FHB MORTGAGE BANK PLC

Transcription

1 FHB MORTGAGE BANK PLC ANNUAL REPORT FOR YEAR 2013

2 FHB Mortgage Bank Plc. Business Report for 2013 Budapest, April 2, 2014

3 FHB MORTGAGE BANK BUSINESS REPORT FOR THE YEAR 2013 TABLE OF CONTENTS 1 OVERVIEW OF FHB MORTGAGE BANK PLC HISTORY AND ACTIVITIES OF FHB MORTGAGE BANK OVERVIEW OF FHB BANKING GROUP MACROECONOMIC ENVIRONMENT IN THE HUNGARIAN ECONOMY IN THE BANKING SECTOR IN BUSINESS AND FINANCIAL RESULTS OF FHB MORTGAGE BANK MAJOR FINANCIAL INDICATORS RETAIL AND CORPORATE LENDING REFINANCING PORTFOLIO QUALITY, PROVISIONING SECURITY ISSUES AND MORTGAGE BOND COVERAGE BALANCE SHEET STRUCTURE PROFIT & LOSS STRUCTURE LIQUIDITY MANAGEMENT RISK MANAGEMENT PRINCIPLES RISK MANAGEMENT POLICY CREDIT RISK MARKET RISK LIQUIDITY AND MATURITY RISK EXCHANGE RATE RISK INTEREST RATE RISK, EXCHANGE RATE RISK OPERATING RISK ORGANIZATIONAL CHANGES AND HEADCOUNTS POST-BALANCE SHEET DATE EVENTS

4 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR OVERVIEW OF FHB MORTGAGE BANK PLC. 1.1 HISTORY AND ACTIVITIES OF FHB MORTGAGE BANK FHB Mortgage Bank Public Limited Company ( FHB, Mortgage Bank or the Bank ) was established by the Hungarian State on 21 October 1997 as a limited liability company with a share capital of HUF 3 billion. The Bank provided mortgage banking services through its Head Office and regional representative offices located in Hungary. The Bank also refinances mortgage loans provided by commercial banks to their customers. The Bank received its license to operate as a specialized financial institution in accordance with the provision of Act CXII of 1996 on Credit Institutions and Financial Enterprises and Act XXX of 1997 on Mortgage Loan Companies and on Mortgage Bonds on 6 March The Bank commenced operation as of 16 March On 31 October 2003 the Hungarian Financial Supervisory Authority (HFSA) granted permission for FHB Mortgage Bank to issue a prospectus to introduce its shares to the Budapest Stock Exchange. Following a public and private placement of the Bank s shares, a total of 2,500,000 ordinary shares were sold in the context of public offering along with an additional 1,324,899 ordinary shares sold to institutional investors in the context of private placement. A total of further 588,570 voting preference shares were sold to the Bank s priority strategic partners in the context of private placement. The ordinary shares were listed on the Budapest Stock Exchange on 24 November On 29 August 2007 the Hungarian Privatization and State Holding Company (ÁPV Ltd.) formerly holding a 54.11% majority share in the Bank sold its packet of Series A ordinary shares of 50% + 1 vote in the Hungarian and international capital market in the context of accelerated book building. The transaction was administered by HSBC Plc. investment services company. As a result of the sale ÁPV s share in the Bank dropped to 4.11% held exclusively in the form of Series B preference shares. The Series B preference shares were converted into ordinary shares in In 2013 FHB Mortgage Bank Plc. had solely series A ordinary shares listed on Budapest Stock Exchange. Besides trading shares on stock exchange no other event modified ownership structure in Majority (57.6%) of FHB shares is owned by domestic institutional investors. FHB Group s shareholder structure as of 31 December 2013: Investor category 31 December December 2013 Number of shares Ownership share Number of shares Ownership share Domestic institution/company 36,795, % 38,040, % Foreign institution/company 14,509, % 14,297, % Domestic and foreign individuals 4,118, % 5,136, % MNV Ltd. 4,724, % 4,724, % FHB Mortgage Bank Plc. 53, % 53, % Other investors 5,797, % 3,747, % Total 66,000, % 66,000, % 1.2 OVERVIEW OF FHB BANKING GROUP The Board of Directors of the Bank accepted a strategic plan in February 2006 focusing on the expansion of the banking activity and branch network as a midterm target. In the framework of this, the Bank set up new subsidiaries besides the already existing FHB Services Ltd., specifically FHB Commercial Bank Ltd., FHB Real Estate Trading and Valuation Ltd., and FHB Life Annuity and Real Estate Investment Ltd. FHB Mortgage Bank is the parent company of the Group. (The Bank and its subsidiaries are jointly referred to as the Group or Banking Group.) During the period between 2008 and 2009 the activities, products and services provided were expanded continuously by the Group, in accordance with the Strategic Plan. The Commercial Bank launched the branch for private company clients and the Netbank service on Internet and provided new services related to the bank accounts and bankcards for the retail customers. In 2010 the Commercial Bank s activities were extended with investment services business. 3

5 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR 2013 In April and June 2009 the Bank increased the Group by the acquisition of Central European Credit Ltd. (CEC, named to FHB Real Estate Lease Ltd. effective from 31 December 2010) and the three companies of POMO group (Portfolio Money Ltd., Portfolio Money FBK Ltd. and Hitelunió Ltd.). The expanding of FHB Group continued in 2010 by acquiring the Allianz Bank Ltd and by entering a long-term strategic and co-operation agreement with Allianz Hungary Insurance Ltd. Allianz Bank was merged into FHB Commercial Bank on 1 April In October 2011 FHB Mortgage Bank's Board of Directors passed a decision to sell FHB Services Ltd. to a buyer outside of the Group. The transaction was concluded on 1 December The Strategic Plan for the business years was adopted by the Board of Directors of FHB Mortgage Bank in The new strategy was built on the results achieved with the previous plans, the possible advantages from the strategic partnership with Allianz and the commitment of the employees of the Group. Every employee can identify oneself with the straightforward and challenging goals which stimulate devoted co-operation in favour of the common success. FHB would like to become a customer- and service-driven medium bank based on the previously adopted conception of The bank of the families providing customer based service supported by an organisational culture where the achievement of the common goals is reached with the strong co-operation of the employees. In 2013, FHB Mortgage Bank managed several acquisition, there through broadened the banking group and the range of activities. The Bank signed a contract in July 2013 to buy 100% of ordinary shares of Diófa Alapkezelő Zrt. (Diófa Asset Management Ltd.). The specified contractual conditions required for the effective transfer of the shares were satisfied by the parties on September 2, 2013, so 100% of ordinary shares of Diófa Asset Management went to the ownership of FHB Mortgage Bank. As a result of several months of negotiations, FHB has signed first a letter of intent, and then on 10 July 2013, a purchase agreement with the shareholders of Díjbeszedő Holding Ltd. ( DBH ), to the business shares of Díjbeszedő Üzemeltetési és Szolgáltatási Kft. (in English: Díjbeszedő Operational and Service Llc; hereinafter the DÜSZ Llc. ) that come into being after a demerge from DBH. In course of the demerge DÜSZ own 51% of the shares of Díjbeszedő Faktorház Ltd. (DBF), 75% of the shares of DíjNET Ltd. and 50% of the shares of Díjbeszedő Informatikai Llc. (DBIT). Related to the transaction of the business shares, FHB and the Magyar Posta (Hungarian Post) entered into a strategic cooperation, and in the scope of that they cooperate in the ownership and control of DÜSZ Llc., DBH and the jointly controlled companies, furthermore in course of the harmonization of the business activities of DÜSZ Llc. and the members of the DBH Group. Based on the Agreement between FHB Group and Magyar Posta, DÜSZ Llc. acquired 50% of shares of Magyar Posta Befektetési Zrt (Hungarian Post Investment Services Ltd., hereinafter the MPBSZ Ltd. ) by exchange of 24% shares of DíjNET Zrt. and additional share price to be paid in next years. This transaction closed on December 5, According to the Syndicate Agreement the subsidiaries of the DÜSZ Llc. (DBF, DíjNET, DBIT and MPBSZ) are jointly controlled subsidiaries of FHB and Magyar Posta, which means 50% effective impact on these companies independently of the ownership. From the subsidiaries mentioned above the DÜSZ, DBF and MPBSZ are under consolidated supervision according to the NBH resolution received on 24 January As parent company of FHB Group, the Mortgage Bank exercises proprietary supervision over the Group companies FHB Commercial Bank Ltd. In line with the midterm strategic plan for the years , Board of Directors of FHB Mortgage Bank decided to establish FHB Commercial Bank Ltd. (FHB Commercial Bank or Commercial Bank) in February FHB Commercial Bank Ltd. was established from HUF 5,996 million equity including HUF 3,996 million capital reserve and HUF 2,000 million registered capital. At the beginning, 90% of the shares of the Bank were owned by FHB Mortgage Bank and 10% by FHB Services Ltd. After receiving its licence, banking operation started on 5 December 2006 in the Central Branch in Budapest. In 2007, the Bank broadened its branch network and gradually took over the distribution of retail and corporate loans from the Mortgage Bank and started funding activity due to continuously developing account 4

6 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR 2013 and bank card services. In 2008 the Bank launched its SME business line, and then in 2010 its investment services business line. Allianz Bank merged into FHB Commercial Bank as of 1 April The merger boosted the number of employees, number of branches and financial assets, as well. Product portfolio broadened due to the acquisition. The Commercial Bank provides agency services for Mortgage Bank and other group members, according to which Commercial Bank sells FHB Mortgage loans handles credit portfolio and has got credit care and qualified credit management function. At the end of 2013 the Board of Directors of FHB Mortgage Bank decided to change the capital structure of the Commercial Bank, meaning that FHB Bank Ltd. bought back 8,179 ordinary shares from Mortgage Bank. At the same time, the Mortgage Bank granted subordinated loan amounting HUF 10 billion to Commercial Bank. The Commercial Bank's total assets in accordance with Hungarian Accounting Standards (HAS) amounted to HUF billion as of 31 December 2013, which surpassed by 22.5% the previous year (HUF billion). The Commercial Bank's gross loan portfolio amounted to HUF billion, a 2.5% increase since the end of the year The Bank's deposit portfolio increased nearly by 150% over the past year and amounted to HUF billion. At the end of 2013 the Commercial Bank had 43 branches countrywide. On 31 December 2013 Commercial Bank managed almost 167 thousand retail and 9.4 thousand corporate current accounts to which 124 thousand retail and 5.8 thousand corporate cards belonged - both current accounts and the number of cards increased compared to the previous year. FHB Commercial Bank s balance sheet profit was HUF 930 million loss in 2013, its shareholders equity at year end was HUF 30.4 billion. The capital adequacy ratio (according to HAS) was 10.69% as at 31 December FHB Real Estate Ltd. FHB Real Estate Ltd. was established on 7 February 2006 based with a share capital of 100 million HUF. At the beginning, 95% of the shares of the Bank were owned by FHB Mortgage Bank and 5% by FHB Services Ltd. FHB Real Estate Ltd. received its licence on 8 May 2006 and started its operation on 1 December FHB Real Estate Ltd. was established for the purpose of promoting the implementation of the tasks laid down in FHB Mortgage Bank Plc. s strategy, specifically to undertake real estate collateral valuation, real estate investment, sales and management services, and as a real estate valuation agent for FHB Group. In addition to Group companies, FHB Real Estate Ltd. provides real estate related services to external customers. In 2009, FHB Mortgage Bank purchased FHB Services share and became the sole owner of the company. Due to easing the effects of the crisis slight increase of real estate sales and lending activities was experienced resulted the Company to close the year 2013 with HUF 33 million profit. FHB Real Estate Ltd. registered capital was 70 million HUF on 31 December 2013, shareholders equity amounted to 177 million HUF. FHB Real Estate Ltd. owns 100% share of Wodomus 54 Property Development Ltd. established on 11 February 2011 with a share capital of HUF 500,000 as a project company to finalize and sale 54 flats of real estate located in Csepel (II. Rákóczi Ferenc str. 144.). Real Estate Ltd. set up also Káry-Villa Property Development Ltd. on 11 February 2011 with a share capital of HUF 500,000 aiming utilization of the property located in Budapest, Dózsa György str. 74. This property was sold in 2012, settling of related loan transaction and financial results of the deal accounted at FHB Mortgage Bank Plc. Wodomus 54 sold all the 54 flats of the condominium located in Csepel in September FHB Life Annuity Ltd. FHB Life Annuity Real Estate Investment Ltd. was founded on 9 June 2006 with a registered capital of HUF 100 million. Upon foundation, 95% of the company's shares were held by FHB Mortgage Bank Plc., and 5% by FHB Services Ltd. Actual operation of FHB Life Annuity Ltd. started on 6 November As of March 2009 FHB Mortgage Bank became the sole owner of the company. FHB Annuity Ltd. sells two products: an annuity product that is sold directly to senior citizens, and a reverse mortgage product. The reverse mortgage product is offered through FHB Annuity Ltd. as an agent of the Mortgage Bank. The 5

