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

Transcription

1 Consolidated Financial Statements December 31, 2011 (With Independent Auditors Report Thereon) This document has been prepared for the purposes of being available to investors and general public. (FREE ENGLISH LANGUAGE TRANSLATION FROM SPANISH VERSION)

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

3 (FREE ENGLISH LANGUAGE TRANSLATION FROM SPANISH VERSION) INDEPENDENT AUDITORS REPORT The Board of Directors Banco General, S. A. We have audited the accompanying consolidated financial statements of Banco General, S. A. and subsidiaries (hereinafter "the Bank"), which comprise the statement of financial position as at December 31, 2011, the statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, as modified by prudential regulations enacted by the Superintendence of Banks of Panama, for supervisory purposes, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsability Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risk of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

4 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Banco General, S. A. and subsidiaries as of December 31, 2011, and their financial performance and consolidated cash flows for the year then ended, in accordance with International Financial Reporting Standards, as modified by prudential regulations enacted by the Superintendence of Banks of Panama for supervisory purposes, as described in note (2) to the consolidated financial statements. KPMG (SIGNED) January 24, 2012 Panama, Republic of Panama 2

5 Consolidated Statement of Financial Position December 31, 2011 (Expressed in Balboas) Assets Note Cash and cash items 189,669, ,020,570 Deposits with banks: 12 Demand deposits with local banks 46,202,767 21,447,048 Demand deposits with foreign banks 81,316,870 51,983,191 Time deposits with local banks 116,809, ,606,955 Time deposits with foreign banks 0 74,539,254 Total deposits with banks 244,329, ,576,448 Total cash, cash items and deposits with banks 433,998, ,597,018 Valores comprados bajo acuerdos de reventa Securities at fair value 5 393,967, ,048,614 Securities available-for-sale 5 1,733,425,987 1,566,064,576 Securities held-to-maturity, net 5 175,678, ,328,854 Loans 6 6,370,212,477 5,753,547,715 Less: Allowance for loan losses 87,922,854 84,479,934 Unearned commissions 19,189,960 17,563,032 Loans, net 6,263,099,663 5,651,504,749 Investments in associates 7 14,820,000 14,014,289 Premises and equipment, net of accumulated depreciation and amortization 8 84,933,988 84,142,697 Customer liability under acceptances 33,756,540 35,413,365 Securities sold pending settlement 9 110,518,630 1,021,642 Accrued interest receivable 35,598,079 33,842,829 Deferred income tax 23 27,148,737 26,095,633 Goodwill and other intangible assets 10 77,429,686 80,047,074 Other real estate owned, net 11 1,545,001 1,730,157 Other assets 106,522,615 71,407,268 Total assets 9,492,443,617 8,419,258,765 The consolidated statement of financial position should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 3

6 Liabilities and Equity Note Liabilities: Deposits: 12 Local: Demand 1,452,357,526 1,200,792,881 Savings 1,894,789,773 1,649,381,925 Time: Non-banks 3,426,844,665 3,314,314,620 Banks 57,781,912 37,958,055 Foreign: Demand 89,329,656 77,056,836 Savings 113,787, ,994,770 Time: Non-banks 179,249, ,030,217 Total deposits 7,214,141,237 6,674,529,304 Securities sold under repurchase agreement 13 99,127,517 0 Borrowings and placements ,675, ,401,163 Perpetual bonds ,362, ,112,000 Acceptances outstanding 33,756,540 35,413,365 Securities purchased pending settlement 9 232,633,465 40,720,140 Accrued interest payable 46,506,768 45,988,033 Liabilities from insurance operations 16 8,006,566 7,832,079 Deferred income tax 23 2,928,389 2,710,585 Other liabilities 312,202, ,021,339 Total liabilities 8,275,340,688 7,309,728,008 Equity: 19 Equity of the controlling Company: Common shares 500,000, ,000,000 Preferred shares 50,000,000 50,000,000 Legal reserve 20,568,876 19,004,947 Capital reserves 24,171,701 23,799,649 Retained earnings 620,905, ,309,624 Total equity of the controlling Company 1,215,646,086 1,108,114,220 Non-controlling interest in subsidiary 1,456,843 1,416,537 Total equity 1,217,102,929 1,109,530,757 Commitments and contingencies 24 Total liabilities and equity 9,492,443,617 8,419,258,765 4

