BANCO ALIADO, S. A. AND SUBSIDIARIES (Panama, Republic of Panama)

Transcription

1 BANCO ALIADO, S. A. AND SUBSIDIARIES Consolidated Financial Statements As of June 30, 2017 (With Independent Auditors Report) (FREE ENGLISH LANGUAGE TRANSLATION FROM SPANISH VERSION)

2 Table of Contents Independent Auditors Report Consolidated Statement of Financial Position Consolidated Statement of Profit or Loss Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements

3 KPMG Apartado Postal B'1 6-'1 089 Panamá 5, República de Panamá Telefono: (507) Fax: (507) lnternet: INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder's of Banco Aliado, S. A. Opinion We have audited the consolidated financial statements of Banco Aliado, S. A. and Subsidiaries, (hereinafter "the Bank"), which comprise the consolidated statement of financial position as of June 30, 2017, the consolidated statements of profit or loss, other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information. ln our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Bank as of June 30, 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with lnternational Financial Reporting Standards (IFRS). Easrs for Opinion We conducted our audit in accordance with lnternational Standards on Auditing (lsas). Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Bank in accordance with lnternational Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the Republic of Panama and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professionaljudgment, were of most significance in our audit of the consolidated financial statements of the current year. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. KPI\,4G. una sociedad civil panameña, y firma de la red de fìrmas miembros independiente de KPlVlG. afìliadas a KPlvlc lnternat onal CooDerative ("KPl\ G lnternational"). una entidad suiza

4 Allowance for loan losses See Notes 3(g), 4 and 9 to the consolidated financial statements The key audit matter The allowance for loan losses is considered one of the most significant issues because it requires the application of judgments and the use of subjective assumptions by management. The gross loan portfolio represents 70% of the Bank's total assets. The allowance for loan losses addresses individually and collectively assessed loans. The individual allowance for impairment of individually assessed loans is based on management judgments and estimates when an impairment event has occurred and the present value of the expected cash flows are uncertain. This is a challenge from the audit perspective in relation to the lending business, because the projected or expected cash flows include time estimates and cash flows arising from the future sale of the assets pledged to secure the loans. The collective allowance for impairment of collective assessed loan is determined according to the grouping of loans with similar credit risk characteristics. The grouping uses an estimate of the probability of default and the potential loss based on such default to determine the collective allowance. This is a challenge from an audit perspective due to the use of complex models to perform these calculations and the application of management judgment. How the matter was addressed in our audit Our procedures in this area included: Control testing on the calculation of delinquencies, internal risk ratings of customers, review of customer risk and models and methodologies used. For a sample of corporate and commercial loans with individual allowance, we examined the credit files of those customers and review the evaluation of allowance estimates prepared by management. For the individual allowance model, an examination of the cash flow calculations taking into account the values of the guarantees with reference to valuations developed by specialists and the contractual payment agreements of customers. Tests of the key inputs used in the calculation of the allowance for impairment for the collective models. We considered the risk rating for commercial loans and delinquency profiles for the different consumer loan products. Assessment of collective allowance models and recalculation of that allowance. Likewise, we tested the allowance based on the country risk model and evaluated the inputs used. Assessment of management's judgment on assumptions regarding current economic conditions and credit conditions that may change the actual level of historical inherent losses suggested, based on our experience and industry knowledge. 2

5 Fair value of investment in securities See Notes 3(e), 4 and 8 to the consolidated financial statements The key audit matter Investments in securities available-for-sale represent 10% of the Bank total assets. The Bank uses external services to obtain the majority of the prices of these investments in securities and also uses internal valuation methodologies for some investment securities when a price provided by external pricing services is not available. The valuation of these investments in securities using internal valuation models involves judgments by management and the use of some inputs that are not available in active markets. The valuation of the investments in securities whose prices are provided by external entities requires additional efforts of the auditors for their validation. Judgment involved in estimating the fair value of an investment in securities when some valuation inputs are not observable is significant. How the matter was addressed in our audit Our procedures in this area included: Assessment of key controls over the process for identification, measurement and management of valuation risk, and assessment of the methodologies, inputs and assumptions used by the Bank in determination of fair value. Valuation tests of level 1 and 2 instruments through comparison of the fair values applied by the Bank to public and observable market data. Assessment of the fair value models and inputs used in the valuation of level 3 instruments; we compared observable market inputs against independent sources and external market data. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Bank s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Bank s financial reporting process. 3

