METROBANK, S. A. AND SUBSIDIARIES Consolidated Financial Statements As of December 31, 2015 (With Independent Auditors Report) (FREE ENGLISH LANGUAGE TRANSLATION FROM SPANISH VERSION)
Table of Contents Independent Auditors Report Consolidated Statement of Financial Position Consolidated Statement of Profit or Loss Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements
KPMG Apartado Postal 81 6-1089 Panamá 5, República de Panamá Teléfono: (507) 208-0700 Fax: (507) 263-9852 lnternet: www.kpmg.com (FREE ENGLISH LANGUAGE TRANSLATION FROM SPANISH VERSION) INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of Metrobank, S. A. We have audited the accompanying consolidated financial statements of Metrobank, S. A. and Subsidiaries, which comprise the consolidated statement of financial position as at December 31, 2015, the consolidated statements of profit or loss, comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. M a n ag e m enf 's Respo n s i b i I ity for th e Co n sol i d ated F i n an c i al Statem e nts Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with lnternational Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Au d itors' Respon si b il ity Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with lnternational Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risk of material misstatement of the consolidated financial statements, whether due to fraud or error. ln making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. KPMG, una sociedad c v l panameña, y f rma de la red de firmas miembros independiente de KPMG. afiliadas a KPI\ G lnternational CooDerative ("KP rg lnternat onal"). una entidad suiza
Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Metrobank, S. A. and Subsidiaries as at December 31, 2015, and of its consolidated financial performance and its consolidated cash flows for the year then ended, in accordance with International Financial Reporting Standards. Other Matter The consolidated financial statements of Metrobank, S. A. and Subsidiaries, as of and for the year ended December 31, 2014, were audited by other auditors, who expressed an unqualified opinion in their report dated February 25, 2015. KPMG (SIGNED) February 29, 2016 Panama, Republic of Panama 2
Consolidated Statement of Financial Position December 31, 2015 (Expressed in Balboas) Notes 2015 2014 Assets Cash and cash equivalents 11,480,126 6,862,225 Deposits with banks: Demand deposits - local 12,251,619 7,267,858 Demand deposits - foreign 85,962,146 68,904,017 Time deposits - local 6,402,771 37,803,483 Time deposits - foreign 6,585,000 2,000,478 Total deposits with banks 111,201,536 115,975,836 Total cash, cash equivalents and deposits with banks 7 122,681,662 122,838,061 Securities available for sale 8 226,032,663 220,974,643 Loans: 6,9 Internal sector 660,616,274 633,233,805 External sector 150,240,106 94,717,656 810,856,380 727,951,461 Less: Allowance for loan losses 3,109,795 5,195,874 Unearned and discounted interest, insurance premium and commissions 29,227,048 28,599,236 Loans, net 778,519,537 694,156,351 Property, furniture, equipment and improvements, net 10 9,841,569 10,377,097 Accrued interests receivable 3,957,192 3,586,465 Customers liabillities under acceptances 173,400 746,223 Prepaid expenses 1,704,756 2,104,308 Goodwill 11 10,134,152 10,134,152 Deferred income tax 615,032 1,122,046 Assets held for sale 13 3,539,611 4,035,217 Other assets 12 2,718,261 2,976,971 Total other assets 22,842,404 24,705,382 Total assets 1,159,917,835 1,073,051,534 The consolidated statement of financial position should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 3
Notes 2015 2014 Liabilities and equity Liabilities: Deposits from customers: Demand deposits - local 83,288,068 106,289,929 Demand deposits - foreign 5,885,178 7,620,564 Savings deposits - local 97,615,645 100,352,372 Savings deposits - foreign 20,800,248 24,431,185 Time deposits - local 659,875,894 576,274,131 Time deposits - foreign 66,518,234 59,970,715 Demand deposits form banks - local 207,938 210,420 Time deposits from banks - foreign 8,001,083 24,033,000 Total deposits from customers and banks 6 942,192,288 899,182,316 Borrowings 7,14 36,480,765 17,517,306 Securities sold under repurchase agreements 8,15 27,500,000 27,500,000 Other liabilities: Cashier's and certified checks 2,560,458 4,525,383 Accrued interests payable 6 5,454,959 4,457,292 Acceptances outstanding 173,400 746,223 Deferred income tax 21 1,174,931 1,174,931 Other liabilities 16 9,464,180 9,703,951 Total other liabilities 18,827,928 20,607,780 Total liabilities 1,025,000,981 964,807,402 Equity: Common shares 17 85,000,000 65,000,000 Valuation reserve for securities available for sale 8 (362,793) 2,649,163 Regulatory reserves 20, 22 13,815,405 8,665,901 Retained earnings 36,464,242 31,929,068 Total equity 134,916,854 108,244,132 Commitments and contingencies 19 Total liabilities and equity 1,159,917,835 1,073,051,534 4
