Union Bank of Israel Ltd. Financial Statements. December 31, 2016

Transcription

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

2 Letter from the Chairman of the Board of Directors - 2 -

3 Letter from the Chairman of the Board Dear Stakeholders, I am honored to present to you the financial statements of the Bank for Strategic Plan and Performance of the Bank In 2016 the Bank continued to expand the retail infrastructure while focusing on the consumer credit field. The consumer credit portfolio grew by approximately 16% and contributed to the increase in the financing income despite a low interest environment. Within this framework, the Bank put an emphasis on increasing the recruitment rate of new active customers alongside implementing moves to deepen and increase the activity of old customers and also worked diligently to develop the direct banking. At the same time, the Bank's direct banking center continued to grant consumer credit to the customers of all banks. In addition, the Bank is in the process of implementing an efficiency plan which is mostly voluntary retirement of employees in order to improve the efficiency ratio and to establish a leaner expenses infrastructure which will strengthen the Bank's competitiveness. Although the financial results of the Bank in 2016 amounted to a loss, the loss was mainly generated as a result of a full allocation of all of the operational streamlining cost in 2016 although it is supposed to be carried out during (the fruits of which, the Bank is expected to harvest in the following years), from the reduction of tax assets and from exceptional allowances for credit losses. Despite the loss, the capital ratios as at December 31, 2016 were 9.67% Tier 1 capital ratio and 14.03% total capital ratio. These ratios are higher than the threshold of the requirement of the Bank of Israel. These days the Bank is preparing a strategic plan for the following five years. The plan is based on the risk appetite, and the capital ratios determined by the Board of Directors in the various activity fields of the Bank, and the main targets of the plan are increasing the Bank's profitability alongside reducing the credit portfolio's concentration. The plan defines the Bank's objectives in each of the years until 2021 in terms of profit, yield, credit concentration, liquidity ratio, capital ratio and more, while determining milestones for the Bank's development in in the various fields of activity and their adjustment to the market challenges, the competition and the regulation

4 The Local and Global Economy The economic activity in 2016 was characterized by a 4% growth rate. Alongside a negative price index of 0.2%, which was among the factors for the continuation of the expansionary monetary policy, which was expressed by a low interest rate of the Bank of Israel at a rate of 0.1%. The average rate of unemployed as at December 2016 among 15 year olds and up was 4.3% and the rate of participants in the labor force was 64%. The real-estate market in 2016, similar to the previous year, was characterized by the continuation of the upward trend of the housing prices. Despite the efforts of the government to stabilize the market and to decrease the prices, the housing prices increased in 2016 by an average rate of approximately 9%. Global economy: the results of the U.S. elections, the intention of Britain to disengage from the European Union, as well as the emerging political trends in Europe, create uncertainty in the global economy and cause concern for the development of a trade war which will harm the efforts and the steps taken so far in order to stimulate the global economy. The monetary policy in most of the central economies remained very expansionary and on the other hand, the Central Bank in the U.S. began the process of increasing the interest in light of the performance of the American economy. The Banking Regulation This year, similar to the previous year, was characterized by many significant regulatory initiatives in the banking branch. These initiatives have an effect on the revenues and expenses of the banking segment in general and of the Bank specifically, and they are a significant challenge to the Bank, which due to its size, is more affected than bigger banks. At the end of the year, the enactment of the Law for increasing competition and reducing concentration in the banking market in Israel, was completed. The law is based on the recommendations of "Strom Committee". Among the recommendations that were accepted, is the separation of credit card companies from the two largest banks and the reduction of entry barriers for new and independent players, which will be able to compete with the existing banking system, thus increasing competition in the financial and banking services market to the retail segment

5 Future Glance The following years will be no less challenging than the past year. Burdensome regulation, continuation of a low interest environment and of the volatility in the markets due to political uncertainty mainly in the European and American markets constitute significant challenges to the Bank. However, the Bank's strategic directions of action such as: optimal management of the Bank's infrastructure from both the capital aspect and the computer systems aspect, expansion of consumer credit, implementation of an efficiency plan and establishment of a leaner expense infrastructure, will enable the Bank to successfully handle these challenges. One of the significant challenges that will accompany the Bank in the following years is locating and assimilating an alternative computer system to the computer system of Bank Leumi which served the Bank many years. This is in light of the decision of the Bank and Bank Leumi to gradually terminate the engagement between them. The Bank is in the process of examining alternatives on this matter. The information above is forward-looking information, as defined in the Securities Law. This information is based on the corporate strategy and work plan of the Bank, which have been adapted to the Israeli and global economic environment, in view of the continued deceleration of growth; on estimates of business functions within the bank regarding the probabilities and possibility of achieving goals and executing activities; and on the regulatory and intra-organizational environment in which the Bank operates. This information also relies on the macro-economic forecasts of the Bank of Israel and of the Research and Products Division of the Bank. Work plans and objectives based on the corporate strategy that has been established by the Bank, may not materialize, in full or in part, or may materialize in a significantly different manner than expected, under the influence of the following main potential factors: changes in macro conditions in the markets, in comparison to current estimates; severe volatility in the capital markets and commodity markets; and regulatory changes that affect the activity of the Bank. Fulfillment of the strategic 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 intra-organizational plans. Corporate Responsibility The Bank has undertaken a commitment to uphold the value of fairness, as its guiding principle in its interaction with all stakeholders

6 In addition, the Board of Directors, management, and employees of the Bank accord high importance to the Bank's involvement in the community, and are committed to social and community activity. This commitment is expressed in a wide range of community activities, as well as initiatives devoted to community involvement and contribution to the advancement of disadvantaged groups in Israeli society. We believe that corporate responsibility and excellence, together with values-driven fair behavior and contribution to society, provide the foundation and are an essential condition for the achievement of objectives and success of the Bank's operations. Finally, I would like to express my appreciation to my colleagues on the Board of Directors of the Bank, to the members of management, and to the employees of the bank, for their devotion, excellence and contribution to the Bank, to our customers, who are loyal to us, and to all of those who joined us in recent years. Sincerely yours, Zeev Abeles Chairman of the Board of Directors March 29,

7 The Board of Directors Mr. Zeev Abeles, Chairman of the Board of Directors Mr. Yeshayahu Landau, Vice Chairman of the Board of Directors Haim Almog Adv. Mr. Alberto Garfunkel Mr. Meir Dayan Ms. Nira Dror Dr. Yaacov Lifshitz Mr. Yigal Landau Mr. Izaac Manor Mrs. M. Marom Brikman Dr. Zalman Segal - 7 -

8 Report of the Board of Directors and the Management - 8 -

9 Table of Contents of the Board of Directors' and Managements' Report The Board of Directors' and the Managements' Report to the Shareholder's General Meeting 11 Forward-looking Information 11 General Overview, Objectives and Strategy 11 The Bank's Organizational Structure 13 Description of Areas of Activity 14 Selected Financial Data - Consolidated 16 Multi Period Data Consolidated Statement of Profit and Loss 18 Multi Period Data Consolidated Balance Sheet 19 Summary Description of Principle Risks 20 Objectives and Business Strategy 21 Explanation and Analysis of the Results of the Business Situation 25 Trends, Phenomena, Developments and Material Changes 25 Developments and Material Changes in Israel's Economy 25 Developments and Material Changes at the Bank 27 Material Developments in Income, Expenses and Other Comprehensive Income 29 Net Interest Income and Non-Interest Income 30 Operating and Other Expenses 33 Investments and Expenses in Respect of IT 34 Developments in Other Comprehensive Income 35 The Structure and Development of Assets, Liabilities, Capital and Capital Adequacy 37 Assets and Liabilities 37 Equity and Capital Adequacy 43 Description of the Bank's Business by Activity Segments 45 Household Segment 48 Private Banking Segment 49 Negligible, Small, Mid-sized and Large Businesses Segment 51 Institutional Entities Segment 53 Financial Management Segment 53 Principle Investee Companies 54 Description of the Activity and Contribution of the Principle Investee Companies to the Group's Business 54 Agreements, Transactions, and Payments between the Group's Companies 57 Risk Overview 58 General Description of the Risks and the Way of Managing Them 58 Corporate Governance 59 Stress Scenarios 60 Credit Risks 61-9-

10 Credit Portfolio Quality Risk 61 Housing Loans Policy 65 Credit Policy for Private Customers (Excluding Housing Loans) 70 Credit Portfolio Concentration Risk 75 Credit for Construction and Real-Estate 79 Market Risks 84 Interest-Rate Risk 86 Linkage-Base Risk 88 Option Portfolio Risk 93 Liquidity Risk 94 Operational Risk 94 Compliance Risk 96 Legal Risk 96 Goodwill Risk 97 Strategic Risk 97 Environmental Risk 98 The Bank's Assessment Regarding the Effect of Risk Factors 98 Critical Accounting Policies and Estimates, Controls and Procedures 100 Allowance for Credit Losses 100 Provision for Impairment of an Other-Than Temporary Nature of Bonds Available for Sale 104 Fair Value of Financial Instruments 105 Employee Benefits 108 Derivative Financial Instruments 111 Contingent Liabilities 111 Buildings and Equipment 112 Deferred Taxes 113 Controls and Procedures 113 Evaluation of Controls and Procedures Regarding Disclosure 115 Changes in Internal Control

11 The Board of Directors and Managements' Report to the Shareholders' General Meeting At the meeting of the Board of Directors of the Bank held on March 29, 2017, it was decided to approve the financial statements of the Bank and its subsidiaries as at December 31, 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 report of the Board of Directors and Management for this year (hereinafter: "The 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 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 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, inter alia, future forecasts regarding matters pertaining to economic developments in Israel and abroad and on the work plans and budgets of the Bank for 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. General Overview, Objectives and Strategy Union Bank of Israel Ltd. (hereinafter the "Bank") was founded in The Bank is a banking corporation and possesses a banking license under the provisions of the Banking Law (Licensing) 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 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 Further to the agreement to sell the controlling interest in the Bank, the -11-

12 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 (including a private banking center). 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, 2016, 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, 2016 December 31, 2015 December 31, 2014 Credit to the public Deposits of the public Shareholders' equity 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. - Proprietary portfolio management and management of market risks and liquidity. The Bank's Board of Directors outlines, in accordance with the risk appetite and risk tolerance that it establishes, the business policies of the Bank and supervises the implementation of the policy by the management of the Bank. As part of this process, the Board of Directors discusses and approves goals, objectives, resource allocation for the work plan and the budget. -12-

13 The Bank's Organizational Structure Set below is a diagram of the Bank's organizational structure as of December 31, 2016: Chairman of the Board of Directors Internal Audit Secretary of the Bank Board of Directors C.E.O. Legal Counsel and Compliance Division Controls and Risk Management Division Chief Accountant Division Resources Division Financial Management Division Corporate Division Retail, Customer Asset, and Advising Division The Bank's Branches and Extensions (36) -13-

14 Description of Areas of Activity A brief description of the distribution of areas of activity at the Bank, based on the current organizational structure of the Bank, is set out below. A. Retail, Customer Asset, and Advising Division The Division is responsible for obtaining the Bank's retail goals and managing the array of the Bank's branches regarding activity with private customers (households and private banking) and small businesses. To which, inter alia, the retail credit and mortgages array (credit to households and small businesses of up to NIS 5 million), advertising, strategy and business development array, customers' assets management and advising sector, direct banking sector and inter-division operations and coordination unit, are subject to. Heads of branches sector also operate in this Division. In addition, the Division monitors the activity of the subsidiary Union Leasing Ltd. B. Corporate Division - Responsible for the management of the exposures to the business credit risks at the Bank including concentration risk of borrowers and groups of borrowers, for the treatment of problematic debts and implementing debt collection procedures through the special credit array and for reporting on the credit field to various supervision entities. C. Financial Management Division - Responsible for the management of the Banks fluent liquidity, in the trading rooms of Israeli and foreign securities, the foreign currency trading rooms, the Bank s proprietary management activity and the Banks' management of assets and liabilities and on reporting on these subjects to the various supervisory factors. 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 including leading a project concerning the replacement of the supplier of IT services to the Bank, procurement and logistics, information security, cyber protection, assets, construction and maintenance, and the Bank s operational expense budget, in addition, the division is also responsible for updating, managing and preparing the Bank's procedures and also for the emergency preparedness. The division also monitors the activity of the following subsidiaries: Union Systems Ltd. and Igudim Ltd. E. Chief Accountant Division Responsible for managing the books of the Bank, coordinating and preparing the quarterly and annual financial statements to the public including coordinating the internal control over financial reporting array (SOX), preparing and analyzing the internal reports to the management and the Board of Directors and reporting to various supervisory entities (mainly to the Bank of Israel), payments and external reporting to the tax authorities and supporting various factors at the Bank on various issues of taxation. In addition, the Division is responsible for monitoring the compliance with the objectives of the work plan, for the Bank's capital plan, for the measurement of the profitability of the business activity and for performing various economic jobs

15 F. Controls and Risk Management Division Responsible for the development and validation 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. The Division monitors as a second defense line to the Banks' business activity and monitors the operational risks inherent in this activity. The Division has no authority to receive business decisions. The Division is responsible for the quarterly risk document, overseeing the processes involved in formulating the Bank s ICAAP document, for providing an opinion on material credit 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 and compliance risk management, and for providing 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, concentration of prosecutions against the Bank and the supervision of professional authorities handling them on behalf of the Bank. Compliance branch, consisting of the prohibition of money laundering unit and the compliance unit, is subject to the Division. In addition, the public inquiries unit is also subject to the Division. The Chief Compliance Officer serves as an ombudsman at the Bank. H. Secretariat of the Bank Subject to the Chairman of the Board of Directors, responsible for assisting the Board of Director's work 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 and 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 the Bank's general meetings 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 and 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 the ICAAP document

16 Concise Financial Information Over Time (On a consolidated basis) Main Performance Indices: For the Year Ended December 31 * Return (loss) on capital (1) (2.0%) 6.1% 1.0% 6.2% 5.9% Return on assets (1) (0.1%) 0.6% 0.1% 0.5% 0.4% Tier 1 capital ratio to risk 9.67% 9.76% 9.61% - - Components (2) Leverage ratio (3) 5.43% 5.36% Liquidity coverage ratio (4) 116% 98% Efficiency ratio (5) 95.4% 87.6% 87.9% 80.2% 79.6% Main Credit Quality Indices: Expense rate in respect of credit Losses from the credit to the public 0.4% (0.5%) 0.4% 0.1% 0.3% Rate of impaired debts or debts in Arrears of 90 days or more from the credit to the public 1.0% 0.9% 1.2% 3.0% 2.7% Rate of net accounting write-offs from average credit to the public 0.1% (0.2%) 0.6% 0.1% 0.2% Main data from Profit and Loss Statement (in NIS): Net profit (loss) (1) (49) Net interest income Provisions (income) for credit Losses 98 (107) Non-interest income Of which: fees Operational and other fees (1) 1, Of which: salaries and related Expenses Basic and diluted earnings (loss) per share (NIS) (1) (0.67)

17 Concise Financial Information Over Time (Cont.) (On a consolidated basis) For the Year Ended December 31 * Main Data from the Balance Sheet (in NIS): Total assets (1) 40,988 40,888 40,858 39,483 38,802 Of which: cash and deposits with banks 3,901 6,668 9,848 9,924 8,246 Securities 11,584 10,371 6,789 4,810 4,940 Net credit to the public 23,684 22,315 21,713 22,135 23,573 Total liabilities 38,646 38,485 38,583 37,219 36,634 Of which: deposits of banks Deposits of the public 32,756 32,466 31,498 30,622 30,890 Bonds and subordinated notes 3,395 3,179 3,474 3,109 2,929 Total capital (1) 2,342 2,403 2,275 2,264 2,168 * Data for 2016 includes one-time effects in respect of full allocation to salary expenses of the operational efficiency plan in the amount of NIS 114 million (before taxes) and depreciation of tax assets (increase in tax expenses) in the amount of NIS 19 million. (1) Comparative figures were restated in light of retroactive implementation of US GAAP on intangible assets, see Note 1.D.2. (2) Comparative figures for were not restated due to a measurement not in accordance to the directives of Basel 3. (3) For the first time as of 2015 the ratio is measured and it represents the ratio between Tier I capital to the total gross exposure, including off-balance sheet exposure without offsetting collateral. (4) The disclosure requirements to the ratio were added as of April 1, The ratio in terms of simple averages of daily observations during the last quarter. (5) The efficiency ratio after neutralizing the effect of the efficiency plan was 84.6% in

18 Multi Period Data Consolidated Statement of Profit and Loss Year-End Statement of Consolidated Profit and Loss Reported Amounts * NIS millions Interest income ,209 1,416 Interest expenses Net interest income Provision (income) for credit losses 98 (107) Net interest income after provision for credit losses Non-Interest Income: Non-interest financing income Fees Other income Total non-interest income Other Operating Expenses: Salaries and related expenses (1) Maintenance and depreciation of buildings and equipment (1) Other expenses Total other and operating expenses 1, Profit (loss) before taxes (49) Provision for taxes on profit (1),(2) - 81 (3) Profit (loss) after taxes (49) Net profit (loss) attributed to shareholders of the banking corporation (1) (49) Basic and diluted net earnings (losses) per ordinary share (NIS) attributed to the banking corporations' shareholders (1) (0.67) * Data for 2016 includes one-time effects in respect of full allocation to salary expenses of the operational efficiency plan in the amount of NIS 114 million and reduction of tax assets (increase in taxes expenses) in the amount of NIS 19 million. (1) Comparative figures were restated in light of the retroactive implementation of US GAAP on intangible assets, see Note 1.D.2. (2) See Subsection Provision for Taxes below. -18-

19 Multi Period Data Consolidated Balance Sheet Year-End Consolidated Balance Sheets Reported Amounts Assets Cash on hand and NIS millions deposits with banks 3,901 6,668 9,848 9,924 8,246 Securities 11,584 10,371 6,789 4,810 4,940 Borrowed securities Credit to the public 23,937 22,505 21,959 22,420 23,858 Allowance for credit losses (253) (190) (246) (285) (285) Net credit to the public 23,684 22,315 21,713 22,135 23,573 Credit to the government Investment in investee companies Buildings and equipment (1) Assets in respect of derivative instruments Other assets (1) ,487 1,198 1,156 Assets held for sale Total Assets 40,988 40,888 40,858 39,483 38,802 Liabilities and Equity Deposits from the public 32,756 32,466 31,498 30,622 30,890 Deposits from banks Deposits from the government Subordinated notes and bonds 3,395 3,179 3,474 3,109 2,929 Liabilities in respect of derivatives instruments Other liabilities 1,928 2,063 2,883 2,609 1,978 Total Liabilities 38,646 38,485 38,583 37,219 36,634 Equity attributed to the shareholders of the banking corporation (1) 2,342 2,403 2,275 2,264 2,168 Total Liabilities and Equity 40,988 40,888 40,858 39,483 38,802 (1) Data for prior periods has been restated in light of the retroactive implementation of US GAAP on intangible assets, see Note 1.D

20 Summary Description of Principal Risks The business activity of the Bank involves credit risks, market risks, liquidity risks, operational risks, legal risks, compliance risks, goodwill risks, and strategic risks. Credit risk is the risk that a loss may be incurred by the Bank as a result of insolvency or decline in the repayment capability of a counterparty to a transaction with the Bank, in which the counterparty fails to fulfill its obligations pursuant to the agreed terms; this is the most significant risk to which the Bank is exposed in the course of its operations, mainly in terms of its volume compared to other risks. Credit risk also encompasses credit portfolio concentration risk. Market risk is the risk of damage to the Bank's revenue and capital as a result of changes in prices and rates in the financial markets, particularly changes in interest rates, exchange rates, inflation, and share prices. Liquidity risk is the risk to the profits of the banking corporation and its stability arising from an inability to supply its liquidity needs and repay its liabilities on time, without incurring exceptional losses. Operational risk is the risk of loss as a result of inappropriate or deficient internal, human, or systemic processes or as a result of external events. This risk includes legal risk and compliance risks, but does not include strategic risk and goodwill risk. See the Section "Risk Overview" for information regarding the Bank's assessment of the effect of the various risk factors at the Bank. The Bank closely monitors developments in the markets, macro-economic data, the regulation and the legislation that apply to or may affect the Bank, and which, together with its corporate strategy and existing activity mix, may expose the Bank to significant risks. Individual material risks that constitute top and emerging risks which the Bank identifies and which it prepares to monitor and manage are: the end of the current contractual engagement with Bank Leumi for the provision of IT services and assimilation of an alternative system; increase of cyber threats; compliance and conduct risks; regulatory initiatives; the continued low interest-rate environment, which may affect the extent of implementation of the Bank's corporate strategy and its profitability. In addition, the Bank is keeping track of the results of the elections in the US, Britain's intention to disengage from the European Union, the political emerging trends in Europe which cause uncertainty in the global economy and cause concern for the development of a trade war which will harm the efforts and the steps taken so far in order to motivate the global economy. The Bank is keeping track of -20-

21 these developments and developments in the world's capital markets, while tightening the controls on its exposures to banks worldwide and to its customers which might be affected from it and adjusts exposures if necessary. For further information regarding top and emerging risks see Report on the Risks on the Bank's website, at: http//unionbank.co.il/1378-he/unionbank.aspx. Objectives and Business Strategy Background The Board of Directors of the Bank has defined the principles of the strategic plan for the years which is focused on improving key indicators of activity such as profitability, liquidity, concentration, and optimal use of risk-weighted assets. The plan defines retail banking as the main growth engine for the coming years. Accordingly, stronger objectives were set in the retail credit and in the credit for small businesses domains, which are designated to serve as the key anchor of revenue growth, in combination with streamlining in the areas of expenses transverse streamlining process concerning manpower, and continued solidification and expansion of the customer base, as well as sales of products to customers of all banks, with an emphasis on credit products. In corporate banking, the Bank intends to decrease the risk-weighted assets allocated to big business customers in order to support the Bank's strategic plan to expand the retail activity and to decrease the credit concentration. The Bank will continue to operate in the business fields the Bank specializes in, including accompanying residential construction, the capital market, and the diamond segment, while considering the changing conditions in markets in Israel and globally, while continuing to take steps to reduce borrower and sector concentration. The main subjects addressed by the Bank's five-year strategic plan are: Retail Banking Growth in retail banking will be based on three main principles, aimed at increasing the proportion of retail banking in the Bank's activity by expansion of credit activity, expansion of the customer base and innovation in the areas of products and digital banking, subject to constraints deriving from the process of replacing the computer systems. The retail-banking work plan for the following years sets challenging goals in the credit domains, which serve as a key growth engine for the retail-banking segment's revenues. Components of growth in retail credit are: - Expansion of credit activity for customers of the Bank. -21-

22 - "Direct Banking Center"- granting credit to customers of all banks. - Expansion of the commercial credit activity for small businesses (in amounts of up to NIS 5 million), the responsibility for which, transferred to the Retail Division during Continued collaboration with Mimun Yashir. Alongside its credit activity, the Bank continues to develop its retail-banking infrastructure by expanding its active customer base, through processes aimed at recruiting customers as well as deepening and strengthening its relationships with the customer. The Bank regularly examines the changes occurring in the banking market in Israel and worldwide, and in response formulates processes to improve its competitiveness capability taking into account renewable technologies, alongside maintaining its relative advantage on the level and quality of professional service. Alongside these processes, the Bank continues to act and expand in the area of client assets, while ensuring proper controls and complying with the provisions of the law. As part of the implementation of the strategic plan, the Bank plans to raise deposits from customers of all banks through an internet-based closed system, when the market terms justify it. Additional emphasis has been placed on maintaining the quality of the mortgage portfolio and improving the yield, taking into consideration the market's condition, the limits on risk-weighted assets, and the spread. The Bank continues to improve infrastructures of the direct channels, which are a key component in strengthening the customer experience and expanding availability. During 2016, the activity of a mobile branch, the first of its kind in Israel, began. In the first stage, it provides service mostly to kibbutzim and entrance to additional areas, in which there is a need for a mobile branch, is examined. The Bank continues to develop awareness to the Bank among all potential customers; to do so, emphasize on the formation of ongoing processes, aimed at increasing awareness and maintaining and enhancing the status of the brand, was placed. In order to support achievement of the objectives of the plan, an organizational change in the Retail- Banking Division was made. The change is meant to provide solutions to the challenges of the strategic plan, to make work processes more efficient, and to provide a supportive infrastructure for the various units, and also increased the efficiency of the man power in the division. -22-

23 Main points of the organizational change: - Centralization of strategic planning processes, of marketing, of information infrastructures, and of digital banking under the marketing, strategy, and business development unit. - Centralization of all elements of direct banking: credit granting, service, and operations, under the direct-banking sector. - Centralization of all retail credit activity (consumer credit, credit for small businesses, and mortgages) under the retail credit and mortgages unit. - Centralization of the advising, the research, and the deposits activity under the customer assets sector. - Establishment of two regional sectors which are responsible for promoting and motivating the activity of the branches while helping managers meet targets. In addition, a change in the Bank's marketing mix, deriving from the Bank's strategic plan, was made. The growth targets in the retail credit volumes are supported by accumulated experience, while improving work processes, expanding powers at the branches and at headquarters and improving decision supporting tools. As a result of the growth of the retail portfolio, the Bank is working to deepen the controls and to consistently examine the effect of the changes on the quality and on the risk of the portfolio. Corporate Credit Adjusting the mix of the credit portfolio to the goal of reducing the concentration, derived from the strategic plan and from regulatory limitations: capital planning, concentration of borrowers and groups of borrowers as well as compliance with additional limitations by virtue of the new directives and compliance with limitations of the economic sectors concentration index, all while maintaining the quality of the credit portfolio in light of the macro aspects and the economic changes. In addition emphasize is given to strictly maintaining and improving the yield for all of the risks arising from the various activities. Optimal allocation of the risk-weighted assets in order to improve the yield, continuing activity in areas in which the Bank has expertise including diamonds, capital market segment and accompaniment of the residential construction, while addressing the changing market conditions in Israel and worldwide, recruiting new customers with an emphasis on mid-sized customers segment, intensifying the activity with existing customers and expanding activities that do not consume risk-weighted assets for increasing the yield. -23-

24 Capital Market - Continuation of the activity in the capital market, while expanding the advised customers infrastructure and increasing the activity among the existing customers and potentially new customers, inter alia, by 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. Continued improvement of the structure of the resources and treatment of the concentration of the depositors, by recruiting retail deposits and reducing the dependence on large depositors and this is 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 information in this paragraph is forward-looking information, as defined in the Securities Law, based on the principles of 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; on the estimates of the business functions at the Bank regarding the probability and possibility of achieving goals and carrying out activities; as well as on the regulatory and intra-organizational environment in which the Bank operates. 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 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. Compliance with the work plan also depends on the success of marketing efforts, on competition, on the success of planned technological improvements due to the replacement of the Bank's systems, and on the degree of the Bank s success in implementing its internal plans. -24-

25 Explanation and Analysis of the Results of the Business Situation Trends, Phenomena, Developments and Material Changes Developments and Material Changes in Israel's Economy General - According to the Central Bureau of Statistics, the gross domestic product, in fixed prices increased in 2016 by 4%. According to the forecast for December 2016 of the Research Division of the Bank of Israel, in the gross domestic product is expected to increase by rates of approximately 3.2% and 3.1% respectively. The monetary interest, according to the forecast of the Research Division, is expected to remain at its current level at a rate of 0.1%, until the third quarter of 2017 and to increase to 0.5% at the end of Employment and Private Consumption - According to the manpower survey of the Central Bureau of Statistics, the average unemployment rate in January 2017 among those aged 15 and up, was 4.3%, this is unchanged from December The rate of participants in the workforce, among aged 15 and up, in January 2017 was 64.1% compared to 64.0% in December The revenues of all of the retail chains indicate an annualized increase at a rate of 1.1% in November 2016 until January 2017, relative to the decrease of approximately 2.6% in the three months August-October Foreign Trade, Capital Movements and Exchange Rates - The trade deficit (excluding ships, airplanes, diamonds and energy materials) amounted to NIS 20.8 billion in 2016, compared with a surplus of NIS 7.9 billion in In 2016 the NIS strengthened (average rate) compared to the JPY by 7.1%, compared to the EURO by 4.8%, compared to the CAD by 1.6%, compared to the CHF by 3.4% and compared to the GBP by 9.3%. However, the NIS weakened compared to the USD by 0.1%. Fiscal Policy - The estimate of the state's budget deficiency for 2016 amounted to NIS 25.9 billion which is 2.15% of the GDP, of which a deficit in December in the amount of NIS 18.1 billion. In the original budget for 2016, a deficit of NIS 35 billion was planned which was approximately 2.9% of the predicted GDP in the original budget. The deviation of the deficit relative to the planned in the original budget is explained by taxes income higher than predicted in the amount of NIS 8.8 billion, and by expenses lower than planned in the original budget in the amount of NIS 0.3 billion. The state budget deficit in 2015 amounted to NIS 24.5 billion (2.15% of the GDP) compared to an annual planned deficit of NIS 31.4 billion. The governments' expenses from the beginning of the year until December 2016 (excluding credit granting) amounted to approximately NIS 347 billion compared to NIS billion in the original budget plan. Prices and Monetary Policy - The CPI decreased by 0.2% in 2016, this is after a decrease of 1% in The index excluding housing decreased by 0.7%, the index excluding energy decreased by 0.2% and the index excluding vegetables and fruits decreased by 0.1%. In 2016 the interest of the Bank of Israel remained unchanged and stood at a level of 0.1%. Capital Market - TA-25 index decreased by approximately 4% in The average daily trading turnover in the shares market in and out of the Stock Exchange, including ETFs amounted to Approximately NIS 1.3 billion in In 2015 the turnover amounted to NIS 1.4 billion. -25-

26 Construction and Real Estate - The housing prices increased at a rate of 5.9% in the last 12 months which ended on December 2016, compared to an increase rate of approximately 8.0% in the last 12 months which ended on December On months January 2017 December 2016 mortgages in the amount of NIS 9.1 billion were given, compared to NIS 10.4 billion in the corresponding period of the previous year. Following are details on the CPI, the representative exchange rates, the interest of the Bank of Israel and the rate of change in them: December 31, 2016 December 31, 2015 December 31, 2014 CPI (in points) Known index (basis of 2014) Exchange Rate (in NIS) USD EURO GBP CHF Interest of the Bank of Israel (percent) For the Year Ended December percentage Increase (decrease) rate of CPI (0.3) (0.9) (0.1) Increase (decrease) rate of USD (1.5) Increase (decrease) rate of EURO (4.8) (10.1) (1.2) Increase (decrease) rate of GBP (18.3) (4.6) 5.6 Increase (decrease) rate of CHF (4.0) (0.1) 0.8 * The data is based on data from the Central Bureau of Statistics. -26-

27 Material Developments and Changes at the Bank The following are the material and exceptional trends and developments of the reported period: 1. On November 30, 2016, the Board of Directors of the Bank approved an efficiency plan, primarily consisting of a voluntary-retirement program, within which, according to the Bank's estimates, approximately 120 employees are expected to retire during The efficiency plan was formulated further to the letter of the Banking Supervision Department, published on January 12, 2016, entitled "Increasing the operational efficiency of the Israeli banking system". The total cost of the plan, according to estimates by the management of the Bank, based on an actuarial calculation, is approximately NIS 114 million, before tax effects. The costs of the actuarial liability to employees due to the efficiency plan were allocated to profit and loss in the annual financial statements for 2016, in accordance with the applicable accounting principles concerning employee benefits. The effect of the costs of the efficiency plan on the ratio of common equity capital to riskadjusted assets, estimated at approximately 0.41%, will be allocated in equal parts over five years, from 2017 forward. For additional details, see Note 21B. It is clarified that the data presented above regarding the extent of the efficiency plan and its effect on profit and loss and on the ratio of common equity capital to risk-adjusted assets during the years of the plan and thereafter constitute forward-looking information, as defined in the Securities Law, This data depend, among other factors, on the degree of employees' responsiveness to the retirement offer and retirement terms, on the timing of retirement of employees, and on the characteristics of the group of retirees (duration of service, age, gender, and salary level); accordingly, the actual expenses of the efficiency plan may differ materially from the data presented above. 2. On January 4, 2016, the Knesset plenum passed a bill, in the second and third reading, to lower the rate of corporation tax by 1.5%, from 26.5% to 25%, beginning January 1, The statutory tax rate applicable to the Bank decreased in 2016, from 37.58% to 35.9%. On December 21, 2016, the Knesset plenum passed the Economic Efficiency Law (Legislative Amendments for the Achievement of the Budget Objectives for the Budget Years 2017 and 2018), in the second and third readings. Within this legislation, a reduction of corporate tax from 25% to 23%, in two stages, was approved. The first stage is a reduction to 24% beginning in January 2017, and the second stage is a reduction to 23% from January 2018 forward. As a result of these changes, the Bank's tax expenses (against deferred taxes) increased by a total of NIS 19 million. -27-

28 3. The expansionary policy of the Bank of Israel was maintained this year, so that the interest rate remained at 0.1%. Despite the low interest-rate environment, the net interest income of the Bank grew by 14%, to a total of NIS 652 million, compared with NIS 571 million in the same period of the preceding year, due, among other causes, to the implementation of the strategic plan for the expansion of retail credit. For an analysis of financing income, see the section "Net Interest Income and Non-Interest Income." 4. The Bank has a material contractual engagement over a period of many years with Bank Leumi LeIsrael Ltd. for the provision of IT and operational services for a considerable part of its core banking systems. The IT and operational agreement was signed for a period of ten years, which ended on December 31, Beginning on that date, the parties entered a transitional period, which may last up to three years, during which the project of ending the contractual engagement is underway. During 2016, the Bank began a process of in-practice examination of alternate suppliers, in cooperation with teams of professional experts; within this process, the Bank contacted various suppliers in order to receive offers for IT and operational services. A dedicated IT Committee of the Board of Directors was established in late 2015, to supervise the process of preparation in this area and examination of alternatives for future IT services, and provide ongoing supervision and guidance for the process. For additional details, see Note 23.C For details regarding the increase in expenses in comparison to the same period of the preceding year, see the item of provision for credit losses and operating and other expenses, below. 6. For details regarding changes and developments during the period of the report, see the Section "Material Developments in Revenues, Expenses, and Other Comprehensive Income" and the Section "Structure and Developments of Assets, Liabilities, Capital, and Capital Adequacy." 7. Management estimates and principal assumptions are described in Note 1 to the Financial Statements and in the Section "Critical Accounting Policies and Critical Accounting Estimates." The main change this year concerned the calculation of the collective allowance, which is calculated, among other matters, with respect to net charge-off rates in a range of years determined according to the directives of the Bank of Israel, with the addition of qualitative adjustments. Pursuant to the guideline of the Bank of Israel, the calculation of net charge-off rates in 2016 and 2017 should continue to include the year 2011 as part of the estimate of the collective allowance, which should be taken into consideration in calculating the qualitative coefficient. As a result of the implementation of the guideline of the Bank of Israel, at the initial implementation date, the collective allowance increased by a total of approximately NIS 6 million. -28-

29 8. For details regarding legislative updates and legislative initiatives related to the banking sector, see Section "Legislative Updates" in the Report on Corporate Governance, Audit, Additional Details, Regarding the Business of the Banking Corporation and Management Thereof". Material Developments in Income, Expenses and Other Comprehensive Income The loss in 2016 amounted to NIS 49 million compared to net profit in the amount of NIS 144 million in the corresponding period of the previous year. The loss includes one-time effects in respect of full allocation to salary exprnses of the operational efficiency plan in the gross amount of NIS 114 million before tax and deductions of deferred tax assets against an increase in tax expenses in the amount of NIS 19 million as a result of legislative updates on the tax rates. Loss return on equity (based on average capital base) amounted to 2.0% in 2016, compared to 6.1% net profit return on equity in the corresponding period of the previous year. Loss before taxes totaled NIS 49 million in 2016 compared to a profit of NIS 225 million in The loss before taxes return on capital (based on an average capital basis) was 2.0% in 2016 compared to the return of profit before taxes on capital of 9.5% in For the Year Ended December Change NIS millions Net interest income Provisions (income) for credit losses (1) 98 (107) 205 Non-interest income Operational and other expenses (2) 1, Profit (loss) before taxes (49) 225 (274) Taxes on income (2) - 81 (81) Rate of provision for tax % - Net profit (loss) (2) (49) 144 (193) Profit (loss) per share in NIS attributed to the Bank's shareholders (2) (0.67) Net profit (loss) return on the capital (2) (2.0%) 6.1% - (1) In the same period last year, an exceptional income was included in respect of a collection from a single customer in the amount of NIS 85 million. (2) Comparative figures were restated in light of retroactive implementation of US GAAP on intangible assets, see Note 1.D

30 Net Interest Income and Non-Interest Income Net Interest Income amounted in 2016 to NIS 652 million compared to NIS 571 million in the corresponding period of the previous year, an increase of 14%. Following is a concise analysis of the development of income and expense rates and interest spreads: For the year Ended December Average Balance Interest Income (Expenses) Rate of Income (Expenses) Average Balance Interest Income (Expenses) Rate of Income (Expenses) NIS millions % NIS millions % Unlinked Israeli Currency ** Total interest-bearing assets 27, , Total interest-bearing liabilities 18,321 (83) (0.45) 17,933 (85) (0.47) Interest spread CPI Linked Israeli Currency Total interest-bearing assets 5, , Total interest-bearing liabilities 4,056 (70) (1.73) 4,973 (63) (1.27) Interest spread Foreign Currency* Total interest-bearing assets 4, , Total interest-bearing liabilities 3,336 (24) (0.72) 3,477 (16) (0.46) Interest spread Total Activity in Israel Total interest-bearing assets 37, , Total interest-bearing liabilities 25,713 (177) (0.69) 26,383 (164) (0.62) Interest spread * Including Israeli currency linked to foreign currency. ** The non-bearing interest balances of current accounts are not included in this table. In the unlinked segment the interest spread is 1.51%, compared to 1.44% in the corresponding period of the previous year. The increase is mainly due to an increase in credit spreads in light of the expansion in the retail activity. In the CPI-linked segment the interest spread is 0.74%, compared to 0.56% in the corresponding period of the previous year. The increase in the interest spread derives mainly from the effect of the changes in the decline rate of the index, including its effect on deposits until securing the index floor on the expense rate. In foreign currency the interest spread is 2.66%, compared to2.41% in the corresponding period of the previous year. Total the total interest spread is 1.51% compared to 1.39% in the corresponding period of the previous year. The increase in the income rate was mainly influenced by the unlinked segment. -30-

31 Provisions (Income) for Credit Losses (4) For the year ended December Change NIS millions Individual provision for credit losses (1) Collection of debts for which allowances were recorded in the past (2) (58) (113) 55 Provision(income) for collective allowance (3) 39 (40) 79 Provision (income) for credit losses 98 (107) 205 Rate of net individual provision (income) for credit losses from the total net credit to the public 0.25% (0.30%) Rate of net collective provision (income) for credit losses from the total net credit to the public 0.16% (0.18%) Rate of net total provision (income) for credit losses from the total net credit to the public 0.41% (0.48%) (1) Before offsetting collection of debts for which allowances were recorded in the past. (2) In 2015 a debt collection in respect of a single customer in the finance sector in the amount of NIS 68 million was included. (3) The collective allowance is influenced by changes in the balance of the credit portfolio, changes in the mix of the portfolio, changes in the classification of problematic debts and the update of collective allowance coefficients. (4) For further information see Section "Risk Overview Credit Risks" in the Report of the Board of Directors and the Management and Note 27 to the financial statements. -31-

32 Net Interest Income after Provision for Credit Losses totaled NIS 554 million in 2016 compared to NIS 678 million in the corresponding period of the previous year, a decrease of approximately 18.3%. Non-Interest Income amounted NIS 405 million in 2016 compared to NIS 383 million in the corresponding period of the preceding year, an increase of approximately 6%. For the Year Ended December Change NIS millions NIS millions Percentage Non-interest financing income Of which: Realization profits and adjustment of securities of bonds and investments in securities including received dividends Derivative activities* and exchange rate differences Other - (9) 9 (100) Income from fees Other income 1 4 (3) (75) Non-interest income * Especially from evaluation of interest derivatives transactions. Following is a breakdown of fees: For the Year Ended December Change NIS millions NIS millions Percentage Account management Credit cards Securities transactions (5) (8) Distribution fees of financial products (2) (11) Management, operations and trust for institutional entities (4) (27) Credit handling Conversion differences Foreign trade activity (1) (7) Fees from money business Net income from credit portfolio services 2 3 (1) (33) Other fees Total fees

33 Operating and Other Expenses Operating and Other Expenses totaled NIS 1,008 million in 2016, compared to NIS 836 million in the corresponding period of the previous year, an increase of approximately 20%. The operating expenses increased by 6.9% when neutralizing the effect of the efficiency plan. The rate of the operating and other expenses from the total income (net interest income and non-interest income) was 95.4% in 2016 compared to 87.6% in the corresponding period of the previous year. When neutralizing the effect of the efficiency plan, the rate of the operating and other expenses was 84.6% in For the Year Ended December Change NIS millions NIS millions Percentage Salaries and related expenses (1) Depreciation and maintenance of buildings and equipment Other expenses Total operational and other expenses 1, (1) Including an expense in the amount of NIS 114 million in respect of the efficiency plan, see details in Note 21.B. The increase rate in salary expenses was 5.8% after neutralizing this expense. Following is a breakdown of other expenses: For the Year Ended December Change NIS millions NIS millions Percentage Computer Professional services Marketing and advertising Office expenses Communication Insurance 4 5 (1) (20) Fees Salary of members of the Board of Directors Training and advanced studies Other Total other expenses

34 Provision for Taxes - In 2016 two offsetting movements were recorded in the "provision for taxes" item, as a result, the recorded tax provision was negligible. An expense in the amount of NIS 19 million due to changes in the corporation tax were recorded, against an annual loss and a tax benefit in respect thereof. For details see Note 8.C. - The Bank has final tax assessments or tax assessments considered final up to and including the tax year 2013 (the subsidiaries, up to and including the tax year 2012, excluding one subsidiary up to and including 2010). - For additional details regarding the Bank's policy for recording taxes and the provision for taxes, see Note 1.E.11 and Note 8 to the Financial Statements. Investments and Expenses in Respect of the Information-Technology Array Costs of software purchased by the Bank, is measured at cost less accrued reductions and impairment. Costs related to software development or adaptation for in-house use are capitalized only if the development costs can be measured reliably, if the software is technically and commercially feasible, if future economic benefits are expected, and if the Bank has the intention and sufficient resources to complete the development and use the software. Costs recognized as an intangible asset include direct costs of services and direct salary of employees. Such costs are measured at cost, with the deduction of accrued depreciation and losses from impairment. Overhead costs that cannot be directly attributed to the development of the software and research costs are recognized as expenses when incurred. On May 21, 2015, the Bank received a letter from the Banking Supervision Department concerning the capitalization of in-house software development costs, pursuant to which the following rules were established: - A materiality threshold was established for capitalization, at no less than NIS 300 thousand. Any software development project the total costs of which are lower than the established materiality threshold shall be allocated to profit and loss as an expense. - In respect of deliverables for which the total capitalizable costs are not lower than the materiality threshold, a capitalization coefficient lower than 1 has been set per hour of work, in order to take into consideration the potential for inefficiency and common deviations in software development projects. - The amortization period of the costs shall not exceed five years. - The rank of the employees whose costs are capitalized to assets shall be restricted, such that the highest rank is at most a manager who demonstrably spends most of his or her time in actual development, and the number of hours actually invested by the manager in the entire development project can be accurately measured. -34-

35 As of January 1, 2016, the Bank has adopted the circular of the Bank of Israel entitled, "Reporting by Israeli banking corporations according to US GAAP concerning intangible assets." See Note 1.D.2. Details of the Bank's investments and expenses in respect of the information-technology system recorded during 2016 are set out below: 1. Expenses recorded in the Statement of Profit and Loss totaled NIS 203 million, of which: NIS 22 million recorded in salaries and related expenses, NIS 39 million in depreciation and amortization expenses, and NIS 142 million in other expenses (mainly outsourcing). Expenses allocated to profit and loss are primarily: labor wages of workers engaged in system maintenance and operation, hardware and software service and maintenance agreements, information costs, and telecommunications and telephone expenses. 2. Costs in respect of information technology which were not recorded as expenses in the Statement of Profit and Loss, but were recorded as assets in the Financial Statement in the reported year, totaled NIS 29 million. 3. The balance of assets in the balance sheet in respect of the information-technology system for the end of the reported year amounts to NIS 90 million. Developments in Comprehensive Income (Loss) The year 2016 amounted to a comprehensive loss of NIS 61 million compared to a comprehensive profit of NIS 128 million in the corresponding period of the previous year. The loss for 2016 amounted to NIS 49 million, compared to a net profit of NIS 144 million in the corresponding period of the previous year. The adjustments in respect of presentation of securities available for sale at fair value increased the other comprehensive loss in the amount of NIS 3 million, compared to a decrease in the other comprehensive income in the amount of NIS 17 million in the corresponding period of the previous year. The adjustments of the net liabilities in respect of employee benefits increased the other comprehensive loss in the amount of NIS 9 million compared to an increase in the other comprehensive income in the amount of NIS 1 million in the corresponding period of the previous year. -35-

36 For the Year Ended December 31 NIS millions Change Net profit (loss) attributed to the shareholders of the Bank (49) 144 (193) Net adjustments in respect of presentation of securities available for sale at fair value (1) (3) (17) 14 Adjustments of liabilities in respect of employee benefits (2) (9) 1 (10) Other comprehensive income (loss), after taxes (12) (16) 4 The comprehensive income (loss) attributed to shareholders of the Bank (61) 128 (189) For the Year Ended December NIS millions 1. Net adjustments in respect of presentation of securities available for sale at fair value after taxes Balance for the beginning of the period Net change during the period (3) (17) Closing balance for the period Adjustments of liabilities in respect of employee benefits after tax Balance for the beginning of the period (31) (32) Net change during the period (9) 1 Closing balance for the period (40) (31) For further details see Section "The Structure and Development of Assets, Liabilities, Capital and Capital Adequacy". -36-

37 The Structure and Development of Assets, Liabilities, Capital and Capital Adequacy Assets and Liabilities The Balance Sheet of the Bank totaled NIS 40,988 million on December 31, 2016, compared to NIS 40,888 million at the end of 2015, an increase of 0.2% Development in Main Balance Sheet Items: December 31, 2016 December 31, 2015 NIS millions Change Rate % Total Balance Sheet 40,988 40, Cash and deposits with banks 3,901 6,668 (41.5) Securities 11,584 10, Net credit to the public (1) 23,684 22, Deposits of the public 32,756 32, Subordinated notes and bonds 3,395 3, Total capital 2,342 2,403 (2.5) (1) Balance of allowance for credit losses in respect of Balance Sheet items Development in Main Off-Balance Sheet Items (2) : December 31, 2016 December 31, 2015 NIS millions Change Rate % Guarantees to homebuyers 2,827 2, Guarantees and other liabilities 1,127 1, Credit frames of unutilized credit cards 1, Current loan account frame and other unutilized credit frames in accounts by demand 1,696 1,796 (5.6) Irrecoverable obligations to grant credit that was approved but not yet granted 4,690 6,872 (31.8) Liabilities to give guarantees (21.7) (2) Balance of allowance for credit losses in respect of off-balance sheet items

38 Net credit to the public (after deduction of allowance for credit losses) totaled NIS 23,684 million as at December 31, 2016, compared to NIS 22,315 million at the end of 2015, an increase of 6.1%. The average balance of net credit to the public was NIS 24,078 million in 2016, compared to NIS 23,185 million in the corresponding period of the previous year, an increase of 3.9%. For further information on the subject see "Credit Risks" in Section "Risks Overview". Securities totaled NIS 11,584 million as at December 31, 2016, compared to NIS 10,371 million at the end of 2015, a 11.7% increase, which derives mainly from an increase in balance of bonds of the Israeli government. Below are details of the Bank's security's portfolio: As at December 31, 2016 Available for Sale Portfolio Trading Portfolio Total Value in the Balance Sheet % of Total Securities Value in the Balance Sheet % of Total Securities Value in the Balance Sheet % of Total Securities Government bonds 7, % 2, % 9, % Bonds of institutions % % % Corporate bonds 1, % % 1, % shares % % % Total securities 9, % 2, % 11, % As at December 31, 2015 Government bonds 6, % 2, % 8, % Bonds of institutions % % % Corporate bonds % % % shares % % % Total securities 8, % 2, % 10, % -38-

39 Approximately 81% of the securities portfolio is classified as available for sale as at December 31, 2016, this portfolio is presented in the Balance Sheet at fair value, while the difference between the fair value and the depreciated cost is 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. The Bank's policy and procedures regarding the examination of the need to make a provision for impairment, of an other-than temporary nature, are detailed in Section "Critical Accounting Policies and Estimates, Controls and Procedures". In 2016, other than temporary impairments in the amount of a NIS 3 million in respect of bonds and in the amount of NIS 5 million in respect of shares were charged to the Profit and Loss Statement. In the corresponding period of the previous year, other than temporary impairments in the amount of NIS 4 million in respect of bonds and in the amount of a NIS 3 million in respect of shares were charged to the Profit and Loss Statement. The net capital reserve as at December 31, 2016, is positive and stands at approximately NIS 69 million (before tax effect), consisting of a positive capital reserve in the amount of NIS 111 million, offset by a negative capital reserve in the amount of NIS 42 million. The net capital reserve as at December 31, 2015 was positive and stood at approximately NIS 80 million (before tax effect), and it consisted of a positive capital reserve in the amount of NIS 115 million, offset by a negative capital reserve in the amount of NIS 35 million. The following table shows the break-down of the capital reserve and the fair value in the available-for-sale portfolio as of December 31, 2016: Balance Sheet Value NIS Millions Negative Capital Fund Positive Capital Fund Net Capital Fund (8) Shares (1) 157 (5) Israeli government bonds 7,151 (24) 29 5 Foreign government bonds 433 (8) - (8) Bonds of financial institutions in Israel (2) 505 (1) 7 6 Bonds of foreign financial institutions (3) 77 (1) - (1) Corporate bonds: (4) Government companies (5) Real estate branch (6) 312 (1) 9 8 Others (7) 507 (2) Total corporate bonds 1,094 (3) Total available-for-sale portfolio 9,417 (42) Including 36 companies; the highest balance is NIS 20 million. Including 10 issuers; the highest balance is NIS 240 million in respect of bonds of Bank Hapoalim. Including 10 issuers which are banks mainly from Germany and the U.S.. The highest balance is NIS 17 million. All corporate bonds are of Israeli companies, with the exception of a balance on NIS 100 million issued by a foreign issuer. Including 4 issuers; the highest balance is NIS 209 million. Including 76 issuers; the highest balance is NIS 21 million. Including 74 issuers; the highest balance is NIS 67 million. This capital fund reflects net unrealized gains and is included in the financial statements under the Banks' equity, in the amount of NIS 49 million, after tax. See Note 10 adjustments in respect of presentation of securities available for sale at fair value. -39-

