Bancolombia Puerto Rico Internacional, Inc. (A wholly owned subsidiary of Bancolombia, S.A.) Report and Financial Statements December 31, 2012 and

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1 Bancolombia Puerto Rico Internacional, Inc. Report and Financial Statements

2 Balance Sheets Page(s) Report of Independent Auditors Financial Statements Balance Sheets... 3 Statements of Income... 4 Statements of Changes in Stockholder s Equity... 5 Statements of Cash Flows

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5 Balance Sheets Assets Cash and cash equivalents $ 5,724,237 $ 16,117,106 Restricted cash 300, ,000 Investments securities available-for-sale, at fair value 22,492,670 14,185,836 Loans, net of allowance for loan losses of $3,671,210 ( $5,423,288 ) 261,492, ,175,363 Interest receivable 1,676,277 2,666,357 Furniture, equipment and leasehold improvements, net 32,689 54,901 Other assets 138, ,834 Total assets $ 291,856,390 $ 320,065,397 Liabilities and Stockholder s Equity Liabilities Time deposits $ 151,559,544 $ 122,230,048 Borrowing from affiliates 55,004, ,231,275 Interest payable 1,796, ,351 Accounts payable and accrued liabilities 143, ,528 Income tax payable - 500,365 Total liabilities 208,503, ,973,567 Commitments (Note 7) Stockholder s equity Preferred stock, $10 par value; 480,000 shares authorized; none issued Common stock - $1 par value; 200,000 shares authorized; 41,350 shares issued and outstanding 41,350 41,350 Additional paid in capital 10,296,305 10,296,305 Retained earnings 71,854,832 61,343,219 Accumulated other comprehensive loss 1,160,275 (589,044) Total stockholder s equity 83,352,762 71,091,830 Total liabilities and stockholder s equity $ 291,856,390 $ 320,065,397 The accompanying notes are an integral part of the financial statements. 3

6 Statements of Income Years Ended Interest income Loans $ 14,018,733 $ 14,721,854 Investment securities 983, ,209 Other 27,074 14,527 Total interest income 15,029,277 15,718,590 Less: Interest expense Deposits 4,893,523 2,765,025 Borrowings 459,211 1,766,550 Total interest expense 5,352,734 4,531,575 Net interest income 9,676,543 11,187,015 Provision (reversal of provision for) loan losses (2,072,959) 472,044 Net interest income after provision for loan losses 11,749,502 10,714,971 Noninterest income Net gain on sale of investments available for sale 358, ,670 Service fees and other 266, ,895 Total noninterest income 625, ,565 Noninterest expenses Employee compensation and benefits 867, ,559 Professional services 299, ,749 Other expenses 695, ,545 Total noninterest expenses 1,863,750 2,191,853 Income before income tax provision 10,511,613 8,923,683 Income tax provision - 516,065 Net income 10,511,613 8,407,618 Other comprehensive income (loss) Unrealized gain on securities available-for-sale during the year 1,749, ,759 Foreign currency translation adjustment - (52,343) Comprehensive income $ 12,260,932 $ 8,557,034 The accompanying notes are an integral part of the financial statements. 4

7 Statements of Changes in Stockholder s Equity Years Ended Accumulated Additional Other Total Common Paid-in Retained Comprehensive Stockholder s Stock Capital Earnings Loss Equity Balances at December 31, 2010 $ 41,350 $ 10,296,305 $ 52,935,601 $ (738,460) $ 62,534,796 Net income - - 8,407,618-8,407,618 Other comprehensive income , ,416 Balances at December 31, ,350 10,296,305 61,343,219 (589,044) 71,091,830 Net income ,511,613-10,511,613 Other comprehensive income ,749,319 1,749,319 Balances at December 31, 2012 $ 41,350 $ 10,296,305 $ 71,854,832 $ 1,160,275 $ 83,352,762 The accompanying notes are an integral part of the financial statements. 5

