Report and Financial Statements t:\cliente\bancolombia\fs\2012\fs12-002cayman.doc/zulia
Index to the Financial Statements Pages Report of Independent Auditors 1 Financial Statements: Balance Sheet 2 Statement of Income 3 Statement of Comprehensive Income 4 Statement of Changes in Shareholder s Equity 5 Statement of Cash Flows 6 7-34
Statement of Income For the year ended Interest Income Interest on bank deposits (Note 6) US$ 2,385,654 US$ 2,758,666 Interest on securities 2,095,624 2,717,252 Interest on loans (include commissions) 2,076,126 2,135,528 6,557,404 7,611,446 Interest Expense Interest on deposits (Note 6) (3,816,175) (3,965,338) Interest on short-term borrowings (51,495) (36,410) (3,867,670) (4,001,748) Net interest income 2,689,734 3,609,698 Other Income (Expenses) Fee and commission income (Note 13) 531,403 565,522 Fee and commission expense (Notes 6 and 15) (1,005,123) (1,037,713) Net gain on sale of securities (Note 14) 506,483 289,186 Provision for loan losses (Note 9) (174,768) (308,989) Other provisions (Note 12) (288,063) (193,602) Other operating income, net (Note 13) 363,720 79,224 (66,348) (606,372) Administrative Expenses Professional services 196,353 197,305 Communications 25,699 20,019 Government license fees 60,976 75,679 Other administrative expenses (Note 15) 28,941 33,247 311,969 326,250 Net income US$ 2,311,417 US$ 2,677,076 The notes on pages 7 to 34 are an integral part of these financial statements. - 3 -
Statement of Comprehensive Income For the year ended Net income US$ 2,311,417 US$ 2,677,076 Other comprehensive income: Net gain from changes in fair value (Note 8) 2,710,515 1,848,990 Net gain transferred to profit/loss (Note 8) (616,181) (269,113) Total comprehensive income US$ 4,405,751 US$ 4,256,953 The notes on pages 7 to 34 are an integral part of these financial statements. - 4 -
Statement of Changes in Shareholder s Equity For the year ended Unrealized (Loss) Gain on Valuation of Available-for- Share Capital Sale Retained Capital Reserve Securities Earnings Total Balance at December 31, 2010 US$ 20,000,000 US$ 289,073 US$ (1,347,309) US$ 246,441 US$ 19,188,205 Comprehensive income Net income - - - 2,677,076 2,677,076 Net gain from changes in fair value (Note 8) - - 1,848,990-1,848,990 Net gain transferred to profit/loss (Note 8) - - (269,113) - (269,113) Total comprehensive income - - 1,579,877 2,677,076 4,256,953 Balance at December 31, 2011 20,000,000 289,073 232,568 2,923,517 23,445,158 Comprehensive income Net income - - - 2,311,417 2,311,417 Net gain from changes in fair value (Note 8) - - 2,710,515-2,710,515 Net gain transferred to profit/loss (Note 8) - - (616,181) - (616,181) Total comprehensive income - - 2,094,334 2,311,417 4,405,751 Balance at US$ 20,000,000 US$ 289,073 US$ 2,326,902 US$ 5,234,934 US$ 27,850,909 The notes on pages 7 to 34 are an integral part of these financial statements. - 5 -
Statement of Cash Flows For the year ended Cash flows from operating activities Interest received US$ 7,362,473 US$ 8,235,431 Interest paid (4,466,581) (3,367,651) Commission income 531,403 565,522 Commission expense (1,005,123) (1,037,713) Other operating income 363,720 79,224 Other expenses (311,969) (326,250) Decrease (increase) in operating assets: Time deposits 5,000,000 (50,000,000) Loans 353,411 (316,263) Other receivables (331,190) (286,293) Increase (decrease) in operating liabilities: Deposits (22,204,681) 18,977,605 Other liabilities (171,384) 14,524 Net cash used in operating activities (14,879,921) (27,461,864) Cash flows from investing activities Purchases of investment securities (9,981,000) (22,855,827) Sales of investment securities 27,283,222 21,574,031 Net cash provided by (used in) investing activities 17,302,222 (1,281,796) Increase (decrease) in cash and cash equivalents 2,422,301 (28,743,660) Cash and cash equivalents at beginning of year (Note 7) 146,580,528 175,324,188 Cash and cash equivalents at end of year (Note 7) US$ 149,002,829 US$ 146,580,528 The notes on pages 7 to 34 are an integral part of these financial statements. - 6 -
1. General Information Bancolombia Cayman (the Bank ) was incorporated as an exempted company under the Companies Law of the Cayman Islands on August 27, 1987, and is a wholly - owned subsidiary of Bancolombia (Panama), S. A. (the Parent Company ). The ultimate parent company is Bancolombia, S. A., a bank incorporated in Colombia. The Bank operates under an unrestricted category B bank and trust license granted by the Cayman Islands Government and it is principally engaged in providing offshore banking facilities. The Bank enters into transactions with its parent company and affiliates, most of which are conducted under the parent company s instructions. The registered office of the Bank is located at Caledonian House, 69 Dr. Roy s Drive, Grand Cayman, Cayman Islands. The financial statements were approved for issue by the Management on April 23, 2013. 2. Summary of Significant Accounting Policies The following is a summary of the major accounting policies used in the preparation of the financial statements. These policies have been consistently applied to all years presented. Basis of Preparation The financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards (IFRS). The financial statements are prepared under the historical cost convention, modified for the revaluation of availablefor-sale securities. The preparation of the financial statements in conformity with International Financial Reporting Standards requires some critical accounting estimates. Also, it requires Management to use judgment in the application of the Bank s accounting policies. The areas that involve a high degree of judgment or complexity, or areas where the assumptions and estimates are significant for the financial statements, are disclosed in Note 5. - 7 -
