euro bank sa

EURO BANK SA

Financial Statements

for the year ended on 31 December 2014

2

EURO BANK SA

Financial Statements for the year ended on 31 December 2014

Approval of the annual financial statements

The Management Board ensured the preparation of the financial statements, so as to present a clear and fair

view of the Bank’s economic and financial position as well as its profit/loss and profitability as at 31

December 2014, in line with International Financial Reporting Standards (IFRS) in the form adopted by the

European Union. The presented financial statements are annual financial statements.

Appropriate accounting principles were adopted during the preparation of the financial statements and were

applied consistently. While measuring assets and liabilities as well as determining the financial result, the

Bank was assumed to operate as a going concern in the foreseeable future. It does not intend to or is forced

to discontinue or significantly alter the scope of its operations.

The statement of comprehensive income, the statement of financial position, the statement of changes in

equity, the statement of cash flows and notes to the financial statements were prepared as required under IFRS

and are presented herein in the following order:

The financial statements for the year ended on 31 December 2014 was approved by the Management Board

on 19 February 2015 by way of Resolution of the Management Board no. DRA/47/2015.

Page

SPRAWOZDANIE Z CAŁKOWITYCH DOCHODÓW 3 SPRAWOZDANIE Z SYTUACJI FINANSOWEJ 4 SPRAWOZDANIE ZE ZMIAN W KAPITALE WŁASNYM 5 SPRAWOZDANIE Z PRZEPŁYWÓW PIENIĘŻNYCH 6 NOTY DO SPRAWOZDANIA FINANSOWEGO 7 These financial statements include 97 numbered pages.

President of the Management

Board

Arnaud Denis

Vice-President of the

Management Board

Marcin Ciszewski


Management Board

Eric Ringeval


Management Board

Krystian Kulczycki


Management Board

Jarosław Nowacki


Management Board

Wojciech Humiński


Management Board

Yves Arrouet


Management Board

Radosław Księżopolski

Responsible for keeping accounting books Alicja Brzezińska

Wrocław, 19 February 2015

3

STATEMENT OF COMPREHENSIVE INCOME


(PLN '000)

Note

2014

2013

Going concern business

Interest income 3 914 315 1 035 511

Interest expense 4 (296 965) (363 493)

Net interest income 617 350 672 018

Commission income 5 88 882 90 165

Fee and commission expense 6 (34 999) (35 468)

Net commission income 53 883 54 697

Net income on financial operations 7 225 3 190

Foreign exchange result 8 2 831 2 865

Gain/loss on adjustments of the fair value in hedge accounting 9 - (3 773)

Net banking income 674 289 728 997

Other operating income 10 162 820 108 348

Other operating expense 11 (29 070) (40 395)

Operating expenditure 12 (391 580) (371 786)

Depreciation 13 (26 894) (28 433)

Result on impairment losses and provisions 14 (97 429) (178 366)

Gross result on operations 292 136 218 365

Gross profit (loss) 292 136 218 365

Income tax 15 (57 397) (44 947)

Net profit (loss) 234 739 173 418

Other comprehensive income - items that may be reclassifies to the profit and loss account

7 386 5 098

Net profit (loss) on revaluation of financial assets available for sale

9

3

- including deferred tax (2) (1)

Net profit (loss) on valuation of derivatives hedging cash flows: (resulting from contracts not settled at the reporting date):

49 7 377 5 095

- including deferred tax (1 730) (1 195)

Items that cannot be reclassified to the profit and loss account

- -

Total other comprehensive income 7 386 5 098

Total net comprehensive income 242 125 178 516

Discontinued operations

In years 2014 and 2013, Euro Bank S.A. did not carry out discontinued operations. Notes presented on pages 10-97 constitute an integral part of these financial statements.

4

STATEMENT OF FINANCIAL POSITION

as at 31 December 2014

(PLN ‘000)

Note 31.12.2014 31.12.2013*

ASSETS

Cash and balances with Central Bank 16 255 982 186 465

Amounts due from banks 17 273 081 934 354

Amounts due from customers 18 9 395 816 8 572 760

Available-for-sale financial assets 19 1 279 977 1 099 884

Fixed assets for sale 479 -

Intangible assets 20 44 071 38 766

Tangible fixed assets 21 74 476 71 740

Current income tax receivables 34 346 -

Deferred tax assets 22 218 570 312 045

Other assets 23 29 698 21 201

TOTAL ASSETS 11 606 496 11 237 215

LIABILITIES

Amounts due to banks and financial institutions 24 4 301 364 4 281 082

Amounts due to customers 25 5 561 487 5 578 743

Provisions 26 25 037 25 162

Derivative instruments in hedge accounting 27 17 934 29 047

Other liabilities 28 177 711 161 176

Current income tax liabilities - 31 786

Subordinated debt 29 331 249 180 630

Total liabilities 10 414 782 10 287 626

Share capital (funds) 30 563 096 563 096

Supplementary capital (funds) 31 401 598 228 180

Revaluation capital reserve 32 (7 719) (15 105)

Net profit (loss) 234 739 173 418

Total equity 1 191 714 949 589

TOTAL LIABILITIES AND EQUITY 11 606 496 11 237 215

*Transformed data

Notes presented on pages 10-97 constitute an integral part of these financial statements.

5

STATEMENT OF CHANGES IN EQUITY


(PLN '000) Note Share capital (funds)

Supplementary capital (fund)

Revaluation reserve

Net profit (loss)

Total equity

01.01.2014 563 096 228 180 (15 105) 173 418 949 589

Allocation of profit for previous years 48d - 173 418 - (173 418) -

Net profit (loss) for period - - - 234 739 234 739

Other net comprehensive income for period - - 7 386 - 7 386

Total income for period - - 7 386 234 739 242 125

31.12.2014 563 096 401 598 (7 719) 234 739 1 191 714


(PLN '000) Note Share capital (funds)

Supplementary capital

Revaluation reserve

Net profit (loss)

Total equity

01.01.2013 563 096 22 957 (20 203) 205 223 771 073

Allocation of profit for previous years 48d - 205 223 - (205 223) -

Net profit (loss) for period - - - 173 418 173 418

Other net comprehensive income for period - - 5 098 - 5 098

Total income for period - - 5 098 173 418 178 516

31.12.2013 563 096 228 180 (15 105) 173 418 949 589


6

STATEMENT OF CASH FLOWS

(PLN '000) Note 2014

2013

NET OPERATING CASH FLOWS

Gross profit (loss) 292 136 218 365

Total adjustments: (324 215) (458 276)

Depreciation 13 26 894 28 433

Foreign exchange profits/losses (666) (180)

Interest 12 785 6 983

(Profit) loss on investment activities 1 282 498

Change in the balance of financial assets 19 (180 093) (300 134)

Change in the balance of available-for-sale fixed assets (479) -

Change in amounts due from banks 17 and 42 661 294 (811 420)

Change in amounts due from customers (excluding changes on sales) (825 007) (276 450)

Change in receivables due to portfolio sale 1 951 152 308

Change in amounts due to banks 24 20 282 196 371

Change in amounts due to customers 25 (17 256) 503 665

Income tax paid (negative value) (31 787) -

Change in the balance of other liabilities and derivatives in hegde accounting ) 15 082 37 475

Change in other assets 23 (8 497) 4 175

Net operating cash flows ( 32 079) (239 911)

NET CASH FLOWS ON INVESTMENT ACTIVITIES

Income on investment activities 261 1 444

Sale of intangible and tangible fixed assets 261 1 444

Expenses on investment activity (36 478) (36 723)

Expense on purchase of tangible fixed assets and intangible assets (36 478) (36 723)

Acquisition of shares or interests in other entities -

NET CASH FLOWS ON INVESTMENT ACTIVITIES (36 217) (35 279)

NET FINANCIAL CASH FLOWS

Income on financial activity 150 000 50 000

Net inflows from issues of shares and contributions to capital - -

Subordinated loan 150 000 50 000

Expenses on financial activity (12 166) (6 983)

Other financial expenses (interest paid on the subordinated loan) (12 166) (6 983)

NET FINANCIAL CASH FLOWS 137 834 43 017

NET CASH FLOWS, TOTAL 69 538 (232 173)

CHANGE IN THE BALANCE OF CASH IN STATEMENT OF FINANCIAL POSITION 69 538 (232 173)

CASH AT THE BEGINNING OF THE PERIOD 194 662 426 835

CASH AT THE END OF THE PERIOD 42 264 200 194 662


Euro Bank S.A. Financial Statements for the year ended on 31 December 2014

7

NOTES TO THE FINANCIAL STATEMENTS

TABLE OF CONTENTS NOTY DO SPRAWOZDANIA FINANSOWEGO 10

INFORMACJE OGÓLNE, POLITYKI RACHUNKOWOŚCI I ISTOTNE SZACUNKI 10

1. Informacje ogólne 10

2. Opis ważniejszych zasad rachunkowości oraz szacunków i ocen 11

2.1. Oświadczenie o zgodności 11

2.2. Kontynuacja działalności 11

2.3. Zmiany zasad rachunkowości w roku obrotowym 12

2.4. Podstawa sporządzenia 15

2.5. Przeliczanie pozycji wyrażonych w walucie obcej 15

2.6. Aktywa trwałe dostępne do sprzedaży 16

2.7. Rzeczowe aktywa trwałe 16

2.8. Wartości niematerialne 17

2.9. Leasing 18

2.10. Utrata wartości niefinansowych aktywów trwałych 18

2.11. Aktywa finansowe 19

2.12. Utrata wartości aktywów finansowych 20

a. Aktywa ujmowane według zamortyzowanego kosztu 21

b. Aktywa finansowe wykazywane według kosztu 22

c. Aktywa finansowe dostępne do sprzedaży 22

2.13. Pochodne instrumenty finansowe i zabezpieczenia 22

2.14. Zabezpieczenie wartości godziwej 23

2.15. Zabezpieczenie przepływów pieniężnych 23

2.16. Zapasy 24

2.17. Pozostałe należności 24

2.18. Środki pieniężne i ekwiwalenty środków pieniężnych 24

2.19. Zobowiązania 24

2.20. Rezerwy 25

2.21. Odprawy emerytalne 25

2.22. Przychody 26

a. Sprzedaż towarów i produktów 26

b. Świadczenie usług 26

c. Przychody z tytułu wynajmu (leasingu operacyjnego) 26

d. Przychody i koszty z tytułu sprzedaży produktów ubezpieczeniowych powiązanych z

kredytami i pożyczkami 26

2.23. Podatki 28

a. Podatek bieżący 28

b. Podatek odroczony 28

2.24. Wynik finansowy 29

2.25. Ważniejsze szacunki i osądy 30

NOTY DO RACHUNKU ZYSKÓW I STRAT 32

3. Przychody z tytułu odsetek 32

4. Koszty z tytułu odsetek 32

5. Przychody z tytułu prowizji 32


8

6. Koszty z tytułu prowizji 32

7. Wynik operacji finansowych 33

8. Wynik z pozycji wymiany 33

9. Wynik z tytułu korekty wartości godziwej w rachunkowości zabezpieczeń 33

10. Pozostałe przychody operacyjne 33

11. Pozostałe koszty operacyjne 34

12. Koszty działania Banku 34

13. Amortyzacja 34

14. Wynik z tytułu odpisów aktualizujących z tytułu utraty wartości i rezerw 35

15. Podatek dochodowy 35

NOTY DO SPRAWOZDANIA Z SYTUACJI FINANSOWEJ 37

16. Kasa, środki w Banku Centralnym 37

17. Należności od banków 37

18. Kredyty i pożyczki udzielone klientom 38

19. Aktywa finansowe dostępne do sprzedaży 40

20. Wartości niematerialne 41

21. Rzeczowe aktywa trwałe 43

22. Aktywo z tytułu podatku odroczonego 45

23. Inne aktywa 46

24. Zobowiązania wobec innych banków i instytucji finansowych 46

25. Zobowiązania wobec klientów 47

26. Rezerwy 47

27. Instrumenty pochodne zabezpieczające w rachunkowości zabezpieczeń 48

28. Inne zobowiązania 48

29. Pożyczka podporządkowana 49

a) Uprzywilejowanie i ograniczenie praw z akcji 50

b) Akcje własne w posiadaniu Banku lub w posiadaniu jednostek zależnych,

współzależnych i stowarzyszonych 50

31. Kapitał (fundusz) zapasowy 51

32. Kapitał (fundusz) z aktualizacji wyceny 51

33. Leasing operacyjny 52

CELE I ZASADY ZARZĄDZANIA RYZYKIEM 53

34. Zarządzanie ryzykiem w Banku 53

35. Zarządzanie ryzykiem kredytowym i ryzykiem kontrahenta 54

36. Zarządzanie ryzykiem koncentracji 60

37. Zarządzanie ryzykiem stopy procentowej 62

38. Zarządzanie ryzykiem walutowym 68

39. Zarządzanie ryzykiem płynności 71

40. Zarządzanie ryzykiem operacyjnym 78

41. Zarządzanie kapitałem i adekwatność kapitałowa 79

POZOSTAŁE NOTY DODATKOWE 81

42. Środki pieniężne 81

43. Znaczące zdarzenia po dniu bilansowym (nie ujęte w sprawozdaniu finansowym) 81

44. Informacja o podmiotach powiązanych (kapitałowo lub organizacyjnie) 81

45. Transakcje z podmiotami powiązanymi 82

46. Wartość godziwa aktywów i zobowiązań finansowych 85

47. Wynagrodzenia członków Zarządu i Rady Nadzorczej 88


9

48. Zobowiązania warunkowe i zabezpieczenia 89

49. Zasady rachunkowości zabezpieczeń stosowane przez Bank 90

50. Informacje o przychodach i kosztach z tytułu sprzedanych aktywów finansowych,

których wartość godziwa nie mogła być wcześniej wiarygodnie wyceniona 94

51. Wynagrodzenie podmiotu uprawnionego do badania sprawozdań finansowych,

wypłaconym lub należnych za rok obrotowy 94

52. Przychody z tytułu dywidend 94

53. Nakłady inwestycyjne 94

54. Przychody i koszty z działalności zaniechanej w okresie obrotowym lub

przewidzianej do zaniechania w następnym okresie 95

55. Przeciętne zatrudnienie w okresie obrotowym 95

56. Rezerwy na przyszłe zobowiązania wobec pracowników 95


10

NOTES TO THE FINANCIAL STATEMENTS

GENERAL INFORMATION, ACCOUNTING POLICIES AND OTHER ESTIMATES

1. General information

The financial statements of Euro Bank S.A. cover the year ended on 31 December 2014 and contain

comparative data for the year ended on 31 December 2013. All financial data are presented in PLN ‘000.

Euro Bank Spółka Akcyjna (formerly: Bank Społem SA, hereinafter referred to as “the Bank”) was

established in 1990. The Bank is organized in the form of a joint-stock company, and operates based on

applicable provisions of the law, in particular on the provisions of the Banking Act, the Code of Commercial

Companies and the Bank's Statute. The Bank has its seat in Wrocław at Św. Mikołaja St. 72.

Bank's business

The Bank’s core business operations involve providing services to retail clients in the scope of granting cash

loans, including credit cards, granting mortgage loans, acceptance of current account and term deposits as

well as operating current accounts and offering insurance products of insurance companies. These

operations are conducted through a nationwide network of bank branches opened during the period from

September 2003 to December 2014. On 25 April 2013, the Bank obtained the license from the Polish

Financial Supervision Authority to manage securitized claims of securitization funds.

Indication of whether the Bank is a parent company or a significant investor, and whether it prepares

consolidated financial statements

The financial statements include individual data. The Bank does not prepare consolidated financial

statements. The direct parent company of the Bank is Societe Generale Consumer Finance S.A. with its

registered office in Paris.

Information about the Bank's Management Board and Supervisory Board

Composition of the Management Board as at 31 December 2014

Arnaud Denis President of the Management Board

Eric Ringeval Vice-President of the Management Board

Jarosław Nowacki Vice-President of the Management Board

Wojciech Humiński Vice-President of the Management Board

Krystian Kulczycki Vice-President of the Management Board

Marcin Ciszewski Vice-President of the Management Board

Yves Arrouet Vice-President of the Management Board

Radosław Księżopolski Vice-President of the Management Board

In the course of the year ended on 31 December 2014, the compositions of the Management Board changes

as follows:


11

Appointment of Radosław Księżopolski to the position of Vice-President of the Management Board

as of 1 November 2014 pursuant to resolution of the Supervisory Board of 15 October 2014.

Composition of the Supervisory Board as at 31 December 2014

Giovanni Luca Soma Chairman

Didier Hauguel Vice-Chairman

Patrick Gelin SB Member

Sławomir Krupa SB Member

Andre Sepaniak SB Member

Henri Bonnet SB Member

Approvals of the financial statements

The Financial Statements for the year ended on 31 December 2013 was approved by the General Meeting

on 7 May 2014.

2. Summary of significant accounting policies and estimates and judgments

2.1. Compliance with accounting standards

The Bank’s financial statements for the financial year ended on 31 December 2014 have been prepared in

accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU as at 31

December 2014.

The European Commission has adopted IAS 39: Financial Instruments: Recognition and Measurement,

except some provisions concerning hedge accounting. Due to the fact that the Bank applies IFRS as

adopted by the European Union (EU), the Bank has applied the IAS 39.AG99C in the form adopted by the

EU, which allows to designate as a hedged item a portion of cash flows from variable rate deposits for which

the effective interest rate is lower than the reference interest rate (not including margins). The IAS 39 as

issued by the International Accounting Standards Board introduces limitations in that respect.

As at the date of approval of these statements for publication, taking into account the ongoing EU process

regarding the introduction of IFRS standards and the Bank’s activity, in terms the accounting principles

applied by the Bank, except the above-mentioned "carve-out, there are no differences between the effective

IFRS standards and the IFRS standards endorsed by the EU.

2.2. Going concern

The financial statements have been prepared on a going concern basis (i.e. at least 12 months from the date

of approval of the financial statements). As at the date of signing these financial statements, the Bank’s

Management Board is not aware of any facts or circumstances that would indicate a threat to the continuing

activity by the Bank for 12 months following the approval date as a result of any intended or compulsory

withdrawal or significant limitation in the activities of Bank.


12

Pursuant to the recommendations of the Polish Financial Supervision Authority (PFSA), included in letter no.

DNB/III/7111/391/MZ/10 dated 12 April 2010, the Bank prepared a Remedial Plan for the period from 14 May

2010 to 31 December 2012, and pursuant to the PFSA letter no. DBK/DBK3/720/3/3/2012/M2 dated 3 July

2012, the Bank prepared an extension of the Remedial Plan for the period: January-December 2013,

accepted by PFSA with the letter no. DBK/DBK4/720/1/21/2012/2013 on 1 March 2013. The purpose of the

Plan was to further adjust the Bank’s business model with the focus on "retail banking" with full support and

synergy with the shareholder, i.e. the Societe Generale Group. In line with the Plan, the objectives achieved

in 2010-2012 were followed in 2013 to continue the evolution towards retail banking, involving the

adjustment of products to the target group and gradual change in the Bank’s organization from product-

oriented to customer-oriented (with significantly greater focus on customer value, loyalty, cross-selling and

developing retail banking products). Given that the solvency ratio and the Tier 1 ratio as at 31 December

2013 remained below the levels recommended by PFSA, i.e. 12% and 9%, respectively, which resulted from

the introduction in April 2014 by the Bank of final changes in the bancassurance revenue recognition

method, on 5 May 2014, by way of PFSA letter, ref. no. DBK/DBK3/7111/110/1/2014, the Bank was obliged

to submit the actual financial plan and assumptions of the Remedial Plan for 2014. The capital plan

developed by the Bank allowed restoring the Tier 1 ratio and the solvency ratio at the level above the

minimum limits recommended by the Polish Financial Supervision Authority (9% and 12%) as at 30 June

2014.

The capital plan provided for the following assumptions:

to obtain another subordinated loan in the amount of MPLN 150 in May 2014 and, upon PFSA approval,

to include the loan in own funds, On 27 May 2014, the Bank obtained the consent of PFSA to allocate the

loan to own funds,

to carry out the audit of the financial statements for Q1 2014, and to apply to PFSA for its consent to

allocate the audited profit to own funds. The Bank obtained the consent of PFSA on 23 June 2014.

to carry out the audit of the financial statements for H1 2014, and to apply to PFSA for its consent to

allocate the audited profit for Q2 2014 to own funds. The Bank obtained the consent of PFSA on 2

October 2014.

On 6 August 2014, the Polish Financial Supervision Authority with its letter, ref. no.

DBK/DBK3/720/14/3/2014, informed the Bank about the completion of the Remedial Plan due to the

achievement of the basic objectives defined in the remedial plan.

Moreover, the Bank was assured by its shareholder – Societe Generale Consumer Finance S.A. in writing on

10 September 2012 of its intention to provide further financing to the Bank to ensure the solvency ratio of at

least 12%. The shareholders also promised to provide necessary support to guarantee the required level of

the Bank’s liquidity and to provide financing in case of any liquidity problems.

