Industrial Development Bank Of Israel Inactive
Filed: 19 Jun 08, 12:00am
EXHIBIT 1
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
2007 ANNUAL REPORT
CONTENTS
PAGE
Report of the Board of Directors for the Year 2007 F-1
Management Review of the Financial Position and Results of
Operations of the Bank F-40
Certifications of the General Manager and the Comptroller F-50
Management and Board of Directors' Statement Regarding their
Responsibility for the Annual Report F-52
Financial Statements as at December 31, 2007 F-55
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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 DECEMBER 31, 2007
At the meeting of the Board of Directors that was held on February 26, 2008, it
was resolved to approve the Bank's audited financial statements as of December
31, 2007. The financial statements are presented in accordance with the
directives of the Supervisor of Banks and the data is stated in reported
amounts.
ECONOMIC DEVELOPMENTS
The growth rate of the gross domestic product in 2007 remained high, further to
the growth of recent years. The initial estimate of growth in 2007 is 5.1%,
similar to the data of 2006.
The representative exchange rate of the dollar as of December 31, 2007 was NIS
3.846 to the dollar, compared with NIS 4.225 on December 31, 2006, a decrease of
9%. The weakening trend of the dollar also continued at the beginning of 2008.
The Consumer Price Index rose by 3.4% in 2007, compared with a decrease of 0.1%
in 2006. The rate of increase constitutes a deviation from the target set by the
Bank of Israel, notwithstanding the aforementioned decline in the rate of the
dollar.
The Bank of Israel interest rate as of December 31, 2007 was 4.25% per annum,
versus 4.5% on December 31, 2006. In the first half of 2007, there was a
declining trend in the interest rate and at the end of June 2007, the Bank of
Israel interest rate was 3.5% per annum. In the second half of 2007, a process
began whereby the interest rate increased, so that by December 31, 2007, as
mentioned above, the interest rate amounted to 4.25% per annum.
THE FOLLOWING TABLE PRESENTS DATA REGARDING THE EFFECT OF THE INCREASE IN THE
"LAST KNOWN" CPI AND THE RATES OF DEVALUATION (APPRECIATION) OF THE SHEKEL IN
RELATION TO PRINCIPAL CURRENCIES:
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
2007 2006 2005
---- ---- ----
% % %
---- ---- ----
Increase (decrease) in "last published" CPI 2.8 (0.3) 2.7
Rate of devaluation (appreciation) of the
shekel in relation to the dollar (9.0) (8.2) 6.8
Rate of devaluation (appreciation) of the
shekel in relation to the euro 1.7 2.2 (7.3)
Rate of devaluation (appreciation) of the
shekel in relation to the yen (3.3) (9.4) (6.7)
A DESCRIPTION OF THE BUSINESS AFFAIRS OF THE BANK AND 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,
implementation or non-implementation of the blueprint for the sale of the shares
of the bank that was assessed by the Finance Ministry and the Government
Companies Authority, 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.
F - 1
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.
The report of the board of directors presented below and the financial
statements do not include a report on activity segments, mainly due to the
exemption granted to the Bank by the Supervisior of Banks regarding such
information.
A DESCRIPTION OF THE GENERAL DEVELOPMENT OF THE BUSINESS AFFAIRS OF THE BANK
YEAR AND FORM OF INCORPORATION
The Bank was incorporated in 1957 as a limited liability company. The Bank is a
public company and is defined as a mixed government company. Until 1989, the
Bank operated as an investment financing bank and its major area of operations
was the provision of long-term loans to finance investments. On June 4, 1989,
the Bank was granted a license to operate as a commercial bank (a "banking
license").
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 Social-Economic Cabinet) 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 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.
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>> 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.
For more information pertaining to the significance of the restricting of the
banking license, see below the chapter relating to the special restrictions and
constraints of the Bank.
The Bank is presently in the process of implementing the "Run-Off" plan as
described in more detail below.
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 2007, the Bank continued implementing the "Run-Off" plan, while reducing
credit to the public and public deposits. The balance of credit to the public
(not including loans with State guarantees to the Israel Electric Company Ltd.),
which as at December 31, 2006 amounted to NIS 848 million, decreased to the
amount of NIS 558 million as of December 31, 2007. The balance of public
deposits in the Bank, which at December 31, 2006 amounted to NIS 67 million,
decreased to NIS 55 million as of December 31, 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.
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.
A BLUEPRINT FOR THE SALE OF THE SHARES OF THE BANK
The Finance Ministry and the Government Companies Authority are in the process
of assessing and taking steps to advance the blueprint for the sale of all of
the issued share capital of the Bank to a third party purchaser. As part of
this, 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 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 whereby, among other things, the holdings of the
State in the shares of the Bank, including the controlling shares (ordinary "A"
shares ) and the holdings of the other holders of controlling shares (the three
large bank groups: the Bank Discount Group, the Bank Hapoalim Group, the Bank
Leumi Group, and also First International Bank, IDB, and the Association of
Industrialists) will be transferred to the designated buyer, the shares of the
Bank that are traded on the Tel Aviv Stock Exchange and which are held by the
public will be purchased by the designated buyer, as part of the creditors
agreement pursuant to article 350 of the Companies Law - 1999, whereas
preference Shares D and DD held by the public will be redeemed and the accrued
preferred dividend in arrears will be paid in respect thereof. A detailed
description of the blueprint that was included in the RFI can be found in the
immediate filing issued by the Bank on June 17, 2007. As reported to the Bank by
the Government Companies Authority, 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.
F - 3
At the beginning of 2008, at the request of the State and other shareholders,
Professor A. Barnea prepared a proposal for the distribution of the proceeds to
be received upon the realization of the blueprint (if and when it is
implemented), among the various shareholders of the Bank. Professor Barnea's
document, which contains the proposed distribution formula and which is dated
January 13, 2008, was attached to the immediate filing issued by the Bank on
January 15, 2008. Among the ordinary shareholders of the Bank who requested the
proposal are Bank Leumi, Bank Hapoalim, Discount Bank, the financial
institutions which filed the suit against the Bank regarding the renewal of the
dividend distribution, and part of the holders of the Bank's ordinary preference
shares. It should be noted that the Bank is not in possession of information
that the State and the aforementioned shareholders have given their consent to
the distribution formula and even at this stage, it is impossible to know if and
when the blueprint will be implemented. In addition, the sale of the holdings of
the State in the Bank necessitates passage of a privatization resolution by the
Ministerial Committee on Privatization, a resolution which has not yet been
passed.
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:
F - 4
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 December 31, 2007 was NIS
476 million, compared with NIS 751 million as at December 31, 2006. The utilized
balance as of December 31, 2007 is NIS 174 million lower than the credit line
amount that was set for that date for the Bank in the updated credit line
decline forecast that was attached to the notification of the Governor of the
Bank of Israel regarding the extension of the line and lower than the framework
stipulated by the Bank of Israel for the conclusion of the Run-Off Plan.
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 80 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 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.
EXEMPTION FROM THE SUPPLEMENTARY ALLOWANCE FOR DOUBTFUL DEBTS IN RESPECT OF A
DEVIATION FROM CERTAIN DEBT LIMITS
As stated in more detail in Note 1G of the 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 should be 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.
MEASUREMENT AND DISCLOSURE OF IMPAIRED DEBTS, CREDIT RISK AND THE PROVISION FOR
CREDIT LOSSES
On December 31, 2007, the Bank of Israel issued a provision addressing the
measurement and disclosure of impaired debts, credit risks and the provision for
credit losses. The provision is scheduled to go into effect commencing with the
financial statements issued after January 1, 2010. In its letter dated August
12, 2007, the Bank of Israel notified the Bank that it is authorized not to make
preparations for the implementation of this provision. For information regarding
the major features of the new provision, see Note 1.
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.
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CONTROL OF THE BANK
The Bank is a "mixed company" as defined in the Government Companies Law - 1975.
The means of control of the Bank (voting rights at the general meeting and the
rights to appoint directors) are held primarily by the State and the three large
banking groups: the Bank Leumi Group, the Bank Hapoalim Group and the Discount
Bank Group.
The percentages of the means of control in the Bank, held by each of the
aforementioned groups, are as follows:
The State of Israel - voting rights - 45.78%, rights to appoint directors -
48.81%.
The Bank Leumi Group - voting rights - 19.32%, rights to appoint directors -
20.60%.
The Discount Bank Group - voting rights - 9.50%, rights to appoint directors -
10.13%.
The Bank Hapoalim Group - voting rights - 11.77%, rights to appoint directors -
12.12%.
As reported to the Bank by Bank Hapoalim, according to the agreements between
Bank Hapoalim and the other shareholders, Bank Hapoalim was granted usage rights
to additional voting rights that constitute 1.55% of all of the voting rights
and additional rights to appoint directors that constitute 3.31% of the total
rights to appoint directors.
THE STRUCTURE OF THE BANK'S SHARE CAPITAL
The issued share capital of the Bank is comprised of nine types of shares, as
follows:
ORDINARY A SHARES - granting their holders the rights to appoint directors in
the Bank and most of the voting rights at the general meetings, the right to a
dividend at an annual rate of 6% (nominal), the right to a participating
dividend and the right to participate in the distribution of the surplus assets
of the Bank upon liquidation, all subject to the preference order set out in the
Bank's by-laws. These shares are held mostly by the State of Israel and by the
three large banking groups.
ORDINARY B SHARES - granting their holders the right to a dividend at an annual
rate of 3% (nominal), and the right to participate in the distribution of the
surplus assets of the Bank upon liquidation, all subject to the preference order
set out in the Bank's by-laws. These shares are held by the State of Israel.
ORDINARY B1 SHARE - granting its holders the right to a dividend at an annual
rate of 3% (nominal), and the right to participate in the distribution of the
surplus assets of the Bank upon liquidation, including receipt of the difference
between the increase in the CPI and the increase of the dollar which will be
paid to the Bank upon liquidation in respect of the perpetual deposits with the
Treasury, on the basis of the agreements between the Bank and the Treasury, all
subject to the preference order set out in the Bank's by-laws. This share is
held by the State of Israel.
ORDINARY PREFERRED SHARES - granting their holders voting rights at the general
meetings, the right to a cumulative preferred dividend at an annual rate of 8%
(nominal), the right to a participating dividend and the right to participate in
the distribution of the surplus assets of the Bank upon liquidation, all subject
to the preference order set out in the Bank's by-laws. These shares are listed
for trade on the Tel Aviv Stock Exchange and are held by the public in Israel.
PREFERENCE C, CC, AND CC1 SHARES - granting their holders the right to a
cumulative preferred dividend at an annual rate of 6% (linked to the U.S.
dollar), the right to a participating dividend and the right to participate in
the distribution of the surplus assets of the Bank upon liquidation, all subject
to the preference order set out in the Bank's by-laws. These shares are listed
for trade on the Tel Aviv Stock Exchange and are held mostly by the public in
Israel and a minority in the U.S.
PREFERENCE D AND DD SHARES - granting their holders the right to a cumulative
preferred dividend at an annual rate of 7.5% (linked to the U.S. dollar), and
the right to participate in the distribution of the surplus assets of the Bank
upon liquidation, all subject to the preference order set out in the Bank's
by-laws. These shares were listed for trade on the Tel Aviv Stock Exchange but
were delisted during the nineties. The shares are held mostly by the State of
Israel which purchased them from their holders in the U.S., and a minority by
the public (mainly in the U.S.).
For more details, see Note 14, 15, and 16 to the financial statements.
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INVESTMENTS IN THE CAPITAL OF THE BANK AND TRANSACTIONS IN THE SHARES THEREOF
A. In the past two years, no investments were made in the capital of the Bank.
B. Material transactions in the shares of the Bank conducted by an interested
party off of the stock market - in the past two years, the State purchased
Preference D and DD shares that do not participate in income. The number of
shares purchased in each of the years 2006 and 2007 and the purchase
prices, are as follows:
2007 2006
--------------------------------------------------------- -------------------------------------------------------
$ PRICE $ PRICE
QUANTITY PERCENTAGE HELD OF PER SHARE QUANTITY PERCENTAGE HELD OF PER SHARE
TYPE PURCHASED ACQUIRED SHARES PURCHASED TYPE PURCHASED ACQUIRED SHARES PURCHASED
---- --------- --------------------- --------- ---- --------- --------------------- ---------
IN CAPITAL IN VOTING IN CAPITAL IN VOTING
---------- --------- ---------- ---------
D 290 0.01% - 90 D 391 0.01% - 90
DD 308 0.44% - 1,000 DD 415 0.59% - 1000
The purchase of the preference D shares by the State was made, as far as the
Bank knows, further to a declaration included in a letter of the Finance
Minister, Mr. Pinchas Sapir, dated February 15, 1967 (which was addressed to the
Vice President of Capital for Israel Inc.) whereby the State of Israel intends
on purchasing D-type shares upon their being listed for trade on the Tel Aviv
Stock Exchange at prices ranging from 90% to 95% of their par value which stood
at $100 a share.
The purchase of the preferencered DD shares by the State was made, as far as the
Bank knows, further to a declaration included in the prospectuses in respect of
the issuance of those shares, whereby the Israeli Government agreed that if
these shares are offered for sale on the Tel Aviv Stock Exchange at any time
during the 20-year period after the issuance to the public, it would bring about
that their purchase would be done at a price equal to 90% of the $1,000 a share
at which they were issued, and from the 21st year after the issuance of the
shares, at a price equal to 100% of the aforementioned price at which they were
issued. The preference D and DD shares were delisted from the stock exchange in
1993 and their purchase by the State directly from their holders was done,
apparently, in lieu of guaranteeing their sales price on the stock market. Since
these purchases were apparently made further to and/or against the background of
the aforementioned declarations, and not as part of a regular sale from a
willing seller to a willing buyer, the Bank is of the opinion that there is no
room to derive from these transactions the price of the shares that were
purchased therein. As the above table indicates, these shares do not grant means
of control.
PREFERENCE SHARES PURCHASED BY THE STATE FROM U.S. RESIDENTS WITHOUT THEIR
HAVING BEEN REGISTERED IN THE SHAREHOLDERS REGISTRY
Further to examinations and verifications carried out by the Bank during the
past year, the Bank reached the conclusion that, of the 3,429 preferred D shares
(par value $100 each) and the 1,901 preference DD shares (par value $1,000 each)
registered in the name of the State in the Bank Agent's registry in the U.S. and
which are not registered in the books of the Bank and are not reported by the
Bank, 2,636 preference D shares and 1,306 preference DD shares should be
transferred and registered in the name of the State in the books of the Bank
(and at the same time remove them from the shares that are registered in the
names of the holders in the U.S.). At its meeting on February 26, 2008, the
Board of Directors of the Bank resolved to approve the transfer of the
aforementioned shares into the name of the State, subject to the receipt of
certain approvals from the State in connection with the correction of the
existing records in its name and the "surplus" stock certificates it has in its
possession. When the transfer is carried out, the percentage held by the State
in the capital of the Bank will amount to 81.82% instead of 79.92% as currently
reported. It should be noted that there is still a quantity of 30 preference DD
shares (beyond the quantity of 1,306 shares mentioned above) which were
apparently also purchased by the State, but due to a lack of information
regarding the details of the sellers, it is not currently possible to transfer
and register them in the name of the State in the books of the Bank.
F - 7
DIVIDEND DISTRIBUTION - CESSATION OF DIVIDEND DISTRIBUTION ON PREFERRED SHARES
The Bank has not distributed any dividends since the third quarter of 2002, when
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 185.4 million as of December 31, 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 185.4 million is comprised as follows: NIS 113.8
million is in respect of non-participating shares (D and DD) and NIS 71.6
million is in respect of participating shares (C, CC and CC1). Of this amount,
an amount of NIS 33.4 million is in respect of 2007 and is comprised as follows:
NIS 20.7 million is in respect of non-participating D and DD shares and NIS 12.7
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. At the time, 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 verdict was rendered by the Tel Aviv District Court whereby it rejected
the opening motion filed by the Bank against the Finance Minister and against
the aforementioned financial institutions and stipulated that as long as a
dividend is not distributed in respect of the preferred shares of the Bank, the
interest does not accrue.
F - 8
At its meeting on October 9, 2007, the Board of Directors of the Bank discussed
the ramifications of the verdict. The Board of Directors decided that since the
suit of the Bank (its originating motion) related not only to the issue of the
accrual of the interest on the perpetual deposits, in the absence of a dividend
distribution, rather also to the accrual and payment of a dividend in arrears
(including upon liquidation), and since on the basis of the determination of the
court that the suit of the Bank was rejected, a claim can be made that the
verdict rejects also the right of the Bank to accrued interest against the
payment of the dividend in arrears on the preference shares (a result which the
Board of Directors believes is incorrect and it is reasonable to assume that the
court did not intend such a result), then the Bank will file an appeal on the
rejection of the claim with regard to the payment of the accrued interest on the
perpetual deposits against the payment of the dividend in arrears.
Notwithstanding the above, the Board of Directors added in its decision that the
appeal will not be filed if an adequate clarification is provided by the State
as to its consent to pay accrued interest on the perpetual deposits against the
payment of the dividend in arrears on the preferred shares (Preferred C, CC,
CC1, D and DD shares). Such a clarification was not given and the Bank's appeal
was submitted to the Supreme Court on January 8, 2008. At the aforementioned
meeting on October 9, 2007, the Board of Directors of the Bank also discussed
the ramifications of the aforementioned verdict on the continuation of its
policy regarding the distribution of the dividend on the preference shares
(Preference C, CC, CC1, D and DD shares). In view of the stipulation of the
verdict pertaining to the non-accrual of interest on the perpetual deposits of
the Bank as long as a dividend is not distributed (a stipulation which the Bank
is not appealing), and after the Board of Directors considered the interests of
both the shareholders of the Bank and the creditors of the Bank (which in view
of the verdict no longer gain anything by the non-distribution of the dividend),
the Board of Directors reached the conclusion that it would be proper for the
Bank to take steps toward renewing the distribution of the dividend. In
connection with the above, the Board of Directors of the Bank decided (at the
same meeting) to take the following steps: 1) to recommend to the general
shareholders meeting of the Bank to amend the Articles of Association of the
Bank in respect of two matters relating to the renewal of the distribution of
the dividend. The first, the authorization to distribute a dividend not just out
of profits (which at present are non-existent), rather also from the interest to
be paid to the Bank on its perpetual deposits with the Finance Ministry, and the
second, authorization to distribute a current preferred dividend on the
preference shares of the Bank, also without a distribution - prior or concurrent
- - of the preferred dividend in arrears on those shares (since, in view of the
wording of the verdict, a claim may be made whereby the Bank is not entitled to
the accrued interest on the perpetual deposits against the distribution of the
dividends in arrears, a result that will prevent the Bank from distributing the
dividends in arrears in the absence of adequate profits); 2) to convene a
general meeting of the Bank to make the aforementioned change in the Articles of
Association and to authorize the Chairman of the Board to determine the date of
the meeting; 3) to petition the Supervisor of Banks to grant approval for the
distribution of the dividend to the preference shareholders, subject to the
aforementioned change in the Articles of Association and receipt of court
approval of the proposed distribution (pursuant to the Companies Law - 1999, the
distribution of a dividend not out of distributable profits requires court
approval, and as of that date, the Bank did not have distributable income). A
detailed description of the decision of the Board of Directors at its meeting on
October 9, 2007, as aforementioned, can be found in the Immediate Report issued
by the Bank on October 10, 2007. In accordance with the decision of the Board of
Directors of the Bank, the general meeting of the Bank convened on January 7,
2008, and on its agenda were the aforementioned proposals to amend the by-laws
of the Bank, so that the by-laws would no longer constitute an impediment to the
renewal of the dividend distribution. The proposed amendments were put to a
vote, but they were rejected by a majority of those voting. On February 5, 2008,
the financial entities that had filed the originating motion against the Bank
filed a petition with the court in which they requested to add the State as an
additional respondent to the originating motion, due to, among other things, the
vote of the State in the general meeting of the Bank against the proposed
amendments to the Bank's by-laws.
See also Notes 1 of the 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 21D of the
financial statements regarding the aforementioned originating motions.
SPECIAL RESTRICTIONS AND CONSTRAINTS OF THE BANK
The following special restrictions and constraints on the activity of the Bank
derive from the decisions of the Israeli Government and the Bank of Israel in
the matter of the Bank:
o According to a decision of the Ministerial Committee on Socio-Economic
Affairs, taken on October 10, 2005, the realization of the balance of the
Bank's assets in a controlled process will continue until July 31, 2008.
F - 9
o According to the letter of the Governor of the Bank of Israel dated October
30, 2005, the term of the special credit line, which constitutes the main
source of the Bank's liquidity needs, is until July 31, 2008.
o According to the aforementioned decision of the Ministerial Committee on
Socio-Economic Affairs, the Bank shall not make use of the special credit
line placed at its disposal by the Bank of Israel or from other sources,
for purposes of granting new credit. According to the aforementioned letter
of the Governor of the Bank of Israel, the Bank can continue using the
special credit line to bridge its liquidity needs required to fulfill its
current and banking liabilities.
o According to the aforementioned decision of the Ministerial Committee on
Socio-Economic Affairs, and the letter of the Governor of the Bank of
Israel, the amount of the special credit line shall not exceed NIS 1.25
billion at any time, and it shall be reduced in accordance with the
forecast that was attached to the letter of the Governor.
o According to the aforementioned letter of the Governor of the Bank of
Israel, the Bank is prohibited from participating in the inter-bank credit
procedure as part of the daily liquidity trading. This restriction will
continue to apply also after the repayment of the special credit line.
o According to the aforementioned letter of the Governor of the Bank of
Israel, any significant administrative expense which deviates from the
normal course of business of the Bank and has an impact on the results of
business operations, requires the approval of the Bank of Israel.
o According to the aforementioned letter of the Governor of the Bank of
Israel, restrictions were placed on the Bank in connection with the making
of deposits in other banks and the pledging of such deposits.
o The Governor of the Bank of Israel clarified in the aforementioned letter
that if the Bank of Israel finds it necessary, and to the extent that it is
necessary in the sole opinion of the Bank of Israel, it will consider
placing additional restrictions beyond those set out above, in connection
with the activity of the Bank, whether or not as a result of the
non-compliance with the objectives of the Run-Off plan.
o According to the debenture dated November 14, 2002 (amended on December 29,
2005), and as part of which the Bank placed a floating charge on part of
its assets in favor of the Bank of Israel, the Bank undertook, among other
things, not to make additional pledges on the aforementioned assets and not
to sell them, in any form whatsoever, unless it receives written permission
in advance from the Bank of Israel. Notwithstanding, the aforementioned
debenture stipulates that the floating charge created by it does not
prohibit the Bank or restrict it as part of management of its normal
business, including the fulfillment of its commitments, from receiving
repayments of or issuing credit. For more information in connection with
the aforementioned debenture, see Note 17 - Liens and Restrictive
Conditions.
o According to the notice of the Governor of the Bank of Israel dated January
29, 2006, the banking license granted to the Bank on June 4, 1989 will be
restricted such that the bank will not engage in a business in which it did
not engage prior to the date of such license. Without derogating from the
generality of the above, the Bank will not accept new deposits and will not
renew deposits that reached their current maturity except for those of
shareholders. The banking license granted to the Bank on June 4, 1989 was a
"banking license" pursuant to article 10 of the Banking Law (Licensing) -
1981 which enabled the Bank to operate as a commercial bank. Until that
time, the Bank operated pursuant to an "Investment Financing Bank" license
under article 16 of that law and its major activity was granting long-term
credit for purposes of financing investments, including granting credit
under the direction of the government from deposits for providing loans.
o According to the aforementioned notice of the Governor of the Bank of
Israel, the banking license of the Bank will be cancelled commencing on
August 1, 2008. If the blueprint for the sale of the Bank is implemented
prior to August 1, 2008, the Bank's license will be cancelled at the date
of the implementation of the blueprint.
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MATERIAL AGREEMENTS
THE PERPETUAL DEPOSIT AGREEMENT
In accordance with agreements (by way of an exchange of letters) entered into at
various times between the State and the Bank, the Bank deposited with the
Treasury the proceeds of the issuance of the Bank's preference shares, shares of
classes C, CC, CC1, D, and DD. Pursuant to these agreements, the Bank is
entitled to receive in respect of the amounts deposited by it, as above, dollar
interest at a annual rate of 7.5% of the dollar value of the amounts of the
deposit (as they were at the date of deposit), to be paid to the Bank by the
State in a grossed-up manner, on the dates on which the bank declares the
payment of a dividend in respect of those preferred shares, such that following
payment of various taxes and levies, the net amount of the interest to be paid
to the Bank by the State will amount to the aforementioned rate of 7.5%. The
principal amounts deposited by the Bank will be repaid to the Bank by the State
upon liquidation of the Bank or at the time and for the purpose of redeeming
preference shares of classes D and DD (which were issued as redeemable shares),
with these principal amounts being linked to the rate of the dollar, from the
date of deposit with the Treasury until October 1, 1987 and from October 1, 1987
until the date of their repayment to the bank, they will be linked to the higher
of the Consumer Price Index or the dollar. The deposit agreements stipulate that
the State shall not have a right of offset in relation to the amounts due to the
Bank in connection with the performance of the deposits thereof. For more
details, see Note 8 of the financial statements.
AGREEMENTS FOR THE KIBBUTZ DEBT ARRANGEMENT
As a result of difficulties suffered by the kibbutzim in Israel and the
organizations related thereto, between 1989 and 1999, a number of agreements
were entered into by the various kibbutz movements, the creditor banks and the
State of Israel.
The objective of these agreements was to refinance the debt of the kibbutzim and
the related organizations and to adapt the debt to the real abilities of the
debtors to repay the debt.
The agreements contain detailed mechanisms for handling these debts. As part of
the agreements, it was stipulated that the kibbutzim that were defined to be
assisted kibbutzim (in need of assistance) would be entitled to refunds of
certain interest differentials in respect of unsettled credit they received in
the past from the banks that are party to the agreement, to the writing off of
part of the balances of such credit and to restructure the repayment dates of
the balance of the credit.
The government financed 35% of the amounts written-off and deposited in the
banks funds to be used as a source for the restructuring of the payment dates.
Kibbutzim defined to be owners of real estate with potential for development
were required as part of these agreements to contribute their rights in the land
in return for part of the write-offs that were approved for them. For more
details, see Note 24 B(2) of the financial statements.
CREDIT TO THE ISRAEL ELECTRIC COMPANY LTD. FROM DEPOSITS OF THE STATE AND
STATE-GUARANTEED
According to a series of agreements entered into at various times during the
nineteen nineties, the Bank lent the Israel Electric Company Ltd. long-term
credits, the final repayment times of which are in the years 2020 - 2025, at a
total amount of $1.5 billion. The loans were granted from deposits made in the
Bank by the State at identical amounts and with identical repayment dates of
those of the credits. These credits are fully guaranteed (principal and
interest) by the State of Israel. The unamortized balance of these credits as of
December 31, 2007 was NIS 4,963 million and they constituted 89.9% of the total
balance of the public credit portfolio of the Bank as of that date.
AGREEMENT FOR THE DISMISSAL OF THE EMPLOYEES OF THE BANK
On December 26, 2002, a collective agreement was signed by the Bank, the New
General Histadrut and the bank's workers committee, applicable to the employees
of the Bank to whom the collective agreements in the Bank apply (and not to
those employees having personal employment contracts). The agreement was made
for a three-year period, with an option to extend the agreement for another
year. The agreement settled, among other things, the following issues:
F - 11
o The termination process and the right of management to dismiss employees as
part of the reduction in the Bank's activity.
o Reductions to be made in the salaries of the employees and in the fringe
benefits to which they are entitled.
o Special benefits and payments to be due to the employees of the Bank as a
result of dismissal, including additional severance pay beyond what is
stipulated by law, and the conversion of the right to additional severance
pay - in respect of employees having a certain amount of seniority and who
have a certain number of years remaining until they reach retirement age -
to the right of early pension.
On March 14, 2005, an additional collective agreement was signed by the
aforementioned parties, extending the aforementioned collective agreement (dated
December 26, 2002) until the earlier of the date on which the Bank's Run-off
Plan ends (including any change or extension of the Plan and approved by the
government) or December 31, 2007 (the "First Extension Agreement").
The First Extension Agreement also set out and clarified the following points:
A. Employees who, under the original agreement, are entitled to early pension
due to their dismissal, will be entitled to it until the age upon which
they are entitled to a regular pension from the pension fund of which they
are members, in accordance with the reform that was enacted in the Israeli
pension schemes after the signing of the original agreement.
B. Part of the items that the employees waived in the original agreement,
which were limited in time, will continue to apply during the period of the
new agreement.
On July 12, 2006, an additional collective agreement was signed between the
aforementioned parties (the "Second Extension Agreement") which extended for an
additional period the aforementioned collective agreement (dated December 26,
2002), as amended by the First Extension Agreement, until July 31, 2008 (the
date for the end of the Run-off Plan). The Second Extension Agreement also
stipulates that if the Run-off Plan is extended beyond July 31, 2008, the period
of the aforementioned collective agreement will also be extended until the date
to be set for the end of the Run-off Plan, but not beyond December 31, 2008.
The Bank set up the provisions in its books in respect of the agreement,
including the extension agreements.
The aforementioned agreements were approved by the Supervisor of Wages and
Employment Agreements in the Finance Ministry.
The items waived and part of the benefits set out in the abovementioned
collective agreements were also applied to some of the employees of the Bank who
are employed under personal contracts.
At present, with the end of the Second Extension Agreement coming near,
negotiations are being conducted for a possible additional extension and/or
change in the collective agreement from December 26, 2002.
LETTER OF INDEMNIFICATION FOR DIRECTORS AND OFFICERS
The Bank issued its officers and directors a letter of indemnification which was
approved by the general meeting of the Bank on August 8, 2002. According to the
letter of indemnification, the Bank undertook to indemnify its officers and
directors in respect of a monetary indebtedness placed on them in favor of
another person by a court ruling (including a ruling rendered as part of a
compromise and the ruling of an arbitrator approved by the court) and in respect
of reasonable litigation expenses (including attorney fees) levied against them
as a result of actions (defined as including acts of omission and decisions)
taken by them and/or to be taken by them by virtues of their being officers or
directors in the Bank or by virtue of any position or job that they fulfilled
and/or will fulfill at the request of the Bank or on its behalf in any company
in which the Bank held and/or will hold shares and in any other corporation and
business initiative in which the Bank invested or will invest, as long as these
actions are connected to one or more of the types of events detailed in the
letter of indemnification, which include, among other things, the following
types of events:
F - 12
o Issuance of shares
o Implementation of voting rights and rights to appoint directors in a
company in which the Company holds and/or will hold shares and/or another
corporation and/or business initiative in which the Bank invested or will
invest
o Voting for or against any decision in the board of directors, committees of
the Company, etc., corporations and/or initiative
o Realization of collateral given to the Bank
o Approval and/or furnishing of credits and other transactions taken as part
of the areas in which the Bank is allowed to do business in accordance with
the Banking Law (Licensing) - 1981
o Holding assets in trust
o Granting an underwriting commitment
o A transaction of the Bank in any assets undertaken on behalf of the Bank
itself
o Providing a report or notification pursuant to any law
o Receipt of licenses and permits
o Events connected to employee - employer relationships
o Privatization of the Bank and any course of action taken to advance the
privatization and/or in connection therewith
o Any refraining from doing one or more of the above matters
The overall and aggregate amount of the indemnification that may be paid under
the abovementioned letter of indemnification shall not exceed 25% of the
shareholders' equity of the Bank on the basis of its financial statements as of
March 31, 2002, which amounted to NIS 640.3 million. In other words, it shall
not exceed NIS 160.1 million, linked to the Consumer Price Index publicized in
respect of March 2002. The indemnification pursuant to the letter of
indemnification is subject to the provisions of the Companies Law and to the
various conditions detailed in the letter of indemnification. Please note that
as part of Amendment No. 3 of the Companies Law - 1999 (which was passed on
March 7, 2005), it was stipulated that an undertaking to indemnify (such as the
aforementioned letter of indemnification) has to be limited to events which the
board of directors believes are expected to occur as a result of the actual
activity of the Company at the time the commitment to indemnify was given and
limited to an amount or benchmark that the board of directors set, which are
reasonable under the circumstances of the matter. The question of the
applicability of the amendment to existing letters of indemnification and the
interpretation of the limitations have not yet been adjudicated in court and,
therefore, the consequences of the amendment on the aforementioned letters of
indemnification are uncertain.
See Note 21C of the financial statements.
AGREEMENT TO OUTSOURCE THE COMPUTER SERVICES OF THE BANK
According to an agreement dated December 23, 2003, signed between the Bank and a
company that provides outsourcing services, including IT services, the company
undertook to provide the Bank with current management and operating services in
connection with the Bank's computer system, operation and maintenance of
hardware, computers, peripheral equipment, communications and infrastructure
software, operation and maintenance of applications, making changes and
adjustments to the IT system, data security , etc.
The agreement was for a period commencing on January 1, 2004 and ends on
December 31, 2008. During the agreement period, the Bank is entitled to order
from the company changes, additions, updates and improvements to the Bank's
existing computer system and/or develop new systems. The Bank has a "bank of
hours" at its disposal for this purpose.
See Note 21B of the financial statements.
SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL
A special line of credit was placed at the disposal of the Bank by the Bank of
Israel to bridge the Bank's liquidity needs. The terms of the line of credit
were set by the Governor of the Bank of Israel, details of which are presented
above in this report and in Note 1 of the financial statements.
F - 13
RISK FACTORS
RISK IN RESPECT OF THE QUALITY OF DEBTORS AND COLLATERAL
The risk that borrowers from the Bank will not meet their debts to the Bank is
an inherent risk of the activity of the Bank even during the implementation of
the Run-Off Plan. Even though the Bank reviews the condition of its customers on
a regular basis as well as the value of the collateral securing their debts, and
makes provisions on the basis of its assessments of the risk that the debtors
will not be able to repay their debts, it is possible that circumstances will
arise in the future that were not taken into account to date by the Bank,
including a deterioration of the condition of the customers and a decline in the
value of their collateral which will require the making of additional
provisions. The focusing of the Bank on the collection of credit and its
refraining from other activities, increase the impact that this risk will have
on the results of the Bank's operations in the event that the risk comes to
fruition.
SPREADING OUT THE CREDIT RISK
For details of the spreading out of the credit risk in connection with credit
concentration and concentration of the indebtedness of borrower groups, see
below the chapter on risk management.
INTEREST RISK, EXCHANGE RATE RISK AND INFLATION RISK
For details regarding these risks, see below the chapter on risk management.
