Banco Internacional de Costa Rica, S. A. and Subsidiary

Transcription

1 FREE ENGLISH LANGUAGE TRANSLATION FROM SPANISH VERSION Banco Internacional de Costa Rica, S. A. and Subsidiary Consolidated Financial Statements

2 Index to Consolidated Financial Statements Page Independent Auditors Report 1-2 Consolidated Financial Statements: Consolidated Balance Sheet 3 Consolidated Income Statement 4 Consolidated Statement of Changes in Equity 5 Consolidated Cash Flow Statement

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5 Consolidated Balance Sheet Assets Liabilities and Equity Cash (Notes 3 and 8) $ 652,042 $ 958,982 Due to depositors (Notes 8 and 10) Due from banks (Notes 3, 8 and 10) Demand deposits - local $ 12,411,264 $ 6,828,271 Demand deposits in local banks 6,956,962 4,664,769 Demand deposits - foreign 94,071,397 62,810,278 Demand deposits in foreign banks 15,599,249 10,115,733 Savings - foreign 813,906 1,667,532 Time deposits in local banks 29,550,433 36,120,000 Time deposits - local 93,416,242 94,628,436 Time deposits in foreign banks 82,522,334 53,934,379 Time deposits - foreign 278,389, ,583,718 Total due from banks 134,628, ,834,881 Total deposits 479,102, ,518,235 Loans (Notes 4, 8 and 10) Borrowed funds (Notes 7 and 8) 121,854,960 97,469,208 Local 132,769,659 99,476,327 Foreign 321,164, ,423,900 Other liabilities 453,933, ,900,227 Acceptances outstanding 14,662,486 14,712,395 Cashier and certified checks 1,492, ,154 Less: Accrued interest payable (Note 10) 3,162,267 2,128,703 Allowance for loan losses 2,921,760 6,654,372 Various creditors 927,310 1,017,539 Unearned income 103, ,609 Accrued expenses payable and others 5,693,832 4,698,314 Loans, net 450,908, ,130,246 Total other liabilities 25,938,128 23,538,105 Investment securities (Notes 5, 8 and 10) Total liabilities 626,895, ,525,548 Available for sale 25,825,670 39,940,092 Held to maturity 77,564,687 35,213,370 Total investment securities 103,390,357 75,153,462 Commitments and contingencies (Notes 11, 12 and 15) Property, furniture, equipment and improvements, net of Equity accumulated depreciation (Note 6) 2,345,191 2,152,882 Common shares with par value of $12,500 each. Authorized, issued and outstanding 3,600 shares 45,000,000 45,000,000 Other assets Regulatory reserve 1,171,685 - Accrued interest receivable (Note 10) Capital reserve 150, ,000 Loans 2,870,384 2,574,851 Unrealized gain on available for sale securities (Note 5) 139, ,139 Time deposits 88,352 49,537 Retained earnings 41,195,572 35,002,032 Investments 2,342,305 1,038,455 Total equity 87,657,080 80,314,171 Customers' liabilities under acceptances 14,662,486 14,712,395 Foreclosed assets 74,711 9,450 Various debtors 544, ,508 Prepaid expenses and other assets 2,044,609 1,574,070 Total other assets 22,627,055 20,609,266 Total assets $ 714,552,257 $ 607,839,719 Total liabilities and equity $ 714,552,257 $ 607,839,719 The notes on pages 7 to 39 are an integral part of these consolidated financial statements. -3-

6 Consolidated Income Statement For the year ended Interest and Commission Income Interest on (Note 10) Loans $ 33,751,526 $ 25,345,205 Time deposits 4,452,764 2,228,005 Investments 4,564,723 3,173,242 Commission on Loans 741, ,118 Letters of credit 1,352,713 1,198,538 Remittances 557, ,913 Foreign exchange 71,738 65,418 Others 1,227,693 1,365,201 Total interest and commission income 46,719,765 34,490,640 Interest and Commission Expense Interest on deposits and borrowed funds (Note 10) 23,702,894 14,180,037 Commissions 177, ,313 Total interest and commission expense 23,880,379 14,401,350 Net interest and commission income 22,839,386 20,089,290 Provision for loan losses (Note 4) (591,068) (1,571,752) Net interest and commission income, after provision for loan losses 22,248,318 18,517,538 Other Income (Expense) Gain on sale of investments 137, ,772 Other income 1,010, ,892 Provision for losses on foreclosed assets - (494,275) Other expenses (Note 10) (924,645) (599,435) Total other income, net 223,255 14,954 General and Administrative Expenses Salaries and other compensations 8,218,703 8,716,778 Professional fees 975, ,521 Advertising and promotion 298, ,911 Rent 883, ,037 Travel 444, ,401 Communications and postage 135, ,434 Stationary and office supplies 114, ,161 Taxes, various 237, ,048 Depreciation (Note 6) 548, ,372 Electricity and telephone 284, ,024 Insurance 117,648 92,804 Retirement plan contributions (Note 9) 400, ,708 Others 2,030,850 1,415,343 Total general and administrative expenses 14,688,897 13,885,542 Income before income tax 7,782,676 4,646,950 Estimated income tax (Note 13) Current (449,999) (330,314) Deferred 32,548 (21,686) (417,451) (352,000) Net income $ 7,365,225 $ 4,294,950 The notes on pages 7 to 39 are integral part of these consolidated financial statements. -4-