7 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR 2013 reverse mortgage scheme is a product of FHB Mortgage Bank Plc.; consequently, the contracts concluded through FHB Annuity are reported in the balance sheet of FHB Mortgage Bank Plc. At 3 June 2013, the Parliament accepted amendment in the Act LX of 2003 on Insurance Companies and Insurance Activities. Hence the alterations for profit annuity services could only be pursued according to the Act from 1 January The scope of law does not apply to contracts signed until 31 December 2014 FHB Mortgage Bank carried out capital increase HUF 310 million in the Company in July 2013, in order to regularize the equity position of FHB Real Estate Lease Ltd. which is in the ownership of the Company. The company s registered capital according to HAS was HUF 165 million at the end of 2013, the capital reserves amounted HUF 744 million. The result of the year of Life Annuity Ltd in 2013 deteriorated the shareholder s equity by HUF 900 million FHB Real Estate Lease Ltd. The private limited company FHB Real Estate Lease Ltd. (formerly Central European Credit Ltd.; the new name became effective as of 31 December 2010) was established on 15 December The company started business on 28 August 2005 with an initial capital of 50 million HUF consisting solely of cash contributions. The company is a financial enterprise. Its HFSA license number is E-I-737/2005. According to the HFSA license, the company is authorized to undertake two types of business activities: mortgage lending and real estate leasing. As had been the case in previous years, FHB Real Estate Lease Ltd. offered mortgage products solely on a real estate collateral basis to retail and corporate customers. The company joined FHB Group in 2009; its sole shareholder was FHB Services Ltd. On 17 November 2011 FHB Services Ltd sold its share in FHB Real Estate Leasing Ltd. to FHB Life Annuity Ltd. FHB Real Estate Lease Ltd. is 100% owner of the shares of Central European Credit d.d. and FHB DWH Services Ltd. The former one is a financial company registered in Croatia, while FHB DWH Ltd. main activities are data processing and web hosting services. FHB Mortgage Bank as parent company exercising ownership rights on investments of FHB Life Annuity Ltd decided to increase company s capital two times in Total capital increase amounted to HUF 310 million. Shareholder s equity of the Company according to HAS amounted to HUF million as at 31 December 2013; issued capital was HUF 110 million and capital reserves amounted to HUF 1.3 billion. The Company closed the year 2013 with HUF 556 million losses Diófa Asset Management Ltd. Diófa Asset Management Ltd. had been established by Évgyűrűk Pension Fund in February Initially, Diófa focused on dedicated wealth management for Évgyűrűk Pension Fund, later on the changing regulation in the private pension fund sector required a new sustainable business model. The Company announced on 8th July 2013, that it signed a contract to buy 100% of the ordinary shares of the Diófa Asset Management Ltd. Pursuant the specified contractual conditions required for the effective transfer of the shares are satisfied by the parties on 2 September 2013, since then the 100% of the ordinary shares of the Asset Management company is owned by FHB Mortgage Bank Plc. After the change in ownership, Diófa Asset Management is a fully consolidated member of FHB Group and belongs to common supervision since September Before the acquisition, Diofa Asset Management was focusing on real estate investments, pension fund wealth management and tailor made solutions for institutional clients. From September 2013 Diofa Asset Management Ltd. still sustains its former focus areas, in addition new retail funds have been launched in the branch network of FHB Banking Group. Sales volume of FHB Forte Short Bond Fund, FHB Money Market Fund and FHB Absolute Yield Fund reached close to HUF 5.3 billion in four months. Total net value of assets under management increased to HUF 23.8 billion from HUF 15.8 at December 31,

8 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR 2013 Asset Management Ltd. closed the year 2013 with HUF 23 million loss (of which pro rata loss of period after change in ownership was around HUF 4 million); subscribed capital amounted to HUF million and shareholders equity HUF 124 million Díjbeszedő Operational and Service Llc The DÜSZ was established by splitting-off from Díjbeszedő Holding Ltd. on 30 September In course of the demerge DÜSZ own 51% of the shares of Díjbeszedő Faktorház Ltd., 75% of the shares of DíjNET Ltd. and 50% of Díjbeszedő Informatikai Ltd. In December 2013, DÜSZ Ltd. acquired 50% share of Magyar Posta Befektetési Zrt (Hungarian Post Investment Services Ltd.) by exchange of 24% shares of DíjNET Ltd. and additional share price to be paid in next years. From 2014, DÜSZ Ltd. is going to be subsidiary of FHB Group dealing with facility management. The company s subscribed capital and shareholder s equity according to HAS was HUF 636 million and HUF 1.3 billion, respectively, as of 31 December Ownership structure of FHB Group members as at 31 December 2013: Subsidiaries FHB Mortgage Bank Plc FHB Bank Ltd. FHB Life Annuity Ltd. FHB Real Estate Ltd. Shareholders FHB Real Estate Leasing Ltd. Portfolio Money Ltd. Díjbeszedő Operational and Service Llc. Díjbeszedő IT Llc. FHB Commercial Bank Ltd % %* %* % FHB Life Annuity Ltd % % FHB Real Estate Lease Ltd % % Central European Credit d.d % % FHB Real Estate Ltd % % Káry-Villa Ltd % % Wodomus 54 Ltd % % FHB DWH Ltd % % Hitelunió Ltd % % Diófa Asset Management Ltd % % Díjbeszedő Operational and Service Llc % % Díjbeszedő Faktorház Ltd % % DíjNET Ltd % % Díjbeszedő IT Llc % % Magyar Posta Investment Services Ltd % % FHB Card Centre Ltd % % 75.00% * FHB Real Estate Lease Ltd. owned 1 piece of shares of FHB Commercial Bank Ltd. and FHB Bank Ltd. owned 8,179 pieces of own shares as at December 31, Total 7

9 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR MACROECONOMIC ENVIRONMENT IN THE HUNGARIAN ECONOMY IN Figures * 2013* GDP increase (%) 1.6% -1.5% 1.1% Industrial production growth (%) 5.4% -1.5% 0.9% Consumer prices (%) 3.9% 5.7% 1.7% Unemployment rate (%) 10.9% 10.5% 9.3% Budget deficit (billion HUF) -1, Current balance of payments (million EUR) ,300 National Bank of Hungary base rate (%, end of the year) 7.00% 5.75% 3.00% EUR exchange rate (end of the year) * expected for 2013 Source: HCSO, NBH After decreasing in 2012, the preliminary GDP of Hungary shows increase of 1.1%. Same growing is expected in industrial production (+0.9%) as in GDP growth. Performance of the building industry showed for the first time after seven years shrinkage. The growth is supported by the increase in the portfolio of construction contracts (expanded by 26% in the January-November period). Consumer price index grew by 1.7% compared to the previous year, representing 4.0%-point decline. In 2013, primarily alcoholic drinks and tobacco prices had been raised. Other commodities, fuel prices grew by 0.5%, the price level of financial services increased by 36%, but household s energy costs decreased by 8.5%. NBH decreased the base rate several times in The 2012 closing base rate of 5.75% fell to 3.00%, as a result of eleven cuts by 25 and 20 basis points from January to December Interbank rates performed similar trend during the year. The exchange rate of the forint against euro continuously sank, from HUF/EUR to HUF/EUR by the end of the year. In domestic lending important Swiss franc remained above HUF 200 in the whole year. The exchange rate was HUF/CHF HUF at the beginning of 2013 and was HUF/CHF at the end of The unemployment rate is below figures of Small reduction (1.2%) compared to 2012 is due to special regulation (public work and 90 working days per year required to cost-of-living allowance) having no influence on demand for financial products. Average number of employees was 3,979 thousand representing 88 thousand growth compared to The average gross income of employees was 3.8% higher than a year before, while net average salaries rose by 5.3% year-on-year. Balance of government budget deteriorated compared to the last year representing HUF 929 billion deficit at the end of Export and import rose by 4.5% and 4.4%. Balance of foreign trade was EUR 7 billion; this means EUR 446 million growths compared to year Growing exports and considerable lag in imports resulted in a positive balance on current account (EUR 2.3 million). Positive indicators achieved by the building industry are not supported by the number of dwelling construction permits issued and new housing constructions. 7,536 residential building permits were issued in 2013, 29% less than in The largest decline was in villages and small towns by 40%. In contrast, building permits issued in the county seats were only down by 11.4% to 2,123. The number of new homes planned in Budapest reduced by 27.5% to 1,430 similarly to the yearly average-change. The number of new homes built reduced to 7,293 from 10,560 in In particular, the share of homes built by firms increased from 31% to 40% (2,924), share of homes built by individuals decreased from 68% to 57% (4,167). As a consequence of the rearrangement in the composition of builder, average floor area of dwellings was 101 m 2 in 2013, which is 6 m 2 less than, in the previous period. 1 Based on reports and statistics of NBH and HCSO 8

10 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR THE BANKING SECTOR IN Total assets of credit institutions amounted to HUF 31,156 billion at the end of 2013, 0.9% lower than at the end of In 2013, the cumulative pre-tax profit was HUF billion, significantly exceeded the HUF 91 billion loss of The 2013th year's positive result is mainly due to the unique exceptional items, the majority of the sector is still closed at a loss. The pre-tax profit of the joint-stock credit institutions was HUF billion (of which the extraordinary profit was HUF 99 billion) and of co-operative credit institutions was HUF 2.8 billion. Credit institution branches made HUF 17.8 billion and the three specific specialized credit institutions made HUF 8.3 billion pre-tax profit. Gross loan portfolio of credit institutions decreased by 6% in Lending of banks declined 6.8% year-on-year. Volume of household s loans decreased continuously during the year, representing 7.5% fall. 23.4% (HUF 4,188 billion) of total loan portfolio (HUF 17,865 billion) was past due loans. Quality of loan portfolio (loans to household s and non-financial corporations) deteriorated further in 2013, share of loans past due was 29% (at the end of 2012 was 28.6%) and share of loans past due more than 90 days grew to 17.5% from 17.1% in The restructured loans amounted to HUF 2,885.8 billion at the end of the year that exceeded 13.3% of the 2012th yearend level. The restructured HUF loan portfolio rose by 49%, and restructured FX loans grew by 5.9% in The share of deposits of the bank's customers liabilities increased in 2013, the share of deposits of the funding of the sector grew in 2013 (47.7% from 46.6% in 2012) amounted to HUF 14,865 billion. Household s deposits represented 47% of total deposits Retail mortgage lending Retail customers' demand for loans still showed low level in Although the disbursement of retail mortgage loans shows slight increase, the total disbursement was only HUF 200 billion. This volume is significantly lower than in If the disbursement in 2012 is cleaned from the disbursement of redeemed loans (related to early repayment of FX loans), the yearly disbursement of retail mortgage loans shows an approximately 35% increase Mortgage loan volumes Based on data published by National Bank of Hungary, volume of retail mortgage loans amounted to 5,495 billion HUF as at 31 December Volume decreased by HUF 347 billion compared to year-end data of 2012 (5,842 billion HUF). Volume of FX loans fell by 8.2%, and HUF denominated loans also decreased despite of growing disbursement of subsidized loans by 2.1%, total volume of mortgage loans decreased by 5.9%. Volume of housing loans amounted to 3,336 billion HUF as of 31 December 2013, representing yearly decrease of HUF 199 million. HUF loans declined by 49 billion HUF, while FX housing loans fell down by 149 billion HUF. General-purpose mortgage loans amounted to 2,158 billion HUF as of 31 December 2013 with a 148 billion HUF yearon-year decline. Growth of HUF-denominated general-purpose loans was 5 billion HUF, at the same time FX-based general-purpose loans were down by 153 billion HUF. As a combined effect of revaluation of FX loans and repayments, proportion of FX mortgage loans decreased from 62.9% in 2012 to 61.8% as of 31 December Home protection measures The problem of foreign currency loans was also a priority issue in There were no new measures introduced in the home protection frame, but the conditions of the exchange rate protection scheme and the National Asset Management Ltd. (NET) that may be offered properties are also changed over the years, have significantly broadened the circle of those entitled. 2 Based on reports and statistics of NBH 9

11 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR 2013 Exchange rate protection scheme Based on the Act LXXV of 2011, on the fixation of the instalments exchange rate of loans denominated in foreign currencies and the rules for the forced sale of properties and the governmental order 57/2012 (III.30) debtors with FX loans not overdue of more than 90 days are eligible to participate in the new scheme offering payment of instalments at reduced rates. The period for the participation in the buffer accounts scheme is limited (5 years but latest the due date of the last instalment before 30 June 2017). During this period only the differences between the market spot rate and the fixed rate on the principal part of the instalment will be transferred to the buffer. Whereas the State and the Bank share the loss on the interest repayments due to the off-market fixed exchange rate on a 50%-50% basis when exchange rates moves in CHF/HUF or EUR/HUF or JPY/HUF band. In the event of exchange rate levels exceeding 270 CHF/HUF, 340 EUR/HUF and 3.3 JPY/HUF, respectively, exchange rate risks are entirely borne by the State. At the beginning of November, the Parliament passed the modification of act on measures needed to protect FX loan debtors, which stepped into effect after its publication, on 9 November The law introduced essentially immediate moratorium on evictions until 30 April 2014, and decided on the extension of range of debtors entitled to participate in FX rate protection scheme. According to the new regulation: debtors with more than 90 days delay can also apply for buffer account, including clients, who s real estate bothered with more than one of such mortgage; participation in client support program is not disqualifying; previous 20 million HUF limit were abolished, so clients with loans over 20 million HUF original value can also apply; conditions of state guarantee behind buffer accounts opened after modification coming into effect became more stringent: o in case of newly opened buffer accounts, state provide guaranty solely if outstanding loan volume not exceeds 95% of collateral real estate value; o Banks can exercise the guaranty if buffer accounts past due over 180 days and the bank terminates the contract because of that. Until 31 December 2013, banks opened nearly 162 thousand new buffer accounts, there were more than 51 thousand new buffer accounts opened in National Asset Management Ltd. Among the steps of the Home Protection Action Plan can be found the establishment of the National Asset Management Ltd (NET). to purchase the properties of the most indigent debtors. The related Act CLXX of 2011 provides details about the criteria and the process of the purchase of the properties ensuring residence to the indigent debtors by the National Asset Management Ltd. After 20 June 2012 the properties can be offered for the Hungarian Property Management Ltd. without marked as available for forced sale. The purchase price of the properties is determined by the Hungarian Property Management Ltd. as 35-55% of the original market value depending on the size of the town. Government assumed to ensure the background for National Asset Management Company to buy 25,000 properties until the end of 2014 according to the following schedule: 8,000 properties in 2012, 15,000 until the end of 2013 and 25,000 until end of Thanks to the modifications of the Act CLXX of 2011 in December 2012, and July 2013, since 1 January 2013 and October 2013; the number of the entitled customers was expanded. Until the end of October 2013, financial institutions offered more than 15 thousand real estates to NET which means HUF 35 billion arranged mortgage loans from HUF 16 billon resources from the State budget Other retail loans Consumer loans of households have been decreasing in 2013, as well. The 6.2% volume decrease was generated by declining FX loans, while HUF denominated consumer loans grew by 1.6% last year. Concerning total consumer loan 10

