· 2 / annual report 2009 ubank ltd. 6 the board of directors’ report to shareholders’ general...

Annual Report 2009

UBank Ltd.

2 / Annual Report 2009

UBank Ltd.

6 The Board of Directors’ Report to Shareholders’ General Meeting

115 Management Review of the Bank’s Financial Position and Operating Results

135 CertificationsoftheGeneralManagerandthe Chief Accountant

138 Report of the Board of Directors and Management Regardinginternalcontroloverfinancialreporting, and auditor’s report to the shareholders of UBank Ltd. Regardinginternalcontroloverfinancialreporting.

142 FinancialStatementsasatDecember31,2009

This is a translation from the Hebrew and has been preparedforconvenienceonly.Incaseofanydiscrepancy,theHebrewwill prevail.

Annual Report 2009

Contents


UBank Ltd.

Description of the General Development of Bank’s Business6 History of the Bank6 ProfitandProfitability8 Developments in Balance Sheet items11 Holdings Structure Chart12 SignificantInvesteecompanies12 Information about the Parent Company12 Description of the Bank’s Operational Segments13 Distribution of Dividends13 The Bank’s Rating by a rating company13 Human Resources15 Restrictions and Supervision of the Bank’s Activities16 SignificantAgreements16 Information Systems18 Legal Proceedings

General Environment and Influence of External Factors on the Bank’s Activity19 Economic Developments in 200921 Updates in legislation in respect of the Banking system in 2009

47 Description of the Bank’s Business according to Operational Segments59 Fixed assets and Facilities59 Taxation

Additional Information59 Risk Management Policy95 Accounting Policy on Critical Matters and Critical accounting estimates99 Contribution to the Community and Donations99 Disclosure with Regard to the Bank’s Internal Auditor101 The Approval Process for Financial Report102 Report on Directors with Accounting and Financial Expertise103 Operation of the Board of Directors and Changes in Board Membership103 Members of the Bank’s Board of Directors106 Members of the Bank’s Management107 Assessment of Controls and Procedures with Regard to the Disclosure in the Financial Report108 DetailsoftheAmountsandBenefitspaidtotheRecipientsoftheHighestSalariesintheBank112 Auditing Accountants’ Remuneration

The Board of Directors’ Report to theShareholders’ General Meeting

Annual Report 2009


UBank Ltd.

Attheboardofdirectors’meetingwhichwasheldonMarch23,2010itwasresolvedtoapproveandpublishtheconsolidatedfinancialstatementsofUBankLtd(hereinafterreferredtoas“theBank”)anditsconsolidatedsubsidiariesfortheyearendedonDecember31,2009.

ThefinancialstatementshavebeenpreparedinaccordancewiththeSupervisionofBanks’directivesandguidelines.

Description of the General Development of the Bank’s Business

History of the Bank

TheBankwasincorporatedinIsraelin1934underthename“BankEretzIsraelle’ToeletHa’ashraiLtd”.In1965theBankwasacquiredbyBaronRothschildwhonamedit“IsraelGeneralBankLtd”.In1978,theBank’sshareswereissuedtothepublicontheTelAvivStockExchange.In1996,theBankwasacquiredbytheInvestecWorldBankingGroupandin1999theBank’snamewaschangedto“InvestecBank(Israel)Ltd”.OnDecember22,2004ownershipoftheBankwastransferredto“TheFirstInternationalBankofIsraelLtd”(hereinafterreferredtoas“FIBI”).

UpontheacquisitionoftheBankbyFIBI,andfollowingtheacceptanceinfullofapurchaseoffermadetothepublic,theBankbecameaprivatecompanyfullyheldbyFIBI.

Followingthechangeofownership,theBank’snamewaschangedinMarch2005to“UBankLtd”,whichactsasaseparateandindependentbank,specialisinginthepersonalbankingandcapitalmarketsegments.

ProfitAndProfitability

Net profitin2009amountedtoNIS65.6million,comparedwithNIS65.3millionin2008,anincreaseof0.5%.

Net profitinthefourthquarterof2009amountedtoNIS9.8million,comparedwithNIS19.7millioninthecorrespondingquarterlastyear,adecreaseof50.2%.Thedecreasederivesmainlyfromadecreaseintheprofitfromfinancingoperations.

Profit from ordinary operations before taxestotalledNIS109.8millionin2009,comparedwithNIS103.8millionin2008,anincreaseof5.8%.Theincreasederivesmainlyfromanincreaseof10.5%inprofitfromfinancingoperations(NIS15.3million),whichwasoffsetPartiallybyanincrease4.9%inoperatingandotherexpenses(NIS8.4million).See itemisation in the income and expenses analysis below.

Provision for taxes on profit from ordinary operations totalled NIS 43.4 million in 2009 and represented 39.5%oftheprofitbeforetax,comparedwithaprovisionofNIS39.4millionin2008thatrepresented38.0%oftheprofitbeforetax.

Theincreaseintheeffectiverateofprovisionfortaxesderivesfromadecreaseinreceiptofdividends,whichistaxesatlowertaxrate,anincreaseinprofitfaxratefor2009,from15.5%to16%andtheexpectedgradualinfluenceofthedecreaseinthestatutorytaxrateonthedeferredtaxesbalances(accordingtotheEconomicEfficiencyLaw),whichwerepartiallyoffsetbydecreaseinthecompaniestaxrate.

The return on equity of the net profit totalled 13.1% compared with 15.0% in 2008.

The return on equity of the profit from ordinary operations before taxes reached approx. 21.9% compared with approx. 23.9% in 2008.

The Board of Directors’ Report 2009 / 7

UBank Ltd.

Net profit per NIS 1 par value of share capitalamountedtoNIS21.0in2009,comparedwithNIS20.9in 2008.

Income and Expenses

(NISmillion):

2009 2008 Change %

Profitfromfinancingoperations 160.4 145.1 10.5

Operating and other income 124.0 124.4 (0.3)

Operating and other expenses 178.5 170.1 4.9

Ofwhich:otherexpenses 80.8 71.4 13.2

Ofwhich:salariesexpenses 75.8 79.3 (4.4)

Profit from financing operations before provision for doubtful debtstotalledNIS160.4millionin2009,comparedwithNIS145.1millionin2008,anincreaseof10.5%.The increase derives mainly from an increase in the operating return on the available-for-sale securities portfolio,locallyandabroad,andanincreaseinprofitrealizationintheavailable-for-salesecuritiesportfolioin the amount of NIS 20.8 million.Profitsintheavailable-for-salesecuritiesportfolioin2009areoffsetbyotherthattemporaryimpairmentofNIS13.7million.(Anotherthantemporaryimpairmentwasrecordedin2008intheamountofNIS15.4millionofwhichwereNIS5.4millioninmortgage-backedbonds).Inadditionincreasederivesfromarangeofactivitiesintheareaofthefinancedivision,includingbeingamarket-makerforgovernmentbondsandothertradingactivities,whicharepartoftheroutineactivityofthe Bank.

Provision for doubtful debtsamountedtoanincomeintheamountofNIS3.9millionin2009,comparedwith an income in the amount of NIS 4.4 million in 2008.Theincomeinbothyearsderivesmainlyfromadecreaseinthespecificprovisionduetorepaymentofdebts.

Operating and other incomeamountedtoNIS124.0millionin2009,comparedwithNIS124.4millionin2008,adecreaseof0.3%.Thedecreasederivesmainlyfromadecreaseinincomefromforeigndealingroomcommissions,adecrease in income from management fees of the mutual funds of the Bank a decrease in income from dividend. The decrease was partially offset by an increase in income from the activity in the Various spheres of the capital market and an increase in the Bank’s Severance Pay Fund.DuetothenewBankCommission’sLaw,Managementfeesfrommutualfundsanddistributionfeeswerereclassifiedfromotherincometooperatingcommissions.

Operating and other expensesamountedtoNIS178.5millionin2009,comparedwithNIS170.1millionin2008,anincreaseof4.9%.Salaries and related expenses in 2009 amounted to NIS 75.8 million compared with NIS 79.3 million duringthecorrespondingperiodtheyearbefore,adecreaseof4.4%.ThedecreaseisduemainlytothereallocationofsalariesoftheBank’scomputerunitemployeestransferredtoMataf(”ComputerizationandFinancialOperations”-asubsidiarycompanyoftheFirstInternationalBankofIsrael),inlightoftheconversion of the computer systems completed in January 2009.Inaddition,lossesintheSeverancePayFundin2008wererecordedinthisitem.Thisdecreaseispartiallyoffset by the increase in the provision for bonuses related to performance in 2009 and an increase in the numberofemployeesemployedintheBank(anincreaseof2.6%),duemainlytotheopeningofbranchesforaffluentcustomers.

Maintenance expenses and depreciation of buildings and equipment in 2009 amounted to NIS 21.9 million,comparedwithNIS19.4millionduringthecorrespondingperiodlastyear,anincreaseof12.9%.The increase derives too mainly from an increase in expenses due to the opening of the new branches.


UBank Ltd.

Other expenses amounted to NIS 80.8 millionin2009,comparedwithNIS71.4 million in the corresponding period thelastyear,anincreaseof13.2%.Theincrease is due mainly to an increase in computerizationexpensesaftertheabove-mentionedconversionofthesystems,asa consequence of reallocation of salaries of the Bank’s computer unit employees transferredtoMataf,andariseintheoverall payment for computer services toMataf.(Forfurtherinformationonthesubject of the computer services agreement with Mataf see the chapter dealing with InformationSystemsonpage16).This increase was partially offset by a decrease in expenses for professional services,marketingandpublicity.

The rate of cover of operating expenses by operating incomewas69.5%in2009,compared with 73.1% in 2008.

The Bank’s share in profits (Losses) from equity basis companies amounted to a loss of NIS 0.8 million in2009,comparedwithaprofitthan0.9millionin2008.

Developments in Balance Sheet items

The total balance sheetasatDecember31,2009amountedtoNIS9,218.2million,comparedwithNIS8,498.1millionasatDecember31,2008,anincreaseof8.5%.

Cash and deposits with banksamountedtoNIS2,827.8millionattheendof2009,comparedwithNIS2,701.8millionattheendof2008,anincreaseof4.7%.

Investment in securitiesamountedtoNIS2,498.2millionattheendof2009,comparedwithNIS2,930.7millionattheendof2008,adecreaseof14.8%.Theinvestmentconsistsof:- GovernmentbondsandMakamintheamountofNIS2,060.9million.- Foreignbanksbonds(“Eurobonds“)intheamountofNIS209.3million,of20differentissuers.- Banks in Israel bonds in the amount of NIS 108.0 million.- Government owned companies bonds in the amount of NIS 12.3 million.- Corporate companies bonds in the amount of NIS 100.9 million’ of approx. 28 different issuers*.

* of which a non material investment in mortgage-backed bonds in the amount of approx. NIS 1.2 million,rated‘AAA’,issuedbytheFederalHomeLoanMortgageCorporation(FHLMC-“FreddieMac”)for a duration of 4.0 years.

2008200720062005 2009

124.0

106.2

131.9

147.8

124.4

284.4

211.6

248.2

270.8 269.5

Total income (Nis million)

profit from financing operations and operating incomeoperating income


UBank Ltd.

Following information regarding the duration and rate of the decrease of fair value of available for sale bonds,directlyrealizedinthecapitalreserveandnotrecordedinprofitandloss,asat31.12.09(inNISmillion):

Rate of decrease Durationofdecrease(inmonths)

Up to 6 6-9 9-12 Over 12 Total

Up to 16.8% (4.8) (0.8) - (6.6) (12.2)

Following information regarding the duration and rate of the decrease of fair value of available for sale bonds,directlyrealizedinthecapitalreserveandnotrecordedinprofitandloss,asat31.12.08(inNISmillion):

Rate of decrease Durationofdecrease(inmonths)

Up to 6 6-9 9-12 Over 12 Total

Up to 20% (24.9) (2.8) (2.9) (0.5) (31.1)

20% - 40% (3.2) (15.4) (0.3) (4.1) (23.0)

Over 40% (1.4) (1.4) (7.8) (4.7) (15.3)

Total (29.5) (19.6) (11.0) (9.3) (69.4)

ThedecreaseoffairvalueofbondsforDecember31,2009consistsof:Governmentbonds,governmentbondstradedabroadorbondsofgovernmentownedcompaniesintheamount of NIS 4.3 million. The entire rate of decrease of government bonds is up to 20% and up to 6 months.AdecreaseofNIS3.1millioninthefairvalueofforeignbank’sbonds,rated‘A-’andup(exceptforonebondthatisrated‘BBB’+)asatthebalancedate.(Seealsothereportofexistingcreditexposurestoforeignfinancialinstitutions).ThedecreaseconsistsNIS0.5millionupto6monthsandtherestisover12months. The entire rate of fair value decrease is up to 20%.CorporatebondsintheamountofNIS4.8million,consistsofNIS0.8millionbetween6-9months,andthe rest is over 12 months. The entire rate of the decrease is up to 20%. The negative capital reserve oftheBanksignificantlydecreasesin2009fromNIS69.4millionasat31December2008toNIS12.2million as at 31 December 2009. The date excludes the effect of a positive capital reserve and tax. The capitalreserveoftheBankasat31December,2009isnegativeintheamountofNIS4.3million,includingtheeffectsmentionedabove(seenote3Securities).

Whenexaminingtheneedtomakeaprovisionforimpairment,inaccordancewiththeaccountingpolicyforcriticalmattersandcriticalaccountingestimates,andinviewofthefactthattherewerenomaterialchangesconcerningthebondissuersmentioned,BankManagementisoftheopinionthatthereisnoneedtomakeaprovisionforimpairmentofanotherthantemporarynatureregardingthesedecreasesinvalue,inthefinancialstatementsasat31December2009.Theexaminingofimpairmentwasmadeaccordingtothe circular of the Banking Supervision department that was published on 1.3.09. See the section dealing with impairment of assets in the Accounting Policy on Critical Matters.

Credit to the publicamountedtoNIS2,021.8millionattheendof2009,comparedwithNIS1,931.6millionattheendof2008,anincreaseof4.7%.Theaveragebalancein2009wasNIS1,804.7millioncomparedwithanaveragebalanceofNIS1,950.6millionin2008,adecreaseof7.5%.Thedecreasederivesmainlyfromshorttermcreditforactivityinthecapital market.


UBank Ltd.

Other assetsamountedattheendof2009toNIS855.9million,comparedwithNIS216.9millionattheendof2008,anincreaseof294.6%.Theincreasederivesmainlyfromanincreaseinthenetclearingbalance in connection with securities activity with the Stock Exchange.

Deposits of the publicamountedtoNIS7,127.8millionattheendof2009,comparedwithNIS6,820.2millionattheendof2008,anincreaseof4.5%.Theaveragebalancein2009wasNIS6,736.6millioncomparedwithanaveragebalanceofNIS6,265.9millionin2008,anincreaseof7.5%.Theincreasederivesmainlyfromshorttermdepositsfromactivityinthe capital market.

Deposits from banksamountedtoNIS72.9millionattheendof2009,comparedwithNIS252.0millionattheendof2008,adecreaseof71.1%.Movement in this item derives mainly from daily interbank activity.

The Bank’s equityamountedtoNIS541.7milliononDecember31,2009,comparedwithNIS451.6milliononDecember31,2008.

The ratio of equity to total assetsstoodat5.9%attheendof2009,comparedwith5.3%attheendof2008.

The capital to risk assets ratio according to proper Conduct of Banking Business Directive 311amountedto20.2%onDecember31,2009,comparedwith24.9%onDecember31,2008.The capital to risk assets ratio that is required by the Bank of Israel is 9%.

The capital to risk assets ratio, as of 31 December, 2009 calculated in accordance with the provisional directive “working Framework for Capital Measurement and Adequacy” (BaselII),is16.7%.


UBank Ltd.

* Significantcompanies.

Holdings structure chart*

UBank Ltd

UBank Financial Asset Management LtdCapital 100%

UBank Trust Company LtdCapital 100%

UBank Mutual Funds LtdCapital 100%

UBank Underwriting & Consulting LtdCapital 100%

Manif Financial Services LtdCapital 19.6%

UBank Investments and Holdings LtdCapital 100%


UBank Ltd.

SignificantInvesteeCompanies

A. “UBankAssetManagementLtd.”(hereinafterreferredtoas“theCompany”)engagesinprovidinginvestment portfolio management services for private and institutional customers. Until 31 December,2009Thecompanywhollyowned“UBankMutualFundsLtd.”,whichengagesinmanagingvariousmutualfunds.On31December,2009theentireholdingwastransferredtoUBankLtd.(forfurtherinformation,seenote5).Thetotalassetsundermanagementattheresponsibilityofbothcompaniesin2009isapprox.NIS1.4billion,ofwhichapprox.NIS0.7billionrepresents investment portfolio management and approx. NIS 0.7 billion represents mutual fund management.

TheCompanyended2009withalossofNIS0.2million,comparedwithalossofNIS1.0millionin2008(excludingtheresultsof“UBankMutualFundsLtd”.).

B. “UBankMutualFunds”Ltd.ended2009withanetProfitofNIS0.2millioncomparedtoNIS1.2million in 2008.

C. "UbankTrustCompanyLtd."(henceforth:"theCompany")isengagedmainlyinprovidingtrustservicesformutualfunds,andinaddition,asatrusteeforbondsseriesofspcandadvancedfincialinstrumentsandholdingassetsofindividualsetc.ThenetprofitoftheCompanyfor2009totaledaboutNIS13.0million,comparedwithNIS13.5millionin2008.

D. “UBankUnderwriting&ConsultingLtd.”engagesinunderwritingissuesandfinancialcounselling.Thecompany’snetprofitamountedtolessthan0.1millionin2009,comparedwithalossoflessthan0.1millionin2008.Asof31December,2009theBoardofdirectorsofthecompanyisconsidering how the operations of the company are to continue.

E. “UBankInvestmentsandHoldingsLtd.”(henceforth:“thecompany”)isengagedmainlyinrentingpremises,equipmentandfurniturefortheBankandconnectedcompanies.

ThenetprofitoftheCompanyfor2009amountedtoNIS0.8million,comparedtoNIS4.4million in 2008.

Information about the Parent Company

TheFIBIGroupisoneofthefivelargestbankinggroupsinIsrael.TheGroupoperatesinanumberoffinancialactivitysectors:commercialbanking,privatebanking,mortgages,activityinthevariouslayersofthecapitalmarket,internationalfinancialactivity,leasingfinancing,factoring,creditcardsandvariousfinancialservices.InadditiontoUbank,theFIBIGroupownsthreecommercialbanksinIsrael-OtsarHahayalBank,PoaleyAgudatIsraelBankandMassadBankLtd.-and2subsidiariesinabroad,FIBIBank(UK)plcheadquarteredinLondonandFIBIBank(Switzerland)headquarteredinZurich.TheGroupoperatesthrough175branchesandextensionsinIsrael,outofwhich85branchesandextensionsattributedtotheParent Company.

Description of the Bank’s Operational Segments

ThefollowingisashortdescriptionofthesegmentsoftheBank’sbusinessactivities:

The Private Banking segment - includes all the Bank’s private customers and their businesses.These are both private customers belonging to the personal banking division and also private customers inthecapitalmarketdivision,whoseprincipaloperationsareinsecurities.Inaddition,thesegmentincludestheactivityoftheAssetManagementcompanyoftheBank,theFundManagementcompanyandtheBank’s Trust company customers except from trust services for mutual funds area.

The Corporate banking segment - includes all the institutional customers whose principal engagement is inthefinancialsphere,suchas:groupsengagedininsurance,pensionsandprovidentspheres,mutualfunds,


UBank Ltd.

portfolio managers and the like. These customers are attributed to the capital market division.Inaddition,thesectorincludesthecustomersoftheTrustcompanyoftheBankintheareaoftrustservices to mutual funds.

The Financial segment-thissegmentincludestheactivitiesofthedealingrooms,liquidityunitandtheassets and liabilities management department of the Bank.

TheBankhasnosignificantactivityinthehouseholds,smallbusinesssegmentsandcommercialBankingSegment.

Fordetailedinformation,includingafinancialanalysis,seethesectionthatdiscussesthedescriptionofthebusiness of the Bank according to operational segments.

Distribution of Dividends

In December 2007 a dividend in the amount of NIS 100 million was declared and distributed.During 2008 and 2009 there was no distribution of dividends.In March 2010 a dividend in the amount of NIS 75 million was declared and distributed.

The Bank’s rating by a rating company

The“Midroog”companyratedtheBank’sdepositsasAa3andtheshort-termdepositswitharatingofP-1.

Human Resources

DescriptionoftheOrganizationalStructureandtheNumberofStaffemployed

FivemanagersaredirectlysubordinatetotheBank’sGeneralmanager,asfollows:

ThemanageressofthePersonalBankingdivision,towhomtheBank’sbranchesaresubordinated(includingthebusinessandcurrentaccount).Theaveragenumberofemployeesinthepersonalbankingdivisionin2009amountedto96(in2008-98).

The manager of the Capital Market division to whom the Israeli securities and foreign securities trading departments,theIsraelisecuritiesandforeignsecuritiesback-roomsystems,themutualfundsoperationsdepartmentandthebankingteamthatprovidesservicesforthecustomersofthedivision,areallsubordinate. The average number of employees in the Capital Market division in 2009 amounted to 83(in2008-80).

ThemanageroftheFinancialdivisiontowhomtheassetsandliabilitiesdepartment,theliquidityunitandthedealingroom,aresubordinate.TheaveragenumberofemployeesintheFinancialdivisionin2009amountedto13(in2008-14).

ThemanageroftheCentralServicesdivision,towhomthefollowingdepartmentsaresubordinate:Humanresourcesandadministration,creditandriskmanagement,Regulationandprocesses,thelegaldepartment,planningandmarketingandcomputerizationliaisonofficer.The number of workers employed at the Headquarters Division amounted in 2009 to 55 employees onaverage(in2008-68employees).Themaindecreaseinthenumberofworkersemployedderivesfrom the reallocation of the Bank’s computer unit employees to Mataf following the conversion of the computersystemscompletedinJanuary2009(forfurtherinformationseethechapterdealingwithInformationSystemsonpage16).

ThemanageressoftheChiefAccountantdivision,towhomthefollowingdepartmentsaresubordinate:accounting,internationalandreconciliationsandbookkeepingandpayments.Theaveragenumberof


UBank Ltd.

employeesintheChiefAccountantdivisionin2009amountedto18(in2008-17).

Inaddition,internalauditservicesrelyforthemostpartontheinternalauditingsystemofFIBI.Foradditional information see the section that deals with disclosure with regard to the Bank’s internal auditor.

Inrespectofinformationsystemsservices,seedetailsinthesectionthatdealswithinformationSystems.

Set out below are data as to the number of employees at the Bank and its subsidiaries at the end of the yearandthemonthlyaverageduringtheyear :

The Bank Subsidiaries Total

PermanentStaff

OtherStaff*

Total PermanentStaff

OtherStaff*

Total PermanentStaff

OtherStaff*

Total

Asatyearend:

31.12.09 228 13 241 29 - 29 257 13 270

31.12.08 222 23 245 31 1 32 253 24 277

Monthlyaverage:

2009 224 12 236 29 - 29 253 12 265

2008 216 29 245 31 1 32 247 30 277

*Includeshourlystaff,stafffrommanpoweragenciesandoutsourcedstaff.

Changes in Manpower9% of the bank’s employees started working for the Bank during 2009. Turnover of employees on that scaleallowstheorganizationaninfluxofnewmanpoweranddoesnotaffecttheworkroutine,asaresultoflearningprocessesandtemporaryinefficiencyonthepartoftherecruitedemployee,andtrainingprocessesandclosemanagementduringthefirstperiodonthepartofthemanagersdoingtherecruiting.

Contracts of Employment

All of Ubank’s employees are employed under personal contracts of employment. These agreements affordtheBankmaximumflexibilityofemployment,whileprovidingaswiftresponsetotheneedsandconditions of the market and the Banks’ business activity.For information on employees’ rights on retirement - see details in note 11.

Training

TheimprovementofthelevelofprofessionalismintheBankisaresultofqualityandfocusedrecruitment,butalsoofapersonalandorganizationaltrainingprogramthatmatchestheneedsoftheBank,andisdefinedintheannualworkprogram.ThetrainingprogramintheBankincludesprofessionalteachingandtrainingindifferentfieldsofroutinebanking activity.Thetrainingprogramisderivedfromvariouschangingfactorssuchas:thebusinesspolicyoftheBank,developmentsexpectedinthemarketingeneral,andinthebankingsectorinparticular,regulatorychanges and so forth.The integration of UBank into the First International Bank Group has given the Bank’s employees opportunitiestousethetrainingsystemdevelopedbytheFirstInternationalBank,courses,studydays,supplementary learning and training.Thetrainingprogramprovidesopportunities,asamotivatingfactorforemployees,anopportunityforthedevelopment of personal skills and allows for the personal development of employees in different subjects. Inparallel,theBankencouragespersonalandprofessionaldevelopmentbymeansof,amongothers,participationinfundingacademicstudiesmeetingtheBank’srequirements,andbyassistingwithvacationdays during examinations.


UBank Ltd.

Remuneration programs for employees

InaccordancewiththedirectivesoftheSupervisorofBanksfromApril2009,theBoardofDirectorsoftheBankdiscussedremunerationpolicyandthemethodologyforitsimplementation,withtheaimoffindingabalancebetweenthedesiretoencouragemotivation,creatingidentificationoflong-terminterestsamongthemanagerswiththeBank,retainingandrewardingmanagersandthedesireforachievement,togetherwiththeneedtopreventexaggeratedrisk-taking.The policy relates to all Bank employees and is a part of Group policy that was put together with the participationoftheparentcompany,inaccordancewiththedirectiveoftheSupervisorofBanks.ThepolicyisstillinthefinalstagesofformulationandawaitstheapprovaloftheBankofIsrael.

Code of Ethics

During2009thewritingoftheBank’sCodeofEthicswascompleted,withtheaimofpromotingethicsand social responsibility and incorporating appropriate norms of behavior among the Bank’s employees and its managers.The writing of the Code of Ethics was done with the participation of the Banks’ employees. Ethics institutionswerecreatedandactivitieswerecarriedouttoincorporatetheCodeofEthics,including:lectures directed to all employees and the distribution of the Code of Ethics brochure to each and every employee individually.

Restrictions and Supervision of the Bank’s Activities

InProperConductofBankingBusinessRegulation313-“LimitationsontheIndebtednessofaBorrowerandaGroupofBorrowers”,therearerestrictions,accordingtowhichtheBankisnotallowedtoextendcredittoa“singleborrower”,toa“groupofborrowers”andtothe“sixlargestborrowersincludinggroupsofborrowers”(asdefinedintheRegulation)inamountsthatexceed15%,30%and135%ofitsshareholders’equity,respectively.The Bank reached an agreement with certain borrowers and certain groups of borrowers in respect of thesaidRegulation,thattheircreditfacilitieswillonlybeexercisedifthatdoesnotresultintheexceedingof the restrictions that are described above.

InProperConductofBankingBusinessRegulation337-“ActivityontheFutureContractsandOptions(MAOF)Market”therearerestrictions,accordingtowhichthetotalamountoftheliabilitiesofabankinginstitutionvis-à-vistheMAOFclearingsystem(afteralloweddeductions)shallnotexceed30%oftheBank’s equity. In light of the high volume of activities of the customers of the capital market segment on theMAOFmarket,theBankexaminesthesaidrestrictiononacurrentbasis.

InProperConductofBankingBusinessRegulation315-“SupplementaryProvisionforDoubtfulDebts”,itis stipulated that an additional provision for doubtful debts is to be made in respect of the concentration ofdebtinsectors.TheBankisexposedtosuchconcentrationinthefinancialservicessector.Thisconcentration follows the business policy of the Bank according to which the capital market customers segment is among the main segments of activity.The Bank is meticulous in implementing the restriction. In 2008 and 2009 no exception occurred to the sector concentration limit.

Inaddition,seedetailsonthesubjectofthereforminthecapitalmarket,inthechapterthatdealswithoperational segments with reference to the activity of UBank Mutual Funds.

Otherthanwhatisdescribedabove,therearenootherrestrictionsandsupervisionthatarespecificorrelatingtotheBankintheperiodunderrevieworwhichareexpectedtohaveasignificanteffectontheactivities of the Bank in the future.


UBank Ltd.

SignificantAgreements

a.Agreementforthetransferoffactoringoperations:

OnJanuary25,2007anagreementwassignedbetweentheBankandOtsarHahayalBankLtd.(hereinafterreferredtoas“OtsarHahayal”)(fullyownedbyacontrollingshareholderoftheBank)forthetransferoftheBank’soperationsintheareaoffactoringservicestoOtsarHahayal,includingtransferringthe expertise acquired by Ubank in the sphere.Pursuanttotheagreement,fromFebruary1,2007UbankwillceasegivingitscustomersfactoringservicesinnewtransactionsandwillrefersuchcustomerstoOtsarHahayal(hereinafterreferredtoas“theexistingcustomers”)toobtainservices.Furthermore,theBankshallbeentitledtoreferOtsarHahayalnewcustomerswhowishtoreceivefactoringservicesfromitinthefuture(hereinafterreferredtoas“thenewcustomers”).Inreturnforthetransferoftheaboveactivity,TheBankisentitledtoannualpaymentsderivingfromtheprofitsofOtzarHachayalfromfactoringactivityofexistingcustomersandnewcustomers,afteroffsettingprovisionsfordoubtfuldebtsinrespectofexistingclientsuptothetotaloftheprofits,allinaccordancewithdefinitionsandformulasforcalculationdeterminedintheagreement.Theperiodoftheagreementisfixedforeightyears.Sinceitcameintoeffect,itsinfluenceontheresultsoftheBank’sactivityhasnotbeenmaterial.

b. Computer services agreement

For detailed information see a chapter regarding the information system.

c.Seeadditionalrelevantinformationinthefollowingnotestothefinancialstatements:

-WithregardtoagreementsrelatingtothechangeofcontrolintheBank-seenote16(E).-WithregardtotheBank’sliabilitiestotheMAOFclearinghouse-seenotes15(C)(2)and15(C)(3).-WithregardtotheBank’sliabilitiestotheStockExchangeclearinghouse-seenote15(C)(4).-WithregardtothecollateralagreementwithEuroclear-seenote15(C)(5).-Withregardtotheindemnificationofofficeholders-seenote15(C)(8).-WithregardtothecommitmentsbetweentheBankandFIBI-seenote15(C)(10).-Withregardtopledges-seenote15(D).-Withregardtotheextensionoftherentalofbuildings-seenote15(c)(11).

Information Systems

a.Computerization:

AspartoftheFIBIGroup,stepsaretakingplacetotakeadvantage,invariousareas,oftheGroup’ssize.OneoftheareasisintegratingUbank’scomputersystemwiththeGroup’ssystems,whilepreservingtherelative advantage of the Bank.

Withinthisframework,thetwobanks’computerinfrastructureswereamalgamatedandthecomputersystems supporting the various applications were converted. The responsibility for data security was transferredtoMataf(“Operational&FinancialComputerization”-asubsidiaryofFIBI).Most of the process of amalgamating applications in the framework of which the computer applications of UBankandFirstInternationalBankLtd.wereunified,wascompletedby31.12.08andasat1.1.09thebankworks with FIBI’s computer infrastructures.

Thenewcomputersystemsintegratespecial-purposesystemstogetherwiththebranchsystem,suchas:themutualfundoperatingsystem,thetrusteeshipmanagementsystem,systemssupportingdealingroomactivities,thefinancialriskmanagementsystemandsoon.


UBank Ltd.

Duringthemigrationofsystemstothenewcomputerapplications,problemsaroseinanumberofareas,which necessitated concentration of inputs and investment of resources. These matters were dealt with by the Bank in cooperation with Mataf and with the help of other external suppliers.The Bank has made preparations to deal with completing adaptations required to the needs of users and customers,Specialemphasishasbeenplacedontheimplementationofcontrolsforpurposesoffinancialreportingandforthemanagementofexposuresandrisks.However,theBankisawarethatmanagementandfinancialreportsareproducedonthebasisofnewcomputersystemsinwhichworkprocessaretakingplaceforthefirsttimeinUBankin2009.Boththesystems,andthewayinwhichtheyareoperated,arebasedonthatexistingintheFIBIGroup,whichisfollowinguptheprocessfromthebeginninguntilthecompletion of its integration.For purposes of the Board of Directors’ and Management’s signature on the Report on Internal Control overFinancialReportingforthe2009financialstatements,theBankperformedafullmappingoutofthecontrolenvironmentoverfinancialreporting,whiletestingforoperationaleffectivenesstowardstheendoftheyear.Duringthepreparationofthefinancialstatements,theBankverifiedthatkeycontrolsinfinancialreporting processes are carried out also at present.

TheBankexamineseveryimprovementrequiredinthevarioussystems,bothforoperatingandcontrolling business activity and in the areas of online banking in order to make it easier for customers. In this framework substantial improvements and changes have been integrated in 2009 in a number of applications,andtheBankhasdefinedandcharacterizedadditionalrequirementswhichareinadvancedstages of treatment.

InaccordancewiththeprinciplesoftheundertakingbetweentheBankandMataf,Matafborethecostsofthe process of unifying applications between the banks.TheBankpaysMatafforongoingcomputingservicesthesameamountofcomputercosts(includingdepreciation)thattheBankhadin2005and,inaddition,itbearsitsshareindevelopmentofregulatoryandGroupapplicationsaswillbeagreedupon,withtheadditionofanagreedincrease.Recently,anewmodeloftheundertakingthatwillbeginin2010wasapproved,whichisbasedontherelative share of the Bank in all computer activities carried out in the FIBI Group.

Mr.AmnonBeck,Mataf ’sCEO,servesasmanagerofinformationtechnologiesoftheBankasof18.5.08.

b.ProvidingofComputerServices:

As a separate matter from the question of the systems themselves and as part of the strategy of the FIBI Group,computerservices,includingoperationsandprogramming,areprovidedbymeansofthesubsidiarycompany - Mataf.The services are provided directly by the staff of Mataf.Aspartofthisstrategy,theemployeesoftheBank’scomputerdepartmentbecameemployeesofMatafin2005.Asaresult,alloftheBank’scomputerservices,includingoperationalservicesandprogrammingservices,are provided to the Bank by the Mataf company.


UBank Ltd.

Legal Proceedings

Setoutbelowaredetailsoffiveactionsformaterialamounts,exceeding1%oftheBank’sequity,againstthe Bank and its consolidated companies.IntheviewofManagement,basedonlegalopinions,appropriateprovisionshavebeenmadeinthefinancialstatements,ifrequired,tocoveranydamageresultingfromthesaidactions.IntheBank’sview,basedontheopinionofitslegaladvisers(andintheviewofconsolidatedcompaniesbasedontheirlegaladvisers’opinion),theprobabilityofariskexposureoccurringtotheBankislow,inallfiveactionsspecifiedbelow:

1.OnJuly25,2002anactionwasbroughtintheTelAvivDistrictCourtagainstacompanywhichsharesweretradedinthestockexchange(”thecompany”),UBankTrustCo.Ltd.-awhollyownedsubsidiaryoftheBank(“TrustCompany”),PoalimCapitalMarkets&InvestmentsLtd.,directorsofthecompany,itscontrollingshareholders,theparentofthecompany,andtheaccountantswhoauditedthecompanyaccounts.ThetotaldamageallegedbythePlaintiffisapprox.NIS32,000(ThequotedamountofthesuitisNIS36.7million).TogetherwiththeactionanapplicationwasfiledinCourttorecogniseitasaclassactiononbehalfofalltheholdersofthedebenturesthatthecompanyissued,inanestimatedamountofapprox.NIS 34.2 million.

After several delays in proceedings in the class action caused by the need to complete the process of liquidatingthecompany,theTrustCompanysubmittedaresponsetothepetitionforapprovaloftheclaimas a class action.Theevidenceinthecasewasheard,andwearewaitingforahearingonthecaseandthesummingup.IntheopinionoftheTrustCompanyanditslegaladvisors,theTrustCompanyhasvalidclaims,bothagainstthesuitbeingadmissibletobejudgedasaclassaction,andalsoonthematterofthelaw-suitagainsttheTrust Company.

2.OnJuly27,2003twocustomersbroughtaclaimintheTelAvivDistrictCourtfortheawardofdeclaratory judgment to the effect that one of the customers does not owe the Bank money and that the pledgeofsharesofaStockExchangelistedcompanythatservesascollateralforbothcustomers’debts,whichtheBankisseekingtorealize,isinvalid.Thevalueofthedisputeaccordingtothestatementofclaimamounts to approx NIS 25.6 million. The claim is at the pre-trial stage.

3.OnDecember22,2005aclaimwasbroughtintheTelAvivDistrictCourtagainstUBankTrustCo.Ltd.(“theCompany”)whichwascorrectedtoapprox.NIS30.6milliononSeptember15,2009bythreePlaintiffs,whicharerelatedcompanies.ThePlaintiffshelddebenturesforwhichtheCompanyservedastrustee.Becauseoffinancialdifficultiestheissuerofthedebenturesdidnotdischargeitsdebtstothedebenture holders. The company has submitted an amended defense plea.IntheopinionoftheTrustCompanyanditslegaladvisors,theCompanyhasagooddefenseagainstthelawsuit.

4.InOctober2006,judgmentwasgivenbytheJerusalemDistrictCourt,accordingtowhichthecounterclaimsubmittedbyacustomeroftheBank,foradeclaratoryjudgmentthathislossesintheamountofNIS10.1millionresultedfromtheBank’serrorsandnegligence,wasdismissed.ThecustomerfiledanappealagainsttheverdictwiththeSupremeCourt.

5.On18.03.09,alawsuitwassubmittedtotheTel-AvivDistrictCourtinTel-AvivagainsttheBankbyacustomer in the sum of NIS 7.6 million. It was claimed that the Bank was negligent in honoring checks amounting to NIS 5.0 million. The checks were forged by an employee of the customer; the Bank has submitted a defense plea and a third party declaration against the employee.


UBank Ltd.

General Environment and Influence of External Factors on the Bank’s Activity

Economic Developments in 2009

2009 ended in a positive trend of development in the Israeli economy and the worldwide economy. The globaleconomiccrisis,thatbegandevelopinginthesecondhalfof2007uptothethirdquarterof2008,ledtoadeeprecessionthathasbeenmuchshorterthanearlierexpectations:inthelastquarterof2008andthefirsthalfof2009.Beginninginthethirdquarteroftheyearthereweresignsofrecoveryfromtheglobalrecession.IntheIsraelieconomy,greenshootsoftherecoverywereseenearlier-fromthesecondquarterof2009.Ifinthefirstmonthsof2009theestimatewasfornegativegrowthinIsraelofabout1.5%,theestimateattheendoftheyearforgrowthinGDPfor2009isapositiverateof0.5%.Allinall,the Israeli economy has suffered less than other countries from the global crisis - the global rate of growth in2009is(0.8%)andindevelopedcountries(3.2%).In2010,accordingtotheforecastoftheInternationalMonetaryFund,worldwidegrowthshouldreach3.9%,indevelopedcountries-2.1%,andintheU.S.A-2.7%.TheInternationalMonetaryFundestimateforIsraelisforgrowthof2.5%,buttheBankofIsraelexpectsamorerapidgrowthof3.5%.

Economicanalysesindicatetheunorthodoxmacro-economicinterventioninthemonetary,physicalandfinancialfieldsasthereasonfortherelativelyrapidglobaleconomicimprovementinthestateoftheeconomy.Againstthisbackground,thereisuncertaintyregardingcontinuationinthetrendofendingtheeconomiccrisis,duetothefactthatpolicymakersaredeclaringtheirintentionofendingtheirpolicyofmacro-economicsupport.Moreover,interventionbygovernmentshascreatedadifficultfiscalsituationwitharealpotentialforfinancialcrisisinseveralcountries.InGreece,PortugalandSpain,theratingandratingforecasthavebeendecreased,outofconcernoverdebtrepaymentability.Fiscalincentivesandtheever-growingburdenofdeficitfunding,haveincreasedgovernmentdebtstremendouslyandreachedall-timerecords.Alloftheabove,anduncertaintyregardingthedegreeofstabilityofmanyfinancialinstitutionsworldwide,castacloudoverthetrendofrecoverythatasstatedhasclearlybeenobservedand is still continuing since the second half of 2009.

TheendingoftherecessionintheIsraelieconomy,thatasmentionedstartedearlier,seemsmuchmoreestablishedandlessfragilecomparedtoworldwidetrends,eventhoughglobaltrendshaveasignificanteffectonIsrael.ThefiscalsituationinIsraelisalsomuchbetterthanintherestoftheworld.Thebudgetdeficithasgrownmuchmoremoderately,andthedebt-to-GDPratiomaintaineditsstability.TrendsinIsraeli capital market have been much more positive compared to those in global capital markets. Trends in the labor market are much more positive - the increase in the unemployment rate has been much more moderateandeversincethethirdquarterof2009isindecline,comparedtoaworldwideincrease.

The estimate of growth in GDP in Israel for 2009 was as mentioned 0.5%. In the second half of the year,itreached2.9%inannualtermsand,inthelastquarteroftheyear,morethan4.0%.Productionofthebusinesssectordecreasedin2009by0.4%.Mostprominentisthedecreaseinexports,excludingdiamonds,of10.8%.Imports,excludingdefenseimportsanddiamondsalsorecordedasignificantdecreaseof13.4%.Privateconsumptionincreasedby1.1%,whichmeansadecreaseinconsumptionpercapita(thestandardofliving)of0.6%.Excludingtheeffectofprivatevehicles,theincreaseinprivateconsumptionis2.1%,andwithoutadecreaseinconsumptionpercapita.Investmentinfixedassetsexcludingshipsandaircraft dropped by 6.6% and public consumption excluding defense imports grew by 2.5%. The trend of recoverystartinginthesecondquarteroftheyearbeganwithprivateconsumption,butfromthethirdquarteroftheyear,therealsowasanincreaseinexportsandinvestments,andtherateofgrowthofimports also accelerated.

Therateofunemployment,followingtheeconomiccrisis,increasedin2009andreached7.7%oftheworkforce,afterreachingarelativelylowratein2008of6.1%.Duringthesecondhalfof2009,adecreasein the unemployment rate began and the assessment is that in 2010 it will reach 7.0% of the work force. Thedeficitinthegovernmentbudgethasalsorisenfollowingthecrisis,anditseffectonrevenuesfromtaxes,andreached5.15%ofGDP.Thatisalowerratethanthebudgetestimatefor2009thatforecastadeficitof6.0%ofGDP.In2010,afurtherdecreaseinthedeficitisexpected,ofupto4.0%ofGDP.Thedebt-to-GDPratiohasremainedmoreorlessstable,andhasnotexceededthelevelof80%,despitethe


UBank Ltd.

increaseinthedeficitandtheneedtofinanceitbyraisingfundsfromthepublic.Thisisduetotheeffectof the increase in prices of production and the strengthening of the shekel last year. The current account surplusinthebalanceofpaymentsincreasedsignificantlyin2009andreached$7.2billioncomparedwith$2.1billionin2008.Themainfactorintheincreaseinthesurplusisthesharpdecreaseincommodityprices,especiallyfuelprices,incomparisonwiththeaveragesof2009and2008.Inaddition,asmentioned,the decline in imports has been stronger in comparison with the decrease in exports of commodities and services.Theexpectationisthatrecoveryineconomicactivity,togetherwitharapidincreaseinimportsincomparisonwiththeincreaseinexports,willreducethecurrentaccountsurplusto$3.0-3.5billionin2010,andthathassignificantconsequencesonthestrengtheningorweakeningoftheshekelintheyeartocome.

InflationinIsraelduring2009reached3.9%,similartotheinflationratein2008of3.8%.Incomparisonwithdevelopedcountries,whereinflationduringthelastyearwasclosetozero,thatisconsideredahighrateofinflation,butincomparisonwithemerginganddevelopingcountries,whereitreached5.2%,itisarelativelylowinflationrate.Itexceedsthetargetrangeforinflationandhasbeenaffectedthisyearbypriceincreasesthatresultedfrominvolvementbygovernment-V.A.T,watertariffs,cigarettes,andtaxonfuel.Afterdeductingthesepriceincreases,inflationreached2.8%,slightlylowerthanthetopendoftheinflationtarget.Housingandenergyitemshadthemosteffectontheincreaseinpriceslastyear.Itshouldbementionedthattheincreaseinpricesofhousingofhome-owners,whichisnotpartofhousingpricesmeasuredintheConsumerPriceIndex,amountedtoabout18%fromthebeginningoftheyear.Themostprominentincreaseinhousingpriceswasaffectedbythesharpdecreaseintheinterestrate,resultinginadecreaseinthecostofmortgages.Thepublictendedtoshifttowardsinvestmentinrealestate,againstabackdropofalackofattractiveinvestmentalternatives.Atthesametime,thedecreaseintheinterestratehadnoaffectonthegrowthofthehousingsupply,wherestartsandcompletionsofresidentialconstructionreflectedadeclineaswellasthenumberofhousesforsale.In2010,adecreaseisexpectedininflationtoreachtheinflationtargetrangeof1%-3%,withthefactorsthataccelerateditin2009notexpectedtocontinuehavinganeffectin2010.Duringthefirstthirdoftheyear,theBankofIsraelinterestratewasinanunprecedenteddownwardtrend,reaching0.5%,withthepurposeofmoderatingtheeffectofthedeepglobalcrisisonthefinancialandnon-bankingmarketsinIsrael,againstthebackdropof weakness in overseas markets and the enhanced risks of heavy recession. Similar action was taken by central banks around the world. With the accumulation of indicators pointing to a continuous and significantrecovery,theinterestratebegantoclimbagainstartingfromSeptember2009.Thepaceoftheincreaseintheinterestrateisslowandprecedesincreasesininterestratesaroundtheworld,whichareexpectedtobeginonlyinthemiddleof2010,withtheestablishingofthetrendforendingtherecession,whichisatthisstage,asmentioned,notyetcertain.UntilFebruary2010theinterestrateincreasedbyonly1.25%,reflectingastillconsiderablerealnegativeinterestrateofabout2.5%.Towards2010,apositiveinterest-rate gap began to develop again between Israel and the rest of the world when comparing central bankinterestrates.However,thepositivegaponlong-termbondsisonadecreasingtrend.Theendingofthe crisis for the economy should bring about the continuation of adjustment of the interest rate to the ongoingestablishmentofthenewdomesticeconomicenvironment.Despitethat,thepaceofadjustmentdepends on developments in the global economic environment that do not match developments in the Israelieconomy.Undercurrenttrends,itisverylikelythatthisprocesswillnotbecompletedduring2010.

The management of monetary policy of close to two years by the Bank of Israel is not only executed throughinterestratedecisions,butalsothroughinterventionbytheBankofIsraelintheforeignexchangemarket. The increasing current account surplus in the balance of payments and positive capital movements intotheeconomy,reflectamongothersthegapinthedepthoftheeconomiccrisisbetweenIsraelandtherestoftheworld(intheworldthecrisisisrelativelydeeper).ThissituationledtheBankofIsraeltointerveneintheforeignexchangemarketandpurchasedollarsinconsiderableamounts,inordertoprevent excessive strengthening of the shekel that could seriously harm the export sector and deepen therecession.During2009,theshekelstrengthenedagainstthedollaratanaggregaterateof2.1%.Thesetrends,perhapswithalowerintensity,areexpectedtocontinueduring2010,againstthebackgroundofthe expectation of a current account surplus and positive capital movements in the coming year also. To that should be added the positive interest rate gap that has increased during recent months and should continue to rise also in 2010. The strengthening trend of the shekel is one of the factors that are supposed tostabilizeinflationin2010withintheinflationtargetrange,eventhoughthelevelofinterestrateswillcontinuetoberelativelylow,andmaypushinflationupwards.


UBank Ltd.

2009 marked the ending of the crisis affecting capital markets in Israel and around the world. After the sharpdecreaseinthemarketsinthelastquarterof2008,thefearofcollapseoftheworldeconomydeclined and negative trends became more moderate. Price increases in 2009 were a natural reaction to the sharp decreases at the peak of the crisis.TheTel-Aviv25indexincreasedbyapprox.75%in2009,andattheendoftheyearreachedalevelhigherthan on the eve of the crisis in September 2008. The index increased by close to 95% from the low point of November 2008. Increases focused on stocks included in sectors that had been eroded due to negative developmentsinthesesectorsoverseas-banking,insuranceandrealestate.Aprominentincreaseofapprox.150%wasregisteredintheTel-Aviv75index,causedbyajumpintheprices of several stocks connected to drilling for gas along the coast of Israel.Sharpincreaseshavecharacterizedmoststockindices,amongthemtheYeter50andRealEstate15,thathavemorethandoubled,andtheTel-Tek15indexthatincreasedbyapprox.85%.Theseindicesstoodoutin 2008 with sharp decreases of approx. 65%-80%.

Instockmarketsabroad,despitetheproblematicstarttotheyear,stocksoftheS&P500ended2009withthebestreturnsince2003,23.5%,ofwhich,sincethelowpointinMarch,theindexaddedabout67%to its value. The Dow-Jones increased this year by 18.9% and the NASDAQ index increased by 43.9%. Europealsoregisteredincreases:theFrenchCAC-40indexincreasedby22.3%andtheGermanDAXindexby23.9%.InJapan,theNikkeiindexincreasedby19%andinHonk-KongtheHang-Sengindexjumped by 52%.

Thebondmarketin2009wascharacterizedbypriceincreasesinallbondtypes.Incorporatebondslinkedtotheindex,anaverageincreaseofcloseto40%wasrecordedthisyear.Theincreaseinpricesofcorporate bonds this year follows their erosion by approx. 20% in September-December 2008. The Tel-Bond20indexincreasedbycloseto22%andtheTel-Bond40index,ofwhichmanyofthebondsincludedinitareconnectedtotherealestatesector,increasedbytwicethatrate,closeto44%,sincethebeginningoftheyear,followingadecreaseofabout33%duringthelastfourmonthsof2008.Governmentbondprices,whichwerenotaffectedbythecrisis,recordedanincreasethisyearofuptoapprox.10%,whereasnon-linkedbonds,Shahar,increasedbyonlyapprox.afteranincreaseofcloseto12.5% in the previous year.

Updates in Legislation and Rulings affecting the Banking System in 2009

Overthelastyear,therewerechangesandinitiativesforchangesinlegislation,togetherwithchangesinregulations,whichhaveimplicationsonthebankingsystemandontheBank,assetoutbelow:

JointInvestmentTrustLaw(AmendmentNo.14),2009The draft law was published on 16.2.10.The main amendment is a change to section 69 in the Joint Investment Trust Law.Themainchangesareasfollows:anobligationwasimposedonthefundmanagertoholdatenderforbrokeragecommissionswitha“tradingcompany”(amemberoftheStockExchange);theBoardofDirectorsofthefundmanagermustfixaprocedureforholdingatenderwhichwillbeapprovedbythetrustee; entering an undertaking with a stock exchange member overseas can be made without a tender (withinthetermsofthelaw);anundertakingbyafundmanagerunderabrokerageagreementwithastock exchange member controlling the fund manager or the trustee of the fund can be made without a tendersubjecttothefollowingconditions:1. The stock exchange member must meet the minimum conditions that were set out in the tender.2. The commission for any kind of a deal will not exceed the commission that the winner of the

tender will be paid for a similar deal.3. The undertaking was approved by the Audit Committee and the Board of Directors of the fund

manager.The fund manager will not make payments from the fund’s assets to stock exchange members related to thefundmanagerortrustee,foraperiodof12monthscommencingonthedatedecidedbythefundmanagerintheprospectus,fortheexecutionoftransactionsinthetrust’sassets,inanamountexceeding20%ofallcommissions(ofalltypes)thatwerepaidfromthefund’sassetsinthatyear.


UBank Ltd.

The amendment will come into effect 12 months after publication of the amendment to the law.It should be mentioned that the amendment to the law replaces the same sections in the proposed Joint InvestmentTrustLaw(AmendmentNo.13),2008,whichdealwiththerequirementforatenderandrestrictions on payments of brokerage commissions to a company related to a fund manager or a trustee.

TheamendmentshouldhaveasignificanteffectonthebusinessoftheBankandtheresultsofitsactivities,becausetheBankhassignificantactivitybothasabankerandasatrusteeformutualfundsthroughitssubsidiarycompanyUBankTrustCompanyLtd.,whichmaybringabouttheneedforsignificantreductionin one of these activities.AsofthedateofapprovaloftheseFinancialStatements,nodecisionhasyetbeenmadebytheBank,regarding the manner of preparation for the implications of the above-mentioned legislation.

RegulationofEngagementinInvestmentAdvice,InvestmentMarketingandInvestmentPortfolioManagementLaw(AmendmentNo.13),2008TheamendmentwaspublishedintheOfficialGazette(Reshumot)on16.2.10,andwillcomeintoeffectsixty days after its publication.Theproposedamendmentdealswiththefollowingsubjects,amongothers:Settingupanarrangementwherebyforeignersthathavebeenauthorizedintheirowncountriestoengageininvestmentadvice,investmentmarketingandportfoliomanagement,willbeallowedtooffertheirservicesinIsraelwithouttheneedofanappropriateIsraelilicense,onconditionthattheserviceswillbegivenwithintheframeworkofanauthorizedIsraelicorporation.Theauthorizedcorporationwill be made responsible and be given the duty of supervision with regard to the activity of the foreign traderinitsframework.Amongthethresholdconditionsforanundertakingbetweentheauthorizedcorporationandtheforeigntrader:anundertakingagreement,theforeigntradermustholdalicensefromhiscountryoforigintoengageinthesameserviceandtheauthorizedcorporationmustbeauthorizedon its own merit to provide the same services to which the undertaking agreement applies - regulations areproposed(detailedasfollowsfortheregulationoftherequestforregistration);thegrantingofanexemptionfromthelicensetomanageportfoliosforsophisticatedcustomers(henceforth:“qualifiedcustomers”)andtheaddingofcustomerswithlargeassetportfoliosandcustomerswithsignificantexperience in the capital market activity or relevant expertise for activity in this market to the list of customersforwhichthereisanexemptionfromowningalicenseforadvising,investmentmarketingand,asproposed,alsoinvestmentportfoliomanagement,duetotheirbeingqualifiedtopurchaseprofessionalassistance with their own money in order to make investment decisions by themselves or because of theirskillinthecapitalmarket,andasaresult,donotrequiretheprotectionofthelawinherentintherequirement for a license; the granting of authority to the Israel Securities Authority to make use of outsourcing for purposes of supervision of license-holders; increasing activities permitted for a portfolio managementcompany,includingpensioncounseling/marketingandothersubjects.

Israel Securities Authority Circular - Principles of measurement of the Bank’s earnings from investment advisory activities and the remuneration of investment advisorsOn15.2.09,theISApublishedacirculartobankingcorporationsconcerningthemethodofmeasuringtheBank’s earnings from investment advisory activities and the remuneration of investment advisors.TheaimofthecircularwastoprovideabalancebetweenaconflictofinterestthatmightbecreatedbetweenthebenefitoftheBankandthepersonalbenefitoftheinvestmentadvisor,andthebenefitofthecustomers,andtheconcernofabreachoffiduciarydutyandtheexerciseofcautionsetoutinthelaw:1. When use is made of measuring or compensatory mechanisms based on the contribution

toprofitabilityoftheunitorthebranch,actionshouldbetakentoreducethepotentialforconflictofinterestsbydilutingtheeffectoftheparameterofprofitabilityonmeasurementandcompensation,anddilutingtheeffectoftheindividualadvisorontheprofitsoftheunit.

2. An investment advisor should not be compensated directly or indirectly for the Bank’s income from his investment advisory activity.

3. Personal measurement of investment advisors is permitted only on the basis of qualitative parameters,asmuchaspossible,whicharesegregatedfromtheBank’sprofitsfrominvestmentadvisory activity which they performed.


UBank Ltd.

Circular of the Supervisor of Banks concerning environmental risks to banking corporationsOnJune11,2009,theSupervisorofBanksissuedadirectiveconcerningenvironmentalriskstobankingcorporation(henceforth:“thedirective”).Bankingcorporationswillberequiredtoincorporateintherangeofcreditconsiderationstheidentificationandassessmentofenvironmentalrisk,andtotakestepsto assimilate the management of exposure to environmental risk in the range of risks of the banking corporation. Implementation of the circular will be in accordance with criteria and timetables to be approvedbytheboardofdirectorsofthebankingcorporation,by30.6.2010,whileforpurposesofimplementation it will be possible to draw on accepted principles and international standards on the subjectofenvironmentalriskmanagement,withthoseadjustmentsnecessarytotheenvironmentinIsrael.

Reform in the area of banking commissionsAnumberofprivatemembers’billsaretabledintheKnessetconcerningrestrictionsonthelevelofcommissions,basketsofcommissions,theprohibitiononchargingtypesofpopulationswithcertaincommissions,theprohibitionofchargingcertaintypesofcommissionsandsoon.Inaddition,thereareprivatemember’sbillstabledintheKnessetseekingtomakebankingcorporationspayinterestoncurrentaccount balances of their customers. The Bank is monitoring developments in the legislative process of thoseproposals,whicharestillinthepreliminarystagesoflegislation.

PowersoftheSecuritiesAuthorityLaw(AmendmentstoLegislation),2008The Law was passed in the plenum of the Authority on 14.12.08.Themainchangesproposedare:unifyingtherulesbywhichtheTASEoperates,whicharenowinthreebodiesoflaws-theConstitution,InstructionsandTemporaryInstructions,intoasingleinclusivevolumetobecalled“Instructions”,andthatdecidingonInstructionsandmakingamendmentstoitwillbeperformedbywayofapprovinganadministrativedirective,afterthereceiptoftheapprovaloftheTASEBoardofDirectorsfortherulingorfortheamendment,whicheveristhecase;empoweringtheAuthoritytoregularize,byadministrativedirectives,mostofthemattersgovernedatpresentbyregulations,inthoseareas over which it has jurisdiction; and deciding that the plenum of the Authority will be the body to give approval to administrative directives proposed by the staff of the Authority. The plenum will be responsible forimposingsanctionsonthoseunderthesupervisionoftheAuthority,includingdecisionsregardingtheimpositionofmonetarysanctionsandcivilfines,anditisproposedtogiveauthoritytothepowersoftheAuthority by pre-ruling.

AmendmenttoIncomeTaxOrdinance(AmendmentNo.169andTemporaryOrder),2008The Amendment was passed on 29.12.08. The Amendment grants tax incentives to foreign residents to investinIsrael:anexemptionfromtaxoninterest,discountfeesandlinkagedifferentialsonbondstradedontheStockExchangeinIsrael,andataxexemptiononcapitalgainsforaforeignresidentofacountrythathassignedadoubletaxationavoidanceagreement.Furthermore,acorporationreceivingadividendin the 2009 tax year from a foreign resident corporation will be liable to Companies’ Tax at a rate of 5% insteadof25%,iftheproceedsofthedividendareusedinIsrael.Inaddition,taxbenefitswereextendedfor residents of Sderot and Western Negev settlements.

ExecutionLaw(AmendmentNo.29)On16.5.09,AmendmentNo.29totheExecutionLawcameintoeffect,underwhichthesubjectofalternativehousingisregulated.AccordingtotheAmendment,itwillnotbepossibletomakeconditionsontherightofadebtortoalternativehousing,althoughitispossibletodeterminethatthealternativehousingofferedtothedebtorwillbeunderanarrangementdetailedbelow,providedthatthesignificanceof the matter is explained to the debtor in clear language that he understands. Under the above-mentionedproposal,thevalueofthealternativehousingwillbeofanamountwhichwillenablethedebtor to rent an apartment in the area where he lives which is appropriate to his needs and the needs of hisfamilymemberslivingwithhimforaperiodnotexceeding18months(exceptinspecialcircumstanceswheretheEnforcementOfficeRegistrarcanextendthatperiod).Thevalueofthealternativehousingwill be deemed to be part of the receivership expenses. Regarding pledge or mortgage agreements that wereenteredintobeforetheAmendmentcomesintoforce,theproposedAmendmentdeterminesthatitispossibletomakeconditionalthedebtor’srighttoalternativehousing,exceptifisproventotheEnforcementOfficeRegistrarthatthedebtor’srighttoalternativehousing,andthesignificanceofwaivingit,werenotexplainedtothedebtor.


UBank Ltd.

AmendmenttotheCompaniesLaw,1999-RecordingacompanyasacompanyinviolationTheAmendmentwaspublishedon23.7.09.Asof1.1.2010,ifacompanybreacheditsdutyofpayingafeeand/orotherpaymentsthatitisobligedtopaytotheRegistrarofCompanies,orifacompanybreacheditsdutyofsubmittinganannualreport,theRegistrarofCompaniesinauthorizedtorefusetoregisteralien on the assets of the company in violation.

MemorandumSupplementaryEnforcementbytheIsraelSecuritiesAuthorityLaw(AmendmentstoLegislation),2009The draft law was approved by the Ministerial Committee for Legislative Matters on 6.12.09.TheAmendmentbringsabouttheexistenceofthreeparallelchannelsofenforcement:a. ProceedingsfortheimpositionofamonetarysanctionbytheAuthority,intendedtodealwith

minor violations.b. Administrative enforcement proceedings - allowing the Administrative Enforcement Committee

toimposeaseriesofmeasuresofenforcement,intendedtodealwithviolationstheproofofwhich requires the existence of disciplinary investigation proceedings.

c. Criminal proceedings - which are intended to deal with serious crimes and which only at its conclusion will it be possible to impose punishment by imprisonment; an Administrative Committee will be set up to review the above violation of the laws. The Committee will be authorized,amongotherthings,toimpose:monetarysanctionsofasignificantamount;arequirementtopaycompensationtothosehurtbytheviolation,prohibitionfromservingincertain bodies and suspension of the license.

Drafts and Proposed Legislation

ProposedLawamendingtheIncomeTaxOrdinance(ExemptionfromTaxonInterestandProfitsfromLong-TermSavings),2009Aprivatemember’sbill,tabledintheKnesseton30.11.09.It is proposed to exempt long-term savings plans from tax.

ProposedExecutionLaw(Amendment-DischargeofaBorrowerofLimitedMeans),2009Aprivatemember’sbill,tabledintheKnesseton23.11.09.ItisproposedtoallowthegrantingofadischargetoaborroweroflimitedmeansbytheExecutionOfficeand thus to equate his status with a borrower of limited means who has been declared bankrupt.

ProposedJointInvestmentTrustLaw,1994,(AmendmentNo.13),2008The proposed Law was approved by the Ministerial Committee for Legislative Matters on 28.6.09.Themainamendmentsproposedare:offertothepublicofforeignmutualfunds;increasingthedutiesofsupervision imposed on the trustee and tightening supervision over fund managers; granting authority to the Securities Authority to deny as well as not to grant a company approval to serve as trustee or fund manager for reasons connected with its reliability; prohibiting a company from serving as a trustee in a fundifoneofthefollowingalternativesexist:1. Intheeventthatthecompanyiscontrolledbythefundmanager,apersoncontrollingit,ora

company under the control of any of them with more than 10% of the issued share capital of the company.

2. Thereisabusinessconnectionbetweenthecompany,orapersoncontrollingit,andthefundmanager,oramaterialbusinessconnectionwithapersoncontrollingafundmanageroracorporation under his control.

3. The revenues of the company together with the revenues of a person controlling it and a corporationunderthecontrolofsuchanabove-mentionedperson,whichderivefromabusinessconnectionwiththefundmanagergroup,includingrevenuesfromtrusteeshipforfundsmanagedbythefundmanagergroup,fromtrusteeshipforbondsissuedbyacorporationincludedinthefundmanagergroup,andfromtheprovisionofusualbankingservices,exceed15%ofitsrevenues together with the revenues of a person controlling it and a corporation under the controlofsuchanabove-mentionedperson.Forthismatter,abusinessconnectionisdefinedas-includingsupplier-customerrelationships,serviceproviders/recipients,loanproviders/recipients


UBank Ltd.

andothers,excludingaconnectionderivingfromtheprovisionofservicestoatrusteeshipforfundsorbonds,andusualbankingservicesduringthecourseoftheusualbusinessofthebank,andonmarkettermsonly,wheretherevenuefromthemdoesnotexceed5%oftherevenuesofthebank;amaterialbusinessconnectionisdefinedas-abusinessconnectionincludingtheprovisionofusualbankingservices,wheretotalrevenuesincludingrevenuesfromallthebusiness connections with the fund manager group exceed 5% of the revenues of the company together with the revenues of a person controlling it and a corporation under the control of such an above-mentioned person.

4. Therearecircumstancesinwhichconflictmaybecreatedbetweenthebenefitofthecompanyor the person controlling it or a corporation under the control of such an above-mentioned person,andthebenefitoftheunitholders:prohibitionofreceiptofbrokerageservicesfromaparty connected with the fund manager or the trustee; a duty to hold a tender for purposes of a commitmentwithabank/memberoftheStockExchangeforthereceiptofbrokerageservices,as well as prohibiting the payment of brokerage commissions or any other payment from fund assetstoacompanyconnectedwiththefundmanagerorthetrustee(whenbodiesconnectedwiththefundmanagerorthetrusteecannotparticipateinsuchatender);aprohibitionofpreferenceofthebenefitofunitholdersinaspecificfundoveranotherfundwhentheyaremanaged by the same fund manager; determining provisions concerning the participation of the fund manager in meetings of public companies whose securities are held by mutual funds; allowing the charging of differential management fees in a fund from different populations of unit holders; changing the format of liquidating a fund and granting authority to the Israel Securities Authoritytoorderthedissolutionofafund.Inaddition,obligingafundmanagertodissolveamutualfundwithalowasset-value;similarly,variousmattersareregulatedintheproposedlawconnectedwiththemannerofmanagementofmutualfunds,chargingofmanagementfees,transferringvitalinformationtounit-holders,liquidatingafund,civilenforcementauthoritiesoftheIsrael Securities Authorities and so on.

IftheAmendmentinitspresentversionwillbecomebindinglegislation,thereisexpectedtobeamaterialeffectonthebusinessofthebankanditsoperatingresults,becausetheBankhassignificantactivitybothasabankerandasatrusteeformutualfundsthroughitssubsidiarycompanyUBankTrustCompanyLtd.,whichmay,ifthelegislativeprocessiscompleted,bringabouttheneedforsignificantreductioninoneofthese activities.AsofthedateofapprovaloftheseFinancialStatements,nodecisionhasyetbeenmadebytheBank,regardingthemannerofpreparationfortheimplicationsoftheabove-mentionedlegislation,ifitisapprovedinitscurrentversion,andregardingwhichactivitieswillbereduced,asmentionedabove.

ProposedJointInvestmentTrustLaw,1994,2009The draft Proposed law was approved in the plenum of the Israel Securities Authority on 15.11.2009 and published for comments by the public by 31.12.2009.Themainamendmentsproposedare:RegulationofExchange-TradedNotes(TeudotSal):1. Activity by exchange-traded notes and issuers of exchange-traded notes will be regulated by

means of the Joint Investment Trust Law and will be subject to supervision by the Authority.2. Exchange-tradednoteswillbedefinedinamannersimilarandcorrespondingtothatofmutual

fundsandissuersofexchange-tradednoteswillbedefinedasexchangetradednotesmanagers(correspondingtofundmanagers).Thesenoteswillchangefromthelegalstructureofa“bond”issuedasasecurityunderprospectus,toalegalstructuresimilarinsubstancetoamutualfundinwhichtherightofacquisitionoftheassetswillbelongtotheinvestors.Inaddition,andunlikeamutualfund,anexchange-tradednotewillincludeanobligationoftheexchange-tradednotesmanagertomakeupthedifference,ifsuchiscreated,betweentheamounttowhichtheholderoftheexchange-tradednoteisentitledonredemption,andtheactualassetvalueoftheexchange-tradednote,Asdistinctfrommutualfunds,theexchange-tradednotesmanagercan“withdraw”moniesfromthearrangementifthevalueoftheassetsishigherthanthevalueoftheliabilities,inaccordancewithamechanismtobedetermined.

3. Theapplicationofnormsapplyingtodaytofundmanagersandfundtrustees,includingthedutyoflicensing,toexchange-tradednotesmanagersandtheirtrustees.Amongthenormsthereare


UBank Ltd.

requirementsonthesubjectofconditionsforqualificationtoserveasafundmanagerandasatrustee,limitsonmarketshare,themannerofmanagementofthefunds,limitsoftheassetswhichit is permitted to hold in a fund and their maximum amounts etc.

RegulationofExchange-TradedFunds(KranotSal):1. A fund whose investment policy is intended to track through replication a market index or other

underlyingasset,canregisteritsunitsfortradingontheTel-AvivStockExchange,andtransactionsinitsunitswillbeallowedduringtradingonly,inasimilarmannertoexchange-tradednotes.

2. Afundmanagerwillbea“marketmaker”forunitsinthefundandwillquotepricesaccordingtorules stipulated in the legislation.

3. Tradingofunitsinthesecondarymarket-Concurrentwiththeactivityofthefundmanager,therewillbeanormal“secondarymarket”forunitsofthefund.

4. Existing tracker funds will be entitled to register for trading and convert themselves into exchange-traded funds.

Additionalchanges:1. Arrangementmanager-Itisproposedthatanarrangementmanager(i.e.afundmanageror

exchange-tradednotesmanager)can,subjecttotherequirementsofstabilitytobedeterminedforeachtypeofarrangement,managealltypesofarrangements.

2. Itisproposedtodeterminethatthetermofserviceofatrusteewillnotbelessthanfiveyears(atpresentthelimitisthreeyears),andanyextensionwillbeforafurtherfiveyears.Inanyinstanceofnon-extensionoftheagreement,thefundmanagerandthetrusteehavetoreportthe reasons for the non-extension of the period of service to the Authority.

3. Change in investment policy - This is possible once every twelve months. It will not be possible tomakeanymaterialchange(achangeininvestmentpolicyofafundwhichaffectsthevolatilityofthepricesofthefundorrequiresachangeinitsclassification),inthefund’sinvestmentpolicy.Exceptional cases will be determined in the regulations when it will nevertheless be permitted to make a material change in an arrangement. It is also proposed to determine that a merger will be allowedonlyregardingfundsinthesameclassification.

ProposedJointInvestmentTrustLaw(TenderforUndertakingwithStockExchangeMember),2009TheproposedlawpasseditssecondreadingintheKnesseton14.3.07.Accordingtotheproposedlaw,theselectionofastockexchangememberbyafundmanagerandenteringintoanundertakingwithhimforpurposesofexecutingtransactionsinsecurities,optionsandfuturescontractsforthefund,willbecarriedoutbymeansofatenderunderrulestobedeterminedbytheMinisterofFinance.Inaddition,itisproposedtoallowafundmanagertoreceiveafullorpartial refund of commission paid by the fund to a stock exchange member for purposes of executing transactionsinsecurities,optionsandfuturescontractsonbehalfofthefund.IntheframeworkofthedebateheldintheKnesseton1.7.09,itwasdecidedthattheproposedlawwouldbejoinedandcombined with Amendment No. 13 to the Joint Investment Trust Law and integrated into it.

ProposedLawamendingtheCompaniesLaw(RecoveryofCompanies),2010The proposed law was published on 6.1.10.The aim of the proposal is to regulate the area of recovery of companies regulated at present under section350oftheCompaniesLaw,1999.Themainpartsoftheproposal:toprovidealegalbasisformeetingsofholdersofdifferenttypesofbonds; to consider the cancellation of a requirement for obtaining a numerical majority in meetings of creditors and shareholders; creating a speedy process for obtaining approval of a compromise or arrangement formulated outside of the Court; granting authority to the Court to extend the period of freezingofproceedingsforspecialreasons;anownerofapropertycannotobtainpossessionintheeventthat the property is needed for the ongoing operation of the company; the debt of the company to the owner of a property is the amount that would be paid to a seller as a condition for transferring ownership not exceeding the value of its sale. The provisions concerning a compromise or an arrangement will apply toacompanyagainstwhomanordertofreezeproceedingshasbeengranted.Providingalegalbasisfortheauthoritytoappointanofficeholderanddetermininghisauthoritiesineveryevent,thepossibilityofusing pledged properties during the normal course of business of the company unless the Court ordered


UBank Ltd.

otherwise.TheCourtcanobligeaproviderofavitalservicetocontinuesupplyingit,subjecttothereceiptofconsideration.Theauthorityofanofficeholdertoadoptorrejectanexistingcontract,toreceivealoan.TheCourtwillbeauthorizedtoenforceanarrangementoracompromiseonmeetingsoftypesofbondholders who objected to them on condition that the proposal is fair and just in relation to all types of bonds not agreeing to it. The granting of authority to the Court to cancel proceedings if it is convinced that there is no possibility of saving the company.

ProposedSecuritiesLaw,2009The proposed law was updated on 26.11.09.Itisproposedtochangethedefinitions“ownership”,“purchase”,and“interestedparty”sothatadditionalsituationswillbedealtwithforpurposesofexaminingreportingrequirements,inrelationtotransactionsexecuted with an interested party in relation to his holdings in the securities of the corporation. In this manner a mutual fund manager will be considered a holder of securities included in the assets of the fund andunderhismanagement,andatrusteewillbeconsideredaholderofsecuritiesforwhichheservesastrustee,ineverymatterandnotonlyconcerningtheirclassificationasinterestedparties.Apersonwill be considered a holder of securities also in the event that the holding is performed by means of his investment portfolio manager. It is proposed that a creditor be deemed a holder of securities pledged in hisfavorasofthefirsttimehetookstepstorealizethepledgeorthefirsttimehemadeuseofvotingrightsrelatingtothepledgedsecurities,whichevertheearlier.Itisproposedtoamendthedefinitionofa“familymember”toincludealsofamilymemberswhoserelationshiptotheholderderivesfromtheirbeingparentsorsiblingsofthespouseoftheholder(additionofsiblingorparentofthespouse).Itisproposedtonarrowthedefinitionofjointownershiporpurchasesothatthisapparentownershipwillapplyonlyaslong as there in no controlling shareholder in the corporation. It is proposed to add additional apparent ownershiptothedefinition“ownershiporpurchaseofsecuritiestogetherwithothers”inaccordancewithwhichanindividualandmembersofhisfamilywillbedeemedasholdingtogether(evenifthefamilymembersdonotlivetogetherorthelivelihoodofoneisnotdependentontheother).Itisproposedtoincludeinthedefinition“interestedparty”alsocasesofownershipofsecuritiesthatareconvertibleintoshares,andofrightstoreceivesharesordebt.Itisproposedthattheresponsibilityofapersonmakingaproposalinapurchaseofferorsaleofferwillbemadeequaltothatofanissuer.Furthermore,apersonmakingaproposalinapurchaseofferwillberesponsibletotheholderofsecurities(includingoptions,bondsandconvertibles)ofthetargetcompanyasdefinedinthePurchaseOfferRegulations,fordamagecaused to him as a result of his violating the provisions of the law.