40 The following table shows the break-down 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, 2016: Up to 6 Months From 6 Months to 9 Months From 9 Months to 12 Months Over 12 Months Total NIS millions Bonds Available for Sale: Others - up to 20% (37) (37) Up to 40% (37_ (37) Asset-Backed - up to 20% Up to 40% Total Bonds (37) (37) Shares - Up to 20% (1) - - (2) (3) 20%-40% (2) (2) Above 40% Total shares (1) - - (4) (5) Total securities (38) - - (4) (42) * 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. -40-

41 The following table shows the break-down of the capital reserve and the fair value in the available-for-sale portfolio as of December 31, 2015: Balance Sheet Value Negative Capital Fund Positive Capital Fund Net Capital Fund (8) NIS Millions Shares (1) 123 (5) 9 4 Israeli government bonds 5,197 (19) Foreign government bonds 1,021 (3) - (3) Bonds of financial institutions in Israel (2) 722 (3) 9 6 Bonds of foreign financial institutions (3) 117 (1) 1 - Corporate bonds: (4) Government companies (5) Real estate branch (6) 158 (1) 6 5 Others (7) 483 (3) Total corporate bonds 904 (4) Total available-for-sale portfolio 8,084 (35) Including 34 companies; the highest balance is NIS 15 million. Including 9 issuers; the highest balance is NIS 467 million in respect of bonds of Bank Hapoalim. Including 7 issuers which are banks mainly from U.S. and Germany. The highest balance is NIS 79 million. All corporate bonds are of Israeli companies, with the exception of a balance on NIS 35 million issued by a foreign issuer. Including 4 issuers; the highest balance is NIS 193 million. Including 56 issuers; the highest balance is NIS 10 million. Including 82 issuers; the highest balance is NIS 46 million. This capital fund reflects net unrealized gains and is included in the financial statements under the Banks' equity, in the amount of NIS 52 million, after tax. See Note 10 adjustments in respect of presentation of securities available for sale at fair value. The following table shows the break-down 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, 2015: Up to 6 Months From 6 Months to 9 Months From 9 Months to 12 Months Over 12 Months Total NIS millions Bonds Available for Sale: Others - up to 20% (19) (9) - (2) (30) Total Bonds (19) (9) - (2) (30) Shares - up to 20% (1) (1) 20% to 40% (4) (4) Total Shares (5) (5) Total Securities (24) (9) - (2) (35) * 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. -41-

42 Assets in respect of derivative instruments as at December 31, 2016 totaled NIS 342 million, compared to NIS 255 million at the end of The volatility of assets in respect of derivative instruments is mainly due to interest and foreign currency derivatives. Other assets totaled NIS 637 million as at December 31, 2016, compared to NIS 670 million at the end of The volatility of other assets is due mainly to activity in the Maof market in instruments which do not meet the definition derivative. Deposits from the public as at December 31, 2016 totaled NIS 32,756 million compared to NIS 32,466 million at the end of 2015, a 0.9% increase. The average balance of deposits from the public was NIS 32,915 million in 2016, compared to NIS 31,473 million in the corresponding period of the previous year, a 4.6% increase. Subordinated notes and bonds amounted to NIS 3,395 at December 31, 2016 compared to NIS 3,179 million at the end of Liabilities in respect of derivative instruments as at December 31, 2016 totaled NIS 393 million compared to NIS 293 million at the end of The volatility of liabilities in respect of derivative instruments is due mainly to interest and foreign currency derivatives. Other liabilities totaled NIS 1,928 million as at December 31, 2016, compared to NIS 2,063 million at the end of The volatility in other liabilities is mainly the result of activities in the Maof market with instruments that do not meet the definition of derivatives. -42-

43 Equity and Capital Adequacy The Bank's equity totaled NIS 2,342 million as at December 31, 2016, compared to NIS 2,403 million at the end of The decrease in equity compared to the end of 2015 derives from the Banks' losses in the amount of NIS 49 million, a decrease in the capital reserve under the item adjustments in respect of presentation of securities available for sale at fair value in the amount of NIS 3 million and adjustments in respect of liabilities for employee benefits in the amount of NIS 9 million. December 31, 2016 NIS millions December 31, (1) 2015 Tier 1 capital (2) 2,464 2,429 Tier 2 capital (3) 1,112 1,260 Tier 3 capital - - Total Capital 3,576 3,689 Credit risk-weighted assets 23,366 22,760 Market risk-weighted assets Operational risk-weighted assets 1,745 1,706 Total Risk-Weighted Assets 25,486 24,893 The ratio of Tier 1 capital to risk components 9.67% 9.76% The minimal Tier 1 capital ratio required by the Supervisor of Banks 9.29% 9.12% The ratio of the total capital to risk components 14.03% 14.82% The minimal ratio of the total capital required by the Supervisor of Banks 12.79% 12.62% 1. Comparative figures have been restated in light of the retroactive implementation of general accepted accounting principles on intangible assets, see Note 1.D The differences between Tier 1 capital to the Bank's capital, as displayed in the Bank's Balance Sheet, derive from deductions and supervisory adjustments and from the transitional directives to Basel 3 and the effect of adjustments in respect of the efficiency plan. For details see Table 3 in the Detailed Report on Risks for December 31, Tier 2 capital consists of capital instruments issued and recognized for the purpose of the capital base and from the balance of the collective allowance. 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 base to the weighted amount of risk components in the Bank s business as defined in the Basel directives. The Basel 3 directives were implemented within the amendment of Proper Conduct of Banking Business Directives , as updated from time to time (hereinafter: the "Basel 3 Directive"). The Basel 3 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 the 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. -43-

44 Instruments Included in the Capital Base Following are the capital instruments comprising the Bank's capital base: Capital instruments eligible to be included in the capital base according to the Basel 3 directives in September 2016 the Bank issued subordinated notes in the amount of NIS 222 million. For additional details see Section "Principle Investee Companies" and Note 19.B.3. Capital instruments eligible to be included in the capital base according to the transitional directives the ceiling stipulating the inclusion of subordinate notes in the capital base is NIS 1,508 million (the total subordinated notes recognized in equity on December 31, 2013 according to the directives of Basel 2). The ceiling in 2016 (at a rate of 60%) is NIS 904 million. The balance of the recognized capital instruments is NIS 863 million as at December 31, Additional disclosures regarding the main characteristics of the issued supervisory capital instruments see the Detailed Report on Risks at the Banks' website at: Capital Adequacy Targets In preparation for the discussions of the Bank's strategy and further to the implementation of the Bank's strategic plan for , including the target of expanding the retail activity, on August 31, 2016 the Banks' Board of Directors decided to update the rising outline for the Tier 1 equity capital ratio so that on December 31, 2019 the ratio will be 10.25% (see also Immediate Report from June 1, 2015 reference ). It was further resolved that the total capital ratio would not fall below 11.3% plus a coefficient in respect of shredding of future capital notes or 13%, the stricter of the two, and that in extreme scenarios the total capital ratio target would not fall below 9%, and the Tier 1 equity ratio target would not fall below 6.5%. 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 Tier 1 equity through profit accrual and/or the issuance of Tier 2 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. Report on liquidity coverage ratio - The liquidity coverage ratio examines a horizon of 30 days in a stress scenario, and is aimed at ensuring that the banking corporation has a stock of high-quality liquid assets that is sufficient for its liquidity needs in that timeframe. The directive establishes the method of calculation of the liquidity coverage ratio, including definition of the characteristics and operational requirements for the "highquality liquid assets" and the security coefficients for them (the numerator), and defines the net expected cash outflow in the stress scenario defined in the directive for the coming thirty calendar days (the denominator). Pursuant to the transitional directives, the minimum requirement is 60% beginning April 1, 2015, increasing to 80% on January 1, 2016, and to 100% on January 1,

45 For the Three Months Ended December 31, 2016 December 31, 2015 Liquidity coverage ratio* 116% 98% Minimum liquidity coverage ratio required by the Supervisor of Banks 80% 60% * Calculated based on simple averages of daily observations during the last reported quarter. Report on the leverage ratio The purpose of this directive is to establish a simple, non-risk-based leverage ratio to complement the risk-based measurement, with the aim of preventing excessive leverage. The directive states that the leverage ratio shall not fall below 5% on a consolidated basis. Set out below is the report on the leverage ratio, based on consolidated data (1) : NIS millions December 31, Tier 1 capital 2,464 2,429 Total exposures 45,390 45,316 Leverage ratio 5.43% 5.36% Minimum leverage ratio required by the Supervisor of Banks 5.00% 5.00% (1) Calculated in accordance with Proper Conduct of Banking Business Directive 218, Leverage Ratio. For further details regarding risk-weighted assets and material changes in capital, see Note 22B to the Financial Statements, and the Detailed Report on Risks at the Bank's website: he/unionbank.aspx. Description of the Bank's Business by Activity Segments Is performed according to the format and the classifications set forth in the Public Reporting Directives of the Supervisor of Banks. The full disclosure was initially included in the financial report of March 31, 2016 and comparative figures were reclassified according to the classification of the customers to supervisory activity segments as at January 1, The characterization of segments is based on the data at a single customer level. In this section, main quantity data regarding each segment and main developments in each segment will be presented. Further details regarding each segment will be presented in the "Corporate Governance, Audit and Additional Details on the Banking Corporation's Business and the Management Thereof" Chapter. -45-

46 The Bank s activity focuses on the activity segments as detailed below: Households Segment Private individuals (including housing loans) excluding customers included in Private Banking Segment. Private Banking Segment Private individuals who manage a financial assets portfolio (including monetary deposits, securities portfolios and other financial assets) of above NIS 3 million. Small and Negligible Businesses Segment Businesses with a turnover of up to NIS 50 million. Mid-sized Businesses Segment Businesses with a turnover greater than NIS 50 million and lower than NIS 250 million. Large Businesses Segment - Businesses with a turnover of above NIS 250 million. Institutional Entities Segment Pension funds, study funds, trust funds, ETFs, insurance companies, Stock Exchange members and managers of customer's money. Financial Management Segment - Includes the trading activity (proprietary), management of assets, liabilities and real investments. Other Segment Including discontinued activities and activities that can't be attributed to other segments. The following are the main rules applied in the division of results of operations among the various segments: Interest Income In segments in which activity focuses on customers, this item includes interest income from credit and interest expenses on deposits attributed directly to the customer. When calculating the income from credit and deposits, the transitional price relevant to the average life duration and to the relevant linkage segment, is taken into account. In addition, each segment is credited/debited in respect of excess/lack of resources in front of the Financial Management segment according to the determined cost. 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, inter alia, by a gap in transfer prices between credits and deposits. 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 financial 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. Provision for Credit Losses Are allocated to the segment to which the customer belongs against whose indebtedness the allowance was recorded. 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 loading keys, which express the relative part of the expense on the segment. Taxes on Income - The provision for taxes on the business results of each activity segment was calculated according to the effective tax rate, with the exception of certain cases in which specific attributions can be made. -46-

47 Balances Balance Sheet balances and balances of managed assets were specifically assigned to the customers. The fixed assets are attributed to the Other Segment. In 2016 an exceptional expense in the amount of NIS 114 million was included in respect of the efficiency plan, for details see Note 21.B. This expense was allocated to the various segments according to the salary costs of the segments. For comparison to a previous period, the following activity segments analysis was done after neutralizing the effect of the efficiency plan expenses. The following is a summary of the development of the net profit (loss) by activity segments: Segment For the Year Ended December 31 *2016 ** Net Profit NIS millions Household (85) (46) (61) Private Banking Small and Negligible Businesses Mid-sized businesses Large businesses (51) (35) 74 Institutional entities Financial management Others Total (49) * As presented in the financial report. ** After neutralizing the effect of the efficiency plan. Segment Total Assets (Average Balance) NIS millions Household 11,480 10,202 Private Banking Small and Negligible Businesses 3,832 3,329 Mid-sized businesses 2,593 2,685 Large businesses 6,279 6,979 Institutional entities 395 1,013 Financial management 16,295 15,370 Others 966 1,310 Total 41,862 40,

48 Households Segment Changes in the Volume of Activity of the Segments and their Net Profit In 2016 a loss in the amount of NIS 46 million was recorded, compared to a loss of NIS 61 million in Total revenues of the segment amounted to NIS 328 million, compared to NIS 286 million in the corresponding period of the previous year, an increase of approximately 14.7%. Net interest income amounted to NIS 236 million, compared to NIS 196 million in the corresponding period of the previous year, an increase of 20.4%, deriving mainly from an increase in credit income, as a result of an increase in spreads and from the volume of credit in the segment. Non-interest income totaled NIS 92 million, compared to NIS 90 million in the corresponding period of the previous year, an increase of 2.2%. Expenses totaled NIS 405 million, compared to NIS 372 million in the corresponding period of the previous year, an increase of 8.9%, mainly as a result of an increase in salary expenses compared to the corresponding period of the previous year due to an increase in the number of jobs in this segment, to an increase in advertising and marketing expenses and to an increase in the Bank's total expenses. Provisions for credit losses totaled NIS 39 million, compared to NIS 10 million in the corresponding period of the previous year, an increase deriving, inter alia, from an increase in the provision for collective allowance in relation to the corresponding period of the previous year, and this is due to an increase in the credit balance of this segment and changes in the collective allowance coefficients. Housing Loans A loss in the amount of NIS 7 million was recorded in 2016, compared with a loss in the amount of NIS 11 million in the same period of the preceding year. Total income from housing loans totaled NIS 70 million, compared with NIS 58 million in the same period of the preceding year, an increase of approximately 20.7%. Net interest income totaled NIS 62 million, compared with NIS 50 million in the same period of the preceding year, an increase of approximately 24%, which mainly resulted from an increase in income from credit due to an increase in spreads and in the volume of credit granted in this area. Non-interest income totaled NIS 8 million, similar to the income recorded in the same period of the preceding year. Expenses totaled NIS 82 million, compared with NIS 77 million in the same period of the preceding year, an increase of 6%, mainly due to an increase in operating expenses at the level of the Bank. The provision for credit losses totaled NIS 7 million, compared with net income in respect of the provision for credit losses in the amount of NIS 2 million in the same period of the preceding year. The increase resulted from an increase in the provision in respect of the collective allowance, relative to the same period of the preceding year, due to an increase in the balance of credit for housing loans. In addition, a provision for an allowance according to the extent of arrears was recorded in the current period, compared with income in the same period of the preceding year. -48-

49 The balance of balance-sheet credit of housing loans totaled approximately NIS 8.6 billion on December 31, 2016 (including mortgages for buying groups included in other households), compared to a balance of NIS 7.7 billion on December 31, The loans granted in 2016 amounted to approximately NIS 2,032 million, compared to NIS 1,235 million in the corresponding period of the previous year. For further details regarding the risks in the housing loan portfolio see also Section" Risk Overview" subsection "Housing Loans Policy". Following is information regarding new loans for the purchase of residential apartments, secured by mortgages, and the scope of refinanced loans: For the year ended December NIS millions Bank funds 2,032 1,233 Finance Ministry funds - - Standing loans - Total new loans 2,032 1,235 Refinanced loans Total loans granted 2,277 1,575 Private Banking Segment In 2016 a profit in the amount of NIS 8 million was recorded compared to a profit of NIS 13 million in The total revenue of the segment amounted to NIS 32 million, similar to the revenue in the corresponding period of the previous year. The income from net interest income amounted to NIS 18 million compared to income in the amount of NIS 17 million in the corresponding period of the previous year. The non-interest income amounted to NIS 14 million compared to NIS 15 million in the corresponding period of the previous year. The expenses amounted to NIS 12 million, similar to the expenses in the corresponding period of the previous year. In 2016 no provision for credit losses was recorded in the segment, similar to the corresponding period of the previous year. In addition, it should be noted that the decrease in the net profit in 2016 was influenced by the increase of the effective tax rate in relation to the corresponding period. -49-

50 Following is a summary of the activity results of the Household Segment and Private Banking Segment: For the year ended December Private Individuals Households and Private Banking Activity in Israel - Consolidated Households Households Housing Private Housing Private Loans Other Banking Total Loans Other Banking Total NIS million Net interest income: Non-interest income: Total income Provision (income) for credit losses (2) Total operating and other expenses Profit (loss) before taxes (19) (97) 20 (96) (17) (79) 20 (76) Provision for taxes on profit (12) (58) 12 (58) (6) (29) 7 (28) Net profit (loss) before efficiency plan (7) (39) 8 (38) (11) (50) 13 (48) Effect of efficiency plan (8) (31) (1) (40) Net profit (loss) after efficiency plan (15) (70) 7 (78) (11) (50) 13 (48) Average balance of assets (1) 8,065 3, ,502 7,196 3, ,240 Of which: average balance of credit to the public (1) 8,065 3, ,500 7,196 3, ,236 Average balance of liabilities (1) ,798 3,785 17, ,889 3,647 16,068 Of which: average balance of deposits of the public - 12,402 3,775 16,177-11,589 3,634 15,223 Average balance of risk-weighted assets (1), (2) 3,866 3, ,224 4,113 2, ,641 (1) An average balance will be calculated on the basis of quarter-end balances or on the basis of a daily average. (2) Risk-weighted assets as calculated for capital adequacy. -50-

51 Negligible, Small, Mid-Sized and Large Businesses Segment The net profit in 2016 amounted to NIS 22 million compared to NIS 141 million in the corresponding period of the previous year. Most of the decrease in profit derives from an increase in the provisions for credit losses in relation to the corresponding period of the previous year. In 2016 a provision for credit losses was recorded in the amount of NIS 59 million compared to an income in the amount of NIS 115 million in the corresponding period of the previous year, mainly as a result of a collection recorded in respect of a single customer in the corresponding period of the previous year. The total revenues of the segments amounted to NIS 491 million, compared to NIS 468 million in the corresponding period of the previous year, an increase of 4.9%. Net interest income amounted to NIS 318 million compared to NIS 303 million in the corresponding period of the previous year, an increase of approximately 5%, deriving, inter alia, from an increase in income from credit in light of the increase in spreads of the credit managed in the segments. Non-interest income amounted to NIS 173 million compared to NIS 165 million, an increase of approximately 4.8%. The segments expenses amounted to NIS 377 million compared to NIS 364 in the corresponding period of the previous year, an increase of approximately 3.6%, mainly as a result of an increase in the Bank's operational expenses

52 Following is a summary of the results of the Negligible, Small, Mid-Sized and Large Businesses Segment: For the year ended December Negligible, Small, Mid-Sized and Large Businesses Segment Activity in Israel - Consolidated Small and Negligible Businesses Mid-Sized Businesses Large Businesses Total Small and Negligible Businesses Mid-Sized Businesses Large Businesses Total NIS million Net interest income: Non-interest income: Total income Provision (income) for credit losses (21) (5) (19) (100) (115) Total operating and other expenses Profit (loss) before taxes (86) Provision for taxes on profit (51) Net profit (loss) before efficiency plan (35) Effect of efficiency plan (7) (6) (16) (29) Net profit (loss) after efficiency plan 36 8 (51) (7) Average balance of assets (1) 3,832 2,593 6,279 12,704 3,329 2,685 6,979 12,993 Of which: average balance of credit to the public (1) 3,817 2,575 5,987 12,379 3,304 2,683 6,243 12,230 Average balance of liabilities (1) 4,143 2,361 6,996 13,500 4,015 3,031 5,921 12,967 Of which: average balance of deposits of the public (1) 3,646 1,886 5,960 11,492 3,475 2,594 4,840 10,909 Average balance of risk-weighted assets (1), (2) 3,973 3,748 7,462 15,183 4,002 3,373 7,787 15,162 (1) An average balance will be calculated on the basis of quarter-end balances or on the basis of a daily average. (2) Risk-weighted assets as calculated for capital adequacy

53 Institutions Segment Net profit totaled NIS 9 million in 2016, compared to a profit of NIS 20 million in the corresponding period of the previous year. The segment s revenues totaled NIS 41 million in 2016, compared with NIS 52 million in the corresponding period of the previous year, a decrease of approximately 21.2%. Net interest income totaled NIS 24 million, compared to income in the amount of NIS 23 million in the corresponding period of the previous year, a 4.3% increase. Non-interest income totaled NIS 17 million compared to NIS 29 million in 2015, a 41% decrease, mainly as a result of a decrease from the activity of the subsidiary attributed to the segment. The segment's expenses totaled NIS 18 million in 2016, compared to NIS 22 million in the corresponding period of the previous year, inter alia, as a result of a decrease in the Stock Exchange expenses. In 2016 a negligible provision for credit losses was recorded, compared to net income for credit losses in the amount of NIS 2 million in the corresponding period of the previous year which derived from a decrease in the collective allowance as a result of change in the coefficients. Financial Management Segment Net profit totaled NIS 33 million in 2016, compared to a profit of NIS 30 million in the corresponding period of the previous year. Net interest income totaled NIS 56 million, compared to net interest income in the amount of NIS 32 million in the corresponding period of the previous year. Most of the increase in the interest income derives from an increase in volume of securities portfolio compared to the corresponding period of the previous year. Non-interest income totaled NIS 109 million compared to income in the amount of NIS 82 million in the corresponding period of the previous year, an increase that derives mainly from an increase in income from activity with derivatives and exchange rate differences in the amount of NIS 12 million and from an increase in income from the the activity of the subsidiary attributed to the segment. The average volume of the securities portfolio for the period amounted to NIS 11.2 billion compared to NIS 8.1 billion in the corresponding period of the previous year. Unallocated Amounts and Adjustments The segment includes activities which can't be specifically associated to the segments

54 Principal Investee Companies Description of the Activity of the Main Investee Companies Union Bank Trust Company Ltd. ( Trust Company ) - The Trust Company was established in The company provides trust services to mutual funds (under the Joint Trust Investment Law ) and to holders of securities traded in the Stock Exchange, to private issuances and provides private trust services (monetary trusts, stock custody, and more). Union Leasing Ltd. ( Union Leasing ) 3 - Union Leasing was established in 1996, and finances vehicles and equipment using the financed leasing method and provides credit for the purchase of "second hand" vehicles for customers of the Bank and for other customers. The balance of financing provided by Union Leasing to its customers on December 31, 2016 amounted to NIS 359 million, compared with NIS 311 million at the end of 2015 and the balance of credit that Union Leasing provided for the purchase of "second hand" vehicles on December 31, 2016 amounted to NIS 220 million compared with NIS 26 million in Union Investments and Enterprise (A.S.Y.) Ltd. ( ASY ) 1,2 A.S.Y was established in 1998 and serves as the Bank s non-financial investment arm. The volume of the investment portfolio of A.S.Y is approximately NIS 88 million in various investment areas. In some of these investments, A.S.Y retains the right to appoint a representative to serve as a director or an observer of the Board of Directors of the company that made the investment. A.S.Y owns the subsidiary Union Capital Markets and Investments Ltd., and the indirect subsidiary, Union Underwriting and Finance Ltd., described below. Union Underwriting and Finance Ltd. ("Union Underwriting") - Union Underwriting was established in 2010 and engages in providing distribution and underwriting services as defined in the Underwriting Regulations. On January 31, 2016 the Board of Directors of Union Underwriting decided to change its status to "inactive underwriter". The Bank's holding rate of Union Underwriting (indirectly through Union Capital Markets) is 100%. Union Issuances Ltd. ( Union Issuances ) - 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 bonds and subordinated notes issued by Union Issuances and the approval of Midroog of those indebtedness certificates, see Note 19 to the financial statements. For details regarding a deposits agreement between the Bank and Union Issuance see Note 23.C.(15). 3 Union Leasing's activity in the consumer credit field for the purchase of second-hand vehicles began in A.S.Y's shares are held by the Bank and by Union Bank Trust Company Ltd. 2 On February 10, 2016 A.S.Y completed the acquisition of 10% of the issued and paid-up capital of Epsilon Underwriting and Issuances Ltd. (hereinafter: "Epsilon") and an option to purchase additional 15% of Epsilon's issued and paid-up capital subject to the fullfillment of several suspending conditions. The consideration for the purchase amounted to an immaterial amount

55 Carmel Union Mortgages and Investments Ltd. ( Carmel ) - Carmel Mortgage and Investment Bank Ltd. (hereinafter: Carmel Bank ) engages in the field of mortgages. In 2001, an agreement was signed between the Bank and the Carmel Investments Ltd. Group, according to 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. Igudim Insurance Agency (1995) Ltd. ( Igudim Insurance Agency ) - 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. Livluv Insurance Agency (1993) Ltd. ( Livluv ) - Livluv was under the full ownership of Bank Carmel when it was acquired by the Bank in 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. Details regarding Carmel see above. Igudim Ltd. ( Igudim ) - 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 is displayed in the Bank's "solo" financial statements. Union Systems Ltd. ( Union Systems ) 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. Other Investment - In addition, the Bank holds approximately 14% of the share capital of the company Development HOF Hatehelet (Tel-Aviv - Herzliya) Ltd. (hereinafter: "The Development Company"), which owns a land division in central Israel. The rate of holdings of the Bank in the Development Company may grow beyond the current rate, but in any case shall not exceed 20% of the share capital of the Development 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 16 to the financial statements

56 The Contribution of Principle Investee Companies to the Group's Business: Profit Before Tax Profit After Tax Profit Before Tax Profit After Tax NIS Thousands Name of the Company Union Bank Trust Company 7,559 4,841 10,512 6,561 Union Leasing ,155 2,611 Union Investment and Enterprise Ltd. (ASY) 16,737 13,952 4,074 3,483 Union Issuances 1,267 1,267 1,547 1,547 Carmel Union Mortgages and Investment 3,217 2,062 3,750 2,354 Igudim Insurance Agency 2,611 1,959 2,238 1,661 Livluv Insurance Agency ,571 1,204 32,603 25,185 26,847 19,421 The Bank's return on the investment in the investee companies detailed above in 2016 was 4.5% compared to 3.3% in The following table lists dividends, management fees, participation in expenses and net financing income (expenses) received or paid by the Bank, or which the Bank is entitled to receive, from its subsidiaries, for 2016 and 2015: Management Fees and Participation in Expenses Net Financing Income (Expenses) Dividend NIS thousands Name of the Company Union Bank Trust company (1,031) (162) Union Leasing ,463 4,956 Union Investments and Enterprise (A.S.Y.) (866) (377) Union Capital Markets and Investments Ltd (178) (111) Union Underwriting and Finance (23) (8) Union Issuances (67,836) (68,309) Carmel Union Mortgages and Investments 3,558 4,472 2,052 2,150 (3,937) (5,008) Igudim Insurance Agency (99) (2)

57 Agreements, Transactions, and Payments between the Group's Companies A. Deposit Agreements with Union Issuances The Bank and Union Issuances Ltd. signed deposit agreements in connection with issuances of bonds and/or subordinated notes and/or commercial securities. For details see Note 23.C.(15). 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 of the subsidiary. 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. C. Capital Notes From 2000 to 2016, the Bank provided capital notes to its subsidiaries against the provision of equity, 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 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. Union Leasing It was agreed that the capital note was issued against an amount of NIS 100 million which the Bank would transfer to Union Leasing at rates and dates to be agreed upon between Union Leasing and the Bank from time to time, this by crediting the account of Union Leasing at the Bank. Each of the said amounts shall be presented for settlement, at the demand of the Bank, which can be submitted not before five years have elapsed from the end of the year in which that amount was provided. The capital note has a deferred repayment priority rank to other liabilities of Union Leasing and will be prior only to the distribution of Union Leasing's assets in liquidation. It was agreed that the aforesaid amount would not bear interest and would not be linked in any way. For further details regarding the capital notes, see Note 14 to the financial statements

58 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 23.C.(14). E. 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. F. Credit Facilities for the Subsidiaries The Bank occasionally provides credit facilities to subsidiaries in the group, for their routine operations. As of December 31, 2016, the Bank provided credit facilities to subsidiaries in the amount of approximately NIS 321 million compared to NIS 332 million in the corresponding period of the previous year, either in the form of financing or of financial guarantees. G. Other On May 3, 2016 the new general Histadrut labor federartion reported a labor dispute to the Bank between the employee's Committee of Union Systems Ltd. and the management of Union Systems. See Section "Human Capital" in the Corporate Governance Report, Audit and Additional Details. Risk Overview General Description of the Risks and the Way of Managing Them 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. For detailed information regarding the risks and the way of managing them, see Detailed Report on the Risks at the Bank's website:

59 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' overall exposure policy is expressed 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 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, the required volume of capital and the allocation of such capital to the various business activities, the establishment of the risk appetite and risk tolerance and examination of the need to update them, in all areas of activity and exposures to risk. These areas include capital targets and capital planning, credit risks, market risks, liquidity risks, operational risks, concentration risks, goodwill risks and strategic risk. Monitoring 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. See Detailed Report on Risks on the Bank's website at:

60 Stress Scenarios Stress Scenarios The Bank uses forward-looking stress scenarios as a supplementary tool to the risk management approaches which are based on complex quantitative models, while addressing the following issues: Capital and liquidity planning Examination of the Bank's risk appetite Identification of existing or potential risk concentrations Development of tools for decreasing risks or business continuity plans Pursuant to the guidelines concerning the ICAAP process, the Bank is required to run appropriate, proportional scenarios, based on the size and complexity of the Bank, with respect to each risk identified as a material risk. For that purpose, the Bank assesses the risks in aggregate, and runs stress scenarios with respect to the material risks, for all of the Bank's business lines. This assessment process is performed through a thorough review of the nature and composition of the Bank's activities, combined with a review of the external environment in which the Bank operates, with the aim of evaluating the extent of its effect on the Bank's present and future financial condition. The identification of the appropriate risk factors is a critical component in ensuring the adequacy of the stress-test process as a whole. Therefore, each stress test is characterized by a clear and identified array of risk factors that may be affected by the scenarios defined. The application of stress scenarios is part of the corporate governance and risk-management policy of the Bank. The results of stress scenarios are taken into consideration when making substantial strategic decisions; the limits on stress-test results and scenarios are commensurate with the risk appetite established by the Bank. Stress tests are applied at various levels of severity and probability of occurrence, also based on historical scenarios and exceptional but plausible scenarios, distributed over a full economic cycle. Some of the stress scenarios are integrative, allowing individual analysis of risk factors and fluctuation in specific markets. The Board of Directors and management are involved in setting targets for stress tests, defining scenarios, discussing the results of stress tests, assessing possible actions, and making decisions. Management shall oversee the developing process and operating of stress tests. See also the Detailed Report on Risks on the Bank's website, at:

61 Credit Risks Credit risk is the risk that a loss may be incurred by the Bank as a result of default or decline in the repayment capability of a counterparty to a transaction with the Bank, in which the counterparty fails to fulfill its obligations pursuant to the agreed terms; this is the most significant risk to which the Bank is exposed in the course of its operations, mainly in terms of extent, relative to other risks. Credit Portfolio Quality Risk The Bank manages credit risk in accordance with credit policy documents that specify principles for the approval of credit evaluation of the customer quality and of the customer's repayment capability, financial stability, liquidity, reliability, duration of activity in the sector, duration of activity at the Bank, quality of collateral provided, and more. Based on these principles, detailed working procedures have been established, which set forth clear instructions with regard to the manner of granting credit at the Bank, credit-management work processes prior to the granting of credit and the course of its management. These procedures require the functions that handle credit at the Bank to become deeply familiar with the borrower and to obtain an understanding of the transaction, including the purpose of the credit, its suitability for the customer's needs, the structure of the credit, and the sources for repayment. The policy documents are discussed on at least an annual basis, and reflect the Bank's corporate strategy as well as economic developments, in Israel and globally, and relevant regulatory directives. The policy documents establish the risk limits for the credit management, corporate governance, and the hierarchy of authority for the approval of credit; the required spread/yield, according to the risk of the transaction; and a description of the lines of defense and of requirements for reporting, monitoring, and control. Indicators have been established for quarterly monitoring, aimed at allowing early identification of a possible need to update this policy. The decision-making process with respect to credit granting is based on a hierarchy of authority in positions at various levels, up to the level of the Credit Committee of the Board of Directors, according to the risk appetite and risk capacity established by the Board of Directors, in order to minimize the risk of reliance on the judgment of a single individual. For additional information regarding credit-risk management, see the Detailed Report on Risks on the Bank's website, at:

62 The Risk Quality Analysis and Problematic Credit Risk (1) : December 31, 2016 NIS millions December 31, 2015 Problematic commercial credit risk Problematic credit risk in respect of private individuals Total Problematic credit risk December 31, 2016 December 31, 2015 Off- Off- Balance Balance Total Balance Balance Total NIS millions Impaired credit risk Inferior credit risk Credit risk under special supervision Total Of which: unpaired debts in arrears of 90 days or more (2) Non-performing assets (3) (1) The data is presented after the deduction of the accounting write-offs balance and before the deduction of the allowance for credit losses balance and does not include deduction of deductible collateral for the indebtedness of a borrower and a group of borrowers. (2) Including in respect of housing loans, for which there is an allowance according to the extent of arrears and in respect housing loans, for which there is no allowance according to the extent of arrears, which are in arrears of 90 days or more. (3) Impaired debts not accruing interest, including bonds not accruing interest,

63 Movement in Impaired Debts* (NIS millions): Balance of Impaired Debts December 31, 2014: 231 Debts classified as impaired during the year 43 Debts returned to a non-impaired classification (2) Accounting write-offs (15) Collections (85) Other - Balance of Impaired Debts December 31, Debts classified as impaired during the year 113 Debts returned to a non-impaired classification (9) Of which: due to a following reorganization (3) Accounting write-offs (33) Collections (58) Other (1) Balance of Impaired Debts December 31, * Balance sheet, not including impaired bonds. Risk Indicators: Balance of impaired credit to the public, as a percentage of the balance December 31, 2016 December 31, 2015 of credit to the public 0.8% 0.8% 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 0.3% 0.2% Balance of allowance for credit losses in respect of credit to the public, as a percentage of the balance of credit to the public 1.1% 0.8% 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 137.5% 110.5% Balance of the allowance for credit losses in respect of credit to the public, as a percentage of the balance of impaired credit to the public plus the balance of credit to the public in arrears of 90 days or more 103.7% 92.2% Problematic credit risk in respect of the public, as a percentage of total credit risk in respect of the public 2.4% 1.5% Provision (income) for credit losses as a percentage of the average balance of credit to the public 0.4% (0.5%) Balance of net write-offs in respect of credit to the public, as a percentage of the average balance of credit to the public 0.1% (0.2%) Net accounting write-offs in respect of credit to the public, as a percentage of the balance of allowance for credit losses in respect of credit to the public* 5.9% (23.7%) * This figure is volatile due to volatility in the volume of accounting write-offs.

64 Credit Exposure to Foreign Financial Institutions Credit exposure to foreign financial institutions (1) on a consolidated basis: External Credit Rating (5) Balance- Sheet Credit Risk (2) NIS millions For December 31, 2016 For December 31, 2015 Off- Off- Balance- Balance- Balance- Sheet Sheet Sheet Credit Credit Credit Credit Credit Risk (3) Exposure Risk (2) Risk (3) Exposure AAA - AA A + - A BBB + - BBB B Unrated Total Exposure (4) Foreign financial institutions include: banks, bank's holding companies, investment banks and custodians. 2. Deposits and current-account balances with banks, investments in bonds, fair value of derivative instruments presented before bilateral offsetting as defined in Appendix C to Proper Conduct of Banking Business Directive No Guarantees to secure debts of third parties. 4. There are no financial institutions that are classified as an impaired, inferior or under special supervision debt and there is no allowance for credit losses. 5. The rating is at the level of a consolidated banking group. Notes: A. Credit exposures do not include investments in asset-backed securities (see details in Note 12.E to the financial statements). B. For details regarding the extent of the exposure to a group of bank borrowers see sub-section "Credit Portfolio Concentration Risk". For further information regarding the composition of credit exposures in respect of derivative instruments with banks and broker/dealers (local and foreign), see Note 25.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, 2016 are to institutions operating in the United States, Germany and Britain. The Bank has an exposure in the amount of NIS 14 million to an Irish bank rated BBB+ and a negligible exposure to banks operating in Italy. There is no exposure to banks operating in Greece, Portugal, or Spain. There is no exposure to foreign financial institutions exceeding 15% of the Banks' capital base, as defined in Proper Conduct of Banking Business Directive No. 202, Capital Components. The Bank monitors changes in the ratings of these institutions issued by the international rating agencies. 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 swaps, resource raising costs, and additional information published regarding the financial institutions. Based on the aggregate information collected, the Bank adjusts its extent of its exposure to the various financial institutions

65 Activity with Banks Abroad The Bank s activity with banks abroad is based on limits of exposure approved annually, examined routinely, and updated as necessary. Credit exposure in activity with banks overseas mainly derives from the following activities: deposits of surplus liquidity, receiving guarantees as collateral for customers, activity in derivatives, clearing activity and purchases of bonds of banks. 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. 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. 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. In addition, the Bank works with a number of foreign financial institutions in order to receive custodian services in activity in foreign securities. Housing Loans 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. 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

66 Control and Risk Management Tools: Various mechanisms of control exist in the Bank, both internal, in the chain of management of the retail credit and mortgages array, and external to the credit processes. The control tools include, inter alia, 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, which are 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 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

67 Ongoing monitoring is performed on the risk in the portfolio, which is reported within the quarterly Risk Document, which is brought up to the Bank's management, to the Board of Director's Risk Management Committee and to the Bank's Board of Directors, for discussion. Within this framework, subjects in the mortgage credit field, such as: development of the portfolio's ranking, the compliance with components of risk appetite and risk tolerance for the single mortgage, examination of the management quality in mortgages, examination of the portfolio's compliance with a stress scenario etc., are being examined and reported. 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: December 31, 2016 NIS millions December 31, 2015 December 31, 2014 Volume of credit 8,638 7,719 7,737 Increase compared with the previous year-end 11.9% (0.2%) 2.8% Credit volume of the entire system 326, , ,438 The Bank's rate from the entire system 2.6% 2.5% 2.7% * 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 2.6%. 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

68 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: Total executions of housing loans for the For the Year Ended December NIS millions period 2,032 1,233 1,326 Executions for the period at a financing rate greater than 60% The rate of executions for housing greater than 60% from total executions of housing 9% 8% 10% An analysis of mortgage execution of 2016 indicates that in the group of mortgages granted at a financing rate of more than 60% (based on Supervision Reporting Directive 876), all of the mortgages had financing rates of 60%-75%. Pursuant to the guidelines of the Bank of Israel, as of November 1, 2012 new loans with a financing ratio exceeding 75% are no longer approved at the Bank. In addition, segmentation of mortgages granted at a financing rate lower than 60% in 2016 indicates that 31% 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 available income (the calculation is in accordance with Supervision Reporting Directive 876) An analysis of mortgage execution in 2016, 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 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 loans in all of the segments are given for periods of up to 25 years, and with the approval of the mortgage system up to 30 years

69 The following table presents data on the development of housing loans* portfolio by linkage segments: For Residential Purposes Foreign Unlinked Segment CPI Linked Segment Currency Linked Segment Total Secured by a Residential Apartment Total Fixed Interest Variable Interest Fixed Interest Variable Interest Variable Interest Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate Balance NIS Millions In % NIS Millions In % NIS Millions In % NIS Millions In % NIS Millions In % NIS Millions , , , , , , , , ,684 * The loans are displayed net, after allowance for credit losses. Allowance for Credit Losses: The decision regarding allowance for credit losses is performed based on a review of the housing credit portfolio, according to a structured procedure, which among other matters determines the authority to examine and decide upon such an allowance. 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 collective examination, according to the impaired debts directive. Developments in balances in arrears and in allowance for credit losses across periods are set out below: As at December 31, 2016 NIS Millions As at December 31, 2015 As at December 31, 2014 Gross balance in arrears (including interest in arrears) Rate of the portfolio 0.35% 0.34% 0.34% Balance of allowance according to the extent of arrears Balance of a collective allowance (1) Total balance of allowance for credit losses Rate of the portfolio 0.45% 0.45% 0.48% (1) Including purchase groups

70 Credit Policy for Private Customers (Excluding Housing Loans) General Within the management of the risks of credit to private individuals, the Bank applies various measures in order to reduce the risks arising from granting such credit. The consumer credit policy details credit policies, in compliance with the corporate governance rules, as established by the Board of Directors, and the guidelines of the Board of Directors for the various ranks of management, according to their areas of responsibility, areas of authority, and manner of control and reporting, including with respect to exceptional cases. The policy establishes principles for credit personnel at the branches and head office with respect to the approval of credit and the management of credit granted by the Bank to borrowers. The policy and guidelines are based, among other matters, on the risk appetite of the Bank, and define the necessary conditions for action in accordance with the risk appetite and within the bounds of its risk tolerance. Principles in Granting Credit In general, the Bank grants credit while taking the customer's needs into consideration, transparently, with appropriate due disclosure. Consumer credit management is characterized by extensive diversification among customers, without dependence on any single customer, and predictable behavior of homogeneous customer groups. In credit applications, the composition of the exposure, collateral, and additional data are documented, including turnover, duration, experience, and more. Based on these data, as well as data such as repayment capability and financial wealth, a rating model is constructed in order to support the decision to approve or reject the application. Most of the credit portfolio consists of the following three areas of activity: Private customers who operate primarily with the Bank This credit is granted to customers of the Bank, and is based on familiarity with the customers, an analysis of their repayment capability, the accumulated credit experience with the customers at the Bank, and an updated snapshot of most of their credit activity. Credit to new customers is granted based on supporting data and on their position at their original bank. Loans to these customers are provided for a period suited to the customer's needs, their repayment capability, and the purpose of the loan. In general, loans are granted for a period of up to 120 consecutive monthly payments

71 Private customers whose main activity is not at Union Bank o Product customers at the Direct Banking Center The activity of product customers is conducted through the Direct Banking Center, which serves as the unit specializing in this area. In general, product activity is characterized by specific models for each product type. o Product customers at Union Leasing Ltd. Most of the credit for this activity segment is part of the activity of Union Leasing Ltd., and is based on supporting data regarding the customers' income, repayment capability, and position at their original bank, as well as on the acquired vehicle and the equity capital paid in the transaction. Controls Credit Granting Processes The process of granting credit to customers is performed through several available channels for communication with the customers. As part of the process of granting credit, the Bank operates decision support systems, addressing the following points: Results of customer rating models (existing, new, product) a figure indicating the customers' risk levels. Customers' activity and credit history: o For the group of existing customers of the Bank, before granting credit, the customer's activity and credit history are examined. o For new customers, the Bank receives information regarding the customer, including the appropriate documentation, prior to granting actual approval of the credit. Reference to data from various databases (BDI). An extensive credit application questionnaire for customers, based on the type of product requested. After weighing in all of the parameters, a recommendation regarding the approval of the credit is obtained; the actual approval is granted pursuant to the credit authority established in the policy

72 Credit Management and Control Processes The control approach of the Bank is based on monitoring and control processes in various layers (lines of defense), aimed at identifying exceptional customers or exceptional conduct in customers' accounts. The Bank operates control systems and processes designed to identify, as early as possible, accounts with negative signs that indicate a possibility that the account may fall into difficulties in repaying the credit. Control and alert tools are available to the branches and head office for that purpose, in order to identify and mark such accounts. Reports on developments in the consumer credit portfolio of the Bank, including compliance with risk appetite and risk tolerance limits. Monitoring and quarterly reporting of indicators to examine the policy, as determined in the policy of the Bank. Below are credit balances of private individuals (excluding housing loans): For the Year Ended December 31 NIS Millions Change in Percentage Loans 2,818 2, Credit Cards and current accounts Total credit to private individuals (excluding housing loans) 3,600 2, Of which: Nor problematic 3,579 2, Problematic unimpaired Impaired Total credit to private individuals (excluding housing loans) , Credit in an amount exceeding NIS 0.5 million per borrower Below is accounting write-offs data and rate of provision for credit losses: For the Year Ended December 31 NIS Millions Change in Percentage Accounting write-offs (18) (8) Provisions for credit losses Rate of provision for credit losses from the total credit to the public to private individuals 0.94% 0.47%

73 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 types of bonds permitted for investments, 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 audited routinely, and the Bank's policy in this area is adjusted to market developments. For additional information regarding to the composition of the corporate-bond portfolio, see the Section "Structure and Developments of Assets, Liabilities, Equity and Capital Adequacy" under the analysis of the "securities" item. Counter-party Credit Risk in Respect of a Market Risk The credit risk that derives from transactions in derivative financial instruments related to the counter-party. 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. This risk is measured by activating coefficients set in the directive on the par value of the transactions and according to the counter party's risk weight. These exposures are concentrated at the Bank s activity with customers, banks in Israel, and banks overseas. The activity 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 25 to the financial statements. Further details of the item Gross fair value of derivative instruments are set out below: Counterparty: Stock Exchanges and Banks as at December 31, 2016: The total fair value balance in respect of the counterparty Stock Exchanges and Banks in derivative financial instruments is in the amount of NIS 262 million; the highest balance for a single entity is in the amount of NIS 56 million

74 Counterparty: Others and Brokers as at December 31, 2016: The total balance in respect of the counterparty Others and Brokers in derivative financial instruments s in the amount of NIS 80 million; the highest balance for a single entity is in the amount of NIS 12 million. Leveraged Financing The Bank occasionally provides credit to its customers at a leverage level that significantly exceeds the norm of the business sector to which the customer belongs and for financing mainly meant to finance 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. 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. The volume of the credit exposure is subject to regulatory restrictions and to the Banks' policy (which is more conservative than the regulatory restrictions). Following the update of the business credit risk management policy of 2016 the definitions and restrictions on the subject were expanded, this is in light of the update of Proper Conduct of Banking Business Directives No. 327 "Management of Leveraged Loans" and No. 323 "Restrictions on Financing Capital Transactions", effective from January 1, The following table shows the break-down of the exposure for leveraged financing transactions by economic sector and geographical region (4) : Israel: Balance December 31, 2016 December 31, 2015 Balance Off- Balance Off- Balance Sheet (1) Sheet Total (2) Sheet (1) Sheet Total (2) NIS Millions Trading Industry (3) Construction (3) Activity in Real Estate Mining and Quarrying Financial services (3) Total Europe: Construction and Real Estate Total leveraged financing

75 (1) (2) (3) (4) (5) Net balance-sheet balance after deduction of individual allowance for credit losses and collateral deductible under Section 5 of Proper Conduct of Banking Business Directive No Net indebtedness balance exceeding the threshold set concerning the capital financing (NIS 35 million) in Proper Conduct of Banking Business Directive No The Bank also adopted this threshold for other leveraged financing. As at December 31, 2016 there is a customer in the industry sector, whose debt in the amount of NIS 21 million is classified as an impaired debt after deduction of individual allowances for credit losses and a customer in the construction sector classified as an impaired debt, whose debt after deduction of individual allowances for credit losses in the amount of NIS 36 million and a different customer in the finance sector classified as an impaired debt in respect of which, the recorded debt balance after deduction of individual allowances for credit losses is in the amount of NIS 36 million. One of the shareholders, indirectly, in a company that's in Israel, holds an Irish passport. There is no exposure to Portugal, Greece, Spain or Italy. If it weren't for the changes in the definition of leveraged financing at the Bank, the credit balance of the leveraged financing according to the definitions prior to January 1, 2016 would have been NIS 236 million as at December 31, 2016 (balance sheet and off-balance sheet credit). 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. Within the risk management, the Bank refers to the following concentration indices: concentration of borrowers, sectorial concentration, geographical concentration, collateral concentration and products concentration. For additional information regarding the credit concentration risk management see the Detailed Report on Risks on the Bank's website at:

76 Credit Risk by Economic Sector - Consolidated (1) Overall Credit Risk As at December 31, 2016 Debts (2) and Off-Balance Sheet Credit Risk (Excluding Derivatives) (3) Credit Losses (4) Credit Performance Rating (5) Problematic (6) Total Of which: Of which: Debts (2) Problematic (6) Impaired Provision (Income) for Credit Losses Net Accounting Write-Offs (9) Balance of Allowance for Credit Losses Total NIS Millions Activity of borrowers in Israel: Agriculture Mining and quarrying Industry 4,155 3, ,063 2, (4) 105 Constructions and real estate - constructions (7) 5,989 5, ,953 1, Constructions and real estate - real estate activities 1,673 1, , (1) 9 Electricity and water supply Commerce Hotels, hospitality and 3,234 3, ,074 2, (1) 2 8 food services Transportation and storage Information and communication Financial services 379 3, , , , (2) (13) Other business services Public and community services Total Commercial 21,992 21, ,639 11, Private individuals - housing loans 8,849 8, ,849 8, (1) 38 Private individuals - other 5,086 5, ,079 3, (18) 41 Total public activity in Israel 35,927 35, ,567 23, (15) 305 Banks in Israel (8) Government of Israel 9,778 9, Total activity in Israel 46,514 45, ,818 24, (15) 305 Borrower Activity Abroad: Total Public Banks abroad Governments abroad Total Activity Abroad Total 47,505 46, ,070 24, (15) 305 (1) Balance sheet credit risk and off-balance sheet credit risk (including in respect of derivative instruments), as calculated for the purpose of the limits on indebtedness of a borrower include: Debts in the amount of NIS 24,436 million, bonds in the amount of NIS 11,408 million, borrowed securities in the amount of NIS 536 million, assets in respect of derivative instruments in amount of NIS 342 million, credit risk in respect of off - balance sheet financial instruments in the amount of NIS 10,783 million. (2) Credit to the public, credit to the governments, deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding bonds and borrowed securities. (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) 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 199 million and in respect of off-balance sheet credit risk in the amount of NIS 220 million. (8) Not including deposits with the Bank of Israel. (9) Decrease (increase) in net write-offs (change in the write-off balance after neutralizing collections and remissions during the period).

