BANCO DE BOGOTÁ AND SUBORDINATES Notes to the Consolidated Financial Statements

Transcription

1 At December 31 and June 30, 2013 (In Millions of Colombian Pesos, Except the Exchange Rate) (1) Reporting Entity Banco de Bogotá (the Bank) is a private entity headquartered in the city of Bogotá D.C. It was incorporated through Public Instrument No. 1923, drawn up and notarized on November 15, 1870 at the Office of Second Notary Public in Bogotá D.C. The Colombian Superintendency of Finance definitively renewed the Bank s operating license through Resolution No issued on September 24, The duration of the Bank, as established in its by-laws, extends to June 30, However, that term may be reduced by dissolution or increased through extension prior to that date. The business of the Bank is to perform all operations and to enter into all contracts legally permitted for commercial banks, subject to the requirements and limitations existing under Colombian law. The Bank was operating on December 31, 2013 with ten thousand two hundred twenty-six (10,226) employees on contract, four hundred thirty-eight (438) working under civil apprenticeship agreements, one thousand two hundred one (1,201) temporary staff members and one thousand seventy-one (1,071) employees contracted with Megalínea. In addition, through outsourcing with specialized companies, the Bank also employs a total of two thousand seven hundred forty-five (2,745) individuals through five hundred ninety-six (596) offices, five (5) corporate service centers (CSC), four (4) small business service centers, fifty (50) collection and payment offices, eighteen (18) business advisory offices, ninety-four (94) non-own code bank branch extension offices, fifteen (15) bank extension offices, ten (10) premium offices, six (6) centers specialized in home mortgages, one thousand seven hundred three (1,703) banking correspondents, thirteen (13) Servicajas, two (2) customer-only service offices, seven (7) payroll installment lending offices with special services, twenty (20) payroll installment lending centers, six (6) core offices and two (2) agencies abroad, one in New York City and the other in Miami, and one (1) bank branch in Panama City that has a local bank operating license. These consolidated financial statements include the following companies. Almacenes Generales de Depósito ALMAVIVA S. A. is involved primarily in the deposit, preservation and custody, management and distribution, purchase and sale of merchandise and products of domestic and foreign origin for its clients. The company also issues warehouse receipts and collateral certificates or warehouse liens. ALMAVIVA S. A. consolidates with its subordinates Almaviva Global Cargo, Comercializadora Internacional S. A., South Logistic S. A. and Zona Franca S.A. Fiduciaria Bogotá S.A. enters into mercantile trust and agency trust agreements without transfer of ownership, as provided for by law. Its primary business is to acquire, dispose of, encumber and manage movable assets and real estate, and to invest as a debtor or creditor in all types of lending operations. Corporación Financiera Colombiana S.A. raises and allocates capital to promote the creation, reorganization, merger, transformation and expansion of all types of companies, to acquire ownership interest in those companies, and to encourage third parties to do so. It also extends medium and longterm financing to such firms and offers them specialized financial services that contribute to their development. These companies do not include those subject to control and supervision by The Colombian Superintendency of Finance, with the exception of financial service firms and lending institutions. Corporación Financiera Colombiana S.A. consolidates with a number of financial subordinates; namely, Leasing Corficolombiana S.A., Banco Corficolombiana (Panama) S.A. (a finance company outside the country), Fiduciaria Corficolombiana S.A. and real-sector subordinates Organización Pajonales S.A., Hoteles Estelar de Colombia S.A., Gas Comprimido del Perú S.A. (a company outside the country), Valora S.A., Proyectos de Infraestructura S.A., Epiandes S.A., Promotora y Comercializadora Turística Santamar S.A., Colombiana de Licitaciones y Concesiones Ltda., Tejidos Sintéticos de Colombia S.A., Plantaciones Unipalma de los Llanos S. A., Pizano S.A. (currently being restructured), Estudios y

2 2 Proyectos del Sol S.A. (formerly Inversora en Aeropuertos S.A.), Industrias Lehner S.A., Proyectos de Ingeniería y Desarrollos S.A.S., CFC Gas Holding S.A.S., CFC Private Equity Holdings S.A.S. and CFC Energy Holding S.A.S. The financial sector shareholders of Corporación Financiera Colombiana S.A. signed an agreement giving Banco de Bogotá control of the company, inasmuch as it is the largest shareholder, in order to consolidate the financial statements pursuant to External Circular 100/1995, issued by The Colombian Superintendency of Finance, and Law 222/2005. Sociedad Administradora de Pensiones y Cesantías Porvenir S. A. was incorporated on October 22, 1991 and is headquartered in Bogotá. Its business is to administer and manage the pension and severance funds authorized by law. According to legal allowances on the matter, both these types of funds are third-party portfolios separate from the portfolio of the company managing them. Porvenir consolidates its financial statements with Gestión y Contacto S.A. Ninety-nine point ninety-nine percent (99.99%) of AFP Horizonte Pensiones y Cesantías S.A. was acquired on April 18, This ownership interest includes a total of 2,746,523,738 shares acquired through Porvenir, equivalent to sixty-four point twenty-eight percent (64.28%), 715,698,470 shares through Banco de Bogotá, equivalent to sixteen point seventy five percent (16.75%) 504,901,995 shares through Banco de Occidente, equivalent to eleven point eight-two percent (11.82%), and 305,168,051 shares through Grupo Aval, equivalent to seven point fourteen percent (7.14%) of the total number of outstanding shares. The following is the balance sheet of AFP Horizonte Pensiones y Cesantías S.A. used to determine goodwill on the date of acquisition: AFP HORIZONTE PENSIONES Y CESANTÍAS S.A. General Balance Sheet Quarter ended March 31, 2013 (In Millions of Colombian Pesos) March 31 Assets $ 560,657 Cash 168,707 Investments 312,801 Accounts receivable 22,208 Property, plant and equipment Net 12,636 Other assets 44,305 Liabilities $ 108,664 Operations with financial instruments. Net 3 Accounts payable 35,643 Other liabilities 3,408 Estimated liabilities and provisions 69,610 Stockholders Equity $ 451,993 Capital stock 42,740 Reserves 367,720 Surplus 20,668 Earnings for the period 20,865

