial assets, intellectual property, or other sensitive information of the bank, its customers, or its business partners; disruption of the activity of the banking corporation; recovery costs; increased costs of protection and information security; loss of income due to unauthorized use of proprietary information or due to the failure to retain or recruit customers as a result of the cybernetic attacks; legal claims; damage to reputation.
The Bank relies on two types of information systems: 1. Information systems received from Bank Leumi, through outsourcing, which support most of its core business activities (hereinafter: "Leumi Systems").
2. Independent information systems, some of which were developed by internal means, while others were developed by various suppliers under the management of the Bank (hereinafter: "Independent Systems").
With regard to the Independent Systems, the Bank has prepared to protect against cybernetic attacks and has reinforced its control and security systems, including the performance of the actions - 145 -
requested by the Bank of Israel. These measures were aimed at reducing potential exposures and strengthening protection against the penetration of its independent IT systems by hostile code. As aforesaid, the Bank routinely carries out safety surveys and risk assessments for its Independent Systems. The surveys and risk assessments are performed at a frequency and on a cyclical schedule congruent with the requirements of the Proper Conduct of Banking Business Directives of the Bank of Israel concerning information technology management. A supplementary risk assessment survey was conducted in 2012, with the assistance of external consultants, with reference to the cyber threats known at that time. The findings indicated that the safety surveys, risk assessments, and consequent actions provided coverage for cybernetic attacks, at the date of the survey.
According to the estimates of the Bank, based on the opinion of the external consultants, among other factors, the Bank routinely acts to implement the controls and means necessary in order to identify risks, assess the potential effect of the risks, and mitigate the risks to the extent possible.
However, new cybernetic risks appear continually; therefore, at any point in time, the safety surveys and risk assessments performed by the Bank are current for such risks and exposures that are known at the date of the surveys. Gaps between the threats present at the date of the supplementary survey in 2012 and the threats known at the date of the surveys performed at the Bank were not large, and it appears, at a high level of probability, that these gaps do not have a material effect on the risk assessment of the Bank, including in the area of cybernetic attacks.
The Bank continues to work to identify potential exposures in all of its Independent Systems, and continues to upgrade its security and control measures, in order to be able to identify cybernetic attacks close to, during, or prior to the event, at a high level of probability.
The Bank is not aware of the occurrence of any material information-security or cyber incident, including any cybernetic events that substantially affected its Independent Systems, and consequently the activity segments supported by these systems. Furthermore, the Bank has not identified any event that would prevent it from adequately recording, processing, summarizing, or reporting information. In the opinion of the Bank, information security and cybernetic attacks in the context of its Independent Systems had no material effect on the financial statements for 2014.
With regard to the Leumi Systems, we have been informed by Leumi that:
In recent years, it's possible to see an escalation in cyber threats around the world. There have been attacks against national infrastructures, government agencies and corporations, in Israel and in the world.
In the opinion of Leumi, it is an attractive target for various attackers. Its computer systems, communication networks, and customers' devices have been attacked, and are likely to continue to come under cyber-attacks and attacks via viruses and malware, phishing attacks, and additional exposures aimed at damage to service, theft, or damage to data.
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Leumi sees the Banks' information and its customers' information as a principal asset and invests efforts in implementing control and defense mechanisms and processes. As part of the preparation for dealing with cyber threats, a survey was performed in order to examine the durability of Leumi. Following the survey, Leumi began a multi-year process for improving defense abilities from cyber threats.
In 2014 there was no material information security incident or cyber incident, in Leumi.
Union Bank receives a report from Leumi Bank at the end of each year regarding controls integrated into Leumi's operational system (including IT) and regarding tests of the effectiveness of the controls (ISAE 3402 type 2). Among other matters, the report includes an accountant's opinion (hereinafter: the "Opinion") as to whether the controls and control objectives set by Bank Leumi were properly planned and whether they operate with sufficient effectiveness in order to provide reasonable assurance that the control objectives were achieved during the year for which the report is produced. In addition, exceptional events relevant to Union Bank or to the Leumi control environment serving Union Bank only, are noted. According to the Opinion on the report for 2014, the controls examined which the accountant believed were essential to the achievement of the control objectives established, operated effectively during 2014. Among other matters, the Opinion addresses the controls applied in order to reduce potential exposures and strengthen protection against cybernetic attacks on the information systems of Leumi through which Leumi provides services to Union Bank and to its customers.
Compliance Compliance risk is defined as the risk that a corporation may be subject to legal or regulatory sanctions or may sustain material financial loss or damage to its reputation as a result of its failure to comply with laws, regulations, internal procedures, or ethical codes. The management of compliance risk includes responsibility for formulating risk management policy, performing mapping and assessment of compliance risks, handling cases of compliance violations, supervising the implementation of compliance policy, and establishing responsibilities and organizational preparations to implement compliance policy.
The Board of Directors approved a compliance risk management policy document in June 2013. The document establishes risk management principles, the division of duties and authority to address compliance risk mapping and minimization at the Bank, and processes for reporting and assessing compliance risks and exposures. Methodologies were established for the assessment of compliance risks and for handling compliance violations, if and as identified.
The policy document is updated from time to time, as necessary, and is discussed on an annual basis at the Banks' Board of Directors.
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The Chief Legal Advisor of the Bank, Dr. Moriah Hoftman Doron Adv., is the head of compliance risk.
The compliance sector is responsible for helping the Bank's employees and managers comply with and maintain the legal directives applicable to the Bank, both in the area of bank-customer relationships and in other areas relevant to the Bank's work. As part of its role, the compliance sector examines and improves compliance processes at the Bank on a lateral basis, through routine interfaces with other units and divisions of the Bank.
The following units report to the compliance sector:
1. The Prohibition of Money Laundering and Terrorism Financing Unit – Works to enforce the duties imposed upon the Bank in this area and supervise the fulfillment of such duties, according to the compliance risk management policy document and to the Banks' procedures in this area.
The Prohibition of Money Laundering and Terrorism Financing Unit routinely provides consulting to the branches and subsidiaries of the Bank and conducts continuous monitoring of banking activity in customers' accounts, with the aim of identifying activities that appear to be unusual and taking the necessary steps according to the law, concerning these activities.
The subject of the prohibition of money laundering and terrorism financing is integrated into the multi-year work plan of the internal audit unit, which performs audits at the branches to ensure compliance with legal directives.
Furthermore, the unit also accompanies the treatment of the FATCA at the Bank, including cross border risks in activity of foreign residents.
The officer responsible for the implementation of the Money Laundering Prohibition Law and the Terrorism Financing Prohibition Law at the Bank is the Chief Legal Advisor.
Disclosure of risks and restrictions to which the Bank is exposed due to its direct or indirect connections with Iran, or with the enemy, which may have a material impact on the corporation – Within its routine operations, the Bank is subject to various prohibitions established in various legal directives, such as the Trade with the Enemy Order, 1939, the Trade with the Enemy Order (Enemy for the Purpose of the Ordinance), 2011, the Law for the Prohibition of Investment in Corporations that Maintain Business Relationships with Iran, 2008, and the derived regulations, and the circular of the Supervisor of Banks of December 26, 2011, regarding the prevention of money laundering and terrorism financing and customer identification, primarily a prohibition on economic or commercial relations with Iran or with entities declared on international lists as entities involved in or assisting its nuclear program and related plans.
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Pursuant to these legal directives, the Bank has integrated the list of entities declared on the aforesaid international lists into its automated systems, and placed an automatic block on banking activity with such entities. These actions, as well as other preparations performed by the Bank, such as the update of the Board of Directors' policy document in this area, the update of the Bank's relevant procedures, and the development of controls that support the creation of a compliance infrastructure congruent with these requirements, have brought the Bank's exposure to these entities to a low level. 2. Compliance Unit – Responsible for the measures necessary in order to comply with the legal directives applicable to the Bank, as noted above, including legal requirements derived from the Law for Increased Efficiency of Enforcement Procedures at the Israel Securities Authority (Legislative Amendments), 2011 (hereinafter: the "Enforcement Procedures Efficiency Law"), which apply to the Bank as a corporation operating in the area of securities and as a public company. In this context, the Board of Directors of the Bank decided to formulate an internal enforcement plan, in congruence with the legal requirements arising from the Enforcement Procedures Efficiency Law, and with the criteria formulated by the Israel Securities Authority for the Bank and the subsidiaries subject to the law, and is acting to implement this resolution.
On March 29, 2012, the Board of Directors of the Bank approved the compliance risk exposure management policy in the area of securities, which also includes an internal enforcement plan for securities laws (primarily the Securities Law, 1968; the Regulation of Occupations of Investment Advising Law, Investment Marketing, and Investment Portfolio Management Law, 1995; the Joint Trusts Investment Law, 1994; and the derived directives and binding guidelines of government agencies).
This policy document was adopted in November 2012 by the subsidiaries' Board of Directors which engaged in portfolio management, underwriting, trust and issuance of securities.
The policy document is updated from time to time, as necessary, and is discussed on an annual basis at the Banks' Board of Directors.
3. Public Inquiry Unit – Handles contact with customers on all matters related to the bank- customer relationship. The unit is preparing to act in accordance with Proper Conduct of Banking Business Directives No. 308A "Treatment of Public Complaints", which will enter into force on April 1, 2015. For details and expansion regarding the directive, please see Section "Legislative Developments".
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Legal Risk Legal risk is the risk of loss as a result of the inability to legally enforce an agreement, and it includes, but is not limited to exposure to fines or penalties as a result of supervisory activities (punitive damages) as well as individual arrangements.
The Legal Advice and Compliance Department of the Bank is responsible for managing the legal risk in the Bank and it provides support and response for all the legal aspects of the activities of the Bank and its' Group. The legal advisor of the Bank serves as a legal risk director of the Bank.
The routine management of legal risk mainly takes the form of legal advice regularly provided by the Legal Advice and Compliance Department to the authorized organs of the Bank and to its various units and subsidiaries on the various topics related to the activity of the Bank; the preparation of contractual documents and banking agreements; writing of procedures in areas under the responsibility of the Department; legal support for the preparation and update of procedures under the responsibility of other parties within the Bank; management of legal knowledge at the Bank, including updates to the relevant parties in the organization regarding changes in the various types of legal and regulatory directives that affect the work of the Bank; routine instruction on a range of legal matters, including lessons learned from various events; adaptation of the system of agreements and procedures to such changes; routine updates of the system of agreements and documents generally used by the Bank; and oversight of legal claims against the Bank and supervision of professional parties processing such claims on behalf of the Bank.
The legal risk management is in accordance with the policy document in which, were defined the principles for the legal risk management, distribution of the roles and the authorities for treatment of mapping and minimizing the legal risks at the Bank, the reporting processes regarding risks and legal exposures and their assessments, including through the Legal Risk Management Committee which operates in the Legal Advice Division and convenes on a periodic basis.
The legal risk management policy is updated from time to time, as necessary, and is discussed by the Bank's Board of Directors on an annual basis.
Goodwill Risk Goodwill risk is defined as risk arising from negative perceptions by customers, counterparties, shareholders, investors, bond holders, analysts, other relevant parties, or regulators, which may have a negative effect on the public’s confidence in the Bank and on the Bank’s ability to retain existing business relationships or to create new relationships, and to sustain continuous access to financing sources (such as through interbank markets or securitization markets). Goodwill risk is characterized by multidimensionality and reflects the perceptions of other participants in the market. Moreover, the risk is present throughout the organization, and by essence is a function of proper internal risk
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management processes at the Bank, as well as of the manner and efficiency of response of management to external effects on transactions related to the Bank. The CEO is responsible for the management of the goodwill risk. The Bank makes every possible effort to preserve its existing positive reputation. Goodwill risk appetite is zero and risk tolerance is particularly small.
The goodwill risk management policy document is updated from time to time, as necessary, and is discussed by the Bank's Board of Directors on an annual basis.
Strategic Risk The strategic risk is a current risk or a future risk for the Bank's capital, goodwill or status, which may originate from erroneous business decisions, improper implementation of decisions, or failure to respond to sectorial, economic, or technological changes. This risk is created from the compliance degree of the strategic objectives set by the Bank, to its capabilities and to the economic environment in which it operates, from the applicability of the work plan and the objectives defined in order to reach them, from the resources defined for compliance with the plans and from the quality of the implementation of the components of the programs. The Banks' Board of Directors adopts a three year strategic plan each year, addressing the capital objectives of the Bank and its risk appetite and risk tolerance with regard to the various types of exposures and risk components. The capital objectives presented take into consideration the need to maintain stability and liquidity, and the achievement of profitability for shareholders over time, with reference to the approved limits on risk appetite and risk tolerance. The Board of Directors sets the general trajectory and guidelines for the establishment of the strategic plan. These guidelines are transformed into a detailed plan by management, based on internal discussions. The detailed plan is presented for approval by the Board of Directors. Annual work plans are derived from this plan.
Risk factors in strategic risk management may be: inadequate strategic planning marred by erroneous decisions; lacking or late reaction to market trends, customer preferences, or competitors' activities; inadequate preparation for regulatory guidelines; lack of coordination between the strategic plan and work plans, capital planning, or budgets; failure to meet targets; lack of clarity in components of authority and responsibility; insufficient quality of risk-management processes; shortage of skilled employees; absence of critical resources; and more.
The materialization of these risk factors may expose the Bank to business losses, financial damage, and a decline in reputation.
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The Bank is committed to taking measures to allow it to increase its degree of managerial control over risk, while creating processes for early identification of improper construction of the plan, or events and developments that may impede the full implementation of the established strategic plan. The Chief Executive Officer of the Bank is responsible for managing strategic risk. Within this responsibility, the strategic plan is discussed based on internal discussions held by the strategy forum, headed by the Chief Executive Officer, with the participation of most of the divisions of the Bank. The plan was formulated based on an evaluation of the strengths and weaknesses of the Bank relative to its competitors, and an assessment of expected developments in the banking system over the coming years. The strategic risk management policy document is updated from time to time, as necessary, and is presented for discussion by the Board of Directors of the Bank on an annual basis.
Environmental Risk Environmental risk is defined as the risk of loss as a result of directives related to the protection of the environment, and the enforcement thereof. Banks can be exposed to environmental risks through various aspects of their activity. Such risks can also be encompassed by other risks (such as credit risk, market risk, operational risk, legal risk, and liquidity risk). Exposure to reputation risk is also possible, as a result of the possibility of attribution to the Bank of a connection with a party causing an environmental hazard.
Credit risk arising from environmental risk is defined as the risk of damage to the credit repayment capability of a borrower as a result of violation of a law leading to the imposition of significant monetary fines, unexpected costs for compliance with legal requirements, damage to profitability and reputation of the borrower due to the results of the environmental aspect of the borrower's activity, exposure to legal claims, etc. Credit risk also includes the risk of exposure of collateral – the risk of damage to the value of collateral as a result of various environmental hazards.
Awareness of the potential exposure of financial institutions to risk arising from environmental hazards and from noncompliance with environmental directives has grown progressively in recent years, globally and in Israel. In June 2009, the Supervisor of Banks issued a letter regarding environmental risks at banking corporations, pursuant to which banking corporations must act to implement environmental risk exposure management within overall risks.
The Bank recognizes that the identification and assessment of environmental risk are part of an appropriate process of assessment of the risks to which the Bank is exposed.
Responsibility for management of the credit aspects of environmental risk exposure at the Bank rests with the head of the Corporate Division. The aspects of environmental risks involving the operation of the Bank are under the responsibility of the Resources Division.
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On June 30, that established the manner of management of environmental risks. Based on the letter of the Supervisor of Banks of June 2009, and in accordance with the aforesaid document, a steering committee headed by the head of the Corporate Division was established in 2010.
The committee carried out a process that included, among other matters, an examination of types of customers and levels of potential for environmental risk. Upon completion of this process, in 2013, the committee recommended an update of the Bank's environmental risk policy and the establishment of risk levels, specific populations and sectors, threshold amounts, and a process for obtaining an opinion with regard to borrowers of the types established. The policy was approved by the Board of Directors in 2013; implementation began on January 1, 2014. As part of the preparations for environmental risk management, the Bank was aided by an external firm in preparing an opinion on the examination of the potential for environmental risks with regard to such borrowers.
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Below are the details of the Bank Management's evaluation of the effect of risk factors in the Bank as at December 31, 2014:
Effect of the Risk Risk factor (High, Medium, Low) 1 Overall Effect of Credit Risks* Medium 1.1 Borrowers and Collaterals Quality Risk Low 1.2 Industry Concentration risk ** Medium 1.3 Borrowers/Groups of Borrowers Concentration Risk ** Medium 2 Overall Effect of Market Risks Medium 2.1 Interest Risk Low 2.2 Linkage-Base Risk (inflation and exchange rates) Low 2.3 Option risk Low 2.4 Share Prices Risk Low 3 Liquidity Risk Low 4 Operational Risk Low 5 Legal Risk Low 6 Goodwill Risk Low 7 Clearance Risk Low 8 Strategic Risk Low 9 Corporate Governance Low
* The overall effect of credit risk determined according the highest risk assessment from amongst the borrowers and collaterals quality risk, industry concentration risk and the borrowers/groups of borrower's concentration risk. ** The calculation is on the basis of gross credit without deductible collateral. Note: The estimated ranking of the impact of risks cannot be compared among different banks.
The risk assessment is based on structured questionnaires, by business lines, in which issues are presented for each business line that reflect the risks inherent in that line. The questions were formulated in discussions held with those responsible for risk management in the various business lines. The answers to the questions are based on existing information at the Bank, and were also reviewed by managers at the business lines. The overall risk assessment for every risk factor at the level of the Bank was weighted by risk types.
The answers to the questions are updated on a quarterly basis, and also serve as the basis for risk assessment in the risk document of the Bank, and the basis for the establishment of the work plan and risk assessment in the ICAAP document.
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No change occurred in the risk factors table as of December 31, 2014, excluding an increase in the total effect on market risks which was evaluated as medium compared to low in December 31, 2013 due to the closeness to the stress scenario limits.
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Critical Accounting Policies and Estimates The accounting policies used in preparing the Bank’s financial statements are set out in Note 1 to the financial statements. Implementation of these policies by Bank Management involves the use of various estimates and assumptions that affect the values of assets, liabilities (including contingent liabilities), and the business results of the Bank.
All assumptions, evaluations, and estimates are “forward-looking information” by nature. Such evaluations and estimates may materialize in the future in a manner different than estimated during the preparation of the financial statements.
We present below various issues regarding which, the estimates and assumptions used in the preparation thereof are sensitive to changes in various variables that may affect the business results. The Bank Management believes that the estimates and assumptions used in preparing the financial statements are fair and were arrived at on the basis of the best of its knowledge and professional discretion.
A. Allowance for credit losses As of January 1, 2011, the Bank implements the new directive of the Supervisor of Banks in respect of "Measurement and Disclosure of Impaired Debts, Credit Risk, and Allowance for Credit Losses" (henceforth: "The Directive").
The allowance for estimated credit losses is assessed by one of two methods: allowance for credit losses estimated on an individual basis and allowance for credit losses estimated on a group basis. See details of the new directive principals in Note 1.E.5.
While updating the credit policy, the Bank updated the methodology (as stated below) for detection and identification of problematic debts, for their classification and for the measurement of allowance for credit losses in respect of these debts. This is in order to maintain an allowance at an appropriate level to cover estimated credit losses in respect of its credit portfolio and in respect of expected credit losses in connection with off-balance sheet credit instruments.
The allowance for credit losses is an estimate established using various variables and working assumptions that have a material effect. These estimates include, among others: the classification manner of debts (sound, or problematic – under special supervision, substandard, or impaired), establishment of expected future cash flows, establishment of the fair value of collateral, establishment of the date of accounting write-offs, the rate of coefficients for group allowances, etc. The implementation of the new directive necessitated the formulation of methodology on these matters, based on the directive, the accompanying clarifications and interpretations.
Identification and classification of the group of problematic debts - partially based on parameters defined in the directive, and partially based on rules established by the Bank for the identification and location of problematic debts.
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The Bank routinely examines its credit portfolio in order to identify, as early as possible, borrowers for which the risk level has increased. In addition, a number of processes are applied by the Bank in order to identify potentially problematic borrowers, to include them in the watch list and to determine how to handle them. For further details, see the Section "Risk Management," subsection "Treatment of Problematic Credit and Debt Collection."
Individual evaluation for credit losses - The Bank examines on an individual basis any debt that its contractual balance is mainly greater than NIS 500 thousand and if the debt is found to be impaired, an individual assessment is performed for it with the purpose of examining the need for allowance for credit losses. The Bank classifies a debt as impaired when, based on current information and events, the Bank expects to be unable to collect the full amount owed to it according to the contractual terms of the debt agreement. In addition, debts are classified as impaired, in an integrative way, by the automated systems, when there are objective reasons for such classification (for example, restructured debts, or debts with principal or interest in arrears of 90 days or more).
When a debt examined individually is classified as impaired, the individual allowance for credit losses in respect of the debt is assessed based on the expected future cash flows from the operating activity of the debtor, funds to be received from other sources, or the realization of collateral, capitalized by the original effective interest rate of the debt. When the collection of the debt is contingent upon collateral, the individual allowance is assessed based on the fair value of the collateral pledged (less the realization costs) to secure the debt. If the present value of future cash flows or the fair value of the pledged asset is lower than the recorded balance of the debt, the Bank records the difference as an individual allowance for credit losses or a write-off, as applicable. With respect to debts examined individually and found to be unimpaired (with the exception of housing loans, for which a minimum allowance was calculated according to the method of the extent of arrears), a group allowance for credit losses shall be calculated, as described below. The Bank has methodologies for the measurement of the cash flow of a debt, the collection of which is not contingent upon collateral, based on criteria for examining the level of certainty that the funds will be received, and the coefficient to be applied to the certainty level. The coefficient depends on the level of certainty and the estimated period of time for the receipt of the funds. The expected proceeds of the collection are determined by the managers of the various relevant units, according to principles that have been established. The establishment of amounts of allowance for credit losses and update of allowances recorded in the past are performed routinely and based on renewed assessments (performed on a quarterly basis) of the impaired debts of the Bank. These decisions are discussed on a quarterly basis by a forum, in which the CEO of the Bank, the head of the Corporate Division and head of the Controls and Risk Management Division participate, as well as by the Audit Committee and by the plenum of the Board of Directors. - 157 -
The balance of individual allowance for credit losses as at December, 31, 2014 is NIS 32 million.
Group evaluation for credit losses – Pursuant to the directive, a group allowance must be recorded for unimpaired debts (with the exception of housing loans for which a minimum allowance is calculated based on the extent of arrears; with regard to the guidelines of the Supervisor of Banks concerning the collective allowance for housing loans, see below).
The collective allowance for credit losses is aimed at reflecting credit losses not identified individually which are inherent in large groups of small debts with similar risk attributes, debts examined individually and found to be unimpaired, and housing loans. The allowance is calculated according to the rules set forth in FAS 5 (ASC 450), Accounting for Contingencies, based on detailed instructions in the Public Reporting Directives. The formula is based on rates of historical losses/write-offs in various economic sectors, with a division into problematic and non-problematic credit, in the range of five years ended at the reporting date.
The historical rate of loss is calculated based on the allowance for credit losses beginning in 2010, and on rates of net write-offs beginning in 2011, relative to debt balances. In general, the coefficient used to calculate the collective allowance is determined as the average rate of historical losses/write-offs during the time range; however, in several economic sectors, the Bank has chosen to use the highest rate of loss within that range, as the Bank estimates that these coefficients reflect the level of uncertainty in the sector, among other matters. In addition to historical rates of loss, the Bank has applied another qualitative adjustment to all economic sectors, in order to reflect the risk inherent in each sector due to uncertainty in the economy. Note that this adjustment is preliminary, and will be updated during 2015.
The calculation of allowance on a collective basis for off-balance-sheet credit instruments is based on the rates of allowances established for balance-sheet credit (as detailed above), taking into consideration the expected rate of realization of off-balance-sheet credit risk. The expected realization rate of credit is calculated by the Bank based on credit conversion coefficients as specified in Proper Conduct of Banking Business Directive 203, Capital Measurement and Adequacy – Credit Risk – The Standardized Approach.
The Bank also implements the guideline of the Supervisor of Banks concerning housing loans, pursuant to which the balance of the collective allowance for credit losses held in respect of housing loans shall not fall below 0.35% of the balance of such loans at the reporting date.
In addition, beginning in 2014, the Bank has implemented the guideline of the Supervisor of Banks concerning credit to private individuals, pursuant to which, in determining the balance of the collective allowance to private individuals, past losses in respect of credit to private
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individuals as well as adjustments in respect of the qualitative factors established by the Supervisor of Banks should be taken into consideration, at a rate of no less than 0.75% of the balance of unimpaired credit to private individuals; for details, see Note 1.E.5.
The balance of group allowance for credit losses as at December 31, 2014 (including allowance by extent of arrears), is NIS 252 million.
Accounting Write-offs - An accounting write-off is performed for sums of debt which are thought to be uncollectible and /or are of such low value that their retention as assets is unjustified. A debt examined individually which is impaired and with regard to which the Bank has conducted prolonged collection efforts (when more than two years have elapsed from the commencement of the proceedings, and the debt has not yet been collected) is written off in accounting, through an automated system that measures the time elapsed from the date of classification of the debt as impaired, as required by the directive. In other cases, accounting write-offs are performed according to specific examinations. The difference between the debt balance and the fair value of the collateral was immediately written-off in respect of debts whose collection is contingent upon collateral. When there is no certainty that the amount eventually received for the repayment of the debt will cover the recorded debt balance of the debt, after the accounting write-off, further reduction should be made from the fair value that was calculated and make an allowance for credit losses in respect thereof.
As of 2014, the Bank updated the methodology concerning write-offs of housing loans, according to which, in case of an individual provision beyond the extent of arrears which brings the total allowance to a full allowance, an accounting write-off is performed on all of the allowance (extent allowance and an addition to the extent).
With regard to debts evaluated on a group basis, an automated system performs an accounting write-off based on their period of arrears and other parameters.
Revenue recognition - Upon classification of a debt as impaired, the Bank defines the debt as a debt not accruing interest income, and stops accruing interest income in respect of the debt, with the exception of certain restructured debts. In addition, upon classification of the debt as impaired, the Bank cancels all uncollected accrued interest income recognized as income in the past in the Statement of Profit and Loss. The debt continues to be classified as debt that does not accrue interest income, as long as its classification as an impaired debt is not cancelled. As long as the collection of the written remaining balance of an impaired debt is under doubt, any payment received will be used to reduce the principal and afterwards for recognition of income from interest that will be written as profit from financing activity before allowance for credit losses.
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Revenue recognition on a cash basis – Interest income in respect of an impaired debt, on a cash basis, as long as the remaining recorded balance of the debt is considered collectible in full. The Bank's determination of the ability to collect the entire remaining recorded balance of the debt must be supported by an up-to-date, well-documented credit evaluation regarding the financial condition of the debtor and the forecast for repayment, including reference to the repayment history of the debtor and other relevant factors. In any event, the amount of income to be recognized as interest income shall be limited to the amount that would have accrued in the reporting period on the remaining recorded balance of the debt at the forecast interest rate.
Interest income in respect of a debt classified as restructured are recognized only after six consecutive payments are performed without arrears, in loans repaid in monthly payments, or after repayment of a material part of the principal of the debt (20%), in loans repaid in non- monthly payments.
For further details on allowances and write-offs, see Note 4 to the financial statements.
B. Provision for other-than-temporary impairment of bonds available for sale: With regard to bonds classified as available for sale, the difference between the bonds' fair value and depreciated cost is allocated to a capital reserve, in accordance with GAAP. When the capital reserve is negative, the bank examines the need to record a provision for decline in value in profit and loss, according to GAAP, including with reference to the American standards published on this matter (FAS 115).
These rules require the Bank to examine whether the impairment of the bonds is of an other- than-temporary nature. Pursuant to the policy of the Bank, which is in line with the directives of the Supervisor of Banks, impairment of securities is recognized as other than temporary for all securities meeting one or more of the following conditions:
1. Securities sold until the date of publication of the report to the public.
2. Securities which, near the date of publication of the report to the public, the Bank intends to sell within a short period.
3. Securities which have been significantly downgraded from the date of purchase of the security, to the date of publication of the report. A significant downgrade is considered to be a decrease of at least three grades, such that the new grade is lower than Investment Grade (BBB).
4. Securities classified as problematic by the Bank following acquisition.
5. Securities in which a default has occurred following acquisition.
6. Securities whose fair value at the end of the reporting period and near the date of publication of the financial statements is significantly lower than their adjusted cost, unless - 160 -
the Bank has solid objective evidence and a cautious analysis of all relevant factors proving at a high level of confidence that the impairment is of a temporary nature.
Various criteria have been established by the Bank for this purpose. When these criteria are met, the securities are examined in depth and subsequently discussed specifically by internal committees within the Bank. The main criteria examined are:
Securities with a decline in fair value of more than 20%, and more than one year of decline below the adjusted cost.
Securities with a decline in fair value of 30% or more, and a yield to maturity of more than 10%.
Securities with a decline in fair value of 20% to 30%, provided that the amount of the impairment is more than NIS 5 million and the yield to maturity is more than 10%.
The in-depth examination is based on an internal methodology approved by the Board of Directors.
Discussions regarding the need to perform provisions are held in internal committees established for this purpose: a subcommittee headed by the Head of the Financial Management Division makes recommendations regarding provisions, based, inter alia, on factors including an internal methodology for detailed analysis of the issuing company. These recommendations are submitted to a committee headed by the CEO of the Bank. The decisions are presented to the Audit Committee of the Board of Directors for discussion. All relevant materials concerning the bonds, including a summary of the detailed analysis performed based on the internal methodology, are presented as background material for the discussion.
The total provision for impairment of an other than temporary nature, in respect of bonds, in 2014 amounted to NIS 2 million, allocated as an expense to non-interest financing income (2013 - NIS 13 million).
C. Fair value of financial instruments The measurement of fair value is based on the principles of FAS 157 (ASC 820-10), that defines fair value as the price that would be obtained from the sale of an asset, or the price that would be paid to extinguish a liability (henceforth: exit price), in a regular transaction, meaning in a transaction that is not a forced transaction or a sale during liquidation, between participants in the market at the time of measurement. According to the principles of the standard, the banking corporation is required to make maximum use of observable inputs, representing information available in the market and received from independent sources, and minimal use of unobservable inputs, which reflect the assumptions of the Bank when determining the exit price. FAS 157 specifies a hierarchy of measurement techniques, based on the question whether the
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inputs used to establish fair value are observable or unobservable. See details on the principles of the directive and their implementation in the Bank in Note 1.E.6.
Some of the financial instruments in which the bank operates - securities (in the available-for- sale portfolio and in the trading portfolio) and derivative financial instruments, are recorded in the balance sheet and/or profit and loss at fair value.
Numerous parameters are used by the Bank to establish the assumptions and estimates used in the fair value process and to validate fair values. These parameters are used both in inputs observed in the market from independent sources and in unobserved inputs that reflect the assumptions of the Bank. These parameters may change as a result of possible changes, mainly in interest rates and standard deviations in the various markets. The Bank has determined a methodology for the measuring method, internal control procedures and disclosure of the process of determining the fair value of these instruments.
In the first stage, financial instruments measured at fair value were mapped, with differentiation between: ‐ Financial instruments quoted on an active market (level 1); ‐ Financial instruments quoted on an inactive market, where the data used to establish fair value are observable (level 2); ‐ Financial instruments whose fair value is measured according to unobservable inputs reflecting the assumptions of the Bank (level 3).
An active market is an active stock exchange, in Israel or elsewhere, where financial instruments are traded, where fair value is quoted and can be quoted at every measurement date. The process of identifying the active market for the purpose of obtaining observable inputs for non-tradable instruments is carried out through guiding questions addressed to the Financial Management Division, based on criteria of the volume of transactions in the market, the BID/ASK spread, and more. The answers are used to determine the degree of reliance on the observable inputs of the instrument based on the market in which the financial instrument operates.
Fair-value measurements for financial instruments where the price is determined based on assumptions of the Bank are performed only after maximum effort has been invested in finding observable inputs to use in determining the fair value at the measurement date, or when the fair- value pricing model is a complex model based on assumptions of the Bank and no other usable economic model exists that is based on assumptions of market participants.
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Following are the balances of financial instruments measured at fair value, included in the balance sheet as at December 31, 2014: December 31, 2014 Fair Value Measurements Using: Prices Other Quoted in Significant Significant an Active Observed Unobservable Balance Market Inputs Inputs Sheet (Level 1) (Level 2) (Level 3) Balance NIS millions Financial Assets Credit to the public 1,405 - - 1,405 Total securities available for sale 4,512 1,451 90 6,053 Total securities held for trade 683 - - 683 Total assets in respect of derivative instruments 196 163 145 504 Assets in respect of activity in the 1,045 - - 1,045 Maof market Total financial assets 7,841 1,614 235 9,690
Financial Liabilities Deposits of the public 1,272 - - 1,272 Liabilities regarding derivative instruments 197 358 25 580 Liabilities in regard of activity in the Maof market 1,045 - - 1,045 Other liabilities 823 - - 823
Total financial liabilities 3,337 358 25 3,720
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December 31, 2013 Fair value measurements using: Prices Other Quoted in Significant Significant an Active Observed Unobservable Balance Market Inputs Inputs Sheet (Level 1) (Level 2) (Level 3) Balance NIS millions Financial Assets Deposits with banks 13 - - 13 Credit to the public 1,251 - - 1,251 Total securities available for sale 3,415 569 216 4,200 Total securities held for trade 572 - - 572 Total assets in respect of derivative instruments 308 169 95 572 Assets in respect of activity in the 813 - - 813 Maof market Total financial assets 6,372 738 311 7,421
Financial Liabilities Deposits of the public 1,185 - - 1,185 Liabilities regarding derivative instruments 308 357 8 673 Liabilities in regard of activity in the Maof market 813 - - 813 Other liabilities 825 - - 825
Total financial liabilities 3,131 357 8 3,496
The rate of assets whose fair value is defined as level 3 of the total assets measured at fair value on a recurring basis in the balance sheet or in the profit and loss is 2.4%. For further details see Note 20.A to the financial statements.
Fair-value measurements of financial instruments in which the Bank operates where the fair value is not determined according to prices quoted in an active market (levels 2 and 3) are established by one of the following two methods:
The income approach – involves measurement of the current value of cash flows, or option pricing models (B&S). This assessment technique has been defined by the Bank as a "common practice/standard model."
The market approach – Uses prices and other relevant information derived from market transactions involving identical or comparable assets or liabilities. This assessment technique has been defined by the Bank as a "complex model".
Determining fair value by common/standard pricing: - 164 -
The risk-management system at the Control and Risk Management Division is responsible for choosing the appropriate model to be used for each type of instrument in this group. Actual computation of fair values is performed at the Chief Accountant Division or at the Control Unit in the Control and Risk Management Division, including reasonableness tests and sampled tests of fair value. Validation of the risk-management system's selection of the most suitable model is under the responsibility of the Controls Section.
Determining fair value by complex pricing:
The risk-management system determines pricing methodology and calculates fair values. The risk-management system takes into account the risks inherent in the financial instrument such as market risks, credit risks and lack of liquidity (dependence on the financial instruments' tradability volume). The methodology is examined by the Controls Section, who has sufficient professional expertise and is independent of the calculating function. The Controls Section also provides comments on the reasonableness of actual fair values obtained. The pricing methodology of the non-tradable Israeli corporate bonds, is based, as much as possible, on recent market transactions, and subsequently on recent transactions of similar bonds. If such transactions do not exist, the Bank uses the pricing services of the company "Interest Rates" in order to calculate the fair values, while exercising discretion. As at December 31, 2014, the fair value determined by a quote from Interest Rates, amounted to NIS 119 million (December 31, 2013 - NIS 161 million). The fair values calculated according to the methodology above by the risk-management system, are submitted for additional examination by an internal committee that consults on fair value; this committee discusses the fair-value results obtained using the complex model. The committee consists of representatives of different divisions of the bank with sufficient professional expertise to validate the fair-value estimates.
In cases in which the fair value can't be determined with a reasonable degree of confidence, in accordance with the Public Reporting Directives, the risk-management system examines the materiality of the volume of such financial instruments. The determination of materiality is performed both in relation to the par value and in relation to the fair value, and is measured once a quarter. Limits for the bank's activity in these areas are determined. According to the results of the materiality tests. As at December 31, 2014, the volume of the aforesaid financial instruments was assessed as immaterial. In addition, a decision was made to refrain from increasing the volume of activity in these instruments at this stage.
In the event of a dispute between the risk-management system and the validating party (the Controls Section), the issue is brought for a discussion with the Head of the Control and Risk Management Division, and afterwards before the CEO of the bank for resolution. With regard to non-tradable Israeli corporate bonds, the dispute is first discussed by the advisory committee on fair value mentioned above; in the event that a decision still has not been
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reached, the issue is brought before the Head of the Control and Risk Management Division and then before the CEO for resolution. A summary of the discussion of this inquiry procedure is reported to the Audit Committee when discussing fair value.
The policy and work process described above, including the internal models in use, were approved by the Audit Committee and by the Board of Directors.
The process of determining the fair value of new products measured in the financial statements at fair value is examined by the risk-management system and validated by the Controls Section on a routine basis, and brought before the Audit Committee and the Board of Directors for approval.
The standard requires reflection of credit risk in measuring the fair value of derivative instruments which are not tradable in an active market. The credit risk must be reflected in both- positions of the asset side in respect of counterparty risk as well as positions of the liability side in respect of the Bank's risk. The Bank's risk is derived from the gap between the Banks' risk premium reflected from bonds it issued and the risk free curve. The counterparty risk is derived from indications from transactions in an active market of the credit quality of the counterparty, to the extent that such indications are available with reasonable effort. The liquid collaterals that the Bank requires from counterparty aren't attributed specifically to activity with a single derivative instrument but to all of the activity of the counterparty, therefore the Bank must make adjustments to the fair value in respect of the quality of the counterparty. The indications regarding the quality of the counterparty, derive among other sources, from prices of debt instruments of the counterparty traded in an active market, and from prices of credit derivatives based on the credit quality of the counterparty. If no such indications are present, the Bank calculates the adjustments based on internal ratings (such as estimated default rates and rates of credit losses in the event of default). Fair value of a derivative which quoted prices do not exist for it, there is no liquid collateral or offsetting agreements adequately assuring the quality of the credit of the derivative and there is no market data regarding the credit quality of the counterparty such as: CDS or bonds of the counterparty will be classified as a level 3 derivative.
For counterparties who have signed netting agreements, credit risk is calculated based on the total portfolio of derivative instruments of the counterparty, at the level of net exposure. For counterparties who have not signed such agreements, the calculation is performed separately on the asset side and on the liability side, without offsetting.
Until 2013 the Bank adopted the transitional directives and based on the current exposure method (on the basis of fair value at the measuring date). As of the first quarter of 2014 the Bank has been implementing a more advanced approach, which takes into account the exposure to the credit risk throughout the transaction life. The implementation of the advanced approach had no material effect on the Banks' financial statements. - 166 -
As at December 31, 2014 the results of the adjustment of assets and liabilities in respect of the credit risk to derivative financial instruments, are immaterial.
D. Employee benefits In calculating the bank's liabilities related to employee benefits, the bank makes use of external actuarial calculations on the three main matters (Details regarding employee benefits are provided in Note 15 to the financial statements):
1. Pension rights - Refers to the group of long-serving executives and authorized signatories of the Bank who are entitled to budget-based pensions upon retirement (Henceforth: "active employees"), and to executives who have retired and chosen the pension track (Henceforth: "pensioners"). See also Note 15.A.4 and the Section “Human Capital” in the Board of Directors’ Report.
2. Bonuses for length of service (jubilee bonuses) - apply to all permanent employees of the Bank, authorized signatories, executives and clerks. See also Note 15.B.
3. Excess compensations - compensations at the retirement beyond contractual obligation. It should be noted that to the estimate of the Bank and its legal advisors, the Bank has no legal responsibility, be it direct or implied, to pay excess compensation. See also Note 15.A.3 of the financial statements.
- The actuarial calculations are performed using the "Accrued Benefit Cost Method" which reflects the total benefits accrued up to the date of the Balance-sheet report with the total benefit expected at the future eligibility date spread linearly over the employment period.
- The actuarial calculations include assumptions regarding the real rate of increase in wages, mortality tables, disability rates, departure rates with regular and excess compensation, rates of excess compensation, percentages of employees choosing a pension, pension utilization rates, etc. The relatively low number of employees of the Bank occasionally makes it impossible to draw statistical conclusions for use in an actuarial model. Accordingly, in certain cases the actuary relies on management's assumptions, or exercises judgment using adjustments to the surveys that have been performed. Although these assumptions are established conservatively and with the appropriate professional skill, change in any or some of the assumptions and/or a change in the discounting rate would lead to a change in the amount of the Bank's liabilities.
- In accordance with the guidelines of the Supervisor of Banks, in calculating actuarial liabilities, the Bank uses mortality tables published on July 11, 2012 as a position paper of the Capital Markets, Insurance, and Savings Division of the Ministry of Finance - 167 -
updating the set of demographical assumptions in pension funds and life insurance, which contains an update of the mortality tables (based on a new study indicating an increase in life expectancy). In addition, the Bank uses an Israeli mortality table with a future improvement in life expectancy and a safety margin in respect of longevity risk (parallel to the use of such a margin in previous tables).
- The actuarial calculations are mainly sensitive to changes in the capitalization rate, to change in the forecast rate of annual wage increments, to departure rates, the rate of excess compensations the rate of employees choosing pensions and mortality tables. Set forth, are examples of the effects of changes of these rates on all of the actuary reserves:
The current value of the reserves above is calculated by the actuary according to a capitalization rate of 4%, in accordance with the directives of the Supervisor of Banks. For example, an increase/a decrease of 0.5 percentage points in the discounting rate would increase/decrease the reserve as at late 2014 accordingly by approximately NIS 19 million.
Note that on April 9, 2014, the Supervision of Banks issued a circular concerning the adoption of US GAAP on employee benefits. Pursuant to the circular, the capitalization rate for employee benefits will be calculated as of January 1, 2015 on the basis of yields of government bonds in Israel with the addition of an average margin on corporate bonds rated AA (internationally) or above at the reporting date. For practical reasons, the margin will be determined by the difference between the yields to maturity rates, according to repayment periods, of corporate bonds rated AA or above in the U.S. and the yield to maturity rates for the same repayment periods of U.S. government bonds, and all at the reporting date. For further details, including an estimate of the expected effect in respect of the adoption of U.S. GAAP, on the capital of the Bank, see Note 1.F. 1.
The calculation of the current value takes into account the forecast of the future non- financial increase in wages of employees - pension rights – 0.8%, excess compensation and jubilee grants wage increase changes according to seniority, according to the assessment of the management of the Bank and in accordance with variance of these populations. For example, an increase/decrease by a rate of half a percentage point of the rate of the non-financial wage increase, would increase/decrease the reserves of late 2014 by approximately NIS 11 million, respectively.
The calculation of the current value of regular and excess compensation takes into account the forecast of the future rates of departure before retirement age. This
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forecast is based on a survey conducted by the Banks' actuary at the beginning of 2011, on data regarding people who retired in the relevant years according to the managements' assessment, as a basis to the actuary calculation of excess compensation (years 2007-2010). Based on the findings of this survey and based on size of the populations typical for the Bank, the actuary assessed the future rates of departure before retirement age with regular and excess compensation. Regarding excess compensation, the rates of departure are relevant only from 2019 because according to the Banks' policy it won't be possible to retire on preferential terms until the end of 2018. Note that according to the managements; estimation, as of 2019 the retirement is expected to be in accordance with the retirement policies during 2007- 2010. For example, an increase/decrease of 10% in the departure rate with regular and excess compensation (the departure rate was multiplied by 0.9/1.1 respectively) would decrease/increase the reserves of late 2014 by approximately NIS 4 million, respectively.
The calculation of the reserve in a respect of "active" pension rights, takes into account the forecast of the rates of excess compensation according to the estimation of the Banks' management. For example, an increase/decrease of 0.1% in the rate of increased compensation would increase/decrease the reserves of late 2014 by approximately NIS 5 million, respectively.
The calculation of the present value of the reserve in a respect of "active" pension rights, takes into account the forecast of the rates of utilization of pension rights (72% choose the pension, while exploiting 60% of their pension rights) based on the Bank's data at the last years. For example, an increase/decrease of 10% in the rate of utilization of pension rights (the rate of utilization of pension rights was multiplies by 0.9/1.1) would increase/decrease the reserves of late 2014 by approximately NIS 2 million, respectively.
The amounts of the actuarial calculations are also sensitive to life expectancy tables.
- See details on balances and changes of these liabilities during the years 2013- 2014 in the Section "Human Resources".
- For details regarding the actuarial estimate upon which the Bank bases the employee benefits as described above, see the estimate of the actuary Mr. Dan Hershkovitz that was attached via the Magna electronic disclosure system of the Israeli Security Authority from February 26, 2015.
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E. Derivative Financial Instruments The Bank is active in derivative financial instruments, both in its activity for its customers and within its asset and liability management policy (closing or creating market exposures).
These instruments include, inter-alia, futures, forwards, swaps, and options on interest rates, currencies, shares, commodities, and others. In accordance with the directives of the Supervisor of Banks, all derivatives are measured at fair value.
Note 19 to the financial statements, provides comprehensive information about the Bank’s activity in these financial instruments. Section A.2 of Note 19 provides information regarding the fair value of these instruments, by type of instrument.
The Bank implements fair value hedge accounting. The changes in the fair value of both the derivative financial instrument designated for hedging and the hedged item are attributed to the Statement of Profit and Loss (see Note 1.E.8.). As at December 31, 2014 the Banks' hedge accounting activity is immaterial.
The Bank’s activity in derivative financial instruments within its asset and liability management policy and which is not treated in accounting terms by way of fair value hedging, creates measurement gaps between the economic measurement, which is used for risk-management purposes, and the accounting measurement on the other hand, which does not comply with the accounting hedge rules.
During 2014 these measurement gaps created income of NIS 13 million compared to income in the amount of NIS 21 million in 2013.
F. Contingent liabilities Contingent liabilities are handled in accordance with the directives of the Bank of Israel regarding this matter. According to these directives, contingent liabilities are classified in accordance with the probability of the exposure to risk loss in a claim, based on the opinions of the Bank's legal counsel, as follows:
A probable risk expected - a probability of more than 70% - requires that a full provision be made. Reasonably possible risk expected - a probability of more than 20% to less or equal 70% - No provision required. Requires disclosure if the aggregate amount of the claims is material. For information, see details in Note 18.C.18.A. to the financial statements.
Remote risk - a probability of less than or equal 20% - No provision required, requires disclosure of the maximum possible loss, if the amount is highly material. For further information, see details in Note 18.C.18(B-I) to the financial statements.
The management of the Bank, included in the financial statements, sufficient provisions required to cover the possible damages resulted from the claims, based on the legal advisors' estimates. The - 170 -
legal advisors’ estimates are based on their best judgment, taking into consideration the stage which the proceedings have reached and accumulated legal experience. However, it must be taken into account that the actual outcome of a claim may differ from the estimates established in the manner described above, which are used to examine the need to perform provisions in the financial statements, and the effect may be material.
G. Buildings and Equipment Buildings and equipment are stated in the balance sheet at cost, less accrued depreciation and less provision for impairment, if exists.
The Bank applies IAS 16 (Fixed Assets) IAS 38 (Intangible Assets), and IAS 36 (Impairment of Assets) including mandatory interpretations and publicized updates, with the exception of areas in which the Supervisor of Banks has set forth specific directives. See details in Note 1.E.11 to the financial statements.
Depreciation percentages are based on the estimated economic life of the asset. The Bank uses the best available information, including past experience, to make such estimates. Costs of the development of software for internal use are capitalized as investments in equipment after the end of the initial planning stage and until the development is completed, and depreciated from the date the software is available for use, according to an estimate of the period of time for which it will be used. For further details see the Section "Fixed Assets and Facilities".
The Bank implements procedures in order to ensure that the value of assets in the balance sheet does not exceed their fair value. When necessary, the Bank records a decline in value. The test for impairment of assets is a comparison of the book value of the asset to its recoverable value, which is the higher of its exercise price (net of sale costs) and its usage value (which is the present value of the future cash flows expected to be derived from an asset). See details in Note 1.E.14 to the financial statements with regard to the implementation of IAS 36 (Impairment of Assets). During the years 2014 and 2013 no impairment was recorded for the buildings or equipment. For details see Note 6 to the financial statements.
Legislative Developments Statements in this section shall not detract from statements in other sections and items of the report, where additional references are made to the legislative amendments described below and to other legislative amendments. Updates of legislation which passed during 2014 and published in the financial statements as of 2013 do not appear in this chapter.
Legislative Developments and proper banking conduct in the banking system
Amendment to Banking Rules (Service to Customers) (Fees), 2008 - 171 -
On January 21, 2015, the Governor of the Bank of Israel signed an amendment to the Banking Rules (Service to Customers) (Fees), the main points of which are as follows:
A. Expansion of the term "small business" to encompass a business of an individual or of a corporation, when less than one year has elapsed from the start of its operations or from its incorporation, respectively, or when the annual turnover of clearing of transactions in charge cards executed for the business by the banking corporation does not exceed NIS 3 million.
A small business defined as such shall not be required to provide an annual report after one year has elapsed, except at the request of the bank.
B. Amendment of the fee list for individuals and small businesses.
The amendment is in effect from February 1, 2015, forward (in accordance with gradual inception directives).
The Bank acts in accordance with the sections of the amendment that have taken effect, and is preparing to implement the other sections, based on the inception dates established in the amendment.
Amendment to Banking Rules (Service to Customers) (Due Disclosure and Delivery of Documents), 1992
On December 30, 2014, an amendment to the Banking Rules (Service to Customers) (Due Disclosure and Delivery of Documents) was published in the Official Gazette of the Israeli Government, as a supplementary measure in the implementation of the Zaken Committee report, which, among other matters, eases the requirements for the existence of a written agreement in certain cases.
From the inception of the amendment forward, the Bank will be permitted to refrain from requiring customers to sign the agreements listed below, provided that customers can affirm in the appropriate place on the banking corporation's website that they were given the requisite opportunity to peruse the agreement:
A. Agreement to open and administer a current account;
B. Agreement to deposit funds for a fixed period exceeding one year (a deposit in a closed system);
C. Agreement concerning orders given by telephone.
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The inception date of the amendment, for this purpose, is January 1, 2015. The amendment serves as a supplementary measure to the distribution of Proper Conduct of Banking Business Directive 418, Opening Accounts Online (see below), pursuant to which the Bank is permitted to offer its customers online account opening.
The Bank is preparing to introduce a system for opening accounts over the Internet during 2015.
Amendment to Proper Conduct of Banking Business Directive 432, Transfer of Activity and Closure of a Customer's Account
On December 21, 2014, the Supervisor of Banks issued an amendment to this directive, which constitutes another step in the implementation of the recommendations of the Committee for Examination of Increasing Competitiveness in the Banking System.
In order to make the process of closing an account and transferring activity in an account shorter and more efficient, the following rules were established, among others:
A. All actions to be performed for the customer by the new bank – the rules emphasize the ability of the new bank to carry out all of the necessary actions on behalf of the customer in order to transfer activity from the old account to the new account, including closing the account at the old bank.
B. Provision of detailed information allowing customers to determine whether transferring and closing the account is worthwhile – banks will be required to provide a detailed annual statement to customers who are considering whether it is worthwhile to switch banks or close their accounts (a "Banking ID"), in a uniform and easily understood format, current for the month preceding the request, as well as guidelines to help the customer understand exactly what is involved in transferring the activity or closing the account.
C. Closure of accounts without the need to come to the branch of the bank – customers will be able to file a request to close an account or transfer activity from an account through the bank's website, without the need to physically visit the branch.
D. Finality of account closure – a timeframe has been established for closure of accounts or transfer of activity from accounts. The procedure for transferring activity shall be completed within 5 business days of the customer's request; the procedure for closing an account shall be completed within 5 business days of the customer's completion of the necessary actions. The procedure for transferring a portfolio of Israeli securities shall be completed within 5 business
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days of the customer's order, whether or not the account is closed (foreign securities – within 14 business days).
E. Retention of benefits and discounts – it has been clarified that banks shall not cancel benefits or discounts granted to customers solely because of the customer's request to transfer activity or close the account.
The directive will take effect gradually, beginning January 1, 2015. The Bank acts in accordance with the sections of the amendment that have taken effect, and is preparing to implement the other sections, based on the inception dates established in the amended directive.
Uniform Contracts Law (Amendment No. 5), 2014
An amendment to the aforesaid law was published on December 17, 2014. Among other matters, the amendment adds two causes of discrimination to the law, as follows:
A. A cause of discrimination with respect to a condition that unreasonably grants a supplier a remedy not awarded by law, including a condition that permits a supplier to add remedies not to be added according to law, or a condition that establishes unreasonable consensual compensation in favor of the supplier;
B. A cause of discrimination with respect to a condition that requires customers to affirm or declare that they have read the contract, or a condition in which customers declare an action they have performed, their awareness of a certain matter, or a fact relevant to them, or provide affirmation thereof, all with the exception of information that the customer provides to the supplier within the contract.
This amendment will apply only to new uniform contracts signed after the date of publication of the amendment. The inception date of the amendment is one year after its publication.
The Bank is studying the details of the amendment and preparing to implement it on schedule.
Political Party Financing Law (Amendment – Loans and Financing), 2014
The aforesaid law was published on December 9, 2014, with the law dissolving the 19th Knesset. Main points of the law:
A. The law aims to reduce the dependence of political parties on the banking system. - 174 -
B. A faction, which is differentiated from a political party not represented in the Knesset, shall not be permitted to receive a loan from a bank, or from any entity other than the state.
C. A decision was made to increase the amount of the advance paid to political parties on election expenses. The advance currently stands at a total of 60% of one financing unit per Member of Knesset who is part of the faction on the date of record; the decision was to increase the advance to 85%.
D. With regard to the relationship between banks and political parties:
1. A bank shall not be permitted to refuse to open a current account for a political party.
2. A faction shall not be permitted to receive a loan from any entity; however, a negative balance in the account to which financing for routine expenses is paid, in an amount not exceeding half of the amount that the faction is expected to receive in that account to finance its routine expenses for the month, shall not be considered a loan.
The inception date of the law is its publication date.
Amendment to Proper Conduct of Banking Business Directive 325, Management of Credit Facilities in Current Accounts
On November 25, 2014, the Supervisor of Banks issued an update to Proper Conduct of Banking Business Directive 325, pursuant to which banks are permitted to adopt the following amendments with regard to deviations from credit facilities in customers' current accounts:
A. Amendment of Section 4 of the directive – banking corporations shall not be required to establish a new credit facility for a customer, in advance and in writing, if the duration of the deviation approved for the customer does not exceed one business day.
B. Amendment of Section 8 of the directive – pursuant to the amendment, the maximum amount of deviation from a credit facility which banks will be permitted to allow customers shall increase to NIS 2,000 for "credit to private individuals" and NIS 5,000 for "commercial credit," as defined in the Public Reporting Directives, provided that the deviations do not persist over a long period.
The Bank has chosen to act in accordance with the eased requirements in Section 4 of the directive.
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Amendment to Proper Conduct of Banking Business Directives 311 and 319
On November 23, 2014, the Supervisor of Banks issued an update of the Proper Conduct of Banking Business Directives that address credit risk management. Within the process of adjusting the Proper Conduct of Banking Business Directives to the recommendations of the Basel Committee on Banking Supervision, the need arose to carry out the following changes to Proper Conduct of Banking Business Directives 311 and 319:
A. Cancellation of Proper Conduct of Banking Business Directive 319.
B. Amendments to Proper Conduct of Banking Business Directive 311 – banking corporations shall establish a mechanism for independent, ongoing evaluation of credit risk management processes, and the results of these reviews shall be reported directly to the board of directors and to senior management. This principle has been updated in a manner that integrates the requirements concerning credit control with the directive on credit risk management. In addition, Principle 14 of the directive, which concerns "credit control," was updated in order to integrate the recommendations of the Basel Committee on Banking Supervision with the Proper Conduct of Banking Business Directives. The emphasis of the directive shifted from technical, quantitative metrics to qualitative requirements and to the desired outputs of the activity of the credit control function.
The inception date of the amendment is April 1, 2015. The Bank is preparing to implement this directive on schedule.
Proper Conduct of Banking Business Directive 425, Annual Statements to Customers of Banking Corporations
On November 19, 2014, the Supervisor of Banks published the new Proper Conduct of Banking Business Directive 425, which concerns annual statements to customers of banking corporations ("Banking ID"), as part of the implementation of the recommendations of the Zaken Committee.
According to the new directive, banking corporations will be required to report to customers who are individuals or small businesses on all of their assets and liabilities, including total income and expenses over the year in respect of assets, liabilities, and routine activity in the account. The abridged and detailed annual statements, as defined in the directive, shall be presented in the customer's online account ("Union Online"), in accordance with the format provided in the directive, by February 28, with respect to the preceding calendar year. In addition, customers who do not maintain online accounts shall receive the abridged statement by February 28, by one of the means
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specified in the directive, and shall be able to receive the detailed report at their request within 7 business days of such request.
The inception date of this directive is February 28, 2016, with reference to data for 2015. The Bank is preparing to implement this directive on schedule.
Proper Conduct of Banking Business Directive 308A, Handling Public Complaints
On September 30, 2014, the Supervisor of Banks published a new Proper Conduct of Banking Business Directive concerning the handling of public complaints. Main points of the new directive:
A. Banking corporations shall be required to establish a specialized function to handle public complaints, and to appoint a public complaints commissioner to head this function.
B. The public complaints commissioner shall be a member of senior management or shall report to a member of senior management.
C. The public complaints commissioner and the commissioner's staff shall not fulfill additional positions. The foregoing shall not apply to banking corporations with limited retail banking activity, subject to approval by the Supervisor of Banks.
D. The board of directors of the bank shall approve a policy document on handling public complaints and a service accord.
E. The public complaints commissioner shall be required to report semiannually to the management of the bank and annually to the board of directors of the bank, and shall be required to report semiannually to the Supervisor of Banks.
F. A prerequisite for filing a complaint with the Supervisor of Banks shall be investigation of the complaint at the banking corporation that is the subject of the complaint, except in exceptional cases.
G. Banking corporations shall publish a report on their website, in a format to be established by the Supervisor, presenting a summary of data on handling of complaints completed during the calendar year, within 90 days of the end of the year.
The inception date of this directive is April 1, 2015. The Bank is preparing to implement the directive on schedule.
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Amendment to Proper Conduct of Banking Business Directive 439, Authorized Debits
On September 1, 2014, the Supervisor of Banks published an amendment to Proper Conduct of Banking Business Directive 439, Authorized Debits. The goal of the amendment to the directive is to create an efficient, rapid process for the transfer of authorizations, without encumbering the customer.
Main points of the amendment to the directive:
A. The beneficiary shall be permitted to file requests to set up an authorization to debit the account, on behalf of the customer.
B. The requirement to use an authorization letter signed by the customer and to retain a copy of this letter at the bank will be canceled.
C. Customers shall be permitted to cancel a particular debit through written notification to their bank, no later than 3 business days after the debit date.
D. Customers shall be permitted to cancel an authorization at any time through written notification, and the bank will be required to reimburse the customer for debit amounts, at the value of the debit date, if the customer's account has been debited despite cancellation of the authorization.
The inception date of the amendment to the directive is October 1, 2015. The Bank is preparing to implement this directive on schedule.
Banking Order (Early Repayment of Housing Loans), 2002
On July 23, 2014, the Finance Committee of the Knesset passed an amendment to the Banking Order (Early Repayment Fees), in a second and third reading. The amendment was published in the Official Gazette of the Israeli Government on August 27, 2014.
The main change to the order is in the method of calculation of the capitalization component of the fee. Prior to the change, this component was calculated as the difference between the future payments that the borrower wishes to repay early, capitalized to the present value on the day of the early repayment according to the "average interest rate" (the interest rate published by the Bank of Israel each month, which is determined based on the average weighted interest rate on housing loans granted by the banks during the month preceding the publication) as of that day, and the same payments capitalized to the present value on the day of the early repayment according to the actual interest rate applied to the loan.
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The new calculation mechanism established for this component provides one formula for loans in which the interest rate on the loan is lower than the "average interest rate" that applied when the loan was granted, and another formula for loans in which the interest rate is higher than the "average interest rate." The significance of this change is that in cases in which the interest rate on the loan is higher than the "average interest rate" that applied when the loan was granted, the customer will pay a lower early repayment fee, according to the new calculation mechanism.
The inception date of the amendment is 180 days from the date of publication (February 23, 2015).
The Bank is preparing to implement the directive on schedule.
Amendment to Proper Conduct of Banking Business Directive 329, Limits on Housing Loans
On July 15, 2014, the Supervisor of Banks issued the new Proper Conduct of Banking Business Directive 329 concerning limits on housing loans. The directive consolidates the guidelines and limits concerning housing loans into a single binding document. This step by the Supervisor of Banks is aimed at simplifying the application of the various guidelines and improving clarity and uniformity in the implementation thereof. In addition, the directive redefines the term "payment as a percentage of income" and restricts the amount of the loan that can be assigned a reduced risk weight pursuant to Section 72 of Proper Conduct of Banking Business Directive 203, Debts Secured by Residential Properties, to NIS 5 million. Loans in an amount greater than NIS 5 million shall be weighted at 100%. The new amendments will apply to housing loans approved in principle beginning October 1, 2014; however, the bank shall be permitted to grant approval in principle of a housing loan after the inception date without application of the amended directive, provided that all of the following conditions are fulfilled:
- The bank provided a written commitment to finance the loan prior to the inception date, even if it did not include all of the details specified in Proper Conduct of Banking Business Directive 421;
- The contract for the sale of the property was signed by the applicant for the loan and by the seller prior to the inception date;
- The loan agreement is signed by December 1, 2014.
On July 17, 2014, the Supervisor of Banks issued a file of questions and answers concerning this directive. On September 28, 2014, the Supervisor of Banks issued an additional update of the directive, including an updated file of questions and answers. The main amendments to the directive are an increase in the capital target according to the size of the housing loan portfolio, and a higher risk weight for floating-rate leveraged loans. - 179 -
The Bank operates in accordance with the sections of the directive that have taken effect, and is preparing to implement the other sections, based on the inception dates established in the directive.
New Proper Conduct of Banking Business Directive 418, Opening Accounts Online
On July 15, 2014, the Supervisor of Banks issued the new Proper Conduct of Banking Business Directive 418 concerning the opening of accounts over the Internet, as part of the implementation of the recommendations of the Committee for Increased Competitiveness in the Banking Industry, which include a recommendation for online account opening, subject to several conditions, with the aim of facilitating transition between banks in general, and transition to banks with a limited branch network in particular. Pursuant to the new directive, banking corporations shall be permitted to open accounts online, provided several cumulative conditions are fulfilled, including:
- The owner of the account is an individual resident of Israel over the age of 18.
- There are no beneficiaries in the account other than the owner.
- The online account is marked and identified as such in the automated systems.
- Unique directives concerning aspects of the prohibition of money laundering and terrorism financing, including Know Your Customer procedures.
- Activity in the online account shall be limited in terms of amounts. Thus, for example, activity in cash shall not exceed NIS 10,000, and any other transaction shall not exceed the amount of NIS 50,000.
Banking corporations interested in allowing online account opening shall be required to notify the Supervisor of Banks in writing, at least 60 days before offering the service to customers. This directive took effect upon publication. The Bank is preparing to implement a system for opening accounts over the Internet during 2015.
Amendment to Proper Conduct of Banking Business Directive 312, Business of a Banking Corporation with Related Persons
On July 10, 2014, the Supervisor of Banks issued an amendment to Proper Conduct of Banking Business Directive 312, Business of a Banking Corporation with Related Persons. The directive is aimed at minimizing the risks arising from balance-sheet transactions and off-balance-sheet transactions executed by banking corporations with related persons, and at preventing abuse of the - 180 -
banking corporation and actions that create a conflict of interest. The directive requires transactions of a banking corporation with related persons to be performed according to business considerations and at market terms.
Main amendments to the directive:
A. The threshold established for the definition of a related person was lowered from a 10% holding in means of control of a banking corporation, or in a banking corporation that controls a banking corporation, to 5%.
B. The definition of "holding," in the context of control, was changed from a quantitative to a qualitative definition.
C. A new section concerning policies and procedures was added. Among other matters, the Board of Directors shall establish policies and procedures for the approval of transactions with related persons, including procedures for control and monitoring.
D. Clarification was provided for the requirement pursuant to which banking corporations shall not execute a transaction with a related person at preferred terms relative to the prevalent practices in its similar transactions with others.
Limits on the indebtedness of related persons were expanded.
The amendments to the directive took effect on January 1, 2015. The relevant parties at the Bank were informed of the details of the amended directive, and the Bank operates in accordance with the directive.
Amendment to Proper Conduct of Banking Business Directive 403, Benefits for Customers
On July 6, 2014, the Supervisor of Banks issued a circular concerning benefits to customers, as part of the implementation of the recommendations of the Committee for Increasing Competitiveness in the Banking Industry. The goal of the amendment to the directive is to establish clear, uniform rules allowing customers to compare banking services and products offered to them, with the ability to differentiate the value of non-banking benefits from the value of banking benefits. Main points of the amendment to the directive:
A. A new section has been added containing definitions of the main terms that appear in the directive. In addition, banking benefits have been differentiated from non-banking benefits.
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B. Rules were established to limit non-banking benefits for customers to the following cases: payment of money when opening a current account only; giving an object of low value for the purpose of marketing the banking corporation; giving discounts or exemptions to recipients of clearing services in payment for advertising of non-banking benefits offered to customers; granting non-banking benefits related to financial education. Banking corporations will also be permitted to give customers non-banking benefits when they file an application to issue, hold, and use a charge card.
C. The directive emphasizes that non-banking benefits shall not be contingent upon the following conditions: contractual engagement with the banking corporation for a certain amount of time and/or a requirement to return the benefit and/or the customer's consent to receive advertising materials from the banking corporation or from a third party with which it has contracted.
D. When the customer files an application to issue a charge card that includes a revolving credit service, the customer shall be offered the opportunity to receive the same benefits, if any, via an ordinary credit card as well.
E. The banking corporation is required to give the customer due disclosure when advertising non- banking benefits.
The amendments to the directive took effect on January 1, 2015, and the Bank is operating according to the amendments.
Pledge Regulations (Procedures for Registration and Perusal) (Amendment), 2014 – Online Interface with Pledge Registrar
The Pledge Regulations (Procedures for Registration and Perusal) (Amendment), 2014, were issued on June 11, 2014. Under the power of these regulations, and pursuant to the content thereof, banking corporations will be required to transition to online interaction with the Pledge Registrar with regard to five basic actions (registration, cancellation, perusal, change, and extension of pledges).
The transition to online operation shall be effected gradually, over a period of 5.5 years; the inception date has been set at January 1, 2020. The Bank is preparing to implement the regulations according to the established schedule.
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Proper Conduct of Banking Business Directive 422, Opening and Managing Current Accounts with Positive Balances
The Supervisor of Banks issued Proper Conduct of Banking Business Directive 422 on May 28, 2014. The goal of the directive is to clarify which services constitute an inseparable part of account management, and in which cases the argument of "reasonable refusal" to open an account will not be accepted, pursuant to the provisions of Section 2(A)2 of the Banking Law (Service to Customers), 1981. The directive applies to individuals who are residents of Israel. Main points of the directive:
A. A list (not exhaustive) of cases was specified in which a corporation's refusal to open an account shall be considered unreasonable: a restricted / severely restricted / specially restricted customer, or a previously restricted customer; a customer in bankruptcy proceedings or who has undergone such proceedings in the past; a customer whose account has been foreclosed; a customer against whom a legal proceeding is currently underway or has been conducted in the past for the collection of a debt by another banking corporation.
B. A decision regarding the application to open an account shall be communicated to the customer in writing within five business days of the later of the date of filing of the application in writing, or the date of submission of all of the documents required by the banking corporation.
C. A list of services was specified which banking corporations shall not unreasonably refuse to provide to customers: authorizations to debit an account, direct debit cards, cash withdrawal cards, registration of the customer for information retrieval via service stations, registration of customers to receive information via the Internet.
D. It is mandatory to provide customers who wish to open an account with an explanatory document detailing the services which the banking corporation is obligated to provide.
E. The services must be published on the bank's website.
Inception, with respect to unreasonable refusal to open an account and registration of customers for information retrieval services and Internet access, is immediate, upon publication of the directive. The inception date with respect to the requirement to provide a direct debit card has been set at January 1, 2015.
The other sections of the directive took effect on September 1, 2014. The Bank operates in accordance with the sections of the directive that have taken effect, and is preparing to implement the requirement to provide a direct debit card by July 1, 2015 (the deadline for the Bank was postponed, with the approval of the Supervisor of Banks).