MemorandumSecuritiesLaw,2009,SecuritiesRegulations(Certificatesofindebtedness),2009ThedraftproposedLawwasapprovedbytheplenumoftheSecuritiesAuthorityon30.3.09,andpublished on the website of the Authority on 1.6.09 for comments by the public. The major changes proposedare:theestablishmentofaregisteroftrusteesandthecheckingofcompliancebytrusteecompanywiththeconditionsofqualificationsetoutinthelawinthisconnection;determininganamountofthedepositinsteadofarequirementforownequity,minimumamountsofinsuranceforatrusteecompanyderivingfromthevolumeofbondsforwhichitservesasatrustee,determiningconditionsofqualificationfordirectorsandthoseemployedbythetrustee;fixingthedutyofreportingtothetrusteeand determining the contents of the annual report on trust matters; the duty to summon an annual meetingtoapprovethecontinuationinofficeofthetrusteeandtosummonameetingatthedemandofa bondholder or at the demand of the trustee; determining the duty of the trustee to act in the interest ofthepublicholdingbondsofthesameseries,includingexaminingcompliancebytheissuerwithhisobligationstowardsthebondholders,andthedutiesderivedfromthisgeneralobligation;safeguardingtrusteeassetsforthebenefitofthepublicholdingthebonds,examiningpossibleactionsavailabletothebondholdersiftherearegroundstomakethebondsrepayableimmediately(includingarealconcernofamaterialbreachofobligationsbytheissuer).

ProposedLawamendingtheBillsofExchangeOrdinance(ChecksCrossedNon-negotiable),2009Thisisaprivatemember’sbilltabledintheKnesseton21.12.09.Itisproposedtoprotecttheconsumer(mainlyhouseholdsandprivateindividuals)andobligethebanksto issue them with books of non-negotiable checks only as the default alternative. A customer requesting checkbooks with no limitation of negotiability can do so by special request at the branch of his bank and on his responsibility.


UBank Ltd.

ProposedSecuritiesLaw(AmendmentNo.38)(SecureElectronicMailSystem),2008The proposal was published on 27.7.09 and will come into effect after regulations will be made and rules determined by the Authority.ThemainchangesproposedaretoallowtheIsraelSecuritiesAuthoritytoprovideadvices,demands,instructionsoranyotherdocumentthattheAuthorityisauthorizedtoprovidetobodiesunderitssupervision,bymeansofasecureelectronicmailsystem.Itisproposedtoimposeonaddresseestheobligation to use the said electronic mail system and to receive documents from the Authority through itatafrequencytobedeterminedinregulations,anditisproposedtodetermineapresumptionthatadocument provided through the system reached its destination after two business days.

ProposedSecuritiesLaw(OffExchangeDealerSystem),2009The proposal was approved in the Ministerial Committee for Legislative Matters on 10.1.2010.Themainchangesproposedare:adefinitionwillbeaddedof“dealer”;thedefinitionof“securities”willbeexpandedtoincludeallfinancialinstruments;a“dealer”willbeobligedtoobtainalicensefromtheAuthorityforpurposesofitsactivity;dutieswillbeimposeduponadealerwhoseaimisminimizingtheeffectofconflictsofinterestsbetweenthedealerandcustomers,includingincreaseddisclosuredutiestowardsitscustomers.Adealerwillberequiredtoshowfinancialstabilitybymeansofhavingminimumownequity,adepositandliquidassets.Itwillalsohavetoholdappropriateinsuranceandwillberequiredto comply with the rules determined in the regulations concerning the manner of handling customer funds.Inaddition,itwillberequiredtoprovecompliancewithtechnicalconditionsofcomputerizationforpurposesofcompliancewithhisobligations.Furthermore,thedutiesofcautionandskilltowardscustomerswillapplytoitanditscontrollingshareholder,directorsandCEO;reportingrequirementstothe public and to the ISA will be imposed on dealers.

ProposedBankofIsraelLaw,2009TheproposedlawwasapprovedinfirstreadingintheplenumoftheKnesseton8.2.2010.ItisproposedthattheGovernorbeauthorizedtoissuedirectivesconcerningliquidassetstobeheldbyabankingcorporation,andthatincaseswhenitdidnotactaccordingly,theGovernorisauthorizedtodetermine the rate of interest that the corporation is to pay. There is a possibility for granting credit to bankingcorporationsandreceivingdepositsfrombankingcorporationsagainstthepledgeofsecurities,whileitisproposedthatthepledgewillbeineffectagainstthirdparties,evenifithasnotbeenrecordedinfavortheBankofIsrael(henceforth:“theBank”)ornotdeposited,providedthatthepledgedsecuritiesarerecordedinfavoroftheBankofIsraelwiththefinancialintermediary,suchas:aStockExchangememberoftheStockExchangeClearingSystem.TheBankwillbeauthorizedtorequirereportingandtosupervisefinancialbodiesthataresubjecttoit,itisproposedtodetermineasageneralrulethattheBankofIsraelisauthorizedtomanageaccounts,andnotjustdeposits,forbankingcorporations.Non-compliancewithoneofthedirectiveswillenabletheGovernortoimposeamonetarysanction,includingimposingdirectresponsibilityontheorganizationthatactedonbehalfofthecorporation.ItisproposedtoauthorizetheGovernortoissueanorderrequiringthegivingofinformationinrelationtotransactionsin the foreign currency market in Israel.

ProposedCourtsLaw(CombinedVersion)(Amendment),2009The proposed law was promulgated by the Advisory and Legislation Committee of the Ministry of Justice for comments by the public by 11.1.09.ItisproposedtosetupanEconomicDepartmentintheTel-AvivDistrictCourt,whichwillhearalleconomicmatterstoallowfortheefficientmanagementofproceedings.Economicmattersasper:theCompaniesLaw,theSecuritiesLaw,theJointInvestmentTrustLaw,andtheRegulationofEngagementinInvestmentAdvice,InvestmentMarketingandInvestmentPortfolioManagementLaw.

ProposedSupplementaryEnforcementbytheIsraelSecuritiesAuthorityLaw(AmendmentstoLegislation),2008The proposed law for supplementary enforcement by the Israel Securities Authority was approved by the plenum of the Authority on 16.11.08 and promulgated for comments by the public until 18.9.09.Theaimofthelawistostreamlineenforcement,sothatlegalproceedingswillbeusedonlyforseriouscases,andthusanadministrativeenforcementmechanismwillbedeterminedandanarrangementfortheconditionalapplicationofproceedings.Tothisend,anAdministrativeCommitteewillbesetuptoreview


UBank Ltd.

violationsoftheSecuritiesLaw,theJointInvestmentTrustLaw,andtheAdvisoryLaw.TheChairmanofthe Authority can decide in every case of violation or breaking the law whether to act through criminal proceedings,administrativeproceedingsofmonetarysanctions.Enforcementmeasureswillbefinesforasignificantamount,arequirementtopaycompensationtoanyonehurtbytheviolation,apaymenttotheStateTreasuryderivingfromprofitsobtainedasaresultoftheviolation,arequirementtotakestepstocorrecttheviolationandpreventitsreoccurrence,aprohibitionagainstservingincertainbodies,suspensionorcancellationofalicense,andconditionalpunishment;itisproposedtodetermineauthorityforcivilinvestigationunderwhich,incaseswheresuspicionarisesofcarryingoutofaviolation,itwillbepossibletorequestasearchwarrantfromtheCourt,inanyplacenotusedsolelyasaplaceofresidence.

ProposedUniformContractsLaw(Amendment-DutyofNotingApprovalandMaterialConditions),2009The proposed law was passed in preliminary reading on 8.7.09.It is proposed to note in a prominent manner if the contract passed inspection by the Uniform Contracts Court in order to generate public awareness and to encourage businesses to be inspected by the Court.

ProposedUniformContractsLaw(Amendment-DeterminingtheMinimumRateofIndex-linkageasaDiscriminatoryCondition),2009TheproposedlawwastabledintheKnesseton25.5.09.Incontractswherethereisaconditionofaminimumrateofanindextowhichitislinked,i.e.iftherealvalueofthemonetaryobligationrose,thentheconsumerpaysmore,butifitsrealvaluefell,theconsumeris liable to pay more than the value of the product. It is proposed to prohibit such provisions.

MemorandumSecuritiesLaw,2009-IncreasingSeverityofPunishmentThe memorandum was approved by the plenum of the Authority on 11.1.09. The proposal is expected to be combined with the proposal to amend the law concerning supplementary enforcement.Themainchangesproposedinthememorandumare:reducingthescaleofpunishmentdeterminedinsection53ofthelaw,increasingpunishmentsdeterminedinthesectionsonfraudandprohibitingtheuseofinsiderinformation,increasingtheamountsofmaximummonetarysanctionswhichcanbeimposedonviolators of the provisions of the law.

Proposed Amendment to the Banking OrdinanceThe proposed Law was approved by the Ministerial Committee for Legislative Matters on 4.6.09.Itisproposedthat:1. The Supervisor may order the transfer of information on a customer of a banking corporation

andofacontrolledcorporation,forpurposesofmanagingthecreditrisksofthecorporationorabankinggroup,toadatabasesetupforthispurpose.Theintentionisforthe“bottom-up”transferof information subsidiaries for purposes of managing credit risks only.

2. Permittingthetransferofinformationabovementionedalsotocontrolledcompanies(andnotjust“bottom-up”).

3. Permittingthetransferofinformationforpurposesofmanagingrisksofanothertype,ifthiswillnot be an invasion of the customer’s privacy.

ProposedBankingLaw(Registration)(AmendmentNo.15),2009TheproposedLawwaspublishedintheOfficialGazetteon15.7.09.It is proposed to amend section 24a. of the Law relating to the restriction in accordance with which abankingcorporationwillnotholdmorethanonerealholdingcorporationinthefollowingmanner:toallowtheholding,directlyorindirectly,ofrealholdingcorporationsbyapercentagelowerthanonepercent,whichdoesnotreflectanyinfluencebythebankingcorporationonthesaidcorporations;acorporation will be deemed a real holding corporation only if it has the ability to have a real effect on morethanthreebranchesoftheeconomy;abankingcorporationwillbeauthorizedtoholdmorethan1%ofthemeansofcontrolinoneinsureronlywhoseequityexceedsNIS2million(sinceaninsurerwillbeseenasoperatinginonlyonebranchoftheeconomy).


UBank Ltd.

ProposedProhibitionoftheUnfairUseofInformationonSecuritiesLaw(AmendmentstoLegislation),2009The memorandum law was promulgated on 20.10.09.Itisproposedtomakeanamendmenttothreelaws:theSecuritiesLaw,1968(henceforth-“theSecuritiesLaw”);theRegulationofEngagementinInvestmentAdvice,InvestmentMarketingandInvestmentPortfolioManagementLaw,1995(henceforth:“theAdvisoryLaw”;andtheJointInvestmentTrustLaw,1994(henceforth:“theJointInvestmentsLaw”).Themainamendmentsare:aprohibitionwillbedeterminedintheSecuritiesLawontheunfairuseofinformation,carriedoutinviolationofthefiduciarydutyofthepersonmakinguseoftheinformationtothe source of the information. It is also proposed to impose duties of supervision on corporations that are financialintermediaries,employingotherfinancialintermediaries,includingadutytofixinternalproceduresandappointingaresponsibleofficeronbehalfofthefinancialintermediary(“ComplianceOfficer”),toensure enforcement of the prohibitions proposed in this proposed law. It is proposed to amend the Securities Law and to determine that information will not be considered as information unknown to thepubliconce30minuteshavepassedfromthetimeitwasreportedtotheMagnaSystem,andalsoproposed to retain the defense of information becoming public after one day has passed from the time itwaspublishedinanotheracceptablemanner,butitisproposedtoreducethisdefensesothatitwillapplyonlytoapersonwhoisnotaninsiderinthecorporation.WithregardtotheJointInvestmentsLaw,therestrictionswillapplytoadirector,anemployeeofthefundmanager,amemberoftheinvestmentscommittee,andanyoneemployedbythefundmanagerevenifnotitsemployee,includingacorporationunder their control. The restrictions will apply also to the spouse of any of those listed above and family members residing with him or the livelihood of one is dependent on the other.

ProposedJointInvestmentTrustLaw(AmendmentofTrustees),2008Aproposedprivatelaw,publishedon31.3.08,whosemainpointsare:imposinganobligationontheSecuritiesAuthoritytoapproveorreject,within30days,therequestofacompanytoactastrusteeformutual funds; imposing a duty on a trustee company to enter into a commitment with a fund manager meetingtherequirementsofthelaw,unlesstheChairmanoftheSecuritiesAuthorityisconvincedthatthere are special reasons for not entering into a mutual agreement; determination by the Securities Authority of the manner of allocating mutual funds between trustees; in the event of the resignation of a trusteefromhisdutiescontrarytotheopinionofthefundmanager,thetrusteewillcontaintoserveinhispositionfor12months,unlessthefundmanagermakesarequesttoshortentheperiod;limitingmarketshare so that a trustee cannot serve as a trustee for more than 5% of all the funds in the market or as a trustee for funds whose assets represent more than 10% of all the assets of all the mutual funds operating inthemarket,whicheverislower.Thesubsidiary,UBankTrusteeCo.Ltd.,servesasatrusteeforfundswithassetstotalingapprox.NIS44billion(33%ofthemarket).

ProposedBankingLaw(ServicetotheCustomer)(Amendment-CancellationofCommissionsonBasicServicesinaCurrentAccount),2009TheproposedLawwassubmittedtotheKnesseton6.7.09.Itisproposedtocancelcommissionsoncurrentaccountservices,inordertomakeiteasyforthecustomertofocusonthelevelofinterest(oncreditandonsavings)andthustoallowforcomparisonbetween banks.

ProposedBankingLaw(ServicetotheCustomer)(Amendment-InterestonCreditBalance),2009TheproposedLawwassubmittedtotheKnesseton25.5.09.There are identical proposed Laws. It is proposed to oblige banks to pay interest on sums accumulating in the current account of their customers.


UBank Ltd.

ProposedRegulationofEngagementinInvestmentAdvice,InvestmentMarketingandInvestmentPortfolioManagementLaw(AmendmentNo.12),2009The proposed amendment to the law was published on 7.7.09.Theamendmentdealswithtwomainissues:1. Achangeinthedefinitionofsecurities,sothatitwillnotincludeexchangetradednotes.

Exchangetradednoteswillbedeemedafinancialasset,sothatifanadvisingportfoliomanagerand/oraninvestmentsadvisorhaveaconnectiontoexchangetradednotes,theywillbedefinedasamarketingportfoliomanagerand/oraninvestmentsmarketerrespectively,inviewoftheconnectionwiththefinancialasset,inasimilarmannertotheexistingarrangementregardingmutual funds.

2. Cancellationoftheinsurancerequirementasaconditionofgrantingalicensetoanindividual,while determining that compliance with the insurance condition will be a duty applying to a licenseholder,amongotherdutiesapplyingtohim.Theamendmentwillallowapersonapplyingforalicensemeetingtheotherrequirementsforalicensedeterminedinthelaw,toreceiveiteven before engaging in the profession.

ProposedCreditDataServicesLaw(AmendmentNo.3),2007The proposed Law was published on 8.1.07. Its applicability was postponed until 30.6.2010.It is proposed to cancel a number of restrictions provided in the Law concerning the collection of data fromofficialsourcesregardingcustomers:toshortentheperiodofnon-paymentofacollectibledebt,itispossiblemakeareportonthecustomer,tocanceltherestrictionofaminimumoftwocheckwarnings,tocanceltherestrictionaccordingtowhichthereisanobligationsupplydetailsinthewarningnotice,tocancel the requirement for a minimum of three debts from different sources for reporting purposes.

ProposedDutyofReportingbyFinancialInstitutionsonUnclaimedFundsLaw,2008The proposal passed its preliminary reading on 4.6.08.TheaimofthelawistoobligefinancialentitiesinIsraeltoreportonanongoingbasistoabodytobesetupintheCommissionerofCapitalMarketsDivision,whichwillberesponsibleforrecordingunclaimedfindsbymeansofsettingupanationaldatabaseavailabletoall.Theintentionisforfundsforwhomnobodyhasbeenfoundwhoisauthorizedtoexertownershiponthemorwhoseownerisunknown,including dormant accounts.

ProposedBankingLaw(ServicetotheCustomer)(Amendment-EarlyRepaymentCommissiononRealizationofanAsset),2008On6.2.08,theproposedlawwasapprovedinitspreliminaryreadingandsentforitsfirstreadingintheKnessetEconomicsCommittee.Itisproposedtocancelearlyrepaymentcommissiononthesaleofapropertyofaborrower,soasnotto cause further harm to those who are unable to meet the payments of a mortgage they had taken. It is claimedthatintheactualrealizationoftheproperty,thebankreceivesbacktheamountoftheloan,andthereisnopointinharmingthedebtors.MemberofKnessetEithanCabelpublishedanidenticalproposedlaw on 4.5.09.


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Regulations

RegulationsforSupervisionofFinancialServices(ProvidentFunds)(ProvidentFundunderPersonalManagement),2009The regulation was published on 22.10.09.It is proposed that providing advice regarding investment of monies of a provident fund under personal management,whereinstructionsconcerninginvestmentoffundsinitaregivenbythefundmember,willbe done only by a portfolio manager or by a person who is exempt from the requirement of receiving a licenseundertheRegulationofEngagementinInvestmentAdvice,InvestmentMarketingandInvestmentPortfolioManagementLaw,1995.Thisdirectiveisintendedtopreventthegivingofadviceregardingtheinvestmentofprovidentfundmoniesbyapersonwhoisnotauthorizedtomakeinvestmentsforprovidentfunds.Furthermore,andinordertopreventthegivingofsaidadvicebyapersonwhois,undertheBankingLaw(Licensing),1981,preventedfrommanagingprovidentfundmonies,itisproposedthatforthepurposesoftheBankingLaw(Licensing)thesaidprovidingofadvicewillbedeemedasmanagingprovident fund monies.

RegulationsoftheExecutionOffice(ProvisionaryOrder),2009TheregulationwaspublishedintheOfficialGazette(Reshumot)on24.12.09.TheregulationallowsforactivityincollectingdebtsuptotheamountofNIS10,000withoutusingalawyer.

RegulationsforLandedProperty(ManagementandRecording),2009Theregulation,passedbytheKnesseton3.8.09,isapplicablefrom1.1.2010.CancellationoftheneedtoattachanextracttoapplicationsforcarryingoutatransactionintheRegister,andcancellationoftheneedtosubmitanapplicationformformostrecordingactivities;clarificationandspecificationconcerningthedocumentsrequiredforsubmittinganapplicationforafirst-timeregistration,a renewal of registration and an amendment to an area and borders; the addition of provisions concerning recordinganddeletingacaveat(warningnote);determiningarrangementsconcerningtheexpiryofamortgagebywayoflodginganddeletingoldattachmentsandspecificreferencetoauthoritytodemandthe submission of an application on special paper.

RegulationsoftheExecutionOffice(AmendmentNo.2),2009The regulation was published on 29.7.09.Anorderwillnotbegivenforthesaleoflandedpropertyusedasadwellingforadebtor,unlesstheExecutionOfficeRegistrarhassummonedthepartiestoahearingandahearinghastakenplaceatwhichtheRegistrarisauthorizedtodecideonthesaleofthepropertyandtheevictionofthedebtorandhisfamilymembers,iftheyhaveareasonableplaceofresidenceortheeconomiccapabilityallowingthemareasonableplaceofresidence,oranalternativehousingarrangementhasbeenputattheirdisposalbymeansofanotherapartment,orthepaymentofcompensation,orbyanyotherwaydetailedinsection38of the law.

DraftRegulationsoftheExecutionOffice(AmendmentNo.3),2009TheregulationswereapprovedinameetingoftheConstitution,LawandJudgmentCommitteeoftheKnesseton5.8.09.The draft regulation deals with the matter of giving information and an abbreviated track. There is the possibility of giving information to an entitled person in relation to information regarding a property or sourceofincomeofthedebtor.Inaddition,applicationsfortheexecutionofamonetaryjudgmentoranyothermonetarychargewhichmaybeexecutedbylaw,suchasthejudgmentofaCourt,wheretheprincipalofthedebtdoesnotexceedNIS10,000(exceptforajudgmentforandapplicationsforrealizingapledgeoramortgage)canbecarriedoutinanabbreviatedtrack.


UBank Ltd.

Proper Conduct of Banking Business Directives

Amendment to Proper Conduct of Banking Business Directive No. 411The amendment was published on 24.1.2010 and comes into effect from 1.7.2010.Themainchangesare:thedirectivewillalsoapplytoaforeigncorporationwhichthebankcontrolsorisaninterestedpartyinit,aslongasthisdoesnotcontradictlocaldirectives;theadditionof“servicerecipient”tothedefinitionofa“customer”,sothatitwillalsoapplyto“casualcustomers”;changeofthedefinitionofa“highriskcountry”.ThereisanadditionalrequirementtocarryoutKnowYourCustomerprocedures when giving services to a person carrying out a transaction who is not registered as the accountholderand/oranauthorizedsignatoryintheaccount.ReferenceisrequiredinpolicytovariousKnowYourCustomerrulesforcustomersofvarioustypes,andtoamendaccordinglytheKnowYourCustomerquestionnaires.Inaddition,variousdirectiveswereexpandedinconnectionwiththeofficerresponsible,amongothers:hisbeingindependentfromabusinessperspective,decidingonaworkingrelationshipbetweeninternalauditandtheofficerresponsibleinsuchamannerthathisworkwillbesubjecttoperiodicaudit,andappropriateresourcesallocatedtoitsexamination.Theadditionofarequirement to carry out ongoing monitoring of customer activity not through the account by the use of meanssuchas:theuseofexternaldatabases.Theadditionofarequirementthatinaccountsofhigh-riskcustomers the bank will perform increased reviews to ensure the existence of appropriate and up-to date information. Details of the duty of monitoring by the banking corporation of activity in the customer account.Thedefinitionofexceptionalactivitywasexpandedsothatcomplextransactionsareincludedin“exceptionalactivity”andreportingonit.Havingcorrespondentbankrelationshipswillnotbepossiblewithafinancialinstitutionallowinguseofitsaccountsbyabankregisteredinaplacewherethebankhasnophysicalpresence.Specificationoftherequirementfortrainingandassimilationofthesubjectforalltheemployees of the bank.

Publishing Information on the Internet - Public Reporting DirectivesThedirective,publishedonJanuary17,2010,willcomeintoeffectforFinancialStatementsasofDecember31,2009.Accordingtothedirective,beginningwiththedateofpublicationoftheReporttothePublicfortheyear2009,therewillbeadutytopublishtheannualandquarterlyfinancialstatementsfortheyears2007-2009inaPDFformatontheinternetwebsitesofthebank.Inaddition,thedataistobepublishedin the format of a worksheet sent by the Information and Reporting Unit of the Banking Supervision Department. Banking corporations have to make technological preparations to allow the possibility of directaccess(“links”)fromtheBankofIsraelwebsitetoinformationpublishedontheirwebsites.TheBankhas made preparations for providing the said information.

Draft Amendment to Proper Conduct of Banking Business Directive No. 325 - Management of Credit Facilities in Current AccountsThedraft,on24.8.09,comesintoeffectfrom1.7.2010.It is proposed that it will be possible to charge a customer with additional over-limit interest and special handling commission for an over-limit account immediately on the creating of the over-limit and not only aftertheaccounthasbeenclassifiedasaproblematicdebtinarrears,asstatedinthepresentversionofthe directive.

Proper Conduct of Banking Business Directive No. 303 - Communication of External Auditor with Those Charged with Governance in the Banking CorporationIn the framework of the adoption of American auditing standards by the auditors when carrying out anauditofthefinancialstatementsofbankingcorporations,adetailedannualreportistobesubmittedand when necessary a supplementary report. It was decided that a banking corporation has to give the SupervisorofBankseveryyearacopyofthedetailedannualreportandthesupplementaryreport,nolater than 15 days after the dates the auditor is required to give the banking corporation the said reports.

Proper Conduct of Banking Business Directive No. 315 - Supplementary provision for doubtful debtsAmendment from 17.9.09.Thedirectivedeterminesthatwhenthetotalindebtednessofaspecificsectortoabankingcorporation(onanunconsolidatedbasis)exceeds20%ofthetotalindebtednessofthepublictoabanking


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corporation,theexcesswillbeconsideredasexceptionalindebtedness,forwhichthebankwillberequired to make an additional provision.In view of the fact that risk in infrastructure-type projects in the set-up stage is considered a combined riskoftheconstructionsectorandthesectorforwhichtheinfrastructureissetup,thedirectivewasamended so that it allows a banking corporation to select a track where it exceeds the 20% - 22% restriction,providedthatitfinancesprojectswhichareincludedintheframeworkofthe“CivilEngineeringWorks”sector(exceptforbuildingconstruction),andprovidedthatindebtednessexceeding18%ofalltheindebtednessofthebankingcorporationtothepublicfor“normalprojects”inthissectorwillbeconsidered as exceptional indebtedness.

DraftAmendmentofProperConductofBankingBusinessDirectiveNo.311-“MinimumCapitalRatio”Intheframeworkoftheproposedamendment,itwillbepossibletoincludethegeneralprovisionmadeinaccordance with section 6 of Proper Conduct of Banking Business Directive No. 315 in the framework of Tier2capital,despitethefactthatwiththeapplicationofimplementationofthedirectiveonthesubjectof“MeasurementandDisclosureofImpairedDebts,CreditRiskandProvisionsforCreditLosses”,bankingcorporations are not required to keep this provision.

Circulars

Circular to Investment Advisory License Holders concerning Referring Customers to Receipt of Portfolio Management ServicesIt is proposed that referring a customer for portfolio management will be allowed based on professional andobjectivecriteria,withtheinvestmentadvisorbearinginmindthebenefitofthecustomeronly.Therefore,referringcustomersforportfoliomanagementcompaniesforthesakeofgettingdirectorindirectbenefitsinkind,orbecauseoftherelationshipbetweenthecorporations,amountstoimproperbehavior of the license holder.

BankofIsraelCircular-FairDisclosurebyElectronicMeans-BankingRegulations(ServicetoCustomers)(FairDisclosureandGivingDocuments),1992The circular was published on 18.8.2009.Accordingtothecircular,whenacustomerrequeststoreceiveadvicesoraccountstatementsbyelectronicmeans,thebankingcorporationwillbeexemptedfromsendinghimadditionaladvicesundertheregulations,providedthefollowingconditionsapply:thecustomersignedanagreementfortheprovisionofinternetbankingservices;thecustomerrequested(inwritingorbymeansoftheinternetwebsiteorinarecordedconversation)thereceiptofadvicesbymeansofelectronicmailortheinternetwebsite;thebankingcorporationmadeuseofcomputerizedtoolsenablingittodetermineabsolutelyifthecustomerreceivedthemailandopenedit,ordownloadedthemessage,orenteredtheinternetwebsite,andineachofthecasesthebankingcorporationretainstheinformationrequiredforexaminationand monitoring compliance with the regulations; advices are to be sent in a secure environment.

Circular on the subject of Chief Risk Manager and the Risk Management FunctionThe Supervisor of Banks published the above circular on 22.12.2009.Withtheaimofstrengtheningabilitytounderstandrisksandtoensuretheircautiousmanagement,thereis need for an independent risk management function headed by a Chief Risk Manager.The Board of Directors and Management of the banking corporation are to regulate the setting up of a riskmanagementfunction,headedbyaChiefRiskManager.TheChiefRiskManagerwillbeamemberofManagement,reportingdirectlytotheCEOandindependent,inamannerinwhichhewillnotmakebusinessdecisionsinvolvedinrisktaking.Accordingtothecircular,theSupervisorofBanksisauthorizedtoexemptcertainbankingcorporations,whicharesubsidiarycompaniesofbankingcorporations,fromtherequirementthattheirChiefRiskManagerwillbea member of Management.The risk management function will ensure that risks inherent in the activities of the banking corporation arefullyunderstoodandwillprovidedindependentsupervisionovertheirmanagement.Amongothers,hisdutiesincludeidentifyingrisksfordeterminingrisk-tolerancelimitations,responsibilityforcontrol


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mechanisms,monitoring,andreportingtoManagementandtotheBoardofDirectors-asdetailedinthedirective.Inaddition,theriskmanagementfunctionwillbeindependent,organizedinamannerthatmaintainssegregationfrompartiestakingrisksthathesupervises,andthatitwillbeallocatedresourcesaccordingly.The Bank has made preparations for compliance with the directive as stated above in coordination with the Group Risk Management Function.

Bank of Israel Circular - Points for Emphasis in Managing Credit RiskThe circular was published on 12.10.2009.Againstthebackdropoftheglobalfinancialcrisisanditseffectsonthecapitalmarketandbankingcorporations,banksarerequiredtomakespecialreferencetothefinancialstatusofsensitivepopulationsof borrowers.The Bank is required to determine a list of characteristics of sensitive populations of borrowers with the aimofidentifyingborrowersmeetingthecharacteristicsdefined,inadditiontothelistofcharacteristicsdetermined by the Bank of Israel. TheBankcarriedoutacomprehensivesurveyofloanportfoliosandreviewedtheratingsofcustomers,theneedtomakedebtarrangements,theneedtostrengthencollateral,andtheclassificationofcustomers.InaccordancewiththeBankofIsraelrequirement,thebusinessunitsaccompaniedcloselybytheLoanReviewUnit,whichvalidatedtheprocesscarriedout,carriedoutthesurveyandreviews.ThereviewanditsfindingswerepresentedtoBankManagement,theCreditCommitteeoftheBoardofDirectors,andtheplenumoftheBoardofDirectors.Duringthefirstquarterof2010,monitoringwillbecarried out of implementation of recommendations and decisions made.

Bank of Israel Circular - Lessons from the Financial Crisis on the subject of Managing Credit RiskThe circular was published on 10.12.2009.Inthelightofincidentsthatbecameknownbecauseoftheglobalfinancialcrisis,theBankofIsraelcircularis aimed at strengthening credit risk management in banking corporations. Banks are required to refer to thesubjectsdetailedbelowintheircreditpolicyandproceduresaccordingly:1. Leveragedfinancing.2. Reliance on personal guarantees.3. AmortizationscheduleshorterthantherangeofrepaymentabilityassessedbytheBank.4. Classificationofdebtsasdebtrestructuringofaproblematicdebt.The Bank is reviewing these subjects from the perspectives of operations and governance. Discussions are taking place in this framework in the Credit Committee and in Management with the aim of making guidelinesmorespecificandwherenecessaryintegratingthemintocreditpolicydocumentsandcreditprocedures.

Rulings

Judgment in the Uniform Contracts CourtOn5.5.09,ajudgmentwashandeddownintheUniformContractsCourtinthematterofdiscriminatoryconditions in a housing loan contract of the First International Bank. The judgment cancelled sections in the loanagreementandorderedtheamendmentofothersections,determiningthattheyarediscriminatorysectionsinauniformcontract.Althoughthejudgmentwasgiveninrespectofahousingloancontract,itcontains determinations that may have an effect also on other contracts used in the banking system. As farasisknown,on12.7.09theFirstInternationalBanksubmittedanamendedversionofitsloancontractto the Uniform Contracts Court. The Court sent the contract for comments to the Supervisor of Banks. On10.1.2010,theFirstInternationalBankfiledanappealagainstthejudgment.TheBankisstudyingthejudgment and its implications and monitoring developments in the proceedings.


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Taxes on Income

ReductionintheRateofTax:OnJuly25,2005,theKnessetpassedIncomeTaxOrdinanceAmendmentLaw(No.147),2005,whichdetermined,interalia,agradualreductionintherateofCompaniesTax,to25%fromtaxyear2010andafterwards.OnJuly14,2009,theKnessetpassedtheEconomicEfficiencyLaw(LegislativeAmendmentsfortheImplementationoftheEconomicPlanfor2009and2010),2009,whichdetermined,interalia,afurthergradualreductionintherateofCompaniesTax,to18%fromtaxyear2016andafterwards.

Inaddition,onJuly1,2009,theValueAddedTaxOrder(TaxRateforNon-ProfitOrganizationsandFinancialInstitutions)(ProvisionalOrder),2009waspublishedintheOfficialGazette(Reshumot),andanamendmenttotheorderwaspublishedonDecember31,2009.Undertheamendedorder,theratesofsalarytaxandprofittaxapplyingtofinancialinstitutionsfortheperiodJuly1,2009toJanuary1,2010,willbe16.5%.FromJanuary1,2010toDecember31,2010,theratesofsalarytaxandprofittaxapplyingtofinancialinstitutionswillbe16%,insteadof15.5%,whichwasineffectuntilJune30,2009.Accordingly,the new rate of salary tax will be at the rates of 16.5% and 16% and will apply to the tax years 2009 and 2010respectively,forsalariespaidforworkcommencinginJuly2009andonwards.Thenewrateofprofittaxwillapplyinrelationtohalfoftheprofitfor2009.Inviewofthis,in2009and2010therateofprofittax will be 16%.

SubsequenttotheAmendmentsmentionedabove,thestatutorytaxratesapplicabletobankingcorporationswerechanged,andtheywillnowbeasfollows:in2009-36.21%,in2010-35.62%,in2011-34.20%,in2012-33.33%,in2013-32.47%,in2014-31.60%,in2015-30.74%,andin2016andafterwards the applicable tax rate will be 29.00%.

TheeffectofthechangesinsalarytaxasofJuly1,2009ledtoanincreaseinsalaryexpensesfor2009inthesumofNIS0.4million.Inaddition,theeffectofchangesintaxratesledtoincreasedtaxexpensesonincome in 2009 in the sum of NIS 0.5 million.


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Basel II

Background

TheBaselCommitteeoperateswithintheframeworkoftheBankforInternationalSettlements(BIS),and,since1988,haspublishedpublishingdirectivesconcerningtheneedfortheallocationofminimumcapitalbybanks.ThepurposeoftheCommitteeistocreateuniformbankingstandards,inordertoimprovethelevel of stability of the world banking system. The instructions of the Committee are adopted by regulators inmanycountries,includingtheBankingSupervisionDepartmentattheBankofIsrael.The Basel Committee for International Convergence of Capital Measurement and Capital Standards (henceforth:BaselII),inJune2006,publisheditsrecommendationstobeimplementedinaccordancewiththe instructions of the central banks in every country.Theinstructionsrefertocredit,market,andoperationalrisks,andinclude3pillarswithreferencetoeachofthetypesofrisks:TheFirstPillar-minimumcapitalrequirements,inaccordancewiththevariousapproaches.TheSecondPillar-theInternalCapitalAdequacyAssessmentProcess(ICAAP)inrelationtotheriskprofileofthebank,thesupervisory,controlandauditsystemsitimplements,anditsbusinessenvironment.The Banking Supervision Department expects banking corporations to implement an appropriate internal processcombiningprincipalcomponentsofcapitalplanningandcapitalmanagement,andpresentstheappropriatenessofthecapitaltotherisksidentified.Theaboveincludes,amongothers,havinginternalprocessesforimplementingcorporategovernance,improvingandenhancingcontrolandauditsystems,andcreatingabasisforanorganizedframeworkofmethodologyforassessingexposuretoarangeofrisks,aspartoftheprocessofexaminingtheappropriatenessofcapital.TheprocessalsoincludesrisksnotcoveredbytheFirstPillar,includingconcentrationsofcredit,interest-rateriskinthebankingportfolio,andothers.TheThirdPillar-marketdiscipline,requirementsfordisclosureandreportingtothepublic.

ThemainchangerequiredofbanksundertheprinciplesofBaselII,comparedwithguidelinespreviouslyused(“BaselI”),isinthemannerofcalculatingminimumcapitalrequired.Untilnow,minimumcapitalinthematterofcreditriskswascalculatedbymeansofrigidformulasdictatedbytheregulator,andbasedongeneralcharacteristicsonlyoftheloanportfolio(distributionbycountries,banks,credittothepublic,andhousingloans).TheBaselIIguidelinesrequirebankstomakeadetailedassessmentofthecreditrisktowhichtheyareexposed,accordingtoexternalratingsorbymeansofriskratingmodels,andtoallocatecapital accordingly.AnadditionalmajorchangeinBaselIIguidelinesisreflectedintheimplementationoftherequirementforbanks to allocate capital also in respect of operational risks with which they are confronted.

Bank of Israel DirectivesOnJanuary5,2009,theBankofIsraelpublishedaprovisionaldirectiveonthesubject:“WorkingFrameworkfortheMeasurementofCapitalAdequacy”(henceforth:“theProvisionalDirective”or“BaselIIProvisionalDirective”),basedontherecommendationsoftheBaselCommitteeonthematterofInternationalConvergenceofCapitalMeasurementandCapitalStandards,thatwerepublishedinJune2006. The Basel Committee recommendations grant discretion to Supervisors in the various countries regarding themannerofimplementationofcertainrecommendationsbytheCommittee(“nationaldiscretion”).TheProvisionalDirectivereflectsthepositionoftheSupervisorineachofthesubjectsforwhichtheSupervisor was granted discretion. The Supervisor’s position was formulated after reviewing references madeonthesubjectbyothersupervisoryauthoritiesworldwide,andexaminingitssuitabilitytothedirectives,laws,anddataoftheIsraelieconomyasnecessary.TheProvisionalDirectiveistheconclusionofaprocessthatbeganin2007,inthecontextofwhichdraftsregarding various subjects were distributed to the banking system. These drafts were discussed at ongoing meetingswithrepresentativesofthebankingsystem,andinjointworkingteamsdealingwithspecifictopics.TheDirectivecameintoeffectasofDecember31,2009.Asexplainedpreviously,theBankingSupervisionDepartmentencouragesbankingcorporationstomakepreparationsinamannerthatwillallowthem,attheappropriatetimeinthefuture,toadoptmethodsbasedoninternalcredit-riskratings.Theseapproachesrepresent“bestpractice”methodsworldwidein


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thisarea,andtheprogressivestrivingfortheirimplementationisimportantinreinforcingthequalityofcredit-risk management in Israel.TheSupervisorofBanksemphasizestheconnectionthatmustbemaintainedbetweenthetotalcapitalthatabankingcorporationisrequiredtoholdagainstitsrisks,andthestrengthandefficiencyofriskmanagementandinternalcontrolprocessesinthecorporation,andheexpectsbankingcorporationstodevelopandupgradetheirriskmanagementsystem,controlsandcorporategovernance.Inaddition,bankingcorporationsaretocarryoutanappropriateinternalassessmentprocess,combiningkeyelementsofcapitalplanningandmanagement,resultingintheholdingofadequatecapitalagainstthoserisks.The process of international convergence of capital measurement and capital standards is a continuous andongoingprocess.TheBaselCommitteereviewsandpublishes,fromtimetotime,andespeciallyagainstthebackdropofthepresenteconomiccrisis,amendmentsandclarificationswithreferenceto risk management and the method of measuring capital. The Banking Supervision will monitor the developmentsandtrendsworldwide,andupdateitsdirectivesasnecessary.AccordingtotheProvisionalDirective,implementationofthedirectivebeganonDecember31,2009,whereasasfromDecember31,2008anduptoSeptember30,2009aparallelrunwasconductedofthecalculationofthecapitaladequacyratioaccordingtotherulesofBaselII(inparallelwithcurrentdirectives),whichwasreportedtotheBankofIsraeleachquarter.In2009andthebeginningof2010,theBankofIsraelcontinuedtopublishconsultationdraftsandvariouspublications,ofwhichthemainoneswenoteasfollows:1. AnamendmenttotheProvisionalDirectiveforsections145(G),146(D),and151(A)ofthe

Directiveregardingrecognitionofeligiblesecurities,thatareinasecuritiesaccountpledgedinfavoroftheBank,asreductionsofcreditrisk.

2. Setting internal capital targets for an interim period - the Supervisory Review and Evaluation Process(SREP)willbecarriedoutafterProvisionalDirectivecomesintoforceandwillbebasedon the ICAAP reports whose date of submission will be published by the Bank of Israel.

3. A second consultation draft on the subject of recognition processes in external credit rating companies,andthemapping-outoftheirratingsforriskweightinginordertocalculatecapitaladequacy.

4. AnamendmenttotheProvisionalDirectiveforsectionB.2(B)ofAppendix1AoftheDirectiveregardingthedefinitionofcapitalthatisincludedinthecapitalbasis,creditthatisgiventofinancecapital components of banking corporations.

5. ChiefRisksManagerandtheRiskManagementFunction-adocumentdefiningprinciplesforhavingaChiefRisksManagerandaRiskManagementFunctioninbankingcorporations,andelaboratesthestatus,duties,andresponsibilityinvolved.

6. Draft relating to the risk weighting of debts of banking corporations. The adoption of the alternative of a risk weighting one level lower than the risk weighting derived from the country rating,ratherthantheriskweightinginaccordancewiththeratingofthebankingcorporation.

Preparations of the Bank TheBankreliesinmanyareasontheoperationalsystemsandspecializedunitsoftheCentralServicesDivisionoftheparentcompany,theFirstInternationalBankofIsraelLtd.,andtherefore,implementationofthedirectivesbytheBankiscarriedoutsidebysidewiththeirimplementationintheparentcompany,makingadaptationswhereneeded.Accordingly,thepreparationsoftheBankfortheimplementationofthedirectivesandrequirementsbytheBankofIsraelonthesubjectofBaselII,in2009andatthebeginningof2010,aredetailedbelow,aspartofthepreparationsoftheFirstInternationalBank:

The Basel II project is managed in the framework of a designated administrative body established for the subject and through steering committees meeting usually on a monthly basis - the Upper Steering CommitteeheadedbytheGeneralManageroftheFirstInternationalBank,andtheSteeringCommitteeheaded by the Head of the Corporate/Business Department of the First International Bank. The membersthesecommitteesinclude,amongothers,representativesfromthevariousdepartmentsoftheFirstInternationalBank,theControlandAuditDepartments,representativesoftheBank,andexternalconsultantsadvisingtheproject.Workingteamshavealsobeensetuptodiscussandpromotespecificprofessional subjects.OnceaquarterareportismadetotheBoardofDirectors,onthestatusofprogressintheproject,asrequired by the Bank of Israel.


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Forpurposesofpossiblefutureimplementationofadvancedapproachesforcreditrisks,theBankhasaccumulateddataofhistoricfinancialstatementsofcompaniesthatgotintodifficultiesandof“good”companies.Inaddition,differentsolutionsaretested,includedintheframeworkofmaintainingconnectionswithconsultantsandsuppliersinthearea,inordertodevelopanalyticalmodelstoratecustomerriskforthe internal rating approaches.The Bank of Israel announced that until the completion of the SREP process that is conducted by the SupervisorofBanksinrelationtotheICAAPprocess(seebelow),theBankhastocalculatetheminimumcapitalratioaccordingtobothofthemethods(DirectiveNo.331andtheProvisionalDirective)asofDecember31,2009.TheBankhasmadepreparationstocomplywiththeserequirements.

Progress in the execution of the projectTheFirstPillar-inaccordancewiththedirectivesoftheBankofIsrael,fivereportshavebeenissuedoncapitaladequacyundertherulesoftheBaselIIProvisionalDirective(COREP)-asatDecember31,2008and the four quarters of 2009. A detailed qualitative questionnaire was added to these reports.IntheCOREPreportasatDecember31,2008,theratioofcapitaltoriskcomponentswas13.8%,atMarch31,2009,theratioofcapitaltoriskcomponentswas13.6%,atJune30,2009,theratioofcapitaltoriskcomponentswas14.9%,atSeptember30,2009,theratioofcapitaltoriskcomponentswas16.11%andatDecember31,2009,theratioofcapitaltoriskcomponentswas16.7%.ItshouldbenotedthatthecalculationofcapitalrequirementsaccordingtotheBaselIIdirectives,basedonthedataofpreviousquarters,didnottakeintoaccountallthecreditriskreductionspossibleaccordingtoBaselIIdirectives.Consequently,thereisanoverstatementoftheseverityoftheresultleadingtoareduction of the ratio of capital to risk components.The main components for which the treatment of credit risks has not yet been completed are offsetting securitiesinaccountsthatareintendedspecificallyforholdingeligiblesecurities,guaranteesreceivedfromforeignbanks,segmentationoftheexposurebetweencorporationsandretailers,theexposureinrespectofunutilizedcreditfacilities,andothers.TheBankcontinuestomakeimprovementstothecomputersystems,inaGroupframework,withtheaimof incorporating the above-mentioned components of risks reduction in reports to be submitted in the future.

Credit risk - the Bank continues expanding the contents of the report and reviewing the data in order to improve the quality of reports to be submitted in the future.TheBankisimplementingatthisstagethestandardizedapproachinaccordancewithBankofIsraeldirectives. The Bank of Israel has for the time being postponed the carrying out of a Quantitative Impact Study(QIS)fortheadvancedapproaches.Operationalrisks-TheBankhasdecidedtoimplementtheBasicIndicatorApproach(BIA).Theparentcompany has made preparations for the accumulation of data according to 8 lines of business for the purposesofthefutureimplementationofthestandardizedapproach.Market risk - the performance of a Group gap survey has been completed in order to examine compliance by the Bank and the Group with Bank of Israel instructions in the matter. The Bank continues itstrainingprogramforcreditofficers,branchmanagers,andmanagersofrelevantunitsinheadquartersunits.

TheSecondPillar-inaccordancewithBankofIsraeldirectives,thecompanysubmittedthefirstdraftoftheICAAPdocumentonaGroupbasisbyJune30,2009,basedondataasatDecember31,2008.TheICAAPReportoftheparentcompanyforDecember31,2009willbesubmittedtotheBankofIsraelbeforeJune30,2010.DuringthemonthofDecember2009,theBanksubmittedanICAAPdocumentbasedonthedataasatDecember31,2008,intheformatofaGroupICAAPdocumentthatwassubmittedbytheparentcompany for the approval of the Board of Directors.Thisdocumentservesasaninfrastructureforthetestingprocessofcapitaladequacy,includingmethodologylinkingtheriskprofileandcapital.Duringthesecondhalfof2010,theBankwillprepareitsICAAPforDecember31,2009.AspartoftheBanks’preparationsfortheimplementationofthedirective,theBankconductedthefollowingactionsandprocesses:Conducting gap surveys and building up the Bank’s mapping out of gaps.


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TheBankcompletedtheconductingofgapsurveysinrelationtothe14principlesoftheBIS,asrequiredby the Banking Supervision Department at the Bank of Israel.ThemethodologyformulatedforclosinggapsisaGroupmethodology,asfaraspossible,sothatwithregardtoallgapscommontotheBankandtheparentcompany,thesolutionforclosureofthegapwillbe formulated and outlined at the level of the parent company and will be transferred for implementation by the Bank with the necessary adaptations and changes. The mapping out by the Bank of gaps based on thefindingsofthegapsurveys,servesasthebasisforderivingtheinternalcapitalandfortheprocessofexamining capital adequacy.

TheThirdPillar-ThedisclosurerequirementsregardingthestatementsforDecember31,2008anduptoSeptember30,2009,weresetoutintheProvisionalDirectivepublishedinDecember2007,andtheBankhas implemented them as required.OnOctober13,2009,the“ProvisionalDirective-ImplementationinStatementsofBankingCorporationsandCreditCardCompanies,fortheyear2009andthereafter,oftheDisclosureRequirementstheThirdPillarofBaselII”waspublished.Accordingtothispublication,thefrequencyofthequantitativedisclosureisquarterly and the frequency of the qualitative disclosure is half-yearly. The Bank has made preparations for the implementation the required disclosure in accordance with this Provisional Directive and the data is reported as required as of the statements of the end of 2009.

The Bank’s approach to the assessment of capital adequacy in support its activities

General- The working framework of Basel II is based on three Pillars that complement each other and

provide an infrastructure for capital assessment of banking corporations. This working framework replaces the provisions of Basel I in all matters related to the determination of the minimum capital ratio for banking corporations.

- TheFirstPillarofBaselII,whichisentitled“MinimumCapitalRequirements”,providesclearandbindinginstructionsforthecalculationofcapitaladequacyofbankingcorporations,withreferencetothemainriskstowhichcorporationsareexposed(credit,marketandoperationalrisks).

- The process for calculating capital adequacy under the First Pillar is based on a framework of instructionsimplementedbasedontheDirective,withoutallowingabankingcorporationanysubjective discretion in relation to the level of risk embodied in the various activities and/or the contribution of the quality of management and the control in reducing an embodied exposure.

- IntheSecondPillarofBaselII,whichisentitled“SupervisoryReview”thebankingcorporationisrequiredtoassessroutinelyitscapitaladequacyincomparisonwiththeriskprofileandthebusinessenvironment,asdistinguishedfromthecalculationofcapitaladequacycarriedoutintheFirst Pillar.

- ThepurposeoftheSecondPillaristoenhanceandstrengthentheaffinitybetweentheBank’srisksprofile,andrisk-managementsystemsandmethodologiesexistingintheBank,andthelevelof capital and capital means.

Theterm“capitaladequacy”expressesasubjectiveassessmentofthecorporationregardingthedegreetowhichtheoveralllevelofitscapitalmeansisappropriatetoitsoverallriskprofile.Inthisframework,thebankingcorporationisrequiredtoassesstheadequacyofitscapitalagainstalltherisksitisexposedto,includingrisksthathavealreadybeenmeasuredandforwhichcapitalhasbeenallocated in the First Pillar.

BeyondthereassessmentofcapitaladequacywithregardtotherisksintheFirstPillar(asmentionedabovecredit,marketandoperationalrisks),thebankingcorporationisrequiredtoassessfurtherrisksonaquantitativebasis(concentrationrisk,interestinthebankingportfolio)andonaqualitativebasis(forexamplereputational,regulatory,compliance,legal,business,andstrategicrisks).The capital adequacy assessment in the framework of the Second Pillar is a self-made subjective assessmentcarriedoutbythecorporation.Thisprocessofself-assessment,performedbythebankingcorporationregardingitscapitaladequacy,istheICAAPprocess.InaccordancewithBankofIsraelinstructions,thisprocessisintendedtoensurethatbankswillretainanappropriatelevelofcapitalleveltosupportalltherisksembodiedintheirbusiness,andthatbankswill


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develop and carry out appropriate processes of risk management and capital management.The second and complementary part of the capital adequacy assessment process by the banking corporationisthecapitaladequacyassessmentbytheregulator,whoseaimistoexaminetowhatdegreethe capital adequacy assessment conducted by the banking corporation can be accepted. This process is called“SupervisoryReview”(SREP),andincludesadetailedframeworkofinstructionsforthereviewoftheICAAPdocument,enablingtheregulatortodrawaconclusionwithreferencetothecapitaladequacyof the bank under supervision.

InaccordancewiththemethodologyoutlinedbytheGroupintheworkingframeworkofBaselII,theBanksubmitted,duringthemonthofDecember2009,theICAAPDocumentbasedondataasatDecember31,2008,forapprovalbytheBoardofDirectors,intheformatoftheGroupICAAPDocumentsubmittedby the parent company. This document serves as an infrastructure for the examination process of the Bank’scapitaladequacy.TheBankisoftheopinion,inaccordancewiththeICAAPthatwasconductedasatDecember31,2008,thattheBankhasappropriatecapitaladequacy.


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In accordance with the Directives of the Supervisor of Banks concerning disclosure requirements of the Third PillarofBaselII,belowaredetailsofthedisclosurerequirementsstipulatedintheDirective:

Table No. Quantitative Disclosure Page Qualitative Disclosure Page

1. Table 1 - - Commencement of implementation - Note12B(d) 197

2. Table 2 Report of Changes in Shareholders’ Equity 148-149 CapitalStructure-Note12A,B 195-196

3. Table 3

a. Capital Adequacy - Risk Assets and Capital Requirements in respect of Credit Risks,MarketRisks,andOperationalRisk.

72Basel II - The Bank’s approach to the Assessment of Capital Adequacy to support its activities.

40-41b. Note 12 B - Capital Adequacy in accordance with Directives of the Supervisor of Banks.

196

4. Table 4A,B

Total Gross Credit Risk Exposures and Average Gross Exposure during the PeriodClassifiedbyMainClassesofCreditExposure.

76

a.ChapteronRiskManagementPolicy:Section 5 - Credit Risk Management 72-84

b.AccountingPolicyonCriticalMatters:Section 1 - Provision for Doubtful Debts 95-96

Table 4C Addendum F to Management Review - Exposure to Foreign Countries 128 - -

Table 4DDistribution of Exposure by Type of Sector orCounterparty,ClassifiedbyMainTypesof Credit Exposure

77 - -

Table 4E

Division of the Portfolio by Remainder ofContractualPeriodtoRepayment,ClassifiedbyMainTypesofCreditExposure

77 - -

Table 4F

BalancesofSpecificandGeneralProvisions.Addendum E - Overall Credit Risk by Economic Sector

126 - -

Table 4GAddendum F to Management Review -ExposuretoForeignCountries,Problematic Debts column

128 - -

Table 4HChange in Balance of Provision for DoubtfulDebts:Note4C-ProvisionforDoubtful Debts

184 - -

5. Table 5CreditRisk,DisclosureRegardingPortfoliosTreatedinAccordancewithStandardizedApproach

77

Chapter on Risk Management Policy Section5C:ChapteronCapitalAllocationinRespectofCreditRisks,MarketRisks,andOperationalRisk.

72

6. Table 7 ReductionofCreditRisk:DisclosuresundertheStandardizedApproach. 74

a. Chapter on Risk Management Policy - Collateral Management Policy 73-74

b.Note1,P-OffsetofFinancialInstruments 165

7. Table 8 General Disclosure Regarding Exposures Connected with Counterparty Credit Risk 79

a. Counterparty Credit Risk Management 79b. Collateral Management Policy 73-74

8. Table 9 Securitization-DisclosureundertheStandardizedApproach. 79 Note 3 - Securities 180-181

9. Table 10Market Risk - Disclosure of Banking CorporationsusingtheStandardizedApproach

60 ChapteronRiskManagementPolicy:Section 2 - Market Risks 60-69

10. Table 12 - - ChapteronRiskManagementPolicy:Section 7 - Operational Risks 84-87

11. Table 13 Disclosure Regarding Positions in Shares in theBankingPortfolio:Note3-Securities 180

a.ChapteronRiskManagementPolicy:Discussion of Risk Factors 92-94

b.AccountingPolicyonCriticalMatters:Impairment of Assets 97

12. Table 14 Interest Rate Risk in the Banking Portfolio 64a.ChapteronRiskManagementPolicy:Section 2 D - Exposure to Changes in Interest Rates

63


UBank Ltd.

Directiveconcerningthemeasurementanddisclosureofimpaireddebts,creditriskandprovisionsfor credit losses

On31.12.07acircularwaspublishedbytheBankingSupervisionDepartmentonthesubject:“MeasurementandDisclosureofImpairedDebts,CreditRiskandProvisionforCreditLosses”(henceforth:“thecircular”or“theDirective”).Thiscircularisbased,interalia,onUSaccountingstandardsand relevant regulatory provisions of banking supervisory institutions and of the SEC in the US. The guidingprinciplesonwhichthecircularisbasedconstituteasignificantchangeascomparedwiththeexistingprovisionsregardingclassificationofproblemloansandthemeasurementofprovisionsforloanlosses in respect of such debts.Accordingtothecircular,bankingcorporationsarerequiredtomaintainaprovisionforcreditlossesatan appropriate level to cover the estimated credit losses relating to its credit portfolio. In addition to that statedabove,itisrequired,accordingtothecircular,tomaintain,asaseparateliabilityaccount,aprovisionatanappropriateleveltocoverestimatedcreditlossesconnectedwithoff-balancesheetinstruments,such as commitments to give credit and guarantees. The provision required to cover estimated credit lossesinrelationtothecreditportfoliowillbeassessedinoneoftwopaths:“individualprovision”and“groupprovision”.Forthismatter,a“specificprovisionforcreditlosses”istobeimplementedforeverydebtwhosecontractualbalance(withoutdeductionofaccountingwrite-offsnotinvolvinganaccountingwaiver,non-deductibleinterest,provisionsforcreditlossesandcollateral)isNIS1millionormore;andalsoinrespectofotherdebtsidentifiedbytheBankforseparateassessment,forwhichtheprovisionforimpairmentisnotincludedina“specificprovisionforcreditlossesassessedonagroupbasis”.The“specificprovisionforcreditlosses”istobeassessedbasedonexpectedfuturecashflows,discountedattheaffectiverateofinterestofthedebt,or,whenthedebtisconditionaloncollateralorwhentheBankdeterminesthataconfiscationofpropertyisanticipated,onthefairvalueofthesecuritythatwaspledgedtoguaranteethatcredit.A“specificprovisionforcreditlossesassessedonagroupbasis”-istobeimplementedforprovisionsforimpairmentlargegroupingsofsmallhomogeneousdebts(suchascreditcarddebts,housingloansandconsumerdebtspayableininstallments),andfordebtsthatexaminedindividuallyandfoundtobenotimpaired.Thespecificprovisionforcreditlossesondebtsestimatedonagroupbasis,exceptforhousingloansforwhichaminimumspecificprovisionwascalculatedaccordingtotheperiodofarrears,istobecalculatedaccordingtotherulesprescribedAmericanAccountingStandardNo.5-“AccountingforContingencies”(FAS5),basedonacurrentassessmentoftherateofpastlossesinrespectofeachofthehomogeneous groupings of debts with similar risk characteristics. The provision required with reference to off-balance sheet credit instruments is to be assessed according to the rules established in FAS 5.Inadditiontotheabove,theDirectiveincludesvariousdefinitionsandclassificationsofbalanceandoff-balancesheetcreditrisk,rulesfortherecognitionofinterestincomefromimpaireddebtsandalsorulesfortheaccountingwrite-offofproblematicdebts.Amongstotherthings,thecircularstipulatesthatanaccounting write-off is to be made for every debt assessed on an individual basis that is considered to benoncollectibleandofsuchalowvaluethatkeepingitasanassetisnotjustified,oradebtforwhichthe banking corporation is carrying out long term collection efforts. Regarding debts assessed on a group basis,rulesforwritingoffweredeterminedbasedontheperiodoftheirarrearsandtheirdependencyonbeingdebtssecuredbyaresidentialapartment,exceptforhousingloansforwhichaminimalprovisionhasbeenmadeinaccordancewiththelengthofarrears,debtssecuredbycollateralwhichisnotaresidentialapartment,unsecureddebts,debtsofborrowersinbankruptcyanddebtscreatedfraudulently.

TheDirectivewillnotbeimplementedretroactivelyinfinancialstatementsforpreviousperiods.Insteadatthefirstimplementationdate,bankingcorporationsandcreditcardcompanieswillberequired,interalia:- To make an accounting write-off for any debt which at that date meets the conditions for being written

off in the accounts;


UBank Ltd.

- Toclassifyasrequiringspecialsupervision,inferiororimpaired,anydebtthatmeetstheconditionsforsuchclassification;

- To cancel all interest income which has accumulated but not been paid for any debt which at that date meetstherelevantconditions,and

- To examine the need for adjusting the balance for current taxes and deferred taxes to be received or paid.

Adjustments to the balance of the provision for losses on credit to the public and for off-balance credit instrumentsatthefirstimplementationdatearisingfromtherequirementsofthisDirective,includingtherequirementsfordeterminingaprovision,willbeincludeddirectlyintheretainedearningsiteminshareholders’ equity.

Itistobemadeclearthatforthispurpose,inspiteofthedefinitionaccordingtowhichaproblematicdebtwhichhasundergonereorganizationisanimpaireddebt,bankingcorporationsandcreditcardcompaniesarenotrequiredtoclassifyitasanimpaireddebtifreorganizedbeforethefirstimplementationdate,aslongasthedebtisnotimpairedbasedontheconditionssetoutinthereorganizationagreement.

FollowingtheoriginalDirectivefromDecember31,2007,theBankingSupervisionDepartmentpublishedonAugust27,2009aDraftDirectiveincludingmainlyupdatesandclarificationsofinstructionsprescribedintheoriginalDirective,andalsoupdatestocertaininstructionsincludedintheProperConductofBankingBusinessDirectives,withtheaimofadaptingexistingrulesandtermstothenewtermsandinstructionsincludedintheoriginalDirectiveandthecurrentDraftDirective(henceforth:“thenewDraftDirectives”).

Thefollowingchanges,amongothers,havebeenproposedinthenewDraftDirectives:- Delaying implementation of the rules set out in the original Directive and in the new Draft

DirectivesasofJuly1,2010.- Cancellingsection5ofProperConductofBankingBusinessDirectiveNo.325,onthesubjectof

“ManagementofCreditFacilities”,relatingtoaccountingaspectsofclassifyingcertainaccountsasproblematicandrecognizinginterestincome.Thesematterswillbedealtwithintheframeworkof the general Directive on the Measurement of Provisions for Credit Losses and Disclosure with regard to Problematic Debts.

- With the aim of simplifying the rules for the measurement of provisions for credit losses on agroupbasis,whichrequirestheuseofcomplexstatisticalmodelsandahistoryofdataofaccountingwrite-offs,whichdonotexistinthebankingsystem,aProvisionalOrderhasbeenincludedintheDraftDirectivetobeimplementedintheyears2010-2012(hereinafter :“thetransitionalperiod”),whichincludesasimplermodelforcalculatingcreditlossprovisionsonagroup basis.

- WiththeaimofadaptingthedefinitionsandtermsincludedinProperConductofBankingBusinessDirectiveNo.315,onthesubjectofthe“SupplementaryProvisionforDoubtfulDebts”,tothetermsincludedinthenewDraftDirectives,asof1July2010theterm“problematicdebts”willbechangedto“Creditriskundernegativeclassificationandcreditriskunderspecialsupervision”,anditwillincludethreetypesofthesaiddebts:“impaireddebts”,“inferiordebts”and“debtsunderspecialsupervision”.

- The rates of supplementary provision applying to the various types of problematic debts will be asfollows:

“Creditrisk“underspecialsupervision”- 1%• “Inferior”creditrisk- 2%• “Impaired”creditrisk- 4%•

- ReportingtotheSupervisorofBanksonchangesexpectedinshareholders’equity,incredittothepublic,andincreditriskasat31December2009,asifthenewDirectiveswereimplementedat that date.


UBank Ltd.

- ToincludeintheFinancialStatementsasatJune30,2010,a“pro-forma”NotedetailingtheexpectedaffectfromtheimplementationoftheDirectiveonthemainbalancesheetitems,asifthe new Directive were implemented at that date.

- TosubmittotheBankingSupervisionDepartmentacertificationsignedbytheChairmanoftheBoardofDirectors,theGeneralManager,andtheChiefAccountant,regardinginternalcontroloverfinancialreportingimplementedbytheBank,forpurposesofdeterminingtherecordedbalanceofdebtofcredittothepublic,andtheprovisionsforloanlossesincludedinthe“pro-forma”NoteasatJune30,2010;toassesstheeffectivenessofthiscontrol;andtostatethatthesaid effectiveness was audited by the external auditors.

Pursuanttotheabove-mentionedDirectives,aDirectivewaspublishedonFebruary18,2010,includingupdatesandfurtherinstructions,whosemainprovisionswere:

- Postponing implementation of the rules prescribed in the original Directive and in those publishedthereafter,toJanuary1,2011.

- Disclosurerequirementsforthequarterlystatementsof2010wereregulated,asdetailedintheDirective.

- Banking corporations are to send reports to the Banking Supervision Department in the format decidedonthedataincludedintheconsolidatedfinancialstatementsofthebankingcorporation,asifthenewDirectivesweretobeimplementedasatthefollowingdates:

31.12.2009 - the report is to be sent no later than 30.04.2010. 31.03.2010 - the report is to be sent no later than 21.06.2010. 30.06.2010 - the report is to be sent no later than 15.09.2010. 30.09.2010 - the report is to be sent no later than 15.12.2010. Theformatofthereportisbasedonspecificitemsofinformationforwhichdisclosureis

requiredaccordingtothenewDirectivesintheNotes,theManagementReview,andtheReportof the Board of Directors. It should be made clear that for the purposes of preparing the report accordingtothereportdetailedintheletter :

- Nocalculationistobemadeofoperatingresults.Alldatarequired(includingprovisionsforcreditlossesandaccountingwrite-offs)arebalancesatthereportingdates.

- Themethodofcalculationoftheamountsreportedintheappendix(unlessspecificallymentionedotherwise)willbeinaccordancewiththedefinitionsprovidedinthenewDirectives.

- Thereportswillincludedatabasedonreasonableestimates,providingthisfactwillbenotedinthe report.

Implementation of the provisions of the Directive require the upgrading and/or establishing a computer infrastructuresystemtoensuretheprocessofassessmentandexecutionoftheprovisionforloanlosses,including internal control systems to check the proper implementation of the Directive and validation of the effectiveness of the method of calculating the provision.In view of the fact that Bank relies in many areas on the operating systems and units of the Central ServicesDivisionoftheFirstInternationalBank,theBankhasmadepreparationsforimplementationoftheDirectiveintheframeworkofGrouppreparationsoftheFirstInternationalBank(theparentcompany).

In2008,theBankmadepreparationsforthestudyoftheDirective,andthemannerofitsimplementation.Inaddition,withintheframeworkofpreparationsbytheGroup,anadministrativebodywassetuptocarry out the Directive and the content of the project and the bodies relevant to its implementation were defined.In2009,therebeganthedevelopmentstagesofthesystemandtherelevantinterfaces,theircharacterization,andtheircomputerization,andtestsbeganontransmittingandreceiving.In2010,concurrentlywiththecompletionofdevelopmentoftheinterfaces,testsonreceivingwillbecarriedoutaswellasintegrationinthesystem,workingprocedureswillbewritten,existingprocedureswillbeadopted,andtrainingwillbecarriedoutforthevariousunitsintheBankintheassimilationofthenew system.ItshouldbenotedthatthisisacomplexprojectaffectingmanyareasintheBank,includingcomputing,reporting and operating systems.


UBank Ltd.

Implementing the directive is expected to have repercussions on future relationships between the Bankanditscustomers,resultingfromtherequirementtoimplementprinciplesmatchingthebusinessenvironment in the U.S. to the business environment that exists in Israel. The directive includes more stringentdocumentationrequirements,andrequirementsfortheassessmentandcarryingoutoftheprovisionforexpectedloanlosses,inrespectofdebtsinvariousclassifications(outofthosecurrentlyprescribed in the Public Reporting Directives and in Proper Conduct of Banking Business Directive No. 314,onthesubjectof“TreatmentofProblematicDebts”),andinrespectofexposurestooff-balancesheetcredit.Inaddition,implementationofthedirectiverequirespreparationandsignificantchangestoexistinginformationsystems,whicharenotadapted,atthisstage,toreportingaccordingtotheprinciplesproposed.

InaccordancewiththerequirementoftheBankofIsrael,theBankcarriedoutapreliminaryassessmentofthe implications of implementing the Directive in its statements.TheBank’sassessmentreferredtomaterialdebtsonly(abovethestipulatedthreshold),andwasbased,interalia,incertaincasesonsubjectiveassessmentsandinterpretations.Accordingtothisassessment,theexpectedeffectofimplementingtheDirectiveontheBank,asat31.12.09,amountstoanincreaseintheprovisionfordoubtfuldebtsofaboutNIS30.0million,beforetheeffectoftaxation.Theamountderivesfromthewritingoffofprincipalandcancellationofaccumulatedinterestondebtstobedefinedasimpairedbecauseofextendedlegalproceedings,thisinspiteofthedebtsbeingwellsecuredandtheBankanticipatingtherepaymentinfullofthedebts,includingaccumulatedinterest.


UBank Ltd.

Description of the Bank’s Business according to Operational Segments

TheBank’soperationsarefocusedin3operationalsegments:privatebanking,corporatebankingandthefinancialsegment.

General Information

1. TheBankappliestheEVA(EconomicValueAdded)modelusedworldwideforpurposesofmeasuringthecontributionofeveryunittotheoverallprofitabilityoftheBank.

Income,expensesandequityareallocatedtoeveryactivitysegmentinimplementingthemodel,asfollows:

a.Incomeofsegmentsfromoutsideentities: Incomeofthebankingsegmentderivesfromfinancingincomeandoperatingincomefrom

privatecustomersattributedtothissegment.Also,thesegment’sincomeincludesincomefrominvestmentportfoliomanagement,incomefrommanagingtheBank’smutualfundsandincomefrom private and public trusts.

Incomeofthebusinesssegmentderivesfromfinancingincomeandoperatingincomefromcustomerswhosemainactivityisinthecapitalmarkets.Also,thesegment’sincomeincludesincome from trusteeships of mutual funds.

IncomeofthefinancialsegmentderivesfromfinancingincomeresultingfrommanagingthesourcesandusesoftheBankinthevariousindex-linkagesegments,andfromtheBank’sactivityinsecuritiesforitself.Also,thesegment’sincomeincludesincomefromactivityofthedealingrooms regarding the management of the Bank’s base- and interest-exposure.

b.Intersegmentalincome: Intersegmentalprofitfromfinancingactivitybeforeprovisionfordoubtfuldebts: Financingincome/expensesarefirstattributedtothesegmenttowhichthecustomeris

attributed.Afterthatthefinancesegment,whichisresponsibleformanagingthesourcesandusesoftheBank,debits/creditstheothersegmentsforthecostofraisingthesources,whichiscalculated in accordance with the relevant index-linkage segments and duration.

Intersegmentaloperatingandotherincome: Operatingandotherincomearefirstattributedtothesegmenttowhichthecustomeris

attributed.Afterthat,therelativepartofthatincome(asdeterminedforeachtypeofincomeseparately)istransferredtotheotheractivitysegmentswhichprovideservicesfortheactivityofthat customer.

c.Provisionfordoubtfuldebts: Provisionsfordoubtfuldebts(specificandsupplementary)relatingtothecustomersattributedto

a segment are ascribed to each segment.

d.Expensesofsegments: Salary and related expenses are allocated among the segments in accordance with the actual

expense. Other main expenses are allocated in accordance with the number of employees or byweightingthenumberofemployeesandequityorareofthepremisesusedbythesegment,asthecaserequires.Depreciationexpensesareallocatedspecificallytosegmentsinaccordancewith the assets used by them.

e.ThecostofcentralservicesandManagementareloadedonthereportingactivitysegments,aspartoftheimplementationofthemodel.(CentralservicesincludeallthedepartmentsintheCentralServicesDivisionandtheChiefAccountant’sDivision,theBank’sCorporateSecretaryandInternalAuditandInformationSystems).


UBank Ltd.

f. The net return on equity is calculated on the average equity allocated to the reporting segments in accordance with the rate of 12% of the risk assets of each segment.

Whenareportingsegmenthasnoriskassetsallocatedtoitforpurposesofitsactivity,theequityallocated to the segment is calculated by the multiplier of the segment’s expenses.

Inthefinancialsector,theyieldusedforpurposesofcalculatingthenetreturnonequityisafterneutralizingtherisk-freereturnontheBank’sinactivecapital

2. The results of the segments are shown in detail in Note 26 to the Financial Statements. In Note 26(B)(3)therearedetailsofthecompositionof“Unallocatedamountsandadjustments”.

3. InaccordancewiththeguidelinesoftheSupervisorofBanks,thefollowingactivitiesaretobeshownseparatelyforeachsegmentintheDirectors’Report:bankingandfinance,creditcards,capitalmarkets,mortgages,constructionandrealestate.

TheBankhasnosignificantactivityinthecreditcards,mortgagesandconstructionandrealestatespheres.

4. Thedivisionbetweenactivitysegmentsisbasedontypesofcustomersordefinedareasofactivity. It is derived from the strategy of customer-focused activity by which the Bank has been operatingoverrecentyears.Theresultsoftheactivityofthesegments,classifiedaccordingtothemainactivitysegments,areshownindetailasmentionedinNote26totheFinancialStatements. Since there are no uniform criteria in the banking sector for attributing customers to activitysegmentsasabove,eachbankattributesitscustomerstoactivitysegmentsreflectingitsmanagementconceptandbusinessstrategy.Inviewofthis,itisimpracticaltorefertotheBank’sshare of the banking sector in the various activity segments.

Data on the results of the segments has been prepared in accordance with the Directives of the SupervisorofBanksonthematterof“MainActivitySegments”.IntheframeworkofpreparingtheNote,interalia,adjustmentsaremadebetweenmanagementreportsrelatingtotheaboveactivitysegmentswhicharebasedpartlyontheManagement’sreviewoftheactivitysegments,and reporting in accordance with accepted accounting principles.

Bellowisasummaryofthenetprofit,accordingtothesegmentinreportedamounts:

The year ended December 31

2009NIS million

2008NIS million

Change percentage

Private banking 2(4.3) 2,1(0.3)

Corporate banking 30.1 126.3 14.4%

Financial segment 40.8 139.5 3.3%

Unallocated amounts adjustments (1.0) (0.2)

Total 65.6 65.3 0.5%

1 Reclassified2 Excludinganexpenserelatedtotheopeningofthenewbranches,theprofitofthesegmentfor2009isintheamountofNIS

6.3million(2008-NIS10.5million).


UBank Ltd.

Private Banking Segment

Description of Area of Activity

The area of Private Banking has developed a great deal in Israel in recent years. In an environment of a growingeconomyandgrowthintheassetsofthehighestincomebrackets,thereisaneedinIsraelforhigh-standardprivatebanking.TheBank,whichhasalong-standingreputationinthisfield,offersaplatformofdiscreet,specialisedandflexibleprivatebankingforhighnetworthcustomersandtheirbusinesses.Personal banking services are provided by the principal branches in Tel-Aviv and Jerusalem and through asystemofbranchesatthecenterofexclusiveneighborhoodsinIsraelbuiltsofarinRa’anana,Rishon-Letzion,RehovotandMalha,andbranchesthataretobeopenedinthenearfutureinfurtherstrategiclocations(suchas:theRamatHaSharonBranchduetobeopenedasearlyasMarch2010).Servicesaregivenbyteamsofprofessionalandexperiencedbankers,andasystemofinvestmentadvisors,whicharethespearheadinthisfield.OperatingwithinthissegmentistheBank’sTrustCompany,whichoffersprivateandpublictrustservices(alsotrustservicestomutualfundsthatareincludedintheCorporateBankingsegment).Furthermore,thesegmentincludestheactivityoftwosubsidiariesintheassetmanagementsphere:“UBankAssetManagementLtd.”and“UBankMutualFundsLtd.’

The Segment’s Customers

The segment includes all the Bank’s private customers and their businesses. These are both private customers belonging to the personal banking division and also private customers in the capital market division,whoseprincipaloperationsareinsecurities.The segment’s customers include long-standing customers who have been with the Bank for many years (morethan15years),alongsideyoungercustomers(withahistoryofuptofiveyears)whoareengagedinthefreeprofessions,foreignresidents,foundersandemployeesofhi-techcompanies,corporateexecutives and those active in the capital market.With the opening of the new branches the sector has broadened its customer base. New customers now joiningtheBankwantprofessionalandfocusedservice,andtobeofferedvaluewhichsuitstheirtypeofbanking needs.The wide range of customers prevents dependency on one narrow segment of customers. The customers’characteristics:limitedtimeresources,availablecapital,businessflexibility,complexbusinessideas,internationalinvestmentsandextensiveknow-howofthecapitalmarket.Inthewakeofdevelopmentsinthecapitalmarketinrecentyears,specialemphasiswasplacedonexpandingthenetworkofinvestmentconsultantsspecializinginmarketsinIsraelandoverseas,andproviding the segment’s customers with access to these services.The investment counsellors engage only in investment counselling for select customers.The relationship of counselors to this group of customers enables the Bank to extend professional service at a high level.