SHARE PRICE RISK
The total volume of investment by the Bank in securities, as of December 31,
2007, amounted to NIS 46 million. Of this amount, an amount of NIS 34 million is
in traded shares. This value is based on the market prices as of the balance
sheet date. Such value is subject to the volatility of the prices of the shares
included in this item. Most of the investments in traded shares (NIS 32.9
million) are in respect of the shares of one company that is listed for trade on
the Tel Aviv 25 list.
LIQUIDITY RISK
Since the Bank is prohibited from raising deposits from the public, it depends
on the credit line from the Bank of Israel to manage its liquidity risk.
OPERATIONAL RISKS
Operational risks include risks deriving from acts of fraud, errors on the part
of bank employees, lack of proper documentation of transactions, failures and
faults in data processing, equipment or external systems of service providers,
and the absence of fair testing procedures and internal control. Notwithstanding
the fact that the Bank instituted various means of supervision and control with
a goal of minimizing the operational risks to which it is exposed, there is no
guarantee that such risks do not exist or that they will not be realized in the
future.
For additional details regarding operational risks, see below the chapter on
risk management.
LEGAL RISKS
During the course of its activity, the Bank is exposed to legal risks, including
the risk of loss as a result of the lack of the possibility to legally enforce
the fulfillment of an agreement. These risks are handled regularly by the Legal
Department of the Bank. There is no guarantee that all of the risks were taken
into consideration or that any given risk will not be realized in the future.
DEPENDENCY ON PROFESSIONAL MANPOWER DUE TO THE REDUCTION OF THE WORK FORCE
According to the Run-off Plan and the efficiency plan that accompanied it, the
Bank significantly reduced the number of its employees, which declined from 170
on January 1, 2002 to 43 on December 31, 2007. The ability of the Bank to
continue the successful implementation of the Run-off Plan is contingent on,
among other things, the continued employment of the same executives and
employees who have the crucial knowledge and acquaintance of the Bank's systems
and customers.
F - 14
DEPENDENCY OF THE BANK ON THE SPECIAL LINE OF CREDIT FROM THE BANK OF ISRAEL
In the absence of other sources of liquidity, the continued proper functioning
of the Bank is contingent on the existence of the special credit line placed at
the disposal of the Bank by the Bank of Israel until July 31, 2008.
Non-compliance by the Bank with the terms of the special credit line may
jeopardize the continued existence of the line. In addition, in a letter from
the Governor of the Bank of Israel dated October 30, 2005, regarding the
extension of the special line of credit, it was stated that in the event that
the Bank of Israel sees fit to do so, and to the extent that it finds it
necessary at its sole discretion, it will consider placing additional
restrictions on those already set out in the above letter in connection with the
activity of the Bank, either as a result of non-compliance with the objectives
of the Run-off Plan or not.
THE IMPAIRMENT OF THE PROFITS OF THE BANK AS A RESULT OF ITS INABILITY TO EXTEND
NEW CREDIT AND RECRUIT AND/OR RENEW DEPOSITS
Further to the decisions of the Socio-economic Ministerial Committee and the
Bank of Israel regarding the affairs of the Bank, the Bank is prohibited from
extending new credit and from raising and/or renewing deposits, and its activity
focuses on collecting its credit portfolio. Restricting the activity of the Bank
to collecting existing credit negatively impacts and will continue to negatively
impact on the ability of the Bank to generate financing and operational income
and its being prohibited from raising and/or renewing deposits impairs its
financing margins.
THE EFFECT OF THE RUN-OFF PLAN ON THE ATTITUDE OF THE DEBTORS OF THE BANK AND
THE COLLECTION ABILITY OF THE BANK
The circumstances of the bank and the limited horizon of the Run-off Plan may
have a negative effect on the willingness of its customers to meet their
liabilities to the Bank. On the one hand, customers may believe that in such
circumstances, it is possible to get the Bank to make concessions and other
leniencies, while on the other hand, they may feel that meeting their
liabilities does not guarantee them a long-term relationship with the Bank. As
noted above, Bank Management has been taking and will continue to take a tough
line in handling its collection problems. As a result, in recent years there has
been a significant increase in the Bank's collection and legal expenses and such
a trend may continue in the future as well.
THE STATUS OF THE BANK AT THE CONCLUSION OF THE RUN-OFF PLAN
In accordance with the decision of the board of directors of the Bank from July
26, 2005, and the decision of the Socio-economic Ministerial Committee from
October 10, 2005, the Run-off Plan of the Bank was extended until July 31, 2008.
According to the notice issued by the Governor of the Bank of Israel on January
29, 2006, the Bank's banking license will be cancelled on August 1, 2008. As
mentioned above, the Finance Ministry and the Government Companies Authority are
assessing and advancing a blueprint for the sale of the shares of the Bank, a
blueprint regarding which, at present, it is impossible to know whether or not
and how it will be implemented. It is unclear as to what the status of the Bank
will be when the Run-off Plan comes to its conclusion, whether or not it will
continue to operate and how. It is reasonable to assume that the final decision
on the future of the Bank will be influenced when the time comes by developments
in connection with the blueprint for the sale of the shares of the Bank and the
decisions of the Israeli government which took upon itself to repay to the Bank
of Israel the remaining balance of the credit line and against which repayment
of the line, is supposed to receive through endorsement from the Bank of Israel,
the floating charge generated by the Bank to guarantee the line.
F - 15
The following table sets out the risk factors and the extent of impact of the
risk on the Bank. The table was prepared in accordance with the instructions of
the Bank of Israel:
RISK FACTOR EFFECT OF THE RISK
------------------------------------------------------------------------------------------ ------
1 Overall impact of credit risk Medium
1.1 Risk in respect of quality of debtor and collateral Medium
1.2 Risk in respect of credit concentration Medium
1.3 Risk in respect of debtor / debtor group concentration Medium
2. Overall effect of market risks Low
2.1 Interest risk Low
2.2 Inflation risk Low
2.3 Exchange rate risk Low
2.4 Share price risk Low
3. Liquidity risk Low
4 Operational risks Low
5. Legal risks Low
6. Dependency on professional manpower due to the reduction in the work force High
7. Dependency on the special credit line of the Bank of Israel High
8. Impairment of profits of the Bank due to its inability to extend new credit and recruit and/or renew deposits High
9. The effect of the Run-off Plan on the attitudes of borrowers to the Bank and the collection ability of the Bank Low
10. The status of the Bank at the conclusion of the Run-off Plan High
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.
MITIGATIONS IN 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 commencing with 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.
F - 16
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.
TAXATION
In 2007, the Bank was subject to corporate tax at a rate of 29% and payroll tax
levied on financial institutions at a rate of 15.5%. The overall tax rate
applicable to the Bank in 2007 was 38.5%.
Due to tax losses, no tax expenses were recorded during the period 2002 - 2006.
In 2006, the Bank recorded a salary tax receivable in an amount of NIS 2.8
million. This amount was included in "Other assets". In 2007, a tax expense was
recorded in an amount of NIS 1.6 million, due to the fact that the tax loss
carry-forwards from prior years cannot be offset against the profit tax
applicable to banking institutions in accordance with the VAT Law.
The Bank received final tax assessments through the 2003 tax year.
Tax losses in respect of which no deferred taxes were recorded amounted to NIS
719 million. The overall tax rate applicable to the Bank in 2008 is 36.8%, in
2009 - 35.9% and in 2010 - 35.1%.
LEGAL CLAIMS AND OTHER CONTINGENCIES
Note 21D of the financial statements presents 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 more
than once 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 22.2 million in 2007,
compared with a net loss of NIS 17.1 million in 2006. The net income in 2007 was
affected mainly by the increase in interest revenue collected in respect of
problematic debts which amounted to NIS 17.4 million, compared with NIS 9.4
million in 2006 and from the fact that in 2007, income of NIS 13.8 million was
recorded to the provision for doubtful debts, compared with an expense of NIS
21.7 million in 2006..
PROFIT FROM FINANCING OPERATIONS BEFORE THE ALLOWANCE FOR DOUBTFUL DEBTS -
amounted to NIS 29.3 million in 2007, compared with NIS 18.2 million in 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 17.4 million compared with NIS 9.4 million in 2006.
- - A decrease in the volume of problematic debts classified as non-interest
bearing. The average balance of non-interest bearing debts in 2007 amounted
to NIS 109 million, compared with NIS 242 million in 2006. The balance of
these debts constituted 13.7% of total monetary assets (excluding credit to
the Israel Electric Company guaranteed by the State), compared with 20.3%
in 2006.
- - The impact of the decrease in the interest rate in the economy on the
volume of the non-accrual of income in respect of non-interest bearing
debt. The average interest rate in 2007 was lower than the average interest
last year. As a result, the negative impact of the non-accrual of revenues
in respect of non-revenue generating debt was smaller than in the same
period last year, in addition to the aforementioned volume of problematic
debts.
F - 17
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,
according to Addendum C of the Management Review, indicates as follows:
UNLINKED SHEKEL SEGMENT - The average balance of assets in this segment amounted
to NIS 184 million in 2007, compared with NIS 364 million in 2006, a decrease of
49%. The margin in this segment, including the effect of derivatives, was 1.70%
in 2007, compared with 1.39% in 2006.
It should be noted that most of the non-income bearing debt is included in this
segment. The balance of such debt as of December 31, 2007 amounted to NIS 42
million, compared with NIS 125 million at December 31, 2006. The improvement in
the margin of this segment compared with 2006, derived both from the decrease in
the volume of non-interest 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 455 million in 2007, compared with NIS 561 million in 2006, a
decrease of 18.9%. The decrease in the volume of activity of this segment
derives both from the overall decline in the activity of the Bank and from the
Bank's policy whereby credit renewed by the Bank is for short periods and mainly
in the unlinked shekel segment. The margin in this segment, including the effect
of derivatives, was 2.30% in 2007, compared with 2.58% in 2006.
FOREIGN CURRENCY AND FOREIGN CURRENCY LINKED SEGMENT - The average overall
volume of assets in this segment amounted to NIS 5,602 million in 2007 compared
with NIS 6,406 million in 2006. Credit in this segment includes credit
guaranteed by the State that was granted to the Israel Electric Company 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 2007 amounted to NIS 5,445 million compared with NIS 6,143
million in 2006. Excluding the said credit, the average balance of assets in
this segment amounts to NIS 156 million, compared with NIS 264 million in 2006,
a decrease of 41%. The margin in this segment, including the effect of
derivatives, was 0.07% in 2007, compared with 0.08% in 2006. The low margin rate
in this segment is the result of the volume of State guaranteed credit, as
stated above. The credit guaranteed by the State and the deposit of the State
from which the credit is granted bear interest at a high rate. Due to their
heavy weight in the assets and liabilities and the negligible interest margin on
this credit, they distort the data referring to the margin in this segment. In
respect of this credit, denominated in dollars, an expense was recorded in 2007
in an amount of NIS 127 million (compared with an expense of NIS 89 million in
2006). The reason that in these years an expense was recorded in respect of this
credit was the decline in the rate of the dollar. As mentioned above, this
credit is guaranteed by the State and the margin in respect thereof is marginal.
Therefore, the amount of the income recorded in respect of the deposit of the
State granted as a source to finance the credit is similar in amount.
In an analysis made regarding the data of this segment, net of the
aforementioned credit and deposit, the data indicate a margin of 2.37% in 2007
(compared with 1.99% in 2006).
The average of the total financial assets (excluding state-guaranteed credit to
the Israel Electric Company) amounted to NIS 795 million in 2007, compared with
NIS 1,189 million in 2006, a decrease of 33%.
Regarding income from financing activity, it can be assumed that the policy
implemented by the Bank to reduce the activity of the Bank and the continued
decline in the volume of credit will continue to negatively impact on the income
from financing activity.
THE ALLOWANCE FOR DOUBTFUL DEBTS - An amount of NIS 13.8 million was recorded as
income in this item in 2007, compared with an expense of NIS 21.7 million in
2006. In the specific allowances for doubtful debts, income of NIS 7.3 million
was recorded in 2007, compared with an expense of NIS 27.6 million in 2006. The
supplementary allowance for doubtful debts reflected a decrease of NIS 6.5
million in 2007, compared with a decrease of NIS 5.9 million in 2006.
F - 18
The decrease in the supplementary allowance for doubtful debts is mainly due to
the decrease in the volume of problematic debts in general and to the volume of
non-income bearing debts in particular. This decline is gradual and has been
reflected in the financial statements of the Bank in recent years.
The supplementary allowance for doubtful debts (including a general allowance
for doubtful debts) amounted to NIS 45.2 million as of December 31, 2007,
constituting 7.5% of the balance of the credit (excluding State-guaranteed
credit to the Israel Electric Company out of the State deposit) before the
aforementioned allowance, compared with an allowance of NIS 51.7 million in 2006
which constituted 5.7% of the balance of the credit. 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 6.4% of the
balance of the credit (versus 4.3% at December 31, 2006).
F - 19
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
----- -----
DECEMBER 31, DECEMBER 31,
2007 2006
----- -----
Non-income bearing 69.7 171.2
Restructured (2) 31.5 74.1
Designated for restructuring (3) 17.3 26.9
Temporarily in arrears 8.7 14.5
Under special supervision** 181.7 208.5
----- -----
Total balance sheet credit to problematic borrowers (1) 308.9 495.2
Off-balance sheet credit risk in
respect of problematic borrowers (1) 81.2 88.0
----- -----
Overall credit risk in respect of problematic borrowers (1) (4) 390.1 583.2
===== =====
** Including an amount of NIS 169.7 million in respect of debts for which a
specific allowance exists (December 31, 2006 - 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.
A comparison of the data indicates a decrease in the volume of problematic debts
in general and debts classified as non-income bearing in particular. The
decrease in the volume of debts classified as non-income bearing derives from a
combination of the following factors: collection of debts from customers
classified as non-income bearing, and arrangements with some of these customers,
further to which moved over to a track of regular payments and were classified
as restructured.
Nevertheless, the data point to a high proportion of debts classified as
non-income bearing when compared to total public credit. The interest charges in
respect of these debts, which were not recorded to financing income, will have a
negative impact on the results of the Bank's operations in the future as long as
these debts are classified as non-income bearing. It is worth noting that
notwithstanding the decline in the volume of non-income bearing debts as a
result of the policy implemented by the Bank of collecting credit, it is
reasonable to assume that the negative impact of this debt on the results of
operations will continue to be significant. In connection with this it is worth
noting that the amount of the interest that will not accrue to income will be
affected both by the volume of the non-income bearing debt and the interest rate
in the economy. In the event that the Bank of Israel interest rate increases,
the negative impact of the non-income bearing debt on the amount of financing
income will be even greater.
Almost all of the volume of the off-balance sheet credit risk in respect of
problematic borrowers derives from the indemnification issued by the Bank in
favor of the receivers that were appointed to realize the assets of the
companies undergoing legal proceedings. The writs 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.
INCOME FROM FINANCING ACTIVITY AFTER THE ALLOWANCE FOR DOUBTFUL ACCOUNTS
amounted in 2007 to NIS 43.1 million, compared to a loss of NIS 3.5 million in
2006.
F - 20
OPERATING AND OTHER INCOME - This income amounted to NIS 11.5 million in 2007,
compared with NIS 21.5 million in 2006. Most of the income derived from gains
from investments in shares which amounted to NIS 8.7 million in 2007, compared
with NIS 16.4 million in 2006. It should be noted that the total investment in
shares as of December 31, 2005 amounted to NIS 61 million, on December 31, 2006
to NIS 50 million, and on December 31, 2007 on NIS 46 million, so that the
income recorded in respect of the share portfolio in recent years was of a very
high rate, but there is no certainty that they will continue in the future.
Revenues from operating commissions in 2007 amounted to NIS 1.1 million,
compared with NIS 1.3 million in 2006, a decline that reflects the decline in
the transactions conducted by the customers through the Bank.
OPERATING AND OTHER EXPENSES - Amounted to NIS 30.8 million in 2007, compared
with NIS 35.1 million in 2006. Payroll expenses totaled NIS 18.5 million in
2007, compared with NIS 17.6 million in 2006. With regard to payroll expenses,
the following points should be noted:
- - Payroll expenses of 2007 included an amount of NIS 2.5 million in respect
of payroll tax. The payroll expenses of 2006 did not include payroll tax
since there was a loss for purposes of the profit tax in 2006.
- - Payroll expenses 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 of the Bank, the GM, and the deputy
GM, upon their retirement from the Bank (see Note 18A to the financial
statements).
Neutralizing the effect of these factors shows that there was a decrease of NIS
2.4 million in payroll expenses.
Maintenance and depreciation expenses for 2007 amounted to NIS 2.9 million,
compared with NIS 2.7 million in 2006.
Other operating expenses amounted to NIS 9.4 million in 2007,, compared with NIS
14.3 million in 2006. 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.
PROVISION FOR TAXES - The provision for taxes on profits in 2007, which amounted
to NIS 1.6 million and which derived from the losses carried forward from
previous years, cannot be offset against profit tax. The Bank received tax
assessments though the 2003 tax year. The Bank has tax loss carry-forwards of
NIS 719 million in respect of which no deferred taxes were recorded.
BALANCE SHEET AND CAPITAL RESOURCES
TOTAL ASSETS - As at December 31, 2007 amounted to NIS 6,483 million, compared
with NIS 7,516 million as at December 31, 2006, a decrease of 14%.
SHAREHOLDERS' EQUITY OF THE BANK INCLUDING PREFERENCE SHARES - Amounted to NIS
557 million as at December 31, 2007, compared with NIS 511 million as at
December 31, 2006.
SHAREHOLDERS' EQUITY - 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 preference shares amounted to NIS 447 million (compared with NIS 491 million
as at December 31, 2006).
Therefore, the shareholders' equity at December 31, 2007 amounted to NIS 110
million, compared with NIS 20 million on December 31, 2006. The increase in
shareholders' equity is comprised of the annual income of NIS 22 million, and
the difference between the revaluation of the perpetual deposit with the
Treasury which is linked to the Index and the revaluation of the preference
shares that are linked to the dollar. This gap amounted in 2007 to NIS 67
million and is expressed in the capital of the Bank and is reflected in the
statement of changes in shareholders' equity, without it being expressed in the
statement of operations.
Of the total amount in respect of the preferred shares which amounted to NIS 447
million at December 31, 2007, an amount of NIS 171 million is in respect of
profit-sharing preference shares (compared with NIS 187 million as at December
31, 2006). Until December 31, 2005, the profit-sharing 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-sharing
preference shares (for details regarding this change, see Note 1D).
F - 21
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.
TOTAL CREDIT TO THE PUBLIC - As at December 31, 2007 amounted to NIS 5,521
million compared with NIS 6,519 million as at December 31, 2006. The credit data
presented below include credit guaranteed by the State that was granted to the
Israel Electric Company Ltd. out of a deposit of the State with the Bank, the
balance of which amounted to NIS 4,963 million as at December 31, 2007, compared
with NIS 5,671 million as at December 31, 2006. The decline in the volume of
this credit was affected also by the decline in the exchange rate of the dollar.
Net of such credit, the credit to the public amounts to NIS 558 million as at
December 31, 2007, compared with NIS 848 million as at December 31, 2006. This
data reflects a decline of 34% when compared to December 2006. The decline in
credit is in accordance with the credit portfolio reduction policy being
followed by the Bank, which policy is the major component of the Run-off Plan.
As can be seen by sorting the balances of public credit by the size of the
borrower's credit (Note 4D of the financial statements) and from the table of
public credit risk by industry (Addendum E of the Management Review), the credit
portfolio of the Bank focuses on credit to mid-sized companies and businesses.
The volume of credit to households is marginal and the weight of this credit in
the Bank is significantly lower than its weight in the general banking system.
The composition of the credit described above increases the sensitivity to
changes in the condition of the economy.
SECURITIES - The balance of securities as at December 31, 2007 amounts to NIS 46
million, compared with NIS 50 million as at December 31, 2006. The securities
portfolio includes an investment of NIS 12 million in mezzanine funds (NIS 17
million as of December 31, 2006). In addition, the securities portfolio includes
marketable shares in the amount of NIS 34 million (according to their market
value as at December 31, 2007). The market value of the shares includes
unrealized gains in the amount of NIS 9.5 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. The income realized on the
investment in shares in 2007 amounted to NIS 8.7 million, further to the income
of NIS 16.4 million recorded in 2006. For information on the classification of a
customer debt to "Securities", see Note 4E of the financial statements.
DEPOSITS OF THE PUBLIC - Amounted to NIS 55 million as at December 31, 2007,
compared with NIS 67 million as at December 31, 2006. These deposits are
comprised of unlinked deposits in the amount of NIS 29 million, compared with an
amount of NIS 31 million as at December 31, 2006, CPI-linked deposits in the
amount of NIS 25 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 during 2005 it ceased renewing
deposits that have reached maturity, subject to certain exceptions. Please note
that about half of the balance of deposits as at December 31, 2007 and at
December 31, 2006 are deposits related to credit.
DEPOSITS OF THE GOVERNMENT - The balance of Government deposits as at December
31, 2007 amounted to NIS 5,319 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
5,062 million compared with NIS 5,781 million as at December 31, 2006. The
decrease in the Government's deposits in foreign currency is affected mainly
from the decrease in the exchange rate of the dollar. Of the State deposits in
foreign currency, an amount of NIS 4,963 million derives from the deposit that
is designated for granting long-term credit to the Israel Electric Company Ltd,
compared with NIS 5,671 million at December 31, 2006. The credit and the deposit
have the same terms, except for a negligible margin that the Bank has on this
credit. As mentioned above, to secure this credit, the Bank also received a
State guarantee.
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 amounted to NIS 257 million, compared with NIS
306 million as at December 31, 2006. These deposits are long-term deposits paid
in installments, concurrent with the period in which the arrangement loans were
granted (until the end of 2013).
F - 22
In respect of government deposits, in 2007 the Bank recorded income of NIS 115.2
million. This was the result of the fact that the government deposit, which
serves as a source for the granting of credit to the Israel Electric Company is
dollar-denominated. Due to the decrease in the exchange rate of the dollar in
2006, income was recorded in respect of this deposit, since the negative
exchange rate differentials were higher than the interest in respect of the
deposit. In 2006, the income in respect of the government deposit amounted to
NIS 84.2 million.
DEPOSITS FROM BANKS - The balance of these deposits as at December 31, 2007
amounted to NIS 481 million, compared with NIS 768 million as at December 31,
2006. The entire balance as of December 31, 2007 derived from the special line
of credit which the Bank of Israel granted to the Bank. The balance at December
31, 2006 also included a deposit from a foreign bank, the balance of which at
December 31, 2006 amounted to NIS 7 million. This deposit was paid out during
2007. The utilized balance of the credit line declined during 2007 by an amount
of NIS 280 million. The utilized balance of the credit line on December 31, 2007
is lower than the framework set for the Bank, both for December 31 and for the
end of the Run-off Plan.
ACCOUNTING POLICY IN RESPECT OF CRITICAL ISSUES AND CRITICAL ACCOUNTING
ESTIMATES
Note 1 of the 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.
We would like to make it perfectly clear that actual results may be different
than these estimates and assessments.
Accounting policy in respect of critical issues as set out below relates to
issues which are of importance to the description of the financial condition of
the Bank, which are difficult and subjective and which often require complex
assessment, as a result of the need to make estimates of effects which for the
most part are uncertain.
Some of the estimates and assessments used, involve a great extent of
uncertainty or dependency on many variables. Such types of estimates and
assessments may have a significant impact on the results of operations in the
financial statements.
In each of the critical issues detailed below, Bank Management makes use of the
best information it has in its possession. The board of directors and management
of the Bank are of the opinion that the estimates and assessments applied in the
preparation of the financial statements are fair.
The following issues were defined by the board of directors and management of
the Bank to be critical issues / estimates from an accounting standpoint:
PROVISIONS FOR DOUBTFUL DEBTS - The specific provision for doubtful debts is
made on the basis of the assessment of the Board of Directors and management
regarding the inherent losses in the Bank's credit portfolio, including in
respect of off-balance sheet items. The assessment of the Board of Directors and
management takes into account, among other considerations, the risks involved in
the financial strength of the debtors and in their repayment capabilities, on
the basis of the information in their possession regarding their financial
position and future cash flows, as well as in the condition and value of the
collateral received.
The financial strength of the debtors and their repayment capabilities are
contingent upon economic variables, part of which are not under the control of
the Bank and/or the customers.
The Management and Board of Directors of the Bank use external appraisers and
valuators in order to obtain an indication of the value of the collateral. For
example, the assessment of the collateral that pertains to real estate is
usually done by external appraisers who conduct appraisals for the Bank. The
value that is used for the provisions required for doubtful debts is usually
lower than the market value of the real estate, due to the constraints of quick
realization and the tax that would apply (if at all) upon the realization of the
real estate.
The amount that can be collected from the debtors is based, therefore, on
estimates which, by their nature, are subjective. The dependency on these
estimates cannot guarantee that the amount actually collected will be in
accordance with the assessment.
The total balance of the monetary debt (excluding off-balance sheet items) of
the debtors in respect of which there is a provision for doubtful debts amounted
to NIS 252 million as of December 31, 2007 (NIS 362 million as of December 31,
2006).
F - 23
The amount of the credit to the public in the financial statements is after
deduction of the supplementary allowance and the general allowance for doubtful
debts, the total balance of which as of December 31, 2007 is NIS 45.2 million
(December 31, 2006 - NIS 51.7 million). These allowances are in accordance with
the instructions of the Bank of Israel.
Bank Management classifies problematic debts on the basis of the classifications
and criteria set out in the Proper Banking Management Provisions. The
classification of debts is sometime subjective (such as the distinction between
a debt that is temporarily in arrears versus one that is in arrears, and the
classification of a debt under special supervision). Changes in such assessments
may have a material impact on the financial statements.
Bank Management and the Board of Directors review the allowances for doubtful
debts and the classifications of the customers on a quarterly basis and update
them where necessary.
The supplementary allowance is based on risk criteria set out by the Bank of
Israel. As mentioned above, the Bank of Israel exempted the Bank from the need
to make a supplementary allowance in respect of deviations from the restrictions
regarding the debts of borrowers and groups of borrowers, in respect of
deviations from the restrictions on the financing of the acquisition of means of
control in corporations, and in respect of deviations from restrictions on
concentration of debts. As a result, the supplementary allowance was made only
in respect of certain deviations relating to the absence of up-to-date financial
statements and in respect of credit balances of borrowers who are classified as
problematic borrowers.
FAIR VALUE OF SECURITIES - All of the securities held by the Bank are classified
as available for sale securities.
Marketable securities are presented in the financial statements at fair value.
The balance of marketable securities at market value as of December 31, 2007 was
NIS 34 million (on December 31, 2006 - NIS 33 million). This data does not
necessarily reflect the price that will be obtained on the sale of a large
number of the securities.
The fair value of non-marketable shares as of December 31, 2007 is NIS 12
million (December 31, 2006 - NIS 17 million). These shares are presented in the
financial statements at adjusted cost, less write-downs in value based on
management estimates. Write-downs in value are done on the basis of the
financial statements of the companies. The actual realization of the investment
in non-marketable shares may be different than the book value in the financial
statements.
CONTINGENT LIABILITIES - There are a number of legal suits pending against the
Bank. Each of the suits is transferred to an external attorney for handling.
These attorneys provide the Bank with their assessments of the probability that
the risk involved in the suit will be realized. In respect of suits, the
probability of which the attorneys believe to be remote or possible, the Bank
does not usually set up a provision in respect of the risk involved.
Regarding suits which the attending attorneys believe will not be rejected or
cancelled, the Bank sets up an appropriate provision.
The opinions of the legal counsel of the Bank are received quarterly, and Bank
Management updates the provisions when necessary.
There is no certainty that the final results of the suits will be in accordance
with the aforementioned assessments.
RISK MANAGEMENT
The activity of the Bank as a financial broker exposes the Bank to credit risks
and financial risks. The major financial risks are market risks and liquidity
risks. These risks are accompanied by operational risks and legal risks.
CREDIT RISKS
As mentioned above, in accordance with the policy adopted by the Bank as part of
the Run-off Plan, the Bank no longer provides credit. The Bank is currently
occupied with collecting the credit that was furnished in the past, and as part
of this process, it enters into debt arrangements with customers.
The ability to collect credit is affected by factors that are external to the
Bank, such as the situation in the economy in general and with borrowers in
particular, and with the policies of other banks in connection with the
furnishing of credit to customers.
F - 24
The balance of public credit as of December 31, 2007 amounted to NIS 5,521
million. This credit includes the credit to the Israel Electric Company Ltd.,
which was secured by a State guarantee. Neutralizing this credit, the balance of
credit amounts to NIS 558 million. The fact that the Bank has refrained from
granting credit for the past five years has reduced to a minimum the ability of
the Bank to spread out its credit risks in accordance with accepted criteria for
measuring credit risk. This is reflected in the following issues (in all of the
issues, the measurement relates to credit after having neutralized credit in an
amount of NIS 4,963 million, which is State-guaranteed):
BREAKDOWN BY INDUSTRY - The Bank's credit to industry constitutes 47% of
the total credit on the balance sheet, compared with 14% of the total
credit to industry in the five large banking groups. The balance sheet
credit to the various branches of trade in the Bank constitutes 2.6% of the
total credit, compared with 8.9% of the credit to branches of trade in the
regular banking institutions. Credit granted by the Bank to individuals
amounts to a small percentage of 0.6%, compared with 31.9% at the large
banking groups. The comparative figures of the five large banking groups
are as of December 31, 2006.
The above indicates that credit to industry at the Bank is significantly
higher than the accepted norms in the banking system and that the level of
spreading out credit over the various industries in the economy is lower
than the accepted norm in the banking system. The area that particularly
stands out is credit to individuals.
SPREADING OUT CREDIT BY SIZE OF BORROWER - The total credit risk of the
Bank as of December 31, 2007 amounts to NIS 722 million. The total credit
risk in respect of the 15 largest borrowers amounts to NIS 413 million and
constitutes 57% of the total credit risk.
Based on the data as of the end of 2006, the weight of the 15 largest
borrowers at the five largest banking groups in Israel constituted 2.7% of
the total credit risk of these banking groups.
The following data point to a larger degree of concentration of the large
borrowers at the Bank than the accepted norm in the banking system.
CREDIT TO PROBLEMATIC BORROWERS -The total balance sheet credit to
borrowers whose debt is classified as problematic credit amounted to NIS
309 million and constitutes 51.2% of the total balance sheet credit (before
deduction of the general and supplementary allowances for doubtful debts),
compared with 8.4% at the five largest banking groups (as of December
2006). The balance of debt classified as non-income bearing amounted to NIS
70 million and constitutes 11.6% of total balance sheet credit, compared
with 1.9% at the five largest banking groups. The large percentage of the
problematic debts at the Bank compared with the data mentioned above in
respect of the five largest banking groups derives from, among other
things, the fact that the Bank has been engaged for more than five years in
the collection of credit and not in the granting of credit.
As mentioned above, the ability of the Bank to control the spreading out of the
credit risks mentioned above is practically non-existent.
CREDIT CONTROL
According to the Proper Banking Management Provisions, a bank has to maintain a
credit control unit as one of the means of intelligent management of its credit
risks. Since from the second half of 2002, the Bank's activity has been focusing
on the collection of its credit portfolio and it does not furnish new credit,
the need for such a unit at the Bank has decreased.
In response to a request from the Bank, the Supervisor of Banks, in his letter
dated November 26, 2003, exempted the Bank from compliance with the Proper
Banking Management Provisions relating to credit control.
F - 25
FINANCIAL RISKS
The asset and liability management policy is designed to keep the risks of
linkage bases and interest risks within the boundaries of exposure set by the
Board of Directors.
The implementation of this policy is discussed by a committee in which the GM
and members of management participate. The committee usually meets weekly. In
accordance with the approval of the Supervisor of Banks from November 26, 2003,
this management committee acts as the Bank's financial risk manager.
In 1997, the Bank of Israel issued instructions regarding management and control
of financial risks. The Bank acts in accordance with such instructions. For
purposes of implementing the asset and liability management policy and the
financial risk management policy, the Board of Directors set out a number of
limits. In addition, it set out dates and formats for reporting and control
regarding compliance with the limits it set. On a quarterly basis, a report on
financial risk management is presented to the plenary session of the Board of
Directors and as part of the discussions held, an updated exposure document is
presented. This document also addresses the exposure limits set and such limits
are updated on the basis of the decisions taken.
The following is a breakdown of the major risks, the limits that were set, and
the reporting dates and formats in connection with the level of the risks and
the compliance with the limits:
BASE RISK - The exposure to base risk is measured as the difference between the
assets and liabilities (including the impact of futures transactions) in each of
the linkage bases.
The Bank, as does the overall banking system, acts in three major activity
segments: the Index-linked segment, the foreign currency (and linked thereto)
segment, and the shekel unlinked segment. The exposure to a base risk relates to
exposure to changes in inflation and to changes in the exchange rates of the
various currencies.
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 from an
accounting standpoint as liabilities).
The report on the base exposure is included as part of the report on the
operations of the Bank that is presented to the plenary of the Board of
Directors. In addition, the report is included as part of the management
committee that meets, as mentioned above, on a weekly basis.
F - 26
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
-------------- ----------- ------ ----- -----
December 31, 2007 (350.6) 854.6 5.5 47.2 556.7
December 31, 2006 (456.0) 888.9 26.8 50.9 510.6
(*) Including a perpetual deposit with the Treasury (December 31, 2007 in an
amount of NIS 848.8 million, 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 8.7
million. A decrease of 1% in the Index would result in a decrease in equity of
the same amount.
The following table presents the sensitivity of the impact of changes in the
exchange rate of the dollar as of December 31, 2007 (in NIS millions) on the
results of operations of the Bank:
Percentage change in dollar rate (5)% (10)% 5% 10%
- --------------------------------------------------------------------------------------------------------------------
Impact on the results of operations (0.4) (0.8) 0.4 0.8
The exposure of the Bank to other currencies is small and, therefore, the impact
on the results of operations of the Bank is marginal.
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 rate 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.
The exposure to interest risk is measured by the gap of the average lifespan in
each linkage segment.
The following table presents the major data pertaining to the average lifespan
in the various linkage segments (in years):
FOREIGN CURRENCY AND
UNLINKED SHEKEL SEGMENT INDEX-LINKED SEGMENT LINKED THERETO
------------------------------- ------------------------------- -------------------------------
12/31/07 12/31/06 12/31/07 12/31/06 12/31/07 12/31/06
- ----------------------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total assets 0.08 0.20 4.13 3.73 6.28 6.52
- ----------------------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total liabilities 0.09 0.09 2.97 3.20 6.34 6.64
- ----------------------------- --------------- --------------- --------------- --------------- --------------- ---------------
Discrepancy in years (0.01) 0.11 1.16 0.53 (0.06) (0.12)
- ----------------------------- --------------- --------------- --------------- --------------- --------------- ---------------
The major interest risk exists mainly in the Index-linked segment, since most of
the assets and liabilities in this segment are long-term and at fixed interest.
