BANCO DE BOGOTÁ S.A. AND SUBORDINATES Notes to the Consolidated Financial Statements

Transcription

1 BANCO DE BOGOTÁ S.A. AND SUBORDINATES At June 30, 2014 and December 31, 2013 (In Millions, Except the Exchange Rate and Net Profit per Share) (1) Reporting Entity Banco de Bogotá S.A. is a private entity headquartered in the city of Bogotá D.C. It was incorporated through Public Instrument No. 1923, drawn up and authenticated on November 15, 1870 by Notary Public No. 2 in Bogotá D.C. Its license to operate was renewed once and for all by the Colombian Superintendency of Finance. The duration of the Bank, as established in its by-laws, extends to June 30, However, the organization may be dissolved or it duration extended prior to that date. The business of the Bank is to perform all operations and to enter into all contracts legally authorized for commercial banks, subject to the requirements and limitations imposed by Colombian law. The Bank was operating at June 30, 2014 with ten thousand four (10.004) employees on contract, three hundred thirty-three (333) working under civil apprenticeship agreements, one thousand one hundred twenty-one (1,121) temporary staff members and one thousand two hundred eighty-five (1,285) employees contracted with Megalínea. In addition, through outsourcing with specialized companies, the Bank also employs a total of three thousand five hundred thirty-nine (3.539) individuals through six hundred three (603) offices, five (5) corporate service centers (CSC), four (4) small-business service centers, fifty (50) collection and payment offices, eighteen (18) business advisory offices, ninety-three (93) non-own-code bank branch extension offices, thirteen (13) bank branch extension offices, eleven (11) premium offices, six (6) centers specialized in home mortgages, one thousand eight hundred seventeen (1,817) banking correspondents, thirteen (13) Servicajas, two (2) customer-only service offices, eight (8) payroll installment lending offices with special services, twenty-five (25) payroll installment lending centers, five (5) core offices, two (2) agencies abroad, one in New York City and the other in Miami, and one (1) branch in Panama City, which is licensed to operate as a local bank. These consolidated financial statements include the following companies. Almacenes Generales de Depósito ALMAVIVA S. A. is involved primarily in the deposit, preservation and custody, management and distribution, purchase and sale of merchandise and products of domestic and foreign origin for its clients. The company also issues warehouse receipts and collateral certificates or warehouse liens. ALMAVIVA S. A. consolidates with its subordinates Almaviva Global Cargo, Comercializadora Internacional S. A., South Logistic S. A. and Zona Franca S.A. Fiduciaria Bogotá S.A. enters into mercantile trust and agency trust agreements without transfer of ownership, as provided for by law. Its primary business is to acquire, dispose of, encumber and manage movable assets and real estate, and to invest as a debtor or creditor in all types of lending operations. Corporación Financiera Colombiana S.A. raises and allocates capital to promote the creation, reorganization, merger, transformation and expansion of all types of companies, to acquire ownership interest in those companies, and to encourage third parties to do so. It also offers these companies medium and long-term financing and specialized financial services that contribute to their development. These companies do not include those subject to control and supervision by the Colombian Superintendency of Finance, with the exception of financial service firms and lending institutions. Corporación Financiera Colombiana S.A. consolidates with a number of financial subordinates; namely, Leasing Corficolombiana S.A., Banco Corficolombiana (Panama) S.A. (a finance company located outside the country), Fiduciaria Corficolombiana S.A. and real-sector subordinates Organización Pajonales S.A., Hoteles Estelar de Colombia S.A., Gas Comprimido del Perú S.A. (a company outside the country), Valora S.A., Proyectos de Infraestructura S.A., Epiandes S.A., Promotora y Comercializadora Turística Santamar S.A., Colombiana de Licitaciones y Concesiones Ltda., Tejidos Sintéticos de Colombia S.A., Plantaciones Unipalma de los Llanos S. A., Pizano S.A. (currently being restructured), Estudios y Proyectos del Sol S.A. (formerly Inversora en Aeropuertos S.A.), Industrias Lehner S.A., Proyectos de

