Bancolombia (Panama), S. A. and Subsidiaries

Transcription

1 Free English Language Translation from Spanish Version Bancolombia (Panama), S. A. and Subsidiaries (a wholly-owned subsidiary of Bancolombia, S. A. - Colombia) Report and Consolidated Financial Statements

2 Index to Consolidated Financial Statements Pages Independent Auditor s Report 1-2 Financial Statements Consolidated Balance Sheet 3 Consolidated Statement of Income 4 5 Consolidated Statement of Comprehensive Income 6 Consolidated Statement of Changes in Equity 7 Consolidated Statement of Cash Flows

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4 To the Board of Directors and Shareholder of Bancolombia (Panama), S. A. Page 2 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Bancolombia (Panama), S. A. and Subsidiaries as of, and of their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards, as modified by prudential regulations issued by the Superintendency of Banks of Panama, as described in Note 2 to the consolidated financial statements. PricewaterhouseCoopers (SIGNED) March 30, 2010 Panama, Republic of Panama

5 (a wholly-owned subsidiary of Bancolombia, S. A. - Colombia) Consolidated Balance Sheet Assets Liabilities and Equity Cash and cash equivalents (Note 6) B/. 79,623,250 B/. 101,348,009 Liabilities Repos and other stock exchange operations (Note 6) 880,000 3,666,304 Foreign deposits (Note 5) Demand B/. 1,050,280,683 B/. 773,261,474 Bank deposits (Notes 5 and 6) Savings 1,023,008, ,528,628 Demand - domestic banks 4,268,551 2,278,308 Time 2,577,175,824 2,769,211,739 Demand - foreign banks 560,237, ,364,746 Other deposits 8,885,000 17,224,663 Time - domestic banks 17,486,046 50,000,000 Interbank - 6,150,625 Time - foreign banks 211,500, ,458,827 Total deposits 4,659,349,977 4,457,377,129 Total bank deposits 793,491, ,101,881 Total cash, cash equivalents and bank deposits 873,994, ,116,194 Bank obligations (Notes 5 and 17) 747,227, ,022,332 Investment securities (Notes 5 and 7) Own issued securities (Note 16) 321,081, ,088,207 Financial assets at fair value through profit or loss 8,013,128 7,956,191 Available-for-sale, net 572,496, ,326,186 Derivative financial instruments (Note 30) 2,710,133 5,667,739 Held-to-maturity 370,336, ,894,462 Permanent 22,380,520 18,042,516 Other liabilities: Total investment securities 973,227, ,219,355 Cashier's and certified checks 9,606,375 14,279,702 Accrued interest payable (Note 5) 12,756,643 19,246,065 Loans to foreign sector (Notes 5 and 8) 3,962,917,100 4,189,768,746 Reserves for contingencies guarantees and bonds (Note 26) 13,092,165 2,461,981 Mathematical reserves, ongoing and claims risk (Note 25) 31,252,810 31,034,290 Less: Acceptances outstanding 1,406,820 2,175,241 Unearned interest and commissions (6,438,087) (6,476,884) Income tax payable 10,705,584 17,961,524 Reserve for loan looses (Note 9) (138,528,949) (112,420,584) Deferred income tax - liability (Note 23) 1,761, ,623 Other liabilities (Note 18) 41,652,575 42,144,757 Loans, net 3,817,950,064 4,070,871,278 Total other liabilities 122,234, ,169,183 Property, plant and equipment, net (Note 10) 101,080, ,744,280 Total liabilities 5,852,604,387 5,936,324,590 Foreclosed assets (Note 11) 30,438,072 19,329,293 Derivative financial instruments (Note 30) 132,143 3,249 Contingencies and commitments (Notes 27 and 31) Other assets: Accrued interest receivable Equity Time deposits 168, ,220 Share capital (Note 19) 14,000,000 14,000,000 Loans, net 19,259,534 25,936,478 Capital reserve 1,289,073 1,289,073 Investments 16,864,903 9,746,151 Other reserves 103, ,243 Goodwill (Note 12) 341,829, ,161,416 Revaluation reserve (Note 7) 11,425,555 (3,700,399) Intangible assets (Note 13) 149,283, ,296,027 Retained earnings 477,898, ,240,805 Insurance premiums receivable, net (Note 14) 21,195,170 19,905,547 Customers' liabilities on acceptances 1,406,820 2,175,241 Net equity attributable to equity holder of the Company 504,715, ,940,722 Prepaid expenses 1,746,758 6,240,101 Deferred income tax - assets (Note 23) 5,894,929 8,684,733 Minority interest (Note 21) 20,328,732 23,655,796 Various debtors, net (Note 15) 23,176,323 20,355,545 Total other assets 580,826, ,637,459 Total equity 525,044, ,596,518 Total assets B/. 6,377,649,082 B/. 6,366,921,108 Total liabilities and equity B/. 6,377,649,082 B/. 6,366,921,108 The notes on pages 10 to 76 are an integral part of these consolidated financial statements. -3-

