AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 2003
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..................... to .................
Commission file number: 1-13850
BANCOLOMBIA S.A.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant's name into English)
REPUBLIC OF COLOMBIA
(Jurisdiction of incorporation or organization)
CALLE 50 NO. 51-66
MEDELLIN, COLOMBIA
(Address of principal executive offices)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT.
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
American Depositary Shares New York Stock Exchange
Preference Shares New York Stock Exchange*
------------------
* Bancolombia's Preference Shares are not listed for trading, but only
in connection with the registration of American Depositary Shares,
which are evidenced by American Depositary Receipts.
Securities registered or to be registered pursuant to Section 12(g) of the Act
Not applicable
(Title of Class)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
Not applicable
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Common Shares ..............................398,259,608
Preference Shares ..........................178,435,787
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 Item 18 X
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TABLE OF CONTENTS
Page
----
EXCHANGE RATES; INFLATION..................................................................................... ii
FORWARD LOOKING STATEMENTS..................................................................................... 1
PART I.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS............................................ 2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.......................................................... 2
ITEM 3. KEY INFORMATION.................................................................................. 2
ITEM 4. INFORMATION ON THE COMPANY...................................................................... 14
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.................................................... 39
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES...................................................... 98
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.............................................. 102
ITEM 8. FINANCIAL INFORMATION.......................................................................... 104
ITEM 9. THE OFFER AND LISTING.......................................................................... 106
ITEM 10. ADDITIONAL INFORMATION......................................................................... 108
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................... 111
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES......................................... 111
PART II.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES................................................ 111
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS................... 111
ITEM 15. CONTROLS AND PROCEDURES........................................................................ 111
ITEM 16. [ RESERVED ].......................................................................... 111
PART III. FINANCIAL STATEMENTS.
ITEM 17. FINANCIAL STATEMENTS........................................................................... 111
ITEM 18. EXHIBITS....................................................................................... 112
i
EXCHANGE RATES; INFLATION
Bancolombia S.A. ("Bancolombia," "BC", the "Bank", "us" or "we") is a
banking institution organized under Colombian law. We maintain accounting
records in Colombian pesos. The audited consolidated financial statements of BC
and its subsidiaries for the years ended December 31, 2000, 2001 and 2002
contained in this Annual Report (collectively, including the notes thereto, the
"Financial Statements") are expressed in Colombian pesos ("peso", "pesos" or
"Ps"). In this Annual Report, references to "dollar", "dollars," "US$" or "$"
are to United States dollars.
This Annual Report translates certain peso amounts into dollars at
specified rates solely for the convenience of the reader. Unless otherwise
indicated, such peso amounts have been translated at the rate of Ps 2,814.89 per
$1.00, which corresponds to the average of the Tasa Representativa del Mercado
("Representative Market Rate") for December 2002. The Representative Market Rate
is computed and certified by the Superintendencia Bancaria (the "Superintendency
of Banking"), the Colombian banking regulator, on a daily basis and represents
the weighted average of the buy/sell foreign exchange rates negotiated on the
previous day by certain financial institutions authorized to engage in foreign
exchange transactions (including BC). The Superintendency of Banking also
calculates and certifies the average Representative Market Rate for each month
for purposes of preparing financial statements, and converting amounts in
foreign currency to Colombian pesos. Such conversion should not be construed as
a representation that the peso amounts correspond to, or have been or could be
converted into, United States dollars at that rate or any other rate. On March
20, 2002, the Representative Market Rate was Ps 2,955.66 per $1.00.
Colombia experienced two-digit inflation rates until 1999 but has
experienced single-digit inflation rates thereafter (8.75%, 7.65% and 6.99% for
the years ended December 31, 2000, 2001 and 2002, respectively). From January 1,
1992 to December 31, 1998, Colombia's generally accepted accounting principles
("Colombian GAAP") required that financial statements of Colombian financial
institutions (including BC) be adjusted for inflation on a one-month's lagging
basis, by applying coefficients of changes in the Colombian middle-income
consumer price index ("MCPI") for the relevant period to non-monetary assets and
liabilities, shareholders' equity (other than surplus from reappraisal of assets
and cumulative translation adjustments) and results of operations. Effective
January 1, 1999, Law 448 of 1998 eliminated the use of inflation adjustments in
income, expense and inventory accounts, and in April 2001, the Superintendency
of Banking issued External Circular 014, which eliminated the use of inflation
adjustments in all the accounts of the financial statements beginning January 1,
2001. See Note 2 to the Financial Statements.
Financial information in this Annual Report is presented in nominal
pesos for the years ended December 31, 2002, 2001 and 2000, without adjustment
for inflation. Financial information for all prior periods is reported in
constant pesos as of December 31, 2000 ("constant pesos"). Financial information
contained in BC's Annual Reports up to and including its Annual Report for the
year ended December 31, 2000, was restated to pesos with a purchasing power
equal to that of constant pesos, by indexing historical amounts using the MCPI
as measured by the Departamento Nacional de Estadistica ("DANE").
ii
FORWARD LOOKING STATEMENTS
This Annual Report on Form 20-F contains certain forward-looking
statements and information relating to us that are based on beliefs of
management as well as assumptions made by and information currently available to
us. When used in this document, the words "anticipate", "believe", "estimate",
"expect", "intend", "plan" and "project" and similar expressions, as they relate
to us or our management, are intended to identify forward-looking statements.
Such statements reflect our current views with respect to future events and are
subject to certain risks, uncertainties and assumptions. Many factors could
cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements that may be expressed or
implied by such forward-looking statements, including, among others, changes in
general economic and business conditions, changes in currency exchange rates and
interest rates, introduction of competing products by other companies, lack of
acceptance of new products or services by our targeted customers, changes in
business strategy and various other factors, both referenced and not referenced
in this Annual Report on Form 20-F. Should one or more of these risks or
uncertainties materialize, or should our underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected, intended, planned or projected. We do not intend,
and do not assume any obligation, to update these forward-looking statements.
PART I.
ITEM 1. - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.
Not applicable.
ITEM 2. - OFFER STATISTICS AND EXPECTED TIMETABLE.
Not applicable.
ITEM 3. - KEY INFORMATION.
A. SELECTED FINANCIAL DATA
The following data have been derived from financial statements audited
by KPMG Ltda., independent accountants. The following information should be read
in conjunction with, and is qualified in its entirety by reference to, the
Financial Statements.
The Financial Statements included herein have been prepared in
conformity with Colombian GAAP, which differ in certain significant aspects from
United States generally acceptable accounting principles ("U.S. GAAP"). Note 31
to the Financial Statements provides a discussion of the principal differences
between Colombian GAAP and U.S. GAAP as they relate to the Bank, and a
reconciliation to amounts calculated in accordance with U.S. GAAP of the Bank's
net income and shareholders' equity as of, and for the years ended, December 31,
2000, 2001 and 2002.
In order to provide a better understanding of BC's financial
statements, certain reclassifications were made in the consolidated statements
of operations for the 1999 and 2000 fiscal years (see the Consolidated
Statements of Operations in the Financial Statements). As a result, certain
figures provided in this annual report for the years ended December 31, 1999 and
2000, such as net interest income, other operating income, and operating
expenses, differ from those reported in the Bank's Annual Report for the years
ended December 31, 1999 and 2000. These reclassifications do not affect the
Bank's net income for either year.
2
Following are selected financial data for each of the five fiscal years
from 1998 to 2002:
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002 2002(1)
--------- ---------- ---------- --------- --------- ---------
(in millions of pesos and thousands of dollars(1), except per share and ADS amounts)
CONSOLIDATED STATEMENT OF OPERATIONS:
COLOMBIAN GAAP:
Interest income..................... Ps1,561,559 Ps1,227,269 Ps842,633 Ps881,757 Ps738,184 US$262,243
Interest expense.................... (1,033,862) (821,203) (458,855) (529,074) 466,223 165,628
--------- ---------- ---------- --------- --------- ---------
NET INTEREST INCOME............... 527,697 406,066 383,778 352,683 271,961 96,615
Provisions for loans and accrued
interest losses(2).................. (150,650) (250,153) (152,296) (73,953) (115,154) (40,909)
Provision for foreclosed assets and
other assets ....................... (22,389) (50,396) (112,219) (63,537) (71,212) (25,298)
--------- ---------- ---------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISIONS 354,658 105,517 119,263 215,193 85,595 30,408
Other operating income.............. 368,283 330,436 341,971 620,188 828,977 294,497
Operating expenses.................. (641,084) (644,922) (573,524) (654,756) (722,773) (256,768)
NET OPERATING INCOME (LOSS)...... 81,857 (208,969) (112,290) 180,625 191,799 68,137
Merger expenses..................... (90,756) (54,268) (44,828) (42,207) (33,028) (11,733)
Net non-operating income (loss)..... 45,890 55,362 67,792 51,000 79,787 28,344
Net monetary inflation adjustment... (34,680) (2,401) 4,209 - - -
--------- ---------- ---------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES........ 2,311 (210,276) (85,117) 189,418 238,558 84,748
Minority interest (loss)............ (3,196) (249) (767) (1,310) 14,440 5,130
Income taxes........................ (11,635) (29,642) (28,106) (31,575) (42,618) (15,140)
--------- ---------- ---------- --------- --------- ---------
NET INCOME (LOSS)................. PS(12,520) PS(240,167) PS(113,990) PS156,533 PS210,380 US$74,738
========= ========== ========== ========= ========= =========
Weighted average of Preference and
Common Shares outstanding(3)...... 234,941,295 249,934,805 542,137,634 576,695,395 576,695,395
Net operating income (loss) per Ps348 Ps(836) Ps(207) Ps313 Ps333 US$0.12
share(3)(4).........................
Net operating income (loss) per ADS. 1,392 (3,344) (828) 1,252 1,332 0.48
Net income (loss) per share(3)(4)... (53) (961) (210) 271 365 0.13
Net income (loss) per ADS........... (212) (3,844) (840) 1,084 1,460 0.52
Cash dividends declared per share(5) - - 36 84 132 0.05
Cash dividends declared per ADS..... - - 144 336 528 0.20
U.S. GAAP:
Net income (loss)................... Ps(65,390) Ps(168,958) Ps(38,915) Ps226,048 Ps207,152 US$73,592
Net income (loss) per share(6)...... (400) (880) (119) 530 461 0.16
Net income (loss) per ADS........... (1,600) (3,520) (476) 2,120 1,844 0.64
3
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002 2002(1)
----------- ----------- ----------- ------------ ------------ ------------
(in millions of pesos and thousands of dollars(1), except per share and ADS amounts)
CONSOLIDATED BALANCE SHEET
COLOMBIAN GAAP:
ASSETS:
Cash and due from banks............. Ps 570,442 Ps 490,293 Ps 428,466 Ps 536,813 Ps 643,405 US$ 228,572
Overnight funds..................... 278,763 232,252 291,786 176,666 207,684 73,780
Investment securities, net.......... 1,640,166 1,462,601 1,575,304 2,984,552 4,343,458 1,543,030
Loans, net.......................... 4,782,117 4,530,943 4,826,506 5,078,476 5,864,991 2,083,559
Accrued interest receivable on loans,
net................................. 167,514 86,635 84,693 77,681 83,459 29,649
Customers' acceptances and derivatives 24,596 23,251 40,358 39,907 (15,662) (5,564)
Accounts receivable, net............ 203,431 135,867 106,557 106,764 181,663 64,536
Premises and equipment, net......... 454,546 445,922 332,120 320,080 317,724 112,873
Foreclosed assets, net.............. 155,182 131,382 99,418 74,656 77,299 27,461
Prepaid expenses and deferred charges 125,738 154,148 107,848 84,483 58,421 20,755
Goodwill............................ 248,857 202,750 164,201 141,552 118,904 42,241
Leasing, net........................ 218,496 211,083 192,883 241,866 341,791 121,422
Other assets........................ 132,546 105,610 94,884 169,236 116,634 41,434
Reappraisal of assets............... 345,088 301,992 262,723 241,727 259,811 92,299
----------- ----------- ----------- ------------ ------------ ------------
TOTAL ASSETS...................... PS9,347,482 PS8,514,729 PS8,607,747 PS10,274,459 PS12,599,582 US$4,476,047
=========== =========== =========== ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits............................ Ps5,498,454 Ps5,945,510 Ps6,116,022 Ps 7,580,848 Ps 8,788,158 US$3,122,025
Borrowings.......................... 1,975,287 1,094,692 908,103 830,654 1,117,015 396,824
Other liabilities................... 936,750 704,728 717,739 892,506 1,410,061 500,929
Shareholders' equity................ 936,991 769,799 865,883 970,451 1,284,348 456,269
----------- ----------- ----------- ------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY PS9,347,482 PS8,514,729 PS8,607,747 PS10,274,459 PS12,599,582 US$4,476,047
=========== =========== =========== ============ ============ ============
U.S. GAAP:
Shareholders' equity................ Ps 798,517 Ps 724,636 Ps 951,191 Ps 1,147,989 Ps 1,413,445 US$ 502,132
Shareholders' equity per share(7)... 3,399 2,899 1,755 1,991 2,451 0,87
Shareholders' equity per ADS(4)..... 13,596 11,596 7,020 7,964 9,804 3,48
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1999 2000 2001 2002
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(percentages, except for operating data)
SELECTED RATIOS: (8)
COLOMBIAN GAAP:
PROFITABILITY RATIOS:
Net interest margin(9) ................................ 8.45% 6.69% 6.45% 4.70% 2.95%
Return on average total assets(10) .................... (0.14) (2.75) (1.44) 1.65 1.88
Return on average shareholders' equity(11) ............ (1.17) (22.16) (11.75) 14.58 20.42
EFFICIENCY RATIO:
Operating expenses as a percentage of net operating
income(12) .......................................... 71.55 87.57 79.03 67.30 65.65
CAPITAL RATIOS:
Period-end shareholders' equity as a percentage of
period-end total assets ............................... 10.02 9.04 10.06 9.45 10.19
Period-end regulatory capital as a percentage of
period-end risk-weighted assets(13) (16) .............. 11.56 9.09 11.09 10.61 11.61
CREDIT QUALITY DATA:
Non-performing loans as a percentage of total loans(14) 3.72 6.29 3.52 4.54 1.77
"C", "D" and "E" loans as a percentage of total loans . 4.81 13.33 10.45 9.70 9.71
Allowance for loan and accrued interest losses as a
percentage of non-performing loans .................. 118.07 119.27 175.98 122.91 316.80
Allowance for loan and accrued interest losses as a
percentage of "C", "D" and "E" loans ................ 91.42 56.27 59.23 57.57 57.71
4
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1999 2000 2001 2002
----------------------------------------------------------------
(percentages, except for operating data)
Allowance for loan and accrued interest losses as a
percentage of total loans ........................... 4.40 7.50 6.19 5.58 5.61
OPERATING DATA:
Number of branches(15) ................................ 376 341 321 323 340
Number of employees(17) ............................... 9,477 8,539 7,688 7,518 7,581
------------------
(1) Amounts stated in dollars have been translated at the rate of Ps 2,814.89
to $1.00 which is the average Representative Market Rate for the month of
December 2002, as reported and certified by the Superintendency of
Banking.
(2) Includes a provision for accrued interest losses amounting to Ps 25,986
million, Ps 48,507 million, Ps 20,178 million, Ps 4,945 million and Ps
4,518 million for the years ended December 31, 1998, 1999, 2000, 2001 and
2002 respectively.
(3) Includes Common Shares and 58,060,558 Preference Shares for 1998;
58,060,562 Preference Shares for 1999; and 178,435,787 Preference Shares
for 2000, 2001 and 2002.
(4) Reflects all stock dividends distributed through December 31, 1998.
Calculated on the basis of average outstanding shares during the period.
(5) This data is presented on an annualized basis.
(6) Reflects stock dividends distributed up to December 31, 1998. Under U.S.
GAAP, these shares are considered outstanding since the beginning of the
earliest period presented. Net income per share under U.S. GAAP is
presented on the basis of net income available to common stockholders
divided by the weighted average number of Common Shares outstanding (191
million for 1998; 281 million for 1999; 380 million for 2000, 398 million
for each of 2001 and 2002). See Note 31 to the Financial Statements.
(7) Shareholders' equity per share is calculated based on the number of Common
Shares and Preference Shares. Total shares outstanding amounted to 249
million for the year ended December 31, 1998; 339 million for the year
ended December 31, 1999; and 577 million for the years ended December 31,
2000; 2001 and 2002.
(8) Ratios were calculated on the basis of daily averages.
(9) Defined as net interest income divided by average interest-earning assets.
(10) Net income divided by average total assets.
(11) Net income divided by monthly average shareholders' equity.
(12) Net operating income includes net interest income, fees and income from
services, net and other operating income.
(13) For an explanation of risk-weighted assets and Technical Capital, see
"Item 4. Information on the Company - B. Business Overview - Supervision
and Regulation - Capital Adequacy Requirements"
(14) Non performing loans are small business loans and consumer loans that are
past due 60 days or more, commercial loans that are past due 90 days or
more and mortgage loans that are past due 120 days or more.
(15) Number of branches does not include branches of the Bank's subsidiaries.
(16) The derivatives' risk-weigh percentage used in the calculation of the
total risk-weighted assets was changed by External Circular 076 of 2000
issued by the Superintendency of Banking.
(17) The number of employees is consolidated.
DIVIDENDS
The declaration, amount and payment of dividends is based on BC's
unconsolidated earnings, which include earnings from unconsolidated subsidiaries
that are accounted for at cost. Dividends must be approved at the ordinary
annual shareholders' meeting upon the recommendation of the Board of Directors
and the President of BC. Under the Colombian Commerce Code, after payment of
income taxes and appropriation of legal and other reserves, and after setting
off losses from prior fiscal years, BC must distribute to its shareholders at
least 50% of its annual net income, or 70% of its annual net income if the total
amount of reserves exceeds its outstanding capital. Such dividend distribution
must be made to all shareholders, in cash or as may be determined by the
shareholders, and within a year from the date of the ordinary annual
shareholders' meeting in which the dividend was declared. Pursuant to Colombia's
Law 222 of 1995, the minimum common stock dividend requirement of 50% or 70%, as
the case may be, may be waived by an affirmative vote of the holders of 78% of
the Common Shares present at the shareholders' meeting.
Under Colombian law, the annual net profits of BC must be applied as
follows:
- first, an amount equal to 10% of BC's net profits to a legal reserve until
such reserve is equal to at least 50% of the Bank's paid-in capital;
5
- second, to the payment of the minimum dividend on the Preference Shares
(for more information, see "Item 10. - Additional Information"); and
- third, as may be determined in the ordinary annual shareholders' meeting by
the vote of the holders of a majority of the Common Shares entitled to
vote, upon the recommendation of the Board of Directors, and may, subject
to further reserves required by BC's by-laws, be distributed as a dividend.
BC paid dividends on its Common Shares for each year from 1947 through
1997. As a general policy, approximately 60% of BC's legally-available net
income was, until 1997, paid annually to shareholders. However, because BC had
losses in 1998 and 1999, it was unable to declare and pay a dividend for the
years ended December 31, 1998, and December 31, 1999. A dividend per share of Ps
36 was declared in respect of BC's operating and financial results from May 1,
2000 to December 31, 2000 after giving effect to a voluntary balance sheet
restructuring at April 30, 2000. See "Item 5. Operating and Financial Review and
Prospects - Liquidity and Capital Resources - Capital - Voluntary Balance Sheet
Restructuring" and Note 28 to the Financial Statements. A dividend per share of
Ps 84 was declared in respect of BC's operating and financial results from
January 1, 2001 to December 31, 2001. A dividend per share of Ps 132, to be paid
in quarterly installments of Ps 33, was declared in respect of BC's operating
and financial results from January 1, 2002 to December 31, 2002.
The following table sets forth the annual cash dividends paid on each
Common Share and, where applicable, each Preference Share during the periods
indicated.
DIVIDENDS DECLARED WITH RESPECT TO NET CASH DIVIDENDS CASH DIVIDENDS
INCOME EARNED IN: PER SHARE(1)(2) PER SHARE(1)(3)
-------------------------------------- --------------- ---------------
(IN PESOS) (IN DOLLARS)
1998........................................................ -- --
1999........................................................ -- --
2000........................................................ 36 0.016
2001........................................................ 84 0.036
2002........................................................ 132 0.045
---------------
(1) Includes Common Shares and Preference Shares.
(2) Cash dividends for 2000 and 2001 were paid in quarterly installments and
cash dividends for 2002 will be paid in quarterly installments.
(3) Amounts have been translated from pesos at the Representative Market Rate
in effect at the end of the month in which the dividends were declared
(February or March, as applicable).
6
EXCHANGE RATES
On March 20, 2003 the Representative Market Rate was Ps 2,955.66 per
$1.00. The following table sets forth the high and low exchange rates for each
month from January 2002 through February, 2003:
RECENT EXCHANGE RATES OF U.S. DOLLARS PER PESO:
LOW HIGH
-------- --------
January 2002................................. 2,231.98 2,311.57
February 2002................................ 2,254.98 2,313.13
March 2002................................... 2,261.23 2,306.45
April 2002 .................................. 2,254.45 2,275.35
May 2002..................................... 2,275.43 2,363.28
June 2002 ................................... 2,321.68 2,398.82
July 2002.................................... 2,398.82 2,625.06
August 2002.................................. 2,568.80 2,712.46
September 2002............................... 2,677.39 2,828.08
October 2002................................. 2,744.32 2,888.23
November 2002................................ 2,666.41 2,784.21
December 2002................................ 2,782.40 2,864.79
January 2003................................. 2,841.56 2,965.60
February 2003................................ 2,929.64 2,968.88
Source: Superintendency of Banking.
The following table sets forth the average peso/dollar Representative
Market Rate for the five most recent fiscal years (calculated by using the
average exchange rate during each period), the highest and lowest rates of each
period, and the end of period Representative Market Rate for U.S. dollars. The
Federal Reserve Bank of New York does not report a noon buying rate for
Colombian pesos.
PESO/US$
-------------------------------------------------------------------
REPRESENTATIVE MARKET RATE
-------------------------------------------------------------------
% CHANGE
FROM PRIOR
AVERAGE HIGH LOW PERIOD END PERIOD END
------- ---- --- ---------- ----------
1998......................... 1,426.35 1,599.15 1,293.58 1,542.11 19.21%
1999......................... 1,756.75 2,017.27 1,525.59 1,873.77 21.51%
2000 ....................... 2,087.57 2,232.24 1,873.77 2,229.18 18.97%
2001 ....................... 2,299.88 2,378.41 2,219.60 2,291.18 2.78%
2002 ....................... 2,506.55 2,888.23 2,231.98 2,864.79 25.04%
Source: Superintendency of Banking.
B. RISK FACTORS
The factors referred to below should be considered by investors when
reviewing any forward-looking statements contained in this Annual Report, in any
of BC's future public filings or press releases, or in any future oral
statements made by the Bank or any of its officers or other persons acting on
its behalf.
7
COLOMBIA HAS EXPERIENCED SEVERAL PERIODS OF VIOLENCE AND INSTABILITY
The Colombian government (excluding departmental and municipal
governments) has historically exercised substantial influence over the Colombian
economy and its policies may continue to have an important effect on Colombian
entities (including BC), market conditions, prices, and rates of return on
Colombian securities (including BC's securities).
The market value of BC's securities and the dividends thereon may also
be affected by changes in labor costs, inflation, interest rates, taxation,
social instability and other political or economic developments in Colombia. The
Bank cannot provide any assurance that future developments in government
policies or in the Colombian economy will not impair its business or financial
condition or the market value of its stock.
Democratic presidential elections were held in May, 2002, and the new
government of President Alvaro Uribe Velez took office on August 7, 2002. The
new government has vouched to increase security within a democratic framework,
fight corruption and carry economic and social reforms to ensure the
reactivation of the Colombian economy. However, the government may not continue
its current economy policy or these policies may no longer have a positive
effect on the economy or the Colombian financial sector.
Colombia has experienced several periods of criminal violence over the
past four decades, primarily due to the activities of guerilla groups and drug
cartels. In response, the government has implemented various security measures
and has strengthened its military and police forces by creating specialized
units. Despite these efforts, drug-related crime and guerilla activity continue
to exist in Colombia. Due to continued attacks by rebel groups against the
Colombian population, the government declared a state of ("conmocion interior")
on August 10, 2002, which has been extended until May 6, 2003 by Decree 245 of
2003. These activities, their possible escalation and the violence associated
with them may have a negative impact on the Colombian economy or on the Bank in
the future.
ECONOMIC ACTIVITY, INFLATION AND INTEREST RATES IN COLOMBIA ARE VOLATILE
In 1998 and 1999, the Colombian economy experienced a severe liquidity
crisis, which resulted in one of the worst economic crises in Colombia's
history. Colombia's gross domestic product ("GDP") decreased by almost 5% in
1999, which lead to the declaration of an economic emergency.
In the second half of 1999, the government adopted a series of measures
to counter the economic crisis and promote an economic turnaround. These
included seeking financing from multilateral organizations, relief for mortgage
debtors, and financial restructuring of economically viable companies. In
addition, in December 1999, Colombia entered into an extended US$2.7 billion
fund facility with the International Monetary Fund (the "IMF") to finance
shortfalls in Colombia's balance of payments for 2000 through 2002. Despite the
fact that the commitments of the initial agreement were not entirely met, on
January 15, 2003, Colombia and the IMF signed an agreement, effective December
2002, for an extended fund facility of approximately $2 billion in connection
with the government's new two-year macroeconomic program. The facility may be
used to support imbalances in Colombia's external accounts, although
disbursements under the IMF program are conditional on achieving certain
targets. These targets are based on estimates and assumptions, and there can be
no assurance that Colombia will be able to achieve all or any of them.
8
Interest rates have steadily decreased since November 1998, and
Colombia's exchange rate has remained within the range targeted by the Central
Bank. Although a collapse of the economy was avoided, volatility is still
significant and the economy remains unstable.
The 1998 - 1999 economic crisis had an adverse impact on BC's results
of operations and net-interest margin. Since 2000, the economy has shown
slightly positive results, although it has not recovered its historic growth
rates. During 2002, the Colombian economy grew close to 1.65% and interest rates
and prices remained at low levels (although inflation exceeded the Central
Bank's target).
There can be no assurance that the Colombian economy will continue to
recover or not return to a state of recession, or that BC's financial condition
and results of operations or the market value of BC's stock will not be
adversely affected by poor economic conditions, both locally or internationally,
increased inflation or increased interest rates.
For more information see "Item 5. Operating and Financial Review and
Prospects - A. Operating Results - Economic Activity in Colombia".
THE QUALITY OF THE BANK'S LOAN PORTFOLIO AND OTHER ASSETS MAY DECLINE
While BC has a significant volume of loans to small companies
outstanding, BC believes that the future growth of its business will be
primarily concentrated in loans to medium-size and large companies. Accordingly,
since 1998, BC has targeted medium and large companies, and has actively pursued
a change in the composition of its loan portfolio. As a result of this strategy,
BC may experience higher levels of past due and non-performing loans than it has
in the past, and may be required to increase its allowances for non-performing
loans. In particular, loans to medium and large size companies present a
different risk profile than loans to small companies, and their credit risk may
be more difficult to assess.
Another of BC's business objectives is to increase the participation of
consumer credits in its loan portfolio, in order to improve its net interest
margin and profitability. As a result, BC can experience detrimental changes in
its credit risk levels. See "Item 4. Information on the Company -- B. Business
Overview -- Operations -- Retail."
Furthermore, there can be no assurance that BC will maintain its
current level of asset quality and credit risk in the future generally.
DEPOSIT CONCENTRATION AND RELIANCE ON SHORT-TERM DEPOSITS MAY INCREASE BC'S
FUNDING COSTS
Like most other Colombian banks, BC's principal source of funds are
short-term savings and demand deposits. Time deposits represented 35.4%, 39.6%
and 34.2% of BC's total funding at the end of 2000, 2001 and 2002, respectively.
Since BC relies on short-term deposits for its funding, there can be no
assurance that, in the event of a sudden or unexpected shortage of funds in the
Colombian banking system and money markets, BC will be able to maintain its
current level of funding without incurring higher costs or liquidating certain
assets.
9
INCREASED COMPETITION MAY HINDER BC'S GROWTH AND PRICING PROSPECTS
The Colombian financial system is highly competitive. Financial sector
reforms have increased, and may continue to encourage competition among both
Colombian and foreign financial institutions. In addition, recent consolidations
in the banking industry have created larger and stronger banks with which BC
must now compete. There can be no assurance that this increased competition will
not adversely affect our pricing and growth prospects, and therefore, our
results of operations. See "Item 4. Information on the Company - B. Business
Overview - Competition" and "Item 4. Information on the Company - B. Business
Overview - Supervision and Regulation."
FOREIGN EXCHANGE RISK
Fluctuations in the exchange rate between the peso and the dollar may
affect the dollar-equivalence of the peso price of securities traded on
Colombian stock exchanges, including the Bank's Preference Shares. As a result,
exchange rate fluctuations are likely to affect the market price of BC's stock.
In the ordinary course of business, BC has a percentage of its assets
and liabilities denominated in currencies other than pesos, mostly U.S. dollars.
Under Colombian regulatory guidelines, the net position in these assets and
liabilities should not exceed 50% of regulatory capital. As of February 4, 2003,
BC had a dollar-denominated negative net assets position of US$0.709 million,
which falls within the aforementioned regulatory guidelines.
Fluctuations in the value of the peso against other currencies may
adversely affect BC's profitability or its ability to repay its indebtedness.
Until September 1999, the Board of Directors of the Central Bank had a policy of
intervening in the foreign exchange market whenever the value of the peso
against the U.S. dollar either fell below, or exceeded, a set exchange rate
range. Since then, the Board of Directors of the Central Bank eliminated the
exchange rate range and the foreign exchange market has floated freely. The
Central Bank, however, retains the authority to buy or sell foreign currency to
avoid abrupt fluctuations in the value of the peso and foreign currency
reserves. This mechanism is only used to control the international reserves of
Colombia or when the mobile average of the Representative Market Rate for the
preceding twenty days exceeds 4% of that day's Representative Market Rate. Upon
such an event, the Central Bank sells call options, whereby the purchaser is
entitled to buy from the Central Bank, on a future date, a specified amount of
dollars at a pre-established exchange rate, thus smoothening the volatility of
the exchange rate.
The foreign currency reserves of the Central Bank totaled US $8
billion, US $10.2 billion and US $10.8 billion as of December 31, 2000, 2001 and
2002, respectively. The government has not imposed prohibitions on the
repatriation of dividends, capital investment or other distributions since 1990.
While the government does not currently restrict the ability of Colombian
persons or entities to convert pesos into U.S. dollars, no assurance can be
given that the government will continue this policy or refrain from adopting a
more restrictive exchange control policy in the future.
PESO DEVALUATION MAY DEPRESS THE VALUE OF DIVIDENDS PAYABLE TO HOLDERS OF ADRS
In September 1999, the Central Bank significantly liberalized the
Colombian exchange market. Since then, the Central Bank has allowed the peso to
float freely, intervening only when there are steep variations in the peso's
value relative to the dollar. This mechanism is only used to control the
international reserves of Colombia or when the mobile average of the
Representative Market Rate for the
10
preceding twenty days exceeds 4% of that day's Representative Market Rate. Upon
such an event, the Central Bank sells call options, whereby the purchaser is
entitled to buy from the Central Bank, on a future date, a specified amount of
dollars at a pre-established exchange rate, thus smoothening the volatility of
the exchange rate.
The devaluation of the peso against the dollar for 2000, 2001 and 2002
was 19%, 2.8% and 25%, respectively. Absent modifying circumstances, a future
peso devaluation would have a negative impact on the U.S. dollar value of the
dividends paid to holders of American Depositary Receipts ("ADRs"). Conversely,
a peso revaluation would display a positive effect. Although the foreign
exchange market is allowed to float freely, no assurance can be given that the
Colombian Central Bank or the government will not intervene in the exchange
market in the future.
COLOMBIAN BANKING REGULATIONS DIFFER FROM UNITED STATES BANKING REGULATIONS
Colombian banking regulations are designed to ensure the safety and
soundness of the banking system and to limit its exposure to risk. While many of
the policies underlying these regulations are similar to those underlying
regulations applicable to banks in other countries, including those in the
United States, Colombian regulations can differ in a number of material respects
from those other regulations. For example, under Colombian GAAP, allowances for
non-performing loans are computed by establishing each non-performing loan's
individual inherent risk, using criteria established by the Superintendency of
Banking that differs from that used under U.S. GAAP (see Item 5. - C. Selected
Statistical Information - Allowance for Loan Losses). In addition, capital
adequacy requirements for banks under Colombian regulations differ from those
under U.S. regulations.
Changes in banking laws and regulations, or in their official
interpretation, may have a material effect on our business and operations. Since
some of the banking laws and regulations are of recent date, their
interpretation, and the manner in which these laws and regulations are applied
to financial institutions is still evolving. No assurance can be given generally
that laws or regulations will be adopted, enforced or interpreted in a manner
that will not have an adverse effect on BC's business.
For more information see "Item 4. Information on the Company - B.
Business Overview - Supervision and Regulation".
FOREIGN INVESTMENT IN COLOMBIA MAY BE RESTRICTED
Colombia's International Investment Statute (Decree 2080 of 2000),
regulates the manner in which foreign-resident entities and individuals can
invest in Colombia and participate in the Colombian securities markets. Among
other requirements, the statute mandates registration of certain foreign
exchange transactions with the Colombian Central Bank and specifies procedures
to authorize and administer certain types of foreign investments.
For example, individual investors depositing Preference Shares into the
ADR facility for purposes of exchanging them for American Depositary Shares
("ADSs") represented by American Depositary Receipts ("ADRs") would be required,
as a condition for acceptance of such deposit by the custodian (Fiducolombia
S.A.), to provide, or cause to be provided, certain information to the
custodian, to enable it to comply with the registration requirements under the
foreign investment regulations relating to foreign exchange. An ADR holder who
withdraws the underlying Preference Shares from the ADR deposit facility may
under certain circumstances be required to comply directly with certain
registration and other requirements under the foreign investment regulations.
Under the foreign investment regulations, the
11
failure of a non-resident investor to report or register with the Central Bank
foreign exchange transactions relating to investments in Colombia on a timely
basis may prevent the investor from obtaining remittance rights, constitute an
exchange control infraction and result in a fine. See "Item 10. Additional
Information - C. Taxation".
OWNERSHIP AND OTHER RESTRICTIONS
Pursuant to Decree 663 adopted by the government on April 2, 1993, as
amended by Law 795 of 2003, any transaction resulting in an individual or
corporation holding 10% or more of any class of capital stock of any Colombian
financial institution, including in the case of BC, transactions resulting in
holding ADRs representing 10% or more of the Preference Shares underlying ADSs,
must receive prior authorization from the Superintendency of Banking. In
granting its approval, the Superintendency of Banking will evaluate the proposed
transaction based on the criteria and guidelines specified in Law 510 of 1999,
as amended by Law 795 of 2003. Transactions entered into without the
Superintendency of Banking's prior approval are void, and cannot be recorded in
the stock registry of the financial institution. Foreign investors are subject
to and receive the same treatment as Colombian citizens with respect to the
above transactions.
In addition to the above restriction, pursuant to Resolution 400 of
1995, as amended, issued by Colombia's Superintendencia de Valores (the
"Superintendency of Securities"), Colombia's securities regulator, any
transaction involving the sale of publicly traded stock of any Colombian
company, including in the case of BC any sale of the Preference Shares (but
excluding any sale of ADSs), for Unidades de Valor Real ("UVR") equivalent to Ps
66,000 or more, must be effected through one of Colombia's stock exchanges. The
UVR is an inflation-adjusted monetary index generally used for pricing
home-mortgage loans. Separately, Resolution 400 of 1995 also requires prior
authorization of the Superintendency of Securities in order to offer to purchase
in the public market 10% or more of the issued and outstanding capital stock of
any Colombian company (including in the case of BC, Preference Shares and Common
Shares), unless the purchaser is acquiring the stock pursuant to a public offer
directed to all shareholders of such a company.
These limitations may affect the market liquidity of the Preference
Shares and the ADSs.
OUR PREFERENCE SHARES HAVE LIMITED VOTING RIGHTS
Under BC's by-laws and Colombian corporate law, holders of Preference
Shares (and consequently, holders of ADRs) have no voting rights in respect of
Preference Shares, other than the right to one vote per Preference Share, voting
separately as a class, in respect of:
- amendments to BC's by-laws impairing the Preference Shares rights;
- BC's failure to pay all or part of the dividends on the Preference Shares
for one fiscal year (provided the Superintendency of Banking affirms the
Preference Shares' right to vote); or
- certain other limited circumstances.
In addition, the holders of Preference Shares have voting rights,
voting together with the holders of Common Shares, in relation to BC's
prospective dissolution, merger or transformation, or upon a change in BC's
business purpose.
12
Holders of ADRs and Preference Shares are not entitled to vote for the
election of directors or to influence BC's management policies.
The Bank's corporate affairs are governed by its by-laws and Colombian
laws. Under such laws, BC's shareholders may have fewer or less well-defined
rights than they might otherwise have as shareholders of a corporation
incorporated in a U.S. jurisdiction.
PREEMPTIVE RIGHTS MAY NOT BE AVAILABLE TO HOLDERS OF ADRS
The Bank's by-laws and Colombian law require BC, whenever it issues new
shares of any outstanding class, to offer the holders of each class of shares
the right to purchase a number of shares of such class sufficient to maintain
their existing percentage of ownership in BC. These rights are called preemptive
rights. United States holders of ADRs may not be able to exercise their
preemptive rights through The Bank of New York, which acts as depositary (the
"Depositary") for Bancolombia's ADR facility, unless a registration statement
under the United States Securities Act of 1933, as amended (the "Securities
Act") is effective with respect to those rights, or an exemption from the
registration requirement under the Securities Act is available. The Bank intends
to consider at the time of any rights offering the costs and potential
liabilities associated with any such registration statement, benefits to BC from
enabling the holders of the ADRs to exercise those rights and any other factors
deemed appropriate at the time, and will then make a decision as to whether to
file a registration statement. Accordingly, no assurance can be given that any
such registration statement will be filed.
To the extent holders of ADRs are unable to exercise these rights
because a registration statement has not been filed and no appropriate exemption
from the registration requirement under the Securities Act is available, the
Depositary may attempt to sell the holders' preemptive rights and distribute the
net proceeds from that sale, if any, to such holders. The Depositary, after
consulting with BC, will have discretion as to the procedure for making
preemptive rights available to the holders of ADSs, disposing of such rights and
making any proceeds available to such holders. If by the terms of any rights
offering or for any other reason the Depositary is unable or chooses not to make
those rights available to any holder of ADSs, and if it is unable or for any
reason chooses not to sell those rights, the Depositary may allow the rights to
lapse. Whenever the rights are sold or lapse, the equity interests of the
holders of ADRs will be proportionately diluted.
MARKET FOR ADSS AND PREFERENCE SHARES; RELATIVE ILLIQUIDITY OF THE COLOMBIAN
SECURITIES MARKETS
The Bank's ADSs are listed on the New York Stock Exchange ("NYSE") and
commenced trading in 1995 under the symbol "CIB". Average daily trading volume
of ADSs was 19,500 in 2000, 18,000 in 2001 and 30,067 in 2002. The Bolsa de
Bogota (the "Bogota Stock Exchange"), the Bolsa de Medellin (the "Medellin Stock
Exchange") and the Bolsa de Occidente (the "Occidente Stock Exchange") were the
only trading markets for our Common Shares and Preference Shares. These three
stock exchanges merged on July 3, 2001 into a single exchange, the Bolsa de
Valores de Colombia (the "Colombian Stock Exchange"), headquartered in Bogota
and with regional offices in Medellin and Cali. The Colombian Stock Exchange is
relatively small and illiquid compared to stock exchanges in major financial
centers. In addition, very few issuers represent a disproportionately large
percentage of market capitalization and trading volume. See "Item 9. The Offer
and Listing".
13
There have been recent regulatory reforms that are expected to increase
the trading volume on Colombia's stock exchanges. There can be no assurance,
however, that this expansion will take place or continue.
The relatively small market capitalization and illiquidity of
Colombia's stock exchanges may substantially impair the ability of a holder of
ADSs to sell or otherwise transfer the Preference Shares underlying such
holder's ADSs.
COLOMBIAN CORPORATE DISCLOSURE AND ACCOUNTING STANDARDS MAY DIFFER FROM THOSE IN
THE UNITED STATES
Publicly-available information about securities listed on Colombia's
stock exchanges is generally narrower than that regularly published in the
United States or certain other countries. Unconsolidated financial statements
are presented to our shareholders at the end of each accounting year to serve as
a basis for dividend and other distributions, and consolidated financial
statements with full footnote disclosure are filed annually with the
Superintendency of Banking. Interim quarterly unconsolidated financial
information is also filed with the Superintendency of Securities but is limited
to a balance sheet and a consolidated statements of operations with minimal
footnote disclosure. Because Colombian GAAP differ in certain significant
respects from U.S. GAAP and since the financial statements of BC are prepared in
accordance with Colombian GAAP, BC's manner of reporting earnings and losses may
differ from those of companies in the U.S. and other countries.
Important factors that could affect forward-looking statements are
subject to change and the Bank does not intend to update the foregoing list of
factors. By means of this cautionary note, the Bank intends to avail itself of
the safe harbor from liability with respect to forward-looking statements
provided by Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
ITEM 4. INFORMATION ON THE COMPANY.
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Bank (formerly, Banco Industrial Colombiano S.A. ("BIC")) was
incorporated in the First Notary's Office of Medellin, Colombia, on January 24,
1945. In January 1998, pursuant to a merger agreement approved on December 3,
1997 by the shareholders of BIC and Banco de Colombia S.A., BIC purchased 51% of
the outstanding common shares of Banco de Colombia S.A. from certain individual
shareholders. Effective April 3, 1998, BIC acquired the remaining outstanding
shares of Banco de Colombia in exchange for Common Shares and Preference Shares
and Banco de Colombia S.A. was merged into BIC (the "Merger"). In connection
with the Merger, BIC changed its name to Bancolombia S.A. and its commercial
activities, products and services began to be carried out under the commercial
name of "Bancolombia".
The Bank was originally established for a fifty-year term, starting on
December 9, 1944. This term was extended for fifty more years, until December 8,
2044. Bancolombia is domiciled in Colombia and operates under Colombian laws and
regulations as a sociedad comercial por acciones, de la especie anonima. The
address and telephone number of the Bank's principal place of business are:
Calle 50 No. 51-66, Medellin, Colombia; telephone +(574) 510-8896.
Since 1995, BC is a New York Stock Exchange, Inc. ("NYSE") listed
company, and its American Depositary Shares ("ADSs") are traded under the symbol
"CIB". See "Item 9. The Offer and Listing."
14
B. BUSINESS OVERVIEW
The Bank provides general banking products and services to large
industrial companies, individuals, and to the middle-market sector of small and
medium-size companies. Such products and services include personal and corporate
loans, deposit-taking, credit and debit cards, electronic banking, cash
management, warehousing services, fiduciary and custodial services, and
dollar-denominated products. In addition, BC's customers have access to a large
network of branches and automatic teller machines ("ATMs") in Colombia. BC
believes that it has the largest service network of any private financial
institution in Colombia, with 340 branch offices operating in 123 cities as of
December 31, 2003. For the year ended December 31, 2002, BC had a positive
return on average assets of 1.88% and a positive return on average shareholders'
equity of 20.42%. See "Item 5. Operating and Financial Review and Prospects."
According to Asobancaria ("Asobancaria"), Colombia's National Banking
Association, BC's market share of the Colombian banking market, as of December
31, 2002, was approximately 11.7% measured by total assets and 12.6% measured by
total loans; BC held 18% of all checking accounts and 10.4% of all savings
accounts measured by deposited amounts.
In order to detect and deter money laundering and in accordance with
legal regulations, BC adopted in 1996 a so-called Sistema Integral para
Prevencion de Lavado de Activos (an integral plan to prevent money laundering,
"SIPLA"). This plan requires training of employees, adoption of policies and
procedures designed to enable the Bank to know the identity of and monitor its
customers and employees, monitoring of the Bank's operations, and implementation
of mechanisms to report suspicious activities to the appropriate governmental
authorities. In line with SIPLA, the Bank has developed so called "know your
customer" policies and procedures, and has established a strict approval process
for deposits. Depositors in time deposits and savings accounts must undergo an
identification and screening procedure, and depositors in checking accounts are
subject to the same credit review process required for potential borrowers.
OPERATIONS
The following tables set forth Bancolombia's revenues by category for
each of the last three financial years:
Year Ended December 31, 2000
Governmental
Small And
Retail Commercial Business Institutional Corporate
Banking Banking Banking Banking Headquarters
---------- ---------- ---------- ---------- ----------
Revenues
from
external
customers Ps 125,042 Ps 27,056 Ps 11,439 Ps 11,984 Ps (12,993)
Revenues
from
transactions
with other
operating
segments of
the same
enterprise 18,344 2,666 340 (3,507) (8,954)
Interest
income Ps 251,131 Ps 178,68 Ps 82,429 Ps 95,082 Ps 133,440
Offshore
Commercial All other
Banking Trust Leasing Manufacturing Segments Total
---------- ---------- ----------- ---------- ---------- ----------
Revenues
from
external
customers Ps 11,884 Ps 19,215 Ps 22,434 Ps 37,817 Ps 27,937 Ps 281,815
Revenues
from
transactions
with other
operating
segments of
the same
enterprise 17,683 (384) (210) 815 (1,782) 25,011
Interest
income Ps108,579 Ps 5,299 Ps 4,341 Ps 997 Ps 24,524 Ps 884,506
15
Year Ended December 31, 2001
Governmental
Small And
Retail Commercial Business Institutional Corporate
Banking Banking Banking Banking Headquarters
----------- ----------- ----------- ----------- -----------
Revenues from
external
customers Ps 149,834 Ps 25,125 Ps 12,042 Ps 10,831 Ps (7,463)
Revenues from
transactions
with other
operating
segments of the
same enterprise 30,138 3,193 3,260 (1,603) (37,727)
Interest income Ps 460,671 Ps 78,837 Ps 53,887 Ps 116,933 Ps 217,191
Offshore
Commercial All other
Banking Trust Leasing Manufacturing Segments Total
----------- ----------- ----------- ----------- ----------- -----------
Revenues from
external
customers Ps 9,234 Ps 24,309 Ps 26,687 Ps 40,059 Ps 66,167 Ps 356,825
Revenues from
transactions
with other
operating
segments of the
same enterprise 7,170 888 508 1,535 4,903 12,265
Interest income Ps 132,437 Ps 6,158 Ps 12,385 Ps 1,230 Ps 25,859 Ps1,105,588
Year Ended December 31, 2002
Governmental
Small And
Retail Commercial Business Institutional Corporate
Banking Banking Banking Banking Headquarters
------------ ------------ ------------ ------------ ------------
Revenues from
external
customers Ps 176,296 Ps 30,930 Ps 18,975 Ps 7,764 Ps (19,835)
Revenues from
transactions
with other
operating
segments of the
same enterprise 22,961 14,308 9,034 21,433 (69,367)
Interest income Ps 338,468 Ps 150,885 Ps 118,925 Ps 71,606 Ps 255,965
Offshore
Commercial All other
Banking Trust Leasing Manufacturing Segments Total
------------ ------------ ------------ ------------ ------------ ------------
Revenues from
external
customers Ps 6,628 Ps 34,327 Ps 32,884 Ps (14,820) Ps 48,564 Ps 321,713
Revenues from
transactions
with other
operating
segments of the
same enterprise (31,185) 1,532 (244) 9,275 2,074 (20,179)
Interest income Ps 93,871 Ps 6,338 Ps 3,848 Ps 1,914 Ps 24,099 Ps 1,065,919
Approximately 73.5% of the Bank's revenue is derived from its
operations in the Colombian cities of Bogota, Medellin, Barranquilla and Cali.
Because of this revenue concentration, and given Colombia's highly centralized
economy, regional and local economic factors are unlikely to have a material
impact on the composition of the Bank's revenues. For this reason, the Bank does
not collect information by revenue segment for each geographic market in which
it operates.
The following table summarizes and sets forth Bancolombia's total
revenue over the last three fiscal years:
Revenues 2000 2001 2002
------------ ------------ ------------
Total revenues for reportable segments Ps 1,140,653 Ps 1,377,748 Ps 1,292,716
Other revenues 69,034 136,462 254,266
Elimination of intersegment revenues (25,011) (12,265) 20,179
Total revenues for reportable segments Ps 1,184,676 Ps 1,501,945 Ps 1,567,161
Historically, the Bank has experienced some seasonality in checking
accounts due to the increase of such accounts at the end of the year when
customers need increased liquidity and the decrease of such accounts in the
first quarter of the year when customers move their funds from checking accounts
to savings and mortgage institutions. Checking accounts represented 25.6% of the
Bank's total funding as of December 31, 2002.
16
RETAIL
GENERAL
Personal Banking. The Bank had 1,136,737 customers in the personal
banking retail segment as of December 31, 2002. Retail customers are categorized
into: (a) high income customers (12% of our total retail customers), whose
monthly income exceeds 11 minimum monthly salaries (as of December 31, 2002, the
minimum monthly salary was Ps 309,000, or approximately US$117), and (b) general
customers (88% of total retail customers), who earn between 1 and 11 minimum
monthly salaries per month. General customers are further subcategorized into
preference customers (9% of general customers), who earn between 5 and 11
minimum monthly salaries per month, middle income customers (14% of general
customers) whose monthly income is between 2.5 and 5 minimum monthly salaries
per month, and basic customers (78% of general customers) whose monthly income
is below three minimum monthly salaries.
Products offered to personal banking customers include checking
accounts, savings accounts, Visa, MasterCard and American Express credit cards,
debit cards, free-investment credits, time deposits, overdraft lines of credit,
home delivery of checkbooks, virtual and telephone banking, and other electronic
services. The total amount of personal banking loans, which includes all types
of credit extended to personal banking customers, was Ps 909,400 million in
2002.
Intermediate Banking (small- and medium-sized companies). The
intermediate banking segment serves businesses and individuals, whose sales or
income, as the case may be, in 2003 ranged between Ps 150 million, and Ps 17,150
million in Bogota and Ps 11,400 million in other cities. The Bank has 71,771
such customers, 21,583 of which have managerial accounts. In the last year, this
segment has grown 22.72% in loans, 31.82% in deposits and 22.56% in profit.
The main products offered to intermediate banking customers include
working capital loans, development loans, foreign trade credit lines, current
accounts, and electronic payment and collection services. As of December 31,
2002, the composition of the loan portfolio of intermediate banking customers
was 69.65% working capital loans, 27.55% development loans and 2.80% trade
financing.
The total retail banking segment (personal banking and intermediate
banking combined) accounted for Ps 1,911,829 millions in loans, representing
30.85% of Bancolombia's total loan portfolio as of December 31, 2002.
Customer Development. During 2002, BC launched a new consulting service
line. The program began with specific strategies to support the personal banking
retail segment.
For the intermediate banking segment a special development strategy was
designed, which includes offering technical and administrative advisory services
in various fields, such as strategic planning, quality assurance and financial
management. In order to perform these services BC established strategic
alliances with firms such as Vision and Unidad de Asistencia Tecnica y
Consultoria de la Universidad de la Sabana. Through the second half of 2002, 64
companies had contracted BC's consulting services for Ps 850 million.
For high income customers the Bank's strategy has focused on training
and encouraging its managers and account executives to recognize, understand and
pursue high income customers' exact needs, in order to provide a personalized
service to such clients, and satisfy their needs with the Bank's products and
services. Thanks to this scheme, at December 31, 2002, the Bank had 45,000
clients approximately whose accounts were personally managed either by an
account executive or a manager of
17
the Bank ("Managed Customers"). According to market investigations conducted by
BC, these clients considered that the service quality provided by the Bank's
account executives and managers was superior than expected.
For the general customer segment, our focus has been on offering
products tailored to their needs and that satisfy their expectations.
The Bank continues to use its Encouragement Sales Plan program ("ESP")
to retain, increase and make more profitable our relationship with intermediate
banking clients and high income personal banking customers. The Encouragement
Sales Plan has been devised by the Bank to assesses the performance of its
executives and managers through a management scorecard that combines the
individual's business volumes and his success with product placement.
In addition, BC offered its executives and managers training programs
on successful commercial management, and re-defined the role of the sales force.
It also developed personal banking and intermediate banking sales programs which
integrate sales of products and services, the recovery of the overdue portfolio
and customer satisfaction and retention.
RETAIL LENDING
Small Businesses. In order to boost the Colombian economy, for the 12
months starting in September 2003, under a plan promoted by the government,
Colombian banks have agreed to open credit lines for small businesses in an
aggregate amount exceeding Ps 301,000 million. BC will be the second largest
operator of this market having agreed to make available 15% of the total credit
lines (Ps 45,000 million).
These resources will be placed with very small businesses either
directly by the Bank, or indirectly through Non-governmental Organizations
("NGOs"). In this regard, Colombia's most representative NGOs in terms of credit
placements currently hold close to Ps 17,500 million in disbursements with BC.
Personal Banking. BC's primary loan products offered to middle and
upper income individuals are personal lines of credit, automobile loans, credit
cards, loans by telephone and college education loans. Personal loans range in
size from Ps 1 million to Ps 57 million with maturities ranging from one to five
years and bearing both interest at fixed and variable rates. Approximately Ps
561,558 million of such loans, or 9.1% of the Bank's total loans, were
outstanding as of December 31, 2002, 4.54% of which (or 0.41% of the Bank's
total loan portfolio) were past due. Under regulations issued by the
Superintendency of Banking, past due loans are loans that are at least 31 days
past the actual due date (for more detailed information see "Item 5. Operating
and Financial Review and Prospects -- Selected Statistical Information --
Classification of the Loan Portfolio").