7 Consolidated Statement of Changes in Shareholders Equity For the year ended Unrealized Gain on Share Regulatory Capital Available for Retained Capital Reserve Reserve Sale Securities Earnings Balance as of January 31, 2006 $ 45,000,000 $ - $ 150,000 $ 162,139 $ 35,002,032 Regulatory reserve for loans - 1,171, (1,171,685) Net income ,365,225 Net change in fair value of available for sale securities (Note 5) (22,316) - Balance as of $ 45,000,000 $ 1,171,685 $ 150,000 $ 139,823 $ 41,195,572 Balance as of January 31, 2005 $ 45,000,000 $ - $ 150,000 $ 370,413 $ 33,443,172 Net income ,294,950 Accumulated loss for merger with Bicsa Corporacion Financiera, S. A (2,736,090) Net change in fair value of available for sale securities (Note 5) (208,274) - Balance as of December 31, 2005 $ 45,000,000 $ - $ 150,000 $ 162,139 $ 35,002,032 The notes on pages 7 to 39 are integral part of these consolidated financial statements. -5-

8 Consolidated Cash Flow Statement For the year ended Cash flows from operating activities Income before income tax $ 7,782,676 $ 4,646,950 Adjustments to reconcile the net income to net cash provided by (used in) operating activities: Provision for loan losses 591,068 1,571,752 Provision for losses on foreclosed assets - 494,275 Depreciation 548, ,372 Gain on sale of investments (137,817) (413,772) Interest expense 23,702,894 14,180,037 Interest income (42,769,013) (30,746,452) Changes in operating assets and liabilities: Net decrease (increase) in time deposits with original maturities up to 3 months 70,000 (70,000) Net increase in loans (47,369,456) (31,557,735) Net (increase) decrease in prepaid expenses and other assets (429,500) 1,460,574 Net increase (decrease) in demand deposits 36,844,112 (33,645,199) Net (decrease) increase in saving accounts (853,626) 417,543 Net increase (decrease) in time deposits 36,593,368 (39,641,871) Increase in other liabilities 1,692,255 53,853 Income tax paid (693,338) (454,129) Interest received 41,130,815 29,753,735 Interest paid (22,669,330) (13,074,542) Net cash provided by (used in) operating activities 34,033,386 (96,478,609) Cash flows from investing activities Purchases of investment securities (211,455,682) (238,787,290) Proceeds from sales and redemptions of investment securities 183,334, ,045,095 Cash transferred from corporate reorganization - 521,753 Net increase in properties and equipment (740,587) (588,159) Net cash used in investing activities (28,861,981) (8,808,601) Cash flows from financing activities Net increase in borrowed funds and net cash provided by Financing activities 24,385,752 11,170,843 Net increase (decrease) in cash and cash equivalents 29,557,157 (94,116,367) Cash and cash equivalents at beginning of year (Note 3) 105,723, ,840,230 Cash and cash equivalents at end of year (Note 3) $ 135,281,020 $ 105,723,863 The notes on pages 7 to 39 are integral part of these consolidated financial statements. -6-

9 1. General Information Banco Internacional de Costa Rica, S. A. is a bank incorporated under the laws of the Republic of Panama that operates under a general license granted by the Superintendence of Banks since 1976, to allow carrying out banking business indistinctly in Panama or abroad. Banco Internacional de Costa Rica, S. A. and its wholly owned subsidiary that are hereinafter referred to as "the Bank", is owned by Banco de Costa Rica and Banco Nacional de Costa Rica, two Costa Rican State banks. It is located in the Panama City and its address is Manuel María Icaza Street No.25. In the Republic of Panama, the banks are regulated by the Superintendence of Banks through the Decree Act No. 9 of February 26, 1998, as well as by Resolutions and Agreements issued by this entity. Among the main aspects of this act, the following are included: authorization for banking licenses, minimum capital and liquidity requirements, consolidated supervision, procedures for credit and market risk management, for money laundering prevention, and procedures for banking intervention and liquidation, and others. As well, the banks are subject, at least, to an inspection every two (2) years by the Superintendence of Banks auditors, in order to determine the fulfillment of the provisions of Decree Act No. 9 and Act No. 42 on the Prevention of Money Laundering. The subsidiary of the Bank included in these consolidated financial statements is Arrendadora Internacional, S. A., engaged to grant credits through finance leases. The Bank maintains an Agency in Miami, Florida, United States of America, that started operations on September 1, 1983 under an international banking agency license, granted by the Comptroller Office and Banking Commission on the State of Florida, United States of America. As a result of routine examinations of the Agency conducted by the Federal Reserve Bank of Atlanta (the FRB ), it was determined that the existing policies and procedures relating to the Agency s compliance with certain rules and regulations required enhancement. Consequently, in July 2000, by means of a memorandum of understanding the Agency and the FRB entered into a memorandum of understanding that establishes certain actions that the Agency must be taken to ensure the Agency s compliance with these rules and regulations. An action plan was developed by the Agency then, addressing most of the requirements of this agreement. The Office of Financial Services of the State of Florida in July 2005 and the Federal Reserve Bank of Atlanta in June 2004 performed an examination of the Agency and noted non-compliance with certain provisions of the memorandum of understanding. In August 2006, the FRB performed its latest examination and determined that the Agency was in noncompliance with certain provisions of the memorandum of understanding. The Agency has modified its action plan subsequent to this examination to address instances of noncompliance with the memorandum of understanding. The FRB has requested full compliance with the memorandum of understanding by March

