Industrial Development Bank Of Israel Inactive
Filed: 17 Oct 07, 12:00am
EXHIBIT 1
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
CONDENSED FINANCIAL STATEMENTS
AS OF JUNE 30, 2007
CONTENTS
PAGE
Report of the Board of Directors for the six and three months ended June 30, 2007 2
Management Review of the Financial Position and Results of Operations of the Bank 19
Certifications of the General Manager and the Comptroller 25
Financial Statements as at June 30, 2007 27
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This is a translation from the Hebrew and has been prepared for convenience
only. In the case of any discrepancy, the Hebrew will prevail.
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THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
REPORT OF THE BOARD OF DIRECTORS AS OF JUNE 30, 2007
At the meeting of the Board of Directors that was held on August 28, 2007, it
was resolved to approve the Bank's unaudited financial statements as of June 30,
2007. The financial statements are presented in accordance with the directives
of the Supervisor of Banks and the data are stated in reported amounts.
ECONOMIC DEVELOPMENTS
The economic data published in respect of the first half of 2007 indicate a
continuing upward trend in economic activity in the market. The market growth
rate in the first half of 2007 was 6.6%, surpassing initial forecasts. This is
the largest growth rate in recent years.
The "last published" Israeli Consumer Price Index increased in the first half of
2007 by 0.3% compared with an increase of 1.3% in the same half of 2006. The
Index in respect of the months of June and July increased by 1.8%, indicating an
increase in the inflation rate in the second half of 2007.
The exchange rate of the dollar which declined in the first quarter of 2007 by
1.7% increased in the second quarter of 2007 by 2.3%. On June 30, 2007, the
exchange rate was NIS 4.249 to the dollar.
In the monetary sphere, during the second quarter of 2007, the process of the
decline in the Bank of Israel interest rate continued. This process started in
the last quarter of 2006. As of June 30, 2007, the Bank of Israel interest rate
was 3.50%(annualized), compared with 4.5% at December 31, 2006, and 5.5% at the
end of the third quarter of 2006. During July 2007, an upward trend began in the
market interest. At the end of July 2007, the Bank of Israel rate was raised by
0.25%. The expectations derived from the capital market are for a continued
process of the increase in the Bank of Israel rate, reflected in the increase in
the annual yield of short-term CDs (MKM), which proximate to the release of the
financial statements was 4.90%.
PRESENTED BELOW IS DATA REGARDING THE EFFECT OF THE INCREASE (DECREASE) IN THE
"LAST PUBLISHED" CPI AND THE RATES OF DEVALUATION (APPRECIATION) OF THE SHEKEL
IN RELATION TO PRINCIPAL CURRENCIES:
THREE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, DECEMBER 31,
2007 2006 2007 2006 2006
---- ---- ---- ---- ----
% % % % %
---- ---- ---- ---- ----
Increase (decrease) in "last published" CPI 0.7 1.2 0.3 1.3 (0.3)
Rate of devaluation (appreciation) of the
shekel in relation to the dollar 2.3 (4.8) 0.6 (3.5) (8.2)
Rate of devaluation (appreciation) of the
shekel in relation to the euro 3.3 (0.3) 2.7 3.6 2.2
Rate of devaluation (appreciation) of the
shekel in relation to the yen (2.2) (2.6) (3.1) (1.3) (9.4)
FORWARD LOOKING INFORMATION
Part of the information included in this report, which does not relate to
historical facts, constitutes forward looking information as defined in the
Securities Law - 1968.
The actual results of the Bank and future developments in its affairs may be
significantly different than those included or described in the forward looking
information, due to a large number of factors including, inter alia, future
decisions regarding the affairs of the Bank by the Government of Israel or the
Bank of Israel, additional restrictions imposed in the future on the business of
the Bank, changes in the condition of the Bank's customers or in the condition
of the collaterals for their debts, and changes in the business environment in
which the Bank and its customers operate.
2
Forward looking information is characterized by words such as "intention",
"likely", "might", "evaluation", "can be assumed", and so forth. These forward
looking terms involve risks and uncertainty since they are based on evaluations
of management regarding future events that may not occur or may occur
differently than expected.
The information presented below is based, inter alia, on the evaluations of
management of the Bank regarding various matters discussed in the directors'
report.
The Bank does not undertake to publish an update to the forward looking
information included in this report, including in respect of the effect on this
information of circumstances or events that occur after the date of publishing
the report.
PRINCIPAL DEVELOPMENTS IN RECENT YEARS
Due to increased withdrawals of deposits during the third quarter of 2002, the
Bank experienced severe liquidity problems, following which the Bank was granted
a special line of credit by the Bank of Israel. The Bank stopped providing
credit and its business focuses on collecting credit as described below in more
detail.
On February 27, 2003, after the Bank did not succeed in selling its asset and
liability portfolio in a short-term, "all or nothing" sale, the Bank's Board of
Directors resolved to adopt the principles of the "Run-Off" plan that was
prepared by a staff of outside consultants. The central aspect of the plan is a
supervised sale of the credit assets of the Bank over a four-year period, along
with cutbacks in manpower and activities. On July 29, 2003, the Ministerial
Committee for Social and Economic Affairs (the socio-economic mini committee)
approved the adoption of the aforementioned plan for the period that was to have
ended, in accordance with the decision, on July 29, 2006.
On July 26, 2005 the Bank's Board of Directors approved the extension of the
"Run-Off" plan until July 31, 2008, and its continued implementation on the
basis of the plan that was presented before it. Furthermore, the Bank's Board of
Directors decided that due to the reduction in the Bank's activity pursuant to
the "Run-Off" plan and the date to which the plan was extended, the Bank would
notify the Governor of the Bank of Israel that it agrees that its banking
license be restricted in a manner that reflects its reduced activity as derived
from the "Run-Off" plan, and to the restricted license specifying that it is
valid until the end of the plan (July 31, 2008).
On October 10, 2005, the Ministerial Committee for Social and Economic Affairs
(the Social Economic Cabinet) approved the extension of the Bank's "Run-Off"
plan until July 31, 2008. The main principles of the Committee's decision from
October 10, 2005 are presented in Note 1 of the condensed financial statements.
In his letter from October 30, 2005, the Governor of the Bank of Israel advised
of the extension of the special line of credit that had been provided to the
Bank, until July 31, 2008. The main provisions of the special line of credit are
described hereunder.
In his letter dated January 29, 2006 the Bank was notified by the Governor of
the Bank of Israel as follows:
>> The banking license the Bank received on June 4, 1989 will be
restricted so that the Bank cannot engage in any business it did not
engage in prior to the date of the license (until the date of the
license the Bank engaged in financing investments) and without
derogating from the generality of the aforementioned, the Bank will
not receive new deposits and will not renew deposits reaching their
current date of maturity, other than from shareholders.
>> The Bank's banking license will be revoked as from August 1, 2008.
In its letter dated May 1, 2007, the Bank of Israel announced that if the
blueprint described below for the sale and/or transfer of the shares of the Bank
is carried out prior to August 1, 2008, the license of the Bank will be
cancelled as of the date the blueprint is carried out.
The Bank is presently in the process of implementing the "Run-Off" plan as
described in more detail below.
3
On April 22, 2007, the Bank issued an Immediate Report to the Israel Securities
Authority and to the Tel Aviv Stock Exchange whereby it gave notice that the
Finance Ministry and the Government Companies Authority have been assessing a
possible blueprint for the sale and/or transfer of all of the issued share
capital of the Bank to a third party purchaser, as follows: (a) the sale and/or
transfer of all of the holdings of the State of Israel and of the three large
banking groups in the shares of the Bank to the designated purchaser; (b) the
purchase by the designated purchaser of the shares of the Bank held by the
public and traded on the Tel Aviv Stock Exchange, as part of the arrangement
plan pursuant to article 350 of the Companies Law - 1999 which requires
obtaining the consent of the court and a special majority of the public
shareholders of the Bank; (c) the redemption by the Bank of the class D and DD
preference shares held by the public, together with payment of the preferred
dividends in arrears in respect thereof (as required by the terms of issuance in
the event of a redemption). The immediate filing further noted that as part of
the assessment of the blueprint, the Government Companies Authority has been
weighing, after making the necessary clarifications with the relevant parties
regarding the feasibility of the aforementioned blueprint, the issuance of a
request for information (hereinafter - "RFI"), as part of which parties
interested in purchasing the shares of the Bank will be invited to give notice
of such interest in carrying out the purchase in accordance with the proposed
blueprint.
At this stage, it is not possible to know if the blueprint under scrutiny will
be adopted and actually implemented and this question will be affected by, among
other things, the willingness of the three banking groups to transfer their
holdings. In addition, the sale of the holdings of the State of Israel is
subject to the passing of a privatization resolution by the Ministerial
Committee on Privatization, a resolution which has not yet been passed.
On June 17, 2007, the Government Companies Authority issued a request for
information (RFI) in which it announced, among other things, that the Government
of Israel, through the Government Companies Authority, was requesting
information from parties interested in purchasing Israel Industrial Development
Bank Ltd. and was requesting that those interested parties submit their requests
on July 3, 2007. The RFI also included a description of the proposed blueprint
for the sale and indicated, among other things, that a pre-condition for the
implementation of the blueprint is an undertaking of the controlling
shareholders (Bank Leumi, Bank Discount, Bank Hapoalim, First International
Bank, IDB, and the Association of Industrialists) to transfer their controlling
shares to the State without consideration.
The Bank was informed by the Government Companies Authority that on the date
stipulated for submission of the requests, July 3, 2007, eleven requests were
received at the offices of the Authority from companies and individuals. The
Government Companies Authority, together with the Finance Ministry, are
assessing the manner and format for implementing the blueprint and have started
taking steps to move forward on the matter. Notwithstanding, as mentioned above,
it is unknown as to if and when the blueprint will come to fruition, and if so,
whether it will be in accordance with the description set out in the sales
blueprint publicized as part of the RFI.
THE RUN-OFF PLAN AND ITS IMPLEMENTATION
The principal components of the "Run-Off" plan that was approved by the Bank's
Board of Directors are a supervised sale of the Bank's assets by the end of the
plan period and a significant reduction in manpower and in operating expenses,
subject to the continued granting of the special line of credit by the Bank of
Israel. As a part of this process the Bank also implemented an extensive and
detailed efficiency plan.
In accordance with the "Run-Off" plan and the efficiency plan implemented by the
Bank, the Bank refrains from granting new credit and concentrates its activities
on collecting the existing credit. Management of the Bank implements, and
intends to continue implementing, an aggressive policy in all matters relating
to collection of problematic debts. As a result, there has been a significant
increase in recent years in the Bank's collection costs and legal expenses.
In the first half of 2007, the Bank continued implementing the "Run-Off" plan,
while reducing credit to the public. The balance of credit to the public (not
including loans with State guarantees to the Israel Electric Corporation Ltd.),
which as at December 31, 2006 amounted to NIS 848 million, decreased to the
amount of NIS 678 million as of June 30, 2007. The Bank refrains from accepting
new deposits and, in accordance with the directives of the Bank of Israel, it
ceased renewing existing deposits that reach maturity, subject to certain
exceptions. The balance of the public's deposits with the Bank amounted to NIS
62 million as of June 30, 2007 (NIS 67 million as at December 31, 2006). About
half of the balance of the deposits are deposits related to credit.
4
As part of the implementation of its plans, the Bank has significantly reduced
or completely discontinued the following activities: foreign currency and
foreign trade activity, maintenance of a trading room, maintenance of current
accounts and securities accounts, maintenance of checking accounts, processing
grants, operating cash and clearing facilities (independently) and credit cards.
The reduction in the Bank's operations was also accompanied by a reduction in
the Bank's staff and a significant reduction in its operating expenses.
The financial statements do not contain any changes in the value and
classification of assets and liabilities that may be needed if it is decided at
the conclusion of the Run-Off Plan to sell the Bank's asset and liability
portfolio as a single unit and within a short time.
THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL
The terms of the special line of credit that was provided to the Bank by the
Bank of Israel were determined by the Governor of the Bank of Israel and over
time they underwent changes. The present terms of the credit line are specified
in the letter of the Governor from October 30, 2005, and the principal terms are
as follows:
o The credit line will be in effect until no later than July 31, 2008.
o The maximum amount of the credit line will at no time exceed NIS 1.25
billion and it will decline gradually in accordance with a forecast that
was attached to the notice of the Governor of the Bank of Israel regarding
extension of the line until July 31, 2008.
o The Bank will be allowed to continue to use the credit line in order to
meet the liquidity needs it has for fulfilling its current banking
obligations.
o The interest on the utilized credit will be the "Bank of Israel interest
rate" (it is noted that before July 29, 2003 the utilized credit bore a
higher rate of interest).
o Any significant administrative expense that deviates from the Bank's
ordinary course of business and has an effect on its business results will
require the approval of the Bank of Israel.
o Limitations were set on the Bank's volume of activity with respect to
making and pledging deposits with banks.
In the abovementioned letter of the Governor of the Bank of Israel dated October
30, 2005 it was noted that if the Bank of Israel should see fit, and to the
extent required at its sole discretion, additional restrictions regarding the
Bank's operations in addition to those specified in the aforementioned letter
will be considered, whether or not as a result of non-conformity with the
objectives of the "Run-Off" plan.
The decision of the Ministerial Committee for Social and Economic Affairs from
October 10, 2005 provides as follows:
1) The Government is responsible for the repayment of the credit line as from
July 1, 2005, on the condition that the interest on the credit line until
the end of the plan shall not exceed the Bank of Israel interest rate.
2) If at the end of the plan there remains an unpaid balance of the line of
credit, the Government will repay the balance to the Bank of Israel until
July 31, 2008. The Government has noted before it that in exchange for its
repayment of the credit balance, the collateral that was provided by the
Bank for repayment of the credit will be assigned in its favor (the Bank
created a floating lien in favor of the Bank of Israel in a debenture dated
November 14, 2002, which was amended on December 29, 2005).
The utilized balance of the special line of credit from the Bank of Israel (not
including interest accrued but not yet charged) as of June 30, 2007 was NIS 575
million, compared with NIS 751 million as at December 31, 2006. The utilized
balance as of June 30, 2007 is NIS 200 million lower than the credit line amount
that was set for that date for the Bank in the updated credit line decline
forecast. Proximate to the release of the financial statements, the utilized
balance of the credit line was lower than the framework stipulated by the Bank
of Israel for the conclusion of the Run-Off Plan and NIS 1,650 million lower
than the original amount of the credit line.
5
The Bank is of the opinion that the Bank of Israel should credit it with all the
amounts of interest in excess of the "Bank of Israel interest rate" which were
charged by the Bank of Israel from August 2002 until July 29, 2003 (the date the
Ministerial Committee for Social and Economic Affairs first approved the Bank's
"Run-Off" plan), in the total amount of NIS 78 million (as calculated by the
Bank). On May 1, 2007, the Bank issued an Immediate Report to the Israel
Securities Authority and to the Tel Aviv Stock Exchange in which it gave notice
that as part of the contacts it recently had with the Bank of Israel, it was
made clear that the issue of the restitution of the surplus interest to the Bank
will be assessed upon the complete repayment of the special credit line.
CAPITAL ADEQUACY
On June 30, 2007, the Bank's ratio of capital to risk assets was 2.63%, compared
with the 9% minimum rate stipulated in Proper Banking Procedures and compared
with a ratio of 1.34% as at December 31, 2006.
Due to the sharp decline in the "first tier capital" of the Bank, and in view of
the limitation by which the "second tier capital" in excess of the "first tier
capital" shall not be taken into consideration in calculating the minimum
capital ratio, almost all the "second tier capital" of the Bank remains
unutilized in the calculation of the aforementioned ratio (thus, as of June 30,
2007, "second tier capital" in the total amount of NIS 513 million remains
unutilized).
Please note that as of June 30, 2007, further to implementation of Israeli
Accounting Standard No. 22, FINANCIAL INSTRUMENTS: DISCLOSURE AND PRESENTATION
(that was implemented for the first time in the first quarter of 2006), the
Bank's shareholders' equity amounted to NIS 29 million, while the preferred
shares, which are not included in shareholders' equity and in first-tier
capital, amounted to NIS 493 million. The aforementioned capital of the
preference shares, and with the addition of the general allowance for doubtful
debts, constitutes the "second-tier capital" of the Bank, which as
aforementioned is almost entirely unutilized for purposes of the ratio of
capital to risk assets. For information regarding the accounting change in the
classification of preference profit-sharing shares as a result of Accounting
Standard No. 22, see Note 1D of the financial statements as at December 31,
2006.
In the opinion of the Bank's Board of Directors, in the Bank's present
circumstances, the requirement to maintain a minimum capital ratio is irrelevant
to its operations.
EXEMPTION FROM THE SUPPLEMENTARY ALLOWANCE FOR DOUBTFUL DEBTS IN RESPECT OF A
DEVIATION FROM CERTAIN DEBT LIMITS
As stated in more detail in Note 3 of the condensed financial statements, as a
result of the approval received from the Supervisor of Banks, the financial
statements of the Bank do not include a supplementary allowance for doubtful
debts in respect of deviations from debt limits of an individual borrower and a
borrower group, deviations from debt limits in respect of financing means of
control in corporate entities and in respect of deviations from the limit of
sector concentration indebtedness.