6 Auditors Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause the Bank to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Bank to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. 4

7 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditors report is Gastón G González F. KPMG (SIGNED) Panama, Republic of Panama August 24,

8 (Panama, Republic of Panamá) Consolidated Statement of Financial Position June (Expressed in Balboas) Assets Note Cash and cash equivalents 2,198,428 2,688,740 Deposits with banks: Demand deposits - local 18,735,922 25,500,052 Demand deposits - foreign 3,104,903 3,894,848 Time deposits - local 192,457, ,340,147 Time deposits - foreign 171,381, ,551,000 Total deposits with banks 385,679, ,286,047 Total cash, cash equivalents and deposits with banks 7 387,877, ,974,787 Securities available for sale 8 251,177, ,730,592 Held-to-maturity securities 8 1,000,000 1,500,000 Loans: Internal sector 1,489,273,960 1,365,277,566 External sector 315,338, ,890,857 1,804,612,606 1,704,168,423 Less: Allowance for loan losses 10,808,476 9,602,499 Unearned and discounted interest and commissions 5,396,830 4,651,371 Loans, net 9, 23 1,788,407,300 1,689,914,553 Property, furniture, equipment and improvements, net 10 15,435,466 15,128,125 Accrued interests receivable 23 9,430,092 8,620,174 Assets held for sale 11 1,600,795 2,125,795 Prepaid expenses 7,139,968 9,191,674 Customers liabilities under acceptances 85,319,293 49,190,814 Deferred income tax 6 2,712,396 2,315,781 Various debtors - insurance operations 6,251,273 23,283,807 Other assets 12 4,046,176 4,869,594 Total other assets 116,499,993 99,597,639 Total assets 2,560,397,716 2,515,845,696 The consolidated statement of financial position should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 6

9 Liabilities and equity Note Liabilities: Deposits from customers: Demand deposits - local 97,763, ,325,465 Demand deposits - foreign 27,597,556 32,445,257 Saving deposits 20,990,432 22,469,325 Time deposits - local 1,196,137,027 1,186,243,906 Time deposits - foreign 299,333, ,761,949 Total deposits from customers 23 1,641,821,649 1,627,245,902 Borrowings ,230, ,850,761 Corporate bonds payable 14, ,602, ,630,993 Cashier's and certified checks 4,866,777 4,181,195 Accrued interests payable 23 18,420,057 18,115,438 Acceptances outstanding 85,319,293 49,190,814 Deferred income tax 6 300, ,435 Insurance operations 13,103,842 31,248,418 Other liabilities 15 31,005,821 25,644,748 Total other liabilities 153,016, ,634,048 Total liabilities 2,303,671,327 2,277,361,704 Equity: Common shares 16 70,000,000 70,000,000 Preferred shares 17 30,000,000 30,000,000 Dynamic regulatory provision 27 26,055,060 24,641,042 Excess regulatory credit reserve 27 1,188,173 1,553,661 Regulatory insurance reserve , ,504 Valuations of investments in securities 1,502,277 (121,602) Retained earnings 127,276, ,952,387 Total equity 256,726, ,483,992 Commitments and contingencies 21, 23 Total liabilities and equity 2,560,397,716 2,515,845,696 7