77 Credit Risk by Economic Sector - Consolidated (cont'd) (1) Overall Credit Risk As at December 31, 2015 Debts (2) and Off-Balance Sheet Credit Risk (Excluding Derivatives) (3) Credit Losses (4) Credit Performance Rating (5) Problematic (6) Total Of which: Of which: Debts (2) Problematic (6) Impaired Provision (Income) for Credit Losses Net Accounting Write-Offs (9) Balance of Allowance for Credit Losses Total NIS Millions Activity of borrowers in Israel: Agriculture (1) - - Mining and quarrying Industry (10) 4,611 4, ,515 2, (3) 64 Constructions and real estate - constructions (7) 6,092 5, ,039 1, (10) 2 14 Constructions and real estate - real estate activities 1,580 1, , (3) 9 Electricity and water supply Commerce 3,723 3, ,617 2, (3) 2 7 Hotels, hospitality and food services Transportation and storage (4) 6 Information and communication Financial services 4,606 4, ,359 2, (113) Other business services (1) - 1 Public and community services (1) - 1 Total Commercial 24,136 23, ,987 12, (118) Private individuals - housing loans 7,740 7, ,740 7, (2) (1) 33 Private individuals - other 4,070 3, ,063 2, (8) 25 Total public activity in Israel 35,946 34, ,790 22, (107) Banks in Israel (8) 1,157 1, Government of Israel 7,650 7, Total activity in Israel 44,753 43, ,123 22, (107) Borrower Activity Abroad: Total Public Banks abroad Governments abroad 1,021 1, Total Activity Abroad 1,712 1, Total 42,465 45, ,565 23, (107) (1) Balance sheet credit risk and off-balance sheet credit risk (including in respect of derivative instruments), as calculated for the purpose of the limits on indebtedness of a borrower include: Debts in the amount of NIS 23,258 million, bonds in the amount of NIS 10,221 million, borrowed securities in the amount of NIS 293 million, assets in respect of derivative instruments and other instruments in amount of NIS 255 million, credit risk in respect of off-balance sheet financial instruments in the amount of NIS 12,438 million. (2) Credit to the public, credit to the governments, deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding bonds and borrowed securities. (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) 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 421 million and in respect of off-balance sheet credit risk in the amount of NIS 418 million. (8) Not including deposits with the Bank of Israel. (9) Decrease (increase) in net write-offs (change in the write-off balance after neutralizing collections and remissions during the period). (10) Including the diamond sector.

78 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 and to a group of banking borrowers shall not exceed 15% of the capital of the Bank; total credit to a group of 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. On June 9, 2015 the Bank of Israel published an update to the directive, which reduces the capital base used for the calculation of the exposure restrictions to borrowers so that the capital base will include only Tier I capital of the Bank (currently includes also Tier 2). The reduction of Tier 2 from the capital base will be carried out in equal installments over 12 quarters as of 2016 and until it is reset in 2018, according to the transitional directives. 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. There are no Balances of credit to the public and off-balance-sheet credit risk as at December 31, 2016, 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 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, 2016: Balance- Sheet Credit* Off-Balance- Sheet Credit Risk Total Sector Number of Borrowers NIS Millions Construction and Real Estate - construction ,315 Financial Services Transportation and Storage Total 8 1,104 1,305 2,409 * 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.

79 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, 2016 in NIS millions: Sector Number of Groups Balance- Sheet Credit NIS Millions Off- Balance- Sheet Credit Risk Total* Construction and real-estate activity in real estate Construction and real-estate - construction Hotels, hospitality and food services Trading Electricity and water supply Industry - diamonds Total 6 1, ,321 * 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 Credit for Construction and Real-Estate The Bank focuses on accompanying residential projects in areas of demand and especially in the following areas: Focusing on projects with adequate profit rates and low risk. Focusing on areas of demand and mainly financing the construction of standard apartments. Following is the break-down of the total credit risk for construction and real estate, as at December 31, 2016 (in NIS millions): Type of Borrower Construction initiation 5,291 Purchase groups 419 Civil engineering jobs (infrastructure) 279 Yield bearing real estate 1,673 Total construction and real estate sector 7,662 Industry and factory in construction products 105 Trading in construction products 78 Total 7,

80 Following is the break-down of the total credit risk for the construction and real estate sector, as at December 31, 2016 (in NIS millions): Type of Credit Balance sheet credit for the construction sector 1,908 Of which: balance sheet credit for accompanying projects 664 Of which: balance sheet credit for purchase groups (over 10 housing units) 199 Real estate 947 Corporate bonds ** 366 Guarantees/selling guarantees * 2,201 Liabilities for credit granting frames 2,169 Other 71 Total credit risk 7,662 Total indebtedness of the construction and real estate sector*** from the total indebtedness of the public 18.1% * Weighted sales guarantees by 10%/50% and other guarantees by 100%. ** Corporate bonds held by the proprietary. *** According to the measurement of the sectorial concentration as detailed in the Proper Conduct of Banking Business Directive No As at December 31, 2016, the Bank finances 158 projects in various stages, with a total volume of 7,500 housing units. 70% of them are in the areas of demand. Following is the break-down of projects according to geographic location, as at December 31, 2016: Area Jerusalem and its surroundings Number of Projects Approved Frames NIS Millions Actual Utilization* Approved Frames Actual Utilization* Tel-Aviv Center 69 3,634 2, North South 46 1,833 1, Total 158 7,084 4, * Including balance sheet and off balance sheet credit, without a commitment to grant credit

81 Exposures to Foreign Countries Consolidated A. Information regarding total exposures to foreign countries (1) 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% of the capital (6), whichever is lower Country Cross-Border Balance-Sheet Exposure (4) To Governments (3) To Banks NIS millions To Others Total Balance- Sheet Exposure As at December 31, 2016 Problematic Balance Sheet Credit Impaired Risk (4) Debts (4) Off-Balance-Sheet Exposure (2),(4) Total Off- Balance- Sheet Exposure Of Which: Problematic Off-Balance Sheet Credit Risk Cross-Border Balance- Sheet Exposure (4) Maturity up to One Year Maturity Over a Year United States Ireland (7)(8) Italy (7)(8) Others (7) Total Exposures to countries , ,118 Total Exposure to LDC countries 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, 2016 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

82 Exposures to Foreign Countries - Consolidated (cont'd) Reported Amounts A. Information regarding total exposures to foreign countries (1) 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% of the capital (6), whichever is lower. Country Cross-Border Balance-Sheet Exposure (4) To Governments (3) To Banks To Others NIS millions Total Balance- Sheet Exposure As at December 31, 2015 Problemati c Balance Sheet Credit Risk (4) Impaired Debts (4) Off-Balance-Sheet Exposure (2),(4) Total Off- Balance-Sheet Exposure Of Which: Problematic Off-Balance Sheet Credit Risk Cross-Border Balance-Sheet Exposure (4) Maturity up to One Year Maturity Over a Year United States *1, *200 1, *201 - *772 *803 Ireland (7)(8) - * *2 - *4 *2 Italy (7)(8) Others (7) - * * Total Exposures to Foreign Countries 1, , ,303 1,237 Total Exposure to LDC Countries 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, 2015 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. * Reclassified

83 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, 2016: The Bank has no exposure. As at December 31, 2015: The Bank has no exposure. C. Information regarding balance-sheet exposure to foreign countries with liquidity problems (1), (2), (4) : Amount of exposure at the beginning of the As at December 31, 2016 As at December, 31, 2015 India Ireland Total India Ireland Total NIS Millions reporting period *11 62 Net changes in amount of short-term exposure (11) (6) 16 Other changes 12 (2) Amount of exposure at the end of the reporting period (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. - The country is 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. * Reclassified

84 Market Risks Market risk is the risk of loss arising from change in the fair value of financial instruments due to changes in market conditions (price levels, interest rates, exchange rates, inflation, prices of shares and commodities) 1. The Board of Directors guides market-risk strategy and the market-risk management framework, and reviews the market policy document of the Bank on at least an annual basis. The organizational structure for market-risk management is based on corporate-governance rules, and includes the three lines of defense, in accordance with the definitions specified in Proper Conduct of Banking Business Directive 310. Market risk measurement Is performed in relation to all of the market risk factors identified in the products and in the balance-sheet and off-balance-sheet activities of the Bank, through a VAR (value at risk) model that presents potential risk (the possible decline in value over a given period of time). In general, the calculation is performed using the parameter method and the historical method at a confidence level of 99% on a daily basis. In addition to the VAR model, the Bank applies stress scenarios. The goal of the stress scenarios is to assess the potential effect of an exceptional event or of a series of exceptional events on the materialization of risks, and the effect thereof on the stability of the Bank. Monitoring and control processes are performed in the first and second lines of defense, with monitoring of actual exposures versus limits, segmented by business lines and by risks; alerts of exceptions and of proximity to limits; and monitoring of risk factors in the financial markets. For additional information regarding market-risk management, see the Detailed Report on Risks on the Bank's website, at: 1 Section 2A, Proper Conduct of Banking Business Directive 339, Market Risk Management

85 The following table presents the overall limits of the market risk and the actual exposure, in NIS millions, in terms of VAR (VAR measurement for 10 days, excluding in the banking portfolio for a calendar month) (2) : Segment Type of Limit Limit December 31, 2016 December 31, 2015 Actual Exposure December December 31, , 2015 Total Overall market exposure (3) Total Overall market exposure in the trading portfolio (3) Interest Overall interest exposure (3) Interest Total DV Base VAR (3) Shares VAR (3) Options (4) VOL/SPOT scenarios (2) When calculating the total, the decreases in the interest risks in respect of correlations are taken into account in the interest exposures between various currencies over the periods in the banking portfolio and the trading portfolio separately. (3) The VAR is measured for 10 days, excluding in the banking portfolio for a calendar month. (4) As of September 30, 2016 the limit to the option exposure is measured and reported in NIS terms (the data for December 31, 2015 was adjusted and is reported in NIS terms)

86 Interest-Rate Risk The interest-rate risk is a risk that derives from the possible effect of changes in interest curves and in the correlation between the interest rates on the fair value of assets and liabilities and on the credit exposures. 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, 2016 Israeli Currency Foreign Currency (2) Unlinked CPI- Linked USD EUR Other Total In NIS million Financial assets (1) 29,981 5,752 3, ,740 Amounts receivable in respect of derivative and off-balance-sheet financial instruments (3) 14, ,302 3,123 1,653 39,715 Financial liabilities (1) 26,559 3,970 5,560 1, ,777 Amounts payable in respect of derivative and off-balance-sheet financial instruments (3) 17, ,256 2,222 1,293 39,766 Net fair value of financial instruments 359 1, (38) (2) 1,912 December 31, 2015 Israeli Currency Foreign Currency 2 Unlinked CPI- Linked USD EUR Other Total In NIS million Financial assets (1) 29,858 5,634 4, ,957 Amounts receivable in respect of derivative and off-balance-sheet financial instruments (3) 9, ,742 2,730 1,710 29,926 Financial liabilities (1) 25,785 4,270 5,962 1, ,902 Amounts payable in respect of derivative and off-balance-sheet financial instruments (3) 12, ,898 1,616 1,380 29,969 Net fair value of financial instruments 841 1,265 (70) (33) 9 2,012 For more details regarding the assumptions and parameters used to calculate the fair value, see Note 30.A.C. to the financial statements. See notes below

87 Interest-Rate Risk (Cont'd) 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: The Change in Interest Rates 1% immediate parallel increase 316 1, (33) (1) - 1,752 (160) (8.4%) 0.1% immediate parallel increase 356 1, (37) (1) - 1,897 (15) (0.8%) 1% immediate parallel decrease 412 1, (40) (1) - 2, % The Change in Interest Rates December 31, 2016 Net Fair Value of Financial Instruments, After the Effect of Changes in Interest Rates (4) Israeli Currency Foreign Currency (2) Change in Fair Value CPI- Offsetting Unlinked Linked USD EUR Other Effects Total Total Total In NIS million Percent December 31, 2015 Net Fair Value of Financial Instruments, After the Effect of Changes in Interest Rates (4) Israeli Currency Foreign Currency (2) Change in Fair Value CPI- Offsetting Unlinked Linked USD EUR Other Effects Total Total Total In NIS million Percent 1% immediate parallel increase 805 1,197 (115) (29) 9-1,867 (145) (7.2%) 0.1% immediate parallel increase 837 1,258 (75) (32) 9-1,997 (15) (0.7%) 1% immediate parallel decrease 886 1,344 (23) (35) 10-2, % 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 offbalance-sheet financial instruments, capitalized at the interest rates used to calculate the fair value presented in Note 30.A to the financial statements. 4. The net fair value of financial instruments presented in each linkage segment is the net fair value in Note: 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. No cumulative weekly change occurred in the last ten years, which had it occurred at the reporting date, would have harmed the going concern assumption based on which the financial statements were prepared

88 Linkage-Base Risk The following table shows sensitivities to changes in foreign-currency exchange rates and in the CPI. The measurement includes both balance-sheet and off-balance-sheet activity (brackets represent loss): CPI USD EUR GBP JPY CHF Other FX As at December 31, 2016 NIS Millions 5% increase 70.2 (1.5) (3.1) 0.1 (0.1) 0.1 (0.2) 10% increase (2.0) (7.5) 0.1 (0.2) 0.2 (0.3) 5% decrease (70.2) (0.6) 1.9 (0.1) 0.1 (0.1) % decrease (140.4) (6.6) 6.4 (0.1) 0.2 (0.2) 0.3 CPI USD EUR GBP JPY CHF Other FX As at December 31, 2015 NIS Millions 5% increase 74.5 (1.2) (0.1) * % increase (0.2) * % decrease (74.5) 3.0 (4.1) (0.1) 0.1 *- (0.4) 10% decrease (149.0) 10.5 (7.1) (0.2) 0.2 *- (0.8) * Less than 0.1. The following table shows the condensed linkage balance-sheets: As at December 31, 2016 Unlinked CPI-Linked Foreign Currency, Including Linked Foreign Currency Non-Monetary Items Total NIS Millions Assets 30,059 5,865 4, ,988 Liabilities 26,583 4,171 7, ,646 3,476 1,694 (3,333) 505 2,342 Net future transactions (2,689) (295) 3,164 Options (delta value) (125) Total 482 1,399 *(44) * Of which: USD NIS (15) million, EUR - NIS (26) million, other currencies NIS (3) million. **As at December 31, 2015 Unlinked CPI-Linked Foreign Currency, Including Linked Foreign Currency Non-Monetary Items Total Assets 29,678 5,699 4, ,888 Liabilities 25,753 4,260 8, ,485 3,925 1,439 (3,453) 492 2,403 Net future transactions (3,376) (99) 3,475 Options (delta value) 85 - (85) Total 634 1,340 * (63) * Of which: USD NIS (59) million, EUR - NIS (12) million, other currencies NIS 8 million. ** Restated in light of the retroactive implementation of US GAAP on intangible assets, see Note 1.D.2. For additional details regarding the division of the Bank s assets and liabilities by linkage bases see Note 28 to the financial statements

89 Exposure to Interest Rate Fluctuations - Consolidated Reported Amounts As at December 31, 2016 As at December 31, 2015 On demand One to Three months One to Three to Five to Ten to More than Without fixed Total Internal Average Total Internal Average up to one three to one three five ten twenty twenty maturity fair rate of effective fair rate of effective month months year years years years years years value return lifetime value return lifetime NIS millions % years % years Unlinked Israeli Currency Financial assets and amounts receivable in respect of derivative instruments Financial assets (a) 15,830 6,970 2,400 1,593 1,096 1, , , Derivative financial instruments (excluding options) 3,791 2, , , Options (in terms of the underlying asset) 4, ,235-4,073 *- Total fair value 23,858 9,948 3,709 2,504 1,993 1, ,216 (b) ,353 (b) 0.7 Financial liabilities and amounts payable in respect of derivative instruments Financial liabilities (a) 20,207 2, , , ,785 ** Derivative financial instruments (excluding options) 5,214 2,899 1,395 1, , , Options (in terms of the underlying asset) 4, ,350-3,999 *- Total fair value 29,700 5,772 2,983 3,210 1, ,857 (b) ,512 (b) 0.4 Net financial instruments Exposure to interest rate fluctuations in the segment (5,842) 4, (706) Cumulative exposure in the segment (5,842) (1,666) (940) (1,646) (808) (509) (218) (115) * Less than 0.05 years. ** Reclassified. See notes below

90 Exposure to Interest Rate Fluctuations - Consolidated (Cont'd) Reported Amounts As at December 31, 2016 As at December 31, 2015 On demand One to Three months One to Three to Five to Ten to More than Without fixed Total Internal Average Total Internal Average up to one three to one three five ten twenty twenty maturity fair rate of effective fair rate of effective month months year years years years years years 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) ,495 1, , , Derivative financial instruments (excluding options) * *- Options (in terms of the underlying asset) Total fair value ,495 2, ,154 (b) 2.7 5,883 (b) 2.9 Financial liabilities and amounts payable in respect of derivative instruments Financial liabilities (a) ,245 1, , ,270 ** Derivative financial instruments (excluding options) * 348 *- Options (in terms of the underlying asset) Total fair value ,742 1, ,667 (b) 2.0 4,618 (b) 1.6 Net financial instruments Exposure to interest rate fluctuations in the segment (124) (215) Cumulative exposure in the segment (124) ,280 1,065 1,115 1,429 1,471 * Less than 0.05 years. ** Reclassified. See notes below

91 Exposure to Interest Rate Fluctuations - Consolidated (Cont'd) Reported Amounts As at December 31, 2016 As at December 31, 2015 On demand One to Three months One to Three to Five to Ten to More than Without fixed Total Internal Average Total Internal Average up to one three to one three five ten twenty twenty maturity fair rate of effective fair rate of effective month months year years years years years years 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) 1, , ,465 ** Derivative financial instruments (excluding options) 11,064 4,909 1,785 4,100 1, , , Options (in terms of the underlying asset) , *- Total fair value 12,956 5,682 2,900 4,372 1, ,085 (b) ,647 (b) 0.8 Financial liabilities and amounts payable in respect of derivative instruments Financial liabilities (a) 5,214 1, , ,847 ** Derivative financial instruments (excluding options) 10,096 6,418 1, , , , Options (in terms of the underlying asset) , *- Total fair value 15,512 8,025 3, , ,019 (b) ,741 (b) 0.7 Net financial instruments Exposure to interest rate fluctuation in the segment (2,556) (2,343) (133) 4, (127) Cumulative exposure in the segment (2,556) (4,899) (5,032) (906) (830) (504) * Less than 0.05 years. ** Reclassified. See notes below

92 Exposure to Interest Rate Fluctuations as at December 31, Consolidated Reported Amounts As at December 31, 2016 As at December 31, 2015 Without fixed Total Internal Average Total Internal Average On demand One to Three months One to Three to Five to Ten to More than up to one three to one three five ten twenty twenty maturity fair rate of effective fair rate of effective month months year years years years years years value return lifetime value return lifetime NIS millions % years % years Overall exposure to interest rate fluctuations Financial assets and amounts receivable in respect of derivative instruments Financial assets (a),(c) 17,622 7,904 4,209 3,616 2,329 2,023 1, , ,957 ** Derivative financial instruments (excluding options) 14,855 7,561 2,521 5,264 2, , , Options (in terms of the underlying asset) 4, , ,698-4, 908 *- Total fair value 36,956 16,216 8,104 8,974 4,524 2,644 1, ,455 (b) ,883 (b) 0.9 Financial liabilities and amounts payable in respect of derivative instruments Financial liabilities (a),(c) 25,587 4,059 2,445 2,974 1, , ,902 ** Derivative financial instruments (excluding options) 15,410 9,317 2,913 2,123 2,105 1, , , Options (in terms of the underlying asset) 4, , ,697-4,921 *- Total fair value 45,478 14,123 6,723 5,198 3,825 1, ,543 (b) ,871 (b) 0.6 Net financial instruments Exposure to interest rate fluctuations in the segment (8,522) 2,093 1,381 3, , Cumulative exposure (8,522) (6,429) (5,048) (1,272) (573) 102 1,366 1,384 * Less than 0.05 years. ** Reclassified. Notes to exposure to Interest Rate Fluctuations as at December 31, Consolidated 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 various 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 the 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 30.A. 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, included, in respect of which, in Note 30.A. to the financial statements. 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 the 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.

93 Option Portfolio Risk Most of the Bank s activity in foreign currency/foreign currency options is performed with back-toback coverage in trading, without the creation of market risks over time. This portfolio is included in other derivatives in Note 25 to the financial statements as of December 31, 2016 (the par value totaled NIS 438 million, and the balance of the fair value totaled NIS 2 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 of the portfolio. This portfolio is included in ALM derivatives in Note 25 to the financial statements as of December 31, The following table shows the breakdown of the portfolio by currencies, as of December 31, 2016 (in NIS millions): Par value EUR/USD EUR/NIS USD/NIS Other Total Purchased options ,225-4,311 Written options ,513-4,713 Total 743 1,543 6,738-9,024 Fair value EUR/USD EUR/NIS USD/NIS Other Total Purchased options Written options

94 Liquidity Risk Liquidity risk is the risk to the profits and stability of the banking corporation arising from an inability to supply its liquidity needs and repay its liabilities on time, without incurring exceptional losses. On September 28, 2014, the Supervisor of Banks issued a circular adding Proper Conduct of Banking Business Directive 221, Liquidity Coverage Ratio (LCR), which adopts the recommendations of the Basel Committee with regard to the liquidity coverage ratio in the Israeli banking system. The liquidity coverage ratio refers to a horizon of thirty days, in a stress scenario, and is aimed at ensuring that the banking corporation has a stock of high-quality liquid assets that is sufficient for its liquidity needs in that timeframe, in accordance with the scenario described in the directive. The Bank evaluates its liquidity profile from a broad perspective, encompassing the use of various risk indicators and additional parameters to assess the various aspects of liquidity risk, including daily and intraday liquidity, liquidity up to one month (based on an internal model and the LCR), long-term liquidity (stable financing ratio), various indices of the mix and structure of resources (percentage of deposits of up to one month, percentage of core deposits, depositor concentration indices, etc.), analysis of liquidity gaps for various time ranges, etc. The Bank has set limits on these parameters, and most are monitored on a daily basis. As at the date of the report the volume of the deposits of the three largest depositors groups amounted to NIS 1,203 million and constitutes 3.7% of the total deposits of the public, For further information regarding the liquidity management see Detailed Report on Risks for 2016 on the Bank's website, at: 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. Operational risk management at the Bank is implemented in accordance with the directives of the Supervisor of Banks, including Proper Conduct of Banking Business Directive 350, and is grounded in the operational risk management policy. The policy defines the manner in which operational risk is managed and the roles of the functions involved in management of the risk, in the three lines of defense. The policy is discussed and approved by the Board of Directors on an annual basis. Within this process, the Bank acts in accordance with the relevant Proper Conduct of Banking Business Directives on the following subjects: 350, 308, 357, 367, 361, and 355. Detailed specific policy documents exist with respect to these subjects

95 Main Principles of the operational risk management policy: The Bank develops, implements and maintains a framework for managing the operational risk which fully integrates into its overall processes for risk management. The Bank maintains a tight control environment which uses policy, processes and systems, adequate internal controls and adequate strategies for decreasing the risk, 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. In 2017 the Bank is preparing to expand the insurance response to damages connected to the cyber domain from aspects of business continuity and cyber risks. The management of the operational risk is carried out in a comprehensive systemic point of view, which includes the subsidiaries, by using a uniform and systematic methodology. The management of the operational risk is based on an active process of identification, assessment, measurement, monitoring, report and control carried out in all of the Bank's lines of business. The number and intensity of attempted attacks, of various types, has increased from year to year, including cyber-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 is not aware of the occurrence of any material information-security or cyber incident, including any cyber event or 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 cyber-attacks, in the context of its independent systems, had no material effect on the financial statements for The Bank implements the information security policy, including upholding a wide range of activities in the technological, operational and procedural fields. The information security policy is adapted to information security standard ISO and has been examined by the Israeli Standards Institute, which granted the Bank a standard mark. All of the information security activity is meant to address the dynamic threats outline, which characterizes the technological environment in which the modern banking information systems work and to allow compliance with the regulatory directives, The Bank has a material contractual engagement, over a period of many years, to receive major IT and operational services from Bank Leumi LeIsrael Ltd., which exposes the Bank to outsourcing risks. The IT and operations agreement was signed for a period of ten years, which ended on December 31, From this period, a period that may last up to three years began, during which, the project of terminating the contractual engagement will be carried out. The contractual engagement with Bank

96 Leumi is backed by the required regulatory approvals. During 2016 the Bank started the process of actual examination of alternative suppliers, in cooperation with professional teams of experts, and within this framework, contacted various suppliers in order to receive offers for future computer services. See Section "Developments and Material Changes at the Bank" and also Note 23.C.4. For additional information regarding operational-risk management, see the Detailed Report on Risks on the Bank's website, at: Compliance Risk 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 compliance risk management policy is discussed and approved by the Board of Directors on at least an annual basis. Compliance risk management is implemented in accordance with the directives of the law applicable to the Bank, including Proper Conduct of Banking Business Directive 308, Compliance and the Compliance Function at Banking Corporations, the updated version of which took effect on January 1, The Chief Legal Advisor is head of the Legal Advising and Compliance Division and serves as Head of Internal Enforcement at the Bank and of the subsidiaries. The Chief Compliance Officer, who is head of the compliance branch, serves as the compliance risk manager subject to the Chief Legal Advisor of the Bank and is responsible for the implementation of the Money Laundering and Terrorism Financing Prohibition Law at the Bank. In addition the Chief Compliance Officer serves also as the Ombudsman. For additional information regarding compliance-risk management, see the Detailed Report on Risks on the Bank's website, at: 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

97 all the legal aspects of the activities of the Bank and its' Group, and the legal advisor of the Bank serves as a legal risk director 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 the risk to the corporation's profits, stability or ability to achieve its objectives as a result of damage to reputation which may result from the corporation's conduct, financial situation or negative publicity (true or false) and may be expressed by 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 management processes at the Bank, as well as of the manner and efficiency of response of management to external effects 3. 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 plans. 3 According to the BIS document, Enhancement to the Basel 2 Framework, from July 2009, goodwill risk may also arise from securitization transactions. The Bank does not operate in this area

98 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. In recent years awareness is increasing in Israel and around the world to the potential of exposure of financial institutions to risk deriving from environmental hazards and from failure to comply with provisions relating to the environment. 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, etc. 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. The Bank's Assessment Regarding the Effect of Risk Factors The following risk factor table is based on an updated methodology which completes a comprehensive process conducted by the Bank for updating the approach used to assess the total risk in the various lines of business. According to the methodology, the extent of influence of the various risk factors, in the following table, reflects the extent to which the risk factor reflects a threat on the Bank's stability. The effect displayed below was formulated while being adapted as much as possible to the ICAAP process and its results, while examining qualitative and quantitative aspects, including the risk profile of the Bank and the current risk measurement processes, and is based on the estimation of the exposure of the Bank's activity to the various risks and their effect on its capital adequacy and stability. In accordance, in general, the perception is based on one or two key parameters: - The effect of the risk in the normal business situation through the rate of capital allocation. - The effect of the risk under a stress scenario through the effect on the Tier I capital adequacy in a stress scenario. Risks difficult to quantify such as goodwill risk, strategic risk etc., are evaluated subjectively by the relevant factors at the Bank and based on the products of the ICAAP. The methodology is based on a five-rank ladder, which increases the flexibility level

99 Below are the details of the Bank Management's evaluation of the effect of risk factors at the Bank as at December 31, 2016 (3) : Risk Factor Effect of the Risk (High, Medium, Low) 1 Overall Effect of the Credit Risks (1) Medium 1.1 Borrowers and Collaterals Quality Risk Medium 1.2 Sectorial Concentration Risk (2) Medium-Low 1.3 Borrowers/Groups of Borrowers Concentration Risk (2) Medium 2 Overall Effect of Market Risks (1) Medium 2.1 Interest-Rate Risk Medium 2.2 Linkage-Base Risk (inflation and exchange rates) Low 2.3 Optionality Risk Low 2.4 Share Prices Risk Low 3 Liquidity Risk Low 4 Operational Risk Medium-Low 5 Legal Risk Low 6 Goodwill Risk Low 7 Clearance Risk Low 8 Strategic Risk Low (1) The overall effect of the credit risks and the market risks was determined according to the highest risk assessment of the sub-risks. (2) The calculation is on the basis of gross credit without deductible collateral. (3) No change occurred compared to the report on September 30, 2016, excluding an increase in respect of sectorial concentration from "low" to "medium-low", and excluding an increase in borrowers and collaterals quality risk from "medium-low" to "medium". No change in the overall effect of credit risks which remained "medium". Notes: - See also Chapter Condensed Description of the Principle Risks for details regarding leading and emerging risks. For additional information see Detailed Report on Risks on the Bank's website at: - The assessment of the influence degrees of the risks is based on the Bank's internal methodology and can't be compared among the various banks

100 Critical Accounting Policies and Estimates, Controls and Procedures 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. 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 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 collective basis. See details of the principles of the directive and their implementation in Note 1.E.6. While updating the credit policy, the Bank updated the methodology 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 offbalance 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, inter alia: the manner of classification of debts (sound, or problematic under special supervision, inferior, 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 collective allowances, etc. The implementation of the directive necessitated the formulation of methodology on these matters, based on the directive, the accompanying clarifications and interpretations. Identification and classification of the population 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

101 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 allowance for credit losses - The Bank examines on an individual basis any debt whose balance is mainly greater than NIS 500 thousand and if the debt is found to be impaired, an individual assessment is performed 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 collective 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 the head of the Chief Accountant Division participate, as well as by the Audit Committee and by the plenum of the Board of Directors. The balance of individual allowance for credit losses as at December, 31, 2016 is NIS 56 million

102 Collective allowance for credit losses Pursuant to the directive, a collective allowance must be made 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 collective allowance calculation 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. Note that the Bank continues to include also 2011 in the range of years according to which the historical rate of loss/write-offs is calculated and this is in accordance to the guidelines of the Bank of Israel as detailed in Note 1.D.4. The historical rate of loss was calculated based on the rates of net accounting write-offs, relative to balance of debts. 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; while providing a higher weight factor to the coefficient of the previous year if it was above average. In addition, the Bank applied another qualitative adjustment, based on a detailed methodology in accordance with the directives of the Bank of Israel on the subject, to all economic sectors, which reflects the risk inherent in each sector. Note that according to the guidelines set in the temporary order, as of January 1, 2011 the Bank doesn't maintain a general and additional allowance, but continues to calculate the additional allowance and checks that in any case the collective allowance at the end of each reporting date isn't lower than the general and additional allowance, which would have been calculated for the same period, before tax. When determining an adequate collective allowance for credit losses in respect of credit for nonhousing private individuals, the Bank takes into consideration both the average past losses in the range of years determined by the Bank of Israel, that ended at the reporting date and the adjustments in respect of environmental factors determined by the Supervisor of Banks in a rate that is no less than 0.75% from the balance of the non-problematic consumer credit. Excluded from the aforesaid is credit risk, deriving from receivables in respect of non-interest bearing banking credit cards, in respect of which the qualitative adjustment was set, as calculated according to the methodology of the Bank. 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

103 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. The balance of collective allowance for credit losses as at December 31, 2016 (including allowance by extent of arrears), is NIS 249 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, by 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 an allowance for credit losses in respect thereof is recorded. 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 collective 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 remaining recorded 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

104 Revenue recognition on a cash basis Interest income in respect of an impaired debt is recognized 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 been accrued in the reporting period on the remaining recorded balance of the debt by the contractual 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 13 and 27.A.1 to the financial statements. 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-thantemporary 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 payment failure 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 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

105 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 and the Board of Director's plenum, for discussion. All relevant materials concerning the bonds, including a summary of the individual 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 allocated as an expense to noninterest financing income in respect of bonds in 2016 amounted to NIS 3 million, ( NIS 4 million). Fair Value of Financial Instruments The measurement of fair value is based on the principles of FAS 157 (ASC ), 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 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

106 Part of the financial instruments in which the bank is active - 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 used are both inputs observed in the market from independent sources and 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). For details regarding transfers between levels in fair value hierarchy, see Note 30.C to the financial statements. 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. As emerges from the data in Note 30.B to the financial statements, 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 Statement is 1% compared to 2% on December 31,

107 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 techniques: - 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". When determining the fair value, the Bank developed a pricing methodology which 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 an auditing factor, which has sufficient professional expertise and is independent of the calculating function. The auditing factor 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 performed on the examined bonds, and subsequently on recent transactions of similar bonds. If such transactions do not exist or if the value of the bonds is under the materiality threshold as determined by the pricing methodology, the Bank uses the pricing services of the company "Fair Margin" in order to calculate the fair values, while exercising discretion. As at December 31, 2016, the fair value determined by a quote from "Fair Margin", amounted to NIS 153 million (December 31, NIS 172 million). The fair values calculated according to the methodology above 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. The Bank examines the materiality of the volume of the financial instruments in which the fair value can't be determined with a reasonable degree of confidence in accordance with the Public Reporting Directives. As at December 31, 2016, 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. 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 and validated on a routine basis, and brought before the Audit Committee and the Board of Directors for approval

108 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 bothpositions of the asset side in respect of the 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 credit 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. The Bank implements an advanced approach, which takes into account the exposure to the credit risk throughout the transaction life. As at December 31, 2016 the results of the adjustment of assets and liabilities in respect of the credit risk to derivative financial instruments, are immaterial. 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 21 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 21.A and the Section Human Capital

109 2. Bonuses for length of service (jubilee bonuses) As at December 31, 2016 apply to the population of clerks at the Bank, See also Note 21.C to the financial statements. Regarding the redemption of rights for jubilee bonuses for the population of managers and authorized signatories, see Note 21.C. 3. Compensations including compensation at 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 21.A.4 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 he performs. 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 capitalization 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 in 2013 in a position paper of the Capital Markets, Insurance, and Savings Division of the Ministry of Finance which concerns the update of the set of demographical assumptions in pension funds and life insurance, which includes 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). As of 2015 the Bank adopts the circular of the Supervisor of Banks regarding the implementation of US GAAP on employee benefits. This circular updates the recognition, measurement and disclosure requirements on employee benefits in the Public Reporting Directives according to GAAP for US banks on this subject. See Note 1.E.18. The amount of liabilities calculated on the basis of actuarial assessments for December 31, 2016 amounted to approximately NIS 474 million. The liabilities are capitalized at a real

110 capitalization rate of 1.9% annually and 3.40% nominally which was set by the Supervisor of Banks, on the basis of government bonds in Israel with the addition of a margin equal to 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 maturity periods of U.S. government bonds, at the reporting date. Regarding the determination of the value of the pension plan's assets see Note 1.E.18. In interim periods, in which no changes materially affecting the plan's assets or the liability in respect of the benefit occurred on a cumulative basis from the beginning of the year, the Bank doesn't re-measure the plan's assets or the liability in respect of the benefit. The actuarial calculations are sensitive mostly to change in the capitalization rate, the predicted rate of non-financial salary increases, departure rates, excess compensation rates, the rate of those who choose pension and the mortality tables. For details regarding the actuarial estimate upon which the Bank bases the employee benefits as described above, see the estimate of the actuary that was attached via the Magna electronic disclosure system of the Israeli Security Authority from March 29, 2017 at On January 12, 2016 the Supervisor of Banks published a circular regarding operational efficiency in the banking system. Within its framework, the banks are required to examine and approve a multi-year efficiency plan for the following five years and principles for longterm efficiency. The circular includes facilitations concerning implications of the plan on the capital adequacy and on the inclusion of the early retirement data on the Bank's financial results. On November 30, 2016 the Bank's Board of Directors approved an efficiency plan which consists mainly of a voluntary retirement plan, which according to, approximately 120 employees are expected to retire from the Bank during For additional details including amounts allocated to profit and loss in the financial statements of 2016, see Note 21.B. and regarding facilitations on capital adequacy see Note 22.B

111 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 in respect of 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 25 to the financial statements, provides comprehensive information about the Bank s activity in these financial instruments. Section A.2 of Note 25 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.9.). As at December 31, 2016 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 2016 these measurement gaps created income of NIS 13 million compared to income in the amount of NIS 14 million in 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 - A probability of more than 70% - requires that a full provision be made. Reasonably possible risk - A probability of more than 20% and less or equal 70% - No provision required. Requires disclosure if the aggregate amount of the claims is material. For further information, see details in Note 23.C.(17).A. to the financial statements. Remote risk - A probability of less than or equal 20% - No provision required. Requires a disclosure of the maximum possible loss, if the amount is highly material. For further information, see details in Note 23.C.(17)(B-K) to the financial statements

112 The management of the Bank, included in the financial statements, sufficient provisions required to cover the possible damages resulted from all of the claims, based on the legal advisors' estimates. The 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. 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 classifies the costs in respect of purchased software assets or costs capitalized as an asset in respect of software developed for personal use, to this item. As of 2015 the Bank implements the letter of the Supervisor of Banks concerning discounting costs of self-development software. For details regarding the rules that the Bank adopted retrospectively and the effect on the Bank's capital, see Note 1.E.14. As of January 1, 2016 the Bank retroactively implemented the guidelines of the circular of the Bank of Israel regarding "Reporting of Banking Corporations in Israel According to US GAAP on Intangible Assets", with respect to the balances of software assets, and comparative figures were restated for each of the reporting periods included in the reports, see accounting policy Note 1.D.2. 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 an impairment. 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 in addition Notes 1.E.12 and 1.E.15 to the financial statements

113 Deferred Taxes Deferred taxes are recorded in respect of temporary differences and in respect of losses carried forward, only if it is more likely than not that at the reversal date a tax saving will be created. Therefore, when recording deferred taxes receivable, the Bank is required to make assessments and estimates concerning their future realization possibilities. The net deferred taxes amount as at December 31, 2016 in respect of temporary differences amounted to NIS 254 million. For details concerning the circular of the Bank of Israel on the adoption of US GAAP on income taxes, see Note 1.F.1.A. For details regarding the decrease of corporation tax within the Economic Efficiency Law and its effect on the amount of temporary differences, see Note 8.C. to the financial statements. Controls and Procedures According to the Public Reporting Directives, the Supervisor of Banks, the CEO 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 Declaration ). This directive refers to the Management's responsibility to the disclosure in the financial statements, starting with the quarterly reports for June 30, 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, 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

114 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 existence of a control array according to a defined, recognized framework; the COSO 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 prepare 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. 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

115 In addition, a quarterly "signature cascade" process is 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, have 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 report, in accordance with the Public Reporting Directives of the Supervisor of Banks, on the date stipulated in these directives. Changes in Internal Control During 2016 there was no change in the Bank's internal control over financial reporting which materially affected or is reasonably likely to materially affect the Bank's internal control over financial reporting. The Board of Directors thanks the Bank's management, the executives and all of the employees for their dedicated work. Zeev Abeles, Chairman of the Board of Directors Israel Trau CEO Tel-Aviv, March 29,

116 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 2016 (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 disclosure and the Bank's internal control on financial reporting (as defined in the Public Reporting Directives concerning the "Board of Directors' Report"); 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 this 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. March 29,

117 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 2016 (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 disclosure and the Bank's internal controls on financial reporting (as defined in the Public Reporting Directives concerning the "Board of Directors' Report"); 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 this 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. March 29,

118 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 these systems are found to be effective, they can provide only a reasonable degree of confidence with regard to the preparation and presentation of the financial statements. The 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, 2016, based on criteria established in the internal control model of the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, the management believes that as of December 31, 2016, the Bank's internal control over financial reporting is effective. The effectiveness of the Bank's internal control over financial reporting as of December 31, 2016 was audited by the external auditors of the Bank, Somekh Chaikin, as noted in their report on page 119, which includes an unqualified opinion regarding the effectiveness of the Bank's internal control over financial reporting as of December 31, Zeev Abeles Chairman of the Board of Directors Israel Trau C.E.O. Arnon Zait Chief Accountant, C.F.O. Date of Approval of the report for publication: March 29,

119 Somekh Chaikin Mail address Office address Telephone PO Box 609 KPMG Millennium Tower Fax Tel Aviv Ha'arba'a Street Website: Israel Tel Aviv Auditors' Report to the shareholders of Union Bank of Israel Ltd. In accordance with Public Reporting Directives of the Supervisor of Banks in Respect of Internal Control Over Financial Reporting We have audited the internal control over financial reporting of Union Bank of Israel Ltd. (hereinafter the "Bank ) as of December 31, 2016, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (hereinafter: "COSO"). The Bank s Board of Directors and Management are responsible for the existence of effective internal control over financial reporting and for their assessment of the effectiveness of internal control over financial reporting, included in the accompanying Directors and Management s reports 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 in respect of auditing of internal control over financial reporting, as adopted by the Institute of Certified Public Accountants 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 all material aspects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness 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 circumstances. We believe that our audit provides a reasonable basis for our opinion. The internal control over the financial reporting of the Bank 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 accounting principles generally accepted in Israel (Israeli GAAP) and directives and guidelines of the Supervisor of Banks. A bank's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Bank (including their removal from its possession); (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statement in accordance with Israeli GAAP and in accordance with directives and guidelines of the Supervisor of Banks, and that money receipts and expenditures 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 (including removal from possession) of the Bank s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, conclusion drawing regarding the future on the basis of any current evaluation of effectiveness is exposed to the risk that controls may become inadequate because of changes in circumstances, or that the degree of compliance with the policies or procedures may deteriorate

120 Somekh Chaikin Mail address Office address Telephone PO Box 609 KPMG Millennium Tower Fax Tel Aviv Ha'arba'a Street Website: Israel Tel Aviv In our opinion, the Bank maintained, in all material respects, effective material control over financial reporting as of December 31, 2016, based on criteria established in Internal Control Integrated Framework issued by COSO. We have also audited, in accordance with accepted auditing standards in Israel, and certain auditing standards whose application in the audit of banking corporations is determined by the directives and guidelines of the Supervisor of Banks, the Balance Sheets of the Bank and consolidated for the days December and 2015 and the Statements of Profit and Loss, the Comprehensive Income Statements, the Statements of Changes in Equity and the Statements of Cash Flows of the Bank and consolidated - for each of the three years in the period ended on December 31, 2016, and our report dated March 29, 2017, included an unqualified opinion on the said financial statements and directs attention to the contents of Note 23.C(17)C to the financial statements in respect of contingent liabilities. Somekh Chaikin Certified Public Accountants (ISR) March 29,

121 Financial Statements as of December 31, 2016 Contents Page Auditors Reports to the Shareholders 122 Financial Statements Statements of Profit and Loss 124 Statement of Comprehensive Income 125 Balance Sheets 126 Statement of Changes in Equity 128 Statements of Cash Flows 129 Notes to the Financial Statements

122 Somekh Chaikin Mail address Office address Telephone PO Box 609 KPMG Millennium Tower Fax Tel Aviv Ha'arba'a Street Website: Israel Tel Aviv 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 Limited (hereinafter - the "Bank") as of December 31, 2016 and 2015 and the consolidated balance sheets for the same dates, the statements of profit and loss, comprehensive income, changes in equity and cash flows - of the Bank and consolidated - for each of the three years in the period ended December 31, These financial statements are the responsibility of the Bank s Board of Directors and 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 Profit and Loss Statements constitute approximately 1.03%, 1.55% and 2.15% of the net consolidated income from interest before provision for credit losses and non-interest income for the years ended on December 31, 2016, 2015 and 2014 respectively. The financial statements of those companies were audited by other auditors whose reports have been furnished to us. Our opinion, insofar as it relates to amounts included for those companies, is based on the reports of the other auditors. We conducted our audit in accordance with Generally Accepted Auditing Standards in Israel, including standards prescribed by the Auditors Regulations (Manner of Auditors' Performance) and certain auditing standards that their implementation in the audit of banking corporations was determined by the directives and guidelines of the Supervisor of Banks. Those 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 examining, 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 Management of the bank, as well as evaluating the overall financial statements presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinion

123 Somekh Chaikin Mail address Office address Telephone PO Box 609 KPMG Millennium Tower Fax Tel Aviv Ha'arba'a Street Website: Israel Tel Aviv In our opinion, based on our audit and on the reports of above mentioned other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank and consolidated, as of December 31, 2016 and 2015 and the results of their operations, the changes in the shareholders equity and their cash flows - of the Bank and consolidated - for each of the three years in the period ended December 31, 2016, in conformity with Generally Accepted Accounting Principles in Israel (Israeli GAAP). Furthermore, in our opinion, the statements have been prepared in accordance with directives and guidelines of the Supervisor of Banks. Without qualifying our said opinion, we refer your attention to Note 23.C(17)C to the financial statements in respect of contingent liabilities. We have also audited in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB) in the United States in respect auditing of internal control over financial reporting, as adopted by the Institute of Certified Public Accountants in Israel, the internal control of the Bank over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 29, 2017, expressed an unqualified opinion on the effectiveness of the Bank's internal control over financial reporting. Somekh Chaikin Certified Public Accountants (Isr.) March 29,

124 Statement of Profit and Loss for the Year Ended December 31 Reported Amounts Note Consolidated The Bank NIS millions Interest income Interest expenses Net interest income Provision (income) for credit losses 13,27 98 (107) (110) 95 Net interest income after provision for credit losses Non-Interest Income Non-interest financing income Fees Other income Total non-interest income Operating and Other Expenses Salaries and related expenses (1) Maintenance and deprecation of buildings and equipment (1) Other expenses (1) Total operating and other expenses 1, Profit (loss) before taxes (49) (83) 196 (28) Provision for taxes on profit (1) 8-81 (3) (8) 73 (9) Profit (loss) after taxes (49) (75) 123 (19) The Bank's share in investee companies' net profits after taxes Net Profit (Loss): attributed to shareholders of the banking corporation (1) (49) (49) Basic and diluted earnings per share (NIS): 9 Net profit (loss) attributed to shareholders of the Bank (1) (0.67) (0.67) (1) Data for prior periods has been restated in light of the retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D.2. Zeev Abeles, Chairman of the Board of Directors Yeshayahu Landau, Vice Chairman of the Board of Directors Israel Trau, Chief Executive Officer Arnon Zait, Chief Financial Officer, Deputy General Manager Date of Approval of the financial statements: March 29, 2017 The accompanying notes are an integral part of the financial statements

125 Consolidated Statement of Comprehensive Income for the Year Ended December 31 Reported Amounts NIS millions Net profit (loss) attributed to the banking corporations' shareholders (1) (49) Other comprehensive loss, before taxes: Net adjustments in respect of securities available for sale at fair value (8) (28) (13) Adjustments of employee benefit liabilities (2) (11) 4 (6) Other comprehensive loss, before taxes (19) (24) (19) Effect of related tax (1) Other comprehensive loss attributed to the shareholders of the Bank, after taxes (12) (16) (12) Comprehensive income (loss) attributed to the shareholders of the Bank (61) (1) Data for prior periods has been restated in light of the retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D.2. (2) Reflects mostly amortization of amounts recorded in the past in other comprehensive income and charged in the reporting period to profit and loss while offsetting adjustments in respect of end of period actuarial estimates for pension plans for a defined benefit. (3) See also Note 10 concerning cumulative other comprehensive income. The accompanying notes are an integral part of the financial statements

126 Balance Sheets as at December 31 Reported Amounts Assets Note Consolidated The Bank NIS millions Cash on hand and deposits with banks 11 3,901 6,668 3,901 6,668 Securities (1) 12 11,584 10,371 11,397 10,203 Borrowed securities Credit to the public 13 23,937 22,505 23,752 22,338 Allowance for credit losses (253) (190) (246) (185) Net credit to the public 23,684 22,315 23,506 22,153 Credit to the government Investment in investee companies Buildings and equipment (6) Assets in respect of derivative instruments Other assets (2), (6) Assets held for sale Total Assets 40,988 40,888 41,295 41,209 The accompanying notes are an integral part of the financial statements

127 Balance Sheets as at December 31 (continued) Reported Amounts Note Consolidated The Bank NIS millions Liabilities and Equity Deposits from the public 17 32,756 32,466 36,278 35,768 Deposits from banks Deposits from the government Subordinated notes and bonds 19 3,395 3, Liabilities in respect of derivative instruments Other liabilities (3),(4) 20 1,928 2,063 2,061 2,205 Total Liabilities 38,646 38,485 38,953 38,806 Total Equity (5), (6) 22A 2,342 2,403 2,342 2,403 Total Liabilities and Equity 40,988 40,888 41,295 41,209 (1) Of which: securities pledged to the Stock Exchange and Maof Clearing House in the amount of NIS 513 million (December 31, 2015: NIS 820 million). ( 2) Of which: other assets at fair value in the amount of NIS 173 million (December 31, 2015: NIS 222 million). ( 3) Of which: other liabilities at fair value in the amount of NIS 703 million (December 31, 2015: NIS 1,015 million). (4) Of which: Allowance for credit losses in respect of off-balance-sheet credit instruments in the amount of NIS 52 million (December 31, 2015: NIS 32 million). ( 5) Equity attributed to the Banks' shareholders. (6) Data of previous periods was restated in light of the retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D.2. The accompanying notes are an integral part of the financial statements