It is noted that if the Supervisor of Banks had not granted the exemption, the
Bank would have been required to make a supplementary allowance of significant
amounts in respect of these deviations, in the periods in which they were
created, which would have had a material impact on its results of operations for
such periods. Furthermore, the adjustment of the aforementioned supplementary
allowance to the changes that occurred from time to time in the extent of the
deviations could have had an effect on the financial results of the Bank in the
subsequent reporting periods.
6
BUSINESS SEGMENTS
In light of the circumstances under which the Bank operates, the Supervisor of
Banks has exempted the Bank from the requirement to report according to business
segments as provided in the temporary order regarding description of a banking
entity's business and forward looking information in the directors' report.
Accordingly, the directors' report and the financial statements do not include a
description of business segments and information according to business segments.
DIVIDEND DISTRIBUTION - CESSATION OF DIVIDEND DISTRIBUTION ON PREFERRED SHARES
The Bank has not distributed any dividends since the third quarter of 2002, in
which the Bank distributed to the holders of the preference shares and of the
ordinary preferred shares the quarterly dividend for the second quarter of 2002.
The issued share capital of the Bank includes preference shares of classes C,
CC, CC1, D, and DD to which the Bank used to pay quarterly 25% of the annual
preferred dividend on those classes and once a year, a participating dividend of
1.5% in respect of classes C, CC, and CC1. The last dividend paid by the Bank in
respect thereof was a preference dividend that was related to the second quarter
of 2002. Following the losses of the Bank in 2002 and after the Bank's Board of
Directors - with the assistance of legal counsel - had discussed the various
aspects concerning the dividend distribution (including the restrictions
stipulated in the Companies Law - 1999, the Bank's articles and the directives
of the Supervisor of Banks), the Bank's Board of Directors decided to refrain at
this point from distributing a dividend in respect of the aforementioned shares.
The aggregate amount of the dividend, at the annual rate of 7.5%, in respect of
the aforementioned preferred shares (including a 1.5% participating dividend for
C, CC and CC1 shares) that has not been paid since the Bank ceased paying the
dividend, amounts to NIS 185.0 million as of June 30, 2007. This amount was not
recorded in the financial statements and it is equal to the amount of the
accrued interest on the perpetual deposits of the Bank with the Israeli
Treasury, which was also not recorded in the financial statements.
The aggregate amount of NIS 185.0 million is comprised as follows: NIS 114.3
million is in respect of non-participating shares (D and DD) and NIS 70.7
million is in respect of participating shares (C, CC and CC1). Of this amount,
an amount of NIS 8.5 million is in respect of the second quarter of 2007 and is
comprised as follows: NIS 5.7 million is in respect of non-participating D and
DD shares and NIS 2.8 million is in respect of participating C, CC and CC1
shares.
On September 28, 2004 various financial entities that hold class C and/or CC
and/or CC1 shares of the Bank filed with the Tel Aviv District Court an
originating motion in which the Court was requested to instruct the Bank to pay
to its shareholders a dividend at the rates and dates it was paid until the
second quarter of 2002. Since in the opinion of the Bank, the matter of the
dividend distribution, which is the issue of the aforementioned originating
motion, is connected to the question of whether under the circumstances of a
non-distribution of dividend, the interest on the perpetual deposits of the Bank
with the Israeli Treasury is accrued in its favor, and since the answers
received so far from the Ministry of Finance were not clear enough and were
insufficient, the Bank filed an originating motion with the Court on March 9,
2005 against the Minister of Finance and the aforementioned financial entities,
in which it requested a ruling declaring (among other things) that the interest
on the perpetual deposits is indeed accrued in favor of the Bank. Following the
request of the Bank and the aforementioned financial entities the Court ordered
that the hearing on the two originating motions be consolidated. In the reply of
the Minister of Finance to the originating motions prior to a preliminary
hearing that was held on January 12, 2006, the Minister of Finance announced
that his position is that the interest on the perpetual deposits does not accrue
in favor of the Bank when it does not distribute a dividend, and that even so,
in light of the Bank's circumstances, there is no justification for the
distribution of a dividend by the Bank. On March 23, 2006, the court decided
that in the first stage, the question of the accrual of interest on the
perpetual deposits of the Bank with the Treasury will be discussed and resolved,
since a resolution of this question will advance the hearing and the resolution
of the rest of the questions that must be answered. The Bank's Board of
Directors expressed its fundamental position that if the interest does not
accrue on the perpetual deposits, the Board of Directors will reconsider its
position regarding renewal of the dividend distribution, subject to the legal
and regulatory restrictions applicable to the Bank in this respect, including
the need to receive approvals and to amend the Bank's articles. On August 5,
2007, a decision was rendered by the Tel Aviv District Court whereby it rejected
the originating motion filed by the Bank against the Finance Minister and
against the aforementioned financial institutions in which it determined that
the interest on the perpetual deposits does not accrue to the credit of the Bank
as long as a dividend is not distributed and/or in respect of the aforementioned
preference shares. The Bank is currently assessing the decision and the
ramifications thereof.
7
See also Notes 5 of the condensed financial statements for details on the
cessation of the dividend distribution, the legal and regulatory restrictions
applicable to the Bank with respect to a dividend distribution and the matter of
the accrued interest on the perpetual deposits with the Treasury. See also Note
8 of the condensed financial statements regarding the aforementioned originating
motions.
EXEMPTION FROM IMPLEMENTING THE BASEL II TREATY
The Basel committee on banking supervision published a document on June 26,
2004, which is known as the "Basel II Treaty", and is comprised of a list of
principles intended first and foremost to improve risk management, including
management of the capital adequacy of banks. The Supervisor of Banks announced
his intention to impose the Basel II Treaty on the entire banking system in
Israel. Implementation of the Treaty's principles requires proper and extensive
preparations, including the establishment and building of various
infrastructures and systems.
In his letter dated November 30, 2004, the Supervisor of Banks accepted the
request of the Bank and exempted it from the need to prepare for implementing
the Basel II Treaty, this in light of the circumstances under which the Bank
operates, including the Government decision regarding implementation of the
Run-Off plan.
RELIEF FROM THE IMPLEMENTATION OF PROPER BANKING PROCEDURES WITH RESPECT TO
CREDIT MANAGEMENT
In his letter of May 1, 2005, the Supervisor of Banks confirmed that in light of
the changes in the Bank's activity and its focusing on the collection of credit,
the Bank is exempt from implementing certain proper banking procedures with
respect to credit management as follows: Section 9(a) of Directive 301 regarding
the establishment of a credit policy by the Board of Directors, Section 3(b) of
Annex A of Directive 316 regarding the credit rating of borrowers and Directive
323 regarding the financing of purchases of means of control in companies.
In accordance with the provisions of the Proper Banking Procedure, a bank is
required to maintain a credit control unit as one of the means of educated
management of its credit risks. Due to the fact that since the second half of
2002, the Bank's activity has been centering around the collection of its credit
portfolio, and it does not approve any new credit, the need for such a unit at
the Bank has diminished.
Further to the request of the Bank, the Supervisor of Banks notified the Bank in
his letter dated November 26, 2003 that the Bank is exempt from complying with
the provision of the Proper Banking Procedure that relates to credit control.
MEASUREMENT AND DISCLOSURE OF IMPAIRED DEBTS, CREDIT RISK, AND A PROVISION FOR
CREDIT LOSSES
The Bank of Israel issued a draft provision relating to the measurement and
disclosure of impaired debts, credit risk, and a provision for credit losses.
The provision is to go into effect commencing with the financial statements to
be issued subsequent to January 1, 2009. In its letter dated August 12, 2007,
the Bank of Israel notified the Bank that it was granted permission not to
implement this provision.
ADOPTION OF CODE OF ETHICS
In its resolution of December 29, 2003, the Bank's Board of Directors adopted a
code of ethics which applies to all the officers and employees of the Bank. This
was done following the provisions of the Sarbanes Oxley Act, which are
applicable to the Bank.
8
TRANSFER OF THE SHARES OF THE BANK TO THE LIST OF SECURITIES WITH LIGHT TRADING
On August 12, 2007, the shares of the Bank traded on the Tel Aviv Stock Exchange
(shares of classes C, CC, CC1 and preferred ordinary shares) were transferred to
the list of securities with light trading, a list that was instituted on the
stock at exchange on that same date. Securities included in this list are traded
only twice a day, at the beginning of the trading day and at its close. The
trading is carried out using the multi-sided tender method and does not involve
continuous trading of the shares. Shares are included in this list if, in the
six months that preceded the "determining date", the median daily turnover of
the shares was lower than NIS 2,000 and the average daily trading turnover was
less than NIS 20,000. The "determining date" for entrance into the new list will
be June 15, 2007 and the determining dates for updating the list on a regular
basis will be June 15, and December 15 of every year.
LEGAL CLAIMS
See Note 8 of the condensed financial statements for information regarding the
significant legal claims filed against the Bank. When evaluating the risks
included in the claims submitted against the Bank, management of the Bank relies
on the opinions of the external legal advisors that represent the Bank in these
claims. These opinions are rendered by them on the basis of their discretion and
on the basis of the facts and legal status known to them, and the data is at
times subject to contradictory interpretation and arguments. Accordingly, the
actual results of the claims may differ from the evaluations of the external
legal advisors and from the provisions made, based upon them.
DEVELOPMENT OF INCOME AND EXPENSES
NET INCOME - The Bank's net income amounted to NIS 9.0 million in the first half
of the year, compared with a net loss of NIS 10.3 million in the first half of
last year and with a net loss of NIS 17.1 million in the entire year of 2006.
The net income of the first half of 2007 was affected by the increase in
interest revenue collected in respect of problematic debts. The net income of
the second quarter of 2007 amounted to NIS 4.1 million, compared with income of
NIS 0.4 million in the second quarter of 2006.
PROFIT FROM FINANCING OPERATIONS BEFORE THE ALLOWANCE FOR DOUBTFUL DEBTS - In
the first half of 2007, this profit amounted to NIS 19.3 million, compared with
NIS 11.5 million in the first half of 2006.
The increase in profit from financing operations resulted mainly from the
following:
- - The increase in revenues from interest collected on problematic debts which
amounted to NIS 13.3 million compared with NIS 3.9 million in the first
half of 2006.
- - A decrease in the volume of problematic debts classified as non-income
bearing. The average balance of non-income bearing debts in the first half
of 2007 amounted to NIS 139 million, compared with NIS 253 million in the
first half of 2006. The balance of these debts constituted 16% of total
monetary assets, compared with 20% in the same period of 2006.
- - The impact of the decrease in the interest rate in the local economy on the
volume of the non-accrual of income in respect of non-income bearing debt.
The average interest rate in the first half of 2007 was lower than the
average interest in the same period last year. As a result, the negative
impact of the non-accrual of revenues in respect of non-income bearing debt
was smaller than in the same period last year, in addition to the
aforementioned volume of problematic debts.
On the other hand, this increase was offset by the decrease in the volume of the
Bank's financing activity, as part of the policy implemented by the Bank in the
past few years. For details regarding this decrease in volume, see the analysis
below on financing activity by linkage segment.
An analysis of the Bank's financing operations in the various linkage segments
indicates as follows:
UNLINKED SHEKEL SEGMENT - The average balance of assets in this segment amounted
to NIS 218 million in the first half of 2007, compared with NIS 405 million in
the same period last year, a decrease of 46%. The margin in this segment,
including the effect of derivatives, was 1.46% in the first half of 2007,
compared with 1.00% in the same period last year.
9
It should be noted that most of the non-income bearing debt is included in this
segment and the margin is affected by this fact. The improvement in the margin
in this segment, when compared with the same period of 2006, derived both from
the decrease in the volume of non-income bearing debt and its relative weight
out of total credit and from the decline in the interest rate and its impact on
the non-accrual of revenue in respect of these debts.
CPI-LINKED SHEKEL SEGMENT - The average balance of assets in this segment
amounted to NIS 486 million in the first half of 2007, compared with NIS 599
million in the first half of last year, a decrease of 19%. The margin in this
segment, including the effect of derivatives, was 2.38% in the first half of
2007, compared with 2.35% in the same period last year.
FOREIGN CURRENCY AND FOREIGN CURRENCY LINKED SEGMENT - The average volume of
assets in this segment amounted to NIS 5,717 million in the first half of 2007
compared with NIS 6,679 million in the first half of 2006. Credit in this
segment includes credit guaranteed by the State that was granted to the Israel
Electric Corporation Ltd. out of a deposit of the State. The margin in respect
of this credit is negligible and matches the level of risk attached to this
credit. The average balance of this credit in the first half of 2007 amounted to
NIS 5,544 million compared with NIS 6,383 million in the first half of 2006.
Excluding the said credit, the average balance of assets in this segment amounts
to NIS 173 million, compared with NIS 296 million in the first half of 2006, a
decrease of 42%. The margin in this segment, including the effect of
derivatives, was 0.03% in the first half of 2007, compared with 0.06% in the
same period last year. The low margin rate in this segment is the result of the
volume of State guaranteed credit, as stated above.
The total average financial assets in all linkage segments (excluding the
aforementioned credit guaranteed by the State of Israel out of the deposit of
the State) in the first half of 2007 amounted to NIS 877 million, compared with
NIS 1,300 million in the first half of 2006, a decrease of 32% in the average of
the financial assets.
The data presented above indicate that the Bank succeeded in maintaining a
positive margin in all linkage segments, notwithstanding the high degree of
credit that was classified as non-income bearing credit.
Comparative data on the development of the overall credit risk in respect of
problematic borrowers (1) is as follows (in NIS millions):
BALANCE AS AT BALANCE AS AT BALANCE AS AT
-------- -------- --------
JUNE 30, JUNE 30, DECEMBER 31,
2007 2006 2006
-------- -------- --------
Non-income bearing 79.6 235.9 171.2
Restructured (2) 107.2 82.8 74.1
Designated for restructuring (3) 15.9 5.4 26.9
Temporarily in arrears 3.9 44.6 14.5
Under special supervision* 164.1 233.9 208.5
-------- -------- --------
Total balance sheet credit to problematic borrowers (1) 370.7 602.6 495.2
Off-balance sheet credit risk in
respect of problematic borrowers (1) 82.4 101.1 88.0
-------- -------- --------
Overall credit risk in respect of problematic borrowers (1) (4) 453.1 703.7 583.2
======== ======== ========
* Including an amount of NIS 153.7 million in respect of debts for which a
specific allowance exists (June 30, 2006 - 69.2 million; December 31, 2006
- NIS 183.1 million).
1) Not including problematic debts that are covered by collateral that is
deductible for purposes of individual borrower and borrower group
limitations (Proper Banking Procedure Directive No. 313).
2) Credit that was restructured in the current year and credit that was
restructured in prior years with waiver of income.
3) Credit to borrowers in respect of which there is an as yet unimplemented
Management decision to restructure their debt.
4) As calculated for purposes of individual borrower and borrower group
limitations, except in respect of guarantees granted by a borrower as
security for the debt of a third party.
10
The data presented above indicate a significant decrease in the volume of debts
classified as non-income bearing. Nevertheless, the weight of the problematic
debts of the total debt continues to be relatively high in relation to the
Bank's total credit. The high volume of non-income bearing debt will have a
negative impact on the results of operations of the Bank in the future, since
the interest income in respect of those debts will not be carried to financing
income as long as the debt is still classified as non-income bearing.
A significant portion of the volume of the off-balance sheet credit risk in
respect of problematic borrowers derives from letters of indemnification issued
by the Bank in favor of the receivers that were appointed to realize the assets
of the companies undergoing legal proceedings. The letters of indemnification
are in respect of receipts that were credited to the borrowers' accounts with
the Bank out of the proceeds from the realization of the assets.
THE ALLOWANCE FOR DOUBTFUL DEBTS - Amounted to NIS 2.2 million in the first half
of 2007, compared with NIS 19.5 million in the first half of 2006. The specific
allowance for doubtful debts in the first half of 2007 amounted to NIS 5.9
million, compared with NIS 22.4 million in the first half of 2006. The
supplementary allowance for doubtful debts reflected a decrease of NIS 3.7
million, mainly a result of the decrease in the volume of problematic debts in
general and the decrease in the volume of non-income bearing debts in
particular. In the first half of 2006, the decrease in the supplementary
allowance amounted to NIS 2.9 million.
The supplementary allowance for doubtful debts (including a general allowance
for doubtful debts) amounted to NIS 48.0 million as of June 30, 2007,
constituting 6.6% of the balance of the credit (excluding State-guaranteed
credit to the Israel Electric Company out of the State deposit) before the
aforementioned allowance. This rate is extraordinarily higher than the accepted
rate in the banking system. The high rate derives mainly from the volume of the
general allowance which amounts to NIS 38.9 million. The general allowance was
standard practice in the banking system until December 31, 1991 and it was based
on the volume of the debt as of that date. In accordance with the provisions of
the Supervisor of Banks, the aforementioned allowance remained at that volume,
notwithstanding the decrease in the volume of debt in recent years. At present
it constitutes 5.4% of the balance of the credit.
OPERATING AND OTHER INCOME - This income amounted to NIS 7.9 million in the
first half of 2007, compared with NIS 14.2 million in the same period in 2006.
