Industrial Development Bank Of Israel Inactive
Filed: 23 Jun 09, 12:00am
EXHIBIT 1
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
FINANCIAL STATEMENTS
AS OF MARCH 31, 2009
(UNAUDITED)
CONTENTS
PAGE
Report of the Board of Directors F-2
Management Review F-23
Certifications of the General Manager and the Comptroller F-29
Condensed Financial Statements F-31
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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 MARCH 31, 2009
At the meeting of the Board of Directors that was held on May 25, 2009, it was
resolved to approve the Bank's unaudited financial statements as of March 31,
2009. The financial statements are presented in accordance with the directives
of the Supervisor of Banks, in reported amounts.
ECONOMIC DEVELOPMENTS
The economic developments in the first quarter of 2009 were overshadowed by the
continued global financial crisis. The data in real terms, both in the developed
countries and in Israel, indicate a recession that is reflected in a decline in
gross national product and in an increase in unemployment. On the other hand,
during the first quarter of 2009, the financial markets were witness to a
significant increase in share prices and a decline in corporate bond yields.
The exchange rate of the U.S. dollar amounted to NIS 4.188 to the dollar as of
March 31, 2009, compared with NIS 3.802 to the dollar on December 31, 2008, an
increase of 10.2%. This increase was influenced by the strengthening of the
dollar on global markets during the same period. During the first quarter of the
year, the Bank of Israel continued a process of lowering interest rates. The
Bank of Israel interest rate stood at 0.5% on March 31, 2009, compared with
1.75% on December 31, 2008 and 3.25% on March 31, 2008.
The reduction in the Bank of Israel interest rate and the purchases of foreign
currency made by the Bank of Israel were intended to improve the business
environment in which companies operate, by reducing costs and increasing the
profitability of exports.
Subsequent to the balance sheet date, there was a declining trend in the
exchange rate of the dollar to the shekel. Immediately prior to the release of
the financial statements, the exchange rate stood at NIS 3.95 to the dollar.
The "known" Consumer Price Index declined by 0.7% in the first quarter of 2009,
notwithstanding the increase in the dollar/shekel exchange rate.
THE FOLLOWING TABLE PRESENTS DATA REGARDING THE IMPACT OF THE INCREASE IN THE
"LAST KNOWN" CPI AND THE RATES OF DEVALUATION (APPRECIATION) OF THE SHEKEL IN
RELATION TO PRINCIPAL CURRENCIES:
YEAR ENDED
DECEMBER 31,
Q1/2009 Q1/2008 2008
-------- -------- --------
% % %
-------- -------- --------
Increase (decrease) in "last published" CPI (0.7) 0.4 4.5
Rate of devaluation (appreciation) of the
shekel in relation to the dollar 10.2 (7.6) (1.1)
Rate of devaluation (appreciation) of the
shekel in relation to the euro 5.2 (0.7) (6.4)
Rate of devaluation (appreciation) of the
shekel in relation to the yen 1.2 4.0 22.2
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,
consummation or non-consummation of the sale of the shares of the Bank in
accordance with the compromise and Arrangement Plan between the Bank and its
shareholders that was approved by the court on November 24, 2008, and future
decisions regarding the affairs of the Bank by the Government of Israel, 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 - 2
Forward looking information is characterized by words such as "intention",
"likely", "might", "evaluation", "can be assumed", and so forth. These forward
looking terms involve risks and uncertainty since they are based on evaluations
of management regarding future events that may not occur or may occur
differently than expected.
The information presented below is based, inter alia, on the evaluations of
management of the Bank regarding various matters discussed in the Directors'
report.
The Bank does not undertake to publish an update to the forward looking
information included in this report, including in respect of the effect on this
information of circumstances or events that occur after the date of publishing
the report.
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 Supervisor of Banks regarding such
information.
PRINCIPAL DEVELOPMENTS AT THE BANK IN RECENT YEARS
On November 24, 2008, the Tel Aviv-Jaffa District Court approved a Compromise
and Arrangement Plan, pursuant to Article 350 of the Companies Law - 1999,
between the Bank and its shareholders, at the center of which was the blueprint
for the sale of most of the shares of the Bank and the redemption of the balance
of the shares (the "Arrangement Plan"). This approval was granted further to the
approval of the various classes of shareholders of the Bank on October 30, 2008
and November 6, 2008. According to the blueprint which was included in the
Arrangement Plan, the Government Companies Authority has to take steps, further
to the approval of the Arrangement Plan, to locate a purchaser for the shares of
the Bank through a sales process to be managed by the Authority.
As part of the above, on April 6, 2009, the Government Companies Authority
issued a press release on behalf of the Israeli Government whereby those parties
interested in purchasing the entire issued share capital of the Bank were
invited to contact the Government Companies Authority in accordance with the
stipulations of the press release and the sales procedure that had also been
issued by the Authority at the same time. The date set in the notification for
submission of applications by interested parties was May 21, 2009. According to
the notification sent to the Bank by the Authority on May 21, 2009, applications
were received by the Authority from five parties that expressed an interest in
participating in the sales process of the shares of the Bank. According to the
sales procedure that was issued by the Authority, the representatives of the
State were now supposed to review the applications and select those that would
be invited to participate in the next phase of the sales process (perusal of the
documents of the Bank in the data room, submission of price quotes, etc.).
For more details regarding the Arrangement Plan, see below.
Due to increased withdrawals of deposits during the third quarter of 2002, the
Bank experienced severe liquidity problems, requiring it to procure a special
line of credit by the Bank of Israel. Further to thee liquidity crisis, the Bank
stopped providing credit and focused its business 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, at the center
of which was a supervised sale of the credit assets of the Bank, 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. 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).
F - 3
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.
In his letter dated January 29, 2006 the Bank was notified by the Governor of
the Bank of Israel that, among other things, the banking license of the Bank
will be revoked as from August 1, 2008.
On April 29, 2008, the Ministerial Committee on Privatization passed a
resolution regarding the privatization of the Bank in the form of the sale of
most of the shares of the Bank and the redemption the rest of the shares. For
more information regarding the privatization decision, see below.
On August 1, 2008, the "banking license" of the Bank expired, in accordance with
the aforementioned letter of the Governor of the Bank of Israel dated January
29, 2006 and the Bank ceased being a banking entity. Notwithstanding, the Bank
is still entitled to use the word "bank" as part of its name for a period of
three years following the expiration of its license.
Further to the approval of the Arrangement Plan by the court, the State repaid
to the Bank on December 31, 2008 an amount of NIS 857.5 million of the Bank's
perpetual deposits with the Treasury. At the same time, the Bank repaid the
special credit line out of the aforementioned funds, in an amount of NIS 304.5
million.
In view of the possibility that the Bank will be privatized, the Bank and the
Finance Ministry are conducting negotiations regarding the assignment to the
State of the State-guaranteed loan that the Bank granted in the past to the
Israel Electric Company and the State deposit which served as the source for the
granting of the aforementioned loan, and in connection with the early redemption
of the State deposits that served as the source of various loans that were
granted by the Bank and for which the Bank is liable. The balance of the loan to
the Electric Company and the balance of the deposit which served as the source
for that loan amounted to NIS 5,120 million as of March 31. The balance of the
other deposits, of which the Bank was supposed to make early repayment, amounted
to NIS 319 million as of March 31, 2009. Since the State is a "controlling
shareholder" of the Bank (as the term "controlling shareholder" is defined in
article 268 of the Companies Act - 1999), the agreements reached with the
Finance Ministry will be subject to the approval of the Audit Committee, the
Board of Directors and the general shareholders meeting.
THE ACTIVITY OF THE BANK DURING AND AFTER THE RUN-OFF PLAN
The principal components of the "Run-Off" plan that was implemented by the Bank
were a supervised sale of the Bank's assets and a significant reduction in
manpower and in operating expenses.
The Bank refrains from accepting new deposits and it ceased renewing existing
deposits that reach maturity. Commencing August 1, 2008, the date on which the
banking license of the Bank expired, the Bank became subject to a restriction
pursuant to the Banking Law (Licensing) - 1981, whereby the number of depositors
in the Bank shall not exceed twenty nine.
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.
Both during and after the period of the Run-off Plan which expired on July 31,
2008, the Bank refrained from granting new credit and focused on the collection
of its existing credit. The Bank intends on continuing this reduced activity
framework until the completion of the sale of the shares of the Bank as part of
the Arrangement Plan or until other developments occur concerning the matters of
the Bank, in the event that the sale of the shares is not implemented.
As part of the reduction in its activity, the Bank notified the head of the
Investment Center of the Ministry of Industry, Commerce and Employment, in its
letter dated May 10, 2009, that it would no longer render services in connection
with the performance of economic feasibility surveys for investment plans that
the Bank performs on behalf of the State.
At present, it is impossible to assess if the sale of the shares of the Bank
pursuant to the Arrangement Plan will take place and what the impact will be on
the Bank if the sale of the shares of the Bank does not take place.
F - 4
THE GOVERNMENT RESOLUTION CONCERNING THE PRIVATIZATION OF THE BANK
On April 29, 2008, the Ministerial Committee of Privatization passed a
resolution concerning the privatization of the Bank, as part of a petition to
approve the arrangement pursuant to Article 350 of the Companies Law. The full
version of the resolution was published by the Bank in an Immediate Report dated
April 30, 2008. The privatization resolution stipulates, among other things, the
following:
o The shares of the Bank held by the State will be sold in one block, by way
of a private sale, to an investor or group of investors from Israel and/or
abroad (the "Purchaser"), as part of an overall blueprint for the sale of
the shares of the Bank, including those held by the public, to the
purchaser (the "Sale").
o Until the consummation of the sale, the Bank will continue collecting its
credit portfolio.
o The Accountant General of the Finance Ministry was authorized to carry out
various steps in connection with the privatization.
o The employees of the Bank will be paid a privatization remuneration in
according with the rules of the Authority. The remuneration will be granted
immediately following the sale and will be subject to the execution
thereof.
The privatization decision was taken further to and on the basis of the
blueprint for the sale of the issued share capital of the Bank that was
previously assessed by the Finance Ministry and the Government Companies
Authority.
THE COMPROMISE AND ARRANGEMENT PLAN PURSUANT TO ARTICLE 350 OF THE COMPANIES LAW
- - 1999 BETWEEN THE BANK AND ITS SHAREHOLDERS
Further to the government resolution regarding the privatization of the Bank and
in accordance with the resolution of the Board of Directors of the Bank decided
at its meeting of May 26, 2008, the Bank filed a petition on July 6, 2008 with
the Tel Aviv - Jaffa District Court to approve the Compromise and Arrangement
Plan pursuant to Article 350 of the Companies Law between the Bank and its
shareholders.
Prior to its decision regarding the submission of the request to have the
Arrangement Plan approved, the Board of Directors was presented with an expert
opinion regarding the reasonableness of the criterion for determining the
Minimum Price at which the sale of the Bank will be carried out in accordance
with the Arrangement Plan, and the fairness of the criterion as far as the
public shareholders are concerned, regarding the formula that was set down in
the plan for the distribution of the proceeds of the sale, and regarding a
document dated March 9, 2008, prepared by Professor A. Barnea, who assessed the
alternative of liquidating the Bank versus the alternative of selling the shares
of the Bank, on the basis of the financial statements of the Bank as of
September 30, 2007 and which contains the formula for the distribution of the
proceeds of the sale. The document of Professor A. Barnea constitutes part of
the Arrangement Plan and its full version was publicized by the Bank in an
Immediate Report dated March 12, 2008. In addition, the Board of Directors was
furnished with a legal opinion regarding the reasonableness of the arrangement
to pay a partial dividend to the C, CC, and CC1 shareholders, which according to
the Arrangement Plan constitutes an alternative to the sale of the shares of the
Bank, in the event that such a sale is not realized.
The resolution of the Board of Directors regarding the submission of the
Arrangement Plan was passed after the Board of Directors reached a decision in
view of, among other things, the conclusions and findings in the aforementioned
two opinions and in the aforementioned document of Professor A. Barnea, that the
alternative of selling the shares of the Bank, which stands at the center of the
Arrangement Plan, may be more beneficial to the public shareholders than the
alternative of liquidating the Bank.
A description of the Arrangement Plan was included in the Immediate Report made
by the Bank on May 27, 2008 (except for minor changes. This description is in
line with the plan that was included in the petition that was filed by the Bank
on July 6, 2008). A brief description follows:
F - 5
The Arrangement Plan includes three parts (two of which are alternatives) which
the shareholders and the court were asked to approve.
1. The first part will be implemented immediately upon the approval of the
Arrangement Plan (by the meetings of the type of shareholders and the
court). Pursuant to the first part, the State will redeem the perpetual
deposits made by the Bank with the Treasury, except that part of them that
reflect the proceeds of the issuance of the D and DD shares held by the
public (which will continue to be maintained as a dollar-linked deposit).
The Bank will use the redemption of the perpetual deposits to repay the
balance of the line of credit placed at its disposal by the Bank of Israel.
The originating motion that was filed by various financial institutions
against the Bank to have the distribution of the dividend renewed will be
rejected, and the appeal filed by the Bank against the court decision
rejecting its originating motion on the matter of the accrual of the
interest on its perpetual deposits with the Treasury will also be rejected.
2. Pursuant to the second part (the sales arrangement), all of the shares of
the Bank, except for the D and DD shares not held by the State, will be
sold by the parties holding them (the State and the public) as part of the
sales process to be implemented by the Government Companies Authority.
The D and DD shares not held by the State will be redeemed according to the
terms of their issue: the D shares at their full dollar par value, plus a
premium of 5.625%, plus the entire preferred dividend in arrears in respect
of such shares, and the DD shares at their full dollar par value plus the
entire preferred dividend in arrears in respect of such shares. The
redemption of the amount of the principal will come from the resources of
the Bank while the payment of the premium and the preferred dividend in
arrears will be financed by funds provided to the Bank by the State of
Israel.
If the total proceeds to be received in respect of the sold shares are
lower than the greater of the "liquidation value of the Bank" as to be
determined by the average of the two valuations conducted at the request of
the State prior to the implementation of the sale, less the principal
amount of the redemption of the D and DD shares, or an amount of NIS 400
million (the "Minimum Price"), the consummation of the sale shall be
subject to the approval of the meeting of the C-type shareholders (C, CC
and CC1) (by a majority of 75% of the value represented by the vote). The
State is authorized, at its discretion, not to carry out the sale even if
the average total proceeds are higher than the Minimum Price.
The proceeds of the sale shall be divided among the holders of the sold
shares on the basis of the distribution formulas prepared by Professor A.
Barnea as part of the abovementioned document he prepared, which is
attached to the Arrangement Plan.
The State shall refund to the Bank part of the perpetual deposits it still
holds, in accordance to the description of part 1 above.
The shareholders of the Bank will waive any claim, demand, or suit against
the Bank, officers of the Bank, shareholders of the Bank, employees of the
Bank, or the State. In addition, the Bank will waive any claim, demand, or
suit toward the State in connection with the perpetual deposit, the payment
of interest in respect thereof, and its refunding to the Bank.
The Bank will assign its rights to the loan it placed at the disposal of
the Israel Electric Company Ltd. and to the State deposit which served as a
source of such loan. The rights will be assigned to the party to which the
Bank is instructed by the Accountant General.
The conditions for the performance of the second part (the sales
arrangement) are the finding of a purchaser and the completion of the sale
by December 31, 2009.
F - 6
3. The third part (the dividend arrangement) is an alternative to the second
part (the sales arrangement) and it shall be carried out in the event that
the sales arrangement is not completed by December 31, 2009 or, if prior to
that date, a liquidation order is issued against the Bank or if the general
meeting of the Bank decides to voluntarily liquidate the Bank. As part of
this course of action, the Bank will pay the holders of C, CC, and CC1
shares, on the earliest of December 31, 2009, or the date on which a
liquidation order is issued against the Bank, or on the date on which the
general meeting of the Bank decides to voluntarily liquidate the Bank, half
of the preferred dividend in arrears (at an annual rate of 6%) accrued on
their shares during the period from July 1, 2002 through July 31, 2008,
plus linkage differentials and interest by law, from July 31, 2008 until
the date of the actual payment to the shareholders. The State will pay the
Bank in respect of the part of the perpetual deposits that reflect the
consideration of the issuance of C, CC and CC1 shares, half of the interest
at an annual rate of 6% accrued on this part during the aforementioned
period, plus linkage differentials and interest by law, from July 31, 2008
until the date of the actual payment to the Bank.
Pursuant to the third part, the State will waive any claim, demand or suit
against the Bank, the receiver of the Bank, and the liquidation account of
the Bank in connection with 50% of the preferred dividend in arrears
accrued on the D and DD shares held by the State in respect of the period
from July 1, 2002 through July 31, 2008, and the holders of C, CC and CC1
shares will waive any claim, demand, or suit in connection with the
perpetual deposit, its return to the Bank, the payment of interest thereon,
and the non-distribution of the dividend during the period until the
payment to them of half of the preferred dividend in arrears, as mentioned
above (without such waiver of the holders of the C, CC and CC1 shares
detracting from their rights under the articles of the Bank to accumulate a
preferred dividend in respect of their shares, including in relation to the
aforementioned period).
Subject to the carrying out of the dividend arrangement, the Bank will waive any
claim, demand, or suit toward the State in connection with the payment of
interest in respect of part of the perpetual deposit which reflects the
considerations of the issuance of the Group C shares, and the Group D shares
that are owned by the State (without it detracting from any claim, demand, or
suit of the Bank in connection with the payment of the interest on the balance
of the perpetual deposit) and in respect of the refund of the perpetual deposit
by the State.
It is hereby clarified and emphasized that the above is solely a condensed
description of the major features of the Arrangement Plan. It does not replace
the full version of the Arrangement Plan as submitted to the court.
Since the redemption of the D and DD shares and the payment of half of the
preferred dividend in respect of the C, CC, and CC1 shares, as described above,
may constitute a reduction in capital, then concurrent with the submission of a
request to the court to approve the Arrangement Plan, on July 6, 2008, the Bank
also submitted to the court a request to reduce its capital. The petition was
approved by the court on November 20, 2008.