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Amendment to Proper Conduct of Banking Business Directive 453, Third-Party Guarantees for Banking Corporations
On April 23, 2014, the Supervisor of Banks issued an amendment to Proper Conduct of Banking Business Directive 453, in order to adjust the directive to Amendment 19 to the Banking Law (Service to Customers), 1981, which concerns the duty of a banking corporation to notify debtor customers before demanding immediate repayment of a loan or initiating a legal proceeding. The adjustment takes the form of formalization of the delivery of such notices to guarantors. Within the amendment to the directive, duties will be imposed upon banking corporations towards guarantors, formalizing the date on which notification should be sent to the guarantor regarding the demand for immediate repayment of the debtor's loan, or initiation of a legal proceeding against the primary debtor; the manner of sending the notification; and the details to be included therein. The amendments to the directive will apply to all guarantees, including guarantees signed prior to its inception. The amendment to the directive took effect on September 10, 2014; the Bank operates in accordance with this amendment.
Supervisor's Letter Concerning Preparation for Implementation of FATCA Directives
On April 6, 2014, the Supervisor of Banks issued binding guidelines with regard to banking corporations' preparations for implementation of the FATCA directives. The FATCA directives were established on March 18, 2010, as part of the struggle in the US against tax evasion using accounts opened outside the US. The US Department of the Treasury enacted regulations for implementation of the law on January 17, 2013, and set the inception date of the regulations at July 1, 2014. In view of the potential implications for the local banking system, and in the absence of an inter-government agreement for implementation of the FATCA directives, banks are required to perform the following actions, among other matters:
A. Appoint a responsible officer and set up a designated work team to coordinate implementation of the directives, reporting directly to a member of management.
B. Inform the bank's management and Board of Directors of the pace of progress of the preparations, at a frequency to be established.
C. Establish policies and procedures with regard to the manner of implementation of the directives. The policy shall be approved by the Board of Directors.
D. Refusal to open an account for a customer who does not cooperate with the banking corporation in the implementation of the FATCA directives, and refusal to provide services in an existing
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account that expose the banking corporation to the risk that it may be considered complicit with the customer in an effort to circumvent the FATCA directives, shall be considered a reasonable refusal in the context of the Banking Law (Service to Customers), 1981.
On April 30, 2014, as part of the Bank's preparations and in accordance with the aforesaid circular, the Bank and three of its subsidiaries (Carmel Union Mortgages and Investments Ltd., Union Issuance Ltd., and Union Bank Trust Company Ltd.) registered on the IRS's portal, in order to receive identification numbers (GIIN) for FATCA.
On May 1, 2014, the Israel Tax Authority announced that an agreement had been signed for inter- country cooperation between the US government and the Israeli government with respect to FATCA. In view of this agreement (details of which have not yet been released), local legislation will be enacted to implement the FATCA guidelines and regulate the activity of financial entities, including the Bank, with Israeli parties (likely at the Israel Tax Authority), rather than directly with US authorities.
The Bank is preparing in accordance with the guidelines, on the schedule required by the Supervisor.
On July 3, 2014, an agreement was signed between Israel's Ministry of Finance and the US tax authorities for the adoption and implementation of the FATCA guidelines in Israeli legislation. The Bank is preparing to carry out the required adjustments, in accordance with the published agreement, to the extent possible until the publication of Israeli legislation on this matter.
Proper Conduct of Banking Business Directive 414, Disclosure of the Cost of Securities Services
On April 2, 2014, following consultation with the advisory committee on banking business and with the approval of the Governor of the Bank of Israel, the Supervisor of Banks issued a new directive concerning disclosure of the cost of securities services, as part of the process of implementation of the recommendations of the Zaken Committee.
The directive primarily obligates banking corporations to present comparative information to customers charged fees for buying, selling, or redemption of Israeli and/or foreign securities, or management fees for securities deposits, with regard to the rates of fees paid by other customers of the banking corporation who hold deposits at a value similar to the value of the deposit held by the customer. The aforesaid comparative information to be provided to the customer shall be presented within the semiannual statement to the customer, along with detailed information regarding buying, selling, and redemption fees and securities deposit management fees actually collected from the customer. The comparative information to be provided to the customer shall also be posted on the
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bank's website, in order to enable customers to compare the costs of the services at different banks. This directive applies to individuals and small businesses; the directive took effect on January 1, 2015. The initial presentation of information to customers, and the publication thereof on the website, were based on data received during the months of July-December 2014.
Banking Order (Service to Customers) (Supervision of Basic Track Services), 2014
On March 26, 2014, the Supervisor of Banks published the Banking Order (Service to Customers) (Supervision of Basic Track Services), 2014, which declares that the basic track is a service subject to supervision, and that the maximum amount of the fee that can be charged for basic track services is NIS 10 per month.
The inception date of the order is April 1, 2014. The Bank operates in accordance with this order; also see the section "Description of the Bank's Business by Activity Segments," subsection "The Private Sector."
Banking Law (Service to Customers) (Amendment No. 19), 2014
Amendment No. 19 to the Banking Law (Service to Customers), 2014, was published in the Official Gazette of the Israeli Government on March 10, 2014.
Pursuant to the amendment to the law, banking corporations shall not demand immediate repayment of a loan, and shall not initiate legal proceedings against a customer for failure to comply with the terms of a loan, unless they have notified the customer accordingly, in writing, at least 21 business days before taking the action. The notification shall be sent to the customer in the manner generally used by the bank to send messages to the customer, as well as via personal delivery to the address of the customer recorded at the bank. The amendment specifies the details that must appear in such a notification. Pursuant to the amendment, the aforesaid notification duty shall not apply to the banking corporation if the notification would cause a tangible threat of damage to the ability to collect the debt, due to one of the following:
- A change for the worse in the customer's repayment capability.
- Other conditions that necessitate immediate action in connection with the loan.
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The amendment to the law took effect in September 2014, and also applies to loans granted prior to the inception date. The Bank is prepared to operate in accordance with the schedule established by the legislator.
Circular 2396/06, General Account Management Terms Form
On January 26, 2014, the Supervisor of Banks issued the circular entitled, General Account Management Terms Form. Pursuant to the circular, banks that ask customers to sign a general terms form, including various banking services, shall do so in one of the following two ways:
A. Division of the general terms form into sections, according to the type of account, and having customers sign at the end of each section.
B. A general terms form noting that the general terms apply only to the types of accounts listed in the appendix to the form and approved by the customer. If all types of services are presented in the appendix, customers shall sign next to each service that they wish to receive. If the appendix presents only the types of services that the customer wishes to receive, the customer shall sign at the bottom of the appendix.
The Bank already operates in accordance with the aforesaid option B.
Legislation and Regularization Initiatives
Legislative Memorandum on Electronic Clearing of Checks, 2015
On January 4, 2015, a legislative memorandum was issued for comments from the public, further to the government resolution of October 22, 2014, adopting the conclusions of the report on the reduction of the use of cash in the Israeli economy.
Main goals of the legislative memorandum:
A. Regularization of electronic clearing of checks in the banking system as a substitute for physical presentation of the checks.
B. Regularization of the return of a rejected check to the customer.
C. Regularization of the admissibility of a computerized check in a legal proceeding.
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E. Determination that the scope of the bank's responsibility towards the customer will not change, under any law, due to the change in the clearing method.
The relevant functions at the Bank have been informed of the details of the legislative memorandum, and are monitoring the progress of the legislation process.
Pursuant to the circular, the inception date is nine months from the date of publication.
Legislative Memorandum on Reduction of the Use of Cash, 2015
In early January 2015, a legislative memorandum was issued for comments from the public, further to the government resolution of October 22, 2014, adopting the conclusions of the report on the reduction of the use of cash in the Israeli economy.
Main points of the proposed legislative memorandum:
A. Restriction of the use of cash, applicable to sums paid or received due to one of the following actions: sale of an asset, provision of a service, payment of wages for labor, and payment of mandatory payments and fines.
B. Prohibition of payment or receipt of sums exceeding NIS 10,000 in cash by a dealer in a transaction for the sale of an asset, provision of a service, or payment of wages for labor.
C. Prohibition of receipt of a sum exceeding NIS 50,000 in cash by a person who is not a dealer, for a transaction as noted above.
D. Prohibition of payment of a sum exceeding NIS 10,000 in cash by a person who is not a dealer, for a transaction as noted above, when the recipient of the sum is a dealer.
E. Prohibition of payment of a sum exceeding NIS 50,000 in cash by a person who is not a dealer, for a transaction as noted above, when the recipient of the sum is not a dealer.
F. Prohibition of receipt of NIS 50,000 or more in cash by lawyers and accountants within the provision of business services to clients.
G. Banking corporations and the Postal Bank shall not redeem a check on which the name of the payer is not noted, and they shall not redeem a check in an amount greater than NIS 10,000 on which the names or identification numbers of the assignors or assignees are not noted, or a check in an amount greater than NIS 10,000 assigned more than once.
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H. Imposition of administrative sanctions, in the form of a monetary sanction, on dealers who violate the directives of the law.
I. Determination that violation of the limits by a person who is not a dealer shall constitute a criminal offense punishable by a fine.
The proposed inception date, pursuant to the circular, is after the Minister of Finance, with the consent of the Minister of Justice and the Governor of the Bank of Israel, is convinced that all of the conditions necessary to make the implementation of the law possible have been fulfilled; these are: existence of direct debit cards, and the absence of a direct channel fee for such cards; availability of direct debit cards to customers of the banking corporation; and issuance of such cards at the Postal Bank as well, to all applicants.
The section concerning the license to engage in check discounting shall take effect one year from the inception of the law.
The relevant functions at the Bank have been informed of the details of the legislative memorandum, and are monitoring the progress of the legislation process.
Draft Circular on Compliance Activities and the Compliance Function at Banking Corporations (Proper Conduct of Banking Business Directive 308)
On December 23, 2014, a draft circular was issued to the members of the Proper Procedures Committee amending the Proper Conduct of Banking Business Directive concerning compliance officers. The goal of the amendment to the directive is to adjust the directive to similar standards established in the Basel Committee's guidelines and by peer regulators overseas and in Israel.
Main points of the draft:
A. Duties of the Board of Directors – The draft emphasizes and clarifies the Board of Directors' responsibility for supervising the compliance risk management of the banking corporation. The board must take the necessary measures to fulfill its role of approving compliance policy and formulating methods of instilling the policy, supervising implementation of the policy, assessing the effectiveness of compliance risk management, and establishing channels for reporting on compliance issues.
B. Duties of senior management – The responsibility of senior management is to effectively manage compliance risk. Senior management must take the necessary measures to fulfill its role, as required in the new directive, including formulation of a written compliance policy; - 189 -
supervision of the work of the compliance function; identification and assessment of key compliance risk issues for the banking corporation; maintenance of channels for reporting to the board of directors; and taking significant actions or remedying any identified violations of compliance policy.
C. Compliance policy – Refers in general to the manner in which the banking corporation prepares to implement the new directive, including key processes through which compliance risks will be identified and managed in material activities and processes at the banking corporation. Compliance policy shall be established on the level of the group.
D. Characteristics of the compliance function – Efficient and effective fulfillment of the duties of the compliance function requires, among other matters: a permanent compliance function that is not dependent on the activities under its examination; anchoring of the status of the compliance function in a charter; assignment of an organizational position to the compliance function that does not create an actual or potential conflict of interest with its responsibility for compliance; remuneration of compliance employees that is consistent with the function's objectives, such that there is no incentive for employees to act in contravention of the goals and characteristics of the function; allocation of appropriate resources and manpower to the function, with professional qualification of the employees and the head of the function, such that the compliance function as a whole has broad, comprehensive understanding of compliance issues.
E. Duties of the compliance function – The directive states that the compliance function shall be responsible, at least, for the management of compliance risk derived from the core directives, such as the bank's fairness towards its customers, money laundering and terrorism financing, advising customers, conflicts of interest, protection of privacy, tax aspects relevant to products or services offered to customers, and more. The other directives applicable to banking corporations can be managed by other functions in the second line of defense. The division of duties between the functions shall be established in the compliance policy.
F. Compliance plan – To be based, among other factors, on the results of a compliance risk survey, which can be performed as part of the operational risk survey, as noted in Section 27 of Proper Conduct of Banking Business Directive 350, Operational Risk Management.
G. Scope of activity – The work of the compliance function shall encompass all of the activities and entities within the banking corporation, including subsidiaries or branches, in a particular jurisdiction.
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H. Compliance officer – The compliance function is headed by the compliance officer. The compliance officer has an important role in ensuring the proper operation of the compliance function and in ensuring that it is up to date and professionally qualified.
Pursuant to the draft directive, the inception date of the amendment is July 1, 2015. The relevant functions at the Bank have been informed of the details of the draft directive and are monitoring its application.
Draft Directive on Banking Activity of Foreign Residents
On December 19, 2014, the Supervisor of Banks published a draft circular concerning compliance risk arising from cross-border banking activity. Main points of the draft:
- The draft reviews the changes performed around the world under the FATCA legislation, which is aimed at obtaining reports on bank accounts and other financial accounts of Americans outside the United States.
- The Supervisor's draft also mentions the recent OECD approval of a standard for automatic exchanges of information for tax purposes, which also includes a due-diligence duty and certain reporting requirements applicable to financial institutions that operate within the jurisdiction of countries that enter into the relevant bilateral agreements.
- In light of the increase in the risks described above, and in accordance with Proper Conduct of Banking Business Directive 411, the board of directors of a banking corporation must examine and update its policy and ensure that management updates its procedures and controls accordingly, with respect to activity with foreign residents.
- The draft states that in order to enable banks to cope with customers who represent a risk to the bank, based on the established criteria, banks will be permitted to refuse to provide banking services to a customer who does not cooperate with the bank in the required manner in order to implement its policy in this area, and such refusal shall be considered reasonable refusal.
The relevant functions at the Bank have been informed of the details of this amendment, and the Bank is monitoring the process of publication of the amendment to the directive.
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Draft Proper Conduct of Banking Business Directive on Cyber Risk Management
On June 2, 2014, the Supervisor of Banks published a new draft Proper Conduct of Banking Business Directive concerning the management of cyber risks. The draft directive includes regularization of the Supervisor of Banks' requirements and expectations of banking corporations in the area of cyber risk management. The draft directive establishes a structured but flexible framework for cyber risk management.
The new draft addresses the following matters, among others:
A. Establishment of a cyber defense strategy; establishment of a cyber risk management framework; formulation of a work plan.
B. Specification of the duties of the Board of Directors and senior management, including the duties of the head of cyber defense, in order to maintain effective defense against cyber threats.
C. A requirement to conduct an orderly risk-management process, including risk identification, risk assessment, establishment and evaluation of cyber defense controls, and reporting on risks.
D. Control objectives and cyber defense controls.
The Bank is studying the draft and preparing for its implementation.
Legislative Memorandum on the Prohibition of Front Running (Legislative Amendments), 2014
In March 2014, the Israel Securities Authority published a bill concerning the prohibition of front running, aimed at prohibiting front-running activities by managers of others' finances and by the employees thereof.
The proposed amendment concerns three main subjects:
A. Prohibition of front running – Prevention of front running by financial intermediaries and the employees thereof. Front running is the execution of an action in a security based on advance knowledge of the expected action of another in securities. According to the proposed phrasing, a financial intermediary who performs an action in a security in the knowledge of a future action to be executed in the same security or in a related security by a financial intermediary, an employee thereof, or a licensed individual, for a client or for the account of the financial intermediary or by a client, information regarding which is important to a reasonable investor
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considering buying or selling the security, and one who provides information regarding such an action, shall be considered to be performing a forbidden front-running activity, punishable by five years' imprisonment or a fine of approximately NIS 1 million for an individual or NIS 5 million for a corporation.
B. Prohibition on the use of an opinion obtained from an insider at a company – Pursuant to the bill, anyone who uses an opinion obtained from an insider at a company is using insider information, if the other foundations of the offense detailed in the bill are fulfilled.
C. Limits on holdings of securities and execution of transactions in securities – Another goal of the amendment is to create a consistent arrangement with respect to limits on holdings and transactions in securities, in investment marketing and in investment portfolio management.
The Bank is following the progress of the legislation process.
Transactions with Controlling Shareholders A. Definition of Exceptional and Negligible Transactions with Controlling Parties Definition of “Exceptional” and “Negligible” Transactions According to the Securities Regulations (Periodic and Immediate Reports), 1970 (hereinafter- the "report regulations") there is an obligation to issue an immediate report and include information in periodic reports with regard to all transactions with controlling shareholders or in the approval of which controlling shareholders have a personal interest (hereinafter: "transactions with controlling shareholders"). Pursuant to the regulations, the reporting duty does not apply to transactions belonging to a type of transactions determined to be negligible in the financial statements of the Bank.
1. “Exceptional Transaction" - Pursuant to the law, the Bank shall file immediate and periodic reports of any exceptional transaction which it executes. According to the position of the Bank, an “exceptional transaction” with a controlling party or one in which a controlling party has a personal interest shall be defined as a transaction meeting the following criteria:
A transaction which is not in the ordinary course of business of the Bank, or which is not at market terms, or a transaction which may have a material effect on the profitability, assets, or liabilities of the Bank. A transaction likely to have an impact on profitability, assets, or
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liabilities shall be considered a “material transaction,” according to the criteria set out below.
For this purpose, “market terms” are terms which are not preferable to the terms at which similar transactions of the same type are carried out by the Bank with persons or corporations which are not controlling parties of the Bank, or with persons in whose transactions controlling parties have no personal interest. With regard to market terms in banking transactions, the transaction shall be examined in relation to deals or transactions of the same type at similar volumes, as is common practice in examining transactions with related parties, pursuant to Directive 312 of the Supervisor (“Directive 312”). With regard to market terms in non-banking transactions, the transaction shall be examined in relation to transactions of the same type contracted by the Bank with other suppliers or third parties, as relevant, or in relation to the terms of contractual engagements proposed by suppliers or third parties against which the terms of the transaction are examined. In cases in which it is difficult for the Bank to obtain corresponding offers of terms of a transaction, market terms shall be examined based on the opinion of a professional consultant in the field of the contractual engagement, who will compare the terms of the transaction or the proposal to similar transactions that may be contracted in the relevant market at the same time. It is hereby clarified that this refers to a transaction executed in the ordinary course of business of the Bank, where a market exists for transactions of that type in which similar transactions are executed.
The criteria for market terms specified in the first part of the definition of “market terms”, as adopted by the Bank, were established by the Supervisor in Directive 312 with regard to related parties of the Bank, and also apply to controlling parties of the Bank. In addition, transactions with related parties are approved by the Audit Committee of the Bank, and the Audit Committee must determine that the transaction is at market terms, according to the criteria described above.
The criteria established by the Supervisor are suitable for the examination of the compliance of transactions with market terms, under the circumstances noted.
Monetary volume of “exceptional transactions” – According to the position of the Bank, a transaction with a monetary volume equal to or greater than the monetary volume listed below, as relevant, shall be considered a “material transaction.”
2. Banking transactions -
2.1 Material credit transaction, including off-balance-sheet credit:
For this purpose, a "material transaction" is a credit transaction the amount of which is greater than 3.33% of the capital of the bank, as defined in the directives of
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the Supervisor of Banks, Minimum Capital Ratio. A "credit transaction" is the provision of credit or a credit facility (including transactions involving credit and constituting off-balance-sheet items, such as transactions in derivatives, guarantees, and commitments to extend credit) including the acquisition of bonds constituting a substitute for credit, the volume of which, for this purpose, is determined according to the definition of “indebtedness” in Directive 312. The measurement for this purpose is performed according to the total credit of each controlling party (with regard to the relevant controlling party, the total credit shall also take into account credit to companies in which the controlling party has holdings of more than 10%, and credit to relatives of the controlling party).
2.2 Material deposit transactions: Each deposit or renewal of a deposit shall constitute a separate transaction for this purpose.
For this purpose, a "material transaction" is a transaction the amount of which is greater than 2% of total deposits from the public according to the most recent financial statements of the bank, published prior to the execution of the transaction ("The Recent Annual Financial Statements").
2.3 Material transactions in securities or transactions in foreign currency (which are not credit transactions or deposit transactions, as detailed above):
For this purpose, "material transaction" is a securities transaction or a foreign currency transaction, which the amount of the fee collected in respect of the transaction is equal or greater than 2% of the annual total non-interest income (net of non-interest financing income and financing fees) according to the most recent annual financial statements of the bank.
2.4 "Negligible transaction" - Pursuant to the instructions given by the Israel Securities Authority to the Bank (in advance of the approval of its prospectus in September 2009), with regard to non-exceptional banking transactions with controlling parties, the Bank shall report in its prospectus, as well as in periodic reporting only, referring solely to the balances of credit and balances of deposits, according to the format shown in the tables below, as of the reporting date noted for each table. In addition, beginning with the annual financial statements for 2009, the Bank is required to disclose the highest balance of deposits of each controlling party for the period (for this purpose, the controlling party include companies in which the controlling party holds more than 10% and relatives of the controlling party; the “Controlling Party Group”), and, to the extent required by the ISA, the disclosure of
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the balance of credit (cumulative) of the relatives of the controlling party shall be broken down in the credit table.
3. Non-banking transactions - 3.1. “Material transaction” – A non-banking material transaction is a nonrecurring transaction, or a continuous transaction (several transactions of identical essence with the same company), or several transactions executed in accordance with a framework agreement, with a cumulative amount over one calendar year equal to or greater than 2% of the annual total operating and other expenses according to the most recent annual financial statements.
3.2. A “negligible transaction,” according to the definition of the Bank, is a transaction in the ordinary course of business, at market terms, in an amount not exceeding the following amounts:
A nonrecurring transaction in an amount not greater than 0.1% of the Banks' total supervisory capital, in accordance with Proper Conduct of Banking Business Directive No. 202, according to the most recent annual financial statements of the Bank published recently, prior to the execution of the transaction; or a continuous transaction (several transactions of identical essence with the same company), or several transactions executed in accordance with a framework agreement, with a cumulative amount over one calendar year not greater than 0.75% of the annual total operating and other expenses according to the most recent annual financial statements of the Bank.
B. Details of the facts, justifications, and explanations in the determination of definitions and parameters with regard to "negligible transactions":
With regard to the monetary volume of non-banking transactions, for nonrecurring transactions, the rate (0.1%) of the Banks' total capital is similar to the minimum amount established in Proper Conduct of Banking Business Directive No. 312 at the approval date of the criteria and the definitions by the Audit Committee as required in 2009, and with regard to continuous transactions or transactions under a framework agreement, in view of the fact that these are transactions in the ordinary course of business rather than unique transactions, the comparison of the weight or share of the transaction relative to the total relevant expenses over a period at the Bank is the most relevant criterion for this purpose, in the opinion of the Bank.
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C. Further to the foregoing, the following table summarizes data on banking transactions with controlling parties1:
1. Credit transactions Data as at December 31, 2014 (in NIS thousand)
Proprietary Guarantees to Investments by Third Parties the Bank in Issued by a Risk-Weighted Bonds Issued by Controlling Balance of Unutilized Assets Arising Companies Shareholder to Balance- Credit from Activity in Bank Controlled by a Total Companies under Details Sheet Credit Facility Derivatives* Guarantees Controlling Party Indebtedness its Control Yeshayahu Landau group and private companies under its control 116,056 - - - - 11,656 46,455 Manor group and private companies under its control 31,038 8,985 - - - 40,023 -
* Including off-balance sheet exposure in respect of derivative instruments.
- Note that the credit facility or the specific credit is approved individually for each controlling party, and the terms are established, among other matters, according to the type and volume of the transaction. - There is no problematic credit or credit in respect of which there was an allowance, within the credit balances detailed in the table. - The data listed above is in accordance with the definition of “indebtedness” in Directive 313.
2. Transactions in deposits The balances of deposits with the Bank of all of the controlling shareholders totaled NIS 423 million on December 31, 2014, according to the division to the controlling shareholder groups: group A – NIS 318 million, group B – NIS 105 million. The highest balance during 2014 is as follows: group A NIS 318 million, group B – NIS 122 million.
These amounts do not include deposits managed by institutional entities controlled by the controlling parties at the Bank for insured customers, provident funds, and mutual funds.
1 As of October 29, 2012, Mr. Shlomo Eliyahu and Mrs. Chaya Eliyahu ceased to have control of the Bank - see Section "Investments in the Bank's Capital and Transactions in its shares".
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Most of the amounts of the deposits of the balances noted above as of December 31, 2014 are deposited in deposits of the types listed below, with interest rates within the range of the minimum and maximum rates noted:
Most significant types of deposits
Minimum Maximum Type of Deposit Annual Annual Interest Interest Weekly fixed-rate deposit in NIS 0.69% 1.05%
3. Other banking transactions The following table lists benefits in rates of the principal fees for each group of controlling shareholders1:
Concentration of the principal fees
Fee's Level as of December 31, 2014 (according to the Bank's Maximum Minimum Name of Fee price list) Benefit Rate Benefit Rate Account transactions Payment of NIS 1.42 per recording transaction 100% 0% Transfer/deposit to an Payment of NIS 43 for account in another bank transfer/deposit 100% 0%
Deposit management fees Payment of 0.15% for a quarter 100% 0% (securities custody fees) minimum NIS 6 for security and tradable on Tel-Aviv Stock NIS 39 for deposit Exchange (including non- tradable securities, certificates in mutual funds and bonds).
1. The benefit rates are not at preferable terms relative to rates of benefits granted to other similar customers who are not part of the groups of controlling parties. The Bank periodically approves the rates of the benefits on fees. The rates of the benefits approved at the reporting date appear in the fee table above.
D. Details of exceptional transactions with controlling parties and additional transactions with controlling parties: 1. For details regarding the decision of the Banks' Board of Directors concerning the application of the general meeting's decision on November 28, 2013, to approve identical remuneration for external directors of the Bank and the rest of the Board members (excluding the Chairman of the Board of Directors), see Note 21.E.1 to the financial statements and Immediate Report from October 30, 2014 (reference 2014-01-184668). The approved remuneration is in amounts that are detailed in the aforesaid decision of the general assembly, for directors (excluding the Chairman of the Board of Directors)
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including external directors, controlling shareholders and their relatives, which shall be appointed from time to time as directors of the Bank.
2. For details regarding the acquisition of a directors' and officers' (D&O) liability insurance policy in the Bank and in subsidiaries, see Note 18.C.17 to the financial statements and see the Banks' immediate report from September 10, 2014 (reference 2014-01-155259)
3. Regarding the approval of remuneration for Mr. Izaac Manor for his tenure as a director at the Bank see Note 21.E.2 to the financial statements and Immediate Report of the Bank regarding the results of the general meeting from October 26, 2014 (reference 2014-01- 181227)
4. Regarding the decision of the general meeting of the Bank concerning indemnification for office holders (including directors who are controlling shareholders of the Bank or someone whom the controlling shareholders of the Bank might have a personal interest in committing to indemnify him) see Notes 18.C.13 – 18.C.14 to the financial statements. Also see Immediate Reports concerning changes in the Banks' regulations concerning indemnification for office holders, from November 1, 2012 (reference 2012-01-268998) and from February 7, 2013 (reference 2013-01-032415).
4. Banking transactions, whose details are listed cumulatively and by controlling party groups – see Paragraph C of this Section, above.
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Community Activity and Donations The employees, management, and the Board of Directors of the Bank see an importance in the Banks' involvement in the community and are committed to activity on behalf of the community and society. This commitment is expressed through a variety of community activities performed by the Bank’s employees, and in projects expressing involvement and the promotion of weak populations in the Israeli society.
In addition, the Board of Directors has determined a donation policy. The Donation Committee, headed by the CEO, acts to implement the policy and allocates donations to a variety of entities and organizations, as a mean of supporting matters of society, community, education and health. Within this framework, the bank has supported various associations.
Beyond the Bank’s direct involvement in donating funds, the Bank assists institutions and associations working to promote special populations through encouraging the purchase of products produced by these entities who assist in the rehabilitation and employment of populations in need, and by that assist them in better assimilating into society.
Alongside the current community activity, the Bank focuses attention and resources in main projects which express the Banks' involvement in the community. In the past, the Bank had a collaboration agreement with “Kav Hazinuk”, an association working to promote leadership and excellence among teenagers, and assisting teenagers with a high potential in leadership from across the country. Today the Bank undertook the project "Ametz Lohem" in which it adopts three Navy units. This activity began in 2014 and is expected to continue in the coming years.
Aside from this activity, the Bank keeps an active connection to various factors in areas of activity of the branches, and in this framework, branches of the Bank initiate activities for their surrounding population, from time to time.
The Bank’s involvement in the community is also expressed in the fields of arts and culture. In this framework, we continue to hold the “Union Gallery” project – a series of changing art exhibitions displayed in the some of the Bank’s branches, and which provide exposure for local artists living near the branch. Union Gallery acts as a unique connection between artists, municipalities (who usually welcome such exhibitions), customers, employees and the general public coming to be impressed by the exhibitions within the walls of the Banks' branches.
The direct monetary contribution in 2014 amounted, as aforesaid, to NIS 0.5 million.
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Disclosure Regarding the Internal Auditor
Mr. Yehuda Orbach ended his job as Chief Internal Auditor of the Bank and its subsidiaries on
March 31, 2014. For details regarding Mr. Yehuda Orbach, see Section "Disclosure Regarding the
Internal Auditor" in the Banks' annual report for 2013. The Chief Internal Auditor of the Bank and its subsidiaries (excluding Union Issuance Ltd.) as of April 1, 2014 is Dr. Akiva Sternberg, a Deputy
General Manager at the Bank. Dr. Sternberg has a Ph.D. in business management from Bar-Ilan
University, a M.S.M in business management from Ben-Gurion University/ Boston University and a
B.A. in economics from the Johns Hopkins University. Until March 17, 2014, Dr. Sternberg served for seven years as Head of Controls and Risk Management Department and Chief Risk Officer
(CRO) at the Bank. Before that, Dr. Sternberg served as Head of the Investments Division (today
Financial Management Division) at the Bank (between 2004 and 2007). Dr. Sternberg served as a director at the Stock Exchanges' Maof Clearing House and as an alternate director at the Stock
Exchanges' Board of Directors and following his appointment as Internal Auditor, he ceased to serve in these roles.
The Chief Internal Auditor is an employee of the Bank and has experience both in the business field and in the control field and meets the conditions specified in Section 3(A) of the Internal Audit Law, 1992 ("Internal Audit Law"), excluding the condition stated in Section 3(A)(5) to the aforesaid law (participation in a professional education program) . However, the appointment of Dr. Sternberg was approved by the Supervisor of Banks, pursuant to his authority according to Section 14.E.(C)(1) to the Banking Ordinance, 1941, which states that notwithstanding the aforesaid in Section 3(A)(5) to the Internal Audit Law, in exceptional cases, the Supervisor is entitled to approve the appointment of an Internal Auditor which doesn't meet the provisions in that section, if he finds that he has significant experience in senior positions in the areas of activity of the banking corporation, and he committed to participating in an aforesaid education program in that section as soon as possible after his appointment. In addition, the Chief Internal Auditor meets the terms stated in Section 146(B) of the Companies Law, and Section 8 of the Internal Audit Law and has no material business relationships or other material relationships with the Bank or with any entity related to the Bank. Internal Audit Unit employees also comply with the directives of Section 8 of the Internal Audit Law. The Internal Auditor operates by virtue of the Banks' Board of Directors' letter of appointment (charter). The letter of appointment regulates his job and authority.
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Appointment Method and Organizational Hierarchy ON November 12th, 2013 the Audit Committee approved and on November 22nd, 2013 the Bank's Board of Directors approved (later on the subsidiaries' Boards of Directors also approved) the appointment of Dr. Sternberg, in light of his education and skills and in light of his rich experience in senior positions at the Bank, all as detailed above, during which Dr. Sternberg gained knowledge, understanding and deep familiarity with the work processes at the Bank, the Banks' activity fields and the control and audit procedures at the Bank. The organizational supervisor of the Chief Internal Auditor is the Chairman of the Board of Directors of the Bank.
Internal Audit Work Plan Internal auditing at the Bank follows a multi-year work plan that presents the entities and issues to be audited during the coming four years. The multi-year work plan is based on a comprehensive risk assessment carried out by the Internal Audit Unit at all units of the Bank. The survey is updated routinely by the Internal Audit Unit and compared with risk assessments performed by the management of the Bank. The annual work plan is derived from the Internal Audit Unit’s multi-year work plan; the annual work plan of the Bank; issues submitted for examination by the Board of Directors, the Audit Committee, and the management of the Bank; and the requirements of government agencies, including the Bank of Israel. The work plan also encompasses the Bank’s subsidiaries. In addition to the foregoing, the internal audit conducts an independent review of the ICAAP document. As part of this process, the audit covers a very broad range of topics to be reviewed and audited. Some of these areas are examined periodically. Other areas are integrated into the multi-year work plan of internal auditing (mainly those related to corporate governance).
The work plan is discussed and approved by the Board of Directors of the Bank, after the Audit Committee has discussed the plan and recommended that the Board of Directors of the Bank approve it. The work plan grants the Chief Internal Auditor the discretion to diverge from the plan, subject to advance authorization by the Audit Committee.
Within the agreement for the provision of computer and operational services between Bank Leumi and Union Bank, the Internal Audit Unit of the Bank receives findings from the audit reports, for its perusal, in respect of Bank Leumis' information technology that relate to the services provided to the Bank. A process has also been established for the immediate transfer of information referring to the Bank in exceptional cases in which the Internal Audit Unit at Bank Leumi reports on material failures or defects to the Audit Committee of Bank Leumi.
Average Number of Positions in 2014 Chief Internal Auditor 1 Employees of the Internal Audit Unit at the Bank 18 Outsourcing * 3 * Equal to approximately 3 positions. - 202 -
This calculation does not include the resources allocated for audits in the area of information technology, which are performed by Bank Leumi for the systems operated by Bank Leumi and used by Union Bank.
Performance of Audits Internal auditing is carried out in accordance with the Internal Audit Law, the Banking Ordinance, the Banking Rules (Internal Auditing), Proper Conduct of Banking Business directives, and including Proper Conduct of Banking Business Directive No. 307 regarding the internal audit function that was published recently, individual guidelines of the supervisor of Banks and the professional guidelines of the Chamber of Internal Auditors in Israel, which are based on international guidelines for internal auditors. The Audit Committee holds discussions from time to time concerning risk mapping and work procedures in internal auditing, with the aim of ensuring that the auditing is performed at the required volume and frequency, in compliance with professional standards.
Access to Information The Internal Auditor is granted free access to all existing information at the Bank, as stipulated in Section 9 of the Internal Audit Law - 1992, including continuous unmediated access to the Bank’s information systems, including financial data.
Reports of the Chief Internal Auditor Each audit report is submitted in writing to the Chairman of the Board of Directors, the Chairman of the Audit Committee, and the CEO. A summary of each report is brought before the Audit Committee, which usually convenes once a month, for discussion. In cases of material reports or reports with exceptionally serious findings, the full report is brought before the committee. Likewise, audit reports that the Audit Committee believes are important to be presented in the plenum of the Board of Directors, after receiving the internal auditor's recommendation, are presented to the Board of Directors' plenum.
Following conclusion of the discussion in the Audit Committee, the Chief Internal Auditor monitors any faults until resolution. As part of the monitoring process, the uncorrected defects are examined approximately once every six months by the management of the Bank, and subsequently by the Audit Committee, in order to make sure that the defects are repaired correctly and in appropriate periods of time. In addition, in accordance with the Proper Conduct of Banking Business Directive No. 307, the Internal Auditor submits semi-annual and annual reports on the performance of the auditing work plan, semi-annual and annual lists of all audit reports in the reported year, and a report summarizing internal audit activity, to the Audit Committee. Discussions of the semi-annual reports for 2014 were held on August 11, 2014 and February 11, 2015.
Board of Directors’ Evaluation of the Activity of the Chief Internal Auditor In the opinion of the Board of Directors and the Audit Committee, the volume, nature, and continuity of the activity of the Chief Internal Auditor and the internal audit staff and his work plan, are reasonable under the
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circumstances, and are sufficient to achieve the objectives of internal auditing at the Bank and its consolidated subsidiaries.
Remuneration The following table lists payments to the Chief Internal Auditor in 2014 (in accordance with the details required in the table of high wage recipients at the Bank):
NIS thousands Remuneration for services(1), (2): Salaries - wages 1,108 Compensation, remuneration, advanced-study fund, 451 vacation, national insurance and usage value Supplementary provisions for related expenses due to changes in wages in the accounting year 22 (3), (4) (77) Bonus 1,504 Total salaries
1. The amounts of the compensation are in terms of cost to the bank, with the exception of wage tax. These amounts are included in the Statement of Profit and Loss, under the item “Salaries and incidental expenses.” There is no additional compensation for services – management fees, consulting fees, commissions, or others. 2. There are no other items of compensation not for services. There are no interest-rate benefits in respect of deposits, as these interest rates are not superior to those paid to other customers of the Bank making deposits on a similar scale, at similar linkage and similar settlement terms. Benefits in respect of other banking transactions were not included, because the amount of these benefits is immaterial and does not exceed a total of NIS 50 thousand per year, and the benefits are granted at the same terms and rates to all employees of the Bank.
3. An estimated negative bonus which was offset from the balance of bonuses, whose payment was postponed from previous years, was included – see details in Paragraph G(2) of the Section "Remuneration of Interested Parties and Senior Officers".
4. Note that bonuses that were paid during 2014 on behalf of previous years (2011-2013) according to spread payments in accordance with the remuneration plans were not included in the number above. See Paragraph G(3) of the Section "Remuneration of Interested Parties and Senior Officers".
5. For details regarding loans on beneficial terms and loans granted on regular terms see Paragraph (H) in Section "Remuneration of Interested Parties and Senior Officers".
6. For details regarding the employment conditions of Dr. Sternberg see Paragraph (E) in Section "Remuneration of Interested Parties and Senior Officers".
The Board of Directors believes that the remuneration of the Chief Internal Auditor has no effect on his professional judgment.
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The Board of Directors Information regarding the Directors of the Bank is set out below:
1. Name of Director: Mr. Zeev Abeles, Chairman of the Banks' Board of Directors
Identification No.: 4333126
Date of Birth: March 8, 1947
Address for court documents: Sokolov 15, Raanana
Citizenship: Israeli
Role: Chairman of the Board of Directors
Membership in committees of the Chairman of the following committees of the Board of Directors: Board Board of Directors: of Directors' Credit Committee; Urgent Credit Approval Committee; Credit to the Diamond Industry Committee; Risk Management Committee; Budgetary Follow-up Committee; the Compliance and Regulation committee; and the Non-Financial Investments Committee.
External director under the proper No conduct of business directives and/or under the provisions of the companies law:
Independent director under the No provisions of the companies law:
Has an accounting and financial Has accounting and financial expertise. expertise or a professional qualification:
Employee of the Bank, its subsidiary, Employed on the corporation as Chairman of the Board of Directors a related company or an interested party:
The day he began serving as a November 1, 1999 director of the bank:
Education: CPA, B.A. in Economics from the Hebrew University of Jerusalem; B.A. in Accounting from Tel Aviv University.
Occupation during the last five years: Chairman of the Board of Union Israel Bank Ltd., Director at the following companies: Zofnat Consulting Assets and Management (2002) Ltd.; Tchelet (Tel Aviv-Herzliya) Coast Development Co. Ltd.; Joint development (Hof Hatchelet – Wilf) Ltd. Edgar Investments and Development Ltd., in the Tel Aviv-Jaffa Economic Development Authority Ltd. Chairman of the Administrative Board of the Open University (voluntarily). Former director of Melisron Ltd. and Tzur Shamir Ltd,
Other corporations in which he Director at the following companies: Zofnat Consulting Assets and serves as a director or officer: Management (2002) Ltd.; Tchelet (Tel Aviv-Herzliya) Coast Development Co. Ltd.; Joint development (Hof Hatchelet – Wilf)
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1. Name of Director: Mr. Zeev Abeles, Chairman of the Banks' Board of Directors Ltd. Edgar Investments and Development Ltd.; Tel Aviv-Jaffa Economic Development Authority Ltd. Chairman of the Administrative Board of the Open University (voluntarily).
A family member of an interested No party of the Bank:
A director that the bank sees as Yes possessing an accounting and financial expertise in order to meet the minimum number that the Board of Directors determined according to Section 92(a)(12) of the companies Law-1999 "The Companies Law"):
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The Board of Directors Information regarding the Directors of the Bank is set out below:
2. Name of Director: Mr. Izaac Manor
Identification No.: 049474356
Date of Birth: March 17, 1941
Address for court documents: Hagderot 26, Savyon
Citizenship: Israeli and French
Role: Director
Membership in committees of the Credit Committee of the Board of Directors, Risk Management Board of Directors: Committee and Budget Monitoring Committee
External director under the proper No conduct of business directives and/or under the provisions of the companies law:
Independent director under the No provisions of the companies law:
Has an accounting and financial Has accounting and financial expertise. expertise or a professional qualification:
Employee of the Bank, its subsidiary, No a related company or an interested party:
The day he began serving as a June 30, 2014 director of the bank:
Education: Executive M.B.A. – business management majoring in strategic management from the Hebrew University of Jerusalem.
Occupation during the last five years: Chairman of the Board of Directors of the following companies: David Lubinski Ltd., Odit Investments Ltd., Adamit Industries and Vehicle Services in Jerusalem Ltd., Price lease Management Vehicle Fleets Management Ltd., Lubex Trading Ltd., I.M.C. (Castings) Ltd.,Lubit Insurane Agency (1997) Ltd. D.T.M.S. Investments Ltd., Manor Holdings B.A. Ltd., Car East Vehicke Import Ltd., Euroman Investments Ltd., Manor Investments – I.D.B. Ltd., Euroman Auto Motive Ltd., D.L.B. Moto Sport Ltd. Prim-rent car Rental Ltd., Morgan Rimon Construction Ltd., Auto Dynamic Israel Ltd. (inactive), Lynx Capital Ltd. and Apollon Ventures Ltd. Director at the following companies: Lubinski Garage Tel Aviv Ltd. (in voluntary liquidation), David Lubinski Properties (Holdings) 1993 Ltd., Cheroudar Properties Ltd. and Olimpia Morgan Projects Ltd.
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2. Name of Director: Mr. Izaac Manor Member of the administration committee, the Board of Trustees and the Working Committee of the Hebrew University in Jerusalem, the honorary president of the commerce chamber Israel France. Former deputy of the Chairman of the Board of Directors of I.D.B. Holdings Ltd. Former director in the following companies: Nesher Israeli Cement Enterprises Ltd. Cellcom Israel Ltd., Koor Industries Ltd. American Israeli Paper Factory Ltd., Clal Industries and Investments Ltd. Shufersal Ltd, Discount Investment Corporation Ltd., Assets and Building Company Ltd., Mashav Initiation and Development Resource Ltd., I.D.B. Holdings Company Ltd., I.D.B. Development Company Ltd. Clal Insurance Enterprises Holdings Ltd. and Machteshim Agan Industries Ltd. Deputy of the Chairman of the Board of Directors of I.D.B. Holdings Ltd.
Other corporations in which he Chairman of the Board of Directors of the following companies: serves as a director or officer: David Lubinski Ltd., Odit Investments Ltd., Adamit Industries and Vehicle Services in Jerusalem Ltd., Price lease Management Vehicle Fleets Management Ltd., Lubex Trading Ltd., I.M.C. (Castings) Ltd., Lubit Insurane Agency (1997) Ltd. D.T.M.S. Investments Ltd., Manor Holdings B.A. Ltd., Car East Vehicke Import Ltd., Euroman Investments Ltd., Manor Investments – I.D.B. Ltd., Euroman Auto Motive Ltd., D.L.B. Moto Sport Ltd. Prim-rent car Rental Ltd., Morgan Rimon Construction Ltd., Auto Dynamic Israel Ltd. (inactive), Lynx Capital Ltd. and Apollon Ventures Ltd. Director at the following companies: Lubinski Garage Tel Aviv Ltd. (in voluntary liquidation), David Lubinski Properties (Holdings) 1993 Ltd., Cheroudar Properties Ltd. and Olimpia Morgan Projects Ltd.
A family member of an interested Yes, the husband of Mrs. Ruth Manor, a controlling shareholder of party of the Bank: the Bank through David Lubinski Properties (Holdings) 1993 Ltd. and Cheroudar Properties Ltd.
A director that the bank sees as Yes possessing an accounting and financial expertise in order to meet the minimum number that the Board of Directors determined according to Section 92(a)(12) of the companies Law-1999 "The Companies Law"):
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3. Name of Director: Mr. Yeshayahu Landau
Identification No.: 4968657
Date of Birth: August 8, 1929
Address for court documents: Daniel Freish 4, Tel-Aviv
Citizenship: Israeli
Role: Director, Deputy Chairman of the Board of Directors
Membership in committees of the Member of the following committees: Fixed Assets Transactions Board of Directors: Committee, Board of Directors' Credit Committee, Urgent Credit Approval Committee and Budgetary Follow-up Committee
External director under the proper No conduct of business directives and/or under the provisions of the companies law:
Independent director under the No provisions of the companies law:
Has an accounting and financial Has professional qualification. expertise or a professional
qualification:
Employee of the Bank, its subsidiary, No a related company or an interested party:
The day he began serving as a June 15, 1993 director of the bank:
Education: High-school graduate.
Occupation during the last five years: Manager of companies and Vice Chairman of the Board of Union Israel Bank Ltd. Chairman of the Board of Directors of Hiram Landau Ltd.; CEO and Director at the following Companies: Yeshayahu Landau Holdings (1993) Ltd.; Yeshayahu Landau Properties (1998) Ltd.; Riverton Corporation (Switzerland) Ltd.; Carlton Trading (Switzerland).
Director at the following companies: Bertura Development Ltd.; Carlton Trading (Ukraine); Landlan Investments Ltd.; Hotam Hiram Management (2002) Ltd.; Langat Development Ltd; Ratio Oil Exploration Ltd.; A member of the Technions' Board of governors. Former director of Granit Hacarmel Ltd. and Hiram Epsilon Ltd.
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3. Name of Director: Mr. Yeshayahu Landau
Other corporations in which he Chairman of the Board of Hiram Landau Ltd.; serves as a director or officer: CEO and Director at the following Companies: Yeshayahu Landau Holdings (1993) Ltd.; Yeshayahu Landau Properties (1998) Ltd.; Riverton Corporation (Switzerland) Ltd.; Carlton Trading (Switzerland).
Director at the following companies: Bertura Development Ltd.; Carlton Trading (Ukraine); Landlan Investments Ltd.; Hotam Hiram Management (2002) Ltd.; Langat Development Ltd; Ratio Oil Exploration Ltd.;
Member of the Board of Governors of the Technion.
A family member of an interested Yes – the father of Yigal Landau, a director of the Bank. party of the Bank:
A director that the bank sees as No possessing an accounting and financial expertise in order to meet the minimum number that the Board of Directors determined according to Section 92(a)(12) of the companies Law-1999 "The Companies Law"):
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4. Name of Director: Mr. Haim Almog Adv.
Identification No.: 50708684
Date of Birth: July 19, 1951
Address for court documents: Beit Tzarfat Delder, Toval 5, Tel-Aviv
Citizenship: Israeli
Role: Director
Membership in committees of the Member of the following committees: Board of Directors' Credit Board of Directors: Committee, Insurance Committee, the Budgetary Follow-up Committee, and Compliance and Regulation Committee.
External director under the proper No conduct of business directives and/or under the provisions of the companies aw:
Independent director under the No provisions of the companies law:
Has an accounting and financial Has accounting and financial expertise. expertise or a professional
qualification:
Employee of the Bank, its subsidiary, No a related company or an interested party:
The day he began serving as a September 25, 2001 director of the bank:
Education: B.A. in Economics, Tel Aviv University, LL.B degree in Law, Ono Academic College, LL.M M.A. in Law, Ono Academic College
Occupation during the last five years: CEO and director of Coral Holdings (2007) Ltd.
Director in the companies: David Lubinski Properties (Holdings) 1993 Ltd. and Cheroudar Properties Ltd.
CEO in the following companies: Beit Tarfat Ltd., Dror Paz 2000 Ltd., Dror Paz Investments (2001) Ltd., I.T.N.A. Ltd. and I.T.N.A. Investments (2001) Ltd.
Other corporations in which he CEO and Director of Coral Holdings (H.C) (2007) Ltd. serves as a director or officer: Director at the following companies: David Lubinski Properties (Holdings) 1993 Ltd.; Cheroudar Properties Ltd.;
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4. Name of Director: Mr. Haim Almog Adv.
CEO of the companies: Beit Tarfat Ltd., Dror Paz 2000 Ltd., Dror Paz Investments (2001) Ltd., I.T.N.A. Ltd. and I.T.N.A. Investments (2001) Ltd.
A family member of an interested No party of the Bank:
A director that the bank sees as Yes possessing an accounting and financial expertise in order to meet the minimum number that the Board of Directors determined according to Section 92(a)(12) of the companies Law-1999 "The Companies Law"):
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5. Name of Director: Mr. Yigal Landau
Identification No.: 56467665
Date of Birth: May 13, 1960
Address for court documents: Daniel Freish 4, Tel-Aviv
Citizenship: Israeli
Role: Director
Membership in committees of the Member of the following committees: Risk Management Committee; the Board of Directors: Committee for Credit to the Diamond Industry; Fixed Asset Transactions Committee and Non-Financial Investments Committee.
External director under the proper No conduct of business directives and/or under the provisions of the companies law:
Independent director under the No provisions of the companies law:
Has an accounting and financial Has accounting and financial expertise. expertise or a professional
qualification:
Employee of the Bank, its subsidiary, CEO of Hiram Landau Ltd. and of Ratio Oil Exploration Ltd., a related company or an interested companies which Yeshayahu Landau, a controlling shareholder of party: the Bank, is of interest in them.
The day he began serving as a June 15, 1993 director of the bank:
Education: M.B.A. in Business Administration, Tel Aviv University; B.Sc. in Civil Engineering, Technion, Haifa.
Occupation during the last five years: Engineer, CEO and director at Ratio Oil Exploration Ltd.,
CEO of Hiram Landau Ltd., Director at the following companies: Proceed Venture Capital Fund Ltd.; Proseed Management Venture Capital (1999) Ltd., Hotam Hiram Management (2002) Ltd.; Langat Development Ltd. and Landlan Investments Ltd.
Other corporations in which he CEO and director of Ratio Oil Exploration Ltd., serves as a director or officer: CEO of Hiram Landau Ltd.
Director at the following companies: Proceed Venture Capital Fund Ltd., Proseed Management Venture Capital (1999) Ltd., Hotam Hiram Management (2002) Ltd.; Langat Development Ltd.; and Landlan Investments Ltd.
A family member of an interested Yes, the son of Mr. Yeshayahu Landau, a controlling shareholder and director of the Bank. party of the Bank: - 213 -
5. Name of Director: Mr. Yigal Landau
A director that the bank sees as Yes possessing an accounting and financial expertise in order to meet the minimum number that the Board of Directors determined according to section 92(a)(12) of the companies Law-1999 "The Companies Law"):
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6. Name of Director: Dr. Yaacov Lifshitz
Identification No.: 007848047
Date of Birth: July 16, 1944
Address for court documents: Hameri 49, Givataim
Citizenship: Israeli
Role: Director
Membership in committees of the Chairman of the Audit Committee and the Insurance Committee and Board of Directors: Member of the following committees: Risk Management Committee, Non-financial Investments Committee, Transactions in Fixed Assets Committee and Remunerations Committee.
External director under the proper External director under the Companies Law. conduct of business directives and/or
under the provisions of the companies law:
Independent director under the Yes provisions of the companies law:
Has an accounting and financial Has accounting and financial expertise. expertise or a professional
qualification:
Employee of the Bank, its subsidiary, No a related company or an interested party:
The day he began serving as a November 2, 2008 director of the bank:
Education: B.A. in Economics and Political Science, M. A. in Economics, the Hebrew University of Jerusalem. PhD in Philosophy, the Ben-Gurion University in the Negev
Occupation during the last five Director at the companies: Kali-Management of Pension Agreements years: Insurance Agency Ltd.; Poalim I.B.I. – Management & Underwriting Ltd.; Member of the Appointment Committee of the Company for Location and Restitution of Holocaust Victims' Assets Ltd., Guest lecturer at Ben-Gurion University in the Economics Department and in the Management and Public Policy Department.
Research associate at the Begin – Sadat Center for strategic researches in Bar Ilan University
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6. Name of Director: Dr. Yaacov Lifshitz
Former guest lecturer at Bar-Ilan University in Political Science; Guest lecturer at the School of Business Management and the Economics Department of the College of Management.
Other corporations in which he Director at the following corporations: Poalim IBI - Management and serves as a director or officer: Underwriting Ltd.; Kali – Management Of Pension Agreements, Insurance Agency Ltd., the Company for Location and Restitution of Holocaust Victims' Assets Ltd. and Guest lecturer at Ben-Gurion University in the Economics Department and in the Management and Public Policy Department.
Research associate at the Begin – Sadat Center for strategic researches in Bar Ilan University.
A family member of an interested No party of the Bank:
A director that the bank sees as Yes possessing an accounting and financial expertise in order to meet the minimum number that the Board of Directors determined according to section 92(a)(12) of the companies Law-1999 "The Companies Law"):
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7. Name of Director: Mr. Giora Morag
Identification No.: 010906709
Date of Birth: February 27, 1945
Address for court documents: Avshalom Haviv 4, Tel-Aviv
Citizenship: Israeli
Role: Director
Membership in committees of the Chairman of the Transactions in Fixed Assets Committee and member of Board of Directors: the following committees: Audit Committee; Insurance Committee, Compliance and Regulation Committee, Non-financial Investments Committee and Budgetary Follow-up Committee
External director under the proper External director under Proper Conduct of Banking Business Directive conduct of business directives and/or No. 301.
under the provisions of the companies law:
Independent director under the Yes provisions of the companies law:
Has an accounting and financial Has accounting and financial expertise.
expertise or a professional qualification:
Employee of the Bank, its subsidiary, No a related company or an interested party:
The day he began serving as a October 29, 2006 director of the bank:
Education: Studied Economics and Political Science at the Hebrew University of Jerusalem.
Occupation during the last five years: Former external director at Delta Textiles Ltd..
Other corporations in which he None serves as a director or officer:
A family member of an interested No party of the Bank:
A director that the bank sees as Yes possessing an accounting and
financial expertise in order to meet the minimum number that the Board of Directors determined according to section 92(a)(12) of the companies Law-1999 "The Companies Law"):
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8. Name of Director: Dr. Zalman Segal
Identification No.: 01387596
Date of Birth: February 23, 1937
Address for court documents: Adam Hacohen 3, Tel-Aviv
Citizenship: Israeli
Role: Director
Membership in committees of the Chairman of the Remuneration Committee and member of the Board of Directors: following Committees: Audit Committee, Credit to the Diamond Industry Committee, Insurance Committee, Compliance and Regulation Committee and Credit Committee of the Board of Directors.
External director under the proper External director under the Companies Law. conduct of business directives and/or
under the provisions of the companies law:
Independent director under the Yes provisions of the companies law:
Has an accounting and financial Has accounting and financial expertise. expertise or a professional
qualification:
Employee of the Bank, its subsidiary, No a related company or an interested party:
The day he began serving as a February 8, 2010 director of the bank:
Education: B.A. in Economics and Political Science; Certificate in Business Administration at the Hebrew University, Tel-Aviv Branch; M.B.A. in Finance; Ph.D. in Banking and Marketing at New York University
Occupation during the Director and Chairman of the Audit Committee of Alon USA {NYSEC}; last five years: Member of the Board of Trustees of Tel Hai College.
Other corporations in which he Director and Chairman of the Audit Committee of Alon USA serves as a director or officer: {NYSEC};
A family member of an interested No party of the Bank:
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8. Name of Director: Dr. Zalman Segal
A director that the bank sees as Yes possessing an accounting and
financial expertise in order to meet the minimum number that the Board of Directors determined according to section 92(a)(12) of the companies Law-1999 "The Companies Law"):
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9. Name of Director: Mr. Alberto Garfunkel
Identification No.: 012592424
Date of Birth: September 7, 1955
Address for court documents: Shapira 11/69 Ramat-Gan
Citizenship: Israeli
Role: Director
Membership in committees of the Member of the following committees: Board of Directors’ Credit Board of Directors: Committee, Urgent Credit Approval Committee, Audit Committee, and Remuneration Committee.
External director under the proper External director under the Companies Law. conduct of business directives and/or
under the provisions of the companies law:
Independent director under the Yes provisions of the companies law:
Has an accounting and financial Has accounting and financial expertise. expertise or a professional
qualification:
Employee of the Bank, its subsidiary, No a related company or an interested party:
The day he began serving as a December 7, 2010 director of the bank:
Education: Holds a B.A. degree in Economics from Ben-Gurion University.
Occupation during the last five years: Financial Advisor,
Other corporations in which he None serves as a director or officer:
A family member of an interested No party of the Bank:
A director that the bank sees as Yes possessing an accounting and
financial expertise in order to meet the minimum number that the Board of Directors determined according to section 92(a)(12) of the companies Law-1999 "The Companies Law"):
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10. Name of Director: Mrs. Micahl Marom Brikman
Identification No.: 024675746
Date of Birth: November 1, 1969
Address for: Brazil 1, Tel-Aviv
citizenship Israeli
Role: Director
Membership in committees of the Member of the Budgetary Follow-up Committee. Board of Directors:
External director under the proper External director according to Proper Conduct of Banking Business conduct of business directives and/or Directive No. 301 under the provisions of the companies law:
Independent director under the Yes provisions of the companies law:
Has an accounting and financial Has accounting and financial expertise. expertise or a professional
qualification:
Employee of the Bank, its subsidiary, No a related company or an interested party:
The day he began serving as a January 1, 2015 director of the bank:
Education: C.P.A, B.A. in business management, specialized in accounting at the College of Management
Master of Science (second degree) in Finance from Baruch College.
Occupation during the last five Director at SpecRonix Ltd. and Intercure Ltd. years: An external director at Biomedix Incubator Ltd., Naaman Group (N.O.) Ltd., I.D.O. Group Ltd., Algomizer Ltd, Levinski Ofer Ltd., (former Nature Mineral Treasures Ltd.), Barko Holdings Ltd. and Dan Public Transportation Company Ltd.
Former external director at Applicure Technologies Ltd.
Former Chief Financial Officer of Linkury Ltd. Chief Purchase, manpower and Financial Officer at Dan Hotels Ltd. and Fatal Hotels Ltd., a business partner at Daniel Doron Business
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10. Name of Director: Mrs. Micahl Marom Brikman
Consulting Ltd., senior analyst at Giza Venture Capital Fund and C.P.A at Bavely Broida – KPMG.
Other corporations in which he Director at SpecRonix Ltd. and Intercure Ltd. serves as a director or officer: An external director at Biomedix Incubator Ltd., Naaman Group (N.O.) Ltd., I.D.O. Group Ltd., Algomizer Ltd, Levinski Ofer Ltd., (former Nature Mineral Treasures Ltd.), Barko Holdings Ltd. and Dan Public Transportation Company Ltd.
A family member of an interested No party of the Bank:
A director that the bank sees as Yes possessing an accounting and financial expertise in order to meet the minimum number that the Board of Directors determined according to section 92(a)(12) of the companies Law-1999 "The Companies Law"):
During 2014, the Board of Directors held 21 meetings in plenary session and 75 meetings of its various committees.
The Board of Directors has appointed committees in the following areas, in accordance with its procedures:
a. Board of Directors' Credit Committee - following the reduction of the Board of Directors' authorities to approve credits, the main roles of the committee are to supervise the implementation of the credit policy determined by the Board of Directors, to supervise compliance with the limitations of the risk appetite and tolerance in the field of exposures to credit risk, to discuss credit requests which exceed the credit policy and to approve especially high amounts of credit according to the Banks' credit policy.
b. Credit to the Diamond Industry Committee - deals with approvals of credit to diamond merchants based on the authority it was granted in the Banks' credit policy.
c. The Audit Committee – holds deliberations among other things on the Bank internal auditor's work plan and recommend to the Board of Directors of the Bank to approve it and follows its progress. In addition, the committee holds deliberation on audit reports of various authorities and of the Auditing Accountant and Internal Auditor and conducts follow up on the treatment of these reports and responsible for monitoring the Chief
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Internal Auditor works. In addition it deliberates on transactions with interested parties pursuant to Section 5 of the Companies Law, 1999, and transactions with “related persons”, pursuant to the Proper Conduct of Banking Business Directives, and addresses additional matters, as required by law and by Proper Conduct of Banking Business Directive No. 301. Likewise, as of 2013 and as required by Proper Conduct of Banking Business Directive No. 301, the Audit Committees' roles include an examination of the Banks' annual and quarterly reports to the public and the transfer of its recommendations regarding their approval to the Banks' Board of Directors. d. Remuneration Committee –The powers and roles of the Remuneration Committee are the roles defined in section 118 of the Companies Law – 1999 (hereinafter: the Companies Law), and in Directive 301 A to Proper Conduct of Banking Business, including advising the Board of Directors about the remuneration policy for the Banks' employees and Senior Officers and updating the policy as required by the Companies Law and by Directive 301 A to Proper Conduct of Banking Business. This committee also decides whether or not to approve transactions regarding the service and employment terms of officers which are subject to the approval of the Remuneration Committee, all in accordance to the guidelines set by the Companies Law. In addition, the Committee discusses and recommends principles of the remuneration agreements of the Banks' employees (who are not Senior Officers) and payroll terms of the Banks' employees, to the Board of Directors. e. The Insurance Committee - holds deliberations on insurance proposals received by the Bank and officers of the Bank. f. Urgent Credit Approval Committee – Handles the approval of credit applications classified as urgent, according to authority levels set by the Banks' credit policy. g. Risk Management Committee – Discusses various matters in the area of risk management, including the risk document, approval of models, discussion of the results of BACK TEST, discussion of limits of extreme scenarios, and monitoring of compliance with limits set by the Board of Directors, subject to the following provisions. Notwithstanding the aforesaid, on matters which the Board of Directors is required to discuss and/or resolve upon, in accordance with the procedures for the work of the Board of Directors of the Bank, the directives of the Supervisor of Banks, or any law, the discussion shall be held and/or the resolution shall be passed by the plenum of the Board of Directors, after the committee has discussed the matter and submitted its recommendation regarding the resolution to the Board of Directors. h. Budget Monitoring Committee – Discusses matters related to monitoring compliance with the budget and objectives of the Bank, and any derived or related matters.
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i. The Compliance and Regulation Committee – The committee discusses and makes recommendations to the Board of Directors on matters relevant to compliance and regulations that have a material impact on the Bank and its conduct, in connection with the formulation, adoption, absorption, and implementation of internal enforcement plans by the Bank and routine monitoring thereof, in all matters related to the formulation and update of procedures for the work of the Board of Directors and matters related to corporate governance and aspects of corporate governance. j. The Fixed Asset Transactions Committee – Approves transactions in fixed assets executed by the Bank or by companies under its control in amounts exceeding the amount established by the Board of Directors of the Bank from time to time, subject to the Proper Conduct of Banking Business Directives. k. Non-Financial Investments Committee – Approves transactions of non-financial investment by the Bank and/or companies under its control, or the realization of such transactions, in amounts exceeding the amount established by the Board of Directors of the Bank from time to time, subject to the Proper Conduct of Banking Business Directives. l. Ad-hoc committees – are established from time to time, as needed.
The Bank’s Board of Directors has stipulated that the minimum number of directors having financial and accounting expertise, in accordance with the provisions of the Companies Law, and based on the criteria stipulated in the Companies Regulations (Conditions and Tests of a Director Having Financial and Accounting Expertise and a Director Having Professional Qualification) – 2005, will be 25% of the total number of directors serving on the Board of Directors (hereinafter: "the minimum level"). In relation to the total number of directors currently in office, ten in number, the required minimum of directors having financial and accounting expertise is three. The Board of Directors stipulated also that all members of the Audit Committee shall have the ability to read and understand financial reports and that at least two of its members will have financial and accounting expertise.
As at the date of this report, there are nine directors with the required accounting and financial expertise: Zeev Abeles, Izaac Manor, Haim Almog Adv., Yaacov Lifshitz, Yigal Landau, Michal Marom Brikman, Giora Morag, Zalman Segal and Alberto Garfunkel.
The details of each of the aforementioned directors and their credentials as financial and accounting experts are presented below:
A. Mr. Zeev Abeles - Mr. Abeles’s professional experience as Supervisor of Banks and member of the senior management of Bank of Israel, member of the Israeli Securities Authority, member of the Israel Accounting Standards Board, Chairman of the Central Securities Company Ltd., and Chairman of the Bank’s Board of Directors since November 1999. His
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membership in the Boards of Directors of various companies, his educational background in economics and accounting, and his CPA qualification grant him an understanding of business issues and enable him to understand the financial statements of the Bank in depth and initiate discussions of the manner of presentation of the financial data of the Bank.
B. Haim Almog Adv. - Mr. Almog’s professional experience as an executive at various companies, and as a director at various companies, as well as his education, which includes a degree in Economics, grant him an understanding of business issues and enable him to understand the financial statements of the Bank in depth and initiate discussions of the manner of presentation of the financial data of the Bank. C. Mr. Alberto Garfunkel – Mr. Alberto Garfunkel's professional experience as the CEO of Bank Hapoalim Switzerland and as Chairman of the Board and Director at banks and companies in the Bank Hapoalim Group, as well as his education in economics, grant him the understanding of business and the appropriate skill necessary in order to understand the financial statements of the Bank in depth and evoke discussion with regard to the manner of presentation of the financial data of the Bank. D. Mr. Yigal Landau - Mr. Landau’s professional experience as CEO of a number of companies, including Hiram Landau Ltd., Ratio Oil Exploration Ltd. and as a director of various companies, together with his education that includes a Masters degree in Business Administration, provide him with the understanding of business issues and enable him to understand the financial statements of the Bank in depth and initiate discussions of the manner of presentation of the financial data of the Bank.
E. Mr. Giora Morag - Mr. Morag's professional experience in the Bank Hapoalim group, inter alia, as CEO of the branches of Bank Hapoalim in England and as CEO of American-Israel Bank, as director in Delta Industries Galil Ltd. (until October 2009), and as Chairman of its Audit Committee, together with his education in economics provide him with the understanding of business issues and the suitable expertise needed to have an in-depth understanding of the Bank’s financial statements and initiate discussions of the manner of presentation of the financial data of the Bank.
F. Dr. Yaacov Lifshitz - Dr. Lifshitz’s professional experience as CEO of Ministry of Finance, senior Deputy CEO, Head of Credit at Israel Discount Bank, Director at Discount Bank for Industrial Finance Ltd, Chairmen of the Board and as Director in additional corporations, together with his education in economics, provide him with the understanding of business issues and the suitable expertise needed to have an in-depth understanding of the Bank’s financial statements, and initiate discussions of the manner of presentation of the financial data of the Bank.
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G. Mr. Izaac Manor – Mr. Manor's professional experience as a director at various companies in the IDB Group in 2003-2013, including as deputy chairman of the Board of IDB Holdings Ltd., and his service at Union Bank of Israel Ltd. in 1993-2011, as well as his education in business management, grant him the understanding of business and the appropriate skill necessary in order to understand the financial statements of the Bank in depth and evoke discussion with regard to the manner of presentation of the financial data of the Bank.
H. Ms. Michal Marom Brickman – Ms. Marom Brickman's professional experience as Chief Financial Officer at a group of high-tech companies in Israel and overseas, her position as a senior analyst at the financial consulting firm Giza, her education in the areas of business, accounting, and financing, and her qualification as a certified public accountant grant her the understanding of business and the appropriate skill necessary in order to understand the financial statements of the Bank in depth and evoke discussion with regard to the manner of presentation of the financial data of the Bank.
I. Dr. Zalman Segal - Dr. Segal's professional experience as Vice President and CEO of Bank Leumi USA, Chairman of Bank Leumi Romania and in senior management positions in the Bank Leumi Group, and as a director at various companies, together with his education in economics and in Business Administration, provide him with the understanding of business issues and the suitable expertise needed to have an in-depth understanding of the Bank’s financial statements, and initiate discussions of the manner of presentation of the financial data of the Bank.
The minimum level that was stipulated by the Board of Directors places the Bank in a position to meet its obligations in general, and its obligations to examine the financial position of the Bank and examine and approve the financial statements in particular, on the basis of the following reasons:
The other members of the Board of Directors, not included in the number of directors having accounting and financial expertise, possess the experience, skills and/or education required of a director having professional qualification, according to the directives concerning the determination of financial and accounting expertise and professional qualification.
Since all members of the Audit Committee in its role as a Financial Statements Examination Committee have accounting and financial expertise, and nine of the members of the Board of Directors have accounting and financial expertise, the Board of Directors has a sufficient number of directors in order to perform a pertinent, professional examination of the financial statements. On June 2, 2014, Mr. Yitzhak Zisman ended his term as a director at the Bank. On August 21, 2014, Mr. Uzi Vardi-Zer ended his term as a director at the Bank. On January 31, 2015, Mrs. Miri Lent Sharir ended her term as a director at the Bank.
