COMPARTAMOS, S. A. B. DE C. V. AND SUBSIDIARY AUDITED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010

Transcription

1 COMPARTAMOS, S. A. B. DE C. V. AND SUBSIDIARY AUDITED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 Internet\Content.Outlook\ZOCX03WS\COMPARTAMOS INGLES MOD.docx25/04/ :19:18 p.m.

2 COMPARTAMOS, S. A. B. DE C. V. AND SUBSIDIARY AUDITED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 INDEX Contents Page Independent auditors report 1 Consolidated financial statements: Balance sheet 2 Statement of income 3 Statement of changes in stockholders equity 4 Statement of cash flows 5 Notes to the financial statements 6 a 35

3 INDEPENDENT AUDITORS REPORT Mexico City, March 28, 2011 To the Stockholders of Compartamos, S. A. B. de C. V. We have audited the consolidated balance sheet of Compartamos, S. A. B de C. V. and subsidiary (Company) as of December 31, 2010, and the related consolidated statements of income, changes in stockholders equity and of cash flows for the period from December 24 (date of start up of operations) to December 31, These financial statements are the responsibility of the Company management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and that they were prepared in accordance with Mexican Financial Reporting Standards (MFRS). An audit includes examining, on a test basis, evidence supporting the amounts and disclosures contained in the financial consolidated statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We consider that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Compartamos, S. A. B. de C.V. and subsidiary at December 31, 2010, and the consolidated results of its operations, the changes in its stockholders equity and its cash flows for the period from December 24 (date of start up of operations) to December 31, 2010, in conformity with MFRS. PricewaterhouseCoopers, S. C. C.P.C. Francisco Javier Zúñiga Loredo Audit Partner

4 COMPARTAMOS, S. A. B. DE C. V. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2010 Millions of Mexican pesos (Note 2) Assets CURRENT ASSETS: Cash and cash equivalents (Note 5) Ps 732 Investments in financial instruments (Note 5) 399 Derivative financial instruments (Note 6) - Accounts receivable : Clients - Net (Note 7) 9,479 Other accounts receivable (Note 8) 152 Prepaid advances 13 Total current assets Other investments - 10,775 FURNITURE AND EQUIPMENT - Net (Note 9) 274 Deferred taxes (Note 15) 146 Other assets (Note 10) 32 Total assets Ps 11,227 Liabilities and Stockholders Equity CURRENT LIABILITIES: Short-term bank loans (Note 11) Ps 919 Other current liabilities with no cost (Note 12) 453 Taxes payable 73 Total short-term liabilities 1,445 LONG-TERM LIABILITIES: Long-term debt (Note 11) 4,199 Deferred credits 34 Total long-term liabilities 4,233 Total liabilities 5,678 STOCKHOLDERS EQUITY (Note 14): Capital stock 4,629 Net premium on shares 710 Net income for the year 52 Investment of majority stockholders in controlling interest 5,391 Non-controlling interest 158 Total stockholders equity 5,549 Commitments (Note 19) Subsequent event (Note 21) Total liabilities and stockholders equity Ps 11,227 The accompanying twenty one notes are an integral part of this consolidated financial statement. (2) Internet\Content.Outlook\ZOCX03WS\COMPARTAMOS INGLES MOD.docx25/04/ :19:18 p.m.

5 Carlos Labarthe Costas Patricio Diez de Bonilla García Vallejo Oscar Luis Ibarra Burgos Elizabeth Solares Flores Chief Executive Officer Chief Financial Officer General Internal Auditor Accounting Tax Administration Assistant Director Internet\Content.Outlook\ZOCX03WS\COMPARTAMOS INGLES MOD.docx25/04/ :19:18 p.m. (2)

6 COMPARTAMOS, S. A. B. DE C. V. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD FROM DECEMBER 24 (DATE OF START UP OF OPERATIONS) TO DECEMBER 31, 2010 Millions of Mexican pesos (Note 2), except earnings per share Service income Ps 158 Cost of services 7 Gross profit 151 Administrative expenses 94 Comprehensive financing result (Note 16) (2) Other income - Net (Note 17) 12 Income before tax on profits 67 Tax on profits (Note 15) 14 Net consolidated profit for the period Ps 53 Profit of controlling interest Ps 52 Profit of non-controlling interest 1 Net consolidated income for the period Ps Earnings per share (pesos) Ps0.03 The accompanying twenty one notes are an integral part of this consolidated financial statement. Carlos Labarthe Costas Chief Executive Office Patricio Diez de Bonilla García Vallejo Chief Financial Officer Oscar Luis Ibarra Burgos Elizabeth Solares Flores (3)

7 General Internal Auditor Accounting Tax Administration Assistant Director (4)

8 COMPARTAMOS, S. A. B. DE C. V. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY FOR THE PERIOD FROM DECEMBER 24 (DATE OF START UP OF OPERATIONS) TO DECEMBER 31, 2010 Millions of Mexican pesos (Notes 2 and 14) Capital contributed Earned capital Net premium Income Non Total Capital on share for controlling stockholders stock placement the year interest equity Initial contribution as of March 23, 2010 Ps - Ps - Ps - Ps - Ps - CHANGES RELATED TO STOCKHOLDERS DECISIONS: Capital stock increase Non-controlling interest 4, , Total 4, ,496 CHANGES RELATED TO RECOGNITION OF COMPREHENSIVE INCOME: Net income for the year Total Balances as of December 31, 2010 Ps 4,629 Ps710 Ps52 Ps158 Ps5,549 The accompanying twenty one notes are an integral part of this consolidated financial statement. Carlos Labarthe Costas Patricio Diez de Bonilla García Vallejo Oscar Luis Ibarra Burgos Elizabeth Solares Flores Chief Executive Officer Chief Financial Officer General Internal Auditor Accounting Tax Administration Assistant Director Internet\Content.Outlook\ZOCX03WS\COMPARTAMOS INGLES MOD.docx25/04/ :19:18 p.m. (4)

9 (5) Internet\Content.Outlook\ZOCX03WS\COMPARTAMOS INGLES MOD.docx25/04/ :19:18 p.m.

