3. Business combinations

On 30 December 2020, the Bank Guarantee Fund (hereinafter ‘BGF’) decided to apply to Idea Bank S.A. the instrument of resolution due to the fulfillment of the following conditions:

1. the bankruptcy of Idea Bank S.A.,
2. there are no premises indicating that possible supervisory actions or actions of Idea Bank S.A. will allow to remove the risk of bankruptcy in due time,
3. initiation of resolution against Idea Bank S.A. was necessary in the public interest understood as the stability of the financial sector.

The resolution instrument applied by the BGF to Idea Bank S.A. consisted in the takeover by the Bank on 3 January 2021 with the effect specified in Art. 176 sec. 1 of the Act of 10 June 2016 on the Bank Guarantee Fund, the deposit guarantee system and forced restructuring (hereinafter the ‘BGF Act’) of Idea Bank SA, covering all its property rights and liabilities as at the end of the day of initiating the resolution, i.e. on 31 December 2020 (hereinafter referred to as ‘Transaction’), excluding certain property rights and liabilities indicated in the BGF decision in question, including, inter alia:

1. property rights and liabilities related to actual, legal or tort related to:
   1. trading in financial instruments and other activities relating to:
      1. 1. financial instruments issued by GetBack S.A. and related entities of GetBack S.A.,
         2. investment certificates, in particular investment certificates issued by Lartiq (formerly Trigon) [Profit XXII NS FIZ, Profit XXIII, NS FIZ, Profit XXIV NS FIZ] represented by Lartiq TFI S.A. (formerly Trigon TFI S.A.), Universe NS FIZ, Universe 2 NS FIZ and other investment funds represented by Altus TFI S.A.,
      2. providing insurance coverage, performing insurance intermediary activities or distribution of life insurances, if they are related to an insurance capital fund (also life insurance, where the insurance company’s performance is determined based on specific indices or other base values),
         1. providing services as an agent of an investment firm,
         2. the activities of Idea Bank S.A., which are not covered by the Bank’s statute,

and claims arising from these rights and liabilities, including those covered by civil and administrative proceedings, regardless of the date when they were raised.

1. shares in subsidiaries and associates of Idea Bank S.A.,
2. corporate bonds issued by GetBack S.A.,
   hereinafter referred to as ‘Acquired Business’.

The takeover of the Acquired Business does not have a significant impact on the financial profile of the Bank, in particular on the capital and liquidity parameters of the Bank and the Group

Idea Bank S.A. was a commercial bank offering banking services provided to individual and institutional clients, such as accepting cash deposits payable on demand or on a specified date and keeping accounts of these deposits, granting loans, granting bank guarantees, issuing securities. Idea Bank S.A. The capital adequacy ratio of Idea Bank S.A. according to the last available financial statements prepared as at 30 September 2020 was at the level of 2.51% (compared to 10.5% required by law) and was significantly below the regulatory requirements.

The initiation of the resolution process made it possible to reduce the effects of the bankruptcy risk of Idea Bank S.A., and the negative consequences for the banking sector related to this eventuality.

The takeover of Idea Bank S.A. was not related to the consideration payment by the Bank. As a result of the transaction, the Bank took over the assets and liabilities of Idea Bank S.A., the total estimated fair value of which was negative.
As indicated in the ‘Description of the Transaction’, the Bank did not acquire all the assets of Idea Bank S.A., in particular, the Bank did not take over shares in subsidiaries and associates.

Considering the above, the Bank received support from the BGF in the form of a subsidy in the amount of PLN 193 million in order to cover the difference between the value of the acquired liabilities and the value of the acquired property rights of Idea Bank S.A. The above funds were received by the Bank on 8 January 2021

As an inseparable element of the entire Transaction, the Bank also received a guarantee from the BGF to cover losses resulting from the risk related to property rights or the entity’s liabilities under the restructuring referred to in Art. 112 sec. 3 point 1 of the BGF Act (‘Loss Coverage Guarantee’), which includes a loss coverage guarantee resulting from credit risk related to loan exposures (‘CRM Guarantee’) and a loss coverage guarantee (other than losses resulting from credit risk) related to the Acquired Business (‘Guarantee for Residual Risks’).

The takeover involves the takeover of the loan exposures included in the Acquired Business and could result in an increase in the risk-weighted exposure amount (it is calculated by multiplying the exposure amounts and the risk weight resulting from the provisions of the Regulation of the European Parliament and of the Council (EU) No.575/ 2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (‘CRR’)). An increase in such risk weighted exposure amounts could affect the Bank’s capital requirements.