12 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR 2013 portfolio, home equity loans representing majority of the volume with 76.4% share; contribution of personal loans reached 12%. 3 BUSINESS AND FINANCIAL RESULTS OF FHB MORTGAGE BANK MAJOR FINANCIAL INDICATORS The balance sheet total calculated on the basis of the Hungarian Accounting Standards was 9.3% or HUF 60.5 billion lower than the previous year s figures. The balance sheet total was billion HUF at the end of Earnings before tax were HUF 127 million gain. in HUF million 31/12/ /12/2013 Change Balance sheet total 647, , % Loans, gross 154, , % Securities issued 418, , % Shareholders equity 52,488 52, % Regulatory capital 60,058 31, % Capital adequacy ratio 47.95% 22.91% -25.0%-pt Profit / (Loss) before tax 1, % Profit / (Loss) for the year 1, % CIR (operating costs / operating income), % 101.5% 116.0% 14.5%-pt ROAA (return on average assets) % 0.2% 0.0% -0.2%-pt ROAE (return on average equity) % 3.5% 0.2% -3.3%-pt 3.2 RETAIL AND CORPORATE LENDING The gross amount of loans was HUF billion as of 31 December 2013, which was HUF 15.4 billion or 10.0% lower than the amount of % of the loan portfolio, HUF billion is retail loans, which is HUF 11.9 billion lower than the amount as of 31 December 2012 (HUF billion). The corporate loans amounted to HUF 9.8 billion at the end of 2013, which is HUF 3.5 billion lower than in 2012 (HUF 13.3 billion). 63.4% (HUF 88.1 billion) of the loan portfolio is denominated if HUF, the sum of loans denominated in foreign currencies were HUF 50.8 billion as of 31 December The total amount of disbursed loans is HUF 6.5 billion for 2013, which is five times more than the disbursed amount of 2012 (HUF 1.3 billion). From the HUF 6.5 billion disbursing in 2013 the brand new transactions give HUF 5.6 billion. The total disbursed loans were retail loan. Main part of lending was generated by housing and general purpose mortgage loans. Housing loans amounted to HUF 95.6 billion in 2013 resulting 74.1% among retail loans. Volume of general purpose loans amounted to HUF 26.6 billion decreasing 10.1% compared to 2012 representing 20.6% among retail loans in 2013 (in 2012 it was 21.0%) The land development portfolio amounted to HUF 2.6 billion at the end of 2013, 20.1% less than the previous year s figure. Reversed mortgages amounted to HUF 3.1 billion at the end of 2013 showing no change compared to Corporate loans were down by 26.5% year-on-year due to nearly 50% decline of housing project loans on the one hand and HUF 3.3 billion or 25.5% drop in commercial real estate financing loans on the other hand. Over amortisation of loans, portfolio clearing measures such as sale of some non-performing debts had an impact on decrease of loan volume. The Mortgage Bank s portfolio-based share of retail mortgage loans was 2.2% at the end of 2013, which is a 20 basis points decrease compared to the previous year.. 3 This financial analysis contains data and tables calculated from controlling point of view, therefore due to reclassification some figures can differ from data reported in other parts of financial statements. 11

13 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR REFINANCING As of 31 December 2013 the portfolio of refinanced loans decreased by 16.0% or HUF 41.0 billion year-on-year and amounted to HUF billion. This volume includes HUF billion receivables from external partner banks. Refinanced loans from FHB Commercial Bank amounted to HUF 81.2 billion. Loans denominated in HUF contributed 41.4% to the 2013 year-end refinanced loan portfolio as opposed to 40.8% at the end of Refinanced loan disbursements amounted to HUF 2.4 billion in 2013 including HUF 2.3 billion contributed by the Commercial Bank. 3.4 PORTFOLIO QUALITY, PROVISIONING As of 31 December 2013 the Bank s rated assets amounted to HUF billion, pending commitments amounted to HUF 4.6 billion (HUF billion total) and future commitments (from swap transactions) to HUF billion. Breakdown of portfolio by classification, loss in value and provisions in HUF million Total receivables 31/12/ /12/2013 Impairment Impairment Total and Distribution and receivables provisions provisions Distribution Performing 481, , To be monitored 24, % 25, % Below average 9,913 2, % 10,892 1, % Doubtful 7,657 3, % 8,269 3, % Bad 3,488 3, % 3,605 2, % Total 527,114 9, % 472,219 9, % HUF 45.1 billion claims and HUF 3.6 billion commitments were classified as to be monitored or bad related 14,461 loan agreements from the total receivables from customers with HUF 9.1 billion total impairment and provisions. The refinancing loan portfolio amounted to billion HUF (45.5%) classified as performing. The Bank holds stakes in five companies: FHB Commercial Bank Ltd., FHB Real Estate Ltd, FHB Life Annuity Ltd. Diófa Asset Management Ltd. and Díjbeszedő Operational and Service Ltd. The total face value of investments is HUF 48.7 billion (10.3%) classified as performing. Future commitments amounting to billion HUF at the balance sheet date are classified as performing. As of 31 December 2013, 89.7% of the classified portfolio (excluding swaps) was performing (compared to 91.29% as of 31 December 2012). The ratio of below average, doubtful and bad receivables was 4.8% (4.0% as of 31 December 2012), and the ratio of category to be monitored was 5.5% (4.7% as of 31 December 2012). In the loan portfolio, the performing rate was 66.4% (71.45% as of 31 December 2012), the combined rate of below average, doubtful and bad loans was 15.7% (12.9% as of 31 December 2012), and the to be monitored category was 17.9% (15.6% as of 31 December 2012). 3.5 SECURITY ISSUES AND MORTGAGE BOND COVERAGE Mortgage and Senior bond issues In 2013 FHB Bank issued 16 distinct series and repurchased 11 series by 27 transactions contrary to the 32 transactions in In 2013, the Bank has HUF 60.3 billion (euro funds calculated in the issuance of euro exchange rate ) new capital market funds, excluded the EUR 10 million Tier 1 bond, the incoming liabilities were HUF 57.4 billion. The face value of issued bonds amounted to HUF 8.1 billion and EUR 15 million as of mortgage bonds, HUF 42.9 million and EUR 16 million (without Tier 1 bond amounted EUR 6 million) unsecured bonds were issued. 12

14 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR 2013 In 2013, the Bank repurchased HUF 2 billon and EUR 11.3 million mortgage bonds and HUF 1 billion and EUR 0.8 million unsecured bonds. In accordance with the relevant statutory provisions the Bank has undertaken to keep a stricter mortgage bond coverage ratio. Accordingly, the aggregate amount of ordinary collateral (net of loss in value) plus supplementary collateral principal exceeded each day the aggregate nominal value of outstanding mortgage bonds in circulation. The same adequacy rule prevailed with respect to interest-to-interest. In accordance with the provisions of the Act on Mortgage Loan Companies and Mortgage Bonds and in keeping with its Rules on Collateral Registration, the Bank monitored the loan cover situation and the compliance with the requirement of proportionality. In order to ensure appropriate mortgage bond cover the Bank verified, upon disbursement of the loan, whether the conditions for ordinary collateral were met. The value assets covering mortgage bonds issued by the Bank was HUF billion as of 31 December 2013, 18.2% less than the figure as of 31 December 2012 (566.6 billion HUF) Value of mortgage bonds and assets involved as collateral as of 31 December 2013 million HUF 31/12/ /12/2013 Change Outstanding mortgage bonds in circulation Principal 304, , % Interest 74,691 53, % Total 378, , % Value of the regular collateral Principal 356, , % Interest 210, , % Total 566, , % As of 31 December 2013, the present value of ordinary collateral was HUF billion and the present value of mortgage bonds was HUF billion, thus the present value of collateral exceeded that of CMBs (Collateralised Mortgage Bond) in circulation not yet repaid. The combined present value of collateral to the combined value of mortgage bonds in circulation was 134.2% in the same period. As of 31 December 2013 net value of ordinary and supplementary collateral principal to the unpaid face value of mortgage bonds in circulation was 136.7%, and the net ordinary and supplementary collateral principal to the unpaid interest on mortgage bonds in circulation was 287.4%. 3.6 BALANCE SHEET STRUCTURE As of 31 December 2013 the balance sheet total of the Bank was HUF billion 9.3% lower than in The bulk of the annual decrease in total assets was generated by 10.0% decrease in own loan portfolio, 16.0% shrank of refinanced loans The Bank's net own loan portfolio shrank year-on-year by a total of HUF 14.7 billion, while the securities portfolio reduced by HUF 6.8 billion compared to 2012 year-end. On the liabilities side, the decrease was dominated by mortgage bonds (25.8%) and by other liabilities (23.4%). Changes in the mortgage bonds portfolio reduced liabilities by HUF 78.4 billion, while reduce of other liabilities was HUF 11.7 billion. Shareholders' equity increased by HUF 127 million. 13

15 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR 2013 in HUF million 31/12/ /12/2013 Change Assets Interest earning assets 581, , % Interbank placements 61,716 64, % Securities 109, , % Refinanced loans 255, , % Loans to customers, gross 154, , % Other interest earnings assets Impairment and provision -9,614-8, % Cash % Investments 51,288 48, % Tangible assets, inventory % Intangible assets 952 2, % Other assets 23,013 23, % Total assets 647, , % Liabilities Interest bearing liabilities 545, , % Mortgage bonds 304, , % Bonds issued 114, , % Interbank funds 67, , % Subordinated debt 59,276 33, % Other interest bearing liabilities % Other liabilities 50,041 38, % Provisions and reserves % Shareholders equity 52,488 52, % Total liabilities and equity 647, , % Interest earning assets The Bank s interest earning assets decreased from HUF billion as of 31 December 2012 by 10.4% to HUF billion by the end of The portfolio of refinanced loans decreased by 16.0% year-on-year; net loans to customers sold by the Mortgage Bank through the Commercial Bank and its network of agents was 10.0%, or HUF 15.4 billion less than in the reference year and amounted to HUF billion. Loans to customers contributed 26.7% to interest earning assets at the end of the year (grew by 0.2%). The aggregate portfolio of mortgage loans (net of provisions) amounted to HUF billion as of 31 December 2013, 13.7% (HUF 56.4 billion) lower than the base period figure. The collateral value of real estate covering mortgage loan principal receivable amounted to HUF billion as of 31 December 2013, 10.3% short of the reference period s figure (HUF 997 billion). Thus the average loan-to-value of coverage (LTV) ratio was 34.3% as of 31 December 2013, somewhat lower than the 2012 LTV of 36.3% Intangible assets and investments The value of invested assets (net of provisions) was HUF 48.7 billion as of 31 December 2013, 4.9% lower than in The decline arises from the Commercial Bank own shares buyback. As of 31 December 2013 FHB Mortgage Bank s net holdings in the affiliated companies were as follows: HUF 42.4 billion in FHB Commercial Bank, HUF million in FHB Life Annuity, HUF 648 million in FHB Real Estate, in Diófa Asset Management Ltd HUF 128 million and in Díjbeszedő Operational and Service Ltd. HUF 4.6 billion. The net value of intangible assets as of 31 December 2013 was HUF 2 billion which contains the goodwill related to shares of Diófa Asset Management Ltd. and shares of Díjbeszedő Operational and Service Ltd (total HUF 792 million). 14

16 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR Other assets The Bank s other assets amounted to HUF 23.8 billion, grew by 3.6% in The bulk of other assets were contributed by accruals amounting to HUF 18.8 billion. As of 31 December 2013 the Bank had repurchased Treasury shares amounting to 28.6 million HUF same as in Interest bearing liabilities Mortgage bonds and senior bonds issued As of 31 December 2013, 45.5% of interest bearing liabilities was contributed by the Bank s mortgage bond portfolio that ensures long-term funding for mortgage loans. As of 31 December 2013, mortgage bonds issued by the Bank amounted to HUF billion HUF, 25.8% lower than the previous year s figure. Senior bonds completing the securities activity of mortgage bond issuance resulted in a book value of billion HUF as of the 31 December 2013, decreasing by 8.4% compared to the previous year-end figure Interbank funds Interbank borrowings amounted to HUF billion as of 31 December The contribution of bank group interbank deposits was 74% or 98.2 billion HUF (which was received from FHB Commercial Bank). As part of the group level liquidity management FHB Commercial Bank deposits their liquid assets by the Mortgage Bank. The Mortgage Bank ensures the profitable placement of the group level liquid assets Subordinated liabilities The Bank possessed a face value of HUF 15 billion and EUR 50 million subordinated debt bonds and a nominal value of EUR 102 million in basic capital qualifying bond as of 31 December During February 2013 the Bank - with the permission of HFSA's - bought back the subordinated debt bonds, value date was 21 of February, 2013 when bonds had been cancelled. In May 2013, the Bank issued further substantial debt bonds, so the stock at 31 December 2013 was EUR 112 million (HUF 33.3 billion) Other interest bearing liabilities The aggregate value of deposits from clients on collateral accounts related to project loan transactions was HUF 104 million as of 31 December 2013, 18.0% lower than the HUF 127 million in the previous year Other liabilities Other liabilities amounted to HUF 38.3 billion representing quarter of the amount of First of all this line item includes passive accruals amounting to HUF 36.9 billion at the end of The two dominant components of passive accruals are accrued interest expenses (HUF 11.7 billion) and accruals related to swap transactions (HUF 20.3 billion) Shareholders equity As of 31 December 2013 the Bank s own equity amounted to HUF 52.6 billion, which means a slight increase as opposed to 2012 end year figure (0.2%) Value of the Bank's the regulatory capital was HUF 31.3 billion at 31 December The capital adequacy ratio was 22.81% (one year ago 47.95% or without subordinated debt it was 24.35%) Off-balance sheet items Within the Bank s off-balance sheet items, amount of unused credit lines was HUF 8.4 million. Future liabilities decreased from previous year s HUF billion to HUF billion, including HUF billion hedge transactions related to mortgage and unsecured bonds issued and HUF 57.2 billion FX swaps liabilities as of 31 December Demands from currency swaps amounted to HUF billion. 15