LegislativeRestrictions,StandardsandSpecialDemandsapplyingtotheSegment

TheBankoperatesunderlaws,regulations,andsupervisoryguidelinesapplyingtothebankingsystemfrompartiessuchastheBankingSupervisionDepartment;theCommissionerfortheCapitalMarket,Insurance,and Savings; the Anti-Trust Commissioner; the Israel Securities Authority and more.

Forinformationregardingregulationintheareaofbankingcommissions,seethechapteronthisunderUpdates in Legislation.

Competition

Competitioninthissegmentisincreasing,asaresultofthegrowthinthefinancialassetsofprivatebankingcustomers,growingawarenesstowardsserviceandanexpandingrangeoffinancialservicesavailableinthe market. Most of the segment’s competition is with commercial banks engaged in the private banking field,foreignbanksoperatinginIsrael,investmentfirms,andentitiesthatenablesecuritiestradingthrough


UBank Ltd.

the Internet.InordertodistinguishthePersonalBankingfromtheBank’scompetitors,thedivisionwaslabeledasthe“PersonalBankingDivision”,whichtakesthecustomerintoapersonalrelationbasedworld.Thesegment’scustomersareofferedhighstandardpersonalserviceandfinancialsolutionsadaptedtothecustomer’s needs and the changing needs of the market.

Technological Changes

IntheframeworkofthesystemsconversiontothesystemsofFIBI,on31.12.08theprocessofabsorbingFIBI’s branch computer systems into both established and new branches ended. This process contributed to the improvement of the computer infrastructure of activity in this sector.Inaddition,theBankusestheconsultingsystemoftheFirstInternationalBank,whichisanadvancedconsultingsystemcombiningacomputerizedcharacterizationmodelfromwhichisderivedtherecommended structure of the investment portfolio based on the needs and preferences of the customer.

Critical success factors in the sector

Successintheprivatebankingsectorisbasedonanumberofmainfactors:- Customerfocusedservice,whileputtinganemphasisonpersonalrelationshipandflexibilityin

matching services and products to the individual needs of each customer.- Investment consultants at a high professional level.- Widerangearrayoffinancialsolutionsandproductsadaptedtotheprivatebankingpopulation

and constantly updated in accordance with market conditions in Israel and abroad.- A dealing room system that allows customers with active investment portfolios constant access

to capital and money markets in Israel and abroad.

Principal barriers to entrance and exit of the sector

Activityintheprivatebankingsectordemandsinvestmentandcapabilitiesinthefollowingsubjects:- Trainingofskilledinvestmentconsultingstaff,authorizedbylaw,withahighlevelofservice

awareness.- A basket of services and products adapted to the needs of private banking customers and

constantly updated in accordance with developments in markets in Israel and abroad.

Products and Services

Thesegmentoffersarangeofproductsandservicesforday-to-daybankingactivity,investmentconsultancyservicesspecializinginIsraeliandglobalmarkets,andtradinginIsraeliandforeignsecurities,through both the dealing room and through the Internet site. The segment also offers the execution of transactionsinforeigncurrencyanddirectaccesstotheforeigncurrencydealingroom,forlargeamounts.TheTrustCompanyactsasatrusteeforseriesofbondsofpurposecompanies(SPC)andadvancedfinancialinstruments(exchangetradedcertificatesandcoveroptionsetc.),issuedbycompaniesthroughprivateorpublicofferings.Inaddition,thecompanyactsatrusteeincredittransactionsforpurposesofsupervisionandcontrolofcollateralsforthesetransactions,asatrusteeofindividualandcorporateassets(includingthelendingofaname)andasatrusteeinEscrowtransactions.Thecompanyalsograntsadministrationservicestohedgefundsandprivateinvestmentfunds,includingalsotrusteeshipforpurposes of deducting taxes by the funds.

Marketing

Thesegment’smarketingstrategyisfocusedontwokeyelements:activationofexistingcustomers,with the objective of encouraging the volume of activity and expanding the areas of activity of existing customersoftheBank,aswellasattractingnewcustomerswhomeettheprofilecharacteristicsofthetype of customer of the personal banking.TheBankmarketsitscompetitiveadvantages,including:theBank’sprestigiousbrandname,theBank’sreputation as a long-standing bank with historical roots that has always specialised in private banking


UBank Ltd.

andthecapitalmarket,devisingspecificproductsinaccordancewiththeindividualcustomer’srequests,personalrelationshipwiththecustomer,immediateaccessibilitytoaprofessionalinvestmentcounsellorconversantwithhisfield,agilityandflexibilityofasmallbankwiththefinancialstrengthoftheFIBIGroup,service over and beyond usual banking hours and a personal banking representative of a high professional level.

UBankAssetManagementLtd.,UBankMutualFundsLtd.

UBankAssetManagementspecializesinthemanagementofinvestmentportfoliosinIsraelandoverseasforavarietyofcustomers:publicentities,governmentandprivatecompanies,non-profitorganizationsandprivatecustomers.Asubsidiary-UBankMutualFundsLtd.,managesavarietyofmutualfundsthatinvestinmarkets in Israel and overseas.The total monies managed by the Company and subsidiary as of the end of 2009 amounted to approx.NIS1.4billion,ofwhichapprox.NIS0.7billionisinthemanagementofinvestmentportfolios,andapprox.NIS 0.7 billion in fund management.The Company works diligently on developing new products and creating investment opportunities for itscustomers,whilemonitoringthechangesinthecapitalmarketsandstudyingthechangingneedsofitspresent and potential customers.Marketingoperationsarecarriedoutthroughthemarketingdepartment.Inaddition,thecompanyusesvariousadvertisingandsalespromotionchannels,suchasadvertisingontheInternet,inthewrittenpress,participationinconventionsandgivinglectures.Furthermore,thecompany’ssalespersonnelandthe investment managers themselves take care to preserve close relations with counsellors in the entire banking system.The Bachar Commission’s recommendations stipulated that a bank corporation shall not own a fund management company and allocated a period of 4-8 years for the sale of the fund management companies,eightyearsinthecaseoftheBank,August2013.TheBankchosenottosellitsmutualfunds,butwillcontinuetoholdthemfortheperiodpermittedbylaw.

Future Objectives

The private banking sector is expected to grow and focus in 2010 on growth in the number of customers in personal banking; this by means of retaining and activating existing customers and in recruiting new ones,addingtotheBank’sbranchnetworkandincreasingconsultancyservices,whilegivingpersonalhigh-level service.Inthefieldofmanagingfinancialassets,thecompanyhopestoincreasethenumberofmanagedportfoliosand asset share.Inthefieldofmanagingmutualfunds,thecompany,thatisconsideredasanexpertinforeignmarkets,willcontinuetofocusuponoverseasnichefunds,inimprovingyieldsandincreasingmarketingeffortswiththeaim of increasing asset share.

Human CapitalThenumberofworkersthatservethissectoramountedin2009toabout150employeesonaverage(in2008-155employeesonaverage).

Operating Results

ThePrivateBankingSegmentendedtheyearwithalossofNIS4.3million,comparedwithalossofNIS0.3 million in 2008.Excludingthelossduetothenewbranches,thesegmentwouldendtheyear2009withanetprofitofNIS6.3million,comparedwithanetprofitofNIS10.5millionlastyear.The increase of the loss derives mainly from an increase in operating and other expenses in light of theopeningofAffluentCustomerBankingbranchesduring2008.Inadditiontherewasareductioninrevenues from managing of the Bank’s mutual funds and a decrease in repayment of debts.Asat31.12.09thebankopenedfournewbranchesfortheaffluentpopulation(ofwhichtwowereopenedduring2008andtwoattheendof2007).


UBank Ltd.

SetforthbelowisasummaryofthePrivateBankingsegment’sresults(inNISmillion):

Bankingand

Finance

CapitalMarket

Total Bankingand

Finance

CapitalMarket

Total

Fortheyearended31,December2009


Profitfromfinancingoperationsbeforeprovisionfordoubtfuldebts:

From external entities 11.6 0.8 12.4 (30.9) 1.7 (29.2)

Inter-segment 28.5 0.1 28.6 68.2 0.6 68.8

Totalprofitfromfinancingoperations 40.1 0.9 41.0 37.3 2.3 39.6

Operatingandotherincome:

From external entities 21.1 20.6 41.7 20.4 22.7 43.1

Inter-segment (4.2) 1.9 (2.3) (4.4) 2.2 (2.2)

Total income 57.0 23.4 80.4 53.3 27.2 80.5

Provision for doubtful debts (0.3) - (0.3) (2.5) - (2.5)

Operatingandotherexpenses,(includingdepreciation) 56.9 30.5 87.4 53.4 30.1 83.5

Profit(loss)fromordinaryoperationsbefore taxes 0.4 (7.1) (6.7) 2.4 (2.9) (0.5)

Provisionfortaxesonprofitfromordinary operations 0.2 (2.6) (2.4) 0.9 (1.1) (0.2)

Netprofit(loss) 0.2 (4.5) (4.3) 1.5 (1.8) (0.3)

Netreturnonequity(inpercentages) 0.4% (24.5%) (6.0%) 3.8% (9.7%) (0.5%)

Average balance of assets 714.0 - 714.0 630.3 - 630.3

Average balance of liabilities 2,704.5 - 2,704.5 2,728.6 - 2,728.6

Average balance of risk assets 445.3 20.7 466.0 327.9 23.2 351.1

Average balance of mutual funds assets - 651.9 651.9 - 919.2 919.2

Average balance of otherassets under management - 596.8 596.8 - 595.1 595.1

Compositionofprofitfromfinancingoperation before provisionfordoubtfuldebts:

Margin from credit activity 13.6 - 13.6 8.7 - 8.7

Margin from deposits activity 21.9 - 21.9 23.6 - 23.6

Other 4.6 0.9 5.5 5.0 2.3 7.3

Totalprofitfromfinancingoperationsbefore provision for doubtful debts 40.1 0.9 41.0 37.3 2.3 39.6

1 Reclassified.


UBank Ltd.

Corporate Banking Segment

Description of Areas of Activity

TheCorporateBankingsegmentincludesthefollowingareasofactivity:tradingServicesinsecuritiesinIsraelandabroad(frontandback-officesystem),operationsformutualfunds,operatingservicesforhedgefunds and trust services for mutual funds provided through the subsidiary "UBank Trust Company Ltd." Moreover,thesegmentprovidesbankingservicesforthecapitalmarketdivision'scustomers.

TheSegment'sCustomers

ThecustomersoftheCorporateBankingSegmentincludeleadinginstitutionsinthecapitalmarket,including:mutualfunds,groupsengagedininsurance,pensionandprovidentspheres,hedgefundsandportfolio managers.Thesegmentconsolidatestheactivitiesofseveralcompaniesintheinsurance,pensionandprovidentfields,whichaccountforapprox.33%ofthesegment'sincome.Itistherefore,naturalthattheyaresignificantcustomersforitsoperations.Likewise,thesegment'scustomersincludecompaniesandself-employedpeoplewhoareactiveinthecapitalmarket,includingoptiontraders,arbitrageursanddaytraders.Privatecustomersactivityisclassifiedwithin the framework of the Private Banking Segment.

LegislativeRestrictions,StandardsandSpecialDemandsapplyingtotheSegment

TheBankoperatesunderlaws,regulations,andsupervisoryguidelinesapplyingtothebankingsystemfrompartiessuchastheBankingSupervisionDepartment;theCommissionerfortheCapitalMarket,Insurance,and Savings; the Anti-Trust Commissioner; the Israel Securities Authority and more.InaccordancewithProperConductofBankingBusinessDirectivesNos.312,313and315,limitsapplytothetotaldebtpermittedforsingleborrowers,groupsofborrowers,thetotalcreditofthesixlargestgroupsofborrowersintheBank,customersdefinedas“interestedparties”andalimittosectorconcentration. These restrictions may have an effect on the manner and extent of activity of the business sector in the Bank with those of its customers.JointInvestmentTrustLaw(AmendmentNo.14),2009The draft law was published on 16.2.10.The main amendment is a change to section 69 in the Joint Investment Trust Law.Themainchangesareasfollows:anobligationwasimposedonthefundmanagertoholdatenderforbrokeragecommissionswitha“tradingcompany”(amemberoftheStockExchange);theBoardofDirectorsofthefundmanagermustfixaprocedureforholdingatenderwhichwillbeapprovedbythetrustee; entering an undertaking with a stock exchange member overseas can be made without a tender (withinthetermsofthelaw);anundertakingbyafundmanagerunderabrokerageagreementwithastock exchange member controlling the fund manager or the trustee of the fund can be made without a tendersubjecttothefollowingconditions:1. The stock exchange member must meet the minimum conditions that were set out in the tender.2. The commission for any kind of a deal will not exceed the commission that the winner of the


manager.The fund manager will not make payments from the fund’s assets to stock exchange members related to thefundmanagerortrustee,foraperiodof12monthscommencingonthedatedecidedbythefundmanagerintheprospectus,fortheexecutionoftransactionsinthetrust’sassets,inanamountexceeding20%ofallcommissions(ofalltypes)thatwerepaidfromthefund’sassetsinthatyear.The amendment will come into effect 12 months after publication of the amendment to the law.It should be mentioned that the amendment to the law replaces the same sections in the proposed Joint InvestmentTrustLaw(AmendmentNo.13),2008,whichdealwiththerequirementforatenderandrestrictions on payments of brokerage commissions to a company related to a fund manager or a trustee.TheamendmentshouldhaveasignificanteffectonthebusinessoftheBankandtheresultsofitsactivities,becausetheBankhassignificantactivitybothasabankerandasatrusteeformutualfundsthroughits


UBank Ltd.

subsidiarycompany-UBankTrustCompanyLtd.,whichmaybringabouttheneedforsignificantreductionin one of these activities.AsofthedateofapprovaloftheseFinancialStatements,nodecisionhasyetbeenmadebytheBank,regarding the manner of preparation for the implications of the above-mentioned legislation.

On28.6.09theProposedJointInvestmentTrustLaw,1994,(AmendmentNo.13),2008Was approved by the Ministerial Committee for Legislative Matters.Themainamendmentsproposedare:offertothepublicofforeignmutualfunds;increasingthedutiesofsupervision imposed on the trustee and tightening supervision over fund managers; granting authority to the Securities Authority to deny as well as not to grant a company approval to serve as trustee or fund manager for reasons connected with its reliability; prohibiting a company from serving as a trustee in a fundifoneofthealternativesdefinedintheproposalexist.IftheAmendmentinitspresentversionwillbecomebindinglegislation,thereisexpectedtobeamaterialeffectonthebusinessofthebankanditsoperatingresults,becausetheBankhassignificantactivitybothasabankerandasatrusteeformutualfundsthroughitssubsidiarycompanyUBankTrustCompanyLtd.,whichmay,ifthelegislativeprocessiscompleted,bringabouttheneedforsignificantreductioninoneofthese activities.AsofthedateofapprovaloftheseFinancialStatements,nodecisionhasyetbeenmadebytheBank,regardingthemannerofpreparationfortheimplicationsoftheabove-mentionedlegislation,ifitisapprovedinitscurrentversion,andregardingwhichactivitieswillbereduced,asmentionedabove.

Competition

MostofthecompetitionintheCorporateBankingsegmentiswiththelargeandmid-sizedbanksinIsrael and with brokers and investment houses. The major institutional customers of the Corporate Bankingsegmentworkwithotherbanks,andsomeowninvestmenthousesthatserveasstockexchangemembers. The main ways for the bank to deal with the competition is by providing a comprehensive solutionforcustomers’capitalmarketneeds,andnurturingthecustomerswhileprovidinganimmediate,fastandeffectiveresponsetotheirneeds,whilealsoadaptingpersonalbankingvaluestotheinstitutionalcustomers.

Technological changes

Asof1.1.09,followingtheconversionofsystemstothecomputersystemsoftheFirstInternationalBank,the sector relies for its operations on the computer system of the parent company while preserving the Bank’suniquecommercialsystem,theU-TRADEsystem.

Critical success factors in the sector

- Providingservicesatthehighestprofessionallevel,whilemeetingappropriateresponsetimesandadaptingfinancialservicesandproductstothebusinessneedsofeachcustomer.

- Financialcreativityandexpertiseinsophisticatedfieldsofactivitysuchasderivativefinancialinstruments,securities,andforeigncurrency.

- Strictobservanceofmanagementandcontrolofcreditrisks,byin-depthknowledgeofeachcustomerandongoingmonitoringofchangesinhisconditionandintheconditionofthemarket,withthepurposeofmaximizingthepotentialforprofitandlimitingrisksasmuchaspossible.

- Advanced technological systems.- Long-term relationships and in-depth acquaintance with long-service customers that have been

with the Bank for many years.

Principal barriers to entering and leaving the sector- Constant investment in advanced technological systems.- Flexibility and creativity on the part of the Bank and providing an immediate and precise response

totheneedsofthecustomers,whilepreservingthe“onestopshop”principle.


UBank Ltd.

Services and Products

The segment provides operational and banking services to mutual funds managed by outside parties.Apartfromsecuritiesclearinghouseservices,thesectoroffersalliedservicessuchas:optionsandfinancetransactions,shareandbondtradinginoverseasStockExchanges,andtradingandclearingofmutualfundsand hedge funds overseas.Thesegment’scustomersoperate,interalia,throughauniquetradingsystem,oftheBank-U-TRADEwhich was developed independently by the Bank’s computer unit. The system enables direct transfer betweentradinginTelAvivandtradingontheNewYorkexchanges.TheBankinvestssubstantialresourcesin developing and improving the system and adapting them to the changing needs of its customers.During the year the trading system was expanded in order to enable pre-market trading in the USA and also direct trading on the London Stock Exchange.The Bank also provides brokerage services and is ready to increase these services mainly in light of the changeexpectedin2008amongpensionfunds,providentfundsandcorporate-concernfundsoftheseotherinstitutionalentities,afterwhichtheywillreceivebrokerageservicesfromanumberofexternalentities.

Trustees for mutual funds

ThisactivityiscarriedoutwithinUBankTrustCompanyLtd.,whichistheoldestandlargestbankingcompany in Israel for providing trust services to funds.Attheendof2009,theCompanyservesastrusteefor438fundsmanagedby23differententities(approx36%ofthemutualfundsinIsrael),ofwhichapprox.49%oftheincomederivesfrom146fundsthat are managed by four entities. The assets of all the funds for which the Company served as trustee at theendof2009totalapprox.NIS44billion(approx33%ofthemarket).TheCompanyistrusteeforawiderangeoffundsspecializinginvariousinvestmentchannelsinthecapitalmarket.

Goals for the Future

The corporate banking segment is expected to focus its efforts on the retention and expansion of its marketsharebyexpandingitscustomerbaseandthevolumeofactivity,developingadvanceservicesandnurturing the segment’s customers while providing an immediate and precise response to their needs. Thesegmentalsoaspirestoprovidepersonalbankingservicesatahighstandardtoinstitutions,whilemaintainingtheprincipalofa“one-stopshop”.Emphasiswillbeplacedonutilizingtheopportunitiesexistinginthemarket,owingtostructuralchanges,and the Bank’s ability to provide appropriate solutions to customers.Inthefieldoftrusteeshipsformutualfunds,thecompanyhopestomaintainandincreaseitsmarketsharewhileutilizingthestrongreputationithasearned.

Human Capital

Thenumberofworkersthatservethissectoramountedin2009toabout92employeesonaverage(in2008-91employeesonaverage).

Operating Results

TheCorporateBankingSegmentendedtheyearwithanetprofitofNIS30.1million,comparedwithanetprofitofNIS26.3millionin2008,adecreaseof14.4%.Theincreaseinnetprofitisduemostlytoanincrease in operating and other income from the capital market activity in all its areas net.


UBank Ltd.

BelowisasummaryoftheCorporateBankingsegment’sresults(inNISmillion):

Bankingand

Finance

CapitalMarket

Total Bankingand

Finance

CapitalMarket

Total



Profitfromfinancingoperationsbeforeprovisionfordoubtfuldebts:

From external entities 4.6 2.4 7.0 (49.9) 5.4 (44.5)

Inter-segment 21.2 - 21.2 76.6 - 76.6

Totalprofitfromfinancingoperations 25.8 2.4 28.2 26.7 5.4 32.1


From external entities 6.6 69.2 75.8 3.7 61.7 65.4

Inter-segment (1.1) - (1.1) (0.3) - (0.3)

Total income 31.3 71.6 102.9 30.1 67.1 97.2

Provision for doubtful debts (0.2) - (0.2) - - -

Operatingandotherexpenses,(includingdepreciation) 8.6 47.3 55.9 10.5 45.0 55.5

Profitfromordinaryoperationsbefore taxes 22.9 24.3 47.2 19.6 22.1 41.7

Provisionfortaxesonprofitfrom ordinary operations 8.3 8.8 17.1 7.3 8.1 15.4

Netprofit 14.6 15.5 30.1 12.3 14.0 26.3

Netreturnonequity(inpercentages) 74.9% 29.3% 41.6% 56.3% 19.7% 28.3%

Average balance of assets 1,080.0 - 1,080.0 1,287.7 - 1,287.7

Average balance of liabilities 3,883.6 - 3,883.6 3,529.0 - 3,529.0

Average balance of risk assets 162.4 341.9 504.3 183.5 494.4 677.9

Composionofprofitfromfinancingoperation before provision fordoubtfuldebts:

Margin from credit activity 1.8 - 1.8 1.2 - 1.2

Margin from deposits activity 23.4 - 23.4 21.7 - 21.7

Other 0.6 2.4 3.0 3.8 5.4 9.2

Totalprofitfromfinancingoperationsbefore provision for doubtful debts 25.8 2.4 28.2 26.7 5.4 32.1

1 Reclassified.


UBank Ltd.

The Financial Segment

Description of Areas of Activity

TheSegmentisdividedintothreesub-segments:theassetandliabilitymanagementdepartment(hereinafterreferredtoas:“ALM”),dealingroomsandliquidityunit.The income in this sector derives mainly from the Nostro activity of the Bank and the management of exposures to market risks and liquidity. In the framework of the management of exposures and market risks,thisincludestheeffectofactivityinderivativesfinancialinstrumentsis,whichforthemostpartservesaspartofthepolicyofmanagingtheindex-linkedbalancesheetoftheBank,andpartiallytheactivitybyspecializeddesk-officersthatserveasfinancialprofitcentersintegratedintheNostroactivityoftheBank,andintheshareoftheBankintheprofitsofcompaniesincludedonequitybasis.

The segment’s Customers

The segment provides services to the customers of the other segments - private and institutional - mainly inthedealingroomarea.Likewise,thedivisionprovidesderivativefinancialproductsandstructuredproducts to the customers of the other segments.

LegislativeRestrictions,StandardsandSpecialDemandsapplyingtothesegmentTheBankoperatesintheframeworkoflaws,regulations,andsupervisoryguidelinesapplyingtotheIsraelibanking system from parties such as the Banking Supervision Department; the Commissioner for the CapitalMarket,Insurance,andSavings;theAnti-TrustCommissioner;theIsraelSecuritiesAuthorityandmore.Inaddition,theboardofdirectorssetguidelinesregardingthepermittedexposuresconcerningthemanaging of market and liquidity risk exposures.

Services and Products

ALMDepartment:The department manages the Bank’s nostro position within the trading securities portfolio and the available-for-sale securities portfolio.Inaddition,thedepartmentmanagestheexposuretobasisandinterestrisksinallthelinkagesectors,inaccordance with the decisions made by the ALM Committee and subject to the limitations approved by the Bank’s board of directors.

Liquidityunit:The unit deals with the management of the Bank’s liquidity by participating in loan and deposit tenders of theBankofIsrael,operationswithbanksandexecutingshekel/foreigncurrencyswaptransactions.

DealingRooms:ComprehensiveservicestotheBank’scustomersareprovidedbythedealingrooms,inexecutingfinancialtransactions in markets in Israel and overseas for purposes of investment and hedging exposures in foreign currency and interest.The types of transactions include conversion and purchases of a wide range of currencies for immediate andfuturedelivery,optionsonforeigncurrencyandinterestderivativesinforeigncurrency,etc.Withinthecontextoftheshekeldealingroom,theBankoperatesasachiefmarketmakeronbehalfofthe Ministry of Finance and also a market maker for Shachar type bonds on the Stock Exchange.In 2009 the Bank was rated in the third place of 15 of the bond market makers.

Competition in the Segment

Most of the competition in this segment is in the dealing room area with the dealing rooms of other banks.TheBank’sdealingroomprovidesitscustomerswithfastandefficientservicesandquotespricesatcompetitive margins.


UBank Ltd.

Marketing and Distribution Channels

Marketinganddistributionactivitiesarecarriedoutbyemployeesofthefinancedivisionandthroughthenetwork of bankers and consultants in the branches.

Goals for the Future

IntheareaofmanagementoftheNostroportfolio,managementoftheexposuretomarketrisksandmanagementofliquidity,thetargetsofthesectorinthisareaarethepro-activemanagementofexposuresandtheNostro,withtheaimmaximizingprofitswhilemaintainingcontroloftheexposuretomarketrisksandappropriateliquidity,accordingtothelimitsprescribedintheguidelinesoftheBoardofDirectors.TheBankintendstocontinuethedevelopmentofthedealingroom,throughexpansionofthecustomerbase and increasing deepening activity and business connections with them.Moreover,thesectorintendsexpandingthesupplyofstructuredandderivativeproductsmarketedtoprivate customers and institutional clients of the Bank.

Human Resources

The number of workers that serve this sector amounted in 2009 to 27 employees on average(in2008-29employeesonaverage).

Operating Results

TheFinancialSegmentendedtheyearwithanetprofitofNIS40.8million,comparedwithanetprofitofNIS39.5millionin2008,anincreaseof3.3%.The increase derives mainly from an increase in the operating return on the available for sale securities portfolio,locallyandabroad,andanincreaseinprofitrealizationintheavailableforsalesecuritiesportfoliointheamountofNIS20.8million.Profitsintheavailableforsalesecuritiesportfolioin2009areoffsetbyotherthattemporaryimpairmentofNIS13.7million.(Anotherthattemporaryimpairmentwasrecordedin2008intheamountofNIS15.4millionofwhichNIS5.4millionwereinmortgagebackedbonds).Inaddition,theincreasederivesfromarangeofactivitiesintheareaoftheFinanceDivision,includingbeingmarketmakerforgovernmentbondsandothertradingactivities,whichareanpartoftheroutineactivity of the Bank.The increase was offset by a decrease in income that derives from the investment in investee companies and a decrease in income from dividend.

BelowisasummaryoftheFinancialsegment’sresults(inNISmillion):

2009 2008

Profitfromfinancingoperationsafterprovisionfordoubtfuldebts 89.8 172.0

Operating and other income 6.2 16.3

Total income 96.0 188.3

Provision for doubtful debts - (0.9)

Operating and other expenses 30.8 28.2

Profitfromordinaryoperationsbeforetaxes 65.2 161.0

Netprofit 40.8 139.5

Net return on capital 36.6% 131.9%

Average balance of assets 5,611.7 4,843.4

Average balance of liabilities 152.5 65.8

Average balance of risk assets 902.2 930.8

1 Reclassified.


UBank Ltd.

Fixed Assets and Facilities

The Bank operates in Six branches.The Jerusalem branch - the Bank is the owner of the branch building.IntheotherbranchesoftheBank,includingthebuildingwhichservesastheBank’sheadquartersandTel-Aviv Branch.The Bank rents premises in various buildings. Rental agreements for the rented premises are for different periods,andforthemostparttheBankhasoptionstoextendtherentalperiod.

Taxation

TheBankandsomeofthesubsidiarycompaniesaredefinedasfinancialinstitutionsforthepurposeoftheV.A.T.Law.InaccordancewiththatLaw,asalariesandprofitstaxisimposedattherateof16.5%(until1July,2009-15.5%)onthesalariespaidandontheprofitsearned,respectively,fortheactivitiesinIsraelofafinancialinstitution.

ForinformationinrespectofthetaxassessmentsoftheBankandoftheconsolidatedcompanies,seeNote23(C).

TheBankhasthestatusofapprovedbroker(QI),asdefinedintheregulationsoftheIncomeTaxAuthoritiesintheUSA.ThesignificanceofthisstatusisthattheBankhasenteredintoanagreementwiththe Tax Authorities in the USA according to which the Bank will deduct tax at source from its customers incomeinrespectoftheactivitiesofitscustomers,whoarenotAmericans,inAmericansecurities.

Additional information

Risk Management Policy

1. General

A. TheBank’sactivityisaccompaniedbyexposuretorisks,ofwhichthemorematerialare:creditrisk,marketrisk,liquidityrisk,operationalrisksandlegalrisks.

B. The risk management policy of the Bank is aimed towards achieving the strategic and business targetsthatwereset,andincreasingprofitexpectancy,whilecultivatingspecializationattheBank,andutilizingadvantagesofvariationandsize,whilemaintainingthelevelsofriskthatwereapprovedandtheexistenceofappropriatemechanismsformanagement,controlandsupervision.

C. The Bank’s overall concept of risk is based on the principle that for every banking activity that involvesriskthefollowingwillbedefinedandcharacterized:riskpolicyandappetite,exposurelimitsfordelineatinganddefiningthescaleanddepthoftheexposure,asystemofcontrolandaudit,areportingsystem,andamechanismforquantifying,measuringandreportingtheprofit,inaccordance with acceptable standards.

D. Riskmanagementandcontrolareconductedthroughanappropriateinfrastructureofcontrol,supervision,monitoring,andauditmechanisms,intheframeworkdeterminedbytheBankingSupervision Department at the Bank of Israel.

E Mr.YaacovGarten,DeputyGeneralManagerandHeadoftheCentralServicesDivision,istheChief Risk Manager of the Bank.

Mr.ShimonVaknin,ManageroftheFinanceDivision,istheMarketandLiquidityRiskManagerofthe Bank.

Mr.DavidKatz,ManagerofRisksandCreditManagementDepartment,istheCreditRiskManagerof the Bank.

Mrs.MichalTilo,ManageroftheRegulationandProcessesDepartment,istheOperationalRisksManager of the Bank. Mrs. Michal Tilo replaced Mr. Moshe Haver who served in the position until 31.08.09.

Adv.RacheliShaulHasharoni,ManageressoftheLegalDepartment,istheLegalRisksManageressof the Bank.


UBank Ltd.

F. TheadditionalriskstowhichtheBankisexposed(seetheChartoftheDiscussionofRiskFactors on page 92 are also managed and supervised as part of the overall management of the business,andbyeachofthemembersofManagementintheareaunderhisresponsibility,and,atthesametime,aspartoftheintegrativeriskmanagementoftheBank.

Relationship of the Board of Directors and Management to risk management issues

Control,supervision,andmonitoringoftheappropriatenessofriskmanagementintheBankisperformed,amongotherthings,bytheBoardofDirectors,committeesonitsbehalf,andcommitteesoftheManagementinthevariousareaofrisk,ofwhichtheprincipalonesare:A. Onceayear,theBoardofDirectorsoutlinesoverallpolicyonexposuretothedifferentrisks,by

means of discussion and approval of the Risk Management Document of the Bank. This document establishes,amongotherthings,theoverallriskappetite,demarcationofrisk,andthemaximumceiling for exposure in the various operating areas and segments. It also sets standards for management,measurement,control,andreportingontheexposuretodifferentrisks.

B. AteverymeetingoftheBoardofDirectors,thereisafollow-upandmonitoringofdevelopmentsintheprincipalfinancialexposures,andanexaminationofcompliancewiththelimitations.TheBoard of Directors also performs monitoring and control of the Bank’s compliance with the limitations set and of the appropriateness of the system of risk management and control in the Bank.

C. TheBoardofDirectorsestablishedacommitteeonitsbehalf,theCreditandRiskManagementCommittee that will meet as of 2010 at least six times a year and will coordinate everything mentioned in paragraph B above.

D. TheCreditandRiskManagementCommitteeoftheBoardofDirectorsmeets,asmentionedinparagraphC,sixtimesayeartodiscusscredits.

E. EveryweekthereisameetingoftheAssetsandLiabilitiesManagement(ALM)CommitteemeetsundertheGeneralManagerandwiththeparticipationoftherelevantMembersofManagement,whichdiscussesdevelopmentsintheNostroportfoliosinshekelsandinforeigncurrency,anddevelopmentsinthefinancialmarkets.TherelevantmanagementandcontrolbodiesintheBankparticipate in the discussion.

F. Eight times a year there is a meeting of the Audit Committee of the Board of Directors.G. Once a quarter a discussion takes place with Management and the Board of Directors regarding

theoverallExposureDocumentoftheBank,inwhicharereportedexposuresoftheBanktofinancialrisks,creditrisks,operationalrisksandlegalrisks,andtheBank’scompliancewiththelimitationssetbytheBoardofDirectors.Asof2010,priortothediscussionbytheBoardofDirectors,adetaileddiscussionwillplacewillbeheldinacommitteeoftheBoardofDirector,the Credit and Risk Management Committee.

H. TheRiskManagementUnitintheparentcompanyisresponsible,amongotherthings,forthe implementation and assimilation of the overall Group policy for risk management that it compatiblewithGrouptargetsandgoals,andfortheexecutionofongoingsupervisionandmonitoringofthebankingsubsidiarycompanies.Inaddition,theunitisresponsiblefortheimplementation and assimilation of the provisions of the Second Pillar of Basel II as part of the advancementandimprovementoftheoverallriskmanagementsystemoftheGroup,includingthe Bank.

I. BankManagement,incoordinationwiththeGroup,continuestoenhanceandimprovetoolsforthemeasurement,supervision,controlandreportingrequired,inordertoobtainanupdatedpicture,inrealtime,oftheBank’sexposurestothevariousrisks.


UBank Ltd.

2. Market Risks

A. Market risk is an existing or future risk to the income and capital of the Bank resulting from changesinratesandmarginsinthefinancialmarketsinwhichitoperatesandthathaveaneffectonthevalueoftheBank’sassetsorliabilities:interestrates,exchangerates,inflation,pricesofsecurities,pricesofproducts,fluctuationsintheseparameters,andchangesinothereconomicindices.

B. TheBankhasadetailedpolicyforthemanagementofexposuretothemarketrisks,whichis approved every year by Management and the Board of Directors. The policy document outlinesandspecifies,amongotherthings:anoverallmarketriskappetiteandariskappetiteforacross-sectionofindividualrisk,principlesforactivityandlimitationsonthelevelofthevariousinstruments,periodicalreportingtotheBoardofDirectorsontheexposuretorisks,anexaminationofchangesrequiredinaccordancewithchangesintheBank’sactivities,adefinitionofthebodiesinvolvedinthemanagementprocess,measurement,controlandsupervisionofrisks.

Below are the capital requirements in respect of market risks in accordance with directives of the Banking SupervisionDepartment:

According to directive 311

31.12.09 31.12.08

NIS million NIS million

Capitalrequirementinrespectof:

Interest risk 11.5 11.0

Shares risk 0.1 1.2

ExchangerateofForeignCurrencyandinflation 5.0 3.5

Total Capital requirement in respect of market risks 16.6 15.7

According to Basel 11

31.12.08


Spesificrisk General risk Total

Capitalrequirementinrespectof:

Interest risk 7.6 11.5 19.1

Shares risk 0.1 0.1 0.2

Foreign Curreny risk - 3.0 3.0

Total Capital requirement in respect of market risks 7.7 14.6 22.3


UBank Ltd.

C. Basis Exposure

GeneralBasis risk is an existing or future risk to the income and capital of the Bank that may occur because ofunexpectedchangesintheConsumerPriceIndex,orinexchangerates,becauseofthedifferencebetweenthevalueofassetsandthevalueofliabilities(includingtheeffectoffuturestransactionsandembodiedoptions).Basisexposureismeasuredandmanagedineachofthevariouslinkage-sectors:CPI-linkedsector,andtheforeigncurrencyandforeigncurrencylinkedsector.Inaccordancewithaccountingprinciples,capitalisdefinedasanunlinkedshekelsource,suchthataninvestmentofcapitalinasectorotherthantheunlinkedshekelsectorisdefinedasabasisexposure.

Management of the exposure- Management of basis risks and the investment of available capital in the various linkage sectors

are carried out based on assessments and updated forecasts regarding expected developments in the money and capital markets.

- The mix of the investment in available in the various linkage sectors is managed on an ongoing basissubjecttotherestrictionsreportedabove,andbasedonforecastsregardingtherelevantmarketvariables,whileutilizingdifferencesinpricesbetweenthecostofsourcesandthereturnontheuseofthevariouslinkagesectors,andtheprofitabilityof“long”positionsor“short”positions in each sector.

- Withintheframeworkofmanagingoflinkagebalances,theBankmakesuse,amongotherthings,ofderivativefinancialinstruments,asameansofneutralizingexposuretobasisandinterestrisks.

Risk appetite- TheBoardofDirectorsoftheBankhassetrestrictionsregardingthepositionsallowed(longor

short)inassetsandliabilitiesandincapitalexposureforeachsector. Availablecapitalisdefinedasshareholders’equitywiththeadditiontothespecificandgeneral

provisionfordoubtfuldebts,afterdeductionofnetnon-monetaryassets,includingmainlyinvestmentsincompaniesincludedonequitybases,shares,buildings,andequipment.

- Stress scenarios - The Board of Directors of the Bank has set a limitation on the level of maximum erosion of fair value with regard to activation of several stress scenarios in the area of the exposure to market risks - including basis risks. This limitation was determined as up to 15% ofshareholders’equity.Theresultsofthescenariosandtheirsignificancearereportedfourtimesa year to Management and the Board of Directors.

Surplusoftheassetsovertheliabilities(includingtheinfluenceofderivativestransactions)asatthebalancesheetdatewasasfollows:

31 December

Type of Linkage2009

NIS million2008

NIS millionMaximum permitted limit

NIS million

Unlinked 568.1 285.0 The Bank’s Capital

Consumer price index (85.2) 95.3 *+ 300.0

Foreign currency or linked thereto 30.8 24.6 + 66.1

Non-monetary items 28.0 46.7

Total shareholders’ equity 541.7 451.6

* Thelimitexistswhileneutralizingthetradingportfolio.

Surplusofliabilitiesovertheassetsasat31.12.09,neutralizingthetradingportfolioisNIS(268.9)million,(asat31.12.08-NIS(4.2)million).


UBank Ltd.

Belowisatableofsensitivitytotheoreticalchangesintherateofexchange(NISmillions)ofthebankcapital

31.12.09 31.12.08

percentage changein rate of exchange

Dollar Euro AllCurrencies

Dollar Euro AllCurrencies

Decrease of 5% (1.7) (0.1) (1.9) (2.2) 0.3 (1.8)

Decrease of 10% (3.3) (0.2) (3.8) (4.4) 0.7 (3.6)

Increase of 5% 1.7 0.1 1.9 2.2 (0.3) 1.8

Increase of 10% 3.3 0.2 3.8 4.5 (0.7) 3.7

Notes:1 An increase /decrease scenario represents a strengthening/weakening of the respective currency against the Shekel.2 ChangesintherateofexchangeofothercurrenciesnotlistedseparatelyhaveanimmaterialeffectontheprofitsoftheBank.3 The statistics show the effect of changes in the rates of exchange after tax.

During2009,theBankcompliedwithallthelimitationsofbasisexposureapprovedbytheBoardofDirectors.

D. Exposure to interest rate changes

GeneralInterest rate risk is an existing or future risk to the income and capital of the Bank that may be created because of the gap in repayment dates or interest adjustment dates between the different assets and liabilities in any of the operating segments.Interestraterisks,foreachportfolio,arethedominantriskstowhichtheBankisexposedwithregardtoitseffectonthefairvalueofassetsandliabilitiesandtheprofit.

Management of the exposureManagement of the exposure to interest rate risks is done by the proper distribution of investment of availablecapitalbetweenthedifferenttime-periods,andthereductionoftheexposuretoerosionofthefair value resulting from unexpected changes in interest rates. The main exposure to interest rate risks intheBankisattributedtothefinanceactivityintheunlinkedshekelsectorandresultsfrominvestmentcharacteristicsderivedfromthedurationsofusesandsourcesoffunds,andfromtheNostroactivityoftheBankinthissector,includingmarketmaking.

Risk appetite- The Board of Directors of the Bank has set restrictions on the overall exposure to interest rate

risks,bydemarcationofthemaximumexposuretoerosionoffairvalueofavailablecapital,withaparallelchangeof1%intheinterestratecurveoftheCPI-linkedsector(onaconsolidatedbasis),theunlinkedshekelsector,andtheforeigncurrencysector.

- Inaddition,restrictionsonexposuretointerestrateweredecidedintermsofthemaximumlossaccordingtotheestimatedValueatRisk(VAR).TheVARlimitisNIS20million.

- Stress scenarios - The Board of Directors of the Bank has set a limitation on the level of maximum erosion of fair value with regard to activation of several stress scenarios in the area of the exposure to market risks - including interest risks. This limitation was determined as up to 15%ofshareholders’equity.Theresultsofthescenariosandtheirsignificancearereportedfourtimes a year to Management and the Board of Directors.

Actual Exposure on the Reporting Date- Interestexposureintheunlinkedshekelsegmentderivesfromthefactthatactivityistypifiedby

alongerdurationofassetsthanthedurationofliabilities,andinrespectofthetotalinvestmentinthischannel,whichisthemostdominantofthethreelinkagesegments.


UBank Ltd.

- InterestexposureintheCPI-linkedshekelsegmentderivesfromthefactthatactivityistypifiedrecently by a longer duration of assets than the duration of liabilities.

- Intheforeign-currencyandforeign-currencylinkedsegment,theexposureisrelativelylowerthantheCPI-linkedandunlinkedshekelsegments,becauseof,amongotherthings,significantactivityinvariousfinancialinstruments,andmainlyininterestrateswaps,whichcontributetoreducingtheexposure to changes in interest in this segment.

Below is a description of the effect on the erosion of the Bank’s available capital of a corresponding rise of 1%intheinterestcurve:

31.12.09 31.12.08

Actual Exposure % Limit % Actual Exposure % Limit %

Unlinked shekel 0.61 5.00 3.10 5.00

Linked shekel 0.60 4.00 1.03 4.00

Foreign curingand linked to foreign curing 0.54 1.00 0.50 1.00

Belowarethedurationgaps*:

Type of Linkage 31.12.09 31.12.08 Limit

Unlinked 0.06 0.29 0.75

Consumer price index 2.40 1.72 3.50

Foreign currency or linked to foreign currency 0.07 0.13 0.50

* BecauseofthechangeinthenewformatofAddendumD,pursuanttothedirectiveoftheSupervisorofBanks,asof31.12.09,thereisnoreconciliationbetweendurationfiguresintheaboveTableandtheAddendum.Durationfiguresasof31.12.08werecalculatedinaccordancewithAddendumDintheoldformat.

Interestriskinthebankingportfolio:Belowistheeffectofanincrease/decreaseintherateofexchangetothefairvalueoftheBank,(asapercentageoffairvalue):

31.12.09 31.12.08

Increaseof 1%

Decreaseof 1%

Increaseof 1%

Decreaseof 1%

Shekel curve (1.97) 2.25 (3.12) 3.31

Linked curve 0.46 (0.32) (0.96) 1.18

Dollar interest (0.75) 0.80 (0.49) 0.50

Euro interest 0.04 (0.06) (0.04) 0.04

Foreigncurrencyinterest(allcurrencies) - - (0.57) 0.58

Basicassumptions:1 ThebankingportfolioincludesalltheassetsandliabilitiesoftheBankinthebalancesheet,includingderivativefinancial

instruments,exceptforthetradingportfolio.2 Thecalculationismadewithoutreferencetoearlyrepaymentsofloans/deposits(basedonpastexperienceearlyrepayments

arenotmaterial).3 Interest risk is examined on a current basis.


UBank Ltd.

Belowisthefairvalueoffinancialinstruments,exceptfornon-monetaryitems(beforetheeffectofhypotheticalchangesininterestrate),inNISmillions:

31.12.09

NIS Foreign currency2

Unlinked Linked Dollar Euro Other Total

Financial assets1 6,745.1 451.0 1,031.9 352.5 291.7 8,872.2

Amounts to receive due to derivative financialinstruments3 1,181.1 - 3,608.4 592.0 1,3369.0 6,750.5

Financial liabilities1 5,609.3 473.6 1,720.5 303.8 237.9 8,345.1

Amounts to pay due to derivative financialinstruments3 1,738.8 64.4 2,886.4 639.2 1,419.7 6,748.5

Netfairvalueoffinancialinstruments 578.1 (87.0) 33.4 1.5 3.1 529.1

31.12.08


Unlinked Linked Dollar Euro Other Total

Financial assets1 5,959.6 321.1 1,511.0 354.2 228.9 8,374.8

Amounts to receive due to derivative financialinstruments3 490.2 - 379.1 2.0 4.1 875.4

Financial liabilities1 5,865.2 63.4 1,550.8 243.8 176.9 7,900.1

Amounts to pay due to derivative financialinstruments3 263.3 162.7 297.1 127.4 57.6 908.1

Netfairvalueoffinancialinstruments 321.3 95.0 42.2 (15.0) (1.5) 442.0

1 Includinghybridfinancialinstruments.Notincludingbalancesheetbalancesofderivativefinancialinstrumentsandfairvalueofoff-balancesheetfinancialinstruments.

2 Including Israel currency linked to foreign currency.3 Amountsreceivable(payable)forderivativefinancialinstrumentsandforoff-balancesheetfinancialinstruments,discountedat

interest rates used for calculating the fair value shown in Note 15 b. to the Financial Statements.4 Netfairvalueoffinancialinstrumentsshownineachindex-linkagesegmentisthenetfairvalueinthissegmentonthe

assumption that the stated change occurred in all the rates of interest in the index-linkage segment. The total net fair value of financialinstrumentsisthenetfairvalueofallthefinancialinstruments(exceptfornon-monetaryitems)ontheassumptionthat the stated change occurred in all the rates of interest in all index-linkage segments. For further details concerning the assumptionsmadeincalculatingthefairvalueoffinancialinstruments,seeNote15b.totheFinancialStatements.


UBank Ltd.

TheeffectofhypotheticalchangesininterestratesonthenetfairvalueoftheBank’sfinancialinstrumentsexceptfornon-monetaryitems,inNISmillions:

2009

Netfairvalueoffinancialinstruments,aftereffectofchanges in interest rates4

Change infair value


InNIS million

Inpercentage

Unlinked Linked Dollar Euro OtherOffsettinginfluences Total Total Total

The change in fair value Parallel

immediate increase of one per cent Parallel 561.1 89.8 41.0 (15.5) (1.6) 5- 417.3 (24.7) (5.60)

immediate increase of 0.1 per cent Parallel 319.5 94.4 42.1 (15.0) (1.5) 5- 431.5 (2.5) (0.57)

immediate decrease of one per centParallel 340.1 100.4 43.5 (14.4) (1.5) 5- 468.1 26.1 5.90

2008

Netfairvalueoffinancialinstruments,aftereffectofchanges in interest rates4

Change infair value


InNIS million

Inpercentage

Unlinked Linked Dollar Euro OtherOffsettinginfluences Total Total Total

The change in fair value Parallel

immediate increase of one per cent Parallel 303.6 89.8 41.0 (15.5) (1.6) 5- 417.3 (24.7) (5.60)

immediate increase of 0.1 per cent Parallel 319.5 94.4 42.1 (15.0) (1.5) 5- 439.5 (2.5) (0.57)

immediate decrease of one per centParallel 340.1 100.4 43.5 (14.4) (1.5) 5- 468.1 26.1 5.90

Thefairvalueoffinancialinstrumentsisdeterminedaccordingtothemodel,theassumptionsandparametersthatwereusedforcalculatingthefairvalueofthefinancialinstrumentsareinNote15b.Figures for the end of the year represent the exposure existing for the Bank throughout the year.

Theeffectofhypotheticalchangeininterestratesonthenetprofitisnotmateriallydifferentfromtheeffectonthefairvalue,net.

1 Less than NIS 0.1 million.

During2009,theBankcompliedwithallinterestexposurelimitsprescribedbytheBoardofDirectors.


UBank Ltd.

E. Options risks

GeneralOptions risks are the risk of loss deriving from changes in the parameters affecting the value of the options.

Risk appetite- TheBank’sforeignexchangedealingroomtradesinarangeoffinancialproducts,including

options.Inadditiontolimitsstipulatedontotalbasisandinterestexposure,andagainstthebackdropofthesensitivityoftheeconomicvalueofoptionstochangesinbasis,interestandespeciallyinthevolatilityofthebasisasset,theBoardofDirectorshasdefinedadditionallimitsondealing room activity in options.

- The Board of Directors of the Bank set out limits in relation to activity permitted in options both in terms of volume and in terms of maximum loss under the scenarios. The scenarios refer to simultaneouschangesintherateofexchangeandinthevolatilityofthebasisassets.Inaddition,limitswerefixedbytheBoardofDirectorsonmaximumchangesinthevalueoftheoptionsportfoliointermsofsensitivityindices(GREEKS).

TheprincipallimitsfixedbytheBoardofDirectorsforactivityonoptionsare:a. Maximummarginal(delta)amountof$5millionduringthedayand$2.5millionovernight.b. Maximumlossof$150thousand.

Managing the exposureTools for managing exposure to options risks include the Vol-Spot sensitivity matrix which shows the exposureresultingfromthecreationofacombinationofvariousscenariosoffluctuationsintheexchangerateandinvolatility.Inaddition,useismadeofaninterest-curveriskexposurescenario(RHOscenario)which examines the change in value of the position in the event of a movement of 1% in the interest curve.Inaddition,theBankmakesuseoftheWeightedVegamodelformanagingexposuretovolatilityrisk.

During2009,theBankcompliedwithalllimitsapprovedbytheBoardofDirectors.

F. EvaluationoftheExposuretoMarketRisks,ManagementandControlTools

TheBankmanagesandcontrolsmarketriskexposurebymeansofvarioustoolsasmentionedabove,anddescribedindetailasfollows:

- TheValueatRisk(VaR)measuredtheexpectancyofmaximumlossinfairvalueoftheBank(assetsandliabilities,includingderivativefinancialinstruments),duringagiveninvestmenthorizon(10businessdays),withaspecificlevelofcertainty(99%)andundernormalmarketconditions.

ThecurrentVaRcalculatedintheBankisbasedontheVarianceCo-Variancemethod.Inaddition,theBankrunsmodelswhennecessary,includinganhistoricsimulation,anda“MonteCarlo”oncea month.

VaRfiguresarecalculatedbytheBankonadailybasis,onthefinancialassetsandliabilitiesoftheBank(thebankingportfolio,thetradingportfolio).TheVaRsysteminincorporatedasanintegralpartoftheworkoftheMarketRiskandLiquidityControlUnit,whichupdatestheFinanceDivision on the exposures.

- Back Testing - The quality of forecasting of the VaR model is examined by the Market Risk and Liquidity Control Unit by means of retroactive measurement.

Actual Exposure on the Reporting DateAsofDecember31,2009,theBank’sVaRwasapprox.NIS2.7million,comparedwithapprox.NIS10.9millionasofDecember31,2008.Thedecreaseincomparisonwiththepreviousyearisattributedtothedecline in the total and duration of the Bank’s investment portfolios and a decline in the level of volatility of the standard deviation.


UBank Ltd.

- Stressscenarios-Stressscenariosforexaminingthemaximumleveloferosionoffairvalue: The Board of Directors of the Bank has set limits on the maximum level of erosion in the

fair value of the Bank in respect of operating a number of stress scenarios in the area of the realizationofmarketrisks.Thislimitisfixedatupto15%oftheshareholders’equityoftheBank.

- Stressscenariosforexaminingcapitaladequacy,andtheeffectofrealizationofstressscenariosontheratioofcapitaltoriskassets:aspartofitspreparationsforimplementationofthedirectivesoftheSecondPillarofBaselII,andtheadvancementofriskmanagementintheGroup,theBankhasdrawn up a range of stress scenarios for examining capital adequacy. The range includes scenarios intheareaofmarketrisks,liquidity,andcredit(includingthesecuritiesportfolioinshekelsandinforeigncurrency),andscenarioscombiningtherealizationofseveralrisksconcurrently.TheresultsofthestressscenariosandtheirsignificancearediscussedatleastfourtimesayearbyManagement and the Credit and Risk Management Committee of the Board of Directors. Exposure management tools include various models implemented in the Bank whose results are reviewedonadailybasis,suchasduration,fairvalue,andsensitivitytochangesintheinterestcurve.

G. Supervision and Control over the Management of Market Risk Exposure

TheBankmaintainsanappropriatesystemofcontrol,supervision,andauditmechanismsonthemarket-risk management process.TheBank’scontrolconceptisfortheongoingidentification,quantifying,andassessmentofmarketriskexposure and monitoring compliance with the limits set.Market-risk exposure management is examined and monitored on a routine basis by designated committeesandforums,including,amongothers:- The Credit and Risk Management Committee of the Board of Directors - the above committee

will begin operating from 2010. The committee is a committee of the Board of Directors designated for the areas of risks in the Bank and their method of management. The committee willholdpreliminarydiscussionsonmostofthesubjectsconnectedwiththeareaoffinancialmanagementintheBankandcreditintheBank,beforevariousmattersarebroughtfordiscussionanddecisionintheplenumoftheBoardofDirectors;andalsoperformsthefollowing:follow-upandmonitoringofdevelopmentsinexposuretothevariousfinancialrisksandcreditrisks,discussingthemannerandscopeofadvisablefinanciallimits,follow-upandmonitoringtheBank’scompliancewithexposurelimitsprescribed,andfollow-upandmonitoringoftheappropriatenessofriskmanagement,includingriskmonitoring.

- Onceinaquarter,adiscussiontakesplacebyManagementandtheBoardofDirectorsontheBank’sTotalExposuresDocument,whenmarketriskexposureisdiscussed.

- ALM(AssetandLiabilityManagement)Committee-thecommitteeheadedbytheGeneralManageroftheBankdiscussesandfollowsuptheimplementationofthefinancialriskspolicyasdeterminedbytheBoardofDirectors,anddiscussesthemaindevelopmentsinmarketriskexposure based on a range of reports received by it. The committee meets once a week and also discusses,basedonmanagementreports,theliquidityposition,financialdevelopments,andtheoperations and results of the Nostro Unit.

- TheMarketRiskandLiquidityManagementControlUnit-theunit,whichbelongstotheRiskandCreditManagementDepartment,isresponsibleforthecontrolofmarketrisksandliquidityin the Bank. The unit operates by virtue of Proper Conduct of Banking Business Directive No. 339 -“RiskManagement”.Intheframeworkofitsactivities,theMarketRiskandLiquidityManagementControlUnitcontrolsandexaminesthequalityofthetoolsusedformeasuringrisk,examinesthelimitssetandtheirsuitabilitytotheexposuresoftheBank,andreportsimmediatelyonanydeviationsfromtheselimits,ifany.

- Internal Audit - the Internal Audit Department of the Bank is the Internal Audit Department of theparentcompany,whichintegratesauditingthesubjectofriskmanagementintheBankintoitsannual work plans.

Internal Audit is responsible for giving an independent opinion of the degree of effectiveness of implementationofprocessandproceduresformanagingrisksintheBank,andalsoexpressesitsopinion to Management and the Board of Directors of the Bank on the degree of suitability and quality of operation of internal control process.


UBank Ltd.

H. Reporting Market Risk Exposures

Management and the Board of Directors of the Bank receive a range of reports on exposure to market risks,withdifferentcross-sections,frommanagementandcontrolbodies.Inaddition,exposurestomarketrisksincomparisonwithframeworksandlimitsprescribedbytheBoardofDirectors,andauthoritiesformanagingthem,arereportedinthequarterly“ExposuresDocument”,asrequiredunderProperConductofBankingBusinessDirectiveNo.339.During2009,theExposuresDocument was discussed once a quarter by the Board of Directors of the Bank.From2010,thedocumentwillbediscussedbytheCreditandRiskManagementCommitteeoftheBoardofDirectors,andbytheBoardofDirectors.Inaddition,exposuresandcompliancewithlimitsarereportedintheframeworkofthequarterlyreportof the Market Risk and Liquidity Control Unit in the Central Risk Control Department of the parent company.

3. Liquidity Risk Management

A. General

- LiquidityriskisthecurrentorfutureriskthattheBankwillhavedifficultyinsupplyingitsliquidityneedsinexceptionalsituationsofdemandandsupply,includingunexpectedliabilities,unexpectedwithdrawalsofdepositsbythepublic,unexpecteddemandforcreditanduncertaintyregardingthe availability of sources of funds.

- TheBankimplementsanoverallpolicyofliquidityriskmanagementinIsraelicurrency,foreigncurrency,andlinkedtoforeigncurrency,inaccordancewiththerequirementsofProperConductof Banking Business Directive No. 342 of the Banking Supervision Department of the Bank of Israel.

- Accordingly,theBoardofDirectorsoftheBankapprovedaliquidity-riskmanagementpolicy,andset limits for the liquidity gap and liquidity ratio under a normal and stress scenario on the cash flows.Thepolicyincludes,amongotherthings,referencetotoolsformeasurement,control,andmonitoring,andreportingmechanismstobemaintainedaspartofliquidityriskmanagement.

- TheBankoperatestoolsforthemanagement,control,andsupervisionofliquidity,basedamongother things on an internal model developed for purposes of compliance with part of Proper Conduct of Banking Business Directive No. 342.

B. Infrastructure for Liquidity Risk Management - Systems and Models for Measurement and Management of the Exposure

The infrastructure for managing liquidity risk in the Bank combines various models for routine managementinshekelsandinforeigncurrency,andtheimplementationofstressscenarios:- Forpurposesofoverallliquiditymanagement,andforpurposesofcompliancewithDirectiveNo.

342oftheProperConductofBankingBusinessDirectives,whoseaimistheexaminationandmonitoringoftheliquidmeansoftheBankunderdifferentscenarios,theBankbasesitselfonan internal model developed by the Group for managing liquidity risk in shekels and in foreign currency.Themodelfacilitatesmanagement,control,supervision,andmonitoringoftheliquiditypositioninshekelsatanongoingdailylevel,andinforeigncurrencyforlongerperiods.

The internal model assesses the level of potential reliance on the various assets of the Bank as realizableforvariousperiods,aswellasthelevelofcashflowliabilitiesanticipatedfordifferentrepaymentperiods.ThemodelissupportedbydifferenttestsmadebytheBank,whichrelyonahistorical examination of the behavior of the Bank’s balance sheet and off-balance sheet balances.

Themodelusesdynamicmanagementtools,atadailylevel,forexaminingtheBank’sliquidityposition and for managing liquidity risk. The results of the model are reported to the ALM committee once a week and audited on a routine basis by the relevant bodies including the Market Risks and Liquidity Control Unit belonging to the Risk and Credit Management Department.

- Inaddition,forpurposesofmanagingongoingliquidityinshekels,theBankusesaninternalsystem


UBank Ltd.

developed for purposes of compliance with the requirements of the reform in the payments and clearing system(theZahav-RTGSsystem.Thesystemfacilitatestheconcurrentsettlement,withoutdelaybetweenexecutionofthepaymentinstructionanditsconfirmation,andallowstheBanktoidentifyatanygivenmomentthemonetarycashflowpassingthoughaccounts.- The“Short/Long”modelintheforeigncurrencysegment Activity of the banking system in the area of asset and liability management in foreign currency is

typifiedbythegenerationoflong-termusesoffundsfinancedbyshort-termsources.Thisactivityderives mainly from the lack of availability of long-term sources of funds in foreign currency and/ortheirhighcost.ActivitysuchastheaboveexposestheBanktofinancialrisksoftwosorts-liquidity and margin.

- Stress scenarios Forpurposesofexaminingliquidityinextremeandstresssituations,adailyscenarioisbuiltbased

ondataoftheBank’sinternalmodel.Thescenarioreflectstheliquiditypositioninstressscenariosbased on a combination of severe parameters observed over the last 12 months’ data. When the amountofcurrentdataislarger,theobservationswillbeincreasedto24months,ineachofthebalance sheet and off-balance sheet items.

Inaddition,theBankconductsstressscenarioscombiningstressscenariosincapitalandmoneymarketsinIsraelandabroad,andexaminestheireffectonthecapitalbaseandthecapitalratioofthe Bank.

C. Supervision and Control of Management of Exposure to Liquidity Risk

TheBank’scontrolconceptisfortheidentification,quantifying,andassessmentofrisksandthemonitoringof compliance with the limits set out in the procedures.Liquidity-risk exposure management is examined and monitored on routine basis by designated committeesandforums,including:- TheALM(AssetandLiabilityManagement)Committee.- The Credit and Risk Management Committee of the Board of Directors.- The Board of Directors of the Bank.- TheInternalAuditDepartmentoftheBank,whichintegratesauditsonthesubjectofliquidityrisk

management into its annual work plans.

D. Reporting Exposure to Liquidity Risk

- Exposure to liquidity risks in comparison with frameworks and limits prescribed by the Board of Directors,andauthoritiesformanagingthem,isreportedweeklyintheframeworkoftheALMCommittee,headedbytheGeneralManager.

- Exposuresarereportedinthequarterly“ExposuresDocument”,asrequiredunderProperConduct of Banking Business Directive No. 339. The Exposures Document is discussed once a quarterbyManagementandbytheBoardofDirectors,andfrom2010,thedocumentwillbediscussed by the Credit and Risk Management Committee of the Board of Directors.

- Exposure to liquidity risk is also reported in the quarterly report of the Market Risk and Liquidity Control Unit in the Central Risk Control Department of the parent company.

- A quarterly report four times a year on the results of the stress scenarios four times a year to the Credit and Risk Management Committee and to the Board of Directors.

Inaddition,BankManagementandtheBoardofDirectorsareupdatedonaroutinebasisandwhen necessary on developments in the Bank’s exposures to liquidity risks.

According to the internal liquidity model developed by the parent company and adopted by the Bank asof1.1.2009,theratioforcoverintheshekelsegmentandintheforeigncurrencysegmentbetweenliquid assets and liabilities during 2009 complied with the limits prescribed by the Board of Directors and requirements of the Bank of Israel.


UBank Ltd.

4. Risk Management in the Securities Portfolio in Foreign Currency - Market Risks and Indebtedness

a. The securities portfolio of the Bank in foreign currency is managed in accordance with investment limits and guidelines approved by the Board of Directors of the Bank. The Bank invests only in debentures issuedbycompaniesofinvestmentgrade,afteranalyzingthecreditqualityoftheissuer,themarketrisksinherent in the investment and the liquidity of the debentures.

b. Afterthedateofexecutionoftheinvestment,theBankmaintainscontroloveritsvariousinvestments,as part of the management of the risks in the securities portfolio in foreign currency. Analysis is performed attheleveloftheindividualsecurity,theindividualcompany,andtheoverallportfoliolevel,withrelianceonpublishedinformationconcerningtheissuingcompany,itsfinancialresults,andotherparametersfromwhich the condition of the company or the investment may be studied. Managing the risks and monitoring investments takes place on a real-time basis.

c. TheBankhasfourindependentcontrolandsupportsystemsbackingupinvestmentactivity:- TheMiddleOffice.- TheBackOffice.- The Market Risk and Liquidity Risks Control Unit.- The Loan Review Unit.Theseunitsauditinvestmentactivity,compliancewithinvestmentproceduresandlimits,developmentsinthefairvalueofthesecurities,andthesuitabilityofthemodelsandtoolsusedformanagingriskinoperations,inthemostreasonabletimeframepossibleafterthedateofexecution.

d. ThemeasurementoffairvalueinthesecuritiesportfolioisperformedbytheMiddleOffice.Withreferencetothemostpartofinvestmentsintheportfolio,themeasurementoffairvalueismadebasedon price quotations of an international supplier of prices outside the Bank - a leading company that providesrevaluationservicestohundredsofleadingfinancialinstitutionsworldwide,withmorethan25years experience. The company is engaged in the provision of quotation and revaluation services and not in the area of securities trading.

e. Apartofthesupervisoryandcontrolmechanismsoverriskmanagement,areportingroutinehasbeen developed in the Bank regarding the manner and scope of exposures in the securities portfolio under management. Reports are made to both decision-making and control units. The main reporting formatintheBankisasfollows:- Immediate reporting of disclosure of a deviation from limits and procedures.- Immediatereportingofwideningofmargins,changeinrating,andanyotherexceptionaleventin

theportfolio,asnecessary.- Weekly meetings of the ALM Committee headed by the General Manager.- Quarterly reports in the framework of the Total Exposures Document to Bank Management and

the Board of Directors.


UBank Ltd.

5. Credit Risk Management

A. General

CreditriskistheriskofharmtothevalueoftheBank’sassetsanditsprofitabilityduetodeteriorationin the ability of borrowers to meet their obligations to the Bank and/or deterioration in the quality of borrowers or the value of collateral provided as security for credit.Inordertominimizetherisk,aCreditRiskManagementPolicyhasbeendefinedintheBankandlimitsregarding borrowers/sectors in the various operating segments and products.

B. AllocationofCapitalinrespectofCreditRisks,MarketRisksandOperationalRisk

Totalriskassetsandcapitalrequirementsinrespectofcreditrisks,marketrisksandoperationalriskderivingfromthefollowingexposures:

31.12.09

Risk assetsin NIS millions

Capitalrequirements(9%)in NIS millions

Type of exposure

Sovereign risk 52.5 4.7

Banking corporations 303.2 27.3

Corporations 1,360.7 122.5

Collateralizedbycommercialrealestate 11.4 1.0

Retail exposures to individuals 77.2 6.9

Housing loans 14.0 1.3

Securitization 0.2 1-

Other assets 747.1 67.3

Total in respect of credit risk 2,566.3 231.0

Market risks 279.1 25.1

Operational risks 455.4 41.0

Total risk assets 3,300.8 297.1

1 Amount less than NIS 0.1 million

See details in section I below on the distribution of capital allocation in different cross-sections.

ForpurposesofratingthecreditexposureofsovereignrisksandbankingcorporationsunderBaselII,theBankmadeuseofpublicratingsofthefirmsMoody’s,S&P,andFitchaccordingtothelowestoftheirsecondary ratings.

C. Policy and Risk Appetite

General

TheBank’spolicyforthemanagingcreditriskisbasedonthecorrectspreadingofrisks,andthecarefulandcontrolledmanagementofexposures,bothattheleveloftheindividualcustomer,andatthelevelof economic sectors and the various business sectors. This policy is founded on the examination of the repayment ability of the customer at the individual level and on analysis and evaluation of a range of additionalparameters,whichhaveimplicationsonthefinancialstrengthofthecustomer.Credit risk management policy is discussed and approved once a year by Management and the Board of Directors of the Bank.Intheframeworkofthecreditpolicy,theBoardofDirectorsoftheBankhassetoutastrategyfor


UBank Ltd.

reducingunexpectedexposuretocreditrisks,whichincludesactionguidelinesincludingmarketingtargetsand instructions taking into account the capital adequacy required in relation to credit given.- Duringrecentyears,thecreditriskexposureoftheBankwasincreasedandaccordinglyitscredit

policy was widened to include limits and standards some of which are stricter than the limits decidedonbytheSupervisorofBanksattheBankofIsrael.Theselimitsaredesigned,amongotherthings,toreduceexposuretothesizeofasingleborrowerorgroupofborrowers.

- As part of ongoing credit risk management and the implementation of the policy of the Board of Directors,examinationsaremade,onaroutinebasis,ofthebusinessactivitycharacteristicsofthecustomer,thecashflowsandhisassetliabilitystructure,thequalityofthecollateral,thesectorialsegmentinwhichheoperatesandparameterssuchashighdependenceoncustomers,suppliersand the like.

- TheBankhasandcontinuestotakestepstoimprovemarginsandoverallprofitabilityfromcustomers,soastoreflectthelevelofriskinherentintheiractivity,whileusingfocusedprocessesandcontrolswhichresultintheexpressionoftotalrevenuefromthecustomer(marginsandfees),inrelationtotheoverallloanportfolio.

Risk Appetite

The policy of the Bank includes a broad and detailed review of targets and the manner of developing creditbusinessinthevarioussectorsandoperatingareas,whiledefiningdetailedprinciplesforeachsectorandareaincludingindividuallimitsatthelevelofsub-sectorsandproductstypifiedbyahighlevelofrisk.TheBank’sappetiteforcreditrisk,assetoutintheframeworkofthePolicyDocument,isconservativeincomparison with regulatory limitations.Intheframeworkofthepolicy,theBoardofDirectorsoftheBankhassetoutastrategyforreducingunexpectedexposuretocreditrisks,whichincludesabroadsystemofcreditrisklimitsforvarioussectorsand operating areas.

D. SystemsfortheMeasurement,AssessmentandManagementofCreditRisks

- The Bank bases itself on models developed by the Group for rating the credit risk inherent in the activity of the customer. The models are based on objective and subjective parameters connected with the condition of the customer. In order to reinforce the connection between the risk rating ofthecustomerandthereturnderivingfromtheactivity,theBankfixedaminimumreturnforeach risk rating.

- Computer systems provide credit risk managers with a broad-based mechanism for ongoing monitoringofcustomeractivity,andfordifferentcrosssections:levelandmixofactivity,utilizationofcreditfacilities,collaterallevelandcurrentinformationonthefinancialconditionofthecustomer. The systems facilitate the provision of the best service to business customers at the highestlevelofprofessionalismandproficiency.

Inaddition,acomputersystemisimplementedintheBankforcreditapplications,whichimprovesand streamlines the decision-making process and control over it.

- Theparentcompanycontinues,incoordinationwiththeBank,toenhanceandimprovementtoolsformeasurement,reportingandcontrolrequiredbyit,inordertoobtainacurrentpictureof the situation in connection with the various risk characteristics present in the business environment of those receiving credit.

E. Policy for the Management of the Collateral System

General

- TheBankhasadetailedpolicyonthesubjectofthereceiptofassetsascollateralforcredit,themannerinwhichtheyarepledged,andtheratesofrelianceforeachindividualtype.Themain points of the policy are discussed once a year by Bank Management and approved once a yearbytheBoardofDirectorsoftheBank,andappearindetailinprocedures.ThemaintypesofcollateralonwhichtheBankreliesare:deposits,securities,pledgesofrealestateandbankguarantees.


UBank Ltd.

IntheframeworkofthecreditpolicyoftheBank,proceduresandcontrolsystemshavebeensetup in the area of management and operation of the collateral system.

Supervision and Control over the Collateral System

AllindebtednessofthecustomertotheBank,includingthevalueofcollateralheldagainstit,iscentralizedintheobligosystem,bymeanofwhichtheBankperformsadailyfollow-upofthecollateralpositionvisàvis credit exposures.- A daily follow-up of shortfall in collateral at customer level is carried out in the branches by

meansofadailyreport,inwhichtheindebtednessofthecustomersandhiscollateralisdetailedvisàvisthecreditfacilitiesapprovedforhim,andwhichgivesacompletepictureinrealtimeofthe exposure of the customer.

- For handling accounts of customers active in the capital market there is a system developed by the parent company and updated in coordination with the Bank. Special characteristics for sophisticated customers operating in the capital market are integrated in the system.

- Concurrentwiththeactionsofthebranchattheleveloftheindividualcustomer,supervisionandcontrol work is performed also in the Risk and Credit Management Department.

- Inaddition,theBankisconstantlyreviewingitscompliancewithregulatorydirectivesinallaspectsofthelimitationonconcentrationofcredit:borrower/groupofborrowersorexposuretosectors of the economy.

Distributionofexposurebytypeofexposureasof31.12.09(inNISmillions):

Balance of exposure

(afterspecificprovision

for doubtful debts)

Total exposure covered by guarantees

(beforemultiplyingby credit conversion

coefficients)

Total exposure covered by credit derivatives(beforemultiplyingby credit conversion coefficients)

Amounts added

Total exposure coveredbyfinancialcollateral eligible understandardizedapproach after multiplying by collateralcoefficients

Type of exposure

Sovereign risk 4,441.5 - - - -

Banking corporations 1,084.0 - - - -

Corporations 4,342.9 - - 48.2 1,924.0

Collateralizedbycommercial real estate 26.4 - - - 12.5

Retail exposures to individuals 132.0 - - - 10.5

Housing loans 44.1 - - - 4.1

Securitization 1.2 - - - -

Other assets 766.8 - - - -

Total risk assets 10,838.9 - - 48.2 1,951.1

Distribution of exposure by economic secter as at 31.12.09Creditisgenerallydividedasfollows:72%ofthecreditattheBank’srisk,includingoff-balancesheetitems,isgiventocustomersinthefinancialservicessector(afteroff-settingthepermitteddeductionsaccordingtotheBankofIsrael’sdirectives,thecreditinthissectorislessthan20%);5.2%tootherbusinessservicessector; 3.7% to customers in industrial sectors; 6.6% to construction and real estate sectors; and 2.2% to private persons.The accrued balance of the general provision for doubtful debts and the supplementary provision for doubtfuldebts,pursuanttotheBankofIsrael’sdirectives,asatDecember31,2009,constitutedapprox.0.2% of the total credit and credit risk to which the provision relates.


UBank Ltd.

F. Policy for Problematic Debts and Provisions for Doubtful Debts

- There are structured process in the Bank set out in working procedures for the early identificationandlocationofproblematicborrowers.Inaddition,thereareworkprocessessetoutinprocedureswithreferencetotheprocessformakingaprovisionfordoubtfuldebts,whichreflectaconservativeassessmentofcreditlossexpectedfortheBank.

- TheBankofIsraelDirectiveon“MeasurementandDisclosureofImpairedDebts,CreditRiskandProvisionforCreditLosses”willleadtoachangeinthetreatmentofthismatter.

BelowaretheoverallcreditriskbalancesrelatingtoproblematicborrowersaccordingtoclassificationssetoutintheSupervisorofBanks’directives,inNISmillions,inreportedamounts:

31 December

2009NIS million

2008NIS million

Problematic debts1:

Non - income bearing 22.9 23.4

Restructured3 5.8 2.8

Temporarily in arrears - 4.0

Under special supervision 1.7 85.0

ofwhich:debtforwhichthereisaspecificprovision 1.7 1.3

Total balance sheet credit to problematic debtors 30.4 115.2

Off - balance sheet credit risk in respect ofproblematic borrowers2 1.8 1.8

Problematic borrowers’ bonds - 9.6

Overall credit risk in respect of problematic borrowers 32.2 126.6

Bonds of which a provision for a decreasein value was recorded 6.6 4.2

1 Not including problematic debts that are covered by collateral that can be deducted for the purposes of restrictions on the liability of a borrower and a group of borrowers.

2 As calculated for the purposes of restrictions on the liability of a borrower and a group of borrowers.3 Restructured credit during the year and restructed credit in past years.

G. Supervision and Control over the Management of Exposure to Credit Risks

TheBankmaintainsanappropriateframeworkofcontrol,management,supervision,monitoring,andauditmechanisms over the credit-risk management process.Creditriskmanagementisreviewedandcontrolledonaroutinebasisbythefollowingunits,amongothers:

- The Credit Risk Management Unit Reports to the Manager of the Risk and Credit Management Department and comprises desk

officersamongwhomcustomersareallocatedaccordingtothebusinessunitinwhichthecustomersareactive,andaccordingtotypesofcreditactivities.Thisprovidesforprofessionalproficiency.