3 3 The merger of AFP Horizonte S.A. by absorption was completed on December 31, 2013 thereby consolidating Porvenir as the largest pension and severance fund manager in the country, given the resources it manages and the number of affiliates. Casa de Bolsa S.A. Sociedad Comisionista de Bolsa (formerly Valores de Occidente Sociedad Comisionista de Bolsa S.A.) is a private company established through Public Instrument No drawn up on July 22, Under a brokerage agreement, it offers financial services that include the purchase and sale of securities listed on the stock exchange, securities and mutual fund management, proprietary trading, securities brokerage and consulting on capital markets, under the terms and conditions determined by the Board of Directors of Banco de la República (the Central Bank of Colombia). It was authorized by The Colombian Superintendency of Finance to conduct its business pursuant to Resolution No issued on August 13, The duration of the company is up to Banco de Bogotá is invested directly in this subordinate entity, with twenty-two point seventy-nine percent (22.79%) ownership interest, and indirectly through Corporación Financiera Colombiana S.A., a subordinate company in which it has thirty-eight point ninety-five percent (38.95%) ownership interest. Banco de Bogotá S.A. Panamá operates in the Republic of Panama with a general and international license to conduct banking business in and outside that country. It consolidates with the subordinate entity known as Banco de Bogotá (Nassau) Limited. Bogotá Finance Corporation is a financial entity created specifically to issue floating-rate securities guaranteed by the parent company (the Bank). In recent periods, the company has maintained an investment as its only income-earning activity. Leasing Bogotá S.A. Panamá was established in 1972 under the Corporate and Partnership Act of the Republic of Panama and currently operates solely as a company holding shares in other financial-sector firms. It is owned entirely by Banco de Bogotá, S.A. and consolidates with BAC Credomatic Inc. and Banco Bac Panama (formerly BBVA Panama). - Acquisitions On December 23, 2013, Banco de Bogota S.A., through its subsidiary Credomatic International Corporation ( CIC), which operates as part of BAC Credomatic in Central America, acquired 100 % of all issued and outstanding shares of Banco Reformador de Guatemala and Transcom Bank (Barbados) Limited, a subsidiary of the Bank, for US$421. The resources available in CIC were used to fund the acquisition, as follows: (i) securitization of future American Express credit card flows for $282: and (ii) a short-term loan for $ 139. On December 19, 2013, Banco de Bogota S.A., through its subsidiary Leasing Bogota S.A. Panama, acquired % of the issued and outstanding shares of Banco Bilbao Vizcaya Argentaria (Panama) S.A. (BBVA Panama) now (BAC Bank Panama) for US$505. To provide Leasing Bogota S.A. Panama with the resources required for the transaction, Banco de Bogota S.A. issued $1.3 billion in ordinary shares, with preferential subscription rights (Note 20).