Most of the increase in income derived from gains from investments in shares
which amounted to NIS 5.7 million in the first half of 2007, compared with NIS
11.9 million in the first half of 2006. The income in the first half of 2007
includes an amount of NIS 3.6 million received as a dividend on the shares of
Bezeq. Revenues from operating commissions in the first half of 2007 amounted to
NIS 0.5 million, compared with NIS 0.7 million in the first half of 2006. The
low volume of such income reflects the fact that the Bank has been reducing the
operating activity it conducts on behalf of its customers. Other income amounted
to NIS 1.7 million compared with NIS 1.6 million in the first half of 2006. In
the first half of 2007, this income included profit from the central severance
pay fund of the employees of the Bank in an amount of NIS 0.9 million. In the
first half of 2006, no income was recorded in this item.
OPERATING AND OTHER EXPENSES - Amounted to NIS 16.0 million in the first half of
2007, compared with NIS 16.5 million in the first half of last year. Payroll
expenses totaled NIS 10.1 million in the first half of 2007, compared with NIS
9.1 million in the first half of 2006. The increase in payroll expenses in the
first half of 2007 derived from the following factors:
- - Payroll expenses of the first half of 2007 included an amount of NIS 1.3 in
respect of payroll VAT. The payroll expenses of the first half of 2006 did
not include payroll VAT since there was an expected loss for purposes of
the profit tax in 2006.
- - Payroll expenses of the first half of 2007 included a provision in an
amount of NIS 0.8 million in respect of an expense related to additional
severance pay approved to the Chairman of the Board, the GM, and the deputy
GM of the Bank, upon their retirement from the Bank (see Note 7 to the
condensed financial statements).
Neutralizing the effect of these factors shows that there was a decrease of NIS
1.1 million in payroll expenses.
Maintenance and depreciation expenses for the first half of 2007 amounted to NIS
1.4 million, compared with NIS 1.3 million in the same period last year.
11
Other operating expenses amounted to NIS 4.5 million in the first half of 2007,
compared with NIS 5.9 million in the same period last year. There was a
significant decrease in the components of this item as part of the efficiency
plan that was implemented by the Bank in connection with the Run-off Plan.
BALANCE SHEET AND CAPITAL RESOURCES
TOTAL ASSETS - As at June 30, 2007 amounted to NIS 7,234 million, compared with
NIS 7,516 million as at December 31, 2006.
SHAREHOLDERS' EQUITY OF THE BANK INCLUDING PREFERENCE SHARES - Amounted to NIS
522 million as at June 30, 2007, compared with NIS 511 as at December 31, 2006.
From an accounting standpoint, the preference shares issued by the Bank are
classified as a liability and are not included in the shareholders' equity of
the Bank. The total amount of liabilities in respect of the Bank's preference
shares amounted to NIS 493 million (compared with NIS 491 million as at December
31, 2006). Of this amount, an amount of NIS 188 million is in respect of
profit-participating preference shares (compared with NIS 187 million as at
December 31, 2006). Until 2005, the profit-participating preference shares were
classified as part of the shareholders' equity of the Bank. As a result of the
implementation of Israeli Accounting Standard No. 22, they were reclassified,
commencing January 1, 2006, as a liability in respect of profit-participating
preference shares (for details regarding this change, see Note 1D of the
financial statements of the Bank as at December 31, 2006).
This accounting change has no impact on the surplus of assets distributable to
shareholders upon liquidation, on the preference order for the distribution of
the balance of assets of the Bank upon liquidation and on the related rights of
each class of shares. (For details of these rights, see Notes 14, 15, and 16 of
the financial statements of the Bank as at December 31, 2006).
TOTAL CREDIT TO THE PUBLIC - As at June 30, 2007 amounted to NIS 6,273 million
compared with NIS 6,519 million as at December 31, 2006. The abovementioned
credit data include credit guaranteed by the State that was granted to the
Israel Electric Corporation Ltd. out of a deposit of the State with the Bank,
the balance of which amounted to NIS 5,595 million as at June 30, 2007, compared
with NIS 5,671 million as at December 31, 2006. Net of such credit, the credit
to the public amounts to NIS 678 million as at June 30, 2007, compared with NIS
848 million as at December 31, 2006. This decrease is in accordance with the
Bank's policy of reducing its credit portfolio and is a continuation of the
decrease in credit that commenced in 2002.
SECURITIES - The balance of securities as at June 30, 2007 amounts to NIS 48
million, compared with NIS 50 million as at December 31, 2006. The securities
portfolio includes an investment of NIS 15 million in mezzanine funds. In
addition, the securities portfolio includes marketable shares in the amount of
NIS 33 million (according to their market value as at June 30, 2007). The market
value of the shares includes unrealized gains in the amount of NIS 8.8 million
which were credited to a capital reserve, as part of the adjustments in respect
of the presentation of available for sale securities to fair value.
DEPOSITS OF THE PUBLIC - Amounted to NIS 62 million as at June 30, 2007,
compared with NIS 67 million as at December 31, 2006. These deposits are
comprised of unlinked deposits in the amount of NIS 33 million, compared with
NIS 31 million as at December 31, 2006, CPI-linked deposits in the amount of NIS
28 million, compared with NIS 33 million as at December 31, 2006, and foreign
currency denominated or linked deposits in the amount of NIS 1 million, compared
with NIS 3 million as at December 31, 2006.
The Bank refrains from accepting new deposits and, in accordance with the
instructions of the Bank of Israel, it ceased renewing deposits that have
reached maturity, subject to certain exceptions. Please note that about half of
the balance of deposits as at June 30, 2007 and at December 31, 2006 are
deposits related to credit.
DEPOSITS OF THE GOVERNMENT - The balance of Government deposits as at June 30,
2007 amounted to NIS 5,986 million, compared with NIS 6,087 million as at
December 31, 2006. The main component of the Government deposits is foreign
currency denominated deposits, which served as the source for granting long-term
loans. The balance of the Government's foreign currency deposits amounted to NIS
5,706 million as at June 30, 2007, compared with NIS 5,781 million as at
December 31, 2006.
12
Another component of these deposits is the CPI-linked deposits that were
received as part of the arrangement of the kibbutzim. These deposits served as a
source for rescheduling the debts of the kibbutzim. The balance of the
Government's CPI-linked deposits as at June 30, 2007 amounted to NIS 281
million, compared with NIS 306 million as at December 31, 2006.
DEPOSITS FROM BANKS - The balance of these deposits as at June 30, 2007 amounted
to NIS 584 million, compared with NIS 768 million as at December 31, 2006. Of
this amount, an amount of NIS 581 million derived from the special line of
credit, which the Bank of Israel granted to the Bank (of this amount, an amount
of NIS 575 million is the balance of the credit line principal and an amount of
NIS 6 million is the accrued interest which has not yet been debited), compared
with NIS 761 million as at December 31, 2006. For information regarding the
interest that the Bank was charged by the Bank of Israel in excess of the "Bank
of Israel Rate", see Note 1 to the condensed financial statements, in the part
relating to the credit line of the Bank of Israel.
The aforementioned item included, in addition to the credit line of the Bank of
Israel, a deposit of NIS 3 million, This is a long-term deposit of a bank abroad
that was deposited in the Bank in 1997. The proceeds of this deposit were
deposited by the Bank with the Treasury, with the redemption dates being
identical to those of the aforementioned deposit.
MARKET RISKS AND RISK MANAGEMENT
Market risk is the risk of impairment in the equity of the Bank deriving from
changes in financial markets that impact on the Bank's assets and liabilities,
such as changes in exchange rates, interest rates, the inflation rate, and the
prices of shares.
The asset and liability management policy is geared to maintain linkage base
risks and interest risks within the range of exposure set out by the board of
directors.
Implementation of this policy is discussed by a committee which usually meets
once a week and the meetings of which are attended by the CEO and other members
of management. In accordance with the approval granted by the Supervisor of
Banks on November 26, 2003, this management committee serves as the financial
risk manager of the Bank.
We present below details of the major market risks, the restrictions stipulated
and the manner and dates of reports on the level of risk and compliance with the
restrictions:
BASE RISK - The exposure to base risk is measured as the difference between the
assets and liabilities (including the impact of future transactions) in each of
the linkage bases.
In respect of each of the linkage segments listed above, the Bank sets out
frameworks of maximum permissible surpluses and deficits. These restrictions are
set taking into consideration the composition of the Bank's capital and the
current activity of the Bank.
The limits sets by the board of directors of the Bank for each of the linkage
segments are as follows (in NIS millions):
INDEX-LINKED SEGMENT * - A maximum surplus of NIS 500 million, and a maximum
deficit of NIS 50 million.
UNLINKED SHEKEL SEGMENT - A maximum surplus of NIS 100 million, and a maximum
deficit of NIS 550 million.
FOREIGN CURRENCY/FOREIGN CURRENCY LINKED SEGMENT - A maximum surplus of NIS 50
million, and a maximum deficit of NIS 25 million.
* In the Index-linked segment, the permissible surplus/deficit is net of the
equity of the Bank (including preference shares classified form an
accounting standpoint as liabilities).
13
Commencing from the second half of 2002, significant changes occurred in the
surplus/deficit of assets based on linkage bases, as a result of the withdrawal
of deposits by the public. Since the Bank required a credit line from the Bank
of Israel, and the credit line was granted solely in unlinked shekels, the Bank
conducts transactions in derivative instruments in order to close the exposure
to linkage bases. These transactions are part of the Bank's management of assets
and liabilities.
The following table presents the surplus of assets over liabilities (liabilities
over assets) broken down by linkage segment. The data include off-balance sheet
items. The data below are computed after neutralizing liabilities in respect of
the Bank's preference shares which are classified from an accounting standpoint
as liabilities, since the Bank's asset and liability management policy is to
relate to the surplus of assets over liabilities that are unrelated to the
equity of the Bank. The following data are in NIS millions:
FOREIGN
CURRENCY
UNLINKED CPI-LINKED DENOMINATED/ NON-MONETARY
SHEKEL SEGMENT SEGMENT (*) LINKED ITEMS TOTAL
-------- -------- -------- -------- --------
June 30, 2007 (387.6) 845.7 15.1 48.6 521.8
June 30, 2006 (461.0) 908.6 23.4 52.3 523.3
December 31, 2006 (456.0) 888.9 26.8 50.9 510.6
(*) Including a perpetual deposit with the Treasury (June 30, 2007 in an amount
of NIS 828.0 million, and December 31, 2006 - NIS 825.8 million).
The data presented below indicate that in all of the linkage segments, the
exposure is within the limits set by the board of directors of the Bank.
An examination conducted on the impact of an increase of 1% in the Consumer
Price Index indicates that the calculated addition to equity amounts to NIS 8.5
million. A decrease of 1% in the Index would result in a decrease in equity of
the same amount.
As can be seen in Appendix C of the condensed financial statements, the volume
of assets in foreign currencies other than the dollar is a very small percentage
of the volume of the Company's balance sheet, and amounts to NIS 23.0 million,
constituting 0.3% of total assets. The surplus of assets in foreign currency
other than the dollar is very marginal and a change in the exchange rate of
those currencies would have no impact on the results of operations of the Bank.
The following table presents the sensitivity of the impact of changes in the
exchange rate of the dollar as of June 30, 2007 (in NIS millions) on the results
of operations of the Banks:
Percentage change in dollar rate (5)% (10)% 5% 10%
---- ---- --- ---
Impact on the results of operations (1.1) (2.3) 1.1 2.3
The abovementioned data are net of the liabilities in respect of the Bank's
preference shares. In addition, the data presented below are calculated without
the impact of such changes on other variables (such as interest rates).
INTEREST RISK - The interest risk derives from the impact of future changes in
interest rates on the present value of the Bank's assets and liabilities. Such
changes may cause erosion of the Bank's income and equity.
In order to reduce the risk deriving from possible changes in interest rates,
the Bank implements a policy of matching, to the extent possible, between the
dates of change of interest on the assets to the dates of change of interest on
liabilities.
As part of the limits on the rate of exposure to changes in interest rates, the
board of directors of the Bank set limits to the maximum calculated impairment
to the equity of the Bank in the event of a change in interest rate of 1%,
versus the accepted interest rates as of the date of the report. The limits are
as follows:
14
UNLINKED SEGMENT - a maximum decrease in value of NIS 4 million.
INDEX-LINKED SEGMENT - a maximum decrease in value of NIS 14 million.
FOREIGN CURRENCY/FOREIGN CURRENCY-LINKED SEGMENT - a maximum decrease in value
of NIS 3 million.
The following table presents the impact of the aforementioned changes on the
computed value of assets and liabilities as of June 30, 2007 (in NIS millions):
Segment Increase of 1% in interest rate Decrease of 1% in interest rate
- ------- ------------------------------- -------------------------------
Decline Decline in Net Decline Decline in Net
in value value of decline in value value of decline in
Linkage of assets liabilities in value of assets liabilities value
- ------- ------ ------ --- ----- ----- ----
Index-linked (17.0) (9.3) (7.7) 18.4 9.7 8.7
Foreign currency / foreign currency-linked (350.6) (352.3) 1.7 387.6 380.0 (0.4)
In the unlinked segment, the impact of a change in interest rate of 1% is
marginal and, as a result, it was not included in the table.
The calculation above is based on the accepted calculation for the measurement
of the average life span of the assets, i.e., discounting the future flows,
including accrued interest to the earlier of maturity or until the change in
interest. The abovementioned calculation of the change in the value of assets
and liabilities is only in respect of a given change in interest rates without
the impact of the aforesaid change in interest on other factors (such as
forecasted inflation rate, etc.).
It is worth noting that the aforementioned calculation measures only the impact
of the change in interest and is unrelated to credit risks. The change in the
computed value of the assets and liabilities in foreign currency as a result of
a given change of 1% is high, due to the fact that it is affected mainly by the
long-term foreign currency credit of the deposit of the State and guaranteed by
the State. The impact of such a change is on both assets and liabilities and, as
can be seen, the net amounts of the differences are small.
The percentage of the net changes in all of the linkage segments is low, in
relation to the volume of assets in the segment.
LIQUIDITY RISK
Since the Bank is not allowed to solicit deposits from the public, it relies on
the credit line from the Bank of Israel in managing its liquidity.
During 2003, the Bank of Israel issued provisions pertaining to liquidity
management. In view of the credit line, the Supervisor of Banks, in his letter
dated November 26, 2003, stipulated that the Bank is not required to implement
part of those provisions.
SUPERVISION OVER MARKET RISK MANAGEMENT POLICY AND THE MANNER IN WHICH IT IS
IMPLEMENTED
Implementation of the Bank's assets and liability management policy, including
the exposure to market risks, is reviewed in a committee on which the GM and
members of management serve. This committee usually meets once a week. A report
on the Bank's assets and liabilities, broken down by linkage bases, is presented
at every meeting of the committee.
The controller of the Bank, who is a member of the aforementioned committee,
receives a daily report of assets and liabilities by linkage bases and checks
the changes that occurred in the assets and liabilities between the dates of the
reports to the committee.
In addition, once a month, the committee is presented with a breakdown of the
Bank's securities portfolio.
The board of directors of the Bank set out guidelines for the implementation of
the Bank's asset and liability management policy, as well as a number of
limitations regarding the exposures to market risks. In addition, they set out
the means and the dates of reporting and control in respect of compliance with
the limitations that were set. Once a quarter, the plenary of the board of
directors is furnished with a quarterly report on the management of the
financial risks and as part of the deliberations, an updated document covering
the risks, the limits set for the risks, the compliance therewith, and an
updating of the limits in accordance with the resolutions taken by the board of
directors.
15
MEASUREMENT OF MARKET RISKS
The model used by the Bank in determining the fair value of financial
instruments not having a market price is based on the expected cash flows from
each of the instruments and the discounting thereof using relevant interest
rates.
The calculation that relates to the impact of a change of 1% in the interest
rate curve of each linkage segment is also based on the expected cash flows from
all of the financial assets and liabilities of the Bank at relevant interest
rates for each balance sheet item, with a variance of 1% in each direction.
VALUE AT RISK (VAR) - The Bank does not conduct an analysis based on this model.
The board of directors of the Bank believes that the model for measuring market
risks used by the Bank, which is based mainly on discounted cash flows, is
adequate for the activity of the Bank, taking into consideration the following
factors:
- - The total volume of the Bank's assets and liabilities.
- - The Run-Off Plan which the Bank has been implementing.
- - The fact that the Bank does not grant new credit or enter into new
investments.
- - The fact that the Bank grants credit in foreign currency or in the unlinked
shekel segment on the basis of variable interest only. Credit at fixed
interest in foreign currency also in the past was based solely on specific
sources at back-to-back conditions.
OPERATIONAL RISKS -
The Bank takes various steps to reduce the operational risks to which the Bank
may be exposed:
- - The Bank appointed an operational risk manager and an operational risk
controller.
- - The Bank operates a computerized control system to identify operational
risks in the Banks operating framework.
- - The Bank conducts, through outside professional parties, periodic
assessments to assess operational risk - including the risks of fraud and
embezzlement to which it is exposed, and the adequacy of the preventative
and compensatory controls designed to reduce such risks. As part of these
assessments, recommendations are made, when necessary for improvement
and/or expansion of existing controls and/or the institution of new
controls.
- - The Bank has a process of management and monitoring of the implementation
of the recommendations of the aforementioned risk assessments.
In accordance with the provisions of the Bank of Israel regarding fraud and
embezzlement risks, a team was set up, headed by the GM, with the participation
of members of management, the internal auditor, the operational risk controller
and the parties responsible for computers in the Bank. The team periodically
discusses the fraud and embezzlement risks that were included in the operational
risk assessment and the controls needed to minimize such risks.