- TheLoanReviewUnitoftheFirstInternationalBank(parentcompany) The Loan Review Unit of the parent company belongs to the Central Department for Credit

RiskControlandisresponsibleforthecontrolofthecreditrisksofthesignificantspecificborrowersintheGroupasawhole,andintheBank.

The Unit acts independently in accordance with Proper Conduct of Banking Business Directive


UBank Ltd.

No.319(“LoanReview”),accordingtowhichthepopulationdefinedas“largeborrowers”istobeexaminedonathree-yearlyrotation,andinamannerthateveryyearatleastonethirdofthispopulation will be examined. The Unit is guided by the Board of Directors in its work and reports to it.

- TheMiddleOffice-ThisisaunitbelongingtotheRiskandCreditManagementDepartmentreportingtoHeadoftheCentralServicesDivision.Theunitspecializesinperformingcontrolsandisaprofessionalbodyintheareaofcontrol.Theunitidentifiesthevariousrisksassoonaspossibleaftertheyarecreated,inthedealingroomsoftheBank,anddevelopscontrolsandworkingprocedurestoreduceBankexposure.Intheframeworkofitsactivity,theunitexaminescompliance with limits prescribed in the areas of credit management in the various dealing rooms attheintra-daylevelandperformsstressscenariosonspecificportfolios.

- The Internal Audit Department The Internal Audit Department evaluates the overall process of the Bank in credit risk

management,andevaluatestheimplementationofpolicyandtheexecutionofthedecisionsoftheBoardofDirectorsinmattersofcreditriskmanagement,compliancewithlimits,andthereliability and timeliness of management information.

The Department is responsible for providing an independent assessment in connection with the degree of compliance with procedures and the effectiveness of implementation of processes and procedures for managing credit risks.

H. Reporting on Exposure to Credit Risks

ManagementandtheBoardofDirectorsoftheBankreceivereportsonexposuretocreditrisks,incomparisonwithapprovedfacilities,tolimitsprescribedbytheBoardofDirectorsandauthoritiesfortheirmanagementintheframeworkofthequarterly“ExposuresDocument”asrequiredinDirectiveNo.319of the Proper Conduct of Banking Business Directives.The“ExposureDocument”isdiscussedonceaquarterbyManagementandbytheBoardofDirectors.TheBankhasdrawnuparangeofstressscenariosforexaminingcapitaladequacy.Inthisframework,theBankexaminesarangeofstressscenariosalsointheareaofmaterializationofcreditrisks(andscenarioscombiningthematerializationofcreditrisksconcurrentlywithotherrisks).Inthisframework,theeffectofthematerializationoftheriskonthecapitalbasisisexamined.TheresultsofthescenariosandtheirsignificancearereportedonceaquartertoManagementandtotheBoard of Directors.

I. DistributionofAllocationofCapitalforCreditRisksbyVariousCross-sections:

Totalexposurestogrosscreditrisksandgrossaverageexposureduringtheperiod,classifiedbymaintypesofcreditexposure(NISmillions):

31.12.09

Type of exposure

Gross credit risks(afterspecificprovisionfordoubtfuldoubts)

Gross average credit exposure1

Loans 5,840.4 5,807.3

Debentures 1,658.2 1,925.8

Derivatives(OTC) 368.8 312.8

Off-balance sheet exposures 2,204.7 2,243.7

Other assets 766.8 327.4

Total gross credit exposures 10,838.9 10,617.0

1 Grossaveragecreditexposureiscalculatedbasedonaverageexposuresforthelastfivequarters.


UBank Ltd.

Distributionofexposurebytypeofsectororcounterparty,classifiedbymaintypesofcreditexposure(NISmillions):

31.12.09

Type of Exposure

Sover-eign

Banking corpor-atios

Corpor-ations

Debts collater-alizedbycommercial real estate

Retail exposu-res to individ-uals

Housing loans

Securit-ization

Other Total

Loans 3,117.7 692.3 1,908.1 22.9 55.3 44.1 - - 5,840.4

Debentures 1,323.8 209.3 123.9 - - - 1.2 - 1,658.2

Derivatives (OTC) - 32.4 336.4 - - - - - 368.8

Off-balance sheet exposures - 150.0 1,974.5 3.5 76.7 - - - 2,204.7

Other assets - - - - - - - 766.8 766.8

Total gross credit exposures 4,441.5 1,084.0 4,342.9 26.4 132.0 44.1 1.2 766.8 10,838.9

Distributionofthewholeportfoliobycontractualrepaymentperiod,classifiedbymaintypesofriskexposure(NISmillions):

31.12.09

Type of Exposure

Demand and up to one month

Above one

month up to three months

Three to

twelve months

One to three years

Three tofiveyears

Five to ten years

Total Cash flows

No Maturity date

Total

Loans 4,880.4 638.5 183.1 86.1 24.1 5.3 5,817.5 22.9 5,840.4

Bonds 14.1 - 498.0 54.5 208.0 883.6 1,658.2 - 1,658.2

Derivatives (OTC) 280.7 48.0 31.6 1.2 2.2 5.1 368.8 - 368.8

Off-balance sheet exposures - 2,204.7 - - - - 2,204.7 - 2,204.7

Other assets 650.3 91.9 - - - - 742.2 24.6 766.8

Total 5,825.5 2,983.1 712.7 141.8 234.3 894.0 10,791.4 47.5 10,838.9


UBank Ltd.

Totalbalances(ratedandunrated)beforereductionofcreditrisk(NISmillions):

31.12.09

Type of Exposure

Exposure balance net

0% 20% 35% 50% 75% 100% 150% Risk assets calculatedby the Bank

Deductionfrom base capital

Sovereign risk 4,441.5 4,179.2 262.3 - - - - - - -

Banking corporations 1,084.0 - 795.2 - 285.6 - 3.2 - - -

Corporations 4,342.9 - - - - - 4,342.9 - - -

Collateralizedby commercial real estate 26.4 - - - - - 26.4 - - -

Retail exposures to individuals 132.0 - - - - 6.2 125.8 - - -

Housing loans securitization 44.1 - - 44.1 - - - - - -

Securitization 1.2 - 1.2 - - - - - - -

Other assets 766.8 22.0 - - - - 740.3 4.5 - -

Total 10,838.9 4,201.2 1,058.7 44.1 285.6 6.2 5,238.6 4.5 - -

Totalbalances(ratedandunrated)afterreductionofcreditrisk(NISmillions):

31.12.09

Type of Exposure

Exposure balance net

0% 20% 35% 50% 75% 100% 150% Risk assets calculatedby the Bank

Deductionfrom base capital

Sovereign risk 4,441.5 4,179.2 262.3 - - - - - - -

Banking corporations 1,084.0 - 795.2 - 285.6 - 3.2 - - -

Corporations 2,467.1 - - - - - 2,467.1 - - -

Collateralizedby commercial real estate 13.9 - - - - - 13.9 - - -

Retail exposures to individuals 121.5 - - - - 6.0 115.8 - - -

Housing loans securitization 40.0 - - 40.0 - - - - - -

Securitization 1.2 - 1.2 - - - - - - -

Other assets 766.8 22.0 - - - - 740.3 4.5 - -

Total 8,936.0 4,201.2 1,058.7 40.0 285.6 6.0 3,340.0 4.5 - -


UBank Ltd.

Disclosureregardingexposuresconnectedwithcounterpartycreditrisk:

31.12.09

NIS millions

Gross fair value

Nominal amount

Amount of exposure = AGROSS2+

fair value as per standardized

approach

Collateral

Cash Government securities

Shares in TA-100

index

Exposure after

collateral

Type of exposure

Interest derivatives 2.5 235.7 5.0 - - - 5.0

Foreign currency derivatives 57.3 5,955.6 121.4 86.8 4.1 1.1 29.4

Share derivatives 1- 2.0 0.1 - - - 0.1

Total 59.8 6,193.3 126.5 86.8 4.1 1.1 34.5

31.12.09

NIS millions

Nominal amount

Amount of exposure3 Collateral

Cash Government securities

Shares in TA-100

index

Exposure after

collateral

Credit exposure 963.8 1,012.0 211.2 341.7 43.3 415.8

Other 24.3 242.3 141.5 141.5 39.5 58.4

Total 1,206.1 1,254.3 352.7 352.7 92.8 474.2

1 Amount less than NIS 0.1 million.2 AGROSSisnominalamountxadd-on(additioncoefficient).3 Nominalamountmultipliedbycollateralcoefficient.

ThetotalexposureinrespectoftheBank’sinvestmentsinsyntheticsecuritization:

Securitizationexposuresasperriskweightingasof31.12.09(inNISmillions):

Exposure Risk weighting Capital requirement

Totalsecuritizationexposures 1.2 20% 0.2

J. Management of Counterparty Credit Risk

A. General

Acounterpartycreditriskistheriskthatthecounterpartywillenterintodefaultbeforethefinalsettlementdateofthepaymentsinrespectofthetransaction.Aneconomiclosswillbecausedif,atthetimeoftheentranceofthecounterpartyintoadefaultcondition,therewillbetransactionswithhimofapositive economic value.Asopposedtocreditexposures,wheretheexposureisone-sidedandtheBankalonebearstheriskofloss,acounterpartyriskcreatesatwo-sidedriskoflosssinceaccordingtowhetherthevalueofthetransaction is positive or negative for each of the parties to the transaction. Exposure to counterparty risk istypifiedalsobythemarketvalueofthetransactions.Themarketvalueofthetransactionsisuncertainand can change throughout the life of the transaction due to changes in the relevant parameters in the market.


UBank Ltd.

IntheframeworkoftheBank’scurrentactivitywithforeignbanksandinvestmenthouses,theBankallocatescreditlinesforavarietyofactivities,includingdeposits,settlementrisk,forex,structuredproducts,commerciallineofcredit,foreigncurrencynostro,anddailyliquidity.Thequantifyingandassessmentoftheexposureforeveryactivity,andthedeterminationofauthoritiesandcriteriaforcompliancewithframeworks for activity are laid down in Bank policy and procedures approved by the Board of Directors.

B. Policy

IntheframeworkoftheBank’sCreditPolicyDocument,theBoardofDirectorsoftheBankhassetoutpolicyandriskappetiteatGrouplevelforactivitywithbanksandinvestmenthouses,whetherattheoverall risk appetite level or at the level of exposure to the individual counterparty in a cross-section of the type of exposure and the individual transaction.The credit policy of the Bank with reference to the manner and scope of exposures with counterparties isbasedonanumberofparametersderivedfromthefinancialstrengthofthecounterparty,includingthecreditratinggiventotheinstitutionbyleadingratingcompaniesworldwide(Moody’s,Fitch,andS&P),itstotalshareholders’equity,ownershipstructure,thecountryinwhichitoperates,andthelike.TheBanktakesstepstominimizecounterpartyrisksbymeansofseveralacceptableagreementsforminimizingexposurewiththirdparties(NettingAgreements).- The ISDA Master Agreement is the basic agreement used between banks and its main advantage

is the ability to perform netting of liabilities in the event of bankruptcy of one of the parties so thatexposureisreducedtoanetzeroexposure.

- The CSA Agreement is an agreement for the creation and operation of a mutual mechanism oftransferringliquidassetstosecureexposuresinopentransactionsbetweentwobanks,aftercalculationoftheexposure.Thismechanismisusedonaroutinebasis,andreducesexposuretothe minimum amount prescribed.

Untilnow,theBankhassignedISDAMasterAgreementswithapprox.13banks,andCSAagreementswithapprox.7banks,andtransfersoffundshaveactuallybeenexecutedundertheagreementswithsomeofthem.The Bank maintains a conservative position in assessing the risk of banks with which the Bank works undertheISDAandCSAAgreements,and,atthisstage,doesnotgiveaweightingtotheexposureforthereductionpermittedincreditriskinrespectofminimizingtheriskinherentintheseNettingAgreements.

The Bank is working towards the implementation of the arrangement that will facilitate settlement by means of the CLS.

Aspartofthemanagementofcurrentcounterpartyrisks,theBankperformsroutinedailycontrolofcompliancewiththelimitsofthecreditlinesallocatedtoactivitywithbanksandinvestmenthouses,includingexaminingroutinereportsofchangesintheratingofcounterpartiesallocatedcreditlines,andchangesinthecreditmargintheyaretradedin.Institutionsinwhich,amongotherthings,significantchanges are anticipated in the parameters mentioned are reexamined in the framework of the various credit committees.


UBank Ltd.

C.Existingcreditexposureofthebanktoforeignfinancialinstitutions1asat31.12.09:

External credit rating4

No. of institutions

NIS million

Balance sheetcredit risk2

NIS million

Off-balance sheet credit risk3

NIS million

Totalcredit risk

NIS million

Credit exposure to foreignfinancialinstitutions

AAA to AA 16 370.7 34.5 405.2

A+toA- 24 423.5 20.1 443.6

BBB+toBB* 2 10.3 -- 10.3

Not rated** 2 7.1 - 7.1

Total 44 811.6 54.6 866.2

Problematic debts5 - - - -

Existingcreditexposureofthebanktoforeignfinancialinstitutions1asat31.12.08:

External credit rating4

No. of institutions

NIS million

Balance sheetcredit risk2

NIS million

Off-balance sheet credit risk3

NIS million

Totalcredit risk

NIS million

Credit exposure to foreignfinancialinstitutions

AAA to AA 18 723.4 32.1 755.5

A+toA- 22 589.4 5.4 594.8

BBB+toBB* 1 5.6 - 5.6

Not rated** 1 - 1.9 1.9

Total 42 1,318.4 39.4 1,357.8

Problematic debts5 - - - -

1 Includingbanksandbrokers(at31.12.08-banksonly)2 Depositswithbanks,investmentsinbondsandotherassetsconcerningderivativeinstruments.3 Mainly guarantees and securing third party debt.4 Forpurposesofratingfinancialinstitutions,theBankmadeuseoftheratingsoftheFITCH,Moody’s,andS&Pagencies(the

lowestofthem). The ratings are changed from time to time by the rating agencies and are correct as at 17.1.2010 for 2009 and as at 20.1.2009

for 2008.5 The balances of problematic debts after deduction of debts covered by collateral which may be deducted for purposes of the

single borrower and group borrower restrictions. Including elements of off-balance sheet risk.

* CreditexposureintheamountofNIS10.2millionsinrespectofEuropeanbankwithaBBB+rating,whichreceivedagovernmentsupportpackage(31.12.08-creditriskintheamountofNIS5.6millions),andacreditriskintheamountofNIS0.1million in respect of a bank in Hungary rated BB-.

** Exposure relating to unrated two private European banks.

The institutions included in the exhibit are foreign banks. In the framework of the routine activities of the bankwiththeseinstitutions,theBankallocatescreditfacilitiestoarangeofactivities,including;deposits,bonds,forwardcontracts,clearingandguarantees.


UBank Ltd.

BelowisalistofcountriesinwhichthereisexposurefortheBankandoverallcreditrisk:

Country Overall credit risk

31.12.09

NIS million

31.12.08

NIS million

United States 281.0 482.0

Germany 119.0 64.1

England 118.0 253.6

Switzerland 83.4 236.1

Spain 71.4 131.1

France 68.0 9.9

Belgium 40.2 32.9

Canada 17.2 78.0

Ireland 16.7 15.6

Portugal 16.4 15.8

Sweden 15.8 -

Norway 14.0 11.8

Austria 2.0 1.8

Australia 1.7 12.1

NewZealand 0.9 -

Denmark 0.4 10.7

Hungary 0.1 -

Holland - 0.2

Italy - 2.1

Total 866.2 1,357.8

TheconservativeriskappetitedefinedbytheBoardofDirectorsoftheBankisexpressedinthedistributionofcreditexposureamongfinancialinstitutions,whichforthemostpartiswithinstitutionswithhigh ratings.Inaddition,theBankmaintainsexposurestocounterpartiesbymeansofanetworkofnettingagreements,whichsignificantlyreducetherisktorevenueandtheequityoftheBankinsituationsofpaymentdefaultby these institutions.47%ofthecurrentcreditexposureoftheBankisattributedtoleadingforeignfinancialinstitutionsinOECDcountries,ratedintheratinggroupsAAAtoAA-,and51%ofcurrentexposureisattributedtofinancialinstitutionsratedintherangeofA+toA-.TheBankdealswithvariousbanksandbrokersinIsraelandabroad,inaccordancewithcreditfacilitiesdetermined in advance under the Bank’s credit policy. The guidelines for choosing a bank or broker are basedmainlyonthefinancialstrengthofthecounterparty,asexpressedintheownershipstructureoftheinstitution,thecreditratinggiventoitbytheleadingratingagenciesintheworld,itsequity,thecountrywhereitoperatesandthenatureofitsactivity(mainlydiversificationofitsretailscustomerbase).Mostofthe facilities are short term facilities for transactions of up to three months.The Board of Directors of the Bank approves facilities to banks and brokers in accordance with Group policy. The Bank performs routine daily control on compliance with the facilities by means of computerizedreportswhicharecheckedbytheRiskandCreditManagementDepartment.

InviewofthematerialchangesandvolatilityinfinancialmarketsinIsraelandabroad,theBankistakingmeasurestoadaptitsactivitywithbanksandbrokersabroad,inordertoreducetheeffectofrisksasmuch as possible.Inthislight,depositsinforeignbanksaremadeforintheshorttermonly.Thedurationofdepositsinforeign banks is less than a month.


UBank Ltd.

Futurestransactions(mainlyforextransactions)areexecutedwithforeignbankssubjecttofacilitiesapprovedbytheBoardofDirectors.Controlovercompliancewiththefacilities(whetherinrespectofforextransactionsorfacilitiesforsettlement)isperformeddailybytheRiskandCreditManagementDepartment(MiddleOffice).

BalancesheetcreditriskincludesapproxNIS590.6millionofdepositswithbanks,themajorityofwhichhavebeenrepaidandthefundsre-deposited.Furthermore,thiscreditriskincludesNIS209.3millionofbondsofbanks,whichhaveahighratingandwhoseresidualaveragedurationis1.22years.

InaccordancewiththeguidelinesoftheSupervisorofBanks,theinformationshownabovedoesnotinclude off-balance sheet credit exposures for derivative instruments. This information is included in Addendum E concerning overall credit risk by economic sector. Off-balance sheet credit exposure included above consists of guarantees given by the foreign bank to secure third party debt.

Off-balancesheetcreditriskforderivativefinancialinstrumentsofforeignfinancialinstitutions,ascalculatedforpurposesofsingleborrowerrestrictions,amountstoapproxNIS74.4million.ֿD. Reporting of Exposure to Counterparty Credit RiskTheMiddleOfficeproducesavarietyofimmediateandotherreportsonthelevel,scope,andmannerofexposure and in different cross-sections.

6. Risk Management in Derivative Financial Instruments

TheBankoperatesinavarietyofderivativefinancialinstruments.Thepolicyformanagingderivativeinstrumentrisk,includingthescopeofactivityandtherangeofinstrumentsallowedforuse,isapprovedintheframeworkoftheBoardofDirectorsoftheBank.

A. Dealing Rooms

The Bank’s dealing rooms are intended for different and varied activity in the capital and foreign exchange markets.Thedealingroomtradesinawiderangeoffinancialinstruments,includingmarketmakingincurrenciesandgovernmentbonds.Amongotherthings,theBankisalsoactiveintheMaofandforeigncurrency area in the Tel-Aviv Stock Exchange.Theexposurecreated,whetherinbasisorininterest,resultingfromtheseactivitiesisincludedinthelimitsapproved by the Board of Directors for basis and interest exposures.

Belowisasummaryofthescopeofactivityinderivativefinancialinstruments(nominalvalue):

As of December 31

2009

NIS million

2008

NIS million

Hedgingtransactions:

Interest contracts 195.5 208.4

ALMandothertransactions:

Interest contracts 40.2 362.9

Foreignexchangecontracts(includingSpot) 10,057.6 3,220.5

Contractsforshares,shareindices,commoditiesandothers 11,064.2 10,253.1

Totalderivativefinancialinstruments 21,357.5 14,044.9


UBank Ltd.

B. Structured Products

TheBankactsasamarketerofstructuredproducts,mainlyoftheparentcompany.Activityisnotmaterial.

C. Credit Risks in Financial Instruments in the Maof Market

The Bank allows some of its customers credit activities in the Maof market. The Bank has a detailed credit policyonallmattersconnectedwiththerelianceoncollateralinthecapitalmarket.Togetherwiththis,theBank carries out stringent ongoing control of the portfolio risk in relation to collateral and approved active facilities on the basis of the credit policy prescribed by the Board of Directors of the Bank.

D. Supervision and Control over the Management of Derivative Instruments Risk

TheBank’sactivityinderivativefinancialinstrumentsforitsownaccountiscontrolledandsupervisedbytheRiskandCreditManagementDepartmentincludingbytheMiddleOffice.

7. Operational Risks

A. General

Anoperationalriskisdefinedastheriskofalossresultingfromfailedorfaultyinternalprocesses,humanactions,systemmalfunctions,orexternalevents.Thedefinitionincludeslegalrisk,butdoesnotincludestrategicriskorreputationrisk(exposureandmanagementaspectsoflegalriskarediscussedatlengthinthesection10below).OperationalriskisinherentinalltheprocedurestakenacrosstheBank,inallactivitiesandworkingprocedures,insystemsandthevarietyofproducts.Asaresult,theBankseesthemanagementofexposure to operational risk as an integral part from the risk management and the management of its business activity.Themanagementofoperationalriskincludes:identification,assessment,monitoring,andcontrol/reductionof the risk.Themanagementofrisksisperformedwiththeaimofmaintainingtheabilitytoassessoperationalrisks,tolimitexposuretothemandthefinancialdamageresultingfromthem,andtomanagetheallocationofcapital in the best way possible.During2009,theBoardofDirectorsoftheBank,Managementandofficersselectedformanagementofoperationalrisk,continuedextensiveactivitiestoassimilatetheSecondPillarofBaselIIandthesupplementary instructions of the Bank of Israel.The preparation of the Bank as a whole in this issue was done with the cooperation of the FIBI Group.

B. Policy

The Board of Directors of the Bank set a policy for the management of operational risk that outlines the activity,frameworks,andmanagerialfunctionsneededforthemanagementofoperationalrisks.ThepolicydocumentisdiscussedandapprovedbyManagementandtheBoardofDirectorsoftheBank,at least once a year.

C.SupportiveOrganizationalStructure

Intheframeworkofthepolicyformanagementofoperationalrisks,officers,interfaces,andareasofresponsibilityweredefinedwiththeaimofestablishingasupportsystemforthemanagementofoperationalrisksattheBank:A Chief Risks Manager responsible for the range of procedures and systems connected with risk management. Reporting to him is an Operational Risks Manager responsible for carrying out the management of operational risks in full.ReportingtotheOperationalRisksManagerareanoperationalriskscenter,abusinessprocessesofficerandoperationalrisksofficers.Thesefunctionsweredefinedforthepurposeoftheroutinemanagementofoperational risk.


UBank Ltd.

IntheFirstInternationalBankGroup,anOperationalRisksManagerhasbeendefinedwithresponsibilityfor the range of processes and systems connected with the management of operational risks in the Group.TheBankmaintainsanOperationalRisksForumheadedbytheChiefRisksManager,whichistheforumdesignatedtohandleoperationalandlegalrisks.Inaddition,theBankmaintainsaRisksMonitoringandManagementCommitteeheadedbytheGeneralManager,whoseaimsarethemonitoringofrisksandtheir management. The Operational Risks Forum which operates in parallel with the Risks Monitoring and Management Committee,workstowardsimplementingthepolicyforOperationalRiskManagementasapprovedbytheBoardofDirectors,andfocusesitsactivityontheexposuretooperationalandlegalrisks.Additionally,thisforumdealswithexposurestoembezzlementandfraudastheyoccur,amongotherthings,ineventsintheFirstInternationalGroup,inthevariousrisksurveysandbyInternalAudit,andwithwaystominimizethem,byestablishingpreventativeandcompensatorycontrols.

D. Management of Operational Risk

Operational Risk SurveysThemaintoolforidentifyingexposuretooperationalrisksissurveyscarriedoutbyfirmsofaccountantsandspecializedexternalbodies.Asurveyisastructuredprocessofmappingandlocationofoperationalrisks throughout the processes taking place in the different units in the Bank. As of the fourth quarter of 2009,risksurveysattheBankarecarriedoutinaccordancewithGroupmethodology.Intheframeworkofthesurvey,ratingsaregiventoeachexposure,infinancialvalues,andrecommendations are given for the reduction of exposure to risk. Recommendations received are summarizedinanimplementationprogram,whichisfollowedupandcontrolleduntilitisassimilated.Theimplementationprogramincludesmanualandmechanicalreviews,changesinworkingprocesses,procedures,andtechnologicalimprovementsofthesystems.

FollowingtheconversionoftheBank’scomputersystemstoFirstInternationalsystems,theBankbasesitself on and uses operational risk surveys performed in the First International Bank referring to the same businessprocesses.SeparatesurveyswillbeperformedwhenthereareuniqueprocessesattheBank,inimplementation and infrastructure. The subsidiary companies of the Bank are the main areas where unique processes are performed for the Bank.

E. KeyRiskIndicators

TheBankhasstartedtheprocessofidentifyingkeyriskindicatorsandthresholdvaluesforidentification.KeyriskindicatorsprovidetheBankwithatoolformonitoringandpro-activemanagementofoperationalrisk,duetotheirabilitytoprovideearlywarningsofincreasedriskoffuturelosses.Theseindicatorsareforward-looking,andaremeanttoreflectthepotentialsourcesforoperationalrisksuchas:rapidgrowth,the launching of new products and more.

- Collation and reporting events of failure and lossThe Bank collates and documents internal events of failure and loss. This database is used for the verificationofassessmentsbycontentspecialistsinevaluatingoperationalrisksinbusinessprocessesandorganizationalunitsattherisk-exposureratingstage,forlong-termanalysisandidentificationoftrends,andfor reporting.Thecollationofexternaleventsoffailure,forevaluationofthereliabilityoftheinternallossdataandforexpansion of the database used for risk assessments conducted in the framework of the First International Group.

- Forum for the management of operational and legal risksAforumforthemanagementofoperationalandlegalrisksintheBank,headedbytheChiefRisksManager,meetsatleastonceineachquarter.The purpose of the forum is to conduct a daily follow up of the level of the Bank’s exposure to operational and legal risks and of actions taken by the units and subsidiary companies of the Bank to minimizeexposuretorisks.


UBank Ltd.

Representatives from the Bank participate in the Group forum for the management of operational risks.

- Business continuity and disaster recoveryTheBank,inaccordancewithBankofIsraelinstructions,hasmadepreparationstoensurebusinesscontinuity and disaster recovery. The Bank has drawn up a policy for recovery from the time of a disaster andapolicyforbusinesscontinuity,procedures,workingteams,andarecoverysite.AforumforbusinesscontinuityanddisasterrecoveryintheBank,headedbytheChiefRisksManager,meets at least once in each quarter. Representatives from the Bank participate in the Group forum for business continuity and disaster recovery.

F. Reporting

The Operational Risks Manager reports to Management and the Board of Directors once in a quarter on theactivityinthefield.Thereportincludesreferencetothefollowingsubjects:policy,risksurveys,riskindicators,eventsoffailureandloss,theconductoftheforums,methodologies,andtoolsofmanagementofoperationalrisk.

G. Data Security

Mataf(“ComputerizationandFinancialOperationsLtd.”-asubsidiarycompanyoftheFirstInternationalBank),isresponsibleforprovidingdataprocessing,computingandcomputercommunicationservicestotheBank.InAugust2005,theGeneralMangerofMatafwasappointedInformationTechnologyManagerofthe Bank.The Bank has adopted the policy principles of the First International Bank for management of information technology.Matafhasundertakentorunanarrayofbackupsforcomputers,communicationsystems,software,anddatabases,inordertoprovideacontinuousandreliablecomputingenvironment.

H. Insurance

TheFirstInternationalBankGroup,includingtheBank,iscoveredbythreemaininsurancepoliciesasofthedateofthisReport:1. “B.B.B.”insurancecover:Thereisajointlimitofliabilityinthispolicyforthefollowingfourpolicyheadings: 1.1Banker’sInsurance:thischaptercoversdirectfinancialdamagecausedtotheBankfrom

dishonestyorfraudbyemployeesoftheBank,damagecausedresultingfromlossordamageto“valuableproperty’,risksintransferring“valuableproperty”,damagecausedbyforgeryofchecks,forgedcollateral,forgedcashetc.

1.2Computercrimeinsurance:thischaptercoversdamagecausedbypaymentortransferofmoniesorproperty,grantingcredit,charginganaccountorthegivingofvalueofanykindbytheBank,asadirectresultofthefraudulentormaliciousenteringofelectronicinformationdirectlyinto the Bank’s computer system or a computer system of a service bureau or an electronic transfer system or a communication system with clients; or as a result of the fraudulent or maliciouschangeorcorruptionofelectronicinformationstoredinthesystems,whenthefraudulentactionwasdonebysomeoneactingwiththeintentofcausinglosstotheBank,ortoproducefinancialgainforhimselforsomeoneelse.

1.3Professionalliabilityinsurance:thischaptercoverstheBankforitslegalobligationtowardsthirdpartiesconcerninga“claim”forfinanciallosscausedbyanegligentaction,error,oromission,or breach of trust of an employee of the Bank.

1.4Personalsafe-depositboxinsurance:thischaptercoversthelegalliabilityoftheBankforlossordamagetoclients’“property”includingcashandjewelry,whichareinpersonalsafe-depositboxes in the premises of the Bank.

2.“DirectorsandOfficers”liabilityinsurance:thischaptercoverstheliabilityofdirectorsandofficersinrespectofaclaimofbreachofthedutyofcautionandandproficiency,breachoffaithtowardsthe


UBank Ltd.

company,wheretheofficeractedingoodfaithandhehadthebasicassumptionthattheactwouldnotcauseharmtothecompany,andinrespectofanyfinancialobligationimposedonhiminfavorofsomeoneelse.

3.“Elementaryinsurance”policies:themaininsurancecoverispropertyinsurance,liabilityinsurance,personalaccidentsinsurance,andinsuranceforcash.

I. Capital allocation against operational risk

Forpurposesofevaluatingthescopeofexposuretooperationalrisk,theBankhasadoptedtheBasicIndicator Approach as elaborated in the First Pillar of Basel II. This approach relates to capital allocation as aspecificamount(afixedcoefficient)oftheBank’stotalgrossincome.The implementation of the Basic Indicator Approach will be for a period of three years from the date of initialimplementation,untiltheimplementationofadvancedsystemsforcreditrisk.

J. Riskofembezzlementandfraud

PursuanttotheinstructionsoftheSupervisorofBanks,andaspartofpreparationsfortheimplementationofthedirectivesofBaselII,thesubjectofriskofembezzlementandfraudwasincorporated within the framework of operational risks.Followingthis,theOperationalRisksforumdiscussedexposurestoriskofembezzlementandfraudasmayarise,amongotherthings,ineventsintheFirstInternationalGroup,invariousrisksurveysandbyInternalAudit,andmethodsofminimizingthem,byestablishingpreventativeandcompensatorycontrolsystems.

8. Compliance risk

A. General

Proper Conduct of Banking Business Directive No. 308 of the Banking Supervision Department requires banks to act in comply with Consumer Directives applying to the Bank’s relationships with its customers.Complianceriskresultsfromnon-compliancewithconsumerprovisionsofthelaw,includingconsumerregulatorydirectivesthatobligatethebankingcorporation,i.e.provisionsofthelawandauthoritiesthatapply to the Bank’s relationships with its customers.

B. Policy

The Board of Directors of the Bank approves and determines the working program of the Bank’s compliance function once a year.

C. Supportiveorganizationalstructure

Officers,interfaces,andareasofresponsibilityhavebeendefinedintheBankwiththeaimofcomplyingwithDirectiveNo.308,andmanagementofcompliancerisks:TheComplianceOfficeristheManageroftheRegulationandProcessesDepartment,andinaccordancewiththeprincipleofnon-dependencyintheDirective,theDepartmentreportstoaDeputyGeneralManager,theManageroftheCentralServicesDivisionandChiefRisksManager,whoisnotabusinessfunction.ReportingtotheComplianceOfficerareMoneyLaunderingProhibitionandComplianceOfficers,who are the professional function in each branch/unit and responsible for verifying compliance with the variousregulationsandforreportingimmediatelytotheComplianceOfficerintheeventofabreachofaConsumer Directive.

D. Management of compliance risk

TheComplianceOfficerheadstheCoordinationCommitteeforComplianceEnforcementthatincludesrepresentativesfromthedifferentBankunits(LegalDepartment,RegulationandProcessesDepartment,


UBank Ltd.

HumanResourcesandAdministrationDepartment,arepresentativeofInternalAudit,CreditandRiskManagementDepartment,arepresentativeoftheprincipalbranches,arepresentativeofthebranchesforwealthyindividuals).TheCommittee,whichmeetsatleastonceaquarter,isresponsibleforcoordinatingbetween the different units in the Bank and acts towards enhancing cooperation in order to implement thecomplianceprogram.Inaddition,theCommitteediscussesissuesrelatingtothecomplianceprogramwith regard to compliance with the Consumer Directives.

- The Regulation and Processes Department is responsible for coordinating control at the Bank of compliance with Consumer Directives in accordance with the compliance program and the annualworkingprogram,andforreportingdeficienciesorgapsatalllevelsofauthorityintheBank,byexaminingnewproductsand/ornewactivities,aswellasperformingcontrolonaroutinebasis on products and existing activities to see that they meet the various regulatory directives intheconsumerareaandintheareaofprohibitionofmoneylaundering.Aspartofitsrole,theDepartment also reviews new circulars and procedures from the perspective of bank-customer relationships,priortotheirpublication.

- Atleastonceinfiveyears,theBankconductsaninfrastructuressurvey,inordertomakesurethat the Bank is indeed appropriately prepared to implement its obligations which derive from the Consumer Directives. The Department checks compliance with Consumer Directives and regularlymonitors,withtheassistanceoftheLegalDepartment,changesinlegislationandinregulatory directives that relate to Consumer Directives.

- The Regulation and Processes Department has a working interface based on working procedures withothersupportunitsintheBank,suchastheLegalDepartmentandtheCreditandRisksManagementDepartment,andaninterfacewithrelatedprofessionalforums,suchastheforumforfollowingupimplementationofstatutorydirectives,theRisksMonitoringCommittee,andtheProcedures Committee.

- The Bank conducts ongoing assimilation processes in the subject of compliance with Consumer Directivesbymeansoftheuseofprogrammedteaching,seminarsandtrainingfortheCentralServicesDivisionandbranches,givenindependentlyorbasedontheGrouptrainingsystem.

E. Reporting exposure

- Onceaquarter,theComplianceOfficerreportstoBankManagementonhisactivityduringthepastquarter.ThedetailedreportincludesasummaryoftheDepartment’sactivity,detailedrecommendations,detailsregardingviolationsofConsumerDirectivesthatwereidentifiedduringthereportedperiod,andrecommendationsonstepsthatneedtobetakenasaresultoftheviolations,andthepreventionoftheirrecurrence,andtheBank’spreparationsforimplementationof new Consumer Directives.

- Atleastonceayear,theComplianceOfficerreportstotheBoardofDirectorsoftheBank.- Inaddition,thecomplianceprogramdeterminedbytheBoardofDirectorsoftheBankincludes

definitionsforimmediatereports.

9. Prohibitionofmoneylaunderingandthefinanceofterrorismrisks

A. General

Prohibitionofmoneylaunderingandthefinanceofterrorismrisks(hereafter :“MoneyLaundering”)arerisksoftheimpositionofsignificantmonetarysanctionsontheBankfornotcomplyingwiththeprovisionsofthelawonthesubjectpreventionofmoneylaunderingandthefinanceofterrorism,andtheriskofcreatingcriminalresponsibilityforthecorporationanditsemployees.Inaddition,materializationofacriminal offence against the provisions of the law in the area of prohibition of money laundering and the financeofterrorismmayleadtothematerializationofreputationalrisk.The banking sector is subject to various directives within the framework of prevention of money launderingandthefinanceofterrorism,thatinclude,amongothers,theProhibitionofMoneyLaunderingLaw,theProhibitionofFinancingTerrorismLaw,theMoneyLaunderingProhibitionOrder,MoneyLaunderingProhibitionRegulations,ProperConductofBankingBusinessDirectiveNo.411(seetheChapteronUpdatesinLegislation)variouscircularsandmore.


UBank Ltd.

B. Policy

The Board of Directors of the Bank approves the policy document once a year.

C. Supportiveorganizationalstructure

Officers,interfaces,andareasofresponsibilityhavebeendefinedwiththeaimofcomplyingwiththeprovisionsofthelawandforthemanagementofprohibitionofmoneylaunderingandthefinanceofterrorismrisks:The person in charge of the obligations of the Bank under the Prohibition of Money Laundering Law is the officerappointedintheFirstInternationalGroupfortheprohibitionofmoneylaundering.The Manager of the Regulation and Processes Department is also a Representative for the prohibition of moneylaundering,andreportingtohimareProhibitionofMoneyLaunderingandComplianceOfficers.

D. Managementoftheprohibitionofmoneylaunderingandthefinanceofterrorismrisk

- Thedutiesofthepersoninchargeoftheprohibitionofmoneylaunderinginclude,amongothers:development and performance of controls in order to ensure that the Bank implements the provisionsofthelaw,includingcontrolsonreportingaccordingtothetypeandthesizeofthetransaction,ensuringthatpolicyandproceduresareputintowritinginaccordancewithupdatesinlegislationandtheprovisionsofthelaw,thecarryingoutand/orreviewingoftrainingsessions,deliveringreportsonunusualactivitiestotheAuthorityfortheProhibitionofMoneyLaundering,and checking up implementation of Bank policy in all of the Bank’s subsidiary companies. During2009,theBankfullyassimilatedthecontrols,toolsandproceduresdefinedbytheofficerappointed by the Group.

- TheMoneyLaunderingProhibitionOfficersaretheprofessionalfunctionineachbranchandunitresponsibleforongoingactivitytopreventmoneylaunderingandthefinancingofterrorism,accordingtoproceduresanddirectives,includingconductingreviewsandreportingunusualactivities.TheofficersareselectedfromtheemployeepopulationoftheBankundertherecommendation of the branch manager/area manager branches for wealthy individuals/Division Manager.

- Fromtimetotime,theBankholdsseminarsforallProhibitionofMoneyLaunderingOfficers,conferencesformanagers,lecturesinthebranchesthemselves,andsupplementalstudiesandtrainingforallemployees,bothindependentlyandintheframeworkoftheGroupTrainingDepartment.Inaddition,theBankdissimilatesprogrammedteachingmaterialforcheckingtheassimilation of the content of the teaching material the employees of the Bank. Most of the relevant employees of the Bank undertook and passed the test. Training processes that were conducted enhanced awareness of the subject.

- The Bank conducts regular steps to locate and improve data by means of control reports dissimilated to the branches together with the appropriate instructions.

- TheLegalDepartmentconductsfollow-upsofupdatesinlegislationandverifiesthattheyaresenttotheProhibitionofMoneyLaunderingRepresentative,andtheprovisionoflegalsupporttoanyoneneedingit,forcompliancewiththedutiesoftheRepresentativeandtheactivitiesofthe Department and of the Bank.

- The Prohibition of Money Laundering Representative is a member of the Group Advisory Committeewhosemaindutiesinclude:discussingunusualactivitiesforwhichdoubtsareraisedastoiftheymustbereportedtoAuthorityfortheProhibitionofMoneyLaundering,discussingaccounts in which there are complex activities in order to examine and decide if unusual activity isinvolved,etc.

E. Reporting exposure

Onceayear,theofficerappointedfortheProhibitionofMoneyLaunderingreportstoManagementoftheBankonactivityduringthepastyear.Asof2010,thereportwillbegivenquarterly.Thedetailedreportincludes,amongotherthings,referencetofocalpointsofriskslocatedbythepersonresponsibleandmethodsforhandlingthem,andareportontheimplementationof“KnowYourCustomer”policy.


UBank Ltd.

Inaddition,thepolicysetbytheBoardofDirectorsprovidesdefinitionsforimmediatereportstotheAuthority for the Prohibition of Money Laundering.

10. Legal risks

A. Legalriskisdefinedastheriskoflossresultingfromtheinabilitytolegallyenforcetheperformanceofanagreement,non-compliancewiththeprovisionsofthelawincludingregulatorydirectives,risksresultingfromactivitieswithoutlegalcounseling/legalback-upwithcustomers,suppliersand/orthirdparties,risksthat involve legal procedures and any other risk that may expose the Bank to a claim or legal lawsuit.

B. Policy and management of exposure

TheBankoperatesaccordingtoGrouppolicyforthemanagementoflegalrisks,whichissubmittedforapprovalbyManagementandtheBoardofDirectorseveryyear,andincludesadescriptionoflegalrisk,andwaysofidentifying,mappingout,andminimizingit.Inthisframework,theBanktakesstepsforidentifyinginadvancelegalrisksinvolvedinallstagesofthedifferentprocesses.Inaccordancewiththisformat,thereisongoingmonitoringofdevelopmentsinlegislation,standardization,rulings,courtsoflaw,andbodiesthathavelegal-typeauthority.Inaddition,theBank examines proceedings that may have consequences on the ongoing activity of the Bank’s units and acts to reduce risks on the basis of those developments.Intheframeworkoflegaltreatment,emphasisisputonlocatingthefocalpointsoflegalriskanddealingwith them. The Bank has made preparations as necessary for updates required in agreements and the rangeoflegaldocumentsusedbyit.Furthermore,everynewproduct/service/activityisexaminedfromalegalpointofviewinordertominimizelegalriskasmuchaspossible.

TheBankalsotakesmeasuresforongoingidentificationandmappingoutofrisks,includingtheuseofrisksurveysandbythedrawingofconclusionsinordertopreventarecurrenceoftherisk,includingbyimproving existing controls and/or implementing new controls.Inaddition,proceduresaresetoutintheBankforworkcarriedoutbytheCentralServicesDivisionandthebranches,androutinetrainingisgivenfortheirimplementationwithemphasislegalmattersinvolvedinthe Bank’s activity.

C. Reporting on exposure to legal risks

Exposurestolegalrisksaresummarizedandreportedinthequarterly“ExposuresDocument”asrequiredin Directive No. 339 of the Proper Conduct of Banking Business Directives. The Exposures Document is discussed once a quarter by Management and the Board of Directors.Whenamaterialeventoccursofalegalnaturesuchasalawsuitorthematerializationofanyrisk,areport is made to the Legal Risks Manager with regard to the event. An examination is also made as to the degree and manner of the effect of the event on the Bank. The Legal Risks Manager gives instructions regardingthemeasurestobetakeninordertominimizethedegreeofexposuretoalegalriskcreated,and,ifnecessary,consultsotherdepartmentssuchastheComplianceOfficerandInternalAudit.

D. Management of legal risks on a Group basis

The legal risks policy of the Bank is adjusted for changes required by the legal risk management policy of the parent company. The Bank is instructed to implement and report to the parent company on legal risks identifiedbyit.


UBank Ltd.

11.Determiningthefairvalueofsecuritiesandderivativefinancialinstruments

Inaccordancewithaccountingprinciplesapplyingtobankingcorporations,securitiesandderivativefinancialinstrumentsareshownonthefairvaluebasis(forinformationonthevaluationofinvestmentsinsecuritiesandtheestimationofthefairvalueofderivativefinancialinstruments,seethechapterdealingwithAccountingPolicyinCriticalMattersandAccountingEstimates).ThecalculationofthefairvalueofunquotedderivativefinancialinstrumentsismadebytheMiddleOfficeunit in the foreign exchange dealing room. The calculation of the fair value of unquoted securities is made bytheMiddleOfficeunitforNostroactivity.TheMiddleOfficeunitisanelementwhichisindependentof the business function carrying out the transactions. The calculations are reviewed and checked by the FinanceDivision.Furthermore,additionaltestsandreasonablenesscontrolsarecarriedoutonthefairvaluecalculationbytheAccountingDepartment.Commencingon31.12.08,verificationandvalidationofthefairvalueiscarriedoutbytheRisksLocationCommitteeandanentityactingonitsbehalf,onceaquarter.Beforetheannualfinancialstatementsanarbitratorwasappointedwhosedutyistoarbitrateifthereisdisagreementoverthefairvaluecalculation,betweentheentitydeterminingfairvalueandthevalidating entity.NewderivativefinancialinstrumentsarebroughtfordiscussionandapprovaltotheRisksIdentificationCommittee headed by the General Manager.


UBank Ltd.

Discussion of Risk Factors

Belowisatablesummarizingtheriskfactorsandthedegreeoftheireffect(high,medium,low):

Risk Factor Degree of Effect

1. Overall effect of credit risk Low

1.1 Risk because of quality of borrowers and their securities Low

1.2 Risk because of sectoral concentration Medium

1.3 Risk because of borrower’s concentration/borrowers’ groups Medium

2. Overall effect of market risk Medium

2.1 Interest risk Medium

2.2 Inflationaryrisk Low

2.3 Exchange rate risk Low

2.4 Share price risk Low

3. Liquidity risk Low

4. Operating risk Medium

5. Legal risk Low

6. Goodwill risk Low

Other risk factors relevant to the Bank:

7. Legislation and Regulation risk Medium

8. Conversion of the Bank’s computer system Low

Below is the background to decisions taken regarding risk factors and their effect on the Bank that are detailedinthetablepresentedabove:

1. Overall effect of credit risk: Basedonthatstatedin1.1,1.2,and1.3below,theoveralleffectofcreditriskcanbeconsidered

minor.

1.1 Risk because of the quality of borrowers and their securities - low risk effect Risk caused by impairment of the repayment ability of the customer and the type of collateral

offered the Bank against credit. The Bank’s past and present policy is very conservative and includes doing transactions with

customerswithahighleveloffinancialstabilityand/orgoodcollaterals.Inaddition,mostoftheBank’screditisshort-term,whichenablesrapidevaluationandresponseintheeventofchanges.InDecember31,2009theprovisionforproblematicdebtsis0.6%frombalancesheetcreditandoff-balancesheetcreditamountedtoNIS32.2million,asubstantiallylowerrate than usual in the banking system. In 2009 and 2008 the Bank actually recorded income under the heading of the provision for doubtful debts.

1.2 Risk because of sectoral concentration - medium risk effect. Risk caused because of the exposure of a relatively high level of credit to a certain sector

orareaofactivity,emanatingfromalackofsectoraldiversificationandwhichmayimpairtherepaymentabilityofcustomerscomprisingthesector,iftherewasdeteriorationintheconditionofthesector,whichmightderivefromachangeindemandorsupply,achangeinthepricesofrawmaterials,securityandpoliticalchanges,regulatorychangesandsoon.

TheBankisrelativelyhighlyconcentratedinthefinancialsector.However,itshouldbenotedthattheBankisincompliancewiththevariouslimitationssetbytheBankofIsrael,regardingexposure to each sector.

TheBank’sexposuretothefinancialsector,afterallowabledeductions,islowthan20%.Inaddition,credittomostofitscustomersinthefinancialsectorisfullysecuredbyfinancialsecurities,andcredit,whichisnotfullysecured,wasgrantedbytheBankmainlytolargeinstitutionalbodiesthatarefinanciallyverystable(foradditionalinformation-seethechapter


UBank Ltd.

onrestrictionsandsupervisionoftheBank’sactivities).1.3 Risk because of the concentration of borrowers/group of borrowers - medium risk effect. Risk caused because of a relatively high level of credit exposure to a borrower or group of

borrowers,emanatingfromalackofadequatediversificationbysizeofborrowerandwhichmayimpairtherepaymentabilityoftheaboveborrowerorgroup,iftherewasdeteriorationin their situation.

The Bank is in compliance with the terms of the limits detailed in the chapter on restrictions and supervision of the Bank’s activities.

OnDecember31,2009,thelimitsonasingleborrowerwereasfollows:singleborrowerNIS82.0million,borrowers’group-NIS164.1millionandsixlargestborrowers-NIS738.3million.

The effect of the risk of concentration of a single borrower or group of borrowers increased from small at the end of 2008 to medium at the end of 2009 in view of the fact that as a resultoftheextensiveoperationsoftheBankinthecapitalmarketarea,theBankisclosetheabove-mentioned limits.

2. Overall effect of market risk: Basedonthatstatedinparagraphs2.1,2.2,2.3,and2.4below,theoveralleffectofmarketriskcan

beclassifiedasaneffectwithamediumrisklevel.Theincreaseoftherisklevelfromlowin2008tomediumin2009derivesmainlyfromtheinterestriskweighting(seeparagraph2.1below).

2.1 Interest risk- medium risk effect. Interestrateriskistheriskthatunforeseenchangesininterestratesmayharmthefinancial

situation of the Bank. This risk exists mainly when the duration of the assets differs from the duration of the liabilities in a certain segment and is affected also by the gap between total assets and total liabilities in that sector.

TheBankkeepstoapolicyofmatching,asmuchaspossible,datesofrepaymentorinterest-adjustment of assets and liabilities in each of the indexing sectors and taking restricted positions.

For further information - see the chapter dealing with interest-rate exposure in the framework of the Risk Management Policy.

Notwithstandingthatstatedabove,becauseofthedrasticchangesininterestratesinIsraelandworldwide,andinthelightofthelowabsolutelevelofinterestinIsraelandworldwide,theeffectofthisriskeffectwasraisedfromlowtomedium,inviewofitsmultipleeffectonthefinancingincomeoftheBank.

2.2Inflationaryrisk-lowriskeffect. InflationriskistheriskthatunforeseenchangesintherateofincreaseoftheCPIwillcause

harm to the Bank’s situation. This risk exists when there is no matching between the balance ofassetslinkedtotheIndexandindex-linkedliabilities,orwhenthereareaccompanyingfinancialinstruments.

Aspartofthepolicyofexposuretobasisrisks,theBank’sBoardofDirectorshassetlimitsonthe Bank’s exposure in the CPI linked sector. The bank maintains low exposure to change in the CPI linked sector.

Foradditionalinformation-seethechapteronbasisexposure,includedunderriskmanagement policy.

2.3 Exchange rate risk - low risk effect. Exchange rate risk exists when there is a difference between the balance of assets and the

balance of liabilities in a certain foreign currency. Aspartofthepolicyofexposuretobasisrisks,theBank’sBoardofDirectorshassetlimitsfor

the Bank’s exposure in the foreign currency sector. The Bank maintains low exposure to changes in foreign currency exchange rates. Foradditionalinformation-seethechapteronbasisexposure,includedunderrisk

management policy.2.4 Share price risk-low risk effect. Risk of a fall in share prices. The exposure is minimal as the Bank has a small investment in shares.


UBank Ltd.

3. Liquidity risk - low risk effect. Risk emanating from uncertainty of unforeseen withdrawals of deposits by the public and credit

demands.TheBankismanagedwithhighliquidity,interalia,asaresultofsignificantbalanceswhichtheBankholdsmainlyinliquidmonetaryassets(mainlydepositsandgovernmentbonds).

Foradditionalinformation-seethechapteronliquidity,includedunderriskmanagementpolicy.

4. Operating risk - medium risk effect. ForinformationontheBank’soperatingrisk,seethechapteronoperatingriskincludedunder

risk management policy. Theoperatingriskinthefieldofcomputerizationisseparatelydiscussedundersection8below.

5. Legal risk- low risk effect. For information on the Bank’s legal risk see the chapter on legal risk included under risk

management policy.

6. Goodwill Risk - low risk effect. Asasmallbankoperatingmainlyinthecapitalmarketandprivatebanking,thereisgreat

importanceinthegoodwilloftheBankintheeyesofitscustomers,sothatdamagetoitsgoodwillmayhaveamaterialeffectontheactivitiesoftheBank.However,inouropinion,theeffectoftheriskcanbeconsidered“low”sincetheBankisasubsidiaryofFIBI.

7. Legislation and Regulation Risk - medium risk effect. Intheseareas,therearefrequentchangesand/orinnovationsinlegislation,andinthepolicyof

thevariousauthorities.ThesechangesaffecttheactivityoftheBankanditsinvesteecompanies,and will/or may affect them in the future. The Bank allocates resources in order to adapt activity tothem,eitherbyinvestinginsystemsorinpersonnelandtheirtraining,andreceivesassistancefrom other entities in the Group in these areas.

Thelevelofthisriskwasincreasedfromasmalltomedium,mainlybecauseoftheexpectedinfluenceofAmendmentsNos.13and14totheJointTrustInvestmentsLawontheBank.

Forfurtherinformation-seetheChapterdealingwithupdatesinlegislation(onpages21,24-25).

8. Conversion of the Bank’s computer system - low risk effect. Theeffectoftheriskdecreasedfromthemediumeffectattheendof2008,toaloweffectat

theendof2009,inviewoftheconclusionoftheconversionofthecomputersystems. Forfurtherinformationonthesubjectofsystemsconversion,seetheChapterdealingwith

InformationSystems(onpage16)

InviewofthemajorchangesandvolatilityinthefinancialmarketsinIsraelandworldwide,theBankistaking measures to adapt its independent activity and activity with customers in order to reduce as much as possible the effect of risks.

Macro-economicriskisofcourselikelytohaveagreatinfluenceoftheBank’sprofitability.SincethisriskisnotuniquetoUBankandaffectsthewholebankingsystem,theseverityofthisriskhasnotbeenratedandhasbeenremovedfromthetableofriskfactors,althoughitcanbeviewedashavinganeffectonthepriorrisks described in the table.

The business results and performance of the Bank are directly affected from the state of the economies inIsraelandworldwide.Deteriorationineconomicconditions,aswellasdeteriorationinthepoliticalandsecurityconditionsinIsrael,islikelytocauseharmtotheBank’sresults.ThemainactivityoftheBankisintheStateofIsrael.Asaresult,amaterialeconomicslowdownislikelyhaveamaterialeffectontheBank’sresults.Moreover,arecessionintheeconomymayreduceactivitycyclesinthecapitalmarketsandleadtoa decline in the Bank’s activity in this area. The processes are likely to have an effect on the Bank’s revenue.


UBank Ltd.

Accounting Policy on Critical Matters and critical accounting Estimates

Accounting policy on critical matters relates to issues that are of importance in describing the Bank’s financialposition,issuesthataredifficult,subjectiveandrequirecomplexevaluationsasaresult,becauseoftheneedtoestimatetheinfluenceofmattersthatbytheirnatureareuncertain.

Setoutbelowarethecriticalsubjectsasabove,inrespectofwhichtheaccountingpolicyshouldbeunderstood in order to understand the Bank’s reported results.

In each of these critical subjects management used the best available information in order to make the estimates necessary in evaluating the Bank’s assets and liabilities and the Bank believes that the estimates used are proper.

Belowistheaccountingpolicythathasbeenadoptedwithregardtothesesubjects:

1. Provision for Doubtful debts

Thefinancialstatementsincludeprovisionsfordoubtfuldebts(aspecificprovisionandalsoageneralandsupplemetaryprovision)whoseobjectistoupdatethevalueofthecreditportfolioasatthebalance sheet date in accordance with generally accepted accounting principles and the directives of the Supervisor of Banks.

The supplementary provision is based upon exceptional credit amounts in accordance with quality characteristics of the obligo portfolio as determined in the Supervisor of Banks’ directives. The discussion ontheclassificationofdebtsasproblematicdebtsaccordingtothevariousqualitygroupsdefinedinthedirectives(specialsupervision,temporarilyinarrears,restructuredandnonincomebearing)iscarriedoutinthecontextofthecreditcommitteethatmeetsonceamonth.Thefinaldecisionastotheclassificationis made in the doubtful debts committee that is made once a quarter and is inter alia based on the discussions held by the credit committees.Thecriteriathatareusedforthepurposesoftheevaluationinrespectoftheclassificationare,interalia:arrangementssignedwithcustomersforrestructuringtheirdebts,customerswhoarenotrepayingtheirdebtinaccordancewitharrangementsthatweremadewiththem,customerswhoaredeviatingfromacreditlineformorethanthreeconsecutivemonths,customerswhoduringadefinedperiodhadnotmadedepositsintheamountofthedebt,negativeexternalinformationaboutthecustomerandachangein the condition of the sector in which the customer operates. An additional important indicator is the customer’s low rating. As at 1.1.09 the Bank adopted the rating system existing in FIBI.Thissystemweightesvariouscriteria,suchas:theBank’sexperiencewiththecustomer,hiscreditability,economicability,theamountofthecreditgrantedtohimandthecreditlinethatwasapprovedforhim,hiscollateralanddeviationfromcreditlines.Inaddition,additionalcriteriaareexaminedinthecaseofacompany/business,suchas:theeconomicabilityoftheshareholdersandthecompany’smanagers,theircredibility,legalclaims,businessresultsaccordingtofinancialstatements,theriskofthesectorinwhichthecompanyoperates,thestateofthebusiness(dependencyuponasupplier,dependencyonaproduct,competitiveness,lengthofrelationship,statutoryrestrictionsetc).

The specific provisionsreflectthelossinherentinthecreditportfolio,includingliabilitiesinoff-balancesheet items.Thedecisionstomakespecificprovisionsforloanlossesaremadeonceaquarterinthecontextofthedoubtfuldebtscommittees,interaliaonthebasisofthelegaladvisers’recommendations.Indeterminingtheadequacyoftheprovisions,thecommitteesarerequiredtoevaluatetheinherentriskinthecreditportfolioandtoevaluateoverallrepaymentability.Forthepurposesoftheseevaluations,substantialjudgementmustbeexercisedbasedontheinformationastothedebtors’financialpositionsand an evaluation of the collateral that was received from them.Gatheringinformationwithregardtothedebtors’financialpositionisbaseduponvarioussourcesofinformationasnecessary:informationreceivedfromemployeesofthebranchonthebasisoftheirknowledgeofthecustomer,informationreceivedfromconversationswiththedebtor,ifthisispossible,financialabilityinvestigationsbyexternalinvestigators,informationfromexternaldatabases(suchasthe


UBank Ltd.

RegistrarofCompanies,theLandRegistry,theOfficialReceiver,theExecutionOffice,BDIandD&B)andin some cases opinions are also received from external experts.ThecollateralisvaluedinaccordancewiththeBank’screditpolicy.Thispolicy,whichispresentedfortheBoardofDirectors’approvaleachyear,relatestotheprinciplesofvaluingthevariousassetsthatserveascollateral,marketableandnon-marketable.Intheconsolidatedprofitandlossstatementfor2009reducingspecificprovisionsinthesumofNIS4.0millionandsupplementaryprovisionsandreducinginthesumofNIS0.1millionwererecorded(2008-specificprovisionsinthesumofNIS4.1million,andreducingsupplementaryprovisionsofNIS0.3million).IntheconsolidatedbalancesheetasatDecember31,2009theprovisionfordoubtfuldebtsamountedtoNIS34.7million-representingapprox.0.7%ofthetotalcreditriskamount(asatDecember31,2008-aprovisioninthesumofNIS44.8million-representingapprox.1.0%).

2. Valuation of Investment in Securities

Accordingtotheaccountingrulesapplicabletobankingcorporations,securitiesinthefinancialstatementsarepresentedasfollows:Tradingsecurities-arepresentedinthebalancesheetaccordingtofairvalue.Profitsorlossesarechargedtotheprofitandlossstatementrespectively.Availableforsalesecurities-bonds(marketableandnon-marketable)andmarketablesharesarepresentedinthebalancesheetaccordingtofairvalueandprofitsorlossesthathavenotyetbeenrealizedfromadjustmentstotheirfairvaluearechargedtoacapitalreserveandnottoprofitandloss.Non-marketable shares are presented in accordance with their adjusted cost.ThemajorityofthesecuritiesthattheBankholdsaremarketableinanactivemarket(whetheritisastockexchangeoranover-the-countermarket),andtherefore,theyhaveanavailablemarketvalue.Forbondsthatarenotmarketablethepresentvalueoffuturecashflowsisused.Followingthecrisisinthefinancialmarkets,theBankreviewedandupdateitssourcesofinformationonwhich it based its fair value evaluation of the investment in securities.The value of bonds of foreign banks is based on quotations from an international supplier of prices external to the Bank - a leading international company supplying valuation services for hundreds of leadingfinancialinstitutionsworldwide,withmorethan25yearsexperience.Thecompanydealswithgivingquotationservicesbutnotintradinginsecurities.Inaddition,forcontrolpurposes,across-checkismadeofsecuritiespricesfromthesupplier’ssystemforquotedpricesfromanotherfinancialinformationsystem,whichtheBankusedpreviously.Forpurposesofcalculatingthevalueofunquotedsecurities,BankManagementexaminedthediscountratereceivedfrominterestratesandinaddition,anexaminationwasmadeofquotedsecuritiesofthesameissuerorsimilarsecuritiesinthemarket,wherepossible.Incertaincases,whendifferenceswerefoundduringthecourseoftheexamination,priceswerereducedbyraisingthediscountrate,asrequired,inordertoshowtheinherentriskinthesecurityanditstruevalue.Onthesubjectofexaminingtheimpairmentoftheinvestmentinsecurities,seeparagraph5below.

Thesensitivityofthefairvalueoftheunquotedbondportfolio(calculatedaccordingtothepresentvalueoffuturecashflows)toachangeof1%intheinterestrateusedfortheirvaluationisasfollows(inNISmillions):

Decrease of 1% Increase of 1%

Change in fair value 0.4 (0.4)

3.Estimatingthefairvalueofderivativefinancialinstruments

TheBankoperatesintheareaofderivativefinancialinstruments,whosestatementinthefinancialreportsisbasedonfairvalue,asopposedtovaluebasedontheprincipleofaccumulation.Thefairvaluecalculationofderivativefinancialinstruments,fortheirforeigncurrencyelement,arebasedondataexistingininternationalcapitalmarkets,andfortheirIsraelicurrencyelement,ontheratesofunlinkedandindex-linkedinterest,ofwhichanassessmentismadebytheRiskandCreditDepartmentoftheBank,consideringcurrentmarketprices,liquidityandmarketabilityinthedomesticmarket.Themarginbetween


UBank Ltd.

sellinginterestandbuyinginterestalsorepresentsasubjectivefactorinfluencingcalculationsofthefairvalueofderivativefinancialinstruments.Mosttransactionsinderivativefinancialinstrumentsareshort-termtransactions,inwhichthereisnoexpressed credit risk. The credit risk component in long-term transactions is taken into account in their pricing.ThefairvalueofdifferenttypesofoptionsisbasedinthemostpartontheBlackandScholesModel,andisaffectedbythevolatilityinherentintherateofexchange,interestandtherelevantindicesfortheoptionwhichtheBankpurchaseorwrote.Withregardstocomplexderivativefinancialinstrumentsthathavenotradablemarket,fairvaluecalculationsaregenerallymadeintheleadinginformationsystemsinthefield,whichareemployedbydealingroomsandbanksworldwide(bloombergsystemandsuperderivativessystem).These interest rates are also used for calculating the fair value of assets and liabilities hedged against derivativefinancialinstruments,iftheymeetthecriteriaofhedging,asrequiredbyaccountingprinciplesand the Directives of the Supervisor of Banks in the matter.TheBank’sactivitiesinderivativefinancialinstrumentsaremostlyinshorttermtransactions.Inviewofthis,theeffectoftheestimatesnotedaboveonfairvaluecalculationsofthestatedinstruments,isnotmaterial.

4.Thefairvalueoffinancialinstruments

Thefollowingtablesummarizesthefairvalueoffinancialinstrumentsbydistributionbetweenfairvalueofpricesquotedinanactivemarketorotherwise:

31.12.09(NISmillion)

Prices quoted in an active market

Other Total

Financial assets 3,230.8 559.8 3,790.6

Financial liabilities 2,310.4 34.6 2,345.0

31.12.08(NISmillion)

Prices quoted in an active market

Other Total

Financial assets 2,816.2 773.9 3,590.1

Financial liabilities 1,351.5 60.6 1,412.1

5. Decrease in Value of Assets

The Bank applies procedures to ensure that the value of its assets in the consolidated balance sheet does notexceedtheirpropervalue.Ifnecessary,theBankrecordsdecreasesinvalueofitsassets.InJanuary2009,theprocedureforreviewingtheimpairmentofsecuritiesavailableforsaleintheNostroportfolio was approved in the meeting of the Board of Directors. For purposes of reviewing impairment intheNostroportfolio,aspecialmanagementcommitteemeetsonceaquarter,withtheparticipationoftheGeneralManager,theManageroftheHeadquartersDivision,theManageroftheRisksandCreditManagementDepartment,theManageroftheFinanceDivision,andtheChiefAccount(asobserver).Thefunction of the committee is to examine if impairment is of an other than temporary nature which has to berecordedinprofitandloss.

An examination of the need for asset value decreases requires the use of various assessments and estimatesinaccordancewiththetypeoftheasset:

a.Investmentinbonds:Bondsintheavailableforsaleportfolio,whethermarketablebondsornon-marketablebonds,arepresentedinthebalancesheetaccordingtotheirfairvalue,butthisrevaluationischargedtoacapitalreserveandnottoprofitandloss.


UBank Ltd.

Foreveryreportingperiod,theBankexamineswhethertheimpairmentinvalueofthefairvalueofsecuritiesclassifiedintheavailableforsaleportfolioisofanatureotherthantemporary.

TheBankrecognizesinthereportingperiodimpairmentofanatureotherthantemporary,atleast,inrespectofanimpairmentofanysecuritymeetingoneormoreofthefollowingconditions:

- A security that was sold before the publication of the report to the public for this period;- A security that the Bank intended to sell within a short period of time before the publication of

the report to the public for this period;- Adebentureforwhichtherewasasignificantdecreaseintheratingbetweentheratingofthe

debenture at the date of acquisition by the Bank and the rating of the debenture at the date of publication of the report for this period;

- AdebenturethatwasclassifiedasproblematicbytheBankafteritsacquisition;- A debenture in respect of which there was a payment default after its purchase;- Asecurity,whosefairvalueattheendofthereportingperiodandalsoatadateshortlybefore

thepublicationdateofthefinancialstatements,waslowerthancostbyasignificantamount(fordebentures-adjustedcost).ThisisunlesstheBankhasconcreteobjectiveevidenceanda conservative analysis of all the relevant factors proving at a high level of certainty that the impairment was of a temporary nature.

Inaddition,determiningiftheimpairmentisofanatureotherthantemporaryisbasedonthefollowingconsiderations:

- Theamountoflossinrelationtothecostofthesecurity(regardingdebentures-adjustedcost);- The period of time in which the fair value of the security was less than its cost;- A deterioration in the condition of the issuer or in the overall situation of the market;- The intention and ability of the Bank to hold the security for a long enough period of time that

would allow for an increase in the fair value of the security or until redemption;- In the case of debentures - the rate of return until redemption;- In the case of shares - the reduction of dividends allocated or its cancellation;

Inaddition,theBankrecognizesanimpairmentofanatureotherthantemporaryinrespectofbeneficiaryrightspurchasedandinrespectofbeneficiaryrightsthatcontinuedtobeheldbytheBankinthesecuritizationoffinancialassets,whencurrentinformationofothereventsindicateaprobabledeteriorationintheforecastofcashflowsderivingfromthefinancialinstrument.

Whenimpairmentinvalueoccursofanatureotherthantemporary,thecostofthesecurityisreducedtothefairvalueandservesasthenewcostbasis.Thecumulativelossrelatingtoasecurityclassifiedas available for sale which was charged in the past to a separate item in shareholders’ equity in the frameworkoftotalotherprofit,istransferredtoprofitandlosswhenthereexistsforitanimpairmentinvalueofanaturewhichisnototherthantemporary.Increasesinvalueinsubsequentreportingperiods,areincludedinaseparateiteminshareholders’equityundertotalotheraccumulatedprofitandisnotchargedtoprofitandloss(thenewcostbasis).

In2009animpairmentofanotherthantemporarynaturewasrecordedintheconsolidatedprofitandlossunderfinancingitem(Note17)intheamountofNIS13.7million.In2008animpairmentofanotherthantemporarynaturewasrecordedintheconsolidatedprofitandlossunderfinancingitem(Note17)intheamountofNIS15.4million,ofwhichNIS5.4millionformortgage-backed bonds.In 2007 an impairment of an other than temporary nature in mortgage-backed bonds was recorded in theconsolidatedprofitandlossunderfinancingitem(Note17)intheamountofNIS1.8million.

b.Investmentinshares:Sharesinthetradingportfolioarerecordedinthefinancialstatementsaccordingtomarketvalue.Sharesintheavailableforsaleportfolio-iftheyaremarketableshares,arepresentedatmarketvalueandtherevaluationischargedtoacapitalreserveandnottoprofitandloss.Wherethereisamaterial


UBank Ltd.

andprolongednegativerevaluation,thesubjectisexaminedbyeconomistsintheBankwhoexaminethecompany’s condition and whether its value on the market represents a nontemporary value decrease. Non-marketablesharesarepresentedinthebalancesheetaccordingtotheiradjustedcost.Eachperiod,the Bank examines the value of these shares and whether there is need for making value decreases. TheBank’seconomistsusethebestinformationavailableforcarryingouttheirassessments,generallyinformationcontainedinfinancialstatementsreceivedfromthecompany,andifnecessaryconversationsare held with key personnel in the company in order to have a better understanding of its operating performanceandanticipationsforthefutureandalsoinordertoobtainadditionalinformation,ifany,suchas:informationaboutanexternalinvestorifany,obtainingvaluations,ifcarriedout,etc.Furthermore,comparisonsaremadewithsimilarcompaniesinthefield.In 2009 provisions for impairment of an other than temporary nature were recorded in the consolidated profitandlossundernetlossesfrominvestmentsinshares(Note19)forsharesavailableforsaleintheamountofNIS3.8million,comparedtoNIS2.7millionin2008,andNIS0.3millionin2007.

6. Liabilities in respect of legal claims

AmongtheotherliabilitiesoftheBankareprovisionsforvariouslegalclaimsagainsttheBank,includingrequestsforclassactions,ifrequired.TheprovisionsweremadeconservativelybasedonManagement’sevaluation and based on legal opinions.OnceaquarteradiscussionisheldbytheBoardofDirectors,regardingclaimsfiledagainsttheBank.ForpurposesofevaluatingtherisksinlegalproceedingsfiledagainsttheBank,BankManagementreliesonthe opinion of external legal consultants representing the Bank in these claims. These opinions are given byexternallegalconsultantstothebestoftheirdiscretion,onthebasisofthefactspresentedtothembytheBankandonthebasisofthelegalposition(judgmentandprecedence)asfarastheyareawareatthetimeoftheevaluation,andwhichareoftensubjecttodifferinginterpretationandpossiblecounterclaims.Theevalutionoftherisksinclassactionsbeingapprovedinvolvesevengreaterdifficulty,sincethisarelativelynewlegalarea,andthelegalproceduresinvolvedaswellasthemostbasicaspectsarestillintheformative stages. Inviewofthatsaidabove,theactualresultsoftheclaimsmaybedifferentfromtheprovisionsmade.

Contribution to the Community and Donations

In2009,theBankjoinedthe“Etgarim”VoluntaryAssociation,whoseaimistoenablechildren,youth,andadultswithphysical,sensory,andpsychologicaldisabilitiesandthosewithspecialneedstofulfilltheirpersonalpotential,toexpandtheirabilitiesinallareasoflife,andtointegratethemintothecommunity.ThankstotheBank’scontributiontotheAssociation,threegroupsofchildrenandyoungpeoplewereadoptedintheframeworkofthe“AdoptaClass”project,whoseaimistogivechildrenwithdisabilitiesanannualframeworkofextremesportsactivitytoreinforcetheirself-confidenceandgivethemanelevatedand positive self-image. The program integrates educational content and extreme sports activities with the aimofmaximizingthechildren’s(disabledanddistressedyouth)personalpotential,byprovidingtoolsfordeveloping skills for dealing with daily life on their own.Inadditiontofinancialsupportfacilitatingeducational-rehabilitationactivity,employeesoftheBankvolunteered to take part in meetings and activities.Totaldonationsfortheyear2009amountedtoNIS335thousand,approx.0.5%ofthenetprofitfromordinary activities of the Bank.

Disclosure with regard to the Bank’s Internal Auditor

The chief Internal Auditor detailsMr.NirAbel,CPA,hasservedastheChiefInternalAuditoroftheBanksinceAugust2006.TheInternalAuditorisanemployeeoftheparentcompany(FIBI)andservesasinternalauditorofallGroupcompanies,exceptfortwosubsidiarycompaniesabroad.The Internal Auditor has a B.A. in public accounting and economics from the Hebrew University in Jerusalem,andisexperiencedintheareaofauditinthebankingsystem.The Internal Auditor carried out a number of managerial duties in the Internal Audit Department of


UBank Ltd.

BankHapoalimoveraperiodofabout13years,andhasbeentheChiefInternalAuditorofBankOtzarHachayal since 2000.TheChiefInternalAuditormeetstheprovisionssetoutinsection3(a)oftheInternalAuditingLaw.TheInternalAuditorandhisstaffserveonlyinauditfunctions,withoutconflictofinterest,andworkinaccordancewiththeInternalAuditorRegulationsasstatedinsection146(b)oftheCompaniesLaw,theprovisionsofParagraph8oftheInternalAuditLaw,andtheprovisionsofsection8oftheBankingRegulations.

MethodofAppointmentandOrganizationalReportingResponsibilitiesThe appointment of the Internal Auditor was approved by the Audit Committee and the Board of DirectorsonJuly4,2006.The Internal Auditor’s superior in the Bank is the Chairman of the Board of Directors.

Internal Audit Work PlanTheInternalAuditworkplanisbasedonamulti-year(4years)risk-focusedworkplan.Instructuringthemulti-yearauditplan,theInternalAuditorbaseshimselfonavarietyoffactors,includingmappingoutthevariousunits,linesofbusiness,andprocessesintheorganization;mappingoutandassessingrisksinherentintheseunitsandprocesses(credit,marketandoperationalrisks);operationalrisksurveyscarriedoutintheBank(includingriskofembezzlementandfraud);alltheprovisionsoflawsanddirectivesoftheSupervisorofBanks;andincidentsoffailureoccurringinthepastintheorganizationand/orinparallelorganizationsinthesystem.

The audit plan for 2009 is a result of a number of varying factors which are the base for building the work plan;themainonesbeing:theupdatedmulti-yearworkplan,theProperConductofBankingBusinessDirectives,risksurveyscarriedoutintheBank,instructionsoftheAuditCommittee,activationofnewareasofactivityandchangesintheorganizationalstructureofunitsintheorganization,recommendationsoftheexternalauditorsandfindingsofthedetailedreportofthecertifiedaccountants,auditfindingsinBankofIsraelreports,auditresources,recommendationsofofficersintheBankandpreviousfindings.The multi-year and annual work plans have been approved by the Audit Committee and Chairman of theBoardofDirectors.Changes(material)fromtheapprovedprogramarebroughtfordiscussiontotheAudit Committee.