17 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR PROFIT & LOSS STRUCTURE in HUF million 31/12/ /12/2013 Change Net interest income 6,472 7, % Interest income 62,817 54, % Interest expense -56,345-46, % Net fees and commission income , % Fee and commission received 1, % Fee and commission paid -2,007-1, % Net result of financial transactions 3, % Other income and expenditure -4,245-1, % Other operating income 2,838 3, % Other operating expenditure -7,083-5, % Gross operating income 4,591 5, % Operating expenses -6,468-5, % Net provisioning and loan losses 3, % Profit/loss before tax 1, % Taxation expense % Profit/loss after tax 1, % General reserve % Profit / loss per balance sheet 1, % The Bank s gross operating income was HUF 5.1 billion in 2013, which is 11.6% higher than the result in As a key component of gross operating income, net interest income increased by 16.3% year/year. Operations throughout the year generated a total of HUF 5.9 billion costs, which means 8.1% reduce compared to Net interest income The HUF 7.5 billion net interest income generated in 2013 emerged as the balance of HUF 54.1 billion interest income (13.8% lower than in 2012) and HUF 46.6 billion interest expense (17.3% decrease). As of the incomes swap deals interests show reduce of 13.0% generating HUF 14.8 billion, and interests of securities down by 31.4% representing 7.2 billion HUF among incomes Among expenses securities interest expenses play the most significant role, its ratio among interest expenses grew by 4.9 %-point and now it s 72.8% but its amount down by 11.3% compared to Interbank borrowings generated 40.7% decrease representing a high change. The average net interest margin was 0.89% as of 31 December 2012 and 1.22% as of 31 December Net fees and commissions In 2013 the net fees and commission income amounted to HUF 1.1 billion loss, after net fee income in 2012 was 687 million HUF loss. Security issuance s costs reduced by 34.3%, option fee down by 75.8%, while the agent fee which is the main part of the fee on commission expenses to FHB Commercial Bank decreased by 1% (HUF 1.7 billion) in Net profit from financial transactions The performance of net result of financial transactions was quite difference compared to 2012 result was six times lower than a year before, amounted to HUF 477 million thanks to the reducing gain from mortgage bonds. Both the result of foreign exchange transactions and securities showed profit in 2013 foreign exchange transactions performed loss in last year and the grew was HUF 1.8 billion and in 2012 and securities generated HUF 1.5 billion gain but this reduced to HUF 244 million. 16

18 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR Other income and expenditure The result of other income and expenditure shows negative amount (HUF 1.8 billion). It s down by nearly 10%, but HUF 2 billion income was generated by internal services (main items were IT, accounting and real estate rental services) and the gain from asset sales doubled from last year. The most significant volume of other expenses was the expenditures related to asset sales. Figures fell by 43.8% to HUF 2.3 billion compared to the HUF 4.1 billion previous year's expenditure. These volumes in 2012 come from final repayments and also played a role in the related debt forgiveness to forint denominated loans based on the law, while in 2013 its related to sold own claim the property sales to NET. 394 loans ceased due to sale to NET in 2013, the expense was recorded in connection with these approximately HUF 477 million. The 2013 year of HUF 1.8 billion bank tax burdened, while the amount of the credit institutions levy was HUF million Operating expenses in HUF million 31/12/ /12/2013 Change General administrative costs 3,538 3, % Personnel expenses 1,999 1, % - wages and salaries 1,428 1, % - other personnel expenses % - social security contributions % Direct costs of banking activity % Costs of internal services Depreciation % TOTAL OPERATING EXPENSES 6,468 5, % There is no significant change in structure of operating expenses, the total expenses decreased by 8.1% to HUF 5.9 billion. General administrative expenses fell by 10.3% which contributed significantly to the reduction of total operating expenses. The main part of this cost group IT costs and property related costs, but significant item in consulting fees and telephone charges as well. The third of operating expenses called personnel expenses decreased by 2.5% Impairment and loan losses In 2013 the Bank recorded HUF 947 million net reserve for impairment and provisions, which resulted from HUF 3.0 billion provisions created, and HUF 3.9 billion provisions and reserves used. The impairment of receivables amounted HUF 2.8 billion and HUF 3.5 billion provisions and reserves reversals Change in general reserve Mortgage Bank composed HUF 12.8 million of general reserve in LIQUIDITY MANAGEMENT In accordance with the Group's strategy the Mortgage Bank ensures the entire Group's liquidity through regular business relations with other Group companies. Liquidity of the Group was stable throughout The Mortgage Bank always made funds available to Group members as needed. The Bank supported the management in making quantitative and scheduling decisions related to short-term and long-term financing with continuous liquidity planning during the entire period. As of 31 December 2013 the Bank had HUF 34.5 billion NBH bonds. The nostro accounts closed with HUF 615 million. There were no margin deposits in HUF. The Bank had a EUR 17.5 million interbank net lending position, margin deposits amounted to EUR 49.9 million (approximately HUF 14.8 billion). 17

19 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR 2013 Beside of two-weeks NBH bonds showing 50% decrease year-on-year, as of 31 December 2013, consolidated securities portfolio (due to liquidity and risk management) contained government bonds (HUF 6 billion and EUR 47.8 million), treasury bills (HUF billion) and other securities guaranteed by the state (HUF 3.4 billion and EUR 15.2 million). Free liquid securities amounted to HUF billion in addition to the NBH bonds. 5 RISK MANAGEMENT PRINCIPLES 5.1 RISK MANAGEMENT POLICY The risks inherent in the Group s business are managed on group level. The primary purpose of risk management is to protect the Group s financial strength and goodwill, and to support the deployment of capital in competitive business activities, which contribute to the increase of shareholder value. The Group applies uniform risk management principles for the parent bank and the subsidiary bank as well as the subsidiary companies. Risk management identifies, evaluates and analyses the exposure of the Group and its members. It processes the information gained and develops risk guidelines and acceptable exposure limits, and operates risk management systems. As of HFSA s request FHB takes part in indicators monitoring defined by Basel III. Semi-annual practices had been coordinated by Risk Management Department and implemented by Controlling, Data Service, Liquidity and Risk Analysis Departments. Consultations with Ministry for National Economy and NBH have been continued in terms of Basel III. standards described in EU Directives and Regulations. During the year the Bank started to prepare for the implementation of CRD IV and CRR since 1st of January, Therefore there were new workgroups developed at the Group, to interpret the legislation, to test the impact of FHB and to measure the responsibilities associated with the data service. In September, 2013 has completed the first phase of the annual SREP supervision and the process continued from November of 2013 by the NBH (which also perform the authority of the Hungarian Banking System). In addition, the competent areas of expertise of the Bank made the Bank s Recovery Plan with participation of the risk management which called for the preparation of the NBH in accordance with the European legislation. The plan was discussed by the Mortgage Bank's Board of Directors, has been approved and submitted to the NBH. 5.2 CREDIT RISK The most important of risk management tasks related to retail business of the Bank, was the comprehensive revision and rationalization of the non-mortgage loan products and its processing process. The risk management had more task related to the higher activity in the residential mortgage loans business because there were more transaction which required participation of risk management. The Corporate-lending Department and the risk management had reviewed the topics of submitting of the risk taking concerned to corporate clients. Compared to the past it has been put together a more streamlined, the decision points even more focused, even more clearly structured presentation the scheme managers for decision-makers. In the second quarter the risk management has reviewed the IRB capital calculation implementation schedule, on which the schedule and the methodology need to be amendments. The application for amendment after approval by the Board of Directors of FHB Mortgage Bank authorization submitted to the Authority, which was adopted. To strengthening the role of risk management in the monitoring process a new corporate credit monitoring regulations has been adjusted in the fourth quarter. Also in the fourth quarter the validation of the banking certification system has been taken place, as well as the bank's annual re-certification and review of the limits. 18

20 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR MARKET RISK Due to the nature of its business as a mortgage bank and to the special legal regulation relating to it, FHB Plc. has a distinctive asset and liabilities structure within the Hungarian banking system as its assets and liabilities are essentially long-term and raise most of its funds on the capital markets. In terms of liquidity and market risk, as leading member of the Group, it is the Bank s duty to provide the necessary funds and manage risks for the Group as a whole and for each Group company. As of asset/liability management Bank continues to apply natural hedge, minimizes level of open FX positions, enters hedging transactions and intensively manages asset-liability ratio to control risks. 5.4 LIQUIDITY AND MATURITY RISK Maintaining liquidity is an essential element of banking. The Bank maintains its liquidity by coordinating the maturity of its receivables and payables. At the same time, it applies maturity transformation regulated by limits in order to improve profitability while maintaining solvency at all times. The Bank regularly reviews prepayments by clients prior to term and takes into consideration their impact on managing market and liquidity risks. 5.5 EXCHANGE RATE RISK The Mortgage Bank is a specialized credit institution, which narrows the scope of business where exchange rate-related risks may arise. Moreover, the Bank s business policy is to keep exchange rate risk at a low level. The Bank strives to immediately hedge the exchange risks related to its core business, i.e. mortgage lending, refinancing and financing though mortgage bonds, as allowed by market circumstances. Therefore, an open FX position can serve primarily the purpose of liquidity management, settlements related to lending and refinancing, or active and passive accruals in currencies in which the Bank keeps a nostro account. 5.6 INTEREST RATE RISK, EXCHANGE RATE RISK Interest rate risk stems from interest rate changes, which affect the value of financial instruments. The Bank is also exposed to interest rate risk when the amounts of assets, liabilities and off-balance sheet instruments maturing or repriced in a particular period are not in harmony. The Bank assesses interest rate risk on a continuous basis with the help of Gap analysis, VaR calculations and sensitivity analysis. The Bank manages market risk mainly by natural hedging. In addition, active management tools such as repurchase of mortgage bonds, swap transactions as well as mortgage bond maturities and interest rates suited to assets are involved in order to ensure the harmony between assets and liabilities. The Bank manages interest rate and exchange rate risks through derivative transactions. 5.7 OPERATING RISK The Bank manages risks related to its operations by developing and improving internal rules and regulations, by providing appropriate training to the staff involved in the work flows and by creating built-in control mechanisms. The management devotes extremely important role to feedback, verifying the efficiency of the measures to eliminate risks. During the first quarter, the Bank Group's operational risk self-assessment is completed. Within the framework of the self-assessment workshops for the main processes carried out in the relevant departments involved in the process, In addition, some departments have been assessed for their own activities. Based on these results the Bank s operational risk map could be assembled and could be defined the low-frequency events that causes large loss to the Bank. These impacts are measured by scenario analyses which were completed in the first quarter of the year. The first quarter has been introduced to a program that lets The Bank collect information about the operational risk events in unified content. The application of the program contributes to the full data are available to the operating risk events and losses. 19

21 FHB MORTGAGE BANK ANNUAL REPORT FOR THE YEAR 2013 From the beginning of the second quarter a new converted operational risk report was submitted to the governing bodies that more focused on the relevant information. In the fourth quarter began with the annual operational risk self-assessment and completed the KRI's review, and the Bank Group has begun the integration of Diófa Asset Management Ltd. into the operational risk management system. 6 ORGANIZATIONAL CHANGES AND HEADCOUNTS The organizational structure of FHB Mortgage Bank Plc changed on 1 February, According to change in management structure of the Bank, the previous two CEO model ceased existing. The Company is managed by one Chief Executive Officer. Range of areas under the direct control of the Chief Executive Officer expanded for the area of treasury, risk management, risk analysis and control and partner refinancing. The head of the business area as a deputy CEO is responsible for the Bank and Group's business and productdevelopment strategy and to reach the Bank's consolidated business plan figures and other goals. Deputy CEO is also responsible for the Group's marketing and management of general public relation activities. The number of 8-hour equivalent employees as of 31 December 2013 was as opposed to the as of 31 December POST-BALANCE SHEET DATE EVENTS On February 3, 2014, FHB Mortgage Bank gained 25% direct share (25%+1 vote) in Magyar Takarék Befektetési és Vagyongazdálkodási Ltd. (MATAK Ltd.) through participating in the share capital increase decided by the general meeting of MATAK Ltd. with a payment at HUF 252 million nominal value. On March 10, 2014 MATAK Ltd., MFB Magyar Befektetési Bank Zrt. (Hungarian Development Bank) and Magyar Posta Ltd. (Hungarian Post) contracted on the purchase of 929,301 pieces of equity shares of Magyar Takarékbank Ltd. By the amount of purchased shares MATAK Ltd. gets around 54.8% ownership in Takarékbank Ltd. As a result of the transaction FHB Mortgage Bank acquires 13.75% indirect ownership in Takarékbank Ltd. According to the contractual will of the parties, but depending on the completion of several regular conditions the transaction shall be closed in the first half of European banks mortgage bonds were upgraded including FHB mortgage bonds by the Moody's Investors Service published on 12 March Mortgage bonds sold by FHB Plc.'s credit rating elevated from "Ba3" to "Ba2", which is due to revision and upgrade of Moody's rating methodology related to mortgage bonds. Budapest, April 2, 2014 dr. Zoltán Spéder Chairman of the Board of Directors Gyula Köbli Chief Executive Officer 20

22 FHB Mortgage Bank Plc. ANNUAL REPORT and INDEPENDENT AUDITOR S REPORT 31 December 2013

23 Deloitte Auditing and Consulting Ltd. H-1068 Budapest, Dózsa György út 84/C, Hungary H-1438 Budapest, P.O. Box 471, Hungary Tel: +36 (1) Fax: +36 (1) Registered by the Capital Court of Registration Company Registration Number: Translation of the Hungarian original INDEPENDENT AUDITORS' REPORT To the Shareholders and the Board of Directors of FHB Mortgage Bank Plc. Report on the Financial Statements We have audited the accompanying financial statements of FHB Mortgage Bank Plc. (the "Bank") for the year 2013, which comprise the balance sheet as at December 31, 2013 which shows total assets of HUF 587,333 million and a retained profit for the year of HUF 114 million, and the related profit and loss account for the year then ended and the supplement comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the Accounting Act, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Hungarian National Standards on Auditing and effective Hungarian laws and other regulations pertaining to audit. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Member of Deloitte Touche Tohmatsu 1/2

24 Opinion In our opinion, the financial statements give a true and fair view of the financial position of FHB Mortgage Bank Plc. as at December 31, 2013, and its financial performance for the year then ended in accordance with the Accounting Act. Other Matters We issued our auditors report dated April 2, 2014 on the financial statements submitted for the General Meeting. The effects of subsequent events were examined until that date. The financial statements were approved by the General Meeting on April 28, Our procedures regarding the subsequent events occured after April 2, 2014 were limited to the General Meeting s decision on the approval of the financial statements. Other Reporting Obligation: Report on the Business Report We have examined the accompanying business report of FHB Mortgage Bank Plc. for the year Management is responsible for the preparation of this business report in accordance with the Accounting Act. Our responsibility is to assess whether the accounting information in the business report is consistent with that contained in the financial statements prepared for the same business year. Our work with respect to the business report was limited to assessing the consistence of the business report with the financial statements, and did not include a review of any information other than that drawn from the audited accounting records of the Company. In our opinion, the business report of FHB Mortgage Bank Plc. for the year corresponds to the figures included in the financial statements of FHB Mortgage Bank Plc. for the year Budapest, April 28, 2014 The original Hungarian version has been signed. Molnár Gábor Horváth Tamás Deloitte Auditing and Consulting Ltd. registered statutory auditor 1068 Budapest, Dózsa György út 84/C /2