Consolidated Statement of Profit or Loss For the year ended December 31, 2015 (Expressed in Balboas) Notes 2015 2014 Interest and commission income: Interest on: 6 Loans 47,999,721 41,763,923 Deposits with banks 152,060 105,498 Securities 10,424,100 8,954,822 Loan commissions 5,323,191 4,841,868 Total interest and commission income 63,899,072 55,666,111 Interest expenses: Deposits 6 32,660,526 27,600,603 Borrowings 1,213,548 1,321,858 Total interest expenses 33,874,074 28,922,461 Net interest and commission income 30,024,998 26,743,650 Provision for loan losses 9 1,676,333 2,588,215 Net interest and commission income, after provisions 28,348,665 24,155,435 Other income (expenses): Other commissions earned 18 4,524,726 4,126,653 Gain on sale of securities, net 8 1,413,088 676,433 Dividends earned 2,832 5,075 Other income 18 3,559,643 5,298,522 Commission expenses (1,498,164) (1,470,407) Total other income, net 8,002,125 8,636,276 General and administrative expenses: Salaries and other employee benefits 6 10,860,050 10,622,226 Fees and professional services 6 1,870,122 1,579,365 Depreciation and amortization 10, 12 1,712,903 1,654,407 Rental 1,123,899 1,012,153 Advertising and publicity 1,106,678 1,136,027 Maintenance and repairs 452,120 456,171 Software support 983,758 935,905 Electricity, water and communications services 507,430 547,860 Donations, contributions and subscriptions 126,130 177,539 Transportation 403,181 365,801 Office supplies 185,662 185,672 Insurance 142,104 106,086 Taxes 1,582,306 1,103,459 Others 1,277,726 778,403 Total general and administrative expenses: 22,334,069 20,661,074 Net income before income tax 14,016,721 12,130,637 Income tax, net 21 (1,560,025) (1,012,687) Net income 12,456,696 11,117,950 The consolidated statement of profit or loss should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 5
Consolidated Statement of Comprehensive Income For the year ended December 31, 2015 (Expressed in Balboas) Note 2015 2014 Net income 12,456,696 11,117,950 Other comprehensive income (loss): Items that are or may be reclassified to the consolidated statement of profit or loss: Net realized gain transferred to profit or loss (1,413,088) (676,433) Net changes in fair value of securities available for sale (1,598,868) 4,507,623 Other comprehensive income (loss), net 8 (3,011,956) 3,831,190 Total comprehensive income 9,444,740 14,949,140 The consolidated statement of comprehensive income should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 6
Consolidated Statement of Changes in Equity For the year ended December 31, 2015 (Expressed in Balboas) Regulatory reserves Valuation reserve for Surplus Common securities available Asset Foreclosed Dynamic of credit Total regulatory Retained Notes shares for sale management assets provision reserve reserves earnings Total equity Balance at December 31, 2013 65,000,000 (1,182,027) 0 0 0 4,915,166 4,915,166 26,977,569 95,710,708 Net income 0 0 0 0 0 0 0 11,117,950 11,117,950 Other comprehensive income (loss): Regulatory provisions on asset management 0 0 90,627 0 0 0 90,627 (90,627) 0 Dynamic provision 0 0 0 0 8,209,649 0 8,209,649 (8,209,649) 0 Credit regulatory reserve 0 0 0 0 0 (4,557,114) (4,557,114) 4,557,114 0 Regulatory reserve for foreclosed assets 0 0 0 7,573 0 0 7,573 (7,573) 0 Net realized gain transferred to profit or loss 0 (676,433) 0 0 0 0 0 0 (676,433) Net changes in fair value of securities available for sale 8 0 4,507,623 0 0 0 0 0 0 4,507,623 Total other comprehensive income (loss) 0 3,831,190 90,627 7,573 8,209,649 (4,557,114) 3,750,735 (3,750,735) 3,831,190 Total comprehensive income 0 3,831,190 90,627 7,573 8,209,649 (4,557,114) 3,750,735 7,367,215 14,949,140 Transactions attributable to shareholder: Dividends paid 17 0 0 0 0 0 0 0 (2,200,000) (2,200,000) Complementary tax 0 0 0 0 0 0 0 (215,716) (215,716) Total transactions attributable to shareholder 0 0 0 0 0 0 0 (2,415,716) (2,415,716) Balance at December 31, 2014 17 65,000,000 2,649,163 90,627 7,573 8,209,649 358,052 8,665,901 31,929,068 108,244,132 Net income 0 0 0 0 0 0 0 12,456,696 12,456,696 Other comprehensive income (loss): Regulatory provisions on assets management 0 0 22,284 0 0 0 22,284 (22,284) 0 Dynamic provision 0 0 0 0 5,472,245 0 5,472,245 (5,472,245) 0 Credit regulatory reserve 0 0 0 0 0 (348,941) (348,941) 348,941 0 Regulatory reserve for foreclosed assets 0 0 0 3,916 0 0 3,916 (3,916) 0 Net realized gain transferred to profit or loss 0 (1,413,088) 0 0 0 0 0 0 (1,413,088) Net changes in fair value of securities available for sale 8 0 (1,598,868) 0 0 0 0 0 0 (1,598,868) Total other comprehensive income (loss) 0 (3,011,956) 22,284 3,916 0 (348,941) 5,149,504 (5,149,504) (3,011,956) Total comprehensive income 0 (3,011,956) 22,284 3,916 0 (348,941) 5,149,504 7,307,192 9,444,740 Transactions attributable to shareholder: Issuance of common shares 17 20,000,000 0 0 0 0 0 0 0 20,000,000 Dividends paid 17 0 0 0 0 0 0 0 (2,500,000) (2,500,000) Complementary tax 0 0 0 0 0 0 0 (272,018) (272,018) Total transactions attributable to shareholder 20,000,000 0 0 0 0 0 0 (2,772,018) 17,227,982 Balance at December 31, 2015 17 85,000,000 (362,793) 112,911 11,489 8,209,649 9,111 13,815,405 36,464,242 134,916,854 The consolidated statement of changes in equity should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 7
Consolidated Statement of Cash Flows For the year ended December 31, 2015 (Expressed in Balboas) Notes 2015 2014 Cash flows from operating activities: Net income 12,456,696 11,117,950 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 10, 12 1,712,903 1,654,407 Provision for loan losses 9 1,676,333 2,588,215 Impairment on assets held for sale 13 495,606 0 Gain on sale of securities 8 (1,413,088) (676,433) Loss on sale and disposal of furtiture and equipment 12,437 12,307 Income tax 21 1,053,011 1,306,189 Deferred income tax 21 507,014 (293,502) Net interest and commission income (30,024,998) (26,743,650) Changes in operating assets and liabilities: Time deposits with banks with original maturities greater than 3 months 7 (500,203) 900,000 Loans (86,039,519) (73,853,012) Other assets 850,053 (3,268,350) Deposits from customers 43,009,972 139,279,276 Other liabilities (2,489,421) (404,734) Cash generated from operation: Interest received 64,559,382 55,615,502 Interest paid (32,876,407) (28,060,739) Income taxes paid (768,286) (1,370,751) Net cash flows from operating activities (27,778,515) 77,802,675 Investing activities: Purchases of securities available for sale 8 (100,711,370) (101,959,432) Sale of securities available for sale 8 76,872,380 