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 Auditors Report 1-2 Consolidated 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 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 for supervision purposes, as described in Note 2 to the consolidated financial statements. PricewaterhouseCoopers (SIGNED) March 30, 2011 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/. 59,698,886 B/. 79,623,250 Foreign deposits (Note 5) Demand B/. 1,087,020,538 B/. 1,050,280,683 Bank deposits (Notes 5 and 6) Savings 1,186,330,204 1,023,008,470 Demand - domestic banks 2,875,960 4,268,551 Time 2,382,657,357 2,577,175,824 Demand - foreign banks 640,074, ,237,052 Other deposits 4,000,000 8,885,000 Time - domestic banks - 17,486,046 Time - foreign banks 162,476, ,500,000 Total deposits 4,660,008,099 4,659,349,977 Total bank deposits 805,426, ,491,649 Negotiable certificates (Note 18) 153,267,000 - Total cash, cash equivalents and bank deposits 865,125, ,994,899 Bank obligations (Notes 5 and 19) 387,870, ,227,607 Reverse repos 10,136, ,000 Own issued securities (Note 17) 226,777, ,081,800 Derivative financial instruments (Note 32) 1,393, ,143 Derivative financial instruments (Note 32) 5,100,959 2,710,133 Investment securities (Note 7) Other liabilities: Financial assets at fair value through profit or loss - 8,013,128 Cashier's and certified checks 10,967,329 9,606,375 Available-for-sale, net 493,629, ,496,795 Accrued interest payable (Note 5) 11,432,958 12,756,643 Held-to-maturity 364,314, ,336,615 Reserves for contingencies, guarantees and bonds (Note 21) 17,928,142 13,092,165 Permanent (Note 5) 24,773,124 22,380,520 Mathematical reserves, ongoing and claims risk (Note 20) 33,303,501 31,252,810 Acceptances outstanding 1,756,798 1,406,820 Total investment securities 882,717, ,227,058 Income tax payable 28,670,138 10,705,584 Deferred income tax - liability (Note 27) 2,265,609 1,761,898 Loans to foreign sector (Notes 5 and 8) 3,886,379,993 3,962,917,100 Other liabilities (Note 22) 44,472,203 41,652,575 Less: Total other liabilities 150,796, ,234,870 Unearned interest and commissions (5,145,548) (6,438,087) Reserve for loan losses (Note 9) (159,116,824) (138,528,949) Total liabilities 5,583,820,845 5,852,604,387 Loans, net 3,722,117,621 3,817,950,064 Assets pledged as collateral (Note 10) 49,871,875 - Contingencies and commitments (Notes 29 and 33) Property, plant and equipment, net (Note 11) 99,648, ,080,506 Equity Foreclosed assets (Note 12) 32,840,999 30,438,072 Share capital (Note 23) 14,000,000 14,000,000 Capital reserve 1,289,073 1,289,073 Other assets: Other reserves 104, ,118 Accrued interest receivable (Note 5) Revaluation reserve 14,227,137 11,425,555 Time deposits 162, ,955 Retained earnings 591,861, ,898,217 Loans, net 18,119,668 19,259,534 Investments 15,018,914 16,864,903 Net equity attributable to equity holder of the Company 621,482, ,715,963 Goodwill (Note 13) 342,051, ,829,758 Intangible assets (Note 14) 128,123, ,283,190 Minority interest (Note 25) 21,054,850 20,328,732 Insurance premiums receivable, net (Note 15) 20,956,335 21,195,170 Customers' liabilities on acceptances 1,756,798 1,406,820 Total equity 642,537, ,044,695 Prepaid expenses 3,290,680 1,746,758 Deferred income tax - assets (Note 27) 13,249,378 5,894,929 Various debtors, net (Note 16) 19,775,524 23,176,323 Total other assets 562,505, ,826,340 Total assets B/. 6,226,358,073 B/. 6,377,649,082 Total liabilities and equity B/. 6,226,358,073 B/. 6,377,649,082 Liabilities 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/. 351,544,856 B/. 399,676,924 Deposits 2,689,454 3,398,735 Investments 24,125,106 24,886,347 Total interest income 378,359, ,962,006 Interest expense (Note 5) Deposits 87,192, ,861,586 Obligations 25,518,748 45,311,684 Total interest expense 112,711, ,173,270 Net interest before provisions 265,648, ,788,736 Provisions Provision for loan losses (Note 9) (72,121,917) (81,196,050) Provision for foreclosed assets (1,795,442) (4,563,766) Share of profit of associates 188,736 2,311,471 Provison for letters of credit, guarantees and bonds (5,153,495) (10,630,184) Others (2,142,285) (3,520,767) Total provisions (81,024,403) (97,599,296) Net interest after provisions 184,623, ,189,440 Other income (expense), net Fees and other commissions (except loans) (Note 24) 83,752,554 77,525,630 Commission expense (Note 26) (17,811,338) (20,070,223) Net gain on sale of securities and derivatives (Note 28) 7,308,288 21,519,954 Unrealized gain on financial instruments at fair value 14, ,770 Dividend income 1,893,012 1,549,940 Net result from insurance operations 1,668,094 3,969,535 Other operating revenues (Note 24) 20,553,962 23,525,224 Total other income, net B/. 97,379,045 B/. 108,150,830 (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 (Note 26) B/. 58,844,068 B/. 59,340,252 Fees and professional services 8,305,786 7,083,611 Depreciation and amortization 6,172,462 8,563,483 Amortization of intangibles and others 22,879,480 25,460,900 Other taxes 7,267,911 6,759,031 Communications and postal expense 7,375,901 8,310,487 Maintenance 5,364,731 5,879,247 Stationery and office supplies 1,805,464 1,529,038 Insurance 494, ,309 Quotas and subscriptions 2,997,729 2,663,784 Electricity and water 2,872,055 2,900,034 Rent 4,087,248 4,284,499 Others (Note 26) 9,375,083 15,932,249 Total other operating expense 137,842, ,003,924 Income before income tax 144,160, ,336,346 Income tax (Note 27) (28,525,255) (20,733,138) Net income B/. 115,635,051 B/. 83,603,208 Attributable to: Equity shareholder B/. 113,963,118 B/. 82,657,412 Non - controlling interests (Note 25) 1,671, ,796 Net income B/. 115,635,051 B/. 83,603,208 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/. 115,635,051 B/. 83,603,208 Other integral income (expenses): Net unrealized loss in reverse repos (46,087) - Net unrealized gain in available-for-sale securities (Note 7) 15,338,394 31,118,582 Gain transferred to the statement of income (Notes 7 and 28) (12,490,725) (15,992,628) Total comprehensive income B/. 118,436,633 B/. 98,729,162 Total comprehensive income attributable to: Equity shareholder B/. 116,764,466 B/. 97,695,052 Non - controlling interests 1,672,167 1,034,110 B/. 118,436,633 B/. 98,729,162 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 Share Capital Capital Reserve Other Reserves Revaluation Reserve Retained Earnings Equity Attributable to Shareholder Non - controlling Interests Total Equity 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 change in fair value of investments available-for-sale (Notes 7 and 28) ,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 Non - controlling interests from business combination (717,819) (717,819) Other reserves - - (8,125) - - (8,125) - (8,125) Dividends (182,683) (182,683) Decrease in in non - controlling interests 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 December 31, ,000,000 1,289, ,118 11,425, ,898, ,715,963 20,328, ,044,695 Comprehensive income Net income ,963, ,963,118 1,671, ,635,051 Net unrealized loss in assets pledged as collateral (46,087) - (46,087) - (46,087) Net change in fair value of investments available-for-sale (Notes 7 and 28) ,847,669-2,847,669-2,847,669 Total comprehensive income ,801, ,963, ,764,700 1,671, ,436,633 Transactions with shareholders Non - controlling interests from business combination , ,145 Other reserves - - 1, ,715-1,715 Dividends (458,804) (458,804) Decrease in non - controlling interests in subsidiaries belonging to Banagricola (849,156) (849,156) Total of transactions with shareholders - - 1, ,715 (945,815) (944,100) Balance at B/. 14,000,000 B/. 1,289,073 B/. 104,833 B/. 14,227,137 B/. 591,861,335 B/. 621,482,378 B/. 21,054,850 B/. 642,537,228 Otras reservas The notes on pages 10 to 76 are an integral part of these consolidated financial statements