Therefore, the CRM Guarantee is used by the Bank as ‘eligible unfunded credit protection’ within the meaning of the CRR. This allowed, in terms of credit risk, to assign a risk weight appropriate to the entity providing protection – BGF, qualified as a public sector entity, to the acquired exposures, in accordance with the Polish Financial Supervision Authority opinion referred to in Art. 116 sec. 4 of CRR. As a consequence of obtaining the opinion referred to in Art. 116 sec. 4 of CRR and after the CRM Guarantee fulfills the remaining conditions for ‘eligible unfunded credit protection’, the exposures covered by the Loss Coverage Guarantee agreement are treated as exposures to the central government, resulting in a significant reduction of the capital requirement for credit risk on the part of the Bank.

The Bank made a settlement of the Transaction using the principles of International Financial Reporting Standard 3 ‘Business Combinations’ (hereinafter ‘IFRS 3’) as at the date of taking control (i.e. 3 January 2021) based on the data as at 31 December 2020.

The recognized fair values of the identifiable assets acquired and liabilities assumed are presented in the table below

As a result of the above, the Bank recognized goodwill in the amount of PLN 904 thousand, calculated as the difference between the net amount of identifiable assets acquired and liabilities assumed (PLN -193 904 thousand) and the amount of subsidies from BGF (PLN 193 000 thousand). Goodwill will not be tax deductible.

The determination of the fair value of the acquired assets and liabilities as well as the identification and recognition of intangible assets resulting from the acquisition were performed based on the available information and the best estimates as at the date of the financial statements. The basis for the valuation of individual components to their fair value were the book values as at 31 December 2020 received by the Bank from the BGF on 3 January 2021.

Cash and due from Central Bank and Loans and advances to banks
The balance of these items has been adjusted to reflect all economic events relating to 31 December 2020 which, for operational reasons, were not included in the statement of turnover and balances received by the Bank on 3 January 2021.
In addition, in the area of loans and advances to banks, a loan was measured at fair value (using the fair value methodology similar to that presented in the area of loans and advances to customers).

Loans and advances to customers
Loans and advances to customers were measured at fair value in accordance with the requirements of IFRS 3 and IFRS 13.
In the case of working loans, including purchased receivables, investment loans and operating loans, the fair value measurement was estimated on the basis of the income method, in which future expected capital and interest flows from the portfolio were discounted taking into account prepayments. Moreover, the Bank decided that the CRM guarantee received from the BGF should be treated as integral with the taken over loan portfolio, which is covered by the guarantee, and therefore the effect of the guarantee was included in the fair value valuation of loans and advances by limiting the expected credit losses.
The future cash flows determined in accordance with the above approach were discounted with the discount rate, which included the following components: the risk-free rate estimated on the basis of IRS contract quotations based on WIBOR 1M, the mark-up on the cost of equity and a component representing the calibration margin.
Due to the recognition of the CRM guarantee in question as recognized unfunded protection (details in the Price conditions section), reduced risk weights for the cost of capital charge were used in the valuation of the loan portfolio.

Securities
The fair value adjustment of securities results from the revaluation of:

• the value of corporate bonds with the same rules as presented for loans and advances to customers, and
• the value of the shares of the financial entity, the value of which was estimated using the discounted dividend model.

Intangible assets
The adjustment of the fair value of intangible assets results mainly from the adoption of the perspective of an average market participant and taking into account plans for the continuation and further use of individual intangible assets.
As a result of the conducted analyzes, no premises for the recognition of relationships with customers holding savings and settlement accounts (‘CDI’) or relationships on loan products were identified, mainly due to the lack of a significant difference between the average interest rate of the taken over accounts, and at the cost of alternative financing of the Bank and a significant excess liquidity of the banking sector. In the case of loan products, no significant relationships were identified due to the low level of net interest and commission income in relation to the corresponding significant risk costs, as well as administrative costs.

Property, plant and equipment
The adjustment of the fair value of property, plant and equipment results mainly from the perspective of an average market participant adopted for valuation. In terms of lease agreements, the liquidation of the acquired facilities was assumed. The above approach results from the conducted market analysis, the attractiveness of the location of individual outlets and the comparison of the price conditions to currently concluded contracts of a similar size in similar locations.

Other assets
Adjustment of the fair value of other assets results mainly from the revaluation of significant receivables from corporate customers, applying the approach analogous to that applied to the valuation of loan exposures.

Amounts due to customers
In the case of current accounts, it was assumed that due to their nature (e.g. the possibility of withdrawing funds on demand, renewable with the possibility of changing conditions upon renewal, no maturity), the fair value does not differ from the book value.
The adjustment of the fair value of term and structured deposits was estimated by discounting future values of term and structured deposits including repayments of nominal values and interest accrued till to repayment.

Provisions
The adjustment of the fair value of provisions results mainly from the write-off of a provision for restructuring.

Other liabilities

The adjustment of the fair value of other liabilities results from the revaluation of the provision for future liabilities. The value of liabilities was estimated on the basis of the expected future cash outflow and taking into account discount factors resulting from the current market conditions.