10 BANCO ALIADO, S. A. AND SUBISIDIARIES Consolidated Statement of Profit or Loss For the year ended June 30, 2017 (Expressed in Balboas) Note Interest and commission income: Interest on: Loans ,589, ,596,866 Deposits with banks 2,212,647 1,184,966 Securities 13,007,184 13,052,854 Loans commissions 6,086,500 4,901,413 Total interest and commission income 132,896, ,736,099 Interest expenses: Deposits 60,231,010 56,681,886 Borrowings 11,158,656 8,465,180 Bonds 11,927,864 13,663,901 Total interest expenses 23 83,317,530 78,810,967 Net interest and commission income, before provisions 49,578,486 44,925,132 Provision (reversal) for loan losses 9 2,823,851 (293,414) Impairment on investment securities 0 300,000 Net interest and commission income, after provisions 46,754,635 44,918,546 Income (expenses) from banking services and others, net: Commissions earned 18, 23 1,890,699 2,053,358 Commissions expenses 23 (2,471,401) (2,475,489) Gain on sales of securities 8 113,940 69,567 Provision for assets held for sale 11 (525,000) (1,000,000) Loss by bail compliance (2,212,810) 0 Insurance premium, net 2,256,585 1,775,299 Other income 19 2,260,068 1,305,945 Total income from banking services and others, net 1,312,081 1,728,680 General and administrative expenses: Salaries and other employee costs 23 9,810,829 9,503,147 Professional fees 1,417,752 1,185,439 Advertising and promotion 344, ,417 Rental 21, , ,939 Flight and transportation 190, ,690 Office supplies 193, ,751 Taxes 1,962,126 2,168,709 Depreciation and amortization 10 1,301, ,940 Others 20 5,782,648 5,741,233 Total general and administrative expenses 21,149,576 20,720,265 Net income before income tax 26,917,140 25,926,961 Income tax 6 (3,877,534) (3,551,149) Net income 23,039,606 22,375,812 The consolidated statement of profit or loss should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 8

11 Consolidated Statement of Comprehensive Income For the year ended June 30, 2017 (Expressed in Balboas) Note Net income 23,039,606 22,375,812 Other comprehensive income (loss): Items that are or may be reclassified to the consolidated statement of profit or loss: Reserve for valuation on investement securities: Net changes in fair value of securities available for sale 1,737,819 (2,425,715) Impairment on securities transferred to profit or loss 0 300,000 Net realized gain transferred to profit or loss (113,940) (69,567) Total other comprehensive income (loss) of the year 1,623,879 (2,195,282) Total comprehensive income of the year 24,663,485 20,180,530 The consolidated statement of comprehensive income should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 9

12 Consolidated Statement of Changes in Equity For the year ended June 30, 2017 (Expressed in Balboas) Excess Dynamic regulatory Regulatory Valuations Common Preferred regulatory credit insurance of investment Retained Note Shares shares provision reserve reserve in securities earnings Total Balance at June 30, ,000,000 30,000,000 23,146, ,596 2,073,680 95,604, ,123,684 Net income ,375,812 22,375,812 Other comprehensive income (loss): Net changes in fair value of securities available for sale (2,425,715) 0 (2,425,715) Impairment on securities transferred to profit or loss , ,000 Net realized gain transferred to profit or loss (69,567) 0 (69,567) Total other comprehensive loss (2,195,282) 0 (2,195,282) Total comprehensive income (loss) of the year (2,195,282) 22,375,812 20,180,530 Other equity transactions: Excess regulatory credit reserve ,553, (1,553,661) 0 Dynamic regulatory provision 0 0 1,495, (1,495,036) 0 Regulatory insurance reserve ,908 0 (158,908) 0 Total other equity transactions 0 0 1,495,036 1,553, ,908 0 (3,207,605) 0 Transactions attributable to shareholders: Dividends paid from preferred shares (2,287,394) (2,287,394) Complementary tax (532,828) (532,828) Total transactions attributable to shareholders (2,820,222) (2,820,222) Balance at June 30, ,000,000 30,000,000 24,641,042 1,553, ,504 (121,602) 111,952, ,483,992 Net income ,039,606 23,039,606 Other comprehensive income (loss): Net changes in fair value of securities available for sale ,737, ,737,819 Net realized gain transferred to profit or loss (113,940) 0 (113,940) Total other comprehensive income ,623, ,623,879 Total comprehensive income of the year ,623,879 23,039,606 24,663,485 Other equity transactions: Excess regulatory credit reserve (365,488) ,488 0 Dynamic regulatory provision 0 0 1,414, (1,414,018) 0 Regulatory insurance reserve ,047 0 (246,047) 0 Total other equity transactions 0 0 1,414,018 (365,488) 246,047 0 (1,294,577) 0 Transactions attributable to shareholders: Dividends paid from common shares (4,000,000) (4,000,000) Dividends paid from preferred shares (2,281,250) (2,281,250) Complementary tax (139,838) (139,838) Total transactions attributable to shareholders (6,421,088) (6,421,088) Balance at June 30, ,000,000 30,000,000 26,055,060 1,188, ,551 1,502, ,276, ,726, ,782,803 The consolidated statement of changes in equity should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 10