6 (a wholly-owned subsidiary of Bancolombia, S. A. - Colombia) Consolidated Statement of Income For the year ended Interest income (Note 5) Loans (including commissions) B/. 399,676,924 B/. 388,453,610 Deposits 3,398,735 17,420,390 Investments 24,886,347 23,722,267 Total interest income 427,962, ,596,267 Interest expense (Note 5) Deposits 139,861, ,324,683 Obligations 45,311,684 70,133,593 Total interest expense 185,173, ,458,276 Net interest before provisions 242,788, ,137,991 Provisions Provision for loan losses (Note 9) (81,196,050) (71,148,315) Provision for foreclosed assets (Note 11) (4,563,766) (3,342,727) Share of profit of associates (Note 9) 2,311,471 1,042,596 Provison for letters of credit, guarantees and bonds (Note 26) (10,630,184) (3,527,568) Others (3,520,767) (794,919) Total provisions (97,599,296) (77,770,933) Net interest after provisions 145,189, ,367,058 Other income (expense) and operating commissions, net Fees and other commissions (Note 20) 77,525,630 76,460,631 Commission expense (Note 22) (20,070,223) (20,363,945) Net gain on sale of securities and derivatives (Note 24) 21,519,954 1,451,703 Unrealized gain (loss) on financial instruments at fair value 130,770 (28,442) Dividend income 1,549,940 1,159,251 Net result from insurance operations 3,969,535 6,278,959 Other operating revenues (Note 20) 23,525,224 25,984,744 Total other income and operating commissions, net 108,150,830 90,942,901 (Continued) The notes on pages 10 to 76 are an integral part of these consolidated financial statements. -4 -

7 (a wholly-owned subsidiary of Bancolombia, S. A. - Colombia) Consolidated Statement of Income - Continued For the year ended Other operating expense Salaries and employee benefits (Notes 5 and 22) B/. 59,340,252 B/. 57,423,785 Fees and professional services 7,083,611 8,361,122 Depreciation and amortization (Note 10) 8,563,483 8,910,361 Amortization of intangibles and others (Note 13) 25,460,900 25,006,473 Impairment loss on intangible assets (Note 13) - 12,367,660 Other taxes 6,759,031 7,229,839 Communications and postal expense 8,310,487 10,558,505 Maintenance 5,879,247 5,586,157 Stationery and office supplies 1,529,038 1,742,693 Insurance 297,309 1,172,957 Quotas and subscriptions 2,663,784 2,568,996 Electricity and water 2,900,034 2,308,345 Rent 4,284,499 4,140,825 Others (Note 22) 15,932,249 15,788,902 Total other operating expense 149,003, ,166,620 Income before income tax 104,336,346 75,143,339 Income tax (Note 23) (20,733,138) (22,792,175) Net income B/. 83,603,208 B/. 52,351,164 Attributable to: Equity shareholder B/. 82,657,412 B/. 51,041,249 Minority interest (Note 21) 945,796 1,309,915 Net income B/. 83,603,208 B/. 52,351,164 The notes on pages 10 to 76 are an integral part of these consolidated financial statements. -5 -

8 (a wholly-owned subsidiary of Bancolombia, S. A. - Colombia) Consolidated Statement of Comprehensive Income For the year ended Net income B/. 83,603,208 B/. 52,351,164 Other comprehensive income (expense): Net unrealized gain (loss) (Note 7) 31,118,582 (6,780,320) (Gain) loss transferred to the statement of income (Note 7) (15,992,628) 8,581 Total comprehensive income B/. 98,729,162 B/. 45,579,425 Total comprehensive income attributable to: Equity shareholder B/. 97,695,052 B/. 44,313,791 Minority interest 1,034,110 1,265,634 B/. 98,729,162 B/. 45,579,425 The notes on pages 10 to 76 are integral part of tese consolidated financial statements

9 (a wholly-owned subsidiary of Bancolombia, S. A. - Colombia) Consolidated Statement of Changes in Equity For the year ended Total Shareholders Equity Attributable Share Capital Capital Reserve Other Revaluation Retained to Parent Company s Minority Reserves Reserve Earnings Shareholders interest Total Equity Balance at January 1, 2008 B/. 14,000,000 B/. 1,289,073 B/. - B/. 3,071,340 B/. 344,242,488 B/. 362,602,901 B/. 27,079,668 B/. 389,682,569 Comprehensive income Net income ,041,249 51,041,249 1,309,915 52,351,164 Net decrease in fair value of investments available-for-sale (Note 7) (6,771,739) - (6,771,739) - (6,771,739) Total comprehensive income (6,771,739) 51,041,249 44,269,510 1,309,915 45,579,425 Transactions with shareholders Other reserves , , ,243 Effect of standardized figures on equity (46,145) (46,145) - (46,145) Liquidation of Suleasing do Brasil ,213 3,213-3,213 Minority interest from business combination (2,324,884) (2,324,884) Decrease in minority interest held in subsidiaries belonging to Banagricola (2,408,903) (2,408,903) Total of transactions with shareholders ,243 - (42,932) 68,311 (4,733,787) (4,665,476) Balance at December 31, 2008 B/. 14,000,000 B/. 1,289,073 B/. 111,243 B/. (3,700,399) B/. 395,240,805 B/. 406,940,722 B/. 23,655,796 B/. 430,596,518 Balance at January 1, 2009 B/. 14,000,000 B/. 1,289,073 B/. 111,243 B/. (3,700,399) B/. 395,240,805 B/. 406,940,722 B/. 23,655,796 B/. 430,596,518 Comprehensive income Net income ,657,412 82,657, ,796 83,603,208 Net increase in fair value of investments available-for-sale (Note 7) ,125,954-15,125,954-15,125,954 Total comprehensive income ,125,954 82,657,412 97,783, ,796 98,729,162 Transactions with shareholders Minority interest from business combination (717,819) (717,819) Other reserves - - (8,125) - - (8,125) - (8,125) Dividends declared (182,683) (182,683) Decrease in minority interest held in subsidiaries belonging to Banagricola (3,372,358) (3,372,358) Total of transactions with shareholders - - (8,125) - - (8,125) (4,272,860) (4,280,985) Balance at B/. 14,000,000 B/. 1,289,073 B/. 103,118 B/. 11,425,555 B/. 477,898,217 B/. 504,715,963 B/. 20,328,732 B/. 525,044,695 Otras reservas The notes on pages 10 to 76 are an integral part of these consolidated financial statements