8 Statements of Cash Flows Years Ended Cash flows from operating activities Net income $ 10,511,613 $ 8,407,618 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 26,393 56,658 (Reversal) provision for loan losses (2,072,959) 472,044 Net gain on sale of investments available for sale (358,905) (173,670) Changes in assets and liabilities that increase (decrease) cash Interest receivable 990,080 (278,186) Other assets 427,651 (431,694) Interest payable 1,077,922 (782,377) Accounts payable and accrued liabilities (150,238) 57,382 Income tax payable (500,365) 146,088 Total adjustments (560,421) (933,755) Net cash provided by operating activities 9,951,192 7,473,863 Cash flows from investing activities Decrease (increase) in loans, net 26,755,988 (10,061,518) Proceeds from sales of investment securities available for sale 57,664,696 10,107,750 Proceeds from maturities of investment securities available for sale 1,299,674 - Purchase of investment securities available for sale (65,162,980) (7,969,300) Capital expenditures (4,181) (15,580) Net cash provided by (used in) investing activities 20,553,197 (7,938,648) Cash flows from financing activities Net decrease in short term borrowings - (10,000,000) Net (decrease) increase in borrowing from affiliates (70,226,754) 55,116,503 Net increase (decrease) in time deposits 29,329,496 (41,034,205) Net cash (used in) provided by financing activities (40,897,258) 4,082,298 Net (decrease) increase in cash and cash equivalents (10,392,869) 3,617,513 Cash and cash equivalents Beginning of year 16,117,106 12,499,593 End of year $ 5,724,237 $ 16,117,106 Supplemental disclosure Interest paid $ 4,501,723 $ 5,197,292 Income tax paid $ - $ 370,342 The accompanying notes are an integral part of the financial statements. 6

9 1. Reporting Entity and Summary of Significant Accounting Policies Bancolombia Puerto Rico Internacional, Inc. (the Bank ) is wholly owned by Bancolombia, S.A. ( Bancolombia ) and was incorporated in Puerto Rico on December 3, The Bank is licensed to operate as an international banking entity pursuant to the 1989 Puerto Rico International Banking Center Act, as amended. The Bank is allowed to accept deposits and other types of borrowings from persons and entities domiciled outside of Puerto Rico, the Government Development Bank for Puerto Rico (GDB), and the Economic Development Bank of Puerto Rico (EDB). It is also allowed to make loans to and invest in international entities and make deposits with the GDB and the EDB and in other international banking entities. The Bank s main office is in Puerto Rico with representation and a specialized sales force in Colombia. The Bank s principal products consist of certificates of deposit and commercial loans. The operations are mainly denominated in United States of America dollars ( U.S. Dollars ). Unless otherwise indicated, all amounts presented and disclosed in the accompanying financial statements and within these notes are denominated in U.S. Dollars. The Bank is subject to supervision by the Office of the Commissioner of Financial Institutions of Puerto Rico and by the Superintendence of Banking of Colombia through Bancolombia. The Bank must comply with certain banking regulations, including minimum capital requirements, among others. Management believes that the Bank has complied with all applicable regulations. The following is a description of the more significant accounting policies: Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ( GAAP ) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these estimates are adequate. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Restricted Assets The Bank is required by the Act No. 52 of August 11, 1989, as amended, known as the International Banking Center Regulatory Act, to maintain $300,000 in assets free of any lien with a financial institution in Puerto Rico. To comply with this requirement, as of December 31, 2012 and 2011, the Bank has a certificate of deposit of $300,000. Investment Securities Investments that have readily determinable fair values are classified by management in three categories and accounted for as follows: Held to Maturity Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. As of December 31, 2012 and 2011, there were no held to maturity investment securities outstanding. 7

10 Trading Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value based on quoted market prices. For securities without quoted prices, fair value represents quoted market prices for comparable instruments. Realized and unrealized changes in market value are recorded in the period in which the changes occur as trading activities. Interest income or expense arising from trading instruments are included as part of net interest income in the Statement of Income. As of, there were no trading securities outstanding. Available for Sale Debt and equity securities not classified as either held to maturity securities or trading securities are classified as available for sale securities and reported at fair value based on quoted market prices, for these or similar securities, with unrealized gains and losses (including those arising from foreign exchange changes) excluded from earnings and reported in a separate component of stockholder s equity. As of, all investments securities outstanding were classified as available for sale. Purchases and sales of securities are recorded on their trade date. Unsettled purchase transactions are recorded as part of the Bank s investment positions and as liability, while unsettled sales transactions are removed from the Bank s investment positions and recorded as a receivable. Premiums and discounts are amortized as an adjustment to interest income over the life of the related securities using a method that approximates the interest method. Realized gains or losses for securities classified as either available for sale or held to maturity are reported in earnings for the corresponding period. When computing realized gains or losses, the cost of securities is determined on the specific identification method. Other-than-temporary impairment loss in the value of securities, if any, is recognized in the Statement of Income in the period that the other-than-temporary impairment is determined. GAAP defines fair value, establishes a consistent framework for measuring fair value, and requires disclosures about fair value instruments. See Note 9 for further disclosure regarding fair value. Market Risk and Concentration of Credit Risk The Bank invests and lends internationally, which gives rise to significant exposure to risk ranging from the economic and political risk of the different countries as well as the volatility of such markets caused by currencies and local interest rates. The risk that counterparties may not comply with their obligations is monitored on an ongoing basis. To manage the level of risk, the Bank deals with counterparties of good credit standing and transactions are denominated in US dollars and to a lesser extent Euros, to reduce currency risk. It is the Bank s policy to provide for impairment on its loan and investment portfolios based on risk and credit evaluations, economic conditions and other pertinent factors. Foreign Currency Transactions The Bank may invest in instruments denominated in a currency other than the US Dollar. These instruments are valued at current exchange rates and unrealized foreign exchange gains or losses are reflected in earnings for the period. 8