Number of PositionsAsmentionedabove,theInternalAuditorisafull-timeemployeeoftheFirstInternationalBank.Theaverage number of employees in internal audit was about 5.5.Thisnumberofpositionsisderivedfromthemulti-yearworkplan,staffturnoverduringthecourseoftheyear and additional manpower from outsourcing.

Conduct of AuditsInternalauditworkiscarriedoutinaccordancewiththevariousrequirementsofthelaw,includingtheInternalAuditingLaw,theBankingOrdinance,BankingRules(InternalAudit),andacceptedprofessionalstandards-“StandardsfortheProfessionalEngagementinInternalAuditing”oftheInstituteofInternalAuditorsinIsrael,inallaspectsofexaminingtheproprietyoftheorganization’soperationsfromtheaspectofcompliancewithlaws,properconduct,integrity,savingsandefficiency,non-dependencyontheauditedentity,directivesandinstructionsoftheSupervisorofBanks,anddirectionsofotherregulatoryentities.ItshouldbenotedthatthereisaformaldeedofappointmentforInternalAudit,providingabasisforitsstatus and authority in the corporation. The deed of appointment is approved as required by the Audit Committee of the Board of Directors and distributed among all Bank employees.

Access to dataTheInternalAuditorhasfreeandindependentaccess,asprovidedinsection9oftheInternalAuditLaw1992,toalltheBank’sandthesubsidiaries’systems,includingtheinformationsystemsandfinancialdata.

The Internal Auditor reportThe Internal Auditor reports to the Audit Committee on everything concerning working procedures and internal procedures.


UBank Ltd.

TheInternalAuditorgivescurrentreportstotheChairmanoftheAuditCommittee,whichincludeacopyofeachauditreportandalsoperiodicalactivitysummaryreports(quarterly,semi-annual,andannual).Allthe reports are discussed in the meetings of the Audit Committee.TheChairmanoftheAuditCommittee,afterconsultingwiththeInternalAuditor,andnotifyingtheChairmanoftheBoardofDirectorsforhisresponse,decideswhichmaterialinternalauditreportsaretobe brought for discussion by the Audit Committee.Inaddition,selectedreportsarediscussedinmeetingswiththeGeneralManager,andwiththeauditedunitsconcerned,beforepresentingthemtotheAuditCommittee.Copies of minutes of the Audit Committees are submitted to members of the Board of Directors to bring the contents of the discussions to the knowledge of those members of the Board of Directors who are not members of the Audit Committee.Incasesofreportswithparticularlyseriousfindings,amoreurgentreportisgiventothoseperformingthe above positions.On5.4.09theauditactivitysummaryreportfor2008wasdiscussedintheAuditCommittee,on13.8.09theauditactivitysummaryreportforthefirsthalfof2009wasdiscussedintheAuditCommittee,andon20.12.2009 the audit activity summary report for 2010 was discussed in the Audit committee.

Estimating the lnernal Auditor by the Board of DirectorsIntheopinionoftheBoardofDirectorsandtheAuditCommittee,thescope,natureandcontinuityoftheoperations and work plan of the Internal Auditor are reasonable under the circumstances and enable the carrying out of the objects of internal audit in the corporation.

RemunerationTheInternalAuditor’scompensationispaidbyFIBI,andtheBankischargedforauditservices.Theauditor’sremunerationisappropriateforhisposition.IntheopinionoftheBoardofDirectors,theauditor’s remuneration does not cause for any bias in the auditor’s professional judgment.

The Approval Process of Financial Reports

Theoffice-holdersengagedwithpreparingtheBank’sfinancialstatementsaretheGeneralManageroftheBank,Mr.IlanRaviv,andtheManageressoftheChiefAccountantDivisionandChiefAccountant,Mrs.OritItzcovitch.The body responsible in the Bank for overall control is the Board of Directors. The Board of Directors hasappointedaBalanceSheetCommittee,whichholdsdetaileddiscussionsonthefinancialreportsandformulates its recommendation prior to bringing them to the Board of Directors for approval.TheBalanceSheetCommitteecomprisesfourmembers,threeofwhomwithfinancialandaccountingexpertise(includingtwoexternaldirectors).AttheBalanceSheetCommittee,aswellastheBoardofDirectorswhentheyarediscussingandapprovingthefinancialreports,theauditorsoftheBankareinvitedtobepresent,andtheyarerequestedtopresenttheirmainfindings,iftherewereany,thatarose during the audit or review process; and they are available to the members of the Balance Sheet CommitteeandthemembersoftheBoardofDirectorsforanyquestionorclarificationbeforetheirapproval.

Onaquarterlybasis,theAuditCommitteeoftheBoardofDirectorsholdsadiscussiononprovisionsfordoubtfuldebts,forpurposesofapprovingtheprovisionsfordoubtfuldebtsandprovisionsforimpairmentinthenostroportfoliobeforebringingthefinancialstatementsforapprovalbytheBoardofDirectors.

Inaddition,intheframeworkofthecontrolsandproceduresconcerningdisclosureinthefinancialreportsinaccordancewiththeprovisionsofsection302and404oftheSarbanes-OxleyAct,informationrelatingtothedisclosurerequirementsinthefinancialreportsiscollectedandbroughtbeforetheManagementoftheBank.ThereportingofsignificantdeficienciesisbroughtfordiscussionintheAuditCommitteeandtheBoardofDirectorsasrequiredbeforetheapprovalofthefinancialreports.Thereportingofmaterialweaknessesismadeinthefinancialreports,ifsuchexist.

Intheframeworkoftheapprovalprocessofthebank’sfinancialreports,backgrounddocumentationand/ordraftfinancialreportsoftheBank,includingtheDirectors’Report,arehandedforreviewtothe


UBank Ltd.

memberstheBalanceSheetCommitteeandtotheBoardofDirectorsasrequired,beforetheregularmeeting for discussing the reports. The meeting of the Board of Directors dealing with the approval of the financialstatementsoftheBankisalsoattendedmembersofBankManagement,includingtheGeneralManager,theChiefAccountant,andtheexternalauditors.DuringthemeetingoftheBoardofDirectorsatwhichthefinancialreportsarediscussedandapproved,theGeneralManageroftheBankgivesadetailedreviewofthemajorpointsofthefinancialreportsaswellasmaterialissuesinthefinancialreport.Inaddition,theongoingactivityoftheBankandtheeffectofthisactivityontheBank’sresultsarereviewed,withemphasisonmaterialissues.Atthesametime,adiscussionisheldduringwhichoffice-holdersintheBankanswerquestionbytheDirectorsonmattersconnectedwiththeresultsofoperationsandthefinancialstatements.Attheconclusionofthediscussion,adecisionismadebytheBoardofDirectorsontheapprovaloftheBank’sfinancialstatements.

Report on Directors with Accounting and Financial Expertise

The Supervisor of Banks’ guideline provides that banking corporations must make disclosure in the BoardofDirectors’reportwithregardtotheappropriateminimumnumberofdirectors(notholdinganadditionalpositionintheBank)withaccountingandfinancialexpertisethatthebankingcorporation’sBoardofDirectorsdecidedandthat,intheBoardofDirectors’opinion,enablesittocomplywithitsresponsibilityofexaminingthebankingcorporation’sfinancialpositionandforthepreparationandapprovalofthefinancialstatements,andalsotogiveparticularsaboutthedirectorsthathavesuchexpertise.Thisdecisionismadewithregard,interalia,tothesizeofthecorporation,thetypeofitsactivity,thenumber of members of its Board of Directors and its complexity.

The Bank’s Board of Directors has determined that the appropriate minimum number of directors with accountingandfinancialexpertise,asdefinedintheguideline,istwodirectors.IntheBoardofDirectors’opinion,thisnumberenablesittocomplywiththeabovedutiesimposeduponit,sinceitalsoensurestheinvolvementofadirectorwiththeaboveexpertiseintheprocessofapprovingthefinancialstatements,even in the event of the absence of one of the two directors with such expertise.Inaddition,theBoardofDirectorsnotedthatthisdeterminationtookintoaccountthefactthattheBank’sfinancialstatementsarebroughtbeforetheAuditcommittee,thatconductsin-depthdiscussionsonthestatements before they are brought for the Board of Directors’ approval.

Setoutbelowaredetailsofthedirectorswithaccountingandfinancialexpertise,includingeducationandexperienceinthebankingsphereandinbusinessandaccountingmatters,thatenablethemtounderstandfinancialstatementsofbankingcorporationsin-depth:

Mr. Jack Elaad has a Masters degree in Business Management and a Bachelors degree in Economics.MrElaadservedasCEOofFIBIBank(U.K.)LtdandadirectorofFIBIBankandchairmanoftheBoardofDirectorsandCEOofSadotResearch&DevelopmentFundLtd.MrElaadservesasthechairmanoftheBank’sBoardofDirectors,thechairmanofFIBIandengagesinfinancialconsultancy.Mr Elaad is a member of the Credit Committee.

Mr. Yehuda Drori has a Master’s Degree in Business managment and a Bachelor’s Degree in Economics. Mr.YehudaDrorihasservedpreviouslyastheSupervisoroftheCapitalMarketandSavingsintheMinistryofFinance,andhasalsoservedasactingChairmanofPoalimCapitalMarkets.Mr. Drori is a member of the Audit and Credit Committees.


UBank Ltd.

Mr. David Blumberg has a Master’s Degree in Business Administration and a Bachelor’s Degree in Economics.Mr.BlumbergservedasGeneralManagerofBankTefahot,GeneralManagerofBankMizrachiandasChairmanoftheBoardofDirectorsofBankYerushalayim,andispresentlytheGeneralManagerofBarMutavltd.,ChairmanoftheboardofDirectorsofBSSHIsraelcreditinsuranceCompanyltd.andHar’el insurance company ltd.Mr. Blumberg is a member of the Credit Committee.

Mr. Ben Zion Israel isacertifiedaccountant,withaBachelor’sDegreeinEconomicsandAccounting.Mr.Israel served as acting General Manager and Finance Manager of Inspire Investments Ltd. and also served asdirectorandmemberoftheAuditCommitteewhichdiscussedthefinancialstatementsofTadir-Gan(PrecisionProducts)1993Ltd.Mr. Israel is a member of the Audit Committee.

Dr. Shimon Ravid has a Ph.D. in economics. Dr Ravid was joint General Manager of Bank Hapoalim Ltd. forapprox.10years(until2000)andthereafterservedasthechairmanoftheBoardofDirectorsofBankOtsarHahayalLtd.(untiltheendofthe2001).Dr.RavidisamemberoftheBalanceSheet,AuditandCreditCommittees.Dr.RavidceasedbeinganexternaldirectorintheBank,after6yearson23February,2009.

Even after the changes above the Bank keeps the minimum number of directors with accounting and financialexpertise.

Operation of the Board of Directors and Changes in Board Membership

During2009theBank’sBoardofDirectorsactedasobligedbyitsduties,indeterminingpolicyinvariousspheres,fixingguidelinesasobligedbythevariousdirectives,approvalofcreditandsupervisionandcontrol of current business activity.

TheBoardofDirectors’plenumanditscommittees,theAuditCommittee,BalanceSheetCommitteeandCreditCommittee,helddetaileddiscussions,eachinitsownsphere.Over the year there were 11 Board of Directors’ meetings and 14 meetings of the various committees of the Board of Directors.

Members of the Bank’s Board of Directors

Set out below are the names of the members of the Board of Directors of the Bank at the time of publicationofthisReport,aswellasmembersoftheBoardofDirectorswhoservedduring2009:

Jack Elaad, ChairmanPeriodofservice:22.12.04-present.MembershipofCommittees:CreditCommittee***.InternalorExternalDirector*:InternalEducation:BAEconomics-HebrewUniversityJerusalem,MABusinessAdministration(Finance)-HebrewUniversity Jerusalem.Employmentduringlastfiveyears:2004-present:DirectorandChairmanoftheBoardofDirectorsofUbank,2006-present:ChairmanoftheBoardofDirectorsofFirstInternationalBankofIsrael,FinancialConsultant.MembershipsinadditionalBoardsofDirectorsasatthedateofpublicationofthereports:JackElaadConsultantsLtd.,SpearcastLtd.andFibiltd.andchairmanoftheboardofFibiSwiss.

* ExternalDirectorasdefinedinProperConductofBankingBusinessDirectiveNo.301.** Asat1.1.09theBalanceSheercommitteewascanceled.Theresponsibilityforthediscussionofthefinancialstatementswas

transferred to the Audit Committee.*** Asof1.1.2010,thenameoftheCreditCommitteewaschangedtotheCreditandRiskManagementCommittee.**** On15.12.09,theBoardofDirectorsoftheBankappointedMr.YoramSirkisasamemberoftheCreditandRiskManagement

Committee,asof1.1.2010.


UBank Ltd.

Yehuda DroriPeriodofservice:24.01.06-present.MembershipofCommittees:AuditCommitteeandCreditCommittee***.InternalorExternalDirector*:External.Education:BAEconomicsandHistory-HebrewUniversityJerusalem,MABusinessAdministration-Hebrew University Jerusalem.Employmentduringlastfiveyears:FinancialConsultantandmembershipofBoardsofDirectorsandInvestment Committees.MembershipsinadditionalBoardsofDirectorsasatthedateofpublicationofthereports:None.

Yehuda BotzerPeriodofservice:1.2.07-presentMembershipofCommittees:CreditCommitteeInternal or External Director*:InternalEducation:BAEconomics-TelAvivUniversity.Employmentduringlastfiveyears:DeputyGeneralmanager,ManagerofCreditDepartmentinFirstInternational Bank of Israel.MembershipsinadditionalBoardsofDirectorsasatthedateofpublicationofthereports:None.

Yoram SirkisPeriodofservice:14.8.07-present.MembershipofCommittees:AuditandCreditCommittee***.InternalorExternalDirector*:InternalEducation:BAEconomicsandAccounting-HebrewUniversityJerusalem;MBABusinessAdministration-Hebrew University Jerusalem.Employmentduringlastfiveyears:2007-present:AssistantGeneralManagerandHeadofCustomers’AssetsDivisioninFirstInternationalBankofIsrael;2000-2007:ManagerofSecuritiesDepartmentinFirstInternational Bank of Israel.MembershipsinadditionalBoardsofDirectorsasatthedateofpublicationofthereports:FirstInternationalBankofIsraelNomineeCompanyLtd.,TASELtd.andinMa’of.ClearingHouseLtd.;ChairmanoftheBoardofDirectorsofFIBIInsuranceAgency(2005)Ltd.

David BlumbergPeriodofservice:14.10.07-present.MembershipofCommittees:CreditCommittee***.InternalorExternalDirector*:ExternalEducation:BAEconomics-HebrewUniversityJerusalem;MABusinessAdministration(Finance)-HebrewUniversity Jerusalem.Employmentduringlastfiveyears:Financialconsultant;OwnerandGeneralManageroftheBarMutavCompany;1998-2006:ChairmanoftheBoardofDirectorsofBankYerushalayim.MembershipsinadditionalBoardsofDirectorsasatthedateofpublicationofthereports:BarMutavLtd.,Chairman of the Board of Directors of BSSH Israel Credit Insurance Company Ltd. and Har’el insurance company ltd.

Avi KramerPeriodofservice:6.5.08-present.MembershipofCommittees:AuditCommitteeInternalorExternalDirector*:ExternalEducation:BAEconomics-TelAvivUniversity.Employmentduringlastfiveyears:2005-2007:DeputyGeneralManagerSalesandMemberofManagement-IBMIsraelLtd.;2008:GeneralManager-BSafeInformationSystems(1983)Ltd.2009-present:buisnessandinformationsystemsconsultant.MembershipsinadditionalBoardsofDirectorsasatthedateofpublicationofthereports:None.


UBank Ltd.

Ben Zion IsraelPeriodofservice:Commencementofservice23.2.09-present.MembershipofCommittees:AuditCommitteeInternalorExternalDirector*:ExternalEducation:BAEconomicsandAccounting-TelAvivUniversity,CPA.Employmentduringlastfiveyears:FromOctober2008:GeneralManager-BakerTillyconsultants(Israel)Ltd.2004-2008:actingGeneralManagerandDeputyGeneralManager-FinanceonInspireInvestmentsLtd.MembershipsinadditionalBoardsofDirectorsasatthedateofpublicationofthereports:Y.A.YigalInvestments(1990)Ltd.,BenZionIsraelBusinessandFinancialconsultancyLtd.andBakerTillyconsultants(Israel)Ltd.

Hadas PeledPeriodofservice:1.9.08-14.10.09.MembershipofCommittees:AuditCommittee.InternalorExternalDirector*:ExternalEducation:LLBLaw-BarIlanUniversity.Studies for Masters Degree in Law - Tel Aviv UniversityEmploymentduringlastfiveyears:1994-31.1.09:DeputyGeneralManagerandLegalCounselofReshet-Noga Ltd. MembershipsinadditionalBoardsofDirectorsasatthedateofpublicationofthereports:None.

Dr. Shimon RavidPeriodofservice:24.2.03-23.2.09.MembershipofCommittees:AuditCommittee,CreditCommittee,BalanceSheetCommittee**,.InternalorExternalDirector*:ExternalEducation:Ph.D.Economics-HebrewUniversityJerusalem.Employmentduringlastfiveyears:MembershipofBoardsofDirectorsandInvestmentCommitteesMembershipsinadditionalBoardsofDirectorsasatthedateofpublicationofthereports:RamatHagolanWineryLtd.,MishkeiHaNegevCentralAgriculturalCooperativeSocietyLtd.,DolevDvirLahavPlasticProducts(Partnership),ArdagLtd.,AlgotechnologiesLtd.,IscorLtd.,Davik-AgriculturalCooperativeSocietyLtd.,Or-AdLtd.


UBank Ltd.

Members of the Bank’s Management

MembersoftheBank’sManagementasatthedateofthepublicationofthisreportandduring2009are:

Ilan Raviv,GeneralManagerPeriodofservice:23.12.04-2.3.10.Education:BAEconomics-AteneodeManila;M.Sc.OperationsResearch/Management-UniversityofLondon.Employmentduringlastfiveyears:Since2004:GeneralManagerUbankLtd.

Avi Basson,DeputyGeneralManagerandHeadofCapitalMarketDivisionPeriodofservice:7.6.05-present.Education:BAEconomics-TelAvivUniversity,MBAFinanceandAccounting-TelAvivUniversity.Employmentduringlastfiveyears:Since2005:DeputyGeneralManagerandHeadofCapitalMarketDivision.2001-2005:GeneralManagerClalFinanceMembersoftheClalInsuranceGroup.

Yaacov Garten,DeputyGeneralManagerandtheHeadofCentralServicesDivision.Periodofservice:3.1.07-present.Education:BScChemicalEngineering-Technion,MBABusinessAdministration-TelAvivUniversityEmploymentduringlastfiveyears:Since2007:DeputyGeneralManagerandtheHeadofCentralServicesDivision,UbankLtd.2004-2006:DeputyGeneralManagerOperationsandComputersinDiscountMortgageBank.

Michal Goren,ManageressofPersonalBankingDivisionPeriodofservice:24.3.08-present.Education:LLBLaw-TelAvivUniversity,LLMLaw-TelAvivUniversity,M.Sc.ManagementStudiesandOrganizationalBehavior-TelAvivUniversity.Employmentduringlastfiveyears:2007-2008:GeneralManagerandDirectorofUBankTrustCo.Ltd.;2004-2007:HeadofBusinessCentersintheLegalCounselDepartmentofBankHapoalimLtd.:1995-2007:LegalCounsel(CounseltoSpecialCreditsDepartment)inCorporateDivisionofBankHapoalim Ltd.

Shimon Vaknin,HeadofFinanceDivisionPeriodofservice:1.3.06-present.Education:BAEconomics-HebrewUniversityJerusalem;MABusinessAdministration(Finance)-HebrewUniversity Jerusalem.Employmentduringlastfiveyears:Since2006:HeadofFinanceDivision,UbankLtd2005-2006:ManagerAssetsandLiabilityDepartment,UbankLtd.2002-2005:ManagerofInterest,ProductDevelopmentandTrainingDesk,andAlternateDealingRoomManager,MizrachiTefahotBankLtd.

Orit Itzcovitch,ManageressoftheChiefAccountantDivisionandChiefAccountant.Periodofservice:1.12.06-present.Education:BAAccountingandEconomics-TelAvivUniversity,MBABusinessAdministration-TelAvivUniversity,CPA.Employmentduringlastfiveyears:SinceDecember2006:ManageressoftheChiefAccountantDivisionandChiefAccountant,UbankLtd.Priortothen:VariouspositionsandmanagedtheManageressoftheAccounting Department in Ubank Ltd.

Changes in Members of Bank ManagementOnDecember13,2009,Mr.IlanRavivnotifiedtheChairmanoftheBoardofDirectorsofhisresignationfrom the position of General Manager of the Bank and from related duties. The resignation will come intoeffectonMarch3,2010.OnJanuary3,2010,theBoardofDirectorsoftheBankapprovedthe appointment of Mr. Ron Badany to the position of General Manager of the Bank. The date of commencementofhisdutiesisfromApril1,2010.BetweenMarch3,2010andApril1,2010Mr.YaacovGarten,DeputyGeneralManagerandtheHeadofCentralServicesDivision,willserveasActingGeneral


UBank Ltd.

Manager.BelowaredetailsofMr.RonBadany:Education:BAEconomicsandBusinessAdministration-HebrewUniversityJerusalem;MBAFinance-Tel-Aviv University.Employmentduringlastfiveyears:Since2006:GlobalTreasureratIsraelDiscountBankLtd.;2001-2006:Dealing Room Manager at Israel Discount Bank Ltd.ServiceonotherBoardsofDirectors:“BeitLamedDaletLtd.”Itshouldbenotedthatthetermofserviceconcluded with the termination of his employment at Israel Discount Bank.

AssessmentofControlsandProcedureswithRegardtothefinancialstatementdisclosure

InaccordancewiththeDirectivesonReportingtothePublic,andinaccordancewiththeprovisionsofProperConductofBankingDirectiveNo.309publishedinSeptember2008,theBankhasmaintainedcontrolsandproceduresregardingdisclosureforanumberofyears,andsetupaninternalcontrolsystemoverfinancialreporting.Thiswasimplementedforthefirsttimeinthefinancialstatementfortheyearending 31.12.08.TheDirectives,whichrefertoManagement’sresponsibilityfortheinternalcontroloverfinancialreportingandtheexternalauditors’opinionwithregardtotheauditoftheinternalcontroloverfinancialreporting,were prepared in accordance with the provisions of Sections 302 and 404 of the law known as the Sarbanes-OxleyActpassedintheUnitedStates,anddirectivesandguidelinesdecideduponintheUnitedStates,amongothersbythePCAOB.AttachedtotheFinancialStatementarecertificationsbytheGeneralManagerandtheChiefAccountant,onanindividualbasis,oftheirevaluationofcontrolsandprocedureswithregardtodisclosure.

TheManagementoftheBank,togetherwiththeGeneralManagerandChiefAccountantoftheBank,hasmadeanevaluation,asattheendoftheperiodcoveredbythisReport,oftheeffectivenessofcontrolsand procedures regarding disclosure in the Bank. Onthebasisofthisevaluation,theGeneralManageroftheBankandtheChiefAccountanthaveconcludedthat,asattheendofthisperiod,controlsandproceduresregardingdisclosureintheBankareeffectivefortherecording,processing,summarizingandreportingoftheinformationthatthebankingcorporationisrequiredtodiscloseinitsannualfinancialstatements,inaccordancewiththeDirectivesonReporting to the Public of the Supervisor of Banks and on the date required in these Directives.

DuringthequarterendingonMarch31,2009,therewasachangeintheBank’sinternalcontroloverfinancialreportingthatmateriallyaffectedorthatmaybereasonablyanticipatedtomateriallyaffecttheBank’sinternalcontroloverfinancialreporting,derivingfromconversionofsystemstothecomputersystems of the First International Bank.Followingtheconversionofthesystems,manyworkingprocesseswerechangedintheBank,andtheinternal audit system was adapted accordingly to the new processes.

DuringthequartersendingJune30,2009,September30,2009,andDecember31,2009,therewerenochangesintheBank’sinternalcontroloverfinancialreportingthatmateriallyaffectedorthatmaybereasonablyanticipatedtomateriallyaffecttheBank’sinternalcontroloverfinancialreporting,withtheexceptionoftheprocessofupdatingandimprovingcontrolscarriedoutforfinancialreportingpurposes,following the systems conversion process mentioned above.

Forfurtherinformation,seecommentsintheChapterdealinginformationsystems(page16).


UBank Ltd.

DetailsoftheAmountsandBenefitspaidtotheRecipientsoftheHighestSalaries in the Bank

Setoutbelowaredetailsofthebenefitsandamountspaid,orinrespectofwhichaprovisionwasrecorded in the reported year1,totherecipientsofthehighestsalariesamongtheBank’sofficersatreportedamounts,inNISthousands:

FortheyearendedDecember31,2009

Detailsontherecipientofthebenefit Benefitsforservices

Position Scope of Full-time Position

Amount of Holdings in Capital of the Bank

Salary Bonuses Value of Benefit3

Severance,savings,continuing studies’ fund,vacation and social security

Additions to reserves in respect of related expenses as a result of salary adjustments during the year

Total salaries and related expenses

Other payments

Jack Elaad

Chairman of the Board of Directors 4 - - - - - - - 1,073

Ilan Raviv

General manager 100% - 1,578 625 72 463 9 2,747 -

Avi Basson

Deputy General manager and head of capital market Division 100% - 941 240 57 2375 4 1,617 -

Shimon Vaknin

Head of financeDivision 100% - 694 400 57 2340 10 1,501 -

YaacovGarten

Deputy general manager and Head of central Services Division 100% - 641 150 57 2285 6 1,139 -

Michal Goren

Mangerss of Personal Banking Division 100% - 532 120 57 2244 4 957 -

Notes see on page 109.


UBank Ltd.


Salaries and bonuses

Severance,savings,continuing studies’fund,vacation and social security

Additions to reserves in respect of related expenses as a result of salary adjustments during the year

Total salaries and related expenses

Other payments

Jack Elaad - - - - 640

Ilan Raviv 1,829 596 7 2,432 74

Avi Basson 1,038 242 14 1,294 64

Shimon Vaknin 853 245 8 1,106 61

YaacovGarten 712 181 4 897 68

OritItzcovitch 659 187 19 865 65

1 Excluding salary tax and information on loans granted on terms similar to all Bank’s employees.2 Including a provision for an adaptation grant of three monthly salaries.3. Includingthevalueofbenefitsforcompanycar,cellulartelephone,newspaper,andhealthinsurance.4. ThescopeofemploymentbytheGroup,asChairmanoftheFirstInternationalBankandasChairmanofU-Bank,is90%ofa

full-timeposition,ofwhichatleasttwodaysperweekatU-Bank.

Notes:a. Indeterminingtheabovepaymentsofsalary,bonuses,andbenefitsincludedinthereportonsalariesofmembersof

Management,theconsiderationsoftheBoardofDirectorswerebasedontherankanddutiesofeachofficerandhiscontributiontotheBank’sactivities.ThevolumeofbusinessandtheBank’soperatingresultswere,amongotherthings,alsotaken into account in considerations of the remuneration.

b. ThetermsforthemaintenanceofaccountsattheBankforseniorofficeholders,includingallactivityinthem,aresimilartotheterms for other customers with similar characteristics.


UBank Ltd.

Mr. Jack ElaadwasappointedasChairmanoftheBoardofDirectorsasofDecember23,2004foranunlimited period. Mr. Elaad serves also as Chairman of the First International Bank. The Chairman performs hisdutiesintheGroupasChairmanofFirstInternationalBankandasChairmanoftheBank,andthescopeofhisemploymentis90%ofafull-timeposition,ofwhichatleasttwodaysperweekatU-Bank.ThetermsofemploymentoftheChairmanoftheBankwereapprovedbytheAuditCommittee,theBoardofDirectors,andtheGeneralMeetingoftheBank.Eachofthepartiesisentitledtoendtheagreementatanytimeandforanyreason,byprovidingwrittennoticethreemonthsinadvanceandinaccordancewiththe terms agreed upon in the employment agreement.InconsiderationfortheservicestheChairmanprovidestheBank,heisentitledtoamonthlypaymentandreimbursement of expenses against a tax invoice. It is provided and agreed that the agreement between theChairmanandtheBankisbasedontheprovisionofservicesbytheChairman,andanemployer-employee relationship will not apply between the parties.The Chairman is also entitled to an annual bonus of a monthly salary for each percent of the return on capital from ordinary activities above a return threshold of eligibility determined by the Board of Directors forthatcalendaryear.In2009,thereturnthresholdstoodat8%.The period of limitation of competition is for six months from the date employment at the Bank is terminated.

Mr. Ilan RavivhasbeenemployedasGeneralManageroftheBanksinceDecember23,2004undertermsofemploymentdetailedinapersonalagreementrecentlyupdatedonJuly5,2007.Eachofthepartiesisentitledtoendtheagreementatanytimeandforanyreason,byprovidingwrittennotice three months in advance and in accordance with the terms agreed upon in the employment agreement.OnterminationofhisemploymentbytheBank,Mr.Ravivisentitledtoseverancecompensation according to the sum that was provided in the individual compensation fund without the addition of reserves. TheBankreservestherightnottoutilizetheperiodofadvancenoticewhollyorpartiallyandtopayMr.Raviv for the period not claimed. The period of limitation of competition is for six months from the date employment at the Bank is terminated.Mr. Raviv entitled for to an annual bonus of a monthly salary for each percent of the return on capital from ordinary activities above a return threshold of eligibility determined by the Board of Directors for thatcalendaryear.In2009,thereturnthresholdstoodat8%.ThepaymentofabonusexceedingthreemonthlysalariesrequirestheapprovaloftheBoardofDirectorsoftheBank.Forpurposesofcalculation,componentsoftheprofitfortheyearwithone-timecharacteristicswillbeeliminated.Mr.Raviv is also entitled to an adaptation grant upon termination of his employment by the Bank of three monthlysalaries,andanadditionalgrantthatwillcalculatedasfollows:ifheworksuntiltheendof2009,hewillbeentitledtothreesalaries;ifheworksuntiltheendof2010,hewillbeentitledtofoursalaries;andifheworksuntiltheendof2011,hewillbeentitledtofivesalaries.Thepaymentisnotcumulativeand is a single grant paid at the end of the period.Mr. Raviv’s salary is linked to the increase in the Consumer Price Index. In the event of a decrease in the CPI,thesalarywillnotchangeuntilanincreasethatoffsetsthedecreaseintheCPIOnDecember13,2009,Mr.IlanRavivnotifiedtheChairmanoftheBoardofDirectorsofhisresignationfrom the position of General Manager of the Bank and from related duties. The resignation will come intoeffectonMarch3,2010.OnJanuary3,2010,theBoardofDirectorsoftheBankapprovedthe appointment of Mr. Ron Badany to the position of General Manager of the Bank. The date of commencementofhisdutiesisfromApril1,2010.BetweenMarch3,2010andApril1,2010Mr.YaacovGarten,DeputyGeneralManagerandtheHeadofCentralServicesDivision,willserveasActingGeneralManager.

Mr. Avi BassonhasservedasaMemberofManagementandanemployeeoftheBankasofJune7,2005,under a personal agreement for an unlimited period.Eachofthepartiesisentitledtoendtheagreementatanytimeandforanyreason,byprovidingwrittennotice three months in advance and in accordance with the terms agreed upon in the employment agreement. OnterminationofhisemploymentbytheBank,Mr.Bassonisentitledtoseverancecompensationaccording to the sum that was provided in the individual compensation fund without the addition of


UBank Ltd.

reserves. Inaddition,Mr.Bassonisentitledtoanadaptationgrantofthreemonthlysalariesonterminationofemployment by the Bank. Mr. Basson’s salary is linked to the increase in the Consumer Price Index. In the event of a decrease in the CPI,thesalarywillnotchangeuntilanincreasethatoffsetsthedecreaseintheCPI.

Mr. Shimon VakninhasservedasaMemberofManagementasofMarch1,2006underapersonalagreement for an unlimited period.Eachofthepartiesisentitledtoendtheagreementatanytimeandforanyreason,byprovidingwrittennotice three months in advance and in accordance with the terms agreed upon in the employment agreement. OnterminationofhisemploymentattheBank,Mr.Vakninwillbeentitledtoseverancecompensationof 100% of his last salary multiplied by the number of years of seniority. From these amounts will be deducted the redemption value of the provident fund for which the Bank has provided amounts in his favor.Inaddition,Mr.Vakninisentitledtoanadaptationgrantofthreemonthlysalariesonterminationofemployment by the Bank. Mr. Vaknin’s salary is linked to the increase in the Consumer Price Index. In the event of a decrease in the CPI,thesalarywillnotchangeuntilanincreasethatoffsetsthedecreaseintheCPI.

Mr. Yaacov GartenhasservedasaMemberofManagementandanemployeeoftheBanksinceJanuary3,2007 under a personal agreement for an unlimited period.Eachofthepartiesisentitledtoendtheagreementatanytimeandforanyreason,byprovidingwrittennotice three months in advance and in accordance with the terms agreed upon in the employment agreement. OnterminationofhisemploymentattheBank,Mr.Gartenwillbeentitledtoseverancecompensationof 100% of his last salary multiplied by the number of years of seniority. From these amounts will be deducted the redemption value of the provident fund for which the Bank has provided amounts in his favor.Inaddition,Mr.Gartenisentitledtoanadaptationgrantofthreemonthlysalariesonterminationofemployment by the Bank. Mr. Garten’s salary is linked to the increase in the Consumer Price Index. In the event of a decrease in the CPI,thesalarywillnotchangeuntilanincreasethatoffsetsthedecreaseintheCPI.

Mrs. Michael GorenhasservedasaMemberofManagementasofMarch24,2008underapersonalagreement for an unlimited period.Eachofthepartiesisentitledtoendtheagreementatanytimeandforanyreason,byprovidingwrittennotice three months in advance and in accordance with the terms agreed upon in the employment agreement. OnterminationofheremploymentattheBank,Mrs.Gorenwillbeentitledtoseverancecompensationof 100% of her last salary multiplied by the number of years of seniority. From these amounts will be deducted the redemption value of the provident fund for which the Bank has provided amounts in her favor.Inaddition,Mrs.Gorenisentitledtoanadaptationgrantofthreemonthlysalariesonterminationofemployment by the Bank. Mrs. Goren salary is linked to the increase in the Consumer Price Index. In the event of a decrease in the CPI,thesalarywillnotchangeuntilanincreasethatoffsetsthedecreaseintheCPI.


UBank Ltd.

Auditing Accountants’ Remuneration

Reported amounts

Consolidated The Bank

2009

NIS thousand

2008

NIS thousand

2009

NIS thousand

2008

NIS thousand

Auditing Accountants’Remuneration1 2 3

For audit work4 1,901 1,863 1,714 1,583

Foradditionalservices:

Additional services related to auditing5 138 860 138 730

Tax services 55 50 - 50

Other services6 - 160 - 160

Total for additional services 193 1,070 138 940

Total 2,094 2,933 1,852 2,523

1 The Board of Directors’ report to the General Meeting of the auditing accountants’ remuneration for audit work and additional services,pursuanttosections165and167oftheCompaniesLaw-1999.

2 The auditing accountants’ remuneration includes payments by the Bank and its consolidated subsidiaries and also includes payments pursuant to the Value Added Tax Law.

3 Includes paid remuneration and accrued remuneration.4 Auditingannualfinancialstatementsandsox,taxreportsandreviewinginterimstatements.5 Including special audit work.6 Including risk survey’s fee.

The Bank’s auditor since its establishment is Somekh Chaikin.

TheBoardofDirectorsexpressesitsgratitudetotheGeneralManageroftheBank,Mr.IlanRaviv,forhissignificantcontributiontotheBank.

The Board of Directors expresses its thanks to the Bank’s management and its employees for their work,loyaltyandprofessionalismandfortheeffortsinvestedtoimprovetheBank’sprofitabilityanditsdevelopment

Jack Elaad Yaacov Garten

Chairman of the Board of Directors Acting General Manager

March23,2009


UBank Ltd.

Followingarethetablesofdetailedfinancialinformationaccordingtothefollowingsubjects:

A ConsolidatedBalanceSheetasatDecember31,oftheyears2005to2009

B ConsolidatedStatementofProfitandLossfortheyears2005to2009

C Income and Expense Ratios on a consolidated basis

D Analysis of Exposure to Changes in the Rates of Interest on a consolidated basis

E Total Credit Risk by Economic Sector on a consolidated basis

F Exposure to foreign countries on a consolidated basis

G Multi Quarter Data - Consolidated Balance Sheet

H MultiQuarterData-ConsolidatedStatementofProfitandLoss

Annual Report 2009

Management Review of the Bank’sFinancial Position and Operating Results


UBank Ltd.

Addendum A: Consolidated Balance sheet as at December 31, of theyears 2005 to 2009

Reported amounts

December 31

2009

NIS million

2008

NIS million

2007

NIS million

2006

NIS million

2005

NIS million

Assets

Cash and deposits with banks 2,827.8 2,701.8 1,744.5 1,890.3 2,663.8

Securities 2,498.2 2,930.7 2,765.5 3,282.6 2,648.1

Borrowed securities 996.2 698.6 434.3 - -

Credit to the public 2,021.8 1,931.6 2,404.1 1,578.0 1,168.9

Credit to the Government - - - - 70.2

Equity basis Investments 1- 0.8 - - 1.6

Buildings and equipment 18.3 17.7 14.2 12.1 16.1

Other assets 855.9 216.9 246.7 232.7 196.6

Total assets 9,218.2 8,498.1 7,609.3 6,995.7 6,765.3

Liabilities and Shareholders’ equity

Deposits of the public 7,127.8 6,820.2 6,469.3 6,083.3 6,054.4

Deposits from banks 72.9 252.0 19.1 48.7 123.1

Deposits of the Government 4.9 6.1 264.1 - -

Other liabilities 1,470.9 968.2 442.3 426.1 138.3

Total liabilities 8,676.5 8,046.5 7,194.8 6,558.1 6,315.8

Shareholders’ equity 541.7 451.6 414.5 437.6 449.5

Total liabilities and Shareholders’ equity 9,218.2 8,498.1 7,609.3 6,995.7 6,765.3


Management Review 2009 / 117

UBank Ltd.

Addendum B: Consolidated Statement of Profit and Loss for the years2005 to 2009

Reported amounts

For the year ended December 31

2009

NIS million

2008

NIS million

2007

NIS million

2006

NIS million

2005

NIS million

Profitfromfinancingoperationsbeforeprovision for doubtful debts 160.4 145.1 123.0 116.3 105.4

Provision for doubtful debts (3.9) (4.4) 1.3 (1.9) 3.7

Profitfromfinancingoperationsafterprovision for doubtful debts 164.3 149.5 121.7 118.2 101.7


Operating commissions 120.8 1121.8 1142.2 1130.8 1105.4

Profits(Losses)oninvestmentinshares,net (2.7) 0.9 2.7 (0.5) (0.3)

Other income 5.9 11.7 12.9 11.6 11.1

Total operating and other income 124.0 1124.4 147.8 131.9 106.2

Operatingandotherexpenses:

Salaries and related expenses 75.8 79.3 73.0 69.6 63.3

Maintenance and depreciation of buildings and equipment 21.9 19.4 16.2 18.1 18.6

Other expenses 80.8 171.4 61.6 51.2 45.3

Total operating and other expenses 178.5 1170.1 150.8 138.9 127.2

Profitfromordinaryoperationsbeforetaxes 109.8 103.8 118.7 111.2 80.7

Provisionfortaxesonprofitfromordinaryoperations 43.4 39.4 41.5 45.4 32.4

Profitfromordinaryoperationsaftertaxes 66.4 64.4 77.2 65.8 48.3

Bank’sshareinprofits(losses)fromordinaryoperationsofinvesteecompanies,after tax effect (0.8) 0.9 2- 1.0 1.7

Netprofitfromordinaryoperations 65.6 65.3 77.2 66.8 50.0

Profitfromextraordinaryoperationsaftertax - - 1.5 6.8 2.6

Cumulative effect at the beginningof the year of change in accountingmethod,aftertax - - - - 2-

Netprofit 65.6 65.3 78.7 73.6 52.6

Earning per share data

NetearningpershareofNIS1parvalue: NIS NIS NIS NIS NIS

Netprofitfromordinaryoperations 21.0 20.9 24.7 21.4 16.0

Netextraordinaryprofit - - 0.5 2.2 0.8

Netprofit 21.0 20.9 25.2 23.6 16.8

1 Reclassified.2 Less than NIS 0.1 million.


UBank Ltd.

Addendum C: Income and Expense Ratios on a consolidated basis

Reported amounts

FortheyearendedDecember31,2009 FortheyearendedDecember31,2008

Average Annual

Balance1

NISmillion

Financing income

(expense)

NISmillion

Rateofincome(expense) Average Annual

Balance1

NISmillion

Financing income

(expense)

NISmillion

Rateofincome(expense)

excluding effect of

derivatives

%

including effect of

derivatives

%

excluding effect of

derivatives

%

including effect of

derivatives

%

UnlinkedNIS:

Assets 5,385.0 61.8 1.15 4,015.5 121.2 3.02

Effect of ALM

derivatives6 657.9 7.0 754.3 24.6

Total Assets 6,042.9 68.8 1.14 4,769.8 145.8 3.06

Liabilities 4,612.8 (10.7) (0.23) 4,134.6 (89.0) (2.15)

Effect of ALM

derivatives6 877.5 (8.1) 468.2 (12.5)

Total liabilities 5,490.3 (18.8) (0.34) 4,602.8 (101.5) (2.21)

Interest margin 0.92 0.80 0.87 0.85

C.P.I.-LinkedNIS:

Assets 100.1 8.8 8.79 303.3 22.8 7.52

Effect of ALM

derivatives6 65.4 0.2 89.6 0.8

Total assets 165.5 9.0 5.44 392.9 23.6 6.01

Liabilities 19.5 (1.4) (7.18) 5.2 (0.4) (7.69)

Effect of ALM

derivatives6 220.4 (7.8) 226.5 (9.2)

Total liabilities 239.9 (9.2) (3.83) 231.7 (9.6) (4.14)

Interest margin 1.61 1.61 (0.17) 1.87

1 Onthebasisofmonthlyopeningbalances(excludingunlinkedIsraelicurrencysector,whichisonthebasisofdailyfigures)afterdeductingtheaveragebalanceofthespecificprovisionfordoubtfuldebts.

2 The interest margin in all the linkage sectors together cannot be compared between periods since it includes the weighted position in the linked sector.

3 Local activity Including Israeli currency linked to foreign currency.4 Thevolatilityintheforeigncurrencymarginisaresultofactivityinshekel/foreigncurrencyoptions,whicharecoveredby

transactions in the base asset.5 Restated.6 Hedgingderivativeinstruments(excludingoptions),embeddedderivativesthathavebeenseparated,andALMderivativeswhich

constitute part of the Bank’s asset and liability management system.

Notes:a. Completedataregardingtheincomeandexpenseratiosineachsegment,accordingtothevariousbalancesheetitemsare

available upon request.b. Thedataprovidesdetailsbeforeandaftertheeffectofderivativeinstruments(includingoff-balancesheeteffectofderivative

instruments).


UBank Ltd.

Reported amounts

FortheyearendedDecember31,2009 FortheyearendedDecember31,20085

Average Annual

Balance1

NISmillion

Financing income

(expense)

NISmillion

Rateofincome(expense) Average Annual

Balance1

NISmillion

Financing income

(expense)

NISmillion

Rateofincome(expense)

excluding effect of

derivatives

%

including effect of

derivatives

%

excluding effect of

derivatives

%

including effect of

derivatives

%

Foreign Currency3

(IndudingIsraelcurrency linked to foreigncurrency)

Assets 1,932.9 93.9 4.86 2,463.9 42.5 1.72

Effect of derivatives6:

Hedging derivatives 181.2 38.1 179.0 2.7

Embedded and ALM

derivatives 2,368.1 34.6 1,474.7 63.2

Total assets 4,482.2 166.6 3.72 4,117.6 108.4 2.63

Liabilities 2,241.6 (8.1) (0.36) 2,243.8 37.6 1.68


Hedging derivatives 181.2 (45.9) 179.0 (15.1)

Embedded and ALM

derivatives 2,033.6 (71.7) 1,624.7 (96.3)


Interest margin 4.50 40.90 3.40 40.81

Total

Financial assets that producedfinancingincome 7,418.0 164.5 2.22 6,782.7 186.5 2.75



Embedded and ALM

derivatives 3,091.4 41.8 2,318.6 88.6

Total assets 10,690.6 244.4 2.29 9,280.3 277.8 2.99

Financial liabilities that produced financingexpenses 6,873.9 (20.2) (0.29) 6,383.6 (51.8) (0.81)



Embedded and ALM

derivatives 3,131.5 (87.6) 2,319.4 (118.0)


Interest margin 2 1.93 0.78 1.94 0.91


UBank Ltd.

Addendum C: Income and Expense Ratios on a consolidated basis (cont’d)

Reported amounts

2009 20083

AverageAnnual

Balance1

NIS million

Financingincome

(expense)

NIS million

AverageAnnual

Balance1

NIS million

Financingincome

(expense)

NIS million

In respect of options (2.3) 10.9

Inrespectofotherderivatives(notincludingoptions,hedgingderivatives,ALMderivativesandseparatedembeddedderivatives) 2.1 (0.1)

Commissionsfromfinancingbusinessandotherfinancingincome2 69.9 41.4

Profitfromfinancingactivitiesbeforeprovisionfor doubtful debts 160.4 145.1

Provisionfordoubtfuldebts(includinggeneralandsupplementaryprovision) (3.9) (4.4)

Profitfromfinancingactivitiesafterprovisionfor doubtful debts 164.3 149.5

Total:

Financialassetsthatproducedfinancingincome 7,418.0 6,782.7

Assets derived from derivative instruments6 89.7 158.5

Otherfinancialassets 38.4 45.8

General and supplementary provision for doubtful debts (10.5) (10.5)

Totalfinancialassets 7,535.6 6,976.5

Total:

Financial liabilities that producedfinancingexpenses 6,873.9 6,383.6

Liabilities derived from derivative instruments6 99.3 168.2

Otherfinancialliabilities 73.7 5.8

Totalfinancialliabilities 7,046.9 6,557.6

Totalexcessoffinancialassetsoverfinancialliabilities 488.7 418.9

Non-monetary items 26.2 26.8

Total capital means 514.9 445.7

1 Onthebasisofmonthlyopeningbalances(excludingunlinkedIsraelicurrencysector,whichisonthebasisofdailyfigures)afterdeductingtheaveragebalanceofthespecificprovisionfordoubtfuldebts.

2 Includingprofitsandlossesfromthesaleofbondsandadjustmentstofairvalueoftradingbonds.3 Restated.4 Local activity including Israeli currency linked to foreign currency.5 Hedgingderivativeinstruments(excludingoptions),embeddedderivativesthathavebeenseparated,andALMderivativeswhich

constitute part of the Bank’s asset and liability management system.6 Averagebalancesofderivativeinstruments(doesnotincludeaverageofoff-balancesheetderivativeinstruments).

Notes: a.Completedataregardingtheincomeandexpenseratiosineachsegment,accordingtothevariousbalancesheetitemsare

available upon request. b. Thedataprovidesdetailsbeforeandaftertheeffectofderivativeinstruments(includingoff-balancesheeteffectofderivative

instruments).


UBank Ltd.

2009 20083

Average Annual

Balance1

US$million

Financing income

(expense)

US$million

Rate of income (expense)

Average Annual

Balance1

US$million

Financing income

(expense)

US$million

Rate of income (expense)

excluding effect of

derivatives

%

includingeffect of

derivatives

%

excluding effect of

derivatives

%

includingeffect of

derivatives

%

Foriegn Currency4(includingIsraelicurrencylinkedtoforeigncurrency):

Assets 492.2 10.2 2.07 665.8 27.0 4.06



Embedded and ALM

derivatives 604.5 3.9 424.6 13.0

Total assets 1,142.9 23.8 2.08 1,140.6 40.8 3.58

Liabilities 570.8 (1.0) (0.18) 605.8 (12.5) (2.06)



Embedded and ALM

derivatives 519.1 (2.8) 467.0 (13.9)


Interest margin 1.89 0.72 2.00 0.85


UBank Ltd.

Addendum D: Analysis of Exposure to Changes in the Rates of Intereston a consolidated basis

Reported amounts

Demand and up to one

month

NIS million

Above one month up to

three monthsNIS million

Three to twelve

months

NIS million

One tothree years

NIS million

Unlinked NIS

Financial assets1,3 5,193.2 167.2 586.1 366.7

Derivativefinancialinstruments(excludingoptions) 384.1 622.8 66.9 9.2

Options(intermsofbasisasset) 53.9 19.8 1.8 2.3

Total fair value 5,631.2 809.8 654.8 378.2

Financial liabilities1 4,827.8 143.0 26.0 364.2

Derivativefinancialinstruments(excludingoptions) 369.9 837.7 439.9 4.3


Total fair value 5,251.6 1,000.3 467.7 370.3

The exposure to changes in interest rates in the segment 379.6 (190.5) 187.1 7.9

Comulative exposure in the segment 379.6 189.1 376.2 384.1

Linked to the C.P.I. NIS

Financial assets1 205.8 42.3 30.9 26.7

Derivativefinancialinstruments(excludingoptions) - - - -

Options(intermsofbasisasset) - - - -

Total fair value 205.8 42.3 30.9 26.7

Financial liabilities1 206.8 0.1 17.1 57.3

Derivativefinancialinstruments(excludingoptions) 0.5 - 1.3 20.4

Options(intermsofbasisasset) - - - -

Total fair value 207.3 0.1 18.4 77.7

The exposure to changes in interest rates in the segment (1.5) 42.2 12.5 (51.0)

Comulative exposure in the segment (1.5) 40.7 53.2 2.2

Notes:a. Furtherdetailsoftheexposuretochangesintheinterestratesineachsectoroffinancialassetsandoffinancialliabilities,

accordingtothevariousbalancesheetcategories,areavailableonrequest.b. Inthistable,thedataforeachperiodrepresentthepresentvalueoffuturecashflowsofeachfinancialinstrument,discountedat

theinterestrateusedfordiscountingtofairvalueincludedforthefinancialinstrumentinNote15BtotheFinancialStatements,consistentwiththeassumptionsaccordingtowhichthefairvalueofthefinancialinstrumentwascalculated.Forfurtherdetailsofassumptionsusedincalculatingfairvalueoffinancialinstruments,seeNote15BtotheFinancialStatements.

c. TheinternalrateofreturnistheinterestrateatwhichcashflowsexpectedfromafinancialinstrumentarediscountedtofairvalueincludedforthefinancialinstrumentinNote15BtotheFinancialStatements.

d. Theeffectiveaveragedurationofagroupoffinancialinstrumentsrepresentsanapproximationofthechangeinpercentagesinfairvalueofthegroupoffinancialinstruments,whichwillbecausedasaresultofasmallchange(increaseof0.1%)intheinternalrateofreturnofeachofthefinancialinstruments.

1. Excludingbalancesheetbalancesofderivativefinancialinstrumentsandfairvalueofoff-balancesheetfinancialinstruments.2. Weighted average according to fair value of effective average duration.3. Includingsharesshowninthe“NoMaturitydate”column.


UBank Ltd.

December31,2009 December31,2008

Three tofiveyears

NIS million

Five toten years

NIS million

Over ten years

NIS million

No Maturity

date1

NIS million

Totalfair value

NIS million

Internal rate

of return

%

Effectiveaverage maturity

Years

Fair value

Internal rate

of return

%

Average maturity

Years

162.3 262.5 5.6 1.5 6,745.1 4.11 0.56 5,959.6 2.87 0.32

8.7 2.1 - - 1,093.8 0.20 490.2 -

9.0 0.5 - - 87.3 0.62 - -

180.0 265.1 5.6 1.5 7,926.2 20.51 6,449.8 2.87 0.32

231.4 16.9 - - 5,609.3 3.55 0.35 5,865.2 2.21 0.03

1.7 0.3 - - 1,653.8 0.34 263.3 -

7.9 - - - 85.0 0.55 - -

241.0 17.2 - - 7,348.1 20.35 6,128.5 2.21 0.03

(61.0) 247.9 5.6 1.5 578.1 321.3

323.1 571.0 576.6 578.1

60.8 80.8 3.7 - 451.0 2.69 2.21 321.1 7.61 2.22

- - - - - - - -

- - - - - - - -

60.8 80.8 3.7 - 451.0 22.21 321.1 7.61 2.22

27.8 164.5 - - 473.6 1.65 2.36 63.4 3.55 0.50

42.2 - - - 64.4 3.36 162.7 -

- - - - - - - -

70.0 164.5 - - 538.0 22.48 226.1 3.55 0.50

(9.2) (83.7) 3.7 - (87.0) 95.0

(7.0) (90.7) (87.0) (87.0)


UBank Ltd.

Addendum D: Analysis of Exposure to Changes in the Rates of Intereston a consolidated basis (cont’d)

Reported amounts

Demand and up to one

month

NIS million

Above one month up

to three months

NIS million

Three to twelve

months

NIS million

One tothree years

NIS million

Foreign Currency4


Derivativefinancialinstruments(excludingoptions) 2,183.7 2,193.3 1,114.5 4.9


Total fair value 3,217.9 2,590.2 1,185.8 27.6


Derivativefinancialinstruments(excludingoptions) 2,101.2 1,804.3 747.8 25.8


Total fair value 4,084.8 2,066.3 820.4 33.1


Comulative exposure in the segment (866.9) (343.0) 22.4 16.9

Total exposure to changes in interest rates




Total fair value 9,054.9 3,442.3 1,871.5 432.5




Total fair value 9,543.7 3,066.7 1,306.5 481.1


Comulative exposure in the segment (488.8) (113.2) 451.8 403.2

Notes:a. Furtherdetailsoftheexposuretochangesintheinterestratesineachsectoroffinancialassetsandoffinancialliabilities,

accordingtothevariousbalancesheetcategories,areavailableonrequest.b. Inthistable,thedataforeachperiodrepresentthepresentvalueoffuturecashflowsofeachfinancialinstrument,discountedat

theinterestrateusedfordiscountingtofairvalueincludedforthefinancialinstrumentinNote15BtotheFinancialStatements,consistentwiththeassumptionsaccordingtowhichthefairvalueofthefinancialinstrumentwascalculated.Forfurtherdetailsofassumptionsusedincalculatingfairvalueoffinancialinstruments,seeNote15BtotheFinancialStatements.

c. TheinternalrateofreturnistheinterestrateatwhichcashflowsexpectedfromafinancialinstrumentarediscountedtofairvalueincludedforthefinancialinstrumentinNote15BtotheFinancialStatements.

d. Theeffectiveaveragedurationofagroupoffinancialinstrumentsrepresentsanapproximationofthechangeinpercentagesinfairvalueofthegroupoffinancialinstruments,whichwillbecausedasaresultofasmallchange(increaseof0.1%)intheinternalrateofreturnofeachofthefinancialinstruments.

1. Excludingbalancesheetbalancesofderivativefinancialinstrumentsandfairvalueofoff-balancesheetfinancialinstruments.2. Weighted average according to fair value of effective average duration.3. Includingsharesshowninthe“NoMaturitydate”column.

4. Including Israeli currency linked to foreign currency.


UBank Ltd.


Three tofiveyears

NIS million

Five toten years

NIS million

Over ten years

NIS million

No Maturity

date1

NIS million

Totalfair value

NIS million

Internal rate

of return

%

Effectiveaverage maturity

Years

Fair value

Internal rate

of return

%

Average maturity

Years

61.6 123.9 - 28.2 1,676.1 3.66 0.73 2,094.1 5.99 0.20

2.1 0.3 - - 5,498.8 0.25 385.2 - -

7.9 - - - 70.6 0.58 - - -

71.6 124.2 - 28.2 7,245.5 20.36 2,479.3 5.99 0.20

- - - - 2,262.2 0.16 0.04 1,971.5 0.84 0.07

66.3 126.9 - - 4,872.3 0.42 482.1 - -

9.1 0.6 - - 73.0 0.64 - - -

75.4 127.5 - - 7,207.5 20.30 2,453.6 0.84 0.07

(3.8) (3.3) - 28.2 38.0 25.7

13.1 9.8 9.8 38.0

284.7 467.2 9.3 29.7 8,872.2 3.79 0.67 8,374.8 0.36

10.8 2.4 - - 6,592.6 0.24 875.4 -

16.9 0.5 - - 157.9 0.60 - -

312.4 470.1 9.3 29.7 15,622.7 20.49 9,250.2 0.36

259.2 181.4 - - 8,345.1 2.80 0.38 7,900.1 0.04

110.2 127.2 - - 6,590.5 0.43 908.1 -

17.0 0.6 - - 158.0 0.60 - -

386.4 309.2 - - 15,093.6 20.41 8,808.2 0.04

(74.0) 160.9 9.3 29.7 529.1 442.0

329.2 490.1 499.4 529.1


UBank Ltd.

Addendum E: Total Credit Risk by Economic Sector on a consolidated basis

Reported amounts

December31,2009

Balance sheet

credit risk1

NIS million

Off Balance sheet

credit risk2

NIS million

Total credit risk to the

public

NIS million

Annual expense ofspecificprovision

for doubtful debts

NIS million

Balance of problematic

debts

NIS million

In respect of borrowers’ activity in Israel

Agriculture 0.3 0.3 0.6 - -

Industry 156.1 37.6 193.7 (2.5) 21.2

Construction and Real Estate 203.0 87.8 290.8 (0.5) 5.3

Commerce 89.6 226.2 315.8 0.6 1.1

Hotel,foodandaccommodationservices 9.8 2.7 12.5 (0.3) -

Transport and Storage 20.1 9.1 29.2 - 5.2

Communication and computer services 46.2 42.4 88.6 (0.2) -

Financial services 1,436.0 2,215.4 3,651.4 - 0.3

Other business services 160.5 97.1 257.6 - 0.1

Community and public services 33.1 55.8 88.9 - -

Individuals 29.5 84.0 113.5 (0.1) -

Total 2,184.2 2,858.4 5,042.6 (3.0) 33.2

In respect of borrowers’ activity abroad

Industry - - - (1.0) -

Construction and Real Estate 44.0 8.0 52.0 - 5.6

Transport and storage - 3.8 3.8 - -

Communication and computer services - 0.9 0.9 - -

Financial services 90.8 21.4 112.2 - -

Other business services 11.6 4.2 15.8 - -

Total 146.4 38.3 184.7 (1.0) 5.6

1 Includes:credittothepublic,investmentsinbondsofthepublic(2009-NIS221.2million,2008-NIS354.8million),andotherassetsinrespectofderivativesinstrumentsinbondsofthepublic(2009-NIS77.1million,2008-NIS70.7million).

2 Off-balancesheetfinancialinstrumentscreditrisk,ascalculatedforthepurposeoftherestrictiononcredittosingleborrower.3 Restated.4 Reclassified.

Notes: a. The credit risk is presented before deductions permitted in accordance with Bank of Israel directives. b.Thebalanceofproblematicdebtispresentedafterthosedeductions,includingoffbalancesheetcreditriskfactors. c.Thecreditriskandbalanceofproblematicdebtsarepresentedafterdeductingofthespecificprovisionsfordoubtfuldebts.


UBank Ltd.

Reported amounts

December31,2008

Balance sheet

credit risk1

NIS million

Off Balance sheet

credit risk2

NIS million

Total credit risk to the

public

NIS million

Annual expense ofspecificprovision

for doubtful debts

NIS million


debts

NIS million

In respect of borrowers’ activity in Israel

Agriculture 0.3 0.1 0.4 - -

Industry 87.8 17.1 104.9 (0.6) 421.2

Construction and Real Estate 224.8 120.2 345.0 (1.1) 412.0

Electricity 12.9 - 12.9 - -

Commerce 63.7 54.9 118.6 40.5 41.8

Hotel,foodandaccommodationservices 9.5 1.7 11.2 (0.1) -

Transport and Storage 54.6 20.1 74.7 - 9.6

Communication and computer services 60.3 34.6 94.9 (1.2) 4.3

Financial services 31,475.5 1,702.2 33,177.7 (1.0) 0.4

Other business services 139.8 132.0 271.8 0.2 70.0

Community and public services 45.8 15.5 61.3 (0.1) -

Individuals 76.0 131.5 207.5 0.5 44.0

Total 32,251.0 2,229.9 34,480.9 4(2.9) 4123.3

In respect of borrowers’ activity abroad

Industry 20.6 0.1 20.7 (1.2) 4-

Construction and Real Estate 13.5 3.1 16.6 - 47.5

Electricity 5.0 - 5.0 - -

Commerce 21.5 9.6 31.1 4- 4-

Communication and computer services 4.2 - 4.2 - -

Financial services 9.3 40.0 49.3 - -

Other business services 14.0 0.5 14.5 - -

Community and public services 17.6 0.5 18.1 - -

Individuals 10.8 9.4 20.2 - 4-

Total 116.5 63.2 179.7 (1.2) 47.5


UBank Ltd.

Addendum F: Exposure to Foreign countries on a consolidated basis

Reported amounts

a.Informationregardingtotalexposuretoforeigncountriesandregardingexposuretocountries,wheretotal exposure for each country is the lowest1 of over 1% of total assets on a consolidated basis or over 20%oftotalcapital:

December31,2009

Balance sheet

exposure

Off Balance

sheet exposure2

Balance sheet

exposureGovern-

ments3Banks Others Total

balance sheet

exposure


debts4

Total off balance

sheetexposure

Of which: problematic off balance

sheetcredit risk

For repayment up to one

year

For repayment

over oneyear

NIS million

NIS million

NIS million

NIS million

NIS million

NIS million

NIS million

NIS million

NIS million

Country

U.S.A - 265.8 6.5 272.3 - 21.1 - 239.2 33.1

England - 118.0 3.6 121.6 - 1.7 - 117.0 4.6

Germany - 119.0 - 119.0 - 0.1 - 108.8 10.2

Vergin island - - 93.4 93.4 - 27.5 - 93.4 -

Others - 308.8 100.5 409.3 30.9 109.0 - 344.8 64.5

Total foreign countries exposure - 811.6 204.0 1,015.6 30.9 159.4 - 903.2 112.4

Total LDC countries exposure - - 37.6 37.6 - 54.9 - 37.6 -

b. Information on countries whose total individual exposure is between 0.75% and 1% of total assets(inNISmillions):

Balance sheet exposure

Off Balance sheet

exposureTotal

exposure

Spain 71.4 0.1 71.5

France 73.0 2.5 75.5

1 Onthebasisofend-risk,aftertheeffectofguaranteesandliquidcollateral.2 Creditriskofoff-balancesheetfinancialinstrumentsascalculatedforpurposesofsingleborrowerrestriction.3 Governments,officialinstitutionsandcentralbanks.4 Balance of problematic debts after deduction of debts covered by collateral permitted for deduction for purposes of single

borrower and group borrower restriction. Not including off-balance sheet credit risk.5 Reclassified.6 Restated.


UBank Ltd.

Addendum F: Exposure to Foreign countries on a consolidated basis

Reported amounts

a.Informationregardingtotalexposuretoforeigncountriesandregardingexposuretocountries,wheretotal exposure for each country is the lowest1 of over 1% of total assets on a consolidated basis or over 20%oftotalcapital:

December31,2008

Balance sheet

exposure

Off Balance

sheet exposure2

Balance sheet

exposureGovern-

ments3Banks Others Total

balance sheet

exposure


debts4

Total off balance

sheetexposure

Of which: problematic off balance

sheetcredit risk

For repayment up to one

year

For repayment

over oneyear

NIS million

NIS million

NIS million

NIS million

NIS million

NIS million

NIS million

NIS million

NIS million

Country

U.S.A 76.3 5466.8 535.2 5578.3 - 18.8 - 5496.8 581.5

England - 5253.6 4.5 5258.1 - 2.1 - 5249.5 58.6

Switzerland - 216.3 0.1 216.4 - 20.3 - 186.1 30.3

Spain - 131.1 - 131.1 - - - 107.0 24.1

Others - 250.6 568.0 5318.6 635.1 561.4 - 5171.8 5146.8

Total foreign countries exposure 76.3 1,318.4 107.8 1,502.5 635.1 102.6 - 1,211.2 5291.3

Total LDC countries exposure - - 36.3 36.3 - 15.2 - 36.3 -

b. Information on countries whose total individual exposure is between 0.75% and 1% of total assets(inNISmillions):

Balance sheet exposure

Off Balance sheet

exposureTotal

exposure

Canada 578.7 53.3 582.0

Germany 64.1 0.1 64.2


UBank Ltd.

Addendum G: Consolidated Balance Sheet as at the end of each Quarter in 2009

Reported amounts

2009

4th Quarter

NIS million

3rd Quarter

NIS million

2nd Quarter

NIS million

1st Quarter

NIS million

Assets

Cash and deposits with banks 2,827.8 13,362.9 13,329.2 12,433.4

Securities 2,498.2 2,312.6 2,818.9 3,304.8

Borrowed Securities 996.2 975.7 825.6 992.3

Credit to the public 2,021.8 1,864.9 1,545.1 1,898.9

Investment in Equity - basis investments 2- 0.2 0.6 0.6

Buildings and equipment 18.3 17.9 17.9 17.9

Other assets 855.9 309.9 372.3 191.4

Total assets 9,218.2 18,844.1 18,909.6 18,839.3

LiabilitiesandShareholders'Equity

Deposits of the public 7,127.8 16,868.5 16,821.3 16,811.5

Deposits from banks 72.9 89.6 289.8 86.0

Deposits of the government 4.9 4.3 2.1 50.6

Other liabilities 1,470.9 1,349.3 1,287.7 1,402.9

Total liabilities 8,676.5 18,311.7 18,400.9 18,351.0

Shareholders'equity 541.7 532.4 508.7 488.3

Totalliabilitiesandshareholders'equity 9,218.2 18,844.1 18,909.6 18,839.3

1 Reclassified.



UBank Ltd.

Addendum G: Consolidated Balance Sheet as at the end of each Quarter in 2008

Reported amounts

2008

4th Quarter

NIS million

3rd Quarter

NIS million

2nd Quarter

NIS million

1st Quarter

NIS million

Assets

Cash and deposits with banks 2,701.8 2,722.8 2,829.8 1,762.5

Securities 2,930.7 2,662.9 2,337.3 12,724.6

Borrowed Securities 698.6 389.1 335.9 353.4

Credit to the public 1,931.6 2,272.8 2,198.0 1,679.0

Investment in Equity - basis investments 0.8 0.4 0.6 -

Buildings and equipment 17.7 17.0 15.4 114.9

Other assets 216.9 232.5 424.3 1357.8

Total assets 8,498.1 8,297.5 8,141.3 16,892.2

LiabilitiesandShareholders'Equity



Deposits of the Government 6.1 10.2 158.3 11.3

Other liabilities 968.2 1,037.0 769.7 1706.5

Total liabilities 8,046.5 7,859.1 7,697.7 16,458.1

Shareholders'equity 451.6 438.4 443.6 434.1

Totalliabilitiesandshareholders'equity 8,498.1 8,297.5 8,141.3 16,892.2

1Reclassified.


UBank Ltd.

Addendum H: Quarterly Consolidated Statement of Profit and Loss in 2009

Reported amounts


4th Quarter

NIS million

3rd Quarter

NIS million

2nd Quarter

NIS million

1st Quarter

NIS million

Profitfromfinancingoperationsbeforeprovision for doubtful debts 27.6 40.6 48.4 43.8

Provision for doubtful debts (0.3) (0.9) (0.9) (1.8)

Profitfromfinancingoperationsafterprovision for doubtful debts 27.9 41.5 49.3 45.6


Operating commissions 32.7 31.3 28.2 28.6

Profits(losses)oninvestmentsinshares,net (1.8) (1.3) (0.3) 0.7

Other income 0.7 1.6 2.1 1.5

Total operating and other income 31.6 31.6 30.0 30.8


Salaries and related expenses 15.3 18.6 21.5 20.4

Maintenance and depreciation ofbuildings and equipment 5.5 5.5 5.4 5.5

Other expenses 21.0 19.3 18.8 21.7

Total operating and other expenses 41.8 43.4 45.7 47.6

Profitfromordinaryoperationsbefore taxes 17.7 29.7 33.6 28.8

Provisionfortaxesonprofitfromordinary operations 7.7 11.6 12.8 11.3

Profitfromordinaryoperationsafter taxes 10.0 18.1 20.8 17.5

Bank’sshareinprofits(losses)fromordinaryoperationsofinvesteecompanies,aftertaxeffect (0.2) (0.4) 1- (0.2)

Netprofit 9.8 17.7 20.8 17.3

Earning per share data NIS NIS NIS NIS

NetearningpershareofNIS1parvalue:

Netprofit 3.1 5.7 6.7 5.5



UBank Ltd.

Addendum H: Quarterly Consolidated Statement of Profit and Loss in 2008

Reported amounts


4th Quarter

NIS million

3rd Quarter

NIS million

2nd Quarter

NIS million

1st Quarter

NIS million

Profitfromfinancingoperationsbeforeprovision for doubtful debts 44.5 32.2 33.2 35.2

Provision for doubtful debts (1.0) 2- (1.6) (1.8)

Profitfromfinancingoperationsafterprovision for doubtful debts 45.5 32.2 34.8 37.0


Operating commissions 1 30.7 1 30.1 1 28.3 1 32.7

Profits(losses)oninvestmentsinshares,net (0.5) 0.1 (0.4) 1.7

Other income 1 0.4 1 0.4 1 0.4 1 0.5

Total operating and other income 1 30.6 1 30.6 1 28.3 1 34.9


Salaries and related expenses 21.7 18.8 17.7 21.1

Maintenance and depreciation ofbuildings and equipment 5.0 4.9 4.9 4.6

Other expenses 1 18.1 1 17.9 1 18.3 1 17.1

Total operating and other expenses 1 44.8 1 41.6 1 40.9 1 42.8

Profitfromordinaryoperationsbefore taxes 31.3 21.2 22.2 29.1

Provisionfortaxesonprofitfromordinary operations 12.0 7.6 8.5 11.3

Profitfromordinaryoperationsafter taxes 19.3 13.6 13.7 17.8

Bank’sshareinprofits(losses)fromordinaryoperationsofinvesteecompanies,aftertaxeffect 0.4 (0.2) 0.7 2-

Netprofit 19.7 13.4 14.4 17.8

NIS NIS NIS NIS

Earning per share data

NetearningpershareofNIS1parvalue:

Netprofit 6.3 4.3 4.6 5.7


Annual Report 2009

Certifications of the General Managerand the Chief Accountant


UBank Ltd.

Certification

I,YaacovGarten,declarethat:

1. IhavereviewedtheannualreportofUbankLtd(hereinafterreferredtoas“theBank”)for2009(hereinafterreferredtoas“thereport”).

2. Basedonmyknowledge,thereportdoesnotcontainanyincorrectrepresentationofamaterialfact and it does not omit any representation of a material fact so that the representations containedtherein,inviewofthecircumstancesinwhichsuchrepresentationshavebeenincluded,shall not be misleading with regard to the period covered by the report.

3. Basedonmyknowledge,thefinancialstatementsandotherfinancialinformationcontainedinthereportcorrectlyreflect,fromallmaterialaspects,theBank’sfinancialposition,operatingresultsand changes in the shareholders’ equity for the periods reported in the report.

4. I and other persons in the Bank who are making this declaration are responsible for the determination and performance of controls and procedures for the purpose of the required disclosureintheBank’sreport;andalso:

a. We have determined such controls and procedures or have ensured the determination ofsuchcontrolsandproceduresunderoursupervision,thataredesignedtoensurethatmaterialinformationrelatingtotheBank,includingitsconsolidatedcorporations,hasbeenbroughttoourknowledgebyothersattheBankandatsuchcorporations,andinparticularduring the course of the period of preparing the report;

b. WehaveassessedtheefficiencyofthecontrolsandprocedureswithregardtotheBank’sdisclosureandwehavepresentedourconclusionswithregardtotheefficiencyofthecontrolsandproceduresinrespectofthedisclosure,attheendoftheperiodcoveredbythereport,baseduponourassessment;andalso;

c. We have given disclosure in the report of any change in the Bank’s internal control of the financialreportthatoccurredinthefourthquarterthatmateriallyaffected,orisreasonablyanticipatedtomateriallyaffect,theBank’sinternalcontrolofthefinancialreport;andalso-

5. I and other persons in the Bank who are making this declaration have given disclosure to the Bank’sauditingaccountant,itsBoardofDirectorsandBoardofDirectors’AuditCommittee,basedonourmostcurrentassessmentwithregardtotheinternalcontrolofthefinancialreport:

a. AllthesignificantdeficienciesandmaterialweaknessesindeterminingoroperatingtheinternalcontrolofthefinancialreportthatcanreasonablybeanticipatedtoimpairtheBank’sabilitytorecord,process,summarizeandreportfinancialinformation;andalso-

b. Anyfraud,whethermaterialorimmaterial,inwhichthemanagementoftheBankisinvolvedorotheremployeesareinvolvedwhohaveasignificantfunctionintheBank’sinternalcontrolofthefinancialreport.

Theabovedoesnotdetractfrommyresponsibility,orthatofanyotherperson,underthelaw.

Yaacov Garten Acting General Manager

March23,2010

CertificationsoftheGeneralManagerandtheChiefAccountant2009/137

UBank Ltd.

Certification

I,OritItzcovitch,declarethat:

1. IhavereviewedtheannualreportofUbankLtd(hereinafterreferredtoas“theBank”)for2009(hereinafterreferredtoas“thereport”).

2. Basedonmyknowledge,thereportdoesnotcontainanyincorrectrepresentationofamaterialfact and it does not omit any representation of a material fact so that the representations containedtherein,inviewofthecircumstancesinwhichsuchrepresentationshavebeenincluded,shall not be misleading with regard to the period covered by the report.

3. Basedonmyknowledge,thefinancialstatementsandotherfinancialinformationcontainedinthereportcorrectlyreflect,fromallmaterialaspects,theBank’sfinancialposition,operatingresultsand changes in the shareholders’ equity for the periods reported in the report.

4. I and other persons in the Bank who are making this declaration are responsible for the determination and performance of controls and procedures for the purpose of the required disclosureintheBank’sreport;andalso:

a. We have determined such controls and procedures or have ensured the determination ofsuchcontrolsandproceduresunderoursupervision,thataredesignedtoensurethatmaterialinformationrelatingtotheBank,includingitsconsolidatedcorporations,hasbeenbroughttoourknowledgebyothersattheBankandatsuchcorporations,andinparticularduring the course of the period of preparing the report;

b. WehaveassessedtheefficiencyofthecontrolsandprocedureswithregardtotheBank’sdisclosureandwehavepresentedourconclusionswithregardtotheefficiencyofthecontrolsandproceduresinrespectofthedisclosure,attheendoftheperiodcoveredbythereport,baseduponourassessment;andalso;

c. We have given disclosure in the report of any change in the Bank’s internal control of the financialreportthatoccurredinthefourthquarterthatmateriallyaffected,orisreasonablyanticipatedtomateriallyaffect,theBank’sinternalcontrolofthefinancialreport;andalso-

5. I and other persons in the Bank who are making this declaration have given disclosure to the Bank’sauditingaccountant,itsBoardofDirectorsandBoardofDirectors’AuditCommittee,basedonourmostcurrentassessmentwithregardtotheinternalcontrolofthefinancialreport:

a. AllthesignificantdeficienciesandmaterialweaknessesindeterminingoroperatingtheinternalcontrolofthefinancialreportthatcanreasonablybeanticipatedtoimpairtheBank’sabilitytorecord,process,summarizeandreportfinancialinformation;andalso-

b. Anyfraud,whethermaterialorimmaterial,inwhichthemanagementoftheBankisinvolvedorotheremployeesareinvolvedwhohaveasignificantfunctionintheBank’sinternalcontrolofthefinancialreport.