4 4 The following are the assets and liabilities received in the purchases, as registered according to the U.S. GAAP at December 31, Grupo Reformador Banco BAC Panamá Total Acquisitions (Figures in USD) Assets Cash and cash equivalents USD 270,778, ,778, ,557,003 Certificates of deposit 51,567,509 1,428,878 52,996,387 Investments in securities 208,680,690 29,495, ,176,092 Loans receivable 1,005,313,232 1,417,286,521 2,422,599,753 Property and equipment 24,628,106 8,969,231 33,597,337 Assets awarded 11,909, ,909,715 Investments in equity securities 0 4,220,720 4,220,720 Other assets 26,504,036 30,077,779 56,581,815 Total acquired assets USD 1,599,381,330 1,879,257,492 3,478,638,822 Liabilities Deposits 1,204,250,781 1,533,408,497 2,737,659,278 Obligations payable 209,657,059 46,571, ,228,488 Other liabilities 32,481, ,219, ,700,696 Non-controlling interest 0 2,043,148 2,043,148 Total assumed liabilities 1,446,389,497 1,691,242,113 3,137,631,610 Total acquired net assets USD 152,991, ,015, ,007,212 The following equalizations were developed to determine goodwill, pursuant to Colombian accounting principles and instructions from The Colombian Superintendency of Finance. (Figures in US dollars) Detail Transcom Reformador Banco BAC Panamá Total Equity US Gaap 40,622, ,369, ,058, ,050,361 Percentage acquired 100% 100% 98.92% Acquired equity US Gaap 40,622, ,369, ,015, ,007,212 Impact of equating adjustments (779,450) (1,137,096) (650,033) (2,566,579) Loan portfolio (862,634) (3,373,164) (4,782,273) (9,018,071) Interest suspension 0 (12,575) (49,508) (62,083) Costs & commissions for execution 0 (518,920) (329,212) (848,132) Long-life assets 0 (325,651) 2,868,742 2,543,091 Foreclosures 122, ,706 (488,637) (441) Guarantees , ,000 Deferred tax 0 1,418, ,418,343 Deferred tax on equalization adjustments 76,638 1,492,132 1,394,103 2,962,873 Reappraisal of investments (115,944) (21,597) 149,688 12,147 Deferred charges 0 (161,370) 0 (161,370) Non-controlling interest 0 0 7,064 7,064 Acquired banking equity US Gaap 39,843, ,232, ,365, ,440,633 Total value paid 82,881, ,090, ,139, ,111,466 Banking goodwill US Gaap 43,037, ,858, ,774, ,670,833 Corporación Financiera Centroamericana S.A. (FICENTRO) is incorporated under Panamanian law and has its headquarters in Panama City. It was engaged primarily in managing loans granted to companies operating outside the Republic of Panama. Ficentro currently is dedicated solely to loan recovery and handling the disposal of assets received for sale. The company s management has expressed its intention to keep the firm functioning, with no additional operations. Moreover, there are no plans to liquidate it in the near future.

5 5 Megalinea S.A. is involved in loan management and collection through pre-trial, trial and out-of-court action. The following is the value of the assets, liabilities and earnings of the Bank and its Subordinates at December 31 and June 30, 2013 as included in the consolidation. Entity Assets % Held Liabilities December 31 % Held Equity % Held Direct Operating Profit % Held Profit (Loss) for the Period Banco de Bogotá (Bank) $ 57,327, ,773, ,554, , , Almacenes Generales de Depósito ALMAVIVA SA and 209, , , , , Subordinates Fiduciaria Bogotá S.A. 234, , , , , Corporación Financiera Colombiana S.A. and 14,061, ,033, ,027, , , Subordinates Sociedad Administradora de Pensiones y Cesantías Porvenir S.A and 1,645, , ,129, , , Subordinates Banco de Bogotá S.A. - Panamá and Subordinate 2,004, ,881, , , , Bogotá Finance Corporation Leasing Bogotá S.A. Panamá 35,213, ,085, ,128, , , Corporación Financiera Centroamericana S.A FINCENTRO Megalínea S.A. 7, , , (260) Casa de Bolsa S.A. 48, , , ,752,179 88,420,936 22,331,243 1,665,891 1,285,131 Eliminations (10,083,147) 2,350,730 (12,433,877) (456,076) (640,579) Consolidated $ 100,669,032 90,771,666 9,897,366 1,209, ,552 % Held Entity Assets % Held Liabilities June 30 % Held Equity % Held Direct Operating Profit % Held Profit (Loss) for the Period Banco de Bogotá (Bankz) $ 53,511, ,941, ,570, , , Almacenes Generales de Depósito ALMAVIVA 211, , , , , SA Fiduciaria Bogotá S.A. 221, , , , , Corporación Financiera Colombiana S.A. 12,218, ,767, ,451, , , Sociedad Administradora de Pensiones y Cesantías 1,607, , , , , Porvenir S.A Banco de Bogotá S.A. - Panamá and 1,934, ,819, , , , Subordinate Bogotá Finance Corporation Leasing Bogotá S.A. Panamá 25,487, ,574, ,913, , , Corporación Financiera Centroamericana S.A FINCENTRO Megalinea 6, , , (268) Casa de Bolsa S.A. 44, , , ,242,034 76,930,319 18,311,715 1,894,370 1,446,022 Eliminations (8,262,943) 2,017,114 (10,280,057) (456,458) (690,642) Consolidated $ 86,979,091 78,947,433 8,031,658 1,437, ,380 % Held

6 6 (2) Principal Accounting Policies (a) Basic Policy on Accounting and Consolidation The accounting policies and preparation of the financial statements of the Bank and its national subordinates are in keeping with the accounting principles generally accepted in Colombia and the instructions imparted by The Colombian Superintendency of Finance. Intercompany accounts and transactions are eliminated when consolidating the financial statements. (b) Standardizing and Equating the Accounting Policies of National and Foreign Subsidiaries As part of the process to consolidate the financial statements, the Bank coordinates with its national and foreign subordinates to equate their financial statements to the Single Plan of Accounts for the Colombian Financial System (PUC in Spanish), as defined by The Colombian Superintendency of Finance. The Bank also coordinates adjusting the accounting policies of its subordinates to the accounting policies generally accepted by the financial sector in Colombia, quantifying the respective adjustments that affect each subsidiary. It is the responsibility of the parent company to ensure accounting policies and practices are applied uniformly to similar transactions and events in comparable circumstances. The requirement to equate does not apply when the controlling company has no transactions similar to those of the companies it controls. The following is the effect equating the financial statements of the Bank s foreign subordinates has on the consolidated financial statements. Leasing Bogotá Panamá December 31 Assets Liabilities Equity Net income US Gaap figures $ 35,126,134 30,025,211 5,100, ,937 Reversal purchase price allocation Us Gaap (27,399) (117,915) 90,516 (40,563) Derivative operations, net 200, , Reclassification non-controlling interest 0 4,280 (4,280) 0 Equating adjustments to Colombian financial principles - Banking Gaap (85,699) (26,777) (58,922) (36,553) Figures in the consolidated statements $ 35,213,284 30,085,047 5,128, ,821 June 30 Assets Liabilities Equity Net income US Gaap figures $ 25,506,632 21,620,672 3,885, ,059 Derivative operations, net 80,628 80, Reversal purchase price allocation Us Gaap (1,396) (82,943) 81,547 12,407 Reclassification non-controlling interest (333) 0 Equating adjustments to Colombian financial principles - Banking Gaap (98,594) (44,424) (54,170) (38,497) Figures in the consolidated statements $ 25,487,270 21,574,266 3,913, ,969

