(Convenience Translation into English from the Original Previously Issued in Portuguese) Banco Sofisa S.A.

Transcription

1 (Convenience Translation into English from the Original Previously Issued in Portuguese) S.A. Individual and Consolidated Financial Statements For the Six-month Period and Year Ended December 31, 2017 and Independent Auditor's Report Deloitte Touche Tohmatsu Auditores Independentes

2 Deloitte Touche Tohmatsu Av. Dr. Chucri Zaidan, nº º ao 12º andares - Golden Tower São Paulo - SP Brasil Tel: + 55 (11) Fax: + 55 (11) (Convenience Translation into English from the Original Previously Issued in Portuguese) INDEPENDENT AUDITOR S REPORT To the Directors and Shareholders of S.A. São Paulo SP Opinião We have audited the accompanying consolidated and individual financial statements of Banco Sofisa S.A. (Bank) and subsidiaries ("Consolidated"), which comprise the balance sheet as at December 31, 2017 and the related income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows for the six-month period and year then ended, and a summary of significant accounting policies and other explanatory information. In our opinion, the individual and consolidated financial statements, referred to above present fairly, in all material respects, the financial position of S.A. and subsidiaries as at December 31, 2017, its consolidated financial performance and its consolidated cash flows for the six-month period and year then ended, in accordance with accounting practices adopted in Brazil applicable to financial institutions authorized to operate by the Central Bank of Brazil. Basis for opinion We conducted our audit in accordance with Brazilian and international standards on auditing. Our responsibilities in conformity with those standards are described below in the Auditor s responsibilities for the audit of the financial statements section. We are independent in relation to the Bank and subsidiaries in accordance with the relevant ethical principles set out in the Code of Ethics for Professional Accountants and professional standards issued by the Federal Accounting Council ("CFC"), and we have fulfilled our other ethical responsibilities in accordance with those standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Other information accompanying the financial statements and the independent auditor s report Management is responsible for such other information that comprises the Management Report. Our opinion on the financial statements does not cover the Management Report and we do not express any form of audit conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether such other information is materially inconsistent with the financial statements or our knowledge obtained during the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of Management Report, we will be required to report such fact. We have nothing to report in this regard. A Deloitte refere-se a uma ou mais entidades da Deloitte Touche Tohmatsu Limited, uma sociedade privada, de responsabilidade limitada, estabelecida no Reino Unido ("DTTL"), sua rede de firmas-membro, e entidades a ela relacionadas. A DTTL e cada uma de suas firmas-membro são entidades legalmente separadas e independentes. A DTTL (também chamada "Deloitte Global") não presta serviços a clientes. Consulte para obter uma descrição mais detalhada da DTTL e suas firmas-membro. A Deloitte oferece serviços de auditoria, consultoria, assessoria financeira, gestão de riscos e consultoria tributária para clientes públicos e privados dos mais diversos setores. A Deloitte atende a quatro de cada cinco organizações listadas pela Fortune Global 500, por meio de uma rede globalmente conectada de firmas-membro em mais de 150 países, trazendo capacidades de classe global, visões e serviços de alta qualidade para abordar os mais complexos desafios de negócios dos clientes. Para saber mais sobre como os cerca de profissionais da Deloitte impactam positivamente nossos clientes, conecte-se a nós pelo Facebook, LinkedIn e Twitter Deloitte Touche Tohmatsu. Todos os direitos reservados.

3 Responsibilities of Management and those charged with governance for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting practices adopted in Brazil applicable to entities authorized to operate by the Central Bank of Brazil (BACEN), 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. In preparing the financial statements, Management is responsible for assessing the Bank s ability to continue as a going concern, disclosing, when applicable, those matters related to its continuity as a going concern and using the going concern basis of accounting in the preparation of the financial statements, unless Management either intends to liquidate the Company or discontinue operations, or has no realistic alternative to prevent the discontinuance of operations. Those charged with governance of the Bank are responsible for overseeing the financial reporting process. Auditor s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements, taken as a whole, are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but it is not a guarantee that an audit conducted in accordance with Brazilian and international standards on auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken based on these financial statements. As part of an audit conducted in accordance with Brazilian and international standards on auditing, we exercise professional judgment and maintain professional skepticism during the course of our audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures in response to those risks, and obtain sufficient and appropriate audit evidence to provide a basis for our audit opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve the override of internal controls, collusion, forgery, intentional omissions or misrepresentations. Obtain an understanding of internal controls relevant to the audit 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 Bank s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management. Conclude on the appropriateness of Management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether there is material uncertainty with respect to events or conditions that may raise significant doubt with respect to the Company s ability to continue as a going concern. If we conclude that material uncertainty exists, we must draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inappropriate, modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our report. However, future events or conditions may give rise to the Bank s inability to continue as a going concern Deloitte Touche Tohmatsu. Todos os direitos reservados. 2