10 COMPARTAMOS, S. A. B. DE C. V. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM DECEMBER 24 (DATE OF STRART UP OF OPERATIONS) TO DECEMBER 31, 2010 Millions of Mexican pesos (Note 2) Operating activities: Profit before taxes on profits Ps 67 Investing activity related items Depreciation and amortization 2 Financing activity related items Interest payable 69 Subtotal of items related to investing and financing activities Increase in accounts receivable and others (9,822) Decrease in suppliers 1,463 Net cash flows from operating activities (8,290) Investing activities: Investments in financial instruments (399) Acquisitions of property, machinery and equipment (274) Net flows of cash from investment activities (673) Cash receivable from financing activities (8,963) Financing activities: Capital increase 5,339 Non-controlling interest 157 Long-term loans received 4,199 Net cash flows from financing activities 9,695 Cash to be applied to financing activities 732 Net increase in cash and temporary investments 732 Cash and cash equivalents at beginning of period - Cash and cash equivalents at end of period Ps 732 The accompanying twenty one notes are an integral part of this consolidated financial statement. Carlos Labarthe Costas Chief Executive Office Patricio Diez de Bonilla García Vallejo Chief Financial Officer (5)

11 Oscar Luis Ibarra Burgos General Internal Auditor Elizabeth Solares Flores Accounting Tax Administration Assistant Director (6)

12 COMPARTAMOS S. A. B. DE C. V. AND SUBSIDIARY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 Millions of Mexican pesos (Note 2), except exchange-rates, foreign currency, profit per share and the par value of shares NOTE 1 ENTITY S HISTORY AND OPERATIONS: Incorporation Compartamos, S. A. B. de C. V. (Compartamos Holding or Company) was incorporated in Mexico for an indefinite period through public deed no. 47,284 on March 23, The entity was properly registered at the Mexico City Public Property and Commerce Registry on May 24, Company operations began on December 24, Business purpose Compartamos Holding is engaged in promoting, organizing and administrating all types of corporations, including, but not limited to, multiple banking entities engaged in rendering bank and loan services in the terms of the Credit Law (Law) and other types of domestic and foreign financial entities. Compartamos Holding identifies opportunities on the local and foreign markets, especially in the microfinancing industry, and it therefore does not wish to restrict its operations to a single market or economic segment. Compartamos Holding seeks to achieve greater flexibility with a view to participating in other markets, locally and abroad, and improving its operating and administrative structure, and consequently, place itself in a better position to identify investment opportunities. Compartamos Holding inteds to achieve its objectives through a corporate restructuring and by operating as a securities company. Through a December 24, 2010 public bidding, Compartamos Holding acquired most of the shares of Banco Compartamos, S. A., Institución de Banca Múltiple (Bank), which resulted in the creation of the consolidated economic entity known as Compartamos, S. A. B. de C. V. and subsidiary (hereinafter Compartamos or the Company). (7)

13 The consolidated financial statements include the figures of Compartamos Holding and its subsidiary at December 31, 2010, as shown below: Shareholding Functional Company percentage Operation currency Bank 97.15% Financial services Pesos NOTE 2 - BASIS FOR PREPARATION: Mexican Financial Reporting Standards (NIF by its initials in Spanish) The accompanying consolidated financial statements at December 31, 2010, fairly meet the provisions of NIF to show a fair presentation of the Compartamos financial position. The NIF establish that the international financial reporting standard, the international accounting standards, international financial reporting interpretations and the Committee of Interpretation interpretation are a suppletory part of the when the absence of them requires it. Costs, expenses and additional line items presentation in the statement of income Compartamos presents costs and expenses in the statement of income under the classification criterion based on the function of items, the main characteristic of which is to separate the sales costs from the other costs and expenses. Additionally, for a better analysis of its financial position, Compartamos has deemed necessary to separately present the amount of the operating profit in the statement of income, as such information is a common disclosure practice of the sector to which the entity belongs. Inflation effects on the financial information According to the provisions in the NIF B-10 Inflation effects, the Mexican economy is not in an inflationary environment, since there has been a cumulative inflation below 26% (threshold to define that an economy should be considered inflationary) in the most recent three year period. Therefore, as of January 1, 2008, it has been necessary to discontinue recognition of inflation effects on the financial information (disconnection from inflationary accounting). Consequently, the consolidated figures of the accompanying financial statements at December 31, 2010 are stated in historical millions Mexican pesos modified by cumulative inflation effects on the financial information recognized up to December 31, (8)

