Letter to the Shareholders and Financial Statements as of December 31, 2008, and 2007, jointly with the Independent Auditors Report and the Statutory

Transcription

1 Letter to the Shareholders and Financial Statements as of December 31, 2008, and 2007, jointly with the Independent Auditors Report and the Statutory Audit Committee s Report

2 LETTER TO THE SHAREHOLDERS AND FINANCIAL STATEMENTS AS OF DECEMBER 31, 2008, AND 2007 TABLE OF CONTENTS Page Letter to the Shareholders Independent Auditors Report Cover page... 1 Balance Sheets... 2 Statements of Income... 7 Statements of Changes in Shareholders Equity... 9 Statements of Cash Flows Notes to the Financial Statements Exhibit A - Breakdown of Government and Private Securities Exhibit B - Financing Facilities Classified by Status and Guarantees Received Exhibit C - Financing-Facilities Concentration Exhibit D - Financing Facilities Broken down by Term Exhibit E - Breakdown of Investments in other Companies Exhibit F - Changes in Bank Premises and Equipment, and Miscellaneous Assets Exhibit G - Breakdown of Intangible Assets Exhibit H - Deposits Concentration Exhibit I - Breakdown by Term of Deposits, other Liabilities from Financial Intermediation and Subordinated Corporate Bonds Exhibit J - Changes in Allowances and provisions Exhibit K - Capital Stock Structure Exhibit L - Foreign Currency Balances Exhibit N - Financial Assistance to Related Parties Exhibit O - Derivative Financial Instruments Earnings Distribution Proposal Schedule 1 - Consolidated Financial Statements Statutory Audit Committee s Report

3 BANCO PATAGONIA S.A ANNUAL REPORT To Shareholders In compliance with legal and statutory provisions in force, the Board of Directors of Banco Patagonia S.A. submits the documentation corresponding to the 85 th corporate financial year ending in December 31, 2008 to the Shareholders for their consideration, which consists of: Annual Report, Balance Sheet, Profit and Loss Statement, Statement of Changes in Shareholders Equity, Statement of Cash Flows, and their equivalents, as well as the complementing notes, annexes and Chart I, Profit Distribution Project, Independent Auditors Report, and Report of the Supervisory Committee.

4 CONTENTS 1 ECONOMIC AND FINANCIAL SYSTEM CONTEXT Economic Perspective. Argentine Financial System. 2 HISTORY 3 BANK MANAGEMENT Planned trading policy and relevant aspects of the business, financial, and investing planning. Aspects related to the organization, the decision-making, and the internal control system of the Bank. Dividend policy. Compensation of the Board of Directors and compensation policy for management offices. RETAIL COMMERCIAL AREA DISTRIBUTION Branch Network Electronic Channels Alternative Sale Channels Payroll Services INDIVIDUALS Transactional Products Credit and Debit Cards Accounts and Packages Lending Products Personal Loans Pledged Loans Products to attract funds Deposits Insurances PYME Small and Medium Sized Company - CORPORATE COMMERCIAL AREA METROPOLITAN AREA PROVINCES AGRO-BUSINESSES CORPORATE AND TRANSACTIONAL PRODUCTS ADMINISTRATION AND FINANCE AREA FINANCE Financial Transaction Desk

5 Financial Entities, Financial Companies that are neither Banks nor Institutions Institutional Relations and Correspondent Banks Safekeeping Department PUBLIC SECTOR CAPITAL MARKET HUMAN RESOURCES 4 ANALYSIS OF SHAREHOLDERS EQUITY AND OF PROFIT AND LOSS STATEMENT 5 MAIN CHANGES IN RULES 6 BUSINESS SOCIAL LIABILITY 7 CONTROLLED COMPANIES PATAGONIA INVERSORA S.A. MUTUAL FUND MANAGING COMPANY PATAGONIA VALORES S.A. STOCKBROKING COMPANY BANCO PATAGONIA (URUGUAY) S.A.I.F.E. 8 HIGHLIGHTS Program for the acquisition of treasury shares. 9 PROFIT DISTRIBUTION PROJECT