4 Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the related transactions and events in a manner that achieves fair presentation. We obtain sufficient and appropriate audit evidence regarding the financial information of the Group entities or business activities to express an opinion on the consolidated financial statements. We are responsible for the steering, supervision and performance of the group audit and, consequently, for the audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit work and significant audit findings, including any significant deficiencies in internal controls identified during our audit work. The accompanying financial statements have been translated into English for the convenience of readers outside Brazil. São Paulo, 27 de fevereiro de 2018 DELOITTE TOUCHE TOHMATSU Auditores Independentes CRC nº 2 SP /O-8 Marcelo Luis Teixeira Santos Contador CRC nº 1 PR /O SPO-0549_Parecer_.doc 2018 Deloitte Touche Tohmatsu. Todos os direitos reservados. 3

5 BANCO SOFISA S.A. BALANCE SHEETS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In thousands of Brazilian reais - R$) ASSETS 12/31/ /31/ /31/ /31/2016 LIABILITIES 12/31/ /31/ /31/ /31/2016 CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents (Note 5) Deposits (Note 16) Interbank funds applied Demand deposits Interbank deposits Money market repurchase commitments (Note 6a) Time deposits Interbank deposits (Note 6b) Money market funding (Note 17) Securities and derivative financial instruments (Note 7) Own portfolio Own portfolio Funds from acceptance and issuance of securities (Note 16) Derivative financial instruments Funds from housing bonds, mortgage notes and similar items Interbank accounts (Note 8) Interbank accounts (Note 8) Restricted deposits Third-party funds in transit Deposits at the Central Bank Corresponding Borrowings (Note 18) Loan operations Domestic borrowings Foreign borrowings Loan operations: Public sector (Note 9) Private sector (Note 9) Foreign onlendings (Note 18) Allowance for a doubtfull accounts (Note 10) (37.774) (41.123) (37.774) (41.123) Foreign onlendings Lease operations Derivative financial instruments (Note 7d) Leases and subleases receivable Futures market Private Sector (Note 9) Allowance for a doubtfull Other liabilities accounts (Note 10) (106) (100) (106) (100) Collection and levy of taxes and alike Other receivables Foreign exchange portfolio (Note 11) Social and statutory Foreign exchange portfolio (Note 11) Taxes and social security (Note 19) Income receivable Contingent liabilities (Note 22) Securities clearing accounts Trading account (Note 20) Sundry (Note 13) Sundry (Note 21) Allowance for other doubtful accounts (Note 10) (6.262) (5.619) (6.166) (5.619) Other assets (Note 14) Long-term liabilities Other assets Prepaid expenses Deposits (Note 16) Long-term assets Interbank deposits

6 Time deposits Interbank funds applied Money market funding (Note 17) Money market repurchase commitments (Note 6a) Own portfolio Interbank deposits (Note 6b) Foreign exchange acceptances (Note 16) Securities and derivative financial instruments (Note 7) Funds from housing bonds, mortgage notes and similar items Own portfolio Subject to repurchase agreements Subject to guarantees provided Other liabilities Loan operations Taxes and social security (Note 19) Loan operations Public sector (Note 9) Deferred income Private sector (Note 9) Allowance for a doubtfull accounts (Note 10) (8.046) (8.771) (8.046) (8.771) Shareholders' equity of controlling shareholders Capital domiciled in the country Other receivables Earnings reserves Equity evaluation adjustments (Note 7c) (1.288) (12.571) (1.288) (12.572) Sundry (Note 13) Other assets (Note 14) Other assets Devaluation allowances (7.239) (7.823) (7.214) (7.798) Prepaid expense Shareholders' equity of non-controlling shareholders (Note 23) Permanent assets Investments Interests in subsidiaries (Note 39) Domestic Abroad Other investments Other investments Provision for losses (49) (49) (49) (49) Property and equipment in use (Note 15) Property for use Construction in process Other property for use Accumulated depreciation (7.175) (5.232) (7.081) (5.161) Intangible Intangible assets Accumulated amortization (170) (7) (170) (7) TOTAL ASSETS TOTAL LIABILITIES AND EQUITY The accompanying notes are an integral part of these financial statements. 5