128 Statements of Changes in Equity For the year ended December 31 Reported Amounts Benefits in Share Respect of Cumulative Capital Share-Based Other and Payment Comprehensive Surplus Premium Transactions Income (3) (1)(2) Total Equity NIS millions Balance as at January 1, ,237 2,264 Net profit for the accounting year Net other comprehensive income (loss), after tax effect - - (12) - (12) Balance as at December 31, ,260 2,275 Net profit for the accounting year Net other comprehensive income (loss), after tax effect - - (16) - (16) Balance as at December 31, ,404 2,403 Loss for the accounting year (49) (49) Net other comprehensive income (loss), after tax effect - - (12) - (12) Balance as at December 31, ,355 2,342 (1) Data of previous periods was restated in light of the retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D.2. (2) See Note 22.A(2) with regard to dividend distribution restriction. (3) See also Note 10 concerning cumulative other comprehensive income. The accompanying notes are an integral part of the financial statements

129 Statements of Cash Flows for the Year Ended December 31 Reported Amounts Consolidated NIS millions The Bank Cash Flows from Operating Activities Net profit (loss) for the year (1) (49) (49) Adjustments: The Bank's share in the undistributed (profits) losses of equity-basis investees (26) (21) (42) Depreciation of buildings and equipment (including impairment) (1) (Income) provision for credit losses 98 (107) (110) 95 Net Profit from sale of securities available for sale (43) (34) (71) (42) (34) (63) Net realized and unrealized net loss (profit) from adjustments to fair value of securities held for trading - (10) (19) - (10) (19) Profit from sale of buildings and equipment - - (4) - - (4) Net deferred taxes (1) (35) 61 (19) (34) 64 (16) Change in net liability in respect of employee benefits Adjustment differences included in investment and financing activities (99) (96) Adjustments in respect of exchange - rate differences on cash balances Net Change in Current Assets: Deposits with banks Credit to the public (1,394) (568) 387 (1,373) (477) 394 Credit to the government (1) - - (1) - - Borrowed securities (243) (111) 321 (243) (111) 321 Assets in respect of derivative instruments (87) (87) Securities held for trading 146 (1,622) (99) 146 (1,622) (99) Other assets (1) (260) (260) Net Change in Current Liabilities: Deposits from banks (309) 331 (57) (309) 331 (57) Deposits from the public ,339 Deposits from the government (1) - (2) (1) - (2) Liabilities in respect of derivative instruments 100 (282) (92) 100 (282) (92) Other liabilities (264) (812) 262 (272) (812) 265 Net cash flows from (for) operating activities (1,447) (719) 1,389 (1,225) (1,000) 1,834 Cash Flows from Investment Activities Acquisition of securities available for sale (14,250) (13,548) (12,281) (14,233) (13,433) (12,268) Proceeds from realization of securities available for sale 10,454 8,258 8,160 10,454 8,254 8,143 Proceeds from redemption of securities available for sale 2,309 3,277 2,350 2,309 3,277 2,350 Proceeds from realization and redemption of investments in investee companies Investment in investee companies (5) (100) - Proceeds from realization of a no longer consolidated subsidiary (appendix B) Acquisition of buildings and Equipment (1) (50) (50) (46) (50) (50) (46) Proceeds from sale of buildings and equipment Dividend received from a subsidiary Net cash from (for) investment activities (1,532) (2,063) (1,812) (1,517) (2,048) (1,785) (1) Data for prior periods has been restated in light of the retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D

130 Statements of Cash Flows for the Year Ended December 31 (continued) Reported Amounts Consolidated The Bank NIS millions Cash Flows From Financing Activity Issuance of bonds and subordinated notes Redemption of subordinated notes and bonds (424) (279) (316) (9) (13) (100) Net cash from (for) financing activity 228 (279) 372 (9) (13) (100) Increase (decrease) in cash (2,751) (3,061) (51) (2,751) (3,061) (51) Balance of cash at the beginning of the year 6,655 9,717 9,776 6,655 9,717 9,776 Effect of changes in exchange rates on cash balances (9) (1) (8) (9) (1) (8) Balance of cash at the end of the year 3,895 6,655 9,717 3,895 6,655 9,717 Interest and Taxes Paid and/or Received: Interest received 809 1, Interest paid (186) (287) (469) (185) (199) (377) Dividends received Income tax paid (85) (75) (92) (70) (62) (75) Income tax received Appendix A- Non-Cash Investments and Financing Activities Acquisition of assets against liability to suppliers (1) Appendix B - Proceeds from the Realization of a Previously Consolidated Subsidiary investments: Assets and liabilities of the previously consolidated subsidiary and cash flows from the realization of this investment for December 31, 2014: NIS millions Derecognized cash (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 (1) Data for prior periods has been restated in light of the retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D.2. The accompanying notes are an integral part of the financial statements

131 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies A. General 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, 2016 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. 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. The financial statements were approved for publication by the Board of Directors of the Bank on March 29, 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, The FASB Accounting Standards Codification and the hierarchy of Generally Accepted Accounting Principles (ASC ). 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 US banks. 3. Subsidiaries - companies whose financial statements are fully consolidated, directly or indirectly, with the financial statements of the Bank. 4. Investee Company - subsidiaries and affiliated companies. 5. Related Parties and Interested Parties as implied by Section 80 of the Public Reporting Directives

132 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) B. Definitions (Cont'd) 6. CPI - The Consumer Price Index published by the Central Bureau of Statistics. 7. 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. 8. 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. 9. Cost - Cost in the reported amount. 10. Nominal Financial Report - financial report based on reported amounts. C. Basis of preparation of the financial statements 1. Reporting Principles The financial statements of the Bank are prepared in accordance with the generally accepted accounting principles in Israel (Israeli GAAP) and in accordance with the Directives and guidelines of the Supervisor of Banks. In the main issues these guidelines are based on generally accepted accounting principles in the US. In the remaining issues, which are less material, the guidelines are based on international financial reporting standards (IFRS) and the generally accepted accounting principles in Israel (Israeli GAAP). In cases in which the IFRS allows a number of alternatives, or doesn't include a specific reference to a certain situation, these directives determine specific implementation guidelines, based mainly on the generally accepted accounting principles in US banks. 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: 1. Derivative financial instruments and other financial instruments measured at fair value through profit and loss (such as investment in securities held for trading); 2. Financial instruments classified as available for sale; 3. Deferred tax assets and liabilities; 4. Provisions; 5. Assets and liabilities in respect of employee benefits; -132-

133 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) C. Basis of preparation of the financial statements (Cont'd) 3. Measurement Base (Cont'd) 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 hyperinflationary 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. 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 2016 the Bank implements financial standards and new directives on the following subjects: 1. Reporting of Banking Corporations in Israel according to US GAAP on Business Combinations, Consolidation of Financial Statements and Investments in Investee Companies On June 10, 2015 the Supervisor of Banks published a circular, according to which, banking corporations and credit card companies will be required to adopt GAAP for US banks on business combinations, consolidation of financial statements and investments in investee companies and inter alia, the presentation, measurement and disclosure requirements set forth in the directives on these topics. The main directives of the American standardization concerning business combinations, consolidation of financial statements and investments in investee companies are included in the following codification topics and subject to the guidelines set forth in the directives of the Supervisor of Banks: -133-

134 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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. Reporting of Banking Corporations in Israel according to US GAAP on Business Combinations, Consolidation of Financial Statements and Investments in Investee Companies (Cont'd) topic 805 regarding "Business Combinations", topic 810 regarding "Consolidation", topic regarding "Intangible Assets Goodwill and Other Assets" regarding the accounting treatment of impairment of goodwill acquired in a business combination and topic 323 regarding "Investments by Equity Method and Joint Transactions". The Bank implements the circular as of January 1, 2016, onwards. The implementation of the directive didn't have a material impact on the financial statements of the Bank. 2. Reporting of Banking Corporations in Israel according to US GAAP on Intangible Assets On October 22, 2015 the Supervisor of Banks issued a circular concerning "Reporting of Banking Corporations in Israel According to US GAAP on Intangible Assets". According to the circular, a banking corporation is required to adopt GAAP for US banks on intangible assets and, inter alia, the presentation, measurement and disclosure rules set forth in the directives of codification topic 350 regarding "Intangible Assets Goodwill and Other Assets". In particular, according to the circular, a banking corporation is required to implement the rules detailed in codification topic regarding "Self Use Software". The directives set forth in the circular will apply to banking corporations as of January 1, 2016 onwards. Upon initial implementation, a banking corporation shall act in accordance with the transitional directives set forth on those topics with the necessary modifications. The aforementioned includes a retroactive amendment of comparative figures, if required according to these subjects. As of January the Bank implemented the guidelines of the circular regarding balances of software assets retrospectively and restated comparative figures for each of the reporting periods included in the statements -134-

135 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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) Below is the effect of the retroactive implementation concerning intangible assets: The effect of the retroactive implementation on the balance sheet items: As Reported in the Past (Audited) NIS millions Effect of Retroactive Implementation of Intangible Assets December 31, 2015 As Reported in these Statements Buildings and Equipment 352 (40) 312 Other Assets Retained Earnings 1,411 (7) 1,404 Total Equity 2,410 (7) 2,403 Tier 1 Capital Ratio to Risk Components 9.79% (0.03%) 9.76% Total Capital Ratio 14.84% (0.02%) 14.82% -135-

136 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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) The effect of the retroactive implementation on profit and loss: For the year ended December 31, 2015 For the year ended December 31, 2014 As Reported in the Past (Audited) Effect of Retroactive Implementation of Intangible Assets As Reported in these Statements As Reported in the Past (Audited) Effect of Retroactive Implementation of Intangible Assets As Reported in these Statements NIS millions NIS millions Salaries and related expenses Depreciation and maintenance of buildings and equipment 154 (17) (16) 138 Other Expenses (12) 220 Provision for taxes on the profit (3) - (3) Net profit after taxes Basic and diluted earnings per share Cash Flow Statement: Net cash from current activities (709) (10) (719) 1,401 (12) 1,389 Net cash from investment activities (2,073) 10 (2,063) (1,824) 12 (1,812) -136-

137 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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) 3. Activity Segments Reporting A circular concerning "Activity Segments Reporting" was issued on November 3, 2014 by the Supervisor of Banks. According to the circular, a banking corporation is required to report activity segments according to a uniform and comparable format, as set forth by the Supervisor of Banks, and to report activity segments according to the approach of the management of the banking corporation, if these activity segments are materially different from the activity segments defined by the Supervisor. The main changes to the Public Reporting Directives: The banking corporation is required to provide disclosure of the supervisory activity segments as follows: private banking, households, microbusinesses and small businesses, mid-sized businesses, large businesses, institutional entities, and financial management. Addition of definitions clarifying which customers shall be included in each segment. Addition of a requirement for separate disclosure of the financial management segment. Supervisory activity segment is defined mainly based on the classification of the customer according to his revenue turnover. When the Bank has no information regarding the revenue turnover of a business customer, which has no indebtedness to the Bank, he may be classified to the relevant supervisory activity segment according to the number of employees in the business or according to the total assets of the business or according to the total financial assets of the customer at the Bank. It is further noted that according to these rules, when the Bank believes that the revenue turnover of a business customer does not represent the volume of his activity, he may be classified as follows: if the total indebtedness is equal to or greater than NIS 100 million he may be classified to the large business segment; if the total indebtedness is lower than NIS 100 million, he can be classified to the relevant segment according to the number of employees or according to the total assets in the balance sheet of the business. Since the Bank didn't have all of the information required, in respect of part of the customers, in order to classify to a supervisory segment according to the new directives, especially information concerning the activity turnover, various measures were taken in order to obtain the information. In certain cases, in the absence of information, decisions were made on the basis of evaluations and estimates. The Bank is working to improve the data and the aforesaid improvement may require classification of customers among the segments in the following reporting periods

138 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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) 3. Activity Segments Reporting (Cont'd) As of the Public Report of the first quarter of 2016 the Bank displays the activity segments according to a uniform format as determined by the Supervisor of Banks which is not materially different from the managements' approach. Comparative figures were retroactively presented of only one year and that's according to the transitional directives on the subject, when the classification of the customers in the corresponding period is according to the customer classification to the supervisory activity segments as at January 1, Although the aforesaid, according to the directive, a banking corporation isn't required to provide a separate disclosure of the "financial management" segment in the Public Reports of It is required to fully implement the guidelines of the circular as of the statements of the first quarter of The effect of the implementation of this directive on the financial statements is immaterial, except for on the presentation and the disclosure. Note 26 has been adjusted in order to include the new disclosure, subject to the transitional directives, as noted above. 4. Guidelines of the Bank of Israel regarding the Collective Allowance According to the directives of the Bank of Israel the collective allowance is calculated, inter alia, on the rates of net accounting write-offs in the last 5 years with the addition of qualitative adjustments. For further details of the method of determining the collective allowance of the Bank see Note 1.E.6. According to the guideline of the Bank of Israel, when calculating the rates of net accounting write-offs, as of the reports of the second quarter of 2016, the year 2011must continue to be included as part of the estimate of the collective allowance and taken into account when calculating the qualitative coefficient. As a result of the implementation of the aforesaid guideline of the Bank of Israel, as at the initial implementation, the collective allowance increased by a total of approximately NIS 6 million. It should be noted that this guideline will apply also in

139 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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) 5. Restructuring of a Problematic Debt On May 22, 2016, a circular amending the Public Reporting Directives, was published. The circular is meant to adopt updates set forth in GAAP for US banks concerning the treatment of restructured credit. In particular, the update to the Public Reporting Directives includes clarifications concerning how to identify debt arrangements which will be defined as a restructuring of a problematic debt. The update also includes conditions, upon fulfillment of which, a consecutive reorganization of debts, which were restructured in the past as problematic debt, (hereinafter: "Consecutive Reorganization"), will allow a banking corporation to cease treatment of the aforesaid debts as restructured debts. The directives set forth in the circular adopt the update of the US accounting standards (ASU ) and certain guidelines of US regulatory authorities (OCC). The main updates set forth in the directives, unlike the currently existing directives, include, inter alia, the following amendments: Guidelines, for determining if during a restructuring of a debt the banking corporation granted a waiver to the borrower, were set forth. Determination of the presumption that the renewal of a debt in inferior classification constitutes a restructuring of a problematic debt if the banking corporation does not perform another underwriting process when it is renewing a debt in inferior classification, or when there is no change in the pricing of the debt or the pricing wasn't adjusted in order to reflect the debts' risk profile or if within the restructuring of the debt the borrower doesn't provide additional collateral in order to compensate for the increase in risk deriving from the borrower's financial difficulties. Characteristics, for determining if the borrower is in financial difficulties, were included. Terms for discontinuing the treatment of the debt as a restructured debt, were included. The terms include, inter alia,: - Performing a consecutive restructuring; - When performing a consecutive restructuring the debtor is not in financial difficulties; - and according to the terms of consecutive restructuring, the Bank didn't grant the debtor a waiver. The allowance for credit losses concerning debts that met the terms above, will be calculated on a collective basis and there won't be a change in the recorded debt balance, except if a cash payment was received as part of the structuring of the debt. A requirement, to not reduce the allowance at the date of the restructuring of a problematic debt as a result of the transition from a collective allowance to an allowance evaluated on an individual basis, was set forth. According to the circular, material changes, if exist, deriving as a result of the combination of the directives of the supervisory authorities on US banks, are required to be applied to restructures that will be carried out or renewed as of December 31, The implementation of this directive on the inventory of restructured debts at the Bank had no material effect

140 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements 1. Consolidation Base (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) 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 (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 are 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. 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 nonmonetary 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

141 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 2. Foreign Currency and Linkage (Cont'd) (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 NIS % Rate of exchange of the: U.S. dollar (1.5) Euro (4.8) (10.1) (1.2) Points Consumer Price Index for the month of November ("known index) (0.3) (0.9) (0.1) December (index "in respect of") (0.2) (1.0) (0.2) 3. Directive regarding the Format of the Profit and Loss Statement for a Banking Corporation and Adoption of GAAP for US Banks on the Measurement of Interest Income On December 29, 2011 circular number H was published, in which a format of the Profit and Loss Statement for a banking corporation was set forth as well as the adoption of GAAP for US banks on the measurement of interest income. On July 30, 2012 circular number H-2343 was published, in which it was determined that the commencement date of the directives of topic will apply as of January 1, According to the aforesaid, as of January 1, 2014, the Bank implements the directives set forth in the circular of the Supervisor of Banks concerning the adoption of GAAP for US banks on the measurement of interest income (ASC ), which, inter alia, 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 yield. Income from such fees is allocated according to the effective interest rate method, and reported as part of interest income

142 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 3. Directive regarding the Format of the Profit and Loss Statement for a Banking Corporation and Adoption of GAAP for US Banks on the Measurement of Interest Income (Cont'd) 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 yield 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. 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 loan 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 a yield adjustment, as noted above. 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

143 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 4. Basis of Recognition of Income and Expenses (a) Income and expenses are included on an accrual basis, except for the detailed below: 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. Income on a cash basis is classified in the Profit and Loss Statement as interest income in the relevant item. When there's doubt regarding the collection of the remaining recorded balance, all payments collected are used to reduce the principal of the loan, until all doubt is removed. 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. 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. 5. 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 displayed 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

144 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 5. Securities (Cont'd) (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 tax, 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 (according to the effective interest method) as well as impairment losses of another-thantemporary 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 is of another-than-temporary nature. 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

145 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 5. Securities (Cont'd) 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. When other-than-temporary impairment has occurred, the cost of the security is reduced 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.7 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. 6. Impaired Debts, Credit Risk and Allowance 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, 2013 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

146 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 6. Impaired Debts, Credit Risk and Allowance for Credit Losses (Cont'd) In addition, from time to time the Supervisor of Banks updates the Public Reporting Directives and the guiding file of questions and answers regarding the manner of implementation of the directives on impaired debts and allowance for credit losses, in order to integrate them with the directives that apply on this matter to the US banks, including guidelines of the supervisory authorities in the US. According to the circular of the Banking Supervision from January 19, 2015, the Bank implements the guidelines of the Supervisor of Banks regarding the calculation of the collective allowance for non-housing credit losses and particularly regarding credit to private individuals. As of 2016, the guidelines, among other things, were updated regarding the treatment of the restructuring of a problematic debt and certain guidelines concerning the manner of examination of the debts. Credit to the Public and Other Balances 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 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. 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. Allowance for Credit Losses 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". The aforesaid examination of the debts for determining the allowance and the treatment of the debt, are applied consistently for all debts according to the quantitative threshold and the credit management policy of the Bank, and no transitions are made between the individual examination method and the collective examination method over the life of the debt, unless a debt was restructured as a problematic debt as stated above

147 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 6. Impaired Debts, Credit Risk and Allowance for Credit Losses (Cont'd) 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. 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 mainly 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 collective allowance calculation is based on rates of historical losses and/or write-offs in various economic sectors, with a division into problematic and non-problematic credit, in the range of years determined by the Bank of Israel. It should be noted that the Bank continues to include 2011 as well in the range of years according to which the rate of historical loss/write-offs is calculated and that is according to the guidelines of the Bank of Israel as detailed in Note 1.D.4.. The historical rate of loss is calculated based on the rates of net write-offs beginning in 2011, relative to debt balances. The Bank determined that the coefficient used to calculate the collective allowance, for the calculation of the range of historical loss rates, will be determined as the average rate of historical losses and/or historical write-offs during the time range while giving a higher weight to the last years' coefficient, if its above average

148 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 6. Impaired Debts, Credit Risk and Allowance for Credit Losses (Cont'd) In addition, the Bank has applied another qualitative adjustment, based on the detailed methodology according to the guidelines of the Bank of Israel on the subject, to all economic sectors, reflecting the risk inherent in each sector. 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. When determining an adequate collective allowance for credit losses in respect of non-housing credit to private individuals, the Bank takes into consideration both average past losses in the range of years determined by the Bank of Israel ending at the reporting date, and adjustments in respect of the environmental 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. 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. 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 Credit Risk the Standardized Approach

149 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 6. Impaired Debts, Credit Risk and Allowance for Credit Losses (Cont'd) In addition, the Bank examines the overall adequacy of the allowance for credit losses. Adequacy assessment is based on the managements' judgment which takes into account the risks inherent in the credit portfolio and the assessment methods used by the Bank to determine the allowance. Identification and Classification of Debts The Bank set procedures for identifying problematic credit and classifying debts as impaired. According to these procedures, the Bank classifies all of its problematic debts and problematic off balance sheet credit items according to the following classifications: 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. 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. 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 addition, an impaired debt will also be considered a debt whose terms have been changed due to the restructuring of a problematic debt. In any case, a debt which is examined on an individual basis is classified as an impaired debt when the principal or the interest in respect thereof have arrears of 90 days or more, excluding if the debt is both well secured and in the process of collection. Therefore, the Bank follows up on the state of the arrears, which is determined with regard to its contractual maturity terms. Debts (including bonds and other assets) are in arrear when the principal or the interest in respect thereof weren't paid after the repayment date. As of the date of classification as impaired debt, shall be treated as a non-accruing interest income debt (such debt will be called "Non-Performing Debt") -149-

150 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 6. Impaired Debts, Credit Risk and Allowance for Credit Losses (Cont'd) Debt Settlement Policy and Treatment of Problematic Debt when Restructuring Problematic Debt a debt restructured as a 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 waiver 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; 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 problematic. The Bank concludes that a waiver 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; -150-

151 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 6. Impaired Debts, Credit Risk and Allowance for Credit Losses (Cont'd) 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 waiver. No additional underwriting process is carried out when an inferior debt is renewed, or when there is no change in the pricing of the debt, or the pricing isn't adjusted so that it will match the risk before the renewal or the burrower does not provide additional means in order to compensate for the increase in risk deriving from the financial difficulties of the burrower, there is a presumption that the renewal is a restructuring of a problematic debt. 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. In this regard, if a number of arrangements involving a change in the terms of the debt were carried out, the Bank takes into account the cumulative effect of the previous organizations in order to determine whether the delay in payments is immaterial. 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-off. 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. Despite the aforesaid, the need for an immediate write-off is examined in respect of the failed problematic debts that were restructured, which are examined on a collective basis. In any case, an accounting write-off is carried out, regarding the aforementioned debts, no later than the date in which the debt became a debt in arrears of 60 days or more. On May 22, 2016 a circular for the amendment of the Public Reporting Directive meant to adopt updates concerning the treatment of restructured credit, was published. See Note 1.D.5. The implementation of this directive on the stock of restructured debts at the Bank had no material effect. According to this directive, when a debt is restructured and it is determined that it meets the definition of a restructuring of a problematic debt, without a partial accounting write-off, it is usually not appropriate to reduce the estimate of allowance for credit losses at the time of the reorganization as a result of the change in the impairment measuring method from measurement on a collective basis to measurement on an individual basis

152 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 6. Impaired Debts, Credit Risk and Allowance for Credit Losses (Cont'd) In light of this, the Bank holds allowance for credit losses in respect of a debt in restructuring, equal at least to the collective allowance which would have been determined if the debt wasn't classified as a problematic debt under restructuring. In general, a restructured problematic debt will continue to be classified as impaired debt until the debt will be fully paid. However, when an additional agreement of restructuring is made between the customer and the Bank, regarding a restructured debt, this debt can be treated as a non-problematic debt if the following conditions are met: The debtor is no longer in financial difficulties. This assessment of the Bank must be based on an updated and documented credit check performed at the time of the following restructure. The Bank didn't grant the customer a waiver (in other words, the new loan was provided on market terms, which would have been given to new loans to other customers with similar risk characteristics). If the Bank chose not to address this debt as a problematic debt then the allowance for credit losses, in respect of which, will be calculated on a collective basis and the recorded debt balance won't change in the following restructuring (unless a payment in cash was received). 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 a debt in respect of which the Bank has carried out prolonged collection efforts (defined in most cases as a period exceeding two years). Regarding 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

153 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 6. Impaired Debts, Credit Risk and Allowance for Credit Losses (Cont'd) As of 2014 the Bank updated the methodology concerning housing loan accounting 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). The need for an immediate write-off is examined in respect of debts which were examined collectively and classified as impaired due to a failed restructuring of a problematic debt. In any case, debts as aforesaid are written-off no later than the date in which the debt became a debt in arrears of 60 days or more, relative to the restructuring terms. 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 is 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. 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 was formally restructured from a problematic debt and after the restructuring there is reasonable assurance that the debt will be paid according to its new terms, shall be treated as an impaired debt accruing interest income. For details regarding the revenue recognition on a cash basis in respect of debts classified as impaired see Note 1.E.4.A. The Bank does not stop accruing interest income in respect of debts that are examined and excreted on a collective basis which are in arrears of 90 days or more. Fees for late payments of these debts are included as income at the date on which the Bank was granted the right to receive them from the customer, provided that the collection is reasonably secured

154 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 6. Impaired Debts, Credit Risk and Allowance for Credit Losses (Cont'd) Returning an Impaired Debt to the State of Non-Impaired An impaired debt returns to be classified as a non-impaired debt upon fulfillment of one of the two following situations: 1. For which there is no principal or interest component that has reached their date and has not yet been paid and the Bank expects payment of the remaining principal and interest fully according to the terms of the contract (including amounts written-off or excreted). 2. When the debt becomes well secured and is in the process of being collected. The rules for reversing classification as impaired as aforesaid will not apply to debts classified as impaired as a result of restructuring of a problematic debt. Returning an Impaired Debt to the State of an Accruing Impaired Debt 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. 7. Establishing the Fair Value of Financial Instruments As of January 1, 2011, the Bank implements FAS 157 (ASC ), 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 regarding Fair Value Measurement (ASC 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. 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

155 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 7. Establishing the Fair Value of Financial Instruments (Cont'd) 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. The Bank uses pricing services from "Fair Margin" company for the calculation of the fair value of the nontradable debt assets. The model is based on the division of the tradable market into deciles according to yield to maturity of the debt assets and on the location determining of the non-tradable asset in the same deciles according to the risk premium derived from transaction prices and/or issuances in the non-tradable market. The model brings forth changes in the risk premium of the debt assets, as they are reflected in the tradable market according to the changes in that decile

156 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 7. 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 due to the size of the Bank's holding or due to 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. 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 regarding the main methods and assumptions used to estimate the fair value of financial instruments, see Note 30A on balances and fair value estimations of financial instruments

157 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 7. Establishing the Fair Value of Financial Instruments (Cont'd) Assessment of credit risk and nonperformance risk (credit valuation adjustment CVA) The standard FAS 157 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). The Bank implements an approach that takes into account the exposure to the credit risk throughout the life of the transaction. 8. 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

158 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 8. Offsetting Financial Instruments (Cont'd) According to the directives, offsetting of assets and liabilities between two different counterparties 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 contingent 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. 9. 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. 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. (b) 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. The hedged item is also displayed at fair value, with regard to the hedged risks, and the changes in fair value are allocated to the Profit and Loss Statement

159 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 9. Derivate Financial Instruments, including Hedge Accounting (Cont'd) 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. (c) Embedded derivatives which were separated and are not used for hedging - 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. 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. 10. 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 ), transfer and Servicing of Financial Assets and Extinguishment of Liabilities, as revised in FAS 166, Transfer and Servicing of Financial Assets (ASC ), for the purpose of the handling transfer of financial assets and extinguishment of liabilities. Pursuant to these rules, a transfer of a financial asset is accounted for as a sale 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 from utilizing his right to encumber or exchange, 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 regarding reconsideration of effective control for repurchase agreements

160 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 10. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (Cont'd) 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 detracted 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. 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 detracts 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

161 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 11. 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 items 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 subsidiaries 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". 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. A deferred tax asset in respect of losses carried forward, tax benefits and deductible temporary differences, are recognized in the books when it is more likely than not that they may be utilized in the future. The deferred tax assets are examined on each reporting date and if the related tax benefits are not expected to be realized, they are depreciated. 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

162 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 11. Taxes on Income (Cont'd) Uncertain Tax Positions The Bank acknowledges the effect 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. The Bank implements the recognition and measurement principles set forth in FASB Interpretation no. 48 "Accounting for uncertainty in Income Taxes". 12. 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. 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 14 below and Section 1.D.2 above 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

163 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 12. Buildings and Equipment (Cont'd) 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. 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 years. - Improvements in rented property and in owned property years. - Software costs 4-5 years (see also Section 14 below and Section 1.D.2). - Hardware costs 3-4 years. Regarding impairment of non-financial assets see Section 15 below. 13. 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 23.C

164 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 14. 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 salary for the employees directly connected to the activity of development or obtaining the software. Other costs in regard of development activities and research costs are charged to the Profit and Loss Statement as incurred. In subsequent periods, capitalized development costs are measured at cost, less amortizations and accrued impairment losses. On May 21, 2015 the Bank received a letter from the Supervisor of Banks regarding capitalization of selfdevelopment costs of software, according to which, the following rules were set: - A discounting materiality threshold will be set, and will be no lower than NIS 300 thousand. Each software development project whose total costs are lower than the materiality threshold set, will be charged as an expense to the Profit and Loss Statement. A lower than 1 discount factor for working hours will be set in respect of products, that the total costs in respect of which, can be discounted isn't lower than the materiality threshold, in order to take into account the potential for un-effectiveness and for accepted deviations as part of software development projects. The depreciation period of software costs shall not exceed 5 years, The employee rank whose costs are discounted to assets shall be limited so that the top rank will be maximum a manager, who can show that most of his time he actually develops, is responsible for a small number of employees and the hours that he actually invested in each development project can be measured accurately. As of January 1, 2016 the Bank adopted the circular of the Bank of Israel regarding "Reporting of Banking Corporations in Israel according to US GAAP on Intangible Assets". See Note 1.D.2. 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

165 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 14. Software Costs (Cont'd) 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. Following the letter from May 21, 2015, the useful life, for the current period and for comparison periods regarding software costs recognized as core systems, was updated according to a useful life of 5 years. 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. 15. Impairment of Non-Financial 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 cashgenerating 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

166 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 15. Impairment of Non-Financial Assets (Cont'd) Losses from impairment, recognized in previous periods, are reexamined each reporting period, in order to determine if the losses have decreased or no longer exist. Loss from impairment is 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. Impairment of Self-Development Costs of Software In addition to the indications of impairment established in IAS 36, Impairment of Assets, an examination of the existence of impairment of self-development costs of software will take place also 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 ), exist: (a) The software is not excepted to provide significant potential services (b) The manner or volume of use or expected use of the software has changed substantially; (c) The software has been or will be substantially changed. (d) Costs of the development or conversion of the software designed for internal use significantly exceed the expected amounts; (e) 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. 16. 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. 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

167 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 16. Contingent Liabilities (Cont'd) Note 23 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. 17. 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. 18. Employee Benefits Post-Retirement Benefits - Pension, Compensation and Other Benefits (hereinafter: "Pension") Defined Benefit Plans A pension benefit is part of the remuneration paid to the employee in return for his services. In the pension plan for a defined benefit, the Bank promises to provide retirement income payments, in addition to the current wages, in future years after the employee will retire or finish the service. In general, the benefit amount that will be paid depends on certain future events included in the plans' benefit formula, which often include the length of time the employee lives or his surviving relatives live, the number of years of service the employee provided and the employees' remuneration in the years right before the retirement or termination. In most of the cases, the services are provided during a number of years before the employee retires and receives or starts to receive the pension. Although the services provided by the employee ended and the employee retired, the total benefit amount that the Bank promised and the cost of the services that were provided to the Bank can't be determined precisely, but can only be estimated by the benefit formula and estimations of the future relevant events, most of which are out of the control of the Bank. The net pension cost for the period is the amount recognized in the financial statements of the Bank as the cost of a pension plan for a certain period. The components of the pension cost for a net period are the cost of the service, cost of interest, actual yield on the assets of the plan, profit or loss, reduction of cost or credit in respect of a previous service and reduction of an asset or a commitment in respect of the transition existing at the initial implementation date according to the Public Reporting Directives. In this regard, profit or loss is the amount of (1) the difference between the actual yield on the plans' assets and the predicted yield on the plans' assets and (2) the reduction of the net profit or loss that was recognized in cumulative other comprehensive income

168 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 18. Employee Benefits (Cont'd) Pension benefits are attributed usually to employee's service periods based on the plan's benefit formula if the formula indicates attribution or implies attribution. The Bank calculates the predicted yield rate for the long term on the plan's assets while using historical yield rates over a long period of time in a portfolio with a similar composition of assets. The commitment in respect of a predicted benefit reflects the actuarial present value of all of the benefits attributed to the employee's service which was provided prior to the date of the balance sheet. The measurement of this commitment will be based on actuarial assumptions suitable at the balance sheet date of the Bank (for example: turnover, mortality, discount rates and so forth) and on population census data as at this date. Change in the value of commitment in respect of a predicted benefit or of the plan's assets, deriving from the fact that the actual experience is different than expected, or resulting from a change in the actuarial assumption, is "profit or loss" (hereinafter: "Actuarial Profit or Loss"). Actuarial profits or losses aren't recognized in the net pension cost for the period at the time of their formation but recognized in other comprehensive income. In following periods, these profits or losses are recognized afterwards in the Statement of Profit and Loss as a component of net pension cost for the period according to the straight line method over the remaining average service period left of the employees who are expected to receive benefits according to the plan. If there's a situation that all or most of the plan participants aren't active, the remaining average life expectancy of the inactive employees will be used instead of the remaining average service period. The capitalization rate for benefits for employees is calculated on the basis of the yields of the Israeli government bonds plus an average spread of corporate bonds rated AA (internationally) or higher at the reporting date. For practical reasons, the spread is determined by the difference between the rates of yield to maturity, according to the repayment periods, on corporate bonds rated AA or higher in the U.S. and the rates of yield to maturity for the same maturity periods of US government bonds, and all at the reporting date The Bank examines its assumptions on a quarterly basis and updates these assumptions when necessary. The Bank doesn't re-measure neither the assets of the plan nor the obligation on behalf of the benefit during a quarter in which no changes materially affecting the assets of the plan or the obligation on behalf of the benefit, occurred, on a cumulative basis from the beginning of the year. The Bank treats pension liabilities relating to the membership period in the pension fund "Amit Pension and Remuneration Fund Ltd." (hereinafter: "the Fund") as of April 1, 1995 as a defined deposit plan. Accordingly, a full liability is recognized for all of the pension payments to which the pension entitled employees are entitled to, both in respect of the Banks commitment to pension payments (until April 1, 1995) and in respect of the funds' part (as of April 1, 1995) on an actuarial basis

169 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 18. Employee Benefits (Cont'd) The assets of the plan relating to the Banks' share of the funds' total assets, were estimated on the basis of the cash flows expected to be paid by the fund according to the accrued pension entitlement rates as at the reporting date (as reported by the fund), capitalized at a capitalization rate based on the mix of the fund's assets. The Bank implements the guidelines of the Supervisor of Banks concerning internal control over the financial reporting process regarding employee benefits,, including regarding the examination of "commitment in essence" to grant its employees benefits in respect of increased compensation. Post Retirement Benefits Defined Deposit Plans A defined deposit plan is a plan which provides benefits after retirement in return for services provided, provides a personal account for each plan participant and defines how the deposits will be determined in the employees' account instead of determining the amount of benefits that the employee will receive. In the defined deposit plan after retirement, the benefits that a plan participant will receive depend only on the amount deposited in the account of the plan participant, the yields earned on the investments of these deposits and on the forfeiture of benefits of other plan participants which may be allocated to the account of that participant. The Bank's commitments to pay compensation in accordance with Section 14 of the Severance Pay Law are treated as a defined deposit plan. Vacation and Other Benefits The banking corporation accrues commitments for employee remuneration in respect of future absences when all of the detailed conditions below are met. The banking corporations' commitment in respect of employee benefits to receive remuneration for future absences is attributed to the services that the employees have already provided, the commitment is related to matured or accrued rights, the payment of the remuneration is expected and the amount can be reasonably estimated. Benefits in respect of vacation, illness and jubilee bonuses are recognized in the Profit and Loss Statement on a current basis. 19. Transactions with Controlling Shareholders The Bank implements the accepted accounting standards in the U.S. regarding the accounting treatment of activities between a banking corporation and its controlling shareholder 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 Shareholder

170 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 Note 1 - Principal Accounting Policies (Cont'd) E. Accounting Policies Applied While Preparing the Financial Statements (Cont'd) 19. Transactions with Controlling Shareholders (Cont'd) If a transaction with assets and liabilities was performed between an entity and its controlling shareholder, 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. 20. Related Party Disclosures The data regarding balance sheet balances and off-balance sheet balances and the data concerning the results of the transactions (hereinafter: "The Data") with interested parties and related parties is given regarding each person defined as an interested party or related party according to the definitions in Section 1 of the Public Reporting Directives, or defined as a related person according to the definitions in Proper Conduct of Banking Business Directive 312 "Business of a Banking Corporation with Related Persons". In addition to the disclosure requirements required under the Public Reporting Directives, the banking corporation also implements the required disclosure directives from the implementation of codification topic 850 regarding "Related Parties Disclosures". The information concerning interested parties and related parties refers to the banking corporation and its subsidiaries, and is not displayed based solely on the banking corporation. F. New Accounting Standards and Directives of the Supervisor of Banks in the Period Before their Implementation 1. Reporting of Israeli Banking Corporations according to US GAAP on Various Subjects On October 13, 2016 a circular concerning reporting of banking corporations and credit card companies in Israel according to US GAAP, was published. The circular includes certain clarifications regarding reporting taxes on income according to the rules in the US. In addition, the circular updates the Public Reporting Directives and adopts US GAAP on the issues: non-current assets held for sale and discontinued operations, fixed assets and real estate for investment, earnings per share, Statement of Cash Flow, interim period reporting and additional issues. a. Income Taxes The Main Amendments to the Public Reporting Directives are as Follows: The circular, Reporting by Banking Corporations in Israel According to US GAAP on Income Taxes was issued on October 22, 2015 by the Supervisor of Banks. Pursuant to the circular, banking corporations are required to adopt GAAP for US banks on income taxes, including, among other matters, the presentation, measurement, and disclosure rules set forth in the directives in codification topic 740 "Foreign Currency Issues Income Taxes"

171 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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. Reporting of Israeli Banking Corporations according to US GAAP on Various Subjects (Cont'd) According to the circular, the rules are required to be implemented as of January 1, During the initial implementation, the transitional directives set in the American standardization, must be followed including, retroactive amendment of comparative figures, if required. A banking corporation isn't required to disclose in the reports of 2017 tax benefits that weren't recognized. On October 13, 2016 a circular regarding the reporting of banking corporations according to US GAAP, was published. The circular includes, inter alia, certain clarifications regarding reporting on income taxes according to the rules in the US. The main amendments to the Public Reporting Directives are as follows: The transitional directives were updated so that temporary differences in respect of previous periods will continue to be treated according to the provisions that applied until December 31, It was clarified that interest income and expenses in respect of income taxes will be classified to the item "Income Taxes"; It was clarified that fines to tax authorities will be classified to the item "Income Taxes". It was clarified that a law will be considered "legislated" only upon its publication in the "records". The disclosure requirements in the Public Reporting Directives and the disclosure format regarding "Provision for Taxes on Profit", were adjusted to the requirements in the new provisions. The requirement to present an informative note, on the basis of historical nominal data for tax purposes according to appendix C1 and C2 that were required in the Public Reporting Directives, was removed, since the note does not add information to the users of the report. The new provisions were implemented as of January 1, In addition, comparative figures must be reclassified in order for them to suit the manner of presentation according to the new provisions. Following is a Review of the Main New Provisions on Implementing the American Standardization Provisions Regarding Income Taxes, as Adopted by the Public Reporting Directives: Investments in Subsidiaries (Temporary Difference after 2017) Deferred tax liability must be recognized, unless (the following cases are not about a temporary difference): the tax laws allow the return of the investment with a tax exemption (for instance by a statutory dissolution or merger with a tax exemption) without significant cost and the parent company expects to execute the return in this way eventually (ability and intent)

172 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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. Reporting of Israeli Banking Corporations according to US GAAP on Various Subjects (Cont'd) Changes in Deferred Taxes from Items Originally Recognized Outside of the Profit and Loss Statement Current taxes and deferred taxes in respect of items which were recognized in the current period outside the Profit and Loss Statement, will be recognized outside the Profit and Loss Statement. There are specific provisions for allocating the tax expenses among the various components of the report. Usually, sequential events (provision for a tax asset) which derive from change in the assessment of the possibility to realize the deferred tax asset generated or from a change in the tax rate, will be recognized in the Profit and Loss Statement, in the current period even if the provision was initially recognized in equity. Uncertain Tax Positions Tax benefits must be recognized when it is expected (more likely than not) that it will be utilized. The amount of tax benefit that will be recognized is the highest amount which is expected (above 50%) to be received. The risk exposure isn't included in the calculation of the benefit. There are specific provisions relating to various aspects of recognition, measurement and disclosure concerning uncertain tax positions. Tax Asset in Respect of Deductible Temporary Differences The whole amount of a deferred tax asset is recognized while recognizing a separate provision (provision for a tax asset) for the same amount included in the asset, which more likely than not, to not be realized. Changes in the Tax Rate Current Tax assets and liabilities are usually measured while using the legislated tax rates. Deferred tax assets and liabilities are usually measured by the tax rate expected to apply in the returning period. Sequential changes in deferred taxes which are generated due to changes in the tax rates, will usually be charged to the Profit and Loss Statement, in the current period, even if the deferred taxes were initially recognized in the equity. It is clarified that according to the practice, under the international standardization, current tax assets and liabilities are usually measured while using the legislated tax rates or whose legislation has actually been completed. The Bank estimates that the implementation of the directive isn't expected to have a material impact on the financial statements

173 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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. Reporting of Israeli Banking Corporations according to US GAAP on Various Subjects (Cont'd) b. Adoption of US GAAP The circular updates the Public Reporting Directives and adopts US GAAP on the following issues: Discontinued operations in accordance with codification topic regarding "Discontinued Operations". Fixed assets in accordance with codification topic 360 regarding "Fixed Assets". Earnings per share in accordance with codification topic 260 regarding "Earnings Per Share". Cash Flow Statement in accordance with codification topic regarding "Cash Flow Statement". Interim periods reporting in accordance with codification topic 270 regarding "Interim Periods Reporting". Capitalization of interest costs in accordance with codification topic regarding "Interest Capitalization" (in this context it should be clarified that according to the Public Reporting Directives, a banking corporation will not capitalize interest costs, without establishing a clear policy, procedures and controls regarding the criteria for recognition of assets as qualifying assets and regarding the interest costs that will be capitalized). Measurement and disclosure of guarantees in accordance with codification topic 460 regarding "Guarantees". On these topics, the directives set forth in the circular will apply from January 1, During the initial implementation, a banking corporation is required to act in accordance with the transitional directives determined regarding those topics in the American standardization with the required changes, including retroactive amending of comparative figures if required by the American standardization on these topics. The Bank has not yet begun examining the impact of the circular on its financial statements

174 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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) 2. Reporting of Banking Corporations in Israel according to US GAAP on the Subjects: Foreign Currency Issues, Accounting Policy, Changes in Accounting Estimates and Mistakes and Subsequent Events On March 21, 2016 a circular regarding the reporting of banking corporations in Israel according to US GAAP was published. The circular updates the Public Reporting Directives and adopts US GAAP on the following subjects: GAAP for US banks on codification topic 830 regarding "Foreign Currency Issues". GAAP for US banks regarding accounting policy, changes in accounting estimates and mistakes, including codification topic 250 regarding "Changes in Accounting Policy and Amendment of Mistakes". GAAP for US banks regarding subsequent events in accordance with codification topic regarding "Subsequent Events". The provisions set forth in the circular shall apply as of January 1, During the initial implementation, it is required to follow the transitional directives determined on those issues in the American standardization with the required changes, including retroactive amendment of comparative figures if required according to the American standardization on these issues. It should be emphasized that when implementing the guidelines of codification topic 830 regarding "Foreign Currency", in reported periods until January 1, 2019, banks shall not include the exchange rate differences in respect of bonds available for sale as part of the adjustments of these bonds to fair value, but shall continue to treat them as required in the Public Reporting Directives before the adoption of this topic. Likewise, International Accounting Standard 29 regarding "Financial Reporting in Hyper-inflationary Economies", as adopted in the Public Reporting Directive, hasn't been implemented as of the date of the commencement of the circular. It is clarified that there is no change of the time when the financial statements of banking corporations stopped being adjusted to the inflation and that the financial statements will be prepared on the basis of reported amounts, unless stated otherwise according to the Public Reporting Directives. The influence of the circular on the financial results of the Bank isn't expected to be material. 3. Revenue Recognition from Contracts with Customers On December 11, 2015 a circular regarding the adoption of an update to the accounting principles concerning revenue from contracts with clients, was published. The circular updates the Public Reporting Directives in light of the publishing of ASU 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

175 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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. Revenue Recognition from Contracts with Customers (Cont'd) Banks are required to implement the amendments to the Public Reporting Directives according to the draft as of January 1, According to the transitional directives, when initially implementing, you can choose either to implement retroactively while redisplaying the comparative figures or to implement in a henceforth manner while attributing 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 of the Codification. In addition, it was clarified in the provisions of the Bank of Israel that overall the provisions of the new standardization will not apply to the accounting treatment of interest income and expenses and of noninterest financing income. 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. 4. New Standardization Update on the Effect of Derivative Contract Novations on Existing Accounting Hedge Ratios In March 2016 the Financial Accounting Standards Board (the FASB) published the update ASU regarding the effect of derivative contract novations on existing hedging ratios, which is an amendment to codification topic 815 regarding derivative instruments and hedging. According to the update, there might be various reasons for replacing a counterparty with a derivative that was intended as a hedging instrument, such as: the existence of inter-company transaction, regulatory demands (such as Dodd Frank), dealing with internal credit limitations and more. The update was published since the guidelines on topic 815 do not provide an unequivocal answer when it comes to the impact on hedging ratios, if at all, as a result of changing the counterparty to a derivative that was intended as a hedging instrument. According to the update, changing the counterparty to a derivative that was intended as a hedging instrument according to the provisions of topic 815, does not harm the destination per se, provided that all of the other criteria for hedge accounting continue to exist, including sections to of the codification. The directives will apply to public entities in the US as of the annual and interim financial statements after December 15, Note that companies are permitted to choose to implement the new directives henceforth or alternatively in a retroactive custom application. Early implementation of the new directives is possible, including in interim reports

176 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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. New Standardization Update on Income Taxes In October 2016 the Financial Accounting Standard Board (the FASB) published update concerning income taxes deriving from transfer of assets (not inventory) between companies within the group, which constitutes an amendment to codification topic 740 regarding income from taxes. This updated was released in order to improve the accounting treatment of income taxes deriving from transfer of assets (not inventory) between companies within the entity as part of the initiative of the FASB to reduce the complexity of the accounting standards. In accordance with the update, the exception, according to which, current/deferred taxes should not be recognized in respect of a transfer of an asset between companies in the group, until the asset is sold to an external body, was cancelled. As a result of the amendment, the recognition of the tax implications deriving from transferring the asset between companies in the group became similar to IFRS. The directives will apply to public entities in the US as of the financial statements and interim reports after December 15, An early implementation of the new directives is possible, including in interim reports (must begin in the first interim period in the year in which the amendment is adopted). 6. New American Standard on Leases On February 25, 2016 the Financial Standards Accounting Board (the FASB) published a new standard on leases (ASU ). The new standard heralds a new era in which lessees will recognize all of the leases whose period exceeds 12 months, in the balance sheet, regardless of the classification of the lease. Therefore, according to the new standard, the examination of whether the lease will be recognized in the balance sheet or outside of the balance sheet, depends on the preliminary question whether it is indeed a lease arrangement and not on the question of the classification of the lease (as operating or finance). The tests in the new standard for identifying a lease aren't identical to the terms existing today in the US GAAP. As far as the result is concerned, there isn't expected to be a difference regarding the situation today and that is a result of the spread of the rental expenses and the reduction of the balance sheet items. In addition, the new standard replaces the existing directives regarding sale-leaseback transactions and sets forth a new model which relates to both the lessor and lessee. According to the update, the new directives in the US are required to be implemented as of the interim periods and annual periods beginning after December 15,

177 NOTES TO THE FINANCIAL STATEMENT AS AT DECEMBER 31, 2016 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) 7. New Standard Update on Options Contingent Upon Debt Instruments In March 2016 the Financial Standards Accounting Board (the FASB) published the update ASU concerning call and put options contingent upon debt instruments, which is an amendment to codification topic 815 regarding derivative instruments and hedging. The update clarifies that it is not required to examine whether the event stipulating the realization of the option is connected to the economic characteristics of the host contract. According to the update, when examining the embedded derivative, when there is an option contingent upon a debt instrument which may accelerate the payment of the principal in respect of the instrument, the derivative is to be examined if it is closely related to the host contract by a model that includes four stages. Under this model, the following must be examined: The full repayment amount is based on changes in a certain index. The index is not interest rates or credit risk. The debt involves significant premium or discount and also- Contingently exercisable. The directives will apply to public entities in the US as of the annual and interim financial statements after December 15, Other entities are required to implement the directives in the annual financial statements after December 15, 2017, and for interim periods after December 15, An early implementation of the new directives is possible, including in the interim reports. The initial implementation will be in accordance with the transitional directives in the update

178 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 2 - Interest Income and Expenses Reported Amounts Composition: Consolidated The Bank Year ended December 31 Year ended December NIS millions NIS millions A. Interest Income (1) From credit to the public From deposits with banks From cash on hand and deposits with the Bank of Israel From borrowed securities From bonds From other assets Total interest income B. Interest Expenses On deposits from the public On subordinated notes and bonds On other liabilities Total interest expenses Total net interest income C. Details of Net Effect of Hedging Derivative Instrument on Interest Income and Expenses (2) Interest income (expenses) 20 5 (9) 20 5 (9) D. Details of Interest Income from Bonds on a Cumulative Basis Available for sale Held for trading Total included in interest income (1) Including an effective component in hedging relations. (2) Details regarding the effect of hedging derivative instruments in Subsection (A)