2 2 Ingeniería y Desarrollos S.A.S., CFC Gas Holding S.A.S., CFC Private Equity Holdings S.A.S. and CFC Energy Holding S.A.S.. The financial sector shareholders of Corporación Financiera Colombiana S.A. signed an agreement giving Banco de Bogotá control of the company, as it is the largest shareholder. The purpose was to consolidate the financial statements pursuant to External Circular 100/1995, issued by the Colombian Superintendency of Finance, and Law 222/2005. Sociedad Administradora de Pensiones y Cesantías Porvenir S. A. was incorporated on October 22, 1991 and is headquartered in Bogotá. Its business is to administer and manage the type of pension and severance funds authorized by law. Under the law, both these funds are third-party portfolios separate from the portfolio of the company managing them. Porvenir consolidates its financial statements with Gestión y Contacto S.A. Ninety-nine point ninety-nine percent (99.99%) of AFP Horizonte Pensiones y Cesantías S.A. was acquired on April 18, The merger by absorption of AFP Horizonte S.A., was completed, thereby consolidating Porvenir as the largest pension and severance fund manager in the country in terms of the resources it manages and the number of affiliates. Casa de Bolsa S.A. Sociedad Comisionista de Bolsa (formerly Valores de Occidente Sociedad Comisionista de Bolsa S.A.) is a private company established through Public Instrument No drawn up on July 22, Under a brokerage agreement, it offers financial services that include the purchase and sale of securities listed on the stock exchange, securities and mutual fund management, proprietary trading, securities brokerage and consulting on capital markets, under the terms and conditions determined by the Board of Directors of the Central Bank of Colombia (Banco de la República). It was authorized by the Colombian Superintendency of Finance to conduct its business pursuant to Resolution No issued on August 13, The duration of the company is until Banco de Bogotá is invested directly in this subordinate, with twenty-two point seventy-nine percent (22.79%) ownership interest, and indirectly through Corporación Financiera Colombiana S.A., a subordinate company in which it has thirty-eight point ninety-five percent (38.95%) ownership interest. Banco de Bogotá S.A. Panamá operates in the Republic of Panama with a general and international license to conduct banking business in and outside that country. It consolidates with the subordinate entity known as Banco de Bogotá (Nassau) Limited. Bogotá Finance Corporation is a financial entity created specifically to issue floating-rate securities guaranteed by the parent company (the Bank). In recent periods, the company has maintained an investment as its only income-earning activity. Leasing Bogotá S.A. Panamá was established in 1972 under the Corporate and Partnership Act of the Republic of Panama and currently operates solely as a company holding shares in other financial-sector firms. It is owned entirely by Banco de Bogotá, S.A. and consolidates with BAC Credomatic Inc. and Banco Bac Panama (formerly BBVA Panama).

3 3 - Acquisitions On December 19, 2013, Banco de Bogota S.A., through its subsidiary Credomatic International Corporation (CIC), which operates as part of BAC Credomatic in Central America, acquired 100 % of all issued and outstanding shares in Banco Reformador de Guatemala and Transcom Bank (Barbados) Limited, a subsidiary of the Bank. The acquisition cost US$421 and the resources available in CIC were used to fund it, as follows: (i) $282 from securitization of future American Express credit card flows: and (ii) a short-term loan for $ 139. On December 19, 2013, Banco de Bogota S.A., through its subsidiary Leasing Bogota S.A. Panama, acquired % of the issued and outstanding shares in Banco Bilbao Vizcaya Argentaria (Panama) S.A. (BBVA Panama ), now BAC Bank Panama, for US$505. Banco de Bogota S.A. issued $1.3 billion in ordinary shares, with preferential subscription rights (Note 20), to provide Leasing Bogota S.A. Panama with the resources required for the transaction. The following are the assets and liabilities received in these purchases, as registered according to U.S. GAAP at December 31, Grupo Reformador Banco BAC Panamá Total Acquisitions (Figures in USD) Assets Cash and cash equivalents USD 270,778, ,778, ,557,003 Certificates of deposit 51,567,509 1,428,878 52,996,387 Investments in securities 208,680,690 29,495, ,176,092 Loans receivable 1,005,313,232 1,417,286,521 2,422,599,753 Property and equipment 24,628,106 8,969,231 33,597,337 Assets awarded 11,909, ,909,715 Investments in equity securities 0 4,220,720 4,220,720 Other assets 26,504,036 30,077,779 56,581,815 Total acquired assets USD 1,599,381,330 1,879,257,492 3,478,638,822 Liabilities Deposits 1,204,250,781 1,533,408,497 2,737,659,278 Obligations payable 209,657,059 46,571, ,228,488 Other liabilities 32,481, ,219, ,700,696 Non-controlling interest 0 2,043,148 2,043,148 Total assumed liabilities 1,446,389,497 1,691,242,113 3,137,631,610 Total acquired net assets USD 152,991, ,015, ,007,212 The following equivalents were developed to determine goodwill, pursuant to Colombian accounting principles and instructions from the Colombian Superintendency of Finance. (Figures in USD) Detail Transcom Reformador Banco BAC Panamá Total Equity US Gaap 40,622, ,369, ,058, ,050,361 Percentage acquired 100% 100% 98.92% Acquired equity US Gaap 40,622, ,369, ,015, ,007,212 Impact of equating adjustments (779,450) (1,137,096) (650,033) (2,566,579) Loan portfolio (862,634) (3,373,164) (4,782,273) (9,018,071) Interest suspension 0 (12,575) (49,508) (62,083) Costs & commissions for execution 0 (518,920) (329,212) (848,132) Long-life assets 0 (325,651) 2,868,742 2,543,091 Foreclosures 122, ,706 (488,637) (441) Guarantees , ,000 Deferred tax 0 1,418, ,418,343