7 (Convenience Translation into English from the Original Previously Issued in Portuguese) BANCO SOFISA S.A. INCOME STATEMENTS FOR THE YEAR AND SEMESTER ENDED DECEMBER 31, 2017 AND YEAR ENDED DECEMBER 31, 2016 (In thousands of Brazilian reais - R$ (unless earnings per share)) 2º semester º semester INCOME FROM FINANCIAL INTERMEDIATION Loan operations (Note 24) Lease operations (Note 25) Securities income (Note 26) Income from derivative financial instruments (Note 7d) Foreign exchange operations (Note 27) Sale or transfer of financial assets EXPENSES OF FINANCIAL INTERMEDIATION ( ) ( ) ( ) ( ) ( ) ( ) Money market repurchase agreements (Note 28) ( ) ( ) ( ) ( ) ( ) ( ) Loans, assignments and onlendings (Note 29) (3.025) (6.035) (26.527) (3.027) (6.055) (26.564) Lease operations (Note 30) (422) (1.283) (1.320) (422) (1.283) (1.320) Allowance for doubtful accounts (Note 10b) (9.204) (20.420) (22.163) (9.109) (20.325) (22.165) Gross income on financial intermediation OPERATING INCOME/(EXPENSES) (77.290) ( ) ( ) (70.494) ( ) ( ) Service income Personnel expenses (Note 31) (35.158) (69.651) (66.567) (33.641) (66.996) (64.466) Other administrative expenses (Note 32) (46.206) (85.875) (67.080) (43.392) (82.406) (65.496) Tax expenses (Note 33) (13.986) (29.327) (24.713) (12.594) (26.143) (22.635) Equity in income of subsidiaries (6.293) Other operating income (Note 34) Other operating expenses (Note 35) (3.123) (5.910) (14.078) (3.040) (5.835) (1.718) Operating income Non-operating income/(loss) (2.500) (1.102) (4.286) (1.326) Income before income taxes and profit sharing INCOME TAX AND SOCIAL CONTRIBUTION (Note 12) (16.951) (30.358) (28.597) (19.010) (29.710) (24.244) Provision for income tax (7.075) (5.544) (5.198) (3.609) Provision for social contribution tax (5.019) (4.569) (3.830) (3.034) Deferred tax assets (21.414) (18.264) (18.484) (23.553) (20.682) (17.601) Profit sharing - employees (10.041) (17.752) (11.488) (10.041) (17.752) (11.488) Non-controlling interests (131) (525) NET INCOME FOR THE PERIOD AND YEAR EARNING PER SHARE ,6558 0,551 The accompanying notes are an integral part of these financial statements

8 (Convenience Translation into English from the Original Previously Issued in Portuguese) BANCO SOFISA S.A STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In thousands of Brazilian reais - R$) 12/31/ /31/2016 Net income for the year Mark-to-market of available-for-sale securities (2.342) (22.856) Tax effects Comprehensive income for the year

9 (Convenience Translation into English from the Original Previously Issued in Portuguese) BANCO SOFISA S.A INDIVIDUAL AND CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR AND SEMESTER ENDED DECEMBER 31, 2017 AND YEAR ENDED DECEMBER 2016 (In thousands of Brazilian reais - R$) Earnings reserve Equity valuation Adjustments Retained Capital Legal Statutory Securities and derivatives earnings Total BALANCE AT JULY 1, (5.956) Equity evaluation adjustment - Securities available for sale (Note 7c) Other events: Net income for the period Allocations: (41.151) - (46.852) (85.660) Allocation to legal reserve (Note 23) (2.343) - Allocation to statutory reserve (Note 23) (18.849) - Interest on capital (Note 23) (25.660) (25.660) Dividends (Note 23) - - (60.000) - - (60.000) BALANCE AT DECEMBER 31, (1.288) Earnings reserve Equity valuation Adjustments Retained Capital Legal Statutory Securities and derivatives earnings Total BALANCE AT JANUARY 1, (12.571) Equity evaluation adjustment - Securities available for sale (Note 7c) Other events: - - (107) Provision for Guarantees - Resolution 4512/16 - Initial Adjustment - - (107) - - (107) Net income for the year Allocations: (56.507) - (90.161) ( ) Allocation to legal reserve (Note 23) (4.508) - Allocation to statutory reserve (Note 23) (33.493) - Interest on capital (Note 23) (52.160) (52.160) Dividends (Note 23) - - (90.000) - - (90.000) BALANCE AT DECEMBER 31, (1.288)

10 (Convenience Translation into English from the Original Previously Issued in Portuguese) BANCO SOFISA S.A INDIVIDUAL AND CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2016 (In thousands of Brazilian reais - R$) Earnings reserve Equity valuation Adjustments Retained Capital Legal Statutory Securities and derivatives earnings Total BALANCE AT JANUARY 1, (45.962) Equity evaluation adjustment - Securities available for sale Other events: Net income for the year Allocations: (75.815) (50.600) Allocation to legal reserve (Note 23) (3.791) - Allocation to statutory reserve (Note 23) (21.424) - Interest on capital (Note 23) (50.600) (50.600) BALANCE AT DECEMBER 31, (12.571)