25 FHB Mortgage Bank Co Plc Annual Report 31 December 2013 Balance Sheet Profit and Loss Statement Notes to Accounts (translation) Budapest, 2 April 2014

26 Statistical code FHB Jelzálogbank Nyilvánosan Működő Részvénytársaság Cg Item No BALANCE SHEET ASSETS in HUF Million Identification of item 31 December December 2013 a b c d 1 1. Liquid assets Treasury bills and similar securities 97,688 98,002 3 a, held for trading 97,688 98,002 4 b, held as financial fixed assets Loans and advances to credit institutions 316, ,383 6 a, repayable on demand b, other loans and advances in connection with financial services 316, ,616 8 ba, with remaining maturity of less than one year 49,813 40,112 9 Showing separately: -to affiliated companies 6,763 9, to other companies linked by virtue of participating interests to the NBH 2, bb, with a remaining maturity of more than one year 266, , Showing separately: -to affiliated companies 117, , to other companies linked by virtue of participating interests to the NBH c, in connection with investment services Showing separately: -to affiliated companies to other companies linked by virtue of participating interests Loans and advances to customers 144, , a, in connection with financial services 144, , aa, with a remaining maturity of less than one year 21,979 21, Showing separately: -to affiliated companies to other companies linked by virtue of participating interests ab, with a remaining maturity of more than one year 122, , Showing separately: -to affiliated companies to other companies linked by virtue of participating interests b, in connection with investment services Showing separately: -to affiliated companies to other companies linked by virtue of participating interests ba, receivables in connection with investment services on the exchange markets bb, receivables in connection with investment services outside the exchange markets bc, receivables from customers in connection with investment services bd, claims from clearing corporations be, receivables in connection with other investment services Debt securities, including fixed-income securities 12,146 5, a, issued by local governments and other public bodies - - (not including treasury bills and similar securities) aa, held for trading ab, held as financial fixed assets b, securities issued by other borrowers 12,146 5, ba, held for trading 12,146 5, Showing separately: -issued by affiliated companies issued by other companies linked by virtue of participating interests own shares repurchased bb, held as financial fixed assets Showing separately: -issued by affiliated companies issued by other companies linked by virtue of participating interests - -

27 Statistical code FHB Jelzálogbank Nyilvánosan Működő Részvénytársaság Cg Item No in HUF Million Identification of item 31 December December 2013 a b c d Shares and other variable-yield securities a, shares and participations in corporations held for trading Showing separately: -issued by affiliated companies issued by other companies linked by virtue of participating interests b, variable-yield securities ba, held for trading bb, held as financial fixed assets Shares and participations in corporations held as financial fixed assets a, shares and participations in corporations held as financial fixed assets Showing separately: -participating interests in credit institutions b, adjusted value of shares and participations in corporations held as financial fixed assets Showing separately: -participating interests in credit institutions Shares and participating interests in affiliated companies 51,288 48, a, shares and participations in corporations held as financial fixed assets 51,288 48, Showing separately: -participating interests in credit institutions 50,241 42, b, adjusted value of shares and participations in corporations held as financial fixed assets Showing separately: -participating interests in credit institutions Intangible assets 981 2, a, intangible assets 981 2, b, adjusted value of intangible assets Tangible assets a, tangible assets for financial and investment services aa, land and buildings ab, machinery, equipment, fittings, fixtures and vehicles ac, tangible assets in course of construction 6-72 ad, payments on account b, tangible assets not directly used for financial and investment services ba, land and buildings bb, machinery, equipment, fittings, fixtures and vehicles bc, tangible assets in course of construction bd, payments on account c, adjusted value of tangible assets Own shares Other assets 5,659 4, a, stocks b, other receivables 5,543 4, Showing separately: -from affiliated companies 1,179 1, from other companies linked by virtue of participating interests Prepayments and accrued income 17,810 18, a, accrued income 14,546 14, b, accrued costs and expenses 3,264 3, c, deferred charges TOTAL ASSETS 647, ,333 Showing separately: CURRENT ASSETS (1+2.a,+3.c,+3.a,+3.ba,+4.aa,+4.b,+5.aa,+5.ba,+6.a,+6.ba,+11+12) 188, ,960 FIXED ASSETS (2.b,+3.bb,+4.ab,+5.ab,+5.bb,+6.bb, ) 441, ,540 Date: Budapest, April 2, 2014 Gyula Köbli CEO Soltész Gábor Gergő Deputy CEO

28 Statistical code FHB Jelzálogbank Nyilvánosan Működő Részvénytársaság Cg Item No BALANCE SHEET LIABILITIES AND EQUITY in HUF Million Identification of item 31 December December 2013 a b c d Amounts owed to credit institutions 67, , a, repayable on demand b, with agreed maturity dates or periods of notice in connection with financial services 67, , ba, with remaining maturity of less than one year 67, , Showing separately: -to affiliated companies 65, , to other companies linked by virtue of participating interests to the NBH bb, with remaining maturity of more than one year Showing separately: -to affiliated companies to other companies linked by virtue of participating interests to the NBH c, in connection with investment services Showing separately: -to affiliated companies to other companies linked by virtue of participating interests Amounts owed to customers a, savings deposits aa, repayable on demand ab, with remaining maturity of less than one year ac, with remaining maturity of more than one year b, other liabilities in connection with financial services ba, repayable on demand Showing separately: -to affiliated companies to other companies linked by virtue of participating interests bb, with remaining maturity of less than one year Showing separately: -to affiliated companies to other companies linked by virtue of participating interests bc, with remaining maturity of more than one year Showing separately: -to affiliated companies to other companies linked by virtue of participating interests c, in connection with investment services Showing separately: -to affiliated companies to other companies linked by virtue of participating interests ca, liabilities in connection with investment services on the stock exchange markets cb, liabilities in connection with investment services outside the stock exchange markets cc, liabilities to customers in connection with investment services cd, liabilities to clearing corporations ce, liabilities in connection with other investment services Debts evidenced by certificates 418, , a, debt securities in issue 418, , aa, with remaining maturity of less than one year 141,682 65, Showing separately: -to affiliated companies 11,413 27, to other companies linked by virtue of participating interests ab, with remaining maturity of more than one year 276, , Showing separately: -to affiliated companies 89,157 52, to other companies linked by virtue of participating interests b, other debt securities issued ba, with remaining maturity of less than one year Showing separately: -to affiliated companies to other companies linked by virtue of participating interests bb, with remaining maturity of more than one year Showing separately: -to affiliated companies to other companies linked by virtue of participating interests - -

29 Statistical code FHB Jelzálogbank Nyilvánosan Működő Részvénytársaság Cg Item No in HUF Million Identification of item 31 December December 2013 a b c d 142 c, debt instruments treated as securities for accounting purposes, which are not recognized as debt securities under the Capital Markets Act ca, with remaining maturity of less than one year Showing separately: -to affiliated companies to other companies linked by virtue of participating interests cb, with remaining maturity of more than one year Showing separately: -to affiliated companies to other companies linked by virtue of participating interests Other liabilities a, with remaining maturity of less than one year Showing separately: -to affiliated companies to other companies linked by virtue of participating interests other contributions received from members in respect of co-operative credit institutions b, with remaining maturity of more than one year Showing separately: -to affiliated companies to other companies linked by virtue of participating interests Accruals and deferred income 48,355 36, a, deferred income 29,344 22, b, deferred costs and expenses 19,011 14, c, deferred income Provisions for liabilities and charges a, provisions for pension and severance pay b, provisions for contingent liabilities and for (future) commitments c, general risk provisions d, other provisions Subordinated liabilities 59,276 33, a, subordinated loan capital 29, Showing separately: -to affiliated companies to other companies linked by virtue of participating interests b, other contributions received from members in respect of co-operative credit institutions c, other subordinated liabilities 29,712 33, Showing separately: -to affiliated companies to other companies linked by virtue of participating interests Subscribed capital 6,600 6, Showing separately: - own shares repurchased on nominal value Subscribed capital called but unpaid (-) Capital reserve 26,530 26, a, difference between the par value and the purchase price of shares and securities (premium) 26,530 26, b, other General reserve Profit reserve (±) 17,515 19, Tied-up reserves Revaluation reserve Profit or loss for the financial year (±) 1, TOTAL LIABILITIES 647, , Showing separately: SHORT-TERM LIABILITIES [1.a,+1.ba,+1.c,+2.aa,+2.ab,+2.ba,+2.bb,+2.c,+3.aa,+3.ba,+3.ca,+4.a,] 210, , LONG-TERM LIABILITIES [1.bb,+2.ac,+2.bc,+3.ab,+3.bb,+3.cb,+4.b,+7] 335, , EQUITY CAPITAL [ ] 52,488 52, CONTINGENT LIABILITIES 3,222 4, FUTURE LIABILITIES 275, , TOTAL OFF-BALANCE SHEET LIABILITIES (ITEMS ) 278, ,602 Date: Budapest, April 2, 2014 Gyula Köbli CEO Soltész Gábor Gergő Deputy CEO

30 Statistical code FHB Jelzálogbank Nyilvánosan Működő Részvénytársaság Cg PROFIT AND LOSS STATEMENT (FINANCIAL INSTITUTIONS) in HUF Million Item 01 January, January, Identification of item No. 31 December, December, 2013 a b c d 1 1. Interest received and similar income 62,828 54,150 2 a) interest received and similar income from fixed-income securities 8,071 5,059 3 Showing separately: -from affiliated companies from other companies linked by virtue of participating interests b) other interest received and similar income 54,757 49,091 6 Showing separately: -from affiliated companies 5,819 5, from other companies linked by virtue of participating interests Interest paid and similar charges 56,346 46,613 9 Showing separately: -to affiliated companies 12,927 12, to other companies linked by virtue of participating interests BALANCE (1-2) 6,482 7, Income from securities a, income held for trading from shares and participations in corporations (dividends and profit-sharing) b, income from participating interests in affiliated companies (dividends and profit-sharing) c, bincome from other securities (dividends and profit-sharing) Commissions and fees received or due 1, a, in connection with other financial services 1, Showing separately: -from affiliated companies from other companies linked by virtue of participating interests b, in connection with investment services (not including trading operations) Showing separately: -from affiliated companies from other companies linked by virtue of participating interests Commissions and fees paid or payable 2,006 1, a, in connection with other financial services 1,773 1, Showing separately: -to affiliated companies 1,755 1, to other companies linked by virtue of participating interests b, in connection with investment services (not including trading operations) Showing separately: -to affiliated companies to other companies linked by virtue of participating interests Net profit or net loss on financial operations [6.a)-6.b)+6.c)-6.d)] 3, a, in connection with other financial services 7,515 2, Showing separately: -from affiliated companies from other companies linked by virtue of participating interests b, in connection with other financial services 4,464 2, Showing separately: -to affiliated companies to other companies linked by virtue of participating interests c, bin connection with investment services (income from trading operations) Showing separately: -from affiliated companies from other companies linked by virtue of participating interests d, in connection with investment services (expenses on trading operations) Showing separately: -to affiliated companies to other companies linked by virtue of participating interests value adjustments in respect of securities held for trading valuation difference - -

31 Statistical code FHB Jelzálogbank Nyilvánosan Működő Részvénytársaság Cg Item No. PROFIT AND LOSS STATEMENT (FINANCIAL INSTITUTIONS) 01 January, December, 2012 in HUF Million 01 January, December, 2013 a b c d Other operating income 2,838 3, a, income from operations other than financial and investment services 2,335 2, Showing separately: -from affiliated companies 2,212 2, from other companies linked by virtue of participating interests b, other income 503 1, Showing separately: -from affiliated companies from other companies linked by virtue of participating interests value readjustments in respect of stocks General administrative expenses 6,259 5, a, staff costs 1,999 1, aa, wages and salaries 1,438 1, ab, other employee benefits Showing separately: -social security costs costs relating to pensions ac, contributions on wages and salaries Showing separately: -social security costs costs relating to pensions b, other administrative expenses (materials and supplies) 4,260 3, Depreciation Other operating charges 7,039 5, a, charges on operations other than financial and investment services Showing separately: -to affiliated companies to other companies linked by virtue of participating interests b, other charges 6,986 5, Showing separately: -to affiliated companies to other companies linked by virtue of participating interests value adjustments in respect of stocks Value adjustments in respect of loans and advances and risk provisions for contingent liabilities and for (future) commitments 3,443 2, a, value adjustments in respect of loans and advances 3,343 2, b, risk provisions for contingent liabilities and for (future) commitments Value readjustments in respect of loans and advances and risk provisions for contingent liabilities and for (future) commitments 7,268 3, a, value readjustments in respect of loans and advances 4,567 3, b, risk provisions for contingent liabilities and for (future) commitments 2, Value adjustments in respect of transferable debt securities held as financial fixed assets, Value readjustments in respect of transferable debt securities held as financial fixed assets, Profit or loss on ordinary activities ( ) 1, ShowinPROFIT OR LOSS ON FINANCIAL AND INVESTMENT SERVICES ,824 [ b) b) ] Identification of item shares and participations in affiliated companies and in other companies linked by virtue of participating interests shares and participations in affiliated companies and in other companies linked by virtue of participating interests 82 PROFIT OR LOSS ON OPERATIONS OTHER THAN FINANCIAL AND INVESTMENT SERVICES [7.a)-10.a)] 2,282 2, Extraordinary income Extraordinary charges Extraordinary profit or loss (16-17) Profit or loss before tax (+15+18) 1, Taxes on income Profit or loss after tax (+19-20) 1, General reserve (±) Profit reserves used for dividends and profit-sharing Dividend and profit-sharing payable Showin-to affiliated companies to other companies linked by virtue of participating interests Profit or loss for the financial year (+21-/ ) 1, Date: Budapest, April 2, 2013 Gyula Köbli CEO Soltész Gábor Gergő Deputy CEO