The average lifespan of the assets in this segment as of December 31, 2007 is
4.13 years versus an average lifespan of the liabilities of this segment of 2.97
years. The gap in the average lifespan, therefore, is 14 months. A longer
average lifespan of assets generates an exposure to the risk of an increase in
interest rates in this segment. This exposure to interest risk is within the
framework set by the Board of Directors of the Bank.
F - 27
In the unlinked shekel segment, the average lifespan gap is smaller and derives
from the fact that the average lifespan of both assets and liabilities is short,
since most of the assets and liabilities have variable rates of interest.
In the foreign currency segment, the average lifespan is affected by the large
volume of credit, which is characterized by low risk and which has a fixed rate
of interest. The average lifespan of the liabilities of this segment is 0.06
years longer than the average lifespan of the assets of the segment.
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 following
are the limits set for the maximum possible decrease in the calculated value of
the Bank's equity, as established by the Board of Directors:
UNLINKED SEGMENT - a maximum decrease of NIS 4 million.
INDEX-LINKED SEGMENT - a maximum decrease of NIS 14 million.
FOREIGN CURRENCY/FOREIGN CURRENCY-LINKED SEGMENT - a maximum decrease of NIS 3 million.
The frequency of reporting on compliance with the limits in connection with
exposure to changes in interest rates was, until 2004, on a quarterly basis, As
a result of the decrease in the volume of the Bank's activity, the frequency of
such reports was changed to twice a year (semi-annual reports).
The following table presents the central data in connection with the sensitivity
of the capital of the Bank (in NIS millions) to changes of 1% in the interest
curve (the theoretical change in the economic value as a result of the
scenario):
LINKAGE SEGMENT INCREASE ON INTEREST BY 1% DECREASE OF INTEREST BY 1%
- ------------------------------------------- ---------------------------------------- ----------------------------------------
Index-linked 10.2 8.7
- ------------------------------------------- ---------------------------------------- ----------------------------------------
Foreign currency / linked thereto 1.2 (1.3)
- ------------------------------------------- ---------------------------------------- ----------------------------------------
In the unlinked segment, the impact of a change in interest of 1% is marginal
and therefore, not included in the table.
The above calculation is based on accepted calculations for the measurement of
the average lifespan of assets, i.e., discounting the future cash flows,
including interest to accrue until the earlier of maturity, or the date of a
change in the interest rate. The calculation of the change in the value of these
assets and liabilities is only in respect of a change in the interest rate,
without the impact of a change in interest on other factors (such as the rate of
forecasted inflation, etc.).
It is worth noting that such a calculation measures only the impact of a change
in interest and is not connected with credit risks.
DERIVATIVE FINANCIAL INSTRUMENTS - As part of the asset and liability management
policy, the Bank conducts transactions in derivative financial instruments.
As a result of the events that occurred in the second half of 2002, the Bank's
activity in derivative financial instruments was reduced to a minimum and, at
present, it is designed solely for the closure of the Bank's position exposure,
through the use of forward transactions, Swap transactions and the purchase of
foreign currency options.
LIQUIDITY RISK - During 2003, the Bank of Israel issued provisions pertaining to
liquidity management. In view of the arrangement of the line of credit, the
Supervisor of Banks, in his letter dated November 26, 2003, stipulated that the
Bank is not required to implement part of those provisions.
F - 28
OPERATIONAL RISKS - The Bank takes various steps to reduce the operational risks to which the Bank
may be exposed:
- - The Bank appointed an operations risk manager and an operations risk
controller.
- - The Bank operates a computerized control system to identify operational
risks in the Bank's operating system.
- - 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 operations 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.
CAPITAL ADEQUACY
On December 31, 2007, the Bank's ratio of capital to risk assets was 15.4%,
higher than the 9% minimum rate stipulated in Proper Banking Procedures and
compared with 1.3% as of December 31, 2006, a rate that was lower than the
minimum stipulated in the Proper Banking Procedures.
The shareholders' equity of the Bank as of December 31, 2007 amounted to NIS 110
million. The Bank's preference shares, in an amount of NIS 447 million, are not
included in the Bank's shareholders' equity. The equity amount of the preference
shares, plus the general allowance for doubtful doubts, constitutes the
second-tier capital of the Bank. In view of the restriction whereby in
calculating the minimum capital ratio, second-tier capital that exceeds
first-tier capital is not taken into consideration, most of the Bank's
second-tier capital is unutilized for purposes of this calculation (as of
December 31, 2007, second-tier capital of NIS 385 million is unutilized).
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.
DISCLOSURE REGARDING THE BANK'S INTERNAL AUDITOR
Mr. Yitzhak David, CPA (Isr.) has been the Bank's internal auditor since
November 1, 2002. Mr. Yitzhak David is a Certified Internal Auditor (CIA), a
certified public accountant since 1982 and has a BA in economics and accounting
from the Tel Aviv University.
The internal auditor and the external auditing services he uses comply with the
conditions set out in the Companies Law - 1989, the Internal Auditing Law - 1992
and the Banking Rules (Internal Auditing) - 1993 regarding their independence
and the dedication of their activities in the Bank.
The internal auditor is an employee of the Bank and is administratively
subordinate to the Chairman of the Board. The appointment of the internal
auditor was approved by the plenary of the Board of Directors on October 30,
2002 upon the recommendation of the Audit Committee given on October 1, 2002.
The appointment was extended a number of times and in May 2006, it was extended
with the approval of the Supervisor of Banks until the end of the Run-off Plan,
i.e., July 31, 2008.
A summary of the reasons for approving his appointment - the professional
qualifications of the candidate, his extensive experience in the field of
auditing, including his many years of work in the CPA firm of Somekh Chaikin,
and his last position as the assistant to the Bank's internal auditor.
F - 29
The internal audit work plan under the special circumstances of the Bank is an
annual plan, taking into consideration the requirements of the Supervisor of
Banks and in accordance with professional standards, as is based mainly on:
- - Mapping risk areas in the various activities of the Bank and assessing the
level of risk of such activities (including exposure to embezzlement and
fraud), on the basis of, inter alia, the risk reviews prepared by the Bank.
- - The Bank's work-plan.
- - The organizational structure of the Bank and the definition of roles in the
various departments and units of the Bank, as provided in the Bank's
procedures.
- - Findings of external auditing parties including - the Supervisor of Banks,
the independent auditors and the State Controller.
- - The necessary frequency, as determined by the internal auditor, for
auditing each audit area/issue, also taking into account the Bank's present
special situation.
- - Additional auditing tasks requested by the Chairman of the Board, the
Chairman of the Audit Committee and the GM.
The parties involved in determining the work plan for the internal audit of the
Bank are: the internal auditor in consultation with the GM, Chairman of the
Board and the chairman of the Audit Committee.
The Bank's internal audit work plan is presented to the Board's Audit Committee
for discussion and is approved by the Committee and by the Chairman of the
Board. It is also reported to the plenary Board of Directors.
The work plan leaves the internal auditor with the discretion to vary from the
plan when necessary, in consultation with the Chairman of the Board and the
chairman of the Audit Committee.
The Bank has a wholly-owned (100%) subsidiary whose activity is immaterial to
the activity of the Bank. The internal audit work-plan refers to this company on
the basis of the criteria described above.
The internal auditor is employed in a full time position. In the reported period
no employees were subordinated to him. The internal auditor uses the services of
external auditing parties, who specialize in specific relevant areas such as:
information systems auditing and auditing in banking areas. The external
auditing parties perform the internal audit of the Bank according to the
instructions of the internal auditor and under his supervision. In the reported
period their work amounted to an average annual scope of 0.3 full-time positions
(in 2006 - an average of 0.4 full-time positions).
The accepted professional standards and guidelines on the basis of which the
internal auditor performs the audit are as follows:
- - Professional guidelines of the Supervisor of Banks in Proper Banking
Procedure Provisions and provisions of the law including the Internal Audit
Law - 1992.
- - Internal auditing ethics code and professional principles.
- - Professional internal auditing standards.
- - Professional guidelines of the Institute of Internal Auditors in Israel.
- - The guidelines of the Audit Committee.
The detailed reports submitted by the internal auditor during the year to the
Audit Committee and the Board of Directors and the discussions held regarding
the reports satisfy the Board of Directors and the Audit Committee that the
internal auditor did indeed fulfill all of the requirements set down by the
aforementioned professional standards and guidelines.
The internal auditor and anyone acting on his behalf have the authority to
request and receive from all the Bank's employees and associated parties any
information, including computerized information, documents and any explanations
that they consider to be necessary in order to perform their duty. Furthermore,
the internal auditor and anyone acting on his behalf have free access to any
asset of the Bank in order to examine it, including continuous and direct access
to the Bank's information systems including financial data, as required in
Section 9 of the Internal Audit Law - 1992.
F - 30
During the reported period the internal auditor submitted the following written
reports to the Chairman of the Board, the General Manager and the Chairman of
the Audit Committee:
- - Current audit reports, which include audit findings, conclusions and
recommendations.
- - Periodic reports - quarterly reports which include a general review,
reports regarding execution of the work-plan during the quarter compared to
the original plan, and a list of all the audit documents that were issued
during the quarter.
- - An annual report which includes a summary of the audit activity during the
reported year, reports on the principal findings and the recommendations in
the various current reports that were issued (material findings),
conclusions of the auditor from following up on the correction of
deficiencies in the previous audit reports, recommendations that were not
accepted by Management and recommendations the implementation of which are
taking more time than reasonable. The report also includes the internal
auditor procedure - definition of the internal auditor's responsibilities,
authorities and manner of operation.
The current audit reports (together with minutes of the discussions held in
respect thereof with the General Manager and other relevant parties in the Bank,
which include decisions that were made and time schedules for their
implementation), the quarterly reports and the annual report are discussed in
the Audit Committee and after the discussion are submitted in a full or
condensed form (together with the minutes of discussions of the Audit Committee)
to the plenary Board of Directors.
During 2007, the internal auditor submitted 4 quarterly reports that were
submitted on the following dates: March 20, 2007, May 22, 2007, August 22, 2007
and November 22, 2007. The reports were discussed on the following dates: March
26, 2007, May 30, 2007, August 28, 2007 and December 31, 2007, as well as an
annual report that was submitted on November 28, 2007 and discussed on December
31, 2007.
The Bank's Board of Directors and the Audit Committee are of the opinion that
the scope of the internal auditor's work-plan, and the nature and continuity of
his work during the reported period are reasonable taking into consideration the
present special situation of the Bank which is in a Run-Off process, and that
they are sufficient for fulfilling the objectives of the internal audit in the
Bank.
The payments of the Bank in respect of the employment of the internal auditor
includes commitments for payments, including terms of retirement in 2007 as
follows:
NIS'000
Salary 331
Severance, provident, pension, National Insurance, education fund and vacation 64
---
Total salary and fringe benefits, not including payroll tax 395
===
The salary of the internal auditor and any raises are set by the plenary of the
Board of Directors on the basis of the recommendation of the Audit Committee.
The Board of Directors believes that this method of determining the remuneration
of the internal auditor will not have an impact on his professional discretion.
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 effectiveness 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 guideline of this provision.
F - 31
Management of the Bank together with the General Manager and Comptroller
evaluated, as at the end of the period included in this report, the
effectiveness 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 effective 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 year ended December 31, 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.
REPORTING REQUIREMENTS IN THE U.S.A.
Since the Bank had in the past issued securities to shareholders in the U.S.A.,
the Bank is required under American law to submit an annual report to the United
State Securities and Exchange Commission (hereinafter - SEC). As part of the
annual report, submitted on a form known as 20F, the Bank has to fulfill various
reporting and disclosure requirements that are not applicable in Israel,
including a reconciliation of its financial statements to the accepted
accounting principles in the United States (U.S. GAAP.). This reconciliation is
made by providing a qualitative note on the differences between Israeli GAAP and
U.S. GAAP and by providing a quantitative note, which presents the results of
the reporting entity's financial statements as if they had been prepared
according to U.S. GAAP.
SECTION 404 OF THE SARBANES OXLEY ACT
Since, as mentioned above, 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 leniency whereby the above requirement under Section 404 for the filing
of an external auditor's report on the effectiveness of internal controls
pertaining to financial reporting will apply only 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 has been taking steps for the implementation of
Section 404 regarding the annual report to be filed in the U.S. in respect of
2007.
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 in its reports filed in Israel.
F - 32
PROCESS OF APPROVING THE FINANCIAL STATEMENTS
The Board of Directors of the Bank is the body that is charged with entity-wide
control of the Bank. In filling this role, the Board of Directors of the Bank
utilizes the services of its committees. The committees that assist the Board in
the area of control are the Audit Committee and the Balance Sheet Committee. The
committee that discusses the draft of the financial statements before they are
presented to the board for approval is the Balance Sheet Committee which is
comprised of six directors, including the Chairman of the Board. Four of the
members of the Balance Sheet Committee are directors having accounting and
financial expertise. As part of the financial statement approval process, two
meetings of the Balance Sheet Committee are held. At the first meeting,
deliberations are held concerning the problematic debts and the allowances for
doubtful debts. A few days prior to the meeting, the members of the Committee
receive reviews of the problematic debtors on the basis of the stipulated
criteria. At the meeting, a discussion is held regarding the fairness of the
allowances for doubtful debts and answers are provided to the questions raised
by the Directors. At the meeting, the external auditor is also present. At the
second meeting of the Balance Sheet Committee, a discussion is held regarding
the financial statements. A number of days before this meeting, the members are
furnished with a draft of the financial statements, as well as additional
accompanying material. Concurrently, a draft of the financial statements is sent
to the Disclosure Committee which is comprised of members of the management of
the Bank and a number of additional senior executives. As part of the meeting of
the Disclosure Committee, the members of the Committee hold discussions and
offer their comments regarding the fairness of the disclosure in connection with
the major issues relating to the activity of the Bank and to the results of its
operations, as reflected in the draft financial statements. During the course of
the meeting of the Balance Sheet Committee, which is held after the meeting of
tDe disclosure committee, the results of operations of the Bank for the past
year are reviewed, as well as the major changes in the composition of the Bank's
assets and liabilities. In addition, a report is presented on the changes that
took place in the financial statements when compared to those of previous
periods, on changes in accounting presentation (if any occurred) and on the
major comments of the members of the Disclosure Committee.
During the meeting answers are provided for the questions raised by the
Directors. The meeting is attended by the external auditors of the Bank who
review the changes in accounting that occurred during the past year and the
policies that were implemented during the performance of the audit of the
financial statements. The auditor is at the disposal of the members of the
Committee to answer any question and, where necessary, provides his opinion on
accounting issues in connection with the financial statements.
The Bank's financial statements are brought before the plenary of the Board of
Directors for approval. A draft of the financial statements is presented to the
members of the Board a few days before the meeting. A review is presented and
discussions are held in a manner similar to the one described above regarding
the second meeting of the Balance Sheet Committee.
The meeting is attended by the external auditor of the Bank who also reviews the
major findings of the audit as part of a detailed annual report.
After deliberation, a vote is taken on the basis of which the financial
statements are approved.
DIRECTORS HAVING ACCOUNTING AND FINANCIAL SKILLS/EXPERTISE
The Bank of Israel has instructed the banks to implement (with the changes and
adjustments specified by the Bank of Israel) a directive that had been issued by
the Securities Authority in 2003 regarding the report relating to directors
having accounting and financial skills, as well as the clarifications that were
issued to this directive. According to the directive of the Securities Authority
and the instructions of the Bank of Israel, the Bank has to determine the
minimum number of directors having accounting and financial skills that should
serve on the Bank's Board of Directors, the Audit Committee and the Balance
Sheet Committee, with "a director having accounting and financial skills" being
a director that does not hold any other position in the company and due to his
education, experience or qualifications, has high skills and understanding in
business, accounting, internal control and financial statement matters, in a way
that enables him to have an in-depth understanding of the financial statements
of the company and to raise on the agenda of the Board of Directors issues and
questions relating to the financial reporting of the company, with the objective
of approving and publishing fair financial statements.
During 2005 Amendment No. 3 to the Companies Law - 1999 was passed, by which,
inter alia, a public company will have at least one external director who has
accounting and financial expertise and additional directors having accounting
and financial expertise in the number determined by the board of directors. The
definition of "accounting and financial expertise" was included in regulations
that were published at the end of 2005 [Companies Regulations (Conditions and
Criteria for a Director having Accounting and Financial Expertise and a Director
having Professional Ability) - 2005] and it is essentially the same as the
definition of "accounting and financial skills" (other than its not including a
threshold condition of not holding an additional position in the company).
F - 33
The Bank implements both the directive of the Securities Authority regarding
directors having accounting and financial skills as instructed by the Bank of
Israel and the provisions of the Companies Law - 1999 and aforementioned
amendments with respect to directors having accounting and financial expertise.
The Bank's Board of Directors has decided that the appropriate minimum number of
directors having accounting and financial skills/expertise that should serve on
the Bank's Board of Directors is two, being of the opinion that in light of the
significant decrease in the volume of activities of the Bank, the reduction in
the lines of operation in which it is engaged and the focusing on the collection
of loans, this number is adequate in order to enable the Board to fulfill the
duties it has to perform in accordance with the law and the Bank's Articles of
Association, and in particular in relation to the examination of the financial
position of the Bank and the preparation and approval of its financial
statements
The Bank's Board of Directors also decided that the appropriate minimum number
of these directors on the Audit Committee and the Balance Sheet Committee is
one. As at the date of approval of these financial statements (February 26,
2008), the Bank has eight directors with accounting and financial
skills/expertise on its Board of Directors. It has three such directors on the
Audit Committee and four such directors on the Balance Sheet Committee. The
Directors having accounting and financial skills/expertise and the facts that
support them as such are as follows:
DR. RAANAN COHEN: Chairman of the Board of Directors of the Bank from August 15,
2002. He is also the Chairman of the Balance Sheet Committee. He has taken
academic courses in risk management, investments in securities and in financial
instruments, directors' training and company recovery laws. Dr. Raanan Cohen
also serves as a director of Trans Clal Trade Ltd. (member of the Balance Sheet
Committee), Zerah Oil and Gas Exploration Ltd., and New Koppel Insurance Company
Ltd.
A. OLSHANSKY: Bachelor of Economics of the Hebrew University. Served in the past
in various positions in Bank Hapoalim, including VP, Deputy CEO and joint CEO.
Served as CEO of Gmul Investment Company Ltd. (central management company of
pension funds). Served as Chairman of the Board of Clal (Israel) Ltd. that
operated companies in the insurance, industry, commerce and construction fields.
Served as a director in various companies, including: external director in Teva
Pharmaceutical Industries Ltd., Gemel Investment Company Ltd., Polgat Ltd.,
Ytong Industries Ltd., and Azorim Properties Ltd. He currently serves as a
director in Camel Grinding Wheels Sarid Ltd, and Asif Provident Fund Management
Company Ltd. and Kibbutz Zora. In the past, he served as a member of the balance
sheet committee of the Hebrew University. Engages in financial and economic
consulting.
Y. EIZNER: Member of the Audit Committee. Bachelor of Economics and Statistics,
studied business administration at the Hebrew University. In the past served for
several years as CEO of Bank Jerusalem Ltd. and as a director of the bank and
its subsidiaries, and prior to that as Deputy CEO of that bank. He currently
serves as a director in Binyamina Fields Company Ltd. He serves as the chairman
of the investment committee of the teachers education funds.
S. ESHBOL: Member of the Audit Committee and the Balance Sheet Committee.
Bachelor of Accounting with minor in financing from the Michlalah Leminhal. An
academic degree in law from the Herzliya Interdisciplinary Center. CPA and
lawyer. In the past engaged in accounting and for several years has been
practicing law. As part of her legal practice she is engaged in the commercial
and financial fields. Served as director of Zim and in the Zichron Yaacov
Economic Development Company. She currently serves as a director of the Israel
Electric Company Ltd.
M. GAVISH: Member of the Balance Sheet Committee. Bachelor of Economics and Law
and Master of Business Administration from the Hebrew University. Served as
Commissioner of the Income Tax and Property Tax Authority and as CEO of
Mercantile Discount Bank. Served in the past and currently serves as chairman of
the finance committees of various entities. Served and currently serves as
director of companies and acts as CEO of companies and as a consultant. Served
as a director in the Israel Electric Company Ltd. and serves today as the
Chairman of the Israel Broadcasting Authority.
B. DAGAN: Member of the Balance Sheet Committee. Bachelor of Economics,
Political Science and Public Administration of the Hebrew University and courses
in business administration. Served as a counselor for small businesses, manager
of a division in the Ministry of Trade and Industry and manager of the imports
and exports financing department of the Ministry of Finance. Served as a
director of Jerusalem Capital Markets and Delek Car Systems. Currently serves as
a director of Gadot Chemical Industries Ltd.
F - 34
A. HILDESHEIMER: Member of the Audit Committee. Bachelor of Economics and
Political Science, and Master of Business Administration from the Hebrew
University. In the past, he filled a number of positions at Bank Mizrahi,
including assistant to the CEO and Deputy CEO. Served as the CEO of Finance and
Trade Bank Ltd. Served as a director in various companies, including senior
Financial Vice President and CFO of an Irish company, Inflight Financial
Services Ltd. Ireland. Engages in economic and financial consulting.
R. ARMON: Bachelor of Social Science, studied business administration at the
Hebrew University. Studied law at the Frahon University of Bucharest. Honorary
chairman of the Romanian - Israel Chamber of Commerce. Served in the past as
Deputy CEO of Bank Hapoalim and in charge of credits in that bank, served as
Deputy CEO and Chairman of the Board of Gmul Investment Company Ltd. (central
management company of pension funds). Served as director of Clal Israel Ltd.,
Clal Industries Ltd., and Amot. Currently serves as a director of Elchana Ltd.
Has been serving a director of the Bank since 1967 (not continuously), including
as Chairman of the Loan Committee of the Board.
F - 35
ORGANIZATIONAL STRUCTURE AND MANPOWER
The activity of the Bank is conducted through a number of departments that
report directly to the GM of the Bank:
- - A business department that deals with collecting credit provided to the
customers of the Bank.
- - An accounting department responsible for, among other things, the financial
reporting of the Bank.
- - An operations department that is responsible for manpower, organization,
administration, operating banking services, information technologies of the
computer services provided by outsourcing and conducting feasibility
surveys for government ministries.
- - The legal counsel and legal department.
The number of full-time employees employed by the Bank as at December 31, 2007
was 43, compared with 50 on December 31, 2006 and 156 employees on December 31,
2002. The number of employees of the Bank as of December 31, 2007 is 28% of the
number employed on December 31, 2002. The decline in the number of employees
increases the dependency of the Bank on the remaining manpower.
REMUNERATION OF THE AUDITORS (IN NIS THOUSANDS)
2007 2006 (1)
----- -----
For audit services (2) 548 690
For audit related services (3) 538 520
----- -----
Total auditors' fees 1,086 1,210
===== =====
(1) The payment in 2006 is to the joint auditors.
(2) Includes the audit of the financial statements, review of interim financial
statements and audit of tax reports.
(3) Audit services of the financial statements that were included in the report
to the SEC in the U.S.A. These payments were paid to Somekh Chaikin which
conducted the audit up to and including 2006.
F - 36
SALARY AND BENEFITS OF SENIOR EXECUTIVES FOR THE YEAR ENDED DECEMBER 31, 2007
Reported amounts (in NIS thousands)
LOANS GRANTED AT PREFERENTIAL TERMS (2)
---------------------------------------------
SEVERANCE PAY, SUPPLEMENTARY TOTAL
PROVIDENT FUND, AMOUNTS WITH SALARIES
PENSION, NATIONAL RESPECT TO SALARY AND RELATED LOANS
INSURANCE, RELATED BENEFITS BENEFITS NOT BALANCE AVERAGE BENEFIT GRANTED
FURTHER EDUCATION RESULTING FROM INCLUDING AS AT TERM GRANTED UNDER
ALLOWANCE AND CHANGES IN SALARY PAYROLL DECEMBER (YEARS) DURING THE REGULAR OTHER
NAME SALARY VACATION PAY (1) DURING THE YEAR TAX 31, 2007 TO MATURITY YEAR TERMS BENEFITS
- --------------------------------------- ----------- ---------------------- ------------------- --------------- ------------- --------------- --------------- ------------ ---------------
Cohen Raanan 614 444 - 1,058 - - - - 57
Galili Uri 728 559 - 1,287 - - - - 37
Savir Arieh 619 452 - 1,071 - - - - 27
Dekel Nathan 612 198 - 810 15 0.5 1.0 15 24
Shmaya Rimon 604 216 - 820 2 0.6 0.4 2 26
SALARY AND BENEFITS OF SENIOR EXECUTIVES FOR THE YEAR ENDED DECEMBER 31, 2006
Reported amounts (in NIS thousands)
LOANS GRANTED AT PREFERENTIAL TERMS (2)
---------------------------------------------
SEVERANCE PAY, SUPPLEMENTARY TOTAL
PROVIDENT FUND, AMOUNTS WITH SALARIES
PENSION, NATIONAL RESPECT TO SALARY AND RELATED LOANS
INSURANCE, RELATED BENEFITS BENEFITS NOT BALANCE AVERAGE BENEFIT GRANTED
FURTHER EDUCATION RESULTING FROM INCLUDING AS AT TERM GRANTED UNDER
ALLOWANCE AND CHANGES IN SALARY PAYROLL DECEMBER (YEARS) DURING THE REGULAR OTHER
NAME SALARY VACATION PAY (1) DURING THE YEAR TAX 31, 2006 TO MATURITY YEAR TERMS BENEFITS
- --------------------------------------- ----------- ---------------------- ------------------- --------------- ------------- --------------- --------------- ------------ ---------------
Cohen Raanan 602 177 - 779 - - - - 47
Galili Uri 714 249 - 963 - - - - 35
Savir Arieh 608 140 - 748 - - - - 27
Dekel Nathan 596 231 - 827 28 1.0 1.8 28 25
Shmaya Rimon 590 165 - 755 16 0.6 1.0 16 27
(1) Including provisions/payments of long service bonus and provisions for
unutilized sick leave and vacation benefits.
(2) The loans are linked to the CPI and are non-interest bearing.
F - 37
MEMBERS OF MANAGEMENT OF THE BANK
FOLLOWING ARE THE MEMBERS OF MANAGEMENT AND THEIR DUTIES:
GALILI URI GM
SAVIR ARIEH Deputy GM, Credit Supervisor
DEKEL NATHAN Operations Manager
SHMAYA RIMON Comptroller
- -------------------------------------------------------------------------------
WARZAGER MICHAEL Legal Counsel
DAVID YITZHAK Internal Auditor
ATLAS NATAN General Secretary
KESSELMAN & KESSELMAN Auditors
F - 38
THE BOARD OF DIRECTORS OF THE BANK
Below is a list of members of the Board of Directors, their main occupations and positions in other
companies:
DR. COHEN RAANAN Education - University.
RAMAT GAN Chairman of the Board of Directors of the Bank.
Director: Trans Clal Trade Ltd., Zerah Oil and Gas Exploration Ltd.,
New Koppel Insurance Company Ltd.
OLSHANSKY AVI Education - University. Economic and financial consultant,
TEL-AVIV project promotion and development.
Director of A. Olshenski Consultancy Ltd., Zora Active Systems Ltd.
Chairman of the following companies: Camel Grinding Wheels Sarid Ltd., Asif Provident
Funds Management Company Ltd., Plasgad Plastic Products Agsh Ltd., Kibbutz Zora
AIZNER YACOB Education - University. Real estate development.
JERUSALEM Director of Sadot Binyamina Ltd., Yacob Eisner Ltd.
Chairman of the audit committee of the teachers education funds
ESHBOL SHULAMIT Attorney and CPA.
ZICHRON YAAKOV Director, Israel Electric Company Ltd.
BEINISCH YEHESKEL Attorney.
JERUSALEM
GAVISH MOSHE Attorney
TEL-AVIV Director of the following companies: Afikim Hashkaot G.G. (2000) Ltd.,
Innoventions, Allium Ltd., Medipower Ltd.
Chairman of the Israel Broadcasting Authority
GREEN EHUD Attorney
JERUSALEM Outside director
DAGAN BEN-ZION Education - Academic
JERUSALEM Director - Gadot Chemical Industries Ltd.
HILDESHEIMER AARON Education - Academic
RAMAT GAN Outside director
CEO - Admon Trusts and Investments Ltd.
Director - Pardes Industries Ltd., L.F.S. (Israel) Ltd., Inflight
Financial Services Ltd. Ireland.
ARMONN RICHARD Education - University.
TEL-AVIV Chairman of the Israel-Romania Chamber of Commerce and Industry.
Director: Elhana Ltd. and various companies associated with Romania.
During 2007, there were eleven plenary sessions of the Board of Directors and 21
meetings of its committees. The committees are the Audit Committee, the Credit
Committee, the Administration Committee, and the Balance Sheet Committee.
The Board of Directors wishes to thank the Bank's management and employees for
achieving objectives and for their contribution to the Bank's accomplishments in
successfully implementing the Run-Off plan.
DR. RAANAN COHEN URI GALILI
Chairman of the Board General Manager
Tel-Aviv, February 26, 2008
F - 39
MANAGEMENT REVIEW OF THE FINANCIAL POSITION OF THE BANK AND THE RESULTS OF ITS
OPERATIONS
The following tables present multi-period information pertaining to the
development of the financial position of the Bank and the results of its
operations:
Table of contents
Exhibit A BALANCE SHEETS - MULTI-PERIOD DATA AS AT THE END OF THE YEARS 2003 - 2007 41
Exhibit B STATEMENTS OF INCOME - MULTI-PERIOD DATA FOR THE YEARS 2003 - 2007 42
Exhibit C RATES OF INCOME AND EXPENSES 43
Exhibit D ANALYSIS OF EXPOSURE TO FLUCTUATIONS IN INTEREST RATES 46
Exhibit E OVERALL RISK OF CREDIT TO THE PUBLIC BY ECONOMIC SECTOR 47
Exhibit F CONDENSED QUARTERLY BALANCE SHEETS FOR 2006 AND 2007 48
Exhibit G CONDENSED QUARTERLY STATEMENTS OF INCOME FOR 2006 AND 2007 49
F - 40
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
EXHIBIT A
BALANCE SHEETS - MULTI-PERIOD DATA AS AT THE END OF THE YEARS 2003 - 2007
AS AT DECEMBER 31
----------------------------------------------------------------
2007 2006 2005 2004 **2003
-------- -------- -------- -------- --------
REPORTED AMOUNTS*
----------------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
-------- -------- -------- -------- --------
ASSETS
Cash and deposits
with banks 33.8 66.4 72.9 117.9 143.9
Securities 46.3 50.4 63.2 60.0 85.4
Credit to the public 5,521.1 6,519.1 7,680.7 7,993.4 9,189.6
Credit to governments 24.7 41.5 59.0 72.7 105.2
Fixed assets 0.8 1.1 1.2 1.9 4.7
Other assets 7.2 12.1 15.6 26.0 28.2
Perpetual deposits
with the Israeli Treasury 848.8 825.8 828.2 806.5 799.3
-------- -------- -------- -------- --------
Total assets 6,482.7 7,516.4 8,720.8 9,078.4 10,356.3
======== ======== ======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits of the public 54.6 66.9 178.2 405.3 620.0
Deposits of banks 481.2 768.3 1,048.8 1,428.0 2,172.7
Deposits of the
Government 5,319.2 6,087.4 6,883.0 6,654.6 6,949.3
Capital notes 20.2 24.9 26.9 25.3 28.2
Perpetual deposit 0.1 0.1 0.1 0.1 0.1
Other liabilities 50.7 58.2 56.4 56.8 76.2
Non-participating
Shares 276.0 303.2 330.3 309.1 314.2
Participating shares *** 170.6 187.4 - - -
Total liabilities 6,372.6 7,496.4 8,523.7 8,879.2 10,160.7
-------- -------- -------- -------- --------
Shareholders' equity *** 110.1 20.0 197.1 199.2 195.6
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity 6,482.7 7,516.4 8,720.8 9,078.4 10,356.3
======== ======== ======== ======== ========
* DISCONTINUANCE OF INFLATIONARY ADJUSTMENT ON THE BASIS OF THE INDEX OF
DECEMBER 2003.
** Amounts adjusted for inflation based on Index of December 2003.
*** FOR INFORMATION REGARDING THE CLASSIFICATION OF PARTICIPATING PREFERENCE
SHARES, SEE NOTE 1D.
F - 41
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- --------------------------------------------------------------------------------
EXHIBIT B
STATEMENTS OF INCOME - MULTI-PERIOD DATA FOR THE YEARS 2003 - 2007
AS AT DECEMBER 31
----------------------------------------------------------------
2007 2006 2005 2004 2003
--------- --------- --------- --------- ----------
REPORTED AMOUNTS*
----------------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------- --------- --------- --------- ----------
Profit from financing
operations before allowance
for doubtful debts 29.3 18.2 61.6 66.2 70.1
Allowance for doubtful debts (13.8) 21.7 44.2 70.2 129.8
--------- --------- --------- --------- ----------
Profit (loss) from financing
operations after allowance
for doubtful debts 43.1 (3.5) 17.4 (4.0) (59.7)
--------- --------- --------- --------- ----------
OPERATING AND OTHER INCOME -
Operating commissions 1.1 1.3 2.2 4.1 6.5
Gains (losses) from
investments in shares 8.7 16.4 11.3 41.5 10.3
Other income 1.7 3.8 4.7 4.6 5.5
--------- --------- --------- --------- ----------
Total operating and other income 11.5 21.5 18.2 50.2 22.3
--------- --------- --------- --------- ----------
OPERATING AND OTHER EXPENSES -
Salaries and related expenses 18.5 17.6 18.2 19.7 33.7
Expenses (income) in respect of
employee retirement - 0.5 5.5 (0.8) (1.5)
Maintenance and depreciation
of buildings and equipment 2.9 2.7 3.8 5.7 11.8
Other expenses 9.4 14.3 16.5 20.4 20.7
--------- --------- --------- --------- ----------
Total operating and other expenses 30.8 35.1 44.0 45.0 64.7
--------- --------- --------- --------- ----------
Operating profit (loss)
before taxes on income 23.8 (17.1) (8.4) 1.2 (102.1)
Erosions and adjustments*** - - - - (4.5)
--------- --------- --------- --------- ----------
Operating profit (loss)
before taxes on income 23.8 (17.1) (8.4) 1.2 ** (106.6)
Provision for taxes on operating
income (tax benefit) 1.6 - - - ** (2.7)
--------- --------- --------- --------- ----------
Operating profit (loss) after
taxes on income 22.2 (17.1) (8.4) 1.2 ** (103.9)
OTHER ITEMS
Share of Bank in losses of
affiliates, net of related taxes - - - - ** (0.4)
Capital gain (loss), net - - - 0.2 ** (0.1)
--------- --------- --------- --------- ----------
Total other items - - - 0.2 ** (0.5)
--------- --------- --------- --------- ----------
NET INCOME (LOSS) FOR THE YEAR 22.2 (17.1) (8.4) 1.4 ** (104.4)
========= ========= ========= ========= ==========
NET INCOME (LOSS) PER SHARE
IN NIS, ORDINARY "A" SHARES 1,470.2 (1,132.4) (556.3) 92.7 (6,913.9)
--------- --------- --------- --------- ----------
* For 2004 and thereafter - discontinuance of inflationary adjustment on the
basis of the Index of December 2003.