10 (a wholly-owned subsidiary of Bancolombia, S. A. - Colombia) Consolidated Statement of Cash Flows For the year ended Cash flows from operating activities Income before income tax B/. 144,160,306 B/. 104,336,346 Adjusments to reconcile net income before income tax and net cash provided by operating activities Depreciation and amortization 6,172,462 8,563,483 Amortization of intangible assets and others 22,879,480 25,460,900 Provision for loan losses 72,121,917 81,196,050 Provision for foreclosed assets 1,795,442 4,563,766 (Reversal) provision for mathematical reserves, ongoing and claims risk (829,007) 535,132 Provision for guarantees, bonds and letters of credit 5,153,495 10,630,184 Reversal of provision for investment valuation (188,736) (2,311,471) Other provisions 2,142,285 3,520,767 Net realized gain on sale of securities available-for-sale (12,490,725) (15,992,628) Interest income (378,359,416) (427,962,006) Interest expense 112,711, ,173,270 Net unrealized gain in financial assets at fair value (14,473) (130,770) Net changes in operating assets and liabilities: Time deposits in banks with original maturities of more than 90 days (97,449,579) 3,966,667 Loans 23,710, ,725,165 Reverse repos (9,256,108) 2,786,304 Other assets (7,226,535) (20,410,551) Demand deposits received 36,739, ,019,209 Savings deposits received 163,321, ,479,842 Time deposits received (46,136,466) (200,375,578) Interbank deposits - (6,150,625) Cashier's and certified checks 1,360,954 (4,673,327) Other liabilities 7,772,634 (3,766,401) 48,091, ,183,728 Cash from operations Income tax paid (17,411,439) (24,302,999) Interest received 381,351, ,510,687 Interest paid (114,034,939) (191,662,692) Net cash provided by operating activities 297,996, ,728,724 The notes on pages 10 to 76 are an integral part of these consolidated financial statements