6 01 ECONOMIC AND FINANCIAL SYSTEM CONTEXT Economic Perspective The Argentine economy had a complex year, both due to the worsening of the sub-prime crisis in USA, and its correlate in the economic slowdown which affected the leading developed countries. Despite the logical deceleration of the economic expansion speed, which was even more obvious during the last months of the year, Argentina managed to keep the growing path started in Pursuant to the last known official data, for 2008 third quarter, the GDP increased by 6.5% on an inter-annual basis, by showing a 7.5% accumulated growth during the first nine months of the year. Regarding the industrial manufacturing, the last data provided by the National Institute of Statistics and Censuses (INDEC) show a 4.6% growth on an inter-annual basis during November, pursuant to the data of the Monthly Estimator of Economic Activity (EMAE). Regarding its monetary policy applied, the Central Bank of the Republic of Argentina (BCRA) performed its established program again. The means of payment (M2) average balance experienced in the fourth quarter an inter-annual 18.9% growth rate, lower than that of nominal product. However, it is important to highlight that the private M2 ended the year under the range established in the program, by showing an annual increase of hardly 8.4%. The uncertainty caused by the above-mentioned factors was the main reason of the less growth of this monetary aggregate. Regarding the evolution of prices, the official data of the INDEC shows a 7.24% annual inflation. When it comes to tax, during 2008 the primary outcome in the National Non-Financial Public Sector achieved exactly the budgetary aim since ARS 32,528.7 millions have been recorded, which is equal to the 3.15% of the GDP. The economic slowdown affected mainly the final income of December, when a primary deficit of ARS 3,563.3 millions was recorded, against the deficit of ARS 1,200 millions of the last month of year Tax resources with higher increase during the year were withholdings (+76%), Social Security (+44.8%), and VAT (+28%). However, withholdings won more participation within the total collection, to the detriment of Income Tax and VAT. Moreover, there is an increase in the tax pressure, which, measured by the relation between collection and GDP, would reach a 26% was a year that began with growing doubts about the real scope to the "sub-prime" crisis in USA. Unfortunately, the worst predictions came true and the crisis, which firstly only affected the US financial sector, finally affected the real economy and plunged the leading developed countries into a recession of uncertain duration. This crisis derived in the disappearance of some American investment banks, as they were then known, which were acquired by different commercial banks. Moreover, the American government instructed a large increase in the public spending, mainly for the rescue of big banks and insurance companies. On the other hand, the Federal Reserve implemented a drastic flexibility of the monetary policy, by diminishing the level of the fed funds rate to a range of 0%- 0.25%, and opening new liquidity assistance windows, in order to try to revive the credit. Global stock markets showed sharp drops, and this was not alien to the Merval index, which lost 49.82% during the whole year. Government securities were also punished, apart from the bonus of new rules implemented in the market about operating methods for purchase and sale of foreign currency. The scene for 2009 is very attached to the ups and downs of the international context and the answers at local level. Predictions of a long recession in developed countries render the economic measures taken by the country decisive, such as the boost for credit, the monetization of the financial system, and thus keeping consumption as the main factor of economy development.

7 Argentine Financial System Upon the unfavourably international context and its impact on the local market, the answer of the Argentine financial system was to give priority to liquidity, a process that was accompanied by a growing portfolio dollarization. As an immediate consequence, there was an important increase in interest rates and adjustment of exchange rate. The rate of fixed-term deposits higher than a million pesos for terms ranging between 30 and 59 days (BADLAR) for private banks fluctuated between a minimum value of 7.75% in February and a maximum of % by the middle of November. The December monthly average was % on a bearish basis, due to a strong injection of liquidity faced by the BCRA. During the year, the BCRA needed to authorize a new series of mechanisms to provide the financial system with liquidity, and therefore counteract the bullish pressure on interest rates. Such mechanisms included the repurchase of LEBAC and NOBAC, the decrease of the reserve requirement ratio in foreign currency, the unification of the minimum cash position for October and November, the increase in the proportion of cash in banks, admissible for the calculation of the integration of the reserve requirements, and the increase in the maximum limit available for active repurchase agreements at fixed rate, going from ARS 3,000 millions to ARS 10,000 millions. On the other hand, the reference exchange rate diminished by 9.61%, ending the year in ARS per dollar. The involvement of the BCRA in a regime of "administered float" managed to hold back the pressure to a higher devaluation of the Peso, even though the external asset building exceeded USD 20,000 millions during This amount was similar to the sum registered during 2001, but the financing of such dollarization was not to the detriment of the reserves of the BCRA, since that year the governing body managed to consolidate its volume in USD 47,000 millions, registering an increase in the year of around 2%. The implementation of only one state regime of social security administration enacted by Law No was the factor with higher impact on the evolution of peso-denominated deposits, going from nearly ARS 224,000 millions by the end of September to a total of ARS 205,430 millions at the end of the year. Despite this drop near the end of the year, the total of peso-denominated deposits showed a 7.50% annual increase. In relation to lending lines, private sector loans recorded a strong 21% increase in this year, ending the year in ARS $109,593 millions and specially focusing in consumption lines. 02 HISTORY The Controlling Shareholders launched into the banking business upon the creation of Banco Mildesa in In turn, our bank is a continuing party of a series of old banks in Argentina such as Banco de Río Negro, a leader in the Patagonia region, Banco Mercantil Argentino, a pioneer in Payroll Services, Banco Caja de Ahorro, a pioneer in incorporating the insurance business into the banking sector, these two last banks were merged with Banco Sudameris Argentina, and finally Lloyds TSB Bank plc Argentina branch, with more than 140 years in the country. The legacies of these and other institutions that are currently a part of our bank represent an asset of great value to our bank and a distinguishing competitive feature. Summary 1976 The Controlling Shareholders begin doing business in the Argentine Financial system through different specialized companies in the stock, OTC and exchange markets The Controlling Shareholders create Cambio Mildesa The Controlling Shareholders acquire Finagen Compañía Financiera, owned by Volkswagen Argentina Finagen Compañía Financiera merges with Cambio Mildesa to become Banco Mildesa Banco Mildesa acquires 85% of Banco de Río Negro corporate capital Banco Mildesa and Banco de Río Negro merge to keep the name of the latter.