The arrangement pursuant to article 350 of the Companies Law - 1999 is subject
to the approval of the meetings of the classes of shareholders of the Bank, as
well as the approval of the court. On October 30, 2008 and November 6, 2008, the
Arrangement Plan was approved by the meetings of the classes of shareholders of
the Bank and on November 24, 2008, the plan was approved by the Court.
Further to the approval of the Arrangement Plan and pursuant to the stipulations
therein, the Government repaid to the Bank, on December 31, 2008, the perpetual
deposits it had deposited with the Treasury (except the part thereof that
reflects the consideration of the issuance of D and DD shares held by the
public), the Bank repaid the balance of the credit line placed at its disposal
by the Bank of Israel, the originating motion filed against the Bank in the
matter of the renewal of the distribution of a dividend was rejected, as was the
appeal of the Bank against the court decision that rejected the Bank's
originating motion in the matter of the accrual of interest on the perpetual
deposits of the Bank with the Treasury.
On April 6, 2009, the Government Companies Authority issued a press release on
behalf of the Israeli Government whereby those parties interested in purchasing
the entire issued share capital of the Bank were invited to contact the
Government Companies Authority in accordance with the stipulations of the press
release and the sales procedure that had also been issued by the Authority at
the same time. The date set in the notification for submission of applications
by interested parties was May 21, 2009. According to the notification sent to
the Bank by the Authority on May 21, 2009, applications were received by the
Authority from five parties that expressed an interest in participating in the
sales process of the shares of the Bank. According to the sales procedure that
was issued by the Authority, the representatives of the State were now supposed
to review the applications and select those that would be invited to participate
in the second phase of the sales process (perusal of the documents of the Bank
in the data room, submission of price quotes, etc.).
F - 7
REPAYMENT OF THE PERPETUAL DEPOSITS OF THE BANK WITH THE TREASURY
According to the first part of the Compromise and Arrangement Plan between the
Bank and its shareholders, the State repaid to the Bank the perpetual deposits
in the Treasury, except for the part thereof that reflects the proceeds of the
issuance of the D and DD shares held by the public, in a total amount of NIS
857.5. Of this amount, an amount of NIS 304.5 million was paid by the Treasury
to the Bank of Israel in respect of the repayment of the balance of the line of
credit that was placed at the disposal of the Bank in the third quarter of 2002
as a result of the liquidity problems experienced by the Bank.
The balance of the repayment of the aforementioned perpetual deposits, in an
amount of NIS 553.0 million, was transferred to the Bank. As a result, as of
both December 31, 2008 and March 31, 2009, the Bank held liquid monetary
balances in excess of all of its liabilities to its creditors (not including the
deposit of the Government that served as the source for the credit granted to
the Israel Electric Company that was secured by a government guarantee).
DIVIDEND DISTRIBUTION - CESSATION OF DIVIDEND DISTRIBUTION ON PREFERRED SHARES
The Bank has not distributed any dividends since the third quarter of 2002, in
which the Bank distributed to the holders of the preference shares and of the
Ordinary Preference 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.
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. The hearing on
the two originating motions was consolidated. 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. On August 5, 2007,
a ruling was rendered by the Tel Aviv District Court whereby it rejected the
originating motion filed by the Bank against the Finance Minister and against
the aforementioned financial institutions and stipulated that as long as a
dividend is not distributed in respect of the preferred shares of the Bank, the
interest does not accrue.
At its meeting on October 9, 2007, the Board of Directors of the Bank discussed
the ramifications of the ruling. 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
ruling 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. The Bank's
appeal was submitted to the Supreme Court on January 6, 2008.
F - 8
At the aforementioned meeting, the Board of Directors of the Bank also discussed
the ramifications of the aforementioned ruling on the continuation of its policy
regarding the distribution of the dividend on the preferred shares (Preferred C,
CC, CC1, D and DD shares). In view of the stipulation of the ruling 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
ruling 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 are
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 preferred 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 ruling, 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
empower the chairman of the board to set the date for its convening; 3) to
petition the Supervisor of Banks to grant approval for the distribution of the
dividend to the preferred 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).
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 Articles of Association of the Bank,
so that the Articles of Association 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 Articles of Association. The Bank announced that it did
not object to adding the State, as requested.
As part of the Arrangement Plan between the Bank and its shareholders, which was
approved by the court on November 24, 2008, it was stipulated that upon the
approval of the plan, the originating motion submitted by the aforementioned
financial institutions against the Bank will be rejected, as well as the appeal
filed by the Bank against the court decision rejecting its originating motion on
the matter of the accrual of the interest on its perpetual deposits with the
Treasury.
Accordingly, a short time after the aforementioned approval of the plan, the
appropriate petitions were filed to reject both the originating motion of the
aforementioned financial institutions and the appeal of the Bank, and the motion
and the appeal were rejected, as requested.
The Arrangement Plan that was approved contains two alternative scenarios, each
of which includes stipulations or results regarding the issue of the dividend
that accrued on the C, CC, CC1, D, and DD shares:
SCENARIO I - the sale of the shares of the Bank, in accordance with the
Arrangement Plan, by December 31, 2009.
In this case, the D and DD shares not held by the State of Israel will be
redeemed in accordance with the terms of redemption set out in the terms of the
issuance of those shares, so that as part of the redemption, the D and DD
shareholders will be paid the full preference dividend in arrears that accrued
on their shares in respect of the period from July 2002 up to and including the
day preceding the date of redemption (such arrears will be paid back-to-back by
the State to the Bank as interest on its perpetual deposits with the Treasury in
respect of that period).
The D and DD shares held by the State will not be redeemed, rather they will
constitute part of the sold shares and the State will not receive for them the
preference dividend in arrears accrued thereupon.
The C, CC, and CC1 shares will constitute part of the sold shares, and the
holders thereof will not receive the preference dividend in arrears that accrued
on their shares. Notwithstanding, the calculation of their share of the
consideration of the overall sale also takes into account their claim to receive
the dividend in arrears.
F - 9
The shareholders will waive all claims against the Bank, including regarding the
distribution or non-distribution of a dividend, including the cumulative
dividend in arrears.
SCENARIO II - the sale of the shares of the Bank, in accordance with the
Arrangement Plan, will not be completed by December 31, 2009.
In this case:
o On December 31, 2009, or when a liquidation order is issued against the
Bank, or when a resolution for voluntary liquidation is passed by the
General Meeting of the Bank (the earliest of the three options), the Bank
will pay the holders of the C, CC, and CC1 shares (and will receive
back-to-back from the State as interest on the perpetual deposits of the
Bank with the Treasury) half of the preferred dividend in arrears, at an
annual rate of 6% that accrued on their shares in respect of the period
July 1, 2002 - July 31, 2008, plus linkage differentials and interest by
law.
o The holders of the C, CC, and CC1 shares will waive all claims against the
Bank, regarding the non-distribution of a dividend in the period starting
July 1, 2002 and ending on the date of the payment of the dividend in
arrears, without such waiver constituting a derogation of their rights
pursuant to the articles of the Bank to the accrual of a preference
dividend in respect of their shares, including in respect of the
aforementioned period.
o The State will waive all claims against the Bank, the receiver of the Bank,
and the liquidation fund of the Bank in connection with 50% of the
preference dividend in arrears that accrued on the D and DD shares held by
the State, in respect of the period that began on July 1, 2002 and ended on
July 31, 2008.
o The Bank will waive all claims against the State in connection with the
payment of interest on the perpetual deposits held by it with the Treasury,
except for that part thereof that reflects the proceeds of the issue of the
D and DD shares held by the public.
Regarding the cessation of dividend distributions, the legal and regulatory
restrictions applying to the Bank in connection with the distribution of a
dividend and the issue of the accrual of interest on the perpetual deposits with
the Treasury, see also Note 14 of the financial statements.
DIRECTIVE PERTAINING TO REPORTING TO THE PUBLIC
Notwithstanding the fact that upon the expiration of the Bank's banking license
on August 1, 2008, the Bank ceased being a "banking entity" as defined in the
Banking Law (Licensing) - 1981, in accordance with the letter of the Supervisor
of Banks dated May 29, 2008, the financial statements of the bank will continue
to be presented in accordance with the directives and guidelines of the
Supervisor of Banks, for a period of three years following the revocation of the
Bank's banking license.
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.
F - 10
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.
MITIGATIONS IN THE IMPLEMENTATION OF PROPER BANKING PROCEDURES
Proper Banking Procedures are issued by the Supervisor of Banks by pursuant to
the authority vested in him regarding this issue in the Banking Ordinance -
1941. Notwithstanding the fact that upon the expiration of the Bank's banking
license on August 1, 2008, the Bank ceased being a "banking corporation",
according to the Banking Law (Licensing) - 1981, the provisions of the Banking
Ordinance still apply to the Bank for an additional period of three years. In a
letter dated July 27, 2008, the Supervisor of Banks announced that he was
exempting the Bank from compliance with part of the directives of Proper Banking
Procedure, including the directives dealing with the activities of the Board of
Directors, directives dealing with credit (including directive 315 regarding the
supplementary provision for doubtful debts), and most of the directives dealing
with the investment and management of financial assets. According to the
aforementioned letter of the Supervisor of Banks, the directives of Proper
Banking Procedure in the chapters entitled "Control and Management" and Between
the Bank and its Customers will continue to apply to the Bank.
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.
LEGAL CLAIMS AND OTHER CONTINGENCIES
Note 9 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 judgment 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 - As a result of the repayment on December 31, 2008 of most of the
perpetual deposit that the Bank had deposited with the Treasury in connection
with the Bank's preference shares which are classified from an accounting
standpoint as a liability and not shareholders' equity, the Bank recorded
exchange rate differentials for the first time in its statement of income for
the three month period ended March 31, 2009 and a current accrual of a dividend
in respect of the preferred shares of the Bank in its statement of income. The
inclusion of the preference shares as a liability is based on Accounting
Standard No. 22, FINANCIAL INSTRUMENTS: DISCLOSURE AND PRESENTATION and on the
clarifications obtained from the Bank of Israel regarding the manner in which
the standard should be implemented in the context of the Bank's preference
shares. According to U.S. GAAP, these preference shares are included as part of
the Bank's shareholders' equity and therefore, the dividend that accrued and the
exchange rate differentials in respect of the preference shares are not included
as an expense in the statement of income pursuant to U.S. GAAP (which the Bank
has to apply in its annual financial statements that have to be submitted to the
U.S. SEC). For details on the exchange rate differentials and the dividend
accrual in respect of the preference shares, see Note 13 of the financial
statements.
F - 11
The Bank's after tax operating income amounted to NIS 37.2 million. This amount
is before the recording of the exchange rate differentials and the current
dividend accrual to the credit of the Bank's preferred shareholders. This
expense amounted to NIS 59.6 million, so that following the recording of the
expense, the net loss amounts to NIS 22.4 million.
PROFIT FROM FINANCING OPERATIONS BEFORE THE ALLOWANCE FOR DOUBTFUL DEBTS -
amounted to NIS 35.8 million in the first quarter of 2009, compared with NIS
11.3 million in the same period in 2008.
The increase in financing income derived mainly from the following factors:
- - The repayment of the perpetual deposit with the Treasury and the linkage
differentials in respect thereof which, until December 31, 2008, were not
carried to the statement of income rather were carried directly to the
statement of changes in shareholders' equity. The repayment of the
deposited amounted to NIS 857.5 million. As a result, the volume of the
assets included in the financing activity of the Bank increased by that
amount.
- - As a result of the repayment of most of the perpetual deposit, the Bank
decided that as part of its asset and liability management policy, the Bank
would increase its dollar assets, taking into consideration the fact that
the overall capital of the Bank includes preferred shares that are linked
to the dollar and are classified from an accounting standpoint as
liabilities. The increase in the surplus of dollar assets contributed to an
increase in profit from financing activity due to the increase in the
exchange rate of the dollar during the first quarter of 2009.
- - A decrease in the volume of problematic debts classified as non-interest
bearing. The average balance of non-interest bearing debts in the first
quarter of 2009 amounted to NIS 22 million, compared with NIS 67 million in
the same period last year.
- - 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 the first quarter of 2009 was lower than
the average interest in the same period in the previous 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 of the
previous year, in addition to the aforementioned volume of problematic
debts classified as non-interest bearing debt.
On the other hand, this increase was offset by the decrease in the volume of the
Bank's credit activity, as part of the policy implemented by the Bank in the
past few years.
Please note that both in the first quarter of 2009 and the first quarter of
2008, the income from financing activity was impacted by significant income in
respect of the collection of interest from problematic debts, which amounted to
NIS 6.6 million and NIS 9.0 million respectively.
An analysis of the Bank's financing operations in the various linkage segments,
indicates as follows:
UNLINKED SHEKEL SEGMENT - The average balance of assets in this segment amounted
to NIS 582 million in the first quarter of 2009, compared with NIS 117 million
in the same period of 2008. The increase derived mainly from the repayment of
the perpetual deposit, as above. Most of the assets in the first quarter of 2009
were bank deposits. The margin in this segment, including the effect of
derivatives, was 1.5% in the first quarter of 2009, compared with 4.71% in the
same period last year. The decrease in the margin derived from an increase in
the relative weight of the bank deposits.
CPI-LINKED SHEKEL SEGMENT - The average balance of assets in this segment
amounted to NIS 271 million in the first quarter of 2009, compared with NIS 337
million in the same quarter of 2009, a decrease of 20%. The margin in this
segment, including the effect of derivatives, was 2.99% in the first quarter of
2009, compared with 2.06% in the same period last year. The increase in the
margin in this segment derives mainly from the fact that during 2008, credit in
this segment bearing relatively lower interest was repaid and, as a result, the
average interest of the credit in this segment increased.
F - 12
FOREIGN CURRENCY AND FOREIGN CURRENCY LINKED SEGMENT - The overall average
volume of assets in this segment amounted to NIS 5,128 million in the first
quarter of 2009, compared with NIS 4,913 million in the first quarter of 2008.
The increase in the average volume of assets in this segment derives both from
the increase in the exchange rate of the dollar and from the intentional
increase in foreign currency assets (bank deposits). Credit in this segment
includes credit guaranteed by the State that was granted to the Israel Electric
Corporation Ltd. out of a deposit of the State. The margin in respect of this
credit is negligible and matches the level of risk attached to this credit. The
average balance of this credit amounted to NIS 4,966 million in the first
quarter of 2009, compared with NIS 4,791 million in 2008. Excluding the said
credit, the average balance of assets in this segment amounts to NIS 162
million, compared with NIS 122 million in the first quarter of 2008. Of the
total average balance of assets in the first quarter of 2009, an amount of NIS
50 million are bank deposits. The margin in this segment, including the effect
of derivatives, was a negative amount of 0.50% in the first quarter of 2009,
compared with a positive amount of 0.11% in the same period last year. The low
margin in this segment is affected by the volume of the abovementioned
State-guaranteed credit. The negative margin in this segment in the first
quarter of 2009 derives from both the large weight of the bank deposits and the
large weight of futures transactions bearing interest that was lower than the
interest on the liability. The increase in the volume of futures transactions in
foreign currency and in foreign currency bank deposits derives, as above, from
the fact that as a result of the repayment of most of the perpetual deposit of
the Bank with the Treasury, the Bank decided that as part of its asset and
liability management policy, it would increase its dollar assets, taking into
consideration that the overall capital of the Bank includes preferred shares
that are linked to the dollar. The average surplus of assets in this segment
(including in respect of futures transactions) amounted to NIS 257 million. This
surplus of assets contributed income of NIS 24.4 million to this segment. This
income was the major factor for the increase in the profit from financing
activity.
The average of the total financial assets (excluding state-guaranteed credit to
the Israel Electric Company) amounted to NIS 1,015 million in the first quarter
of 2009, compared with NIS 576 million in the first quarter of 2008, an increase
of 76% in the average of monetary assets that derived, as above, from the
repayment of the perpetual deposit.
THE ALLOWANCE FOR DOUBTFUL DEBTS - An amount of NIS 12.1 million was recorded as
income in this item in the first quarter of 2009, compared with income of NIS
11.1 million in the first quarter of 2008. The major change in the allowances
for doubtful debts in the first quarter of 2009 derived from the change in the
accounting policy regarding the supplemental allowance for doubtful debts. Until
December 31, 2008, the Bank would make a supplemental allowance and a general
allowance in accordance with the directives of the Supervisor of Banks. On
August 1, 2008, the "banking license" of the Bank expired. In his letter to the
Bank dated July 27, 2008, the Supervisor of Banks notified the Bank that he was
exempting the Bank from complying with Banking Procedure 315 which addresses the
issue of the supplemental and general allowance for doubtful debts. The Bank
continues to prepare its financial statements in accordance with the directives
of the Supervisor of Banks. In the Directive pertaining to Reporting to the
Public, the Bank is required to make a supplemental and general allowance for
doubtful debts according to the provision of Proper Banking Procedure 315. As a
result, the Bank asked the Supervisor for clarification of his position on this
matter. The Bank expressed its stand that over the years, as a result of the
decline in the volume of the Bank's credit portfolio, the relative weight of the
general allowance for doubtful debts increased to a rate that is high when
compared with the overall liability and that the position of the Bank is that
the general allowance should be set as a percentage of the balance of debt.
In his letter dated January 25, 2009, the Supervisor of Banks notified the Bank
that he was exempting the Bank from both compliance with the directive in Proper
Banking Procedure 315 and from the reference in the Directive Pertaining to
Reporting to the Public to the requirements by virtue of the aforementioned
directive. In addition, the Supervisor of Banks notified the Bank that he would
not address the fairness of the percentage of the general allowance for doubtful
debts that the Bank believed it should make.
In connection with the financial statements as of December 31, 2008, the Board
of Directors of the Bank decided to continue maintaining the supplemental and
general allowance for doubtful debts in accordance with the same policies that
it followed prior to receipt of the letter of the Supervisor of Banks (for
complete details of the accounting policy implemented, see Note 1G of the
financial statements as of December 31, 2008).