32 FHB Mortgage Bank Co Plc NOTES TO ACCOUNTS 31 December 2013 (translation) Budapest, 2 April 2014

33 TABLE OF CONTENTS TO NOTES TO ACCOUNTS 31 December 2013 I. GENERAL PART I / 1 Description of FHB Land Credit and Mortgage Bank Public Limited Company 3 I / 2 Key elements of accounting policy 5 I / 3 Information 8 I / 4 Changes in own equity 15 II. SPECIFIC PART II / 1 Changes in gross values of intangible and tangible assets 16 II / 2 Changes in accumulated depreciation of intangible and tangible assets 17 II / 3 Changes in net values of intangible and tangible assets 18 II / 4 Changes in depreciation of intangible and tangible assets in the subject year 19 II / 5 Portfolio of accounts receivable from credit institutions and customers broken down by residual time to maturity (without sight ones) 20 II / 6 Portfolio of accounts payable to credit institutions / customers and issued securities broken down by residual times to maturity (without sight ones) 21 II / 7 Items to modify corporate tax base 22 II / 8 /a Changes in provisions 23 II / 8 / b Changes in value losses 23 II / 9 Cash-flow 24 II / 10 Maturities of major items of accrued interests and deferred costs and expenses 25 II / 11 Assets and liabilities in foreign currencies 26 III. INFORMATIVE PART III / 1/a Informative data on direct participations of the bank 27 III / 1/a Informative data on indirect participations of the bank 28 III / 2 Investments 29 III / 3 Total emoluments payable to members of Board of Directors, Management and Supervisory Board on business year 30 III / 4 Loans granted to members of Board of Directors, Management and Supervisory Board 31 III / 5 Average statistical personnel staff broken down by staff groups 31 III / 6 Book value and nominal value of own securities 32 III / 7 Extraordinary incomes and expenses 33 III / 8 Off-balance sheet items 34

34 I. GENERAL NOTES I/1. Description of FHB Land Credit and Mortgage Bank Public Limited Company FHB Mortgage Bank Public Limited Company (hereinafter FHB Plc, FHB Mortgage Bank Plc, Bank) was established on 21 October 1997 under the name of FHB Land Credit and Mortgage Bank Company. The Bank s share capital is HUF 6,600,001,000 Ft, the total amount of which was contributed in cash. The Bank s share capital is comprised of 66,000,010 registered shares of HUF 100 par value each. The share capital includes the following types of shares: - 66,000,010 ordinary Class A registered shares at a total nominal value of HUF 6,600,001,000. FHB Plc. s ownership structure Shareholders Number of shares (pcs) Ownership share in the share capital (%) Series A ordinary shares listed on the Budapest Stock Exchange Domestic institutional investors / companies Foreign institutional investors / companies 42,593,245 41,787, % 63.32% 14,509,484 14,297, % 21.66% Domestic private individuals 4,100,055 5,091, % 7.71% Foreign private individuals 18,792 45, % 0.07% FHB Plc. 53,601 53, % 0.08% Hungarian State 4,724,833 4,724, % 7.16% Total 66,000,010 66,000, % % The Bank s operations are provided for by Act CXII of 1996 on Credit Institutions and Financial Enterprises, as well as Act XXX of 1997 on Mortgage Loan Companies and Mortgage Bonds. The licence of operation, issued by the Hungarian Financial Supervisory Authority, specifies the Bank s activities and their conditions. The Bank s core business as a specialised credit institution includes provision of long-term loans secured by mortgaged properties as a collateral, and issue of special long-term securities (mortgage bonds). In 2011 the FHB Mortgage Bank Plc. significantly revamped its investments to be able to be up to the challenges of the market. On one hand the Allianz Bank Limited, which was acquired in the course of 2010, was merged by acquisition into the FHB Commercial Bank in H1 of In the second half of the year the FHB Service Limited after its assets and liabilities were reviewed and restructured was sold outside the Group, and along with it the majority of the previously outsourced activities were insourced to the banks. The revamp was completed in 3

35 December Accordingly, as of 31 December 2013 the members of the FHB Group under consolidated supervision are as follows: FHB Mortgage Bank Plc., FHB Commercial Bank Ltd., FHB Real Estate Leasing Ltd., FHB Annuity and Real Estate Investment Ltd., FHB Real Estate Ltd., Diófa Alapkezelő Ltd. In the course of 2013 the business relations between the FHB Group members further broadened in line with the strategic concept of the Group. The FHB Mortgage Bank Plc., as a revamp of the operation of the group, provides part of the resources required for the general operation of the Group members - which resources were previously provided by FHB Service Ltd., renamed to EXO-BIT Ltd. - by means regulated by the contracts taken over and the individual contracts on providing services to each Group member within the Service Limited, the so called Service Level Agreements, and the individual property and other lease agreements and operational agreements. Some of the services previously provided by the FHB Service Ltd. are currently provided by the FHB Commercial Bank Ltd. and the rest of the services by EXO-BIT Ltd. The scope of services provided by the FHB Mortgage Bank Plc. as follows: Full-fledged business administration services including accounting, taxation, HR, payroll accounting, statistics, statutory data provision; Provision of full-fledged material conditions in the context of lease and operation agreements except the branch offices of the Commercial Bank; Partial operation of the IT infrastructure required for the operation. The FHB Commercial Bank, as the agent of the Mortgage Bank, entirely does direct lending furthermore complete loan aftercare and qualified loan management, and at the same time the FHB Commercial Bank, in order to have favorable funding costs, has majority of its loans refinanced by the FHB Mortgage Bank. The FHB Real Estate Leasing Ltd. provides mortgage based financing to retail and corporate customers, furthermore sells leasing products. FHB Annuity and Real Estate Investment Ltd. (FHB Annuity Ltd.) is involved in the sales of reverse mortgage products as the Mortgage Bank s agent and provides the life annuity contracts as its own products. The FHB Real Estate Ltd. especially helps to carry out the tasks specified in the FHB Mortgage Bank Plc.'s strategic concept with the FHB Group's activities including cover valuation, real estate sales, furthermore real estate management and real estate valuation. After the acquisition the Diófa Alapkezelő Ltd. besides carrying on and strengthening real-estate investments, pension fund wealth management and tailor made solutions for institutional clients handles new retail funds which have been launched in the branch network of FHB Group. 4

36 FHB Mortgage Bank s operation for the past period is characterised by the following key data and indicators: FHB data Major financial indicators 31 Dec Dec 2013 Balance sheet total (million HUF) 647, ,333 Mortgage loans (million HUF) 400, ,646 Mortgage bonds outstanding (million HUF) 304, ,601 Bonds outstanding (million HUF) 114, ,745 Own equity (million HUF) 52,488 52,615 Adjusted capital (million HUF) 60,058 31,395 Capital adequacy ratio (%) After-tax profit (million HUF) 1, CIR (operating costs / gross operating profit) (%) ROAA (return on average assets) (%) ROAE (return on average equity) (%) I/2. Key elements of the accounting policy The aim of the accounting policy is to set up the accounting of economic and financial events and establish the technicalities of accounting; to synchronise financial activities and their accounting; to determine the key operating principles and conditions of accounting in order to help the Bank s various investors understand and follow the company s actual financial position and profitability through the Bank s annual reports. The accounting policy is based on the provisions of Act C of It applies Government Decree No. 250/2000 on the Special Provisions regarding the Annual Reporting and Book-Keeping Obligations of Credit Institutions and Financial Enterprises, and also observes the provisions of Act CXII of 1996 on Credit Institutions and Financial Enterprises, Act XXX of 1997 on Mortgage Loan Companies and Mortgage Bonds, Act CXX of 2001 on the Capital Market, as well as relevant provisions of the Hungarian National Bank and the Ministry for National Economy in order to assist the Bank in realising its primary objectives. The Bank s accounting policy determines the rules for the valuation of assets and liabilities, as well as the contents of the balance sheet, the profit and loss statement and the notes to the consolidated financial statement. In accordance with the provisions of the Accounting Act, the Bank applies double-entry book keeping and issues annual reports. The balance sheet is prepared in accordance with Annex 1 of Government Decree No. 250/2000 and the profit and loss statement is made in a vertical format, as required by Annex 2 of the same Decree. The Bank s accounting systems The Bank uses BANKMASTER for client registration, accounting and basic transactions, which transfers data by controlled posting into the Bank s general ledger, SAP integrated company management system. 5

37 Error distorting true and fair view Errors identified in the course of audits performed by external bodies or the internal audit department shall be considered to be errors distorting true and fair view for the purposes of the Bank if the shareholders equity in the balance sheet of the business year before the year in which the error was disclosed changes by at least 20%. Level of material and minor errors Errors identified in the course of various audits shall always be considered to be material for the purposes of the Bank, if the aggregate impact of such errors, in the year in which the errors were disclosed, result in any changes (increases or decreases) in the shareholders equity, financials or income in excess of 2% of the audited business year s balance sheet total. When the 2% of balance sheet total not exceeding of HUF 1 million, the margin for the above errors is HUF 1 million. Balance sheet Within the scope of the accounting principles the Bank set forth the balance sheet date to be 31 st December of the year of reporting. The balance sheet is prepared in 10 workdays after the balance sheet date. Tangible Assets under the purchase value of HUF 50,000 shall be accounted in a lump sum by the Company as costs at the time of the purchase. Balance sheet and off balance sheet foreign exchange liabilities and receivables shall be recorded by the Bank at the NBH s (National Bank of Hungary) exchange rate valid as of the balance sheet date. Within accruals, apart from general terms, the Bank s special terms include the following: accrual of interest earned and owed, as well as accrual (for the time of maturity) of negative or positive variances (exchange rate variances) between the proceeds from the issue of interest-bearing securities and their par value. Accruals and deferrals shall be registered at contract value. Liabilities to customers include credit related interest and capital repayments paid in by customers but not yet due as well as cash received as surety from customers based on customer contracts. The utilization of surety for credit repayment takes place in circumstances stipulated in the contract. Profit and Loss Statement The Profit and Loss Statement calculates the retained profit of the year, while observing the provisions for the accumulation and accounting of credit institution reserves and losses. Depreciation and amortization on tangible and intangible assets is reported monthly pro rata temporis, by including changes that occur during the year. The Bank when accounting foreign currency swaps aiming liquidity, which usually mature within one year, examines the swaps not closed before balance sheet date and realizes the profit or loss proportionate to the current year in interest income or interest expense. Thereafter the Bank determines the foreign currency difference originating from the revaluation of swap related currency amount. These transactions are accounted as 6

38 the foreign currency swaps for interest arbitrage according to the regulations of the Government Decree. Depending on the nature of profit or loss, profit is accounted to deferred income, loss is accounted to accrued expense, and will be released when the swap deal will be closed. Notes to the Financial Statements The notes to the financial statements contain the numerical data and narrative explanations, which help shareholders, investors and creditors to have a better understanding and analysis of certain lines in the balance sheet and the P/L statement. These notes provide additional information on the Bank s activities, as well as details on certain balance sheet and P/L data. Depending on their contents, data are grouped by the Bank in the Notes to the financial statement in the following sections: General notes, Specific notes, Information. Business Report Apart from the events of the accounting period, the Bank discusses issues and plans with significant present and future reference in its Business Report. The Business Report contains information on: the analysis of the Bank s activities and course of business with regards to the accounting period, as well as their future impact; significant events occurring after the balance sheet date; changes with an impact on the ownership structure; the human resources policy; the research and development; the persentation of the branches; and any additional information considered important by the Bank. 7

39 I/3. Information 1. Information on shareholders with significant or majority interest None of the Bank s shareholders has a majority interest under Act IV of 2006 on Business Associations. 2. Information on the Bank s risks in excess Section 79 of Act CXII of 1996 on Credit Institutions and Financial Enterprises provides that risks are considered in excess when the total risks provided for a customer or group of customers exceeds 10% of the credit institution s solvency margin. As of 31 December 2013 the Bank had one client with risks in excess as described above - the total amount of receivables is HUF 5,067 million. 3. Compliance with mortgage lending provisions Within the total balance of mortgage loans, 98.99% have a maturity over five years compared tothe minimum requirement of 80.0% as stipulated by Subsection (1) Section 5 of Act XXX of Total outstanding mortgage loan balance does not exceed 70% of the collateral value of real estate as provided for by subsection (3), Section 5 of Act XXX of The rate was 39.08% as of 31 December Compliance with the provisions on investment As at 31 December 2013 the Bank have the following investments: FHB Commercial Bank Ltd., FHB Annuity and Real Estate Investment Ltd., FHB Real Estate Ltd. Diófa Alapkezelő Ltd. and Díjbeszedő Operating and Servicing Ltd. All of the Bank s investments are in conformity with Section 9(1) of Act XXX of 1997 providing limitations of direct and indirect ownership. The aggregate value of investment by the Bank does not exceed 10% of the adjusted capital, as set forth by Section 9(2) of the Act. 5. Compliance with the provisions on the issue of mortgage bonds As of 31 December 2013, surpassing the provisions of Subsections (1, 2a) Section 14 of Act XXX of 1997, the Bank s collateral exceeded the nominal value HUF 225,601 million of mortgage bonds outstanding. At the end of the reported period this consisted of principle outstanding, net of impairment, amounting to HUF 308,444 million considered as ordinary collateral. 8

40 As of 31 December 2013, surpassing the provisions of Paragraphs (1, 2b) Section 14 of Act XXX of 1997, the Bank s interest on net ordinary collateral exceeded the interest on the nominal value of mortgage bonds outstanding, HUF 53,899 million. At the end of the period of reporting the interest on ordinary collateral net of impairment was HUF 154,922 million. No supplementary collateral according to Article 14 (11) of Act XXX of 1997 on Mortgage Banks and Mortgage Bonds was involved by 31 December Pursuant to Section 14(1) of the Act on Mortgage Banks and Mortgage Bonds mortgage banks must at all times have sufficient cover assets of a value higher than the sum of the face value of and the interest on outstanding mortgage bonds. Pursuant to the provisions of Section 137(43) of Act XLVIII of 2004, as of 1 January 2006 mortgage banks must also at all times ensure cover for mortgage bonds at present value. The rules of calculating the present value of assets used as cover for mortgage bonds are set forth by Decree 40 of 2005 (9 December) by the Minister of Finance. The Decree provides for the present value of mortgage bonds and cover assets to be assessed for each banking day. In cases where the present value of cover assets does not exceed the present value of outstanding mortgage bonds in circulation the mortgage bank must proceed to supplement the missing cover as stipulated in the rules of collateral registration. Since the statutory provisions described above entered into effect FHB has established, on a daily basis, the present value of mortgage bonds as well as collateral relying on the zero coupon yield curve determined from the actual yield curve at any time, and ensures their adequacy. As of 31 December 2013 the present value of ordinary collateral was HUF 350,680 million and that of mortgage bonds was HUF 261,276 million, which means the present value of cover assets exceeded the present value of outstanding mortgage bonds in circulation. Pursuant to the provisions of the Decree by the Minister of Finance cited above the Bank has applied a quarterly sensitivity test since 2006 to check the availability, at present value, of collateral exceeding the nominal value and interest in HUF in the case of changes in interest rates and/or exchange rates. The effect of changes in the interest rate on present value is examined statically, by parallel shifting of the zero coupon yield curve 250 base points upwards and downwards. The static method of analysis is also used in the assessment of exchange rate risk as provided for by the Decree of the Minister of Finance. The sensitivity analysis conducted on 31 December 2013 showed the surplus cover of the mortgage bonds in circulation and the present value of their coverage as required by the relevant statutory provisions. 6. Information on mortgage bonds issued As of 31 December 2013 the aggregate mortgage lending value of real estate serving as ordinary collateral was HUF 874,610 million. Liabilities from mortgage bonds issued by the Bank with a maturity exceeding five years amounted to HUF 10,069 million as of 31 December The Bank organised repurchase of its listed and non-listed mortgage bonds and bonds four times in The face value of repurchased mortgage bonds amounted to EUR 11.1 million and HUF 2,049 million, of repurchased bonds to HUF 5,625 million and EUR 2,000.9 million. The subordinated bonds which was issued with a total face value of HUF 15,000 million and EUR 50 million issued on 13 June 2012 have been repurchased in By an active ALM, the Bank further improved the harmonization of maturity, mitigated the concentration of maturity for the coming years, and cut its funding costs as a result of the favorable yield spread and commission structures. 9