11 As of December 31, 2012, the Bank had the following balances denominated in Euros: EUR USD Cash 465,562 $ 614,263 Loans 1,955,458 2,580,031 Deposits 600, ,390 Interest payable 1,110 1,464 Discount Factoring 14,261 18,816 Loans Loans are reported at the principal amount outstanding, less the allowance for loan losses. Interest income on loans is recognized on the accrual basis unless payments are in arrears or other factors indicate that collection of interest and principal is doubtful. Loan origination fees charged for the origination of loans are deferred and amortized over the life of the loans as an adjustment to interest income using a method that approximates the interest method. The credit underwriting function and the direct costs of origination are incurred partly by an affiliate for which nominal charges are made to the Bank. Allowance for Loan Losses The allowance for loan losses is established by a charge to operations through the provision for loan losses. Recoveries of loans previously charged off are credited to the allowance for loan losses. Based on management s opinion, the allowance for loan losses is adequate to absorb estimated probable losses on loans that may become uncollectible. The Bank provides for estimated losses on loans based upon periodic evaluations of the individual loans and the inherent risk of the portfolio. The Bank measures the impairment of a loan based on the present value of expected future cash flows discounted at the loan s effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. The Bank has defined impaired loans as loans with interest and/or principal past due 90 days or more and other specific loans for which, based on current information and events, it is probable that the debtor will be unable to pay all amounts due according to the contractual terms of the loan agreement. The accrual of interest on loans is discontinued when in management s opinion there is a clear indication the borrower s cash flows may not be sufficient to meet payments as they become due. When a loan is placed on nonaccrual status the loan is accounted for on the cash method thereafter, until it qualifies for return to accrual status. Generally, a loan is returned to accrual status when all delinquent interest and principal payments become current in accordance with the terms of the loan agreement. 9

12 Furniture, Equipment and Leasehold Improvements Furniture and equipment is carried at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful life of the individual assets (1 to 7 years). Amortization of leasehold improvements is computed on the straight-line method over the terms of the leases or the estimated useful life of the improvements, whichever is shorter. When assets are disposed of, the cost of the asset and related accumulated depreciation are removed from the accounts, and any gain or loss is reflected in earnings for the period. Maintenance and repair costs, which do not improve or extend the life of the respective assets, are expensed as incurred. Costs of renewals and betterments are capitalized. The Bank evaluates its premises and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, an estimate of the future cash flows expected to result from the use of the asset and its eventual disposition is made. If the sum of the future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. The amount of the impairment is the excess of the carrying amount over the fair value of the asset. Taxes Pursuant to the Act, as amended, the Bank is 100% exempt from Puerto Rico income, property, municipal and tollgate taxes, on income derived from international banking activities, as defined. On March 9, 2009, the Government of Puerto Rico enacted Tax Law No.7, Special Law Declaring a Fiscal State of Emergency and Establishing a Fiscal Stabilization Plan to Save Puerto Rico s Credit, for the purpose of resolving in an integrated and responsible manner the fiscal crisis the Government of Puerto Rico is currently going through and to protect Puerto Rico s credit in accordance with Section 8 of Article VI of the Constitution. The enacted tax law is effective for years beginning after December 31, 2008 and ending on or prior to December 31, The law requires, among other things, Bancolombia Puerto Rico Internacional, Inc. to pay a special five percent (5%) tax on the Bank s taxable income. This special tax law will apply to the Bank for each of the years ended December 31, 2009 through December 31, As of December 31, 2011, no deferred tax asset has been recognized related to the allowance for loan losses since the tax imposed to the Bank is temporary and the related temporary difference is not expected to reverse during a taxable period. The special tax was not applicable for the year ended December 31, Subsequent Events The Bank has performed an evaluation of subsequent events through April 1, 2013, which is the date the financial statements were available to be issued and has determined that there are no subsequent events that require recognition or disclosure on these financial statements. Reclassifications Certain reclassifications have been made to prior year amounts to conform with current year presentation. 10