Theabovedoesnotdetractfrommyresponsibility,orthatofanyotherperson,underthelaw.

Orit Itzcovitch Chief Accountant

March23,2010

Report of the Board of Directors and Management regarding internal control over financial reporting and Auditor’s report to the shareholders of UBank Ltd. Regarding internal control over financial reporting

Annual Report 2009

Report of the Board of Directors and Management on Internal Control over Financial Reporting / 139

UBank Ltd.

Report of the Board of Directors and Management on Internal Control over Financial Reporting

TheBoardofDirectorsandManagementofUBankLtd.(henceforth:"theBank"),areresponsibleforestablishingandmaintainingappropriateinternalcontroloverfinancialreporting(asdefinedintheDirectivesforPublicReportingDirectivesconcerning"TheDirectors'Report").TheinternalcontrolsystemoftheBankhasbeendesignedtoprovideareasonablelevelofconfidencetotheBoardofDirectors and Management of the Bank concerning the preparation and appropriate presentation of financialstatementspublishedinaccordancewithacceptedaccountingprinciplesandtheDirectivesoftheSupervisorofBanksandhisinstructions.Irrespectiveofthequalityleveloftheirdesign,allinternalcontrolsystemshaveinherentlimitations.Thereforeevenifitisdeterminedthattheyareeffective,theycanonlyprovideareasonablelevelofconfidencewithreferencetothepreparingandpresentationofafinancialstatement.

Management,underthesupervisionoftheBoardofDirectors,maintainsacomprehensiveinternalcontrolsystemdesignedtoensurethattransactionsareexecutedinaccordancewiththeauthorizationsofManagement,assetsareprotected,andthataccountingentriesarereliable.Furthermore,Management,underthesupervisionoftheBoardofDirectors,takesstepstoensurethatchannelsofinformationandcommunicationareeffectiveandmonitorperformance,includingperformanceof internal control procedures.

ManagementoftheBank,underthesupervisionoftheBoardofDirectors,hasevaluatedtheeffectivenessofinternalcontroloftheBankoverfinancialreportingasat31.12.09,basedonthecriteriadeterminedintheinternalcontrolmodeloftheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).Basedonthisevaluation,Managementbelievesthatasat31.12.09,theBank'sinternalcontroloverfinancialreportingiseffective.

TheeffectivenessoftheBank'sinternalcontroloverfinancialreportingasat31.12.09wasauditedbytheBank'sAuditors(SomekhChaikin),asstatedintheirReportonpage140,whichincludesanopinionregardingtheeffectivenessoftheBank'sinternalcontroloverfinancialreportingasat31.12.09.

Jack Elaad Yaacov Garten Orit Itzcovitch

Chairman of the Boardof Directors

Acting General Manager Chief Accountant

March23,2010

Annual Report 2009 / 141

UBank Ltd.

145 Auditors’ Report to the Shareholders

FinancialStatementsasatDecember31,2009 and for the year ended that date

146 Consolidated Balance Sheet

147 ConsolidatedStatementofProfitandLoss

148 Statement of Changes in Shareholders’ Equity

150 Consolidated Statement of Cash Flows

152 Balance Sheet of the Bank

153 StatementofProfitandLossoftheBank

154 Statement of Cash Flows of the Bank

156 Notes to the Financial Statements

Annual Report 2009

Financial Statements as atDecember 31,2009


UBank Ltd.

Consolidated Balance Sheet as at December 31

Reported amounts

Note

2009

NIS million

2008

NIS million

Assets

Cash and deposits with banks 2 2,827.8 2,701.8

Securities 3 2,498.2 2,930.7

Borrowed securities 1(I),2 996.2 698.6

Credit to the public 4 2,021.8 1,931.6

Investment in equity-basis investments 5 1- 0.8

Buildings and equipment 6 18.3 17.7

Other assets 7 855.9 216.9

Total assets 9,218.2 8,498.1

Liabilities and Shareholders’ Equity

Deposits of the public 8 7,127.8 6,820.2

Deposits from banks 9 72.9 252.0

Deposits of the Government 4.9 6.1

Other liabilities 10 1,470.9 968.2

Total liabilities 8,676.5 8,046.5

Shareholders’ equity 541.7 451.6

Total liabilities and shareholders’ equity 9,218.2 8,498.1


Theaccompanyingnotesareanintegralpartofthefinancialstatements.




DateofapprovaloftheFinancialStatements:March23,2010

Financial Statements 2009 / 147

UBank Ltd.

Consolidated Statement of Profit and Loss for the year ended December 31

Reported amounts

Note

2009

NIS million

2008

NIS million

2007

NIS million

Profitfromfinancingoperationsbeforeprovisionfor doubtful debts 17 160.4 145.1 123.0

Provision for doubtful debts 4 (3.9) (4.4) 1.3

Profitfromfinancingoperationsafterprovisionfor doubtful debts 164.3 149.5 121.7


Operating commissions 18 120.8 1121.8 1142.2

Profits(Losses)oninvestmentinshares,net 19 (2.7) 0.9 2.7

Other income 20 5.9 11.7 12.9

Total operating and other income 124.0 1124.4 147.8


Salaries and related expenses 21 75.8 79.3 73.0

Maintenance and depreciation

of property and equipment 21.9 19.4 16.2

Other expenses 22 80.8 171.4 61.6

Total operating and other expenses 178.5 1170.1 150.8

Profitfromordinaryoperationsbeforetaxes 109.8 103.8 118.7

Provisionfortaxesonprofitfromordinaryoperations 23 43.4 39.4 41.5

Profitfromordinaryoperationsaftertaxes 66.4 64.4 77.2

Bank’sshareinoperatingprofitsofequity-basisinvestments,aftertax 5 (0.8) 0.9 2-

Netprofitfromordinaryoperations 65.6 65.3 77.2

Profitfromextraordinaryoperationsaftertax 24 - 1.5

Netprofit 65.6 65.3 78.7

Earningpersharedata: 25 NIS NIS NIS

PerNIS1parvalueofsharecapital:


Netprofitfromextraordinaryitems - - 0.5

Netprofit 21.0 20.9 25.2

Number of Shares of NIS 1 each(Inthousandsshares) 3,123.9 3,123.9 3,123.9




UBank Ltd.

Statement of Changes in Shareholders’ Equity

Reported amounts

Paid-up share capital

NIS million

Premium

NIS million

BalanceasatJanuary1,2007 60.2 333.4

Changesduring2007:

NetProfitfortheyear - -

Distributed dividend - -

Adjustment to fair value of available for sale securities - -

Adjustment in respect of presentation of securities avaliableforsalethatwerereclassifiedforprofitandlossstatment - -

Related tax effect - -

BalanceasatDecember31,2007 60.2 333.4

Changesduring2008:

Netprofitfortheyear - -




Capital Reserve due to expired options - 1.2


Changesduring2009:

Netprofitfortheyear - -

Dividend - -





1 See Note 3.



UBank Ltd.

Capital reserves

Benefitsfromissue of options

to employees

NIS million

Benefitsfromcontrolling

shareholders

NIS million

Total paid-up share capital

and capital reserves

NIS million

Adjustments for fair value of

available for sale securities1

NIS million

Retained earnings

NIS million

Declared and

distributed dividend

after balance sheet date

Total shareholders’

equity

NIS million

1.2 2.8 397.6 1.2 38.8 437.6

- - - - 78.7 78.7

- - - - (100.0) (100.0)

- - - 12.8 - 12.8

- - - (15.7) - (15.7)

- - - 1.1 - 1.1

1.2 2.8 397.6 (0.6) 17.5 414.5

- - - 65.3 65.3

- - - (20.9) - (20.9)

-

- - - (23.7) - (23.7)

- - - 16.4 - 16.4

(1.2) - - - - -

- 2.8 397.6 (28.8) 82.8 451.6

- - - - 65.6 65.6

- - - - (75.0) 75.0 -

- - 60.6 - 60.6

- - - (22.0) - (22.0)

- - - (14.1) - (14.1)

- 2.8 397.6 (4.3) 73.4 75.0 541.7


UBank Ltd.

Consolidated Statement of Cash Flows for the yearended December 31

Reported amounts

2009

NIS million

2008

NIS million

2007

NIS million

Cashflowsgeneratedbyoperatingactivity

Netprofitfortheyear 65.6 65.3 78.7

Adjustments needed to present the cash generatedbyoperatingactivity:

Bank’sshareinoperatingprofitofinvesteecompanies,netofdividendreceived 0.8 (0.9) 1-

Depreciationandamortization 2.9 1.7 1.7

Provision for doubtful debts (3.9) (4.4) 1.3

Profitfromsaleofprovidentfundsoperation - - (1.5)

Profitonsaleandonadjustmentinvalueofavailable for sale securities (31.7) (31.3) (41.1)

Profit,realizedandnotrealized,fromadjustmentsto fair value of trading securities (32.5) (24.7) (10.9)

Provision for value decrease in available for sale securities 17.5 18.1 2.1

Deferredtaxes,net (2.7) 0.1 1(-)

Decrease in surplus of provision over amount funded(increaseinsurplusofprovisionoveramountfunded) (5.2) 2.8 (1.2)

(Increase)decreaseinotherassets (474.3) 34.1 (13.8)

(Decrease)Increaseinotherliabilities 162.2 (22.4) (89.6)

Netcashinflowfromoperatingactivity (301.3) 38.4 (74.3)




UBank Ltd.

Reported amounts

2009

NIS million

2008

NIS million

2007

NIS million

Cashflowsgeneratedbyactivityinassets

Tradingsecurities,net 443.7 (4.3) 618.1

Purchase of available for sale securities (3,462.9) (5,042.8) (10,168.5)

Proceeds from sale of available for sale securities 3,520.8 4,978.2 3,003.0

Proceeds of redemption of available for sale securities 222.2 430.9 7,244.2

Borrowd securities (297.6) (264.3) (434.3)

Depositswithbanks,net 7.4 1106.5 155.6

Credittothepublic,net (86.3) 192.3 (536.7)

Purchases of property and equipment (2.6) (5.2) (4.9)

Proceeds from sale of provident funds operation - - 2.4

Taxpaidforprofitfromsaleofprovidentfunds operation - - (0.9)

Netcashflowfromactivityinassets 344.7 1391.3 1(222.0)

Cashflowsgeneratedbyactivityinliabilities and equity

Depositsofthepublic,net 270.3 401.2 335.7

Depositsfrombanks,net (179.1) 232.9 (29.6)

Depositsfromgoverment,net (1.2) - -

Dividend paid - - (100.0)

Netcashflowfromactivityinliabilitiesandequity 90.0 634.1 206.1

(Decrease)increaseincash 133.4 11,063.8 1(90.2)

Cash on hand at beginning of year 2,670.1 11,606.3 11,696.5

Cash on hand at end of year 2,803.5 12,670.1 11,606.3

Material non-monetary activity - In 2009 securities were lent from the trading portfolio in the sum of NIS 37.3million(in31.12.08nosecuritieswerelent).



UBank Ltd.

Balance Sheet of the Bank as at December 31

Reported amounts

Note

2009

NIS million

2008

NIS million

Assets

Cash and deposits with banks 2 2,827.2 2,700.8

Securities 2,385.9 2,913.3

Borrowed securities 1(I)2 996.2 698.6

Credit to the public 2,019.9 1,931.0

Investment in investee companies 5 265.9 253.7

Buildings and equipment 6 14.3 13.5

Other assets 7 834.2 202.6

Total assets 9,343.6 8,713.5

Liabilities and Shareholders’ Equity

Deposits of the public 8 7,262.9 7,041.9

Deposits from banks 9 72.9 252.0

Deposits of the Government 4.9 6.1

Other liabilities 10 1,461.2 961.9

Total liabilities 8,801.9 8,261.9

Shareholders’ equity 541.7 451.6

Total liabilities and shareholders’ equity 9,343.6 8,713.5





DateofapprovaloftheFinancialStatements:March23,2010


UBank Ltd.

Statement of Profit and Loss of the Bank for the year ended December 31

Reported amounts

Note

2009

NIS million

2008

NIS million

2007

NIS million

Profitfromfinancingoperationsbeforeprovisionfor doubtful debts 153.0 134.0 115.2

Provision for doubtful debts 4 (3.9) (4.4) 1.3

Profitfromfinancingoperationsafterprovisionfor doubtful debts 156.9 138.4 113.9


Operating commissions 18 82.3 178.3 179.1

Profits(losses)oninvestmentinshares,net 19 (0.2) 3.1 2.8

Other income 20 8.0 13.6 14.1

Total operating and other income 90.1 185.0 86.0


Salaries and related expenses 21 68.5 71.3 63.8

Maintenance and depreciation

of property and equipment 19.9 17.0 14.2

Other expenses 22 71.9 158.4 47.7

Total operating and other expenses 160.3 1146.7 125.7

Profitfromordinaryoperationsbeforetaxes 86.7 76.7 74.2

Provisionfortaxesonprofitfromordinaryoperations 23 34.9 29.5 26.3

Profitfromordinaryoperationsaftertaxes 51.8 47.2 47.9

Bank’sshareinoperatingprofitsofinvesteecompanies,aftertax 5 13.8 18.1 29.3


Profitfromextraordinaryoperationsaftertax 24 - - 1.5

Netprofit 65.6 65.3 78.7

Earningpersharedata: 25 NIS NIS NIS

PerNIS1parvalueofsharecapital:

Netoperatingprofitfromordinaryoperations 21.0 20.9 24.7

Netprofitfromextraordinaryitems - - 0.5

Netprofit 21.0 20.9 25.2

Number of Shares of NIS 1 each(Inthousandsshares) 3,123.9 3,123.9 3,123.9

1 Reclassified.



UBank Ltd.

Statement of Cash Flows of the Bank for the year ended December 31

Reported amounts

2009

NIS million

2008

NIS million

2007

NIS million

Cashflowsgeneratedbyoperatingactivity

Netprofitfortheyear 65.6 65.3 78.7

Adjustments needed to present the cash generatedbyoperatingactivity:

Bank’sshareinoperatingprofitofinvesteecompanies,netofdividendreceived (12.2) (18.1) (30.8)

Depreciationandamortization 2.2 0.9 0.6

Provision for doubtful debts (3.9) (4.4) 1.3

Profitonsaleandonadjustmentinvalueofavailable for sale securities (31.8) (30.1) (40.4)

Profit,realizedandnotrealized,fromadjustmentsto fair value of trading securities (30.3) (24.9) (13.9)

Provision for value decrease in available for sale securities 14.9 15.6 1.8

Deferredtaxes,net (2.5) 0.8 2-

Severancepay,net (4.9) 2.8 (1.4)

(Increase)decreaseinotherassets (467.1) 40.4 (12.2)

(Decrease)Increaseinotherliabilities 158.6 (19.3) (89.2)

Netcashinflowfromoperatingactivity (311.4) 29.0 (105.5)


UBank Ltd.

Reported amounts

2009

NIS million

2008

NIS million

2007

NIS million

Cashflowsgeneratedbyactivityinassets

Tradingsecurities,net 539.5 (10.6) 538.6

Purchase of available for sale securities (3,461.9) (5,041.0) (10,165.3)

Proceeds from sale of available for sale securities 3,520.8 4,977.0 3,000.5

Proceeds of redemption of available for sale securities 220.7 429.3 7,242.6

Borrowed securities (297.6) (264.3) (434.3)

Depositswithbanks,net 7.4 1106.5 155.6

Credittothepublic,net (85.0) 192.1 (529.8)

Purchases of property and equipment (2.1) (3.7) (4.3)

Redemption of shareholder’s loan - - 0.2

Netcashflowfromactivityinassets 441.8 1385.3 1(296.2)

Cashflowsgeneratedbyactivityinliabilities and equity

Depositsofthepublic,net 183.7 416.4 440.3

Depositsfrombanks,net (179.1) 232.9 (29.6)

Depositsfromgoverment,net (1.2) - -

Dividend paid - - (100.0)

Netcashflowfromactivityinliabilitiesandequity 3.4 649.3 310.7

(Decrease)increaseincash 133.8 11,063.6 1(91.0)

Cash on hand at beginning of year 2,669.1 11,605.5 11,696.5

Cash on hand at end of year 2,802.9 12,669.1 11,605.5

Material non-monetary activity - In 2009 securities were lent from the trading portfolio in the sum of NIS 37.3million,(in31.12.08nosecuritieswerelent).




UBank Ltd.

Notes to the Financial Statements

Note1:PrincipalAccountingPolicies

A. General

1. U-BankLtd.(henceforth:“theBank”)isincorporatedinIsrael.ThefinancialstatementsoftheBankhavebeenpreparedinaccordancewithgenerallyacceptedaccountingprinciplesinIsrael(IsraeliGAAP)andthedirectivesandguidelinesoftheSupervisorofBanksrelatingtothepreparationofannualfinancialstatementsofabank.

InaccordancewithinstructionsoftheSupervisorofBanks,publicationofthefinancialstatementsis on the basis of the consolidated statements only.

2. SinceinsomeofthefinancialstatementitemsthereisnosignificantdifferencebetweenthedatafortheBankandtheconsolidateddata,thenotestothefinancialstatementsinrespectoftheseitemsrelatetherefore,totheconsolidateddataonly.

B.DefinitionsintheseFinancialStatements-

1. Consolidatedcompanies:companiesofwhichthefinancialstatementsarefullyconsolidated,directlyorindirectly,inthestatementsoftheBank.

2. Companiesincludedonequitybasis:companies,otherthanconsolidatedcompanies,inwhichtheBank’sinvestmentisincluded,directlyorindirectly,inthefinancialstatementsonequitybasis.

3. Investeecompanies:consolidatedcompaniesorcompaniesincludedonequitybasis.4. Functionalcurrency:thecurrencyofthemaineconomicenvironmentinwhichtheBankoperates;

generally,thisisthecurrencyoftheenvironmentwherethecorporationproducesandspendsmost of its cash funds.

5. Reportingcurrency:thecurrencyinaccordancewithwhichthefinancialstatementsarereported.6. Relatedparties:asdefinedinOpinionNo.29oftheInstituteofCertifiedPublicAccountantsin

Israel,exceptforinterestedparties.7. Interestedparties:asdefinedinparagraph1ofthedefinition“InterestedParty,inaCorporation”

inparagraph1oftheSecuritiesLaw,1968.8. ControllingShareholder:asdefinedinSecuritiesRegulations(presentationofActivitiesbetweena

corporationanditscontrollingshareholderinthefinancialstatements),1996.9. Index-theConsumerPriceIndexinIsrael,publishedbytheCentralBureauofStatistics.10.Adjustedamount-anhistoricalnominalamountthatwasadjustedtotheDecember2003CPI,

inaccordancewiththeprovisionsofOpinions23and36oftheInstituteofCertifiedPublicAccountants in Israel.

11.Reportedamount-anamountadjustedtothetransitiondate(December31,2003)withtheaddition of amounts in nominal values that were added after the transition date and less amounts that were eliminated after the transition date.

12.Nominalfinancialreport-financialreportbasedonreportedamounts.13.Adjustedfinancialreport-financialreportinvaluesadjustedaccordingtothechangesinthe

general purchasing power of the Israeli currency in accordance with the provisions of the opinionsoftheInstituteofCertifiedPublicAccountantsinIsrael.

C. Financial Statements in Reported Amounts

a. In October 2001 the Israeli Accounting Standards Board published Accounting Standard No.12-“DiscontinuationofAdjustmentofFinancialStatements”.PursuanttothisStandard,andAccountingStandardNo.17publishedonDecember2002,theadjustmentoffinancialstatementswasdiscontinuedasofJanuary1,2004.UntilDecember31,2003theBankcontinued preparing adjusted statements in accordance with Opinion 36 of the Institute of CertifiedPublicAccountantsinIsrael.TheBankisimplementingtheprovisionsofthestandardandaccordinglytheadjustmentwasdiscontinued,asabove,asofJanuary1,2004.

This is subject to the transitory directives set out in the matter by the Supervisor of Banks.b. TheBankprepareditsfinancialstatementsinthepastbasedonhistoricalcostadjustedtothe


UBank Ltd.

ConsumerPriceIndex.Theadjustedamounts,asabove,includedinthefinancialstatementsasatDecember31,2003wereusedasastartingpointforthenominalfinancialreportingCommencing on 1 January 2004. Additions carried out during the period were included in nominalvalues.Therefore,financialstatementsasatdatesandforreportingperiodsafterDecember31,2003areshowninreportedamountsinaccordancewiththeaccountingstandards of the Israeli Accounting Standards Board and the directives of the Supervisor of Banks.

c. Amountsofnon-monetaryassetsdonotnecessarilyshowarealizablevalueoracurrenteconomicvalue,butonlythereportedamountsofthoseassets.

d. IntheFinancialStatements,“cost”meansthereportedamountofcost.

D. Functional Currency and Reporting Currency

ThefunctionalcurrencyoftheBankistheNewIsraeliShekel(NIS).Theconsolidatedfinancialstatements are shown in NIS and rounded to the nearest million.

E. Principles of Reporting

1. Balance Sheetsa. Theequityvalueofinvestmentsininvesteecompaniesisdeterminedbasedonthefinancial

statements in reported amounts of these companies.b. Othernon-monetaryitems(mainlybuildingsandequipment,andinvestmentsshownatcost)

are shown in reported amounts.c. Monetary items are shown in the balance sheet at their historical nominal values as at the

balance sheet date.

2. Profit and Loss Statementsa. The Bank’s share in the operating results of investee companies is determined based on the

financialstatementsinreportedamountsofthesecompanies.b. Incomeandexpensesthatarisefromnon-monetaryitems(suchasdepreciationand

amortization,prepaidexpensesandincome)orfromprovisionsincludedinthebalancesheetare derived from the difference between the reported amount of the opening balance and the reported amount of the closing balance.

c. Othercomponentsoftheprofitandlossstatement(suchasfinancingprofit,andoperatingcommissions)areshownattheirnominalvalues.

3. Statement of changes in shareholders’ equity Dividend declared or paid in the reporting period is stated in nominal values.

F. Linkage and Foreign Currency

1. Transactions in Foreign Currency Transactions in foreign currency are translated into the functional currency according to the

exchange rate published by the Bank of Israel applicable on the dates of the transactions. Financial assets and liabilities stated in foreign currency on the reporting date are translated into the functional currency according to the exchange rate applicable on that date. Exchange rate differencesforfinancialitemsarethedifferencebetweentheamortizedcostinthefunctionalcurrencyatthebeginningoftheperiod,adjustedforeffectiveinterestandpaymentsduringtheperiod,andtheamortizedcostinforeigncurrencytranslatedattheexchangerateattheendoftheperiod.Non-financialassetsandliabilitiesstatedinforeigncurrenciesandmeasuredaccordingto fair value are translated into the functional currency according to the exchange rate applicable on the day the fair value was determined.

2. Index-linked Assets and Liabilities not measured according to fair value Assets and liabilities linked to the CPI are included according to the terms of linkage determined

for each balance.


UBank Ltd.

3. Below are details of the representative exchange rates and Consumer Price Index and the rates of change therein:

2009 2008 2007

Consumerpriceindex:

December 105.2 101.2 97.5

November 105.2 101.3 97.0

RateofexchangeofU.S.$1inNIS 3.775 3.802 3.846

Rate of exchange of Euro 1 in NIS 5.442 5.297 5.659

2009 2008 2007

Consumerpriceindex:

December 3.9% 3.8% 3.4%

November 3.8% 4.5% 2.8%

Revaluation(devaluation)inrealtermsofNISinrelationto:

RateofexchangeofU.S.$1inNIS (0.7%) (1.1%) (9.0%)

Rate of exchange of Euro 1 in NIS 2.7% (6.3%) 1.7%

G. Use of estimates

WhenpreparingthefinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciplesinIsrael(IsraeliGAAP)andthedirectivesandguidelinesoftheSupervisorofBanks,Thebankmanagementisrequiredtomakeuseofcertainconsiderations,assessments,estimates,andassumptionsthataffecttheimplementationofpolicyandtheamountsofassetsandliabilities,andamountsofincomeandexpenses.Itshouldbeclarifiedthatactualresultsmaydifferfromsuch estimates.

WhenformulatingaccountingestimatesusedinpreparingtheBank’sfinancialstatements,Bank Management has to make assumptions concerning circumstances and events that involve significantuncertainty.Initsconsiderationoftheestimates,BankManagementbasesitselfonpastexperience,variousfacts,externalfactors,andonreasonableassumptionsinaccordancewithcircumstances appropriate to each estimate.

Estimates and the assumptions on which they are based are reviewed on a routine basis. Changes inaccountingestimatesarerecognizedintheperiodinwhichtheestimateswereamendedandfor each period affected in the future.

H. Statement of Cash Flows Thestatementofcashflowsispresentedclassifiedundercashflowsfromoperatingactivities,

fromactivitiesinassets,andfromactivitiesinliabilitiesandcapital.Thecashflowsfromactivitiesinassetsandinliabilities,andincapital,areshownnet,otherthanchangesinsecuritiesforinvestment and in non-monetary assets.

Theitem“Cashandcashequivalents”includescashanddepositswithbanks,negotiableCD’sanddeposits in central banks for an original period not exceeding three months.

I. Principles of consolidation

1. Subsidiary companies Subsidiary companies are entities controlled by the Bank. Control exists when the Bank has the

abilitytodeterminethefinancialandoperatingpolicyoftheentityinordertoobtainbenefitfromitsresourcesandactivities.ControlexistswhentheBankholds,directlyorindirectly,shares


UBank Ltd.

granting more than 50% of the voting rights in the subsidiary and the rights to appoint the majorityofthemembersofitsBoardofDirectors,unlesstherearereasonsthatclearlypreventthe parent company from implementing actual control.

TheconsolidatedfinancialstatementsincludetheauditedfinancialstatementsoftheBankandofentitiesinwhichtheBankhascontrol.Thefinancialstatementsofsubsidiarycompaniesareincludedintheconsolidatedfinancialstatementsfromthedatecontrolisobtaineduntilthedatecontrol ceases. The accounting policy of subsidiary companies was amended as necessary in ordertoadaptittotheaccountingpolicyadoptedbytheBank,exceptinthosecaseswhentheSupervisor of Banks permitted otherwise.

2. Companies included on equity basis CompaniesincludedonequitybasisareentitiesinwhichtheBankhasmaterialinfluenceoverthe

financialandoperatingpolicy,butcontrolofthemhasnotbeenachieved. Investments in companies included on equity basis are dealt according to the equity method and

recognizedinitiallyatcost. Investments include goodwill or negative goodwill calculated at the date of acquisition and shown

after deducting aggregate losses from impairment. TheconsolidatedfinancialstatementsincludetheBank’sshareintheincomeandexpensesof

theentityheld,whichisdealtwithinaccordancewiththeequitymethodfromthedatethereismaterialinfluenceuntilthedatematerialinfluenceceases.

Theaccountingpolicyofcompaniesincludedonequitybasiswasamended,asnecessary,inordertoadaptittotheaccountingpolicyadoptedbytheBank,exceptinthosecaseswhentheaccounting principle implemented by the company included on equity basis is an accounting principleacceptedinIsrael,aninternationalaccountingprinciple,ifthecompanyincludedonequitybasisisinaforeigncountry,orotherwisepermittedbytheSupervisorofBanks.

TheBank’sshareinthefinancialresultsofthesaidcompaniesisshownafteramortizationofthe excess cost generated on their acquisition. Excess cost attributed to assets and liabilities is amortizedovertheusefullifeoftheasset.Goodwillandnegativegoodwillareamortizedonastraight-line basis over 10 years.

When the Bank’s share in the losses exceeds the value of the Bank’s rights in the company includedonequitybasis,thebookvalueofthoserightsareamortizedtozeroandtheBankdoesnotrecognizefurtherlosses,unlesstheBankguaranteestheliabilitiesofthecompanyincludedonequitybasisorithasanotherobligationoffinancialsupportforthecompanyincludedonequitybasis.

Regarding impairment in investments in companies included on equity basis - see T. below.

3. Transactions eliminated on consolidation MutualbalancesintheBankandunrealizedincomeandexpensesderivingfrommutual

transactions,areeliminatedintheprocessofpreparationoftheconsolidatedfinancialstatements.Unrealizedprofitsderivingfromtransactionswithcompaniesincludedonequitybasisareeliminated against the investment in accordance with the Group’s rights in these investments. Unrealizedlossesareeliminatedinthesamemannerbywhichunrealizedprofitsareeliminated,aslongasthelossdoesnotreflectevidenceofimpairment.

J. Securities

1. SecuritiesinwhichtheBankinvestsareclassifiedintwoportfoliosasfollows:a. Securities held for trading Quoted securities that are acquired and held with the aim of selling them in the near future.

Securitiesheldfortradingarestatedatfairvalueatthedateofthereport.Profitsandlossesonadjustmenttofairvaluearechargedtotheprofitandlossstatement.

b. Securities available for sale SecuritiesnotclassifiedasheldtomaturityBonds(BondswhichtheBankintendsandis


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abletoholduntilredemptiondate)orassecuritiesheldfortrading.Sharesforwhichafairvalue is available and Bonds are stated in the balance sheet at their fair value at the date of the report. Shares for which fair value is not available are measured in the balance sheet accordingtocost.Unrealizedprofitsorlossesonadjustmenttofairvaluearenotchargedtotheprofitandlossstatement,andarereportednetoftheeffectoftax,inaseparateitemintheshareholders’equityintheframeworkofotheraggregateoverallprofit.

2. Dividendincome,accumulatedinterest,linkageandexchangeratedifferences,amortizationofpremiumordiscount(inaccordancewiththeeffectiveinterestmethod),aswellaslossesfromimpairmentnotofatemporarynature,arechargetotheprofitandlossstatement.

3. Interestincomeinrespectofbeneficiaryrightspurchased(suchas:asset-backedfinancialinstrumentsoftypesMBS,CLO,CDO,andCMO,aswellasbeneficiaryrightswhichcontinuedtobeheldbytheBankinthesecuritizationoffinancialassets,exceptforbeneficiaryrightsofhighcreditquality,arerecognizedinaccordancewiththeprospectiveinterestmethod,afteradjustingtheinterestrateusedtorecognizeinterestincometochangesintheestimateoffuturecashflows.Forthispurpose,beneficiaryrightsofhighcreditqualityarebeneficiaryrightsissuedunderguaranteeoftheU.S.GovernmentorbyagenciesoftheU.S.Government,aswellasasset-backedsecurities with an international credit rating of at least AA.

4. The Bank’s investments in venture capital funds is treated according to cost less losses from impairmentnotofatemporarynature.Profitfrominvestmentsinventurecapitalischargedtotheprofitandlossstatementatthetimetheinvestmentisrealized.

5. Thecostofsecuritiesrealizediscalculatedona“firstin,firstout”(FIFO)basis.

6. Concerning the calculation of fair value - see section M below.

7. Concerning the treatment of impairment not of a temporary nature - see section N below.

8. Securities Exchange Transactions Exchange transactions of government bonds with other government bonds for redemption in

underayear,areshownasgovernmentbondspurchasedattenderpriceandsaleofbondsatmarket price.

K LendingSecurities

1. ThelendingofsecuritiesbyonecustomertoanotherortotheBank,inwhichtheBankactsasanintermediary,isshownbytheBankas“depositswithbanks”,“credittothepublic”and“depositsofthepublic”aslongasthesecuritieshavenotbeenreturned.

Transactionscarriedoutas“ordinary”credittransactionsinwhichtheBanklendssecuritiesagainstacollateralportfolio,andtheborrowerdoesnotprovidethebankingcorporationwithasecuritymarginrelatingspecificallytothesecuritieslendingtransaction,areshownascredittothepublic as per market value and are added to the liability of the borrower.

2. BorrowingofSecuritiesfromtheTreasury: The Bank borrows securities from the Treasury for purposes of covering short sales of securities

(oftheBank’snostrooroftheBank’scustomers). SecuritiesborrowingbytheBankisshownintheitem“SecuritiesBorrowed”.Theshortsaleof

securitiesbytheNostroisshownintheitem“OtherLiabilities”andtheshortsaleofsecuritiesbycustomersisshownintheitem“CredittothePublic”.

Forthesubject,TransfersandServicingofFinancialAssetsandExtinguishmentsofLiabilities-Seesection Q below.


UBank Ltd.

L. Derivativefinancialinstrumentsandhedgingactivities

1. AspartoftheBank’sactivityforitscustomers,andintheframeworkofitsAssetandLiabilityManagementpolicyaimedatthecontrolledmanagementofitsexposuretofinancialrisks,theBankexecutestransactionsinderivativefinancialinstrumentswithcustomers,banks,theMaofClearingHouse,andtheBankofIsrael.Theseinstrumentsincludeamongothers:forwardtransactions,futurescontracts,financialswaps,optionsetc.,whosemainpurposeistoprovideprotectionagainstindexbasisexposure,currencyexposure,andinterestexposure.

2. TheBankisexposedtocreditrisks,liquidityrisks,andmarketrisks.AspartoftheoverallstrategyoftheBankformanagingitslevelofexposuretothevariousrisks,theBankmakesuseofderivativefinancialinstrumentswhichincludeamongothers,forwardtransactions,futurescontracts,financialswaps,optionsetc.TheBankholdsearmarkedandeligiblederivativesasfairvaluehedges,andderivativesnotearmarkedforaneligiblehedgingrelationship.

3. Ifaderivativeisnotearmarkedforaneligiblehedgingrelationship,thederivativeisrecordedatfairvalue,andchangesinthefairvaluearechargedtotheprofitandlossstatementonacurrentbasis.

4. ItispossiblethattheBankwillenterintoacontractthatisnotaderivativeinstrumentonitsown,but contains an embedded derivative.

An embedded derivative that was separated is included in the balance sheet together with the hostcontract,andchangesinfairvalueofseparatedembeddedderivativesarechargedonacurrentbasistoprofitandloss.

Incertaincases(suchas:incaseswhentheBankisnotabletoseparatetheembeddedderivativefromthehostcontract),inaccordancewithAmericanAccountingStandard155(FAS155),AccountingTreatmentofCertainHybridFinancialInstruments,theBankelectsnottoseparatetheembeddedderivativeandtomeasurethehybridinstrumentasawholeforfairvalue,whilereportingchangesinthefairvalueinthestatementofprofitandlosswhentheyoccur.Theabove election is made at the date of purchase of the hybrid instrument or on the occurrence of certaineventswhentheinstrumentissubjecttoremeasurement(remeasurementevent),suchas:aresultofbusinesscombinationsormaterialchangesinthedebtinstrument.Suchfairvalueelection is irrevocable.

5. TheBankceaseshedgeaccountingfromnowoninthefollowingcases:a. it is decided that the derivative is no longer effective in offsetting changes in the fair value or

cashflowsofthehedgeditem;b. thederivativeexpires,issold,cancelledorrealized;c. thederivativeceasestobedesignatedasahedginginstrument,sinceitisalmostcertainthat

the forecast transaction will not be carried out;d. ahedgedfirmcommitmentnolongerfulfillsthedefinitionofafirmcommitment;e. Management cancels the designation of the derivative as a hedging instrument.

When there is a cessation of hedge accounting because it was determined that the derivative is nolongereligibleasaneffectivefairvaluehedge,thederivativewillcontinuetoberecordedinthebalancesheetatitsfairvalue,butthehedgedassetorliabilitywillnolongerbeadjustedforchanges in fair value.

Whenthereisacessationofhedgeaccountingbecausethehedgeditemnolongerfulfilsthedefinitionofafirmcommitment,thederivativewillcontinuetoberecordedinthebalancesheetatitsfairvalue,andanyassetorliabilitythatwasrecordedinaccordancewithitsrecognitionasafirmcommitmentwillbedeletedfromthebalancesheetandrecognizedasaprofitorlossintheprofitandlossstatementforthecurrentperiod.

6. The Bank designates certain derivatives as fair value hedges. Changes in the fair value of derivativeshedgingexposuretochangesinthefairvalueofanasset,liabilityorfirmcommitment,arerecognizedonacurrentbasisintheprofitandlossstatement;asarechangesinfairvalueofthe hedged item which can be attributed to the hedged risk.

7. TheBankisactiveintheareaofderivativefinancialinstruments,whicharereportedintheFinancialStatementsbasedonfairvalue,asopposedtothevalueonaccrualbasis.Thefairvaluecalculationsofderivativefinancialinstruments,inrespectoftheirforeigncurrencyelement,arebasedonprevailingdataininternationalmoneymarkets,andinrespectoftheIsraelicurrencyelement,ontheratesofunlinkedandindex-linkedinterestforwhichtheRiskManagementand


UBank Ltd.

CreditManagementDepartmentoftheBankhasmadeanestimate,takingintoaccountmarketprices,liquidityandnegotiabilityprevailinginthedomesticmarket.Themarginbetweensellinginterestandbuyinginterestalsorepresentsasubjectivefactorinfluencingcalculationsofthefairvalueofderivativefinancialinstruments.

Mosttransactionsinderivativefinancialinstrumentsareshort-termtransactions,inwhichthereis no credit risk. The credit risk component in long-term transactions is taken into account in their pricing. The fair value of different types of options is based in the most part on the Black andScholesModel,andisaffectedbythevolatilityinherentintherateofexchange,interestandthe relevant indices for the option that the Bank purchased or wrote. With regard to hybrid derivativefinancialinstrumentsthathavenoactivemarket,fairvaluecalculationsaregenerallymadebytheleadingfinancialinformationsystemsinthefield,whichareusedbydealingroomsandbanksworldwide(theBloombergsystemandtheSuperDerivativessystem).

InterestratesinIsraelicurrencyandforeigncurrencyforvaryingtime-periods,asmentionedabove,arealsothebasisforthecalculationoffairvalueforbalancesheetitems,asnotedindetailin Note 15 b to the Financial Statements. These interest rates are also used for calculating the fair valueofassetsandliabilitieshedgedagainstderivativefinancialinstruments,iftheymeethedgingcriteria as required by accounting principles and the directives of the Supervisor of Banks in the matter.

M. The determination of Fair Value of Financial Instruments

Thefairvalueistheamountatwhichtheassetcouldbeboughtorsold(theliabilitycouldbeundertakenorredeemed)inatransactionintheordinarycourseofbusinessbetweenwillingparties,i.e.inatransactionwhichisnotaforcedsaleorsalemadeduringliquidation.TheBankdeterminesfairvalueasdetailedbelow:

1. Securities The fair value of securities held for trading and securities available for sale is determined based

onmarketpricesquotedinactivemarkets.Inthesecases,thefairvalueoftheBank’sinvestmentsin securities is the multiple of the number of units and the same market price. If a quoted market priceisnotavailable,afairvalueestimateisbasedonthebestavailableinformation.Thefairvalue estimate takes into account the prices of similar assets or similar liabilities and the results of various assessment methods as detailed in paragraph 4 below.

2. Derivativefinancialinstruments Derivativefinancialinstrumentsthathaveanactivemarketwerevaluedatmarketvalueand,

whenthereareanumberofactivemarketsinwhichtheinstrumentistraded,thevalueisdeterminedaccordingtothemostactivemarket.Derivativefinancialinstrumentsthatarenottraded on an active market were valued on the basis of models the Bank uses in its current operationsthattakeintoaccounttherisksinherentintheDerivativefinancialinstrument(marketrisk,creditriskandsoon),asdetailedinparagraph4below.

3. Additionalnon-derivativefinancialinstruments Formostofthefinancialinstrumentsinthiscategory(suchas:depositsofthepublicanddeposits

withbanks,credittothepublicandcredittothegovernment,debentures,subordinatednotes,andnon-quotedloans)a“marketvalue”cannotbequotedbecausetheydonothaveanactivetradingmarket.Thereforethefairvalueisestimatedbymeansofacceptedpricingmodels,suchasthepresentvalueoffuturecashflows,discountedataninterestratethatreflectsthelevelofriskinherentinthefinancialinstrument.

4. Determination of fair value in inactive markets. TheBankimplementsthedirectivesoftheClarificationFSPFAS157-3,“DeterminingtheFair

ValueofFinancialAssetsinanInactiveMarket”.Accordingly,indeterminingthefairvalueofsecuritiesandotherfinancialinstrumentstradedinaninactivemarket,significantuseofjudgmentissometimesinvolved,includinganexaminationofwhetherthetransactionswereexecutedunder conditions of duress and coercion.


UBank Ltd.

Incasesinwhichthereisnoavailablequoteofpricesinanactivemarket,fairvalueisdeterminedon the basis of accepted pricing models. Valuation methods include the use of various parameters,suchasinterest-ratecurvesandcurrencyexchangerates,takingintoaccountassumptions with regard to various factors.

5. For further explanation of the methods and the main assumptions used for purposes of the estimationofthefairvalueoffinancialinstruments,seeNote15Bonthesubjectofbalancesandfairvalueestimatesoffinancialinstruments.

N. Impairment of Financial Instruments 1. SecuritiesForeveryreportingperiod,theBankexamineswhethertheimpairmentofthefairvalueofsecuritiesclassifiedintheavailableforsaleportfolioisofanatureotherthantemporary.

TheBankrecognizesinthereportingperiodimpairmentofanatureotherthantemporary,atleast,inrespectofanimpairmentofanysecuritymeetingoneormoreofthefollowingconditions:

- A security that was sold until the publication date of the report to the public for this period;- A security that near the publication date of the report to the public for this period the Bank

intended to sell within a short period of time.- Adebentureforwhichtherewasasignificantdecreaseintheratingbetweentheratingofthe

debenture at the date of acquisition by the Bank and the rating of the debenture at the date of publication of the report for this period;

- AdebenturethatwasclassifiedasproblematicbytheBankafteritsacquisition;- A debenture in respect of which there was a payment default after its purchase;- Asecurity,whosefairvalueattheendofthereportingperiodandalsoatadateshortlybefore

thepublicationdateofthefinancialstatements,waslowerthancostbyasignificantrate(fordebentures-amortizedcost).ThisisunlesstheBankhasconcreteobjectiveevidenceanda conservative analysis of all the relevant factors proving at a high level of certainty that the impairment was of a temporary nature.

Inaddition,determiningiftheimpairmentisofanatureotherthantemporaryisbasedonthefollowingconsiderations:

- Therateoflossinrelationtothecostofthesecurity(regardingdebentures-totheamortizedcost);

- The period of time in which the fair value of the security was less than its cost;- A deterioration in the condition of the issuer or in the overall situation of the market;- The intention and ability of the Bank to hold the security for a long enough period of time that

would allow for an increase in the fair value of the security or until redemption;- In the case of debentures - the rate of return until redemption;- In the case of shares - the reduction of dividends allocated or its cancellation;

Inaddition,theBankrecognizesanimpairmentofanatureotherthantemporaryinrespectofbeneficiaryrightspurchasedandinrespectofbeneficiaryrightsthatcontinuedtobeheldbytheBankinthesecuritizationoffinancialassets,whencurrentinformationofothereventsindicateaprobabledeteriorationintheforecastofcashflowsderivingfromthefinancialinstrument.

Whenimpairmentofanatureotherthantemporaryoccurs,thecostofthesecurityisreducedtothefairvalueandservesasthenewcostbasis.Thecumulativelossrelatingtoasecurityclassifiedasavailableforsale which was charged in the past to a separate item in shareholders’ equity in the framework of total otherprofit,istransferredtoprofitandlosswhenthereexistsforitanimpairmentofanaturewhichisnototherthantemporary.Increasesinvalueinsubsequentreportingperiods,areincludedinaseparateiteminshareholders’equityundertotalotheraccumulatedprofitandisnotchargedtoprofitandloss(thenewcostbasis).


UBank Ltd.

2. Policy for the provision for doubtful debts Theprovisionfordoubtfuldebtsisdeterminedonaspecificbasis.Inaddition,ageneralprovision

andasupplementaryprovisionareincluded,inaccordancewiththedirectivesoftheSupervisorof Banks.

ThespecificprovisionfordoubtfuldebtsismadebasedonManagement’scautiousestimateofthelossesinherentinthecreditportfolio,includingdebtsinoff-balance-sheetitems.Inthepreviouslymentionedestimate,Managementtakesintoaccount,amongotherconsiderations,theextentoftherisksrelatedtothefinancialstabilityofborrowers,basedonitsinformationregardingtheirfinancialcondition,theirbusinessoperations,theirmeetingofobligations,andan evaluation of collateral received from them. Interest income in respect of a debt declared as doubtful is not recorded as of the beginning of the quarter in which the debt is declared doubtful.Uponcollectionoftheinterest,theinterestincomeisrecordedintheitem“otherfinancingincome”.

The supplementary provision for doubtful debts is based on the quality of the customer debt portfolio,inaccordancewithriskattributesdefinedinthedirectivesoftheSupervisorofBanks.Different provision rates have been determined for each such risk attribute. The supplementary provision for doubtful debts is calculated according to the rates determined for the different attributes.Thegeneralprovisionisinvaluesadjustedfortheendof2004,inanamountconstituting 1% of the total indebtedness under the responsibility of the Bank and investee bankingcompaniesOnDecember31,1991.Thecumulativepercentageofthesupplementaryand general provision for doubtful debts from the amount of risk of total credit to the public at December31,2009is0.2%(similartoDecember31,2008,andDecember31,2007).

WritingoffbaddebtsiscarriedoutwhentheBankhasdeterminedthatthedebtisuncollectible,followinglegalproceedingsundertakenorasaresultofagreementsorarrangementsmade,mostofthemincasesinwhichnolegalproceedingswereundertaken,andthedebtsarenotcollectible,orduetootherreasonsforwhichthedebtsareuncollectible.

O. Basis of recognition of income and expenses

1. Financingincomeandexpensesareincludedonanaccrualbasis,exceptforitemsdetailedasfollows:accumulatedinterestonproblematicdebtsclassifiedasnon-incomebearingdebts,whichisrecognizedinthestatementofprofitandlossbasedonactualcollectionandcreditfacilityallocationfees,aswellascommissionsonfinancingtransactions(suchas:commissionsforacceptances,guaranteesanddocumentarycredit)whicharerecognizedinprofitandlossrelativeto the periods of the transactions.

2. Operatingcommissionsforgrantingservices(suchas:fromactivityinsecuritiesandderivativeinstruments,creditcards,accountmanagement,dealingwithcredit,conversiondifferencesandforeigntrade)arerecognizedinprofitandloss,whentheBank’sentitlementtoreceivethememerges.

3. Otherincomeandexpensearerecognizedonanaccrualbasis.4. Securities - see Section J above.5. Derivativefinancialinstruments-seeSectionLabove.6. Inconsecutiveperiodsfollowingimpairmentofanotherthantemporarynature,interestincome

frominvestmentsindebtinstrumentsshallberecognizedasfollows:accumulationofincomeinareportingperiodismadebasedonthesurplusofexpectedcashflowstobecollectedonthedebtinstrument(thebasisamountofthedebtinstrumentatthetimeofimpairmentofanotherthantemporarynatureisthefairvalue).InrarecasesinwhichtheBankhasnoreasonableestimateoftheamountsandtimingoftheexpectedcashflowstobecollectedfromthedebtinstrument,theBankrecognizesincomeaccordingtothemethodofrecoveryofthecost,orrecognizesincomeonacashbasis.


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P. Offsettingoffinancialinstruments

1. The Bank offsets assets and liabilities derives from the same counterparty and states their balance netinthebalancesheetifthefollowingcumulativeconditionsexist:- Fortheseliabilities,existsalegallyenforceablerighttooffsetliabilitiesfromassets;- Thereistheintenttopayofftheliabilitiesandtorealizetheassetsonanetbasisoratthe

same time.2. The Bank offsets assets and liabilities with two different counterparties and states a net amount

inthebalancesheetiftheabovecumulativetwoconditionsexist,andonconditionthatthereisan agreement between the three parties clearly determining the Bank’s right of offset of those liabilities.

3. The Bank offsets deposits whose repayment to the depositor is conditional upon the amount of

thecreditcollectedandthecreditgrantedfromthesedeposits,inrespectofwhichtheBankhasno risk of loss from the credit.

Q. Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

The Bank applies the principles of measurement and disclosure set out in the American AccountingStandardFAS140-“AccountingprinciplesforTransfersandServicingofFinancialAssetsandExtinguishmentsofLiabilities”,forthepurposeofdistinguishingbetweentransfersoffinancialassetsreportedasasale,andothertransfers.Inviewofthis,theprinciplehasbeenimplementedwherebyafinancialassetthatwastransferredwillbeshowninthebalancesheetofthepartycontrollingit,whetheritisthetransferororthereceiveroftheasset.Forthismatter,testsofcontrolhavebeendeterminedrelatingtothetransferoffinancialassetstransactions(suchas:repurchasetransactions,lendingofsecurities,securitizationofloans,saleandparticipationinloans).

The amendments to the Directives on Reporting to the Public apply to the Bank regarding transactionsoflendingsecurities,repurchaseofsecurities,securitizationoffinancialassets,othertransfersoffinancialassets,servicingfinancialassetsandtheextinguishmentofliabilitieswhichwerecarriedoutafterDecember31,2006,andaremanagedundermanagementprinciples,includingthemanagementofmargindeposits,determinedonthesubjectintheU.S.andaspublished in the draft Proper Banking Conduct of the Supervisor of Banks. Transactions that do not meet the above management principles have been dealt with in accordance with the Directives for Reporting to the Public before the adoption of the principles of FAS 140.

Securitiessoldunderconditionsofrepurchaseorpurchasedunderconditionsofresale,securitiesborrowedorlent,andotherfinancialinstrumentstransferredorreceivedbytheBank,inwhichthe Bank did not lose control over the transferred asset or did not acquire control in the asset received,aretreatedassecureddebt.Inaddition,accordingtotheinstructionsoftheSupervisorofBanks,certainsecuritiessoldunderconditionsofrepurchasetotheBankofIsraelaretreatedassecureddebt.Financialinstrumentstransferredintransactionssuchastheabove,aremeasuredin accordance with the same measurement principles applied before their transfer ; i.e. securities asmentionedabovearenotdeductedfromthebalancesheet,andasopposedtothese,the deposit for which those securities were pledged to ensure its repayment is shown under “Securitieslentorsoldunderagreementstorepurchase”.Securitiesreceivedintransactionsas mentioned above are recorded according to the cash amount received by the Bank under “Securitiesborrowedorpurchasedunderagreementstoresell”.

The Bank monitors the fair value of securities borrowed and lent as well as securities transferred underrepurchaseandresaleagreementsonadailybasis,andademandforcollateralismadeinappropriatecases.Interestreceivedorpaidinrespectofthesaidsecuritiesisreportedasfinanceincome or expense respectively.

TheBankdeductsaliabilityifandonlyiftheliabilityisrepaid,namelyoneofthefollowingconditionsexist:(a)theBankpaidthelenderandwasreleasedfromitsobligationundertheliability,or(b)theBankwaslegallyreleased,bylegalproceedingsorbyagreementofthelender,from being the principal debtor under the liability.


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R. Buildings and Equipment

1. Recognition and measurement Itemsoffixedassetsaremeasuredatcostlessaccumulateddepreciationandlossesfrom

impairment.Whensignificantpartsofthefixedassetshaveadifferentlifespan,theyaredealtwithasseparateitemsoffixedassets.

Ongoingmaintenancecostsoffixedassetitemsarechargedtotheprofitandlosswhenincurred. Profitorlossonthedisposalofitemsoffixedassetsisdeterminedbycomparingtheproceeds

ofdisposaloftheassetwithitsbookvalue,andareincludednetunder“Profitaftertaxesfromextraordinaryactivities”intheprofitandlossstatement.

2. Depreciation Depreciationisthesystematicallocationoftheamortizableamountofanassetoveritsuseful

lifetime.Theamortizableamountisthecostoftheasset,oranotheramountreplacingthecost,less the asset’s residual value.

Depreciationischargedtotheprofitandlossstatementaccordingtothestraight-linemethodovertheestimatedusefullifetimeofeverypartofthefixedassetitems,sincethismethodreflectsbestthepredictedpatternfortheconsumptionoffutureeconomicbenefitsinherentintheasset.

Estimatesofthemethodofdepreciation,usefullifetime,andresidualvaluearereviewedatleastattheendofeveryfinancialyearandadjustedwhennecessary.

3. Softwarecostsshowninthebalancesheetunder“Otherassets”.Regardingtheaccountingtreatment of software costs - see section S below.

S. Intangible assets

1. Goodwill-goodwillcreatedfollowingtheacquisitionofsubsidiarycompanies(includingacquisitionofminorityinterests)isincludedunder“Otherassets”.Fordetailsoffirst-timerecognition of goodwill - see section I above.

2. Subsequent measurement - goodwill is measured by cost less accumulated depreciation and losses from impairment. Goodwill in respect of investments treated according to the equity basismethod,inincludedatthebookvalueoftheinvestment.Lossfromimpairmentinrespectofinvestmentsasmentionedaboveisnotattributedtoanyasset,includinggoodwill,whichrepresents part of the book value of the investment.

3. Software costs - Software purchased by the Bank is measured by cost less accumulated depreciation and losses from impairment.

4. Subsequentcosts-subsequentcostsofsoftwarearerecognizedasanassetonlyiftheyincreasethefutureeconomicbenefitsinherentintheassetforwhichtheywereexpended.Othercostsarechargedtoprofitandlossstatementwhenincurred.

5. Depreciation-depreciationischargedtotheprofitandlossstatementaccordingtothestraight-linemethodovertheestimatedofusefullifetimeofthesoftware,beginningintheperiodwhenthe software is ready for use.

T. Impairment of Non-Financial Assets

Thebookvalueofnon-financialassetsoftheBank,excludingdeferredtaxassets,andincludingmonetaryassetsthatareinvestmentstreatedaccordingtotheequitymethod,isexaminedateachreportingdateinordertodeterminewhethersignsexisttoindicateimpairment.Ifsuchsignsexist,anestimateoftherecoverableamountoftheassetiscalculated.Inperiodssubsequenttothefirstrecognitiondate,theBankassesses,onceannuallyonafixeddateforeachasset,therecoverableamountofintangibleassetswithanundefinedlifetime,orwhichareunavailableforuse;ormorefrequentlyifsignsofimpairmentexist.


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Therecoverableamountofanassetisthehigherofthevalueinuseandthenetsaleprice(fairvaluenetofsellingexpenses).Indeterminingvalueinuse,theBankcapitalizesthepredictedfuturecashflowsaccordingtoapretaxcapitalizationratereflectingmarketestimatesregardingthetimevalueofthemoneyandthespecificrisksrelatedtotheasset.Forthepurposeofexaminingimpairment,assetswhichcannotbe examined individually are aggregated into the smallest group of assets that generatescashflowsfromongoinguse,whichareessentiallynon-dependentonotherassetsandgroups(“cash-generatingunit”).Forthepurposesofexaminingimpairmentofgoodwill,cash-generatingunitstowhichgoodwillwasallocatedareaggregatedsuchthatthelevelatwhichtheimpairmentisexaminedreflectsthelowestlevelatwhichgoodwillwasmonitoredforinternalreportingpurposes,butisnotlargerthananoperating segment. Goodwill acquired in the course of a business combination is allocated to the cash-generatingunitsexpectedtoderivebenefitfromthesynergyofthecombination.AssetsoftheheadquartersoftheBankdonotgenerateseparatecashflows.IftherearesignsofimpairmentofanassetbelongingtotheheadquartersoftheBank,therecoverableamountofthegroupof cash-generating units served by the headquarters is determined.

Lossesfromimpairmentarerecognizedwhenthebookvalueoftheassetorofthecash-generatingunittowhichtheassetbelongsexceedstherecoverableamount,andarechargedtoprofitandloss.Lossesfromimpairmentrecognizedwithregardtocash-generatingunitsarefirstallocatedtotheamortizationofthebookvalueofthegoodwillattributedtosuchunits,andafterwardtotheamortizationofthebookvalueoftheotherassetsinthecash-generatingunit,proportionally.

Lossfromtheimpairmentofgoodwillisnotcancelled.Withregardtootherassets,lossesfromimpairmentrecognizedinpreviousperiodsarereexaminedateachreportingdate,inordertotestforsigns that the losses have decreased or no longer exist. Loss from impairment is cancelled if a change has occurredintheestimatesusedtodeterminetherecoverableamount,onlyifthebookvalueoftheasset,aftercancellationofthelossfromimpairment,doesnotexceedthebookvaluenetofamortizationordepreciationthatwouldhavebeendeterminedifnolossfromimpairmenthadbeenrecognized.

Goodwillthatispartofaninvestmentaccountinacompanyincludedonequitybasisisnotrecognizedseparately,andisthereforenotexaminedseparatelyforimpairment.Alternatively,impairmentisexaminedwithregardtotheinvestmentasawhole,whenobjectiveevidencepointingtoimpairmentexists.

U. Employee rights

Thereareappropriatereservesforallliabilitiesregardingemployer/employeerelations,inaccordancewiththelaw,agreement,acceptedpractice,andmanagement’sexpectations.Liabilitiesforseverancepayandpensionsarecoveredmainlybyamountsfunded,whicharedepositedinprovidencefundsforpensionandseverancepay.Foramountsofliabilitiesnotcoveredasstated,aprovision is made in the Financial Statements - see Note 11.

V. Contingent Liabilities

TheFinancialStatementsincludeappropriateprovisionsforlegalclaims,inaccordancewiththeestimation of the Management and based on the estimations of its legal counsels.

DisclosureisintheformatsetforthinthedirectivesoftheSupervisorofBanks,sothatclaimsfiledagainsttheBankareclassifiedintothreegroups:

1. Probablerisk-probabilityofrealizationoftheriskexposureexceeds70%.Forclaimincludedinthisriskgroup,provisionisincludedintheFinancialStatements.

2. Reasonablypossiblerisk-probabilityofrealizationoftheriskexposureisbetween20%and70%.Forclaimincludedinthisriskgroup,provisionisnotincludedintheFinancialStatementsbutdisclosure only is made.

3. Remoterisk-probabilityofrealizationoftheriskexposureislessthan20%.Forclaimincludedinthisriskgroup,provisionisnotincludedintheFinancialStatementsandnodisclosureismade.


UBank Ltd.

Aclaim,forwhichthereisadeterminationbytheSupervisorofBanksthattheBankisrequiredtorepayfunds,isclassifiedasprobableandaprovisionismadeforitintheamounttheBankisrequired to repay.

InrarecasestheBankhasdeterminedthat,intheopinionofBankManagement,basedonitslegalcounsels,itisnotpossibletoevaluatetheprobabilityofrealizationoftheriskexposurewithregardtoanormalclaimandaclaimapprovedasaclassaction,andsonoprovisionwasmade.

Note 15 on Contingent Liabilities and Special Commitments includes quantitative disclosure for allexposureswhoseprobabilityofrealizationisnotremote,forwhichnoprovisionhasbeenmade,wheretheamountofeachofthem(orthejoiningofseveralclaimsonsimilarmatters),accordingtotheclaim,isgreaterthananamountconstitutingapproximately10%ofthecapitalofthe Bank.

Inaddition,theabove-mentionedNoteincludesdetailsofcontingentliabilitieswhosepossibilityofrealizationisremotebuttherealizationofthesaidliabilitiesorthemaximumlossmaycastdoubt on the continued operation of the corporation in its present format.

W. Taxes on income

Tax expense on income include current taxes and deferred taxes. Current and deferred taxes arechargedtothestatementofprofitandloss,exceptifthetaxderivefromatransactionoraneventchargeddirectlytoshareholders’equity.Inthesecases,thetaxexpenseonincomeischargedtoshareholders’equity.Currenttaxistheamountoftaxexpectedtobepaid(orreceived)ontaxableincomefortheyear,calculatedinaccordancewiththetaxratesapplicableby law that was passed or for which legislation has effectively been completed by the balance sheetdate,aswellasadjustmentstothetaxliabilityforpreviousyears.

The provision for taxes on the income of the Bank and its consolidated companies that are financialinstitutionsforValueAddedTaxpurposes,includeprofitstaxleviedontheincomeaccordingtotheValueAddedTaxLaw.ValueAddedTaxleviedonsalariesinfinancialinstitutionsisincludedinthestatementofprofitandlossunder“Salariesandrelatedexpenses”.

TheBankrecognizesdeferredtaxesinrespectoftemporarydifferencesbetweenthebookvalueofassetsandliabilitiesforpurposesoffinancialreporting,andtheirvaluefortaxpurposes.TheBankhoweverdoesnotrecognizedeferredtaxesinrespectoftemporarydifferencesderivingfrominvestmentsinsubsidiarycompaniesandcompaniesincludedonequitybasis,if it is not expected that they will be reversed in the foreseeable future. Deferred taxes are measured according to tax rates expected to apply to the temporary differences at the time oftheirrealization,basedonlawsthatwerepassedorforwhichlegislationhaseffectivelybeencompleted by the balance sheet date. The Bank offsets deferred tax assets and liabilities in the eventthatanenforceablelegalrightexistsfortheoffsettingofcurrenttaxassetsandliabilities,and they are attributed to the same taxable income taxed by the same tax authority for the same taxedcompany,orindifferentcompaniesintheGroupwhichintendtosettlecurrenttaxassetsandliabilitiesonanetbasis,orthetaxassetsandliabilitiesaresettledsimultaneously.

Deferred tax asset in respect of losses carried forward and in respect of right carried forward tooffsettaxisrecognizedinthebooksincasesinwhichtherealizationofthesaidtaxintheforeseeablefutureisnotindoubt.Adeferredtaxassetisrecognizedinrespectoftemporarydifferences when it is probable that a tax saving will be created in respect thereof at the reversal date. The creation of net deferred tax assets shall not exceed the current taxes in the accounting period,exceptinspecialcasesinwhichtherealizationofthetaxintheforeseeablefutureisnotin doubt.

The Bank may be obligated to add taxes in the case of distribution of dividends in respect of investeecompanies.ThisadditionaltaxisnotincludedintheFinancialStatements,inviewofthepolicy of the investee companies not to cause a distribution of a dividend that involves additional taxfortheBank,intheforeseeablefuture.IncasesinwhichaninvesteecompanyisexpectedtodistributeadividendfromprofitsinvolvingadditionaltaxfortheBank,theBankcreatesareservefor tax in respect of the additional tax that it is likely to incur.

Deferred tax in respect of intercompany transactions in the consolidated statement is recorded according to the tax rate applicable to the acquiring company.


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X. Earningspershare

The Bank presents basic earnings per share data with regard to its ordinary share capital. Basic earnings pershareiscalculatedbydividingtheprofitorlossattributedtotheordinaryshareholdersoftheBankbythe weighted average number of ordinary shares that were in circulation during the period.

Y. ReportingonOperationalSegments

Anoperationalsegmentisacomponentinabankingcorporation,engagedinactivitiesfromwhichitislikelytoderiveincomeandbearexpenses,theresultofitsoperationsisregularlyexaminedbyManagementandtheBoardofDirectors,inordertomakedecisionsregardingtheallocationofresourcesandtheevaluationofitsperformance,andwithregardtowhichthereisseparatefinancialinformation.Theformat for reporting on operational segments of the Bank is set out in the Public Reporting Directives of theSupervisorofBanks.Forfurtherinformation,seeNote26(b).

Z. TransactionswithControllingShareholders

1. Undertakingofaliability,indemnity,orwaiver-theamountoftheliability,indemnity,orwaiverischarged to capital reserve.

2. Loan and subordinated noteThegrantingofaloanortheissueofasubordinatednote,carriedoutbetweentheBankandacontrollingshareholder,foradefinedperiodandnotundermarketconditions,arepresentedintheFinancialStatements at the present value of the expected repayments calculated according to the effective interestrateatthedateofreceiptoftheloanorissueofthesubordinatednote,ifonthedayofthecommitment the difference between the present value of expected repayments and the nominal amount inthesubordinatednotewasfivepercentormore.Thedifferencebetweentheamountoftheloanorthenominalamountinthesubordinatednoteandthepresentvalueofexpectedrepayments,calculatedaccordingtothesaideffectiveinterestrate,ischargedtocapitalreserve.Thegrantingofaloanortheissueofasubordinatednote,carriedoutbetweentheBankandacontrollingshareholder,forwhichnorepaymentdatewasdetermined,and,onthedateofthecommitmentthe difference between the present value of expected repayments and the nominal amount in the subordinatednotewasfivepercentormore,arepresentedintheFinancialStatementsasaloanorasasubordinated note for the period of one year renewable annually. The difference between the amount of theloanorthenominalamountinthesubordinatednoteandthepresentvalueofexpectedrepayments,calculatedaccordingtothesaideffectiveinterestrate,ischargedtocapitalreserve.Whenthegrantorof the loan or the issuer of the subordinated note does not intend to demand their repayment and theborrowerdoesnotintendtomakeearlyrepaymentoftheloanorthesubordinatednote,foranyreportingperiod,theBankchargestocapitalreservethedifferencebetweenthefinancingexpensesoftheloanorsubordinatednote,calculatedaccordingtotherateofincreaseoftheadjustedCPIforthereportingperiod,andtheseexpensescalculatedaccordingtotheinterestrateunderthetermsoftheloanor subordinated note.

3. Transfer of an assetDifferences between consideration received from the sale of assets to a controlling shareholder and the book value of the assets in the books of the Bank are charged to the capital reserve of the bank. Assets acquired from a controlling shareholder are recorded in the Financial Statements according to their bookvalueinthebooksofthecontrollingshareholderatthetimeoftheirtransfertotheBank,andthedifference compared with the amount paid for them less relevant taxes is charged to shareholders’ equity.

AA. Presentation of the Bank’s Liability to the Maof Clearing House

In consequence of the Bank’s liability to the Maof Clearing House in respect of the General Risk Fund andtheMaoftransactionsforwhichtheBankisliableonbehalfofitscustomers,securitieshavebeendeposited in separate accounts in the name of the Clearing House.


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Balances representing the collateral for any amount that the Bank shall owe the Maof Clearing House as mentionedabovearepresentedinthebalancesheetunder“Securities”.SeeNote15(C)(2)(3),15(D)(1),and15(F).

AB. Structured deposits

The Bank markets structured deposits to its customers. These deposits include combined options on interestrates,linkagebasesandvariousindices.Theoptionsthatarecombinedinthedepositsweremeasuredonthebasisofthemeasurementrulesforderivativefinancialinstruments,asdistinguishedfromdepositsthatarepresentedinaccordancewithaccrualvalue.Thedeposits,includingtheoptionscombinedtherein,areshownasdepositsofthepublic.

AC. Initial Implementation of Accounting Standards

“ImpairmentofAssets”-AccountingStandardNo.15(Amended),ClarificationNo.10,andarevisedtextofClarificationsNo.1andNo.6

InJanuary2009,theIsraeliAccountingStandardsBoardpublishedAccountingStandardNo.15(Amended),“ImpairmentofAssets”,ClarificationNo.10,TheAccountingTreatmentofImpairmentinInvestmentinanInvesteeCompanywhichisnotaSubsidiarycompany,andarevisedtextofClarificationsNo.1andNo.6,TheAccountingTreatmentofImpairmentinInvestmentinanInvesteeCompanywhichis not a Subsidiary company and The Treatment of Impairment in Assets of an Investee Company which is notaSubsidiarycompany,respectively.StandardNo.15(Amended)changesmainlytheaccountingtreatmentofthemannerofallocationofgoodwilltocash-generatingunitsinaconsolidatedbalancesheet.ClarificationNo.10determineshowalossfromimpairmentofaninvesteecompanywhichisnotasubsidiaryCompanyistobeallocated,includingthetreatmentofthecancellationofalossfromimpairmentrecognizedinpreviousperiods.AccordingtotheStandard,forpurposesofexaminingimpairment,goodwillacquiredduringabusinesscombination is to be allocated from the date of acquisition to each of the cash-generating units or groups of cash-generating units of the acquired entity and to each of the cash-generating units or groups of cash-generatingunitsoftheacquiringentity,whichareexpectedtobenefitfromthesynergiesofthecombination,regardlessofwhetherotherassetsorliabilitiesoftheacquiredentityareattributedtothoseunits or groups of units. The basis of the allocation will be according to fair value ratios of the units as at thedayofacquisition.Thus,impairmentofgoodwillwillbeexaminedatthelevelreflectingthemannerin which the entity manages its activities and to which the goodwill is attributed. The Standard also stipulates that each unit or group of units to which goodwill has been allocated shall represent the lowest level at which the goodwill is monitored for internal management purposes; and is not to be larger than asegmentasestablishedunderAccountingStandardNo.11,SegmentalReporting.TheStandardthuscancelled the accounting treatment in the previous Standard with regard to the implementation of a two-stagetesttoexaminetherecognitionofimpairment(‘top-down’and‘bottom-up’tests).ClarificationNo.10stipulatesthatanentityhastodetermineforeachbalancesheetdateiftherearesignsindicatingimpairmentinaninvestmentinacompanyincludedonequitybasis.Ifsuchasignexists,the entity must estimate the recoverable amount of the investment in accordance with the provisions oftheStandard.Ifalossfromimpairmentisrecognized,inaccordancewiththeStandard,thislossistobe allocated to the investment as a whole. Cancellation of a loss from impairment to the investment will bemadealsoafterexaminingtheinvestmentasawhole.Inthismanner,ClarificationNo.10cancelstherulessetoutonStandardNo.15beforeitwasamended,accordingtowhichtheallocationoflossfromimpairmentofaninvestmentinacompanyincludedonequitybasiswasfirstallocatedtogoodwillintheaccountoftheinvestment,andthebalanceofthelosswasrecordedagainsttheinvestmentasawhole.TherevisedtextofClarificationNo.1wasadaptedtotheaccountingtreatmentofimpairmentofinvesteecompaniesasstipulatedinStandard15(Amended)andinClarificationNo.10.TheprovisionsoftheStandardandtheClarificationswillbeimplementedfromnowon.Theimplementation of the Standard had no material impact on the results of operations of the Bank.


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AD. New Accounting standards and instructions of the supervisor of Banks prior to their implementation

1. Accounting standard No. 29 - Adoption of International Financial Reporting Standards

InJuly2006,theIsraeliAccountingStandardsBoardpublishedAccountingStandardNo.29,AdoptionofInternationalFinancialReportingStandards(IFRS).

TheStandarddeterminesthatentitiesthataresubjecttoSecuritiesLaw,1968andarerequiredtoreportinaccordancewithitsregulations,willpreparetheirfinancialstatementsaccordingtoIFRSstandardsforperiodsstartingJanuary1,2008.

Theabovedoesnotyetapplytobankingcorporationsandcreditcardcompanieswhosefinancialstatements are prepared according to the directives and guidelines of the Supervisor of Banks.

WithregardtothemannerofimplementationoftheStandardbybankingcorporations,theSupervisorofBankshasstated,interalia,thatduringthesecondhalfof2009hewillannouncehisdecision regarding the implementation date of IFRS Standards concerning the core business of banking.InJune2009,theSupervisorofBanksissuedacircularconcerning“ReportingbyBankingCorporations and Credit-Card Companies in Israel in Accordance with International Financial ReportingStandards(IFRS),”whichestablishestheexpectedmannerofadoptionofInternationalFinancialReportingStandards(IFRS)bybankingcorporationsandcreditcardcompanies.

Pursuanttothecircular,thetargetdateforreportingbybankingcorporationsandcreditcardcompaniesaccordingtoIFRSStandardsareasfollows:

Onmattersnotrelatedtothecorebusinessofbanking-commencingJanuary1,2011.Fromthatdateforward,bankingcorporationsandcreditcardcompanieswillberequiredtoupdatetheaccountingtreatmentofthesemattersroutinely,pursuanttothetransitionaldirectivesinthenewinternationalstandardstobepublishedonthesematters,andinaccordancewithclarificationstobe issued by the Supervisor of Banks.

Onmattersrelatedtothecorebusinessofbanking-commencingJanuary1,2013,andduring2011theSupervisorofBanksintendstoreachafinaldecisiononthismatter.Thefinaldecisionwill be made taking into consideration the schedule established in the United States and the progressoftheconvergenceprocessbetweeninternationalandAmericanstandardizationbodies.

ItisclarifiedinthecircularthatafterthecompletionoftheprocessofadaptingtheDirectivestotheinternationalstandards,theSupervisorofBankswillretaintheauthoritytosetforthbindingclarificationswithregardtothemannerofimplementationoftherequirementsoftheinternationalstandards,andtosetforthadditionaldirectivesincaseswhereitisnecessaryduetotherequirementsofthesupervisoryagenciesindevelopedcountriesworldwide,oronmattersnotaddressedbytheinternationalstandards.Inaddition,theSupervisorofBankswillretaintheauthority to establish disclosure and reporting requirements.

Therefore,untilthetargetdatesfortheadoptionofIFRSStandards,asstatedabove,thefinancialstatements of a banking corporation or a credit card company will continue to be prepared in accordance with the directives and guidelines of the Supervisor of Banks.

For information concerning the adoption of certain International Financial Reporting Standards (IFRS),seesection4cbelow.

2. Accounting Standard 23 - Accounting Treatment of Transactions between an Entity and its Controlling Shareholder.

InDecember2006,theIsraeliAccountingStandardsBoardpublishedAccountingStandard23 Accounting Treatment of Transactions Between an Entity and its Controlling Shareholder. ThisStandardreplacesSecuritiesRegulations1996(PresentationofTransactionsbetweenCorporationsandControllingShareholdersinFinancialStatements),asadoptedindirectivesonreporting to the public issued by the Supervisor of Banks. The Standard requires that all assets and liabilities included in a transaction between the entity and its controlling shareholder will be measured on the date of the transaction at fair value and the difference between the fair value and consideration of the transaction will be included in shareholders’ equity. A debit difference


UBank Ltd.

essentially represents a dividend and accordingly reduces retained earnings balances. A credit difference essentially represents investments by shareholders and accordingly will be shown separatelyinshareholders’equityunder“capitalreservesfromtransactionbetweentheentityanditscontrollingshareholder“.

The Standard deals with three types of transactions between an entity and its controlling shareholder,asfollows:(1)atransferofanassettotheentitybyitscontrollingshareholder,oralternatively,atransferofanassetfromtheentitytoitscontrollingshareholder;(2)theassumingofliabilitiesoftheentityvis-àvisthirdparties,inwholeorinpart,byacontrollingshareholder,indemnificationoftheentitybythecontrollingshareholderinrespectofanexpense,awaiverbythecontrollingshareholderinfavoroftheentityofadebtduehimbytheentity,inwholeorinpart;and(3)loansgiventothecontrollingshareholderorloansreceivedfromthecontrollingshareholder.Inaddition,theStandardsetsouttherequireddisclosurethatmustbeprovidedinthefinancialstatementsregardingtransactionsbetweentheentityanditscontrollingshareholderduring the period.