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Members of Management and Senior Officers Members of Management
Mr. Israel Trau CEO
Mrs. Netta Avrahamov-Bitan Deputy General Manager; Head of Controls and Risk Management Division,
Mr. Efraim Avraham Deputy General Manager; Head of Finance Management Division
Mr. Arnon Zait Deputy General Manager; Head of Chief Accountant Division
Mr. Menachem Morag Senior Deputy General Manager; Head of Resources Division
Mrs. Edna Press-Lachisch Senior Deputy General Manager, Head of Retail Banking, Customers' Assets & Investments Advice Division
Mrs. Shevy Shemer Deputy General Manager; Head of Corporate Division
Mr. Haim Freilichman ended his term as the CEO of the Bank on February 28, 2014 and as of March 1, 2014 Mr. Israel Trau, (who started working at the Bank on February 16, 2014), is the CEO of the Bank.
On December 31, 2014, the Board of Directors resolved to appoint Ms. Ayala Hefetz to the position of deputy general manager and head of the Corporate Division of the Bank, subject to the condition that the Supervisor of Banks does not give notice of objection to the appointment, or gives notice of consent to the appointment. The beginning of Ms. Ayala Hefetz's term of service has been scheduled for April 5, 2015.
On October 29, 2014, Ms. Edna Press-Lachish, senior deputy general manager, who serves as head of the Retail Banking, Client Asset, and Advisory Division of the Bank, gave notice of her decision to resign from this position and from the Bank. In accordance with Ms. Press-Lachish's notice, the Board of Directors resolved on October 30, 2014, to appoint Ms. Shevy Shemer, who serves as head of the Corporate Division of the Bank, to the position of head of the Retail Banking, Client Asset, and Advisory Division, with her title to change to senior deputy general manager from the date of the appointment, replacing Ms. Press-Lachish in this position. The end of the term of service of Ms. Press-Lachish was set at February 28, 2015, and the beginning of the term of service of Ms. Shemer was set at March 1, 2015.
Dr. Akiva Sternberg ended his role as head of Controls and Risk Management Division and as the Bank's Chief Risk Officer (CRO) on March 17, 2014 and as of March 18, 2014, Mrs. Netta Avrahamov-Bitan is the Controls and Risk Management Division and is the Bank's Chief Risk Manager.
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Mrs. Netta Avrahamov-Bitan ended her role as head of the Chief Financial Officer Department on March 1, 2014 and as of March 18, 2014 Mr. Arnon Zait began serving as the head of the Chief Accountant Financial Officer Department.
Other Senior Officers:
Dr. Moriah Hoftman-Doron, Adv. - Deputy General Manager; Chief Legal Advisor
Dr. Akiva Sternberg - Senior Deputy General Manager; Chief Internal Auditor
Mrs. Irit Makov, Yerushalmi Adv. - Deputy Legal Advisor and Secretary of the Bank
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Information regarding the members of management is set out below: 1. Name of executive Mr. Israel Trau I.D. number: 53641775 Date of birth: December 16, 1955 Beginning of tenure: March 1, 2014 Position in the corporate, in a CEO of the corporation. subsidiary company, in a related Chairman of Union Systems Ltd and Igud company or in a holder of Investments and Enterprise (A.S.Y.) Ltd. interest : Is the executive a holder of No. interest or family member of another executive or holder of interest: Education and experience in the B.A in Humanities from Tel Aviv. Advanced studies last 5 years: for executives in financing, capital market and management in the Recanati Business Management faculty in Tel Aviv University. The C.E.O. of Bank Otzar Hahayal.
2. Name of executive Mrs. Edna Press-Lachisch I.D. number: 53582128 Date of birth: September 13, 1955 Beginning of tenure: September 1, 2010 Position in the corporate, in a Senior Deputy General Manager; Head of Retail subsidiary company, in a related Division, Customer Assets and Consulting company or in a holder of Chairman of Igudim Insurance Agency (1995) Ltd, interest : Chairman of Carmel - Mortgate & Investment Society Ltd, and Chairman at Livalov Insurance Company 1993 Ltd. Director at Igudim Ltd. Is the executive a holder of No. interest or family member of another executive or holder of interest: Education and experience in the B.A in economics and M.A in business last 5 years: administration, both from Tel-Aviv University. Head of the corporations' Business Department; Head of Retail Department, Customer Assets and Consulting of the corporation. Chairman of Igudim Insurance Agency (1995) Ltd, Chairman of Carmel - Mortgate & Investment Union Ltd, and Chairman at Livalov Insurance Company (1993) Ltd. Director at Igudim Ltd.
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3. Name of executive Mr. Efraim Avraham I.D. number: 52752078 Date of birth: September 24, 1954 Beginning of tenure: July 1, 2007 Position in the corporate, in a Deputy General Manager; Head of Financial subsidiary company, in a related Management Division company or in a holder of interest: Chairman of Union Mutual Funds Management Ltd. (Formerly A.K.N.) (until February 2014), Director at Union Issuances Ltd., Union Bank Trust Company Ltd. and at Igud Investments and Enterprise (A.S.Y.) Ltd. and C.E.O. at Igud Investments and Enterprise (A.S.Y.) Ltd. Is the executive a holder of No. interest or family member of another executive or holder of interest: Education and experience in the High school graduate. last 5 years: Deputy General Manager; Head of Financial Management Division Director in the Board of Directors of the Tel Aviv Stock Exchange, and an alternate director in the Tel Aviv Stock Exchange’s TA-25 index clearing house (until July 2014). Chairman of Union Mutual Funds Management Ltd. (Formerly A.K.N.) (until February 2014), Director at Union Issuances Ltd., Union Bank Trust Company Ltd. and at Igud Investments and Enterprise (A.S.Y.) Ltd. C.E.O. at Igud Investments and Enterprise (A.S.Y.) Ltd.
4. Name of executive Mrs. Netta Avrahamov-Bitan** I.D. number: 28610574 Date of birth: March 21, 1971 Beginning of tenure: March 18, 2014 Position in the corporate, in a Deputy General Manager; head of the Controls and subsidiary company, in a related Risk Management Division and the Chief Risk company or in a holder of Officer (CRO) of the Bank. interest: Director at Union Bank Registration Co. Ltd. Is the executive a holder of No. interest or family member of another executive or holder of interest: Education and experience in the B.B in business administration from Tel Aviv last 5 years: College of Management. Certified Public Accountant (CPA). Head of the Controls and Risk Management Division and the Chief Risk Officer (CRO) of the Bank. Director at Union Bank Registration Co. Ltd.
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** Mrs. Netta Avrahamov-Bitan ended her position as head of the Chief Financial Officer Department on March 1, 2014.
As of March 18, 2014, she began acting as head of Controls and Risk Management Department and Chief Risk Officer.
5. Name of executive Dr. Akiva Sternberg*** I.D. number: 13577895 Date of birth: August 30, 1961 Beginning of tenure: April 1, 2014 Position in the corporate, in a Senior Deputy General Manager, Chief Internal subsidiary company, in a related Auditor of the Bank. company or in a holder of interest: Is the executive a holder of No. interest or family member of another executive or holder of interest: Education and experience in the PhD in business administration from Bar-Ilan last 5 years: University, M.S.M in business management from Boston Ben-Gurion University and B.A in Economics from the Johns Hopkins University.
*** Dr. Akiva Strenberg ended his position as head of Controls & Risk Management Division and as Chief Risk Officer (CRO) on March 17, 2014.
As of April 1, 2014 began serving as the Bank’s Internal Auditor.
5. Name of executive Mr. Arnon Zait I.D. number: 28420768 Date of birth: February 3, 1971 Beginning of tenure: March 18, 2014 Position in the corporate, in a Deputy General Manager, Chief Financial Officer subsidiary company, in a related and head of the Chief Financial Officer Division company or in a holder of interest: Is the executive a holder of No. interest or family member of another executive or holder of interest: Education and experience in the CPA, has a B.A. in Economics and Business last 5 years: Management from Bar Ilan University. Has an M.B.A. in Business Management from the Hebrew University. Deputy Director General, Deputy General Manager and head of the Finance Division in the Bank of Jerusalem between 2008-2013.
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6. Name of executive Mr. Menachem Morag I.D. number: 050744226 Date of birth: July 2, 1951 Beginning of tenure: June 1, 2006 Position in the corporate, in a Senior Deputy General Manager; Head of Resources subsidiary company, in a related Division. company or in a holder of Chairman of Union of Redundancy Ltd. (formerly interest : Union Provident Funds) and Chairman of Igudim Ltd. Director at and Igud Investments and Enterprise (A.S.Y.) Ltd. and at Union Systems Ltd. Is the executive a holder of No. interest or family member of another executive or holder of interest: Education and experience in the B.A in social science from the Open University, last 5 years: M.A in political science from Haifa University, graduate of internal audit from Tel Aviv College and economics and accounting at Montgomery MD. Head of Resources Division in the corporation. Chairman of Union of Redundancy Ltd. (formerly Union Provident Funds) and Chairman of Igudim Ltd. Director at and Igud Investments and Enterprise (A.S.Y.) Ltd. and at Union Systems Ltd.
7. Name of executive Mrs. Shevy Shemer **** I.D. number: 059030957 Date of birth: September 1, 1964 Beginning of tenure: September 1, 2010 Position in the corporate, in a Deputy General Manager; Head of Corporate subsidiary company, in a related Division. company or in a holder of interest: Chairman of Igud Leasing Ltd. and director at Igudim Ltd. Is the executive a holder of No. interest or family member of another executive or holder of interest: Education and experience in the B.A in industrial engineering and management – last 5 years: BSC, M.A in business administration, both from Ben Gurion University of the Negev. Head of Corporate Division of the corporation. Former head of central Israel region’s business center – Commercial department in Bank Hapoalim Ltd. Chairman of Union Leasing Ltd. and a director at Igudim Ltd.
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**** On October 30, 2014 the Board of Directors of the Bank decided that Mrs. Shevy Shemer would be appointed as head of the Retail Banking, Customers' Assets & Investments Advice Division and that her description will be updated to Senior Deputy General Manager from the date of her appointment, and that she'll replace Mrs. Edna Press-Lachisch. The date of the end of Mrs. Edna Press-Lachisch's tenure is February 28, 2015 and the date of the beginning of Mrs. Shemers' tenure is March 1, 2015.
Following are details on other executives in the Bank: 8. Name of executive Dr. Moriah Hoftman Doron Adv. I.D. number: 24517070 Date of birth: December 9, 1969 Beginning of tenure: September 1, 2009 Position in the corporate, in a Deputy General Manager; Chief Legal Advisor, subsidiary company, in a related responsible for the prohibition of money laundering company or in a holder of and in charge of enforcement in the field of interest: securities. Is the executive a holder of No. interest or family member of another executive or holder of interest: Education and experience in the LL.B, PhD in a direct program, both in law, from last 5 years: Bar-Ilan University. Certified attorney. Chief Legal Advisor of the corporation, responsible for prohibition of money laundering and in charge of enforcement in the field of securities.
10. Name of executive Mrs. Irit Makov, Yerushalmi Adv. I.D. number: 23018658 Date of birth; June 23, 1967 Beginning of tenure: December 10, 2007 Position in the corporate, in a Secretary of the Bank and Deputy of the Chief Legal subsidiary company, in a related Advisor. company or in a holder of interest: Is the executive a holder of No. interest or family member of another executive or holder of interest: Education and experience in the L.LB from Tel Aviv University and M.A in business last 5 years: management from Bar Ilan University. Certified Attorney. Secretary of the Bank and Deputy of the Chief Legal Advisor of the corporation. Director at Madanes Holdings Ltd.
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Disclosure Regarding the Procedure for Approval of the Financial Statements The Board of Directors of the Bank is the organ charged with overarching control at the Bank and with the approval of its financial statements.
The financial statements are prepared by the Chief Accountant Division, headed by Mr. Arnon Zait, the Chief Financial Officer. As part of the process of preparing the financial statements, preliminary discussions are held with the members of management of the Bank and other senior employees with regard to the matters under their responsibility. In addition, the draft of the financial statements is discussed with the CEO, Mr. Israel Trau, and with the Chairman of the Board of Directors, Mr. Zeev Abeles.
Within the implementation of Article 302 of the Sarbanes Oxley Act (hereinafter- “SOX”), the principal processing and preparation processes of the financial statements were mapped, and risks and controls related to the mapped processes were mapped as well. Article 404 of the SOX took effect as of the annual reports for 2008. This article sets forth directives with regard to management’s responsibility for the internal control over financial reporting (see the Section “Controls and Procedures”). At the end of each quarter, all those performing controls confirm that the controls have been performed to the Head of SOX at the Chief Accountant Division. In addition, the relevant officers sign a declaration before the CEO and the Chief Accountant stating that based on their knowledge, the reports under their responsibility contain no misrepresentation of material facts, and no material presentations of facts are missing which are necessary in order for the presentations included, in light of the circumstances under which such presentations were included, not to be misleading with regard to the period covered in the reports, and that the reports fairly reflect, in all material aspects, the topics contained therein.
Ongoing consultations with the external auditors are conducted as needed during the period of preparation of the financial statements. In addition, discussions are held each quarter and attended by the external accountants, the CEO, the Chief Accountant, the head of the Corporate Division, and the head of the Financial Management Division (as needed), on material issues relevant to that quarter.
When preparation of the financial statements is completed, a “Disclosure Committee” is convened, consisting of members of the management of the Bank and other senior executives. The committee conducts a preliminary discussion of the draft of the financial statements. Minutes of this meeting are submitted to the Audit committee in the detailed preliminary discussion of the draft financial statements, as described below. As of 2014, the appropriateness of the classification and the allowances for credit losses, are discussed also with the Chief Risk Officer.
Each quarter, before the discussion of the financial statements by the Board of Directors, the Audit Committee of the Board of Directors convenes for at least two meetings. The first meeting is mainly devoted to a discussion of allowance for credit losses, the volume of problematic debts, the fair value of the financial instruments and provisions for impairment of an-other-than-temporary nature of - 234 -
corporate bonds in the available-for-sale portfolio. The CEO, the head of the Corporate Division, the Chief Risk Officer, head of the Credit Control Branch, the head of the Special Credit Department, the head of the Financial Management Division, the head of Risk Management Division, the Chairman of the Board of Directors and the external auditors participate in this discussion. In addition, accounting policies in critical issues and critical accounting estimates are discussed annually by this committee pursuant to Pillar III of Basel (when there is a material change a discussion is conducted in the quarter in which the change occurred).
In its second meeting the Committee discussed in detail the draft of the financial statements and the Board of Directors’ report, the internal controls related to the financial reporting and the completeness and adequacy of the disclosure made in the financial statements. The Chairman of the Board of Directors, the CEO, the Chief Accountant, the external auditors and others, based on requirement, participate in this discussion.
As part of the approval of the financial statements by the Audit Committee and the Board of Directors, procedure, drafts of the financial statements and the Board of Directors’ report are delivered to the directors for review and comments, several days prior to the date of the meeting scheduled for discussion on the financial statements.
Four directors are members of the Audit Committee; all of them have accounting and financial expertise. Comments of the financial statement Review Committee, if any, are implemented, and it's recommendation for approval of the final draft are brought to discussion and approval of the Board of Directors. For details regarding the directors and their membership in the various committees, see the Section “The Board of Directors”.
In addition to the members of the Board of Directors, the CEO, the Chief Accountant and the external auditors also participate in the meeting of the Board of Directors in which the approval of the quarterly financial statements is discussed. In the meeting in which the annual financial statements are discussed, all members of the management meeting forum also participate.
At the end of the discussion, a resolution is passed with regard to the approval of the financial statements of the Bank and the authorization of the Chairman of the Board of Directors, the CEO, and the Chief Accountant to sign the financial statements. In the annual statements, Mr. Yeshayahu Landau is also authorized within his role as Vice Chairman of the Board of Directors.
Controls and Procedures According to the Public Reporting Directives, the Supervisor of Banks, Manager and the Chief Accountant of the Bank, each separately, sign a declaration regarding “Evaluation of Controls and Procedures Concerning Disclosure,” in accordance with the directives of Section 302 of the law known as the “Sarbanes-Oxley Act,” enacted in the United States (hereinafter- the “Disclosure
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Declaration”). This directive refers to the Management's responsibility to the disclosure in the financial statements, starting with the quarterly reports for June 30, 2005. The Disclosure Declaration refers to controls and procedures regarding disclosure established in order to ensure that information which the Bank is required to disclose in its financial statements is recorded, processed, summarized, and reported in accordance with the Supervisor of Banks’ Public Reporting Directives, and in accordance with additional reporting directives. The “controls and procedures concerning disclosure” are aimed, among other things, at ensuring that such information is accumulated and transmitted to the management of the corporation in a suitable manner in order to allow decisions to be made at the appropriate time with respect to the disclosure requirements.
Section 404 of the SOX Act was adopted by the Supervisor of Banks in a circular issued on December, 2005. Directives concerning the responsibility of management for the internal control of financial reporting were set forth in Section 404 by the SEC and the Public Company Accounting Oversight Board.
The directives of the Supervisor of Banks in the aforesaid circular stipulate the following: Banking corporations shall implement the requirements of Section 404 and the SEC directives issued in accordance thereto.
Starting with the financial statements as of December 31, 2008, banking corporations shall include a declaration in their reports concerning management’s responsibility for the establishment and maintenance of a system of adequate procedures for the internal control over financial reporting, as well as an assessment as of the end of the year of the effectiveness of these procedures for the control over financial reporting.
Concurrently, external auditors of financial corporations will be required to provide an opinion, while implementing the relevant standards of the PCAOB.
Adequate internal control requires the maintenance of a control system based on a defined, recognized system; the COSO 1992 model meets the requirements and can be used for the evaluation of internal control.
Implementation of the requirements of the directive requires the upgrade and/or setup of a system of internal-control infrastructures at the Bank; the development process of this system requires the Bank to make preparations and establish stages and milestones towards full implementation.
The Bank implemented this directive initially in the financial statements of December 31, 2008, with the assistance of consultants hired to carry out the project. As part of this implementation, processes affecting financial reporting were documented, and outputs of the documentation of each process were discussed in depth at the SOX administration established for that purpose at the Bank, which includes senior representatives of all divisions of the Bank.
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In these discussions, all of the process documentations were verified and validated by the person responsible for each process, by the parties involved in each process, and by all members of the administration.
Management, under the supervision of the Board of Directors, ensured the establishment and maintenance of a system of internal control of financial reporting, including through the establishment of a SOX Department at the Bank, the approval of the annual work plan of the SOX Department by the Board of Directors of the Bank, and regular quarterly follow-up by management and the Board of Directors of the progress of implementation of the annual work plan.
In addition, a specialized computer system was acquired and implemented at the Bank, which contains all accumulated information regarding business processes surveyed, as described above, including a description of the process, the possible risks in the process, existing controls for the process, and a rating of the residual exposure considering the existing controls. The system serves as a key tool for the implementation of the directives and routine monitoring of the effectiveness of internal controls of financial reporting.
The report of the Board of Directors and management on the internal control of financial reporting is attached to the financial statements.
The Bank conducts routine effectiveness tests during the year; in addition, additional effectiveness tests are conducted near the date of signing of the annual financial statements.
In addition, a "signature cascade" process was implemented at the Bank for all controls documented in the processes, from the person performing the control, through his or her direct supervisor, the person responsible for the process, that person's supervisor, the relevant members of the administration, additional members of management and Senior Executives, to the Chief Accountant and the CEO. The objective of this cascade method is to ensure the efficiency of controls and the completeness and correctness of processes.
Evaluation of Controls and Procedures Regarding Disclosure The management of the Bank, in cooperation with the CEO and the Chief Accountant of the Bank, has assessed the effectiveness of the controls and procedures regarding disclosure at the Bank as of the end of the period covered by this report. Based on this assessment, the CEO and the Chief Accountant of the Bank have concluded that, as of the end of this period, the controls and procedures concerning disclosure at the Bank are effective in order to record, process, summarize, and report the information which the Bank is required to disclose in its annual report, in accordance with the Public Reporting Directives of the Supervisor of Banks, on the date stipulated in these directives.
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Changes in Internal Control During the fourth quarter ending on December 31, 2014, there was no change in the Banks' internal control regarding financial report, which materially affected, or is likely to materially affect the Banks internal control regarding financial report.
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Compensations for interested parties and Senior Officers at the Bank The following table lists compensations for recipients of the highest compensation among the Senior Officers at the Bank for 2014, in thousands of NIS: Other Compensation for Services 1 Compensations 2 Compensations Receivers Details Salary Interest Total Supplementary Severance Pay, Provisions for Compensation, Incidental Expenses Study Funds, Due to Changes in Holding Rate of Vacation, Jubilee Wages and the Grants, National Retirement Terms Scope of Corporations' Insurance, Value During the Total Name Function Position Capital Salary of Use Accounting Year Bonus (3) Salary Z. Abeles Chairman of the Board of Directors (A) 75% 0.01%(5) 2,323 719 101 (509) 2,634 - 2,634 I. Trau Main C.E.O (B) 100% - 1,563 387 1,005 270(4) 3,225 - 3,225 H. Freilichman Former Main CEO (C) 100% - 789 (75) 17 (170) 561 - 561 E. Peres-Lachish Deputy general manager, Head of Retail Division, Customer Assets and Bank Counseling(D) 100% - 1,195 356 1,427 (96) 2,882 5 2,887 A. Sternberg Deputy General Manager, head of Controls and Risk Management Division (E) 100% - 1,108 451 22 (77) 1,504 - 1,504 M. Morag Senior Deputy General Manager; Head of Resources Division (F) 100% - 1,077 328 - (84) 1,321 - 1,321 (1) The amounts of the compensation are in the terms of cost to the Bank, not including payroll tax. The amounts are included in the Statement of Profit and Loss under the item "Salaries and related expenses". There is no additional compensation for services – management fees, consulting fees, commissions and other payments. (2) The interest column includes benefit amounts in respect of discounts on interest rates on loans extended to the officers listed above. The terms and rates of these benefits are identical to those for all employees of the Bank. See also Section (H) below. No benefits were granted in respect of interest on deposits, because the interest rates granted to officers for their deposits are not preferable to those granted to other customers of the Bank who perform deposits on a similar scale, with similar linkage and maturity terms. The table does not include benefits in respect of other banking transactions to which these officers are entitled, because the amounts of these benefits are immaterial and do not exceed a total of NIS 50 thousand annually per employee, and they are granted at the same terms and rates to all employees of the Bank. (3) Amounts presented in this column are estimates of negative bonuses offset from bonus balances whose payment was postponed from previous years– see details in Section (G)(2) below. Note that bonuses paid during 2014 in respect of previous years (2011-2013), according to the compensation plans' payment schedule, are not included in the table above. For details regarding these bonuses see Sections (G)(3). (4) One-time signing bonus paid in 2014 to the C.E.O. of the Bank, in the amount of two monthly salaries – see Note 15.E.2. (5) Holds 3,500 ordinary shares.
Other notes: For details regarding loans with benefit condition and normal condition - see Section H below. Regarding remuneration for Interested parties - see Section I below. Regarding remuneration for the Internal Auditor – see details also in the Board of Directors' Report in the section concerning the Internal Auditor.
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Compensations for interested parties and Senior Officers at the Bank The following table lists compensations for recipients of the highest compensation among the Senior Officers at the Bank for 2013, in thousands of NIS: Other Compensation for Services 1 Compensations 2 Compensations Receivers Details Salary Interest Total Supplementary Severance Pay, Provisions for Compensation, Incidental Expenses Study Funds, Due to Changes in Vacation, Jubilee Wages and Grants, National Retirement Terms Scope of Holding Rate of Insurance, Value During the Total Name Function Position the Corporation Salary of Use Accounting Year Bonus (3) Salary Z. Abeles Chairman of the Board of Directors (A) 75% 0.01%(4) 2,284 758 69 895 4,006 - 4,006 H. Freilichman CEO (B) 100% - 2,277 821 42 1,003 4,143 - 4,143 E. Peres-Lachish Deputy general manager, Head of Retail Division, Customer Assets and Bank Counseling(D) 100% - 1,174 390 102 208 1,874 6 1,880 A. Sternberg Deputy General Manager, head of Controls and Risk Management Division (E) 100% - 1,094 424 75 197 1,790 1 1,791 M. Morag Senior Deputy General Manager; Head of Resources Division (F) 100% - 1,061 322 15 224 1,622 - 1,622 (1) The amounts of the compensation are in the terms of cost to the Bank, not including payroll tax. The amounts are included in the Statement of Profit and Loss under the item "Salaries and related expenses". There is no additional compensation for services – management fees, consulting fees, commissions and other payments. (2) The interest column includes benefit amounts in respect of discounts on interest rates on loans extended to the officers listed above. The terms and rates of these benefits are identical to those for all employees of the Bank. No benefits were granted in respect of interest on deposits, because the interest rates granted to officers for their deposits are not preferable to those granted to other customers of the Bank who perform deposits on a similar scale, with similar linkage and maturity terms. The table does not include benefits in respect of other banking transactions to which these officers are entitled, because the amounts of these benefits are immaterial and do not exceed a total of NIS 50 thousand annually per employee, and they are granted at the same terms and rates to all employees of the Bank. (3) Amounts presented in this column are estimates of bonuses in 2013 – see details in Section (G)(3) below. Note that bonuses paid during 2013 in respect of previous years (2010-2012), according to the compensation plans' payment schedule, are not included in the table above. (4) Holds 3,500 ordinary shares.
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Terms of Employment of Senior Executives
A. Mr. Zeev Abeles - Employed at the Bank under a personal employment contract, from November 1, 1999 for an unspecified period. Each of the parties to the employment agreement may terminate the contractual engagement pursuant to the agreement at any time and at absolute discretion, with six months' advance notice. According to the decision of the Banks' general meeting from June 11, 2012, upon the conclusion of his employment at the Bank (excluding cases in which his eligibility for severance pay is denied) , Mr. Abeles shall be entitled to severance pay, as determined by law, at a rate of 100% of the last salary of the Chairman at the date of termination of his employment, multiplied by the number of years of his work as a Chairman at the Bank (including part of a year, proportionally, hereinafter: "100% severance pay"), instead of the amounts that should have been deposited for him personally in a severance pay provident fund on his name according to section 14 of the Severance Pay Law 1964. Therefore, upon termination of the Chairman's employment, Mr. Abeles shall be entitled to all the funds and rights that accumulated and will accumulate in the personal severance fund, and the Bank will continue to pay him money equal to the difference between his right to 100% severance pay and between the funds and rights in the personal severance fund. In addition, upon termination of his employment at the Bank, Mr. Abeles is entitled to additional severance pay at a rate of 100% of his last salary multiplied by the number of years of his work at the Bank (including part of a year, proportionally) as approved in the Banks' general meeting on April 30, 2006. Period of restricted competition - six months from the date that the Chairman will cease his work actually in the Bank (either through termination or resignation). Mr. Abeles' salary is linked to the increase in the consumer price index (update once a year). During 2014 and 2013, no change has occurred in Mr. Abeles's salary except for this linkage. With regard to entitlement for bonuses, see details in Section G below. B. Mr. Israel Trau, Chief Executive Officer of the Bank since March 1, 2014, is employed under a personal employment agreement for a period of three years from the date of the beginning of his actual work at the Bank, February 16, 2014 (hereinafter: the "Initial Employment Period"), which shall be extended, provided that neither party gives notice to the other, up to six months before the end of the Initial Employment Period, regarding non-extension of the employment period. Each party shall be permitted to terminate the contractual engagement at any time, with six months' advance notice, either during the Initial Employment Period or thereafter, if and as the employment period may be extended. Upon the end of Mr. Trau's employment at the Bank, for any reason, Mr. Trau shall be entitled to all moneys and rights accrued in his favor in the executive insurance policy, and the policy shall be transferred to Mr. Trau's ownership, all provided that the termination of his employment does not occur under circumstances in which severance pay can legally be denied; and all sums accrued in his favor in the study fund shall be released. It is hereby clarified that the Bank's payments into the executive insurance are a substitute for the duty to pay full severance pay, if such pay is owned according to law, pursuant to Section 14 of the Severance Pay Law, 1963, and in accordance with the terms established in the general approval for employers' payments to pension funds and insurance funds as a replacement for severance pay. Mr. Trau shall be obligated to maintain a cooling period (non-competition) of six months from the end of his actual work at the Bank. During the cooling period, Mr. Trau shall be entitled to full wages - 241 -
and the full associated benefits (hereinafter: "Adjustment Pay"). It is hereby clarified that during the overlap of the cooling period with the advance notice period, Mr. Trau shall be entitled to pay only for the advance notice period. Should Mr. Trau violate his non-competition commitment, without prejudice to any other remedy available to the Bank, he shall be required to reimburse the Bank for all payments received in respect of the advance notice period and/or the cooling period. Mr. Trau's salary is linked to increases in the consumer price index (updated on a quarterly basis). With the exception of this linkage, no change occurred in his wages during 2014. With regard to entitlement to bonuses, see details in Section G below.
On October 26, 2014, the general assembly of the Bank, further to approval by the Board of Directors of the Bank on April 30, 2014, and ratification on September 10, 2014, and further to the approval by the Remuneration Committee of the Bank on April 28, 2014, approved a one-time signing bonus for the Chief Executive Officer of the Bank, Mr. Israel Trau, in the amount of two monthly salaries (a total of NIS 270 thousand).
C. Mr. Haim Freilichman – Was employed at the Bank as of April 2, 2006, and ended his role as the Bank's C.E.O. on February 28, 2014. On September 8, 2011, following approval by the Audit Committee of the Board of Directors on July 18, 2011, the Board of Directors of the Bank approved an amendment of the employment agreement with the CEO of the Bank (hereinafter: the "Amendment"). Pursuant to the Amendment, upon termination of the employment of the CEO of the Bank for any reason, other than under circumstances in which the CEO may be denied severance pay by law, the CEO shall be entitled to severance pay at a rate of 100% of his gross monthly salary at the date of termination of his employment, multiplied by the number of years of his work at the Bank (including part of a year, proportionally), in addition to his entitlement to the employer contributions for the compensation component made by the Bank for the CEO pursuant to Section 14 of the Severance Pay Law, 1963, and the general approval of employer contributions to a pension fund and insurance fund in place of the severance pay owed to him under his existing employment agreement. Upon termination of his employment, Mr. Freilichman shall be entitled to an adjustment grant in the amount of six monthly salaries. Competition restriction period – Six months from the date of actual termination of the CEO's work at the Bank (either through dismissal or resignation). With regard to entitlement to bonuses, see details in Section G below.
D. Mrs. Edna Press-Lachisch - Employed at the Bank from June 22, 1980. In effect as of December 31, 2003, employed under a personal employment contract for an unspecified period. Each of the parties to the employment agreement may terminate the contractual engagement pursuant to the agreement at any time and for any reason, with three months' advance notice in writing, in accordance with the terms set forth in the employment agreement. Further to Mrs. Peres-Lachish's announcement regarding her decision to retire from her position and from the Bank (see details in Section "Members of Management and Senior Officials" above) under circumstances justifying severance terms by law. Mrs. Peres-Lachish is entitled to increased severance pay in a rate of 250% of her last salary less the redemption value of the compensation deposited on her behalf in pension fund by the Bank and this is according to the - 242 -
approval of the Remuneration Committee and the Bank's Board of Directors in accordance with the remuneration policy for senior officers at the bank. In addition, Mrs. Peres-Lachish is entitled to an adjustment bonus of three monthly salaries, which she will be paid as part of the payment in respect of the restriction of competition, as detailed below: payment in respect of restricted competition - six monthly payments in the amount of one monthly salary, at the end of each month from the disconnection of employment relations provided that she complied with the restriction of competition in the preceding month. Mrs. Peres-Lachisch's monthly salary is linked to the increase in the consumer price index. In 2013-2014, in addition to the linkage, there was no change in Mrs. Edna Press- Lachischs' salary. With regard to entitlement to bonuses, see details in Section G below.
E. Dr. Akiva Sternberg - Employed at the Bank from August 1, 1987. In effect as of December 16, 2003, employed under a personal employment contract for an unspecified period. Each of the parties to the employment agreement may terminate the contractual engagement pursuant to the agreement at any time and for any reason, with three months' advance notice in writing, in accordance with the terms set forth in the employment agreement. Pursuant to the amendment to the employment agreement of Dr. Sternberg, in effect as of April 1, 2014, the rate of severance pay to be paid to Dr. Sternberg in the event of dismissal, or under circumstances of resignation due to Bank's termination of his service as auditor, at the initiative of the Bank, and his transfer to a position that does not carry the rank of a member of management, shall stand at 200% of his last monthly salary (instead of 250% prior to the amendment). The rate of severance pay in the event of resignation shall stand at 180% (instead of 100% prior to the amendment), subject to the completion of a term of employment of five years in the position of auditor (should Dr. Sternberg resign within the first five years of his service as auditor, except under circumstances in which the Bank terminates his service as auditor, at the initiative of the Bank, and transfers him to a position that does not carry the rank of a member of management, Dr. Sternberg shall be entitled to severance pay at a rate of 100%, subject to the directives of the law and to the remuneration policy of the Bank). The redemption value of the compensation deposited on his behalf in pension fund by the Bank will be deducted from these amounts. In addition, Dr. Sternberg is entitled to an adjustment bonus of three monthly salaries, either through termination or resignation, within overlapping between the adjustment bonus and the payment due to the previous period notice, as soon as the Bank will break off the employment relations before the notice period and will redeem its remainder. The adjustment bonus will be paid as part of the restriction of competition. According to the amendment, Dr. Sternbergs' eligibility period for payment in respect of non-competition in case of termination of employer-employee relations between him and the Bank, will be reduced to 3 months only (instead of 6 months prior to the amendment) as detailed below: payment in respect of restricted competition - three monthly payments in the amount of one monthly salary, at the end of each month from the severance of employment relations (either through termination or resignation), provided that the employee complied with the restriction of competition in the preceding month. All of the above, unless the termination of employment was under circumstances in which severance pay may be fully or - 243 -
partially denied. Dr. Sternberg's monthly salary is linked to the increase in the consumer price index. In 2013-2014, beyond the linkage there was no change in Dr. Sternbergs' salary. With regard to entitlement to bonuses, see details in Section G below.
F. Mr. Menachem Morag – Employed at the Bank under a personal employment agreement as of May 23, 2006, in effect as of June 1, 2006, for an unspecified period. Each of the parties to the employment agreement is entitled to terminate the contractual engagement pursuant to the agreement at any time, for any reason, with six months' advance written notice, in accordance with the terms established in the employment agreement (which include three months' advance notice followed by three months of restricted competition, as detailed below). Upon termination of his employment at the Bank, whether through dismissal or resignation, Mr. Morag is entitled to receive ownership of his senior executives' insurance policy and to the release of all sums accrued to his credit in the study fund, except if the termination of his employment occurred under circumstances in which severance pay may be fully or partially denied, by law; in such a case, Mr. Morag shall be entitled to the release of the compensation amounts arising from his payments into the policy and study fund only, and to the appropriate relative share of the Bank's payments (if any, as relevant) into severance pay, compensation, and the study fund. All of the payments performed by the Bank towards severance pay, including all profits borne by such payments, shall be at the expense of the severance pay, if Mr. Morag is owed such severance pay under the Severance Pay Law, 1963. With regard to the restriction of competition (in the case of either dismissal or resignation), Mr. Morag is entitled to three monthly payments in the amount of his monthly salary, starting at the beginning of the second month immediately following the month of the end of the advance notice period, provided that he complied with the restriction of competition in the preceding month. Under circumstances in which the employment relationship is terminated at the initiative of the Bank, Mr. Morag shall also be entitled, in respect of the restriction of competition, to all payments (and deductions) into his senior executives' insurance policy and study fund. The monthly salary of Mr. Morag is linked to the consumer price index. In 2013-2014, beyond this linkage, there was no change in Mr. Morag's salary. With regard to entitlement to bonuses, see details in Section G below.
G. Bonuses: 1. Bonus Plan - On February 6, 2014 the general meeting of the Bank has approved the remuneration policy for Senior Officers (hereinafter: “compensation policy”), and as part of that the bonuses program for Senior Officers, attached as an appendix to the remuneration policy (hereinafter: bonus program”), and this following the approval of the Board of Directors from December 31, 2013 and the approval of the Remuneration Committee of the Bank from December 26, 2013. In addition, the Remuneration Committee and the Board of Directors have approved (and as far as the Chairman and the CEO the general meeting as well) that the bonus program shall be attached to the employment contracts of the Senior Officers serving in the Bank, and shall replace any approved bonus program
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for Senior Officers in the Bank by the Bank’s authorized organs in the past, including relating in respect of 2013. The remuneration policy and the bonus plan have been formulated according to the Companies Law (amendment no. 20) 2012 and according to regulation no. 301 A of the Proper Conduct of Banking Business Regulation of the Supervisor of Banks regarding “Remuneration Policy of Banking Corporations”. For further details regarding the bonus program for Senior Officers which has been authorized by the general meeting on February 6, 2014 – see details in Note 15.D.1 and 15.D.2 to the financial reports and see immediate reports by the bank from December 31, 2013 (reference 2013-01-115228) and from February 6, 2014 (reference 2014-01-034207)
2. Bonuses in respect of 2014 –
Pursuant to the terms of the bonus plan, officers of the Bank are not entitled to bonuses in respect of 2014. In addition, within the implementation of the bonus plan discussed and approved by the Remuneration Committee on February 11, 2015, and by the Board of Directors of the Bank on February 18, 201517 , a "negative bonus" was offset against the balances of bonuses deferred from previous years, in accordance with the terms of the bonus plans for officers, as approved by the authorized organs of the Bank in previous years, as follows: the amount of the negative bonus18 deducted from the amounts of bonuses approved in previous years for the Chairman of the Bank, Mr. Zeev Abeles, is a total of NIS 509 thousand; the amount of the negative bonus deducted from the amounts of bonuses approved in previous years for the former Chief Executive Officer of the Bank, Mr. Haim Freilichman, is a total of NIS 170 thousand; the amount of the negative bonus deducted from the amounts of bonuses approved in previous years for Ms. Edna Press-Lachish is a total of NIS 96 thousand; the amount of the bonus deducted from the amounts of bonuses approved in previous years for Dr. Akiva Sternberg is a total of NIS 77 thousand; and the amount of the bonus deducted from the amounts of bonuses approved in previous years for Mr. Menachem Morag is a total of NIS 84 thousand.
17 The Remuneration Committee's decisions were based on non-final data (including data from the financial statements) that were known at the time of the discussion in the committee. The results of the bonus amounts, as presented in the committee, did not diverge materially from the results presented to the Board of Directors. 18 The amounts of the negative bonuses approved by the Board of Directors within the implementation of the bonus plan are not final, as the parameter concerning the comparison of the data of the Bank to the data of other banks was calculated based on data for the first three quarters of 2014. Upon publication of the financial statements of the other banks, in March 2015, a final calculation for this parameter will be performed and the calculation of the amounts of the bonuses will be adjusted accordingly. - 245 -
3. Bonuses in respect of 2013 – The Bank's Board of Directors discussed and approved on April 20, 2014 the final bonus amounts for Senior Officers mentioned in Section 1 above in respect of 2013 (excluding the C.E.O. of the Bank, Mr. Israel Trau, who started serving as C.E.O. of the Bank on March 1, 2014). This is pursuant to the recommendation of the Remuneration Committee which discussed the matter and approved the bonus’ amounts. The approved bonuses are according to the remuneration policy for Senior Officers of the Bank and to the bonus program which is part of it, as approved by the authorized organs of the Bank, as detailed in Note 15.D to the financial statements. Relevant figures and parameters for setting the bonus amount for the Senior Officers in respect of 2013 were presented to the Board of Directors, as determined in the bonus program (see details within the description of the bonus program in Note 15.D.2 to the financial statements). Inter alia, the business results of the Bank for 2013, the Bank’s annual yields less taxes, the Bank’s annual performance compared to targets approved by the Board of Directors, the capital adequacy ratio of the Bank as well as figures and comparing public information relative to the yields of the banking groups in the banking system, were presented to the Board of Directors and the committee. In addition, the Remuneration Committee and the Board of Directors were presented with figures relating to the performance of Senior Officers in 2013 according to the parameters determined in the bonus program, including the personal Balance Score Card (BSC) 19 of each of the Senior Officers and an evaluation score based on a list of quality parameters determined in advance and approved by the Remuneration Committee and the Board of Directors, of each of the above mentioned Senior Officers.
19 Balance Score Card – a score sheet combining quantity measurement of parameters included in the Bank’s targets which are under the responsibility of the executive, as pre-determined by the Board of the Bank, and which is used to evaluate the performance of the executive during the year of report, using measurable parameters. - 246 -
H. The following are details of loans under benefit terms and loans granted under ordinary terms to the recipients of the highest remuneration among the Senior Officers of the Bank, in NIS thousands: Loans*and guarantees Loans granted with benefit term (benefit terms granted under ordinary for all employees of the Bank) terms Average Balance as at term to December maturity - in benefit granted Name 31, 2014 years during the year
Z. Abeles - - - 2 I. Trau 1 H. Freilichman - - - 593 E. Peres-Lachish 378 8 5 1,571 A. Sternberg 21 0.5 - 935 M. Morag -- - 1
* Including mortgages and credit cards.
I. Details of remuneration of interested parties The following are details of remuneration granted to each of the interested parties of the Bank, who aren't listed in the table above, by the Bank or by a corporation under its control in 2014:
Total payment received by all directors of the Bank amounted to NIS 4,297 thousand, in respect of participation in meetings of the Board of Directors and its committees. This amount is included in the Statement of Profit and Loss, under the item "Other expenses." The amount paid to directors who are controlling parties or relatives of controlling parties is identical to the remuneration paid to all other directors of the Bank (other than the Chairman).
Of the aforesaid amount, the following amounts were paid to each of the controlling parties serving as a director at the Bank (or whose relatives serve as directors thereof):
(1) To Mr. Yeshayahu Landau - a controlling shareholder in the Bank - an amount of NIS 321 thousand.
(2) To Mr. Yigal Landau (Yeshayahu Landau's son, a controlling shareholder of the Bank) - an amount of NIS 235 thousand.
(3) To Mr. Izaac Manor (the husband of Mrs. Ruth Manor, a controlling shareholder of the Bank) – an amount of NIS 108 thousand.
See also Notes 21.E.1 and 21.E.2 regarding remuneration for directors.
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Remuneration of Auditors
The following table provides details of the remuneration of the external auditors of the Bank: Consolidated The Bank 2014 2013 2014 2013 NIS NIS NIS NIS Thousands Thousands Thousands Thousands
For the audit activities: (1) (2) (3) The external auditors 4,359 4,557 4,099 4,297 Other auditor 121 146 - - Total 4,480 4,703 4,099 4,297
For additional services: (3) For audit related services: The external auditors 284 495 284 495 Tax services: The external auditors 88 84 - 63 Other services: The external auditors 569 454 (4) 569 395 Other auditor - 6 - - Total 941 1,039 853 953 5,421 5,742 4,952 5,250
(1) The remuneration of the external auditors includes payments to partnerships and corporations under their control, and payments in accordance with the Value Added Tax Law. (2) Includes audit of the annual financial statements and a review of the interim reports. (3) Includes remuneration paid and remuneration accrued. (4) Including remuneration in respect of shelf prospectus for Union Issuances Ltd, a consolidated company.
The Board of Directors wishes to thank the Management of the Bank, its managers and all of the Bank’s employees for their dedicated work and efforts they have made in advancing the Bank and their contribution to the results of the Bank's operations.
Z. Abeles I. Trau Chairman of the Board of Directors C.E.O.
Tel Aviv, February 26, 2015
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The accompanying data and exhibits are based on the Bank’s financial statements.
The following data and appendixes are included in the Management Review:
Selected data from the financial statements
Appendix A Consolidated Balance Sheets as at the end of 2010 - 2014
Appendix B Consolidated Statements of Profit and Loss for 2010 - 2014
Appendix C Rates of Income and Expenses
Appendix D Exposure to Interest Rate Fluctuations
Appendix E Credit risk by Economic Sectors
Appendix F Exposures to Foreign Countries
Appendix G Consolidated Balance Sheet for the end of the Quarter - Multi-Quarter Data
Appendix H Quarterly Consolidated Statements of Profit and Loss - Multi-Quarter Data
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Selected Data from the Consolidated Financial Statements (in NIS Millions)
Year ended December 31 Change rate 2014 2013 %
Profitability Net interest income 567 662 (14.4) Provision for credit losses 95 23 313.0 Net interest income after provision for credit losses 472 639 (26.1) Non-interest income 386 360 7.2 Of which: fees 278 280 (0.7) Operating and other expenses 797 813 (2.0) Net profit 50 140 (64.3) Net profit return on equity 2.1% 6.2%
December 31 December 31 Change 2014 2013 %
Balance sheet Cash on hand and deposits 9,848 9,924 (0.8) with banks Net credit to the public 21,713 22,135 (1.9) Securities 6,789 4,810 41.1 Deposits from the public 31,498 30,622 2.9 Total equity 2,376 2,335 1.8 Total balance sheet 40,853 39,490 3.5
% %
Financial ratios Equity to total balance sheet 5.82% 5.9% Operating and other expenses to total incomes (net interest income and non-interest income) 83.63% 79.5% Provision for credit losses from net credit to the public 0.44% 0.10% Total capital ratio to risk components(1) 15.73% 15.34% Tier I capital ratio to risk components(1) 9.74% 9.48%
(1) In terms of Basel III.
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Appendix A Year-End Consolidated Balance Sheets Reported amounts 2014 2013 2012 2011 2010 NIS millions Assets
Cash on hand and deposits with banks 9,848 9,924 8,246 6,961 7,132
Securities 6,789 4,810 4,940 6,785 4,553
Borrowed securities 182 503 68 5 415
Credit to the public(1) 21,959 22,420 23,858 23,140 22,749
Allowance for credit losses(1) (246) (285) (285) (272) (1,036)
Net credit to the public 21,713 22,135 23,573 22,868 21,713
Credit to the government -* - - - -
Investment in investee companies - 1 1 1 1
Buildings and equipment 404 405 398 408 380
Assets in respect of derivative instruments 504 572 476 846 562
Other assets 1,413 1,140 1,123 1,041 556
Total assets 40,853 39,490 38,825 38,915 35,312
Liabilities and equity
Deposits from the public 31,498 30,622 30,890 31,158 28,844
Deposits from banks 152 209 244 392 271
Deposits from the government 1 3 1 1 2
Subordinated notes and deposit certificates 3,474 3,109 2,929 2,761 2,344
Liabilities in respect of derivatives instruments 575 667 592 907 737
Other liabilities(1) 2,777 2,545 1,978 1,710 1,108
Total liabilities 38,477 37,155 36,634 36,929 33,306
Equity attributed to the shareholders of the Bank 2,376 2,335 2,191 1,985 2,005
Non-controlling interests(2) - - - 1 1
Total equity 2,376 2,335 2,191 1,986 2,006
Total liabilities and equity 40,853 39,490 38,825 38,915 35,312
* Less than NIS 500 thousand (1) On January 1, 2011, the Bank initially adopted the directives of the Supervisor of Banks regarding measurement and disclosure of impaired debts, credit risk and allowance for credit losses. Comparative figures from previous years were not restated, and therefore the data for 2010 is not comparable. (2) Initial implementation of the letter from Bank of Israel concerning the treatment of put options given to the non-controlling interest – see Note 1.E.1.B.
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Appendix B
Year-End Statement of Consolidated Profit and Loss Reported amounts 2014 2013 2012 2011 2010 NIS millions
Interest income (3) 865 1,209 1,416 1,488 1,128 Interest expenses 298 547 756 838 525 Net interest income 567 662 660 650 603 Provision for credit losses (1) 95 23 65 27 87 Net interest income after provision for credit losses 472 639 595 623 516
Non-interest income: Non-interest financing income 102 78 65 4 88 Fees(3) 278 280 288 310 311 Other income 6 2 4 2 2 Total non-interest income 386 360 357 316 401
Other operating expenses: Salaries and related expenses 432 456 455 459 396 Maintenance and depreciation of buildings and equipment 157 153 147 135 127 Other expenses 208 204 198 193 175 Total other operating expenses 797 813 800 787 698
Profit before taxes 61 186 152 152 219 Provision for taxes on profit 11 46 25 20 70
Profit after taxes 50 140 127 132 149 The Bank's share in net profits of investee companies after taxes -* -* -* -* -*
Net profit: Before attribution to non- controlling interests 50 140 127 132 149
Attributed to non-controlling interests (2) - - - -* -*
Attributed to shareholders of the banking corporation 50 140 127 132 149
Earnings per ordinary share (NIS)
Basic and diluted earnings:
Net profit attributed to shareholders of the banking corporation 0.68 1.91 1.73 1.79 2.02
* Less than NIS 500 thousand.
Comments: (1) On January 1, 2011, the Bank initially adopted the directives of the Supervisor of Banks regarding measurement and disclosure of impaired debts, credit risk and allowance for credit losses. Comparative figures for previous years were not restated, and therefore the data for 2010 is not comparable. (2) Initial implementation of the letter from Bank of Israel concerning the treatment of put options given to the non-controlling interest, for details see Note 1.E.1.B. (3) As of January 1, 2014, the Bank implements the directives determined in the circular of the supervision of banks concerning the adoption of GAAP in U.S, banks regarding the measurement of interest income. The implementation of the directive is prospectively. For details see Note 1.D.2.
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Appendix C Rates of Interest Income and Expenses and Analysis of the Changes in Interest Income and Expenses – Consolidated (1)
Average balances and interest rates Reported amounts 2014 2013 2012(9) Average Interest Rate of Average Interest Rate of Average Interest Rate of balance (2) income income balance (2) income income balance (2) income income NIS millions % NIS millions % NIS millions %
Interest-bearing assets in Israel Credit to the public (3) 23,416 718(6) 3.07(6) 22,313 958(6) 4.29 22,265 1,073(6) 4.82 Deposits with banks 518 6 1.16 724 10 1.38 953 11 1.15 Deposits with central banks 5,494 31 0.56 6,120 84 1.37 5,856 137 2.34 Borrowed securities 466 2 0.43 218 3 1.38 118 2 1.69 Bonds available for sale (4) 4,221 88 2.08 4,534 141 3.11 4,650 174 3.74 Bonds held for trading (4) 1,369 17 1.24 442 11 2.49 619 15 2.42 Other assets (10) 50 3 6.00 30 2 6.67 46 4 8.70 Total interest-bearing assets 35,534 865 2.43 34,381 1,209 3.52 34,507 1,416 4.10 Non-bearing interest credit card debtors 401 363 337 Other non-bearing interest assets (5) 2,950 4,357 4,039 Total assets 38,885 39,101 38,883
(1) Data presented after the effect of hedging derivative instruments. (2) Based on monthly opening balances, excluding the unlinked Israel currency segment in which the average balance is calculated on the basis of daily data. (3) Before deduction of the average balance sheet balance of allowances for credit losses. Including non-accruing interest income impaired debts. (4) The average balance of unrealized gains/losses from adjustments to fair value of bonds held for trading and of gains/losses in respect of bonds available for sale, included in the equity within the cumulative other comprehensive income under the item "adjustments in respect of the presentation of securities available for sale at fair value", was deducted from/added to the average balance of bonds held for trading and bonds available for sale. In the year ended December 31, 2014 an amount of NIS 159 million was deducted (in the year ended December 31, 2013 an amount of NIS 114 million was deducted, in the year ended December 31, 2012 an amount of NIS 30 million was deducted). (5) Including fair value in respect of derivative instruments, other non-bearing interest assets and less allowance for credit losses. (6) Fees in the amount of NIS 25 million were included in interest income in the year ended December 31, 2014 (NIS 17 million and NIS 9 million were included in the year ended December 31, 2013 and December 31, 2012 respectively). (7) Including fair value in respect of derivative instruments. (8) Net return – net interest income divided by total interest bearing assets. (9) As of the reports for the first quarter of 2013 the Bank initially implemented the directives of the Supervisor of Banks from December 23, 2012 regarding a change in the reporting format for this addition. The adoption of the directive was retrospectively. In light of this, the data for December 31, 2012 was reclassified. (10) Including income tax balances that their related interest is recorded on a cash basis.
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Appendix C (cont'd)
Rates of Interest Income and Expenses and Analysis of the Changes in Interest Income and Expenses - Consolidated (1) (cont'd)
Average balances and interest rates (cont'd) Reported amounts 2014 2013 2012 (9) Average Interest Rate of Average Interest Rate of Average Interest Rate of balance (2) expenses expense balance (2) expenses expense balance (2) expenses expense NIS millions % NIS millions % NIS millions % Interest bearing liabilities in Israel Deposits of the public 24,577 189 0.77 25,448 386 1.52 26,179 612 2.34 Upon request 3,013 11 0.37 3,140 29 0.92 3,376 64 1.90 Fixed term 21,564 178 0.83 22,308 357 1.60 22,803 548 2.40 Deposits of the government -* -* - 1 -* - 2 -* - Deposits from banks 79 -* - 105 -* - 147 1 0.68 Liability deeds and deposit certificates 3,267 97 2.97 3,050 151 4.95 2,789 143 5.13 Other liabilities 899 12 1.33 415 10 2.41 306 - - Total interest bearing liabilities 28,822 298 1.03 29,019 547 1.88 29,423 756 2.57 Non-interest bearing deposits of the 5,641 4,195 3,640 public Non-interest bearing credit card payable 401 363 337 Other non-bearing interest liabilities (7) 1,775 3,385 3,442 Total liabilities 36,639 36,962 36,842 Total equity resources 2,246 2,139 2,041 Total liabilities and equity resources 38,885 39,101 38,883 Interest spread 1.40 1.64 1.53 Net return on interest bearing assets (8) 35,534 567 1.60 34,381 662 1.93 34,507 660 1.91
* Less than NIS 500 thousand.
(1) Data presented after the effect of hedging derivative instruments. (2) Based on monthly opening balances, excluding the unlinked Israel currency segment in which the average balance is calculated on the basis of daily data. (3) Before deduction of the average balance sheet balance of allowances for credit losses. Including non-accruing interest income impaired debts. (4) The average balance of unrealized gains/losses from adjustments to fair value of bonds held for trading and of gains/losses in respect of bonds available for sale, included in the equity within the cumulative other comprehensive income under the item "adjustments in respect of the presentation of securities available for sale at fair value", was deducted from/added to the average balance of bonds held for trading and bonds available for sale. In the year ended December 31, 2014 an amount of NIS 159 million was deducted (in the year ended December 31, 2013 an amount of NIS 114 million was deducted, in the year ended December 31, 2012 an amount of NIS 30 million was deducted). (5) Including fair value in respect of derivative instruments, other non-bearing interest assets and less allowance for credit losses. (6) Fees in the amount of NIS 25 million were included in interest income in the year ended December 31, 2014 (NIS 17 million and NIS 9 million were included in the year ended December 31, 2013 and December 31, 2012 respectively). (7) Including fair value in respect of derivative instruments. (8) Net return – net interest income divided by total interest bearing assets. (9) As of the reports for the first quarter of 2013 the Bank initially implemented the directives of the Supervisor of Banks from December 23, 2012 regarding a change in the reporting format for this addition. The adoption of the directive was retrospectively. In light of this, the data for December 31, 2012 was reclassified. (10) Including income tax balances that their related interest is recorded on a cash basis.
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Appendix C (cont'd)
Rates of Interest Income and Expenses and Analysis of the Changes in Interest Income and Expenses – Consolidated (1) (cont'd)
Average balances and interest rates - additional information regarding interest-bearing assets and liabilities attributed to activity in Israel Reported amounts 2014 2013 2012(9) Interest Rate of Interest Rate of Interest Rate of Average income/ income/ Average income/ income/ Average income/ income/ balance (2) (expenses) (expenses) balance (2) (expenses) (expenses) balance (2) (expenses) (expenses) NIS millions % NIS millions % NIS millions % Unlinked Israeli currency Total interest-bearing assets 25,250 585 2.32 25,214 782 3.10 24,460 979 4.00 Total interest-bearing liabilities 18,415 (155) (0.84) 19,736 (303) (1.54) 20,483 (502) (2.45) Interest spread 1.48 1.56 1.55
CPI-linked Israeli currency: Total interest-bearing assets 6,768 170 2.51 5,535 318 5.75 5,203 290 5.57 Total interest-bearing liabilities 6,091 (118) (1.94) 4,517 (214) (4.74) 4,090 (203) (4.96) Interest spread 0.57 1.01 0.61
Foreign currency (including foreign- currency-linked Israeli currency): Total interest-bearing assets 3,516 110 313 3,632 109 3.00 4,844 147 3.03 Total interest-bearing liabilities 4,316 (25) (0.58) 4,766 (30) (0.63) 4,850 (51) (1.05) Interest spread 2.55 2.37 1.98
Total activity in Israel: Total interest-bearing assets 35,534 865 2.43 34,381 1,209 3.52 34,507 1,416 4.10 Total interest-bearing liabilities 28,822 (298) (1.03) 29,019 (547) (1.88) 29,423 (756) (2.57) Interest spread 1.40 1.64 1.53
(1) Data presented after the effect of hedging derivative instruments. (2) Based on monthly opening balances, excluding the unlinked Israel currency segment in which the average balance is calculated on the basis of daily data. (3) Before deduction of the average balance sheet balance of allowances for credit losses. Including non-accruing interest income impaired debts. (4) The average balance of unrealized gains/losses from adjustments to fair value of bonds held for trading and of gains/losses in respect of bonds available for sale, included in the equity within the cumulative other comprehensive income under the item "adjustments in respect of the presentation of securities available for sale at fair value", was deducted from/added to the average balance of bonds held for trading and bonds available for sale. In the year ended December 31, 2014 an amount of NIS 159 million was deducted (in the year ended December 31, 2013 an amount of NIS 114 million was deducted, in the year ended December 31, 2012 an amount of NIS 30 million was deducted). (5) Including fair value in respect of derivative instruments, other non-bearing interest assets and less allowance for credit losses. (6) Fees in the amount of NIS 25 million were included in interest income in the year ended December 31, 2014 (NIS 17 million and NIS 9 million were included in the year ended December 31, 2013 and December 31, 2012 respectively). (7) Including fair value in respect of derivative instruments. (8) Net return – net interest income divided by total interest bearing assets. (9) As of the reports for the first quarter of 2013 the Bank initially implemented the directives of the Supervisor of Banks from December 23, 2012 regarding a change in the reporting format for this addition. The adoption of the directive was retrospectively. In light of this, the data for December 31, 2012 was reclassified. (10) Including income tax balances that their related interest is recorded on a cash basis.
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Appendix C (cont'd)
Rates of Interest Income and Expenses and Analysis of the Changes in Interest Income and Expenses – Consolidated (cont'd)
Analysis of changes in interest income and expenses Reported amounts
2014 compared with 2013 2013 compared with 2012 Increase (decrease) due to change Net change Increase (decrease) due to change Net change Quantity Price Quantity Price NIS millions NIS millions Interest-bearing assets in Israel Credit to the public: 34 (274) (240) 2 (117) (115) Other interest-bearing assets 1 (105) (104) (6) (86) (92) Total interest income 35 (379) (344) (4) (203) (207)
Interest-bearing liabilities in Israel Deposits of the public (7) (190) (197) (11) (215) (226) Other interest-bearing liabilities 13 (65) (52) 15 2 17 Total interest expenses 6 (255) (249) 4 (213) (209)
Note: The change attributed to the change in quantity was calculated by multiplying the new price with the change in quantity. The change attributed to the change in price was calculated by multiplying the old quantity with the change in price.
(1) Data presented after the effect of hedging derivative instruments. (2) Based on monthly opening balances, excluding the unlinked Israel currency segment in which the average balance is calculated on the basis of daily data. (3) Before deduction of the average balance sheet balance of allowances for credit losses. Including non-accruing interest income impaired debts. (4) The average balance of unrealized gains/losses from adjustments to fair value of bonds held for trading and of gains/losses in respect of bonds available for sale, included in the equity within the cumulative other comprehensive income under the item "adjustments in respect of the presentation of securities available for sale at fair value", was deducted from/added to the average balance of bonds held for trading and bonds available for sale. In the year ended December 31, 2014 an amount of NIS 159 million was deducted (in the year ended December 31, 2013 an amount of NIS 114 million was deducted, in the year ended December 31, 2012 an amount of NIS 30 million was deducted). (5) Including fair value in respect of derivative instruments, other non-bearing interest assets and less allowance for credit losses. (6) Fees in the amount of NIS 25 million were included in interest income in the year ended December 31, 2014 (NIS 17 million and NIS 9 million were included in the year ended December 31, 2013 and December 31, 2012 respectively). (7) Including fair value in respect of derivative instruments. (8) Net return – net interest income divided by total interest bearing assets. (9) As of the reports for the first quarter of 2013 the Bank initially implemented the directives of the Supervisor of Banks from December 23, 2012 regarding a change in the reporting format for this addition. The adoption of the directive was retrospectively. In light of this, the data for December 31, 2012 was reclassified. (10) Including income tax balances that their related interest is recorded on a cash basis.
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Appendix D Exposure to Interest Rate Fluctuations as at December 31, 2014 - Consolidated Reported amounts Three As at December 31, 2014 As at December 31, 2013 On demand One to months One to Three to Five to Ten to More than Without Internal Average Internal Average up to one three to one three five ten twenty twenty fixed Total rate of effective Total fair rate of effective month months year years years years years years maturity fair value return lifetime value return lifetime NIS millions % years % years
Israeli unlinked currency Financial assets and amounts receivable in respect of derivative instruments Financial assets(a) 22,162 2,260 934 2,112 632 620 272 58 511 29,561 2.28 0.5 28,486 4.18 0.4 Derivative financial instruments (excluding options) 1,586 1,289 876 379 122 9 - - - 4,261 0.2 4,024 0.1 Options (in terms of the underlying asset) 11,060 1,685 598 1 - - - - - 13,344 - 12,443 -* Total fair value 34,808 5,234 2,408 2,492 754 629 272 58 511 47,166 0.4(b) 44,953 0.3(b) Financial liabilities and amounts payable in respect of derivative instruments Financial liabilities(a) 18,867 3,251 499 869 485 449 - - 190 24,610 1.54 0.2 23,500 2.14 0.2 Derivative financial instruments (excluding options) 4,056 1,258 892 393 75 54 - - - 6,728 0.2 7,781 0.1 Options (in terms of the underlying asset) 11,363 1,975 860 1 - 3 - - - 14,202 - 12,576 -* Total fair value 34,286 6,484 2,251 1,263 560 506 - - 190 45,540 0.2(b) 43,857 0.1(b) Net financial instruments Exposure to interest rate fluctuations in the segment 522 (1,250) 157 1,229 194 123 272 58 Cumulative exposure in the segment 522 (728) (571) 658 852 975 1247 1,305
* Less than 0.05 years.
See notes below.
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Appendix D (cont'd) Exposure to Interest Rate Fluctuations as at December 31, 2014 - Consolidated Reported amounts
Three As at December 31, 2014 As at December 31, 2013 On demand One to months One to Three to Five to Ten to More than Without Internal Average Total Internal Average up to one three to one three five ten twenty twenty fixed Total rate of effective fair rate of effective month months year years years years years years maturity fair value return lifetime value return lifetime NIS millions % years % years
CPI linked Israeli currency Financial assets and amounts receivable in respect of derivative instruments Financial assets(a) 116 954 1,151 1,888 858 773 148 93 19 6,000 3.37 3.0 6,466 3.41 3.0 Derivative financial instruments (excluding options) 130 - - 52 - - - - - 182 -* 306 -* Options (in terms of the underlying asset) ------Total fair value 246 954 1,151 1,940 858 773 148 93 19 6,182 2.9 (b) 6,772 2.8(b) Financial liabilities and amounts payable in respect of derivative instruments Financial liabilities (a) 157 670 732 1,902 983 977 2 - - 5,423 0.73 2.5 6,022 1.11 2.8 Derivative financial instruments (excluding options) 199 398 60 100 - - - - - 757 -* 304 -* Options (in terms of the underlying asset) ------Total fair value 356 1,068 792 2,002 983 977 2 - - 6,180 2.2 (b) 6,326 2.6(b) Net financial instruments Exposure to interest rate fluctuations in the segment (110) (114) 359 (62) (125) (204) 146 93 Cumulative exposure in the segment (110) (224) 135 73 (52) (256) (110) (17)
* Less than 0.05 years.
See notes below.
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Appendix D (cont'd.) Exposure to Interest Rate Fluctuations as at December 31, 2014 - Consolidated Reported amounts
Three As at December 31, 2014 As at December 31, 2013 On demand One to months One to Three to Five to Ten to More than Without Internal Average Total Internal Average up to one three to one three five ten twenty twenty fixed Total rate of effective fair rate of effective month months year years years years years years maturity fair value return lifetime Value Return lifetime NIS millions % years % years
Foreign currency (d) Financial assets and amounts receivable in respect of derivative instruments Financial assets (a) 2,161 441 395 63 355 424 42 - 33 3,914 3.25 1.5 3,069 4.61 0.6 Derivative financial instruments (excluding options) 6,826 4,375 1,863 1,360 574 483 - - - 15,481 0.6 14,814 0.6 Options (in terms of the underlying asset) 1,196 765 1,088 17 - - - - - 3,066 - 2,840 -* Total fair value 10,183 5,581 3,346 1,440 929 907 42 - 33 22,461 0.7(b) 20,723 0.5(b) Financial liabilities and amounts payable in respect of derivative instruments Financial liabilities (a) 5,617 1,156 1,007 2 - - - - - 7,782 0.42 0.1 6,819 0.92 0.1 Derivative financial instruments (excluding options) 4,466 2,556 3,665 572 557 707 - - - 12,533 0.9 11,153 0.8 Options (in terms of the underlying asset) 889 466 817 18 - - - - - 2,190 - 2,714 -* Total fair value 10,972 4,188 5,489 592 557 707 - - - 22,505 0.5(b) 20,686 0.5(b) Net financial instruments Exposure to interest rate fluctuation in the segment (789) 1,393 (2,143) 848 372 200 42 - Cumulative exposure in the segment (789) 604 (1,539) (691) (319) (119) (77) (77)
* Less than 0.05 years.
See notes below.
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Appendix D (cont'd.) Exposure to Interest Rate Fluctuations as at December 31, 2014 - Consolidated Reported amounts Three As at December 31, 2014 As at December 31, 2013 On demand One to months One to Three to Five to Ten to More than Without Internal Average Total Internal Average up to one three to one three five ten twenty twenty fixed Total rate of effective Fair rate of effective month months year years years years years years maturity fair value return lifetime Value Return lifetime NIS millions % years % years Aggregate exposure to interest rate fluctuations Financial assets and amounts receivable in respect of derivative instruments Financial assets(a),(c) 24,439 3,655 2,480 4,063 1,845 1,817 462 151 563 39,475 2.54 1.0 38,021 4.08 0.9 Derivative financial instruments (excluding options) 8,542 5,644 2,739 1,791 696 492 - - - 19,924 0.5 19,144 0.5 Options (in terms of the underlying asset) 12,256 2,450 1,686 18 - - - - - 16,410 - 15,283 -* Total fair value 45,237 11,769 6,905 5,872 2,541 2,309 462 151 563 75,809 0.7(b) 72,448 0.6(b) Financial liabilities and amounts payable in respect of derivative instruments Financial liabilities (a),(c) 24,641 5,077 2,238 2,773 1,468 1,426 2 - 190 37,815 1.19 0.5 36,341 1.74 0.6 Derivative financial instruments (excluding options) 8,721 4,222 4,617 1,065 632 761 - - - 20,018 0.6 19,238 0.5 Options (in terms of the underlying asset) 12,252 2,441 1,677 19 - 3 - - - 16,392 - 15,290 -* Total fair value 45,614 11,740 8,532 3,857 2,100 2,190 2 - 190 74,225 0.4(b) 70,869 0.5(b) Net financial instruments Exposure to interest rate fluctuations in the segment 377 29 (1,627) 2,015 441 119 460 151 Cumulative exposure in the segment (377) (348) (1,975) 40 481 600 1,060 1,211 * Less than 0.05 years. Specific notes: a. With the exception of balance sheet balances of derivative financial instruments and fair value of off-balance sheet financial instruments. b. Weighted average according to fair value of average effective lifetime. c. Including stocks presented in the column "Without fixed maturity". d. Including Israeli currency – foreign currency linked.