39,523,315 Redemptions of securities availables for sale 8 16,151,064 10,227,153 Sale of properties and equipments 101,013 59,522 Acquisition of property, equipments and intangible assets 10, 12 (1,482,615) (2,143,803) Cash flows from investing activities (9,069,528) (54,293,245) Financing activities: Borrowings paid (20,191,311) (35,081,437) New borrowings received 39,154,770 26,633,613 Payments of securities sold under repurchase agreements 0 (4,573,750) Complementary tax (272,018) (215,716) Dividends paid on common shares 17 (2,500,000) (2,200,000) Issuance of common shares 17 20,000,000 0 Cash flows from financing activities 36,191,441 (15,437,290) Net (decrease) increase in cash and cash equivalents (656,602) 8,072,140 Cash and cash equivalents at beginning of year 122,738,061 114,665,921 Cash and cash equivalents at end of year 7 122,081,459 122,738,061 The consolidated statement of cash flows should be read along with the accompanying notes which are an integral part of the consolidated financial statements. 8
December 31, 2015 (Expressed in Balboas) (1) General Information Metrobank, S. A., was established on May 14, 1991 and started operations on September, 1991 and operates in the Republic of Panama with a general license granted by the Superintendence of Banks of Panama ( the Superintendence ), that allows it to perform banking business activities indistinctly in Panama or abroad. Metrobank, S. A. and its subsidiaries will be referred to collectively as the Bank. The Bank is a 100% subsidiary of Metro Holding Enterprises, Inc. The Bank owns or controls the following subsidiaries: Activity Country of Incorporation Controlling Interest 2015 2014 Metroleasing, S. A. Financial leasing movable property. Panama 100% 100% Eurovalores, S. A. Financial intermediation services and other related services. Panama 100% 100% Financiera Govimar, S. A. Consumer loans. Panama 100% 100% Corporación Govimar, S. A. Consumer loans, subsidiary of Financiera Govimar, S. A. Panama 100% 100% Metrotrust, S. A. Trust business. Panama 100% 100% Metrofactoring, S. A. Factoring business. Panama 100% 100% Banking operations in Panama are regulated and supervised by the Superintendence of Banks of Panama (hereinafter "the Superintendence") according to the law established by Decree Law No. 2 of February 22, 2008 and the rules for its implementation. Metroleasing, S. A., operations are regulated by the Direction of Financial Enterprises of the Ministry of Commerce and Industry pursuant to Law No. 7 of July 10, 1990. Eurovalores, S. A., is regulated by the Superintendence of Securities Market of Panama according to the laws established in Law Decree No.1 of July 8, 1999, which was amended by Decree Law No.67 of September 1, 2011. Also, in accordance with Agreement 4-2011 of June 27, 2011 issued by the Superintendence of Securities Market of Panama amended by Agreement 8-2013 of September 18, 2013, brokerage houses must meet capital adequacy standards, solvency ratio, capital funds, liquidity ratio and credit risk concentrations. 9
(1) General Information, continued The operations of Financiera Govimar, S. A. and Corporacion Govimar, are regulated by the Direction of Financial Enterprises of the Ministry of Commerce and Industry according to Decree Law No. 42 of July 23, 2001, amended by Law No. 33 of June 26, 2002. Its main source of business constitute consumer loans granted mainly to retirees and pensioners, employees of the central government, independent and semi-independent entities. Metrotrust, S. A. operations, are regulated by the Superintendence of Banks of Panama through Law No.1 of January 5, 1984 and Executive Decree No.16 of October 3, 1984. The main office of the Bank is located at Punta Pacífica, Isaac Hanono Misri street, Metrobank Tower, Panama City. (2) Basis of Preparation (a) Statement of Compliance The Bank s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). These consolidated financial statements were authorized by the Audit Committee and approved by the Board of Directors for its issuance on February 29, 2016. (b) Basis of Measurement These consolidated financial statements have been prepared on the historical cost basis or amortized cost, except for securities available for sale, which are measured at fair value; and assets classified as held for sale, which are measured at the lower of its carrying value and its fair value less costs to sell. The Bank initially recognizes all financial assets on its settlement date. (c) Functional and Presentation Currency These consolidated financial statements are presented in balboas (B/.). The balboa is the monetary unit of the Republic of Panama, which is at par and freely exchangeable with the Dollar of the United States of America (US$). The Republic of Panama does not issue its own paper currency, and in lieu, the Dollar (US$) of the United States of America is used as legal tender and is considered the functional currency of the Bank. 10