Automobile loans bear interest at both fixed and variable rates, have
terms of up to 5 years, loan-to-value ratios of at least 99%, and are secured by
the respective automobile. As of December 31, 2002, approximately 0.39% of the
Bank's total loan portfolio, or Ps 24,476 million, consisted of automobile
loans, 2.18% of which were past due by at least 31 days (or 0.0086% of the
Bank's total loan portfolio).
Pre-approved loans by telephone range in size from Ps 1 million to Ps
57 million with maturities of up to 3 years. As of December 31, 2002, the Bank
had Ps 165,340 million, or 2.67% of the Bank's total loan portfolio, outstanding
as pre-approved loans by telephone, 2.28% of which were past due by at least 31
days (or 0.06% of the Bank's total loan portfolio).
18
Credit Cards. BC participates in the Colombian credit card market
through the issuance of MasterCard,Visa and American Express credit cards. As of
December 31, 2002, BC had issued 158,969 MasterCard cards, 100,069 Visa cards
and 23,629 American Express cards. Since June 2002, BC is the exclusive
Colombian issuer and acquirer agent for American Express credit cards. In
October 2002, BC launched three different American Express personal cards: the
American Express credit card, the Blue American Express credit card and the
American Express Gold credit card. According to information reported by
Credibanco Visa and Redeban-Multicolor, these accounted for 11.73% of the
Colombian market in terms of outstanding credit cards and 15.79% in terms of
total credit card billing. As a result, BC is one of the market leaders in the
credit card business. As of December 31, 2002, credit card loans totaled
approximately Ps 254,876 million, representing approximately 4.11% of BC's total
loan portfolio, 5.86% of which were past due by at least 31 days (or 0.24% of
the Bank's total loan portfolio).
In 2002, BC was a major player in the acquirer business, that is, the
business of purchasing credit card vouchers from retail stores at a discount,
paying Ps 3,487,288 million for debit and credit card sales, representing 39,30%
of the acquirer market.
During 2002, Bancolombia charged quarterly maintenance fees to its
MasterCard and Visa cardholders, ranging from 25,000 to 35,600 depending on the
card class (i.e. Ps 25,000 for Classic cards, Ps 31,900 for Gold and Business
cards and Ps 35,600 for Platinum cards). The Bank also charged a separate
quarterly maintenance fee for overseas use of the cards (i.e. US$24 for Classic
cards, US$30 for Gold, Corporate and Business cards and US$34 for Platinum
cards). No maintenance fees were charged for American Express cards during 2002
because as a marketing strategy, BC decided not to charge the first quarterly
maintenance fees to its new cardholders.
During 2002, BC continued its loyalty program "Millas Libres
Bancolombia" in association with recognized airlines such as Aces, Avianca,
Continental and Copa. In July 2002, the Corporate and Business Class cards were
added to this program. Unlike other loyalty programs, Millas Libres Bancolombia
gives the cardholder the possibility to choose among the various associated
airlines for award travel. During the months of November and December of 2002,
and January and February of 2003 all personal credit card clients were given the
possibility to exchange their accrued miles for Panasonic products.
BC is also participating in e-commerce with MasterCard E-Card and
E-Prepago. Master Card E-card is a virtual credit card developed and launched in
2000. As of December 31, 2002, BC had issued 2,012 E-Cards which billed Ps
705,329,455 during 2002. E-Prepago is a virtual pre-paid card developed and
launched in 2001. As of December 31, 2002, BC had issued more than 800 E-Prepago
cards which billed Ps 586,152,370 during 2002.
BC was the first Colombian bank to issue co-branded credit cards. As of
December 31, 2002, BC had issued 15,495 co-branded credit cards with Almacenes
Exito, Colombia's largest department-store chain and 17,660 credit cards with
Cadenalco, a Colombian supermarket chain.
In addition, the Bank offers the Bancolombia Cayman VISA card, issued
and booked through BC's subsidiary in the Cayman Islands. Bancolombia Cayman
VISA card's billing was US$15.6 million for the year ended December 31, 2002,
with 5,587 cards outstanding as of that date.
The revenues derived from the Bank's credit card business are depend
significantly on its Visa, MasterCard and American Express franchises.
19
DEBIT CARDS
Bancolombia has 2 types of debit cards:
- Bancolombia Maestro: used by clients who have only a savings account with
the Bank to debit their savings account. At December 31, 2002, 746,032
such cards issued by Bancolombia were outstanding.
- MasterCard Debit Bancolombia: used to debit checking and savings accounts.
At December 31, 2002, 142,615 such cards issued by Bancolombia were
outstanding.
80% of BC's savings and checking-account customers have been issued debit cards.
Finally, during the first quarter of 2003, BC introduced Efectivo
Seguro, a pre-paid Visa card. Three companies have been testing this product,
which is targeted to corporate customers for use as petty cash or to pay their
employees' compensation.
INTERMEDIATE BANKING
BC's primary loan products for small companies are working capital
loans, loans funded by Colombian development banks and trade financing loans.
Working capital loans to small companies are typically variable rate
loans based on the average interest rate for time deposits (the Colombian
average certificate of deposit rate equivalent) with maturities of up to 12
months. As of December 31, 2002, 11.27% (Ps 698,160 million) of BC's total loan
portfolio consisted of working capital loans, 4.53% of which were past due (or
0.51% of BC's total loan portfolio).
Loans funded by Colombian development banks have variable rates based
on time deposit rates or LIBOR and have maturities ranging from six months to
five years. For these loans, the Bank receives funding from Colombian
development banks, such as IFI, Finagro, and Banco de Comercio Exterior de
Colombia S.A. ("Bancoldex"), Colombia's export development bank. BC on-lends
such funds in the same currency and with the same maturity at which they were
borrowed from the most recent borrower. As of December 31, 2002, 4.46% (Ps
276,157 million) of the Bank's total loan portfolio consisted of loans funded by
Colombian development banks, 1.39% of which were past due (or 0.06% of BC's
total loan portfolio).
Trade financing loans are typically variable rate loans based on LIBOR
with maturities of up to 6 months. As of December 31, 2002, 0.45% (Ps 28,112
million) of BC's total loan portfolio consisted of trade financing, 3.17% of
which were past due (or 0.01% of BC's total loan portfolio).
DEPOSITS
BC offers a variety of checking accounts, savings accounts, time
deposit accounts and tax collection services to its customers through 340
branches. At December 31, 2002, based on information compiled by the
Superintendency of Banking, BC was the largest bank nationwide in terms of
deposits, with a total of Ps 6,078,126 million on an unconsolidated basis,
representing 12.1% of the Colombian market. 34% of BC's total deposits are in
checking accounts, 38% in savings accounts and 28% in time deposits. BC also
offers its Colombian retail clients dollar-denominated deposit accounts through
Bancolombia Panama, its Panamanian subsidiary.
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As of December 31, 2002, on an unconsolidated basis, BC had
approximately 396,645 checking accounts totaling Ps 2,085,981 million, 74,503
time deposit accounts totaling Ps 1,686,350 million, and 1,138,431 savings
accounts totaling Ps 2,305,795 million.
BANCASSURANCE ("BANCASEGUROS")
During 2002, Bancolombia continued to focus on the insurance business
("Bancassurance"), selling through its network life and home insurance policies
of Suramericana de Seguros. In 2002 the Bank achieved excellent sales and
premium collection results, receiving approximately Ps 21,786 million in
premiums compared to Ps 17,061 million during 2001. Also, 67,940 life insurance
policies "Plan Vida" and "Plan Vida Ideal" were sold in 2002. BC's Bancassurance
business had 128,083 customers as of December 31, 2002.
BANK PENSION ("BANCA PENSION")
In 2002 the bank introduced "Banca Pension", which consists of
voluntary pension plans. Fiducolombia S.A., a subsidiary of the Bank,
administers the pension fund. During 2002 the Bank sold pension plans to 5,798
customers in an aggregate amount of Ps 26,607 million.
OTHER
BC receives fee income from electronic banking services, debit cards,
telephone banking and from its internet "Virtual Branch" service. Retail clients
can use debit cards for withdrawals, deposits, transfers among accounts (both
between BC accounts and between BC and Banco Hipotecario Conavi ("Conavi")
accounts), balance information, and third-party payments. With the exception of
withdrawals and deposits, the same services are provided over the telephone and
electronically. Debit cards can be used at any ATM of BC or Conavi, or at any
ATM that is part of the Redeban-Multicolor, CIRRUS or Visa Plus networks. BC
receives a commission of Ps 1,400 for each transfer between accounts in the same
geographic location. BC also receives a commission of Ps 1,511 for ATM payments
to customers of other banks but charges no commission to BC's customers for ATM
transactions at its own tellers or at Conavi's tellers.
CORPORATE
GENERAL
In order to offer customized services and products, provide for price
segmentation, and to focus the Bank's commercial efforts and personalize its
relationship with corporate customers, BC has divided its corporate customers
into four different segments:
- Corporate: clients with annual sales over Ps 50,000 million;
- Enterprise: medium size clients with annual sales over Ps 11,400
millions and below Ps 50,000 millions;
- Institutional: clients subject to the supervision of the
Superintendency of Banking, the Superintendency of Securities, or
the Superintendency of Health, Family Subsidy; and corporations from
the electricity and public utilities sector and Financial
Corporations; and
- Government: public sector entities.
21
BC's Regional Managers, Account Managers and Assistant Account Managers
are responsible for sales efforts targeted at our corporate clients. During 2002
the Bank conducted an exhaustive review in order to design strategies to
increase the number of corporate clients and the amount of business with them.
One of the conclusions of this review was that the sales force should be
increased, and consequently, between July 2002 and November 2002, the number of
Account Managers was raised from 45 to 57 and the number of Assistant Account
Managers increased from 25 to 43. Account Managers and Assistant Account
Managers are supervised by four Regional Managers. Another result of the Bank's
review was the creation of a Sector Analysis department, which should support
the sales force and provide information and knowledge on the various economic
sectors relevant to the Bank's corporate clients.
BC's growth strategy in the corporate market is based on increasing its
client base and raising the amount of revenue derived from each client. This can
be achieved by offering a specialized sector analysis, focus on low risk
products and increasing the amount of the commissions charged by the Bank.
Services like strategic cash management performed by BC's Account Managers,
coupled with our information system and the integrated services offered through
our subsidiaries respond to the Bank's strategy.
CORPORATE LENDING
BC provides a range of products and services covering the needs of its
corporate banking customers, such as working capital loans, trade financing,
loans funded by Colombian development banks, foreign exchange, cash management
services and electronic payments. BC also offers non-banking services to its
corporate clients such as zero balance cash management, payroll management and
electronic account access via personal computers.
Working capital lending is the most common type of lending in the
corporate credit market. Interest rates for working capital loans are
predominantly variable, based on the interest rate for time deposits which is
reset every three months. As of December 31, 2002, working capital loans totaled
approximately 3,650,585 million, representing approximately 58.9% of BC's total
loan portfolio, 2.06% of which were past due (or 1.22% of the Bank's total loan
portfolio).
Trade finance loans are typically dollar-denominated, variable rate
loans, and as of December 31, 2002, BC's trade financing loans totaled
approximately Ps 166,620 million. They represented 2.69% of the Bank's total
loan portfolio, 0.09% of which were at least 31 days past due (or 0.002% of the
Bank's total loan portfolio. Due to legal restrictions, this portfolio can only
have maturities of six months or less, whereas some capital assets are financed
up to 3 years.
Loans funded by Colombian development banks are variable rate loans,
with interest rates based on time deposit rates or LIBOR, and maturities ranging
from six months to five years. As of December 31, 2002, BC's loans funded by
Colombian development banks totaled approximately Ps 376,378 million,
representing 6.07% of the Bank's total loan portfolio, 0.36% of which were at
least one day past due (or 0.02% of the Bank's total loan portfolio).
BC generally requires greater security coverage from Managed Customers
than from large corporate customers. BC usually obtains mortgages, warehouse
receipt endorsements, equipment liens, and other collateral to secure loans to
managed customers. In addition, BC frequently requires personal guarantees from
the shareholders of Managed Customers. As of December 31, 2002, approximately
62.46% of BC's corporate lending was unsecured and approximately 37.54% was
considered secured or guaranteed.
22
One of BC's competitive advantages in corporate banking is its emphasis
on long-term relationships with clients, together with its ability to provide a
full array of services to meet their needs. In addition, BC is focused on
providing fee income-generating products to large corporate customers,
developing products and services in foreign exchange, international trade
financing and cash management, and expanding its products and services to the
growing market of medium-size corporations.
CREDIT ANALYSIS
BC's credit standards and policies are aimed at achieving a high level
of credit quality in the Bank's loan portfolio, efficiency in the processing of
loans, strict monitoring of outstanding loans and the specific assignment of
responsibilities for credit risk.
To achieve high levels of credit quality and to manage the risks
arising from our lending activities, we have established general policies on:
- credit evaluation;
- lending limits to single customers or business groups, as required by law;
- the level of management authority required for loan approvals;
- maximum terms of loans; and
- security requirements for certain types of loans and their valuation.
The bank has a specialized and centralized department to carry out
credit-risk analysis for the different segments in which customers are
classified. See "Item 5.- Selected Statistical Information-Credit Review
Policies." BC's loan approval policies require that the following factors be
analyzed for every loan:
- the character, reputation and credit history of the borrower;
- the type of business in which the borrower is engaged;
- the borrower's ability to repay the loan;
- the coverage and suitability of the proposed security for the loan;
- the information received from the credit risk center;
- the borrower's debt service ability;
- compliance with the loan terms; and
- for overseas credits, the country risk of the country where the debtor is
headquartered.
- In addition, the Bank continuously monitors the different economic sectors
to which our corporate borrowers belong and has established guidelines for
analyzing the financial condition of borrowers, and for participating in
investment projects, both in Colombia and overseas.
23
In compliance with the requirements of the Superintendency of Banking,
BC monitors its outstanding commercial loan portfolio every six months and its
outstanding consumer and mortgage loan portfolios on a monthly basis. In
addition, BC carries out during the months of May and November a biannual
evaluation of all debtors whose indebtedness for the various credit types
exceeds 300 minimum monthly salaries (equivalent to Ps 99.6 million for 2003).
Also, past due credits are evaluated monthly based on the days they are past
due. In order to monitor outstanding loans with terms in excess of one year, the
Bank periodically requires borrowers to provide, and examines, current cash flow
statements.
DISTRIBUTION NETWORK
GENERAL
BC owns a variety of distribution channels through which it sells
financial products and services, executes transactions, and provides information
to its clients. As of December 31, 2002, these distribution channels included
340 branches located in 123 Colombian cities, a network of 449 ATMs owned by BC,
and a network of 516 ATMs owned by Conavi (with which the Bank has a strategic
alliance). All ATMs are linked to the national Redeban and Red Multicolor
Networks, as well as the worldwide CIRRUS network. In 2002, our ATMs performed
over 45 million transactions. Other distribution channels include telephone
banking, internet banking, PC Banking, banking via electronic devices at our
branch offices, and banking at third-party commercial establishments through
debit cards or electronic passwords.
BRANCH NETWORK
The increase in our branch network is largely due to our strategic
expansion into supermarket and client on-site branches. To date, BC operates 23
supermarket branches, each of which employs about six workers. In addition to
ordinary teller banking services, supermarket branches are able to transact in
US dollars, allowing our customers to receive MoneyGram fund wires, buy and sell
US dollars, purchase travelers checks, and transfer funds to BC's offshore
subsidiaries. Client on-site branches, on the other hand, currently account for
24 of the Bank's branches, 8 of which were opened on client premises during
2002.
Out of BC's 340 branches, 38 branches were "NOVA"-type branches as of
December 31, 2002. Nova branches are generally of medium or small-size,
characterized by versatile employees and the availability of multiple electronic
services. Also, during 2002, the Bank increased its network of ATMs from 418 in
2001 to 449, and launched a drive-in automated service called "Autobanco" in
three of its branches.
The administration of the Bank's network is divided into 5 regions:
Antioquia, with 57 branch offices; Bogota and Sabana, with 107 offices; the
Southern Region, with 68 offices; the Northern Region with 45 offices; and the
Central Region, with 63 offices. Each region is further divided into several
zones to facilitate administration, management and supervision. All branches use
the same on-line and real-time technology to process transactions, making
information immediately available to all our branches.
ELECTRONIC AND INTERNET BANKING
General. Bancolombia has an extensive network of electronic
distribution channels, enabling quick, cost-effective and safe transactions.
Since 1998, the Bank has tried to transfer customer transactions from branch
offices to electronic distribution channels, thereby decongesting BC's branch
offices, improving service and decreasing operational expenses. During 2002, the
Bank continued to enhance its electronic distribution channels by setting target
milestones, developing new transactions and
24
by offering training to its customers in using electronic services. The volume
of transactions processed through electronic distribution channels increased
from 66% of the Bank's overall transaction volume in 2001 to 71% in 2002.
Automatic Teller Machines. With over 449 units, Bancolombia has one of
the largest networks of electronic ATMs in the country. Approximately 75% are
located at the Bank's offices, and 25% are located at shopping centers, gas
service stations, retail stores and similar locations throughout 123 cities and
towns. BC's clients can access their accounts at all of the existing ATMs in
Colombia through the Redeban and Red Multicolor networks, and can access their
accounts in approximately 105 countries worldwide through the CIRRUS network. A
strategic alliance with Conavi gives BC's customers access to additional 516
ATMs, which can be used by the Bank's clients, at no additional cost.
BC's ATMs accept cards from all banking institutions affiliated with
the domestic network and with international networks affiliated with CIRRUS and
Plus. BC charges its clients Ps 4,000 for withdrawals at any non-BC or
non-Conavi ATM. BC assesses no charges to its customers on withdrawals performed
at BC or Conavi ATMs. In 2002, there were 45 million transactions on BC ATMs.
Automatic Payment Systems. Bancolombia's customers may place standing
payment orders and pre-register payments, which are debited automatically and
periodically from their accounts. The Bank's automatic payment system also
enables its customers to effect transactions with any banking institution in
Colombia because it is connected to the two authorized clearinghouses existing
in Colombia, namely ACH and ACH Cenit.
Internet Banking. BC estimates that approximately 11% of the Bank's
transactions with its customers are carried over the Internet. To decrease
operating costs and free up branch networks, BC has implemented programs
oriented to increase the use of electronic banking, by training its employees
and clients in the use of such technology.
BC consolidated its Internet transaction systems in 1998 into a
"Virtual Branch". The Virtual Branch offers services 24 hours a day, including
balance inquiries, savings and credit card information, payment of credit cards,
disbursement of pre-approved loans, blocking of credit cards, counter-order of
checks, transfers among BC accounts and to Conavi accounts, requests for
products and services, payment of bills for more than 350 companies, purchases
on commercial vendor websites, and customer services.
During 2002, a monthly average of 91,500 users used BC via the Internet
which compares positively to the 65,500 monthly average users during 2001.
Approximately 1,851,000 transactions were conducted monthly via the Internet
during 2002 compared to 946,000 during 2001.
Bancolombia has also developed special Internet banking products, which
can be acquired on its Virtual Branch:
- MasterCard E-Card - the first virtual credit card in Colombia.
Application, approval, invoicing, blocking, payment and use are only
carried out through the Internet;
- Virtual Investment - a certificado de deposito a termino (term deposit or
"CDT") that can be opened only through the Internet. Clients can choose
amount, term and interest payment periods, which are paid at a fixed rate
that is higher than traditional CDTs; and
25
- E-Prepago - a credit card number that can be charged and discharged from
deposit accounts for use only over the Internet. The virtual number can be
changed several times allowing secure on-line transactions and reducing
the risk of fraud.
BC has continued developing a special Internet banking service for its
corporate clients, the "Corporate Virtual Branch", which features payment
capabilities and cash management services. As of December 31, 2002, a total of
6,300 clients are using the service compared to 2,600 as of December 2001. With
this product, BC wants to improve its on-line Banking service, giving its
corporate customers internet banking products that are tailored to their needs.
Bancolombia has developed the first Internet corporate banking product,
which can be acquired on its Corporate Virtual Branch. Credipagos Virtual is a
revolving credit facility specifically marketed to small corporate clients.
These loans can be disbursed 24 hours a day, only through the Corporate Virtual
Branch.
TODO1 Alliance. During 2002, Bancolombia continued with TODO 1 Services
("TODO 1") through the alliance with Mercantil Servicios Financieros of
Venezuela and Banco Del Pichincha of Ecuador. TODO 1 is coordinating the
development of Web-based products and services for individual consumers and
corporate clients. This alliance enables Bancolombia to improve its e-business
development and to provide superior services to its customers.
Facturanet. Recently, TODO 1 has developed an electronic bill
presentment and payment system ("EBPP") available for Conavi and BC's customers
through the Internet. At this site, BC's customers can logon to make monthly
payments. It features a notification process that alerts the customer via e-mail
when a new bill is available for payment. At December 31, 2002, more than 15,000
bills had been paid through Facturanet since its inception in September. BC
expects that by December, 2003, customers who are using the Virtual Branch bill
payment feature will migrate to Facturanet.
PC Banking. In addition to retail banking via the Internet, BC offers a
PC Banking service to select corporate clients which allows such clients to
access account information and transfer funds within their BC accounts or to
accounts at other financial institutions. The service operates through software
that has to be installed on a client's information technology system and enables
clients to make their payroll payments, pay their suppliers electronically and
draw individual checks. As of December 31, 2002, the Bank's PC Banking service
had 4,450 customers.
Bancolombia - Conavi Strategic Alliance. Bancolombia continued its
strategic alliance during 2002 with Conavi in order to take advantage of
commercial opportunities, reduce costs and create new joint ventures. This
alliance allows real-time transfers between the two banks through Conavitel, an
electronic transactions system for customers of Bancolombia and Conavi.
TECHNOLOGY
During 2002, BC invested some Ps 24,293 million in technology, mainly
to update its hardware, enhance security, purchase new software and develop new
products.
26
COMPETITION
Following the deregulation of the Colombian financial system in 1993,
competition increased considerably. Significant merger and acquisition activity
in the Colombian financial sector, mostly through 2000, contributed to its
consolidation and the creation of larger and more competitive banks. This
consolidation has resulted in the number of financial institutions decreasing
from 112 as of December 31, 1998 to 72 as of December 31, 2002. The most
significant event during 2002 was the loss of market share by foreign banks,
relative to domestic Colombian banks. According to information provided by the
Superintendency of Banking, foreign banks' market share decreased by 7.8%,
measured by total assets, and by 1.33% measured by total loans, while Colombian
banks' market share increased by 10.8%, measured by total assets, and by 7%
measured by total loans. BC believes its principal competitors in the corporate
market include Banco de Bogota, Citibank and Banco de Occidente.
BC believes its principal competitors in the retail market, based on
their distribution network and customer service, are Citibank, Banco de Bogota,
Davivienda, Banco Popular and Conavi. The Bank believes it is competitive in the
retail market because of its high quality client base, technology and
information systems.
THE COLOMBIAN FINANCIAL SYSTEM
GENERAL
As of December 31, 2002, the principal participants in the Colombian
financial system were: the Central Bank; 28 commercial banks (of which 14 were
domestic banks, 9 were foreign banks and 5 were public banks); 7 public and
private finance corporations; 17 commercial finance companies; 11 leasing
companies; and 9 government-owned development banks. In addition, insurance
companies, securities brokerage firms, cooperatives and bonded warehouse and
trust companies were also present in the Colombian financial system.
As of December 31, 2002, 53.41% of the total assets of the financial
system were held by private entities, 32.83% were held by state-owned or
state-controlled entities and the balance of 13.75% was held by foreign
investors. Specifically, of the total assets of the banking system alone,
private Colombian banks had a share of 62.32%, private foreign banks 18.64% and
state-owned or state controlled banks 19.03%. With respect to deposits in the
banking system, private Colombian banks had a share of 65.74%, private foreign
banks had a 17.62% share and state-owned or state controlled banks had a 16.64%
share.
As a consequence of the consolidation of the Colombian financial
system, the three private banks that, on average in 2002, aggregated most of the
total checking accounts in the banking system were BC, Banco de Bogota and BBVA
Banco Ganadero, with market shares of 18%, 15.3% and 11.1%, respectively, and a
44.4% combined market share. In terms of average savings in 2002, the three
largest banks were Conavi, with a 10.6% share, BC, with a 10.4%, and Davivienda,
with a 8.4%, respectively, and a 29.4% combined market share. In terms of time
deposits, BC had the largest market share with 10.8%, Davivienda, had the second
largest market share with 10% and Granahorrar had the third largest market share
with 9.2%. Together, these three banks had a combined time deposit market share
of 30%. This data is based on statistics released by Asobancaria.
27
Historically, the Colombian financial system was comprised of
specialized institutions operating in market niches that were regulated and
delineated by Law. However, Law 45 of 1990, Law 35 of 1993 and the Estatuto
Organico del Sistema Financiero (Decree 663 of 1993, as amended), significantly
deregulated the Colombian financial system, providing commercial banks with the
opportunity to set up subsidiaries to compete in different markets, and
permitting other financial institutions to enter markets in the Colombian
financial system from which they had previously been excluded. These laws have
increased competition among the different types of financial institutions,
promoted consolidation of the financial industry and created considerable
overlap in the permitted scope of business activities of the various types of
financial institutions, particularly with respect to foreign exchange
operations. Also, foreign investment was permitted in all types of financial
institutions.
Additional laws have since been promulgated with the purpose of further
deregulating the Colombian financial system. Besides Law 35 and Decree 663, Law
510 of 1999, Law 546 of 1999 and Law 795 of 2003 further broadened the scope of
activities permitted to financial institutions, set forth general circumstances
under which the government may intervene in the financial sector, prescribe the
rules governing intervention and established the instruments that the government
may use. Furthermore, savings and loan banks were authorized to expand their
lending activities beyond the construction sector (which they were historically
involved in), were allowed to participate as foreign exchange intermediaries,
and were permitted to offer interest bearing savings accounts as well as credit
and debit cards.
In response to the crisis faced by the Colombian financial system
during the early 1980s, in 1985 the government created the Fondo de Garantias de
Instituciones Financieras ("Fogafin"), a fund meant to assist troubled financial
institutions. Subject to specific limitations, Fogafin is authorized to provide
equity (whether or not reducing the par value of the recipient's shares) and/or
secured credits to troubled financial institutions, and to insure deposits of
commercial banks and certain other financial institutions. Yet, in 1998 and
1999, to address the adverse effects of the economic crisis, Law 550 (Ley de
Reactivacion Economica), Law 546 (Ley de Vivienda), External Circular 039 and
External Circular 044 were further adopted. Notably, under Law 546 of 1999,
savings and loan banks were required to convert into commercial banks.
REGULATORS
The principal bodies regulating the Colombian financial system are the
Ministry of Finance, the Board of Directors of the Central Bank, the
Superintendency of Banking and the Superintendency of Securities. Colombia's
National Congress prescribes the general framework under which the government
may regulate the financial system. The Superintendency of Banking regulates and
supervises all financial institutions, and the Superintendency of Securities
supervises brokerage houses and stock exchanges and monitors and regulates the
market for publicly-traded securities.
The basic regulatory framework for the operations of the Colombian
financial sector is set forth in Decree 663 of 1993, modified by Law 510 of 1999
and Law 795 of 2003. Laws 510 and 795 substantially modified the control,
regulation and surveillance powers of the Superintendency of Banking. Law 510
also streamlined the procedures for Fogafin to intervene on behalf of
economically troubled companies. The main objective of Law 510 was, and
continues to be, to increase the solvency and stability of Colombia's financial
institutions, by establishing rules for their incorporation, the permitted
investments of credit institutions, insurance companies and investment
companies. The main objective of Law 795 is to broaden the scope of activities
to be performed by state-owned financial institutions and to adopt the Basel
Committee principles. Law 795 also increased the minimum capital requirements in
order to incorporate a financial institution (for more information see "Minimum
Capital Requirements" in this Item 4) and authorized the Superintendency of
Banking to take precautionary measures, consisting mainly
28
in preventive interventions with respect to financial institutions whose capital
has fallen below certain thresholds. Such financial institutions, in order to
avoid a temporary take-over by the Superintendency of Banking, must submit to
the Superintendency a restructuring program to restore their financial
situation.
More recently, on January 14, 2003, the Colombian Congress passed Law
795 which further broadened the scope of activities permitted to financial
institutions, including state owned institutions. The Law also mandates
compliance with the management responsibility rules of the Basel Commitee on
Banking Regulations and Supervisory Practices of the Bank for International
Settlement; and sets forth new mechanisms through which the Superintendency of
Banking may increase the solvency and stability of financial institutions. See
"Supervision and Regulation - General".
KEY INTEREST RATES
Colombian commercial banks, finance corporations and commercial finance
companies are required to report to the Central Bank, on a weekly basis, data
regarding the total volume (in pesos) of certificates of deposit issued during
the prior week and the average interest rates paid for certificates of deposit
with maturities of less than 90 days (commercial banks only), 90 to 180 days,
181 to 360 days, and more than 360 days. Based on such reports , the Central
Bank computes the Tasa de Captaciones de Corporaciones Financieras ("TCC") and
the Depositos a Termino Fijo ("DTF") rates, which are published at the beginning
of the following week for use in calculating interest rates payable by financial
institutions. The TCC is the weighted average interest rate paid by finance
corporations during the second week preceding its publication. The DTF is the
weighted average interest rate paid by finance corporations, commercial banks,
savings and loan banks and commercial finance companies during the second week
preceding its publication. As of March 20, 2003, the DTF was 7.65% and the TCC
was 8.25%.
CENTRAL BANK
The Central Bank was created in 1923 and is the second oldest central
bank in Latin America. The Central Bank exercises the customary functions of a
central bank, including price stabilization, legal currency issuance, regulation
of currency circulation, credit and exchange rate monitoring, and administration
of international reserves. Its Board of Directors is the regulatory authority
for monetary, currency exchange and credit policies, and is responsible for the
direction and execution of the Central Bank's duties. The Central Bank also acts
as the fiscal agent of the government and lender of last resort to financial
institutions.
Pursuant to the Colombian Constitution of 1991, the Central Bank has
autonomy from the government in the formulation of monetary policy and for
administrative matters. More specifically, the Constitution of 1991 established
administrative, technical, budgetary and legal autonomy for the Central Bank and
its Board of Directors in respect of monetary, credit and foreign exchange
matters. The Central Bank reports only to the National Congress; its Board of
Directors has seven members, one of whom is the Minister of Finance.
SUPERVISION AND REGULATION
GENERAL
To implement and enforce the provisions described in the preceding
section "Regulators", the Superintendency of Banking and the Board of Directors
of the Central Bank issue periodic circulars and resolutions. In External
Circular 007 of 1996, as amended, the Superintendency of Banking compiled all
29
the rules and regulations covering banking institutions. And, External Circular
100 of 1995, as amended, compiled all regulations applicable to the accounting
and financial treatment of banking institutions.
The Superintendency of Banking was established in 1923 and is
responsible for supervising and regulating all entities classified as financial
institutions under Decree 663 of 1993, including commercial banks such as BC,
mortgage banks, finance corporations, commercial finance companies, savings and
loan banks, financial services companies (such as trust companies, warehouse
companies, and pension and severance pay administration companies) and insurance
companies. Decree 2359 of 1993 provides the Superintendency of Banking's legal
framework. Financial institutions must seek the authorization of the
Superintendency of Banking before initiating new operations.
Violations of Laws 510, 795 and specified provisions of Decree 663 and
their underlying regulations are subject to administrative sanctions and, in
some cases, criminal penalties. The Superintendency of Banking may inspect
Colombian financial institutions on a discretionary basis, and has the authority
to fine such institutions, their directors and officers for violations of
Colombian laws, regulations, or such financial institutions' own by-laws.
Since BC's Common Shares and Preference Shares are publicly traded on
the Colombian Stock Exchange, certain aspects of BC's operations are supervised
by the Superintendency of Securities.
The Ministry of Finance and the Board of Directors of the Central Bank,
which have significant influence over domestic interest rates, issue most
regulations governing the financial system and are responsible for Colombia's
fiscal and monetary policy.
BC files periodic reports with the Superintendency of Banking, the
Superintendency of Securities and the Central Bank. In addition, the
Superintendency of Banking makes on-site inspections of Colombian banks,
including BC, on a regular basis.
CAPITAL ADEQUACY REQUIREMENTS
Capital adequacy requirements for Colombian financial institutions are
based on the standards of the Basel Committee on Banking Regulations and
Supervisory Practices of the Bank for International Settlements. The regulations
establish four categories of assets, each being assigned different risk weights,
and require that a credit institution's Technical Capital (as defined below) be
at least 9% of that institution's total risk-weighted assets.
Technical Capital for the purposes of the regulations consists of basic
capital ("Primary Capital") and additional capital ("Secondary Capital")
(collectively, "Technical Capital"). Primary Capital consists primarily of:
- paid-in capital stock;
- legal and other primary capital reserves;
- earnings retained from prior fiscal years;
- the total value, if positive, of the primary capital revaluation account;
- the balance of the financial statements conversion adjustment;
30
- current fiscal year profits in a proportion equal to the percentage of
prior fiscal year profits that were allocated to the legal reserve, or
capitalized, or used to cover accrued losses;
- the total value of capitalized dividends; and
- any representative shares held as guarantee pending compliance with a
recovery program aimed at bringing the Bank back into compliance with
capital adequacy requirements, if the Superintendency of Banking
established that such recovery program has failed;
Items deducted from Primary Capital are:
- any prior or current period losses;
- the total value of the primary capital revaluation account (if negative);
- accumulated inflation adjustment on non-monetary assets (provided that the
respective assets have not been transferred);
- capital investments in entities subject to the supervision of the
Superintendency of Banking (including purchases of mandatory convertible
bonds); and
- investments in financial subsidiaries, other capital investments in
financial institutions and certain other items.
Secondary Capital consists of other reserves and retained earnings,
which are added to the Primary Capital in order to establish the total Technical
Capital. Secondary Capital includes:
- 50% of asset reappraisal (excluding revaluations of assets acquired by
foreclosure or paid for in kind);
- mandatory convertible bonds (provided that the terms and conditions of
their issuance were approved by the Superintendency of Banking);
- 50% of the accumulated inflation adjustment of non-monetary assets
(provided that such assets have not been disposed of);
- general provision; and
- the difference between the surplus capital account from donations and the
investment devaluation account.
In computing Technical Capital, Secondary Capital may not exceed (but
can be less than) the total amount of Primary Capital.
The following table sets forth certain information regarding BC's
capital adequacy as of December 31, 2002:
31
As of December 31, 2002
-----------------------
(In millions of pesos,
except percentages)
-----------------------
Subscribed capital ......................................... Ps 355,119
Legal reserve and other reserves ........................... 566,187
Unappropriated retained earnings ........................... 51,136
Net Income ................................................. 132,413
Less:
Long-term investments ............................. (131,280)
Non-monetary inflation adjustment ................. (178,029)
-----------
Primary capital ............................................ Ps 795,546
===========
Reappraisal of assets ...................................... Ps 74,079
Provision loans ............................................ 66,640
Non-monetary inflation adjustment .......................... 102,057
-----------
Computed secondary capital ................................. Ps 242,776
===========
Primary capital ............................................ Ps 795,546
Secondary capital (up to an amount equal to primary capital) 242,776
-----------
Technical Capital .......................................... Ps1,038,322
===========
Capital ratios
Primary capital to risk-weighted assets .................... 8.90%
Secondary capital to risk-weighted assets .................. 2.71%
-----------
Technical capital to risk-weighted assets .................. 11.61%
===========
As of December 31, 2002, the Bank's Technical Capital ratio was 11.61%,
thereby exceeding the requirements of the Colombian government and the
Superintendency of Banking by 261 basis points. The Bank's capital has
fluctuated over time. There can be no assurance that the Bank will not continue
to experience such fluctuations in the future. However, the Bank expects to be
able to continue to meet all capital adequacy requirements under Colombian law.
In April 2001, the Superintendency of Banking issued External Circular
014 which eliminated the use of inflation adjustments in all financial-statement
accounts beginning January 1, 2001. See Note 2(b) to the Financial Statements.
Until 2001, market and liquidity risks were regulated by the
Superintendency of Banking's Resolution 001 of January, 1996. While liquidity
risks are still regulated by Resolution 001, since 2001, market risks are
governed by External Circular 042 of 2001 and External Circulars 003 and 007 of
2002. These circulars define new criteria and procedures for measuring the
Bank's exposure to interest rate risk, foreign exchange risk, and equity price
risk. Under the new regulations, the Bank must send to the Superintendency of
Banking information on the net present value, duration, and interest rate of its
assets, liabilities, and derivative positions. Since January 2002, the Bank has
also been required to calculate, for each position on the balance sheet, a
volatility rate and a parametric VaR (value at risk), which is calculated based
on net present value, modified duration and a risk factor computed in terms of a
basis points change. Each risk factor is calculated and provided by the
Superintendency of Banking.
32
MINIMUM CAPITAL REQUIREMENTS
The minimum capital requirements for banks on an unconsolidated basis
is now contained in Law 795 of 2003. Failure to meet such requirements can
result in the imposition of a fine by the Superintendency of Banking of up to
3.5% of the difference between the required minimum capital and the bank's
effective capital. BC has met all such requirements. As of December 31, 2002,
BC's total capital consisted of Ps 355,119 million of paid-in capital stock and
Ps 566,187 million of legal and other reserve funds.
FOREIGN CURRENCY POSITION REQUIREMENTS
Until January 1, 1996, commercial banks were required by the Central
Bank's Board of Directors to maintain a minimum foreign currency position equal
to a specified percentage of each bank's foreign currency-denominated
liabilities.
Effective January 1, 1996, Resolution 28 of 1995 of the Board of
Directors of the Central Bank abolished the minimum foreign currency position
requirement and allowed a commercial bank to borrow funds denominated in foreign
currency and to make peso-denominated loans therewith. Resolution 26 of 1996 of
the Board of Directors of the Central Bank (amended by Resolution 4 of 2001)
provides that the sum of the bank's foreign currency-denominated assets and
liabilities (including any off-balance sheet items) cannot, if assets are
greater than liabilities, exceed 50% of the bank's Technical Capital, except
that currency exchange intermediaries are permitted to hold negative foreign
currency positions not exceeding the equivalent of 5% of its Technical Capital
(with penalties being payable after the first day). As of February 4, 2003, BC
had a dollar-denominated negative net assets position of US$0.709 million, which
falls within the aforementioned regulatory guidelines. See Note 3 to the
Financial Statements.
RESERVE REQUIREMENTS
Commercial banks are required by the Central Bank's Board of Directors
to satisfy reserve requirements with respect to deposits. Such reserves are held
by the Central Bank in the form of cash deposits and their required amounts
vary. According to the Central Bank's Board of Directors' Resolution 19 of 2000,
the reserve requirements for Colombian banks for deposits received on or after
December 31, 2000 are:
Reserve Requirement (%)
-----------------------
Private demand deposits....................................... 13
Government demand deposits.................................... 13
Other deposits and liabilities................................ 13
Savings deposits.............................................. 6
Time deposits (1)............................................. 0 - 2.5
---------------
(1) Under 540 days, 2.5% and above 540 days, 0%
FOREIGN CURRENCY LOANS
Resolution 08, dated May 5, 2000, of the Board of Directors of the
Central Bank requires every Colombian resident and institution borrowing under
foreign currency loans, regardless of the term or conditions of the loan, to
maintain at the Central Bank a non-interest bearing deposit for a percentage of
the respective indebtedness and during a term specified by the Central Bank's
Board of Directors. The Bank is not required to register with the Central Bank
to make foreign currency loans, but must submit a
33
report of all foreign currency loans made by the Bank, subject to certain
exceptions for loans to finance imports, capital goods, foreign investments and
credit card debt.
BAD LOAN ALLOWANCE
The Superintendency of Banking has issued guidelines on bad loan
allowances for Colombian credit institutions. See "Item 5. Operating and
Financial Review and Prospects -- G. Selected Statistical Information --
Allowance for Loan Losses."
LENDING ACTIVITIES
The government, pursuant to Decrees 2360 and 2653, each of 1993, set
the maximum amounts that each financial institution may lend to a single
borrower (including for this purpose all related fees, expenses and charges).
These maximum amounts may not exceed 10% of a commercial bank's Technical
Capital. The limit is raised to 25% when any amounts lent above 5% of Technical
Capital are secured by guarantees that comply with the financial institutions'
guidelines, in accordance with the requirements set forth in Decrees 2360 and
2653. Also, according to Decree 1886 of 1994, BC may not make a loan to any
shareholder that holds directly more than 10% of its capital stock, for one year
after such shareholder reaches the 10% threshold. In no event may a loan to a
shareholder holding directly or indirectly 20% or more of BC's capital stock
exceed 20% of BC's Technical Capital. In addition, no loan to a single financial
institution may exceed 30% of BC's Technical Capital. As of December 31, 2002,
BC's lending limit per borrower on an unconsolidated basis was Ps 82,333 million
for unsecured loans and Ps 205,832 million for secured loans. If a financial
institution exceeds these limits, the Superintendency of Banking may impose a
fine up to twice the amount by which any such loan exceeded the limit. At
December 31, 2002, the Bank was in compliance with these limitations.
The Central Bank also has the authority to establish maximum limits on
the interest rates that commercial banks and other financial institutions may
charge on loans.
The Bank is also subject to limits on risk concentration. Pursuant to
Decree 2360, exposure to any individual or entity is limited to 30% of the
Bank's Technical Capital, on a consolidated basis. Risk exposure includes loans,
leasing transactions and equity and debt investments.
OWNERSHIP RESTRICTIONS
BC is organized as a limited liability stock corporation under
Colombian law and is governed by laws that regulate the activities of private
companies, such as the Colombian Commerce Code. The Commerce Code requires
companies such as BC to have at least five shareholders at all times and
provides that no single shareholder may own 95% or more of BC's subscribed
capital stock. Article 262 of the Colombian Commerce Code prohibits BC and its
directly owned subsidiaries (but not its indirect subsidiaries) from acquiring
capital stock of BC.
Pursuant to Decree 663 adopted by the government on April 2, 1993, as
amended by Law 795 of 2003, any transaction resulting in an individual or
corporation holding 10% or more of any class of capital stock of any Colombian
financial institution, including in the case of BC, transactions resulting in
holding ADRs representing 10% or more of the Preference Shares underlying ADSs,
must receive prior authorization from the Superintendency of Banking. In
granting its approval, the Superintendency of Banking will evaluate the proposed
transaction based on the criteria and guidelines specified in Law 510 of 1999,
as amended by Law 795 of 2003. Transactions entered into without the
Superintendency of Banking's prior approval are void, and cannot be recorded in
the stock registry of the financial institution.
34
Foreign investors are subject to and receive the same treatment as Colombian
citizens with respect to the above transactions.
In addition to the above restriction, pursuant to Resolution 400 of
1995, as amended, issued by the Superintendency of Securities, any transaction
involving the sale of publicly traded stock of any Colombian company, including
in the case of BC, any sale of the Preference Shares (but excluding any sale of
ADSs), for UVR equivalent to Ps 66,000 or more, must be effected through one of
Colombia's stock exchanges. Separately, Resolution 400 of 1995 also requires
prior authorization of the Superintendency of Securities in order to offer to
purchase in the public market 10% or more of the issued and outstanding capital
stock of any Colombian company (including in the case of BC, Preference Shares
and Common Shares), unless the purchaser is acquiring the stock pursuant to a
public offer directed to all shareholders of such a company.
These limitations may affect the market liquidity of the Preference
Shares and the ADSs.
DEPOSIT INSURANCE
To protect the customers of commercial banks and certain financial
institutions, Resolution 1 of 1988 of the Board of Directors of Fogafin, as
amended ("Resolution 1"), requires mandatory deposit insurance. Under Resolution
1, banks must pay an annual premium of 0.3% of total funds received on deposit
and checking accounts, certificates of deposit and bonds. If a bank is
liquidated, the deposit insurance will cover 75% of all funds deposited by an
individual or corporation with such bank, up to a maximum of Ps 10 million.
Thus, the maximum amount that a customer of a liquidated financial institution
is entitled to recover under deposit insurance is Ps 7.5 million.
INTERVENTION RIGHTS OF THE SUPERINTENDENCY OF BANKING
According to laws 510 of 1999 and 795 of 2003, and subject to the prior
consent of the Advisory Board of the Ministry of Finance and the Minister of
Finance's approval, the Superintendency of Banking may seize the operations and
assets of a bank in order to manage it or proceed with its liquidation, if such
bank:
- suspends the payment of its debts;
- does not allow the Superintendency of Banking to inspect its records;
- repeatedly fails to comply with the instructions of the Superintendency of
Banking;
- repeatedly violates Colombian law or its own by-laws;
- repeatedly manages its operations in an unauthorized or unsafe manner;
- allows its shareholders' equity to fall below 50% of its outstanding
capital stock;
- provides materially misleading information to the Superintendency of
Banking;
- fails to comply with applicable capital adequacy requirements; or
- fails to comply with the adopted recovery programs.
35
The Superintendency of Banking may immediately seize the
operations and assets of a bank if: (a) its Technical Capital falls below 40% of
the minimum capital adequacy requirements, or (b) the term to implement a
restructuring program mandated by the Superintendency of Banking has lapsed.
Rather than seizing the operations and assets of a bank, the Superintendency of
Banking may adopt other preventive measures, such as imposing additional reserve
requirements on the commercial bank, ordering the increase of its capital stock
or the investment of certain or all of its assets, and placing the bank under
special surveillance.
C. ORGANIZATIONAL STRUCTURE
The following is a list of Bancolombia's significant subsidiaries:
COLOMBIAN SUBSIDIARIES
FIDUCOLOMBIA S.A.
Fiducolombia S.A. is a trust company, 85.93% owned by BC
(consolidated), formed upon the merger in December 1998, of the trust companies
of BIC, Banco de Colombia, Sufibic and Fiducolombia. Fiducolombia's services
include financial, guarantee, real estate, management and administration trusts.
As of December 31, 2002 Fiducolombia managed approximately Ps 7,000 billion in
assets from approximately 39,800 customers.
Fiducolombia is the leader in the mutual fund and public trust market
in Colombia and has been approved by Morgan Guaranty Trust and The Bank of New
York to act as custodian for ADRs and GDRs.
In 2002, Duff and Phelps of Colombia rated Fiducolombia "AAA" for the
strength in portfolio management. Also, BCR Investor Services rated Fiducolombia
"AAA" in counterpart risk. Moreover, IQNet, the international certification
network, extended Fiducolombia's certificate with NTC/ISO 9001:2000 on Quality
Management for management and investment procedures in mutual funds, individual
portfolios and trust operation.
Fiducolombia's headquarters are located in Bogota, and the company has
branches in Medellin, Cali and Barranquilla and offices in Manizales, Pereira
and Bucaramanga.
ALMACENAR S.A.
Almacenar S.A., (Almacenar), which is a 98.25% owned subsidiary of BC
(consolidated), was formed upon the merger, in May 1998, of the bonded
warehousing subsidiaries of BIC, Banco de Colombia, Almabic and Almacenar.
Almacenar, which is certified under ISO 9002/94, carries out bonded warehousing,
freight forwarding, customs agency operations and other logistics services in
Colombia.
Almacenar has a reputation for being the leading logistics operator in
Colombia, with 848 employees and 17 offices throughout the country.
In line with Almacenar's strategy, its logistics business
(international trade, inventory management and distribution) grew 58% in 2002
reaching a 66% share of total market revenues.
36
As of December 2002, Almacenar had increased its total revenue by 19.8%
from the prior year. During the year ended December 31, 2001, Almacenar's total
income increase by 20.13% compared to the previous year.
COLCORP S.A.
Colcorp S.A. ("Colcorp"), a financial corporation established in 1994,
is BC's largest Colombian subsidiary. As of December 31, 2002, BC beneficially
owned 100% of Colcorp's capital stock.
Colcorp engages primarily in asset management and investment banking
services. As of December 31, 2002, Colcorp S.A. had over Ps 201,000 million
assets under management, invested in a diversified portfolio of Colombian
economic sectors, including agriculture, telecommunications and public
infrastructure.
As part of its investment banking activities, Colcorp S.A. offers
specialized advisory services to private companies and government entities in
areas such as mergers and acquisitions, project finance, syndicated loans and
debt restructuring, both in Colombia and abroad.
For the year ended December 31, 2002, Colcorp had a net income after
taxes of Ps 7,252 million.
LEASING COLOMBIA S.A.
Leasing Colombia S.A. ("Leasing Colombia") was a subsidiary of Banco de
Colombia S.A. before the Merger and has been operating since the 1970s. Leasing
Colombia, which is now 99.98% beneficially owned by BC (consolidated), provides
lease financing and other leasing products for the industrial and corporate
markets, as well as automobile leases and other such leasing products for the
consumer market. Its headquarters are in Bogota, with offices in Medellin, Cali,
Barranquilla, Pereira Manizales and Bucaramanga.
As of December 31, 2002, Leasing Colombia had approximately Ps 308,046
million in real estate and equipment under lease. Leasing Colombia arranges
lease financing primarily for the public works and transportation sectors, but
also for the construction, trade, manufacturing, cargo transport and electricity
sectors. Leasing Colombia is the third largest leasing company in Colombia
(based on amount of lease receivable) with a market share of approximately 12%
at December 31, 2002, as reported by the Superintendency of Banking.
COMISIONISTA DE COLOMBIA S.A.
Comisionista de Colombia S.A. ("Comisionista de Colombia"), which is
99.99% beneficially owned by BC (consolidated), is a brokerage house that
operates in both the equity and debt markets and is a member of the Colombian
Stock Exchange. In addition, Comisionista de Colombia manages its own mutual
fund ("Opcion Colombia"). As of December 31, 2002, it had assets totaling
approximately Ps 16,822 million, gross revenues for the year was approximately
Ps 12,804 million and net income for the year was approximately Ps 1,412
million. As of December 31, 2002 Comisionista de Colombia managed approximately
Ps 417,167 million in assets for more than 65,500 clients. In 2002, Duff and
Phelps rated Comisionista de Colombia AA- (with positive outlook) for portfolio
management risk and for its mutual fund Opcion Colombia and 4/AA+ for market and
credits risks.
37
OFF-SHORE SUBSIDIARIES
BC's international banking operations were established to support and
enhance the domestic business of the Bank. They are conducted through the Bank's
head office in Medellin, and through its wholly-owned direct and indirect bank
subsidiaries (Bancolombia Panama, Bancolombia Cayman, Sinesa, Sinesa Holding and
Future Net, Inc.) based in Panama, Cayman Islands and British Virgin Islands. In
addition, the Bank has a banking license in Venezuela. During 2002, BC completed
the voluntary liquidation of its banking license in Montserrat.
Bancolombia Panama was established in 1972 and provides a complete line
of banking services mainly outside Panama, including loans to Colombian private
sector companies, trade financing, lease financing, financing for industrial
projects and a complete portfolio of products for private banking clients.
Leasing operations relate mainly to equipment and machinery purchases for
technological modernization and for expansion of the production capacity of its
customers in Colombia.
As of December 31, 2002, Bancolombia Panama and its wholly-owned
subsidiaries had total consolidated assets of US$962 million. Bancolombia
Panama's consolidated loans outstanding to borrowers in Colombia, Brazil, Costa
Rica, the United States, Panama, the Dominican Republic and Venezuela, as of
December 31, 2002, were US$303.2 million, US$3.4 million, US$2.1 million, US$2
million, US$1.3 million, US$1.5 million, and US$10.3 million, respectively.
Funding sources included demand deposits of US$259 million and time deposits of
US$585 million. As of December 31, 2002, Bancolombia Panama had an investment
portfolio of US$530 million and shareholder's equity of US$102 million.
Bancolombia Panama had consolidated net income for the fiscal year ended
December 31, 2002 of US$21 million. (This financial information has been
provided under Colombian GAAP).
Through its affiliates Bancolombia Panama and Bancolombia Cayman,
Bancolombia offers its customers investment opportunities denominated in
dollars, such as checking accounts, money market accounts, savings accounts,
time deposits and investment funds.
OTHER INVESTMENTS AND INTERESTS
In addition to investments in the foregoing subsidiaries, the Bank has
made several equity investments, which in accordance with Colombian law are
limited to financial companies. As of December 31, 2002, the sum of the book
value of the issuers of the securities representing these investments and
dividends received amounted to Ps 118,874 million.
38
The following table sets forth information regarding BC's investments
in such financial companies as of, and for the year ended December 31, 2002:
% Shares
Owned Dividends
(Direct or Received
Company Business indirectly) by BC
------- -------- ----------- -----
(in millions
of pesos)
Conavi (1) Saving and Loans Banking 28.52 11,279
Proteccion (Sociedad Administradora de Fondos de Severance and Pension Fund 7.42 1,385
Pensiones y Cesantias S.A.) Management
Deceval (Deposito Central de Valores S.A.) Securities Depositary 6.97 114
Corfinsura (Corporacion Financiera Suramericana
S.A.) Finance Corporation 4.62 -
Bladex (Banco Latinoamericano de Exportaciones) Export Finance 0.43 20
---------------
(1) BC increased its ownership in CONAVI from 23.91% on December 31, 2000 to
28.52% on December 31, 2000 and 2001 respectively, after BC purchased
1,922,007,608 common shares. At and for the year ended December 31, 2002,
CONAVI had total assets of Ps 3,958,936 million (nominal Pesos), total
shareholders' equity of Ps 349,463 million (nominal pesos) and net income
of Ps 67,498 million (nominal pesos).
Bancolombia is also a shareholder of Multienlace S.A. ("Multienlace").