13 Consolidated Statement of Cash Flows For the year ended June 30, 2017 (Expressed in Balboas) Nota Operating activities: Net income 23,039,606 22,375,812 Adjustments to reconcile net income to net cash from operating activities: Provision (reversal) for loan losses 2,823,851 (293,414) Impairment on investment securities 0 300,000 Provision for assets held for sale 525,000 1,000,000 Depreciation and amortization 1,301, ,940 Gain on sales of securities (113,940) (69,567) Disposals of furniture and equipment 2,178 0 Deferred income tax 3,877,534 3,551,149 Net interest and commission income (49,578,486) (44,925,132) Changes in operating assets and liabilities: Time deposits with banks with original maturities greater than 3 months (92,393) (7,565,147) Loans (101,316,598) (39,861,887) Deposits from customers 14,575,747 83,489,453 Other assets 23,898,414 (4,330,527) Other liabilities (16,324,514) 9,220,828 Cash generated from operation: Interest received 132,086, ,043,521 Interest paid (83,012,911) (77,729,318) Income tax paid (3,990,756) (3,266,723) Net cash flows from operating activities (52,299,578) 65,918,988 Investment activities: Purchases of securities available for sale (78,988,242) (39,038,277) Sale of securities available for sale 14,663,940 3,539,465 Redemptions and maturities of securities available for sale 74,615,549 40,422,374 Purchases of held-to-maturity securities 0 (500,000) Redemptions of held-to-maturity securities 500,000 0 Acquisition of property and equipments (1,611,111) (2,655,910) Cash flows from investing activities 9,180,136 1,767,652 Financing activities: Borrowings and corporate bonds paid (324,430,616) (330,916,970) Borrowings and corporate bonds payable 311,781, ,963,672 Dividends paid from common shares (4,000,000) 0 Dividends paid from preferred shares (2,281,250) (2,287,394) Complementary tax (139,838) (532,828) Cash flows from financing activities (19,069,945) (34,773,520) Net (decrease) increase in cash and cash equivalents (62,189,387) 32,913,120 Cash and cash equivalents at beginning of the year 441,909, ,996,520 Cash and cash equivalents at end of the year 7 379,720, ,909,640 The consolidated statement of cash flows should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 11

14 June 30, 2017 (Expressed in Balboas) (1) General Information Banco Aliado, S. A. (the Bank ), started operations on July 14, 1992 in the Republic of Panama, by means of Resolution No.9-92 dated May 7, 1992 and operates under a general banking license issued by the Superintendence of Banks of Panama, which allows to provide banking services in Panama or abroad. The Bank is a 100%-owned subsidiary of Grupo Aliado, S. A. The Bank owns the following subsidiaries: Activity Country of incorporation Controlling interest Aliado Leasing, S. A. Financial Leasing Panama 100% 100% Aliado Factoring, S. A. Factoring business Panama 100% 100% Financiera Finacredit, S. A. Lending personal loans Panama 100% 100% Aliado Seguros, S. A. Insurance business in general, life and security. Panama 100% 100% Aliado Leasing, S. A., Company that started operations on March, 2004 and dedicates to financial leasing activities; Aliado Factoring, S. A., entity that started operations on August, 2004 and dedicates to factoring activities; Financiera Finacredit, S. A., (before Financiera Davivienda, S. A.) acquired entity on July, 2004 dedicates to the activity of lending loans; Aliado Seguros, S. A., company that started operations on 2011, and holds an insurance license to operate in the general branches, life and security. Banco Aliado, S. A. and Subsidiaries shall be hereinafter jointly referred to as the Bank. Banking operations in the Republic of Panama, are regulated and supervised by the Superintendence of Banks of the Republic of Panama, pursuant to the regulations established in Executive Decree No.52 of April 30, 2008 and the standards that develop it. Insurance and reinsurance operations in Panama are regulated by the Superintendence of Insurance and Reinsurance of Panama pursuant to the regulations established by Insurance Law No.12 of April 3, 2012 and Reinsurance Law No.63 of 19 September The main office of the Bank is located in building Banco Aliado, S. A., Calle 50 y 56, Urbanización Obarrio, Panamá, Republic of Panama. 12