13 2. Investment Securities Available-for-Sale The amortized cost, gross unrealized gains and losses, estimated fair value, interest rates and maturity date of investment securities available for sale as of were as follows: December 31, 2012 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value Debt Securities Available for sale Banco Credito del Peru, 5.375%; due 09/16/20 $ 3,045,885 $ 281,916 $ - $ 3,327,801 Banco Do Brazil, 5.375%; due 01/15/21 2,004, ,948-2,128,194 Bradesco Sao Paulo, 5.75%; due 03/01/22 5,071, ,216-5,406,495 Banco Itau Sao Paulo, 5.65%; due 03/19/22 2,997, ,582-3,163,373 Banco Santander Brasil, 4.625%; due 02/13/17 2,983, ,316-3,168,462 Inversiones CMPC, 4.5%; due 04/25/22 1,984,171 60,870-2,045,041 Corp. Andina Fomento Caracas, 4.375%; due 06/15/22 3,245,877 7,427-3,253,304 $ 21,332,395 $ 1,160,275 $ - $ 22,492,670 December 31, 2011 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value Debt Securities Available for sale Banco Credito del Peru,5.375%; due 09/16/20 $ 3,056,250 $ - $ (129,630) $ 2,926,620 Banco Do Brazil, 5.375%; due 01/15/21 2,005,000 - (700) 2,004,300 Telemar Norte Leste S.A.,5.5%; due 10/23/20 8,195,000 - (297,320) 7,897,680 Republica de Brazil, 8.5%; due 09/24/12 1,466,287 - (109,051) 1,357,236 $ 14,722,537 $ - $ (536,701) $ 14,185,836 The maturity dates of investment securities available for sale at December 31, 2012 were as follows: Amortized Fair Maturity Cost Value Due from one to five years $ 2,983,146 $ - Due from five to ten years 18,349,249 - $ 21,332,395 $ - The gross proceeds from the sale of investments securities available-for-sale and the gross gains or losses realized from the sale of these investments were as follows: Gross proceeds from sales $ 57,664,696 $ 10,107,750 Gross gains realized from sales 358, ,670 11

14 3. Loans and Allowance for Loan Losses As of the loan portfolio consisted primarily of commercial loans and participations in loans collateralized by equipment and advances thereon. The components of the loans portfolio consist of the following: Commercial loans $ 212,112,780 $ 248,095,654 Collateralized with equipment and advances 53,050,764 43,502,997 Total loans 265,163, ,598,651 Allowance for loan losses (3,671,210) (5,423,288) $ 261,492,334 $ 286,175,363 At December 31, 2012, the Bank had loans outstanding in the following countries: Loans Collateralized With Commercial Equipment Loans and Advances Total Peru $ 117,039,531 $ - $ 117,039,531 Colombia 46,837,197-46,837,197 Panamá 20,000,000 15,954,312 35,954,312 Chile 16,905,156-16,905,156 Mexico 7,630,896 7,297,057 14,927,953 Costa Rica - 14,850,197 14,850,197 Guatemala - 11,056,966 11,056,966 Guyana 3,700,000-3,700,000 El Salvador - 2,838,777 2,838,777 Brazil - 1,053,455 1,053,455 $ 212,112,780 $ 53,050,764 $ 265,163,544 The contractual maturities of the loan portfolio as of December 31, 2012 are as follows: Years Ending 2013 $ 17,133, ,268, ,610, ,168, ,801,910 Thereafter 130,181,523 $ 265,163,544 12