14 The inflation percentages are indicated as follows, which have been determined on the basis of Investment Units (UDI for its acronym in Spanish): December 31, 2010 (%) Annual inflation 4.28 Cumulative inflation in the last three years The figures at December 31, 2010 shown in the enclosed consolidated financial statements are shown in millions of historical pesos. Given that the posting, functional and reporting currency is the Mexican peso, it was not necessary to perform any conversion processes. The accompanying financial statements and their notes were authorized for issuance on March 25, 2011 by the signing officers. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Following is a summary of the most significant accounting policies, which have been applied consistently during the years presented, unless otherwise specified. NIF requires the use of certain critical accounting estimations in preparing the financial statements. NIF also require that management exercise its judgment in determining the Company s accounting policies. a. Consolidation All significant balances and transactions between the consolidated companies have been eliminated for consolidation effects. The consolidation was carried out on the basis of audited financial statements of the subsidiary. b. Cash and cash equivalents Cash and cash equivalents include cash balances, bank deposits and other highly liquid investments with minor risks for changes in value. See note 5. They also include investments payable on demand, which are securities whose disposal by the entity is foreseen immediately, and which generate yields and have insignificant risks for change in value, such as very short-term investments, e.g., maturing in up to three months as from their acquisition date. (9)

15 c. Investment in financial instruments Includes debt and equity securities and are classified according to the intention given by management at the time of investment, and is valued as follows: Debt financial instruments constituting temporary investments with a term of less than one year and that are traded on securities markets, as well as investments in those instruments carried out for trade purposes, are classified as temporary investments and must be classified as temporary investments and shown in current assets. See Note 5. Trading securities are valued at fair value, which closely resembles market value. Fair value is the amount for which a financial instrument may be exchanged between interested and willing parties in a transaction free of influence. Adjustments arising from valuations in this category are recorded directly against income for the period. d. Derivative financial instruments All derivative financial instruments classified as trading or hedging are recognized in the balance sheet as assets and/or liabilities. These instruments are recorded at the agreed value and are subsequently valued at fair value on the basis of their intended use, either as coverage for an open risk position or for trade. Assets and/or liabilities arising from operations with derivative financial instruments are recognized or cancelled on the date on which the operation becomes known, regardless of the date on which the item in question is paid for or delivered. Open-risk position hedging operations consist of buying or selling derivative financial instruments for the purpose of mitigating the risk of a transaction or group of transactions. These operations must meet all hedging requirements, document their designation at the outset of the hedging operation, describe the objective, primary position, risks to be hedged, types of derivatives and the measurement of the effectiveness, characteristics, book recognition and the manner by which effectiveness is measured with regard to that operation. Based on the aforementioned categories, the Bank transactions with derivative financial instruments are recorded as follows: Options Management entered into an option agreement to hedge against the potential upward trend of the interest rate of traded notes known as Certificados Bursátiles Bancarios (Cebures for its acronym in Spanish) (see Note 6), whereby the holder has the right, yet not obligation, to purchase the underlying asset. The option becomes usable when the Average Interbank Interest Rate (TIIE for its initial in Spanish) exceeds 8% of the value in each of the maturity dates of the Cebures coupons. See Note 6. (10)

16 The exercise price is that agreed in the option and it is exercised if it is convenient for the buyer of the option. The instrument on which said price is set is the reference or underlying value. The premium is the price paid by the holder to the issuer for the right conferred by the option. The option premium was recorded as an asset on the date on which the operation was entered into. With respect to fluctuations arising from market valuation of the option premium, because it is classified as a cash flow hedge, the effective portion is applied to comprehensive income under stockholders equity in the Result of valuation of cash flow hedging instruments and the ineffective portion is applied to income for the period. The Bank suspends hedge accounting when a derivative instruments matures, has been sold, is cancelled or exercised, when the derivative fails to reach high effectiveness to offset the changes in fair value or cash flows of the item hedged, or when it is decided to cancel the hedge designation. Upon suspending the hedge accounting of cash flow hedging, the accumulated gain or loss corresponding to the effective portion of the hedging derivative instruments recorded in stockholders equity as part of comprehensive income remains in stockholders equity until such time as the effects of the forecasted transaction or firm commitment affect income. In the event the firm commitment or forecasted transaction are no longer likely to occur, the gain or loss recognized in the comprehensive income account is immediately applied to income. When hedging of a forecasted transaction was shown as prospectively satisfactory and is subsequently shown not to be highly effective, the accrued effects on comprehensive income in stockholders equity are proportionately applied to income, to the extent that the forecasted asset or liability affects income. e. Accounts receivable Represents the unpaid balance of the amounts actually delivered to borrowers, plus uncollected interest earned and is recorded at its value determined as per the Law. Loans are granted based on an analysis of the customer s application, the socioeconomic study conducted and the consultations made at the credit information bureaus. In some cases, an analysis is conducted of the borrower s financial position, the economic feasibility of the investment projects and other general characteristics established in the law, the Bank s manuals and internal policies. Loans are controlled by periodic visits to clients by the Bank s personnel, and by daily monitoring (through the system), where the personnel in question can follow-up on late payments. (11)