15 (2) Basis of preparation (a) Statement of Compliance Banco Aliado, S. A. and Subsidiaries consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). These consolidated financial statements were authorized by the Board of Directors for its issuance on August 24, (b) Basis of Measurement These consolidated financial statements have been prepared on the historical cost basis or amortized cost, except for financial assets and liabilities at fair value, securities available for sale, which are measured at fair value, the asset held for sale, which are measured at the lower of the book value or the fair value less costs of sales. The Bank initially recognizes the loans and receivables and deposits on the date they originate. All other financial assets are recognize initially on its settlement date in which the Bank undertakes to buy or sell an instrument. (c) Functional and Presentation Currency The consolidated financial statements are presented in balboas (B/.), the monetary unit of the Republic of Panama, which is at par and freely exchangeable with the United States dollar (US$ or US dollar). The Republic of Panama does not issue its own paper currency, and instead, the US dollar of the United States of America is used as legal tender, and it is considered as the Bank functional currency. (3) Summary of Significant Accounting Policies The accounting policies detailed below have been consistently applied by the Bank for all the periods presented in these consolidated financial statements. (a) Basis of Consolidation (a.1) Subsidiaries The Bank has control on a subsidiary when is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to use its power to affect its returns. The financial statements of subsidiaries described in Note 1, are included in the consolidated financial statements from the date on which it obtains control until the date when control ceases. Income and expenses of subsidiaries acquired or disposed during the year are included in the consolidated statement of profit or loss from the effective date of the acquisition or until the effective date of disposal, as appropriate. (a.2) Separate Vehicles The Bank manages and administers assets held in trust funds. The financials statements of these entities do not form part of these consolidated financial statements except when the Bank has control over the entity. 13

16 (3) Summary of Significant Accounting Policies, continued (a.3) Structured Entities A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, for example when any voting rights relate to administrative tasks only, and key activities are directed by contractual agreement. In assessing whether the Bank has control over such investees in which it has an interest, and therefore determine whether the structured entity is consolidated, several factors of the investee are evaluated, such as the purpose and design of the investee; its practical ability to direct relevant activities of the investee; the nature of its relationship with the investee; and the size of its exposure to the variability of returns of the investee. The financials statements of these structured entities do not form part of these consolidated financial statements, except when the Bank has control over the entity. (a.4) Transactions Eliminated on Consolidation All assets, liabilities, equity, income, expenses and cash flows relating to transactions between subsidiaries of the Bank are eliminated in preparing the consolidated financial statements. (b) Foreign Currency Foreign currency transactions are recorded at the exchange rates prevailing at the date of the transaction. Assets and liabilities held in foreign currency are translated into the functional currency at the rate prevailing exchange rate at the reporting date. Gains or losses from foreign currency translation are reflected in the accounts of other income or other expenses in the consolidated statement of profit or loss. (c) Fair Value Measurement Fair value is 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, or in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. When applicable, the Bank measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is considered as active, if the transactions of these assets or liabilities take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Bank uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. 14

17 (3) Summary of Significant Accounting Policies, continued The best evidence of the fair value is a quoted market price in an active market. In the case that the market for a financial instrument is not considered active, a valuation technique is used. The decision of whether a market is active may include, but is not limited to, consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the magnitude of offers and sales. In markets that are not active, the guarantee to get that the price of the transaction provides evidence of fair value or to determine the adjustments to transaction prices that are necessary to measure the fair value of the instrument, requires additional work during the valuation process. The fair value of a demand deposit is not lower than the amount payable as required, discounted since the first date payment might be required. The Bank recognized transfers between levels of the fair value hierarchy at the end of the period during which the change occurred. (d) (e) Cash and Cash Equivalents For purposes of the consolidated statement of cash flows, cash equivalents include cash and cash equivalents, demand deposits and time deposits with banks with original maturities of three months or less. Investment Securities Investment securities are initially measured at fair value plus, incremental transaction costs and subsequently accounted for depending on the classifications maintained in accordance with the characteristics of the instrument and the intention for which their acquisition was determined. The classification used by the Bank is detailed as follows: (e.1) Securities available for sale This category includes securities acquired with the intention of holding them for an undetermined period of time, which may be sold in response to needs for liquidity, changes in interest rates, currency exchange rates or market prices of stocks. These investments are measured at fair value and changes in value are recognized directly in the consolidated statement of comprehensive income using an valuation reserve account until they are sold or redeemed (derecognition) or has been determined that a security has been impaired; in this case the cumulative gain or loss previously recognized in the consolidated statement of comprehensive income are reclassified to the results of operations in the consolidated statement of profit or loss. Impairment of securities available for sale The Bank reviews at each reporting date, if there is any objective evidence of impairment in investment securities. For equity investments, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment. 15