179 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 3 - Non-Interest Financing Income Reported Amounts Composition: Consolidated The Bank Year ended December 31 Year ended December 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) (73) (113) 235 (73) (113) 235 Total from activity in derivative instruments (73) (113) 235 (73) (113) 235 A.2 From Investment in Bonds Gains from sale of bonds available for sale (2) Provision for impairment in respect of bonds available for sale (2) (3) (4) (2) (3) (4) (2) Losses from sale of bonds available for sale (2) (2) (15) (2) (2) (15) (2) Total from investment in bonds A3. Net Exchange Differences (234) (235) A4. Gains (Losses) from Investment in Shares Gains from sale of shares available for sale (2) Provision for impairment in respect of shares available for sale (2) (5) (3) (2) (5) (2) (1) Dividend from shares available for sale Other (3) - (9) - - (9) - Total from investment in shares 13 (2) 14 (3) (6) 2 Total non-interest financing income in respect of non-trading activities B. Non-interest financing income in respect of trading activities * Net income in respect of other derivative instruments Net realized and unrealized gains (losses) from adjustments to fair value of bonds held for trading (3) 9 20 (3) 9 20 Net realized and unrealized gains (losses) from adjustments to fair value of shares held for trading 3 1 (1) 3 1 (1) Total from trading activities ** Total (1) Derivative instruments constituting part of the asset and liability management of the bank, which are not designated for hedging. (2) Classified from cumulative other comprehensive income. (3) Previous year data include amounts returned on profits recognized in the past. * Including exchange differences arising from trading activity. ** With regard to interest income from investment in bonds held for trading - see Note 2.D

180 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 4 - Fees Reported Amounts Composition: Consolidated The Bank Year ended December 31 Year ended December NIS millions Account management Credit cards Securities activity Financial products distribution fees Management, operation and trust to institutional entities Credit handling Conversion differences Foreign trade activity Financing business fees Net income from credit portfolios services Other fees Total operating fees Note 5 - Other Income Reported Amounts Composition: Consolidated The Bank Year ended December 31 Year ended December NIS millions Others Total other income

181 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 6 - Salaries and Related Expenses Reported Amounts Composition: Consolidated The Bank Year ended December 31 Year ended December NIS millions Salaries (1) Other related expenses, including study fund, vacation, and sick days Long-term benefits 9 (14) 3 9 (14) 3 National Insurance and wage tax Pension expenses (including severance pay and remuneration) (2) Defined benefit - pension Defined benefit severance pay Defined deposit Other benefits after employment termination and post-retirement benefits (nonpension) (2) Expenses in respect of other employee benefits Expenses of voluntary retirement plan (3) Total salaries and related expenses (1) Data for prior periods has been restated in light of the retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D.2. (2) See Note 21.G. (3) See Note 21.B. Note 7 - Other Expenses Reported Amounts Composition: Consolidated The Bank Year ended December 31 Year ended December NIS millions Computer (1) Professional services Marketing and advertising Office expenses Communications Insurance Fees Salaries of members of the Board of Directors Training and advanced study Others Total other expenses (1) Data for prior periods has been restated in light of the retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D

182 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 8 - Provision for Taxes on Profit Reported Amounts A. Composition: Consolidated The Bank Year ended December 31 Year ended December NIS millions Current Taxes - Relating to current year Relating to previous years (2) (5) (9) (2) (5) (4) Total current taxes Plus (less) Deferred Taxes (1) (28) 72 (14) (27) 73 (14) Total provision for taxes on the income - 81 (3) (8) 73 (9) (1) Details of the Movement of Deferred Taxes: Creation and reversal of temporary differences (47) 69 (14) (46) 70 (14) Change in tax rates Total movement of deferred taxes (28) 72 (14) (27) 73 (14) -182-

183 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 8 - Provision for Taxesn 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 ** **2014 NIS millions Statutory tax rate applying to banks in Israel 35.90% 37.58% 37.71% 35.90% 37.58% 37.71% Theoretical tax amount based on the statutory tax rate (18) 85 8 (30) Tax (tax savings) in respect of: Depreciation differences, depreciation adjustments and capital gain Other unrecognized expenses (excess and fines) Timing difference in respect of which there are no deferred taxes Taxes from previous years (2) (5) (8) (2) (5) (3) Additional amount in respect of problematic debt Income of subsidiaries in Israel (7) (5) (7) (3) (2) - Change in deferred tax balances due to change in tax rates Provision for taxes on the income - 81 (3) (8) 73 (9) ** Data for prior periods has been restated after retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D.2 C. On January 4, 2016 the Knesset plenum approved the Income Tax Ordinance Amendment Law (no. 216), 2016 which set forth, inter alia, the reduction of the corporation tax as of January 1, 2016 onwards by 1.5% so that it will be 25%. In addition, on December 22, 2016 the Knesset Plenum approved the Economic Efficiency Law (Legislative Amendments to Obtain the Budget Objectives for the Budget Years 2017 and 2018) 2016, which set forth, inter alia, the reduction of the corporation tax rate from 25% to 23% in two beats. The first beat to a rate of 24%, as of January 2017 and the second beat to a rate of 23% as of January 2018 onwards. As a result of the reduction of the tax rate to 23% in two beats, the balance of the deferred taxes for December 31, 2016 were calculated according to the new tax rates as set forth in the Economic Efficiency Law (Legislative Amendments to Obtain the Budget Objectives for the Budget Years 2017 and 2018), according to the tax rate expected to apply at the time of the reversal. The effect of the changes described above on the financial reports of 2016 is expressed in a decrease in the deferred taxes balance in the amount of NIS 19 million. The update of the deferred taxes balances was recognized against deferred taxes expenses

184 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 8 - Provision for Taxesn on Operating Profit (Cont'd)) Reported Amounts D. The tax that the Bank pays includes corporation tax according to the Income Tax Ordinance and Profit Tax According to the VAT Law, therefore the combined tax rates (according to the mentioned above) are as follows: Year Profit Tax Rate Income Tax Rate Combined Tax Rate % 26.50% 37.71% % 26.50% 37.58% % 25.00% 35.90% % 24.00% 35.04% 2018 onwards 17.00% 23.00% 34.19% E. The Bank has final tax assessments (or assessments considered to be final) up to and including the tax year (subsidiaries up to and including the tax year 2012 excluding one subsidiary up to and including 2010). F. 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 Union Bank. In accordance with the arrangement with the tax authorities, such company is to have no activity other than the issuance and/or sale of subordinated notes to Union 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 also will not purchase subordinated notes on the Stock Exchange in Israel

185 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 8 - Provision for Taxesn on Operating Profit (Cont'd) Reported Amounts G.1. Net Balances of Receivable Deferred Taxes*, in Respect of: Consolidated The Bank December 31 December 31 December 31 December Average Tax Average Tax Average Tax Average Tax Balance Rate Balance Rate Balance Rate Balance Rate NIS millions % NIS millions % NIS millions % NIS millions % Excess of provision for severance pay and pension over amounts funded Provision for vacation, sick days and jubilee bonuses Allowance for credit losses Adjustment of depreciable nonmonetary assets** (8) (6) (8) (6) 26.5 Securities (2) (2) Others Total * Realization of the deferred taxes is based on a forecast that there will be taxable income in the foreseeable future. ** Data for prior periods has been restated after retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D

186 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 8 - Provision for Taxation on Operating Profit (cont'd) Reported Amounts G.2. Movements of Deferred Tax Assets and Liabilities, Attributed to the Following (Consolidated) (1) : Excess Reserve for Severance Pay and Pension over Fund NIS millions Provision for Vacation and Jubilee Grant Allowance for Credit Losses For the year ended on December 31, 2016 Adjustments of Non- Monetary Depreciable Assets Securities Others Total Deferred tax as at January 1, (6) (2) Changes charged to profit and loss 38 (2) 17 (3) - (3) 47 Effect of change in the tax rate (9) (2) (6) 1 (3) - (19) Changes charged to other comprehensive income Deferred tax balance as at December 31, (8) (2) Excess Reserve for Severance Pay and Pension over Fund NIS millions Provision for Vacation and Jubilee Grant Allowance for Credit Losses For the year ended on December 31, 2015 Adjustments of Non- Monetary Depreciable Assets (2) Securities Others Total Deferred tax as at January 1, (4) (1) Changes charged to profit and loss - (1) (49) (2) (12) (5) (69) Effect of change in the tax rate (1) (1) (1) (3) Changes charged to other comprehensive income Deferred tax balance as at December 31, (6) (2) (1) See Note 1A. (2) Data for prior periods has been restated after retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D.2., -186-

187 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 9 - Profit per Ordinary Share (NIS) Reported Amounts Composition: Basic and Diluted Profit Consolidated For the year ended December NIS millions Net profit attributed to shareholders of the Bank (1) (49) Weighted average of number of shares (in thousands) Consolidated For the year ended December 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 (1) Data for prior periods has been restated in light of the retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D.2. Note 10 - Cumulative Other Comprehensive Income 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 Adjustments in Respect of Employee Benefits Total Balance as at January 1, (29) 49 Net change during the period (9) (3) (12) Balance as at January 1, (32) 37 Net change during the period (17) 1 (16) Balance as at January 1, (31) 21 Net change during the period (3) (9) (12) Balance as at December 31, (40)

188 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 10 - Cumulative Other Comprehensive Income (Cont'd) Reported Amounts B. Changes in Components of Cumulative Other Comprehensive Income (Loss), Before and After Tax Effect: For the year ended December 31, 2016 For the year ended December 31, 2015 For the year ended December 31, 2014 Before Tax Tax Effect After Tax Before Tax Tax Effect After Tax NIS millions NIS millions NIS millions Before Tax Tax Effect After Tax Adjustments in respect of Presentation of Securities Available for Sale at Fair Value Net unrealized gains (losses) from adjustments to fair value 35 (12) (4) 8 60 (23) 37 Losses (gains) in respect of securities available for sale reclassified to the Profit and Loss Statement (1), (3) (43) 17 (26) (40) 15 (25) (73) 27 (46) Net change during the year (8) 5 (3) (28) 11 (17) (13) 4 (9) Employee Benefits Net actuarial loss for the year (15) 4 (11) (7) 3 (4) Net (gains) losses reclassified to the statement of Profit and Loss (2), (3) 4 (2) 2 4 (3) Net change during the year (11) 2 (9) 4 (3) 1 (6) 3 (3) Total net change during the year (19) 7 (12) (24) 8 (16) (19) 7 (12) (1) The amount before tax is reported in the Profit and Loss Statement, under the item "non-interest financing income". For further details, see Note 3. (2) The amount before tax is reported in the Profit and Loss Statement, under the item "expenses in respect of employee benefits"'. For further details, see Note 21 - Employee Benefits. (3) Including an update of the tax rates, see Note 8.C

189 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 11 - Cash on Hand and Deposits with Banks Reported Amounts Consolidated Composition (1) : December NIS millions Cash and deposits with the Bank of Israel 3,574 6,138 Deposits with commercial banks (2) Total 3,901 6,668 Of which: Cash on hand, deposits with banks and deposits with the Bank of Israel for an original period of up to three months 3,895 6,655 (1) See Note 1.A (2) Of which: the balance of deposits with Israeli banks as at December 31, 2016 totaled NIS 78 million (as at December 31, NIS 106 million), and the remaining balance in respect of the Banks' clearing house totaled approximately NIS 49 million (as at December 31, NIS 94 million). (3) See Note 24 regarding liens

190 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 12 - Securities Reported Amounts Consolidated Composition (1) : December 31, 2016 Amortized Cost (for Shares-Cost) Cumulative Other Comprehensive Income Fair Value (3) Book Value Profits Losses NIS millions A. Securities Available for Sale Bonds and Loans - Of Israel government 7,151 7, (24) 7,151 Of foreign governments (8) 433 Of financial institutions in Israel (1) 505 Of foreign financial institutions (1) 77 Asset backed securities (ABS) Of others in Israel (3) 914 Of foreign others ,260 (4) 9, (37) 9,260 Shares and other securities 157 (5) (5) (6) 157 Total available for sale securities 9,417 9,348 (7) 111 (7) (42) 9,417 Amortized Cost (for Shares- Cost) Unrealized Gains from Adjustments to Fair Value Unrealized Losses from Adjustments to Fair Value Fair Value (3) Book Value NIS millions B. Securities Held for Trading Bonds and Loans - Of Israeli government 2,091 2,099 1 (9) 2,091 Of foreign governments (2) 21 Of financial institutions in Israel Of others in Israel Of foreign others ,148 2,157 2 (11) 2,148 Shares and other securities (2) 19 Total securities held for trading 2,167 2,176 (8) 4 (8) (13) 2,167 Total securities (9) 11,584 11,524 11,

191 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 12 - Securities (Cont'd) Reported Amounts As at December 31, 2016 NIS millions C. Additional Data Regarding Bonds Recorded debt balances of - Impaired bonds accruing interest income - Impaired bonds not accruing interest income (1) See Note 1.A. (2) See Note 2 and 3 for details regarding results of activities in investment in bonds and in shares. (3) The fair value of securities is usually 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 44 million. (5) After a cumulative provision for impairment in value of an investment in the amount of NIS 39 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 80 million. (7) Included in the item "adjustments to net 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 99 million in respect of subsidiary's bonds and NIS 88 million in respect of subsidiary's securities. (10) Israeli bonds and foreign bonds are differentiated according to the residence country of the entity issuing the security

192 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 12 - Securities (Cont'd) Reported Amounts Consolidated Composition (1) : December 31, 2015 Amortized Cost (for Shares-Cost) Cumulative Other Comprehensive Income Fair Value (3) Book Value Profits Losses NIS millions A. Securities Available for Sale Bonds and Loans - Of Israel government 5,197 5, (19) 5,197 Of foreign governments 1,021 1,024 - (3) 1,021 Of financial institutions in Israel (3) 722 Of foreign financial institutions (1) 117 Asset backed securities (ABS) Of others in Israel (3) 786 Of foreign others (1) 35 7,961 (4) 7, (30) 7,961 Shares and other securities 123 (5) (5) (6) 123 Total available for sale securities 8,084 8,004 (7) 115 (7) (35) 8,084 Amortized Cost (for Shares-Cost) Unrealized Gains from Adjustments to Fair Value Unrealized Losses from Adjustments to Fair Value Fair Value (3) Book Value NIS millions B. Securities Held for Trading Bonds and Loans - Of Israeli government 2,160 2,162 5 (7) 2,160 Of financial institutions in Israel Of others in Israel (1) 34 Of foreign others ,260 2,261 7 (8) 2,260 Shares and other securities (6) 27 Total securities held for trading 2,287 2,293 (8) 8 (8) (14) 2,287 Total securities (9) 10,371 10,297 10,

193 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 12 - Securities (Cont'd) Reported Amounts As at December 31, 2015 NIS millions C. Additional Data Regarding Bonds Recorded debt balances of - Impaired bonds accruing interest income - Impaired bonds not accruing interest income (1) See Note 1.A. (2) See Note 2 and 3 for details regarding results of activities in investment in bonds and in shares. (3) The fair value is usually 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 46 million. (5) After a cumulative provision for impairment in value of an investment in the amount of NIS 34 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 66 million. (7) Included in the item "adjustments to net 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 103 million in respect of subsidiary's bonds and NIS 65 million in respect of subsidiary's securities. (10) Israeli bonds and foreign bonds are differentiated according to the residence country of the entity issuing the security

194 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 12 - Securities (Cont'd) Reported Amounts Consolidated Composition*: D. Fair Value and Unrealized Losses, According to Time Duration and the Impairment Rate of Securities Available for Sale which are in an Unrealized Loss Position: December 31, 2016 Less than 12 Months (1) 12 Months or More (2) Bonds - Unrealized Losses Fair Value 0%-20% (3) 20%-40% (4) Total NIS millions Unrealized Losses Fair Value 0%-20% (3) 20%-40% (4) Total Of the Israel government 4, Of foreign governments Of financial institutions in Israel Of foreign financial institutions Of others in Israel , Shares and Other Securities Total securities available for sale 5,

195 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 12 - Securities (Cont'd) Reported Amounts Consolidated Composition (cont d.)*: 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, 2015 Less than 12 Months (1) 12 Months or More (2) Unrealized Losses Fair Value 0%-20% (3) 20%-40% (4) Total NIS millions Fair Value Unrealized Losses 0%- 20% (3) 20%-40% (4) Total Of the Israel government 2, Of foreign governments 1, Of financial institutions in Israel Of foreign financial institutions Of others in Israel Of foreign others , Shares and Other Securities Total securities available for sale 4, ** See Note 1.A. (1) Investments that were in an ongoing position of unrealized loss for less than 12 months. (2) Investments that were in an ongoing position of unrealized loss for 12 months or more. (3) Investments whose unrealized loss constitutes up to 20% of their depreciated cost. (4) Investments whose unrealized loss constitutes over 20% and up to 40% of their depreciated cost

196 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 12 - Securities (Cont'd) Reported Amounts Consolidated Composition*: E. Information regarding the depreciated cost and fair value of asset-backed bonds in the available-for-sale portfolio: Book Value NIS millions Cumulative Other Comprehensive Income December 31, 2016 Depreciated Cost Profits Losses Fair Value ABS - Asset-Backed Bonds Others (1) Total asset backed bonds available for sale (1) Of which: - NIS 67 million non-marketable bonds rated AA in 2016, backed by cash flows from gas sale. - NIS 7 million - non-marketable bonds rated AA in 2016, backed by cash flows from municipal tax payments of local authorities. - NIS 3 million - non-marketable bonds rated AA in 2016, backed by cash flows from municipal tax payments of local authorities. - NIS 2 million non-marketable bond rated AA- in 2016, backed by cash flows from property rentals. - NIS 1 million non-marketable bond rated AA in 2016, backed by cash flows from bonds issued by an infrastructure company

197 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 12 - Securities (Cont'd) Reported Amounts Book Value NIS millions Cumulative Other Comprehensive Income December 31, 2015 Depreciated Cost Profits Losses Fair Value ABS - Asset-Backed Bonds Others (1) Total asset backed bonds available for sale (1) Of which: - NIS 68 million - non-marketable bonds rated AA in 2015, backed by cash flows from gas sale. - NIS 12 million - non-marketable bonds rated AA in 2015, backed by cash flows from municipal tax payments of local authorities. - NIS 2 million - non-marketable bond rated AA- in 2015, backed by cash flows from property rentals. - NIS 1 million non-marketable bond rated AA in 2015, backed by cash flows from bonds issued by an infrastructure company. * See Note 1.A

198 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 13 - Credit Risk, Credit to the Public and Allowance for Credit Losses Reported Amounts Consolidated Composition: A. Debts (1), Credit to the Public, and Balance of Allowance for Credit Losses Credit to the Public Other Private Banks and Governments December 31, 2016 Commercial Housing Total Total NIS millions Recorded Debt Balance: Examined on an individual basis 11, , ,811 Examined on a collective basis 751 8,432 3,442 12,625-12,625 Of which: according to the extent of arrears 160 8,410-8,570-8,570 Total 11,898 8,439 3,600 23, ,436 Of which: Debts in restructuring Other impaired debts Total impaired debts Debts in arrears of 90 days or more Other problematic debts Total problematic debts Balance of Allowance for Credit Losses in Respect of Debts: Examined on an individual basis Examined on a collective basis Of which: according to the extent of arrears 1 * Total Of which: in respect of impaired debts * Including a provision balance beyond required according to the extent of arrears method calculated on the basis of a collective allowance in the amount of NIS 30 million. (1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts, excluding bonds and burrowed securities

199 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 13 - Credit Risk, Credit to the Public and Allowance for Credit Losses (Cont'd) Reported Amounts Consolidated Composition: A. Debts (1), Credit to the Public and Allowance for Credit Losses (Cont'd) Credit to the Public Other Private Banks and Governments December 31, 2015 Commercial Housing Total Total NIS millions Recorded Debt Balance: Examined on an individual basis 11, , ,416 Examined on a collective basis 942 7,292 2,608 10,842-10,842 Of which: according to the extent of arrears 373 7,288-7,661-7,661 Total 12,454 7,298 2,753 22, ,258 Of which: Debts in restructuring Other impaired debts Total impaired debts Debts in arrears of 90 days or more Other problematic debts Total problematic debts Balance of Allowance for Credit Losses in Respect of Debts: Examined on an individual basis Examined on a collective basis Of which: according to the extent of arrears 2 * Total Of which: in respect of impaired debts * Including a provision balance beyond required according to the extent of arrears method calculated on the basis of a collective allowance in the amount of NIS 27 million. (1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts, excluding bonds and burrowed securities

200 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 13 - Credit Risk, Credit to the Public and Allowance for Credit Losses (Cont'd) Reported Amounts Consolidated Composition: B. Change in Allowance for Credit Losses Credit to the Public Commercial Housing NIS millions Other Private Total Banks and Governments Total Allowance for credit losses as at December 31, Expenses (income) in respect of credit losses 84 (2) Accounting write-offs (169) (12) (14) (195) - (195) Recoveries of debts written-off in previous years Net accounting write-offs (139) (11) - (150) - (150) Allowance for credit losses as at December 31, Expenses (income) in respect of credit losses (118) (2) 13 (107) - (107) Accounting write-offs (30) (2) (26) (58) - (58) Recoveries of debts written-off in previous years Net accounting write-offs 54 (1) (8) Allowance for credit losses as at December 31, Provisions in respect of credit losses Accounting write-offs (37) (2) (34) (73) - (73) Recoveries of debts written-off in previous years Net accounting write-offs 4 (1) (18) (15) - (15) Allowance for credit losses as at December 31, Of which in respect of off-balance sheet credit instruments December 31, December 31, December 31,

201 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 14 - Investments in Investee Companies and Details on such Companies Reported Amounts Details of Principal Investee Companies (1) : Share in Equity and Voting Investments on Equity Basis as at December 31 Cost of Acquisition Company Name Main Activity % NIS millions Profits (Losses) Since Date of Acquisition Dividend Received Since Date of Acquisition Other Items Accumulated in the Equity (2) Bank's Share in the Profits (Losses) of Investee Companies Union Investment and Enterprises (A.S.Y) Ltd. (3) Real Investments Union Leasing Ltd. (4) Leasing Union Bank Trust Company Ltd. Trustee Services Carmel Union - Mortgages and Investments Ltd. Livluv Insurance Agency (1993) Ltd. Union Issuances Ltd. (5) Operating Services to (87) (83) the Bank Real Estate Insurance Issuance of Liability Deeds Igudim Insurance Company Insurance Agent (1) The data regarding 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 share in their results of operations less each company s share in the results of operations of other principal investee companies of the Bank Group. (2) Mainly includes adjustments to fair value presentation of available for sale securities of the subsidiaries. (3) The investment in the subsidiary includes capital notes in the amount of NIS 139 million (as at December 31, NIS 139 million). Regarding engagements of the subsidiary, see Note 23.C.(3) below. Including a subsidiary Union Capital Markets and Investments Ltd., held 100% by Union Investments & Enterprises (A.S.Y.) Ltd. and Union Underwriting & Finances Ltd., held 100% by Capital Markets as at the date of approval of the financial statements. (4) The investment in the consolidated company includes capital notes in the amount of NIS 100 million. (5) The investment in the consolidated company includes capital notes in the amount of NIS 16 million (December 31, NIS 16 million). See Note 19.B regarding the issuance of subordinated notes by Union Issuances Ltd

202 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 15 - Buildings and Equipment Reported Amounts A. Consolidated and the Bank Composition (1) : Buildings and Real Estate (Including Installations and Leasehold Improvements) (5) Cost of Assets: NIS millions Equipment, Furniture and Vehicles Software Costs (2) Balance as at December 31, ,152 Additions Subtractions (4) (1) - (5) Balance as at December 31, ,182 Additions Subtractions (11) (1) - (12) Balance as at December 31, ,216 Depreciation and Impairment Losses: Book Value Balance as at December 31, 2014 (3) Depreciation for the year Subtractions (4) (1) - (5) Balance as at December 31, 2015 (3) Depreciation for the year Subtractions (7) (1) - (8) Balance as at December 31, 2016 (3) As at December 31, As at December 31, As at December 31, Weighted average depreciation rate as at December 31, % 15.5% 21.8% Weighted average depreciation rate as at December 31, % 15.3% 22.3% Total B. Following are details regarding real estate rights (in NIS millions): The Date of the Termination of the Lease (in Years) As at December 31, 2016 As at December 31, 2015 Ownership rights Leased rights in a discounted financing lease (4) See comments below

203 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 15 - Buildings and Equipment (Cont'd.) Reported Amounts C. Buildings and real estate include property unoccupied by the Bank in the amount of NIS 10 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, 2016 (December 31, NIS 10 million). D. The Bank has assets held for sale (fixed assets) in the amount of NIS 4 million. The transfer of rights and the delivery date ended during January The effect on the result of the financial statements is not material. Notes: (1) See Note 1.A. (2) The Bank receives computing services from Leumi Bank, see Note 23.C.4 regarding the computing services agreement with Leumi Bank. This item was restated due to retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D.2. (3) Including a provision for impairment in the amount of NIS 2 million (as at December 31, 2015 and December 31, NIS 2 million). (4) Rights in real estate in the depreciated amount of NIS 60 million have not yet been registered in the Bank's name at the Land Registry Office (December 31, NIS 67 million). (5) Including an asset held for sale as at December 31, 2016 in the amount of NIS 4 million (December 31, 2015 NIS 4 million)

204 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 16 - Other Assets Reported Amounts Consolidated - Composition (1), (5) : December 31, December 31, NIS millions Receivable deferred taxes (See Note 8.G) Assets in respect of Maof market transactions (2) Other receivables and debit balances (3), (4) Total other assets (1) (2) (3) See Note 1.A. Assets not meeting the definition of derivatives. See also Note 20 Liabilities in respect of Maof Market transactions. 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, 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 CPI-linked lease agreements. b. The Bank paid leasing fees in respect of the buildings, totaling NIS 28 million ( NIS 28 Million, NIS 28 Million). For rent payable in future years - See Note 23.C.1. c. Balance of other receivables and debit balances include prepaid expenses in the amount of NIS 0.3 million in respect of operating leases (as at December 31, NIS 0.3 million). (5) Data for prior periods has been restated after retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D

205 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 17 - 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, NIS millions Upon request Non-bearing interest 11,718 10,593 Bearing interest 4,536 3,582 Total upon request 16,254 14,175 Fixed term 16,502 18,291 Total deposits in Israel* 32,756 32,466 * Of which: Deposits of private individuals 16,129 16,071 Deposits of institutional entities 4,092 **5,007 Deposits of corporations and others 12,535 **11,388 B. Types of Deposits According to Size December 31, December 31, NIS millions Deposit ceiling (in NIS millions) Up to 1 9,478 9,082 From 1 to 10 9,931 9,762 From 10 to 100 7,305 7,485 From 100 to 500 (2) 6,042 6,137 Total 32,756 32,466 ** Reclassified (1) See Note 1.A. (2) On December 31, 2016 the top step ceiling is NIS 419 million (December 31, 2015 NIS 415 million)

206 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 18 - Deposits from Banks Reported Amounts Consolidated Composition (1) : December 31, December 31, NIS millions Commercial Banks in Israel Deposits upon demand Commercial Banks Abroad Deposits upon demand Acceptances Total deposits from banks (1) See Note 1.A. Note 19 - Subordinate Notes and Bonds Reported Amounts A. Composition: Consolidated Average Life Duration (1) Internal Rate of Return (2) December 31, 2016 December 31, 2015 Years % NIS millions Subordinated notes (3)(4) : In NIS unlinked In NIS linked to the CPI ,109 1,024 Bonds: (4) In NIS unlinked to the CPI In NIS linked to the CPI Total 3,395 3,

207 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 19 - Subordinate notes and Bonds (Cont'd.) Reported Amounts A. Composition: The Bank Average Life Duration (1) Internal Rate of Return (2) December 31, 2016 Years % NIS millions December 31, 2015 Subordinated notes: In NIS unlinked Total (1) The average life duration is the weighted average period of the payments based on the cash flow discounted at the internal rate of return. (2) The internal rate of return is the interest rate deducting the expected future payments to the balance sheet balance included in the financial statements. (3) The subordinated notes will be settled until (4) The subordinated notes and bonds are not convertible into shares and are tradable in the amount of NIS 3,127 million (December 31, 2015 NIS 3,123 million). B. Liability Deeds and Bonds Issued by Union Issuances 1. On January 23, 2017 Union Issuances, a wholly owned subsidiary of the Bank, (hereinafter: Union Issuances") published a shelf prospectus bearing the date January 24, 2017, for the issuance of series of non-convertible bonds, subordinated notes and commercial securities. 2. On November 24, 2016 Union Issuances issued NIS million par value of bonds (Series I) according to a shelf offering report published by the company on November 22, 2016 by virtue of a shelf prospectus of Union Issuances from November 27, 2013, whose validity was extended until November 26, The annual interest rate determined in the auction is 0.95%. The interest in respect of the bonds will be paid on March 1 of each of the years 2017 until 2025 (including). The bonds will be linked (principal and interest) to the CPI published on November 15, 2016 in respect of October The consideration received in the issuance amounts to NIS million. The total issuance expenses amounted to NIS 3.2 million and the effective interest rate is 1.1%. 3. On September 11, 2016 Union Issuances issued, NIS million par value of subordinated notes (Series K) (hereinafter: "The Subordinated Notes") with a mechanism for absorbing principal losses by writing-off the principal of the subordinated notes (series K) fully or partially, under certain circumstances

208 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 19 - Subordinate notes and Bonds (Cont'd.) Reported Amounts B. Liability Deeds and Bonds Issued by Union Issuances (Cont'd.) In the terms of the subordinated notes, it was determined that the rights of the holders of the subordinated notes (series K) will be subordinated to any kind of claims of all the rest of the creditors of Union Issuances and/or the Bank, except for the right of other creditors of Union Issuances and/or the Bank which was determined or will be determined explicitly (by law or otherwise), repayment level equal or inferior to those of the subordinated notes (series K). The subordinated notes were issued according to a shelf offering report published by Union Issuances on September 7, 2016 by virtue of a shelf prospectus of Union Issuances from November 27, 2013 whose validity was extended until November 26, The subordinated notes are repayable in one payment on September 11, 2026 with an early repayment option for Union Issuances, not prior to September 11, 2021 and not later than October 11, 2021 when they are linked (principal and interest) to the CPI, as published on August 15, 2016 in respect of July , and bearing interest at an annual rate of 2.85%. Given the non-exercise of the right of Union Issuances for early repayment, the interest rate of the subordinated notes will be updated to September 11, 2021 (hereinafter: "Interest Rate Change Date"), so that the annual interest rate will increase or decrease, as applicable, by the difference between the anchor 2 interest rate at the interest rate change date and the anchor interest rate at the issuance date 3 of the subordinated notes 4. Until the repayment date of the subordinated notes (series K), upon occurrence of a constitutive event for the absorbance of principal losses 5 or a constitutive event for non-existence 6, Union Issuances will write-off the subordinated notes 7. In a case in which after the writing-off of the principal as mentioned above, the Tier 1 equity ratio of the Bank will exceed the minimum capital ratio that the Supervisor of Banks set for the Bank, Union Issuances will be permitted, after receiving the Bank's decision, at 1 If it turns out on any payment date, that the paying index rose in comparison to the base index, Union Issuances will pay the principal and/or interest payments, as they are increased relative to the increase rate of the payment index, compared to the base index. If it turns out that the paying index is lower than the base index, Union Issuances will pay the principal and/or interest payments as they are reduced relative to the decrease rate of the payment index compared to the base index. 2 In this regard, "Anchor Interest" meaning the average annual yield of linked government bonds, whose remaining period for repayment is 5 years in 30 trading days, the last of which took place five trading days before the calculation date of the anchor interest ("The Calculation Date"). If there is more than one government bonds series as aforesaid, the average yield of all of the government bonds series, whose repayment period at the calculation date is five years, will be calculated. If in case there won't be a government bonds series in the cycle, whose period at the date of the calculation is exactly five years, a weighted average will be calculated of the yield rates as aforesaid, of the two government bonds series, whose repayment period is closest to five years, when the repayment date of one of them is over five years and the other one lower than five years. The aforesaid weighted average will be calculated according to the repayment periods of both of these series, and without taking into account the volume of the series, meaning, when calculating the weighted average, each of these series will be given a different relative weight, so that the average repayment period will be exactly 5 years. 3 As at the issuance date of the subordinated notes (series K) the anchor interest was %. 4 If the calculated interest rate will be negative, a negative interest rate will not be collected from the holders of the subordinated notes (series K) as long as all of the following conditions have not been met, and Union Issuances reported their occurrence at least 30 days prior to the interest calculation date: (a) The tax authority will receive a decision, according to which, the holders of the subordinated notes (series K) will be permitted to offset the negative interest from other income; (b) The subject of the payment of negative interest will be reregulated by the Stock Exchange and its members. 5 A constitutive event for the absorbance of principal losses" means that the Bank's Tier 1 equity ratio falls below 5%. 6 A constitutive event for non-existence" means the earlier of the two: (a) A written message from the Supervisor of Banks to the Bank that writingoff the notes is necessary, since without doing so, in the Supervisor of Banks' opinion, the Bank will arrive at a non-existence point; or (b) A written message from the Supervisor of Banks to the Bank regarding a decision to make a capital injection from the public sector, or equal support, without which it would reach the non-existence point, as the Supervisor of Banks will determine. 7 In a case in which the deletion was done due to a constitutive event for the absorbance of principal losses, the deletion will be a full or partial deletion, at a rate that will be required by the Supervisor of Banks in order for the constitutive event for the absorbance of principal losses to cease existing and that the Tier 1 equity ratio of the Bank will be at least 5%. The deletion will be in relation to the principal amount in the subordinated notes' cycle with the additional subordinated notes, pari passu. If the deletion was due to the existence of a constitutive event for non-existence, the principal will be written-off fully and the subordinated notes (series K) will cease to be traded in the Stock Exchange

209 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 19 - Subordinate notes and Bonds (Cont'd.) Reported Amounts B. Liability Deeds and Bonds Issued by Union Issuances (Cont'd.) its discretion, to announce the cancellation of the principal write-off fully or partially, and this in relation to the holders of the subordinated notes (series K) according to the list of holders prior to the writing-off. The subordinated notes are qualified to be included in Tier 2 of the Bank as of the issuance date. The immediate gross consideration received by Union Issuances within the issuance amounted to NIS million. The total issuance expenses amounted to NIS 2.1 million and the effective interest rate is 3.06%. C. See Note 22.B regarding the capital notes included in Tier II. D. During 2016 and 2015, the Bank did not issue non-tradable subordinated notes. E. On January 25, 2017 the rating agency Midroog (hereinafter: "Midroog") published a rating report in which the Bank's rating was approved as follows: Internal financial strength rating of the Bank A2.il horizon: stable Long-term deposits / bonds Aa3.il horizon: stable Short-term deposits P-1.il Subordinated notes with a contractual mechanism A3.il (hyb) horizon: stable for absorbing losses (CoCo) Liability deed (lower Tier II capital) A1.il horizon: stable Deferred capital notes (upper Tier II capital) A2.il (hyb) horizon: stable Note that on December 1, 2016 Midroog updated the support assumption for inferior debts (which are not recognized under Basel III) in the banking system and changed the rating horizon of these instruments from negative to stable. Note 20 - Other Liabilities Reported Amounts Composition: Consolidated December 31, 2016 NIS millions December 31, 2015 The Bank December 31, 2016 December 31, 2015 Excess liability for employee benefits over the programs' assets (see Note 21) Income in advance Employees - in respect of salaries and related benefits Liabilities in respect of Maof Market transactions (1) Payables in respect of credit cards Short sale of securities Other payables and credit balances Total other liabilities 1,928 2,063 2,061 2,205 (1) Liabilities not meeting the definition of derivatives. See Note 16 - Assets in respect of Maof Market transactions

210 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits General The Bank has adopted the circular of the Supervisor of Banks regarding the adoption of US GAAP on employee benefits. The circular updates the recognition, measurement and disclosure requirements on employee benefits of the Public Reporting Directives according to GAAP in US banks. 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) 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) A special collective agreement from 1979 regulates the working relations with the authorized signatories. The agreement links the salary conditions of the authorized signatories to those of the authorized signatories at Leumi Bank (hereinafter: "Implementation Agreement"). 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

211 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) General A New authorized signatory (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. In accordance, amounts in respect of the Bank's liability to pay severance pay to new authorized signatories were not included in the reserve and the amounts deposited in the Amit, were not included in the severance fund. (4) 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. Note that according to estimates of the Bank and its legal advisors, the Bank has no legal obligation, either direct or implied, to pay Excess Compensation. (5) The reserves for severance pay and pension are calculated on an actuarial basis by the Banks' actuary by "assessment of expected cumulative benefits" and capitalized according to the capitalization rate calculated on the basis of the yields of Israeli government bonds plus an average spread on corporate bonds rated AA (internationally) or higher, at the reporting date. Due to practical considerations, the spread will be determined by the difference between the yield to maturity rate, according to maturity periods, on US corporate bonds rated AA (internationally) or higher, and the yields to maturity rates, for the same maturity periods, on US government bonds, and all at the reporting date. This spread is based upon a publication on the Federal Reserve's website in St. Louis. The small size of the Banks' employee population doesn't allow, sometimes, to draw statistical conclusions for use in an actuarial model. Accordingly, in certain cases, the actuary relies on the managements' assumptions, and in certain cases uses his own judgment while using adjustments to polls he holds

212 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) The Severance Pay and Pension Reserves in the Bank's Books: The actuary calculation takes into account different parameters, in regard of the pension reserve, including probability on the basis of past experience regarding the utilization rate of pension rights and the rate of withdrawals of compensation and remuneration funds (the existing utilization rate of pension rights in respect of the Bank's seniority is 72% and the rest withdraw compensation and remuneration), the future real increase in salaries until the expected retirement date of the Banks' employees (0.8% a year), the rates of future departure before retirement with excess compensation and the excess compensation rates (according to a survey on dissidents in ). The liabilities in respect of pension are accrued in a straight line until the average retirement age at the Bank (based on historical data). The actuarial calculation takes in to account the following parameters in respect of regular severance pay reserve for a group of employees which began working before January 1, 1995 and isn't part of the population entitled to budgetary pension upon their retirement and excess severance pay reserve (see section 4 above): a nominal salary growth chart according to seniority ( survey findings including a mechanism for salary cuts following the Leumi Agreement, the rates of future departure before retirement with regular compensation and with excess compensation and the excess compensation rates (according to a survey on dissidents in ). According to the guidelines of the Supervisor of Banks, in order to calculate the actuary liabilities, the Bank uses mortality tables from 2013 of the Capital Market, Insurance and Savings Division of the Treasury, which deals with the updating of the demographic assumptions array in pensions funds and in life insurance, which includes updating mortality tables (as a result of a new research which points to an increase in life expectancy). (6) The Bank deals with the pension liability (for the population of the veteran authorized signatories) relating to the membership period in the pension fund of "Amit Pension and Remuneration Fund Ltd." (hereinafter: "the Fund") as of April 1, 1995 as a defined deposit plan. Accordingly, a full liability is recognized for all of the pension payments that the pension entitled employees are entitled to, both in respect of the Banks commitment to pension payments (until April 1, 1995) and in respect of the funds' part (as of April 1, 1995) on an actuarial basis. The assets of the plan relating to the Banks' share of the funds' total assets, were estimated on the basis of the cash flows expected to be paid by the fund according to the accrued pension entitlement rates as at the reporting date (as reported by the fund), capitalized at a capitalization rate based on the mix of the fund's assets

213 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) B. Reduction of the Defined Benefit Plan On January 12, 2016 the Supervisor of Banks published a letter concerning "Operational Streamlining of the Israeli Banking System". According to the letter, the banking corporation's Board of Directors will outline a multi-year plan for streamlining. A banking corporation that will meet the terms defined in the letter will receive relief, according to which, it will be able to deploy the impact of the plan's costs regarding the calculation of capital adequacy, over five years in a straight line. On November 30, 2016 the Bank's Board of Directors approved a streamlining plan which is mostly a voluntary retirement plan, in which, the Bank's management assesses that approximately 120 employees are expected to retire between 2016 and According to the plan, employees, who the retirement plan is relevant for them, are able to notify within a specific period of time, if they wish to retire within the plan, when the management has exclusive discretion to approve retirement in the terms of the plan. The benefits that will be offered, depending in the employee's age and seniority, includes early pension until retirement age according to law or increased compensation of up to 270%, according to the relevant working population. In this context and according to the Public Reporting Directives of the Supervisor of Banks on employee benefits, the Bank recognizes loss in respect of reduction of the defined benefit plan, in other words, when an event significantly reduces the number of expected future service years of the employees of the benefit plan or which cancels for a significant number of employees the accruing of defined benefits in respect of part or all of their future service, according to the Bank's policy. The total cost of the efficiency plan was estimated on the basis of actuarial calculations at approximately NIS 114 million (before tax effect) and was allocated to Profit and Loss Statement in the financial reports of 2016 since it meets the definition "Plan Reduction", according to Public Reporting Directives of the Supervisor of Banks on employee benefits and as detailed above. The actuarial calculation for December 31, 2016 includes assumptions concerning the volume of the retirement, the retirement manner and characteristics of the population of retirees according to the assessment of the Bank's management, so that actual realization that defers from these assumptions will require an update of the actuarial reserves in the future, according to actual realization

214 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) C. Bonuses in Respect of Seniority According to collective agreements, 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. On October 1, 2016 the Bank redeemed the recorded right in the Bank's books on December 31, 2015 of jubilee grants and jubilee vacations, accumulated in favor of the population of managers and authorized signatories who are entitled to jubilee grants and whose payment date of the jubilee grant is as of January 1, This redemption for the population of managers and authorized signatories at the Bank is in accordance to a special collective agreement at Bank Leumi from February 17, The decrease in liabilities is allocated to profit and loss in these financial statements in an immaterial amount. As at December 31, 2016, the calculation of the liability for the population of clerks is performed on an actuarial basis by the Banks' actuary. The calculation is based on a capitalization rate as detailed in Note A.(5). In calculating the current value, the rate of seniority-dependent salary increase is taken into account. The future rates of departure before retirement age are according to departure rates which are used for calculation of surplus of severance pay. D. Vacation and Illness Employees of the Bank and its subsidiaries are entitled to paid annual vacation as provided by the Annual Vacation Law , subject to a special collective agreement for 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 24 million (December 31, NIS 24 million) for unutilized vacation which has already vested. The liability is included under "Other Liabilities". Parallel to the Leumi agreement from 2015, a conversion mechanism of unutilized sick days to vacation days was determined at the Bank for the population of managers and authorized signatories. The calculation of the liabilities in respect of sick days, which won't be utilized during the current serving period for the population of managers and authorized signatories, is based on an actuarial calculation while using actuarial capitalization rates and assumptions

215 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) E. Policy Regarding Terms of Service and Employment of Senior Officers 1. On October 6, 2016 further to the approval Board of Directors and the recommendation of the Remuneration Committee, the general meeting approved the remuneration policy for Senior Officers of the Bank, which replaced the remuneration policy for Senior Officers of the Bank which was approved by the general meeting on February 6, The remuneration policy for Senior Officers of the Bank is updated, inter alia, in light of relevant regulation updates for determining remuneration policy, including, directive 301A of the directives of the Supervisor of Banks and law provisions Remuneration for Senior Officers in Financial Corporations (Special Approval and Dis-Allowing Expenses for Tax Purposes Due to Exceptional Remuneration) 2016 (hereinafter: "The Remuneration Limit Law") and the rules and limits set forth therein, in light of the experience accumulated in the implementation of the former remuneration policy and while taking into consideration, inter alia, the Bank's long term business strategy, and the Bank's objectives and its ability to withstand the risk tolerance approved by the Board of Directors. The new remuneration policy for the Bank's Senior Officers came into force on the day of the approval of the general meeting and shall apply until 2019 (including). Regarding bonuses in respect of 2016, the former remuneration policy for Senior Officers of the Bank applies in relation to the period until the new remuneration policy takes effect, and the new remuneration policy will apply in relation to the period from the date of the entry in to force of the new remuneration policy. However, the list of parameters and objectives, for the examination of the performances of the Senior Officers in respect of the period from the entry into force of the new remuneration policy, and the minimal yield, which serves as a threshold criteria for the payment of bonuses in respect of 2016, subject to the rules of the new remuneration policy, are compatible with the list of parameters and objectives and the minimal yield predefined for Accrued bonus balances for Senior Officers, if there are any, in respect of bonuses approved according to the former remuneration policy for Senior Officers of the Bank, the new remuneration rules apply to them regarding deployed payments, in relation to the period commencing from the entry into force of the new remuneration policy for Senior Officers at the Bank. Main changes between the former remuneration policy and the approved remuneration policy for the Bank's Senior Officers: a. According to the stipulated in the provisions of the Companies Regulations (Facilitations in Transactions with Interested Parties) 2000, the CEO's authority to approve immaterial changes (except for salary changes) in the terms of service of the Senior Officers subject to him, was added (without the approval of the Remuneration Committee)

216 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) E. Policy Regarding Terms of Service and Employment of Senior Officers (Cont'd.) b. The terms of the bonus program included in the former policy, detailed in section 2 below, were replaced with the new rules set forth in the policy itself. Within these rules, threshold terms for the payment of the bonuses were set, and subject to their existence, a list of data and parameters which was presented to the Remuneration Committee and the Board of Directors, was set forth, in order to make a decision regarding the approval of bonuses in the amount of up to three salaries and in addition, measurable parameters were set forth, according to which the Remuneration Committee and the Board of Directors will examine whether to approve bonuses totaling more than three salaries. All according to the policy and subject to the maximum volume of bonuses to which the Senior Officers may be entitled to, as determined in the policy and subject to the Remuneration Limit Law. Within the Remuneration Policy for Senior Officers of the Bank, as approved in 2016, the Bank's Board of Directors set forth an objective of the Bank's compliance with the minimal rate of return on equity, regarding the payment of a bonus that will be predetermined by the Bank's Board of Directors when approving the work plan, as a threshold condition for the Senior Officers to be entitled to bonuses. The Bank's Board of Directors also set forth an objective of the Bank's compliance with risk tolerance to the Bank's capital adequacy ratio as approved by the Bank's Board of Directors in the work plan for the relevant calendar year. Within the framework of the remuneration policy, insofar as the Bank will comply with the aforesaid threshold conditions, it was determined that the Remuneration Committee and the Board of Directors are permitted to approve a bonus to any of the Senior Officers as described above. This is after they will consider a series of parameters which include, inter alia, parameters of compliance with the provisions of the law, the regulation and the Bank's procedures, absence of deviations from limitations and rules set forth by the Board of Directors within the policy documents that the Bank's Board of Directors approved and audit reports given within the responsibility of the Senior Officer and the treatment of the Senior Officer of critical and severe audit deficiencies alongside the Senior Officer's and his unit's compliance with main objectives within his area of responsibility as will be defined in the work plan derived from the Bank's strategic plan. In addition, the Remuneration Committee and the Board of Directors will consider and refer to personal assessment of the Senior Officers and the comparison of the Bank's results compared to the banking system

217 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) E. Policy Regarding Terms of Service and Employment of Senior Officers (Cont'd.) According to the stipulated in directive 301A of the directives of the Supervisor of Banks, the mechanism for the deferral of the payment of remuneration in respect of termination of employment, which is not a fixed component to the extent that Senior Officers are entitled to them, was updated. Also, the rules regarding the deployment and postponement of bonuses was updated, including the determination that bonuses will not be deployed and postponed in cases in which the volume of the variable compensation of the Senior Officer does not exceed 40% of the fixed remuneration of the Senior Officer 5.. However, in the event that the total variable annual bonus to the Senior Officer in respect of a calendar year will exceed 40% of the fixed remuneration of the Senior Officer in the same year, then 50% of the total bonus that he is entitled to in respect of that year will be deferred and will be paid to the Senior Officer in equal parts in each of the three following years to the calendar year in which the bonus was approved (hereinafter: "Bonus Deferral Mechanism"). The deferred payments are linked to the CPI from the date of the approval of the bonus. The relevant deferred annual bonus portion in each year of delay, will vest, subject to the annual yield to the Bank's capital being at least 2%. If the Bank does not meet this vesting condition, the relevant deferred annual bonus portion will be deferred to the next date in which the Bank will meet these conditions. c. The entitlement of the Chairman of the Board of Directors to bonuses and variable remuneration, to which he was entitled according to the former policy, was cancelled. d. A stipulation, in accordance to directive 301A of the directives of the Supervisor of Banks, was added. According to which, each variable remuneration given and paid to Senior Officers will be recoverable, upon fulfillment of the restitution criteria, detailed in the remuneration policy. e. A stipulation, according to which the remuneration policy is subject to rules and limitations set forth in the Remuneration Limit Law, was added. f. The ratio between the salary of the Senior Employees and the lower of the average and the median salary of the employees of the Bank (including contract workers), was updated. g. In the policy, a provision according to which, the Bank will be entitled to dismiss the Senior Officers in advance and/or retroactively from responsibility towards him, was added. 5 Subject to the remuneration of the Senior Officer meeting the requirements of the Remuneration Limit Law concerning the remuneration ceiling

218 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) E. Policy Regarding Terms of Service and Employment of Senior Officers (Cont'd.) 2. The Bonus Program before Approval of the New Compensation Program 6 1. General The Bonus Program shall be an integral part of the remuneration policy of Senior Officers 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 compliance with the capital adequacy ratio determined by the Banks' Board of Directors. The program and its compliance with the Bank s risk profile shall be reexamined 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 Program 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"). 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. 6 See Section E.1 above, regarding the period for which the bonuses plan, which was included in the former remuneration policy, applies