16
DISCLOSURE OF CRITICAL ACCOUNTING POLICIES
Note 1 of the annual financial statements describes the principal accounting
policies according to which the financial statements of the Bank are prepared.
The implementation of these accounting principles by the Board of Directors and
Management when preparing the financial statements often requires the use of
various assessments and estimates that affect the reported amounts of assets and
liabilities (including contingent liabilities) and the financial results of the
Bank.
Details relating to the critical accounting policies were presented in the
report of the board of directors for 2006 in the chapter relating to critical
accounting policy.
RESPONSIBILITY OF THE MANAGEMENT FOR THE INTERNAL CONTROL OVER FINANCIAL
REPORTING
The financial statements include certifications of the Bank's General Manager
and Comptroller regarding the efficiency of the controls and procedures relating
to the disclosure in the financial statements and regarding changes in the
internal control over financial reporting.
The aforementioned certifications are in accordance with the directives
published by the Bank of Israel, which came into effect for the first time in
the financial statements for June 30, 2005. The directives published by the Bank
of Israel are in accordance with the provisions of Section 302 of the Sarbanes
Oxley Law.
With the assistance of external consultants, the Bank established controls and
procedures relating to the disclosure, and it maintains a system of internal
control relating to the disclosure among the various managers of the Bank, in
such a way as to enable compliance with the requirement of this directive.
Management of the Bank together with the General Manager and Comptroller
evaluated, as at the end of the period included in this report, the efficiency
of the controls and procedures relating to the Bank's disclosure. On the basis
of this evaluation, the Bank's General Manager and Comptroller concluded that as
at the end of this period, the controls and procedures relating to the Bank's
disclosure are efficient in order to record, process, summarize and report the
information the Bank is required to disclose in the annual report in accordance
with the reporting to the public directives of the Supervisor of Banks and at
the date specified in these directives.
During the course of the quarter ended June 30, 2007, there was no change in the
Bank's internal control over financial reporting which has had or is likely to
have a significant effect on the Bank's internal control over financial
reporting.
SECTION 404 OF THE SARBANES OXLEY ACT
Since the Bank has issued its securities to shareholders in the U.S.A., it is
subject to the provisions of the Sarbanes Oxley Act. Pursuant to Section 404 of
the Sarbanes Oxley Act, the management of the reporting entity is required to
declare, among other things, its responsibility for fulfilling and maintaining
proper internal controls and proper procedures with respect to financial
reporting, and to provide its evaluation on the effectiveness of such controls
and procedures. The United States Securities and Exchange Commission (SEC)
announced that it is postponing the application of Section 404 with respect to
companies that are not defined as an "Accelerated Filer", including a foreign
issuer that does not meet this definition, so that they will be required to
implement the Section only from the fiscal year ending on or after July 15,
2007. In the opinion of the Bank's legal advisors and on the basis of the Bank's
valuation of its shares, the Bank does not meet the aforementioned definition of
an "Accelerated Filer". As a result of this, the Bank will be required to
implement Section 404 of the Sarbanes Oxley Act only from the financial
statements for 2007 that it submits in the U.S.A. On August 9, 2006, the SEC
issued a relief whereby the filing of an external auditor's report on the
effectiveness of internal controls pertaining to financial reporting will be
required from the fiscal year ended December 15, 2008. The implementation of
Section 404 of the Sarbanes Oxley Act requires appropriate preparations and the
investment of significant time and management resources. The Bank is taking
steps for the implementation of Section 404.
In accordance with a directive that was published by the Supervisor of Banks on
December 5, 2005, requirements similar to those included in Section 404 of the
Sarbanes Oxley Act will be imposed on the banks in Israel. In accordance with
this directive, the provisions will apply as from the annual financial
statements for the year ended December 31, 2008. In accordance with the letter
of the Supervisor of Banks dated March 18, 2007, the Bank is entitled not to
implement this directive.
17
DISCLOSURE REGARDING THE INTERNAL AUDITOR OF THE BANK
The disclosure regarding the internal auditor of the Bank is as detailed in the
report of the board of directors for 2006, with no changes occurring therein.
ORGANIZATIONAL STRUCTURE AND MANPOWER
The number of full-time employees employed by the Bank as at June 30, 2007 was
45, compared with 50 on December 31, 2006 and 170 employees on January 1, 2002.
During the first half of 2007, there were four plenary sessions of the board of
directors and 11 meetings of its committees.
DR. RAANAN COHEN URI GALILI
Chairman of the Board General Manager
Tel-Aviv, August 28, 2007
18
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
RATES OF FINANCING INCOME AND EXPENSES (1)
REPORTED AMOUNTS
THREE MONTHS ENDED JUNE 30
-----------------------------------------------------------------------------------------------------------------------
2007 2006
------------------------------------------------------- --------------------------------------------------------
RATE OF INCOME RATE OF INCOME RATE OF INCOME RATE OF INCOME
(EXPENSES) (EXPENSES) (EXPENSES) (EXPENSES)
FINANCING NOT INCLUDING INCLUDING FINANCING NOT INCLUDING INCLUDING
AVERAGE INCOME THE EFFECT OF THE EFFECT OF AVERAGE INCOME THE EFFECT OF THE EFFECT OF
BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES
-------- -------- -------- -------- -------- -------- -------- --------
NIS MILLIONS % % NIS MILLIONS % %
------------------------ -------- -------- ------------------------ -------- --------
ISRAELI CURRENCY - NON-LINKED
Assets 186.1 2.8 6.16 368.1 6.1 6.80
Effect of ALM derivatives (3) 66.7 0.7 154.4 2.1
-------- -------- -------- --------
Total assets 252.8 3.5 5.65 522.5 8.2 6.43
-------- -------- -------- --------
Liabilities 647.3 (5.9) (3.70) (3.70) 964.0 (12.2) (5.16) (5.16)
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin 2.46 1.95 1.64 1.27
-------- -------- -------- --------
ISRAELI CURRENCY - LINKED TO THE CPI
Assets 469.0 8.9 7.81 7.81 566.4 13.8 10.11 10.11
-------- -------- -------- --------
Liabilities 311.4 (4.2) (5.51) 396.4 (7.2) (7.47)
Effect of ALM derivatives (3) 47.4 (0.7) 39.8 (0.8)
-------- -------- -------- --------
Total liabilities 358.8 (4.9) (5.58) 436.2 (8.0) (7.54)
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin 2.30 2.23 2.64 2.57
-------- -------- -------- --------
FOREIGN CURRENCY - DOMESTIC OPERATIONS (4)
Assets 5,547.5 231.5 17.77 17.77 6,557.1 (209.3) (12.17) (12.17)
Liabilities 5,506.5 (230.5) (17.82) 6,409.0 206.0 12.25
Effect of ALM derivatives(3) 19.3 0.3 114.6 3.7
-------- -------- -------- --------
Total liabilities 5,525.8 (230.2) (17.73) 6,523.6 209.7 12.25
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin (0.05) 0.04 0.08 0.08
-------- -------- -------- --------
TOTAL
Monetary assets 6,202.6 243.2 16.63 7,491.6 (189.4) (9.74)
Effect of ALM derivatives (3) 66.7 0.7 154.4 2.1
-------- -------- -------- --------
Total monetary assets generating financing income 6,269.3 243.9 16.49 7,646.0 (187.3) (9.44)
-------- -------- -------- --------
Monetary liabilities generating financing expenses 6,465.2 (240.6) (15.74) 7,769.4 186.6 9.27
Effect of ALM derivatives (3) 66.7 (0.4) 154.4 2.9
-------- -------- -------- --------
Total monetary liabilities generating
financing expenses 6,531.9 (241.0) (15.6) 7,923.8 189.5 9.23
-------- -------- -------- --------
Interest margin 0.89 0.89 (0.47) (0.21)
-------- -------- -------- --------
SEE PAGE 24 FOR COMMENTS ON THE RATES OF FINANCING INCOME AND EXPENSES.
19
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT'D)
REPORTED AMOUNTS
THREE MONTHS ENDED JUNE 30
-----------------------------------------------------------------------------------------------------------------------
2007 2006
------------------------------------------------------- --------------------------------------------------------
RATE OF INCOME RATE OF INCOME RATE OF INCOME RATE OF INCOME
(EXPENSES) (EXPENSES) (EXPENSES) (EXPENSES)
FINANCING NOT INCLUDING INCLUDING FINANCING NOT INCLUDING INCLUDING
AVERAGE INCOME THE EFFECT OF THE EFFECT OF AVERAGE INCOME THE EFFECT OF THE EFFECT OF
BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES
-------- -------- -------- -------- -------- -------- -------- --------
NIS MILLIONS % % NIS MILLIONS % %
------------------------ -------- -------- ------------------------ -------- --------
Financing commissions and other
financing income 9.9 7.2
Other financing expenses (2.2) (2.5)
-------- --------
Profit from financing operations before
allowance for doubtful debts 10.6 6.9
Allowance for doubtful debts (including general
and supplementary allowance) (1.2) (8.3)
-------- --------
Gain (loss) from financing operations after
allowance for doubtful debts (9.4) (1.4)
======== ========
Other monetary assets 857.0 870.8
General and supplementary allowance for
doubtful debts (49.1) (54.9)
Non-monetary assets 48.6 60.2
-------- --------
Total assets 7,059.1 8,367.7
======== ========
Other monetary liabilities 84.3 77.1
Non-monetary liabilities 1.1 1.7
Capital resources 508.5 519.5
-------- --------
Total liabilities and capital resources 7,059.1 8,367.7
======== ========
SEE PAGE 24 FOR COMMENTS ON THE RATES OF FINANCING INCOME AND EXPENSES.
20
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT'D)
IN TERMS OF US DOLLARS
THREE MONTHS ENDED JUNE 30
-----------------------------------------------------------------------------------------------------------------------
2007 2006
------------------------------------------------------- --------------------------------------------------------
RATE OF INCOME RATE OF INCOME RATE OF INCOME RATE OF INCOME
(EXPENSES) (EXPENSES) (EXPENSES) (EXPENSES)
FINANCING NOT INCLUDING INCLUDING FINANCING NOT INCLUDING INCLUDING
AVERAGE INCOME THE EFFECT OF THE EFFECT OF AVERAGE INCOME THE EFFECT OF THE EFFECT OF
BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES
-------- -------- -------- -------- -------- -------- -------- --------
US$ MILLIONS % % US$ MILLIONS % %
------------------------ -------- -------- ------------------------ -------- --------
FOREIGN CURRENCY - DOMESTIC OPERATIONS (4)
Assets 1,362.7 23.5 7.08 7.08 1,437.3 24.2 6.91 6.91
Liabilities 1,352.7 (23.4) (7.10) 1,404.8 (23.3) (6.80)
Effect of ALM derivatives (3) 4.7 0.1 25.1 0.8
-------- -------- -------- --------
Total liabilities 1,357.4 (23.3) (7.04) 1,429.9 (22.5) (6.44)
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin (0.02) 0.04 0.11 0.47
-------- -------- -------- --------
SEE PAGE 24 FOR COMMENTS ON THE RATES OF FINANCING INCOME AND EXPENSES.
21
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT'D)
REPORTED AMOUNTS
SIX MONTHS ENDED JUNE 30
-----------------------------------------------------------------------------------------------------------------------
2007 2006
------------------------------------------------------- --------------------------------------------------------
RATE OF INCOME RATE OF INCOME RATE OF INCOME RATE OF INCOME
(EXPENSES) (EXPENSES) (EXPENSES) (EXPENSES)
FINANCING NOT INCLUDING INCLUDING FINANCING NOT INCLUDING INCLUDING
AVERAGE INCOME THE EFFECT OF THE EFFECT OF AVERAGE INCOME THE EFFECT OF THE EFFECT OF
BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES
-------- -------- -------- -------- -------- -------- -------- --------
NIS MILLIONS % % NIS MILLIONS % %
------------------------ -------- -------- ------------------------ -------- --------
ISRAELI CURRENCY - NON-LINKED
Assets 217.6 6.1 5.69 405.0 12.1 6.06
Effect of ALM derivatives (3) 75.3 1.7 157.4 4.0
-------- -------- -------- --------
Total assets 292.9 7.8 5.40 562.4 16.1 5.81
-------- -------- -------- --------
Liabilities 702.6 (13.7) (3.94) (3.94) 1,006.5 (23.9) (4.81) (4.81)
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin 1.75 1.46 1.25 1.00
-------- -------- -------- --------
ISRAELI CURRENCY - LINKED TO THE CPI
Assets 485.7 13.4 5.59 5.59 598.7 22.0 7.48 7.48
-------- -------- -------- --------
Liabilities 318.5 (4.9) (3.10) 410.0 (10.4) (5.14)
Effect of ALM derivatives (3) 45.7 (0.9) 36.5 (0.9)
-------- -------- -------- --------
Total liabilities 364.2 (5.8) (3.21) 446.5 (11.3) (5.13)
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin 2.49 2.38 2.34 2.35
-------- -------- -------- --------
FOREIGN CURRENCY - DOMESTIC OPERATIONS (4)
Assets 5,717.4 233.2 8.32 8.32 6,678.8 (1.6) (0.05) (0.05)
Liabilities 5,660.0 (231.4) (8.34) 6,524.0 2.4 0.07
Effect of ALM derivatives (3) 29.6 0.2 120.9 1.3
-------- -------- -------- --------
Total liabilities 5,689.6 (231.2) (8.29) 6,644.9 3.7 0.11
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin (0.02) 0.03 0.02 0.06
-------- -------- -------- --------
TOTAL
Monetary assets 6,420.7 252.7 8.03 7,682.5 32.5 0.85
Effect of ALM derivatives (3) 75.3 1.7 157.4 4.0
-------- -------- -------- --------
Total monetary assets generating financing income 6,496.0 254.4 7.99 7,839.9 36.5 0.93
-------- -------- -------- --------
Monetary liabilities generating financing expenses 6,681.1 (250.0) (7.62) 7,940.5 (31.9) (0.81)
Effect of ALM derivatives (3) 75.3 (0.7) 157.4 0.4
-------- -------- -------- --------
Total monetary liabilities generating
financing expenses 6,756.4 (250.7) (7.56) 8,097.9 (31.5) (0.78)
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin 0.41 0.43 0.04 0.15
-------- -------- -------- --------
SEE PAGE 24 FOR COMMENTS ON THE RATES OF FINANCING INCOME AND EXPENSES.
22
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT'D)
REPORTED AMOUNTS
SIX MONTHS ENDED JUNE 30
-----------------------------------------------------------------------------------------------------------------------
2007 2006
------------------------------------------------------- --------------------------------------------------------
RATE OF INCOME RATE OF INCOME RATE OF INCOME RATE OF INCOME
(EXPENSES) (EXPENSES) (EXPENSES) (EXPENSES)
FINANCING NOT INCLUDING INCLUDING FINANCING NOT INCLUDING INCLUDING
AVERAGE INCOME THE EFFECT OF THE EFFECT OF AVERAGE INCOME THE EFFECT OF THE EFFECT OF
BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES
-------- -------- -------- -------- -------- -------- -------- --------
NIS MILLIONS % % NIS MILLIONS % %
------------------------ -------- -------- ------------------------ -------- --------
Financing commissions and other
financing income 20.5 12.1
Other financing expenses (4.9) (5.6)
-------- --------
Profit from financing operations before
allowance for doubtful debts 19.3 11.5
Allowance for doubtful debts (including general
and supplementary allowance) (2.2) (19.5)
-------- --------
Profit (loss) from financing operations after
allowance for doubtful debts 17.1 (8.0)
======== ========
Other monetary assets 858.2 866.9
General and supplementary allowance for
doubtful debts (50.4) (56.2)
Non-monetary assets 49.4 61.5
-------- --------
Total assets 7,277.9 8,554.7
======== ========
Other monetary liabilities 87.0 92.1
Non-monetary liabilities 1.4 1.8
Capital resources 508.4 520.3
-------- --------
Total liabilities and capital resources 7,277.9 8,554.7
======== ========
SEE PAGE 24 FOR COMMENTS ON THE RATES OF FINANCING INCOME AND EXPENSES.
23
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT'D)
IN TERMS OF US DOLLARS
SIX MONTHS ENDED JUNE 30
-----------------------------------------------------------------------------------------------------------------------
2007 2006
------------------------------------------------------- --------------------------------------------------------
RATE OF INCOME RATE OF INCOME RATE OF INCOME RATE OF INCOME
(EXPENSES) (EXPENSES) (EXPENSES) (EXPENSES)
FINANCING NOT INCLUDING INCLUDING FINANCING NOT INCLUDING INCLUDING
AVERAGE INCOME THE EFFECT OF THE EFFECT OF AVERAGE INCOME THE EFFECT OF THE EFFECT OF
BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES
-------- -------- -------- -------- -------- -------- -------- --------
US$ MILLIONS % % US$ MILLIONS % %
------------------------ -------- -------- ------------------------ -------- --------
FOREIGN CURRENCY - DOMESTIC OPERATIONS (4)
Assets 1,376.9 47.2 6.97 6.97 1,449.0 49.5 6.95 6.95
Liabilities 1,363.2 (46.6) (6.95) 1,415.4 (48.2) (6.93)
Effect of ALM derivatives (3) 7.1 0.1 26.2 0.3
-------- -------- -------- --------
Total liabilities 1,370.3 (47.9) (6.90) 1,441.6 (47.9) (6.76)
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin 0.02 0.07 0.02 0.19
-------- -------- -------- --------
FOOTNOTES:
(1) The data in this table are presented before and after the effect of
derivative instruments (including the off-balance sheet effects of
derivative instruments).