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12 1. General Information Bancolombia (Panama), S. A. (the Bank ), is an entity incorporated on December 14, 1972 and began operations on April 26, The Bank operates in Panama under an international license granted by the Superintendency of Banks of the Republic of Panama (the Superintendency ), which allows the Bank to conduct, at its offices in Panama and on an exclusive basis, transactions which are executed, consummated or come into effect abroad. The Bank is wholly-owned by Bancolombia S. A. (Parent Company in Colombia), an entity incorporated in the Republic of Colombia. The Bank s main office is located in Plaza Marbella, Aquilino de la Guardia Ave., 47th Street, Marbella. Further to the operations that it carries out directly, the Bank heads a group of finance companies (hereinafter referred in conjunction with the Bank as the "Group ). The Group s subsidiaries directly or indirectly are as follows: % Stake Name Main economic activity Country of incorporation Bancolombia Cayman Banking Cayman Islands 100% 100% Sistema de Inversiones y Negocios, S. A. Investment Panama 100% 100% Banagricola, S. A. Investment Panama 99.16% 99.12% Suleasing Internacional USA Inc. Financial Leasing USA 100% 100% Inversiones Financieras Banco Agricola, S. A. Holding Company El Salvador 99.71% 99.16% Banco Agricola, (Panama), S. A. Banking Panama 100% 100% Banco Agricola, S. A. Banking El Salvador 98.37% 98.37% Aseguradora Suiza Salvadoreña, S. A. Insurance El Salvador 97.03% 96.18% AFP Crecer, S.A. Pension Fund Management El Salvador % % Arrendadora Financiera, S.A. Financial Leasing El Salvador % % Credibac, S.A. de C.V. Credit Card Issuer El Salvador % % Bursabac, S.A. de C.V., Casa de Stock Exchange Corredores de Bolsa Brokerage El Salvador 99.99% 99.99% Asesuisa Vida, S.A. Insurance El Salvador 99.99% 99.99%

13 1. General Information (Continued) Bancolombia Cayman holds an unrestricted Category B license awarded by the Monetary Authorities of the Cayman Islands enabling it to conduct banking operations abroad. Sistema de Inversiones y Negocios, S. A. holds a 100% of Sinesa Holding Company Limited's capital. Sinesa Holding Company Limited holds a 100% in the share capital of Future Net, Inc. together with a minority interest in the share capital of Banca de Inversion Bancolombia, S. A. Future Net, Inc. holds a 47% of the equity of Todo 1 Services, Inc. Banagricola, S. A. is a Panamanian company, incorporated on March 14, 2003, whose sole purpose is to make international investments in the share capital of companies dedicated to financial intermediation activities and engage in all those banking and financial transactions that are legally permitted by each country where the investee companies are located. In 2008, Banco Agricola (Panama), S. A. began a voluntary liquidation process and on December 15, 2008, Superintendency of Banks of the Republic of Panama by means of Resolution S. B. P. N gave due authorization for the Bank to cease operation. As part of this process, all assets and liabilities have been transferred to Bancolombia (Panama), S. A. and consequently for 2008 the statement of income pertaining to Banagricola, S. A. and Subsidiaries contains the net results obtained from these assets and liabilities until its disposal date. The Group conducts significant transactions with related parties, which are managed and authorized by its Parent Company. Since May 2007, the Banagricola Financial Conglomerate came under the control of Bancolombia Panama, S. A. In this same month 89.15% of its total shares were acquired. Banagricola, S. A. s shareholders agreed to sell 16,817,633 shares of Banagricola, S. A. out of a total of 18,865,000 shares outstanding. The purchase price was B/ per share for a total of B/.791,182 thousand. The Bank continued to buy shares from Banagricola, S. A.'s minority shareholders and at held a total of 99.16% (2008: 99.12%) shares of Banagricola, S. A