7 7 December 31 Assets Liabilities Equity Net income Banco de Bogotá Panamá IFRS figures $ 2,002,057 1,882, ,865 3,159 Equating adjustments to Colombian financial principles - Banking Gaap 2,477 (672) 3, Figures in the consolidated statements $ 2,004,534 1,881, ,014 3,964 June 30 Assets Liabilities Equity Net income IFRS figures $ 1,931,441 1,819, ,754 6,144 Equating adjustments to Colombian financial principles - Banking Gaap 2,659 (64) 2,723 (103) Figures in the consolidated statements $ 1,934,100 1,819, ,477 6,041 c) Cash Flow Statement and Cash Equivalents The cash flow statement is prepared using the indirect method. For that purpose and in addition to cash, the Bank regards as cash equivalents asset positions that mature in less than 90 days and are readily convertible to cash with insignificant risk of changes in value. (d) Conversion of the Financial Statements of Foreign Subordinates The assets, liabilities and equity in foreign currency included in the consolidation were converted into Colombian pesos at the representative market rate of exchange (TRM) calculated on the last business day of the month and certified by The Colombian Superintendency of Finance. The respective rates at December 31 and June 30, 2013 were $1, (in pesos) and $1, (in pesos) per dollar. The nominal accounts were converted into Colombian pesos at $1, (pesos) and $1, (pesos) per dollar. These are the average representative market exchange rates posted between July 1 and December 31, 2013 and January 1 and June 30, 2013, in that order. The average rate was calculated excluding Saturdays, Sundays and holidays, then divided by the number of business days in the respective six-month period. (e) Money Market Assets and Liabilities and Similar Positions This account groups interbank operations, repos, simultaneous operations and temporary transfers of securities, as explained below. Ordinary Interbank Funds These are funds the Bank and its Subordinates place with or receive directly from another financial institution, with no agreement to transfer investments or to extend loans. Also included in this category are overnight operations conducted with financial institutions outside the country, using own funds. The interest income generated by these operations is entered on the statement of operations.

8 8 Repurchase Operations (Repos) Asset Position Repos are transactions involving the placement of secured funds in other financial institutions, with the Bank and its Subordinates purchasing investments in debt securities under a commitment to resell them to the counterparty at a set price, plus interest at a fixed rate, on a specific date not exceeding one year. The amount entered in this account is the value of the disbursed funds, and the purchased investments are recorded in contingent accounts. The accrued interest is entered under accounts receivable. Liability Position These are transactions involving the receipt of secured funds in which the Bank sells investments in debt securities with a commitment to repurchase them at a certain price, plus interest, on a specified date not exceeding one year. The values received are entered as liabilities and the investment sold is reclassified within the investment portfolio in the account entitled "Investments sold under repurchase agreements". Accrued interest is recorded under accounts payable. Simultaneous Operations The asset and liability positions in simultaneous operations are similar to those in repo operations. In transactions of this type, no restrictions may be established on the mobility of the securities in question, nor may the initial amount be calculated with a discount on the market price of the securities involved. The securities received in money market operations (repos and simultaneous) are valued daily at fair market prices, based on the prices published by the trading systems, and the guarantees received or pledged are valued the same way in memorandum accounts. Money market operations are entered in contingent accounts to recognize and disclose receipt of the respective value. The yields agreed on in money market operations are calculated exponentially during the term of the transaction. Accordingly, these returns represent income (for asset operations) or an outlay (for liability operations) and are recognized in the statement of operations according to the principal of accrual accounting. Securities delivered in repo and simultaneous transactions are reclassified to a transfer rights account, within the same investment account, until the operation is complete. They also are recorded in contingent memorandum accounts. The collateral received in repo and simultaneous transactions is recorded in contingent memorandum accounts and only is recorded in balance sheet accounts when the so-called short position is sold. Securities Lending Securities lending or temporary transfer operations are those in which one party (the "originator") transfers property of the securities (involved in the transaction) to the other party (the "recipient"), under an