Multienlace provides technical and administrative services to the Bank and other
entities, including Conavi, Fiducolombia, Suramericana de Seguros de Vida and
Suramericana de Capitalizacion and Proteccion. Although Multienlace is not a
financial entity, Colombian law allows a financial institution such as BC to
invest in companies that provide services that are related to the operations of
a financial institution. As of December 31, 2002, BC owned 49.44% of the voting
stock of Multienlace, which had total assets of Ps 28,406 million (nominal
pesos), total shareholders' equity of Ps 16,172 million (nominal pesos) and a
net income for the year of Ps 1,854 million (nominal pesos).
D. PROPERTY, PLANT AND EQUIPMENT
BC owns its principal executive offices, located at Calle 50, No.
51-66, Medellin, Colombia. As of December 31, 2002, BC had 340 office locations
throughout Colombia, of which 176 were owned and 164 were leased. BC also owns
and leases properties in various locations across Colombia for the storage of
documents and for back-office and administrative operations.
Bancolombia Panama owns its principal executive offices, which are
located in Panama City, Panama.
As of December 31, 2002, the net book value of all premises and
equipment owned by the Bank was approximately Ps 317,724 million.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
A. OPERATING RESULTS
IN GENERAL
The following discussion should be read in conjunction with the Bank's
audited consolidated financial statements attached to this Annual Report. The
financial statements have been prepared in accordance with Colombian GAAP.
39
As of January 1998, BC had purchased 51% of the outstanding capital
stock of Banco de Colombia in connection with the Merger. As a result of this
majority ownership, BC's results of operations for the year ended December 31,
1998, include amounts attributable to Banco de Colombia's results of operations
for such period and BC's financial position as of December 31, 1998, includes
the assets and liabilities of Banco de Colombia as of that date. The Merger was
completed in April 1998 through the exchange of shares of BC for the remaining
49% of the outstanding capital stock of Banco de Colombia. Since the Bank's
results of operations for the years ended December 31, 1998, December 31, 1999,
December 31, 2000, December 31, 2001 and December 31, 2002, reflect amounts
recognized from the combined operations for such period, they cannot be divided
between or attributed directly to either of the former entities nor can they be
directly compared to prior periods. Any financial information herein for the
year ended December 31, 1997, does not give effect to the Merger and, as such,
reflects only the results of operations and financial condition of the former
BIC and cannot be directly compared with future periods. In accordance with
Colombian GAAP, the Bank began to consolidate its financial statements to
include the results of operations of Banco de Colombia as of January 1, 1998.
ADJUSTMENTS FOR INFLATION
The consolidated financial statements, as previously required by law,
were adjusted for the effects of inflation occurring from January 1, 1992 to
December 31, 2000. See "Exchange Rates; Inflation."
Accordingly, the "non-monetary inflation adjustment" reported in the
Bank's consolidated statements of operations for the year ended December 31,
2000 is the result of netting or offsetting the following items:
- a credit (or income entry) for inflation affecting non-monetary assets;
- a charge (or expense entry) for inflation affecting non-monetary
liabilities and shareholders' equity; and
- charges and credits (for expense and income entries) representing
inflation adjustments made to expenses and revenues, respectively.
Monetary balances were not adjusted for inflation because they reflect
the purchasing power of the currency at the date of the balance sheet. Publicly
traded equity securities were not adjusted for inflation because they were
recorded at their fair market value. Permanently held securities, however, were
adjusted for inflation until September 30, 1998. Foreign currency balances were
not adjusted since they were (and continue to be) translated into Colombian
pesos at the date of the balance sheet and reflect the purchasing power of the
currency on that date. The inflation-adjusted cost of the Bank's non-monetary
assets may not exceed the net market value of such assets.
The net loss from exposure to inflation for the year ended December 31,
2000, is reflected as "Net monetary inflation adjustment" in the Bank's
Consolidated Statements of Operations.
Our profitability depends principally on the difference between
interest earned on loans and investments and the interest paid on deposits and
borrowings and on our ability to earn commissions. In addition, our
profitability depends significantly on factors such as regulation, competition,
interest rates, taxes, foreign exchange rates, securities market conditions and
general local and global economic conditions.
40
Below is a description of the economic situation in Colombia, followed
by a description of the relevant conditions of the Colombian financial system.
ECONOMIC ACTIVITY IN COLOMBIA
IN GENERAL
Since 1950 and until 1998, Colombia enjoyed positive real gross
domestic product ("GDP") growth in every year (ranging from a low of 0.6% in
1998 to a high of 8.47% in 1978) and relatively stable rates of inflation (with
a low of 2.2% in 1955 and a high of 32.6% in 1963). In 1997, Colombia registered
real GDP growth of 3.4%. During 1998, as a consequence of sharply higher
domestic interest rates, the effects of the El Nino weather phenomenon on the
agricultural sector, the negative effects of the financial crisis in Asia and
Russia and the significant decline in international crude oil and other
commodities prices, the Colombian economy suffered a severe slowdown, growing by
just 0.6% during the year. The economy worsened in 1999, registering negative
real growth of 4.2%, the deepest recession in Colombian economic history.
Inflation, as measured by the change in the consumer price index, averaged 17.7%
in 1997, 16.7% in 1998 and 9.2% in 1999. In 2000 and 2001, the economy resumed
economic growth, with GDP increasing by 2.7% and 1.6% in real terms,
respectively, at the same time that inflation declined to 8.8% in 2000 and 7.7%
in 2001. According to preliminary figures, real GDP growth for the year ended
December 31, 2002 was 1.65%. Real GDP growth was 0.47%, 2.31%, 1.91% and 2.18%
during the first, second, third and fourth quarters of 2002, respectively. The
sectors of the economy that experienced the largest increases in real growth
during 2002 were construction and financial services. The Government's current
official projection for real GDP growth for 2003 is approximately 2%.
Colombia's ratio of debt to gross domestic product ("GDP") increased
from 39.0% in 1999 to 45.1% in 2000 and to 47.7% in 2001. Official figures for
2002 have not yet been released, but the ratio of debt to GDP is expected to
have exceeded 50% in 2002. In December 2002, Congress authorized the issuance of
up to $16.5 billion in external debt over the next four years. Although Congress
approved tax, pension and labor reform legislation on December 20, 2002, and the
Government has proposed additional legislation to reduce Government
expenditures, the debt to GDP ratio is expected to continue to increase due to
slow economic growth and the current level of government spending. For a further
discussion of the reforms passed by Congress, see "Public Sector
Finances-Recently Enacted Fiscal Reforms."
On November 16, 2002, President Uribe's administration announced its
intention to propose to Congress a four-year national development plan entitled
"Hacia un Estado Comunitario" (Towards a Communitarian State). The proposed
plan, seeks to increase annual real GDP growth and reduce the unemployment rate
and the public sector deficit through economic growth incentives. The proposed
plan calls for total expenditures of Ps 108 trillion, of which Ps 65.7 trillion
would be spent on social programs, Ps 27.6 trillion would be spent on
infrastructure improvements and Ps 3.2 trillion would be spent on defense. As
part of its goal to reduce the fiscal deficit and modernize the State, the plan
calls for the Government to trim the public workforce by an estimated 40,000
employees. The Government's development plan has been submitted to Congress, but
no assurances can be given that it will be adopted in the form proposed by the
Government, if at all, or that it will achieve its stated objectives.
INTERNAL SECURITY
Due to continued attacks by rebel groups against the Colombian
population, the Government extended the State of Emergency until May 6, 2003.
See "Item 3. Key Information - B. Risk Factors - Colombia Has Experienced
Several Periods of Violence and Instability".
41
EMPLOYMENT AND LABOR
Employment suffered a considerable decline during the past ten years.
In 2002, the unemployment rate reached 18%. A labor reform approved by Congress
in December, 2002 and a higher economic growth are expected to improve the
unemployment situation.
INTEREST RATES AND INFLATION
The DTF was 7.8% in December 2002, as compared to 11.4% in December
2001. Interest rates slightly decreased in 2003, with the DTF registering 7.6%
on March 20, 2003.
Consumer inflation (as measured by the change in the consumer price
index, or "CPI") for the twelve months ended December 31, 2002 was 7.0%, as
compared to 7.7% for the twelve months ended December 31, 2001, and 8.8% for the
twelve months ended December 31, 2000.
Producer price inflation (as measured by the change in the producer
price index, or "PPI") for the twelve months ended December 31, 2002 was 9.3%,
as compared to 6.9% for the twelve months ended December 31, 2001.
The following table sets forth changes in the consumer price index
(CPI), the producer price index (PPI) and average 90-day deposit rates (DTF)
during 2002.
INFLATION AND INTEREST RATES IN 2002
SHORT-TERM
CONSUMER PRODUCER REFERENCE
PRICE INDEX PRICE INDEX RATE
(CPI)(1) (PPI)(1) (DTF)(2)
-------- -------- --------
2002
January.............. 7.4% 5.5% 11.2%
February............. 6.7 4.0 10.8
March................ 5.9 3.5 10.6
April................ 5.7 2.5 10.0
May.................. 5.8 2.3 9.1
June................. 6.3 2.9 8.4
July................. 6.2 3.8 7.9
August............... 6.0 4.8 7.9
September............ 6.0 6.8 7.9
October.............. 6.4 8.9 7.9
November............. 7.1 9.0 7.9
December............. 7.0 9.3 7.8
------
(1) Percentage change over the previous twelve months at the end of each month
indicated.
(2) Average for each month of the short-term composite reference rate
(depositos a termino fijo or "DTF", as calculated by the Superintendency of
Banks
Sources: DANE and Banco de la Republica.
INTERNATIONAL RESERVES
International Reserves. Net international reserves increased from $10.2
billion at December 31, 2001 to $11 billion at February 28, 2003.
PUBLIC SECTOR ACCOUNTS
The Government revised its 2002 Central Government deficit target to
6.4% of GDP, from the 4.8% target included in its previous agreement with the
International Monetary Fund ("IMF"). Preliminary figures indicate that the
Central Government deficit for the first nine months of 2002 totaled
42
Ps 7.9 trillion, a 64.5% increase as compared to the Ps 4.8 trillion deficit
registered in the same period of 2001.
2002-2004 INTERNATIONAL MONETARY FUND PROGRAM
On January 15, 2003, Colombia and the International Monetary Fund
("IMF") signed an agreement, effective December 2002, for an Extended Fund
Facility of approximately US$2 billion in connection with the Government's new
two-year macroeconomic program. The facility may be used to support imbalances
in Colombia's external accounts, although disbursements under the IMF program
are conditional on achieving certain targets. These targets are based on
estimates and assumptions, and there can be no assurance that Colombia will be
able to achieve all or any of them.
The agreement's macroeconomic goals include:
MACROECONOMIC FRAME 2003 GOAL
------------------- ---------
Economic growth......................................... between 2.0% and 2.5%
Inflation............................................... between 5% and 6%
Current Account Deficit................................. 0.8% of GDP
Consolidated Public Sector Deficit...................... 2.5% of GDP
Primary Surplus......................................... 3% of GDP
RECENTLY ENACTED FISCAL REFORMS
The Government has committed to a sustained reduction of the fiscal
deficit and to that end Congress approved the following reforms in December
2002:
Pension Reform: This bill modifies the official retirement age and
increases payroll taxes in order to reduce the rate of growth of pension
expenditures.
Tax Reform: The Government expects to increase its revenues and reduce
its fiscal deficit through this reform, which seeks to increase Central
Government revenues by Ps 2.6 trillion in 2003 and by Ps 10.6 trillion over the
next four years. This law will phase out most tax exemptions over the next five
years; impose a surcharge of 10% over the marginal income tax rate; increase the
value-added tax ("VAT") to 7% for certain products; institute, as of 2005, a 2%
VAT on products currently exempt from VAT; introduce a 5% VAT on gambling; and
toughen tax evasion penalties.
Labor Reform: This bill legislates changes to the hiring process and
modifies the laws regarding work hours and overtime pay.
PROPOSED REFORMS
Constitutional Referendum: In November and December 2002, Congress
approved a proposed referendum, which would submit eighteen issues to a vote of
the Colombian population. Some of the economic measures proposed would freeze
wages of high-ranking civil servants for a four-year period and limit the
pensions of former Presidents of the Republic and other high-ranking officials.
The President has signed the bill into law and the Constitutional Court must now
determine whether the law is constitutional. If the legislation is deemed
constitutional, it will be voted upon in a national referendum in the second
quarter of 2003. No assurances can be given that this referendum will be
adopted, or that it will be adopted in the form proposed by the Government.
43
FINANCIAL SECTOR
Colombia's financial sector had a total gross loan portfolio of Ps 50.2
billion at December 31, 2002, as compared to Ps 47.6 trillion at December 31,
2001 and Ps 47.2 trillion at December 31, 2000. Past-due loans amounted to Ps
4.3 trillion at December 31, 2002, consistent with a similar amount of Ps 4.6
trillion at December 31, 2001 and as compared to Ps 5.2 trillion at December 31,
2000. As a percentage of total loans, past-due loans fell from 11% at December
31, 2000 to 9.7% at December 31, 2001 and further decreased to 8.7% at December
31, 2002. The provisions covering past-due loans increased from 49.6% at
December 31, 2000 to 74.7% at December 31, 2001 and to 86.3% at December 31,
2002.
In 2002, the financial sector had aggregate earnings of Ps 1.1 trillion
(excluding results of special government-owned development banks), compared to
Ps 0.3 trillion in 2001, after sustaining a loss of Ps 1.8 trillion in 2000.
The following tables show the results of the financial sector as of,
and for the year ended December 31, 2002.
SELECTED FINANCIAL SECTOR INDICATORS
(IN MILLIONS OF PESOS AS OF, AND FOR THE YEAR ENDED, DECEMBER 31, 2002)
ASSETS LIABILITIES NET WORTH EARNINGS/(LOSSES)
------ ----------- --------- -----------------
Private Sector Institutions............. Ps72,451,066 Ps63,866,793 Ps8,584,273 Ps 852,313
Cooperatives............................ 412 311 101 20
State-Owned Institutions(1)............. 16,826,268 15,442,137 1,384,131 223,491
------------ ------------ ----------- -----------
Total................................... Ps89,277,746 Ps79,329,241 Ps9,968,505 Ps1,075,824
============ ============ =========== ===========
----------
Totals may differ due to rounding.
(1) Includes Special Financing Institutions.
Source: Superintendency of Banking.
GROSS DOMESTIC PRODUCT - FINANCIAL ACTIVITY (ANNUAL PERCENTAGE VARIATIONS)
1999 2000 2001 2002
-----------------------------------------------------
ANNUAL ANNUAL ANNUAL 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER*
------ ------ ------ ----------- ----------- ----------- ------------
Financial Intermediation (15.31%) (1.47%) (1.85%) (2.76)% (7.77%) 1.18% 4.2%
Services......................
Imputed Banking Services...... (19.54%) (0.29%) (6.14%) (10.39%) 4.4% (10.98%) (8.07%)
Gross Domestic Product........ (4.2)% (2.74%) 1.4% 0.47% 2.31% 1.91% 2.5%
* Estimated
Source: DANE
The financial sector showed significant growth in the return on equity
indicator, from 3.1% in 2001 to 10.8% in 2002, similar to the levels shown
before the financial crisis.
Other financial management indicators followed a similar trend. The
administration expenses over total assets indicator for the entire financial
system, including depreciations and amortizations, dropped from 7.15% to 6.89%
between 2001 and 2002.
The growth of assets, although still far from the rates experienced
before the crisis, has recovered and shows positive results with Ps 89.3
trillion at December 31, 2002, compared to Ps 84.5 trillion in 2001 and Ps 80.4
trillion in 2000. The most significant growth rate was recorded for investments,
with
44
13.2% for the financial system in the December 2001 to December 2002 period. For
banks only, the growth rate was even higher (15.8%).
The government has taken measures to facilitate loan financing.
Recently, the financial reform authorized the Superintendency of Banking to
differentiate interest rates by type of loan, which is expected to encourage
intermediaries to lend resources to sectors with high risk rating.
Loan quality and coverage also showed improvement. While as of December
2001, the financial system's loan coverage was 74.7% and loan quality was 9.7%,
as of December 2002, the coverage was 86.3% and the loan quality 8.73%. For
December 2001, coverage for the banking sector alone was 73.4% and loan quality
was 10.3%; for December 2002, the coverage was 82.84% and loan quality was
9.47%.
The implementation of loan risk management systems has strengthened the
financial system's reliability. The calculation of expected losses when granting
a loan and the establishment of the provision needed to protect the equity at
risk are crucial in modern banking management.
The solvency index for the financial system in the aggregate was 12.57%
as of December 31, 2002, without considering market risk, or 13.33% considering
such risk. Such levels are significantly better than those immediately after the
1998 and 1999 crisis, when amounts observed were slightly above 9.0%. Although
the solvency indicator of December 2002, is slightly lower than the solvency
indicator before the crisis, it should guarantee the financial system's
stability and should be able support an eventual recovery of loan growth. With
the current equity values, the financial system's capital adequacy is able to
support additional risk assets for a little more than 30% of the risk assets it
currently has, without reducing below 10% its solvency ratio, including market
risk.
Value-added services related to financial activity, which decreased by
1.47% in 2000, and by 1.85% in 2001, increased by 1.18% in the third quarter of
2002. An annual growth of 2.52% is expected for 2002.
Imputed banking services, which reflect the value of financial
intermediation, dropped 19.54% in 1999 and 0.29% in 2000, and 10.98% in the
third quarter of 2002. A further 6.46% reduction is estimated for 2002.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2002
The Bank's operating and financial review and prospects are based on
the Bank's consolidated financial statements, which have been prepared in
accordance with Colombian GAAP. The use of Colombian GAAP as opposed to U.S.
GAAP has an impact on the Bank's critical accounting policies and estimates. The
application of U.S. GAAP would have affected the determination of consolidated
net income (loss) for the period ended December 31, 2002 and the determination
of consolidated stockholders' equity and consolidated financial position as of
December 31, 2002. Note 31 to the Financial Statements provides a reconciliation
to U.S. GAAP of the Bank's results of operations, stockholders' equity and
certain other selected financial data.
RESULTS OF OPERATIONS
BC's net income for 2002 amounted to Ps 210,380 million, a 34.4%
increase compared to the net income of Ps 156,533 million in 2001. This increase
is mainly explained by the decreasing growth rate of the Bank's operational
expenses and by the reduction of expenses related to the Merger. Operational
expenses increased 10.4% in 2002 compared to 14.2% in 2001, and expenses related
to the Merger were
45
Ps 33,028 in 2002, that is, Ps 9,179 million lower than in 2001. Although the
net interest income - determined negatively as a result of the market's rate
reduction - dropped 22.9%, other operational income increased 33.7%.
YEAR ENDED DECEMBER 31,
-----------------------
2000 2001 2002
---- ---- ----
(in millions of pesos)
NET INCOME (LOSS):
Net interest income ............................ Ps383,778 Ps352,683 Ps271,961
Provision for loan and accrued interest losses . (152,296) (73,953) (115,154)
Provision for foreclosed assets and other assets (112,219) (63,537) (71,212)
Other operating income ......................... 341,971 620,188 828,977
Non-operating income (expense) ................. 67,792 51,000 79,787
Net monetary inflation adjustment .............. 4,209 -- --
Operating expenses ............................. (573,524) (654,756) (722,773)
Merger expenses ................................ (44,828) (42,207) (33,028)
Income (loss) before taxes ..................... (85,117) 189,418 238,558
Minority interest .............................. (767) (1,310) 14,440
Income tax ..................................... (28,106) (31,575) (42,618)
---------- --------- ---------
Net income (loss) .............................. Ps(113,990) Ps156,533 Ps210,380
========== ========= =========
Net income from Personal Banking and Intermediate Banking was Ps
249,518 million in 2002, mostly as a result of higher intermediation margins,
larger commissions, increased revenues from affiliates, and a reduced allocation
of operational costs under a new cost allocation model implemented by the Bank
in 2002. Net income from Corporate Banking was Ps 55,125 million in 2002,
affected by an increased allocation of operational costs under the new cost
allocation model implemented by the Bank in 2002. Net income from Enterprise
Banking was Ps 46,581 million in 2002 due to higher commissions and higher
revenues from affiliates. Net income from Institutional Banking increased to Ps
55,566 million in 2002 mostly as a result of business transacted through
Bancolombia Panama, the Bank's Panamanian subsidiary. Finally, income from
trustee services rendered through Fiducolombia S.A. was Ps 12,363 in 2002. Since
the foregoing information for 2002 reflects the use of a new cost allocation
model, it is not directly comparable to similar information from prior periods.
INTEREST INCOME
Gross Interest Income
Due to the reduction of interest rates and despite a 5.4% growth in
average loans, interest income from loans dropped 10.5% in 2002 as compared to
2001. Interest income from overnight funds and investment securities also
decreased, although gains from the sale of investment securities, reflected in
our Financial Statements under "other operating income", increased 133.2% in
2002.
BC's interest income increased 4.6% in 2001, from Ps 842,633 million in
2000 to 881,757 million in 2001. The volume effect of higher interest-earning
assets (26.3%) basically influenced this increase, since the rate effect was
negative due to the decrease in the average nominal interest rate of these
assets (from 14.2% to 11.7%). The average nominal interest rate of the
peso-denominated loans did increase (from 17.5% to 18.2%) but was counteracted
by the rate reductions of other interest-earning assets.
46
Interest Expenses
BC's interest expenses dropped 11.9% between 2001 and 2002, from Ps
529,074 million in 2001 to Ps 466,223 million in 2002. This decrease is
explained by a substantial decline in average nominal interest rates for
interest-bearing liabilities from 8.2% in 2001 to 5.9% in 2002 (due to market
rates), with the average volume of interest-bearing liabilities increasing
21.7%.
BC's interest expenses increased 15.3% in 2001, from Ps 458,855 million
in 2000 to Ps 529,074 million in 2001. This increase is explained by the higher
volume of interest-bearing liabilities (increasing an average of 20.9% between
2000 and 2001), since the total average nominal interest rate decreased between
both periods, from 8.6% to 8.2%. This decrease was caused by the lower
dollar-denominated average nominal interest rate, which decreased from 6.6% to
4.8% because the corresponding peso-denominated increased from 9.8% to 10.1%.
Net Interest Income
BC's net interest income, decreased 22.9% during 2002, from Ps 352,683
million for 2001 to Ps 271,961 million for 2002. This decrease was mainly the
result of an overall reduction of interest rates, which determined a 16.3%
decrease of interest income, without a correlative offsetting reduction of
interest expense, which dropped only 11.9%. While the average yield on
interest-earnings assets dropped 370 basis points, from 11.7% in 2001 to 8.0% in
2002, the average cost on interest-bearing liabilities dropped only 200 basis
points, from 7.0% in 2001 to 5.0% in 2002. The combination of these two factors
determined a reduction of the net interest margin from 4.7% for the year 2001 to
3.0% for 2002, which was not offset by the balance's dynamics, despite a 22.7%
increase in total average interest-earning assets.
BC's net interest income was Ps 352,683 million in 2001 compared to Ps
383,778 million in 2000. This decrease was caused by the decline of the net
interest margin ("NIM"), from 6.5% in 2000 to 4.7% in 2001. Nevertheless, NIM
does not include gains on sales of investment securities, which amounted Ps
159,883 million in 2001 and are aggregated in other operating income. During
year 2000, gains on sales of investment securities were Ps 30,335 million.
The components of the Bank's consolidated net interest income before
provisions for loan and accrued interest losses are reflected in the following
table:
YEAR ENDED DECEMBER 31,
-----------------------
2000 2001 2002
---- ---- ----
(in millions of pesos)
INTEREST INCOME:
Loans ............................................ Ps678,583 Ps811,446 Ps726,112
Investment securities ............................ 145,575 48,658 247
Overnight funds .................................. 18,475 21,653 11,825
--------- --------- ---------
Total interest income .................... 842,633 881,757 738,184
INTEREST EXPENSE:
Time deposits and checking accounts .............. 276,451 326,339 273,253
Savings deposits ................................. 87,629 113,156 106,825
Borrowings from domestic development banks ....... 41,530 40,722 49,317
Interbank borrowings ............................. 42,094 20,160 9,404
Amortized premium on investments ................. 7,714 27,120 26,645
Long-term debt ................................... 3,437 1,577 779
--------- --------- ---------
Total interest expense ................... 458,855 529,074 466,223
Net interest income ...................... Ps383,778 Ps352,683 Ps271,961
========= ========= =========
47
YEAR ENDED DECEMBER 31,
-----------------------
2000 2001 2002
---- ---- ----
(in millions of pesos)
Average nominal interest rates on loans .......... 15.5% 15.8% 13.4%
Average nominal interest rates on time deposits .. 10.3% 10.2% 7.3%
Average nominal interest rates on savings deposits 6.3% 6.6% 4.9%
PROVISIONS FOR LOAN AND ACCRUED INTEREST LOSSES
The Bank's provisions for loan and accrued interest losses, net of
recoveries, increased 55.71%, from Ps 73,953 million in 2001 to Ps 115,154
million in 2002. This increase was a result of higher general provisions.
As of December 31, 2002, 70.68% of the Bank's overdue loans were
non-performing. Allowances for loan and accrued interest losses, as a percentage
of the non-performing loans, were 316.80% in 2002, and 122.95% in 2001 mainly
due to an increase in general provisions and improvement in the financial
situations of our clients.
The allowances for loan losses under U.S. GAAP differ from those under
Colombian GAAP. Under Colombian GAAP, an allowance for loan losses is created
for each individual loan based on the risk classification system established by
the Superintendency of Banking. Additionally, the Superintendency of Banking
requires a general allowance of 1% of the total loans. This general reserve, not
tied to any specific loans, is established to absorb losses inherent in the
existing loan portfolio in future periods. Under U.S. GAAP, FASB Statement No.
114 established an individual test for impaired loans. This is measured based on
the present value of expected future cash flows, market price or fair value of
collateral, if the loan is collateral dependent. As of December 31, 2000, 2001
and 2002, the allowances for loan losses existing under Colombian GAAP were Ps
285,565 million, Ps 271,729 million and Ps 332,324 million, respectively, and
the allowances that would have been required under U.S. GAAP were Ps 227,247
million, Ps 223,227 million and Ps 339,612 million, respectively.
OTHER OPERATING INCOME
The following table summarizes the components of the Bank's other
operating income for the period under review:
YEAR ENDED DECEMBER 31,
-----------------------
2000 2001 2002
---- ---- ----
(in millions of pesos)
OTHER OPERATING INCOME:
Fees and service charges, net................................ Ps218,035 Ps265,382 Ps292,308
Foreign exchange gain (loss), net............................ 12,451 20,345 93,371
Dividend income(1)........................................... 5,223 2,665 19,491
Forward contracts............................................ (4,020) 52,890 (62,612)
Financing leases............................................. 33,671 35,410 39,596
Revenues from commercial subsidiaries........................ 32,362 47,619 52,759
Gains on sales of investments, net........................... 30,335 159,883 372,793
Other........................................................ 13,914 35,994 21,271
--------- --------- ---------
Total other operating income............................. Ps341,971 Ps620,188 Ps828,977
========= ========= =========
----------
(1) Income from dividends represents only the recognition of income from
unconsolidated subsidiaries under Colombian GAAP.
48
Fees and service charges, one of the largest component of other
operating income, consist of service charges, credit card merchant fees, credit
and debit card annual fees, checking fees, warehouse services, commissions and
fees from fiduciary activities and letters of credit. The most significant
component is service charges, which primarily consist of income money transfer
fees, remittances, bank acceptances and automated services.
The total of other net operating income increased 33.7%, from Ps
620,188 million in 2001 to Ps 828,977 million in 2002. This growth is mainly
explained by a 133.2% increase in net gains from the sales of investments (Ps
212,910 million), which became the largest non-operating income component in the
Financial Statements for 2002. Net income from fees and service charges
increased 10.1%, from 265,382 in the year 2001 to 292,308 in 2002, and net
income from foreign exchange transactions increased by 358.9%, from 20,345
million in 2001 to 93,371 million in 2002. In contrast, forward contracts
decreased from a net income of Ps 52,890 million in 2001 to a net loss of Ps
62,612 million in 2002.
Other operating income increased 81.4%, from Ps 341,971 million in 2000
to Ps 620,188 million in 2001. The most significant item (representing almost
43% of the other operating income in 2001), fees and service charges, increased
21.7%, due to higher commissions from banking services, and commissions and fees
from fiduciary activities and warehouse services; the second item of importance,
gains on sales of investments, increased from Ps 30,335 million to Ps 159,883
million, mainly due to higher turnover of investment securities portfolio;
realized and unrealized gains (losses) on forward contracts, increased from a
negative figure of Ps 4,020 million to a positive figure of Ps 52,890 million,
due to higher earnings from forward contracts resulting from the offer to BC's
clients of interest rates coverage in local currency thanks to higher levels of
the investment portfolio; and revenues from commercial subsidiaries increased
47.1%, similar to the total average growth.
The Bank did not recognize any income from the marking-to-market of
trading equity investment securities due to Communication 070 of the
Superintendency of Banking, which gives the option that such investments be
classified as permanent investments and changes in fair value be recorded as a
separate component of shareholders' equity.
OTHER OPERATING EXPENSES
BC's operating expenses increased 10.4% in 2002, from Ps 654,756
million in 2001 to Ps 722,773 million in 2002, while in 2001, BC reported an
increase of 14.2% compared to 2000. This lower increase in total operating
expenses was due to the performance of administrative and other expenses and
depreciation, which together increased 7.5% between 2001 and 2002 as opposed to
17% between 2000 and 2001. Underlying the growth of salaries and employee
benefits is the hiring of 63 employees and a reduction in labor compensation of
Ps 5,439 million in 2002 compared to 2001.
BC's operating expenses increased 14.2% between 2000 and 2001, climbing
from Ps 573,524 million to Ps 654,756 million. Salaries and employee benefits
for 2001 include the effect of the collective bargaining agreement signed with
Bancolombia's Union, effective beginning November 1, 2001. The rest of the
staff, not covered by this agreement, received salary increases in the months of
January and February 2001. Likewise, the administrative and other expenses
increased 21.2%, from Ps 274,966 in 2000 to Ps 333,321 in 2001. This rise in
expenses was driven by the increase of: amortization of deferred charges, which
includes expenses for special projects to improve efficiency levels; insurance,
due to higher premiums of insurance policies; communication, postage and
freight, which includes cash transportation expenses resulted from the
preference of cash payments caused by the tax on financial transactions;
professional fees, which includes the payment of the consultancy firm for the
comprehensive efficiency program performed by BC during 2000 and 2001; and
advertising, among others.
49
The following table summarizes the principal components of BC's
operating expenses in the relevant periods:
YEAR ENDED DECEMBER 31,
-----------------------
2000 2001 2002
---- ---- ----
(in millions of pesos)
OPERATING EXPENSES:
Salaries and employee benefits.................................... Ps230,651 Ps250,456 Ps286,307
Severance benefits................................................ 27,192 35,014 29,575
Expense for transition to new severance benefits law.............. 124 -- --
Administrative and other expenses................................. 274,966 333,321 362,495
Depreciation...................................................... 40,591 35,965 34,444
Losses on sales of loans, net..................................... -- -- 9,952
========= ========= =========
Total operating expenses..................................... Ps573,524 Ps654,756 Ps722,773
========= ========= =========
MERGER EXPENSES
On April 3, 1998, the Merger of the Bank and Banco de Colombia S.A.
was completed.
For the fiscal year of 2002, merger-related expenses aggregated Ps
33,028 million, which consisted of:
- Ps 22,649 million for the amortization of goodwill recorded in connection
with the Merger;
- Ps 5,061 million in amortization of severance payments for reduction of
personnel; and
- Ps 5,318 million in amortization of general merger expenses.
The Bank incurred a charge for the year ended December 31, 2001 for
merger-related expenses aggregating Ps 42,207 million, which consisted of:
- Ps 22,649 million for the amortization of goodwill recorded in connection
with the Merger;
- Ps 11,654 million in severance payments for reduction of personnel; and
- Ps 7,904 million in general merger expenses.
The syndicated loan of US$265 million BC obtained to finance the
cash portion of the Merger was fully prepaid in the beginning of 1999.
Goodwill as of December 31, 2002 was Ps 118,903 million, which is
being amortized in an amount of Ps 22,649 million each year for the ten years
following the Merger.
NON-OPERATING INCOME (EXPENSES)
Net non-operating income increased 56.4% between 2001 and 2002 from Ps
51,000 million in 2001 to Ps 79,787 million in 2002. This increase is due to a
38.5% increase in non-operating income, compared to a 17.5% increase in
non-operating expenses.
50
Net non-operating income decreased 24.8%, from Ps 67,792 million in
2000 to Ps 51,000 million in 2001. This drop was the result of low growth of
non-operating income (2.1%) compared to the sharp increase of non-operating
expenses (75.4%).
The following table summarizes the components of BC's non-operating
income (expenses) for the relevant periods:
YEAR ENDED DECEMBER 31,
-----------------------
2000 2001 2002
---- ---- ----
(in millions of pesos)
NON-OPERATING INCOME (EXPENSES):
Other income........................................... Ps92,651 Ps94,597 Ps131,026
Other expenses......................................... (24,859) (43,597) (51,239)
-------- -------- ---------
Total non-operating income (expenses), net.... Ps67,792 Ps51,000 Ps 79,787
======== ======== =========
NET MONETARY INFLATION ADJUSTMENT
While in 2000 the Bank recorded a net monetary inflation adjustment of
Ps 4,209 million, in 2001 and 2002, no net monetary inflation adjustment was
recorded since the Superintendency of Banking issued External Circular 014 in
April 2001, which eliminated the use of inflation adjustments in every account
of the financial statement from January 1, 2001.
INCOME TAX EXPENSES
BC's income tax expenses in 2002 amounted to Ps 42,618 million,
displaying a 35.0% increase compared to Ps 31,575 million for 2001. This Ps
11,043 million increase is mainly explained by BC's higher taxable fiscal income
and higher shareholders' equity, which are the basis for computing Colombia's
income tax and presumed income tax, respectively. It is also explained by a 200
basis point increase in the income tax of Bancolombia, Leasing Colombia,
Fiducolombia and Colcorp pursuant to the special tax stability regime.
BC's income tax expenses in 2001 amounted to Ps 31,575 million, a 12.3%
increase compared to Ps 28,106 million in 2000. This increase was mainly due to
the enactment of Law 633 of 2000, which raised the presumed income tax rate from
5% to 6%, and BC's higher taxable fiscal income for 2001 compared to 2000,
calculated on the basis of presumed income.
NET INCOME INFORMATION UNDER U.S. GAAP
The Financial Statements included elsewhere in this Annual Report have
been prepared in accordance with Colombian GAAP, which differs in certain
significant respects from U.S. GAAP. The principal differences between U.S. and
Colombian GAAP which affect net income include the methods of accounting for
income taxes, inflation, employee benefit plans and allowances for loan losses.
For a summary of the most significant adjustments required to calculate net
income under U.S. GAAP, see Note 31 to the Financial Statements.
ASSET AND LIABILITY MANAGEMENT
The Bank's policy on asset and liability management is to maximize its
net interest income and return on assets and equity, while providing for
adequate liquidity, capital and effective risk management. BC has an asset and
liability committee which decides funding strategies, sets interest rate levels
and terms for both assets and liabilities (in pesos and dollars) and makes
decisions regarding maturities and pricing of assets and liabilities. The asset
and liability committee is comprised of five Vice Presidents, the
51
Product Manager, the Market Risk Manager, and the Treasurer and is chaired by
BC's Vice President of Finance; it meets on a weekly basis.
The following tables represent the breakdown of the Bank's assets and
liabilities by currency as of December 31, 2001 and December 31, 2002. Most of
the Bank's foreign currency assets and liabilities are denominated in dollars.
AS OF DECEMBER 31, 2001
-----------------------
FOREIGN
PESO- CURRENCY-
DENOMINATED DENOMINATED TOTAL PERCENTAGE
----------- ----------- ----- ----------
(in millions of pesos, except percentages)
ASSETS
Cash and due from banks.......................... Ps 433,360 Ps 103,453 Ps 536,813 5.22%
Other assets(1):
Less than 1 year.............................. 4,501,463 1,019,634 5,521,097 53.74%
From 1 to 4 years............................. 628,728 870,595 1,499,323 14.59%
More than 4 years............................. 647,565 666,773 1,314,338 12.79%
Bank premises and equipment and other............ 1,385,499 289,118 1,674,617 16.30%
Allowances for loan losses....................... (235,091) (36,638) (271,729) (2.64)%
----------- ----------- ------------ ------
Total assets.......................... Ps7,361,524 Ps2,912,935 Ps10,274,459 100.00%
=========== =========== ============ ======
Percentage of total assets....................... 71.65% 28.35% 100.00%
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest-bearing deposits.................... Ps2,358,121 Ps 93,408 Ps 2,451,529 23.86%
Other liabilities(2):
Less than 1 year.............................. 3,882,411 2,268,960 6,151,371 59.87%
From 1 to 4 years............................. 578,613 63,437 642,050 6.25%
More than 4 years............................. 41,910 17,148 59,058 0.57%
----------- ----------- ------------ ------
Total liabilities..................... 6,861,055 2,442,953 9,304,008 90.55%
Percentage of total liabilities.................. 73.74% 26.26% 100.00%
Shareholders' equity............................. 847,357 123,094 970,451 9.45%
----------- ----------- ------------ ------
Total liabilities and shareholders'
equity ............................. Ps7,708,412 Ps2,566,047 Ps10,274,459 100.00%
========== ========== =========== ======
Percentage of total liabilities and Shareholders'
equity........................................ 75.02% 24.98% 100.00%
---------------
(1) Includes loans and investment securities.
(2) Includes time deposits, savings deposits and overnight funds, interbank
borrowings, and borrowings from domestic development banks.
52
AS OF DECEMBER 31, 2002
-----------------------
FOREIGN
PESO- CURRENCY-
DENOMINATED DENOMINATED TOTAL PERCENTAGE
----------- ----------- ----- ----------
(in millions of pesos, except percentages)
ASSETS
Cash and due from banks.......................... Ps 552,981 Ps 90,424 Ps 643,405 5.11%
Other assets(1):
Less than 1 year............................... 3,179,466 1,056,540 4,236,006 33.62%
From 1 to 4 years.............................. 2,723,789 1,618,791 4,342,580 34.47%
More than 4 years.............................. 1,404,206 557,981 1,962,187 15.57%
Bank premises and equipment and other.......... 1,411,136 336,592 1,747,728 13.87%
Allowances for loan losses..................... (271,486) (60,838) (332,324) (2.64)%
----------- ----------- ------------ ------
Total assets.......................... Ps9,000,092 Ps3,599,490 Ps12,599,582 100.00%
=========== =========== ============ ======
Percentage of total assets..................... 71.43% 28.57% 100.00%
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest-bearing deposits.................... Ps2,608,622 Ps99,088 Ps 2,707,710 21.49%
Other liabilities(2):
Less than 1 year............................... 5,008,887 2,717,894 7,726,781 61.33%
From 1 to 4 years.............................. 511,673 140,907 652,580 5.18%
More than 4 years.............................. 228,163 -- 228,163 1.81%
----------- ----------- ------------ ------
Total liabilities..................... 8,357,345 2,957,889 11,315,234 89.81%
Percentage of total liabilities................ 73.86% 26.14% 100.00%
Shareholders' equity........................... 1,003,752 280,596 1,284,348 10.19%
----------- ----------- ------------ ------
Total liabilities and shareholders'
equity ............................. Ps9,361,097 Ps3,238,485 Ps12,599,582 100.00%
=========== =========== ============ ======
Percentage of total liabilities and
shareholders' equity............................. 74.30% 25,70% 100,00%
----------
(1) Includes loan and investment securities.
(2) Includes time deposits, savings deposits and overnight funds, interbank
borrowings and borrowings from domestic development banks.
Other assets with a term of less than 1 year, expressed as a percentage of
total assets, decreased from 53.74% in 2001 to 33.62% in 2002, while Bank
premises and equipment and others dropped from 16.30% in 2001 to 13.87% in 2002.
On the other hand, other liabilities with a term of less than one year increased
from 59.87% in 2001 to 61.33% in 2002, non-interest-bearing deposits increased
from 23.86% in 2001 to 21.49% in 2002, and equity increased from 9.45% in 2001
to 10.19% in 2002.
INTEREST RATE SENSITIVITY
A key component of BC's asset and liability policy is the management of
interest rate sensitivity. Interest rate sensitivity is the relationship between
market interest rates and net interest income due to the repricing
characteristics of assets and liabilities. For any given period, the pricing
structure is matched when an equal amount of assets and liabilities reprice. A
mismatch in the maturity or repricing of the Bank's assets or liabilities
results in a gap.
The Bank's interest-earning assets and interest-bearing liabilities are
shown in the following table as of December 31, 2002. Variations in interest
rate sensitivity may exist within the repricing period presented due to
differing repricing dates within the period. Variations may also arise among the
different currencies in which interest rate positions are held. The Bank's
liabilities are primarily fixed-rate but with short maturities while assets are
primarily variable-rate and reprice in general every three months, although BC
does have some fixed-rate retail loans.
The Bank has a gap for a significant portion of its balance sheet,
particularly related to maturities of less than three months and, therefore, an
increase in interest rates should normally have a negative
53
impact on net interest income. Thus, in a rising interest rate environment, the
Bank's liabilities have been repricing faster than its assets with a resulting
negative effect on net interest margin in the short term. If the rate increase
is permanent, the effect in the net interest income is positive due to
interest-earning assets being greater than interest-bearing liabilities. A
declining interest rate environment, however, can normally be expected to have a
positive effect on net interest margin in the short term as the Bank should be
able to take advantage of decreased funding costs more quickly than its assets
reprice. If the rate decrease is permanent, the effect in the net interest
income is negative due to interest-earning assets being greater than interest
bearing liabilities. The Bank manages the risk of maintaining a negative gap
through the pricing of its interest-earning assets and hedging its exposure to
interest rate risk by entering into transactions such as interest rate contracts
designed to reduce the Bank's risk profile.
EARLIER OF REMAINING MATURITY OR REPRICING PERIOD
AS OF DECEMBER 31, 2002
-----------------------
FROM 6
OVERNIGHT TO FROM 3 TO MONTHS TO FROM 1 TO 4 MORE THAN
3 MONTHS 6 MONTHS 1 YEAR YEARS 4 YEARS TOTAL
-------- -------- ------ ----- ------- -----
(in millions of pesos)
INTEREST-EARNING ASSETS
OVERNIGHT FUNDS
Peso-denominated................ Ps 55,500 Ps -- Ps -- Ps -- Ps -- Ps 55,500
Dollar-denominated.............. 152,184 -- -- -- -- 152,184
----------- --------- --------- ----------- ----------- ------------
Total....................... 207,684 -- -- -- -- 207,684
----------- --------- --------- ----------- ----------- ------------
Investment securities
Peso-denominated................ 205,196 88,427 195,985 1,490,336 490,794 2,470,738
Dollar-denominated 80,512 142,129 53,000 787,870 809,209 1,872,720
----------- --------- --------- ----------- ----------- ------------
Total....................... 285,708 230,556 248,985 2,278,206 1,300,003 4,343,458
----------- --------- --------- ----------- ----------- ------------
Loans
Peso-denominated................ 4,170,768 31,388 69,591 213,863 79,628 4,565,238
Dollar-denominated.............. 981,175 45,439 19,719 103,935 149,485 1,299,753
----------- --------- --------- ----------- ----------- ------------
Total....................... 5,151,943 76,827 89,310 317,798 229,113 5,864,991
----------- --------- --------- ----------- ----------- ------------
Total interest-earning assets
Peso-denominated................ 4,431,464 119,815 265,576 1,704,199 570,422 7,091,476
Dollar-denominated.............. 1,213,871 187,568 72,719 891,805 958,694 3,324,657
----------- --------- --------- ----------- ----------- ------------
Total....................... Ps5,645,335 Ps307,383 Ps338,295 Ps2,596,004 Ps1,529,116 Ps10,416,133
=========== ========= ========= =========== =========== ============
INTEREST-BEARING LIABILITIES
Checking accounts (1)
Peso-denominated................ Ps 207,917 Ps -- Ps -- Ps -- Ps -- Ps 207,917
Dollar-denominated.............. 607,462 -- -- -- -- 607,462
----------- --------- --------- ----------- ----------- ------------
Total....................... 815,379 -- -- -- -- 815,379
----------- --------- --------- ----------- ----------- ------------
Time Deposits
Peso-denominated................ 1,115,084 351,049 270,182 222,340 535 1,959,190
Dollar-denominated.............. 1,052,443 336,937 148,811 105,592 493 1,644,276
----------- --------- --------- ----------- ----------- ------------
Total....................... 2,167,527 687,986 418,993 327,932 1,028 3,603,466
----------- --------- --------- ----------- ----------- ------------
Savings Deposits
Peso-denominated................ 2,294,374 -- -- -- -- 2,294,374
Dollar-denominated.............. 104,352 -- -- -- -- 104,352
----------- --------- --------- ----------- ----------- ------------
Total....................... 2,398,726 -- -- -- -- 2,398,726
----------- --------- --------- ----------- ----------- ------------
Overnight funds
Peso-denominated................ 550,807 -- -- -- -- 550,807
Dollar-denominated.............. 59,351 -- -- -- -- 59,351
----------- --------- --------- ----------- ----------- ------------
Total....................... 610,158 -- -- -- -- 610,158
----------- --------- --------- ----------- ----------- ------------
Borrowings from domestic
development banks and
Interbank
Peso-denominated................ 161,523 22,608 35,273 255,622 198,628 673,654
Dollar-denominated.............. 295,627 93,985 22,308 31,441 -- 443,361
----------- --------- --------- ----------- ----------- ------------
Total....................... 457,150 116,593 57,581 287,063 198,628 1,117,015
----------- --------- --------- ----------- ----------- ------------
Total interest-bearing
liabilities
Peso-denominated................ 4,329,705 373,657 305,455 477,962 199,163 5,685,942
Dollar-denominated.............. 2,119,235 430,922 171,119 137,033 493 2,858,802
----------- --------- --------- ----------- ----------- ------------
Total....................... Ps6,448,940 Ps804,579 Ps476,574 Ps 614,995 Ps 199,656 Ps 8,544,744
=========== ========= ========= =========== =========== ============
Asset/liability gap
Peso-denominated................ 101,759 (253,842) (39,879) 1,226,237 371,259 1,405,534
Dollar-denominated.............. (905,364) (243,354) (98,400) 754,772 958,201 465,855
----------- --------- --------- ----------- ----------- ------------
Total....................... Ps(803,605) Ps(497,196) Ps(138,279) Ps1,981,009 Ps1,329,460 Ps1,871,389
=========== ========= ========= =========== =========== ============
54
EARLIER OF REMAINING MATURITY OR REPRICING PERIOD
AS OF DECEMBER 21, 2002
-----------------------
FROM 6
OVERNIGHT TO FROM 3 TO MONTHS TO 1-4 MORE THAN
3 MONTHS 6 MONTHS 1 YEAR YEARS 4 YEARS
-------- -------- ------ ----- -------
(in millions of pesos, except percentages)
Cumulative gap
Peso-denominated................ Ps 101,759 Ps (152,083) Ps (191,962) Ps1,034,275 Ps1,405,534
Dollar-denominated.............. (905,364) (1,148,718) (1,247,118) (492,346) 465,855
---------- ------------ ------------ ----------- -----------
Total........................ Ps(803,605) Ps(1,300,801) Ps(1,439,080) Ps 541,929 Ps1,871,389
========== ============ ============ =========== ===========
Gap as a % of total interest
earning assets
Peso-denominated................ 2% (212)% (15)% 72% 65%
Dollar-denominated.............. (75)% (130)% (135)% 85% 100%
Total........................ (14)% (162)% (41)% 76% 87%
Cumulative gap as a % of
cumulative total
interest-earning assets
Peso-denominated................ 2% (127)% (72)% 61% 246%
Dollar-denominated.............. (75)% (612)% (1715)% (55)% 49%
Total........................ (14)% (423)% (425)% 21% 122%
MARKET RISK
The Bank's Market Risks Management Office is responsible for identifying,
measuring, monitoring and managing the Bank's exposure to market and liquidity
risks with the purpose of enabling management to maximize the Bank's earnings
and add value to its shareholders. Additionally, this Management Office is in
charge of treasury risks, mainly by monitoring the policies, strategies, limits,
allotments and procedures authorized by the Board of Directors and to report
these to the Board and the Bank's senior officers.
The measurement of market risk, the performance, the results of the Bank's
investment portfolio and the compliance with policies are reported to the Bank's
senior officers, specifically to the Assets and Liabilities Management Committee
("CAP"), to the Risks Committee and also to the Board of Directors.
Currently, the Bank measures the market risk of each position of the balance
sheet, bank book and treasury book, by computing the corresponding value at risk
("VaR") in accordance with Chapter XXI of the Basic Financial and Accounting
Norm (Norm 100 of 1995) of the Superintendency of Banking. A risk factor is any
market variable capable of influencing the corresponding position's market value
when it fluctuates. The VaR calculation represents the probable loss value based
on fluctuations of such risk
55
factors. The aggregate VaR is considered in the Bank's solvency calculation, in
accordance with Decree 1720 of 2001.
The relevant risk factors for which VaR is computed are:
- interest rate risk for local currency, foreign currency and UVR;
- exchange rate risk; and
- stock price risk.
Following is a brief explanation of the methodology used by Bancolombia to
calculate the VaR based on interest rate risk, exchange rate risk and stock
price risk.
INTEREST RATE RISK
Bancolombia calculates the interest rate risk for local currency, foreign
currency and UVR in accordance with Chapter XXI of the Basic Financial and
Accounting Norm. The interest rate risk is the probability of loss in the value
of a position of the balance due to fluctuations in the market interest rates or
market curves. As indicated, the methodology used in this Annual Report to
measure such risk consists on computing VaR, which in the case of interest rate
fluctuations begins by determining the net present value ("NPV") of the relevant
balance position. Such NPV is then multiplied by the Modified Duration of the
position and by the interest rate's estimated fluctuation ("Delta-i"), which is
established by the Superintendency of Banking according to the market's historic
performance.
VaR = Modified Duration * NPV * Delta-i
NPV: Sum of the discounted values of a position's cash flows
(positive and negative), computed on the basis of the yield
and maturity (including expected or contractually convened
depreciation).
Duration: Is the weighted average of the expected times to each cash
flow under an instrument or position. The weight applied to
each expected time is the present value of the corresponding
cash flow divided by the total cash flow under the instrument
or position.
Y: The instrument or position's yield.
Modified Duration: = Duration / (1+ Y). Corresponds to the percentage variation
of the market value of an investment or a position of the
balance before a 1% increase of the interest rate (Y).
Consequently, the duration enables to measure the sensitivity
of the price of a position regarding interest rate changes.
Delta-i: Maximum probable variation of the interest rate for the
instrument or position of the balance.