10 1. General Information (continued) At an Extraordinary Meeting held on February 4, 2005, the shareholders agreed to merge Bicsa Corporation Financiera, S. A. with Banco Internacional de Costa Rica, S. A., both Panamanian corporations, surviving the later. On August 16, 2005, the Superintendence of Banks of the Republic of Panama issued the Resolution S.B. No in which it authorized the Merger Agreement between the aforementioned entities. The merger was full completed on September 14, In May 2005, the Bank received authorization of the Superintendence of the Financial System of El Salvador to establish a Representative Office in that country. This office is engaged to promoting lending activities, particularly related to foreign trade. In November 2004, Banco Internacional de Costa Rica, S. A. opened a client service office in Costa Rica, which is a business promotion office in Costa Rica for the financial services of Bicsa Panama and Bicsa Miami. In October 2004, Banco Internacional de Costa Rica, S. A. opened a Representative Office in Nicaragua, whose core activity is to grant banking services to companies that are directly or indirectly engaged in foreign trade (exports and imports), in addition to correspondent banking activities, granting as a result lines of credit to the principal Nicaraguan banks. These consolidated financial statements were authorized for issue by the Audit Committee on February 8, Most Significant Accounting Policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to the previous year. Basis of Preparation The Bank s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available for sale financial assets. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires Management to exercise its judgment in the process of applying the Bank s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note

11 2. Most Significant Accounting Policies (continued) Basis of Preparation (continued) (a) Amendments to published standards and interpretations effective January 1, 2006 The application of the amendments and interpretations listed below did not result in substantial changes to the Bank s accounting policies: IAS 19 Amendment Actuarial Gains and Losses, Group Plans and Disclosures; IAS 39 Amendment The Fair Value Option; IAS 39 and IFRS 4 Amendment Financial Guarantee Contracts; and IFRIC 4 Determining whether an Arrangement contains a Lease. The following amendments and interpretations that are not applicable to the Bank are: IAS 21 Amendment - Net Investment in a Foreign Operation; IAS 39 Amendment Cash Flow Hedge Accounting of Forecast Intragroup Transactions; IFRS 1 (Amendment), First-time Adoption of International Financial Reporting Standards, and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources; IFRS 6 Exploration for and Evaluation of Mineral Resources; IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds; and IFRIC 6 Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment. (b) Standards and Interpretations issued but not yet effective The Bank has chosen not to early adopt the following standards and interpretations that were issued but not yet effective for accounting periods beginning on January 1, 2006: IFRS 7, Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements Capital Disclosures (effective from January 1, 2007); and IFRS 8, Operating Segments (effective January 1, 2009). IFRS 7 introduces new disclosures to improve qualitative and quantitative information about exposure to risks arising from financial instruments. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. -9-

12 2. Most Significant Accounting Policies (continued) Basis of Preparation (continued) The following interpretations that were issued but not yet effective for accounting periods beginning on January 1, 2006 and that are not applicable to the Bank are: IFRIC 7, Applying the Restatement Approach under IAS 29 (effective March 1, 2006); IFRIC 8, Scope of IFRS 2 (effective May 1, 2006); IFRIC 9, Reassessment of embedded derivative (effective June 1, 2006); IFRIC 10, Interim Financial Reporting and Impairment (effective November 1, 2006); IFRIC 11, IFRS 2 Group Treasury Share Transactions (effective March 1, 2007); and IFRIC 12, Service Concession Arrangements (effective January 1, 2009). Principle of Consolidation The consolidated financial statements include the assets, liabilities, and results of operations of Banco Internacional de Costa Rica, S. A. (BICSA), its Agency in Miami, Florida, United States of America and its wholly owned subsidiary Arrendadora Internacional, S. A. All significant intercompany balances and transactions have been eliminated in the consolidation. Interest Income and Expense Interest income and expense are recognized in the income statement for all interest bearing instruments under the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. Fees and Commissions Income Fees and commissions are generally recognized on an accrual basis. Loan origination fees for loans are deferred and recognized as an adjustment to the effective yield on the loan. Financial Assets The financial assets are classified in the following categories: financial assets at fair value through profit or loss; loans; held to maturity assets; and available for sale financial assets. Management determines the classification of its investments at initial recognition: -10-