In a deliberation that was held as part of the assessment of the accounting
policy on this issue, in connection with the financial statements as of March
31, 2009 and further to receipt of the letter of the Supervisor of Banks, the
Board of Directors of the Bank decided to cancel the existing supplemental and
general allowances in accordance with the directive of the Supervisor and make
in its place an allowance that is based on industry-wide risk characteristics.
This allowance is based on data pertaining to specific allowances made over the
six years of activity of the Bank as part of the Run-off plan.
F - 13
The balance of the supplemental and general allowance as of December 31, 2008
amounted to NIS 41.8 million. The allowance calculated on the basis of the
principles set out in respect of the industry-wide risk characteristics as of
March 31, 2009 amounted to NIS 30.3 million, i.e., a decrease of NIS 11.5
million. Of this amount, an amount of NIS 11.0 million derives from the change
in the manner in which the allowance is calculated.
In the specific allowance for doubtful debts, an amount of NIS 0.6 million was
recorded as income in the first quarter of 2009, compared with income of NIS 9.7
million recorded in the first quarter of 2008.
Comparative data on the development of the overall credit risk in respect of
problematic borrowers (1) is as follows (in NIS millions):
BALANCE AS AT BALANCE AS AT BALANCE AS AT
---------- ---------- ----------
MARCH 31, MARCH 31, DECEMBER 31,
2009 2008 2008
---------- ---------- ----------
Non-income bearing 22.2 63.8 22.1
Restructured (2) 16.0 27.8 24.4
Designated for restructuring (3) 9.7 12.5 8.5
Temporarily in arrears 1.6 3.6 1.9
Under special supervision* 174.9 165.7 170.5
---------- ---------- ----------
Total balance sheet credit to problematic
borrowers (1) 224.5 273.4 227.4
Off-balance sheet credit risk in
respect of problematic borrowers (1) 69.8 74.0 61.4
---------- ---------- ----------
Overall credit risk in respect of problematic
borrowers (1) (4) 294.2 347.4 288.8
========== ========== ==========
* Including an amount of NIS 170.8 million in respect of debts for which a
specific allowance exists (March 31, 2008 - NIS 152.9 million, December 31,
2008 - NIS 164.5 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.
The above data indicates a significant decrease in the volume of debts
classified as non-income bearing when compared with the data of March 31, 2008.
Notwithstanding, the weight of problematic debts out of the total debt continues
to be relatively high when compared to the overall credit of the Bank.
Most of the volume of the off-balance sheet credit risk in respect of
problematic borrowers derives from the letters of indemnification issued by the
Bank in favor of the receivers that were appointed to realize the assets of the
companies undergoing legal proceedings. The letters of indemnification are in
respect of receipts that were credited to the borrowers' accounts with the Bank
out of the proceeds from the realization of the assets.
INCOME FROM FINANCING ACTIVITY AFTER THE ALLOWANCE FOR DOUBTFUL ACCOUNTS
amounted to NIS 47.9 million in the first quarter of 2009, compared to NIS 22.4
million in the first quarter of 2008.
OPERATING AND OTHER INCOME -amounted to NIS 1.3 million in the first quarter of
2009, compared with an expense of NIS 0.1 million in the first quarter of 2008.
The major change in this item was in other income, in an amount of NIS 1.4
million versus NIS 0.5 million in the first quarter of 2008. The increase
derived entirely from the gains in the severance pay fund that were carried to
other income. Income from operating commissions in the first quarter of 2009
amounted to NIS 0.1 million, similar to the income in the same period last year.
The low volume of this income reflects the fact that the Bank has been reducing
the operating activity it conducts on behalf of its clients.
F - 14
OPERATING AND OTHER EXPENSES - Amounted to NIS 8.1 million in the first quarter
of 2009, compared with NIS 19.4 million in the first quarter of 2008.
The operating expenses of the first quarter of 2008 included a provision in an
amount of NIS 11.0 million in connection with the special retirement agreement
signed in connection with the plan to privatize the Bank. In the first quarter
of 2009, this item included an expense in an amount of NIS 0.8 million in
respect of the updating of the liability in connection to the aforementioned
agreement.
Payroll expenses amounted to NIS 4.8 million in the first quarter of 2009,
compared with NIS 5.7 million in the first quarter of 2008. The payroll expenses
of the first quarter of 2008 were affected by losses of NIS 0.7 million that
accrued during the quarter in the severance pay fund. The amount needed to
supplement the liability for severance pay as a result of such losses was
included in the payroll expense.
Other operating expenses amounted to NIS 1.8 million in the first quarter of
2009, compared with NIS 2.0 million in the same period of 2008. Most of the
components of other operating expenses decrease during the period.
OPERATING INCOME BEFORE TAXES ON INCOME amounted to NIS 41.1 million, compared
with NIS 2.9 million in the first quarter of 2008. As mentioned above, the
increase in income derived from the impact of the repayment of the perpetual
deposit, from the fact that the Bank increased its surplus dollar assets as a
percentage of total equity and from the difference deriving from the calculation
of the allowance on the basis of industry-wide risk characteristics when
compared with the supplemental allowance.
PROVISION FOR TAXES - The provision for taxes is calculated on the basis of
operating income and does not include the recording of the expense in respect of
exchange rate differentials and the dividend on the preferred shares of the Bank
which are classified from an accounting standpoint as a liability. This expense
was not included in the calculation of the tax expense. The provision for income
taxes on the income of the first quarter of 2009 amounted to NIS 3.9 million.
The Bank has tax loss carry-forwards of NIS 640 million in respect of which no
deferred taxes were recorded. The provision for taxes derives from the fact that
the tax loss carry-forwards of prior years cannot be used against profit tax.
The Bank received final tax assessments up to and including the 2003 tax year.
Please note that the provision for taxes in 2008 was calculated on the basis of
the income of the Bank reported in the financial statements as of December 31,
2008, including income of NIS 48.6 million in respect of the refund of interest
from the Bank of Israel from prior years. The Bank requested from the Income Tax
authorities to recognize the refund as a refund on account of the 2002 and 2003
tax years in which the Bank had income tax losses. In the event that the request
of the Bank is granted, the provision for taxes will be reduced by an amount of
NIS 6.5 million. The handling of the Bank's request has not yet been completed
and the Bank is uncertain as to how this issue will be resolved.
BALANCE SHEET AND CAPITAL RESOURCES
TOTAL ASSETS - As of March 31, 2009, amounted to NIS 6,217 million, compared
with NIS 5,757 million as of December 31, 2008.
THE EQUITY OF THE BANK INCLUDING PREFERENCE SHARES - Amounted to NIS 686 million
as of March 31, 2009, compared with NIS 643 million as of December 31, 2008.
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 602 million as of March 31, 2009, compared with NIS 539 million
as of December 31, 2008. The preference shares are linked to the dollar. The
increase in the value of the preference shares in the first quarter of 2009
derives from both the increase in the exchange rate of the dollar and the
quarterly accrual of the dividend ($1.9 million).
Please note that since, in the past, the Bank issued securities to holders in
the U.S., the Bank is required to file an annual report with the U.S. SEC.
According to U.S. GAAP, these preference shares are included as part of the
Bank's shareholders' equity. Their inclusion as a liability in the Bank's
Israeli financial statements is based on Accounting Standard No. 22, FINANCIAL
INSTRUMENTS: DISCLOSURE AND PRESENTATION and on clarifications received from the
Bank of Israel regarding the manner of implementation of the standard in
connection with the Bank's preference shares.
F - 15
TOTAL CREDIT TO THE PUBLIC - As of March 31, 2009 amounted to NIS 5,524 million
compared with NIS 5,107 million as of December 31, 2008. The credit data
presented above include credit guaranteed by the State that was granted to the
Israel Electric Corporation Ltd. out of a deposit of the State with the Bank,
the balance of which amounted to NIS 5,120 million as of March 31, 2009,
compared with NIS 4,699 million as of December 31, 2008. Net of such credit, the
credit to the public amounts to NIS 404 million as of March 31, 2009, compared
with NIS 408 million as of December 31, 2008. The decline in the volume in the
credit is less than the volume of the credit collections, due to the fact that
the increase in the exchange rate of the dollar resulted in an increase in the
balance of the dollar-linked loans and also due to the cancellation of the
supplemental allowance for doubtful debts and the change in the basis of the
allowance to the risk characteristics, the amount of which is less than NIS 11
million.
DEPOSITS IN BANKS - The balance of the deposits in banks as of March 31, 2009
was NIS 601 million, compared with an amount of NIS 35 million as of March 31,
2008, and an amount of NIS 575 million as of December 31, 2008. The increase in
deposits at the end of 2008 derived from the repayment of the perpetual deposit.
The increase in the bank deposits in the first quarter of 2009 derived from both
the continued process of realization of the Bank's assets and from the results
of current operations. All of the deposits are with banks in Israel and most of
the amount is in roll-over weekly deposits. The balance of bank deposits
includes an amount of NIS 30 million on deposit in trust to secure the rights of
the employees. These funds are designated to make severance payments to
employees upon termination, in respect of which no amounts are deposited in
severance pay funds.
SECURITIES - The balance of securities as of March 31, 2009 amounts to NIS 39
million, compared with NIS 38 million as of December 31, 2008. The securities
portfolio includes an investment of NIS 8 million in mezzanine funds. In
addition, the securities portfolio includes marketable shares in the amount of
NIS 31 million (according to their market value as of March 31, 2009). The
market value of the shares includes unrealized gains in the amount of NIS 7.1
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
Bank has no investments in securities or other financial instruments that are
asset-backed.
DEPOSITS OF THE PUBLIC - Amounted to NIS 25 million as of March 31, 2009,
compared with NIS 27 million as of December 31, 2008.
The Bank has been refraining from accepting new deposits and it ceased renewing
deposits that matured, subject to certain exceptions. It is worth noting that
more than half of the balance of deposits of the public (both as of March 31,
2009 and December 31, 2008) are deposits in connection with credit. Since the
expiration of the "banking license" of the Bank on August 1, 2008, the Bank is
prohibited from holding deposits of more than 30 or more depositors
simultaneously.
DEPOSITS OF THE GOVERNMENT - The balance of Government deposits as of March 31,
2009 amounted to NIS 5,440 million, compared with NIS 5,023 million as of
December 31, 2008. 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
5,226 million as of March 31, 2009, compared with NIS 4,797 million as of
December 31, 2008. The increase in the volume of the deposits derives from the
increase in the exchange rate of the dollar.
Another component of these deposits are the CPI-linked deposits that were
received from the Government as part of the arrangement of the Kibbutzim. These
deposits served as a source for rescheduling these debts. The balance of the
Government's CPI-linked deposits as of March 31, 2009 amounted to NIS 214
million, compared with NIS 226 million as of December 31, 2008.
F - 16
RISK MANAGEMENT
Market risk is the risk of impairment of the equity of the Bank deriving from
changes in financial markets that impact the assets and liabilities of the Bank,
such as: changes in exchange rates, interest rates, inflation rates and share
prices.
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.
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.
At the beginning of 2009, further to the repayment of the perpetual deposit and
the increase in the liquid monetary balances held by the Bank, it was decided to
set up an investment committee on behalf of the board of directors. The
committee guides Bank Management regarding policy and the composition of the
investments of these balances and regarding the handling of the financial risks
of the Bank. The committee meets on a monthly basis, and members receive
semi-monthly updates.
The following is a breakdown of the major exposures to market 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. In respect of each of the linkage segments listed above, the
Bank sets out frameworks of maximum permissible surpluses and deficits. These
limits are set taking into consideration the composition of the equity of the
Bank and its current activity. The limits relate to the total equity of the Bank
(including the preference shares that are classified from an accounting
standpoint as liabilities).
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 100 million, and a maximum
deficit of NIS 50 million.
UNLINKED SHEKEL SEGMENT - A maximum surplus of NIS 250 million, and a maximum
deficit of NIS 50 million.
FOREIGN CURRENCY/FOREIGN CURRENCY LINKED SEGMENT - A maximum surplus equal to
the value of the preference shares. The minimum surplus shall not be less than
$80 million.
The following table presents the surplus of assets over liabilities (liabilities
over assets) broken down by linkage segment, as of March 31, 2009. 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 as mentioned above, 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.
NIS MILLIONS
----------
UNLINKED SHEKEL SEGMENT - surplus assets 179
INDEX-LINKED SEGMENT - surplus liabilities (10)
FOREIGN CURRENCY DENOMINATE/LINKED - surplus assets 477
NON-MONETARY ITEMS - surplus assets 40
----------
TOTAL EQUITY (including preference shares) 686
==========
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.
F - 17
An examination conducted on the impact of an increase of 1% in the Consumer
Price Index indicates that such changes will have an absolutely marginal impact
on the results of the Bank's operations.
As shown in Note 8 of the financial statements, the volume of non-dollar foreign
currency denominated assets is very small when compared with the Bank's total
balance sheet and amounts to NIS 12.8 million constituting 0.2% of the total
assets. The Bank has no surplus of assets or liabilities in such currencies and,
therefore, a change in the exchange rates of such currencies has a zero impact
on the results of the Bank's operations.
The following table presents the sensitivity of the impact of changes in the
exchange rate of the dollar as of March 31, 2009 (in NIS millions) on the total
equity of the Bank. The impact is computed prior to the tax effect:
Percentage change in dollar rate (5)% (10)% 5% 10%
------ ------ ------ ------
Impact on the results of operations (23.7) (48.6) 23.6 47.1
The abovementioned data are net of the liabilities in respect of the Bank's
preference shares. In addition, the data presented below are calculated without
the impact of such changes on other variables (such as interest rates).
INTEREST RISK - The interest risk derives from the impact of future changes in
interest rates on the present value of the Bank's assets and liabilities. Such
changes may case 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. In the unlinked shekel segment, most of the activity is at variable
interest so that there is a matching of the dates of changes in interest. In the
foreign currency segment, loans at fixed interest are only back-to-back and,
therefore, in this segment also there is no significant lack of matching in the
timing of the changes in interest.
As part of the limits on the rate of exposure to changes in interest rates, the
Board of Directors of the Bank set limits to the maximum calculated impairment
to the equity of the Bank in the event of a change in interest rate of 1%,
versus the accepted interest rates as of the date of the report. The limits are
as follows:
UNLINKED SHEKEL 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.
According to the decision of the Board of Directors, the measurement of the
impact of a possible change in interest rates on the computed value of assets
and liabilities is carried out every half a year, due to the fact that the Bank
does not have any new credit activity and, therefore a semi-annual measurement
is adequate for the level of activity of the Bank.
LIQUIDITY RISK - At present, the Bank has liquid balances that allow it to fully
cover its liabilities, regardless of the realization of the balance of its
assets. As of March 31, 2009, the Bank invests all of its liquid balances in
bank deposits, with the major component being weekly deposits.
SUPERVISION OVER MARKET RISK MANAGEMENT POLICY AND THE MANNER IN WHICH SUCH
POLICY IS IMPLEMENTED
Implementation of the Bank's asset and liability management policy, including
exposure to market risks is discussed by a committee composed of the GM and
members of management. This committee usually convenes weekly. At each meeting,
the committee is furnished with a report on the Bank's assets and liabilities
broken down by linkage bases.
F - 18
The controller of the Bank, a member of this committee, receives the
aforementioned report on a daily basis in order to check the changes that occur
in the breakdown of the linkage bases of the assets and liabilities between the
reports submitted to the committee.
In addition, once a month, the committee is furnished with a report on the
breakdown of the Bank's investment portfolio.
The Board of Directors of the Bank set up guidelines to carry out its asset and
liability management policy and a number of limits regarding the exposures to
market risks. In addition, it set out the format and dates for reporting and
control in respect of compliance with these limits. Once a quarter, the plenary
of the Board of Directors receives a report on the management of financial
risks, including the risk limits that were set, the compliance therewith, and
updates of such limits in accordance with the decisions made by the Board.
MARKET RISK MEASUREMENT
The model used by the Bank to determine the fair value of the financial
instruments that have no market price is based on forecasted cash flows from
each of these instruments and the discounting thereof using relevant interest
rates.
The calculation that relates to the impact of a change of 1% in the interest
curve in each of the linkage segments is based also on forecasted cash flows
from all of the financial assets and liabilities of the Bank, at relevant
interest rates for each balance sheet item, with a fluctuation of 1% in each
direction.
DERIVATIVE FINANCIAL INSTRUMENTS - As part of the asset and liability management
policy, the Bank conducts transactions in derivative financial instruments. The
Bank executes such transactions solely with banks. The major part of the
activity of the Bank in financial instruments is designed to hedge against an
increase in the exchange rate of the dollar in connection with the preference
shares of the Bank.
VALUE OF EQUITY AT RISK (VAR) - The Bank does not perform an analysis on the
basis of this model. The Board of Directors of the Bank believes that the model
for the measurement of market risks used by the Bank, based mainly on discounted
cash flows, is adequate for the activity of the Bank, based on the following
factors:
- - The total volume of the assets and liabilities of the Bank.
- - The fact that the Bank does not grant new credit and it is in a process of
decline credit volume.
- - The fact that the Bank grants credit in foreign currency or in the unlinked
shekel segment on the basis of variable interest only.
Credit in foreign currency at fixed interest was granted in the past only
on the basis of specific sources at parallel terms (back-to-back).
OPERATIONAL RISKS - The Bank takes various steps to reduce the operational risks
to which the Bank may be exposed:
- - The Bank appointed an operational risk manager and an operational risk
controller.
- - The Bank operates a computerized control system to identify operational
risks in the Bank's operating framework.
- - The Bank conducts, through outside professional parties, periodic
assessments to assess operational risk - including the risks of fraud and
embezzlement to which it is exposed, and the adequacy of the preventative
and compensatory controls designed to reduce such risks. As part of these
assessments, recommendations are made, when necessary for improvement
and/or expansion of existing controls and/or the institution of new
controls.
- - The Bank has a process of management and monitoring of the implementation
of the recommendations of the aforementioned risk assessments.