(3) Summary of Significant Accounting Policies The accounting policies detailed below have been consistently applied by the Bank for all the periods presented in these consolidated financial statements. (a) Basis of Consolidation (a.1) Subsidiaries The Bank has control on a subsidiary when is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to use its power to affect its returns. The financial statements of subsidiaries described in Note 1, are included in the consolidated financial statements from the date on which it obtains control until the date when control ceases. Income and expenses of subsidiaries acquired or disposed during the year are included in the consolidated statement of profit or loss from the effective date of the acquisition or until the effective date of disposal, as appropriate. (a.2) Investment Entities and Separate Vehicles The Bank manages and administers assets held in trust funds and other investment vehicles to support investors. The financials statements of these entities do not form part of these consolidated financial statements except when the Bank has control over the entity. (a.3) Structured Entities A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, for example when any voting rights relate to administrative tasks only, and key activities are directed by contractual agreement. In assessing whether the Bank has control over such investees in which it has an interest, and therefore determine whether the structured entity is consolidated, several factors of the investee are evaluated, such as the purpose and design of the investee; its practical ability to direct relevant activities of the investee; the nature of its relationship with the investee; and the size of its exposure to the variability of returns of the investee. The financials statements of these structured entities do not form part of these consolidated financial statements, except when the Bank has control over the entity. (a.4) Transactions Eliminated on Consolidation All assets, liabilities, equity, income, expenses and cash flows relating to transactions between subsidiaries of the Bank are eliminated in preparing the consolidated financial statements. (b) Fair Value Measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. 11
(3) Summary of Significant Accounting Policies, continued When applicable, the Bank measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is considered as active, if the transactions of these assets or liabilities take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Bank uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value is a quoted market price in an active market. In the case that the market for a financial instrument is not considered active, a valuation technique is used. The decision of whether a market is active may include, but is not limited to, consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the magnitude of offers and sales. In markets that are not active, the guarantee to get that the price of the transaction provides evidence of fair value or to determine the adjustments to transaction prices that are necessary to measure the fair value of the instrument, requires additional work during the valuation process. The fair value of a demand deposit is not lower than the amount payable as required, discounted since the first date payment might be required. The Bank recognized transfers between levels of the fair value hierarchy at the end of the period during which the change occurred. (c) (d) Cash and Cash Equivalents For purposes of the consolidated statement of cash flows, cash equivalents include demand deposits and time deposits with banks with original maturities of three months or less. Investment Securities Investment securities are initially measured at fair value plus, incremental transaction costs and subsequently accounted for depending on the classifications maintained in accordance with the characteristics of the instrument and the intention for which their acquisition was determined. The classification used by the Bank is detailed as follows: Securities available for sale This category includes securities acquired with the intention of holding them for an undetermined period of time, which may be sold in response to needs for liquidity, changes in interest rates, currency exchange rates or market prices of stocks. These investments are measured at fair value and changes in value are recognized directly in the consolidated statement of comprehensive income using an valuation reserve account until they are sold or redeemed (derecognition) or has been determined that a security has been impaired; in this case the cumulative gain or loss previously recognized in the consolidated statement of comprehensive income are reclassified to the results of operations in the consolidated statement of profit or loss. 12
(3) Summary of Significant Accounting Policies, continued Impairment of securities available for sale The Bank reviews at each reporting date, if there is any objective evidence of impairment in investment securities. For equity investments, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment. If there is an objective evidence of impairment for financial assets available for sale, cumulative losses are removed from equity and recognized in the consolidated statement of profit or loss. If in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase is objectively related to an event occurring after the impairment loss was recognized in the consolidated statement of profit or loss, the impairment loss will be reverse through the consolidated statement of profit or loss. Unquoted equity securities whose fair value cannot be measured reliably are carried at cost. (e) Loans Loans receivable are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are generally originated by to provide funds to a debtor as a loan. Loans are stated at their principal outstanding amount pending collection, less insurance premiums, unearned interest and commissions and the allowance for loan losses. Unearned interest and commissions are recognized as income through the duration of the loan by using the effective interest rate method. Finance leases are mainly comprised of vehicles lease arrangements, which are reported as part of the loan portfolio at their present value. The difference between the gross amount receivable and the present value of the receivable amount, is recorded as unearned interests, which is amortized to operating income by using a method that shows a periodical return rate. Factoring consists of