41 7. Information on the rating of banking activities, accounting of impairment and provisions The Bank has carried out the rating of receivables and liabilities. On 31 December 2013, the portfolio of receivables and liabilities, which includes receivables from customers, off-balance contingencies, receivables from the loan bank and financial investments, was HUF 472,219 million in total. As a result of the rating, based on the Government decree and internal regulations, 89.70% of the total portfolio is problem-free prime, 5.48% is on the watch list, 2.31% is classified as sub-prime, 1.75% is rated as doubtful, and 0.76% as bad debt. As of 31 December 2013, the Bank recorded HUF 8,917 million impairment from receivables, and a risk provision of HUF 172 million for contingencies. On basis of the qualification of strategic investments during the year 2013, the Bank reversed the previously generated impairment in the amount of HUF 158 million to its subsidiary, the FHB Real Estate Limited. 8. Information on the general risk provision As of 1 January 2008 the Bank discontinued the system of general risk provision. On 18 September 2012 the Board of Directors of the Bank amended the internal rules of the Bank on the generating and use (of impairment and provisions). According to the amendment from 30 September 2012 the Mortgage Bank in compliance with Section 87 of the Credit Institutions Act shall create general risk provisions - up to a maximum of 0.01% of the risk-weighted exposure amounts (adjusted balance sheet total) - to cover any unforeseeable and indeterminable losses in connection with exposures. If the amount of general risk provisions exceeds the level stipulated in Article 87 (2) of the Credit Institutions Act on the balance sheet preparation date of the business year, or on the last day of the quarter, then the Bank shall set the surplus of provisions free. In compliance with that the Bank corrected the sum of the general risk provisions during the quarter-ends of Due to this the portfolio of provisions amounted to HUF 13 million as of 31 December Information on the general reserve According to Section 75 of the Credit Institutions Act a credit institution shall create general reserves from its after-tax profits prior to paying dividends and shares, which shall be ten percent of the after-tax profits of the year. In 2013 the Bank generated general reserves in the amount of HUF 13 million. 10. Impairment of other receivables As of 31 December 2013 no such losses were recorded by the Bank. 11. Information on the Bank s shares The Bank assigned KELER Ltd. to maintain the Register of Shares in accordance with the relevant legal provisions. Payment of dividends for the years 2003 through 2006 is also carried out by KELER Ltd. 10

42 On 1 January 2013 the total amount of unpaid dividends was HUF 202 million. This amount can be considered as an expired liability because the reason of non-payment solely the owners responsibility and form the full portfolio of the liabilities from unpaid dividends is over 5 year old. The income from the expired liabilities booked as an extraordinary income on 30 June Derivative deals As of 31 December 2013 the following OTC hedging futures are recorded by the Bank: - interest swap transactions, in which cases the value of future liabilities undertaken was HUF 298 million, and the value of related future receivables was HUF 453 million. - foreign exchange swaps with future receivables of EUR 135 million (HUF 40,083 million) and HUF 106,498 million, and related future liabilities of CHF 499 million (HUF 120,802 million) and EUR 141 million (HUF 41,788 million). In relation to the OTC hedging futures existing on 31 December 2013, the P/L statement already recorded HUF 699 million (EUR 2.36 million), HUF 4,728 million accrued interest, as well as HUF 1,293 million (CHF 5.34 million), HUF 446 million (EUR 1.5 million) and HUF 43 million interest expenditure. Swaps for hedging purposes are based on mortgage bonds denominated in EUR, HUF-denominated bonds and EUR-denominated long-term interbank loans. The swap parameters (amount and type of foreign exchange, interest, maturity etc.) are identical with the parameters of the mortgage bond and FEX loan. Liquidity swaps involve CHF 2.5 million (HUF 605 million), EUR 167 million (HUF million) and HUF 6,616 million future receivables and CHF 180 million (HUF 43,638 million), GBP 8.5 million (HUF 3,032 million) HUF 10,485 million future liabilities. HUF 5 million deferred interest expense and HUF 33 million accrued interest income related to liquidity swaps open on balance sheet date were accounted. 13. Other banking information In accordance with the Government Decree, the value of pending interest which is % of interest on receivables from customers, reported in 2013 was HUF 2,237 million as of 31 December 2013 (2012: HUF million) and the value of pending interest type commission was HUF 409 million (2012: HUF 304 million). During the reported year the Bank received HUF 372 million from interest that was pending before the year of reporting, of which HUF 56 million was accrued in the 2012 financial statement. The amount of absolute guaranty from customers backing the receivables from customers (private persons), was HUF 25,963 million (2012: HUF 30,165 million) and the amount of government guaranty was HUF 4,604 million (2012: HUF 5,251 million). Receivables covered by life insurance taken out by debtors amounted to HUF 15,448 million (2012: HUF 16,257 million). The portfolio of loan transactions with partner banks and savings cooperatives within syndicated lending was HUF 3,993 million as of 31 December The cooperation agreement with the credit institutions includes a deficiency guaranty and loss sharing in favour of the Bank. Within the deficiency guaranty, the partner bank takes over a certain amount of liabilities, which the Bank recorded as non-recurring losses/provision on loans and advances. The partner bank undertakes deficiency guarantee to the extent of lending losses suffered by the Bank that cannot be recovered by any other means. According to the loss-sharing agreement, the syndicated partner undertakes 40-60% of losses/provision on loans and advances. 11

43 Within the amounts of the liabilities from clients the contractual value of restructured liabilities was HUF 24,899 million as of 31 December 2013; its value according to the registration was HUF 21,160. Foreclosure procedure is in progress with regard to 351 terminated deals on 31 December 2013 that are accounted for HUF 1,989 million. The Bank initiated new auction procedures in case of 36 terminated deals in 2013 that are accounted for HUF 198 million. 12 pieces of transactions terminated in the base period got out of the portfolio from the transactions affected by enforcement proceedings initiated by the Bank. In case of 10 pieces of auctions completed in the base period there were 2 pieces of transactions in case of which our Bank initiated the enforcement proceedings, based on the pay-out plan of the bailiff the amount calculated for our Bank is HUF 8 million. In case of the other 8 pieces of transactions the real estate serving as collateral were auctioned by outside enforcement proceedings, based on the pay-out plan of the bailiff the amount calculated for our Bank is HUF 42 million. The purchase price achieved at the auction and the amount calculated for our Bank after the pay-out plan covered the debt to the Bank in two cases, the acting bailiff is still carrying on the proceedings in case of the other 8 pieces of transactions. Regarding the auctions that ended in 2013 (10 auctions, 15 affected deals), the value difference of the result of the auction and the existing mortgage loan is HUF 31 million. In order to reduce and avoid loss related to mortgage lending, the data of properties received as a result of execution are as follows: Number 13 pieces Legal characteristics Taken into possession 12 pieces Taken into ownership, but accession not yet realized 1 pieces Sold from the properties received 4 pieces Till 31 December 2013 the Bank offered 320 pieces of properties (2012: 160 pieces) to the NET (National Asset Management Ltd), to which 571 pieces of transactions were related (2012: 313 pieces). From the offered properties 237 pieces of properties (2012: 103 pieces) were purchased and together with that 394 pieces of transactions (in the amount of HUF 1,270 million) (2012: 155 pieces and HUF million) were closed till 31 December From the beginning of the exchange rate protection scheme to the end of the year 3,542 clients of the Bank notified their intention to participate in the program, and from them 2,910 clients signed the contracts until 31 December As of 31 December 2013, the amount of principal repayment from mortgages for the reported year was HUF 60,702 million, of which HUF 19,807 million was mortgage repayment from customers and 40,895 was repayment from credit institution refinancing. As set forth by the provisions of the Government Decree, during the preparation of the balance sheet the Bank has to move the amount of receivables and liabilities that is due in the year following the reported year from long term to short term receivables and liabilities. Accordingly, the Bank restructured HUF 21,426 million from long-term receivables from customers and HUF 17,628 million from long-term receivables from credit institutions into short-term receivables. From long-term liabilities due to issued mortgage bonds HUF 34,132 million, due to issued bonds HUF 30,896 million were moved to short-term liabilities. Of the HUF 98,002 reported by the Bank in the 31 December 2013 balance sheet as government securities HUF 63,747 are listed securities. 12

44 In inventory the Bank accounts for purchased inventory amounted to HUF 10.7 million and repossessed real estate amounted to HUF 144,3 million on 31 December 2013, based on which there is impairment of HUF 4.7 million. The Expenditures on investment services line item of the profit and loss statement recorded HUF 153 million sales expenditures related to the sales of mortgage bonds As a result of sales of services within the Group companies, as of 31 December 2013 the Bank had receivables from subsidiaries amounting to HUF 1,027 million in the following breakdown: FHB Commercial Bank Ltd. FHB Annuity Ltd. FHB Real Estate Ltd. HUF 985 million HUF 13 million HUF 29 million The Bank recorded HUF 375 million liabilities for services extended by its subsidiaries in the following breakdown: FHB Commercial Bank Ltd. HUF 234 million FHB Annuity Ltd. HUF 2 million FHB Real Estate Ltd. HUF 139 million The Bank s assets also include CHF 3.3 million (HUF 792 million), EUR 26 million (HUF 7,720 million), and HUF 440 million current, CHF 70.6 million (HUF 17,095 million), and HUF 10,000 million long term interbank deposit with FHB Commercial Bank Ltd., and CHF 50,500 million (HUF 12,228 million), EUR 10 million (HUF 2,963 million) and HUF 114,500 million interbank deposit from FHB Commercial Bank Ltd. The part of the members of FHB Group are subject to group taxation headed by FHB Mortgage Bank Plc. No VAT is incurred by services extended within the tax group. 14. Additional information The Bank has no pension payment obligations to its previous senior management members. The Bank did not provide long-term loans for its associated enterprise. The Bank did not maintain or use provisions for its subsidiary. The Bank did not record any export sales to countries within or outside of the European Union. The Bank did not receive any export subsidies. The Bank did not receive any disbursement without return from subsidy programmes. Subsidy programmes include subsidies and allocations disbursed from central government, local government and/or international funds, as well as other business enterprises for the upkeep and development of activities. The Bank did not engage in research and development activities in The Bank does not own any tangible assets intended for direct environmental protection purposes, nor any hazardous waste and pollutants. The Bank does not have any present or future environmental obligations or environmental protection costs. In 2013 the Bank was not a member of the National Deposit Insurance Fund nor of any voluntary deposit insurance fund, institution protection fund or investor protection fund. The Bank s assets are not encumbered with mortgage or any other similar rights. 13

45 The Bank did not carry out any reverse transactions in Other information As a result of the revamp of the Group the FHB Mortgage Bank Plc. has been keeping its books and accounts since December 2011 despite of the previous practice. Public data on record: Gyula Köbli Registration number: Residence: 1192 Budapest, Szent Imre u. 4. In the 2013 business year the Company employed Deloitte Auditing and Consultiung Ltd. (seated: 1068 Budapest, Dózsa György út 84/C., corporate registration number: ; auditors chamber id: ; Hungarian Financial Supervisory Authority id: T /94; hereinafter referred to as: "Auditor") to act as its auditor. The personally appointed auditor of the auditing company was Mr. Tamás Horváth (mother s name: Veronika Grósz; address: 1028 Budapest, Bölény u. 16; auditors chamber id: ; Hungarian Financial Supervisory Authority id: E003449; hereinafter referred to as: personally assigned auditor ). The audit fee of the Auditor for performing the annual audit of the financial reports of the Company on year 2013 was HUF 14.6 million. In addition to the annual audit, the Bank assigned the Deloitte Ltd to perform other non-audit services, and paid all together HUF 7.1 million for them. The following persons are authorised to represent FHB Mortgage Bank Public Limited Company and sign the Company s annual report: Gyula Köbli Gábor Gergő Soltész Chief Executive Officer 1192 Budapest, Szent Imre u. 4. Deputy Chief Executive Officer 1118 Budapest, Ratkóc u. 11. The Bank s Annual Report can be inspected at the Company s registered office and on its website The Company s registered office: 1082 Budapest, Üllői út

46 I /4. Changes in own equity 31 December 2013 Data in million HUF Subscibed Capital General Accumulated Fixed Balance Total capital reserve reserve profit reserve Sheet own reserve profit equty 31 December ,600 26, , ,633 52, Creation of general reserve profit , , profit December ,600 26, , ,615

47 II. SPECIFIC PART II / 1. Changes in gross values of intangible and tangible assets 31 December 2013 Data in million HUF Description Balance Changes in gross values sheet line Opening Transfer from Increase in Decrease Closing balance opening balance the year in the year balance I. Intangible assets : a/ Valuable rigths b/ Intellectual products 1, , d/ Goodwill Total intangible assets : 9. 1,722-1,136-2,858 II. Tangible assets of financial services: a/ Land and buildings 10. aa) b/ Plant, machinery 10. ab) installations, vehicles c/ Investments 10. ac) d/ Advances on investments 10. ad) Total tangible assets of financial services: 10. a) III. Tangible assets of non-direct financial services: a/ Land and buildings 10. ba) b/ Plant, machinery 10. bb) installations, vehicles c/ Investments 10. bc) d/ Advances on investments 10. bd) Total tangible assets of non-direct financial services: 10. b)