In accordance with the provisions of the Bank of Israel regarding fraud and
embezzlement risks, a team was set up, headed by the GM, with the participation
of members of management, the internal auditor, the operational risk controller
and the parties responsible for computers in the Bank. The team periodically
discusses the fraud and embezzlement risks that were included in the operational
risk assessment and the controls needed to minimize such risks.
F - 19
ACCOUNTING POLICY IN RESPECT OF CRITICAL ISSUES AND CRITICAL ACCOUNTING
ESTIMATES
Note 1 of the annual financial statements describes the principal accounting
policies according to which the financial statements of the Bank are prepared.
The implementation of these accounting principles by the Board of Directors and
management when preparing the financial statements often requires the use of
various assessments and estimates that affect the reported amounts of assets and
liabilities (including contingent liabilities) and the financial results of the
Bank.
Details relating to the accounting policy on critical issues were presented in
the report of the Board of Directors for 2008 in the chapter relating to
critical issue policy.
CONTROLS AND PROCEDURES PERTAINING TO FINANCIAL STATEMENT DISCLOSURE
The financial statements include certifications of the Bank's General Manager
and Comptroller regarding the efficiency of the controls and procedures relating
to the disclosure in the financial statements and regarding changes in the
internal control over financial reporting.
The aforementioned certifications are in accordance with the directives
published by the Bank of Israel, which came into effect for the first time in
the financial statements for June 30, 2005. The directives published by the Bank
of Israel are in accordance with the provisions of Section 302 of the Sarbanes
Oxley Law.
With the assistance of external consultants, the Bank established controls and
procedures relating to the disclosure, and it maintains a system of internal
control relating to the disclosure among the various managers of the Bank, in
such a way as to enable compliance with the requirement of this directive.
Management of the Bank together with the General Manager and Comptroller
evaluated, as at the end of the period included in this report, the efficiency
of the controls and procedures relating to the Bank's disclosure. On the basis
of this evaluation, the Bank's General Manager and Comptroller concluded that as
at the end of this period, the controls and procedures relating to the Bank's
disclosure are efficient in order to record, process, summarize and report the
information the Bank is required to disclose in the annual report in accordance
with the reporting to the public directives of the Supervisor of Banks and at
the date specified in these directives.
During the course of the quarter ended March 31, 2009, 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, in the past, the Bank issued its 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, some of which 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 the Bank 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 Bank implemented Section 404 of the Sarbanes Oxley Act for
the first time in its annual report for 2007, filed in the U.S. on September 11,
2008. On June 20, 2008, the SEC publicized a leniency whereby the external
auditor's report on the effectiveness of the internal control over financial
reporting would be required only commencing with the fiscal year ending December
15, 2009.
F - 20
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 were imposed on the banks in Israel. In accordance with this
directive, the provisions 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
PROCESS OF APPROVING THE FINANCIAL STATEMENTS
The Board of Directors of the Bank is the body that is charged with the internal
control structure 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 internal 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 has a membership of three directors, including the
Chairman of the Board. Two of the members of the Balance Sheet Committee are
directors having accounting and financial expertise. As part of the financial
statement approval process, a meeting of the Balance Sheet Committee is
convened. 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, as
well as a draft of the financial statements and other related material. At the
first part of the meeting, a discussion is held regarding the classification of
the problematic debts and the fairness of the allowances for doubtful debts and
answers are provided to the questions raised by the directors in connection with
the problematic debts. In the second part of the meeting of the Balance Sheet
Committee, a discussion is held regarding the financial statements.
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 that is held after the meeting of the
Disclosure Committee, the results of operations of the Bank for the past quarter
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 this part of the meeting answers are provided for the questions raised by
the directors on accounting and other issues. The meeting is attended by the
external auditor of the Bank who 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.
After the aforementioned deliberations, a proposal is made to approve the
financial statements.
NON-APPOINTMENT OF NEW EXTERNAL DIRECTORS
According to the Companies Law - 1999, the Bank, as a public company, is
required to appoint two external directors. The external directors are supposed
to be appointed by the general meeting. According to the by-laws of the Bank,
the rights to appoint directors in the Bank belong to the holders of the Banks
Ordinary "A" shares. According to the agreements reached in the past between the
three banking groups that hold the Bank's ordinary "A" shares and the State of
Israel which also holds ordinary "A" shares of the Bank, one of the two external
directors that have to be appointed will be appointed on account of the number
of directors that the banking group is entitled to appoint, by rotation among
them, and the second external directors will be appointed on account of the
number of directors the State is entitled to appoint. Appointment of the
external directors by the general meeting will be based on the recommendation of
each of the groups, with the banking group making their recommendation for their
external director and the State making its recommendation for its external
director. The tenure of the two external directors that recently served at the
Bank ended on March 22, 2009. The Bank contacted the banking group and the State
a number of months prior to that date and asked for the candidates for the
appointment as new external directors. The State has not yet informed the Bank
as to the identity of its candidate and the appointment of the candidate on
behalf of the banking group has been delayed until receipt of the identity of
the candidate of the State. Therefore, at present there are no external
directors on the board. As a result, in accordance with the Companies Law -
1999, the Bank is prohibited from approving transactions that require the
approval of the Audit Committee, such as an extraordinary transaction with a
controlling shareholder, the terms of service of the directors, etc.
F - 21
DISCLOSURE REGARDING THE INTERNAL AUDITOR OF THE BANK
The disclosure regarding the internal auditor of the Bank is as detailed in the
report of the Board of Directors for 2008, with no changes occurring therein.
ORGANIZATIONAL STRUCTURE AND MANPOWER
The number of full-time employees employed by the Bank as of March 31, 2009 was
38, compared with 42 on December 31, 2008 and 170 employees on January 1, 2002.
The Bank is continuing the reduction in manpower, concurrent with the decline in
its activity. At the end of May 2009, the number of employees will be 35.
During the first quarter of 2009, there were 3 plenary sessions of the Board of
Directors and 4 meetings of its committees.
DR. RAANAN COHEN URI GALILI
Chairman of the Board General Manager
Tel-Aviv, May 25, 2009
F - 22
RATES OF INCOME AND EXPENSES (1) APPENDIX A
Reported amounts
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------------------------------
2009 2008
------------------------------------------------- -------------------------------------------------
RATE OF RATE OF RATE OF RATE OF
INCOME INCOME INCOME 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 582.2 3.8 2.64 116.6 2.9 10.33
Effect of ALM derivatives (3) 13.0 1.0 40.0 0.4
Total assets 595.2 3.9 2.65 156.6 3.3 8.70
Liabilities 17.5 - - 429.1 (4.2) (3.97)
Effect of ALM derivatives (3) 227.5 (0.7) 19.1 (0.2)
Total liabilities 245.0 (0.7) (1.15) 448.2 (4.4) (3.99)
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin 2.64 1.50 6.36 4.71
-------- -------- -------- -------- -------- -------- -------- --------
ISRAELI CURRENCY - LINKED TO THE CPI
Assets 270.8 1.9 2.84 336.8 5.5 6.69
Effect of ALM derivatives (3) 18.6 - 19.0 0.1
Total assets 289.4 1.9 2.65 355.8 5.6 6.45
Liabilities 234.6 0.2 0.34 281.9 (3.0) (4.33)
Effect of ALM derivatives (3) - - 24.0 (0.3)
Total liabilities 234.6 0.2 0.34 305.9 (3.3) (4.39)
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin 3.18 2.99 2.36 2.06
-------- -------- -------- -------- -------- -------- -------- --------
FOREIGN CURRENCY - DOMESTIC
OPERATIONS (4)
Assets 5,128.2 582.7 53.80 4,913.5 (303.2) (22.49)
Effect of ALM derivatives (3) 208.9 19.1 - -
Total assets 5,337.1 601.8 53.32 4,913.5 (303.2) (22.49)
Liabilities 5,066.8 (577.2) (53.96) 4,881.6 304.2 22.69
Effect of ALM derivatives (3) 13.0 (0.2) 15.9 (0.4)
Total liabilities 5,079.8 (577.4) (53.82) 4,897.5 303.8 22.60
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin (0.16) (0.50) 0.20 0.11
-------- -------- -------- -------- -------- -------- -------- --------
TOTAL
Monetary assets generating
financing income 5,981.2 588.4 45.55 5,366.9 (294.8) (20.23)
Effect of ALM derivatives (3) 240.5 19.2 59.0 0.5
Total monetary assets generating
financing income 6,221.7 607.6 45.17 5,425.9 (294.3) (19.99)
Monetary liabilities generating
financing expenses 5,318.9 (577.0) (50.98) 5,592.6 297.0 19.61
Effect of ALM derivatives (3) 240.5 (0.9) 59.0 (0.9)
Total liabilities generating
financing expenses 5,559.4 (577.9) (48.52) 5,651.6 296.1 19.37
-------- -------- -------- -------- -------- -------- -------- --------
Interest margin (5.43) (3.35) (0.62) (0.62)
-------- -------- -------- -------- -------- -------- -------- --------
See page 25 for footnotes relating to rates of income and expenses
F - 23
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT.) APPENDIX A
Reported amounts
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------------------------------
2009 2008
------------------------------------------------ ------------------------------------------------
RATE OF RATE OF RATE OF RATE OF
INCOME INCOME INCOME 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 % %
---------------------- -------- -------- ---------------------- -------- --------
In respect of options 1.6 -
Financing commissions and other
financing income 9.2 11.7
Other financing expenses (4.7) (2.2)
-------- --------
Profit from financing operations
before allowance for
doubtful debts 35.8 11.3
Allowance for doubtful debts
(including general
and supplementary allowances) 12.1 11.1
-------- --------
Profit from financing operations
after allowance for doubtful debts 47.9 22.4
Other monetary assets 33.9 877.6
General and supplementary allowances
for doubtful debts (41.8) (45.2)
Non-monetary assets 40.1 46.0
-------- --------
Total assets 6,013.4 6,245.3
======== ========
Other monetary liabilities 605.8 93.4
Non-monetary liabilities 0.1 0.6
Capital resources 88.6 558.7
-------- --------
Total liabilities and capital
resources 6,013.4 6,245.3
======== ========
See page 25 for footnotes relating to rates of income and expenses
F - 24
- --------------------------------------------------------------------------------
EXHIBIT A (CONT.)
RATES OF FINANCING INCOME AND EXPENSES (1) (CONT'D)
IN TERMS OF US DOLLARS
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------------------------------------
2009 2008
------------------------------------------------- ------------------------------------------------
RATE OF RATE OF RATE OF RATE OF
INCOME INCOME INCOME 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 1,278.6 23.8 7.66 1,327.3 21.3 6.58
Effect of ALM derivatives (3) 52.2 - - -
Total assets 1,330.8 23.8 7.35 1,327.3 21.3 6.58
Liabilities 1,263.6 (23.7) (7.72) 1,318.7 (21.0) (6.52)
Effect of ALM derivatives (3) 3.2 - 4.3 (0.1)
-------- -------- -------- --------
Total liabilities 1,266.8 (23.7) (7.70) 1,323.0 (21.1) (6.53)
-------- -------- -------- --------
Interest margin (0.06) (0.35) 0.06 0.05
-------- -------- -------- --------
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.
(4) Including Israeli currency linked to foreign currency.
F - 25
- --------------------------------------------------------------------------------
EXHIBIT B
ANALYSIS OF EXPOSURE TO FLUCTUATIONS IN INTEREST RATES AS AT
Reported amounts
MARCH 31, 2009 DECEMBER 31, 2008
------------------------------------------------------------------------------------------------------------------- -----------------
ON FROM FROM FROM FROM FROM FROM
DEMAND ONE TO THREE TO ONE TO THREE TO FIVE TO TEN TO OVER WITHOUT 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 514.5 0.4 - - - - - - 2.4 517.3 1.20 0.08 2.02 0.08
Total liabilities 16.4 - - - - - - - 29.9 46.3 0.15 0.08 0.80 0.08
------ ------ ------ ------- ------ ------- ------- ------ ------ ------- ------ ------ ------ ------
Difference 498.1 - - - - - - - (27.5) 471.0 1.05 - 1.22 -
Effect of futures
transactions (4.2) (288.4) - - - - - - - (292.6)
Exposure to interest
rate fluctuations 493.9 (288.0) - - - - - - (27.5) 178.4
Cumulative segment
exposure 493.9 205.9 205.9 205.9 205.9 205.9 205.9 205.9 178.4 178.4
------ ------ ------ ------- ------ ------- ------- ------ ------ -------
ISRAELI CURRENCY -
LINKED TO THE CPI
Total assets 5.7 7.5 49.9 73.4 42.3 49.6 20.4 - - 248.8 5.67 3.86 5.71 3.97
Total liabilities 0.2 12.7 58.8 110.6 73.4 1.6 1.1 - - 258.4 2.40 2.45 2.46 2.46
------ ------ ------ ------- ------ ------- ------- ------ ------ ------- ------ ------ ------ ------
Difference 5.5 (5.2) (8.9) (37.2) (31.1) 48.0 19.3 - - (9.6) 3.27 1.41 3.25 1.51
Effect of futures
transactions - - - - - - - - - -
------ ------ ------ ------- ------ ------- ------- ------ ------ -------
Exposure to interest
rate fluctuations 5.5 (5.2) (8.9) (37.2) (31.1) 48.0 19.3 - - (9.6)
Cumulative segment
exposure 5.5 0.3 (8.6) (45.8) (76.9) (28.9) (9.6) (9.6) - (9.6)
------ ------ ------ ------- ------ ------- ------- ------ ------ -------
FOREIGN CURRENCY AND
LINKED THERETO
Total assets 27.0 163.5 555.9 1,025.0 880.3 1,724.1 1,002.5 - 32.9 5,411.2 6.90 5.79 6.93 5.99
Total liabilities 1.2 148.7 425.6 1,026.2 882.1 1,734.0 1,009.1 - 602.0 5,828.9 6.88 5.94 6.88 6.05
------ ------ ------ ------- ------ ------- ------- ------ ------ ------- ------ ------ ------ ------
Difference 25.8 14.8 130.3 (1.2) (1.8) (9.9) (6.6) - (569.1) (417.7) 0.02 (0.15) 0.05 (0.06)
Effect of futures
transactions 4.2 288.4 - - - - - - - 292.6
------ ------ ------ ------- ------ ------- ------- ------ ------ -------
Exposure to interest
rate fluctuations 30.0 303.2 130.3 (1.2) (1.8) (9.9) (6.6) - (569.1) (125.1)
Cumulative segment
exposure 30.0 333.2 463.5 462.3 460.5 450.6 444.0 444.0 (125.1) (125.1)
------ ------ ------ ------- ------ ------- ------- ------ ------ -------
OVERALL EXPOSURE TO
FLUCTUATIONS
IN INTEREST RATES
Total assets** 547.2 171.4 605.8 1,098.4 922.6 1,773.7 1,022.9 - 74.7 6,216.7 6.38 5.24 6.41 5.25
Total liabilities 17.8 161.4 484.4 1,136.8 955.5 1,735.6 1,010.2 - 631.9 6,133.6 6.65 5.79 6.65 5.79
------ ------ ------ ------- ------ ------- ------- ------ ------ ------- ------ ------ ------ ------
Exposure to interest
rate fluctuations 529.4 10.0 121.4 (38.4) (32.9) 38.1 12.7 - (557.2) 83.1 (0.27) (0.55) (0.25) (0.54)
------ ------ ------ ------- ------ ------- ------- ------ ------ -------
Cumulative exposure 529.4 539.4 660.8 622.4 589.5 627.6 640.3 640.3 83.1 83.1
------ ------ ------ ------- ------ ------- ------- ------ ------ -------
General notes -
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 maturity date" column are the amounts as
stated in the balance sheet.
** Including shares amounting to NIS 39.4 million, which are stated in the
"without maturity date" column.
F - 26
- --------------------------------------------------------------------------------
EXHIBIT C
OVERALL RISK OF CREDIT TO THE PUBLIC BY ECONOMIC SECTORS
Reported amounts
MARCH 31, 2009 MARCH 31, 2008
--------------------------------------------------------- ---------------------------------------------------------
ANNUAL ANNUAL
EXPENSE EXPENSE
FOR THE FOR THE
SPECIFIC SPECIFIC
BALANCE OFF-BALANCE ALLOWANCE BALANCE OFF-BALANCE TOTAL RISK ALLOWANCE
SHEET SHEET TOTAL RISK FOR BALANCE OF SHEET SHEET 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 2.3 0.1 2.4 - 1.9 0.9 0.1 1.0 - 0.4
Industry 179.4 10.6 190.0 (0.6) 141.9 203.8 12.2 216.0 (8.2) 153.5
Construction and real
estate 27.9 52.0 79.9 - 73.9 48.2 47.7 95.9 (1.5) 93.0
Electricity 5,237.5 5.2 5,242.7 - 39.1 4,658.4 3.2 4,661.6 - 37.8
Commerce 3.5 2.4 5.9 - 6.0 9.9 5.6 15.5 - 12.5
Restaurants and hotels 4.3 2.2 6.5 - 5.5 8.3 2.1 10.4 - 6.9
Transport and storage 14.3 - 14.3 - - 12.9 - 12.9 - 0.1
Communications and
computer services 2.7 - 2.7 - 1.6 3.6 0.4 4.0 - 2.0
Financial services 27.4 70.4 97.8 - 1.4 31.1 64.8 95.9 - 1.9
Other business services 22.1 1.6 23.7 - 4.7 24.1 3.2 27.3 - 8.7
Public and community
services 30.8 0.1 30.9 - 17.9 40.1 - 40.1 - 30.3
Private households 1.9 - 1.9 - 0.3 3.5 - 3.5 - 0.3
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total 5,554.1 144.6 5,698.7 (0.6) 294.2 5,044.8 139.3 5,184.1 (9.7) 347.4
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Credit risk included
in the various economic
sectors:
Agricultural settlement
movements (4) 89.5 2.1 91.6 - 50.2 109.9 0.9 110.8 (7.9) 56.9
Local authorities and
entities controlled by them 1.7 - 1.7 - - 3.4 - 3.4 - -
(1) Credit to the public and investments in debentures of the public. Credit to
the public is before the deduction of the allowance in respect of
industry-wide risk characteristics. 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 - 27
- --------------------------------------------------------------------------------
EXHIBIT C
OVERALL RISK OF CREDIT TO THE PUBLIC BY ECONOMIC SECTORS (CONT.)