4 4 Detail Transcom Reformador Banco BAC Panamá Total Deferred tax on adjustments from equating 76,638 1,492,132 1,394,103 2,962,873 Reappraisal of investments (115,944) (21,597) 149,688 12,147 Deferred charges 0 (161,370) 0 (161,370) Non-controlling interest 0 0 7,064 7,064 Acquired equity: Banking Gaap 39,843, ,232, ,365, ,440,633 Total amount paid 82,881, ,090, ,139, ,111,466 Goodwill: Banking Gaap 43,037, ,858, ,774, ,670,833 Corporación Financiera Centroamericana S.A. (FICENTRO) is incorporated under Panamanian law and has its headquarters in Panama City. It was engaged primarily in managing loans granted to companies operating outside the Republic of Panama. Ficentro currently is dedicated solely to loan recovery and administering the disposal of assets received for sale. The company s management has expressed its intention to keep the firm functioning, but with no additional operations. There are no plans to liquidate it in the near future. Megalinea S.A. is involved in loan management and collection through pre-trial, trial and out-of-court action. The following is the value of the assets, liabilities and earnings of the Bank and its subordinates at June 30, 2014 and December 31, 2013, as included in the consolidation. Entity Assets % Held Liabilities June 30 % Held Equity % Held Direct Operating Profit Banco de Bogotá S.A. (Bank) $ , , , , ,6 Almacenes Generales de Depósito Almaviva , , , , ,6 SA & Subordinates Fiduciaria Bogotá S.A , , , , ,2 Corporación Financiera Colombiana S.A. & , , , , ,6 Subordinates Sociedad Administradora de Pensiones y Cesantías , , , , ,2 Porvenir S.A & Subordinates Banco de Bogotá S.A. - Panamá & , , , , ,0 Subordinate Bogotá Finance Corporation 159 0,0 0 0, ,0 1 0,0 1 0,0 Leasing Bogotá S.A. Panamá , , , , ,7 Corporación Financiera Centroamericana S.A 5 0,0 5 0,0 0 0,0 0 0,0 0 0,0 Ficentro Megalínea S.A , , ,0 69 0,0 (26) 0,0 Casa de Bolsa S.A , , ,1 (235) 0,0 11 0, , Eliminations ( ) ( ) ( ) ( ) Consolidated $ % Held Profit (Loss) for the Period % Held

5 5 Entity Assets % Held Liabilities December 31 % Held Equity % Held Direct Operating Profit % Held Profit (Loss) for the Period Banco de Bogotá S.A. (Bank) $ 57,327, ,773, ,554, , , Almacenes Generales de Depósito Almaviva 209, , , , , SA & Subordinates Fiduciaria Bogotá S.A. 234, , , , , Corporación Financiera Colombiana S.A. & 14,061, ,033, ,027, , , Subordinates Sociedad Administradora de Pensiones y Cesantías 1,645, , ,129, , , Porvenir S.A & Subordinates Banco de Bogotá S.A. - Panamá & 2,004, ,881, , , , Subordinate Bogotá Finance Corporation Leasing Bogotá S.A. Panamá 35,213, ,085, ,128, , , Corporación Financiera Centroamericana S.A Ficentro Megalínea S.A. 7, , , (260) Casa de Bolsa S.A. 48, , , ,752,179 88,420,936 22,331,243 1,665,891 1,285,131 Eliminations (10,083,147) 2,350,730 (12,433,877) (456,076) (640,489) Consolidated $ 100,669,032 90,771,666 9,897,366 1,209, ,642 % Held (2) Principal Accounting Policies (a) Basic Policy on Accounting and Consolidation The accounting policies and preparation of the financial statements of the Bank and its national subordinates are in keeping with the accounting principles generally accepted in Colombia and the instructions imparted by the Colombian Superintendency of Finance. Intercompany accounts and transactions are eliminated when consolidating the financial statements. (b) Equating and Standardizing the Accounting Policies of National and Foreign Subsidiaries As part of the process to consolidate the financial statements, the Bank coordinates with its national and foreign subordinates to equate their financial statements to the Single Plan of Accounts for the Colombian Financial System (PUC in Spanish), as defined by the Colombian Superintendency of Finance. The Bank also coordinates efforts to adjust the accounting policies of its subordinates to the accounting policies generally accepted by the financial sector in Colombia, quantifying the respective adjustments that affect each subsidiary. It is the responsibility of the parent company to ensure accounting policies and practices are applied uniformly to similar transactions and events in comparable circumstances. The requirement to equate

6 6 does not apply when the controlling company has no transactions similar to those of the companies it controls. Standardizing the financial statements of the Bank s foreign subordinates has the following impact on the consolidated financial statements. Leasing Bogotá Panamá June 30 Assets Liabilities Equity Earnings for the Period US Gaap figures $ 34,329,863 29,127,999 5,201, ,733 Reversal purchase price allocation Us Gaap 27,344 (93,378) 120,722 28,486 Derivative operations, net 323, , Reclassification of non-controlling interest (886) 0 Equating adjustments to Colombian financial principles - Banking Gaap (108,861) (31,998) (76,863) (115,270) Figures in the consolidated statement $ 34,572,318 29,327,481 5,244, ,949 December 31 Assets Liabilities Equity Earnings for the Period US Gaap figures $ 35,126,134 30,025,211 5,100, ,937 Derivative operations, net (27,399) (117,915) 90,516 (40,563) Reversal purchase price allocation Us Gaap 200, , Reclassification of non-controlling interest 0 4,280 (4,280) 0 Equating adjustments to Colombian financial principles - Banking Gaap (85,699) (26,777) (58,922) (36,553) Figures in the consolidated statements $ 35,213,283 30,085,046 5,128, ,821 June 30 Assets Liabilities Equity Earnings for the Period Banco de Bogotá Panamá IFRS figures $ 1,631,611 1,495, ,381 13,577 Equating adjustments to Colombian financial principles - Banking Gaap 2,206 (330) 2,536 (667) Figures in the consolidated statements $ 1,633,817 1,494, ,917 12,910 December 31 Assets Liabilities Equity Earnings for the Period IFRS figures $ 2,002,057 1,882, ,865 3,159 Equating adjustments to Colombian financial principles - Banking Gaap 2,477 (672) 3, Figures in the consolidated statements $ 2,004,534 1,881, ,014 3,964