11 (a wholly-owned subsidiary of Bancolombia, S. A. - Colombia) Consolidated Statement of Cash Flows - Continued For the year ended Cash flows from investing activities Purchases of securities held-to-maturity (7,639,257,895) (7,458,091,168) Redemption of securities held-to-maturity 7,645,279,696 7,424,649,015 Increase in permanent investments (2,203,868) (2,026,533) Purchase of investments available-for-sale (920,698,469) (1,307,975,276) Sales and redemptions of investments available-for-sale 964,986,091 1,122,923,249 Sales and redemptions of financial assets designated at fair value 8,027,601 73,833 Goodwill (71,972) (951,752) Purchases, sales and disposals of property, plant and equipment, net (4,740,737) (1,899,709) Net cash provided by (used in) investing activitites 51,320,447 (223,298,341) Cash flows from financing activities Bank obligations (359,357,255) (243,794,725) Placements of own issued securities - 54,000,000 Cancellations of own issued securities (94,304,043) (85,006,407) Dividends paid to non - controlling interests (458,804) (182,683) Decrease in non - controlling interests in subsidiaries (635,539) (3,814,892) Net cash used in financing activities (454,755,641) (278,798,707) Net (decrease) increase in cash and cash equivalents (105,438,851) 37,631,676 Cash and cash equivalents at beginning of year (Note 6) 844,531, ,899,890 Cash and cash equivalents at end of year (Note 6) B/. 739,092,715 B/. 844,531,566 The notes on pages 10 to 76 are an integral part of these consolidated financial statements