Reported amounts
DECEMBER 31, 2008
-------------------------------------------------------------
ANNUAL
EXPENSE
FOR THE
SPECIFIC
BALANCE OFF-BALANCE TOTAL ALLOWANCE
SHEET SHEET RISK OF FOR BALANCE OF
CREDIT CREDIT CREDIT TO DOUBTFUL PROBLEMATIC
RISK (1) RISK (2) PUBLIC DEBTS DEBTS (3)
-------- -------- -------- -------- --------
NIS MILLIONS
-------------------------------------------------------------
Agriculture 2.5 0.1 2.6 - 2.1
Industry 175.5 10.7 186.2 (7.5) 138.7
Construction and real estate 37.4 40.8 78.2 (4.0) 64.0
Electricity 4,819.0 5.2 4,824.2 - 39.7
Commerce 3.8 2.4 6.2 0.6 6.2
Restaurants and hotels 4.3 2.2 6.5 (2.6) 6.4
Transport and storage 13.2 - 13.2 (0.1) -
Communications and computer
services 2.9 0.4 3.3 - 1.9
Financial services 28.0 64.4 92.4 - 1.4
Other business services 22.6 1.5 24.1 (0.1) 5.1
Public and community services 36.5 0.1 36.6 0.2 23.0
Private households 3.4 - 3.4 - 0.3
-------- -------- -------- -------- --------
Total 5,149.1 127.8 5,276.9 (13.5) 288.8
======== ======== ======== ======== ========
Credit risk included in the
various economic sectors:
Agricultural settlement movements (4) 92.1 2.2 94.3 (11.8) 49.6
Local authorities and entities
controlled by them 2.2 - 2.2 - -
(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 - 28
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 quarter ending on March 31,
2009 (hereinafter - the report).
2. Based on my knowledge, the report does not contain any untrue statement of
a material fact or omit any material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by the report.
3. Based on my knowledge, the financial statements and other financial
information included in the report fairly present in all material respects,
the Bank's financial condition, results of operations, and the changes in
the shareholders' equity as at the dates and for the periods presented in
the report.
4. The Bank's other certifying officers and I are responsible for establishing
and maintaining controls and procedures necessary for the required
disclosure in the Bank's report. Furthermore:
A. We have established such controls and procedures, or caused such
controls and procedures to be established under our supervision,
intended to ensure that material information relating to the Bank is
made known to us by others in the Bank, particularly during the period
of preparing the report;
B. We have evaluated the effectiveness of the Bank's disclosure controls
and procedures and we have presented our conclusions regarding the
effectiveness of the disclosure controls and procedures as at the end
of the period covered by the report based on such evaluation; and
C. We have disclosed in the report any change in the internal control of
the Bank over financial reporting that occurred in the 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
May 25, 2009
F - 29
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 quarter ending March 31, 2009
(hereinafter - the report).
2. Based on my knowledge, the report does not contain any untrue statement of
a material fact or omit any material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by the report.
3. Based on my knowledge, the financial statements and other financial
information included in the report fairly present in all material respects,
the Bank's financial condition, results of operations, and the changes in
the shareholders' equity as at the dates and for the periods presented in
the report.
4. The Bank's other certifying officers and I are responsible for establishing
and maintaining controls and procedures necessary for the required
disclosure in the Bank's report. Furthermore:
A. We have established such controls and procedures, or caused such
controls and procedures to be established under our supervision,
intended to ensure that material information relating to the Bank is
made known to us by others in the Bank, particularly during the period
of preparing the report;
B. We have evaluated the effectiveness of the Bank's disclosure controls
and procedures and we have presented our conclusions regarding the
effectiveness of the disclosure controls and procedures as at the end
of the period covered by the report based on such evaluation; and
C. We have disclosed in the report any change in the internal control of
the Bank over financial reporting that occurred in the 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
May 25, 2009
F - 30
- --------------------------------------------------------------------------------
|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
REVIEW REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
INTRODUCTION
We reviewed the enclosed financial information of The Industrial Development
Bank of Israel Limited, including the condensed balance sheet as of March 31,
2009, and the condensed statements of income, changes in shareholders' equity
and cash flows for the three-month period then ended. The board of directors and
management are responsible for the preparation and presentation of the financial
information for this interim period, in accordance with Accounting Standard No.
14 of the Israel Accounting Standards Board, FINANCIAL REPORTING FOR INTERIM
PERIODS, and in accordance with the directives and guidelines of the Supervisor
of Banks. Our responsibility is to express a conclusion regarding the financial
information for this interim period based on our review.
SCOPE OF REVIEW
We conducted our review in accordance with Review Standard No. 1 of the
Institute of Certified Public Accountants in Israel, REVIEW OF INTERIM FINANCIAL
INFORMATION CONDUCTED BY THE AUDITOR OF THE ENTITY and the review standard, the
implementation of which in reviewing banking institutions is stipulated by the
directives and guidelines of the Supervisor of Banks. A review of interim
financial information consists of making inquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and
other review procedures. A review is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in Israel and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identifies in an audit. Accordingly we
do not express an audit opinion.
CONCLUSION
Based on our review, nothing has come to our attention that causes us to believe
that the aforementioned financial information is not presented, in all material
respects, in accordance with Accounting Standard No. 14 of the Israel Accounting
Standards Board and in accordance with the directives and guidelines of the
Supervisor of Banks.
F - 31
- --------------------------------------------------------------------------------
|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
Without qualifying our opinion, we would call attention to the following:
A. Note 1A of the financial statements regarding the severe liquidity problems
the Bank experienced in August 2002, which were caused by increased
withdrawals of public deposits, 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, the cancellation of the license of the Bank as from August
1, 2008, and the blueprint for the sale of all of the shares of the Bank,
all as detailed in the said note.
Note 1 states, among other things, that: "at present, it is impossible to
ascertain if the sale of the shares of the Bank pursuant to the Arrangement
Plan will be implemented and what the ramifications on the Bank will be if
the sale of the shares of the Bank is not implemented."
B. Note 9 of the financial statements regarding litigation, all as detailed in
the aforementioned note.
Kesselman & Kesselman
Certified Public Accountants (Isr.)
Tel Aviv
May 25, 2009
F - 32
The Industrial Development Bank of Israel Limited
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
REPORTED AMOUNTS
MARCH 31, DECEMBER 31,
-------------------------- ----------
2009 2008 2008
---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (AUDITED)
---------- ---------- ----------
NOTE NIS MILLIONS NIS MILLIONS NIS MILLIONS
---------- ---------- ---------- ----------
ASSETS
Cash and deposits with banks 600.9 35.1 575.3
Securities 5 39.4 40.3 37.9
Credit to the public 5,523.8 5,000.8 5,107.1
Credit to the Israeli government 2.7 23.4 2.8
Fixed assets 0.5 0.7 0.5
Other assets 17.2 6.2 3.3
Perpetual deposits with the Israeli Treasury 32.9 852.2 29.9
---------- ---------- ----------
Total assets 6,217.4 5,958.7 5,756.8
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits of the public 25.3 52.3 26.7
Deposits of banks - 390.0 -
Deposits of the Government 5,439.5 4,876.9 5,022.6
Perpetual deposit 0.1 0.1 0.1
Capital notes - 19.0 -
Other liabilities 66.8 62.4 63.9
Non-participating preference shares 374.9 255.0 335.8
Participating preference shares 227.1 157.6 203.6
---------- ---------- ----------
Total liabilities 6,133.7 5,813.3 5,652.7
---------- ---------- ----------
Shareholders' equity 83.7 145.4 104.1
---------- ---------- ----------
Total liabilities and shareholders' equity 6,217.4 5,958.7 5,756.8
========== ========== ==========
DR. RAANAN COHEN URI GALILI RIMON SHMAYA
- --------------------- --------------------- ---------------------
Chairman of the Board General Manager Comptroller
May 25, 2009
The accompanying notes are an integral part of the condensed financial
statements.
F - 33
The Industrial Development Bank of Israel Limited
CONDENSED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Reported amounts
THREE MONTHS ENDED YEAR ENDED
MARCH 31 MARCH 31 DECEMBER 31
2009 2008 2008
---------- ---------- ----------
NOTE (NIS MILLIONS)
-------- --------------------------------------------
(UNAUDITED) (UNAUDITED) (AUDITED)
---------- ---------- ----------
Profit from financing operations
before allowance for doubtful debts 11 35.8 11.3 84.0
Allowance for doubtful debts 6 (12.1) (11.1) (16.9)
---------- ---------- ----------
Profit from financing operations
after allowance for doubtful debts 47.9 22.4 100.9
---------- ---------- ----------
OPERATING AND OTHER INCOME
Operating commissions 0.1 0.1 0.6
Gains (losses) from investments in shares 12 (0.2) (0.7) 1.0
Other income 1.4 0.5 1.4
---------- ---------- ----------
Total operating and other income (expenses) 1.3 (0.1) 3.0
---------- ---------- ----------
OPERATING AND OTHER EXPENSES
Salaries and related expenses 4.8 5.7 19.9
Expenses in respect of employee retirement 0.8 11.0 9.0
Maintenance and depreciation of buildings and
equipment 0.7 0.7 2.9
Other expenses 1.8 2.0 9.6
---------- ---------- ----------
Total operating and other expenses 8.1 19.4 41.4
---------- ---------- ----------
OPERATING PROFIT BEFORE TAXES ON INCOME 41.1 2.9 62.5
Provision for taxes on operating income 3.9 1.7 9.5
---------- ---------- ----------
OPERATING PROFIT AFTER TAXES ON INCOME 37.2 1.2 53.0
Dividend and exchange rate differentials on preference
shares classified as liabilities 13 (59.6) - -
---------- ---------- ----------
NET EARNINGS (LOSS) FOR THE PERIOD (22.4) 1.2 53.0
========== ========== ==========
NET EARNINGS (LOSS) PER SHARE IN NIS
---------- ---------- ----------
"A" ordinary shares (1,483.4) 79.5 3,509.9
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
F - 34
The Industrial Development Bank of Israel Limited
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------
Reported amounts
THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)
-----------------------------------------------------------------------------
ADJUSTMENTS
SHARE ACCUMULATED FROM
CAPITAL DIFFERENCE ON PRESENTATION
AND TRANSLATION OF AVAILABLE-
PREMIUM OF FOR-SALE TOTAL
ON CPI LINKED SECURITIES AT ACCUMULATED SHAREHOLDERS'
SHARES DEPOSIT MARKET VALUE DEFICIT EQUITY
---------- ---------- ---------- ---------- ----------
NIS MILLIONS
-----------------------------------------------------------------------------
BALANCE AS OF THE BEGINNING
OF THE PERIOD (AUDITED) 554.8 - 5.1 (455.8) 104.1
Net loss for the period - - - (22.4) (22.4)
Adjustments from present-
ation of available-for-sale
securities at market value - - 2.0 - 2.0
---------- ---------- ---------- ---------- ----------
BALANCE AS AT THE END OF THE
PERIOD 554.8 - 7.1 (478.2) 83.7
========== ========== ========== ========== ==========
THREE MONTHS ENDED MARCH 31, 2008 (UNAUDITED)
-----------------------------------------------------------------------------
ADJUSTMENTS
SHARE ACCUMULATED FROM
CAPITAL DIFFERENCE ON PRESENTATION
AND TRANSLATION OF AVAILABLE-
PREMIUM OF FOR-SALE TOTAL
ON CPI LINKED SECURITIES AT ACCUMULATED SHAREHOLDERS'
SHARES DEPOSIT MARKET VALUE DEFICIT EQUITY
---------- ---------- ---------- ---------- ----------
NIS MILLIONS
-----------------------------------------------------------------------------
BALANCE AS OF THE BEGINNING
OF THE PERIOD (AUDITED) 207.1 402.3 9.5 (508.8) 110.1
Net earnings for the period - - - 1.2 1.2
Adjustments from present-
ation of available-for-sale
securities at market value - - (3.3) - (3.3)
Translation differences
relating to a perpetual
deposit - 37.4 - - 37.4
---------- ---------- ---------- ---------- ----------
BALANCE AS AT THE END OF THE
PERIOD 207.1 439.7 6.2 (507.6) 145.4
========== ========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
F - 35
The Industrial Development Bank of Israel Limited
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (CONT'D)
- --------------------------------------------------------------------------------
Reported amounts
YEAR ENDED DECEMBER 31, 2008 (AUDITED)
-----------------------------------------------------------------------------
ADJUSTMENTS
SHARE ACCUMULATED FROM
CAPITAL DIFFERENCE ON PRESENTATION
AND TRANSLATION OF AVAILABLE-
PREMIUM OF FOR-SALE TOTAL
ON CPI LINKED SECURITIES AT ACCUMULATED SHAREHOLDERS'
SHARES DEPOSIT MARKET VALUE DEFICIT EQUITY
---------- ---------- ---------- ---------- ----------
NIS MILLIONS
-----------------------------------------------------------------------------
BALANCE AS OF THE BEGINNING
OF THE YEAR 207.1 402.3 9.5 (508.8) 110.1
Net earnings - - - 53.0 53.0
Adjustments from present-
ation of available-for-sale
securities at market value - - (4.4) - (4.4)
Translation differences relating
to a perpetual deposit - 43.4 - - 43.4
Arrangement plan between the BANK
AND ITS SHAREHOLDERS
Arrangement in connection with
interest on perpetual deposit
against dividend in arrears on
preference shares - (98.0) - - (98.0)
Refund of perpetual deposit,
constituting in essence payment
of the State in respect of B1
share 347.7 (347.7) - - -
---------- ---------- ---------- ---------- ----------
BALANCE AS AT THE END OF THE YEAR 554.8 - 5.1 (455.8) 104.1
========== ========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
F - 36
The Industrial Development Bank of Israel Limited
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------
REPORTED AMOUNTS
FOR THE THREE FOR THE YEAR
MONTHS ENDED ENDED
MARCH 31,2009 DECEMBER 31, 2008
---------- ----------
NIS MILLIONS NIS MILLIONS
---------- ----------
CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net earnings (loss) for the period (22.4) 53.0
Adjustments need to present cash flow operations:
Depreciation on equipment - 0.4
Allowance for doubtful debts (12.0) (8.4)
Loss on sale of available-for-sale securities 0.2 2.4
Provision for severance pay and pensions, net 0.9 6.5
Inflationary erosion of capital notes and perpetual deposit - (0.3)
---------- ----------
Net cash provided by (used in) operating activities (33.3) 53.6
---------- ----------
CASH FLOWS GENERATED BY ACTIVITIES RELATED TO ASSETS:
Deposits with banks, net (175.0) 2.6
Available-for-sale securities, net 0.3 1.6
Credit to the public, net (405.5) 421.1
Credit to the Israeli government, net 0.1 21.9
Other assets, net (13.9) 3.9
Perpetual deposit with the Israeli treasury (3.0) 857.2
Acquisition of fixed assets - (0.1)
---------- ----------
Net cash provided by (used in)
activities related to assets (597.0) 1,308.2
---------- ----------
CASH FLOWS GENERATED BY ACTIVITIES RELATED TO
LIABILITIES AND SHAREHOLDERS' EQUITY:
Redemption of capital notes - (19.9)
Deposits of the public, net (1.4) (27.9)
Deposits of banks, net - (481.2)
Deposits of the Government, net 416.9 (296.6)
Other liabilities, net 2.8 7.9
Non-participating preference shares, net 39.1 -
Participating preference shares, net 23.5 -
---------- ----------
Net cash provided by (used in)
activities relating to liabilities and shareholders' equity 480.9 (817.7)
---------- ----------
INCREASE (DECREASE) IN CASH (149.4) 544.1
BALANCE OF CASH AS OF BEGINNING OF YEAR 574.1 30.0
---------- ----------
BALANCE OF CASH AS OF END OF YEAR 424.7 574.1
========== ==========
The accompanying notes are an integral part of the financial statements.
F - 37
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 1 - THE RUN-OFF PLAN, THE COMPROMISE AND ARRANGEMENT PLAN BETWEEN THE BANK
AND ITS SHAREHOLDERS, THE REPAYMENT OF THE PERPETUAL DEPOSITS OF THE
BANK WITH THE TREASURY
Due to increased withdrawals of deposits during the third quarter of 2002,
the Bank experienced severe liquidity problems, following which the Bank,
on August 22, 2002, requested a special line of credit from the Governor of
the Bank of Israel. The Bank repaid the credit line in full on December 31,
2008.
On August 1, 2009, the "banking license" of the Bank expired, in accordance
with the announcement of the Governor of the Bank of Israel.
THE ACTIVITY OF THE BANK DURING AND SUBSEQUENT TO THE RUN-OFF PLAN
The principal components of the "Run-Off" plan that was implemented by the
Bank were a supervised sale of the Bank's assets and a significant
reduction in manpower and in operating expenses.
The Bank is prohibited from accepting new deposits and from renewing
existing deposits which have matured. Commencing August 1, 2008, the date
on which the banking license of the Bank expired, the Bank became subject
to a restriction pursuant to the Banking Law (Licensing) - 1981, whereby
the number of depositors in the Bank shall not exceed twenty nine.
The reduction in the Bank's operations was also accompanied by a reduction
in the Bank's staff and in the Bank's operating expenses.
Both during and subsequent to the Run-Off Plan which ended on July 31,
2008, the Bank has been refraining from granting new credit and its
activity focuses on the collection of the existing credit. The Bank intends
on continuing this reduced framework of activity until the completion of
the sale of the shares of the Bank as part of the Arrangement Plan, or
until other developments occur in the event that the sale of the shares is
not implemented.