11 (Convenience Translation into English from the Original Previously Issued in Portuguese) BANCO SOFISA S.A STATEMENTS OF CASH FLOWS FOR THE YEAR AND SEMESTER ENDED DECEMBER 31, 2017 AND YEAR ENDED DECEMBER 2016 (In thousands of Brazilian reais - R$) 2º Semester º Semester ADJUSTED NET INCOME Net income for the period and year Allowance for doubtful accounts (Note 10) Income tax and social contribution provision (Note 12a) (4.463) (4.543) Deferred tax (Note 12a) Depreciation and amortization (Note 32) Equity in earnings of subsidiaries (Note 39) (497) (4.946) Exchange variation on foreing currency cash and cash equivalents (1) 233 (3.680) (1) 233 (3.680) Variation in assets and obligations (45.621) (54.654) ( ) (52.009) (57.456) ( ) (Increase) decrease in interbank funds applied (Increase) increase in securities and derivative financial instruments ( ) ( ) (Increase) decrease in interbank accounts and investments (10.729) (44.004) (10.729) (44.004) (Increase) decrease in loan and lease operations ( ) ( ) ( ) ( ) ( ) ( ) (Increase) decrease in other receivables and assets (30.440) (90.569) Increase (decrease) in deposits ( ) ( ) ( ) ( ) Increase (decrease) in money market repurchase commitments ( ) ( ) ( ) ( ) Increase (decrease) in foreign exchange portfolio Decrease (decrease) in borrowings and onlendings (18.162) (32.271) Increase (decrease) in derivative financial instruments liability (18) (115) (2.143) (18) (115) (2.143) Increase (decrease) in other obligation (42.354) (21.321) (49.656) (20.453) Income tax and social contribution tax paid (12.466) (22.344) (13.839) (12.423) (21.219) (12.855) Increase (decrease) in deferred income (783) (515) (783) (515) Net cash generated by (used in) operating activities (83.476) (Increase) decrease in investments (401) (1.572) Disposal (acquisition) of fixed assets in use (567) (1.003) (2.710) (559) (38.981) Deferred Intangible 52 (143) (493) 52 (143) (493) Net cash used in investing activities (515) (1.146) (3.132) (908) Interest on capital paid (Note 23) (25.660) (52.160) (50.600) (25.660) (52.160) (50.600) Dividends paid - (30.000) - - (30.000) - Net cash generated by (used in) financing activities (25.660) (82.160) (50.600) (25.660) (82.160) (50.600) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (32.981) (2.570) 471 (31.919) Cash and cash equivalents at the beginning of the period and year Exchange differences on translating cash and cash equivalents 1 (233) (233) Cash and cash equivalents at the end of the period and year INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (32.981) (2.570) 471 (31.919) The accompanying notes are an integral part of these financial statements. 10

12 (Convenience Translation into English from the Original Previously Issued in Portuguese) BANCO SOFISA S.A. Notes to the financial statements (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) 1. GENERAL INFORMATION S.A. ( Sofisa or Bank ), together with its subsidiaries, operates as a full service bank through its commercial, investment, financing and investment, foreign exchange, and lease portfolios. 2. PREPARATION AND PRESENTATION OF THE FINANCIAL STATEMENTS The financial statements has been prepared and are being presented in accordance with accounting practices adopted in Brazil, applicable to institutions authorized to operate by the Central Bank of Brazil, which take into consideration the provisions of the Brazilian Corporate Law and the standards issued by the National Monetary Council ( CMN ) and the Central Bank of Brazil ( BACEN ). Since 2008, the Accounting Pronouncements Committee (CPC) issues pronouncements related to the convergence with international financial reporting standards; however, not all of these pronouncements were ratified by BACEN. Accordingly, in the preparation of its individual and consolidated financial information, Sofisa adopted the following pronouncements approved by BACEN: a) CPC 00 - Conceptual Framework - CMN Resolution 4144/12; b) CPC 01 (R1) - Impairment of Assets - CMN Resolution 3566/08; c) CPC 03 (R3) - Statement of Cash Flows - CMN Resolution 3604/88; d) CPC 04 (R1) Intangible Assets CMN Resolution 4534/16; e) CPC 05 (R1) - Related-Party Disclosures - CMN Resolution 3750/09; f) CPC 10 (R1) - Share-based Payment - CMN Resolution 3989/11; g) CPC 23 - Accounting Policies, Changes in Accounting Estimates and Errors - CMN Resolution 4007/11; h) CPC 24 - Events after the Reporting Period - CMN Resolution 3973/11; i) CPC 25 - Provisions, Contingent Assets and Contingent Liabilities - CMN Resolution 3823/09; j) CPC 27 Property, Plant and Equipment CMN Resolution 4535/16; and k) CPC 33 - Employee Benefits - CMN Resolution 4424/15 CMN Resolution 4512, which provides for the applicable accounting procedures for the measurement and accounting for the provision for financial guarantees provided, was issued on July 28, The initial adjustment arising on such standard application, in the amount of R$ 107, net of taxes, was recognized as a contra entry to line item Retained earnings (accumulated losses), as set out in article 6, paragraph 1, items I and II of said Resolution. 11