15 As of, adjustable rate loans amounting to approximately $234,159,133 and $249,465,749, respectively, have interest rate adjustment limitations and are tied to LIBOR rate indexes. Future market factors may affect the correlation of the interest rate adjustment with the rate the Bank pays on the short-term deposits that have primarily funded these loans. The following is a summary of the allowance for loan losses activities for the year ended December 31: 2012 Loans Collateralized With Commercial Equipment and Loans Advances Total Balances at beginning of year $ 3,963,650 $ 1,459,638 $ 5,423,288 Reversal of allowance for loan losses (1,972,260) (100,699) (2,072,959) Recoveries - 320, ,881 Balances at end of year $ 1,991,390 $ 1,679,820 $ 3,671, Loans Collateralized With Commercial Equipment and Loans Advances Total Balances at beginning of year $ 3,844,176 $ 663,430 $ 4,507,606 Provision for loan losses 119, , ,044 Recoveries - 443, ,638 Balances at end of year $ 3,963,650 $ 1,459,638 $ 5,423,288 The following is a summary of the allowance for loan losses by portfolio segment and the allowance that pertains to loans individually or collectively evaluated for impairment for the year ended December 31: 2012 Loans Collateralized With Commercial Equipment and Loans Advances Total Allowance for loan losses by impairment methodology Collectively evaluated $ 1,991,390 $ 945,896 $ 2,937,286 Individually evaluated - 733, ,924 $ 1,991,390 $ 1,679,820 $ 3,671,210 13

16 2011 Loans Collateralized With Commercial Equipment and Loans Advances Total Allowance for loan losses by impairment methodology Collectively evaluated $ 3,963,650 $ 801,028 $ 4,764,678 Individually evaluated - 658, ,610 $ 3,963,650 $ 1,459,638 $ 5,423,288 As of December 31, 2012, the Bank had one loan collateralized with equipment classified as impaired with an unpaid principal balance of approximately $1,017,000 and a related allowance of approximately $734,000. As of December 31, 2011, the Bank had one loan collateralized with equipment classified as impaired with an unpaid principal balance of approximately $1,305,000 and a related allowance of approximately $659,000. During the year ended December 31, 2012, the Bank reviewed its allowance for loan losses estimate assumptions and calculations, considering new information developed during the year, and the uncertain economic and regulatory environments. The resulting changes in estimate are reflected in the 2012 provision and allowance for loan and lease losses. Significant changes in assumptions and calculations include emphasizing the consideration of more recent experience in determining the probability of default and loss given default considering country risk, and adjusting factors considered in estimating the expected loss. Credit Risk Quality As of, management believes that the allowance for loan losses represents an adequate estimate for loan losses based upon an analysis of individual loans and the inherent risk characteristics of the portfolio. As part of the on-going monitoring of the credit quality of the Bank s loan portfolio, management tracks certain credit quality indicators including trends related primarily to (1) the risk rating of loans, (ii) the loan payment status, (iii) net charge-offs, (iv) nonperforming loans, and (v) the general economic conditions in the main geographies where the Bank s borrowers conduct their businesses. The Bank assigns a credit risk rating to identify the risk characteristics of each of its loans. Loans are rated on a monthly basis (or more frequently when the circumstances require it) on a scale from a Category E (worst credit quality) to Category A (best credit quality). Loans are then grouped in five credit risk categories for purposes of monitoring rising levels of potential loss risks and to enable the activation of collection or recovery processes as defined in the Bank s credit risk policies. The following is a summary of the risk ratings, as well as a description of the general characteristics of each of the risk ratings: Category A rated loans reflect excellent structure and care. The financial statements of the debtors or cash flows of the project, as well as other credit information, indicate an optimum affordability in terms of the amount and source of income that borrowers have to meet required 14