7 Consolidated Statement of Income For the year ended December 31, 2011 (Expressed in Balboas) Acumulado Note Interest and commission income: Interest: Loans 408,177, ,359,680 Deposits with banks 2,609,479 2,826,572 Securities 75,260,770 71,234,037 Commissions on loans 27,229,663 22,511,357 Total interest and commission income 513,277, ,931,646 Interest expenses: Deposits 137,788, ,434,331 Borrowings and placements 14,981,703 22,402,367 Total interest expenses 152,769, ,836,698 Net interest and commission income 360,507, ,094,948 Provision for loan losses, net 6 15,467,633 15,288,475 Reversal of provision for securities 5 (10,863) (7,654) Provision (reversion) for other real estate owned ,996 (316,317) Net interest and commission income, after provisions 344,653, ,130,444 Other income (expenses): Fees and other commissions 105,678,109 89,693,078 Insurance premiums, net 10,401,524 9,552,003 Gain on financial instruments, net 20 8,057,266 8,698,828 Other income 21 13,058,641 19,387,443 Commission expenses and other expenses (41,601,405) (36,822,566) Total other income, net 95,594,135 90,508,786 General and administrative expenses: Salaries and other employee expenses 104,603,378 96,520,071 Depreciation and amortization 8 13,164,534 14,193,602 Premises and equipment expenses 10,743,516 9,648,115 Other expenses 45,606,122 38,528,633 Total general and administrative expenses 174,117, ,890,421 Operational net income 266,130, ,748,809 Equity participation in associates 2,226, ,990 Net income before income tax 268,356, ,729,799 Income tax, net 23 36,482,853 40,801,335 Net income 231,873, ,928,464 Net income attributable to: Controlling Company 231,519, ,613,911 Non-controlling interests in subsidiary 354, ,553 Net income 231,873, ,928,464 The consolidated statement of income should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 5

8 Consolidated Statement of Comprehensive Income For the year ended on December 31, 2011 (Expressed in Balboas) Note Net income 231,873, ,928,464 Other comprehensive income (expense) Revaluation of securities available-for-sale 1,363,720 6,499,100 Revaluation of hedging instruments 26 (991,668) 380,657 Foreign currency translation differences from foreign operations 0 50,722 Other comprehensive income, net 372,052 6,930,479 Total comprehensive income 232,245, ,858,943 Comprehensive income attributable to: Controlling Company 231,891, ,544,907 Non-controlling interests in subsidiary 354, ,036 Total comprehensive income 232,245, ,858,943 The consolidated statement of comprehensive income should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 6

9 BANCO GENERAL, S.A.AND SUBSIDIARIES Consolidated Statement of Changes in Equity For the year ended December 31, 2011 (Expressed in Balboas) Equity of the controlling Company Capital reserves Reserve for Reserve Foreign Common Preferred Legal Insurance securities available for hedging currency Retained Non - controlling Total shares shares reserve reserve for sale instruments translation earnings Total interests equity Balance as of December 31, ,000, ,000, ,567,356 1,000,000 15,919,375 0 (50,722) 435,382, ,019,818, ,337,570 1,021,156, Net income ,613, ,613, , ,928,464 Other comprehensive income (expense) Revaluation of securities available-for-sale ,499, ,499,617 (517) 6,499,100 Revaluation of hedging instruments , , ,657 Foreign currency translation , , ,722 Total other comprehensive income, net ,499, ,657 50, ,930,996 (517) 6,930,479 Total comprehensive income ,499, ,657 50, ,613, ,544, , ,858,943 Transactions with owners: Dividends paid on common shares (114,411,190) (114,411,190) (235,069) (114,646,259) Dividends paid on preferred shares (3,750,000) (3,750,000) 0 (3,750,000) Dividend tax (88,431) (88,431) 0 (88,431) Capitalization of retained earnings 0 0 1,437, (1,437,591) Total transactions with owners 0 0 1,437, (119,687,212) (118,249,621) (235,069) (118,484,690) Balance as of December 31, ,000,000 50,000,000 19,004,947 1,000,000 22,418, , ,309,624 1,108,114,220 1,416,537 1,109,530,757 Net income ,519, ,519, , ,873,795 Other comprehensive income (expense) Revaluation of securities available-for-sale ,363, ,363, ,363,720 Revaluation of hedging instruments (991,668) 0 0 (991,668) 0 (991,668) Total other comprehensive income, net ,363,720 (991,668) , ,052 Total comprehensive income ,363,720 (991,668) 0 231,519, ,891, , ,245,847 Transactions with owners: Dividends paid on common shares (120,500,000), (120,500,000), (314,037) (120,814,037), Dividends paid on preferred shares (3,750,000) (3,750,000) 0 (3,750,000) Dividend tax (109,638) (109,638) 0 (109,638) Capitalization of retained earnings 0 0 1,563, (1,563,929) Total transactions with owners 0 0 1,563, (125,923,567) (124,359,638) (314,037) (124,673,675) Balance as of December 31, ,000,000 50,000,000 20,568,876 1,000,000 23,782,712 (611,011) 0 620,905,509 1,215,646,086 1,456,843 1,217,102,929 The consolidated statement of changes in equity should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 7

10 Consolidated Statement of Cash Flows For the year ended December 31, 2011 (Expressed in Balboas) Note Operating activities: Net income 231,873, ,928,464 Adjustments to reconcile net income to net cash provided from operation activities: Provision for loan losses, net 6 15,467,633 15,288,475 Reversion for valuation of investment securities 5 (10,863) (7,654) Provision (reversion) for impairment of other real estate owned ,996 (316,317) Unrealized loss (gain) on securities 20 6,662,132 (4,506,310) Unrealized gain on derivative instruments 20 (267,674) (3,537,624) Gain on sale of securities 20 (14,753,154) (4,226,414) Unrealized loss on derivative instruments ,430 3,571,520 Gain on sale of fixed assets 21 (105,819) (2,312,695) Deferred income tax-asset 23 (1,053,104) 2,671,970 Deferred income tax-liability ,804 (300,633) Depreciation and amortization 8 13,164,534 14,193,602 Amortization of intangible asset 10 2,617,388 2,617,387 Equity participation in associates (2,226,251) (980,990) Interest income (486,047,904) (474,420,289) Interest expense 152,769, ,836,698 Changes in operating assets and liabilities: Loans (628,689,475) (333,787,794) Time deposits due from banks 16,046,888 (37,373,189) Securities purchased under agreements to resell 0 20,000,000 Unearned commissions 1,626,928 1,127,608 Tax credit from preferential interest loans 6 (24,114,357) (22,694,427) Other assets (120,709,818) 28,024,447 Demand deposits 263,837, ,698,136 Savings accounts 210,200, ,417,525 Time deposits 65,573,537 18,470,757 Liabilities under insurance operations 174,487 (398,670) Other liabilities 333,060,803 17,050,608 Cash provided by operating activities: Interest received 484,292, ,377,604 Interest paid (152,251,254) (174,579,392) Total 136,181,926 41,903,939 Cash flows from operating activities 368,055, ,832,403 Investing activities: Purchase of securties at fair value, net of redemptions (4,308,567,205) (560,261,781) Sales of securities at fair value 4,170,577, ,851,589 Purchases of securities available-for-sale, net of redemptions (1,521,024,903) (1,746,367,723) Proceeds from sale of securities available-for-sale 1,361,195,687 1,435,540,145 Purchases of securities held-to-maturity, net of redemptions 42,661,581 84,982,159 Investments in associates 1,420,540 1,329,535 Proceeds from sale of premises and equipment 2,037,966 9,001,033 Purchases of premises and equipment (15,887,972) (15,420,160) Dividends received 21 1,001,187 1,908,672 Cash flows from investing activities (266,585,207) 42,563,469 Financing activities: Proceeds from borrowings 66,360,000 75,000,000 Repayment and redemptions of bonds and other obligations (72,085,530) (423,975,969) Securities sold under agreements to repurchase 99,127,517 0 Proceeds from issuance of perpetual bonds 250, ,839,000 Dividends paid on common shares (120,814,037) (114,646,259) Dividends paid on preferred shares (3,750,000) (3,750,000) Tax on dividends (109,638) (88,431) Cash flows from financing activities (31,021,688) (348,621,659) Net increase (decrease) in cash and cash equivalents 70,448,826 (64,225,787) Cash and cash equivalents at beginning of year 307,086, ,311,809 Cash and cash equivalents at end of year 4 377,534, ,086,022 The consolidated statement of cash flows should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 8

11 December 31, 2011 (Expressed in Balboas) Index of : 1 General Information 16 Liabilities from Insurance Operations 2 Summary of Significant Accounting Policies 3 Balances and Transactions with Related Parties 17 Concentration of Financial Assets and Liabilities 18 Segment Information 4 Cash and Cash Equivalents 19 Equity 5 Investment Securities 20 Gain on Financial Instruments, Net 6 Loans 21 Other Income 7 Investments in Associates 22 Associate Benefits 8 Premises and Equipment 23 Income Tax 9 Securities Sold and Purchased Pending Settlement 10 Goodwill and Intangible Assets, Net 24 Commitments and Contingencies 25 Administration of Trust Contracts and Administration of Investment Funds 11 Other Real Estate Owned, Net 26 Derivative Financial Instruments 12 Time Deposits with Banks and Due to Depositors 13 Securities sold under repurchase agreements 27 Fair Value of Financial Instruments 28 Financial Instruments Risk Management 14 Borrowings and Placements 29 Critical Accounting Estimates and Judgments in Applying Accounting Policies 15 Perpetual Bonds 30 Main Applicable Laws and Regulations 9

12 December 31, 2011 (Expressed in Balboas) (1) General Information Banco General, S. A. was incorporated under the laws of the Republic of Panama in 1954 and started operations in The Bank operates under a general license granted by the Superintendence of Banks of Panama, to engage in the banking business indistinctly in Panama or abroad. Banco General, S. A. and its subsidiaries will be referred to collectively as the Bank. The Bank provides a wide variety of financial services, mainly, corporate, mortgage and consumer banking, management of investments and pension, retirement and severance funds. The Bank has representation offices in Colombia. México, El Salvador, and Guatemala. Grupo Financiero BG, S. A. (owned 61% by Empresa General de Inversiones, S. A.) owns 100% of the common shares issued and outstanding of Banco General, S. A. Banco General, S. A. owns 100% of the following subsidiaries which form part of the consolidation: Finanzas Generales, S. A., B. G. Investment Co., Inc. and subsidiary, Empresa General de Seguros, S. A., Overseas Capital Markets, Inc. and subsidiary, BG Valores, S. A., y Banco General (Costa Rica), S. A. and a 79% equity participation in Profuturo Administradora de Fondos de Pensiones y Cesantía, S. A. As of December 31, 2011, Empresa General de Seguros, S. A. absorbed by merger the subsidiary Compañia Istmeña de Seguros, S. A., so all assets, liabilities and equity accounts of this Company were incorporated into the statement of financial position of the subsidiary Empresa General de Seguros, S. A. As of December 31, 2011, the Bank had 3,384 (2010: 3,210) permanent associates. The main office is located at Urbanizacion Marbella, Aquilino de la Guardia Avenue, Torre Banco General, Panama City, Republic of Panama. These consolidated financial statements were authorized for issuance by the Board of Directors on January 24, (2) Summary of Significant Accounting Policies The significant accounting policies are summarized as follows: (a) Statement of Compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and in compliance with the prudential regulatory standards in effect enacted by the Superintendence of Banks of Panama for supervisory purposes. 10

13 (b) Basis of Preparation The consolidated financial statements are prepared on a fair value basis for financial assets and liabilities intended for trading, derivatives, securities at fair value and assets available for sale. Recognized assets and liabilities that are hedged are stated at fair value in respect of the risk being hedged. Other financial assets and liabilities and nonfinancial assets and liabilities are stated at amortized cost or historical cost. The Superintendence of Banks of Panama has determined that financial statements filed at this regulatory entity, for annual periods ending on or after December 31, 2007, must comply with the prudential standards and regulations in effect enacted by the Superintendence of Banks of Panama. Additional information on applicable laws and regulations is presented in note 30. The methodology and recognition of losses on loans, investment securities and other real estate owned in conformity with prudential standards enacted by the Superintendence of Banks of Panama, differ in some aspects from the accounting methodology and treatment in conformity with International Financial Reporting Standards, specifically IAS 39 and IFRS 5. The consolidated financial statements are expressed in Balboas (B/.), the monetary unit of the Republic of Panama, which is at par and freely exchangeable with the United States Dollar (US$). The Republic of Panama does not issue its own paper currency and, in lieu, the Dollar ($) of the United States of America is used as legal tender. (c) (d) (e) Basis of Consolidation The consolidated financial statements include assets, liabilities, equity and the results of operations of Banco General, S. A. and its subsidiaries which are described in note 1. All significant inter-company balances and transactions have been eliminated in the consolidation. Cash and Cash Equivalents For purpose of the consolidated statement of cash flows, cash equivalents include demand deposits and time deposits with banks that have an original maturity of three months or less. Investment Securities Investment securities are classified at their trade date based on management s ability and intention to sell or to hold them until their maturity date. The classification used by the Bank is detailed as follows: - Securities at Fair Value: - Trading Securities This category includes those securities acquired for the purpose of generating a profit from short term fluctuations in the market value of the instrument. These securities are reported at their fair value and changes in valuation are recognized in the consolidated statement of income. 11

14 - Other Securities at Fair Value This category includes those securities acquired with the intention of holding them for an undetermined period of time and for which a quoted price in an active market is available. These securities are measured at their fair value and changes in valuation are recognized in the consolidated statement of income. - Securities Available-for-Sale This category includes the securities acquired with the intention of holding them for an undetermined period of time. These securities are measured at their fair value and changes in valuation are recognized in equity accounts. - Securities Held-to-Maturity Securities held-to-maturity are financial assets that the Bank has the intention and ability to hold to their maturity. These securities consist mainly of debt instruments and are carried at amortized cost. The value of any security is reduced to its fair value for any material loss due to other than temporary impairment, by establishing a specific allowance for securities against the results of operations of the year. The fair value of the investments is based on its quoted market price at the consolidated statement of financial position date. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques. When the fair value of equity investments cannot be reliably measured, they are stated at cost. The Bank determines that investment securities are impaired when there has been a significant and prolonged decline in the fair value below its cost or subjected to a downgrade from investment grade below B +, non-payments, bankruptcy, debt restructuring or similar events that would materially change the original terms and conditions of the instrument. If any such evidence exists for available-for-sale financial assets, the cumulative loss is removed from equity and recognized in the consolidated statement of income. If, in a subsequent period, the fair value of a debt instrument classified as available-forsale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the consolidated statement of income. (f) Derivative Financial Instruments The Bank records its derivative financial instruments in the consolidated statement of financial position, at their fair value under the fair value or the cash flow method, when hedge accounting is used, and as trading instruments when the derivative does not qualify for hedge accounting. Derivative instruments under the fair value method are instruments that hedge the exposure to change in the fair value of: (a) assets or liabilities or an identified portion of the value of assets or liabilities recognized in the consolidated statement of financial position, (b) a firm commitment or a forecasted transaction which is almost certain to occur. Changes in the value of these instruments using the fair value method are recognized in the consolidated statement of income. 12

15 For an available-for-sale hedged asset, changes in fair value should be recognized directly in equity. Starting on the date that the available-for-sale asset becomes a hedged item, the changes in fair value should be charged through the consolidated statement of income and the revaluation balance accounted in the equity reserve should remain recorded until these assets are sold or redeemed. A hedged asset or liability carried at amortized cost is adjusted by the change in fair value that is attributable to the changes in interest rates. When these assets and liabilities cease being hedged they will start being amortized at their adjusted recalculated effective interest rate. If the hedged asset carried at amortized cost suffers a permanent impairment, the loss is calculated based on the difference between the carrying value after fair value adjustments of the hedged asset attributable to the risk being hedged and the present value of the estimated cash flows discounted at the adjusted effective interest rate. Derivative instruments under the cash flow method are instruments that hedge the exposure to variability in the cash flows of an asset or liability recognized in the consolidated statement of financial position affecting net income. The effective part of any change in value on remeasurement of the hedging instrument is recognized directly in equity, while the ineffective part of any change in value is recognized in the consolidated statement of income. Derivative instruments that do not qualify for hedge accounting are classified as assets or liabilities at fair value and are recognized in the consolidated statement of financial position at their fair value. Changes in the fair value of these derivatives are recognized in the consolidated statement of income. (g) Loans and Interest Loans are reported at their principal amounts outstanding. Interest on loans is credited to income based on loan principal amounts outstanding at the agreed interest rates, under the accrual method of accounting. The lease financing portfolio is reported as part of the loan portfolio and recorded under the financial method, which presents these financial leases at the present value of the contracts. The difference between the contract s total amount and the leased property cost is recorded as unearned interest and is credited to interest income on loans during the life of the lease contract period using the effective interest rate method. The factoring operations, net of guarantee deposits and interest discounted in advance, are reported as part of the loan portfolio. (h) Allowance for Loan Losses The Bank uses the allowance method to provide for loans losses. The amount of loan losses determined during the period is recognized as a provision expense in the results of operations and is credited to the allowance for loan losses. 13

16 The allowance is presented as a deduction from loans receivable in the consolidated statement of financial position. The Bank periodically reviews its impaired portfolio to identify those credits that require to be charged off against the allowance for loan losses. Recoveries of loans previously charged off as non-recoverable, are credited to the allowance balance. The Bank assesses at the consolidated statement of financial position date whether there is objective evidence that impairment of a loan or portfolio of loans has occurred. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the carrying amount of the asset and the present value of estimated future cash flows discounted at the loan s original effective interest rate. Impairment losses are determined following two methodologies to assess whether objective evidence of impairment exists, individually for loans that are individually significant, and individually or collectively for loans that are not individually significant. - Individually Assessed Loans Impairment losses on individually assessed loans are determined by an evaluation of the exposures on a case-by-case basis. This procedure is applied to all loans, whether individually significant or not. If it is determined that no objective evidence of impairment exists for an individual loan, it is included in a group of loans with similar credit characteristics and collectively assessed for impairment. The impairment loss is calculated by comparing the present value of the expected future cash flows, discounted at the original effective interest rate of the loan, to its current carrying value, and the amount of any loss is charged as a loss provision in the consolidated statement of income. The carrying amount of impaired loans is reduced through the use of an allowance account. - Collectively Assessed Loans For the purpose of a collective evaluation of impairment, loans are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of similar assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of loans that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group, historical loss experience for assets with credit risk characteristics similar to those in the group and Management s experienced judgment as to whether the current economy and credit conditions are such that the actual level of inherent losses is likely to be greater or less than the suggested historical experience. 14

17 - Reversal of Impairment If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed by reducing the loan impairment allowance account. The amount of any reversal is recognized in the consolidated statement of income. (i) (j) Investments in Associates This category includes investments representing equity shares acquired for the purpose of establishing equity participation in other entities. Investments included in this category are recorded using the equity participation method. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Major improvements are capitalized while minor repairs and maintenance expenses which do not extend the useful life or improve the asset are charged directly to expenses when incurred. Depreciation and amortization expenses are charged to current operations using the straight-line method over the estimated useful life of each asset, except for land, which is not depreciated, as follows: - Buildings 30 years - Vehicles 3-5 years - Furniture and equipment 3-5 years - Improvements 10 years (k) Goodwill and Intangible Assets When an acquisition of a significant part of the equity of another company or a significant acquisition of a business occurs, goodwill represents the portion of the cost of acquisition in excess of the fair value of the net assets acquired. Goodwill is recognized as an asset in the consolidated statement of financial position and is tested annually for impairment. When impairment is determined, the difference between the carrying value of the goodwill and its fair value is recorded as an expense in the consolidated statement of income. Other intangible assets acquired by the Bank are recognized at cost less accrued amortization and impairment losses and amortized over 20 years under the straight-line method during their useful lives. Intangible assets are subject to annual review for impairment when there are events or changes in the circumstances that indicate that the carrying value may not be recoverable. (l) Other Real Estate Owned Other real estate owned acquired through loan foreclosure are stated at the lower of the outstanding principal of the guaranteed loan or the estimated realizable value of the acquired asset. 15

18 The subsidiary Banco General (Costa Rica), S. A., presents other real estate acquired through foreclosure of loans, at the lowest value between the balance of the loan and the estimated realizable value of repossessed assets. The Bank uses the allowance method in providing for significant impairment losses on other real estate owned. The impairment provision is recognized in the consolidated statement of income and the allowance for losses is presented as a deduction from the carrying value of the other real estate owned. (m) Impairment of Non-Financial Assets The carrying value of the Bank s non-financial assets is reviewed at the consolidated statement of financial position date to determine whether there is evidence of impairment. If such impairment exists, the asset s recoverable amount is estimated and an impairment loss is recognized equivalent to the difference between the asset s carrying value and its estimated recoverable amount. The impairment loss of an asset is recognized as an expense in the consolidated statement of income. (n) (o) (p) Securities sold under repurchase agreements Securities sold under repurchase agreements are short-term financing transactions guaranteed with securities, in which the Bank is obliged to repurchase the securities sold at a future date at a specified price. The difference between the selling price and value of future purchase is recognized as interest expense under the method of effective interest rate. Deposits Due to Depositors and Borrowings and Placements Deposits due to depositors and borrowings and placements are initially measured at fair value. Subsequently measured at their amortized cost using the effective interest method. Financial Guarantees Financial guarantees are contracts that commit the Bank to make specific payments on behalf of its customers, to reimburse the beneficiary of the guarantee, in the event that the client fails to make payments when due in accordance with the terms and conditions of the contract. Liabilities for financial guarantees are initially recognized at fair value; this initial value is amortized over the life of the financial guarantee. Financial guarantees are included in the consolidated statement of financial position within other liabilities. (q) Interest Income and Expense Interest income and expense are recognized in the consolidated statement of income for all financial instruments using the effective interest method. The effective interest rate is the discount rate that exactly equals the estimated future cash receipts or payments through the expected life of the financial instrument, to the net carrying amount of the financial asset or financial liability. 16

19 (r) Commission Income Generally, the commission on short-term loans, letters of credit and other banking services are recognized as income on a cash basis due to their short-term maturity. Income recognized on a cash basis is not significantly different from the income that would be recognized under the accrual method. Commission income on medium and long-term loans, net of certain direct loan origination costs, is deferred and amortized using the effective interest rate method over the average life of the loan. (s) Insurance Operations Unearned premium and reinsurers participation in unearned premium are calculated using the monthly quota method. Estimated claims pending settlement are represented by claims incurred but not disbursed at the consolidated statement of financial position date, whether reported or not and the related claim management expenses, internal and external, and an appropriate prudential margin. Fees paid to insurance agents and taxes paid on premiums are deferred in the consolidated statement of financial position as acquisition costs deferred in accordance with their relation with the unearned premiums net of reinsurers participation. Premiums issued in advance are credited in the consolidated statement of financial position in accordance with their maturity date. The portion corresponding to the current year is recorded as premium income at the anniversary dates and the rest of the premiums, relating to future years, are maintained in the consolidated statement of financial position as premiums issued in advance. (t) (u) Trust Operations Assets held in trust or where the Bank has a Fiducuary function are not considered part of the Bank, and consequently, such assets and their correspondinding income are not included in these consolidated financial statements. Commission income related on managed assets held in trust are recongnized in the consolidated statement of income. Income Tax Estimated income tax is calculated on the net taxable income, using tax rates enacted at the consolidated statement of financial position date, and any adjustment to the income tax of prior years. Deferred income tax represents the amount of income tax payable and/or receivable in future years resulting from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes, using the tax rates enacted at the consolidated statement of financial position date. These temporary differences are expected to be reversed in future years. Deferred tax assets or liabilities are reduced to the extent that it is no longer probable that the related tax effect will be realized. 17

20 (v) Share-Based Compensation Plan and Restricted Share Option Plan The Board of Directors of Grupo Financiero BG, S. A. authorized a grant to key executives, hereinafter participants the following plans: - Option to purchase shares of Grupo Financiero BG, S.A. and its Holding company - Restricted Share Option Plan of Grupo Financiero BG, S.A. The fair value of options granted to the participant is recognized as an administrative expense against the balance due to Grupo Financiero BG, S.A., and its holding company. The fair value of the option on the grant date is recognized as an expense of the Bank, during the vesting period. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options on the grant date. The fair value of the restricted share option annually granted to the participants is recognized in the Bank s consolidated statement of income as an employee expense during the period. (w) (x) (y) Uniformity in Presentation of Financial Statements The accounting policies previously detailed have been consistently applied in the periods presented in these consolidated financial statements and have been consistently applied by the Bank s subsidiaries. Segment Reporting A business segment is a component of the Bank whose operating results are reviewed regularly by management to make decisions about resources allocated to each segment and assess its performance, and for which financial information is available. Foreign Currency Transactions The functional currency of the subsidiary Banco General (Costa Rica), S.A., is the Unites States Dollar. Transactions in foreign currency are recorded at the exchange rates in effect at the transaction date. Assets and liabilities held in foreign currency are converted into dollars at the exchange rate in effect at the consolidated statement of financial position date and the average yearly exchange rate for the income and expense accounts. Gains and losses from foreign currency conversion are reflected in other income or other expenses in the consolidated statement of income. (z) New International Financial Standards (IFRS) and Interpretations Adopted For the year ended December 31, 2011, the Bank has adopted the following revised standard: IAS 24 (Revised in 2009) Related Party Disclosures: The amendments modify the definition of related parties and simplify disclosures for government-related entities. 18

21 (aa) New International Financial Reporting Standards (IFRS) and Interpretations Not Adopted As of the consolidated statement of financial position date, there are new standards and amendments which have not been early applied in preparing these consolidated financial statements: Amendment to IAS 1 Presentation of items contained in other comprehensive income, published on June 16, The standard is effective for annual periods beginning on or after July 1, Application is permitted at an earlier date. IFRS 9 Financial Instruments, published on November 12, 2009 as part of phase I of the IASB s comprehensive project to replace IAS 39. The standard is effective for annuals periods beginning on or after January 1, Earlier application is permitted. IFRS 13 Fair Value Measurement, published on May 12, This new standard defines what is considered fair value, establishes a single framework of work for measuring fair value and requires disclosures about such measurements. The standard is effective for annual periods beginning on or after January 1, Adoption is permitted at an earlier date. Bank s management is currently in the process of evaluating the potential impact of these standards. Given the nature of the Bank s operations, these standards are expected to have a significant impact on the Bank s consolidated financial statements. (3) Balances and Transactions with Related Parties The consolidated statement of financial position and the consolidated statement of income include balances and transactions with related parties, which are summarized as follows: Directors and Management Related Companies 2011 Affiliated Companies Total Assets: Investment securities 0 180,551,863 64,800, ,351,863 Loans 19,610, ,803,740 6,634, ,049,287 Investments in associates 0 14,820, ,820,000 Liabilities: Deposits: Demand 1,744,392 46,008,104 51,686,737 99,439,233 Savings 7,509,662 64,132, ,687 71,909,060 Time 5,447, ,920, ,368,329 14,701, ,061,556 51,953, ,716,622 Commitments and contingencies 1,400, ,272 4,150,000 6,419,272 19

22 Directors and Management Related Companies 2010 Affiliated Companies Total Assets: Investment securities 0 109,980,011 26,600, ,580,011 Loans 17,735,538 95,715,155 74,232, ,683,258 Investments in associates 0 14,014, ,014,289 Liabilities: Deposits: Demand 1,409,886 31,590,822 31,152,552 64,153,260 Savings 5,752,894 76,511,548 4,772,664 87,037,106 Time 10,098, ,417, ,516,408 17,261, ,520,058 35,925, ,706,774 Commitments and contingencies 766,400 1,302,221 4,000,000 6,068,821 Directors and Management 2011 Related Companies Affiliated Companies Total Interest income: 886,978 2,295, ,405 3,943,134 Loans 0 7,145,566 2,350,337 9,495,903 Securities Interest expense: 191,219 2,218,250 7,793 2,417,262 Deposits Other income: 0 2,226, ,226,251 Equity participation in associates 0 495, ,262 Dividends received General and administrative expenses: Directors fees 86, ,400 Benefits to key management personnel 8,833, ,833,209 Directors and Management 2010 Related Companies Affiliated Companies Total Interest income: Loans 963,273 2,741, ,215 4,655,115 Securities 0 1,446, ,219 2,216,447 Interest expense: Deposits 230,990 2,450, ,748 2,814,957 Other income: Equity participation in associates 0 980, ,990 Dividends received 0 442,586 6, ,904 General and administrative expenses: Directors fees 70, ,800 Benefits to key management personnel 8,333, ,333,582 20

23 The benefits to key management personnel include salaries and other expenses for B/.8,161,791 (2010: B/.7,662,164) and options to purchase shares for B/.671,418 (2010: B/.671,418). The conditions granted in transactions with related parties are substantially similar to those granted to third parties not related to the Bank. (4) Cash and Cash Equivalents Cash and cash equivalents are detailed as follows for purposes of reconciliation with the consolidated statement of cash flows: Cash and cash items 189,669, ,020,570 Demand deposits with banks 127,519,637 73,430,239 Time deposits with original maturities of three months or less 60,345, ,635,213 Cash and cash equivalents in the consolidated statement of cash flows 377,534, ,086,022 (5) Investment Securities Investment securities are summarized as follows: Securities at Fair Value The portfolio of securities at fair value amounted to B/.393,967,599 (2010: B/.256,048,614) and was comprised of trading securities and other securities at fair value, as follows: Trading Securities Trading securities at fair value are detailed as follows: Local Commercial paper 3,540,160 1,290,271 Local Corporate Bonds and Fixed Income Funds 2,675, ,400 Republic of Panama Bonds 969,750 0 Local Equity Shares and Mutual Funds 60,000 0 Foreign Treasury Bills 149, ,757 Foreign Corporate Bonds and Fixed Income Funds 57, ,458 Foreign Equity Shares and Mutual Funds 396,449 18,349 Total 7,849,266 1,993,235 The Bank sold trading securities for an amount of B/.1,073,413,597 (2010: B/.381,801,399). These sales generated a net gain of B/.2,397,341 (2010: B/.1,429,028). 21