General notes: 1. Further details regarding the exposure to changes in interest rates in each segment of the financial assets and financial liabilities according to the different balance-sheet items, will be provided upon request. 2. In this table, data by periods reflect the current value of future cash flows of each financial instrument, capitalized by the interest rate used for deduction to the fair value included in respect of the financial instrument, in consistency with th assumptions used to calculate the fair value of the financial instrument. For further details regarding the assumptions used in the calculation of the fair value of the financial instruments, see Note 20 to the financial statements. 3. The internal return rate is the interest rate deducting the expected cash flows from the financial instrument to the fair value. 4. The average effective lifetime of a group of financial instruments constitutes an approximation of the change, in percent, in the fair value of the group of financial instruments which would be caused by a small change (a 0.1% increase) in th internal return rate of each of the financial instruments. 5. Instruments that embody options which have not been separated from the hosting contract, in accordance with the accounting principles, are included in the deployment of the financial instruments.
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Appendix E Credit Risk by Economic Sector - Consolidated Reported amounts As at December 31, 2014 Overall credit risk (1) Debts and off-balance sheet credit risk (3) Credit losses (4) Balance of Credit Provision allowance performance Of which: Of which: (income) for Net accounting for credit Total rating(5) Problematic(6) Total debts (2) Problematic (6) impaired credit losses Write-offs (9) losses NIS Millions Activity of borrowers in Israel: Public - commercial Agriculture 269 269 -* 269 204 -* -* -* -* 1 Industry 2,442 2,271 150 2,202 1,179 143 5 (16) (5) 56 Diamonds 2,094 1,926 14 2,094 1,330 14 14 (12) 715 Constructions and real estate - constructions (7) 5,626 5,455 102 5,585 2,082 98 60 (37) 521 Constructions and real estate - real estate activities 1,251 1,154 41 1,086 834 30 27 -* (1) 7 Electricity and water 543 536 -* 279 104 -* -* -* 1 -* Commerce 2,649 2,520 127 2,557 1,638 125 5 (15) 69 Hotels, hospitality and food services 246 242 3 239 221 1 1 (1) 11 Transportation and storage 482 456 22 420 263 13 11 5 1 7 Communication and computer services 367 355 17 257 128 13 1 (1) (1) 6 Financial services 5,671 5,117 123 5,093 3,553 117 97 164 (151) 99 Other business services 1,026 971 49 978 654 49 1 2 (1) 4 Public and community services 609 572 40 572 411 40 29 (5) (1) 2 Total commercial 23,275 21,844 688 21,631 12,601 643 251 84 (139) 228 Private individuals - housing loans 7,556 7,457 37 7,556 7,119 37 - (2) (11) 36 Private individuals - other 3,362 3,287 12 3,351 2,233 12 6 13 -* 20 Total public – activity in Israel 34,193 32,588 737 32,538 21,953 692 257 95 (150) 284
Banks in Israel(8) 2,019 2,019 - 223 223 - - - - - Government of Israel 4,359 4,359 ------Total activity in Israel 40,571 38,966 737 32,761 22,176 692 257 95 (150) 284
Borrower activity abroad: Total public – activity abroad 11 11 - 10 6 - - -* -* -* Banks abroad 558 558 - 337 337 - - - - - Governments abroad 589 589 ------Total activity abroad 1,158 1,158 - 347 343 - - -* -* -* Total 41,729 40,124 737 33,108 22,519 692 257 95 (150) 284 * Less than NIS 500 thousand. (1) Balance sheet credit risk and off-balance sheet credit risk, as calculated for the purpose of the limits on indebtedness of a borrower include: Debts in the amount of NIS 22,519 million, bonds in the amount of NIS 6,663 million, borrowed securities in the amount of NIS 182 million, assets in respect of derivative instruments and other instruments in amount of NIS 1,549 million, credit risk in respect of off-balanc sheet financial instruments in the amount of NIS 10,816 million. (2) Credit to the public, credit to the governments, deposits with banks (excluding deposits with the Bank of Israel). (3) Credit risk in respect of off-balance sheet financial instruments as calculated for the purpose of the limits on indebtedness of a borrower, except in respect of derivative instruments. (4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item "Other Liabilities"). The Bank examines and updates the methodology for calculating the allowance for credit losses from time to time. See Note 1.(E).5 to the financial statements. (5) Credit risk that its credit rating at the date of the report matches the credit rating of execution of new credit according to the Bank's policy. (6) Balance sheet and off-balance sheet credit risk that is impaired, inferior, or under special supervision, including in respect of housing loans for which a provision based on the extent of arrears exists, and housing loans for which a provision based on the extent of arrears does not exist, which are in arrears of 90 days or more. (7) Including housing loans, which were provided to an acquisition group, which is in construction procedures. In respect of balance sheet credit risk in the amount of NIS 618 million and in respect of off-balance sheet credit risk in the amount of NIS 428 million. (8) Not including deposits with the Bank of Israel. (9) (Increase) decrease in net write-offs (change in the write-off balance after neutralizing collections and remissions during the period). - 261 -
Appendix E (cont'd) Credit Risk by Economic Sector - Consolidated (cont'd) Reported amounts As at December 31, 2013 Overall credit risk (1) Debts and off-balance sheet credit risk (3) Credit losses (4) Provision Balance of Of which: (income) for Net accounting allowance for Total Problematic(5) Total debts (2) Problematic (5) Impaired credit losses Write-offs(8) credit losses NIS Millions Activity of borrowers in Israel: Public - commercial Agriculture 268 3 268 227 3 3 (2) - -* Industry 2,610 157 2,526 1,299 149 23 4 34 80 Diamonds 1,870 26 1,869 1,245 26 12 (2) 3 18 Constructions and real estate - 6,176 256 6,176 2,097 242 50 (23) 9 53 constructions (6) Constructions and real estate - real estate activities 1,514 45 1,365 930 45 37 (1) (3) 11 Electricity and water 503 - 273 88 - - 1 - -* Commerce 2,619 144 2,531 1,539 134 5 5 (8) 21 Hotels, hospitality and food services 283 1 283 248 1 1 (1) - -* Transportation and storage 324 9 318 179 9 8 2 (2) 2 Communication and computer services 376 12 369 244 12 3 16 (11) 8 Financial services 7,010 281 6,341 4,043 281 268 35 (38) 81 Other business services 1,366 39 1,164 815 4 3 (2) 1 1 Public and community services 612 205 571 442 207 196 (14) - 8 Total commercial 25,531 1,178 24,054 13,396 1,113 609 18 (15) 283 Private individuals - housing loans 7,322** 54 7,322** 6,886 54 - 13 (3) 49 Private individuals - other 3,345** 10 3,328** 2,132 10 5 (8) - 7 Total public – activity in Israel 36,198 1,242 34,704 22,414 1,177 614 23 (18) 339
Banks in Israel(7) 1,862 - 270 270 - - - - - Government of Israel 3,481 ------Total activity in Israel 41,541 1,242 34,974 22,684 1,177 614 23 (18) 339
Borrower activity abroad: Total public – activity abroad 11 - 7 6 - - *- - -* Banks abroad 753 - 349 349 - - - - - Governments abroad ------Total activity abroad 764 - 356 355 - - *- - -* Total 42,305 1,242 35,330 23,039 1,177 614 23 (18) 339 * Less than NIS 500 thousand. ** Reclassified.
(1) Balance sheet credit risk and off-balance sheet credit risk, as calculated for the purpose of the limits on indebtedness of a borrower include: Debts in the amount of NIS 23,039 million, bonds in the amount of NIS 4,701 million, borrowed securities in the amount of NIS 503 million, assets in respect of derivative instruments and other instruments in amount of NIS 1,385 million, credit risk in respect of off-balance sheet financial instruments in the amount of NIS 12,677 million. (2) Credit to the public, credit to the governments, deposits with banks (excluding deposits with the Bank of Israel). (3) Credit risk in respect of off-balance sheet financial instruments as calculated for the purpose of the limits on indebtedness of a borrower, except in respect of derivative instruments. (4) Including in respect of off-balance sheet credit instruments (presented in the balance sheet under the item "Other Liabilities"). (5) Balance sheet and off-balance sheet credit risk that is impaired, inferior, or under special supervision, including in respect of housing loans for which a provision based on the extent of arrears exists, and housing loans for which a provision based on the extent of arrears does not exist, which are in arrears of 90 days or more. (6) Including housing loans, which were provided to an acquisition group, which is in construction procedures. In respect of balance sheet credit risk in the amount of NIS 639 million and in respect of off-balance sheet credit risk in the amount of NIS 615 million. (7) Not including deposits with the Bank of Israel. (8) (Increase) decrease in net write-offs (change in the write-off balance after neutralizing collections and remissions during the period). - 262 -
Appendix F Exposures to Foreign Countries– Consolidated (1) Reported amounts A. Information regarding total exposures to foreign countries and exposures to countries where the total exposure to each country is greater than 1% of the total assets of the consolidated balance sheet or greater than 20% (6) of the capital, whichever is lower
As at December 31, 2014 Cross-border balance- (4) (2),(4) (4) Cross-border balance-sheet exposure Off-balance-sheet exposure sheet exposure
Of which: Total problematic balance- Problematic Total off- off-balance To To sheet balance sheet Impaired balance-sheet sheet credit Maturity up Maturity Country governments(3) To banks others exposure credit risk(4) debts (4) exposure risk to one year over a year NIS millions
United States 589 207 186 982 19 -* 67 - 257 725 Ireland(7)(8) - - 9 9 - - 1 - 9 -* Italy(7)(8) - -* 24 24 24 - 1 - 9 15 Others (7) - 362 552 914 14 13 202 - 501 413 Total exposures to foreign countries 589 569 771 1,929 57 13 271 - 776 1,153 Total exposure to LDC countries - 4 145 149 -* -* 105 - 78 71
The line "Total LDC countries" includes the total exposure to countries defined as less-developed countries (LDCs) in Proper Conduct of Banking Business Directive No. 315, "Supplementary Provision for Doubtful Debts"; this amount is included in the "Others" line in the table above. See Note (5) below.
(1) Based on final risk, after the effect of guarantees and liquid collateral. (2) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on indebtedness of a borrower. (3) Governments, official institutions, and central banks. (4) Balance sheet and off-balance sheet credit risk, problematic credit risk and impaired debts are presented before the effect of allowance for credit losses, and before the effect of deductible collateral regarding indebtedness of a borrower and a group of burrowers. (5) Given that pursuant to the rules of the directive, risk is classified according to residency, Israeli companies were included in this amount wherein the guarantors of the debt (in this case they are also the owners) hold passports of these countries. Regarding LDCs, the Bank does not rely only on this guarantee, but primarily on other collateral, including non-liquid collateral. The Bank does not directly grant credit or finance projects of LDCs. (6) Capital as defined in Proper Conduct of Banking Business Directive No. 202 regarding "Measurement and Capital Adequacy – Capital Components". (7) According to the directives of the Supervisor of Banks an exposure to the countries Portugal, Ireland, Italy, Greece and Spain is required to be disclosed in a separate line. As at December 31, 2014 the Bank doesn't have exposure to the countries: Portugal, Greece and Spain. (8) Given that pursuant to the rules of the directive, risk is classified according to residency, these sums derive from borrowers wherein the guarantors of the debt (in this case they are also the owners) hold Italian or Irish passports. The Bank does not solely rely on this guarantee, but primarily on other collateral including non-liquid collateral. The Bank does not directly grant credit or finance projects of PIIGS countries. * Less than NIS 500 thousand.
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Appendix F (cont'd.) Exposures to Foreign Countries - Consolidated (1) Reported amounts A. Information regarding total exposures to foreign countries and exposures to countries where the total exposure to each country is greater than 1% of the total assets of the consolidated balance sheet or greater than 20% (6) of the capital, whichever is lower.
As at December 31, 2014 Off-balance-sheet exposure Cross-border balance- (4) (2),(4) (4) Cross-border balance-sheet exposure sheet exposure
Of which: Total problematic balance- Problematic Total off- off-balance To To sheet balance sheet Impaired balance-sheet sheet credit Maturity up Maturity Country governments(3) To banks others exposure credit risk(4) debts (4) exposure risk to one year over a year NIS millions
United States - 299 215 514 -* -* 92 - 343 171 Ireland(7)(8) - - 9 9 - - -* - 1 8 Italy(7)(8) - -* 33 33 -* -* 1 - 25 8 Others (7) - 409 577 986 14 14 304 - 594 392 Total exposures to foreign countries - 708 834 1,542 14 14 397 - 963 579 Total exposure to LDC countries - 2 121 123 -* -* 98 - 104 19
The line "Total exposure to LDC countries" includes the total exposure to countries defined as less-developed countries (LDCs) in Proper Conduct of Banking Business Directive No. 315, "Supplementary Provision for Doubtful Debts"; this amount is included in the "Others" line in the table above. See Note (5) below.
(1) Based on final risk, after the effect of guarantees and liquid collateral. (2) Credit risk in off-balance sheet financial instruments, as calculated for the purpose of the limit on indebtedness of a borrower. (3) Governments, official institutions, and central banks. (4) Balance sheet and off-balance sheet credit risk, problematic credit risk and impaired debts are presented before the effect of allowance for credit losses, and before the effect of deductible collateral regarding indebtedness of a borrower and groups of burrowers. (5) Given that pursuant to the rules of the directive, risk is classified according to residency, Israeli companies were included in this amount wherein the guarantors of the debt (in this case they are also the owners) hold passports of these countries. Regarding LDCs, the Bank does not rely only on this guarantee, but primarily on other collateral, including non-liquid collateral. The Bank does not directly grant credit or finance projects of LDCs. (6) Capital as defined in Proper Conduct of Banking Business Directive No. 202 regarding "Measurement and Capital Adequacy – Capital Components". (7) According to the directives of the Supervisor of Banks an exposure to the countries Portugal, Ireland, Italy, Greece and Spain is required to be disclosed in a separate line. As at December 31, 2013 the Bank doesn't have exposure to the countries: Portugal, Greece and Spain. (8) Given that pursuant to the rules of the directive, risk is classified according to residency, these sums derive from borrowers wherein the guarantors of the debt (in this case they are also the owners) hold Italian or Irish passports. The Bank does not solely rely on this guarantee, but primarily on other collateral including non-liquid collateral. The Bank does not directly grant credit or finance projects of PIIGS countries. * Less than NIS 500 thousand.
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Appendix F (cont'd)
Exposures to Foreign Countries – Consolidated
Reported amounts
B. Information regarding countries where total exposure to each country is between 0.75% and 1% of total consolidated assets, or between 15% and 20% of the capital(3), whichever is lower
As at December 31, 2014: The Bank has no exposure.
As at December 31, 2013: The Bank has no exposure.
C. Information regarding balance-sheet exposure to foreign countries with liquidity problems in NIS millions (1), (2), (4): As at December 31, 2014 As at December, 31, 2013 India Ireland Total India Ireland Total
Amount of exposure at the beginning of the reporting period 40 10 50 59 9 68 Net changes in amount of short-term exposure 12 8 20 (17) (8) (25) Other changes (1) (9) (10) (2) 9 7 Amount of exposure at year the end of the reporting period 51 9 60 40 10 50
(1) The aforesaid disclosure includes countries meeting the criteria listed below: - Countries that have received aid from the International Monetary Fund (IMF). - Countries rated CCC or lower by the international rating agency S&P. - Countries classified by the World Bank in the low or medium income level group. (2) Since risk is classified, under the rules of the directive, according to the residence of the guarantor, this amount includes Israeli companies whose guarantors (who in this case are also the owners) hold passports from these countries. With regard to countries with liquidity problems, the Bank does not rely on this guarantee alone; it relies primarily on other collateral, including non-liquid collateral. The Bank does not directly grant credit or finance projects of countries with liquidity problems. (3) Capital as defined in Proper Conduct of Banking Business Directive No. 202 in respect of "Measurement and Capital Adequacy - Capital Components". (4) The Bank has no exposure to the countries: Portugal, Greece and Spain. - 265 -
Appendix G Condensed Consolidated Balance Sheet at the End of Each Quarter for the Years 2013 - 2014 Reported amounts
Year 2014 2013 Quarter 4 3 2 1 4 3 2 1 NIS millions NIS millions
Assets Cash on hand and deposits with banks 9,848 8,000 6,777 6,912 9,924 7,854 9,395 7,709 Securities 6,789 6,074 6,175 5,353 4,810 4,897 5,464 5,867 Borrowed securities 182 543 518 562 503 - 27 417 Credit to the public 21,959 24,253 23,887 23,942 22,420 22,763 23,010 24,254 Allowance for credit losses (246) (256) (255) (275) (285) (283) (290) (281) Net credit to the public 21,713 23,997 23,632 23,667 22,135 22,480 22,720 23,973
Credit to the government *------Investment in investee companies - - - -* 1 1 1 1 Buildings and equipment 404 385 392 396 405 394 390 392 Assets in respect of derivative instruments 504 432 204 331 572 521 748 485 Other assets 1,413 1,280 971 937 1,140 1,768 1,378 1,251 Total assets 40,853 40,711 38,669 38,158 39,490 37,915 40,123 40,095
Liabilities and Equity Deposits from the public 31,498 31,328 30,378 29,488 30,622 29,804 31,447 31,693 Deposits from banks 152 227 172 185 209 176 152 183 Deposits from the government 1 1 1 2 3 1 1 -* Subordinated notes and bonds 3,474 3,465 3,059 3,224 3,109 3,098 3,126 2,972 Liabilities in respect of derivative instruments 575 457 280 405 667 631 863 641 Other liabilities 2,777 2,780 2,368 2,475 2,545 1,906 2,290 2,387 Total liabilities 37,155 35,616 37,879 37,876 38,477 38,258 36,258 35,779 Equity attributed to the shareholders of the banking 2,376 2,453 2,411 2,379 2,335 2,299 2,244 2,219 corporation
Total liabilities and equity 40,853 40,711 38,669 38,158 39,490 37,915 40,123 40,095
* Less than NIS 500 thousand.
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Appendix H
Condensed Consolidated Statements of Profit and Loss for Each Quarter for the Years 2013 - 2014 Reported amounts 2014 2013 4 3 2 1 4 3 2 1 NIS millions NIS millions
Interest income 196 227 241 201 249 342 323 295 Interest expenses 56 85 102 55 91 167 155 134 Net interest income 140 142 139 146 158 175 168 161 Provision (income) for credit losses 126 (8) (25) 2 (3) 12 14 -* Net interest income after provision for credit losses 14 150 164 144 161 163 154 161
Non-interest income: Non-interest financing income (expenses) 28 19 28 27 18 8 26 26 Fees 70 69 68 71 71 68 70 71 Other income - 6 -* -* 1 1 -* -* Total non-interest income 98 94 96 98 90 77 96 97
Operating and other expenses: Salaries and related expenses 93 106 112 121 109 117 109 121 Maintenance and depreciation of buildings and equipment 39 40 40 38 39 38 38 38 Other expenses 59 49 50 50 56 47 54 47 Total operating and other expenses 191 195 202 209 204 202 201 206
Profit (loss) before taxes (79) 49 58 33 47 38 49 52 Provision for taxes on profit (37) 17 21 10 10 4 15 17 Profit (loss) after taxes (42) 32 37 23 37 34 34 35 The Bank's share in investee companies' net profits after taxes - - - -* -* -* -* -* Net profit (loss): Attributed to shareholders of the banking corporation (42) 32 37 23 37 34 34 35
Earnings per ordinary share (NIS): Basic and diluted earnings: Net profit attributed to shareholders of the Bank (0.57) 0.44 0.50 0.31 0.51 0.46 0.46 0.48
* Less than NIS 500 thousand.
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Declaration I, Israel Trau, declare that: 1. I have reviewed the annual report of Union Bank of Israel Ltd. (hereinafter: the “Bank”) for the year 2014 (hereinafter: the “Report”). 2. Based on my knowledge, the Report contains no incorrect presentation of a material fact, nor is there a lack of presentation of a material fact in the Report, that is necessary so that the presentations included in it, in light of the circumstances under which such presentations were included, are not misleading with regard to the period covered by the Report. 3. Based on my knowledge, the financial statements and other financial information included in the Report correctly reflect, the financial condition, results of operations, changes in shareholders’ equity, and cash flows of the Bank, in all material aspects, for the dates and periods presented in the Report. 4. I, and others at the Bank declaring this declaration, are responsible for the establishment and application of controls and procedures regarding the disclosure20 and the Bank's internal control on financial reporting1; furthermore: (A) We have established such controls and procedures, or caused such controls and procedures to be established under our supervision, aimed at ensuring that material information pertaining to the Bank, including its consolidated corporations, is brought to our knowledge by others at the Bank and at such corporations, in particular during the preparation of the Report; (B) We have established internal control over financial reporting, or caused such internal control to be established under our supervision, designed to provide a reasonable degree of confidence with regard to the reliability of financial reporting, and that the financial statements for external purposes are prepared in compliance with generally accepted accounting principles and with the directives and guidelines of the Supervisor of Banks. (C) We have assessed the effectiveness of the controls and procedures concerning the disclosure of the Bank, and we have presented our findings in the report regarding the effectiveness of the controls and procedures concerning the disclosure, for the end of the period covered in the Report, based on our assessment; and (D) We have disclosed in the Report every change in the Bank's internal control of financial reporting that occurred during the fourth quarter, and that had a material effect, or is likely to have a material effect, on the Bank's internal control of financial reporting; and 5. I, and others at the Bank declaring this declaration, have disclosed to the external auditor, to the Board of Directors, and to the Audit Committee of the Board of Directors of the Bank, based on our most current assessment of the internal control of financial reporting: (A) Any significant deficiencies and material weaknesses in the establishment or application of internal control of financial reporting that can reasonably be expected to impair the Bank’s ability to record, process, summarize, or report financial information; and (B) Any fraud, whether material or immaterial, in which management was involved, or in which other employees were involved who have a significant role in the internal control of financial reporting at the Bank. The aforesaid shall not detract from my responsibility, or from the responsibility of any other person, under any law.
______Israel Trau C.E.O.
February 26, 2015
20 As defined in the Public Reporting Directives concerning the "Board of Directors' Report".
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Declaration I, Arnon Zait, declare that: 1. I have reviewed the annual report of Union Bank of Israel Ltd. (hereinafter: the “Bank”) for the year 2014 (hereinafter: the “Report”). 2. Based on my knowledge, the Report contains no incorrect presentation of a material fact, nor is there a lack of presentation of a material fact in the Report that is necessary so that the presentations included in it, in light of the circumstances under which such presentations were included, are not misleading with regard to the period covered by the Report. 3. Based on my knowledge, the financial statements and other financial information included in the Report correctly reflect the financial condition, results of operations, changes in shareholders’ equity, and cash flows of the Bank, in all material aspects, for the dates and periods presented in the Report. 4. I, and others at the Bank declaring this declaration, are responsible for the establishment and application of controls and procedures regarding the disclosure1 and the Bank's internal controls on financial reporting1; furthermore: (A) We have established such controls and procedures, or caused such controls and procedures to be established under our supervision, aimed at ensuring that material information pertaining to the Bank, including its consolidated corporations, is brought to our knowledge by others at the Bank and at such corporations, in particular during the preparation of the Report; (B) We have established internal control over financial reporting, or caused such internal control to be established under our supervision, designed to provide a reasonable degree of confidence with regard to the reliability of financial reporting, and that the financial statements for external purposes are prepared in compliance with generally accepted accounting principles and with the directives and guidelines of the Supervisor of Banks. (C) We have assessed the effectiveness of the controls and procedures concerning the disclosure of the Bank, and we have presented our findings in the report regarding the effectiveness of the controls and procedures concerning the disclosure, for the end of the period covered in the Report, based on our assessment; and (D) We have disclosed in the Report every change in the Bank's internal control of financial reporting that occurred during the fourth quarter, and that had a material effect, or is likely to have a material effect, on the Bank's internal control of financial reporting; and 5. I, and others at the Bank declaring this declaration, have disclosed to the external auditor, to the Board of Directors, and to the Audit Committee of the Board of Directors of the Bank, based on our most current assessment of the internal control of financial reporting: (A) Any significant deficiencies and material weaknesses in the establishment or application of internal control of financial reporting that can reasonably be expected to impair the Bank’s ability to record, process, summarize, or report financial information; and (B) Any fraud, whether material or immaterial, in which management was involved, or in which other employees were involved who have a significant role in the internal control of financial reporting at the Bank. The aforesaid shall not detract from my responsibility, or from the responsibility of any other person, under any law.
Arnon Zait Chief Accountant, C.F.O. February 26, 2015
1 As defined in the Public Reporting Directives concerning the "Board of Directors' Report".
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Report of the Board of Directors and Management on the Internal Control over Financial Reporting
The Board of Directors and the management of Union Bank of Israel Ltd. (hereinafter: "the Bank") are responsible for the establishment and maintenance of adequate internal control over financial reporting (as defined in the Public Reporting Directives concerning "The Board of Directors' Report"). The internal control system of the Bank was designed to provide a reasonable degree of confidence to the Board of Directors and Management of the Bank regarding the fair preparation and presentation of financial statements, published in compliance with generally accepted accounting principles and with the directives and guidelines of the Supervisor of Banks. Regardless of the quality of planning of such systems, all internal control systems have inherent limitations. Therefore, even if we determine that these systems are effective, they can provide only a reasonable degree of confidence with regard to the preparation and presentation of the financial statements.
Management, under the supervision of the Board of Directors, maintains a comprehensive system of controls aimed at ensuring that transactions are executed in accordance with management authorizations that assets are protected and that accounting records are reliable. In addition, management, under the supervision of the Board of Directors, takes steps to ensure that information and communication channels are effective and monitor performance, including the performance of internal control procedures.
The management of the Bank, under the supervision of the Board of Directors, has assessed the effectiveness of the internal control over financial reporting at the Bank as of December 31, 2014, based on criteria established in the internal control model of the Committee of Sponsoring Organizations of the Treadway Commission 1992 (COSO). Based on this assessment, management believes that as of December 31, 2014, the internal control over financial reporting of the Bank is effective.
The effectiveness of the Bank's internal control over financial reporting as of December 31, 2014 was audited by the external auditors of the Bank, Somekh Chaikin, as noted in their report on page 213, which includes an unqualified opinion regarding the effectiveness of the Bank's internal control over financial reporting as of December 31, 2014.
Zeev Abeles Israel Trau Arnon Zait Chairman of the Board C.E.O. Chief Accountant, of Directors C.F.O.
Date of Approval of the report for publication: February 26, 2015
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Financial Statements as at December 31, 2014
Contents Page
Auditors’ Reports to the Shareholders 272
Financial Statements
Balance Sheets 276
Statements of Profit and Loss 278
Statement of Comprehensive Income 279
Statements of Changes in Equity 280
Statements of Cash Flows 281
Notes to the Financial Statements 283
- 271 -
Somekh Chaikin
Mail address Office address Telephone 972 3 684 8000 PO Box 609 KPMG Millennium Tower Fax 972 3 684 8444 Tel Aviv 61006 17 Ha'arba'a Street Israel Teel Aviv 64739
Auditors' Report to the shareholders of Union Bank of Israel Ltd. In accordance with Public Reporting Directives of the Supervisor of Banks regarding internal control over financial reporting
We have audited the internal control of Union Bank of Israel Ltd. (hereinafter –the "Bank”) over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (hereinafter: "COSO"). The Bank’s Board of Directorss and Management are responsible for maintaining effective internal control over financial reporting and for their assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of the Board of Directors and Management on internal control over financial reporting. Our responsibility is to express an opinion on the Bank’’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB) in the United States regarding the audit of internal control over financial reporting, as adopted by the Institute of Certified Public Accountanntts in Israel. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in alll material aspects. Our audit included obtaining an understtanding of internal control over finnancial reporting, assessing the risk that a material weakneess exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary under the ciircumstances. We believe that our audit provides a reasonable basis for our opinion.
A Bank’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in Israel (Israeli GAAP) and with the directives and guidelines of the Supervisor of Banks. A bank's internal control over financial reporting includes those policies and prrocedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and transfers of the assets of the Bank (including dispositions ) (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statement in accordance with generally accepted accounting principles in Israel (Israeli GAAP) and directives and guidelines of the Supervisor of Banks, and that receeipts and payment of funds of the bank are being made only in accordance with authorizations of management and Board of Directors of the Bank; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Bank’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internaal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subjecct to the risk that controls may become inadequate because of changes inn circumstances, or that the degree of compliance with the policies or procedures may deteriorate.
- 272 -
Somekh Chaikin
Mail address Office address Telephone 972 3 684 8000 PO Box 609 KPMG Millennium Tower Fax 972 3 684 8444 Tel Aviv 61006 17 Ha'arba'a Street Israel Teel Aviv 64739
In our opinion, the Bank maintained, in all material respects, effective matterial control over financial reporting as of December 31, 2014, based on criteria established in IInternal Control – Integrated Framework (1992) issued by COSO.
We have also audited, in accordance with generally accepted auditing standards in Israel, and certain auditing standards whose applicatiion in the audit of banking institutions was required in directiives and guidelines of the Supervisor of Banks, the Bank’s accommppanying financial statements and consolidated financial statements as of December 31 ,2014 and 2013 and for each of the three years in the period ended December 31, 2014, and our reporrt of February 26, 2015, included an unqualified opinion on those financial statements, as well as drawing attention to that noted in Note 18.C(18)D to the financial statements in respect of contingent liabilities.
Somekh Chaikin Certified Public Accountants (ISR)
February 26, 2015
- 273 -
Somekh Chaikin
Mail address Office address Telephone 972 3 684 8000 PO Box 609 KPMG Millennium Tower Fax 972 3 684 8444 Tel Aviv 61006 17 Ha'arba'a Street Israel Teel Aviv 64739 Israel
Auditors’ Report to the Shareholders of Union Bank of Israel Ltd. – Annual Financial Statements
We have audited the accompanying balance sheets of Union Bank of Israel Liimited (hereinafter - the Bank) as at December 31, 2014 and 2013 and the consolidated balance sheets of the Bank and its subsidiaries as such dates and the related statements of profit and loss, statements of comprehensive income, statements of changes in equity and the consolidated statements of cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Bank’s Board of Directors and of its Management. Our responsibility is to express an opinion on these financial statements based on our audit.
We did not audit the financial statements of consolidated subsidiaries, whose net interest income, before provision for credit losses and non-interest income included in the consolidated statements of profit and loss constitute approximately 2.15%, 1.62% and 1.01% of the net consoolidated income from interest before provision for credit losses and non-interest income for the years ended December 31, 2014, 2013 and 2012 respectively. The finanncial statements of those subsidiaries were audited by other auditors whose reports thereon have been furnished to us and our opinion, insofar as it relates to amounts included in respect of these companies is based on the reports of the other auditors.
We conducted our audit in accordance with Generally Accepted Auditing Sttandards in Israel, including standards prescribed by the Auditors Regulations (Manner of Auditors' Performance) - 1973 and certain audit standards implementation of which in the audit of baanking institutions was required in directives and guidelines of the Supervisor of Banks. Such standards require that we plan and perform the audit in order to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examiningg, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and by Managementn of the bank, as well as evaluating the appropriateness of the overall financial statements presentation. WWe believe that our audit and the reports of the other auditors provide a reasonable basis for our opinion.
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Somekh Chaikin, a partnership registered under the Israeli Partnership Ordinance, is a member of KPMG International, a Swiss cooperative.
Somekh Chaikin
Mail address Office address Telephone 972 3 684 8000 PO Box 609 KPMG Millennium Tower Fax 972 3 684 8444 Tel Aviv 61006 17 Ha'arba'a Street Israel Teel Aviv 64739 Israel
In our opinion, based on our audit and on the reports of abovementioned other auditors, the financial statements referred to above present fairly, in all material aspects, thee financial position - of the Bank and consolidated - as at December 31, 2014 and 2013 and the results of operations, changes in equity and cash fflows - of the Bank and consolidated - for each of the three years ending in the period December 31, 2014, in conformity with Generally Accepted Accounting Principles (Israeli GAAP) . Furthermore, the above financial statements have, in our opinion, been prepared in accordance with the directives and guidelines of the Supervisor of Banks.
Without qualifying our above opinion, we draw your attention to Note 18.C.(18)D to the financial statements in respect of contingent liabilities.
We have also audited, in accordance with standards of the PCAOB (Public Company Accounting Oversight Board) in the United States regarding the audit of intteernal control over financial reporting, as adopted by the Institute of Certified Public Accountants in Israel, internal control over financial reporting of the Bank as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by tthe Committee of Sponsoring Organizations of the Treadway Commission (COSO) , and our repoort as of February 26, 2015, included an unqualified opinion on the effectiveness of internal control on financial reporting by the Bank.
Somekh Chaikin Certified Public Accountants (Isr.)
February 26, 2015
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Somekh Chaikin, a partnership registered under the Israeli Partnership Ordinance, is a member of KPMG International, a Swiss cooperative.
Balance Sheets as at December 31
Reported amounts
Consolidated The Bank 2014 2013 2014 2013 Note NIS millions
Assets
Cash on hand and deposits with banks 2 9,848 9,924 9,848 9,924
Securities (1) 3 6,789 4,810 6,732 4,748
Borrowed securities 182 503 182 503
Credit to the public 4 21,959 22,420 21,883 22,350
Allowance for credit losses (246) (285) (244) (282)
Net credit to the public 21,713 22,135 21,639 22,068
Credit to the government -* - - - Investment in investee companies 5 - 1 544 543
Buildings and equipment 6 404 405 404 405
Assets in respect of derivative instruments 19 504 57 2 504 572
Other assets (2) 7 1,413 1,140 1,406 1,136
Total assets 40,853 39,490 41,259 39,899
______Z. Abeles, Chairman of the Board of Directors
______Y. Landau, Vice Chairman of the Board of Directors
______I. Trau, Chief Executive Officer
______A. Zait, Chief Financial Officer, Deputy General Manager
Date of the approval of the financial statements: February 26, 2015
The accompanying notes are an integral part of the financial statements.
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Balance Sheets as at December 31 (cont'd)
Consolidated The Bank 2014 2013 2014 2013 Note NIS millions
Liabilities and Equity
Deposits from the public 8 31,498 30,622 35,171 33,832
Deposits from banks 9 152 209 152 209
Deposits from the government 1 3 1 3
Subordinated notes and bonds 10 3,474 3,109 64 168
Liabilities in respect of derivative instruments 19 575 667 575 667
Other liabilities (3),(4) 11 2,777 2,545 2,920 2,685
Total liabilities 38,477 37,155 38,883 37,564
Total equity (5) 12 2,376 2,335 2,376 2,335
Total liabilities and equity 40,853 39,490 41,259 39,899
(1) Of which: securities pledged to the Stock Exchange and Maof Clearing House in the amount of NIS 680 million (December 31, 2013: NIS 776 million). (2) Of which: other assets at fair value in the amount of NIS 1,045 million (December 31, 2013: NIS 813 million). (3) Of which: other liabilities at fair value in the amount of NIS 1,868 million (December 31, 2013: NIS 1,638 million). (4) Of which: Allowance for credit losses in respect of off-balance-sheet credit instruments in the amount of NIS 38 million (December 31, 2013: NIS 54 million). (5) Equity attributed to the banking corporations' shareholders.
* Less than NIS 500 thousand.
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Statements of Profit and Loss for the Year Ended December 31 Reported amounts Consolidated The Bank 2014 2013 2012 2014 2013 2012 Note NIS millions
Interest income 22 865 1,209 1,416 854 1,196 1,402 Interest expenses 22 298 547 756 309 561 772 Net interest income 567 662 660 545 635 630 Provision for credit losses 4 95 23 65 95 22 63 Net interest income after provision for credit losses 472 639 595 450 613 567
Non-interest income: Non-interest financing income (expenses) 23 102 78 65 89 62 59 Fees 24 278 280 288 254 258 272 Other income 25 6 2 4 6 2 3 Total non-interest income 386 360 357 349 322 334
Operating and other expenses: Salaries and related expenses 26 432 456 455 425 449 448 Maintenance and deprecation of buildings and equipment 157 153 147 157 151 146 Other expenses 27 208 204 198 204 200 194 Total operating and other expenses 797 813 800 786 800 788
Profit before taxes 61 186 152 13 135 113 Provision for taxes on profit 28 11 46 25 5 35 19 Profit after taxes 50 140 127 8 100 94 The Bank's share in investee companies' net profits after taxes 5 -* -* -* 42 40 33
Net profit: attributed to shareholders of the bank 50 140 127 50 140 127
Basic and diluted earnings per share (NIS) 29
Net profit attributed to shareholders of the bank 0.68 1.91 1.73 0.68 1.91 1.73
* Less than NIS 500 thousand.
The accompanying notes are an integral part of the financial statements.
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Condensed Consolidated Statement of Comprehensive Income for the Year Ended December 31 Reported amounts 2014 2013 2012
Note NIS millions
Net profit attributed to the bank' shareholders 50 140 127
Other comprehensive income, before taxes: Net adjustments in respect of securities available for sale at fair value (13) 10 122
Other comprehensive income, before taxes (13) 10 122
Effect of related tax 4 (6) (43)
Other comprehensive income attributed to the shareholders of (9) 4 79 the bank, after taxes
Comprehensive income attributed to the shareholders of the 41 144 206 bank
The accompanying notes are an integral part of the financial statements.
-279-
Statements of Changes in Equity For the year ended December 31, 2014 Reported amounts
Benefits in Share respect of Cumulative Capital Share-Based Other and Payment Comprehensive Non-Controlling Premium Transactions Income (1) Surplus (2) Total Interests Total Equity NIS millions
Balance as at January 1, 2012 952 26 (5) 1,012 1,985 1 1,986
Non-controlling put options (3) - - - - - (1) (1) Net profit for the year - - - 127 127 - 127 Net other comprehensive income, after tax effect - - 79 - 79 - 79 Balance as at December 31, 2012 952 26 74 1,139 2,191 - 2,191
Net profit for the year - - - 140 140 - 140 Net other comprehensive income, after tax effect - - 4 - 4 - 4 Balance as at December 31, 2013 952 26 78 1,279 2,335 - 2,335
Net profit for the year - - - 50 50 - 50 Net other comprehensive income, after tax effect - - (9) - (9) - (9) Balance as at December 31, 2014 952 26 69 1,329 2,376 - 2,376
(1) See Note 30. (2) With respect to the restriction on dividend distribution, see Note 12(2). (3) Initial implementation of the letter from the Bank of Israel concerning the treatment of put options given to the non-controlling interest – for details see Note 1.E.1.B.
The accompanying notes are an integral part of the financial statements.
-280- NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Statements of Cash Flows for the Year Ended December 31 Reported amounts Consolidated The Bank 2014 2013 2012 2014 2013 2012 NIS millions NIS millions
Net profit for the year 50 140 127 50 140 127
Adjustments: The Bank's share in the undistributed losses (profits) of equity-basis investees -* -* -* (42) (40) (33) Depreciation of buildings and equipment (including impairment) 73 68 65 73 68 65 Provision for credit losses 95 23 65 95 22 63 Net Profit from sale of securities (71) (72) (80) (63) (59) (79) available for sale Realized and unrealized net( loss) profit from adjustments to fair value of securities held for trading (19) (7) (4) (19) (7) (4) Profit from sale of a subsidiary (4) - - (4) - - Profit from sale of buildings and equipment - (1) (2) - (1) (2) Net deferred taxes (5) (14) 6 (2) (15) 5 Retirement compensation - decrease (increase) in the excess accrued reserve over prepaid assets (35) (12) (7) (35) (12) (7) Adjustment differences included in investment and financing activities (99) 125 69 (96) 93 47 Adjustments in respect of exchange - rate differences on cash balances 8 32 (1) 8 32 (1)
Net change in current assets: Deposits with banks 17 203 (140) 17 203 (140) Credit to the public 387 1,438 (749) 394 1,446 (742) Decrease (increase) in borrowed securities 321 (435) (63) 321 (435) (63) Decrease (increase) in assets in respect of derivative instruments 68 (96) 370 68 (96) 370 Securities held for trading (99) (188) 682 (99) (188) 682 Decrease (increase) in other assets (264) (9) (131) (264) (8) (133)
Net change in current liabilities: Net deposits from banks (57) (35) (148) (57) (35) (148) Net deposits from the public 876 (268) (268) 1,339 (44) 3 Net deposits from the government (2) 2 - (2) 2 - Increase (decrease) in net liabilities in respect of derivative instruments (92) 75 (315) (92) 75 (315) Increase (decrease) in other Liabilities, net 262 576 284 265 568 286 Net cash flows from (for) operating activities 1,410 1,545 (240) 1,855 1,709 (19) Cash flows from investment activities Acquisition of securities available for sale (12,281) (12,808) (10,617) (12,268) (12,807) (10,608) Proceeds from sale of securities available for sale 8,160 10,513 7,386 8,143 10,482 7,332 Proceeds from redemption of securities available for sale 2,350 2,588 4,536 2,350 2,588 4,521 Proceeds from realization and revenue from investments in investee companies 1 - - 26 - - Proceeds from realization of a no longer consolidated subsidiary (appendix B) 4 - - 4 - - Acquisition of buildings and equipment (67) (72) (74) (67) (72) (74) Proceeds from sale of buildings and equipment - 1 11 - 1 11 Dividend received from a subsidiary - - - 6 44 7 Net cash for (from) investment activities (1,833) 222 1,242 (1,806) 236 1,189
* Less than NIS 500 thousand.
281
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Statements of Cash Flows for the Year Ended December 31 (cont’d) Reported amounts
Consolidated The Bank 2014 2013 2012 2014 2013 2012 NIS millions NIS millions
Cash flows from financing activity Issuance of subordinated notes and deposit certificates 688 486 366 - - - Redemption of subordinated notes and deposit certificates (316) (340) (224) (100) (32) (26)
Net cash from financing activity 372 146 142 (100) (32) (26) Increase in cash (51) 1,913 1,144 (51) 1,913 1,144 Balance of cash at the beginning of year 9,776 7,895 6,750 9,776 7,895 6,750 Effect of changes in exchange rates on cash balances (8) (32) 1 (8) (32) 1 Balance of cash at end of year 9,717 9,776 7,895 9,717 9,776 7,895
Interest and taxes paid and/or received: Interest received 954 1,408 1,270 965 1,408 1,270 Interest paid (469) (593) (832) (377) (593) (728) Dividends received from shares available for sale 5 4 5 1 1 - * Income tax paid (92) (79) (111) (75) (70) (98) Income tax received 41 36 54 35 24 44
The accompanying notes are an integral part of the financial statements.
282
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Statements of Cash Flows for the Year Ended December 31 (cont’d) Reported amounts
Appendix A - Non-Cash Activities in Assets and Liabilities:
Year 2014 A. Securities in the amount of NIS 60 million, net were transferred, NIS 53 million from the available for sale portfolio and NIS 7 million from the trading portfolio to credit to the public due to the lending of securities - consolidated and Bank. B. Assets in the amount of NIS 21 million were purchased against liability to suppliers Year 2013 A. Securities in the amount of NIS 23 million, net, were transferred from the available for sale portfolio to credit to the public due to the lending of securities - consolidated and Bank. B. Assets in the amount of NIS 15 million were purchased against liability to suppliers. Year 2012 A. Securities in the amount of NIS 21 million, net, were transferred from the available for sale portfolio to credit to the public due to the lending of securities - consolidated and Bank. B. Assets in the amount of NIS 12 million were purchased against liability to suppliers.
Appendix B – proceeds from the realization of a previously consolidated subsidiary:
Assets and liabilities of the previously consolidated subsidiary and cash flows from the realization of the previously consolidated subsidiary, for the date of the sale (September 30, 2014):
NIS millions Derecognized cash (21) Assets (excluding cash) - * liabilities _* Identifiable assets and liabilities (21) Capital gain from the realization of a previously consolidated subsidiary 4 Total proceeds received in cash from the realization of a previously consolidated subsidiary 25 Less: derecognized cash (21) Cash flow from the realization of the investment in a previously consolidated subsidiary 4
* Less than NIS 500 thousand.
The accompanying notes are an integral part of the financial statements.
283
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies A. General 1. Union Bank Ltd. (hereinafter: the "Bank") is an Israeli corporation. The consolidated financial statements of the Bank and its subsidiary companies as of December 31, 2014 were prepared in accordance with generally accepted accounting principles in Israel (Israeli GAAP) and in accordance with the directives and guidelines of the Supervisor of Banks.
2. The notes to the financial statements refer to the financial statements of the Bank and to the consolidated financial statements of the Bank and its subsidiary companies, except for cases in which the note indicates that it refers only to the financial statements of the Bank or only to the consolidated financial statements.
3. The financial statements were approved for publication by the Board of Directors of the Bank on February 26, 2015.
B. Definitions In these financial statements: 1. International Financial Reporting Standards (hereinafter: "IFRS") - Standards and interpretations adopted by the International Accounting Standards Board (IASB), which include International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS), including interpretations of these standards by the International Financial Reporting Interpretations Committee (IFRIC) or by the Standing Interpretations Committee (SIC), respectively.
2. Generally Accepted Accounting Principles (GAAP) for US Banks - Accounting principles which American banks, traded in the United States, are required to implement. These rules are established by the bank supervision agencies in the United States, the Securities and Exchange Commission in the United States, the Financial Accounting Standards Board in the United States, and other entities in the United States, and implemented according to the hierarchy established in the American accounting standard FAS 168 (ASC 105-10), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. In addition, as established by the Supervisor of Banks, despite the hierarchy established in FAS 168, it has been clarified that any stance stated to the public by the bank supervision agencies in the United States or by the staff of the bank supervisory authorities in the United States regarding the manner of implementation of US GAAP is an accounting rule accepted in U.S. banks.
3. Subsidiaries - companies whose financial statements are fully consolidated, directly or indirectly, with the financial statements of the Bank.
284
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) B. Definitions (cont'd.) 4. Affiliated Companies - companies, excluding subsidiaries, that the Bank's investment in them, directly or indirectly, is included in the Bank's financial statements on the equity basis.
5. Investee Company - subsidiaries and affiliated companies.
6. Related Parties - as defined in IAS 24, Related Party Disclosures, excluding Interested Parties.
7. Interested Parties - as defined in paragraph (1) of the definition of an "Interested party" in Section 1 of the Securities Law – 1968.
8. CPI - The Consumer Price Index published by the Central Bureau of Statistics.
9. Adjusted Amount - the nominal historical amount adjusted to the CPI in respect of December 2003, according to the provisions of the Opinions Statement no. 23 and 36 of the Institute of Certified Public Accountants in Israel.
10. Reported Amount - the amount adjusted to the transition date (December 31, 2003), with the addition of amounts in nominal values that were added after the transition date less amounts eliminated after the transition date.
11. Cost - Cost in the reported amount.
12. Nominal Financial Report - financial report based on reported amounts.
C. Financial statements in Reported Amounts 1. Reporting Principles The financial statements of the Bank are prepared in accordance with the Public Reporting Directives and Guidelines of the Supervisor of Banks. In preparing the financial statements, the Bank implements, inter alia, certain international financial reporting standard (IFRS) and GAAP for US banks, as follows: On matters related to the core business of banking – the accounting treatment is in accordance with the directives and guidelines of the Supervisor of Banks, and in accordance to GAAP for US banks which have been adopted as part of the Public Reporting Directives of the Supervisor of Banks. Matters related to the core business of banking were defined by the supervision of banks as financial instruments including, inter alia, hedge accounting, revenue recognition including customer loyalty programs, allowance for credit losses, contingent liabilities and provisions, presentation of financial statements and segmental reporting.
285
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) C. Financial statements in Reported Amounts (cont'd.) 1. Reporting Principles (cont'd.) On matters not related to the core business of banking - the accounting treatment is in accordance with Israeli GAAP, and in accordance with certain IFRS. International standards are implemented accordance to the following principles:
o Cases in which a material issue arises and is not resolved in the IFRS or in the implementation instructions of the Supervisor, the Bank treats the issue according to GAAP for US banks specifically applicable to these matters;
o Cases in which there is no specific reference to material matters in the standards or in the interpretations, or there are several treatment alternatives concerning a material matter, the Bank acts according to specific implementation guidelines established by the Supervisor.
o If an IFRS that has been adopted contains a reference to another IFRS adopted in the Public Reporting Directives, the Bank acts according to the IFRS;
o If an IFRS that has been adopted contains a reference to another IFRS that has not been adopted by the Public Reporting Directives, the Bank acts according to the Reporting Directives and the Israeli GAAP;
o If an IFRS that has been adopted contains a reference to a definition of a term defined in the Public Reporting Directives, a reference to the definition in the directives shall replace the original reference.
2. Functional Currency and Presentation Currency The NIS is the currency representing the primary economic environment in which the Bank operates. The financial statements are presented in NIS and rounded to the nearest million, unless otherwise noted.
3. Measurement Base The financial statements were prepared on the basis of historical cost, with the exception of the assets and liabilities listed below: o Derivative financial instruments and other financial instruments measured at fair value through profit and loss (such as investment in securities held for trading);
o Financial instruments classified as available for sale;
286
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) C. Financial statements in Reported Amounts (cont'd.) 3. Measurement Base (cont'd.) o Deferred tax assets and liabilities;
o Provisions;
o Assets and liabilities in respect of employee benefits;
The Value of non-monetary assets and equity items measured on the basis of historical cost was adjusted to changes in the CPI up until December 31, 2003, because the Israeli economy was considered a hyper-inflationary economy up until that date. As of January 1, 2004, the Bank has been preparing its financial statements in reported amounts.
4. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in Israel (Israeli GAAP) and the directives and guidelines of the Supervisor of Banks requires the Bank's management to use estimates and assumptions that affect the policy implementation and the amounts of assets and liabilities, income and expenses. It is clarified that actual results may differ from these estimates. In formulating the accounting estimates used to prepare the financial statements of the Bank, the management of the Bank is required to make assumptions with regard to circumstances and events that involve significant uncertainty. In its judgment when establishing the estimates, management relies on past experience, various facts, external factors, and on reasonable assumptions according to the circumstances appropriate to each estimate. An actuarial change regarding the estimate of the salary increase rate was updated this year according to the estimations of the Banks' management.
The estimates and the underlying assumptions are reviewed routinely. Changes in accounting estimates are recognized during the period in which the estimates were amended and in every affected future period.
D. Initial Implementation of Accounting Standards, Accounting Standards Updates and Directives of the Supervisor of Banks In the financial statements for 2014 the bank implements the following financial standards and directives:
287
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) D. Initial Implementation of Accounting Standards, Accounting Standards Updates and Directives of the Supervisor of Banks (cont'd.) 1. Evaluation of Credit Risk and Nonperformance Risk in the Measurement of Fair Value of Derivative Instruments Pursuant to the directives of the Supervisor of Banks, credit risk should be reflected in measuring the fair value of derivative instruments not traded in an active market. Until 2013, the Bank adopted the transitional directives and used the current position method. Beginning in the first quarter of 2014, the Bank has implemented a more advanced approach, which takes into consideration the exposure to credit risk over the life of the transaction. The implementation of the advanced approach had no material effect on the financial statements of the Bank.
2. Directive Concerning the Format of the Statement of Profit and Loss of a Banking Corporation and the Adoption of GAAP for US Banks on Interest Income Measurement As of January 1, 2014, the Bank has applied the instructions set forth in the circular of the Supervisor of Banks concerning the adoption of GAAP for US banks on interest income measurement (ASC 310-20), which among other matters establishes rules for the treatment of credit origination fees, commitments to grant credit, changes in the terms of debt, and early repayment fees.
Credit Origination Fees Fees charged for credit origination, with the exception of loans for a period of up to three months, are not recognized immediately as income in the Statement of Profit and Loss; instead, they are deferred and recognized over the life of the loan as an adjustment of the return. Income from such fees is allocated according to the effective interest rate method, and reported as part of interest income.
Credit Allocation Fees Credit allocation fees are treated according to the probability of realization of the commitment to grant credit. If the probability is remote, the fee is recognized on a straight-line basis over the period of the commitment; otherwise, the Bank defers recognition of the income from such fees until the date of realization of the commitment or until it expires, whichever is earlier. If the commitment is realized, the fees are recognized through an adjustment of the return over the life of the loan, as noted above. If the commitment expires without being realized, the fees are recognized at the expiration date, and reported within fee income. For this purpose, the Bank assumes that the probability of realization of the commitment is not remote.
288
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) D. Initial Implementation of Accounting Standards, Accounting Standards Updates and Directives of the Supervisor of Banks (cont'd.) 2. Directive Concerning the Format of the Statement of Profit and Loss of a Banking Corporation and the Adoption of GAAP for US Banks on Interest Income Measurement (cont'd.) Credit Allocation Fees (cont'd.) In renewable credit lines, the fees are recognized in the Statement of Profit and Loss on a straight-line basis over the period in which the renewable credit line is active.
Change in Terms of Debt In cases of refinancing or restructuring of non-problematic debts, an examination should be performed to determine whether the terms of the debt have changed materially. The examination should determine whether the present value of cash flows based on the new terms of the loan has changed by at least 10% of the present value of the remaining cash flows according to the current terms, or whether the currency of the loan has changed. In such cases, all fees not yet depreciated and early repayment fees collected from the customer in respect of a change in terms of credit are recognized in profit and loss. Otherwise, the aforesaid fees are included as part of the net investment in the new loan, and are recognized as an adjustment of the return, as noted above. For this purpose, the Bank assumes that the change in the present value of cash flows according to the new terms of the loan is less than 10% of the present value of remaining cash flows according to the current terms.
Early Repayment Fees Early repayment fees charged for early repayment executed prior to January 1, 2014, and not yet depreciated are recognized over the shorter of a period of three years or the remaining period of the loan. Fees charged for early repayment, with the exception of a change in terms of debt, as detailed above, executed after January 1, 2014, are recognized immediately within interest income.
Effect of Initial Implementation As noted, the Bank has implemented these new directives beginning January 1, 2014, in accordance with the transitional directives and guidelines of the Supervisor of Banks. The directive is implemented prospectively; as part of the implementation of the directive, the Bank has changed the manner of recognition of income and the classification of the aforesaid fees, as part of interest income or fee income, in accordance with the nature of the fee, adjustment of return, or other fee.
289
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) D. Initial Implementation of Accounting Standards, Accounting Standards Updates and Directives of the Supervisor of Banks (cont'd.) 2. Directive Concerning the Format of the Statement of Profit and Loss of a Banking Corporation and the Adoption of GAAP for US Banks on Interest Income Measurement (cont'd.) Effect of Initial Implementation (cont'd.) The following table presents the effect of the implementation of this directive on net interest income, non-interest income (fees), and the net profit of the Bank in the year ended December 31, 2014: For the year ended December 31, 2014 According to According to Effect of new reporting previous reporting implementation directive directive of new directive NIS millions Interest income 865 864 1 Fees 278 289 (11) Net profit 50 56 (6) The main changes, among other matters, refer to the deferment of credit granting fees and credit allocation fees, and non-spreading of early repayment fees. Following the implementation of the directive, certain income items were reclassified as interest income, and certain income items previously classified as interest income were reclassified and are now stated within the fees item.
E. Accounting Policies Applied While Preparing Financial Statements 1. Consolidation Base The Bank implements the International Standards regarding Business Combinations IFRS 3 (2008), Consolidated Financial Statements IFRS 10 and Investments in Associates IAS 28. (a) Subsidiaries Subsidiaries are entities controlled by the Bank. The financial statements of subsidiaries are included in the consolidated financial statements from the day control is attained until the day control is ceased. The accounting policy of the subsidiaries was changed as necessary in order to customize it to the accounting policy adopted by the Bank. (b) Non-Controlling Interest Non-controlling interests represent the share of the equity of a subsidiary that cannot be directly or indirectly attributed to the parent company.
290
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 1. Consolidation Base (cont'd.) (b) Non-Controlling Interest (cont'd.) Non-controlling interests which are instruments granting an ownership right, in the present, and granting the holder a share of the net assets in the event of liquidation, are measured at the date of the business combination at fair value. Profit or loss and any component of other comprehensive income are attributed to the owners of the Bank and to non-controlling interests (the attribution is performed even if the balance of non- controlling interests is negative). Since January 2012, the Bank has been implementing the IFRS guidelines concerning put options for non-controlling interest – according to the letter of the Supervisor of Banks from March 18, 2012 Therefore put options, settled by cash or by another financial instrument (including the options issued before January 1 2012), issued to non-controlling interest are recognized as a liability at the sum of the present value of the exercise supplement. In addition, the groups' share in the subsidiary's equity includes the non- controlling interests' share, to whom the group issued the put options. (c) Intercompany transactions Mutual balances in the group and unrealized income and expenses, arising from mutual transactions, were cancelled in the preparation of the consolidated financial statements. Unrealized losses were cancelled in the same manner as unrealized gains, provided that there was no evidence of impairment.
2. Foreign Currency and Linkage The Bank implements the international standard IAS 21 regarding The Effects of Changes in Foreign Exchange Rates. (a) Transactions in foreign currency are translated into the Banks' relevant operating currencies using the exchange rates which are in effect at the dates of the transactions. Monetary assets and liabilities denominated in foreign currency at the reporting date are translated into the operating currency using the exchange rate in effect at that date (the representative rate which is published by the Bank of Israel once a day). Exchange-rate differentials in respect of the monetary items is the difference between the depreciated cost in the operating currency for the beginning of the year, including adjustments to the effective interest rate and to the payments during the year, and the depreciated cost in foreign currency translated using the exchange rate in effect at the end of the year.
291
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 2. Foreign Currency and Linkage (cont'd.) (a) (cont'd.) Non-monetary assets and liabilities denominated in foreign currencies which are measured at fair value are translated into the operating currency using the exchange rate in effect at the date on which the fair value is established. Non monetary items denominated in foreign currency and measured by historical cost are translated using the exchange rates which are in effect on the date of the transaction. Exchange-rate differentials arising from the translation to the operating currency are recognized in the Profit and Loss Statement, excluding differentials which occurred as a result of translation of non-monetary equity financial instrument, which are classified into the available for sale portfolio and recognized in other comprehensive income (except in case of impairment, in which the translation differentials which were recognized in other comprehensive income are reclassified to the Profit and Loss Statement).
(b) CPI-linked assets and liabilities were included according to the appropriate index for each asset or liability.
(c) Details of the representative exchange rates, the Consumer Price Index and the rate of change therein, are as follows: December 31, Rate of change during 2014 2013 2012 2014 2013 2012 NIS NIS NIS % % %
Rate of exchange of the: U.S. dollar 3.889 3.471 3.733 12.0 (7.0) (2.3) Euro 4.725 4.782 4.921 (1.2) (2.8) (0.3)
Points Points Points Consumer Price Index for the month of November ("known” index) 102.1 102.2 100.29 (0.1) 1.9 1.4 December (index "in respect of") 102.1 102.3 100.48 (0.2) 1.8 1.6
292
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 3. Basis of Recognition of Income and Expenses (a) Income and expenses are included on an accrual basis, except: o Interest accrued on problematic debts, classified as not accruing interest impaired debts, is recognized as income on a cash basis, when there is no doubt regarding the collection of the remaining recorded balance of impaired debt. In such situations, the amount collected at the expense of the interest to be recognized as interest income, is limited to the amount that would have been accrued during the reporting period on the debts' remaining recorded balance, according to the contractual interest rate. When there's doubt regarding the collection of the remaining recorded balance, all payments collected are used to reduce the principal of the loan. In addition, interest regarding amounts in arrears in respect of housing loans is recognized in the Profit and Loss Statement based on the actual collection.
o In cases of other than temporary impairment regarding debt instruments, the interest income from then on is recognized on a cash basis, except in cases where there has been a significant increase in price and yield of the security traded.
(b) Operational fees regarding service granting (such as: from activity of securities and derivative instruments, from credit cards, account management, credit treatment, exchange and foreign trade differentials) are recognized in the Profit and Loss Statement, when the Bank's entitlement to receive arises. Certain fees, such as fees in respect of guarantees and certain fees in respect of project accompaniment, are recognized proportionally over the transaction period.
(c) Other income and expenses – recognized on an accrual basis.
(d) Income and expenses from securities held for trading and from derivative instruments, are recorded according to the changes in fair value.
293
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 4. Securities (a) In accordance with the directives of the Supervisor of Banks, the Bank’s securities are classified into three portfolios as follows: (1) "Bonds Held to Maturity" - Bonds which the Bank intends and has the means to hold until maturity, with the exception of bonds where early repayment or other settlement is possible, such that the Bank will not cover, materially, its entire registered investment.
Held to Maturity Bonds are stated in the balance sheet at their adjusted value at the reporting date, consisting of their par value and interest, exchange or linkage increments accrued, as well as the unamortized amount of premium or discount, which arose upon acquisition and has not yet been reduced, and net of impairment losses of an other than temporary nature. Income from held to maturity bonds is recognized at the Profit and Loss Statement on the accrual basis.
(2) "Securities Held for Trading" - Securities acquired and held with the intention of selling them in the short term, excluding shares for which no fair value is available. Such securities are stated at fair value at the reporting date. Unrealized gains or losses from adjustment to fair value are reflected in the Profit and Loss Statement.
(3) "Securities Available for Sale" - Securities which were not included in the two classifications above. Shares for which a fair value is available and bonds are included in the balance sheet at fair value on the reporting date. Shares for which a fair value is not available are measured in the balance sheet at cost. Unrealized profit or losses from adjustments to fair value are not included in the Profit and Loss Statement, and are reported net, excluding an appropriate provision for taxes, in a separate item under equity, within cumulative other comprehensive income.
(b) Income from dividend, accrued interest, linkage and exchange rate differentials, premium or discount amortization as well as impairment losses of another-than-temporary nature are recognized in the Profit and Loss Statement.
(c) Each reporting period, the Bank examines whether decline in the fair value of securities classified into the available for sale portfolio and the held to maturity portfolio is of another-than-temporary nature.
294
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 4. Securities (cont'd.) (c) (cont'd.) The Bank recognizes other-than-temporary impairment in the reporting period, at least in respect of impairments of all securities meeting one or more of the following conditions: A security sold up to the date of publication of the report for the period;
A security which, near the date of publication of the report for the period, the Bank intends to sell within a short period of time;
A bond with a significant downgrade from the rating at the time of its purchase by the Bank to the rating at the date of publication of the report for the period;
A bond which after its purchase was classified by the Bank as problematic;
A bond in which a payment failure has occurred following its purchase;
A security whose fair value as of the end of the reporting period and near the date of publication of the financial statements was significantly lower than its cost (the depreciated cost – regarding bonds). This is unless the Bank has objective and solid evidence and a cautious analysis of all relevant factors proving with a high degree of confidence that the impairment is temporary.
In addition, the examination of other-than-temporary impairment is based on the following considerations: The rate of loss compared to the cost of the security (to the depreciated cost – regarding bonds).
The length of the period for which the fair value of the security is lower than its cost;
Changes for the worse in the condition of the issuer or of the market in general;
The intention and ability of the Bank to hold the security for a sufficient period in order to allow an increase in its fair value, or until maturity;
In the case of bonds – the rate of the yield to maturity;
In the case of shares – reduction or cancellation of dividend distribution.
295
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 4. Securities (cont'd.) (c) (cont'd.) When other-than-temporary impairment has occurred, the cost of the security is written down to its fair value and used as the new cost base. The cumulative loss referring to a security classified as available for sale, which was previously allocated to a separate item under equity, within other comprehensive income, is transferred to the Profit and Loss Statement when a temporary impairment has occurred. Increase in value during subsequent reporting periods is recognized in a separate item under equity, within cumulative other comprehensive income, and is not allocated to the Profit and Loss Statement (the new cost base).
(d) Regarding fair value calculation – see section 1.E.6 below.
(e) In the calculation of profit from the realization of securities, the cost is calculated according to a weighted moving average base.
(f) The investments of the Bank in shares and in venture capital funds are accounted for at cost, net of losses from other-than-temporary impairment. Profit from investments in shares and venture-capital is allocated to the Profit and Loss Statement at the realization of the investment.
5. Impaired Debts, Credit Risk and Provision for Credit Losses As of January 1, 2011 the Bank has implemented the American accounting standards regarding impaired debts, credit risk, and allowance for credit losses (ASC 310) and the regulatory directives of the bank supervision agencies and the Securities and exchange Commission in the United States, as adopted in the Public Reporting Directives. In addition, as of that date, the Bank has implemented the directives of the Supervisor of Banks regarding the treatment of problematic debts. Likewise, as of January 1, 2012 the Bank has implemented the Directives of the Supervisor of Banks regarding the update of the disclosure of the credit quality of debts and the allowance for credit losses. In addition, according to the circular of the Banking Supervision from January 19, 2015, the Bank implements the guidelines of the banking supervision regarding the calculation of the collective allowance for non-housing credit losses and particularly regarding credit to private individuals.
296
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 5. Impaired Debts, Credit Risk and Provision for Credit Losses (cont'd.) The directive is applied to all debt balances, such as credit to the public, deposits with banks, credit to the government, etc. The recorded debt balance in the balance sheet is defined as the debt balance, after the deduction of accounting write-offs, but before the deduction of the allowance for credit losses in respect of that debt. The recorded debt balance does not include unrecognized accrued interest, or accrued interest recognized in the past and cancelled later on. It is hereby clarified that before January 1, 2011, the Bank implemented different rules, pursuant to which the debt balance in the Bank's books included the component of interest accrued before the debt was classified as non-income-bearing problematic debt. Therefore, credit balances presented in periods prior to the period of the initial implementation of the directive are not comparable with the credit balances reported after implementation. With regard to other debt balances for which specific rules exist on the measurement and recognition of the provision for impairment (e.g. bonds), there is no change in the rules.
The Bank has established procedures for the classification of credit and the measurement of the allowance for credit losses, in order to maintain an allowance at an appropriate level to cover estimated credit losses in respect of its credit portfolio. In addition, the Bank has established the necessary procedures in order to maintain an allowance (in a separate liability account) at an appropriate level to cover expected credit losses in connection with off-balance-sheet credit instruments (such as contractual engagements to grant credit, unutilized credit facilities, and guarantees).
The allowance to cover estimated credit losses with respect to the credit portfolio is assessed by one of two methods: "individual allowance" or "collective allowance"
Individual Allowance for Credit Losses – The Bank examines on an individual basis any debt that its contractual balance is mainly greater than NIS 500 thousand (without deducting accounting write-offs, unrecognized interest, allowance for credit losses and collateral). Individual allowance for credit losses is recognized for all debts individually examined as aforesaid and classified as impaired as well as problematic debts under restructuring. The individual allowance for credit losses is assessed based on the expected future cash flows, capitalized by the original effective interest rate of the debt.
297
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 5. Impaired Debts, Credit Risk and Provision for Credit Losses (cont'd.) Individual Allowance for Credit Losses (cont'd.) When the debt is contingent upon collateral, or when the Bank determines that an asset foreclosure is expected, the individual allowance is assessed based on the fair value of the collateral pledged to secure the debt, after activating cautious and consistent coefficients that reflect, inter alia, the fluctuation in the collaterals' fair value, the time until the actual realization and the expected costs of selling the collateral. On this matter, the Bank defines a debt as a debt contingent upon collateral, when its' payment is expected to be from the pledged collateral in favor of the Bank or when the Bank is expected to be paid with the asset held by the borrower, even if there is no specific lien on the asset, but only when the borrower doesn't have any other essential available and reliable repayment sources.
Collective Allowance for Credit Losses – The collective allowance for credit losses is aimed at reflecting credit losses not identified individually which are inherent in large groups of small debts with similar risk attributes, debts examined individually and found to be unimpaired, and housing loans. The allowance is calculated according to the rules set forth in FAS 5 (ASC 450), Accounting for Contingencies, based on detailed instructions in the Public Reporting Directives. The formula is based on rates of historical losses/write-offs in various economic sectors, with a division into problematic and non-problematic credit, in the range of five years ended at the reporting date.
The historical rate of loss is calculated based on the allowance for credit losses beginning in 2010, and on rates of net write-offs beginning in 2011, relative to debt balances. In general, the coefficient used to calculate the collective allowance is determined as the average rate of historical losses/write-offs during the time range; however, in several economic sectors, the Bank has chosen to use the highest rate of loss within that range, as the Bank estimates that these coefficients reflect the level of uncertainty in the sector, among other matters. In addition to historical rates of loss, the Bank has applied another qualitative adjustment to all economic sectors, reflecting the risk inherent in each sector due to uncertainty in the economy.
298
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 5. Impaired Debts, Credit Risk and Provision for Credit Losses (cont'd.) Collective Allowance for Credit Losses (cont'd.) We note that pursuant to the directives of the temporary order, as of January 1, 2011, the Bank does not maintain a general and supplementary provision, but continues to calculate the supplementary provision, and ascertains that in any event, the amount of the collective allowance at the end of each reporting period shall not be less than the amount of the general and supplementary provision that would have been calculated at that date, before taxes.
A circular of the Supervisor of Banks updating the Public Reporting Directives, Collective Allowance in Respect of Credit to Private Individuals, was published on January 19, 2015. Pursuant to the circular, in determining the allowance for credit losses, banking corporations and credit-card companies should, among other matters, take into consideration both past losses, to be calculated according to the average past losses in the last five years, and adjustments in respect of the qualitative factors established by the Supervisor of Banks, at a rate of no less than 0.75% of the balance of non-problematic consumer credit. Credit risk arising from receivables in respect of bank credit cards without interest charges has been excluded from the foregoing.