2. Summary of Significant Accounting Policies (Continued) Basis of Preparation (continued) Changes in the accounting policy and disclosures (a) New and amended standards adopted There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning on or after January 1, 2012 that would be expected to have a material impact on the Bank. (b) New standards issued and standards amendments, but not effective for the financial year beginning 1 January 2012 and not early adopted - IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2011. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The Bank is yet to assess IFRS 9 s full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after January 1, 2015. - IFRS 13, Fair value measurement, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP. The Bank assesses IFRS 13 s full impact and concluded that has not material impact on the Bank. - 8 -
2. Summary of Significant Accounting Policies (Continued) Foreign Currencies Translation Transactions in currencies other than the US dollars (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. Assets and liabilities denominated in foreign currencies are translated at the rates prevailing at the balance sheet date. Exchange differences are recognized in profit or loss in the period in which they arise. Financial Assets Classification The Bank classifies its financial assets in the following categories: loans and receivables, held-to-maturity and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (a) (b) (c) Loans and receivables Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the entity has no intention to sell immediately or in the short-term. Loans are stated at their principal amount, net of allowance for loan losses and unearned discounts. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. Held-to-maturity financial assets Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that Management has the positive intention and ability to hold to maturity, other than: those that the Bank upon initial recognition designates as at fair value through profit or loss; those that the Bank designates as available-for-sale; and those that meet the definition of loans and receivables - 9 -
2. Summary of Significant Accounting Policies (Continued) Recognition and Measurement Regular purchases and sales of financial assets are recognized on the trade-date the date on which the Bank commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Bank has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables are carried at amortized cost. Held-to-maturity investments are initially recognized at fair value including direct and incremental transaction costs and measured subsequently at amortized cost. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analyzed between translation differences resulting from changes in amortized cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognized in profit or loss; translation differences on non-monetary securities are recognized in equity. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognized in the statement of comprehensive income. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the statement of income as net gain on sale of securities. Interest on available-for-sale securities calculated using the effective interest method is recognized in the statement of income as part of interest on securities. Dividends on available-for-sale equity instruments are recognized in the statement of income as part of other income when the Bank s right to receive payments is established. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Bank establishes fair value by valuation techniques. - 10 -
2. Summary of Significant Accounting Policies (Continued) Impairment of Financial Assets a. Held-to-maturity investments The Bank assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. 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 (such as an improvement in the debtor s credit rating), the reversal of the previously recognized impairment loss is recognized in the statement of income. b. Available-for-sale securities The Bank assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. For debt securities, the Bank uses the criteria referred to in (a) above. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss is removed from equity and recognized in profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the statement of income. - 11 -