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% 99.16% Suleasing Internacional USA Inc. Financial Leasing USA 100% 100% Inversiones Financieras Banco Agricola, S. A. Holding Company El Salvador 99.72% 99.71% Banco Agricola, (Panama), S. A. Banking Panama 100% 100% Banco Agricola, S. A. Banking El Salvador 98.41% 98.37% Aseguradora Suiza Salvadoreña, S. A. Insurance El Salvador 97.03% 97.03% 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 Corredores de Bolsa Stock Exchange Brokerage El Salvador 99.99% 99.99% Asesuisa Vida, S. A. Insurance El Salvador 99.99% 99.99% -10-

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. On December, 2010 the company Sinesa Holding Company Ltd. was liquidated and its assets were transferred to Sistema de Inversiones y Negocios, S. A. as the only shareholder, and consequently, this company turned into the owner of all the capital investments holds by Sinesa Holding Company Ltd. Likewise Sistema de Inversiones y Negocios, S. A. 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. No authorized the Bank to cease operation. As part of this process, all assets and liabilities have been transferred to Bancolombia (Panama), S. A. 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 month, 89.15% of its total shares were acquired. The Banagricola, S. A. 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% (2009 : 99.16%) shares of Banagricola, S. A. -11-

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 26, 1998, subsequently amended by Decree-Law No.2 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: Inversiones Financieras Banco Agrícola, S. A., 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, and AFP Crecer, S. A. have been prepared according to the accounting practices established by the Superintendency of Pensions of El Salvador. Therefore, these financial statements were adjusted to 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 Management 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 (SBP) for supervision 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 No 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. Also, the accounting treatment for the 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, impairment of financial assets. 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 or complexity, as areas where assumption and estimates are significant to the consolidated financial statements are disclosed in Note 4. Standard and review of standards not yet effective and not early adopted by the Group - IFRS 9, Financial instruments. This standard is the first step in the process to replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 introduces new requirements for classifying and measuring financial assets and is likely to affect the accounting for the financial assets. The standard is applicable since January 1, The Group will apply this standard from force and consider that it will have no material effect on the Group s operations. - IAS 24 (revised), Related party disclosures. It supersedes IAS 24, Related party disclosures, issued in IAS 24 (revised) is mandatory for periods beginning on or after January 1,

16 2. Summary of the Most Significant Accounting Policies (Continued) Consolidation Principles The consolidated financial statements include the financial statements of the Bank 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 indirectly owned. (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 and 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 modified 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 as the sum of fair values (at the trade date) of the assets given, the liabilities incurred or assumed and the equity instruments issued by the Bank in exchange for the control acquired, plus any direct costs attributable to the business combination. Identifiable assets and liabilities of the acquiree and contingent liabilities that comply with the conditions of IFRS 3: Business Combinations, for their recognition, are recognized 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 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 participation held by the Group in the net fair value of the identifiable assets and liabilities and the recognized contingent liabilities. If the Group s participation in the net fair value of the identifiable assets and liabilities, and contingent liabilities of the acquiree exceeds the cost of the business combination, the excess is recognized immediately in the actual results. The non controlling interest in the acquiree is initially measured based on the proportion of the minority in the net fair value of the assets, liabilities and contingent liabilities recognized. -14-