In accordance with the circular, the Bank has formulated a policy designed to ensure that it complies with the new requirements and prepares to develop and implement a collective allowance calculation methodology that takes the qualitative adjustment coefficient into account, as required in the directives. The Bank has also implemented the guidelines set forth in the directives of the Supervisor with regard to a qualitative adjustment at a rate of 0.75% over the average past losses in a range of five years ended at the reporting date. The new directives set forth in the circular were implemented prospectively. As a result of the implementation of the directives, the allowance for credit losses in respect of private individuals increased by a total of approximately NIS 14 million, before tax. The increase in the balance of the allowance was allocated to profit and loss.
Housing Loans - A minimum allowance in respect of housing loans is calculated according to a formula established by the Supervisor of Banks, taking into account the extent of arrears in a way that the rate of the allowance increases with greater arrears, excluding loans not repaid in periodic installments and loans used to finance activities of a business nature.
299
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 5. Impaired Debts, Credit Risk and Provision for Credit Losses (cont'd.) Housing Loans (cont'd.) The Bank implements the guidelines of the supervision of banks regarding housing loans, according to which, the balance of the collective allowance for credit losses in respect of housing loans shall not be less than 0.35% of the balance of the aforesaid loans at the reporting date.
In addition, the Bank implements the directives of Proper Conduct of Banking Business Directive No. 329 "Limitations for Granting Housing Loans".
Off Balance Sheet Credit - The allowance required regarding the off balance sheet credit instruments is estimated according to the rules set forth in FAS 5 (ASC 450). The allowance estimated on a collective basis for the off balance sheet credit instruments is based on the allowance rates set forth for the balance sheet credit (as described above), while taking into account the realization rate of the expected credit of the off balance sheet credit risk. The credits' realization rate is calculated by the Bank based on credit conversion factors as detailed in the Proper Conduct of Banking Business Directive No. 203 Measurement and Capital Adequacy – the Standardized Approach – Credit Risk.
Classification of Debts – The Bank classifies all of its problematic debts and problematic off balance sheet credit items according to the following classifications: Balance Sheet Credit under Special Supervision is credit with potential weaknesses that deserves special attention from the corporations' management. Off balance sheet credit is classified as credit under special supervision if the realization of the regarding contingent liability is "possible" and if the debts, that may be recognized as a result of the realization of the contingent liability, fit the classification of this category.
Balance Sheet Inferior Credit is credit which is insufficiently protected by the based current value and by the ability of the debtor or the pledged collateral, if exists, to pay. Balance sheet credit risk under this classification has a weakness or well defined weaknesses which endanger the realization of the debt. Credit which has an allowance for credit losses on its behalf on a collective basis will be classified as inferior when it becomes a debt with arrears of 90 days or more.
300
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 5. Impaired Debts, Credit Risk and Provision for Credit Losses (cont'd.) Classification of Debts (cont'd.) Impaired Credit is credit which is examined individually and based on information and recent events its probable that the banking corporation will not be able to collect all of the amounts of money it deserves (principal and interest payments) according to the contractual terms of the debt agreement. In particular, a debt is classified as impaired in any case when principal or interest in respect of which, have arrears of 90 days or more, unless the debt is well guaranteed and is in the process of collection. In addition, an impaired debt will also be considered a debt whose terms have been changed due to the restructuring of a problematic debt.
Restructuring of problematic debt – Pursuant to American standards on this subject (ASC 310), a debt restructured as problematic debt is a debt that has undergone formal restructuring in which, for economic or legal reasons related to financial difficulties of the borrower, the Bank has granted a concession to the borrower, in the form of a change in the terms of the debt, in order to facilitate the burden of cash payments on the borrower in the short term (reduction or postponement of cash payments required of the borrower), or in the form of reception of other assets as partial or full settlement of the debt.
In order to determine whether a debt arrangement performed by the Bank constitutes a restructuring of a problematic debt, the Bank performs a qualitative examination of all of the terms of the arrangement and of the circumstances in which it was performed, in order to establish whether: (1) the borrower is in financial difficulties; and (2) the Bank granted a waiver to the borrower as part of the arrangement.
In order to determine whether the borrower is in financial difficulties, the Bank examines whether there are signs indicating that the borrower was in difficulties at the time of the arrangement, or whether there is a reasonable probability that the borrower will fall into financial difficulties without the arrangement. Among other factors, the Bank examines the existence of one or more of the following circumstances: At the date of the debt arrangement, the borrower is in default, including when any other debt of the borrower is in default;
301
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 5. Impaired Debts, Credit Risk and Provision for Credit Losses (cont'd.) Restructuring of problematic debt (cont'd.) With regard to debts that at the date of the arrangement are not in arrears, the Bank estimates whether, based on the borrower's current repayment capability, it is likely that the borrower will fail in the foreseeable future and will fail to comply with the original contractual terms of the debt; The debtor has been declared bankrupt, is in a receivership proceeding, or there are significant doubts regarding the continued survival of the borrower as a going concern; and, If there is no change in the terms of the debt, the borrower will be unable to raise funds from other resources at the accepted interest rate in the market for borrowers who are not in default.
The Bank concludes that a concession was granted to the borrower in the arrangement, even if the contractual interest rate was raised as part of the arrangement, if one or more of the following occurs: As a result of the restructuring, the Bank is not expected to collect the full amount of the debt (including interest accrued according to the contractual terms); The current fair value of the collateral, for debts contingent upon collateral, does not cover the contractual debt balance, and indicates an inability to collect the full amount of the debt; The borrower does not have the ability to raise resources at the accepted market rates regarding a debt with terms and characteristics corresponding to those of the debt created in the arrangement and any other change in the repayment terms, which the Bank sees as a concession.
In addition, the Bank does not classify a debt as a restructured problematic debt if, in the arrangement, the borrower was granted a postponement of payments that is immaterial in view of the frequency of payments, the contractual term to maturity, and the expected average duration of the original debt.
Restructured debts shall be classified as impaired debt and shall be assessed on an individual basis for the purpose of the allowance for credit losses or accounting write-offs. In light of the fact that a debt that has undergone problematic debt restructuring will not be repaid according to its original contractual terms, the debt continues to be classified as impaired, even after the borrower resumes repayment according to the new terms.
302
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 5. Impaired Debts, Credit Risk and Provision for Credit Losses (cont'd.) Accounting Write-off – The Bank performs accounting write-offs regarding any debt or part of a debt evaluated on an individual basis, which is thought to be uncollectible and is of such low value that its retention as an asset is unjustified, or debt in respect of which the Bank has carried out prolonged collection efforts (defined in most cases as a period exceeding two years). With regard to debts evaluated on a group basis, write-off rules were established based on the period of arrears (in most cases more than 150 consecutive days) and other problematic parameters. The difference between the debt balance and the collaterals' fair value less the expected costs of the sale, is immediately written-off, regarding debts whose repayment is contingent upon collateral. When there is no certainty that the amount eventually received for the repayment of the debt will cover the outstanding balance of the debts' balance, after the accounting write-off, another reduction should be made from the calculated fair value and a provision should be made in respect.
It is hereby clarified that accounting write-offs do not entail a legal waiver, and serve to reduce the reported balance of the debt for accounting purposes only, while creating a new cost base for the debt in the Bank's books.
As of 2014 the Bank updated the methodology concerning housing loan write-offs, according to which, if there's an individual allowance beyond the extent, bringing the total allowance to a full allowance, an accounting write-off is carried out on the whole allowance (extent allowance and an addition to the extent).
Revenue recognition – When a debt is classified as impaired, the Bank defines the debt as a debt that doesn't accrue interest income and stops accruing interest income on its behalf, except for the following regarding certain restructured debts. Also, when a debt is classified as impaired, the Bank eliminates all of the accumulated and not yet collected interest income, which has been recognized as income in the past in the Profit and Loss Statement. The debt continues to be classified as a non-accumulating interest debt, as long as it as classified as impaired. As long as there's doubt regarding the collection of the remaining recorded balance of an impaired debt, all of the received payments will be used to reduce the principal and subsequently recognized as interest income which will be recorded under the interest income item.
303
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 5. Impaired Debts, Credit Risk and Provision for Credit Losses (cont'd.) Revenue recognition (cont'd.) Cash-Basis Revenue Recognition – Interest income, in respect of an impaired debt, is on a cash- basis as long as the recorded remaining balance is considered fully collectable. When the Bank determines the ability of each debt's remaining recorded balance, to collect, it must be supported by an updated and well documented credit assessment of the debtor's financial situation and the repayment forecast, including a reference to the debtor's historical repayment performance and other relevant factors. In any case, the amount of income, recognized as interest income, will be limited to the amount that would have been accrued during the reporting period on the remaining recorded balance of the debt according to the predicted interest rate. A debt, which formally underwent a problematic debt restructuring and after the restructuring there is reasonable assurance that the debt will be repaid and will perform in accordance with its' new terms, will be treated as an interest income accumulating impaired debt. For this purpose, the Bank examines the repayment performance of 6 consecutive payments without arrears in loans repaid in monthly payments or after the repayment of a material part of the debts' principal (20%), in loans which aren't repaid in monthly payments. The Bank doesn't stop accruing interest income regarding debts which are examined and secreted on a collective basis, including debts that are in arrears of 90 days or more and are measured on a collective basis. These debts are subject to evaluation methods of allowance for credit losses which insure that the Banks' profit isn't biased upwards. Fees regarding delay of these debts are included as income at the date on which the Bank has the right to receive them from the customer, provided that the collection is reasonably assured.
6. Establishing the Fair Value of Financial Instruments The Bank implements FAS 157 (ASC 820-10), which defines fair value and establishes a consistent framework for the measurement of fair value by defining techniques for the assessment of fair value of assets and liabilities and establishing a fair-value hierarchy and detailed implementation instructions. Likewise, as of January 1, 2012, the bank has been implementing the Supervisor of Banks' directives regarding the measurement of fair value combining in the Public Reporting Directives, the directives determined in ASU 2011-04 regarding Fair Value Measurement (ASC 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.
304
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 6. Establishing the Fair Value of Financial Instruments (cont'd.) Fair value is defined as the amount/price which would be obtained from the sale of an asset, or that would be paid to settle a liability, in a transaction between a willing seller and a willing buyer, at the date of measurement. Among other matters, in order to assess fair value, the standard requires the maximum possible use of observable inputs, and minimum use of unobservable inputs. Observable inputs represent information available in the market and received from independent sources, whereas unobservable inputs reflect the assumptions of the banking corporation. FAS 157 specifies a hierarchy of measurement techniques, based on the question whether the inputs used to establish fair value are observable or unobservable. These types of inputs form the following fair-value hierarchy: Level 1 data: Prices quoted (unadjusted) in active markets for identical assets or liabilities.
Level 2 data: Prices quoted in active markets for similar assets or liabilities; prices quoted in inactive markets for identical assets or liabilities; prices derived from evaluation models in which all significant inputs are observed in the market or supported by observed market data.
Level 3 data: Unobservable inputs regarding the asset or liability, arising from evaluation models in which one or more of the significant inputs are unobservable.
The hierarchy requires the use of observable market inputs, when such information is available. When possible, the Bank considers relevant observable market information in its evaluation.
The volume and frequency of transactions, the bid-ask spread, and size of the adjustment necessary when comparing similar transactions are all factors taken into consideration when determining the liquidity of markets and the relevance of prices observed in such markets.
In addition, the fair value of financial instruments is measured without taking into account the blockage factor regarding both financial instruments assessed by level 1 and financial instruments assessed by levels 2 or 3, excluding cases in which other market participants would have taken into account premium or discount while measuring fair value, when level 1 data was lacking.
305
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 6. Establishing the Fair Value of Financial Instruments (cont'd.) Securities The fair value of securities held for trading and of securities available for sale is determined based on market prices quoted in the primary market. When the security is traded in several markets, the evaluation is performed according to the market price quoted in the most beneficial market. In such cases, the fair value of the Bank's investment in the securities is the number of units multiplied by the quoted market price. The quoted price used to determine fair value, as mentioned above, is not adjusted for the size of the Bank's holding or for the size of the position relative to the trading volume (the blockage factor). If no quoted market price is available, the fair-value estimate is based on the best available information, with maximum use of observable inputs, taking into consideration the risks inherent in the financial instrument (market risk, credit risk, non-tradability, etc).
Derivative Financial Instruments Derivative financial instruments with an active market were evaluated according to the market value established in the primary market, or in the absence of a primary market, according to the market price quoted on the most beneficial market (the market in which the price for transferring an asset is the maximal price or the price for transferring a liability is the minimal price, net of transaction cost). Derivative financial instruments that are not traded were evaluated using models that take the risks inherent in the derivative instrument into consideration (market risk, credit, risk, etc.). For further details, see the methodology regarding assessment of credit risk and nonperformance risk, below.
Additional non-derivative financial instruments A "market price" cannot be quoted for most of the financial instruments in this category (such as credit to the public, deposits from the public and deposits with banks and subordinated notes), because there is no active market in which they are traded. Fair value is therefore estimated using prevalent pricing models, such as the present value of future cash flows capitalized by a discounting interest rate reflecting the risk level inherent in the financial instrument. For this purpose, the future cash flows for impaired debts and other debts were calculated after the deduction of the influences of accounting write-offs and allowances for credit losses of the debts.
306
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 6. Establishing the Fair Value of Financial Instruments (cont'd.) Additional non-derivative financial instruments (cont'd.) These instruments are presented at fair value under the note on balances and fair value estimations of financial instruments only, and their effect does not apply to balance-sheet balances and/or to profit and loss. For further details with regard to the main methods and assumptions used to estimate the fair value of financial instruments, see Note 20 on balances and fair value estimations of financial instruments.
Assessment of credit risk and nonperformance risk (credit valuation adjustment – CVA) The standard requires the banking corporation to reflect credit risk and nonperformance risk in measuring the fair value of derivative instruments. The Bank assesses fair value based on indications from transactions in an active market of the credit quality of the counterparty, to the extent that such indications are available with reasonable effort. The liquid collaterals that the Bank requires from a counterparty, are not attributed specifically to activity in a single derivative instrument but to all of the activity of the counterparty, therefore the Bank is required to make adjustments to the fair value according to the quality of the counterparty. The indications of the credit quality of the counterparty derive, among other sources, from prices of debt instruments of the counterparty traded in an active market, and from prices of credit derivatives based on the credit quality of the counterparty. If there are no such indications, the Bank calculates the adjustments based on internal ratings (such as estimations for expected default rates and rates of credit losses in the event of default). For counterparties who have signed netting agreements, credit risk is calculated based on the portfolio of all of the derivative instruments of the counterparty, at the level of net exposure.
For counterparties who have not signed such agreements, the calculation is performed separately on the asset side and on the liability side, without offsetting. When the exposure is the Bank's liability to a counterparty, the Bank reflects the probability of default by the Bank in the fair value (the risk of the Bank is derived from the Bank's rating). See also Section 1.D.1.
307
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 7. Offsetting Financial Instruments In the circular of the Supervisor of Banks from December 12, 2012 which updates the Public Reporting Directives of the Supervisor regarding offsetting of assets and liabilities, amendments which were meant to match section 15A of the Public Reporting Directives to the accepted accounting principles in the U.S, were included. According to the instructions, the Bank will offset assets and liabilities arising from the same counterparty and will display their net balance in the balance sheet upon fulfillment of the following cumulative conditions: (a) In respect of those liabilities, it has a legally enforceable right to offset the liabilities from the assets. (b) It intends to repay the liability and to realize the assets on a net basis or simultaneously. (c) Both the banking corporation and the counterparty owe each other determinable amounts.
According to the directives, offsetting of assets and liabilities with two different counterparties it is possible if all of the cumulative conditions above are met, and provided that there's an agreement between the three parties clearly harboring the Banks' right concerning those liabilities meant for offset. Also, it is established that the Bank will offset deposits whose repayment to the depositor is conditional upon the extent of collection of the credit, and the credit granted out of these deposits, when there is no risk to the Bank for loss from the credit. The circular states that in certain cases the Bank is allowed to offset fair value amounts that were recognized in respect of derivative instruments and fair value amounts recognized in respect of the right to demand back a cash collateral (receivables) or the commitment to return a cash collateral (payable), arising from derivative instruments, that were executed with the same counterparty according to a master netting arrangement. The circular also states that balance sheet offsetting requires prior authorization of the Supervisor of Banks. The Bank chose not to offset assets in respect of financial derivatives with liabilities in respect of financial derivatives.
8. Derivate Financial Instruments, including Hedge Accounting (a) The Bank enters into transactions in derivative financial instruments in order to hedge foreign currency risks and interest risks, and also derivatives for non-hedging purposes, including separated embedded derivatives. Such financial instruments include forward contracts, financial swaps, options etc.
308
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 8. Derivate Financial Instruments, including Hedge Accounting (cont'd.) (b) Pursuant to the directives of the Supervisor of Banks regarding "accounting for derivative instruments and hedging activities," all derivatives are presented as assets or liabilities in the balance sheet at fair value. Changes in fair value of derivative instruments including derivative instruments used for accounting hedges (fair value hedging) are allocated immediately to the Profit and Loss Statement.
(c) Hedge Accounting – Fair Value Hedging – The Bank holds derivative financial instruments, among other reasons, for the purpose of hedging interest risks. If an instrument was intended for hedging, at the time of the creation of the hedge, the Bank formally documents the hedging ratios between the hedging instrument and the hedged item, including the Banks' risk and strategy management objective for performing the hedge and the way in which the Bank will evaluate the effectiveness of the hedging ratios. The Bank evaluates the effectiveness of the hedging ratios both at the beginning of the hedge and on a continuous basis. Changes in the fair value of a derivative financial instrument, intended as fair value hedging, are allocated to the Profit and Loss Statement. If the hedging instrument no longer meets the criteria for hedge accounting, or expires, is sold, cancelled or realized or the Bank eliminates the designation of the fair value hedging, then the hedge accounting treatment is stopped.
(d) Embedded derivatives - Embedded derivatives instruments are separated from the host contract and dealt with separately if: There is no clear and tight connection between the economic characteristics and the risks of the host contract, and the embedded derivative instrument, including credit risks derived from certain embedded credit derivatives;
a separate instrument with the same terms as the embedded derivative instrument would have been included in the definition of a derivative; and
The combined instrument isn't measured at fair value through the Profit and Loss Statement.
An embedded derivative that was separated is displayed in the balance sheet with the host contract, changes in the fair value of embedded derivatives that were separated are allocated immediately to the Profit and Loss Statement.
309
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 9. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities The Bank implements the measurement and disclosure rules set forth in the American accounting standard FAS 140 (ASC 860-10), transfer and Servicing of Financial Assets and Extinguishment of Liabilities, as revised in FAS 166, Transfer and Servicing of Financial Assets (ASC 860-10), for the purpose of the handling transfer of financial assets and extinguishment of liabilities.
Pursuant to these rules, transfers of financial assets are accounted for as sales if and only if all of the following conditions, are met: (a) The transferred financial assets were isolated from the banking corporation (including related parties) and from its creditors, even in the event of bankruptcy or receivership; (b) The receiver may encumber or exchange the assets he received, and there are no terms limiting the receiver and granting the banking corporation a greater benefit than a trivial benefit. (c) The banking corporation, subsidiaries included in its financial statements or the agents on its behalf, do not maintain effective control over the transferred financial assets or any beneficiary rights of a third party, related to these transferred assets.
As of January 1, 2012 the Bank implements ASU 2011-03 regarding reconsideration of effective control for repurchase agreements.
In financial assets transfer transactions, the Bank states that the transferor remains in effective control over the transferred assets (therefore the assets transfer will be handled as a secured debt) if all of the following conditions are met: The assets that will be repurchased or redeemed are identical or identical in essence to the transferred assets. The agreement is to repurchase or to redeem them before the maturity date, by a fixed cost or by a determinable price. The agreement is executed at the time of the transfer.
If the transaction meets all of the conditions for treating the transaction as a sale, the transferred financial assets are derecognized from the Bank's balance sheet. If the sale conditions aren't met, then the transfer is considered a secured debt. The sale of part of a financial asset, which isn't a participating right, is treated as a secured debt, in other words, the transferred assets continue to be recorded in the Bank's balance sheet and the consideration from the sale shall be recognized as a liability of the Bank.
310
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 9. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (cont'd.) The Bank implements specific directives determined in the Public Reporting Directives for the treatment of borrowing or lending transactions of securities in which the borrowing is against the general credit quality and the general collaterals of the borrower, when the borrower doesn't transfer liquid instruments specifically relating to the securities lending transaction, which the lender is permitted to sell or subordinate, as a collateral to the lender. The loan or the lending as aforesaid, are treated as credit or as a deposit measured at fair value, of the related security. Accrual basis income in respect of these securities is recorded as interest income from credit and changes in fair value (beyond the changes of the accrual basis) are recorded as part of non-interest financing income when concerning securities in the trading portfolio, or in other comprehensive income, when concerning securities available for sale.
The Bank derogates the liability if and only if the liability was paid off, meaning, one of the following conditions was met: - The Bank paid the lender and was released from its obligation in respect of the liability. Or - The Bank was legally released in a legal proceeding or with the consent of the lender, from being the principal debtor in respect of the liability.
10. Taxes on Income Expenses for taxes on income include current and deferred taxes. Current and deferred taxes are allocated to the Profit and Loss Statement, unless the tax arises from a transaction or event recognized directly in shareholders' equity. In such cases, the expense for taxes on income is allocated to shareholders' equity.
Current taxes Current tax is the amount of tax expected to be paid (or received) on the taxable income for the year, calculated according to the applicable tax rates under laws legislated or legislated in practice at the balance sheet date, including changes in tax payments referring to previous years. The provision for taxes on the income of the Bank and its consolidated companies which are financial institutions for the purposes of value added tax includes a profit tax imposed on income under the Value Added Tax Law. The value added tax applied to wages at financial institutions is included under item "Salaries and Related Expenses".
311
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 10. Taxes on Income (cont'd.) Deferred taxes The Bank recognizes deferred taxes with reference to temporary differences between the book value of assets and liabilities for the purposes of financial reporting and their value for tax purposes. However, the Bank does not recognize deferred taxes with respect to the following temporary differences: First-time recognition of goodwill;
First-time recognition of assets and liabilities in a transaction that does not constitute a combination of businesses and does not affect accounting profit or profit for tax purposes;
Differences arising from investments in subsidiaries and in affiliated companies, if they are not expected to be reversed in the foreseeable future.
The deferred taxes are measured according to the tax rates expected to apply to the temporary differences at the date when they are realized, based on laws legislated or legislated in practice at the balance-sheet date. The Bank offsets deferred tax assets and liabilities in the event that an enforceable legal right exists to offset current tax assets and liabilities, and they are attributed to the same taxable income item taxed by the same tax authority for the same taxed company, or in different subsidiaries which intend to settle current tax assets and liabilities on a net basis, or the tax assets and liabilities are settled simultaneously.
Uncertain tax positions - The Bank acknowledges the affect of tax positions only if it is more likely than not that the tax authorities or the court of law will accept the tax positions. Acknowledged tax positions are measured at the maximum sum which has more than 50% realization probability. Changes in recognition or measurement are recognized during the period, in which changes in circumstances that led to a change in judgment, occurred.
11. Buildings and equipment Recognition and measurement Fixed-asset items are measured at cost, less accrued depreciation and losses from impairment. The cost includes expenses directly attributable to the acquisition of the asset.
312
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 11. Buildings and equipment (cont'd.) Recognition and measurement (cont'd.) The cost of software purchased constituting an inseparable part of the operation of the related equipment is recognized as part of the cost of such equipment. In addition, pursuant to the Public Reporting directives, the Bank classifies costs in respect of software assets acquired or costs capitalized as an asset in respect of software internally developed for internal use under the item "Buildings and Equipment". See Section 13 below regarding the accounting treatment of software costs. When significant parts of a fixed asset (including costs of significant periodic tests) have different useful lives, they are treated as separate items (significant components) of the fixed asset. Profit or loss from the subtraction of an item of fixed assets is determined by comparing the consideration from the subtraction of the asset to its book value, and recognized net, under the item “Other Income” in the Profit and Loss Statement.
Subsequent costs The replacement cost of part of a fixed asset is recognized as part of the book value of that item, if the future economic benefits inherent in the item are expected to flow to the Bank, and if its cost can be measured reliably. The book value of the replaced part is subtracted. Routine maintenance costs of fixed assets and items are allocated to the Profit and Loss Statement as incurred.
Depreciation Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of the asset, or another amount substituting the cost, net of the residual value of the asset. Depreciation is allocated to the Profit and Loss Statement using the straight-line method, over the estimated useful life of each part of the fixed-asset items, because this method best reflects the predicted consumption pattern of the future economic benefits inherent in the asset. Assets leased under a financial lease are depreciated over the shorter of the lease period or the period of use of the assets. Land owned by the bank is not depreciated. Improvements in rented property are amortized over the shorter of the rental period including an option likely to be realized or their useful life. An asset is depreciated when it is available for use, in other words, when it has reached the position and condition necessary for it to operate in the way the management intended for it to operate.
313
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 11. Buildings and equipment (cont'd.) Depreciation (cont'd.) Estimates regarding the depreciation method, duration of useful life, and residual value are reexamined at least at the end of each fiscal year and adjusted when necessary.
Useful life estimation for the current period and for the comparison periods is as follows: - Buildings and real estate 50 years (owned land isn't depreciated) - Furniture and equipment 6.7-14.3 years - Improvements in rented property and in owned property 10-15.4 years - Software costs 4-7 years - Hardware costs 3-4 years
Regarding impairment of non-financial assets see section 14 below.
12. Leases Leases, including leases of land from the Israel Land Administration or from other third parties, in which the Bank materially bears all of the risks and returns from the asset, are classified as financing leases. At initial recognition, leased assets are measured at an amount equal to the lower of the fair value and the present value of the minimum future leasing fees.
Future payments for the exercise of an option to extend the term of the lease from the Israel Land Administration are not recognized as part of the asset and the related liability, as they constitute contingent leasing fees, which are derived from the fair value of the land at the future renewal dates of the leasing agreement. After the initial recognition, the asset is treated in accordance with the accounting policy customarily applied to that asset.
The rest of the leases are classified as operational leases. The leased assets are not recognized in the balance sheet of the Bank.
Payments made under operational leases, except for contingent lease payments, are allocated to the Profit and Loss Statement using the straight-line method, over the period of the lease. Leasing incentives received are recognized as an inseparable part of the total leasing expenses, using the straight-line method, over the period of the lease.
For details regarding prepaid operational leasing fees see Note 18.C.1.
314
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 13. Software costs Software acquired by the Bank is measured at cost, less accumulated reductions and losses from decline in value.
Costs related to the development of software or adjustment for own use, are capitalized if and only if: the development costs can be measured reliably; the software is feasible in technical and commercial terms; future economic benefit is expected; and the Bank has sufficient intent and resources to complete the development and to use the software. The costs recognized as a software asset include direct costs of material, services and direct salary for employees. Other costs in regard of development activities and research costs are charged to the Profit and Loss Statement as incurred. In subsequent periods, development costs which were capitalized are measured at cost, less amortization and accrued impairment losses.
Subsequent costs Subsequent costs are recognized as software costs only when they increase the future economic benefits inherent in the asset in respect of which they are expended. Other costs, including costs related to goodwill or self developed brands, are allocated to the Profit and Loss Statement as incurred.
Amortization Amortization is allocated to the Profit and Loss Statement, using the straight-line method, over the estimated useful life of software assets, starting on the date when the assets are available for use.
Software under development isn't amortized systematically as long as it's not available for use. Accordingly, these software assets are examined for impairment at least once a year until they become available for use.
The useful life estimation for the current period and for comparison periods is 7 years regarding software costs recognized as core systems, the Banks' share in Leumi Banks' systems under development according to the useful life estimated by Leumi Bank (average approximately 6.6 years) and 4 years regarding other software costs.
The estimations regarding the amortization method, the useful life and the residual value are reexamined at the end of every reporting year, at least, and are adapted if necessary.
315
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 14. Impairment of nonfinancial assets The consolidated book value of non-monetary assets within the scope of IAS 36, excluding deferred tax assets, and including investments treated using the equity method, is examined at each reporting date in order to determine whether signs exist to indicate impairment. If such signs exist, an estimate of the recoverable amount of the asset is calculated. The recoverable amount of an asset or of a cash generating unit is the higher of the value of use and the net sale value (fair value net of selling expenses). In determining the value of use, the Bank capitalized the estimated future cash flows according to a pretax capitalization rate reflecting market estimates regarding the time value of the money and the specific risks related to the asset. For the purpose of examining impairment, assets which cannot be examined individually are aggregated into the smallest group of assets that generates cash flows from ongoing use, which are essentially non-dependent on other assets and groups (a "cash-generating unit").
Assets of the Banks' headquarters do not generate separate cash flows, and serve more than one cash-generating unit. Therefore, they are allocated to cash-generating units, on a reasonable and consistent basis, and examined for impairment as part of the examination of impairment in respect of the cash-generating units to which they are allocated. Other headquarters assets that cannot be allocated to cash generating units in a clear and consistent manner are allocated to a group of cash-generating units, if there are indications that impairment has commenced in an assets belonging to the Banks' headquarters, or when there are indications of impairment in the group of cash-generating units. In such cases, the recoverable amount of the group of cash- generating units served by headquarters is determined. Losses from impairment are recognized when the book value of the asset or of the cash-generating unit to which the asset belongs exceeds the recoverable value, and are charged to the Profit and Loss Statement. Losses from impairment recognized in previous periods are reexamined each reporting period, in order to test for signs that the losses have decreased or no longer exist. Losses from impairment are cancelled if a change has occurred in the estimates used to determine the recoverable amount, only if the book value of the asset, after cancellation of the loss from impairment, does not exceed the book value net of amortization or depreciation that would have been determined if no loss from impairment had been recognized.
316
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 14. Impairment of nonfinancial assets (cont'd.) Impairment of Self-Development Costs of Software In addition to the indications of impairment established in IAS 36, Impairment of Assets, impairment of self-development costs of software shall be assessed when the signs listed in GAAP for US banks, SOP 98-1; Accounting for the Costs of Computer software Developed or Obtained for Internal Use (ASC 350-40), exist: (1) The software is not excepted to provide significant potential services (2) The manner or volume of use or expected use of the software has changed substantially; (3) The software has been or will be substantially changed. (4) Costs of the development or conversion of the software designed for internal use significantly exceed the expected amounts; (5) It is no longer expected that the development will be completed and the software will be used. If one or more of the signs listed above exist, an examination for the need of impairment, according to the rules set forth in IAS 36, Impairment of Assets, must be performed.
15. Contingent liabilities The financial statements include sufficient provisions in respect of legal claims, according to the assessment of the Board of Management and based on the opinion of its legal counsels. The disclosure format, based on directives of the Supervisor of Banks in a manner that the claims were classified in accordance with the probability of occurrence of the exposure to risk, is as follows: (a) Probable - when the probability is over 70% - a full provision has been included. (b) Reasonably possible - when the probability is over 20% and less than or equal to 70% - a provision hasn't been included. When all of the claims sum up to a material amount, a disclosure is given. (c) Remote - when the probability is less than or equal to 20% - a provision hasn't been included and a disclosure hasn't been given. When the maximal loss is extremely material, a disclosure is given.
317
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 15. Contingent liabilities (cont'd.) In rare cases the Banks' management has determined on the basis of its legal advisors, that it isn't possible to evaluate the probability of the occurrence of the exposure to risk, in respect of an ordinary claim and a claim that was certified as a class action, therefore no provision is made, (such determination is possible only up until four financial statements are published after the filing of the claim, with regard to a claim that includes a request for recognition as class action) in the financial statement. The Bank has provided disclosure regarding material legal proceedings pending against the Bank and subsidiaries.
Note 18 regarding contingent liabilities and special commitments includes a quantitative disclosure of the total exposures with a realization probability that is not remote, for which no provision was made, and in which the amount of each (or the aggregate amount of several claims concerning similar matters), according to the claim statement, exceeds an amount constituting approximately 1% of the Banks' equity.
16. Earnings per share The Bank presents basic and diluted earnings per share data with regard to its ordinary share capital. Basic earnings per share are calculated by dividing the profit or loss attributed to the holders of the ordinary shares of the Bank by the weighted average number of ordinary shares in circulation during the period. Diluted earnings per share are determined by adjusting the profit or loss attributed to the holders of ordinary shares and adjusting the weighted average of the ordinary shares in circulation in respect of the effects of all diluted potential ordinary shares, including, inter alia, options for shares granted to employees.
17. Employee Benefits Appropriate provisions in accordance with the law, agreements, customary practice, and management expectations exist in respect of all liabilities related to employer-employee relations. Future liabilities for pensions, excess compensation and Jubilee bonuses are calculated by an actuary specializing in the method for evaluation of accrued benefits, taking into consideration probabilities, past experience and the managements' assessment, among other factors. The reserves capitalization rate is 4% according to the directives of the Supervisor of Banks. For details regarding actuary assumptions see Note 15.
318
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 17. Employee Benefits (cont'd.) The liability for severance pay and pensions is mainly covered by deposits in provident funds for pension allowances and compensation. Due to sums of uncovered liabilities as aforesaid, provision was included in the financial statement - see Note 15.
Profit and loss accumulated in respect of a central compensation fund and of provident funds for pension allowances and compensation are allocated to the Profit and Loss Statement.
See Section 1.F.1 regarding the adoption of U.S.GAAP on the subject of employee benefits. Instructions of the Supervisor of Banks Concerning the Reinforcement of Internal Control over Financial Reporting regarding Employee Benefits On March 27, 2011 the instructions of the supervision of banks concerning the reinforcement of internal control over financial reporting regarding employee benefits, were published. The instructions determine a number of clarifications concerning the assessment of liability in respect of employee benefits and guidelines concerning internal control over financial reporting regarding employee benefits whilst demanding the inclusion of a qualified actuary, identification and sorting of liabilities in respect of employee benefits, existence of internal controls for relying on the actuary's assessment and validating it and certain disclosure requirements. The Bank implements the Bank of Israel's' circular regarding “Reinforcing Internal Control over Financial Reporting Regarding Employee Benefits” in regard of compensation beyond a contractual obligation (hereinafter: “Excess Compensation”). According to the circular, a banking corporation that expects a group of employees to be paid benefits beyond the contractual terms shall take into consideration the expected departure rate of employees (including employees expected to retire under voluntary-retirement plans or upon receiving other preferred terms) and the benefits that these employees are expected to receive upon departure. The liability in respect of severance pay for this group of employees is displayed in the financial statements as the higher between the liability amount calculated on an actuarial basis, taking into consideration the additional cost expected to be incurred by the banking corporation due to the aforesaid benefits, and the amount of the liability calculated by multiplying the employee's monthly salary by the number of years of the employee's service, as required in Opinion Statement No. 20 of the Institute of Certified Public Accountants in Israel. Note that according to estimates by the Bank and its legal advisors, the Bank has no legal obligation either direct or implied, to pay excess compensation for employees under a collective agreement.
319
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) E. Accounting Policies Applied While Preparing Financial Statements (cont'd.) 18. Transactions between an Entity and its Controlling Party The Bank implements the accepted accounting standards in the U.S. regarding the accounting treatment of activities between banking corporations and their controlling party and between a company controlled by the Bank. Cases in which the mentioned standards don't address the treatment method, the Bank implements the directives stated in the Israel Accounting Standards Board issued Accounting Standard No. 23, “Accounting Treatment of Transactions between an Entity and its Controlling Party”. If a transaction with assets and liabilities was performed between an entity and its controlling party, then the assets and liabilities are measured at the date of the transaction at fair value. If there is a gap between the consideration and the fair value due to the fact that the transaction is on an equity level, the Bank attributes the difference between the fair value and the consideration from the transaction, to equity.
19. Related Party Disclosures International standard IAS 24 Related Party Disclosures establishes the required disclosures by the Bank regarding its relationship with a related party and regarding transactions and unsettled balances with a related party. In addition, disclosure is required for remuneration of key executives. Key executives are those who have authority and responsibility for planning, directing, and controlling the activities of the Bank, or indirectly, including any director (whether active or inactive) of the Bank.
F. New Accounting Standards and Directives of the Supervisor of Banks in the Period before their Implementation (1) Adoption of U.S. GAAP regarding Employee Benefits On April 9, 2014 the supervision of banks published a circular concerning the adoption of U.S. GAAP regarding employee benefits. The circular updates the recognition, measurement and disclosure requirements concerning employee benefits in the Public Reporting Directives according to the GAAP in U.S. banks. The circular determines that the amendments to the Public Reporting Directives will apply as of January 1, 2015, while during the initial implementation the Bank will retrospectively amend the comparative figures for the periods beginning on January 1, 2013 and onwards, in order to comply with the aforesaid requirements.
320
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) F. New Accounting Standards and Directives of the Supervisor of Banks in the Period before their Implementation (cont'd.) (1) Adoption of U.S. GAAP regarding Employee Benefits (cont'd.) Likewise, on January 11, 2015 a circular for the amendment of the Public Reporting Directives regarding employee benefits was published, including a disclosure format and transitional directives. It is noted in the circular that the Bank of Israel concluded that in Israel there is no deep market for high quality corporate bonds. Accordingly, the capitalization rate for employee benefits will be calculated on the basis of the yield on Israeli government bonds plus an average margin on corporate bonds rated AA (internationally) and above at the reporting date. For practical reasons, it was determined that the margin will be determined according to the difference between the yield to maturity rates, according to the repayment periods of corporate bonds rated AA and above, in the U.S. and the yield to maturity rates for the same repayment periods, on bonds of the U.S. government, and all at the reporting period. A bank that believes that changes to the margin obtained above in a certain period are due to exceptional market movements, so that the obtained margins according to which, are not suitable to be used for capitalization, as mentioned above, will ask for preliminary guidance from the supervision of banks. According to the circular, examples to such situations may include, inter alia, changes in respect of which the obtained margin will be greater than the margin on corporate bonds rated AA (locally) in Israel.
A Bank is required to retrospectively amend comparative figures for periods beginning on January 1, 2013 and onwards. The following was determined in respect of the accounting treatment of actuarial profits and losses:
‐ The actuarial loss for January 1, 2013 deriving from the difference between the capitalization rate for calculating CPI-linked reserves for employee benefits determined according to the temporary order in the Public Reporting Directives (4%) and the capitalization rates of the CPI-linked employee liabilities, determined according to the new rules as explained above (hereinafter: the loss), will be included in the cumulative other comprehensive income.
‐ Actuarial profits which will be recorded as of January 1, 2013, as a result of current changes in the capitalization rates during the reporting year, will be recorded in the cumulative other comprehensive income and will reduce the abovementioned recorded loss balance, until this balance will be reset.
321
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) F. New Accounting Standards and Directives of the Supervisor of Banks in the Period before their Implementation (cont'd.) (1) Adoption of U.S. GAAP regarding Employee Benefits (cont'd.)
‐ Actuarial losses deriving from current changes to capitalization rates during the reporting period, and actuarial profits deriving from current changes to capitalization rates during the reporting period after resetting the recorded loss balance as mentioned above, will be reduced in a straight-line method over the remaining average service period of the employees expected to receive benefits according to the plan.
‐ Other actuarial profits and losses (that don't derive as a result of change in the capitalization rate) for January 1, 2013 and the following periods will be included in the cumulative other comprehensive income and will be reduced in a straight-line method over the remaining average service period of the employees expected to receive benefits according to the plan.
‐ The influence of the initial implementation on other employee benefits, which all the changes in them are charged on an ongoing basis to the Profit and Loss Statement (such as jubilee bonuses), will be charged to the surplus.
In addition, the circular updates the disclosure requirements concerning employee benefits according to the GAAP in U.S. banks.
In addition, on January 12, 2015, a file of Q&As regarding employee benefits, which includes, inter alia, examples for the manner of handling frequent benefits in the banking system according to the U.S. GAAP, was published.
Main New Provisions Regarding Employee Benefits:
Post-Retirement Benefits – Pension, Compensation and Other Benefits – Plans for a Defined Benefit: ‐ The Bank acknowledges the amounts relating to pension plans and other post-retirement plans on the basis of calculations which include actuarial assumptions and other assumptions, including capitalization rates as detailed below: mortality; long-term predictive yield rate on the assets of the plan; future realistic salary increase rate and the utilization rate of pension rights.
322
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) F. New Accounting Standards and Directives of the Supervisor of Banks in the Period before their Implementation (cont'd.) (1) Adoption of U.S. GAAP regarding Employee Benefits (cont'd.) Post-Retirement Benefits – Pension, Compensation and Other Benefits – Plans for a Defined Benefit (cont'd.) ‐ Changes in assumptions are recognized, in general, and subject to the abovementioned instructions, initially in cumulative other comprehensive income and amortized to Profit and Loss Statement in following periods. ‐ The liability is accumulated during the relevant period determined according to the rules detailed in subject 715 of the Codification. See below details regarding the estimate of the influence of liability accrual method over a straight-line until the average retirement age at the Bank (based on historical data). ‐ The Bank implements the directives of the supervision of banks regarding internal control over the financial reporting process in respect of employee benefits, including, the examination of "a commitment in essence" to provide its employees benefits in respect of increased compensation and/or early pension.
Post-Retirement Benefits – Defined Deposit Plans: A defined deposit plan is a plan, according to which, the Bank pays fixed payments to a separate entity without having the legal or implied obligation to pay additional payments. The Banks' obligations to deposit in a defined deposit plan, are recorded as an expense in the Profit and Loss Statement during the periods in which the employees provided related services.
Other Long-Term Benefits for Active Employees: Jubilee Bonuses: ‐ The liability is accrued over the period qualifying for the benefit. ‐ In order to calculate the liability, capitalization rates and actuarial assumptions are taken into consideration. ‐ All of the components of the benefits' cost for the period, including actuarial profits and losses, are immediately charged to the Profit and Loss Statement.
The Main Changes Relative to the Accounting Policy Currently Implemented in the Financial Statements, Before the Implementation of the New Rules: ‐ The capitalization rate of the reserves is 4% according to the instructions of the supervision of banks. ‐ Actuarial profits and losses are immediately charged to the Profit and Loss Statement.
323
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) F. New Accounting Standards and Directives of the Supervisor of Banks in the Period before their Implementation (cont'd.) (1) Adoption of U.S. GAAP regarding Employee Benefits (cont'd.) The Main Changes Relative to the Accounting Policy Currently Implemented in the Financial Statements, Before the Implementation of the New Rules (cont'd.) ‐ In accordance with the instructions of the supervision of banks regarding internal control over the financial reporting process regarding employee benefits, a liability in respect of payment of severance pay is displayed in the higher of (1) the amount of the liability calculated on an actuarial basis, taking into consideration the additional cost that will be caused in respect of the aforesaid granting of benefits, or (2) the amount of liability calculated as the employees' monthly salary multiplied by his number of seniority years, as required in Opinion Statement 20 of the Israeli CPA Association.
‐ For more information regarding the accounting policy applied currently by the Bank regarding employee benefits, see Note 1.E.17 above and Note 15 below.
The Bank estimated that the expected effect on January 1, 2015 of the implementation of the new directives is an increase in assets in the amount of NIS 40 million, an increase in liabilities in the amount of NIS 100 million, a decrease in shareholders' equity in the amount of NIS 60 million after tax. The influence on the shareholders' equity mainly derives from the influence of NIS 53 million in respect of a change in the capitalization rate as described above and NIS 7 million in respect of change in the liability accrual method in respect of pension plans as mentioned above. For the calculation of capital requirements according to Basel III, according to the transitional directives determined in Proper Conduct of Banking Business Directive No. 299, the balance of cumulative other comprehensive income or loss, deriving from adjustments in respect of employee benefits, and the amount charged directly to the surplus for January 1, 2013 in respect of the initial implementation, will not be taken into account immediately, but rather subject to transitional directives, so that their influence will be spread at equal rates of 20% as of January 1, 2014, 40% as of January 1, 2015 and until the full implementation as of January 1, 2018. See Note 13 for disclosure regarding the estimation of the expected influence on Ratio of Tier I equity capital for December 31, 2014. The Bank estimates that the data above properly reflects the aforementioned expected influence for January 1, 2015 in respect of the implementation of the new directives, however, because of the complexity of the initial implementation of this directive, there's a possibility that the realization manner of the evaluations and estimates will be different than assessed in this note.
324
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) F. New Accounting Standards and Directives of the Supervisor of Banks in the Period before their Implementation (cont'd.) (1) Adoption of U.S. GAAP regarding Employee Benefits (cont'd.) The capitalization rate of the actuarial liabilities, which was used for the purpose of this estimate, is 1.3%. The 0.84% international margin added to the yield rates of Israeli government bonds was determined in accordance with the guidance of the supervision of Banks.
(2) Reporting according to U.S. Generally Accepted Accounting Principles (U.S. GAAP) Concerning the Distinction between Liabilities and Equity On October 6, 2014 the Supervisor of Banks published a directive regarding reporting according to U.S. GAAP concerning the distinction between liabilities and equity. This was done following the policy of the supervision of banks, to adopt the financial reporting array that applies to U.S. banks, in material matters. According to the directive, it is required to implement the U.S. GAAP concerning the classification of financial instruments as equity or as a liability, including complex instruments. In order to do that, it is required to implement, inter alia, the presentation, measurement and disclosure rules determined in the following subjects in the Codification: ‐ Subject 480 concerning distinction between liabilities and equity; ‐ Subject 470-20 concerning a debt with a convertible option and other options; and ‐ Subject 505-30 concerning treasury stock. In addition, when implementing the distinction between liabilities and capital, it's required to refer to Public Reporting Directive regarding embedded instruments. Concurrently to the publishing of the aforesaid circular, the supervision of banks published a file of Q&As which clarified that existing debt instruments with a conversion component contingent to shares (which were included in Tier I equity capital according to the Basel II directives and according to the transitional directives, meets the definition complex capital instrument, or which were included as a regulatory capital component according to the directives of Basel III) must be classified as a liability that will be measured at depreciated cost, without having to separate an embedded derivative. The starting date is January 1, 2015, while at the initial implementation it's required to act in accordance with the transitional directives determined in the subjects in the Codification detailed above, including amendment of comparative figures if relevant. The initial implementation isn't expected to have an influence on the Bank's financial
325
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
statements. Note 1 - Principal Accounting Policies (cont'd.) F. New Accounting Standards and Directives of the Supervisor of Banks in the Period before their Implementation (cont'd.) (3) Circular Regarding Operating Segments Reporting On November 3, 2014 a circular concerning operating segments reporting, was published. The circular updates the Public Reporting Directives concerning the reporting requirement of supervisory operating segments, inter alia, includes a change of certain definitions and guidelines according to which, the banks will be required to reclassify clients to supervisory segments and to update their reports.
The amendments to the directives are meant to force reporting of operating segments according to a uniform and comparable format determined by the supervision of banks. In addition, the circular determines that the disclosure concerning "operational segments according to the managements' approach" will be in accordance with GAAP in U.S. banks regarding operational segments (included in ASC 280) if there's a material difference between the managements' approach and the reporting segments according to the supervisions' guidelines.
The new directives shall apply as of the financial statements of 2015 in the manner detailed below: ‐ In the reports for 2015, the disclosure requirement will apply concerning balance sheet data in relation to supervisory operating segments as defined in the new directives. According to the new directives, it isn't necessary to provide disclosure concerning the comparative figures to the balance sheet data in respect of the supervisory operational segments, instead it's possible to include comparative figures, according to the Public Reporting Directives that were in effect before the circular took effect. Likewise, it isn't necessary to provide disclosure regarding the financial management segment.
‐ As of the financial statement of the first quarter of 2016, it is necessary to provide full disclosure according to the new directives, excluding disclosure regarding the financial management segment. The comparative figures will be retroactively adjusted. In the financial statements of 2016, it's possible to display comparative figures for only one year regarding the note concerning supervisory operating segments. For the purpose of displaying comparative figures, it will be possible to rely on the clients' classification to supervisory operating segments as at January 1, 2016.
326
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) F. New Accounting Standards and Directives of the Supervisor of Banks in the Period before their Implementation (cont'd.) (3) Circular Regarding Operating Segments Reporting (cont'd.) As of the financial reports of the first quarter of 2017, it's required to fully implement the circulars' directives.
The implementation of the new directives isn't expected to have material effect with the exception of presentation and disclosure.
(4) Adoption of Generally Accepted Accounting Principles in U.S. Banks On June 2009 the supervision of banks published a letter regarding the reporting of banking corporations and credit card companies in Israel according to International Financial Reporting Standards (IFRS) which determines the expected adoption manner of the IFRS by banking corporations. According to the circular, during 2011-2012 IFRS was gradually adopted in respect of non-core banking business issues, excluding IAS 19 concerning employee benefits whose implementation was postponed to a later date. The supervision of banks clarified that a final decision will be made, in accordance with the schedule that'll be determined in the U.S. and the progress of the convergence process between the international and the American standards bodies, concerning issues within the core banking business.
During January 2014, the banking supervision clarified that banking corporations will not be required to adopt the IFRS but to fully adopt the U.S. General American Accounting Standards, implemented by U.S. banks. However, it is noted that a draft of the subject hasn't been discussed yet in the advisory committee for banking issues.
(5) Revenue Recognition from Contracts with Clients On December 11, 2014 a draft circular regarding the adoption of an update to the accounting principles concerning revenue from contracts with clients, was published. The draft updates the Public Reporting Directives in light of the publishing of ASU 2014-09 which adopts a new American standard regarding revenue recognition. The standard determines that revenue will be recognized in the amount expected to be received in return for the transfer of goods or the provision of services to the client.
327
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 1 - Principal Accounting Policies (cont'd.) F. New Accounting Standards and Directives of the Supervisor of Banks in the Period before their Implementation (cont'd.) (5) Revenue Recognition from Contracts with Clients Banks are required to implement the amendments to the Public Reporting Directives according to the draft as of January 1, 2017. According to the transitional directives in the draft, when initially implementing, you can choose either to implement retroactively while redisplaying the comparative figures or to prospectively implement while imputing the cumulative effect on the equity upon initial implementation.
The new standard doesn't apply, inter alia, on financial instruments and rights or contractual obligations which are within the scope of chapter 310 to the Codification. The Bank has not yet begun to examine the impact of the standard on its financial statements and has not yet selected an alternative for the implementation of the transitional directives.
328
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 2 - Cash on Hand and Deposits with Banks Reported Amounts
Consolidated Composition (1): Consolidated December 31, December 31, 2014 2013 NIS millions
Cash and deposits with the Bank of Israel 9,291 9,305 Deposits with commercial banks (2) 557 619
Total 9,848 9,924
Of which: cash on hand, deposits with banks and deposits with the Bank of Israel for an original period of up to three months 9,717 9,776
(1) See Note 1.A(2).
(2) Of which: the balance of deposits with Israeli banks as at December 31, 2014 totaled NIS 136 million (as at December 31, 2013 - NIS 174 million), and the remaining balance in respect of the Banks' clearing house totaled approximately NIS 89 million (as at December 31, 2013 - NIS 100 million).
(3) See Note 14 regarding liens.
329
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 3 - Securities Reported Amounts Consolidated Composition (1): December 31, 2014
Cumulative other comprehensive Amortized cost income (for Book value shares-cost) Profits Losses Fair value (3) NIS millions A. Available for sale securities Bonds and loans: Of Israel government 3,605 3,550 59 (4) 3,605 Of foreign governments 588 591 1 (4) 588 Of financial institutions in Israel 778 766 12 -* 788 Of foreign financial institutions 92 90 2 -* 92 Asset backed securities (ABS) 87 84 4 (1) 87 Of others in Israel 804 773 45 (14) 804 Of foreign others 52 53 1 (2) 52 6,006 5,907 (4) 124 (25) 6,006
Shares and other securities 100 96(5) 8 (4) 100(6)
Total available for sale (7) (7) securities 6,106 6,003 132 29 6,106
December 31, 2014 Unrealized gains Unrealized from losses from Amortized cost (for shares- adjustments to adjustments Book value cost) fair value to fair value Fair value(3) NIS millions B. Securities held for trading Bonds and loans - Of Israeli government 572 545 28 (1) 572 Of financial institutions in Israel 42 42 -* -* 42 Of others in Israel 37 38 -* (1) 37 Of foreign others 6 6 -* -* 6 657 631 28 (2) 657 Shares and other securities 26 30 1 (5) 26
Total securities held for (8) (8) trading 683 661 29 (7) 683
Total securities (9) 6,789 6,664 6,789
330
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 3 - Securities (Cont'd.) Reported Amounts As at December 31, 2014 NIS millions
C. Additional data regarding impaired bonds and bonds in arrears Recorded debt balances of - Impaired bonds accruing interest income -* Impaired bonds not accruing interest income 45
Total recorded debt balances 45
* Less than NIS 500 thousand. (1) See Note 1.A.(2). (2) See Note 22 and 23 for details regarding results of activities in investment in bonds and in shares. (3) The fair value of securities is generally based on Stock Exchange prices, which do not necessarily reflect the price obtained in the event of sale of securities in large quantities. (4) After a cumulative provision for impairment in value of an investment in the amount of NIS 49 million. (5) After a cumulative provision for impairment in value of an investment in the amount of NIS 31 million. (6) Including shares and other securities for which there is no available fair value and which are stated at cost, in the amount of NIS 53 million. (7) Included in equity in the category "adjustments to fair value of available for sale securities” in the Condensed Consolidated Statement of Comprehensive Income. (8) Charged to the Profit and Loss Statement. (9) Of which: the balance-sheet balance in the amount of NIS 3 million in respect of subsidiary's bonds and NIS 54 million in respect of subsidiary's securities.
Notes: (a) See Note 14 regarding liens on bonds. (b) Israeli bonds and foreign bonds are differentiated according to the residence country of the entity issuing the security.
331
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 3 - Securities (cont’d) Reported Amounts Consolidated Composition (1): December 31, 2013
Cumulative other comprehensive Amortized cost income (for Book value shares-cost) Profits Losses Fair value (3) NIS millions A. Available for sale securities
Bonds and loans: Of Israel government 2,430 2,398 36 (4) 2,430 Of financial institutions in Israel 745 729 16 - 745 Of foreign financial institutions 149 147 2 -* 149 Asset backed securities (ABS) 55 50 6 (1) 55 Of others in Israel 754 703 55 (4) 754 Of foreign others 13 13 -* -* 13 4,146 4,040(4) 115 (9) 4,146
Shares and other securities 92 76(5) 16 -* 92(6)
Total available for sale (7) (7) securities 4,238 4,116 131 (9) 4,238
December 31, 2013 Unrealized gains Unrealized from losses from Amortized cost (for shares- adjustments to adjustments Book value cost) fair value to fair value Fair value(3) NIS millions B. Securities held for trading: Bonds and loans: Of Israel government 548 537 12 (1) 548 Of financial institutions in Israel -* -* -* - -* Of others in Israel 7 8 -* (1) 7 555 545 12 (2) 555
Shares and other securities 17 17 2 (2) 17
Total securities held for (8) (8) trading 572 562 14 (4) 572
Total securities (9) 4,810 4,678 4,810
332
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 3 - Securities (Cont'd.) Reported Amounts As at December 31, 2013 NIS millions
C. Additional data regarding bonds Recorded debt balances of - Impaired bonds accruing interest income -* Impaired bonds not accruing interest income 65 65
* Less than NIS 500 thousand. (1) See Note 1.A.(2). (2) See Note 22 and 23 for details regarding results of activities in investment in bonds and in shares. (3) The fair value of securities is generally based on Stock Exchange prices, which do not necessarily reflect the price obtained in the event of sale of securities in large quantities. (4) After a cumulative provision for impairment in value of an investment in the amount of NIS 67 million. (5) After a cumulative provision for impairment in value of an investment in the amount of NIS 22 million. (6) Including shares and other securities for which there is no available fair value and which are stated at cost, in the amount of NIS 38 million. (7) Included in equity in the category "adjustments to fair value of available for sale securities” in the Condensed Consolidated Statement of Comprehensive Income. (8) Charged to the Profit and Loss Statement. (9) Of which: the balance-sheet balance in the amount of NIS 3 million in respect of subsidiary's bonds and NIS 58 million in respect of subsidiary's securities.
Notes: (a) See Note 14 regarding liens on bonds. (b) Israeli bonds and foreign bonds are differentiated according to the residence country of the entity issuing the security.
333
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 3 - Securities (cont’d.) Reported Amounts
Consolidated Composition(1): D. Fair value and unrealized losses, according to time duration and impairment rate of securities available for sale which are in an unrealized loss position
December 31, 2014 Less than 12 months(2) 12 months or more (3) Fair Fair value Unrealized losses value Unrealized losses Above Above 0%-20% (4) 20%-40% (5) 40% (6) Total 0%-20% (4) 20%-40% (5) 40% (6) Total NIS millions Bonds -
Of the Israel government 470 (4) - - (4) - - - - -
Of foreign governments 509 (4) - - (4) - - - - - Of financial institutions in Israel 125 -* - - -* - - - - - Of foreign financial institutions 5 -* - - -* - - - - -
Asset backed securities (ABS) 61 (1) - - (1) - - - - - Of others in Israel 280 (13) (1) - (14) - - - - - Of foreign others 30 (1) (1) - (2) - - - - - 1,480 (23) (2) - (25) - - - - -
Shares and other securities 22 (1) (1) (2) (4) - - - - -
Total available for sale securities 1,502 (24) (3) (2) (29) - - - - -
334
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 3 - Securities (cont’d.) Reported Amounts Consolidated Composition (cont’d.): (1) D. Fair value and unrealized losses, according to time duration and impairment rate of securities available for sale which are in an unrealized loss position (cont’d.): December 31, 2013 Less than 12 months (2) 12 months or more (3) Fair value Unrealized losses Fair value Unrealized losses Above Above 0%-20%(4) 20%-40%(5) 40% (6) Total 0%-20%(4) 20%-40%(5) 40% (6) Total NIS millions Bonds: Of the Israel government 181 (4) --(4) - - - - - Of foreign financial institutions 18 -* - - -* 2 -* - - -* Asset backed securities (ABS) 1 -* - - -* 14 (1) --(1) Of others in Israel 107 (4) -* - (4) 16 -* - - -* Of foreign others 5 -* - - -* - - - - - 312 (8) -* - (8) 32 (1) - - (1) Shares and other securities 6 -* - - -* -* - -* - -* Total available for sale securities 318 (8) -* - (8) 32 (1) -* - (1)
* Less than NIS 500 thousand. (1) See Note 1.A.(2). (2) Investments that were in an ongoing position of unrealized loss for less than 12 months. (3) Investments that were in an ongoing position of unrealized loss for 12 months or more. (4) Investments whose unrealized loss constitutes up to 20% of their depreciated cost. (5) Investments whose unrealized loss constitutes over 20% and up to 40% of their depreciated cost. (6) Investments whose unrealized loss constitutes over 40% of their depreciated cost.
335
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 3A - Asset-Backed Financial Instruments
Reported Amounts
Consolidated Composition(1):
The following table shows information regarding the depreciated cost and fair value of asset-backed bonds in the available-for-sale portfolio: December 31, 2014 Cumulative other Depreciated cost comprehensive income Book value (for shares–cost) Profits Losses Fair value NIS millions ABS - Asset-Backed Bonds Others (2) 87 84 4 (1) 87 Total asset backed available 87 84 4 (1) 87 for sale bonds
(2) Of which: - NIS 62 million – non-marketable bonds rated AA in 2014, backed by cash flows from sale of gas. - NIS 9 million - non-marketable bonds rated AA in 2011, backed by cash flows from municipal tax payments of local authorities. - NIS 7 million – non-marketable bonds rated A- in 2013, backed by cash flows from sales of apartments. - NIS 5 million - non-marketable bonds rated AA- in 2014, backed by cash flows from municipal tax payments of local authorities. - NIS 2 million – non-marketable bonds rated AA- in 2014, backed by cash flows from property rentals. - NIS 1 million - bonds rated AA in 2011, backed by cash flows from bonds issued by an infrastructure company. - NIS 1 million non-marketable bonds rated AA- in 2011, backed by cash flows from water desalination.
336
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 3A - Asset-Backed Financial Instruments (cont'd.) Reported Amounts December 31, 2013 Cumulative other Depreciated cost comprehensive income Book value (for shares–cost) Profits Losses Fair value NIS millions ABS - Asset-Backed Bonds Others (2) 55 50 6 (1) 55 Total asset backed bonds 55 50 6 (1) 55 available for sale
(2) Of which: - NIS 20 million - bonds rated AAA in 2010, backed by assets which are USD - denominated bonds of the state of Israel. - NIS 10 million – non-marketable bonds rated AA in 2011, backed by cash flows from municipal tax payments of local authorities. - NIS 6 million - non-marketable bonds rated AA in 2013, backed by cash flows from municipal tax payments of local authorities. - NIS 14 million – non-marketable bonds rated A- in 2013, backed by cash flows from sales of apartments. - NIS 2 million - non-marketable bonds rated AA- in 2013, backed by cash flows from property rentals. - NIS 1 million – non-marketable bonds rated AA in 2011, backed by cash flows from bonds issued by an infrastructure company. - NIS 1 million - bonds rated A+ in 2013, backed by CLN transactions. - NIS 1 million non-marketable bonds rated AA- in 2011, backed by cash flows from water desalination. (1) See Note 1.A.(2)
337
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses Reported Amounts
Consolidated Composition: A. Debts (1) and off-balance sheet credit instruments - Allowance for credit losses 1. Change in allowance for credit losses
Year ended December 31, 2014 Credit to the Public Other Banks and Commercial Housing(2) private Total government Total NIS millions
Allowance for credit losses at the beginning of the year 283 49 7 339 - 339
Provision for credit losses Accounting write-offs 84 (2) 13 95 - 95 Recoveries of debts written-off (169) (12) (14) (195) - (195) in previous years 30 1 14 45 - 45 Net accounting write-offs (139) (11) -* (150) - (150)
Balance of allowance for credit 228 36 20 284 - 284 losses at the end of the year Of which: In respect of off-balance sheet credit instruments 36 - 2 38 - 38
Year ended December 31, 2013 Credit to the Public Other Banks and Commercial Housing private Total government Total NIS millions
Allowance for credit losses at the beginning of the year 280 39 15 334 - 334
Provision for credit losses 18 13 (8) 23 - 23 Accounting write-offs (75) (5) (13) (93) - (93) Recoveries of debts written-off in previous years 60 2 13 75 - 75 Net accounting write-offs (15) (3) - (18) - (18)
Balance of allowance for credit 283 49 7 339 - 339 losses at the end of the year Of which: In respect of off-balance sheet credit instruments 54 - - 54 - 54
338
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported Amounts
Consolidated Composition: A. Debts (1) and off-balance sheet credit instruments - Allowance for credit losses (cont'd.) 1. Change in allowance for credit losses (cont'd.)
Year ended December 31, 2012 Credit to the Public Other Banks and Commercial Housing private Total government Total NIS millions
Allowance for credit losses at the beginning of the year 264 39 13 316 - 316
Provision for credit losses 57 3 5 65 - 65 Accounting write-offs (78) (3) (15) (96) - (96) Recoveries of debts written-off in previous years 37 - 12 49 - 49 Net accounting write-offs (41) (3) (3) (47) - (47)
Balance of allowance for credit losses at the end of the year 280 39 15 334 - 334 Of which: In respect of off-balance sheet credit instruments 49 - - 49 - 49
* Less than NIS 500 thousand.
(1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel). (2) See Note 1.E.5 subsection "Accounting Write-offs".
339
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition: A. Debts (1) and off-balance sheet credit instruments - Allowance for credit losses (cont'd.) 2. Additional information regarding the calculation method of allowance for credit losses in respect of debts and underlying debts:
Year ended December 31, 2014 Credit to the Public Other Banks and Commercial Housing private Total government Total NIS millions Recorded debt balance of debts: Examined on an individual basis 11,285 3 131 11,419 560 11,979 Examined on a collective basis 1,322 7,116 2,102 10,540 - 10,540 Of which: Allowance calculated according to the extent of arrears 549 7,112 - 7,661 - 7,661 Total debts 12,607 7,119 2,233 21,959 560 22,519
Allowance for credit losses in respect of debts: Examined on an individual basis 183 -* 1 184 - 184 Examined on a collective basis 9 36 17 62 - 62 Of which: Allowance calculated according to the extent of arrears 2 35 - 37** - 37 Total allowance for credit losses 192 36 18 246 - 246
Year ended December 31, 2013 Credit to the public Other Banks and Commercial Housing private Total government Total NIS millions Recorded debt balance of debts: Examined on an individual basis 12,129 13 107 12,249 619 12,868 Examined on a collective basis 1,273 6,873 2,025 10,171 - 10,171 Of which: Allowance calculated according to the extent of arrears 442 6,863 - 7,305 - 7,305 Total debts 13,402 6,886 2,132 22,420 619 23,039
Allowance for credit losses in respect of debts: Examined on an individual basis 221 -* -* 221 - 221 Examined on a collective basis 8 49 7 64 - 64 Of which: Allowance calculated according to the extent of arrears 2 49 - 51** - 51 Total allowance for credit losses 229 49 7 285 - 285
(1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel).
* Less than NIS 500 thousand. ** The allowance beyond the extent of arrears calculated on a collective basis in the amount of NIS 27 million (December 31, 2013 - NIS 26 million).
340
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition:
B. Debts (1) 1. Credit Quality and Arrears:
December 31, 2014 Unimpaired debts additional (2) Problematic information In arrears of In arrears of Non 90 days or 30 to 89 (3) (4) (5) problematic Unimpaired Impaired Total more days NIS millions
Borrower activity in Israel public - commercial Construction and real estate - construction 2,021 26 35 2,082 2 13 Construction and real estate - real- estate activity 804 3 27 834 - 9 Financial services 3,436 20 97 3,553 - 30 Commercial - other 5,767 299 66 6,132 - 53 Total commercial 12,028 348 225 12,601 2 105 Private individuals - housing loans Private individuals - others Total public - activity in Israel 21,332 390 231 21,953 42 124
Banks in Israel 223 - - 223 - - Total activity in Israel 21,555 390 231 22,176 42 124
Borrower activity abroad public - commercial Total public – activity abroad 6 - - 6 - - Banks abroad 337 - - 337 - - Total activity abroad 343 - - 343 - -
Total public 21,338 390 231 21,959 42 124 Total banks 560 - - 560 - - Total 21,898 390 231 22,519 42 124
(1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel). (2) Credit risk that is impaired, inferior, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist, which are in arrears of 90 days or more. (3) In general, impaired debts do not accrue interest income. For information regarding certain restructured impaired debts, see Note 4(b)(2)(3)(2) below. (4) Classified as unimpaired problematic debts, accruing interest income. (5) Accruing interest income. Debts in arrears of 30 to 89 days, in the amount of NIS 4 million were classified as unimpaired problematic debts. (6) Includes a balance of housing loans, in the amount of NIS 16 million with allowance based on the extent of arrears, for which an arrangement has been signed for the borrower's repayment of the amounts in arrears, where a change has been made in the repayment schedule with regard to the balance of the loan not yet due for repayment.
Note: The state of the arrears is handled on an ongoing basis and is one of the main indications for the credit quality - for further information regarding the Banks' treatment of arrears see Note 1.E.5.
341
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition: B. Debts (1) (cont'd.) 1. Credit Quality and Arrears (cont.) December 31, 2013 Unimpaired debts additional (2) Problematic information In arrears of In arrears of Non 90 days or 30 to 89 (3) (4) (5) problematic Unimpaired Impaired Total more days NIS millions
Borrower activity in Israel public - commercial Construction and real estate - construction 1,968 82 47 2,097 1 18 Construction and real estate - real- estate activity 886 7 37 930 - 3 Financial services 3,762 13 268 4,043 12 7 Commercial - other 5,788 285 253 6,326 2 61 Total commercial 12,404 387 605 13,396 15 89 Private individuals - housing loans 6,832 54(6) - 6,886 53 12 Private individuals - others 2,123 4 5 2,132 2 10 Total public - activity in Israel 21,359 445 610 22,414 70 111
Banks in Israel 270 - - 270 - - Total activity in Israel 21,629 445 610 22,684 70 111
Borrower activity abroad public - commercial Total public – activity abroad 6 - - 6 - - Banks abroad 349 - - 349 - - Total activity abroad 355 - - 355 - -
Total public 21,365 445 610 22,420 70 111 Total banks 619 - - 619 - - Total 21,984 445 610 23,039 70 111
(1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel) (2) Credit risk that is impaired, inferior, or under special supervision, including in respect of housing loans for which an allowance based on the extent of arrears exists, and housing loans for which an allowance based on the extent of arrears does not exist, which are in arrears of 90 days or more. (3) In general, impaired debts do not accrue interest income. For information regarding certain restructured impaired debts, see Note 4(b)(2)(3)(2) below. (4) Classified as unimpaired problematic debts, accruing interest income. (5) Accruing interest income. Debts in arrears of 30 to 89 days, in the amount of NIS 3 million were classified as unimpaired problematic debts. (6) Includes a balance of housing loans, in the amount of NIS 9 million with allowance based on the extent of arrears, for which an arrangement has been signed for the borrower's repayment of the amounts in arrears, where a change has been made in the repayment schedule with regard to the balance of the loan not yet due for repayment.