13 2. Most Significant Accounting Policies (continued) Financial Assets (continued) Financial Assets at Fair Value through Profit or Loss This category has two sub-categories: financial assets held for trading and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Loans Loans are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when provide money, goods or services directly to a debtor with no intention of trading the receivable. Held to maturity Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the management has the positive intention and ability to hold to maturity. If the Bank were to sell other than a insignificant amount of held to maturity assets, the entire category would be reclassified as available for sale. Available for sale Available for sale investments are those intended to be held by the Bank for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Purchases and sales of financial assets at fair value through profit or loss, held to maturity and available for sale are recognized at the trade date, which is the date on the Bank commits to purchase or sell the asset. Loans are recognized when cash is advanced to the borrowers. Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value trough profit or loss. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. Available for sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and held to maturity investments are carried at amortized cost using the effective interest method. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are included in the statement of income in the period in which they arise. -11-

14 2. Most Significant Accounting Policies (continued) Financial Assets (continued) Gains and losses arising from changes in the fair value of available for sale financial assets are recognized directly in equity, until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously recognized in equity should be recognized in the results of the period. However, interest calculated using the effective interest method is recognized in the income statement. Dividends on available for sale equity instruments are recognized in the statement of income when the entity s right to receive payment is established. The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), it establishes fair value by using valuation techniques, that include the use of recent arm s length transactions, discounted cash flow analysis and other valuation techniques commonly used by market participants. Equity securities for which fair values cannot be measured reliably are recognized at cost less impairment. Impairment of Financial Assets Assets Carried at Amortized Cost At each balance sheet date, the Bank assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Bank about the following loss events: significant financial difficulty of the issuer or obligor; a breach of contract, such as a default or delinquency in interest or principal payments; granting to the borrower, for economic or legal reasons relating to the borrower s financial difficulty, a concession that the lender would not otherwise consider; it becoming probable that the borrower will enter bankruptcy or other financial reorganization; the disappearance of an active market for that financial asset because of financial difficulties; or observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the Bank. -12-

15 2. Most Significant Accounting Policies (continued) Impairment of Financial Assets (continued) The Bank assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written-off when all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written-off decrease the amount of the reserve. If, in a subsequent period, the amount of the impairment loss decrease and the decrease can be related objectively to an event occurring after the impairment loss is reversed by adjusting the reserve account. The amount of the reversal is recognized in the income statement. Management believes that the accumulated reserve for loan losses is adequate. The regulator, as an integral part of its examination process, periodically reviews the reserve for loan portfolio. Such regulator may require additional reserves to be recognized based on its evaluation of information available at the time of its examinations. Regulatory loan loss reserve requirements that exceed the Bank s reserves are treated as an appropriation of the retained earnings. Assets Carried at Fair Value At each balance sheet date, the Bank assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available for sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the income statement. -13-

16 2. Most Significant Accounting Policies (continued) Property, Furniture, Equipment and Improvements Property, furniture, equipment and improvements are carried at cost, net of accumulated depreciation and amortization. Major improvements are capitalized while minor repairs and maintenance which do not extend the useful life or improve the asset status are charged directly to expense when incurred. Depreciation is recorded in the current operations, using the straight-line method over the estimated useful lives of the respective assets, as follows: Building Vehicles Furniture, equipment, and improvements 40 years 3 to 5 years 3 to 10 years Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset s carrying amount is written down immediately to its recoverable amount, which is the higher of the asset s fair value less costs to sell and value in use. Income Tax Deferred income tax is provide in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates that have been enacted for the year in which the temporary differences are expected to be realized or settled. The principal temporary differences arise of allowance for loan losses, provision for pensions, and finance leases. Deferred tax assets are recognized where it is probable that future taxable profits will be available to be utilized against the temporary differences. The Miami Agency is subject to U.S. A. federal and state income taxes. Income tax expense is determined by using the separate currency as described in Section of the U. S. Department of the Treasury Regulations. Borrowings Borrowings are recognized initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between proceeds net of transaction costs and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method. Cash and Cash Equivalents For purposes of the consolidated cash flow statement, the Bank considers cash and all deposits with original maturity of ninety days or less, as cash and cash equivalents. -14-

17 2. Most Significant Accounting Policies (continued) Foreign Currency Transactions Assets and liabilities in foreign currency are translated into the functional currency using the exchange rates prevailing at the balance sheet date. Transactions in foreign currency during the year are translated using the exchange rates prevailing at the dates of the transactions. The differences arising from such translation are charged to the results of operations. Finance Leases Finance lease operations consist mainly in the leasing of transportation equipment and machinery and equipment, which contracts having an average period ranging between 36 and 60 months. Leases receivables are reported at their principal amount outstanding, net of unearned interest. The difference between the account receivable balance and the present value of the account receivable is presented as income, during the term of the lease. Employee Benefits The Bank maintains defined contribution plans in accordance with the conditions and practices in the jurisdictions where it is operating. A defined contribution plan is a pension plan under which the Bank pays fixed contributions into a separate entity, without having any legal obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current or prior periods. The number of undefined employees hired was 155 (2005:148). Severance and Seniority Premium The Panamanian labor legislation requires companies to constitute a severance trust fund, to guarantee the payment to employees of a severance and seniority premium due to unjustified or justified dismissal. This fund must be established by the contributions that correspond to the amount of the seniority premium based on 1.92% of salaries paid in the Republic of Panama and the 5% of the monthly severance amount. Quarterly contributions should be deposited on a trust fund. The severance trust fund amounted to $366,371 (2005: $338,870), is included as prepaid expenses and other assets in the consolidated financial statements. Financial Guarantee Contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities. -15-