2. Summary of Significant Accounting Policies (Continued) Allowance for Loan Losses The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial assets or group of financial assets that can reliably estimated. The allowance for loan losses is established as losses when impairment has occurred, through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when Management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to other income. The allowance for loans losses is performed in relation to possible loan losses of clients whose loans have been reviewed individually and have been identified as non-recoverable, after periodic review in which Management considers the estimated recovery of the debtor, co-debtors or guarantee payment sources and the realization of assets received as collateral. Income and Expense Interest income and expense for all interest-bearing financial instruments, and amortization of premium and discounts are recognized within interest income and interest expense in the statement of income using the effective interest method. Banking fees and commissions are generally recognized when the service has been provided. Portfolio and other management service fee expenses are recognized on an accrual basis based on the applicable service contracts. Income Tax Under the present laws of the Cayman Islands, the Bank is not subject to income taxes. The Bank intends to conduct its operations so as not to be subject to taxation in any other jurisdiction. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, on demand and shortterm investments with an original maturity of 90 days or less from the date of acquisition. - 12 -
2. Summary of Significant Accounting Policies (Continued) Borrowings Borrowings are recognized initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. Financial Liabilities The Bank s holding in financial liabilities is in financial liabilities at amortized cost. Financial liabilities are derecognized when extinguished. Financial liabilities measured at amortized cost are deposits from banks or customers, for which the fair value option is not applied. 3. Financial Risk Management The Bank is exposed to the following financial risks: Credit risk Liquidity risk Market risk (includes interest rate, currency risk and other price risk) The Board of Directors of the Bank has the responsibility to establish and oversee the policies of financial instruments risk management. Accordingly, it has appointed committees in charge of the periodic administration and oversight of the risks to which the Bank is exposed. The Audit Committee is responsible for verifying the correct functioning of the internal control system and the compliance of the internal and external audit programs by means of internal policies and procedures to detect control and internal administration problems, as well as the corrective measures implemented based on the evaluations carried out by the internal audit function, the external auditors and the Cayman Islands Monetary Authority. The audit committee is assisted in these functions by the Internal Audit Department. This Department carries out regular audits to the Company s processes and controls of risk management; the results are reported to the Audit Committee. Credit Risk It is the risk of financial loss that faces the Bank if a client or counterparty in a financial instrument does not fully comply with his commitments. Credit risk arises mainly from loan granting activities and investments in bonds. Credit risk also exists in off-balance financial instruments, such as guarantees granted and commitments to grant credits, if any. - 13 -
3. Financial Risk Management (Continued) Credit Risk (continued) The Board of Directors and the General Management have delegated the responsibility of the identification and risks management to their Risk Committee, which at the same time has delegated the credit risk management to Credit Committee. The main function of the Credit Committee is to do a follow-up on risk, to assist in the design of policies and procedures, verify its compliance and warn the Board of Directors and General Management regarding risks that could require additional controls. The Risk Committee has established some procedures to manage credit risk, such as: 1. Drafting of credit policies 2. Establishment of authorization limits 3. Concentration limits 4. Exposure limits 5. Risk evaluation development and maintenance 6. Review of policy compliance The Internal Audit Department carries out regular audits to the Company s credit processes. Credit risk measurement In measuring credit risk on loans, the Bank considers three components (i) the probability of default by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its likely future development, from which the Bank derives the exposure at default ; and (iii) the likely recovery ratio on the defaulted obligations (the loss given default ). a) Loans receivable risk For the application of provisions for the consumer loan portfolio (credit cards), the Bank establishes 100% provision for all loans for which the payment of capital and interest has been outstanding for more than 180 days. b) Investments in securities For investments in securities, external ratings or their equivalents are taken into consideration by the Board of Directors at the time of evaluating and approving the authorized counterparts and/or issuers. - 14 -