8 1998 Banco de Río Negro acquires nine branches of former Banco Almafuerte and a branch of the former Banco Mayo Banco de Río Negro changes its trade name by Banco Patagonia Banco Patagonia (Uruguay) S.A.I.F.E., a Bank subsidiary, begins doing business in Uruguay Banco Patagonia merges with Banco Sudameris Argentina and this, as a surviving institution, changes its trade name to Banco Patagonia Sudameris. In 2000, Banco Sudameris Argentina had acquired Banco Caja de Ahorro. In 1999, Banco Caja de Ahorro had merged with Banco Mercantil Argentino Banco Patagonia Sudameris takes on the assets, liabilities and staff of Lloyds TSB Bank plc Argentina Branch, which took in Banco de Tres Arroyos in Banco Patagonia Sudameris adopts name Banco Patagonia Banco Patagonia starts listing in the Buenos Aires and Sao Paulo stock exchanges, thus, becoming the first company not doing business in Brazil, though going public in the San Paulo stock exchange (BOVESPA). That event set a precedent for fostering regional development of Argentine companies in MERCOSUR. Banco Mildesa In 1976, the Controlling Shareholders began doing business in the Argentine Financial system through different specialized companies in the stock, OTC and exchange markets, creating in 1979 Cambio Mildesa. In 1987, they acquired Finagen Compañía Financiera, owned by Volkswagen Argentina, which in 1988 merged with Cambio Mildesa to become Banco Mildesa. Banco de Río Negro In 1996, within the framework of former Banco de la Provincia de Río Negro privatization and the establishment of Banco de Río Negro (with the main assets and liabilities of the former one) and aiming at becoming a regional financial institution, Banco Mildesa acquired 85% of the corporate capital of this new institution, becoming a financial agent in that province, which kept 15% of the acquired bank corporate capital. In 1997, Banco Mildesa and Banco de Río Negro merged keeping the name of the latter. As a consequence of this transaction, the Controlling Shareholders increased their equity interest to 95.77% in the consolidated bank. From that moment on, a consolidation process began as a leading bank in the Patagonia region, including in 1998 the incorporation of nine branches of former Banco Almafuerte located in different provinces of the region by transferring certain deposits to said institution. In that same year, Banco de Río Negro acquired a branch of former Banco Mayo for which certain deposits corresponding to that branch were transferred to the Bank. In year 2000, in order to identify and reaffirm its regional strategy, Banco de Río Negro changed its trade name by Banco Patagonia, a name which, after several subsequent mergers and acquisitions, remains the one currently used. Banco Patagonia Sudameris During critical year 2002, drawing on its solid liquidity and credit standing, Banco Patagonia began taking measures for merging Banco Sudameris Argentina owned by Banca Intesa (today Intesa Sanpaolo). Said measures, aiming at extending and consolidating the presence of Banco Patagonia at local level, ended in May 2003 upon the merge of Banco Patagonia (as a taken-in company) with Banco Sudameris Argentina (as a taking-in company). Banco Patagonia Sudameris, the company resulting from said merger, was owned by Intesa Sanpaolo (through different means) with 19.95% and by the original Banco Patagonia shareholders (Controlling Shareholders and the province of Río Negro) with the remaining 80.05%.

9 After the merger of the two aforementioned institutions, the experience of more than 90 years in the Argentine financial market was incorporated since as of year 2000 Banco Sudameris Argentina had acquired Banco Caja de Ahorro, a pioneer institution for having introduced the insurance business into the banking sector which, in turn, in 1999 had merged with Banco Mercantil Argentino, of historic presence in this country, The Bank, from a legal point of view, is the continuing party of Banco Mercantil Argentino, which was originally established as a cooperative, according to the Argentina laws, on December 23, 1923 and later on was established as a corporation on August 29, Lloyds TSB Bank plc Argentina Branch By orderly growing and carefully expanding, in July 2004, Banco Patagonia Sudameris signed an agreement with Lloyds TSB Bank plc Argentina Branch which was effective in November 2004 upon taking on assets, liabilities and staff of the Argentine branch by said British institution which had a 140-year background in Argentina and, in turn, had been incorporated to Banco de Tres Arroyos in From that moment on, Banco Patagonia Sudameris adopted the name of Banco Patagonia and introduced our current logotype. The Bank in the Stock Exchange The Ordinary and Extraordinary General Meeting of Shareholders held on April 24, 2007 and the Board of Directors of Banco Patagonia S.A., in a meeting held on May 22, 2007, approved a 200,000,000 common stock offer including an initial offer of 75,000,000 new common shares and a secondary offer of 125,000,000 common shares owned by certain selling shareholders. During the said meeting of the Board of Directors, it was expressly set forth that the Controlling Shareholders will continue to have the control of the Bank. The offer was composed of shares of class B, registered, having ARS 1 par value and a voting right each, simultaneously launched in Argentina and abroad, either directly or by means of Brazilian Depositary Receipts ( BDRs ), which in turn were given directly or in final form as American Depositary Shares ( ADSs ), represented by American Depositary Receipts ( ADRs ). Each BDR accounts for twenty class B shares of the Bank and each ADS accounts for a BDR. Regarding the allotment of share placement, 66,600,040 shares were placed by public offering in Argentina to the investing public; 8,400,000 shares were placed by public offering in Brazil to the investing public, and 124,999,960 shares were sold by private placement out of Argentina and Brazil. On July , the CNV Argentine Securities and Exchange Commission- through Regulation No authorized Caja de Valores S.A. (Securities Clearing House) to keep a Book of Shares of the Bank, and on July the Bank shares started being traded in the Buenos Aires Stock Exchange (BCBA) and in the Sao Paulo Stock Exchange (BOVESPA), by means of BDRs. Finally, on August 22, 2007 and within the framework of the public offering authorized by the CNV, the over subscription option set forth in the prospect was exercised, by an amount of 23,000,000 Class B common shares as additional ADSs regarding the 125,000,000 common shares of the original offer. During 2008, as the result of the international macroeconomic context and the capital market volatility in general, local stock prices were unfavourably affected, as well as the shares belonging to the Bank. Therefore, on July 31, 2008 the Bank decided to implement a program for the repurchase of treasury shares in the Argentine market. As from December 31, 2008, the Bank has acquired ARS 16,467,670 par value shares per ARS millions.