18 (3) Summary of Significant Accounting Policies, continued If there is an objective evidence of impairment for financial assets available for sale, cumulative losses are removed from equity and recognized in the consolidated statement of profit or loss. If in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase is objectively related to an event occurring after the impairment loss was recognized in the consolidated statement of profit or loss, the impairment loss will be reverse through the consolidated statement of profit or loss. Unquoted equity securities whose fair value cannot be measured reliably are carried at cost. (e.2) Held to maturity securities The held to maturity securities are financial assets no derivatives with fixed payments or determinable with fixed maturities, that the Bank has the intention and ability to hold to maturity. The held to maturity securities Bank property are mainly comprised of debt instruments, which are presented on the amortized cost basis using the effective interest rate method. (f) Loans Loans receivable are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are generally originated by to provide funds to a debtor as a loan. Loans are stated at their principal outstanding amount pending collection, less insurance premiums, unearned interest and commissions and the allowance for loan losses. Unearned interest and commissions are recognized as income through the duration of the loan by using the effective interest rate method. Finance leases are mainly comprised of vehicles lease arrangements, which are reported as part of the loan portfolio at their present value. The difference between the gross amount receivable and the present value of the receivable amount, is recorded as unearned interests, which is amortized to operating income by using a method that shows a periodical return rate. Factoring consists of the purchase of invoices, which are presented at their principal amount of collection. Discounted bills receivable, net of amounts retained and interest collected in advance are presented as part of the loan portfolio. (g) Allowance for Loan Losses At each reporting date, the Bank reviews loan or loan portfolio, to determine whether there is any indication that those assets have suffered an impairment loss. The amount of loan losses determined during the period is recognized as a provision expense in the consolidated statement of profit or loss and increases the allowance for loan losses. The allowance is presented deducted from loans receivable in the consolidated statement of financial position. When a loan is determined to be uncollectible, the unrecoverable amount is charged to the allowance account referred above. Subsequent recoveries of loans previously charged-off as uncollectible are credited to the allowance account. 16

19 (3) Summary of Significant Accounting Policies, continued Impairment losses are determined through two methods which indicate if there is any objective evidence of impairment, i.e. individually, for loans individually significant and collectively, for loans that are not individually significant. - Individually Assessed Loans Impairment losses on individually assessed loans are determined based on an assessment of each particular exposure. If there is not objective evidence of impairment for a significant individual loan, this is included in a group of loans with similar characteristics and impairment is collectively assessed. Impairment loss is calculated comparing the present value of expected future cash flows, discounted at the original effective interest rate of the loan, versus its current carrying value and the amount of any loss is recognized as an allowance for loan losses in the consolidated statement of profit or loss. The carrying value of impaired loans is decreased through the use of the allowance for loan losses account. - Collectively Assessed Loans For purposes of a collective assessment for impairment, the Bank principally uses statistical methods with a formula approach based on historical loss rate experience, the opportunity of recoveries and the actual loss incurred and make an adjustment if current economic and credit conditions are such that it is likely that the actual losses are higher or lower than those suggested by historical trends. Roll rates, loss rates and the expected future recoveries terms are regularly benchmarked against actual loss experience, in order to assure that they are still appropriate. Reversal due to impairment If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed by decreasing the allowance for loan losses. The amount of any reversal is recognized in the consolidated statement of profit or loss. Renegotiated or Restructured Loans Are loans that due to difficulties in the repayment ability of the debtor, a variation on the original terms of the loan (balance, term, payment plan, fee or guarantees) has been formally documented, and the result of the evaluation of its current condition does not allow them to be reclassified as normal. These loans once, are restructured should be maintained for a period of six (6) months, in the risk classification it was classified before the loan was restructured or at a higher risk, regardless of any improvement in its condition of the debtor subsequent restructuring. (h) Property, Furniture, Equipment and Improvements Property, furniture, equipment and improvements comprise buildings, furniture and improvements used by branches and offices. All properties, furnitures, equipments and improvements are presented at their historical cost, less accumulated depreciation and amortization. The historical cost includes the expense directly attributed to the purchase of goods. 17