7 7 c) Cash Flow Statement and Cash Equivalents The cash flow statement is prepared using the indirect method. For that purpose and in addition to cash, the Bank regards as cash equivalents asset positions that mature in less than 90 days and are readily convertible to cash with insignificant risk of changes in value. (d) Conversion of the Financial Statements of Foreign Subordinates The assets, liabilities and equity in foreign currency included in the consolidation were converted into Colombian pesos at the representative market rate of exchange (TRM in Spanish), as calculated on the last business day of the month and certified by the Colombian Superintendency of Finance. The respective rates at June 30, 2014 and December 31, 2013 were $1, (in pesos) and $1, (in pesos). The nominal accounts were converted into Colombian pesos at $1, (in pesos) y $1, (in pesos) per dollar. These are the average representative market exchange rates posted between January 1 and June 30, 2014, in that order. The average rate was calculated excluding Saturdays, Sundays and holidays, then divided by the number of business days in the respective six-month period. (e) Money Market Assets and Liability Operations and Similar Positions This account groups interbank operations, repos, simultaneous operations and temporary transfers of securities, as explained below. Ordinary Interbank Funds These are funds the Bank and its subordinates place with or receive directly from another financial institution, with no agreement to transfer investments or loans. Also included in this category are overnight operations conducted with financial institutions outside the country, using own funds. The interest income generated by these operations is entered on the statement of operations. Repurchase Operations (Repos) Asset Position Repos are transactions involving the placement of secured funds with other financial institutions. The Bank and its subordinates purchase investments in debt securities under a commitment to resell them to the counterparty at a set price, plus interest at a fixed rate, on a specific date not to exceed one year. The amount entered in this account is the value of the disbursed funds, and the purchased investments are recorded in contingent accounts. The accrued interest is entered under accounts receivable. Liability Position These are transactions involving the receipt of secured funds. The Bank sells investments in debt securities with a commitment to repurchase them at a certain price, plus interest, on a specified date not to exceed one year. The values received are entered as liabilities and the sold investment is reclassified

8 8 within the investment portfolio in the account entitled "Investments sold under repurchase agreements". Accrued interest is recorded under accounts payable. Simultaneous Operations The asset and liability positions in simultaneous operations are similar to those in repo operations. In transactions of this type, no restrictions may be placed on the mobility of the securities in question and the initial amount may not be calculated with a discount on the market price of the securities involved. The securities received in money market operations (repos and simultaneous) are valued daily at fair market prices, based on the prices published by the trading systems, and the guarantees received or pledged are valued the same way in memorandum accounts. Money market operations are entered in contingent accounts to recognize and disclose receipt of the respective value. The yields agreed on in money market operations are calculated exponentially during the term of the transaction. Consequently, these returns represent income (for asset operations) or an outlay (for liability operations) and are recognized in the statement of operations according to the principal of accrual accounting. Securities delivered in repo and simultaneous transactions are reclassified to a transfer rights account, within the same investment account, until the operation is complete. They also are recorded in contingent memorandum accounts. The collateral received in repo and simultaneous transactions is recorded in contingent memorandum accounts and is only recorded in balance sheet accounts when the so-called short position is sold. Securities Lending Securities lending or temporary transfer operations are those in which one party (the "originator") transfers possession of the securities (involved in the transaction) to the other party (the "recipient"), under an agreement to re-transfer them on the same date or on a later date. Concurrently, the recipient will transfer to the originator possession of other securities or a sum of money equal to or greater than the value of the securities in the transaction. When the transaction is reversed, both the originator and the recipient must restore possession of securities of the same kind and characteristics as those received in the transaction, or the amount of money received, as applicable. (f) Investment Securities This account includes investments acquired by the Bank and its subordinates to maintain a secondary liquidity reserve, to gain direct or indirect control of any company in the financial or service sector, to comply with legal or regulatory requirements, or solely to eliminate or reduce the market risk to which assets, liabilities and other items on the financial statements are exposed.

9 9 All investments by the Banks and its subordinates are reappraised using information provided by INFOVALMER S.A., which is a pricing service. It supplies the information required to reappraise investments in each segment of the market (prices, rates, curves, margins, etc.) and issues and provides methods to reappraise the investments needed to comply with the corporate business, doing so in accordance with the parameters outlined in Chapter I of the Basic Accounting and Financial Circular issued by the Colombian Superintendency of Finance. The different types of investments are classified, reappraised and entered on the books as indicated in the following table. Trading Characteristics Valuation Entered on the Books Short term Securities acquired to turn a profit on short-term price fluctuations Investments in the form of debt securities are valued based on the price determined by the valuation pricing service. On days when the fair price cannot be found or estimated, these securities are valued exponentially, based on the internal rate of return. This procedure is performed daily. The difference between the actual market value and the immediately preceding value is entered as a gain or loss in the value of the investment, and the balancing item affects earnings for the period. This procedure is performed daily. Investments are valued at market prices as of the same day they are acquired. Therefore, changes or differences between the purchase price and market value of investments also are recorded as of the purchase date. Held to Maturity Term to maturity Characteristics Valuation Entered on the Books These are securities the Bank and its subordinates seriously intend to hold to maturity or to the redemption date and have the legal, contractual, financial and operational capacity to do so. These investments may not be used in liquidity operations, nor for repos, simultaneous operations or securities lending, unless they are forced or mandatory investments subscribed in the primary market and the other party in the operation is the Central Bank of Colombia Exponentially, according to the internal rate of return calculated at the time of purchase, based on a year with 365 days When there is objective evidence of a loss due to deterioration in the value of these assets, the book value will be reduced directly and the loss will be recognized in the earnings for the period. This procedure is performed daily. The present value is entered as an increase in the value of the investment, and its balancing item is recorded in the earnings for the period. Required yield pending collection is recorded as an increase in the value of the investment. Consequently, collection of any such yield should be entered as a decline in the value of the investment. This procedure is performed daily.