(2) Based on monthly opening balances except for the non-linked Israeli
currency segment where the balance is based on daily figures, and net of
the average balance of the specific allowances for doubtful debts.
(3) Derivatives (ALM) which comprise part of the Bank's asset and liability
management.
(4) Including Israeli currency linked to foreign currency.
24
CERTIFICATION
I, Uri Galili, hereby certify as follows:
1. I have reviewed the quarterly report of The Industrial Development Bank of
Israel Ltd. (hereinafter - the Bank) for the quarter ended June 30, 2007
(hereinafter - the report).
2. Based on my knowledge, the report does not contain any untrue statement of
a material fact or omit any material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by the report.
3. Based on my knowledge, the financial statements and other financial
information included in the report fairly present in all material respects,
the Bank's financial condition, results of operations, and the changes in
the shareholders' equity as at the dates and for the periods presented in
the report.
4. The Bank's other certifying officers and I are responsible for establishing
and maintaining controls and procedures necessary for the required
disclosure in the Bank's report. Furthermore:
A. We have established such controls and procedures, or caused such
controls and procedures to be established under our supervision,
intended to ensure that material information relating to the Bank is
made known to us by others in the Bank, particularly during the period
of preparing the report;
B. We have evaluated the effectiveness of the Bank's disclosure controls
and procedures and we have presented our conclusions regarding the
effectiveness of the disclosure controls and procedures as at the end
of the period covered by the report based on such evaluation; and
C. We have disclosed in the report any change in the internal control of
the Bank over financial reporting that occurred in the second quarter
and that has materially affected, or is reasonably likely to
materially affect, the internal control of the Bank over financial
reporting; and
5. The Bank's other certifying officers and I have disclosed to the Bank's
auditor, Board of Directors and Audit Committee, based on our most recent
evaluation of the internal control over financial reporting, as follows:
A. All significant deficiencies and material weaknesses relating to the
establishment or operation of internal control over financial
reporting that are reasonably likely to adversely affect the ability
of the Bank to record, process, summarize and report financial
information; and
B. Any fraud, whether or not material, which involves Management or other
employees who have a significant role in the Bank's internal control
over financial reporting.
The aforementioned does not derogate from my responsibility or from the
responsibility of any other person according to the law.
- -------------------------------------------
U. Galili - General Manager
August 28, 2007
25
CERTIFICATION
I, Rimon Shmaya, hereby certify as follows:
1. I have reviewed the quarterly report of The Industrial Development Bank of
Israel Ltd. (hereinafter - the Bank) for the quarter ended June 30, 2007
(hereinafter - the report).
2. Based on my knowledge, the report does not contain any untrue statement of
a material fact or omit any material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by the report.
3. Based on my knowledge, the financial statements and other financial
information included in the report fairly present in all material respects,
the Bank's financial condition, results of operations, and the changes in
the shareholders' equity as at the dates and for the periods presented in
the report.
4. The Bank's other certifying officers and I are responsible for establishing
and maintaining controls and procedures necessary for the required
disclosure in the Bank's report. Furthermore:
A. We have established such controls and procedures, or caused such
controls and procedures to be established under our supervision,
intended to ensure that material information relating to the Bank is
made known to us by others in the Bank, particularly during the period
of preparing the report;
B. We have evaluated the effectiveness of the Bank's disclosure controls
and procedures and we have presented our conclusions regarding the
effectiveness of the disclosure controls and procedures as at the end
of the period covered by the report based on such evaluation; and
C. We have disclosed in the report any change in the internal control of
the Bank over financial reporting that occurred in the second quarter
and that has materially affected, or is reasonably likely to
materially affect, the internal control of the Bank over financial
reporting; and
5. The Bank's other certifying officers and I have disclosed to the Bank's
auditor, Board of Directors and Audit Committee, based on our most recent
evaluation of the internal control over financial reporting, as follows:
A. All significant deficiencies and material weaknesses relating to the
establishment or operation of internal control over financial
reporting that are reasonably likely to adversely affect the ability
of the Bank to record, process, summarize and report financial
information; and
B. Any fraud, whether or not material, which involves Management or other
employees who have a significant role in the Bank's internal control
over financial reporting.
The aforementioned does not derogate from my responsibility or from the
responsibility of any other person according to the law.
- -------------------------------------------
Rimon Shmaya - Comptroller
August 28, 2007
26
THE INDUSTRIAL DEVELOPMENT BANK
OF ISRAEL LIMITED
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2007
27
Industrial Development Bank of Israel Limited
FINANCIAL STATEMENTS AS AT JUNE 30, 2007
- --------------------------------------------------------------------------------
CONTENTS
PAGE
Auditors' Review Report 29
Balance Sheets 31
Statements of Income 32
Statement of Shareholders' Equity 33
Notes to the Financial Statements 36
28
- --------------------------------------------------------------------------------
|KESSELMAN & KESSELMAN
|Certified Public Accountants (Isr.)
|Trade Tower, 25 Hamered Street
|Tel Aviv 68125 Israel
|P.O Box 452 Tel Aviv 61003
|Telephone +972-3-7954555
|Facsimile +972-3-7954556
The Board of Directors
The Industrial Development Bank of Israel Limited
TEL AVIV
Dear Sirs/Ladies,
RE: REVIEW OF THE CONDENSED UNAUDITED INTERIM FINANCIAL STATEMENTS FOR THE SIX
AND THREE-MONTH PERIODS ENDED JUNE 30, 2007
At your request, we reviewed the condensed interim balance sheet of The
Industrial Development Bank of Israel Limited as of June 30, 2007 and the
condensed interim statement of income and the condensed interim statement of
shareholders' equity for the six and three-month periods then ended. Our review
was conducted in accordance with procedures prescribed by the Institute of
Certified Public Accountants in Israel and included, inter alia, reading the
said financial statements, reading the minutes of the shareholders' meetings and
of the Board of Directors and its committees, as well as making inquiries of
persons responsible for financial and accounting matters at the Bank.
Since the review performed is limited in scope and does not constitute an audit
in accordance with generally accepted auditing standards, we do not express an
opinion on the said condensed interim financial statements.
Based on our review, we are not aware of any material modifications that would
have to be made to the condensed interim financial statements referred to above
in order for them to be in conformity with generally accepted accounting
principles, and in accordance with the directives and guidelines of the
Supervisor of Banks.
We would call attention to the following:
A. Note 1 of the condensed interim financial statements regarding the severe
liquidity problems the Bank experienced in August 2002, which were caused
by increased withdrawals of public deposits, the interest-bearing special
line of credit that was provided to the Bank by the Bank of Israel, the
decision of the Bank's Board of Directors to adopt the "Run-Off" plan for
the supervised sale of the Bank's credit assets and to extend the plan
until July 31, 2008, the agreement of the Bank's Board of Directors to
restrict the license of the Bank and to limit its duration until the end of
the "Run-Off " plan, the announcement of the Governor of the Bank of Israel
regarding the restriction of the Bank's license and its being revoked as
from August 1, 2008, and the decision of the Ministerial Committee for
Social and Economic Affairs (the Social Economic Cabinet) to extend the
"Run-Off" plan (hereinafter - the Government decision extending the
"Run-Off" plan), all as detailed in the said note.
29
Note 1 states, among other things, that "Since, as aforementioned, the
decision of the Government stipulates that the Run-Off plan shall end on
July 31, 2008 and it is unknown as to whether the sales blueprint will
reach fruition, as long as no other government decision is passed, there is
no certainty that the Bank will continue to exist as a "going concern"
following that date".
B. Note 5 of the condensed interim financial statements regarding the minimum
capital ratio of the Bank as of June 30, 2007, which is below the minimum
of 9% set by the Supervisor of Banks in Proper Banking Procedures.
C. Note 8 of the condensed interim financial statements regarding the
litigation pending against the Bank and its senior officers, all as
detailed in the aforementioned note.
The condensed interim financial statements do not contain any changes in the
value or classification of assets or liabilities that may be needed if the Bank
is unable to continue operating as a "going concern".
Kesselman & Kesselman
Certified Public Accountants (Isr.)
August 28, 2007
30
The Industrial Development Bank of Israel Limited
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
JUNE 30
--------------------- DECEMBER 31
2007 2006 2006
------- ------- -------
(UNAUDITED) (UNAUDITED) (AUDITED)
------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
ASSETS
Cash and deposits with banks 42.9 79.8 66.4
Securities 48.5 52.7 50.4
Credit to the public 6,273.1 7,115.4 6,519.1
Credit to governments 33.6 46.6 41.5
Fixed assets 0.9 1.0 1.1
Other assets 7.0 13.3 12.1
Perpetual deposits with the Israeli Treasury 828.0 838.6 825.8
------- ------- -------
Total assets 7,234.0 8,147.4 7,516.4
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits of the public 62.2 87.0 66.9
Deposits of banks 584.0 937.8 768.3
Deposits of the Government 5,986.4 6,519.4 6,087.4
Perpetual deposit 0.1 0.1 0.1
Capital notes 25.1 25.2 24.9
Other liabilities 54.4 54.6 58.2
Non-participating preference shares 304.9 318.6 303.2
Participating preference shares 188.4 196.9 187.4
------- ------- -------
Total liabilities 7,205.5 8,139.6 7,496.4
------- ------- -------
Shareholders' equity 28.5 7.8 20.0
------- ------- -------
Total liabilities and shareholders' equity 7,234.0 8,147.4 7,516.4
======= ======= =======
- ------------------------- ------------------------- -------------------------
DR. RAANAN COHEN URI GALILI RIMON SHMAYA
Chairman of the Board General Manager Comptroller
August 28, 2007
The accompanying notes are an integral part of the condensed financial
statements.
31
The Industrial Development Bank of Israel Limited
CONDENSED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30 YEAR ENDED
--------------------- --------------------- DECEMBER 31
2007 2006 2007 2006 2006
------- ------- ------- ------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED)
------- ------- ------- ------- --------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- ------- --------
Profit from financing
operations before
allowance for doubtful debts 10.6 6.9 19.3 11.5 18.2
Allowance for doubtful debts 1.2 8.3 2.2 19.5 21.7
------- ------- ------- ------- --------
Profit (loss) from financing
operations after
allowance for doubtful debts 9.4 (1.4) 17.1 (8.0) (3.5)
------- ------- ------- ------- --------
OPERATING AND OTHER INCOME
Operating commissions 0.3 0.4 0.5 0.7 1.3
Gains from investments
in shares 1.5 9.3 5.7 11.9 16.4
Other income 0.8 0.6 1.7 1.6 3.8
------- ------- ------- ------- --------
Total operating and
other income 2.6 10.3 7.9 14.2 21.5
------- ------- ------- ------- --------
OPERATING AND
OTHER EXPENSES
Salaries and related expenses 5.2 4.6 10.1 9.1 17.6
Retirement of employees - 0.2 - 0.2 0.5
Maintenance and depreciation
of buildings and equipment 0.7 0.7 1.4 1.3 2.7
Other expenses 2.0 3.0 4.5 5.9 14.3
------- ------- ------- ------- --------
Total operating and
other expenses 7.9 8.5 16.0 16.5 35.1
------- ------- ------- ------- --------
Operating profit (loss) before
taxes on income 4.1 0.4 9.0 (10.3) (17.1)
Tax provision on
operating profit - - - - -
------- ------- ------- ------- --------
NET EARNINGS (LOSS) 4.1 0.4 9.0 (10.3) (17.1)
======= ======= ======= ======= ========
NET EARNINGS (LOSS) PER SHARE
IN NIS
"A" ordinary shares 271.52 26.4 596.03 (682.1) (1,132.4)
The accompanying notes are an integral part of the financial statements.
32
The Industrial Development Bank of Israel Limited
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Reported amounts
THREE MONTHS ENDED JUNE 30, 2007 (UNAUDITED)
--------------------------------------------------------------------------------
ADJUSTMENTS
SHARE ACCUMULATED ACCUMULATED FROM
CAPITAL DIFFERENCE ON DIFFERENCE ON PRESENTATION
AND TRANSLATION TRANSLATION OF AVAILABLE-
PREMIUM OF DOLLAR OF FOR-SALE TOTAL
ON LINKED CPI LINKED SECURITIES ACCUMULATED SHAREHOLDERS'
SHARES DEPOSIT DEPOSIT AT FAIR VALUE DEFICIT EQUITY
------- ------- ------- ------- ------- -------
NIS MILLIONS
--------------------------------------------------------------------------------
BALANCE AS AT THE BEGINNING
OF THE PERIOD 207.1 - 339.7 6.6 (526.1) 27.3
Net earnings for the period - - - - 4.1 4.1
Adjustments from present-
ation of available-for-sale
securities at market value - - - 2.2 - 2.2
Translation differences
relating to a perpetual
deposit - - (5.1) - - (5.1)
------- ------- ------- ------- ------- -------
BALANCE AS AT THE END OF THE
PERIOD 207.1 - 334.6 8.8 (522.0) 28.5
======= ======= ======= ======= ======= =======
THREE MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
----------------------------------------------------------------------------------------
ADJUSTMENTS
SHARE ACCUMULATED ACCUMULATED FROM
CAPITAL DIFFERENCE ON DIFFERENCE ON PRESENTATION
AND TRANSLATION TRANSLATION OF AVAILABLE-
PREMIUM OF OF FOR-SALE TOTAL
ON DOLLAR LINKED CPI LINKED SECURITIES ACCUMULATED SHAREHOLDERS'
SHARES DEPOSIT DEPOSIT AT FAIR VALUE DEFICIT EQUITY
------- ------- ------- ------- ------- -------
NIS MILLIONS
----------------------------------------------------------------------------------------
BALANCE AS AT THE BEGINNING
OF THE PERIOD 207.1 - 287.3 5.4 (524.6) 24.8
Net earnings for the period - - - - 0.4 0.4
Adjustments from present-
ation of available-for-sale
securities at fair value - - - (3.6) - (3.6)
Translation differences
relating to a perpetual
deposit - - 35.8 - - 35.8
------- ------- ------- ------- ------- -------
BALANCE AS AT THE END OF THE
PERIOD 207.1 - 323.1 1.8 (524.2) 7.8
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
33
The Industrial Development Bank of Israel Limited
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (CONT'D)
- --------------------------------------------------------------------------------
Reported amounts
SIX MONTHS ENDED JUNE 30, 2007 (UNAUDITED)
-------------------------------------------------------------------------------------
ADJUSTMENTS
SHARE ACCUMULATED ACCUMULATED FROM
CAPITAL DIFFERENCE ON DIFFERENCE ON PRESENTATION
AND TRANSLATION TRANSLATION OF AVAILABLE-
PREMIUM OF OF FOR-SALE TOTAL
ON DOLLAR LINKED CPI LINKED SECURITIES ACCUMULATED SHAREHOLDERS'
SHARES DEPOSIT DEPOSIT AT FAIR VALUE DEFICIT EQUITY
------- ------- ------- ------- ------- -------
NIS MILLIONS
-------------------------------------------------------------------------------------
BALANCE AS AT THE BEGINNING
OF THE PERIOD (AUDITED) 207.1 335.2 8.7 (531.0) 20.0
Net earnings for the period - - - - 9.0 9.0
Adjustments from present-
ation of available-for-sale
securities at fair value - - - 0.1 - 0.1
Translation differences
relating to a perpetual
deposit - - (0.6) - - (0.6)
------- ------- ------- ------- ------- -------
BALANCE AS AT THE END OF THE
PERIOD 207.1 - 334.6 8.8 (522.0) 28.5
======= ======= ======= ======= ======= =======
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
---------------------------------------------------------------------------------
ADJUSTMENTS
SHARE ACCUMULATED ACCUMULATED FROM
CAPITAL DIFFERENCE ON DIFFERENCE ON PRESENTATION
AND TRANSLATION TRANSLATION OF AVAILABLE-
PREMIUM OF OF FOR-SALE TOTAL
ON DOLLAR LINKED CPI LINKED SECURITIES ACCUMULATED SHAREHOLDERS'
SHARES DEPOSIT DEPOSIT AT FAIR VALUE DEFICIT EQUITY
------- ------- ------- ------- ------- -------
NIS MILLIONS
---------------------------------------------------------------------------------
BALANCE AS AT THE BEGINNING
OF THE PERIOD (AUDITED) 1,199.4 (697.5) 203.0 6.1 (513.9) 197.1
Adjustments as at January 1,
2006, deriving from initial
implementation of
Accounting Standard no 22 (992.3) 697.5 90.7 - - (204.1)
------- ------- ------- ------- ------- -------
Balance as at January 1, 2006
after initial
implementation of
Accounting Standard No. 22 207.1 - 293.7 6.1 (513.9) (7.0)
Loss for the period - - - - (10.3) (10.3)
Adjustments from presentation
of available-for-sale
securities at fair value - - - (4.3) - (4.3)
Translation differences
relating to a perpetual
deposit - - 29.4 - - 29.4
------- ------- ------- ------- ------- -------
BALANCE AS AT THE END OF THE
PERIOD 207.1 - 323.1 1.8 (524.2) 7.8
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
34
The Industrial Development Bank of Israel Limited
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (CONT'D)
- --------------------------------------------------------------------------------
Reported amounts
YEAR ENDED DECEMBER 31, 2006 (AUDITED)
----------------------------------------------------------------------------------
ADJUSTMENTS
SHARE ACCUMULATED ACCUMULATED FROM
CAPITAL DIFFERENCE ON DIFFERENCE ON PRESENTATION
AND TRANSLATION TRANSLATION OF AVAILABLE-
PREMIUM OF OF FOR-SALE TOTAL
ON DOLLAR LINKED CPI LINKED SECURITIES ACCUMULATED SHAREHOLDERS'
SHARES DEPOSIT DEPOSIT AT FAIR VALUE DEFICIT EQUITY
------- ------- ------- ------- ------- -------
NIS MILLIONS
----------------------------------------------------------------------------------
BALANCE AS AT THE BEGINNING
OF THE YEAR 1,199.4 (697.5) 203.0 6.1 (513.9) 197.1
Adjustments as at January 1,
2006, deriving from initial
implementation of
Accounting Standard No. 22 (992.3) 697.5 90.7 - - (204.1)
------- ------- ------- ------- ------- -------
Balance as at January 1, 2006
after initial implementation
of Acct. Standard No. 22 207.1 - 293.7 6.1 (513.9) (7.0)
Loss for the year - - - - (17.1) (17.1)
Adjustments from presentation
of available-for-sale
securities at market value - - - 2.6 - 2.6
Translation differences
relating to a perpetual
deposit - - 41.5 - - 41.5
------- ------- ------- ------- ------- -------
BALANCE AS AT THE END OF THE
YEAR 207.1 - 335.2 8.7 (531.0) 20.0
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
35
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - THE "RUN OFF" PLAN AND THE SPECIAL LINE OF CREDIT OF THE BANK OF ISRAEL
Due to increased withdrawals of deposits of the public during the third
quarter of 2002, the Bank experienced severe liquidity problems, following
which the Bank turned to the Governor of the Bank of Israel on August 22,
2002, with a request for a special line of credit.