14 1. General Information (Continued) Regulatory Matters The Bank comes under the oversight of the Superintendency of Banks of the Republic of Panama, pursuant to Decree-Law No.9 issued February , subsequently amended by Decree-Law issued February 22, 2008, together with other Resolutions and Agreements issued by this same Superintendency. This Law covers the following: authorization of banking licenses, minimum capital and liquidity requirements, consolidated supervision, procedures for managing credit and market risk, money-laundering prevention, and procedures for the intervention and liquidation of banks, among others. Also, banks are subject, at least, to an inspection every two years carried out by auditors from the Banking Superintendency for the purpose of verifying compliance with the aforementioned Decree- Law No.9 issued February , subsequently amended by Decree-Law issued February 22, 2008, as well as Law No. 42 governing the prevention of money laundering. The financial statements of Banagricola S.A. s Subsidiaries that are not located in Panama: Banco Agricola, S. A. and Subsidiaries (Arrendadora Financiera, S.A., Bursabac, S.A. de C.V. y Credibac S.A. de C.V.), Aseguradora Suiza Salvadoreña, S. A. and Asesuisa Vida, S. A. are governed by all those accounting rules and regulations issued by the Superintendency of Financial Institutions whereas the financial statements belonging to AFP Crecer, S. A. have been prepared according to the accounting practices established by the Superintendency of Pensions of El Salvador. Therefore, the financial statements were adjusted on the basis of the rules and regulations established by the Superintendency of Banks of the Republic of Panama, for the purpose of preparation of these consolidated financial statements. The consolidated financial statements for the year ended were approved for issue by the Board of Directors on March 30,

15 2. Summary of the Most Significant Accounting Policies Following are the significant accounting policies adopted in the preparation of the consolidated financial statements: Basis of Preparation The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS), as modified by the prudential regulations issued by the Superintendency of Banks of Panama (BSP) for oversight purposes. The most relevant amendment introduced by the prudential regulations that establishes a different treatment from the International Financial Reporting Standards (IFRS) corresponds to determination of a provision for possible loan looses due to Agreement No dated June 28, 2000, requires loans to be classified in one of five categories and that the provision for possible loan losses be determined based on minimum reserves, that is according to the expected loss; while the International Accounting Standard No. 39 establishes that the provision for possible loan looses be estimated by the discounted cash flow method based on historical experienced incurred looses. Furthermore, Agreement stipulates that interest accrued on loans must be suspended when commercial loan is more than 90 days past due and when consumer loan is more than 120 days past due in the case of consumer loans. Also, the accounting treatment for the classification and recognition of investment looses, according to the prudential regulations issued by the Superintendency of Banks of Panama, differs in certain aspects from the accounting treatment provided by International Accounting Standard No. 39. See Note 2, investments held-to-maturity. The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. Management is also required to use its judgment in the process of applying the Group s accounting policies. The areas involving a higher degree of judgment are complexity, as areas where assumption and estimates are significant to the consolidated financial statements are disclosed in Note

16 2. Summary of Significant Accounting Policies (Continued) Basis of Preparation (continued) (a) Amendments effective in 2009 but not relevant The following amendments are mandatory for accounting periods beginning on or after January 1, 2009 but are not relevant for Group s operations: - IAS 1 (revised). Presentation of financial statements effective January 1, A revised version of IAS 1 was issued in September It prohibits the presentation of items of income and expenses (that is, non-owner changes in equity ) in the statement of changes in equity, requiring non-owner changes in equity to be presented separately from owner changes in equity in a statement of comprehensive income. As a result the Group presents in the statement of changes in equity all owner changes in equity, whereas all nonowner changes in equity are presented in the statement of comprehensive income. Comparative information has been re-presented so that it also is in conformity with the revised standard. According to the amendment of IAS 1 in January 2008, each component of equity, including each item of other comprehensive income, should be reconciled between carrying amount at the beginning and the end of the period. As the change in accounting policy only impacts presentation aspects, there is no impact on retained earnings. - IFRS 7 Financial instruments Disclosures (amendment) effective January 1, The amendment requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. As the change in accounting policy only results in additional disclosures

17 2. Summary of Significant Accounting Policies (Continued) Basis of Preparation (continued) (b) Standards and amendments to existing standards that are not yet effective and that have not been early adopted by the Group IFRS 1 and IAS 27, 'Cost of an investment in a subsidiary, jointly-controlled entity or associate' The amended standard allows first-time adopters to use a deemed cost of either fair value or the carrying amount under previous accounting practice to measure the initial cost of investments in subsidiaries, jointly controlled entities and associates in the separate financial statements. The amendment also removes the definition of the cost method from IAS 27 and requires an entity to present dividends from investments in subsidiaries, jointly controlled entities and associates as income in the separate financial statements of the investor. IAS 27 (revised), 'Consolidated and Separate Financial Statements', (effective from July 1, 2009). The revised standard requires the effects of all transactions with noncontrolling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value and the gain or loss is recognized in the statement of income. - IFRS 9 Financial Instruments: Classification and measurement. The new standard is mandatory for annual periods beginning on or after January 1, This standard replaces part of IAS 39 relating to the classification and measurement of financial assets. (c) Standard and amendments to existing standards that are not relevant for the Group s operations As part of the IASB s annual improvements project published in May 2008 and April 2009, were made a number of minor amendments to: IFRS 1, IFRS 5, IFRS 7, IAS 1, IAS 9, IAS 10, IAS 16, IAS 18, IAS 19, IAS 20, IAS 23, IAS 27, IAS 28, IAS 29, IAS 31, IAS 34, IAS 36, IAS 39, IAS 40, IAS 41, IFRS 2, IFRS 8, IAS 7, IAS 17, IAS 38. These amendments are effective on January 1, 2009, July 1, 2009 and January 1, 2010; however, the Group is assessing their impact on the consolidated financial statements

18 2. Summary of the Most Significant Accounting Policies (Continued) Consolidation Principles The consolidated financial statements include the financial statements of the Group and those companies that are directly controlled by the Bank (its subsidiaries), Bancolombia Cayman, Sistema de Inversiones y Negocios, S. A., Banagricola S. A. and Suleasing Inc., as those where it holds an indirect participation. (a) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Bank has the power to govern the financial and operating policies generally accompanying a shareholdering of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Bank. They are not consolidated from the day that control ceases. Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated, but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where are necessary to ensure consistency with the policies adopted by the Bank. b) Business Combinations The acquisition of subsidiaries is recognized by using the purchase method. The acquisition cost is measured at fair value (at the trade date) of the assets given, the liabilities incurred or assumed and the equity instruments issued by the Group in exchange for the control acquired, plus any direct costs attributable to the business combination. Identifiable assets and liabilities acquired and contingent liabilities that comply with the conditions of IFRS 3: Business Combinations, for their recognition, are measured at their fair values at the acquisition date, except for those non-current assets that are classified as "Available-for-sale pursuant to IFRS 5: Non-Current Assets Available For Sale And Discontinued Operations, which are recognized and measured at their fair market value less the cost incurred in selling them. Goodwill resulting from the acquisition is recognized as an asset and measured initially at cost, this being the surplus existing between the cost of the business combination and the portion held by the Group in the net fair value of the identifiable assets and liabilities and the recognized contingent liabilities. If the Group s portion in the net fair value of the assets and liabilities, and contingent liabilities of the acquired company exceed the cost of the business combination, the difference is recognized immediately directly in the statement of income

19 2. Summary of the Most Significant Accounting Policies (Continued) Consolidation Principles (continued) b) Business Combinations (continued) The participation held by minority shareholders in the acquired entity is initially measured based on the portion of the minority shareholders in the net fair value of the assets, liabilities and contingent liabilities recognized. c) Minority Interest Minority interest corresponding to the net assets (excluding the goodwill) of the consolidated subsidiaries is separately listed under the Group s equity. Minority interest consists of the value of such interests at the date on which the business combination originally takes place (see below) and minority shareholders participation in the changes of equity since the date of the business combination. Losses that are applicable to the minority shareholders are carried against the Group s interest except insomuch as the minority shareholder is bound and is able to make additional investments to cover such losses. (d) Associates A permanent investment is an entity over which the Group has a significant influence or maintains links of a permanent nature and which is neither a subsidiary nor an interest in a combined company. The results, assets and liabilities of associates are included in the financial statements using the equity method. Under the equity method, investments in associates companies are accounted to costs on the balance sheet and then are subsequently adjusted by the changes in the Group s participation in the net assets of the associated company, less any impairment to the value of the individual investments. Losses incurred with a permanent investment that exceeds the interest earned by the Group on the investment (which includes any long-term interest that, in essence, forms part of the Group s net investment in the associated company) are recognized only in the event that the Group has incurred in legal or constructive obligation or has made payments on behalf of the entity. Any excess of the acquisition cost over the fair value of the Group s share of the identifiable net assets, liabilities and contingent liabilities, identifiable to the associate, recognized at the acquisition date, is recorded as goodwill. The goodwill is included in the book value of the investment and is evaluated for impairment purposes as part of the investment

20 2. Summary of the Most Significant Accounting Policies (Continued) Monetary Unit The Group s accounting records are stated in balboas (B/.) and the consolidated financial statements are also expressed in this currency. The balboa is the monetary unit of Panama, which is at par and is freely exchangeable with the US dollar (US$). The Republic of Panama does not issue paper currency and instead uses the US$ as its legal tender. Financial Assets The Group classifies these assets based on what establishes Agreements (Loans) and (Investments). The Group classifies its financial assets in the following categories: financial assets measured at fair value through profit or loss, loans receivable, investments in securities held-tomaturity and investments in securities available-for-sale. This classification depends on the purpose for which the financial asset was acquired. Management determines investments classifications since their initial recognition. (a) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets classified as held for trading and those measured at fair value through profit or loss upon initial recognition. A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorized as held for trading unless they are designated and effective as hedging instruments. Financial instruments included in this category are recognized initially at fair value; transaction costs are taken directly to the consolidated income statement. Gains and losses arising from changes in fair value are included directly in the consolidated income statement. Certain investments, such as equity investments, investments in mutual funds or investments in indexed funds, are managed and evaluated based on their fair value according to their risk profile and based investment strategy. These are totally and directly appraised based on quoted prices published on the active market. (b) Loans Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are not intended to be sold off either immediately or in the short term. Loans are stated at the value of the principal due, net of interest and unearned discounted commissions, less the reserve for possible loan losses

21 2. Summary of the Most Significant Accounting Policies (Continued) Financial Assets (Continued) (b) Loans (continued) Interest and non-earned discounted commissions are charged to the income accounts during the term of the loan using the effective interest method. Financial leasing operations consist mainly of leasing contracts for equipment or vehicles, which are normally granted for terms between 36 and 60 months and which are disclosed as part of the loan portfolio and are posted at the contract s present value. The difference between the total value due from the financial leasing contract and the present value of the financial leasing receivable is recognized as unearned interest which is charged to income during the term of the lease using a method which reflects a constant periodic rate of return. Leasing receivables are stated at their corresponding value net of unearned interest due. (c) Investments on securities available-for-sale Available-for-sale investments are financial assets that are intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices or that are not classified as loans and receivables, held to-maturity investments or financial assets at fair value through profit or loss. Available-for-sale financial assets are initially recognized at fair value, which is the cash consideration including any transaction costs, and measured subsequently at fair value with gains and losses being recognized in the consolidated statement of comprehensive income, except for impairment losses and foreign exchange gains and losses, until the financial asset is derecognized. If an available-for-sale financial asset is determined to be impaired, the cumulative gain or loss previously recognized in the consolidated statement of comprehensive income is recognized in the consolidated income statement. However, interest is calculated using the effective interest method, and foreign currency gains and losses on monetary assets classified as available for sale are recognized in the consolidated income statement. Dividends on available-for-sale equity instruments are recognized in the consolidated income statement when the Group s right to receive payment is established. (d) Investments in securities held-to-maturity Securities held-to-maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities which the Group s Senior Management has the firm intention and the ability to hold until maturity. Should the Bank sell off certain assets held-to-maturity, the quantity of which is considered not to be insignificant, the entire category is to be reclassified as available-for-sale

22 2. Summary of the Most Significant Accounting Policies (Continued) Financial Assets (Continued) (d) Investments in securities held-to-maturity (continued) Pursuant to Agreement , banks may record their investments in this category upon meeting any of the following requirements: When such investments have a residual maturity of more than one year, when first acquired. When these are rated on the immediately preceding level to an investment grade by at least one reputable risk rating firm, either local or foreign. Any other such investments that the Superintendency of Banks of Panama should include for the purposes of this Agreement. In October 2008, the Superintendency of Banks of Panama issued the Agreement No , through which temporary measures were adopted in response to the international financial situation. In this sense, after obtaining the authorization from the Superintendency, a bank may transfer certain securities from the category Securities Available-for-Sale to the category Securities Held-to-Maturity. The Group did not transfer any securities pursuant to this Agreement which, through the Agreement No of March 11, 2009, was without effect. Purchases and sales of financial assets measured at fair value with changes recognized in the statement of income, investments in securities held-to-maturity and investments in securities available-for-sales are recognized on the date when these are realized, this being the date on which the asset is transferred to or by the entity. Loans are recognized when cash is paid out to the borrowers. Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value with changes to the income accounts. Financial assets at fair value with changes recognized in the income statement are initially recognized at fair value, and transaction costs are expensed in the statement of income. Financial assets are derecognized when the rights to receive cash flows from a financial asset have expired or when the Group has transferred substantially all inherent risks. If the risks and ownership benefits are not transferred or withheld to a substantial extent, the entity continues controlling the asset thus transferred. If the risks and ownership benefits of a transferred financial asset be withheld to a substantial extent, the financial asset in question shall continue to be recognized in books together with a liability guaranteed by the amount thus received

23 2. Summary of the Most Significant Accounting Policies (Continued) Financial Assets (continued) In the case of those investments traded in organized financial markets, the fair value is based on recent bid prices. In the case of investments that do not have listed market prices, their fair value is estimated based on the current market value of any other instrument, which shall be substantially the same, or based on expected cash flows or the underlying net asset of the investment in question. Interest Income and Expense Interest income and expense are generally recognized in the statement of income for all interest bearing instruments using the effective interest method. The effective interest method is a means of calculating the amortized cost of a financial asset or liability and of allocating the interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument, but does not consider future credit losses. Once the Group determines the impairment in a financial asset exists due to the financial condition of the debtor, and has no certainty to collect the totality of the loan balance, or the indebted party has not made the originally contractual payments to capital or interest, suspends the recognition of interests, as it is regulated by Agreement , as follows: (a) More than ninety (90) days of delay in the case of loans that finance commercial and/or production, including corporate and consumer loans by means of voluntary payments, that is to say, all those that are not are not made in the form of direct discounts. (b) More than one hundred and twenty (120) days of delay for consumer loans with repayments that are directly discounted from the employer, unless there is evidence that the client has lost the employment, and for mortgage the employment loans and all those consumer loans that are guaranteed by means of a residential mortgage. Fee and Commission Income Generally, fees and commissions on short-term loans, letters of credit and other banking services are recognized as income when these are collected due to their short-term maturity. Income recognized upon collection is not significantly different from income that shall be recognized using the accrual method. Fees and commissions on mid- and longterm transactions are deferred and amortized on the income accounts during the term of these same. Commissions on loans are included as income interest on loans on the consolidated statement of income

24 2. Summary of the Most Significant Accounting Policies (Continued) Impairment of Financial Assets (a) Loans The Group classifies its loan portfolio and estimates the provision for possible loan losses based on the Agreement No , issued by the Superintendency of Banks on June 28, This Agreement stipulates that all loans must be classified in one of the following five (5) categories, according to its recovery risk and conditions of the loan, and establishes a minimum provision for each classification: Normal 0%, Special Mention 2%, Substandard 15%, Doubtful 50%, and Loss 100%. For the purpose of portfolio classification, based on the Agreement No , the Group takes into consideration, among other, the following: Significant financial difficulty of the debtor; A reach of contract, as default on delinquency in interest or principal payments; Adverse situations in the economic sector that affects the debtor; The probability that the borrower will enter in bankruptcy or other financial reorganization; Existence and quality of the loan collateral; Observable information that indicates there has been a decrease in the operating inflows of the debtor. When a loan is considered uncollectible, it is written-off against the related provision for loan impairment. Such loans are written-off, after all the collecting procedures have been duly carried out and the amount of the loss has been determined. Subsequently, recoveries of amounts previously written-off are credited in the consolidated statement of income. Management considers that the provision for possible loans losses is adequate. The oversight authorities periodically review the reserve for loan losses as part of their integral examinations. These oversight authorities may request additional provisions based on the evaluations of the available information at the date of their review

25 2. Summary of the Most Significant Accounting Policies (Continued) Impairment of Financial Assets (Continued) (b) Investments Available-for-Sale The Group assesses at each balance sheet date whether there is objective evidence of a possible impairment to a financial asset or a group of financial assets. In the case of equity investment classified as available-for-sale, a significant or prolonged decline in the fair value below their respective cost is considered in determining the impairment of such assets. If such evidence exists in the case of financial assets that are availablefor-sale, the accumulated loss, calculated based on the difference between the acquisition cost and fair value, less any impairment losses of the financial asset previously recorded in the profit and loss accounts, is removed from the equity accounts and recognized in the consolidated statement of income. Impairment losses that are recognized in the consolidated statement of income on equity instruments (shares) are not reversed through the statement of income. If in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and this increase can be objectively related to an event occurring after the impairment loss was recognized in the profit and loss accounts, the impairment loss is reversed through the statement of income. (c) Investments Held-to-Maturity At the balance sheet date, the Group assesses whether there is an objective evidence of a possible impairment to a financial asset or a group of financial assets. The Group determines any impairment on investments held-to-maturity based on Agreement No , considering the following aspects: Reduction in the credit rating awarded by a local or foreign rating agency; The fair value falls significantly below the cost; Reduction in the fair value for a long period of time (more than one year); Material reduction, not temporary, unless there is evidence of probable collection; Deterioration in the condition of the industry or geographical area; Reduction in the capacity to continue as an ongoing business. The Group must set up provisions equivalent for the amount non-temporary losses, as well as other special provisions established by the aforementioned Agreement

26 2. Summary of the Most Significant Accounting Policies (Continued) Property, Furniture and Equipment Property, furniture and equipment acquired in the business combinations are stated at the fair value, based on appraisals made by independent appraisers, less the respective accumulated depreciation and any impairment loss, as applicable. Acquired property, furniture and equipment are stated at cost less accumulated depreciation and any impairment losses sustained. When any complete elements are replaced or renovated and, as a result, prolong the useful life of the asset or its economic capacity, they are carried as a greater value of property, plant or equipment with the consequent withdrawal of the replaced or renovated elements from books. When the parts of an item of property, furniture or equipment have a different useful life, they are carried separately from the property, furniture and equipment items. Periodic maintenance and repair costs are charged to the statement of income, following the accrual accounting principle, as a cost for the period in which they are incurred. Depreciation is charged to the corresponding cost, during the estimated service life of the corresponding asset, using the straight-line method based on the following depreciation rates: Buildings Furniture and equipment Vehicles Computer equipment Other assets 20 to 30 years 3 to 10 years 5 to 7 years 3 to 5 years 3 to 10 years Gains or losses resulting from disposal of an asset are calculated as the difference between the proceed from the sale and the carrying value of the asset and it is recognized in the statement of income. Property, furniture and equipment are assessed for impairment providing the course of events or the changes in circumstances indicate that the book value may not be recovered. The book value of the asset is then immediately reduced to its recoverable value if the carrying is higher than the estimated recoverable value. The recoverable amount is the highest value between the asset s fair value less its selling cost and its respective value in use