At present, it is impossible to assess if and the sale of the shares of the
Bank pursuant to the Arrangement Plan will actually be implemented and what
the consequences on the Bank will be if the sale of the shares of the Bank
is not implemented.
GOVERNMENT DECISION REGARDING THE PRIVATIZATION OF THE BANK
On April 29, 2008, the Ministerial Committee on Privatization passed a
resolution pertaining to the privatization of the Bank, as part of a
petition to approve the arrangement pursuant to Article 350 of the
Companies Law. The full wording of the resolution was publicized by the
Bank in its Immediate Report on April 30, 2008. The privatization
resolution stipulates, among other things, the following:
o The shares of the State in the Bank shall be sold, as one block, by
way of a private placement, to an investor or group of investors from
Israel and/or abroad (the "Purchaser"), as part of the blueprint for
the sale, including the transfer of all of the shares of the Bank,
including those held by the public, to the Purchaser (the "Sale").
o Until the completion of the sale, the Bank shall continue collecting
its credit portfolio.
o The Accountant General of the Ministry of Finance was authorized to
carry out a number of steps in connection with the privatization of
the Bank.
o The employees of the Bank will be paid a privatization remuneration in
according with the rules of the Authority. The remuneration will be
granted immediately following the sale and will be subject to the
execution thereof.
The privatization decision was taken further to and on the basis of the
blueprint for the sale of the issued share capital of the bank that was
assessed by the Finance Ministry and the Government Companies Authority.
F - 38
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
THE COMPROMISE AND ARRANGEMENT PLAN PURSUANT TO ARTICLE 350 OF THE
COMPANIES LAW - 1999 BETWEEN THE BANK AND ITS SHAREHOLDERS
Further to the Government resolution regarding the privatization of the
Bank and in accordance with the resolution of the Board of Directors of the
Bank at its meeting of May 26, 2008, the Bank filed a petition with the Tel
Aviv - Jaffa District Court on July 6, 2008 to approve the compromise and
arrangement plan pursuant to Article 350 of the Companies Law between the
Bank and its shareholders.
Prior to passing the resolution regarding the filing of the petition to
have the Arrangement Plan approved, the Board of Directors was presented
with the opinion of an expert regarding the reasonableness of the criterion
for determining the Minimum Price at which the sale of the Bank will be
carried out in accordance with the Arrangement Plan, and the fairness of
the criterion as far as the public shareholders are concerned, regarding
the formula that was set down in the plan for the distribution of the
proceeds of the sale, as well as a document dated March 9, 2008, prepared
by Professor A. Barnea, who assessed the alternative of liquidating the
Bank versus the alternative of selling the shares of the Bank, on the basis
of the financial statements of the Bank as of September 30, 2007 and which
contains the formula for the distribution of the proceeds of the sale. The
document of Professor A. Barnea constitutes part of the Arrangement Plan
and its full version was publicized by the Bank in an Immediate Report
dated March 12, 2008. In addition, the Board of Directors was furnished
with a legal opinion regarding the reasonableness of the arrangement to pay
a partial dividend to the C, CC, and CC1 shareholders, which according to
the Arrangement Plan constitutes an alternative to the sale of the shares
of the Bank in the event that such sale is not realized.
The resolution of the Board of Directors regarding the submission of the
Arrangement Plan was passed after the Board of Directors reached a decision
in view of, among other things, the conclusions and findings in the
aforementioned two opinions and in the aforementioned document of Professor
A. Barnea, that the alternative of selling the shares of the Bank, which
stands at the center of the Arrangement Plan, may be more beneficial to the
public shareholders than the alternative of liquidating the Bank.
The Arrangement Plan was included in the Immediate Report made by the Bank
on May 27, 2008 (except of minor changes. This description is in line with
the plan that was included in the petition that was filed by the Bank on
July 6, 2008). A brief description follows:
The Arrangement Plan includes three parts (two of which are alternatives)
which the shareholders and the court were asked to approve as one unit.
1. The first part will be implemented immediately upon the approval of
the Arrangement Plan (by the meetings of the type of shareholders and
the court). Pursuant to the first part, the State will redeem the
perpetual deposits made by the Bank with the Treasury, except that
part of them that reflects the proceeds of the issuance of the D and
DD shares held by the public (which will continue to be maintained as
a dollar-linked deposit). The Bank will use the redemption of the
perpetual deposits to repay the balance of the line of credit placed
at its disposal by the Bank of Israel. The originating motion that was
filed by various financial institutions against the Bank to have the
distribution of the dividend renewed will be rejected, and the appeal
filed by the Bank against the court decision rejecting its originating
motion on the matter of the accrual of the interest on its perpetual
deposits with the Treasury will also be rejected.
2. Pursuant to the second part (the sales arrangement), all of the shares
of the Bank, except for the D and DD shares not held by the State,
will be sold by the parties holding them (the State and the public) as
part of the sales process to be implemented by the Government
Companies Authority.
F - 39
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
The D and DD shares not held by the State will be redeemed according
to the terms of their issue: the D shares at their full dollar par
value, plus a premium of 5.625%, plus the entire preferred dividend in
arrears in respect of such shares, and the DD shares at their full
dollar par value plus the entire preferred dividend in arrears in
respect of such shares. The redemption of the amount of the principal
will come from the resources of the Bank while the payment of the
premium and the preferred dividend in arrears will be financed by
funds provided to the Bank by the State of Israel.
If the total proceeds to be received in respect of the sold shares are
lower than the greater of the "liquidation value of the Bank" as to be
determined by the average of the two valuations conducted at the
request of the State prior to the implementation of the sale, less the
principal amount of the redemption of the D and DD shares, or an
amount of NIS 400 million (the "Minimum Price"), the consummation of
the sale shall be subject to the approval of the meeting of the C-type
shareholders (C, CC and CC1) (by a majority of 75% of the value
represented by the vote). The State is authorized, at its discretion,
not to carry out the sale even if the average total proceeds are
higher than the Minimum Price.
The proceeds of the sale shall be divided among the holders of the
sold shares on the basis of the distribution formulas prepared by
Professor A. Barnea as part of the document he prepared, as above,
which is attached to the Arrangement Plan. The State shall refund to
the Bank part of the perpetual deposits it still holds, in accordance
to the description of part 1 above.
The shareholders of the Bank will waive any claim, demand, or suit
against the Bank, officers of the Bank, shareholders of the Bank,
employees of the Bank, or the State. In addition, the Bank will waive
any claim, demand, or suit toward the State in connection with the
perpetual deposit, the payment of interest in respect thereof, and its
refunding to the Bank.
The Bank will assign its rights to the loan it placed at the disposal
of the Israel Electric Company Ltd. and to the State deposit which
served as a source of such loan. The rights will be assigned to the
party to which the Bank is instructed by the Accountant General. The
conditions for the performance of the second part (the sales
arrangement) are the finding of a purchaser and the completion of the
sale by December 31, 2009.
3. The third part (the dividend arrangement) is an alternative to the
second part (the sale arrangement) and it shall be carried out in the
event that the sales arrangement is not completed by December 31, 2009
or, if prior to that date, a liquidation order is issued against the
Bank or if the general meeting of the Bank decides to voluntarily
liquidate the Bank. As part of this course of action, the Bank will
pay the holders of C, CC, and CC1 shares, on the earliest of December
31, 2009, or the date on which a liquidation order is issued against
the Bank, or on the date on which the general meeting of the Bank
decides to voluntarily liquidate the Bank, half of the preferred
dividend in arrears (at an annual rate of 6%) accrued on their shares
during the period from July 1, 2002 through July 31, 2008, plus
linkage differentials and interest by law, from July 31, 2008 until
the date of the actual payment to the shareholders. The State will pay
the Bank in respect of the part of the perpetual deposits that reflect
the consideration of the issuance of C, CC and CC1 shares, half of the
interest at an annual rate of 6% accrued on this part during the
aforementioned period, plus linkage differentials and interest by law,
from July 31, 2008 until the date of the actual payment to the Bank.
Pursuant to the third part, the State will waive any claim, demand or
suit against the Bank, the receiver of the Bank, and the liquidation
account of the Bank in connection with 50% of the preferred dividend
in arrears accrued on the D and DD shares held by the State in respect
of the period from July 1, 2002 through July 31, 2008, and the holders
of C, CC and CC1 shares will waive any claim, demand, or suit in
connection with the perpetual deposit, its return to the Bank, the
payment of interest thereon, and the non-distribution of the dividend
during the period until the payment to them of half of the preferred
dividend in arrears, as mentioned above (without such waiver of the
holders of the C, CC and CC1 shares detracting from their rights under
the articles of the Bank to accumulate a preferred dividend in respect
of their shares, including in relation to the aforementioned period).
F - 40
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
Subject to the carrying out of the dividend arrangement, the Bank will
waive any claim, demand, or suit toward the State in connection with
the payment of interest in respect of part of the perpetual deposit
which reflects the considerations of the issuance of the Group C
shares, and the Group D shares that are owned by the State (without it
detracting from any claim, demand, or suit of the Bank in connection
with the payment of the interest on the balance of the perpetual
deposit) and in respect of the refund of the perpetual deposit by the
State.
It is hereby clarified and emphasized that the above description is solely
a condensed summary of the major features of the Arrangement Plan and it
does not come replace the full version of the Arrangement Plan submitted to
the court.
Since the redemption of the D and DD shares and the payment of half of the
preferred dividend in respect of the C, CC, and CC1 shares, as described
above, may constitute a reduction in capital, then concurrent with the
submission of a request to the court to approve the Arrangement Plan, on
July 6, 2008, the Bank submitted to the court a request to reduce its
capital. The request was approved by the court on November 20, 2008.
The arrangement pursuant to Article 350 of the companies Law - 1999 is
subject to the approval of the meetings of the different classes of
shareholders of the Bank as well as the approval of the court. On October
30, 2008 and November 6, 2008, the Arrangement Plan was approved by the
meetings of the classes of shareholders of the Bank and on November 24,
2008, the plan was approved by the Court.
Further to the approval of the Arrangement Plan and pursuant to the
stipulations therein, on December 31, 2008, the Government repaid to the
Bank the perpetual deposits it had deposited with the Treasury (except the
part thereof that reflects the consideration of the issuance of D and DD
shares held by the public), the Bank repaid the balance of the credit line
placed at its disposal by the Bank of Israel, the originating motion filed
against the Bank in the matter of the renewal of the distribution of a
dividend was rejected, as was the appeal of the Bank against the court
decision that rejected the Bank's originating motion in the matter of the
accrual of interest on the perpetual deposits of the Bank with the
Treasury.
On April 6, 2009, the Government Companies Authority issued a press release
on behalf of the Israeli Government whereby those parties interested in
purchasing the entire issued share capital of the Bank were invited to
contact the Government Companies Authority in accordance with the
stipulations of the press release and the sales procedure that had also
been issued by the Authority at the same time. The date set in the
notification for submission of applications by interested parties was May
21, 2009. According to the notification sent to the Bank by the Authority
on May 21, 2009, applications were received by the Authority from five
parties that expressed an interest in participating in the sales process of
the shares of the Bank. According to the sales procedure that was issued by
the Authority, the representatives of the State were now supposed to review
the applications and select those that would be invited to participate in
the next phase of the sales process (perusal of the documents of the Bank
in the data room, submission of price quotes, etc.).
REPAYMENT OF THE PERPETUAL DEPOSITS OF THE BANK WITH THE TREASURY
According to the first part of the Compromise and Arrangement Plan between
the Bank and its shareholders, on December 31, 2008, the State repaid to
the Bank the perpetual deposits in the Treasury, except for the part
thereof that reflects the proceeds of the issuance of the D and DD shares
held by the public, in a total amount of NIS 857.5 million. Of this amount,
an amount of NIS 304.5 million was paid by the Treasury to the Bank of
Israel in respect of the repayment of the balance of the line of credit
placed at the disposal of the Bank in the third quarter of 2002 as a result
of the liquidity problems facing the Bank..
F - 41
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
The balance of the repayment of the aforementioned perpetual deposits, in
an amount of NIS 553.0 million, was transferred to the Bank. As a result,
as of both December 31, 2008 and March 31, 2009, the Bank held liquid
monetary balances in excess of all of its liabilities to its creditors (not
including the deposit of the Government that served as the source for the
credit granted to the Israel Electric Company that was secured by a
government guarantee).
NOTE 2 - ACCOUNTING POLICY
The condensed interim financial statements are presented in accordance with
the directives and guidelines of the Supervisor of Banks and in accordance
with accounting principles implemented for purposes of preparing interim
financial statements, as set out in Accounting Standard No. 14 of the
Israel Accounting Standards Board. In a letter dated May 29, 2008, the
Supervisor of Banks announced that the financial statements of the Bank
have to be presented in accordance with his directives for an additional
three-year period following the date the "banking license" of the Bank was
cancelled (August 1, 2008). The accounting principles implemented in the
preparation of the interim financial statements are consistent with those
applied in the preparation of the audited financial statements as at
December 31, 2008. These financial statements should be read in conjunction
with the annual financial statements as at December 31, 2008 and for the
year then ended, together with their accompanying notes.
According to the directives of the Bank of Israel, issued on March 18,
2008, the scope of the disclosure required in the quarterly financial
statements of banking institutions was expanded. The effective date of the
directive is from the financial statements as of June 30, 2008. In
accordance with the transition provisions set out in this directive, no
comparative amounts were included in the statement of cash flows and in the
notes relating to the same quarter of 2008, in the event that no such
information was reported in 2008.
NOTE 3 - DISCLOSURE OF THE IMPACT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO IMPLEMENTATION
A. In July 2006, the Israel Accounting Standards Board issued Accounting
Standard No. 29, "Adoption of International Financial Reporting
Standards ("IFRS")" (hereinafter - the Standard). The Standard
stipulates that entities subject to the Securities Law - 1968 and that
are required to report according to the regulations of this law, are
to prepare their financial statements for periods beginning as from
January 1, 2008 according to IFRS. This does not apply to banking
institutions, the financial statements of which are presented in
accordance with the provisions and guidelines of the Supervisor of
Banks.
In relating to the manner in which banking institutions are to
implement the Standard, the Supervisor of Banks notified banking
institutions that:
o He intends on setting down on a regular basis provisions for the
implementation of Israeli standards issued by the Israel
Accounting Standards Board and which are based on IFRS that do
not relate to the core banking business.
o In the second half of 2009, he will publicize his decision
regarding the date of implementation of IFRS standards that
relate to the core banking business. In doing so, he will take
into consideration the results of the process of adoption of
these standards in Israel on the one hand and the progress of the
process of convergence between IFRS and U.S. standards on the
other hand.
o Therefore, relating to the core banking business, the financial
statements of a banking institution presented in accordance with
the provisions and guidelines of the Supervisor of Banks will
continue to be presented on the basis of the U.S. standards as
stipulated in the provisions for reporting to the public.
F - 42
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 3 - DISCLOSURE OF THE IMPACT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO IMPLEMENTATION (CONT.)
B. In December 2006, the Israel Accounting Standards Board issued
Accounting Standard No. 23, "The Accounting Treatment of Transactions
between an Entity and its Controlling Shareholder" issued by the
Israel Accounting Standards Board (hereinafter - the "Standard"). The
Standard replaces the Securities Regulations (Financial Statement
Presentation of a Transaction between a Company and its Controlling
Shareholder) - 1996 as adopted in the provisions for reporting to the
public of the Supervisor of Banks. The Standard stipulates that assets
and liabilities which were the subject of a transaction between an
entity and its controlling shareholders shall be measured at the date
of the transaction at fair value and that the difference between the
fair value and the consideration of the transaction be carried to
shareholders' equity. Any difference with a debit balance is in effect
a dividend which reduces retained earnings. Any difference with a
credit balance constitutes an investment by the owners and shall be
presented separately as part of shareholders' equity under the title
"Capital Reserve deriving from a transaction between the entity and
its controlling shareholder".
The Standard deals with three issues in connection with transactions
between an entity and its controlling shareholder, as follows: the
transfer of an asset to the entity from the controlling shareholder,
or the opposite, transfer of an asset from the controlling shareholder
to the entity; the assumption of a liability of the entity to a third
party, in whole or in part, by the controlling shareholder,
indemnification of the entity by the controlling shareholder in
respect of an expense, the waiver of the controlling shareholder to
the entity regarding a debt due to him from the entity, in whole or in
part; and loans granted to the controlling shareholder or loans
received from the controlling shareholder. In addition, the Standard
sets forth the disclosure to be made in the financial statements
regarding transactions between the entity and its controlling
shareholder during the period.
The Standard applies to transactions between an entity and its
controlling shareholder carried out after January 1, 2007 and to loans
granted to or received from the controlling shareholder prior to the
effective date of the Standard, commencing on the effective date.
As of the date of release of the financial statements, the Supervisor
of Banks had not yet issued his provisions regarding the manner of
adoption of the Standard by banking institutions, if at all.
C. Directive on the Measurement and Disclosure of Impaired Debts, Credit
Risk and a Provision for credit Losses - On December 31, 2007, the
Supervisor of Banks issued a directive on "Measurement and Disclosure
of Impaired Debts, Credit Risk, and a Provision for Credit Losses".
The directive was brought up for discussion at the advisory committee
of the Bank of Israel on matters related to banking affairs.
The directive is based on accounting principles generally accepted by
banks in the U.S. The underlying principles of the directive
constitute a significant change versus the current provisions relating
to the classification of problematic debts and the measurement of the
provision for doubtful debts in respect of credit losses. The new
directive sets out explicit guidelines regarding the classification of
impaired debts, credit risk, the measurement of the provisions for
credit losses, the accounting write-offs of debts and revenue
recognition in respect of debts. Moreover the new guidelines set out
detailed requirements for the conducting of a systematic process to
set up provisions for credit losses and to save documentation in
support of the process and the provisions.
F - 43
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 3 - DISCLOSURE OF THE IMPACT OF NEW ACCOUNTING STANDARDS IN THE PERIOD
PRIOR TO IMPLEMENTATION (CONT.)