DECISIONS OF THE MINISTERIAL COMMITTEE FOR SOCIAL AND ECONOMIC AFFAIRS
REGARDING APPROVAL AND EXTENSION OF THE RUN-OFF PLAN
On October 10, 2005 the Ministerial Committee for Social and Economic
Affairs (the Social Economic Cabinet) approved the extension of the Bank's
"Run-Off" plan, after two years earlier, on July 29, 2003, it had decided
to adopt it. The main principles of the Committee's decision from October
10, 2005 are as follows:
>> The assets of the Bank are to be sold of in a supervised process
and over a period ending by July 31, 2008, as part of the
"Run-Off" plan approved by the Bank's Board of Directors and with
the changes to be determined by the Accountant General and the
Government Companies Authority.
>> The maximum amount of the special line of credit will at no time
exceed NIS 1.25 billion and over the period of executing the
Run-Off plan it will not exceed the amounts approved by the Bank
of Israel.
>> The Bank will not use the special line of credit or other sources
for the purpose of providing new credit.
>> The Government is responsible for the repayment of the special
line of credit as from July 1, 2005, on the condition that the
interest on the credit line until the end of the plan shall not
exceed the Bank of Israel interest rate.
>> If, at the end of the Run-Off plan, there remains an unpaid
balance of the special line of credit, the Government will repay
the balance to Bank of Israel until July 31, 2008. The Government
has noted before it the notice of the Governor of Bank of Israel
that in exchange for its repayment of the credit balance, the
collateral that was provided by the Bank for repayment of the
credit line will be assigned in its favor (the debenture dated
November 14, 2002 by which the Bank created a general floating
lien in favor of the Bank of Israel, which was amended on
December 29, 2005).
The Bank is presently in the process of implementing the "Run-Off" plan as
described in more detail below.
36
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 1 - "RUN OFF" PLAN AND THE SPECIAL LINE OF CREDIT OF THE BANK OF ISRAEL
(CONT'D)
THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL
Following the liquidity problems encountered by the Bank in the third
quarter of 2002, the Bank of Israel had provided it a special line of
credit, which was recently extended until July 31, 2008 in accordance with
the letter of the Governor from October 30, 2005. The terms of the special
line of credit were determined by the Governor of the Bank of Israel and
over time they underwent changes. The present terms of the special line of
credit are specified in the letter of the Governor from October 30, 2005,
and the principal terms are as follows:
>> The credit line will be in effect until no later than July 31, 2008.
>> The maximum amount of the credit line will at no time exceed NIS 1.25
billion and it will decline in accordance with a forecast that was
attached to the notice of the Governor of the Bank of Israel regarding
extension of the line until July 31, 2008.
>> The Bank will be allowed to continue to use the credit line in order
to meet the liquidity needs it has for fulfilling its current banking
obligations.
>> The interest on the utilized credit will be the "Bank of Israel
interest rate" (it is noted that before July 29, 2003 the utilized
credit bore a higher rate of interest).
>> Any significant administrative expense that deviates from the Bank's
ordinary course of business and has an effect on its business results
will require the approval of the Bank of Israel.
>> Limitations were set on the Bank's volume of activity with respect to
making and pledging deposits with banks.
In his letter from October 30, 2005, the Governor of the Bank of Israel
clarified that if the Bank of Israel should see fit, and to the extent
required at its sole discretion, additional restrictions regarding the
Bank's operations besides those specified in the aforementioned letter will
be considered, whether or not as a result of non-conformity with the
objectives of the "Run-Off" plan.
The utilized balance of the special line of credit of the Bank of Israel
(not including accrued interest) was NIS 575 million as of June 30, 2007
(compared with NIS 751 million as at December 31, 2006).
The Bank is of the opinion that the Bank of Israel should credit it with
all the amounts of interest in excess of the "Bank of Israel interest rate"
which were charged by the Bank of Israel from August 2002 until July 29,
2003 (the date the Ministerial Committee for Social and Economic Affairs
first approved the Bank's "Run-Off" plan), in the total amount of NIS 78
million (as calculated by the Bank). On May 1, 2007, the Bank issued an
immediate filing to the Israel Securities Authority and to the Tel Aviv
Stock Exchange in which it gave notice that as part of the contacts it
recently had with the Bank of Israel, it was made clear that the issue of
the recouping of the surplus interest to the Bank will be assessed upon the
complete repayment of the special credit line.
37
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 1 - "RUN OFF" PLAN AND THE SPECIAL LINE OF CREDIT OF THE BANK OF ISRAEL
(CONT'D)
THE COMPONENTS OF THE RUN-OFF PLAN
The principal components of the "Run-Off" plan that was approved by the
Bank's Board of Directors are a supervised sale of the Bank's assets by the
end of the plan period and a significant reduction in manpower and in
operating expenses, subject to the continued granting of the special line
of credit by the Bank of Israel. As a part of this process the Bank also
implemented an extensive and detailed efficiency plan.
In accordance with the "Run-Off" plan and the efficiency plan implemented
by the Bank, the Bank refrains from granting new credit and concentrates
its activities on collecting the existing credit.
As part of the implementation of its plans, the Bank has significantly
reduced or completely discontinued the following activities: foreign
currency and foreign trade activity, maintenance of a dealing room,
maintenance of current accounts, checking accounts and securities accounts,
processing grants, operating cash and clearing facilities (independently)
and credit cards. The Bank also refrains from accepting new deposits and it
has recently stopped (subject to certain exceptions) renewing existing
deposits that reach maturity.
The reduction in the Bank's operations was also accompanied by a reduction
in the Bank's staff.
On July 26, 2005 the Bank's Board of Directors discussed a document that
had been prepared regarding the extension of the "Run-Off" plan. In light
of the document's conclusion regarding the advantages of extending the
plan, the Board of Directors approved extension of the plan until July 31,
2008. The Bank's Board of Directors also decided on the same occasion that
due to the reduction in the Bank's activity according to the "Run-Off" plan
and the date to which the plan was extended, the Bank would notify the
Governor of the Bank of Israel that it agrees that its banking license be
restricted in a manner that reflects its reduced activity as derived from
the "Run-Off" plan, and to the restricted license specifying that it is
valid until the end of the plan (July 31, 2008).
In his letter from January 29, 2006 the Bank was notified by the Governor
of the Bank of Israel as follows:
>> The banking license the Bank received on June 4, 1989 will be
restricted so that the Bank cannot engage in any business it did
not engage in prior to the date of the license (until the date of
the license the Bank engaged in financing investments) and
without derogating from the generality of the aforementioned, the
Bank will not receive new deposits and will not renew deposits
reaching their current date of maturity, other than from the
shareholders.
>> The Bank's banking license will be revoked as from August 1,
2008.
In its letter dated May 1, 2007, the Bank of Israel announced that if the
blueprint described below for the sale and/or transfer of the shares of the
Bank is carried out prior to August 1, 2008, the license of the Bank will
be cancelled as of the date the blueprint is carried out.
Since, as aforementioned, the decision of the Government stipulates that
the Run-Off plan shall end on July 31, 2008 and it is unknown as to whether
the sales blueprint will reach fruition, as long as no other government
decision is passed, there is no certainty that the Bank will continue to
exist as a "going concern" following that date
The financial statements do not contain any changes in the value and
classification of assets and liabilities that may be needed in the event
that it is decided at the end of the Run-Off plan to sell the Bank's
portfolio of assets and liabilities as a single unit and within a short
time.
38
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 1 - "RUN OFF" PLAN AND THE SPECIAL LINE OF CREDIT OF THE BANK OF ISRAEL
(CONT'D)
POSSIBLE BLUEPRINT FOR THE SALE AND/OR TRANSFER OF THE SHARES OF THE BANK
The Finance Ministry and the Government Companies Authority have been
assessing a possible blueprint for the sale and/or transfer of all of the
issued share capital of the Bank to a third party purchaser, as follows:
(a) the sale and/or transfer of all of the holdings of the State of Israel
and of the three large banking groups in the shares of the Bank to the
designated purchaser; (b) the purchase by the designated purchaser of the
shares of the Bank held by the public and traded on the Tel Aviv Stock
Exchange, as part of the arrangement plan pursuant to article 350 of the
Companies Law - 1999 which requires obtaining the consent of the court and
a special majority of the public shareholders of the Bank; (c) the
redemption by the Bank of the class D and DD preference shares held by the
public, together with payment of the preferred dividends in arrears in
respect thereof (as required by the terms of issuance in the event of a
redemption).
On June 17, 2007, the Government Companies Authority issued a request for
information (hereinafter - "RFI") in which it announced, among other
things, that the Government of Israel, through the Government Companies
Authority, was requesting information from parties interested in purchasing
the Industrial Development Bank of Israel Ltd. and was requesting that
those interested parties submit their requests on July 3, 2007. The RFI
also included a description of the proposed blueprint for the sale and
indicated, among other things, that a pre-condition for the implementation
of the blueprint is an undertaking of the holders of the controlling shares
(Bank Leumi, Bank Discount, Bank Hapoalim, First International Bank, IDB,
and the Association of Industrialists) to transfer their controlling shares
to the State without consideration. The Bank was informed by the Government
Companies Authority that on the date stipulated for submission of the
requests, July 3, 2007, eleven requests were received at the offices of the
Authority from companies and individuals. The Government Companies
Authority, together with the Finance Ministry, are assessing the manner and
format for implementing the blueprint and have started taking steps to move
forward on the matter.
At this stage, it is not possible to know if the blueprint under scrutiny
will be adopted and actually implemented as described therein and this
question will be affected by, among other things, the willingness of the
holders of the controlling shares to transfer their holdings to the State
of Israel. In addition, the sale of the holdings of the State of Israel is
subject to the passing of a privatization resolution by the Ministerial
Committee on Privatization, a resolution which has not yet been passed.
NOTE 2 - ACCOUNTING POLICY
The condensed interim financial statements are presented in accordance with
accounting principles implemented for purposes of preparing interim
financial statements. The accounting principles implemented in the
preparation of the interim financial statements are consistent with those
applied in the preparation of the audited financial statements as at
December 31, 2006. These financial statements should be read in conjunction
with the annual financial statements as at December 31, 2006 and for the
year then ended, together with their accompanying notes.
39
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 3 - DISCLOSURE OF THE IMPACT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO THEIR IMPLEMENTATION
A. In July 2006, the Israel Accounting Standards Board issued Accounting
Standard No. 29, "Adoption of International Financial Reporting
Standards ("IFRS")" (hereinafter - the Standard). The Standard
stipulates that entities subject to the Securities Law - 1968 and that
are required to report according to the regulations of this law, are
to prepare their financial statements for periods beginning as from
January 1, 2008 according to IFRS. This does not apply to banking
institutions, the financial statements of which are presented in
accordance with the provisions and guidelines of the Supervisor of
Banks.
In relating to the manner in which banking institutions are to
implement the Standard, the Supervisor of Banks notified banking
institutions that:
o He intends on establishing on a regular basis provisions for the
implementation of Israeli standards issued by the Israel
Accounting Standards Board and which are based on IFRS that do
not relate to the core banking business.
o In the second half of 2009, he will publicize his decision
regarding the date of implementation of IFRS standards that
relate to the core banking business. In doing so, he will take
into consideration the results of the process of adoption of
these standards in Israel on the one hand and the progress of the
process of convergence between IFRS and U.S. standards on the
other hand.
o Therefore, relating to the core banking business, the financial
statements of a banking institution presented in accordance with
the provisions and guidelines of the Supervisor of Banks will
continue to be presented on the basis of the U.S. standards as
stipulated in the provisions for reporting to the public.
B. In December 2006, the Israel Accounting Standards Board issued
Accounting Standard No. 23, "The Accounting Treatment of Transactions
between an Entity and its Controlling Shareholder" issued by the
Israel Accounting Standards Board (hereinafter - the "Standard"). The
Standard replaces the Securities Regulations (Financial Statement
Presentation of a Transaction between a Company and its Controlling
Shareholder) - 1996 as adopted in the provisions for reporting to the
public of the Supervisor of Banks. The Standard stipulates that assets
and liabilities which were the subject of a transaction between an
entity and its controlling shareholders shall be measured at the date
of the transaction at fair value and that the difference between the
fair value and the consideration of the transaction be carried to
shareholders' equity. Any difference with a debit balance is in effect
a dividend which reduces retained earnings. Any difference with a
credit balance constitutes an investment by the owners and shall be
presented separately as part of shareholders' equity under the title
"Capital Reserve deriving from a transaction between the entity and
its controlling shareholder".
The Standard deals with three issues in connection with transactions
between an entity and its controlling shareholder, as follows: the
transfer of an asset to the entity from the controlling shareholder,
or the opposite, transfer of an asset from the controlling shareholder
to the entity; the assumption of a liability of the entity to a third
party, in whole or in part, by the controlling shareholder,
indemnification of the entity by the controlling shareholder in
respect of an expense, the waiver of the controlling shareholder to
the entity regarding a debt due to him from the entity, in whole or in
part; and loans granted to the controlling shareholder or loans
received from the controlling shareholder. In addition, the Standard
sets forth the disclosure to be made in the financial statements
regarding transactions between the entity and its controlling
shareholder during the period.
40
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 3 - DISCLOSURE OF THE IMPACT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO THEIR IMPLEMENTATION (CONT'D)
The Standard applies to transactions between an entity and its
controlling shareholder carried out after January 1, 2007 and to loans
granted to or received from the controlling shareholder prior to the
effective date of the Standard, commencing on the effective date.
As of the date of release of the financial statements, the Supervisor
of Banks had not yet issued his provisions regarding the manner of
adoption of the Standard by banking institutions, if at all.
NOTE 4 - EXEMPTION FROM SUPPLEMENTARY ALLOWANCE FOR DOUBTFUL DEBTS IN RESPECT OF
DEVIATIONS FROM CERTAIN DEBT LIMITS
As stated in Note 1G of the Bank's financial statements as at December 31,
2006, as a result of the approval received from the Supervisor of Banks,
the financial statements of the Bank do not include a supplementary
allowance for doubtful debts in respect of deviations from debt limits of
an individual borrower and a borrower group, deviations from debt limits in
respect of financing purchases of means of control in corporate entities
and in respect of deviations from the limit of sector indebtedness.
It is noted that if the Supervisor of Banks had not granted the exemption,
the Bank would have been required to make a supplementary allowance of
significant amounts in respect of these deviations, in the periods in which
they were created, which could have had a material impact on its results of
operations for such periods. Furthermore, the adjustment of the
aforementioned supplementary allowance to the changes that occurred from
time to time in the extent of the deviations could have had an effect on
the financial results of the Bank in the subsequent reporting periods.
NOTE 5 - CAPITAL ADEQUACY
On June 30, 2007, the Bank's ratio of capital to risk assets was 2.63%,
compared with the 9% minimum stipulated in Proper Banking Procedures and a
ratio of 1.34% as at December 31, 2006.
NOTE 6 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
The issued share capital of the Bank includes preference shares of classes
C, CC, CC1, D, and DD to which the Bank used to pay on a quarterly basis
25% of the annual preferred dividend of those classes . In addition, the
Bank would pay an annual participating dividend at a rate of 1.5% in
respect of C, CC and CC1 shares. The consideration from the issuance of
these preferred shares was deposited by the Bank with the Israeli Treasury
in perpetual deposits, which will be returned to the Bank only upon
liquidation or for the purpose of redeeming the preference D and DD shares
(hereinafter - the "perpetual deposits"). According to the deposit
agreements, the interest on the perpetual deposits, at an annual rate of
7.5% (plus differentials of linkage to the dollar), is paid to the Bank on
the payment dates of the dividends to the aforementioned preferred shares.