13 CMN Resolution 4524 was issued on September 29, 2016, providing for the accounting procedures related to the recognition of the effects from exchange rate changes on the financial statements of a foreign branch and associate or subsidiary and foreign exchange hedge transactions of branches or investments in foreign associate or subsidiary. The accounting procedures prescribed by said Resolution must be applied by the financial institutions on a prospective basis beginning January 1, BACEN Circular Letter 3782 was issued on September 19, 2016, providing for deductions from and adjustments to line items with respect to the Standard Chart of Accounts for Financial Institutions (COSIF) for purposes of recognizing accrued payables. Financial Institutions are required to apply the accounting procedures determined by such Circular Letter beginning January 1, In the semester and at the year ended, the impact derived from that standard first-time adoption involved the reclassification of tax risks as provision for risks and, for better comparability purposes, the balances corresponding to 2016 year have been reclassified as well, as stated in Notes 19 and 22. In preparing for the financial statements consolidated, the balances of intragroup transactions were eliminated and the shares of profits and equity attributable to noncontrolling interests are separately disclosed. The accounting policies adopted by the parent company and the companies included in consolidation to account for operations and measure the main balance sheet components were consistently applied. Considering the fact that the functional currency and the reporting currency used in Sofisa s financial statements is the Brazilian real and that the transactions with our foreign branch and foreign subsidiary are a supplement to the activities carried out in Brazil, the assets, liabilities and the profit or loss are adjusted to the accounting practices adopted in Brazil and are translated into Brazilian reais at the local exchange rates. Gains and losses arising on the translation process are recognized in profit or loss for the year. The foreign exchange differences of the opening balance of the foreign investment, not eliminated in consolidation, is recorded in the statement of profit and loss, in the line corresponding to other operating income/expenses. The effect of changes in foreign exchange rates on the balances of cash and cash equivalents in foreign currency are adjusted to profit and in the changes in cash and cash equivalents. Sofisa s consolidated financial statements includes all the financial information of its foreign branch and foreign and local subsidiaries, including the following companies: CONSOLIDATED % Equity Interests Direct subsidiaries 12/31/ /31/2016 Sofisa S/A. Crédito, Financiamento e Investimento Sata Sociedade Asses. Técnica Administrativa Ltda Sofisa Investment Ltd Sofisa Corretora de Seguros Ltda Trademaster Serviços e Participações S.A Fintecto Companhia Securitizadora de Crédito S.A. (b) Indirect subsidiaries (a) Eco Beach Empreendimentos Imobiliários Ltda SPE Premium 1 Empreendimentos Imobiliários Ltda SPE Premium 2 Empreendimentos Imobiliários Ltda SPE Premium 3 Empreendimentos Imobiliários Ltda. (c) SPE Premium 5 Empreendimentos Imobiliários Ltda. (d)

14 (a) (b) (c) (d) Investees through Sata Sociedade Assessoria Técnica Administrativa Ltda. In June 2017, Sofisa subscribed capital in such company, in the amount of R$99 thousand, which will be paid in upon filing the Minutes with the Board of Trade of the State of São Paulo ("JUCESP"). Operations will begin upon the Central Bank of Brazil s approval for its recognition. In May 2017 the percentage of ownership interest held by Sata Sociedade de Assessoria Técnica e Administrativa Ltda. in SPE 3 was increased from 52.0% to 55.1%. In May 2017 the percentage of ownership interest held by Sata Sociedade de Assessoria Técnica e Administrativa Ltda. ( Sata ) in SPE 5 was increased from 59.5% to 100%. Management on February 27, 2018 approved the financial statements. Management declares that all relevant information specific to the financial information, and only such information, is being disclosed and corresponds to the information used by Management to manage the Company. 3. DESCRIPTION OF SIGNIFICANT ACCOUNTING POLICIES a) Accounting estimates The financial statements includes estimates and assumptions that require judgment, such as the measurement of allowances for loan losses, fair values estimates of certain financial instruments, tax credits, and provisions for contingencies. Actual results may differ from those estimates and assumptions. b) Statement of cash flows For the purposes of the Statements of Cash flows, Sofisa uses the indirect method, under which profit or loss is adjusted by the effects of: (i) noncash transactions; (ii) any deferrals or other recognitions on the accrual basis on past or future operating receipts or payments; (iii) income or expense items associated to cash flows from investing or financing activities; and (iv) foreign exchange differences on translating foreign currency-denominated amounts that are included on the balances of cash and cash equivalents. For comparability purposes, the investment related to the non-controlling interest that did not affect cash was eliminated, management calculated, and separately disclosed foreign exchange differences in the statement of cash flows for the year ended on December 31, 2017 and December 31, For statement of cash flows purposes (as provided for by CMN Resolution 3604/08), cash and cash equivalents correspond to the balances of cash and short-term interbank investments immediately convertible into a cash amount or maturing within 90 days or less. c) Interbank investments Stated at the investment or acquisition amount plus income earned through the end of the reporting exercise. 13