219 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) E. Policy Regarding Terms of Service and Employment of Senior Officers (Cont'd.) 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 and below. It is hereby clarified that in the event that a balance remains and the total bonus is not distributed in full 7, then the remainder will be divided pro rata between the Senior Executives according to the distribution rates as detailed in Sections and 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. 2.5 Establishing the weighted score of the Bank for the purpose of calculating the Standardized Return Rate The performance of the Bank shall be measured based on three parameters, for each of which scores will be assigned on a scale of 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 BSC 8 (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 as well as comparison to the banking system. 7 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. 8 The BSC is a score sheet which combines a quantitative 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)

220 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) E. Policy Regarding Terms of Service and Employment of Senior Officers (Cont'd.) 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 of the Bank (hereby list of quality parameters ) 9 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 10 amount which shall be pre-determined, as follows: The relative normative maximum 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 Calculation of the personal bonus for each of the other Senior Executives: 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 Directors 11 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%. 9 As for the Chairman of the Board of Directors, these parameters include, inter alia, 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, inter alia, transparency and precision in reporting to the Board of Directors, strategic seeing and thinking and the degree of contribution to 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 outerorganizational behavior. 10 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. 11 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 predetermined 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 predetermined 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 predetermined by the Remuneration Committee and the Board of Directors. Quality criteria for the evaluation of Executive Vice Presidents shall include, inter alia, 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

221 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) E. Policy Regarding Terms of Service and Employment of Senior Officers (Cont'd.) 3. Negative Bonus 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 footnote 11 below) which will be given 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 of the members of the Executives group shall not exceed 6.25%. 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% 12, 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 and 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) 12 No yield standardization shall be made when the accounting yield is negative

222 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) E. Policy Regarding Terms of Service and Employment of Senior Officers (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 deferred 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 in respect of a relevant year shall not exceed the rest of the deferred 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 on an appointed Senior Executive, there will be a negative bonus then 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 deferred payments shall be postponed, if such will appear after offsetting the negative bonus as aforesaid 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 to the rest of aforesaid payments as detailed in Section 3 above

223 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) E. Policy Regarding Terms of Service and Employment of Senior Officers (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 program. 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 deferred payments shall be linked to the CPI 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 program, the bonus to which Senior Executives retiring from the Bank are entitled shall be calculated as follows: The Senior Executive shall be entitled only to a proportional bonus 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") 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 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 The rest of the deferred payments in respect of bonuses, authorized in previous years, and including the deferred payments in respect of the above mentioned relative bonus, shall be paid to the executive in accordance to the rules mentioned in Section 4 above. The Board of Directors shall be permitted to decrease a 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 deferred payment/s of bonus/es do not generate any employeremployee relations between the executive and the Bank after the end of the executives' working period at the Bank. 13 Excluding the CEO who retired, who is entitled to a grant on the day of his retirement, willingly or not (excluding retirement under circumstances which negate eligibility for compensations) by his terms of employment

224 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) E. Policy Regarding Terms of Service and Employment of Senior Officers (Cont'd.) 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 of the remaining deferred payments, in respect of bonuses authorized in previous years at dates and under terms detailed in Section 4 above, and subject to the Board of Directors authority to reduce the bonus for reasons detailed in Section 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. 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 program 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 program 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 Program

225 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) E. Policy Regarding Terms of Service and Employment of Senior Officers (Cont'd.) 8. The bonuses granted to Senior Executives under this program, inasmuch as the Senior Executives are entitled to bonuses under the program, 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 program. 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 Program. 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 reduction 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

226 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) F. Personal Contracts (1) As of December 31, 2016, 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. (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 funds 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 to 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 payment 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 he 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)

227 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) F. Personal Contracts (Cont'd.) In 2016, the negative bonus offset from the bonus amounts approved in previous years, according to the former bonus program (see Section E.2 above), to the CEO of the Bank amounts to NIS 334 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. On October 6, 2016, further to the approval of the Board of Directors and the Remuneration Committee, the general meeting approved amendments to the employment agreement of the Bank's Chairman of the Board of Directors, Mr. Zeev Abeles in order to adjust the employment agreement of Mr. Zeev Abeles to the rules and limitations set forth within the Remuneration Limit Law, and directive 301A to Proper Conduct of Banking Business regarding "Remuneration Policy in a Banking Corporation". The update of the employment agreement of Mr. Abeles was made in light of the commencement date of the Remuneration Limit Law on an engagement with a Senior Officer, which was approved prior to the date of publication of the law. Following are the main amendments to the employment agreement of the Bank's Chairman of the Board of Directors which came into force as of October 1, 2016 (hereinafter: "The Day of the Amendment of the Agreement"): Monthly Salary and Scope of Position The scope of the position of Mr. Zeev Abeles will increase from 75% to 100% and his gross monthly salary will be reduced from NIS 172,769 to NIS 170,000 and will be linked to the CPI on the basis of the known index on the day of the amendment of the agreement and towards the index that was known at the payment day of each future salary (hereinafter: " Monthly Salary"). In addition, the grossing up of the value of the vehicle given to Mr. Abeles, will be cancelled

228 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) F. Personal Contracts (Cont'd.) Compensation in Respect of Termination of Employment 1. Upon termination of employment of Mr. Zeev Abeles at the Bank (excluding circumstances in which his entitlement for severance pay will be revoked) Mr. Zeev Abeles will be entitled to compensation in respect of termination of employment in a cumulative amount of sections (1) and (2) below: (1) compensation at the rate of 100% of his last salary multiplied by the number of years he worked at the Bank in respect of the period beginning on the day of the amendment of the agreement and until the end of employee-employer relations for any reason (including part of a year relatively); plus (2) compensation at the rate of 200% of the last salary of the Chairman before the day of the amendment of the agreement, multiplied by the number of years he worked at the Bank during the period beginning on the date of the beginning of the employment of the Chairman at the Bank and until the day of the amendment of the agreement. It is clarified that upon termination of employment of Mr, Abeles at the Bank he will be entitled to all of the funds and rights accumulated and that will be accumulated in the personal severance pay fund under his name, and the Bank will also pay Mr. Abeles compensation in respect of termination of employment in the amount of the difference between Mr. Abeles's entitlement to compensation according to the aforesaid in section (1) and (2) and the funds and rights in his personal severance pay fund. 2. To avoid any doubt, it is clarified that the amendment is not meant to harm Mr. Abeles's right for full compensation in respect of the period until the amendment to the agreement (at a rate of 200%) on the basis of the salary to which he was entitled before the day of the amendment of the agreement. Provisions, Vacation Days and Recovery Days 1. The rate of provisions of the Bank and the deductions from Mr. Abeles's salary to remuneration will be adjusted to the rates required by law as will be from time to time. 2. Mr. Abeles will take advantage of all of the annual vacation days he deserves in respect of a calendar year, and will not be entitled to accumulate or redeem vacation days unutilized during all of his employment period during a calendar year, and all according to the provisions of The Annual Vacation Law The number of recovery days to which Mr. Abeles is entitled will be adjusted to a 100% position (according to the customary rate for Senior Officers of the Bank in respect of a full time job)

229 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) F. Personal Contracts (Cont'd.) Bonuses 1. Mr. Abeles's entitlement to receive an annual bonus will be cancelled as of the day of the amendment of the agreement. This is not to harm Mr. Abeles's right to receive the remaining deferred payments accrued on his behalf in respect of bonuses approved to him until the day of the amendment of the agreement, subject to the rules for their payment as will be according to the remuneration policy conditions for Senior Officers which will apply to Senior Officers of the Bank as will be from time to time. 2. The terms of employment of Mr. Abeles are subject to rules and limitations set forth in the Remuneration Limit Law. 3. Subject to the aforesaid, no additional changes, in the employment terms of the Chairman of the Board of Directors, will be made. In 2016, the negative bonus that was offset from the bonus amounts approved in previous years, according to the former bonus program (see Section E.2 above), to the Chairman of the Board of Directors amounts to NIS 298 thousand

230 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) G. Details on Employee Benefits A. Employee Benefit Types Pension NIS millions Severance Pay Other Benefits at End of Employment Jubilee Bonus December 31, 2016 Total Liability amount Fair value of the programs' assets * Excess liability over programs' assets included in "Other Liabilities" Pension NIS millions Severance Pay Other Benefits at End of Employment Jubilee Bonus December 31, 2015 Total Liability amount Fair value of the programs' assets * Excess liability over programs' assets included in "Other Liabilities" * See Note 1.E.18. regarding the estimation of assets of Amit fund

231 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) B. Post-Retirement Benefit Plan 1. Commitment and Financing Status Pension Plan for a Defined Benefit Compensation Plan December NIS millions a. Change in Commitment in Respect of an Anticipated Benefit Commitment in respect of an anticipated benefit at the beginning of the year Cost of service Cost of interest Net actuarial loss (profit)* 64 (16) 55 4 Benefits paid (11) (12) (5) (8) Commitment in respect of an anticipated benefit at the end of the year Commitment in respect of a cumulative benefit at the end of the year** Pension Plan for a Defined Benefit Compensation Plan December NIS millions b. Change in Fair Value of the Plan's Assets and Funding State of the Plan Fair value of the program's assets at the beginning of the year Actual return on the program's assets Deposits by the banking corporation to the plan Benefits paid - - (2) (2) Fair value of the program's assets at the end of the year Funding state net liability recognized at the end of the year*** * In 2016 including actuarial loss in respect of efficiency plan attributed to profit and loss. ** After neutralizing the compensation growth forecast. *** Included in "Other Liabilities"

232 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) Pension Plan for a Defined Benefit Compensation Plan December NIS millions NIS millions c. Amounts Recognized in the Consolidated Balance Sheet Amount recognized in the item "Other Assets" Amount recognized in the item "Other Liabilities" d. Amounts Recognized in Accumulated Other Comprehensive Income (Loss), before Tax Effect Net actuarial loss Net liability in respect of the transition Closing balances of accumulated other comprehensive income

233 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) 2. Expense for the Period Pension Plan for a Defined Benefit Severance Pay Plan For the year ended December NIS millions a. Components of Net Benefit Cost Recognized in Profit and Loss Cost of service Cost of interest The anticipated yield on the assets of (4) (12) (11) (3) (3) (6) the plan Amortization of unrecognized amounts - Net actuarial loss Total net cost of benefits Total expense in respect of a defined deposit plan Efficiency plan expenses Total expense included in salaries and related expenses Pension Plan for a Defined Benefit Severance Pay Plan For the year ended December NIS millions b. Changes in Assets of the Plan and in the Commitment for Benefit Recognized in Other Comprehensive Income (Loss) Before Tax Effect Net actuarial loss (income) for the year 28 (8) 9 (13) 9 (3) Amortization of actuarial loss (3) (3) - (1) (1) - Total recognized in other comprehensive income 25 (11) 9 (14) 8 (3) Total net cost of benefit Total amount recognized in net cost of the benefit for the period and in other comprehensive income (3) 15 (1) c. Estimate of Amounts Included in Accumulated Other Comprehensive Income Expected to be Amortized from Accumulated Other Comprehensive Income to the Statement of Profit and Loss as an Expense in 2017, Before Tax Effect NIS millions Net actuarial loss

234 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) 3. Assumptions Pension Plan for a Defined Benefit Assumptions on the Basis of a Weighted Average Used in Determining the Commitment in Respect of the Benefit and in Measuring the Net Cost of the Benefit 1. Principal Assumptions Used in Determining the Commitment in Respect of the Benefit December Real capitalization rate 1.90% 2.25% Increase rate of the CPI 1.40% 2.00% Retirement rate 0%-5.9% 0%-5.9% Real remuneration growth rate 0.80% 0.80% 2. Principal Assumptions Used in Determining the Commitment in Respect of Net Benefit for the Period December Real capitalization rate 1.70% 1.80% 2.60% Anticipated long-term yield on the plan's assets* 4.10% 4.10% 4.20% Real remuneration growth rate 0.80% 0.80% 0.80% * From practical considerations in 2014 the Bank chose to use the actual yield rates in order to determine the anticipated yield rates in prior periods. Effect of a Percentage Point (1%) Change on the Commitment in Respect of an Anticipated Benefit, Before the Tax Effect Increase of One Percentage Point Decrease of one percentage point December 31 December NIS millions NIS millions Real capitalization rate (33.9) (34.9) Beneficiary retirement rate (1.6) (1.1) Real remuneration growth rate (16.6) (18.9)

235 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) Severance Pay Plan Assumptions on the Basis of a Weighted Average Used in Determining the Commitment in Respect of the Benefit and in Measuring the Net Cost of the Benefit 1. The Principal Assumptions Used in Determining the Commitment in Respect of the Benefit December Nominal capitalization rate 3.40% 3.62% Retirement rate 0%-5.9% 0%-5.9% Nominal remuneration growth rate 1.9%-6.6% 2.5%-7.2% 2. Principal Assumptions Used in Determining the Commitment in Respect of the Net Benefit for the Period December Nominal capitalization rate 3.17% 3.70% 4.90% Nominal anticipated long-term yield on the plan's assets* 5.00% 5.00% 8.30% Nominal remuneration growth rate 1.9%-6.6% 2.5%-7.2% 2.5%-7.2% * From practical considerations in 2014 the Bank chose to use the actual yield rates in order to determine the anticipated yield rates in prior periods. Effect of a Percentage Point (1%) Change on the Commitment in Respect of an Anticipated Benefit, Before the Tax Effect Increase of One Percentage Point December NIS millions Nominal capitalization rate (9.9) (11.3) Regular retirement rate (1.5) (4.3) Beneficiary retirement rate Nominal remuneration growth rate Decrease of One Percentage Point December NIS millions Nominal capitalization rate Regular retirement rate Beneficiary retirement rate (13.4) (13.7) Nominal remuneration growth rate (11.0) (12.2)

236 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) 4. The Plan's Assets A. Composition of the Fair Value of the Plan's Assets Pension Plan for a Defined Benefit * December December Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total NIS millions Type of Asset Cash and deposits with banks Shares Government Bonds Corporate Bonds Other Total Severance Pay Plan December December Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total NIS millions Type of Asset Cash and deposits with banks Shares Government Bonds Corporate Bonds Other Total * See Note 1.E.18. regarding the assets' estimation of the Amit fund. B. The Fair Value of the Plan's Assets by Type of Assets and Allocation Target for the Year 2017: Pension Plan for a Defined Benefit Severance Pay Plan Allocation % of the Plan's Assets Allocation % of the Plan's Assets Target December 31 Target December Type of Asset Cash and deposits with banks 1% 7% 5% 8% 6% 8% Shares 9% 8% 6% 8% 9% 10% Bonds: Government 63% 54% 60% 49% 43% 43% Corporate 15% 14% 16% 15% 21% 18% Total bonds 78% 68% 76% 64% 65% 61% Other 12% 17% 13% 20% 20% 21% Total 100% 100% 100% 100% 100% 100%

237 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 21 - Employee Benefits (Cont'd.) 5. Cash Flow 1. Deposits Forecast Actual Deposits * NIS millions Deposits * Estimation of deposits expected to be paid to defined benefit pension plans during Benefits the Bank Expects to Pay in the Future** Year NIS millions and thereafter 428 Total 782 ** In capitalized values, not including future cost of service

238 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 22A - Shareholders' Equity (1) Composition of Share Capital In Nominal Values December 31, 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' shareholders 2. 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 (hereinafter: "The Amendment") which entered into force as of January 1, In light of additional requirements in the past few years to the Public Reporting Directives, which require the recording 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. According to the update, Distributable Profits include the other comprehensive income factor, however, despite that, the Bank shall not execute a distribution of dividends (unless it received an approval from the supervisor prior to that), inter alia, 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. 2 16,864,720 shares are held by Shlomo Eliyahu Holdings Ltd. and 3,092,368 shares are held by Eliyahu 1959 Ltd., through trustees. The holders and the trustees are not allowed to participate in the general meetings 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

239 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 22A - Shareholders' Equity (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. 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, 2016, is NIS 463 million from retained earnings of NIS 1,355 million. In the Basel III Supervisor of Banks' Letter Minimum Core Capital Ratio, the banks were demanded, inter alia, to avoid dividend distribution if it might cause them to not meet the pre-determined capital targets. 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. Note that in 2016 the Bank did not distribute dividends

240 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 22B - Capital Adequacy, Liquidity and Leveraging under Directives of the Supervisor of Banks General On May 2013 the Supervisor of Banks amended the Proper Conduct of Banking Business Directive No regarding "Measurement & Capital Adequacy", in order to match them to the directives of Basel III. It should be emphasized that the Basel III directives determine significant changes in the calculation of the regulatory capital requirements, inter alia, when it comes to: - The supervisory capital components - Deductions from the capital and supervisory adjustments - Treatment of exposure to financial corporations - Treatment of exposure to credit risk in respect of impaired debts - Capital allocation in respect of CVA risk 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". This is in order to allow compliance with the new requirements of the supervisory capital within the implementation of Basel III and to establish a transitional period until full implementation. The transitional directives address, inter alia, the supervisory adjustments and the deductions from the capital, and capital instruments which aren't eligible for inclusion in the supervisory capital according to the new criteria established in the Basel directives. According to the transitional directives, the supervisory adjustments and the deductions from the capital and the minority interests which aren't eligible for inclusion in the supervisory capital are gradually deducted from the capital by 20% each year from January 1, 2014 and until January 1, In addition, the capital instruments, which are no longer eligible as supervisory capital, were recognized up to a ceiling of 80% on January 1, 2014 and in each following year this ceiling is reduced by an additional 10% until January 1, In 2016 the rate of deductions from the supervisory capital is 60% and the ceiling of the instruments which are eligible as supervisory capital is 60%. On October 22, 2015 the Supervisor of Banks published a final circular regarding "Capital Requirements in Respect of Exposure to Central Counterparties" (hereinafter: "The Circular")

241 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 22B - Capital Adequacy, Liquidity and Leveraging under Directives of the Supervisor of Banks (Cont'd.) General (Cont'd.) The circular amends Proper Conduct of Banking Business Directives No. 203 and 204 in order to adapt them to the recommendations of the Basel Committee with regard to capital requirements in respect of exposures of banking corporations to central counterparties. The circular lists the new guidelines, which will apply to exposures to central counterparties caused by OTC derivatives, transactions of derivatives marketable in the Stock Exchange and securities financing transactions. The guidelines distinguish between a non-eligible central counterparty and an eligible central counterparty, while the latter was prescribed reduced capital requirements. The aforesaid in the circular shall apply as of January 1, 2017, while up until June 30, 2017 the Tel Aviv Stock Exchange can be regarded as an eligible central counterparty. On December 28, 2016 the Supervisor of Banks published a letter that excludes the exposures, in respect of customers who are active in the Maof Stock Exchange, from the implementation of this directive. These guidelines are not expected to materially affect the Bank's capital requirements in respect of the aforesaid exposures. The Capital Adequacy Objective In preparation for the discussions of the Bank's strategic plan and further to the implementation of the Bank's strategic plan for , including the objectives set forth therein regarding the expansion of the retail activity, the Bank's Board of Directors decided on August 31, 2016 to update the rising layout to the primary capital ratio, so that the Bank will arrive at primary capital ratio (Tier 1) of 10.25% as at December 31, In addition it was decided that the total capital ratio won't be less than 11.3% plus a coefficient in respect of the shredding of future capital notes or 13% the stricter of them, and in stress scenarios the objective of the total capital ratio won't be less than 9% and the objective of the tier 1 equity ratio won't be less than 6.5%

242 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 22B - Capital Adequacy, Liquidity and Leveraging under Directives of the Supervisor of Banks (Cont'd) 1. Capital Adequacy According to the Guidelines of the Supervisor of Banks Calculated according to Proper Conduct of Banking Business Directives No regarding "Capital Measurement and Adequacy". A. Consolidated Data: 1. Capital for the Purpose of Calculating the Capital Ratio December 31, 2016 NIS millions December 31, **2015 Tier I equity 2,464 2,429 Tier II capital 1,112 1,260 Total capital 3,576 3, Weighted Balances of Risk-Weighted Assets Credit risks 23,366 22,760 Market risks Operational risk 1,745 1,706 Total weighted balances of risk-weighted assets 25,486 24, Ratio of Capital to Risk Components Percentage Ratio of Tier I equity to risk components 9.67% 9.76% Ratio of total capital to risk components 14.03% 14.82% Minimal ratio of Tier I equity required by the Supervisor of Banks 9.29%* 9.12% Minimal ratio of total capital as required by the Supervisor of Banks 12.79%* 12.62% * The ratios that the Bank is required to meet as of January 1, In addition, according to the directives of the Supervisor of Banks regarding "Limits for Granting Housing Loans", the Bank is required to increase the target ratio of Tier 1 equity ratio and the total capital ratio at a rate which reflects 1% of the housing loans balance. The Tier 1 equity target will increase by constant quarterly rates from April 1, 2015 until January 1, According to that, the minimal Tier 1 equity ratio and the minimal total capital ratio that will be required by the Supervisor of Banks for January 1, 2017, according to figures of the reporting date, is 9.33% and 12.83%, respectively

243 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 22B - Capital Adequacy, Liquidity and Leveraging under Directives of the Supervisor of Banks (Cont'd) B. Components of Capital for the Purpose of Calculating the Capital Ratio (Consolidated Data): December 31, 2016 NIS millions December 31, ** Tier I Equity Equity 2,342 2,403 Differences between equity and Tier I equity Total Tier I equity, before supervisory adjustments and deductions 2,363 2,430 Supervisory Adjustments and Deductions: Deferred taxes receivable (3) - Supervisory adjustments and other deductions Tier I capital (1) (1) Effect of adjustment in respect of efficiency plan* Total supervisory adjustments and deductions Tier I capital 101 (1) Total Tier I capital, after supervisory adjustments and deductions 2,464 2,429 * In accordance with the stated in the letter of the Bank of Israel from January 12, 2016 on "Operational Efficiency" of the banking system in Israel, see Note 21.B, and after receiving an approval in principal from the Supervisor of Banks, this effect will be charged in equal rates over 5 years beginning on 2017 onwards. ** Data for prior periods has been restated in light of the retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D.2. December 31, 2016 December 31, 2015 NIS millions 2. Tier II Capital Tier II capital: instruments before deductions* 863 1,051 Tier II capital: provisions, before deductions Total Tier II capital, before deductions 1,112 1,260 Deductions: Total deductions - Tier II capital - - Total Tier II capital 1,112 1,260 *Regarding issuance of subordinated notes with a mechanism for absorbing losses, see Note 19.B

244 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 22B - Capital Adequacy, Liquidity and Leveraging under Directives of the Supervisor of Banks (Cont'd) C. The Effect of the Transitional Directives on the Tier I Capital Ratio December 31, 2016 Percentage December 31, 2015 Capital Ratio to Risk Components Ratio of Tier I equity to risk components before implementation of the transitional directives** in Directive No. 299 and before the effect of the adjustments in respect of the efficiency plan 9.11% 9.64% influence of transitional directives before the effect of the adjustments in respect of the efficiency plan 0.15% 0.12% Effect of adjustments in respect of the efficiency plan*** 0.41% 0.00% Ratio of Tier I equity to risk components 9.67% 9.76% ** Including the effect of the adoption of U.S. GAAP on employee benefits. *** In accordance with the stated in the letter of the Bank of Israel from January 12, 2016 on "Operational Efficiency" of the banking system in Israel, see details in Note 21.B, and after receiving an approval in principal from the Supervisor of Banks, this effect will be charged in equal rates over 5 years beginning on 2017 onwards. 2. Leverage Ratio According to the Directives of the Supervisor of Banks The leverage ratio is simple and not risk based and completes the risk based measurement in order to prevent excess leverage. The directive stipulates that the leverage ratio on a consolidated basis must not be less than 5%. Following is the report on the leverage ratio based on consolidated data (1),(2), (3) : December 31, 2016 NIS millions December 31, 2015 Tier 1 capital 2,464 2,429 Total exposures 45,390 45,316 Leverage ratio 5.43% 5.36% Minimal leverage ratio required by the Supervisor of 5.00% 5.00% Banks (1) The Bank is required to meet the minimal leverage ratio required by the Supervisor of Banks as of April 1, (2) Calculated according to Proper Conduct of Banking Business Directives No. 218 concerning leverage ratio. (3) Data for prior periods has been restated in light of the retroactive implementation of the circular regarding the reporting of banking corporations according to US GAAP on intangible assets, see Note 1.D

245 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 22B - Capital Adequacy, Liquidity and Leveraging under Directives of the Supervisor of Banks (Cont'd) 3. Liquidity Coverage Ratio according to the directives of the Supervisor of Banks 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. Proper Conduct of Banking Business Directive No. 221 regarding liquidity coverage ratio determines the way to calculate the liquidity coverage ratio, including the defining of the characteristics and operational requirements for "inventory of high quality liquid assets" and safety factors for them (numerator) and the net cash flow expected to come out in a stress scenario, defined in the directive for the 30 calendar days (denominator). According to the transitional directives, as of April 1, 2015 the minimal requirement will be 60% and will increase to 80% on January 1, 2016 and to 100% on January 1, (1), (3) Following is the report on liquidity coverage on the basis of the consolidated data For 3 months ended at December 31, December 31, Percentage Percentage Liquidity coverage ratio 116% 98% Minimal liquidity coverage ratio required by the Supervisor of Banks (2) 80% 60% (1) In terms of simple averages of daily observations during the reported quarter. (2) The minimal liquidity coverage ratio required by the Supervisor of Banks is 60% as of April 1, 2015 and it increases gradually to 80% on January 1, 2016 and up to 100% on January 1, (3) Calculated according to Proper Conduct of Banking Business Directives No. 221 concerning liquidity coverage ratio

246 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments Reported Amounts A. Off-Balance-Sheet Commitments 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, NIS millions Israeli CPI-linked currency (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 8 million ( NIS 10 million) are not included in this table. B. 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, , year Up to to 1 year 3 years NIS millions 3 years to 5 years 5 years to 10 years 10 years to 20 years Over 20 years Total Total CPI-Linked Segment Future contractual cash flows Expected future cash flows after Management's estimate of early repayments Capitalized future cash flows after Management's estimate of early repayments (1) (1) The capitalization was at an average rate of 0.75% ( %) NIS millions Information Regarding Loans Extended During the Year Standing loans 2 2

247 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments: (1) Rentals for Premises and Equipment Payable in Future Years: Consolidated and the Bank December 31, December 31, NIS millions First year Second year Third year Fourth year Fifth year Over five years Total (2) As at December 31, 2016, there is no commitments to purchase premises and equipment (December 31, NIS 7 million - consolidated and Bank). (3) A consolidated company committed to invest NIS 10 million (December 31, NIS 12 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") According to a perennial agreement between Leumi and the Bank, 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 are based on the computing services given to Leumi's customers plus additional services as detailed in the agreement. Leumi also provides the Bank support and maintenance services and training infrastructure regarding the systems used to provide the services and the operating services. According to 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. The agreement was signed for a 10 year period which ended on December 31, As of January 1, 2017, the period of "Engagement Termination Project" with Leumi entered into force and it ends on December 31, Within its framework, the parties are preparing to gradually terminate the engagement between them. During this period, the Bank will examine alternatives to receive computing services in the future. During 2016 the Bank started the process of actual examination of alternative suppliers, in collaboration with professional teams of experts, and within this framework, approached various suppliers in order to receive offers for computing and operation services

248 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (4) (Cont'd) On December 29, 2016 the Bank received from the Antitrust Commissioner an exemption from the approval of a restrictive arrangement for the agreement between the Bank and Leumi Bank regarding the provision of computing and operational services to the Bank by Leumi, and this is until December 31, In addition, the Bank received on January 1, 2017 the approval of the Supervisor of Banks to extend the period of provision of computing services to the Bank by Leumi for the duration of the engagement termination project period and until December 31, (5) On October 27, 2015 the Bank signed addendums to the agreement 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, both from July 1, 2010 (hereinafter: the Agreements and "Addendums"). The agreements were, at the time, for ten years, and according to which, CAL and Diners issue credit cards, bank cards and combined cards to customers of the Bank, and 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 regarding the operation and provision of services by CAL and/or Diners for charge cards to be issued pursuant to the agreement, as well as the rest of the related terms. Under the agreement with CAL, at the time, the Bank was granted a nontransferable option to purchase from CAL 32,934 ordinary shares of NIS of CAL, which as of the date of the signment 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). Within the addendum, the aforesaid option given to the Bank, was cancelled. As part of the amendments and addendums, it was agreed that the Bank will receive from CAL and Diners, remuneration and an annual grant subject to the business terms concerning a mutual issuance of cards. The validity of the updated agreements was extended until December 31, 2021 subject to their terms including cancellation terms. The amendment of the agreements according to the addendums entered into force in 2015 upon receipt of an exemption from a restrictive arrangement from the Antitrust Commissioner (the exemption was received on December 30, 2015)

249 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special 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 determines rules for the allocation of responsibility between Poalim Express Ltd. and the Bank, in view of the provisions of the Charge Cards Law and determines 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 determines rules for the allocation of responsibility between Poalim Express Ltd. and the Bank, in view of the provisions of the Charge Cards Law and determines the relevant business, operational, and legal terms for the aforesaid 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 regarding which, the Bank has a right of return for a period defined in the agreement, which are recorded as secured debt to Mimun Yashir. The financing income from the transaction is recorded according to the effective interest rate of the acquired loans

250 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (7) (Cont'd) On May 29, 2016 the Bank and Mimun Yashir signed an amendment letter to the agreement (hereinafter: "The Amendment Letter to the Agreement"), in which the agreement period between the Bank and Mimun Yashir was extended until April 1, 2017 and the maximum amount of the balance of the overall funds for loans that the Bank will purchase from Mimun Yashir within the framework of all of the agreements between the Bank and Mimun Yashir (existing and future), was increased to NIS billion 1.8 (hereinafter: "The Ceiling Amount"). Execution of any selling transaction of the loan portfolios, as aforesaid, between the parties, will be subject to the existence of terms agreed upon within the agreements between the sides and subject to the discretion of each of the parties. Without detracting from the aforesaid, the execution of the sale of the loan portfolios as aforesaid subject to the ceiling amount is contingent upon the approval of the Bank in writing and in advance. (8) As collateral for committing all of the Bank's commitments, according to the agreement referring to eligibility loans from state funds, signed between the Bank and the Israeli government in 2004, and an addendum to the agreement signed in 2008, the Bank devised to the treasury a CPI linked un-contingent autonomous liability as at December 31, 2016 in the amount of NIS 12 million (December 31, NIS 12 million). (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 Trust Company of Union Bank Ltd. (subsidiary) deposited an amount of NIS 8 million in the Bank (December 31, NIS 7 million) in favor of owners of units of mutual funds for which the Trust Company of Union Bank Ltd. serves as their trustee. b. A consolidated company which was engaged in underwriting, which is in the status of inactive underwriter, is covered by professional liability insurance, under the Securities Regulations (Underwriting) (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

251 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (11) 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"), beyond 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 beyond the additional indemnity amount, the officers will also 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, The controlling interests of 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 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 among 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)

252 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (12) a. 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, 2016 the Bank s share in the risk fund amounted to NIS 27 million (December 31, NIS 40 million). See Note 24 regarding a lien in respect of the above. b. 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. In November 2008, the Ma'of Clearing House's 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 63 million (December 31, NIS 89 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

253 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (12) b (Cont'd) The Bank pledged to pay 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, 2016, the guarantees regarding transactions executed for customers, amounted to NIS 152 million (December 31, NIS 176 million). See also Note 24 regarding a lien in respect of the above. (13) The Amendment of the Undertaking to Indemnify the Officers of the Bank and its Subsidiaries and the Amendment of the Directives of the Bank's Articles of Association Concerning Indemnification 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 (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"). 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 Indemnify for 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

254 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (13) (Cont'd) 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 August 10, 2011 (Mr. Yitzhak Manor is the husband of Mrs. Ruth Manor who controls, along with Dr. Yael Almog Zackai, 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 Dr. Yael Almog Zackai 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 Zackai 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 Bank's 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. Further to the approval of the Remuneration Committee of the Bank from July 23, 2015 and to the approval of the Bank's Board of Directors from September 2, 2015, the Bank's General Meeting decided on October 25, 2015 to reapprove the liability deed for indemnifying directors who are controlling shareholders of the Bank or their relatives or that the controlling shareholders of the Bank might have a personal interest in giving them an indemnifying liability, who serve, served or will serve at the Bank or its subsidiaries, at the same terms and by the same version of the existing liability deed for indemnifying officers of the Bank and its subsidiaries, as approved by the General Meeting of the Bank on October 31,

255 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (14) 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., 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. (15) On January 31, 2017, the Bank's Board of Directors approved (then the Board of Directors of Union Issuances Ltd. approved) a deposits agreement between Union Issuance and the Bank which will apply to issuances of bonds and/or liability deeds and/or commercial securities that will be offered by virtue of the shelf prospectus published by Union Issuances on January 23, 2017 (carrying the date January 24, 2017). The agreement will also apply to aforesaid issuances of Union Issuances by virtue of other shelf prospectus that the company will publish upon the expiry of the aforesaid prospectus (hereinafter: "2017 Deposits Agreement") and this under the same conditions to the deposit agreement signed between Union Issuances and the Bank on November 25, 2013 whose conditions are detailed below. According to an agreement signed on November 25, 2013 between 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:

256 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (15) (Cont'd) "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 another rate as shall be agreed between the Bank and Union Issuances, in order to approximately cover the routine expenses of Union Issuances. 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 to 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

257 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (15) (Cont'd) According to an agreement signed on August 28, 2011 between Union Issuances and the Bank (hereinafter: "2011 Agreement") which applies to issues of bonds and/or liability deeds 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 determined 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 upon 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 (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:

258 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (15) (Cont'd) 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 whose consideration 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. (16) On February 29, 2016, further to the approval of the Insurance Committee of the Board of Directors of the Bank on February 23, 2016, and the approval of the Remuneration Committee of the Board of Directors on February 25, 2016, and in accordance with the principles established in the remuneration policy of the officers 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 March 15, 2016 to September 14, The policies were purchased from a consortium of insurers in London. "Front-office services" for the policies were purchased from an Israeli Insurance Company. The premium paid by the Bank for the purchase of the D&O Policy (including the consideration in respect of the aforesaid front-office services) is in a total amount of approximately USD 320 thousand 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

259 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (16) (Cont'd) 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 Zackai, in David Lubinski Properties (Holdings) 1993 Ltd. and in Cheroudar Properties Ltd.), and to other officers of the Bank. (17) Various Claims Against the Bank and its Subsidiaries A. A number of legal actions are pending against the Bank and its subsidiaries. Adequate reserves have been made in accordance with generally accepted accounting principles in respect of all the expected losses from the 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 advisers, have little chances of success. The additional amount of exposure, in respect of pending claims whose chances of realization are not remote, and for which no provision has been made, is approximately NIS 15 million. B. In December 2007, a payment demand in a total amount of USD 10 million was served on the Bank in connection with the activity in the capital market of a holder of a 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. 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

260 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (17) B (Cont'd) 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 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. The claim was treated in accordance with generally accepted accounting principles based on the assessment of the Bank's management, which relied on its legal advisors. 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. This claim was denied with the consent of the parties which was recorded as a judgment. C. 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 a total amount of NIS 500 million, in connection with the allegedly unlawful charging of commission in respect of borrowers' life insurance and the insurance of assets pledged to the Bank. In addition, various forms of declaratory relief were requested and a motion was filed for approval of the claim as a class action. On behalf of the defendants a motion to dismiss in limine the motion to approve the claim as a class action was filed, but this motion has not yet been heard on its merits

261 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (17) C (Cont'd) The proceedings have been delayed in accordance with the court's decision, inter alia, in light of a different but similar motion, which ended with a settlement agreement. In the opinion of the Company s legal advisors certain grounds 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 proceedings, 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 discussed, 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. D. In March 2014, the Bank received a motion filed by customers of the Bank and additional petitioners with the District Court in Tel Aviv for the approval of a class action against the Bank and four other banks, concerning the charging of certain commissions, allegedly unlawfully, by the respondents, in connection with the conversion and delivery of foreign currency, a lack of proper disclosure and alleged misleading of the customers with regard to the costs involved in conversion services, and the alleged existence of a restrictive arrangement concerning the pricing, service, and proper disclosure provided in connection with foreign currency (hereinafter: the "Motion"). The petitioners note in the Motion 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 Motion, the represented class consists of all persons or legal entities which used the Bank's 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 differentials; a mandatory injunction obligating the banks to establish and implement an inter-bank clearing system for foreign currency;

262 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (17) D (Cont'd) a prohibitory injunction on the charging of any fee on the fee list and/or exchange-rate differentials, 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. The hearing of this claim was consolidated with an additional claim against other banks which is identical in essence. On April 2015, the court ordered the petitioners to file a request for an abbreviated approval, in which the total financial compensation against the defendants is NIS 8.55 billion (before capitalization) plus indirect damage and violation of autonomy. In addition, out of this total, the Bank's share of the claim is NIS 277 million. In the opinion of the Bank's management, based on the opinion of its legal advisors, at this point, before the Motion to approve the claim as a class action has been resolved, the probability of acceptance of the claim is estimated as remote. E. On January 1, 2015, a Motion was filed with the Economic Department of the District Court in Tel Aviv against the Trust Company of Union Bank Ltd. (hereinafter: "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 with payment for operational services. The statement of claim alleges, inter alia, that the defendant fund managers, prior to Amendment 14 to the Mutual Funds 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 by tens of percent points the amounts that they should have paid

263 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (17) E (Cont'd) The allegations 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 activities of the mutual funds in which the public invested its money, according to the directives of the laws applicable to them. The amount of the claim for all members of the group is NIS 220 million, of which a total of NIS 26 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. On February 28, 2017, the court approved the withdrawal of the petitioners without an expense order and with that the proceedings came to an end. F. In March 2014, the Bank received a Motion to certify a class action against the Bank filed by shareholders of the Bank with the Economic Department of the District Court in Tel Aviv, concerning the Bank's failure to pay dividends during 2011 in respect of its profits in 2010, which allegedly, according to the Motion, constitutes violation of a commitment, fraud and misleading of investors, negligence, and breach of a statutory duty (hereinafter: the "Motion"). According to the Motion, 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 Motion include, inter alia, an order to the Bank to disclose the number of customers who held its shares on December 31, 2011; to reveal 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 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

264 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (17) F (Cont'd) On February 9, 2016 the District Court rejected the request to approve the claim as a class action. In March 2016, an appeal was submitted to the Supreme Court in regard to the ruling that rejected the request. On January 2017 the appeal was dismissed by the Supreme Court. G. On February 28, 2013, a statement of claim was filed in the District Court in Jerusalem in the total 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 four 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. It is claimed that the aforesaid actions were carried out, inter alia 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 improper withdrawal of money, 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,

265 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (17) G (Cont'd) which should be reduced from the damages claimed, was deposited in Hofim accounts. In December 2015, a notice was filed by the special manager concerning the payment of filing fee differentials in respect of the revaluation of the amounts claimed until the filing of the claim. Hence, according to his notice, the revalued amount of the claim totals NIS 62 million against all of the defendants. 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. H. On January 31, 2016, the Bank received a Motion, submitted to the District Court in Jerusalem, to approve a class action against the Bank and four other banks (hereinafter: "the Respondents"), the gist of which is that the respondents do not maintain branches in the Arab centers of population in Israel and do not make their banking services accessible to this population, contrary to the Prohibition of Discrimination in Products, Services and Entrance to Public Places Law 2000, to the Banking Law (Customer Service) Law 1981 and to the Basic Law: Human Dignity and Liberty. The group that the action seeks to represent is all of the citizens of Israel, Muslims, Christians and Druze, who allegedly suffer from discrimination in accessibility to banking services, due to the absence of bank branches where they live. Within their claim for various remedies, the plaintiffs divide their claim between monetary damage, which is estimated at NIS 39.5 million, and non-monetary damage, which is estimated at NIS 658 million, which amount together to NIS million and they note that each respondent bank's share in the alleged damage is also according to its market share. In the opinion of the Bank's management, based on its legal advisors, at this point in which the aforesaid motion is in its early stages, after the Bank's response has been submitted but before the hearing of the Motion to approve the claim as a class action, the chances of the claim being accepted are assessed as remote

266 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (17) (Cont'd) I. On December 21, 2016, the Bank received a Motion, according to Section 198A. to the Companies Law 1999, to disclose and review documents, which was submitted to the Economic Department at the District Court in Tel Aviv ("The Application"). The applicant, who claims to be a shareholder in the Bank, requests that the court order the Bank to disclose documents concerning credits that the Bank granted to Mr. Eliezer Fishman and to others, for whom Mr. Fishman is a personal guarantor of their debts (hereinafter: The Credit"). This is in order for the applicant to formulate a position in connection with the filing of a Motion for approval of a derivative claim, which, he claims, concerns the apparent failures in the Bank's corporate governance and alleged breaches of the duties of care and fidelity owed by the Board of Directors and the members of the Bank's Credit Committee to the Bank, by approving the granting of the abovementioned credit without being backed by sufficient collateral and without acting properly to collect the debt, in a manner that allegedly caused damage to the Bank. Recently the Bank's Board of Directors decided to establish an Independent Claims Committee to examine the events relating to the credit claimed in the Application. In light of this, a Motion has been filed with the court on behalf of the Bank to delay proceedings concerning the aforesaid request for a limited time. In the opinion of the Bank's management, based on its legal advisors, at this point, at which the Application is in its earliest stages, before the Independent Claims Committee has performed its work and before the Bank has filed its response, it is not possible to estimate its chances of being accepted. J. On February 23, 2017, the Bank was served with a Motion, filed in the District Court in Tel Aviv Jaffa, to approve a class action against the Bank, regarding the allegedly unlawful fixing and charging of fees from small businesses, whilst being in breach of the duties of care, disclosure and fidelity which the Bank owes its customers (hereinafter: "The Request"). The total claim, as estimated by the applicant, amounts to NIS 48 million. The applicant notes that class actions on similar grounds were submitted against two additional banks

267 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (17) J (Cont'd) According to the Motion, the class represented is all of the Bank's customers who meet the definition "small business", as defined in the Banking (Customer Service) (Fees) Regulations 2008, who paid fees otherwise that in accordance with the tariff applicable to "small businesses", from the date of the entry into force of the fees regulations, namely July 1, 2008, until the present day. The remedies requested in the action are, inter alia, giving a mandatory order to the Bank to contact all of its business customers and to update them regarding the practical meaning of the classification of the account as a "small business" in regard to the tariff, giving a mandatory order to the Bank to note in the Bank's documents the type of account and the tariff according to which the fees in the account are paid and restitution and/or monetary compensation and/or any other remedy to the group. In the opinion of the Bank's management, at this point at which the aforesaid Motion is in its earliest stages, before the Bank has filed its response, it is not possible to estimate its chances of being accepted. K. On March 6, 2017, the Bank was served with a Motion, filed in the Central District Court, to approve a claim as a class action against the Bank, regarding alleged overcharging in cases involving the execution of judgments which the Bank conducts against its customers ("Members of the Affected Group"). It is alleged in the claim that the overcharging is caused by to the addition of interest to the principal amount of the debt more frequently than permitted according to the agreement between the Bank and its customers and/or according to the judgment, in respect of which the case was opened and/or according to the Adjudication of Interest and Linkage Law 1961, (hereinafter: " The Motion"). The total claim, as estimated by the applicant, amounts to approximately NIS 15.5 million (which includes a claim to return the amount actually overcharged as claimed in the Motion in the amount of approximately NIS 13.5 million and also a demand for compensation for the members of the affected group in respect of non-pecuniary damage in the amount of approximately NIS 2 million)

268 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 23 - Contingent Liabilities and Special Commitments (Cont'd.) C. Contingent Liabilities and Commitments (Cont'd.) (17) K (Cont'd) The "Affected Group", represented by the Motion, is every customer of the Bank, individual and/or corporation and/or other legal entity against which the Bank is conducting or has conducted an execution of judgment case, in which the customer was allegedly overcharged in respect of compound interest, viz., due to the addition of interest to the principal more frequently than permitted according to the agreement between him and the Bank and/or according to the judgment, in respect of which the execution file was opened and/or according to the Adjudication of Interest and Linkage Law 1961, and all during the 7 years prior to the filing of the Motion to approve this claim as a class action and until the date of its approval. The causes of action of the claim are breach of statutory duty, deception, negligence, breach of fiduciary duty, breach of contractual and non-contractual duty of good faith and unjust enrichment. The applicant notes that class actions on similar grounds have been submitted against other banks. In the opinion of the Bank's management, at this point, at which the aforesaid Motion is in its earliest stages, before the Bank has filed its response, it is not possible to estimate its chances of being accepted. Note 24 - Liens (1) In order to secure the clearance of daily credit allocated or to be allocated to the Bank by the Bank of Israel 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

269 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 24 - Liens (Cont'd.) (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. As a precaution, 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, 2016, no collateral was provided

270 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 24 - 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 as at December 31, 2016 (December 31, 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, 2016 is NIS 535 million (December 31, NIS 853 million); the average during 2016 was NIS 604 million. The maximum balance deposited was NIS 731 million. For further details, see Note 23.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 NIS millions Securities received in borrowing transactions of securities for cash

271 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 25 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 (1) (2) Interest Contracts December 31, 2016 Foreign Currency Shares Commodity Contracts Related and Other Contracts Contracts NIS-CPI Other Total NIS millions a. Hedging Derivatives (1) Swaps Of which interest rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate b. ALM Derivatives (1)(2) Forward contracts 1,103-10, ,914 Option contracts traded on the Stock Exchange: Options written Options bought - - 1, ,104 Other options contracts: Options written - - 4, ,621 Options bought ,207 Swaps - 9, ,603 Total 1,103 9,603 19, ,541 Of which interest rate swap Contracts in which the banking corporation has agreed to pay a fixed interest rate - 4, ,953 c. Other Derivatives (1) Futures contracts Forward contracts - - 2, ,939 Option contracts traded on the Stock Exchange: Options written ,288-6,159 Options bought , ,047 Other options contracts: Options written Options bought ,938-13,390 Swaps - 1, ,339 Total - 1,805 5,128 23, ,735 Of which interest rate swap Contracts in which the banking corporation has agreed to pay a fixed interest rate d. Credit Derivatives and Spot Swap Foreign Currency Contracts Credit derivatives for which the banking corporation is a beneficiary Spot swap foreign currency contracts - - 2, ,564 Except for credit derivatives and spot swap foreign currency contracts. Derivatives constituting part of the Bank s asset and liabilities management that have not been designated for hedging

272 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 25 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, 2016 Interest Contracts Foreign Currency Shares Related Commodity and Other NIS-CPI Other Contracts Contracts Contracts NIS millions Total a. Hedging Derivatives (1) Gross positive fair value Gross negative fair value b. ALM Derivatives (1)(2) Gross positive fair value Gross negative fair value c. OtherDerivatives (1) Gross positive fair value Gross negative fair value d. Total Gross positive fair value Amounts of fair value offset in the balance sheet Balance sheet balance of assets in respect of derivative instruments Of which: balance sheet balance of assets in respect of derivative instruments not subject to a netting arrangement or similar arrangements Gross negative fair value Amounts of fair value offset in the balance sheet Balance sheet balance of liabilities in respect of derivative instruments Of which: balance sheet balance of liabilities in respect of derivative instruments not subject to a netting arrangement or similar arrangements (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

273 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 25 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 (1) Interest Contracts December 31, 2015 Foreign Currency Shares Commodity Contracts Related and Other Contracts Contracts NIS-CPI Other NIS millions a. Hedging Derivatives (1) Swaps Of which interest rate swap contracts in which the banking corporation has agreed to pay a fixed interest rate b. ALM Derivatives (1)(2) Forward contracts 601-8, ,924 Option contracts traded on the Stock Exchange: Options written Options bought Other options contracts: Options written - - 2, ,771 Options bought - - 2, ,143 Swaps - 7, ,023 Total 601 7,023 13, ,131 Of which interest rate swap Contracts in which the banking corporation has agreed to pay a fixed interest rate - 2, ,430 c. Other Derivatives (1) Futures contracts Forward contracts - - 2, ,508 Option contracts traded on the Stock Exchange: Options written ,801-6,329 Options bought ,750-6,278 Other options contracts: Options written Options bought Swaps Total ,593 12,297-17,388 Of which interest rate swap Contracts in which the banking corporation has agreed to pay a fixed interest rate d. Credit Derivatives and Spot Swap Foreign Currency Contracts Credit derivatives for which the banking corporation is a beneficiary Spot swap foreign currency contracts - - 1, ,613 Except for credit derivatives and spot swap foreign currency contracts. (2) Derivatives constituting part of the Bank s asset and liabilities management that have not been designated for hedging. Total

274 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 25 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, 2015 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 Gross negative fair value b. ALM Derivatives (1)(2) Gross positive fair value Gross negative fair value c. OtherDerivatives (1) Gross positive fair value Gross negative fair value d. Total Gross positive fair value Amounts of fair value offset in the balance sheet Balance sheet balance of assets in respect of derivative instruments Of which: balance sheet balance of assets in respect of derivative instruments not subject to a netting arrangement or similar arrangements Gross negative fair value (3) Amounts of fair value offset in the balance sheet Balance sheet balance of liabilities in respect of derivative instruments Of which: balance sheet balance of liabilities in respect of derivative instruments not subject to a netting arrangement or similar arrangements (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

275 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 25 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 to the Contract on a Consolidated Basis Stock Exchanges NIS millions Dealers/ Banks Brokers Governments and Central Banks Others December 31, 2016 Balance sheet balance of assets in respect of derivative instruments Gross Amounts not Offset in the Balance Sheet: Credit risk mitigation in respect of financial instruments - (165) (165) Net total assets in respect of derivative instruments Off-balance sheet credit risk in respect of derivative instruments (1) Off balance sheet credit risk mitigation - (116) - - (9) (125) Net off balance sheet credit risk in respect of derivative instruments Total credit risk in respect of derivative instruments Balance sheet balance of liabilities in respect of derivative instruments (2) ` Gross Amounts Not Offset in the Balance Sheet: Financial instruments - (165) (165) Net total liabilities in respect of derivative instruments Total (1) (2) 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. Of which: balance sheet balance of derivative instruments standing on their own in the amount of NIS 393 million (December 31, NIS 293 million)