18 2. Most Significant Accounting Policies (continued) Financial Guarantee Contracts (continued) Financial guarantees are initially recognized in the financial statements at fair value on the date the guarantee was given. Subsequent to initial recognition, the bank s liabilities under such guarantees are measured at the higher of initial measurement, less amortization calculated to recognize in the income statement the fee income earned on a straight line basis over the life of the guarantee and the best estimate of the expenditure required to settle any financial obligation arising at the balance sheet date. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgment of Management. Any increase in the liability relating to guarantees is taken to the income statement under other operating expenses. Trust Funds Banco Internacional de Costa Rica, S. A. maintains a general license to operate in the trust business, within or from the Republic of Panama. Commission income related to the administration of trust funds is recorded under the accrual method. The Bank is obliged to administer the trust funds in accordance with the trust agreements and independently from its own capital. Monetary Unit The consolidated financial statements are expressed in Dollar (US$), the monetary unit of the United States of America which is the functional currency of the Bank and its subsidiary. The US$ Dollar is freely exchangeable in the Republic of Panama. 3. Cash and Cash Equivalents Cash and cash equivalents include the following: Cash $ 652,042 $ 958,982 Demand deposits 22,556,211 14,780,502 Time deposits 112,072,767 90,054, ,281, ,793,863 Time deposits with original maturities up to 3 months - (70,000) $ 135,281,020 $ 105,723,

19 4. Loans The loan portfolio is classified by economic activity as follows: Agriculture $ 19,030,749 $ 15,816,545 Cattle 16,332,608 11,590,802 Commercial 85,439,419 68,862,043 Construction 39,450,569 23,371,572 Hotel and Tourism 5,198,373 4,910,033 Personal and Consumer 4,217,620 3,265,598 Industrial 96,148,139 83,520,661 Public utilities 3,515,093 12,852,163 Services and Overdrafts 67,800,760 62,166,805 Banks and Financial Institutions 116,294, ,609,573 Transportation 505, ,916 Others - 109,516 The loan portfolio is summarized as follows: $ 453,933,872 $ 410,900, Banks and Government Financial Owned Banks Country Individuals Entities Corporations Corporations Acceptances Total Domestic sector: Panama $ 1,270,563 $ 11,952,597 $ 117,665,297 $ - $ 1,881,202 $ 132,769,659 Foreign sector: Colombia 200, ,000 Costa Rica 881,839 30,707, ,050,573 3,505, ,145,576 Dominican Rep , ,440 Ecuador - 4,603, ,603,387 El Salvador 1,118,088 6,000,000 6,454, ,572,648 United States of America 75,000-4,734,882-2,995,756 7,805,638 Guatemala 38,970 30,274,537 21,081, ,816 51,516,696 Honduras - 416,672 40, ,672 Italy 35, ,000 Nicaragua 114,664 3,567,501 19,638, ,321,156 Total foreign sector 2,463,561 75,569, ,507,819 3,505,333 3,117, ,164,213 Total loans $ 3,734,124 $ 87,522,525 $ 354,173,116 $ 3,505,333 $ 4,998,774 $ 453,933,

20 4. Loans (continued) 2005 Banks and Government Financial Owned Banks Country Individuals Entities Corporations Corporations Acceptances Total Domestic sector: Panama $ 2,005,897 $ 14,958,469 $ 81,113,385 $ - $ 1,398,576 $ 99,476,327 Foreign sector: Brazil 3,866 4,341, ,345,052 Colombia 200,000-7, ,500 Costa Rica 758,094 56,116, ,367,920 6,800, ,042,880 Ecuador - 3,165, ,165,323 El Salvador 63,400 10,831,625 2,114, ,009,721 United States of America 95,000 2,800,176 5,935, ,830,423 Guatemala 38,970 28,054,798 16,102, ,196,707 Honduras 21,000-58, ,123 Jamaica ,039,739-6,039,739 Nicaragua 10,206 3,341,131 17,156, ,507,432 Total foreign sector 1,190, ,651, ,742,520 12,839, ,423,900 Total loans $ 3,196,433 $123,609,574 $ 269,855,905 $ 12,839,739 $ 1,398,576 $ 410,900,227 Allowance for loan losses Movement of allowance for loan losses is as follows: Balance at beginning of year $ 6,654,372 $ 5,654,974 Provision charged to operating expenses 591,068 1,571,752 Charge-offs (4,413,119) (653,932) Recoveries 137,288 77,220 Others (47,849) 4,358 Balance at end of year $ 2,921,760 $ 6,654,372 Management of the Bank does not anticipate losses in excess of the allowance for loan losses balance. -18-