The new directive is scheduled to go into effect commencing with the
financial statements as of January 1, 2010. The directive set out
transition provisions to implement in the annual financial statements
of 2007 and in the financial statements to be issued during 2008 and
2009.
In its letter to the Bank dated August 12, 2007, the Bank of Israel
notified the Bank that it has permission not to take steps to prepare
for the implementation of the aforementioned directive.
NOTE 4 - EXEMPTION FROM SUPPLEMENTARY ALLOWANCE FOR DOUBTFUL DEBTS IN RESPECT OF
DEVIATIONS FROM CERTAIN DEBT LIMITS
As stated in Note 1G of the Bank's financial statements as of December 31,
2008, as a result of the approval received from the Supervisor of Banks,
the financial statements of the Bank do not include a supplementary
allowance for doubtful debts in respect of deviations from debt limits of
an individual borrower and a borrower group, deviations from debt limits in
respect of financing purchases of means of control in corporate entities
and in respect of deviations from the limit of sector indebtedness.
It is noted that if the Supervisor of Banks had not granted the exemption,
the Bank would have been required to make a supplementary allowance of
significant amounts in respect of these deviations, in the periods in which
they were created, which could have had a material impact on its results of
operations for such periods. Furthermore, the adjustment of the
aforementioned supplementary allowance to the changes that occurred from
time to time in the extent of the deviations could have had an effect on
the financial results of the Bank in the subsequent reporting periods.
On August 1, 2008, the "banking license" of the Bank expired. In his letter
to the Bank dated July 27, 2008, the Supervisor of Banks notified the Bank
that he was exempting the Bank from complying with Banking Procedure 315
which addresses the issue of the supplemental and general allowance for
doubtful debts. The Bank continues to prepare its financial statements in
accordance with the directives of the Supervisor of Banks. In the Directive
pertaining to Reporting to the Public, the Bank is required to make a
supplemental and general allowance for doubtful debts according to the
provision of Proper Banking Procedure 315. As a result, the Bank asked the
Supervisor for clarification of his position on this matter. The Bank
expressed its stand that over the years, as a result of the decline in the
volume of the Bank's credit portfolio, the relative weight of the general
allowance for doubtful debts increased to a rate that is high when compared
with the overall liability and that the position of the Bank is that the
general allowance should be set as a percentage of the balance of debt.
In his letter dated January 25, 2009, the Supervisor of Banks notified the
Bank that he was exempting the Bank from both compliance with the directive
in Proper Banking Procedure 315 and from the reference in the Directive
Pertaining to Reporting to the Public to the requirements by virtue of the
aforementioned directive. In addition, the Supervisor of Banks notified the
Bank that he would not address the fairness of the percentage of the
general allowance for doubtful debts that the Bank believed it should make.
In connection with the financial statements as of December 31, 2008, the
Board of Directors of the Bank decided to continue maintaining the
supplemental and general allowance for doubtful debts in accordance with
the same policies that it followed prior to receipt of the letter of the
Supervisor of Banks (for complete details of the accounting policy
implemented, see Note 1G of the financial statements as of December 31,
2008).
F - 44
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 4 - EXEMPTION FROM SUPPLEMENTARY ALLOWANCE FOR DOUBTFUL DEBTS IN RESPECT OF
DEVIATIONS FROM CERTAIN DEBT LIMITS (CONT.)
In a deliberation that was held as part of the assessment of the accounting
policy on this issue, in connection with the financial statements as of
March 31, 2009 and further to receipt of the letter of the Supervisor of
Banks, the Board of Directors of the Bank decided to cancel the existing
supplemental and general allowances in accordance with the directive of the
Supervisor and make in its stead an allowance that is based on
industry-wide risk characteristics. This allowance is based on data
pertaining to specific allowances made over the six years of activity of
the Bank as part of the Run-off plan.
The allowance calculated on the basis of the principles set out in respect
of the industry-wide risk characteristics as of March 31, 2009 amounted to
NIS 30.3 million, constituting 5.3% of the public credit risk, which
includes credit risk and off-balance sheet risk as calculated for purposes
of borrower limits and borrower group limits. The balance of the
supplemental and general allowance as of December 31, 2008 amounted to NIS
41.8 million, constituting 7.3% of the aforementioned credit risk.
F - 45
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 5 - SECURITIES
A. COMPOSITION
MARCH 31, 2009
------------------------------------------------------------------------
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
Shares of others 39.4 32.3 7.1 - (3) 39.4
-------- -------- -------- -------- --------
Total available- for-sale securities 39.4 32.3 (4) 7.1 - (3) 39.4
======== ======== ======== ======== ========
DECEMBER 31, 2008
------------------------------------------------------------------------
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 0.2 0.2 - - 0.2
Shares of others 37.7 32.6 5.2 (0.1) (3) 37.7
-------- -------- -------- -------- --------
Total available- for-sale securities 37.9 32.8 (4) 5.2 (0.1) (3) 37.9
======== ======== ======== ======== ========
(1) In the case of shares - cost less provision for impairment in value,
when necessary.
(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 available,
which are stated at cost in the amount of NIS 8.2 million (December
31, 2008 - NIS 8.4 million).
(4) Included in shareholders' equity in the category "adjustment from
presentation of available-for-sale securities at fair value".
B. See Note 4E of the financial statements as of December 31, 2008,
regarding the classification of a customer's debt to the securities
item.
NOTE: For details regarding results of investments in shares - see Note 12.
F - 46
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 6 - ALLOWANCE FOR DOUBTFUL DEBTS
REPORTED AMOUNTS
FOR THE THREE MONTHS ENDED MARCH 31 (UNAUDITED)
----------------------------------------------------------------------------
2009 2008
---------------------------------- ---------------------------------
SPECIFIC SUPPLEMENTARY SPECIFIC SUPPLEMENTARY
ALLOWANCE (*) ALLOWANCE (**) TOTAL ALLOWANCE (*) ALLOWANCE (**) TOTAL
----- ----- ----- ----- ----- -----
NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- ----- ----- ----- -----
BALANCE OF ALLOWANCE AT
THE BEGINNING OF THE
PERIOD (AUDITED) 531.1 41.8 572.9 572.6 45.2 617.8
----- ----- ----- ----- ----- -----
Allowance provided
during the period 0.2 - 0.2 0.4 - 0.4
Reduction of allowance (0.7) (4)(41.8) (42.5) (2.5) (1.4) (3.9)
Collection of debts written
off in the past (0.1) - (0.1) (7.6) - (7.6)
Allowance based on
industry-wide risk
characteristics 30.3 - 30.3 - - -
Amount carried to
statement of income 29.7 (4)(41.8) (12.1) (9.7) (1.4) (11.1)
Debts written off(3) (14.7) - (14.7) 1.6 - 1.6
----- ----- ----- ----- ----- -----
BALANCE OF ALLOWANCE AT
THE END OF THE PERIOD 546.1 - 546.1 564.5 43.8 608.3
===== ===== ===== ===== ===== =====
Including - balance of
allowance not deducted
from credit to public - - - 1.1 - 1.1
----- ----- ----- ----- ----- -----
(1) Not including allowance for interest on non-income bearing credit.
(2) Including the general allowance for doubtful debts.
(3) Net of the collection of debts written off in previous years.
(4) See Note 4.
F - 47
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 7 - 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
MARCH 31 MARCH 31 DECEMBER 31
2009 2008 2008
----- ----- -----
REPORTED REPORTED REPORTED
AMOUNTS AMOUNTS AMOUNTS
----- ----- -----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- -----
First tier capital 76.6 139.2 98.9
Second tier capital(1) 76.6 139.2 98.9
----- ----- -----
Total capital 153.2 278.4 197.8
===== ===== =====
B. WEIGHTED-BALANCES OF CREDIT RISK
MARCH 31, 2009 MARCH 31, 2008 DECEMBER 31, 2008
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
CREDIT RISK CREDIT RISK CREDIT RISK
BALANCES(2) BALANCES BALANCES(2) BALANCES BALANCES(2) BALANCES
------- ------- ------- ------- ------- -------
REPORTED AMOUNTS REPORTED AMOUNTS REPORTED AMOUNTS
---------------------- ---------------------- ----------------------
CREDIT RISK NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS NIS MILLIONS
------- ------- ------- ------- ------- -------
ASSETS
Cash and deposits with banks 600.9 120.2 35.1 5.5 575.3 115.1
Securities 39.4 32.3 40.3 34.0 37.9 32.7
Credit to the public 5,523.8 399.7 (1) 5,000.8 452.4 (1)5,107.1 403.8
Credit to the Israeli government and
perpetual deposits with the
Israeli Treasury 35.6 - 875.6 - 32.7 -
Buildings and equipment 0.5 0.5 0.7 0.7 0.5 0.5
Other assets 17.2 3.4 6.2 1.1 3.3 0.5
------- ------- ------- ------- ------- -------
Total assets 6,217.4 556.1 5,958.7 493.7 5,756.8 552.6
======= ======= ======= ======= ======= =======
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS
Transactions representing credit risk 159.0 144.4 153.9 138.7 142.5 127.6
Derivative financial instruments 337.7 6.8 57.9 1.2 120.0 2.4
------- ------- ------- ------- ------- -------
Total off-balance sheet financial
instruments 496.7 151.2 211.8 139.9 262.5 130.0
------- ------- ------- ------- ------- -------
Total credit risk assets 6,714.1 707.3 6,170.5 633.6 6,019.3 682.6
Market risk - 115.8 - 507.4 - 386.8
------- ------- ------- ------- ------- -------
Total risk assets 6,714.1 823.1 6,170.5 1,141.0 6,019.3 1,069.4
======= ======= ======= ======= ======= =======
(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 - 48
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 7 - CAPITAL ADEQUACY IN ACCORDANCE WITH DIRECTIVES OF THE SUPERVISOR OF
BANKS (CONT.)
C. RATIO OF CAPITAL TO RISK COMPONENTS
MARCH 31 MARCH 31 DECEMBER 31
2009 2008 2008
---- ---- ----
% % %
---- ---- ----
Ratio of first tier capital to risk components 9.3 12.2 9.2
Ratio of second tier capital to risk components 9.3 12.2 9.2
---- ---- ----
Ratio of total first and second tier capital to risk components 18.6 24.4 18.4
==== ==== ====
F - 49
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 8 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS
REPORTED AMOUNTS
MARCH 31, 2009 (UNAUDITED)
--------------------------------------------------------------------------------------
ISRAELI CURRENCY FOREIGN CURRENCY OR LINKED 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 449.2 16.2 135.4 0.1 - 600.9
Securities - - - - 39.4 39.4
Credit to the public 65.3 229.9 5,125.6 13.0 - 5,523.8
Credit to Israeli government - 2.7 - - - 2.7
Fixed assets - - - - 0.5 0.5
Other assets 2.8 - 14.2 - 0.2 17.2
Perpetual deposits with
the Israeli Treasury - - 32.9 - - 32.9
------- ------- ------- ------- ------- -------
Total assets 517.3 248.8 5,398.1 13.1 40.1 6,217.4
------- ------- ------- ------- ------- -------
LIABILITIES
Deposits of the public 16.4 8.7 0.2 - - 25.3
Deposits of banks - 213.9 5,225.6 - - 5,439.5
Perpetual deposit 0.1 - - - - 0.1
Other liabilities 29.8 35.8 1.1 - 0.1 66.8
Non-participating shares - - 374.9 - - 374.9
Preferred participating shares - - 227.1 - - 227.1
------- ------- ------- ------- ------- -------
Total liabilities 46.3 258.4 5,828.9 - 0.1 6,133.7
------- ------- ------- ------- ------- -------
Difference 471.0 (9.6) (430.8) 13.1 40.0 83.7
Forward transactions, net (240.8) - 253.5 (12.7) - -
------- ------- ------- ------- ------- -------
Effect of derivative
instruments not hedging
options in the money, net* (36.6) - 36.6 - - -
Options out of the money* (15.2) - 15.2 - - -
------- ------- ------- ------- ------- -------
Total 178.4 (9.6) (125.5) 0.4 40.0 83.7
======= ======= ======= ======= ======= =======
Option in the money, net** (58.7) - 58.7 - - -
Options out of the money** (57.0) - 57.0 - - -
* IN TERMS OF BASE ASSETS.
** DISCOUNTED PAR VALUE.
F - 50
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 8 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (CONT.)
REPORTED AMOUNTS
MARCH 31, 2008 (UNAUDITED)
-------------------------------------------------------------------------------------
ISRAELI CURRENCY FOREIGN CURRENCY OR LINKED 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 20.7 2.3 12.0 0.1 - 35.1
Securities - 0.2 - - 40.1 40.3
Credit to the public 96.5 267.3 4,624.9 12.1 - 5,000.8
Credit to Israeli government - 4.4 19.0 - - 23.4
Fixed assets - - - - 0.7 0.7
Other assets 5.6 - - - 0.6 6.2
Perpetual deposits with
the Israeli Treasury - 852.2 - - - 852.2
------- ------- ------- ------- ------- -------
Total assets 122.8 1,126.4 4,655.9 12.2 41.4 5,958.7
------- ------- ------- ------- ------- -------
LIABILITIES
Deposits of the public 28.9 22.9 0.5 - - 52.3
Deposits of banks 390.0 - - - - 390.0
Deposits of the Government - 247.6 4,629.3 - - 4,876.9
Perpetual deposit 0.1 - - - - 0.1
Capital notes - - 19.0 - - 19.0
Other liabilities 18.8 41.6 1.4 0.1 0.5 62.4
Non-participating shares - - 255.0 - - 255.0
Preferred participating shares - - 157.6 - - 157.6
------- ------- ------- ------- ------- -------
Total liabilities 437.8 312.1 5,062.8 0.1 0.5 5,813.3
------- ------- ------- ------- ------- -------
Difference (315.0) 814.3 (406.9) 12.1 40.9 145.4
Forward transactions, net (11.9) 24.6 - (12.7) - -
------- ------- ------- ------- ------- -------
Total (326.9) 838.9 (406.9) (0.6) 40.9 145.4
======= ======= ======= ======= ======= =======
F - 51
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 8 - ASSETS AND LIABILITIES CLASSIFIED ACCORDING TO LINKAGE BASIS (CONT.)
REPORTED AMOUNTS
DECEMBER 31, 2008
-------------------------------------------------------------------------------------
ISRAELI CURRENCY FOREIGN CURRENCY OR LINKED 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 558.9 1.2 15.1 0.1 - 575.3
Securities - 0.2 - - 37.7 37.9
Credit to the public 73.8 235.1 4,785.4 12.8 - 5,107.1
Credit to Israeli government - 2.8 - - - 2.8
Fixed assets - - - - 0.5 0.5
Other assets 2.4 0.5 - - 0.4 3.3
Perpetual deposits with
the Israeli Treasury - - 29.9 - - 29.9
------- ------- ------- ------- ------- -------
Total assets 635.1 239.8 4,830.4 12.9 38.6 5,756.8
------- ------- ------- ------- ------- -------
LIABILITIES
Deposits of the public 17.5 9.1 0.1 - - 26.7
Deposits of
the Government - 225.9 4,796.7 - - 5,022.6
Perpetual deposit 0.1 - - - - 0.1
Other liabilities 24.6 37.3 0.9 1.1 - 63.9
Non participating shares - - 335.8 - - 335.8
Participating shares - - 203.6 - - 203.6
------- ------- ------- ------- ------- -------
Total liabilities 42.2 272.3 5,337.1 1.1 - 5,652.7
------- ------- ------- ------- ------- -------
Difference 592.9 (32.5) (506.7) 11.8 38.6 104.1
Forward transactions, net (95.9) 35.8 71.6 (11.5) - -
------- ------- ------- ------- ------- -------
Total 497.0 3.3 (435.1) 0.3 38.6 104.1
======= ======= ======= ======= ======= =======
F - 52
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS
A. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
MARCH 31 DECEMBER 31
2009 2008
----- -----
REPORTED REPORTED
AMOUNTS AMOUNTS
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Transactions, the balance of which
represents a credit risk -
Guarantees securing credit 139.5 122.7
Guarantees to apartment purchasers 15.7 15.8
Other guarantees and liabilities 3.9 4.1
B. OTHER LIABILITIES AND COMMITMENTS
MARCH 31 DECEMBER 31
2009 2008
----- -----
REPORTED REPORTED
AMOUNTS AMOUNTS
----- -----
NIS MILLIONS NIS MILLIONS
----- -----
Rental contracts for offices 0.4 0.8
Outsourced computer services* 2.6 2.6
Storage and archive services 0.1 0.1
* This amount represents the annual cost in respect of the outsourcing
agreement. The current agreement is set to expire on December 10,
2011. Commencing on January 1, 2010, the Company will look into the
possibility of giving advanced notice of six month in respect of
termination of the service.
C. LEGAL CLAIMS
Legal actions 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 claims, including the motion to certify a claim as a
class action, 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 May 2009, the Bank was served with a notice of appeal notification
that was filed in November 2008 with the National Labor Court by two
former senior employees of the Bank. The plaintiffs are appealing the
court decision that rejected their claim against the Bank. In 2004,
these two employees filed suit against the Bank claiming an amount of
NIS 2.3 million (both together) in 2002 values in respect of various
benefits due in connection with their resignation from the Bank in
2002. The Bank is prohibited from making such payments due to the lack
of approval of the Supervisor of Wages and Labor Agreements in the
Finance Ministry. Alternatively, the two employees claimed salary
increases which they allegedly waived in consideration of such
benefits. During 2005, the employees filed a petition for a partial
verdict in an amount of NIS 415,000 (in 2002 values) in respect of
amounts which were approved by the Supervisor of Wages during the
investigation of the suit. In its decision rendered in 2008, the
District Labor Court rejected the suit in its entirety, including the
petition requesting the amount of NIS 415,000. The appeal is being
handled by an attorney on behalf of the Bank.
F - 53
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)
2) 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 overcharged 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. The Bank filed a
countersuit in respect of the debit balance with the Bank.
3) 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.
4) 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.