10 10 Held to Maturity Characteristics Valuation Entered on the Books (Banco de la República), the General Office of Public Credit and the National Treasury, or an entity supervised by the Colombian Superintendency of Finance. They also may be delivered to a central counterparty clearing house as collateral to back compliance with operations it has accepted for clearing and settlement. Available for Sale Debt Securities Characteristics valuation Entered on the Books One year up to November 22, 2013 and six (6) months as of that date. These are securities the Bank and its subordinates seriously intend to hold for at least six (6) months from the date they were classified in this category, and have the legal, contractual, financial and operational capacity to do so. On the first business day following completion of that six-month period, these securities may be reclassified as held for trading or held to maturity. If not, they will remain classified as available for sale. Securities classified as investments available for sale may be pledged as collateral guarantees to a central counterparty clearing house to back compliance with operations it has accepted for clearing and settlement. Investments in debt securities are valued on the basis of the price determined by the valuation pricing service. On days when the fair price cannot be found or cannot be estimated, these securities are valued exponentially, based on the internal rate of return. This is a daily procedure. Changes in these securities are entered on the books as follows. - The difference between the present value on reappraisal day (calculated exponentially from the internal rate of return assessed at the time of purchase, based on a year with 365 days) and the immediately preceding value is recorded as an increase or decrease in the value of the investment, and is credited or charged to the nominal accounts. - The difference between market value and the present value calculated according to the preceding paragraph is entered in the equity accounts as an unrealized accumulated gain or loss. This procedure is performed daily. These investments also may be used for liquidity operations,

11 11 Available for Sale Debt Securities Characteristics valuation Entered on the Books repos, simultaneous operations or securities lending. Available for Sale Equity Securities Characteristics Valuation Entered on the Books No term Investments whereby the Bank becomes joint owner of the issuer. This category includes securities with high, medium, low or minimal turnover or unlisted securities and those held by the Bank as controlling interest in its capacity as a parent company or head office, in or outside the country. For the purpose of their sale, these investments need not be held for six (6) months. Equity securities listed in the national registry of securities (RNVE) (Spanish acronym): These are valued according to the price determined by the valuation pricing services authorized by the Colombian Superintendency of Finance. Mutual funds and securitizations are valued according to the unit of value calculated by the management company on the day prior to reappraisal. Equity securities quoted only on foreign stock exchanges: These are valued based on the price determined by the valuation pricing services authorized by the Colombian Superintendency of Finance. If there is no reappraisal method, the most recent closing price in the last five (5) trading days shall be used, including the reappraisal day or the simple average of the closing prices reported in the last 30 days. If they are traded on more than one foreign stock exchange, the value on the home market will be used. The price of the security is converted into domestic currency. Equity securities listed in foreign securities exchange systems authorized in Colombia: Are valued at the price supplied by Low or minimum turnover or unlisted - The difference between the market or updated value of the investment and the book value is recorded as follows: If greater, it is used first to reduce the allowance or for a downward adjustment in value until exhausted, and the excess is recorded as an equity reappraisal surplus. If less, the difference is used to reduce the equity reappraisal surplus until exhausted, and the remainder is recorded as a loss in market value. - When dividends or profits are distributed in kind, including those from capitalization of the equity reappraisal account, the portion entered on the books as an equity surplus is treated as income, chargeable to the investment, and that surplus is reversed. - When dividends or profits are distributed in cash, the amount entered as an equity reappraisal surplus is recorded under income, thereby reversing that surplus. The amount of dividends that exceeds it is recorded as a decline in the value of the investment. High and Medium Turnover The updated market value of securities with high and medium turnover or those

12 12 Available for Sale Equity Securities Characteristics Valuation Entered on the Books the valuation pricing services authorized by the Colombian Superintendency of Finance. Equity securities not listed on a stock exchange: Are valued at the price determined by the valuation pricing service designated as official for the respective segment. When the pricing service has no method for valuing these investments, institutions shall increase or decrease the acquisition cost in proportion to the percentage of ownership interest the investor has in subsequent variations in the issuer s equity, calculated on the basis of certified financial statements at December 31 and June 30 of each year, or the most recent ones, if known. quoted on internationally recognized foreign stock exchanges is recorded in the equity accounts as an unrealized accumulated gain or loss and credited or charged to the investment, as the case may be. This procedure is performed daily. Dividends or profits distributed in cash or kind, including those from capitalization of the equity reappraisal account, are entered as income up to the amount pertaining to the investor with respect to profits or reappraisal of the issuer s equity, as recorded by the latter from the date the investment was acquired, chargeable to accounts receivable. Investment Reclassification For an investment to remain in any of the classification categories, it must comply with the characteristics or conditions particular to the type of investments in that category. The Colombian Superintendency of Finance may order the institution to reclassify a security at any time, if it does not comply with the characteristics particular to the category in which it is classified or when reclassification is required for better disclosure of the financial situation. Investments may be reclassified pursuant to the following provisions: Reclassification from investments held to maturity to investments held for trading is possible in any of the circumstances listed below: Significant deterioration in the conditions of the issuer, its parent company, its subordinates or its affiliates Changes in regulations that make it impossible to maintain the investment