2.3. Changes in accounting principles over the financial year

The Bank prepares the financial statements in accordance with the International Financial Reporting

Standards as approved by the European Union.

The standards below and interpretations applying for annual periods starting on 1 January 2014 did not have

a significant impact on the financial situation, the results of the Bank, or the scope of information presented in

the financial statements of the Bank:


13

IFRS 10 Consolidated financial statements – applicable to annual periods beginning on or after 1

January 2013 – applicable in the EU to annual periods beginning on or after 1 January 2014.

IFRS 11 Joint Arrangements – applicable to annual periods beginning on or after 1 January 2013 –

applicable in the EU to annual periods beginning on or after 1 January 2014.

IFRS 12 Disclosure of interests in other entities – applicable to annual periods beginning on or after

1 January 2013 – applicable in the EU to annual periods beginning on or after 1 January 2014.

Amendments to IFRS 10, IFRS 11 and IFRS 12 Transitional provisions – applicable to annual

periods beginning on or after 1 January 2013 – applicable in the EU to annual periods beginning on

or after 1 January 2014.

IFRS 27 Separate financial statements – applicable to periods beginning on or after 1 January 2013

– applicable in the EU to annual periods beginning on or after 1 January 2014.

IAS 28 Investments in Associates and Joint Ventures – applicable to periods beginning on or after 1

January 2013 – applicable in the EU to annual periods beginning on or after 1 January 2014.

Amendments to IAS 32 Financial Instruments: Presentation: Offsetting of financial assets and

liabilities – applicable to annual periods beginning on or after 1 January 2014.

Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities (published on 31 October 2012)

– applicable to annual periods beginning on or after 1 January 2014.

Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets(published on 29

May 2013) – applicable to annual periods beginning on or after 1 January 2014.

Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting (published

on 27 June 2013) – applicable to annual periods beginning on or after 1 January 2014.

The following are the published standards and interpretations that have been issued but are not yet effective,

and have not been earlier applied:

IFRS 9 Financial Instruments (published on 24 July 2014) – applicable to annual periods beginning on or

after 1 January 2018 – not approved by the EU by the date of approval of these financial statements,

Amendments to IAS 19 Defined Benefit Plans: Employee Contributions (published on 21 November

2013) – applicable to annual periods beginning on or after 1 July 2014 – applicable in the EU at the latest

for annual periods beginning on or after 1 February 2015,

Amendments resulting from the review of IFRS 2010-2012 (published on 12 December 2013) – some

amendments are applicable to annual periods beginning on or after 1 July 2014, and some prospectively

to transactions made on or after 1 July 2014 – applicable in the EU at the latest for annual periods

beginning on or after 1 February 2015,

Amendments resulting from the review of IFRS 2011-2013 (published on 12 December 2013) –

applicable to annual periods beginning on or after 1 July 2014 – applicable in the EU at the latest for

annual periods beginning on or after 1 January 2015,

IFRS 14 Regulatory Deferral Accounts (published on 30 January 2014) – applicable to annual periods

beginning on or after 1 January 2016 – no decision as to the date on which EFRAG will carry out the

individual stages of work leading to the approval of this standard – not approved by the EU by the date of

approval of these financial statements,


14

Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations (published on 6 May

2014) – applicable to annual periods beginning on or after 1 January 2016 – not approved by the EU by

the date of approval of these financial statements,

Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation

(published on 12 May 2014) – applicable to annual periods beginning on or after 1 January 2016 – not

approved by the EU by the date of approval of these financial statements,

IFRS 15 Revenue from Contracts with Customers (published on 28 May 2014) – applicable to annual

periods beginning on or after 1 January 2017 – not approved by the EU by the date of approval of these

financial statements,

Amendments to IAS 16 and IAS 41 Agriculture: Bearer Plants (published on 30 June 2014) – applicable

to annual periods beginning on or after 1 January 2016 – not approved by the EU by the date of approval

of these financial statements,

Amendments to IAS 27 Equity Method in Separate Financial Statements (published on 12 August 2014)

– applicable to annual periods beginning on or after 1 January 2016 – not approved by the EU by the

date of approval of these financial statements,

Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its

Associate or Joint Venture (published on 11 September 2014) - applicable to annual periods beginning

on or after 1 January 2016 – not approved by the EU by the date of approval of these financial

statements,

Amendments resulting from the review of IFRS 2012-2014 (published on 25 September 2014) -

applicable to annual periods beginning on or after 1 January 2016 – not approved by the EU by the date

of approval of these financial statements,

Amendments to IRFS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception

(published on 18 December 2014) – applicable to annual periods beginning on or after 1 January 2016 –

not approved by the EU by the date of approval of these financial statements,

Amendments to IAS 1 Disclosures (published on 18 December 2014) – applicable to annual periods

beginning on or after 1 January 2016 – not approved by the EU by the date of approval of these financial

statements,

IFRIC 21 Levies – applicable to annual periods beginning on or after 17 June 2014. As of 1 January

2015, the change will significantly affect the interim financial statements of the Bank, yet will not affect the

annual financial statements.

The Management Board does not expect the above standards and interpretations to have a significant

influence on the accounting principles applied by the Bank, except for IFRIC 21 and IFRS 9 (the impact of

IFRS 9 on the accounting principles applied by the Bank has not yet been assessed).

Changes in the presentation in the financial statements

In 2014, the Bank changed the presentation of the allowances for insurance and amounts due from one of

the debtors – from "Other liabilities" to "Other assets" in the amount of kPLN 4 441 (as at 31 December

2013). For data comparison purposes, the Bank has made an analogical change in presentation in the

statement as at 31 December 2013.


15

Other assets

(PLN '000)

31.12.2013 Comparable data

transformed Changes 31.12.2013

Other assets, of which: 14 354 -4 441 18 795

- account receivables for sale of debts 0 -798 798

- insurance receivables 5 404 -3 643 9 047

TOTAL OTHER ASSETS 21 201 -4 441 25 642

Other liabilities

(PLN '000)

31.12.2013 Comparable data

transformed Changes 31.12.2013

Deferred income, of which: 50 079 -4 441 54 520

- insurance income to be settled 50 079 -3 643 53 722

- other income to be settled - -798 798

TOTAL OTHER LIABILITIES 161 176 -4 441 165 617

2.4. Basis of preparation of the financial statements

The financial statements follow the historical cost basis, except for the fair value with respect to financial

assets and liabilities measured at fair value through profit or loss, including derivatives, and available-for-sale

financial assets, except for instances where the fair value could not be reliably estimated. Other financial

assets and liabilities (including loans and advances) are disclosed at amortized cost less impairment loss or

cost less impairment loss.

Non-current assets are stated at acquisition cost less depreciation and impairment allowances. Non-current

assets or groups of assets classified as held for sale are stated at the lower of their carrying amount and fair

value less costs to sell.

2.5. Translation of items denominated in foreign currency

Transactions denominated in foreign currency are translated into PLN at the exchange rate applicable on the

transaction date.

As at the balance sheet day, assets and liabilities denominated in foreign currencies are translated into the

domestic currency (PLN) at the average exchange rate of the National Bank of Poland defined for a given

currency as at the end of the reporting period. Exchange differences arising from the measurement of

balances in foreign currency are recognized in financial income (costs) item or capitalized in the value of

assets, respectively. Non-monetary assets and liabilities measured at historical costs in foreign currency are

recognized at the historical exchange rate on the transaction date. Non-monetary assets and liabilities

recognized at fair value stated in a foreign currency are translated at the rate applicable on the day of

measurement to the fair value.


16

The following exchange rates have been adopted for the balance sheet valuation:

31 December 2014 31 December 2013

USD 3,5072 3,0120

EUR 4,2623 4,1472

CHF 3,5447 3,3816

Foreign exchange gains and losses arising from the settlement of such transactions and balance sheet

valuation of monetary assets and liabilities denominated in foreign currencies are recognized in the profit and

loss account.

The financial statements are presented in Polish zloty, which is the functional and presentation currency of

the Bank.

2.6. Available-for-sale fixed assets

Assets held for sale are assets whose carrying value will be recovered through a sale transaction rather than

through their use. Non-current assets classified as available for sale cover components that are intended for

immediate sale in their present condition, and the sale of which is highly probable.

Assets are offered for sale at a price that is reasonable in relation to their current fair value.

Assets for sale are accounted for at the lower of the two values:

the carrying amount at the day preceding the classification of the asset as held for sale,

fair value less costs to sell.

On a semi-annual basis, the Bank performs valuation of assets for sale by an independent appraiser, and

the impairment loss on revaluation of property to fair value less costs to sell, is referred to other operating

expenses/ income in the income statement.

2.7. Tangible fixed assets

Tangible assets are carried at purchase price/ manufacturing cost less depreciation charges and impairment

loss. The initial value of tangible assets includes its purchase cost plus all direct costs related to purchase

and the adaptation of the asset for use. The cost also includes the cost of replacement of parts of machines

and equipment at the time it is incurred, if the recognition criteria are met. The costs incurred after the date

on which the fixed asset is made available for use, such as maintenance and repair costs, encumber the

profit or loss at the time they are incurred.

Fixed assets at the time of purchase are divided into components being items of significant value, for which a

separate period of economic usefulness can be assigned.

Depreciation is calculated using the straight-line method throughout the economic useful life of a given asset.

Depreciation rates calculated on this basis are as follows:


17

Type

Buildings and structures 2,5 %

Telecommunications devices 10,0-20,0 %

Other tangible assets 14,0–20,0 %

Vehicles 14,0-20,0 %

Computers 16,67–33,3 %

Leasehold improvements 10,0–38,0 %

The final value, the useful life and the depreciation method of assets are verified on an annual basis. An item

of tangible fixed assets may be derecognized from the statement after its disposal or when the entity does

not expect any economic benefits from the further use of the asset. All gains and losses arising from an

asset’s derecognition from the statement (calculated as the difference between the net proceeds from sale

and the carrying amount of a given item) are recognized in the profit or loss in the period, in which the asset

is derecognized.

Commenced investments apply to fixed assets under construction or assembly, and are recognized in line

with the purchase price or manufacture costs less impairment loss. Fixed assets under construction are not

subject to depreciation until the end of construction and making the assets available for use.

2.8. Intangible assets

Intangible assets purchased under a separate transaction or produced (if they meet the criteria for

recognition for development costs) are initially measured at the purchase price or manufacture cost. The

purchase price of intangible assets purchased under a business combination transaction equals to their fair

value at the combination date. Upon initial recognition, intangible assets are measured at the purchase price

or manufacture cost less amortization charges and impairment loss. Expenditure on intangible assets

generated internally, with the exception of capitalized development costs, are not capitalized and are

recognized in the period in which they are incurred.

The Bank determines whether the useful life of intangible assets is limited or indefinite. Intangible assets with

limited useful life are amortized over their useful life and tested for impairment when there is indication of

impairment. The period and method of amortization of intangible assets with limited useful life are reviewed

at least at the end of each financial year. Changes in the expected useful life or the expected consumption of

the economic benefits resulting from an asset are recognized by changing the amortization period or method

respectively, and treated as changes in estimates. The amortization charges on intangible assets with limited

useful life are recognized in profit or loss in the category consistent with the function of the intangible asset.

Intangible assets with indefinite useful life and those that are not used are annually tested for impairment in

respect of each asset or at the cash generating unit.

Development costs

Expenditure incurred on development works carried out in the framework of a given project are transferred to

the next period, if it is legitimate to state that they will be recovered in the future. Following the initial

recognition of the development expenditure, the historical cost model is applied, requiring that the assets are


18

recognized at cost less accumulated amortization and accumulated impairment losses. Capitalized

expenditures are amortized over the expected period of obtaining proceeds from the sale of the project.

The summary of rules applied to intangible assets is as follows:

Patents and licenses Development costs Computer software

Useful life For patents and licenses used on the

basis of a contract for a specified period,

said period is taken into account with an

additional period for which use can be

extended.

28,57% 13,0 - 50,0 %

Depreciation

method applied

Depreciated over the contract period –

straight-line method.

Straight-line method Straight-line method

Internally

generated or

purchased

Purchased

Internally generated

Purchased

Test for

impairment

Indefinite useful life – annual and in case

of indication of impairment.

Other – annual assessment of indications

of impairment.

Annual in case of

components not yet in

use, and if there is

indication of impairment.

Annual assessment

of indications of

impairment.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between

the net proceeds from sale and the carrying amount of the asset, and are recognized in profit or loss when

the asset is derecognized.

2.9. Leases

Lease agreements, according to which the lessor retains substantially all the risks and rewards of ownership

of the asset, are classified as operating leases.

Lease payments under an operating lease and subsequent lease payments are recognized by the Bank

(lessee) as operating expenses in the profit or loss using the straight-line method over the term of lease.

Lease agreements, according to which the Bank (lessor) retains substantially all the risks and rewards of

ownership of the asset, are classified as operating leases. Initial direct costs incurred in the course of

negotiations of operating lease agreements are added to the carrying amount of the leased asset and

recognized over the term of lease on the same basis as rental income.

2.10. Impairment of non-financial fixed assets

As at each end of the reporting period, the Bank evaluates whether there is any indication of impairment of a

non-financial asset. If any such indications exist, or in the need to perform an annual test for impairment, the

Bank estimates the recoverable amount of an asset or cash-generating unit to which the asset belongs.

The recoverable amount of an asset or cash-generating unit equals the fair value less costs to sell the asset

or cash-generating unit, respectively, or its value in use, depending on which one is higher. The recoverable

amount is determined for individual assets, unless a given asset does not generate cash inflows that are

largely independent from those generated by other assets or groups of assets. If the carrying amount of an

asset exceeds its recoverable amount, impairment occurs and the write-down to its recoverable amount is


19

carried out. When estimating the useful value, the projected cash flows are discounted to their present value

using the discount rate before tax that reflects the current market assessment of time value of money and the

risks specific to the asset. Impairment losses on assets used in continued operations are recognized in those

cost categories, which are consistent with the function of the impaired asset.

At each reporting date the Bank evaluates whether there is any indication that an impairment loss, which was

recognized in prior periods for an asset, is redundant or may be reduced. If such indications exist, the Bank

estimates the recoverable amount of the asset. A previously recognized impairment loss is reversed only if

there was a change in the estimates used to determine the recoverable amount of the asset since the

previous recognition of the impairment loss. Should this be the case, the carrying amount of the asset is

increased to its recoverable amount. That increased amount can not exceed the carrying amount of the

asset that would have been determined (after depreciation), had the impairment loss in respect of that asset

not been recognized in previous years. The reversal of impairment loss for an asset is recognized

immediately as income. After the reversal of the impairment loss, in future periods, the depreciation of the

asset is adjusted in such a way that allows regular write-off of its revised carrying amount less its final value

over the remaining useful life of the asset.

2.11. Financial assets

Financial assets include the following categories:

Financial assets held to maturity,

Financial assets measured at fair value through profit or loss,

Loans and receivables,

Financial assets available for sale.

Financial assets held to maturity include non-derivative investments with a determined or determinable due

date or amount, which the Bank intends to and is able to hold to maturity. They have been valued at their

amortized cost and may be subject to impairment as appropriate.

Financial assets measured at fair value through profit and loss meet one of the following conditions:

a) are classified as held for trading. Financial assets are classified as held for trading, if they are:

purchased principally for the purpose of selling in the short term,

part of the portfolio of certain financial instruments that are managed jointly and for which there is a

probability of profit in the short term,

derivatives, except for derivatives that are part of hedge accounting and financial guarantee

contracts,

b) assigned to this category upon initial recognition in accordance with IAS 39.

Financial assets measured at fair value through profit and loss are measured at fair value including their

market value as of the reporting date without sale transaction costs. Changes in the value of these financial

instruments are recognized in the statement of comprehensive income as financial income (positive net

change in fair value) or costs (negative net change in fair value). At initial recognition, financial assets may

be assigned to the category of assets measured at fair value through profit or loss if the following criteria are

met: (i) the designation eliminates or significantly reduces the inconsistency in measurement or recognition

(accounting mismatch), or (ii) the assets are part of a group of financial assets that are managed and

evaluated on a fair value basis, in accordance with a documented risk management strategy, or (iii) the


20

financial assets contain embedded derivatives that should be recognized separately. As at 31 December

2014, no financial assets have been designated as measured at fair value through profit or loss.

Loans and receivables are non-derivative financial assets with determined or determinable payments, which

are not quoted in an active market. Loans and receivables encompass receivables from banks, loans and

advances extended to clients. They are valued at their amortized cost and may be subject to impairment, as

appropriate.

Financial assets, other than derivative hedging instruments, are classified as available for sale. Financial

assets available for sale are recognized at fair value without deducting transaction costs that may be directly

assigned for purchase or issuance of financial assets. Positive and negative difference between the fair

value of financial assets available for sale (if their price is determined on the regulated market or whose fair

value can be reliably estimated by alternative means) and their purchase price, net of deferred tax, is

recognized in other comprehensive income. The decline in the value of assets available for sale resulting

from impairment is recognized as a finance cost.

Purchases and sales of financial assets are recognized on the date of the transaction. At the initial

recognition, a financial asset is measured at fair value, plus, in the case of assets not measures at fair value

through profit or loss, transaction costs that are directly attributable to the purchase.

A financial asset is derecognized when the Bank loses control over the contractual rights that comprise the

financial instrument; this usually takes place when the instrument is sold, or when all cash flows attributable

to the instrument are transferred to an independent third party.

2.12. Impairment of financial assets

As at each end of the reporting period, the Bank evaluates whether there is any indication of impairment of a

financial asset or a group of financial assets.

In 2014, the Bank implemented a 7-year horizon to recognize recoveries for the purpose of LGD estimation

for cash loans, and updated the LIP parameter values.

The change of the recovery recognition horizon resulted from the analysis of statistically significant historical

data regarding the level of materiality of recoveries on impaired loans. Annual recoveries during the

additional observation period (6 and 7 years after termination) amount approx. to 6% of the loan balance at

the time of termination, and 13% of the amount recovered. The significance of the observed recoveries justify

their inclusion in the estimation of impairment losses on receivables. As at 30 June 2014, the Bank has made

a change in terms of taking into account a longer horizon for the recognition of recoveries, where the level of

impairment losses was reduced by MPLN 25.7, which represents 3.7% of the total level of charges. The

presented estimate is the difference between the levels of impairment determined using the LGD curves

estimated with the 5 and 7-year recovery recognition horizons.

The update of LIP parameters has been based on an analysis of historical data regarding the observed loss

identification horizons. As a result of the review, LIP parameters have been extended for mortgage loans

from 9 to 11 months for loans delayed up to 29 days, and from 7 to 8 months for loans delayed 30-59 days.

For retail loans and credit cards, as a result of the review, the LIP has been reduced from 5 to 4 months for

the portfolio of credit cards delayed up to 29 days, while for the portfolio of credit cards delayed 30-59 days,

the LIP has been extended from 3 to 4 months.


21

For other homogeneous portfolios the LIP parameters remained unchanged. As a result of the update, the

IBNR allowance has been raised by MPLN 1.9 (as at 31 December 2014), which represents 3.2% of the total

IBNR allowance.

a. Assets recognized at amortized cost

If there is objective evidence of impairment of loans granted and receivables measures at amortized cost, the

amount of the loss is calculated as the difference between the carrying amount of a given asset and the

present value of the estimated future cash flows discounted using the original (i.e. determined at initial

recognition) effective interest rate. The carrying amount of an asset is reduced through posting of impairment

losses.

Objective evidence of impairment of a financial assets or a group of assets includes information obtained by

the Bank about the following loss generating events:

significant financial problems of the issuer or debtor,

breach of contractual terms, e.g. default or delayed payment of interest or principal of a liability,

concessions made to the debtor by the Bank as a result of his economic difficulties,

disappearance of an active market for a given financial asset due to financial difficulties.

First, the Bank assesses whether there is objective evidence of impairment of individual financial assets that

are individually significant, as well as indications of impairment of financial assets that are not individually

significant. If the analysis shows that there is no objective indication of impairment for an individually

assessed financial asset, regardless of whether it is significant or not, the Bank includes the asset in the

group of financial assets with similar credit risk characteristics and collectively assesses them for impairment.

Assets that are individually assessed for impairment and for which an impairment loss was previously

recognized, or for which it has been determined that the loss does not change, are not taken into account in

the overall assessment of assets for impairment.

If, in a subsequent period, an impairment loss decreases and the decrease can be related objectively to an

event occurring after the impairment was recognized, the previously recognized impairment loss is reversed.

A reversal of an impairment loss is recognized in profit or loss to the extent, in which at the reversal date the

asset's carrying amount does not exceed its amortized cost.