27 2. Summary of the More Significant Accounting Policies (Continued) Foreclosed Assets According to Agreement , issued by the Superintendency of Banks of Panama, foreclosed assets received through mortgaged judgments, that will be sold later, are initially recorded at fast sale value, according to appraisal, net of estimated costs of sale of the property, or the balance of credit canceled, either the lesser. Operating expenses are included in the income statement. That agreement sets at five (5) years the period for disposal of real estate acquired in payment of credits unpaid computed from the date of the asset registration in the Public Registry. If after this period the Bank has not sold the property acquired, must make an independent appraisal to establish whether the property has decreased its value, at the same time, will be fined up to annual ten percent (10%) of acquisition value. The Agreement also provides that the Bank must create a reserve in the equity account, through appropriation in the following order: a) its retained earnings, b) income of the period, which will remain until the actual transfer of good takes place: Years Minimum Percentage First year 10% Second year 20% Third year 35% Fourth year 15% Fifth year 10% Purchased Goodwill The Group presents goodwill acquired through the business combinations, which represents the payments made in advance of future economic benefits obtained from assets which were not individually identified and separately recognized. After its initial recognition, the entity appraises the purchased goodwill acquired through the business combinations at cost less accumulated impairment losses. The goodwill acquired through business combinations is not amortized. Instead, the entity assesses the impairment of its value on an annual basis, or more frequently if the events or changes in circumstances indicate that its value might have declined, as pursuant to IAS36 Impairment of Assets. The Group decided not to apply the IFRS 3 Business Combinations standard to all those combinations carried out before May 31, Therefore, no adjustment shall be recognized in the book value of goodwill purchased through business combinations before that date

28 2. Summary of the Most Significant Accounting Policies (Continued) Intangible Assets Intangible assets acquired through business combinations are identified and recognized separately from goodwill when these are defined as intangibles and their fair value can be reliably measured. The cost of intangible assets acquired through business combinations is recorded at fair value on the date they were acquired. Subsequent to their initial recognition, intangible assets are recognized in books at cost less accumulated amortization and any accumulated impairment losses. Amortization is charged using the straight-line method for certain assets and the decreasing digit method for others, this based on their estimated useful lives. Cash and Cash Equivalents For presentation purposes of the consolidated statement of cash flows, cash and cash equivalents include cash, due from banks, and interest-bearing deposits with original maturities of three months or less. Employee Benefits Panama Seniority Premium and Severance Trust Funds According to the Labor Code in Panama, employees holding an indefinite employment contract are entitled to receive, at the end of their term of employment, a seniority premium equal to a week s salary for each year of service, as of the date on which the employee begins to work for the entity. Furthermore, all those employees who are dismissed under certain circumstances are entitled to receive compensation based on their respective years of service. Law No.44 of 1995 stipulates that companies must make contributions to a Severance Fund to cover seniority premiums. These contributions are calculated based on the salaries or wages paid to employees. For the purpose of managing this fund, the Company has set up a trust with a duly authorized private firm. For the year ended, this amounted to B/.26,881 (2008: B/.21,102) and the accumulated value of severance trust fund amounted to B/.219,312 (2008: B/.192,431). Social Security According to Law No. 51 of December 27, 2005, Panamanian companies must make monthly contributions to the Social Security Administration (in Spanish, Caja de Seguro Social), equal to 12.25% of the total amount of salaries and wages paid out to their employees. Part of these contributions is used by the Panamanian Government to pay out future retirement pensions to these employees. All contributions made are considered part of a defined contribution plan, in which the Company is not obliged in the future to pay any additional amounts other than the contributions thus made. The amount paid out in social security contributions in 2009 amounted to B/.235,561 (2008: B/.190,369)

29 2. Summary of the Most Significant Accounting Policies (Continued) Employee Benefits (continued) El Salvador Indemnity and voluntary retirement All compensation accruing in favor of the employees of the Company and its subsidiaries, based on their years of service, according to that laid out in the current Labor Code, may be paid out in the event the employee is dismissed. At, the maximum contingency for this item in the case of the companies belonging to the Group is estimated in B/.9,199 (2008: B/.7,492); and the Group s policy is to record all compensation expense during the period in which this obligation arises. Foreign Currency Assets and liabilities in foreign currency are converted to balboas using the exchange rate applicable at the balance sheet date, except for all those transactions where the exchange rate is contractually agreed upon. Transactions in foreign currency carried out during the period, are converted using the exchange rates applicable on the dates on which said transactions are carried out. Gain or losses resulting from fluctuating exchange rates are recognized in the income or other expense accounts, respectively. Any changes in the fair value of investments held in foreign currency that are classified as financial instruments measured at fair value through profit or loss are analyzed comparing the difference between their market and book values. This exchange differences are included in the income accounts for the period. Derivative Financial Instruments Derivatives are initially recognized at fair value on the date on which the derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are obtained from market prices quoted in active markets, including recent market transactions and valuation techniques, including discounted cash flow and options price model, as appropriate. All derivatives are carried as assets when fair value is positive and as a liability when fair value is negative. The method of recognizing the fair value gain or loss depends on whether the derivative is a hedging instrument, and if so, the nature of the item hedged; if it is not designated as a hedging instrument, it is considered a negotiable instrument. The financial instruments used by the Group are considered negotiable derivatives. Changes in the fair value of these instruments are immediately recognized in the consolidated statement of income. Capital Reserve The capital reserve is set up by the Group to cover contingencies, by means of transferring of retained earnings. This reserve is set up at the discretion of Management, and may be changed or eliminated at any time by instructions of the Board of Directors