48 II / 2. Changes in accumulated depreciation of intangible and tangible assets 31 December 2013 Data in million HUF Description Balance Changes in gross values sheet line Opening Transfer from Increase in Decrease Closing balance opening balance the year in the year balance I. Intangible assets : a/ Valuable rigths b/ Intellectual products c/ Value of formation / reorganization Total intangible assets : II. Tangible assets of financial services: a/ Land and buildings 10. aa) b/ Plant, machinery 10. ab) installations, vehicles c/ Investments 10. ac) d/ Advances on investments 10. ad) Total tangible assets of financial services: 10. a) III. Tangible assets of non-direct financial services: a/ Land and buildings 10. ba) b/ Plant, machinery 10. bb) installations, vehicles c/ Investments 10. bc) d/ Advances on investments 10. bd) Total tangible assets of non-direct financial services: 10. b)

49 II / 3. Changes in net values of intangible and tangible assets 31 December 2013 Data in million HUF Changes in Description Balance net values sheet line Opening Closing balance balance 18 I. Intangible assets : a/ Valuable rigths b/ Intellectual products 968 1,189 c/ Value of formation / reorganization Total intangible assets : ,016 II. Tangible assets of financial services: a/ Land and buildings 10. aa) b/ Plant, machinery 10. ab) installations, vehicles c/ Investments 10. ac) 6 - d/ Advances on investments 10. ad) - - Total tangible assets of financial services: 10. a) III. Tangible assets of non-direct financial services: a/ Land and buildings 10. ba) - - b/ Plant, machinery 10. bb) 7 5 installations, vehicles c/ Investments 10. bc) - - d/ Advances on investments 10. bd) - - Total tangible assets of non-direct financial services: 10. b) 7 5

50 II / 4. Changes in depreciation of intangible and tangible assets in the subject year 31 December 2013 Description Planned depreciations Data in million HUF Over-plan depreciations, shrinkage I. Intangible assets 1/ Valuable rights 7-2/ Intellectual products 94-3/ Value of formation / reorganization - - Total intangible assets II.1. Tangible assets of financial services: 19 1/ Land and buildings 39-2/ Plant, machinery installations, vehicles 3/ Investments - - Total tangible assets of financial services: II.2. Tangible assets of non-direct financial services 1/ Land and buildings - - 2/ Plant, machinery 2 - installations, vehicles Total tangible assets of non-direct financial services: 2 - III. Depreciation of tangible and intangible assets of - - a value below HUF 50,000 each accounted in a sum T o t a l : 243 4

51 II / 5. Portfolio of accounts receivable from credit institutions and customers broken down by residual time to maturity (without sight ones) 31 December 2013 Data in million HUF Balance Portfolio as of Portfolio of 31 December 2013 without value loss broken down by residual times to maturity D e s c r i p t i o n sheet 31 December 2013 Within Between 3 months Between 1 year Between 5 years Between 10 years More then line three months and one year and 5 years and 10 years and 15 years 15 years 1 = Accounts receivable from credit institutions : 20 - Other short term 3. ba) 40,112 26,443 13, Long term 3.bb) 237, ,660 93,954 43,011 20,879 Accounts receivable from customers : - Short term 4. aa) 21,426 11,565 9, Long term 4. ab) 117, ,026 43,168 20,692 11,648 - Accounted value loss from 4. ab) -8, T o t a l : 407,659 38,008 23, , ,122 63,703 32,527

52 II / 6. Portfolio of accounts payable to credit institutions / customers and issued securities broken down by residual times to maturity (without sight ones) 31 December 2013 Balance Portfolio as of Data in million HUF Portfolio of 31 December 2013 without value loss broken down by residual times to maturity D e s c r i p t i o n sheet 31 December 2013 Within Between 3 months Between 1 year Between 5 years Between 10 years More then No line three months and one year and 5 years and 10 years and 15 years 15 years maturity 1 = Accounts payable to credit institutions : - Short term 1. ba) 132, , Long term 1. bb) Accounts payable to customers : - Short term 2. ab) bb) Long term 2. ac) bc) Accounts payable due to issued securities : - Short term 3.aa) 65,028 5,700 59, Long term 3.ab) 265, ,249 10, Subordinated accounts 7. 33, ,254 payable T o t a l : 496, ,294 59, ,249 10, ,254

53 II / 7. Items to modify corporate tax base 31 December 2013 Data in million HUF Items to decrease pre-tax profit Amount Items to increase pre-tax profit Amount 1. Planned and over-plan depreciation Planned depreciation 242 applicable according tothe provisions of Corporate Tax Act. accounted as cost according to Accounting Act. 2. Expenses related to sale of properties Over-plan depreciation accounted as cost according to Accounting Ac 6 according to the provisions of Corporate Tax Act. 3. Items to increase pre-tax profit of the previous years (revenues) 0 3. Expenses related to sale of properties according to Accounting Act Reversal of provision for pending litigations 1 4. Items to decrease pre-tax profit of the previous years (expenses) Extraordinary income from expired liabilities Provision for pending litigations 5 6. Released bad debt Tax penalty 11 T o t a l : 445 T o t a l : 481 Pre-tax profit (19 of P&L statement): 127 The amount of the released receivables which was reimbursed by the State 258 Corporate income tax base (after the deduction of the revenues which are exempt based on the Special Banking Tax Act) -131 Items to increase pre-tax profit 481 Items to decrease pre-tax profit 445 Corporate tax base: -95 Tax payable 0

54 II / 8 / a. Changes in provisions 31 December 2013 Data in million HUF Description Opening Writing off of Creation of Writing back FX Closing balance credit losses privision of provision differences balance 1. Provision for securities Provision for accounts receivable Provision for inventories Provision for financial investments Provision for off-balance-sheet items Provision for possible future obligation Provision for general risks Other provisions Total provisions : ( ) II / 8 / b. Changes in value losses Description Opening Writing back of Writing back Value losses FX Closing balance value losses of of value losses accounted in differences balance previous year in subject year subject year 1. Value loss of accounts receivable from credit institutions Value loss of accounts receivable from customers 9,613 3,531 2,536 5, , Value loss of shares for investment purposes Value loss of accounts receivable Total value losses: ( ) 9,933 3,846 2,536 5, ,922

55 II / 9. CASH-FLOW Data in million HUF No. 31 December 31 December D e s c r i p t i o n Interest received 62,828 54, Incomes from other financial services 8,823 3, Other incomes (without use of provision and writing back of 503 1,810 surplus provision, value loss of inventories and over-plan depreciation Incomes from investment services (except for writing back - - of value loss of securities) Incomes from services other than financial or investment 2,335 2, Dividend received Extraordinary income Interest paid -56,346-46, Expenses on other financial services (without value loss of securities) -6,237-3, Other expenses (except for creation of provision and value loss, over-plan depreciation) -6,985-5, Expenses on investment services (without value loss of securities) Expenses on services other than financial and investment ones General administration costs -6,259-5, Extraordinary expenses (without taxation in subject year) Corporate tax payable in subject year Dividend paid Operating cash flow ( lines ) -1, ± Changes in accounts payable -106,657-49, ± Changes in accounts receivable 188,858 53, ± Changes in inventories ± Changes in portfolio of securities indicated as current assets -28,669 6, ± Changes in financial investments -17,318 2, ± Changes in portfolio of investments (including advances) ± Changes in portfolio of intangible assets , ± Changes in portfolio of tangible assets (without investments) ± Changes in accruals 15,881-1, ± Changes in deferrals -49,241-11, Issue of shares at selling price Funds received without compensation according to relevant rules of law Funds handed over without compensation according to relevant rules of law Nominal value of withdrawn own shares, property bonds NET CASH FLOW ( lines ) Out of which: - changes in cash changes in bank money (accounting and other sight deposit with NBH) 24

56 II / 10. Maturities of major items of accrued interests and deferred costs and expenses 31 December 2013 Balance Items of 31 December 2013 broken down by maturities Description sheet Within 3 Between 3 months More then 1 year More then line months and one year but, less then 2 2 years Data in million HUF 31 December = Accrued interest From 13. a) - Accrued interests on redeemed own securities , Accrued interests from accounts receivable 2, ,268 from customers - Accrued interests from credit institutions from refinancing loans - Accrued interests of interbank deposits Accrued interest of hedge transactions 1,871 3, ,461 - Commission for arrangement of state subsidies Deferred costs and expenses From 5. b) - Deferred interest on issued mortgage bonds 3,034 9, ,701 - Deferred interest on hedge transactions 236 1, ,788 - Deferred interest on interbank loans

57 II / 11. Assets and liabilities in foreign currencies 31 December 2013 Data in million HUF ASSETS Amount in balance Of which in foreign currency, LIABILITIES Amount in balance Of which in foreign currency, sheet value in HUF sheet value in HUF 1. Cash b. 2.a. Government securities 98,002 15,571 2.b. Liabilities towards credit institutions from financial services and fixed for a predetermined term 132,490 17,990 Other liabilities to customers from financial services a. Receivables from credit institutions - sight Liabilities from securities issued 330,346 59, b. Other receivables from financial services 277, ,328 4.a. Other liabilities a. Receivables from customers from financial services 130,043 46,316 5.a. Passive accrual of income 22, ba. Debt securities, including fixed interest securities issued by other issuer 5, b. Accrued costs and expenditures 14,591 2, b. Other receivables 4, b. risk reserve for pending and certain future liabilities a. Accrued income 14,943 1,961 7.a Subordinated loan capital b. Deferred costs and expenditures 3, c Other subordinated liabilities 33,254 33,254

58 III. INFORMATIVE PART III / 1/a Informative data on direct participations of the bank 31 December 2013 Data in million HUF Registered value Enterprise's Name of the enterprise\ Share in of the investmen Own equity Subscribed Subscribed Profit Restricted Capital Valuation 2013 Registered office property capital and not yet paid reserve reserve reserve reserve profit FHB Real Estate Ltd 100% Budapest Üllői út FHB Commercial Bank Ltd % 42,381 30,364 5,228-12,967 7,999 5, Budapest Üllői út 48. FHB Life Annuity Ltd 100% 987 1, , , Budapest Üllői út 48. Diófa Alapkezelő Ltd. 99.7% Budapest, Kacsa utca em. Díjbeszedő Operating and Servicing Ltd. 100% 4,611 1, Budapest, Budafoki út Total 48,755 33,067 6,234-8,669 8,000 6,359 4,985-1,180

59 III / 1/b Informative data on indirect participations of the bank 31 December 2013 Data in million HUF Share in Subscribed Name of enterprise Rerfistered office property capital Magyar Kártya Szolgáltató Plc Budapest, Üllői út % 5 FHB Ingatlanlízing Plc Budapest, Üllői út % 110 Central European Credit d.d. (Croatian) Zagreb, Marulićev trg 10, Croatia 100% FHB DWH Plc Budapest, Üllői út % 5 Hitelunió Pénzügyi és Szolgáltató Ltd Budapest, Flórián tér % 0.5 Káry-villa Ingatlanfejlesztő Ltd Budapest, Üllői út % 0.5 Wodomus 54 Ingatlanfejlesztő Ltd Budapest, Üllői út % 0.5 Díjbeszedő Faktorház Plc Budapest, Budafoki út % 500 Díjbeszedő Informatikai Ltd Budapest, Budafoki út % 670 Díjbeszedő Kártyaközpont Ltd Budapest, Budafoki út % 5 DÍJNET Plc Budapest, Budafoki út % 5 Magyar Posta Befektetési Szolgáltató Plc Budapest, Budafoki út % 100

60 III/2. Investments 31 December 2013 Data in million HUF FHB FHB FHB Diófa Díjbeszedő Commercial Bank Ltd. Real Estate Ltd Life Annuity Ltd Alapkezelő Ltd Operatin and Total Servicing Ltd. 31 December , ,288 Sales of shares 8,179 piece -7, , Capital increase Reverse of impairment Acquisition ,611 4, December , ,611 48,755

61 III / 3. Total emoluments payable to members of Board of Directors and Supervisory Board on business year 31 December 2013 Description Number of persons receiving emoluments Amount of emoluments payable (million HUF) Board of Directors Supervisory Board 6 12 T o t a l : Total emoluments payable to Management Description Number of persons receiving emoluments Amount of emoluments payable (million HUF) Management 4 87

62 III / 4. Loans granted to members of Board of Directors, Management and Supervisory Board 31 December 2013 Data in million HUF 1. Internal loans D e s c r i p t i o n Paid Re - paid Principal Essential conditions, interests-bearing to be re-pad - Board of Directors Management Structure as set out in announcement under preferential conditions - Supervisory Boars Structure as set out in announcement under preferential conditions 1. Total: III / 5 Average statistical personnel staff broken down by staff groups 31 December 2013 Average statistical personnel staff P E R I O D Blue collar White collar Total

63 III / 6. Book value and nominal value of own securities 31 December 2013 Type of securities Book value Data in million HUF Nominal value I. Current assets a) Government bonds 18,419 18,450 b) Treasury Bills 45,328 46,830 c) MNB bonds 34,255 34,300 d) Bonds issued by credit institutions e) Re-deemed own bonds (repurchased by the bank) 5,000 4,794 f) Re-deemed own shares (repurchased by the bank) 29 5 (repurchased by the Bank) Total current assets 103, ,379 II. Financial investments, interests in other enterprises a) participations in credit institutions 42,381 4,410 b) participations in other enterprises 6,374 1,006 Total financial investments: 48,755 5,416 TOTAL (I. + II.) 151, ,795

64 III /7. Extraordinary incomes and expenses 31 December 2013 Data in million HUF Extraordinary incomes Extraordinary expenses Income from expired liabilities / Expired liabilities Donation Released bad debt Total incomes : Total charges :

65 III / 8. Off-balance sheet items 31 December 2013 Data in million HUF D e s c r i p t i o n s 31 December December Pending liabilities - Available credit facility on credits extended Loans committed in contract but not yet extended 3,213 4,551 Total pending liabilities 3,222 4,559 Future obligations 275, ,043 Total off-balance sheet liabilities 278, ,602 Future receivables 252, ,810 Collaterals 1,331, ,971 Total off-balance sheet receivables 1,584,411 1,140,781 Budapest, 2 April 2014 Gyula Köbli CEO Soltész Gábor Gergő Deputy CEO

66 FHB Mortgage Bank Co. Plc. Address: 1082 Budapest, Üllői út Website: