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The Bank Supervisory Board worked as a seven-member body from the beginning of to 17 June 2008 (the Annual General Meeting of the Bank):

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Bank Ochrony Środowiska S.A. Supervisory Board 2008 Activity Report with a brief assessment of the Bank standing in 2008, the Bank s internal control and risk management systems, and an appraisal of the
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Bank Ochrony Środowiska S.A. Supervisory Board 2008 Activity Report with a brief assessment of the Bank standing in 2008, the Bank s internal control and risk management systems, and an appraisal of the Bank Supervisory Board performance in 2008 The Bank Supervisory Board exercised its supervisory function at Bank Ochrony Środowiska S.A. as required by the relevant regulations and the Bank s Articles of Association throughout the report period. Composition of the Supervisory Board The Bank Supervisory Board worked as a seven-member body from the beginning of 2008 to 17 June 2008 (the Annual General Meeting of the Bank): Andrzej Herman, Chairman of the Supervisory Board Janina Jóźwiak, Deputy Chair of the Supervisory Board Ryszard Bartkowiak, Secretary of the Supervisory Board Marta Czyż Andrzej Matysiak Lech Płotkowski Agnieszka Zawartko On 17 June 2008, the Annual General Meeting BOŚ S.A., dismissed the above persons as Supervisory Board members and appointed in their stead: Jacek Bajorek Józef Kozioł Marcin Likierski Michał Machlejd Marian Malicki Marian Pigan Michał Wysocki, and subsequently, at an Extraordinary General Meeting on 29 July 2008, adopted a resolution to raise the number of Supervisory Board members to 8 and appointed Mr Ryszard Ochwat Supervisory Board member. Following the above changes and the Supervisory Board establishment of itself at the 17 June 2008 meeting, in the latter half of 2008 the Bank Supervisory Board worked as a body of 8: Marcin Likierski, Chairman of the Supervisory Board Jacek Bajorek, Deputy Chair of the Supervisory Board Marian Pigan, Secretary of the Supervisory Board Józef Kozioł Michał Machlejd Marian Malicki Ryszard Ochwat Michał Wysocki Main activities in 2008 In the exercise of their duties of supervising activities of the Bank, the Supervisory Board held 9 recorded meetings in 2008 (including a two-day meeting with a recess), in the following terms: 27 February April May June 2008, with two meetings in one day: one before the Annual Meeting proceedings and the other right after the proceedings 23 June August 2008, a meeting with a recess, resuming on 29 August November December 2008 In 2008, the Supervisory Board adopted 50 resolutions, including: a resolution to enact Bank Ochrony Środowiska S.A. equity management policy (Resolution No. 1/2008 of 30 January 2008), which was adopted in correspondence voting; a resolution to approve Bank Ochrony Środowiska S.A. risk management system rules of procedure (Resolution No. 2/2008 of 30 January 2008), which was adopted in correspondence voting; a resolution to approve amendments to Rules of procedure of Bank Ochrony Środowiska S.A. Workforce Fund (Resolution No. 4/2008 of 27 February 2008); a resolution to approve rules of procedure of a Fund to Promote Environmental Protection (Resolution No. 5/2008 of 9 April 2008); a resolution to approve amendments to Bank Ochrony Środowiska S.A. information policy rules of procedure revised pursuant to Banking Supervision Commission Resolution No. 6/2007 of 13 March 2007 (Resolution No. 6/2008 of 9 April 2008); a resolution to approve amendments to Rules of procedure in extending loans, cash advances, guarantees and other off balance sheet liabilities to members of the Bank directing bodies, persons holding managerial positions at BOŚ S.A., and entities related by capital or management to the above-named ones, or on their behalf (Resolution No. 7/2008 of 21 May 2008); a resolution to approve amendments to Rules of procedure in extending loans, cash advances, guarantees and other off balance sheet liabilities to members of the Bank directing bodies, persons holding managerial positions at BOŚ S.A., and entities related by capital or management to the above-named ones, or on their behalf (Resolution No. 8/2008 of 21 May 2008); a resolution to choose a chartered auditor to audit the semi-annual financial statements of the Bank and semi-annual consolidated financial statements of the BOŚ S.A. Capital Group for the first half of 2008 and to audit the annual financial statements of the Bank and annual consolidated financial statements of the BOŚ S.A. Capital Group for 2008 (Resolution No. 15/2008 of 4 June 2008), which was adopted in correspondence voting; a resolution to set the number of members of the BOŚ S.A. Management Board to 5 (Resolution No. 26/2008 of 19 August 2008); a resolution to approve the Bank Ochrony Środowiska S.A. Financial Plan for 2009 (Resolution No. 46/2008 of 19 December 2008); a resolution to approve a change to the Organisational Structure of Bank Ochrony Środowiska S.A. (Resolution No. 47/2008 of 19 December 2008); a resolution to approve Internal Audit Agenda for 2009 (Resolution No. 48/2008 of 19 December 2008). A major action the Supervisory Board took in 2008 was the establishment of a new Management Board of the Bank for a next term in office. The term of the Management Board expired as did the mandates of its members with the close of the Annual Meeting of BOŚ S.A. on 17 June The Supervisory Board then appointed a Management Board for a next term in office including: Jerzy Pietrewicz, President of the Management Board, Stanisław Kostrzewski, Vice-President of the Management Board, Jan Wielgus, Member of the Management Board. The Supervisory Board also resolved to call a contest for the posts of president and members of the BOŚ S.A. Management Board (Resolution No. 22/2008) and they set requirements for candidates for the posts of Management Board members to oversee the lines of business at the Bank. The election procedure was conducted by a Qualification Panel made up of four members of the Supervisory Board. On 19 August then the Supervisory Board adopted a resolution to dismiss, as of 1 October 2008: Jerzy Witold Pietrewicz, as President of the Management Board, Stanisław Kostrzewski, as Vice-President of the Management Board, Jan Krzysztof Wielgus, as Member of the Management Board. At the same meeting, the Bank Supervisory Board followed the Qualification Panel recommendations to adopt: a Resolution to appoint Mr Mariusz Klimczak President of the Management Board of BOŚ S.A. The resolution took effect on 17 December 2008, the day the Financial Supervision Commission gave their requisite approval of the appointment; from 1 October to 17 December 2008, Mr M. Klimczak acted in the capacity of Vice-President of the Management Board of BOŚ S.A. overseeing the work of the BOŚ S.A. Management Board; a Resolution to appoint Mr Jerzy Witold Pietrewicz Vice-President First Deputy President of the Management Board of BOŚ S.A. The resolution took effect on 11 February 2009, the day the Financial Supervision Commission gave their requisite approval; from 1 October 2008 to 11 February 2009, Mr J. Pietrewicz acted in the capacity of Vice-President of the Management Board; a Resolution to appoint Mr Adam Grzebieluch Vice-President of the Management Board of BOŚ S.A. The resolution took effect on 1 October 2008; a Resolution to appoint Mr Krzysztof Telega Vice-President of the Management Board of BOŚ S.A. The resolution took effect on 1 October 2008; and at a meeting on 13 November a further resolution to appoint Mr Marek Serafiński Vice-President of the Management Board of BOŚ S.A. as of 15 December The Supervisory Board activities in 2008 further included: detailed discussions of the Bank s 2007 financial results at meetings in February and April, one of which was with the auditors that examined the Bank s financial statements for The Supervisory Board Heard the auditors opinion on the financial standing of the Bank and their account of the review of the annual financial statements of the Bank and the consolidated report of the BOŚ S.A. Capital Group. As the result of the discussions and the meetings the Supervisory Board expressed their opinions of the relevant Management Board reports and a gave their comprehensive assessment of the Bank s performance in 2007; presentation, as required under corporate governance principles, of a report on Supervisory Board 2007 activities, and a discussion and evaluation of materials placed on the agenda for the Annual General Meeting; approval of the BOŚ S.A. Financial Plan for The blueprint provides for the Bank s further development, even though there is no clear view of the impact of the crisis of financial markets on the further functioning of the banking sector in Poland. The 2009 Financial Plan was compiled on the Assumption that 2009 will be a stable enough year for the Bank to develop its business continuously. The Bank set itself the following priorities for 2009: to increase its market share and its net income from banking activity, with cost optimisation at the same time for improved effectiveness as measured by the C/I ratio. The Supervisory Board found it was an ambitious yet feasible plan, and resolved unanimously to approve the Bank s Financial Plan for 2009, as proposed by the Management Board; approval of changes in the Bank organisational structure for improved safety of the Bank operations and greater efficiency in marketing activities and internal communication. The structural changes took effect from 1 January The following topics were discussed by the Supervisory Board on a regular basis: the financial situation of the Bank after several months and/or quarters, with a progress report on 2008 financial plan implementation and a forecast of results of the coming months (at every meeting); results of the Bank s lending activity, with emphasis on loan portfolio quality and debt recovery effectiveness (at every meeting); the Central Information System project. That topic, an outstandingly important issue at the Bank, was also discussed at every meeting the Supervisory Board; credit financing environment friendly projects and the environmental effect secured, with emphasis on co-operation with the National Fund for Environmental Protection and Water Resource Management [NFOŚiGW] and its regional counterparts [Wojewódzkie Fundusze Ochrony Środowiska i Gospodarki Wodnej]; BOŚ S.A. standing in the banking sector and compared with the peer group; results of audit and institutional control activities, in performance of statutory duties to watch over the audit and internal control unit; management basic financial risks at the Bank, including: liquidity risk, interest rate risk, foreign exchange risk, credit risk, capital adequacy; preparation of the Bank to implement New Capital Accord provisions; implementation of Commission for Banking Supervision / Financial Banking Supervision recommendations made to the Bank following a GINB [General Inspectorate of Banking Supervision] inspection at BOŚ S.A. in Brief assessment of the Bank standing in 2008, the Bank s internal control and risk management systems Based on an analysis of the Bank financial statements for 2008, the Management Board report the Bank activity in 2008, opinion the auditors on the course and findings of the audits of the statements and current reports on the situation economic and financial situation of the Bank the Supervisory Board considered at meetings during the year, the Supervisory Board made their own assessment of the Bank activity in In their approach to the appraisal of activities and generally the situation of BOŚ S.A. In 2008, the Supervisory Board put it in context of the difficult environment in which the Bank and the entire banking sector had to operate in the reporting year, as the financial crisis was deteriorating in the fourth quarter of The crisis did have an impact on results BOŚ S.A. reported in The Bank posted a net profit to the tune of PLN 6.6 mn, a 79.2% drop from the same period in 2007, even as increases were noted for: net interest income net foreign exchange gains(losses) dividend earnings scale of activity as measured by the increase in assets (the Bank total balance sheet was above PLN 11 bn at end 2008 or more than PLN 2 bn above the end 2007 figure), with cost discipline well in place. It should be pointed out that the financial result the Bank posted was due mainly to the heavy impairment write-offs on loans and advances the Bank had to make to a total PLN 71.2 mn (in 2007, net impairment resulted in a positive balance of PLN 8.9 mn). The bulk of these write-offs, to a total amount of PLN 40.7 mn, were made on loans extended to international banks, and also write-offs on loans to corporate clients which sustained losses on foreign exchange option transactions concluded with other banks (PLN 18.4 mn in total). The aggregate write-down on loans to retail clients connected with the growing value of the portfolio was a major charge affecting the net income figure. The Supervisory Board however emphasized that even though the Bank had to make bigger write-downs than the previous year, the loan portfolio quality, as measured by the proportion of impaired loans in the total credit outstanding value, improved from the previous year. The Supervisory Board, following a close analysis of the progress of implementation of a Central Information System (CSI) in the Bank, voiced their understanding of the way the Management Board handled the case. The Management Board, having established the facts and the legal status of the CSI implementation project, and following a study of the documentation for possibilities to put to practical use the development work yet completed on the CSI project towards the establishment of an integrated information system at BOŚ S.A., and having determined the expenditure to date on the project, recognised, in consultation with the auditors, that the total value capitalized expenses on the CSI to subsume under a revaluation write-down is PLN , of which the amount PLN in costs paid by end 2007 is to be charged off the 2007 financial result by adjusting the opening balance in the financial statements for 2008 and the parallel comparative data for 2007, and the amount PLN in costs sustained in 2008 to be charged off the 2008 result. The above adjustments changed the result the Bank posted for 2008 and affected significantly the comparative data of The Supervisory Board, as they addressed the Bank s results and financial situation discussed in periodic reports presented to them during the year: took note of the fact that in its pursuit of the plan targets for the year the Bank fell short of its development strategy for the years especially in respect of total assets and loans outstanding value. The business outlook was generally good most of the year in 22008, so the Supervisory Board said the Bank failed to take full advantage of the propitious conditions then to keep a sound growth rate, especially of its loan portfolio. The downturn showed among other things in the Bank s dropping market shares: o to 1.02% in total assets, from 1.07% at end 2007, o 1.15% in total liabilities, from 1.21% at end 2007, o 1.04% in total receivables, from 1.06% at end 2007 noted that the financial results, if the write-downs at the close of the year are disregarded, were actually above the plan targets, yet their structure was different from plan; said it was necessary for the Bank: o to penetrate the market for opportunities to launch new projects and to establish active contacts with investors; o to be guided in its operations by profitability of projects and risk diversification; o to develop its co-operation with the NFOŚiGW and the WFOŚiGWs on long-term agreements. Further, with the financial crisis worsening in the fourth quarter last year the Supervisory Board: acknowledged the Management Board for taking proper actions to strengthen deposit taking, this in order for the Bank to maintain adequate liquidity levels and to reinforce security of its operations in what was a tough and worsening market, especially in the context of the problems the Bank faced in obtaining cash in the interbank market late last year, recognised it was necessary for the Bank to focus strongly on vetting clients for credit capacity and to maintain accurate and ongoing monitoring on real property value brought to the Bank as security against mortgaged loan exposures, this in order to forestall any potential deterioration of loan portfolio quality. The Supervisory Board voiced their positive views of: the more than 22% growth in scale of activity of the Bank in 2008; the attractive offer of the Bank and the invigorated promotional and advertising presence of the Bank in the media, with the spinoff in better recognition rate of the brand of the Bank; the introduction, as of 1 February 2008, changes in the Bank organisational structure, in particular the functional and organisational separation of two operational divisions each responsible for sales: one to corporate clients and clients in the public finance sector, the other to retail clients. That particular solution left the Bank s sale structures focused on market needs more strongly than before. Beyond that, in the new organisational structure: 1) credit risk management was revamped in such a way that tasks performed at the Bank warranted separation of the risk measurement, monitoring and control functions from the operation proper which necessitates the taking of risk; 2) an independent unit to manage non-compliance risk was established, which is responsible for the identification, assessment and monitoring of risks related to the observance of laws, regulations, and standards, 3) functions not related to sales were centralised. As of 1 January 2009, on approval from the Supervisory Board, the Management Board made certain adjustments to the organisational structure in order to improve the security of functioning of the Bank and to streamline marketing activities and internal communication; the Fitch Ratings agency reaffirming its appraisal of the Bank s creditworthiness and maintaining Bank Ochrony Środowiska S.A. rating at BBB. Long-term rating, as before, was stable. In summary the Supervisory Board said that because of the economic crisis 2008 was not the best or easy time for the Bank, just as for other financial institutions in Poland. The worsening prospects of the world economy, and in consequence of the Polish economy as well, forced the Bank to take strong steps likely to stabilize its economic and financial standing. One crucial challenge facing the Bank was to maintain liquidity, while keeping cash taking costs on the best feasible level and ensuring the best possible match between specific provisions and loan portfolio quality. Assessment of the risk management system and the internal control system at the Bank The Bank maintains a Bank management mechanism, enacted through resolutions of the Supervisory Board, which consists of: a risk management system, an internal control system. The aim of risk management is to maximise goodwill of the Bank by adapting risk levels and profiles to market conditions and the character of the Bank s activities. The risk management system, as defined by the Supervisory Board through a resolution, sets out the roles, duties and entitlements of governing bodies and organisational units and offices at the Bank in the risk management process and mutual interactions between entities involved in the process. The risk management process comprises: 1) the identification of risk, its assessment and measurement, 2) monitoring, control and reporting, 3) decision-making, and taking actions to change risk levels and profiles, along with the monitoring of effects of such decisions and actions. Within the scope of the risk management system at the Bank there are: an Assets and Liabilities Committee, with responsibility for ongoing oversight over market risk, liquidity risk and for the management of credit risk in portfolio approach; Operating Risk Committee, with responsibility for the ongoing oversight over operating risk management; Credit Committee at the Head Office, with responsibility for the management of cre
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