In May 2008 the Supervisor of Banks issued a letter stating a re-examination is being made of the rules to be applied to banking corporations and credit-card companies with respect to the handlingoftransactionsbetweenanentityanditscontrollingshareholder.Accordingtotheletter,the Supervisor of Banks intends to apply the following rules to transactions between banking corporationsandcredit-cardcompaniesandtheircontrollingshareholder,andtotransactionsbetweenbankingcorporationsandcompaniesundertheircontrol:

- Internationalfinancialreportingstandards;

- Intheabsenceofaspecificreferenceininternationalfinancialreportingstandards,generallyaccepted accounting principles in the United States applicable to banking corporations in the U.S. shallbeapplied,providedthattheydonotconflictwithinternationalfinancialreportingstandards;

- IntheabsenceofreferencesingenerallyacceptedaccountingprinciplesintheU.S.,partsofStandard23aretobeimplemented,providedthattheydonotconflictwithinternationalfinancialreportingstandardsorwithgenerallyacceptedaccountingprinciplesintheU.S.,asnotedabove.

Asatthedateofpublicationofthefinancialstatements,theSupervisorofBankshasnotyetpublishedafinaldirectivewithregardtotheadoptionofspecificrulesonthissubjectandwithregardtothemannerofthefirst-timeimplementationthereof.

3. FAS 166 - Accounting Treatment of Transfers of Financial Assets and FAS 167 - Amendments to clarificationFIN46(R).

InMay2009,theFASBpublishedUSAccountingStandardFAS166,TransfersandServicingofFinancialAssetsanamendmentofFAS140.FAS166cancelstheprincipleofQualifiedSpecialPurposeEntities(QSPE),establishesstrictertermsforaccountingtreatmentasasalewithregardtothetransferofpartoffinancialassets,includingclarificationsofthetermsforsubtractionoffinancialassets,amendsmeasurementrulesforthefirst-timerecognitionofretainedinterestsandcancelsreclassificationrulesinguaranteedmortgagesecuritization.

TheFASBconcurrentlypublishedUSAccountingStandardFAS167,AmendmentstoInterpretation46(FIN46(R))-ConsolidationofVariableInterestEntities”,whichamendstherulessetforthinFIN46(R),regardingconsolidationofvariableInterestentities.FAS167makesit obligatory to examine the requirement for consolidation with regard to all entities previously definedasQualifiedSpecialPurposeEntities(QSPE),updatescriteriafortheidentificationofVariableInterestEntities(VIEs),changestheapproachforestablishingtheidentityoftheprimarybeneficiary(fromanapproachbasedonquantitativeexaminationstoaqualitativeexaminationtoidentifycontroloffinancialrights),andrequiresreportingcorporationstoreexaminetherequirement to consolidate VIEs more frequently.


UBank Ltd.

Inaddition,FAS166andFAS167establishnewdisclosurerequirementstobeincludedinannualandinterimfinancialstatements.

AccordingtothecircularoftheSupervisorofBanksofSeptember6,2009,abankingcorporationandacredit-cardcompany(hereinafter :“bankingcorporation”)isrequiredtoimplementtherulessetforthinFAS166andFAS167,includingthedisclosurerequirementsestablishedtherein,fromJanuary1,2010forward,inaccordancewiththetransitionaldirectivesestablishedinthoseStandards.Ingeneral,thetransitionaldirectivesrequirethefollowing:- To implement the recognition and measurement requirements in the Standard with regard to

transfersoffinancialassetsperformedasofJanuary1,2010forward- ToexamineasofJanuary1,2010forwardifitisrequired,accordingtoFAS167,toconsolidate

entitiesdefinedasQualifiedSpecialPurposeEntities(QSPE)undertheformerrules.

Inaddition,abankingcorporationispermittednottodisclosecomparativefiguresfor2009withregardtodisclosurerequirementsaddedforthefirsttimeduetothecircularoftheSupervisorofBanks.Theexpectedeffectofthefirst-timeimplementationofFAS166andFAS167isnotmaterial.

4. FairValueMeasurements,theFairValueAlternativeandtheAdoptionofCertainInternationalFinancialReportingStandards(IFRS)

OnDecember31,2009,theSupervisorofBankspublishedacircularregardingFairValueMeasurements,theFairValueAlternative,andtheAdoptionofCertainInternationalFinancialReportingStandards(IFRS)”(hereinafter :the“Circular”).TheCircularadopts:a. USAccountingStandard157,“FairValueMeasurements”(hereinafter :“FAS157”)b. USAccountingStandard159,“TheFairValueAlternativeforFinancialAssetsandFinancial

Liabilities”(hereinafter :“FAS159”)c. CertainInternationalFinancialReportingStandards(IFRS).

a. FAS 157 - Fair Value Measurements

FAS157definesfairvalueandestablishesaconsistentworkingframeworkforthemeasurementoffairvaluebydefiningfairvalueassessmenttechniqueswithregardtoassetsandliabilities,andbyestablishingafairvaluehierarchywithadivisionintothreelevels(level1,2,3)anddetailedinstructionsforimplementation.Inaddition,FAS157expandsthedisclosurerequirementsformeasurementsoffairvalue. The implementation of the rules set forth in FAS 157 will require the cessation of the use of the blockagefactorinthecalculationoffairvalue,andwillreplacethedirectivesofEITF02-3,IssuesInvolvedin Accounting Treatment for Derivative Contracts Held for Trading Purposes and Contracts Involved inEnergyTradingandRiskManagementActivities,”whichprohibittherecognitionofdayoneprofitsand require that the fair value of derivative instruments not traded on an active market be determined accordingtothetransactionprice.Inaddition,FAS157requiresthebankingcorporationtoreflectnonperformanceriskinthemeasurementofthefairvalueofdebt,includingderivatives,issuedbythebanking corporation and measured at fair value. Nonperformance risk shall include the credit risk of the bankingcorporation,butshallnotbelimitedtothisriskalone.

FAS157willapplyfromJanuary1,2011forward,andwillbeadoptedforthefirsttimeinalimitedformatofretroactiveimplementation.Consequently,FAS157willbeimplementedfromthispointforward,withtheexceptionoffinancialinstrumentsmeasuredpriortotheinitialimplementationofFAS157,inthefollowingmanner:1. Positionsinfinancialinstrumentstradedonanactivemarket,whichweremeasuredatfairvalue

using the blockage factor.2. Financialinstrumentsmeasuredatfairvalueatthefirstrecognitiondatepursuanttosection

A.1ofthePublicReportingDirectives,usingthetransactionprice,pursuanttothedirectivesinmarginal notation 3 of EITF 02-3.

3. Hybridfinancialinstrumentsmeasuredatfairvalueatthefirstrecognitiondate,usingthetransactionprice,accordingtoSectionA.1ofthePublicReportingDirectives.


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Atthefirstimplementationdate,thedifferencebetweenthebalance-sheetbalancesoftheaforesaidfinancialinstrumentsandthefairvaluesofthoseinstrumentsshallberecognizedasacumulativeeffectintheopeningbalanceofsurplusesasofJanuary1,2011,whichwillbepresentedseparately.Thenewdisclosurerequirements,includingthedisclosurerequiredonlyinannualreports,willbeimplementedinthefirstquarterof2011,withnoobligationtoimplementtheaforesaiddisclosurerequirementsforfinancialstatementsforperiodspresentedbeforetheinitialimplementationofFAS157.In order to determine the amount of the adjustment to be recorded as a cumulative effect in the opening balanceofsurplusesasofJanuary1,2011,andtoensuretheadaptationoftheassessmentmethodsofthebankingcorporationtotheexitpriceprincipleandtheguidelinesestablishedinFAS157,bankingcorporations shall be required to reexamine its implemented assessment methods for the measurement offairvalue,takingintoconsiderationtherelevantcircumstancesforthevarioustransactions,includingpricesofrecenttransactionsinthemarket,indicativepricesofassessmentservices,andtheresultsofback-testing of similar types of transactions.

Inlightoftheforegoing,theBankisexaminingtheeffectsoftheadoptionofthestandardonthefinancialstatements;atthisstage,theBankcannotestimatetheexpectedeffectofthefirst-timeimplementationofFAS 157.

b. USAccountingStandard159,“TheFairValueAlternativeforFinancialAssetsandFinancialLiabilities”

ThepurposeofFAS159istoallowreducedfluctuationsinreportedprofitsarisingfromthemeasurement of hedged assets and hedged liabilities and hedging derivative instruments using different measurement bases.

FAS159allowsabankingcorporationtochoose,atdefineddates,tomeasurefinancialinstrumentsandcertainotheritems(theeligibleitems)atfairvalue,whichunderPublicReportingDirectivesarenotrequiredtobemeasuredatfairvalue.Unrealizedprofitsandlossesinrespectofchangesinthefairvalue of the items for which the fair value alternative is selected shall be reported in the statement of profitandlossforeachconsecutivereportingperiod.Inaddition,prepaidcostsandfeesrelatedtotheitemsforwhichthefairvaluealternativeisselectedshallberecognizedinprofitandlossonthedateofcreation,ratherthandeferred.Thechoicetoapplythefairvaluealternative,asnotedabove,shallbemadeinstrumentbyinstrument,andcannotbecancelled.Inaddition,FAS159establishespresentationand disclosure requirements aimed at facilitating comparisons between banking corporations that choose different measurement bases for similar types of assets and liabilities.Despitetheaforesaid,theCircularclarifiesthatabankingcorporationshallnotchoosethefairvaluealternativeunlessthebankingcorporationhasdevelopedknowledge,systems,procedures,andcontrolsatahighlevel,inadvance,whichwillenableittomeasuretheitematahighdegreeofreliability.Thus,abankingcorporationshallnotchoosethefairvaluealternativewithregardtoanyassetclassifiedinlevel2orlevel3ofthefairvaluehierarchy,orwithregardtoanyliability,unlessitreceivesadvanceapprovaltodoso from the Supervisor of Banks.

FAS159willapplyfromJanuary1,2011forward.Implementationthroughretroactiveadoption,orimplementationthroughearlyadoption,isprohibited.ThetransitionaldirectivesoftheSupervisorofBanksrefertotheimplementationwithregardtoeligibleassetsexistingattheinceptiondate,andtosecuritiesavailableforsaleandsecuritiesheldtomaturity,asfollows:

- Implementationforeligibleitemsexistingattheinceptiondate:Abankingcorporationispermitted to choose the fair value alternative for eligible items existing at the inception date. In thesecases,thebalance-sheetbalancesoftheseeligibleitemsshallbeadjustedtofairvalue,andthe effect of the initial re-measurement at fair value shall be allocated as an adjustment in respect ofthecumulativeeffecttotheopeningbalanceofsurpluses.Inaddition,abankingcorporationchoosing the fair value alternative for items existing at the inception date shall include extensive disclosures,asrequiredintheCircular,initsannualfinancialstatementsandinitsfirstinterimfinancialstatementsfor2011.


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- Securitiesavailableforsaleandsecuritiesheldtomaturity:Securitiesavailableforsaleandsecurities held to maturity held at the inception date are eligible for the fair value alternative at thatdate.Ifthefairvaluealternativeischosenforanyofthesesecuritiesattheinceptiondate,accruedprofitsandlossesnotyetrealizedatthatdateshallbeincludedintheadjustmentinrespectofthecumulativeeffect,andthesecurityinquestionshallbereportedasofthatdateasasecurityheldfortrading.Inaddition,separatedisclosureshallbegiventotheamountofunrealizedprofitsandlossesreclassifiedfromcumulativeothercomprehensiveprofit,andtotheamountofunrealizedprofitsandlossesnotpreviouslyrecognized.Thechoiceofthefairvaluealternative for an existing security held to maturity at the initial adoption shall not cast doubt on the banking corporation’s intention to hold other bonds to maturity in the future.

TheBankisexaminingtheimplicationsoftheadoptionofthestandardonthefinancial

statements;atthisstage,theBankcannotestimatetheexpectedeffectofthefirst-timeimplementation of FAS 159.

c. AdoptionofCertainInternationalFinancialReportingStandards(IFRS)

PursuanttotheCircular,certainIFRSwereadoptedwhichaddressmattersnotrelatedtothecorebusinessofbanking.Specifically,theCircularrequirestheadoptionofIFRSintheareaslistedbelow:

1. IAS8,AccountingPolicies,ChangesinAccountingEstimatesandErrors;2. IAS21,TheEffectsofChangesinForeignExchangeRates;3. IAS33,EarningsPerShare;4. IFRS2,Share-BasedPayment;5. IAS29,FinancialReportinginHyperinflationaryEconomies;6. IAS34,InterimFinancialReporting;7. IFRS3(2008),BusinessCombinations;8. IAS27(2008),ConsolidatedandSeparateFinancialStatements;9. IAS28,InvestmentsinAssociates;10.IAS36,ImpairmentofAssets;11.IAS17,Leases;12.IAS16,FixedAssets;13.IAS40,InvestmentProperty.

TheIFRSlistedaboveandtherelatedinterpretationsoftheIFRIC(InternationalFinancialReportingInterpretationsCommittee)aretobeadoptedaccordingtothefollowingprinciples:

- Incasesinwhichmaterialmattersarenotspecificallyaddressedbythestandardsorinterpretations,orthereareanumberofalternativesforthetreatmentofamaterialmatter,bankingcorporationsshallactaccordingtospecificimplementationinstructionsestablishedbythe Supervisor ;

- In cases in which a material issue arises which is not resolved in the IFRS or in the implementation instructionsoftheSupervisor,bankingcorporationsshalltreattheissueaccordingtoGAAPatUSbanksspecificallyapplicabletothesematters;

- WhereanIFRScontainsareferencetoanotherIFRSadoptedinthePublicReportingDirectives,the banking corporation shall act in accordance with the IFRS;

- Where an IFRS contains a reference to another IFRS not adopted in the Public Reporting Directives,thebankingcorporationshallactinaccordancewiththeReportingDirectivesandwith Israeli GAAP;

- WhereanIFRScontainsareferencetoadefinitionofatermdefinedinthePublicReportingDirectives,thereferencetothedefinitionintheDirectivesshallreplacetheoriginalreference.

Banking corporations shall implement the IFRS listed above and the IFRIC interpretations related to the implementationofthesestandardsfromJanuary1,2011forward.Thefirst-timeimplementationoftheIFRS adopted in this Circular shall be performed in accordance with transitional directives established in theseIFRS,includingtheretroactiveadjustmentofcomparisonfigureswhennecessary.


UBank Ltd.

AsofJanuary1,2011,bankingcorporationsshallroutinelyupdatetheaccountingtreatmentofthemattersaddressedintheCircular,accordingtotheinceptiondatesandtransitionaldirectivesestablishedinnewIFRStobeissuedonthesematters,andaccordingtotheadoptionprinciplesandclarificationsoftheSupervisor of Banks.

TheBankisexaminingtheimplicationsoftheadoptionoftheIFRSonitsfinancialstatements;atthisstage,itcannotestimatetheexpectedeffectofthefirst-timeimplementationthereof.

AE.DirectiveontheMeasurementandDisclosureofImpairedDebts,CreditRiskandProvisionsforCredit Losses

On31December,2007,aCircularwaspublishedbytheSupervisorofBanksonthesubject:“TheMeasurementandDisclosureofImpairedDebts,CreditRiskandProvisionforCreditLosses”(henceforth:“theCircular”or“theDirective”).ThisCircularisbased,amongotherthings,onaccountingstandardsintheU.S.,onrelatedregulatoryprovisionsofbankingsupervisoryauthoritiesandtheSECintheU.S.TheguidelinesonwhichtheCircularisbasedconstituteasignificantchangeascomparedwiththeexistingprovisionsregardingclassificationofproblematicdebtsandthemeasurementofprovisionsforloanlossesin respect of such debts.AccordingtotheCircular,thebankingcorporationisrequiredtomaintainaprovisionforcreditlossesat an appropriate level to cover estimated credit losses relating to its credit portfolio. In addition to thatmentionedabove,itisrequiredtomaintain,accordingtotheCircular,inaseparateliabilityaccount,a provision at an appropriate level to cover estimated credit losses relating to off-balance sheet credit instruments,suchas:undertakingstograntcreditandguarantees.The provision required to cover expected credit losses relating to its credit portfolio will be evaluated in oneoftwoways:“specificprovision”and“groupprovision”.Forthismatter,a“specificprovisionforcreditlosses”istobeimplementedforeverydebtwhosecontractualbalance(withoutdeductionofaccountingwrite-offsnotinvolvinganaccountingwaiver,non-deductibleinterest,provisionsforcreditlossesandcollaterals)isNIS1millionormore;andalsoinrespectofotherdebtsidentifiedbytheBankforseparateassessment,forwhichtheprovisionforimpairmentisnotincludedina“specificprovisionforcreditlossesassessedonagroupbasis”.The“specificprovisionforcreditlosses”istobeassessedbasedonexpectedfuturecashflows,discountedattheaffectiverateofinterestofthedebt,or,whenthedebtisconditionaloncollateralorwhentheBankdeterminesthataconfiscationofpropertyisanticipated,onthefairvalueofthecollateralthatwaspledgedtoguaranteethatcredit.A“specificprovisionforcreditlossesassessedonagroupbasis”-istobeimplementedforprovisionsforimpairmentlargegroupingsofsmallhomogeneousdebts(suchas:creditcarddebts,housingloansandconsumerdebtspayableininstallments),andfordebtsthatexaminedindividuallyandfoundtobenotimpaired.Thespecificprovisionforcreditlossesondebtsestimatedonagroupbasis,exceptforhousingloansforwhichaminimumspecificprovisionwascalculatedaccordingtotheperiodofarrears,istobecalculatedaccordingtotherulesprescribedAmericanAccountingStandardNo.5-“AccountingforContingencies”(FAS5),basedonacurrentassessmentoftherateofpastlossesinrespectofeachofthehomogeneous groupings of debts with similar risk characteristics. The provision required with reference to off-balance sheet credit instruments is to be assessed according to the rules established in FAS 5.

Inaddition,definitionsandclassificationsaresetoutintheDirectiveforbalancesheetandoff-balancesheetcreditrisk,aswellasprinciplesforrecognizinginterestfromdefectivedebtsandtheaccountingwrite-off of problematic debts. Among other things it is stipulated in the Circular that an accounting write-offistobemadeforeverydebtexaminedonaspecificbasisasbeinguncollectibleandofsuchlowvaluethatallowingitasanassetisunjustified,oradebtforwhichthebankingcorporationismakinglong-termcollectionefforts.Regardingdebtsestimatedonagroupbasis,principlesforwritingoffhavebeendeterminedbasedontheperiodoftheirarrears,dependingonthedebtsbeingsecuredbyaprivatedwelling,excludinghousingloansforwhichaminimumprovisionhasbeenmadeinaccordancewiththedepthofarrears,debtssecuredbycollateralwhichisnotaprivatedwelling,unsecureddebts,debtsofborrowersinbankruptcy,anddebtscreatedfraudulently.

ThisDirectiveistobeappliedtothefinancialstatementsofbankingcorporationsandcreditcardcompanies,asat1.1.11(henceforth:“thefirstimplementationdate”)andafterwards.TheDirectivewillnotbeappliedretroactivelyinfinancialstatementsforpreviousperiods.Alternatively,atthefirst


UBank Ltd.

implementationdate,bankingcorporationsandcreditcardcompanieswillberequired,amongotherthings:- to make an accounting write-off of any debt at that date which meets the conditions accounting

write-off.- toclassifyasunderspecialsupervision,inferior,ordefective,anydebtmeetingtheconditionsfor

suchclassification.- to cancel all accrued and unpaid interest income for any debt which at that time meets the

conditionsforsuchandalso:- to examine the need to adjust the balance of current and deferred taxation receivable and

payable. The adaptation of the balance of the provision for credit losses for loans to the public and foroffbalancesheetcreditinstrumentsasat1.1.11totherequirementsofthisDirective,includingtherequirementstomakeaprovisionandtherequirementfordocumentation,shallbeincludedasreserves under equity.

Forthispurpose,itshouldbemadeclearthatdespitethedefinition,inaccordancewithwhichaproblematicdebtwhichhasbeenrestructuredisadefectivedebt,abankingcorporationorcreditcardcompanyisnotrequiredtoclassifyasdefective,adebtwhichwasrestructuredbefore1.1.07,aslongasitis not a defective debt on the basis of the conditions laid out in the restructuring agreement.There are expected to be consequences in implementing the Directive for the future relationship betweenthebankingcorporationanditscustomers,arisingfromtherequirementtoapplyprinciplessuitable to the U.S. business environment - to the business environment existing in Israel.

FollowingtheoriginalDirectivefromDecember31,2007,theBankingSupervisionDepartmentpublishedonAugust27,2009aDraftDirectiveincludingmainlyupdatesandclarificationsofinstructionsprescribedintheoriginalDirective,andalsoupdatestocertaininstructionsincludedintheProperConductofBankingBusinessDirectives,withtheaimofadaptingexistingrulesandtermstothenewtermsandinstructionsincludedintheoriginalDirectiveandthecurrentDraftDirective(hereinafter :“thenewDraftDirectives”).

Thefollowingchanges,amongothers,havebeenproposedinthenewDraftDirectives:- Delaying implementation of the rules set out in the original Directive and in the new Draft

DirectivesasofJuly1,2010.- Cancellingsection5ofProperConductofBankingBusinessDirectiveNo.325,onthesubjectof

“ManagementofCreditFacilities”,relatingtoaccountingaspectsofclassifyingcertainaccountsasproblematicandrecognizinginterestincome.Thesematterswillbedealtwithintheframeworkof the general Directive on the Measurement of Provisions for Credit Losses and Disclosure with regard to Problematic Debts.

- With the aim of simplifying the rules for the measurement of provisions for credit losses on agroupbasis,whichrequirestheuseofcomplexstatisticalmodelsandahistoryofdataofaccountingwrite-offs,whichdonotexistinthebankingsystem,aProvisionalOrderhasbeenincludedintheDraftDirectivetobeimplementedintheyears2010-2012(hereinafter :“thetransitionalperiod”),whichincludesasimplermodelforcalculatingcreditlossprovisionsonagroup basis.

- WiththeaimofadaptingthedefinitionsandtermsincludedinProperConductofBankingBusinessDirectiveNo.315,onthesubjectofthe“SupplementaryProvisionforDoubtfulDebts”,tothetermsincludedinthenewDraftDirectives,asof1July2010theterm“problematicdebts”willbechangedto“Creditriskundernegativeclassificationandcreditriskunderspecialsupervision”,anditwillincludethreetypesofthesaiddebts:“impaireddebts”,“inferiordebts”and“debtsunderspecialsupervision”.

- The rates of supplementary provision applying to the various types of problematic debts will be asfollows:

• Creditrisk“underspecialsupervision”-1%• “Inferior”creditrisk-2%• “Impaired”creditrisk-4%ReportingtotheSupervisorofBanksonchangesexpectedinshareholders’equity,incredittothepublic,andincreditriskasat31December2009,asifthenewDirectiveswereimplementedatthatdate.ToincludeintheFinancialStatementsasatJune30,2010,a“pro-forma”Notedetailingtheexpectedaffect


UBank Ltd.

fromtheimplementationoftheDirectiveonthemainbalancesheetitems,asifthenewDirectivewereimplemented at that date.TosubmittotheBankingSupervisionDepartmentacertificationsignedbytheChairmanoftheBoardofDirectors,theGeneralManager,andtheChiefAccountant,regardinginternalcontroloverfinancialreportingimplementedbytheBank,forpurposesofdeterminingtherecordedbalanceofdebtofcredittothepublic,andtheprovisionsforloanlossesincludedinthe“pro-forma”NoteasatJune30,2010;toassess the effectiveness of this control; and to state that the said effectiveness was audited by the external auditors.WithregardtotheDirectivefromFebruary18,2010,seeupdatesandadditionalinstructionsonpage44of the Directors’ Report.

Implementing the requirements of the Directive will require the upgrading or establishment of a computer infrastructuresystem,inordertoensuretheprocessofevaluationandmakingaprovisionforcreditrisksincluding internal control systems for checking the appropriate application of the Directive and validating the effectiveness of the system for calculating the provision.In view of the fact that the Bank relies in many areas on the operating systems and headquarters units ofFIBI,theBankwillbemakingpreparationsforimplementingtheDirectivewithintheframeworkofthepreparationsoftheFIBI(theparentcompany)Group.

In2008,theBankmadepreparationsforthestudyoftheDirective,andthemannerofitsimplementation.Inaddition,withintheframeworkofpreparationsbytheGroup,anadministrativebodywassetuptocarry out the Directive and the content of the project and the bodies relevant to its implementation were defined.In2009,therebeganthedevelopmentstagesofthesystemandtherelevantinterfaces,theircharacterization,andtheircomputerization,andtestsbeganontransmittingandreceiving.In2010,concurrentlywiththecompletionofdevelopmentoftheinterfaces,testsonreceivingwillbecarriedoutaswellasintegrationinthesystem,workingprocedureswillbewritten,existingprocedureswillbeadopted,andtrainingwillbecarriedoutforthevariousunitsintheBankintheassimilationofthenew system.ItshouldbenotedthatthisisacomplexprojectaffectingmanyareasintheBank,includingcomputing,reporting and operating systems.Implementing the directive is expected to have repercussions on future relationships between the Bankanditscustomers,resultingfromtherequirementtoimplementprinciplesmatchingthebusinessenvironment in the U.S. to the business environment that exists in Israel. The directive includes more stringentdocumentationrequirements,andrequirementsfortheassessmentandcarryingoutoftheprovisionforexpectedloanlosses,inrespectofdebtsinvariousclassifications(outofthosecurrentlyprescribed in the Public Reporting Directives and in Proper Conduct of Banking Business Directive No. 314,onthesubjectof“TreatmentofProblematicDebts”),andinrespectofexposurestooff-balancesheetcredit.Inaddition,implementationofthedirectiverequirespreparationandsignificantchangestoexistinginformationsystems,whicharenotadapted,atthisstage,toreportingaccordingtotheprinciplesproposed.

InaccordancewithBankofIsraelrequirements,theBankhaspreparedapreliminaryestimateoftheconsequences of the implementation of the Directive in its reports.TheBank’sestimaterelatestomaterialdebtsonly(abovethelevelstipulated),andwasbasedon,amongotherthings,incertaincasesonsubjectiveevaluationsandinterpretations.Accordingtothisestimate,theexpectedeffectontheBankofimplementingthedraftDirective,asat31.12.09,totalsapproxNIS30.0million,beforetax.Theamountarisesfromwritingoffprincipalandcancelingaccruedinterestonwhichwillbedefinedasdefectivebecauseofdrawn-outlegalaction,andthisinspiteofthedebtsbeingwellcollateralizedandthattheBankexpectscollectionofthedebtsinfull,includingaccruedinterestonthem.


UBank Ltd.

Note 2: Cash and Deposits with Banks

Reported amounts


December 31 December 31

2009

NIS million

2008

NIS million

2009

NIS million

2008

NIS million

Cash and deposits with Bank of Israel1 2,132.7 1,520.5 2,132.7 1,520.5

Deposits with commercial banks 695.1 1,181.3 694.5 1,180.3

Total cash and deposits with banks 2,827.8 2,701.8 2,827.2 2,700.8

Including:cash,depositswithbanksanddeposits with Bank of Israel for an initial period not exceeding three months 2,803.5 22,670.1 2,802.9 22,669.1

1 Daily deposits for the ongoing liquidity managment of the bank.2 Reclassified.


UBank Ltd.

Note 3: Securities

Reported amounts

December31,2009

Balance sheet value

NIS million

Amortizedcost

(shares-cost)1

NIS million

Cumulative other comprehensive income

fair value2

NIS million

Profits Losses8


Composition-Consolidated:

1. Available for sale securities

Government bonds and loans 1,323.8 1,323.9 4.2 (4.3) 1,323.8

Other bonds 3335.7 342.5 1.1 4(7.9) 335.7

Shares5 6.3 6.3 - - 6.3

Total available for sale securities 1,665.8 1,672.7 65.3 6(12.2) 1,665.8

December31,2009

Balance sheet value

Amortizedcost

(shares-cost)1

Unrealizedprofitson

adjustment to fair value

Unrealizedlosses on


fair value2

NIS million NIS million NIS million NIS million NIS million

2. Trading securities

Government bonds and loans 737.1 729.8 11.8 (4.5) 737.1

Other bonds 394.8 95.2 1.2 (1.6) 94.8

Shares 0.5 0.5 - - 0.5

Total trading securities 832.4 825.5 713.0 7(6.1) 832.4

Total securities 2,498.2 2,498.2 18.3 (18.3) 2,498.2

Below is information on the amounts of the cost after deductions of asset-backed debentures included in theavailable-for-saleportfolio:

December31,2009

Balance sheet value

NIS million

Amortizedcost

(shares-cost)1

NIS million


fair value2

NIS million

Profits Losses


Mortgage - backed securities9 1.2 1.3 - (0.1) 1.2

1 Amortizedcostoffsettingprovisionforanon-temporarydeclineinvalue.2 Thefairvalueofsecuritiesisgenerallybasedonmarketprice,whichdoesnotnecessarilyreflectthepriceobtainableinthe

event of sale of securities in large volumes.3. Investmentconsistsofforeignbanks(“Eurobonds“)intheamountofNIS209.3million(seeadditionalinformationinsection

aboutexposuretoforeignbanks),banksinIsraelintheamountofNIS108.0million,insurancecompaniesintheamountofNIS1.3million,governmentownedcompaniesintheamountofNIS12.3millionandcorporatecompaniesintheamountofNIS99.6 million.

4. ofwhich:corporatecompanies-anegativecapitalreserveintheamountofNIS4.8million,foreignbanks(“Eurobonds“)-anegativecapitalreserveintheamountofNIS3.1million.(In2008-corporatecompaniesanegativecapitalreserveintheamountofNIS40.0million,foreignbanks(“Eurobonds”)-anegativecapitalreserveintheamountofNIS18.7million).

5. Include shares that do not have available fair value and are presented according to cost and are held privately.6 Included in shareholders’ equity in the item adjustment to fair value of available for sale securities.7 Reflectedinthestatementofprofitandloss.8 Unrealizedlosspositionswithadurationofmorethan12months,areintheamountofNIS6.6million(2008NIS9.3million).


UBank Ltd.

Reported amounts

December31,2008

Balance sheet value

NIS million

Amortizedcost

(shares-cost)1

NIS million


fair value2

NIS million

Profits Losses8


Composition-Consolidated:

1. Available for sale securities

Government bonds and loans 1,460.5 1,449.2 22.0 (10.7) 1,460.5

Other bonds 586.1 642.9 1.9 4(58.7) 586.1

Shares5 9.1 9.1 - - 9.1

Total available for sale securities 2,055.7 2,101.2 623.9 6(69.4) 2,055.7

December31,2008

Balance sheet value

Amortizedcost

(shares-cost)1

Unrealizedprofitson


Unrealizedprofitson


fair value2

NIS million NIS million NIS million NIS million NIS million

2. Trading securities

Government bonds and loans 752.6 755.6 6.9 (9.9) 752.6

Other bonds 106.8 104.7 2.9 (0.8) 106.8

Shares 15.6 15.6 - - 15.6

Total trading securities 875.0 875.9 79.8 7(10.7) 875.0

Total securities 2,930.7 2,977.1 33.7 (80.1) 2,930.7

Below is information on the amounts of the cost after deductions of asset-backed debentures included in theavailable-for-saleportfolio:

December31,2008

Balance sheet value

NIS million

Amortizedcost

(shares-cost)1

NIS million


fair value2

NIS million

Profits Losses


Mortgage - backed securities9 1.3 1.3 - - 1.3

9. Mortgage-backedbondsaredividedto: -ForeignsecuritiesinthemountofNIS1.2million(2008-NIS1.3million),ratedAAA,issuedbyFHLMCandmatureafter4

years. Most of the base assets backing the bonds are RMBS of mortgage for dwelling. -IsraelisecuritiesratedC,issuedbyotherfinancialentitiesandmatureafter3years.Animpairmentofanatureotherthan

temporarywasrecorded,duetothesesecurities,sothattheirfairvalueinthebalancesheetis0.Thebondsbearfixedinterest.10. In2009animpairmentofanatureotherthantemporarywasrecordedintheprofitandlossintheamountofNIS13.7million

(2008-NIS15.4million).Forpurposesofdeterminingtheimpairment,theBank’smanagementreliedonvariousparameters,suchas:percentageoftheimpairmentonthecostofthesecurity,thedurationofwhichthesecuritywaslossthancostandachange in the security’s rating.

RegardingtheimpairmentoffinancialinstrumentsSeenote1(N).11. The amount of swap deais in 2009 is approx. NIS 235 million.

Notes:a. Regardingthebank’sliabilitiestotheMaofclearinghouse,TelAvivStockExchangeclearinghouseandEuroclear-seenotes

15(C)(2)(3)(4)and(5)and15(D)(1)(2)and(4).b. ForbondspledgedinfavorofBankofIsrael-seeNote15(D)(3).c. SeeNote17(E)fordetailsofresultsofactivitiesininvestmentinbonds.d. See Note 19 for details of results of activities in investment in shares


UBank Ltd.

Note 4: Credit to the Public (After deduction of provisions for doubtful debts)

Reported amounts

December 31

2009

NIS million

2008

NIS million

A.Composition-Consolidated:

Credit 2,032.3 1,942.0

General and supplementary provisions for doubtfuldebts1 10.5 10.4

Total credit to the public 2,021.8 1,931.6

1 Thespecificprovisionfordoubtfuldebtshasbeendeductedfromthecredititemstowhichitrelates.


UBank Ltd.

Reported amounts

December 31

2009

NIS million

2008

NIS million

B. Credittothepublicincludes:

Credit to problematic borrowers,

a. Non-incomebearingcredit:

Credit in unlinked shekel 1.6 2.2

Credit in foreign currency(includinginshekellinkedthetoforeigncurrency) 21.3 21.2

Total non-income bearing credit 22.9 23.4

b. Creditrestructured:

Credit in unlinked shekel 5.6 1.6

Credit in foreign currency(includinginshekellinkedthetoforeigncurrency) 0.2 1.2

Totalcreditrestructured: 5.8 2.8

c. Credittemporarilyinarrears:

Balance 1- 4.0

Interestincludedinthestatementofprofitandloss,inrespectofthiscredit - 0.2

d. Creditunderspecialsupervision: 1.7 85.0



UBank Ltd.

Note 4: Credit to the Public (after deduction of provisions of doubtful debts) (Cont’d)

Reported amounts

December31,2009

SpecificProvision1

NIS million

Supplementary provision2

NIS million

Total

NIS million

C. Provision for doubtful debtsConsolidated and the Bank

Balance of provision at beginning of year 34.4 10.4 44.8

Current year provision 1.5 1.5 3.0

Reduction in provision (5.5) (1.4) (6.9)

Amountrecordedinprofitandloss (4.0) 0.1 (3.9)

Write-offs (6.2) - (6.2)

Balance of provision at end of year 24.2 10.5 34.7

1 Not including provision in respect of interest on doubtful debts which accrued after the loans were determined to be doubtful.2 Includes a general provision for doubtful debts in accordance with the instructions of Bank of Israel.


UBank Ltd.


SpecificProvision1

NIS million


NIS million

Total

NIS million

SpecificProvision1

NIS million


NIS million

Total

NIS million

P

B 47.2 10.7 57.9 48.1 11.4 59.5

C 1.9 0.9 2.8 7.5 0.3 7.8

R (6.0) (1.2) (7.2) (5.5) (1.0) (6.5)

A (4.1) (0.3) (4.4) 2.0 (0.7) 1.3

W (8.7) - (8.7) (2.9) - (2.9)

Ba 34.4 10.4 44.8 47.2 10.7 57.9


UBank Ltd.

Note 4: Credit to the Public (After deducting specific provisions for doubtful debts) (Cont’d)

Reported amounts

December31,2009

D. Credit to the public and offbalance sheetcreditriskaccordingtosizeofcredit per borrower1:

SizeofcreditperborrowerNIS thousands

Number of borrowers2

Credit

NIS million

Credit risk3

NIS million

Up to 10 1.173 0.7 0.1

10 to 20 464 1.8 5.6

20 to 40 459 3.8 10.0

40 to 80 673 10.3 29.0

80 to 150 404 11.3 33.1

150 to 300 250 17.9 36.1

300 to 600 170 20.1 53.0

600to1,200 134 36.5 80.1

1,200to2000 86 32.7 103.7

2,000to4,000 106 106.1 190.6

4,000to8,000 68 159.0 197.6

8,000to20,000 59 304.7 394.9

20,000to40,000 22 230.3 310.3

40,000to200,000 19 389.5 1,137.4

200,000to400,000 2 293.0 310.2

Above400,0004 1 414.6 5.0

Total 4,090 2,032.3 2,896.7

December31,2008

D. Credit to the public and offbalance heetcreditriskaccordingtosizeofcredit of borrower1:

SizeofcreditperborrowerNIS thousands

Number of borrowers2

Credit

NIS million

Credit risk3

NIS million

Up to 10 2,145 0.6 2.1

10 to 20 421 1.4 4.6

20 to 40 471 3.7 10.1

40 to 80 579 8.2 25.0

80 to 150 340 9.0 28.0

150 to 300 249 13.8 39.0

300 to 600 180 23.9 53.4

600to1,200 149 40.9 88.8

1,200to2000 77 25.7 101.9

2,000to4,000 84 82.9 164.0

4,000to8,000 55 105.5 198.0

8,000to20,000 48 356.2 270.6

20,000to40,000 28 312.6 466.8

40,000to200,000 17 571.0 684.0

200,000to400,0004 2 386.6 156.8

Total 4,845 1,942.0 2,293.1

1 Afterdeductingspecificprovisionsfordoubtfuldebts.2 Number of borrowers according to total credit and credit risk.3 Off-balancesheetfinancialinstrumentscreditriskascalculatedfortherestrictiononcredittosingleborrower.4 ThehighestbalanceofloaninthetopcategoryisNIS419.6million(balancelesspermitteddeductions-NIS81.1million)

(31.12.08-NIS295.4million,balancelesspermitteddeductions-NIS60.5million).


UBank Ltd.

Note 5: Investment in Investee Companies

Reported amounts



2009

NIS million

2008

NIS million

2009

NIS million

2008

NIS million

A.Composition:

(1)Consolidatedcompanies

Investment in shares - - 96.0 96.0

Investments in shareholders’ loansand capital notes - - 4.0 4.0

Other investments - - 0.2 0.2

Total investments - - 100.2 100.2

Post-acquisition income lessdividends that were distributed - - 165.7 153.5

Total investments in consolidated companies - - 265.9 253.7

(2)Equitybasisinvestees

Investment in shares - - - -

Investments in shareholders’ loans 0.1 0.1 - -

Post-acquisitionprofits(losses)plusdividends that were distributed (0.1) 0.7 - -

Total investment in equity basis investees 1- 0.8 - -

Total investment in investee companies 1- 0.8 265.9 253.7

1 Less than NIS 0.1 million..


UBank Ltd.

Note 5: Investment in Investee Companies (Cont’d)

Reported amounts

Main activity Share in Equity Voting rightswhich provides

the right to receiveprofits2009

%

2008

%

2009

%

2008

%

B. Details of principal investee companies

Company name

Consolidated companies

UBank Investments and Holdings Ltd.1,5 Holding company 100 100 100 100

UBank Mutual Funds Ltd.2 Managing of mutual funds 100 100 100 100

UBank Trust Company Ltd. Trust company 100 100 100 100

UBank Underwriting and Consulting Ltd.3 Underwriting company 100 100 100 100

UBank Financial Asset Management Ltd2 Portfolio management 100 100 100 100

Until 11.07

UBankFinance(2005)Ltd.4 Managing Company of Provident funds 100 100 100 100

Equity basis investees

Manif - Financial Services Ltd.5,7 Financial services 19.6 19.6 19.6 19.6

1 IncludingapartofManifFinancialServicesLtd.profits,whichisheldbyUBankInvestmentsandHoldingsLtd.2 OnDecember31,2009,allthesharesofU-BankMutualFundsLtd.heldbyU-BankFinancialAssetsManagementLtd.were

transferredtoU-BankLtd.asa(non-cash)dividend.FiguresforU-BankFinancialAssetsManagementLtd.andU-BankMutualFundsLtd.arestatedaccordingtotheBank’sshareintheinvestmentandprofitsofthesecompanies.AmountsattributedtoU-BankMutualFunds,helddirectlybyU-BankFinancialAssetsManagementuntil31.12.09,weresubtractedforpurposesoftheabove reporting from the balances of U-Bank Financial Assets Management that the Bank held directly.

3 UBankUnderwritingandConsultingLtd.(hereinafterreferredtoas“thecompany”)isanunderwriterinthesecuritiesissuesmarket,mainlyasasecondaryunderwriter.Forsomeissues,thecompanyservesasoneofthemanagersoftheunderwritingconsortium.Asof31.12.09,theBoardofDirectorsofthecompanyisconsideringhowtheoperationsofthecompanyaretocontinue. The company continues to operate in accordance with regulations applying to it.

4 OnMay25,2006theRegistrarofCompanies’approvalwasreceivedforthemergeroftheBank’sprovidentfunds(UBankProvidentFundLtd.,UBankMutualFundLtd.andUBankCentralCompensationFundLtd.)intoUBankProvidentFundManagement(2005)Ltd.(hereinafterreferredtoas“themanagingcompany”),anewsubsidiaryestablishedforthispurposeonDecember15,2005.

OnSeptember27,2006thecompanyreceivedalicensefromtheFinanceMinistryasamanagingcompany.On13November2007theprovidentfundsactivitywassoldtoaprovidentfundmanagementcompanycontrolledbyYashirI.D.I.InsuranceCompanyLtd.Inaccordancewiththeconditionsoftheapproval,thecompanysubmittedarequesttotheMinistryofFinancetocancel the managing company’s license and the request was accepted.

Inthelightofthecancellationofthemanagingcompany’slicense,andinaccordancewiththetermsoftheapproval,thecompanychangeditsArticlesofAssociationaswellasitsnameto“UBankFinance(2005)Ltd.”

OnDecember31,2009,thecompanydistributedadividendinthesumofNIS1.6milliontotheBank.


UBank Ltd.

Investment in equitybasis investees

Other capitalinvestments

Dividend distributed Bank’sshareinprofits(losses)ofinvestees,

netofrelatedtaxes,fortheyearended December 31

2009

NIS million

2008

NIS million

2009

NIS million

2008

NIS million

2009

NIS million

2008

NIS million

2009

NIS million

2008

NIS million

134.9 134.1 - - - - 0.8 4.4

19.0 18.8 - - - - 0.2 1.2

92.2 79.2 - - - - 13.0 13.5

4.9 4.9 1.6 1.6 - - 6- 6-

9.5 9.7 2.6 2.6 - - (0.2) (1.0)

1.2 2.8 - - 1.6 - - -

(0.1) 0.7 0.1 0.1 - - (0.8) 0.9

5 UBankInvestmentsandHoldingsLtd.gavebankguaranteestoManifFinancialServicesLtd.,throughtheBank,intheamountofapprox.NIS15.9million(31.12.08-approx.NIS16.8million).OtherguaranteesintheamountofNIS4.4millionwereconfiscatedandarepresentedinthecredittothepublic(31.12.08-NIS4.5million).

TheBankmadeaprovisionfordoubtfuldebtsinrespectoftheseguaranteeinitsfinancialreportsasat31.12.09intheamountof NIS 2.7 million.

6 Less than NIS 0.1 million.7 Theinvestmentwasdealtwithbytheequitybasesmethod,sinceU-BankInvestmentsandHoldingsLtd.hastherighttoappoint

20% of the directors of the company.


UBank Ltd.

Note 6: Buildings and Equipment

Reported amounts

Cost of Asset

As at beginning

of thereported

yearNIS million

During the reported yearAs at

balance sheet date

NIS million

Additions

NIS million

Disposals

NIS million

A.Consolidated:

Buildings and real estate3 219.5 1.8 - 221.3

Equipment,fixtures2 75.4 0.8 - 76.2

Total 94.9 2.6 - 97.5

B.TheBank:

Buildings and real estate3 218.3 1.5 - 219.8

Equipment,fixtures 7.4 0.6 - 8.0

Total 25.7 2.1 - 27.8

1 Depreciationratesonaveragebasisasatreportingdate:

31 December

2009 2008

Buildings,realestateandinstallations 6.0% 5.8%

Equipment,fixtures 9.4% 9.6%

Theaveragedepreciationrateiscalculatedbyweightingeachdepreciationrateintheratioofthenetcost(beforedepreciation)whichitrelatestoandthenetcost(beforedepreciation)ofallthedepreciableassets.

2 Includingcapitalizedexpensesintheamountofapprox.NIS0.6million(in2008theamountofapprox.NIS0.5million).3 Includingrentalrights(includingrenovations),intheamountofNIS8.6million.(in2008-NIS6.8million).


UBank Ltd.

Reported amounts

Depreciation1 Net book value

Accumulated at beginning of the

reported year

NIS million

Depreciation inthe reported

year

NIS million

Accumulatedon disposals

NIS million

Accumulated at balance sheet

date

NIS million

At beginning of the

reported year

NIS million

As atbalance

sheet date

NIS million

6.4 1.0 - 7.4 13.1 13.9

70.8 1.0 - 71.8 4.6 4.4

77.2 2.0 - 79.2 17.7 18.3

6.2 0.9 - 7.1 12.1 12.7

6.0 0.4 - 6.4 1.4 1.6

12.2 1.3 - 13.5 13.5 14.3


UBank Ltd.

Notes 7-8

Reported amounts



2009

NIS million

2008

NIS million

2009

NIS million

2008

NIS million

Note 7: Other Assets

Depreciation expenses 3.9 2.6 3.9 2.6

Deferredtaxasset,net(seeNote23(E)) 7.0 8.7 5.8 7.6

Excess of advance payments over current provision for taxes 11.0 11.6 - 4.3

Excess of fundings for severance pay over theprovision(SeeNote11) 0.4 - 0.3 -

Net clearing balances in respect of securities activities 489.4 67.3 489.4 67.3

Prepaid expenses 2.5 3.5 2.2 2.4

Debit balances in respect ofderivative instruments(excludingembeddedderivatives) 124.8 109.1 124.8 109.1

Assets in respect of operations on the Maof market 207.5 6.4 207.5 6.4

Other receivables and debit balances 9.4 7.7 0.3 2.9

Total other assets 855.9 216.9 834.2 202.6



2009

NIS million

2008

NIS million

2009

NIS million

2008

NIS million

Note 8: Deposits of the Public

Demand deposits 5,551.9 5,142.3 5,598.4 5,142.3

Fixed-term and other deposits 1,575.9 1,677.8 1,664.5 1,899.5

Savings deposits - 0.1 - 0.1

Total deposits from the public 7,127.8 6,820.2 7,262.9 7,041.9


UBank Ltd.

Notes 9-10Reported amounts

Consolidated and The Bank

December 31

2009

NIS million

2008

NIS million

Note 9: Deposits from Banks

CommercialBanks:

Demand deposits 35.7 181.2

Fixed-term deposits 37.2 70.8

Total deposits from banks 72.9 252.0



2009

NIS million

2008

NIS million

2009

NIS million

2008

NIS million

Note 10: Other Liabilities

Excess of provision for current taxesover advance payments 11.5 - 11.5 -

Deferredtaxliability(seeNote23(E)) - 0.9 - 0.9

Provisionforvacationpay(seeNote11(E)) 3.8 3.5 3.6 3.2

Credit balances in respect ofderivative instruments(excludingembeddedderivatives) 126.9 146.1 126.9 146.1

Liabilities in respect of operations on the Maof market 207.5 6.4 207.5 6.4

Excess of provision for severance payoverthefundings(seeNote11) - 4.8 - 4.6

Liabilities in respect of credit card transactions 23.8 63.9 23.8 63.9

Expenses payable 37.5 30.4 30.0 25.8

Prepaid income 3.5 0.6 2.7 0.3

Other payables and credit balances 9.8 1.6 8.6 0.7

Short sale of securities 1,046.6 710.0 1,046.6 710.0

Total other liabilities 1,470.9 968.2 1,461.2 961.9


UBank Ltd.

Note 11: Employee Rights

A. TheliabilityoftheBankanditsconsolidatedcompaniesforseverancepaytoemployees,includingincreasedseverancepay,iscoveredbyappropriatereserves.Amountsdesignatedtocovertheaboveliability(exceptfortheliabilityforincreasedseveranceandadaptationpay)aredepositedinsenioremployees'insurancepolicies.RegardingemployeesforwhomadepositwasmadeinDecember2007,fundsarealsodepositedinthecompensationfundmanagedbytheBank.

Theliabilityforseverancepayiscomputedonthebasisofonemonth’ssalaryperyearofservice,as is customary.

B. Increasedseverancecompensation:

OnJuly21,2004therepresentativesoftheBankandthesubsidiariesandoftheBank’semployeesandsubsidiaries’employeesreachedagreement(hereinafterreferredtoas“theagreement”)withregardtothetermsandconditionsoftheterminationofemployees’employment,intheeventtheywillendtheiremploymentagainstthebackgroundoftheanticipatedtransferofcontroloftheBanktoFIBI(hereinafterreferredtoas“theacquisition”).

The agreement includes principles for the payment of increased severance payments to the employees,whowillterminatetheiremploymentinconsequenceoforganisationalchangesthatare likely to occur at the Bank and its subsidiaries in consequence of the anticipated acquisition and/oradeteriorationintheiremploymentconditions,atanadditionalrateof50%-100%(inaccordancewiththeemployee’sseniority)andalsootherrelatedconditions.

In 2004 - 2005 an assessment was made by Management based on the changes anticipated in the Bank’sbusinesspolicyandtheanticipatedefficiencyprocess,accordingtowhichaprovisionwasmade.

TheseprovisionsareincludedintheProfitandLossAccountunderProfit(Loss)afterTaxesfromExtraordinary Activities.

WithintheframeworkoftheBank’spersonalagreementswithsomeofitsemployees,theyareintitled,inadditiontotheregularseverancepay,toincreasedseverancecompensation.

C. OnJuly5,2007,theBank’sBoardofDirectors,afterapprovalbytheBank’sAuditCommittee,approvedanamendmentoftheemploymentagreementwiththeBank’sGeneralManager,IlanRaviv.

The agreement is for an unlimited period and each party will be entitled to terminate it with a written notice sent six moths in advance. The agreement establishes the general manager’s terms ofemployment,salaryandbenefits.

Inaddition,thegeneralmanagerwillbeentitledtoanannualgrantthatwillbeafunctionoftheBank’sprofitability,aswellasotherterms.OnDecember13,2009,Mr.IlanRavivgavenoticetothe Chairman of the Board of Directors of his resignation from the position of General Manager of the Bank and related duties.

An appropriate provision has been included in the Financial Statements based on the above conditions.


UBank Ltd.

Note 11: Employee Rights (Cont’d)

D. The amounts of the provision and fundingforseverancepayareasfollows:

Reported Amounts

Consolidated

December 31

2009

NIS million

2008

NIS million

Provision 16.0 19.6

Amount funded (16.4) (14.8)

Excess(funds)provision (0.4) 4.8

Excessfunds(presentedintheotherassetsitem) 0.4 -

Excessprovision(presentedintheotherliabilitiesitem) - 4.8

The Bank and its subsidiaries may not withdraw the amounts deposited except for the purpose of paymentofseverancebenefits

E. The liability of the Bank and consolidated subsidiaries for vacation pay to employees is calculated on the basis of the employees’ last salary and the vacation days accrued to their credit plus the required related expenses.

The liability of the Bank and the consolidated companies for payment of vacation to employees iscalculatedbasedonthelatestsalaryoftheemployees,andvacationdaysaccumulatingtotheircredit,withtheadditionoftherequiredrelatedexpenses.ThereisaprovisionofNIS3.8millionunder“OtherLiabilities”forunutilizedvacationdays(December31,2008-NIS3.5million).

F. Regardingtheeffectofthechangeintherateofsalarytaxin2009,seeNote23G.

Note 12A: Share CapitalReported Amounts

Authorized Issued and paid-up


2009

NIS

2008

NIS

2009

NIS

2008

NIS

1.Ordinary“A”SharesofNIS1each 6,000,000 6,000,000 3,123,865 3,123,865

2. Theordinary“A”sharesofaparvalueofNIS1werelistedfortradingontheTelAvivStockExchangeuntilDecember20,2004.Onthisdate,inconsequenceoffullacceptanceofthepurchaseoffer,theBankbecameaprivatecompany.

3. In March 2010 a dividend in the amount of NIS 75 million was declared and distributed. In 2009 and 2008 no dividend was distributed. In December 2007 a dividend in the amount of NIS 100.0 million was declared and distributed.


UBank Ltd.

Note 12B: Capital Adequacy according to the Directives of the Supervisorof Banks

December 31

2009

NIS million

2009

NIS million

2008

NIS million

Basel II1 Basel I3 Basel I2

A. In consolidated terms

1. Capital for purposes of calculating capital ratio

Tier1capital,afterdeductions 541.7 546.0 479.6

Tier2capital,afterdeductions 8.5 8.5 8.5

Total Capital 550.2 554.5 488.1

2. Weighted balances of risk assets

Credit risk 2,566.3 2,559.1 1,785.2

Market risks 279.1 184.6 175.4

Operational risk 455.4 - -

Total weighted balances of risk assets 3,300.8 2,743.7 1,960.6

3. Ratio of capital to risk assets

Ratio of Tier 1 capital to risk assets *16.4% 19.9% 424.5%

Ratio of total capital to risk assets *16.7% 20.2% 424.9%

Ratio of total minimum capital required by the Supervisor of Banks 9.0% 9.0% 9.0%

December 31

2009

NIS million

2009

NIS million

2008

NIS million

Basel II1 Basel I3 Basel I2

B. Capital components for purposes of calculating the capitalratio(inconsolidatedterms)

1. Tier 1 capital

Shareholders’ equity 541.7 541.7 451.6

Less:netprofitsfromadjustmenttofairvalueofsecurities available for sale - 64.3 628.8

Less:investmentsincompaniesotherthannon-bankingthathaveasignificanteffect 5- 5- 0.8

Total Tier 1 capital 541.7 546.0 479.6

2. Tier 2 capital

General provision for doubtful debts 8.5 8.5 8.5

Less:investmentsincompaniesotherthannon-bankingthathaveasignificanteffect - - -

Total Tier 2 capital 8.5 8.5 8.5

Total Capital 550.2 554.5 488.1

* Restated-afterpublicationoftheFinancialStatements,anerrorwasdiscoveredintheminimumcapitalratioasperBaselII.Theoverallcapitalratiowasamendedfrom17.1%to16.7%,asshownabove,andtheTier1capitalratiowasamendedfrom16.8%to 16.4% as shown above.


UBank Ltd.

Notes:1. CalculatedinaccordancewiththeProvisionalDirective,“WorkingFrameworkforCapital

MeasurementandAdequacy”ofDecember31,2008.2. CalculatedinaccordancewiththeSupervisorofBanks’Directives311,“MinimumCapitalRatio”,

and341,“CapitalAllocationforExposuretoMarketRisks”. The headings of certain terms established in these directives and certain interim summaries

presentedinthisNoteinreportspublishedinthepastwereadjustedandreclassifiedaccordingto the disclosure format for the current year.

3. In order to clarify the effect of the change in the method of measurement of the ratio of capital torisk-adjustedassets,andinordertoallowcomparisonswithpreviousperiods,theratioofcapitaltorisk-adjustedassetsasofDecember31,2009,isstatedinadditiontothepresentationinsection1above,inaccordancewithProperConductofBankingBusinessDirectives311and341.

4. Restated.5. Amount less than NIS 0.1 million.6. For purposes of Basel I this deduction includes losses in respect of adjustments to fair value of

securitiesavailableforsaleandnetprofitsinrespectofadjustmentstofairvalueofsecuritiesavailableforsale(netlossesweredeductedinrespectofadjustmentstofairvalueofsecuritiesavailableforsale).

c. The main effects of the change in the method of measuring capital adequacy on the results of the minimumcapitalratiooftheBankderivemainlyfromthreeprincipalcomponents:

- Asmallchangeincreditrisksderivingfromanincreaseinriskassetsinrespectofunutilizedcreditfacilities,andadecreaseincollateraldefinedaseligibleforpurposesofreductionofrisk,afteroffsetting the decrease in respect of the trading portfolio.

- Anincreaseinmarketrisks,derivingfromtheadditionofspecificrisknottakenintoaccountpreviously in the measurement framework under directives 311 and 341.

- Anincreasederivingfromoperationalrisk,addedforthefirsttimetothemeasurementoftheminimumcapitalratio,inaccordancewiththeProvisionalDirective,“WorkingFrameworkforCapitalMeasurementandAdequacy”ofDecember31,2008.

d. Comingintoeffectoftheimplementationof“WorkingFrameworkforCapitalMeasurementandAdequacy”.

AccordingtoSection20oftheProvisionalDirectiveonthesubjectof“WorkingFrameworkforCapitalMeasurementandAdequacy”(BaselII)(henceforth:“theDirective”),asubsidiarycompanyofabankingcorporationwhoseriskassets,inaccordancewiththisworkingframework,arelessthatNIS50million,isexempted from implementing the Directive.AsdetailedinNote5B,theconsolidatedcompaniesoftheBankareU-BankU-BankInvestmentsandHoldingLtd.,U-BankmutualFundsLtd.,U-BanktrustcompanyLtd.,U-BankunderwritingandconsultingLtd.,FinancialAssetsManagementLtd.andU-BankFinance(2005)Ltd.TheriskassetsofeachofthesaidcompaniesarelessthanNIS50million,andinviewofthis,inaccordancewiththatstatedabove,theyareexempt from implementing the Directive.


UBank Ltd.

Note 13: Assets and Liabilities classified according to Linkage Bases

Reported amounts

December31,2009

Israeli Currency Foreign CurrencyNon

monetary items

NIS million

Total

NIS million

Unlinked

NIS million

CPI linked

NIS million

US dollar

NIS million

Euro

NIS million

Other

NIS million

Consolidated:

Assets

Cash and depositswith banks 2,145.9 - 300.0 178.0 203.9 - 2,827.8

Securities 1,728.9 242.3 363.5 133.1 23.6 6.8 2,498.2

Borrowed securities 996.2 - - - - - 996.2

Credit to the public 1,344.2 206.8 364.4 41.5 64.9 - 2,021.8

Investment in equity-basis companies - - - - - 3- 3-

Buildings and Equipment - - - - - 18.3 18.3

Other assets 525.5 2.3 39.1 0.6 3.8 284.6 855.9

Total assets 6,740.7 451.4 1,067.0 353.2 296.2 309.7 9,218.2

Liabilities

Deposits from the public 4,657.4 227.9 1,711.2 303.8 227.5 - 7,127.8

Deposits from banks 53.5 - 9.0 - 10.4 - 72.9

Deposits of the government 4.9 - - - - - 4.9

Other liabilities 897.1 244.9 38.0 4.1 4.6 282.2 1,470.9

Total liabilities 5,612.9 472.8 1,758.2 307.9 242.5 282.2 8,676.5

Difference 1,127.8 (21.4) (691.2) 45.3 53.7 27.5 541.7

Derivatives instruments which are not hedging

Derivative instruments(excludingoptions) (561.5) (63.8) 719.4 (44.1) (50.0) - -

Optionsinthemoney,net(inunderlyingassetterms) - - - - - - -

Optionsoutofthemoney,net(inunderlyingassetterms) 1.8 - (2.3) - - 0.5 -

Total 568.1 (85.2) 25.9 1.2 3.7 28.0 541.7

Optionsinthemoney,net(nominalpresentvalue) - - - - - - -

Optionsoutofthemoney,net(nominal present value) (4.6) - - - - 4.6 -

1 Including linked to foreign currency.2 Including derivatives instruments whose basis refers to a non monetary item.



UBank Ltd.

Reported amounts

December31,2008

Israeli Currency Foreign CurrencyNon

monetary items

NIS million

Total

NIS million

Unlinked

NIS million

CPI linked

NIS million

US dollar

NIS million

Euro

NIS million

Other

NIS million

Consolidated:

Assets

Cash and depositswith banks 1,673.5 - 856.9 23.6 147.8 - 2,701.8

Securities 1,862.7 313.1 413.9 295.9 20.4 24.7 2,930.7

Borrowed securities 698.6 - - - - - 698.6

Credit to the public 1,596.8 2.4 236.9 34.6 60.9 - 1,931.6

Investment in equity-basis companies - - - - - 0.8 0.8

Buildings and Equipment - - - - - 17.7 17.7

Other assets 102.3 5.7 33.6 2.0 - 73.3 216.9

Total assets 5,933.9 321.2 1,541.3 356.1 229.1 116.5 8,498.1

Liabilities

Deposits from the public 4,850.9 10.8 1,537.6 243.8 177.1 - 6,820.2

Deposits from banks 241.7 - 10.3 - - - 252.0

Deposits of the government 6.1 - - - - - 6.1

Other liabilities 772.5 62.7 53.9 9.1 0.2 69.8 968.2

Total liabilities 5,871.2 73.5 1,601.8 252.9 177.3 69.8 8,046.5

Difference 62.7 247.7 (60.5) 103.2 51.8 46.7 451.6

Derivatives instruments which are not hedging

Derivative instruments(excludingoptions) 218.6 (152.4) 105.4 (118.3) (53.3) - -

Optionsinthemoney,net(inunderlyingassetterms) - - - - - - -

Optionsoutofthemoney,net(inunderlyingassetterms) 3.7 - (3.7) - - - -

Total 285.0 95.3 41.2 (15.1) (1.5) 46.7 451.6

Optionsinthemoney,net(nominalpresentvalue) - - - - - - -

Optionsoutofthemoney,net(nominal present value) - - - - - - -


UBank Ltd.

Note 14: Assets and Liabilities according to Linkage Bases and Maturity Periods

Reported amounts

December31,2009

Expectedfuturecontractscashflow

On demand and up to

one month

NIS million

One tothree

months2

NIS million

Three to twelve

months

NIS million

One totwo

years

NIS million

Two tothreeyears

NIS million

Unlinked Israeli currency

Assets 4,564.3 447.6 860.6 91.4 363.0

Liabilities 4,769.5 83.3 85.4 316.6 64.7

Difference (205.2) 364.3 775.2 (225.2) 298.3

Derivativeinstruments(excludingoptions) 13.4 (214.5) (379.1) 0.3 3.9

Options(inunderlyingassetterm) 1.8 - - - -

CPI linked Israeli currency

Assets 221.3 42.5 31.3 21.0 9.5

Liabilities 207.1 0.1 17.6 19.4 38.7

Difference 14.2 42.4 13.7 1.6 (29.2)

Derivativeinstruments(excludingoptions) - (0.2) (0.9) (2.0) (20.8)

Foreign currency4

Assets 724.4 418.5 143.3 115.7 73.1

Liabilities 1,975.2 239.8 79.7 4.7 8.6

Difference (1,250.8) 178.7 63.6 111.0 64.5

Derivativeinstruments(excludingoptions) (13.4) 214.7 380.0 1.7 16.9

Options(inunderlyingassetterm) (2.3) - - - -

Non-monetary items

Assets 284.6 - - - -

Liabilities 282.2 - - - -

Difference 2.4 - - - -

Options(inunderlyingassetterm) 0.5 - - - -

Total

Assets 5,794.6 908.6 1,035.2 228.1 445.6

Liabilities 7,234.0 323.2 182.7 340.7 112.0

Difference (1,439.4) 585.4 852.5 (112.6) 333.6

December31,2008

Expectedfuturecontractscashflow

Assets 5,067.8 1,205.0 552.5 526.9 356.6

Liabilities 7,558.2 295.5 126.5 34.2 4.9

Difference (2,490.4) 909.5 426.0 492.7 351.7

1 AsincludedinNote13:“Assetsandliabilitiesclassifiedaccordingtolinkagebases”includingoffbalancesheetinrespectofderivatives amounts.

2 AssetsondemandanduptothreemonthsincludeNIS468.4millionofcreditonrevolvingaccountterms(December31,2008-NIS937.3million).

3 AssetswithnomaturitydateincludeassetsintheamountofNIS22.9million(2008-NIS25.6million)therepaymentofwhichis overdue.

4 Including linked to foreign currency.5 ThecontractualrateofreturnistheinterestratediscountingfutureanticipatedcontractualcashflowsreportedinthisNoteto

thebalancesheetfigure.Notes:a. ReportedinthisNotearetheanticipatedfuturecontractualcashflowsinrespectoftheassetsandliabilitiesitemsaccordingto

thelinkagebases,inaccordancewiththeperiodsremaininguntilthecontractualrepaymentdateofeveryflow.Thefiguresarereported after deduction of provisions for doubtful debts.


UBank Ltd.

Balance Amount1

Three to four

years

NIS million

Four to five

years2

NIS million

Five toten

years

NIS million

Ten to twenty

years

NIS million

Over twenty

years

NIS million

Totalcashflow

NIS million

No maturity

date3

NIS million

Total

NIS million

Contractualrate ofreturn

%

120.6 89.5 383.2 12.4 - 6,932.6 1.5 6,740.7 4.02

64.5 209.7 94.1 - - 5,687.8 - 5,612.9 1.24

56.1 (120.2) 289.1 12.4 - 1,244.8 1.5 1,127.8 -

4.0 4.0 2.1 - - (565.9) - (561.5) -

- - - - - 1.8 - 1.8 -

13.9 54.1 99.8 5.5 0.3 499.2 - 451.4 2.03

18.0 11.7 180.9 - - 493.5 - 472.8 2.87

(4.1) 42.4 (81.8) 5.5 0.3 5.7 - (21.4) -

(20.3) (26.4) - - - (70.6) - (63.8) -

71.7 24.9 205.7 0.1 1.4 1,778.8 21.4 1,716.4 4.06

1.2 - - - - 2,309.2 - 2,308.6 0.69

70.5 24.9 205.7 0.1 1.4 (530.4) 21.4 (592.2) -

16.3 22.4 (2.1) - - 636.5 - 625.3 -

- - - - - (2.3) - (2.3) -

- - - - - 284.6 25.1 309.7 -

- - - - - 282.2 - 282.2 -

- - - - - 2.4 25.1 27.5 -

- - - - - 0.5 - 0.5 -

206.2 168.5 688.7 18.0 1.7 9,495.2 48.0 9,218.2 3.74

83.7 221.4 275.0 - - 8,772.7 - 8,676.5 1.43

122.5 (52.9) 413.7 18.0 1.7 722.5 48.0 541.7 -

Balance Amount1

206.1 90.9 774.2 3.1 0.3 8,783.4 68.9 8,498.1

- 4.6 29.2 - - 8,053.1 - 8,046.5

206.1 86.3 745.0 3.1 0.3 730.3 68.9 451.6

.


UBank Ltd.

Note 15: Contingent Liabilities, Commitments and Liens

Reported amounts


December 31

2009

NIS million

2008

NIS million

A. Off-Balance Sheet Financial Instruments

Balances of contracts or their stated amounts attheendoftheyear :

Transactions the balance of which represents credit risk

Documentary credit - 1.5

Guarantees securing credit 152.9 186.6

Guarantees securing property acquisitors - 3.6

Guarantees and other liabilities 46.4 49.7

Unutilizedrevolvingcreditandothercreditlines in demand accounts1 1,936.2 21,772.4

Unutilizedcreditlinesofcreditcards 77.5 85.0

Commitment to grant other credit which was approved and had not yet been granted1 - 2-

RegardingtheBank’sliabilitiestotheMaofclearinghouse-seesectionC(2)and(3),hereafter.

Reported amounts


December 31

2009

NIS million

2008

NIS million

B. Off balance sheet commitments for transactions based on collections at end of the year 1

Balance of credit from deposits on collection basis

Israeli currency unlinked 54.7 58.6

Israeli currency linked to the CPI 2- 0.1

Foreign Currency 59.4 79.3

Total 114.1 138.0

1 Thiscommitment,whichincludesoff-balancesheetitems,hasbeenapprovedbytheBank’screditcommittees. Itsutilizationisconditionaluponreceiptofcollateralassetoutintheapproval.2 Reclasified.


UBank Ltd.

Reported amounts


December 31

2009 2008

Up toone year

NIS million

One tothree years

NIS million

Over Three years

NIS million

Total

NIS million

Total

NIS million

Cashflowsinrespectofinterestmarginsonactivitiesoncollectionbasis

Israeli currency unlinked

Futurecontractedcashflows 0.3 - - 0.3 0.3

Israeli currency linked to the CPI

Futurecontractedcashflows 2- - - 2- -

Foreign currency

Futurecontractedcashflows - - - - 0.1

1 Creditanddepositswhoserepaymenttothedepositorisdependentoncollectionofthecredit,withmarginorcollectionfee.2 Less than NIS 0.1 million. GeneralComment: Thistablepresentspresentvalueoffuturecashflows,discountedaccordingtotheinternalrateofreturnofthebalancesheet

item.Thefuturecashflowsthatwerediscounted,includeinterestaccrueduntiltheearlierofmaturity,ortheinterestpaymentdate.

C. Other Contingent Liabilities and Commitments - Consolidated and the Bank

1. The Trust Company of the Bank provides trustee services for businesses as well as private individuals,whichincludemainlytheholdingandmanagementoffinancialassets.Themajorityof the company’s activity is focused on trustee services to holders of units in mutual funds to holders of debentures issued by public companies and for exchange-traded funds and credit transactionsforpurposesofsupervisionandcontrolofcollateralforthesetransactions,astrusteeof assets of individuals or companies.

2. TheBank,asamemberoftheMaofClearingHouseLtd.,hasundertaken,jointlywithothermembers,oftheMaofClearingHouse,toindemnifytheClearingHouseintheeventthatitwillsufferlossesderivingfrominsufficientholdingsofsecuritiesorinsufficientfinancialcoverbyoneof the members.

Themutualguarantees,asatDecember31,2009,amountedtoNIS76.8million.(December31,2008-NIS74.5million).

Furthermore,theBankhasundertakentotheMaofClearingHousetopayeverymonetarycharge deriving from transactions for its customers and itself in respect of options traded within the context of the Clearing House. The balance of the liability to the Maof Clearing House that isbasedontheStockExchange’sscenarios,isNIS428.8million(December31,2008-NIS198.2million).

The amount of liability as at the balance sheet date deriving from transacions for customers and the Bank in respect of Maof options is included in the balance sheet under other assets and represents the fair value of these transactions. The balance of the liability to the Maof Clearing Housebasedonscenarios,abovetheamountrecordedinthebalancesheet,isNIS200.6million(beforepermitteddeductions)(December31,2008-NIS176.6million).


UBank Ltd.

Note 15: Contingent Liabilities, Commitments and Liens (cont’d). The part of each member in the fund derives from its volume of activity in the clearing House.

3. InaccordancewiththederivativesprofileissuedbyMaofClearingHouseLtd.anditsby-laws,theBankundertooktofurnishtheMaofClearingHousewithsufficientcollateraltodischargeitsliabilities as per para 2 above.

PursuanttoaresolutionoftheBoardofDirectorsoftheMaofClearingHouse,theMaofClearingHouse’sby-lawsandprofilewereamendedandtheMaofClearingHouse’scollateralarrangementwaschanged,asof1.4.2004,allofthemembersoftheMaofClearingHouse,includingtheBank,wererequiredtosignnewpledgeagreementstosecuretheirliabilities,thatreplacethepreviouspledgedocumentssignedinfavouroftheMaofClearingHouse,andtodepositonlyliquidcollateral(bondsoftheStateofIsraelandcash),inaccordancewiththerequirements of the by-laws.

Pursuanttotheaboveresolutions,theMaofClearingHouseopenedanaccountinitsnameattheStockExchangeClearingHouse,onbehalfoftheBank,inwhichtheBankhasdepositedcollateralinfavouroftheMaofClearingHouse.Thisaccountispledgedwithafixedandfloatingpledge in favour of the Maof Clearing House. The Bank also opened an account in its name at theStockExchangeClearingHouse,inwhichitalsodepositedliquidcollateral.ThisaccountispledgedwithafloatingpledgeinfavouroftheMaofClearingHouse.Inaddition,theMaofClearingHouseopenedanaccountinitsnameatanotherbank,onbehalfoftheBank,inwhichitwill be possible to deposit cash as collateral and in which will be deposited cash paid to the Bank asincomeonsecuritiesoftheBank,thatweredepositedandpledgedasaforesaid.ThisaccountispledgedwithafixedandfloatingpledgeinfavouroftheMaofClearingHouse.

AssecurityfortheperformanceoftheBank’s,unlimitedintotalamount,obligationstotheMaofClearingHouseasaforesaid,onMarch29,2004theBankcreatedfixedandfloatingpledgesunlimitedintheirtotalamount,infavouroftheMaofClearingHouse,overtheaccountsoftheMaofClearingHouseattheStockExchangeClearingHouseandatanotherBank,andafloatingpledge on the account in the Bank’s name in the Stock Exchange Clearing house.

See15(d)(1)belowwithregardtoapledgetotheMaofClearingHouse.

4. TheTelAvivStockExchangeClearingHouseLtd.(hereinafterreferredtoas“theStockExchangeClearingHouse”)establishedariskfund(hereinafterreferredtoas“thefund”),theobjectofwhich is to secure the Clearing House members’ liabilities in respect of the operations of each Clearing House member. The amount of the risk fund is updated on March 1 and on September 1 of each year and is in the sum of the average daily general clearing turnover in the Six months ending prior to the date of the adjustment and in any event is not less than NIS 150 million. The Bank’sshareamounttoNIS35.9million(31December,2008-NIS41.2million).

PursuanttoaresolutionoftheStockExchange’sBoardofDirectors,theClearingHouseby-lawswereamendedandasfromMay15,2005theClearingHouse’scollateralarrangementwaschanged.

Inconsequencethereof,theBankwasrequiredtodepositonlyliquidcollateral(bondsoftheStateofIsraelorcash)inaccordancewiththeby-laws’requirements,andalsotosignapledgeagreement to secure its said liabilities.

Pursuanttothesaidresolutions,theStockExchangeClearingHouseopenedaccountsinitsnameintheClearingHouseonbehalfoftheBank,inwhichtheBankdepositedsecuritiesascollateral in favour of the Stock Exchange Clearing House.

Inaddition,theStockExchangeClearingHouseopenedaccountsinitsnameatanotherbank,onbehalftheBank,inwhichitwillbepossibletodepositcashascollateralandalsoinwhichtheClearing House will deposit cash that shall be paid to the Bank as income on its securities that were deposited and charged as aforesaid. As surety for the performance of all the Bank’s liabilities totheStockExchangeClearingHouseasaforesaid,unlimitedintotalamount,theBankcreatedonApril14,2005,afirstrankingchargeandassignmentbywayofcharge,infavouroftheStockExchangeClearingHouse,overtheClearingHouse’saccountattheClearingHouseandovertheClearingHouse’saccountatanotherbank.Seenote15(d)(4)belowwithregardtoapledgetothe Stock Exchange Clearing House.