The deposit agreements do not expressly stipulate how the interest on the
perpetual deposits should be handled during periods in which the Bank is
prevented from distributing dividends on these preferred shares, and
whether the interest will accrue and be paid when the Bank pays the accrued
preferred dividends in arrears or upon liquidation.
41
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 6 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
(CONT'D)
According to the Companies Law - 1999 (the "Companies Law"), a company is
entitled to distribute dividends only from its profits (as defined
therein), on condition that there is no reasonable fear that such
distribution would prevent the company from meeting its existing
liabilities and its expected liabilities when they come due (hereinafter -
the "repayment ability test"). Nevertheless, the court is permitted to
approve the distribution of a dividend not from the company's profits, if
it is convinced that the company meets the "repayment ability test".
According to the Directives of Proper Banking Procedures, the Supervisor of
Banks prohibited distribution of dividends by a banking institution if,
among other things, one or more of the last three calendar years ended in a
loss, or the aggregate results of the three quarters ending on the last day
of the interim period for which the last financial statements were issued
reflected a loss.
The Bank ended the years 2001 through 2003 with a loss, the year 2004 with
a profit and the years 2005 and 2006 with a loss. Commencing with the
financial statements for the first quarter of 2002, the Bank had no profits
from which it could distribute a dividend under the Companies Law.
In accordance with the Bank's Articles it can distribute a dividend only
out of earnings of the Bank. As from the second quarter of 2002 the Bank
does not even have any nominal earnings.
The last dividend paid by the Bank in respect of the aforementioned
preferred shares was the second quarterly dividend of 2002, and in order to
distribute that dividend, the Bank obtained court approval and the approval
of the Supervisor of Banks.
Prior to the publication of the financial statements of the Bank for the
third quarter of 2002, the Board of Directors of the Bank decided, for the
time being, not to distribute dividends in respect of the aforementioned
shares. The decision was taken upon the advice of legal counsel and taking
into consideration, among other things, the following issues:
o The results of operations of the third quarter of 2002 and the crisis
which affected the Bank during that quarter.
o Non-existence of distributable profits under the Companies Law.
o The prohibition on distribution of dividends according to the Bank's
Articles when there are no profits, even in nominal terms.
o The prohibition on distribution of dividends according to the
directives of Proper Banking Procedures, as long as the Supervisor of
Banks has not replied to the Bank's request and has not permitted such
distribution.
o The possibility that the interest on the Bank's perpetual deposits
with the Israeli Treasury will continue to accrue to the credit of the
Bank even if not actually paid, as long as no dividend is distributed.
On December 1, 2002, the Bank received the reply of the Supervisor of Banks
to its request for the position of the Supervisor on the matter of
distributing a dividend in respect of the third quarter of 2002. The
Supervisor's answer stipulated, among other things, that in the existing
circumstances (as detailed in the letter), the Supervisor of the Banks
believes that "it is inappropriate to distribute a dividend at this time".
Nevertheless, the Supervisor of Banks noted that it was still not
completely clear as to the legal aspects of various questions connected
with the distribution of the dividend and the accrual of the interest on
the perpetual deposits, and as to the position of the State of Israel on
this issue. The Supervisor of Banks added that a copy of the letter had
been sent to the Government Companies Authority and the Accountant General,
and that following receipt of clarifications from them and from the Bank to
the questions which arose, the Supervisor will notify the Bank as to his
position.
42
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 6 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
(CONT'D)
In view of the lack of clarity as to the matter of the accrual of interest
on the perpetual deposits during the period in which the Bank is prevented
from distributing a dividend (the lack of clarity to which also the
Supervisor of Banks referred to in his letter) and in view of the possible
ramifications of this matter on the distribution of the dividends in
respect of the preferred shares, the Board of Directors deliberated the
matter, taking into consideration a comprehensive legal opinion presented
to the Board. The Board reached the conclusion that the interest not paid
to the Bank due to the non-distribution of the dividend should accrue to
the Bank's credit and, accordingly, in the event of the Bank's liquidation,
the interest will be paid to the receiver's fund. In a letter dated January
22, 2003, the Bank requested from the Ministry of Finance and the
Government Companies Authority to issue their positions on this matter as
soon as possible.
In its reply dated March 13, 2003, the Ministry of Finance stated (among
other things) that the monies paid on the perpetual deposits for purposes
of distributing the dividend should be transferred to the Bank solely for
purposes of redeeming the aforementioned redeemable preference shares
(Classes D and DD), or upon liquidation. In order to clarify matters and to
avoid doubt, the Bank once again petitioned the Ministry of Finance to
confirm that it accepts the position of the Bank's Board of Directors as
described above. Despite the reminders that were sent by the Bank on this
matter, the requested clarification has still not been obtained. The Bank
made further requests on this matter during 2004, but as yet has not
received a satisfactory response. The Board of Directors has deliberated
the matter of the dividend on the said preferred shares several more times,
and after taking into account all of the considerations and circumstances
described above has decided to abide by its previous decision and to
refrain from distributing any further dividend at this time.
From the date the Bank stopped paying the dividend on the aforementioned
preferred shares, the State has stopped paying to the Bank the interest on
its perpetual deposits with the Israeli Treasury.
The accrued amount of the dividend, at the annual rate of 7.5%, in respect
of the aforementioned preferred shares (including a 1.5% participating
dividend for C, CC and CC1 shares) that has not been paid since the Bank
ceased paying the dividend amounts to NIS 185.0 million. This amount was
not recorded in the financial statements and it is equal to the amount of
the accrued interest on the perpetual deposits, which was also not recorded
in the financial statements.
The total accrued amount of NIS 185.0 million is comprised as follows: NIS
114.3 million is in respect of non-participating shares (D and DD) and NIS
70.7 million is in respect of participating shares (C, CC and CC1). Of this
amount, an amount of NIS 8.5 million is in respect of the second quarter of
2007 and is comprised as follows: NIS 5.7 million in respect of
non-participating D and DD shares and NIS 2.8 million in respect of
participating C, CC and CC1 shares.
On September 28, 2004 various financial entities that hold class C and/or
CC and/or CC1 shares of the Bank filed with the Tel Aviv District Court an
originating motion in which the Court was requested to instruct the Bank to
pay to its shareholders a dividend at the rates and dates it was paid until
the second quarter of 2002.
43
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 6 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
(CONT'D)
Since in the opinion of the Bank, the matter of the dividend distribution,
which is the issue of the aforementioned originating motion, is connected
to the question of whether under the circumstances of a non-distribution of
dividends, the interest on the perpetual deposits of the Bank with the
Israeli Treasury is accrued in its favor, and since the answers received so
far from the Ministry of Finance were not clear enough and were
insufficient, the Bank filed an originating motion with the Court on March
9, 2005 against the Minister of Finance and the aforementioned financial
entities, in which it requested (among other things) a declaratory ruling
by which the interest on the perpetual deposits is indeed accrued in favor
of the Bank. Following the request of the Bank and the aforementioned
financial entities the Court ordered that the hearing on the two
originating motions be consolidated. In the reply of the Minister of
Finance to the originating motions prior to a preliminary hearing that was
held on January 12, 2006, the Minister of Finance announced that his
position is that the interest on the perpetual deposits does not accrue in
favor of the Bank when it does not distribute a dividend, and that even so,
in light of the Bank's circumstances, there is no justification for the
distribution of a dividend by the Bank. On August 5, 2007, a decision was
rendered by the Tel Aviv District Court whereby it rejected the originating
motion filed by the Bank against the Finance Minister and against the
aforementioned financial institutions and in which it established that the
interest on the perpetual deposits does not accrue to the credit of the
Bank as long as a dividend is not distributed and/or in respect of the
aforementioned preference shares. The Bank and its legal counsel are
currently assessing the decision and the ramifications thereof, including
on the originating motion against the Bank.
See also Note 8 regarding the originating motions on the matter of the
cessation of the dividend distribution.
NOTE 7 - APPROVAL OF ADDITIONAL SEVERANCE PAY TO THE CHAIRMAN OF THE BOARD OF
DIRECTORS, THE GM AND THE DEPUTY GM OF THE BANK
On May 30, 2007, the audit committee and the board of directors of the Bank
authorized the granting of additional severance pay to the Chairman of the
Board of Directors, the GM and the Deputy GM of the Bank, upon the
termination of their service (in excess of the amounts provided for them in
managers insurance policies and/or pension funds), at a rate of one month's
salary for each year of service and the relative share of a month's salary
in respect of part of the year. This resolution is subject to the approval
of the Supervisor of Wages and Labor Agreements in the Israeli Finance
Ministry, who announced that he had no objection to the wording of the
decision and that his approval of the proposal will be taken under
advisement if, and only if, the termination of their employment occurs at
the end of the Bank's Run-off Plan (which is scheduled to end on July 31,
2008) or if ownership of the Bank is transferred to an external investor
prior to the end of the Run-Off Plan. The additional severance pay to the
Chairman of the Board of Directors was ratified by the general shareholders
meeting of the Bank. The periods of service of the Chairman of the Board,
Dr. R. Cohen, the GM, Mr. A Galili, and the Deputy GM, Mr. A Savir, started
at different times during the second half of 2002 and, therefore, assuming
that their periods of service conclude at the end of the Run-off Plan on
July 31, 2008, we are dealing with additional severance pay of six-months'
salary for each of the above. The cost of the additional severance pay in
respect of the three of them together, for the entire period, amounts to
NIS 0.9 million. The financial statements contained a provision related to
the period ended June 30, 2007 (approx. NIS 0.8 million).
44
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 8 - LEGAL CLAIMS
Legal claims, including a request to certify a claim as a class action, were
filed against the Bank in the ordinary course of business. Management of the
Bank believes, on the basis of legal opinions of external legal counsel
representing the Bank in these claims, that with respect to the risks of the
claims, adequate provisions have been included in the financial statements, when
necessary, so as to cover possible losses in respect of those claims.
Following are details of legal claims against the Bank in which the amounts
claimed are material:
1) In March 2003, Lehava Underwriters Ltd. (by virtue of it being a
shareholder of the Bank) filed a derivative claim with the Tel Aviv-Jaffa
District Court in the amount of NIS 409.5 million against eleven senior
officers of the Bank (current and past) and against the Bank itself. The
plaintiff claims that the senior officers it sued breached their "duty of
care" toward the Bank and were negligent in fulfilling their duty and, as a
result, should be required to pay the Bank the amount of the claim, as
compensation for the damages they inflicted on the Bank. According to the
claim, the negligence of the senior officers is reflected in, among other
things, the credit that they granted without suitable collateral, problems
with the credit-granting policy and the quality and approval procedures
thereof, credit risk management and the ongoing handling of the credit. The
amount of the suit, in respect of damages incurred as a result of the
alleged negligence, reflects the amount of the allowances made by the Bank
for doubtful debts in 2002. The Bank notified the insurers with which it
has a directors and senior officers liability insurance policy of the
filing of the suit. The insurers have notified the Bank that they have
certain reservations regarding the validity of the insurance coverage of
the claim and that they reserve their rights on this matter. The Bank
rejects these reservations in their entirety and intends to act in order to
fully exercise its rights towards the insurers. The defendants filed a
motion to have the suit summarily dismissed on the grounds that the
plaintiff should have filed a motion for approval of the claim as a
derivative claim. The Court accepted the position of the defendants and it
ordered the plaintiff to file a motion for the approval of the claim as a
derivative claim. Such a motion was submitted on December 7, 2003.
Representation of the Bank in the proceedings regarding the claim and the
motion has been handed over to legal counsel. On May 26, 2005 a hearing was
held on the motion. On June 18, 2006, the Court decided to reject the
motion to have the claim approved as a derivative claim and ordered the
petitioner to pay court costs and legal fees.
On September 18, 2006, the petitioner filed an appeal with the Supreme
Court on the decision rejecting the motion to have the claim approved as a
derivative claim. The court set dates for the filing of written summations
by the parties and set a date for the completion of oral motions on
November 26, 2007, which was postponed to February 14, 2008. In the opinion
of the Bank's legal counsel, since the action is a derivative claim in
which for all intents and purposes the Bank is only a formal respondent,
the Bank's exposure in respect thereto is only for expenses (including
court fees, expenses of the plaintiff, fee to the attorney of the plaintiff
and special compensation to the plaintiff).
2) In October 2002, Mr. Arye Fin (a shareholder of the Bank) filed with the
Tel Aviv-Jaffa District Court a legal action against the Bank, against the
State of Israel (as controlling shareholder in the Bank), and against 17
former and current officers of the Bank (two of which were removed later
from the action), together with a motion to have the suit approved as a
class action. The class action was filed in the name of all those who
purchased shares of the Bank between December 1, 2001 and August 22, 2002,
and the cause of the action is the alleged breach of the duty to report
under the Securities Law - 1968 and the Securities Regulations (Periodic
and Immediate Reports) - 1970 enacted thereunder (hereinafter - the
Securities Regulations). As claimed in the action, during the
aforementioned period, a number of extraordinary events and/or matters
occurred that indicated that the Bank was in serious condition, and both
these events and matters, and the Bank's very situation mandated that the
Bank file an immediate report under the Securities Regulations. Such a
report was not filed. The estimated damages being claimed in the action is
NIS 20 million and, alternatively, NIS 14 million. The Bank notified the
insurers with which it has a banking policy and a directors and senior
officers liability insurance policy of the filing of the suit.
45
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 8 - LEGAL CLAIMS (CONT.)
The insurers carrying the banking policy notified the Bank that the banking
policy does not cover the claim. The Bank was also notified by the insurers
carrying the directors and senior officers liability insurance policy that
they have certain reservations regarding the validity of the claim's
insurance coverage and that they reserve their rights on this matter. The
Bank announced that it summarily rejects these reservations and intends to
act in order to fully exercise its rights towards the insurers. The Bank
handed over the care of the suit and the motion to have the suit recognized
as a class action to an attorney acting on its behalf. On May 17, 2005, the
Court accepted the motion of the plaintiff and ordered the disclosure of a
number of documents by the Bank. The Bank filed an appeal on the ruling
regarding the disclosure of documents, which was denied on March 9, 2006.
On April 3, 2006 the Bank submitted to the Supreme Court a request for
leave to appeal the ruling that denied its appeal regarding the disclosure
of documents. On January 22, 2007, the Supreme Court decided, with the
consent of the parties, that part of the documents in respect of which the
Bank filed its appeal would not be disclosed, whereas the others would be
disclosed. The Bank transferred to the plaintiff those documents which, at
its understanding, it had to disclose. On February 27, 2007, the plaintiff
petitioned the District Court demanding that the Bank disclose documents
which the plaintiff claimed the Bank had to disclose. On July 11, 2007, a
settlement agreement was signed between the Bank and the class action
plaintiff, Mr. A. Fin (without either party recognizing the claims of the
other), whereby the Bank undertook to pay an amount of NIS 4.7 million to
the plaintiff group and an additional amount of NIS 1.2 million (plus VAT
as applicable) as a special remuneration to the plaintiff and attorney fees
to the attorneys of the plaintiff. In addition, the Bank will have to bear
the costs of advertising the compromise arrangement, the fee of the
examiner to be appointed by court to render his opinion on the proposed
compromise, and an amount of US$ 10,000 plus VAT as the fee of the trustee
who will examine the debt claims of the group. Concurrently, the Bank
entered into a settlement agreement with the insurer which issued the
policy granting indemnification of the directors and senior officers,
whereby the insurers undertook to indemnify the Bank in an amount equal to
half of the cost of the compromise with the class action plaintiff (up to a
maximum of NIS 6.25 million), plus NIS 1 million in respect of the legal
fees of the Bank and the senior officers that were sued. The settlement
agreement with the class action plaintiff was ratified by the general
shareholders meeting of the Bank on August 20, 2007 and still requires
court approval. The Bank recorded an expense in respect of the compromise
agreement in its accounting records.
3) In September 2004, various financial entities that hold class C and/or CC
and/or CC1 shares of the Bank filed with the Tel Aviv-Jaffa District Court
an originating motion in which the Court was requested, inter alia, to
instruct the Bank to pay to its shareholders a dividend at the rates and
dates it was paid until the second quarter of 2002. The petitioners
contend, inter alia, that according to the Bank's articles of association,
the Bank is required to pay to the holders of its preferred shares an
annual dividend at the rate of 7.5%, because this dividend is not actually
a dividend but rather a payment made in full by the State of Israel in
respect of the perpetual deposits the Bank keeps with it, and therefore its
distribution is not subject to the distribution conditions provided in the
law, and that even if the distribution conditions should be applied, the
Bank should still be ordered to distribute the requested dividend, due to
the Bank's meeting the repayment ability test as the dividend is being
fully financed by the State of Israel and not being deducted from the
capital of the Bank. The Bank transferred the handling of the originating
motion to attorneys acting on its behalf. Since in the opinion of the Bank,
the matter of the dividend distribution, which is the issue of the
aforementioned originating motion, is connected to the question of whether
under the circumstances of a non-distribution of dividends, the interest on
the perpetual deposits of the Bank with the Ministry of Finance is accrued
in its favor, and since the answers received so far from the Ministry of
Finance were not clear enough and were insufficient, the Bank filed an
originating motion with the Court on March 9, 2005 against the Minister of
Finance and the aforementioned financial entities, in which it requested
(among other things) a declaratory ruling by which the interest on the
perpetual deposits is indeed accrued in favor of the Bank. Following the
request of the Bank and the aforementioned financial entities the Court
ordered that the hearing on the two originating motions be consolidated. A
preliminary hearing on the originating motions took place on January 12,
2006. In the reply of the Minister of Finance to the originating motions
prior to the aforementioned preliminary hearing, the Minister of Finance
announced that his position is that the interest on the perpetual deposits
does not accrue in favor of the Bank when it does not distribute a
dividend, and that even so, in light of the Bank's circumstances, there is
no justification for the distribution of a dividend by the Bank. On March
23, 2006, the court decided that in the first stage, the question of the
accrual of interest on the perpetual deposits of the Bank with the Treasury
will be discussed and resolved, since a resolution of this question will
advance the hearing and the resolution of the rest of the questions that
must be answered. On August 5, 2007, a decision was rendered by the Tel
Aviv District Court whereby it rejected the originating motion filed by the
Bank against the Finance Minister and against the aforementioned financial
institutions in which it determined that the interest on the perpetual
deposits does not accrue to the credit of the Bank as long as a dividend is
not distributed and/or in respect of the preference shares of the Bank. The
Bank is currently assessing the decision and the ramifications thereof.