56
VALUE AT RISK FOR PESO (LOCAL CURRENCY)
---------------------------------------
VPN DUR Y Delta-I VER
--- --- --- ------- ---
ASSETS
Overnight Funds..................................................... Ps 55,000.13 0.07 3.25% 232 7.00
Trading Securities Issued by the Colombian Government - TES IPC Rate 30,406.03 12.99 12.76% 200 645.47
Trading Securities Issued by the Colombian Government - TES Fixed
Rate 535,249.51 23.30 11.98% 200 20,394.14
Other Trading Securities Issued by the Colombian Government......... 20,153.33 6.40 10.52% 41 43.72
Trading Securities Issued by Financial Institutions................. 254,731.91 1.98 10.43% 41 170.91
Other Marketable Trading Securities................................. 29,637.28 1.77 12.55% 41 17.17
Held to Maturity Securities Issued by the Colombian Government -
TES Fixed Rate...................................................... 230,808.46 16.11 13.85% 300 9,071.17
Available for Sale Issued by the Colombian Government - TES Fixed
Rate 15,249.15 30.11 11.63% 300 1,122.09
Available for Sale Issued by Financial Institutions................. 22,576.74 0.92 5.12% 230 39.08
Commercial Loans - Fixed Rate....................................... 630,265.73 4.65 15.08% 230 5,488.99
Commercial Loans - Variable Rate.................................... 3,296,619.60 2.09 15.39% 230 12,920.15
Mortgage Loans in Pesos............................................. 1,457.97 17.95 15.08% 230 49.05
Consumer Loans - Fixed Rate......................................... 406,791.16 6.17 23.23% 224 4,573.16
Consumer Loans - Variable Rate...................................... 542,839.38 2.92 15.70% 41 533.93
Small business loans - Fixed Rate .................................. 26,689.74 12.43 15.08% 224 606.00
Small business loans - Variable Rate................................ 65,039.97 4.63 15.63% 41 101.49
Other Assets........................................................ 48,351.44 30.41 15.07% 230 2,756.95
Contingencies....................................................... 251,700.40 6.26 16.01% 230 2,951.03
Rights Buyback Trading Securities Issued by the Colombian
Government - TES IPC Rate........................................... 998.89 11.08 9.68% 200 18.14
Rights Buyback Trading Securities Issued by the Colombian
Government - TES Fixed Rate......................................... 82,981.65 20.40 12.19% 200 2,768.82
Rights Buyback Other Trading Securities Issued by the Colombian
Government (TES not included)....................................... 634.97 8.27 23.05% 41 1.76
Rights Buyback Trading Securities Issued by Financial Institutions.. 180,888.73 1.38 8.16% 41 84.51
Rights Buyback Other Marketable Trading Securities.................. 15,451.41 3.65 15.33% 41 19.01
Rights Buyback Held to Maturity Securities Issued by the Colombian
Government - TES Fix Rate ...................................... 167,676.87 14.72 13.92% 300 6,021.98
Rights Buyback Available for Sale Issued by the Colombian
Government - TES Fixed Rate......................................... 400,506.46 30.04 12.35% 300 29,379.04
-------------- ------ ------ ---------
Total........................................................ Ps7,312,706.88 99,785.29
============== =========
LIABILITIES
Non-Interest Bearing Checking Accounts.............................. Ps1,950,231.69 21.57 0.00% 230 79,785.77
Interest Bearing Checking Accounts.................................. 135,748.99 2.55 3.17% 231 658.86
Time Deposits....................................................... 1,981,953.02 2.09 8.25% 232 7,853.97
Savings Deposits.................................................... 134,546.71 0.29 7.99% 233 74.52
Saving Deposits..................................................... 2,171,306.97 0.90 3.89% 234 3,387.96
Overnight Funds..................................................... 6,512.41 0.50 7.48% 236 6.30
Repurchase Agreements............................................... 670,190.68 0.39 3.83% 237 505.13
Bank Acceptances Outstanding 3,077.52 1.28 0.00% 238 7.73
Interbank Borrowings................................................ 529,191.18 2.27 6.34% 239 2,354.59
Long Term Debt...................................................... 29,730.07 3.70 9.11% 240 216.07
-------------- ------ ------ --- ---------
Total........................................................ Ps7,612,489.24 94,850.91
============== =========
INTEREST RATE DERIVATIVES
Forward Contracts Rights Issued by the Colombian Government - TES
DTF Rate........................................................ Ps 3,563.30 1.82 14.87 249 13.17
Forward Contracts Rights Issued by the Colombian Government - TES
IPC Rate........................................................ 963.10 1.13 15.88 250 2.22
Forward Contracts Rights Issued by the Colombian Government - TES
Fixed Rate...................................................... 49,620.36 17.58 14.82 251 1,783.19
Forward Contracts Rights Issued by Financial Institutions........... 11,955.81 5.94 12.03 253 146.30
Forward Contracts Commitments to Discount........................... (64,761.01) 0.63 14.29 255 (84.14)
Forward Contracts Commitments Issued by the Colombian Government -
TES IPC Rate.................................................... (17,506.44) 6.61 14.72 257 (242.19)
Forward Contracts Commitments other Securities...................... (11,592.29) 5.08 14.18 261 (125.20)
Forward Contracts Rights to Discount................................ 79,508.38 1.40 7.64 262 238.54
-------------- ------ ------ --- ---------
Total........................................................ Ps 51,751.21 1,731.88
============== =========
FOREIGN EXCHANGE FORWARD CONTRACTS
Foreign Exchange Contracts Rights in Local Currency................. Ps 651,485.90 2.87 2.37% 262 4,031.15
Foreign Exchange Contracts Commitments in Local Currency............ (253,303.63) 1.98 2.37% 263 (1,084.02)
-------------- ------- ------- --- ---------
Total........................................................ Ps 398,182.27 2,947.13
============== =========
57
VALUE AT RISK FOR FOREIGN CURRENCY
----------------------------------
VPN DUR Y Delta-I VER
--- --- --- ------ ---
ASSETS
Overnight Funds .................................................... 1,150,001.19 0.07 1.00% 27 17,21
Trading Securities Issued by the Colombian Government - TES INDEX
TRM 6,694,212.97 63.88 7.99% 27 95,482.94
Trading Securities Issued by the Colombian Government - TES
YANKEES............................................................. 3,842,689.54 37.11 7.15% 27 31,864.88
Other Trading Securities Issued by the Colombian Government
(Other Than TES) ................................................... 33,868,156.95 16.63 9.30% 27 125,366.47
Other Marketable Trading Securities................................. 1,013,088.44 36.82 9.17% 27 8,321.36
Held to Maturity Securities Issued by the Colombian Government -
TES YANKEES......................................................... 9,093,002.19 25.39 9.99% 15 28,610.84
Other Held to Maturity Securities Issued by the Colombian
Government (TES not included) ...................................... 60,147,015.60 30.48 9.90% 15 227,176.41
Other Available for sale Issued by the Colombian Government (TES
not included) ...................................................... 1,663,343.57 45.32 10.89% 15 9,335.25
Commercial Loans - Fixed Rate....................................... 8,718,414.72 7.08 3.38% 15 7,687.42
Commercial Loans - Variable Rate.................................... 170,132,565.41 1.22 3.38% 15 25,865.59
Consumer Loans - Fixed Rate......................................... 10,490,078.63 0.90 15.39% 15 1,171.32
Consumer Loans - Variable Rate...................................... 1,460,325.74 1.31 3.38% 6 95,34
Small Loans - Variable Rate......................................... 25,637.49 0.17 3.38% 6 0,21
Rights Buyback Other Trading Securities Issued by the Colombian
Government (TES not included) ...................................... 11,520,054.12 6.03 5.80% 27 15,545.88
Rights Buyback Other Available for Sale Issued by the Colombian
Government (TES not included) ...................................... 18,027,567.60 45.32 10.89% 15 101,179.81
-------------- ----- ----- -- ----------
337,846,154.16 677,721.19
=============== ==========
LIABILITIES
Other 3,674,445.44 0.03 3.00% 27 24,71
Overnight Funds..................................................... 10,000,000.00 0.03 2.70% 27 67.27
Repurchase Agreements............................................... 21,493,564.69 0.25 4.44% 27 1,219.05
Interbank Borrowings ............................................... 192,156,339.60 2.64 2.87% 15 63,187.86
-------------- ----- ----- -- ----------
227,324,349.74 64,498.89
=============== ==========
INTEREST RATE DERIVATES
Forward Contracts Rights Issued by the Colombian Government - TES
YANKEES............................................................. 1,009,131.11 1.20 9.38% 27 270,10
Forward Contracts Commitments to Discount........................... (1,016,918.45) 1.20 118.00% 27 (256,99)
-------------- ----- ----- -- ----------
(7,787.34) 13,12
=============== ==========
FOREIGN EXCHANGE FORWARD CONTRACTS
Foreign Exchange Contracts Rights in Foreign Currency............... 92,330,063.59 1.97 2.37% 27 40,840.33
Foreign Exchange Contracts Commitments in Foreign Currency.......... (238,509,347.62) 2.82 2.37% 27 (151,077.09)
--------------- ----- ----- --- -----------
(146,179,284.03) (110,236.76)
=============== ===========
UVR INTEREST RATE RISK
----------------------
VPN DUR Y Delta-I VER
--- --- --- ------ ---
Trading Securities Issued by the Colombian Government - TES Fixed
Rate Ps192,323,308.43 36.47 6.18% 12.4 720,775.01
Other Trading Securities Issued by the Colombian Government
(Other than TES).................................................... 737,611,099.00 103.03 0.00% 12.4 7,848,835.59
Trading Securities Issued by Financial Institutions................. 317,069,299.88 13.38 0.96% 12.4 437,723.87
Other Marketable Trading Securities................................. 21,773,200.00 105.91 0.00% 12.4 238,146.79
Rights Buyback Other Available for Sale Issued by the Colombian
Government (Other than TES)......................................... 78,088,200.00 120.22 0.00% 12.4 969,544.17
------------------ ------ ---- ---- -------------
Total........................................................ Ps1,346,865,107.31 10,215,025.43
================== =============
INTEREST RATE DERIVATIVES
Forward contracts Rights to Discount................................ 10,642,404.35 0.07 6.60% 12.4 72.88
58
FOREIGN EXCHANGE RISK
The Foreign Exchange Risk is the probability of loss due to fluctuations in the
exchange rates of the currencies in which the Bank maintains positions. As
indicated, the methodology used in this Annual Report to measure such risk
consists on computing VaR, which in the case exchange rate fluctuations is
derived from multiplying the net position ("NP") held in each of the foreign
currencies by the estimated variation of the foreign exchange rate for such
currency ("Delta-e"), as the same may be derived from statistical analysis,
established by the Superintendency of Banking according to the market's historic
performance. The NP is the difference, expressed in pesos, between all the
active and passive positions denominated or indexed in each currency. The active
or passive positions include commitments to buy and sell in foreign currency
(forwards over foreign currencies) and the delta of the options, whatever the
case may be.
VaR = PN * Delta-e
STOCK PRICE RISK
The stock price risk is the probability of loss due to fluctuations in the price
of stocks in which the Bank maintains a position (PosA). As indicated, the
methodology used in this Annual Report to measure such risk consists on
computing VaR, which in the case of fluctuations in the price of publicly traded
stocks is derived from multiplying the PosA by the maximum probable variation in
the price of such positions ("Delta-p"). In the case of non-publicly traded
stocks, the resulting VaR is further augmented by 20%. The Delta-p is determined
by reference to the volatility of the price index of the Colombian Stock
Exchange, as estimated by the Banking Superintendency.
For publicly traded stocks:
VaR = PosA* Delta-p
For non-publicly traded stocks:
VaR = PosA* 1.2 * Delta-p
EXCHANGE RATE SENSIVITY
P. NETA DI VER
------- -- ---
PRICE RISK
U.S Dollars (279,561) 0.0285 (7,968)
Japanese Yen 149 0.0587 9
British Pound (98) 0.0587 (6)
Venezuelan Bolivar 4 0.0285 0
Canadian Dollars 163 0.0285 5
Swiss Franc 252 0.0587 15
Euro 476 0.0587 28
Krona 24 0.0587 1
Krone 27 0.0587 2
-------- ------ ------
(7,914)
UVR
French Without Uvr 17,593 0.0390 6,861
SHARES
Available for Sale 118,173 0.0808 9,548
59
TOTAL MARKET RISK VALUE
Theoretically, a portfolio is built by instruments which by being mutually
related, make the portfolio's aggregate risk lower than the sum of each
instrument's individual risk. This is known as correlation, which helps to
diversify the risk of a portfolio. Once the correlation is determined between
each risk factor and a correlations matrix is built, the overall market risk
faced by the Bank can be calculated.
After individually calculating the VaR of a position in the balance sheet in
respect of interest rate, exchange rate and stock price risk factors, and taking
into account the correlations between such various risk factors, a total VaR,
which includes interest rate, exchange rate and stock price risk factors, is
computed for each position. Then, taking into account the correlation among the
VaR of different assets, a total VaR for all assets is computed. The same
procedure is followed to compute the total VaR for all liabilities. Finally,
taking into account the correlation between the VaR for assets and the VaR for
liabilities, an overall VaR for market risk is calculated. Such market risk VaR
is included in the solvency calculation in accordance with Decree 1720 of 2001.
[MATHEMATICAL FORMULA]
The Bank's aggregate market risk VaR, as of December 31, 2002, was Ps 47.3
billion.
LIMITATIONS OF VAR MODELS
Although VaR models represent a recognized tool for risk management,
they have inherent limitations, including reliance on historical data that may
not be indicative of future market conditions or trading patterns. Accordingly,
you should not view VaR models as a predictor of future results. We may incur
losses that could be materially in excess of the amounts indicated by the models
on a particular trading day or over a period of time, and there have been
instances when results have fallen outside the values generated by our VaR
models. A VaR model does not estimate the greatest possible loss. The results of
these models and analysis thereof are subject to the judgment of our risk
management personnel.
B. LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND FUNDING
The Bank requires liquid funds in order to honor withdrawals of
deposits, to make repayments upon maturity of other liabilities, to extend loans
or other forms of credit to its customers and to meet its own working capital
needs. The minimum amount of liquidity required is determined by the reserve
requirements established by the Central Bank. The Bank's policy is to ensure
that sufficient liquidity is available to meet funding requirements, including
the replacement of existing funds as they mature or are withdrawn and the
satisfaction of demand for additional borrowings. These requirements are met by
60
maintaining a proper balance between maturity distribution and diversity of
sources of funds. BC believes that its working capital is sufficient for its
present requirements.
In the short term, the Bank has a negative gap position in terms of
maturities. The gap is eliminated and reverses as maturities are extended. This
is a systemic characteristic inherent to the Colombian financial system, which
historically resulted from the unavailability of medium-to long-term funding
instruments in Colombia.
Traditionally, Colombian banks, unlike U.S. banks, have not had access
to longer-term funding as a result of the high inflation rates in Colombia and
the uncertainty caused by the volatility of the interest rates, even though
during the last years those rates have been decreasing. Accordingly, investors
in Colombia require liquidity and have a preference for short-term investments.
BC's deposit base is primarily short term; however, the stable nature of its
deposit base has enabled the Bank to offer longer-term loans, such as automobile
loans. As a consequence of the development of Colombia's capital markets, the
Bank believes that longer-term funding will become available so as to enable
credit institutions to minimize liquidity risks, although no assurances can be
made in this regard.
BC has various sources of liquidity such as short-term and marketable
investments; domestic interbank credit lines, international commercial bank
credit lines, interbank borrowings and securities repurchase transactions. The
Bank's marketable investments are very liquid in the Colombian market and within
BC this kind of securities have high-level rotation. In addition, the Bank
generally has access to funds from the Central Bank, which have been used from
time to time on a short-term basis.
The share of total Checking deposits has decreased to 25.6% in 2002
from 29.1% and 26.8% as of December 31, 2000 and 2001 respectively.
Another important source of funding are time deposits which represented
35.4%, 39.6% and 34.2% of the Bank's total funding at the end of 2000, 2001 and
2002, respectively. Furthermore, the Bank relies on short-term deposits for its
funding which means that there can be no assurance that, in the event of a
sudden or unexpected shortage of funds in the Colombian banking system and money
markets, BC will be able to maintain its levels of funding without incurring
higher funding costs or liquidation of certain assets.
Cash flows for the Bank include net cash provided by operating
activities, net cash used in investing activities and net cash provided by
financing activities. For the years ended December 31, 2000, 2001 and 2002, net
cash provided by operating activities equaled Ps 13,425 million, Ps 371,755
million and Ps 546,935 million, respectively. For the years ended December 31,
2000, 2001 and 2002, net cash used in investing activities equaled Ps 793,270
million, Ps 1,720,964 million and Ps 2,315,976 million, respectively. This
increase was mainly due to a net increase in the loan portfolio and purchases of
investment securities. For the years ended December 31, 2000, 2001 and 2002, net
cash provided by financing activities equaled Ps 835,687 million, Ps 1,342,436
million and Ps 1,906,651 million, respectively. This increase was mainly the
result of an increase in deposits.
The Bank's principal sources of funds are customer deposits (consisting
of time deposits, checking accounts and savings deposits), interbank borrowings,
overnight funds, development fund borrowings, and bank acceptances outstanding.
Below is a breakdown of the Bank's funding as of December 31, 2000, 2001 and
2002:
61
AS OF DECEMBER 31,
------------------
% OF TOTAL % OF TOTAL % OF TOTAL
2000 FUNDING 2001 FUNDING 2002 FUNDING
---- ------- ---- ------- ---- -------
(in millions of pesos, except percentages)
Checking deposits
Peso-denominated Ps1,708,423 23.4% Ps1,805,085 20.9% Ps 2,083,931 19.8%
Dollar-denominated 417,204 5.7% 512,577 5.9% 607,462 5.8%
----------- ----- ----------- ----- ------------ -----
Total 2,125,627 29.1% 2,317,662 26.8% 2,691,393 25.6%
----------- ----- ----------- ----- ------------ -----
Time deposits
Peso-denominated 1,519,316 20.9% 2,112,815 24.4% 1,959,190 18.6%
Dollar-denominated 1,055,896 14.5% 1,313,814 15.2% 1,644,276 15.6%
----------- ----- ----------- ----- ------------ -----
Total 2,575,212 35.4% 3,426,629 39.6% 3,603,466 34.2%
----------- ----- ----------- ----- ------------ -----
Savings deposits
Peso-denominated 1,317,036 18.1% 1,700,913 19.7% 2,294,374 21.8%
Dollar-denominated 47,023 0.7% 68,951 0.8% 104,352 1.0%
----------- ----- ----------- ----- ------------ -----
Total 1,364,059 18.8% 1,769,864 20.5% 2,398,726 22.8%
----------- ----- ----------- ----- ------------ -----
Other deposits
Peso-denominated 29,346 0.4% 39,664 0.5% 64,581 0.6%
Dollar-denominated 21,778 0.3% 27,029 0.3% 29,992 0.3%
----------- ----- ----------- ----- ------------ -----
Total 51,124 0.7% 66,693 0.8% 94,573 0.9%
----------- ----- ----------- ----- ------------ -----
Interbank Borrowings
Peso-denominated -- 0.0% -- 0.0% -- 0.0%
Dollar-denominated 564,368 7.8% 399,595 4.6% 403,962 3.8%
----------- ----- ----------- ----- ------------ -----
Total 564,368 7.8% 399,595 4.6% 403,962 3.8%
----------- ----- ----------- ----- ------------ -----
Overnight funds
Peso-denominated 211,764 2.9% 202,994 2.3% 550,807 5.2%
Dollar-denominated -- 0.0% -- 0.0% 59,351 0.6%
----------- ----- ----------- ----- ------------ -----
Total 211,764 2.9% 202,994 2.3% 610,158 5.8%
----------- ----- ----------- ----- ------------ -----
Domestic development bank
borrowings
Peso-denominated 248,774 3.4% 376,450 4.4% 673,654 6.3%
Dollar-denominated 94,961 1.3% 54,609 0.6% 39,399 0.3%
----------- ----- ----------- ----- ------------ -----
Total 343,735 4.7% 431,059 5.0% 713,053 6.6%
----------- ----- ----------- ----- ------------ -----
Bank acceptances outstanding
Peso-denominated 7,246 0.1% 8,185 0.1% 3,456 0.0%
Dollar-denominated 38,595 0.5% 22,881 0.3% 27,594 0.3%
----------- ----- ----------- ----- ------------ -----
Total 45,841 0.6% 31,066 0.4% 31,050 0.3%
----------- ----- ----------- ----- ------------ -----
Total funding
Peso-denominated 5,041,905 69.2% 6,246,106 72.2% 7,629,993 72.3%
Dollar-denominated 2,239,825 30.8% 2,399,456 27.8% 2,916,388 27.7%
----------- ----- ----------- ----- ------------ -----
Total Ps7,281,730 100.0% Ps8,645,562 100.0% Ps10,546,381 100.0%
=========== ===== =========== ===== ============ =====
The Bank obtains funding from official institutions such as Bancoldex
for development projects and export financing. These institutions have
historically been the primary sources of long-term funding in Colombia. The
originating entity will usually prescribe the use to which the funds will be put
but will not impose any other lending criteria. The Bank conducts its own credit
analysis in deciding whether to act as intermediary for these on-lending
activities and is obligated to repay the loan regardless of the performance of
the borrower.
The Bank also uses domestic credit lines from other banks as a source
of overnight funding for short-term investments and for covering temporary
reserve shortages. This source of funds constituted 2.9%, 2.3% and 5.8% of total
funding at December 31, 2000, 2001 and 2002, respectively. At January 31, 2003,
domestic credit lines constituted 4.7% of BC's total funding.
Interbank borrowings from foreign banks and from domestic banks in U.S.
dollars (such as Bancoldex dollar-denominated development borrowings) are based
on LIBOR. Interbank peso
62
borrowings are based on the domestic market rate in effect at that time.
Peso-denominated development fund borrowings are based on DTF. Almost all such
borrowings are on a floating rate basis. BC also has a correspondent banking
network with other banks in Latin America and elsewhere. As of December 31,
2002, the Bank had international trade lines with 60 international banks
providing credit facilities for up to US$1,000 billion.
In the event that the Bank has a liquidity shortfall, it might be
required to increase liquidity by selling assets at a discount. The Bank manages
this risk by analyzing the maturity of assets, liabilities and off-balance sheet
positions. In addition, management believes that the relatively high volume and
quality of the net liquid assets owned by the Bank helps it to maintain its
liquidity position and its ability to meet its commitments when due. However, no
assurance can be given that in the event of a liquidity shortfall, the Bank
would not be required to sell assets at a discount.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any transactions, arrangements or other relationships
with unconsolidated entities or other persons that are reasonably likely to have
a material effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
our access to our requirements for capital resources. In addition, we do not
have relationships with any unconsolidated entities that are contractually
limited to narrow activities that facilitate our transfer of or access to
assets.
CAPITAL EXPENDITURES
The Bank has made significant capital expenditures in advanced computer
systems and other technology over the last three years to further increase the
efficiency and volume of its operations, the range of services offered to its
customers and its productivity, while maintaining a streamlined work force. The
Bank intends to continue to invest in the development of such systems and
technologies during 2003.
In 2002, of a total budget of Ps 54,700 million (US$21.8 million) for
capital expenditures, the Bank spent Ps 24,300 million (US$9.7 million) updating
its computer and telecommunications networks, system software technology and in
other technology investments. For 2003, the Bank has budgeted Ps 76,200 million
for further capital expenditures, of which approximately Ps 47,000 million are
intended for further investments in technology, part of which may be acquired
through purchases and the rest through leasing. The Bank may also make
additional capital expenditures, for which no amounts have yet been budgeted.
During 2002, BC sold fixed assets of Ps 34,247 million (US$13.7
million), of which 93% were foreclosed assets.
CAPITAL
SHAREHOLDERS' EQUITY
As of December 31, 2002, the Bank's shareholders' equity was Ps
1,284,348 million, a 32.3% increase from Ps 970,451 million as of December 31,
2001. BC's shareholders' equity is comprised of subscribed and paid-in capital,
retained earnings and surplus (which is comprised of the reappraisal of
63
assets; see Note 2 to the Financial Statements). The main cause for the increase
in shareholders' equity was an increase in retained earnings and a gross
unrealized gain on investments available for sale.
CAPITALIZATION PROGRAM
In connection with a capitalization program completed on March 28, 2000
under which additional capital was raised to approximately $176 million,
Bancolombia entered into several agreements with Capital International Global
Emerging Markets Private Equity Fund, L.P., a limited partnership organized
under the laws of Delaware, and certain of its affiliates (collectively,
"CIPEF"). Under a stock subscription agreement with Bancolombia, CIPEF, for a
consideration of approximately Ps 81.4 billion, acquired approximately 77.6
million of the total of 120,375,229 Preference Shares issued in the
capitalization program. All such Preference Shares were registered for resale
through the Bank's ADR facility with the United States Securities and Exchange
Commission (the "Commission"), under a registration statement on Form F-3 (File
No. 333-12658), which went into effect on October 12, 2000. Furthermore, the
Bank, under a shareholder rights agreement, granted CIPEF certain management
information and consulting rights as well as consent rights for certain material
transactions of the Bank. All such agreements with CIPEF were filed with the
Commission as exhibits to Bancolombia's Annual Report on Form 20-F for 1999.
VOLUNTARY BALANCE SHEET RESTRUCTURING
In the second quarter of 2000, following the successful completion of
the capitalization program, and with the concurrence of the Superintendency of
Banking, the Bank approved a voluntary balance sheet restructuring program
(saneamiento voluntario), which enabled it, pursuant to Colombian law, to use
some of the new funds received under the capitalization program to offset
charges on the balance sheet. As of April 30, 2000, Bancolombia had made
allowances and write-offs under the voluntary balance sheet restructuring
program of approximately Ps 196,558 million, which amount was transferred from
the capital surplus account, for past due loans, non-performing loans and
foreclosed assets. As a result, Bancolombia had a coverage ratio of 116% for
past-due loans and of 156%, on an unconsolidated basis, for non-performing
loans, as well as a Technical Capital (expressed as a percentage of risk
weighted assets) of 11%. In addition, the balance sheet restructuring carried
out by BC helped to improve the relation of interest-earning assets to
interest-bearing liabilities. See Note 28 to the Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have identified the accounting policies that are critical to our
business operations and the understanding of its results of operations. These
critical accounting policies are those which involve the most complex or
subjective decisions or assessments, and relate to loan loss allowances and the
determination of the fair value of financial assets and liabilities, including
impairment charges and foreclosed asset allowances and are discussed in detail
under "C. Selected Statistical Information -- "Investment Securities";
"Classification of the Loan Portfolio"; "Allowance for Loan Losses"; and "New
Provision System" below.
In each case, the determination of these items is fundamental to our
financial condition and results of operations, and requires management to make
complex judgments based on information and financial data that may change in
future periods. As a result, determinations regarding these items necessarily
involve the use of assumptions and subjective judgments as to future events and
are subject to change, and the use of different assumptions or data could
produce materially different results.
64
C. SELECTED STATISTICAL INFORMATION
The following information should be read in conjunction with "Item 5.
Operating and Financial Review and Prospects" and the Financial Statements
included in this Annual Report.
AVERAGE BALANCE SHEET AND INTEREST RATE DATA
Average balances have been calculated as follows: For each month, the
actual month-end balances were established. The average balance for each period
is the average of such month-end balances. For purposes of the presentation in
the following tables, non-performing loans have been treated as
non-interest-earning assets. In addition, loan fees are immaterial in amount and
are included in "loans" in the tables below.
REAL AVERAGE INTEREST RATES
The real average interest rates set forth in the tables below have been
calculated by adjusting the nominal average interest rates on peso-denominated
assets and liabilities using the following formula:
R(p) = 1 + N(p) -1
--------
1 + I
Where:
R(p) = real average interest rate on peso-denominated assets and
liabilities for the period.
N(p) = nominal average interest rate on peso-denominated assets
and liabilities for the period.
I = inflation rate in Colombia for the period (based on the
Colombian wholesale inflation rate).
Under this adjustment formula, assuming positive nominal average
interest rates, the real average interest rate on a portfolio of
peso-denominated assets or liabilities would be equal to the nominal average
interest rate on that portfolio if the inflation rate were zero. The real
average interest rate would be smaller than the nominal average interest rate if
the inflation rate were positive, and the real average interest rate would be
greater than the nominal average interest rate if the inflation rate were
negative (i.e., becomes a deflation rate). In addition, the real average
interest rate would be negative if the inflation rate were greater than the
average nominal interest rate.
AVERAGE BALANCE SHEET
The following tables show for the years ended December 31, 2000, 2001
and 2002, respectively:
- average annual balances calculated using actual month-end balances for all
of the Bank's assets and liabilities;
65
- interest income and expense amounts; and
- nominal and real rates for the bank's interest-earning assets and
interest-bearing liabilities.
In the table below, the nominal rate for dollar-denominated items is
also considered to be the real rate, given that this activity originated outside
of Colombia and would not be impacted by the inflation and devaluation levels
that would impact domestic activity.
66
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
2000 2001
-------------------------------------------- ----------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
NOMINAL REAL NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE BALANCE EARNED RATE RATE
------- ------ ---- ---- ------- ------ ---- ----
(in millions of pesos, except percentages)
ASSETS(1)
INTEREST-EARNING ASSETS(2):
Overnight Funds
Peso-denominated ........ Ps 56,061 Ps 11,992 21.4% 11.6% Ps 16,060 Ps 13,395 83.4% 70.4%
Dollar-denominated ...... 129,513 6,483 5.0% 5.0% 238,230 8,258 3.5% 3.5%
----------- --------- ----------- ---------
Total 185,574 18,475 10.0% 254,290 21,653 8.5%
Investment securities
Peso-denominated ........ 630,779 106,486 16.9% 7.5% 889,566 12,755 1.4% -5.8%
Dollar-denominated ...... 760,927 39,089 5.1% 5.1% 1,241,754 35,903 2.9% 2.9%
----------- --------- ----------- ---------
Total 1,391,706 145,575 10.5% 2,131,320 48,658 2.3%
Loans(3)
Peso-denominated ........ 3,368,956 589,911 17.5% 8.1% 4,099,831 747,543 18.2% 9.8%
Dollar-denominated ...... 999,663 88,672 8.9% 8.9% 1,024,660 63,903 6.2% 6.2%
----------- --------- ----------- ---------
Total 4,368,619 678,583 15.5% 5,124,491 811,446 15.8%
Total interest-earning
assets(4)
Peso-denominated ........ 4,055,796 708,389 17.5% 8.0% 5,005,457 773,693 15.5% 7.3%
Dollar-denominated ...... 1,890,103 134,244 7.1% 7.1% 2,504,644 108,064 4.3% 4.3%
----------- --------- ----------- ---------
Total 5,945,899 842,633 14.2% 7,510,101 881,757 11.7%
NON INTEREST-EARNING ASSETS:
Cash due from banks and
Central Bank
Peso-denominated ........ 318,021 362,048
Dollar-denominated ...... 31,129 44,474
----------- -----------
Total 349,150 406,522
Allowance for loan losses
Peso-denominated ........ (286,182) (251,987)
Dollar-denominated ...... (26,689) (44,873)
----------- -----------
Total (312,871) (296,860)
Non-performing loans
Peso-denominated ........ 165,861 110,935
Dollar-denominated ...... 25,646 26,301
----------- -----------
Total ................. 191,507 137,236
Customers' acceptances
Peso-denominated ........ 3,465 4,575
Dollar-denominated ...... 26,330 34,480
----------- -----------
Total 29,795 39,055
Accounts receivable, net
Peso-denominated ........ 160,853 165,394
Dollar-denominated ...... 15,646 12,003
----------- -----------
Total ................. 176,499 177,397
YEAR ENDED DECEMBER 31,
----------------------------------------------
2002
----------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE
------- ------ ---- ----
ASSETS(1)
INTEREST-EARNING ASSETS(2):
Overnight Funds
Peso-denominated ........ Ps 14,221 Ps 9,730 68.4% 57.4%
Dollar-denominated ...... 226,535 2,095 0.9% 0.9%
------------ ---------
Total 240,756 11,825 4.9%
Investment securities
Peso-denominated ........ 1,908,293 6,352 0.3% -6.3%
Dollar-denominated ...... 1,663,565 (6,105) -0.4% -0.4%
------------ ---------
Total 3,571,858 247 0.0%
Loans(3)
Peso-denominated ........ 4,355,031 671,657 15.4% 7.9%
Dollar-denominated ...... 1,046,841 54,455 5.2% 5.2%
------------ ---------
Total ................. 5,401,872 726,112 13.4%
Total interest-earning
assets(4)
Peso-denominated ........ 6,277,545 687,739 11.0% 3.7%
Dollar-denominated ...... 2,936,941 50,445 1.7% 1.7%
------------ ---------
Total 9,214,486 738,184 8.0%
NON INTEREST-EARNING ASSETS:
Cash due from banks and
Central Bank
Peso-denominated ........ 386,770
Dollar-denominated ...... 28,403
------------
Total 415,173
Allowance for loan losses
Peso-denominated ........ (250,972)
Dollar-denominated ...... (42,164)
------------
Total ................. (293,136)
Non-performing loans
Peso-denominated ........ 130,228
Dollar-denominated ...... 44,536
------------
Total ................. 174,764
Customers' acceptances
Peso-denominated ........ (3,799)
Dollar-denominated ...... 23,980
------------
Total 20,181
Accounts receivable, net
Peso-denominated ........ 166,091
Dollar-denominated ...... 6,801
------------
Total ................. 172,892
67
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
2000 2001
-------------------------------------------- ----------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
NOMINAL REAL NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE BALANCE EARNED RATE RATE
------- ------ ---- ---- ------- ------ ---- ----
(in millions of pesos, except percentages)
Foreclosed assets, net
Peso-denominated ........ 106,356 94,636
-----------
Dollar-denominated ...... 112 -
-----------
Total ................. 106,468 94,636
Premises and equipment, net
Peso-denominated ........ 478,172 454,825
Dollar-denominated ...... 109,561 97,981
----------- -----------
Total ................. 587,733 552,806
Other assets
Peso-denominated ........ 806,317 780,607
Dollar-denominated ...... 43,914 63,684
----------- -----------
Total ................. 850,231 844,291
Total non interest-earning
assets
Peso-denominated ........ 1,752,863 1,721,033
Dollar-denominated ...... 225,649 234,050
----------- -----------
Total ................. 1,978,512 1,955,083
TOTAL ASSETS ............ PS7,924,411 PS842,633 PS9,465,184 PS881,757
=========== ========= =========== =========
YEAR ENDED DECEMBER 31,
----------------------------------------------
2002
----------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE
------- ------ ---- ----
Foreclosed assets, net
Peso-denominated ........ 74,314
Dollar-denominated ...... 1,050
------------
Total 75,364
Premises and equipment, net
Peso-denominated ........ 490,785
Dollar-denominated ...... 152,897
------------
Total 643,682
Other assets
Peso-denominated ........ 671,958
Dollar-denominated ...... 85,997
------------
Total 757,955
Total non interest-earning
assets
Peso-denominated ........ 1,665,375
Dollar-denominated ...... 301,500
------------
Total ................. 1,966,875
TOTAL ASSETS ............ PS11,181,361 PS738,184
============ =========
Out-of-period items and adjustments have been included in the appropriate line
items as of the time they were received.
Throughout this analysis, the nominal rate for the dollar-denominated activity
is also considered to be the real rate, given that this activity originated
outside of Colombia and would not be impacted by the inflation and devaluation
levels that would impact domestic activity. Individual component interest rate
subtotals are based on weighted averages using the average balances of the
components.
Includes performing loans only.
Interest income and expenses resulting from the inflation adjustments are
distributed to the individual asset/liability components for the purpose of
determining the nominal and real rates.
68
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
2000 2001
------------------------------------------------ --------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
NOMINAL REAL NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE BALANCE EARNED RATE RATE
----------- --------- -------- -------- ----------- --------- -------- --------
(in millions of pesos, except percentages)
LIABILITIES AND SHARE-HOLDERS'
EQUITY(1)(2)(3)
INTEREST-BEARING LIABILITIES:
Checking deposits
Peso-denominated ............ Ps 177,619 Ps 11,195 6.3% (2.3)% Ps 102,257 Ps 4,171 4.1% -3.3%
Dollar-denominated .......... 397,140 20,345 5.1% 5.1% 506,098 18,156 3.6% 3.6%
----------- --------- ----------- ---------
Total ..................... 574,759 31,540 5.6% 608,355 22,327 3.7%
Time deposits
Peso-denominated ............ 1,505,107 187,292 12.4% 3.4% 1,802,223 238,241 13.2% 5.2%
Dollar-denominated .......... 871,572 57,619 6.6% 6.6% 1,165,018 65,771 5.6% 5.6%
----------- --------- ----------- ---------
Total ..................... 2,376,679 244,911 10.3% 2,967,241 304,012 10.2%
Savings deposits
Peso-denominated ............ 1,353,366 85,810 6.3% (2.2)% 1,646,305 110,828 6.7% -0.9%
Dollar-denominated .......... 32,844 1,819 5.5% 5.5% 64,045 2,328 3.6% 3.6%
----------- --------- ----------- ---------
Total ..................... 1,386,210 87,629 6.3% 1,710,350 113,156 6.6%
Overnight funds
Peso-denominated ............ 89,173 7,714 8.7% (0.1)% 321,138 27,120 8.4% 0.7%
Dollar-denominated .......... - - - -
----------- --------- ----------- ---------
Total 89,173 7,714 8.7% 321,138 27,120 8.4%
Borrowings from domestic
development banks
Peso-denominated ............ 213,487 32,467 15.2% 5.9% 259,401 35,643 13.7% 5.6%
Dollar-denominated .......... 148,610 9,063 6.1% 6.1% 110,993 5,079 4.6% 4.6%
----------- --------- ----------- ---------
Total ..................... 362,097 41,530 11.5% 370,394 40,722 11.0%
Interbank borrowings
Peso-denominated - - - -
Dollar-denominated .......... 535,748 42,094 7.9% 7.9% 472,975 20,160 4.3% 4.3%
----------- --------- ----------- ---------
Total ..................... 535,748 42,094 7.9% 472,975 20,160 4.3%
Long-term debt
Peso-denominated ............ 22,082 3,437 15.6% 6.3% 11,991 1,577 13.2% 5.2%
Dollar-denominated .......... - - - -
----------- --------- ----------- ---------
Total ..................... 22,082 3,437 15.6% 11,991 1,577 13.2%
Fiduciary deposits
Peso-denominated ............ - - - -
Dollar-denominated .......... - - - -
----------- --------- ----------- ---------
Total ..................... - - - -
Total interest-bearing
liabilities
Peso-denominated ............ 3,360,834 327,915 9.8% 0.9% 4,143,315 417,580 10.1% 2.3%
Dollar-denominated .......... 1,985,914 130,940 6.6% 6.6% 2,319,129 111,494 4.8% 4.8%
----------- --------- ----------- ---------
Total ..................... 5,346,748 458,855 8.6% 6,462,444 529,074 8.2%
NON-INTEREST-BEARING
LIABILITIES:
Checking accounts
Peso-denominated ............ 1,080,749 1,182,007
Dollar-denominated .......... 33 23
----------- -----------
Total ..................... 1,080,782 1,182,030
Other deposits
Peso-denominated ............ 17,859 130,692
Dollar-denominated .......... 24,369 40,278
----------- -----------
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002
-----------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE
------------ --------- -------- --------
(in millions of pesos, except percentages)
LIABILITIES AND SHARE-HOLDERS'
EQUITY(1)(2)(3)
INTEREST-BEARING LIABILITIES:
Checking deposits
Peso-denominated ............ Ps 90,332 Ps 2,962 3.3% -3.4%
Dollar-denominated .......... 576,933 10,013 1.7% 1.7%
------------ ---------
Total ..................... 667,265 12,975 1.9%
Time deposits
Peso-denominated ............ 2,167,388 211,375 9.8% 2.6%
Dollar-denominated .......... 1,386,388 48,903 3.5% 3.5%
------------ ---------
Total ..................... 3,553,776 260,278 7.3%
Savings deposits
Peso-denominated ............ 2,077,699 105,442 5.1% -1.8%
Dollar-denominated .......... 83,796 1,383 1.7% 1.7%
------------ ---------
Total ..................... 2,161,495 106,825 4.9%
Overnight funds
Peso-denominated ............ 363,623 22,569 6.2% -0.7%
Dollar-denominated .......... 81,474 4,076 5.0% 5.0%
------------ ---------
Total 445,097 26,645 6.0%
Borrowings from domestic
development banks
Peso-denominated ............ 436,132 43,722 10.0% 2.8%
Dollar-denominated .......... 77,540 5,595 7.2% 7.2%
------------ ---------
Total ..................... 513,672 49,317 9.6%
Interbank borrowings
Peso-denominated - -
Dollar-denominated .......... 505,832 9,404 1.9% 1.9%
------------ ---------
Total ..................... 505,832 9,404 1.9% 1.9%
Long-term debt
Peso-denominated ............ 20,776 779 3.7% -3.1%
Dollar-denominated .......... - -
------------ ---------
Total ..................... 20,776 779 3.7% 3.7%
Fiduciary deposits
Peso-denominated ............ - -
Dollar-denominated .......... - -
------------ ---------
Total ..................... - -
Total interest-bearing
liabilities
Peso-denominated ............ 5,155,950 386,849 7.5% 0.5%
Dollar-denominated .......... 2,711,963 79,374 2.9% 2.9%
------------ ---------
Total ..................... 7,867,913 466,223 5.9%
NON-INTEREST-BEARING
LIABILITIES:
Checking accounts
Peso-denominated ............ 1,437,429
Dollar-denominated .......... 21
------------
Total ..................... 1,437,450
Other deposits
Peso-denominated ............ 48,331
Dollar-denominated .......... 50,513
------------
69
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
2000 2001
------------------------------------------------ --------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
NOMINAL REAL NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE BALANCE EARNED RATE RATE
----------- --------- -------- -------- ----------- --------- -------- --------
(in millions of pesos, except percentages)
Total ..................... 42,228 170,970
Bank Acceptances Outstanding
Peso-denominated ............ 5,064 4,607
Dollar-denominated .......... 26,330 34,480
----------- -----------
Total ..................... 31,394 39,087
Fiduciary deposits
Peso-denominated ............ 44,750 22,860
Dollar-denominated .......... - -
----------- -----------
Total ..................... 44,750 22,,860
Other liabilities .............
Peso-denominated ............ 366,901 484,984
Dollar-denominated .......... 41,581 29,019
----------- -----------
Total ..................... 408,482 514,003
Shareholders' equity
Peso-denominated ............ 967,150 1,002,941
Dollar-denominated .......... 2,877 70,849
----------- -----------
Total ..................... 970,027 1,073,790
Total non-interest bearing
liabilities
Peso-denominated ............ 2,482,473 2,828,091
Dollar-denominated .......... 95,190 174,649
----------- -----------
Total ....................... 2,577,663 3,002,740
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY ........... PS7,924,411 PS458,855 PS9,465,184 PS529,074
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002
-----------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE
------------ --------- -------- --------
(in millions of pesos, except percentages)
Total ..................... 98,844
Bank Acceptances Outstanding
Peso-denominated ............ 4,243
Dollar-denominated .......... 23,980
------------
Total ..................... 28,223
Fiduciary deposits
Peso-denominated ............ -
Dollar-denominated .......... -
------------
Total ..................... -
Other liabilities .............
Peso-denominated ............ 673,000
Dollar-denominated .......... 45,472
------------
Total ..................... 718,472
Shareholders' equity
Peso-denominated ............ 939,774
Dollar-denominated .......... 90,685
------------
Total ..................... 1,030,459
Total non-interest bearing
liabilities
Peso-denominated ............ 3,102,777
Dollar-denominated .......... 210,671
------------
Total ....................... 3,313,448
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY ........... PS11,181,361 PS466,223
---------------
(1) Out of period items and adjustments have been included in the appropriate
line items as of the time they were received.
(2) Throughout this analysis, the nominal rate for the dollar-denominated
activity is also considered to be the real rate, given that this activity
originated outside of Colombia and would not be impacted by the inflation
and devaluation levels that would impact domestic activity. Individuals
component interest rate subtotals are based on weighted averages using the
average balances of the components.
(3) Includes performing loans only.
(4) Interest income and expense resulting from the inflation adjustments are
distributed to the individual asset/liability components for the purpose
of determining the nominal and real rates.
70
CHANGES IN NET INTEREST INCOME AND EXPENSES -- VOLUME AND RATE ANALYSIS
The following table allocates changes in the Bank's net interest income
between changes in average volume, changes in nominal rates and the net variance
caused by changes in both average volume and nominal rate for the fiscal year
ended December 31, 2002 compared to the fiscal year ended December 31, 2001; and
the fiscal year ended December 31, 2001 compared to the fiscal year ended
December 31, 2000. Volume and rate variances have been calculated based on
movements in average balances over the period and changes in nominal interest
rates on average interest-earning assets and average interest-bearing
liabilities. Net changes attributable to changes in both volume and rate have
been allocated to volume.
2000-2001 2001-2002
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES DUE TO CHANGES
----------------------------------- -------------------------------
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
------- ------- ------- ------ -------- --------
(in millions of pesos)
INTEREST-EARNING ASSETS:
Overnight funds
Peso-denominated (33,364) 34,767 1,403 (1,258) (2,407) (3,665)
Dollar-denominated 3,769 (1,994) 1,775 (108) (6,055) (6,163)
------- ------- ------- ------ -------- --------
Total (29,595) 32,773 3,178 (1,366) (8,462) (9,828)
Investment securities
Peso-denominated 3,711 (97,442) (93,731) 3,391 (9,794) (6,403)
Dollar-denominated 13,902 (17,088) (3,186) (1,549) (40,459) (42,008)
------- ------- ------- ------ -------- --------
Total 17,613 (114,530) (96,917) 1,842 (50,253) (48,411)
Loans
Peso-denominated 133,264 24,368 157,632 39,358 (115,244) (75,886)
Dollar-denominated 1,559 (26,328) (24,769) 1,154 (10,602) (9,448)
------- ------- ------- ------ -------- --------
Total 134,823 (1,960) 132,863 40,512 (125,846) (85,334)
Total interest-earning assets
Peso-denominated 103,611 (38,307) 65,304 41,491 (127,445) (85,954)
Dollar-denominated 19,230 (45,410) (26,180) (503) (57,116) (57,619)
------- ------- ------- ------ -------- --------
TOTAL 122,841 (83,717) 39,124 40,988 (184,561) (143,573)
======= ======= ======= ====== ======== ========
INTEREST-BEARING LIABILITIES:
Checking accounts
Peso-denominated (3,074) (3,950) (7,024) (391) (818) (1,209)
Dollar-denominated 3,909 (6,098) (2,189) 1,229 (9,372) (8,143)
------- ------- ------- ------ -------- --------
Total 835 (10,048) (9,213) 838 (10,190) (9,352)
Time deposits
Peso-denominated 39,277 11,672 50,949 35,613 (62,479) (26,866)
Dollar-denominated 16,566 (8,414) 8,152 7,809 (24,677) (16,868)
------- ------- ------- ------ -------- --------
Total 55,843 3,258 59,101 43,422 (87,156) (43,734)
Savings deposits
Peso-denominated 19,720 5,298 25,018 21,893 (27,279) (5,386)
Dollar-denominated 1,134 (625) 509 326 (1,271) (945)
------- ------- ------- ------ -------- --------
Total 20,854 4,673 25,527 22,219 (28,550) (6,331)
Overnight funds
Peso-denominated 19,590 (184) 19,406 2,637 (7,188) (4,551)
Dollar-denominated - - - 4,076 - 4,076
------- ------- ------- ------ -------- --------
Total 19,590 (184) 19,406 6,713 (7,188) (475)
Borrowings from domestic
development banks
Peso-denominated 6,309 (3,133) 3,176 17,719 (9,640) 8,079
71
2000-2001 2001-2002
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES DUE TO CHANGES
----------------------------------- -------------------------------
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
------- ------- ------- ------ -------- --------
(in millions of pesos)
Dollar-denominated (1,721) (2,263) (3,984) (2,414) 2,930 516
------- ------- ------- ------ -------- --------
Total 4,588 (5,396) (808) 15,305 (6,710) 8,595
Interbank borrowings
Peso-denominated - - - - - -
Dollar-denominated (2,676) (19,258) (21,934) 611 (11,367) (10,756)
------- ------- ------- ------ -------- --------
Total (2,676) (19,258) (21,934) 611 (11,367) (10,756)
Long-term debt
Peso-denominated (1,328) (532) (1,860) 329 (1,127) (798)
Dollar-denominated - - - - - -
------- ------- ------- ------ -------- --------
Total (1,328) (532) (1,860) 329 (1,127) (798)
Fiduciary deposits
Peso-denominated - - - - - -
Dollar-denominated - - - - - -
------- ------- ------- ------ -------- --------
Total - - - - - -
Total interest-bearing liabilities
Peso-denominated 80,494 9,171 89,665 77,800 (108,531) (30,731)
Dollar-denominated 17,212 (36,658) (19,446) 11,637 (43,757) (32,120)
------- ------- ------- ------ -------- --------
TOTAL 97,706 (27,487) 70,219 89,437 (152,288) (62,851)
======= ======= ======= ====== ======== ========
INTEREST-EARNING ASSETS -- NET INTEREST MARGIN AND SPREAD
The following table analyzes the levels of average interest-earning assets
and net interest income of the Bank and illustrates the comparative net interest
margin and interest spread obtained for the fiscal years ended December 31,
2000, 2001 and 2002, respectively.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2000 2001 2002
------------ ------------ ------------
(in millions of pesos, except percentages)
Total average interest-earning assets
Peso-denominated Ps 4,055,796 Ps 5,005,457 Ps 6,277,545
Dollar-denominated 1,890,103 2,504,644 2,936,941
------------ ------------ ------------
Total 5,945,899 7,510,101 9,214,486
Average yield on average interest-earning assets
Peso-denominated 17.4% 15.5% 11.0%
Dollar-denominated 8.9% 4.3% 1.7%
------------ ------------ ------------
Total 14.7% 11.7% 8.0%
Net interest earned(1)
Peso-denominated Ps 380,474 Ps 356,113 Ps 300,890
Dollar-denominated 3,304 (3,430) (28,929)
------------ ------------ ------------
Total 383,778 352,683 271,961
Net interest margin(2)
Peso-denominated 9.4% 7.1% 4.8%
Dollar-denominated 0.2% (0.1)% (1.0)%
------------ ------------ ------------
Total 6.5% 4.7% 3.0%
Interest spread(3)
Peso-denominated 7.7% 5.4% 3.5%
Dollar-denominated 0.5% (0.5)% (1.2)%
------------ ------------ ------------
Total 5.6% 3.6% 2.1%
---------------
(1) Defined as interest income less interest paid and includes interest earned
on investments.
(2) Defined as net interest income divided by total average interest-earning
assets.
(3) Defined as the difference between the average yield on interest-earning
assets and the average rate paid on interest-bearing liabilities.
72
ASSETS
The following table presents certain selected financial ratios of the Bank
for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2000 2001 2002
------ ------ ------
(in percentages)
Net income as a percentage of:
Average total assets (1.44) 1.65 1.88
Average shareholders' equity (11.75) 14.58 20.42
Dividends per share as a percentage of
net income per share(1) -- 31.00 36.18
Average shareholders' equity as a percentage of
average total assets 12.24 11.34 9.22
Return on interest-earning assets(2) 14.2 11.7 8.0
---------------
(1) Dividends are paid based on unconsolidated earnings. Net income per share
is calculated using the average number of Common Shares outstanding during
the year.
(2) Defined as total interest earned divided by average interest-earning
assets.
INVESTMENT SECURITIES
The Bank acquires and holds investment securities for liquidity and other
strategic purposes, or when it is required by law to do so. Under Colombian law,
prior to 1995, banks were restricted from holding equity securities in their
investment securities portfolio. Effective April 28, 1995, however, equity
securities of liquid, publicly traded Colombian financial institutions may be
held by banks as investment securities. See Note 2 to the Financial Statements.
Equity investments are recorded at cost, adjusted for inflation from January 1,
1992 to December 31, 2002. See Note 2 to the Financial Statements. As of April
28, 1995, debt securities held by Colombian financial institutions are required
to be marked to market monthly. See Note 2 to the Financial Statements. As of
December 31, 2002, the value of BC's dollar-and peso-denominated portfolio on a
consolidated basis was Ps 4,089,685 million.
Investments are fully reviewed in June and December and partially reviewed
in March and September of each year for impairment by considering the related
solvency risk, market exposure, currency exchange and country risk. Investment
securities with a rating by external agencies recognized by the Superintendency
of Banking cannot be recorded on the balance sheet of the Bank for an amount
higher than certain percentages of the face value (shown in the table below),
including the accrued income or excluding returns received in an anticipated
manner. Depending on the results of the review and on the likelihood of loss of
the investment, allowances are recorded for 20% to 100% of the cost of the
investment, and for 100% of accrued income.
The following table indicates the different categories of investments
securities and the maximum face value for these to be recorded.
LONG - TERM CLASSIFICATION MAXIMUM FACE VALUE (%)
-------------------------- ----------------------
BB+, BB, BB- Eighty (80)
B+, B, B- Sixty (60)
C Fourty (40)
D, E Zero (0)
Allowances for investment securities for which no computation methods have
been provided by the Superintendency of Banking are calculated based on other
methods. If there are no such methods, the solvency risk levels, as defined by
the Superintendency of Banking, have to be used: "A"-Normal, "B"-
73
Subnormal, "C"- Deficient. "D"- Doubtful Recovery, and "E"- Unrecoverable. Fixed
rate or variable rate investments classified in categories B, C, D and E cannot
be recorded on the balance sheet of the Bank for an amount higher than 80%, 60%,
40% and 0% respectively, of the face value, including the accrued income or
excluding returns received in an anticipated manner.
The following investments are excluded from this evaluation: (a) mandatory
investments and investments held in reserve against deposits and securities
issued or guaranteed by the Colombian Government or issued by the Central Bank;
and (b) securities that are classified "high and medium liquidity" by the
Superintendency of Securities as long as they maintain their rating categories.
See Note 2 to the Financial Statements.
As of September 1, 2002, investment are to be classified as "trading",
"available for sale" and "held to maturity". Trading investments may have fixed
interest or variable yield. Available for sale investment securities must be
held in the Bank's portfolio at least one year after such classification. These
securities have to be recorded at cost and market value adjustments will be
recorded in shareholder's equity. Held to maturity securities remain in the
Bank's portfolio until maturity. These investments have since September 1, 2002
been recorded at cost. Later on, the present value of said investments are
recorded as an increased value of the investment and the difference is recorded
in the statement of operations.
As of December 31, 2002, most of the investment securities held by BC were
classified as "A", except for two that were classified as "D", and five as "E".
See Note 5 to the Financial Statements.
The following table sets forth the Bank's investments in government and
corporate securities and certain other financial investments as of the dates
indicated:
AS OF DECEMBER 31,
------------------------------------------------------
2000(1)(2) 2001(1)(2) 2002(1)(2)
------------ ------------ ------------
(in millions of pesos)
DOLLAR-DENOMINATED
Securities issued or secured by the Colombian Government Ps 621,171 Ps 1,261,055 Ps 1,322,471
Euronotes and Eurobonds 140,101 178,604 373,339
Securities issued by foreign governments 54,950 2,552 --
Others 140,886 98,662 92,169
------------ ------------ ------------
Subtotal 957,108 1,540,873 1,787,979
------------ ------------ ------------
PESO-DENOMINATED
Securities issued or secured by the Colombian Government 222,716 740,083 1,692,817
Securities issued or secured by the Central Bank 6,718 3,181 11,767
Securities issued or secured by government entities 99,465 212,742 134,519
Securities issued or secured by other financial entities 186,106 293,064 261,266
Accounts receivable discounted 896 -- --
Others 14,937 9,844 201,337
------------ ------------ ------------
Subtotal 530,838 1,258,914 2,301,706
------------ ------------ ------------
Total Ps 1,487,946 Ps 2,799,787 Ps 4,089,685
============ ============ ============
--------------
(1) Includes debt securities only. The Bank's total long-term investments, net
in equity securities were Ps 87,358 million, Ps 184,755 million and Ps
253,774 million for 2000, 2001 and 2002, respectively.
(2) These amounts are net of allowances for decline in value which were Ps
1,646 million for 2000, Ps 3,168 million for 2001 and Ps 10,313 million
for 2002.
74
As of December 31, 2002, the Bank did not have any investment that
exceeded 10% of its shareholders' equity.