3. Financial Risk Management (Continued) Credit Risk (continued) Collateral The Bank implements guidelines on the acceptability of collateral for credit risk mitigation. Mainly, collateral consists of pledges over deposits placed in the Bank. As of and 2011, the loans of the Bank do not have collateral because the loan portfolio only includes credit cards. Impairment and provisioning policies Impairment on loans is determined considering the amount of principal and interest in accordance to the contractual term. Loans are classified based on the book value at the date of analysis in the following categories, from a lower to higher risk: neither past due nor impaired, past due not impaired and impaired. Once each loan risk is classified, specific provisions are constituted based on the estimated recovery of the principal. Maximum exposure to credit risk before credit guarantees and other credit enhancements: Maximum Exposure Loans Consumer US$ 5,633,758 US$ 6,296,787 Investments in securities Private debt securities US$ 42,015,418 US$ 48,378,973 Government debt securities 5,682,153 14,020,003 US$ 47,697,571 US$ 62,398,976-15 -
3. Financial Risk Management (Continued) Credit Risk (continued) Impairment and provisioning policies (continued) The following table contains the Bank loan portfolio that is exposed to the credit risk and its corresponding assessment: December 31 Neither past due nor impaired US$ 5,192,723 US$ 5,899,031 Past due but not impaired 350,858 301,313 Impaired 90,177 96,443 5,633,758 6,296,787 Allowance for loan losses (646,067) (780,917) US$ 4,987,691 US$ 5,515,870 Past due but not impaired loans Loans are considered as past due not impaired when the payments of capital and agreed contractual interest due are not received and/or within 120 days after the maturity of such payments. These loans are not considered impaired, unless other information is available to indicate the contrary. Gross amount of loans that were past due but not impaired is as follows: Past due not impaired: Up to 30 days US$ 197,146 US$ 133,059 Up to 60 days 119,768 76,953 Up to 120 days 33,944 91,301 US$ 350,858 US$ 301,313 To manage the financial risk exposures of the investment portfolio, the Bank uses the assessment of the external qualifiers (Moodys), as detailed as follows: Degree of qualification External qualification Investment grade AAA to BBB- Moderate risk BB+ to BB- High risk B+ to C - 16 -
3. Financial Risk Management (Continued) Credit Risk (continued) The following detail analyzes the investment portfolio that is exposed to credit risk and its corresponding evaluation based on the degree of qualification: Private Government Debt Securities Debt Securities Total Investment grade US$ 42,015,417 US$ 5,682,153 US$ 47,697,571 December 31, 2011 Investment grade US$ 48,378,973 US$ 14,020,003 US$ 62,398,976 To manage the financial risk exposures of the cash in banks, the Bank uses the assessment of the external qualifiers, as detailed as follows: Investment grade US$ 229,002,829 US$ 181,580,528 Moderate risk - 50,000,000 US$ 229,002,829 US$ 231,580,528-17 -
3. Financial Risk Management (Continued) Credit Risk (continued) Concentration of risk of financial assets with credit risk exposure The Bank monitors the credit risk concentration by economic sector and geographical location. This exposure has been classified according to the geographical location based on the country where the cash flows were generated to obtain the recovery of the liability and/or from which the return of the invested resources were obtained. The credit risk concentration analysis at the date of the financial statements is the following: Held-to- Available-for- Maturity Country Cash in Banks Sale Securities Investments Loans Argentina US$ - US$ - US$ - US$ 2,726 Brazil - 18,085,353 5,069,819 10,152 Colombia - 1,959,596-4,763,761 Costa Rica - - - 7,749 Chile - 5,202,033 8,971,827 - El Salvador - - - 33,662 Mexico - - 2,986,425 13,425 Panama 184,816,403 - - 33,427 Peru - 3,327,802-1,390 Puerto Rico - - - 2,803 Spain - - - 12,546 United States of America 44,186,426 - - 83,394 Venezuela - 2,094,716-2,026 Others - - - 20,630 US$ 229,002,829 US$ 30,669,500 US$ 17,028,071 US$ 4,987,691-18 -
3. Financial Risk Management (Continued) Credit Risk (continued) Concentration of risk of financial assets with credit risk exposure (continued) December 31, 2011 Held-to- Available-for- Maturity Country Cash in Banks Sale Securities Investments Loans Argentina US$ - US$ - US$ - US$ 26,176 Brazil 5,175,600 17,774,050 5,096,196 6,607 Colombia - 4,279,283-5,262,649 Costa Rica - - - 11,020 Chile - 10,020,650 8,999,619 10,235 El Salvador - - - 22,313 Guatemala - - - 4,180 Mexico - - 2,982,007 10,344 Panama 155,272,768 - - 28,134 Peru - 7,994,120-5,968 Puerto Rico 50,000,000 - - 2,292 Spain - - - 9,700 United States of America 21,132,160 - - 92,628 Trinidad and Tobago - - - 10,518 Venezuela - 1,717,489 3,535,562 4,419 Others - - - 8,687 US$ 231,580,528 US$ 41,785,592 US$ 20,613,384 US$ 