15 d) Securities As provided for by BACEN Circular 3068/01, securities are measured and classified as follows: Trading securities: securities acquired for the purpose of being actively and frequently traded, are marked to market as a balancing item to profit or loss for the year. Available-for-sale securities: securities not classified as either trading securities or heldto-maturity securities are marked to market as a balancing item to a separate line item of equity. Gains and losses from available-for-sale securities, when realized, are recognized in the statement of profit and loss on the trading date, as a balancing item to a specific line item of equity, net of taxes. Non-temporary decreases in the fair value of available-for-sale and held-to-maturity securities below their adjusted costs are charged to profit or loss as realized losses. Held-to-maturity securities: securities acquired with the intention of and the financial ability to be held to maturity. These are stated at acquisition cost, plus income earned, as a balancing item to profit or loss for the exercise. e) Derivatives financial instruments (assets and liabilities) Derivatives financial instruments, consisting of options, futures, forwards, and swaps, are accounted for using the following criteria: options: premiums paid or received are recognized in assets or liabilities, respectively, until the actual exercise of each option, and accounted for as a decrease or increase in the cost of the asset or right, due to the exercise of the option, or in income or expenses, should the option not be exercised; Futures: daily adjustments are recognized in assets or liabilities and recorded on a daily basis either as income or expenses; Forwards: recognized at the final contractual amount, less the difference between this amount and the cash price of the asset or right, with income and expenses being recognized over the term of the contract through the end of the reporting exercise; and Swaps: the differential receivable or payable is accounted for in assets or liabilities, respectively, and allocated as income or expenses on a pro rata basis through the end of the reporting exercise. Derivative transactions are stated at fair value at the reporting date, and gains or losses are recognized as described below: derivatives not designated as hedges: recognized as income or expenses in profit or loss for the year; derivatives designated as hedges: classified either as market risk hedges or cash flow hedges. Derivatives used for hedging purposes and the related hedged items must be marked to market, at least at the monthly trial balance dates and at the end of the reporting exercise. Market risk hedges are intended to offset the risks arising from an hedged item s exposure to market value fluctuations. Its appreciation or depreciation must be recognized in the appropriate income or expense line item, in profit or loss for the year. 14

16 Cash flow hedges are intended to offset changes in estimated future cash flows. The appreciation or depreciation of the effective portion must be recognized as a balancing item to a separate line item of equity, net of taxes. The ineffective hedge portion, where applicable, is recognized directly in profit or loss for the year. The hedge effectiveness monitoring, which measures the neutralization by derivative instruments of the effects of the market fluctuations on the hedged items, is carried out on a monthly basis. f) Loan and lease operations, time and interbank deposits, and other asset and liability transactions Fixed-income transactions are recognized at principal plus income or charges, and are adjusted by the corresponding unearned income or unrecognized expenses line item. Floating rate transactions are recognized at principal plus income earned or charges incurred, calculated on a daily pro rata basis. Commercial lease operations, calculated at their present value, were classified at the end of the reporting exercise, as leases operations, at the net value of the liabilities from advances for residual values. g) Transactions with financial assets - transactions retaining substantially all the risks and rewards The transactions for the sale and transfer of financial assets substantially retaining all the risks and rewards related to the ownership of the financial asset are recognized and stated as prescribed by CMN Resolution 3.533/08, which is in effect since January 1, 2012, and pursuant to CMN Resolution 3895/10 of BACEN: (i) (ii) financial assets being sold or transferred are fully recorded in assets; amounts received or receivable are recognized in assets and have as a balancing item to liabilities related to the assumed obligation; (iii) income and expenses are allocated on a monthly basis to profit or loss for the year over the remaining term of the transactions, at the agreed contractual rates; and (iv) in asset purchase transactions, the amounts paid are recognized in assets as receivable and income are charged to profit or loss for the year over the remaining term of the transactions. In the semester and year ended December 31, 2017, financial assets were sold, without substantial risk retention based on Management s assessment, in the amount of R$6,246, recognizing a profit arising on such assignment in the amount of R$691. In the semester and year ended December 31, 2017, financial assets were purchased with a substantial risk retention totaling de R$ 1,504 (R$ 724 December 31, 2016). h) Allowance for loan losses The accrual of loan and leases operations, advances on foreign exchange contracts, and other receivables with credit granting features are classified in the related risk ratings, taking into consideration: (i) the parameters set by CMN Resolution 2682/99 that require classification into nine levels, from AA (minimum risk) to H (maximum risk); and (ii) risk ratings are periodically assessed by the Bank s management taking into account the economic environment, past experience, and specific and global risks regarding the transactions. Additionally, delay periods set by said Resolution and double counting of unelapsed terms higher than 36 months are also taken into consideration for the assignment of its clients risk ratings. 15