17 Loans are a recovered weekly, every two weeks or monthly, when clients make loan payments in the form of deposits in accounts contracted by the Bank at other multiple banking institutions exclusively for that purpose, as well as the correspondents to conduct this type of operations. Evaluation and follow-up on the credit risk of each client is handled on the basis of credit history Bank and consultations of clients credit ratings at credit bureaus. The Bank s policy for avoiding risk concentration is based principally on setting maximum amount limits on loans. Interest is recorded as income when earned under the service income caption of the statement of income. Commissions on late payment of loans are recorded as income when the delay occurs. At December 31, 2010, the Bank has mainly a short-term loan portfolio. f. Allowance for loan losses The reserves is determinated applying default probabilities based on the number of billing periods showing default at the date of rating and the likelihood of a 100% loss, using the following proceed: i. The portfolio is strategized in terms of the number of billing periods reporting default of the payment due established by the Bank at the date of the rating, using the historical dates pertaining to payments of each loans of at least 18, 13 or 9 periods prior to that date, with respect to loans with weekly, biweekly or monthly payments according to the following tables. With respect to new loans in which the record of payments does not meet the minimum required number of periods, the date available thus far is used. ii. For each stratum, the preventive reserves resulting from applying the percentages of the following preventive reserves to the total outstanding balance of loans in each tier, depending on whether or not the billing periods showing default are weekly, biweekly or monthly. In any event, the amount subject to rating does not include uncollected interest earned recorded in the balance sheet, pertaining to loans of the past-due portfolio. (12)

18 Applicable table for loans with weekly billing: Number of billing periods showing default Percentage s severity loss (%) Percentage of the preventive reserves (%) Default probabilities (%) or more Applicable table for loans with biweekly billing: Number of billing periods showing default Percentage s severity loss(%) Percentage of the preventive reserves (%) Default probabilities (%) or more (13)

19 Applicable table for loans with monthly billing: Number of billing periods showing default Percentage severity loss (%) Percentage of the preventive reserves (%) Default probabilities (%) or more The Bank periodically evaluates whether or not a past due loan should remain in the balance sheet, or be written off. When applicable, said write off is conducted by canceling the unpaid balance of the loan against the preventive loan loss reserve. In the event the loan balance to be written off exceeds that corresponding to the related reserve, prior to the write off, said reserve is increased up to the amount of the difference. Recoveries related to written off loans or loans eliminated from the balance sheet are applied to income for the period. The last rating of the loan portfolio was conducted at December 31, 2010 and management considers that the reserves resulting from said rating are sufficient to absorb the portfolio s loan loss risks. See Note 7. g. Other accounts receivable Accounts receivable other than the Bank s loan portfolio represent, among other items, loans made to employees and items directly related to the loan portfolio, such as litigation expenses and debts of the correspondents. h. Furniture and equipment As of December 31, 2010, furniture and equipment are stated as follows: i) acquisitions conducted as from January 1, 2008 at their historical cost, and ii) domestic acquisitions made up to December 31, 2007 at their restated values, determined applying factors derived from UDI to their acquisition costs up to December 31, See Note (14)

20 Depreciation is calculated using the straight-line method, based on the useful life estimated by Compartamos. In the period ended December 31, 2010, the charge to income for depreciation shown under administrative and promotion expenses was Ps2. i. Deferred income tax This item is recorded by the comprehensive asset-and-liability method, which consists of recognizing deferred tax on all temporary differences between the book and tax values of assets and liabilities expected to materialize over time, at the rates set forth in the tax provisions in effect at the date of the financial statements. See Note 15. The effects of deferred Employees Statutory Profit Sharing (ESPS) are not calculated, as it is determined based on the provisions of section III of article 127 of the Federal Labor Law. j. Liabilities arising from deposits This item includes Deposit Certificates (Cedes for its acronym in Spanish) and Cebures issued, which are recorded at placement cost, plus interest earned, determined by the straight-line method for days elapsed at the close of each month, which is charged to income for the period as accrued. See Note 13. Issue expenses are initially recognized as deferred charges and amortized against income for the period, according to the term of the securities from which they arose. k. Interbank and other entities loans This caption refers to credit lines and other loans obtained from banks. They are recorded at the contractual value of the liability recognizing interest as it is accrued. See Note 14. l. Provisions Provisions for liabilities represent present obligations arising from past events, likely to require the use of economic resources to settle the obligation. These provisions have been recorded under Management s best estimate. See Note 12. m. Employee benefits The benefits granted by Compartamos to its employees are described as follows: Direct benefits (salaries, vacations, holidays and paid leave of absence, among others) are applied to income as they arise and the related liabilities are stated at their nominal value, due to their short-term nature. Absences payable under legal or contractual provisions are noncumulative. (15)

21 Employee benefits upon termination of employment for reasons other than restructuring (severance), as well as retirement benefits (seniority premium) are recorded based on actuarial studies conducted by independent experts by the projected unit credit method. See Note 13. The net cost for the period of each benefit plan is recognized as an operating expense in the year in which it becomes payable, which includes, among other items, amortization of the labor cost of past services and prior years actuarial gains. Actuarial studies on employees benefits include the assumption on the wage career. n. Stockholders equity Capital stock and net premium on share placement are stated at their historical cost. See Nota 15. The net premium on share placement represents the excess difference between the payment for subscribed shares and the par value thereof. o. Comprehensive income Comprehensive income comprises the net income, result from valuation of cash flow hedging instruments, as well as items required by specific accounting standards to be included in stockholders equity, but which do not constitute capital contributions, reductions or distributions. The amounts of comprehensive income are expressed in modified historical millions of pesos. The net profit is equal to the comprehensive income. p. Service income recognition Yields earned from cash equivalents and from investments in financial instruments are recorded in income as they accrue based on the straight-line method. Interest earned on accounts receivable from clients is recorded as interest accrues. q. Service cost recognition This item includes interest accrued on financing received to fund the Entity s operations and the interest accrued from bank loans and debt instruments. r. Earnings per share This represents the result of dividing the net profit for the period by the weighted average of current shares for the period ended on December 31, (16)