17 payments. At a minimum, a loan classified in this category should comply with this condition: loans granted and not showing more than 30 days delinquent on their contractual obligations; that is, between 0 and 30 days in arrears. Category B rated loans are cared for and protected in an acceptable manner, but there are weaknesses that could potentially affect, temporarily or permanently, the debtor s ability to pay or cash flows of the project, so that, if not corrected promptly, they would affect the normal collection of credit or contract. At a minimum, a loan classified in this category should comply with this condition: loans granted and showing arrears of not less than 31 days and less than 61 days in their contractual obligations; that is, between 31 and 60 days in arrears. Category C loans or contracts have insufficient capacity in the debtor s payment or cash flows of the project, which compromise the normal collection of the obligation on agreed terms. At a minimum, a loan classified in this category should comply with this condition: loans granted and showing arrears of not less than 61 days but less than 91 days on its contractual obligations; that is, between 61 and 90 days in arrears. Category D loans or contracts have serious deficiencies in the payment capacity of the obligor or cash flows of the project that significantly compromise the collection of the obligation on agreed terms. At a minimum, a loan classified in this category should comply with this condition: loans granted and showing arrears of not less than 90 days and less than 361 days on its contractual obligations; that is, between 91 and 360 days in arrears. Category E loans or contracts are considered in default and very unlikely to be collectible. Loans or contracts within this category are 361 days or more in arrears and/or present a high risk of default due to other qualitative factors. As of December 31, 2012 all loans of the Bank were classified as Category A, except for two loans which has been classified as Category B and one loan which has been classified as Category E. As of December 31, 2011 all loans of the Bank were classified as Category A, except for one loan which has been classified as Category E. The loans classified as Category E were individually evaluated for impairment as of. 4. Furniture, Equipment and Leasehold Improvements The components of furniture, equipment and leasehold improvements as of December 31, 2012 and 2011 were as follows: Estimated Useful Lives (Years) Vehicles 5 $ 49,350 $ 49,350 Computer equipment , ,145 Furniture and fixtures ,827 97,827 Total cost 307, ,322 Less: Accumulated depreciation (274,814) (248,421) Furniture, equipment and leasehold improvements $ 32,689 $ 54,901 15

18 5. Time Deposits As of, the Bank has time deposits amounting to $151,559,544 and $122,230,048, respectively. From the total of time deposits, time deposits amounting to $133,296,556 ( $102,297,002) are in denominations of $100,000 or higher. Time deposits amounting to $149,387,690 ( $120,274,681) mature in less than one year and bear interest ranging from 0.2% to 3.2% ( % to 3.22%) with an average yield of 1.96% at December 31, 2012 ( %). All other time deposits amounting to $2,171,854 ( $1,955,367) mature within two years and bear interest ranging from 0.88% to 2.6% ( % to 2.9%). 6. Short-term Borrowings At, the Bank has available lines of credit amounting to $21,000,000 and $16,000,000, respectively, with financial institutions. At, there were no borrowings outstanding under these lines of credit Maximum balance outstanding during the year $ - $ 10,000,000 Weighted average balance outstanding during the year $ - $ 7,051,282 Weighted average interest rate during the year % Weighted average interest rate at end of the year % 7. Commitments The Bank leased its office facilities under a non-cancelable operating lease agreement which matures on January 2015 and requires the following minimum rental payments. Amount Year Ending December 31, 2013 $ 113, , $ 9, ,700 Rent expense for the year ended December 31, 2012 amounted to approximately $230,000 ( $300,000). 8. Related Party Transactions At, there were no loans receivables from affiliated entities. At, the Bank has borrowings from affiliated entities for approximately $55 million and $125 million, respectively. Borrowings from affiliates at December 31, 2012 are due in January 2013 and bear interest at 0.35%. Borrowings from affiliates at December 31, 2011 were due in 2012 and bore interest ranging from 1.6% to 1.77%. The interest expense on these borrowings for the year ended December 31, 2012 amounted to $459,211 ( $1,659,628). 16

19 During the years ended, administrative services fees were charged by an affiliate amounting to approximately $10,000 and $15,000, respectively. 9. Fair Value of Financial Instruments Fair Value Measurements Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. GAAP establishes a fair value hierarchy that prioritizes the inputs and valuation techniques used to measure fair value into three levels in order to increase consistency and comparability in fair value measurements and disclosures. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for the fair value measurement are observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect the Bank s estimates about assumptions that market participants would use in pricing the asset or liability based on the best information available. The hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1 Level 2 Level 3 Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. Valuation on these instruments does not need a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market. Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the financial instrument. Unobservable inputs are significant to the fair value measurement. Unobservable inputs reflect the Bank s own assumptions about assumptions that market participants would use in pricing the asset or liability. The Bank maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. The inputs or methodologies used for valuating securities are not necessarily an indication of the risk associated with investing on these securities. The fair value of obligations that relates to the Bank s available-for-sale portfolio are based on quoted market prices for similar securities on an active market. These securities are classified as Level 2. 17