21 4. Loans (continued) Classification of loan portfolio according to the regulatory requirements (In thousands) Normal $ 424,013 $ 387,110 Special Mention 24,163 15,367 Subnormal 4,932 3,285 Doubtful Irrecoverable 378 4,458 Total loans $ 453,934 $ 410,900 There were no restructured loans during 2006 (2005: $249 thousand). Non performing and past due loans amounted to $676,200 (2005: $5,171,379). In December 2005, the Agency, along with other financial institutions, entered into an agreement with an unrelated third party to purposes of financing the purchase of a company whose loans were previously charge off by the Agency in the amount of $1,512,000. This transaction will be recorded as a recovery on a cash basis. Finance Lease Receivables Finance lease receivables are summarized as follows: Total minimum payments $ 17,316,492 $ 11,430,660 Unearned income (313,067) (741,465) Total finance lease receivables $ 17,003,425 $ 10,689,195 Maturities of finance lease receivables are the following: Less than 1 year $ 293,677 $ 498,000 From 1 to 5 years 13,881,443 10,191,195 More than 5 years 2,828,305 - $ 17,003,425 $ 10,689,

22 5. Investment Securities Investment securities are represented by available for sale and held to maturity securities, detailed as follows: Currency Rate Maturity Available for sale Investment funds in Costa Rica Government titles $ 5.40% 5.72% Various until January 2007 $ 14,879,690 $ 28,188,894 Structured Note BDE % Various until Deutsche Bank AG London $ 5.79% March ,519,059 Structured Note BDK08 - Deutsche Bank AG London $ 7.13% January ,943,359 - Treasury Bills (Panama 5.64% Various until Government) $ 6.03% May ,888,400 4,513,020 Promissory Notes of Cía. Nacional de Fuerza y Luz of Costa Rica $ 8.75% July ,000 10,000 Class B common shares of Banco Latinoamericano de Exportaciones, S. A. (BLADEX), Panama $ , ,600 Treasury Notes (Panama 5.75% - Various until Government) $ 6.75% June ,944,421 4,035,519 Total available for sale securities $ 25,825,670 $ 39,940,092 Held to maturity Bonds issued by United States 3.05% - Various until of America Agencies $ 5.50% November ,500,000 13,499,795 Costa Rica Government bonds 6.45% - Various until $ 9.34% February ,909,680 7,338,908 Certificates of time deposit in Central Bank of Costa Rica $ 7.25% January ,993,171 6,099,921 Costa Rica Government title of 5.14% - Various until Property $ 6.65% August ,588,800 2,374,746 Corporate bonds 4.13% - Various until $ 7.37% January ,875,000 5,900,000 Central American Bank of Economic Integration (CABEI) Structured Note (Costa Rica External Debt Bond BD 20) $ 7.58% July ,698,036 - Morgan Stanley Structured Note (Panama Bond 15) $ 6.50% October ,000,000 - Total held to maturity securities 77,564,687 35,213,370 Total investment securities $ 103,390,357 $ 75,153,

23 5. Investment Securities (continued) The market value of held to maturity securities was $77,760,024 (2005: $34,984,661). Of the total held to maturity securities comprising of bonds issued by the United States of America Government, $10,546,902 (2005: $9,680,600) are pledges as collateral to secure certain short term time deposits. The movement of the available for sale and held to maturity securities is summarized as follows: Available for Sale 2006 Held to Maturity As of December 31, 2005 $ 39,940,092 $ 35,213,370 Additions 151,558,930 59,896,752 Sales and redemptions (165,651,036) (17,545,435) Loss from changes in fair value (22,316) - As of $ 25,825,670 $ 77,564,687 Available for Sale 2005 Held to Maturity As of December 31, 2004 $ 44,674,663 $ 21,518,374 Additions 185,337,540 53,449,750 Sales and redemptions (189,863,837) (39,754,754) Loss from changes in fair value (208,274) - As of December 31, 2005 $ 39,940,092 $ 35,213,370 The Bank has engaged in investment transactions within its investment policy, related to commercial short term negotiable contracts (at sight to 90 days) securities that are guaranteed by debt instruments issued by the Government of Costa Rica in US$ Dollars. These investments are considered as low risk by Management, due to the collateral in place and the short term nature of the investments. -21-

24 5. Investment Securities (continued) The investment securities classified as available for sale are measured at their fair value. Gains and losses arising from the changes in the fair value are recognized as unrealized gains (losses) on available for sale securities in the consolidated statement of equity. Following is a movement schedule of the unrealized gain on available for sale securities: Balance at beginning of year $ 162,139 $ 370,413 Gain transferred to income statement on sales and/or impairment 90, ,546 Net loss from changes in fair value (112,316) (311,820) Balance at end of year $ 139,823 $ 162, Property, Furniture, Equipment and Improvements The movements of property, furniture, equipment and improvements are as follows: Furniture and Leasehold Land Building Vehicles Equipment Improvements Total Book value at 12/31/05 $ 410,000 $ 573,044 $ 117,605 $ 608,223 $ 444,010 $ 2,152,882 Additions , ,256 9, ,223 Disposals (40,385) - (40,385) Adjustments Depreciation expense - (25,468) (53,852) (367,689) (101,269) (548,278) Book value at 12/31/06 $ 410,000 $ 547,576 $ 94,293 $ 940,405 $ 352,917 $ 2,345,191 Cost $ 410,000 $ 971,655 $ 169,017 $ 3,674,599 $ 767,971 $ 5,993,242 Accumulated depreciation - (424,079) (74,724) (2,734,194) (415,054) (3,648,051) Book value at 12/31/06 $ 410,000 $ 547,576 $ 94,293 $ 940,405 $ 352,917 $ 2,345,