the purchase of invoices, which are presented at their principal amount of collection. Discounted bills receivable, net of amounts retained and interest collected in advance are presented as part of the loan portfolio. (f) Allowance for Loan Losses At each reporting date, the Bank reviews loan or loan portfolio, to determine whether there is any indication that those assets have suffered an impairment loss. The amount of loan losses determined during the period is recognized as a provision expense in the consolidated statement of profit or loss and increases the allowance for loan losses. The allowance is presented deducted from loans receivable in the consolidated statement of financial position. When a loan is determined to be uncollectible, the unrecoverable amount is charged to the allowance account referred above. Subsequent recoveries of loans previously charged-off as uncollectible are credited to the allowance account. 13
(3) Summary of Significant Accounting Policies, continued Impairment losses are determined through two methods which indicate if there is any objective evidence of impairment, i.e. individually, for loans individually significant and collectively, for loans that are not individually significant. - Individually Assessed Loans Impairment losses on individually assessed loans are determined based on an assessment of each particular exposure. If there is not objective evidence of impairment for a significant individual loan, this is included in a group of loans with similar characteristics and impairment is collectively assessed. Impairment loss is calculated comparing the present value of expected future cash flows, discounted at the original effective interest rate of the loan, versus its current carrying value and the amount of any loss is recognized as an allowance for loan losses in the consolidated statement of profit or loss. The carrying value of impaired loans is decreased through the use of the allowance for loan losses account. - Collectively Assessed Loans For purposes of a collective assessment for impairment, the Bank principally uses statistical methods with a formula approach based on historical loss rate experience, the opportunity of recoveries and the actual loss incurred and make an adjustment if current economic and credit conditions are such that it is likely that the actual losses are higher or lower than those suggested by historical trends. Roll rates, loss rates and the expected future recoveries terms are regularly benchmarked against actual loss experience, in order to assure that they are still appropriate. - Reversal due to impairment If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed by decreasing the allowance for loan losses. The amount of any reversal is recognized in the consolidated statement of profit or loss. - Renegotiated or Restructured Loans Are loans that due to difficulties in the repayment ability of the debtor, a variation on the original terms of the loan (balance, term, payment plan, fee or guarantees) has been formally documented, and the result of the evaluation of its current condition does not allow them to be reclassified as normal. These loans once, are restructured should be maintained for a period of six (6) months, in the risk classification it was classified before the loan was restructured, regardless of any improvement in its condition of the debtor subsequent restructuring. (g) Properties, Furniture, Equipment and Improvements Properties, furniture, equipment and improvements comprise buildings, furniture and improvements used by branches and offices. All properties, furniture, equipment and improvements are stated at historical cost less accumulated depreciation and amortization. Historical cost includes expenditure that is directly attributable to the acquisition of the assets. 14
(3) Summary of Significant Accounting Policies, continued Subsequent costs are included in the asset s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are recognized to the consolidated statement of profit or loss during the financial period in which they are incurred. The depreciation expense of computer equipment is charged to results of current operations, using the straight-line method over an estimated useful life. The useful lives of assets are as follows: Depreciation and amortization expenses of properties, furniture and office equipments and improvements are charged to current operations using the straight-line method over the estimated useful life of each asset. Land is not depreciated. The estimated useful lives of the assets are summarized as follows: - Properties and improvements Up to 30 years - Furniture and office equipment 3-10 years - Vehicles 3-5 years The useful life of assets is reviewed and adjusted if appropriate, at each reporting date. Properties and equipment are reviewed for impairment whenever events or changes in circumstances that indicate that the carrying amount may not be recoverable. An asset s carrying amount is written down immediately to its recoverable amount if the asset s amount carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset s fair value less costs to sell and value in use. (h) Intangible Assets (h.1) Intangible Assets Intangible assets consist of software and licenses of computer programs with a defined life, acquired by the Bank and that are recorded at cost of acquisition or internal development, less accumulated amortization and impairment losses. Amortization is charged to operating results on a straight-line method over the estimated useful life of the acquired software from the date it is available for use life. The estimated useful life of software is three to five years. (h.2) Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets acquired, resulting from the acquisition of a business by the Bank. All goodwill is allocated to one or more cash-generating units of an entity and is tested for impairment at that level. The impairment test requires that the fair value of each cash-generating unit be compared with its carrying amount. Goodwill is presented at cost less accumulated losses for impairment. The losses due to impairments, if any, are reflected in the consolidated statement of profit or loss. 15