INVESTMENT SECURITIES PORTFOLIO MATURITY
The following table analyzes the maturities and weighted average nominal
yields of the Bank's investment securities as of December 31, 2002:
AS OF DECEMBER 31, 2002
----------------------------------------------------------------------------------------------
MATURITY LESS THAN 1 MATURITY BETWEEN MATURITY MORE
YEAR 1 AND 5 YEARS THAN 5 YEARS TOTAL
-------------------- --------------------- -------------------- -----------------------
BALANCE(1) YIELD % BALANCE(1) YIELD % BALANCE(1) YIELD % BALANCE(1) YIELD %
---------- ------- ----------- ------- ---------- ------- ------------ -------
(in millions of pesos, except yields)
DOLLAR-DENOMINATED:
Securities issued or
secured by
the Colombian government Ps 91,447 5.79% Ps 742,381 8.85% Ps 488,643 9.10% Ps 1,322,471 8.73%
Time deposits in financial
entities -- -- -- -- -- -- -- --
Loans bought at a discount -- -- -- -- -- -- -- --
Euronotes and Eurobonds 117,454 6.57% 248,587 8.24% 7,298 2.40% 373,339 7.60%
Securities issued by
foreign
governments -- -- -- -- -- -- -- --
Others -- -- 81,597 9.13% 10,572 9.99% 92,169 9.23%
---------- ----- ----------- ----- ---------- ----- ------------ -----
Subtotal 208,901 6.23% 1,072,565 8.73% 506,513 9.03% 1,787,979 8.52%
---------- ----- ----------- ----- ---------- ----- ------------ -----
PESO-DENOMINATED
Securities issued or
secured by
the Colombian government 111,373 13.11% 1,317,193 13.94% 264,251 7.81% 1,692,817 12.93%
Securities issued or
secured by
the Central Bank 2,725 17.49% 9,036 11.23% 6 7.43% 11,767 12.68%
Securities issued or
secured by
government entities 49,366 12.35% 77,187 11.77% 7,966 10.79% 134,519 11.92%
Securities issued or
secured by
other financial entities 130,919 10.90% 114,798 12.23% 15,549 11.73% 261,266 11.54%
Accounts receivable
discounted -- -- -- -- -- -- -- --
Other 158,140 6.20% 38,027 10.40% 5,170 11.47% 201,337 7.13%
---------- ----- ----------- ----- ---------- ----- ------------ -----
Subtotal 452,523 10.03% 1,556,241 13.60% 292,942 8.16% 2,301,706 12.19%
---------- ----- ----------- ---------- ----- ------------ -----
Total Ps 661,424 Ps 2,628,80 Ps 799,455 Ps 4,089,685
========== =========== ========== ============
----------
(1) These amounts are net of allowances for decline in value which were Ps
10,313 million in 2002.
LOAN PORTFOLIO
On October 5, 2000, through External Circular 070, the Colombian
Superintendency of Banking introduced new modifications to Chapters II and III
of External Circular No. 100 of 1995 (Basic Accounting and Financial), relating
to the system of provisions for supervised institutions, and the role of
guarantees in their incorporation process.
The Superintendency of Banking requires that banks in Colombia separate
their loan portfolio into three categories, commercial, consumer, small business
loan and mortgage, for purposes of determining allowances for loan losses and
the non-performing loan portfolio. The commercial loan portfolio is defined as
all peso- and dollar-denominated loans, even if to an individual, with a
principal amount exceeding 300 minimum monthly salaries, or approximately Ps
99.6 million nominal pesos (approximately US$35,383), and small- and
medium-sized commercial customer loans. The commercial loan portfolio also
includes loans funded by discounting with the Central Bank and Bancoldex for
lending to projects that those institutions approve and loans that are secured
through real estate, unless they are classified as mortgage loans, independent
of the size of the loan. In a similar way, the Bank may classify loans of less
than 300 minimum monthly salaries as commercial loans according to its internal
policies.
75
A consumer loan was defined by the Superintendency of Banking as a loan with a
principal amount of less than or equal to 300 minimum monthly salaries, or
approximately Ps 99.6 million nominal pesos, that may be made to individuals.
These loans include all credit card loans and any other loans granted to an
individual for purposes of financing the acquisition of consumer goods or the
payment of services.
Each of the commercial and consumer loan portfolios is segregated into
secured and unsecured loans. A secured loan is one the repayment of which is
secured by real property or certain other types of property, whereas an
unsecured loan is supported by an undertaking from the borrower or a third-party
guarantor, but does not involve the creation of a security interest in property.
Mortgage loans are loans secured by real property where such property serves as
collateral to secure all or a part of its purchase price.
In October 2001, the Superintendency of Banking issued External Circular
050, which modified the classification of loan portfolios in financial
statements beginning March 2002. This new classification was ratified by
External Circular 011 all of March 5, 2002, which introduced new amendments
regarding management of credit risk. External Circular 050 and External Circular
011, require classification of loans into four categories: mortgage, consumer,
small business loans and commercial (which involves ordinary, preferential and
treasury loans).
- Mortgage loans are loans, independent of the amount, granted to
individuals to acquire new or used homes, or for the construction of
individual homes.
- Consumer loans are loans granted to individuals for the purpose of
financing the acquisition of consumer goods or the payment of services for
non-commercial or non-corporate objects.
- Small business loans ("microloans") are loans granted to very small
corporations with indebtedness levels with the corresponding entity not
higher than 25 minimum monthly legal salaries (US$2,949) (a very small
corporation is every unit of economic exploitation, whether individual or
corporation, in entrepreneurial, farming and livestock, industrial,
commercial or utilities activities, rural or urban, with a staff no larger
than 10 workers and with total assets lower than 501 minimum monthly legal
salaries (US$59,090)).
- Commercial loans are all loans except mortgage, consumer and small
business loans, as defined above.
These categories are used in order to determine the required review and
classification of the non-performing loan portfolio.
As of December 31, 2002, BC's commercial loan portfolio aggregated Ps
5,219,460 million, a 19.87% increase from December 31, 2001. As of December 31,
2001, BC's commercial loan portfolio amounted to Ps 4,354,031 million, which was
an increase of 1.58% from December 31, 2000.
The following table shows the Bank's loan portfolio categorized in
accordance with the regulations of the Superintendency of Banking in effect for
the relevant periods:
76
AS OF DECEMBER 31,
------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
(in millions of pesos)
Commercial Ps 3,890,545 Ps 3,962,890 Ps 4,286,220 Ps 4,354,031 Ps 5,219,460
Consumer 1,038,272 827,816 792,573 961,663 870,898
Small business loans -- -- -- -- 68,863
Mortgage 35,592 35,253 33,278 34,511 38,094
------------ ------------ ------------ ------------ ------------
Total Loans 4,964,409 4,825,959 5,112,071 5,350,205 6,197,315
Allowance for Loan Losses 182,292 295,016 285,565 271,729 332,324
------------ ------------ ------------ ------------ ------------
Total Loans, net Ps 4,782,117 Ps 4,530,943 Ps 4,826,506 Ps 5,078,476 Ps 5,864,991
============ ============ ============ ============ ============
The Bank segregates its loan portfolio into:
- corporate loans, which include loans to medium and large corporations;
- retail loans, which include loans to individuals, such as personal lines
of credit, automobile loans and credit card loans; and
- mortgage loans, which consist primarily of mortgage loans to BC employees
and a small number of mortgage loans made to customers of the former Banco
de Colombia.
The following table shows the Bank's loan portfolio classified by
corporate, retail and mortgage:
AS OF DECEMBER 31,
----------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
(in millions of pesos)
CORPORATE
Trade financing Ps 256,073 Ps 91,987 Ps 92,213 Ps 95,649 Ps 166,620
Loans funded by domestic development
banks 277,708 320,250 303,718 292,609 376,378
Working capital loans 2,688,291 2,735,692 3,053,580 3,040,469 3,650,585
Credit cards 2,084 7,704 4,446 3,892 5,218
Overdrafts 53,478 63,449 51,132 22,755 48,591
Other 7,050 716 -- 22,886 --
------------ ------------ ------------ ------------ ------------
Total corporate 3,284,684 3,219,798 3,505,089 3,478,260 4,247,392
------------ ------------ ------------ ------------ ------------
RETAIL (1)
Credit cards 185,021 185,981 199,351 231,965 254,876
Personal loans 300,068 376,080 354,223 457,677 561,558
Automobile loans 41,288 49,916 32,270 15,713 24,476
Overdrafts 92,362 60,588 58,128 73,372 68,490
Loans funded by domestic development
banks 95,538 70,065 79,430 138,415 276,157
Trade financing 40,562 24,650 25,403 38,643 28,112
Working capital loans 889,294 803,627 824,899 881,649 698,160
------------ ------------ ------------ ------------ ------------
Total retail 1,644,133 1,570,907 1,573,704 1,837,434 1,911,829
------------ ------------ ------------ ------------ ------------
MORTGAGE 35,592 35,254 33,278 34,511 38,094
------------ ------------ ------------ ------------ ------------
Total loans 4,964,409 4,825,959 5,112,071 5,350,205 6,197,315
Allowance for loan losses (182,292) (295,016) (285,565) (271,729) (332,324)
------------ ------------ ------------ ------------ ------------
Total loans, net Ps 4,782,117 Ps 4,530,943 Ps 4,826,506 Ps 5,078,476 Ps 5,864,991
============ ============ ============ ============ ============
----------
(1) Includes loans to upper-income individuals and small companies.
In 2002, the Bank's total loan portfolio increased 15.83% to Ps 6,197,315
million from Ps 5,350,205 million in 2001, due primarily to a recovery of the
Colombian economy. The Bank's total
77
loan portfolio increased 4.66% in 2001 to Ps 5,350,205 million from Ps 5,112,071
million in 2000 primarily due to a recovery of the customers' economic
situation.
In 2002, total corporate loans increased 22.11% to Ps 4,247,392 million
due primarily to a 20.06% increase in working capital loans and a 74.20%
increase in trade financing. In 2001, total corporate loans decreased 0.76% to
Ps 3,478,260 million from Ps 3,505,089 million in 2000 due primarily to a 55.50%
reduction in overdraft. As of December 31, 2000, 2001 and 2002, total corporate
loans represented 69%, 65% and 69% respectively, of the Bank's total loan
portfolio.
Total retail loans increased 4.05% in 2002 to Ps 1,911,829 million, due
primarily to a 22.7% increase in personal loans, a 99.51% increase in loans
funded by domestic development banks and a 9.88% increase in credit cards. In
2001, total retail loans increased 16.76% to Ps 1,837,434 million from Ps
1,573,704 million in 2000 primarily due to a 29.2% increase in personal loans, a
74.26% increase in loans funded by domestic development banks and a 6.88% in
working capital loans. As of December 31, 2000, 2001 and 2002 retail loans
represented 31%, 34% and 31% respectively, of the Bank's total loan portfolio.
As of December 31, 2002, the aggregate outstanding principal amount of the
Bank's 25 largest borrowing relationships represented approximately 20% of the
total loan portfolio, and no single borrowing relationship represented more than
1.81% of the total loan portfolio. Approximately 11.80% of such loans are
denominated in foreign currencies. 100% of these loans are corporate loans and,
as of December 31, 2002, 69.44% of these borrowing relationships were classified
as "A" credits, 10.72% as "B", 3.87%, as "C", 3.22% as "D" and 12.73% as "E"
credits.
LOANS BY ECONOMIC ACTIVITY
The following table analyzes the Bank's loan portfolio for the periods
indicated by the principal activity of the borrower using the Primary Standard
Industrial Classification Codes. Where the Bank has not assigned a code to a
borrower, classification of the loan has been made based on the purpose of the
loan as described by the borrower:
AS OF DECEMBER 31, 2002
-------------------------------------------------------------------------------------------------------------
1998 % 1999 % 2000 % 2001 % 2002 %
------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------ -------
Agricultural Ps 166,825 3.4% Ps 57,675 1.2% Ps 100,346 2.0% Ps 136,201 2.5% Ps 135,554 2.2%
Mining products and
oil 20,195 0.4% 38,997 0.8% 10,199 0.2% 43,881 0.8% 103,624 1.7%
Food, beverage and
tobacco 320,401 6.5% 361,164 7.5% 449,171 8.8% 68,651 1.3% 174,818 2.8%
Chemical production 147,390 3.0% 106,873 2.2% 264,633 5.2% -- 0.0% 11,453 0.1%
Other industrial and
manufacturing
products 749,986 15.1% 582,168 12.1% 816,477 16.0% 1,550,141 29.0% 1,738,250 28.0%
Government 616,444 12.4% 278,367 5.8% 657,050 12.8% 91,146 1.6% 152,453 2.4%
Construction 161.370 3.2% 106,572 2.2% 160,095 3.1% 181,788 3.4% 163,755 2.6%
Trade and tourism 453,599 9.1% 412,231 8.5% 731,099 14.3% 712,333 13.3% 816,090 13.2%
Transportation and
communications 158,323 3.2% 100,894 2.1% 213,519 4.2% 302,100 5.6% 299,184 4.8%
Public services 217,786 4.4% 104,931 2.2% 297,329 5.8% 284,031 5.3% 464,054 7.5%
Consumer services 477,732 9.6% 532,386 11.0% 303,937 5.9% 1,619,689 30.5% 1,840,735 29.9%
Commercial services 1,474,358 29.7% 2,143,601 44.4% 1,108,216 21.7% 360,244 _6.7% 297,345 4.8%
------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------ -------
Total loans Ps 4,964,409 100.0% PS 4,825,959 100.0% Ps 5,112,071 100.0% Ps 5,350,205 100.0% Ps 6,197,315 100.0%
============ ====== ============ ====== ============ ====== ============ ====== ============ =======
78
MATURITY AND INTEREST RATE SENSITIVITY OF LOANS
The following table shows the maturities of the Bank's loan portfolio:
AS OF DECEMBER 31, 2002
----------------------------------------------------------
DUE FROM
DUE IN ONE ONE TO DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ ------------ ---------- ------------
(in millions of pesos)
PESO-DENOMINATED LOANS:
Corporate
Trade financing Ps 6.538 Ps 1,679 Ps - Ps 8,217
Loans funded by domestic development banks 85,684 70,131 32,539 188,354
Working capital loans 1,749,478 604,941 372,926 2,727,345
Credit cards 1,467 2,314 - 3,781
Overdrafts 48,591 - - 48,591
Other - - - -
- - - -
------------ ------------ ---------- ------------
Total corporate 1,891,758 679,065 405,465 2,976,288
------------ ------------ ---------- ------------
Retail (1)
Credit cards 132,333 81,150 - 213,483
Personal loans 244,245 306,715 3,913 554,873
Automobile loans 12,887 11,570 19 24,476
Overdrafts 68,368 - - 68,368
Loans funded by domestic development banks 123,299 102,750 48,478 274,527
Trade financing 6,180 6,205 344 12,729
Working capital loans 456,522 171,746 45,618 673,886
------------ ------------ ---------- ------------
Total retail 1,043,834 680,136 98,372 1,822,342
------------ ------------ ---------- ------------
Mortgage 1,310 935 35,849 38,094
------------ ------------ ---------- ------------
Total peso-denominated loans Ps 2,936,902 Ps 1,360,136 Ps 539,686 Ps 4,836,724
============ ============ ========== ============
DOLLAR-DENOMINATED LOANS
Corporate
Trade financing Ps 158,403 Ps - Ps - Ps 158,403
Loans funded by domestic development banks 43,017 145,007 - 188,024
Working capital loans 457,325 432,844 33,071 923,240
Credit cards 711 726 - 1,437
Overdrafts - - - -
Other - - - -
- - - -
------------ ------------ ---------- ------------
Total corporate 659,456 578,577 33,071 1,271,104
------------ ------------ ---------- ------------
Retail (1)
Credit cards 30,810 10,583 - 41,393
Personal loans 6,141 442 102 6,685
Automobile loans - - - -
Overdrafts 122 - - 122
Loans funded by domestic development banks 1,630 - - 1,630
Trade financing 15,383 - - 15,383
Working capital loans 24,274 - - 24,274
------------ ------------ ---------- ------------
Total retail 78,360 11,025 102 89,487
------------ ------------ ---------- ------------
Mortgage - - - -
------------ ------------ ---------- ------------
Total dollar-denominated loans 737,816 589,602 33,173 1,360,591
------------ ------------ ---------- ------------
Total loans Ps 3,674,718 Ps 1,949,738 Ps 572,859 Ps 6,197,315
============ ============ ========== ============
----------
(1) Includes loans to upper-income individuals and small companies.
(2)
As of December 31, 2002, approximately 59.30% of the Bank's loans had a
maturity of one year or less. The Bank's policy is not to automatically roll
over an existing loan without a thorough credit analysis of the borrower.
79
The following table shows the interest rate sensitivity of the Bank's loan
portfolio as of December 31, 2002:
AS OF DECEMBER 31, 2002
-----------------------
(in millions of pesos)
LOANS WITH TERMS OF 1 YEAR OR MORE:
VARIABLE RATE
Peso-denominated Ps 1,587,325
Dollar-denominated 357,188
------------
Total 1,944,513
------------
FIXED RATE
Peso-denominated 312,497
Dollar-denominated 265,587
------------
Total 578,084
------------
LOANS WITH TERMS OF LESS THAN 1 YEAR:
Peso-denominated 2,936,902
Dollar-denominated 737,816
------------
Total 3,674,718
------------
TOTAL LOANS Ps 6,197,315
============
CREDIT REVIEW POLICIES
The Bank's credit standards and policies aim to achieve a high level of
credit quality in the Bank's loan portfolio, efficiency in the processing of
loans and the specific assignment of responsibilities for credit risk.
Loan applications, depending on their amount, are presented for approval
to (i) branch managers, (ii) the appropriate zone or regional managers, (iii)
the appropriate vice presidents, (iv) the President, (v) the Credit Committee
and (vi) the Board of Directors of BC. In general, loan application decisions
are made by bank managers in committee. Loan applications up to a maximum of 200
minimum monthly salaries or approximately Ps 66.4 million (approximately US
$23,589) also have to be submitted for approval to the Bank's centralized credit
scoring department.
80
The following table sets forth the size limits for loan application
approval by authorization level as established by the Board of Directors of BC:
MAXIMUM LOAN APPROVAL LIMITS (1)
--------------------------------------------------------------
UNSECURED LOANS (2) SECURED LOANS
-------------------------- ----------------------------
(in U.S. dollar amounts)
AUTHORIZATION LEVEL:
Branch Managers $5,228 $10,456
Zone Managers 62,243 103,739
Regional Managers Corporate Banking 270,000 450,000
Middle-corporate and Personal
Banking Regional Managers 360,000 600,000
Middle-corporate and Personal
Banking Vice Presidents 900,000 1,500,000
Corporate Banking, Finance
and International Vice Presidents 900,000 1,500,000
President 2,100,000 3,500,000
Credit Committee Any loan not requiring Any loan not requiring
approval of the Board of approval of the Board of
Directors, within the Directors, within the limits
limits established by law. established by law.
----------
(1) Approval limits are measured in dollars or their equivalent in nominal
pesos.
(2) Includes loans with a personal guarantee.
Loans to employees and affiliates of the Bank must be approved by the
Board of Directors, which has the authority to grant loans in any principal
amount subject to the Bank's legal lending limit. Approval at each level also
requires the agreement of each lower level of the approval hierarchy. For
example, a loan approval by regional management as referred to in (ii) above
would also require approval from the branch managers mentioned in (i) above.
To maintain credit quality and manage the risk arising from its lending
activities, the Bank has established general loan policies for (i) evaluation of
credits, (ii) lending limits to a single customer or economic group that conform
to those required by law, (iii) the level of management authority required to
approve a loan, (iv) maximum terms of loans, and (v) collateral required for
certain types of loans and their valuation.
BC's policies require that every credit be analyzed using the following
factors: the character, reputation and credit history of the borrower, the type
of business the borrower engages in, the borrower's ability to repay the loan,
the coverage and suitability of the proposed collateral for the loan,
information received from the credit risk center, debt service ability and
compliance with the loan terms and the country risk where the debtor is
headquartered in the event of overseas credits. The Bank applies this same
detailed credit analysis to potential depositors.
In addition to an analysis of the borrower, the Bank engages in the
analysis of the different economic sectors to which the Bank makes loans and has
established guidelines for financial analysis of the borrower and for
participation in investment projects in Colombia and outside Colombia. The Bank
applies the lending limits established under Colombian law, which require that:
- an uncollateralized loan to a single customer or economic group may not
exceed 10% of the Bank's Technical Capital (the Bank's largest such loan
as of December 31, 2002 is for Ps 61,444 million and is current and
performing in accordance with its terms);
81
- a collateralized loan to a single customer or economic group may not
exceed 25% of the Bank's Technical Capital (the Bank's largest such loan
as of December 31, 2002 is for Ps 103,842 million and is current and
performing in accordance with its terms);
- a loan to a shareholder of the Bank, with a share exceeding 20% of the
Bank's Capital, may not exceed 20% of the Bank's Technical Capital (the
Bank's largest such loan as of December 31, 2002 is for Ps 10,455 million
and is current and performing in accordance with its terms); and
- a loan to a financial institution may not exceed 30% of the Bank's
Technical Capital (the Banks' largest such loan as of December 31, 2002 is
for Ps 5,009 million and is current and performing in accordance with its
terms).
In general, the term of a loan will depend on the type of guarantee, the
credit history of the borrower and the purpose of the loan, averaging in length
from one to five years.
The Bank has established policies for the valuation of collateral received
as well as for the determination of the maximum loan that can be granted against
the value of the collateral. The Bank undertakes annually a valuation of
collateral held as security for a loan. In addition, when a loan becomes 60 days
past due, the loan is given to the Collections Department where various steps
are taken to recover on the loan. However, jointly with the Commercial area, the
Asset Recovery Unit may begin the recovery process before the 60 day past due
date.
With respect to monitoring outstanding loans, the Bank, in accordance with
the requirements of the Superintendency of Banking, has implemented a review
policy providing for a biannual evaluation during the months of May and
November, of all debtors whose indebtedness for the various credit facilities
exceeds 300 minimum legal monthly salaries (US$35,383). Additionally, these
credits, and those which do not meet this condition, are evaluated monthly based
on the days they are past due. When reviewing loans, BC evaluates and updates
their risk classification and make corresponding adjustment in the provision, if
needed. When monitoring outstanding loans, the Bank examines current financial
statements including, for those material loans that are for a term greater than
one year, current cash flow statements. The Bank is currently centralizing its
credit review process through its information systems, including the necessary
adjustments of credit scoring for automobile loans, credit cards and personal
lines of credit. In addition, the Bank has a list of loans it reviews every
month and carries out a credit audit process that reviews the 200 largest
debtors and randomly reviews a selection of its other debtors.
OLD METHOD FOR CLASSIFICATION OF THE LOAN PORTFOLIO
External Circular 070 of 2000, which was amended by External Circular 050
of October 2001, required Colombian financial institutions to grade 100% of
their commercial, consumer and mortgage loan portfolios according to the risk
classification described below. The risk classification for all loans was based
on their past due status and an analysis of the borrower's ability to repay the
loan. The risk classification for consumer and mortgage loans was further based
on the individual terms of each such loan, as well as any bankruptcy proceedings
to which a borrower was a party or any insolvency judgments entered against a
borrower. If a loan to a borrower was downgraded by the Bank to a classification
of "B", "C", "D" or "E," all loans to that client were similarly downgraded. In
addition, the Superintendency of Banking could require additional allowances
under certain circumstances.
82
The loan portfolio was classified, with a frequency determined by the type
of loan, in accordance with the following categories:
EVALUATION CRITERIA
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER LOANS AND SMALL
RISK CLASSIFICATION BUSINESS LOANS COMMERCIAL LOANS MORTGAGE LOANS
--------------------- ---------------------------- --------------------------------------------------------- --------------------
"A" Normal Current loans and loans 1-30 Current loans and loans past due up to 30 days which do Current loans and
days past due not present non-collection risk. loans 1-30 days past
due
"B" Subnormal 31-60 days past due Loans more than 30 and up to 90 days past due and loans 31-120 days past
with an inadequate amortization plan according to the due
borrowers' cash flow, borrowers with incomplete or
outdated information, adverse conditions affecting the
borrower's economic sector and weaknesses in the
financial condition of the borrower, which could affect
temporarily or permanently the borrower's cash flow and
the ability to repay the loan.
"C" Deficient 61-90 days past due Loans more than 91 and up to 180 days past due and 121-180 days past
current loans which present deficiencies in the due
borrower's ability to repay the loan, or in the cash flow
of the project being financed by such loan, that
jeopardizes the normal and agreed collection of the loan.
"D" Doubtful Recovery 91-180 days past due Loans to borrowers more than 181 and up to 360 days past 181-360 days past
due which present serious deficiencies in the borrower's due
ability to repay the loan and which make normal recovery
highly doubtful.
"E" Unrecoverable More than 180 days past due Loans past due more than 360 days and any loan considered More than 360 days
uncollectible. past due
For purposes of classifying commercial loans, the Bank first determined
whether the loan was past due and then classified the loan according to the
number of days past due. In addition, whether or not it was past due, the Bank
analyzed the loan, to determine if there were "potential weaknesses",
"deficiencies" or "serious deficiencies" based on the existence and magnitude of
the following factors:
- inadequacy of borrower's payment plan;
- insufficient or outdated loan documentation;
- adverse market conditions negatively affecting borrower's industrial
sector;
- adverse trends in borrower's financial condition negatively affecting
borrower's cash flow;
- failure to comply with BC's internal lending policies; and
- inadequate supervision of the loan as determined by BC's internal credit
and audit departments.
83
Consequently, if one or more of these factors were present, a
current loan could be classified "B," "C" or "D" and a past due loan could be
further downgraded.
The Bank's policy with respect to the accrual of interest for non-payment
of principal or interest (and in accordance with Superintendency of Banking
regulations) is that if an installment of principal or interest is for (i) a
commercial or a consumer loan that is more than 90 days past due, or (ii) a
mortgage loan that is more than 120 days past due, the Bank classifies the loan
as non-performing. If one installment payment is 31 or more days past the actual
due date, then the entire loan is considered past due for purposes of the
regulations of the Superintendency of Banking. The Bank continues to accumulate
interest on a loan until it is considered non-performing even though the
interest has not been received. Once a loan is non-performing, an allowance is
established for 100% of the interest recorded as income but not received and the
Bank stops recording interest on that loan in its consolidated statements of
operations but does record it in memorandum accounts. See Note 6 to the
Financial Statements.
NEW RISK CLASSIFICATION SYSTEM
External Circular 050 of 2001, modified by External Circular 011 of 2002
effective in financial statements beginning March 2002, provides that to
determine risk classification, it is necessary to consider, in addition to
whether a loan is past due:
- the expected ability of payment of a debtor and co-debtor, or the project
to be financed, analyzing the flows of income and expenses;
- the debtor's solvency, through variables such as the level of indebtedness
and the quality and composition of the debtor's and/or project's assets,
liabilities, equity and contingencies;
- information of the current and past compliance of the debtor's
obligations;
- the timely payment of all quotas or installments as well as the financial
and credit-based history as shown by risk controls and risk classifiers of
the debtor or any other relevant source;
- the number of times that the loan has been restructured and the nature of
the respective restructuring(s);
- the possible effects of the financial risks that the cash flow of the
debtor and/or the project to be financed may be exposed to;
- for loans denominated in foreign currencies, the market risk derived from
the volatility of the corresponding exchange rates and its possible impact
on the debtor's ability to pay; and
- for loans made abroad, an in-house and market analysis of the risk of the
country where the debtor is domiciled, with the purpose of identifying the
risks of transfer and exchange of the currencies required to serve the
loan and the legal, operating and strategic risks of spreading that the
ability to pay of the debtor or the project to be financed may be exposed
to.
External Circular 011 of 2002 provides the following minimum risk
classifications, according to the past due days of the obligation:
84
Category A or "Normal Risk": Loans in THIS category are appropriately
attended. The debtor's financial statements or the project cash flows, as well
as any other credit information, reflect adequate paying capacity (based on the
amount of debt and the debtor's source of money).
LOAN TYPE NO. OF MONTHS PAST DUE (RANGE)
--------- ------------------------------
Mortgage 0 - 2
Consumer 0 - 1
Small business loans 0 - 1
Commercial 0 - 1
Category B or "Acceptable Risk, Above Normal": Loans in this category are
acceptably attended and protected, but there are WEAKNESSES which may
potentially affect, on a transitory or permanent basis, the debtor's paying
capacity or the project cash flows, to the extent that, if not timely corrected,
would affect the normal collection of credit or contracts.
LOAN TYPE NO. OF MONTHS PAST DUE (RANGE)
--------- ------------------------------
Mortgage more than 2 and up to 5
Consumer more than 1 and up to 2
Small business loans more than 1 and up to 2
Commercial more than 1 and up to 3
Category C or "Appreciable Risk": Loans in this category represent
insufficiencies in the debtors' paying capacity or in the project's cash flow,
which may compromise the normal collection of the obligations.
LOAN TYPE NO. OF MONTHS PAST DUE (RANGE)
---------- ------------------------------
Mortgage more than 5 and up to 12
Consumer more than 2 and up to 3
Small business loans more than 2 and up to 3
Commercial more than 3 and up to 6
Category D or "Significant Risk": Loans in this category have the same
deficiencies as loans in category C, but to a larger extent; consequently, the
probability of collection is highly doubtful.
LOAN TYPE NO. OF MONTHS PAST DUE (RANGE)
--------- ------------------------------
Mortgage more than 12 and up to 18
Consumer more than 3 and up to 6
Small business loans more than 3 and up to 4
Commercial more than 6 and up to 12
Category E or "Risk of Non-Recoverability": Loans in this category are
deemed uncollectible.
LOAN TYPE NO. OF MONTHS PAST DUE (RANGE)
--------- ------------------------------
Mortgage more than 18
Consumer more than 6
Small business loans more than 4
Commercial more than 12
85
The Bank's policy with respect to the accrual of interest for
non-payment of principal or interest (and in accordance with Superintendency of
Banking regulations) is that if an installment of principal or interest is for
(i) a commercial loan that is more than 90 days past due, (ii) a consumer loan
that is more than 60 days past due (iii) a small business loan that is more than
60 days past due, or (iv) a mortgage loan that is more than 120 days past due
the Bank classifies the loan as non-performing. If one installment payment is 31
or more days past the actual due date, then the entire loan is considered past
due for purposes of the regulations of the Superintendency of Banking.
The following table presents the Bank's loan portfolio using the
classification system of the Superintendency of Banking in effect at the end of
each period:
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1998 % 1999 % 2000 % 2001 % 2002 %
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
(in millions of pesos, except percentages)
"A" Normal Ps4,644,383 93.6% Ps3,466,011 71.8% Ps4,017,027 78.6% Ps4,228,248 79.0% Ps5,115,889 82.6%
"B" Subnormal 81,333 1.7% 716,707 14.9% 560,961 11.0% 603,068 11.3% 479,429 7.7%
"C" Deficient 50,321 0.9% 210,658 4.4% 209,851 4.1% 103,761 1.9% 142,782 2.3%
"D" Doubtful Recovery 88,602 1.8% 141,539 2.9% 135,536 2.6% 259,811 4.9% 180,630 2.9%
"E" Unrecoverable 99,770 2.0% 291,044 6.0% 188,696 3.7% 155,317 2.9% 278,585 4.5%
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total Ps4,964,409 100.0% Ps4,825,959 100.0% Ps5,112,071 100.0% Ps5,350,205 100.0% Ps6,197,315 100.0%
=========== ===== =========== ===== =========== ===== =========== ===== =========== =====
Loans classified as "C,"
"D" and "E" as a
percentage of total loans 4.8% 13.3% 10.5% 9.7% 9.7%
Note: In 1999, the Bank reported the loan portfolio classified by
individual risk according to past due term. In 2000, it reported the loan
portfolio classified according to the risk category considering the past due
term and additional subjects such as debtor's capacity of payment, debt service,
and information from external risk agencies. However, in this report, provisions
for both years were based on the latter method. For 2001, the loan portfolio was
reported in the same fashion as in 2000, as described above.
The Bank continues to accrue interest on a loan until it is considered
non-performing. Once a loan is deemed non-performing, an allowance is made for
100% of the unpaid interest recorded as income, and going forward, instead of
recording interest on that loan in the consolidated statement of operations,
such interest is recorded in memorandum accounts. See Note 2 to the Financial
Statements.
The following table indicates the breakdown of the Bank's past due loans
at least one day past due by type of loan in accordance with the criteria of the
Superintendency of Banking in effect at the end of each period:
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------------
1998 % 1999 % 2000 % 2001 % 2002 %
--------- ----- --------- ----- --------- ----- --------- ----- ---------- -----
(in millions of pesos, except percentages)
PERFORMING PAST DUE LOANS:(1)
Consumer loans past due 31 to
60 days .................... Ps 64,595 53.4% Ps34,755 30.5% Ps18,108 32.4% Ps19,543 24.8% Ps 17,537 38.6%
Small business loans past due
from 31 to 60 days(3) ...... -- 0.0% -- 0.0% -- 0.0% -- 0.0% 777 1.7%
Commercial loans past due 31
to 120/90 days(2) .......... 56,230 46.5% 79,011 69.5% 37,576 67.3% 59,066 74.9% 27,149 59.7%
Mortgage loans past due 31 to
90/120 days ................ 190 0.1% 21 0.0% 171 0.3% 202 0.3% 22 0.0%
--------- ----- --------- ----- --------- ----- --------- ----- ---------- -----
Total performing past due
loans ...................... 121,015 100.0% 113,787 100.0% 55,855 100.0% 78,811 00.0% 45,485 100.0%
NON-PERFORMING PAST DUE LOANS:.
Consumer loans past due 61 to
180 days ................... 28,850 15.6% 21,664 7.1% 9,660 5.4% 9,711 4.0% 8,993 8.2%
Small business loans past due
from 61 to 180 days ........ -- 0.0% -- 0.0% -- 0.0% -- 0.0% 1,633 1.5%
86
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------------
1998 % 1999 % 2000 % 2001 % 2002 %
--------- ----- --------- ----- --------- ----- --------- ----- ---------- -----
(in millions of pesos, except percentages)
Consumer loans past due more
than 180 days .............. 32,624 17.7% 68,783 22.7% 40,161 22.3% 10,019 4.1% 10,678 9.7%
Small business loans past
due from 91 to 180 days .... -- 0.0% -- 0.0% -- 0.0% -- 0.0% -- 0.0%
Commercial loans past due
more than 120/90 days ...... 122,821 66.5% 212,259 69.9% 128,740 71.6% 224,024 91.8% 88,217 80.5%
Mortgage loans past due more
than 91 days ............... 523 0.2% 767 0.3% 1,190 0.7% 138 0.1% 138 0.1%
--------- ----- --------- ----- --------- ----- --------- ----- ---------- -----
Total non-performing past due
loans ...................... 184,818 100.0% 303,473 100.0% 179,751 100.0% 243,892 100.0% 109,659 100.0%
Total past due loans ..... Ps305,833 Ps417,260 Ps235,606 Ps322,703 Ps 155,144
--------- --------- --------- --------- ----------
Total non-performing past due
loans ...................... 184,818 303,473 179,751 243,892 109,659
Allowance for loan losses ..... (182,292) (295,016) (285,565) (271,729) (332,324)
Foreclosed assets ............. 181,264 173,897 193,009 180,737 185,261
Allowance for estimated
losses on foreclosed assets (26,083) (42,515) (93,591) (106,081) (107,962)
Other accounts receivable more
than 180 days past due ..... 14,181 30,190 22,573 17,875 8,655
Allowance for accounts
receivable and accrued
interest losses ............ (56,725) (98,319) (50,350) (42,707) (24,891)
--------- --------- --------- --------- ----------
Total non-performing assets,
net ........................ Ps115,163 Ps 71,710 Ps(34,173) Ps 21,987 Ps(161,602)
--------- --------- --------- --------- ----------
Loans at least one day past
due as a percentage of
total loans ................ 6.2% 8.6% 4.6% 6.0% 2.5%
Allowance for loan losses as a
percentage of loans at
least one day past due ..... 59.6% 70.7% 121.2% 84.2% 214.2%
Allowance for loan losses as a
percentage of loans
classified as "C," "D"
and "E" .................... 76.4% 45.9% 53.5% 52.4% 55.2%
Percentage of performing loans
to total loans ............. 96.3% 93.7% 96.5% 95.5% 98.2%
----------
(1) Performing past due loans are loans upon which the Bank continues to
recognize income although interest has not been received for the periods
indicated. Once interest is unpaid on accrual loans for a longer period
than is specified above, the loan is classified as non-performing. Under
Colombian Banking regulations, a loan is past due when it is at least 31
days past the actual due date.
(2) In the second quarter of 1999, the Superintendency of Banking changed the
classifications for commercial loans.
(3) During the first quarter of 2002, the Superintendency of Banking changed
the classification of the commercial, consumer and mortgage loan
categories, and introduced the new category of "Small business loans"
("Microloan").
The following table analyzes the quality of the Bank's loan
portfolio using the classification system of the Superintendency of Banking in
effect at the end of each period:
AS OF DECEMBER 31,
---------------------------------
2000 2001 2002
--------- ---------- ---------
(in millions of pesos,
except percentages)
Loans secured by real guarantees as a percentage of
total loans ....................................... 35.4% 44.8% 37.5%
Loans classified as "A" as a percentage of total loans . 78.6% 79.0% 82.6%
Loans classified as "B as a percentage of total loans .. 11.0% 11.3% 7.7%
Loans classified as "C," "D" and "E" as a percentage of
total loans ....................................... 10.5% 9.7% 9.7%
Total allowance for loan losses as a percentage of
non-performing loans .............................. 158.9% 111.4% 303.1%
Total allowance for loan losses as a percentage of loans
classified as "C," "D" and "E" .................... 53.5% 52.4% 55.2%
Non-performing loans as a percentage of total loans .... 3.5% 4.6% 1.8%
Loans classified as "C," "D" and "E" ................... Ps534,083 Ps518,889 Ps601,997
Total non-performing loans ............................. 179,751 243,892 109.659
87
The following table shows BC's past due loan portfolio by type of loan:
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------------
1998 % 1999 % 2000 % 2001 % 2002 %
--------- ----- --------- ----- --------- ----- --------- ----- --------- ------
(in millions of pesos, except percentages)
CORPORATE
Trade financing............ Ps 2,760 0.9% Ps 6,172 1.5% Ps 9,329 4.0% Ps 5,398 1.6% Ps 143 0.0%
Loans funded by domestic
development banks....... 5,336 1.7 5,931 1.4 10,073 4.3 7,950 2.5 1,360 0.9%
Working capital loans...... 68,656 22.4 238,602 57.2 145,506 61.8 210,281 65.2 75,333 48.6%
Credit cards............... 112 0.0 117 0.0 48 0.0 103 0.0 90 0.1%
Overdrafts................. 6,823 2.2 7,233 1.7 1,408 0.6 1,583 0.5 -- 0.0%
Other...................... 309 0.1 29 0.0 -- 0.0 -- 0.0 -- 0.0%
--------- ----- --------- ----- --------- ----- --------- ----- --------- ------
Total corporate......... 83,996 27.5% 258,084 61.8% 166,364 70.6% 225,315 69.8 76,926 49.6%
RETAIL (1)
Credit cards............... 23,821 7.8 17,435 4.2 11,686 5.0 10,606 3.3 14,930 9.6%
Personal loans............. 26,045 8.5 36,006 8.6 10,734 4.6 17,442 5.4 25,516 16.4%
Automobile loans........... 2,836 0.9 3,455 0.8 1,402 0.6 323 0.1 534 0.3%
Overdrafts................. 16,249 5.3 8,327 2.0 8,924 3.8 8,491 2.6 -- 0.0%
Loans funded by domestic
development banks.......... 12,104 4.0 3,695 0.9 -- 0.0 6,843 2.1 3,840 2.5%
Trade financing............ 4,226 1.4 4,935 1.2 1,320 0.6 1,841 0.6 890 0.6%
Working capital loans...... 136,480 44.6 84,536 20.3 33,815 14.4 50,563 15.7 31,644 20.4%
--------- ----- --------- ----- --------- ----- --------- ----- --------- ------
Total retail............ 221,761 72.5 158,389 38.0 67,881 28.8 96,109 29.8 77,354 49.8%
MORTGAGE................... 76 0.0 787 0.2 1,361 0.6 1,279 0.4 864 0.6%
--------- ----- --------- ----- --------- ----- --------- ----- --------- ------
Total past due loans....... Ps305,833 100.0% Ps417,260 100.0% Ps235,606 100.0% Ps322,703 100.0% Ps155,144 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= ======
---------------
(1) Includes loans to upper-income individuals and small companies.
The foregoing tables reflect the quality of the Bank's loan portfolio over
the five years ended December 31, 2002.
The past due portfolio decreased by 51.92% between 2001 and 2002, from Ps
322,703 million at December 31, 2001 to Ps 155,144 million at December 31, 2002,
mainly due to a recovery of past due corporate working capital loans, which
decreased from Ps 210,281 million at December 21, 2001 to Ps 75,333 million at
December 31, 2002. This recovery was primarily caused by an improvement of our
customer's economic situation, coupled with measures by the Bank to recover the
portfolio through a specialized department for asset recovery.
The 36.97% increase in past due loans in 2001 compared to 2000 was mainly
the result of a deterioration of the corporate loans for working capital.
The Bank believes that future increases in average nominal interest rates
may result in additional past due loans. There can be no assurance that the
increases in past due performing loans will not continue in the future. If
performing past due loans are not made current, they will become categorized as
non-performing past due loans and additional allowances for loan losses will
have to be established.The following table presents information with respect to
the Bank's loan portfolio at least 31 days past due based on the nature of the
collateral for the loan:
AS OF DECEMBER 31,
--------------------------------------------------------------------------------------------------
1998 % 1999 % 2000 % 2001 % 2002 %
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
(in millions of pesos, except percentages)
SECURED
Current.................... Ps1,569,781 31.6% Ps1,502,187 31.1% Ps1,701,775 33.3% Ps2,203,986 41.2% Ps2,261,968 36.5%
Past due from 31 to 60 days
(consumer).............. -- 0.0 -- 0.0 -- 0.0 -- 0.0 3,686 0.1
Past due from 61 to 90 days
(consumer).............. 10,280 0.2 6,879 0.2 2,903 0.1 4,009 0.1 -- 0.0
Past due from 31 to 60
(small business loans).. -- 0.0 -- 0.0 -- 0.0 -- 0.0 246 0.0
Past due from 61 to 90
(small business loans).. -- 0.0 -- 0.0 -- 0.0 -- 0.0 89 0.0
Past due from 31 to 90/120
days (mortgage)......... 21 0.0 21 0.0 171 0.0 202 0.0 22 0.0
Past due from 91 to 180
days (consumer)......... 4,991 0.1 4,487 0.1 1,572 0.0 1,823 0.0 1,881 0.0
Past due from 91 to 180
days (small business
loans).................. -- 0.0 -- 0.0 -- 0.0 -- 0.0 415 0.0
Past due from 91 to 180
days (mortgage) ........ 102 0.0 13 0.0 3 0.0 -- 0.0 -- 0.0
Past due from 31 to 90 days
(commercial)(1)......... -- 0.0 54,519 1.1 14,268 0.3 51,414 1.0 9,617 0.2
88
AS OF DECEMBER 31,
--------------------------------------------------------------------------------------------------
1998 % 1999 % 2000 % 2001 % 2002 %
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
(in millions of pesos, except percentages)
Past due from 31 to 120
days (commercial)....... 31,752 0.6 -- 0.0 -- 0.0 -- 0.0 -- 0.0
Past due from 181 days to
360 days (consumer)..... 4,350 0.1 8,331 0.2 2,784 0.1 2,835 0.1 -- 0.0
Past due from 31 days to
120 days (small business
loans).................. -- 0.0 -- 0.0 -- 0.0 -- 0.0 -- 0.0
Past due from 181 days to
360 days (mortgage)..... 165 0.0 421 0.0 1,083 0.0 138 0.0 138 0.0
Past due from 91 to 180
days (commercial)(1) ... -- 0.0 13,921 0.3 29,198 0.6 35,933 0.7 8,736 0.1
Past due from 121 to 360
days (commercial)....... 32,014 0.7 40,178 0.8 10,368 0.2 47,628 0.9 10,452 0.2
Past due more than 360 days 43,797 0.9 43,744 0.9 43,321 0.8 50,554 0.9 29,501 0.5
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total................. Ps1,697,253 34.2% Ps1,674,701 34.7% Ps1,807,446 35.4% Ps2,398,522 44.9% Ps2,326,751 37.6%
=========== ===== =========== ===== =========== ===== =========== ===== =========== =====
UNSECURED(2)
Current.................... Ps3,088,795 62.2% Ps2,906,512 60.2% Ps3,174,690 62.1% Ps2,823,516 52.8% Ps3,780,203 61.0%
Past due from 31 to 60 days
(consumer).............. 54,315 1.1 27,876 0.6 15,205 0.3 15,534 0.3 13,851 0.2
Past due from 61 to 90 days
(consumer).............. - 0.0 - 0.0 - 0.0 - 0.0 - 0.0
Past due from 31 to 60 days
(small business loans).. - 0.0 - 0.0 - 0.0 - 0.0 531 0.0
Past due from 61 to 90 days
(small business loans).. - 0.0 - 0.0 - 0.0 - 0.0 308 0.0
Past due from 91 to 180
days (consumer)......... 23,860 0.5 17,177 0.4 8,088 0.2 7,888 0.1 7,112 0.1
Past due from 91 to 180
days (small business
loans).................. - 0.0 - 0.0 - 0.0 - 0.0 821 0.0
Past due from 31 to 90
days (commercial)(1).... - 0.0 24,492 0.5 23,308 0.4 7,652 0.1 17,532 0.3
Past due from 31 to 120
days (commercial)....... 24,647 0.5 - 0.0 - 0.0 - 0.0 - 0.0
Past due from 181 days to
360 days (consumer).... 23,740 0.5 49,625 1.0 31,649 0.6 7,184 0.1 10,678 0.2
Past due from 181 to 360
days (small business
loans).................. - 0.0 - 0.0 - 0.0 - 0.0 - 0.0
Past due from 91 to 180
days (commercial)(1).... - 0.0 13,822 0.3 5,537 0.1 3,493 0.1 9,358 0.2
Past due from 121 to 360
days (commercial) ...... 24,699 0.5 29,186 0.6 7,001 0.1 34,077 0.6 9,192 0.1
Past due more than 360 days 27,100 0.5 82,568 1.7 39,147 0.8 52,339 1.0 20,978 0.3
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total................. Ps3,267,156 65.8% Ps3,151,258 65.3% Ps3,304,625 64.6% Ps2,951,683 55.1% Ps3,870,564 62.4%
=========== ===== =========== ===== =========== ===== =========== ===== =========== =====
TOTAL CURRENT LOANS........ Ps4,658,576 93.8% Ps4,408,699 91.3% Ps4,876,465 95.4% Ps5,027,502 94.0% Ps6,042,171 97.5%
Past due from 31 to 60 days
(consumer).............. 64,595 1.3 34,755 0.8 18,108 0.4 19,543 0.4 17,537 0.3
Past due from 61 to 90 days
(consumer).............. - 0.0 - 0.0 - 0.0 - 0.0 - 0.0
Past due from 31 to 60 days
(small business loans).. - 0.0 - 0.0 - 0.0 - 0.0 777 0.0
Past due from 61 to 90 days
(small business loans).. - 0.0 - 0.0 - 0.0 - 0.0 397 0.0
Past due from 31 to 90/120
days (mortgage)......... 21 0.0 21 0.0 171 0.0 202 0.0 22 0.0
Past due from 31 to 90
days (commercial)(1).... - 0.0 79,011 1.6 37,576 0.7 59,066 1.1 27,149 0.4
Past due from 31 to 120
days (commercial)....... 56,399 1.1 - 0.0 - 0.0 - 0.0 - 0.0
Past due from 91 to 180
days (consumer) ........ 28,851 0.6 21,664 0.5 9,660 0.2 9,711 0.2 8,993 0.1
Past due from 91 to 180
days (small business
loans).................. - 0.0 - 0.0 - 0.0 - 0.0 1,236 0.0
Past due from 91/121 to 180
days (mortgage)......... 102 0.0 13 0.0 3 0.0 - 0.0 - 0.0
Past due from 91 to 180
days (commercial)(1) ... - 0.0 27,743 0.6 34,735 0.7 39,426 0.7 18,094 0.3
Past due from 121 to 360
days (commercial) ..... 56,713 1.2 69,364 1.4 17,369 0.3 81,705 1.5 19,644 0.3
Total Past due from 181
days to 360 days
(consumer).............. 28,090 0.6 57,956 1.2 34,433 0.7 10,019 0.2 10,678 0.2
Total past due from 181 to
360 days (small business
loans).................. - 0.0 - 0.0 - 0.0 - 0.0 - 0.0
Past due from 181 days to
360 days (mortgage)..... 165 0.0 421 0.0 1,083 0.0 138 0.0 138 0.0
Total past due more than
360 days................ 70,897 1.4 126,312 2.6 82,468 1.6 102,893 1.9 50,479 0.9
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total past due loans.. 305,833 6.2 417,260 8.7 235,606 4.6 322,703 6.0 155,144 2.5
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total gross loans.......... 4,964,409 100.0 4,825,959 100.0 5,112,071 100.0 5,350,205 100.0 6,197,315 100.0
Allowance for loan losses.. (182,292) (3.7) (295,016) (6.1) (285,565) (5.6) (271,729) (5.1) (332,324) (5.4)
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total loans, net...... Ps4,782,117 96.3% Ps4,530,943 93.9% Ps4,826,506 94.4% Ps5,078,476 94.9% Ps5,864,991 94.6%
=========== ===== =========== ===== =========== ===== =========== ===== =========== =====
---------------
(1) Includes loans with personal guarantees.
(2) In the second quarter of 1999 the Superintendency of Banking changed the
classifications for commercial loans.
ALLOWANCE FOR LOAN LOSSES
The Bank believes that it is in compliance with Colombian regulations
regarding allowances for loan losses, setting aside specific allowances on past
due performing and non-performing loans based on the length of time such loans
have been past due. The Superintendency of Banking, through External Circular
044 of July 23, 1999, tightened loan allowance rules for Colombian banks. In
addition, banks
89
started to accumulate a general allowance, which should amount to 1% of the
total loans of a bank within three years starting July 31, 1999. The current
regulations contained in External Circular No. 070 dated October 5, 2000
ratified this general 1% provision and eliminated the risk coefficient and the
obligation to make additional provision for this item. The regulations of the
Superintendency of Banking required the Bank to review commercial loans every
six months, and consumer and mortgage loans at least monthly. The new regulation
contained in External Circular 011 of March, 2002, requires that all debtors
whose indebtedness for the different categories of credit exceeds 300 minimum
legal monthly salaries (Ps 99,6 million for 2003), be evaluated twice a year.
Additionally, the regulation requires that all loans be evaluated every month on
their past due days basis.
The Bank establishes its loan allowances by classifying its loan portfolio
according to the loan classification system determined by the Superintendency of
Banking and by applying to each such classification the applicable allowance
percentage formula, also as specified by the Superintendency of Banking. The
Bank believes that its application of the loan classification system and
allowance formula results in the establishment of allowances that are reasonable
and adequate for the credit risk associated with BC's loan portfolio. BC's
directors review BC's results of operations and financial condition monthly as
to whether the loan classification system and allowance formula have been
applied in accordance with the regulations issued by the Superintendency of
Banking. The Bank reviews commercial loans every six months, and consumer and
mortgage loans monthly. In addition, the Bank's loan policy units perform an
ongoing review of the loan portfolio from time to time so that if there were an
occurrence that required a change in the classification of a loan in between
regular review periods, the Bank would be able to adjust its allowances for loan
losses as necessary.
Guidelines for the establishment of the allowance for loan losses by
Colombian credit institutions, including commercial banks, are set by the
Superintendency of Banking.
The following table shows the allowance for loan losses required to be
taken, expressed as a percentage of the value of the loan to the extent not
covered by collateral (including principal, interest and commissions and fees).
Commercial, smallest business ("microloan"), consumer and mortgage loans
classified as:
"A" "B" "C" "D" "E"
--- --- --- --- ----
0% 1% 20% 50% 100%
The Bank allocates the allowance for loan losses on the basis of whether
the loans are secured and, among those loans that are secured, whether such
security is real or personal. The largest percentage of allowances is allocated
to consumer, commercial and small business loans ("microloans") that are
supported by personal security. The allowance for loan losses is calculated
including the value of the underlying security. The new regulation by the
Superintendency of Banking establishes that for allowances on loans, the
security that guarantees the loan will only support the principal of the loan.
Consequently, allowances are calculated in accordance with the loan
classification system's percentage, which is applied to the difference between
the amount outstanding and 70% of the value of the security supporting the loan.
In addition, for establishing provisions, the percentages of the total amount of
such guarantee must be taken into consideration, as follows:
90
For guarantees not backed by mortgages:
TIME ELAPSED BETWEEN THE DATE OF DEFAULT AND THE DATE OF
NON-REALIZATION OF THE GUARANTEE Percentage
---------------------------------------------------------- ----------
0 to 12 Months 70%
Over 12 Up to 24 Months 50%
Over 24 Months 0%
For mortgage-backed guarantees:
TIME ELAPSED BETWEEN THE DATE OF DEFAULT AND THE DATE OF
NON-REALIZATION OF THE GUARANTEE Percentage
---------------------------------------------------------- ----------
0 To 18 Months 70%
Over 18 Up To 24 Months 50%
Over 24 Up To 30 Months 30%
Over 30 Up To 36 Months 15%
Over 36 Months 0%
There are special requirements for the required allowance for loan losses
in respect of loans of borrowers involved in proceedings with their creditors.
The Bank may make additional allowances not required by the regulations of the
Superintendency of Banking when, in its judgment, an additional allowance is
warranted. As of December 31, 2002, the Bank had not made any such additional
allowances with respect to its outstanding loans. Through the office of the
Bank's Vice President for Risk Management, the Bank undertakes a monthly review
of its past due and non-performing loan portfolio.