For 2003 - discontinuance of inflationary adjustment on the basis of the
Index of December 2002.
** Amounts adjusted for inflation based on Index of December 2003.
*** Erosions and inflationary adjustments based on the Index of December 2003
of income and expenses that were included in the operating profit before
taxes, in reported amounts.
F - 42
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
EXHIBIT C
RATES OF INCOME AND EXPENSES (1)
Reported amounts
2007 2006
-------------------------------------------------------- -------------------------------------------------------
RATE OF INCOME RATE OF INCOME RATE OF INCOME RATE OF INCOME
FINANCING (EXPENSES) (EXPENSES) FINANCING (EXPENSES) (EXPENSES)
AVERAGE INCOME NOT INCLUDING INCLUDING AVERAGE INCOME NOT INCLUDING INCLUDING
BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES
-------- -------- -------- -------- -------- -------- -------- --------
NIS MILLIONS % % NIS MILLIONS % %
------------------------- -------- -------- ------------------------- -------- --------
ISRAELI CURRENCY - UNLINKED
Assets 183.8 11.3 6.15 363.9 24.4 6.71
Effect of ALM derivatives (3) 64.7 2.6 137.7 7.7
-------- -------- -------- --------
Total assets 248.5 13.9 5.59 501.6 32.1 6.40
Liabilities 632.1 (24.6) (3.89) (3.89) 935.9 (46.9) (5.01) (5.01)
-------- -------- -------- --------
Interest margin 2.26 1.70 1.70 1.39
-------- -------- -------- --------
ISRAELI CURRENCY - LINKED TO THE CPI
Assets 454.8 35.1 7.72 7.72 561.4 28.7 5.11 5.11
Liabilities 308.4 (16.3) (5.29) 387.5 (9.8) (2.53)
Effect of ALM derivatives (3) 40.0 (2.6) 43.3 (1.1)
-------- -------- -------- --------
Total liabilities 348.4 (18.9) (5.42) 430.8 (10.9) (2.53)
-------- -------- -------- --------
Interest margin 2.43 2.30 2.58 2.58
-------- -------- -------- --------
FOREIGN CURRENCY - DOMESTIC OPERATIONS (4)
Assets 5,601.7 (126.3) (2.25) (2.25) 6,406.5 (93.0) (1.45) (1.45)
Liabilities 5,556.1 129.4 2.33 6,276.0 92.2 1.47
Effect of ALM derivatives (3) 24.7 0.3 94.4 5.0
-------- -------- -------- --------
Total liabilities 5,580.8 129.7 2.32 6,370.4 97.2 1.53
-------- -------- -------- --------
Interest margin 0.08 0.07 0.02 0.08
-------- -------- -------- --------
TOTAL
Monetary assets generating income 6,240.3 (79.9) (1.28) 7,331.8 (39.9) (0.54)
Effect of ALM derivatives (3) 64.7 2.6 137.7 7.7
-------- -------- -------- --------
Total monetary assets 6,305.0 (77.3) (1.23) 7,469.5 (32.2) (0.43)
Monetary liabilities generating financing expenses 6,496.6 88.5 1.36 7,599.4 35.5 0.47
Effect of ALM derivatives (3) 64.7 (2.3) 137.7 3.9
-------- -------- -------- --------
Total liabilities 6,561.3 86.2 1.31 7,737.1 39.4 0.51
-------- -------- -------- --------
Interest margin 0.08 0.08 (0.07) 0.08
-------- -------- -------- --------
See page 50 for footnotes relating to rates of income and expenses
F - 43
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
EXHIBIT C (CONT'D)
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT'D)
Reported amounts
2007 2006
-------------------------------------------------------- -------------------------------------------------------
RATE OF INCOME RATE OF INCOME RATE OF INCOME RATE OF INCOME
FINANCING (EXPENSES) (EXPENSES) FINANCING (EXPENSES) (EXPENSES)
AVERAGE INCOME NOT INCLUDING INCLUDING AVERAGE INCOME NOT INCLUDING INCLUDING
BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES
-------- -------- -------- -------- -------- -------- -------- --------
NIS MILLIONS % % NIS MILLIONS % %
------------------------- -------- -------- ------------------------- -------- --------
Financing commissions and other financing income 30.0 23.7
Other financing expenses (9.6) (12.7)
-------- --------
Profit from financing operations before allowance
for doubtful debts 29.3 18.2
Allowance for doubtful debts (including general
and supplementary allowances) 13.8 (21.7)
-------- --------
Profit (loss) from financing operations after
Allowance for doubtful debts 43.1 (3.5)
Other monetary assets 865.1 868.7
General and supplementary allowances for
doubtful debts (49.0) (55.1)
Non-monetary assets 48.7 57.1
-------- --------
Total assets 7,105.1 8,202.5
======== ========
Other monetary liabilities 85.8 79.3
Non-monetary liabilities 1.1 1.6
Capital resources 521.6 522.2
-------- --------
Total liabilities and capital resources 7,105.1 8,202.5
======== ========
See page 50 for footnotes relating to rates of income and expenses
F - 44
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
EXHIBIT C (CONT'D)
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT'D)
IN TERMS OF US DOLLARS
2007 2006
-------------------------------------------------------- -------------------------------------------------------
RATE OF INCOME RATE OF INCOME RATE OF INCOME RATE OF INCOME
FINANCING (EXPENSES) (EXPENSES) FINANCING (EXPENSES) (EXPENSES)
AVERAGE INCOME NOT INCLUDING INCLUDING AVERAGE INCOME NOT INCLUDING INCLUDING
BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES BALANCE (2) (EXPENSES) DERIVATIVES DERIVATIVES
-------- -------- -------- -------- -------- -------- -------- --------
$ MILLIONS % % $ MILLIONS % %
------------------------- -------- -------- ------------------------- -------- --------
FOREIGN CURRENCY - DOMESTIC OPERATIONS (4)
Assets 1,360.3 92.3 6.79 6.79 1,431.2 96.9 6.77 6.77
Liabilities 1,349.3 (90.8) (6.73) 1,402.3 (95.5) (6.81)
Effect of ALM derivatives (3) 5.9 (0.1) 20.9 1.2
-------- -------- -------- --------
Total liabilities 1,355.2 (90.9) (6.70) 1,423.2 (94.3) (6.63)
-------- -------- -------- --------
Interest margin 0.06 0.09 (0.04) 0.14
======== ======== ======== ========
Full data of rates of income and expenses per segment, according to balance
sheet classification, are available on request.
FOOTNOTES:
(1) The data in this table are presented before and after the effect of
derivative instruments (including the off-balance sheet effect of
derivative instruments).
(2) Based on monthly opening balances except for the unlinked Israeli currency
segment where the average balance is based on daily figures, and net of the
average balance of the specific allowance for doubtful debts.
(3) Derivatives (ALM) which comprise part of the Bank's asset and liability
management and with respect to which income (expense) can be attributed to
the linkage segments.
(4) Including Israeli currency linked to foreign currency.
F - 45
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW (CONT'D)
- -------------------------------------------------------------------------------
EXHIBIT D
ANALYSIS OF EXPOSURE TO FLUCTUATIONS IN INTEREST RATES AS AT DECEMBER 31, 2007
Reported amounts
DECEMBER 31, 2007 DECEMBER 31, 2006
------------------------------------------------------------------------------------------------------------------------------------------------- -----------------
ON FROM FROM FROM FROM FROM FROM WITHOUT
DEMAND ONE TO THREE TO ONE TO THREE TO FIVE TO TEN TO OVER FIXED INTERNAL INTERNAL
AND UP TO THREE TWELVE THREE FIVE TEN TWENTY TWENTY MATURITY RATE OF AVERAGE RATE OF AVERAGE
ONE MONTH MONTHS MONTHS YEARS YEARS YEARS YEARS YEARS DATE * TOTAL RETURN DURATION RETURN DURATION
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NIS MILLIONS % YEARS % YEARS
------------------------------------------------------------------------------------------------------------------------- ------- ------- ------- -------
ISRAELI CURRENCY - UNLINKED
Total assets 130.3 - 0.1 - - - - - - 130.4 5.67 0.08 6.72 0.20
Total liabilities 504.9 22.3 0.2 - - - - - 0.1 (527.5) 4.19 0.09 4.50 0.09
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference (374.6) (22.3) (0.1) - - - - - (0.1) (397.1) 1.48 (0.01) 2.22 0.11
Effect of futures
transactions 16.5 20.1 9.9 - - - - - - 46.5
Exposure to interest rate
fluctuations (358.1) (2.2) 9.8 - - - - - (0.1) (350.0)
Cumulative segment exposure (358.1) (360.3) (350.5) (350.5) (350.5) (350.5) (350.5) (350.5) (350.6) (350.6)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
ISRAELI CURRENCY -
LINKED TO THE CPI
Total assets 6.3 11.6 54.0 105.2 65.9 72.7 33.3 - 848.8 1,197.7 5.78 4.13 5.00 3.73
Total liabilities 1.2 12.5 48.5 124.0 84.3 41.3 1.4 - - 313.3 2.62 2.97 2.66 3.20
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference 5.1 (0.9) 5.5 (18.8) (18.4) 31.4 31.9 - 848.8 884.6 3.16 1.16 2.34 0.53
Effect of futures
transactions - (20.1) (9.9) - - - - - - (30.0)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Exposure to interest rate
fluctuations 5.1 (21.0) (4.4) (18.8) (18.4) 31.4 31.9 - 848.8 854.6
Cumulative segment exposure 5.1 (15.9) (20.3) (39.1) (57.5) (26.1) 5.8 5.8 854.6 854.6
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
FOREIGN CURRENCY AND
LINKED THERETO
Total assets 41.6 140.9 397.3 969.4 816.5 1,586.8 1,154.2 - - 5,106.7 6.90 6.28 6.90 6.52
Total liabilities 1.7 137.0 397.5 970.7 818.1 1,596.7 1,163.0 - 446.6 5,531.3 6.88 6.34 6.88 6.64
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference 39.9 3.9 (0.2) (1.3) (1.6) (9.9) (8.8) - (446.6) (424.6) 0.02 (0.06) 0.02 (0.12)
Effect of futures
transactions (16.5) - - - - - - - - (16.5)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Exposure to interest rate
fluctuations 23.4 3.9 (0.2) (1.3) (1.6) 9.9 (8.8) - (446.6) (441.1)
Cumulative segment exposure 23.4 27.3 27.1 25.8 24.2 14.3 5.5 5.5 (441.1) (441.1)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
OVERALL EXPOSURE TO
FLUCTUATIONS
IN INTEREST RATES
Total assets** 178.2 152.5 451.4 1,074.6 882.4 1,659.5 1,187.5 - 848.8 6,434.9 6.81 6.01 6.76 6.08
Total liabilities 507.8 171.8 446.2 1,094.7 902.4 1,638.0 1,164.4 - 446.7 6,372.0 6.44 5.64 6.40 5.72
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference (329.6) (19.3) 5.2 (20.1) (20.0) 21.5 23.1 - 402.1 (62.9) 0.37 0.37 0.36 0.36
Exposure to interest rate
fluctuations (329.6) (19.3) 5.2 (20.1) (20.0) 21.5 23.1 - 402.1 (62.9)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cumulative exposure (329.6) (348.9) (343.7) (363.8) (383.8) (362.3) (339.2) (339.2) 62.9 (62.9)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
General Nnotes -
1. The data classified according to maturity date, presented above, represent
the present value of future flows, discounted at the internal rate of
return, for each balance sheet item. Such discounted future flows include
interest, which will accrue until the earlier of the maturity date or the
date of change in the interest rate.
2. The effect of hedging transactions is included in the total of assets or
liabilities, as the case may be.
3. The table does not include the effect of early repayments.
* The amounts stated in the "without fixed maturity date" column are the
amounts as stated in the balance sheet.
** Including shares, which are stated in the "without fixed maturity date"
column.
F - 46
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
EXHIBIT E
OVERALL RISK OF CREDIT TO THE PUBLIC BY ECONOMIC SECTORS
Reported amounts
DECEMBER 31, 2007 DECEMBER 31, 2006
-------------------------------------------------------------- -------------------------------------------------------------
ANNUAL ANNUAL
EXPENSE EXPENSE
FOR FOR THE
OFF THE SPECIFIC OFF SPECIFIC
BALANCE -BALANCE TOTAL ALLOWANCE BALANCE -BALANCE TOTAL ALLOWANCE
SHEET SHEET RISK OF FOR BALANCE OF SHEET SHEET RISK OF FOR BALANCE OF
CREDIT CREDIT CREDIT TO DOUBTFUL PROBLEMATIC CREDIT CREDIT CREDIT TO DOUBTFUL PROBLEMATIC
RISK (1) RISK (2) PUBLIC DEBTS DEBTS (3) RISK (1) RISK (2) PUBLIC DEBTS DEBTS (3)
------- ------- ------- ------- ------- ------- ------- ------- ------- -----
NIS MILLIONS NIS MILLIONS
-------------------------------------------------------------- -------------------------------------------------------------
Agriculture 5.2 0.6 5.8 (0.2) 1.0 5.6 0.3 5.9 1.4 0.7
Industry 264.6 12.1 276.7 (7.2) 179.6 338.7 14.4 353.1 7.2 221.9
Construction and real estate 56.4 65.3 121.7 0.6 102.4 156.4 71.3 227.7 7.5 193.9
Electricity 5,083.5 3.2 5,086.7 - 38.0 5,795.8 3.7 5,799.5 - 34.9
Commerce 14.3 5.6 19.9 (0.6) 16.8 31.0 5.7 36.7 2.1 28.3
Restaurants and hotels 8.9 2.1 11.0 - 7.5 11.6 2.1 13.7 0.7 8.6
Transport and storage 19.2 - 19.2 - - 23.0 - 23.0 0.1 0.5
Communications and computer services 3.8 0.4 4.2 0.8 2.0 7.9 - 7.9 (1.1) 7.2
Financial services 32.6 70.8 103.4 (1.2) 2.7 45.2 84.0 129.2 1.3 23.0
Other business services 32.1 3.4 35.5 0.8 8.9 54.4 2.5 56.9 6.7 31.9
Public and community services 42.6 0.1 42.7 (0.4) 30.9 97.2 0.2 97.4 1.2 32.0
Private households 3.6 - 3.6 - 0.3 4.7 - 4.7 0.5 0.3
------- ------- ------- ------- ------- ------- ------- ------- ------- -----
Total 5,566.8 163.6 5,730.4 (7.4) 390.1 6,571.5 184.2 6,755.7 27.6 583.2
======= ======= ======= ======= ======= ======= ======= ======= ======= =====
Credit risk included in the
various economic sectors:
Agricultural settlement movements (4) 173.8 1.4 175.2 (6.3) 78.0 208.9 2.8 211.7 2.1 94.0
Local authorities and entities controlled by them 4.0 - 4.0 - - 6.5 - 6.5 - -
(1) Credit to the public and investments in debentures of the public. There are
no other assets in respect of derivative instruments in relation to the
public.
(2) Credit risk in off-balance sheet financial instruments as calculated for
the purpose of determining per borrower credit limitations.
(3) Balances of problematic debts, less credit covered by collateral that is
deductible for purposes of individual borrower and group of borrowers
limitations. Includes components of off-balance sheet risk.
(4) Kibbutzim and cooperative settlements and related local and national
organizations and entities controlled by such movements.
The credit risk and the balance of problematic debts are presented net of the
specific allowances for doubtful debts.
F - 47
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
EXHIBIT F
CONDENSED QUARTERLY BALANCE SHEETS FOR 2006 AND 2007
Reported amounts
YEAR 2007 2006
---------------------------------------------------- ----------------------------------------------------
QUARTER 4 3 2 1 4 3 2 1
------- ------- ------- ------- ------- ------- ------- -------
NIS MILLIONS NIS MILLIONS
---------------------------------------------------- ----------------------------------------------------
ASSETS
Cash and deposits with banks 33.8 32.6 42.9 42.7 66.4 50.0 79.8 75.1
Securities 46.3 45.9 48.5 48.5 50.4 50.3 52.7 57.9
Credit to the public 5,521.1 5,857.4 6,273.1 6,314.1 6,519.1 6,773.9 7,115.4 7,533.2
Credit to governments 24.7 31.5 33.6 40.2 41.5 47.1 46.6 54.7
Fixed assets 0.8 0.8 0.9 1.0 1.1 1.0 1.0 1.1
Other assets 7.2 6.2 7.0 11.4 12.1 11.3 13.3 11.4
Perpetual deposits with the Israeli Treasury 848.8 848.8 828.0 822.2 825.8 840.2 838.6 829.0
------- ------- ------- ------- ------- ------- ------- -------
Total assets 6,482.7 6,823.2 7,234.0 7,280.1 7,516.4 7,773.8 8,147.4 8,562.4
======= ======= ======= ======= ======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits of the public 54.6 57.6 62.2 65.8 66.9 74.0 87.0 117.7
Deposits of banks 481.2 541.6 584.0 703.4 768.3 832.2 937.8 952.5
Deposits of the Government 5,319.2 5,602.1 5,986.4 5,919.6 6,087.4 6,270.3 6,519.4 6,892.6
Perpetual deposit 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Capital notes 20.2 23.2 25.1 24.1 24.9 24.9 25.2 27.7
Other liabilities 50.7 52.9 54.4 57.4 58.2 55.0 54.6 55.0
Non-participating shares 276.0 288.0 304.9 298.1 303.2 308.7 318.6 334.7
Participating shares* 170.6 178.0 188.4 184.3 187.4 190.8 196.9 206.9
------- ------- ------- ------- ------- ------- ------- -------
Total liabilities 6,372.6 6,743.5 7,205.5 7,252.8 7,496.4 7,756.0 8,139.6 8,587.2
======= ======= ======= ======= ======= ======= ======= =======
Shareholders' equity* 110.1 79.7 28.5 27.3 20.0 17.8 7.8 (24.8)
------- ------- ------- ------- ------- ------- ------- -------
Total liabilities and shareholders' equity 6,482.7 6,823.2 7,234.0 7,280.1 7,516.4 7,773.8 8,147.4 8,562.4
======= ======= ======= ======= ======= ======= ======= =======
F - 48
Industrial Development Bank of Israel Limited
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
EXHIBIT G
CONDENSED QUARTERLY STATEMENTS OF INCOME FOR 2006 AND 2007
Reported amounts
YEAR 2007 2006
------------------------------------------------ -----------------------------------------------
QUARTER 4 3 2 1 4 3 2 1
------- ------- ------- ------- ------- ------- ------- -------
NIS MILLIONS NIS MILLIONS
------------------------------------------------ -----------------------------------------------
Profit from financing operations before
allowance for doubtful debts 5.4 8.2 10.6 * 5.1 3.6 3.1 6.9 4.6
Allowance for doubtful debts (9.3) (3.1) 1.2 * (2.6) (2.6) 4.8 8.3 11.2
------- ------- ------- ------- ------- ------- ------- -------
Profit (loss) from financing operations after
allowance for doubtful debts 14.7 11.3 9.4 7.7 6.2 (1.7) (1.4) (6.6)
------- ------- ------- ------- ------- ------- ------- -------
OPERATING AND OTHER INCOME
Operating commissions 0.5 0.1 0.3 0.2 0.4 0.2 0.4 0.3
Gains (losses) from investments in shares 2.6 0.4 1.5 4.2 3.6 0.9 9.3 2.6
Other income - - 0.8 0.9 1.3 0.9 0.6 1.0
------- ------- ------- ------- ------- ------- ------- -------
Total operating and other income 3.1 0.5 2.6 5.3 5.3 2.0 10.3 3.9
------- ------- ------- ------- ------- ------- ------- -------
OPERATING AND OTHER EXPENSES
Salaries and related expenses 4.1 4.3 5.2 4.9 4.5 4.0 4.6 4.5
Expenses (income) in respect of employee
retirement - - - - - 0.3 0.2 -
Maintenance and depreciation of buildings and
equipment 0.8 0.7 0.7 0.7 0.8 0.6 0.7 0.6
Other expenses 2.7 2.2 2.0 2.5 5.1 3.3 3.0 2.9
------- ------- ------- ------- ------- ------- ------- -------
Total operating and other expenses 7.6 7.2 7.9 8.1 10.4 8.2 8.5 8.0
------- ------- ------- ------- ------- ------- ------- -------
Operating profit (loss) before taxes on income 10.2 4.6 4.1 4.9 1.1 (7.9) 0.4 (10.7)
Provision for income taxes 1.6 - - - - - - -
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) for the period 8.6 4.6 4.1 4.9 1.1 (7.9) 0.4 (10.7)
======= ======= ======= ======= ======= ======= ======= =======
NIS NIS
------------------------------------------------ -----------------------------------------------
INCOME (LOSS) PER SHARE IN NIS
Ordinary "A' shares 569.5 304.6 271.5 324.5 73.0 (523.2) 26.4 (708.6)
* Restated.
F - 49
CERTIFICATION
I, Uri Galili, hereby certify as follows:
1. I have reviewed the annual report of The Industrial Development Bank of
Israel Ltd. (hereinafter - the Bank) for the year ended December 31, 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 and cash-flows 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 fourth 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
February 26, 2008
F - 50
CERTIFICATION
I, Rimon Shmaya, hereby certify as follows:
1. I have reviewed the annual report of The Industrial Development Bank of
Israel Ltd. (hereinafter - the Bank) for the year ended December 31, 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 and cash-flows 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 fourth 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
February 26, 2008
F - 51
MANAGEMENT AND BOARD OF DIRECTORS' STATEMENT REGARDING THEIR RESPONSIBILITY FOR
THE ANNUAL REPORT
- --------------------------------------------------------------------------------
The Management of the Bank has prepared the annual report and is responsible for
its suitability. This report includes financial statements prepared in
accordance with generally accepted accounting principles and with the reporting
principles and guidelines of the Supervisor of Banks, related supplementary
data, as well as other information.
The preparation of the periodic financial statements also requires the use of
estimates for the purpose of determining various amounts and items in the
financial statements. Such estimates were prepared by the Bank's Management,
using its best judgment.
In order to ensure suitable standards for the Bank's financial reporting,
Management maintains a comprehensive system of internal control for the purpose
of ensuring that all the transactions effected by the Bank are properly
authorized, that the Bank's assets are properly safeguarded and their soundness
is ensured and that the accounting records provide a reliable basis for
compilation of the financial statements. The system of internal control is, by
its nature, limited in that it provides only reasonable rather than absolute
assurance as to its ability to detect and prevent errors and irregularities. The
principle of reasonable assurance is based on the recognition that the decision
regarding the amount of resources to be invested in operating the control
procedures must, by its nature, be weighed against the benefit to be derived
from such procedures.
The Board of Directors of the Bank, which in accordance with Section 92 of the
Companies Law, is responsible for the financial statements and their approval,
determines the accounting policy and supervises its application. It also
determines the structure of the internal control system and supervises its
functioning. The General Manager is responsible for the Bank's current
operations in the framework of the policies set by the Board of Directors and is
subject to its guidelines. Management of the Bank acts according to the policies
set by the Board of Directors. The Board of Directors, through its committees,
holds regular meetings with the Bank's Management as well as with the Internal
Auditor and the Bank's independent auditors, in order to review the scope and
results of their work.
The Bank's external auditors, Kesselman & Kessleman, have audited the annual
financial statements of the Bank, in accordance with generally accepted auditing
standards, including those standards prescribed by the Auditors Regulations
(Manner of Auditors' Performance) - 1973 and certain auditing standards
promulgated by the Institute of Certified Public Accountants in the U.S., the
use of which are mandatory under the provisions of the Supervisor of Banks. The
purpose of their audit was to enable them to express an opinion regarding the
extent to which these statements reflect the financial position of the Bank, the
results of its operations, the changes in its shareholders' equity and its cash
flows, in accordance with generally accepted accounting principles, and
reporting procedures prescribed in directives and guidelines issued by the
Supervisor of Banks. Pursuant to Section 170 of the Companies Law, the auditors
are responsible to the Bank and its shareholders for what is stated in their
opinion in respect of the financial statements. The auditors' report is appended
to the annual financial statements.
Furthermore, the information contained in the Board of Directors' Report and the
Management Review (henceforth - the ancillary information) was given to the
external auditors for their review, so that they might indicate whether there is
any material inconsistency between the information contained in the financial
statements and the ancillary information, or whether the ancillary information
contains information which is materially inconsistent with evidence or other
information brought to the attention of the auditors in the course of their
audit. No such indication has been received from the external auditors. The
auditors did not, for this purpose, employ any auditing procedures in addition
to those that they considered necessary for the purpose of auditing the
financial statements.
- --------------------- --------------------- ---------------------
DR. RAANAN COHEN URI GALILI RIMON SHMAYA
Chairman of the Board General Manager Comptroller
DATE OF APPROVAL OF THE REPORT: February 26, 2008
F - 52
THE INDUSTRIAL DEVELOPMENT BANK
OF ISRAEL LIMITED
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
F - 53
Industrial Development Bank of Israel Limited
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2007
- --------------------------------------------------------------------------------
CONTENTS
PAGE
Auditors' Review Report F-55
Balance Sheets F-57
Statements of Income F-58
Statement of Shareholders' Equity F-59
Notes to the Financial Statements F-61
F - 54
- --------------------------------------------------------------------------------
|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
AUDITORS' REPORT TO THE SHAREHOLDERS OF
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
We have audited the accompanying financial statements of Industrial Development
Bank of Israel Limited ("the Bank"), detailed hereunder: Balance sheets as at
December 31, 2007 and 2006 and the statements of income, shareholders' equity,
and cash flows, for each of the years then ended. These financial statements are
the responsibility of the Bank's Board of Directors and of its Management. Our
responsibility is to express an opinion on these financial statements, based on
our audits.
The financial statements of the Bank as of December 31, 2005 and for the year
then ended were audited solely by Somekh Chaikin, CPAs (Isr.), whose unqualified
opinion, rendered on February 27, 2006 ,drew attention to certain issues.
The financial statements of the Bank as of December 31, 2006 and for the year
then ended were audited jointly by us and by Someh Chaikin CPAs (Isr.). Our
joint opinion dated March 26, 2007 was unqualified. The opinion drew attention
to certain issues.
We conducted our audits in accordance with generally accepted auditing
standards, including standards prescribed by the Auditors Regulations (Manner of
Auditors' Performance) - 1973, and standards the implementation of which in
audits of banking corporations is determined in guidelines of the Supervisor of
Banks. Such standards require that we plan and perform the audits to obtain
reasonable assurance that the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Board of Directors and by Management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements that were audited by us, as referred to
above, present fairly, in all material respects, the financial position of the
Bank as at December 31, 2007 and 2006 and the results of its operations, the
changes in its shareholders' equity and its cash flows for each of the years
then ended, in conformity with accounting principles generally accepted in
Israel. Furthermore, in our opinion, the statements that were audited by us, as
above, have been prepared in accordance with the directives and guidelines of
the Supervisor of Banks.
As explained in Note 1C, the aforementioned financial statements are presented
in new Israeli shekels in accordance with Accounting Standards of the Israel
Accounting Standards Board and the provisions of the Supervisor of Banks.
F - 55
Without qualifying our opinion, we would call attention to the following:
A. Note 1A of the financial statements refers to the severe liquidity problems
experienced by the Bank in August 2002. These liquidity problems were
caused by increased withdrawals of deposits by the public, the
interest-bearing special line of credit provided to the Bank by the Bank of
Israel, the decisions 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
Bank of Israel regarding the restriction of the Bank's license and the
revocation of the license as from August 1, 2008, and the decision of the
Ministerial Committee for Social and Economic Affairs (the Social Economic
Cabinet) to approve and extend the duration of the "Run-Off" plan, as
above, (hereinafter - the Government decision extending the duration of the
"Run-Off" plan), and the blueprint for the sale of all the shares of the
Bank, all this as detailed in the above note.
Note 1 states, among other things, that: "as mentioned above, the decision
of the Government stipulates that the Run-off Plan shall conclude on July
31, 2008. As of the date of approval of these financial statements, it is
not known whether the blueprint plan for the sale will be implemented."
B. Note 21 of the financial statements regarding the litigation pending
against the Bank and senior officers thereof, all as detailed in the
aforementioned note.
The financial statements do not contain any changes in the value or
classification of assets or liabilities that may be required should the Bank
cease to operate as a "going concern".
Kesselman & Kesselman
Certified Public Accountants (Isr.)
February 26, 2008
F - 56
The Industrial Development Bank of Israel Limited
BALANCE SHEETS AS AT DECEMBER 31
- --------------------------------------------------------------------------------
Reported amounts
2007 2006
------- -------
NOTE NIS MILLIONS NIS MILLIONS
------- ------- -------
ASSETS
Cash and deposits with banks 2 33.8 66.4
Securities 3 46.3 50.4
Credit to the public 4 5,521.1 6,519.1
Credit to governments 5 24.7 41.5
Fixed assets 6 0.8 1.1
Other assets 7 7.2 12.1
Perpetual deposits with the Israeli Treasury 8 848.8 825.8
------- -------
Total assets 6,482.7 7,516.4
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits of the public 9 54.6 66.9
Deposits of banks 10 481.2 768.3
Deposits of the Government 5,319.2 6,087.4
Perpetual deposit 11 0.1 0.1
Capital notes 12 20.2 24.9
Other liabilities 13 50.7 58.2
Non-participating shares 14 276.0 303.2
Participating preference shares 15 170.6 187.4
------- -------
Total liabilities 6,372.6 7,496.4
Shareholders' equity 16 110.1 20.0
------- -------
Total liabilities and shareholders' equity 6,482.7 7,516.4
======= =======
- ---------------------------------------- ---------------------------- --------------------------
Dr. Raanan Cohen - Chairman of the Board Uri Galili - General Manager Rimon Shmaya - Comptroller
Date of approval of the financial statements: February 26, 2008
The accompanying notes are an integral part of the financial statements.
F - 57
The Industrial Development Bank of Israel Limited
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
Reported amounts
2007 2006 2005
------- ------- -------
NIS NIS NIS
NOTE MILLIONS MILLIONS MILLIONS
------- ------- ------- -------
Profit from financing operations
before allowance for doubtful debts 23 29.3 18.2 61.6
Allowance for doubtful debts 4C (13.8) 21.7 44.2
------- ------- -------
Profit (loss) from financing operations
after allowance for doubtful debts 43.1 (3.5) 17.4
------- ------- -------
OPERATING AND OTHER INCOME
Operating commissions 24 1.1 1.3 2.2
Gains from investments in shares 25 8.7 16.4 11.3
Other income 26 1.7 3.8 4.7
------- ------- -------
Total operating and other income 11.5 21.5 18.2
------- ------- -------
OPERATING AND OTHER EXPENSES
Salaries and related expenses 27 18.5 17.6 18.2
Expenses in respect of employee retirement - 0.5 5.5
Maintenance and depreciation of buildings
and equipment 2.9 2.7 3.8
Other expenses 28 9.4 14.3 16.5
------- ------- -------
Total operating and other expenses 30.8 35.1 44.0
------- ------- -------
Income (loss) from ordinary operations before taxes 23.8 (17.1) (8.4)
Provision for taxes on operating income 29 1.6 - -
------- ------- -------
NET INCOME (LOSS) FOR THE YEAR 22.2 (17.1) (8.4)
======= ======= =======
NET INCOME (LOSS) PER SHARE
--------------------------------------
2007 2006 2005
------- -------- ------
NIS NIS NIS
------- -------- ------
"A" ordinary shares 1,470.2 (1,132.4) (556.3)
======= ======== =======
WEIGHTED QUANTITY OF SHARES USED IN COMPUTING
INCOME PER SHARE
---------------------------------
2007 2006 2005
------- ------- -------
"A" ordinary shares 1,510 1,510 1,510
======= ======= =======
The accompanying notes are an integral part of the financial statements.
F - 58
The Industrial Development Bank of Israel Limited
STATEMENT OF SHAREHOLDERS' EQUITY*
- --------------------------------------------------------------------------------
Reported amounts
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 LOSS EQUITY
------- ------- ------- ------- ------- -------
NIS MILLIONS
-------------------------------------------------------------------------------------
BALANCE AS AT JANUARY 31,
2005 1,199.4 (697.5) 202.5 0.3 (505.5) 199.2
CHANGES DURING 2005
Net loss - - - - (8.4) (8.4)
Adjustments from
presentation of
available-for
- -sale securities at fair - - - 5.8 - 5.8
value
Translation differences
relating to CPI-linked
perpetual deposit (*) - - 0.5 - - 0.5
------- ------- ------- ------- ------- -------
BALANCE AS AT DECEMBER 31,
2005 1,199.4 (697.5) 203.0 6.1 (513.9) 197.1
CHANGES DURING 2006
Adjustments as of January 1,
2006 caused by initial
implementation of
Accounting Standard No. 22 (992.3) 697.5 90.7 - - (204.1)
------- ------- ------- ------- ------- -------
Balance as at January 1,
2006 following the
implementation of
Standard No. 22 207.1 - 293.7 6.1 (513.9) (7.0)
Net loss - - - - (17.1) (17.1)
Adjustments from
presentation of available-
for-sale securities at fair - - - 2.6 - 2.6
value
Translation differences
relating to CPI-linked
perpetual deposit (*) - - 41.5 - - 41.5
------- ------- ------- ------- ------- -------
BALANCE AS AT DECEMBER 31,
2006 207.1 - 335.2 8.7 (531.0) 20.0
------- ------- ------- ------- ------- -------
CHANGES DURING 2007
Net income - - - - 22.2 22.2
Adjustments from
presentation of
available-for
- -sale securities at fair - - - 0.8 - 0.8
value
Translation differences
relating to CPI-linked
perpetual deposit (*) - - 67.1 - - 67.1
------- ------- ------- ------- ------- -------
BALANCE AS AT DECEMBER 31,
2007 207.1 - 402.3 9.5 (508.8) 110.1
* See Note 8 to the financial statements.
The accompanying notes are an integral part of the financial statements.