20 Disclosures About Fair Value of Financial Instruments The fair value estimates are made at a point in time based on the type of financial instruments and related relevant market information. Quoted market prices are used for financial instruments in which an active market exists. Fair value estimates are based on judgments regarding the amount and timing of estimated future cash flows, assumed discount rates reflecting varying degrees of risk, and other factors. Because of the uncertainty inherent in estimating fair values, these estimates may vary from the values that would have been used had a ready market for these financial instruments existed. The fair value estimates are based on outstanding balances without attempting to estimate the value of anticipated future business. Therefore, the estimated fair value may materially differ from the value that could actually be realized on a sale. These estimates are subjective in nature and involve uncertainties and matters of significant judgment. Changes in assumptions could affect these fair value estimates. The fair value estimates do not take into consideration the value of future business and the value of assets and liabilities that are not financial instruments. Therefore the estimated fair value may materially differ from the value that would actually be realized on a sale. The estimated fair value and carrying value of the Bank s financial instruments are presented below: December 31, 2012 December 31, 2011 Fair Carrying Fair Carrying Value Value Value Value Assets Cash and cash equivalents $ 5,724,237 $ 5,724,237 $ 16,117,106 $ 16,117,106 Restricted cash 300, , , ,000 Investments 22,492,670 22,492,670 14,185,836 14,185,836 Loans, net of allowance for loan losses 261,492, ,492, ,175, ,175,363 Interest receivable 1,676,277 1,676,277 2,666,357 2,666,357 Liabilities Deposits $ 151,559,544 $ 151,559,544 $ 122,230,048 $ 122,230,048 Interest payable 1,796,273 1,796, , ,351 Borrowing from affiliated entities 55,004,521 55,004, ,231, ,231,275 The estimated fair values of other financial instruments are determined as follows: Cash and Cash Equivalents The carrying amounts of these instruments are a reasonable estimate of their fair value because they are due on demand or have maturities of less than 90 days upon acquisition. Loans Portfolio consists of loans with variable rates and frequent repricing, as well as loans with shortterm maturities and therefore, their carrying value, net of allowance for loan losses is assumed to approximate their fair value. Deposits The fair value of fixed-maturity deposits, including certificates of deposit, is estimated based on discounted cash flows using rates currently offered for deposits of similar remaining maturities. 18

21 The value of long-term relationships with depositors is not taken into account in estimating the fair values disclosed. The carrying amount of the time deposits accounts at is a reasonable estimate of their fair value, given the fact that one year is the maximum term on most of the time deposits. Borrowing From Affiliates The carrying amount of borrowing from affiliates is a reasonable estimate of their fair value given the fact that these are due in less than one year. 10. Concentration of Credit Risk A concentration of credit risk exists within the Bank s loan portfolio since most of its business activity is concentrated in Latin America. The Bank s loans and investments outstanding at December 31, by country, are summarized as follows: Loans Brazil $ 1,053,455 $ 3,327,597 Chile 16,905,156 36,999,971 Colombia 46,837,197 51,266,588 Costa Rica 14,850,197 24,670,179 EI Salvador 2,838,777 2,675,065 Guatemala 11,056,966 7,441,180 Guyana 3,700,000 4,900,000 Mexico 14,927,953 43,241,220 Panama 35,954,312 16,998,008 Peru 117,039, ,078,843 Investments $ 265,163,544 $ 291,598,651 Brazil $ - $ 11,259,216 Chile - - Colombia - - Peru - 2,926,620 $ - $ 14,185,836 At, the Bank has loans to six customers aggregating approximately $170,000,000 and $167,900,000, respectively, which individually exceed 15% of the Bank s capital. The Bank, on a standalone basis, is not subject to limitations on loans to one borrower. 19

22 11. Regulatory Requirements Each bank operating pursuant to the Act s provisions is required to maintain certain minimum capital levels. The requirement call for maintaining an amount of capital of at least one-third of the institution s original common stock and paid in capital. At, the Bank was in compliance with this requirement. 12. Savings Plan The Bank has a defined contribution plan named Bancolombia Puerto Rico International, Inc. CODA Profit Sharing Plan in which the employees make contributions to their established accounts in a master trust sponsored by a financial institution. Any employee who meets certain service requirements is eligible for participation in the Plan. Members of the Plan can contribute up to $13,000 of their annual salaries of wages which is the maximum deferrable amount allowed by local law. The Bank s contribution to the plan is discretionary. The Bank generally contributes 50 cents for each dollar contributed by the employees up to the maximum allowed by local law. The Bank s contributions to the plan amounted to $19,582 for the year ended December 31, 2012 ( $15,328). In addition, the Bank paid $4,941 related to the administrative expenses of the defined contribution plan for the year ended December 31, 2012 ( $3,362). 20