The following table sets forth the activity in the allowance for loan
losses:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(in millions of pesos)
Balance at beginning of period (BIC)................. Ps 31,896 Ps182,292 Ps295,016 Ps285,565 Ps271,729
Balance at beginning of period (Banco de Colombia)... 83,248 -- -- -- --
Provisions for loan losses (1)....................... 145,680 180,711 264,756 86,793 143,361
Effect of revaluing to constant pesos (3) .......... (18,458) (15,403) (19,008) -- --
Effect of difference in exchange rate (4) .......... -- -- -- -- 10,366
Charge--offs......................................... (45,207) (51,113) (148,056) (83,586) (71,592)
Recovering from former fiscal years.................. (14,867) (1,471) (107,143) (17,043) (21,540)
--------- --------- --------- --------- ---------
Balance at end of period (2)......................... Ps182,292 Ps295,016 Ps285,565 Ps271,729 Ps332,324
========= ========= ========= ========= =========
---------------
(1) The provision for past due accrued interest receivable, which is not
included in this item, amounted to Ps 25,986 million, Ps 48,507 million,
Ps 20,178 million, Ps 4,965 and Ps 4,518 million for the years ended
December 31, 1998, 1999, 2000, 2001 and 2002, respectively.
(2) The allowance for past due accrued interest receivable, which is not
included in this item, amounted to Ps 35,920 million, Ps 66,939 million,
Ps 30,771 million, Ps 27,011 million and Ps 15,074 million for the years
ended December 31, 1998, 1999, 2000, 2001 and 2002 respectively.
(3) Inflation adjustment was eliminated starting on January 1, 2001. See Note
2(b) to the Financial Statements.
(4) For years 1998, 1999, 2000 and 2001, the effect of difference in exchange
rate was included as a part of recoveries.
91
The following table shows the allocation of the Bank's allowance for loan
losses by type of loan:
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------
1998 % 1999 % 2000 % 2001 % 2002 %
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(in million of pesos, except percentages)
CORPORATE
Trade financing................... Ps 898 0.5% Ps 1,402 0.5% Ps 1,413 0.5% Ps 491 0.2% Ps 3,073 0.9%
Loans funded by domestic
development banks.............. 1,021 0.6 5,598 1.9 1,972 0.7 845 0.3 812 0.2
Working capital loans............. 51,065 28.0 143,419 48.6 180,470 63.2 177,135 65.2 212,108 63.8
Credit cards...................... 43 0.0 57 0.0 46 0.0 -- 0.0 107 0.0
Overdrafts........................ 409 0.2 2,158 0.7 923 0.3 -- 0.0 1,313 0.4
Other............................. 6,384 3.5 -- 0.0 -- 0.0 -- 0.0 -- 0.0
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total corporate................ 59,820 32.8 152,634 51.7 184,824 64.7 178,471 65.7 217,413 65.3
RETAIL (1)
Credit cards...................... 9,359 5.1 12,978 4.4 8,039 2.8 5,823 2.1 9,568 2.9
Personal loans.................... 9,055 5.0 26,996 9.2 14,316 5.0 5,947 2.2 9,816 3.0
Automobile loans.................. 656 0.3 1,832 0.6 741 0.3 99 0.0 77 0.0
Overdrafts........................ 5,781 3.2 6,615 2.2 3,332 1.2 2,727 1.0 3,318 1.0
Loans funded by domestic
development banks.............. 1,615 0.9 2,468 0.8 847 0.3 851 0.3 1,507 0.5
Trade financing................... 1,947 1.1 1,774 0.6 734 0.3 349 0.1 792 0.2
Working capital loans............. 93,932 51.5 75,694 25.7 46,132 16.1 30,927 11.3 25,272 7.6
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total retail...................... 122,345 67.1 128,357 43.5 74,141 26.0 46,723 17.2 50,350 15.2
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
MORTGAGE.......................... 127 0.1 843 0.3 1,667 0.6 1,116 0.4 849 0.3
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
GENERAL(2)........................ -- 0.0 13,182 4.5 24,933 8.7 45,419 16.7 63,712 19.2
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total allowance for loan losses Ps182,292 100.0% Ps295,016 100.0% Ps285,565 100.0% Ps271,729 100.0% Ps332,324 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
---------------
(1) Includes allowances for loans to upper-income individuals and small
companies.
(2) This is a provision established in 1999 by Circular 044.
As of December 31, 2002, the allowance for loan losses increased Ps 60,595
million compared to December 31, 2001 due primarily to an increase in general
provisions. As of December 31, 2001, the allowance for loan losses decreased
4.84% compared to December 31, 2000 due primarily to adequate management of
asset recovery.
The following table shows the allocation of the Bank's allowance for loan
losses by type of loan using the classification of the Superintendency of
Banking:
AS OF DECEMBER 31,
-----------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(in millions of pesos)
Commercial .................... Ps123,327 Ps210,695 Ps212,428 Ps178,471 Ps243,835
Consumer ...................... 58,838 70,296 46,537 46,723 22,668
Small business loans .......... -- -- -- -- 1,260
Mortgage ...................... 127 843 1,667 1,116 849
General(1) .................... -- 13,182 24,933 45,419 63,712
--------- --------- --------- --------- ---------
Total allowance for loan losses Ps182,292 Ps295,016 Ps285,565 Ps271,729 Ps332,324
========= ========= ========= ========= =========
--------
(1) This is a provision established in 1999 by Circular 044.
NEW PROVISION SYSTEM (OR CREDIT RISK MANAGEMENT SYSTEM - "SARC")
Through External Circular 011 of March 05, 2002, which modifies Chapter II
of External Circular 100 of 1995 (Basic Accounting and Financial), regarding
management of credit risk, the Superintendency of Banking requires entities to
its supervision to develop a system for the management credit risk ("Sistema de
Administracion de Riesgo Crediticio" - "SARC"). As a consequence, the Bank must
establish strategies, policies, methodologies, processes and structures to
evaluate, rate, monitor, and control its credit risks.
92
The Superintendency of Banking has provided general guidelines and
deadlines for the development and implementation of SARC, and the Bank has
complied with those guidelines and deadlines subject to the requirements set
forth in Circular Letter of March 5, 2002, as show in the table below:
PHASE DESCRIPTION MAXIMUM DEADLINE
----- ----------- ----------------
I Preparation and submission of the document supporting the development June 28 of 2002
of the SARC to the Superintendency of Banking, taking into account
risk management polices, adequate organizational structure, appropriate
methodologies and processes for risk management, suitable infrastructure
and human resources, as well as a general auditing process.
Additionally, significant advances shall be provided regarding
reconstruction of historical information necessary for the
implementation of the SARC by the Bank.
II Conclusion of the process of reconstruction of historical information and December 31 of 2002
the information and/or computer programs which will assure adequate
assessment and management of credit risk.
III During this phase, the entity shall begin estimating expected losses by June 27 of 2003
applying the methodology defined for such purpose. The foregoing, in
order to calibrate any relevant variables which guarantee the results
of the methodology.
SARC requires that the entities under the supervision of the
Superintendency of Banking permanently evaluate the credit risk and the paying
capacity of each debtor, and to this end, they must internally define a
methodology which will take into account at least the following:
- Probability of impairment or change in the rating of credit risk
(probability of non-payment or expected delay in payment rate);
- Estimate or quantification of the expected loss which would be incurred by
the entity, should the foregoing event occur, during a determined lapse of
time (e.g., 12 months). For this estimate, it is important, among other
things, to compute the value or rate of recovery of the active value, in
the event that the credit would become unrecoverable. The existence and
suitability of the collateral that supports the credits are an important
factor that should be taken into account in the context.
The allowances for credits must be based on the estimate of the expected
losses, and minimum levels of allowances must be maintained in accordance with
current provision. A general allowance of 1% on the total gross portfolio is
maintained.
For the estimate of expected losses and allowance, the Bank has to follow
guidelines established by the methodological documents published by the Basel
Internal Rating Approach. This model, if
93
applied, is based on three fundamental factors which must be estimated to
compute the expected loss for each business line being analyzed.
Expected Loss = PD x EAD x LGD
Where:
PD: Probability of default
EAD: Exposure at the time of default.
LGD: "Loss given default" or loss before default
CHARGE-OFFS
The following table shows the allocation of the Bank's charge-offs by type
of loan as of December 31, 1998, 1999, 2000, 2001 and 2002:
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(in millions of pesos)
Trade financing .......................... Ps -- Ps -- Ps 54 Ps -- Ps24,470
Loans funded by domestic development banks -- -- -- -- --
Working capital loans .................... 32,006 15,734 111,652 49,460 36,022
Credit cards ............................. 5,061 4,592 20 -- 517
Personal loans ........................... 4,558 24,246 16,366 17,338 9,140
Automobile loans ......................... 902 1,089 2,377 506 35
Overdrafts ............................... 2,657 5,332 13,563 13,902 1,086
Other .................................... 23 120 4,024 2,380 322
-------- -------- --------- -------- --------
Total charge-offs ........................ Ps45,207 Ps51,113 Ps148,056 Ps83,586 Ps71,592
======== ======== ========= ======== ========
The Bank has a policy of actively pursuing collection of charged-off
balances. In practice, the manager of the branch where the loan was made and the
attorney handling the collection pursue the collection process to judgment. In
addition, non-payment by the debtor is reported to the Banking Association of
Colombia credit risk center where the creditor's name and the outstanding debt
is registered. This credit risk center is consulted by every Colombian financial
institution, and any debtor listed in such registry will not be extended credit
until the defaulted loan has been satisfied.
Charge-offs are only made after the manager of the branch and the attorney
handling the case have exhausted all means to secure payment of the judgment
against any known assets of the borrower and the charge-off has been approved by
the Board of Directors and the Superintendency of Banking. Recoveries have not
been significant in any of the periods presented.
CROSS-BORDER OUTSTANDING
Total cross-border outstanding amounted to approximately US$160.41 million
as of December 31, 2002, of which US$129.28 million were investments and
US$31.13 million were loans granted to banks and corporate clients. Total
cross-border outstanding represented 3.6% of total assets as of December 31,
2002.
94
Loans from correspondent banks to BC amounted to approximately US$173.2
million (Ps 399,555 million).
AVERAGE LIABILITIES
The Bank's deposits consist of checking deposits, time deposits and
savings deposits. During 2002, checking deposits, time deposits and savings
deposits represented an average of 26%, 45%, and 27%, respectively, of the
Bank's total deposits.
AVERAGE MATURITY OF DEPOSITS
As of December 31, 2002, the average balance of maturities of customers'
deposits were as follows:
YEAR ENDED DECEMBER 31, 2002
----------------------------------------------------------------------------------
UP TO 91 TO 181 TO MORE THAN
90 DAYS % 180 DAYS % 360 DAYS % 360 DAYS % TOTAL %
----------- --- --------- --- --------- --- --------- --- ----------- ---
(in millions of pesos, except percentages)
NON-INTEREST BEARING DEPOSITS:
Checking accounts
Peso-denominated............ Ps1,437,429 18% Ps -- Ps -- Ps -- Ps1,437,429 18%
Dollar-denominated.......... 21 0% -- -- -- 21 0%
----------- --- --------- --- --------- --- --------- --- ----------- ---
Total.................... 1,437,450 18% -- -- -- 1,437,450 18%
Other deposits and fiduciary
Peso-denominated............ 48,331 1% -- -- -- 48,331 1%
Dollar-denominated.......... 50,514 1% -- -- -- 50,514 1%
----------- --- --------- --- --------- --- --------- --- ----------- ---
Total.................... 98,845 2% -- -- -- 98,845 2%
INTEREST BEARING DEPOSITS:
Checking accounts
Peso-denominated............ 90,332 1% -- -- -- 90,332 1%
Dollar-denominated.......... 576,933 7% -- -- -- 576,933 7%
----------- --- --------- --- --------- --- --------- --- ----------- ---
Total.................... 667,265 8% -- -- -- 667,265 8%
Time deposits
Peso-denominated............ 1,108,543 14% 417,135 5% 298,563 4% 343,147 4% 2,167,388 27%
Dollar-denominated.......... 884,361 11% 284,210 4% 125,481 2% 92,336 1% 1,386,388 18%
----------- --- --------- --- --------- --- --------- --- ----------- ---
Total.................... 1,992,904 25% 701,345 9% 424,044 6% 435,483 5% 3,553,776 45%
Savings deposits
Peso-denominated............ 2,077,699 26% -- -- -- 2,077,699 26%
Dollar-denominated.......... 83,795 1% -- -- -- 83,795 1%
----------- --- --------- --- --------- --- --------- --- ----------- ---
Total.................... 2,161,494 27% -- -- -- 2,161,494 27%
Long-term debt
Peso-denominated............ 18 0% -- 0% -- 0% 20,757 0% 20,775 0%
Dollar-denominated.......... -- 0% -- 0% -- 0% -- 0% -- 0%
----------- --- --------- --- --------- --- --------- --- ----------- ---
Total.................... 18 0% -- 0% -- 0% 20,757 0% 20,775 0%
Total deposits
Peso-denominated............ 4,762,352 60% 417,135 5% 298,563 4% 363,904 4% 5,841,954 73%
Dollar-denominated.......... 1,595,624 20% 284,210 4% 125,481 2% 92,336 1% 2,097,651 27%
----------- --- --------- --- --------- --- --------- --- ----------- ---
Total deposits(1 Ps6,357,976 80% Ps701,345 9% Ps424,044 6% Ps456,240 5% Ps7,939,605 100%
=========== === ========= === ========= === ========= === =========== ===
---------------
(1) There is a seasonality in checking accounts that results in an increase in
checking accounts in the last quarter of the year.
95
The following table shows the composition of the Bank's deposits for 2000,
2001 and 2002:
AS OF DECEMBER 31,
---------------------------------------
2000 2001 2002
----------- ----------- -----------
(in millions of pesos)
NON-INTEREST BEARING DEPOSITS:
Checking accounts............. Ps1,451,425 Ps1,709,575 Ps1,876,026
Other deposits................ 51,124 66,693 94,573
----------- ----------- -----------
Total.................... 1,502,549 1,776,268 1,970,599
INTEREST BEARING DEPOSITS:
Checking accounts............. 674,202 608,087 815,367
Time deposits................. 2,575,212 3,426,629 3,603,466
Savings deposits.............. 1,364,059 1,769,864 2,398,726
----------- ----------- -----------
Total.................... 4,613,473 5,804,580 6,817,559
----------- ----------- -----------
TOTAL DEPOSITS........... Ps6,116,022 Ps7,580,848 Ps8,788,158
=========== =========== ===========
The following table shows the time deposits in excess of Ps 281.5 million
(the equivalent of $100,000 at the Representative Market Rate as of December 31,
2002) held by the Bank as of December 31, 2002, by amount and by maturity:
AS OF DECEMBER 31, 2002
-------------------------------
PESOS DOLLARS TOTAL
--------- --------- ---------
(in millions of pesos)
Up to 3 months ......................... 484,740 818,809 1,303,549
From 3 to 6 months ..................... 191,263 257,415 448,678
From 6 to 12 months .................... 220,295 115,951 336,246
More than 12 months .................... 217,036 107,524 324,560
Time deposits less than Ps 281.5 million 845,857 344,576 1,190,433
--------- --------- ---------
TOTAL ............................. 1,959,191 1,644,275 3,603,466
========= ========= =========
INTERBANK BORROWINGS
The following table sets forth the Bank's short-term interbank borrowings
for the periods indicated:
AS OF DECEMBER 31,
----------------------------------------------------------
2000 2001 2002
------------------ ------------------ ------------------
AMOUNT RATE(1) AMOUNT RATE(1) AMOUNT RATE(1)
--------- ------- --------- ------- --------- -------
(in millions of pesos, except percentages)
End of period.......................... Ps564,368 7.80% Ps399,595 2.88% Ps403,962 2.44%
Average during period.................. 535,748 7.90% 472,975 4.30% 505,832 1.86%
Maximum month-end balance.............. 686,476 474,653 594,810
Month of maximum balance............... September March September
Interest paid during the year.......... 42,094 20,160 9,404
---------------
(1) At the end of the year, the Bank typically increases its
dollar-denominated interbank borrowings, which represent the great
majority of interbank borrowings and which have lower interest rates.
96
RECENT U.S. GAAP PRONOUNCEMENTS
In June 2002, the FASB issued Statement No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities", This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." This Statement requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. A
fundamental conclusion is that an entity's commitment to a plan, by itself, does
not create a present obligation to others that meets the definition of a
liability. Therefore, this Statement eliminates the definition and requirements
for recognition of exit costs in Issue 94-3. This Statement also establishes
that fair value is the objective for initial measurement of the liability. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, early application encouraged. BC is
evaluating the impact Statement 146 may have on its future Consolidated
Financial Statements.
In October, 2002, the FASB issued Statement No. 147 "Acquisitions of
Certain Financial Institutions". Except for transactions between two or more
mutual enterprises, this Statement requires that acquisitions of certain
financial institutions be accounted for in accordance with FASB Statements No.
141, "Business Combinations", and No. 142, "Goodwill and Other Intangible
Assets". Thus, the requirement to recognize (and subsequently amortize) any
excess of the fair value of liabilities assumed over the fair value of tangible
and identifiable intangible assets acquired as an unidentifiable intangible
asset no longer applies to acquisitions within the scope of this Statement. In
addition, this Statement amends FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor and borrower-relationship intangible assets and credit cardholder
intangible assets. The Effective Date of This Statement about the application of
the purchase method of accounting, is effective for acquisitions for which the
date of acquisition is on or after October 1, 2002. This Statement may have an
impact on BC if another business combination would take place.
In November, 2002, the FASB issued the Financial Accounting Standards
Board Interpretation No. 45, "Guarantor's Accounting and Disclosure requirements
for Guarantees Including Indirect Guarantees of Indebtedness of Others." The
Interpretation expands on the accounting guidance of Statements No. 5, 57, and
107 and incorporates without change the provisions of FASB Interpretation No.
34, which is being superseded. The Interpretation elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees such as
standby letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. This
guidance does not apply to certain guarantee contracts, such as those issued by
insurance companies or for a lessee's residual value guarantee embedded in a
capital lease. The provisions related to recognizing a liability at inception of
the guarantee for the fair value of the guarantor's obligations would not apply
to product warranties or to guarantees accounted for as derivatives. The initial
recognition and initial measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002, regardless of the
guarantor's fiscal year-end. The disclosure requirements in the Interpretation
are effective for financial statements of interim or annual periods ending after
December 15, 2002. BC is evaluating the impact FIN 45 may have on its future
Consolidated Financial Statements.
97
In January, 2003, the Financial Accounting Standards Board (FASB) has
issued Interpretation No. 46, Consolidation of Variable Interest Entities. Many
variable interest entities have commonly been referred to as special-purpose
entities or off-balance sheet structures, but the guidance applies to a larger
population of entities. Consolidation by a primary beneficiary of the assets,
liabilities and results of activities of variable interest entities will provide
more complete information about the resources, obligations, risks and
opportunities of the consolidated company. To further assist financial statement
users in assessing a company's risks, the Interpretation also requires
disclosures about variable interest entities that the company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The interpretation FIN 46 will have no
impact on net income or stockholders' equity.
In December, 2002, FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB
Statement No. 123". This Statement provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. This Statement permits two additional transition methods for
entities that adopt the preferable method of accounting for stock-based employee
compensation. Both of those methods avoid the ramp-up effect arising from
prospective application of the fair value based method. In addition, this
Statement does not permit the use of the original Statement 123 prospective
method of transition for changes to the fair value based method made in fiscal
years beginning after December 15, 2003. Also, in the absence of a single
accounting method for stock-based employee compensation, this Statement requires
disclosure of comparable information for all companies regardless of whether,
when, or how an entity adopts the preferable, fair value based method of
accounting. In addition, this Statement improves the timeliness of those
disclosures by requiring their inclusion in financial reports for interim
periods. BC evaluated the impact Statement 148 and determined it will have no
impact on net income or stockholders equity.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
A. DIRECTORS AND SENIOR MANAGEMENT
On December 31, 2002, the following persons acted as current and alternate
directors of BC:
DIRECTORS
---------
FIRST
ELECTED TO PRINCIPAL OCCUPATION
NAME THE BOARD TERM EXPIRES AREAS OF EXPERIENCE OUTSIDE THE BANK
---- --------- ------------ ------------------- ----------------
Nicanor Restrepo Santamaria 1984 2004 Chairman of the Board President of Inversura S.A
Carlos Enrique Piedrahita Arocha 1994 2004 Finance President of Compania
Nacional de Chocolates
Juan Manuel Ruiseco Vieira 2000 2004 Engineering President of Compania de
Cemento Argos
Jose Alberto Velez Cadavid 1996 2004 Finance President of Suramericana
de Seguros S.A
Ricardo Sierra Moreno 1996 2004 Finance General Manager of
Productora Distrihogar.
Dr. Nicanor Restrepo Santamaria has been the President of Suramericana de
Inversiones S.A. since 1984. Mr. Restrepo Santamaria served previously as the
Governor of the Department of Antioquia from 1983 to 1984. He was President of
Corporacion Financiera Nacional form 1982 to 1983, and Vice
98
President of Finance of Compania Suramericana de Seguros y Filiales from 1979 to
1982. Before serving as president of Corporacion Financiera Suramericana from
1976 until 1979, Mr. Restrepo Santamaria held management positions at Ospinas y
Cia S.A. from April, 1976, to December, 1976, Emcoper S.A. from 1973 until 1976,
Caja de Credito Agrario form 1971 to 1973, Celanese Colombiana from 1968 to
1971, and Primavera from 1966 to 1968.
Dr. Carlos Enrique Piedrahita Arocha, President of Compania Nacional de
Chocolates since 1999 was president of Corfinsura.
Dr. Juan Manuel Ruiseco Vieira, is an engineer, and is President of
Compania De Cemento Argos since 1999, was president of Cementos del Caribe from
1957 to 1999 prior to his current presidency.
Dr. Jose Alberto Velez Cadavid assumed the Presidency of Suramericana de
Seguros S.A. in 2000 and is currently also the President of Inversura S.A.. He
previously served as Vice President of Investments at Suramericana de Seguros
S.A. from 1996 to 2000, and prior to that, held various other managerial
positions at Suramericana de Seguros S.A. since 1984. Among others, he was Vice
President of Enterprise Development, and Vice President of Marketing and Sales.
Dr. Ricardo Sierra Moreno, General Manager of Production Distrihogar S.A.
since 1989, became Vice President of Finance at Suramericana de Seguros S.A. in
1982 and served in this capacity until 1989. Prior to this, Mr. Sierra Moreno
served as Regional Manager at Corporacion Financiera Suramericana from 1979 to
1982.
ALTERNATE DIRECTORS
-------------------
FIRST ELECTED TERM PRINCIPAL OCCUPATION
NAME TO THE BOARD EXPIRES AREAS OF EXPERIENCE OUTSIDE THE BANK
---- ------------ ------- ------------------- ----------------
Luis Mariano Sanin 2002 2004 Engineering President of
Tejicondor-Fabricato S.A
Hector Arango Gaviria 1988 2004 Finance Finance Vice-President of
Compania Nacional de
Chocolates S.A.
German Botero Arango 2002 2004 Engineering General Manager of
Cementos el Cairo S.A.
Juan Sebastian Betancur 1994 2004 Law Vice President- Bogota
Escobar region of Suramericana
deSeguros S.A.
Federico Echavarria Restrepo 2002 2004 Engineering General Manager of
Merilectrica S.A
Luis Mariano Sanin is an engineer, holds a Masters degree from the
Massachusetts Institute of Technology and is the President of Tejicondor-
Fabricato S.A. Mr. Sanin has previously served as President of Tejicondor (since
1996) and President of Fabricato (since 2001).
Hector Arango Gaviria is a business administrator and Finance
Vice-president of Compania Nacional de Chocolates S.A.
German Botero Arango is an engineer and is the General Manager of Cementos
El Cairo S.A. since 1986.
Juan Sebastian Betancur Escobar is an attorney and is Vice-president of
Bogota de Suramericana de Seguros since 1991.
Federico Echavarria Restrepo is an industrial engineer, holds a Master in
Business Administration from Harvard University, and is the General Manager of
Merilectrica y Cia. SCA since 1997.
99
SENIOR MANAGEMENT
-----------------
NAME FIRST JOINED THE BANK FUNCTION
---- --------------------- --------
PRESIDENT
Jorge Londono Saldarriaga 1996 President of Bancolombia S.A
VICE PRESIDENTS
Leonardo Hincapie Naranjo 1983 Risk Management
Santiago Perez Moreno 1989 Personal and Middle-Corporate Market
Banking
Jaime Alberto Velasquez Botero 1989 Finance
Leonardo Uribe Correa 1984 Legal/General Secretary
Gabriel Jaime Agudelo Tobon 1973 Technology
Gonzalo Toro Bridge 1988 Corporate and International Banking
Federico Ochoa Barrera 1984 Executive
Hernan Dario Ramirez Giraldo 1985 General Auditor
Luis Fernando Montoya Cusso 1973 Operations
Jairo Burgos de la Espriella 1990 Human Resources
B. COMPENSATION
BC compensates each of its directors with Ps 500,000 per meeting. The
directors receive no other compensation or benefit. The aggregate amount of
remuneration paid by BC and consolidated subsidiaries to all directors,
alternate directors and senior management during the fiscal year ended December
31, 2002 was Ps 3,928 million.
C. BOARD PRACTICES
BC is managed by its Board of Directors and President. BC's Board of
Directors consists of five directors and their respective alternate directors.
Alternate directors participate in and are entitled to vote at meetings of the
Board of Directors only when their respective principal directors announce that
they will not attend directors' meetings for longer than a month. If a director
misses meetings for more than three consecutive months, that director will be
removed and replaced with such director's alternate for the remainder of the
term. The directors (together with their respective alternate directors) are
elected every two years at a general meeting of BC's Shareholders. In addition,
on the first occasion a person is elected to the Board of Directors, such person
must supply the Superintendency of Banking with specified information (including
the person's prior professional and credit history) and must be approved by the
Superintendency of Banking in order to assume office. Directors may be
re-elected indefinitely. The Chairman of the Board of Directors is Nicanor
Restrepo Santamaria.
Under the Colombian Code of Commerce and the By-laws of BC, directors are
re-elected in accordance with the "proportional representation" voting system
(electoral quotient system). In general, under the proportional representation
voting system, holders of Common Shares are able to elect a director each time
the number of votes cast meets a specified quota of votes, even though the quota
represents a minority of the total votes cast.
Neither Bancolombia nor its subsidiaries have any service contracts with
BC's directors providing for benefits upon termination of employment.
Decree 663 and the By-laws of BC require that the Board of Directors holds
at least one meeting each month. A quorum for a Board of Directors' meeting
consists of a majority of directors or their alternates and action may be taken
by a minimum of three directors. In the event of a tie, a proposal is considered
rejected. If the tie occurs during a nomination, a second vote is taken. If the
second vote produces another tie, the nomination is suspended. Pursuant to the
By-laws of BC, BC's President and his alternate are elected by the Board of
Directors and serve at the Board's discretion. The President has the power to
appoint and remove the Vice Presidents and the regional managers. The Directors
and the President must be confirmed by the Superintendency of Banking before
assuming their office.
100
At a General Shareholders' Meeting, BC's Shareholders elect BC's statutory
auditor for a two-year term. The statutory auditor is entitled to select a
principal representative auditor and one alternate auditor. Under Colombian law,
the duties of the statutory auditor include, among other things, the examination
of the operations, books, records and any other documents of BC as well as the
presentation of a report of such examination at the Annual General Shareholders'
Meeting. Before assuming office, the statutory auditor must be approved by the
Superintendency of Banking. At BC's 1996 annual general shareholders' meeting,
BC replaced Price Waterhouse and retained KPMG Ltda. as its statutory auditor,
beginning with respect to BC's financial statements for the fiscal year ended
December 31, 1997. This change was not made as a result of any disagreement with
Price Waterhouse on any matter of accounting principles or practices, financial
statements disclosure or auditing scope or procedures. KPMG Ltda. appointed
Gustavo Avendano Luque and Gabriel Marcelo Calderon to serve as principal
representative auditor and alternate auditor, respectively. At BC's 2003 annual
general shareholders' meeting, held on February 27, 2003, BC replaced KPMG Ltda.
and retained Deloitte & Touche Ltda. as its statutory auditor. This change was
not made as a result of any disagreement with KPMG Ltda. on any matter of
accounting principles or practices, financial statements disclosure or auditing
scope or procedures.
Bancolombia has an audit committee the main purpose of which is to support
the Board of Directors in supervising the effectiveness of the Bank's internal
controls. The committee consists of three members who are elected by the Board
of Directors for a period of two years. The current members are Hector Arango
Gaviria, Jose Alberto Velez Cadavid, and Ricardo Sierra Moreno.
D. EMPLOYEES
The following table sets forth the number of employees of Bancolombia for the
last three fiscal years:
As of December 31 Total number of employees employed by BC Number of employees employed by BC
and its consolidated subsidiaries directly
----------------- --------------------------------- --------
2000 7,688 6,518
2001 7,518 6,258
2002 7,581 6,364
On December 31, 2002, Bancolombia and its consolidated subsidiaries had
7,581 employees of which 6,364 were employed directly by the Bank. Of the 6,364
employees, approximately 30.51% belong to a labor union called Sintrabancol and
15.60% are members of an industry union called Uneb. A collective bargaining
agreement with both unions has been in effect since November 1, 2001 and expires
on October 31, 2003. The bank is satisfied with the existing collective
bargaining agreement, both for the labor costs it implies and for the amicable
relationship it has helped to develop with the labor unions and BC employees.
Although labor relationshipsare harmonious within BC, certain tax, labor and
social security reforms enacted in 2002 have irritated labor unions, which may
attempt to extract greater concessions in the upcoming collective bargaining
process to offset the effect of such reforms. In preparation for such a
scenario, with the participation of labor union leaders, the Bank has prepared
an agenda of the items that need to be studied by both parties in advance of the
collective bargaining process.
Of the 6,364 employees approximately 27% were located in Bogota Region,
16% in the South Region, 13% in the Antioquia Region, 20% in the Medellin
headquarters, 13% in the Central Region and 11% in the North Region.
Law 50 of 1990 established a significant change in the system for
severance payments. According to this law, for employees hired after January 1,
1991, this benefit is calculated every year by
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the employer on December 31 and is deposited in a fund management company. The
new scheme is mandatory for all employees hired after January 1, 1991. Employees
hired prior to that date are given the option of continuing with the previous
system or switching to the new one. On December 31, 2002, 67.28% of the
employees were under by the new payment system.
BC established an incentive compensation plan in the first semester of
2002 that a award bonuses bi-annually to its vice-presidents, department
directors and certain managers. In determining the amount of any bonuses, the
Bank takes into consideration the overall return on equity of BC and the meeting
by its executives of individual goals. Depending on the amount awarded, the
bonuses are payable solely in cash, or as a combination of cash, a right to
receive in three years an amount in cash determined with reference to the value
of BC Common Shares, and an entitlement to a share in a pool of unvested
bonuses. The pool of unvested bonuses is an account of preliminary bonuses,
payable once it is established that the results triggering such bonuses have
been sustained over time, and were not the result of a particular, extraordinary
transaction that does not really reflect better performance, according to
guidelines designed by the Bank.
E. SHARE OWNERSHIP
No director or executive officer of Bancolombia owned any Preference
Shares in BC as of December 31, 2002. The following directors and managers owned
Common Shares in BC as of December 31, 2002: Nicanor Restrepo Santamaria, Fabio
Rico Calle, Ricardo Sierra Moreno, Santiago Vaquez Haupt, Hector Arango Gaviria,
Juan Sebastian Betancur Escobar, Jorge Londono Saldarriaga, Luis Santiago Perez
Moreno, and Gonzalo Toro Bridge. None of their shareholdings, individually or in
the aggregate, exceeded one percent of Bancolombia's outstanding Common Shares.
As of December 31, 2002, Bancolombia had no outstanding options to acquire any
of its Common or Preference Shares outstanding.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
A. MAJOR SHAREHOLDERS
The following table sets forth, solely for purposes of United States
securities laws, certain information regarding the beneficial ownership of BC's
capital stock as of December 31, 2002, by each person known to BC to own
beneficially more than 5% of each class of BC's outstanding capital stock. A
beneficial owner includes anyone who has the power to receive the economic
benefit of ownership of the securities.
% OWNERSHIP % OWNERSHIP OF
PREFERENCE OF COMMON PREFERENCE
NAME COMMON SHARES SHARES SHARES(1) SHARES(1)
---- ------------- ------ --------- ---------
Suramericana de Inversiones 60,891,371 15,3% -
S.A. (2)
Portafolio de Inversiones
Suramericana S.A. (3) 43,687,875 10.96% -
Fideicomiso
cititrust-Suramericana-IFC 39,170,000 9.8% -
Cementos del Valle S.A. 29,658,125 4,120,038 7.4% 2.3%
Holding de Inversion
Mercantil de Colombia S.A. 27,984,714 4,120,038 7.% -
Emmery Equity Corporation 24,387,619 6.1% -
Compania de Cemento Argos S.A 24,375,687 3,386,177 6.1% 1.9%
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% OWNERSHIP % OWNERSHIP OF
PREFERENCE OF COMMON PREFERENCE
NAME COMMON SHARES SHARES SHARES(1) SHARES(1)
---- ------------- ------ --------- ---------
Lorange Industrial Corporation 20,612,331 5.2% -
Proteccion 6,944,368 14,912,239 1.74% 8.35%
BIC ADR Program Sufibic 136,743,128 76.6%
(1) Common Shares have one vote per share; Preference Shares have limited
voting rights under certain circumstances specified in the Estatutos of
Bancolombia filed as Exhibit 1 to this Annual Report.
(2) Represents ownership by Suramericana de Inversiones S.A. directly and
through its subsidiary Suramericana de Construcciones S.A. and Inversura
S.A.
(3) Suramericana de Inversiones S.A. owns 94.8% of Portafolio de Inversiones
Suramericana S.A.'s voting stock.
As of December 31, 2002, a total of 398,259,608 Common Shares and
178,435,787 Preference Shares were registered in the Bank's shareholder registry
in the name of 13,675 shareholders. As of December 31, 2002, a total of
136,743,128 Preference Shares, representing 76.63% of outstanding Preference
Shares, were directly held by one record holder in the United States. No Common
Shares were held directly by record holders in the United States.
Under Colombian law, BC has no controlling entities.
B. RELATED PARTY TRANSACTIONS
From time to time, BC lends to affiliates and other related parties and
engages in other transactions with such parties. Such loans have been made in
the ordinary course of business, on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and have not involved more than the normal risk
of collectibility or present other unfavorable features. At January 31, 2003,
BC's largest direct shareholder Suramericana de Inversiones S.A., had a total
amount of Ps 29,103 million in loans from BC outstanding. Other related parties
(for purposes of United States securities laws), had a total amount of Ps 37,208
million in loans from BC outstanding. Transactions between BC and related
parties have been conducted on an arms-length basis. Under decree 633 and
Decrees 2360 and 2653 of 1993, transactions with affiliates and other related
parties may not exceed certain limits, based on, among other things, a
percentage of BC's assets. BC has to date complied with all such regulatory
limitations on affiliate and other related party transactions.
As of January 31, 2003, an aggregate of Ps 51,815 million in loans to BC
employees was outstanding. These loans represented 0.83% of BC's total net loans
as of December 31, 2002.
Certain directors, alternate directors and officers of BC have been
involved in credit transactions with BC as permitted by Colombian law. The Code
of Commerce and certain Colombian laws, including Decree 663, allow a company to
enter into transactions with its officers, directors and other affiliates if
such transaction is in accordance with prevailing market conditions and is
approved by such company's board of directors. Additionally, the granting of
credit to persons or entities affiliated with BC is subject to the regulations
of the Colombian Government. Such regulations set limits on the amount of credit
that can be extended to affiliates based on, among other things, a percentage of
BC's net worth. Decree 663 requires that loans to directors, principal
shareholders, officers and other related entities must be granted on an equal
basis with respect to rates, tenor and guarantees as loans granted to the
general public.
103
Decree 663 regulates and limits transactions with related parties and
affiliates. Loans to a holder of 5% or more of a financial institution's shares,
directors, certain principal executive officers, or relatives of any such person
must be approved unanimously by the company's board of directors. Except for
loans extended to employees as part of their health, housing, education and
transportation benefits, loans to related parties may not contain better terms
than those provided for in loans to non-related parties. Additionally, the
granting of credit to persons or entities affiliated with the Bank is subject to
the regulations of the Central Bank. Such regulations set limits on the amount
of credit that can be extended to affiliates based on, among other things, a
percentage of BC's net worth. Financial institutions are prohibited from
extending loans to financial services subsidiaries. They may, however, extend
loans to non-financial services subsidiaries. Loans to non-financial
subsidiaries and to BC's officers and employees are subject only to the general
lending limits on loans to single borrowers described above.
ITEM 8. FINANCIAL INFORMATION.
A. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to pages F-1 through F-96.
B. DIVIDEND POLICY
See "Item 3. Key Information - A. Selected Financial Data - Dividends"
C. SIGNIFICANT CHANGE
There has not been any significant change since the date of the annual
financial statements included in this document.
D. CHANGE IN EXTERNAL AUDITORS
As discussed in the Bank's current report on form 6-K filed with the
Commission on March 5, 2003, a majority of the shareholders represented at the
annual shareholders meeting held on February 27, 2003, approved that Deloitte &
Touche Ltda. replaced KPMG Ltda. as the Bank's independent auditors for the
fiscal year 2003. KPMG Ltda. reported on the Bank's financial statements for the
fiscal years ended December 31, 1999, 2000, 2001 and 2002. KPMG Ltda. did not
resign or refuse to stand for re-election, and none of its reports on such
financial statements contained an adverse opinion, disclaimer, modification or
qualification. BC's Audit Committee and Board of Directors approved the decision
to change the independent auditors.
E. LEGAL PROCEEDINGS
The Bank is involved in normal collection proceedings, restructuring
proceedings with respect to certain borrowers and other legal procedures in the
ordinary course of business. For the purpose of its audited financial
statements, the Bank has various contingent liabilities, including contingent
liabilities relating to ordinary litigation outstanding at December 31, 2002
amounting to Ps 445,350 million. A portion of these liabilities are covered by
Fogafin Ps 16,717 million at December 31, 2002. In the opinion of management,
after consultation with its external Colombian legal counsel, the outcome of
these contingent liabilities relating to ordinary litigation is not expected to
have a material adverse effect on BC's financial condition or results of
operations and the possibility of loss by BC as a result of such litigation is
not likely to exceed the recorded allowance of pesos at December 31, 2002.
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OTHER LEGAL PROCEEDINGS
As of the filing date of this Annual Report, the claims and lawsuits made
in the United States and Colombia by Jaime Gilinski and Isaac Gilinski, Bancol y
Cia. and several other entities controlled by them (as former controlling
shareholders of Banco de Colombia) ("the Plaintiffs") against Bancolombia and
certain directors and officers ("the Defendants") regarding the acquisition and
merger of Banco de Colombia by BIC in 1998, are as follows:
IN THE UNITED STATES:
In March 1999, Plaintiffs filed a lawsuit against the Defendants in the
United States District Court in New York claiming damages in excess of US$76
million for alleged market manipulation, misrepresentations and fraudulent
concealment by the defendants in connection with the Bank's Merger with Banco de
Colombia in 1998. Plaintiffs allege that the defendants manipulated the market
price of the Bank's ADRs during the Merger negotiations so as to misrepresent
the value of the ADRs the plaintiffs were effectively to receive as
consideration for a portion of plaintiffs' Banco de Colombia Common Shares. In
addition, plaintiffs allege that the defendants represented that they would
raise additional equity to fund a portion of the Merger and that the defendants
failed to disclose an alleged plan to operate Banco de Colombia and the merged
entity in violation of Colombian law and sound banking practices. On December
18, 2000, the Court held that claims must be asserted in arbitration in Bogota,
Colombia, according to the merger and acquisition agreement. No additional
events have occurred as of the date of the filing of this Annual Report.
IN COLOMBIA:
Superintendency of Banking. Plaintiffs filed several requests for
investigation against the Bank in order to determine whether there were
self-loans, undue use of funds received from customers, insufficient
capitalization, real estate and investment portfolio sales from BIC (renamed
Bancolombia in 1998) to Banco de Colombia, which allegedly occurred at the end
of 1997 and in midyear 1998. The Superintendency of Banking fined Bancolombia on
March 15, 2001 with a fine of Ps 44 million, for one inter-banking loan facility
on March 16, 1998 between former Banco de Colombia to former BIC. The rest of
the claims were dismissed. Bancolombia has appealed the fine before the "Consejo
de Estado" (administrative jurisdictional authority). As of the date of the
filing of this Annual Report, a final decision has not yet been issued.
General Prosecutor's Office: There is a denunciation (Exp 542480) on the
grounds described above against Bancolombia's officers Jorge Londono Saldarriaga
and Federico Ochoa Barrera. There also are four civil actions pending within the
criminal proceedings against Jorge Londono, Federico Ochoa Barrera and the Bank
itself as responsible on the grounds of civil liability. Both the criminal and
civil actions are currently pending and no final decisions have yet been issued.
Chamber of Commerce of Bogota. By letter dated May 31, 2001, plaintiffs
requested the Chamber of Commerce of Bogota, Colombia, to appoint arbitrators
based on the rules of the Inter-American Commercial Arbitration Commission
(IACAC rules), although these were not the rules agreed by the parties on the
acquisition and merger agreement. The Chamber of Commerce declined "to admit"
the Plaintiffs' request for appointment of arbitrators until a number of
procedural deficiencies were remedied. To the Bank's knowledge, the Plaintiffs
have not yet rectified these procedural defects.
105
BANCOLOMBIA'S CLAIMS AGAINST JAIME GILINSKI
There is a lawsuit pending (filed by Bancolombia on December 1, 2000 with
the Chamber of Commerce of Bogota) against Jaime Gilinski to enforce a pledge
granted by him in connection with the acquisition and merger of Banco de
Colombia by BIC for hidden liabilities. Both notification and appointment of
arbitrators are still pending. The Chamber of Commerce of Bogota admitted the
lawsuit.
Bancolombia has rejected Jaime Gilinski's and the Plaintiffs' claims and
has opposed and will oppose any claim related to the acquisition and merger of
Bancolombia by BIC. Amounts claimed by Jaime and Isaac Gilinski and the
Plaintiffs have no grounds and therefore have also been rejected.
CLASS ACTION.
A civil attorney filed a class action lawsuit with the Chamber of Commerce
of Bogota against Bancolombia and its significant shareholders, regarding the
exchange ratio used for the merger and acquisition of Banco de Colombia by BIC.
The Chamber of Commerce admitted such action on September 26, 2001 the
arbitrators were appointed and the arbitration commenced.
OTHER ACTION ("POPULAR ACTION")
Another lawsuit was filed in Colombia by the same attorney who filed the
above mentioned class action. The "Tribunal Administrativo" (administrative
jurisdictional authority) admitted the lawsuit on December 11, 2002 and began
the proceeding. In this action the defendants are the Superintendency of
Banking, the Superintendency of Securities and Bancolombia as one party.
ITEM 9. THE OFFER AND LISTING.
A. OFFER AND LISTING DETAILS
BC is a New York Stock Exchange, Inc. ("NYSE") listed company, where its
ADSs are listed under the symbol "CIB". The table below sets forth, for the
periods indicated, the reported high and low share prices and share trading
volume for the Preference Shares on the Medellin Stock Exchange until July 3,
2001 and, from that day on, on the Colombian Stock Exchange, expressed in
nominal pesos. The table also sets forth the reported high and low sale prices,
and the average daily trading volume, of the ADSs on the NYSE for the periods
indicated.
MEDELLIN/ COLOMBIA STOCK EXCHANGE NEW YORK STOCK EXCHANGE
--------------------------------- -----------------------
Ps PER PREFERENCE TRADING
SHARES VOLUME $ PER ADS
----------------- (NUMBER OF ------------- TRADING VOLUME
HIGH LOW SHARES) HIGH LOW (NUMBER OF ADSS)
---- --- ------- ---- --- ----------------
(in nominal pesos)
2001
First quarter 1,300 1,300 21,727 3.22 2.0 317,300
Second quarter 1,177 1,177 76,914 2.50 1.36 1,068,100
Third quarter -- -- -- 2.25 1.05 891,000
Fourth quarter (Colombia
Stock Exchange) 1,015 649 2,881,504 1.74 1.00 2,425,900
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MEDELLIN/ COLOMBIA STOCK EXCHANGE NEW YORK STOCK EXCHANGE
--------------------------------- -----------------------
Ps PER PREFERENCE TRADING
SHARES VOLUME $ PER ADS
----------------- (NUMBER OF ------------- TRADING VOLUME
HIGH LOW SHARES) HIGH LOW (NUMBER OF ADSS)
---- --- ------- ---- --- ----------------
(in nominal pesos)
2002
First quarter 1,200 1,025 725,997 2.45 1.55 1,090,700
Second quarter 1,600 1,061 720,874 2.88 1.65 1,923,300
Third quarter 1,589 1,360 1,870,660 2.5 1.35 2,100,300
Fourth quarter 1,800 1,233 8,847,306 2.34 1.37 2,703,000
Sources: Medellin Stock Exchange, Colombia Stock Exchange, Bloomberg Financial
Services Commodities News.
MEDELLIN STOCK EXCHANGE NEW YORK STOCK EXCHANGE
----------------------- -----------------------
Ps PER PREFERENCE SHARE $ PER ADS
----------------------- --------------- TRADING VOLUME
HIGH LOW HIGH LOW (NUMBER OF ADSS)
---- --- ---- --- ----------------
YEAR ENDING
December 31, 1998 4,600 4,050 15.5 4.3 6,555,600
December 31, 1999 2,372 1,820 7.4 3.0 7,883,000
December 29, 2000 1,550 1,550 4.9 1.8 5,304,200
December 31, 2001(until
July 3, 2001) 1,300 1,177 3.2 1.0 4,702,300
December 31, 2002 1,800 1,025 2.88 1.35 7,817,300
Source: Bloomberg Financial Services Commodities News, Medellin Stock Exchange,
and Colombia Stock Exchange.
COLOMBIA STOCK EXCHANGE NEW YORK STOCK EXCHANGE
----------------------- ---------------------------------
Ps PER PREFERENCE SHARE $ PER ADS
----------------------- --------------- TRADING VOLUME
HIGH LOW HIGH LOW (NUMBER OF ADSS)
------- ------ ------ ----- -----------------
MONTH
September 2002 1,370 1,370 1.8 1.35 383,500
October 2002 1,400 1,233 1.9 1.37 447,700
November 2002 1,599 406 2.16 1.83 348,500
December 2002 1,800 1,450 2.34 1.95 1,906,800
January 2003 1,200 1,025 2.86 2.32 497,400
February 2003 1,200 1,100 2.45 1.50 651,100
Source: Bloomberg Financial Services Commodities News, Medellin Stock Exchange,
and Colombia Stock Exchange.
ADRs evidencing ADSs are issuable by The Bank of New York, as Depositary,
pursuant to the Deposit Agreement, dated as of July 25, 1995, entered into by
BC, the Depositary, the owners of ADRs from time to time and the owners and
beneficial owners from time to time of ADRs, pursuant to which the ADSs are
issued. Copies of the Deposit Agreement are available for inspection at the
Corporate Trust Office of the Depositary, currently located at 101 Barclay
Street, New York, New York 10286, and at the office of Fiducolombia (S.A.), as
agent of the Depositary, currently located at Carrera 43A, No. 11A-44, Medellin,
Colombia. The Depositary's principal executive office is located at One Wall
Street, New York, New York 10286.
B. MARKETS
BC's ADSs, each of which represents the right to receive four Preference
Shares deposited in Colombia with the Custodian under the Deposit Agreement (as
defined below), have been listed on the NYSE since July 1995. The Preference
Shares have been listed on the Colombian Stock Exchange since July 1995. Through
the ADSs, the NYSE is the principal U.S. trading market for the Preference
Shares.
107
On September 30, 1998, BC filed a registration statement with the Commission to
register the Preference Shares issued in the Capitalization Program, in the form
of ADRs, for resale by the holders into the U.S. public market from time to
time. The SEC declared this registration statement effective on October 12,
2000.
On December 31, 2002, there were 398,259,608 Common Shares outstanding,
none of which were held of record by holders in the United States, and
178,435,787 Preference Shares outstanding, of which 136,743,128 were directly
held by record holders in the United States (represented by 34,185,782 ADSs).
Because certain of the Preference Shares and ADSs are held by nominees, the
number of record holders may not be representative of the number of beneficial
owners.
The Medellin Stock Exchange was the principal non-U.S. trading market for
the Preference Shares before the Stock Exchanges merged into the Colombian Stock
Exchange on July 3, 2001. As of December 31, 2002, the market capitalization for
Bancolombia's Preference Shares on the Colombian Stock Exchange was Ps 315,653
million. The Medellin Stock Exchange, founded in 1961, had 51.2% of aggregate
equity trading, based on value, on the Colombian Stock Exchanges during the six
months ended June 30, 2001. There are no official market makers or independent
specialists in the Medellin Stock Exchange or in the Colombian Stock Exchange to
assure market liquidity and, therefore, orders to buy or sell in excess of
corresponding orders to sell or buy will not be executed. The Colombian Stock
Exchange is relatively volatile compared to major world markets. The aggregate
equity market capitalization of the Colombian Stock Exchange as of December 31,
2002, was approximately Ps 31,231,059 million, with 110 companies listed as of
that date. A substantial portion of the trading on the Colombian Stock Exchanges
consists of trading in debt securities.
ITEM 10. ADDITIONAL INFORMATION.
A. MEMORANDUM AND ARTICLES OF ASSOCIATION
Reference is made to the information contained under the headings
"Description of Share Capital" and "Description of American Depositary Receipts"
in BC's Registration Statement on Form F-3, which was filed with the Commission
on September 29, 2000 (File No. 333-12658) and declared effective on October 12,
2000. All such information is incorporated by reference into this Annual Report.
B. EXCHANGE CONTROLS
The Central Bank consistently has made foreign currency available to
Colombian private sector entities to meet their foreign currency obligations.
Nevertheless, in the event of renewed shortages of foreign currency, there can
be no assurance that foreign currency would continue to be available to private
sector companies or that foreign currency needed by BC to service foreign
currency obligations could be purchased in the open market without substantial
additional cost.
The International Investment Statute of Colombia contained in Law 9 of
1991 and Decree 2080 of 2000 issued by Departamento Nacional de Planeacion, as
amended (the "Foreign Investment Law"), regulates the manner in which foreign
investors can participate in the Colombian securities markets and undertake
other types of investment, prescribes registration with the Central Bank of
certain foreign exchange transactions and specifies procedures pursuant to which
certain types of foreign investments are to be authorized and administered.
Each individual investor who deposits Preference Shares into the ADS
deposit facility for the purpose of acquiring ADSs (other than in connection
with or reacquisition of the ADSs pursuant to the ADS offerings) will be
required, as a condition to acceptance by Fiducolombia, as custodian of such
108
deposit, to provide or cause to be provided certain information to Fiducolombia,
to enable it to comply with the registration requirements under the foreign
investment regulations relating to foreign exchange. A holder of ADSs who
withdraws Preference Shares from the ADS deposit facility under certain
circumstances may be required to comply directly with certain registration and
other requirements under the foreign investment regulations. Under such
regulations, the failure of a non-resident investor to report or register
foreign exchange transactions relating to investments in Colombia with the
Central Bank on a timely basis may prevent the investor from obtaining
remittance rights, constitute an exchange control infraction and result in a
fine.
Under Colombian law and the by-laws of BC, foreign investors receive the
same treatment as Colombian citizens with respect to the ownership and the
voting of ADSs and Preference Shares. For a detailed discussion of ownership
restrictions see "Item 4. Information on the Company -- B. Business Overview --
Supervision and Regulation -- Ownership Restrictions".
C. TAXATION
Pursuant to Resolution 56 of 1992, issued by CONPES (Consejo Nacional de
Politica Economica y Social) the Deposit Agreement constitutes a Fondo
Institucional de Capital Extranjero (a "Foreign Institutional Capital Investment
Fund"). Under Law 223 of 1995, dividends paid to foreign institutional capital
investment funds are not subject to Colombian income, withholding, remittance or
other taxes, provided that such dividends are paid in respect of previously
taxed earnings of the Company. Therefore, provided that distributions are made
by BC to the holders of ADSs through the Depositary, all distributions by BC
made on account of Preference Shares to holders of ADRs evidencing ADSs who are
not resident in Colombia, as defined below, will be exempt from Colombian
income, withholding and remittance taxes, except in the case of distributions
paid out of non-taxed earnings of BC (which would bear a 35% Colombian tax that
BC would be required to withhold and pay over to the Colombian tax authorities).
Dividends paid to a holder of Preference Shares (as distinguished from the
ADSs representing such Preference Shares) who is not a resident of Colombia, as
defined below, and who holds the Preference Shares in his own name, rather than
through another institutional or individual fund, will be subject to Colombian
income taxes at a flat rate of 7% for 1998 and thereafter, which tax must be
withheld by the payor. However, if such dividends do not correspond to BC
profits that have been taxed at the corporate level, the applicable rate is 35%,
BC would in all such cases withhold and pay to the Colombian tax authorities,
within the legally prescribed period, the appropriate percentage of the amount
of such dividends, and would have no liability or obligation to any holder of
Preference Shares with respect to any amount properly so withheld and paid over.
In the event that a holder of ADSs who is not resident in Colombia chooses
to surrender its ADSs and withdraw the underlying Preference Shares, dividends
to such non-resident holder would be subject to withholding tax at the rates set
forth in the preceding paragraph, unless such non-resident holder takes the
necessary actions under Colombian law to hold such Preference Shares through
either an "institutional fund" or an "individual fund" under foreign investment
regulations, in which case dividends payable with respect to the Preference
Shares would receive the same preferential treatment accorded the ADSs.