20 (3) Summary of Significant Accounting Policies, continued Subsequent costs are included in the carrying amount of the asset or recognized as a separate asset, as applicable, only when it is probable that the Bank will obtain the future economic benefits associated with the asset and the cost of the asset can be measured reliably. Costs for maintenance and repairs are charged directly to expenses when incurred. Depreciation expenses of properties, furniture and equipment and amortization of improvements are recognized in current operations using the straight-line method considering the useful life of the assets. Lands is not depreciated. The useful life of the assets is summarized as follows: - Buildings 30 years - Technological Equipment 5 years - Vehicles 5-7 years - Furniture and office equipment 5-10 years - Property improvements 5-20 years The useful life is reviewed and adjusted as appropriate, at each date of the report. Properties and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying amount of an asset is immediately reduced to its recoverable value if the carrying amount of the asset is greater than the estimated recoverable amount. The recoverable amount is the higher of the fair value of the asset less cost to sell and value in use. The useful life and residual value of the assets is reviewed, and adjusted if appropriate, on each date of the consolidated statement of financial position. (i) Assets held for sale Non-current assets, or disposal group comprising assets, including property held for sale, which are expected to be recovered mainly through sales rather than being recovered through their continuous use, are classified as held for sale. Immediately before being classified as held for sale, the assets or components of a group of assets to be disposed, of shall be remeasured in accordance with the Bank's accounting policies. From this classification, they are recognized at the lower of their carrying amount and their fair value less costs to sell. An impairment loss will be recognized due to reductions in the initial value of the assets. Impairment losses are recognized in the consolidated statement of profit or loss. (j) Deposits, Borrowings and Corporate Bonds Payable These instruments result from the funds received by the Bank, which are initially measured at fair value, net of transaction costs. Subsequently, they are measured at amortized cost, using the effective interest rate method. The Bank classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. 18

21 (3) Summary of Significant Accounting Policies, continued (k) Financial Guarantees The financial guarantees issued are contracts that require the Bank to make specific payments on behalf of its customers, to reimburse the beneficiary of the guarantee, in case the client does not meet the payment on the agreed date, according to the terms and conditions of the contract. Liabilities for financial Guarantees are initially recognized at fair value; this initial value is amortized for the duration of the financial guarantee. Subsequently, the guarantee is recorded at the higher of the amortized amount and the present value of expected future payments. The financial guarantees are included in the consolidated statement of financial position under other liabilities. (l) Interest income and expenses Interest income and expenses are usually recognized in the consolidated statement of profit or loss for any financial instrument presented at amortized cost using the effective interest rate method. The effective interest rate is the rate that exactly discounts future cash flows receivable or payable estimated over the expected life of the financial instrument with the net carrying amount of the financial asset or liability. The calculation includes all commissions paid or received between the parties, transaction costs and any premium or discount. (m) Income from Fees and Commissions Usually, fees and commissions on short-term loans, letters of credit and other bank services are recognized as income under the cash basis due to their short-term maturity. Income recognized the cash basis does not significantly differ from income recognized under the accrual method. Commissions on medium and long-term transactions are deferred and amortized to income using the effective interest rate method over the life of the loan. Loan fees are included as commission income on loans in the consolidated statement of profit or loss. (n) (o) Dividend income Dividends are recognized in the consolidated statement of profit or loss when the Bank's right to receive the dividends is established. Recognition of lease income Lease income is recognized at the time the lessee is entitled to use the leased asset. Leases will be perfected when the following elements occur: consent of the contractors; true object that is subject of the contract; cause of the obligation to be established; and the contract is in writing 19