(3) Summary of Significant Accounting Policies, continued Goodwill is not amortized, but is tested for impairment at least once a year and when there is indication of impairment. (i) Assets classified as held for sale Non-current assets, or disposal groups comprising of asset and liabilities, including foreclosed assets held for sale, are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. Immediately before being classified as held for sale, assets or disposal groups will be measured again in conformity with the Bank s accounting policies. Based on that classification, the lowest value between its carrying amount and its fair value less costs of sales shall be recognized. An impairment loss shall be recognized by virtue of reductions in the beginning value of the Bank s assets. Impairment losses are recognized in the consolidated statements of profit or loss. (j) (k) Deposits and Borrowings Received These instruments result from the funds received by the Bank and are initially measured at fair value, net of transaction costs. Subsequently they are measured at amortized cost, using the effective interest rate method, except for liabilities that the Bank decides to measure at fair value through profit or loss. The Bank classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. Securities Sold under Repurchase Agreements Securities sold under repurchase agreements are short term financing transactions guaranteed with securities, in which the Bank has the obligation to repurchase the securities sold on a future date and at a price. The difference between the sale price and the future purchase price is recognized as an interest expense under the effective interest rate method. The securities submitted as collateral will remain recorded in the consolidated statement of financial position, as the counterparty has no right of ownership over securities unless there is a breach of contract by the Bank. (l) Financial Guarantees Financial guarantees are contracts that commits the Bank to make specific payments on behalf of its customers, to reimburse the beneficiary of the guarantee, in the event that the client fails to make payment when due in accordance with the terms and conditions of the contract. Liabilities arising from financial guarantees are initially recognized at fair value; which is amortized trough out the term of the financial guarantee. Subsequently, the guarantee is carried at the highest amount between the amortized amount and the present value of expected future payments. Financial guarantees are included in the consolidated statement of financial position within other liabilities. 16
(3) Summary of Significant Accounting Policies, continued (m) Income and Interest Expense Income and interest expense are recognized in the consolidated statement of profit or loss for all financial instruments using the effective interest rate method. The effective interest rate method is the rate that exactly discounts future cash flows receivable or payable estimated over the expected life of the financial instrument to the net carrying amount of the financial asset or liability. The calculation includes all fees paid or received between the parties, the transaction costs and any premium or discount. (n) Income Fees and Commission Generally, fees and commissions on short-term loans, letters of credit and other banking services are recognized as income under the cash basis method due to their short-term maturity. Income recognized on a cash basis method does not significantly differ from income that would have been recognized under the accrual method. Fees and commissions on medium and long term transactions are deferred and amortized to income using the effective interest rate method over the life of the loan. Commissions on loans are included as loan commissions in the consolidated statement of profit or loss. (o) (p) Dividend Dividends are recognized in the consolidated income statement of profit or loss when the entity has the rights to receive the payment established. Revenue Recognition for Leases Lease income is recognized at the time the lessee has the right to use the leased asset. Lease contracts are valid when the following elements occur: Consent of the parties; Object certain that is subject of the contract; Cause of the obligation to be established; and There is a writing contract. (q) Trust Operations Assets held in trust or fiduciary function are not considered part of the Bank s assets, and therefore such assets and their corresponding income are not included in these consolidated financial statements. The Bank shall administrate the trust funds in conformity with contractual arrangements and separately from its own equity. The Bank charges a commission for administrating the trust funds, which is paid by the trustees on the basis of the amount maintained in the trust funds or as agreed between the parties. These commissions are recognized in income according to the terms of the trust agreements whether monthly, quarterly or annually on an accrual basis. (r) Income Tax Estimated income tax is the income tax payable on the taxable income for the year, using tax rates enacted at the consolidated statement of financial position date, and any adjustment to tax from previous years. 17