9 9 agreement to re-transfer them on the same date or on a later date. Concurrently, the recipient will transfer to the originator the property of other securities or a sum of money equal to or greater than the value of the securities in the transaction. When the transaction is reversed, both the originator and the recipient must restore property of securities of the same kind and characteristics as those received in the transaction, or the amount of money received, as applicable. (f) Investment securities This account includes investments acquired by the Bank and its Subordinates to maintain a secondary liquidity reserve, to gain direct or indirect control of any company in the financial or service sector, to comply with legal or regulatory requirements, or solely to eliminate or reduce the market risk to which assets, liabilities and other items on the financial statements are exposed. All investments of the Banks and its subordinates are reappraised using information provided by INFOVALMER S.A., which is a pricing service. It supplies the information required to reappraise the investments in each segment of the market (prices, rates, curves, margins, etc.) and issues and provides methods to reappraise the investments needed to comply with the corporate business, doing so in accordance with the parameters outlined in Chapter I of the Basic Accounting and Financial Circular issued by The Colombian Superintendency of Finance. The different types of investments are classified, reappraised and entered on the books as indicated in the following table. Short term Trading Characteristics Reappraisal Entered on the Books Securities acquired to turn a profit on short-term price fluctuations. Investments in the form of debt securities are valued based on the price determined by the valuation pricing service. On days when the fair price cannot be found or estimated, these securities are valued exponentially, based on the internal rate of return. This procedure is performed daily. The difference between the actual market value and the immediately preceding value is entered as a gain or loss in the value of the investment, and the balancing item affects earnings for the period. This procedure is performed daily. Investments are valued at market prices, as of the same day they are acquired. Therefore, changes or differences between the purchase price and market value of investments also are recorded as of the purchase date.

10 10 Held to maturity Held to Maturity Characteristics Reappraisal Entered on the Books These are securities the Bank and its subordinates seriously intend to hold to maturity or to the redemption date and have the legal, contractual, financial and operational capacity to do so. These investments may not be used in liquidity operations nor for repos, simultaneous operations or securities lending, unless they are forced or mandatory investments subscribed in the primary market and the other party in the operation is the Central Bank (Banco de la República), the General Office of Public Credit and the National Treasury, or an entity supervised by The Colombian Superintendency of Finance. They also may be delivered to a central counterparty clearing house as collateral to back compliance with operations it has accepted for clearing and settlement. Exponentially, according to the internal rate of return calculated at the time of purchase, based on a year with 365 days. When there is objective evidence of a loss due to deterioration in the value of these assets, the book value will be reduced directly and the loss will be recognized in the earnings for the period. This procedure is performed daily. The present value is entered as an increase in the value of the investment, and its balancing item is recorded in the earnings for the period. Required yield pending collection is recorded as an increase in the value of the investment. Consequently, collection of those yields should be entered as a decline in the value of the investment. This procedure is performed daily. Available for Sale Debt Securities Characteristics Reappraisal Entered on the Books One year up to November 22, 2013 and six (6) months as of that date. These are securities the Bank and its subordinates seriously intend to hold for at least six (6) months from the date they were classified in this category, and Investments in debt securities are valued on the basis of the price determined by the valuation pricing service. On days when the fair price cannot be Changes in these securities are entered on the books as follows. - The difference between the present value on reappraisal day (calculated exponentially from the internal rate of

11 11 Available for Sale Debt Securities Characteristics Reappraisal Entered on the Books have the legal, contractual, financial and operational capacity to do so. On the first business day following completion of that sixmonth period, these securities may be reclassified as held for trading or held to maturity. If not, they will remain classified as available for sale. Securities classified as investments available for sale may be pledged as collateral guarantees to a central counterparty clearing house to back compliance with operations it has accepted for clearing and settlement. These investments also may be used for liquidity operations, repos, simultaneous operations or securities lending. found or cannot be estimated, these securities are valued exponentially, based on the internal rate of return. This is a daily procedure. return assessed at the time of purchase, based on a year with 365 days) and the immediately preceding value is recorded as an increase or decrease in the value of the investment, and is credited or charged to the nominal accounts. - The difference between market value and the present value calculated according to the preceding paragraph is entered in the equity accounts as an unrealized accumulated gain or loss. This procedure is performed daily. Available for Sale Equity Securities Characteristics Reappraisal Entered on the Books No term Investments whereby the Bank becomes joint owner of the issuer. This category includes securities with high, medium, low or minimal turnover or unlisted securities and those held by the Bank as controlling interest in its capacity as a parent company or head office, in or outside the country. For the purpose of their sale, these investments need not be held for six (6) months. Equity securities listed in the national registry of securities (RNVE) (Spanish acronym): These are valued according to the price determined by the valuation pricing services authorized by The Colombian Superintendency of Finance. Mutual funds and securitizations are valued according to the unit of value calculated by the management company on the day prior to reappraisal. Low or minimum turnover or unlisted - The difference between the market or updated value of the investment and the book value is recorded as follows: If greater, it is used first to reduce the allowance or for a downward adjustment in value until exhausted, and the excess is recorded as an equity surplus. If less, the difference is used to reduce the equity surplus until exhausted, and the remainder is recorded as a loss in market value.