22 (3) Summary of Significant Accounting Policies, continued (p) Insurance operations Insurance arrangements correspond to those arrangements whereby the Bank assumes the significant insurance risk of a counterparty (the insurer), committing to compensate the insurer or other beneficiary when an uncertain future event (the insured event) adversely affects the insurer or beneficiary. By general rule, the group determines if the arrangement has a significant insurance risk by comparing benefits paid to benefits to be paid if the insured event does not occur. An insurance arrangement might also transfer financial risks. Insurance arrangements are maintained for the rest of their effective term, notwithstanding if the insurance risk significantly decreases, until all the risks and obligations terminate or expire. During the normal course of operations, the Bank has entered into reinsurance arrangements with reinsurance companies. The ceded reinsurance payable corresponds to the portion of premiums which is transferred to third parties by the participation in the risks; is the way to share the risks. Participation is agreed upon in reinsurance contracts; however, reinsurance contracts do not release the Bank from its contracted obligations, retaining the liability to the insured, policy holders or beneficiaries. The reinsurance receivable represents the balance of the amounts receivable from reinsurance companies by virtue of claims occurred, whereby it assumes the indemnity in favor of the insurer, and for the reinsurances accepted on behalf of other insurance companies. The amounts expected to be recovered from reinsurance companies are recognized in conformity with the clauses included in the arrangements entered into by both parties. The commissions received by the reinsurance ceded are recognized as income to the extent they are accrued, in proportion to the acquisition costs, the difference is recognized in the income at the beginning of the coverage. Income and expenses from insurance operations are recorded as follows: Premiums receivable are recognized when the insurance policy is issued. Income from insurance premium corresponding to the period contracted in the policy is recognized upon the inception of the hedge without considering the payment status of the premium. Hedging begins with the acceptance of the insurance request by the client and payment of the premium, which may be fractioned or deferred when, paid in one sole portion. Expenses from reinsurance and commissions and other income and expenses related to the policy issuance are recognized upon recognition of income from premiums. (q) Trust Operations Assets held in trust or fiduciary function are not considered part of the Bank s assets, and therefore such assets and their corresponding income are not included in these consolidated financial statements. The Bank shall administrate the trust funds in conformity with contractual arrangements and separately from its own equity. 20

23 (3) Summary of Significant Accounting Policies, continued The Bank charges a commission for administrating the trust funds, which is paid by the trustees on the basis of the amount maintained in the trust funds or as agreed between the parties. These commissions are recognized in income according to the terms of the trust agreements whether monthly, quarterly or annually on an accrual basis. (r) Share Capital The Bank classifies a capital instrument as liability or equity according to the substance and contractual terms of the instrument. An equity instrument is any contract that shows a residual interest in the assets of an entity, after deducting all its liabilities. Common shares are issued at face value with no costs or expenses of any kind because they are privately issued. Preferred shares are classified as part of their equity, because the Bank has full discretion in its redemption and dividend declaration. The payment of dividends is deducted from undistributed profits. (s) Income Tax Estimated income tax is the income tax payable on the taxable income for the year, using tax rates enacted at the consolidated statement of financial position date, and any adjustment to tax from previous years. Deferred income tax represents the amount of income tax payable and/or receivable in future years resulting from temporary differences between carrying values of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes, measured at the tax rates that are expected to be applied to the temporary differences when they are reversed, based on the laws that have been enacted or substantively enacted at the reporting date. These temporary differences are expected to be reversed in future dates. If it is determined that the deferred tax may not be realized be in future years, it would be totally or partially reduced. (t) (u) Segment Information A business segment is a component of the Bank, whose operating results are reviewed on a regular basis by Management to make decisions about resources allocated to each segment and assess its performance, and for which financial information is available for this purpose. Comparative Information Certain comparative information as of June 30, 2016 has been reclassified to conform its presentation to the consolidated financial statements as of June 30, (v) New International Financial Reporting Standards (IFRS) and interpretations not yet adopted At the date of the consolidated financial statements are standards, amendments and interpretations which are not effective for the period ended on June 30, 2017 and therefore; have not been applied in preparing of these consolidated financial statements. Among the changes we have: 21