F - 59
The Industrial Development Bank of Israel Limited
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
2007 2006 2005
--------- --------- ---------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------- --------- ---------
CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net income (loss) for the year 22.2 (17.1) (8.4)
Adjustments to reconcile net income/loss to net cash flows
generated by operating activities:
Depreciation on equipment 0.4 0.4 1.1
Allowance for doubtful debts (13.0) 22.9 44.5
Gain on sale of available-for-sale securities (3.3) (10.3) (11.3)
Provision for severance pay and pensions, net (4.9) (0.6) 0.3
Inflationary erosion of capital notes and perpetual deposit (3.0) (1.8) 1.6
--------- --------- ---------
Net cash provided by (used in) operating activities (1.6) (6.5) 27.8
--------- --------- ---------
CASH FLOWS GENERATED BY ACTIVITIES RELATED TO ASSETS:
Deposits with banks, net 9.2 6.5 3.0
Available-for-sale securities, net 8.2 25.7 13.9
Credit to the public, net 1,010.5 1,139.6 269.2
Credit to governments, net 16.8 17.5 13.7
Other assets, net 4.9 3.5 10.4
Acquisition of fixed assets (0.1) (0.3) (0.4)
--------- --------- ---------
Net cash provided by activities related to assets 1,049.5 1,192.5 309.8
--------- --------- ---------
CASH FLOWS GENERATED BY ACTIVITIES RELATED TO
LIABILITIES AND SHAREHOLDERS' EQUITY:
Redemption of capital notes (1.7) (0.2) -
Deposits of the public, net (12.3) (111.3) (227.1)
Deposits of banks, net (287.1) (280.5) (379.2)
Deposits of the Government, net (768.2) (795.6) 228.4
Other liabilities, net (2.0) 1.6 (1.7)
--------- --------- ---------
Net cash used in activities
relating to liabilities and shareholders' equity (1,071.3) (1,186.0) (379.6)
--------- --------- ---------
DECREASE IN CASH (23.4) - (42.0)
BALANCE OF CASH AS AT BEGINNING OF YEAR 53.4 53.4 95.4
--------- --------- ---------
BALANCE OF CASH AS AT END OF YEAR 30.0 53.4 53.4
========= ========= =========
The accompanying notes are an integral part of the financial statements.
F - 60
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
A. THE "RUN OFF" PLAN, THE SPECIAL LINE OF CREDIT OF THE BANK OF ISRAEL
AND THE BLUEPRINT FOR THE SALE OF THE SHARES OF THE BANK
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 (hereinafter -
the "Governor") 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, in the framework 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 the 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.
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:
F - 61
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
>> 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.
The letter of the Governor dated October 30, 2005 noted that, should the
Bank of Israel, in its sole and exclusive discretion, see fit so to do,
consideration will be given to the imposition of further restrictions upon
the operations of the Bank in addition to those contained in the
above-mentioned letter, whether or not those further restrictions relate to
non-compliance with the provisions 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 476 million as at December 31,
2007 (compared with NIS 751 million as at December 31, 2006).
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 (for
customers), 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.
F - 62
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
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 acted as an investment bank) 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 a letter dated May 1, 2007, the Bank of Israel announced that if the
blueprint set out below for the sale of the shares of the Bank is
implemented prior to July 31, 2008, the banking license of the Bank will be
cancelled on the date the blueprint is carried out.
BLUEPRINT FOR THE SALE OF THE SHARES OF THE BANK
The Finance Ministry and the Government Companies Authority are in the
process of assessing and taking steps to advance the blueprint for the sale
of all of the issued share capital of the Bank to a third party purchaser.
As part of this, 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
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 whereby,
among other things, the holdings of the State in the shares of the Bank,
including the controlling shares (ordinary shares A) and the holdings of
the other holders of controlling shares (the three large bank groups: Bank
Discount, Bank Hapoalim, Bank Leumi, and also First International Bank,
IDB, and the Association of Industrialists) will be transferred to the
designated buyer, the shares of the Bank that are traded on the Tel Aviv
Stock Exchange and which are held by the public will be purchased by the
designated buyer, as part of the creditors agreement pursuant to article
350 of the Companies Law - 1999, whereas preferred Shares D and DD held by
the public will be redeemed and the accrued preferred dividend in arrears
will be paid in respect thereof. A detailed description of the blueprint
that was included in the RFI can be found in the Immediate Report issued by
the Bank on June 17, 2007. As reported to the Bank by the Government
Companies Authority, 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.
F - 63
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
At the beginning of 2008, at the request of the State and other
shareholders, Professor A. Barnea prepared a proposal for the distribution
of the proceeds to be received upon the realization of the blueprint (if
and when it is implemented), among the various shareholders of the Bank.
Professor Barnea's document, which contains the proposed distribution
formula and which is dated January 13, 2008, was attached to the Immediate
Report issued by the Bank on January 15, 2008. Among the ordinary
shareholders of the Bank who requested the proposal are Bank Leumi, Bank
Hapoalim, Discount Bank, the financial institutions which filed the suit
against the Bank regarding the renewal of the dividend distribution, and
part of the holders of the Bank's ordinary preferred shares. Please note
that the Bank is not in possession of information that the State and the
aforementioned shareholders have given their consent to the distribution
formula and even at this stage, it is impossible to know if and when the
blueprint will be implemented. In addition, the sale of the holdings of the
State in the Bank necessitates passage of a privatization resolution by the
Ministerial Committee on Privatization, a resolution which has not yet been
passed.
As mentioned above, the decision of the Government stipulates that the
Run-off Plan shall conclude on July 31, 2008. As of the date of approval of
these financial statements, it is not known whether the blueprint plan for
the sale will be implemented
The financial statements do not contain any changes in the value or
classification of assets or liabilities that may be required should the
Bank cease to operate as a "going concern".
B. DEFINITIONS
In these financial statements -
ADJUSTED AMOUNT - The nominal historical amount adjusted to the effect of
the changes in the general purchasing power of the Israeli currency in
accordance with the opinions of the Institute of Certified Public
Accountants in Israel.
REPORTED AMOUNT - The adjusted amount as at the date of transition with the
addition of amounts in nominal values that were added after the date of
transition and less amounts subtracted after the date of transition.
DATE OF TRANSITION - December 31, 2003.
ADJUSTED FINANCIAL REPORTING - Financial reporting in amounts adjusted to
the effect of the changes in the general purchasing power of the Israeli
currency in accordance with the opinions of the Institute of Certified
Public Accountants in Israel.
F - 64
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
C. FINANCIAL STATEMENTS IN REPORTED AMOUNTS
GENERAL
The financial statements have been prepared in accordance with directives
and guidelines of the Supervisor of Banks in Israel and in accordance with
generally accepted accounting principlesin Israel.
In October 2001 the Israel Accounting Standards Board published Accounting
Standard No. 12, "Discontinuance of Adjustment of Financial Statements".
Pursuant to this standard and in accordance with Accounting Standard No. 17
that was published in December 2002, the adjustment of financial statements
was discontinued as at January 1, 2004. Until December 31, 2003, the Bank
continued to prepare adjusted financial statements in accordance with the
directives of the Supervisor of Banks, on the basis of the principles of
the Opinion No. 36 of the Institute of Certified Public Accountants in
Israel. The adjusted amounts presented in the financial statements as at
December 31, 2003 are the basis for the financial statements in reported
amounts. Any additions made during the period are included according to
their nominal values.
BALANCE SHEET
Non-monetary items are stated at reported amounts.
Monetary items are stated in the balance sheet at their nominal historical
values as at balance sheet date.
Amounts of non-monetary assets do not necessarily reflect their realizable
value or current economic value, but only the reported amounts of such
assets.
The term "cost" in these financial statements means the reported amount of
cost.
STATEMENTS OF INCOME
Income and expenses deriving from non-monetary items or from provisions
included in the balance sheet are derived from the difference between the
reported amount of the opening balance and the reported amount of the
closing balance. All other operating items are stated at their nominal
historical values.
D. STATEMENT OF ADJUSTMENTS TO SHAREHOLDERS' EQUITY
On January 1, 2006, the Bank implemented for the first time accounting
Standard No. 22, "Financial Instruments: Disclosure and Presentation'
(hereinafter - the "Standard"). The Standard sets forth the presentation
provisions of financial instruments in the financial statements and details
the required fair disclosure thereof. In addition, the Standard stipulates
the manner of classification of financial instruments as financial
liabilities and equity, classification of interest, dividends, and related
losses and gains, and the circumstances under which an entity can set off
financial assets and liabilities. The Standard cancels Opinion No. 53, "The
Accounting Treatment of Convertible Liabilities" and Opinion No. 48, "the
Accounting Treatment of Option Warrants".
In respect of certain issues relating to the aforementioned treatment,
there exist directives of the Supervisor of Banks. In such cases, the Bank
is subject to those directives.
F - 65
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
D. STATEMENT OF SHAREHOLDERS' EQUITY (CONT.)
The initial implementation of the Standard resulted in a reduction in
shareholders' equity in an amount of NIS 204.1 million, as a result of the
classification of participating preference shares of Class C, CC, and CC1
which were previously classified as shareholders' equity, to a liability in
respect of participating preference shares.
Adoption of the Standard was prospective. Comparative amounts relating to
previous periods were not restated.
The difference generated until May 6, 1996 between the adjustment of the
special deposit with the Israeli Treasury which, up to May 6, 1996, was
linked to the exchange rate of the US dollar, in respect of the
participating preference shares similarly linked to the exchange rate of
the US dollar, and the adjustment of the said deposit on the basis of the
CPI, is reflected in the statement of shareholders' equity in the item
entitled "Accumulated difference on translation of a dollar linked
deposit".
Further to the initial implementation of Standard No. 22, the balance of
the accumulated difference from the dollar-linked deposit was cancelled as
from January 1, 2006, due to the fact that the participating preference
shares were classified to a liability in respect of participating
preference shares and are measured, as from that date, on the basis of
their dollar-linked value (see Note 8).
The difference generated from May 7, 1996, between the adjustment of the
perpetual deposit with the Israeli Treasury, linked from that date to the
CPI (which in no event will be less than its dollar value as it was on
October 1, 1987) and the adjustment of the non-participating shares linked
to the exchange rate of the dollar, is reflected in the statement of
shareholders' equity in the item entitled "Accumulated difference on
translation of CPI-linked deposit" (see Note 8).
E. EXCHANGE RATES AND LINKAGE
(1) Assets and liabilities denominated in, or linked to, foreign currency,
except for investments in securities, are stated on the basis of the
representative exchange rates, published by Bank of Israel, in effect
on balance sheet date or on a date relevant to the particular
transaction.
(2) Assets and liabilities linked to the CPI are stated according to the
contractual linkage terms of each balance.
(3) Assets and liabilities, which are optionally linked to the CPI or to
foreign currency, are stated in the financial statements using the
relevant basis under the terms of the respective transactions.
(4) Interest and linkage differences accrued in respect of assets and
liabilities are included in the balance sheet under the items to which
they relate.
F - 66
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
E. EXCHANGE RATES AND LINKAGE (CONT'D)
(5) Following are details of exchange rates and the CPI and the rates of
change therein:
DECEMBER 31 RATE OF CHANGE DURING
--------------------------------- ----------------------------------
2007 2006 2005 2007 2006 2005
---- ---- ---- ---- ---- ----
% % %
---- ---- ----
Representative
exchange rate
of US$1
(in NIS) 3.846 4.225 4.603 (9.0) (8.2) 6.8
CPI in points
for:
December 191.1 184.9 185.0 3.3 (0.1) 2.4
November 190.0 184.9 185.4 2.8 (0.3) 2.7
F. SECURITIES
In accordance with the directives of the Supervisor of Banks securities are
to be classified into three groups, and principles of measurement were
provided for each group as follows:
HELD-TO-MATURITY DEBENTURES
Such debentures are stated at their amortized cost as at balance sheet
date. Such cost represents the par value plus linkage increments and
interest accrued since acquisition. It also includes the unamortized
discount or premium, generated upon acquisition. Income from
held-to-maturity debentures is recognized on the accrual basis.
AVAILABLE-FOR-SALE SECURITIES
Such securities are stated at their fair value. Income therefrom is
recognized on the accrual basis. The difference between the fair value and
the amortized cost of available-for-sale securities, net of the related tax
effect, is recorded as a capital reserve. Non-marketable shares are stated
at their reported cost.
SECURITIES FOR TRADING
Such securities are stated at their fair value. Gains or losses arising
from changes in the fair value are recognized in the statement of income.
The fair value of securities for trading is determined based on their stock
market prices as at balance sheet date.
F - 67
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
F. SECURITIES (CONT'D)
IMPAIRMENT IN VALUE OF INVESTMENTS
From time to time the Bank examines whether there has been an impairment in
the value of its investments in securities which is not of a temporary
nature. This examination is performed when there are signs that may
indicate the possibility of an impairment in the value of an investment,
including a decline in their stock market prices, the business of the
investee, the industry in which the investee operates and additional
parameters. Provisions for the adjustment in value of these investments,
which in accordance with the opinion of the Management are based on an
examination of the overall relevant aspects and the significance of each,
and which are not of a temporary nature, are recorded in the statement of
income.
G. ALLOWANCE FOR DOUBTFUL DEBTS
The financial statements include specific allowances for doubtful debts,
which, in Management's opinion, fairly present the anticipated loss on the
credit portfolio, including off-balance sheet credit.
In determining the adequacy of the allowances, Management based itself upon
the evaluation of the risk involved in the credit portfolio using available
information on the customers' financial position, volume of activity, past
record and adequacy of the collaterals received.
The directives of the Supervisor of Banks require that, commencing with
1992, banks include, in addition to the specific allowance for doubtful
debts, a supplementary allowance for doubtful debts, which replaces the
general allowance, which had been required up to that time. The
supplementary allowance for doubtful debts is based upon excessive credit
balances, measured according to specified quality characteristics of the
credit portfolio, as provided in the directives of the Supervisor of Banks.
In accordance with the aforementioned requirements, a portion of the
general allowance, as at December 31, 1991, equal to 1% of the total debt
to which it was related at that date, is to be maintained in inflation
adjusted values. According to a directive of the Supervisor of Banks the
adjustment to inflation of the general allowance was discontinued as at
January 1, 2005.
According to Directive 315 of Proper Banking Procedures, a banking
corporation must record a supplementary allowance for doubtful debts in
respect of debts of customers which deviate from limits stipulated by the
Supervisor of Banks, which are calculated as a certain percentage of the
Bank's capital, as stipulated for purposes of calculating the minimum
capital ratio. These limits relate to the indebtedness of an individual
borrower or a borrower group, to the indebtedness in respect of financing
the acquisition of means of control of corporate entities and to the
indebtedness of related parties.
As a result of the decline in the "first tier capital" of the Bank and the
limitation on the amount of "second tier capital" that may be taken into
consideration, a part of the customers' debts to the Bank exceed the
amounts of the aforementioned limits.
Furthermore, Directive 315 of the Proper Banking Procedures provides that a
banking corporation is required to make a supplementary allowance for
doubtful debts if the total liabilities of a certain sector to the banking
corporation exceed 20% of the total liabilities of the public to the
banking corporation (hereinafter - "the limit on sector indebtedness").
F - 68
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
G. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
Since the Bank has stopped providing new credit and is focusing on the
collection of the existing credit to its customers, its ability to spread
the indebtedness of its customers between the various sectors has decreased
and it may on occasion deviate from the limit on sector indebtedness.
The Bank applied to the Bank of Israel requesting an exemption from
recording the supplementary allowance for doubtful debts deriving from
deviations from the aforementioned various debt limits.
In his letters dated May 28, 2003 and August 21, 2003, the Supervisor of
Banks exempted the Bank from the requirement to increase the supplementary
allowance for doubtful debts in its financial statements as at March 31,
2003 and June 30, 2003, in respect of deviations from the debt limits of an
individual borrower and a borrower group and in respect of deviations from
limits in respect of financing means of control in corporate entities.
In his letter of November 26, 2003, the Supervisor of Banks announced that
in light of the Government's decision on the affairs of the Bank, the
Bank's plan to reduce its activity and the commitment of the Government to
repay the special line of credit, which was granted to the Bank by the Bank
of Israel and which is being used by the Bank to repay its liabilities to
its depositors, he approves the following relief with respect to
implementation of the Proper Banking Procedures:
A. As from the financial statements as at September 30, 2003 and
thereafter, the Bank is exempt from increasing the supplementary
allowance for doubtful debts in respect of deviations from debt limits
of an individual borrower and a borrower group and deviations from
debt limits in respect of financing means of control in corporate
entities, and in respect of deviations from the limit of sector
indebtedness.
B. The Bank is allowed to reduce the supplementary allowance it recorded
in respect of the deviation from the aforementioned limits in the last
quarter of 2002.
C. The Bank is allowed to reduce the supplementary allowance it recorded
in the past in respect of the deviation from indebtedness of related
parties.
Accordingly, in the Bank's financial statements as at December 31, 2003,
the Bank did not record a supplementary allowance for doubtful debts in
respect of deviations from the aforementioned limits, and the supplementary
allowance for doubtful debts in the amount of NIS 7.5 million that was
included in the financial statements of the Bank on December 31, 2002 and
thereafter, in respect of the deviation from these limits, was cancelled in
the third quarter of 2003.
It is noted that if the Supervisor of Banks had not granted the exemption,
the Bank would have been required to record a supplementary allowance in
significant amounts in respect of these deviations, which would have had a
material impact on its financial results for those periods. In addition,
the adjustment of the supplementary allowance for changes occurring from
time to time in the volume of the deviations would have impacted on the
financial results of the Bank in the subsequent reporting periods.
The aggregate balance of the general allowance and the supplementary
allowance for doubtful debts in accordance with the directives of the Bank
of Israel, as at December 31, 2007, constitutes 5.94% of the credit to the
public risk, which includes credit risk and off-balance sheet credit risk
as calculated for purposes of individual borrower and group of borrowers
limitations (December 31, 2006 - 4.82%).
F - 69
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - GENERAL AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
G. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
The Bank's policy is not to write-off doubtful debts until all collection
efforts, with respect thereto, have been exhausted. If Management concludes
that recovery of a debt is no longer possible, then cases involving
significant amounts are brought before the authorized bodies of the Bank,
which decide upon their being written-off.
H. FIXED ASSETS
Fixed assets are stated at cost net of accumulated depreciation.
Depreciation is calculated using the "straight-line" method, at rates
deemed adequate to write off the assets over their estimated useful lives.
I. CONTINGENT LIABILITIES
The accounting treatment of contingent legal claims is based on an opinion
received by management of the Bank from its legal counsel, on which
management of the Bank relies, which provides the probability of occurrence
of the exposure to risk relating to contingent claims. The claims were
classified in accordance with the probability ranges of occurrence of the
exposure to risk as follows:
1) Probable - when the probability is over 70%.
2) Reasonably possible - when the probability is over 20% and less than
or equal to 70%.
3) Remote - when the probability is less than or equal to 20%.
Only in rare cases is a banking institution allowed to state in the
financial statements that in the opinion of the bank's management, based
upon its legal counsel, it is unable to evaluate the probability of
realization of the exposure to risk in respect of a claim for which a
petition was filed to have the claim certified as a class action, this in
the four financial statements that are published after the filing of the
petition. The Bank has provided disclosure with respect to material legal
proceedings pending against the Bank. Note 21D provides disclosure
regarding contingencies in respect of which the risk of occurrence of the
exposure is not remote and for which no provision was made. The Bank's
practice is to include in its financial statements appropriate provisions
in respect of claims which in the opinion of management of the Bank will
not be rejected or cancelled and the risk of their occurrence is probable.
J. BASIS OF RECOGNITION OF INCOME AND EXPENSES
(1) Income and expenses are recognized on the accrual basis.
(2) As to the basis of recognition of income and expenses with respect to
trading securities and derivative financial instruments defined as
other transactions, see F and L, respectively.
F - 70
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
K. EMPLOYEE RIGHTS
Appropriate provisions cover the Bank's liability for payment of severance
pay and other benefits to its employees, according to labor agreements.
In December 2002, the Bank, the General Federation of Labor and the Bank's
employee committee signed a special collective agreement regarding a
reduction in the number of the Bank's employees. According to this
agreement some of the employees are entitled to a pension as from the date
of termination of their employment. In respect of such employees, the Bank
signed an agreement with a pension fund which arranges the payment of the
pensions. In accordance with the agreements, on the date on which the
employment of each such employee is terminated, the Bank deposits with the
pension fund the amount required in order to purchase the pension rights
for the employee. The Bank included a provision in respect of the
anticipated cost of acquisition of the pension rights, as calculated by a
pension consultant.
L. DERIVATIVE FINANCIAL INSTRUMENTS
The Bank implements the directives of the Supervisor of Banks regarding
derivative financial instruments and hedging activities. The directives are
based on the principles stipulated in U.S. Accounting Standard FAS 133. In
accordance with these directives, the Bank presents all the derivative
instruments, including certain derivative instruments embedded in other
contracts, as assets or liabilities in the balance sheet and measures them
according to fair value. The change in the fair value of a derivative
instrument is recorded in the statement of income or included in the
shareholders' equity as a component of other comprehensive income,
according to the designated purpose of the instrument.
M. OFF-SETTING OF FINANCIAL INSTRUMENTS
Pursuant to the directives of the Supervisor of Banks, amounts of
designated deposits, the repayment of which to the depositor is contingent
on the collection of the loans granted therefrom, are offset against the
amounts of the related loans and, therefore, are not reflected in the
balance sheet. Income earned from such collection-based loan operations is
classified as operating commissions.
In accordance with the instructions of the Supervisor of Banks, assets and
liabilities in respect of financial instruments with the same counter party
are set-off against one another and presented net in the balance sheet when
the following cumulative conditions are fulfilled:
(1) In respect of such liabilities the Bank has the legal right to enforce
the set-off of the liabilities from the assets.
(2) The Bank intends to pay the liabilities and realize the assets on a
net basis or simultaneously.
F - 71
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
N. TAXES ON INCOME
The provision for taxes on the income of the Bank, which is classified as a
financial institution for value-added tax purposes, includes a provision
for profit tax leviable on the Bank's income under the provisions of the
Value-Added Tax Law. Value-added tax on payroll ("Payroll Tax"), which is
leviable on the payroll costs of financial institutions, is reflected in
the statement of income under the "payroll and related expenses" item. In
the period between 2002 and 2006, the payroll and related expenses item was
not charged with any expense relating to payroll tax due to losses for
profit tax purposes.
O. STATEMENT OF CASH FLOWS
Cash flows from activity in assets and liabilities are presented net,
except for securities, fixed assets, and capital notes. "Cash", for
purposes of the cash flow statement, includes cash balances and cash
deposits with banks for an initial period not exceeding three months.
P. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities as at the date of the
financial statements and the reported amounts of income and expenses during
the reported period. Actual results may differ from such estimates.
Q. NET INCOME (LOSS) PER SHARE
Commencing on January 1, 2006, the Bank implemented Accounting Standard No.
21 "Income Per Share" of the Israel Accounting Standards Board. This
standard, which is based on International Accounting Standard No. 33,
replaces Opinion No. 55 of the Institute of Certified Public Accountants in
Israel on this issue and sets out new rules regarding the calculation of
income per share and the presentation thereof in the financial statements.
According to the provisions of the Standard, the Bank computes income per
share in respect of income from continuing operations allocated to ordinary
shareholders. Income per share is computed by dividing the income or loss
allocated solely to the ordinary shareholders, by the weighted average of
the number of ordinary shares in circulation during the reported period. In
the past, income per share was computed in relation to an amount which
equals US$1 of the par value of the shares, according to the basic exchange
rate to which they are linked. Comparative amounts of income per share in
these financial statements were restated in respect of the retroactive
implementation of the calculation provisions of the new standard.
R. IMPAIRMENT OF ASSETS
Accounting Standard No. 15, "Impairment in value of assets" stipulates the
procedures to be implemented by the corporation in order to ensure that its
assets in the balance sheet are not presented at amounts higher than their
recoverable value. Such value is the higher of the net selling price and
the present value of the estimated future cash flows expected to be
generated from the use and disposal of the asset. The Standard also
stipulates principles of presentation and disclosure regarding assets which
have been impaired.
F - 72
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
S. BUSINESS SEGMENTS
In accordance with an approval received from Bank of Israel, the Bank is
not required to report according to business segments.
T. DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO THEIR APPLICATION
1. 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
provides that entities subject to the Securities Law - 1968 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 directives and guidelines of the Supervisor of
Banks.
In addressing the manner in which the Standard is to be implemented by
banking institutions, the Supervisor of Banks notified the banking
institutions that:
a. He intends on regularly issuing directives for the implementation
of Israeli standards issued by the Israel Accounting Standards
Board, which are based on IFRS that do not relate to the core
banking business.
b. In the second half of 2009 he will render his decision regarding
the date of implementation of IFRS that relate to the core
banking business, taking into account the results of the process
of adoption of these standards in Israel on the one hand and the
progress of the process of convergence of IFRS and U.S. standards
on the other.
c. Therefore, in addressing the core banking business, the financial
statements of a banking institution presented in accordance with
the directives and guidelines of the Supervisor of Banks will
continue to be presented on the basis of U.S. standards that were
set out in the public reporting directives.
2. In December 2006, the Israel Accounting Standards Board published
Accounting Standard No. 23, "The Accounting Treatment of Transactions
between an Entity and Its Controlling Shareholder" (hereinafter - the
"Standard"). The Standard replaces the Securities Regulations
(Financial Statement Presentation of Transactions between a
Corporation and its Controlling Shareholder) - 1996 as adopted in the
public reporting directives of the Supervisor of Banks. The Standard
stipulates that assets and liabilities that were the subject of a
transaction between an entity and its controlling interest shall be
measured at the date of the transaction at fair value and that the
difference between the fair value and the proceeds of the transaction
are to be carried to shareholders' equity. A debit difference is in
essence a dividend, thereby reducing retained earnings. A credit
difference is in essence an owners' investment and shall be presented
as a separate item in shareholders' equity entitled "Capital reserve
from a transaction between the entity and its controlling
shareholder".
F - 73
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
T. DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO THEIR APPLICATION (CONT'D)
The Standard discusses three issues relating to transactions between
an entity and its controlling interest, as follows: the transfer of an
asset from the controlling shareholder to the entity or alternatively,
the transfer of an asset from the entity to the controlling
shareholder; a controlling shareholder's assumption of a liability, in
whole or in part, to a third party on behalf of the entity, the
indemnification of the entity by a controlling shareholder in respect
of an expense, or the waiver by the controlling shareholder to the
entity of a debt, in whole or in part, due to the shareholder from the
entity; and loans granted to the controlling shareholder or received
from the controlling shareholder. In addition, the Standard stipulates
the disclosure that must be made in the financial statements in
connection with transactions between the entity and its controlling
shareholder during the period.
The Standard applies to transactions between an entity and its
controlling shareholder that were made after January 1, 2007, as well
as to loans granted to or received from a controlling shareholder
prior to the effective date of the Standard, as of the effective date.
As of the date of the release of the financial statements, the
Supervisor of Banks has not yet issued a directive regarding the
manner of adoption of the Standard by banking institutions, if at all.
3. A directive on the issue of measurement and disclosure of impaired
debts, credit risk and the allowance for credit losses - On December
31, 2007, the Supervisor of Banks issued a draft directive on the
issue of "Measurement and Disclosure of Impaired Debts, Credit Risk
and the Allowance for Credit Losses". The directive was raised for
discussion at the Advisory Committee of the Bank of Israel regarding
banking matters.
The directive is based on accounting principles accepted among U.S.
banks. The principles behind the draft directive constitute a
significant change over the current directives regarding the
classification of problematic debts and the measurement of allowances
for doubtful debts in respect of credit losses. The new directive sets
out explicit rules in connection with the classification of impaired
debts, credit risk, measurement of allowances for credit losses, the
accounting write-off of debts and the recognition of income in respect
of debts. In addition, the new guidelines set out explicit
requirements for maintaining a systematic process for setting up
provisions for credit losses and preservation of documentation that
supports the process and the allowances.
The new directive is supposed to go into effect commencing with the
financial statements as of January 1, 2010. The directive set out
transition provisions for implementation in the annual financial
statements for 2007 and in the financial statements to be issued
during 2008 and 2009. The transition provisions for the annual
financial statements of 2007 relate to setting out the major features
of the directive, information regarding the preparations of a banking
entity to implement the directive and data in respect of the expected
impact (direction and scope) of initial implementation of the
directive on shareholders' equity as of January 1, 2010. The
transition provision for the annual financial statements of 2009
includes, in addition to the above, the requirement to provide
quantitative information regarding the adoption of the new guidelines
on:
- The recorded balance of credit debt as of January 1, 2010, with a
breakdown into its various components.
F - 74
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONT'D)
T. DISCLOSURE OF THE EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO THEIR APPLICATION (CONT'D)
- The balance of the provision for credit losses as of January 1,
2010, with a breakdown into its various components.
- The balance included in the required disclosure for the report of
the board of directors as of January 1, 2010.
- The balance of the provision for credit losses in respect of
off-balance sheet credit instruments as of January 1, 2010.
- The balance of current or deferred taxes receivable or payable in
respect of the provision for credit losses and accounting
write-offs as of January 1, 2010.
- The impact on shareholders' equity as of January 1, 2010.
In its letter dated August 12, 2007, the Bank of Israel notified the Bank
that the Bank is entitled not to take steps toward implementation of this
directive.
NOTE 2 - CASH AND DEPOSITS WITH BANKS
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS NIS
MILLIONS MILLIONS
------- -------
Cash and deposits with Bank of Israel 5.9 8.1
Deposits with commercial banks (1) 24.1 50.6
Deposits in special banking institutions 3.8 7.7
------- -------
Total 33.8 66.4
======= =======
Including cash, deposits with Bank of Israel
and with banks for an initial period not
exceeding three months 30.0 53.4
======= =======
(1) As to the pledge on deposits with commercial banks - see Note 17
below.
F - 75
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES
A. COMPOSITION
DECEMBER 31, 2007
-------------------------------------------------------------------------
NON-REALIZED NON-REALIZED
GAINS FROM LOSSES FROM
CARRYING ADJUSTED ADJUSTMENTS TO ADJUSTMENTS TO FAIR
VALUE VALUE (1) FAIR VALUE FAIR VALUE VALUE (2)
------- ------- ------- ------- -------
REPORTED AMOUNTS
-------------------------------------------------------------------------
NIS MILLIONS
-------------------------------------------------------------------------
AVAILABLE-FOR-
SALE SECURITIES
Other debentures 0.5 0.5 - - 0.5
Shares of others 45.8 36.3 9.5 - 45.8 (3)
------- ------- ------- ------- -------
Total available-
for-sale securities 46.3 36.8 9.5 (4) - 46.3
------- ------- ------- ------- -------
Total securities 46.3 36.8 9.5 - 46.3 (3)
======= ======= ======= ======= =======
DECEMBER 31, 2006
-------------------------------------------------------------------------
NON-REALIZED NON-REALIZED
GAINS FROM LOSSES FROM
CARRYING ADJUSTED ADJUSTMENTS TO ADJUSTMENTS TO FAIR
VALUE VALUE (1) FAIR VALUE FAIR VALUE VALUE (2)
------- ------- ------- ------- -------
REPORTED AMOUNTS
-------------------------------------------------------------------------
NIS MILLIONS
-------------------------------------------------------------------------
AVAILABLE-FOR-
SALE SECURITIES
Other debentures 0.7 0.7 - - 0.7
Shares of others 49.7 41.0 8.7 - 49.7 (3)
------- ------- ------- ------- -------
Total available-
for-sale securities 50.4 41.7 8.7 (4) - 50.4
------- ------- ------- ------- -------
Total securities 50.4 41.7 8.7 - 50.4 (3)
======= ======= ======= ======= =======
(1) In the case of shares - cost less provision for impairment in value,
where required.
(2) Fair value data are based, generally, on stock market prices, which do
not necessarily reflect the price which would be received on the sale
of a large quantity of shares.
(3) Includes shares, the fair value of which is not readily determinable,
which are stated at cost in the amount of NIS 11.8 million (December
31, 2006 - NIS 16.7 million).
(4) Included in shareholders' equity in the category "adjustment from
presentation of available-for-sale securities at fair value".
B. See Note 4E regarding the classification of a customer's debt to the
securities item.
NOTE: For detail regarding results of investments in debentures - see Note
23E, and for detail regarding results of investments in shares - see
Note 25.
F - 76
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (1)
A. COMPOSITION OF CREDIT
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED AMOUNTS
-----------------------
NIS MILLIONS NIS MILLIONS
------- -------
Credit 5,566.3 6,570.8
General and supplementary allowances for doubtful debts(1) 45.2 51.7
------- -------
Total 5,521.1 6,519.1
======= =======
B. CREDIT TO THE PUBLIC INCLUDES:
1. CREDIT TO PROBLEMATIC BORROWERS (2) WHICH ARE NOT INCLUDED IN THE
AGRICULTURAL SECTOR AND ARE NOT LOCAL AUTHORITIES
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED AMOUNTS
-----------------------
NIS MILLIONS NIS MILLIONS
------- -------
a. Non-income bearing credit to problematic borrowers -
Unlinked Israeli currency 41.1 123.7
Israeli currency linked to the CPI 3.9 7.0
Denominated in or linked to foreign currency 3.5 10.9
------- -------
48.5 141.6
======= =======
b. Credit restructured during the year, without waiver of income -
Unlinked Israeli currency 23.3 21.7
Israeli currency linked to the CPI 1.1 38.2
Denominated in or linked to foreign currency 1.0 5.1
c. Credit to borrowers regarding which there is an as-yet
unimplemented Management decision to restructure
their debt 9.3 26.5
d. Credit temporarily in arrears 8.7 14.5
Interest income recorded in respect thereof 0.7 0.4
e. Credit under special supervision 139.8 156.2
(1) The specific allowance for doubtful debts was deducted from the
relevant credit categories.
(2) The balance of problematic debts, less credit covered by collateral
that is deductible for purposes of individual borrower and group of
borrowers limitations.
F - 77
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO THE AGRICULTURAL SECTOR
In 1991, the Bank joined the Kibbutz Debt Arrangement, signed in 1989 by
the banks, the Government and the Kibbutz movements. This Arrangement
includes the implementation of a rehabilitation program prepared by the
borrowers, the waiver by the Bank of part of the loans granted by it,
receipt of Government grants designated for the early repayment of a part
of the Kibbutz debts, and a rescheduling of another portion of the debts
for a period of up to 25 years, in respect of which the Government provided
less costly financing which leaves the Bank with a margin of 2% p.a.
During 1991 through 1996, the Bank received from the Government the grants
under the Kibbutz Arrangement of 1989, designated for the early repayment
of the Kibbutz debts, as noted above, and reduced the outstanding Kibbutz
debt accordingly. Furthermore, the Bank also received from the Government,
the deposits required for the rescheduling of part of the Kibbutz debts in
accordance with the Bank's proportionate share of the overall arrangement.