The IBNR provisioning methodology is based on statistical approach, and allows estimating losses

generated by the retail products portfolio and interbank market transactions, for which evidence of

impairment occurred, but has not yet been observed (was impossible to be observed) by the Bank (e.g. the

customer lost their job, but the loan is repaid in a timely manner).

The Bank writes off loan receivables from the balance sheet to impairment losses when such receivables are

uncollectible, that is:

further debt recovery costs will exceed the expected proceeds from the recovery;

ineffective debt enforcement by Bank confirmed by a relevant document of the competent enforcement

authority.

For off-balance sheet liabilities arising from unused credit lines the Bank does not make allowances for

impairment of financial assets.


22

b. Financial assets recognized at cost

If there is objective evidence for an impairment loss on an unquoted equity instrument that is not carried at

fair value because its fair value can not be reliably measured, or on a derivative that is linked and must be

settled by delivery of such an unquoted equity instrument, the amount of impairment loss is determined as

the difference between the carrying amount of the financial asset and the present value of estimated future

cash flows discounted at the current market rate of return for similar financial assets.

c. Available-for-sale financial assets

If there is objective evidence for an impairment loss of financial assets available for sale, the amount of the

difference between the purchase price of the asset (net of any principal repayment and amortization) and its

present fair value, less any impairment loss on that asset previously recognized in profit or loss, is removed

from equity and reclassified into profit or loss. The reversal of impairment losses on equity instruments

classified as available for sale cannot be recognized in profit or loss. If, in a subsequent period, the fair value

of a debt instrument available for sale increases, and the increase can be objectively related to an event

occurring after the impairment losses has been recognized in profit or loss, the amount of the reversed

impairment loss is recognized in profit or loss.

2.13. Financial derivatives and hedges

Derivative instruments used by the Bank to hedge the interest rate and foreign exchange risks are mainly

forward currency contracts and interest rate swaps. Such derivatives are measured at fair value. Derivatives

are carried as assets when their fair value is positive, and as liabilities - when the fair value is negative.

Gains and losses arising from changes in fair value of derivatives that do not meet the hedge accounting

rules are taken directly to the net profit or loss for the financial year.

The fair value of currency forward contracts is determined by reference to the current forward rates

applicable to contracts with similar maturity. The fair value of interest rate swaps is calculated based on a

valuation model that takes into account the observable market data, including, in particular the current

forward interest rates.

In hedge accounting, hedges are classified as:

fair value hedge: a hedge of the exposure to changes in fair value of a recognized asset or liability, or

cash flow hedge: a hedge of the exposure to variability in cash flows that is attributable to a particular

risk associated with a recognized asset or liability, or a forecast transaction.

At the inception of the hedge there is formal designation and documentation of the hedging relationships and

the Bank’s risk management objective and strategy for undertaking the hedge. That documentation includes

identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged

and how the Bank will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in

the hedged item’s fair value or cash flows attributable to the hedged risk. The hedge is expected to be highly

effective in offsetting changes in fair value or cash flows attributable to the hedged risk. The hedge is

assessed on an ongoing basis and determined actually to have been highly effective throughout the financial

reporting periods for which the hedge was designated.

The Bank applied the hedge accounting policy in accordance with IAS 39, approved by the EU (the so-called

'carve out' version), abolishing some of the limitations of the original version of IAS 39.


23

2.14. Fair value hedges

A fair value hedge is a hedge against changes in the fair value of a recognized asset or liability or an

unrecognized probable commitment, or an identified portion of such an asset, liability or probable

commitment, that is attributable to a particular risk and could affect profit or loss. For fair value hedges, the

carrying amount of the hedged item is adjusted for gains and/or losses arising from changes in fair value

resulting from the hedged risk, the hedging instrument is measured at fair value, and gains and losses on the

hedging instrument and the hedged item are recognized in profit or loss.

When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change

in the fair value of the firm commitment attributable to the hedged risk is recognized as an asset or liability,

and the corresponding gain or loss is recognized in profit or loss. Changes in the fair value of the hedging

instrument are also recognized in profit or loss.

The Bank discontinues the hedge accounting if the hedging instrument expires or is sold, terminated or

exercised, the hedge no longer meets the criteria for hedge accounting or the Company revokes the

designation. Any adjustment of the carrying amount of a hedged financial instrument for which the effective

interest method is used, is amortized and appropriate impairment is recognized in profit or loss. Amortization

may begin as soon as an adjustment exists, however not later than when the hedged item ceases to be

adjusted for changes in its fair value attributable to the risk being hedged.

2.15. Cash flow hedges

A cash flow hedge is a hedge against the exposure to variability in cash flows that is attributable to a

particular risk associated with a recognized asset or liability or a highly probable forecast transaction, and

that could affect profit or loss. The portion of the gain or loss on the hedging instrument that is determined to

be an effective hedge is recognized in other comprehensive income, and the ineffective part is recognized in

profit or loss.

If a hedged forecast transaction subsequently results in the recognition of a financial asset or a financial

liability, the associated gains or losses that were recognized in other comprehensive income and

accumulated in equity are transferred to profit or loss in the same period or periods in which the asset

acquired or liability incurred affect profit or loss.

If a hedge of a forecast transaction subsequently results in the recognition of non-financial asset or non-

financial liability, or a forecast transaction for a non-financial asset or non-financial liability becomes a firm

commitment for which the fair value hedge will apply, the gains or losses that were recognized in other

comprehensive income are reclassified from equity to profit or loss in the same period or periods in which the

non-financial asset acquired or non-financial liability incurred affect profit or loss.

Gains or losses arising from changes in fair value of derivatives that do not meet the conditions for the

application of hedge accounting are recognized directly in the net result for the current period.

The Bank discontinues the hedge accounting when the hedging instrument expires or is sold, terminated or

exercised, or when hedge no longer meets the criteria for hedge accounting. In this case, the cumulative

gain or loss on the hedging instrument that has been recognized in other comprehensive income and

accumulated in equity shall remain in equity until the forecast transaction occurs. If the Company no longer

expects the forecast transaction to occur, the net total profit or loss accumulated in equity are recognized in

net profit or loss for the current period.


24

2.16. Inventory

Inventory is measured at purchase price. The purchase price includes all costs of purchase, processing

costs and other costs incurred in bringing the inventories to their present location and condition – both for the

current and previous year – and are determined as follows:

goods at purchase price determined by the "fixed price" method.

2.17. Other receivables

Trade receivables are recognized and carried at original invoice amounts less an allowance for doubtful

receivables. Losses on receivables are estimated when the recovery of the full amount is no longer probable.

If the effect of time value of money is material, the value of receivables is determined by discounting the

expected future cash flows to their present value using a gross discount rate that reflects current market

assessments of the time value of money. If the discounting method has been applied, the increase in

receivables due to the passage of time is recognized as financial income.

Other receivables include, in particular, advance payments for future purchases of tangible fixed assets

intangible assets and inventories. Advance payments are presented in accordance with the nature of the

assets to which they refer – as the fixed assets or current assets. As a non-monetary assets, advance

payments are not discounted. Budget receivables are presented within other non-financial assets, except for

corporate income tax receivables, which are a separate item in the balance sheet.

2.18. Cash and cash equivalents

Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short-term

deposits with an original maturity of maximum three months.

The balance of cash and cash equivalents in the statement of cash flows consists of the above cash and

cash equivalents.

2.19. Liabilities

Short-term trade liabilities are recognized at the amount payable.

Financial liabilities measured at fair value through profit or loss include financial liabilities held for trading and

financial liabilities initially classified as measured at fair value through profit or loss. Financial liabilities are

classified as held for trading if they are acquired for the purpose of selling in the near future. Derivatives,

including separated embedded instruments, are also classified as held for trading unless they are designated

as effective hedging instruments. At initial recognition, financial liabilities may be assigned to the category of

liabilities measured at fair value through profit or loss if the following criteria are met: (i) the designation

eliminates or significantly reduces the inconsistent treatment, when both the measurement and recognition

rules for profits or losses are subject to other regulations, or (ii) the liabilities are part of a group of financial

liabilities which are managed and evaluated on a fair value basis, in accordance with the documented risk

management strategy, or (iii) the financial liabilities contain an embedded derivatives that should be

recognized separately. As at 31 December 2014, no financial liabilities have been designated as measured

at fair value through profit or loss.


25

Financial liabilities measured at fair value through profit and loss are measured at fair value including their

market value as of the reporting date without sale transaction costs. Changes in the fair value of these

instruments are recognized in profit or loss as financial income or costs.

Financial liabilities other than financial instruments measured at fair value through profit or loss are

measured at amortized cost using the effective interest rate method.

Bank derecognizes a financial liability when the liability expires – i.e. when the obligation specified in the

contract is fulfilled, canceled or expired. A replacement of an existing debt instrument with an instrument with

substantially different terms between the same parties is recognized by the Bank as expiration of the original

financial liability and recognition of a new financial liability. Similarly, significant modifications of the

agreement for an existing financial liability are recognized by Bank as the expiration of the original and

recognition of the new financial liability. The resulting replacement differences for carrying amounts are

recognized in profit or loss.

Other non-financial liabilities include in particular the obligations to the tax office for tax on goods and

services, and liabilities on advances received, which will be settled by delivery of goods, services or fixed

assets. Other non-financial liabilities are recognized at the amount due.

2.20. Provisions

Provisions are created when the Bank is subject to an obligation (legal or constructive) resulting from past

events and it is probable that fulfillment of such obligation will involve the outflow of funds creating economic

benefits, and the amount of such liability can be reliably measured. If the Bank expects the cost covered by

the provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized

as a separate asset, yet only when it is virtually certain that reimbursement will occur. Costs relating to any

provision are presented in the statement of comprehensive income net of any reimbursements.

If the effect of time value of money is material, the value of provisions is determined by discounting the

expected future cash flows to their present value using a gross discount rate that reflects current market

assessments of the time value of money and potential risk associated with a given liability. If the discounting

method has been applied, the increase in provisions due to the passage of time is recognized as financial

cost.

The provision created for potential returns due the sale of the credit claims portfolio is presented in the

statement of comprehensive income under item "Charges to provisions and value adjustments".

2.21. Retirement benefits

Retirement benefits are paid once at the time of retirement. The amount of retirement benefits is dependent

on the term of service and the average salary. The Bank creates a provision for future liabilities due to

retirement benefit in order to allocate costs to periods to which they relate. Pursuant to IAS 19, retirement

benefits are schemes of certain benefits after the employment period. The present value of such liabilities is

calculated by an independent actuary. Accrued liabilities are equal to the discounted payments that will be

made in the future, taking into account staff turnover, and relate to the period up to the balance sheet date.

In the periods between valuations by an independent actuary the Bank analyses all key indicators reflecting

the employment structure necessary for correct provision assessment.


26

2.22. Revenues

Revenue is recognized in such amounts as it is probable that the Bank will obtain economic benefits

associated with a given transaction, and when the amount of revenue can be measured reliably. Revenues

are recognized at fair value of payments received or due, net of value added tax (VAT) and discounts. The

recognition of revenue is also subject to the criteria presented below.

a. Sale of goods and products

Revenue is recognized when the significant risks and rewards resulting from ownership rights to goods and

products have been transferred to the buyer, and the amount of revenue can be measured reliably.

b. Services

Revenue on services is recognized based on the stage of performance.

The percentage of completion of the service is determined as the ratio of costs incurred to estimated costs

necessary to complete the order.

c. Revenue on lease (operating lease)

Revenues on lease of tangible fixed assets are recognized on the straight-line basis over the term of lease in

relation to open agreements.

d. Revenue and expenses on sale of insurance products linked with credits and loans

In order to determine the recognition method of the transaction in the Bank's books, it is required to

determine the degree of the direct link between an insurance product and a financial product, taking into

account the economic sense of the transaction.

The direct link between an insurance product and a financial instrument exists in particular when at least one

of the two conditions is met:

a financial instrument is offered by the Bank always with an insurance product,

an insurance product is offered by the Bank only with a financial instrument, i.e. it is not possible to

purchase an insurance product which is identical in its legal form, terms and conditions and the

economic substance without purchasing the product combined with a financial instrument.

In the analysis of the link between an insurance product and a financial instrument, the Bank takes into

account financial instruments that are not offered contractually with an insurance, but which are recognized

in the balance sheet in the result on the sale of an insurance product, regardless of whether: this approach

was the result of a contract with an insurance company, or an adopted business practice.

In the absence of fulfillment of the conditions referred to above, the Bank additionally performs a detailed

analysis of the economic substance of the product, including the fulfillment of the criteria of independence of

insurance agreements from offered financial instruments by establishing, inter alia, the following:

the level of sales of linked products, i.e. the percentage share of financial instruments with insurance

coverage to the number of agreements relating to financial instruments in the portfolio of the Bank;

the impact of insurance remuneration and credit intermediation costs on the profitability of individual

financial products;


27

the average annual rates of individual financial instruments in the portfolio of the Bank by products with

and without insurance coverage;

the possibility to accede to insurance without a financial instrument;

in the absence of the requirement for the customer to conclude an insurance contract to a purchased

financial instrument – the number of similar terms and conditions of insurance contracts in other

insurance companies than that whose products are offered by the Bank jointly with a financial instrument

(a percentage share in the entire loan portfolio – by financial instruments in accordance with the product

offer of the Bank);

the number of withdrawals and the amount of returned commissions – by financial instruments in

accordance with the product offer of the Bank, insurance products and insurance classes;

the number of insurance contracts continued after early loan repayment, along with information about

credit products with which they were linked;

the scope of activities performed for the insurer during the term of the insurance contract;

the effects of the analysis of management reports on the performance of individual financial instruments in

accordance with the product offer of the Bank, banking services.

As a result of the above analysis, the Bank identifies which loans and insurance policies – in accordance with

the bancassurance model adopted by the Bank – are linked transactions.

Accounting treatment of bancassurance costs and revenues for linked transactions

A transaction is split into components in respect of which income is allocated separately:

Remuneration for services rendered at the time of signing of the insurance policy – in accordance with

IAS 18, should be qualified as fees that are earned on the execution of a significant act and recognized

once in commission income.

Fee linked to the loan granted – the remuneration of the Bank reduced by remuneration for signing an

insurance policy and by remuneration for services performed after insurance policy signing should be

treated as revenue for loan granting. Therefore, this part of remuneration is included in the effective

interest rate and recognized in interest income;

Remuneration for services rendered by the Bank during the term of the insurance policy – this part of

remuneration (revenue) for ongoing services is deferred and amortized linearly in commission income

over the life of the policy (deferred part) in line with the stage of completion of the service.

The split of insurance remuneration is made in proportion of the fair value of the financial instrument (loan)

and the fair value of the intermediation service (taking into account the remuneration for additional activities

after the sale of an insurance product) to the sum of both these values. In the calculation of the split of

remuneration, the Bank also takes into account the value of after-sales services rendered by the Bank.

The measurement of the fair value of the insurance intermediation service (including the value of after-sales

services) is made based on market prices analysis.

The determination of the fair value of a financial instrument is based on the income-based approach

involving the recalculation of future amounts into the present value, in line with IFRS 13, which constitutes a

reliable approximation of the fair value.


28

Bank’s revenues are recognized in net amounts. Therefore, it is required to calculate the expected returns of

the Bank's remuneration due to early loan repayments resulting in the shortening of the insurance coverage

period. The Bank creates a provision up to the amount of future expected returns for:

the portion related to the remuneration for intermediation. The provision is used in correspondence with

the commission income item in the event of returns;

the portion related to the remuneration for after-sales services. The provision is used in correspondence

with the commission income item in the event of returns;

the deferred part accounted for at amortized cost, as an element adjusting the effective interest rate. The

provision is used in correspondence with the interest income item in the event of returns.

Stand-alone products.

The remuneration for stand-alone products is the remuneration for the execution of a significant act, and it

does not require the Bank to provide any other services, particularly after the sale. Therefore, the

remuneration from insurance companies due or received is recognized as revenues earned on the day of

commencement or renewal of insurance policies.

2.23. Taxes

a. Current tax

Current tax payables and receivables for the current and prior periods are measured at the amounts

expected to be paid to tax authorities (recoverable from tax authorities) using the tax rates and tax laws

legally or substantively applicable at the balance sheet date.

The income tax basis is calculated based on local tax law as set out in the provisions of the Corporate

Income Tax Act.

b. Deferred tax

For the purpose of financial reporting, the deferred tax is determined according to the balance sheet liability

method in relation to temporary differences occurring as at the end of the reporting period between the tax

value of assets and liabilities and their carrying amount recognized in the financial statements.

The deferred tax liability is created in relation to all taxable temporary differences

except for instances when the deferred tax liability results from the initial recognition of goodwill or initial

recognition of assets or liabilities in transactions that do not constitute business combinations and upon their

conclusion do not impact the gross financial result or taxable income and tax loss, and in the case of positive

temporary differences resulting from investments in subsidiaries or associates and interest in joint ventures –

except for situations when the reversal date of such differences is controlled by the investor and it is

probable that their reversal will not take place in the foreseeable future.

Deferred tax assets are recognized with respect to all deductible temporary differences as well as unused tax

reliefs and unused tax losses brought forward up to the probable amount of taxable income that will allow the

Bank to use the aforementioned difference, assets and losses, except for situations, when the deferred tax

asset related to deductible temporary differences is created as a result of the initial recognition of assets or

liabilities in transactions that do not constitute business combinations and upon their conclusion do not have

an effect on the gross financial result or taxable income and tax loss, and in the case of deductible temporary

differences arising from investments in subsidiaries or associates and interests in joint ventures, a deferred


29

tax asset is recognized in the balance sheet in the amount, in which it will be probable, that in the

foreseeable future the aforementioned temporary differences will be reversed and that taxable income will

allow for deducting deductible temporary differences

The carrying amount of a deferred tax asset is verified as at each end of the reporting period and is reduced

as appropriate, taking into account the reduction in the probability of achieving taxable income sufficient for

the realization of the deferred tax asset in part or in whole. Unrecognized deferred tax assets are reassessed

at each balance sheet date and are recognized up to the amount reflecting the probability of achieving

taxable income in the future will allow the recovery of the asset.

Deferred tax asset and liability are measured with the application of tax rates expected to be applicable in

the period of realization of the asset or release of the provision, with the consideration of tax rates (and tax

regulations) applicable as at the end of the reporting period or rates that will be applicable at the end of the

reporting period in the future.

Income tax relating to items recognized outside profit or loss is recognized outside profit or loss: in other

comprehensive income relating to items recognized in other comprehensive income or directly in equity

relating to items recognized directly in equity.

The Bank offsets deferred tax assets and provisions only if it has an enforceable legal right to offset

receivables with current tax liabilities, and the deferred income taxes relate to the same taxable entity and

the same tax authority.

The Bank offsets deferred tax asset and liability only if the deferred tax is related to the same tax payer and

the same tax authority.

The amount of the deferred tax asset and liability is determined based on the income tax rate applicable in

the year in which the tax obligation occurs.

The deferred portion disclosed in the statement of comprehensive income constitutes the difference between

the opening and closing balance of the deferred tax asset and liability in the reporting period, whereas the

deferred tax asset and liability related to transactions charged to equity are also charged to the revaluation

reserve.

2.24. Financial result

All interest income and expense related to financial instruments measured at amortized cost using the

effective interest rate are recognized in the statement of comprehensive income.

Interest income includes interest received or payable due to loans and securities. The recoverable portion of

interest accrued on receivables with respect to which impairment has been identified is classified as revenue

using the interest rate used for discounting future cash flows when measuring impairment. Net interest

income includes interest revenue/expense due to derivatives designated by the Bank as hedging

instruments.

Fees on extended advances and loans are settled over time using the effective interest rate and taking into

account the related loan extension costs. Such fees are recognized as interest income.

Fees and commissions include remuneration received due to activities related to the conclusion of insurance

agreements distributed among credit clients and are recognized in line with the rules described in point 2.22

d.


30

Revenue and expenses due to fees and commissions with respect to which the effective interest rate method

cannot be applied are recognized in accordance with the accrual principle upon the performance of services.

Other operating income and expenses include the results achieved by the Bank on activities not directly

related to financial activities. In particular, these are the income and expenses from the sale of fixed assets

and services provided to franchisees.

Expenses are recognized on an accrual basis, i.e. in periods to which they relate, irrespective of the payment

date.

The result of foreign exchange includes the realized and unrealized foreign exchange gains and losses

resulting from servicing denominated mortgage products and their funding sources, and the settlement of

invoice payments.

In the result on financial operations the Bank recognizes the ineffective portion of gains or losses on the

hedging instrument in cash flow hedge accounting. The net profit/loss includes the profit/loss on operating

activity and statutory withholdings from the financial profit/loss due to income tax and equivalent payments.

2.25. Major estimates and judgments

The preparation of IFRS-compliant financial statements requires that the Management Board make certain

estimates and adopt assumptions that affect the amounts presented in the financial statements and

explanatory notes.

The estimates and assumptions made by the Bank are subject to regular reviews. Adjustments of estimates

are recognized in the period in which such adjustments were made.

Major assumptions/subjective assessments adopted for the purpose of estimations concern mainly the

following:

Impairment of credits and loans

The assumptions adopted during the estimation of the impairment of loans and advances are described in

point 2.12.

Impairment of fixed assets

As of every balance sheet date, the Bank assesses the existence of premises indicating the impairment of

any components of fixed assets or cash-generating units.

In the presence of such a premise, the Bank estimates the recoverable value. The estimation of the value-in-

use of a component of fixed assets or cash-generating unit requires to adopt assumptions on the values and

dates of such flows and potential changes.

Insurance income

In order to determine the recognition method for insurance products sale transactions, the Bank determines

the degree of the direct link between an insurance product and a financial product, taking into account the

economic sense of the transaction and a number of criteria.

As at each balance sheet date, the Bank estimates provisions for the return of remuneration related to early

termination of insurance policies, in particular, resulting from loan repayments effecting in the reduction of

the insurance coverage period. The Bank makes such estimates based on historical data on early loan

repayments.


31

Useful life of tangible fixed assets and intangible assets

The useful life of tangible fixed assets and intangible assets is the period of economic life of assets, in which,

as expected by the Bank, fixed assets and intangible assets will be used and will generate economic

benefits. Notes 2.7 and 2.8 present the amortization rates for tangible fixed assets and intangible assets.

Provisions for pension and disability funds

The provisions for pension funds is calculated using the actuarial method by an independent actuary as the

present value of future liabilities towards employees according to the level of employment and wages as of

the update date. The calculation of provisions is based on a number of assumptions concerning both

macroeconomic conditions and assumptions as to the turnover of employees, risk of death and other.

In the period between the valuation by the independent actuary, the Bank updates key indicators reflecting

the employment structure necessary for the correct assessment of the provisions.

Component of deferred tax assets

The Bank recognizes the deferred tax assets portion based on the assumption of a future tax profit allowing

its use. The deterioration of tax profits in the future could result in that this assumption would become

ungrounded.


32

NOTES TO THE PROFIT AND LOSS ACCOUNT

3. Interest income

(PLN '000) 2014 2013

Interest income calculated using the effective interest rate method, of which:

914 315 1 040 104

Income on bank deposits 24 101 31 875

Income on credits and loans for customer (individuals): 863 274 976 647

- non-impaired loans 821 210 900 146

- impaired loans 42 064 76 501

Income on financial assets available for sale 26 940 31 582

Other income: - (4 593)

Derivative hedge instruments - (4 593)

TOTAL 914 315 1 035 511

4. Interest expense

(PLN '000) 2014 2013

Interest expense calculated using the effective interest rate method, of which:

283 295 352 954

Cost of liabilities to banks and financial institutions: 144 227 140 981

- Banks 136 624 137 879

- Financial institutions 7 603 3 102

Cost of liabilities to customers: 139 068 211 973

- Individuals 139 068 211 973

Other costs: 13 670 10 539

Derivative hedge instruments 13 670 10 539

TOTAL 296 965 363 493

5. Commission income

(PLN '000) 2014 2013

Commission income on sale of insurance 45 125 48 951

Commissions for transactions on customer accounts 27 684 21 470

Commissions – payment and credit card servicing 13 772 17 450

Other commissions 2 301 2 294

TOTAL 88 882 90 165

6. Fee and commission expense

(PLN '000) 2014 2013

Credit intermediation commissions 8 881 9 675

Commissions – payment and credit card servicing 24 286 23 081

Expense on insurance sale 1 258 2 144

Other fees and commissions 574 568

TOTAL 34 999 35 468


33

7. Net income on financial operations

(PLN '000) 2014 2013

Derivative hedge instruments - cash flows hedging 225 -

Derivative hedge instruments - fair value hedging - 3 190

TOTAL 225 3 190

8. Foreign exchange result

(PLN '000) 2014 2013

Foreign exchange income 123 132 98 597

Foreign exchange costs (120 301) (95 732)

TOTAL 2 831 2 865

The income and expense on FX positions were affected by the repayments of mortgage products

denominated in CHF and its funding sources continued in 2014, as well as by the settlement of invoices.

Currency risk management is described in note 38.

9. Gain/loss on adjustments of the fair value in hedge accounting

(PLN '000) 2014 2013

Adjustment of the fair value due to hedged risk - (3 773)

TOTAL - (3 773)

10. Other operating income

(in PLN ‘000) 2014 2013

Release of other provisions 620 239

Income on collection fees 18 302 30 424

Recovered receivables written-off* 129 448 64 298

Release of provisions due to rents 144 750

Release of provisions for expected losses 614 2 163

Income on reinvoices to franchisees 2 361 2 844

Other sales income 159 149

Income on management of sold receivables 8 705 5 444

Related to disposal of fixed assets, intangible assets and assets held for sale

146 525

Release of provisions for legal claims 345 8

Release of provisions for liquidation of branches 737 -

Other 1 239 1 504

TOTAL 162 820 108 348

* including the income on the sale of credit receivables of the Bank in the amount of kPLN 97,757 in 2014 (kPLN 46,711 in 2013).

In 2014, the Bank sold a portfolio of non-performing loans to the nominal amount of mPLN 367, of which

mPLN 354 represented sold off-balance sheet loans, and mPLN 13 represented balance sheet loans (NPV

mPLN 2).

In 2013, the Bank sold a portfolio on non-performing loans to the gross present value (GPV) of MPLN 1,038

and the net present value (NPV) of MPLN 190.


34

11. Other operating expense

(PLN '000) 2014 2013

Related to liquidation of fixed assets, intangible assets and assets held for sale

1 428 3 648

Costs of damages and fines 565 180

Collection and court costs 16 323 23 145

Provision for receivables 778 716

Provision for legal claims 149 632

Provision for expected losses 389 728

Provision for costs of rent - 894

Franchise costs 796 1 313

Complaint costs 959 1 230

Costs of sale of receivables 476 3 930

Costs due to management of sold receivables 6 167 2 365

Other 1 040 1 614

TOTAL 29 070 40 395

12. Operating expenditure

(in PLN ‘000) 2014 2013

Employee costs 181 274 173 644

Remunerations 148 719 143 019

Social insurance 25 047 23 958

Other costs of employee benefits 7 508 6 667

Material costs 210 306 198 142

Building rental costs 62 536 60 021

Promotion and advertising services 49 687 38 426

Cost of consultancy and specialized services 22 609 27 645

IT and telecommunications services 19 174 17 725

Cost of purchase of materials 11 850 11 743

Contribution and payments to the Bank Guarantee Fund

11 927 9 304

Postal fees 4 662 4 989

Taxes and charges 4 495 4 834

Property insurance costs 3 766 3 946

Other material costs 19 600 19 509

TOTAL 391 580 371 786

13. Depreciation

(in PLN ‘000) 2014 2013

Depreciation of tangible fixed assets 18 634 22 409

Depreciation of intangible assets 8 260 6 024

TOTAL 26 894 28 433


35

14. Result on impairment losses and provisions

(in PLN ‘000) 2014 2013

Impairment losses (226 345) (339 534)

Individuals (221 245) (315 591)

- allowances for incurred but not reported losses (IBNR)

(10 265) (17 723)

Mortgage loan (5 471) (9 691)

Credit card (30) (528)

Cash loan (4 339) (7 121)

Other credits and loans (425) (383)

- allowances for impaired receivables (210 980) (297 868)

Mortgage loan (28 204) (32 443)

Credit card (48 700) (616)

Cash loan (128 226) (259 618)

Other credits and loans (5 850) (5 191)

Banks (450) (1 006)

- allowances for incurred but not reported losses (IBNR)

(450) (1 006)

Provision for potential claims on sale of the loan portfolio (Note 26)

(4 650) (22 937)

Released impairment losses 128 916 161 168

Individuals 124 018 160 636

- release of allowances for incurred but not reported losses (IBNR)

18 917 34 182

Mortgage loan 5 144 12 663

Credit card 797 2 345

Cash loan 12 582 18 893

Other credits and loans 394 281

- release of allowances for impaired receivables 105 101 126 454


Credit card 47 663 4 626

Cash loan 51 181 115 166

Other credits and loans 447 1 499

Banks 898 532

- release of allowances for incurred but not reported losses (IBNR)

898 532

Release of provision for potential claims on sale of the loan portfolio (Note 26)

4 000 -

NET IMPAIRMENT ALLOWANCE (97 429) (178 366)

15. Income tax

Income tax for a given reporting period which affects the financial result includes the following items:

a) current portion,

b) deferred portion.

Current income tax is calculated based on the gross profit determined in line with IFRS adjusted by non-

taxable revenue and expenses which are not tax-deductible.


36

(PLN '000) 2014 2013

Income tax charged to profit/loss for a given financial year

- current portion - 31 787

- current portion (income tax adjustment of previous years)

34 346 -

- change in (net) deferred tax asset (91 743) 13 160

TOTAL (57 397) 44 947

Determination of the effective tax rate

(in PLN ‘000) 2014 2013

Income tax calculation – current portion

Profit before tax 292 136 218 365

Income tax at the statutory rate of 19% (55 506) (41 489)

Permanent differences between profit (loss) and income subject to income tax, including:

(1 315) (947)

- State Fund for Rehabilitation of Disabled Persons (PFRON)

(522) (481)

- non-deductible contributions to organizations

(649) (202)

- other (144) (264)

Other differences between profit (loss) and income subject to income tax, including:

(576) (2 511)

- non-deductible credit allowance costs (477) (2 511)

Income tax charged to profit/loss for a given financial year

(57 397) (44 947)

Effective interest rate % 19,65 20,58

On 25 March 2014, the Bank received an individual interpretation of the tax law issued on behalf of the

Minister of Finance, confirming the lack of tax effect regarding the transfer of credit receivables together with

impairment losses to the off-balance sheet. Upon receipt of the above-mentioned interpretation, the Bank

has made adjustments to the corporate income tax for years 2009-2013 regarding the tax treatment in the

respective periods of impairment losses on loan receivables. Changing the tax base resulting from these

adjustments effects in an excess payment of kPLN 34,346 and tax losses. Correction of the tax return did not

affect the net profit in the statement of comprehensive income. On the other hand, in the statement of

financial position the Bank recognized "receivables from current income tax" in assets, and at the same time

reduced the value of "deferred tax assets".


37

NOTES TO THE STATEMENT OF FINANCIAL POSITION

16. Cash and deposits in the Central Bank

(in PLN ‘000) 31.12.2014 31.12.2013

Cash 72 343 65 889

Funds on accounts in Central Bank 183 639 120 576

TOTAL 255 982 186 465

Cash includes funds in the Bank's cashboxes, CDMs, ATMs and branch vaults.

During the day the Bank can use cash from the account of the mandatory reserve held at the National Bank

of Poland for its current transactions, but it has to provide an average level of cash on the account in order to

satisfy the minimum reserves requirements under the Act on the National Bank of Poland. In the reporting

period covering the 31st of December 2014, the Bank was obliges to maintain an average reserve of kPLN

201,978, and in the reporting period covering the 31st of December 2013 – a reserve of kPLN 203,733.

17. Amounts due from banks

a) structure of receivables

(in PLN ‘000) 31.12.2014 31.12.2013

Current accounts 8 427 8 262

Term deposits 264 668 925 610

Other receivables 32 976

Gross total 273 127 934 848

Impairments (46) (494)

- term deposit IBNR impairment loss (46) (494)

TOTAL 273 081 934 354

In 2014 and 2013 no impairment loss on receivables from banks has been recognized.

b) structure by risk groups

(in PLN ‘000) 31.12.2014 31.12.2013

Non-impaired receivables 273 095 933 872

Other receivables 32 976

IBNR impairment losses (46) (494)

TOTAL 273 081 934 354

c) change in impairment losses

Balance as at 1 January 2014 (in PLN '000) (494)

Change in value of impairments:

IBNR impairment loss on deposits offered to banks (450)

Used impairments - Release of IBNR impairment losses on deposits offered to banks 898

Balance as at 31 December 2014 (in PLN '000) (46)


38

Balance as at 1 January 2013 (in PLN '000) (20)


IBNR impairment loss on deposits offered to banks (1 006)

Used impairments - Release of IBNR impairment losses on deposits offered to banks 532

Balance as at 31 December 2013 (in PLN '000) (494)

d) structure by maturity from the balance-sheet date (face value)

(in PLN ‘000) 31.12.2014 31.12.2013

up to 30 days 8 571 818 405

30 to 90 days 150 024 24

90 to 180 days - -

180 days to 1 year - -

1 to 3 years - -

3 to 5 years 62 000 42 000

over 5 years 50 000 70 000

TOTAL 270 595 930 429

18. Customer loans

a) structure by risk groups

(in PLN ‘000) 31.12.2014 31.12.2013

Gross value

Non-impaired receivables 9 132 793 8 320 249

Impaired receivables 1 014 591 996 022

individually impaired 209 806 181 889

collectively impaired 804 785 814 133

Gross total 10 147 384 9 316 271

Impairments (751 568) (743 511)

impairment loss for non-impaired receivables (58 556) (67 209)

impairment loss for impaired receivables (693 012) (676 302)

Net receivables 9 395 816 8 572 760


39

b) structure by products

(in PLN ‘000) 31.12.2014 31.12.2013

Gross value 10 147 384 9 316 271

Non-impaired receivables 9 132 793 8 320 249

Mortgage loan 4 889 457 4 099 015

Credit card 108 885 120 076

Cash loan 4 093 700 4 075 507

Other credits and loans 40 751 25 651

Impaired receivables 1 014 591 996 022


Credit card 48 080 65 828

Cash loan 743 386 739 120

Other credits and loans 13 319 9 185

Impairment losses (including IBNR) (751 568) (743 511)

Impairment loss for non-impaired receivables (58 556) (67 209)

Mortgage loan (13 862) (13 534)

Credit card (680) (1 447)

Cash loan (43 597) (51 840)

Other credits and loans (417) (388)

Impairment loss for impaired receivables (693 012) (676 302)

Mortgage loan (94 753) (72 358)

Credit card (36 405) (48 948)

Cash loan (548 956) (546 629)

Other credits and loans (12 898) (8 367)


c) structure of receivables by customers

(in PLN ‘000) 31.12.2014 31.12.2013

Gross value 10 147 384 9 316 271

Individuals 10 147 384 9 316 271

Impairments (751 568) (743 511)

Individuals (751 568) (743 511)


d) change in impairments

Balance as at 1 January 2014 (in PLN '000) 743 511


Impairment of loans and credits extended to customers 221 245

Total amounts charged to provisions (89 170)

Reversal of impairments (124 018)

Balance as at 31 December 2014 (in PLN '000) 751 568

Balance as at 1 January 2013 (in PLN '000) 1 952 543


Impairment of loans and credits extended to customers 315 591

Total amounts charged to provisions (1 363 987)

Reversal of impairments (160 636)

Balance as at 31 December 2013 (in PLN '000) 743 511

e) structure by maturity from the balance-sheet date (face value)


40

(in PLN ‘000) 31.12.2014 31.12.2013

up to 30 days 838 079 837 557

30 to 90 days 234 850 236 502

90 to 180 days 334 772 344 048

180 days to 1 year 626 662 666 945

1 to 2 years 1 128 277 1 153 261

2 to 5 years 2 567 789 2 417 910

over 5 years 4 702 155 3 996 847

TOTAL 10 432 584 9 653 070

19. Available-for-sale financial assets

Financial assets available for sale include money bills and shares in Visa INT.

SECURITIES (in PLN '000) 31.12.2014 31.12.2013

With unlimited transferability, unlisted on stock exchange and not placed on regulated over-the-counter market 1 279 932 1 099 851

a) stocks and shares - -

b) bonds - -

c) other – by generic groups: 1 279 932 1 099 851

- T bills - -

- money bills 1 279 932 1 099 851

Unlisted stock 45 33

Total 1 279 977 1 099 884

a) structure by maturity of securities from the balance-sheet date

Maturity dates (PLN '000) 31.12.2014 31.12.2013

Without maturity 45 33 Up to 1 month 1 279 932 1 099 851 From 3 to 6 months - - 1 to 2 years - - 2 to 5 years - -

Total 1 279 977 1 099 884


41

20. Intangible assets

(PLN '000) Organizational

expenses Goodwill Computer software

Internally generated software Other intangible assets

Intangible assets not commissioned

Total

Gross value as at 1 January 2014 43 39 844 31 417 21 152 14 176 15 937 122 569

Additions due to: - - 14 060 11 250 339 10 660 36 309

purchase - - 5 115 248 10 588 15 951

acceptance for use - - 8 379 6 135 91 - 14 605 reclassification between groups 5 681 72 5 753

Disposals due to: - - - 6 833 5 684 10 419 22 936

release for use - - - 6 135 - 8 749 14 884 reclassification between groups - - - - 5 684 5 5 689

liquidation - - - 698 - - 698

release of provisions - - - - - 1 665 1 665 Gross value as at 31 December 2014 43 39 844 45 477 25 569 8 831 16 178 135 942 Depreciation as at 1 January 2014 43 - 25 786 4 463 13 667 - 43959

Additions - - 7 954 5 495 155 - 13 604

- depreciation - - 2 610 5 495 155 - 8 260 - reclassification between groups - - 5 344 - - - 5 344

Disposals - - - 192 5 344 - 5 536 - including reclassification between groups - - - - 5 344 - 5 344 Depreciation as at 31 December 2014 43 - 33 740 9 766 8 478 - 52 027 Impairments 01.01.2014 - 39 844 - - - - 39 844 Impairments 31.12.2014 - 39 844 - - - - 39 844 Net value as at 1 January 2014 - - 5 631 16 689 509 15 937 38 766

Net value as at 31 December 2014 - - 11 737 15 803 353 16178 44 071

All intangible assets are held by the Bank and no intangible assets are used based on a finance lease agreement.


42

(PLN '000) Organizational

expenses Goodwill Computer software

Internally generated software Other intangible assets

Intangible assets not commissioned

Total

Gross value as at 1 January 2013 43 39 844 29 327

14 361 14 015 9 822 107 412

Additions due to: - - 2 275 18 263 341 10 060 30 939

purchase - - 192 7 301 215 9 388 17 096

acceptance for use - - 2 083 10 962 114 - 13 159 reclassification between groups - - - - 12 672 684

Disposals due to: - - 185 11 472 180 3 945 15 782

release for use - - -

10 962 - 2 883 13 845 reclassification between groups - - 185 - 180 - 365

liquidation - - - 510 - - 510

release of provisions - - - - - 1 062 1 062 Gross value as at 31 December 2013 43 39 844 31 417 21 152 14 176 15 937 122 569 Depreciation as at 1 January 2013 43 - 22 679

1 707 13 506 - 37 935

Additions - - 3 107 2 756 161 - 6 024

Disposals - - - - - - - Depreciation as at 31 December 2013 43 - 25 786 4 463 13667 - 43 959 Impairments 01.01.2013 - 39 844 - - - - 39 844 Impairments 31.12.2013 - 39 844 - - - - 39 844 Net value as at 1 January 2013 - - 6 648

12 654 509 9 822 29 633

Net value as at 31 December 2013 - - 5 631 16 689 509 15 937 38 766

All intangible assets are held by the Bank and no intangible assets are used based on a finance lease agreement.


43

21. Tangible fixed assets

(PLN '000)

Buildings and structures

Computers and computer hardware

Technical equipment and machinery

Vehicles Other fixed assets Fixed assets under

construction Total

Gross value as at 1 January 2014 106 340 77 230 10 008 2 426 50 992 9 240 256 236

Additions due to: 6 909 4 570 165 - 1 550 18 868 32 062

purchase 1 868 100 57 - 757 17 879 20 661

acceptance for use 5 041 4 466 108 - 793 - 10 408 reclassification between groups - 4 - - - 989 993

Disposals due to: 3 571 2 225 10 2 370 1 077 11 122 20 375

sale - 5 - 2 370 - - 2 375

liquidation 3 520 2 220 - - 1 074 - 6 814

release for use - - - - - 10 129 10 129

reclassification between groups 51 - 10 - 3 993 1057 Gross value as at 31 December 2014 109 678 79 575 10 163 56 51 465 16 986 267 923 Depreciation as at 1 January 2014 56 980 66 550 8 150 2 091 46 860 - 180 631

Additions 10 749 5 399 703 215 1 726 - 18 792

depreciation 10 596 5 399 698 215 1 726 - 18 634

other additions 153 - 5 - - - 158

Disposals due to: 2 618 2 248 1 2 253 1 123 - 8 243

sale - - - 2 252 - - 2 252

liquidation 2 618 2 225 1 055 - 5 898

other disposals - 23 1 1 68 93 Depreciation as at 31 December 2014 65 111 69 701 8 852 53 47 463 - 191 180 Impairment loss as at 1 January 2014 3 865 - - - - - 3 865

Additions - - - - - - -

Disposals 1 598 - - - - - 1 598 Impairment loss as at 31 December 2014 2 267 - - - - - 2 267 Net value as at 1 January 2014 45 495 10 680 1 858 335 4 132 9 240 71 740

Net value as at 31 December 2014 42 300 9 874 1 311 3 4 002 16 986 74 476

All tangible fixed assets are held by the Bank and no such assets are used based on a finance lease agreement. In the current year, the Bank used impairment losses of kPLN 861 in connection with implementation of the plans to improve Bank’s branches.


44

(PLN '000)

Buildings and structures

Computers and computer hardware

Technical equipment and machinery

Vehicles* Other fixed assets Fixed assets under

construction Total

Gross value as at 1 January 2013 103 837 68 908 9 850 9 527 51 450 7 536 251 108

Additions due to: 6 724 11 006 190 - 1 751 16 788 36 459

purchase 1 852 1 344 74 - 1 148 15 210 19 628

acceptance for use 4 772 9 662 110 - 594 - 15 138 reclassification between groups 100 - 6 - 9 1 578 1 693

Disposals due to: 4 221 2 684 32 7 101 2 209 15 084 31 331

sale - - - 7 101 776 - 7 877

liquidation 4 196 1 097 12 - 1 430 - 6 735

release for use - - - - - 14 452 14 452 reclassification between groups 25 1 587 20 - 3 377 2 012

release of provisions - - - - - 255 255 Gross value as at 31 December 2013 106 340 77 230 10 008 2 426 50 992 9 240 256 236 Depreciation as at 1 January 2013 49 862 60 452 7 130 7 283 46 135 - 170 862

Additions 10 402 7 195 1 032 989 2 791 - 22 409

Disposals due to: 3 284 1 097 12 6 181 2 066 - 12 640

sale - - - 6 181 776 - 6 957

liquidation 3 284 1 097 12 - 1 290 - 5 683 Depreciation as at 31 December 2013 56 980 66 550 8 150 2 091 46 860 - 180 631 Impairment loss as at 1 January 2013 1 242 - - - - - 1 242

Additions 2 623 - - - - - 2 623

Disposals - - - - - - - Impairment loss as at 31 December 2013 3 865 - - - - - 3 865 Net value as at 1 January 2013 52 733 8 456 2 720 2 244 5 315 7 536 79 004

Net value as at 31 December 2013 45 495 10 680 1 858 335 4 132 9 240 71 740

All tangible fixed assets are held by the Bank and no such assets are used based on a finance lease agreement. In the current year, the Bank released impairment provisions of kPLN 2,623 in connection with implementation of the plans to improve Bank’s branches. * Vehicles owned by the Bank are progressively replaced by long-term rentals (operating lease) provided by ALD Automotive Poland Sp. z o.o.


45

22. Deferred tax assets

(PLN '000)

31.12.2014 31.12.2013*

Base Asset Base Asset

Tax rate 19% - 19%

Allowances for credit exposures 452 481 85 971 990 824 188 256

Accrued interest to be paid 57 869 10 995 71 770 13 636

Deferred fee and commission income 358 639 68 141 392 680 74 609

Provisions and deferred insurance income 50 162 9 531 50 078 9 515

Valuation of hedge accounting - ineffective part 8 360 1 588 10 556 2 006

Accrued expenses 60 691 11 531 55 136 10 476

Impairment losses on other receivables 32 719 6 217 32 610 6 196

Impairment losses on fixed assets 2 267 431 3 865 734

Tax loss 214 410 40 738 95 917 18 224

Interest accrued on receivables (75 940) (14 429) (59 324) (11 271)

Interest accrued on discount of securities (213) (40) (382) (73)

Intangible assets generated internally (16 182) (3 075) (16 689) (3 171)

Balance sheet taxable income in next year (8) (2) (14) (3) Book amortization (tangible assets and intangible assets) (4 416) (839) (3 332) (633)

Total – Items to profit and loss 1 140 839 216 759 1 623 695 308 501

Valuation of hedge accounting – effective part 9 573 1 819 18 681 3 550

Valuation of securities (44) (8) (32) (6)

Total – Items to revaluation capital 9 529 1 811 18 649 3 544

Total 1 150 368 218 570 1 642 344 312 045

*Transformed data (transfer of the amount of kPLN 3,643 from "provisions and deferred insurance income" to "impairment losses on other receivables")

The Bank analyzes the recoverability of the deferred tax assets and in particular the application of provision

for credit exposures. As a result of filing tax returns adjustments, as described in Note 15, the Bank

recognized tax losses in years 2011-2013 to the total amount of kPLN 407,468, which will be used within

max. 5 years. As at 31 December 2014, the loss of previous years remaining for use amounts to kPLN

214,410.


46

23. Other assets

Structure of other assets

(PLN '000) 31.12.2014 31.12.2013*

Accruals, including: 5 327 6 847

- rents paid in advance 231 364

- insurances paid 1 564 1 818

- IT services 999 1 344

- materials purchased but not released for use 1 570 2 617

- other 963 703

Other assets, of which: 24 371 14 354

- payment card settlements 1 717 1 889

- account receivables 3 761 1 736

- advance payments to suppliers 10 060 2 843

- insurance receivables 3 214 5 404

- loan receivables 876 686

- receivables arising from VAT 2 058 -

- other assets 2 685 1 796

TOTAL 29 698 21 201

including financial assets** 21 686 12 558

*Transformed data **The financial assets item does not include "Accruals” and "Other assets".

24. Amounts due to banks and financial institutions

(PLN '000) 31.12.2014 31.12.2013


Deposits 235 037 143 930

Loans 4 064 724 4 135 551

TOTAL 4 301 364 4 281 082

Liabilities to other banks and financial institutions – structure by type

(PLN '000) 31.12.2014 31.12.2013

Banks 4 064 933 4 135 616

Current accounts 209 65

Loans 4 064 724 4 135 551

Financial institutions 236 431 145 466


Deposits 235 037 143 930

TOTAL 4 301 364 4 281 082


47

Liabilities by maturity from the balance-sheet date (face value)

(PLN '000) 31.12.2014 31.12.2013

Up to 1 month 37 050 86 141

Over 1 month to 3 months 70 894 67 632

Over 3 months to 6 months 25 299 -

Over 6 months to 1 year 283 315 287 632

Over 1 year to 5 years 2 205 177 2 128 196

Over 5 years 1 649 430 1 680 136

TOTAL 4 271 165 4 249 737

25. Amounts due to customers

(PLN '000) 31.12.2014 31.12.2013

Current accounts 3 010 362 2 594 452

Fixed-term deposits 2 551 125 2 984 291

TOTAL 5 561 487 5 578 743

Liabilities to clients – structure by type

(PLN '000) 31.12.2014 31.12.2013

Individuals 5 561 487 5 578 743

Current accounts 3 010 362 2 594 452

Fixed-term deposits 2 551 125 2 984 291

TOTAL 5 561 487 5 578 743

Liabilities by maturity (face value)

(PLN '000) 31.12.2014 31.12.2013

Up to 1 month 3 465 955 3 200 495

Over 1 month to 3 months 777 272 951 766

Over 3 months to 6 months 664 111 791 652

Over 6 months to 1 year 468 101 546 346

Over 1 year to 5 years 159 628 48 689

Over 5 years - -

TOTAL 5 535 067 5 538 948

26. Provisions

(in PLN ‘000)

Provision for liabilities

resulting from rental

agreements Provision for legal claims

Provision for future losses due

to concluded agreements

Provision for retirement severance

TOTAL PROVISION

As at 1 January 2014 144 1 268 23 550 200 25 162

Additions - 148 5 039 24 5 211

Use - 234 500 - 734

Release 144 345 4 113 - 4 602

As at 31 December 2014 - 837 23 976 224 25 037

At the end of 2014, the provision for potential claims related to the refund of the price related to the

guarantee for sold loan portfolios amounted to mPLN 23.9.


48

(in PLN ‘000)

Provision for liabilities

resulting from rental

agreements Provision for legal claims

Provision for future losses due

to concluded agreements

Provision for retirement severance

TOTAL PROVISION

As at 1 January 2013 636 644 2 048 176 3 504

Additions 258 632 23 665 24 24 579

Use - - - - -

Release 750 8 2163 - 2 921

As at 31 December 2013 144 1 268 23 550 200 25 162

In 2013, the Bank created the provision of MPLN 23.5 for potential claims to return the price in connection

with the guarantee for a sold portfolio of credit claims.

27. Derivative instruments in hedge accounting

(PLN '000) 31.12.2014 31.12.2013

Cash Flow Hedge instrument 17 934 29 047

TOTAL 17 934 29 047

28. Other liabilities

(in PLN ‘000) 31.12.2014 31.12.2013*

Other liabilities, including: 56 828 44 632

- sundry creditors 42 998 30 136

- interbank settlements 7 065 6 238

- statutory settlements 6 765 8 258

Costs to be paid, including: 70 721 66 465

- wages and salaries 14 034 14 547

- due to agents’ fees 3 710 3 623

- management services 9 342 8 306

- investments 11 047 16 863

- holidays 7 424 6 452

- rents 2 238 878

- card fees 2 568 2 115

- IT and telecommunications services 3 163 2 109

- promotion and advertisement 4 421 3 258

- postal services 768 873

- consultancy 6 983 3 396

- collection services 44 24

- other costs to be paid 4 979 4 021 Estimated future returns of remuneration for insurance intermediation and income settled over time, of which: 50 162 50 079

- estimated future returns of remuneration for insurance intermediation 30 383 28 300 - income on insurance intermediation settled over time 19 779 21 779

TOTAL 177 711 161 176

*Transformed data


49

29. Subordinated loan

As at 31 December 2014 the Bank had subordinated loans of PLN 330,000,000 based on:

- the agreement of 8 July 2010 to the amount of PLN 80 000 000 (total one-time repayment on 29 March

2017),

- the agreement of 16 August 2012 to the amount of PLN 50,000,000 (total one-time repayment on 5 August

2019),

- the agreement of 17 December 2013 to the amount of PLN 50,000,000 (total one-time repayment on 20

December 2020),

- the agreement of 15 May 2014 to the amount of PLN 150,000,000 (total one-time repayment on 17 May

2021)

As at 31 December 2013 the Bank had subordinated loans of PLN 180,000,000 based on:

- the agreement of 8 July 2010 to the amount of PLN 80 000 000 (total one-time repayment on 29 March

2017),

- the agreement of 16 August 2012 to the amount of PLN 50,000,000 (total one-time repayment on 5 August

2019),

- the agreement of 17 December 2013 to the amount of PLN 50,000,000 (total one-time repayment on 21

December 2020),

The lender is not entitled to demand early repayment of the loan. The loan has a floating interest rate

(WIBOR plus margin):

- agreement of 8 July 2010 (WIBOR 3M + 0.91%),

- agreement of 16 August 2012 (WIBOR 3M + 3.78%),

- agreement of 17 December 2013 (WIBOR 3M + 3.08%),

- agreement of 15 May 2014 (WIBOR 3M + 1.602%),

In order to strengthen the solvency ratio, in 2014 the Bank incurred a subordinated loan in the amount of

PLN 150 000 000 for the period of 7 years.

Pursuant to Art. 127 of the Banking Act and to resolutions of the Polish Financial Supervision Authority

(PFSA), the loans were classified to additional funds of the Bank based on the following decisions:

- PFSA decision of 30 July 2010,

- PFSA decision of 27 September 2012,

- PFSA decision of 30 December 2013,

- PFSA decision of 27 May 2014.

(in PLN ‘000) 31.12.2014 31.12.2013

Subordinated loan gross amount 331 249 180 630


50

30. Share capital as at the reporting date

Series Type Number of shares Face value per share

Value of issued shares (PLN ‘000)

A Ordinary shares 39 340 13,83 544

B Ordinary shares 16 000 13,83 221

C Ordinary shares 6 600 13,83 91

D Ordinary shares 120 424 13,83 1 666

E Ordinary shares 28 795 13,83 398

F Ordinary shares 43 719 13,83 605

G Ordinary shares 15 076 13,83 209

H Ordinary shares 158 413 13,83 2 191

I Ordinary shares 67 926 13,83 939

S Ordinary shares 1 537 404 13,83 21 262

T Ordinary shares 3 253 800 13,83 45 000

U Ordinary shares 7 230 000 13,83 99 991

W Ordinary shares 2 169 197 13,83 30 000

X Ordinary shares 723 066 13,83 10 000

Y Ordinary shares 144 614 13,83 2 000

Z Ordinary shares 1 446 132 13,83 20 000

L Ordinary shares 1 300 000 13,83 17 979

M Ordinary shares 1 301 517 13,83 18 000

N Ordinary shares 1 663 052 13,83 23 000

O Ordinary shares 2 386 118 13,83 33 000

Reduction on the face value of shares 11,29 -60 074

P Ordinary shares 5 320 995 11,29 60 074

R Ordinary shares 3 631 533 11,29 41 000

Q Ordinary shares 4 694 420 11,29 53 000

J Ordinary shares 3 454 385 11,29 39 000

K Ordinary shares 2 037 202 11,29 23 000

AA Ordinary shares 7 085 917 11,29 80 000

Total 49 875 645 11,29 563 096

As at 31 December 2014, Societe Generale Consumer Finance SA belonging to the Societe Generale

Group, which held 49,636,482 shares and votes at the General Shareholders’ Meeting, i.e. 99,52% of all

shares and votes, was the only shareholder that held over 5% of the Bank’s shares.

a) Preference shares and limitation of rights associated with shares

The Bank’s shares are not associated with any preferences and limitations.

b) Own shares held by the Bank or its subsidiaries, co-subsidiaries and associates

As at 31 December 2014 and 31 December 2013, the Bank did not hold any own shares.


51

31. Supplementary capital (funds)

(in PLN ‘000) 31.12.2014

Balance as at 1 January 2014 228 180

Allocation of profit for previous years 173 418

TOTAL 401 598

32. Revaluation capital reserve

(in PLN ‘000) 31.12.2014

Balance as at 1 January 2014 (15 105)

Net profit (loss) on revaluation of financial assets available for sale 9

Net profits (losses) on valuation of derivative instruments hedging cash flows

7 377

TOTAL (7 719)

(in PLN ‘000) 31.12.2013

Balance as at 1 January 2013 (20 203)

Net profit (loss) on revaluation of financial assets available for sale 3

Net profits (losses) on valuation of derivative instruments hedging cash flows

5 095

TOTAL (15 105)

(in PLN ‘000) 31.12.2013

Balance as at 1 January 2013 22 957

Allocation of profit for previous years 205 223

TOTAL 228 180


52

33. Operating lease

a) income and expenses due to operating leases – lessor (computer hardware lease)

(in PLN ‘000) 2014 2013

Operating lease income 73 73

Operating lease expenses 70 68

b) maturity dates of operating leases – lessor (computer hardware lease)

Maturity dates (in PLN '000) 31.12.2014 31.12.2013

Up to 1 year 59 79

1 to 5 years 29 71

Over 5 years - -

c) income and expenses due to operating leases – lessee (vehicle lease)

(PLN '000) 2014 2013

Operating lease expenses (lease payments - rents) 4 316 4 454

Operating lease expenses (lease payments - maintenance service)

2 449 1 692

d) maturity dates of operating leases – lessee (vehicle lease)


Lease payments

Up to 1 year 4 063 3 739

1 to 5 years 6 475 3 108

Over 5 years - -

Maintenance fees

Up to 1 year 1 639 1 678

1 to 5 years 2 389 1 238

Over 5 years -

TOTAL 14 566 9 763

e) income and expenses due to operating leases – lessee (rents)

(PLN '000) 2014 2013

Operating lease expenses (lease payments) 57 931 54 055

f) maturity dates of operating leases – lessee (rents)


Up to 1 year 51 744 53 693

1 to 5 years 113 035 112 901

Over 5 years 12 861 15 976

TOTAL 177 640 182 570

Operating lease agreements relate to lease of functional movables and real properties under normal

operations.

All agreements are concluded with market terms and conditions, without special or non-standard provisions.


53

RISK MANAGEMENT OBJECTIVES AND PRINCIPLES

34. Risk management at the Bank

a) Basic assumptions of the risk management system at Euro Bank S.A.

Pursuant to Art. 9(3) of the Banking Act (Journal of Laws of 2002 No. 72, item 665, as amended), the

requirements under Resolution no. 258/2011 of the Polish Financial Supervision Authority of 4 October 2011

(as amended) and relevant recommendations of the Polish Financial Supervision Authority, Euro Bank S.A.

implemented a risk management system developed by the Management Board and approved by the

Supervisory Board (last update of 6 November 2013).

The objective of the risk management system is to identify, measure or estimate, monitor and control risk in

the Bank’s operations, which ensures correctness of the process of setting and achieving detailed objectives

of the Bank’s business activity.

The risk management system at Euro Bank is based on:

the Bank’s appropriate organizational structure adjusted to the size and profile of the incurred risk

and a division of roles ensuring independence of risk identification, measurement, monitoring and

control activities from the operating activity giving rise to the Bank’s exposure to risks,

strategies and procedures updated systematically and describing the division of roles in line with the

Bank’s organizational structure, the principles governing cooperation between units as well as other

rules aimed at ensuring proper operation of the risk management system implemented by the Bank,

periodic information, approved by the Management Board and passed to the Supervisory Board,

which present the types and size of risk in the Bank's operation in a reliable, clear and synthetic

way,

the material risk identification process.

The risk management at Euro Bank is compliant with the Polish law and the requirements of supervision

authorities.

b) The organizational structure and the role of individual organizational units in the

management of risks associated with the activities of the Bank

Role of the Management Board and Supervisory Board of Euro Bank S.A.

The Bank's Management Board monitors, on an ongoing basis, the risks the Bank is or may be exposed to.

The Management Board takes relevant actions to adjust the Bank's organizational structure to effectively

manage all risk types. Considering the scope of the Bank's operations, the Management Board adapts

relevant procedures which are a basis for performing the Bank's activity and managing risks. The

Management Board is responsible for preparing and, upon approval of the Supervisory Board, implementing

the Bank's strategy.

The Management Board delegates the management of individual risk types to relevant organizational units

of the Bank. In its activities, the Management Board also relies on opinions of established committees and on

results of audits provided by the Internal Audit Department and independent auditors.


54

The Supervisory Board supports the Management Board in effective management of the Bank. The

Supervisory Board in particular approves the Bank's strategy and the organizational structure adjusted to the

scale of activities and risks.

Based on periodic reports presented by relevant units, the Management Board and the Supervisory Board

monitor risks to borne by the Bank and their evolution over time.

List and definitions of risks in the Bank's activity

The Management Board of Euro Bank approves and updates the list of risks related to the Bank's activity.

The current list of risks includes:

Credit and counterparty risk – risk of financial loss related to insolvency of a borrower or

counterparty.

Residual risk – risk of risk mitigation techniques used by the Bank being less effective than

assumed.

Concentration risk – risk of default by a single entity or entities linked by capital or organization, or

entity groups for which the probability of default depends on common factors.

Operational risk – risk resulting from inadequate or failed internal procedures, people and internal

systems as well as resulting from external events, including ones with low probability of emergence,

yet resulting in significant losses. According to the Bank's standards, the definition of operational

risk includes compliance risk and reputation risk, excluding strategic risk (i.e. the risk related to

inappropriate strategic decisions affecting the activities of the Bank).

Liquidity risk – risk of not being able to meet liabilities in due time,

Interest rate risk – sensitivity of the financial result to interest rate fluctuations,

Market risk – risk of deterioration of the Bank's financial result caused by fluctuations of market

parameters – for Euro Bank S.A. it is a change in the exchange rate,

Risk related to changes to macroeconomic conditions – risk of losses resulting from changes in

macroeconomic conditions.

Compliance risk – risk of legal, administrative or disciplinary sanctions, financial loss or damaged

reputation of the Bank resulting from incompliance with legal provisions, internal regulations and

codes of conduct adopted by the Bank,

Reputation risk – risk of deterioration of the Bank's image in terms of relationships with customers,

counterparties, shareholders and regulators,

Strategic risk – the risk of incurring losses resulting from adverse changes in business environment,

disadvantageous decisions, improper implementation of decisions or failure to take appropriate

actions, which would respond to the changing business environment.

The following section of the statements describes the credit and counterparty risks, the interest rate risk, the

currency risk, the concentration risk, the liquidity risk and the operational risk.

35. Credit and counterparty risks management

Credit and counterparty risk is the risk of financial loss incurred due to insolvency of borrowers or

counterparties. In granting loans and developing new advanced financing methods, the Bank incurs the risk

of the borrower failing to repay the loan or other liability in the agreed period. The Bank is always exposed to


55

this type of risk, irrespective of the form of financing. The risk results mainly from the clients’ inability to fulfill

their obligations towards the Bank, arising from deterioration in their financial position.

Insolvency risk is assessed by the Bank based on application and behavioral scoring.

Scoring assigned to a particular borrower / transaction allows the Bank to determine the probability of the

borrower’s default.

1. Identification of events of default

The list of default events specified by the Bank complies with the requirements of the New Capital Accord

and is identical with the list of circumstances indicating impairment as defined in IAS 39 “Financial

Instruments – Recognition and Measurement” as well as the provisions of the “R Recommendation” issued

by the Polish Financial Supervision Authority.

The list of objective evidence (events of default) takes into consideration both quantitative and qualitative

data, including:

occurrence of a material amount past due by more than 90 days in any relevant account of the

borrower;

significant deterioration in the economic and financial position of the borrower or occurrence of other

factors which constitute a threat to the repayment of receivables;

restructuring involving the Bank entering into an arrangement with the borrower, for economic or legal

reasons related to the counterparty’s difficult financial position which would not be otherwise entered

into;

identification of fraud or obtaining / attempt to obtain a loan under false pretences;

issuance of a bank enforcement title to the account;

expiry of the loan agreement notice period.

Measurement is determined by event identification combined with the size of the credit exposure.

2. Measurement of credit exposures with respect to impairment.

The principles for measurement of the Bank’s credit exposure impairment are determined based on the

International Accounting Standards, International Financial Reporting Standards and the “R

Recommendation” issued by the Polish Financial Supervision Authority.

For the purposes of measurement the entire credit portfolio was divided into the following sub-portfolios:

individual (individual material exposures with indications of impairment),

collective (exposures with indications of impairment, immaterial individually).

The division into homogenous groups was based on:

distribution channel;

product type;

loan currency (for mortgage loans);

LTV (for mortgage loans).


56

3. Calculation of capital requirement due to credit risk

The Bank applies a standard method of calculating the capital requirement due to credit risk.

4. Credit risk management system components

The credit risk management system consists of the following components:

strategy, policies and procedures;

credit process organization;

credit risk assessment, scoring system;

credit risk mitigation;

credit risk monitoring.

5. Credit risk monitoring

The Bank’s credit risk is monitored and quantified in a regular process based mainly on an efficient

classification system, including appropriate procedures and tools, i.e. the rating system, the early warning

system and a mechanism for identification and designation of events of default. The respective procedures

are applied to both exposures classified as normal and exposures at risk subject to restructuring and

collection. Additionally, the accepted collateral (its value and certainty of use) is subject to ongoing

monitoring.

a) structure of amounts due from clients by the past-due period

Past-due receivables (total)

Past-due period (in PLN '000) Gross value as at 31.12 2014

Gross value as at 31.12

2013

Repaid on a timely basis 8 383 840 7 493 472

1 to 30 days 670 298 747 467

30 to 90 days 213 880 227 473

Total healthy and up to 90 days past due receivables 9 268 018 8 468 412

30 to 180 days 92 790 102 281

180 days to 1 year 101 672 128 124

1 to 2 years 194 453 268 163

2 to 3 years 211 658 186 358

3 to 5 years 235 594 154 413

Over 5 years 43 199 8 520

Total receivables over 90 days past due 879 366 847 859

Total 10 147 384 9 316 271


57

Non-impaired past-due receivables

Past-due period (in PLN '000) Gross value as at 31.12 2014

Gross value as at 31.12

2013

1 to 30 days 636 262 709 407

30 to 90 days 177 538 185 390

Total receivables up to 90 days past due 813 800 894 797

90 to 180 days 1 14

180 days to 1 year 1 1

1 to 2 years 4 2

2 to 3 years 0 5

3 to 5 years 3 9

Over 5 years 2 -

Total receivables over 90 days past due 11 31

Total 813 811 894 828

b) collaterals

(PLN '000) 31.12. 2014 31.12. 2013

Fair value of credit collaterals 6 654 880 5 232 880

The Bank uses additional collateral to improve the terms of financing in the scope of:

retail loans – life and non-life insurance,

mortgage loans – capped mortgage or life and non-life insurance.

The Bank does not use other credit collaterals, e.g. credit derivatives.

The most important security for the Bank's credit portfolio are real property mortgage collaterals. The Bank

assesses the value of any collateral by examining documents submitted by borrowers, the valuation carried

out by independent experts, and internal and external databases.

For mortgage collaterals the Bank monitors the LTV ratio (loan-to-value ratio), including regularly updated

collateral value and the current value of the exposure.

c) debt restructuring

Through the restructuring process, the Bank allows customers to handle the loan properly. The restructuring

process is performed by way of annexing of the initial loan agreement, usually terminated by the Bank.

Restructuring applies to credits extended to individuals.

Restructuring is carried out at the request of the customer, and may by proposed to the customer by the

Bank. The Bank proposes the customer a relevant restructuring offer allowing him/her the handle their

liabilities in a timely manner. Restructuring covers debt obligations of customers whose economic and

financial or personal situation deteriorated upon receiving the restructured loan.

The restructuring process is carried out based on approved rules determining, among others, the following:

the circumstances giving ground to restructuring,

the terms of the agreement that may by changed and to what extent,

credit capacity assessment methodology for customers subject to restructuring, and

the credit history a customer should have to start restructuring negotiations.


58

Under the debt valuation process, the restructuring loans, in case of which a delay of 180 days has been

observed for the restructured loan, remain in the group of impaired loans, and are not reclassified to the

group of non-impaired loans. The write-offs for restructured loans are estimated using statistical models,

taking into account the characteristics of this portfolio.

Non-impaired restructuring loans are not covered by IBNR provisions estimated based on a statistical model.

The impaired portfolio is covered by allowances at the level of 74%.

Structure of restructured receivables by risk groups

(in PLN ‘000) 31.12.2014 31.12.2013

Gross value

Non-impaired receivables 3 6 408

Impaired receivables 59 179 59 253

Gross total 59 182 65 661

Impairments (43 920) (48 004)

impairment loss for non-impaired receivables - (289)

impairment loss for impaired receivables (43 920) (47 715)

Net receivables 15 262 17 657

Impact on interest income - restructured receivables

(PLN '000) 2014 2013

Non-impaired loans 2 417 571

Impaired loans 1 590 3 324

TOTAL 4 007 3 895

Exposure of the Bank by geographical segments for restructured receivables (receivables from

customers - gross value)

Region 31.12.2014 (%) 31.12.2013 (%)

Dolnośląskie 9 11

Kujawsko-Pomorskie 7 5

Lubelskie 4 4

Lubuskie 2 2

Łódzkie 6 7

Małopolskie 7 10

Mazowieckie 14 15

Opolskie 3 3

Podkarpackie 3 4

Podlaskie 1 1

Pomorskie 4 4

Śląskie 18 17

Świętokrzyskie 2 3

Warmińsko-Mazurskie 3 1

Wielkopolskie 12 10

Zachodniopomorskie 5 3

TOTAL 100 100

Restructured loans have a small share in the Bank's portfolio, and the share is decreasing. In 2014, the

portfolio of impaired debts is at a similar level to the portfolio of impaired debts in 2013.


59

Impaired receivables gross value (in PLN '000) as at 1 January 2014 59 253

additions due to change of risk groups 37 329

disposals: (37 403)

- due to portfolio sale -

- remission and transfer to off-balance sheet (8 691)

- due to repayments (28 712)

Impaired receivables gross value (in PLN '000) as at 31 December 2014

59 179

Additionally, for the purposes of estimating IBNR impairments, since 2014 the Bank has been recognizing a

group of non-impaired receivables for which the client has applied for change in the terms of repayment, and

in the period of 3 months preceding the application there was a delay in payment over 30 days (ie.

forberance). This group is covered by IBNR allowance, which is estimated based on PD parameters

determined for this particular group.

Within the forberance group, the Bank considers loans for which the an application for a change of the

schedule has been submitted, and in the 3 months prior to this application, there was a delay of 30 days.

Such loans remain in the non-impairment group in the forberance portfolio until full repayment, or

reclassification.

In the process of rescheduling during the term of the agreement, the Bank allows the customer to reschedule

the loan by:

Prolongation of repayments (from 1 to 3 months)

Reduction the amount of installments for a period of max. 12 months

Changing the installment date

The decision on restructuring is made in the Collection Department, and is preceded by a financial analysis

of the customer's situation and supported by a statistical model defining customers eligible for restructuring.

The risk observed for restructured loans is reflected in the PD parameters observed in this portfolio.

Loans in the forberance group constitute a homogenous portfolio for the purpose of estimating IBNR

allowance. For the classification of loans to the impairment group, the Bank applies the same principles as

for non-forberance loans (including 90+ delay, termination, extortion, difficult situation on the customer on the

basis of the status assigned by the Collection Department). A loan classified as impaired remains in this

category indefinitely.


60

Data as at 31 December 2014

Past-due group

Non-impaired receivables (principal)

PD (within LIP) IBNR

Receivables from the forberance group

1_to_29_days 86 586 6,7% 3 153

2_to_59 13 976 23,6% 1 735

3_to_89 8 630 37,2% 1 685

Receivables from the forberance group 109 192

6 573

1_to_29_days 4 375 6,7% 159

2_to_59 1 392 23,6% 173

3_to_89 2 065 37,2% 403

Receivables from the non-foberance group 7 832

735

TOTAL: 117 024 7 308

d) max. credit risk exposure

Statement of financial position items (PLN '000)

31.12.2014 31.12.2013*

Funds on the account in Central Bank 183 639 120 576

Amounts due from banks 273 081 934 354

Amounts due from customers 9 395 816 8 572 760

Financial assets available for sale – debt securities 1 279 932 1 099 851

issued by the Central Bank 1 279 932 1 099 851

Other assets 21 686 12 558

TOTAL 11 154 154 11 740 099

*Transformed data

Off-balance sheet items (PLN '000)

31.12.2014 31.12.2013

Granted financial liabilities 628 002 545 209

TOTAL 628 002 545 209

36. Concentration risk management

Concentration risk - which may exert a material influence on the stability and security of the Bank’s

operations is the risk of non-fulfillment of obligation(s) by individual entities and groups of entities in the case

of which the probability of default depends on the same factors.

Due to the nature and large diversification of the credit portfolio, the Bank has established the following limits

in the concentration of exposure management policy:

Inter-bank portfolio


61

The Bank applies limits approved by the Management Board based on the Banking Act and considering

resolutions of the Polish Financial Supervision Authority.

Credit portfolio

1) Limit for a single exposure/single borrower. Due to the characteristics of the Bank, the following limits

(1/20 of a large exposure defined in resolution no. 208/2011 of the Polish Financial Supervision Authority)

apply:

the maximum credit exposure amounts to the maximum credit exposure is 0.5% of the Bank’s equity.

2) Concentration limits in the portfolio are defined based on the Bank’s business strategy, among other, the

Financial Plan approved by the Management Board and Supervisory Board of the Bank.

Strategic limits include:

- Portfolio limit for exposures denominated in foreign currencies. In 2014, the Bank did not grant loans

denominated in foreign currencies. If such loans are extended, the Bank will establish a relevant limit and will

agree the way it will be established.

- Portfolio limit for exposures with real property collateral. The maximum exposure which the Bank may have

for the portfolio of loans with real property collateral. The limit is established based on allocation of risk

appetite to the portfolio of loans with real property collateral and evaluation of liquidity risk. The limit is

established in cooperation with the Assets and Liabilities Management Committee.

- Portfolio limit for exposures for Bank’s employees holding managerial positions. Limit is in compliance with

Art.. 79a of the Banking Act.

The entity responsible for identification, measurement and monitoring of concentration risk is the Risk and

Analyses Department (DRiA). Pursuant to the internal procedure, the Department monitors the use of the

limits and thresholds for the credit portfolio on a quarterly basis. The current use of concentration limits is

reported to the Risk Committee on a quarterly basis. The findings and information are presented at the

meeting of the Risk Committee.

As at 31 December 2014, the equity, which serves as the basis for defining large exposure limits, in

accordance with Article 395 of CRR amounted to kPLN 1,241,674 (as at 31 December 2013: kPLN

1,008,953). No concentration limits were exceeded as at 31 December 2014 for the exposures of the Bank

against retail customers for granted loans and credits, and against another domestic bank, credit institution,

foreign bank or a group of entities related by capital or organization.


62

Exposure of the Bank by geographical segments (receivables from customers - gross value)

Region 31.12.2014 (%) 31.12.2013 (%)

Dolnośląskie 11 10

Kujawsko-Pomorskie 6 6

Lubelskie 3 3

Lubuskie 3 3

Łódzkie 5 5

Małopolskie 8 7

Mazowieckie 15 15

Opolskie 3 2

Podkarpackie 3 3

Podlaskie 2 2

Pomorskie 7 7

Śląskie 16 17

Świętokrzyskie 2 2

Warmińsko-Mazurskie 3 4

Wielkopolskie 8 8

Zachodniopomorskie 5 6

TOTAL 100 100

37. Interest rate risk management

Interest rate risk results from the exposure of the Bank to adverse impact of interest rate fluctuations. The

Bank does not carry out material trading activity as understood under Resolution No. 76/2010 of the Polish

Financial Supervision Authority of 10 March 2010 on the scope and detailed rules of capital requirements for

specific types of risk. The interest rate risk is generated by the banking portfolio.

It is assumed that interest rate risk management is aimed at limiting changes to the Bank’s financial result

sensitive to changes in interest rates (NII) and the economic value of capital (EVC) to a level which does not

constitute a threat to the Bank’s security. The objective is achieved through the optimization of the structure

of the Bank's balance sheet, off-balance sheet items and interest margin. In order to ensure effective interest

rate risk management, the Bank is supported by hedge accounting mechanisms.

Interest bearing items split by type of the rate as at 31 December 2014 are presented in the table below:

Fixed interest rate Variable interest

rate Rate managed by

the Bank Total

Interest bearing assets

54% 44% 2% 100%

Non-financial sector 40% 44% 2% 86%

Financial sector 14% 0% 0% 14%

Interest bearing liabilities

35% 42% 23% 100%



Interest bearing items split by type of the rate as at 31 December 2013:


63

Fixed interest rate Variable interest

rate Rate managed by

the Bank Total

Interest bearing assets

60% 38% 2% 100%



Interest bearing liabilities

44% 35% 21% 100%



The assessment of the overall exposure to the interest rate risk in the banking portfolio is based on the

analysis or risk of a mismatch of the dates of restatement, base risk and client’s option risk.


64

Gap analysis (assets/liabilities and off-balance sheet liabilities) by interest rate revaluation as at 31 December 2014 (in PLN '000)

ASSETS up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y NIB* Total

Cash and balances with Central Bank

183 640 - - - - - - 72 342 255 982

Amounts due from banks 8 571 150 024 - - - 62 000 50 000 2 486 273 081

Amounts due from customers 440 968 5 239 808 671 183 940 779 1 174 774 1 172 578 136 642 (380 916) 9 395 816

Financial assets held as investment

1 280 000 - - - - - - (23) 1 279 977

Other assets - - - - - - - 401 640 401 640

TOTAL ASSETS 1 913 179 5 389 832 671 183 940 779 1 174 774 1 234 578 186 642 95 529 11 606 496

*NIB – non-interest bearing items

OFF-BALANCE LIABILITIES GRANTED

up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y NIB* Total

Derivatives 14 818 - 570 000 - - - - - 584 818



65

LIABILITIES up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y NIB* Total

Amounts due to banks and financial institutions

831 945 2 444 146 39 219 270 953 284 713 398 939 - 31 449 4 301 364

Amounts due to customers 1 634 282 1 583 217 1 105 543 938 714 236 654 36 142 515 26 420 5 561 487

Other liabilities - - - - - - - 220 682 220 682

Subordinated debt - 331 249 - - - - - - 331 249

Capitals and current year profit/loss

- - - - - - - 1 191 714 1 191 714

TOTAL EQUITY AND LIABILITIES

2 466 227 4 358 612 1 144 762 1 209 667 521 367 435 081 515 1 470 265 11 606 496


OFF-BALANCE LIABILITIES RECEIVED


Derivatives 14 746 - - - 220 000 350 000 - - 584 746


Duration gaps

PLN gap 36 680 482 484 84 750 (273 836) 420 497 439 320 184 407 (1 374 380) (78)

CHF gap (589 658) 548 736 11 671 4 947 12 910 10 176 1 720 (355) 147

TOTAL (552 978) 1 031 220 96 421 (268 889) 433 407 449 496 186 127 (1 374 735) 69


66

Gap analysis (assets/liabilities and off-balance sheet liabilities) by interest rate revaluation as at 31 December 2013 (in PLN '000)

ASSETS up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y NIB* Total


120 576 - - - - - - 65 889 186 465

Amounts due from banks 818 405 24 - - - 42 000 70 000 3 925 934 354

Amounts due from customers 469 009 4 536 082 732 371 983 992 1 071 619 1 076 277 125 266 (421 858) 8 572 760

Financial assets held as investment

1 100 000 - - - - - - (116) 1 099 884

Other assets - - - - - - - 443 752 443 752

TOTAL ASSETS 2 507 990 4 536 106 732 371 983 992 1 071 619 1 118 277 195 266 91 594 11 237 215




Derivatives 6 764 - 540 000 - - - - - 546 764



67

LIABILITIES up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y NIB* Total


841 737 1 961 584 200 000 220 000 419 998 605 788 - 31 975 4 281 082

Amounts due to customers 1 557 291 1 625 677 1 331 345 912 042 90 235 21 517 842 39 794 5 578 743

Other liabilities - - - - - - - 247 171 247 171

Subordinated debt - 180 630 - - - - - - 180 630

Capitals and current year profit/loss

- - - - - - - 949 589 949 589

TOTAL EQUITY AND LIABILITIES

2 399 028 3 767 891 1 531 345 1 132 042 510 233 627 305 842 1 268 529 11 237 215




Derivatives 6 770 - - 320 000 - 220 000 - - 546 770


Duration gaps

PLN gap 804 544 107 968 (268 072) (469 890) 556 617 254 822 190 424 (1 176 576) (163)

CHF gap (695 587) 660 247 9 099 1 839 4 769 16 150 4 000 (360) 157

TOTAL 108 957 768 215 (258 973) (468 051) 561 386 270 972 194 424 (1 176 936) (6)


68

A gap analysis of interest rates, understood as the difference between the value of assets (increased by

extended off-balance sheet items) and liabilities (increased by received off-balance sheet items) subject to

interest rate changes in the same period, is carried out based on realigned restatement dates. The mismatch

thus determined is used to determine the economic sensitivity of equity to leap shifts of the market interest

rate curve by 100 bps. The Bank limits the sensitivity of net interest income in the horizon of 12 months to

the increase in interest rates by 100 bps. As at 31 December 2014, the above measures were as follows:

CHANGE IN ECONOMIC CAPITAL in %

NET INTEREST INCOME SENSITIVITY in %

-2,1% 0,13%

For comparison purposes, the above items as at 31 December 2013 were as follows:

CHANGE IN ECONOMIC CAPITAL in %

NET INTEREST INCOME SENSITIVITY in %

-2,0% 0,27%

The Bank regularly performs stress tests designed to evaluate the potential loss in scenarios assuming

extremely adverse changes in the level of interest rates (historical and hypothetical scenarios).

38. Currency risk management

Currency risk is the risk of a deterioration of the financial position due to unfavorable changes in the

exchange rates. At the Bank, the risk is generated by a mismatch of assets and liabilities. The Bank does not

conduct foreign currency transactions in cash with customers and it does not operate current and deposit

accounts in foreign currencies. The Bank’s currency risk is related mainly to mortgage loans denominated in

a foreign currency. The Bank's policy provides for financing new loans based on liabilities denominated in the

same currency, which allows the Bank to minimize the currency risk and the currency liquidity risk. Foreign

currency items result from foreign currency liabilities and receivables resulting from the Bank's own

operations.

On each business day the Bank measures the exposure to currency risk by applying standard supervisory

requirements involving the determination of the ratio of overall position to equity.

The Bank has adopted limits for currency positions as at the end of the day for three currencies: EUR, USD

and CHF and for the total foreign-exchange position denominated in PLN. The assessment of the exposure

to foreign currency risk is supported by using Value at Risk (VaR).


69

Statement of financial position in foreign currencies


CURRENCY

(in '000)

CHF

EUR

USD

Currency conversion in PLN

ASSETS

Amounts due from banks 36 90 1 518 Amounts due from customers 368 580 - - 1 306 504

Other assets - 1 - 3

TOTAL ASSETS 368 616 91 1 1 307 025

LIABILITIES

Amounts due to banks and financial institutions 364 378 - - 1 291 609

Other liabilities 90 - - 319

Total liabilities 364 468 - - 1 291 928

TOTAL LIABILITIES AND EQUITY 364 468 - - 1 291 928

CURRENCY

(in '000)

CHF

EUR

USD


OFF-BALANCE SHEET Current FX transactions (received) - 50 - 213

Derivatives (received) 4 100 - - 14 533

Other liabilities received - 15 - 64

TOTAL OFF-BALANCE SHEET 4 100 65 - 14 810

The values in foreign currencies were translated into PLN according to Table 252/A/NBP/2014 as at 31 December 2014 and Table 251/A/NBP/2013 as at 31 December 2013.


70

Statement of financial position in foreign currencies


CURRENCY

(in '000)

CHF

EUR

USD


ASSETS

Amounts due from banks 36 59 5 382 Amounts due from customers 392 766 - - 1 328 176

Other assets - 1 - 3

TOTAL ASSETS 392 802 60 5 1 328 561

LIABILITIES

Amounts due to banks and financial institutions 394 419 - - 1 333 769

Other liabilities 45 - - 152

Total liabilities 394 464 - - 1 333 921

TOTAL LIABILITIES AND EQUITY 394 464 - - 1 333 921

CURRENCY

(in '000)

CHF

EUR

USD


OFF-BALANCE SHEET

Derivatives 2 000 - - 6 763

granted 1850 6256

received 150 507

Other liabilities received - 91 - 379

TOTAL OFF-BALANCE SHEET 2 000 91 - 7 142

Bank’s foreign-exchange position and foreign-exchange position to equity ratio:

Year 2014

Foreign-exchange position Total foreign-

exchange position Own funds

Total foreign-exchange position to

equity ratio

‘000 CHF ‘000 EUR ‘000 USD ‘000 PLN ‘000 PLN ‘000 PLN

49 26 1 287 1 241 674 0,02%


71

Year 2013

Foreign-exchange position Total foreign-

exchange position Own funds

Total foreign-exchange position to

equity ratio

‘000 CHF ‘000 EUR ‘000 USD ‘000 PLN ‘000 PLN ‘000 PLN

37 (31) 5 140 1 008 953 0,01%

The Bank regularly performs stress tests designed to evaluate the potential loss in scenarios assuming

extremely adverse changes in exchange rates (historical and hypothetical scenarios).

39. Liquidity risk management

The Bank’s liquidity is the ability to generate positive balance of cash flows within a specified time horizon.

The liquidity risk is the effect of everyday activities of the Bank in line with statutory activities. Daily

transactions lead to changes in the structure of the balance sheet, due dates and maturity of its components.

Liquidity risk is characterized by two basic factors:

market liquidity risk – risks related to the situation when the an item of assets can not be liquidated in

a short time without a significant impact on the price;

funding risk – risks associated with the inability to obtain new or renew the current funding.

The objective of the Bank’s liquidity policy is to ensure safe and effective structure of assets and liabilities

and off-balance sheet items and prevent a crisis so that at any given time it can settle its liabilities, i.e. make

payments to deponents and settle credit liabilities.

The basic source of financing for the Bank are long-term funds from the main shareholder and deposits

made by individual clients. Additionally, the Bank acquires funds in the interbank market. Liquidity reserves

maintained by the Bank on an ongoing basis enable it to secure funds necessary to fulfill its payment

obligations in the event of e.g. seasonal outflow of deposits or credit activity dynamics incommensurate with

the increase in deposits.

Liquidity management is supported by limits, control mechanisms and cross-section management

information prepared for the management at various levels.

It also includes requirements resulting from supervisory liquidity measures calculated on a daily basis. The

Bank monitors the liquidity gaps with realigned maturity and due dates of individual items. Available funds

are invested in safe and liquid money bills of the National Bank of Poland and short-term inter-bank deposits.

The limits related to permitted investments are reviewed every quarter.

The Bank regularly performs stress tests for the estimation of potential losses assuming extremely adverse

scenarios affecting the liquidity position of the Bank.


72

Gap analysis (assets/liabilities and off-balance sheet liabilities) by realigned maturity/due date as at 31 December 2014 (in PLN ‘000)

ASSETS up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y Total

Cash and balances with Central Bank 73 327 23 307 24 572 31 857 31 947 50 413 20 559 255 982

Amounts due from banks 8 557 150 365 1 196 963 - 62 000 50 000 273 081

Amounts due from customers 218 924 337 335 476 548 1 017 258 1 714 619 2 726 304 2 904 828 9 395 816

Financial assets held as investment 1 279 930 - - 5 5 14 23 1 279 977

Other assets 54 707 31 405 48 088 84 053 86 728 86 729 9 930 401 640

TOTAL ASSETS 1 635 445 542 412 550 404 1 134 136 1 833 299 2 925 460 2 985 340 11 606 496

OFF-BALANCE LIABILITIES GRANTED up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y Total

Derivatives - - - - - - - -

Other - - - - - - - -


73

LIABILITIES up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y Total


56 138 79 287 43 753 271 122 536 303 1 665 332 1 649 429 4 301 364

Amounts due to customers 337 695 584 067 689 859 904 098 929 552 1 427 762 688 454 5 561 487

Other liabilities 79 958 35 654 33 954 44 481 12 240 13 833 562 220 682

Subordinated debt - 1 249 - - - 130 000 200 000 331 249

Capitals and current year profit/loss (7 719) - - - - - 1 199 433 1 191 714

TOTAL EQUITY AND LIABILITIES 466 072 700 257 767 566 1 219 701 1 478 095 3 236 927 3 737 878 11 606 496

OFF-BALANCE LIABILITIES RECEIVED up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y Total


Other - - - - - - - -

Cumulative gap 1 169 373 1 011 528 794 366 708 801 1 064 005 752 538 - -

Liquidity ratio 3,51 1,87 - - - - - -


74

Gap analysis (assets/liabilities and off-balance sheet liabilities) by realigned maturity/due date as at 31 December 2013 (in PLN ‘000)

ASSETS up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y Total


186 465 - - - - - - 186 465

Amounts due from banks 820 166 24 1 209 955 - 42 000 70 000 934 354

Amounts due from customers 221 059 307 236 443 263 1030132 1644115 2495887 2431068 8 572 760

Financial assets held as investment 1 099 852 - - 3 3 10 16 1 099 884

Other assets 43 835 36 342 55 000 85 602 130 213 89 696 7 505 443 752

TOTAL ASSETS 2 371 377 343 602 499 472 1 116 692 1 774 331 2 627 593 2 508 589 11 237 215


up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y Total


Other - - - - - - - -


75

LIABILITIES up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y Total


92 779 75 631 7 758 298 011 538 878 1 587 889 1 680 136 4 281 082

Amounts due to customers 485 034 712 285 828 936 1 084 118 1 189 656 1 131 766 146 948 5 578 743

Other liabilities 130 317 12 290 24 484 54 924 13 769 15 589 239 247 171

Subordinated debt - 630 - - - 80 000 100 000 180 630

Capitals and current year profit/loss -15 105 - - - - - 964 694 949 589

TOTAL EQUITY AND LIABILITIES 693 025 800 836 861 178 1 437 053 1 742 303 2 815 244 2 892 017 11 237 215


up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y Total


Other - - - - - - - -

Cumulative gap 1 678 352 1 221 118 859 412 539 051 571 079 383 428 - -

Liquidity ratio 3,42 1,82 - - - - - -


76

Financial assets by maturity date based on contractual non-discounted payments with future interest payments as at 31 December 2014 (in PLN '000)

LIABILITIES On demand up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y Total

Amounts due to banks and financial institutions 1 658 45 959 92 206 63 862 333 503 639 273 1 842 160 1 769 996 4 788 617

Amounts due to customers 3 010 362 478 718 770 658 672 028 486 686 37 051 139 265 - 5 594 768

Subordinated debt - - 3 313 3 266 6 704 13 291 162 601 210 808 399 983

TOTAL EQUITY AND LIABILITIES 3 012 020 524 677 866 177 739 156 826 893 689 615 2 144 026 1 980 804 10 783 368

Financial assets by maturity date based on contractual non-discounted payments with future interest payments as at 31 December 2013 (in PLN '000)

LIABILITIES On demand up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y Total

Amounts due to banks and financial institutions 2 281 87 148 88 608 28 897 366 959 677 054 1 914 844 1 904 430 5 070 221

Amounts due to customers 2 594 452 647 964 939 568 817 473 556 606 49 767 2 589 - 5 608 419

Subordinated debt - - 2 231 2 276 4 546 10 031 107 650 110 968 237 702

TOTAL EQUITY AND LIABILITIES 2 596 733 735 112 1 030 407 848 646 928 111 736 852 2 025 083 2 015 398 10 916 342


77

Receivables and liabilities arising from derivatives designated for hedge accounting, together with the reconciliation to their carrying values as at 31 December

2014

(PLN '000) On demand up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y Total

Inflows - - - 5 846 5 084 7 885 16 677 - 35 492

Outflows - - - (12 518) (6 463) (19 027) (15 747) - (53 754)

NET - - - (6 672) (1 379) (11 142) 930 - (18 262)

Discounted using the zero-coupon curve - - - (6 475) (1 354) (10 609) 933 - (17 505)

Receivables and liabilities arising from derivatives designated for hedge accounting, together with the reconciliation to their carrying values as at 31 December

2013.

(PLN '000) On demand up to 1 M 1-3 M 3-6 M 6-12 M 1-2 Y 2-5 Y > 5 Y Total

Inflows - - - 7 286 7 381 6 685 3 839 - 25 191

Outflows - - - (12 484) (17 648) (12 518) (12 544) - (55 194)

NET - - - (5 198) (10 267) (5 833) (8 705) - (30 003)

Discounted using the zero-coupon curve - - - (5 168) (10 050) (5 692) (8 136) - (29 046)

78

40. Operationsl risk management

a) Operational risk management strategy and processes

According to the definition adopted by the Bank, the operational risk is defined as the risk resulting from

unadjusted or unreliable procedures, employees and internal systems as well as arising from external events,

including low-probability events, yet resulting in significant losses.

According to the Bank's standards, the operational risk includes compliance risk and reputation risk, excluding

strategic risk, i.e. the risk related to inappropriate strategic decisions affecting the activities of the Bank.

The operational risk management at Euro Bank S.A. involves the following:

identification, measurement or estimation (including assessment), monitoring and control of operational

risk in individual aspects of the Bank's operations,

assessment of the effectiveness of existing controls,

implementation of measures to mitigate this risk.

The operational risk management is based on the Operational Risk Management Strategy as approved by the

Bank's Management Board and Supervisory Board. The Strategy contains the following, among others: the

definition of Operational Risk, Operational Risk management principles, the Operational Risk profile and

tolerance. The assumptions described in the Strategy are elaborated on in operational internal documents of the

Bank, including the Operational Risk Management Procedure, the Operational Losses Declaration Procedure.

Internal documents present the organization and functioning of the operational risk management process at the

Bank, and the tools for the identification and measurement of risk used in the Bank. These measurement tools are

updated and adapted to the Bank's operation on an ongoing basis, and their cross-analysis ensures an analytical

assessment of the Bank's exposure to operational risk. The results of these analyzes are presented on a quarterly

basis, at meetings of the Operational Risk Committee or the Internal Control Coordination Committee, as well as

provided to the Management Board and the Supervisory Board's Audit Committee (quarterly) and to the

Supervisory Board (annually).

b) The structure and organization of the unit responsible for operational risk

The operational risk at Euro Bank S.A. is managed by all operational units of the Bank in terms of relevant risk

categories and areas.

The operational risk management is coordinated at the level of the Operational Risk Management and Internal

Control Department.

The Department cooperates with specialized units of the Bank, as well as the Operational Risk Committee and the

Internal Control Coordination Committee. The Committees were established by resolutions of the Management

Board to monitor the operational risk management and analyze reports on the Bank's operational risk. Meetings of

the Operational Risk Committee and the Internal Control Coordination Committee are held on a quarterly basis (in

a given quarter a meeting must be held by at least one Committee), and the meetings cover aspects related to the

management of operational risk in the Bank, including:

current information on reported operating losses, their analyzes and steps taken to eliminate

irregularities,

analysis of key risk indicators,

self-assessment of operational risks and controls,

79

Permanent Control results,

issues related to the Business Continuity Plan and Crisis Management.

The Committee also discusses and analyzes other aspects of operational risk identified in the current operations

of the Bank.

c) Operational risk hedging and mitigation rules

The Bank performs a regular analysis of events and incidents of operational risk in order to reduce this risk. In

addition, the Bank performs regular analysis of new business areas and new products that can affect the risk

profile, as well as assesses the risks associated with the allocation of tasks to external companies. The Bank

reduces individual areas of operational risk by ensuring proper procedures and internal controls, as well as

through the use of appropriate insurance, and through the implementation of appropriate business continuity plans

and contingency plans.

41. Equity management and capital adequacy

Under the applicable Banking Law and Regulation (EU) No 575/2013 of the European Parliament and of the

Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR), banks are

required to maintain own capital at a level appropriate to the level of risk incurred.

The capital requirement is measured using the solvency ratio, which presents the relation between capital

requirements due to credit risk, market risk and operational risk, among others, and the owned capitals after

taking account of obligatory deductions.

The minimum – required by CRR – level of the capital adequacy ratio may not be lower than 8%.

On the orher hand, pursuant to the letter of the Polish Financial Supervision Authority of 21 March 2014,

addressed to the banking sector, the Bank implements the equity management policy assuming the maintenance

of the solvency ratio at the level of at least 12%, and the Tier 1 ratio – at the level of at least 9%.

For the purpose of calculation of the capital requirements due to credit and operational risks associated with

banking business, the Bank uses the standard method in accordance with Regulation (EU) No 575/2013 of the

European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and

investment firms.

The implemented capital plan in 2014, aimed at improving the solvency ratio level, has been presented in note

2.2.

Capital adequacy

(PLN '000) 31.12.2014 31.12.2013

Own funds 1 241 674 1 008 953

Share capital 563 096 563 096

Reserve capital 401 599 228 180

Revaluation capital - valuation of securities - 26

Audited profit 154 325 92 417

Subordinated loan 281 874 164 000

Adjustment of funds by deferred tax asset (115 149) -

Adjustment of funds by intangible assets (44 071) (38 766)

-

80

Balance sheet risk-weighted assets 7 119 977 6 816 343

20% risk rate 31 754 164 008

35% risk rate 772 404 563 226

50% risk rate 57 154 57 156

75% risk rate 4 216 079 4 027 428

100% risk rate 1 720 613 2 000 245

150% risk rate 63 420 4 280

250% risk rate 258 553

Off-balance sheet risk-weighted liabilities 228 272 199 267

20% risk rate 59 27

50% risk rate 7 100 3 000

75% risk rate 221 113 195 697

100% risk rate - 543

Total risk weighted balance sheet assets and off-balance sheet liabilities

7 348 249 7 015 610

Capital requirement due to credit risk 587 860 561 249

Total capital requirement 699 698 696 281

Tier 1 10,97% 9,71%

Solvency ratio 14,20% 11,59%

The capital adequacy as at 31 December 2014 was calculated based on Regulation (EU) No 575/2013 of the

European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and

investment firms (CRR).

As at 31 December 2013, credit risk exposure was determined in accordance with Appendix 4 to Resolution no.

76/2010 of the Polish Financial Supervision Authority of 10 March 2010 regarding the determination of capital

requirements due to credit risk.

The solvency ratio calculated as at 31 December 2014 was at the level of 14.20%, and the Tier 1 ration at the

level of 10.97%.

As at 31 December 2014, the Bank meets all the statutory capital requirements set out under the law and the

PFSA guidelines on capital adequacy.

81

OTHER ADDITIONAL NOTES

42. Cash

The cash flow statement includes the following items:

(PLN '000) 31.12.2014 31.12.2013

Cash, funds in the Central Bank (note 17) 255 982 186 465 Current accounts (without the Company Social Benefits Fund) 8 218 8 197

TOTAL 264 200 194 662

43. Significant post-balance sheet events (not recognized in the financial statements)

All events as at the end of the reporting period have been recognized in the financial statements and

accounting records for the period from 1 January to 31 December 2014. After the end of the reporting period

there were no significant events which would not be presented in the financial statements.

Pursuant to Article 133(3a) of the Banking Act, the Polish Financial Supervision Authority initiated a problem-

specific control at the Bank from 2 February 2015 to 3 March 2015 in the following areas:

liquidity risk, capital adequacy, asset quality, and bancassurance. The control has not been completed by the

date of approval of the financial statements.

In January, there has been a significant weakening of the zloty against Swiss franc caused by the decision of

the Swiss National Bank to release of the Swiss franc exchange rate relative to euro. The change in the

exchange rate significantly impacted the value of denominated amounts due from customers as at 31

January 2015.

The estimated conversion of denominated receivables as at 31.12.2014 using the exchange rate of

30.01.2015 (4.0179) is presented below. The solvency ratio when using the exchange rate of 30 January

2015 would be at the level of 13.89%, while the actual ratio stood at 14.20%. As at 19 February 2015, the

CHF exchange rate was at the level of 3.8818, and was lower than the CHF exchange rate on 30 January

2015 by 3.4%.

(PLN '000) Value as at 31.12.2014 Value as at 31.12.2014 with the exchange rate of 30.01.2015

Amounts due from customers – denominated loans 1 414 882 1 589 294

44. Information on related entities (in terms of capital or organizational aspects)

As at 31 December 2014 and 31 December 2013, Societe Generale Consumer Finance SA with its

registered office in Paris held 99.52% of the Bank’s shares.

82

45. Transactions with related parties

The Bank purchases support services provided by related entities regarding management, control, lease of

movables and support to the Bank’s operations in line with the objectives implemented by the Bank.

83

The table below presents the stock of transactions with related parties as at 31 December 2014 and 31

December 2013.

(in PLN '000) 31.12.2014 31.12.2013

Societe Generale Consumer Finance (parent company)

Liabilities 202 8 319

Liabilities for invoices 202 8 319

Siège SG - Comptabilité Fournisseurs (entity belonging to the group)

Liabilities 9 342 -

Liabilities for invoices 9 342 -

Societe Generale Paris (entity belonging to the group)

Assets 264 454 114 145

Granted deposits 264 500 114 165

IBNR write-off (46) (20)

Liabilities and capitals 4 413 937 4 345 257

Loans received 4 395 973 4 316 181

Invoices 30 29

CF derivative hedge instruments – valuation 17 934 29 047

Derivatives (face value) 1 140 000 1 080 000

CF sold term derivative instruments 570 000 540 000

CF purchased term derivative instruments 570 000 540 000

Guarantees 73 060 66 148

Guarantees received 73 060 66 148

Societe Generale Warsaw (entity belonging to the group)

Assets 7 349 7 100


Invoice receivables 62 1

Derivatives (face value) 215 -

Forward 215 -

SOGECAP (entity belonging to the group)

Assets 218 111


Liabilities 147 484 104 120

Liabilities for invoices 6 624 12 973

Deposits 140 860 91 147

SOGECAP RD (entity belonging to the group)

Liabilities 9 079 6 566

Liabilities for invoices 238 796

Deposits 8 841 5 770

Societe Generale Equipment Leasing (entity belonging to the group)

Assets 41 23


ALD AUTOMOTIVE Warsaw (entity belonging to the group)

Assets 18 13


Liabilities - 13

84

Liabilities for invoices - 13

The table below presents income and costs generated on transactions with related entities in periods from 1

January 2014 to 31 December 2014 and from 1 January 2013 to 31 December 2013.

(in PLN '000) 2014 2013

Societe Generale Consumer Finance (parent company)

Costs (202) (17 876)

Management services costs (202) (17 861)

Other costs - (15)

Siège SG - Comptabilité Fournisseurs (entity belonging to the Group)

Costs (9 461) -

Management services costs (9 461) -

Societe Generale Paris (entity belonging to the group)

Revenues 6532 1 598

Interest income 6 532 6 191

Interest income on derivatives - (4 593)

Costs (150 263) (146 287)

Interest expenses (136 563) (135 696)

Interest expense on derivatives (13 670) (10 539)

Invoice costs (30) (52)

Societe Generale Warsaw (entity belonging to the group)

Revenues 4 323 9 803

Interest income 4 261 9 774

Invoice income 62 29

Costs (65) (2 105)

Interest expenses (6) (2 060)


Commission expense (46) (43)

SOGECAP (entity belonging to the group)

Revenues 189 127 342 195

Insurance income 188 643 341 604

Revenue from services 484 591

Costs (4 667) (1 868)

Interest expenses (4 612) (1 747)


SOGECAP RD (entity belonging to the group)

Revenues 18 928 44 801

Insurance income 18 928 44 801

Costs (291) (110)

Interest expenses (291) (110)

ALD AUTOMOTIVE Warsaw (entity belonging to the group)

Revenues 52 44

Revenue due to lease services fees 52 44

Costs (6 444) (6 244)

Costs of car maintenance services and lease fees (6 444) (6 244)

Societe Generale Equipment Leasing (entity belonging to the group)

Revenues 29 25

85

Revenue due to lease services fees 29 25

As at 30 December 2014, the Bank’s exposure to employees due to loans and advances amounted to PLN

92,262 thousand, and as at 31 December 2013 - PLN 95,092 thousand.