Note: The state of the arrears is handled on an ongoing basis and is one of the main indications for the credit quality - for further information regarding the Banks' treatment of arrears see Note 1.E.5.
342
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition: B. Debts (1) (cont'd.) 2. Additional information regarding impaired debts: 2.1 Impaired debts and the individual allowance:
December 31, 2014 Balance of impaired debts Balance of for which an impaired debts individual Balance of for which there Balance of allowance for individual is no individual Total balance of contractual credit losses allowance for allowance for impaired principal of (2) (2) (2) exists credit losses credit losses debts impaired debts NIS millions Borrower activity in Israel public - commercial Construction and real estate - construction 1 1 34 35 997 Construction and real-estate – real estate activity - - 27 27 125 Financial services 88 21 9 97 531 Commercial - other 10 7 56 66 1,568 Total commercial 99 29 126 225 3,221 Private individuals - housing loans - - - - 6 Private individuals - others -* -* 6 6 240 Total 99 29 132 231 3,467
Of which: Measured at the present value of cash flows 12 8 98 110 Debts in troubled debts restructuring 91 23 93 184
343
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition: B. Debts (1) (cont'd.) 2. Additional information regarding impaired debts (cont'd.): 2.1 Impaired debts and the individual allowance (cont'd.):
December 31, 2013 Balance of impaired debts Balance of for which an impaired debts individual Balance of for which there Balance of allowance for individual is no individual Total balance of contractual credit losses allowance for allowance for impaired principal of (2) (2) (2) exists credit losses credit losses debts impaired debts NIS millions Borrower activity in Israel public - commercial Construction and real estate - construction 2 -* 45 47 917 Construction and real-estate – real estate activity 5 3 32 37 126 Financial services 265** 55 3** 268 562 Commercial - other 188 17 65 253 1,771 Total commercial 460 75 145 605 3,376 Private individuals - housing loans - - - - 11 Private individuals - others 1 -* 4 5 220 Total 461 75 149 610 3,607
Of which: Measured at the present value of cash flows 209** 34 111** 320 Debts in troubled debts restructuring 228** 53 137** 365
* Less than NIS 500 thousand. ** Reclassified.
(1) Credit to the public, credit to the governments and deposits with banks (excluding deposits with the Bank of Israel). (2) Debt balance recorded in the Bank's books less accounting write-offs.
344
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition:
B. Debts (1) (cont'd.) 2. Additional information regarding impaired debts (cont'd.) 2.2 Average balance and interest income
For the year ended December 31, 2014 Average balance Of which: of impaired Interest income recorded on a debts(2) recorded(3) cash basis
Borrower activity in Israel public - commercial Construction and real estate - construction 41 1 1 Construction and real estate - real estate activity 32 - - Financial services 219 - - Commercial - other 201 2 2 Total commercial 493 3 3 Private Individuals – housing loans - - - Private individuals - others 6 -* - (4) Total 499 3 3
For the year ended December 31, 2013 Average balance Of which: of impaired Interest income recorded on a debts(2) recorded(3) cash basis
Borrower activity in Israel public - commercial Construction and real estate - construction 65 1 -* Construction and real estate - real estate activity 17 - - Financial services 294 - - Commercial - other 155 1 -* Total commercial 531 2 -* Private Individuals – housing loans - - - Private individuals - others - - - (4) Total 531 2 -*
* Less than NIS 500 thousand.
(1) Credit to the public, credit to the governments and deposits with banks (excluding deposits with the Bank of Israel). (2) Average recorded debt balance of impaired debts in the reporting period. (3) Interest income recorded in the reporting period, regarding the average balance of impaired debts, in respect of the period in which the debt was classified as impaired. (4) If the impaired debts had been accumulating interest according to the original terms, interest income in the amount of NIS 27 million would have been recorded (December 31, 2013 - NIS 31 million). (5) The Bank has no problematic debt in the 'credit to the government' and 'deposits with banks' balances.
345
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition:
B. Debts (1) (cont'd.) 2.3 Restructuring of problematic debts:
December 31, 2014 Recorded debt balance Not Accruing in accruing arrears of 90 Accruing in interest days or more arrears of 30 Accruing not income (2) to 89 days (2) in arrears (2) Total(3) NIS millions Borrower activity in Israel pubic - commercial Construction and real-estate - construction 13 - - 19 32 Construction and real estate - real estate activity 4 - - -* 4 Financial services 89 - - 8 97 Commercial - other 14 - - 33 47 Total commercial 120 - - 60 180 Private individuals - housing loans - - - - - Private individuals - others 3 - - 1 4 Total 123 - - 61 184
December 31, 2013 Recorded debt balance Not Accruing in accruing arrears of 90 Accruing in interest days or more arrears of 30 Accruing not income (2) to 89 days (2) in arrears (2) Total(3) NIS millions Borrower activity in Israel pubic - commercial Construction and real-estate - construction 5 - - 25 30 Construction and real estate - real estate activity 8 - - - 8 Financial services 258 - - - 258 Commercial - other 26 - - 40 66 Total commercial 297 - - 65 362 Private individuals - housing loans - - - - - Private individuals - others 3 - - - 3 Total 300 - - 65 365
(1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel). (2) Accruing interest income. (3) Included in impaired debts.
346
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition:
B. Debts (1) (cont'd.) 2.3 Restructuring of problematic debts (cont'd.):
Reorganizations made in 2014 2013 Number Recorded debt Recorded debt Recorded debt Recorded debt of balance before balance after Number of balance before balance after contracts reorganization reorganization contracts reorganization reorganization NIS millions NIS millions Borrower activity in Israel pubic - commercial Construction and real-estate - construction 7 18 18 13 3 3 Construction and real estate - real estate activities 2 3 . 6 7 7 Financial services 5 16 16 10 196 196 Commercial - other 22 7 7 45 40 40 Total commercial 36 44 44 74 246 246 Private individuals - housing loans ------Private individuals - others 132 5 5 121 3 3 Total 168 49 49 195 249 249
Reorganizations that failed in 2014 (3) 2013 (3) Number of Recorded debt Number of Recorded debt contracts balance contracts balance NIS millions NIS millions
Borrower activity in Israel pubic - commercial Construction and real-estate - construction 2 -* 4 -* Construction and real estate - real estate activity 1 3 - - Financial services 3 -* - - Commercial - other 22 1 13 1 Total commercial 28 4 17 1 Private individuals - housing loans - - - - Private individuals - others 73 2 36 1 Total 101 6 53 2
(1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel). (2) The Bank has no problematic debt in the 'credit to the government' and 'deposits with banks' balances. (3) Debts that have become in the reporting year, debts in arrears of 30 days or more, which were reorganized as a problematic debt during the 12 months prior to the date in which they became debts in arrears.
* Less than NIS 500 thousand.
347
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition:
B. Debts (1) (cont'd.) 3. Additional information regarding housing loans (3) Year-end balances by financing ratio (LTV) (2) repayment type, and interest type:
December 31, 2014 Balance of housing loans Of which: Total off- balance Of which: floating sheet credit Total bullet and balloon interest rate risk NIS millions
First lien: financing rate: up to 60% 5,903 365 3,792 558 over 60% 1,834 53 1,349 322 Total 7,737 418 5,141 880
December 31, 2013 Balance of housing loans Of which: Total off- balance Of which: floating sheet credit Total bullet and balloon interest rate risk NIS millions
First lien: financing rate: up to 60% 5,485 277 3,658 679 over 60% 2,040 63 1,503 499 Total 7,525 340 5,161 1,178
(1) Credit to the public, credit to the governments and deposits with banks (excluding deposits with the Bank of Israel). (2) The ratio between the approved facility at the time the facility was given and the asset value, as approved by the Bank at the time the facility was provided. The financing rate (LTV) as defined in the reporting directives to the Supervisor no. 876. The LTV ratio is an additional indication for the Bank to assess the customer's risk when granting him credit. (3) Including acquisition groups.
348
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 4 - Credit risk, credit to the public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition: C. Credit to the public and off-balance-sheet credit risk according to the debt size per borrower:
December 31, 2014 December 31, 2013 Credit limit per borrower (in thousands Off- Off- of NIS) Balance- Balance- Number of sheet credit Number of sheet credit (2) (1) (1),(3) (2) (1) (1), (3) borrowers Credit risk borrowers Credit risk From To NIS millions NIS millions
0 10 23,870 48 33 22,560 40 29 10 20 20,602 176 112 17,135 134 88 20 40 28,887 583 254 27,202 514 209 40 80 22,166 865 370 22,636 779 374 80 150 7,575 576 253 8,073 515 281 150 300 5,232 960 210 5,236 910 163 300 600 6,247 2,501 294 6,168 2,317 221 600 1,200 4,274 3,237 284 4,229 2,924 352 1,200 2,000 998 1,308 206 994 1,199 223 2,000 4,000 533 1,134 303 547 1,114 299 4,000 8,000 262 871 560 253 885 469 8,000 20,000 240 1,599 1,563 232 1,719 1,293 20,000 40,000 131 1,832 1,824 114 1,873 1,715 40,000 200,000 120 5,284 4,151 114 5,067 5,279 200,000 400,000 5 888 381 10 1,316 1,355 400,000 800,000 1 534 15 1 743(4) - 800,000 1,200,000 - - - 1 753(4) 212 121,143 22,396 10,813 115,505 22,802 12,562
(1) Credit and off-balance-sheet credit risk are presented before the effect of allowance for credit losses and the influence of deductible collateral for purposes of the indebtedness of a borrower and with the addition of the fair value of derivative instruments in the amount of NIS 437 million and NIS 382 million for December 31, 2014 and December 31, 2013, respectively. (2) Number of borrowers according to total credit and off-balance-sheet credit risk. (3) Credit risk in off-balance-sheet financial instruments as calculated for a borrower's credit limitations. (4) Fully covered by collateral that is permitted for offset.
D. Information regarding purchases of debts: The following table details the consideration paid for purchases of loans:
2014 2013 NIS millions Private individuals - others Loans purchased* 584 794
* For further information regarding loan purchase transactions. See Note 18.C.7. below.
349
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 5 - Investments in Investee Companies and Details on such Companies Reported Amounts Details of principal investee companies (1): Investments on equity basis as at December 31
Share Cost of Profit (loss) since Dividend Other items Bank's equity in the in acquisition date of received accumulated in the profits (losses) of investee equity acquisition since date of equity (2) companies and acquisition voting 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2012 Company name Main activity % NIS millions
Union Investment and Real Enterprises (A.S.Y) Ltd. (3) (8) Investments 100 149 149 60 41 - - 5 10 19 16 10
Impact Investment Portfolio Portfolio Management management Ltd. (4) - - 10 - 14 - - - 2 -* -* 1
Union Leasing Ltd. Leasing 100 1 1 73 66 - - - - 7 8 9
Union Bank Trust Trustee services Company Ltd. 100 2 2 40 31 - - - - 9 7 3
Carmel Union - Operating Mortgages and services to Investments Ltd. the Bank 100 138 138 52 49 (79) (73) - - 3 4 5
Livluv Insurance Real estate Agency (1993) Ltd. insurance 100 11 11 26 25 - - - - 1 2 1
Union Finances Ltd. (5) - - - - 37 - (37) - - - -* 1
Union Balances Ltd. (6) 100 1 1 40 40 - - - - -* -* 1
Union Issuances Ltd. (7) Issuance of liability deeds 100 16 16 7 5 - - - - 2 2 1
* Less than NIS 500 thousand.
(1) The data on the subsidiaries reflects the investment of the Bank in them less the investments of each company in other principal investee companies of the Bank Group, and the Bank’s equity in their results of operations less each company’s equity in the results of operations of other principal investee companies of the Bank Group. (2) Including mainly adjustments to the presentation of available for sale securities of the subsidiaries according to net fair value. (3) The investment in the subsidiary includes capital notes in the amount of NIS 139 million (as at December 31, 2013 - NIS 139 million). Regarding engagements of the subsidiary, see Note 18.C.(3) below. (4) On September 30, 2014 the Bank completed the sale of all of its holdings of Impact Investment Portfolio Management Ltd. (hereinafter: "Impact"), a portfolio management company under the exclusive control of the Bank, to "A.T Impact Gate Holding Ltd". (hereinafter: "the buyer"), a company owned by Mr. Albert Tubul (70%) and the C.E.O of Impact, Mr. Ztachi Rodnik (30%). According to the agreement, in return for the sale of the Bank's shares of Impact, the buyer paid the Bank a total of NIS 25 million subject to an adjustment mechanism which will be activated at the end of a year from the closing date of the transaction or an earlier date that'll be agreed upon between both parties. According to which, inter alia, the proceeds may be reduced, subject to the terms determined in the agreement, by no more than NIS 1.25 million. As a result of the sale of the shares of Impact, the Bank recorded a profit after tax in the amount of NIS 3 million in respect of the proceeds received less the amount regarding the adjustment mechanism. (5) Formerly - Union Mutual Funds (U.M.F.) Ltd. The mutual funds activity was sold in 2006. In 2013 the company distributed dividends in the amount of NIS 37 million. On 31.12.13 the Bank made an agreement to sale Union Finances to a third party, the Board of Directors approved the sale of the company at its meeting on January 16, 2014. (6) Formerly - Union Provident Funds Management Ltd. The provident fund activity was sold in 2006. (7) The investment in the subsidiary includes capital notes in the amount of NIS 16 million (December 31, 2013 - NIS 16 million). See Note 10 regarding the issuance of subordinated notes by Union Issuances Ltd. (8) Including a subsidiary– Union Capital Markets and Investments Ltd. (hereinafter: Capital Markets") held 100% by Union Investments & Enterprises (A.S.Y.) Ltd. (hereinafter: A.S.Y.) and Union Underwriting & Finances Ltd. (hereinafter: "Union Underwriting") held 80% by Capital Markets and 20% by a company controlled by the C.E.O. of Union Underwriting. In 2014, following the realization of a put option which was given to the a service provider in the company for the sale of his shares in the company to Capital Markets, the Bank indirectly increased its holdings of Union Underwriting (through Union Capital Markets) from 75% to 80%. The proceeds from the acquisition are NIS 0.2 million
350
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 6 - Buildings and Equipment Reported Amounts
A. Consolidated and the Bank - Composition: Buildings and real estate (including installations Equipment, and leasehold furniture Software (1) improvements) and vehicles costs Total NIS millions
Cost of assets: Balance as at December 31, 2012 391 310 417 1,118 Additions 7 18 51 (2) 76 Subtractions (7) (1) - (8) Balance as at December 31, 2013 391 327 468 1,186 Additions 7 9 57 (2) 73 Subtractions (2) - - (2) Balance as at December 31, 2014 396 336 525 1,257
Depreciation and impairment losses Balance as at December 31, 2011 176(3) 267 277 720 Depreciation for the year 12 12 44 68 Subtractions (6) (1) - (7) Balance as at December 31, 2012 182(3) 278 321 781 Depreciation for the year 13 12 48 73 Subtractions (1) - - (1) Balance as at December 31, 2014 194(3) 290 369 853
Book value As at December 31, 2012 215 43 140 398 As at December 31, 2013 209 49 147 405 As at December 31, 2014 202 46 156 404
Weighted average depreciation rate as at December 31, 2014 3.9% 15.3% 20.3%
Weighted average depreciation rate as at December 31, 2013 3.8% 14.4% 20.6%
B. Following are details regarding real estate rights:
As at December 31 The date of the termination of the lease (in years) 2014 2013
Ownership rights 48 50
Leased rights in a capitalized financing lease(4) 35-44 129 133 177 183
351
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 6 - Buildings and Equipment (Cont'd.) Reported Amounts
C. Buildings and real estate include property unoccupied by the Bank in the amount of NIS 9 million (net of accumulated depreciation and impairment), of which there's no balance in respect of buildings and real estate intended for sale, as at December 31, 2014 (December 31, 2013 - NIS 8 million). Notes: (1) The Bank receives computing services from Leumi Bank, see Note 18.C.4. regarding the computing services agreement with Leumi Bank. (2) Additions in respect of software costs constitute expenses that were capitalized regarding costs of software development for own use. Regarding the policy of capitalization of software costs – see Note 1.E.13. (3) Including a provision for impairment in the amount of NIS 2 million (as at December 31, 2013 and December 31, 2012 - NIS 2 million). (4) Rights in real estate in the depreciated amount of NIS 69 million have not yet been registered in the Bank's name at the Land Registry Office (December 31, 2013 - NIS 70 million).
352
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 7 - Other Assets
Reported Amounts Consolidated - Composition (1): December 31, December 31, 2014 2013 NIS millions
Net deferred tax assets (See Note 28.G) 244 240* Assets in respect of Maof market transactions (2) 1,045 813 Other receivables and debit balances (3), (4) 124 87*
Total other assets 1,413 1,140
* Reclassified (1) See Note 1.A.(2). (2) Assets not meeting the definition of derivatives. See also Note 11 – Liabilities in respect of Maof Market transactions. (3) Includes NIS 13 million in respect of a loan with no scheduled maturity date, granted to Hof Hathelet (Tel Aviv- Herzlyia) Development Company Ltd., which the Bank holds 14% of its shares. The Bank and other shareholders in the company gave loans to cover development expenses, which are to be returned out of the amounts the company will receive upon realization of its assets (as at December 31, 2013 - NIS 13 million). (4) Following are additional details regarding operating lease agreements: a. The Bank and its subsidiaries lease buildings and equipment under operating leases with lease agreements linked to CPI. b. The Bank paid leasing fees in respect of the buildings, totaling NIS 28 million (2013 - NIS 27 Million, 2012 - NIS 25 Million). For rent payable in future years - See Note 18.C.1. c. Balance of other receivables and debit balances include prepaid expenses in the amount of NIS 0.1 million in respect of operating leases (as at December 31, 2013 - NIS 0.2 million).
353
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 8 - Deposits from the Public
Reported Amounts
Consolidated - Composition (1): A. Types of deposits according to place of recruitment and depositor type in Israel
December 31, December 31, 2014 2013 NIS millions
Upon request Non-bearing interest 7,661 5,014** Bearing interest 3,148 3,280** Total upon request 10,809 8,294 Fixed term deposits 20,689 22,328 Total deposits in Israel* 31,498 30,622
* Of which: Deposits of private individuals 15,252 15,231 Deposits of institutional entities 2,894 2,607** Deposits of corporations and others 13,352 12,784** ** Reclassified (1) See Note 1.A(2)
B. Types of deposits according to size December 31, December 31, 2014 2013(2) NIS millions
Deposit limit (in NIS millions) Up to 1 8,438 8,363 From 1 to 10 9,351 9,265 From 10 to 100 7,929 7,843 From 100 to 500 5,779 5,151
Total 31,497 30,622
(1) See Note 1.A(2). (2) Reclassified. (3) On December 31, 2014 the top step ceiling is NIS 357 million (December 31, 2013 – NIS 317 million).
354
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 9 - Deposits from Banks
Reported Amounts
Consolidated Composition (1):
December 31, December 31, 2014 2013 NIS millions Commercial banks in Israel Deposits on demand 111 124 Fixes term deposits - -
Commercial banks abroad Deposits on demand 9 45 Acceptances 32 40 Total deposits from banks 152 209
(1) See Note 1.A(2).
Note 10 - Subordinate Notes and Bonds Reported Amounts A. Composition: Consolidated Average life Internal rate duration (1) of return (2) December 31, December 31, 2014 2014 2013 Years % NIS millions Liability deed(3) Deferred liability deed: In NIS unlinked 5.2 2.7 715 714 In NIS linked to the CPI 3.5 3.9 1,167 1,270
Bonds: (3) In NIS unlinked to the CPI 4.6 2.0 799 222 In NIS linked to the CPI 1.3 0.6 793 903
Total deferred liability and deposit certificates(5) 3,474 3,109
355
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 10 - Subordinate notes and Bonds Reported Amounts A. Composition: The Bank Average life Internal rate duration (1) of return (2) December 31, December 31, 2014 2014 2013 Years % NIS millions
Deferred liability deed (3), (4) In NIS linked to the CPI 3.6 4.5 64 168
Total deferred liability deed 64 168
(1) The average life duration is the weighted average period of the payments based on the cash flow capitalized at the internal rate of return. (2) The internal rate of return is the interest rate discounting the expected future payments to the balance sheet balance included in the financial statements. (3) The deferred liability deed and bonds are not convertible into shares. (4) The deferred liability deed will be settled until 2022. (5) Including tradable deferred liability deeds in the amount of NIS 3,410 million (December 31, 2013 – NIS 2,941 million).
B. Shelf Prospectus Publication: On November 26, 2013 a subsidiary of the Bank, Union Issuances LTD, published a shelf prospectus bearing the date November 27, 2013, for the issuance of a new series of liability deeds and expansion of existing series. According to the shelf prospectus, the Company can issue the following: An issuance of up to 10 series of bonds (Series G through P) at a regular repayment priority ranking, which shall be equal to the repayment priority ranking of all deposits deposited with the Bank from time to time, and bonds (Series D through F) which will be offered by way of expansion of a negotiable series under the same conditions of the bonds of the same series in the turnover and of up to 12 series of commercial securities (Series 14 through 25). Each of the series that will be offered according to the shelf prospectus (including by way of expansion of a negotiable series) will be at a par value of up to NIS 1 billion.
356
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 10 - Subordinate notes and Bonds (Cont'd.) Reported Amounts
C. Shelf Prospectus Fundraising in 2014:
1. On September 21, 2014 Union Issuances Ltd. (hereinafter: Union Issuance) issued, NIS 433,251 thousand par value of bonds (Series H) as part of a shelf prospectus from September 17, 2014 published according to a shelf prospectus from November 27, 2013. The bonds are payable in one payment on June 1 2020. The bonds bear a variable annual interest rate of a government bond interest with variable interest 520, as was on the first day of the relevant interest period plus an annual 0.86% margin. The interest in respect of the bonds will be paid four times a year on March 1, June 1, September 1 and December 1 of each of the years from 2014 to 2020 (including), so that the first interest payment will be paid on December 1 2014 and the last payment will be paid together with the principal repayment on June 1, 2020. The principal and the interest of the bonds aren't linked to the CPI or to any currency. The immediate gross return received by Union Issuance as part of the above mentioned issuing amounted to NIS 433.3 million. Total issuing expenditures amounted to NIS 3.4 million and the effective interest rate is 1.3%.
2. On March 27, 2014 Union Issuances Ltd. (hereinafter: Union Issuance) issued NIS 254,621 thousand par value of bonds (Series G) as part of a shelf prospectus from March 25 2014, published by a shelf prospectus on November 27, 2013. The bonds are payable in three payments on March 27 of each of the years 2019 until 2021 (including) (the first two payments are 33.3% each of the par value of the bonds and the last payment is 33.4% of the par value of the bonds). The bonds carry an annual interest rate of 2.95% that will be paid on March 27 of each of the years 2015 until 2021 (including). The bonds aren't linked to the CPI or to any currency. The immediate gross return received by Union Issuance, as part of the issuing, amounted to NIS 254.6 million. Total issuing expenditures amounted to NIS 2.6 million and the effective interest rate is 3.14%.
D. With regard to the capital notes included in Tier II, see Note 13.
E. During 2014 and 2013, the Bank did not issue non-tradable subordinated notes.
F. On September 1, 2014 and on March 19, 2014 Midroog Ltd. (hereinafter: “Midroog”) affirmed a Aa3 rating with a stable horizon for the bonds issuing frameworks (series G and H), of up to NIS 500 million par value each, respectively, which will be issued by Union Issuances Ltd. In addition, Midroog has published on June 5, 2014 an updated report regarding the Bank’s rating and the rating horizon as follows: Internal financial strength rating A2 horizon: stable Short-term deposits P-1 Long-term deposits / bonds Aa3 horizon: stable Subordinated notes (lower Tier II capital) A1 horizon: negative Subordinated notes (upper Tier II capital) A2 horizon: negative
357
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 11 - Other Liabilities Reported Amounts Composition: Consolidated The Bank December 31 December 31 2014 2013 2014 2013 NIS millions NIS millions
Excess of provision for severance 218 253 218 253 pay, retirement, and pension over funds (see Note 15.A.7) Income in advance 28 31 28 31 Employees - in respect of salaries and related benefits 100 92 100 91 Liabilities in respect of Maof market transactions (1) 1,045 813 1,045 813 Payables in respect of credit cards 424 383 424 383 Short sale of securities 823 825 823 825 Other payables and credit balances 139 148 282 289
Total other liabilities 2,777 2,545 2,920 2,685
(1) Liabilities not meeting the definition of derivatives. See Note 7 - Assets in respect of Maof market transactions.
358
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 12 - Shareholders' Equity
(1) Composition of Share Capital
In nominal values December 31, 2014 2013
Registered share capital Ordinary stocks of NIS 0.01 each 90,000,000 90,000,000
Issued and paid-up share capital Ordinary stocks of NIS 0.01 each 73,583,024 73,583,024
The shares are registered for trade on the Tel Aviv Stock Exchange. Each share confers upon its holder one vote in the general meeting of the Banks' shareholders22. Each share confers upon its holder the right to participate in earnings, and in the event of liquidation in the remaining assets of the Bank according to its proportionate par value.
(2) Dividends distribution limits – On January 15, 2013 an amendment to the Proper Conduct of Banking Business Regulation No. 331 regarding distribution of dividends by banking corporations was published. In light of additional requirements in the past few years to the Public Reporting Directives, which demand the documentation of specific profits and losses of the bank in other comprehensive income and not in profit and loss, the tests for dividend distribution have been updated. In accordance to the update “Distributable Profits” include the other comprehensive income factor, yet despite that the bank shall not execute a distribution of dividends (unless it received an approval from the supervisor prior to that), including when: The accumulated reserve balance with the deduction of debit margins which were included in other comprehensive income is not positive, or when the suggested amount for distribution might cause such a reserve balance, as aforesaid. One or more of the past years ended in loss or comprehensive loss. When the accumulated outcome of the past three quarters, which end after the interim period for which the last financial report relates to, discloses a loss or a comprehensive loss.
22.16,864,720 shares are held by Shlomo Eliyahu Holdings Ltd. and 3,092,368 shares are held by Eliyahu Insurance Company Ltd., through trustees. The holders and the trustees are not allowed to participate in the general meeting of the Banks' shareholders or to vote by virtue of the aforesaid shares. The rest of the holders voting percentages haven't been changed accordingly.
359
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 12 - Shareholders' Equity (Cont'd.) (2) Dividends distribution limits (Cont'd.) The amendment also states that the Bank shall not execute a distribution out of capital reserves, or from credit margins which were included in the accumulated other comprehensive income. The amendment is in force as of January 1, 2013. In the Basel III supervision of banks' letter – minimum core capital ratio, the banks were demanded, among other things, to avoid dividend distribution if it might cause them to not meet the pre-determined capital targets. According to the permit for acquisition of means of control of the Bank from 1993, the Bank is prohibited from distributing dividends from profits accrued in the period prior to the acquisition, except by advance written approval of the Supervisor of Banks. The amount of accrued profits in respect of which dividends cannot be distributed, as of December 31, 2014, is NIS 463 million from retained earnings of NIS 1,329 million. In addition, note that according to the terms of issuance of upper tier II capital notes issued by Union Issuances Ltd., on September 10, 2009, and according to the shelf prospectus of Union Issuances of November 26, 2013, as long as interest, whose settlement has been postponed, in respect of the complex capital notes issued, wasn't paid, the Bank can't distribute dividends or perform distributions, as these terms are defined in the Companies Law.
(3) Without derogating the aforesaid limitations, regarding the dividend distribution, according to the supervision of banks' position, the Bank did not distribute dividends in recent years, including in 2014.
(4) On October 29, 2012 Shlomo Eliyahu Holdings ceased to be a part of the controlling interest of the Bank following the completion of the acquisition of control of Migdal Insurance and Financial Holdings Ltd. by Mr. Shlomo Eliyahu through an Insurance Company Ltd.
360
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 13 - Capital Adequacy under Directives of the Supervisor of Banks Reported amounts
On May 2013the Supervisor of Banks amended the Proper Conduct of Banking Business Directive No. 201-211 regarding "Measurement & Capital Adequacy", in order to match them to the directives of Basel III. The amendments to these directives came into force as of January 1, 2014, and were applied gradually according to the transitional directives determined in Proper Conduct of Banking Business Directive No. 299 regarding "Measurement & Capital Adequacy – Supervisory Capital – Transitional Directives". In addition, on August 29, 2013 a circular of the supervision of banks was published regarding the disclosure requirements of Basel concerning composition of capital. The circular determined updated disclosure requirements, which the Bank will be required to include as part of the adoption of Basel III directives.
A. Consolidated Data: December 31, January 1, December 31, 2014 2014 2013 (Basel III) * (Basel II)** NIS millions
1. Capital for the purpose of calculating the capital ratio Tier I equity 2,372 2,332 - Tier I capital 2,372 2,332 2,257 Tier II capital 1,458 1,442 1,616 Total capital 3,830 3,774 3,873
2. Weighted balances of risk-weighted assets Credit risks 22,339 22,591 21,916 Market risks 280 235 235 Operational risk 1,736 1,774 1,774 Total weighted balances of risk-weighted assets 24,355 24,600 23,925
Percentage
3. Ratio of capital to risk components Ratio of Tier I equity to risk components 9.74% 9.48% - Ratio of Tier I capital to risk components 9.74% 9.48% 9.43% Ratio of total capital to risk components 15.73% 15.34% 16.19% Minimum ratio of Tier I equity required by the Supervisor of Banks. 9%*** 9%*** 7.5% Minimum ratio of total capital as required by the Supervisor of Banks 12.5%*** 12.5%*** 9.0%
361
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 13 - Capital Adequacy under Directives of the Supervisor of Banks (1) (Cont'd.) Reported Amounts
B. Components of capital for the purpose of calculating the capital ratio (consolidated data): December December 31, 31, 2014 January 1, 2014 2013 (Basel III) * (Basel II)** NIS millions
1. Tier I equity
Equity attributable to shareholders 2,376 2,335 2,335 differences between equity and Tier I equity - - 78 Total Tier I equity, before supervisory adjustments and deductions 2,376 2,335 2,257 Supervisory adjustments and deductions: Goodwill and intangible assets - - - Deferred taxes receivable (1) (2) - Investments in financial corporations which aren't consolidated in the public statements - - - Supervisory adjustments and other deductions – Tier I capital (3) (1) - Total supervisory adjustments and deductions – Tier I capital (4) (3) - Total Tier I capital, after supervisory 2,372 2,332 2,257 adjustments and deductions
* Calculated according to Proper Conduct of Banking Business Directives No. 201-211, 299 regarding "Measurement & Capital Adequacy", which apply as of January 1, 2014. ** Calculated according to Proper Conduct of Banking Business Directives No. 201-211 regarding "Measurement & Capital Adequacy" which applied until December 31, 2013. *** Regarding the influence of the directive on the capital objectives see section D.2. below.
December December 31, 31, 2014 January 1, 2014 2013 (Basel III) * (Basel II)** NIS millions 2. Tier II capital Tier II capital: instruments before deductions 1,206 1,206 1564 Tier II capital: provisions, before deductions 252 236 52 Total Tier II capital, before deductions 1,458 1,442 1616 Deductions: Total deductions - Tier II capital - - - Total Tier II capital 1,458 1,442 1,616
* Calculated according to Proper Conduct of Banking Business Directives No. 201-211, 299 regarding "Measurement & Capital Adequacy", which apply as of January 1, 2014. ** Calculated according to Proper Conduct of Banking Business Directives No. 201-211 regarding "Measurement & Capital Adequacy" which applied until December 31, 2013.
Note: Regarding the calculations for the purpose of Basel III: supervisory adjustments and deductions – in accordance with Proper Conduct of Banking Business Directive No. 202 regarding "Measurement & Capital Adequacy – the Supervisory Capital". The risk assets and the supervisory adjustments are displayed according to the transitional directives determined in Proper Conduct of Banking Business Directive No. 299.
362
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 13 - Capital Adequacy under Directives of the Supervisor of Banks (1) (Cont'd.) Reported Amounts
C. The Effect of the Transitional Directives on the Tier I Capital Ratio December 31, January 1, 2014 2014 (Basel III) Percentage
Capital ratio to risk components Ratio of Tier I equity to risk components before implementation of the transitional directives in Directive No. 299 9.30%* 9.45% influence of transitional directives 0.44% 0.03% Ratio of Tier I equity to risk components after implementation of the transitional directives in Directive No. 299 9.74% 9.48% * Including the expected influence of the initial implementation of U.S. GAAP concerning employee benefits, according to expected data for January 1, 2015. D. Capital Adequacy Objective 1. In October 2014, within the three-year strategy discussions for 2015-2017, it was decided that as of 2015 the objective for the ration of Tier I equity will be 9.3% (risk tolerance of 9.1%). In addition, it was decided that the total capital ratio shall not be less than 13%, and in stress scenarios the total capital ratio objective shall not be less than 9% and the Tier I equity ratio objective shall not be less than 6.5% 2. On September 14, 2014 the supervision of Banks distributed a circular regarding "Limitations for Granting Housing Loans", according to which, the banks must increase the Tier I equity objective in a rate that reflects 1% of the housing loans balance. According to the transitional directives, Tier I equity objective will increase at quarterly fixed rates from April 1, 2015 to January 1, 2017. Full implementation of this directive is expected to increase Union Banks' capital requirement by approximately 0.29 percentage points so that the capital objective for 2017 is expected to be 9.59%.
E. Reporting Regarding the Liquidity Coverage Ratio On September 28 2014 the Supervisor of Banks distributed a circular in which Proper Conduct of Banking Business Directive No. 221 regarding liquidity coverage ratio, was added. This directive adopts the recommendations of the Basel Committee regarding the liquidity coverage ratio in the banking system in Israel. The liquidity coverage ratio examines a 30-day horizon in a stress scenario and is meant to insure that the banking corporation has an inventory of high quality liquid assets which meets the corporations' liquidity needs at this time horizon. The directive determined the way to calculate the liquidity coverage ratio, including the defining the characteristics and operational requirements for "inventory of high quality liquid assets" (numerator) and safety factors for them and the net cash flow expected to come out in a stress scenario, defined in the directive for the 30 calendar days (denominator). The liquidity coverage ratio will be applied as of April 1, 2015. According to the transitional directives, as of April 1, 2015 the minimum requirement will be 60% and will increase to 80% on January 1, 2016 and to 100% from January 1, 2017 and onwards. However, in times of financial pressure, a banking corporation will be able to go below these minimal requirements. In addition, a circular of the supervision of banks regarding "temporary order – implementation of disclosure requirements according to pillar III of Basel – disclosure of liquidity coverage ratio", was published. According to this circular, it was determined, inter alia, that as of April 1, 2015 the disclosure requirements of the liquidity coverage ratio in the consolidated statements within the Capital Adequacy note will be added and changed to "Capital Adequacy and Liquidity According to the Directives of the Supervisor of Banks" note.
363
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 14 - Liens (1) In order to secure the clearance of daily credit allocated or to be allocated by the Bank of Israel to the Bank from time to time in connection with its activity on the Zahav RTGS (real-time gross settlement) system, operating in the banking system since late July 2007, the Bank created a current lien in July 2007 in favor of the Bank of Israel, in an unlimited amount, on the inventory of State bonds and short-term notes (Makam) held by the Bank. Under the terms of the lien, the lien is in effect as long as such bonds or short- term notes exist in the account in the name of and on behalf of the Bank of Israel maintained at the TASE Clearing House and designated for deposits and/or registration of collateral for the Bank of Israel, or in the Bank’s account at the Bank of Israel which is designated for monetary debits and credits of the TASE Clearing House.
(2) To secure credit of any kind, in foreign or Israeli currency, received by the banks, including Union Bank, from time to time, from the Bank of Israel, insofar as credit is extended by the Bank of Israel, and the Bank’s consequent liabilities towards the Bank of Israel, in August 2010 the Bank entered into an agreement to place a first-rank permanent pledge and an assignment by way of a pledge, with no amount limit, on all assets and rights in all accounts maintained at the TASE Clearing House Ltd. and at the Euroclear Bank (hereinafter: the “Collateral Accounts”) in favor of and in the name of the Bank of Israel, which are designated for deposit and/or recording of collateral by the Bank in favor of the Bank of Israel, including on money and securities deposited or recorded, or to be deposited or recorded, in the Collateral Accounts, including the profits thereof and the monetary consideration of the sale or realization thereof. For further security, the assets pledged in the collateral account at Euroclear Bank or in any other collateral account maintained with a clearing house outside Israel, shall also be pledged, in addition to the first-rank permanent pledge, in a first-rank floating pledge, with no amount limit.
The pledges described above shall serve as a continual and renewing guarantee for the liabilities secured by such pledges, and shall remain in effect until such time as the Bank of Israel approves the cancellation thereof, in writing. In addition to the aforesaid, the Bank has granted the right to offsets and liens of all assets owed to it by the Bank of Israel, to secure the settlement of the secured liabilities. The management of the pledged assets, including with regard to the execution of deposits and withdrawals of money and securities in the Collateral Accounts, and the revaluation thereof, are as stipulated in the collateral management documents of the clearing house where the collateral account is maintained. The system of agreements required in order to operate the pledge includes consent to the operation of the system of collateral by the TASE Clearing House for the Bank of Israel, in accordance with an agreement signed between them, and the authorization of the TASE Clearing House to execute the orders of the Bank of Israel in connection with the Israeli securities deposited, and/or to be deposited from time to time, in the relevant collateral account designated for the deposit of collateral by the Bank, and an agreement to regularize the operational aspects of the management of the collateral (foreign securities) at Euroclear Bank. As at December 31, 2014, no collateral was provided.
364
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 14 - Liens (Cont'd.) 3) The Bank is a member of the Euroclear Clearinghouse Bank Brussels, which clears securities traded on international markets. For the Bank's operations through the said clearinghouse, and to secure the credit effectively utilized by the Bank with the said clearinghouse from time to time, the Bank registered a charge on monies and securities. The credit facility against which the Bank registered a charge on securities is in the amount of USD 6 million (December 31, 2013 - USD 6 million).
(4) In accordance with the Bank’s agreement with the Maof Clearing House and the TASE Clearing House, and pursuant to the resolutions of the Board of Directors of the Maof Clearing House and the bylaws and guidelines of the Maof Clearing House, the Bank deposits securities in an account in the name of the Maof Clearing House as collateral for the Maof Clearing House, as well as cash in an account opened in the name of the clearing house at another bank, which will constitute payment to the clearing houses for any amount which the Bank may owe them in respect of transactions in Maof and in Israeli securities for which the Bank is liable towards them, against a commitment by the clearing houses to remit this amount to the Bank, pursuant to the agreement. To secure these charges, on March 31, 2004 the Bank created a first-rank permanent and floating lien in an unlimited amount on these accounts in favor of the Maof Clearing House. The value of the collateral deposited in favor of the clearing houses as at December 31, 2014 is NIS 713 million (December 31, 2013 - NIS 811 million); the average during 2014 was NIS 788 million. The maximum balance deposited was NIS 1,017 million. For further details, see Note 18.C.11, and 18.C.12. Customers of the Bank place liens on various types of assets in respect of their overall activity at the Bank, including Maof activity. (5) Sources of securities received which the Bank may sell or pledge at fair value.
December 31 2014 2013 NIS millions
Securities received in borrowing transactions of securities for cash 182 503
365
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits A. Severance pay and pension (1) The liability of the Bank and its subsidiaries for severance pay and pensions to their employees is partially covered by appropriate provisions which are deposited in provident and pension funds and by purchasing policies of insurance companies. The provision for severance pay and pensions included in the balance sheet represents the balance of the provision which is not covered by the deposits and/or insurance policies as aforesaid.
(2) The contractual liability for severance pay to employees of the Bank is calculated on the basis of one month's salary for each year of service. See also Note A.(3) below, regarding the actuarial calculation of the surplus of severance pay in excess of the contractual terms. In 1996, the Bank signed a special collective agreement with those clerks of the Bank who are members of the basic pension fund "Amit Pension and Provident Fund Limited" (hereinafter - “Amit”), according to which, as of April 1, 1995, payments of the Bank to the said pension fund will relieve the Bank from any liability for payment of severance indemnities to which such employees may be entitled under the law for that period. As from the above-mentioned date, the provision for severance pay does not include amounts in respect of severance pay to the said clerks and, as at the same time, amounts paid to the said pension fund do not include the amounts funded in Amit.
(3) As of April 1, 2011, the Bank implements the instructions of the Supervisor of Banks concerning compensation beyond contractual obligations, as published on March 27, 2011, in the circular, “Reinforcing Internal Control over Financial Reporting on Employee Benefits” (hereinafter: “Excess Compensation”). According to the circular, a banking corporation that expects a group of employees to be paid benefits beyond the contractual terms shall take into account the expected departure rate of employees (including employees expected to retire under voluntary-retirement plans or upon receiving other preferred terms) and the benefits that these employees are expected to receive upon departure. The liability in respect of severance pay for this group of employees shall be presented in the financial statements as the higher of the amount of the liability calculated on an actuarial basis, taking into consideration the additional cost expected to be incurred by the banking corporation due to the aforesaid benefits, and the amount of the liability calculated by multiplying the employee's monthly salary by the number of years of the employee's service, as required in Opinion Statement 20 of the Institute of Certified Public Accountants in Israel. Note that according to estimates by the Bank and its legal advisors, the Bank has no legal obligation, either direct or implied, to pay Excess Compensation.
366
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) A. Severance pay and pension (Cont'd.) (3) (Cont'd.) The liability is calculated by the Bank on an actuarial basis in an "expected accrued benefits evaluation" method which reflects the total benefit accrued until the balance sheet date, when the total expected future benefit is spread on a straight line basis over the work period. The small size of the Banks' employee population sometimes does not enable to conclude statistical conclusions for the use of an actuarial model. Accordingly, in some cases the actuary relies on managements' assumptions and in some cases exercises judgment while using adjustments to the surveys he performs.
For the purposes of the actuarial calculation of Excess Compensation, at the beginning of 2011 the actuary of the Bank conducted a survey of data on retirees in 2007-2010, the relevant years, according to management's assessment, as a basis for the aforesaid actuarial calculation of excess compensation. Based on the findings of the survey, and taking into account the typical size of population groups at the Bank, the actuary estimated future rates of departure before retirement age, with ordinary compensation and with Excess Compensation. The departure rate regarding excess compensation is relevant only as of 2019 because according to the Banks' policy it will not be possible until the end of 2018 – for details, see Section A(5) below. Note that according to the managements' assessment, as of 2019, retirement is expected to be in accordance with the retirement policy of 2007-2010. Additional assumptions used in calculating the provision for Excess Compensation: a capitalization rate of 4%, in accordance with the directives of the Supervisor of Banks; a rate of seniority-dependent salary increase based on findings of a survey of 2010-2013 and additionally took into account the salary reduction mechanism following an agreement at Leumi Bank – see Section G below (in 2013 a future increase in real wages at a rate of 3% annually, according to the managements' estimation; According to the directives of the Supervisor of Banks, for the purpose of calculating the actuarial liability, the Bank uses mortality tables published on July 11, 2012 in a position paper of the Capital Markets, Insurance and Savings Department in the Finance Ministry (distributed in 2012 as a draft which was approved in 2013) regarding the update of the demographic assumptions in pension funds and life insurance, which includes an update of the mortality tables (as a result of a new research indicating an increase in life expectancy). Also, an Israeli mortality table with a future improvement in life expectancy and a safety interval in respect of longevity risk, was used.
367
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) A. Severance pay and pension (Cont'd.) (4) The group of executives and senior authorized signatories of the Bank are entitled to choose, upon retirement from the Bank, either to receive a pension while waiving their rights to compensation and provident funds, or to receive retirement compensation and provident fund payments. In February 1997, an agreement was signed between the union of executives and authorized signatories of the Bank and the Bank, referring to authorized signatories who are members of the pension fund Amit. Pursuant to the agreement, during the period of employment until the date on which an authorized signatory joins Amit, the terms that were customary at the Bank until the signing date of the agreement shall apply to the authorized signatory. With regard to the period of membership in Amit, in the event of retirement on a compensation track, the authorized signatory shall receive the money in Amit, but no less than the severance pay to which the Bank is obligated by law. In the event of retirement on a pension track, the authorized signatory shall receive, as a pension, the money accrued on his or her behalf at Amit in respect of remuneration, but no less than the Bank's obligation according to the terms that were customary until that time, as well as a pension in respect of money accrued by the authorized signatory at Amit in respect of compensation, up to the Bank's total obligation to pay a pension derived from severance pay. The aforesaid shall apply to senior authorized signatories (as defined in the agreement) only. New authorized signatories (anyone who is not a senior authorized signatory) are not entitled to a pension, and the Bank's payments to Amit shall replace the full severance pay to which the authorized signatory would have been entitled by law. Regarding the agreement signed between the Bank and the group of executives and senior authorized signatories regarding the funded pension, see Section F below. The liability for pensions to senior authorized signatories is calculated on an actuarial basis, by the Banks' actuary, based on the present value of the liability that exceeds the amount of the liability for compensation and the balances in the provident funds. The actuarial provision also includes a calculation of Excess Compensation beyond the contractual terms – see details in Section A (3) above. Regarding the small size of the Banks' population see Section A (3) above. The actuarial liability was calculated according to a capitalization rate of 4% (the same rate applied in 2013), in accordance with the directives of the Supervisor of Banks. The calculation of the present value takes into consideration a factor of the real future increase in wages, up to the expected date of retirement of the employees from the Bank. At the end of 2014, following a salary agreement at Leumi Bank – see Section G below, the Bank updated the estimation of real future increase in wages and determined that the rate will be 0.8% annually (in 2013 – 2%) , in accordance with the Banks' managements' estimation. A forecast regarding the rate of utilization of pension rights is also used: 72% choose pensions; these employees utilize 60% of their pension rights, based on data at the Bank in recent years. In addition, the actuarial calculations include assumptions regarding mortality tables – see Section A (3) above. Rates of departure with ordinary compensation and with Excess Compensation and the rates of Excess Compensation according to the departure rates used to calculate Excess Compensation, as described in Section A(3) above are relevant as of 2019, as aforesaid.
368
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) A. Severance pay and pension (Cont'd.) (5) Retirement plan and change in retirement policy On February 26, 2012, the Banks' Board of Directors approved a format for a preferred-terms retirement plan (hereinafter: the "Plan"), within a defined period of time. The Plan is targeted for employees aged 57 to 64. In addition, The Banks' Board of Directors also affirmed that along with the approval of the format for the Plan, a policy would take effect under which early retirement with preferred terms would not be possible for the coming seven years (through the end of 2018). Until the end of 2013 65 employees retired under the retirement operation at a cost of approximately NIS 77 million. In addition, there is a provision for compensation in a special fund for exceptional and single retirement cases for the period until the end of 2018, in the amount of approximately NIS 5 million. The actuarial calculations (pensions, Excess Compensation, and long-service grants) took into consideration the change in policy up until 2018, whereby early retirement with preferred terms will not be possible. Rates of departure with Excess Compensation starting in 2019 are based on the survey performed for 2007-2010 (as described in Section A.(3) above).
(6) Pension liabilities in respect of executives and authorized signatories entitled to pensions who retire and choose a pension are covered by a pension reserve calculated according to the present value of the liability, as calculated by the actuary, according to a capitalization rate of 4%, in accordance with the directives of the Supervisor of Banks (the same rate applied in 2013), and mortality tables as described in Section A.(4) above. See Note 1.F.1 concerning the directive of the Bank of Israel, regarding the adoption of the U.S. accounting principles for employee rights.
(7) The amounts of the provisions and funding relating to employee severance benefits included in the balance sheet are as follows: Consolidated and the Bank December 31, 2014 2013 NIS millions
Net Reserves*** 310 341 Funds* 92 88 Net excess reserves over funds ** 218 253
The Bank may not withdraw funded amounts other than for the purpose of making severance payments. * The amount of funds recorded in accordance with balance confirmation received from external sources in which the money is deposited. ** Included in "Other liabilities" (See Note 11). *** The balance as at December 31, 2014 includes the influence of the Banks' management estimation change regarding the real wage increase rate, including that resulting from a new wage agreement at Leumi Bank from January 2015.
369
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) B. Long service bonuses Employees of the Bank, upon attaining 20, 30 and 40 years of service, are entitled to long service bonuses ("Jubilee Grant") amounting to a specified number of monthly salaries as well as to a special vacation period. In the balance sheet as at December 31, 2014, the accumulated provision amounted to NIS 35 million, December 31, 2013 - NIS 33 million. The provision is included in "Other Liabilities".
The calculation of the liability is performed on an actuarial basis by the Banks' actuary. The calculation is based on a capitalization rate of 4% (the same as in 2012), in accordance with the instructions of the Supervisor of Banks. In calculating the current value, the rate of seniority-dependent salary increase based on findings of a survey of 2010-2013 was taken into account as well as the salary reduction mechanism following an agreement at Leumi Bank – see Section G below (in 2013 a future increase in real wages at a rate of 3% annually, according to the managements' estimation . The future rates of departure before retirement age, are according to departure rates which were used for calculation of surplus of severance pay - as detailed in Note A(3) above.
C. Vacation Employees of the Bank and its subsidiaries are entitled to paid annual vacation as provided by the Annual Vacation Law - 1951, subject to a special labor contract with the Bank's employees and employees under personal contracts according to the specified limits detailed in these agreements. The liability is calculated on the basis of latest salary plus social benefits. The financial statements include a provision of NIS 23 million (December 31, 2013 - NIS 23 million) for unutilized vacation which has already vested. The liability is included under "Other Liabilities".
D. Policy regarding terms of service and employment of Senior Executives 1. On December 12, 2012 the Companies Law (Amendment no. 20) 2012 (hereby: “Amendment 20”) entered into force. In accordance to Amendment 20, a public company must determine a policy regarding terms of service and employment of Senior Executives, according to Sections 267A and 267B of the Companies Law, 1999 (hereby: the “Companies Law”).
On November 19 2013 regulation no. 301 A of the Proper Conduct of Banking Business Regulation by the Supervisor of Banks, regarding “Remuneration Directive of Banking Corporations” (hereby: “Remuneration Directive in a Banking Corporation”), which determines, among other things, rules aimed to ensure that the remuneration arrangements in the banking corporation will be consistent with the risk management framework and the banking corporations' long term goals, following Amendment 20. Therefore, after publishing the Remuneration Directive in a banking corporation, the bank adjusted its policy regarding terms of service and employment of Senior Executives, which was formed prior to Amendment 20, as well as to the Remuneration Policy at banking corporations, as needed.
370
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) D. Policy regarding terms of service and employment of Senior Executives (Cont'd.) 1. (Cont'd.) On February 6, 2014 the Bank’s general meeting has authorized the policy regarding terms of service and employment of Senior Executives, after the authorization of the Board of Directors in its meeting on December 31, 2013 following the consideration of the recommendations of the Board of Directors' Remuneration Committee on December 26, 2013. The remuneration policy includes, inter alia, a policy for the fixed and variable remunerations for Senior Executives, and the ratio between them, and as part of a bonus program, which sets principals for determining performance based annual bonuses for the Chairman of the Board of Directors, the CEO of the Bank, Deputy General Managers, the Internal Auditor and the Legal Advisor (hereby “Bonus Program”, hereby “The Executives”). In addition the Remuneration Committee and the Board of Directors (and regarding the Chairmen of the Board of Directors and the C.E.O. of the Bank, also the Banks' General Meeting) have approved, that the Bonus Program shall be adopted to employment contracts of the serving Executives in the Bank, and shall substitute any bonus programs for the Banks' senior officers, approved by any of the banks’ past authorized organs, including in respect of 2013.
2. The Bonus Program 1. General The Bonus Program shall be an integral part of the remuneration policy of Senior Executives of the Bank and sets the methodology for the calculation and determination of the annual Bonus (“the bonus”) for Senior Executives of the Bank: the Chairman, the CEO, Board Members, Chief legal Advisor and the Internal Auditor (10 executives all together) (“the executives”). The Bonus Program is based, among other things, on the annual return on equity from post-tax regular actions (“return on equity”), on the annual bank’s performance relative to pre-determined objectives set by the Board of Directors and the ratio between the Bank’s yields and yields by other banking corporations (“other banks”), and on achieving the capital requirements determined by the Banks' Board of Directors. The program and its compliance with the bank’s risk profile shall be re-examined by the Board of Directors as part of its re-examination of the remuneration policy at whole, at least once a year.
2. The Method of Establishing the Total Bonus According to the Bonus Plan – General Description The total bonus for Senior Executives shall be determined in the following manner: Determining the extent of the total annual bonus for Senior Executives - The volume of the total annual bonus for Senior Executives (the "Total Bonus") shall be determined based on a standardized rate of return derived by multiplying the actual rate of Return on Equity by the weighted score of the Bank (divided by 100), as detailed in Section 2.5 below (the "Standardized Return").
371
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) D. Policy regarding terms of service and employment of Senior Executives (Cont'd.) 2. The Bonus Program (Cont'd.) 2. (Cont'd.) 2.1 A Standardized Return equal to or greater than 6% (subject to the provisions of Section 2.2 below) creates entitlement to a positive bonus. If the Standardized Return is 6%, the volume of the Total Bonus shall be up to NIS 3.25 million. If the Standardized Return is 7%, the volume of the Total Bonus shall be up to NIS 4 million; if the Standardized Return is 8%, the volume of the Total Bonus shall be up to NIS 4.75 million; if the Standardized Return is 9%, the volume of the Total Bonus shall be up to NIS 5.5 million; and if the Standardized Return is 10%, the volume of the Total Bonus shall be up to NIS 6 million. Note that the extent of the total bonus, in any case, won't exceed NIS 6 million, and the Banks' Board of Directors will be allowed, according to his discretion, to reduce the extent of the total bonus as detailed in Section 10 below. When the Standardized Return is in a range between the values listed above, the Total Bonus shall be set between the two values in a linear calculation.
2.2 Despite the aforementioned, in the event that the Standardized Return is lower than 6% but greater than or equal to 5.5%, but the Return on Equity is greater than 6%, the volume of the Total Bonus shall be NIS 1 million. 2.3 Notwithstanding all of the aforesaid in Section 2 above, if the Return on Equity in the relevant year is lower than 6%, or if the Bank fails to comply with the ratio of capital to risk-weighted assets according to the risk tolerance established by the Board of Directors of the Bank, in any of these cases, the Senior Executives shall not be entitled to a positive bonus under this plan, even if the Standardized Return is greater than 6%.
2.4 The Total Bonus shall be distributed among the Senior Executives as described in Sections 2.5.1 and 2.5.2 below. It is hereby clarified that in the event that a balance remains and the total bonus is not distributed in full1, then the remainder will be divided pro rata between the Senior Executives according to the distribution rates as detailed in Sections 2.5.1 and 2.5.2 below, and the Banks' Board of Directors shall be entitled to decide whether or not to reduce the increment of this remainder of all or part of the Senior Executives.
1 For example, when some of the Senior Executives won't attain full entitlement (because they haven't reach a personal weighted score of 110), or due to retirement of a Senior Executive during the year.
372
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) D. Policy regarding terms of service and employment of Senior Executives (Cont'd.) 2. The Bonus Program (Cont'd.) 2. (Cont'd.) 2.5 Establishing the weighted score of the Bank for the purpose of calculating the Standardized Return: The performance of the Bank shall be measured based on three parameters, for each of which scores will be assigned on a scale of 70-130. In extreme cases of failure to attain threshold objectives, a score of zero will be assigned. The parameters and weights are the following: (A) Return on Equity – 40%; (B) the Bank's BSC23 (Balanced Score Card) score - 45%; (C) the Bank's capital adequacy (ratio of capital to risk-weighted assets) - 15%. The following parameters are used to establish the Bank's BSC score: stability, efficiency, growth, compliance and control and a comparison to the banking system. 2.5.1 Calculation of Personal Bonuses for the Chairman and the CEO - The portions of the Chairman of the Board of Directors and of the CEO in the annual bonuses shall be determined in accordance to their personal scores, which will be based mainly (80%) on the adjusted score of the Bank (which is calculated according to measurable parameters as described in Section 2.5 above), whereas the other 20% of the grant shall be based on a list of quality parameters which were pre-determined and approved by the Remuneration Committee and the Board of Directors (hereby “list of quality parameters”) 24 and provided that the portions of the Chairman of the Board of Directors and the CEO in the annual bonus shall not exceed the relative normative maximum amount which shall be pre-determined, as follows: The relative normative maximum25 amount for the Chairman is 25% of the total bonus, as pre-determined by the Board of Directors. The relative normative maximum amount for the CEO is 28% of the total bonus, as pre-determined by the Board of Directors.
23 The BSC is a score sheet which combines a quantative measurement of financial and other parameters included in the Banks' objectives as shall be predetermined by the Board of Directors in the annual work plan of the Bank which is derived from the Banks' strategic plan, and which is used to assess the performance of the Bank and its units (using measurable parameters). 24 As for the Chairman of the Board of Directors, these parameters include among other things, adhering proper corporate governance and its assimilation, involvement in the design of the strategic plan and the management of board meetings. As for the Bank’s CEO – these parameters include among other things, transparency and precision in reporting to the Board of Directors, strategic seeing and thinking and the contribution degree for the implementation of the overall strategy of the bank, human resources management skill level, teamwork capabilities and inter-organizational behavior (human relations with lower and higher ranks, management and leadership) and outer- organizational behavior. 25 The normative proportionate part – the maximum portion of the executive in the overall bonus when receiving an adjusted personal score of 110 or more. The scores range for each parameter in which the executives are being examined can range between 0-130, whereas over-performance in one criteria can compensate for under-performance in another criteria.
373
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) D. Policy regarding terms of service and employment of Senior Executives (Cont'd.) 2. The Bonus Program (Cont'd.) 2. (Cont'd.) 2.5.2 Calculation of the personal bonus for each of the other Senior Executives:
2.5.2.1 Chief accountant, Legal Advisor, Internal Auditor, and Chief Risk Officer (Audit and Control Function) – The amount of the bonus for each of the aforesaid Senior Executives shall be determined based on: (1) a weighted personal score composed of the personal BSC score (60%), 20% according to the Banks' weighted score and 20% according to a personal assessment score, based on a list of qualitative parameters that was predetermined and approved by the Remuneration Committee and the Banks' Board of Directors26 and (2) the maximum normative proportional share of all of the aforesaid Senior Executives is at a rate of 22% from the extent of the bonus as predetermined by the Board of Directors. the Maximum Normative Share for each of the Senior Executives in this group (the Chief Accountant, the Legal Advisor, the Internal Auditor and the Chief Risk Officer) out of the Maximum Normative Share shall not exceed 5.5%. 2.5.2.2. Heads of Business Departments (Head of Business Department, Head of Retail Department, Advisory and Customers’ Assets, Head of Financial Management Department and Head of Resources Department)- the bonus for heads of Business Departments shall be determined on the basis of: (1) a personal weighted score composed 60% of a personal BSC score, 20% according to the Bank’s weighted score and 20% according to a personal evaluation score based on a list of quality parameters which were pre-determined and authorized by the Remuneration Committee and the Board of Directors (as detailed in
26 The personal evaluation score is to be determined as follows: for the Internal Auditor – according to a personal evaluation score which will be given by the Audit Committee and the Chairman OF THE Board of Directors on the basis of a list of quality parameters which were determined in advance by the Remuneration Committee and the Board of Directors; for the Chief Risk Officer - according to a personal evaluation score which will be given by the CEO and the Chairman of the Board of Directors on the basis of a list of quality parameters which were determined in advance by the Remuneration Committee and the Board of Directors; for the Chief Accountant and the Legal Advisor - according to a personal evaluation score which will be given by the CEO on the basis of a list of quality parameters which were determined in advance by the Remuneration Committee and the Board of Directors. Quality criteria for the evaluation of Executive Vice President shall include, among other things, a demonstration of long term target focused management, leadership and personal example, leading and contribution for the development of new businesses and projects while optimally managing resources (for heads of business departments), existence of systematic control while providing feedback and lesson learning.
374
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) D. Policy regarding terms of service and employment of Senior Executives (Cont'd.) 2. The Bonus Program (Cont'd.) 2. (Cont'd.) 2.5.2 (Cont'd.) Section 5 below) which will be granted by the Board of Directors after receiving the bank’s CEO recommendation, and (2)- the relative normative maximum amount for the rest of the Executives shall be on a rate of 25% of the total bonus which was pre- determined by the Board of Directors. The normative maximum amount of each and every member of the Executives’ group shall not exceed 6.25%.
3. Negative bonuses 3.1 If the Standardized Return of the Bank is lower than 4%, a negative bonus shall be charged to the Senior Executives, as follows: if the Standardized Return is 3.99%, the volume of the total negative bonus shall be up to NIS 0.2 million; if the Standardized Return is 3%, the volume of the total negative bonus shall be up to NIS 0.7 million; if the Standardized Return is 2%, the volume of the total negative bonus shall be up to NIS 1.2 million; if the Standardized Return is 1%, the volume of the total negative bonus shall be up to NIS 2 million; if the Standardized Return is equal to or lower than 0%27, the volume of the total negative bonus shall be up to NIS 2.5 million. It is hereby clarified that the maximum volume of the total negative bonus shall be no more than NIS 2.5 million. When the Standardized Return is in a range between the values listed above, the negative bonus shall be set between the two values in a linear calculation.
3.2 Subject to the provisions of Section 2.2 above, the Senior Executives shall not be entitled to a positive bonus and shall not be charged with a negative bonus when the Standardized Return of the Bank for the relevant year is lower than 6% and greater than or equal to 4%. 3.3 Establishing the volume of the personal negative bonus for each Senior Executive: The proportional distribution of the negative bonus among the Senior Executives and the weighted personal score of each Senior Executive shall be determined in accordance with the provisions of Sections 2.5.1 and 2.5.2 above. The extent of the negative bonus for each Senior Executive relative to his normative proportional share, shall be determined according to the following formula:
(B)*70/(A)
27 No yield standardization shall be made when the “accounting” yield is negative.
375
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) D. Policy regarding terms of service and employment of Senior Executives (Cont'd.) 2. The Bonus Program (Cont'd.) 3. (Cont'd.) 3.3 (Cont'd.)
Where:
A = The Senior Executive's weighted personal score.
B = The Senior Executive's share of the negative bonus.
In other words: 70 divided by the Senior Executive's weighted personal score (A), multiplied by the Senior Executive's share of the negative bonus (B). For the purpose of the calculation of the negative bonus, the weighted personal score (A) shall not be less than 70. Thus, at a score of 70 or less, the Senior Executive shall be charged with his or her full share of the total negative bonus (B). Based on the calculation method of the negative bonus, the lower the Senior Executive's score, the greater his or her share of the negative bonus. 3.4 A negative bonus as mentioned above, as much as attributed for the executive for a specific year, shall be offset from the rejected payments to which the executive is entitled to due to bonuses offered in previous years as detailed in Section 4 below. The maximum negative bonus for each executive for a relevant year shall be as high as the rest of the rejected payments to which he is entitled due to bonuses offered in previous years. It shall be noted that a negative bonus only reduces or zeroes the rest of the rejected payments, as aforesaid. If a negative bonus is left, the remainder shall be zeroed and not attributed to the next year. In addition, if during the first year in which this program is to be executed there will be a negative bonus for a Senior Executive and then such a negative bonus shall not be attributed to him. 3.5 Without subtracting from the aforesaid, as long as there shall be a registered annual loss for the Bank in respect of a certain year, the rest of the rejected payments shall be postponed, if such will appear after offsetting the negative bonus as mentioned – for the following year, as long as there shall not be any registered annual loss for the Bank, and this is without subtracting from the offsetting arrangements that apply on the rest of payments detailed in Section 3 above.
376
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) D. Policy regarding terms of service and employment of Senior Executives (Cont'd.) 2. The Bonus Program (Cont'd.) 4. Spreading bonus payments over the long term
The amount of the annual bonus payment for each Senior Executive under this plan in the relevant year shall be calculated and distributed as follows:
4.1 For each year, a positive bonus owed to the Senior Executive or a negative bonus charged to the Senior Executive shall be calculated, according to the specifications of this plan. The positive or negative bonus shall be credited or debited from the Senior Executive, as relevant. 4.2 After the calculation and the authorization of the annual bonus for each Executive, as determined in this program in respect of the past year, the executive shall be paid a bonus of 50% of the total bonus which he deserves in regard of the aforesaid year, whereas the payment of the rest of the 50% for the same year shall be postponed and paid in equal parts in each of the three following years to the calendar year in which the grant was approved. 4.3 Each of the above rejected payments shall be linked to the consumer price index as of the day of the approval of the bonus for the relevant year and until the date of actual payment, and shall be subjected to an offsetting mechanism as detailed in Section 3 above (and for an executive who retired to an offsetting mechanism as detailed in the following Section 5.1.4).
5. Retirement of Senior Executives
5.1 Subject to the terms of this plan, the bonus to which Senior Executives retiring from the Bank are entitled shall be calculated as follows:
5.1.1 The Senior Executive shall be entitled to a proportional bonus only in respect of the year of retirement. The calculation of the proportional bonus shall take the duration of the Senior Executive's actual service at the Bank into consideration (the "Proportional Bonus"). 5.1.2 In spite of the above said, the Board of Directors shall be entitled to decide on the decreasing of an executive’s part, if he resigned, or left willingly before the retirement age.28
28 This, non-including the CEO who retired, which is entitled to a grant on the day of retirement, willingly or not (with the exclusion of retirement under circumstances which disquality the right for conpensations) by his terms of emplyment.
377
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) D. Policy regarding terms of service and employment of Senior Executives (Cont'd.) 2. The Bonus Program (Cont'd.) 5. (Cont'd.): 5.1 (Cont'd.): 5.1.3. Calculation of the relative bonus amount shall be done in the following year of the year of retirement. After the calculation the executive shall be paid the relative bonus in the dates and under the conditions mentioned in Section 4 above. 5.1.4. The rest of the deferred payments due to bonuses authorized in previous years and including the deferred payments due to the above mentioned relative bonus, the executive shall be paid in accordance to the rules mentioned in Section 4 above. The Board of Directors shall be permitted to decrease the payment or deferred payments beyond their actual payment dates, in a case in which during the payments period there has been an incident which negatively affected the Bank’s performance and/or results for this year and that is related to a the retiring Senior Executives' behavior beyond the payment date of the relative bonus. It shall be noted, that any rejected payment/s of bonus/es are not to generate any employer-employee relations between the executive and the Bank after the end of the executives' working period at the Bank. 5.2 In spite of the above mentioned in Section 5.1 above, an executive who retired or was fired due to an event that allows his dismissal without compensations, shall not be entitled to a positive annual grant due to the retirement year and shall not be entitled to receive the rest of the deferred payments left to pay due to recent years. 5.3 An executive who retired due to illness, disability or death – in spite of the above said in Section 5.1, an executive who retired due to illness, disability or death, shall be entitled (him/her or their successors, for that matter) to a relative bonus in respect of the year of retirement. Such relative bonus shall be calculated and paid in the year following the retirement, at the same time of the calculation and payment of the bonus for the same year to the rest of the Bank’s executives. In addition, such an executive shall be entitled (him/her or their successors, for that matter) to a payment as detailed in Section 4 above, and subject to the Board of Directors’ authority to reduce the bonus for reasons detailed in Section 5.1.4 above. In spite of the above said, the Board of Directors shall be permitted, after considering the recommendations of the Remuneration Committee, to determine that an executive who retired due to illness, disability or death shall be entitled (him/her or their successors, for that matter) to the full payment of the rest of the deferred payments due to bonuses authorized in previous years and this together with the payment of the relative bonus.
378
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) D. Policy regarding terms of service and employment of Senior Executives (Cont'd.) 2. The Bonus Program (Cont'd.) 6. Amount of bonus for a new Senior Executive appointed during the calendar year
6.1 An employee of the Bank who is promoted and appointed to the position of a Senior Executive of the Bank during a calendar year shall be entitled to a proportional bonus pursuant to this plan in respect of the months during which he or she served as a Senior Executive at the Bank in that calendar year. In respect of the period preceding the appointment as a Senior Executive, during which the employee held another position at the Bank, the Senior Executive shall be entitled to proportional remuneration, in accordance with the terms established for that position under the collective agreement or any other agreement, taking into account the duration of the service.
6.2 A new employee appointed to the position of a Senior Executive of the Bank during a calendar year shall be entitled to a proportional bonus pursuant to this plan in respect of the months during which he or she served as a Senior Executive at the Bank in that calendar year.
7. The Auditor will audit the implementation of the Bonus Plan.
8. The bonuses granted to Senior Executives under this plan, inasmuch as the Senior Executives are entitled to bonuses under the plan, do not constitute part of the wage paid to any of the Senior Executives and shall not be taken into account in calculating employer contributions to social benefits, compensation, or retirement allowances, and shall not be considered a related term of any kind or type for any of the Senior Executives. It is hereby clarified that tax will be deducted, according to law, from all actual payments to Senior Executives under this plan.