In 1993, the Bank commenced the implementation of the Arrangement at the
individual Kibbutz level for some Kibbutzim, reflecting the results thereof
on its books.
During 1996, a supplementary arrangement was signed by the banks, the
Government and the Kibbutz movements for the arrangement of the debts of
the Kibbutzim. In April 1999, an amendment to the supplementary arrangement
was signed by the said parties. The main principles of the supplementary
arrangement, including the amendment thereto, are as follows:
- The arrangement relates to a part of the Kibbutzim and organizations
included in the first arrangement, in respect thereof it has become
evident that after full execution of the financial arrangement
contemplated by the first arrangement, debts remain regarding which
the repayment ability envisioned, with respect thereto, under that
agreement, does not allow them to fulfill their obligations (the
"balloon" debt). Such "balloon" debt is to be written off.
- In respect of most of the "balloon" debts, the writing-off shall be
covered as to 65% from bank sources and as to 35% from Government
sources.
- Kibbutzim will assign part of their rights in land to the Israel Lands
Administration. Upon each Kibbutz joining the arrangement, its land,
which was found in the land survey to have an alternative value
compared to agricultural use, will revert to the Israel Lands
Administration, without attaching to it an obligatory price tag. A
caveat is to be registered in favor of the banks with respect to such
land. In the future, when the land is sold, part of the net proceeds
to be received, which represents the value of the original rights of
the Kibbutz in the land, will be paid over to the banks and the
Government in proportion to their share in the writing-off of the
debt, as stated above. The funds transferred by the Government for the
purpose of the writing-off of the debts of each Kibbutz, as stated
above, are conditional upon the consent of each individual Kibbutz to
the said arrangement and its subsequent joining as a party to the
supplementary arrangement, including the reversion of the land to the
Israel Lands Administration. The abovementioned payments will be made
in five annual installments: the first - an immediate payment and the
remaining payments to be linked to the CPI with annual interest at a
rate of 1.5%.
The Bank set up a provision for doubtful debts in respect of all of
the amounts it believes will be required taking the above into
consideration.
F - 78
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO THE AGRICULTURAL SECTOR (CONT'D)
During 2007, principles were formulated regarding the transfer of the
receipts that the Kibbutzim are supposed to receive in respect of the
sale of their holdings in Tnuva on account of the repayment of their
debts included in the Kibbutz Debt Arrangement with the banks. At the
beginning of 2008, further to the completion of the Tnuva transaction,
debts of Kibbutzim were repaid as part of the implementation of the
abovementioned principles, in an amount of NIS 50 million. In
addition, at the same date, an amount of NIS 7.5 million was received
in account of debts written off in the past, which will be included in
the Bank's income for the first quarter of 2008.
Composition of the credit to the agricultural sector:
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED AMOUNTS
-----------------------
NIS MILLIONS NIS MILLIONS
------- -------
Kibbutzim (including regional enterprises and organizations) 168.3 202.5
Moshavim 5.5 6.4
------- -------
Total credit for kibbutzim and moshavim 173.8 208.9
======= =======
F - 79
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
2. CREDIT TO THE AGRICULTURAL SECTOR (CONT'D)
THE CREDIT (1) TO THE AGRICULTURAL SECTOR (2) INCLUDES:
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED AMOUNTS
---------------------
NIS MILLIONS NIS MILLIONS
------- -------
a. Non-income bearing loans to problematic borrowers -
Unlinked Israeli currency 1.2 1.3
Denominated in or linked to foreign currency 1.0 -
Israeli currency linked to the CPI 19.0 28.3
------- -------
21.2 29.6
======= =======
b. Restructured credit to borrowers-
1. Credit restructured during the current
year with waiver of income -
Israeli currency linked to the CPI 4.8 6.8
Average repayment period (years) 3.0 3.5
Expected interest margin from the credit 2.0% 2.0%
Unlinked Israeli currency 0.9 -
Average repayment period (years) 0.5 -
Weighted interest margin in respect of 3.0% -
2. Credit restructured in prior years
with waiver of income -
Israeli currency linked to the CPI 0.4 2.3
c. Credit to borrowers in respect of which
there is an as-yet unimplemented
management decision to restructure their debt 8.0 0.4
d. Credit under special supervision 41.9 52.3
e. Credit not included in above credit to problematic borrowers 96.6 117.5
Interest income recorded in the income statements in respect
Of this credit 7.1 5.2
(1) The balance of problematic debts less credit covered by collateral
that is deductible for purposes of individual borrower and group of
borrowers limitations.
(2) Including industrial enterprises and other organizations related to
the Kibbutz sector.
F - 80
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
B. CREDIT TO THE PUBLIC INCLUDES: (CONT'D)
3. CREDIT TO LOCAL AUTHORITIES
Following is the composition of credit to local authorities:
DECEMBER 31 DECEMBER 31
2007 2006
------- ---------
REPORTED AMOUNTS
-----------------------
NIS MILLIONS NIS MILLIONS
------- -------
Balance of credit to local authorities at balance sheet date 4.0 6.5
CREDIT (1) GRANTED TO LOCAL AUTHORITIES INCLUDES:
b. Credit not included in above credit to problematic borrowers 4.0 6.5
Interest income recorded in income statements with respect of such credit 0.4 0.5
(1) The balance of problematic debts less credit covered by collateral
that is deductible for purposes of individual borrower and group of
borrowers limitations.
F - 81
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
C. ALLOWANCE FOR DOUBTFUL DEBTS
2007
-----------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
------- ------- -------
REPORTED AMOUNTS
-----------------------------------------
NIS MILLIONS
-----------------------------------------
Balance of allowance at beginning of year 658.3 51.7 710.0
------- ------- -------
Current allowances 13.1 - 13.1
Reduction in allowances (19.6) (6.5) (26.1)
Collection of debts written-off in previous years (0.8) - (0.8)
------- ------- -------
Amount charged to the income statement (7.3) (6.5) (13.8)
------- ------- -------
Debts written-off (79.2) - (79.2)
------- ------- -------
Balance of allowance at end of year 572.6 45.2 617.8
======= ======= =======
Amount of allowance not deducted from credit
to public 1.3 - 1.3
------- ------- -------
2006
-----------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
------- ------- -------
REPORTED AMOUNTS
-----------------------------------------
NIS MILLIONS
-----------------------------------------
Balance of allowance at beginning of year 675.6 57.6 733.2
------- ------- -------
Current allowances 40.8 - 40.8
Reduction in allowances (12.0) (5.9) (17.9)
Collection of debts written-off in previous years (1.2) - (1.2)
------- ------- -------
Amount carried to the income statement 27.6 (5.9) 21.7
------- ------- -------
Debts written-off (46.1) - (46.1)
------- ------- -------
Balance of allowance at end of year 658.3 51.7 710.0
======= ======= =======
Amount of allowance not deducted from credit
to public 1.9 - 1.9
------- ------- -------
F - 82
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
C. ALLOWANCE FOR DOUBTFUL DEBTS (CONT'D)
2005
-----------------------------------------
SPECIFIC SUPPLEMENTARY
ALLOWANCE (1) ALLOWANCE (2) TOTAL
------- ------- -------
REPORTED AMOUNTS
-----------------------------------------
NIS MILLIONS
-----------------------------------------
Balance of allowance at beginning of year 714.4 69.6 784.0
------- ------- -------
Current allowances 82.9 - 82.9
Reduction in allowances (26.4) (12.0) (38.4)
Collection of debts written-off in previous years (0.3) - (0.3)
------- ------- -------
Amount carried to the income statement 56.2 (12.0) 44.2
------- ------- -------
Debts written-off (95.3) - (95.3)
------- ------- -------
Balance of allowance at end of year 675.6 57.6 733.2
======= ======= =======
Amount of allowance not deducted from credit
to public 1.0 - 1.0
------- ------- -------
(1) Not including allowance for interest on non-income bearing loans.
(2) Including a general allowance in accordance with Bank of Israel
directives in the total amount of NIS 38.9 million (as at December 31,
2006 - NIS 38.9 million; as at December 31, 2005 - NIS 38.9 million).
F - 83
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
D. CLASSIFICATION OF BALANCES OF CREDIT TO THE PUBLIC (1) AND OFF-BALANCE
SHEET CREDIT RISK (2) IN ACCORDANCE WITH THE SIZE OF THE CREDIT PER
BORROWER
DECEMBER 31, 2007
---------------------------------------------
NUMBER OF CREDIT
BORROWERS (3) CREDIT (1) RISK (2)
------- ------- -------
AMOUNT OF CREDIT PER BORROWER REPORTED AMOUNTS
- --------------------------------- ---------------------------------------------
NIS THOUSANDS NIS MILLIONS
- --------------------------------- ---------------------------------------------
Up to 10 33 0.2 -
From 10 to 20 19 0.3 -
From 20 to 40 15 0.4 -
From 40 to 80 17 0.9 0.1
From 80 to 150 26 2.5 0.2
From 150 to 300 49 9.9 1.0
From 300 to 600 57 22.4 1.7
From 600 to 1,200 74 61.4 2.7
From 1,200 to 2,000 43 59.7 7.6
From 2,000 to 4,000 37 97.0 13.1
From 4,000 to 8,000 13 66.8 5.3
From 8,000 to 20,000 10 84.5 32.8
From 20,000 to 40,000 2 38.2 28.0
From 40,000 to 200,000 3 158.9 71.1
From 3,200,000 and up 1 4,963.2 (4) -
------- ------- -------
399 5,566.3 163.6
======= ======= =======
(1) The credit is net of the specific allowances for doubtful debts.
(2) Credit risk relating to off-balance sheet financial instruments as
computed for the purpose of individual borrower debt limitations.
(3) The number of borrowers is based on the total credit and credit risk.
Borrowers that constitute one legal entity were grouped together.
(4) Credit secured by a guarantee of the State.
F - 84
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 4 - CREDIT TO THE PUBLIC (NET OF ALLOWANCE FOR DOUBTFUL DEBTS) (CONT'D)
D. CLASSIFICATION OF BALANCES OF CREDIT TO THE PUBLIC (1) AND OFF-BALANCE
SHEET CREDIT RISK (2) IN ACCORDANCE WITH THE SIZE OF THE CREDIT PER
BORROWER (CONT'D)
DECEMBER 31, 2006
------------------------------------------
NUMBER OF CREDIT
BORROWERS (3) CREDIT (1) RISK (2)
------- ------- -------
AMOUNT OF CREDIT PER BORROWER REPORTED AMOUNTS
- -------------------------------- ------------------------------------------
NIS THOUSANDS NIS MILLIONS
- -------------------------------- ------------------------------------------
Up to 10 98 0.6 -
From 10 to 20 42 0.6 -
From 20 to 40 34 1.0 -
From 40 to 80 30 1.4 0.2
From 80 to 150 33 3.5 0.2
From 150 to 300 56 11.2 1.5
From 300 to 600 65 25.2 0.8
From 600 to 1,200 81 68.3 2.3
From 1,200 to 2,000 53 76.0 6.5
From 2,000 to 4,000 53 141.8 10.9
From 4,000 to 8,000 22 110.9 9.5
From 8,000 to 20,000 17 175.2 38.0
From 20,000 to 40,000 5 112.6 29.6
From 40,000 to 200,000 3 171.5 84.7
From 3,200,000 and up 1 5,671.0 (4) -
------- ------- -------
593 6,570.8 184.2
======= ======= =======
(1) The credit is net of the specific allowances for doubtful debts.
(2) Credit risk relating to off-balance sheet financial instruments as
computed for the purpose of individual borrower debt limitations.
(3) The number of borrowers is based on the total credit and credit risk.
Borrowers that constitute one legal entity were grouped together.
(4) Credit secured by a guarantee of the State.
E. CUSTOMER'S DEBT RECLASSIFIED TO THE "SECURITIES" ITEM
In his letter of July 15, 2003, regarding a debt of a customer in respect
of which a receiver was appointed to realize shares pledged in favor of the
Bank, the Supervisor of Banks stated that it is no longer proper to treat
the outstanding balance of the debt, due to be repaid through the
realization of the said shares by the receiver, as a credit item.
Accordingly, the balance of the debt was reclassified on June 30, 2003, and
stated as shares included in the item "Available-for-sale securities",
presented at their market value at that date.
Beginning with June 30, 2003, these shares are included in the "Securities"
item and from that date the changes in the market value of these shares are
recorded in a capital reserve.
In view of the inability of the customer to honor his debt, the Bank in the
past classified this debt as non-income bearing and recorded the allowances
required from such classification. The supplementary allowance for doubtful
debts recorded in respect of the classification of the debt as non-income
bearing was cancelled in 2005.
F - 85
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 5 - CREDIT TO GOVERNMENTS
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Deposits in foreign currency out of loans received - 6.8
Amounts receivable in connection with exchange
rate insurance of capital notes 20.2 24.9
Credit to foreign governments - 2.0
Other credit 4.5 7.8
------- -------
Total credit to governments 24.7 41.5
======= =======
NOTE 6 - FIXED ASSETS
A. This item includes equipment, computers, furniture and motor vehicles
as follows:
CHANGES DURING THE YEAR
AT ------------------------ AT
JANUARY 1 DECEMBER 31
2007 ADDITIONS DISPOSALS 2007
------- ------- ------- -------
REPORTED AMOUNTS
---------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- -------
Cost 57.6 0.1 - 57.7
Accumulated depreciation (56.5) (0.4) - (56.9)
------- ------- ------- -------
Net book value 1.1 (0.3) - 0.8
======= ======= ======= =======
B. The average rate of depreciation is 25% (2006 - 21%).
F - 86
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 7 - OTHER ASSETS
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Excess of income tax advances over current
provisions - 0.1
Prepaid expenses 1.1 1.6
Payroll VAT receivable 2.8 5.9
Debit balances in respect of derivative financial instruments 0.5 2.1
Sundry receivables and debit balances 2.8 2.4
------- -------
Total other assets 7.2 12.1
======= =======
NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Deposit in respect of the "C", "CC" and "CC1" non-redeemable
participating preference shares linked to the U.S. dollar (B) 324.2 315.4
Deposit in respect of the "D" redeemable non-participating
preference shares linked to the U.S. dollar (C) 119.5 116.3
Deposit in respect of the "DD" redeemable non-participating
preference shares linked to the U.S. dollar (C) 405.1 394.1
------- -------
Total perpetual deposits with the Treasury 848.8 825.8
======= =======
F - 87
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)
A. On May 6, 1996, an agreement was signed between the Bank and the
Treasury of the State of Israel regarding changes in the method of
computing the linkage on perpetual deposits, which the Bank had
deposited with the Israeli Treasury with respect to the Bank's
preference shares (C, CC, CC1, D, and DD).
Until the signing of the agreement the aforementioned deposits were
linked to the exchange rate of the dollar. In addition, the deposits
bear dollar-linked interest at a rate, which, after the payment of VAT
on profit imposed on the Bank's income, leaves the Bank with an amount
comprising net interest at a rate of 7.5% per annum, the same as the
dividend the Bank used to pay on the aforementioned preference shares.
Pursuant to an Order of the Income Tax Authorities, the interest and
linkage differentials paid on the deposits are exempt from tax, except
for VAT on profit on the interest. The deposits will be repaid to the
Bank at the time of the redemption of the relevant shares or upon
liquidation of the Bank.
Pursuant to the deposit agreements, the aforementioned interest will
be paid to the Bank on the payment dates of the dividends on the
aforementioned preference shares. According to the agreement signed on
May 6, 1996, the deposits have become, in effect, linked to the CPI,
with retroactive effect from October 1, 1987. However, in no case
shall their amount be less than their dollar value as computed prior
to the date of the agreement. Namely, the linkage on the deposits as
at October 1, 1987 is based on the higher of the CPI or the dollar.
The interest continues to be computed based on a dollar calculation.
These deposit agreements do not explicitly establish the rule as to
the interest on the perpetual deposits in the period during which the
Bank is prevented from distributing the aforementioned dividends on
the aforementioned preference shares, and whether the interest will
accrue and be paid when the Bank pays the accrued preferred dividends
in arrears or upon liquidation. The Bank's Board of Directors reached
the conclusion that the interest, which is not claimed due to the
non-payment of the dividend, would accrue to the Bank's credit and,
accordingly, upon liquidation, it would become part of the liquidation
assets. On August 5, 2007, the Tel Aviv District Court rendered a
ruling on the originating motion filed by the Bank, in which it
rejected the position of the Bank and stipulated that as long as a
dividend is not distributed on the Bank's preference shares, no
interest accrues on the perpetual deposits with the Treasury. The
amount of the accrued interest, which has not yet been drawn, totals
NIS 185.4 million as of December 31, 2007 (NIS 167.0 million as at
December 31, 2006), and is not recorded in the financial statements of
the Bank. This amount is equal to the amount of the accrued dividend
in arrears, which is also not recorded in the financial statements.
See Note 16E for further details regarding the discontinued
distribution of dividend and the requests made to the Ministry of
Finance and the Government Companies Authority with respect to the
above matter as well as regarding the legal proceedings being held on
this matter.
F - 88
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 8 - PERPETUAL DEPOSITS WITH THE ISRAEL TREASURY (CONT'D)
Concurrent with the signing of the above-mentioned agreement, the
Bank's Articles of Association were amended in May 1996. According to
the amendment, an ordinary "B1" share (currently held by the State of
Israel) was separated from all of the ordinary "B" shares. The
difference deriving from the change in the method of calculating the
revaluation of the deposit (should such difference exist) shall be
paid, upon liquidation of the Bank to the holder of the "B1" share.
However, the right attached to the ordinary "B1" share ranks after the
settlement in full of all amounts due in the present and future to
creditors of the Bank, and after repayment of the paid-up share
capital to the holders of the Bank's preferred ordinary shares,
ordinary "A" shares and ordinary "B" shares and after repayment of the
paid-up share capital, including linkage differentials, to the holders
of the Bank's linked preferred shares of the "C", "CC", "CC1", "D" and
"DD" classes and payment of the cumulative preferred dividends in
arrears to these preferred shareholders and to ordinary shareholders.
Further to the agreement with the Treasury, there was an increase in
the amount of the deposits with the Treasury and a parallel increase
in the Bank's shareholders' equity. As of the date of the signing of
the agreement, the aforementioned increase in deposits and capital
amounts to NIS 279.6 million. As of December 31, 2007, this difference
amounts to NIS 402.3 million (December 31, 2006 - NIS 335.2 million).
B. As noted, up to May 6, 1996, the above-mentioned deposits were linked
to the dollar. The difference which arose up to May 6, 1996, between
the adjustment of the deposit on the basis of the dollar linkage, in
respect of the participating, preference "C", "CC" and "CC1" shares,
which are also dollar-linked, and the adjustment thereof to the CPI,
was credited in the statement of shareholders' equity to "accumulated
difference on translation of dollar linked deposits." Further to the
initial implementation of Accounting Standard No. 22, as at January 1,
2006, the Bank cancelled the balance of the accumulated difference
from the dollar-linked deposit, due to the reclassification of the
participating preference shares to a liability and their being
measured as at that date at their dollar-linked value.
C. Up to May 6, 1996, the above-mentioned deposits were linked to the
dollar. The difference which arose up to May 6, 1996, between the
adjustment of the deposit on the basis of the dollar linkage in
respect of the non-participating preference "D" and "DD" shares, which
do not constitute shareholder's equity and which are also linked to
the dollar, and the adjustment of the above-mentioned deposit to the
CPI, was recorded in the statement of income, as was recorded the
difference arising from the liabilities in respect of these shares. As
a result of signing the above-mentioned agreement, differences arose
from the date of signing between the adjustment of the deposits with
the Treasury (linked to the higher of the CPI or the dollar), and the
adjustment of the non-participating dollar-linked preference D and DD
shares and the participating dollar-linked preference C, CC, and CC1
shares. Such differences are recorded in the statement of
shareholder's equity under "accumulated difference on translation of
CPI linked deposits." As at December 31, 2007, the balance of this
item amounted to NIS 402.3 million (December 31, 2006 - NIS 335.2
million).
F - 89
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 9 - DEPOSITS OF THE PUBLIC
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
On-demand deposits 11.4 14.2
Fixed-term and other deposits 37.0 44.3
Savings deposits 6.2 8.4
------- -------
Total deposits from the public 54.6 66.9
======= =======
NOTE 10 - DEPOSITS OF BANKS
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Fixed-term deposits - 6.8
Special line of credit from the Bank of Israel (1) 481.2 761.5
------- -------
Total deposits of banks 481.2 768.3
======= =======
(1) See Note 17 regarding a pledge provided as security for credit
received from the Bank of Israel.
NOTE 11 - PERPETUAL DEPOSIT
This deposit of the Israeli Treasury is unlinked and is convertible at
any time, at the request of the Israeli Treasury, into ordinary "B"
shares of the Bank, at their par value.
The deposit is perpetual, but the Israeli Treasury has the right to
demand its redemption in the event that the State's voting power in
the Bank falls below 20%. The redemption would thereupon be effected
in twenty-five equal annual installments, beginning ten years after
the date of the demand for redemption. The Bank has agreed to issue
capital notes to the State of Israel in place of the deposit, on
identical terms and conditions.
F - 90
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 12 - CAPITAL NOTES
This series of capital notes of a par value of $ 49,976,000 bears
interest at the rate of 7.5% per annum and was due on December 31,
1998. The terms of the above capital notes provide that the redemption
date of notes for which the holders did not give notice of their
intention to redeem, will be deferred by an additional 18 months each
time. Over the last nine years, notes of a par value of $ 44,730,755
were redeemed. Accordingly, the balance of notes still outstanding as
at December 31, 2007 amounts to $ 5,245,245 which constitute NIS 20.2
million (December 31, 2006 - $ 5,684,245 which constitute NIS 24.0
million). The next redemption date for the capital notes is June 30,
2009. The Bank is entitled to redeem the unredeemed capital notes at a
premium of 5%. See Note 5 regarding amounts receivable with respect to
exchange rate insurance on the capital notes.
NOTE 13 - OTHER LIABILITIES
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Excess of provision for severance pay and pensions over
amounts funded (see Note 18) 21.3 26.2
Provision for vacation pay, long-service
bonus and unutilized sick leave (see Note 18) 4.3 5.4
Prepaid income 0.5 1.5
Credit balances in respect of derivative financial instruments 0.6 -
Allowance for doubtful debts in respect of an off-balance sheet item 1.3 1.9
Sundry creditors and credit balances 22.7 23.2
------- -------
Total other liabilities 50.7 58.2
======= =======
F - 91
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 14 - NON-PARTICIPATING SHARES
A. COMPOSITION:
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
"B" ordinary shares - -
"D" preference shares linked to the US dollar (1) 62.9 69.1
"DD" preference shares linked to the US dollar (1) 213.1 234.1
------- -------
Total non-participating shares 276.0 303.2
======= =======
(1) See Note 8 regarding a deposit with the Israeli Treasury in respect of
non-participating preference shares.
B. ADDITIONAL DATA REGARDING THE NON-PARTICIPATING SHARES AND THE
PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN NOMINAL VALUES)
AUTHORIZED ISSUED AND PAID
--------- ---------------------------
2007 2007 2006
NUMBER --------- --------- ---------
OF SHARES CLASS OF SHARES NIS NIS NIS
- ------------- ------------------------------------------ --------- --------- ---------
135,399 "B" ordinary shares of NIS 0.1 each 13,539.9 13,489.9 13,489.9
164,000 7.5% cumulative "D" preference
shares of NIS 0.03 each, linked to the
US dollar at the rate of
$1 = NIS 0.0003, redeemable
at a premium of 5 5/8 %
(redemption dates will be
determined by the Bank subject
to approval by the Israeli Treasury) 4,920 4,904.3 4,904.3
60,000 7.5% cumulative "DD" preference
shares of NIS 2.1 each, linked to the
US dollar at the rate of
$1 = NIS 0.0021 redeemable (without
premium) (redemption dates will be
determined by the Bank, subject to
approval by the Israeli Treasury) 126,000 116,358.9 116,358.9
--------- --------- ---------
Total shares 144,459.9 134,753.1 134,753.1
========= ========= =========
F - 92
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 14 - NON-PARTICIPATING SHARES (CONT'D)
C. For rights in dividend distributions - see Note 16D.
D. For cessation of dividend distributions - see Note 16E.
E. For rights upon liquidation - see Note 16F.
F. All the non-participating shares are not traded on the Tel-Aviv Stock
Exchange.
F - 93
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 15 - PARTICIPATING PREFERENCE SHARES *
A. COMPOSITION:
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
"C" preference shares linked to the US dollar (1) 65.4 71.8
"CC" preference shares linked to the US dollar (1) 38.4 42.3
"CC1" preference shares linked to the US dollar (1) 66.8 73.3
------- -------
Total participating shares 170.6 187.4
======= =======
(1) See Note 8 regarding a deposit with the Israeli Treasury in respect of
non-participating preference shares.
B. ADDITIONAL DATA REGARDING THE PARTICIPATING PREFERENCE SHARES AND THE
PRINCIPAL RIGHTS ATTACHED THERETO (THE AMOUNTS ARE IN NOMINAL VALUES)
AUTHORIZED ISSUED AND PAID
------- -----------------------
2007 2007 2006
NUMBER ------- ------- -------
OF SHARES CLASS OF SHARES NIS NIS NIS
- ------------- ------------------------------------------ ------- ------- -------
17,000,000 6% cumulative "C" participating
preference shares of NIS 0.00018 each,
linked to the US dollar at the rate of
$1 = NIS 0.00018 3,060 3,060 3,060
1,000,000 6% cumulative "CC" participating
preference shares of NIS 0.003 each,
linked to the US dollar at the rate of
$1 = NIS 0.0003 3,000 3,000 3,000
1,740,000 6% cumulative "CC1" participating
preference shares of NIS 0.003 each,
linked to the US dollar at the rate of
$1 = NIS 0.0003 5,220 5,204 5,204
------- ------- -------
Total shares 11,280 11,264 11,264
======= ======= =======
The participating shares are traded on the Tel-Aviv Stock Exchange.
C. For rights in dividend distributions - see Note 16D.
D. For cessation of dividend distributions - see Note 16E.
E. For rights upon liquidation - see Note 16F.
* For information regarding the accounting classification of the
participating preference shares as a result of the initial
implementation of Accounting Standard No. 22, see Note 1D.
F - 94
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY
A. The following are details regarding the nominal value of the share
capital and the principal rights attached thereto:
AUTHORIZED ISSUED AND PAID
------- -----------------------
2007 2007 2006
NUMBER ------- ------- -------
OF SHARES TYPE OF SHARES NIS NIS NIS
- ------------- ------------------------------------------ ------- ------- -------
16,000 "A" ordinary shares of NIS 0.1 each 1,600 1,510 1,510
1 "B1" ordinary share of NIS 0.1 0.1 0.1 0.1
1,000,000 8% cumulative participating preferred ordinary shares of NIS 0.001 each 1,000 1,000 1,000
50,100 Unclassified shares of NIS 0.1 each 5,010 - -
------- ------- -------
Total shares 7,610.1 2,510.1 2,510.1
======= ======= =======
The ordinary preference shares are traded on the Tel Aviv Stock Exchange.
None of the other shares are traded.
F - 95
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
B. VOTING RIGHTS
Only "A" class ordinary shares and ordinary preferred shares grant their
holders the right to receive notification regarding general shareholders'
meetings of the Bank, and to participate and vote in the general meetings
of the Bank. Every "A" class ordinary share has 1000 votes and every
ordinary preferred share has one vote.
C. RIGHT TO APPOINT DIRECTORS
According to the Bank's Articles of Association, the Board of Directors is
comprised of no less than 7 and no more than 15 directors. The directors of
the Bank (except for the Chairman of the Board) are appointed solely by
holders of "A" class ordinary shares. Every 1015 "A" class ordinary shares
grant the right to appoint one director. The other shares in the Bank do
not grant rights to appoint directors of the Bank. The appointment of
external directors is done in accordance with an agreement that was signed
in July 2001 between Bank Leumi le-Israel B.M., Leumi Industrial
Development Bank Ltd., Poalim Trust Services Ltd., Bank Hapoalim B.M.,
Israel Discount Bank Ltd. and the nominee company of Israel Discount Bank
Ltd., and the decision of the Government from March 2001. In accordance
with the aforementioned agreement and Government decision, one external
director is appointed by the general meeting on account of the rights to
appoint directors of the three banking groups that are party to the
aforementioned agreement (as proposed by one of them and supported by the
others) and an additional external director is appointed by the general
meeting on account of the State's rights to appoint directors.
The Chairman of the Board, who is the extra director (the fifteenth
director), is appointed by all the other members of the Board who were
appointed, as above, by the holders of "A" class ordinary shares.
D. RIGHTS TO RECEIVE A PREFERENCE DIVIDEND
According to the Bank's Articles of Association, in the event that there
are sufficient profits, the Bank shall first distribute a preferred
dividend of 6% per annum (plus necessary adjustments due to linkage to the
dollar) on the paid-in capital of "C" class preference shares, the paid in
capital of "CC" class preference shares and the paid-in capital of "CC1"
class preference shares, and of 7 1/2% per annum (plus necessary
adjustmenTS due to linkage to the dollar) on the paid-in capital of "D"
class preference shares, and the paid-in capital of "DD" class preference
shares, all dividends being pari-passu and pro-rata to the paid-in capital
of the aforementioned shares, and then will distribute an 8% cumulative
preferred dividend on the paid in capital of ordinary preferred shares.
However, if until then preferred dividends in arrears on the shares
accumulated, they will be distributed prior to the other dividends.
F - 96
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
E. CESSATION OF DIVIDEND DISTRIBUTION
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 (the "quarterly dividend"). The Bank deposited
the proceeds of issue of these preferred shares 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 a 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.
According to the Companies Law - 1999 (hereinafter - "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
earnings and the years 2005 - 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
did not remain even with nominal earnings.
The last quarterly 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.
Immediately 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, at that stage, not to distribute a dividend for the third quarter
of 2002. 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 of Association when there are no profits, even in nominal
terms.
o The prohibition on distribution of dividends according to Proper
Banking Procedure, as long as the Supervisor of Banks has not replied
to the Bank's request and has not permitted such distribution.
F - 97
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
E. CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)
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 what the position of the State of Israel
is 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 raised, the Supervisor will notify the Bank as to
his position.
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 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. 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. The reply of the Finance Ministry to the Bank's letter was
unclear and further requests and reminders of the Bank did not result in
its clarification. During that time, the Board of Directors has deliberated
the matter of the dividend on the said preference 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 for the time being.
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.
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 is petitioned 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.
F - 98
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
E. CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)
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.
At the time, the board of directors of the Bank expressed its in principle
position that if the court rules that the interest on the perpetual
deposits does not accrue, the board of directors will reconsider its
position regarding the renewal of the dividend distribution, subject to the
legal and regulatory restrictions placed on the Bank in connection with
this issue, including the need to obtain authorizations and to amend the
by-laws of the Bank. On August 5, 2007, the Tel Aviv District Court issued
its ruling whereby it rejected the originating motion filed by the Bank
against the Finance Minister and the aforementioned financial institutions
and stipulated that as long as no dividend is distributed to the preference
shares of the Bank, the interest does not accrue on the perpetual deposits
of the Bank with the Treasury.
At its meeting of October 9, 2007, the Board of Directors of the Bank
discussed the consequences of the court ruling. The Board decided that
since the claim of the Bank (its originating motion) related not only to
the issue of the accrual of interest on the perpetual deposits in the
absence of a dividend distribution, rather also to its accrual and payment
when a dividend in arrears is paid (including during liquidation), and
since on the basis of the determination of the court that the claim of the
Bank was rejected, a claim could be made that the court ruling also
rejected the right of the Bank to accrued interest against the payment of
the dividend in arrears on the preference shares (a result which in the
opinion of the Board of Directors is basically incorrect and it is
reasonable to assume that the court did not mean it), then the Bank should
file an appeal on the rejection of the suit in connection with the payment
of the accrued interest on the perpetual deposits against payment of the
dividend in arrears. Such an appeal was filed by the Bank with the Supreme
Court on February 6, 2008.
At its meeting on October 9, 2007, the Board also discussed the
ramifications of the aforementioned ruling on its continued policy in
connection with the distribution of a dividend on the preference shares
(preference shares of classes C, CC, CC1, D and DD). In view of the
determination of the court ruling in connection with the non-accrual of
interest on the Bank's perpetual deposits with the Treasury as long as no
dividend is distributed (a determination which the Bank does not dispute),
and after the board considered the interests of both the shareholders of
the Bank and the creditors of the Bank (who in view of the court ruling no
longer profit from the non-distribution of the dividend), the Board reached
a decision that it would be prudent for the Bank to take steps towards a
renewal of the distribution of the dividend. In connection with this, the
Board also decided (at the aforementioned meeting) to take a number of
steps, as follows: 1) to recommend to the general meeting of the Bank to
amend the by-laws of the Bank in connection with two matters that relate to
the renewal of the dividend, one being the authorization to distribute a
dividend not only from profits (which at present are non-existent) but also
from the interest to be paid to the Bank on its perpetual deposits with the
Treasury and the other, the authorization of the distribution of a regular
preference dividend on the Bank's preference shares even without the
distribution - either prior or concurrent - of the preference dividend in
arrears on these shares (since, in view of the wording of the court ruling,
claims may be raised whereby the Bank is not entitled to the accrued
interest on the perpetual deposits against the distribution of the dividend
in arrears, a result that will prevent the Bank from distributing the
dividend in arrears in the absence of sufficient income); 2) to convene a
general meeting of the Bank to amend the Bank's by-laws as above and
empower the Chairman of the Board to determine the date of the meeting;
F - 99
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
E. CESSATION OF DIVIDEND DISTRIBUTION (CONT'D)
3) to petition the Supervisor of Banks for his approval of a distribution
of a dividend to the preferred shareholders, subject to an amendment to the
by-laws, as above, and to obtain the approval of the court to the proposed
distribution (according to the Companies Law - 1999, the distribution of a
dividend not from distributable income requires court approval, and at that
time the Bank did not have distributable income). A detailed description of
the decisions of the Board of Directors at its meeting of October 9, 2007
can be found in the Immediate Reports issued by the Bank on October 10,
2007. In accordance with those decisions of the Board of Directors of the
Bank, on January 7, 2008, the general meeting of the Bank was convened and
on its agenda were the abovementioned proposals for the amendment to the
by-laws of the Bank such that the by-laws would not continue being an
impediment to the renewal of a dividend distribution.
The proposed changes were put to a vote and were rejected by a majority of
the voters. On February 5, 2008, the financing entities which filed the
originating motion against the Bank filed a request with the court to add
the State as an additional respondent to the originating motion, due to,
among other reasons, the vote of the State at the general meeting of the
Bank against the proposed amendments to the by-laws of the Bank.