13 13 Mergers that lead to reclassification or sale of the investment to maintain the previous interest-rate risk position or to adjust to the credit risk policy established beforehand by the resulting entity. Other unforeseen events, subject to prior authorization from the Colombian Superintendency of Finance. Reclassification from investments available for sale to investments held for trading or held to maturity is possible in any of the following circumstances: Completion of the six-month period applying to this classification. When the investor loses its capacity as a parent or controlling company, provided this circumstance involves a decision to dispose of the investment or the primary intent is to profit from short-term price fluctuations, as of that date. When the conditions of the issuer, its parent company, its subordinates or its affiliates have deteriorated significantly. When changes in regulations make it impossible to maintain the investment. When mergers lead to reclassification or sale of the investment to maintain the previous interest-rate risk position or to adjust to the credit risk policy established beforehand by the resulting entity. When the investment goes from low or minimum turnover or unquoted to high or medium turnover. When investments held to maturity or available for sale are reclassified as trading investments, the rules applicable to the latter with respect to reappraisal and accounting are to be observed. Consequently, unrealized gains or losses are treated as income or expenses on the date of reclassification. Securities reclassified as trading investments may not be reclassified again. Investment Repurchase Rights This account records investments that represent collateral guarantees for investment repurchase agreements. All economic rights and benefits associated with the value of these investments are preserved and all risks inherent in that value are retained, even though legal ownership is transferred when the operation is conducted in the money market. These securities continue to be valued daily and entered on the balance sheet and the statement of operations pursuant to the method and procedure applicable to investments classified as trading, held to maturity and available for sale, depending on the category in which they were listed before the repurchase agreement was acquired.

14 14 Investments Pledged as Collateral Guarantees These are investments in debt securities pledged as collateral to back compliance with operations accepted for clearing and settlement by the Central Counterparty Clearing House. They are valued daily and entered on the balance sheet and the statement of operations pursuant to the method and procedure applicable to the category in which they were listed before being pledged as collateral. Allowances or Losses, by Credit Risk Rating The price of trading investments for which there is no fair price on the day of reappraisal and the price of investments classified as held to maturity must be adjusted on each reappraisal date, based on the credit risk rating and pursuant to the following criteria: Unrated Issues or Allowances: Securities with no external rating or those issued by unrated entities are classified as follows. Category/Risk Characteristics Allowances A-Normal B- Acceptable They comply with the terms agreed on in the instrument, and the issuer has sufficient capacity to pay the principal and interest. This classification pertains to issues with uncertainty factors that could affect the capacity to continue to service the debt adequately. In addition, the financial statements and other available data show weaknesses that might affect the issuer s financial situation. None required The net value may not exceed eighty percent (80%) of the acquisition cost, net face value of amortization up to the reappraisal date. C- Appreciable D- Significant These are issues with high or medium probability of default on prompt payment of principal and interest. Moreover, the financial statements and other available data show weaknesses in the issuer s financial situation that could jeopardize recovery of the investment. These are issues that default on the terms agreed in the instrument. In addition, the respective financial statements and other available data show serious weaknesses in the issuer s financial situation, so much so that there is very little likelihood of recovering the investment. The net value may not exceed sixty percent (60%) of the acquisition cost. In the case of debt securities, their book value may not exceed eighty percent (80%) of the net face value of amortization prior to the reappraisal date. The net value may not exceed forty percent (40%) of the acquisition cost. E-Uncollectable Issuers with financial statements and other available data suggesting the investment is uncollectible. Also, if there are no financial statements at December 31 and June 30 of each year. The value of these investments is provisioned in its entirety.

15 15 Externally-rated Issues or Issuers Debt securities with one or more ratings and those ranked by external credit rating agencies recognized by the Colombian Superintendency of Finance may not be recorded for an amount that exceeds the following percentages of the net face value of amortization prior to the reappraisal date. Long-term Rating Maximum Value % Short-term Rating Maximum Value % BB+, BB, BB- Ninety (90) 3 Ninety (90) B+, B, B- Seventy (70) 4 Fifty (50) CCC Fifty (50) 5 and 6 Zero (0) DD,EE Zero (0) 5 and 6 Zero (0) The respective issuer s rating is used to estimate the allowances for time deposits. The allowance for investments classified as held to maturity and for which a fair value can be determined, as stipulated in the case of trading securities or those available for sale, is the difference between the book value and said price. Domestic or foreign government debt securities issued or guaranteed by the nation, those issued by the Central Bank of Colombia and those issued or backed by the Guarantee Fund for Financial Institutions (FOGAFIN) are not subject to these provisions. Method Used to Calculate the Proportional Value of Equity In cases involving purchases made prior to December 31, 1976, the proportional equity value of the sum of those acquisitions is calculated with the equity recorded by the institution on that date, applying the percentage of equity investment accumulated at December 31, 1976 to each component of equity. The step-by-step method is used for each subsequent purchase representing an increase in that interest or equity investment, regardless of the percentage. The sum of the value of each equity component determined according to the percentage of interest or equity investment acquired with each purchase is matched against the cost of each purchase to identify a difference of greater or lesser value between the cost versus the acquired equity. If the cost is greater than the acquired equity, it is treated as a surplus investment cost, or an investment cost shortfall, if it is less. The amortization period for these surpluses or shortfalls is five (5) years from the moment control is acquired. Those obtained in subsequent acquisitions are amortized during the period remaining to complete the five (5) years. Those obtained after the five (5) years must be amortized in full at the time they are determined. Amortization is entered against the earnings for the accounting period or previous periods, as appropriate.