17 Transactions past due for more than 59 days are recognized as income only when realized, regardless of their risk rating. Transactions rated H remain under this rating for six months, after which they are written off against the existing allowance and controlled in a memorandum account, no longer being recognized in the balance sheet. Renegotiated operations remain at least in the same rating under which they were originally classified. Renegotiated loans that had already been written off against the allowance and that were recognized in a memorandum account are rated H, and any gains from renegotiation are only recognized when actually received. In the fourth quarter of 2016, has started to review its entire risk rating process in relation to doubtful debts, by adopting a Credit Scoring model that seeks, based on the borrowers characteristics, to create measures that separate credits and operations, according to the borrowers payment capacity, as well as performance measurement indicators (Kolmogorov-Smirnov statistics, known as KS), and thus assigning the credit scoring appropriate to each operation. Additionally, the Institution has prepared a study that supports the additional scoring to be assigned to each borrower, based on the collaterals provided for each of the transactions, adopting an expected loss model, thus evidencing the mitigating power of each collateral and its recovery history. After the transaction is rated, it is subject to all effects set forth in CMN Resolution 2682, of December 21, 1999, that is, the transaction will be downgraded based on the delay ranges and effects from the assigning of equal scores to other transactions belonging to the same economic group. i) Other assets Repossessed assets: represented by assets that are not intended for the Bank s own use, received as payment in kind and originally recognized at cost and adjusted by allowance for impairment, if necessary. In the case of the vehicle portfolio, the allowance is calculated based on the historical loss of the past eighteen (18) months, taking into account all vehicles, including vehicles sold, regardless of the time in the portfolio or their manufacturing date. The percentage to be applied to the portfolio is determined as the result of the division of the historical loss determined as the sum of the amounts in the portfolio of vehicles sold in the past eighteen (18) months. Additionally, an allowance for 100% of the vehicles is recognized. Prepaid expenses: Refer to prepaid expenses whose benefit rights or service provision will be received in future years, which are represented by agent commissions paid for financing placements, insurance expenses, and substantially by foreign borrowing costs. When these rights or benefits are granted, the corresponding commissions are immediately recognized in profit or loss. j) Investments Investments in subsidiaries are accounted for under the equity method and the other investments are measured at historical cost. k) Property, plant and equipment in use and deferred charges Property, plant and equipment in use and deferred charges are stated at acquisition or formation cost. Depreciation and amortization are calculated on a straight-line basis at the related asset s annual rates, as disclosed in Note

18 l) Intangible assets Intangible assets correspond to the rights acquired on intangible assets intended to maintain the Bank s continuity as a going concern. Intangible assets with finite useful lives are generally amortized on a straight-line basis over the period they are expected to generate economic benefits. m) Impairment of non-financial assets Management annually tests assets for impairment to determine whether events or changes in economic, operating or technological circumstances indicate that they might be impaired. Whenever such evidences are identified and the carrying amount exceeds the recoverable value, an allowance for impairment is recorded to adjust the carrying amount to the recoverable amount. n) Income tax and social contribution The provision for income tax is recognized at the rate of 15% plus a 10% surtax on annual taxable income exceeding R$240. For financial companies, the provision for social contribution (CSLL) was calculated at the rate of 15% on income earned through August 31, 2015 and at the rate of 20% on income earned from September 1, 2015 to December 31, For nonfinancial companies, CSLL was calculated at the rate of 9% on taxable income. Deferred income tax and social contribution assets are calculated on tax loss carryforwards and temporary differences up to December 31, Tax credits are based on current expected realization and Management s technical studies and analysis, in compliance with CMN Resolutions 3059/02 and 3355/06. Deferred tax obligations are calculated on excess depreciation and temporary differences. Upon the change in the CSLL tax rate referred to above, the deferred social contribution installments, expected to be realized in 2018, were duly adjusted at the rate prevailing in the year (20%). The realization effect corresponds to R$5,637 in and R$5,027 in, as reported in note 12c. o) Contingent assets and contingent liabilities, and legal obligations The accounting policies for the recognition, measurement and disclosure of contingent assets and contingent liabilities are set forth in CMN Resolution 3823/09 and BACEN Circular Letter 3429/10, as follows: Contingent assets are recognized only when there are collaterals or favorable, unappealable court decisions. Contingent assets with a probable favorable outcome are only disclosed in the explanatory notes; Contingent liabilities are recognized when losses are assessed as probable and amounts can be reliably measured. Contingent liabilities assessed as possible losses are disclosed and contingent liabilities that cannot be reliably measured or assessed as remote losses are neither accrued nor disclosed. Legal obligations are recognized as payables, regardless of the assessment on the likelihood of a favorable outcome and are represented by lawsuits challenging their legality or constitutionality. p) Financial liabilities arising on (I) Deposits, (II) Money market funding, (III) Foreign exchange acceptances, (IV) Foreign borrowings and onlendings. Stated at the original amounts, plus charges incurred through the end of the reporting exercise, recognized on a daily pro rata basis, where applicable. 17