12 12 Available for Sale Equity Securities Characteristics Reappraisal Entered on the Books Equity securities quoted only on foreign stock exchanges: These are valued based on the price determined by the valuation pricing services authorized by The Colombian Superintendency of Finance. If there is no reappraisal method, the most recent closing price in the last five (5) trading days shall be used, including the reappraisal day or the simple average of the closing prices reported in the last 30 days. If they are traded on more than one foreign stock exchange, the value on the home market will be used. The price of the security is converted into domestic currency. Equity securities listed in foreign securities exchange systems authorized in Colombia: Are valued at the price supplied by the valuation pricing services authorized by The Colombian Superintendency of Finance. Equity securities not listed on a stock exchange: Are valued at the price determined by the valuation pricing service designated as official for the respective segment. When the pricing service has no method for valuing these investments, institutions shall increase or decrease the acquisition cost in proportion to the percentage of ownership interest the investor has in subsequent variations in the issuer s equity, calculated on the basis of certified financial statements at December 31 and June 30 of each year, or the most recent ones, if known. - When dividends or profits are distributed in kind, including those from capitalization of the equity reappraisal account, the portion entered on the books as an equity surplus is treated as income, chargeable to the investment, and that surplus is reversed. - When dividends or profits are distributed in cash, the amount entered as an equity surplus is recorded under income, thereby reversing that surplus. The amount of dividends that exceeds it is recorded as a decline in the value of the investment. High and Medium Turnover The updated market value of securities with high and medium turnover or those quoted on internationally recognized foreign stock exchanges is recorded in the equity accounts as an unrealized accumulated gain or loss and credited or charged to the investment, as the case may be. This procedure is performed daily. Dividends or profits distributed in cash or kind, including those from capitalization of the equity reappraisal account, they are entered as income up to the amount pertaining to the investor with respect to profits or reappraisal of the issuer s equity, as recorded by the latter from the date the investment was acquired, chargeable to accounts receivable.

13 13 Reclassification of Investments If an investment is to remain in any of the classification categories, it must comply with the characteristics or conditions particular to the type of investments in that category. The Colombian Superintendency of Finance may order the institution to reclassify a security at any time, if it does not comply with the characteristics particular to the category in which it is classified or when reclassification is required for better disclosure of the financial situation. Investments may be reclassified pursuant to the following allowances: Reclassification from investments held to maturity to investments held for trading is possible in any of the following circumstances: Significant deterioration in the conditions of the issuer, its parent company, its subordinates or its affiliates. Changes in regulations that make it impossible to maintain the investment. Mergers that lead to reclassification or sale of the investment to maintain the previous interest-rate risk position or to adjust to the credit risk policy established beforehand by the resulting entity. Other unforeseen events, subject to prior authorization from The Colombian Superintendency of Finance. Reclassification from investments available for sale to investments held for trading or held to maturity is possible in any of the following circumstances: Completion of the six-month period applying to this classification. When the investor loses its capacity as a parent or controlling company, provided this circumstance involves a decision to dispose of the investment or the primary intent is to profit from short-term price fluctuations, as of that date. When the conditions of the issuer, its parent company, its subordinates or its affiliates have deteriorated significantly. When changes in regulations make it impossible to maintain the investment. When mergers lead to reclassification or sale of the investment to maintain the previous interest-rate risk position or to adjust to the credit risk policy established beforehand by the resulting entity. When the investment goes from low or minimum turnover or unquoted to high or medium turnover. When investments held to maturity or available for sale are reclassified as trading investments, the rules applicable to the latter with respect to reappraisal and accounting are to be observed. Consequently, unrealized gains or losses are treated as income or expenses on the date of reclassification. Securities reclassified as trading investments may not be reclassified again.

14 14 Investment Repurchase Rights This account records investments that represent collateral guarantees for investment repurchase agreements. All economic rights and benefits associated with the value of these investments are preserved and all risks inherent in that value are retained, even though legal ownership is transferred when the operation is conducted in the money market. These securities continue to be valued daily and entered on the balance sheet and the statement of operations pursuant to the method and procedure applicable to investments classified as trading, held to maturity and available for sale, depending on the category in which they were listed before the repurchase agreement was acquired. Investments Pledged as Collateral Guarantees These are investments in debt securities pledged as collateral to back compliance with operations accepted for clearing and settlement by the Central Counterparty Clearing House. These securities are valued daily and entered on the balance sheet and the statement of operations pursuant to the method and procedure applicable to the category in which they were listed before being pledged as collateral. Allowances or Losses, by Credit Risk Rating The price of trading investments for which there is no fair price on the day of reappraisal and the price of investments classified as held to maturity must be adjusted on each reappraisal date, based on the credit risk rating and pursuant to the following criteria: Unrated Issues or Allowances: Securities with no external rating or those issued by unrated entities are classified as follows. Category/Risk Characteristics Allowances A-Normal B- Acceptable C- Appreciable They comply with the terms agreed on in the instrument, and the issuer has sufficient capacity to pay the principal and interest. This classification pertains to issues with uncertainty factors that could affect the capacity to continue to service the debt adequately. In addition, the financial statements and other available data show weaknesses that might affect the issuer s financial situation. These are issues with high or medium probability of default on prompt payment of principal and interest. Moreover, the financial statements and other available data show weaknesses in the issuer s financial situation that could jeopardize recovery of the investment. None required The net value may not exceed eighty percent (80%) of the acquisition cost, the face value net of amortization up to the reappraisal date. The net value may not exceed sixty percent (60%) of the acquisition cost. In the case of debt securities, their book value may not exceed eighty percent (80%) of the face value net of amortization up to the reappraisal date.