The cumulative amount of the dividend, at a rate of 7.5% per annum, in
respect of the aforementioned preference shares (including a 1.5%
participating dividend in respect of class C, CC, and CC1 shares) which has
not been paid since the Bank ceased paying dividends is, as of December 31,
2007, an amount of NIS 185.4 million. This amount was not recorded in the
financial statements and is equal to the amount of the interest on the
perpetual deposits which was also not recorded in the financial statements.
The cumulative amount of NIS 185.4 million is broken down as follows: NIS
113.8 million in respect of non-participating shares (D and DD), and an
amount of NIS 71.6 million in respect of participating shares (C, CC, and
CC1). Of this amount, an amount of NIS 33.4 million is in respect of 2007,
as follows: NIS 20.7 million in respect of non participating shares (D and
DD), and an amount of NIS 12.7 million in respect of C, CC, and CC1 shares
which are participating shares.
For information pertaining to the originating motions on the aforementioned
cessation of distribution of dividends, see Note 20D below.
F. RIGHTS UPON LIQUIDATION
Upon liquidation of the Bank, all available assets will be distributed to
shareholders. Following are the first seven stages of distribution in
accordance with the priorities appearing in the Bank's Articles of
Association:
o First - to pay cumulative preferred dividends in arrears, including
dollar linkage differentials, to all classes of preference shares (C,
CC, CC1, D, DD) all being pari passu and pro-rata to the paid in
capital of the aforementioned shares. As at December 31, 2007, the
accrued amount of the preferred dividend in arrears is NIS 170.1
million (as at December 31, 2006 - NIS 152.9 million).
o Second - to pay cumulative preferred dividends in arrears to preferred
ordinary shares. As at December 31, 2007 the dividends in arrears in
respect of the preferred ordinary shares amount to NIS 440 (as at
December 31, 2005 - NIS 360).
F - 100
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT'D)
F. RIGHTS UPON LIQUIDATION (CONT'D)
o Third - to refund paid in capital (plus dollar linkage differentials)
of "C" class preference shares, to refund paid in capital (plus dollar
linkage differentials) of "CC" class preference shares, to refund paid
in capital (plus dollar linkage differentials) of "CC1" class
preference shares, to refund paid in capital (plus dollar linkage
differentials) of "D" class preference shares, to refund paid in
capital (plus dollar linkage differentials) of "DD" class preference
shares - all being pari-passu and pro-rata to the paid in capital of
the aforementioned shares. As at December 31, 2007, the aforementioned
amounts to NIS 446.6 million (as at December 31, 2006 - NIS 490.6
million).
o Fourth - to refund paid in capital of preferred ordinary shares. As at
December 31, 2007, the aforementioned amounts to NIS 1,000 (as at
December 31, 2006 - NIS 1,000).
o Fifth - to refund paid in capital of class "A" ordinary shares, to
refund paid in capital of class "B" ordinary shares, and to refund
paid in capital of class "B1" ordinary shares - all being pari passu
and pro-rata to the paid in capital of the aforementioned shares. As
at December 31, 2007, the aforementioned amounts to NIS 14 thousand
(as at December 31, 2006 - NIS 14 thousand).
o Sixth - the remainder (if at all) of the differences to be paid to the
Bank by the State of Israel upon liquidation as a result of the rate
of increase in the CPI as compared with the increase in the
representative exchange rate of the dollar, in respect of the deposits
made by the Bank with the State, shall be paid to the holder or
holders of the class "B1" ordinary share. As at December 31, 2007, the
aforementioned difference amounts to NIS 402.3 million (as at December
31, 2006 - NIS 335.2 million).
o Seventh - the remainder of ordinary assets will be distributed between
the holders of the class "A" ordinary shares, the holders of the
preferred ordinary shares, and the holders of the C, CC and CC1
preference shares, according to the paid in capital of these shares
and at the ratio of ten per each agora of paid in class "A" ordinary
shares, ten per each agora of paid in preferred ordinary shares, ten
per each agora of paid in class "C" preference shares, six per each
agora of paid in class "CC" preference shares and six per each agora
of paid in class "CC1" preference shares - all being pari-passu and
pro-rata to the paid in capital of the aforementioned shares.
F - 101
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS
Following is the calculation of capital adequacy in accordance with
Directives Nos. 311 and 341 of the Supervisor of Banks, regarding
"Minimal Capital Ratio" and "Capital Allocation with respect to
Exposure to Market Risks":
A. CAPITAL FOR PURPOSES OF CALCULATING CAPITAL RATIO
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
First tier capital 100.4 11.4
Second tier capital (1) 100.4 11.4
------- -------
Total capital 200.8 22.8
======= =======
(1) The general allowance for doubtful debts, in the amount of NIS 38.9
million was deducted from the credit since it is not a part of the
second tier capital.
F - 102
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS (CONT'D)
B. WEIGHTED-BALANCES OF CREDIT RISK
DECEMBER 31, 2007 DECEMBER 31, 2006
----------------------- ----------------------
WEIGHTED CREDIT WEIGHTED CREDIT
BALANCES(2) RISK BALANCES Balances(2) RISK BALANCES
------- ------- ------- -------
REPORTED AMOUNTS
-------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- -------
ASSETS
Cash and deposits with banks 33.8 5.6 66.4 11.7
Securities 46.3 36.8 50.4 50.4
Credit to the public (1) 5,521.1 547.8 6,519.1 831.2
Credit to governments and
perpetual deposits with the
Israeli Treasury 873.5 - 867.3 -
Buildings and equipment 0.8 0.8 1.1 1.1
Other assets 7.2 2.0 12.1 2.4
------- ------- ------- -------
Total assets 6,482.7 593.0 7,516.4 896.8
======= ======= ======= =======
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Transactions representing credit risk 180.4 163.4 224.0 182.8
Derivative financial instruments 47.5 0.9 99.3 1.9
------- ------- ------- -------
Total off-balance sheet financial instruments 227.9 164.3 323.3 184.7
------- ------- ------- -------
Total credit risk assets 6,710.6 757.3 7,839.7 1,081.5
Market risk - 548.0 - 615.5
------- ------- ------- -------
Total risk assets 6,710.6 1,305.3 7,839.7 1,697.0
======= ======= ======= =======
(1) The general allowance for doubtful debts, in the amount of NIS 38.9
million was deducted from the credit since it is not a part of the
second tier capital.
(2) Assets - balance sheet amounts, off-balance sheet financial
instruments - nominal balances weighted by credit conversion factors.
F - 103
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 16A - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS (CONT'D)
C. RATIO OF CAPITAL TO TOTAL RISK ASSETS
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
% %
------- -------
Ratio of first tier capital to total risk assets 7.7 0.67
Ratio of second tier capital to total risk assets 7.7 0.67
------- -------
Ratio of total first and second tier capital to total risk assets 15.4 1.34
======= =======
The ratio of capital to risk assets, as of December 31, 2006, was lower
than the 9% as prescribed by Proper Banking Procedures.
NOTE 17 - LIENS AND RESTRICTIVE CONDITIONS
A. In connection with receiving of the special line of credit from the
Bank of Israel, the Bank signed on November 14, 2002 a debenture in
favor of the Bank of Israel (that was amended on December 29, 2005),
whereby the Bank registered a first degree floating pledge on all of
its assets, excluding the following assets:
- Loans and credits under State guarantee at a total balance sheet
value (according to financial statements as at December 31, 2007)
of NIS 5.0 billion.
- The Bank's deposit with the Ministry of Finance (the Accountant
General) in respect of the DD preference shares of the Bank.
- Deposits made by the Bank from time to time with other banking
institutions in Israel and/or abroad, and/or with brokers in
Israel and/or abroad, which were deposited in connection with
guaranteeing the Bank's liabilities to such banking institutions
and/or brokers, which were created subsequent to November 14,
2002.
Under this debenture, the Bank undertook, among other things, not to
register additional pledges on the assets pledged as part of the
debenture and not to dispose of such assets, in any form, without
receiving the prior written consent of the Bank of Israel.
Notwithstanding the above, the debenture stipulates that the floating
pledge registered therein does not prevent the Bank, or restrict the
Bank in the ordinary course of its business, including the fulfillment
of its obligations, receiving repayments of credit or granting credit.
The balance of the credit line (including accrued interest) as at
December 31, 2007, was an amount of NIS 481.2 million (December 31,
2006 - NIS 761.5 million).
B. As of December 31, 2007, deposits with banks in the amount of NIS 10.0
million have been pledged by the Bank in favor of those banks
(December 31, 2006 - NIS 22.0 million). The Bank of Israel gave its
consent to the pledge, which serves as collateral for transactions in
derivative financial instruments with those banks.
F - 104
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 18 - EMPLOYEE RIGHTS
A. SEVERANCE PAY
1. The Bank's liability for the payment of severance pay to its
employees, which is calculated as customary on the basis of one
monthly salary per each year of employment, is fully covered by
payments and deposits with recognized pension and provident funds, the
purchase of insurance policies and by the unfunded provision in the
books.
2. Commencing on July 15, 2002, Mr. U. Galili has served as the General
Manager of the Bank. During 2005, the Bank extended the employment
agreement of Mr. Galili until July 31, 2008 (the end of the Run-Off
plan).
Commencing on August 14, 2002, Dr. Ra'anan Cohen has served as the
Chairman of the Board of Directors of the Bank. During 2005, the
employment agreement of Dr. Ra'anan Cohen was extended until July 31,
2008 (the end of the Run-Off plan).
On September 1, 2002, Mr. A. Savir joined the Bank's Management. Mr.
Savir serves as Deputy General Manager and as Credit Supervisor of the
Bank. During 2005, the employment agreement of Mr. Savir was extended
until July 31, 2008 (the end of the Run-Off plan).
On May 30, 2007, the Audit Committee and the Board of Directors of the
Bank authorized the granting of additional severance pay to the GM and
the Deputy GM of the Bank upon resignation from their positions (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, there will be 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 September 30, 2007 (approx. NIS 0.8 million).
3. On December 26, 2002 a collective agreement was signed between the
Bank, the New Histadrut (the general federation of labor) and the
representatives of the Bank's employees, which applies to the Bank's
employees who are subject to the collective agreements of the Bank.
The agreement was for a period of 3 years and can be extended by one
additional year. The agreement arranged, inter alia, the following
matters:
F - 105
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 18 - EMPLOYEE RIGHTS (CONT'D)
A. SEVERANCE PAY (CONT'D)
o Management's right to dismiss employees in the framework of
cutbacks in the Bank's activities, as well as the process of
dismissal.
o Cutbacks that will be made in the salary of the employees and in
their related benefits.
o Benefits and special payments that will be due to the employees
who are dismissed, including additional severance pay in addition
to those provided in the law, and with respect to employees
having worked a certain number of years and with a certain number
of years remaining until retirement, conversion of the right to
enhanced severance pay, with the right to receive an early
pension.
On March 14, 2005 the parties signed a new collective agreement which
extended the period of the aforementioned collective agreement (from
December 26, 2002) until the earlier of the end of the Bank's Run-Off
plan (including any change and extension made and approved by the
Government) or December 31, 2007 (the "first extension agreement").
The first extension agreement also provided and clarified the
following points:
A. Employees who according to the original agreement are entitled to
an early pension following their dismissal, will be entitled to
receive it until they reach the age they are entitled to receive
an ordinary pension from the pension fund to which they belong,
following the pension reform that came into effect in Israel
after the signing of the original agreement.
B. Some of the concessions the employees agreed to make in the
original agreement that were limited in time, will continue to
apply also in the period of the first extension agreement.
On July 12, 2006, a new collective agreement was signed between the
parties (the "second extension agreement") which extended for the
second time the aforementioned collective agreement (dated December
26, 2002), as amended by the first extension agreement, until July 31,
2008 (the end of the Run-off Plan). The second extension agreement
also stipulated that should the Run-off Plan be extended past July 31,
2008, the aforementioned collective agreement would be extended until
the termination of the Run-off Plan, but not beyond December 31, 2008.
At present, with the second extension agreement coming to an end,
negotiations are being held regarding the possible extension of the
agreement for an additional period and/or a change in the collective
agreement from December 26, 2002.
Certain provisions of the aforementioned agreements, which for the
most part grant the employees special benefits and payments following
their dismissal, were also applied to employees with personal
contracts who began working with the Bank before January 1, 2003, in
exchange for their agreeing to certain reductions in their terms of
employment, as was done with respect to the employees under the
collective agreements.
As at December 31, 2007, the balance of the provision relating to the
employees included in the aforementioned collective agreement amounted
to NIS 18.2 million (excluding salary tax), compared with NIS 20.8
million in December 2006.
F - 106
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 18 - EMPLOYEE RIGHTS (CONT'D)
A. SEVERANCE PAY (CONT'D)
4. In the past, the Bank signed personal employment contracts with three
senior executives of the Bank. The Bank and these executives have the
right to terminate the employee-employer relationship by providing an
advance notice of three months.
In accordance with these contracts, in the event of the resignation of
the executives, the Bank has undertaken to pay them additional
severance payments and an "adaptation bonus" in addition to the
regular severance pay. In the event that their employment is
terminated by the Bank, these executives are entitled to severance pay
at higher rates or to early pensions. In August 2006, the employment
contracts of these three employees were amended with regard to the
severance terms in the event of termination by the Bank. The amended
terms, which in general are inferior to those included in the original
employee contracts, were determined on the basis of the principles of
the collective agreement dated December 26, 2002 and in accordance
with the approval of the Supervisor of Wages in the Israeli Finance
Ministry.
The Bank has an appropriate provision included in the reserve for
severance pay in respect of these liabilities, which as at December
31, 2007 amounted to NIS 6.4 million (December 31, 2006 - NIS 6.5
million).
5. In the framework of the Economic Policy Law for 2005 (Legislation
Amendments) - 2004, which was approved by the Knesset on March 29,
2005, the definition of "salary" for purposes of paying salary tax by
financial institutions, including the Bank, was expanded so as to
include also a retirement grant or a death grant and any other amount
paid by an employer to an advanced study fund or provident fund that
is not a central severance pay fund, even if according to Section 3 of
the Income Tax Ordinance it is not considered earned income on the
date it was paid to the advanced study fund or the provident fund. The
amendment is in effect from January 1, 2005. In accordance with an
examination of the Bank, the aforementioned law mainly affects the
special collective agreement that was signed on December 26, 2002 with
respect to the dismissal of employees. Following the said change in
the definition of salary tax the Bank recorded a provision in 2005 in
the amount of NIS 3.7 million in respect of salary tax on expenses
relating to early retirement.
6. Following is the data relating to provisions and funding for severance
pay included in the balance sheet:
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Provision for severance pay 43.4 48.0
Amounts funded with pension and provident funds
(including earnings thereon) 22.1 21.8
------- -------
Unfunded provision included in "Other liabilities" 21.3 26.2
======= =======
The Bank may not withdraw amounts funded other than for the purpose of
discharging severance pay liabilities.
F - 107
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 18 - EMPLOYEE RIGHTS (CONT'D)
B. UNUTILIZED SICK LEAVE
Employees who retire or are terminated are entitled, under certain
conditions, to compensation in respect of unutilized sick leave. In the
opinion of Management of the Bank an adequate provision has been included
in the financial statements in this respect. The balance of the provision
as at balance sheet date totals NIS 2.5 million (December 31, 2006 - NIS
3.1 million) and is included in the "Other liabilities" item.
C. LONG SERVICE BONUS
In accordance with the current collective employment agreement at the Bank,
employees who are subject to this agreement are entitled to a special long
service bonus upon completing periods of twenty-five years and thirty years
of service with the Bank. A full provision has been made in the financial
statements for this liability, based on the probability of the employee
still being employed by the Bank on one of the two aforementioned dates.
The balance of the provision as at balance sheet date is NIS 0.1 million
(December 31, 2006 - NIS 0.1 million). This balance is included in "Other
liabilities" item.
D. UNUTILIZED VACATION
The balance of the provision for unutilized vacation is NIS 1.7 million as
at balance sheet date (December 31, 2006 - NIS 2.2 million). The balance is
included in "Other liabilities" item.
F - 108
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS
REPORTED AMOUNTS
DECEMBER 31, 2007
-----------------------------------------------------------------------------------
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 20.3 3.8 9.6 0.1 - 33.8
Securities - 0.5 - - 45.8 46.3
Credit to the public 104.0 340.2 5,060.2 16.7 - 5,521.1
Credit to governments - 4.5 20.2 - - 24.7
Fixed assets - - - - 0.8 0.8
Other assets 6.1 - - - 1.1 7.2
Perpetual deposits with
the Israeli Treasury - 848.8 - - - 848.8
------- ------- ------- ------- ------- -------
Total assets 130.4 1,197.8 5,090.0 16.8 47.7 6,482.7
------- ------- ------- ------- ------- -------
LIABILITIES
Deposits of the public 29.4 24.7 0.5 - - 54.6
Deposits of banks 481.2 - - - - 481.2
Deposits of
the Government - 256.6 5,062.6 - - 5,319.2
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 20.2 - - 20.2
Other liabilities 16.8 31.9 1.5 - 0.5 50.7
Non-participating shares - - 276.0 - - 276.0
Participating shares - - 170.6 - - 170.6
------- ------- ------- ------- ------- -------
Total liabilities 527.5 313.2 5,531.4 - 0.5 6,372.6
------- ------- ------- ------- ------- -------
Difference (397.1) 884.6 (441.4) 16.8 47.2 110.1
Forward transactions, net 46.5 (30.0) - (16.5) - -
------- ------- ------- ------- ------- -------
Total (350.6) 854.6 (441.4) 0.3 47.2 110.1
======= ======= ======= ======= ======= =======
F - 109
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 19 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (CONT'D)
REPORTED AMOUNTS
DECEMBER 31, 2006
-----------------------------------------------------------------------------------
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
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
======= ======= ======= ======= ======= =======
F - 110
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 20 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
MATURITY DATE (1)
REPORTED AMOUNTS
DECEMBER 31, 2007
------------------------------------------------------------------------------------------------------------------------------------------------
ON DEMAND FROM ONE FROM THREE FROM ONE FROM TWO FROM THREE FROM FOUR FROM FIVE FROM TEN OVER WITHOUT TOTAL
AND UP TO TO THREE MONTHS TO TO TWO TO THREE TO FOUR TO FIVE TO TEN TO TWENTY TWENTY TOTAL CASH MATURITY BALANCE SHEET
ONE MONTH MONTHS ONE YEAR YEARS YEARS YEARS YEARS YEARS YEARS YEARS FLOWS DATE(2) AMOUNT (3)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
UNLINKED ISRAELI CURRENCY
Assets 22.3 1.6 24.9 19.9 4.9 2.1 0.1 - - - 75.8 68.4 130.4
Liabilities 15.0 11.7 3.0 - - - - - - - 29.7 510.0 (4) 527.5
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference 7.3 (10.1) 21.9 19.9 4.9 2.1 0.1 - - - 46.1 (441.6) (397.1)
Derivative instruments
excluding options 16.5 20.1 9.9 - - - - - - - 46.5 - 46.5
ISRAELI CURRENCY LINKED TO THE CPI
Assets 5.5 11.9 50.4 60.4 56.6 49.3 47.2 127.6 68.3 - 477.2 848.8 1,197.8
Liabilities 1.2 12.6 47.2 50.7 49.6 48.4 45.0 48.1 2.4 - 305.2 31.3 313.2
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference 4.3 (0.7) 3.2 9.7 7.0 0.9 2.2 79.5 65.9 - 172.0 817.5 884.6
Derivative instruments
excluding options - (20.1) (9.9) - - - - - - - (30.0) - (30.0)
FOREIGN CURRENCY AND
LINKED THERETO
Assets 22.8 139.7 419.5 574.3 549.1 544.8 540.8 2,675.8 2,808.8 - 8,275.6 5.1 5,106.8
Liabilities 0.2 139.0 416.6 570.8 546.1 542.2 538.4 2,671.3 2,811.1 - 8,235.7 448.1 5,531.4
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference 22.6 0.7 2.9 3.5 3.0 2.6 2.4 4.5 (2.3) - 39.9 (443.0) (424.6)
Derivative instruments
excluding options (16.5) - - - - - - - - - (16.5) - (16.5)
NON-MONETARY ITEMS
Assets - - - - - - - - - - - 47.7 47.7
Liabilities - - - - - - - - - - - 0.5 0.5
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Difference - - - - - - - - - - - 47.2 47.2
TOTAL AS AT DECEMBER 31, 2007
ASSETS 50.6 153.2 494.8 654.6 610.6 596.2 588.1 2,803.4 2,877.1 - 8,828.6 970.0 6,482.7
LIABILITIES 16.4 163.3 466.8 621.5 595.7 590.6 583.4 2,719.4 2,813.5 - 8,570.6 989.9 6,372.6
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
DIFFERENCE 34.2 (10.1) 28.0 33.1 14.9 5.6 4.7 84.0 63.6 - 258.0 (19.9) 110.1
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
(1) In this table the future cash flows in respect of assets and liabilities
are presented according to linkage base, in accordance with the remaining
period to the contractual maturity date of each cash flow.
(2) Including assets past due in the amount of NIS 67.7 million. The data is
net of specific allowances for doubtful debts.
(3) As included in Note 19 "Assets and liabilities classified according to
linkage base", including off-balance sheet amounts for derivatives.
(4) The balance includes the balance of the credit line that was provided by
the Bank of Israel until July 31, 2008 (the end of the Run-Off plan).
F - 111
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 20 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS AND
MATURITY DATE (1) (CONT'D)
REPORTED AMOUNTS
DECEMBER 31, 2006
------------------------------------------------------------------------------------------------------------------------------------------------------
ON DEMAND FROM ONE FROM THREE FROM ONE FROM TWO FROM THREE FROM FOUR FROM FIVE FROM TEN OVER WITHOUT TOTAL
AND UP TO TO THREE MONTHS TO TO TWO TO THREE TO FOUR TO FIVE TO TEN TO TWENTY TWENTY TOTAL CASH MATURITY BALANCE SHEET
ONE MONTH MONTHS ONE YEAR YEARS YEARS YEARS YEARS YEARS YEARS YEARS FLOWS DATE(2) AMOUNT (3)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS MILLIONS
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
UNLINKED ISRAELI CURRENCY
Assets 37.1 3.6 36.6 34.3 30.3 4.0 2.1 3.3 - - 151.3 128.0 257.5
Liabilities 25.2 21.1 128.5 114.0 - - - - - - 288.8 569.5 (4) 809.7
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Difference 11.9 (17.5) (91.9) (79.7) 30.3 4.0 2.1 3.3 - - (137.5) (441.5) (552.2)
Derivative instruments
excluding options 52.2 19.9 24.1 - - - - - - - 96.2 - 96.2
ISRAELI CURRENCY LINKED TO THE CPI
Assets 10.2 21.4 74.7 82.5 73.9 67.5 58.7 163.4 87.9 0.8 641.0 825.8 1,309.3
Liabilities 20.5 11.9 47.5 51.9 49.3 48.2 47.0 89.7 3.2 - 369.2 37.6 376.4
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Difference (10.3) 9.5 27.2 30.6 24.6 19.3 11.7 73.7 84.7 0.8 271.8 788.2 932.9
Derivative instruments
excluding options - (19.9) (24.1) - - - - - - - (44.0) - (44.0)
FOREIGN CURRENCY AND
LINKED THERETO
Assets 26.2 160.4 496.8 617.5 611.7 606.4 600.6 2,949.2 3,672.5 - 9,741.3 36.8 5,897.2
Liabilities 2.8 158.1 488.8 608.3 604.1 599.9 595.6 2,940.5 3,673.6 - 9,671.7 492.2 6,308.8
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Difference 23.4 2.3 8.0 9.2 7.6 6.5 5.0 8.7 (1.1) - 69.6 (455.4) (411.6)
Derivative instruments
excluding options (52.2) - - - - - - - - - (52.2) - (52.2)
NON-MONETARY ITEMS
Assets - - - - - - - - - - - 52.4 52.4
Liabilities - - - - - - - - - - - 1.5 1.5
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Difference - - - - - - - - - - - 50.9 50.9
TOTAL AS AT DECEMBER 31, 2006
ASSETS 73.5 185.4 608.1 734.3 715.9 677.9 661.4 3,115.9 3,760.4 0.8 10,533.6 1,043.0 7,516.4
LIABILITIES 48.5 191.1 664.8 774.2 653.4 648.1 642.6 3,030.2 3,676.8 - 10,329.7 1,100.8 7,496.4
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
DIFFERENCE 25.0 (5.7) (56.7) (39.9) 62.5 29.8 18.8 85.7 83.6 0.8 203.9 (57.8) 20.0
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
(1) In this table the future cash flows in respect of assets and liabilities
are presented according to linkage base, in accordance with the remaining
period to the contractual maturity date of each cash flow.
(2) Including assets past due in the amount of NIS 154.3 million. The data is
net of specific allowances for doubtful debts.
(3) As included in Note 19 "Assets and liabilities classified according to
linkage base", including off-balance sheet amounts for derivatives.
(4) The balance includes the balance of the credit line that was provided by
the Bank of Israel until July 31, 2008 (the end of the Run-Off plan).
F - 112
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS
A. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
DECEMBER 31 DECEMBER 31
2007 2006
----- -----
REPORTED REPORTED
AMOUNTS AMOUNTS
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Transactions the balance of which
represents a credit risk -
Guarantees securing credit 157.9 170.9
Guarantees to home purchasers 17.9 46.2
Other guarantees and liabilities 4.6 6.3
Unutilized revolving credit facilities - 0.6
B. OTHER CONTINGENT LIABILITIES AND COMMITMENTS
1. See Note 18A with respect to the contingent liabilities regarding
personal employment agreements with senior executives.
2. Long-term rental agreement -
During 2003, the Bank signed a rental agreement in respect of its
office premises for the period ending in August 2009. The annual
rental payment, which is linked to the CPI, amounts to NIS 1.1
million.
3. As at January 1, 2004 the Bank has outsourced its computer services,
according to which it signed an agreement to receive computer services
for a period of five years. As part of the agreement, the company with
which the Bank signed the agreement undertook to provide the Bank with
ongoing management and operational services of its information
systems, operation and maintenance of hardware, computers, peripheral
equipment, communications and infrastructure software, operation and
maintenance of applications, making changes and adjustments to the
information systems, data security, etc. In 2008, the cost of the
service will amount to NIS 2.2 million per annum. This agreement will
expire on December 31, 2008 and the parties have no commitment to
extend it further.
4. During 2006, the Bank signed an agreement to receive storage and
archive services for a period of four years, ending at the end of
April 2010. The annual cost is estimated at NIS 78 thousand.
5. A few years ago, the Bank entered into agreements whereby it will
participate in private investment funds. The total amount approved for
investment by the Bank amounts to U.S.$ 20 million. The said
investment funds invest in Israeli companies or companies related to
Israel and in hi-tech companies. The investment in them is presented
under the "Securities" item. The major part of the investments made by
these funds is in the credit component. The balance of these
liabilities as at balance sheet date amounts to U.S.$ 0.7 million.
F - 113
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
C. INDEMNIFICATION AND LETTERS OF EXEMPTION FOR SENIOR OFFICERS
1) The Company issued to its officers and directors a letter of
indemnification that was approved by the shareholders' general meeting
of the Bank on August 8, 2002. According to the letter of
indemnification that was issued, the Bank undertook to indemnify its
officers and directors in respect of any monetary liability imposed on
them in favor of another person in accordance with a court ruling
(including a ruling made as part of a compromise and an arbitration
decision that received court approval) and in respect of reasonable
legal expenses (including attorney fees), that are imposed on them
following actions (defined as including acts of omission or
commission) that were taken and/or will be taken by them due to their
being officers or directors of the Bank or as part of a position or
duty that they fulfilled and/or will fulfill at the request of the
Bank or on its behalf in a company or other corporate entity or any
business venture in which the Bank has invested or will invest,
providing that these actions are connected with one or more of the
types of events detailed in the letter of indemnification including,
inter alia, the following events:
o The issuance of securities.
o Using voting rights and rights to appoint directors in a company
in which the Bank held and/or will hold shares and/or in another
company and/or business venture in which the Bank has or will
invest.
o Voting for or against any decision of the Board of Directors, a
committee, etc., of a company, entity or venture as
aforementioned.
o The realizing of collateral provided to the Bank.
o The approval of credit and/or the provision of credit and other
actions as part of the Bank's permissible business in accordance
with the Banking Law (Licensing) - 1981.
o The holding of assets in trust.
o The providing of an underwriting commitment.
o A transaction in assets executed by the Bank for itself.
o The issuance of a report or notice as required by law.
o The receipt of licenses and permits.
o Events connected to employee-employer relations.
o The privatization of the Bank and any course of action performed
to further the privatization or in connection therewith.
o Any refraining from executing one or more of the aforementioned
acts.
The amount of the total cumulative indemnification that is payable
according to the aforementioned letter of indemnification shall not
exceed 25% of the Bank's shareholders' equity according to its
financial statements for March 31, 2002, which was NIS 640.3 million,
meaning no more than NIS 160.1 million, linked to the CPI published in
respect of March 2002. The letter of indemnification is subject to the
provisions of the Companies Law and to various conditions as specified
in the letter of indemnification. It is noted that Amendment 3 to the
Companies Law - 1999 (dated March 7, 2005) provides, inter alia, that
an indemnification commitment (such as the aforementioned letter of
indemnification) has to be limited to events the board of directors
believes may actually occur at the time of providing the
indemnification commitment and to an amount or criterion the board of
directors deems as reasonable under the circumstances of the matter.
The question of the amendment applying to existing letters of
indemnification and the interpretation of the aforementioned
restriction have not yet been addressed in court rulings and therefore
the effects of the amendment on the aforementioned writ of
indemnification are uncertain.
F - 114
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
C. INDEMNIFICATION AND LETTERS OF EXEMPTION FOR SENIOR OFFICERS
(CONT'D)
In May 2003, the Audit Committee and the Board of Directors of
the Bank approved the applicability of the letter of
indemnification to an additional director whose appointment ended
prior to July 11, 2002.
2) On February 26, 2008, the Audit Committee and the Board of
Directors of the Bank approved the issuance of a new letter of
indemnification to Officers and Directors of the Bank
(hereinafter - the "New Letter of Indemnification"). The new
letter of indemnification applies to transactions (as defined to
include acts of omission and decisions) conducted commencing on
August 26, 2002 (which is the date on which the Prime Minister's
Office, the Finance Ministry and the Bank of Israel decided on a
package of steps in connection with the Bank, including the sale
of its asset and liability portfolio) and that were performed
and/or will be performed by Officers and Directors of the Bank by
virtue of their being Officers or Directors of the Bank, or by
virtue of any position or job in any company, the shares of which
are and/or will be held by the Bank or in any corporation or
other business project in which the Bank invested and/or will
invest. The new letter of indemnification covers monetary
indebtedness placed on the Officers or Directors in favor of
another person by court ruling (including a ruling rendered as
part of a compromise or arbitration ruling approved by the court)
and which are connected or which derive from events set out in
the new letter of indemnification, that are events that the Board
of Directors of the Bank found to be foreseeable in view of the
activity of the Bank at the date of the approval of the new
letter of indemnification.
These events include, among other things, the following:
o The sale or assignment of credit or collateral.
o Receipt of a special credit line from the Bank of Israel.
o Adoption or extension of the Bank's Run-off Plan.
o Liquidation or receivership of the assets of the Bank.
o Repayment of the perpetual deposits of the Bank with the
Treasury.
o Redemption of the redeemable preference shares of the Bank.
o Conducting and/or advancing negotiations and executing an
arrangement with the shareholders of the Bank as part of
article 350 of the Companies Law - 1999, in connection with
the transfer and/or delivery and/or redemption of their
shares.
o The privatization of the Bank.
o Management of credit, handling debts, restructuring of
debts, taking steps to collect debts.
o Management of various types of risks.
o Activities connected with the disclosure and recording
requirements applicable to the Bank.
The overall amount of the indemnification in respect of the
aforementioned monetary indebtedness to be paid as part of the
new letter of indemnification and the overall amount of the
indemnification in respect of the monetary indebtedness to be
paid as part of the existing letter of indemnification which was
approved by the general meeting of the Bank on August 8, 2002
(hereinafter - the "existing letter of indemnification"), shall
not exceed in the aggregate the ceiling for indemnification set
out in the existing letter of indemnification which, as mentioned
above, amounts to NIS 160.1 million, linked to the Cost of Living
Index in respect of March 2002.
F - 115
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
C. INDEMNIFICATION AND LETTERS OF EXEMPTION FOR SENIOR OFFICERS (CONT'D)
In addition to the aforementioned monetary indebtedness, the new
letter of indemnification also covers reasonable litigation costs,
including attorney fees that officers or directors incurred or will be
charged in certain proceedings. The new letter of indemnification
still requires the approval of the general meeting of the Bank (which
has not yet been given) and in any event will go into effect only upon
submission of a request by the bank to the court to approve a
compromise plan and/or arrangement pursuant to article 350 of the
Companies Law - 1999, between the Bank and all or part of its
shareholders, in connection with (among other things) the purchase
and/or redemption of their shares.
3) On February 26, 2008, the Audit Committee and the Board of Directors
of the Bank approved the issuance of a letter of exemption to Officers
and Directors of the Bank. The letter of exemption exempts the
Officers and Directors of the Bank from liability in respect of damage
caused to the Bank as a result of a breach in their fiduciary
responsibility towards the Bank in actions (defined as including acts
of omission and decisions) carried out and/or that will be carried out
by them by virtue of their being Officers and Directors of the Bank,
except for actions carried out, as above, prior to August 26, 2002.
The letter of exemption still requires the approval of the general
meeting of the Bank (which has not yet been given) and in any event
will go into effect only upon submission of a request by the bank to
the court to approve a compromise plan and/or arrangement pursuant to
article 350 of the Companies Law - 1999, between the Bank and all or
part of its shareholders, in connection with (among other things) the
purchase and/or redemption of their shares.
4) On July 17, 2005 the Bank issued a letter of indemnification to a
former employee of the Bank regarding a possible claim that may be
filed against him by a customer of the Bank and/or representatives of
the customer. The Bank has taken legal measures against this customer
in respect of a liability in the amount of U.S. $ 250,000. The claim
filed by the aforementioned customer also includes various allegations
against the aforementioned employee.
5) On February 11, 2005 the Bank issued a letter of indemnification in
favor of an attorney of the Bank who was appointed as the execution
office receiver for the purpose of realizing a mortgage of the Bank.
The letter of indemnification was issued in respect of proceedings the
Bank and aforementioned attorney are taking in order to annul the sale
agreement that was prepared by the said attorney in the framework of
realizing the mortgage in favor of the Bank.