(3) Summary of Significant Accounting Policies, continued Deferred income tax represents the amount of income tax payable and/or receivable in future years resulting from temporary differences between carrying values of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes, measured at the tax rates that are expected to be applied to the temporary differences when they are reversed, based on the laws that have been enacted or substantively enacted at the reporting date. These temporary differences are expected to be reversed in future dates. If it is determined that the deferred tax may not be realized be in future years, it would be totally or partially reduced. (s) (t) Foreign Currency Foreign currency transactions are recorded at the exchange rates prevailing at the date of the transaction. Assets and liabilities held in foreign currency are translated into the functional currency at the rate prevailing exchange rate at the reporting date. Gains or losses from foreign currency translation are reflected in the accounts of other income or other expenses in the consolidated statement of profit or loss. Comparative information Certain comparative information for 2014 has been modified to adapt its presentation to the consolidated financial statements of 2015. (u) New International Financial Reporting Standards (IFRS) and interpretations not yet adopted At the date of the consolidated financial statements are standards, amendments and interpretations which are not effective for the period ended on December 31, 2015 and therefore; have not been applied in preparing of these consolidated financial statements. Among the changes we have: The final version of IFRS 9 Financial Instruments (2014) supersedes any previous versions of IFRS 9 (2009, 2010 and 2013), and forms part of the comprehensive project to supersede IAS 39. Among the most significant effects of this Standard are: - IFRS 9 contains new requirements for the classification and measurement of financial assets. Among other aspects, this Standard includes two primary measurement categories for financial assets: amortized cost and fair value. IFRS 9 eliminates the categories previously implemented by IAS 39 corresponding to held-to-maturity investments, available-for-sale investments, loans and receivables. - Removal of profit or loss volatility caused by changes in the credit risk of liabilities measured at fair value, which implies that gains obtained from the entity s own credit risk impairment in this type of obligations is no longer recognized in profit or loss for the period, but in equity. - A substantially amended approach for hedge accounting, with enhanced disclosures in relating with risk management. 18
(3) Summary of Significant Accounting Policies, continued - A new impairment model, based on expected losses which will require greater and timely recognition of expected credit losses. IFRS 9 is effective for annual reporting periods beginning on or after January 1, 2018, with early adoption permitted. Given the nature of the Bank s financial operations, the adoption of this standard is expected to have a pervasive impact on the consolidated financial statements which is currently being assessed by management. IFRS 15 Revenue from Contracts with Customers. IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. It will supersede the following revenue Standards and Interpretations upon its effective date including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for reporting periods beginning on or after January 1, 2018 with early adoption permitted. The Bank is evaluating the potential effect of the application of IFRS 15 on its consolidated financial statements. Also, on January 13, 2016, the International Accounting Standards Board (IASB) published a new Standard, IFRS 16, Leases, which replaces the current IAS 17 Leases. IFRS 16 eliminates the current operating/finance lease dual accounting model for lessees. Instead, there is a single, on-balance sheet accounting model, similar to current finance lease accounting. Leases are measured at the present value of future lease payments and are presented as either leased assets (right-ofuse asset) or along with property, furniture and equipment. IFRS 16 is effective for entities that apply IFRS for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15, Revenue from Contracts with Customers, at or before the date of initial application of IFRS 16. At the date of the consolidated financial statements, the Bank has not assessed the impact that the adoption of this standard will have on the consolidated financial statements. 19
(4) Financial Risk Management The activities of the Bank are exposed to a variety of financial risks and those activities include the analysis, evaluation, acceptance and administration of certain degree of risk or combination of risks. Taking risks is essential to the financial business, and operational risks are inevitable consequence of being in the business. Therefore, the objective of the Bank is to achieve an appropriate balance between risk and return and minimize the potential adverse effects on the financial return of the Bank. The activities of the Bank are mainly related with the use of financial instruments, and as such, the consolidated statement of financial position is mainly composed of financial instruments, therefore the Bank is exposed to the following risks in the use of them: Credit risk Liquidity risk Market risk Operational risk The Board of Directors of the Bank has the responsibility to establish and overlook the policies of financial instruments risk management. For this purpose, it has appointed committees in charge of the periodic management and overlook of the risks to which the Bank is exposed. These committees are: Audit Committee Asset and Liability