UBank Ltd.

5. OnFebruary10,2002theBanksignedacollateralagreementwiththesecuritiesclearingsystemorganizedbyS.A./N.V.EuroclearBank(“Euroclear”),aforeigncompanyregisteredinBelgium,accordingtowhichtheBankpledged,infavorofEuroclear,assetsdepositedbytheBankwithEuroclear,unimitedinamount,forpurposesofactivityinsecuritiesbymeansoftheaboveclearingsystem;andascollateralforthecreditlineof$15million,whichtheoperatoroftheclearing system provided in the Bank’s favor.

RegardingtheBank’spledgetoEuroclear-seeNote15(d)(2),below.

6. Various claims and demands are pending against the Bank and consolidated companies. In the opinionoftheManagementofthebankinginstitution,baseduponlegalopinionswithregardtotheprospectsofpendingclaims,includingapplicationstoapproveclassactions,appropriateprovisionshavebeenmadeinthefinancialstatements,asneeded,inaccordancewithgenerallyacceptedaccountingprinciples,foralllossesanticipatedfrompendingclaimsagainsttheBank.

7. DuringthecourseoflawsuitsfiledbytheBankagainstdebtorsand/orguarantors,andwithintheframeworkoftemporaryordersrequested,theBankissueslettersofundertakinginunlimitedamounts,tocoverpossibledamagesufferedbythedefendantsintheeventthattheCourtfindsagainsttheBank,orincasethetemporaryorderexpiresforanyotherreason.

8.a.PursuanttoaresolutionoftheBank’sBoardofDirectorsonMarch15,2005,thatwas passedinaccordancewiththeBank’sArticlesofAssociation,theBankexemptedtheBank’s

directorsandofficers(asdefinedintheCompaniesLaw,1999,includingtheinternalauditor,chiefaccountantandsecretary)fromliabilityinrespectofabreachofthedutyofcaretotheBankasfromDecember22,2004andawaivedanyclaimbytheBankagainsttheminrespectof the above. The said exemption and waiver do not apply to cases in respect of which the BankisnotentitledundertotheCompaniesLawtoexempttheofficerfromhisliability.

AtthesamemeetingoftheBoardofDirectors,theBankundertooktoindemnifythesaiddirectorsandofficersinrespectofachargeorexpensethatmaybeimposeduponthem.

inrespectofactscommittedbyvirtueoftheirpositionsattheBank,asperthedetailedconditionsintheundertakingtoindemnifyofficers.

ThetotaloftheindemnityamountthatshallbepaidbytheBank(inadditiontoandaboveamountsreceivedundertheinsurancepolicy,whetherpaidtotheBankorpaidtotheofficer)foreachofficerattheBankandthesubsidiaries,inaggregate,inaccordancetheletterofundertakingand/orletterofindemnityissuedpursuanttothisinstrument,inrespectofoneoftheeventsdetailedtherein,shallnotexceed25%(twentyfivepercent)oftheBank’sconsolidatedshareholders’equityinaccordancewiththelastfinancialstatements(annualorquarterly)publishedimmediatelypriortotheactualpaymentoftheindemnity.

The exemption and the indemnity undertaking set forth above were approved by a Special GeneralMeetingoftheBank’sshareholdersonMay18,2005,insofarassuchanapprovalisrequired.

b. Simultaneously,onDecember21,2004,theparentcompanyoftheBank’sformercontrollingshareholder,InvestecBank(UK)Ltd.,gaveanundertakingtoindemnifytheBankinrespectofanypaymentthatitwouldbearvis-à-visthedirectorsandotherofficersoftheBankorontheirbehalf,inaccordancewiththeprovisionsoftheexemptionandindemnityinstrument,inrespect of actions that were effected until the date of the transfer of control of the Bank to FIBI. This undertaking was limited to the maximum indemnity amount of the exemption and indemnityinstrument,asdetailedinsection(a)above.

c. Furthertothedecisionfrommarch15,2005,theBank’sauditcommitteeapprovedinOctober2006grantingindemnificationtodirectors,appointedbytheBanktoserveatUbankfinance(2005)Ltd.(Hereinafterreferredtoas“thecompany”)whoarenotBankofficeholders.TheletterofindemnificationisgivenintheformofindemnificationusedforBankofficeholders,adjustedtothecharacteristicsofthecompany.


UBank Ltd.

Note 15: Contingent Liabilities, Commitments and Liens (cont’d)

9. IndemnificationfortheSaleoftheProvidentFundsoperations: OnJanuary9,2007,theBankenteredintoanagreementforthesaleoftheoperationsofits

provident funds by transferring their management to a provident fund management company controlledbyYashirI.D.IInsuranceCo.Ltd.ThepartiestothesaleagreementweretheBank,U-BankProvidentFundManagement(2005)Ltd.(hereinafterreferredtoas“thecompany”)oftheonepartandYashirI.D.I.InsuranceCo.Ltd.,andaprovidentfundmanagementcompanyunderitscontrol(hereinafterreferredtoasthe“purchasercompanies”)oftheotherpart.Thetransaction was carried out simultaneously with the sale of the provident funds under the control ofFIBItothepurchaser(hereinaftertogether:“thetransactions”).

Inaccordancewiththetermsofthetransaction,theBankandthecompanyundertooktoindemnify the acquiring companies for any claims which may be made against them during the periodoffouryearsfromthedatethetransactionwascompleted,thegroundsofwhichwereinexistencebeforethedatethetransactionwascompleted,butwasnotexplicitlyidentifiedfromthefinancialstatementsofthefunds,providedthatthetotalamountoftheclaimsdoesnotexceedtheamountoftheconsideration,aswellasadditionalconditionsdetermined.

10. CommitmentbetweentheBankandtheFIBIGroup:a. The Bank entered into various agreements to receive services from FIBI in the following

spheres:servicesforcustomersoftheHaifabranchthatwasclosed,security,officeequipmentprocurement,internalauditandcreditcontrolservices,operationswithstructuredproducts,foreign trade and more. The agreements are in accordance with usual market terms and conditions.

b. In February 2005 an agreement was signed between UBank Mutual Funds Ltd. And Modus SelectiveInvestmentManagement&CounsellingLtd.(Hereinafterreferredtoas“Modus”),asubsidiaryofFIBI,toreceiveinvestmentmanagementservicesformutualfunds,pursuantwhereto UBank Mutual Funds Ltd. Will purchase investment management services from Modusforthemutualfundsdefinedintheagreement.

c. InMay2005,acommitmentwasapprovedwithMatafIndustrial&FinancialComputerisationLtd.(Hereinafterreferredtoas“Mataf”),asubsidiaryofFIBI,forconsolidationofinfrastructure and operating activity with regard to information systems. Within this framework,thetwobank’scomputerinfrastructureswereamalgamated,aswellascertainoperatingactivities,suchastheBank’sclearinghouseandSwiftoperation.

d. Furthermore,theBankandMatafarecooperatinginacomputerapplicationsconsolidationproject.thatendedatJanuary1,2009.TheprinciplesoftheundertakingbetweentheBankand Mataf are such that Mataf will bear the costs of the process of combining applications ofthebanks,andtheBankwillpayMatafanamountequaltotheexpense(includingdepreciation)thattheBankincurredfor2005,andwillbearitssharetobeagreeduponofregulatory developments and Group projects.

Recently,anewmodeloftheundertakingthatwillbeginin2010wasapproved,whichisbased on the relative share of the Bank in all computer activities carried out in the FIBI Group.

Inaddition,ThereisaServiceLevelAgreement(SLA)whichwassignedon13.11.2007.e. InNovember2005,theBank’sBoardofDirectorsapprovedcooperationwithFIBIwith

regard to UBank customers’ operations during the night via FIBI’s dealing room.f. IntheframeworkofthesaleofprovidentfundactivityoftheBankon13.11.07,theassets

oftheprovidentfundsweresold,excludingUBank’sassetsasamember-employeeinUBankCentral Fund for Severance Pay.


UBank Ltd.

TheBanktransferredtheaccumulatedmoniesofUBank,whichareintheCentralFundaswellfuturedepositsforseverancepaytothemanagementofKidmaProvidentFundManagementCompanyLtd.(Henceforth:“Kidma”).Kidmaisaprovidentfundmanagingcompany,fullyownedbyFIBI.

TheaccumulatedmoniesofUBankwillbemanagedbyKidmainaseparateCentralProvidentFundforSeverancePay,whichwillbeestablishedforthis,inwhichonlyemployeesofUBank,subsidiariesofUBankandotherwholly-ownedoralmostwholly-ownedbyitcanbemembers(“thenewfund”).MoniesoftheBankandeachofthesubsidiariesoftheBankwillbe managed in a separate account in the new fund.

11. Commitments of the Bank and its consolidated subsidiaries

December 31

2009

NIS million

2008

NIS million

Undertaking to invest in venture capital 1.4 2.3

Professional counseling services 0.3 0.1

Purchaseoffixedassets 0.5 0.7

Rental of Properties

The Bank and its investee companies have rented buildings for long periods. The rent which will be paidinthefutureinrespectofthesecommitmentsis:

December31,2009

NIS million

December31,2008

NIS million

First year 5.7 5.4

Second year 5.9 5.6

Third year 6.0 5.8

Fourth year 6.1 5.9

Fifth year 6.1 6.0

Sixth year 3.8 6.0

Seventh year 1.5 3.7

Eighth year and after 1.7 2.8

36.8 41.2

The rent are linked to C.P.I of Israel or C.P.I of U.S.A or to the dollar.

12.ActivityoftheBankasmarketmakerforgovernmentbonds: OnJuly21,2006,theAccountantGeneralannouncedtheappointmentofcertainparties,

includingtheBank,asprimarymarketmakersforgovernmentbonds,underSection6aofGovernmentLoansLaw,1979,thisintheframeworkofreformsinitiatedbytheMinistryofFinance for the issue of government bonds and transactions in bonds in the secondary capital market,toencourageaccessbymorepartiestothecapitalmarketsinordertoincreaseliquidityand transparency in trading and in order to reduce the government’s costs of raising funds. The BankstartedoperatingasamarketmakerOnSeptember4,2006.


UBank Ltd.

D. Liens

1. TosecuretheBank’sobligationstotheMaofClearingHouseforitscustomersanditself,asstatedinNote15(c)(2),theBankhaspledgedfirst-chargefloatingchargemoniesand/orsecuritiesinfavouroftheMaofClearingHouse,pursuanttoanagreementdated29.3.2004,asstatedinNote15(c)(3).

SetoutbelowisthebalanceofthecollateralgivenbytheBanktotheMaofClearingHouse,inNISmillion:

AsatDecember31,2009 Average Balance in 2009* Highest Balance in 2009*

For Risk Fund

For customers and nostro operations

For Risk Fund


For Risk Fund


Deposits in bank 20.1 - 20.0 - 20.1 -

Securities 56.7 343.1 59.9 180.7 79.7 343.1


For Risk Fund


For Risk Fund


For Risk Fund


Deposits in bank 18.7 - 0.7 - 18.7 -

Securities 55.8 215.8 84.1 205.6 107.4 250.7

* On basis of monthly closing balances.

2. ToprovidesecuritytoEuroclearfortheBank’soperationsinsecuritiesasstatedinNote15(c)(5),the Bank pledged assets deposited by the Bank with Euroclear.

Set out below is the balance in respect of customer and nostro operations which the Bank made availabletoEuroclear,in$million:

AsatDecember31,2009 Average Balance in 2009 Highest Balance in 2009

Securities 15.0 15.0 15.0




3. Pledge to Bank of Israel InaccordancewiththearrangementforreceivingcreditfromtheBankofIsrael(netcredit,after

deductingthebalanceofthebank’sdepositswiththeBankofIsrael),Israelibanksarerequiredtotransfer to the Bank of Israel appropriate collateral against such credit.

To secure credit that the Bank will receive from the Bank of Israel for purposes of participating in theZahavSystem,theBankon22.7.2007pledgedinfavoroftheBankofIsraelbyafirstfloatingcharge,bondsissuedorthatwillbeissuedinaccordancewiththeStateLoansLaw,1979,orbondsissuedorthatwillbeissuedinaccordancewiththeShortTermLoansLaw,1984,whicharetradedintheTASE,andallrightsderivingfromand/orconnectedwiththem,includingthemonetary proceeds of their sale which will be recorded or deposited from time to time in a collateral account held in the TASE Clearing House in the name of the Bank of Israel and on its behalf. This pledge is independent of collaterals or of other securities that the Bank of Israel received or will receive from the Bank.


UBank Ltd.

FollowingaredetailsofbondspledgedtotheBankofIsrael:

Pledged Government bonds Pledged Government bonds

2009 2008


Balance of the date of the balance sheet 119.1 388.2

Average balance during the year* 191.2 270.2

Highest balance during the year* 389.7 543.5


4. TosecuretheBank’sobligationstotheStockExchangeClearingHouse,asstatedinNote15(c)(4),theBankgaveafirst-chargefixedpledgeonsecuritiesinfavouroftheStockExchangeClearing House.

Set out below is the balance of collateral that the Bank made available to the Stock Exchange ClearingHouse,inNISmillion:


Deposits in bank 10.5 14.4 17.5



Deposits in bank 10.3 0.4 10.3



e. SourcesofSecuritiesreceivedwhichtheBankmaysell:

BelowarethesourcesofsecuritieswhichtheBankmaysell:

AsatDecember31,2009 AsatDecember31,2008


Securities received in securities borrowing transactions against cash 996.2 698.6

f. Securitiespledgedtoborrowers:

Belowaredetailsofsecuritiespledgedtoborrowers:

AsatDecember31,2009 AsatDecember31,2008


Securities available for sale 631.5 776.7

The Bank had no securities given as collateral for borrowers who were not permitted to sell or pledge them.


UBank Ltd.

Note 15A: Activity in Derivative Instruments - Volume, Credit Risks and Repayment Dates

Reported amounts

December31,2009

Interest rate contracts

Shekel - CPI

NIS million

Interestrate

contracts other

NIS million

ForeignCurrency contracts

NIS million

Contractsin respectof shares

NIS million

Commoditiescontractsand other

NIS million

Total

NIS million

A. Volume of activity on consolidated and Bank basis1. Stated amount of derivative

instrumentsA. Hedgederivatives:

Swaps - 195.5 - - - 195.5Includes Swaps in which the bank agreed to pay fixedinterest-rate 195.5

B. ALMderivatives:1,2

Option contracts traded on the stock exchangeWritten Options - - 9.2 - - 9.2Bought options - - 4.6 - - 4.6Other option contractsBought options - - 9.2 - - 9.2Forward contracts - - 5,831.4 - - 5,831.4Swaps - 40.2 - - - 40.2Total - 40.2 5,854.4 - - 5,894.6Includes Swaps in which the bank agreed to pay fixedinterest-rate 40.2

C. Otherderivatives:Futures contracts - - - 3,407.6 259.6 3,667.2Forward contracts - - 28.1 - - 28.1Option contracts traded on the stock exchangeWritten options - - 1,837.8 3,696.5 - 5,534.3Bought options - - 1,837.8 3,696.5 - 5,534.3Other option contractsWritten options - - 92.7 2.0 - 94.7Bought options - - 86.9 2.0 - 88.9Total - - 3,883.3 10,804.6 259.6 14,947.5

D. Credit derivatives and spot foreignexchangecontracts:Spot foreign exchange contracts - - 319.9 - - 319.9

2. Fairvalueoffinancialderivativeinstruments(gross)3

A. Hedgederivatives:Positivefairvalue(gross) - 2.5 - - - 2.5Negativefairvalue(gross) - 11.2 - - - 11.2

B. ALMderivatives:2

Positivefairvalue(gross) - - 26.7 - - 26.7Negativefairvalue(gross) - 0.6 17.4 - - 18.0

C. Otherderivatives:Positivefairvalue(gross) - - 22.5 77.4 - 99.9Negativefairvalue(gross) - - 20.4 77.4 - 97.8

1 Excluding spot foreign exchange contracts.2 DerivativeswhicharepartoftheBank’sassetandliabilitiesmanagement,thatarenotdesignatedforhedging.3 Includes positive fair value of embedded derivatives in the amount of NIS 4.3 million and negative fair value of embedded

derivativeslessthanofNIS0.1million.(2008-positivefairvalueofembeddedderivativesintheamountofNIS6.0millionandnegativefairvalueofembeddedderivativesintheamountofNIS0.1million).


UBank Ltd.

Reported amounts

December31,2008


Shekel - CPI

NIS million

Interestrate

contracts other

NIS million

ForeignCurrency contracts

NIS million

Contractsin respectof shares

NIS million

Commoditiescontractsand other

NIS million

Total

NIS million

A. Volume of activity on consolidated and Bank basis1. Stated amount of derivative

instrumentsA. Hedgederivatives:

Swaps - 208.4 - - - 208.4Includes Swaps in which the bank agreed to pay fixedinterest-rate 208.4

B. ALMderivatives:1,2

Other option contractsBought options - - 9.8 - - 9.8Forward contracts 300.0 - 458.5 - - 758.5Swaps - 62.9 - - - 62.9Total 300.0 62.9 468.3 - - 831.2Includes Swaps in which the bank agreed to pay fixedinterest-rate 62.9

C. Otherderivatives:Futures contracts - - - 1,377.2 142.7 1,519.9Forward contracts - - 481.0 - 102.0 583.0Option contracts traded on the stock exchangeWritten options - - 972.0 4,307.5 - 5,279.5Bought options - - 972.0 4,307.5 - 5,279.5Other option contractsWritten options - - 47.7 8.1 - 55.8Bought options - - 43.9 8.1 - 52.0Total - - 2,516.6 10,008.4 244.7 12,769.7

D. Credit derivatives and spot foreignexchangecontracts:Spot foreign exchange contracts - - 235.6 - - 235.6

2. Fairvalueoffinancialderivativeinstruments(gross)3

A. Hedgederivatives:Positivefairvalue(gross) - - - - - -Negativefairvalue(gross) - 17.0 - - - 17.0

B. ALMderivatives:2

Positivefairvalue(gross) 5.6 - 3.3 - - 8.9Negativefairvalue(gross) 2.7 5.2 16.0 - - 23.9

C. Otherderivatives:Positivefairvalue(gross) - - 37.1 66.2 2.9 106.2Negativefairvalue(gross) - - 36.2 66.2 2.9 105.3


UBank Ltd.

Note 15A: Derivative Financial Instruments - Volume, Credit Risks and Repayment Dates (Cont’d)

Reported amounts

December31,2009

Stockexchanges

NIS million

Banks

NIS million

Brokers

NIS million

Governments and

Central Banks

NIS million

Others

NIS million

Total

NIS million

B. Consolidated and Bank- credit risk in respect of derivative instruments by counter party to the contract

Positivefairvalue(gross)ofderivative instruments 38.8 311.9 38.2 - 70.2 129.1

Less off set agreements - - - - - -

Balance sheet amounts of assets that derive from derivative instruments1 38.8 11.9 8.2 - 70.2 129.1

Off balance sheet credit risk in respect of derivative instruments2 - 236.1 5.2 - 652.3 893.6

Total credit risk in respect of derivative instruments 38.8 248.0 13.4 - 722.5 1,022.7

December31,2009

Up to three months

NIS million

Three to twelve

monthsNIS million

One year tofiveyears

NIS million

Overfiveyears

NIS million

Total

NIS million

C. RepaymentDates-statedamounts:Consolidated and Bank year end balances


Shekel - CPI - - - - -

other 36.3 - 49.1 150.3 235.7

Foreign currency contracts 8,643.0 1,291.2 118.6 4.8 10,057.6

Contracts in respect of shares 9,984.6 319.3 500.7 - 10,804.6

Commodities contracts and other 259.6 - - - 259.6

Total 18,923.5 1,610.5 668.4 155.1 21,357.5

1 IncludesaderivativeinstrumentsbalanceintheamountofNIS124.8million(2008-NIS109.1million).2 Offbalancesheetcreditriskinrespectofderivativeinstruments(includingderivativeinstrumentswithnegativefairvalue)as

calculatedforthepurposesofanindividualborrower’srestrictions(beforepermitteddeductions).3 IncludesforeignbanksandbrokersintheamountofNIS14.1million(in2008-NIS22.3million).


UBank Ltd.

Reported amounts

December31,2008

Stockexchanges

NIS million

Banks

NIS million

Brokers

NIS million

Governments and

Central Banks

NIS million

Others

NIS million

Total

NIS million

B. Consolidated and Bank- credit risk in respect of derivative instruments by counter party to the contract

Positivefairvalue(gross)ofderivative instruments 24.9 316.9 314.7 - 58.6 115.1

Less off set agreements - - - - - -

Balance sheet amounts of assets that derive from derivative instruments1 24.9 16.9 14.7 - 58.6 115.1

Off balance sheet credit risk in respect of derivative instruments2 - 93.9 0.3 - 289.9 384.1

Total credit risk in respect of derivative instruments 24.9 110.8 15.0 - 348.5 499.2

December31,2008

Up to three months

NIS million

Three to twelve

monthsNIS million

One year tofiveyears

NIS million

Overfiveyears

NIS million

Total

NIS million

C. RepaymentDates-statedamounts:Consolidated and Bank year end balances


Shekel - CPI - 300.0 - - 300.0

other 106.0 - 75.6 89.7 271.3

Foreign currency contracts 2,963.5 106.1 103.4 47.5 3,220.5

Contracts in respect of shares 9,872.4 134.2 1.8 - 10,008.4

Commodities contracts and other 244.7 - - - 244.7

Total 13,186.6 540.3 180.8 137.2 14,044.9


UBank Ltd.

Note 15B: Balances and Estimates of Fair Value of Financial Instruments

Reported amounts

December31,2009

Amount in Balance Sheet Fair value

(a)

NIS million

(b)

NIS million

Total


A.Composition-consolidated:

Financial assets

Cash and deposits with banks 2,563.8 264.0 2,827.8 2,828.8

Securities1 2,498.2 - 2,498.2 2,498.2

Borrowed Securities 996.2 - 996.2 996.2

Credit to the public 358.1 1,663.7 2,021.8 2,032.3

Otherfinancialassets 821.7 26.8 848.5 848.5

Totalfinancialassets 7,238.0 1,954.5 9,192.5 9,204.0

Financial liabilities


Deposits from banks - 72.9 72.9 72.9

Deposits of the government - 4.9 4.9 5.0

Otherfinancialliabilities 1,381.0 86.1 1,467.1 1,467.1

Totalfinancialliabilities 3,336.2 5,336.5 8,672.7 8,674.9

Off-balancesheetfinancialinstruments

Amounts related to transactions the balance of which represents credit risk 0.4 - 0.4 0.4

1 Includessharesforwhichafairvalueisnotavailable,andwhicharestatedatcostintheamountofNIS6.8million(in2008-NIS9.1million).

2 Reclassifiedinaccordancewiththedirectivesofthesupervisorofbanks

Notes:a. Financial instruments whose balance in the balance sheet is an estimate of the fair value.b. Otherfinancialinstruments.


UBank Ltd.

Reported amounts

December31,2008

Amount in Balance Sheet2 Fair value

(a)

NIS million

(b)

NIS million

Total


A.Composition-consolidated:

Financial assets

Cash and deposits with banks 2,064.6 637.2 2,701.8 2,702.1

Securities1 2,930.7 - 2,930.7 2,930.7

Borrowed Securities 698.6 - 698.6 698.6

Credit to the public 919.6 1,012.0 1,931.6 1,941.3

Otherfinancialassets 173.5 34.7 208.2 208.2

Totalfinancialassets 6,787.0 1,683.9 8,470.9 8,480.9

Financial liabilities



Deposits of the government - 6.1 6.1 6.1

Otherfinancialliabilities 862.4 96.6 959.0 959.0

Totalfinancialliabilities 2,891.1 5,146.2 8,037.3 8,038.9

Off-balancesheetfinancialinstruments

Amounts related to transactions the balance of which represents credit risk 0.7 - 0.7 0.7


UBank Ltd.

Note 15B: Balances and Estimates of the Fair Value of Financial Instruments (cont’d)

B.Fairvalueoffinancialinstruments

TheNoteincludesinformationregardingtheestimateoffairvalueoffinancialinstruments.

FormostofthefinancialinstrumentsintheBank,a“marketprice”cannotbequoted,asthereisnoactivemarketinwhichtheyaretraded.Consequently,thefairvalueisestimatedbymeansofthepresentvalueoffuturecashflowsdiscountedatarateofinterestthatreflectsthelevelofriskinherentinthefinancialinstrument.

Financialinstruments(excludingderivativeandmarketablefinancialinstruments)areforashortoriginalterm and at a variable market interest rate.Inthefiguresfor2008,theamountinthebalancesheetconstitutesacloseapproximationtothefairvalue,subjecttochangesincreditriskandintheBank’smargininvariableinteresttransactions.

Estimatingofthefairvaluebymeansofanevaluationofthefuturecashflowandthedeterminationofadiscountrateissubjective.Therefore,formostfinancialinstruments,theattachedestimateoffairvalueisnotnecessarilyanindicationoftherealizablevalueofthefinancialinstrumentonbalancesheetdate.Theestimateofthefairvalueiscarriedoutatratesofinteresteffectiveatthetime,anddoesnottakeintoaccountthevolatilityofinterestrates.Underotherratesofinterest,substantiallydifferentfairvaluesmaybereceived.Theaforesaidappliesmainlytofinancialinstrumentsbearingafixedrateofinterestornotbearing interest at all.

Furthermore,whendeterminingafairvalue,commissionsreceivableorpayableinrespectofthebusinessactivityarenottakenintoaccount,noristhetaxeffectincluded.Moreover,thegapbetweentheamountinthebalancesheetandthefairvalueamountmaynotberealized,sinceinmostcasestheBankmayholdthefinancialinstrumentuntilredemption.Inviewoftheabove,itshouldbestressedthatthedatastatedinthisNotedoesnotindicatewhetherthebankinginstitutionconstitutesagoingconcern.Likewise,giventhewiderangeofvaluationtechniquesandpossibleestimatesusableinthecalculationofthefairvalue,cautionshouldbetakenwhencomparingfairvalues of different banks.

C.Methodsandprincipalassumptionsforestimatingthefairvalueoffinancialinstruments

Deposits with banks, credit to the Government and non marketable securitiesThemethodisthatofdiscountingfuturecashflowsatratesofinterestusedbytheBankforsimilartransactions on balance sheet date; shares for which a fair market value is not available are presented at their book value.


UBank Ltd.

SecuritiesAcordingtomarketvalueorfairvalue.Seenote1(J).

Credit to the publicThe fair value of the balance of credit to the public was estimated according to the method of the present valueoffuturecashflowsdiscountedatasuitablediscountrate.Thebalanceofcreditwasdividedintohomogenouscategories.Ineachcategorytheflowoffuturereceipts(capitalandinterest)wascalculated.Thesereceiptswerediscountedatarateofinterestwhichreflectsthelevelofriskinherentincredittothat category. Generally,thisrateofinterestisdeterminedaccordingtotherateatwhichsimilartransactionsweremadeon balance sheet date.

The general provision and the supplementary provision for doubtful debts in the amount of NIS 10.5 million(2008-NIS10.4million)werenotdeductedfromthecreditbalancesinthecalculationofthecashflowofthefairvalue.

Deposits from the public and banksThemethodusedisthatofdiscountingfuturecashflowsattherateofinterestatwhichtheBankacceptssimilar deposits on balance sheet date.

Derivative financial instrumentsDerivativefinancialinstrumentswhichhaveanactivemarketwerevaluedaccordingtotheirmarketvalue.Derivativefinancialinstrumentswhicharenottradedinanactivemarketwerevaluedaccordingtomodels which the Bank uses in its regular activity and which take into account the risks inherent in the financialinstrument(marketrisk,creditrisk,etc.)(SeeNote1(M)).


UBank Ltd.

Note 16: Interested and Related Parties

A. Balance - Consolidated

Interested Parties5

Shareholders

ControllingShareholders6 Others7

As at December

31 2009

NIS million

Highest balance

during the year13

NIS million

As at December

31 2009

NIS million

Highest balance

during the year13

NIS million

AssetsCash and deposits with banks 3.1 108.5 - -Credit to the public - - - -Securities - - - -Investment in equity basis investee companies - - - -Other assets 1.1 1.3 1- 1.7

LiabilitiesDeposits of the public 0.1 0.1 - -Deposits from banks 0.8 213.2 - -Other liabilities 1.2 1.3 - -

Shares(includedintheBank’sequity)11 541.7 541.7 - -Creditriskrelatedtooff-balancesheetfinancialinstruments12 486.5 537.4 158.5 196.7

Interested Parties

Shareholders5

ControllingShareholders6 Others7

As at December

31 2008

NIS million

Highest balance

during the year13

NIS million

As at December

31 2008

NIS million

Highest balance

during the year13

NIS million

AssetsCash and deposits with banks 109.1 873.5 - 480.0Credit to the public - - - -Securities - - - -Investment in equity basis investee companies - - - -Other assets - 0.7 - 0.2

LiabilitiesDeposits of the public 0.1 0.2 - -Deposits from banks 105.1 454.4 - 150.0Other liabilities 1- 3.1 - -

Shares(includedintheBank’sequity)11 451.6 451.6 - -Creditriskrelatedtooff-balancesheetfinancialinstruments12 347.2 477.7 186.3 202.8

1 Less that NIS 0.1 million.2 UBankInvestmentsandHoldingLtd.gavebankguaranteestoManiffinancialServicesseenote5(b). AdditionalguaranteesgiventoManifintheamountofNIS4.4millionwerecancelledandareshowninthe“Credittothe

Public”item(2008-NIS4.5million).TheBankmadeaprovisionfordoubtfuldebtsinrespectoftheseguaranteesinitsfinancialreportsintheamountforNIS2.7million(2008-NIS2.7million).

Comment:CommentstothetableSeepage223.


UBank Ltd.

Reported amounts

December31,2009

Interested Parties5 Other related parties held by the Bank

Directors andGeneral

Manager8 Others9Equity basis

investees Others10

As at December

31 2009

NIS million

Highest balance

during the year13

NIS million

As at December

31 2009

NIS million

Highest balance

during the year13

NIS million

As at December

31 2009

NIS million

Highest balance

during the year13

NIS million

As at December

31 2009

NIS million

Highest balance

during the year13

NIS million

- - 22.9 32.6 - - - -1- 0.1 - - 21.8 21.8 - -- - - - - - 5.0 7.0- - - - 1- 0.7 - -- - 0.8 1.1 6.4 6.4 - -

0.5 1.2 2.4 54.8 - - - -- - 1- 1- - - - -- - 7.1 7.1 - - - -

- - - - - - - -0.2 2.7 125.7 151.9 15.9 15.9 - -

December31,2008

Interested Parties5 Other related parties held by the Bank

Directors andGeneral Manager8

Others9Equity basis

investees Others10

As at December

31 2008

NIS million

Highest balance

during the year13

NIS million

As at December

31 2008

NIS million

Highest balance

during the year13

NIS million

As at December

31 2008

NIS million

Highest balance

during the year13

NIS million

As at December

31 2008

NIS million

Highest balance

during the year13

NIS million

- - 22.8 25.6 - - - -0.8 1.7 - - 21.8 21.9 - 1-

- - - - - - 6.6 7.4- - - - 0.8 0.8 - -- - 0.7 0.7 4.6 4.6 - -

0.5 2.1 7.4 16.4 - - - -- - 3.2 3.2 - - - -- - 3.7 6.2 - - - -

- - - - - - - -2.0 2.0 138.1 149.7 23.0 23.0 - -


UBank Ltd.

Note 16: Interested and Related Parties (cont’d)

B. Summary business results with interested and related parties - Consolidated

Reported amounts


Interested Parties5Related parties held

by the bank

Shareholders

Controlling6

shareholders

NISmillion

Others7

NIS million

Directors8 and General

ManagerNIS

million

Others9

NIS million

Equity basis

investeesNIS

million

Others10

NIS million

Resultsoffinancingoperationsbefore provision for doubtful debts2 (3.2) 1- 1- 0.7 2.2 -

Provision for doubtful debts - - - - - -

Operating and other income 1.3 - - 0.9 - -

Operating and other expenses3 (3.9) - (4.9) (21.7) - -

Total (5.8) 1- (4.9) (20.1) 2.2 -

Reported amounts


Interested Parties5Related parties held

by the bank

Shareholders

Controlling6

shareholders

NISmillion

Others7

NIS million

Directors8 and General

ManagerNIS

million

Others9

NIS million

Equity basis

investeesNIS

million

Others10

NIS million

Resultsoffinancingoperationsbefore provision for doubtful debts2 12.2 2.5 1- 1.5 2.5 -

Provision for doubtful debts - - - - (0.9) -

Operating and other income 1.0 - 1- 1.4 - -

Operating and other expenses3 (3.7) - (4.1) (16.9) - -

Total 9.5 2.5 (4.1) (14.0) 3.4 -

1 Less than NIS 0.1 million.2 See D.below.3 See C.below


UBank Ltd.

C.Benefitstointerestedparties

Reported amounts


Controllingshareholders6


Totalbenefits

NIS million

Number of recipients

Totalbenefits4

NIS million


Interested parties employed bythe Bank or on its behalf - - 2.7 1

Directors not employed bythe Bank or on its behalf - - 2.2 7


Controllingshareholders6


Totalbenefits

NIS million


Totalbenefits4

NIS million


Interested parties employed bythe Bank or on its behalf - - 2.5 1

Directors not employed bythe Bank or on its behalf - - 1.6 7

4 Not including vat on salaries


UBank Ltd.

Note 16: Interested and Related Parties (cont’d)Reported amounts

FortheyearendedDecember31,

2009 2008 2007

Consolidated

NIS million

Including:Equity basis

investeesNIS million

Consolidated

NIS million



Consolidated

NIS million



D.Resultsoffinancingoperations(beforeprovisionfordoubtfuldebts) with interested and related parties

In respect of assetsCredit to the public - - 1- - 1- -Deposits with banks (2.0) - 18.5 - 0.6 -

In respect of liabilitiesDeposits from the public 1- - 1- - 1- -Deposits from banks (0.5) - (2.3) - (4.0) -

OtherCommissionsonfinancingbusiness 1- - 1- - 0.2 -Otherfinancingincome 2.2 2.2 2.5 2.5 0.2 0.2

Totalresultsoffinancingoperationsbefore provision for doubtful debts (0.3) 2.2 18.7 2.5 (3.0) 0.2


UBank Ltd.

E. ChangeofControloftheBank:

OnJuly29,2004anagreement(hereinafterreferredtoas“theagreement”)wassignedbetweenInvestec(Israel)B.V.andTheFirstInternationalBankofIsraelLtd.(hereinafterreferredtoas“FIBI”),accordingtowhichFIBIwouldpurchasefromInvestec(Israel)B.V.allitsholdingsinthesharesoftheBank(hereinafterreferredtoas“thetransaction”).

OnDecember22,2004thetransactionwascompletedandfullownershipoftheBank(100%)passed to FIBI.

Withinthecontextofcompletingthetransaction,InvestecBank(UK)Ltd.,thecontrollingshareholderofInvestec(Israel)B.V.,gavetheBankcollateralandindemnitiesinrespectofanumberofdebtsandclaims,intheamountofapprox.NIS94.5million,whicharelinkedtothetermsofthedebtsandtheclaims.Theamountofthecollateral,onDecember31,2009,isapprox. NIS 18.1 million.

F. SeedetailsinNote15(c)(10)regardingcommitmentsbetweentheBankandtheFIBIgroup.

G. Agreementforthetransferoffactoringoperations:

OnJanuary25,2007,anagreementwassignedbetweentheBankandOtsarHahayalBankLtd.(hereinafter :“OtsarHahayal”)(fullyownedbyacontrollingshareholderoftheBank)forthetransferoftheBank’soperationsintheareaoffactoringservicestoOtsarHahayal,includingtransferring the expertise acquired by U-Bank in the area.

Pursuanttotheagreement,fromFebruary1,2007,theBankgraduallytransferreditscustomersforfactoringservicesinnewtransactionstoOtsarHahayal(hereinafter :“existingcustomers”)forpurposesofreceivingservices.Furthermore,theBankshallbeentitledtorefertoOtsarHahayalthosenewcustomersrequestingtoreceivefactoringservicesfromitinthefuture(hereinafter :“newcustomers”).Inconsiderationforthetransferoftheoperationsasaforesaid,theBankisentitledtoannualpaymentsthatshallbederivedfromOtsarHahayal’sprofitsfromfactoringoperationsofexistingcustomersandnewcustomers,afteroffsettingprovisionsfordoubtfuldebtsforexistingcustomersuptotheamountofthetotalprofits,inaccordancewiththedefinitionsandformulasforcalculationstipulatedintheagreement.Thetermoftheagreementhasbeenfixedforeightyears.

Sincetheagreementcameintoforce,theimpactoftheresultsoftheBank’soperationshasnotbeen material.

H. The Bank and its consolidated subsidiaries conduct business with interested parties. These transactions are made in the ordinary course of business and under terms similar to those of transactions with non-related parties.

5 Interestedparty-asdefinedintheSecuritiesRegulations.Relatedparty-asdefinedinOpinion29oftheInstituteofCertifiedPublic Accountant in Israel - that is not an interested party.

6 Controllingowner:asdefinedintheSecuritiesRegulations.7 Whoeverholds5%ormoreofthebankingcorporationissuedsharecapital,oritsvotingrights,Whoeverisauthorizedto

appoint one or more of the corporation directors or its General Manager.8 Including spouses and their minors.9 Acorporation,inwhichaninterestedpartyholds25%ormoreoftheissuedsharecapitaloritsvotingrights,orisauthorizedto

appoint 25% or more of the directors.10 Acorporationinwhichabankingcorporationholds10%ormoreoftheissuedsharecapitaloritsvotingrights,orisauthorized

toappoint10%ormoreofthedirectors,orisauthorizedtoappointtheGeneralManager.Anothercorporationinwhicharelatedpartyholds25%ormoreoftheissuedsharecapitalorvotingrights,ortheauthoritytoappointdirectors.

11 Interested and related parties holdings’ in the share capital of the banking corporation.12 Creditrisksofoff-balance-sheetfinancialinstruments,ascalculatedforthepurposeofborrower’slimitations.13 Based on balances at the end of each month.


UBank Ltd.

Note 17: Profit from Financing Operations before Provision for Doubtful DebtsReported amounts


2009 2008 2007

NIS million NIS million NIS million

Composition-consolidated:

A. In respect of assets1

Credit to the public 17.8 55.8 89.6Cash on hand and deposits with Bank of Israel 21.1 10.5 (1.3)Borrowed securities 6.2 15.7 12.1Deposits with banks 61.2 23.0 (33.5)Bonds5 50.5 69.1 106.6

B. In respect of liabilities1

Deposits from the public (19.8) (45.5) (72.8)Deposits from Bank of Israel - (0.7) (5.6)Deposits from banks (0.4) (5.6) (3.9)

C. In respect of derivative financial instrumentsand hedging activitiesIncome(expenses)fromALMderivativeinstruments,net2 (45.8) (29.4) (25.3)Income (expenses)fromotherderivativeinstruments,net (0.8) 411.2 29.9Non effective component of the hedging relationships9

(seeFbelow) 0.6 4(0.4) -

D. OtherCommissionsfromfinancingbusiness 0.6 1.4 2.4Otherfinancingincome3 69.3 40.0 24.8Totalincomefromfinancingoperationsbeforeprovisionfor doubtful debts 160.4 145.1 123.0

Includes:NetLinkagedifferences 54.2 28.0 8.8

1 Including the effective component of the hedging relationships.2 Derivativeinstrumentswhichconstitutepartofthebankassetsandliabilitiesmanagement,thatwerenotdesignatedashedging

relationships.3 IncludingNIS4.1millionwithregardstointerestfromloanlossesandnonincomebearingdebt(2008-NIS2.7million,2007-

NIS1.7million).4 Reclassified.5 IncludinginterestandlinkagedifferencesfromassetsbackedsecuritiesfortheyearendedDecember31,2009intheamountof

NIS(0.1)million(2008-NIS(0.4)million,2007-NIS(0.7)million).


UBank Ltd.

Reported amounts


2009 2008 2007


E. Results of investment activity in bonds:Financingincomefrombonds,onaccrualbasis:Available for sale bonds 53.3 68.5 90.9Trading bonds (2.8) 0.6 15.7Totalincludedinprofitfromfinancingactivitiesin respect of assets 50.5 69.1 106.6

Profitsfromsaleofavailableforsalebonds 47.3 26.6 15.5Losses from sale of available for sale bonds8 (16.5) (16.6) (3.5)Realizedandunrealizedprofitsonadjustmentstofairvalueoftradingbonds,net6 31.5 24.0 10.6

Totalincludedinotherfinancingincome 62.3 34.0 22.6

Total from investments in bonds 112.8 103.1 129.2

F. Ineffective part of hedge ratiosFair value hedgingIneffectiveness of the hedges 0.6 (0.4) -

G. Details of net influence of hedging derivative instruments on profit from financing operations

Financingincome(expenses)inrespectofassets(paragraphA)7 (7.8) (12.4) (3.4)

6 IncludingpartoftheprofitsandlossesrelatedtotradingbondswhicharestillheldonthebalancesheetdateintheamountofNIS(6.9)million(2008-NIS(0.9)million,2007-NIS1.2million).

7 Details of effect of hedging derivative instruments on sub-paragraphs A and B above.8 Including provisions for decrease in value.9 Less off an effective component of the hedging relationships.


UBank Ltd.



For the year ended December 31 For the year ended December 31

2009 2008 2007 2009 2008 2007

NIS million NIS million NIS million NIS million NIS million NIS million

Note 18: Operating Commissions

Ledger fees 5.8 6.0 5.7 5.8 6.0 5.7Credit cards 1.0 0.8 0.7 1.0 0.8 0.7Activity in securities and certain derivative instruments 53.5 45.7 49.0 53.5 45.3 48.8Commission on distribution offinancialproducts 0.4 0.4 0.6 0.4 0.4 0.6Management,operations,andtrusteeship for institutional bodies 37.5 42.2 61.8 - - -Conversion differentials 20.1 24.3 21.4 20.1 24.3 21.4Foreign trade transactions 0.4 1.0 1.4 0.4 1.0 1.4Net income from servicing loan portfolios 0.5 0.5 0.5 0.5 0.5 0.5Handling credit 0.6 - - 0.6 - -Other 1.0 0.9 1.1 - - -

Total operating commissions 120.8 1,3121.8 1,3142.2 82.3 1,378.3 1,379.1



2009 2008 2007 2009 2008 2007


Note 19: Profits (losses) on Investments in Shares, Net

Provision for loss from decrease in value of available for sale shares (3.8) (2.7) (0.3) (1.2) (0.2) -Realizedandunrealizedprofitson trading shares2 1.0 0.7 0.3 0.9 0.8 0.5Dividend from available for sale shares 0.1 2.9 2.7 0.1 2.5 2.3

Totalprofits(losses)oninvestmentinshares,net (2.7) 0.9 2.7 (0.2) 3.1 2.8

1 Reclassified,inaccordancewiththedirectivesoftheSupervisorofBanks. BecauseofthechangeinthefeestructureandthecancelationofProperConductofBankingBusinessDirective414(Tableof

BankFees)andtheamendmentofProperConductofBankingBusinessDirective415concerningproceduresonthesubjectoffees,thereferencetothetypeofclassificationandreportingofoperatingcommissionsintheFinancialStatementshasbeenamended.

2 Mutual funds and managers of long-term savings.3 Reclassified.


UBank Ltd.




2009 2008 2007 2009 2008 2007


Note 20: Other Income

Management fees from provident funds - - 0.3 - - -Management fees from other related companies - - - 2.8 2.8 2.6Rental income 0.9 1.2 1.2 0.3 0.3 0.4Profitfromseverancepaymentfund 4.9 - 1.0 4.7 - 1.0Other 0.1 0.5 0.4 0.2 0.5 0.1

Total other income 5.9 11.7 12.9 8.0 13.6 14.1



2009 2008 2007 2009 2008 2007


Note 21: Salaries and Related Expenses

Salaries 45.0 51.1 45.8 41.1 46.0 40.6Bonus 10.2 5.9 10.7 9.4 5.4 9.1Severancepay,contributionstoprovidentfund,vacationpayand further education fund 9.5 11.9 6.4 8.0 10.7 5.5Reserve completion due to change in salary during the year 0.3 0.1 1.1 0.3 0.1 0.9NationalInsurance,VATonsalaries and tax deductions 10.8 10.3 9.0 9.7 9.1 7.7

Total salaries and related expenses 75.8 79.3 73.0 68.5 71.3 63.8


UBank Ltd.

Note 22: Other ExpensesReported amounts



2009 2008 2007 2009 2008 2007


Marketing and advertising6.3 7.8 6.1 5.8 6.2 4.1

Communications10.5 9.8 9.9 10.2 9.5 9.6

Computer22.9 10.2 8.7 22.9 10.2 9.1

Officeexpenses2.2 2.3 2.4 2.2 2.2 2.3

Insurance0.7 0.5 1.2 0.6 0.4 1.1

Professional fees13.0 17.5 16.6 7.6 11.4 10.9

Directors’ fees0.9 0.9 1.0 0.6 0.5 0.6

Staff training0.6 0.7 0.8 0.6 0.6 0.8

Commissions17.3 116.7 111.1 16.0 114.1 16.9

Vehicle and travel expenses0.7 0.6 0.6 0.7 0.6 0.6

Fees and memberships1.1 1.8 1.4 0.9 0.3 0.3

Other4.6 2.6 11.8 3.8 2.4 11.4

Total other expenses80.8 171.4 61.6 71.9 158.4 47.7

1 Reclassified.


UBank Ltd.

Note 23: Provision for Taxes on Operating ProfitReported amounts



2009 2008 2007 2009 2008 2007


A.Current taxes in respectof current year 45.1 37.4 42.0 36.4 26.8 26.7Current taxes in respectof previous years 1.0 1.9 (0.5) 1.0 1.9 (0.4)Total current taxes 46.1 39.3 41.5 37.4 28.7 26.3

Inaddition(deduction):Deferred taxes in respect of current year (1.5) 1.8 0.9 (1.3) 2.6 0.9Deferred taxes in respectof previous years (1.2) (1.7) (0.9) (1.2) (1.8) (0.9)Total deferred taxes (2.7) 0.1 1- (2.5) 0.8 1-Total provision for taxes 43.4 39.4 41.5 34.9 29.5 26.3

B.Reconciliationbetweenthetheoreticaltaxcomputedontheoperatingprofit,usingthestatutorytaxrate applying to banks in Israel and the adjusted tax provision appearing in the consolidated statement of profitandloss:

2009 2008 2007

Statutory tax rate applying to a banking institution in Israel 36.21% 36.80% 38.53%


Theoretical tax at the statutory rate 39.8 38.2 45.7Additionaltax(taxsaving)inrespectof:Addiction(deduction)inrespectofinflation - - (4.3)Non-deductible expenses 0.3 0.6 0.3General and supplementary provision 0.1 (0.1) (0.2)Differences in adjustment of depreciationandamortization 0.3 (0.5) 1-Exempt income or income taxed atlower tax rates (0.4) (1.2) (1.1)ProfittaxonVATonsalaries,net - 0.4 0.8Taxes in respect of previous years (0.2) 0.2 (1.4)Timing differences in respect of whichdeferred taxes were not recorded 0.4 0.1 1-Change in balance of deferred tax assets(taxprovision)duetochangeintaxrate 0.5 0.1 0.3Other 2.6 1.6 1.4Provisionfortaxonprofitfromordinary operations 43.4 39.4 41.5



UBank Ltd.

Note 23: Provision for Taxes on Operating Income (cont’d)

C. 1. Final tax assessments have been issued to the Bank for all tax years up to and including the 2006taxyear,Consolidatedcompanieshavebeenissuedfinalassessmentsfortheyears2005–2006,respectively

2.DeductionassessmentshavebeenissuedtotheBankfortheyears2004-2006,forwhichtheBankappealed.TheBankassessesthattheprovisionsinthefinancialstatementsaresuitable.

D. The balance of accumulated losses for which no deferred tax assets were recorded in the consolidatedstatementsisintheamountofNIS1.3million(in2008NIS0.6million).

E. Deferredtaxassetsandliabilitiesintheconsolidatedstatementswererecordedinrespectof:

Reported amounts

Deferred tax assets Deferred tax liabilities Average tax rate

December 31 December 31 December 31

2009 2008 2009 2008 2009 2008


Liability in respect of employee-employer relations 1- 1.6 - - 29.00 35.07Provision for vacation 1.3 1.2 - - 35.34 35.93SpecificProvisionfordoubtfuldebts 1- 1- - - 35.34 35.93Adjustment of securities 3.9 3.5 - 1(-) 34.20 35.06Unpaid provisions 1.8 1.7 - - 35.34 35.93Depreciable non-monetary (1.0) - - (0.9) 29.00 35.06Other non-monetary itemes 1.0 0.7 - - 18.00 25.00Assets 7.0 8.7 - (0.9)

Reported amounts

December 31

2009 2008


Deferredtaxesincludedintheconsolidatedbalancesheet:In“Otherassets” 7.0 8.7In“Otherliabilities” - (0.9)

Deferredtaxassets,net 7.0 7.8

F. 1.Realizationofthedeferredtaxesisbasedonaforecastoftheexistenceofincometaxableinthefuture,andiscalculatedaccordingtoataxrateof18%-35.34%(in2008-25%-35.93%).

2.ThechangeinthebalanceofreceivabledeferredtaxesintheamountofNIS3.5million(in

2008-NIS(3.7)million),inrespectofanadjustmentinpresentingavailableforsalesecuritiesaccordingtofairvalue,isincludedinthestatementofchangesinshareholders’equity.



UBank Ltd.

G. Reduction in Tax rates

OnJuly25,2005,theIncomeTaxOrdinance,2005(AmendmentNo.147),(hereinafterreferredtoas“theAmendment”)waspassedintheKnesset.TheAmendmentprovides,amongothers,fora gradual reduction of the rate of Companies Tax to 25% for the tax year 2010 and thereafter.

On14July2009,theKnessetapprovedtheImprovedEconomicEfficiencyLaw(StatutoryAmendmentsforImplementationoftheEconomicPlanfor2009and2010),2009,which,amongothers,graduallyreducestherateofCompaniesTaxto18%fortheyear2016andthereafter.

Inaddition,onJuly1,2009,theValueAddedTaxOrder(TaxRateforNon-ProfitOrganizationsandFinancialInstitutions)(ProvisionalOrder),2009waspublishedintheOfficialGazette(Reshumot),andanamendmenttotheorderwaspublishedonDecember31,2009.Undertheamendedorder,theratesofsalarytaxandprofittaxapplyingtofinancialinstitutionsfortheperiodJuly1,2009toJanuary1,2010,willbe16.5%.FromJanuary1,2010toDecember31,2010,theratesofsalarytaxandprofittaxapplyingtofinancialinstitutionswillbe16%,insteadof15.5%,whichwasineffectuntilJune30,2009.Accordingly,thenewrateofsalarytaxwillbeattheratesof16.5%and16%andwillapplytothetaxyears2009and2010respectively,forsalariespaidforworkcommencinginJuly2009andonwards.Thenewrateofprofittaxwillapplyinrelationtohalfoftheprofitfor2009.Inviewofthis,in2009and2010therateofprofittaxwill be 16%.

AsaresultoftheaboveAmendments,thestatutoryratesoftaxapplicabletobankingcorporations(companiesdefinedasafinancialinstitutionundertheValueAddedTaxLaw)werechanged,andwillbeatthefollowingrates:forthetaxyear2009-

36.21%,forthetaxyear2010-35.34%,forthetaxyear2011-34.20%,forthetaxyear2012-33.33%,forthetaxyear2013-32.47%,forthetaxyear2014-31.60%,forthetaxyear2015-30.74%,andfrom2016andthereafter,thetaxratewillbe29.0%.

TheeffectofthechangesinsalarytaxasofJuly1,2009ledtoanincreaseinsalaryexpensesfor2009inthesumofNIS0.4million.Inaddition,theeffectofchangesintaxratesledtoincreasedtax expenses on income in 2009 in the sum of NIS 0.5 million.


UBank Ltd.

Note 24: Profit from Extraordinary Operations after taxReported amounts



2009 2008 2007 2009 2008 2007


Sale of Provident Funds operations3 - - 2.4 - - -Taxexpensesonprofitfromextraordinary operations - - 0.9 - - -Profitfromextraordinaryoperations after tax - - 1.5 - - -TheBank’sshareinprofitfromextraordinary operations after tax of investee company - - - - - 1.5Profitfromextraordinaryoperations after tax - - 1.5 - - 1.5

1 On 13 November 2007 the Bank sold the provident funds activity by way of transferring their management to a provident fund managementcompanycontrolledbyYashirI.D.IInsuranceCompanyLtd.

TheprofitfromthesaleafterdeductingalltaxesincurredamountedtoapproxNIS1.5million.


UBank Ltd.

Note 25: Earnings per ShareReported amounts

2009 2008 2007

NISthousand

NISthousand

NISthousand

Theamountofprofitandnumberofsharesusedincalculatingthebasicanddilutedearningspershareareasfollows:

Netprofitforcalculatingearningpershare 65,600 65,300 78,700

Weighted average of amount of ordinary shares used in calculation ofthebasicprofit(inthousands) 3,123.9 3,123.9 3,123.9


UBank Ltd.

Note 26: Operational SegmentsReported amounts

PrivateBanking

NIS million

CorporateBanking

NIS million

A.Consolidated:Profit(loss)fromfinancingoperationsbeforeprovisionfordoubtfuldebts:From external entities 12.4 7.0Inter-segment 28.6 21.2Operatingandotherincome:From external entities 41.7 75.8Inter-segment (2.3) (1.1)Total income 80.4 102.9Provision for doubtful debts (0.3) (0.2)Operatingandotherexpenses,(includingdepreciation):To external entities 70.1 43.3Inter-segment 17.3 12.6Profit(loss)from ordinary operations before taxes (6.7) 47.2Provisionfortaxesonprofitfromordinaryoperations (2.4) 17.1Profit(loss) from ordinary operations after taxes (4.3) 30.1Bank’s share in operating losses of equity-basis companies - -Netprofit(loss)from ordinary operations (4.3) 30.1Profit(loss) from extraordinary operations after tax - -Netprofit(loss) (4.3) 30.1

Netreturnonequity(inpercentages) (6.0) 41.6

Average balance of assets 714.0 1,080.0Ofwhich:Investmentsinequity-basiscompanies - -Average balance of liabilities 2,704.5 3,883.6Average balance of risk assets 466.0 504.3Average balance of mutual fund assets 651.9 -Average balance of other assets under management 596.8 -

Margin from credit activity 13.6 1.8Margin from deposits activity 21.9 23.4Other 5.5 3.0Totalprofitfromfinancingoperationsbeforeprovisionfor doubtful debts 41.0 28.2


UBank Ltd.


FinancialSegment

NIS million

Amounts not allocated and adjustments

NIS million

TotalConsolidated

NIS million

143.5 (2.5) 160.4(53.7) 3.9 -

2.8 3.7 124.03.4 - -

96.0 5.1 284.4- (3.4) (3.9)

21.5 43.6 178.59.3 (39.2) -

65.2 4.1 109.823.6 5.1 43.441.6 (1.0) 66.4(0.8) - (0.8)40.8 (1.0) 65.6

- - -40.8 (1.0) 65.6

36.6 - -

5,611.7 28.0 7,433.78.8 - 8.8

152.5 168.6 6,909.2902.2 25.2 1,897.7

- - 651.9- - 596.8

- 0.3 15.7- 1.1 46.4

89.8 - 98.3

89.8 1.4 160.4


UBank Ltd.

Note 26: Operational Segments (cont’d)Reported amounts

PrivateBanking

NIS million

CorporateBanking

NIS million

A.Consolidated:Profit(loss)fromfinancingoperationsbeforeprovisionfordoubtfuldebts:From external entities (29.2) (44.5)Inter-segment 68.8 76.6Operatingandotherincome:From external entities 43.1 65.4Inter-segment (2.2) (0.3)Total income 80.5 97.2Provision for doubtful debts (2.5) -Operatingandotherexpenses,(includingdepreciation):To external entities 68.1 37.2Inter-segment 15.4 18.3Profit(loss) from ordinary operations before taxes (0.5) 41.7Provisionfortaxesonprofitfromordinaryoperations (0.2) 15.4Profit(loss) from ordinary operations after taxes (0.3) 26.3Bank’s share in operating losses of equity-basis companies - -Netprofit(loss)from ordinary operations (0.3) 26.3Profit(loss) from extraordinary operations after tax - -Netprofit(loss) (0.3) 26.3

Netreturnonequity(inpercentages) (0.5) 28.3

Average balance of assets 630.3 1,287.7Ofwhich:Investmentsinequity-basiscompanies - -Average balance of liabilities 2,728.6 3,529.0Average balance of risk assets 351.1 677.9Average balance of mutual fund assets 919.2 -Average balance of other assets under management 595.1 -



UBank Ltd.


FinancialSegment

NIS million


NIS million

TotalConsolidated

NIS million

A. PfF 222.3 (3.5) 145.1I 1(150.3) 4.9 -O:F 13.8 2.1 1124.4I 2.5 - -T 188.3 3.5 269.5P (0.9) (1.0) (4.4)O:T 19.2 45.6 1170.1I 9.0 (42.7) -P 161.0 1.6 103.8P 122.4 1.8 39.4P 138.6 (0.2) 64.4B 0.9 - 0.9N 139.5 (0.2) 65.3P - - -N 139.5 (0.2) 65.3

N 131.9

As 4,843.4 45.4 6,806.8Of 10.0 - 10.0A 65.8 66.0 6,389.4A 930.8 33.4 1,993.2A - - 919.2A - - 595.1

a - 0.9 10.8a - 0.9 46.2a 172.0 (0.4) 88.1aa 172.0 1.4 145.1


UBank Ltd.

Note 26: Operational Segments (Cont’d)Reported amounts

PrivateBanking

NIS million

CommercialBanking

NIS million

A.Consolidated:Profit(loss)fromfinancingoperationsbeforeprovisionfordoubtfuldebts:From external entities (55.3) 0.4Inter-segment 197.9 5.2Operatingandotherincome:From external entities 51.9 1.1Inter-segment (2.2) (0.1)Total income 192.3 6.6Provision for doubtful debts 0.7 (3.0)Operatingandotherexpenses,(includingdepreciation):To external entities 58.8 2.2Inter-segment 13.9 1.7Profitfromordinaryoperationsbeforetaxes 118.9 5.7Provisionfortaxesonprofitfromordinaryoperations 17.3 2.2Profitfromordinaryoperationsaftertaxes 111.6 3.5Bank’s share in operating losses of equity-basis companies - -Netprofitfromordinaryoperations 111.6 3.5Profitfrom extraordinary operations after tax - -Netprofit 111.6 3.5

Netreturnonequity(inpercentages) 117.1 9.5

Average balance of assets 598.5 114.9Ofwhich:Investmentsinequity-basiscompanies - -Average balance of liabilities 2,773.1 238.5Average balance of risk assets 468.2 307.7Average balance of mutual fund assets 1,150.8 -Average balance of other assets under management 735.2 -




UBank Ltd.


CorporateBanking1

NIS million

FinancialSegment

NIS million


NIS million

TotalConsolidated

NIS million

A. PfF (39.7) 217.6 - 123.0I 177.0 1(180.1) - -O:F 81.0 12.3 1.5 147.8I (0.8) 3.1 - -T 1117.5 152.9 1.5 270.8P (0.1) 3.7 - 1.3O:T 36.3 12.1 41.4 150.8I 16.7 7.6 (39.9) -P 164.6 129.5 - 118.7P 124.9 111.3 (4.2) 41.5P 139.7 118.2 4.2 77.2B - 2- - 2-N 139.7 118.2 4.2 77.2P - 1.5 - 1.5N 139.7 119.7 4.2 78.7

N 151.5 118.0

As 1,325.5 4,994.4 13.1 7,046.4Of - 2- - 2-A 3,375.0 249.4 - 6,636.0A 543.5 845.8 23.9 2,189.1A - - - 1,150.8A - - - 735.2

a 12.0 - - 113.4a 123.0 - - 152.1a 12.3 137.5 - 157.5aa 137.3 137.5 - 123.0


UBank Ltd.

Note 26: Operational Segments (Cont’d)

b. Additionalinformation:

1. TheBankoperatestheEVA(EconomicValueAdded)model,whichisanacceptedmodelaroundthe world for the purposes of measuring the contribution of each unit to the Bank’s overall profitability.

Income,expensesandcapitalareallocatedtoeachoperationalsegmentinimplementingthemodel,asfollows:

Thesegments’incomefromexternalsources:

- thePrivateBankingsegment’sincomederivesfromfinancingprofitandoperatingincomederiving from private customers attributed to this segment.

Likewise,thesegment’sincomeincludesincomefrommanagementofinvestmentportfoliosandinvestmentcounseling,incomefrommanagingtheBank’smutualfundsandtheincomefrom public and private trust services.

- theCommercialBankingfinancesegment’sincomederivesfromfinancingprofitandoperatingincomefromcommercialcustomersattributedtothissector,(mainlyfactoringcustomers).

- theCorporateBankingsegment’sincomeisfromfinancingprofitandoperatingincomederivingfromcustomerswhosemainactivityisinthecapitalmarket.Furthermore,thedivision’s income includes the income from operations for mutual funds and trust services for mutual funds.

- theFinancialsegment’sincomeisprincipallyfromfinancingprofitthatderivesfrommanagingthe sources and applications of the Bank in the various linkage sectors and from operations intheBank’ssecuritiesforitself;furthermore,thedivision’sincomeincludesincomefromthedealing room’s operations in managing the Bank’s basis and interest exposures.

Inter-SegmentIncome:

- Inter-segmentprofitfromfinancingoperationsbeforeprovisionfordoubtfuldebts: Thefinancingincome/expensesarefirstattributedtothesegmenttowhichthecustomer

belongs. Thereafterthefinancialsegment,whichisresponsibleforthemanagementofthesources

andapplicationsoftheBank,debits/creditstheothersegmentswiththecostofraisingthesources,calculatedinaccordancewiththerelevantlinkagesectorsandaverageduration.

- Inter-segmentoperatingandotherincome: Operatingandotherincomeisfirstattributedtothesegmenttowhichthecustomer

belongs. Thereafteraproportionatepartofthatincome(aswasdeterminedforeachtypeofincome)

is transferred to other segments that also provide a service to the same customer.

Thesegment’sexpenses:

Salary and related expenses were allocated between the segments according to actual expenses. Other major expenses were allocated in accordance with the number of employees or a

weighted number of employees and capital or the relative area of the building used by the segment,asthecasemaybe.Depreciationexpensesarespecificallyallocatedtothesegmentsaccordingtotheassetstheyuse.Theprovisionfordoubtfuldebtswassplitspecificallyaccordingto each sector’s customers.


UBank Ltd.

The cost of central services and management are charged to the operational segments reporting aspartoftheapplicationofthemodel.(Thecentralservicesincludeallthedepartmentsinthecentralservicesdivisionandthechiefaccountingdivision,theBank’ssecretaryandalsotheinternalauditandinformationsystemsdepartments).

Net return on capital is calculated on the average capital that was allocated to the reporting segments,atarateof12%ofeachsegment’sriskassets.Wherethereportingsegmentdoesnothaveriskassetsallocatedtoitforthepurposesofitsoperations,thecapitalallocatedtothesegmentiscalculatedaccordingtoacoefficientofthesegment’sexpenses.

In the Financial segment the return that is taken for the purposes of calculating net return on capital is after neutralising a risk free return on the Bank’s non-active capital.

2. Theaveragebalanceofassetsinthe“Amountsnotallocatedandadjustments”columnincludesthe average balance of buildings and equipment and other assets.

Theaveragebalanceofliabilitiesinthe“Amountsnotallocatedandadjustments”columnincludesthe average balance of other liabilities.

3. TheProfit(loss)inthe“Amountsnotallocatedandadjustments”columnprimarilyincludes:- Net rent income from external entities.- Balanceoftaxexpenses,aftertaxexpenseswereattributedtothereportingsegmentsata

theoreticaltaxrateof36.21%(in2008-36.8%).

4. Allocationbetweenoperationalsegmentsisbasedontypesofcustomersanddefinedareasofactivity.

It is derived from the customer-focused activity strategy employed by the Bank in recent years. As there are no uniform criteria in the banking system for assigning customers to the above operationalsegments,eachbankassignsitscustomerstooperationalsegmentswhichcorrespondtoitsmanagementconceptandbusinessstrategy.Inthelightofthis,itisimpracticaltorefertothe Bank’s share of the various operational segments in the banking system.

Data of the results of the segments are presented in accordance with the Directives of the SupervisorofBanks-“PrincipalOperationalSegments”.IntheframeworkofdrawingupthisNote,amongotherthings,reconciliationismadebetweenmanagerialreportsrelatingtotheaboveoperationalsegments,basedpartlyonmanagement’sassessmentoftheoperationalsegments,andreportinginaccordancewithacceptedaccountingprinciples.


UBank Ltd.

December 31

2009 2008


Note 27: Condensed Financial Dataof the Bank in Historical Values

Total assets 9,213.4 18,707.5Total liabilities 8,676.6 18,261.0Shareholders’ equity 536.8 446.5Netprofit 65.8 66.5

Note 28: Updates in Legislation

Updates in Legislation and Rulings affecting the Banking System in 2009

Overthelastyear,therewerechangesandinitiativesforchangesinlegislation,togetherwithchangesinregulations,whichhaveimplicationsonthebankingsystemandontheBank,assetoutbelow:

JointInvestmentTrustLaw(AmendmentNo.14),2009The draft law was published on 16.2.10.The main amendment is a change to section 69 in the Joint Investment Trust Law.Themainchangesareasfollows:anobligationwasimposedonthefundmanagertoholdatenderforbrokeragecommissionswitha“tradingcompany”(amemberoftheStockExchange);theBoardofDirectorsofthefundmanagermustfixaprocedureforholdingatenderwhichwillbeapprovedbythetrustee; entering an undertaking with a stock exchange member overseas can be made without a tender (withinthetermsofthelaw);anundertakingbyafundmanagerunderabrokerageagreementwithastock exchange member controlling the fund manager or the trustee of the fund can be made without a tendersubjecttothefollowingconditions:1. The stock exchange member must meet the minimum conditions that were set out in the tender.2. The commission for any kind of a deal will not exceed the commission that the winner of the


manager.The fund manager will not make payments from the fund’s assets to stock exchange members related to thefundmanagerortrustee,foraperiodof12monthscommencingonthedatedecidedbythefundmanagerintheprospectus,fortheexecutionoftransactionsinthetrust’sassets,inanamountexceeding20%ofallcommissions(ofalltypes)thatwerepaidfromthefund’sassetsinthatyear.The amendment will come into effect 12 months after publication of the amendment to the law.It should be mentioned that the amendment to the law replaces the same sections in the proposed Joint InvestmentTrustLaw(AmendmentNo.13),2008,whichdealwiththerequirementforatenderandrestrictions on payments of brokerage commissions to a company related to a fund manager or a trustee.

TheamendmentshouldhaveasignificanteffectonthebusinessoftheBankandtheresultsofitsactivities,becausetheBankhassignificantactivitybothasabankerandasatrusteeformutualfundsthroughitssubsidiarycompanyUBankTrustCompanyLtd.,whichmaybringabouttheneedforsignificantreductionin one of these activities.AsofthedateofapprovaloftheseFinancialStatements,nodecisionhasyetbeenmadebytheBank,


UBank Ltd.

regarding the manner of preparation for the implications of the above-mentioned legislation.

RegulationofEngagementinInvestmentAdvice,InvestmentMarketingandInvestmentPortfolioManagementLaw(AmendmentNo.13),2008TheamendmentwaspublishedintheOfficialGazette(Reshumot)on16.2.10,andwillcomeintoeffectsixty days after its publication.Theproposedamendmentdealswiththefollowingsubjects,amongothers:Settingupanarrangementwherebyforeignersthathavebeenauthorizedintheirowncountriestoengageininvestmentadvice,investmentmarketingandportfoliomanagement,willbeallowedtooffertheirservicesinIsraelwithouttheneedofanappropriateIsraelilicense,onconditionthattheserviceswillbegivenwithintheframeworkofanauthorizedIsraelicorporation.Theauthorizedcorporationwill be made responsible and be given the duty of supervision with regard to the activity of the foreign traderinitsframework.Amongthethresholdconditionsforanundertakingbetweentheauthorizedcorporationandtheforeigntrader:anundertakingagreement,theforeigntradermustholdalicensefromhiscountryoforigintoengageinthesameserviceandtheauthorizedcorporationmustbeauthorizedon its own merit to provide the same services to which the undertaking agreement applies - regulations areproposed(detailedasfollows)fortheregulationoftherequestforregistration);thegrantingofanexemptionfromthelicensetomanageportfoliosforsophisticatedcustomers(henceforth:“qualifiedcustomers”)andtheaddingofcustomerswithlargeassetportfoliosandcustomerswithsignificantexperience in the capital market activity or relevant expertise for activity in this market to the list of customersforwhichthereisanexemptionfromowningalicenseforadvising,investmentmarketingand,asproposed,alsoinvestmentportfoliomanagement,duetotheirbeingqualifiedtopurchaseprofessionalassistance with their own money in order to make investment decisions by themselves or because of theirskillinthecapitalmarket,andasaresult,donotrequiretheprotectionofthelawinherentintherequirement for a license; the granting of authority to the Israel Securities Authority to make use of outsourcing for purposes of supervision of license-holders; increasing activities permitted for a portfolio managementcompany,includingpensioncounseling/marketingandothersubjects.

ProposedJointInvestmentTrustLaw,1994,(AmendmentNo.13),2008The proposed Law was approved by the Ministerial Committee for Legislative Matters on 28.6.09.Themainamendmentsproposedare:offertothepublicofforeignmutualfunds;increasingthedutiesofsupervision imposed on the trustee and tightening supervision over fund managers; granting authority to the Securities Authority to deny as well as not to grant a company approval to serve as trustee or fund manager for reasons connected with its reliability; prohibiting a company from serving as a trustee in a fundifoneofthefollowingalternativesexist:1. Intheeventthatthecompanyiscontrolledbythefundmanager,apersoncontrollingit,ora

company under the control of any of them with more than 10% of the issued share capital of the company.

2. Thereisabusinessconnectionbetweenthecompany,orapersoncontrollingit,andthefundmanager,oramaterialbusinessconnectionwithapersoncontrollingafundmanageroracorporation under his control.

3 The revenues of the company together with the revenues of a person controlling it and a corporationunderthecontrolofsuchanabove-mentionedperson,whichderivefromabusinessconnectionwiththefundmanagergroup,includingrevenuesfromtrusteeshipforfundsmanagedbythefundmanagergroup,fromtrusteeshipforbondsissuedbyacorporationincludedinthefundmanagergroup,andfromtheprovisionofusualbankingservices,exceed15%ofitsrevenues together with the revenues of a person controlling it and a corporation under the controlofsuchanabove-mentionedperson.Forthismatter,abusinessconnectionisdefinedas-includingsupplier-customerrelationships,serviceproviders/recipients,loanproviders/recipientsandothers,excludingaconnectionderivingfromtheprovisionofservicestoatrusteeshipforfundsorbonds,andusualbankingservicesduringthecourseoftheusualbusinessofthebank,andonmarkettermsonly,wheretherevenuefromthemdoesnotexceed5%oftherevenuesofthebank;amaterialbusinessconnectionisdefinedas-abusinessconnectionincludingtheprovisionofusualbankingservices,wheretotalrevenuesincludingrevenuesfromallthebusiness connections with the fund manager group exceed 5% of the revenues of the company


UBank Ltd.

together with the revenues of a person controlling it and a corporation under the control of such an above-mentioned person.

4. Therearecircumstancesinwhichconflictmaybecreatedbetweenthebenefitofthecompanyor the person controlling it or a corporation under the control of such an above-mentioned person,andthebenefitoftheunitholders:prohibitionofreceiptofbrokerageservicesfromaparty connected with the fund manager or the trustee; a duty to hold a tender for purposes of a commitmentwithabank/memberoftheStockExchangeforthereceiptofbrokerageservices,as well as prohibiting the payment of brokerage commissions or any other payment from fund assetstoacompanyconnectedwiththefundmanagerorthetrustee(whenbodiesconnectedwiththefundmanagerorthetrusteecannotparticipateinsuchatender);aprohibitionofpreferenceofthebenefitofunitholdersinaspecificfundoveranotherfundwhentheyaremanaged by the same fund manager; determining provisions concerning the participation of the fund manager in meetings of public companies whose securities are held by mutual funds; allowing the charging of differential management fees in a fund from different populations of unit holders; changing the format of liquidating a fund and granting authority to the Israel Securities Authoritytoorderthedissolutionofafund.Inaddition,obligingafundmanagertodissolveamutualfundwithalowasset-value;similarly,variousmattersareregulatedintheproposedlawconnectedwiththemannerofmanagementofmutualfunds,chargingofmanagementfees,transferringvitalinformationtounit-holders,liquidatingafund,civilenforcementauthoritiesoftheIsrael Securities Authorities and so on.

IftheAmendmentinitspresentversionwillbecomebindinglegislation,thereisexpectedtobeamaterialeffectonthebusinessofthebankanditsoperatingresults,becausetheBankhassignificantactivitybothasabankerandasatrusteeformutualfundsthroughitssubsidiarycompanyUBankTrustCompanyLtd.,whichmay,ifthelegislativeprocessiscompleted,bringabouttheneedforsignificantreductioninoneofthese activities.AsofthedateofapprovaloftheseFinancialStatements,nodecisionhasyetbeenmadebytheBank,regardingthemannerofpreparationfortheimplicationsoftheabove-mentionedlegislation,ifitisapprovedinitscurrentversion,andregardingwhichactivitieswillbereduced,asmentionedabove.

Note 29: Events after the Balance Sheet Date

1. OnDecember13,2009,Mr.IlanRavivgavenoticetotheChairmanoftheBoardofDirectorsof his resignation from the position of General Manager of the Bank and related duties. The resignationwillcomeintoeffectonMarch3,2010.OnJanuary3,2010,theBoardofDirectorsof the Bank approved the appointment of Mr. Ron Badany to the position of General Manager oftheBank,commencingonApril1,2010.BetweenMarch3,2010andApril1,2010,Mr.YaacovGarten,DeputyGeneralManagerandManageroftheHeadquartersDivision,willserveasActingGeneral Manager.

BelowaredetailsofMr.RonBadany: Education:BAEconomicsandBusinessAdministration-HebrewUniversityJerusalem;MBA

Finance - Tel-Aviv University. Employmentduringlastfiveyears:Since2006:GlobalTreasureratIsraelDiscountBankLtd.;

2001-2006:DealingRoomManageratIsraelDiscountBankLtd. ServiceonotherBoardsofDirectors:“BeitLamedDaletLtd.”Itshouldbenotedthatthetermof

service concluded with the termination of his employment at Israel Discount Bank.

2. InMarch2010,adividendintheamountofNIS75millionwasdeclaredanddistributed.


UBank Ltd.