10 03 BANK MANAGEMENT Planned trading policy and relevant aspects of the business, financial, and investing planning. As time goes by, our bank keeps an outstanding performance in the Argentine Financial System, by ranking fourth in terms of aggregate deposits and shareholders' equity and fifth in terms of aggregate loans among locally owned private banks, according to the publication released by the Central Bank on December 31, The Bank has a nationwide physical distribution network which allows satisfying our customers needs and attracting potential customers that may appear. We are one of a few institutions with physical presence in all Argentine provinces. Our distribution network is balanced between the City of Buenos Aires and the Great Buenos Aires, as well as the provinces of our country. We operate as a Universal Bank with significant presence in the segments of individuals, micro, small and mediumsized companies. Through a wide distribution network, our bank efficiently offers a varied range of products and services to more than 738,000 active customers. Among the most distinguishing aspects, our solid financial standing, a wide range of financial and capital market products are to be highlighted, which make us one of the leading institutions in structuring, placing and administering financial trusts with public offering. When it comes to strategy, our bank has focused on providing loan service to medium income individuals from its customer base of Payroll Services and on small and medium-sized companies, segments that offer significant business growing opportunities. Prospects For 2009, the Bank aim is to keep on consolidating itself as one of the leading banks in integrated financial services in Argentina, paying attention to customers - individuals and micro and small sized companies-, focusing on: Organic growth opportunities, both for catching new customers as well as for increasing product offers for current customers, using the strong leadership of Payroll Services and other cross-selling actions. Quality of service aimed at knowing and developing lasting relationships with our customers. Development of innovative and added value products for our customers. Nationwide physical distribution network, as well as increase in the use of alternative channels. Development of the Payroll Services business through our specialized management and its focus on several types of customers. Regarding our economic and financial strategy, the aims are centred on remaining as one of the most sound and profitable banks of the Financial System. For such purpose, we focus on: Maintaining a diversified, stable and low-cost funding structure, giving priority to individuals and companies deposits (whether micro, small and medium-sized companies) as main source for financing. Continuing prudent policies in risk management so that the loan portfolio grows minimizing the irregular portfolio and, consequently, the provision requirement. Undertaking an efficient management of our resources and keeping an adequate spending control by deploying, all along the organization, result-based managerial criteria.

11 Aspects related to the organization, the decision-making, and the internal control system of the Bank. The main liabilities and duties of the Board of Directors, the Supervisory Committee, the various committees of the Bank, and the front-line Management Offices are described hereinbelow. The components of the internal control system used by the Bank are also described. Board of Directors of the Bank The Board of Directors of the Bank is composed of six regular directors elected for 2 annual years; one is elected by Class A shareholders, and five are elected by Class B shareholders. The following table shows information on the members of the Board of Directors of the Bank, whose corresponding terms of office expire in the shareholders' meeting dealing with this annual year ended on December 31, 2008: Name Title Appointment year (1) (2) Jorge Guillermo Stuart Milne Chairman 2006 Ricardo Alberto Stuart Milne 1 st (1) (2) Vice Chairman 2006 Emilio Carlos González Moreno 2 nd (1) (2) Vice Chairman 2006 (1) (3) Alberto Julio Francisco Croceri Regular Director 2006 (1) (2) Carlos González Taboada Regular Director 2006 Carlos Alberto Giovanelli Regular Director 2007 (2) (1) The appointment in 2006, with a three-year term of office, took place before the amendment to the corporate by-laws, which diminished the term of office to two years. Thus, such appointment expires in the meeting dealing with the financial statements ended as of December 31, 2008 together with the directors appointed in (2) Director appointed by Class B shareholders. (3) Director appointed by Class A shareholders. Supervisory Committee The By-laws of the Bank establishes a supervisory committee composed of three permanent syndics and three temporary syndics, appointed by the regular shareholders' meeting. The term of their office will be one financial year. The Business Companies Act sets forth that the main powers and duties of the members of the supervisory committee are, among others, the following: (i) company management supervision, by examining books and documents whenever it considers advisable and, at least, once every three months; (ii) verifying in equal time and periods cash and cash equivalents and securities, as well as liabilities and their fulfilment; (iii) attendance, without vote, to shareholders' meetings and meetings of the Board of Directors; (iv) calling extraordinary meetings of shareholders whenever it is considered necessary, and regular and special meetings of shareholders when they are not called by the Board of Directors; (v) submitting before the regular meeting of shareholders a written report based on the economic and financial position of the company, by giving its opinion on the annual report, inventory, balance sheet, and profit and loss statement; and (vi) investigation of complaints submitted in writing by shareholders representing at least 2% of the capital stock. When the supervisory committee carries out these duties, it does not control the transactions of the Bank or assess the merits of the decisions made by its directors. The following table shows the members of the Supervisory Committee of the Bank, whose corresponding terms of office expire in the shareholders' meeting dealing with the annual year ended as of December 31, 2008:

12 Appointment Name Title year Permanent Syndic 2008 Alberto Mario Tenaillón Permanent Syndic 2008 César Iraola Permanent Syndic 2008 Marina Elsa Campanelli Temporary syndic 2008 María Lucía Denevi Artola Temporary syndic 2008 Daniel Barbato Temporary syndic 2008 Committees of the Bank The Bank has the following committees, which are under the supervision of the Board of Directors and report to the President and Vice Presidents of the Bank. Audit Committee CNV (Argentine Securities and Exchange Commission)-: it is composed of three regular directors; two of them must be independent, pursuant to the rules of the CNV. All members of the audit committee, appointed by the Board of Directors in its meeting held on June 15, 2007, were elected for a term of office of one revolving year (staying in their position until the appointment of their replacement). Pursuant to the regulations of the Audit Committee -CNV-, the committee holds sessions according to regulations when the absolute majority of its members is present, makes its decisions by simple majority of attending votes, and in case of draw, the president of the committee, or the vice president if the former is absent, has double vote. The president and the vice president of the committee are independent. According to Decree No. 677/2001, the Audit Committee CNV- of the Bank has the following powers and duties, among others: (i) issuance of a report regarding the proposals of the board of directors about the appointment of the external auditors of the Bank and the control of their independence feature; (ii) supervision of the operation of the internal control system as well as the administrative-accounting system of the Bank; (iii) supervision of the fulfilment of the policies related to information on risk management of the Bank; and (iv) issuance of a justified opinion as regards the transactions made between Related Parties or other transactions that may cause conflict of interests. Every year the Audit Committee CNV- must prepare an action plan for the financial year for which it will account to the board of directors and the supervisory committee. Audit Committee BCRA (Central Bank of the Argentine Republic)-: It is composed of two Regular Directors and the Manager of the Internal Auditing Department, and it is in charge of the formalities that make possible to secure the right operation of the internal control systems and procedures of the Bank, pursuant to the guidelines defined by the Board of Directors. Furthermore, this committee approves the Annual Plan of the Internal Auditing Department, reviews its level of fulfilment and analyzes the annual and quarterly financial statements of the Bank, the reports of the external auditor, the pertaining financial information, and the reports of the supervisory committee. Committee on Credit of Corporate Banking: It is composed of one Regular Director, the General Assistant Managers in charge of the Transactions and Technology Area, the General Assistant Manager of Corporate Commercial Area, the Senior Manager of Credit Risks and the Manager of Corporate Risk. The team leader of Corporate Banking or of Credit Risk in charge of the analysis and assessment of customers based on their geographical position also participates. The Committee on Senior Credit analyzes and approves credit transactions for more than ARS 3 millions not exceeding the 1% or 1.5% of the Shareholders Equity of the Bank, whether they are financing with or without collateral, respectively. When services to be provided exceed the foregoing percentages, the committee will be composed of two additional members then acting as directors of the Bank. Committee on Credit of Financial Institutions: It establishes the limit to carry out credit transactions to institutions forming part of the financial system up to the amount of ARS 30 millions. The Committee on Credit of Financial Institutions is composed of the General Assistant Manager in charge of the, the Senior Manager of Finance and the Manager of Corporate Risk.