5,515,870 Liquidity Risk Liquidity risk is defined as the risk that the entity finds difficulties in obtaining the necessary funds to comply with commitments associated with its financial instruments. The liquidity risk can be the result of the inability to sell an asset rapidly for an amount close to its reasonable value. This risk is managed by keeping adequate liquidity levels in liquidity assets and with international banks, in addition to a system for managing liquidity risk. The Board of Directors has delegated some of its attributions in the Liquidity Committee, who, in accordance with the General Management, establishes policies and procedures for the adequate management of this risk, such as minimum liquidity levels, follow-up to the composition of the liabilities and concentration of the same, among others. - 19 -
3. Financial Risk Management (Continued) Liquidity Risk (continued) The methodology for measuring the liquidity risk of the different positions of the balance sheet, both assets and liabilities, involves projecting contractual future flows both of capital and of interest; some positions such as time deposits, expected future cash flows are projected, affecting contractual flows for an alleged contractual renewal. The flows are located in defined bands of time and are calculated in relation to the difference between the assets and liabilities flows, obtaining the liquidity GAP for different time horizons, besides the liquidity accumulated GAP. The following table illustrates the liquidity GAP analysis: Under 1 1 to 3 3 to 12 More than Month Months Months 1 to 5 Years 5 Years Total (Expressed in US$) Assets Cash in banks 79,007,090 70,579,700 81,040,829 - - 230,627,619 Available-for-sale-securities 263,375 445,734 659,761 19,098,215 14,668,125 35,135,210 Held-to-maturity investments 118,750 67,500 626,250 18,958,750-19,771,250 Loans 548,165 963,147 2,751,941 2,304,807 12,510 6,580,570 79,937,380 72,056,081 85,078,781 40,361,772 14,680,635 292,114,649 Liabilities Deposits 164,496,218 5,554,414 36,987,201 48,618,341-255,656,174 Net Liquidity (84,558,838) 66,501,667 48,091,580 (8,256,569) 14,680,635 36,458,475 Under 1 1 to 3 3 to 12 More than Month Months Months 1 to 5 Years 5 Years Total (Expressed in US$) December 31, 2011 Assets Cash in banks 33,580,671 113,842,918 85,696,918 - - 233,120,507 Available-for-sale-securities 2,934,875 5,463,234 1,693,012 16,411,463 24,190,875 50,693,459 Held-to-maturity investments 118,750 3,687,813 626,250 14,415,000 5,356,250 24,204,063 Loans 612,677 1,076,498 3,075,813 2,546,632 43,428 7,355,048 37,246,973 124,070,463 91,091,993 33,373,095 29,590,553 315,373,077 Liabilities Deposits 170,357,089 8,110,765 27,716,755 56,350,807 17,217,522 279,752,938 Net Liquidity (133,110,116) 115,959,698 63,375,238 (22,977,712) 12,373,031 35,620,139-20 -
3. Financial Risk Management (Continued) Market Risk Market risk is the risk that the Bank may suffer losses arising from fluctuations in interest rate risk, price risk and currency risk. The Board of Directors has determined that the definition, follow-up and control of general policies on management of assets and liabilities, and the assumption of market risk is verified by Assets and Liabilities Committee and Investments Committee, directly, which are composed for members of the Board of Directors and executive personnel of the Bank, these committees are responsible for the development of policies for market risks management, and also for checking and approving the adequate implementation of such policies. The main objective to manage market risk is to manage and monitor the investment portfolio and the different positions in the balance sheet exposed to market risks, and also to analyze the impact of new business strategies that the Bank wants to develop. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The exposure to interest rate risk is reviewed by Assets and Liabilities Committee. The table below summarizes the Bank s exposure to interest rate risks. Included in the table are the Bank s assets and liabilities at carrying amounts, categorized by the earlier of contractual repricing or maturity dates: 1 to 3 3 to 6 6 Months to 1 Year to More than Non-Interest Months Months 1 Year 3 Years 3 Years Bearing Total (Expressed in US$) Assets Cash in banks 149,002,829 40,000,000 40,000,000 - - - 229,002,829 Available-for-sale securities - - - - 30,669,500-30,669,500 Held-to-maturity investments - - - - 17,028,071-17,028,071 Loans - - - 2,544,508 2,443,182-4,987,691 149,002,829 40,000,000 40,000,000 2,544,508 50,140,153-281,688,092 Liabilities Deposits 190,342,049 19,575,912 17,716,237 24,872,644-1,796,576 254,303,418 Total interest reprising gap (41,339,320) 20,420,088 22,283,763 (22,328,136) 50,140,153-21 -