24 Other Securities at Fair Value The other securities at fair value are detailed as follows: 0 1 year 1 5 years Years More than 10 years and with no maturity Fair value Local Bankers Acceptances, Commercial Paper and Treasury Bills 984, ,160 Local Corporate Bonds and Fixed Income Funds 38,404,205 10,340,260 13,786,399 2,002,996 64,533,860 Local Corporate Shares and Variable Income Mutual Funds ,322,859 20,322,859 Foreign Bankers Acceptances, Commercial Paper, Treasury Bills and Mutual Funds 6,664, ,664,093 Mortgage Backed Securities (MBS) and Collateralized Mortgage Obligations (CMO) 0 399,423 8,768, ,727, ,895,464 Asset Backed Securities 0 1,351, ,593,243 2,944,375 Foreign Corporate Bonds and Fixed Income Funds 24,778,533 9, ,788,352 Foreign Corporate Shares and Variable Income Mutual Funds ,985,170 1,985,170 Total 70,830,991 12,100,634 22,555, ,631, ,118, year 1 5 years Years More than 10 years and with no maturity Fair value Local Corporate Bonds and Fixed Income Funds. 33,945,697 10,733,445 4,826,583 10,755,632 60,261,357 Local Corporate Shares and Variable Income Mutual Funds ,319,145 16,319,145 Foreign Bankers Acceptances, Commercial Paper, Treasury Bills and Mutual Funds 66,378, ,378,960 Mortgage Backed Securities (MBS) and Collateralized Mortgage Obligations (CMO) ,470,749 88,056,432 98,527,181 Foreign Corporate Bonds and Fixed Income Funds 7,082,780 34, ,117,635 Foreign Corporate Shares and Variable Income Mutual Funds ,451,101 5,451,101 Total 107,407,437 10,768,300 15,297, ,582, ,055,379 The Bank sold other securities at fair value for an amount of B/.3,097,164,315 (2010: B/.450,050,190). These sales generated a net gain of B/.3,011,701 (2010: B/.201,318). 22

25 Securities Available-for-Sale The portfolio of securities available-for-sale amounted to B/.1,733,425,987 (2010: B/.1,566,064,576). 0 1 year 1 5 years 5 10 Years 2011 More than 10 years and with no maturity Fair value Amortized cost Local Bankers Acceptances, Commercial Paper and Treasury Bills 7,250, ,250,000 7,250,000 Local Corporate Bonds and Fixed Income Funds 835,369 74,781, ,648,855 89,607, ,873, ,848,948 Republic of Panama Bonds 12,498,000 21,513,696 7,790,100 17,982,000 59,783,796 54,794,484 Local Corporate Shares and Variable Income Mutual Funds ,866,557 3,866,557 2,602,945 US Government and Agency Bonds 9,600,044 4,995,096 11,172,529 1,525,672 27,293,341 27,023,268 Foreign Bankers Acceptances, Commercial Paper, Treasury Bills and Mutual Funds 35,854,242 11,155, ,009,741 47,448,667 Mortgage Backed Securities (MBS) and Collateralized Mortgage Obligations (CMOs) 720,067 1,570, ,018, ,768, ,077, ,509,649 Asset Backed Securities 41,569 2,395,820 2,965,155 3,649,950 9,052,494 9,263,988 Foreign Corporate Bonds and Fixed Income Funds 101,099,017 72,620, ,213,057 12,788, ,721, ,864,267 Other Government Bonds 1,517,900 4,402,072 2,458,820 2,872,651 11,251,443 11,117,647 Foreign Corporate Shares and Variable Income Mutual Funds ,246,441 2,246, ,412 Total 169,416, ,434, ,267, ,307,980 1,733,425,987 1,709,643, year 1 5 years 5 10 Years 2010 More than 10 years and with no maturity Fair value Amortized cost Local Bankers Acceptances, Commercial Paper and Treasury Bills 16,900, ,900,665 16,911,461 Local Corporate Bonds and Fixed Income Funds 3,930,807 53,960, ,865,158 60,280, ,037, ,073,723 Republic of Panama Bonds 303,600 33,204,298 7,295,640 14,486,250 55,289,788 52,193,368 Local Corporate Shares and Variable Income Mutual Funds ,294,152 3,294,152 2,755,348 US Government and Agency Bonds 1,999,220 16,141,737 3,244, ,385,180 21,446,862 Foreign Bankers Acceptances, Commercial Paper, Treasury Bills and Mutual Funds 58,358,090 5,936, ,294,952 64,291,804 Mortgage Backed Securities (MBS) and Collateralized Mortgage Obligations (CMOs) 0 4,163,103 65,083, ,484, ,731, ,369,573 Asset Backed Securities 246,835 4,830,202 2,259,559 1,671,012 9,007,608 8,989,961 Foreign Corporate Bonds and Fixed Income Funds 29,957,546 93,795, ,555,389 13,531, ,839, ,255,747 Other Government Bonds 1,194,412 7,482, ,044 8,297,218 17,636,450 17,517,377 Foreign Corporate Shares and Variable Income Mutual Funds ,647,359 10,647,359 8,840,360 Total 112,891, ,514, ,965, ,693,200 1,566,064,576 1,543,645,584 The Bank sold securities available-for-sale for an amount of B/.1,361,195,687 (2010: B/.1,435,540,145). These sales generated a net gain of B/.9,344,112 (2010: B/.2,596,068). The Bank holds equity shares amounting to B/.908,046 (2010: B/.817,330), which are carried at their acquisition cost since the Bank was not able to determine its fair value. Securities Held-to-Maturity The portfolio of securities held-to-maturity amounted to B/.175,891,043 (2010: B/.218,552,624) less a valuation allowance of B/.212,907 (2010: B/.223,770), due to the permanent impairment of some securities. 23