25 6. Property, Furniture, Equipment and Improvements (continued) Furniture and Leasehold Land Building Vehicles Equipment Improvements Total Book value at 12/31/04 $ 410,000 $ 598,510 $ 7,700 $ 623,040 $ 351,124 $ 1,990,374 Effect from merger , , ,724 Additions , , , ,259 Disposals - - (18,493) (96,910) - (115,403) Adjustments - - (7,700) - - (7,700) Depreciation expense - (25,466) (26,976) (433,191) (60,739) (546,372) Book value at 12/31/05 $ 410,000 $ 573,044 $ 117,605 $ 608,223 $ 444,010 $ 2,152,882 Cost $ 410, , ,717 3,263, ,446 5,554,512 Accumulated depreciation - (398,611) (29,112) (2,655,471) (318,436) (3,401,630) Book value at 12/31/05 $ 410,000 $ 573,044 $ 117,605 $ 608,223 $ 444,010 $ 2,152, Borrowed Funds The Bank maintained obligations in US dollars for the financing of foreign credits, which are detailed as follows: Wachovia National Bank, N. A. Maturity 2006 Various until June 2007 $ 24,000,000 Central American Bank of Economic Various until Integration (CABEI) August ,000,000 Cobank Dresdner Bank Various until July ,676,237 Various until June ,050,000 Banco Latinoamericano de Various until Exportaciones, S. A. (BLADEX) June ,500,000 Banco Mercantil Various until June ,070,000 Societe Generale June ,000,000 Carried forward $ 96,296,

26 7. Borrowed Funds (continued) Maturity 2006 Banco de Comercio Exterior (BANCOLDEX) Brought forward $ 96,296,237 Various until August ,500,000 Kreditanstalt Furk Weid June ,000,000 Banco Continental de Panama March ,000,000 Natexis Banque Populaires Various until June ,875,000 BNP Paribas (Panama) May ,000,000 Israel Discount Bank of New York Various until March ,000,000 HSBC Plc. February ,000,000 American Express Bank The Export Import Bank of Korea Various until January ,000,000 Various until October ,723 $ 121,854,960 The Export Import Bank of Korea BNP Paribas (Panama) Maturity 2005 Various until May 2007 $ 1,072,888 Various until April ,000,000 Union Bank of California March ,000,000 Wachovia National Bank, N. A. Various until May ,000,000 Kreditanstalt Furk Weid June ,000,000 Israel Discount Bank of New York March ,000,000 Banco Latinoamericano de Various until Exportaciones, S. A. (BLADEX) May ,000,000 Carried forward $ 49,072,

27 7. Borrowed Funds (continued) Cobank Banco Mercantil Maturity 2005 Brought forward $ 49,072,888 Various until May ,642,320 Various until March ,354,000 Natexis Banque March ,000,000 Dresdner Bank Various until April ,000,000 Banco Continental de Panama February ,000,000 Toronto Dominion Bank Various until January ,800,000 Banco de Comercio Exterior (BANCOLDEX) February ,000,000 American Express Bank February ,000 $ 97,469,208 The interest rates of the borrowed funds in US$ dollar ranged from 4.509% to 7.375% (2005: 3.567% to 6.95%). 8. Financial Risk Management A. Capital Adequacy The Bank monitors its capital adequacy using ratios comparable to those suggested by the Basle Committee on Banking Regulations and Supervisory Practices. The capital adequacy ratio measures the capital adequacy by comparing the Bank s eligible capital with its balance sheet assets, off-balance sheet commitments and other risk positions at a weighted amount. The market risk approach used by the Bank to calculate its capital requirements covers the general market risk of the Bank s operations and the specific risks of open positions in currencies and debt and equity securities included in the risk portfolio. Assets are weighted according to broad categories of notional credit risk, being assigned a risk weighting average according to the capital amount deemed to be necessary to support them. Five categories of risk weights (0%, 10%, 20%, 50%, 100%) are applied. For example, cash and cash collateralized loans have zero risk weighting which means that no capital is required to support the holding of these assets. Premises and equipment carry a 100% risk weighting, meaning that it must be supported by capital equal to 8% of the carrying amount. -25-