22 s. Exchange gain (loss) Foreign currency transactions are initially recorded in the posting currency, applying the exchange rate prevailing on the transaction date. Assets and liabilities denominated in foreign currency are stated in local currency at the rate of exchange in effect on the balance-sheet date. Differences arising from fluctuations in exchange rates between the dates on which transactions are entered into and those on which they are settled, or the balance sheet date, are recorded in income as a component of comprehensive financing icnome (RIF for its initials in Spanish), except for exchange differences that are capitalized jointly with other RIF components in the cost of ratable assets. See Note 17. NOTE 4 - FOREING CURRENCY POSITION: As of December 31, 2010, the entity has the following assets and liabilities in dollars (Dls.): 2010 Assets Dls. 24,387 Liabilities - Long position Dls. 24,387 At December 31, 2010 the exchange rate determined by the Central Bank and used by the Bank to value its assets and liabilities in foreign currency was Ps to the dollar. At March 28, 2011, date of issuance of the financial statements, the exchange rate was Ps to the dollar. NOTE 5 - CASH AND CASH EQUIVALENTS At December 31, 2010, the cash and cash equivalent caption is comprised as follows: Cash Ps - Bank deposits 66 Investments payable on demand maturing in a maximum of three months 459 Total non-restricted 525 (17)

23 Restricted cash Monetary regulations 204 Savings funds of employees 3 Total restricted 207 Total cash and cash equivalents Ps732 At December 31, 2010, the Bank has restricted cash and cash equivalents of Ps207 corresponding to monetary regulation deposits with the Central Bank, as per Circular 36/208 of August 1, 2008 issued by the Central Bank, and they include the savings fund of Entity employees as of December 31, 2010 of Ps3. As of December 31, 2010, Compartamos has no precious metals, coins or position in foreign bills and coins. Cash surpluses resulting from Bank operations are invested in debt instruments, and the best available rate is always arranged with the counterparties involved. December 31, 2010 Financial instruments Amount Interest rate (%) Maturity Debt: Promissory notes with interest payable at maturity (PRLV) Ps Jan-11 PRLV Feb-11 Total PRLV 301 Federal Treasury bonds (CEDES) Ps Jun-11 Total CEDES 98 Total financial instruments Ps 399 The purpose of securities classified as trading is to obtain short-term earnings as a market participant. (18)

24 Investments in securities are subject to different types of risks directly related to the market in which they operate, such as interest rates and risks inherent to credit and market liquidity. Market risk management takes into consideration, at minimum, the identification, quantification, limits-setting and monitoring of risks arising from changes in risk factors that affect the valuation or the expected effects of asset or liability operations, or operations giving rise to contingent liabilities. The financial instrument portfolio subject to market risk at December 31, 2010 is comprised solely of call money operations and of purchases of CETES and PRLV. Therefore, the risk factors that might affect the portfolio value of investments basically include interest rates, surcharges and the price of other financial instruments. Please note that the Entity s treasury operations are limited to investments of cash surpluses arising from loan operations. NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS: At December 31, 2010, the Bank has entered into the following option agreement: 2010 Strike Reference Premium Fair Type of operation Underlying asset price amount paid value Purchase Interest rate 8% Ps1,500 Ps 16 Ps - Given the value of TIIE at December 31, 2010, Bank Management does not expect to exercise any of the captles; therefore, the charge to income will be made as each caplet matures with respect to the originally paid premium. At December 31, 2010, the Bank entered into an interest rate hedging option to limit the amount of interest on Cebures; no option caplets have been exercised, since there have been no values equal to or above the exercise price. The Bank documented the hedge as pertaining to cash flows, as it expects that as a result of the volatility of the financial markets, the rate could be affected and exceed 8% during issuance of the Cebures. At December 31, 2010, Management foresees no terms or conditions that could significantly affect the amount, terms and degree of certainty of future cash flows. (19)

25 The respective features are described below: Counterparty: Banamex Date of operation: 14/10/2009 Notional amount: Ps 1,500 Reference: TIIE 28 Maturity date: 18/06/2012 Net initial investment: Ps 16.6 CAP or Floor as the case may be: Cap (C) or Floor (F): C Long (L) or Short (C): L Style for exercising option (A, E, other): European Exercise price or return: 8% First date of review of reference rate: 9/11/2009 Frequency of review: 28 days Number of periods to be hedge: 34 The operation in question was conducted to manage risk arising from interest rates on interest payments pertaining to issuance of unsecured notes known as COMPART 09. The effectiveness of the hedge is determined based on changes in the intrinsic and extrinsic values of the option (time value and volatility) are excluded from measurement of the effectiveness of this optionbased hedge. Due to the fact that the changes in the reference rate observable on the date of review of the rate for calculation and settlement of interest of the unsecured note are made simultaneously on the same reference rate and review/settlement date as that of the European option acquired, and that the effectiveness of the comprehensive income account pertains solely to changes in the intrinsic value of the option in a hedge factor or ratio of 100% of inverse correlation, the option is expected to be highly effective when the reference rate exceeds the 8% level for the 34 periods of maturity. Because the characteristics of the option and of the COMPART 09 unsecured note are the same (notional amount, reference rate, review and interest payment dates, frequency of review, term of agreement), the changes in fair value attributable to the risk being hedged are completely offset at the beginning, during and up until maturity of the hedging, as a result of which, evaluating and measuring the effectiveness of the hedging is unnecessary. NOTE 7 - CLIENTS (NET): At December 31, 2010, accounts receivable from clients are as follows: Clients Ps 9,773 Less: Estimation 294 Total accounts receivable in the short term Ps 9,479 (20)