15 15 Category/Risk Characteristics Allowances D- Significant E-Uncollectable These are issues that default on the terms agreed in the instrument. In addition, the respective financial statements and other available data show serious weaknesses in the issuer s financial situation, so much so that there is very little likelihood of recovering the investment. Issuers with financial statements and other available data suggesting the investment is uncollectible. Also, if there are no financial statements at December 31 and June 30 of each year. The net value may not exceed forty percent (40%) of the acquisition cost. The value of these investments is provisioned in its entirety. Externally-rated Issues or Issuers Debt securities with one or more ratings and those ranked by external credit rating agencies recognized by The Colombian Superintendency of Finance may not be recorded for an amount that exceeds the following percentages of the face value net of amortization up to the reappraisal date. Long-term Rating Maximum Value % Short-term Rating Maximum Value % BB+, BB, BB- Ninety (90) 3 Ninety (90) B+, B, B- Seventy (70) 4 Fifty (50) CCC Fifty (50) 5 and 6 Zero (0) DD,EE Zero (0) 5 and 6 Zero (0) The respective issuer s rating is used to estimate the allowances for time deposits. The allowance for investments classified as held to maturity and for which a fair value can be determined, as stipulated for trading securities or those available for sale, is the difference between the book value and said price. Internal or external government debt securities issued or guaranteed by the nation, those issued by the Central Bank of Colombia (Banco de la República) and those issued or backed by the Guarantee Fund for Financial Institutions (FOGAFIN) are not subject to these provisions. Method Used to Calculate the Proportional Value of Equity In cases involving purchases made prior to December 31, 1976, the proportional equity value of the sum of such acquisitions is calculated with the equity recorded by the institution on that date, applying the percentage of equity investment accumulated at December 31, 1976 to each component of equity. The step-by-step method is used for each subsequent purchase representing an increase in that interest or equity investment, regardless of the percentage.

16 16 The sum of the value of each equity component determined according to the percentage of interest or equity investment acquired with each purchase is matched against the cost of each purchase to identify a difference of greater or lesser value between cost versus the acquired equity. If the cost is greater than the acquired equity, it is treated as a surplus investment cost, or an investment cost shortfall, if it is less. The amortization period for these surpluses or shortfalls is five (5) years from the moment control is acquired. Those obtained in subsequent acquisitions are amortized during the period remaining to complete the five (5) years. Those obtained after the five (5) years must be amortized in full at the time they are determined. Amortization is entered against the earnings for the accounting period or previous periods, as appropriate. (g) Loans and Financial Leases These accounts record loans made according to the different types of authorized lending. The funds used to extend loans come from the Bank s own resources, the public (in the form of deposits), and other external and internal sources of funding. Loans are entered on the books at their disbursement value, except in the case of factoring operations, which are recorded at cost. The loan portfolio is classified according to four (4) types of credit: Commercial Loans These are loans made to persons or legal entities to develop organized business activities. They are different from micro-loans. Consumer Loans These loans, regardless of the amount, are made to persons to finance the acquisition of consumer goods or the payment of non-commercial or non-business services. They are different from micro-loans. Mortgage Loans These loans, regardless of the amount, are granted to persons for the purchase of new or used housing, or the construction of individual homes. As provided for under Law 546/ 1999, they are denominated in constant-value units (UVR-Spanish acronym) or in domestic currency, and are backed by a first mortgage on the property being financed. The payback period ranges from a minimum of five (5) years to a maximum of thirty (30). These loans may be prepaid all or in part at any time, without penalty. In the event of partial prepayments, the borrower is entitled to decide if the amount paid will go to reduce the monthly installment or the mortgage payback period. Moreover, these loans have a remunerative rate of interest, which is applied to the outstanding balance denominated in pesos or UVR. Interest is charged in arrears and may not be capitalized. The amount of the mortgage may be for as much as seventy-percent (70%) of the value of the property, as

