Jerusalem Issues: Why The Core Spread Weakened While Reported Earnings Stayed Stable

The main article already established that Jerusalem Issues grew the balance sheet in 2025 without changing the fact that it remains a thin Bank Jerusalem funding wrapper. This follow-up isolates the main contradiction inside the accounts: why the contractual line that should remain with the issuer between the bank deposit and the debt securities weakened sharply, while reported earnings barely moved.

Four sharp points up front:

• The line closest to the contractual spread, net interest and linkage income, fell to NIS 7.371 million from NIS 11.187 million, a decline of about 34%.
• Even so, net finance income slipped by only NIS 374 thousand to NIS 10.925 million, and net profit actually rose by NIS 183 thousand to NIS 7.455 million.
• The gap was not closed by a stronger core. It was closed by a smaller fair-value expense on debt securities, lower expected credit-loss expense, a modest increase in other finance income, and a friendlier tax line.
• Cash flow does not validate a "stronger core" reading either: operating activities consumed NIS 2.265 million, while the increase in cash was built through the investing and financing legs.

Where The Spread Actually Weakened

Jerusalem Issues has to be read through its contractual structure. The company raises debt securities, places the proceeds at Bank Jerusalem on equal or better terms, and keeps the residual spread. That is why the most informative line is not net profit, but net interest and linkage income.

In 2025 that line fell to NIS 7.371 million, from NIS 11.187 million in 2024 and NIS 9.219 million in 2023. At the same time, the core asset kept growing: deposits at the bank, including current maturities, rose to NIS 2.951 billion, and debt securities, including current maturities, rose to NIS 2.982 billion. Scale went up, but the layer left to the issuer on top of that scale became thinner.

That gap is the entire story. If the core economics had stayed steady, the erosion would have looked much smaller. Instead, the contractual spread fell by NIS 3.816 million in a single year. That is a large number for a company whose full-year net profit was only NIS 7.455 million.

What Held Up Reported Earnings

To understand why the bottom line did not fall with the spread, the income statement has to be broken into layers. Interest and linkage income from deposits fell to NIS 115.703 million from NIS 144.902 million. Against that, interest and linkage expense on debt securities fell to NIS 108.332 million from NIS 135.485 million. That is the first layer where the pressure on reported earnings becomes visible.

But the reported result had other cushioning layers. Fair-value income on deposits was still NIS 4.307 million. Fair-value expense on debt securities fell to NIS 2.801 million from NIS 6.285 million in 2024. Other finance income, net, rose to NIS 2.147 million from NIS 1.910 million. On top of that, expected credit-loss expense dropped to only NIS 99 thousand from NIS 403 thousand.

The implication is straightforward: the core spread weakened, but lower fair-value expense on liabilities, other finance items, and a smaller credit-loss charge pulled net finance income back up. That is why net finance income fell by only NIS 374 thousand, far less than the NIS 3.816 million deterioration in the core line.

This is exactly what the reader can miss on first pass. A headline view shows stability. A line-by-line read shows that the stability came mainly from accounting and tax support around the core, not from a stronger residual spread.

Why This Is Mostly An Accounting-Presentation Story

The company says explicitly that it designates liabilities with a contingent write-down feature to fair value through profit and loss in order to reduce an accounting mismatch against the deferred deposits, which are also measured at fair value. That sounds technical, but here it matters. It means part of the stability in reported earnings does not come from a wider ordinary funding spread. It comes from the measurement method applied to the deferred instrument layer.

The same point appears in the fair-value disclosures. At the end of 2025, parent-bank deposits measured at amortized cost stood at NIS 2.733 billion, while their disclosed fair value was NIS 2.683 billion. Debt securities measured at amortized cost stood at NIS 2.762 billion, against a disclosed fair value of NIS 2.721 billion. In other words, most of the balance sheet is not run through profit and loss at market value. What does hit profit and loss through fair value is a defined and intentional slice, not a full read of the ongoing economics.

That does not mean reported earnings are fake. That would be the wrong conclusion. It does mean reported earnings are not the right test for whether the basic transaction became better. That question has to be asked through net interest and linkage income, and there the 2025 answer is weaker.

Taxes Also Helped The Stable Read

The last layer sits below pre-tax profit. Income tax expense fell to NIS 3.115 million from NIS 3.705 million, and the effective tax rate fell to 29.5% from 33.8%. The tax note points to three contributors: NIS 460 thousand of exempt inflationary profit, NIS 51 thousand of interest income from the tax authority, and NIS 47 thousand related to prior years' taxes.

That is a small detail relative to the balance sheet, but a meaningful one relative to the annual movement in net profit. Once the core line weakened, even a NIS 590 thousand tax benefit became large enough to change the picture conveyed by the bottom line.

What Cash Flow Says

The cash-flow statement also needs a careful read. Operating activities consumed NIS 2.265 million despite net profit of NIS 7.455 million. At the same time, investing activities generated NIS 1.888 million net, and financing activities generated NIS 6.666 million net, lifting cash by NIS 6.289 million to NIS 72.127 million.

It would be wrong to read operating cash flow here the way one would in a normal operating company. At Jerusalem Issues, placing deposits at the bank sits in investing cash flow, and issuing debt sits in financing cash flow, so the operating section is not meant to capture the full economics of the conduit by itself. But it still reinforces one point: there is no cash-flow confirmation of a "stronger core spread" story. If anything, the statement again shows that accounting profit is an output layer, not the right place to measure spread quality.

What Has To Be Tested Next

The right test for the next reports is not whether net profit stays around NIS 7 million to NIS 8 million. That is too soft a test. The harder questions are different:

• Does net interest and linkage income stabilize after the balance-sheet expansion, or keep eroding.
• Do the fair-value lines and other finance income keep acting as a cushion, or fade.
• Is the next issue structured in a way that preserves the contractual spread, not just the accounting bottom line.
• Does the effective tax rate move back toward the statutory rate and remove another support layer from net profit.

The core conclusion of this continuation is simple: Jerusalem Issues did not keep net profit stable in 2025 because the underlying spread stayed healthy. It kept it stable because the core deterioration was absorbed by other accounting and tax layers. Anyone trying to understand whether this conduit remains economically attractive for Bank Jerusalem therefore needs to look less at net profit and more at the spread left after matching deposits against debt.