For purposes of Colombian taxation, a natural person is a resident of
Colombia if he or she is physically present within Colombia for more than six
months during the calendar year or the six months are completed within that
taxable period. For purposes of Colombian taxation, a legal person other than a
natural person is a resident of Colombia if it is organized under the laws of
Colombia.
109
SALES AND OTHER DISPOSITIONS
Gain or loss realized by a non-resident of Colombia from the sale or other
disposition of ADSs, including by way of redemption or liquidation, will not be
subject to Colombian taxation, regardless of the place at which such sale or
disposition occurs. Gain or loss realized by a non-resident of Colombia from the
sale or other disposition of Preference Shares including by way of redemption or
liquidation (as distinguished from sales or other dispositions of ADSs
representing such Preference Shares) will not be subject to Colombian taxation
provided the sale or other disposition is effected on or through the facilities
of a recognized stock exchange. Deposits and withdrawals of Preference Shares in
exchange for ADSs will not be subject to Colombian taxation.
In all cases in which the gain or loss realized upon a sale or other
disposition of Preference Shares is subject to Colombian taxation, such taxation
will correspond to a 14% income tax applied over the gain and a 1% remittance
tax applied over the difference once the 14% is subtracted. Such gain or loss
will be measured by the difference, if any, between the amount realized upon the
sale or disposition and the cost of acquisition plus inflation adjustments
through percentage increases of the Consumer Price Index for employees of the
Preference Shares or ADSs, as the case may be, sold or disposed of by the
holder. The Tax Basis of Preference Shares withdrawn by a holder in exchange for
ADSs immediately after such withdrawal shall equal the holder's Tax Basis in the
ADSs exchanged for such Preference Shares immediately before such withdrawal.
The Tax Basis of ADSs received by a holder in exchange for a deposit of
Preference Shares immediately after such deposit shall equal the holder's Tax
Basis in the Preference Shares deposited in exchange for such ADSs immediately
before such deposit. The Tax Basis of additional Preference Shares or ADSs
distributed to a holder of Preference Shares or ADSs on account thereof, whether
by stock dividend, revaluation of the assets of the Company or otherwise, shall
equal the value of such additional Preference Shares or ADSs at the time of such
dividend or revaluation.
OTHER TAX CONSIDERATIONS
As of the date of this report, there is no income tax treaty and no
inheritance or gift tax treaty in effect between Colombia and the United States.
Transfers of ADSs to non-residents of Colombia by gift or inheritance are not
subject to Colombian gift or inheritance taxes. Transfers of Preference Shares
(as distinguished from the ADSs representing such Preference Shares) will be
subject to Colombian gift or inheritance tax at a flat rate of 35% of the
unrealized appreciation, if any, in the value of the Preference Shares
transferred. There are no Colombian stamp, issue, registration, transfer or
similar taxes or duties payable by holders of Preference Shares or ADSs.
For a more detailed description of the tax consequences relating to
U.S. holders, see the information contained under the heading "Taxation" in BC's
Registration Statement on Form F-3, which was filed with the Commission on
September 29, 2000 (File No. 333-12658) and declared effective on October 12,
2000. All such information is incorporated by reference into this Annual Report.
D. PUBLICLY AVAILABLE DOCUMENTS
Bancolombia files periodic reports and other information with the
Commission. You may read and copy any document that Bancolombia files at the
Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Some of our SEC filings are also available to the public from the SEC's
website at http://www.sec.gov.
110
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is contained in "Item 5. - Operating
and Financial Review and Prospects" herein under the headings "Interest Rate
Sensitivity," "Interest Rate Market Risk," "Exchange Rate Sensitivity" and
"Liquidity and Funding."
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not Applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
None.
ITEM 15. CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of the filing of this annual
report, an evaluation was carried out, under the supervision and with the
participation of BC's management, including President Jorge Londono Saldarriaga,
and Vice-President Jaime Alberto Velasquez Botero of the effectiveness of the
design and operation of our "disclosure controls and procedures" as defined in
Exchange Act Rules 13a-14(c) and 15d-14(c). Our disclosure controls and
procedures are designed to ensure that the financial and non-financial
information required to be disclosed in reports that we file or submit under the
Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms. Based upon that evaluation, our
management, including the President and Vice-President Jaime Alberto Velasquez
Botero, concluded that our disclosure controls and procedures are effective.
There have been no significant changes in our internal controls or other
factors that could significantly affect internal controls subsequent to the date
of the evaluation, nor were any corrective actions taken with regard significant
deficiencies and material weaknesses.
ITEM 16. [RESERVED]
PART III-
FINANCIAL STATEMENTS.
We have responded to Item 18 in lieu of responding to this Item.
ITEM 17. FINANCIAL STATEMENTS.
Reference is made to pages F-1 through F-94.
111
ITEM 18. EXHIBITS
The following exhibits are filed as part of this annual report.
1. Corporate charter (estatutos) of the registrant, as amended through
April 22, 2002, together with an English translation.
2. Consent of KPMG Limited.
3.1 Stock Subscription Agreement, dated as of March 28, 2000, by and
among Bancolombia S.A., Capital International Global Emerging
Markets Private Equity Fund, L.P., and certain other investors
listed on Schedule A thereto.
3.2 Shareholders Agreement, dated as of March 28, 2000, by and among
Bancolombia S.A., Capital International Global Emerging Markets
Private Equity Fund, L.P., and certain other investors listed on
Schedule A thereto.
3.3 Registration Rights Agreement, dated as of March 28, 2000, by and
among Bancolombia S.A., Capital International Global Emerging
Markets Private Equity Fund, L.P., and certain other investors
listed on Schedule A thereto.
Exhibits 3.1, 3.2 and 3.3 have been filed with the Commission together
with Bancolombia's Annual Report on Form 20-F for the fiscal year 1999 and
are incorporated by reference into this Annual Report.
112
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this Annual Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: March 27, 2003
BANCOLOMBIA S.A.
By: /s/JAIME ALBERTO VELASQUEZ B.
-----------------------------
Name: Jaime Alberto Velasquez B.
Title: Vice President, Finance
CERTIFICATION
I, Jorge Londono Saldarriaga, certify that:
1. I have reviewed this annual report on Form 20-F of Bancolombia S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that
could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 27,2003
Name: Jorge Londono Saldarriaga
Title: Chief Executive Officer
CERTIFICATION
I, Jaime Alberto Velasquez Botero, certify that:
1. I have reviewed this annual report on Form 20-F of Bancolombia S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that
could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date March 27, 2003
Name: Jaime Alberto Velasquez Botero
Title: Chief Financial Officer
[This page intentionally left blank]
F-1
[KPMG LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Bancolombia S.A.:
We have audited the accompanying consolidated balance sheets of Bancolombia
S.A., and subsidiaries as of December 31, 2001 and 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 2002. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bancolombia S.A. and
subsidiaries as of December 31, 2001 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in Colombia for financial institutions.
As discussed in Note 2b to the financial statements, the Colombia
Superintendency of Banking issued External Circular 014 which eliminated
inflation accounting effective January 1, 2001, and, as discussed in Note 2g,
issued External Circular 033 which changes the method for classification and
valuation of investment securities, effective September 2, 2002.
Accounting practices prescribed by the Colombia Superintendency of Banking, as
described in Note 2 to the consolidated financial statements, vary in certain
significant respects from accounting principles generally accepted in the United
States of America. The application of accounting principles generally accepted
in the Untied States of America would have affected consolidated results of
operations and consolidated stockholders' equity for each of the years in the
three-year period ended December 31, 2002, to the extent summarized in Note 31
to the consolidated financial statements.
/s/ KPMG
Medellin, Colombia
January 21, 2002, except as to the 2003 column in note 21 and note 31,
which are as of March 12, 2003
F-2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Consolidated Balance Sheets - December 31, 2001 and 2002 F-4
Consolidated Statement of Operations - Years Ended
December 31, 2000, 2001 and 2002 F-6
Consolidated Statements of Stockholders' Equity - Years
Ended December 31, 2000, 2001 and 2002 F-8
Consolidated Statements of Cash Flows - Years Ended
December 31, 2000, 2001 and 2002 F-9
Notes to Consolidated Financial Statements F-11
F-3
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2002
(Stated in millions of pesos and thousands of U.S. dollars)
Assets 2001 2002 2002
------ ------------ ------------ ------------
US Dollar
(Unaudited)
Cash and cash equivalents:
Cash and due from banks (Note 4) Ps 536,813 Ps 643,405 US$ 228,572
Overnight funds 176,666 207,684 73,780
------------ ------------ ------------
Total cash and cash equivalents 713,479 851,089 302,352
------------ ------------ ------------
Investment securities (Note 5):
Trading securities 2,720,718 1,688,404 599,812
Nontrading securities:
Mandatory and reserve-against-deposits
investments 130,525 -- --
Equity securities, net 109,925 -- --
Permanent investments 23,384 -- --
Available for sale, net -- 2,047,073 727,230
Held to maturity, net -- 607,981 215,988
------------ ------------ ------------
Total investment securities 2,984,552 4,343,458 1,543,030
------------ ------------ ------------
Loans (Note 6 and 27):
Commercial 4,354,031 5,219,460 1,854,232
Consumer 961,663 870,898 309,390
Small business loans -- 68,863 24,463
Mortgage 34,511 38,094 13,533
------------ ------------ ------------
5,350,205 6,197,315 2,201,618
Less allowance for loan losses (Note 7) (271,729) (332,324) (118,059)
------------ ------------ ------------
Loans, net 5,078,476 5,864,991 2,083,559
------------ ------------ ------------
Accrued interest receivable on loans:
Accrued interest receivable on loans 104,692 98,533 35,004
Less allowance for accrued interest losses (Note 7) (27,011) (15,074) (5,355)
------------ ------------ ------------
Interest accrued, net 77,681 83,459 29,649
Customers' acceptances and derivatives (Note 8) 39,907 (15,662) (5,564)
Accounts receivable, net (Note 9 and 27) 106,764 181,663 64,536
Premises and equipment, net (Note 10) 320,080 317,724 112,873
Leases, net (Note 10) 241,866 341,791 121,422
Prepaid expenses, deferred charges and
other assets (Note 11) 395,271 293,959 104,430
Foreclosed assets, net (Note 12) 74,656 77,299 27,461
Reappraisal of assets (Note 13) 241,727 259,811 92,299
------------ ------------ ------------
Ps 10,274,459 Ps 12,599,582 US$ 4,476,047
============ ============ ============
Memorandum accounts (Note 22) Ps 40,117,252 Ps 46,798,693 US$ 16,625,407
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2002
(Stated in millions of pesos and thousands of U.S. dollars)
Liabilities and Stockholders' Equity 2001 2002 2002
------------------------------------ ----------- ----------- -----------
US Dollar
(Unaudited)
Deposits (Note 27)
Non-interest bearing:
Checking accounts Ps 1,709,575 Ps 1,876,026 US$ 666,465
Other 66,693 94,573 33,597
Interest bearing:
Checking accounts 608,087 815,367 289,662
Time deposits 3,426,629 3,603,466 1,280,145
Savings deposits 1,769,864 2,398,726 852,156
----------- ----------- -----------
Total deposits 7,580,848 8,788,158 3,122,025
----------- ----------- -----------
Overnight funds 202,994 610,158 216,761
Bank acceptances outstanding 31,066 31,050 11,031
Interbank borrowings (Note 14) 399,595 403,962 143,509
Borrowings from domestic development banks (Note 15) 431,059 713,053 253,315
Accounts payable 271,297 355,772 126,389
Accrued interest payable 81,323 73,487 26,106
Other liabilities (Note 16) 135,623 170,572 60,596
Long-term debt (Note 17) 8,523 62,782 22,304
Accrued expenses (Note 18) 102,501 55,104 19,576
Minority interest in consolidated subsidiaries 59,179 51,136 18,166
----------- ----------- -----------
Total liabilities 9,304,008 11,315,234 4,019,778
----------- ----------- -----------
Stockholders' equity (Notes 19 and 21):
Subscribed and paid in capital:
Nonvoting preference shares 101,579 101,579 36,086
Common shares 253,540 253,540 90,071
Retained earnings:
Appropriated (Note 20) 438,718 566,187 201,140
Unappropriated 156,533 210,380 74,738
Reappraisal of assets (Note 13) 20,081 37,368 13,275
Gross unrealized gain or loss on investments -- 115,294 40,959
----------- ----------- -----------
Stockholders' equity 970,451 1,284,348 456,269
Commitments and contingencies (Note 23)
----------- ----------- -----------
Ps 10,274,459 Ps 12,599,582 US$ 4,476,047
=========== =========== ===========
Memorandum accounts (Note 22) Ps 40,117,252 Ps 46,798,693 US$16,625,407
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2000, 2001, 2002
(Stated in millions of pesos and thousands of U.S. dollars,
except per share data)
2000 2001 2002 2002
--------- --------- --------- ---------
(Unaudited)
Interest income:
Loans in local currency Ps 589,911 Ps 747,543 Ps 671,657 US$ 238,609
Loans in foreign currency 88,672 63,903 54,455 19,345
--------- --------- --------- ---------
Total interest on loans 678,583 811,446 726,112 257,954
Investment securities 145,575 48,658 247 88
Overnight funds and other (1) 18,475 21,653 11,825 4,201
--------- --------- --------- ---------
Total interest income 842,633 881,757 738,184 262,243
--------- --------- --------- ---------
Interest expense:
Checking accounts 31,540 22,327 12,975 4,609
Time deposits 244,911 304,012 260,278 92,465
Savings deposits 87,629 113,156 106,825 37,950
--------- --------- --------- ---------
Total interest on deposits 364,080 439,495 380,078 135,024
Interbank borrowings 42,094 20,160 9,404 3,341
Borrowings from domestic development banks 41,530 40,722 49,317 17,520
Amortized premiums on investments 7,714 27,120 26,645 9,466
Long-term debt 3,437 1,577 779 277
--------- --------- --------- ---------
Total interest expense 458,855 529,074 466,223 165,628
--------- --------- --------- ---------
Net interest income 383,778 352,683 271,961 96,615
--------- --------- --------- ---------
Provision for loans and accrued interest losses,
net of recoveries (Note 7) 152,296 73,953 115,154 40,909
Provision for foreclosed assets and other assets 112,219 63,537 71,212 25,298
--------- --------- --------- ---------
Net interest income after provision for loans
and accrued interest losses 119,263 215,193 85,595 30,408
--------- --------- --------- ---------
Other operating income:
Fees and service charges, net (Note 24) 218,035 265,382 292,308 103,843
Foreign exchange gains, net 12,451 20,345 93,371 33,170
Dividend income (Note 5) 5,223 2,665 19,491 6,924
Forward contracts (4,020) 52,890 (62,612) (22,243)
Financing leases 33,671 35,410 39,596 14,067
Gains on sales of investments, net 30,335 159,883 372,793 132,436
Revenues from commercial subsidiaries 32,362 47,619 52,759 18,743
Other 13,914 35,994 21,271 7,557
--------- --------- --------- ---------
Total other operating income 341,971 620,188 828,977 294,497
--------- --------- --------- ---------
F-6
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2000, 2001, 2002
(Stated in millions of pesos and thousands of U.S. dollars,
except per share data)
2000 2001 2002 2002
--------- --------- --------- ---------
(Unaudited)
Operating expenses:
Salaries and employee benefits Ps 230,651 Ps 250,456 Ps 286,307 US$ 101,712
Severance benefits 27,192 35,014 29,575 10,507
Expense for transition to new severance
benefits law (Note 16) 124 -- -- --
Administrative and other expenses (Note 25) 274,966 333,321 362,495 128,778
Depreciation (Note 10) 40,591 35,965 34,444 12,236
Losses on sales of loans, net -- -- 9,952 3,535
--------- --------- --------- ---------
Total operating expenses 573,524 654,756 722,773 256,768
--------- --------- --------- ---------
Merger expenses 44,828 42,207 33,028 11,733
Non-operating income (expense):
Other income 92,651 94,597 131,026 46,547
Other expense (24,859) (43,597) (51,239) (18,203)
--------- --------- --------- ---------
Total non-operating income 67,792 51,000 79,787 28,344
Net monetary inflation adjustment (Note 26) 4,209 -- -- --
--------- --------- --------- ---------
Income (loss) before minority interest and
provision for income taxes (85,117) 189,418 238,558 84,748
Minority interest (767) (1,310) 14,440 5,130
Provision for income taxes (Note 18) 28,106 31,575 42,618 15,140
--------- --------- --------- ---------
Net income (loss) Ps (113,990) Ps 156,533 Ps 210,380 US$ 74,738
========= ========= ========= =========
Earnings (loss) per share Ps (210) Ps 271 Ps 365 US$ 0.13
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
(1) Includes Interest Income on Mandatory Deposits.
F-7
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2000, 2001 and 2002
(Stated in millions of pesos and thousands of U.S. dollars,
except share and per share data)
Non Voting Preference Shares Voting Common Shares
---------------------------- ----------------------------
Number Value Number Value
----------- ----------- ----------- -----------
Balance at December 31, 1999 58,060,562 39,477 280,988,338 193,040
Net loss -- -- -- --
Transfer to appropriated retained earnings -- -- -- --
Issuance of preference and common shares 120,375,225 62,102 117,271,270 60,500
Valuation of investment -- -- -- --
Decrease during year -- -- -- --
Other -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 2000 178,435,787 101,579 398,259,608 253,540
Net Income -- -- -- --
Transfer to appropriated retained earnings -- -- -- --
Valuation of investment -- -- -- --
Dividends Declared -- -- -- --
Other -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 2001 178,435,787 101,579 398,259,608 253,540
Net Income -- -- -- --
Transfer to appropriated retained earnings -- -- -- --
Valuation of investment -- -- -- --
Dividends Declared -- -- -- --
Other -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 2002 178,435,787 Ps 101,579 398,259,608 Ps 253,540
=========== =========== =========== ===========
Balance at December 31, 2002 (Unaudited) 178,435,787 US$ 36,086 398,259,608 US$ 90,071
=========== =========== =========== ===========
Retained earnings
-----------------------------
Appro- Unappro-
priated priated
----------- -----------
Balance at December 31, 1999 674,084 (240,167)
Net loss -- (113,990)
Transfer to appropriated retained earnings (240,167) 240,167
Issuance of preference and common shares 134,861 --
Valuation of investment -- --
Decrease during year -- --
Other 8,619 --
----------- -----------
Balance at December 31, 2000 Ps 577,397 (113,990)
Net Income -- 156,533
Transfer to appropriated retained earnings (113,990) 113,990
Valuation of investment -- --
Dividends Declared (20,760) --
Other (3,929) --
----------- -----------
Balance at December 31, 2001 438,718 156,533
Net Income 210,380
Transfer to appropriated retained earnings 156,533 (156,533)
Valuation of investment -- --
Dividends Declared (48,442) --
Other 19,378 --
----------- -----------
Balance at December 31, 2002 Ps 566,187 Ps 210,380
=========== ===========
Balance at December 31, 2002 (Unaudited) US$ 201,140 US$ 74,738
=========== ===========
Surplus
-------------------------------------------------
Gross
unrealized
Cumulative gain or Total
Reappraisal translation loss on stockholders'
of assets adjustments investments equity
----------- ----------- ----------- -----------
Balance at December 31, 1999 95,422 7,943 -- 769,799
Net loss -- -- -- (113,990)
Transfer to appropriated retained earnings -- -- -- --
Issuance of preference and common shares -- -- -- 257,463
Valuation of investment (48,065) -- -- (48,065)
Decrease during year -- (7,943) -- (7,943)
Other -- -- -- 8,619
----------- ----------- ----------- -----------
Balance at December 31, 2000 Ps 47,357 -- -- 865,883
Net Income -- -- -- 156,533
Transfer to appropriated retained earnings -- -- -- --
Valuation of investment (27,276) -- -- (27,276)
Dividends Declared -- -- -- (20,760)
Other -- -- -- (3,929)
----------- ----------- ----------- -----------
Balance at December 31, 2001 20,081 -- -- 970,451
Net Income -- -- -- 210,380
Transfer to appropriated retained earnings -- -- -- --
Valuation of investment 17,287 -- 115,294 132,581
Dividends Declared -- -- -- (48,442)
Other -- -- -- 19,378
----------- ----------- ----------- -----------
Balance at December 31, 2002 Ps 37,368 PS -- Ps 115,294 Ps 1,284,348
=========== =========== =========== ===========
Balance at December 31, 2002 (Unaudited) US$ 13,275 US$ -- US$ 40,959 US$ 456,269
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-8
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 2001, 2002
(Stated in millions of pesos and thousands of U.S. dollars)
2000 2001 2002 2002
--------- --------- --------- ---------
(Unaudited)
Cash flows from operating activities:
Net income (loss) Ps (113,990) Ps 156,533 Ps 210,380 US$ 74,738
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation 40,591 35,965 34,444 12,236
Amortization 60,008 67,177 57,943 20,584
Minority interest (16,147) 18,027 (8,043) (2,857)
Provision for loans, accrued interest and
accounts receivable losses 287,577 95,497 153,004 54,355
Provision for foreclosed assets 81,630 21,321 17,236 6,123
Provision for losses on investment
securities and equity investments 7,816 11,446 47,722 16,953
Provision for premises and equipment 19,163 24,924 3,548 1,260
Provision for other assets 3,610 5,732 2,552 907
Reversal of provision for investments (161) (3,076) (10,022) (3,560)
Reversal of provision for loans and
accounts receivable (135,281) (21,544) (37,850) (13,446)
Reversal of provision for foreclosed assets (16,582) (8,248) (15,333) (5,447)
Reversal of provision for other assets (5,466) (534) (1,534) (545)
Reversal of provision for premises and equipment (1,135) (9,606) (7,905) (2,808)
Unrealized foreign exchange gain (7,943) -- -- --
Loss (gain) on sales of premises
and equipment (1,181) (2,236) 369 131
Loss (gain) on sales on investments securities (9,730) 76 161 57
Realized and unrealized loss (gain) on
derivative financial instruments 4,020 (52,890) 1,299 462
Loss (gain) on sales on foreclosed assets 4,122 3,106 7,121 2,530
Valuation (gain) loss on investment securities (163,640) (59,055) 37,736 13,406
Foreclosed assets donation 5,522 4,280 8,840 3,141
Net monetary inflation adjustment (4,209) -- -- --
(Increase) decrease in accounts receivable 14,619 (638) (75,496) (26,820)
Increase in other assets (144,364) (110,197) 56,571 20,097
Increase (decrease) in accounts payable 46,482 131,824 76,639 27,226
Increase (decrease) in other liabilities (10,994) 5,040 34,950 12,416
Other 69,088 58,831 (47,397) (16,838)
--------- --------- --------- ---------
Net cash provided by operating activities 13,425 371,755 546,935 194,301
--------- --------- --------- ---------
(Continued)
F-9
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 2001, 2002
(Stated in millions of pesos and thousands of U.S. dollars)
2000 2001 2002 2002
----------- ----------- ----------- -----------
Unaudited
Cash flows from investing activities:
Increase in loans (902,025) (334,665) (947,739) (336,688)
(Increase) decrease in customers' acceptances 3,661 38,567 54,254 19,274
Proceeds from sales of premises and equipment 73,799 6,782 15,048 5,346
Proceeds from sales of foreclosed assets 44,126 19,740 24,743 8,790
Purchases of premises and equipment 19,574 (92,771) (143,073) (50,827)
(Purchases) sales of investment securities (53,241) (1,419,345) (1,319,241) (468,665)
Proceeds from sales of long term investments 20,836 60,728 32 11
----------- ----------- ----------- -----------
Net cash used in investing activities (793,270) (1,720,964) (2,315,976) (822,759)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Shares issued Ps 257,463 Ps -- Ps -- US$ --
Dividends paid -- (20,760) (48,442) (17,209)
Increase in deposits 648,886 1,464,826 1,207,310 428,901
Increase (decrease) in long-term debt 2,067 (15,412) 54,258 19,275
Increase (decrease) in overnight funds 25,781 (8,770) 407,164 144,646
Increase (decrease) in interbank borrowings and
borrowings from domestic development banks (98,510) (77,448) 286,361 101,731
----------- ----------- ----------- -----------
Net cash provided by financing activities 835,687 1,342,436 1,906,651 677,344
----------- ----------- ----------- -----------
Increase in cumulative translation adjustments and
effect of revaluing to constant pesos (55,842) -- -- --
----------- ----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (2,293) (6,773) 137,610 48,886
Cash and cash equivalents at beginning of year 722,545 720,252 713,479 253,466
----------- ----------- ----------- -----------
Cash and cash equivalents at end of year Ps 720,252 Ps 713,479 Ps 851,089 US$ 302,352
=========== =========== =========== ===========
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest Ps 767,209 Ps 517,123 Ps 472,795 US$ 167,962
=========== =========== =========== ===========
Income taxes Ps 4,804 Ps 1,130 Ps 6,892 US$ 2,448
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-10
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(1) ORGANIZATION AND BACKGROUND
Bancolombia S.A., ("the Bank") previously known as "Banco Industrial
Colombiano S.A." is a private commercial bank incorporated under
Colombian law on January 24, 1945. On April 3, 1998, Banco Industrial
Colombiano S.A. merged with Banco de Colombia S.A., with the surviving
entity being renamed Bancolombia S.A. The registered office of the Bank
is in Medellin.
The Bank has 6,364 employees and operates through 340 branches.
The attached financial statements consolidate the assets, liabilities,
earnings, contingent accounts and memorandum accounts of the Bank and
subsidiaries in which it holds, directly or indirectly, 50% or more of
the outstanding voting shares. The consolidated subsidiaries are:
PARTICIPATION DATE OF
ENTITY LOCATION BUSINESS PERCENTAGE CREATION
------ -------- -------- ---------- --------
Almacenes Generales de Deposito
Mercantil S.A. Almacenar Colombia Warehousing 98.25% February 1953
Fiducolombia S.A. Colombia Trust 85.93% January 1992
Bancolombia Panama S.A. Panama Banking 100% February 1973
Bancolombia Cayman S.A. Cayman Islands Banking 100% August 1987
Leasing Colombia S.A. Colombia Leasing 99.98% December 1978
Colcorp S.A. Corporacion
Financiera Colombia Finance 100% July 1994
Comisionista de Colombia S.A. Colombia Securities 99.99% December 1991
Brokerage
Abocol S.A. Colombia Chemical 92.14% March 1960
Valores Simesa S.A Colombia Various 71.69% December 2000
Comercial
investments
Inmobiliaria Bancol S.A. Colombia Real estate broker 98.95% June 1995
Fundicom S.A. Colombia Metals engineering 79.86% May 2000
Todo UNO Colombia Colombia e-commerce 53.92% June 2001
Unicargo de Colombia S.A. Colombia Freight service 98.35% August 1994
C.T.I. Cargo S.A. Colombia Freight service 93.32% June 1994
Sistema de Inversiones y
Negocios S.A. Panama Comercial entity 100% September 1975
Sinesa Holding Company British Virgin Is Holding 100% June 1988
Future Net Inc. Panama e-commerce 60.02% November 2000
Compania Metalurgica
Colombiana S.A COMECOL (1) Colombia Metals engineering 39.62% December 1996
Sociedad Portuaria Mamonal S.A. Colombia Customs office 92.52% August 1991
Abocol Costa Rica S.A. Costa Rica Chemical products
comercial 92.25% December 2001
Fertillanos Ltda. Colombia Chemical Products 55.28% October 2001
commercial
(1) Controlled through other subsidiaries
F-11
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF CONSOLIDATED
FINANCIAL STATEMENT PRESENTATION
(A) CONSOLIDATION AND PRESENTATION
Accounting practices and the preparation of financial statements of the
Bank and its Subsidiaries follow the special regulations of the Colombian
Superintendency of Banking, or, in the absence of such regulations, the
accounting practices generally accepted in Colombia.
For consolidation purposes, financial statements of foreign subsidiaries
were adjusted as required by Colombian regulations with regard to
investments, loans and leased assets. The Bank also unified accounting
policies related to inflation adjustments with the Colombian
Superintendency of Banking.
The Bank consolidates companies in which it holds, directly or
indirectly, 50% or more of outstanding voting shares. The Bank's
subsidiary Bancolombia Panama S.A. sub-consolidates Bancolombia Cayman
S.A., Sistema de Inversiones y Negocios S.A., Sinesa Holding Company and
Future Net. The Bank's subsidiary Almacenar S.A. consolidates Unicargo de
Colombia S.A. and C.T.I. Cargo S.A. The subsidiary Colcorp S.A.
consolidates Inmobiliaria Bancol S.A., Abocol S.A., Valores Simesa (a
company resulting from a spin-off by Simesa S.A. at December 31, 2000),
Fundicom S.A. and Todo Uno Colombia.
The Bank's subsidiary Colcorp S.A. Corporacion Financiera has investments
in Industrias Metalmecanicas Forum S.A. and Venrepa C.A. which represent
0.35% of the consolidated portfolio of the Bank; these companies are not
included in the subconsolidation since the intention is to hold them only
temporarily. There are provisions of 100% against Forum and 60% against
Venrepa in the Colcorp financial statements.
The consolidated financial statements are prepared for presentation to
the stockholders, but are not taken as a basis for the distribution of
dividends or appropriation of profits.
Intercompany operations and balances are eliminated upon consolidation.
Under Columbian GAAP when new financial statement classifications are
adopted, prior year financial statements are not restated to reflect
the new classifications.
(B) INFLATION ACCOUNTING
From January 1, 1992 to December 31, 2000, the consolidated financial
statements were adjusted for inflation based on the variation in the CPI
for middle-income earners. The adjustment was applied monthly to
non-monetary assets, equity (except for the revaluation surplus and
exchange adjustment) contingent accounts and memorandum accounts. No
adjustment was made to income, costs or expenses, and the financial
statements for the preceding period did not have to be re-expressed.
Beginning January 1, 2001, the Superintendency of Banking eliminated
inflation adjustments for accounting purposes. This led to an increase in
consolidated expenses of Ps 18,578 in 2001.
F-12
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(C) CONVERSION OF FOREIGN CURRENCY TRANSACTIONS AND BALANCES
As an authorized exchange dealer the Bank and its Colombian subsidiaries
are authorized by the Superintendency of Banking to make direct currency
purchases and sales on the market.
Operations in currencies other than dollars are translated into dollars
and re-expressed in Colombian pesos at the average Market Reference Rate
(TRM) published by the Superintendency. The rates were $2,186.21 on
December 31, 2000, $2,306.90 on December 31, 2001 and $2,814.89 on
December 31, 2002.
The foreign currency assets and liabilities of subsidiaries included in
the consolidation were converted to Colombian pesos using the TRM at the
closing date. Equity accounts were converted using historic exchange
rates and earnings statement accounts at $2,087.92, $2,299.89 and
$2,504.68 per dollar, respectively. These were the average TRMs between
January 1 and December 31, 2000, January 1 and December 31, 2001 and
January 1 and December 31, 2002 respectively.
(D) CASH AND CASH EQUIVALENTS
The statement of cash flows was prepared using the indirect method.
Inter-bank funds sold with reselling agreements are considered to be cash
equivalents for the purposes of this statement.
(E) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(F) INTERBANK FUNDS SOLD AND RESELLING AGREEMENTS
This account records the funds placed by the Bank in another financial
institution with investment collateral, using surplus liquidity, with or
without a commitment to resell, at terms of up to 30 days. The account
also contains overnight deposits with banks abroad using Bank funds
deposited outside Colombia.
Operations not repaid within 30 days are reclassified as investments or
loans, as the case may be.
The difference between present value (cash received) and future value
(resale price) is income booked to financial yields.
(G) INVESTMENTS
This account includes investments acquired by the Bank and its
subsidiaries to maintain secondary liquidity, to acquire direct or
indirect control of any company, to satisfy requirements of law or
regulation, or simply to eliminate or significantly reduce market risks
to which assets, liabilities or
F-13
other balance sheet items are exposed.
1. CLASSIFICATION
As of September 2002, as required by the Superintendency of Banking,
investments are classified as "trading investments", "investments
available for sale" and "investments held to maturity". The first two of
these groups are further subclassified as "debt" or "equity" investments.
Debt investments are those which make the holder the creditor of the
issuer, whereas equity investments are those which make the holder a
part-owner of the issuer.
Up to and including August 2002, investments were classified as
"marketable", "non-marketable", "held to maturity", "permanent" or
"hedging". Marketable and non-marketable investments were further
sub-classified into "fixed-income" and "variable-income" investments.
TRADING SECURITIES
Trading investments are those acquired for the main purpose of obtaining
profits from fluctuations in short-term prices.
HELD TO MATURITY
Investments "held to maturity" are debt securities acquired with the
stated purpose and legal, contractual, financial and operational capacity
to hold them until maturity or redemption. They may not be used for
liquidity operations unless permitted by the Superintendency.
AVAILABLE FOR SALE
These are the investments which do not fall into either of the other two
classifications, for which the investor has the stated intention and
legal, contractual, financial, and operational capacity to hold them for
at least one year from the date of this classification.
This classification covers equity investments with low exchange turnover
or no exchange turnover or which are unquoted; and those held as Parent
or controlling stockholder of the issuer. There is no one-year minimum
holding period required for the purposes of sale.
2. VALUATION
The purpose of valuation is to calculate and disclose a fair market price
for a given investment.
F-14
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2.1 DEBT SECURITIES
Debt securities are valued daily and the result of the valuation is recorded
daily. The Bank and its subsidiaries use the following parameters to establish
the value of these investments:
- Simple projection, to establish future funds flows;
- The initial margin is established on date of purchase;
- The Superintendency's base rate TBS is used for fixed-rate securities.
Debt securities held to maturity are valued exponentially on the basis of the
internal rate of return calculated at the time of purchase.
2.2 EQUITY SECURITIES
Equity investments are valued monthly and the results of the valuation are
recorded monthly. They are valued on the level of exchange turnover at the time
of valuation, as follows:
- High-turnover, on the basis of the daily weighted average trading price
published by the exchange.
- Medium-turnover: based on the average price published by the exchange,
being the weighted average trading price on the last five days on which
the security has been traded.
- Low/minimum-turnover or unquoted: increases or decreases are made in
accordance with the percentages held by the investor, on the basis of
variations in equity value in the most recent audited financial
statements, which may not be more than six months old at the time of
valuation; or more recent statements if available.
3. RECORDING
3.1 TRADING INVESTMENTS
The difference between current and previous market value is added to or
subtracted from the value of the investment and credited or charged to earnings.
3.2 INVESTMENTS HELD TO MATURITY
Present value is added to the value of the investment and credited to earnings.
3.3 INVESTMENTS AVAILABLE FOR SALE
3.3.1 DEBT SECURITIES
Changes to the values of these securities are recorded as follows:
F-15
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
- The difference between present value on valuation date and the previous
value increases the value of the investment and is credited to earnings.
The present value is arrived at by applying an exponential calculation
based on an internal rate of return established at the time of purchase.
- The market value of UVR-indexed (Unidades de valor real ("UVR") is an
inflation-adjusted monetary index generally used for pricing home-mortgage
loans) and fixed-rate Treasury paper is calculated by application of the
base rate, which are the UVR internal rate of return (IRUVR) and the
Treasury rate for CETES(Curva estimada de los TES) considered curve of the
TES-CETES, respectively.
Subsequently, the difference between market value and present value affects the
investment and a separate account in the equity section.
3.3.2 EQUITY INVESTMENTS
The changes in the value of these securities are recorded as follows:
- If market value is higher than book value the difference is first credited
to the provision or write-down until that account is exhausted. Any excess
is recorded as revaluation surplus.
- If market value is lower than book value, the difference is first charged
to the revaluation surplus until that is exhausted. Any excess is charged
to write-downs of that investment in the equity section.
Up to August 2002, the Bank and its subsidiaries used the following methods to
value variable-income investments:
Non-trading and permanent investments with low/minimum exchange turnover or
unquoted: equity value, on financial statements not more than 12 months old at
then time of valuation, or the most recent known account.
Trading investments of high and medium turnover, on the basis of the weighted
average trading price on the exchange over at least the last 10 and at most the
last 90 days. If there was no trading, the latest value recorded is maintained.
4. PROVISIONS OR LOSSES DUE TO CREDIT RISK CLASSIFICATION
Investments are classified for credit risk as A-Normal Risk, B-Acceptable Risk,
Above Normal, C-Appreciable Risk, D-Significant Risk or E-Risk of
Unrecoverability.
The value of debt and equity investments with low/minimum turnover or unquoted
is adjusted at each valuation date in terms of risk, as follows:
- Investments classified as B may not be recorded for more than 80% of the
face value of debt
F-16
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
securities, net of any amortizations made, or of the cost of acquisition
of equity securities. Investments classified as C may not be recorded for
more than 60% of that value; those classified as D for not more than 40%;
and those classified as E are written down to zero.
- Government and FOGAFIN Fondo de Garantias de Instituciones Financieras
(Financial Institutions Guarantee Fund, "Fogafin") issues and issues
guaranteed by them, and Central Bank issues, are not subject to these
adjustments.
Until August 25, 2002 investments classified as C could not be recorded for more
than 80% of face value, including uncollected yields or excluding yields
received in advance, for fixed-income securities or equity value for variable
income investments; and not for more than 50% of that value for investment
classified as D. Investments classified as E were written down to zero.
(H) LOANS AND LEASING CONTRACTS
These accounts record loans and leasing contracts made by the Bank and its
subsidiaries in the various modes permitted by local rules and regulations. They
are funded by own capital, public deposits and other internal and external
sources.
Loans are recorded at face value, except for factoring operations which are
recorded at cost; and foreign currency operations, which are translated into
pesos at each month end exchange rate.
Credit appraisals for each type of loan will in the future be undertaken using a
new method devised by the Bank and its subsidiaries, currently in development
and due to be completed in 2003. The method takes account of probabilities of
deterioration of loans and estimates of expected losses.
Until the new method is approved by the Superintendency and introduced, the Bank
and its subsidiaries will continue to apply the Superintendency's existing
regulations.
1. CLASSIFICATION
Beginning on January 1, 2002 loans were classified as follows:
HOME MORTGAGE LOANS
These are loans made to individuals for the purchase of new or used housing, or
the building of a home, all in accordance with Law 546/1999. This type of loan
is not of material importance, and is not a market target for the Bank or any of
it subsidiaries. Its characteristics are therefore not described here. Total
loans of this type accounted for 0.61% of gross loans.
CONSUMER LOANS
"Consumer Loans" are loans granted to individuals to finance the purchase of
consumer goods or payment of non-commercial or business services regardless of
amount.
F-17
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
SMALL BUSINESS LOANS
Loans to small corporations ("micro-businesses") for a maximum total exposure of
25 National Minimum Monthly Salaries (NMMS).
A "microbusiness" is a personal or corporate rural or urban business in farming,
industry, commerce or services with not more than 10 employees and assets not
exceeding 501 NMMS.
COMMERCIAL LOANS
A "Commercial Loan" is a loan other than a loan for housing, consumer loans and
small business loans.
Loan-related commissions and other receivables are classified within the
accounts for the type of loan to which they are related.
Until December 31, 2001 the classifications and relevant definitions were as
follows:
COMMERCIAL
Loans made for over 300 National Minimum Monthly Salaries (NMMS); those made for
less than 300 NMMS which the Bank internally considers to be commercial and are
not specifically designated as Consumer or Home mortgage loans; discounts,
regardless of amount; and loans secured by mortgage and not classified as Home
Mortgage loans, regardless of amount. Commercial loan-related amounts receivable
were treated as commercial accounts.
CONSUMER
All loans made through credit cards, commissions and other receivables for a
total of not more than 300NMMS which the Bank did not consider to be
"commercial".
HOME-MORTGAGE
These are loans regardless of amount which complied with the provisions of Law
546/99 made or purchased from other banks for the building of new and used
housing, repairs, remodeling, extension, improvements and subdivision of the
borrower's home; and the purchase of plots with services.
2. FREQUENCY OF EVALUATION
The Bank and its subsidiaries make continuous evaluations of lending risk,
modifying loan classifications when necessary.
F-18
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Since January 1, 2002 the Bank and its subsidiaries evaluate all commercial
loans in arrears after restructuring, those made for more than 300 NMMS at the
time of evaluation, and debtors who have total indebtedness of more than 300
NMMS, in May and November; and the result of the evaluation is recorded in the
following month.
Up to December 2001, the Bank and its subsidiaries evaluated all commercial
loans in May and November and results were recorded at the close of the
following month. Evaluations were updated monthly and related provisions were
recorded.
3. EVALUATION CRITERIA
The Bank and its subsidiaries evaluate commercial loans on the following minimum
criteria required by the Superintendency:
Ability to pay of the debtor/co-debtors/guarantors or any other person directly
or indirectly unconditionally liable for the debt, and project cash-flow, if
any. The following is the minimum required to be known about the debtor; income
and outgoing flows, economic solvency, number of times loans have been
restructured, possible financial risks to the cash flow, legal, operational and
strategic risks; and the possibility of contagion.
Commercial, consumer, small business loans and home mortgage loans are
classified on the basis of the following characteristics :
Characteristics
Classification 1 2 3 4 5 6
--- --- --- --- --- ---
A- Normal Risk Y Y Y Y N N
B- Acceptable, Above
Normal Y N Y Y N N
C- Appreciable Risk N N N Y N N
D- Significant Risk N N N Y Y N
E- Risk of
Unrecoverability N N N Y N Y
Characteristics :
Y - Applies
N - Does not apply
Characteristics :
1 - Appropriate structure and attention to credit
2 - Financial information and project funds flows indicate sufficient capacity
to pay and information provided for analysis is sufficient
3 - Compliance with debt-servicing
4 - Loans overdue by aging
F-19
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
5 - Highly doubtful recovery
6 - Unrecoverable
Up to March 31, 2002 the criteria for evaluation were:
- Ability of the debtor/codebtors to pay, project cash-flow, on the basis of
updated and related documentation and financial information
- Debt servicing and compliance with agreed terms (payment of installments
when due on any loan operation on any given date, regardless of the nature
of the payment (capital, interest, other)).
- Information from credit bureaus consolidated with the system, and other
available sources of information, and
- Country risk for the country of domicile of the debtor. This identifies
specific risks of transferability or currency convertibility connected to
loan servicing.
The classification of loans and characteristics was as follows:
Characteristics
Classification 1 2 3 4 5 6 7
--- --- --- --- --- --- ---
A- Normal Y Y Y N Y N N
B- Acceptable Y N Y Y Y N N
C- Deficient N N N Y Y N N
D- Doubtful N N N Y Y Y N
E- Unrecoverable N N N Y Y Y Y
Characteristics :
Y - Applies
N - Does not apply
Characteristics :
1 - Appropriate structure and debt servicing
2 - Financial information and funds flows suggest appropriate capacity to pay
and financial information for analysis is sufficient
3 - Complies with debt servicing requirements
4 - Adverse market/geographical conditions
5 - Loans overdue by aging
6 - Doubtful recovery
7 - Recovery highly improbable
F-20
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Characteristics may be associated or individual.
The evaluation of consumer and home mortgage loans was based solely on
debt-servicing, with the same classifications as were used to evaluate
commercial loans.
4. CLASSIFICATION
The Bank and its subsidiaries classify loans on the basis of the above criteria
into the following categories:
CATEGORY COMMERCIAL CONSUMER
-------- ---------- --------
"A"- Normal Risk current - and up to 1 month past current and up to 1 month past due
due
"B"- Acceptable Risk, 1-3 months past due 1-2 months past due
Above Normal
"C"- Appreciable Risk 3-6 months past due 2-3 months past due
"D"- Significant Risk 6-12 months past due 3-6 months past due
"E"- Risk of
Unrecoverability Over 12 months past due Over 6 months past due
SMALL BUSINESS LOANS HOME MORTGAGE
-------------------- -------------
"A"- Normal Risk current - and up to 1 month past current - and up to 2 months past due
due
"B"- Acceptable Risk, 1-2 months past due 2-5 months past due
Above Normal
"C"- Appreciable Risk 2-3 months past due 5-12 months past due
"D"- Significant Risk 3-4 months past due 12-18 months past due
"E"- Risk of
Unrecoverability Over 4 months past due Over 18 months past due
Compliance includes capital, interest, exchange adjustments and any other
related sum due.
RULES OF ALIGNMENT
A classification of B, C, D or E for any debt would automatically classify all
of that debtor's accounts to the same category, unless it could be shown to the
Superintendency that there were sound reasons for a lower risk classification.
"Financially related parties" within the meaning of Articles 260-262 of the
Commercial Code, will receive the same classification as the parent entity
unless the lender can show to the Superintendency that there are good reasons
for maintaining it/them in a lower risk category.
F-21
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The Bank and its subsidiaries align their classifications with other financial
institutions when at least two of them have classified the debtor into a higher
risk category, where the debt represents at least 20% of the debtor's total
indebtedness according to the most recent information available from credit
bureaus. In this event, there may not be more than one level of difference in
risk classification.
The Superintendency may order reclassifications to higher risk categories and
reclassification to lower risks may only be effected with the permission of the
Superintendency. It may also order reclassifications of loans by economic
sector, geographical zone or for one debtor or a group of debtors, whose
borrowings should be accumulated in accordance with the rules for individual
debt limits.
5. SUSPENSION OF ACCRUALS
As of March 2002, interest, monetary correction, exchange adjustments, lease
payments and other items of income cease to be accrued in the earnings statement
and begin to be recorded in memorandum accounts until effective payment is
collected, after a loan is in arrears for more than a certain time:
Type of Loan Arrears in excess of:
------------ ---------------------
Home mortgage 4 months
Consumer 2 months
Small loans 2 months
Commercial 3 months
Up to March 2002, if a home mortgage or commercial loan was classified as C or a
consumer loan as D, accruals were no longer made in the profit and loss accounts
for interest, monetary correction, exchange adjustment, lease payments or other
items of income. Amounts were recorded in memorandum accounts until effective
payment was received.
6. PROVISIONS
The Bank makes provisions against earnings for each period as follows:
General Provision:
There is a general provision for a minimum of 1% of gross loans. This proportion
may be higher if the general meeting of shareholders so instructs. The provision
is being made in monthly installments that began on July 31, 1999, and was
completed on July 31, 2002.
Individual Provisions :
In addition to the general provision, minimum individual provisions on the basis
of unsecured balances outstanding are made, pending introduction of a new method
that reflects the risk of possible losses on default:
F-22
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Commercial Consumer Small Loans Mortgage
------------------- ------------------- ------------------- -------------------
Interest/ Interest/ Interest/ Interest/
Capital Other Capital Other Capital Other Capital Other
------- --------- ------- --------- ------- --------- ------- ---------
B- Acceptable Risk, Above
Normal 1 1 1 1 1 1 1 1
C- Appreciable Risk 20 100 20 20 20 100 10 100
D- Significant Risk 50 100 50 100 50 100 20 100
E- Risk of
Unrecoverability 100 100 100 100 100 100 30 100
7. THE EFFECT OF SECURITY ON PROVISIONS
For individual provisions, admissible security is valued at no more than 70% of
their value. The length of arrears elapsed before provisions are made -
depending on whether the security is a mortgage or not and the percentage of
security value applied:
% Cover of security Time elapsed from default
------------------- -----------------------------------------------------------------
Appropriate mortgage security/escrow Non-mortgage security
------------------------------------ ---------------------
70 0-18 months 0 -12 months
50 18-24 months 12-24 months
30 24-30 months -
15 30-36 months -
0 Over 36 months Over 24 months
Security is appropriate when formalized and if it has a
professionally-established and objective value to provide effective legal
backing to repayment of the loan guaranteed, giving the lender or creditor
preferential or prior rights to obtain payment, and which is reasonably
marketable.
As of January 1, 2002 calculations of provisions took no account of the value of
collateral in the form of pledges of the debtor's places of business or trade,
real property forming part of those premises, or mortgages on property where the
business operates. Security taken on these assets prior to that date were
gradually reduce in value: 50% at December 31, 2000 and 30% at December 31,
2001.
The Bank and its subsidiaries do not base their decision to lend on the amount
or type of security offered, since they understand that the source of repayment
of loans or financing is provided by cash flows of the borrower, whether
individual or corporate. In the case of new projects, or for medium
F-23
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
and long-term loans, prudence requires the offer of alternative sources of
repayment. To the extent that the Bank and its subsidiaries are entering the
market for SMEs, it has been their policy to seek cover under the guarantee
funds Fondo Nacional de Garantias (FNG) and Fondo Agropecuario de Garantias
(FAG).
8. LOANS TO REGIONAL AUTHORITIES
The evaluation of loans to regional authorities includes the criteria applicable
to ordinary borrowers as well as the conditions of Law 358/97 and 617/2000.
In any case, loans for which the authority pledges revenues are classed as "D"
if there is no reasonable way of ascertaining that those revenues have already
been pledged to secure another obligation, if revenues pledged are not
sufficient to cover the loan or if the loan has been used for purposes other
than those permitted by law. Loans secured by pledges of revenues already
pledged to secure another lender and loans covered by Art. 8 of Decree 696/98
which lack the necessary authorization will be classed as "E".
9. RESTRUCTURED LOANS
A "restructured loan" is one for which a legal agreement exists with the
intention or effect to modify the terms of the credit, for the debtor's benefit
and at the debtor's request. This includes informal or non-moratorium
agreements, Law 550/99 agreements, and special restructurings of Superintendency
Circular 39/99.
For restructured loans under Law 550/99 and, as of October 2000, other modes of
restructuring which include the capitalization of interest recorded in
memorandum accounts or balances written off, including capital, interest and
other items or interest generated in the future; amounts capitalized are
recorded as deferred income and they are amortized in proportion to amounts
actually collected.
10. ACCOUNTS WRITTEN OFF
The Bank writes off debtors classified as "unrecoverable", following the
criteria given below, at the latest at the close of the half-year in which that
classification was made:
- Provision of 100% of all amounts due (capital, interest and other items)
- 180 days for consumer and small loans
- 360 days for commercial loans
- 540 days for home mortgage loans.
All write-offs must be approved by the Board of Directors. Even if a loan is
written off, management remains responsible for its decisions in that regard,
and neither the Bank or its subsidiaries are relieved of their obligations to
pursue recovery as appropriate.
Write-offs in Bancolombia Panama S.A.
F-24
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
In the case of the Panamanian affiliate, account is taken of the Panamanian
banking authority's Order 6-2000 of June 28, 2000, which states as follows
(Point C): "The Bank will write off all loans classified as unrecoverable at the
latest by the end of the fiscal period in which they were so classified."
(I) ACCEPTANCES AND DERIVATIVES
ACCEPTANCES
The Bank issues local currency acceptances for up to 180 days for import and
export operations or local purchases. They are treated as loans and may not
total more than the Bank's paid in capital and Legal Reserve. The asset and
liability are initially recorded at the same time. If unpaid at maturity, the
asset is reclassified to a loan account and the liability to "Acceptances past
due", and from maturity, these acceptances are subject to reserve requirements
for demand liabilities for payment within 30 days.
The term granted by the beneficiary abroad to the client in Colombia to pay for
the goods is governed by International Chamber of Commerce rules and may exceed
180 days under internationally-accepted deferred credit for up to a year. The
books may therefore contain foreign currency acceptances for more than 180 days.
DERIVATIVES
The Bank records the amount of agreements between two or more parties to
purchase or sell assets at a future date in order to provide or obtain hedging,
in terms defined by the appropriate authorities. Therefore, reciprocal and
unconditional rights and obligations arise. Operations are formalized by
contract or letter of commitment. The Bank is involved in term contracts
(forwards), hedging options and futures.
Currency derivatives are designed to cover exchange risks on structural or
traded open positions by setting up a reciprocal operation or synthetic cover
for up to the maximum exposures allowed by the regulators.
The difference between rights and obligations is recorded as income or expense,
as the case may be.
FORWARDS
A forward is any agreement or contract that meets the needs of two parties
acting outside the market to accept or deliver a specific quantity of a product
or underlying asset with defined specifications.
FUTURES
This is a standard contract for future delivery specifying due date, quantities,
amounts, qualities etc., the valuation being made in accordance with the
practice in the market when the business is closed.
F-25
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Futures may be liquidated in cash or by a reciprocal operation prior to due date
or by physical delivery of a product.
OPTIONS
The holder of an option has the right (but not the obligation) to purchase or
sell a specific quantity of an asset at a given price on a given date or during
a defined time. The Bank uses accepted techniques for valuing these operations,
taking account of the market risks, operational risks and legal risks.
Derivatives are valued daily and results of the valuation are recorded daily.
(J) FORECLOSED ASSETS
The Bank records the adjusted value of foreclosed assets received in payment of
unpaid loans in this account. Real property received in payment is recorded on
the basis of a technical market valuation. Movable assets, shares and similar
capital interests are recorded at market value.
The following criteria apply to the recording of foreclosed assets:
- The initial value recorded is that specified in the court award or as
agreed with debtors.
- If the property received in payment is in an un-sellable condition, its
book value is increased by expenses incurred in putting it into a sellable
condition.
- If the proceeds of sale leave a balance over and above the value agreed
with the debtor, that difference is recorded as an account payable. If the
proceeds of sale are insufficient to cover the total debt, the difference
is recorded as a reserve.
Securities received in payment are valued in accordance with the principles of
section (g) for Investments, and provisions are recorded for periods referred to
below .
PROVISION FOR FORECLOSED ASSETS
Individual provisions are made to all kinds of foreclosed assets as of the time
they are received:
Description % of market value Term to make provision
----------- ----------------- --------------------------
Real property 40 June 30, 2002
Housing 30 June 30, 2002
Moveable assets (1) 100 24 months after receipt
F-26
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(1) If market value is lower than the unreserved balance the difference is
charged to earnings.
The Bank and its subsidiaries record revaluations when market value is higher
than book value, provided that they exceed the minimum amount to be provided and
it makes additional provisions when a valuation shows a loss greater than the
amount provided.