17 2. Summary of the Most Significant Accounting Policies (Continued) Consolidation Principles (continued) (c) Non controlling Interest Non controlling interests in the net assets (excluding the goodwill) of the consolidated subsidiaries are separately identified in the Group s equity. Non controlling interests consist of the value of such interests at the date on which the business combination originally takes place (see below) and non - controlling interests in the changes of equity since the date of the business combination. Losses applicable to the non controlling interests in excess to the participation in the subsidiary s equity are carried against the Group s interest except to the extent that non controlling interests have a binding obligation and be able to make additional investments to cover such losses. Permanent Investments (a) Associates An associate is an entity over which the Group has a significant influence or maintains links of permanent nature and which is neither a subsidiary nor an interest in a joint venture. The results, assets and liabilities of associates are included in the financial statements using the equity method. Under the equity method, investments in associates are stated at cost in the balance sheet and are subsequently adjusted by the changes in the Group s participation in the net assets of the associate, less any impairment to the value of the individual investments. Losses incurred in a permanent investment that exceed the interest of the Group on the investment (which include any long-term interest that, in essence, form part of the Group s net investment in the associate) are only recognized only in the event that the Group has incurred in legal or constructive obligations or has made payments on behalf of such entity. Any excess of the acquisition cost over the Group s share in the fair value of the net identifiable assets, liabilities and contingent liabilities of the associate, recognized at the acquisition date, is recorded as goodwill. The goodwill is included in the book value of the investment and is assessed for impairment as part of the investment. (b) Subsidiaries non Consolidated According with Agreement No , the Group can classified equity investments in order to participate as shareholder and have control or relation with other companies. Those investments can be accounted for by the equity method or at cost. The Group has adopted the cost method, for effects of presentation of the financial statements. -15-

18 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 dollar (US$) of the United States of America. The Republic of Panama does not issue paper currency and instead uses the US$ as its legal tender. Financial Assets The Group classifies these assets based on what establish by the Agreements No (Loans) and No (Investments), in the following categories: financial assets at fair value through profit or loss, loans receivable, investments in securities held-to-maturity and investments in securities available-for-sale. The 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 for trading and assets designated at fair value through profit or loss since their 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 initially recognized 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 on the investment strategy. Their valuations are totally and directly appraised based on quoted prices published in the active market. -16-

19 2. Summary of the Most Significant Accounting Policies (Continued) Financial Assets (continued) (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 immediately or in the short-term. Loans are stated at their principal outstanding net of interest and unearned discounted commissions, less the reserve for possible loan losses. Interest and unearned discounted commissions are credited to the income accounts during the term of the loans under 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 carried out at the present value of the contract. The difference between the total value of the financial leasing contract and the present value of the financial leasing receivable is recognized as unearned interest which is credited 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 value net of unearned interest and commissions receivable. (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 Management has the positive intention and the ability to hold until maturity. If the Group sells certain insignificant assets held-to-maturity, the entire category is to be reclassified as available-for-sale. -17-

20 2. Summary of the Most Significant Accounting Policies (Continued) Financial Assets (continued) (d) Investments in securities held-to-maturity (continued) According to Agreement No , the banks may record their investments in this category if they meet the following requirements: When these have a residual maturity of more than one year, when they are acquired; When these are rated on the immediately preceding level to an investment grade by at least a reputable risk rating firm, either local or foreign; and Any other that the Superintendency of Banks of Panama should include for the purposes of this Agreement. Purchases and sales of financial assets at fair value through profit or loss, investments in securities held-to-maturity and investments in securities available-for-sales are recognized at the settlement date, this being the date on which the asset is transferred to or by the entity. Loans are recognized when cash is disbursed 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 risks. If the risks and ownership benefits are not transferred or withheld to a substantial extent, and the entity continues controlling the asset transferred, shall continue to be recognized the interest retained in the assets and a liability related by the amounts that it should have to pay. 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. 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. -19-

21 2. Summary of the Most Significant Accounting Policies (Continued) Assets Pledged Securities sold under repurchase agreements ( repos ) are considered in the financial statements as assets pledged as collateral when the transfer by the agreement grants the right to sell or repledge the collateral; the counterparty is a liability included in bank obligations. The difference between sale price and repurchase price is treated as interest and is accrued over the life of the agreement using the effective interest method. 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 with 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 principal or interest, suspends the recognition of interests, as it is regulated by Agreement No , 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 Fees and commissions on short-term loans, letters of credit and other banking services are generally 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 medium and long-term transactions are deferred and amortized on the income accounts during the term of them. Commissions on loans are included as interest income on loans on the consolidated statement of income. -20-