5) 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. On June 29, 2008, a court
decision was rendered, as part of which the mediation agreement
between the parties to the suit was approved, whereby all of the
disputes between them were resolved, without the former manager of the
Bank, who was one of the defendants, being required to make any
payments. To the best of the knowledge of the Bank, to date, the
repayment of the compromise amount has not yet been completed by the
parties who undertook to make the payment.
F - 54
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)
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 2 million.
D. 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
unclaimed 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. This state is also entitled to take ownership of the security. The
same applies to the payment of a dividend and/or interest and/or redemption
payments 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 became "abandoned"
as well as payments in respect of the securities of the Bank which were not
collected. Failure to file the required reports and the resultant
non-transfer of the securities and/or the payments, may expose the bank to
financial sanctions. This issue raises the question of "choice of law". Is
the U.S. law the law that applies to the securities or is it Israeli law?
There are other issues as well, such as 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. In accordance with the decision of
the Board of Directors of the Bank at the end of 2008, the Bank instructed
the agent in the U.S. to execute the reporting and the transfer to the
States of the shares of the Bank and the dividends in respect thereof in
the U.S. in respect of the shares that became "abandoned" and concurrently,
the Bank informed the Administrator General in Israel of the Bank's
instructions to its agent. The Administrator General is the entity that, in
accordance with the Administrator General Law - 1978, is entitled to take
over management of "abandoned property". Further to contacts made between
the Bank and the Administrator General, both written and oral, notice was
given to the Bank by the Administrator General whereby the Administrator
General Law - 1978 does not apply to dividends in the U.S. that became
"abandoned" and that the Administrator General would take no steps in
connection with such dividends. To the best of the understanding of the
Bank, this position relates also to the shares of the Bank held by
residents of the U.S. and which became "abandoned". The agent in the U.S.
has taken steps in recent months in an additional attempt to locate
shareholders, with whom contact has been lost. Upon exhausting his efforts
to locate such shareholders, he expects to begin executing the reporting
and transferring to the U.S. states. According to a report furnished by the
agent to the Bank, the par value of the shares that became abandoned
according to U.S. law amounts to $183,000 and the amounts of the dividends
that became abandoned totaled $826,000. The Capital Notes of the Bank were
redeemed on December 31, 2008. The Bank was informed by the U.S. agent that
he still has in his possession approximately $1.8 million of the redemption
funds that have not been claimed. According to the reports of the agent,
these funds are still not considered to be "abandoned" by U.S. law. At
present, it is unclear as to whether there are also interest payments on
the Capital Notes that have not been claimed and/or have become "abandoned"
under U.S. law.
At this stage, the Bank is unable to assess the financial consequences, if
at all, of these matters on the Bank.
F - 55
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS
A. VOLUME OF OPERATIONS
1. Par value of derivative instruments ALM (1)
MARCH 31, 2009 DECEMBER 31, 2008
------------------ ------------------
CPI/SHEKEL FOREIGN CPI/SHEKEL FOREIGN
INTEREST CURRENCY INTEREST CURRENCY
CONTRACTS CONTRACTS CONTRACTS CONTRACTS
----- ----- ----- -----
REPORTED AMOUNTS REPORTED AMOUNTS
------------------ ------------------
NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS
----- ----- ----- -----
Forward contracts - 266.4 36.4 83.8
Options written - 57.3 - -
Option purchased - 58.6 - -
----- ----- ----- -----
Total - 382.3 36.4 83.8
===== ===== ===== =====
2. Gross fair value of derivative instruments ALM (1)
MARCH 31, 2009 DECEMBER 31, 2008
---------------- ----------------
CPI/SHEKEL FOREIGN CPI/SHEKEL FOREIGN
INTEREST CURRENCY INTEREST CURRENCY
CONTRACTS CONTRACTS CONTRACTS CONTRACTS
---- ---- ---- ----
REPORTED AMOUNTS REPORTED AMOUNTS
---------------- ----------------
NIS NIS NIS NIS
MILLIONS MILLIONS MILLIONS MILLIONS
---- ---- ---- ----
Gross positive fair value - 14.3 0.4 -
Gross negative fair value - - - 1.1
---- ---- ---- ----
Total - 14.3 0.4 1.1
==== ==== ==== ====
B. DERIVATIVE INSTRUMENTS CREDIT RISK ACCORDING TO THE OPPOSITE PARTY TO
THE CONTRACT
MARCH 31, 2009
-----------------------------
REPORTED AMOUNTS
-----------------------------
NIS MILLIONS
-----------------------------
BANKS CENTRAL BANKS TOTAL
---- ---- ----
Gross positive fair value of derivative instruments 14.3 - 14.3
Off-balance sheet credit risk in
respect of derivative instruments(2) 33.8 - 33.8
---- ---- ----
Total credit risk in respect of derivative instruments 48.1 - 48.1
==== ==== ====
DECEMBER 31, 2008
-----------------------------
REPORTED AMOUNTS
-----------------------------
NIS MILLIONS
-----------------------------
BANKS CENTRAL BANKS TOTAL
---- ---- ----
Gross positive fair value of derivative instruments 0.4 - 0.4
Off-balance sheet credit risk in
respect of derivative instruments (2) 12.0 - 12.0
---- ---- ----
Total credit risk in respect of derivative instruments 12.4 - 12.4
==== ==== ====
(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 - 56
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS - VOLUME, CREDIT RISK AND MATURITY
PERIODS (CONT.)
C. MATURITY PERIOD - STATED AMOUNTS AT YEAR-END
MARCH 31, 2009
-------------------------------
REPORTED AMOUNTS
-------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
----- ----- -----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- -----
Foreign currency contracts 382.3 - 382.3
----- ----- -----
Total 382.3 - 382.3
===== ===== =====
DECEMBER 31, 2008
-------------------------------
REPORTED AMOUNTS
-------------------------------
UP TO FROM 3 MONTHS
3 MONTHS TO 1 YEAR TOTAL
----- ----- -----
NIS MILLIONS NIS MILLIONS NIS MILLIONS
----- ----- -----
CPI/Shekel interest contracts 36.4 - 36.4
Foreign currency contracts 83.8 - 83.8
----- ----- -----
Total 120.2 - 120.2
===== ===== =====
F - 57
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 11 - PROFIT FROM FINANCING OPERATIONS BEFORE ALLOWANCE FOR DOUBTFUL DEBTS
THREE MONTHS ENDED MARCH 31,
---------------------
2009 2008
----- -----
NIS MILLIONS NIS millions
----- -----
(UNAUDITED)
----- -----
A. IN RESPECT OF ASSETS:
From Credit to the public 583.0 (294.3)
From Deposits with banks 5.4 (0.5)
----- -----
588.4 (294.8)
----- -----
B. IN RESPECT OF LIABILITIES:
On Deposits of the public (0.1) (0.6)
On Deposits of the Government (576.9) 301.6
On Deposits of Bank of Israel - (4.0)
----- -----
(577.0) 297.0
----- -----
C. IN RESPECT OF DERIVATIVE FINANCIAL INSTRUMENTS
Net income (expenses) from ALM
derivative instruments (*) 19.9 (0.4)
----- -----
19.9 (0.4)
----- -----
D. OTHERS
Commissions from financing operations 2.6 2.3
Other financing income** 6.6 9.4
Other financing expenses (4.7) (2.2)
----- -----
4.5 9.5
----- -----
Total profit from financing operations
before allowance for doubtful debts 35.8 11.3
===== =====
Including - exchange rate
differences, net 10.2 (2.3)
===== =====
* Derivative financial instruments comprising part of the asset and liability
management system of the Bank, not designated for hedging purposes.
** Including income from
interest collected in
respect of problematic debts 6.6 9.0
===== =====
F - 58
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 12 - PROFIT (LOSS) FROM INVESTING IN SHARES
THREE MONTHS
ENDED MARCH 31,
-----
2009
-----
NIS MILLIONS
-----
Allowance for impairment of available for sale securities (0.2)
-----
Total profit (loss) on investment in shares (0.2)
=====
NOTE 13 - DIVIDEND AND EXCHANGE RATE DIFFERENTIALS ON PREFERENCE SHARES
The issued share capital of the Bank includes dollar-linked preference
shares. In the past, the Bank deposited the proceeds received from the
issuance of these shares as a perpetual deposit with the Treasury of the
State of Israel. The deposit was linked to the higher of the Index or the
dollar. The interest on the deposit served as a source for payment of the
dividend to the preferred shareholders of the Bank (for details regarding
the cessation of the distribution of the dividend, see Note 14).
On December 31, 2008, the major portion of the perpetual deposit was
repaid, as part of the first stage of the Compromise and Arrangement Plan
pursuant to Article 350 of the Companies Law between the Bank and its
shareholders (for details regarding the Compromise and Arrangement Plan,
see Note 1). Until December 31, 2008, linkage differentials in respect of
the perpetual deposit on the one hand and exchange rate differentials in
respect of the preference shares on the other were carried directly to the
statement of changes in shareholders' equity of the Bank, under an item
entitled "Accrued difference from translation of an Index-linked deposit",
without their being reflected in the Statement of Income of the Bank.
Commencing from January 1, 2009, further to the repayment of most of the
perpetual deposit, the exchange rate differentials in respect of the
preference shares and the current accrual of the dividend to the credit of
the preferred shareholders are expensed in the Statement of Income, as a
result of their being classified from an accounting standpoint as a
liability. For details of the accounting policy regarding this issue, see
Note 1D of the financial statements as of December 31, 2008.
The following table presents the composition of the expense in respect of
the preference shares:
THREE MONTHS
ENDED MARCH 31
----
2009
----
NIS MILLIONS
----
Exchange rate differentials in respect of the non-participating preference shares 34.1
Accrual of quarterly dividend in respect of non-participating preference shares 5.0
Less: Exchange rate differentials in respect of the balance of the perpetual deposit
with the Treasury in respect of non-participating preference shares (3.0)
----
Total net expense carried to the statement of income in respect of non-participating
preference shares 36.1
----
Exchange rate differentials in respect of the participating preference shares 20.7
Accrual of quarterly dividend in respect of participating preference shares 2.8
----
Total net expense carried to the statement of income in respect of participating
preference shares 23.5
----
Total expense carried to the statement of income in respect of preference shares 59.6
====
F - 59
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 14 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
Since the third quarter of 2002, during the course of which the Bank
distributed to its preferred shareholders and to the holders of its
Ordinary Preference shares, the quarterly dividend in respect of Q2/2002,
no dividend whatsoever has been distributed by the Bank.
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.
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. The hearing on the two originating
motions was consolidated. 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. On August 5, 2007, a
ruling was rendered by the Tel Aviv District Court whereby it rejected the
originating motion filed by the Bank against the Finance Minister and
against the aforementioned financial institutions and stipulated that as
long as a dividend is not distributed in respect of the preferred shares of
the Bank, the interest on the perpetual deposits does not accrue.
At its meeting on October 9, 2007, the Board of Directors of the Bank
discussed the ramifications of the ruling. 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 ruling 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. The Bank's appeal
was submitted to the Supreme Court on January 8, 2008.
F - 60
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 14 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
(CONT.)
At the aforementioned meeting, the Board of Directors of the Bank also
discussed the ramifications of the aforementioned ruling on the
continuation of its policy regarding the distribution of the dividend on
the preferred shares (Preferred C, CC, CC1, D and DD shares). In view of
the stipulation of the ruling 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 ruling 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 are 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 preferred 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 ruling, 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 empower the
chairman of the board to set the date for its convening; 3) to petition the
Supervisor of Banks to grant approval for the distribution of the dividend
to the preferred 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).
In accordance with the aforementioned 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 Articles of
Association of the Bank, so that the Articles of Association 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 Articles of Association. The Bank
announced that it did not object to adding the State, as requested.
As part of the Arrangement Plan between the Bank and its shareholders,
which was approved by the court on November 24, 2008, it was stipulated
that upon the approval of the plan, the originating motion submitted by the
aforementioned financial institutions against the Bank will be rejected, as
well as the appeal filed by the Bank against the court decision rejecting
its originating motion on the matter of the accrual of the interest on its
perpetual deposits with the Treasury.
Accordingly, a short time after the aforementioned approval of the plan,
the appropriate petitions were filed to reject both the originating motion
of the aforementioned financial institutions and the appeal of the Bank,
and the motion and the appeal were rejected, as requested.
F - 61
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 14 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
(CONT.)
The Arrangement Plan that was approved contains two alternative scenarios,
each of which includes stipulations or results regarding the issue of the
dividend that accrued on the C, CC, CC1, D, and DD shares:
SCENARIO I - the sale of the shares of the Bank, in accordance with the
Arrangement Plan, by December 31, 2009.
In this case, the D and DD shares not held by the State of Israel will be
redeemed in accordance with the terms of redemption set out in the terms of
the issuance of those shares, so that as part of the redemption, the D and
DD shareholders will be paid the full preference dividend in arrears that
accrued on their shares in respect of the period from July 1, 2002 up to
and including the day preceding the date of redemption (such arrears will
be paid back-to-back by the State to the Bank as interest on its perpetual
deposits with the Treasury in respect of that period).
The D and DD shares held by the State will not be redeemed, rather they
will constitute part of the sold shares and the State will not receive for
them the preference dividend in arrears accrued thereupon.
The C, CC, and CC1 shares will constitute part of the sold shares, and the
holders thereof will not receive the preference dividend in arrears that
accrued on their shares. Notwithstanding, the calculation of their share of
the consideration of the overall sale also takes into account their claim
to receive the dividend in arrears.
The shareholders will waive all claims against the Bank, including
regarding the distribution or non-distribution of a dividend, including the
cumulative dividend in arrears.
SCENARIO II - the sale of the shares of the Bank, in accordance with the
Arrangement Plan, will not be completed by December 31, 2009.
In this case:
o On December 31, 2009, or when a liquidation order is issued against
the Bank, or when a resolution for voluntary liquidation is passed by
the General Meeting of the Bank (the earliest of the three options),
the Bank will pay the holders of the C, CC, and CC1 shares (and will
receive back-to-back from the State as interest on the perpetual
deposits of the Bank with the Treasury in respect of the period until
their return to the Bank) half of the preferred dividend in arrears,
at an annual rate of 6% that accrued on their shares in respect of the
period July 1, 2002 - July 31, 2008, plus linkage differentials and
interest by law.
o The holders of the C, CC, and CC1 shares will waive all claims against
the Bank, regarding the non-distribution of a dividend in the period
starting July 1, 2002 and ending on the date of the payment of the
dividend in arrears, without such waiver constituting a derogation of
their rights pursuant to the articles of the Bank to the accrual of a
preference dividend in respect of their shares, including in respect
of the aforementioned period.
o The State will waive all claims against the Bank, the receiver of the
Bank, and the liquidation fund of the Bank in connection with 50% of
the preference dividend in arrears that accrued on the D and DD shares
held by the State, in respect of the period that began on July 1, 2002
and ended on July 31, 2008.
o The Bank will waive all claims against the State in connection with
the payment of interest on the perpetual deposits held by it with the
Treasury, except for that part thereof that reflects the proceeds of
the issue of the D and DD shares held by the public.
F - 62
THE INDUSTRIAL DEVELOPMENT BANK OF ISRAEL LIMITED
NOTES TO THE CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 2009
- --------------------------------------------------------------------------------
NOTE 14 - CESSATION OF DIVIDEND DISTRIBUTION IN RESPECT OF PREFERRED SHARES
(CONT.)
The significance of the aforementioned stipulations of the Arrangement Plan
is as follows:
PARTICIPATING PREFERENCE SHARES (C, CC, CC1) - In the event that the sale
of the shares of the Bank is not consummated by December 31, 2009, they
will receive half of the preferred dividend (at an annual rate of 6%)
accrued in respect of their shares from July 1, 2002 through July 31, 2008,
in a total amount of NIS 28.1 million (plus linkage differentials and
interest by law, from July 31, 2008 until the date of the actual payment).
Concurrently, the Bank will receive an identical amount from the State as
interest on the perpetual deposits of the Bank with the Treasury. In view
of this, the abovementioned amount was not recorded in the financial
statements of the Bank. The balance of the preferred dividend accrued on
the shares from July 1, 2002 through March 31, 2009, in an amount of NIS
41.3 million (as of December 31, 2008 - NIS 35.0 million), was added to the
liability in respect of the preference shares. In the event that the sale
of the shares of the Bank as part of the Arrangement is implemented, the
preferred shareholders waive all of their claims to the dividend in arrears
that accrued until the date of the sale.
NON-PARTICIPATING PREFERENCE SHARES (D AND DD) HELD BY THE STATE - In the
event that the sale of the shares of the Bank is not consummated by
December 31, 2009, the State will waive half of the preferred dividend (at
an annual rate of 7.5%) accrued on its shares from July 1, 2002 until July
31, 2008, in an amount of $14.6 million. Therefore, this amount was not
recorded in the financial statements of the Bank. The balance of the
preferred dividend that accrued on these shares from July 1, 2002 until
March 31, 2009, in an amount of NIS 74.4 million (December 31, 2008 - NIS
63.0 million), was added to the liability in respect of these preference
shares. In the event that the sale of the shares of the Bank as part of the
Compromise and Arrangement Plan is implemented, the State as the holder of
these shares waives all of its claims to the dividend in arrears that
accrued until the date of the sale.
NON-PARTICIPATING PREFERENCE SHARES (D AND DD) HELD BY THE PUBLIC - The
right of the shareholders to receive the preferred dividend in arrears that
accrued on their shares is fully preserved. The amount of the preferred
dividend that accrued on these shares is NIS 16.7 million as of March 31,
2009 (December 31, 2008 - NIS 14.6 million). This amount was not recorded
in the financial statements and it is equal to the amount of the interest
on the balance of the perpetual deposits of the Bank with the Treasury
which was also not recorded in the financial statements of the Bank. In the
event that the sale of the shares of the Bank as part of the Compromise and
Arrangement Plan is implemented, the Bank will redeem these shares at their
dollar value and will pay the entire dividend in arrears. Concurrently, the
State will pay the Bank as interest on the perpetual deposit the entire
dividend in arrears in respect of these shares.
F - 63