276 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 25 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 to the Contract on a Consolidated Basis Stock Exchanges NIS millions Dealers/ Banks Brokers Governments and Central Banks Others December 31, 2015 Balance sheet balance of assets in respect of derivative instruments Gross Amounts not Offset in the Balance Sheet: Credit risk mitigation in respect of financial instruments - (116) - - (4) (120) Net total assets in respect of derivative instruments Off-balance sheet credit risk in respect of derivative instruments (1) Off balance sheet credit risk mitigation - (71) - - (5) (76) Net off balance sheet credit risk in respect of derivative instruments Total credit risk in respect of derivative instruments Balance sheet balance of liabilities in respect of derivative instruments (2) Gross Amounts not Offset in the Balance Sheet: Financial instruments - (116) - - (4) (120) Net total liabilities in respect of derivative instruments Total (1) (2) 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. Of which: balance sheet balance of derivative instruments standing on their own in the amount of NIS 393 million (December 31, NIS 293 million)

277 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 25 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, 2016 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 ,103 Other 2,692 2,845 2,706 3,656 11,899 Foreign currency contracts 18,606 7,738 1, ,508 Shares related contracts 10, ,837 23,801 Commodities and other contracts Total 32,238 10,736 4,732 16,625 64,331 December 31, 2015 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 Other 285 1,172 4,553 1,814 7,824 Foreign currency contracts 15,015 4, ,646 Shares related contracts 12, ,363 Commodities and other contracts Total 27,634 6,141 4,916 1,822 40,

278 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 26 - Report on Business Segments The Bank reports on supervisory segments according to the definitions set forth by the Supervisor of Banks. The Bank s activities are focused on the following Business Segments: - Households Segment Private individuals other than customers included in Private Banking Segment. - Private Banking Segment Private individuals who manage a financial assets portfolio (including monetary deposits, securities portfolios and other financial assets) of above NIS 3 million. - Small and Negligible Businesses Segment Businesses with a turnover of up to NIS 50 million. - Mid-sized Businesses Segment A business with a turnover greater than NIS 50 million and lower than NIS 250 million. - Large Businesses Segment - Businesses with a turnover of above NIS 250 million. - Institutional Entities Segment Pension funds, study funds, trust funds, ETFs, insurance companies, Stock Exchange members and managers of customer's money. - Financial Management Segment - Includes the trading activity (proprietary), management of assets, liabilities and real investments. - Other Segment Including discontinued activities and activities that can't be attributed to other segments. The main principles that were applied in the division of the results of operations among the various segments are as follows: Interest Income - In the customers focused segments this item includes interest income from credit and interest expenses on deposits attributed directly to the customer. When calculating the income from credit and deposits the relevant transfer price for the average lifespan and the linkage segment is taken into account. In addition, each segment is credited or charged in respect of excess/lack of resources against the Financial Management Segment according to the cost determined. 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 inter alia, by a gap in transfer prices between credits and deposits. 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

279 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 26 - Report on Business Segments (cont d) Provisions 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 identified with a specific segment, are attributed to that segment. The rest of the expenses are attributed to the various segments according to an allocation methodology based on various loading keys which express the relative part of the expense for the segment. Taxes on Income - The provision for tax of the business results of each segment was calculated according to the effective tax rate, with the exception of certain cases which a specific attribution can be made. Balances Balance-sheet balances and balances of managed assets were specifically attributed to the customers. The fixed assets are attributed to the Other Segment

280 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 26 - Supervisory Activity Segments (Cont'd) Reported amounts C. Information Regarding Activity Segments - Consolidated: Activity in Israel Households Segment (4) NIS millions Private Banking Segment Small and negligible Business Segment Mid-sized Business Segment Large Business Segment Institutional Entities For the year ended December 31, 2016 Financial Management Segment Other Segment Total Activity in Israel Interest income from outsiders Interest expenses from outsiders Net interest income: - From outsiders 323 (18) (1) Inter-segment (87) 36 1 (12) (16) Total net interest income Non-interest income: - From outsiders Inter-segment (8) - - Total non-interest income Total income ,057 Provisions (income) in respect of credit losses 39 - (21) (5) Operational and other expenses: - From outsiders Inter-segment (9) - - Total operational and other expenses Profit (loss) before taxes (116) (86) Provision for taxes on the profit (70) (51) Net profit (loss) before the effect of the efficiency plan (46) (35) Effect of the efficiency plan (39) (1) (7) (6) (16) (1) (5) - (75) Net profit (loss) attributed to the shareholders of the Bank after the effect of the efficiency plan (85) (51) (49) Average balance of assets (1) 11, ,832 2,593 6, , ,862 Average balance of credit to the public (1) 11, ,817 2,575 5, ,258 Balance of credit to the public for the end of the reporting period 12, ,459 2,535 5, ,937 Balance of impaired debts Balance of debts in arrears of over 90 days Average balance of liabilities (1) 13,263 3,785 4,143 2,361 6,996 5, ,187 38,470 Of which: average balance of public deposits (1) 12,402 3,775 3,646 1,886 5,960 4, ,627 Balance of public deposits for the end of the reporting period 12,219 3,910 3,769 1,826 6,940 4, ,

281 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 26 - Supervisory Activity Segments (Cont'd) Reported amounts C. Information Regarding Activity Segments Consolidated (Cont'd): Activity in Israel Households Segment (4) NIS millions Private Banking Segment Small and negligible Business Segment Mid-sized Business Segment Large Business Segment Institutional Entities For the year ended December 31, 2016 Financial Management Segment Other Segment Total Activity in Israel Average balance of risk-weighted assets (1), (2) 7, ,973 3,748 7, , ,889 Balance of risk-weighted assets for the end of the reporting date (2) 7, ,793 3,789 6, ,314 1,045 25,486 Average balance of managed assets (1), (3) 6,326 3,680 2,360 1,321 10,607 31, ,295 Division of net interest income: - From profit from credit granting activity From profit from deposit receiving activity Other Total net interest income (1) An average balance will be calculated on the basis of quarter-end balances excluding an average balance of credit to the public and public deposits which is calculated on a daily average basis. (2) Risk-weighted assets as calculated for capital adequacy. (3) Assets under management - including provident assets, study funds, trust funds and securities of customers. (4) Housing loans including purchase groups were included in Household Segment

282 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 26A - Supervisory Activity Segments (Cont'd) Reported amounts C. Information Regarding Activity Segments Consolidated (Cont'd) : Activity in Israel Households Segment (4) NIS millions Private Banking Segment Small and negligible Business Segment Mid-sized Business Segment Large Business Segment Institutional Entities * For the year ended December 31, 2015 Financial Management Segment Other Segment Total Activity in Israel Interest income from outsiders Interest expenses from outsiders Net interest income: - From outsiders 196 (16) Inter-segment (7) (23) 12 (17) - - Total net interest income Non-interest income: - From outsiders Inter-segment (12) - - Total non-interest income Total income Provisions (income) in respect of credit losses 10-4 (19) (100) (2) - - (107) Operational and other expenses: - From outsiders Inter-segment (10) - - Total operational and other expenses Profit (loss) before taxes (96) Provision for taxes on the profit (35) Net profit (loss) attributed to the shareholders of the Bank (61) Average balance of assets (1) 10, ,329 2,685 6,979 1,013 15,370 1,310 40,926 Average balance of credit to the public (1) 10, ,304 2,683 6, ,452 Balance of credit to the public for the end of the reporting period 10, ,337 2,240 5, ,505 Balance of impaired debts Balance of debts in arrears of over 90 days Average balance of liabilities (1) 12,421 3,647 4,015 3,031 5,921 5, ,485 37,739 Of which: average balance of public deposits (1) 11,589 3,634 3,475 2,594 4,840 5, ,473 Balance of public deposits for the end of the reporting period 11,959 4,117 3,337 1,995 6,051 5, ,

283 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 26A - Supervisory Activity Segments (Cont'd) Reported amounts C. Information Regarding Activity Segments Consolidated (Cont'd) : Activity in Israel Households Segment (4) NIS millions Private Banking Segment Small and negligible Business Segment Mid-sized Business Segment Large Business Segment Institutional Entities * For the year ended December 31, 2015 Financial Management Segment Other Segment Total Activity in Israel Average balance of risk-weighted assets (1), (2) 6, ,002 3,373 7, ,681 1,070 25,041 Balance of risk-weighted assets for the end of the reporting period (2) 6, ,005 3,278 7, , ,893 Average balance of managed assets (1), (3) 7,832 4,383 2,559 1,065 9,447 38, ,944 Division of net interest income: - From profit from credit granting activity From profit from deposit receiving activity Other Total net interest income (1) An average balance will be calculated on the basis of quarter-end balances excluding an average balance of credit to the public and public deposits which is calculated on a daily average basis. (2) Risk-weighted assets as calculated for capital adequacy. (3) Assets under management - including provident assets, study funds, trust funds and securities of customers. (4) Housing loans including purchase groups were included in Household Segment. * Reclassified

284 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding 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 Credit to the Public Other Private Year ended December 31, 2016 Banks and Government Commercial Housing Total Total NIS millions Allowance for credit losses as at December 31, Provision (income) for credit losses Accounting write-offs (37) (2) (34) (73) - (73) Recoveries of debts written-off in previous years Net accounting write-offs 4 (1) (18) (15) - (15) Balance of allowance for credit losses as at December 31, Of which: In respect of off-balance sheet credit instruments Credit to the Public Other Private Year ended December 31, 2015 Banks and Government Commercial Housing Total Total NIS millions Allowance for credit losses as at December 31, Provision (income) for credit losses (118) (2) 13 (107) - (107) Accounting write-offs (30) (2) (26) (58) - (58) Recoveries of debts written-off in previous years Net accounting write-offs 54 (1) (8) Balance of allowance for credit losses as at December 31, Of which: In respect of off-balance sheet credit instruments

285 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding 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.) Allowance for credit losses as at December 31, 2013 Credit to the Public Commercial NIS millions Housing Other Private Total Year ended December 31, 2014 Banks and Government Total Provision (income) for credit losses 84 (2) Accounting write-offs (169) (12) (14) (195) - (195) Recoveries of debts written-off in previous years Net accounting write-offs (139) (11) - (150) - (150) Balance of allowance for credit losses as at December 31, 2014 Of which: In respect of off-balance sheet credit instruments (1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding borrowed bonds and securities

286 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding 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: Credit to the Public Commercial Housing NIS millions Other Private Total Year ended December 31, 2016 Banks and Government Recorded Debt Balance of Debts : Examined on an individual basis 11, , ,811 Examined on a collective basis 751 8,432 3,442 12,625-12,625 Of which: Allowance calculated according to the extent of arrears 160 8,410-8,570-8,570 Total debts 11,898 8,439 3,600 23, ,436 Total Allowance for Credit Losses in Respect of Debts: Examined on an individual basis Examined on a collective basis Of which: Allowance calculated according to the extent of arrears 1 * Total allowance for credit losses

287 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding 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 (cont'd): Credit to the Public Other Private Year ended December 31, 2015 Banks and Government Commercial Housing Total Total NIS millions Recorded Debt Balance of Debts : Examined on an individual basis 11, , ,416 Examined on a collective basis 942 7,292 2,608 10,842-10,842 Of which: Allowance calculated according to the extent of arrears 373 7,288-7,661-7,661 Total debts 12,454 7,298 2,753 22, ,258 Allowance for Credit Losses in Respect of Debts: Examined on an individual basis Examined on a collective basis Of which: Allowance calculated according to the extent of arrears 2 * Total allowance for credit losses (1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding borrowed bonds and securities. * Including an allowance beyond required according to the extent of arrears method which was calculated on a collective basis in the amount of NIS 30 million (December 31, 2015 NIS 27 million)

288 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding 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, 2016 Problematic ( 2) Additional Information Unimpaired Debts In Arrears of 90 Days or More (4) In Arrears of 30 to 89 Days (5) Non Problematic Unimpaired Impaired (3) Total NIS millions Borrower Activity in Israel Public Construction and real estate - construction 1, , Construction and real estate - realestate activity Financial services 2, ,475-4 Commercial - other 6, , Total commercial 11, , Private individuals - housing loans 8, (6) 4 8, Private individuals - others 3, , Total public - activity in Israel 23, , Banks in Israel Total activity in Israel 23, , Borrower Activity Abroad Total public activity abroad Banks abroad Total activity abroad Total public 23, , Total banks Total 23, , (1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding borrowed bonds and securities. (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 27.B 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 (December 31, 2015 a negligible amount) were classified as unimpaired problematic debts. (6) Includes a balance of housing loans, in the amount of NIS 8 million (December 31, NIS 8 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.

289 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding 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, 2015 Problematic ( 2) Additional Information Unimpaired Debts In Arrears of 90 Days or More (4) In Arrears of 30 to 89 Days (5) Non Problematic Unimpaired Impaired (3) Total NIS millions Borrower Activity in Israel Public Construction and real estate - construction 1, ,876-4 Construction and real estate - realestate activity Financial services 2, ,960-1 Commercial - other 6, , Total commercial 12, , Private individuals - housing loans 7, (6) - 7, Private individuals - others 2, , Total public - activity in Israel 22, , Banks in Israel Total activity in Israel 22, , Borrower Activity Abroad Total public activity abroad Banks abroad Total activity abroad Total public 22, , Total banks Total 22, , (1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding borrowed bonds and securities. (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 27.B 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 (December 31, 2015 a negligible amount) were classified as unimpaired problematic debts. (6) Includes a balance of housing loans, in the amount of NIS 8 million (December 31, NIS 8 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.

290 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding 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: Balance (2) of Impaired Debts for which an Individual Allowance for Credit Losses Exists NIS millions Balance of Individual Allowance for Credit Losses Balance (2) of Impaired Debts for which there is no Individual Allowance for Credit Losses Total Balance (2) of Impaired Debts December 31, 2016 Balance of Contractual Principal of Impaired Debts Borrower Activity in Israel Public - Commercial Construction and real estate - construction ,269 Construction and real-estate real estate activity Financial services Commercial - other ,668 Total commercial ,515 Private individuals - housing loans Private individuals - others Total ,870 Of which: Measured at the present value of cash flows Debts in troubled debts restructuring (1) Credit to the public, credit to the governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding borrowed bonds and securities. (2) Recorded debt balance. (3) There are no problematic debts at the Bank in the 'credit to the government' and the 'deposits with banks' balances

291 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding 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.): Balance (2) of Impaired Debts for which an Individual Allowance for Credit Losses Exists NIS millions Balance of Individual Allowance for Credit Losses Balance (2) of Impaired Debts for which there is no Individual Allowance for Credit Losses Total Balance (2) of Impaired Debts December 31, 2015 Balance of Contractual Principal of Impaired Debts Borrower Activity in Israel Public - Commercial Construction and real estate - construction ,132 Construction and real-estate real estate activity Financial services Commercial - other ,671 Total commercial ,392 Private individuals - housing loans Private individuals - others Total ,673 Of which: Measured at the present value of cash flows Debts in troubled debts restructuring (1) Credit to the public, credit to the governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding borrowed bonds and securities. (2) Recorded debt balance. (3) There are no problematic debts at the Bank in the 'credit to the government' and the 'deposits with banks' balances

292 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding 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 Average Balance of Impaired Debts (2) For the year ended December 31, 2016 Of which: Recorded on a Cash Basis Recorded Interest Income (3) Borrower Activity in Israel Public - Commercial Construction and real estate - construction Construction and real estate - real estate activity Financial services Commercial - other Total commercial Private Individuals housing loans Private individuals - others Total 217 (4) 2 2 Average Balance of Impaired Debts (2) For the year ended December 31, 2015 Of which: Recorded Interest Recorded on a Income (3) Cash Basis Borrower Activity in Israel Public - Commercial Construction and real estate - construction Construction and real estate - real estate activity Financial services Commercial - other Total commercial Private Individuals housing loans Private individuals - others Total 201 (4) 3 3 (1) Credit to the public, credit to the governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding borrowed bonds and securities. (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, NIS 34 million, December 31, NIS 27 million). (5) The Bank has no problematic debt in the 'credit to the government' and 'deposits with banks' balances

293 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding 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 (cont'd) Average Balance of Impaired Debts (2) For the year ended December 31, 2014 Of which: Recorded Interest Recorded on a Income (3) Cash Basis Borrower Activity in Israel Public - Commercial Construction and real estate - construction Construction and real estate - real estate activity Financial services Commercial - other Total commercial Private Individuals - housing loans Private individuals - others Total 499 (4) 3 3 (1) Credit to the public, credit to the governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding borrowed bonds and securities. (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, NIS 34 million, December 31, NIS 27 million). (5) The Bank has no problematic debt in the 'credit to the government' and 'deposits with banks' balances

294 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding Credit risk, Credit to the Public and Allowance for Credit Losses (cont'd) Reported Amounts Consolidated Composition: ( 1) B. Debts, (cont'd) 2. Additional Information Regarding Impaired Debts (cont'd.) 2.3 Restructuring of Problematic Debts: Recorded Debt Balance Not Accruing Interest Income NIS millions Accruing in Arrears of 90 Days or More (2) Accruing in Arrears of 30 to 89 Days (2) December 31, 2016 Accruing not in Arrears (2) Total (3) Borrower Activity in Israel Pubic - Commercial Construction and real-estate - construction Construction and real estate - real estate activity Financial services Commercial - other Total commercial Private individuals - housing loans Private individuals - others Total Recorded Debt Balance Not Accruing Interest Income NIS millions Accruing in Arrears of 90 Days or More (2) Accruing in Arrears of 30 to 89 Days (2) December 31, 2015 Accruing not in Arrears (2) Total (3) Borrower Activity in Israel Pubic - Commercial Construction and real-estate - construction Construction and real estate - real estate activity Financial services Commercial - other Total commercial Private individuals - housing loans Private individuals - others Total (1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding borrowed bonds and securities. (2) Accruing interest income. (3) Included in impaired debts. (4) The Bank has no problematic debt in the 'credit to the government' and 'deposits with banks' balances.

295 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding 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.) 2.4 Restructuring of Problematic Debts: Reorganizations Made in the Reporting Year Number of contracts Recorded debt balance before reorganization Recorded debt balance after reorganization Number of contracts Recorded debt balance before reorganization Recorded debt balance after reorganization Number of contracts Recorded debt balance before reorganization Recorded debt balance after reorganization NIS millions NIS millions NIS millions Borrower Activity in Israel Pubic - Commercial Construction and real-estate - construction Construction and real estate - real estate activities Financial services Commercial - other Total commercial Private individuals - housing loans Private individuals - others Total (1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding borrowed bonds and securities. (2) The Bank has no problematic debt in the 'credit to the government' and 'deposits with banks' balances

296 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding Credit risk, Credit to the Public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition: (1),(2) B. Debts (cont'd.) 2. Additional Information Regarding Impaired Debts (cont'd.) 2.4 Restructuring of Problematic Debts (cont'd.): Failed Reorganizations (3) Number of Contracts Recorded Debt Balance after reorganization Number of Contracts Recorded Debt Balance after reorganization Number of Contracts Recorded Debt Balance after reorganization NIS millions NIS millions NIS millions Borrower Activity in Israel Pubic - Commercial Construction and real-estate - construction Construction and real estate - real estate activity Financial services Commercial - other Total commercial Private individuals - housing loans Private individuals - others Total (1) Credit to the public, credit to governments and deposits with banks (excluding deposits with the Bank of Israel) and other debts excluding borrowed bonds and securities. (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

297 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding Credit risk, Credit to the Public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition: (1) B. Debts (cont'd.) 3. Additional Information Regarding Housing Loans (3) Year-End Balances by Financing Ratio (LTV) (2) Repayment Type, and Interest Type: December 31, 2016 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% 7, , over 60% 1, Second Lien or Without Lien Total 8, , *December 31, 2015 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, , over 60% 1, Second Lien or Without Lien Total 7, , (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 reporting directive no. 876 of the Supervisor of Banks. The LTV ratio is an additional indication for the Bank to assess the customer's risk when granting him credit. (3) Not including acquisition groups. *Reclassified

298 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding 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, 2016 *December 31, 2015 Credit Limit Per Borrower (in Thousands of NIS) Number of Off- Balance- Sheet Credit Risk Number of Off- Balance- Sheet Credit Risk Borrowers (2) Credit (1) (1),(3) Borrowers (2) Credit (1) (1), (3) From To NIS millions NIS millions , , , , , , ,727 1, ,737 1, , , ,819 1, , ,646 2, ,203 2, ,200 4,972 3, ,353 3, ,200 2,000 1,025 1, , ,000 4, , , ,000 8, ,000 20, ,708 1, ,708 1,611 20,000 40, ,697 1, ,590 1,363 40, , ,975 3, ,431 4, , , , , , , ,477 24,017 10, ,467 22,580 12,420 * Reclassified. (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 indebtedness of a borrower and with the addition of the fair value of derivative instruments in the amount of NIS 80 million and NIS 75 million for December 31, 2016 and December 31, 2015, 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. D. Off-Balance-Sheet Financial Instruments: Contracts' Balances or Their Year-End Face Amounts Consolidated and the Bank December 31 December NIS millions Balance of Contracts (1) Balance of Allowance for Credit losses Balance of Contracts (1) Balance of Allowance for Credit Losses Transactions in Which the Balance Reflects Credit Risk: Documentary credit Guarantees for securing credit Guarantees for dwelling purchasers 2, ,228 2 Other liabilities and guarantees 1, ,010 5 Unutilized credit card limits 1, Unutilized revolving credit and other on-call limits 1, ,796 3 Irrevocable credit approvals not yet utilized 4, , Commitments to issue guarantees (1) The contract balances or their face amount for the end of the period prior to the effect of allowance for credit losses

299 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 27 - Additional Information Regarding Credit risk, Credit to the Public and Allowance for Credit Losses (cont'd.) Reported Amounts Consolidated Composition: E. Information Regarding Purchases of Debts: The following table details the consideration paid for purchases of loans: NIS millions Private Individuals - Others Loans purchased* 1, * For further information regarding loan purchase transactions See Note 23.C.7 above

300 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 28 Statement on Assets and Liabilities According to Linkage Basis Reported amounts A. Consolidated - Composition (1) : Israeli Currency Foreign Currency (2) December 31, 2016 Linked to the CPI USD Euro Other Non-Monetary Items (3) Unlinked Total NIS millions Assets Cash on hand and deposits with banks 3, ,901 Securities 8,213 1,569 1, ,584 Borrowed Securities Net, credit to the public (4) 17,252 4,287 1, ,684 Credit to the government Buildings and equipment Assets in respect of derivative instruments Other assets Assets held for sale Total assets 30,059 5,865 3, ,988 Liabilities Deposits from the public 23,895 1,608 5,432 1, ,756 Deposits from banks Subordinated notes and bonds 1,337 2, ,395 Liabilities in respect of derivative instruments Other liabilities 1, ,928 Total liabilities 26,583 4,171 5,737 1, ,646 Difference 3,476 1,694 (2,006) (964) (363) 505 2,342 Effect of Non - Hedging Derivative Instruments: Derivative instruments (excluding options) (2,869) (295) 1, Net, in the money options (in underlying asset terms) (55) Net, out of the money options (in underlying asset terms) (70) (51) - Total 482 1,399 (15) (26) (3) Net, in the money options (capitalized stated amount) (15) - (37) 52 - Net, out of the money options (capitalized stated amount) (327) - (1) See Note 1.A. (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

301 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 28 - Statement on Assets and Liabilities According to Linkage Basis (cont'd.) Reported Amounts A. Consolidated - Composition (1) : Israeli Currency Foreign Currency (2) December 31, 2015 Linked to the CPI USD Euro Other Non-Monetary Items (3) Unlinked Total NIS millions Assets Cash on hand and deposits with banks 6, ,668 Securities 6,845 1,555 1, ,371 Borrowed Securities Net, credit to the public (4) 15,949 4,135 1, ,315 Buildings and equipment (5) Assets in respect of derivative instruments Other assets (5) Assets held for sale Total assets 29,678 5,699 4, ,888 Liabilities Deposits from the public 22,482 2,090 5,910 1, ,466 Deposits from banks Deposits from Government Subordinated notes and bonds 1,371 1, ,179 Liabilities in respect of derivative instruments Other liabilities 1, ,063 Total liabilities 25,753 4,260 6,088 1, ,485 Difference 3,925 1,439 (1,964) (1,167) (322) 492 2,403 Effect of Non - Hedging Derivative Instruments: Derivative instruments (excluding options) (3,376) (99) 1,943 1, Net, in the money options (in underlying asset terms) (56) - Net, out of the money options (in underlying asset terms) 66 - (75) 8 1 Total 634 1,340 (59) (12) 8 Net, in the money options (capitalized stated amount) (90) - Net, out of the money options (capitalized stated amount) (175) (496) 7 (1) See Note 1.A. (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. (5) Restated in light of the retroactive implementation of the circular of the Supervisor of Banks regarding the reporting of banking corporations according to general accepted accounting principles on intangible assets, see Note 1.D.2 to the financial statements.

302 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 29 - Assets and Liabilities According to Linkage Basis and Maturity Date (1) Reported Amounts A. Consolidated - Composition (2) : December 31, 2016 Future Expected Contractual Cash Flows Balance-sheet balance (4) 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 7,722 3,605 7,103 3,156 2,518 3,225 2,698 4,742 4, , , % Liabilities 18,448 2,329 6,263 1,453 1, , , % Difference (10,726) 1, ,703 1,473 3,004 2,440 3,887 4, , ,292 Derivative instruments (excluding options) (1,220) (590) (633) (574) (9) (9) (9) (124) - - (3,168) - (3,168) Options (in terms of the underlying asset) (31) 13 (108) (116) - (116) Difference after effect of derivative instruments (11,977) ,139 1,464 2,995 2,431 3,763 4, , ,008 Foreign Currency (3) Assets , , , % Liabilities 5,296 1, ,535-7, % Difference (4,432) (677) (314) , (2,546) 23 (3,455) Of which: difference in USD (3,489) (993) (262) ,334 - (2,081) (5) (2,141) Derivative instruments (excluding options) 1, ,168-3,168 Options (in terms of the underlying asset) 31 (13) 108 (10) Difference after effect of derivative instruments (3,181) (100) , (171) Total Assets 8,586 4,189 7,653 3,350 2,736 3,478 2,918 5,514 5, , , % Liabilities 23,744 3,590 7,127 1,480 1, , , % Difference (15,158) ,870 1,670 3,242 2,649 4,624 5, , ,837 Of which: Credit to the public 3,787 2,818 3,636 2,870 2,332 1,687 1,277 4,099 4, , , % Of which: Deposits of the public 22,973 3,320 3,713 1, ,779-32, % See notes below

303 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 29 - Assets and Liabilities According to Linkage Basis and Maturity Date (1) (cont'd.) Reported Amounts A. Consolidated - Composition (2) : December 31, 2015 Future Expected Contractual Cash Flows Balance-sheet balance (4) 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 Total Assets (7) 10,795 3,094 8,246 4,068 2,633 2,084 2,136 5,940 3, , , % Liabilities (7) 22,771 4,805 4,901 1,598 2, , , % Difference (11,976) (1,711) 3,345 2,470 (50) 1,667 1,893 4,975 3, , ,911 Of which: Credit to the public 3,726 2,635 4,058 2,506 1,922 1,592 1,107 3,571 3, , , % Of which: Deposits of the public 21,611 4,573 4, ,504-32, % (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. (3) Not including Israeli currency linked to foreign currency. (4) As included in Note No. 28 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 202 million (December 31, 2015 NIS 266 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

304 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 30A - Balances and Fair Value Estimations of Financial Instruments Reported Amounts A. Balances on a Consolidated Basis December 31, 2016 Balance Fair Value* Sheet Value Level 1 Level 2 Level 3 Total NIS millions Financial Assets Cash on hand and deposits with banks 3,901 1,726-2,175 3,901 Securities (1) 11,584 9,622 1,761 (2) ,584 Borrowed securities Net credit to the public 23, ,481 23,416 Credit to the government Assets in respect of derivative instruments Other financial assets Total financial assets (3) 40,350 13,076 1,991 25,015 40,082 Financial Liabilities Deposits from the public 32, ,014 32,814 Deposits from banks Deposits from the Government Subordinated notes and bonds 3,395 3, ,514 Liabilities in respect of derivative instruments Other financial liabilities 1, ,275 Total financial liabilities (3) 37,993 5, ,737 38,170 December 31, 2015 Balance Fair Value* Sheet Value Level 1 Level 2 Level 3 Total NIS millions Financial Assets Cash on hand and deposits with banks 6,668 2,027-4,641 6,668 Securities (1) 10,371 8,196 1,925 (2) ,371 Borrowed securities Net credit to the public 22, ,317 22,256 Credit to the government Assets in respect of derivative instruments Other financial assets Total financial assets (3) 40,271 11,762 2,062 26,388 40,212 Financial Liabilities Deposits from the public 32, ,641 32,548 Deposits from banks Deposits from the Government Subordinated notes and bonds 3,179 3, ,321 Liabilities in respect of derivative instruments Other financial liabilities 1,554 1, ,554 Total financial liabilities (3) 37,976 5, ,599 38,200 * 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 12. (2) Shares and securities, which have no available fair value and are stated at cost, amount to NIS 80 million on December 31, 2016 (December 31, 2015 NIS 66 million). (3) From this: Assets totaled NIS 20,404 million (December 31, 2015 NIS 15,736 million), Liabilities totaled NIS 15,824 million (December 31, 2015 NIS 15,384 million) 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 30.B-30.D

305 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 30A - 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 30B. 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 a future cash flow 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 discount 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 the effective interest rates at the balancesheet 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 balancesheet balance and fair-values balances may not be realized, because in the majority of cases the Bank may hold the financial instrument 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 Cash on Hand - Balance-sheet balance is the fair value. 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. 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 30.B. 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 calculated. Such receipts were capitalized using interest rates at which the Bank executed similar transactions close to the balance-sheet date

306 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 30A - 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.) 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 calculated 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 calculated after deduction of the allowance 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 has a negligible effect on the estimated fair value of the problematic debts as at December 31, Deposits from the Public, from Banks and from the Government - Using the capitalization of future cash flows method based on the interest rate with which the Bank recruits similar deposits on the reporting date. 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 reporting date. Tradable Subordinated Notes - Based on market value in the Stock Exchange. Off-Balance-Sheet Financial Instruments in which 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. 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 activity which take into account the risks inherent in the particular financial instrument (market risk, credit risk, etc.) See also Note

307 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 30B -Items Measured at Fair Value in the Balance Sheet Reported Amounts Balances on a Consolidated Basis A. Items Measured at Fair Value on a Recurrent Basis Fair-Value Measurements Using Prices Quoted in an Active Market (Level 1) NIS millions Other Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) As at December 31, 2016 Balance Sheet Balance Assets Deposits with banks Credit to the public (1) Security Available for Sale: Bonds of the Israeli government 6, ,151 Bonds of foreign governments Bonds of financial institutions in Israel Bonds of foreign financial institutions Asset backed securities (ABS) Bonds of others in Israel Bonds of foreign others Shares (2) Securities Held for Trading: Bonds of the Israeli government 2, ,091 Bonds of foreign governments Bonds of financial institutions in Israel Bonds of others in Israel Bonds of foreign others Shares Assets in Respect of Derivatives Instruments: NIS-CPI contracts Other interest contracts Foreign-currency contracts Share contracts Assets in respect of activity in the Maof market Total Assets 10,820 1, ,960 Liabilities Deposits from the public (1) Liabilities in Respect of Derivate Instruments: NIS-CPI contracts Other interest contracts Foreign-currency contracts Share contracts Liabilities in respect of activity in the Maof market Other liabilities (3) Total Liabilities 1, ,896 (1) Lending of tradable securities. (2) Shares and securities for which no fair value is available, which are presented at cost total NIS 80 million (December 31, NIS 66 million). (3) Short sale of securities

308 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 30B Items Measured at Fair Value in the Balance Sheet (Cont'd) Reported Amounts Balances on a Consolidated Basis A. Items Measured at Fair Value on a Recurrent Basis Fair-Value Measurements Using Prices Quoted in an Active Market (Level 1) NIS millions Other Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) As at December 31, 2015 Balance Sheet Balance Assets Deposits with banks Credit to the public (1) Security Available for Sale: Bonds of the Israeli government 4, ,197 Bonds of foreign governments - 1,021-1,021 Bonds of financial institutions in Israel Bonds of foreign financial institutions Asset backed securities (ABS) Bonds of others in Israel Bonds of foreign others Shares (2) Securities Held for Trading: Bonds of the Israeli government 2, ,160 Bonds of foreign governments Bonds of financial institutions in Israel Bonds of others in Israel Bonds of foreign others Shares Assets in Respect of Derivatives Instruments: NIS-CPI contracts Other interest contracts Foreign-currency contracts Share contracts Assets in respect of activity in the Maof market Total Assets 9,442 2, ,721 Liabilities Deposits from the public (1) Liabilities in Respect of Derivate Instrument: NIS-CPI contracts Other interest contracts Foreign-currency contracts Share contracts Liabilities in respect of activity in the Maof market Other liabilities (3) Total Liabilities 2, ,220 (1) Lending of tradable securities. (2) Shares and securities for which no fair value is available, which are presented at cost total NIS 80 million (December 31, NIS 66 million). (3) Short sale of securities. 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 78 million (December 31, 2015 NIS 101 million) and fair value is ranked at level 3.

309 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 30C - Changes in Items Measured at Fair Value on a Recurrent Basis Included in Level 3 Reported Amounts Balances on a Consolidated Basis Fair Value as at December 31, 2015 Net Profit (Losses) Realized and Non-Realized and Included in: Profit and Loss Statement Other Comprehensive Income in Equity Acquisitions and Issuances Sales and Settlement Transfer to Level 3 (3) Transfer from Level 3 (3) Year ended December 31, 2016 Fair Value as at December 31, 2016 Unrealized Profit (Losses) in Respect of Instruments Held as at December 31, 2016 NIS millions Assets Securities Available for Sale: (1) Bonds of the Israeli government (2) Bonds of foreign financial institutions 79 - (1) - (78) 2-2 (2) Bonds of others in Israel 83 1 (3) - (11) 60 (48) 82 (5) Bonds of foreign others Assets in Respect of Derivative Instruments (2) NIS-CPI contracts (4) Foreign currency contracts (24) Share contracts (5) Total Assets (3) 23 (124) 66 (48) Liabilities Liabilities in Respect of Derivative Instruments (2) NIS-CPI contracts (2) Share contracts 8 (3) - - (5) Total Liabilities 11 (3) - - (7) (1) (2) (3) 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. Included in the Profit and Loss Statement, under the item "Non-interest financing income". 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

310 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 30C - 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, 2015 Fair Value as at December 31, 2014 NIS millions Net Profit (Losses) Realized and Non-Realized and Included in: Profit and Loss Statement Other Comprehensive Income in Equity Acquisitions and Issuances Sales and Extinguishment Transfer to Level 3 (3) Transfer from Level 3 (3) Fair Value as at December 31, 2015 Unrealized Profit (Losses) in Respect of Instruments Held as at December 31, 2015 Assets Securities Available for Sale: (1) Bonds of the Israeli government Bonds of foreign financial institutions 79 2 (1) - (1) Bonds of others in Israel (3) (3) Bonds of foreign others (4) - - Assets in Respect of Derivative Instruments (2) NIS-CPI contracts (11) Other interest contracts (1) Foreign currency contracts (130) Share contracts Total Assets (1) 19 (146) 103 (4) Liabilities Liabilities in respect of derivative instruments (2) NIS-CPI contracts Foreign currency contracts (17) Share contracts Total Liabilities (17) (1) (2) (3) 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. Included in the Profit and Loss Statement, under the item "Non-interest financing income". 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

311 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 30D - Quantitative Information Regarding Items Measured at Fair Value Included in Level 3 Reported Amounts 1. Item Measured at Fair Value on a Recurrent Basis Consolidated: Assets Securities Available for Sale: Bonds of foreign financial institutions Bonds others in Israel Assets in Respect of Derivatives Instruments: NIS - CPI contracts Foreign currency contracts Assessment Technique Capitalization of cash flow Capitalization of cash flow Capitalization of cash flow Discounted cash flow/ option pricing model Unobservable Inputs Capitalization rate Price Capitalization rate Capitalization rate Counter party credit risk (CVA) Counter party credit risk (CVA) Fair Value in NIS Millions Range of Data* % 0.98%-(0.30%) 0.08%-0.58% 0.08%-10.03% December 31, 2016 Weighted Average % 0.13% 0.42% 1.20% Total Assets ** 87 Liabilities Liabilities in Respect of Derivative Instruments: NIS - CPI contracts Share contracts Total liabilities ** Capitalized cash flow Option pricing model Capitalization rate Standard deviation %-(0.40%) (0.07%) * 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, on the assets side, there are untradeable bonds and contracts for shares in the amount of NIS 62 million (as at December 31, 2015 NIS 106 million) 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. On the liabilities side, there are no balances which were evaluated by an external quoting factor as at December 31, 2016 (as at December 31, 2015 NIS 5 million)

312 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 30D - Quantitative Information Regarding Items Measured at Fair Value Included in Level 3 (Cont'd) 1. Item Measured at Fair Value on a Recurrent Basis (cont'd) Assets Securities Available for Sale: Bonds of foreign financial institutions Bonds others in Israel Assessment Technique Capitalization of cash flow Unobservable Inputs Capitalization rate Price Fair Value in NIS Millions 79 4 Range of Data* 1.4% December 31, 2015 Weighted Average 1.40% 31.9 Assets in Respect of Derivatives Instruments: NIS - CPI contracts Capitalization of cash flow Capitalization rate Counter party credit risk (CVA) 4 0.3% - 0.4% 0.4% Foreign currency contracts Capitalization of cash flow Option pricing model Counter party credit risk (CVA) %-11. 7% 2.8% Total Assets ** 111 Liabilities Liabilities in Respect of Derivative Instruments: NIS - CPI contracts Share contracts Total Liabilities ** Capitalization of cash flow Option pricing model Discount rate Standard deviation (0.6%) % 31.2% (0.2%) 31.2% * 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, on the assets side, there are untradeable bonds and contracts for shares in the amount of NIS 62 million (as at December 31, 2015 NIS 106 million) 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. On the liabilities side, there are no balances, which were evaluated by an external quoting factor as at December 31, 2016 (as at December 31, 2015 NIS 5 million)

313 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 30D - Quantitative Information Regarding Items Measured at Fair Value Included in Level 3 (Cont'd) Reported Amounts 2. Item Measured at Fair Value on a Non-Recurring Basis Assets Assessment Technique December 31, 2016 Fair value NIS million December 31, 2015 Impaired credit whose collection is contingent upon collateral Evaluations including coefficients for quick realization 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 riskfree 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 an assessment of the probability of a weighted failure of the state of Israel and the issuing bank. The significant unobservable data, which was used to measure fair value of other bonds in Israel, is a price and capitalization rate, which embody 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

314 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 31 - Interested and Related Parties of the Banking Corporation and its Subsidiaries Reported Amounts A. Balances with Related Parties Consolidated: Interested Parties December 31, 2016 Shareholders Senior Officers (3) Others (4) Interested Parties at Time Controlling Shareholders (1) Others (2) of Transaction 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 sheet during the sheet during the sheet during the sheet during the sheet during the date year (5) date year (5) date year (5) date year (5) date year (5) NIS millions Assets Securities (6) Credit to the public Allowance for credit losses (10) 1 1 (9) 12 (9) Net credit to public Assets in respect of derivative instruments Liabilities Deposits from the public Deposits from banks Liabilities in respect of derivative instruments Other liabilities Subordinated notes Shares (included in shareholders' equity) (7) 1,115 1, Credit risk in off- balance-sheet financial instruments (8) (1) Shareholders, controlling shareholders and their relatives. (2) Including anyone who holds 5% or more of the means of control of the banking corporation, and anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (3) Senior Officers including their close family members.. (4) 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. (5) Based on all month-end balances. (6) Details regarding these items are included also in Note 12 "Securities". (7) Holdings of the Banks' capital by interested parties and related parties. (8) Credit risk in off-balance-sheet financial instruments as calculated for the purpose of the indebtedness limitations of a borrower. (9) Including classification of a related party as a problematic debt. (10) Collective allowance for credit losses

315 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 31 - Interested and Related Parties of the Banking Corporation and its Subsidiaries (cont'd) Reported Amounts A. Balances with Related Parties (cont'd) Consolidated: Interested Parties December 31, 2015 Shareholders Senior Officers (3) Others (4) Interested Parties at Time Controlling Shareholders (1) Others (2) of Transaction 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 sheet during the sheet during the sheet during the sheet during the sheet during the date year (5) date year (5) date year (5) date year (5) date year (5) NIS millions Assets Deposits with banks Securities (6) Credit to the public Allowance for credit losses (9) Net credit to public Investments in investee companies (6) Assets in respect of derivative instruments Other assets Liabilities Deposits from the public Deposits from banks Liabilities in respect of derivative instruments Other liabilities Subordinated notes Shares (included in shareholders' equity) (7) 1,148 1, Credit risk in off- balance-sheet - - financial instruments (8) (1) Shareholders, controlling shareholders and their relatives. (2) Including anyone who holds 5% or more of the means of control of the banking corporation, and anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (3) Senior Officers including their close family members.. (4) 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. (5) Based on all month-end balances. (6) Details regarding these items are included also in Note 12 "Securities" and Note 14 "Investments in investee companies". (7) Holdings of the Banks' capital by interested parties and related parties. (8) Credit risk in off-balance-sheet financial instruments as calculated for the purpose of the indebtedness limitations of a borrower. (9) Collective allowance for credit losses

316 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 31 - Interested and related Parties of the Banking Corporation and its Subsidiaries (cont'd) Reported Amounts B. Summarized Results of Transactions with Interested and Related Parties: Consolidated: Interested Parties Year ended December 31, 2016 Related Parties Held by the Bank Shareholders Controlling Senior Investee Shareholders (1) Others (2) Officers (3) Others (4) Companies NIS millions Net interest income (expenses) (5) (1) - Provisions in respect of credit losses Non-interest income (19) - Operating and other expenses (6) - - (21) (2) - Total 4 13 (21) (21) - Interested Parties Year ended December 31, 2015 Related Parties Held by the Bank Shareholders Controlling Senior Investee Shareholders (1) Others (2) Officers (3) Others (4) Companies NIS millions Net interest income (expenses) (5) (2) - Provisions in respect of credit losses Non-interest income Operating and other expenses (6) - - (22) (3) - Total 2 1 (22) (5) -. (1) Shareholders, controlling shareholders and their relatives (2) Including anyone who holds 5% or more of the means of control of the banking corporation, and anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (3) Senior Officers including their close family members. (4) Corporations, that a person or corporation included in one of the interested party groups, holds 25% or more of their issued share capital or voting power or may appoint 25% or more of their directors. (5) See C. below. (6) See D. below

317 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 31 - Interested and Related Parties of the Banking Corporation and its Subsidiaries (cont'd) Reported Amounts B. Summarized Results of Transactions with Interested and Related Parties (cont'd): Consolidated: Interested Parties Year ended December 31, 2014 Related Parties Held by the Bank Shareholders Controlling Senior Investee Shareholders (1) Others (2) Officers (3) Others (4) Companies NIS millions Net interest income (expenses) (5) (5) - Income in respect of credit losses Non-interest income Operating and other expenses (6) - - (20) (3) - Total 3 3 (20) (5) -. (1) Shareholders, controlling shareholders and their relatives (2) Including anyone who holds 5% or more of the means of control of the banking corporation, and anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (3) Senior Officers including their close family members. (4) Corporations, that a person or corporation included in one of the interested party groups, holds 25% or more of their issued share capital or voting power or may appoint 25% or more of their directors. (5) See C. below. (6) See D. below. C. Net Interest Income from Transactions of the Bank and its Subsidiaries with Interested and Related Parties Year ended December NIS millions In respect of Assets From credit to the public In respect of Liabilities On deposits from the public - (2) (1) On subordinated notes (4) (6) (8) Total net interest income 5 1 (1)

318 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 31 - Interested and Related Parties of the Banking Corporation and its Subsidiaries (cont'd) Reported Amounts D. Remuneration and Any Other Benefit to Interested Parties: Consolidated: Year ended December 31, 2016 Interested Parties at the Shareholders Senior Officers (3) Time of the Transaction Others (4) Controlling Shareholders (1) Others (2) 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 ** Directors who are not Bank employees -* Other interested parties who are not Bank employees Total -* Year ended December 31, 2015 Interested Parties at the Shareholders Senior Officers (3) Time of the Transaction Others (4) Controlling Shareholders (1) Others (2) 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 ** Directors who are not Bank employees * Other interested parties who are not Bank employees * Total * * Less than NIS 500 thousand. ** Constitutes salary and benefits, from this: short-term employee benefits: NIS 14 million (in 2015 NIS 16 million and in 2014 NIS 12 million), benefits upon termination of employment: NIS 4 million (in 2015 NIS 3 million and in 2014 NIS 5 million). (1) Shareholders, controlling shareholders and their relatives (2) Including anyone who holds 5% or more of the means of control of the banking corporation, and anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (3) Senior Officers including their close family members. (4) Corporations, that a person or corporation included in one of the interested party groups, controls them, hold 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

319 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 31 - Interested and Related Parties of the Banking Corporation and its Subsidiaries (cont'd) Reported Amounts D. Remuneration and Any Other Benefit to Interested Parties (cont'd): Consolidated: Year ended December 31, 2014 Interested Parties at the Shareholders Senior Officers (3) Time of the Transaction Others (4) Controlling Shareholders (1) Others (2) 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 ** Directors who are not Bank employees * Other interested parties who are not Bank employees * Total * * Less than NIS 500 thousand. ** Constitutes salary and benefits, from this: short-term employee benefits: NIS 14 million (in 2015 NIS 16 million and in 2014 NIS 12 million), benefits upon termination of employment: NIS 4 million (in 2015 NIS 3 million and in 2014 NIS 5 million). (1) Shareholders, controlling shareholders and their relatives (2) Including anyone who holds 5% or more of the means of control of the banking corporation, and anyone who is entitled to appoint one or more of the Banks' directors or the Banks' CEO. (3) Senior Officers including their close family members. (4) Corporations, that a person or corporation included in one of the interested party groups, controls them, hold 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

320 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 31 - Interested and Related Parties of the Banking Corporation and its Subsidiaries (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 meeting 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 meeting 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 the Board of Directors' 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 of Directors' 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), 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

321 NOTES TO THE FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 Note 31 - Interested and Related Parties of the Banking Corporation and its Subsidiaries (cont'd) E. Further Details (Cont'd): 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 meeting 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. Remuneration for participation in meetings shall be paid to Mr. Manor for participation in meetings of the Board of Directors and of the Board of Directors' 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, Regarding the communication to purchase a Directors & Officers insurance policy (D&O) see Note 23.C Regarding the approval of the general meeting of the Banks' shareholders' for the indemnification letter for Directors & Officers (D&O) - see Note 23.C.11 and 23.C Regarding the agreements of the Chairman of the Board of Directors and the Banks' CEO - see Notes 21.F.(2)) and 21.F.(3)

322 Union Bank of Israel Ltd. CORPORATE GOVERNANCE, AUDIT, ADDITIONAL DETAILS REGARDING THE BUSINESS OF THE BANKING CORPORATION AND MANAGEMENT THEREOF December 31,

323 Table of Contents Corporate Governance, Audit, Additional Details Regarding the Business of the Banking Corporation and Management Thereof Corporate Governance and Audit 324 The Board of Directors 324 Members of Management and Senior Officers 341 Disclosure Regarding the Internal Auditor 347 Professional Fees for Auditors 351 Disclosure Regarding the Process of Approval of the Financial Statements 352 Salary of Senior Officers and Compensation for Interested Parties 354 Transactions with Controlling Shareholders 362 Additional Details Regarding the Business of the Banking Corporation and Management Thereof 368 Diagram of the Bank's principal Investee Companies 368 Controlling Interests in the Bank 369 Investments in the Bank s Capital and Transactions in its Shares 369 Fixed Assets and Facilities 375 Activity with Overseas Entities 378 Human Capital 379 Material Agreements 382 Licenses, Permits and Approvals 384 Legislative Developments 386 The Ranking of the Bank 402 Community activity and Donations 403 Supervisory Activity Segments Additional Information

324 Corporate Governance and Audit The Board of Directors 1. Name of Director: Mr. Zeev Abeles, Chairman of the Banks' Board of Directors Identification No.: Date of Birth: March 8, 1947 Address for court documents: Citizenship: Role: Membership in committees of the Board of Directors: External director under the Proper Conduct of Business Directives and/or under the provisions of the Companies Law: Independent director under the provisions of the Companies Law: Has an accounting and financial expertise or a professional qualification: Employee of the Bank, its subsidiary, a related company or an interested party: The day he began serving as a director of the Bank: Education: Sokolov 15, Raanana Israeli Chairman of the Board of Directors Chairman of the following committees of the Board of Directors: Board of Directors' Credit Committee; Urgent Credit Approval Committee; Credit to the Diamond Industry Committee; Risk Management Committee; Budgetary Follow-up Committee; Computerization Committee; and the Non-Financial Investments Committee. No No Has accounting and financial expertise. Employed at the corporation as Chairman of the Board of Directors. November 1, 1999 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 and other corporations in which he serves as a director or officer: A family member of an interested party of the Bank: A director that the Bank sees as 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"): 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.; Chairman of the Administrative Board of the Open University (voluntarily). Former director of Melisron Ltd. and Tel Aviv-Jaffa Economic Development Authority Ltd. No Yes