17 17 determined by the purchase price or by a professional appraisal done within six (6) months before the loan is granted. Loans to finance low-income housing may be for as much as eighty percent (80%) of the value of the property. In all cases, the property being financed must be insured against fire and earthquake. Microcredit Loans These are the loans referred to in Article 39, Law 590/2000, or as amended, substituted or expanded, and those made to micro-businesses where the primary source of repayment is the income derived from their commercial activity. The borrower s debit balance may not exceed one hundred twenty (120) times the minimum monthly wage (SMMLV: Spanish acronym) provided for by law at the time the loan is approved. The debit balance is understood as the sum of what the micro-business still owes on loans from the financial sector and other sectors, as listed in the records of the database operators consulted by the respective lender, excluding home mortgages and adding the value of the new loan. A micro-business is understood as any unit of economic pursuit established by a private person or legal entity to engage in rural or urban business, farming, industrial, commercial or service activities, with a staff of no more than ten (10) workers and total assets that do not exceed five hundred (500) times the minimum monthly wage (SMMLV) in effect at the time. Credit Risk Assessment Criteria The Bank and its Subordinates continuously assesses the risk inherent in their loan assets. This is done when the loan is granted and throughout its life, even in cases of restructuring. The Credit Risk Management System (SARC Spanish acronym) was designed and adopted for that purpose. It is comprised of credit-risk management policies and processes, reference models to estimate or quantify anticipated losses, a system of allowances to cover credit risk, and processes for internal control. Loans are granted on the basis of what is known about the potential borrower, the borrower s creditworthiness, and the terms of the loan agreement to be entered into. Among others, these include the financial terms of the loan, the collateral, sources of payment and the macroeconomic conditions to which the borrower might be exposed. The loan approval process involves a series of variables established for each of the portfolios. These make it possible to identify borrowers who fit the organization s risk profile. The segmentation and discrimination processes for loan portfolios and their potential borrowers serve as the basis for their rating. The methods and procedures included in the loan approval process make it possible to monitor and control credit exposure for the different individual portfolios and the aggregate portfolio alike, thereby avoiding an excessive concentration of lending per borrower, economic sector, economic group, risk factor, etc. The Bank and its Subordinates constantly monitor and rank lending operations pursuant to the loan approval process, which is founded on several criteria; namely, information on the historical pattern of the portfolios and individual loans; the particular characteristics of the borrowers, their loans and the collateral backing them; the borrower s credit history or reputation with other institutions; financial information that provides an understanding of the borrower s financial situation; and the macroeconomic and sector variables that might affect the normal development of lending operations.

18 18 When assessing regional government agencies, the Bank and its Subordinates verify compliance with the provisions set forth in Law 358/1997, Law 550/ 1999 and Law 617 / Loan Assessment and Re-rating The Bank and its Subordinates evaluate the risk to their loan portfolio, making changes in the respective ratings when justified in light of new analysis or information. The Banks and its Subordinates fulfill this obligation by considering the borrower s credit history with other lenders, particularly if information provided by credit reporting agencies or other sources shows the borrower has any restructured loans at the time of the assessment. Nevertheless, the Bank assesses and reclassifies the loan portfolio i) when loans fall into arrears after being restructured, in which case they must be reclassified immediately, and ii) during the months of May and November, at the very least, recording the results of the assessment and reclassifying as needed at the close of following month. Credit Risk Rating Commercial and consumer loans are classified and rated in the respective risk categories pursuant to the rules outlined in Chapter II of Basic Accounting and Financial Circular 100/ 1995, as detailed in Attachment 3 concerning application of the Commercial Loan Reference Model (MRC in Spanish) and Attachment 5 containing instructions on the Consumer Loan Reference Model (MRCO in Spanish). Credit risk assessment is based on a variety of criteria; namely, information related to the historical performance of portfolios and loans, the particular characteristics of the borrowers, their credit history with other lenders, and financial information, as well as sector and macroeconomic variables. It is important to point out that the following minimum objective conditions apply in all cases: Category New Existing Commercial Loans Existing Consumer Loans AA This category includes new loans that are rated AA when approved. Existing loan up to 29 days past due on contractual obligations; that is, between 0 and 29 days in arrears. Loans with a rating equivalent to AA based on the legally approved MCRO method. A BB B New loans that are rated A when approved should be assigned to this category.. New loans that are rated BB when approved should be assigned to this category. New loans that are rated B when approved should be assigned to this category. Existing loans 30 days or more but less than 60 days past due on their contractual obligations; that is, between 30 and 59 days in arrears. Existing loans 60 days or more but less than 90 days past due on contractual obligations; that is, from 60 to 89 days in arrears. Existing loans 90 days or more but less than 120 days past due on their contractual obligations; that is, between 90 and 119 days in arrears. Loans with a rating equivalent to A based on the legally approved MCRO method. Loans with a rating equivalent to BB based on the legally approved MCRO method. Loans with a rating equivalent to B based on the legally approved MCRO method.

19 19 Category New Existing Commercial Loans Existing Consumer Loans CC Default New loans that are rated CC when approved should be assigned to this category. Existing loans 120 days or more but less than 150 days past due on their contractual obligations; that is, between 120 and 149 days in arrears. Existing loans 150 days past due, or more. Loans with a rating equivalent to CC based on the legally approved MCRO method.. Consumer loans more than 90 days past due. The following table shows the equivalent risk ratings for commercial and consumer loans used in the borrowing reports and for entries in the financial statements of the Bank and its Subordinates: Reporting Categories Group Category Commercial Consumer AA A AA A - currently 0-30 days past due A A - currently over 30 days past due B BB BB B B C CC CC C C D D D E E E The following equivalences are used when the Bank and its Subordinates classify their customers as being in default, based on application of the reference models adopted by The Colombian Superintendency of Finance. Group E = Clients in default with an assigned LGD equal to one hundred percent (100%). Group D = All other clients rated as being in default. For the purpose of equivalence in consumer loans, the current arrears shown in the foregoing table are understood at the maximum posted by the borrower for aligned products at the evaluation date. Mortgages and microcredit Loans are placed in the following categories, taking loan arrears aging into account: Category Microcredit Loans Mortgage Loans A Normal Risk Existing loans up to one (1) month past due With installments current or up to two (2) months past due.