19 Transaction costs incurred refer basically to amounts paid to third parties for intermediation, placement, and distribution services of own securities. They are accounted for as a reduction to the securities and allocated on a pro rata basis to the relevant expense account, except in those cases where the securities are measured at fair value through profit or loss. q) Other assets and liabilities Assets are stated at their realizable values, including, when applicable, earnings and inflation adjustments (on a daily pro rata basis) and allowance for losses, when necessary. Liabilities are stated at known or estimated values, plus incurred charges and inflation adjustments (on a daily pro rata basis). r) Employee benefits On June, 2015 was published the CMN Resolution 4424, issued in June 2015, ratifies CPC 33 - Employee Benefits, which is effective for annual periods beginning on or after January 1, The application of this standard did not have impacts on the preparation and presentation of the financial statements. s) Earnings per share Earnings per share are calculated in Brazilian reais based on the number of shares outstanding at the end of the reporting exercise. In the semester and year ended December 31, 2017, the number of shares were not changed. 4. CONSOLIDATED BALANCE SHEET PER YEAR 12/31/2017 Up to From 31 From 181 More than Indefinite 30 days to 180 days to 360 days to 361 days period Total ASSETS Cash and cash equivalents ,996 22,996 Interbank investments 18,820 30,339-82, ,171 Money market investments ,011 80,011 Interbank deposits 18,820 30,339-2,001-51,160 Securities and derivatives 32 9,013 1,332 1,135,676-1,146,053 Interbranch and interbank accounts Lending and leasing operations 542,210 1,290, , ,087-2,568,512 Other assets 30, ,490 72, , ,756 Foreign exchange portfolio 30, ,725 15, ,102 Tax credit , , ,258 Other - 82, , ,396 Capital assets ,804 34,804 Investments Property and equipment in use ,261 33,261 Deferred charges Total assets 592,667 1,516, ,640 1,922,810 57,800 4,448,165 LIABILITIES AND EQUITY Deposits 200, , ,530 1,021, ,759 2,889,112 Demand deposits , ,759 Interbank deposits 19,393 20, ,067 Time deposits 181, , ,530 1,021,969-2,729,286 Money market funding ,247 15,465-50,712 Funds from acceptances and issuance of securities 120, ,503 20,472 73, ,454 Interbranch and interbank accounts 13, ,466 Borrowings 10, ,089 18, ,721 Other payables 98,598 43, , ,694 Foreign exchange portfolio 16,787 9, ,692 Other 81,811 33, , ,002 Deferred income ,225 1,225 Equity , ,788 Capital and reserves , ,788 Equity attributable to noncontrolling interests Total liabilities and equity 443,969 1,157, ,164 1,110, ,765 4,448,165 18

20 12/31/2016 Up to From 31 From 181 More than Indefinite 30 days to 180 days to 360 days to 361 days period Total ASSETS Cash and cash equivalents ,941 16,941 Interbank investments 141,134 56,685 2, ,820 Money market investments 122, ,041 Interbank deposits 19,093 56,685 2, ,779 Securities and derivatives 242,728 81,991-1,378,223-1,702,942 Interbranch and interbank accounts 6, ,100 Lending and leasing operations 551,862 1,108, , ,138-2,259,386 Other assets 39, ,541 48, , ,580 Foreign exchange portfolio 39,234 71, ,668 Tax credit , , ,106 Other - 57, , ,806 Capital assets ,734 36,734 Investments Property and equipment in use ,334 35,334 Deferred charges Total assets 981,058 1,375, ,510 2,090,848 53,675 4,753,503 LIABILITIES AND EQUITY Deposits 288, ,800 1,035, ,240 86,323 3,072,401 Demand deposits ,323 86,323 Interbank deposits - 62, ,870 Time deposits 288, ,260 1,035, ,910-2,923,208 Money market funding , ,944 Funds from acceptances and issuance of securities 35, ,608 71,368 58, ,324 Interbranch and interbank accounts 29, ,422 Borrowings 30,056 91, ,607 Onlendings - 50, ,276 Derivatives Other payables 22,469 62, , ,492 Foreign exchange portfolio 22,469 1, ,201 Other - 61, , ,291 Deferred income ,740 1,740 Equity , ,611 Capital and reserves , ,611 Equity attributable to noncontrolling interests Total liabilities and equity 405,326 1,034,202 1,106,376 1,369, ,245 4,753, CASH AND CASH EQUIVALENTS 12/31/ /31/ /31/ /31/2016 Cash and cash equivalents 22,996 16,941 16,598 16,360 Interbank funds applied (i) - 10,021-10,021 Cash and cash equivalents 22,996 26,962 16,598 26,381 (i) Includes only the investments with maturities not in excess of 90 days after the investment date. 6. INTERBANK DEPOSITS a) Money market repurchase agreements - own portfolio and 12/31/ /31/2016 Financial Treasury Bills (LFTs) 80,011 1,995 National Treasury Bills (LTNs) - 100,043 National Treasury Notes (NTNs) - 20,003 Total 80, ,041 19