26 Allowance for loan loss reserve As of December 31, 2010, the provisions created are as follows: December 31, 2010 Accounts receivable from clients Estimation Total accounts receivable from clients 100 Ps9,773 Risk % Amount % Amount [A] 91 Ps 8, Ps 45 [B] [C] [D] [E] , Total estimation for accounts receivable from clients Ps 294 NOTE 8 - OTHER ACCOUNTS RECEIVABLE: At December 31, 2010, this item is comprised as follows: Debit for intermediation Ps 129 Items related to client operations 11 Other receivables Less: Allowance for doubtful accounts (8) Ps 152 (21)

27 NOTE 9 - FURNITURE AND EQUIPMENT: As of December 31, 2010, this item is comprised as follows: 2010 Annual Depreciation Original rate Accumulated Net cost (%) depreciation value Office furniture and equipment Ps Ps 34 Ps 65 Transportation equipment Computer equipment and Others: Leasehold improvements 113 5* Telecommunications equipment Phone lines Ps 569 Ps 295 Ps 274 Fully depreciated assets Original cost Office furniture and equipment Ps - Transportation equipment 1 Computer equipment 81 Others: Leasehold improvements 73 Telecommunications equipment - Phone lines - The fixed assets property of the Bank does not present any burden or restriction. Furniture and equipment are not securing bank loans or any other type of loans. Ps 155 (22)

28 NOTE 10 - OTHER ASSETS: As of December 31, 2010, this item is comprised as follows: Guarantee deposits (a) Ps 17 Other intangible assets 1 Debt issuance costs Less: Accumulated amortization 11 Ps 32 (a) Not amortizable, subject to recovery upon expiration of each leasing agreement for the respective service office. NOTE 11 - ANALYSIS OF BANK LOANS: As of December 31, 2010, the Bank had contracted the following loans: Short-term: Mexican pesos Bank Interest rate Maturity Amount (%) Nacional Financiera, S. N. C. (NAFIN) Aug-2011 Ps 200 NAFIN Jan NAFIN Dec Sociedad Hipotecaria Federal, S. N. C. (SHF) Feb SHF Mar Banco Mercantil del Norte, S. A May HSBC Banco, S. A Jun Accrued interest 2 Total loan and interest payable in the short term Ps 919 (23)

29 Long term: Mexican pesos Bank Interest rate Maturity Amount (%) NAFIN Jan-2012 Ps 325 NAFIN May Banco Ve por Más, S. A Dec IXE Banco, S. A Jun Fideicomisos Instituidos en Relación con la Agricultura (FIRA) Feb FIRA Mar FIRA Apr Accrued interest - Total loan and interest payable in the long term Ps 1,688 Cebures COMPART 09 TIIE 28 días + 200Pb Jun-2012 Ps 1,500 COMPART 10 TIIE 28 días + 130Pb Oct ,000 Accrued interest 11 Total loan and interest payable in the long term Ps 2,511 Total long term Ps 4,199 With respect of the lines of credits received by the Bank at December 31, 2010, the unused portion is as shown below: 2010 Line of credit Portion still Institution received unused FIRA Ps 2,000 Ps 1,250 NAFIN 2, SHF BBVA Bancomer, S. A Banco Nacional de México, S. A HSBC México, S. A IXE Banco, S. A Banco Ve por Más, S. A Banco Mercantil del Norte, S. A Ps 6,150 Ps 3,545 (24)

30 (25)

31 NOTE 12 - ANALYSIS OF OTHER LIABILITIES AND PROVISIONS: As of December 31, 2010, this item is comprised as follows: December 31, 2010 ESPS Ps 68 Social security contributions 45 Other taxes 69 Labor liabilities 26 Other provisions 112 Other accounts payable 133 Total Ps 453 The analysis of the most significant provisions is presented below: Balance at Balance at Type of January 1, December 31, provision 2010 Increases Applications Cancellations 2010 Short term: ESPS Ps 53 Ps 68 Ps 53 Ps - Ps 68 Other provisions Ps 105 Ps 180 Ps 92 Ps 13 Ps 180 The liabilities provisions represent present obligations for past events where the outflow of economic resources is possible in the short-term. Following are presented the main items: December 31, 2010 Productivity bonus Ps 90 Employees Statutory Profit Sharing provision 68 Commissions 22 Total de provisions Ps 180 (26)

32 NOTE 13 - EMPLOYEE BENEFITS: a. Reconciliation between the initial and final balances of the defined benefit obligations (OBD for its initials in Spanish) present value for 2010: Pre-retirement Pre-retirement Seniority premium Financial position of legal seniority at assets and liabilities compensation premium retirement OBD at beginning of period (Ps ) (Ps3.865) (Ps1.558) Plus (less): Labor cost of current service (7.394) (2.033) (0.668) Financial cost (1.034) (0.315) (0.132) Actuarial earnings generated in the period (0.080) OBD reductions Paid benefits OBD at the end of the period (Ps ) (Ps5.269) (Ps2.438) b. The value of acquired benefit obligations at December 31, 2010, amounted to Ps c. Conciliation of the OBD and the et projected liability (PNP, for its initials in Spanish). Reconciliation between the OBD present value and the PNP recognized in the balance sheet: Pre-retirement Pre-retirement Seniority premium legal seniority at Labor liabilities compensation premium retirement OBD at December 31, 2010 (Ps ) (Ps 5.269) (Ps 2.438) Plan assets Financial position of plan (19.059) (5.269) (2.438) Unamortized items Actuarial gains - - (0.251) Transition liability PNP (Ps ) (Ps 5.216) (Ps 2.622) d. Net cost for the period (CNP for its Spanish acronym) Following is an analysis of the CNP by plan type: Pre-retirement Pre-retirement Seniority premium legal seniority at compensation premium retirement CNP Labor cost of the current service Ps Ps2.032 Ps Financial cost Actuarial (gain) loss (2.933) (0.569) (0.005) Labor cost of past services Amortization of transition liability (27)