46
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 8 - LEGAL CLAIMS (CONT.)
4) In May 2006, a suit was filed in the Rehovot Magistrates Court, in an
amount of NIS 2.5 million, against the Bank, the receiver that was
appointed at the request of the Bank in respect of a carpentry workshop and
the purchaser of the workshop from the receiver. According to the statement
of claim, the Bank agreed to allow the plaintiffs who were the owners of
the workshop to find a purchaser for the workshop by themselves, but when
the potential purchaser that the owners found heard that the workshop was
in receivership, he entered into an agreement with the Bank and the
receiver for the purchase of the workshop at an amount that was lower than
the amount that he undertook to pay the plaintiffs. The plaintiffs also
claim that the Bank and the receiver did not insure the premises and
equipment of the workshop and, therefore, they are liable for the damages
that occurred to the premises and the equipment as a result of a fire that
broke out at the workshop. The handling of the suit was transferred to an
attorney on behalf of the Bank.
5) In October 2005, a company, that performs engineering and plumbing work,
filed a claim with the Tel Aviv-Jaffa District Court in the amount of NIS
1.4 million against the Bank, a receiver that was appointed at the request
of the Bank to a residential and commercial project that encountered
difficulties, and against the owner of the land that at the time had
entered into a combination agreement with the promoter that had constructed
the project with the financing of the Bank. The plaintiff company allegedly
performed work on the project at the request of the promoter, which had
failed and did not repay its debt to the plaintiff company. The claim
states that the amount requested reflects the amount the promoter still
owes the plaintiff company in respect of the work it executed on the
project with the addition of interest and/or linkage differences. The
plaintiff company contends that due to principles of closed banking
financing and the Bank having granted to the promoter bank financing for
construction of the project, the Bank should be considered responsible for
repayment of the debt. Furthermore, it contends that at the time it had
entered into the agreement with the promoter, the Bank should have brought
to its attention the information the plaintiff contends was in the
possession of the Bank, regarding the difficult condition of the promoter
and the project. The handling of the claim was transferred to the care of
an attorney acting on behalf of the Bank. On March 14, 2006, the suit
against the receiver was summarily dismissed, but the suit against the Bank
and the owner of the property (who has since passed away) remained in place
47
The Industrial Development Bank of Israel Limited
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
- --------------------------------------------------------------------------------
NOTE 8 - LEGAL CLAIMS (CONT.)
6) In June 2004, two former employees of the Bank, who had filled senior
positions in the Bank, filed a suit against the Bank with the Tel
Aviv-Jaffa Labor Court in the total amount (for both of them) of NIS 2.3
million. The claim is for the payment of certain benefits, which the
plaintiffs allege were due to them with regard to their retirement from the
Bank in 2002. The suit was filed also against the Ministry of Finance's
Commissioner of Wages and Labor Agreements in respect of the non-approval
of these payments. Alternatively the aforementioned plaintiffs claim the
salary raises they allege that they forfeited in the past in exchange for
the aforementioned benefits. The Bank has transferred the matter to an
attorney acting on its behalf. On June 20, 2005 the aforementioned
plaintiffs filed a request for a partial ruling in the amount of NIS 415
thousand, in respect of amounts the payment of which was approved by the
Ministry of Finance's Commissioner of Wages and Labor Agreements without
conditioning the approval upon their relinquishing any additional claims.
The Bank has filed an objection to the request. The Court has not yet ruled
on the request.
7) In September 2003, a supplier of fuel products filed a claim in the amount
of NIS 6 million with the Tel Aviv-Jaffa District Court against the Bank
and two other banks regarding non-payment of the consideration for fuel
products it had provided to a mutual customer of the three defendant banks.
It is alleged that the involvement of the defending banks in the approval
of the business plan and in the approval of the expense and income budget
of the aforementioned customer, had created a representation towards the
plaintiff on which it had relied at the time of delivery of its products,
because it had assumed that the expenses included in the approved plan
and/or budgets would be paid by the defending banks. The Bank has
transferred the matter to an attorney acting on its behalf.
8) In August 2000, a suit was filed with the Tel Aviv-Jaffa District Court
against one of the Bank's former senior executives and against 24 other
defendants by a number of venture capital funds. For purposes of the court
fee, the amount of the suit was set at $ 18.7 million, which was later
increased to $ 22.5 million. The suit also included relief of the receipt
of actual shares. According to the plaintiff's complaint, the suit was
filed, among other reasons, in connection with the breach of an investment
agreement, whereby the plaintiffs and other investors were allegedly
supposed to receive 46.5% of the shares of a company in which the
aforementioned senior executive served in the past as a director on behalf
of a former grandchild subsidiary of the Bank. The claim was transferred to
an attorney and a defense brief was submitted. In 2005, the insurers
carrying the directors and senior officers liability insurance policy
notified the Bank that in their opinion the claim does not have insurance
coverage, but the Bank's legal counsel handling the claim believes that if
the said executive has to make any monetary payment in respect of the suit,
the payment will be covered by the insurance policy.
In the opinion of Management of the Bank, which is based on the opinion of its
legal counsel, the Bank's exposure in respect of pending claims, whose prospects
of success are not remote and regarding which a provision was not recorded,
amounts to NIS 32 million.
48
ANNEX A - PROFIT FROM FINANCING OPERATIONS BEFORE ALLOWANCE FOR DOUBTFUL DEBTS
- --------------------------------------------------------------------------------
Reported amounts
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------- ----------------------
2007 2006 2007 2006
------ ------ ------ ------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
------ ------ ------ ------
A. DERIVING FROM ASSETS:
Credit to the public 241.7 (188.8) 252.1 31.7
Credit to governments 0.6 (0.3) (0.1) 0.2
Deposits with banks 0.9 (0.3) 0.7 0.6
------ ------ ------ ------
243.2 (189.4) 252.7 32.5
------ ------ ------ ------
B. DERIVING FROM LIABILITIES
Deposits of the public (0.9) (1.7) (1.3) (3.2)
Deposits of the Government (234.1) 199.8 (235.6) (5.8)
Deposits of Bank of Israel (5.7) (11.8) (13.2) (22.9)
Deposits of banks 0.1 0.3 0.1 -
------ ------ ------ ------
(240.6) 186.6 (250.0) (31.9)
------ ------ ------ ------
C. DERIVING FROM DERIVATIVE FINANCIAL
INSTRUMENTS
Net income from ALM derivative
instruments (*) 0.3 5.0 1.0 4.4
------ ------ ------ ------
D. OTHER
Commissions from financing operations 2.7 3.1 5.9 6.7
Other financing income** 7.2 4.1 14.6 5.4
Other financing expenses (2.2) (2.5) (4.9) (5.6)
------ ------ ------ ------
7.7 4.7 15.6 6.5
------ ------ ------ ------
Total profit from financing operations
before allowance for doubtful debts 10.6 6.9 19.3 11.5
====== ====== ====== ======
Including - exchange rate differences, net 0.7 (6.4) (0.7) (5.7)
====== ====== ====== ======
* Derivatives comprising part of the asset and liability management system of the
Bank, not designated for hedging purposes.
** Including income from interest
collected in respect of
problematic debts 6.8 3.1 13.3 3.9
====== ====== ====== ======
49
ANNEX B - ALLOWANCE FOR DOUBTFUL DEBTS
- ------------------------------------------------------------------------------------------------------
REPORTED AMOUNTS
FOR THE THREE MONTHS ENDED JUNE 30 (UNAUDITED)
------------------------------------------------------------------------------------
2007 2006
------------------------------------- -------------------------------------
SPECIFIC SUPPLEMENTARY SPECIFIC SUPPLEMENTARY
ALLOWANCE (*) ALLOWANCE (**) TOTAL ALLOWANCE (*) ALLOWANCE (**) TOTAL
------ ------ ------ ------ ------ ------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------ ------ ------ ------ ------ ------
BALANCE OF ALLOWANCE AT
THE BEGINNING OF THE
PERIOD 656.7 49.2 705.9 687.5 54.9 742.4
------ ------ ------ ------ ------ ------
Allowance provided
during the period 4.3 0.5 4.8 10.0 - 10.0
Reduction of allowance (1.5) (1.7) (3.2) (1.4) (0.2) (1.6)
Collection of debts written
off in the past (0.4) - (0.4) (0.1) - (0.1)
------ ------ ------ ------ ------ ------
Amount carried to
statement of income 2.4 (1.2) 1.2 8.5 (0.2) 8.3
------ ------ ------ ------ ------ ------
Debts written off (49.4) - (49.4) (6.7) - (6.7)
------ ------ ------ ------ ------ ------
BALANCE OF ALLOWANCE AT
THE END OF THE PERIOD 610.1 48.0 658.1 689.4 54.7 744.1
====== ====== ====== ====== ====== ======
Including - balance of
allowance not deducted
from credit to public 3.0 - 3.0 0.9 - 0.9
------ ------ ------ ------ ------ ------
FOR THE SIX MONTHS ENDED JUNE 30 (UNAUDITED)
------------------------------------------------------------------------------------
2007 2006
------------------------------------- -------------------------------------
SPECIFIC SUPPLEMENTARY SPECIFIC SUPPLEMENTARY
ALLOWANCE (*) ALLOWANCE (**) TOTAL ALLOWANCE (*) ALLOWANCE (**) TOTAL
------ ------ ------ ------ ------ ------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------ ------ ------ ------ ------ ------
BALANCE OF ALLOWANCE AT
THE BEGINNING OF THE
PERIOD (AUDITED) 658.3 51.7 710.0 675.6 57.6 733.2
------ ------ ------ ------ ------ ------
Allowance provided
during the period 11.0 0.6 11.6 25.7 - 25.7
Reduction of allowance (4.7) (4.3) (9.0) (2.3) (2.9) (5.2)
Collection of debts written
off in the past (0.4) - (0.4) (1.0) - (1.0)
------ ------ ------ ------ ------ ------
Amount carried to
statement of income 5.9 (3.7) 2.2 22.4 (2.9) 19.5
------ ------ ------ ------ ------ ------
Debts written off (54.5) - (54.5) (9.6) - (9.6)
------ ------ ------ ------ ------ ------
BALANCE OF ALLOWANCE AT
THE END OF THE PERIOD 610.1 48.0 658.1 689.4 54.7 744.1
====== ====== ====== ====== ====== ======
Including - balance of
allowance not deducted
from credit to public 3.0 - 3.0 0.9 - 0.9
------ ------ ------ ------ ------ ------
(*) Not including allowance for interest on non-income bearing credit.
(**) Including the general allowance for doubtful debts.
50
ANNEX C - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
JUNE 30, 2007 (UNAUDITED)
----------------------------------------------------------------------------------------
FOREIGN CURRENCY OR LINKED
ISRAELI CURRENCY THERETO
----------------------- -------------------------
LINKED TO US OTHER NON-MONETARY
UNLINKED THE CPI DOLLAR CURRENCIES ITEMS TOTAL
------- ------- ------- ------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- ------- ------- -------
ASSETS
Cash and deposits
with banks 17.6 7.4 14.7 3.2 - 42.9
Securities - 0.4 - - 48.1 48.5
Credit to the public 146.5 401.7 5,708.4 16.5 - 6,273.1
Credit to governments - 5.2 25.1 3.3 - 33.6
Fixed assets - - - - 0.9 0.9
Other assets 6.6 - - - 0.4 7.0
Perpetual deposits with
the Israeli Treasury - 828.0 - - - 828.0
------- ------- ------- ------- ------- -------
Total assets 170.7 1,242.7 5,748.2 23.0 49.4 7,234.0
------- ------- ------- ------- ------- -------
LIABILITIES
Deposits of the public 32.8 28.5 0.9 - - 62.2
Deposits of banks 580.7 - - 3.3 - 584.0
Deposits of the Government - 280.8 5,705.6 - - 5,986.4
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 25.1 - - 25.1
Other liabilities 17.6 33.6 1.6 0.8 0.8 54.4
Non-participating shares - - 304.9 - - 304.9
Preferred participating shares - - 188.4 - - 188.4
------- ------- ------- ------- ------- -------
Total liabilities 631.2 342.9 6,226.5 4.1 0.8 7,205.5
------- ------- ------- ------- ------- -------
Difference (460.5) 899.8 (478.3) 18.9 48.6 28.5
Forward transactions, net 72.9 (54.1) - (18.8) - -
------- ------- ------- ------- ------- -------
Total (387.6) 845.7 (478.3) 0.1 48.6 28.5
======= ======= ======= ======= ======= =======
51
ANNEX C - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (cont'd)
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
JUNE 30, 2006 (UNAUDITED)
----------------------------------------------------------------------------------------
FOREIGN CURRENCY OR LINKED
ISRAELI CURRENCY THERETO
----------------------- -------------------------
LINKED TO US OTHER NON-MONETARY
UNLINKED THE CPI DOLLAR CURRENCIES ITEMS TOTAL
------- ------- ------- ------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- ------- ------- -------
ASSETS
Cash and deposits
with banks 37.8 14.1 27.7 0.2 - 79.8
Securities - 0.7 - - 52.0 52.7
Credit to the public 323.7 499.2 6,238.3 54.2 - 7,115.4
Credit to governments - 5.9 29.6 11.1 - 46.6
Fixed assets - - - - 1.0 1.0
Other assets 12.7 - - - 0.6 13.3
Perpetual deposits with
the Israeli Treasury - 838.6 - - - 838.6
------- ------- ------- ------- ------- -------
Total assets 374.2 1,358.5 6,295.6 65.5 53.6 8,147.4
------- ------- ------- ------- ------- -------
LIABILITIES
Deposits of the public 42.4 40.9 3.6 0.1 - 87.0
Deposits of banks 926.7 - - 11.1 - 937.8
Deposits of the Government - 332.0 6,187.4 - - 6,519.4
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 25.2 - - 25.2
Other liabilities 14.4 37.2 1.7 - 1.3 54.6
Non-participating shares - - 318.6 - - 318.6
Preferred participating shares - - 196.9 - - 196.9
------- ------- ------- ------- ------- -------
Total liabilities 983.6 410.1 6,733.4 11.2 1.3 8,139.6
------- ------- ------- ------- ------- -------
Difference (609.4) 948.4 (437.8) 54.3 52.3 7.8
Forward transactions, net 148.4 (39.8) (53.2) (55.4) - -
------- ------- ------- ------- ------- -------
Total (461.0) 908.6 (491.0) (1.1) 52.3 7.8
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52
ANNEX C - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (cont'd)
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
DECEMBER 31, 2006 (AUDITED)
----------------------------------------------------------------------------------------
FOREIGN CURRENCY OR LINKED
ISRAELI CURRENCY THERETO
----------------------- -------------------------
LINKED TO US OTHER NON-MONETARY
UNLINKED THE CPI DOLLAR CURRENCIES ITEMS TOTAL
------- ------- ------- ------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- ------- ------- -------
ASSETS
Cash and deposits
with banks 33.1 10.2 22.9 0.2 - 66.4
Securities - 0.7 - - 49.7 50.4
Credit to the public 213.9 464.8 5,819.5 20.9 - 6,519.1
Credit to governments - 7.8 26.9 6.8 - 41.5
Fixed assets - - - - 1.1 1.1
Other assets 10.5 - - - 1.6 12.1
Perpetual deposits with
the Israeli Treasury - 825.8 - - - 825.8
------- ------- ------- ------- ------- -------
Total assets 257.5 1,309.3 5,869.3 27.9 52.4 7,516.4
------- ------- ------- ------- ------- -------
LIABILITIES
Deposits of the public 30.6 32.7 3.5 0.1 - 66.9
Deposits of banks 761.5 - - 6.8 - 768.3
Deposits of
the Government - 306.1 5,781.3 - - 6,087.4
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 24.9 - - 24.9
Other liabilities 17.5 37.6 1.6 - 1.5 58.2
Non participating shares - - 303.2 - - 303.2
Preferred participating
shares - - 187.4 - - 187.4
------- ------- ------- ------- ------- -------
Total liabilities 809.7 376.4 6,301.9 6.9 1.5 7,496.4
------- ------- ------- ------- ------- -------
Difference (552.2) 932.9 (432.6) 21.0 50.9 20.0
Forward transactions, net 96.2 (44.0) (29.5) (22.7) - -
------- ------- ------- ------- ------- -------
Total (456.0) 888.9 (462.1) (1.7) 50.9 20.0
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53