16 16 g) Loans and Financial Leases These accounts record loans made according to the different types of authorized lending. The funds used to extend loans come from the Bank s own resources, the public (in the form of deposits), and other external and internal sources of funding. Loans are entered on the books at their disbursement value, except in the case of factoring operations, which are recorded at cost. The loan portfolio is classified according to four (4) types of credit: Commercial These are loans made to persons or legal entities to develop organized business activities. They are different from microcredit. Consumer These loans, regardless of the amount, are made to persons to finance the acquisition of consumer goods or the payment of non-commercial or non-business services. They are different from microcredit. Mortgage These loans, regardless of the amount, are granted to persons for the purchase of new or used housing, or the construction of individual homes. As provided for under Law 546/ 1999, they are denominated in constant-value units (UVR-Spanish acronym) or in domestic currency, and are backed by a first mortgage on the property being financed. The payback period ranges from a minimum of five (5) years to a maximum of thirty (30). These loans may be prepaid all or in part at any time, without penalty. In the event of partial prepayments, the borrower is entitled to decide if the amount paid will go to reduce the monthly installment or the mortgage payback period. Moreover, these loans have a remunerative rate of interest, which is applied to the outstanding balance denominated in pesos or UVR. Interest is charged in arrears and may not be capitalized. The amount of the mortgage may be for as much as seventy-percent (70%) of the value of the property, as determined by the purchase price or by a professional appraisal done within six (6) months before the loan is granted. Loans to finance low-income housing may be for as much as eighty percent (80%) of the value of the property. In all cases, the property being financed must be insured against fire and earthquake. Microcredit These are the loans referred to in Article 39, Law 590/2000, as amended, substituted or expanded, and those made to micro-businesses where the primary source of repayment is the income derived from their commercial activity. The borrower s debit balance may not exceed one hundred twenty (120) times the minimum monthly wage (SMMLV: Spanish acronym) in effect at the time the loan is approved. The debit balance is understood

17 17 as the sum of what the micro-business still owes on loans from the financial system and other sectors, as listed in the records of the database operators consulted by the respective lender, excluding home mortgages and adding the value of the new loan. A micro-business is understood as any unit of economic pursuit established by a private person or legal entity to engage in rural or urban business, farming, industrial, commercial or service activities, with a staff of no more than ten (10) workers and total assets that do not exceed five hundred (500) times the minimum monthly wage (SMMLV) in effect at the time. Credit Risk Assessment Criteria The Bank and its subordinates continuously assess the risk inherent in their loan assets. This is done when the loan is granted and throughout its life, even in cases of restructuring. The Credit Risk Management System (SARC Spanish acronym) was designed and adopted for that purpose. It is comprised of credit-risk management policies and processes, reference models to estimate or quantify anticipated losses, a system of allowances to cover credit risk, and processes for internal control. Loans are granted on the basis of what is known about the potential borrower and the borrower s creditworthiness. The terms of the loan agreement to be entered into are taken into account as well. Among others, these include the financial terms of the loan, the collateral, sources of payment and the macroeconomic conditions to which the borrower might be exposed. The loan approval process involves a series of variables established for each of the portfolios. These make it possible to identify borrowers who fit the organization s risk profile. The segmentation and discrimination processes for loan portfolios and their potential borrowers serve as the basis for their rating. The methods and procedures included in the loan approval process make it possible to monitor and control credit exposure for the various individual portfolios and the aggregate portfolio alike, thereby avoiding an excessive concentration of lending per borrower, economic sector, economic group, risk factor, etc. The Bank and its subordinates constantly monitor and rank lending operations pursuant to the loan approval process, which is founded on several criteria. These include information on the historical pattern of the portfolios and individual loans; the particular characteristics of borrowers, their loans and the collateral backing them; the borrower s credit history or reputation with other institutions; financial information that provides an understanding of the borrower s financial situation; and the macroeconomic and sector variables that might affect the normal development of lending operations. When assessing regional government agencies, the Bank and its subordinates verify compliance with the provisions contained in laws 358/1997, 550/1999 and 617 / Loan Assessment and Re-rating The Bank and its subordinates evaluate the risk to their loan portfolio, making changes in the respective ratings when justified in light of new analysis or information.