33 Total Ps Ps1.805 Ps (28)

34 e. Main actuarial assumptions: The main actuarial assumptions used, expressed in absolute terms, as well as the discount rates, assets yield plan, salaries increases and changes in the indexes or other changes, referred to at December 31, 2010, are as follows: Age Death (%) Disability (%) Dismissal (%) Designation (%) (%) Discount rate: 7.50 Rate of salary increases: 5.57 Rate of increases to the minimum wage: 4.27 f. OBD and plan situation for the last four annual periods: The OBD value, the plan situation, as well as the adjustments by experience of the last four years are shown as follows: Seniority premium plan Historical values Adjustments for Plan experience Year OBD AP situation OBD (%) 2010 Ps Ps - Ps (29)

35 g. ESPS Benefit plan at termination of employment Historical value Adjustments for Plan experience Year OBD AP situation OBD (%) 2010 Ps Ps - Ps During 2010, the Bank used the provisions of article 127, section III of the Federal Labor Law as the basis for calculating ESPS. The total for 2010 was Ps1. NOTE 14 - STOCKHOLDERS EQUITY: The Company was incorporated with a minimum fixed capital of fifty thousand pesos and an unlimited variable capital. At the Ordinary and Extraordinary General Meeting of November 10, 2010, the stockholders authorized an increase in the variable and fixed portions of Compartamos capital stock and they agreed on the public exchange offer for the acquisition of the Bank s shares and the reciprocal subscription of Compartamos shares; they also agreed to reduce the fixed portion of capital stock by fifty thousand pesos through cancelation of 50,000 single series, ordinary, nominative shares with no par value, which was subject to the Bank s share exchange offer. As a result of the public offer, on December 24, 2010, the entity recognized a net premium on share placement of Ps721, which includes Ps11 for placement expenses for the public offer, net of tax (Ps16 placement expenses and Ps5 deferred taxes). As a result of the offer and the agreements reached at the November 10, 2010 meeting, the Compartamos subscribed and paid in capital at December 31, 2010 is made up as follows: Serie Shares* Description Amount Single 403,767,863 Minimum fixed capital with no withdrawal rights Ps 1,157 1,211,303,589 Variable capital 3,472 96,276,052 Shares in the treasury - Total 1,711,347,504 Ps4,629 * Common nominative shares with no par value. (30)

36 (31)

37 The net income for the year is subject to the legal provision requiring that at least 5% of the net income for each period be set aside to increase the legal reserve until it reaches an amount equivalent to the capital stock. Dividends paid are not subject to income tax if paid from the after-tax earnings account. Any dividends paid in excess of this account will cause a to tax equivalent to 42.86%, if they are paid on The current tax is payable by Compartamos and may be credited against its income tax in the same year or the following two years or, if applicable, against the flat tax for the period. Dividends paid that come from earnings previously taxed by income tax will not subject of any kind of retention or additional tax payment. In the event of a capital reduction, the provisions of the Income Tax Law establish that any excess of stockholders equity over capital contributions is accorded the same tax treatment as dividends. NOTE 15 - INCOME TAX AND FLAT TAX: a. Income tax Income tax is determined on the basis of each Company s results and not on a consolidated basis. In 2010, the Bank determined a tax profit of Ps2,676, which exceeded the amount determined for flat tax purposes, and Compartamos determined a tax loss of Ps20. The tax results differ from the accounting result, mainly in such items cumulative by the time and deducted differently for accounting and tax purposes, by the recognition of the inflation effects for tax purposes, as well as such items only affecting either the accouting or tax results. Based on its financial and tax projections, Compartamos determined that the tax to be paid in the future will be the income tax, therefore it has been recognized deferred income tax. On December 7, 2009, the decreed by which diverse provisions of the Income Tax Law are reformed, added an derogated for 2010, which establishes, among other, that the income tax rate applicable from 2011 to 2012 will be 30%, for 2013 will be 29% and as of 2014 will be 28%. The provision for consolidated income tax is as follows: Year ended December 31, 2010 Current income tax (15) Deferred income tax 1 Income tax provision (Ps 14) (32)

38 At December 31, 2010, the principal temporary differences on which deferred income tax was recognized were as shown below: December 31, 2010 Provision for loan loss reserves Ps 219 Furniture and equipment (72) Installation expenses 74 Valuation of instruments 16 ESPS 68 Employee benefits study 26 Provisions 138 Tax loss Income tax rate 30% Deferred income tax Ps 146 At December 31, 2010, the Company has tax losses in the mount of Ps20, whose right to be amortized against future profits expires in b. Flat tax Flat tax of 2010 is calculated at the 17.5% rate on the profit determined with base on the cash flows, such net income represents the differences between the total income collected by taxable activities, less the authorized tax deductions paid. The law also allows reducing that amount with the flat tax credits, based on the procedures established in the law. According to current legislation, the Company must pay annually the higher of income tax and Flat tax. NOTE 16 - COMPREHENSIVE FINANCING RESULT: At December 31, the RIF is comprised as follows: Year ended on December 31, 2010 Exchange gain (net) Ps- Other financial expenses (2) Total (Ps2) (33)