28 8. Financial Risk Management (continued) A. Capital Adequacy (continued) The risk weighted amount of assets and commitments of the Bank are as follows: Weighted Balance Balance (in thousands) (in thousands) Assets (net of provisions) Cash $ 652 $ - Due from banks 134,629 26,185 Loans 450, ,550 Investments 103,390 74,372 Fixed assets 2,345 2,345 Other assets 22,627 22,627 Total assets 714, ,079 Contingencies Letters of credit 30,725 15,362 Guarantees 30,856 15,428 Total contingencies 61,581 30,790 Total risk weighted assets $ 776,133 $ 570,869 Capital base $ 87,517 Capital adequacy ratio as of 15% Capital adequacy ratio as of December 31, % Minimum capital adequacy regulatory ratio 8% B. Credit Risk The Bank takes on exposure to credit risk which is the risk that a counterparty will be unable to pay amounts in full when due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and the geographical segment. Such risks are monitored on a revolving basis and subject to a periodic review. Financial assets which potentially subject the Bank to concentrations of credit risk consist primarily of cash and cash equivalents, interest-bearing deposits with banks, certain available-for-sale investment securities, loans and other assets. Cash and cash equivalents and interest bearing deposits with banks are placed either with related parties or reputable financial institutions. An analysis of the available for sale securities and loans is provided in Notes 4 and

29 8. Financial Risk Management (continued) B. Credit Risk (continued) Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral, corporate and personal guarantees. Concentration of assets, liabilities, and off balance sheet items: 2006 Off-Balance Assets Liabilities Sheet Items (Note 11) Geographical region Costa Rica $ 268,963,029 $ 339,246,477 $ 31,647,147 Panama 192,550, ,384,149 12,501,135 U.S. A. 62,505,656 50,610,874 96,701 Central America 120,695,381 50,233,677 14,010,242 Europe 63,581,766 24,911, ,685 South America 5,013,458 14,849,687 1,913,510 Caribbean 507,380 2,436, ,224 Asia 545,375 8,261,926 - Others 189, ,312 20,700 $ 714,552,257 $ 626,895,177 $ 61,581, Off-Balance Assets Liabilities Sheet Items (Note 11) Geographical region Costa Rica $ 266,608,439 $ 256,807,748 $ 30,319,186 Panama 160,086, ,448,702 14,693,053 Central America 87,687,899 36,826,745 9,818,661 U.S. A. 55,934,485 61,362,929 - Europe 27,665,934 19,270,074 2,994,583 Caribbean 6,038,173 6,325, ,585 South America 3,705,033 12,663,129 3,100,315 Others 113,112 8,821,068 - $ 607,839,719 $ 527,525,548 $ 61,780,

30 8. Financial Risk Management (continued) C. Credit Commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Standby letters of credit and issued guarantees, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same risk as loans. Documentary and commercial letter of credit, which are written authorizations undertaken by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipments of goods to which they relate and, therefore, carry less risk than a direct borrower. The Bank s credit policies and procedures to approve credit commitments, guarantees, and commitments to purchase and sell securities are the same as those for extension of credits that are recorded on balance sheet and take into account the collateral and other security, if any. -28-

31 8. Financial Risk Management (continued) D. Interest Rate Risk The Bank is exposed to various risks associated with the effects of market changes on interest rates. Following is a summary of the Bank s exposure to the interest rate risks that includes the assets and liabilities classified by the earlier of contractual repricing or maturity dates. Assets 2006 Up to From 1 to 3 From 3 months From 1 to 5 More than Non interest 1 month months to 1 year years 5 years bearing Total Due from banks $ 114,601,840 $ - $ - $ - $ - $ 20,027,138 $ 134,628,978 Investments 18,629,690 7,353,630 10,388,400 65,105,784 1,743, , ,390,357 Loans 137,057, ,361, ,785,569 17,864,516 7,991, , ,933,872 $ 270,288,546 $ 176,714,687 $ 131,173,969 $ 82,970,300 $ 9,734,726 $ 21,070,979 $ 691,953,207 Liabilities 2006 Up to From 1 to 3 From 3 months From 1 to 5 More than Non interest 1 month months to 1 year years 5 years bearing Total Due to depositors $ 307,134,435 $ 42,139,633 $ 45,272,254 $ 31,006,352 $ 3,200,000 $ 50,349,415 $ 479,102,089 Borrowed funds 10,880,651 28,573,097 81,401,212-1,000, ,854,960 $ 318,015,086 $ 70,712,730 $ 126,673,466 $ 31,006,352 $ 4,200,000 $ 50,349,415 $ 600,957,049 Assets 2005 Up to From 1 to 3 From 3 months From 1 to 5 More than Non interest 1 month months to 1 year years 5 years bearing Total Due from banks $ 90,083,670 $ 170,000 $ 70,000 $ - $ - $ 14,511,211 $ 104,834,881 Investments 25,572,010 7,116,883 7,513,020 27,731,295 7,036, ,599 75,153,462 Loans 156,162, ,695, ,406,132 16,890,688 5,084,588 4,660, ,900,227 $ 271,818,254 $ 134,982,511 $ 107,989,152 $ 44,621,983 $ 12,121,243 $ 19,355,427 $ 590,888,570 Liabilities 2005 Up to From 1 to 3 From 3 months From 1 to 5 More than Non interest 1 month months to 1 year years 5 years bearing Total Due to depositors $ 246,450,263 $ 65,640,027 $ 38,984,876 $ 7,648,477 $ - $ 47,794,592 $ 406,518,235 Borrowed funds 13,442,924 34,840,571 49,185, ,469,208 $ 259,893,187 $ 100,480,598 $ 88,170,589 $ 7,648,477 $ - $ 47,794,592 $ 503,987,