9. The aforesaid in the Senior Executives' employment agreements regarding their entitlement to an annual bonus from the Bank will be amended, as necessary and as applicable, according to the provisions of the Bonus Plan.
10. The Board of Directors will be allowed to decide that the bonus amounts that the Senior Executives are entitled to (or some of them) will be reduced and to determine the amount of decrease and also to determine, by a reasoned decision, that bonuses won't be granted to Senior Executives in a relevant year, in exceptional cases such as a general economic crisis, a general systemic crisis or a crisis at the Bank.
379
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) D. Policy regarding terms of service and employment of Senior Executives (Cont'd.) 3. Bonuses in respect of 2014 According to the terms of the bonus plan, the Bank's senior officers are not entitled to bonuses in respect of 2014. In addition, within the implementation of the bonus plan which as discussed and approved by the Remuneration Committee on February 11, 2015 and by the Board of Directors on February 18, 201529 a negative bonus30 was offset from the bonus balance whose payment was postponed from previous years according to the terms of the bonus plans for senior officers as approved by the qualified organs of the Bank in previous years.
E. Personal contracts (1) As of December 31, 2014, all management members are employed under personal contracts. Part of the management members have a personal contract providing them with enhanced severance pay should they be dismissed by the Bank. The maximum amount of the Bank’s additional expense is NIS 2.5 million (December 31, 2013 - NIS 5.6 million), which was not recorded in the Banks' books as of December 31, 2014, as the Bank has no intention of dismissing abovementioned management members.
(2) On February 6, 2014 the general meeting of the Bank approved, after the approval of the Board of Directors on December 31, 2013 and the Remuneration Committee on December 26, 2013, the terms of service and employment of the CEO, Mr. Israel Trau. Mr. Trau is employed under a personal employment agreement for a period of three years from the date of the beginning of his actual work at the Bank, February 16, 2014 (hereinafter: the "Initial Employment Period"), which shall be extended, provided that neither party gives notice to the other, up to six months before the end of the Initial Employment Period, regarding non-extension of the employment period. Each party shall be permitted to terminate the contractual engagement at any time, with six months' advance notice, either during the Initial Employment Period or thereafter, if and as the employment period may be extended. Upon the end of Mr. Trau's employment at the Bank, for any reason, Mr. Trau shall be entitled to all moneys and rights accrued in his favor in the executive insurance policy, and the policy shall be transferred to Mr. Trau's ownership, all provided that the termination of his employment does not occur under circumstances in which
29 The decisions of the Remuneration Committee were based on non-final data (including data from financial statements) which were known at the time the discuusion took place in the committee. There wasn't a material deviation between the results of the bonuses as were displayed in the committee and the results displayed in the Board of Directors. 30 The negative bonus amounts approved by the Board of Directors within the implementation of the bonus plan aren't final, because the parameter regarding the comparison of the Banks' data to other banks was calculated on the basis of data from the first three quarters of 2014. Upon publication of the financial statements of the other banks on March 2015, a final calculation will be made of the aforesaid parameter and the bonus amounts will be adjusted accordingly.
380
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) E. Personal contracts (Cont'd.) (2) (Cont'd.) severance pay can legally be denied; and all sums accrued in his favor in the study fund shall be released. It is hereby clarified that the Bank's payments into the executive insurance are a substitute for the duty to pay full severance pay, if such pay is owned according to law, pursuant to Section 14 of the Severance Pay Law, 1963, and in accordance with the terms established in the general approval for employers' payments to pension funds and insurance funds as a replacement for severance pay. Mr. Trau shall be obligated to maintain a cooling period (non-competition) of six months from the end of his actual work at the Bank. During the cooling period, Mr. Trau shall be entitled to full wages and the full associated benefits (hereinafter: "Adjustment Pay"). It is hereby clarified that during the overlap of the cooling period with the advance notice period, Mr. Trau shall be entitled to pay only for the advance notice period. Should Mr. Trau violate his non-competition commitment, without prejudice to any other remedy available to the Bank, he shall be required to reimburse the Bank for all payments received in respect of the advance notice period and/or the cooling period. Mr. Trau's salary is linked to increases in the consumer price index (updated on a quarterly basis). With the exception of this linkage, no change occurred in his wages during 2014.
On October 26, 2014, the general assembly of the Bank, further to approval by the board of directors of the Bank on April 30, 2014, and ratification on September 10, 2014, and further to the approval by the Remuneration Committee of the Bank on April 28, 2014, approved a one-time signing bonus for the chief executive officer of the Bank, Mr. Israel Trau, in the amount of two monthly salaries (a total of NIS 270 thousand).
(3) Mr. Zeev Abeles, Chairman of the Board of Directors, employed under personal contract for an unlimited period of time, as of November 1, 1999, which was updated from time to time according to the decisions of the Banks' general meeting. Each of the sides to the employment agreement may terminate the employment at any time and at his absolute discretion, in an advance notice of six months. Upon termination of the employment (excluding circumstances in which he may be denied severance pay), Mr. Abeles shall be entitled to severance pay as determined by law at a rate of 100% of his gross monthly salary at the date of termination of his employment at the Bank, multiplied by the number of years of his work at the Bank (including part of a year, proportionally, hereinafter: "100% compensation").
381
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) E. Personal contracts (Cont'd.) (3) (Cont'd.) This is instead of the amounts that should have been deposited for him in a personal compensation provident fund in his name pursuant to Section 14 of the Severance Pay Law, 1964. Therefore, upon termination of the employment as the Banks' Chairman, Mr. Abeles shall be entitled to all the money and rights accumulated and accrued in the personal compensation fund, and the Bank will continue to pay money to the Chairman in the amount of the difference between his entitlement to 100% compensation and the money and rights in the personal compensation fund. In addition, Mr. Abeles is entitled, upon termination of his employment at the Bank, to additional compensation in the amount of 100% of his last salary multiplied by the number of years he has worked at the Bank (including part of a year, proportionally), as approved by the Banks' general meeting from April 30, 2006. The competition restriction period is six months from the time the Chairman actually ceases to work in the Bank (either by dismissal or by resignation). Mr. Abeles' salary is CPI linked (updated once a year).
As detailed in section D.2. above, the terms of the Bonus Plan for the Banks' Senior Executives, which was adjusted to the requirements of Amendment 20 and to banking corporation remuneration directives, have replaced the Bonus Plan terms approved in the past regarding the Banks' Chairman of the Board of Directors. ‐ The negative bonus offset from the bonus amount approved in previous years for the Chairman of the Board of Directors of the Bank is estimated at NIS 509 thousand. ‐ The bonus for 2013 for the Chairman of the Board of Directors of the Bank, Mr. Zeev Abeles totaled NIS 909 thousand.
(4) Mr. Freilichman was employed at the Bank since April 2, 2006 and ended his job as the Banks' C.E.O. on February 28, 2014. As detailed in Section D.2. above, the terms of the bonus plan for senior officers at the Bank, which was adapted to correction requirement no. 20 and to the remuneration directive in a banking corporation, replaced the bonus plan terms approved for the C.E.O. of the Bank in the past. ‐ The negative bonus estimate offset from the bonus amount approved in previous years for Haim Freilichman is NIS 170 thousand. ‐ The bonus for 2013 for the former C.E.O. of the Bank, Mr. Haim Freilichman totaled NIS 1,018 thousand.
382
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 15 - Employee Benefits (Cont'd.) F. In 1997, the bank signed an agreement with authorized signatories and managers and the union, which determine among other things that the managers and senior authorized signatories of the Bank, who are entitled to choose to retire with a budget-based pension in a certain format used at the Bank until that time (hereinafter: the “Binding Pension”), and who choose this pension (instead of receiving compensation and remuneration, which is their other option), shall receive pensions from the "Amit" pension funds (with which the Bank and employees of the Bank entered into an agreement) and from the Bank in an integrated manner, with the integration formula established in the agreement. A dispute existed over this integration formula between the union of managers and authorized signatories, and the Bank. The Bank’s position was that the Bank’s indebtedness to retirees is in the amount of the difference between the amount of the first pension which the retiree receives from "Amit" upon retirement and the amount of the Binding Pension (to the extent that such a difference exists at that time), and which the Bank must pay to the retiree each month, fully linked to the consumer price index. The position of the managers is that the Bank’s indebtedness to retirees is in the amount of the difference (to the extent that it exists) between the amount of the pension which the retiree receives from "Amit" and the amount of the Binding Pension, as was the difference each month (the amounts of the aforesaid differences which the Bank must pay, hereinafter: the “Supplementary Amounts”). On October 31, 2013 an agreement between the Bank and the Organization of Managers and Authorized Signatories, which sets the controversy regarding the above mentioned combination formula, has been signed. According to the agreement, the following arrangements shall be in force: (1) A retiree who retires due to retirement age, or arrive at the retirement age while receiving an agreed upon budgetary pension from the Bank, shall receive the appropriate pension according to the collective agreement from both the Bank and “Amit” pension fund, as it is fully linked to the CPI (hereinafter: the basic pension). (2) As for a retiree who retired due to retirement age and began receiving allowance from “Amit” pension fund, the pension payment of January 1, 2014 by both the Bank and “Amit” shall be considered as the basic pension. (3) As for a retiree who retired in an early retirement and has yet to receive any allowances from “Amit”, as the retiree shall decide to join the agreement, the pension payment to be paid by January 1, 2014 shall be considered as the basic payment, and as he arrives at the age of retirement, he shall be entitled to receive pension payments from both “Amit” and the Bank. In any case in which, as time goes by, the part to be paid by “Amit” shall decrease, the part to be paid by the Bank shall increase, and vice versa.
G. On January 29, 2015 a new wage agreement was signed at Leumi Bank for the years 2015-2018. The agreement mainly reduces the annual salary update mechanism and changes benefits and jubilee grants. The new wage agreement was partly reflected in 2014 and will be fully reflected as of the statements of 2015. The net influence on the financial statements for 2014 is not material.
383
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 16 - Assets and Liabilities According to Linkage Basis Reported amounts
Consolidated - Composition(1): December 31, 2014 Israeli currency Foreign currency (2) Linked to the Consumer Non-monetary Unlinked Price Index U.S. dollars Euro Other items (3) Total NIS millions Assets Cash on hand and deposits with banks 9,313 130 306 35 64 - 9,848 Securities 3,978 1,458 1,062 158 7 126 6,789 Borrowed Securities 182 - - - - - 182 Net, credit to the public (4) 14,716 4,541 1,930 187 149 190 21,713 Credit to the government -* ------* Buildings and equipment - - - - - 404 404 Assets in respect of derivative instruments 34 -* 235 41 4 190 504 Other assets 357 - -* 1 -* 1,055 1,413 Total assets 28,580 6,129 3,533 422 224 1,965 40,853
Liabilities Deposits from the public 20,622 2,978 5,871 1,298 534 195 31,498 Deposits from banks 76 - 61 5 10 - 152 Deposits from Government 1 - - - - - 1 Deferred liability deeds and bonds 1,514 1,960 - - - - 3,474 Liabilities in respect of derivative instruments 61 - 253 71 2 188 575 Other liabilities 1,327 391 2 1 -* 1,056 2,777 Total liabilities 23,601 5,329 6,187 1,375 546 1,439 38,477
Differential 4,979 800 (2,654) (953) (322) 526 2,376
Non - hedging derivative instruments: Derivative instruments (excluding options) (2,450) (575) 1,851 845 329 Net, in the money options (in underlying asset terms) (701) - 526 175 - Net, out of the money options (in underlying asset terms) (180) - 277 (97) - Total 1,648 225 - (30) 7
Net, in the money options (capitalized stated amount) (897) - 728 169 - Net, out of the money options (capitalized stated amount) (898) - 1,174 (276) -
(1) See Note 1.A.(2). (2) Including linked to foreign currency. (3) Including derivative instruments where the underlying asset relates to a non-monetary item. (4) After deduction of allowances for credit losses which were attributed to the linkage bases.
- 384 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 16 - Assets and Liabilities According to Linkage Basis (cont'd.) Reported Amounts Consolidated - Composition (1): December 31, 2013 Israeli currency Foreign currency (2) Linked to the Consumer Non-Monetary Unlinked Price Index U.S. dollars Euro Other Items (3) Total NIS millions Assets Cash on hand and deposits with banks 9,311 147 356 50 60 - 9,924 Securities 2,995 1,254 424 28 - 109 4,810 Borrowed Securities 503 - - - - - 503 Net, credit to the public (4) 14,700 5,133 1,727 218 204 153 22,135 Investment in investee companies - - - - - 1 1 Buildings and equipment - - - - - 405 405 Assets in respect of derivative instruments 43 - 162 29 42 296 572 Other assets 328 1 - - 4 807 1,140 Total assets 27,880 6,535 2,669 325 310 1,771 39,490
Liabilities Deposits from the public 20,225 3,510 5,120 1,157 451 159 30,622 Deposits from banks 121 - 56 30 2 - 209 Deposits from Government 3 - - - - - 3 Deferred liability deeds and bonds 935 2,174 - - - - 3,109 Liabilities in respect of derivative instruments 96 - 193 42 43 293 667 Other liabilities 1,480 250 1 - 5 809 2,545 Total liabilities 22,860 5,934 5,370 1,229 501 1,261 37,155
Differential 5,020 601 (2,701) (904) (191) 510 2,335
Non - hedging derivative instruments: Derivative instruments (excluding options) (3,662) 2 2,566 901 193 Net, in the money options (in underlying asset terms) (100) - 96 4 - Net, out of the money options (in underlying asset terms) (28) - 43 (15) - Total 1,230 603 4 (14) 2
Net, in the money options (capitalized stated amount) (131) - 127 8 (4) Net, out of the money options (capitalized stated amount) (32) - 39 (10) 3
(1) See Note 1.A.(2). (2) Including linked to foreign currency. (3) Including derivative instruments where the underlying asset relates to a non-monetary item. (4) After deduction of allowances for credit losses which were attributed to the linkage bases.
- 385 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 17 - Assets and Liabilities according to Linkage Basis and Maturity Date (1) Reported Amounts
Consolidated - Composition (2): December 31, 2014 Future expected contractual cash flows (4) Balance-sheet balance Upon From one From From two From From ten With no demand month to three From one years to three From four From five years to Over fixed Contractual and up to three months to year to three years to years to years to twenty twenty Total cash repayment return one month months one year two years years four years five years ten years years years flows period (5) Total rate (6) NIS millions
Israeli currency (including foreign currency linked) Assets 13,355 3,108 4,095 3,880 2,115 1,584 1,206 4,382 3,286 629 37,640 503 34,832 2.52% Liabilities 17,155 3,420 2,431 1,658 1,053 443 1,210 1,835 47 17 29,269 100 28,950 2.17% Differential (3,800) (312) 1,664 2,222 1,067 1,141 (4) 2,547 3,239 612 8,371 403 5,882 Derivative instruments (excluding options) (2,520) (509) 4 (7) ------(3,032) - (3,032) Options (in terms of the underlying asset) (360) (296) (242) -* ------(898) - (898) Difference after effect of derivative instruments (6,680) (1,117) 1,426 2,215 1,062 1,141 (4) 2,547 3,239 612 4,441 403 1,952
Foreign currency (3) Assets 970 487 1,190 225 154 163 417 690 127 3 4,426 17 4,056 4.64% Liabilities 5,664 1,224 1,127 38 32 30 29 48 1 - 8,193 - 8,088 1.28% Differential (4,694) (737) 63 187 122 133 388 642 126 3 (3,767) 17 (4,032) Of which: difference in USD (3,269) (513) 44 130 85 93 270 447 88 2 2,623 (3) (2,746)
Derivative instruments (excluding options) Options (in terms of the underlying asset) 2,520 509 (4) 7 ------3,032 - 3,032 Difference after effect of derivative instruments 360 296 242 -* ------898 - 898 (1,814) 68 301 194 122 133 388 642 126 3 163 17 (102) Total Assets 14,325 3,595 5,285 4,105 2,269 1,747 1,623 5,072 3,413 632 42,066 520 38,888 2.74% Liabilities 22,819 4,644 3,558 1,696 1,085 473 1,239 1,883 48 17 37,462 100 37,038 2.01% Differential (8,494) (1,049) 1,727 2,409 1,184 1,247 384 3,189 3,365 615 4,604 420 1,850 Of which: Credit to the public 4,086 3,041 4,159 2,180 1,697 1,285 1,051 3,157 3,092 391 24,139 254 21,523 3.78% Of which: Deposits of the public 21,978 4,171 3,305 1,140 230 98 114 457 - - 31,493 - 31,303 1.94%
* Less than NIS 500 thousand. See notes below.
- 386 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 17 - Assets and Liabilities according to Linkage Basis and Maturity Date (1) (cont'd.) Reported Amounts Consolidated - Composition (2):
December 31, 2013 Future expected contractual cash flows (4) Balance-sheet balance Upon From one From From two From From ten With no demand month to three From one years to three From four From five years to Over fixed Contractual and up to three months to year to three years to years to years to twenty twenty Total cash repayment return one month months one year two years years four years five years ten years years years flows period (5) Total rate (6) NIS millions
Assets 15,089 3,017 5,316 2,974 2,329 1,822 1,376 5,458 3,714 582 41,677 528 37,719 3.53% Liabilities 21,949 4,110 3,963 1,679 1,135 1,163 426 1,896 62 19 36,402 124 35,894 2.33% Differential (6,860) (1,093) 1,353 1,295 1,194 659 950 3,562 3,652 563 5,275 404 1825 Of which: Credit to the public 4,364 2,752 4,262 2,317 1,703 1,381 1,099 3,531 3,414 446 25,269 268 21,982 4.41% Of which: Deposits of the public 21,168 3,601 3,552 1,198 519 145 75 425 8 - 30,691 30,463 2.26%
(1) Presented in this note are future expected cash flows in respect of assets and liabilities according to currencies, according to the remaining period to the maturity dates of each cash flow. The data is presented net of accounting write-offs and allowance for credit losses. (2) See Note 1.A(2). (3) Not including Israeli currency linked to foreign currency. (4) As included in Note No. 16 “Assets and Liabilities according to Linkage Basis”, including off-balance sheet amounts in respect of derivatives, which aren't net redeemed. (5) Assets with no fixed repayment period including past due assets totaling NIS 247 million (December 31, 2013 – NIS 210 million). (6) Contractual return rate is the interest rate that deducts the future expected cash flows presented in this note in respect of monetary items over its balance-sheet balance.
- 387 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Special Commitments Reported amounts A. Off-Balance-Sheet Financial Instruments: Consolidated and the Bank December 31 December 31 2014 2013 NIS millions NIS millions Balance Balance Balance of Balance of of Allowance of Allowance Contracts for credit Contracts for credit (1) loss(2) (1) loss(2) Transactions in which the balance reflects credit risk: Documentary credit 71 -* 110 -* Guarantees securing loans 430 9 457 9 Guarantees to dwelling purchasers 1,991 4 2,073 11 Other liabilities and guarantees 791 6 794 7 Unutilized credit card limits 808 1 910 -* Unutilized revolving credit and on-call limits 836 1 734 -* Unutilized loan and revolving credit facilities of diamond dealers 757 1 594 2 Irrevocable credit approvals not yet utilized 5,857 14 7,977 19 Commitments to issue guarantees 803 2 962 6
(1) The contract balances or their face amount prior to the effect of allowance for credit losses. (2) Mainly collective allowance.
* Amounts lower than NIS 500 thousand.
- 388 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Special Commitments (Cont'd.) B. Off-balance-sheet undertakings with respect to activities based on the extent of collection(1): Balance of credit from deposits based on the extent of collection (2) Consolidated and the Bank December 31 December 31 2014 2013 NIS millions
Israeli CPI-linked currency 250 304
Cash flows with respect to collection commission and interest margins for activities based on the extent of collection- consolidated and the bank As at December As at December 31, 2014 31, 2013 1 year 3 years 5 years 10 years Up to to to to to Over 1 year 3 years 5 years 10 years 20 years 20 years Total Total NIS millions
Linked Segment Future contractual cash flows 3 5 5 5 1 1 20 24 Expected future cash flows after Management's estimate of early repayments 3 5 3 3 -* 1 15 18 Discounted future cash flows after Management's estimate of early repayments (3) 3 5 3 3 -* 1 15 17
2014 2013 NIS millions
Information about loans extended during the year Loans out of deposits based on the extent of collections -* 1 Standing loans 2 2 (1) Credit and deposits whose repayment to the depositor is contingent upon the collection of the credit (or deposits) with a margin or with a collection fee (instead of a margin). (2) Standing loans and government deposits made in respect thereof, in the amount of NIS 13 million (2013 - NIS 19 million) are not included in this table. (3) The capitalization was at the rate of 0.9% (2013 - 1.40%). * Less than NIS 500 thousand.
- 389 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent liabilities and commitments: (1) Rentals for bank premises and equipment payable in future years: Consolidated and the Bank December 31 December 31 2014 2013 NIS millions
First year 25 23 Second year 24 21 Third year 23 20 Fourth year 20 18 Fifth year 18 14 Over five years 86 61 Total 196 157
(2) As at December 31, 2014, commitments to purchase premises and equipment totaled NIS 6 million – consolidated and Bank, (December 31, 2013 - NIS 5 million - consolidated and Bank).
(3) A consolidated company committed to invest NIS 20 million (December 31, 2013 - NIS 10 million) in additional non-banking corporations and in a hedge fund, this being upon fulfillment of certain conditions provided in agreements with those corporations.
(4) Agreement to receive computing services from Bank Leumi L'Israel B.M.. (hereinafter - "Leumi") - On September 29, 2001, an operating and computing agreement was signed with Leumi for a period of 11 years, valid from 1998, pursuant to which Leumi renders computer and operational services to the Bank in respect of banking infrastructure services, in addition to the Bank's entitlement to receive the majority of information systems operating in Leumi, most of which have been assimilated by the Bank (hereinafter - the "Agreement"). The services which Leumi committed to provide through its Operations and Administration Division or any entity replacing it (hereinafter - "OAD") are based on computing services that OAD renders to its customers in addition to other services set forth in detail in the agreement. Leumi also renders to the Bank complete ongoing support and maintenance services, and training infrastructure concerning the systems used to provide the services, and the operating services. Under the agreement Leumi undertakes to transfer operating information concerning the systems to the Bank, and to maintain a high level of information security for the Bank's data.
- 390 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (4) (cont'd) On December 31, 2007, after the Bank examined computerization alternatives, the Bank and Leumi signed an addendum to the agreement, according to which the validity of the agreement was extended for ten years, starting January 1, 2007; the terms of the agreement were improved on the monetary level, by reducing the cost of routine services and the reduction of uncertainty related to uncontrolled increase in the cost of services in the future, as well as on the service-quality level, by the signing of a service-level agreement (SLA).
In accordance with the agreements between the parties pursuant to the provisions of the agreement, the "Termination of Engagement Project" will begin at the end of the agreement period and could last up to three years. Insofar as it may be necessary to renew the regulatory approvals regarding the agreement, both parties will work to achieve them. Following the signing of the addendum to the agreement, the Bank exercised its right to use Leumi's additional information systems, which substantially contribute to the upgrading of the operation, management, control and risk management arrays.
(5) On July 1, 2010, agreements were signed between the Bank and Cartisei Ashrai LeIsrael Ltd. [Israel Credit Cards Ltd.] (hereinafter: “CAL”), and between the Bank and Diners Club Israel Ltd. (hereinafter: “Diners”), a company controlled by CAL, (hereinafter: “the Agreements”). The Agreements are for ten years, subject to the right to cancel the Agreements, which is available by law to each of the parties. The Agreements replace the contracts between the Bank and CAL, and between the Bank and Diners, which ended at that date. Under the Agreements, CAL and Diners will issue credit cards, bank cards, and combined cards to customers of the Bank, and will provide the customers with the services involved in the issuance and use of the cards. The Agreements establish the rights of the parties as well as arrangements with regard to the operation and provision of services by CAL and/or Diners for charge cards to be issued pursuant to the agreement, and the other relevant conditions.
- 391 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (5) (cont'd) Under the agreement with CAL, subject to the contingent terms detailed below, the Bank was granted a nontransferable option to buy from CAL 32,934 ordinary shares of NIS 0.0001 of CAL, which as of the date of signing of the agreement constitute 3% of the issued and paid-up ordinary share capital of CAL, subject to adjustment events stipulated in the agreement, upon completion of the public offering of CALs' securities, and subject to the completion of the issuing (insofar as will be executed). The exercise price of the options reflects a discount of 25% on the gross price of the share, as the same shall be fixed in the prospectus for the public offering. CAL has the discretionary right to convert the option shares to a one-time payment, at an amount equal to the exercise price for the total number of option shares, as if the option had been exercised in full. The shares that will arise from the exercise of the option, insofar as will be exercised, shall not be transferable to a competitor of CAL. The validity of the option during the term of the agreement is contingent upon a series of commercial terms set forth in the agreement. The option shall take effect when an exemption from a restrictive arrangement is received from the Antitrust Commissioner regarding the provisions of the Agreement relating to the terms of the option, and when approval is received from the Supervisor of Banks referring to the Bank and CAL, to the extent that such approvals shall be required.
In December 2010, the Bank received the decision of the Antitrust Commissioner to grant an exemption from the approval of a restrictive arrangement, for five years, with regard to the option given by CAL pursuant to the Agreement between the Bank and CAL, and with regard to the Agreements between the Bank and CAL and between the Bank and Diners, a company under the control of CAL, on the grounds set forth in the decision. One of the grounds upon which the Commissioner’s decision is based is that the exclusivity stipulation in the Agreement with regard to the option cannot be substantially detrimental to competition. It was further established that when the five-year period has elapsed, it will be possible to request an extension of the period of the exemption. In May 2011, the Bank was notified of the position of the Supervisor of Banks according to which no supervisory authorization is required in connection with the option granted to the Bank pursuant to the agreement. Accordingly, the contingent terms required for the validity of the option are fulfilled.
- 392 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(6) On February 3, 2011, the Bank entered into an agreement with Isracard Ltd., for a period of five years, for the issuance of charge cards under the brand names Isracard and MasterCard. Inter alia, the agreement contains provisions for the allocation of responsibility between Poalim Express Ltd. and the Bank, in view of the provisions of the Charge Cards Law and the relevant business, operational, and legal terms for such issuance. The period of the agreement will be extended automatically for additional periods of two years each, unless either of the parties notifies the other, in the manner specified in the agreement, that it is not interested in such an extension. On the same date, the Bank entered into an agreement with Poalim Express Ltd., for a period of four years, for the issuance of charge cards under the brand name American Express. Inter alia, the agreement contains provisions for the allocation of responsibility between Poalim Express Ltd. and the Bank, in view of the provisions of the Charge Cards Law and the relevant business, operational, and legal terms for such issuance. The period of the agreement will be extended automatically for additional periods of two years each, unless either of the parties notifies the other, in the manner specified in the agreement, that it is not interested in such an extension.
(7) In accordance with the Bank's business strategy, which includes an emphasis on retail banking, from time to time (as from 2010) the Bank enters into agreements with Mimun Yashir, of the Yashir (2006) Group Ltd. (hereinafter: “Mimun Yashir”), pursuant to which the Bank acquires through the assignment of rights and obligations by way of a sale, portfolios of loans granted by Mimun Yashir to private customers for purchase of motor vehicles, as well as all-purpose loans. At the date of the purchase of the loans from Mimun Yashir, upon fulfillment of the terms for the recognition of a financial asset (pursuant to FAS 166), the Bank records the acquired loans in its books, at the amount of the consideration, i.e. at fair value, with the exception of loans where the Bank has a right of return for a period defined in the agreement, which are recorded as secured debt to Mimun Yashir. The income from financing the transaction is recorded according to the effective interest rate of the acquired loans.
(8) Guarantees to courts and others as at December 31, 2014 amounted to NIS 12 million, - consolidated and Bank (December 31, 2013 - NIS 12 million - consolidated and Bank).
- 393 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(9) a. According to the Joint Trust Investment Regulations (Equity Capital and Insurance of Fund Managers and Trustees and Terms for Qualifications of Directors and Employees), 1995, the consolidated company deposited an amount of NIS 7 million (December 31, 2013 - NIS 7 million) in favor of owners of units of mutual funds for which a consolidated company of the Bank serves as a trustee.
b. A consolidated company engaged in underwriting is covered by professional liability insurance, under the Securities Regulations (Underwriting) - 2007.
(10) Pursuant to the agreements signed on December 18, 2006, August 27, 2009, August 28,2011 and November 25, 2013 between Union Issuances Ltd., a consolidated company, and the Bank, the Bank undertook a commitment towards the trustees of the bonds issued by the consolidated company, to comply with the terms of the bonds and to repay them according to their terms.
(11) The Bank, which is a member of the Tel Aviv Stock Exchange (TASE) Clearing House, has undertaken, together with the other members of the Stock Exchange, to mutually indemnify the TASE Clearing House in the event that it suffers losses deriving from insufficient inventory or insufficient financial coverage by any one of the members of the Stock Exchange. A risk fund was founded by TASE Clearing House for this purpose in which all members of the Clearing House, including the Bank, will participate. In November 2008, the board of directors of the Clearing House decided to amend the clause regarding the provision of collateral by members in respect of the risk fund of the Clearing House. According to the amendment, each member shall deposit at least 25% of the collateral in cash to secure his share of the risk fund. As at December 31, 2014 the Bank’s share in the risk fund amounted to NIS 37 million (December 31, 2013 - NIS 32 million).
(12) The Ma'of Clearing House Ltd. is operated by the Tel Aviv Stock Exchange Ltd. The main activities of the Clearing House are the issuance of options, providing clearinghouse facilities for transactions in options and the exercise thereof and providing ancillary services to members of the Clearing House and to the trade in options. The Bank, as a member of the Clearing House, is responsible, jointly with the other members of the Clearing House, for any financial indebtedness of the Clearing House resulting from transactions in options executed on the Stock Exchange. For this purpose, the Clearing House established a risk fund. Each member of the Clearing House is responsible for his share of the Fund, which is determined based on the relative share of his activities in options or of the total amount of the collateral which it is required to provide to the Clearing House and on the terms set by the Board of Directors of the Clearing House from time to time.
- 394 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (12) (cont'd) In November 2008, the Ma'of Clearing House Board of Directors decided to amend the clause regarding the collateral provided by members in respect of the risk fund of the Clearing House. According to the amendment, each member shall deposit at least 25% of the collateral required to secure his share of the risk fund in cash.
As at the balance sheet date, the Bank's share of the Risk Fund is NIS 95 million (December 31, 2013 - NIS 106 million). The Bank's share of the Risk Fund may increase if one or more of the other members of the Clearing House do not meet their obligations.
The Bank pledged to pay to the Clearing House any monetary obligation deriving from transactions executed for its customers in connection with the writing of options traded within the Clearing House. As at December 31, 2014, the amount of guarantees, relating to transactions executed for customers, was NIS 353 million (December 31, 2013 - NIS 293 million). See also Note 14 regarding the collateralization of the aforegoing obligations.
(13) The amendment of the undertaking to indemnify the officers of the Bank and its subsidiaries and the amendment of the provisions of the Bank's Articles of Association that deal with indemnity and insurance of officers: On October 31, 2012, following the Audit Committee's approval dated September 6, 2012 and the subsequent approval of the Bank's Board of Directors dated September 10, 2012, the Bank's General Meeting approved the amendment of the undertaking to indemnify the officers of the Bank and its subsidiaries, including past, present and future directors of the Bank or its subsidiaries, to whom persons having a controlling interest in the Bank might have a personal interest in giving an undertaking to indemnify. This is in part due to various legislative amendments, including the Companies Law, 1999, the Streamlining of Enforcement by the Israel Securities Authority (Statutory Amendments) Law 2011, the Antitrust Law (amendment no. 13) 2012, the Supervision of Financial Services Law (Insurance) 1981 and the Supervision of Financial Services Law (Provident Funds) Law 2005 (hereinafter: "Legislative Amendments") and to update the events appendix attached to the Letter of Undertaking to Indemnify, taking into account the changes and developments in the nature and volume of the legal risks that apply to the Bank and its subsidiaries (hereinafter: "the amendment of the Letter of Undertaking to Indemnify" or "the transaction").
- 395 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (13) (cont'd) The persons having a controlling interest in the Bank, whose names are listed below, have a personal interest in the transaction or had a personal interest in the transaction when it was approved, as follows: Mr. Yeshayahu Landau, regarding an approval of amendments to the Letter of Undertaking to Indemnifyfor Mr. Yeshayahu Landau and Mr. Yigal Landau [Yeshayahu Landau Holdings (1993) Ltd. in which Mr. Yeshayahu Landau (Yigal Landau's father) is the controlling shareholder, is part of the controlling group of the Bank] and this is since the aforesaid decision will apply to the controlling shareholder or to his relative mentioned above, by virtue of their service as directors at the Bank. Mrs. Ruth Manor regarding the decision to amend the Letter of Undertaking to Indemnify Mr. Yitzhak Manor who served as a director at the Bank up until 10.8.2011 (Mr. Yitzhak Manor is the husband of Mrs. Ruth Manor who controls, along with Dr. Yael Almog, David Lubinski Properties (Holdings) 1993 Ltd. and Cheroudar Properties Ltd., who are numbered amongst the controlling shareholders of the Bank). Also, and for the sake of caution, it should be noted that Mrs. Ruth Manor might have a personal interest in the amendment of the Letter of Undertaking to Indemnify Izhak Zisman Adv. (Adv. Izhak Zisman held Mrs. Ruth Manor's power of attorney for the exercise of voting or other rights granted to Mrs. Ruth Manor by virtue of her control and indirect holding of the Banks' shares, as required by letters from the Supervisor of Banks dated 10.8.2011 and 2.8.2012). Also, and for the sake of caution, it should be noted that Dr. Yael Almog and/or David Lubinski Properties (Holdings) 1993 Ltd. and/or Cheroudar Properties Ltd. might have a personal interest in the amendment of the Letter of Undertaking to Indemnify Mr. Haim Almog, who serves as a director at the Bank on behalf of Dr. Yael Almog and/or David Lubinski Properties (Holdings) 1993 Ltd. and Cheroudar Properties Ltd. Prior to approval of amending the Letter of Undertaking to Indemnify, on October 31, 2012 the General Meeting of the Bank (following the approval of the Audit Committee dated September 6, 2012 and the subsequent approval of the Banks' Board of Directors dated September 10, 2012) approved the amendment of Articles 127 and 129 of the Bank's Articles of Association, regarding the indemnification and insurance of officers, inter alia in order to match the version of the aforesaid Articles to the Legislative Amendments (hereinafter: "Amendment of the Articles of Association"). Also note that on February 6, 2013 the Bank's Articles of Association were amended so as to include a limitation as to the maximum amount of indemnity that the Bank will pay pursuant to the undertaking to indemnify officers given in advance.
- 396 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(14) On June 22, 2009 the General Meeting of the Bank approved a transaction to increase the amount of the indemnity for those who serve as officers of the Bank and its subsidiaries from time to time (hereinafter: the officers"), pursuant to the Letter of Undertaking to Indemnify, which was approved by the Bank's General Meeting held on December 29, 2005 (hereinafter: "the Letter of Indemnity"), regarding an offer and/or an issuing of securities pursuant to a prospectus, and all the ramifications thereof, as set forth in section (1) to Appendix A to the Letter of Indemnity, namely an additional amount of USD 15 million (hereinafter: "additional indemnity amount"), in excess of the liability to indemnify in the amount of USD 35 million, stipulated in the aforesaid Letter of Indemnity. The additional indemnity amount is devoted exclusively to the event set forth in Section (1) to Appendix A to the aforementioned Letter of Indemnity (concerning an offer and/or an issuing of securities pursuant to a prospectus). It is clarified that the indemnity regarding the events included in section (1) to Appendix A to the Letter of Indemnity will initially be provided out of the additional indemnity amount (USD 15 million) and if an indemnity shall be required in respect of an event of the aforesaid nature in excess of the additional indemnity amount, the balance will be paid out of the existing indemnity amount of USD 35 million. The aforesaid increase in the indemnity amount was approved by the Audit Committee on April 27, 2009 and by the Bank's Board of Directors on April 30, 2009. The persons having a controlling interest in the Bank, whose names are listed below, have a personal interest in the transaction or had a personal interest in the transaction at the time of its approval, as hereinafter set forth, as a result of the increase in the indemnification amount concerning themselves and/or their relatives serving as directors in the company: Mr. Yeshayahu Landau, the holder of the controlling interest in Yeshayahu Landau Holdings (1993) Ltd., a member of the Bank's controlling group – in relation to the increase in the Undertaking to Indemnify for himself and for his son, Mr. Yigal Landau; Mrs. Ruth Manor and Mrs. Drora Zachai, the controlling shareholders, at the time of the approval of the transaction, of David Lubinski Properties (Holdings) 1993 Ltd. and Cheroudar Properties Ltd., which are numbered amongst the Bank's controlling group – in relation to the increase in the Undertaking to Indemnify for Mr. Yitzhak Manor (Ruth Manor's husband) and to Mr. Haim Almog (Mrs. Drora Zachai's son in law at the time of the approval of the Indemnity).
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NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(15) On June 30, 2009, the Bank's Board of Directors approved the granting of irrevocable and unconditional Letters of Indemnity to the consolidated companies: Union Capital Markets Ltd., Union Issuances Ltd., Igudim Insurance Agency (1995) Ltd., Union Bank Trust Company Ltd., Impact Investment Portfolio Management Ltd., Carmel Union Mortgages and Investments Ltd., and Livluv Insurance Agency (1993) Ltd. (in addition to Letters of Indemnity granted in the past to Igudim Ltd., Union Systems Ltd., Union Investments and Enterprises Ltd., and Union Leasing Ltd.; with regard to the Letter of Indemnity to Union Leasing, the Board of Directors of the Bank approved the omission of conditions from the Letter of Indemnity, in effect as of June 30, 2009), in respect of all of their liabilities (with no amount limit), including but not limited to credit and loans granted to these companies by the Bank or by any third party, and in respect of any other liability which the consolidated companies may have, in accordance with Proper Conduct of Banking Business Directive No. 311 (Minimum Capital Ratio) (replaced by Proper Conduct of Banking Business Directive No. 201) and 313 (Limits on Indebtedness of a Borrower and a Group of Borrowers), and in accordance with the Proper Conduct of Banking Business Directive No. 203 concerning the working and measurement framework for capital adequacy – standardized approach credit risk.
(16) Pursuant to an agreement signed on November 25, 2013 between Union Issuances Ltd. (hereinafter: "Union Issuances") and the Bank (hereinafter: "The 2013 Deposit Agreement") which applies to issuances of bonds and/or commercial securities offered by virtue of a shelf prospectus which Union Issuances published on November 26, 2013 and dated November 27, 2013 (hereinafter: "2013 Shelf Prospectus", hereinafter: "The Offered Securities"), the Bank will cover all of the direct issuance costs of Union Issuances in respect of the Offered Securities immediately upon their actual issuance, and will refund to Union Issuances any amount it has spent and will spend in connection with the issuance of any series of the Offered Securities insofar as such amount was not covered by the margin on the deposits paid by the Bank, as detailed below. The aforesaid agreement also provides that the consideration from the issuance of the Offered Securities pursuant to the 2013 Shelf Prospectus, will be deposited by Union Issuances in the Bank, and each of the deposits will be subject to such repayment, linkage and interest terms as shall be agreed upon with the Bank from time to time, so as to allow for the full and punctual payment of the Offered Securities on maturity. The deposit will be used for payment of the Offered Securities plus a margin at a rate of 0.05% or such other rate as shall be agreed between the Bank and Union Issuances, in order to approximately cover the routine expenses of Union Issuances.
- 398 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (16) (cont'd) The repayment of every deposit will rank equally in priority to the repayment of the Offered Securities (meaning, the consideration from the Offered Securities will be deposited in a deposit with a repayment priority ranking equally with that of the deposits in the Bank). Notwithstanding the above, if Union Issuances issues a series expansion denominated in premium or at discount, in respect to the Bonds issued in the shelf offering report pursuant to which the Bonds, the subject of the issuance by expansion of the series are first registered for trading, the terms of the deposit in which the Bonds fund are deposited may incorporate the adjustment to the premium or the discount, provided that the deposit terms allow full and punctual payment of the Bonds, and with the addition of a margin of 0.05% or a margin at such other rate as agreed by the Bank and Union Issuances. The Bank gave its consent in principle to fulfill all the conditions of the Offered Securities, which will be held by the public. The Bank will issue a specific and separate undertaking, in advance, in respect to every Bonds issue of the issued series, whereby the Bank will undertake to fulfill the conditions of that series of Bonds and repay them in accordance with their terms. The Bank's undertaking as aforesaid may not be canceled or changed. According to an agreement signed on August 28, 2011 between Union Issuances and the Bank (hereinafter: "2011 Agreement") which applies to issues of debentures and/or bonds and/or commercial securities (hereinafter: "The Offered Securities"), offered by virtue of a shelf prospectus which Union Issuances published on August 29, 2011 (hereinafter: "2011 Shelf Prospectus"), the Bank will cover all of the direct costs incurred by Union Issuances in the issuance of the Offered Securities, immediately upon their actual payment. The 2011 Agreement also provided that the consideration from the Offered Securities according to the 2011 Shelf Prospectus will be deposited by Union Issuances in deposits with the Bank, on settlement and linkage terms similar to the terms of the Offered Securities, and on interest terms identical or preferable thereto, as agreed with the Bank from time to time, allowing full and punctual payment of the Offered Securities, plus a margin at the rate of 0.05% or such other rate as shall be agreed by the Bank and Union Issuances, in order to approximately cover the routine expenses of Union Issuances in connection with the Offered Securities to be issued as aforesaid. The 2011 Agreement shall not detract from the validity of previous deposit agreements made by Union Issuances with the Bank, which apply to offerings issued pursuant to earlier prospectuses of Union Issuances, as follows: On April 12, 2005, a deposit agreement was signed between the Bank and Union Issuances in connection with the shelf prospectus published by Union Issuances on April 13, 2005
- 399 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (16) (cont'd) (hereinafter: "the 2005 Agreement"). On November 22, 2005 an addendum to the 2005 Agreement was signed between the Bank and Union Issuance, whereby the agreement was extended to cover also bonds which were listed for trade pursuant to a prospectus dated November 22, 2005; On December 18, 2006, a deposit agreement was signed between the Bank and Union Issuances (as amended on January 1, 2007) in connection with the shelf prospectus published by Union Issuances on January 7, 2007; On August 27, 2009, a deposit agreement was signed between the Bank and Union Issuances in connection with the shelf prospectus published by Union Issuances on August 31, 2009 (hereinafter: "Previous Deposit Agreements". The Previous Deposits Agreements provided, inter alia, as follows:
A. The consideration from the issuance of the bonds to be issued under the aforesaid prospectuses shall be deposited by Union Issuances in deposits with the Bank (hereinafter: the “Deposits”). Each of the Deposits shall have maturity and linkage terms similar to the terms of the bonds offered under the aforesaid prospectuses, and on interest terms identical and/or preferable thereto, plus a margin of 0.12% (or such other margin as shall cover the expenses of Union Issuances relating to the issuance of the bonds).
B. Each deposit shall have a repayment priority rank equal to the repayment priority rank of the bonds the consideration for which was deposited in the deposit.
C. The Bank granted its consent in principle to comply with all of the terms of the bonds to be offered pursuant to the said prospectuses, which will be held by the public. The Bank's undertaking cannot be canceled or changed, as third-party rights are dependent upon it, i.e. the rights of the bondholders and the trustees of the bonds.
D. The agreements shall remain in effect as long as the bonds are in circulation.
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NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(17) On September 10, 2014, further to approval by the Insurance Committee of the Board of Directors of the Bank on September 4, 2014, and approval by the Remuneration Committee of the Board of Directors on September 7, 2014, and in accordance with the principles established in the officers' remuneration policy of the Bank, as approved by the General Meeting of the Bank, the Board of Directors of the Bank approved the purchase of a directors' and officers' liability insurance (D&O) policy for the Bank and its subsidiaries, with a liability limit of USD 100 million per event and per period (hereinafter: the "D&O Policy"), together with the purchase of a banking insurance policy with a liability limit in the same amount per event and per period, for a period of up to eighteen months, from September 15, 2014 to March 14, 2016. The policies were purchased from a consortium of insurers in London. "Front-office services" for the policies were purchased from The Phoenix Insurance Company Ltd. The premium paid by the Bank for the purchase of the D&O Policy (including in respect of the aforesaid front-office services) is in a total amount of approximately USD 338,000 for eighteen months, for all of the directors of the Bank, including directors who are controlling parties of the Bank or relatives thereof, who have an interest in the purchase of the D&O Policy. The D&O Policy applies under the same terms both to officers who are controlling parties of the Bank or their relatives: Mr. Yeshayahu Landau and Mr. Yigal Landau, his son, who serve as directors of the Bank (Mr. Yeshayahu Landau is one of the controlling parties of the Bank, through his holdings in Yeshayahu Landau Holdings (1993) Ltd. and Yeshayahu Landau Properties (1998) Ltd.), and Mr. Yitzhak Manor, who serves as a director of the Bank (Mr. Yitzhak Manor is the husband of Mrs. Ruth Manor, who is one of the controlling parties of the Bank through her holdings, with Dr. Yael Almog, in David Lubinski Properties (Holdings) 1993 Ltd. and in Cheroudar Properties Ltd.), and to other officers of the Bank.
(18) Various Claims Against the Bank and its Subsidiaries A. A number of legal actions are pending against the Bank and the consolidated companies. Adequate reserves have been made in accordance with generally accepted accounting principles in respect of all the expected losses from pending claims against the Bank, including requests to approve class actions, regarding claims for which, in the opinion of the Bank's management, on the basis of legal opinions as to the risks inherent in these claims, there is a need for provision of a reserve. No provision has been made in respect of claims which, in the opinion of the Bank's management and its legal adviser, have little chances of success. The additional amount of exposure, in respect of contingent claims the chances of realization whereof are not remote, and for which no provision has been made, is approximately NIS 19 million.
- 401 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (18) (cont'd) B. In December 2007, a payment demand in a total amount of USD 10 million was served on the Bank in connection with activity in the capital market of a holder of power of attorney in an account (the “Demand”). The Demand was filed by the trustee in bankruptcy of the assets of the holder of the power of attorney. The main allegations in the Demand concern the conduct of the holder of the power of attorney in the relevant bank accounts. According to the trustee, the Bank violated the trust of the Bank's customers and the duty of care towards the customers of the holder of the power of attorney, and was in breach of its statutory duties by allowing the holder of the power of attorney to perform the alleged acts of fraud against his own customers. After the Bank rejected the Demand, the trustee in bankruptcy of the holder of the power of attorney filed a report to the court in which allegations are made against the Bank with regard to the management of the accounts, including that the Bank violated the duty of care and fidelity incumbent upon it as a bank, and violated regulations related to the prohibition of money laundering and/or taxation. In the aforesaid report, no monetary relief was requested against the Bank, but the Bank was asked to respond to the report and to provide various specific reports and documents. Pursuant to a ruling by the court, the Bank must provide reports and documents to the trustee regarding the account of the holder of the power of attorney (to the extent that these exist) and not any other account. In late October 2011, a monetary claim in the amount of NIS 12 million was filed against the Bank in the Central District Court, by two plaintiffs who are not customers of the Bank, who claim that they incurred damage due to the actions of the holder of power of attorney as aforesaid. The claim of one of them was denied with the consent of the parties, which was recorded as a judgment, and the remaining claim, which stood at NIS 4.7 million, was also recently dismissed with the consent of the parties, which was recorded as a judgment., In December 2011, an additional claim in the amount of NIS 6 million was filed against the Bank with the District Court in Tel Aviv, in connection with an account opened in the name of the plaintiff under a power of attorney granted to the aforesaid holder of power of attorney, in which the plaintiff states that he incurred damage due to these actions. This claim was summarily rejected, but an appeal was filed. On June 2014 a claim in the amount of NIS 2.6 million was filed against the Bank in the District Court in Haifa by three plaintiffs who had accounts at the Bank. They claim that they suffered losses at the hands of the holder of power of attorney as mentioned above. These two claims were treated in accordance with generally accepted accounting
- 402 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (18) (cont'd) principles, based on the estimation of the Bank's management, which relied on its legal advisors. C. On October 29, 2009, a claim was filed with the Central District Court by Zeevi Communications Holdings Ltd. (in receivership) and Zeevi Communications – Financing and Management Ltd. (in receivership) for declaratory relief against the Bank and against six other banks, concerning the alleged attempt by the banks to collect differentials from the plaintiffs in respect of “penalty interest,” as it is called in the claim, on a loan extended to them by the banks, for which shares of Bezeq The Israel Communications Corporation Ltd. served as collateral. The accrued differentials, according to the claim, as of the filing date of the claim, amount to approximately NIS 840 million for all of the banks (hereinafter: the “Amount of the Differentials in Respect of the Penalty Interest”) beyond the contractual interest, as defined in the claim. The plaintiffs request declaratory orders stating as follows: ‐ The banks are not entitled to charge the plaintiffs with differentials in respect of the penalty interest, as it is defined in the claim. ‐ The Amount of the Differentials in Respect of the Penalty Interest shall be reduced to a total of approximately NIS 37 million. ‐ In accordance with the foregoing, the total debt of the plaintiffs is in the amount of approximately NIS 176 million, as of the filing date of the claim (rather than a total of approximately NIS 981 million, as claimed by the banks). ‐ Alternatively, that the banks are entitled to charge the plaintiffs for the period from May 2003 onwards only for differentials in respect of interest pursuant to the Adjudication of Interest and Linkage Law, 1961, in relation to the debt of the plaintiffs accrued up to that date; and that accordingly, the total debt of the plaintiffs is in the amount of approximately NIS 459 million, as of the filing date of the claim.
The claim is based on several main grounds, including the arguments that the “penalty interest” actually constitutes “agreed compensation,” which the court is permitted to reduce; and that the examination of the circumstances of the case necessitates the conclusion that there is justification to reduce the amount; that the reduction of the penalty interest differentials is also mandated by the interpretation of the loan agreement, in accordance with the opinion of the parties; that charging the plaintiffs with penalty interest would constitute unjust enforcement of the loan agreement; that
- 403 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (18) (cont'd) C. (cont'd)
the banks’ insistence on charging the plaintiffs with penalty interest constitutes bad faith; and that the collection thereof would constitute unjust enrichment of the banks. The claim does not refer to the “share” of each of the banks in the Amount of the Differentials in respect of the Penalty Interest, but notes the percentage of the participation of the banks in the financing; the Bank’s share is 4%. In January 2010, the court ruled that the claim would be tried as a regular monetary claim, in respect of which the plaintiff must pay the full fee within the timeframe allotted by the court; the fee was paid to the court in February 2010.
According to the opinion of the legal advisors of the Bank, it can be assumed that the share of each of the banks in the differentials claimed is in proportion to its participation in the financing.
In July 2013, a partial judgment was given by the court, stating that the claim will be accepted in part, in a limited manner only, so that despite the fact that the plaintiff companies' claim that the conduct of the banks and the official receiver was inappropriate was not accepted, the penalty interest rate in respect of the period from 1.1.2007 to 9.11.2009 the date of the payment of the loan, will be reduced by a rate of 0.5% and will be 2.5% instead of 3%. It was also determined that the banks must return the difference, and that the refund will bear linkage differentials and statutory interest from 9.11.2009 until the actual payment date. The court also instructed that after filing the calculation of the refund by the banks, a supplemental judgment will be given by the court. In November 2013, the court gave a supplemental judgment, according to which, all of the defendant banks will return a total amount of NIS 48 million to the plaintiffs, with the addition of linkage differentials and interest in respect of the period from 9.11.2009 until the actual payment date, and also the expenses and legal fees determined by the court - each bank according to its share in the financing. Since the Bank's share in the financing is approximately 4%, as stated above, the pro-rata debt of the Bank is estimated at NIS 2.3 million, and is expressed in the financial statements. On December 2013 reciprocal appeals were filed against the judgments of the District Court. A ruling on the appeal has not yet been given.
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NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (18) (cont'd) D. A claim against Carmel Union Mortgages and Investments Ltd. (hereinafter - the "Company"): On November 2, 1997, a claim was filed in the District Court in Tel Aviv against Carmel Union Mortgages and Investments Ltd. (formerly Carmel Bank), (a wholly owned subsidiary of the Bank), and three other mortgage banks in an aggregate amount of NIS 500 million, along with a plea for various forms of declaratory relief. In addition, a request was filed for approval of the claim as a class action. The claim alleged, inter alia, that the banks improperly collected from the borrowers and the guarantors commissions in respect of borrowers' life insurance and assets pledged to the Bank, and that they are entitled to a return of the amounts of these commissions. The Company, as well as the other defendants, filed requests to summarily dismiss the motion to approve the claim as a class action. This request has not yet been considered. During a preliminary hearing held in the District Court it was decided to delay the hearing on the case until a final decision is made with respect to the disposition of another request to approve a claim as a class action concerning a similar matter to which the Company is not a party (hereinafter - the "other request"). The other request ended in a settlement which received the court's approval. In addition, it was decided to “freeze” the proceedings in the claim until the Supreme Court hands down an in-principle ruling on the matter of Regulation 29 of the Civil Procedure Regulations - 1984. The Supreme Court has ruled, regarding this issue, that Regulation 29 does not allow the filing of class actions. It should be noted that the plaintiffs have also requested approval of the claim as a class action under other laws that establish arrangements for the filing of class-action suits. With regard to the proceedings in the claim which rely on other grounds, the suspension stands until further determination. In addition to the aforementioned, in the opinion of the Company’s legal advisors certain causes of action of the plaintiffs, who are borrowers of the Company, are out of time, the size of the group the plaintiffs request to represent in the class action cannot be evaluated and estimated, and the relief requested in the class action including the method of calculating the damages is unclear and indefinable, including the question as to what part of the amount is attributable to the Company. The legal advisors believe that under these circumstances, the uncertainty concerning the proceeding, both factual and legal, is so great as to render it impossible to evaluate the risk in respect of the claim. Since the aforesaid claim is still in its very early stages, and the motion for approval of the claim as a class action has not yet been heard, the management of the Company and the Bank, based on the opinion of its legal advisors, is unable, at this stage, to estimate the results of the claim.
- 405 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (18) (cont'd) E. In March 2014, the Bank received a petition filed by customers of the Bank and other petitioners with the District Court of Tel Aviv for the approval of a class action against the Bank and four other banks, concerning the collection of certain fees, allegedly unlawfully, by the respondents, in connection with the conversion and delivery of foreign currency, a lack of due disclosure and alleged misleading of the customers with regard to the costs involved in conversion services, and the prima facie existence of a restrictive arrangement with respect to the pricing, service, and due disclosure provided in connection with foreign currency (hereinafter: the "Petition").
The petitioners note in the petition that there is no petitioner with a personal cause of action against the Bank with regard to a violation of the banking laws. According to the petition, the represented group consists of all persons or legal entities which used the Banks' services to carry out conversion, delivery, or receipt of foreign currency, as well as the general public in Israel, which is directly or indirectly harmed by the alleged violations, as defined by the court. The remedies requested in the claim are, inter alia, a mandatory injunction for the disclosure of all costs involved in providing currency exchange services, including exchange-rate differences; a mandatory injunction obligating the banks to establish and implement an inter-bank clearing system for foreign currency; a prohibitory injunction on the collection of any fee on the fee list and/or exchange-rate differences, until a final ruling is given on the claim; and also a demand for monetary compensation, which has been set, against all of the respondent banks in the petition in aggregate, at approximately NIS 2.07 billion. In the opinion of the Bank's management, based on the opinion of its legal advisors, at this point, with the aforesaid claim still in its earliest stages, after the Bank's response has been submitted but before the petition to approve the claim as a class action has been heard, the probability of acceptance of the claim can be said to be remote.
- 406 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (18) (cont'd) F. 1. Claim against Union Bank Trust Company Ltd. (hereinafter: the “Company”) On June 22, 2009, an amended claim in the amount of NIS 10 million was filed with the District Court against the Bank and its wholly owned subsidiary Union Bank Israel Trust Company Ltd. (jointly: the “Bank”), by Red-Rock Holdings Ltd., an American company, and its subsidiary, Red Rock Commodities (“Commodities”), which is an American company currently undergoing liquidation in Israel (jointly: the “Plaintiffs”). The amount stated in the statement of claim prior to the amendment was approximately USD 178 million (hereinafter: the “Original Amount”). The Plaintiffs applied for an exemption from the payment of a fee in respect of the Original Amount, but this application was denied. Subsequently, the Plaintiffs petitioned to amend the statement of claim to the amount of NIS 10 million (for fee purposes) (hereinafter: the “Amended Amount”), and this petition was granted. The Plaintiffs also petitioned to reduce the fee payment and to pay a fee according to the Amended Amount, despite the fact that it was ruled in the previous ruling that they must pay a far higher fee. This petition was granted; subsequently, the fee was paid and the aforesaid claim was filed. In the amended statement of claim, the Plaintiffs note that the amount of the claim is approximately USD 155 million, and NIS 10 million for the purposes of the fee. In brief, the Plaintiffs' arguments concern events which occurred in 1992, alleging that the Bank allowed the release to a third party of steel cargoes imported to Israel for it, without payment for the steel cargoes by the third party. The Plaintiffs state that the Bank thereby violated a trust agreement signed between it and the American company, in which the Bank undertook a commitment to check and ensure that the steel cargoes were stored and safeguarded at the port. According to the Plaintiffs, because the Bank failed to fulfill this obligation, it must pay the Plaintiffs the amount which they were owed by that third party for the steel bars, plus interest. Alternatively, the Plaintiffs allege that the Bank made negligent misrepresentations to them, and was in breach of its alleged duty of care towards them, duties under the Bailment Law,
- 407 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (18) (cont'd) F. 1. (cont'd) duties under the Banking Law (Service to Customers), and its obligation to insure the steel cargoes. A compromise agreement in an insignificant amount was signed between both parties, which was approved by the court and was afforded the status of a judgment, although there is still a pending procedure filed by the controlling owner of the plaintiff companies appealing against this agreement. The Bank's management estimates, according to its legal advisors, that the chances of the appeal are low. The Bank has an arrangement with its insurers regarding the coverage of a major part of the amounts that might be payable in respect of the claim, including the legal expenses of the conduct thereof.
2. On January 1, 2015, a petition was filed with the Economic Department of the District Court of Tel Aviv against the Company, which is a wholly-owned subsidiary of the Bank, to approve a class action filed against nine mutual trust investment fund managers and six trustees of these funds, including the Company.
The class represented in the action consists of anyone who held participatory units of any mutual fund that was under the management of one or more of the defendant fund managers during the period ended on December 27, 2011, or during part of that period, and was charged brokerage fees and/or was directly or indirectly charged payment for operational services.
The statement of claim alleges, inter alia, that the defendant fund managers, prior to Amendment 14 to the Joint Trust Investments Law, 1994 entering into force (i.e. up to December 27, 2011), executed transactions for the funds under their management without making efforts to reduce the brokerage fees paid by the owners of units in the funds, so that the owners of units in the funds paid brokerage fees in a total amount exceeding the amount that they should have paid by tens of percent.
The arguments against the trustees who are defendants in the claim are that they violated their duty to act in the best interests of the investors in the funds and to supervise the actions of the mutual funds in which the public invested its money, according to the directives of the laws applicable to them.
- 408 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (18) (cont'd) F. 2. (cont'd) The amount of the claim for all members of the group is NIS 220 million, of which a total of NIS 26.44 million is attributed to the Company; the amount claimed from the relevant fund managers overlaps the amount claimed from the trustees.
The amount of the personal claim of the claimants is NIS 845.
The damage was divided among the trustees, according to the claimants, based on an estimate of their market share relative to the assets of the defendant fund managers, excluding the assets of money-market funds and shekel funds, under the assumption that an additional 10% of the funds' assets were exempt from brokerage fees.
In the opinion of the Bank's management, based on the opinions of its legal advisors, given that the aforesaid claim is still in its earliest stages, the Company's response has not yet been submitted, and the petition to approve the claim as a class action has not yet been heard, it cannot estimate its outcome at this stage.
G. In March 2014, the Bank received a petition to certify a class action against the Bank filed by shareholders of the Bank with the Economic Department of the District Court of Tel Aviv, concerning the Bank's failure to pay dividends during 2011 in respect of its profits in 2010, which allegedly, according to the petition, constitutes violation of a commitment, fraud and misleading of investors, negligence, and breach of a statutory duty (hereinafter: the "Petition"). According to the Petition, the represented class consists of all holders of ordinary shares of par value NIS 1 of the Bank on December 31, 2011, subject to the ruling of the court. The remedies requested in the Petition include, inter alia, an order to the Bank to disclose the number of customers who held its shares on December 31, 2011; to expose the discussions conducted at the Bank in 2011 prior to its decision not to distribute dividends in that year, allegedly in contradiction of its distribution policy; and to appoint an independent investigator, who should be granted full access to information. Further requested is monetary compensation for the members of the represented class in the full amount of the dividend that the Bank allegedly should have paid in 2011, linked to the cost of living index and bearing maximum statutory
- 409 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (18) (cont'd) G. (cont'd) interest, from December 31, 2011 to the date of actual payment. The amount of the claim for all members of the class has been set at a total of approximately NIS 62 million. In the opinion of the Bank's management, based on the opinion of its legal advisors, at this stage, with the aforesaid claim still in its earliest stages, after the Bank's response has been submitted but before the motion to approve the claim as a class action has been heard, the probability of acceptance of the claim can be said to be remote.
H. On November 5, 2013, the Bank was served with a motion, filed in the Jerusalem District Court, for the approval of a class action against the Bank and 4 other banks, concerning the collection of a commission in regard to credit and collaterals upon renewal of credit with no change or additional collateral, and this is allegedly contrary to the full tariff set forth in Schedule One of The Banking (Service to Customers) (Fees) Law, 2008. The class to which the claim is attributed includes all of the customers who were charged with the aforesaid fee from the time the full tariff came into force on 1.1.2008. The requested relief in the claim is a mandatory injunction instructing the banks to update their tariffs and/or their guidelines so that customers who want to renew their credit lines (without any change or additional collateral) will be exempt from payment of a credit or collateral commission, and a monetary claim against all of the banks together in a total amount of NIS 2 billion. The monetary relief is estimated by the plaintiffs, based on data from the financial statements of each of the defendant banks from 1.1.2008 to 31.12.2012, and on assumptions regarding the income from the commission in question in 2013. From these amounts, the plaintiffs assess that about two thirds were illegally charged, and therefore, the class action against the Bank, according to the claim, amounts to approximately NIS 125 million. In the opinion of the Bank's management, based on its legal advisors, at this point, in which the aforesaid claim is still its earliest stages, after the Bank has already filed its response, but before approval of the claim as a class action, it can be said that the chances of the claim being accepted, relative to the amount of the claim, are very remote.
- 410 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd) (18) (cont'd) I. On February 28, 2013, a statement of claim was filed in the Jerusalem District Court in the amount of NIS 45 million, by the company Heftziba Hofim Ltd. (in liquidation) (hereinafter: "Hofim"), through the special manager on behalf of the official receiver, in his capacity as liquidator of Heftziba Group (in liquidation), against Bank Leumi Le-Israel Ltd., Israel Discount Bank Ltd., the Bank and 4 additional defendants. According to the statement of claim, from March 2006 until the collapse of Heftziba Group in the beginning of August 2007, over NIS 45 million were taken out of Hofim's various bank accounts, and were transferred illegally to other entities, including building companies in the Heftziba Group and other private companies that were controlled by Boaz Yona and/or another defendant. The aforesaid actions were allegedly, in part through Hofim's bank accounts which were maintained in each of the defendant banks, whilst each of them also served as the bank of the aforementioned building companies. It is argued that the banks allowed the withdrawal of money according to improper instructions, even though the actions and the related circumstances should have aroused suspicions, and that the banks knew, or at least should have known, that the giving of such instructions required additional approval from the organs of Hofim itself. It was also claimed that the banks knew, or should have known, that most of the funds were withdrawn from Hofim otherwise than for its benefit, and that the banks themselves were infected with a conflict of interest, because some of the alleged improper financial transfers were to the accounts of the building companies, in which there were debit balances or debit balances exceeding the approved credit lines. The liability of all of the banks for the alleged losses is "jointly and severally, each bank up to a ceiling equal to the amount withdrawn from the Hofim account at that bank", and in relation to Union Bank, the ceiling was approximately NIS 37 million, plus linkage differentials and interest. The claim also states that money was deposited in Hofim accounts that should be reduced from the damages claimed. In the opinion of the Bank's management, based on legal advice, on the basis of the information and data known to it at this point, and although the aforesaid claim is still in its earliest stages, the chances of the main amount of the claim being accepted are remote.
- 411 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 18 - Contingent Liabilities and Commitments (cont'd)
C. Contingent liabilities and commitments (cont'd)
(19) On August 18, 2011, a subsidiary of the Bank – Union Systems Ltd., a private company providing computer services to the Bank (hereinafter: "the Company") received a letter from the Israel Tax Authority, stating that the ITA had decided to change the company's classification from "business" to "financial institution," effective September 1, 2011. The significance of the change in classification is a "notional sale" of the Company's assets (computer equipment), in respect of which input tax was deducted upon purchase, and the imposition of VAT in respect thereof. The date of the "sale" shall be according to the date of the change in classification. The Company disputes the decision to change the classification, and filed its objection on December 1, 2011. In July 2012 the Tax Authority informed the Company of the rejection of its objection. In October 2012 the Company filed an appeal to the District Court regarding the Tax Authority's decision regarding the appeal and this is still pending. The Bank estimates that the reclassification will not materially affect the Bank's financial situation.
(20) In recent years, the Bank instigated the formulation of a dedicated written clearing arrangement to all of the Banks in Israel which specialize in the management of diamond accounts and which clear checks, denominated in USD, which are drawn on accounts of diamond merchants. The arrangement was formulated in cooperation with the Bank of Israel and was filed, as required, to the Antitrust Commissioner, in order to receive an exemption from approving a restrictive arrangement. On September 3, 2013 the Antitrust Commissioner announced the grant of an exemption for a period of a year and a half for the aforesaid arrangement.
- 412 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 19 – Activity of Derivative Instruments – Volume, Credit Risks and Maturity Dates Reported Amounts A. Volume of Activity on a Consolidated Basis (1) Stated Amounts of Derivative Instruments December 31, 2014 Foreign Interest Contracts Currency Shares Commodity NIS-CPI Other Contracts Related and Other Total Contracts Contracts NIS millions a. Hedging derivatives(1) Swaps - 116 - - - 116 Total - 116 - - - 116 Of which interest rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 116 - - - 116
b. ALM Derivatives (1)(2) Forward contracts 942 - 9,376 - 25 10,343 Option contracts traded on the Stock Exchange: Options written - - 39 - - 39 Options bought - - 655 - - 655 Other options contracts: Options written - - 4,770 33 - 4,803 Options bought - - 4,093 33 - 4,126 Swaps - 5,288 - - - 5,288
Total 942 5,288 18,933 66 25 25,254
Of which interest rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 2,802 - - - 2,802
c. Other derivatives (1) Futures contracts - - - 1,751 - 1,751 Forward contracts - - 298 - - 298 Option contracts traded on the Stock Exchange: Options written - - 1,057 9,198 - 10,255 Options bought - - 1,057 9,146 - 10,203 Other options contracts: Options written - - 298 - - 298 Options bought - - 299 228 - 527 Swaps - 282 - - - 282
Total - 282 3,009 20,323 - 23,614 Of which the banking corporation has agreed to pay a fixed interest rate - 141 - - - 141
d. Credit Derivatives and spot swap foreign currency contracts
Credit derivatives for which the banking corporation - - - - 78 78 is a beneficiary Spot swap foreign currency contracts - - 2,481 - - 2,481
(1) Except for credit derivatives and foreign currency spot swap contracts. (2) Derivatives constituting part of the Bank’s asset and liabilities management that have not been designated for hedging.
- 413 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 19 – Activity of Derivative Instruments - Volume, Credit Risks and Maturity Dates (cont’d) Reported Amounts A. Volume of Activity on a Consolidated Basis (cont’d) (2) Gross Fair Value of Derivative Instruments December 31, 2014
Foreign Shares Commodity Total Interest contracts currency related and other NIS-CPI Other contracts contracts contracts NIS millions
a. Hedging derivatives(1) Gross negative fair value - 8 - - - 8
b. ALM derivatives (1)(2) Gross positive fair value 10 51 231 5 -* 297 Gross negative fair value 4 111 242 5 - 362
c. Other derivatives (1) Gross positive fair value - 2 20 185 - 207 Gross negative fair value - 2 20 188 - 210
d. Total Gross positive fair value 10 53 251 190 -* 504 Amounts of fair value offset in the balance sheet ------Balance sheet balance of assets in respect of derivative instruments 10 53 251 190 -* 504 Of which: balance sheet balance of assets in respect of derivative instruments not subject to a netting arrangement or similar arrangements -* 1 125 - -* 126
Gross negative fair value (3) 4 121 262 193 - 580 Amounts of fair value offset in the balance sheet ------Balance sheet balance of liabilities in respect of derivative instruments 4 121 262 193 - 580 Of which: balance sheet balance of liabilities in respect of derivative instruments not subject to a netting arrangement or similar arrangements -* - 45 8 - 53
(1) Except for credit derivatives. (2) Derivatives constituting part of the Bank’s assets and liabilities management that haven't been designated for hedging relations. (3) Of which: Gross negative fair value of liabilities in respect of embedded derivative instruments in the amount of NIS 5 million.