D. LEGAL ACTIONS
Legal actions, including a motion to certify a claim as a class
action, were filed against the Bank in the ordinary course of
business. Management of the Bank, on the basis of legal opinions
regarding the prospects of the actions, believes that when necessary,
adequate provisions were included in the financial statements to cover
possible losses in respect of those claims.
Following are details of legal actions against the Bank in material
amounts:
1) In March 2003, Lehava Underwriters Ltd. (by virtue of its being a
shareholder of the Bank) filed a derivative claim 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 named
senior officers 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.
F - 116
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
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 for doubtful debts recorded by the Bank
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 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 against 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. The Bank delegated an attorney to represent it in the claim
and the motion for approval. The hearing on the motion was held on May
26, 2005. On June 18, 2006, the Court decided to reject the motion to
approve the suit as a derivative suit and awarded the defendants court
costs and attorney fees. On September 18, 2006, the plaintiff appealed
the decision to reject the motion to approve the suit as a derivative
suit to the Supreme Court. The parties submitted written summaries,
and the completion of oral arguments was held on February 21, 2008.
The Supreme Court has not yet rendered its ruling on the appeal. In
the opinion of the Bank's legal counsel, since the claim is a
derivative action in which 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 bankers policy and a directors and senior officers
liability insurance policy of the filing of the suit. The insurers
carrying the bankers policy notified the Bank that the bankers 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.
F - 117
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
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 July 11, 2007, a compromise agreement was signed
between the Bank and the representative 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 Supervisor who will examine the debt claims of the group.
Concurrently, the Bank entered into a compromise 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 representative 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 compromise agreement
with the representative plaintiff was ratified by the court on
November 4, 2007 (with no objections to its ratification being
submitted), after having been previously ratified by the general
shareholders meeting of the Bank and the Bank paid the amounts set out
in the agreement.
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.
F - 118
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
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 verdict was handed down by the Tel Aviv District
Court whereby it rejected the opening motion filed by the Bank against
the Finance Minister and against the aforementioned financial
institutions and determined that as long as a dividend is not
distributed on the preference shares of the Bank, the interest on the
perpetual deposits of the Bank with the Treasury does not accrue. At
its meeting on October 9, 2007, the board of directors of the Bank
discussed the ramifications of the verdict. The board of directors
decided that since the suit of the Bank (its opening motion) related
not only to the issue of the accrual of the interest on the perpetual
deposits, in the absence of a dividend distribution, rather also to
the accrual and payment of a dividend in arrears (including upon
liquidation), and since on the basis of the determination of the court
that the suit of the Bank was rejected, a claim can be made that the
verdict rejects also the right of the Bank to accrued interest against
the payment of the dividend in arrears on the preferred shares (a
result which the board of directors believes is incorrect and it is
reasonable to assume that the court did not intend such a result),
then the Bank will file an appeal on the rejection of the claim with
regard to the payment of the accrued interest on the perpetual
deposits against the payment of the dividend in arrears.
Notwithstanding the above, the board of directors added in its
decision that the appeal will not be filed if an adequate
clarification is provided by the State as to its consent to pay
accrued interest on the perpetual deposits against the payment of the
dividend in arrears on the preferred shares (Preferred C, CC, CC1, D
and DD shares). Such clarification was not forthcoming and the appeal
of the Bank was submitted to the Supreme Court on January 6, 2008. At
the aforementioned meeting on October 9, 2007, the board of directors
of the Bank also decided that in view of the ruling handed down by the
Tel Aviv District Court on the originating motion of the Bank, it
would be prudent for the Bank to take steps towards the renewal of the
distribution of the dividend and as such, it decided to take a number
of steps including convening a general meeting of the Bank and
recommending to the general meeting to amend the by-laws of the Bank
so as to remove the existing impediment therein against the renewal of
a dividend distribution to the preferred shareholders of the Bank. The
general meeting of the Bank convened on January 7, 2008 and rejected
the proposed amendments to the by-laws of the Bank. On February 5,
2008, the financial entities that filed the originating motion against
the Bank submitted a request to the court to add the State as an
additional respondent to the originating motion due to, among other
reasons, the vote of the State at the general meeting of the Bank
against the proposed amendments to the Bank's by-laws. In the opinion
of the Bank's legal counsel, the likelihood that the court will
require the Bank to pay the dividend, as above, without its being
financed by the State (as interest on the perpetual deposits of the
Bank with the Treasury) is remote.
4) In December 2007, a suit was filed against the Bank in the Tel Aviv-
Jaffa Magistrates Court for an amount of NIS 1.3 million. The suit was
filed by a customer of the Bank which received in the past credit from
the Bank to finance a construction project. As alleged in the suit,
the Bank over charged the plaintiff's account with the bank in respect
of interest and commissions, without its consent or against agreements
with it. According to the plaintiff, if not for these charges, its
account with the Bank as of June 2007 would have had a credit balance
in the amount being sued for and not a debit balance. The Bank
transferred the handling of this suit to an attorney.
F - 119
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
5) 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.
6) 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.
7) 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 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
judgment in the amount of NIS 415 thousand, in respect of amounts the
payment of which was approved by the Ministry of Finance 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.
F - 120
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
D. LEGAL ACTIONS (CONT'D)
8) 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 defending 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.
9) 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. 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 15 million.
E NON-REPORTING IN THE U.S. REGARDING SHARES CONSIDERED "ABANDONED"
The Bank's D and DD preference shares were issued in the U.S., as were some
of the C and CC preference shares and capital notes of the Bank. According
to U.S. state law, under certain circumstances, a security that is uncalled
for is considered to be "abandoned" and it must be reported each year to
the state in which the last residence of the owner of the security is
located. The same state is also entitled to take ownership of the security.
The same applies to the payment of a dividend and/or interest in respect of
securities not collected by the holders of the securities which, when
certain conditions are fulfilled, are also considered to be "abandoned" and
which must be reported and transferred. The shares and capital notes were
issued in the U.S. many years ago and the ongoing handling of the
securities was done by an agent in the U.S. The information which reached
the Bank indicates that no reports were filed with the various states and
as a result the securities and/or the payments in respect of the securities
of the Bank which were not collected became "abandoned".. Failure to file
the required reports and the resulting non-transfer of the securities
and/or the payments, may expose the bank to financial sanctions. There are
various issues involved which still require further investigation, such as
the volume of the securities and payments involved, whether the securities
are indeed subject to U.S. law or to Israeli law, who is entitled to them
as a result of their being "abandoned", the likelihood of sanctions and the
possibility of having them cancelled, and to what extent the Bank is liable
for the failure to report and transfer. At this stage, the Bank is unable
to assess the financial consequences, if at all.
F - 121
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
F. OFF-BALANCE SHEET COMMITMENT AT YEAR-END IN RESPECT OF ACTIVITY BASED
ON COLLECTION OF LOANS*
DECEMBER 31 DECEMBER 31
2007 2006
------- -------
REPORTED REPORTED
AMOUNTS AMOUNTS
------- -------
NIS MILLIONS NIS MILLIONS
------- -------
Credit from deposits based on rate of collection**
Unlinked Israeli currency 335.1 335.6
CPI linked Israeli currency 4.7 4.7
Foreign currency 171.8 188.6
------- -------
Total 511.6 528.9
======= =======
* Credit and deposits from deposits the repayment of which to the
depositor is contingent upon the collection of credit (or deposits).
The Bank presently has no interest margin or collection commission
with respect to the handling of such credit.
** The aforementioned credit and deposits mainly derive from agreements
that were made with the State regarding the granting of credit as
follows:
- Loans intended for research and development.
- Loans in the framework of the fund for small businesses.
- Loans that were granted in the framework of Amendment 39 of the
Law for the Encouragement of Capital Investments.
As at December 31, 2007, the activity based on the extent of collection
includes past due balances amounting to NIS 506.9 million (December 31,
2006 - NIS 524.2 million).
NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS
A. VOLUME OF OPERATIONS
1. Stated amount of derivative instruments ALM (1)
DECEMBER 31, 2007 DECEMBER 31, 2006
--------------------- ---------------------
CPI/SHEKEL FOREIGN CPI/SHEKEL FOREIGN
INTEREST CURRENCY INTEREST CURRENCY
CONTRACTS CONTRACTS CONTRACTS CONTRACTS
------- ------- ------- -------
REPORTED AMOUNTS REPORTED AMOUNTS
--------------------- ---------------------
NIS MILLIONS NIS MILLIONS NIS millions NIS millions
------- ------- ------- -------
Forward contracts 30.4 17.0 45.9 53.4
------- ------- ------- -------
Total 30.4 17.0 45.9 53.4
======= ======= ======= =======
(1) Derivatives comprising part of the asset and liability management of
the Bank, not designated for hedging purposes.
F - 122
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS (CONT'D)
A. VOLUME OF OPERATIONS (CONT'D)
2. Gross fair value of derivative instruments ALM (1)
DECEMBER 31, 2007 DECEMBER 31, 2006
--------------------- ---------------------
CPI/SHEKEL FOREIGN CPI/SHEKEL FOREIGN
INTEREST CURRENCY INTEREST CURRENCY
CONTRACTS CONTRACTS CONTRACTS CONTRACTS
------- ------- ------- -------
REPORTED AMOUNTS REPORTED AMOUNTS
--------------------- ---------------------
NIS MILLIONS NIS MILLIONS NIS millions NIS millions
------- ------- ------- -------
Gross positive fair value - 0.5 1.0 1.1
Gross negative fair value (0.6) - - -
------- ------- ------- -------
Total (0.6) 0.5 1.0 1.1
======= ======= ======= =======
B. DERIVATIVE INSTRUMENTS CREDIT RISK ACCORDING TO THE OPPOSITE PARTY TO
THE CONTRACT
DECEMBER 31, 2007
-------------------------------
REPORTED AMOUNTS
-------------------------------
NIS MILLIONS
-------------------------------
BANKS CENTRAL BANKS TOTAL
------- ------- -------
Gross positive fair value of derivative instruments 0.5 - 0.5
Off-balance sheet credit risk in
respect of derivative instruments (2) 4.7 - 4.7
------- ------- -------
Total credit risk in respect of derivative instruments 5.2 - 5.2
======= ======= =======
DECEMBER 31, 2006
-------------------------------
REPORTED AMOUNTS
-------------------------------
NIS MILLIONS
-------------------------------
BANKS CENTRAL BANKS TOTAL
------- ------- -------
Gross positive fair value of derivative instruments 2.1 - 2.1
Off-balance sheet credit risk in
respect of derivative instruments (2) 9.9 - 9.9
------- ------- -------
Total credit risk in respect of derivative instruments 12.0 - 12.0
======= ======= =======
(1) Derivatives comprising part of the asset and liability management of
the Bank, not designated for hedging purposes.
(2) Off-balance sheet credit risk relating to derivative instruments
(including those with a negative fair value) as computed for
limitation on individual borrower indebtedness.
F - 123
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21A - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS (CONT'D)
C. MATURITY PERIOD - STATED AMOUNTS AT YEAR-END
DECEMBER 31, 2007
----------------------------------
REPORTED AMOUNTS
----------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
CPI/Shekel interest contracts 20.3 10.1 30.4
Foreign currency contracts 17.0 - 17.0
------- ------- -------
Total 37.3 10.1 47.4
======= ======= =======
DECEMBER 31, 2006
----------------------------------
REPORTED AMOUNTS
----------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
------- ------- -------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
CPI/Shekel interest contracts 20.5 25.4 45.9
Foreign currency contracts 53.4 - 53.4
------- ------- -------
Total 73.9 25.4 99.3
======= ======= =======
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
This note contains information on the methods of arriving at the fair value
of financial instruments. Most of the Bank's financial instruments are not
traded on active markets and thus market quotations are not available.
Therefore, the fair value is arrived at by using accepted pricing models,
such as the present value of future cash flows discounted at interest
rates, which reflect the level of risk intrinsic to the financial
instrument. Estimating the fair value by way of determining the future cash
flows and setting the discount interest rate is subjective. Therefore,
regarding most of the financial instruments, the fair value estimate is not
necessarily an indication of the instrument's realizable value on balance
sheet date. The estimate of the fair value was made at interest rates
prevailing at balance sheet date and did not take interest rate
fluctuations into consideration. The use of other interest rates could
result in significantly different fair values. This is especially true in
regard to non-interest bearing financial instruments or those bearing fixed
interest rates. Furthermore, commissions receivable or payable as a result
of the business activity were not taken into account and neither was the
tax effect.
F - 124
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT'D)
Moreover, the difference between the book value and fair value of the
financial instruments may not be realized since, in most cases, the Bank is
likely to hold the instruments until redemption. In view of the above, it
should be emphasized, that the data contained in this note should not be
considered as an indication of the value of the Bank as a going concern.
Furthermore, considering the wide range of valuation and estimation
techniques which may be applied in arriving at fair values, caution should
be used in comparing the fair values arrived at by different banks.
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS
GENERAL - As mentioned in Note 1A, the Bank needed a credit line from the
Bank of Israel. The credit line from the Bank of Israel bears the Bank of
Israel rate of interest. The discount rate of the cash flows of the
deposits raised by the Bank is set, for purposes of the fair value of the
liabilities, on the basis of the said interest rates.
DEPOSITS WITH BANKS AND CREDIT TO THE GOVERNMENT - By use of the method of
discounting future cash flows at interest rates used by the Bank in similar
transactions proximate to balance sheet date.
MARKETABLE SECURITIES - Are valued at market value. Shares for which no
market value is readily available are stated at cost.
CREDIT TO THE PUBLIC - The fair value of the balance of credit to the
public was arrived at by using the method of the present value of future
cash flows discounted at an appropriate interest rate. The balance of such
credit was segmented into several categories. The future aggregate cash
flows of each category (principal and interest) were calculated. Such cash
inflows were discounted at an interest rate, which reflects the level of
risk inherent in the credit. Generally, this interest rate is set on the
basis of the rate at which similar transactions of the Bank were effected
as at balance sheet date. For short-term balances of credit (for an initial
period of up to three months), or balances at variable market interest
rates (prime, Libor, etc.), which change at intervals of up to three
months, their stated value is considered to be their fair value.
The fair value of problematic debts was calculated by using discount rates
reflecting their intrinsic high credit risk. In any event, such discount
rates were not less than the highest interest rate used by the Bank in its
operations proximate to balance sheet date. The future cash flows of
problematic debts were calculated net of the specific allowances for
doubtful debts. The general and supplementary allowances for doubtful debts
in an aggregate amount of NIS 45.3 million (on December 31, 2006 - NIS 51.7
million), were not deducted from the balance of credit to the public for
cash flows purposes in assessing the fair value.
PERPETUAL DEPOSITS WITH THE ISRAELI TREASURY - The accepted pricing models
cannot be applied to such deposits. Therefore, their book value is
considered to be their fair value (see Note 8 for details of the terms of
these deposits).
DEPOSITS, DEBENTURES AND CAPITAL NOTES - The fair value of these
liabilities was arrived at by the method of discounting the future cash
flows at the interest rate paid by the Bank in obtaining similar deposits,
or the interest rate of similar debentures and capital notes issued by the
Bank, prevailing as at balance sheet date.
F - 125
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
DEPOSITS FROM THE BANK OF ISRAEL - The balance in the balance sheet is a
close approximation of the fair value since the deposits are at variable
rates of interest.
NON-PARTICIPATING PREFERENCE SHARES - The common costing models do not
address this type of share. As a result, the fair value is presented as
book value (for information pertaining to the rights of these shares and
the dividend in arrears, see Notes 14 and 16).
PARTICIPATING PREFERENCE SHARES - The common costing models do not address
this type of share. As a result, the fair value is presented as book value
(for information pertaining to the rights of these shares and the dividend
in arrears, see Notes 15 and 16).
DERIVATIVE FINANCIAL INSTRUMENTS - Instruments having an active market,
were valued at market value. Where these instruments are traded on several
markets, valuation was based on quotations in the most active market.
Derivatives that are not traded on an active market, were valued based on
models used by the Bank in its current operations which take into
consideration the inherent risk of the financial instrument (market risk,
credit risk etc.).
FINANCIAL INSTRUMENTS (OTHER THAN DERIVATIVE AND MARKETABLE FINANCIAL
INSTRUMENTS) FOR AN INITIAL PERIOD NOT EXCEEDING THREE MONTHS AND AT
VARIABLE MARKET INTEREST RATES - The amount stated in the balance sheet
represents an approximation of the fair value subject to changes in credit
risks and interest margins of the Bank in transactions at variable interest
rates.
F - 126
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
Following are balances and fair value estimates of financial instruments:
DECEMBER 31, 2007
---------------------------------------------------------
BALANCE SHEET AMOUNTS
-----------------------------------------
OTHER
FINANCIAL FINANCIAL
INSTRUMENTS(1) INSTRUMENTS(2) TOTAL FAIR VALUE
--------- --------- --------- ---------
REPORTED AMOUNTS
---------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------- --------- --------- ---------
FINANCIAL ASSETS
Cash and deposits with banks 31.5 2.3 33.8 33.9
Securities 45.8 0.5 46.3 46.3
Credit to the public 148.5 5,372.6 5,521.1 5,551.9
Credit to governments 0.1 24.6 24.7 26.2
Other financial assets 3.3 - 3.3 3.3
Perpetual deposits with the
Israeli Treasury 848.8 - 848.8 848.8
--------- --------- --------- ---------
Total financial assets 1,078.0 5,400.0 6,478.0 6,510.4
========= ========= ========= =========
FINANCIAL LIABILITIES
Deposits of the public 30.0 24.6 54.6 55.5
Deposits of banks 481.2 - 481.2 481.2
Deposits of the Government
and a perpetual deposit 0.1 5,319.2 5,319.3 5,326.2
Capital notes - 20.2 20.2 21.8
Other financial liabilities 24.0 - 24.0 24.0
Non participating preference
shares 276.0 - 276.0 276.0
Participating preference shares 170.6 - 170.6 170.6
--------- --------- --------- ---------
Total financial liabilities 981.9 5,364.0 6,345.9 6,355.3
========= ========= ========= =========
(1) Financial instruments, the balance sheet amount of which represents
the estimated fair value - financial instruments stated at market
value, or instruments with an initial maturity period not exceeding
three months, or instruments based on market interest rates that vary
at intervals of up to three months.
(2) Other financial instruments.
F - 127
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 21B - BALANCES AND FAIR VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
PRINCIPAL METHODS AND ASSUMPTIONS USED FOR THE CALCULATION OF THE FAIR
VALUE ESTIMATES OF FINANCIAL INSTRUMENTS (CONT'D)
Following are balances and fair value estimates of financial instruments:
(cont'd)
DECEMBER 31, 2006
---------------------------------------------------------
BALANCE SHEET AMOUNTS
-----------------------------------------
OTHER
FINANCIAL FINANCIAL
INSTRUMENTS(1) INSTRUMENTS(2) TOTAL FAIR VALUE
--------- --------- --------- ---------
REPORTED AMOUNTS
---------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------- --------- --------- ---------
FINANCIAL ASSETS
Cash and deposits with banks 56.2 10.2 66.4 66.5
Securities 49.7 0.7 50.4 50.4
Credit to the public 322.7 6,196.4 6,519.1 6,514.5
Credit to governments - 41.5 41.5 41.8
Other financial assets 4.5 - 4.5 4.5
Perpetual deposits with the
Israeli Treasury 825.8 - 825.8 825.8
--------- --------- --------- ---------
Total financial assets 1,258.9 6,248.8 7,507.7 7,503.5
========= ========= ========= =========
FINANCIAL LIABILITIES
Deposits of the public 33.8 33.1 66.9 68.2
Deposits of banks 761.5 6.8 768.3 768.4
Deposits of the Government
and a perpetual deposit 0.1 6,087.4 6,087.5 6,088.2
Capital notes - 24.9 24.9 25.4
Other financial liabilities 25.1 - 25.1 25.1
Non participating preference
shares 303.2 - 303.2 303.2
Participating preference shares 187.4 - 187.4 187.4
--------- --------- --------- ---------
Total financial liabilities 1,311.1 6,152.2 7,463.3 7,465.9
========= ========= ========= =========
(1) Financial instruments, the balance sheet amount of which represents
the estimated fair value - financial instruments stated at market
value, or instruments with an initial maturity period not exceeding
three months, or instruments based on market interest rates that vary
at intervals of up to three months.
(2) Other financial instruments.
F - 128
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 22 - INTERESTED AND RELATED PARTIES
"Related Parties" and "Interested Parties" of the Bank, as defined in
Opinion No. 29 of the Institute of Certified Public Accountants in Israel
and the Securities Regulations (Preparation of Annual Financial Statements)
- 1993, are: The State of Israel; Bank Hapoalim B.M.; Israel Discount Bank
Ltd.; Bank Leumi le-Israel B.M.; the General Manager, Directors of the Bank
and companies related to them, affiliates of the Bank and their related
companies.
The Bank conducts transactions with all or some of the aforementioned
parties, in the ordinary course of business on terms applicable to its
transactions in general. As it is not practical to separately record the
transactions with such entities, it is not possible to reflect the
information required by the said Opinion except for the following details:
A. BALANCES
DECEMBER 31, 2007 DECEMBER 31, 2006
------------------------------------------------- -------------------------------------------------
AFFILIATES AND THEIR AFFILIATES AND THEIR
RELATED COMPANIES DIRECTORS AND GENERAL MANAGER RELATED COMPANIES DIRECTORS AND GENERAL MANAGER
--------------------- --------------------- --------------------- ---------------------
HIGHEST HIGHEST HIGHEST HIGHEST
BALANCE AT BALANCE BALANCE AT BALANCE BALANCE AT BALANCE BALANCE AT BALANCE
BALANCE SHEET DURING THE BALANCE SHEET DURING THE BALANCE SHEET DURING THE BALANCE SHEET DURING THE
DATE YEAR(1) DATE YEAR(1) DATE YEAR(1) DATE YEAR(1)
------- ------- ------- ------- ------- ------- ------- -------
REPORTED AMOUNTS
---------------------------------------------------------------------------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- ------- ------- ------- ------- -------
ASSETS
Credit to the public 0.1 0.2 - - 0.2 0.3 - -
LIABILITIES
Other liabilities - - 0.9 0.9 - - 0.2 0.2
(1) On the basis of the balances at the end of each month.
(*) For information on the credit to the Israel Electric Company
Ltd., granted from the deposit of the State and with the
guarantee of the State - see E below.
F - 129
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 22 - INTERESTED AND RELATED PARTIES (CONT'D)
B. SUMMARY OF RESULTS OF OPERATIONS WITH INTERESTED AND RELATED PARTIES*
2007 2006
--------- ---------
DIRECTORS AND DIRECTORS AND
GENERAL GENERAL
MANAGER MANAGER
--------- ---------
REPORTED AMOUNTS
-----------------------
NIS MILLIONS NIS MILLIONS
--------- ---------
Profit from financing
operations before allowance
for doubtful debts (1) - -
Allowance for doubtful debts - -
Operating and other expenses (2) 2.3 2.3
(1) See details in D hereunder.
(2) See details in C hereunder.
(*) For information on the credit to the Israel Electric Company Ltd.,
granted from the deposit of the State and with the guarantee of the
State - see E below.
C. BENEFITS TO INTERESTED PARTIES
2007 2006
---------------------- ----------------------
DIRECTORS AND GENERAL MANAGER DIRECTORS AND GENERAL MANAGER
---------------------- ----------------------
REPORTED AMOUNTS REPORTED AMOUNTS
---------------------- ----------------------
NUMBER OF NUMBER OF
NIS MILLIONS RECIPIENTS NIS MILLIONS RECIPIENTS
--------- --------- --------- ---------
Interested parties employed by
the Bank (1) 2.3 2 1.7 2
Fees to directors not employed
by the Bank 0.6 9 0.6 10
(1) Not including VAT on salaries.
See Note 18A regarding employment agreements with the Chairman of the Board
of the Bank and its General Manager.
F - 130
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 22 - INTERESTED AND RELATED PARTIES (CONT'D)
D. RESULTS OF FINANCING OPERATIONS (BEFORE ALLOWANCE FOR DOUBTFUL DEBTS)
WITH INTERESTED AND RELATED PARTIES*
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
-----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Income deriving from credit to the public - - -
Expenses deriving from deposits of the public - - -
------- ------- -------
Net results from financing operations
before allowance for doubtful debts - - -
======= ======= =======
Definitions in this note:
- Interested parties - as defined in Paragraph 1 of the definition of an
"interested party in a company" in Section 1 of the Securities Law.
- Related party - as defined in Opinion 29 of the Institute of Certified
Public Accountants in Israel.
- Directors and General Manager - including their spouses and minors
(Opinion 29 of the Institute of Certified Public Accountants in
Israel).
(*) For information on the income and expenses in connection with the
credit to the Israel Electric Company Ltd., granted from the deposit
of the State and with the guarantee of the State - see E below.
E. CREDIT TO THE ISRAEL ELECTRIC COMPANY LTD. AND DEPOSITS OF THE
GOVERNMENT
The Bank provided long-term credit to the Israel Electric Corporation Ltd.
which was granted out of a deposit of the State. The State provided a
guarantee as security for the repayment of such credit to the Bank. As at
December 31, 2007, the balance of the credit was NIS 4,963 million (as at
December 31, 2006 - NIS 5,671 million). An expense of NIS 127 million was
recorded in respect of the aforementioned credit in 2007 (in 2006 - an
expense of NIS 89 million). This refers to dollar-denominated credit and
due to the decrease in the exchange rate of the dollar, negative exchange
rate differentials were recorded. In 2005, income of NIS 864 million was
recorded, constituting more than 10% of the profit from financing
operations before the allowance for doubtful debts in the said year.
As aforementioned, the source for this credit was a deposit of the State of
Israel. In addition to the said deposit, the balance of the Government
deposits includes also deposits made in order to provide loans in the
framework of the Kibbutzim arrangement and other deposits made in order to
provide other long-term loans. As at December 31, 2007, the overall balance
of the Government deposits amounted to NIS 5,319 million compared with NIS
6,087 million as at December 31, 2006. Financing income in an amount of NIS
115 million was recorded in 2007 in respect of the Government deposits,
compared with income of NIS 84 million in 2006 and an expense of NIS 902
million in 2005.
F - 131
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 23 - PROFIT FROM FINANCING OPERATIONS BEFORE ALLOWANCE FOR DOUBTFUL DEBTS
2007 2006 2005
--------- --------- ---------
REPORTED AMOUNTS
--------------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------- --------- ---------
A. INCOME (EXPENSES) DERIVING FROM ASSETS:
Credit to the public (80.7) (39.7) 979.3
Credit to governments - (0.9) 1.0
Deposits with Bank of Israel - - 0.1
Deposits with banks 0.8 0.7 8.2
Debentures - - 0.3
--------- --------- ---------
(79.9) (39.9) 988.9
--------- --------- ---------
B. (EXPENSES) INCOME DERIVING FROM LIABILITIES
Deposits of the public (3.1) (4.4) (15.4)
Deposits of the Government 115.1 84.2 (901.7)
Deposits of Bank of Israel (23.6) (45.2) (43.0)
Deposits of banks 0.1 0.9 0.7
--------- --------- ---------
88.5 35.5 (959.4)
--------- --------- ---------
C. INCOME DERIVING FROM DERIVATIVE FINANCIAL
INSTRUMENTS
Net income from derivative instruments ALM * 0.3 11.6 1.8
--------- --------- ---------
0.3 11.6 1.8
--------- --------- ---------
D. OTHER INCOME AND EXPENSES
Commissions from financing operations 11.0 12.1 13.4
Other financing income** 19.0 11.6 28.1
Other financing expenses (9.6) (12.7) (11.2)
--------- --------- ---------
20.4 11.0 30.3
--------- --------- ---------
Total profit from financing operations before
allowance for doubtful debts 29.3 18.2 61.6
========= ========= =========
Including - exchange rate differences, net (6.1) (9.8) 15.6
========= ========= =========
E. RESULTS FROM INVESTMENTS IN DEBENTURES
Financing income on accrual basis on available-for-
sale debentures (included in income from assets) - - 0.3
--------- --------- ---------
Total profit from investments in debentures - - 0.3
========= ========= =========
* 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 17.4 9.4 21.6
========= ========= =========
F - 132
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 24 - OPERATING COMMISSIONS
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Ledger fees (in Israeli and foreign currency) 0.5 0.4 1.1
Payment order system services - 0.1 0.1
Foreign trade transactions 0.1 0.2 0.2
Credit handling and drafting of contracts - - 0.1
Computerized information services and
confirmations - - 0.1
Other 0.5 0.6 0.6
------- ------- -------
Total operating commissions 1.1 1.3 2.2
======= ======= =======
NOTE 25 - GAINS ON INVESTMENTS IN SHARES
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Gains on sale of available-for-sale shares 3.3 10.3 11.3
Dividend from available-for-sale and trading shares 5.4 6.1 -
------- ------- -------
Total gains on investments in shares 8.7 16.4 11.3
======= ======= =======
NOTE 26 - OTHER INCOME
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Gains on severance funding 0.2 0.8 0.6
Other 1.5 3.0 4.1
------- ------- -------
Total other income 1.7 3.8 4.7
======= ======= =======
F - 133
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 27 - SALARIES AND RELATED EXPENSES
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Salaries 13.3 13.8 14.5
Severance pay, provident fund, pensions,
continuing education fund, vacation pay,
sick leave pay and long service bonuses (*) 2.1 3.0 2.8
National insurance 3.1 0.7 0.8
Other related expenses - 0.1 0.1
------- ------- -------
Total salaries and related expenses 18.5 17.6 18.2
======= ======= =======
(*) In 2006 and 2005, payroll tax was not included in payroll expenses due
to the existence of losses for purposes of profit tax.
NOTE 28 - OTHER EXPENSES
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Marketing and advertising 0.1 0.1 0.1
Communications (postage, telephone,
courier fees, etc.) 0.3 0.4 0.4
Computer (not including salaries and
depreciation) 2.8 3.3 4.3
Office expenses 0.2 0.2 0.3
Insurance 1.5 3.2 4.7
Professional services 3.3 3.4 4.8
Directors' fees (not including a director employed
as a senior executive) 0.6 0.6 0.7
Staff training, further education, etc. 0.1 0.1 -
Other 0.5 3.0 1.2
------- ------- -------
Total other expenses 9.4 14.3 16.5
======= ======= =======
F - 134
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 29 - TAXES ON ORDINARY OPERATING INCOME
A. COMPOSITION:
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Taxes for the current year 1.5 - -
Taxes in respect of prior years 0.1 - -
------- ------- -------
Provision for taxes on income 1.6 - -
======= ======= =======
B. RECONCILIATION BETWEEN THE THEORETICAL TAX AND THE TAX EXPENSE
The following table presents a reconciliation between the theoretical tax
applying to the operating profit of the Bank, based on the statutory tax
rate applicable to banks in Israel, and the tax expense on operating
profit, as reflected in the statement of income:
2007 2006 2005
------- ------- -------
REPORTED AMOUNTS
----------------------------------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- -------
Statutory tax rate 38.53% 40.65% 43.59%
======= ======= =======
Tax (tax savings) at the valid statutory rate 9.2 (7.0) (3.7)
Tax (tax savings) in respect of:
Addition (deduction) in respect of inflation 2.1 (0.2) 2.2
General and supplementary allowances for
doubtful debts (2.5) (2.4) (5.2)
Other non-deductible expenses (fines, excess expenses) 0.1 0.1 0.1
Exempt income and income with limited rates - 1.1 -
Differences and tax benefits in respect of which
deferred taxes had not been recorded, (4.2) 7.3 3.6
Profit tax on payroll tax (net) 0.2 - -
Taxes in respect of prior years 0.1 - -
Additional payables (receivables) in respect of
other problematic debts (3.4) - -
Loss for purposes of profit VAT which
cannot be set off - 1.1 3.0
------- ------- -------
Tax expense reflected in the statement of income 1.6 - -
======= ======= =======
C. The Bank has been issued final tax assessments for all years through
2003.
D. Carryforward tax losses in respect of which deferred tax assets were
not recorded total NIS 719 million (in 2006 - NIS 707 million).
F - 135
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 29 - TAXES ON INCOME (CONT'D)
E. In 2006, the Bank recorded payroll tax on salaries receivable in the
amounts of NIS 2.8 million, as a result of losses for purposes of
profit tax.
F. On July 25, 2005 the Israeli parliament passed the Law for the
Amendment of the Income Tax Ordinance (No. 147 and Temporary Order) -
2005 (hereinafter - Amendment 147). The Amendment provides for a
gradual reduction in the company tax rate in the following manner: in
2007 the tax rate will be 29%, in 2008 the tax rate will be 27%, in
2009 the tax rate will be 26% and from 2010 onward the tax rate will
be 25%. Furthermore, as from 2010, upon reduction of the company tax
rate to 25%, real capital gains will be subject to tax of 25%.
The tax on banking institutions includes profit tax in accordance with
the VAT Law
On June 29, 2006, a VAT Order was issued reducing the profit tax rate
from 17% to 15.5%, commencing on July 1, 2006. Accordingly, the
statutory tax rate that will apply to the Bank will be 36.8% in 2008,
35.9% in 2009 and 35.1% in 2010.
NOTE 30 - DESIGNATED DEPOSITS AND CREDIT AND DEPOSITS GRANTED THEREFROM
DECEMBER 31 DECEMBER 31
2007 2006
--------- ---------
REPORTED REPORTED
AMOUNTS AMOUNTS
--------- ---------
NIS MILLIONS NIS MILLIONS
--------- ---------
CREDIT AND DEPOSITS OUT OF DESIGNATED DEPOSITS
Credit to the public 5,095.4 5,840.1
--------- ---------
Total 5,095.4 5,840.1
========= =========
DESIGNATED DEPOSITS
Deposits of the Government 5,219.8 5,977.1
--------- ---------
Total 5,219.8 5,977.1
========= =========
Credit out of designated deposits includes NIS 4,963.2 million, which is
secured by a State guarantee. The annual interest margin in respect of this
credit amounts to NIS 0.3 million (on December 31, 2006 the balance of the
credit secured by a State guarantee was NIS 5,671.0 million).
F - 136
The Industrial Development Bank of Israel Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007
- --------------------------------------------------------------------------------
NOTE 31 - INFORMATION ON NOMINAL DATA BASIS
DECEMBER 31 DECEMBER 31
2007 2006
--------- ---------
NIS MILLIONS NIS MILLIONS
--------- ---------
Total assets 6,482.6 7,516.3
Total liabilities 6,372.6 7,496.4
--------- ---------
Total shareholders' equity 110.0 19.9
========= =========
2007 2006 2005
--------- --------- ---------
NIS MILLIONS NIS MILLIONS NIS MILLIONS
--------- --------- ---------
Nominal net income (loss) 22.2 (17.1) (8.4)
F - 137