3. Financial Risk Management (Continued) Market Risk (continued) Interest rate risk (continued) 1 to 3 3 to 6 6 Months to 1 Year to More than Non-Interest Months Months 1 Year 3 Years 3 Years Bearing Total (Expressed in US$) December 31, 2011 Assets Cash in banks 118,175,600 85,000,000 - - - 28,404,928 231,580,528 Available-for-sale securities - - - 5,067,500 36,718,092-41,785,592 Held-to-maturity investments - - - 3,535,562 17,077,822-20,613,384 Loans - - - 560,977 4,954,893-5,515,870 118,175,600 85,000,000-9,164,039 58,750,807 28,404,928 299,495,374 Liabilities Deposits 17,868,032 8,747,176 23,623,347 65,544,418 7,583,548 153,141,578 276,508,099 Total interest reprising gap 100,307,568 76,252,824 (23,623,347) (56,380,379) 51,167,259 The table below illustrates the sensitivity of the Bank s net income of reasonably possible changes in interest rates for the cash and cash equivalents and time deposits, loans, and deposits existing at the balance sheet dates: Interest income On bank deposits +1% US$ 1,800,000 US$ 2,031,756-1% (1,800,000) (2,031,756) On loans +1% 56,338 62,968-1% (56,338) (62,968) Interest expense On deposits +1% 2,545,841 2,039,491-1% (2,545,841) (2,039,491) Price risk It is the risk that the value of a financial instrument may fluctuate as a consequence of changes on the market prices, regardless if they are caused by specific factors related to the instrument in particular, or its issuer, or due to factors that affect all securities negotiated in the market. - 22 -
3. Financial Risk Management (Continued) Market Risk (continued) Price risk (continued) Price risk also includes covers the transfer and convertibility risks. There exists in every transaction where, due to legal provisions, the debtor or counterpart cannot transfer funds in the currency and place of payment stipulated in the operation regardless of the particular financial condition of the debtor. Currency Risk Currency risk is the risk which the fair value or future cash flows of a financial instrument fluctuates as a consequence of variations in the foreign currency exchange rates. The Bank uses several techniques for management of the risk exposure to currency risk, including investments in securities in other currencies, and others. The table below summarizes the Bank s exposure to foreign currency exchange risk at December 31. Included in the table are the Bank s financial instruments at carrying amounts, categorized by currency: Euros US$ Total Assets Cash in banks US$ 500,092 US$ 228,502,737 US$ 229,002,829 Available-for-sale securities 5,888,566 24,780,934 30,669,500 Held-to-maturity investments - 17,028,071 17,028,071 Loans, net - 4,987,691 4,987,691 Accrued interest receivable 211,743 1,035,915 1,247,658 Other receivables and fixed assets 99 226,449 226,548 Total assets US$ 6,600,500 US$ 276,561,797 US$ 283,162,297 Liabilities Deposits US$ 6,548,729 US$ 247,754,689 US$ 254,303,418 Accrued interest payable 4,356 949,232 953,588 Other payables - 54,382 54,382 Total liabilities US$ 6,553,085 US$ 248,758,303 US$ 255,311,388 Net exposure to foreign currency exchange risk US$ 47,415 US$ 27,803,494 US$ 27,850,909-23 -
3. Financial Risk Management (Continued) Currency Risk (continued) December 31, 2011 Euros US$ Total Assets Cash in banks US$ 5,673,060 US$ 225,907,468 US$ 231,580,528 Available-for-sale securities 7,920,839 33,864,753 41,785,592 Held-to-maturity investments - 20,613,384 20,613,384 Loans, net - 5,515,870 5,515,870 Accrued interest receivable 299,924 1,752,803 2,052,727 Other receivables and fixed assets 81 183,340 183,421 Total assets US$ 13,893,904 US$ 287,837,618 US$ 301,731,522 Liabilities Deposits US$ 11,812,631 US$ 264,695,468 US$ 276,508,099 Accrued interest payable 4,502 1,547,997 1,552,499 Other payables - 225,766 225,766 Total liabilities US$ 11,817,133 US$ 266,469,231 US$ 278,286,364 Net exposure to foreign currency exchange risk US$ 2,076,771 US$ 21,368,387 US$ 23,445,158 At the net exposure to Euro is US$47,415 (2011: US$2,076,771). The table below illustrates the sensitivity of the Bank s net income of a reasonably possible +/-0.51% (2011: +/-0.71%) change in foreign currency exchange rates: % Value % Value -0.51 (781) -0.71 (19,094) +0.51 781 +0.71 19,094 Capital Management The Bank s objectives when managing capital are: To continue as a going concern while maximizing the returns to shareholders through the optimization of the debt and equity balance. To maintain a strong capital base to support the development of its business. To ensure compliance with statutory and regulatory capital requirements to which the Bank is subject. - 24 -
3. Financial Risk Management (Continued) Capital Management (continued) The Bank is subject to various regulatory capital requirements administered by the Cayman Island Monetary Authority (CIMA). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank s assets, liabilities, and certain offbalance-sheet items as calculated under regulatory accounting practices. The Bank s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain the higher of US$500,000 or a risk asset ratio of 10% (2011: 10%). The risk asset ratio and capital of the Bank as of are 40.97% (2011: 31.19%) or US$27,687,884 (2011: US$23,445,158). Management believes, as of and 2011, that the Bank meets all regulatory capital adequacy requirements established by CIMA. 4. Fair Value of the Financial Instruments The following methods and assumptions were used by the Bank in estimating fair value disclosures for financial statements: Deposits Placed with Banks - The carrying value approximates fair value due to their short-term nature. Investments Securities - Fair value for investments in securities classified as availablefor-sale securities and held-to-maturity investment are substantially based on quoted market prices or quotations of broker agents and financial institutions that are active in the market of the referenced values. If the market for financial instrument is not active, the Bank established fair value by using a valuation technique. When valuation technique is used to determine fair value, this is reviewed and approved by the Management. As far as practicable, model uses only observable data; however, areas such as credit risk (down and counterparty), volatilities and correlations require judgment to make estimates. Changes in assumptions about these factors could affect reported fair value. - 25 -
4. Fair Value of the Financial Instruments (Continued) Loans Receivable - The fair value of loans is based on the present value of the future cash flows estimated to be collected. Those cash flows are discounted to the current rates for similar groups of loans. Deposits (Liability) - The fair value for time deposits is estimated as the present value of the future cash flows using a discounted interest rate for deposits of similar maturities. Carrying Fair Carrying Fair Value Value Value Value Assets Cash in banks US$ 229,002,829 US$ 229,002,829 US$ 231,580,528 US$ 231,580,528 Available-for-sale securities 30,669,500 30,669,500 41,785,592 41,785,592 Held-to-maturity investments 17,028,071 18,066,385 20,613,384 20,661,240 Loans, net 4,987,691 5,813,685 5,515,870 6,428,906 US$ 281,688,091 US$ 283,552,399 US$ 299,495,374 US$ 300,546,266 Liabilities Deposits Demand US$ 158,013,277 US$ 158,013,277 US$ 164,830,917 US$ 164,830,917 Savings 101,490 101,490 452,210 452,210 Time 96,188,651 98,793,601 111,224,972 114,068,758 US$ 254,303,418 US$ 256,908,368 US$ 276,508,099 US$ 279,351,885 Fair Value Hierarchy IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Bank s market assumptions. These two types of inputs have created the following fair value hierarchy: - Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges and exchanges traded derivatives like futures. - Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). - Level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. - 26 -
4. Fair Value of the Financial Instruments (Continued) This hierarchy requires the use of observable market data when available. The Bank considers relevant and observable market prices in its valuations where possible. Level 1 Level 2 Level 3 Total Available-for-sale securities Public debt US$ 5,682,154 US$ - US$ - US$ 5,682,154 Other institutions 22,892,630 2,094,716-24,987,346 US$ 28,574,784 US$ 2,094,716 US$ - US$ 30,669,500 Level 1 Level 2 Level 3 Total December 31, 2011 Available-for-sale securities Public debt US$ 14,020,003 US$ - US$ - US$ 14,020,003 Other institutions 27,765,589 - - 27,765,589 US$ 41,785,592 US$ - US$ - US$ 41,785,592 The following is a reconciliation of those securities available-for-sale that are measured using a valuation technique whose main support is not based on the observable market data, meaning they are the ones that fell into Level 3 of the fair value measurement hierarchy: Balance at beginning of year US$ - US$ 3,722,522 Transfers out of level 3 - (1,713,634) Net gain in statement of income - 278,613 Sales/amortizations - (2,287,501) Balance at end of year US$ - US$ - Transfers between levels are deemed to have occurred at the beginning of the accounting period. - 27 -
5. Critical Accounting Estimates and Judgments in Applying Accounting Policies The Bank s financial statements include estimates performed by the Bank s management to quantify some of the assets, liabilities, revenues, expenses and commitments included in the balance sheet. The main estimates and assumptions made in preparing the financial statements are the following: Impairment Losses on Loans and Advances The Bank reviews its loan portfolio to assess impairments on a quarterly basis. In determining whether an impairment loss should be recorded in the income statement, the Bank makes estimates as to whether there is any observable information indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. Evidence may include observable information indicating that there has been an adverse change in the payment status of borrowers in a bank, or national or local economic conditions that correlate with defaults on assets in the Bank. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. 6. Related Party Transactions The balances and transactions performed with related parties for the years ended December 31, are as follows: Balance sheet Cash in banks US$ 156,298,380 US$ 208,573,721 Loans US$ 11,600 US$ 6,582 Accrued interest receivable US$ 430,504 US$ 770,113 Deposits US$ 24,902,714 US$ 9,445,480 Other receivable US$ 225,699 US$ - Statement of income Interest income US$ 2,266,769 US$ 2,613,564 Interest expense US$ 143,404 US$ 121,477 Commissions expense US$ 59,943 US$ 65,714 Key management compensation US$ 32,265 US$ 24,199 On a monthly basis, the Bank pays a management fee to a related party based on a 0.01% (2011: 0.01%) of treasury funds and the loan portfolio based on 0.4% (2011: 0.4%) (see Note 15). - 28 -