13 Committee on Credit of the Public Sector: It is composed of the General Assistant Manager in charge of the, the Manager of Public Sector, the Manager of Corporate Risk, the Regional Manager of Río Negro and Neuquén Public Sector-, and the Public Sector Team Leader. The Committee on Credit of the Public Sector analyzes and approves the granting of credit facilities to customers belonging to the national, provincial or municipal public sector. Committee on IT: It is in charge of suggesting to the Board of Director and implementing the technological policy for the development of the Bank businesses, and considering the needs of IT, micro IT, and communication systems meeting the commercial strategy of the Bank, in order to secure the provision of information and services necessary for operation and management. It is composed of a Regular Director, the General Assistant Manager in charge of the Transaction and Technology Area, the Senior Manager of Technology and Systems, the Senior Manager of Operating Resources and the Manager of Software Development and Maintenance. Quality Committee: It is in charge of the gradual and progressive implementation of the quality management system pursuant to the provisions of the international standard ISO 9001:2000, within the guidelines established as this regards by the Board of Directors. Some of its duties are described hereinbelow: preparing and performing the follow-up of the strategic quality plan, approving the aims regarding the quality of each product or service offered by the Bank, approving quality records and indicators to be used, preparing annual reports regarding quality, defining the products or services to be verified as regards their quality, and selecting the certifying entity. It is composed of the General Assistant Manager in charge of the Transactions and Technology Area, the Senior Manager of Operating Resources, the Senior Manager of Human Resources, and the Senior Manager of Distribution, and the Head of Quality. Committee on IT Security: It is in charge of suggesting policies regarding IT security to the Board of Directors and monitoring their enforcement. This committee is also liable for the preparation of proposals to the Board of Directors with regard to preventive measures aimed at minimizing the risks related to IT security or, if it may correspond, to corrective actions. It is composed of a Regular Director, the General Assistant Manager in charge of the Transactions and Technology Area, the Senior Manager of Technology and Systems and the Manager of IT Security. Committee on the Prevention of Money Laundering: It is in charge of planning, coordinating and ensuring the fulfilment of the policies established by the Board of Directors in this regard. Moreover, the committee provides the Bank with the necessary assistance regarding the inexistence or detection in due form and time of transactions that may be suspected as coming from money laundering from illegal activities within the scope of the rules of the Central Bank and the Financial Information Unit ( UIF ). It is composed of two Regular Directors, the General Assistant Manager in charge of the Transactions and Technology Area, the Senior Manager of Legal Affairs, the Senior Manager of Operating Resources, the Manager of Operational Risk Management and Rules Compliance, and the Fulfilment Officer. Committee on Ethics: its aim is to decide on issues related to the construction and scope of the Code of Ethics, which establishes the different policies related to the ethical behaviour of all members of the Bank. It is composed of two Regular Directors and the Senior Manager of Human Resources. Capital Market Committee: its aim is to assess all the transactions of the Capital Market with current or potential customers asking for services and/or loan services, through transactions of placement price advances or firm subscription commitment. It is composed of the General Assistant Managers in charge of the Administration and Finance Area and the Corporate Trading Area, the Senior Manager of Capital Markets and Investment Banking, the Manager of Corporate Risk, the Senior Manager of Credit Risks, the Senior Manager of Operating Resources, and the Manager of Capital Market. The team leader in charge of the analysis and assessment of customers also participates. Finance Committee: It is in charge of issues related to the management of financial assets and liabilities of the Bank. It is composed of the General Assistant Managers in charge of the, the Senior Manager of Finance, and the Chief of the Financial Trading Desk. Committee on Operational Risk: its aim is to guarantee the existence of processes and procedures applicable to each business unit, for the operational risk management of products, activities, processes, and systems of the financial institution, by assessing the managerial surveillance process adapts to the inherent risks. At least every six months, it must report to the Board of Directors and provide information on the main aspects related to the operational risk management. It is composed of a Regular Director, the General Assistant Managers of Area, and the Manager of Operational Risk and Rules Compliance. The Manager of Internal Audit may be present as a guess.

14 Committee on Irregularities of Corporate Banking: Its duty is to evaluate customers in arrears of Corporate Banking, define the corresponding treatment, and carry out a follow-up. It is composed of the General Assistant Manager in charge of the Corporate Trading Area, the Senior Manager of Corporate Banking, the Manager of Corporate Banking in provinces, the Manager of Corporate Banking in Metropolitan Area, the Manager of Agrobusinesses, the Senior Manager of Credit Risk, the Manager of Corporate Risks, the Chief of Risk Control, and the Manager of Credit Recovery. Front-line Management Offices The following General Assistant Management Offices report to the Board of Directors: Administration and Finance: it is the department in charge of the general administration and of the financial resources of the Bank. The followings are some of the sectors that report to it: Administration, Finance, Public Sector, Capital Market, and Investment Banking and Relationship with Investors. Transactions and Technology: It is in charge of the administration of the operating resources of the Bank, and it deals with the corresponding processes. The followings are some of the sectors that depend on it: Operating Resources, Technology and Systems, Architecture and Maintenance. Retail Commercial Area: it is in charge of the administration of the commercial resources of the Retail Banking. The followings are some of the sectors that depend on it: Individual Banking, Distribution, Pyme Banking, and Commercial Training. Corporate Commercial Area: it is responsible of the administration of commercial resources. The followings are some of the sectors that depend on it: Corporate Banking and Corporate and Transactional Products. Moreover, the Management of Internal Audit, the Management of Human Resources, the Management of Legal Affairs, the Management of Management Control and Special Projects, the Management of Credit Risks, the Management of Operational Risk and Rules Compliance, the Management of IT Security, and the Secretariat of the Board of Directors report directly to the Board of Directors. Description of the internal control system of the Bank The internal control consists of five interrelated components. Additional considerations about each of them are detailed hereinbelow. Control environment. Control environment establishes the operating method of the Bank and influences on the control awareness of its employees. These are some of the factors constituting the control environment feature: Integrity, ethic values, and competence of members of the staff of the Bank; the style of the Management and its operating methods; the way the Management grants powers and duties, organizes and trains its staff; and the attention and guidance provided by the Board of Directors. Risk assessment. The Bank, by virtue of its operation, faces many risks from external and internal sources that must be assessed. Risk assessment refers to the procedures and mechanisms established in the Bank for the identification and analysis of significant risks derived from changes in the economic, financial, regulatory, and operating conditions making an impact on the achievement of the business aims of the Bank. Control activities. Control activities are the policies and procedures helping to secure the fulfilment of the guidelines of the Management. This implies taking the necessary actions to face risks towards the achievement of the aims of the Bank. Control activities are performed all along the Bank, that is, at all levels and in all offices. They include several activities, such as: approvals, authorizations, verifications, conciliations, operating performance reviews, assets security, and task segregation, among others.