18 18 The Banks and its subordinates fulfill this obligation by considering the borrower s credit history with other lenders, particularly if the information provided by credit reporting agencies or other sources shows the borrower has restructured loans at the time of the assessment. In any case, the Bank and its subordinates assess and reclassify the loan portfolio i) when loans fall into arrears after being restructured, in which case they must be reclassified immediately, and ii) during May and November, at the very least, recording the results of the assessment and reclassifying as needed at the close of following month. Credit Risk Rating The Bank and its subordinates classify and rate commercial and consumer loans in the respective risk categories, taking into account the following objective conditions, at the very least. Commercial and consumer loans are classified and rated in the respective risk categories, pursuant to the rules outlined in Chapter II of Basic Accounting and Financial Circular 100/ 1995, as detailed in Attachment 3 concerning application of the Commercial Loan Reference Model (MRC in Spanish) and Attachment 5 containing instructions on the Consumer Loan Reference Model (MRCO in Spanish). Credit risk assessment is based on a variety of criteria; namely, loan arrears aging, information related to the historical performance of portfolios and loans, the particular characteristics of the borrowers, their credit history with other lenders, financial information, and sector and macroeconomic variables, as indicated below. Category New Existing Commercial Loans Existing Consumer Loans AA New loans that are rated AA when approved. Loans with a rating equivalent to AA based on the legally approved MRC method. Loans with a rating equivalent to AA based on the legally approved MRCO method. A New loans that are rated A when approved should be assigned to this category. Loans with a rating equivalent to A based on the legally approved MRC method. Loans with a rating equivalent to A based on the legally approved MRCO method. BB New loans that are rated BB when approved should be assigned to this category. Loans with a rating equivalent to BB based on the legally approved MRC method Loans with a rating equivalent to BB based on the legally approved MRCO method. B New loans that are rated B when approved should be assigned to this category. Loans with a rating equivalent to B based on the legally approved MRC method Loans with a rating equivalent to B based on the legally approved MRCO method. CC New loans that are rated CC when approved should be assigned to this category. Loans with a rating equivalent to CC based on the legally approved MRC method. Loans with a rating equivalent to CC based on the legally approved MRCO method.. Default Existing loans 150 days past due, or more. Consumer loans more than 90 days past due.

19 19 The following table shows the equivalent risk ratings for commercial and consumer loans used in the borrowing reports and for entries in the financial statements of the Bank and its subordinates. Group Category A B C Commercial AA A BB B CC C Reporting Categories Consumer AA A - currently 0-30 days past due A - currently over 30 days past due BB B CC D D D E E E The following equivalences are used when the Bank and its subordinates classify their customers as being in default, based on application of the reference models adopted by Colombian Superintendency of Finance. Group E = Clients in default with an assigned LGD equal to one hundred percent (100%). Group D = All other clients rated as being in default. For the purpose of equivalence in consumer loans, the current arrears shown in the foregoing table are understood at the maximum posted by the borrower for aligned products at the evaluation date. The Bank and its subordinates must classify borrowers in higher risk categories when they are aware of additional elements of risk to support this change. Mortgage loans and microcredit are placed in the following categories, taking loan arrears aging into account: Category Microcredit Mortgage Loans C A Normal Risk Existing loans up to one (1) month past due With installments current or up to two (2) months past due B Acceptable Risk Loans over (1) and up to two (2) months past due Over two (2) and up to five (5) months past due C Appreciable Risk Loans over two (2) and up to three (3) months past due Over five (5) and up to 12 months past due

20 20 Category Microcredit Mortgage Loans D Significant Risk Loans over three (3) and up to four (4) months past due Over 12 and up to 18 months past due E Risk of Being Uncollectible Loans over four (4) months past due Over 18 months past due Restructuring Processes Restructuring a loan is understood as any exceptional mechanism implemented through legal steps taken to enable borrowers to discharge their obligations appropriately in the face of real or potential constraints to their ability to pay by amending the terms originally agreed on. Agreements reached under laws 550/ 1999, 617/ 2000 and 1116/ 2006, or norms that add to or supplement them, also are regarded as restructured, as are special restructurings and novations. Tax Reform Act 617/ 2000 In restructuring derived from the tax and financial reform programs subscribed under the terms of Act 617/ 2000, sovereign guarantees were supplied for loans contracted by regional government agencies with financial institutions supervised by the Colombian Superintendency of Finance, provided the requirements set forth in that legislation were met and the fiscal adjustment agreements were entered into before June 30, The respective guarantee could be as much as forty percent (40.0%) for loans outstanding at December 31, 1999 and up to one hundred percent (100.0%) in the case of new loans used for tax adjustment. These restructurings reversed the allowances constituted for the sovereign-guaranteed portion of the restructured debt. The restructured portion not guaranteed by the government kept the rating it had at June 30, If the restructuring agreement is not fulfilled, the borrower is classified in the category occupied prior to restructuring or in a higher risk category. To improve their rating after respective restructuring, borrowers must comply fully with all terms and conditions outlined in the restructuring agreement. If a regional government agency defaults on the agreement, the portion of the outstanding debt not backed by a sovereign guarantee on the date of default is reclassified in risk category E. Restructuring Agreements For loans restructured before Law 550/1999 took effect, the Bank and its subordinates suspended interest accrual on the outstanding balance at the onset of restructuring negotiations and maintained the rating the loans had at that point. However, a client in risk category A was reclassified at least to category B and an allowance equal to one hundred percent (100.0%) of accounts receivable was made.