* Less than NIS 500 thousand.
- 414 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 19 – Activity of Derivative Instruments - Volume, Credit Risks and Maturity Dates (cont’d) Reported Amounts B. Credit Risk in Respect of Derivative Instruments, According to Counterparty on a Consolidated Basis December 31, 2014 Dealers/ Stock Banks Brokers Governments Others Total Exchanges and Central Banks NIS millions
Balance sheet balance of liabilities in respect of derivative instruments 68 177 4 - 255 504 Gross amounts not offset in the balance sheet: Credit risk mitigation in respect of financial instruments - (155) - - (5) (160) Net total assets in respect of derivative instruments 68 22 4 - 250 344 Off-balance sheet credit risk in respect of derivative instruments (1) - 148 48 - 136 332 Off balance sheet credit risk mitigation - (70) - - (6) (76) Net off balance sheet credit risk in respect of derivative instruments - 78 48 - 130 256 Total credit risk in respect of derivative instruments 68 100 52 - 380 600 Balance sheet balance of liabilities in respect of derivative instruments (2) 95 323 27 - 135 580
Gross amounts not offset in the balance sheet: Financial instruments - (155) - - (5) (160) Net total liabilities in respect of derivative instruments 95 168 27 - 130 420
(1) The difference, if it's positive, between the total amounts in respect of derivative instruments (including in respect of derivative instruments with a negative fair value) included in the borrowers' indebtedness, as calculated for the purpose of restrictions on the borrowers' indebtedness, before reduction of credit risk, and the balance sheet balance of assets in respect of derivative instruments of the borrower. (2) Of which: balance sheet balance of derivative instruments standing on their own in the amount of NIS 575 million.
- 415 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 19 – Activity of Derivative Instruments - Volume, Credit Risks and Maturity Dates (cont’d) Reported Amounts
C. Repayment Schedule - Stated Amounts: Year-End Balances on a Consolidated Basis
December 31, 2014 Up to 3 From 3 months From 1 year to months to 1 year 5 years Over 5 years Total NIS millions Interest rate contracts NIS-CPI 730 60 152 - 942 Other 78 1,190 3,101 1,317 5,686 Foreign currency contracts 17,983 6,412 23 5 24,423 Shares related contracts 19,810 160 354 65 20,389 Commodities and other contracts 25 - 78 - 103
Total 38,626 7,822 3,708 1,387 51,543
- 416 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 19 – Activity of Derivative Instruments - Volume, Credit Risks and Maturity Dates (cont’d) Reported Amounts A. Volume of Activity on a Consolidated Basis (1) Stated Amounts of Derivative Instruments December 31, 2013 Foreign Interest contracts currency Shares Commodity NIS-CPI Other contracts related and other Total contracts contracts NIS millions a. Hedging derivatives(1) Swaps - 67 - - - 67 Total - 67 - - - 67 Of which interest rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 67 - - - 67
b. ALM Derivatives (1)(2) Forward contracts 605 - 9,191 - 69 9,865 Option contracts traded on the Stock Exchange: Options written - - 44 - - 44 Options bought ------Other options contracts: Options written - - 1,303 87 - 1,390 Options bought - - 1,378 87 - 1,465 Swaps - 4,232 - - - 4,232
Total 605 4,232 11,916 174 69 16,996
Of which interest rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate - 2,906 - - - 2,906
c. Other derivatives (1) Futures contracts - - - 1,323 - 1,323 Forward contracts - - 2,094 - - 2,094 Option contracts traded on the Stock Exchange: Options written - - 1,448 10,759 - 12,207 Options bought - - 1,448 10,759 - 12,207 Other options contracts: Options written - 54 1,587 - 108 1,749 Options bought - 54 1,558 220 115 1,947 Swaps - 187 - - - 187
Total - 295 8,135 23,061 223 31,714 Of which the banking corporation has agreed to pay a fixed interest rate - 93 - - - 93
d. Credit Derivatives and spot swap foreign currency contracts
Credit derivatives for which the banking corporation is a beneficiary - - - - 121 121 Spot swap foreign currency contracts - - 2,020 - - 2,020
(1) Except for credit derivatives and foreign currency spot swap contracts. (2) Derivatives constituting part of the Bank’s asset and liabilities management that have not been designated for hedging. - 417 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 19 – Activity of Derivative Instruments - Volume, Credit Risks and Maturity Dates (cont’d) Reported amounts A. Volume of activity on a consolidated basis (cont’d) (2) Gross fair value of derivative instruments December 31, 2013
Foreign Shares Commodity Total Interest contracts currency related and other NIS-CPI Other contracts contracts contracts NIS millions
a. Hedging derivatives(1) Gross positive fair value - 2 - - - 2 Gross negative fair value - 1 - - - 1
b. ALM derivatives (1)(2) Gross positive fair value -* 34 118 6 1 159 Gross negative fair value 2 113 137 6 1 259
c. Other derivatives (1) Gross positive fair value - 3 107 290 11 411 Gross negative fair value - 3 106 293 11 413
d. Total Gross positive fair value -* 39 225 296 12 572 Amounts of fair value offset in the balance sheet ------Balance sheet balance of assets in respect of derivative instruments -* 39 225 296 12 572
Of which: balance sheet balance of assets in respect of derivative instruments not subject to a netting arrangement or similar arrangements - 1 27 - 1 29
Gross negative fair value (3) 2 117 243 299 12 673 Amounts of fair value offset in the balance sheet ------Balance sheet balance of liabilities in respect of derivative instruments 2 117 243 299 12 673 Of which: balance sheet balance of liabilities in respect of derivative instruments not subject to a netting arrangement or similar arrangements - - 28 8 -* 36
(1) Except for credit derivatives. (2) Derivatives constituting part of the Bank’s assets and liabilities management that haven't been designated for hedging relations. (3) Of which: Gross negative fair value of liabilities in respect of embedded derivative instruments in the amount of NIS 6 million.
* Less than NIS 500 thousand.
- 418 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 19 – Activity of Derivative Instruments - Volume, Credit Risks and Maturity Dates (cont’d) Reported Amounts B. Credit risk in Respect of Derivative Instruments, According to Counterparty on a Consolidated Basis December 31, 2013 Dealers/ Stock Banks Brokers Governments Others Total Exchanges and Central Banks NIS millions
Balance sheet balance of liabilities in respect of derivative instruments 104 177 1 - 290 572 Gross amounts not offset in the balance sheet: Credit risk mitigation in respect of financial instruments - (109) - - (53) (162) Net total assets in respect of derivative instruments 104 68 1 - 237 410 Off-balance sheet credit risk in respect of derivative instruments (1) - 406 141 - 196 743 Off balance sheet credit risk mitigation - (203) - - (49) (252) Net off balance sheet credit risk in respect of derivative instruments - 203 141 - 147 491 Total credit risk in respect of derivative instruments 104 271 142 - 384 901 Balance sheet balance of liabilities in respect of derivative instruments (2) 158 269 44 - 202 673
Gross amounts not offset in the balance sheet: Financial instruments - (109) - - (53) (162) Net total liabilities in respect of derivative instruments 158 160 44 - 149 511
(1) The difference, if it's positive, between the total amounts in respect of derivative instruments (including in respect of derivative instruments with a negative fair value) included in the borrowers' indebtedness, as calculated for the purpose of restrictions on the borrowers' indebtedness, before reduction of credit risk, and the balance sheet balance of assets in respect of derivative instruments of the borrower. (2) Of which: balance sheet balance of derivative instruments standing on their own in the amount of NIS 667 million.
- 419 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 19 – Activity of Derivative Instruments - Volume, Credit Risks and Maturity Dates (cont’d) Reported Amounts
C. Repayment Schedule - Stated Amounts: Year-End Balances on a Consolidated Basis
December 31, 2013 Up to 3 From 3 months From 1 year to months to 1 year 5 years Over 5 years Total NIS millions Interest rate contracts NIS-CPI 150 403 52 - 605 Other 643 890 1,356 1,705 4,594 Foreign currency contracts 18,290 3,774 7 - 22,071 Shares related contracts 22,881 86 266 2 23,235 Commodities and other contracts 289 55 69 - 413
Total 42,253 5,208 1,750 1,707 50,918
- 420 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 20 - Balances and fair value estimations of financial instruments
Reported amounts
A. Balances on a consolidated basis December 31, 2014 Balance Fair value* sheet value Level 1 Level 2 Level 3 Total NIS millions Financial assets Cash on hand and deposits with banks 9,848 1,168 - 8,679 9,847 Securities (1) 6,789 5,195 1451 143 6,789 Borrowed securities 182 182 - - 182 Net credit to the public 21,713 1,405 - 20,123 21,528 Assets in respect of derivative instruments 504 196 163 145 504 Other financial assets 1,129 1,045 - 84 1,129 Total financial assets 40,165(2) 9,191 1614 29,174 39,979
Financial liabilities Deposits from the public 31,498 1,272 - 30,343 31,615 Deposits from banks 152 72 - 80 152 Deposits from the Government 1 - - 1 1 Subordinated notes and bonds 3,474 3,618 70 - 3,688 Liabilities in respect of derivative instruments 575 197 358 20 575 Other financial liabilities 2,364 1,868 - 496 2,364 Total financial liabilities 38,064(2) 7,027 428 30,940 38,395
December 31, 2013 Balance Fair value* sheet value Level 1 Level 2 Level 3 Total NIS millions Financial assets Cash on hand and deposits with banks 9,924 1,493 - 8,428 9,921 Securities (1) 4,810 3,987 569 254 4,810 Borrowed securities 503 503 - - 503 Net credit to the public 22,135 1,251 - 20,671 21,922 Assets in respect of derivative instruments 572 308 169 95 572 Other financial assets 865 813 - 52 865 Total financial assets 38,809(2) 8,355 738 29,500 38,593
Financial liabilities Deposits from the public 30,622 1,185 - 29,545 30,730 Deposits from banks 209 66 - 143 209 Deposits from the Government 3 - - 3 3 Subordinated notes and bonds 3,109 3,146 175 - 3,321 Liabilities in respect of derivative instruments 667 308 357 2 667 Other financial liabilities 2,084 1,638 - 446 2,084 Total financial liabilities 36,694(2) 6,343 532 30,139 37,014
* Level 1 – Fair value measurements using prices quoted in an active market. Level 2 - Fair value measurements using other significant observed inputs. Level 3 - Fair value measurements using significant unobserved inputs.
(1) For further details regarding a balance sheet balance and the fair value of the securities – see Note 3. (2) From this: Assets totaled NIS 12,625 million (December 31, 2013 – NIS 10,850 million), Liabilities totaled NIS 10,594 million (December 31, 2013 – NIS 7,874million) whose balance sheet balance is the same as their fair value (the instruments are presented at fair value in the balance sheet). For additional information regarding instruments measured at fair value on a recurring basis and on a non-recurring basis see Notes 20.A-20.C.
- 421 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 20 - Balances and Estimates of Fair Financial Instruments (cont'd.) B. Fair value of financial instruments The note includes information concerning assessment of the fair value of financial instruments. With regard to financial instruments measured in the balance sheet and/or in profit and loss at fair value, see details in Note 20.A. A "market price" cannot be quoted for the other financial instruments because there is no active market in which they are traded (excluding negotiable subordinated notes). Therefore, their fair value is estimated by means of accepted pricing models, such as the present value of future cash flows capitalized by an interest rate that reflects the level of risk inherent in the financial instrument. An estimate of fair value by means of assessment of the future cash flows and the setting of a capital interest rate is subjective. For the majority of financial instruments, therefore, the following assessment of fair value is not necessarily an indication of the exercise value of the financial instrument on the balance-sheet date. The fair value is assessed on the basis of interest rates close to the balance- sheet date, and does not take interest rate fluctuation into account. Under the assumption of other interest rates, fair values would be obtained that may differ materially. This mainly applies to financial instruments that bear fixed rate of interest or that do not bear interest. In addition, commissions to be received or paid in the course of business activity were not taken into account in determining the fair values, nor the tax effect. Moreover, the difference between the balance- sheet balance and fair-values balances may not be realized, because in the majority of cases the financial instrument may be held to maturity. Due to all of these factors, it should be emphasized that the data included in this note is insufficient to indicate the value of the Bank as a going concern. In addition, due to a broad spectrum of assessment techniques and estimates that can be applied in assessing fair value, caution should be exercised when comparing fair values between different banking groups.
C. Main methods and assumptions for the purpose of estimating the fair value of financial instruments 1. Cash on hand - balance-sheet balance represents fair value. 2. Deposits in banks - capitalization of the future cash flows are based on interest rates used by the Bank in similar transactions close to the balance-sheet date. 3. Securities- Securities with an active market were estimated at market value. Securities not traded in an active market were estimated using pricing models used by the Bank, except non-tradable shares which are presented at cost (which is an estimation for fair value) - See details in Note 20A. 4. Credit to the public - the fair value of the credit to the public is estimated using the method of the present value of future cash flows using interest rates where the Bank executed similar transactions close to the balance-sheet date. Each group was broken down into categories based on linkage basis and repayment periods. In addition, for each category the value of the future receipts (principal and interest) was computed. Such receipts were capitalized using interest rates at which the Bank executed similar transactions close to the balance-sheet date.
- 422 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 20 - Balances and Estimates of Fair Financial Instruments (cont'd.) C. Main methods and assumptions for the purpose of estimating the fair value of financial instruments (cont'd) 4. (cont'd) In addition, a breakdown into several additional categories was made which reflect the level of risk implicit in the credit granted to different borrower groups, and which are reflected in the different capitalization rates based on the level of risk. The fair value of problematic debts was computed using discount rates reflecting the high level of credit risk inherent therein. In any case, the discount rates applied were not less than the highest interest rate used by the Bank in execution of its transactions at the report date. The future cash flows from problematic debts were computed after deduction of the provisions for credit losses. In addition, the sensitivity of the estimated fair value of the problematic debts to the discount interest rates was also tested. This test indicated that the addition of 1% to the discount interest rate would reduce a total of NIS 4 million of the estimated fair value of the problematic debts as at December 31, 2014.
5. Deposits from the public, from banks and from the Government - using the capitalization of future cash flows method based on the interest rate which the Bank pays on similar deposits on the date of the report.
6. Non-tradable Subordinated notes - using the capitalization of future cash flows method based on the interest rate at which the Bank is able to raise funds through similar subordinated notes at the report date.
7. Tradable subordinated notes-based on market value in the Stock Exchange.
8. Off-balance-sheet financial instruments where the balance reflects credit risk, contingent liabilities and extraordinary commitments – the balance sheet balance is an approximation of fair value, because the terms of the transactions in the balance sheet are not materially different from the terms of similar transactions on the reporting date.
9. Derivative financial instruments - derivative financial instruments for which there is an active market were valued at their market value determined in the main market. When a number of markets exist in which the instruments are traded, the evaluation is based on the main market. Derivative financial instruments which are not traded in an active market were valued based on models which the Bank uses in its regular operations which take into account the risks inherent in the particular financial instrument (market risk, credit risk, etc.) See also Note 19.
- 423 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 20A –Items measured at fair value in the balance sheet Reported amounts
Balances on a consolidated basis As at December 31, 2014 Fair-value measurements using Other Prices quoted significant Significant in an active observable unobservable A. Items measured at fair value on a recurrent market inputs inputs Balance Sheet basis (level 1) (level 2) (level 3) balance NIS millions Assets Deposits with banks - - - - Credit to the public (1) 1,405 - - 1,405
Security available for sale: Bonds of the Israeli government 3,284 321 - 3,605 Bonds of foreign governments - 588 - 588 Bonds of financial institutions in Israel 778 - - 778 Bonds of foreign financial institutions - 13 79 92 Asset backed securities (ABS) - 87 - 87 Bonds of others in Israel 370 427 7 804 Bonds of foreign others 33 15 4 52 Shares (2) 47 -* - 47
Securities held for trading: Bonds of the Israeli government 572 - - 572 Bonds of financial institutions in Israel 42 - - 42 Bonds of others in Israel 37 -* -* 37 Bonds of foreign others 6 -* - 6 Shares 26 - - 26
Assets in respect of derivatives instruments: NIS-CPI contracts - 1 9 10 Other interest contracts - 52 1 53 Foreign-currency contracts 11 110 130 251 Share contracts 185 - 5 190 Commodity and other contracts - - - - Assets in respect of activity in the Maof market 1,045 - - 1,045
Total Assets 7,841 1,614 235 9,690
Liabilities Deposits from the public (1) 1,272 - - 1,272 Liabilities in respect of derivate instrument: NIS-CPI contracts - 4 - 4 Other interest contracts - 121 - 121 Foreign-currency contracts 12 233 17 262 Share contracts 185 - 8 193 Commodity and other contracts - - - - Liabilities in respect of activity in the Maof market 1,045 - - 1,045 Other liabilities (3) 823 - - 823 Total Liabilities 3,337 358 25 3,720
(1) Lending of tradable securities. (2) Shares and securities for which no fair value is available, which are presented at cost total NIS 53 million. (December 31, 2013 - NIS 38 million). (3) Short sale of securities.
* Less than NIS 500 thousand.
- 424 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 20A – Items measured at fair value in the balance sheet (Cont'd) Reported Amounts
Balances on a Consolidated Basis As at December 31, 2013 Fair-value measurements using Other Prices quoted significant Significant in an active observable unobservable A. Items measured at fair value on a recurrent market inputs inputs Balance Sheet basis (level 1) (level 2) (level 3) balance NIS millions Assets Deposits with banks 13 - - 13 Credit to the public (1) 1,251 - - 1,251
Security available for sale: Bonds of the Israeli government 2,237 178 15 2,430 Bonds of foreign governments - - - - Bonds of financial institutions in Israel 744 1 - 745 Bonds of foreign financial institutions - 25 124 149 Asset backed securities (ABS) 21 33 1 55 Bonds of others in Israel 359 321 74 754 Bonds of foreign others - 11 2 13 Shares (2) 54 -* - 54
Securities held for trading: Bonds of the Israeli government 548 - - 548 Bonds of financial institutions in Israel *- - - -* Bonds of others in Israel 7 - - 7 Bonds of foreign others - - - - Shares 17 - - 17
Assets in respect of derivatives instruments: NIS-CPI contracts - - -* -* Other interest contracts - 35 4 39 Foreign-currency contracts 18 128 79 225 Share contracts 290 - 6 296 Commodity and other contracts - 6 6 12 Assets in respect of activity in the Maof market 813 - - 813
Total Assets 6,372 738 311 7,421
Liabilities Deposits from the public (1) 1,185 - - 1,185 Liabilities in respect of derivate instrument: NIS-CPI contracts - 2 -* 2 Other interest contracts - 117 - 117 Foreign-currency contracts 17 226 - 243 Share contracts 291 - 8 299 Commodity and other contracts - 12 - 12 Liabilities in respect of activity in the Maof market 813 - - 813 Other liabilities (3) 825 - - 825 Total Liabilities 3,131 357 8 3,496
(1) Lending of tradable securities. (2) Shares and securities for which no fair value is available, which are presented at cost total NIS 53 million. (December 31, 2013- NIS 38 million). (3) Short sale of securities. * Less than NIS 500 thousand. B. Items measured in the balance sheet at fair value on a non-recurring basis Impaired debt whose collection is contingent upon security amounts to NIS 121 million (December 31, 2013 – NIS 290 million) and fair value is ranked at level 3.
- 425 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 20B - Changes in Items Measured at Fair Value on a Recurrent Basis Included in Level 3 Reported Amounts Balances on a Consolidated Basis Year ended December 31, 2014
Net profit (losses) realized and Unrealized profit non-realized and included in: (losses) in respect Fair value Other Fair value of instruments as at Profit and comprehensive Transfer as at held as at December Loss income in Transfer from December December 31, (3) (3) 31, 2013 statement equity Acquisitions Extinguishment to level 3 level 3 31, 2014 2014
NIS millions Assets Securities available for sale: (1) Bonds of the Israeli government 15 4 (1) 1 (1) - (18) - 3 Bonds of foreign financial institutions 124 18 (1) - (62) - - 79 14 Asset backed securities (ABS) 1 -* *- - -* - (1) - -* Bonds of others in Israel 74 12 2 3 (2) 7 (89) 7 9 Bonds of foreign others 2 -* -* - -* 4 (2) 4 -*
Assets in respect of derivative instruments (2): NIS-CPI contracts *- 10 - - (1) - - 9 12 Other interest contracts 4 *- - - (3) - - 1 (1) Foreign currency contracts 79 89 - 24 (79) 17 - 130 89 Share contracts 6 2 - - (3) - - 5 2 Commodity and other contracts 6 *- - - (6) - - *- *-
Total Assets 311 135 *- 28 (157) 28 (110) 235 128
Liabilities Liabilities in respect of derivative instruments (2) NIS-CPI contracts -* 1 - - (1) - - -* -* Foreign currency contracts - - - - - 17 - 17 - Share contracts 8 3 - - (3) - - 8 3
Total Liabilities 8 4 - - (4) 17 - 25 3
(1) Net realized gains (losses) are included in the Profit and Loss Statement, under the item "Non-interest financing income". Net unrealized gains (losses) are included in equity, under the item "Adjustments in respect of the presentation of securities available for sale at fair value", under other comprehensive income. (2) Net realized and unrealized gains (losses) are included in the Profit and Loss Statement, under the item "Non-interest financing income". (3) Transfers from level 2 to level 3 derive from the lack of observable market data in the measurement period, compared with the existence of observable market data in the previous period. Transfers from level 3 to level 2 derive from reverse situation. * Less than NIS 500 thousand
- 426 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 20B - Changes in items measured at fair value on a recurrent basis included in level 3 (Cont'd) Reported Amounts Balances on a Consolidated Basis
Year ended December 31, 2013
Net profit (losses) realized and Unrealized profit non-realized and included in: (losses) in Fair value Other Fair value respect of as at Profit and comprehensive Transfer as at instruments held December Loss income in Transfer from level December as at December (3) (3) 31, 2012 statement equity Acquisitions Issuance Extinguishment to level 3 3 31, 2013 31, 2013 NIS millions
Assets Securities available for sale: (1) Bonds of the Israeli government 2 -* -* 13 - - - - 15 (1) Bonds of foreign financial institutions 136 (4) 1 - - (5) - (4) 124 (6) Asset backed securities (ABS) 1 -* -* - - -* 1 (1) 1 -* Bonds of others in Israel 41 (3) 5 1 - (1) 31 - 74 - Bonds of foreign others 5 (1) - - - - 2 (4) 2 -
Assets in respect of derivative instruments (2): NIS-CPI contracts 5 -* - - - (5) - - -* -* Other interest contracts 7 3 - 2 - (7) - (1) 4 -* Foreign currency contracts 63 (9) - 25 - - - - 79 (9) Share contracts 13 5 - 2 - (14) - - 6 3 Commodity and other contracts 8 (5) - 3 - - - - 6 (5)
Total Assets 281 (14) 6 46 - (32) 34 (10) 311 (18)
Liabilities Liabilities in respect of derivative instruments (2) NIS-CPI contracts 3 2 - - - (5 ) - - -* -* Share contracts 15 6 - 1 - (14) - - 8 4
Total Liabilities 18 8 - 1 - (19) - - 8 4
(1) Net realized gains (losses) are included in the Profit and Loss Statement, under the item "Non-interest financing income". Net unrealized gains (losses) are included in equity, under the item "Adjustments in respect of the presentation of securities available for sale at fair value", under other comprehensive income. (2) Net realized and unrealized gains (losses) are included in the Profit and Loss Statement, under the item "Non-interest financing income". (3) Transfers from level 2 to level 3 derive from the lack of observable market data in the measurement period, compared with the existence of observable market data in the previous period. Transfers from level 3 to level 2 derive from reverse situation. Less than NIS 500 thousand
- 427 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 20C - Additional information regarding significant unobservable inputs and assessment techniques in the measurement of the fair value of items classified level 3 Reported Amounts A. Item Measured at Fair Value on a Recurrent Basis Consolidated: December 31, 2014 Fair value Assessment in NIS Range of Weighted technique Unobservable inputs millions data* average Assets Securities available for sale:
Bonds of foreign financial Capitalization of institutions cash flow Capitalization rate 79 0.83% 0.83% Capitalization of Capitalization period - - - Bonds - others cash flow Price 7 29.1%-54.4% 33.2%
Assets in respect of derivatives instruments: Capitalization rate 9 Capitalization of Counter party credit (1.1%) -0.3% (0.4%) NIS - CPI contracts cash flow risk (CVA) 0.92% 0.92%
Discounted cash flow option pricing Counter party credit Other interest contracts model risk (CVA) 1 5% 5% Discounted cash flow option pricing Counter party credit Foreign currency contracts model risk (CVA) 130 0.29%-5% 3.31%
Discounted cash Commodity and other flow option pricing Counter party credit contracts model risk (CVA) -*** 1.67%-5% 1.89%
Total Assets ** 226
Liabilities Liabilities in respect of derivative instruments: NIS - CPI contracts Discounted cash Discount rate -*** (1.1%) (1.1%) flow 17 0.43% - 1.05% 0.91% Option pricing Share contracts model Standard deviation 3 20.9% 20.9% Total liabilities ** 20
* When the row includes a number of instruments, the range between the instrument with the minimal amount and the instrument with the maximum amount, is displayed. ** In addition, there are assets in the amount of NIS 9 million (as at December 31, 20123 – NIS 87 million) and liabilities in the amount of NIS 5 million (as at December 31, 2013 – NIS 5 million). Untradeable bonds and contracts for shares which were evaluated by an external quoting factor (including an immaterial amount evaluated by the issuer) and the Bank does not have the significant non-observable data which was used for fair value pricing. *** Less than NIS 500 thousand.
- 428 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 20C - Additional information regarding significant unobservable inputs and assessment techniques in the measurement of the fair value of items classified level 3 (Cont'd)
A. Item Measured at Fair Value on a Recurrent Basis (cont'd) December 31, 2013 Fair value Assessment in NIS Range of Weighted technique Unobservable inputs millions data* average Assets Securities available for sale: Bonds of foreign financial Capitalization of institutions cash flow Capitalization rate 124 0.8%-1.1% 1.00% Capitalization of Capitalization period 11 Until 2020 Until 2020 Bonds - others cash flow Price 31.5%-32.2% 31.76%
Assets in respect of derivatives instruments: Capitalization rate -*** Capitalization of Counter party credit (1.03%) -0.12% (0.50%) NIS - CPI contracts cash flow risk (CVA) 0.58%-2.17% 1.08%
Discounted cash flow option pricing Counter party credit Other interest contracts model risk (CVA) 4 0.92%-5% 3.45%
Discounted cash Foreign currency flow option pricing Counter party credit contracts model risk (CVA) 79 0.3%-5% 3.22%
Discounted cash Commodity and other flow option pricing Counter party credit contracts model risk (CVA) 6 1.67%-5% 3.03%
Total Assets ** 224
Liabilities Liabilities in respect of derivative instruments: NIS - CPI contracts Discounted cash Discount rate -*** (1.07%) -0.4% (0.22%) flow Option pricing Share contracts model Standard deviation 3 20.5% 20.5%
Total liabilities ** 3
* When the row includes a number of instruments, the range between the instrument with the minimal amount and the instrument with the maximum amount, is displayed. ** In addition, there are assets in the amount of NIS 9 million (as at December 31, 2013 – NIS 87 million) and liabilities in the amount of NIS 5 million (as at December 31, 2013 – NIS 5 million). Untradeable bonds and contracts for shares which were evaluated by an external quoting factor (including an immaterial amount evaluated by the issuer) and the Bank does not have the significant non-observable data which was used for fair value pricing. *** Less than NIS 500 thousand.
- 429 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 20C - Additional information regarding significant unobservable inputs and assessment techniques in the measurement of the fair value of items classified level 3 (Cont'd)
B. Item Measured at Fair Value not on a Recurrent Basis December 31, 2014 December 31, 2013 Fair value Assessment Technique NIS million
Impaired credit whose Evaluations including collection is contingent coefficients for quick upon collateral realization 121 290
C. Qualitative Information Regarding Fair Value Measurement at Level 3 The main evaluation technique that the Bank uses in order to measure fair value of assets and liabilities at level 3 is capitalization of cash flow. The future cash flow of the instrument is taken from the agreement with the counterparty while the capitalization rate embodies the risk inherent in the instrument. The capitalization rate which is use to capitalize the cash flow is a combination of a risk-free interest which is observable data from the market such as: the interest of the Bank of Israel, Libor or interest from bonds of the state of Israel combined with the evaluation of the risk premium according to the Banks assumptions. A significant increase in the risk premium compared with the Banks' assumptions might cause a reduction in the fair value of the instrument and a reduction in the Banks' capital. The capitalization rate of bonds of foreign financial institutions includes a weighted assessment of the state of Israel and the issuing banks' failure probability. The significant unobservable data which was used to measure fair value of other bonds in Israel is a price which embodies the risk inherent in the instrument. In shekel contracts – the capitalization rate index includes a component of inflation expectations up to a year. The bank implements the clarification of the Bank of Israel, according to which, in cases where there was no observable market inputs found regarding the credit quality of the counterparty, the Banks' exposure to that counterparty will be classified as level 3 rating.
- 430 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 21 - Interested and Related Parties Reported Amounts A. Balances with Related Parties Consolidated: December 31, 2014 Interested Parties Related Parties Held by the Bank Shareholders Key Executives(2) Others(3) Interested Parties at Time Controlling Shareholders Others(1) of Transaction Investee companies Balance Highest Balance Highest Balance Highest Balance Highest Balance Highest Balance Highest at balance balance at balance balance at balance balance at balance balance at balance balance at balance balance sheet during the sheet during the sheet during the sheet during the sheet during the sheet during the date year (4) date year (4) date year (4) date year (4) date year (4) date year (4) NIS millions
Assets - Deposits with banks ------Securities (5) ------Credit to the public 47 53 69 71 3 5 136 136 1 1 - - Provision for credit losses (8) 1 1 1 1 -* -* 2 2 -* -* - - Net credit to public 46 52 68 70 3 5 134 134 1 1 - - Investments in investee companies (5) ------Assets in respect of derivative instruments ------2 - - - - Other assets ------* 1 - - - 1
Liabilities - Deposits from the public -* -* - - -* 6 422 666 - - - - Deposits from banks ------Liabilities in respect of derivative instruments ------1 - - - - Other liabilities - - - - 21 24 ------Deferred liabilities deeds ------282 331 - - - - Shares (included in shareholders' equity)(6) 1,132 1,168 545 562 -* -* 100 103 - - - - Credit risk in off- balance-sheet financial instruments(7) -* 10 4 4 2 3 41 64 - - - -
* Less than NIS 500 thousand.
(1) Including anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (2) Including their close relatives as defined in IAS 24. (3) Corporations, that a person or corporation included in one of the interested party groups, controls them, holds joint control over them, have material influence over them or holds 25% or more of their issued share capital or voting power or may appoint 25% or more of their directors. (4) Based on quarter-end balances. (5) Details regarding these items are included also in Note 3 "Securities" and Note 5 "Investments in investee companies". (6) Holdings of the Banks' capital by interested parties and related parties. (7) Credit risk in off-balance-sheet financial instruments as calculated for the purpose of the indebtedness limitations of a borrower. (8) Collective allowance for credit losses. - 431 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 21 - Interested and Related Parties (cont'd) Reported Amounts A. Balances with Related Parties (cont'd) Consolidated: December 31, 2013 Interested Parties Related Parties Held by the Bank Shareholders Key Executives(2) Others(3) Interested Parties at Time Controlling Shareholders Others(1) of Transaction Investee companies Balance Highest Balance Highest Balance Highest Balance Highest Balance Highest Balance Highest at balance balance at balance balance at balance balance at balance balance at balance balance at balance balance sheet during the sheet during the sheet during the sheet during the sheet during the sheet during the date year (4) date year (4) date year (4) date year (4) date year (4) date year (4) NIS millions
Assets - Deposits with banks ------Securities (5) ------44 51 - - - - Credit to the public 23 24 72 73 6 6 109 144 - - - - Provision for credit losses -* -* -* -* -* -* 3 5 - - - - Net credit to public 23 24 72 73 6 6 106 139 - - - - Investments in investee companies (5) ------1 1 Assets in respect of derivative instruments ------2 4 - - - - Other assets ------1 1 - - - -
Liabilities - Deposits from the public -* -* -* -* 6 6 666 1,199 - - - - Deposits from banks ------Liabilities in respect of derivative instruments ------1 7 - - - - Other liabilities - - - - 24 24 -* -* - - - - Deferred liabilities deeds ------331 357 - - - - Shares (included in shareholders' equity)(6) 1,114 1,114 536 536 -* -* 98 98 - - - - Credit risk in off- balance-sheet financial instruments(7) 10 10 1 1 3 3 64 91 - - - -
* Less than NIS 500 thousand.
(1) Including anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (2) Including their close relatives as defined in IAS 24. (3) Corporations, that a person or corporation included in one of the interested party groups, controls them, holds joint control over them, have material influence over them or holds 25% or more of their issued share capital or voting power or may appoint 25% or more of their directors. (4) Based on quarter-end balances. (5) Details regarding these items are included also in Note 3 "Securities" and Note 5 "Investments in investee companies". (6) Holdings of the Banks' capital by interested parties and related parties. (7) Credit risk in off-balance-sheet financial instruments as calculated for the purpose of the indebtedness limitations of a borrower. - 432 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 21 - Interested and related Parties (cont'd)
Reported Amounts
B. Summarized Results of Transactions with Interested and Related Parties:
Consolidated: Year ended December 31, 2014 Related Parties Held by the Interested Parties Bank
Shareholders Controlling Investee Key Shareholders Others (1) Executives(2) Others (3) Companies NIS millions
Net interest income (expenses) (4) 2 2 -* (5) - Income in respect of credit losses 1 1 - 2 - Non-interest income - -* -* 1 - Of which: Management fees and services - -* -* *- - Operating and other expenses (5) - -* (20) (2) -
Total 3 3 (20) (4) -
Year ended December 31, 2013 Related Parties held by the Interested parties Bank
Shareholders Controlling Investee Key Shareholders Others (1) Executives(2) Others (3) Companies NIS millions
Net interest income (expenses) (4) 1 - -* (19) - Income in respect of credit losses -* - - 2 - Non-interest income (expenses) - - - 2 - Of which: Management fees and services - - - 4 - Operating and other expenses (5) *- - (22) (5) -
Total 1 - (22) (20) -
* Less than NIS 500 thousand.
(1) Including anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (2) Including their close relatives as defined in IAS 24. (3) Corporations, that a person or corporation included in one of the interested party groups, controls them, holds joint control over them, has material influence over them or holds 25% or more of their issued share capital or voting power or may appoint 25% or more of their directors.
(4) See C. below. (5) See D. below.
- 433 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 21 - Interested and Related Parties (cont'd)
Reported Amounts
B. Summarized Results of Transactions with Interested and Related Parties (cont'd):
Consolidated:
Year ended December 31, 2012 Related Parties Held by the Interested Parties Bank
Shareholders Controlling Investee Key Shareholders Others (1) Executives(2) Others (3) Companies NIS millions
Net interest income (expenses) (4) 1 - -* (21) - Provision for credit losses -* - - (5) - Non-interest income (expenses) -* -* -* (1) - Of which: Management fees and services -* - -* 6 - Operating and other expenses (5) -* - (21) (4) -
Total 1 -* (21) (31) -
* Less than NIS 500 thousand.
(1) Including anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (2) Including their close relatives as defined in IAS 24. (3) Corporations, that a person or corporation included in one of the interested party groups, controls them, holds joint control over them, has material influence over them or holds 25% or more of their issued share capital or voting power or may appoint 25% or more of their directors.
(4) See C. below. (5) See D. below.
C. Net Interest Income from Transactions of the Bank and its Subsidiaries with Interested and Related Parties Consolidated: Year ended December 31 2014 2013 2012 NIS millions
In respect of assets - From credit to the public 8 6 8 From deposits with banks - - - From bonds - 2 2
In respect of liabilities - On deposits from the public (1) (10) (13) On deposits from banks - - - On deferred liabilities deeds (8) (16) (17)
(1) (18) (20)
- 434 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 21 - Interested and Related Parties (cont'd) Reported Amounts D. Payments to Interested Parties (from the Bank and its Investee Companies): Consolidated: Year ended December 31, 2014 Interested Parties at the (2) (3) Shareholders Key Executives Time of the Transaction Others (1) Controlling Shareholders Others Total Number of Total Number of Total Number of Total Number of Total Number of NIS millions Recipients NIS millions Recipients NIS millions Recipients NIS millions Recipients NIS millions Recipients
Interested parties employed by or on behalf of the Bank - - - - 17** 10 - - - - Directors who are not Bank employees *- 2 - - 3 8 - - - - Other interested parties who are not Bank employees ------2 2 Total *- 2 - - 20 18 - - 2 2
Year ended December 31, 2013 Interested Parties at the (2) (3) Shareholders Key Executives Time of the Transaction Others (1) Controlling Shareholders Others Total Number of Total Number of Total Number of Total Number of Total Number of NIS millions Recipients NIS millions Recipients NIS millions Recipients NIS millions Recipients NIS millions Recipients
Interested parties employed by or on behalf of the Bank - - - - 19** 9 - - - - Directors who are not Bank employees -* 1 - - 3 9 - - - - Other interested parties who are not Bank employees ------5 10 Total -* 1 - - 22 18 - - 5 10
* Less than NIS 500 thousand. ** Constitutes salary and benefits, from this: short-term employee benefits: NIS 12 million (in 2013 – NIS 16 million and in 2012 – NIS 15 million), benefits upon termination of employment: NIS 5 million (in 2013 – NIS 3 million and in 2012 – NIS 3 million). (1) Including anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (2) Including their close relatives as defined in IAS 24. (3) Corporations, that a person or corporation included in one of the interested party groups, controls them, holds joint control over them, have material influence over them or holds 25% or more of their issued share capital or voting power or may appoint 25% or more of their directors.
- 435 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 21 - Related Parties (cont'd)
Reported Amounts
D. Payments to Interested Parties (from the Bank and its Investee Companies) (cont'd):
Consolidated: Year ended December 31, 2012 Interested Parties at the (2) (3) Shareholders Key Executives Time of the Transaction Others (1) Controlling Shareholders Others Total Number of Total Number of Total Number of Total Number of Total Number of NIS millions Recipients NIS millions Recipients NIS millions Recipients NIS millions Recipients NIS millions Recipients
Interested parties employed by or on behalf of the Bank - - - - 18** 9 - - - - Directors who are not Bank employees -* 1 - - 3 9 - - - - Other interested parties who are not Bank employees ------4 7 Total -* 1 - - 21 18 - - 4 7
* Less than NIS 500 thousand. ** Constitutes salary and benefits, from this: short-term employee benefits: NIS 12 million (in 2013 – NIS 16 million and in 2012 – NIS 15 million), benefits upon termination of employment: NIS 5 million (in 2013 – NIS 3 million and in 2012 – NIS 3 million). (1) Including anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (2) Including their close relatives as defined in IAS 24 (3) Corporations, that a person or corporation included in one of the interested party groups, controls them, holds joint control over them, have material influence over them or holds 25% or more of their issued share capital or voting power or may appoint 25% or more of their directors.
- 436 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 21 - Related Parties (cont'd) E. Further details: 1. Further to the approval and recommendation of the Remuneration Committee of the Bank on October 19, 2014, the Board of Directors of the Bank resolved, on October 30, 2014, to apply the resolution of the general assembly of the Bank of November 28, 2013, approving identical remuneration, in the amounts listed below, for external directors and for the other members of the Board of Directors, excluding the Chairman of the Board (hereinafter: the "Remuneration Resolution"), to directors (other than the Chairman of the Board), including external directors, controlling shareholders, and relatives of controlling shareholders of the Bank, who shall be appointed from time to time to serve as directors of the Bank. The amounts of the remuneration approved for the external directors of the Bank and for the other members of the Board of Directors, excluding the Chairman of the Board, according to the resolution of the general assembly of November 28, 2013, which shall also apply to directors (excluding the Chairman of the Board), including external directors, controlling shareholders, and the relatives thereof, who shall be appointed from time to time to serve as directors of the Bank, are as follows: annual remuneration in the amount of NIS 110,800, and meeting participation remuneration in the amount of NIS 4,250. Remuneration for participation in meetings shall be paid to members of the Board of Directors for participation in meetings of the Board of Directors and of board committees. For participation in meetings via means of communication as noted in Section 101 of the Companies Law, directors shall be paid participation remuneration at a rate of 60% of the remuneration for participation in an ordinary meeting; for a resolution of the Board of Directors or of the board committees passed without convening, the directors shall be paid participation remuneration at a rate of 50% of the remuneration for participation in an ordinary meeting. Directors are entitled to participation remuneration when they attend all or most of a meeting. Dates of payment are as specified in the Companies Regulations (Rules Regarding Remuneration and Expenses for External Directors), 2000. The aforesaid amounts shall be updated on February 1 and August 1 each year (hereinafter: the "Change Date"), according to the rate of increase of the last new CPI published before the Change Date as compared to the last CPI published before the date of approval of the remuneration.
2. Further to the approval of the remuneration committee on September 7, 2014, and the approval of the Board of Directors of the Bank on September 10, 2014, the general assembly of the Bank resolved on October 26, 2014, to approve identical remuneration for Mr. Yitzhak Manor, a director of the Bank and the husband of Mrs. Ruth Manor, who is one of the controlling shareholders of the Bank, to the remuneration of the other members of the Board of Directors (including the external directors), other than the Chairman of the Board, in the following amounts: annual remuneration in the amount of NIS 110,800 and meeting participation remuneration in the amount of NIS 4,250.
- 437 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 21 - Related Parties (cont'd) E. Further details (cont'd) 2. (cont'd) Remuneration for participation in meetings shall be paid to Mr. Manor for participation in meetings of the Board of Directors and of board committees. For participation in meetings via means of communication as noted in Section 101 of the Companies Law, 1999, Mr. Manor shall be paid participation remuneration at a rate of 60% of the remuneration for participation in an ordinary meeting; for a resolution of the Board of Directors or of the board committees passed without convening, Mr. Manor shall be paid participation remuneration at a rate of 50% of the remuneration for participation in an ordinary meeting. Mr. Manor is entitled to participation remuneration when he attends all or most of a meeting. Dates of payment are subject to the Companies Regulations (Rules Regarding Remuneration and Expenses for External Directors), 2000 (hereinafter: the "External Directors' Remuneration Regulations"). The aforesaid amounts shall be updated on February 1 and August 1 each year (hereinafter: the "Change Date"), according to the rate of increase of the last new CPI published before the Change Date as compared to the last CPI published before the date of approval of the remuneration. The resolution regarding approval of the remuneration for Mr. Manor is in effect beginning on the date of Mr. Manor's appointment as a director of the Bank by the Board of Directors of the Bank, on June 30, 2014.
3. Regarding the communication to purchase a Directors & Officers insurance policy (D&O) see Note 18.C.17.
4. Regarding the approval of the general meeting of the Banks' shareholders, the indemnification letter for Directors Officers (D&O) - see Note 18.C.13 and 18.C.14.
5. Regarding the agreements of the Chairman and the Banks' CEO - see Notes 15.E.(2)) and15.E.(3).
6. On January 8, 2014, the bank received messages from David Lubinski Properties (Holdings) (1993) Ltd. and IDB Holding Corporation Ltd. (hereinafter: "IDB"), according to which, the companies Manor Holdings B.A. Ltd. and Manor Investments – I D B Ltd. have sold on January 7, 2014 (hereby: “day of sale”) in the Stock Exchange 4,819,550 IDB shares and were left with no holdings of IDB after the above sale. Following the aforesaid stock sale, Ms. Ruth Manor, who is one of the banks' controlling shareholders, ceased to be an interested party in IDB, and therefore as of the date of sale IDB group ceased to be a related party to the Bank.
- 438 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 22 - Interest income and expenses Reported Amounts
Composition: Consolidated The Bank Year ended December 31 Year ended December 31 2014 2013 2012 2014 2013 2012 NIS millions NIS millions
A. Interest income ** From credit to the public 718 958 1,073 707 945 1,061 From cash on hand and deposits with Bank of Israel 31 84 137 31 84 137 From deposits with banks 6 10 11 6 10 11 From borrowed securities 2 3 2 2 3 2 From bonds 105 152 189 105 152 188 From other assets 3 2 4 3 2 3 Total interest income 865 1,209 1,416 854 1,196 1,402
B. Interest expenses** On deposits from the public 189 386 612 292 538 757 On deposits from the Government -* -* -* -* -* -* On deposits from banks -* -* 1 -* -* 1 On subordinated notes and bonds 97 151 143 5 13 14 On other liabilities 12 10 - 12 10 - Total interest expenses 298 547 756 309 561 772 Total interest income, net 567 662 660 545 635 630
C. Details of net effect of hedging derivative instrument on interest income and expenses *** Interest income - 5 - - 5 - Interest expenses 9 - 3 9 - 3 9 5 3 9 5 3
D. Details of interest income from bonds on a cumulative basis
Available for sale 88 141 174 88 141 173 Held for trading 17 11 15 17 11 15 Total included in interest income 105 152 189 105 152 188
* Less than NIS 500 thousand. ** Including an effective component in hedging relations. *** Details regarding the effect of hedging derivative instruments in Subsections (A) and (B).
- 439 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 23 - Non-interest financing income Reported Amounts Consolidated - Composition: Consolidated The Bank Year ended December 31 Year ended December 31 2014 2013 2012 2014 2013 2012 NIS millions NIS millions A. Non interest financing income in respect of non-trading activities A.1 From activity in derivative instruments Net income (expenses) in respect of ALM derivative instruments (1) 235 (195) (39) 235 (195) (39)
Total from activity in derivative instruments 235 (195) (39) 235 (195) (39)
A.2 From investment in bonds Gain from sale of bonds available for 66 74 95 66 74 95 sale(2) Provision for impairment in respect of (2) (13) (18) (2) (13) (18) bonds available for sale(2) Losses from sale of bonds available for sale (2) (2) (3) - (2) (3) -
Total from investment in bond 58 77 58 77 62 62 A3. Net exchange differences (234) 176 (12) (235) 176 (12)
A4. Gains (losses) from investment in shares Gains from sale of shares available for sale(2) 11 14 6 2 1 2 Provision for impairment in respect of shares available for sale(2) (2) - (3) (1) - - Losses from sale of shares available for sale(2) ------Dividend from shares available for sale 5 4 5 1 1 -*
Total from investment in shares 14 18 8 2 2 2
Total non-interest financing income in respect of non-trading activities 77 57 34 64 41 28
B. Non-interest financing income in respect of trading activities ** Net income in respect of other derivative instruments 6 14 27 6 14 27 Net realized and unrealized gains (losses) from adjustments to fair value of bonds held for trading 20 5 1 20 5 1 Net realized and unrealized gains (losses) from adjustments to fair value of share held for trading (1) 2 3 (1) 2 3 Dividends from shares held for trading -* -* -* -* -* -*
Total from trading activities *** 25 21 31 25 21 31
Total 102 78 65 89 62 59
(1) Derivative instruments constituting part of the asset and liability management of the bank, which are not designated for hedging purposes. (2) Classified from cumulative other comprehensive income.
* Less than NIS 500 thousand. ** Including exchange differences arising from trading activity. *** With regard to interest income from investment in bonds held for trading - see Note 22.D.
- 440 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 24 - Fees
Reported Amounts
Composition: Consolidated The Bank Year ended December 31 Year ended December 31 2014 2013 2012 2014 2013 2012 NIS millions NIS millions
Account management 55 59 64 55 59 64 Credit cards 17 16 17 17 16 17 Securities and certain derivative instruments activity 57 55 55 57 55 55 Financial products distribution fees 18 15 14 15 12 12 Management, operation and trust to institutional entities 19 15 8 - - - Credit handling 19 28 32 18 25 29 Conversion differences 31 28 31 31 28 31 Foreign trade activity 14 13 14 14 13 14 Financing transaction fees 37 38 36 37 38 36 Net income from credit portfolios services 3 3 4 3 3 4 Other fees 8 10 13 7 9 10 Total operating fees 278 280 288 254 258 272
Note 25 - Other Income
Reported Amounts
Composition: Consolidated The Bank Year ended December 31 Year ended December 31 2014 2013 2012 2014 2013 2012 NIS millions NIS millions
Others 6* 2 4 6* 2 3
Total other income 6 2 4 6 2 3
* See Note 5 regarding the sale of all of the Banks' holdings in Impact Investment Portfolio Management Ltd.
- 441 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 26 - Salaries and Related Expenses
Reported Amounts
Composition: Consolidated The Bank Year ended December 31 Year ended December 31 2014 2013 2012 2014 2013 2012 NIS millions NIS millions
Salaries 312 299 301 305 292 294 Severance pay, advanced study fund, compensation, pensions and vacation 21 52 47 21 52 47 National Insurance and VAT on salaries 80 79 73 80 79 73 Other related expenses 19 19 14 19 19 14 Voluntary early retirement expenses (A) - 7 20 - 7 20 Total salaries and related expenses 432 456 455 425 449 448
(A) The expenses in 2012-2013 derive from the implementation of the Retirement Plan approved on February 2012 – see details in Note 15.A.5. Until December 31, 2013 all of the employees that were supposed to retire within this plan, retired and the update of reserves ended.
Note 27 - Other Expenses
Reported Amounts
Composition: Consolidated The Bank Year ended December 31 Year ended December 31 2014 2013 2012 2014 2013 2012 NIS millions NIS millions
Computer 96 88 85 96 88 85 Professional services 36 40 36 34 39 36 Marketing and advertising 17 15 16 16 15 15 Office expenses 9 9 10 9 9 10 Communications 10 10 9 10 10 9 Insurance 5 5 5 5 5 5 Fees 13 12 12 13 11 12 Directors' salaries and reimbursement of expenses 4 4 4 4 4 3 Staff training and advanced study 2 2 3 2 2 3 Others 16 19 18 15 17 16
Total other expenses 208 204 198 204 200 194
- 442 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 28 - Provision for Taxation on Profit
Reported Amounts
A. Composition: Consolidated The Bank Year ended December 31 Year ended December 31 2014 2013 2012 2014 2013 2012 NIS millions NIS millions
Current taxes - Relating to current year 20 73 75 9 61 66 Relating to previous years (9) (6) (17) (4) (5) (13) Total current taxes 11 67 58 5 56 53
Plus (less) Deferred taxes - Relating to current year *- (8) (28) *- (8) (29) Change in tax rate - (13) (5) - (13) (5) Total deferred taxes** *- (21) (33) *- (21) (34)
Total provision for taxes on operating profit 11 46 25 5 35 19
** Details regarding the movement of deferred taxes:
Consolidated The Bank Year ended December 31 Year ended December 31 2014 2013 2012 2014 2013 2012 NIS millions NIS millions
Creation and reversal of temporary differences** (1) (2) 15 (1) (2) 14 Change in tax rates - (13) (5) - (13) (5) Deferred taxes reclassified from capital to profit and loss 1 (6) (43) 1 (6) (43)
Total deferred taxes *- (21) (33) *- (21) (34)
* Less than NIS 500 thousand. ** See also Note 28.G.2.
- 443 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 28 - Provision for Taxation on Operating Profit (cont'd) Reported Amounts
B. Reconciliation between the theoretical tax amount that would have resulted if the profit would have been taxed at the statutory rate applying to banks in Israel, and the actual tax provision on profit in the Profit and Loss Statement: Consolidated The Bank Year ended December 31 Year ended December 31 2014 2013 2012 2014 2013 2012 NIS millions NIS millions Statutory tax rate applying to banks in Israel 37.71% 36.22% 35.53% 37.71% 36.22% 35.53%
Theoretical tax amount based 23 67 54 5 49 40 on the statutory tax rate Tax (tax savings) resulting from: Unrecognized expenses, net of tax-exempt income and income at a different tax rate 3 3 (9) 3 3 (5) Effect of change in tax rate (8) *(22) (5) (1) *(15) (5) Adjustment differences in depreciation and amortization 1 1 2 1 1 2 Prior years’ taxes (9) (6) (17) (4) (5) (13) Others 1 3 - 1 2 - Provision for taxes on income 11 46 25 5 35 19
* Derives both from various tax rates of subsidiaries which are practitioners and from the detailed below.
C. As part of the Governments' fiscal policy, the Government received a number of decisions regarding 2013- 2014, among other things, to increase the VAT rate and the Corporation Tax. On June 3, 2013 the VAT order was published and it increased the Payroll tax and the Income tax imposed on financial institutions from 17% to 18%. The commencement of the order was set to June 2, 2013. During the tax year of 2013 the increased tax rates will apply to the salaries paid in respect of work as of June 2013, regarding the proportional part of the profit in this tax year. As a result of the aforesaid amendment, the statutory tax rate which applies to financial institutions will increase as of June 2013 from a rate of 35.9% to a rate of 36.22%.
- 444 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 28 - Provision for Taxation on Operating Profit (cont'd.) C. (cont'd.) In addition, on July 30, 2013, the Knesset Plenum approved in a second and third reading, the Budget Law and the Arrangements Law for 2013 and 2014. As part of this, an increase in corporation tax to 26.5% was approved, as of January 1 2014. As a result, the statutory tax rate that applies to financial institutions will increase from a rate of 36.22% to a rate of 37.71%.
D. The Bank and its subsidiaries have final tax assessments (or assessments considered to be final) up to and including the tax year 2010.
E. Union Issuances Ltd. - the subsidiary, is completely transparent for tax purposes and accordingly its revenues and/or receipts and/or expenses are considered revenues and/or receipts and/or expenses of the Bank. In accordance with the arrangement, such company is to have no activity other than the issuance and/or sale of subordinated notes to the Bank. Therefore the subsidiary will not have any earnings or losses for tax purposes of any kind whatsoever. Furthermore, the subsidiary is not allowed to hold assets or liabilities other than the subordinated notes and/or a deposit. The subsidiary will not engage in any activity and will not purchase subordinated notes on the Stock Exchange in Israel.
F. For details regarding the decision of the Israel Tax Authority to change the classification of the subsidiary Union Systems Ltd. from "practitioner" to "financial institution" see Note 18.C.19.
- 445 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 28 - Provision for Taxation on Operating Profit (cont'd)
G.1. Balances of Deferred Tax Assets, Net, in Respect of:
Consolidated The Bank December 31 December 31 December 31 December 31 2014 2013 2014 2013 Average Average Tax Average Tax Average Balance Rate Balance tax rate Balance Rate Balance Tax Rate NIS NIS NIS NIS millions % millions % millions % millions %
Excess of provision for severance pay and pension over amounts funded 82 37.71 95 37.71 82 37.71 95 37.71
Provision for vacation pay and long service bonuses 22 37.71 21 37.71 22 37.71 21 37.71
Provision for credit losses 131 37.71 120 37.71 130 37.71 119 37.71
Adjustment of depreciable non- monetary assets (11) 26.50 (9) 26.50 (11) 26.50 (9) 26.50
Securities (1) 37.71 (4) 37.71 - - - -
Others 9 37.71 4 37.71 9 37.71 4 37.71
Total 232 227 232 230
Realization of the deferred taxes is based on a forecast that there will be taxable income in the foreseeable future.
- 446 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 28 - Provision for Taxation on Operating Profit (cont'd) Reported Amounts G.2. Movements of Deferred Tax Assets and Liabilities, Attributed to the Following:
Consolidated For the year ended on December 31, 2014 Excess Reserve for Adjustments Severance of Non- Pay and Provision for Monetary Pension over Vacation and Allowance for Depreciable Fund Jubilee Grant Credit Losses Assets Securities Others Total NIS millions
Deferred tax as at January 1, 2014 95 21 120 (9) (4) 4 227 Changes charged to profit and loss (13) 1 11 (2) (2) 5 - Changes charged to the equity - - - - 5 - 5 Deferred tax balance as at December 31, 2014 82 22 131 (11) (1) 9 232
Consolidated For the year ended on December 31, 2013 Excess Reserve for Adjustments Severance of Non- Pay and Provision for Monetary Pension over Vacation and Allowance for Depreciable Fund Jubilee Grant Credit Losses Assets Securities Others Total NIS millions
Deferred tax as at January 1, 2013 95 18 107 (7) (4) 4 213 Changes charged to profit and loss (5) 2 8 (2) 5 -* 8 Effect of change in tax rate 5 1 5 -* 2 -* 13 Changes charged to the equity - - - - (7) - (7) Deferred tax balance as at December 31, 2013 95 21 120 (9) (4) 4 227
- 447 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 29 - Profit per Ordinary Share Reported Amounts Composition: Consolidated For the year ended December 31 2014 2013 2012 NIS millions Basic and Diluted Profit Net profit attributed to shareholders of the bank 50 140 127
Consolidated For the year ended December 31 2014 2013 2012 Weighted average of number of shares (in thousands) Weighted average of number of ordinary shares used to calculate the basic profit 73,583 73,583 73,583 Weighted average of number of ordinary shares used to calculate the diluted profit 73,583 73,583 73,583
Note 30 - Cumulative Other Comprehensive Income (Loss): Reported Amounts
A. Change in cumulative other comprehensive income (loss), after tax effect:
Adjustments regarding the presentation of available for sale securities according to fair value NIS million
Balance as at January 1, 2012 (5) Net change during the period 79 Balance as at January 1, 2013 74 Net change during the period 4 Balance as at January 1, 2014 78 Net change during the period (9) Balance as at December 31, 2014 69
- 448 -
NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 30 - Cumulative Other Comprehensive Income (Loss): Reported Amounts
B. Adjustments in Respect of the Presentation of Securities Available for Sale at Fair Value:
Before tax Tax effect After tax NIS millions
For the year ended December 31, 2014 Net unrealized gains (losses) from adjustments to fair value 60 (23) 37 Net losses (gains) reclassified to the Profit and Loss Statement* (73) 27 (46) Net change during the year (13) 4 (9)
For the year ended December 31, 2013 Net unrealized gains (losses) from adjustments to fair value 82 (33)** 49 Net losses (gains) reclassified to the Profit and Loss Statement* (72) 27 (45) Net change during the year 10 (6) 4
For the year ended December 31, 2012 Net unrealized gains (losses) from adjustments to fair value 203 (72) 131 Net losses (gains) reclassified to the Profit and Loss Statement* (81) 29 (52) Net change during the period 122 (43) 79
* The amount before tax is reported in the Profit and Loss Statement under the item 'non-interest financing income'. For further details see Note 23. ** Including a cumulative effect following the change of the tax rate charged to equity as aforesaid in Note 28.C. in the amount of NIS 2 million.
- 449 - NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 31 - Report on Business Segments The characteristics of the segments are mainly based on the types of customers and activity areas included in each segment.
The Bank’s activities are focused on the following Business Segments(1): Private Segment - This segment provides a range of banking services and financial products to households and private customers having financial wealth, including investment advisory services. Furthermore, the segment includes small businesses which are managed as part of the Retail Division (with an indebtedness of up to NIS 500,000) and the housing finance activity.
Business Segment - This segment provides a range of banking services and financial products to business customers from a variety of economic segments, including construction, real estate, and the capital market.
Diamonds Segment - This segment includes customers active in the diamond industry, most of whom are members of the Ramat-Gan Diamond Exchange.
Financial Management Segment - This segment coordinates the Banks' management of assets and liabilities in shekels and in foreign currency. The segment includes the Banks' activity in securities for itself (in the available for sale portfolio and the trading portfolio) and in derivative financial instruments, including currency and interest positions. Likewise, costs are allocated to this segment arising from the need to preserve a business liquidity level and an adequate level of diversification of depositors, as expressed in part, by a gap in transfer prices between credits and deposits.
Others and adjustments - This segment includes activities which could not be specifically allocated to segments.
The main principles that were applied in order to split the results of operations between the various segments are as follows: Net interest income - In the customers focused segments this item includes a financial margin on loans/deposits of customers. The margin is calculated above the transfer price which is determined for each kind of loan and deposit in respect of the average duration, the relevant linkage channel and taking into account the Banks' strategic objectives. This item also includes risk-free interest on the capital which is calculated on the basis of the risk-weighted assets ascribed to each segment. In the Financial Management segment this item includes income from interest on bonds and expenses arising from the need to preserve a business liquidity level and an adequate level of diversification of depositors, as expressed in part, by a gap in transfer prices between credits and deposits.
(1) It is emphasized that due to the fact that each Bank classifies its customers to segments according to different parameters and also allocates income and expenses to segments according to different parameters, when comparing between different banks, this must be addressed and the comparison should be made with due caution.
- 450 - NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 31 - Report on Business Segments (cont’d)
Reported Amounts
In 2014 a change was made in the transfer prices method in NIS and in foreign currency. According to the methodology approved during the second half of the year, net interest income includes an inter-segment settlement in respect of surpluses of deposits. A positive/negative amount is added to each sub-segment which represents the multiplication of the gap between the balance of the deposits and the credit balance in an annual rate of 0.25%. At the Bank, an inter-segment charge in respect of surpluses of deposits is recorded under the Financial Management Segment, comparative figures haven't been restated because of lack of materiality.
Non - interest income – are attributed to the segment to which the customer belongs. In the Financial Management segment this item includes: income (expenses) in respect of the fair value of derivative financial instruments (as required by accounting principles), income from the Banks' actions in derivatives for itself, income from realization and adjustment of bonds and income from realization and adjustment of shares.
Allowance for credit losses - attributed to the segment to which the customer belongs, against which the allowance was recorded.
Operating and other expenses - Direct expenses that can be granted to a specific segment, are attributed to that segment. The rest of the expenses are attributed to the different segments according to an allocation methodology based on various parameters.
Taxes on income - The provision for tax of the business results of each segment is usually calculated according to the effective tax rate, with the exception of certain cases where a specific attribution can be made.
Return on capital - The ratio between the net profit of each segment and the capital means attributed to the segment. The capital means are allocated to the segments based on the average risk-weighted assets of each segment.
The database and methodology used to report the results of the Banks' segments is in a continuous process of improvement, and accordingly, reclassification of the results is applied, as much as possible for comparison periods. The Bank is in the process of installing the Bachan (Banking, Accounting, Administration) system of Bank Leumi Le Israel Ltd., which includes, inter alia, the adjustment of data in information systems to book data, starting on the transaction level.
- 451 - NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 31 - Report on Business Segments (cont’d)
Reported Amounts
Information on business segments - consolidated
For the year ended December 31, 2014 Private Business Diamonds Financial Amounts not Total Segment Segment Segment Management Allocated Segment and Adjustments NIS millions Net interest income (expenses): - From outsiders 268 285 36 (22) - 567 - Inter-segment 4 2 (1) (5) - - Non - interest income: - From outsiders 117 140 16 108 5 386 - Inter-segment 1 12 -* (13) - - Total income 390 439 51 68 5 953 Expenses (income) in respect of credit losses 10 97 (12) - - 95 Operating and other expenses 372 348 28 49 - 797 Profit (loss) before taxes 8 (6) 35 19 5 61 Provision for taxes on profit 2 (1) 6 3 1 11
Net profit (loss) 6 (5) 29 16 4 50
Return on equity 1.1% (0.4%) 22.1% 7.8% 4.2% 2.2% Average balance of assets 9,745 12,846 1,310 14,703 1,544 40,148 Average balance of liabilities 17,121 16,079 213 594 2,732 36,739 Average balance of risk-weighted assets 5,805 14,573 1,354 2,131 982 24,845 Average balance of securities 13,151 49,774 25 - - 62,950 Average balance of managed Securities 3 59 - - - 62 Net - interest income: Margin from credit granting activities 168 231 31 - Margin from deposit receipt activities 83 35 - - Other 21 21 4 (27)
Total net interest income 272 287 35 (27)
* Less than NIS 500 thousand.
- 452 - NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 31 - Report on Business Segments (cont’d)
Information on Business Segments – Consolidated (cont'd) For the year ended December 31, 2013 Private Business Diamonds Financial Amounts not Total Segment Segment Segment Management Allocated Segment and Adjustments NIS millions Net interest income: - From outsiders 282 346 35 (1) - 662 - Inter-segment ------Non - interest income: - From outsiders 123 128 15 94 - 360 - Inter-segment 1 12 -* (13) - - Total income 406 486 50 80 - 1,022 Expenses (income) in respect of credit losses 8 17 (2) - - 23 Operating and other expenses 373 364 32 44 - 813 Profit before taxes 25 105 20 36 - 186 Provision for taxes on profit 6 26 5 9 - 46
Net profit 19 79 15 27 - 140
Return on equity 3.9% 5.6% 12.2% 14.4% - 6.2% Average balance of assets 9,171 12,632 1,363 14,396 1,726 39,288 Average balance of liabilities 17,025 16,422 384 896 2,303 37,030 Average balance of risk-weighted assets 5,247 15,235 1,339 2,042 675 24,507 Average balance of securities 12,298 40,663 46 - - 53,007 Average balance of managed Securities 239 202 - - - 441 Net - interest income: Margin from credit granting activities 145 262 28 - Margin from deposit receipt activities 114 58 2 - Other 23 26 5 (1)
Total net interest income 282 346 35 (1)
* Less than NIS 500 thousand.
- 453 - NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 31 - Report on Business Segments (cont’d)
Information on business segments - consolidated (cont'd) For the year ended December 31, 2012 Private Business Diamonds Financial Amounts not Total Segment Segment Segment Management Allocated Segment and Adjustments NIS millions Net interest income: - From outsiders 282 355 36 (13) - 660 - Inter-segment ------Non - interest income: - From outsiders 127 133 16 81 - 357 - Inter-segment 1 26 -* (27) - - Total income 410 514 52 41 - 1,017 Provision for credit losses 10 52 3 - - 65 Operating and other expenses 358 361 36 45 - 800 Profit (loss) before taxes 42 101 13 (4) - 152 Provision for taxes on profit 7 16 3 (1) - 25
Net profit (loss) 35 85 10 (3) - 127
Return on equity 8.3% 6.5% 9.4% (2.3%) - 6.2% Average balance of assets 8,651 13,673 1,419 13,429 1,304 38,476 Average balance of liabilities 16,323 17,135 374 751 1,816 36,399 Average balance of risk-weighted assets 5,018 15,497 1,264 2,106 741 24,626 Average balance of securities 11,807 33,799 41 - - 45,647 Average balance of managed Securities 246 258 - - - 504 Net - interest income: Margin from credit granting activities 131 274 28 - Margin from deposit receipt activities 140 65 3 - Other 11 16 5 13
Total net interest income 282 355 36 (13)
* Less than NIS 500 thousand.
- 454 - NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 32 - Data in Nominal Values - The Bank A. The accounting principles used to present the data in nominal historical values for tax purposes are as follows: (1) These financial statements were prepared on the basis of historical cost. (2) These financial statements include data regarding the Bank, and two subsidiary companies constituting as auxiliary corporations. (3) These financial statements do not include provisions for the impairment of fixed assets.
B. Nominal Balance Sheet as at December 31
2014 2013 NIS millions Assets
Cash on hand and deposits with banks 9,848 9,924
Securities 6,731 4,747
Borrowed securities 182 503
Credit to the public 21,883 22,350
Allowance for credit losses (244) (282)
Net credit to the public 21,639 22,068
Investments in investee companies 539 538
Buildings and equipment 382 382
Assets in respect of derivative instruments 504 572
Other assets 1,417 1,145
Total assets 41,242 39,879
Liabilities and shareholders' equity
Deposits from the public 35,171 33,832
Deposits from banks 152 209
Deposits from the Government 1 3
Subordinated notes and deposit certificates 64 168
Liabilities in respect of derivative instruments 575 667
Other liabilities 2,920 2,686
Total liabilities 38,883 37,565
Shareholders' equity 2,359 2,314
Total liabilities and shareholders' equity 41,242 39,879
- 455 - NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014
Note 32 - Data in Nominal Values - The Bank (cont’d)
C. Statement of Profit and Loss for the Year Ended December 31
2014 2013 NIS millions
Interest income 854 1,196 Interest expenses 309 561
Net interest income 545 635 Provision for credit losses 95 22
Net interest income after provision for credit losses 450 613
Non - interest income: Non - interest financing income 89 62 Fees 254 258 Other income 6 2
Total net non- interest income 349 322
Operating and other expenses: Salaries and related expenses 425 449 Maintenance and depreciation of buildings and equipment 156 150 Other expenses 204 200
Total operating and other expenses 785 799
Profit before taxes 14 136
Provision for taxes on profit 3 34
Profit after taxes 11 102
The Bank's share in after-tax operating profits of investee companies 42 40
Net profit:
Attributable to shareholders of the Bank 53 142
- 456 -