15 The Bank has written policies and procedures about its main processes and operations it carries out, which are printed (handbooks of organization and procedure) and electronic (Intranet), which permits to be informed and be available for the whole staff from time to time by the Organization and Methods Area. Information and communication. It refers to the type and quality of the information generated by the Bank, which must be identified, captured, and informed in some way and time for the involved people to be able to comply with their liabilities. It is not only information internally generated but also information referred to foreign affairs. Both are necessary conditions for the decision-making and the filling of reports to third parties. Monitoring. The internal control system is monitored by a process that assesses the system performance quality during the course of time. This is achieved by monitoring activities in force, separated assessments or a combination of both. Dividend policy. Procedure for the payment of dividends according to the rules of the Central Bank The Central Bank has established the applicable criteria in order for a financial institution to be able to distribute dividends without affecting its liquidity and solvency. For such purposes, financial institutions shall ask for the authorization to carry out the distribution of dividends to the Superintendency of the Central Bank at least 30 working days before the date of the shareholders' meeting that will consider the payment of dividends. Financial institutions may distribute dividends provided that they are not within the scope of section 34 "Normalization and reorganization" and section 35 bis Reorganization of the institution for the protection of the credit and banking deposits of the Financial Institutions Act, they do not have financial assistance of the Central Bank, they do not show delays or infringements regarding the information regimen established by the Central Bank or they do not have deficiencies in the payment of minimum capital stock, or in the minimum cash. If financial institutions are not involved in any of the situations described in the preceding paragraph, they may distribute earnings to the extent they have earnings after deducting the following items: (i) the difference between the book value and the market value of the assets of the public sector in their portfolio; (ii) the residual exchange differences due to remedies for the protection of constitutional rights capitalized; (iii) the adjustments of the Central Bank and the external audit of the institution which have not been recorded yet by the said institution; and (iv) the individual deductible of assets valuation granted by the Superintendency. Furthermore, if the institution has profits after such adjustments are performed, it may distribute earnings upon the fulfilment of the requirement of technical rate of minimum capitals, by deducting from it: (i) the above-mentioned items, (ii) the amount corresponding to the minimum presumed income take into account in the regulatory capital, (iii) the amount of earnings intended to be distributed, and finally, (iv) the existing deductibles as regards the requirement of minimum capitals in relation to the holding of assets of the public sector and by interest rate risk. Bank Dividend Distribution The Bank has distributed dividends in the last four financial years, and it wishes to go on with such policy in the future. The declaration, the amount and the payment of dividends are determined by the vote of the majority of shareholders present at the regular meeting, generally based on a proposal submitted by the board of directors, and they depend on the profits and losses of the financial year, the financial position of the Bank at that moment, the potential cash requirements, and other factors the board of directors and the shareholders of the Bank may consider relevant. The following table shows the dividends in cash, which were paid to the shareholders of the Bank for the financial years ended as of December 2004, 2005, 2006, and 2007, subject to approval, pursuant to the rules in force issued by the Central Bank, and the proposed dividends under consideration of the Shareholders' Meeting for the 2008 financial year.

16 Dividends per share (in ARS) Total payment of dividends (in thousand of ARS) Financial Year , % , % , % , % 2008 (1) (2) 133, % Percentage of earnings (1) According to Profit Distribution Project attached hereto as annex to the individual Financial Statements of the Bank for the Financial Year ended as of December 31, 2008 to be considered by the Shareholders Meeting to be held on April 27, (2) According to outstanding shares as of December 31, Compensation of the Board of Directors and compensation policy for management offices Pursuant to the provisions of section 9 of the By-laws, Directors' fees are stipulated during the Shareholders' Meeting. When deciding such fees, liabilities, time devoted to duties, experience and professional reputation, and value of services rendered by the Directors during the performance of the bank in the market are taken into account. It is important to highlight that Directors do not have executive positions in the Bank, so they do not receive any other kind of compensation. Regarding the possibility directors have to obtain, as compensation, equity interest in the Bank, it is important to mention that the Bank does not grant this type of benefits and there are not provisions in the By-laws stipulating such possibility. In relation to the managers' compensations, it is worth mentioning that the Bank pays variable salaries according to compensations for similar positions in the market, performance put in and professional development, and the profits/losses obtained for the pertaining financial year. During the 2008 financial year, provisions have been foreseen to meet the payment of such variable compensations. RETAIL COMMERCIAL AREA DISTRIBUTION During this year, the Senior Management of Distribution has been created to negotiate and boost Service and Sale Channels, by offering the most appropriate combination for each Customer Segment. It is formed by the following Management Offices: Branch Network. Electronic Channels. Alternative Sale Channels. Payroll Services. Branch Network The Branch Network was developed taking into account the customer-tailored service model to build up Customers loyalty in each Business Segment. By means of our Branch Network, we set out the following goals:

17 To increase the customer base. To cooperate with the fulfilment of the budgets of sales, of portfolio growth, and of profitability. To provide Customers with an appropriate service of value. To reach the transactional and operating efficiency. To adjust the network scope, by creating further penetration in areas of great potential for businesses. Each of the thirteen Areas forming the three Territories has concrete Business Plans, designed according to the specific characteristics of each area. There were 125 new hires for the branches, which made the payroll reach 1,503 employees as of December In order to support the business building process of the human resources participating in the retail business, during 2008 we implemented the Training Program Training into Action which had as main axis deepening of knowledge in the offer of product and services, developing of skills for sales, and quality of service. The Program reached to more 1,500 participants, including Individual Banking Executives, Greeters, Sales Force Executives, Telemarketers, and Traders of the Investment Centre, and included attending activities such as workshops, semi-attending activities, and off-site activities (via e-learning). Moreover, we furnished a Coaching and Leadership workshop targeted to Branch Managers in order to consolidate their role of main reference in the process of creation of branch teams. In 2008, we added the Branches of Southern Neuquén, Mendoza Barrio Cívico, and the Commercial Customer Services in Carmen de Patagones and in the University of Mar del Plata (Province of Buenos Aires), and in the Universidad Nacional de San Martín (Great Buenos Aires) to the Network. Whilst we implemented the relocation of the Branches of Viedma (Province of Río Negro), Barrio Norte, and Villa Devoto (City of Buenos Aires). Furthermore, we adjusted the standards of layout and image of the following branches: Catriel, Allen, and Bariloche Onelli (Province of Río Negro), San Martín (Great Buenos Aires), Salta (Province of Salta), Palermo (City of Buenos Aires), and Pueyrredón (Province of Córdoba). Besides, we increased customer service capacity by Electronic Channels with the installation of new Automatic Teller Machines in the existing branches, and we enlarged the service coverage in Fernández Oro (Province of Río Negro) and in the following entities: Non-commissioned Officers School Sargento Cabral, Argentine Military School, Secondary Schools of Bahía Blanca and in the Veterinary Faculty (Province of Corrientes). Likewise, we included a modern technology aimed at improving service to our customers, thanks to the installation of Self-Service Terminals in 69 Branches. These latter were selected pursuant to the volume of transactions carried out in the bank teller sector, in order to enlarge our transactional service offered to our customers. We also added new services of Safety Boxes in the branches of Bariloche (Province of Río Negro) and Mar del Plata (Province of Buenos Aires). When it comes to security, and in order to comply with the regulatory requirements of the BCRA, we implemented the closing of boxes in 38 branches, pursuant to the Works Plan. The Commercial Management of the Branches was complemented by the active participation in local events such as Regional Economic Sessions and sport activities such as Turismo Competición 2000 (TC 2000), among others. As of December 2008, our Branch Network amounted to 153 Service Centres with 259 ATM, with the following distribution: 136 branches. 15 Commercial Customer Service Centres. 2 Collection Centres.

18 197 ATM in branches. 62 ATM in other locations. Therefore, the Branch Network has the following geographical coverage as of December 2008: Provinces Number of Branches Customer Service Centres Collection Centres ATM in Branches Neutral ATM Buenos Aires CABA Catamarca 1 1 Chaco Chubut 5 9 Córdoba Corrientes Entre Ríos 1 1 Formosa Gran Bs. As Jujuy 1 1 La Pampa 1 1 La Rioja Mendoza Misiones Neuquén 5 7 Río Negro Salta San Juan 1 1 San Luis Santa Cruz Santa Fe 4 5 Santiago del Estero 1 1 Tierra del Fuego 2 3 Tucumán 1 1 Total Objectives for 2009 In Banco Patagonia, we plan to continue with the expansion plan we fixed as entity, by taking advantages of the several opportunities offered by the market.

19 Electronic Channels Like in previous years, the level of use of these means by our customers showed an upwards trend. In December 2008, more than 80% of the transactions carried out were performed through the alternative channels we have, with an increase as compared to December Nowadays, we have several service, transaction and sale channels to meet the needs of both people and companies. These channels include: The Patagonia 24 ATM Network. The self-service terminals. Patagonia online telephone banking. Patagonia e-bank Internet banking service. Cell phone banking. Patagonia 24 ATMs At the end of 2008, the Patagonia 24 ATM Network was composed of 259 ATMs covering the branch network and these strategic locations, distributed by geographical areas: 60 in the Federal Capital City 36 in the Great Buenos Aires. 163 in the provinces of the country. This channel ensures the means necessary to meet the transactional needs of our customers and users in general, in a dynamic, simple, safe, and accessible fashion. A relevant data showing this is the volume of transactions registering a 10% increase as compared to the previous year. Therefore, and in order to consolidate the improvement in the level of service, from the second four-month period of 2008 on we started a process of installation of new and replacement positions of ATM installed. This activity will continue in As part of the commercial initiatives leading to consolidate our presence in tourism areas, and thus facilitate the ordinary transactions of our customers while on holidays, Patagonia 24 ATM were installed in the Cerro Catedral of the city of Bariloche, and Las Grutas (Province of Río Negro) and Villa Gesell (Province of Buenos Aires). Self-Service Terminals In order to enlarge the offer of electronic services and to improve the quality of service, during 2008 we significantly invested in advanced technology with the installation of 71 new Self-Service Terminals in 69 branches nationwide, by which our customers -and non-customers- may carry out their transactions with no need of going to branch teller section. Regarding transaction volume, the deposits in customers' accounts and the payment of credit cards of the Bank stood out as the most frequent transactions through new terminals. Our Bank is one of the two banks in the whole country offering the possibility to carry out deposits and cash payment of credit cards by Self-Service Terminals during branch non-business hours. This not only permitted us to extend the hours for service to our customers due to the possibility they have to carry out this kind of transactions, but also contributed to improve substantially the quality of service. However, this is not the end of said expansion process. In 2009, we will continue with the installation new terminals in branches and increasing other valuable features for our customers. Of 71 Self-Service Terminals installed during 2008, 27 are totally innovative in the market, because, apart from permitting traditional transactions of this channel, they also have the digitalization feature of deposited checks, by printing a copy for the customer. In this regard, our bank is the first bank in Argentina having this kind of terminals installed in branches all over the country.