7. Cash in Banks Cash in banks comprises the following balances: Demand deposits US$ 49,002,829 US$ 28,404,928 Time deposits 180,000,000 203,175,600 229,002,829 231,580,528 Less: Time deposits with original maturities greater than 90 days (80,000,000) (85,000,000) Cash and cash equivalents for the purpose of statement of cash flows US$ 149,002,829 US$ 146,580,528 Time deposits are agreed at fixed interest rate ranging from 0.25% to 1.85% (2011: from 0.20% to 1.77%). 8. Investment Securities Available-for-sale Securities The available-for-sale securities are detailed as follows: Net Interest Amortized Unrealized Fair Rate Maturity Cost Gain Value Government debt 5.88% to Various until US$ 5,037,517 US$ 644,637 US$ 5,682,154 8.70% January 2019 Private debt 3.75% to Various until 5.65% March 2022 23,305,081 1,682,265 24,987,346 US$ 28,342,598 US$ 2,326,902 US$ 30,669,500-29 -
8. Investment Securities (Continued) Available-for-sale Securities (continued) December 31, 2011 Net Interest Amortized Unrealized Fair Rate Maturity Cost Gain (Loss) Value 5.88% to Various until US$ 13,638,102 US$ 381,901 US$ 14,020,003 Government debt 10.00% to January 2019 3.75% to Various until Private debt 5.38% to January 2021 27,914,922 (149,333) 27,765,589 US$ 41,553,024 US$ 232,568 US$ 41,785,592 Held-to-maturity Investments Amortized Cost Other institutions US$ 17,028,071 US$ 20,613,384 Annual interest rates for held-to-maturity investments ranging from 4.50% to 5.37% (2011: 4.50% to 6.88%), and the latest maturity date is January 2018 (2011: January 2018). The movement of investment securities for the year ended December 31 is summarized below: Available- Held to Available- Held to for-sale Maturity for-sale Maturity Balance at January 1 US$ 41,785,592 US$ 20,613,384 US$ 55,541,872 US$ 3,706,245 Additions 9,981,000-5,737,277 17,118,550 Sales and redemptions (23,191,426) (3,585,313) (21,073,434) (211,411) Gain on change in fair value 2,094,334-1,579,877 - Balance at December 31 US$ 30,669,500 US$ 17,028,071 US$ 41,785,592 US$ 20,613,384 The fair values are obtained from a recognized pricing source and quotations obtained from financial institutions active in the referenced values. - 30 -
8. Investment Securities (Continued) Unrealized gain on valuation of available-for-sale securities: Balance at January 1 US$ 232,568 US$ (1,347,309) Net gain from changes in fair value 2,710,515 1,848,990 Net gain transferred to profit/loss on disposal (616,181) (269,113) Net movement during the year 2,094,334 1,579,877 Balance at December 31 US$ 2,326,902 US$ 232,568 9. Loans Loans classification is as follows: Consumer US$ 5,633,758 US$ 6,296,787 Less allowance for loan losses (646,067) (780,917) Loans, net US$ 4,987,691 US$ 5,515,870 Loans consist of credit card loans. Repayments should be made in the month following the charges generated by the cardholder, based on a required minimum payment ranging from 5% to 10% of the outstanding balance of the cardholder. All loans have fixed rates. Nominal interest rate on loans is 16.8% (2011: 16.8%). A summary of the transactions in the allowance for loan losses is as follows: Balance at January 1 US$ 780,917 US$ 646,571 Provision charged to operations 174,768 308,989 Loans written-off (309,618) (174,643) Balance at December 31 US$ 646,067 US$ 780,917-31 -
10. Deposits Deposits from customers are detailed as follows: Demand US$ 158,013,277 US$ 164,830,917 Savings 101,490 452,210 Time deposits 96,188,651 111,224,972 US$ 254,303,418 US$ 276,508,099 All time deposits have fixed interest rates ranging from 0.05% to 4.9% (2011: from 0.1% to 5%). 11. Share Capital Share capital is comprised as follows: Par Value Shares Amount Shares Amount Authorized, issued and fully paid US$1.00 each 20,000,000 US$ 20,000,000 20,000,000 US$ 20,000,000 12. Other Provisions During 2012, the Bank recognized a provision for claims related to worldwide fraud with credit card issue for US$288,063 (2011: US$193,602). - 32 -
13. Commissions and Other Income A detail of commissions and other income is as follows: Fees and commission income: Wire transfer US$ 484,084 US$ 493,453 Others 47,319 72,069 US$ 531,403 US$ 565,522 Other operating income, net: Gain on currency exchange US$ 409,909 US$ 52,434 Other (46,189) 26,790 US$ 363,720 US$ 79,224 14. Net Gain on Sale of Securities The following table details net gain on sale of securities available-for-sale: Net realized (loss) gain on instruments US$ (109,698) US$ 20,073 Realized gain on sale of securities available-for-sale (Note 8) 616,181 269,113 US$ 506,483 US$ 289,186-33 -
15. Commissions and Other Expenses Commissions and other expenses are detailed as follows: Fee and commission expense on: Banking services US$ 111,771 US$ 80,776 Credit cards 828,877 888,019 Management services fees (Note 6) 59,943 65,714 Others 4,532 3,204 US$ 1,005,123 US$ 1,037,713 Other administrative expenses: Papers and materials US$ 1,498 US$ 3,344 Insurance 11,307 14,003 Public services 16,036 15,731 Others 100 169 US$ 28,941 US$ 33,247-34 -