Committee (ALCO) Risk Committee Prevention of Money Laundering Committe Credit Committee Human Resources Committee Senior Management Committee Technology Committee In addition, the Bank and its subsidiary Eurovalores, S. A., are subject to the regulations of the Superintendence of Banks of Panama and the Superintendence of Securities Market of Panama, respectively, related to concentration, liquidity and capitalization risks, among others. (a) Credit Risk Is the risk of a financial loss for the Bank, that may take place if a client or a counterparty of a financial instrument fails to meet their contractual obligations, and it arises mainly from loans to customers and investment in securities. For purposes of risk management, the Bank considers and consolidates all elements of credit risk exposure, debtor risk, country risk, sector or industry risk. The credit risk that arises from maintaining securities is managed independently, but informed as a component of credit risk exposure. 20
(4) Financial Risk Management, continued The respective committees appointed by the Bank s Board of Directors, periodically overlooks the financial condition of the debtors and issuers of debt securities, that involves a credit risk for the Bank. The Credit Committee is comprised of members of the Board of Directors, credit management staff, and representatives of the business areas. This Committee is in charge of developing changes to credit policies, and to present them to the Bank s Board of Directors. The Bank has established certain procedures to manage credit risk, summarized as follows: Formulating of credit policies Credit policies are issued or reviewed as recommended by any member of the Credit Committee or by the credit vice presidents, as well as control areas, who must make written suggestions in writing, considering the following factors: Changes in market conditions Risk factors Changes in laws and regulations Changes in financial conditions and credit availability Other relevant factors at the moment All changes in policies or the issuance of new policies must be approved by the Risk Committee, whom in turn submits them to the Board of Directors for approval, issuing a memorandum of instructions for disclosure and subsequent implementation: Establishment of authorization limits Approval limits for credits are established depending on the amount that it represents to the Bank s equity. These levels are recommended by the Credit Committee, whom in turn submits them for the approval of the Bank s Board of Directors. Exposure limits In order to limit the exposure, maximum limits have been established for an individual debtor or economic group, based on the Bank s Capital funds. Concentration limits In order to limit concentration per activity or industries, exposure limits have been approved based on capital distribution and the strategic orientation that wants to be given to the loan portfolio. Furthermore, the Bank has limited its exposure to different geographies through the country risk policy, in which it has defined countries where it would like to have exposure based on the Bank s strategic plan; also, credit and investment exposure limits have been implemented in such countries, based on their credit assessment of each of them. Maximum limits by counterparty In regards to counterparty exposure, limits have been defined based on risk rating of the counterparty, as a proportion of the Bank s capital. 21
(4) Financial Risk Management, continued Impairment and provision rating policies The internal and external systems are centralized more in projecting credit quality since the beginning of the loan and investment activities. Conversely, impairment provisions are recognized for financial reporting purposes only for losses that have been incurred at the date of the consolidated statement of financial position with objective evidence of impairment. The following table analyzes the Bank s loan and investment portfolios that are exposed to credit risk and the corresponding assessment: Loans receivable Investment in debt securities 2015 2014 2015 2014 Maximum exposure Carrying value 778,519,537 694,156,351 225,894,397 220,832,246 At amortized cost Grade 1: Standard 792,309,735 721,103,577 0 0 Grade 2: Special mention 15,128,757 791,193 0 0 Grade 3: Sub-standard 719,238 356,320 0 0 Grade 4: Doubtful 1,627,613 1,279,781 0 0 Grade 5: Loss 1,071,037 4,420,590 0 0 Gross amount 810,856,380 727,951,461 0 0 Allowance for impairment loss (3,109,795) (5,195,874) 0 0 Unearned interest, insurance premium and commissions (29,227,048) (28,599,236) 0 0 Carrying value, net 778,519,537 694,156,351 0 0 Available-for-sale securities Level 1: Low risk 0 0 225,894,397 220,832,246 Carrying value 0 0 225,894,397 220,832,246 Allowance for impairment loss 0 0 0 0 Carrying value, net 0 0 225,894,397 220,832,246 Neither past-due nor impaired Grade 1 792,309,735 721,103,577 0 0 Grade 2 13,938,805 0 0 0 Grade 3 58,665 0 0 0 Total 806,307,205 721,103,577 0 0 Past due but not impaired 60 days 1,759,979 1,204,476 0 0 61 90 days 975,190 589,150 0 0 Over 90 days 1,079,895 1,145,530 0 0 Total 3,815,064 2,939,156 0 0 Individually Impaired Grade 3 18,648 0 0 0 Grade 4 207,741 203,872 0 0 Grade 5 507,722 3,704,856 0 0 Total 734,111 3,908,728 0 0 Allowance for impairment Individual 538,113 3,715,279 0 0 Collective 2,571,682 1,480,595 0 0 Total allowance for impairment 3,109,795 5,195,874 0 0 Off-balance sheet operations Grade 1: Low risk Letters of credit stand by 9,714,160 12,090,511 0 0 Sureties and endorsements 3,854,363 11,359,363 0 0 Promissory notes of payment 20,020,416 33,815,319 0 0 Grade 3: Sub-standard Letters of credit stand by 0 165,480 0 0 Promissory notes of payment 0 59,980 0 0 33,588,939 57,490,653 0 0 22