39 NOTE 17 - ANALYSIS OF OTHER INCOME: Other income/expenses accrued are as follows: Year ended on December 31, 2010 ESPS accrued (Ps 1) Donations 2 Intermediation income 5 Other intercompany income 2 Cancellation of liabilities 4 Total other income/expenses Ps12 NOTE 18 - INFORMATION PER SEGMENT: Accounts receivable from clients, segmented by economic sector, are as follows: 2010 Economic activities Amount % Trade Ps8, Construction 4 - Professional services Agriculture 48 1 Cattle breeding Manufacturing industry 59 1 Other Total Ps9, (34)

40 Following is the analysis of the portfolio per geographical zone at December 31, 2010: State: Aguascalientes Ps 40 Baja California 137 Baja California Sur 57 Campeche 123 Chiapas 639 Chihuahua 60 Coahuila 304 Colima 70 Distrito Federal 180 Durango 158 Estado de México 817 Guanajuato 195 Guerrero 468 Hidalgo 220 Jalisco 222 Michoacán 337 Morelos 207 Nayarit 65 Nuevo León 421 Oaxaca 490 Puebla 756 Querétaro 72 Quintana Roo 206 San Luis Potosí 173 Sinaloa 128 Sonora 200 Tabasco 514 Tamaulipas 400 Tlaxcala 290 Veracruz 1,433 Yucatán 180 Zacatecas 73 9,635 Plus: interest 138 Total Ps9,773 (35)

41 NOTE 19 - COMMITMENTS: The Bank entered into a number of lease agreements for its head office and service offices. The terms of these agreements range from two to five years. Rent payments to be made over the next three years amount to Ps132 (Ps87 in 2011, Ps43 in 2012 and Ps2 in 2013). The lease agreements for the service offices are, for the most part, Bank forms, containing the following clauses: purpose, intent, duration, rent, guarantee deposit, form of payment, expense, additional obligations, rescission, returning of the building, maintenance and leasehold improvements, assignment, absence of flaws and jurisdiction. Most of the agreements establish the option of early termination for the entity after notifying the lessor in writing. For the most part, contract renewals require that the lessor respect the preemptive right established in the legislation, as well as signature of a new lease agreement in the same terms and conditions set forth in the expiring agreement. The lessor is to grant the Institution 60 days prior to expiration of the agreement to conduct the renewal. The lessee will enjoy a term of 10 business days as from the first working date after the lessor delivers the agreement, in order for the former to decide whether or not to sign the agreement. The Bank does not sign lease agreements with an option to buy. All of the lease agreements are guaranteed with guarantee deposits, which are the equivalent of one or two months rent, as the case may be. Under no circumstances does the entity offer additional guarantees. Rent conditions are updated annually and increases are determined as per the National Consumer Price Index published by Central Bank the month immediately prior to signing the agreement supporting said increase. In most cases, the annual increase is capped at 10% of the rent price paid the prior year, as a result of which, in the event of macroeconomic contingencies, said percentage will be applied. Rent increases must be supported through an amending agreement, to be signed 30 days prior to the date on which the rent is to be increased. The Bank s lease agreements do not consider caps on dividend payments and debt contracting. (36)

42 NOTA 20 - ACCOUNTING PRONOUNCEMENTS: In December 2009 and 2010, the CINIF issued a series of NIF and interpretations of NIF, that become effective as of January 1, It is considered that such changes will not substantially affect the financial information presented by Compartamos. NIF B-5 Financial information by segments : it establishes the general standards to disclose financial information by segments; additionally it allows the user or such information to analyze the entity from the same perspective as management and allows presenting information by segment more consistent with its financial statements. This standard supersedes Statement B-5 Financial information by segment, effective up to December 31, NIF B-9 Financial information at interim dates : it establishes standards for the determination and presentation of financial information at interim dates for external use where it is required to present the statement of changes in stockholders equity and of cash flows. Such statements were not required by Statement B-9 Financial information at interim dates, effective up to December 31, NIF C-5 Advance payments : applicable retrospectively, establishes, among others, the particular standards for valuation, presentation and disclosure of the advance payment caption; it also establishes that advance payments for the purchase of inventory, real estate, machinery and equipment should be presented in the advance payment caption and not in inventory or property, machinery and equipment, as previously required. Additionally, it establishes that advance payments related to acquisitions of goods should be shown in the balance sheet based on the intended item classification, either as current or non-current assets. This standard supersedes Statement C-5 Advance payments, effective up to December 31, 2010, NIF C-6 Property, plant and equipment : applicable retrospectively, (except for disclosure maters), establishes, among others, the particular standards for valuation, presentation and disclosure of property, plant and equipment; it also establishes: a) property, plant and equipment used to develop or maintain biological and extractive industry assets already under its scope, and b) the obligation to impair components of a property, plant and equipment, irrespectively from impairing the remaining item as it were a single component. This NIF is effective as of January 1, 2011, with the exception of the changes arising from the segregation of its components and which have a useful life clearly different from the main asset. In this case, and for entities which have not performed such segregation, the applicable provision will become effective for periods starting as of January 1, This standard supersedes Statement C-6 Property, plant and equipment, effective up to December 31, (37)