22 2. Summary of the Most Significant Accounting Policies (Continued) Impairment of Financial Assets (a) Loans The Group classifies its loan portfolio and estimates the provisions 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 breach of contract, as default on delinquency in interest or principal payments; Adverse situations in the economic sector that affects the debtor; 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 derecognized 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 regulator periodically reviews the reserve for loan losses as part of their integral examinations. The regulator may request additional provisions based on the evaluations of the available information at the date of their examinations. -21-

23 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 an 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 available-for-sale, the cumulative loss, determined based on the difference between the acquisition cost and fair value, less any impairment losses of the financial asset previously recognized in the profit and loss, is removed from the equity 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, 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 a going concern business. The Group must set up provisions equivalent for the amount of such non-temporary losses, as well as other special provisions established by the aforementioned Agreement. -22-

24 2. Summary of the Most Significant Accounting Policies (Continued) Property, Plant and Equipment Property, plant 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, plant 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 out 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, plant or equipment have a different useful life, they are carried separately from the property, plant and equipment items. Periodic maintenance and repair costs are charged to the statement of income, following the accrual 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 Plant 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 Gain or loss resulting from disposal of an asset is determined as the difference between proceed from the sale and the carrying value of the asset and it is recognized in the consolidated statement of income. Property and equipment are assessed for impairment whenever the 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. -23-

25 2. Summary of the More Significant Accounting Policies (Continued) Foreclosed Assets According to Agreement No , 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 on the income statement. That Agreement sets at five (5) years the period to dispose of real estate acquired in payment of unpaid credits since 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) profit for 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% Goodwill The Group recorded goodwill acquired through the business combinations, which represents the payment 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 impaired, as pursuant to IAS 36 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 goodwills purchased through business combinations before that date. -24-

26 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 they satisfy the definition of intangible and their fair values can be reliably measured. The cost of intangible assets acquired through business combinations is recorded at fair value at their acquisition date. Subsequent to their initial recognition, intangible assets are accounted for 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/.31,521 (2009: B/.26,881) and the accumulated value of severance trust fund amounted to B/.250,833 (2009: B/.219,312). 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 2010 amounted to B/.237,142 (2009: B/.235,561). -25-

27 2. Summary of the Most Significant Accounting Policies (Continued) Employee Benefits (continued) Social Security (continued) El Salvador Indemnity and voluntary retirement All compensation accruing in favor of the employees of the companies and their subsidiaries, based on their years of service, according the dispositions of the current Labor Code, may be paid out in the event the employee is dismissed. At December 31, 2010, the maximum contingency for this item in the case of the companies belonging to the Group is estimated in B/.10,442 (2009: B/.9,199); and the Group s policy is to record all indemnity during the period in which the obligation arises. Foreign Currency Assets and liabilities denominated 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 prevailing at the transactions dates. Gain or losses resulting from changes in exchange rates are recognized in the income or other expense accounts, respectively. Changes in the fair value of investments denominated in foreign currency that are classified as financial instruments at fair value through profit or loss are analyzed comparing the difference between their market value and book values. This exchange differences are included in the results for the period. Derivative Financial Instruments Derivatives are initially recognized at fair value at the date on which the derivative contract is entered into and are subsequently measured 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 liabilities when fair value is negative. The method of recognizing the fair value gain or loss depends on whether the derivative is designated and qualifies as a hedging instrument, and if so, the nature of the item hedged; if it is not designated or qualified as a hedging instrument, it is considered as a negotiable instrument. The financial instruments used by the Group are considered as 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 transfers from 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. -26-