325 2. Name of Director: Mr. Izaac Manor Identification No.: Date of Birth: March 17, 1941 Address for court documents: Citizenship: Role: Membership in committees of the Board of Directors: External director under the Proper Conduct of Business Directives and/or under the provisions of the Companies Law: Independent director under the provisions of the Companies Law: Has an accounting and financial expertise or a professional qualification: Employee of the Bank, its subsidiary, a related company or an interested party: The day he began serving as a director of the Bank: Education: Occupation during the last five years and other corporations in which he serves as a director or officer: Hagderot 26, Savyon Israeli and French Director Member of the committees: Credit Committee of the Board of Directors, Risk Management Committee and Budget Monitoring Committee No No Has accounting and financial expertise. No June 30, 2014 Executive M.B.A. business management majoring in strategic management from the Hebrew University of Jerusalem. 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 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 Vehicle Import Ltd., Euroman Investments Ltd., Manor Investments I.D.B. Ltd., Euroman Auto Motive Ltd., D.L.B. Moto Sport Ltd., Prime-Rent Car Rental Ltd., Morgan Rimon Construction Ltd., Auto Dynamic Israel Ltd. (inactive), and Apollon Ventures Ltd. Director at the following companies: David Lubinski Properties (Holdings) 1993 Ltd., Cheroudar Properties Ltd., Olimpia Morgan Projects Ltd. 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 director in the following companies: Deputy of the Chairman of the Board of Directors of I.D.B. Holdings Ltd., Lynx Capital Ltd., Lubinski Garage Ltd., Nesher Israeli Cement Enterprises 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. Development Company Ltd. and Clal Insurance Enterprises Holdings Ltd

326 2. Name of Director: Mr. Izaac Manor A family member of an interested party of the Bank: Yes, the husband of Mrs. Ruth Manor, a controlling shareholder of the Bank through David Lubinski Properties (Holdings) 1993 Ltd. and Cheroudar Properties Ltd. A director that the Bank sees as 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"): Yes -326-

327 3. Name of Director: Mr. Yeshayahu Landau Vice Chairman of the Board of Directors Identification No.: Date of Birth: August 8, 1929 Address for court documents: Citizenship: Role: Daniel Freish 4, Tel-Aviv Israeli Director, Deputy Chairman of the Board of Directors Membership in committees of the Board of Directors: External director under the Proper Conduct of Business Directives and/or under the provisions of the Companies Law: Independent director under the provisions of the Companies Law: Has an accounting and financial expertise or a professional qualification: Employee of the Bank, its subsidiary, a related company or an interested party: The day he began serving as a director of the Bank: Education: Occupation during the last five years and other corporations in which he serves as a director or officer : A family member of an interested party of the Bank: A director that the Bank sees as 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"): Member of the following committees: Fixed Assets Transactions Committee, Board of Directors' Credit Committee, Urgent Credit Approval Committee and Budgetary Follow-up Committee No No Has professional qualification. No June 15, 1993 High-school graduate. Manager of companies and Vice Chairman of the Board of Directors of Union Bank of Israel 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. Yes the father of Yigal Landau, a director of the Bank. No -327-

328 4. Name of Director: Mr. Haim Almog Adv. Identification No.: Date of Birth: July 19, 1951 Address for court documents: Citizenship: Role: Membership in committees of the Board of Directors: External director under the Proper Conduct of Business Directives and/or under the provisions of the Companies Law: Independent director under the provisions of the Companies Law: Has an accounting and financial expertise or a professional qualification: Employee of the Bank, its subsidiary, a related company or an interested party: The day he began serving as a director of the Bank: Education: Occupation during the last five years and other corporations in which he serves as a director or officer: Beit Tzarfat Delder, Toval 5, Tel-Aviv Israeli Director Member of the following committees: Board of Directors' Credit Committee, Credit to Diamond Industry Committee and the Budgetary Follow-up Committee. No No Has accounting and financial expertise. No September 25, 2001 B.A. in Economics, Tel Aviv University, LL.B degree in Law, Ono Academic College, LL.M M.A. in Law, Ono Academic College. Partner at Hemi Almog, Shapira and Co. law firm. CEO and director of Coral Holdings (2007) Ltd. Director in the companies: David Lubinski Properties (Holdings) 1993 Ltd. and Cheroudar Properties Ltd. A family member of an interested party of the Bank: A director that the Bank sees as 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"): No Yes -328-

329 5. Name of Director: Mr. Yigal Landau Identification No.: Date of Birth: May 13, 1960 Address for court documents: Citizenship: Role: Membership in committees of the Board of Directors: External director under the Proper Conduct of Business Directives and/or under the provisions of the Companies Law: Independent director under the provisions of the Companies Law: Has an accounting and financial expertise or a professional qualification: Employee of the Bank, its subsidiary, a related company or an interested party: The day he began serving as a director of the Bank: Education: Occupation during the last five years and other corporations in which he serves as a director or officer: Daniel Freish 4, Tel-Aviv Israeli Director Member of the following committees: Risk Management Committee; the Committee for Credit to the Diamond Industry; Fixed Asset Transactions Committee and Non-Financial Investments Committee. No No Has accounting and financial expertise. CEO of Hiram Landau Ltd. and of Ratio Oil Exploration Ltd., companies which Yeshayahu Landau, a controlling shareholder of the Bank, is of interest in them. June 15, 1993 M.B.A. in Business Administration, Tel Aviv University; B.Sc. in Civil Engineering, Technion, Haifa. Engineer CEO and director at Ratio Oil Exploration Ltd., CEO of Hiram Landau Ltd. Director at the following companies: Ratio Petroleum Ltd., Proceed Venture Capital Fund Management Ltd.; Proseed Management Venture Capital (1999) Ltd., Hotam Hiram Management (2002) Ltd.; Langat Development Ltd. and Landlan Investments Ltd. Member of the Board of Trustees at Arial University. A family member of an interested party of the Bank: A director that the Bank sees as 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"): Yes, the son of Mr. Yeshayahu Landau, a controlling shareholder and director of the Bank. Yes -329-

330 6. Name of Director: Dr. Yaacov Lifshitz Identification No.: Date of Birth: July 16, 1944 Address for court documents: Citizenship: Role: Membership in committees of the Board of Directors: External director under the Proper Conduct of Business Directives and/or under the provisions of the Companies Law: Independent director under the provisions of the Companies Law: Has an accounting and financial expertise or a professional qualification: Employee of the Bank, its subsidiary, a related company or an interested party: The day he began serving as a director of the Bank: Education: Occupation during the last five years and other corporations in which he serves as a director or officer: A family member of an interested party of the Bank: A director that the Bank sees as 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"): Hameri 49, Givataim Israeli Director Chairman of the Audit Committee and the Insurance Committee Member of the following committees: Risk Management Committee, Non-financial Investments Committee, Transactions in Fixed Assets Committee, Committee for Credit to the Diamond Industry, Remunerations Committee and Computerization Committee. External director under the Companies Law. Yes Has accounting and financial expertise. No November 2, 2008 B.A. in Economics and Political Science, M. A. in Economics, the Hebrew University of Jerusalem. PhD in Philosophy, Ben-Gurion University in the Negev Director at the companies: Kali-Management of Financial Agreements Insurance Agency 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 Former director at Poalim I.B.I. Management & Underwriting Ltd.; No Yes -330-

331 7. Name of Director: Dr. Zalman Segal Identification No.: Date of Birth: February 23, 1937 Address for court documents: Citizenship: Role: Membership in committees of the Board of Directors: External director under the Proper Conduct of Business Directives and/or under the provisions of the Companies Law: Independent director under the provisions of the Companies Law: Has an accounting and financial expertise or a professional qualification: Adam Hacohen 3, Tel-Aviv Israeli Director Chairman of the Remuneration Committee and the Transactions in Fixed Assets Committee and member of the following Committees: Audit Committee, Credit to the Diamond Industry Committee, Computerization Committee, Credit Committee of the Board of Directors, the Urgent Credit Approval Committee and the Budgetary Follow-up Committee. External director under the Companies Law. Yes Has accounting and financial expertise. Employee of the Bank, its subsidiary, a related company or an interested party: The day he began serving as a director of the Bank: Education: Occupation during the last five years and other corporations in which he serves as a director or officer : A family member of an interested party of the Bank: A director that the Bank sees as possessing an accounting and No February 8, 2010 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 Director and Chairman of the Audit Committee of Alon USA. Member of the Board of Trustees of Tel Hai College. No Yes 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 ("The Companies Law"): -331-

332 8. Name of Director: Mr. Alberto Garfunkel Identification No.: Date of Birth: September 7, 1955 Address for court documents: Citizenship: Role: Membership in committees of the Board of Directors: External director under the Proper Conduct of Business Directives and/or under the provisions of the Companies Law: Independent director under the provisions of the Companies Law: Has an accounting and financial expertise or a professional qualification: Shapira 11/69 Ramat-Gan Israeli Director Member of the following committees: Board of Directors Credit Committee, Urgent Credit Approval Committee, Audit Committee, and Remuneration Committee. External director under the Companies Law. Yes Has accounting and financial expertise. Employee of the Bank, its subsidiary, a related company or an interested party: The day he began serving as a director of the Bank: Education: Occupation during the last five years and other corporations in which he serves as a director or officer : A family member of an interested party of the Bank: A director that the Bank sees as possessing an accounting and No December 7, 2010 Holds a B.A. degree in Economics from Ben-Gurion University. Financial Advisor. Director at Sigma Investments House Ltd. No Yes 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 ("The Companies Law"): -332-

333 9. Name of Director: Mrs. Micahl Marom Brikman Identification No.: Date of Birth: November 1, 1969 Address for court documents : Citizenship Role: Membership in committees of the Board of Directors: External director under the Proper Conduct of Business Directives and/or under the provisions of the Companies Law: Independent director under the provisions of the Companies Law: Has an accounting and financial expertise or a professional qualification: Employee of the Bank, its subsidiary, a related company or an interested party: The day he began serving as a director of the Bank: Education: Usha 9, Tel-Aviv Israeli Director Member of the following committees: Computerization Committee, Remuneration Committee, Insurance Committee and Audit Committee. External director according to Proper Conduct of Banking Business Directive No. 301 Yes Has accounting and financial expertise. No January 1, 2015 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 years and other corporations in which he serves as a director or officer: An external director at Naaman Vardinon Ltd., I.D.O. Group Ltd., Arko Holdings Ltd., Algomizer Ltd, and Dan Public Transportation Company Ltd., Biondvax Pharmaceuticals Ltd., Oren Investments (A.A.A.) LTD. and external director at Biomedic Incubator Ltd. Former Chief Financial Officer of Linkury Ltd. and Chief Purchase, and Technologies Officer at Dan Hotels Ltd. Former director at SpecRonix Ltd. and at Levinski Ofer Ltd. A family member of an interested party of the Bank: A director that the Bank sees as 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"): No Yes -333-

334 10. Name of Director: Mr. Meir Dayan Identification No.: Date of Birth: August 5, 1943 Address for court documents : Citizenship Role: Membership in committees of the Board of Directors: External director under the Proper Conduct of Business Directives and/or under the provisions of the Companies Law: Independent director under the provisions of the Companies Law: Has an accounting and financial expertise or a professional qualification: Employee of the Bank, its subsidiary, a related company or an interested party: The day he began serving as a director of the Bank: Education: Occupation during the last five years and other corporations in which he serves as a director or officer: A family member of an interested party of the Bank: Abarbanel 29A, Raanana Israeli Director Member of the following committees: Audit Committee, Remuneration Committee and the Risk Management Committee. External director according to Proper Conduct of Banking Business Directive No Yes Has accounting and financial expertise. No June 1, 2015 Holds a B.A. degree in Economics from the Hebrew University in Jerusalem and an M.B.A. in Business Administration with a major in finance from the Hebrew University in Jerusalem. Owner and manager of M.D. Tanner Holdings Ltd., director at Shalom Tower Ltd., Assets of the Hebrew University Ltd., former director at Real Estate Participations Ltd. and external director (according to Proper Conduct of Banking Business Directive No. 301) at the First International Bank of Israel Ltd. No A director that the Bank sees as 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"): Yes -334-

335 11. Name of Director: Mrs. Nira Dror Identification No.: Date of Birth: November 25, 1954 Address for : court documents Citizenship Role: Membership in committees of the Board of Directors: External director under the Proper Conduct of Business Directives and/or under the provisions of the Companies Law: Independent director under the provisions of the Companies Law: Has an accounting and financial expertise or a professional qualification: Employee of the Bank, its subsidiary, a related company or an interested party: The day he began serving as a director of the Bank: Education: Occupation during the last five years and other corporations in which he serves as a director or officer: A family member of an interested party of the Bank: A director that the Bank sees as 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"): Dvora Haneviya 7, Ramat-Hasharon Israeli Director Member of the following committees: Risk Management Committee, Budgetary Follow-up Committee, Non-financial Investments Committee, Insurance Committee and the Transactions in Fixed Assets Committee External director according to Proper Conduct of Banking Business Directive No Yes Has accounting and financial expertise. No February 3, 2016 Holds a B.A. degree in Economics from Tel-Aviv University and an M.B.A. in Business Administration, from Tel-Aviv University. Director at the following companies: Isrotel Ltd., S. Shlomo Insurance Company Ltd,, S. Shlomo Holdings, Ltd. Sharonim Water and Sewage Infrastructure Ltd.,Amot Investments Ltd., Nira Dror Ltd. Member of the Executive Board of Jordan River Village. Member of the Audit Committee of the Cancer Association and an executive member of Tel Hai Association. Former: Chairman of the Board of Directors at B.H.I Global Investments Counseling (Israel) Ltd., director at Colfnet Holdings Ltd., director at Click Software Technologies Ltd. and at Dikla Insurance Company Ltd. (until 2015); Director and Chairman of Audit and Balance Sheet Committee at Shemen Oil and Gas Exploration Ltd.,director at Tzur Shamir Holdings Ltd., responsible for the development of the Israeli market, sales and marketing at Hotelbeds (until 2014); Director and Chairman of the Audit Committee at Bank Hapoalim of Israel Ltd. (until 2012). No Yes -335-

336 During 2016, the Board of Directors held 22 meetings in plenary session and 76 meetings of its various committees. The Board of Directors has appointed committees for the following issues, in accordance with its procedures: a. Board of Directors' Credit Committee - The committee supervises the implementation of the credit policy determined by the Board of Directors, supervises the compliance with the limitations of the risk appetite and risk tolerance in the field of exposures to credit risks and discusses credit requests which exceed the credit policy of the Bank or are under its authority according to the Banks' credit policy. b. Credit to the Diamond Industry Committee - Deals with approvals of credit to diamond merchants according to the authority it was granted in the Banks' credit policy and supervises the implementation of the credit policy to the diamond industry at the Bank. c. The Audit Committee Holds deliberations, inter alia, on the Bank's internal auditor's work plan and recommends to the Board of Directors of the Bank to approve it and follows its execution. 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 is responsible for monitoring the work of the Chief Internal Auditor. In addition it deliberates on transactions with interested parties pursuant to Section 5 of the Companies Law, 1999 (hereinafter: "Companies Law"), and transactions with related people, 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 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 B of 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

337 e. The Insurance Committee - Holds deliberations on insurance proposals for the Bank and for the 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, inter alia, the risk document, approval of models, discussion of back tests results, discussion of limits of stress scenarios, and monitors compliance with limits set by the Board of Directors and the management of the legal risks and the compliance risks of the Bank (including money laundering and cross boarder risks, assimilation and implementation of internal enforcement plans by the Bank and ongoing monitoring of these), and this is subject to the following. Notwithstanding the aforesaid, on matters which the Board of Directors is required to discuss and/or to decide, in accordance with the procedures of 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 decision shall be made in accordance at the plenum of the Board of Directors, after the committee has discussed the matter and submitted its recommendation regarding the decision to the Board of Directors. h. Budget Monitoring Committee Discusses matters related to monitoring budget compliance and objectives of the Bank, and any derived or related matters. i. 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. j. 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. k. Computerization Committee An ad-hoc committee of the Board of Directors which was established in order to supervise the process of preparing for the termination of the computer agreement engagement with Leumi Bank Le-Israel B.M. and to examine alternatives for receiving future computer services, whether from Leumi Bank or from third parties, while supervising and accompanying the process on an ongoing basis. l. Ad-hoc committees Are established from time to time, as needed

338 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, eleven in number, the required minimum of directors having financial and accounting expertise is three. The Board of Directors stipulated also that, inter alia, 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 ten directors with the required accounting and financial expertise: Mr. Zeev Abeles, Mr. Izaac Manor, Haim Almog Adv., Dr. Yaacov Lifshitz, Mr. Yigal Landau, Mrs. Michal Marom Brikman, Mr. Meir Dayan, Dr. Zalman Segal, Mr. Alberto Garfunkel and Mrs. Nira Dror. The facts regarding each of the aforementioned directors, and by virtue of which they should be regarded as possessing accounting and financial expertise, are presented below: A. Mr. Zeev Abeles - Mr. Abeles s professional experience in his former positions as Supervisor of Banks, member of the senior management of the Bank of Israel, member of the Israeli Securities Authority, member of the Israel Accounting Standards Board, Chairman of the Central Securities Company Ltd., and his position as Chairman of the Bank s Board of Directors since November His membership in the Boards of Directors of various companies, his educational background in economics and accounting, and his being a CPA 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 and law, 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 in his former positions 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

339 D. Mr. Yigal Landau - Mr. Landau s professional experience as CEO of various companies, such as his being the CEO of Hiram Landau Ltd., Ratio Oil Exploration Ltd. and a director of various companies, together with his education that includes a Master 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. Meir Dayan - Mr. Dayan's professional experience as a former external director at Bank Leumi Le-Israel B.M. and at the First International Bank of Israel Ltd. together with his education in economics and 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. F. Dr. Yaacov Lifshitz - Dr. Lifshitz s professional experience in his former positions 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 of Directors and a 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. G. Mr. Izaac Manor Mr. Manor's professional experience as a director at various companies in the IDB Group in , including as Deputy Chairman of the Board of IDB Holdings Ltd., and his service as a director at Union Bank of Israel Ltd. in , as well as his education in business administration, 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. Mrs. Michal Marom Brickman Mrs. Marom Brickman's professional experience in her former position 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 administration, 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

340 I. Dr. Zalman Segal - Dr. Segal's professional experience in his former positions as Deputy Chairman 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. J. Mrs. Nira Dror - Mrs. Nira Dror's professional experience in her former positions as a director and as the Chairman of the Audit Committee of Bank Hapoalim and as a director at various companies, as well as her education in economics and in business administration 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. The minimum level that was stipulated by the Board of Directors, which takes into account the size of the Bank, the complexity of its activities and its risks, enables the Bank to meet its obligations in general, and its obligations to examine the financial situation of the Bank and examine and approve the financial statements in particular. The rest of the members of the Board of Directors of the Bank, which weren't counted among the directors with financial and accounting expertise, have professional qualifications, as defined in the Companies Regulations (Requirements and Tests for Directors with Financial and Accounting Expertise and Directors with Professional Qualifications), Since all members of the Audit Committee in its role as a Financial Statements Examination Committee have accounting and financial expertise, and 10 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 February 3, 2016, Ms. Nira Dror began serving as an external director at the Bank according to Proper Conduct of Banking Business no

341 Members of Management and Senior Officers Members of Management Mr. Israel Trau Mr. Efraim Avraham Mrs. Netta Avrahamov-Bitan Mr. Arnon Zait Mrs. Ayala Hefetz Mr. Menachem Morag Mrs. Shevy Shemer CEO Deputy General Manager; Head of Financial Management Division Deputy General Manager; Head of Controls and Risk Management Division Deputy General Manager; Head of Chief Accountant Division Deputy General Manager; Head of Corporate Division Senior Deputy General Manager; Head of Resources Division Senior Deputy General Manager; Head of Retail Banking, Customers' Assets and Advisory Division For a headcount of Senior Officers of the Bank as at the reporting date see the Bank's Immediate Report from February 3, 2016 (reference ), which is presented by reference. On March 31, 2017 Mr. Efraim Avraham will end his term as head of the Financial Management Division and will retire from the Bank. As of April 1, 2017 Mr. Tal Ben-Ari will begin his tenure as head of the Financial Management Division at the rank of Deputy General Manager. Other Senior Officers: Dr. Moriah Hoftman-Doron, Adv. - Deputy General Manager; Chief Legal Advisor Dr. Akiva Sternberg Mrs. Irit Makov, Yerushalmi Adv. - Senior Deputy General Manager; Chief Internal Auditor - Deputy Legal Advisor and Secretary of the Bank -341-

342 Information regarding the members of management is set out below: 1. Name of executive Mr. Israel Trau I.D. number: Date of birth: December 16, 1955 Beginning of tenure: March 1, 2014 Position in the corporate, in a subsidiary company, in a related company or in a holder of interest : Is the executive a holder of interest or family member of another executive or holder of interest: Education and experience in the last 5 years: CEO of the corporation. Chairman of Union Systems Ltd and Igud Investments and Enterprise (A.S.Y.) Ltd. No. 2. Name of executive Mr. Efraim Avraham I.D. number: Date of birth: September 24, 1954 Beginning of tenure: July 1, 2007 Position in the corporate, in a subsidiary company, in a related company or in a holder of interest: Is the executive a holder of interest or family member of another executive or holder of interest: Education and experience in the last 5 years: B.A in Humanities from Tel Aviv. Advanced studies 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. Deputy General Manager; Head of Financial Management Division 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. No. High school graduate. Director in the Board of Directors of the Stock Exchange, and an alternate director in the Stock Exchange s Maof Clearing House (until July 2014). Chairman of Union Mutual Funds Management Ltd. (Formerly A.K.N.) (until February 2014)

343 3. Name of executive Mrs. Netta Avrahamov-Bitan I.D. number: Date of birth: March 21, 1971 Beginning of tenure: March 18, 2014 Position in the corporate, in a subsidiary company, in a related company or in a holder of interest : Is the executive a holder of interest or family member of another executive or holder of interest: Education and experience in the last 5 years: Deputy General Manager; head of the Controls and Risk Management Division and the Chief Risk Officer (CRO) of the Bank. Director at Union Bank Registration Co. Ltd. and alternate director at the Maof Clearing House of the Stock Exchange. No. B.B in business administration from Tel Aviv College of Management. Certified Public Accountant (CPA). Head of the Chief Accountant Division, Chief Accountant of the Bank. 4. Name of executive Dr. Akiva Sternberg I.D. number: Date of birth: August 30, 1961 Beginning of tenure: April 1, 2014 Position in the corporate, in a subsidiary company, in a related company or in a holder of interest: Is the executive a holder of interest or family member of another executive or holder of interest: Education and experience in the last 5 years: Senior Deputy General Manager, Chief Internal Auditor of the Bank. No. PhD in business administration from Bar-Ilan University, M.S.M in business administration from Boston University and B.A in Economics from Ben- Gurion University / The Johns Hopkins University. Head of the Controls and Risk Management Division and the Chief Risk Officer of the Bank

344 5. Name of executive Mr. Arnon Zait I.D. number: Date of birth: February 3, 1971 Beginning of tenure: March 18, 2014 Position in the corporate, in a subsidiary company, in a related company or in a holder of interest: Is the executive a holder of interest or family member of another executive or holder of interest: Education and experience in the last 5 years: Deputy General Manager, Chief Financial Officer and head of the Chief Financial Officer Division. The Chairman of The Board of Directors of Union Issuances Ltd., director at Union Systems Ltd. No. CPA, has a B.A. in economics and business administration from Bar-Ilan University. Has an M.B.A. in business administration from the Hebrew University. Deputy CEO, Deputy General Manager and head of the Finance Division in the Bank of Jerusalem between Name of executive Mr. Menachem Morag I.D. number: Date of birth: July 2, 1951 Beginning of tenure: June 1, 2006 Position in the corporate, in a subsidiary company, in a related company or in a holder of interest : Is the executive a holder of interest or family member of another executive or holder of interest: Education and experience in the last 5 years: Senior Deputy General Manager; Head of Resources Division. Chairman of Union Surplus 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. No. B.A in social science from the Open University, M.A in political science from Haifa University, graduate of internal audit from Tel Aviv College and economics and accounting at MONTGOMERY MD

345 7. Name of executive Mrs. Shevy Shemer I.D. number: Date of birth: September 1, 1964 Beginning of tenure: September 1, 2010 Position in the corporate, in a subsidiary company, in a related company or in a holder of interest: Is the executive a holder of interest or family member of another executive or holder of interest: Education and experience in the last 5 years: Senior Deputy General Manager; Head of Retail Banking, Customer's Assets And Advisory Division. Chairman of the Board of Directors at Igud Leasing Ltd., director at Igudim Ltd. and director at Igudin Insurance Company Ltd. No. B.A in Industrial Engineering and Management BSC, M.A in Business Administration, both from Ben Gurion University of the Negev. Former head of Corporate Division 8. Name of executive Mrs. Ayala Hefetz I.D. number: Date of birth: June 6, 1963 Beginning of tenure: April 5, 2015 Position in the corporate, in a subsidiary company, in a related company or in a holder of interest: Is the executive a holder of interest or family member of another executive or holder of interest: Education and experience in the last 5 years: Deputy General Manager, Head of Corporate Division and director at Igudim Ltd. No B.A in Economics from Baruch College City University of New York, M.B.A. in Business Administration from the Hebrew University of Jerusalem. Manager of Negev Business Center and South Business Center at Bank Hapoalim

346 Information regarding additional Senior Officers is set out below: 9. Name of executive Dr. Moriah Hoftman Doron Adv. I.D. number: Date of birth: December 9, 1969 Beginning of tenure: September 1, 2009 Position in the corporate, in a subsidiary company, in a related company or in a holder of interest: Is the executive a holder of interest or family member of another executive or holder of interest: Education and experience in the last 5 years: Deputy General Manager; Chief Legal Advisor, Head of Legal Advice and Compliance Division and in charge of internal enforcement in the field of securities. No. LL.B, and PhD in a direct program, both in law, from Bar-Ilan University. Certified attorney. Chief Legal Advisor of the corporation and in charge of enforcement in the field of securities. 10. Name of executive Mrs. Irit Makov, Yerushalmi Adv. I.D. number: Date of birth; June 23, 1967 Beginning of tenure: December 10, 2007 Position in the corporate, in a subsidiary company, in a related company or in a holder of interest : Is the executive a holder of interest or family member of another executive or holder of interest: Education and experience in the last 5 years: Secretary of the Bank and Deputy of the Chief Legal Advisor. No. L.LB in law from Tel Aviv University and M.A in Business Administration from Bar Ilan University. Certified Attorney. Director at Madanes Holdings Ltd

347 Disclosure Regarding the Internal Auditor 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 administration from Bar-Ilan University, a M.S.M in business administration 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"), 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 Chief Internal Auditor operates by virtue of the Banks' Board of Directors' letter of appointment (charter). The letter of appointment regulates his job and authority. Appointment Method and Organizational Hierarchy On November 12, 2013 the Audit Committee approved and on November 22, 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 on 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 -347-

348 subsidiaries. In addition to the aforesaid, 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 multiyear 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 authorization in advance 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 2016 Chief Internal Auditor 1 Employees of the Internal Audit Unit at the Bank 15 Outsourcing * 3 * Equal to approximately 3 positions. 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 which 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

349 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 , 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. After the completion of the discussion in the Audit Committee, the Chief Internal Auditor monitors any faults until they are resolved. 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 2016 were held on August 10, 2016 and February 12, 2017 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 circumstances, and are sufficient to achieve the objectives of internal auditing at the Bank and its consolidated subsidiaries

350 Remuneration The following table lists payments to the Chief Internal Auditor in 2016 (in accordance with the details required in the table of high wage recipients at the Bank): NIS thousands Remuneration for services (1), (2) : Wages: Salaries 1,152 Compensation, remuneration, advanced-study fund, 430 vacation, national insurance and usage value Supplementary provisions for related expenses due to changes in wages in the accounting year (1) Bonus (3), (4) (49) Total wages 1, The amounts of the compensation are in terms of cost to the bank, with the exception of payroll tax. These amounts are included in the Statement of Profit and Loss, under the item Salaries and related expenses. There are no additional remunerations for services management fees, consulting fees, commissions, or others. 2. There are no other items of remuneration which are not for services. Benefits in respect of interest on deposits were not given, since 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. Note that bonuses that were paid in 2015, in respect of previous years according to a spread of payments in accordance with the remuneration plans, weren't included in the number above. See details in Paragraph 2(B) of the Section "Salary of Senior Officers and Compensation for Interested Parties ". 4. For details regarding loans on beneficial terms and loans granted on regular terms see Paragraph (3) in Section "Remuneration for Interested Parties and Senior Officers". 5. For details regarding the employment conditions of Dr. Sternberg see Paragraph 1.(C) in Section " Salary of Senior Officers and Compensation for Interested Parties ". The Board of Directors believes that the remuneration of the Chief Internal Auditor has no effect on his professional judgment

351 Remuneration of Auditors The following table provides details of the remuneration of the external auditors of the Bank: (1) (2) (3) For Audit Activities: Consolidated The Bank NIS Thousands The external auditor 4,306 4,096 4,083 3,839 Other external auditor ,383 4,172 4,083 3,839 For additional services: (3) For audit related services: The external auditors Tax services: The external auditors Other services: The external auditors Total 4,800 5,126 4,500 4,793 (1) The salary of the external auditor. (2) Includes audit of the annual financial statements and a review of the interim reports. (3) Includes remuneration paid and remuneration accrued

352 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, the report of the Board of Directors and the Management, Corporate Governance, Additional Information and Appendixes (hereinafter: "the Financial Statements") are prepared by the Chief Accountant Division, headed by Mr. Arnon Zait, the Chief Financial Officer. The Detailed Report on the Risks is prepared by Controls and Risk Management Division. As part of the process of preparing the financial statements and the Detailed Report on the Risks (hereinafter: the Reports"), 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 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 them, 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

353 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 the appropriateness of the classification and 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 corporate bonds in the available-for-sale portfolio. The Chairman of the Board of Directors, the CEO, the Chief Accountant, the head of the Corporate Division, the head of the Financial Management Division, the external auditors and additional parties participate in this discussion. In addition, accounting policies in critical issues and critical accounting estimates are discussed annually by this committee (when there is a material change a discussion is conducted in the quarter in which the change occurred). In its second meeting the Committee discusses in detail the draft of the financial statements, the internal controls related to the financial reporting and the completeness and adequacy of the disclosure made in the financial statements and the Detailed Report on the Risks. The Chairman of the Board of Directors, the CEO, the Chief Accountant, the Chief Risk Officer (in the discussion concerning the Detailed Report on the Risks), the external auditors and others, based on requirement, participate in this discussion. As part of the approval of the financial statements and the Detailed Report on the Risks by the Audit Committee and the Board of Directors, drafts of the reports 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. Five directors are members of the Audit Committee; all of them have accounting and financial expertise. Comments of the financial statement Review Committee, if there are any, are implemented, and its 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, the Chief Risk Officer (in the discussion concerning the Detailed Report on the Risks), and the external auditors also participate in the meeting of the Board of Directors in which the approval of the quarterly and annual financial statements and the Detailed Report on the Risks, are 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 Detailed Report on the Risks, and the accreditation 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. The Chairman of the Board of Directors, the CEO and the Chief Risk Officer are authorized to sign the Detailed Report on the Risks

354 Salary of Senior Officers and Compensation for Interested Parties The following table lists compensations for recipients of the highest compensation among the Senior Officers at the Bank for 2016, in thousands of NIS: Compensations Receivers Details Scope of Position Holding Rate of the Corporations' Capital Compensation for Services (1) Salary Severance Pay, Compensation, Study Funds, Vacation, Jubilee Grants, National Insurance, Value of Use Supplementary Provisions for Related Expenses Due to Changes in Wages and Retirement Terms During the Accounting Year Bonus (4) Total Salary Other Compensations (2) Interest Total Name Function Salary Zeev Abeles Chairman of the Board of Directors (A) 100% (5) 0.01% (3) 2, (51) (298) 2,550-2,550 Israel Trau C.E.O (B) 100% - 1, (334) 1,828-1,828 Akiva Sternberg Senior Deputy General Manager, Internal Auditor(C) 100% - 1, (1) (49) 1,532-1,532 Menachem Morag Senior Deputy General Manager; Head of Resources Division (D) 100% - 1, (52) 1,445-1,445 Efraim Avraham Deputy General Manager, Head of Financial Management Division (E) 100% ,815 (6) (54) 3,023-3,023 (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 of all employees of the Bank. See also Section 3 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) Holds 3,500 ordinary shares. (4) Amounts presented in this column are estimates of negative bonuses whose payment was postponed from previous years see details in Section 2.B. below. (5) As of October 1, (6) This amount is the completion of a provision connected with the retirement of Mr. Avraham from the Bank, a retirement which entitles Mr.,Avraham to all the rights accrued to his credit according to his employment agreement at the Bank before the Remuneration for Senior Officers in Financial Corporations Law came into force see Section Legislative Developments". Additional notes: For details regarding loans with benefit condition and normal condition - see Section (3) below. Regarding remuneration for Interested parties - see Section (4) below. Regarding remuneration for the Internal Auditor see details also in the Section "Disclosure regarding the Internal Auditor"

355 The following table lists compensations for recipients of the highest compensation among the Senior Officers at the Bank for 2015, in thousands of NIS: Compensations Receivers Details Compensation for Services 1 Salary Other Compensations 2 Interest Supplementary Severance Pay, Provisions for Compensation, Related Expenses Study Funds, Due to Changes in Holding Rate of Vacation, Jubilee Wages and the Grants, National Retirement Terms Name Function Scope of Position Corporations' Capital Salary Insurance, Value of Use During the Accounting Year Bonus (3) Total Salary Zeev Abeles Chairman of the Board of Directors (A) 75% 0.01% (4) 2, (5) 844 3,807-3,807 Israel Trau C.E.O (B) 100% - 1, ,141-3,141 Akiva Sternberg Senior Deputy General Manager, Internal Auditor(C) 100% - 1, ,895-1,895 Menachem Morag Senior Deputy General Manager; Head of Resources Division (D) 100% - 1, ,633-1,633 Arnon Zait Deputy General Manager, Head of Chief Accountant Division (E) 100% - 1, ,518-1,518 (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 (3) 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 bonuses in respect of 2015 see details in section 2 (B) below. Note that bonuses paid during 2015 in respect of previous years ( ), according to the compensation plans' payment schedule, are not included in the table above. (4) Holds 3,500 ordinary shares. Total Additional notes: For details regarding loans with benefit condition and normal condition - see Section (3) below. Regarding remuneration for Interested parties - see Section (4) below. Regarding remuneration for the Internal Auditor see details also in the Section "Disclosure regarding the Internal Auditor"

356 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 unlimited 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 update of the employment terms of Mr. Abeles, as approved by the Banks' general meeting from October 6, 2016 ("The Agreement Amendment Day"), upon the termination of the employment of Mr. Abeles at the Bank (excluding cases in which his eligibility for severance pay is denied), Mr. Abeles shall be entitled to severance pay in respect of termination of employment in the cumulative amount of subsection (1) and (2) below: (1) compensation at a rate of 100% of his last salary multiplied by the number of years of his work at the Bank in respect of the period beginning on the agreement amendment day until the date of termination of employee-employer relations for any reason (including part of a year, proportionally); plus (2) compensation at a rate of 200% of the last salary of the Chairman prior to the agreement amendment day multiplied by the number of years of his work at the Bank during the period as of the beginning of the employment of the Chairman at the Bank and until the agreement amendment day. Note that upon termination of the employment of Mr. Abeles at the Bank, he shall be entitled to all the funds and rights that were accumulated and that will be accumulated in the personal severance fund under his name, and the Bank will continue to pay him compensation in respect of termination of employment in the amount of the difference between Mr. Abeles's right for compensation according to subsections (1) and (2) as aforesaid and the funds and the rights in the personal severance fund. The period of the restriction of competition is six months from when the Chairman will actually cease working at the Bank (whether by dismissal or by resignation). Mr. Abeles's salary is linked to the CPI. According to the amendment of the employment agreement of Mr. Abeles, Mr. Aveles's entitlement to receive an annual bonus was cancelled as of the agreement amendment day. With regard to entitlement for bonuses, approved to Mr. Abeles in previous years, see details in Section 2 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, on December 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 to the executive insurance are a substitute for the duty to pay full severance pay, if such pay is deserved 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

357 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 for payment only in respect of 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. With regard to entitlement to bonuses, see details in Section 2 below. C. Dr. Akiva Sternberg - Employed at the Bank from August 1, 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 noncompetition 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) and onwards, 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 partially denied. Dr. Sternberg's monthly salary is linked to the increase in the consumer price index. With regard to entitlement to bonuses, see details in Section 2 below

358 D. 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 unlimited 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 only from his payments into the policy and study fund, 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 of the Bank to 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, Upon the actual termination of his employment at the Bank, Mr. Morag is entitled to payment in respect of three months of restriction of competition (in the case of either dismissal or resignation) and to a payment in respect of three months of adaption. The monthly salary of Mr. Morag is linked to the consumer price index. With regard to entitlement to bonuses, see details in Section 2 below. E. Mr. Efraim Avraham - Employed at the Bank since May 18, As of July 1, 2007, he is employed under a personal employment agreement effective from that date, for an unlimited 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 three months' advance written notice, in accordance with the terms established in the employment agreement. Further to Mr. Avraham's announcement on December 2016, regarding his decision to retire from his position and from the Bank (regarding the date of the termination of Mr. Efraim Avraham's employment at the Bank see details in Section "Management Members and Senior Officers" above) under circumstances that justify terms of dismissal by law and by the terms of his agreement, Mr. Avraham is entitled to severance pay at a rate of 250% of his last salary less the redemption value of the compensation in the various funds to which the Bank secreted funds in his favor. In addition, Mr. Avraham is entitled to the payment of an adaption grant in the amount of three monthly salaries which will be paid within a payment in respect of restriction of competition (except if the termination of his employment occurred under circumstances in which severance pay may be fully or partially denied). The monthly salary of Mr. Avraham is linked to the increase of the consumer price index. Regarding entitlement to bonuses - see details in Section 2 below. 2. Bonuses: A. Bonus plan On October 6, 2016, the general assembly of the Bank approved, further to the approval of the Board of Directors and of the Remuneration Committee, a remuneration policy for Senior Officers of the Bank (hereinafter: the "New Remuneration Policy"), within which, among other matters, the terms of -358-

359 the bonus plan approved by the general assembly of the Bank as part of the previous remuneration policy for Senior Officers of the Bank, which was approved by the general assembly on February 6, 2014 (hereinafter: the "Bonus Plan"), were replaced. The remuneration policy for Senior Officers of the Bank was updated, among other matters, in light of the updates in regulation relevant to the establishment of a remuneration policy, including Directive 301A of the Banking Supervision Department and the directives of the Financial Corporations Officer Remuneration Law (Special Approval and Non-Deduction of Expenses for Tax Purposes due to Exceptional Remuneration), 2016, and the rules and limits established therein; in light of the accumulated experience in the implementation of the previous remuneration policy; and with due attention, among other matters, to the long-term business strategy of the Bank, the goals of the Bank, and its compliance with the risk tolerance established by the Board of Directors. The New Remuneration Policy for officers of the Bank took effect on the day of the approval thereof by the general assembly, and will apply until 2019 (inclusive). The previous remuneration policy applies to bonuses in respect of However, the New Remuneration Policy for Senior Officers of the Bank applies to the period from the inception date of the New Remuneration Policy; the list of parameters and objectives for the examination of the Senior Officers' performance in the period from the inception date of the New Remuneration Policy, and the minimum return used as the threshold criterion for payment of bonuses in respect of 2016, subject to the rules of the New Remuneration Policy, are consistent with the list of parameters and objectives and with the minimum return established in advance for With respect to the period beginning with the inception of the New Remuneration Policy for officers of the Bank, the rules of this policy regarding payments that have been spread apply to bonus balances, if any, accrued in favor of the senior executives in respect of bonuses approved for them pursuant to the previous policy. For additional details regarding the previous Bonus Plan for Senior Officers of the Bank, as approved on February 6, 2014, see Notes 21.E.1 and 21.E.2 to the Financial Statements, and see, by reference, the Immediate Reports of the Bank dated December 31, 2013 (reference no ) and February 6, 2014 (reference no ). With regard to the New Remuneration Policy for Senior Officers of the Bank, see, by reference, the Immediate Report of the Bank dated August 31, 2016 (reference no ) and the Immediate Report dated October 6, 2016 (reference no ), presented by reference. B. Bonuses in respect of 2016 The Bonus Plan, implemented in accordance with the approval of the general assembly, constitutes part of the previous remuneration policy for Senior Officers of the Bank with respect to the period up to the approval of the New Remuneration Policy; with respect to the period from the date of approval of the New Remuneration Policy, the officers' eligibility for bonuses was examined in accordance with the rules thereof. The officers of the Bank are not eligible for a bonus in respect of 2016, according to the rules of the Bonus Plan or according to the New Remuneration Policy approved on October 6, In addition, within the implementation of the Bonus Plan with respect to the period up to the approval of the New -359-

360 Remuneration Policy, a "negative bonus" was offset against the balances of bonuses the payment of which was deferred from previous years, in accordance with the terms of the Bonus Plan for Senior Officers, as approved by the authorized organs of the Bank in previous years, as follows: the amount of the negative bonus deducted from the amounts of bonuses approved in previous years for the Chairman of the Bank, Mr. Zeev Abeles, is a total of NIS 298 thousand; the amount of the negative bonus deducted from the amounts of bonuses approved for the Chief Executive Officer of the Bank is a total of NIS 334 thousand; the amount of the negative bonus deducted from the amounts of bonuses approved for Dr. Akiva Sternberg is a total of NIS 49 thousand; the amount of the bonus deducted from the amounts of bonuses approved for Mr. Hemi Morag is a total of NIS 52 thousand; and the amount of the negative bonus deducted from the amounts of bonuses approved for Mr. Efraim Avraham is a total of NIS 54 thousand. C. Bonuses in respect of 2015 (1) The Bank's Board of Directors discussed and approved on February 23, 2016 the bonus amounts for Senior Officers of the Bank, including those mentioned in Section A above in respect of The Bank's Board of Directors approved the bonus amounts after he was presented with the recommendations of the Remuneration Committee which discussed and approved on February 10, 2016 the bonus amounts to the aforesaid Senior Officers, all in accordance with the remuneration policy and the bonus plan. Within the discussions of the Remuneration Committee and the Board of Directors to approve the bonus amounts to Senior Officers, the relevant figures and parameters, set in the bonus plan, were presented, in order to determine the bonus amounts for Senior Officers in respect of 2015 (see details within the description of the bonus plan in Note 21.E.2 to the financial statements). Inter alia, the Remuneration Committee and the Board of Directors were presented with the Bank's business results in 2015, the total BSC (Balance Score Card) of the Bank which includes, inter alia, parameters such as the rate of return on the Bank's annual equity after tax, the Bank's capital adequacy ratio, the performance of the Bank's various divisions relative to the annual performance targets set by the Board of Directors, as well as, public information and comparative data relative to the yields of the banking groups in the Israeli banking system. In addition, the Remuneration Committee and the Board of Directors were presented with data regarding the performance of the Senior Officers in 2015 according to parameters established in the bonus plan, inter alia, the personal BSC score and a personal evaluation score of each of the Senior Officers which was determined on the basis of a list of qualitative parameters pre-determined and approved by the Remuneration Committee and the Board of Directors. 1 The bonus amounts approved by the Remuneration Committee and the Board of Directors weren't final at the time of their approval since the parameter of comparing the Bank's figures to the figures of additional banking groups in the banking system was calculated on the basis of figures of the first three quarters of Not far after the publication of the annual financial statements of 2015 of additional banking groups in the banking system, a final calculation was conducted of the aforesaid parameter and the calculation of the bonus amounts for the Senior Officers was adjusted according to the figures detailed in the aforesaid statements and the Bank's Board of Directors reconfirmed the bonus amounts on April10,

361 3. Benefits and Loans to Recipients of Remuneration 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: Name Loans Granted with Benefit Term (Benefit Terms for all Employees of the Bank) Average Balance as at Term to December Maturity - in Benefit Granted 31, 2016 Years During the Year Loans*and Guarantees Granted under Ordinary Terms Z. Abeles I. Trau A. Sternberg ,006 M. Morag E. Avraham * Including mortgages and credit cards. 4. 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 2016: Total payment received by all directors of the Bank amounted to NIS 3,723 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 of the Bank - an amount of NIS 319 thousand. (2) To Mr. Yigal Landau (Yeshayahu Landau's son, a controlling shareholder of the Bank) - an amount of NIS 271 thousand. (3) To Mr. Izaac Manor (the husband of Mrs. Ruth Manor, a controlling shareholder of the Bank) an amount of NIS 346 thousand. See also Notes 31.E.1 and 31.E.2 regarding remuneration for directors

362 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 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 of Banks (hereinafter: 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

363 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 of Banks are suitable for the examination of the compliance of transactions with market terms, under the circumstances noted. Monetary volume of an exceptional transaction 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 Material Credit Transaction, Including Off-Balance-Sheet Credit: For this purpose, a "material transaction" is a credit transaction in an amount greater than 3.33% of the capital of the banking corporation, as defined in Proper Conduct of Banking Business Directive no. 202 of the Supervisor of Banks, "Capital Measurement and Adequacy- Supervisory Capital". 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) 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") 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

364 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 includes 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 the balance of credit (cumulative) of the relatives of the controlling party shall be broken down in the credit table. 3. Non-Banking Transactions 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 "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 for the Determination of the Definitions and Parameters Regarding a "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 threshold 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

365 C. Further to the foregoing, the following table summarizes data on banking transactions with controlling parties 3 : 1. Credit Transactions Data as at December 31, 2016 (in NIS thousand) Balance of Balance- Sheet Credit Unutilized Credit Facility Risk-Weighted Assets Arising from Activity in Derivatives* Bank Guarantees Proprietary Investments by the Bank in Bonds Issued by Companies Controlled by a Controlling Shareholder Total Indebtedness Guarantees to Third Parties Issued by a Controlling Shareholder to Companies under his Control Details Yeshayahu Landau group and private companies under its control 107, ,499 42,296 Manor group and private companies under its control 82,116 1, ,251 89,082 - * 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, inter alia, 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 Transactions in Deposits The balances of deposits with the Bank of one of the of the controlling shareholders' groups totaled NIS 95 million on December 31, The highest balance during 2016 is as follows: group A - NIS 90 million, group B - NIS 143 million. The amounts do not include the deposits which are managed by institutional entities under the control of the shareholders of the Bank on behalf of policy holders, provident funds and trust funds. Most of the amounts of the deposits from the balances noted above as of December 31, 2016 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 Type of Deposit Minimum Annual Interest Maximum Annual Interest Weekly fixed-rate deposit in NIS 0.09% 0.09% 3 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"

366 3. Other Banking Transactions The following table lists benefits in rates of the principal fees for each group of controlling shareholders (1) : Name of Fee Account transactions recording Transfer/deposit to an account in another bank Deposit management fees (securities custody fees) tradable in Tel-Aviv Stock Exchange (including nontradable securities, certificates in mutual funds and bonds). Fee's Level as of December 31, 2016 (According to the Bank's Price List) Benefit Rate Payment of NIS 1.45 per transaction 100% Payment of NIS 43 for transfer/deposit Payment of 0.15% for a quarter minimum NIS 6 for security and NIS 39 for deposit 50%-66% 100% (1) The benefit rates are not under preferred conditions over the benefit rates given to other similar customers, who are not among the controlling shareholders of the Bank. The Bank periodically approves the benefit rates for the fees. The approved benefit rates as at the reporting date are presented in the fee table above. D. Details of Exceptional Transactions with Controlling Shareholders and Additional Transactions with Controlling Shareholders: 1. Regarding the decision of the general meeting of the Bank concerning indemnification for Senior Officers (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 23.C C.11 to the financial statements. Also see Immediate Reports concerning changes in the Banks' regulations concerning indemnification for Senior Officers, from November 1, 2012 (reference ) and from February 7, 2013 (reference ), presented by reference. 2. For details regarding the acquisition of a directors' and officers' (D&O) liability insurance policy at the Bank and at the subsidiaries, see Note 23.C.16 to the financial statements and see the Banks' Immediate Report from February 29, 2016 (reference ), presented by reference. 3. For details regarding the decision of the Banks' Board of Directors concerning the application of the general meeting's decision from 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 31.E.1 to the financial statements and Immediate Report from October 30, 2014 (reference ), presented by reference. The approved remuneration is in amounts that -366-

367 are detailed in the aforesaid decision of the general meeting, for directors (excluding the Chairman of the Board of Directors) including external directors, controlling shareholders and their relatives, which shall be appointed from time to time as directors of the Bank. 4. Regarding the decision of the Bank's general meeting to reaffirm the letter of commitment of indemnification to the directors who are controlling shareholders of the Bank or their relatives or to someone whom the controlling shareholders of the Bank might have a personal interest in committing to indemnify him, who serve, served or will serve at the Bank or its subsidiaries, under the same conditions and the same version of the letter of commitment of indemnification existing in the company, see Note 23.C.13 to the financial statements and Immediate Report from October 25, 2015 (reference ), presented by reference. Banking transactions, whose details are listed cumulatively and by controlling party groups see Paragraph C of this Section, above

368 Additional Details Regarding the Business of the Banking Corporation and Management Thereof Diagram of the Bank's Principle Investee Companies Set below is a diagram of the Bank's principle investee companies (4) as at December 31, 2016: Union Bank Consolidated Auxiliary Corporations in the Bank's Reports (1) Capital Market (1) Auxiliary Corporation (1) Igudim Ltd. Union Systems Ltd. Union Capital Markets and Investments Ltd. (2) Union Underwriting and Fnances Ltd. (3) Union Investments and Enterprise (A.S.Y) Ltd. Union Leasing Ltd. Union Bank Trust Co. Ltd. Union Issuances Ltd. Carmel Union Mortgages and Investments Ltd. Igudim Insurance Agency (1995) Ltd. Livluv Insurance Agency (1993) Ltd. (1) Held by 100%. (2) An inactive company - held by Union Investments and Enterprise (A.S.Y.) Ltd. (3) An inactive company - held by Union Capital Markets and Investments Ltd. (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 Principle Investee Companies and Note