In 2014, there were no significant non-standard transactions with related parties, the nature and conditions of

which were not related to current operations. All transactions were concluded with market terms and

conditions, without special or non-standard provisions.

46. Fair value of financial assets and liabilities

Fair value is the amount for which an asset could be exchanged or liability settled between knowledgeable

and willing parties in a directly concluded transaction, other than a forced sale transaction or liquidation, and

is best reflected by the market price, if available.

The tables below present a summary of the carrying amounts and fair values of each financial asset and

liability group, which has not been disclosed at fair value in the Bank’s statement in line with IFRS.

The Bank's balance sheet includes financial instruments that are not presented at fair value in the financial

statements.

Due to the fact that market values are not available for many financial instruments, the calculation of their

estimate fair values involved appropriate valuation techniques. To estimate the fair value of financial

instruments of this type, the Bank applied a model based on the estimate of the present value of future cash

flows by discounting them using relevant interest rates.

All model-based calculations includes certain simplifying assumptions, as well as are characterized by

sensitivity to a set of assumptions made.

Year 2014

(in PLN ‘000)

Hierarchy level Valuation method

Carrying amount as at 31 December

2014

Fair value as at 31 December

2014

Amounts due from banks 3 discounted cash flows

273 081 285 742

Individuals 3 discounted cash flows 9 395 816 9 422 365

mortgage loans 3 discounted cash flows 4 990 648 4 969 919

credit cards 3 discounted cash flows 119 880 118 044

other credits and loans 3 discounted cash flows 4 285 288 4 334 402

TOTAL 9 668 897 9 708 107

(in PLN ‘000) Hierarchy level Valuation

method Carrying

amount as at 31 December 2014


2014


3 discounted cash flows 4 301 364 4 341 999

Amounts due to customers 3 discounted cash flows 5 561 487 5 566 495

TOTAL 9 862 851 9 908 494

86

Year 2013

(in PLN ‘000)

Hierarchy level Valuation method

Carrying amount as at 31 December

2013


2013

Amounts due from banks 3 discounted cash flows

934 354 937 943

Individuals 3 discounted cash flows 8 572 760 8 524 895

mortgage loans 3 discounted cash flows 4 195 010 4 116 959

credit cards 3 discounted cash flows 135 508 134 016

other credits and loans 3 discounted cash flows

4 242 242 4 273 920

TOTAL 9 507 114 9 462 838

(in PLN ‘000) Hierarchy level Valuation

method Carrying

amount as at 31 December 2013


2013


3 discounted cash flows 4 281 082 4 301 728

Amounts due to customers 3 discounted cash flows 5 578 743 5 578 017

TOTAL 9 859 825 9 879 745

The summary of main methods and assumptions used in the measurement of the fair value of financial

instruments is presented below.

Receivables from banks:

The fair value of deposits is estimated based on discounted flows using the present curve of interest rates, at

which the Bank is able to obtain funding on the market.

Receivables from customers:

Market values for loans are unavailable, thus the presented fair values are generally estimated using the

valuation techniques assuming that at the time of loan granting the fair value is equal to the balance sheet

value. The credit portfolio is presented in net value after taking into account the allowances for provisions.

The fair value is calculated as the discounted value of expected future payments of principal and interest,

assuming that loan payments would be made on dates defined in loan agreements. For the purpose of

discounting cash flows, the Bank used the effective interest rate for current production. The estimated fair

value of credits and loans reflects the change in the level of credit risk (margins) from the time of loan

granting and changes in interest rates.

Liabilities to banks:

The fair value is estimated based on discounted flows using the current curve of interest rates at which the

Bank is able to acquire funding in the market, taking into account the currency of the deposit.

Liabilities to customers:

The fair value of term-deposits is estimated based on cash flows discounted by the current curve of interest

rates at which the Bank is able to obtain funding in the market. In case of callable deposits without a defined

maturity date, it is assumed that the fair value does not significantly differ from the balance sheet value. The

87

significance of long-term cooperation with depositaries is not taken into account in the fair value estimation

process.

The tables below analyze financial instruments measured at fair value divided into three levels, where:

Level 1 – the fair value is based on stock prices (not adjusted) offered for the same assets or

liabilities in active markets,

Level 2 – the fair value is determined based on the values in the market, however, not direct

market quotations (e.g. by direct or indirect reference to similar instruments in the market),

Level 3 – the fair value is determined based on various valuation techniques which are not based

on any observable market data.

Year 2014

In the current period, there were not transfers between level 1 and 2.

(in PLN ‘000)

Level 1 Level 2 Level 3 TOTAL

31.12.2014 31.12.2014 31.12.2014 31.12.2014

Financial assets measured at fair value through profit or loss - - - -

Derivatives - - - -

Available-for-sale financial assets - - - -

Securities 45 1 279 932 - 1 279 977

TOTAL 45 1 279 932 - 1 279 977

Year 2013

In the current period, there were not transfers between level 1 and 2.

(in PLN ‘000)


31.12.2013 31.12.2013 31.12.2013 31.12.2013

Financial assets measured at fair value through profit or loss

Derivatives - - - -

Available-for-sale financial assets

Securities 33 1 099 851 - 1 099 884

TOTAL 33 1 099 851 - 1 099 884

Distribution of the fair value of financial assets and liabilities into levels (for financial assets and liabilities that

are not measured at fair value for purposes of presentation in the statement of financial position).

Year 2014

(in PLN ‘000)


31.12.2014 31.12.2014 31.12.2014 31.12.2014

Financial assets

Amounts due from banks - 285 742- - 285 742

Individuals - 9 422 365 9 422 365

TOTAL 285 742 9 422 365 9 708 107

Financial liabilities

Amounts due to banks and financial institutions - 4 341 999 - 4 341 999

Amounts due to customers - 5 566 495 - 5 566 495

TOTAL 9 908 494 9 908 494

Year 2013

88

(in PLN ‘000)


31.12.2013 31.12.2013 31.12.2013 31.12.2013

Financial assets

Amounts due from banks - 937 943 - 937 943

Individuals - 8 524 895 8 524 895

TOTAL - 937 943 8 524 895 9 462 838

Financial liabilities

Amounts due to banks and financial institutions - 4 301 728 - 4 301 728

Amounts due to customers - 5 578 017 - 5 578 017

TOTAL - 9 879 745 - 9 879 745

47. Remuneration paid to members of the Management Board and Supervisory Board

Remuneration of the Management Board

(in PLN ‘000) 2014 2013

Remuneration in the financial period 8 782 8 551

Short-term benefits (remuneration and payroll charges)

7 745 7 703

Provision for unused holidays 459 420

Other benefits 578 428

Remuneration of the Supervisory Board

(in PLN ‘000) 2014 2013

Remuneration in the financial period 95 63

Short-term benefits 95 63

Other benefits - -

The Remuneration Policy for 2012, developed by the Management Board of the Bank and approved by the

Supervisory Board on 25 April 2012, is compliant with the provisions set forth in the CRD III directive and its

transposition to the Polish law in Resolution no. 258/2011 of the Polish Financial Supervision Authority of 4

October 2011.

The aims of the Policy are as follows:

a) to support proper and efficient risk management and reduce the eagerness to take

excessive risk going beyond the strategy of the Bank,

b) to support the implementation of the Bank's strategy and to reduce the occurrence of

conflicts of interest,

c) to bind personal aims of employees with long-term interest of the Bank,

d) to bind variable remuneration components with long-term results of the Bank.

The variable remuneration component is calculated in accordance with the principles of management by

objectives, the establishment and implementation of individual and common goals in the area of the

employee's responsibility, and the achievement of individual performance of tasks related to the

implementation of the Bank's strategy.

In 2014, the variable remuneration component has been recognized by the Bank in remuneration cost with

payroll charges in the amount of kPLN 3,463.

In 2013, the variable remuneration component has been recognized by the Bank in remuneration cost with

payroll charges in the amount of kPLN 3,463.

89

48. Contingent liabilities and collaterals

a) Granted guarantees and endorsements

The Bank did not grant any guarantees or endorsements.

b) Issuer guarantees and endorsements

The Bank did not perform the role an underwriter of the issuance of securities.

c) Subscription options or sale of ordinary shares

The Bank did not enter into any such contracts.

d) Dividends

The profit achieved by the Bank in 2014 has been dedicated to increase own equity in the context of Basel III

implementation.

The profit disclosed by the Bank for 2013 was used to increase equity (supplementary capital).

e) Information about assets used as collateral of the Bank’s own liabilities and third-party liabilities

The following assets were used as collateral of the Bank’s own liabilities as at 31 December 2014:

- securities used as collateral of the guarantee fund maintained by the Bank Guarantee Fund with a

carrying amount of PLN 32,158 thousand,

- deposits used as collateral of rental agreements in the amount of PLN 168 thousand.

The following assets were used as collateral of the Bank’s own liabilities as at 31 December 2013:

- securities used as collateral of the guarantee fund maintained by the Bank Guarantee Fund with a

carrying amount of PLN 32,086 thousand,

- deposits used as collateral of rental agreements in the amount of PLN 167 thousand.

f) Transactions with buy-back clauses not disclosed in the balance sheet

As at 31 December 2014, the Bank was not a party to transactions with buy-back clauses that would not be

disclosed in the balance sheet.

As at 31 December 2013, the Bank was not a party to transactions with buy-back clauses that would not be

disclosed in the balance sheet.

g) Granted financial liabilities

90

As at 31 December 2014 the Bank had off-balance financial liabilities totaling PLN 628,002 thousand,

including liabilities due to extended mortgage loans in the amount of PLN 160,374 thousand, due to

extended credit card loans in the amount PLN 403,684 thousand and due to granted overdrafts in the

amount of PLN 63,937 thousand.

As at 31 December 2013 the Bank had off-balance financial liabilities totaling PLN 545,209 thousand,

including liabilities due to extended mortgage loans in the amount of PLN 157,833 thousand, due to

extended credit card loans in the amount PLN 350,266 thousand and due to granted overdrafts in the

amount of PLN 37,103 thousand.

h) Face value of underlying instruments covered by derivative contracts

In its operations the Bank uses derivative financial instruments to manage risks associated with its activities.

Forwards constitute the majority of derivatives that are used by the Bank for the above purpose. As at 31

December 2014 and 31 December 2013 the Bank had the following derivatives (value at measurement):

31 December 2014 31 December 2013

Type of contract Assets Liabilities Assets Liabilities

IRS* - 17 934 - 29 047

FRA - - - -

FX Swap - - - -

CIRS - - - -

Forward 67 - - 6

Options - - - -

Other - - - -

Total 67 17 934 - 29 053

* Applies to the measurement of the instrument presented in note 49.

i) Received liabilities

As at 31 December 2014 the Bank had off-balance sheet liabilities in the amount of kPLN 2,819,000 and

kCHF 25,000 (kPLN 88,618) due to granted and unused lines of funding, and kEUR 15,950 (kPLN 67,984)

due to VISA guarantees received and kUSD 1,448 (kPLN 5,077) due to Mastercard guarantees received.

As at 31 December 2013 the Bank had off-balance sheet liabilities in the amount of kPLN 2,605,000 and

kCHF 27,000 (kPLN 91,303) due to granted and unused lines of funding, and kEUR 15,950 (kPLN 66,148)

due to guarantees received.

49. Hedge accounting principles adopted by the Bank

As at 31 December 2014, the Bank applied hedge accounting to the following types of hedging relationships:

- on 9 October 2009, the Bank purchased IRS 5Y in the amount of kPLN 320,000 and designated it fully to

macro cash flow hedge linked to PLN savings accounts with floating interest rates in order to hedge the

fluctuations in cash flows. On 28 February 2011, the cash flow hedges were declared ineffective and it was

91

decided to cease to apply hedge accounting on the same basis, i.e. with 1M WIBOR as the benchmark

interest rate, 6M WIBOR interest rate of the hedging instrument. At the same time, due to the decision to

adjust the macro cash flow hedge model to the new strategy of the Bank, the IRS transaction of 9 October

2009 was redesignated to new cash flow hedge accounting relation with 3M WIBOR as a benchmark rate for

floating rate saving accounts. The above transaction expired on 13 October 2014.

- on 30 March 2011, the Bank purchased IRS 5Y in the amount of kPLN 220,000 and designated it fully to

macro cash flow hedge linked to PLN savings accounts with floating interest rates in order to hedge the

fluctuations in cash flows.

- on 4 November 2014, the Bank purchased IRS 4Y in the amount of kPLN 200,000 and IRS 5Y in the

amount of kPLN 150,000 and designated them fully to macro cash flow hedge linked to PLN savings

accounts with floating interest rates in order to hedge the fluctuations in cash flows.

On a monthly basis, the Bank verifies the effectiveness of the hedge through the use of prospective and

retrospective effectiveness tests and the high probability cash flows test. The high probability test is back-

tested. The retrospective effectiveness test is carried out using the "hypothetical derivative" method. In 2014,

all hedge accounting tests were effective.

Macro cash flow hedges

The table below presents detailed information about the hedging relationship in macro cash flow hedges:

Hedge type Hedge against fluctuations in cash flows of the portfolio of saving

accounts in PLN using Interest Rate Swaps

Hedging relationship The Bank hedges against part of the interest rate risk resulting from

fluctuations in cash flows on saving accounts with floating interest rates

in PLN using Interest Rate Swaps replacing floating payments with fixed

payments.

Hedged item Cash flows due to the portfolio of saving accounts with floating interest

rate in PLN.

Hedging instruments

Interest Rate Swap transactions where the Bank pays fixed cash flows

and receives floating ones.

Recognition of the profit/loss on

hedged and hedging

transactions in the financial

statements

The portion of the revaluation to the fair value of hedging instruments

corresponding to the effective hedge is recognized in revaluation

reserve (note 32). The ineffective portion of the revaluation to the fair

value of hedging instruments is recognized in profit/loss on financial

transactions (note 7). Interest on hedging instruments and hedged item

is recognized in net interest income (note 4).

The table below present the amounts due to macro cash flow hedges which in 2014 and 2013 the Bank

recognized in the statement of comprehensive income and revaluation reserve:

(PLN '000) 31.12.2014 31.12.2013

Revaluation reserve as at the end of the period (revaluation

to the fair value of hedging derivatives due to hedged risk,

corresponding to the effective hedge)

(7 963) (15 131)

Ineffective portion of the revaluation to the fair value of 225 -

92

hedging derivative due to hedged risk, recognized in the

profit/loss on financial transactions

Net interest on hedging derivatives in macro cash flow

hedges recognized in the interest margin

(13 670) (10 539)

Period when the hedged cash flows are expected, including

interest (in PLN ‘000):

A. as at 31 December 2014

- up to 1 year – 10,127

- 1 to 3 years – 13,422

- over 3 years – 9,299

B. as at 31 December 2013

- up to 1 year – 12 622

- 1 to 3 years – 9 005

- over 3 years – 0

5 years 3 years

The tables below present the periods in which the expected cash flows from derivative instruments

designated to cash flow hedge accounting with regard to their impact on the profit and loss account.

Year 2014

(PLN '000) INTEREST INCOME INTEREST EXPENSE NET

Up to 1 year 10 482 (18 972) (8 490)

1 to 2 years 6 979 (9 586) (2 607)

2 to 3 years 6 461 (6 460) 1

3 to 4 years 6 488 (5 907) 581

over 4 years 2 786 (2 406) 380

CASH FLOWS

(PLN '000) INFLOWS OUTFLOWS NET

Up to 1 year 10 930 (18 981) (8 051)

1 to 2 years 7 885 (19 027) (11 142)

2 to 3 years 6 349 (6 442) (93)

3 to 4 years 7 047 (6 463) 584

over 4 years 3 280 (2 843) 437

Year 2013

(PLN '000) INTEREST INCOME INTEREST EXPENSE NET

Up to 1 year 12 873 (26 335) (13 462)

1 to 2 years 7 035 (12 512) (5 477)

2 to 3 years 1 909 (3 119) (1 210)

3 to 4 years - - -

over 4 years - - -

CASH FLOWS

(PLN '000) INFLOWS OUTFLOWS NET

Up to 1 year 14 667 (30 131) (15 464)

1 to 2 years 6 685 (12 518) (5 833)

2 to 3 years 3 839 (12 544) (8 705)

3 to 4 years - - -

over 4 years - - -

93

The table below presents changes in revaluation reserve due to macro cash flow hedges in 2014 and 2013:

Change in the revaluation reserve in period (in PLN ‘000)

2014 2013

Opening balance (15 131) (20 226)

Movements of active hedges

- change in clean value

- interest

(4 764)

8 906

(13 670)

(4 182)

6 424

(10 539)

Amortization of inactive hedges (56) (67)

Amount of deferred revaluation to the fair value of hedging

derivatives due to hedged risk, moved from the revaluation

reserve to the interest margin (Net interest on hedging

derivative in macro cash flow hedges)

13 670

10 539

Deferred tax (1 681) (1 195)

Closing balance (7 963) (15 131)

Total change in period 7 168 5 095

Fair value hedges

The table below presents detailed information about the hedging relationship in fair value hedges:

Hedge type Hedge against fluctuations in the fair value of a portion of the portfolio of

loans with fixed interest rate in PLN using Interest Rate Swaps.

Hedging relationship The Bank hedges against fluctuations in the fair value of the portion of a

portfolio of fixed interest rate loans in PLN due to market changes in

interest rates, using Interest Rate Swaps where the Bank replaces fixed

payments with floating payments.

Hedged item Portion of the portfolio of cash loans and consolidation loans with fixed

interest rate denominated in PLN.

Hedging instruments Interest Rate Swaps in which the Bank pays fixed rate coupons and

receives floating rate coupons.

Recognition of the profit/loss on

hedged and hedging

transactions in the financial

statements

The Bank revalues the hedged item (portion of the loan portfolio) to the

fair value due to hedged risk (i.e. fluctuations in the market interest

rate). Fluctuations in the fair value of the hedged item due to the

hedged risk are charged to the income statement in “Profit/loss on

financial transactions” (note 7).

Profit/loss due to mark-to-market change (i.e. fair value less accrued

interest) of hedging instruments is charged to “Profit/loss on financial

transactions”. Net interest due to hedging transactions is charged to

interest income (note 3).

The table below presents amounts due to fair value hedges which in 2014 and 2013 the Bank recognized in

the income statement:

(PLN '000) 2014 2013 Note

Profit/loss due to fluctuations in the fair 225 3 190 7

94

value of the hedging instrument

Profit/loss due to fluctuations in the fair

value of the hedged item due to the

hedged risk

- (3 773) 9

50. Information about revenue and expenses related to sold financial assets whose fair value

could not be reliably estimated

No financial assets whose fair value could not be reliably estimated were sold during the period from 1

January to 31 December 2014.

No financial assets whose fair value could not be reliably estimated were sold during the period from 1

January to 31 December 2013.

51. Remuneration of the entity authorized to audit financial statements, paid or payable for the

financial year

(PLN '000) 2014 2013

Remuneration for mandatory audit of the annual

financial statements

320 401

Remuneration for interim audits 418 148

Total 738 549

52. Income on dividends

The Bank did not receive any dividend income during the period from 1 January to 31 December 2014.

The Bank did not receive any dividend income during the period from 1 January to 31 December 2013.

53. Capital expenditure

During the period from 1 January to 31 December 2014 the Bank incurred PLN 36,612 thousand in capital

expenditure, of which PLN 20,661 thousand for fixed assets and PLN 15,951 thousand for intangible assets.

Capital expenditure committed by the Bank for 2015 amount to kPLN 2,538 and apply particularly to the IT

area.

During the period from 1 January to 31 December 2013 the Bank incurred PLN 34,898 thousand in capital

expenditure, of which PLN 19,741 thousand for fixed assets and PLN 15,157 thousand for intangible assets.

In 2014 capital expenditure is planned to amount to PLN 48,278 thousand, mainly in the IT area.

95

54. Revenue and expenses related to operations discontinued during the financial year or planned

to be discontinued next year

The Bank did not discontinue any operations during the period from 1 January to 31 December 2014 and

does not plan to do so after the end of the reporting period.

The Bank did not discontinue any operations during the period from 1 January to 31 December 2013.

55. Average number of employees in the financial period

The average number of employees in the financial year (2014) was 2839, compared to 2720 in the previous

year (2013).

The number of employees as at the end of 2014 was 2919, and 2753 in the previous year.

56. Provisions for future liabilities to employees

Provisions for future liabilities to employees, by type:

(PLN '000) 31.12.2014 31.12.2013

- for retirement severance 224 200

- for unused holidays (short-term benefits) 7 424 6 452

The Bank recognizes provisions for future retirement liabilities to its employees determined based on an

actuarial method by an independent actuary and revalued by the Bank based on key indicators reflecting the

structure of staff.

The Bank has not introduced any equity-based programs. According to the provision of CRD III directive, the

variable component of remuneration of persons holding managerial positions is paid in the form of non-

financial instruments under SCANAV (Synthetic Contract on Adjusted Net Assets Value).

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