The Bank has no method approved by the Superintendency to estimate the maximum
expected loss on sale of foreclosed assets, and therefore follows the practice
established by the Superintendency.
(K) LOAN FEES
Loan origination and commitment fees, as well as direct loan origination and
commitment costs, are recorded in the consolidated statement of income as
collected or incurred.
(L) PROPERTY AND EQUIPMENT
This account records tangible assets acquired, constructed or in the process of
importation or construction and permanently used in the course of the Bank's,
business whose useful life exceeds one year. Property and equipment is recorded
at the cost of acquisition, including direct and indirect costs and expenses
incurred up to the time that the asset is in a usable condition.
Additions, improvements and non-routine repairs that significantly prolong the
useful life of an asset are capitalized. Payments for routine maintenance and
repairs are charged to expense in the period in which they are incurred.
Depreciation is calculated on a straight-line basis over the estimated useful
life of the asset (and of units produced for the fertilizer plant and
turbo-generator of the subsidiary Abocol S.A.). The annual rates used are:
Buildings 5%
Equipment, furniture and fittings 10%
Computer equipment 20%
Vehicles 20%
At the close individual net book values of real property (cost less accumulated
depreciation) is compared with market values taken from independent professional
valuations. If the market value is higher, a revaluation is recorded; otherwise,
the difference is charged to expenses for the period. Valuations must be made at
least every three years.
For 2001 and 2002 the Bank had insurance cover for fidelity and financial risks.
And civil liability cover for risks inherent to its business. Other policies
protect assets against fire, earthquake, explosion, civil disturbance, riot,
terrorism, damage to computers and vehicles.
Maintenance policy:
F-27
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Corrective maintenance provides for the immediate replacement of parts that may
affect safety or proper operation. Preventive maintenance makes regular checks
of architectural and electrical items. Each branch is visited at least twice a
year, always during the night or on a Saturday or public holiday. There is also
productive maintenance that takes proposed work in an order of priorities, and
is designed to ensure that the premises are in optimum condition of electrical
operation, suited to present and future needs, within a framework of electrical
and telecommunications standards. Maintenance expenses are not classified as
improvements, and are therefore charged to earnings for the period.
(M) BRANCHES AND AGENCIES
This account records the operations between the branches and the agencies.
Balances are reconciled monthly and pending items are adjusted within 30 days.
On the closing date of the financial statements, the Bank reclassifies net
balances representing branch and agency transactions, which are then
reclassified to asset or liability accounts and the respective income or expense
is recorded.
(N) PREPAID EXPENSES AND DEFERRED CHARGES
Prepaid expenses are payments made in the normal course of business, the
benefits of which are recovered over more than one period and are recoverable
assuming continuous delivery of services. Deferred charges are costs and
expenses which benefit future periods and cannot be recovered.
Amortization is calculated from the date which they contribute to the generation
of income, considering the following factors:
Prepaid Expenses
Interest is amortized monthly during the period prepaid; insurance, over the
life of the policy; rent, over the period prepaid; equipment maintenance, over
the life of the contract; and other prepaid expenses over the period in which
services are received or costs and expenses are incurred.
Deferred Charges
- Remodeling charges are amortized over a maximum of two years.
- Software is amortized over a maximum of three years.
- Goodwill is amortized over ten years. Goodwill arises from the amount paid
in the 1998 merger over and above the equity value, plus or less certain
expenses incurred in the process.
- Stationery is amortized as and when consumed.
- Bonuses under the voluntary retirement scheme are amortized as permitted
by the
F-28
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Superintendency of Banking.
- Improvements to rented property are amortized over the shorter of (a) the
remaining life of the lease and (b) the probable useful life of the
improvements.
- Institutional advertising is amortized over the accounting period.
Advertising for product launches or changes of brand or name or product
may be amortized over up to three years. Other occasional advertising,
regardless of amount, may not be deferred.
- Taxes are amortized over the fiscal prepaid period.
- Contributions and affiliations are amortized over the period prepaid
- Studies, consultancies, fees and retirement plans related to the 1998
merger are amortized over three years.
- Other items are amortized over the period in which it is estimated that
the expense will be recovered or expected benefits will be realized.
(O) LEASED ASSETS
The affiliates Leasing Colombia S.A. and Bancolombia Panama S.A. record the
value of assets delivered under financial leases.
Since January 1, 1996 record the leasing agreements as monetary assets for an
amount equal to the net present value of lease-payments due and the purchase
option calculated at the start of the contract and at the rate agreed in the
contract.
Contracts entered into up to December 31, 1995 were recorded at acquisition or
construction cost including capitalizable improvements and expenses which
increased the value of the property and were adjusted for inflation until
December 2000.
The companies depreciate all their leased assets acquired prior to December 31,
1995 over the life of the contract, as required by Superintendency Circulars
097/94, 080/94 and 026/95.
The depreciation for leasing contracts in force at that time was the result of
subtracting the net book balance from the present value of the routine and
special lease payments receivable in the future plus the purchase option.
Contracts made after January 1, 1996 record lease payments in two parts. The
portion corresponding to capital repayments is recorded as an amortization of
the asset, and the rest is treated as financial income, credited to the income
statement.
(P) REVALUATIONS
F-29
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
This account records revaluations of permanent investments in non-marketable
variable-income securities, property and equipment, foreclosed assets and works
of art and culture.
Up to August 2002, the revaluations of non-trading variable income investments
and permanent investments were recorded in this account.
Valuations are subject to the accounting policy for each type of asset.
(Q) INTERBANK FUNDS PURCHASED AND REPURCHASE AGREEMENTS
This account records funds obtained by the Bank from other financial
institutions to satisfy transient liquidity needs. These transactions have a
maximum term of 30 calendar days and purchases not repaid within that term are
reclassified as bank loans and other financial obligations.
The difference between present value (cash received) and future value
(repurchase price) is a financial expense.
(R) DEFERRED INCOME
This account records deferred income and income received in advance in the
course of business. Amounts recorded in this account are amortized over the
period to which they relate or the services are rendered.
The capitalization of yields on restructured loans that have been recorded in
memorandum accounts or as written - off loan balances is included here as
indicated in the notes on lending policy.
(S) PENSIONS
The Bank and its subsidiary Almacenar S.A. apply the provisions of Decree
1517/98, which requires a distribution of charges to amortize the actuarial
calculation by 2010. The distribution is calculated by taking the percentage
amortized up to December 1997 and annually adding the minimum percentage points
needed to complete amortization by 2010.
(T) ACCRUALS AND PROVISIONS
The Bank records provisions to cover estimated liabilities, where:
- The Bank has acquired a right, and therefore an obligation
- Payment may be demanded or is probable, and
- The provision is justifiable, quantifiable and verifiable.
This account also records estimates for taxes.
(U) RECOGNITION OF FINANCIAL YIELDS
F-30
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Interest income is recognized by the Bank when accrued, except for Category "C"
or higher risk, for commercial, consumer and small business loans, and Category
"B" or higher risk for home mortgage loans, or when income accruals are
suspended. Interest on past due loans is controlled in contingent accounts
(debtor) and is recorded as income only when collected. (V) CONTINGENT ACCOUNTS
These accounts record operations in which the Bank acquires rights or assumes
obligations conditioned by possible future events of varying degrees of
probability. Likewise, interest recorded in this account when loans are placed
on non-performing status.
(W) MEMORANDUM ACCOUNTS
These accounts record third party operations whose nature does not affect the
financial situation of the Bank. They also include tax memorandum accounts,
which record the figures used in preparing tax returns and memorandum accounts
used for internal control or management information. Since December 2000, the
reciprocal operations of the Bank and its subsidiaries have been recorded here,
and since September 2001, inflation adjustments on non-monetary assets and
equity have been included for fiscal purposes.
(X) NET INCOME PER SHARE
Net income per share is determined on the basis of the weighted average number
of shares outstanding during the period. For the periods ended December 31,
2000, 2001 and 2002 the average was 542,137,634, 576,695,395 and 576,695,395,
respectively.
(Y) ASSET AND LIABILITY MANAGEMENT
The Bank evaluates asset and liability management and off-balance-sheet
positions, estimating and controlling the level of exposure to the major market
risks, in order to provide protection against losses due to possible variations
in asset or liability values.
(Z) CAPITAL ADEQUACY
Finance Ministry Decree 1720/2001 required Technical Capital to be not less than
9% of total risk-weighted assets and contingencies. Calculations are made each
month on the unconsolidated balance sheet and in June and December on the
consolidated accounts which include the Bank's financial subsidiaries in
Colombia and abroad.
(AA) LEGAL RESERVE
Banks are required to appropriate 10% of net income for each period to a Legal
Reserve until the reserve reaches 50% of subscribed capital. The reserve may be
used to absorb losses in excess of undistributed profits, but may not be used to
pay dividends or cover costs or losses while the Bank has undistributed losses.
F-31
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Share premium, which is the difference between the par value and the amount
actually paid for a share, is also recorded in this account.
(AB) CONVENIENCE TRANSLATION TO US DOLLARS (UNAUDITED)
The Bank maintains its accounting records and prepares its financial statements
in Colombian pesos. The US dollar amounts presented in the financial statements
and accompanying notes have been translated from peso figures solely for the
convenience of the reader at the exchange rate of Ps 2,814.89 per US$1, which is
approximately the exchange rate, in effect at December 31, 2002. This
translation may not be construed to represent that the Colombian peso represents
or has been or could be converted into dollars at that or any other rate.
(3) TRANSACTIONS IN FOREIGN CURRENCY
The Superintendency of Banking sets limits on the amount of foreign currency
assets and liabilities. As of December 31, 2001 and 2002, the Bank was in
compliance with these relevant rules.
Substantially all foreign currency holdings are in U.S. dollars. The
consolidated foreign currency assets and liabilities of the Bank at December 31,
2001 and 2002 were as follows:
2001 2002
--------- ---------
Assets:
Cash and due from banks US$ 44,845 US$ 32,123
Overnight funds 63,818 54,064
Investment securities 685,542 665,291
Loans 405,985 461,742
Customers' acceptances 9,918 9,808
Accounts receivable 5,467 16,562
Premises and equipment, net 40,596 37,439
Other assets 5,528 1,031
--------- ---------
Total foreign currency assets US$ 1,261,699 US$ 1,278,060
--------- ---------
Liabilities:
Deposits 833,314 847,665
Bank acceptances outstanding 9,918 9,803
Borrowings from domestic development banks 23,672 13,997
Interbank borrowings 173,217 133,509
Other liabilities 18,855 45,828
--------- ---------
Total foreign currency liabilities 1,058,976 1,050,802
--------- ---------
Net foreign currency asset position US$ 202,723 US$ 227,258
========= =========
The Bank's unconsolidated net foreign currency asset position amounted to US $
167,000 and US $
F-32
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
132,995 at December 31, 2001 and 2002, respectively.
The Bank has the required net foreign currency position within the legal
terms.
(4) CASH AND DUE FROM BANKS
The balances of cash and due from banks at December 31, 2001 and 2002
consisted of the following:
2001 2002
---- ----
Colombian peso denominated:
Cash Ps296,899 Ps368,734
Due from the Colombian Central Bank 83,981 137,644
Due from domestic banks 18,078 9,976
Remittances of domestic negotiated checks in transit 34,516 36,653
Provision (114) (26)
---------- ----------
Total local currency 433,360 552,981
---------- ----------
Foreign currency:
Cash 13,730 17,154
Due from the Colombian Central Bank 7,397 9,734
Due from foreign banks 77,082 58,454
Remittances of foreign negotiated checks in transit 5,244 5,082
---------- ----------
Total foreign currency 103,453 90,424
---------- ----------
Total cash and due from banks Ps536,813 Ps643,405
========== ==========
Restricted cash and deposits at the Central Bank amounted to Ps 360,364 and Ps
492,445 at December 31, 2001 and 2002, respectively. The restriction, which is
prescribed by the Central Bank, is based on a percentage of deposits maintained
at the Bank by its customers.
(5) INVESTMENT SECURITIES
Investment securities at December 31, 2001 and 2002 consisted of the
following:
Trading Securities 2001 2002
------------------ ---- ----
Colombian peso denominated:
Colombian government Ps 688,919 Ps 887,804
Colombian Central Bank 1,969 515
Government entities 81,826 36,457
Financial institutions 341,509 508,678
Corporate bonds 14,167 --
Other marketable equity securities 10,852 42,419
--------- ---------
Total local currency denominated 1,139,242 1,475,873
--------- ---------
Foreign currency denominated:
Colombian government 1,170,569 109,833
Euronotes and Eurobonds 178,604 27
Foreign governments 2,552 --
F - 33
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Goverment entities 189,157 97,107
Other marketable equity securities 40,594 5,564
--------- -------
Total foreign currency denominated 1,581,476 212,531
--------- -------
Total trading securities Ps2,720,718 Ps1,688,404
========= =========
The foreign currency denominated securities issued or secured by the Colombian
government are bonds denominated in U.S. dollars, purchased at par value, with
annual average interest rates of 9.99% and 8.73 % for 2001 and 2002,
respectively.
The Bank had pledged Ps 246,495 and Ps 483,884 as collateral to secure lines of
credit at international banks as of December 31, 2001 and 2002, respectively.
The Bank sold Ps 26,936,496 and Ps 58,673,102 of investment securities during
the years ended December 31, 2001 and 2002, respectively.
Non-trading Securities 2001
---------------------- ----
Mandatory and reserve-against-deposit investments:
Colombian peso denominated:
Colombian government Ps 65,200
Government entities 65,325
--------
Total mandatory and reserve-against-deposit
investments Ps130,525
=========
Investment securities amounting to Ps 81,077 and Ps 137,251 as of December 31,
2001 and 2002 respectively, were restricted under "reserve-against-deposits"
agreements.
Available for sale - Debt Securities 2002
----
Colombian peso denominated:
Colombian Government 425,812
Financial institutions 22,270
---------
Total local currency denominated 448,082
---------
Foreign currency denominated:
Colombian government 1,017,651
Financial institutions 229,462
Other marketable equity securities 190,943
---------
Total foreign currency denominated 1,438,056
---------
Total available for sale securities 1,886,138
=========
F - 34
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Participation
percentage at
Available for Sale - Equity Securities December 31, 2002 2001 2002
-------------------------------------- ----------------- ---- ----
Corporacion Nacional de Ahorro y Vivienda S.A.
Conavi 28.52% Ps 88,585 Ps 88,681
Todo Uno Services 38.43% -- 53,367
Corporacion Financiera Suramericana S.A Corfinsura(2) 4.62% -- 14,567
Urbanizacion Chico Oriental No. 2 Ltda (1) 24.37% 7,848 7,848
Carreteras Nacionales de Meta S.A. 8.44% 9,464 7,408
Sociedad Administradora de Fondos de Pensiones
y de Cesantias Proteccion S.A. 7.42% 7,014 7,014
Sociedad de servicios tecnicos y administrativos
Multienlace S.A.(2) 48.60% -- 6,957
Fideicomiso Devinorte 10.31% -- 5,277
Industrias Forum S.A. 100.00% 3,671 4,480
Concesiones CCFC S.A. 25.50% 4,358 4,358
Venrepa C.A. 99.62% 2,604 3,177
Transmetano ESP S.A. 6.87% 2,673 2,673
Banco Latinoamericano de exportaciones
BLADEX S.A. 0.45% 2,143 2,391
Deposito Centralizado de Valores de Colombia
Deceval S.A. 6.97% 979 979
Cia de Inversiones Bogota S.A. 13.00% 653 653
3001 S.A. 4.87% 15 457
Urbanizacion las Sierras del Chico Ltda. (1) 0.55% 203 203
Other 5,115 11,024
--------- ---------
Total equity securities 135,325 221,514
Allowance for other-than-temporary impairment
In value Equity securities, net (25,400) (60,579)
--------- ---------
Ps109,925 Ps160,935
========= =========
(1) Allowance was increased in compliance with instructions of Superintendency
of Banking.
(2) This investment in 2001 is classified as"Permanent securities".
Dividends received from equity investments amounted to Ps 5,223, Ps 2,665, and
Ps 19,491 for the years ended December 31, 2000, 2001 and 2002, respectively.
Most of the equity investments were classified as Category "A". The following
investments are classified in categories other than "A":
F - 35
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2001 2002
------------------------ ------------------------
Category Valuation Category Valuation
allowance allowance
--------- ---------
Todo Uno Services - Ps - D Ps 42,286
Urbanizacion Chico Oriental No. 2 Ltda. D 7,848 E 7,848
Urbanizacion Las Sierras del Chico Ltda. D 203 E 203
Industria Colombo Andina Inca S.A. E 405 E 300
Industrias Forum S.A. D 2,914 E 4,480
Venrepa C.A. D 1,302 D 1,906
Compania de Inversiones Bogota S.A. E 653 E 653
Other investments with participation
of less than 10% D 3 - -
Participation
percentage at
Permanent Securities December 31, 2001 2001
Corporacion Financiera Suramericana S.A.
Corfinsura 4.6% Ps16,642
Terminal Maritimo Muelles El Bosque 8.8% 4,632
Other 2,110
-------
Total Permanent Investments Ps23,384
=======
Held to Maturity Securities 2001 2002
--------------------------- ---- ----
Colombian peso denomitaded:
Colombian government Ps -- Ps 596,438
Government entities -- 6,232
Financial institutions -- 5,311
Other 1,987 1,987
------- ---------
Total Held to maturity securities, net Ps 1,987 Ps 609,968
Allowance for other-than-temporary Impairment
in value (1,987) (1,987)
------- ---------
Total Held to maturity securities, net Ps -- Ps 607,981
======= =========
F - 36
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(6) LOANS
The following represents the classification of the total loan portfolio as
of December 31, 2001 and 2002 in accordance with the provisions of the
Superintendency of Banking:
December 31, 2001
Classification Mortgage Commercial Consumer Small business loan Total
-------------- -------- ---------- -------- ------------------- -----
A Normal Risk Ps33,327 Ps3,304,550 Ps890,371 Ps -- Ps4,228,248
B Acceptable Risk 126 578,066 24,876 -- 603,068
C Appreciable Risk 119 92,551 11,091 -- 103,761
D Significant Risk 61 246,633 13,117 -- 259,811
E Unrecoverable 878 132,231 22,208 -- 155,317
------- ---------- -------- ------------------- ----------
Total loans Ps34,511 Ps4,354,031 Ps961,663 Ps -- Ps5,350,205
======= ========== ======== =================== ==========
December 31, 2002
Classification Mortgage Commercial Consumer Small business loan Total
-------------- -------- ---------- -------- ------------------- -----
A Normal Risk Ps37,210 Ps4,209,753 Ps803,705 Ps 65,221 Ps5,115,889
B Acceptable Risk 21 454,955 23,138 1,315 479,429
C Appreciable Risk 118 131,588 10,539 537 142,782
D Significant Risk 20 167,916 12,290 404 180,630
E Unrecoverable 725 255,248 21,226 1,386 278,585
------- ---------- -------- ------------------- ----------
Total loans Ps38,094 Ps5,219,460 Ps870,898 Ps 68,863 Ps6,197,315
======= ========== ======== =================== ==========
Loans amounting to Ps 431,024 and Ps 652,535 at December 31, 2001 and
2002, respectively have been pledged as collateral under borrowings from
domestic development banks.
The following represents a summary of restructured loans as of December
31, 2001 and 2002:
2001 2002
---- ----
Ordinary restructurings Ps 481,707 Ps 602,977
Extraordinary restructurings 88,367 48,435
Under law 550 73,073 71,291
Under law 617 158,592 123,477
Creditor agreement proceedings 12,241 13,653
Interest and other receivable items 72,361 26,315
-------- -------
886,341 886,148
-------- -------
Allowances for loan losses (147,367) (206,263)
-------- -------
Net of restructured loans Ps 738,974 Ps 679,885
======== =======
F - 37
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(7) ALLOWANCE FOR LOANS AND ACCRUED INTEREST LOSSES
An analysis of the activity in the allowance for loan losses during the
years ended December 31, 2000, 2001 and 2002 is as follows:
2000 2001 2002
---- ---- ----
Balance at beginning of year Ps 295,016 Ps 285,565 Ps 271,729
Provision 264,756 86,793 143,361
Charge-offs (148,056) (83,586) (71,592)
Effect of restating to constant pesos (1) (19,008) -- --
Effect of difference in exchange rate (2) -- -- 10,366
Reversal of provisions and Recoveries (107,143) (17,043) (21,540)
--------- --------- ---------
Balance at end of year Ps 285,565 Ps 271,729 Ps 332,324
========= ========= =========
Ratio of charge - offs to average
outstanding loans 3.49% 1.69% 1.31%
========= ========= =========
(1) On January 1, 2001, the integral inflation adjustment system, which
provided for mandatory inflation adjustments, was eliminated.
(2) For years 2000 and 2001, the effect of difference in exchange rate
was included as a part of recoveries.
The activity in the allowance for accrued interest losses during the year ended
December 31, 2000, 2001 and 2002 is as follows:
2000 2001 2002
---- ---- ----
Balance at beginning of year Ps 66,939 Ps 30,771 Ps 27,011
Provision 20,178 4,965 4,518
Charge-offs (29,687) (4,255) (5,293)
Reversal of provisions and Recoveries (21,273) (4,470) (11,834)
Effect of difference in exchange rate (2) - - 672
Effect of restating to constant pesos (1) (5,386) - -
-------- --------- -------
Balance at end of year Ps 30,771 Ps 27,011 Ps 15,074
======== ========= ======
(1) On January 1, 2001, the integral inflation adjustment system, which
required inflation adjustments, was eliminated.
(2) For years 2000 and 2001, the effect of difference in exchange rate
was included as a part of recoveries.
(8) CUSTOMER ACCEPTANCES AND DERIVATIVES
The net fair value of the Bank's customer acceptances and rights and
commitments from derivatives operations as of December 31, 2001 and 2002
were as follows:
F - 38
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2001 2002
---- ----
CUSTOMER ACCEPTANCES
Current Ps 28,944 Ps 29,102
Overdue 1,731 1,570
------ -----
Total 30,675 30,672
------ ------
DERIVATIVES:
(Fair value of derivatives instruments)
FORWARD CONTRACTS
Foreign exchange rights contracts to buy Ps 769,328 Ps 609,466
Foreign exchange rights contracts to sell 1,187,524 1,223,531
Financial instruments rights to buy (local currency) 65,444 107,299
Financial instruments rights to sell (local currency) 88,362 95,561
----------- -----------
Total rights 2,110,658 2,035,857
---------- ----------
Foreign exchange commitments contracts to buy Ps 778,932 Ps 567,369
Foreign exchange commitments contracts to sell 1,168,913 1,310,014
Financial instruments commitments to buy (local currency) 65,821 106,022
Financial instruments commitments to sell (local currency) 87,760 98,786
------------ ------------
Total obligations (2,101,426) (2,082,191)
----------- -----------
Total 9,232 (46,334)
------------ ------------
FUTURES CONTRACTS
Foreign exchange rights contracts to buy Ps - Ps 38,635
Foreign exchange rights contracts to sell - 5,724
------- -----
Total rights - 44,359
Foreign exchange commitments contracts to buy - (38,635)
Foreign exchange commitments contracts to sell - (5,724)
------- -------
Total obligations - (44,359)
Total customer acceptances and derivatives Ps 39,907 Ps (15,662)
====== ========
The Bank currently has an investment portfolio in local and foreign
currency that allows it to offer foreign exchange and interest rate
coverage to its clients. By using derivatives the Bank hedges exchange
risk and protects its foreign currency portfolio. These derivatives help
protect the Bank against exchange-rate fluctuation and increases the
predictability of the Bank's yield on foreign-currency investments.
The Bank derivatives' policy is to maintain active and passive positions
with clients with the intent to
F - 39
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
reduce interest rate and exchange rate risk as much as possible. Within
the amount of credit granted to the Bank's clients there is a portion for
the management of derivatives. For this reason, the Bank never carries out
any operation of this type unless the client has the capacity to obtain a
credit from the Bank.
Under the rules of the Superintendency of Banking, BC's derivatives
portfolio is marked to market daily. Unrealized gains and losses are
expressed in the income statement.
During the year for forward contracts, the average cost of rights and
commitments relating to the purchase of financial instruments is 13.12%
with a maturity of 10 days and the average yield from rights and
commitments relating to the sale of financial instruments is 9.21% with a
maturity of 3 days.
During the year the average yield from rights and commitments relating to
the sale of foreign currency is 5.05% annually with a maturity of 63 days.
The average yield from rights and commitments relating to the purchase of
foreign currency is 4.2% annually with a maturity of 53 days.
The rates and the maturities indicated for forward contracts are the same
for futures contracts.
The average value of the hedging portfolio during the year 2002 was
US$137.529 and the average yield was 5.05%.
(9) ACCOUNTS RECEIVABLE
As of December 31, 2001 and 2002, accounts receivable consisted of the
following:
2001 2002
---- ----
Credit card operations Ps 23,951 Ps 61,773
Due from other banks 3,818 753
Accrued interest on investment securities 1,170 81
Advances to contractors and employees 14,270 14,980
Remittances in transit 2,314 828
Commissions 5,959 5,587
Warehousing services 6,947 7,200
Dividends 258 347
Leasing 4,555 34,384
Services and properties sells 28,792 24,255
Employee advances 1,734 276
Claims to insurance companies 1,961 349
Credit card compensation - 29,075
Other receivables 26,731 11,592
-------- ------
Total accounts receivable 122,460 191,480
Allowance for accounts receivable losses (15,696) (9,817)
--------- -------
Accounts receivable Ps 106,764 Ps 181,663
========= =======
F - 40
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The activity in the allowance for accounts receivable during the years
ended December 31, 2000, 2001 and 2002 is as follows:
2000 2001 2002
---- ---- ----
Balance at beginning of year Ps 31,380 Ps 19,580 Ps 15,696
Provision for uncollectible amounts 2,643 3,739 5,125
Charge-offs (5,053) (7,592) (6,524)
Recoveries (6,865) (31) (4,476)
Allowance used - - (424)
Effect of difference in exchange rate (2) - - 420
Effect of restating to constant pesos (1) (2,525) - -
------- ------- -------
Balance at end of year Ps 19,580 Ps 15,696 Ps 9,817
(1) As of January 1, 2001, the integral inflation adjustment system,
which provided for mandatory inflation adjustments, was eliminated.
(2) For years 2000 and 2001, the effect of difference in exchange rate
was included as a part of recoveries.
(10) PREMISES AND EQUIPMENT AND LEASE
At December 31, 2001 and 2002 premises and equipment consisted of the
following:
2001 2002
---- ----
Premises and equipment
Land Ps 57,209 Ps 53,930
Buildings 229,302 222,444
Warehouses 14,049 20,081
Furniture, equipment and fixtures 101,046 103,215
Computer equipment 145,836 150,851
Vehicles 3,640 3,897
Construction in progress 17,156 10,376
Machinery and equipment 99,165 101,361
Equipment in - transit 4,281 11,456
Rural premises 208 1,091
--------- -------
Total 671,892 678,702
Less accumulated depreciation (317,733) (331,694)
Allowance (34,079) (29,284)
--------- -------
Premises and equipment, net Ps 320,080 Ps 317,724
========= =======
F - 41
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2001 2002
---- ----
Leases
Machinery and equipment Ps 168,766 Ps 236,346
Vehicles 27,451 51,138
Furniture, equipment and fixtures 3,467 3,054
Ships, trains and livestock 718 1,864
Computer equipment 9,607 18,660
Real goods 43,308 44,239
----------- ---------
Total 253,317 355,301
Less accumulated depreciation (7,597) (7,475)
Allowance (3,854) (6,035)
=========== =======
Lease, net Ps 241,866 Ps 341,791
=========== =======
Depreciation expense for the years ended December 31, 2000, 2001 and
2002, amounted to Ps 40,591, Ps 35,965 and Ps 34,444, respectively.
(11) PREPAID EXPENSES, DEFERRED CHARGES AND OTHER ASSETS
At December 31, 2001 and 2002, prepaid expenses, deferred charges and
other assets consisted of the following:
2001 2002
---- ----
Prepaid expenses:
Insurance premiums Ps 4,354 Ps 5,540
Interest 1,623 360
Other 1,231 745
----- -----
Total prepaid expenses Ps 7,208 Ps 6,645
----- -----
Deferred charges:
Goodwill Ps 141,552 Ps 118,903
Studies and projects 19,207 10,250
Computer programs 10,070 8,508
Remodeling 3,046 5,033
Organization and preoperating expenses 3,880 1,876
Leasehold improvements 4,733 1,553
Deferred taxes nonbanking entities 806 562
Stationery and supplies 365 481
Taxes - 182
Contributions 10 -
Other 35,159 23,314
------- ----------
Total deferred charges Ps 218,828 Ps 170,662
------- ----------
F - 42
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2001 2002
---- ----
Other assets:
Value added tax deductible and withholding taxes Ps 110,718 Ps 51,173
Investment in Trust 49,109 51,072
Deposits 657 7,946
Furniture and fixtures in storage 2 -
Other 8,749 6,461
----------- -----------
Total other assets 169,235 116,652
----------- -----------
Total Ps 395,271 Ps 293,959
=========== ===========
The activity of the goodwill account during the years ended December 31,
2000, 2001 and 2002 is as follows:
2000 2001 2002
---- ---- ----
Balance at beginning of year Ps 202,750 Ps 164,201 Ps 141,552
Amortization (22,649) (22,649) (22,649)
Effect of restating to constant pesos (1) (15,900) - -
---------- --------- -----------
Balance at end of year Ps 164,201 Ps 141,552 Ps 118,903
========== ========= ===========
(1)On January 1, 2001, the integral inflation adjustment system, which
provided for mandatory inflation adjustments, was eliminated.
(12) FORECLOSED ASSETS
At December 31, 2001 and 2002, foreclosed assets consisted of the
following:
2001 2002
---- ----
Equity securities Ps 39,290 Ps 37,530
Real estate 121,369 114,306
Other assets 20,078 33,425
----------- ---------
180,737 185,261
Allowance (106,081) (107,962)
----------- ---------
Total foreclosed assets, net Ps 74,656 Ps 77,299
=========== =========
The following is a summary of equity securities classified as foreclosed
assets:
F - 43
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2001 2002
---- ----
Urbanizacion las Sierras del Chico Ltda Ps 11,567 Ps 11,567
Chico Oriental Numero 2 Ltda 14,052 14,052
Banco Davivienda S.A.(1) 4,055 -
Pizano S.A. 3,663 3,663
Convertible Securities Pizano S.A. 3,221 3,221
Patrimonio Lineas Agromar - 1,571
Other 2,732 3,456
----------- ---------
Ps 39,290 Ps 37,530
=========== ======
(1) This investment was sold in the 2002.
The activity of the valuation allowance foreclosed assets during the
years ended December 31, 2001 and 2002 is as follows:
2000 2001 2002
---- ---- ----
Balance at beginning of year Ps 42,515 Ps 93,591 Ps 106,081
Provision 81,630 21,321 17,236
Adjustment according to Circular 073 of 2000 1,759 - -
Charge-offs (18,106) (583) -
Reversals of previously recorded provisions (16,582) (8,248) (15,355)
Effects of revaluating to constant pesos (1) 2,375 - -
------- --------- -------
Balance at the end of year Ps 93,591 Ps 106,081 Ps 107,962
======= ========= =======
(1) On January 1, 2001, the integral inflation adjustment system, which
provided for mandatory inflation adjustments, was eliminated.
(13) REAPPRAISAL OF ASSETS
The following is a detail at December 31:
2001 2002
---- ----
Asset revaluations Ps 241,727 Ps 259,811
Less: proportional equity revaluations (195,554) (195,554)
Less: minority interests (26,092) (26,889)
-------- -------
Total equity revaluations Ps 20,081 Ps 37,368
======== =======
The proportional equity revaluations refer to the acquisition of
investments in Colcorp S.A., Almacenar S.A., Comisionista de Colombia
S.A., Leasing Colombia S.A., Fiducolombia S.A. and affiliates calculated
on acquisition date. Consolidation rules require this value to be
unchanged while the investment is held or no new acquisitions are made.
F - 44
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(14) INTERBANK BORROWINGS
Interbank borrowings, primarily denominated in U.S. dollars, at December
31, 2001 and 2002 are summarized as follows:
2001 2002
---- ----
Foreign banks:
Short-term Ps 356,998 Ps 365,316
Long-term 42,597 38,646
----------- ------
Total Ps 399,595 Ps 403,962
=========== =======
Short-term interbank borrowings, obtained from other banks for liquidity
purposes, are unsecured and generally have maturities ranging from 90 to
180 days.
Interest rates on U.S. dollar denominated short-term borrowings from
foreign banks averaged 2.88% and 2.44% in 2001 and 2002, respectively.
(15) BORROWINGS FROM DOMESTIC DEVELOPMENT BANKS
The Colombian government has established programs to promote the
development of specific sectors of the economy. These sectors include
foreign trade, agriculture, tourism and many other industries. These
programs are under the administration of the Central Bank and various
government entities.
Under such programs, the Bank receives a loan request from an applicant
operating in a designated economic sector. The Bank then performs a full
credit analysis of the applicant based upon its normal credit criteria. If
such criteria are met, the Bank applies to the appropriate government
agency for funding. The government agency reviews the loan application to
determine its compliance with policy objectives and may also perform an
independent credit analysis of the applicant. Upon approval, the agency
disburses funds to the Bank. The Bank, in turn, disburses the loan to its
customer and assumes all credit risk.
These loans generally bear interest from three to six percentage points
above the average rates paid by domestic banks on short-term time
deposits. Loan maturities vary depending on the program (ranging from one
to ten years). The Bank funds approximately 0% to 15% of the total loan
balance, with the remainder being provided by the respective government
agencies. Loans to customers are in the same currency and maturities as
the borrowings from the agencies.
As of December 31, 2001 and 2002, borrowings from domestic development
banks received from certain Colombian government agencies consisted of the
following:
F - 45
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2001 2002
---- ----
Fondo para el Financiamiento del Sector Agropecuario Ps 83,180 Ps 121,878
Banco de Comercio Exterior de Colombia ("Bancoldex") 181,858 193,935
Findeter 39,976 43,672
Instituto de Fomento Industrial, IFI 31,113 146,749
Colombian Central Bank 22,866 132,165
Other 72,066 74,654
------- ------
Total Ps 431,059 Ps 713,053
=========== =======
Interest rates on borrowings from domestic development banks averaged
13.5% and 7.98% in 2001 and 2002, respectively, in local currency and 8.4%
and 3.44% in 2001 and 2002, respectively, in foreign currency. Maturities
at December 31, 2002 were as follows:
2003 Ps 255,805
2004 45,120
2005 143,011
2006 70,490
2007 99,786
2008 and thereafter 98,841
------
Total Ps 713,053
=======
(16) OTHER LIABILITIES
As of December 31, 2001 and 2002, other liabilities consisted of the
following:
2001 2002
---- ----
Unearned income Ps 6,370 Ps 8,975
Accrued severance Law 50, net of advances 3,308 4,148
Accrued severance pre-Law 50, net of advances to
employees of Ps 10,360 and Ps 11,502 in 2001
and 2002, respectively 11,459 11,346
Accrued payroll and other severance benefits 13,704 14,740
Accrued pension obligations net of deferred cost 62,228 68,322
Negative Goodwill 10,444 3,788
Deferred interest on restructured loans 18,624 49,664
Other 9,486 9,589
--------- --------
Total Ps 135,623 Ps 170,572
========= =======
F - 46
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Unearned income consists of prepayments of interest by customers. Terms
for the prepayment of interest are established when the loan is
originated. Unearned income is generally amortized on a straight-line
basis over the term for which interest has been prepaid.
Colombian labor legislation entitles each employee hired before January 1,
1991 to severance pay in an amount equal to such employee's last monthly
salary multiplied by the number of years in service. The Bank increases
the accrued liability for such severance benefits whenever an employee's
salary is increased. To allow greater flexibility in labor contracts, the
Colombian government enacted Law 50 in 1990, which, among other things,
permits companies to negotiate a waiver of the retroactivity component of
severance pay with their employees. In August 1994, the Bank and its
executive employees agreed on a plan, which waived the retroactivity
component of severance pay. The total payout under the proposal for the
transition to the new severance benefits law amounted to Ps 124, Ps -0-
and Ps -0- for the years 2000, 2001 and 2002, respectively. Those amounts
are included as "operating expenses" in the income statement.
In accordance with the Colombian Labor Code, employers must pay retirement
pensions to employees who fulfill certain requirements as to age and time
of service. However, the Social Security Institute has assumed a large
portion of this obligation.
Pension obligation
The following is an analysis of the Bank's pension obligations for the
years ended December 31, 2001 and 2002:
Projected
pension Deferred
liability cost Net
Balance at December 31, 1999 Ps 81,427 Ps (14,325) Ps 67,102
Adjustment per actuarial valuation 7,967 (7,967) -
Benefits paid (6,715) - (6,715)
Pension expense - 9,847 9,847
Effect of revaluing to constant pesos (12,003) 784 (11,219)
-------- --------- --------
Balance at December 31, 2000 70,676 (11,661) 59,015
--------- -------- ------
Adjustment per actuarial valuation 10,357 (10,357) -
Benefits paid (8,050) - (8,050)
Pension expense - 11,263 11,263
-------- ------ ------
Balance at December 31, 2001 72,983 (10,755) 62,228
------ -------- ------
Adjustment per actuarial valuation 13,973 (13,973) -
Benefits paid (8,393) - (8,393)
Pension expense - 14,487 14,487
--------- ------ ------
Balance at December 31, 2002 Ps 78,563 Ps (10,241) Ps 68,322
====== ======== ======
F - 47
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The present value of the obligation for pensions as of December 31, 2000,
2001, and 2002 was determined on the basis of actuarial calculations in
conformity with legal regulations. The significant assumptions utilized in
the actuarial calculations for the years ended December 31, 2000, 2001 and
2002 were as follows:
2000 2001 2002
------- ------- -------
Discount rate 29.73% 27.30% 24.82%
Future pension increases 23.42% 19.06% 17.14%
(17) LONG TERM-DEBT
The scheduled maturities of long term-debt at December 31, 2002 are as
follows:
2003 Ps 70
2004 10,088
2005 6,124
2006 17,500
2007 23,500
2008 5,500
---------
Ps 62,782
=========
Long term debt consists of bonds issued by Leasing Colombia S.A. in 1999
and 2000 bearing interest at an average rate of 10.25%; and bonds issued
by Abocol in 2002 bearing interest at an average rate of CPI+ 8%.
(18) ACCRUED EXPENSES
As of December 31, 2001 and 2002, accrued expenses consisted of the
following:
2001 2002
---- ----
Interest payable Ps 73 Ps 318
Income tax payable 29,200 6,333
Fines and sanctions (1) 40,096 20,492
Labor obligations 1,030 1,186
Other 32,102 26,775
------ ---------
Total Ps 102,501 Ps 55,104
======= =========
(1) See note 23(d) as it refers to Bancolombia.
The statutory income tax rate for 2000 and 2001 was 35%. For 2002, the
statutory income tax was 37% for Bancolombia, Leasing Colombia, Colcorp
and Fiducolombia according to an agreement of tax stability and 35% for
the other subsidiaries.
The Bank's tax liability is calculated based on the greater of (i) net
taxable income and (ii) presumed income, which, in 2002 is 6% of
stockholders' equity.
F - 48
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following is a reconciliation of taxable income before income taxes
for the years ended December 31, 2000, 2001 and 2002:
2000 2001 2002
---- ---- ----
(Loss) income before income taxes Ps (85,884) Ps 188,108 Ps 252,998
Adjustments for consolidation
purposes, net (88,235) (29,546) (7,114)
Difference between net operating loss carry-
forwards and presumed income 211,936 56,569 54,015
Non-deductible provisions, costs and expenses 10,399 120,115 99,806
Nontaxable or exempt income (916) (218,406) (251,005)
Difference between monetary correction for
tax purposes and for financial reporting
purposes (140) (26,546) (27,989)
------ -------- --------
Taxable income 47,160 90,294 120,711
Statutory tax rate (1) 35% 35% 36.89%
Estimated current income tax Ps 16,506 Ps 31,603 Ps 44,533
====== ====== ======
(1) The statutory income tax rate for 2002 was 37% for Bancolombia,
Leasing Colombia, Colcorp and Fiducolombia, according to the agreement of
tax stability and 35% for the other subsidiaries.
For the years ended December 31, 2000, 2001 and 2002, income tax expense
consisted of the following:
2000 2001 2002
---- ---- ----
Current income tax expense Ps 16,506 Ps 31,603 Ps 44,533
Deferred income tax expense (benefit) 11,600 (28) (1,915)
------------ --------- -------
Total Ps 28,106 Ps 31,575 Ps 42,618
============ ======== ======
Income taxes for the years ended December 31, 2001 and 2002 are subject to
review by the tax authorities. The Bank management and its legal advisors
believe that no significant liabilities in addition to those recorded will
arise from such a review. The Bank and its subsidiaries do not have any
pending claims from the tax authorities.
The following represents a summary of the utilizable date for the fiscal
losses to amortize and excess of presumed income over ordinary income:
F - 49
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Fiscal losses Excess of presumed income
to amortize over ordinary income
----------- --------------------
2003 Ps 5,249 Ps 4,977
2004 137,400 4,445
2005 102,722 4,776
2006 465 7,260
2007 4,330 77,856
--------- ---------
Ps 250,166 Ps 99,314
========= =========
(19) SUBSCRIBED AND PAID-IN CAPITAL
Subscribed and paid-in capital consisted of the following:
2000 2001 2002
---- ---- ----
Authorized shares 670,000,000 670,000,000 670,000,000
=========== =========== ===========
Issued and outstanding:
Common shares with a nominal
value of 500 pesos 398,259,608 398,259,608 398,259,608
Preference shares with a nominal
value of 500 pesos 178,435,787 178,435,787 178,435,787
In order to effect the capitalization of the Bank, 207,182,884 common and
120,375,225 preference shares were issued in 2000.
The holders of American Depositary Shares ("ADSs") and non-voting
preference shares have a right to receive annually, when and if declared
by the Bank, from funds legally available, a minimum dividend in
Colombian pesos of 1% of the issued price of the preference shares. Such
dividends may not be less than those declared for common shares, and have
preference over any other dividends for common shares.
1. In addition, the non-voting preference shares are entitled to the
following:
a) Dividends once declared and once reserves are approved at the
annual general shareholders' meetings.
b) Recovery of their initial investment preference over common
shareholders, in case of dissolution of the Bank, after the
payment of liabilities to third parties, including mandatorily
convertible debentures, if any.
c) A preemptive right in the event of new issues of preference
shares. In the event that only common shares are issued,
preference shareholders have no preemptive rights to such shares.
F-50
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
d) To demand meetings of preference shareholders, at the request of
not less than 20% of preference shares outstanding, in order to
deliberate on matters of common interest.
e) To appoint, at meetings of preference shareholders and in
conformity with the law, a representative to assist them in their
rights before the Bank.
2. The non-voting preference shares do not confer on their holders the
right of participating in shareholders' meetings or of voting
therein, except in the following cases:
a) Whenever there is a proposed modification to impair the rights
provided in the bylaws for preference shares.
b) Whenever the anticipated dissolution of the Bank, or its merger,
its transformation or the change in its business objectives is to
be voted upon.
c) Whenever the preference dividends have not been paid in full
during two consecutive periods, and while this situation
continues, within the terms of the law.
d) Whenever the shareholders in the annual general meeting declare
the payment of a stock dividend. In this event, the decision must
be approved by the majority provided by the Colombian Commercial
Code, which will include a favorable vote of 80% of the preference
shares.
e) Whenever the Superintendency of Banking requires it, on the
grounds that management has concealed income by any means, and has
thereby reduced net income available for distributions as
dividends.
f) Whenever the registration of preference shares in stock exchanges
or in the National Securities Registry is suspended or cancelled
and as long as such situation exits.
In accordance with Colombian law, the deposit of shares abroad
constitutes a foreign investment institutional fund, and the dividends
paid to such funds are not subject to taxes in Colombia. Accordingly, the
dividends paid abroad by the Bank to holders of ADSs are tax free in
Colombia, except in cases in which the Bank distributes income in excess
of that on which it has paid income taxes; in such cases, the ADS holders
would have to pay income tax at the rate of 35% on the excess portion of
dividends received.
The Bank's weighted average number of common and preference shares
outstanding used in the computation of earnings per share was 542,137,634
in 2000, and 576,695,395 in 2001 and 2002.
(20) APPROPRIATED RETAINED EARNINGS
Pursuant to Colombian law, 10% of the net income of the Bank company and
its Colombian subsidiaries in each year must be appropriated with a
credit to a "legal reserve fund" until its balance is
F-51
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
equivalent to at least 50% of the subscribed capital. This legal reserve
may not be reduced to less than the indicated percentage, except to cover
losses in excess of undistributed earnings.
Appropriated retained earnings consist of the following:
2000 2001 2002
---- ---- ----
Legal reserve Ps 436,873 Ps 291,133 Ps 386,009
Additional paid-in capital 107,359 107,359 107,359
Other reserves 33,165 40,226 72,819
------- ------- -------
Total Ps 577,397 Ps 438,718 Ps 566,187
======= ======= =======
In addition, paid-in capital of Ps 107,359 at December 31, 2000, 2001 and
2002 was recorded as part of the legal reserve, as required by the
Superintendency of Banking.
(21) DIVIDENDS DECLARED
The Bank's shareholders declared common stock dividends with respect to
the preceding year's earnings of the Bank (the parent company) during
2001, 2002 and 2003 as indicated below:
2001 2002 2003
---- ---- ----
Preceding year's
unconsolidated earnings Ps (159,983) Ps 90,123 Ps 150,923
(losses)
Dividends in cash 36 pesos per share 84 pesos per share 132 pesos per share
payable in four payable in four payable in four quartely
quartely installments quartely installments installments of 33 pesos
of 9 pesos from March of 21 pesos per share per share from April 2003
2001 on 398,259,608 and from April 2002 on on 398,259,608 and
178,435,787 common and 398,259,608 and 178,435,787 common and
preference shares, 178,435,787 common and preferences shares,
respectively. preference shares, respectively.
respectively.
Total dividends declared Ps 20,760 Ps 48,442 Ps 76,124
Dividends payable at Ps 7,823 Ps 15,322
December 31
(22) MEMORANDUM ACCOUNTS
At December 31, 2001 and 2002, memorandum accounts consisted of the
following:
F-52
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2001 2002
----------- -----------
Trust:
Investment trusts Ps 6,251,978 Ps 6,987,025
Commitments:
Unused credit card limits 788,598 1,050,837
Civil litigation against the Bank 83,707 952,769
Issued and confirmed letters of credit 136,307 352,430
Uncommitted lines of credit 161,331 216,881
Bank guarantees 193,912 76,931
Approved credits not disbursed 8,044 10,296
Other 103,710 45,104
------------ ------------
Total 7,727,587 9,692,273
Other memorandum accounts:
Memorandum accounts receivable:
Tax value of assets 7,647,226 8,789,766
Assets and securities given in custody 472,228 1,441,058
Negotiable investments in debt titles -- 1,263,206
Written-off assets 752,396 680,651
Quotas of leasing for receive 203,489 440,770
Investments held to maturity -- 430,147
Adjustments for inflation of assets 179,730 204,114
Accounts to receive yields negotiable investments in debts titles -- 139,919
Investments available for sale in debt titles -- 52,229
Remittances sent for collection 15,298 33,600
Securities secured by government and financial institution 1,524,630 --
Other memorandum account receivable 1,888,501 1,252,073
------------ ------------
Total 12,683,498 14,727,533
Memorandum accounts payable:
Assets and securities received as collateral 9,501,786 7,984,314
Qualification commercial loans -- 5,350,927
Assets and securities received in custody 375,915 1,812,359
Tax value of shareholders' equity 1,471,670 1,605,488
Qualification consumer loans -- 931,584
Adjustment for inflation of Equity 500,538 499,481
Qualification consumer loans -- 69,860
Merchandise in owned warehouses 63,928 46,081
Merchandise in third-party warehouses 32,776 36,507
Other memorandum account payable 7,759,554 4,042,286
------------ ------------
Total 19,706,167 22,378,887
------------ ------------
Total memorandum accounts Ps40,117,252 Ps46,798,693
============ ============
F-53
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(23) COMMITMENTS AND CONTINGENCIES
THE BANK
a) Contingencies Covered by Fogafin:
As part of the privatization process of Banco de Colombia (merged
into Bancolombia S.A. in 1998), which ended on January 31, 1994,
("Fogafin") agreed to assume liabilities derived from contingencies
referring to events that occurred prior to the sale of the shares,
provided that claims were submitted within the following five
years. The Fogafin guarantee covers 80% of the first Ps10,000, net
of provisions, and 100% thereafter. This figure is adjusted every
year by the change in the CPI.
The guarantee agreement commits Banco de Colombia to transfer to
Fogafin the rights it then held in Sierras del Chico Ltda and Chico
Oriental Numero Dos Ltda. for net less than book value at December
31, 1993, adjusted for inflation and excluding revaluations. The
validity and enforceability of the commitment has been challenged
in court. No decision has yet been issued.
On December 31, 2001 and 2002, the civil contingencies covered by
the guarantee amounted to approximately Ps 24,006 and Ps 20,897,
respectively, with provisions in the amounts of Ps 3,643 and Ps
1,288. Labor liabilities totaled Ps 695 and Ps 475, with provisions
for Ps 408 and Ps 238, respectively.
b) Legal Actions:
As of December 31, 2001 and 2002, in addition to the contingencies
disclosed in item (a) above, there were several labor-related legal
actions with claims for approximately Ps 8,343 and Ps 8,803,
respectively. The final outcome of these lawsuits is unsure due to
the controversial nature of the obligations. The provisions for
contingencies at December 31, 2001 and 2002 were Ps 3,505 and Ps
4,208, respectively.
On December 31, 2001 and 2002, there were ordinary civil suits and
enforcement actions pending against the Bank for amounts totaling
approximately Ps 59,734 and Ps 87,405 respectively. Progress in
these cases did not require further material provisions to be made
in addition to the amounts of Ps 769 and Ps 1,904 already reserved.
Provisions are accounted for when a decision is issued against the
Bank in the lower court, or on the basis of an opinion of counsel.
The Superintendency of Banking has fined the Bank Ps 245. This
amount was fully provisioned, despite the fact that the Bank's
arguments against the decision were sufficiently solid.
F-54
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
c) Contingency Related to Purchase of 51% of Banco de Colombia S.A.
The corporations that sold their majority shares in the former
Banco de Colombia S.A. ("Sellers") set up a guarantee trust fund in
the name of the Bank through Fiduanglo (now Lloyds Trust), against
Bancolombia shares, to cover the contingencies and liabilities of
the Bank that had been sold. The guarantee covers claims between
US$ 7,500 and US$ 60,000.
The Bank submitted, within the appropriate terms, a number of
claims against this trust fund, and but the claims were rejected by
the Sellers. The Bank petitioned the Bogota Chamber of Commerce to
set up an arbitration court to decide on the admissibility of those
claims and enforce the above-mentioned guarantee. The amount
claimed in the suit is Ps 46,947. The case continues despite the
many obstacles produced by the defendants.
THE GILINSKI CASE
The Gilinski family has entered the criminal investigation ordered
by the Prosecution Service against the Bank as a civil party for
individual and collective interests, and is attempting to implicate
the Bank as a third party with civil liability.
The contingency of a loss is considered remote, since the entire
process of acquisition and merger was in accordance with applicable
law, and business ethics.
Further, in the administrative courts, the Bank challenged the
Superintendency of Banking's fine of Ps 44, imposed due to the fact
that former Banco de Colombia made an interbank loan to Banco
Industrial Colombiano when the two banks were merging. The other
complaints of the Gilinsky family were rejected by the
Superintendency of Banking, and their appeal against that decision
was also denied.
LUIS ALBERTO DURAN
The process continued with the claims of a class action initiated
by Luis Alberto Duran against Bancolombia and certain stockholders,
and a popular action initiated by Maximiliano Echeverri against the
Bank, the Superintendency of Banking and the Superintendency of
Securities.
The contingency of a loss is considered remote, since the entire
process of acquisition and merger was in accordance with applicable
law and business ethics.
d) Income Tax and Other Assessments
The Bank has contested income tax assessments for 1996 and
transaction tax assessments. The amount in dispute totals Ps 29,261
and provisions total Ps 17,540.
F-55
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
FIDUCOLOMBIA:
Enforcement proceedings for non-material amounts have been brought
against this trust company a subsidiary of the Bank. In the opinion of
both management and counsel, the decisions are not likely to be
unfavorable to Fiducolombia S.A.
At December 31, 2002 a civil suit against Banco de Colombia and Sociedad
Fiduciaria was pending in the 12th Civil Court, Bogota. The plaintiff in
that action is Mr. Carlos Paz Mendez. Notice of this suit was served on
July 16, 1993. On November 5, 1998 the court ruled in favor of
Fiducolombia and ordered the defendant to pay costs. The plaintiff
appealed and the appeal was admitted on December 14, 1998. On appeal,
counsel for Bancolombia and Fiducolombia requested the hearing permitted
by Art. 360 of the Civil Procedure Code to be held; and it was duly held
on May 9, 2001. The case was referred to the Superior Tribunal of Bogota
on May 24, 2001.
This process is expressly covered by the passive contingency agreement
signed with Fogafin, as contained in Public Deed No. 0182 dated January
18, 1994 and recorded with the Second Notary Public of Bogota D.C,
according to a schedule included in the above-mentioned documents as
Attachment # 1. Management and legal counsel for the fiduciary company
believes that the probability is high for a favorable decision.
Therefore, Fiducolombia has not made any provisions for this item.
As a consequence of the operation of an escrow agreement ("Silvania"),
the trustor corporation Gallego Inmobiliaria S.A. sued Fiducolombia S.A
before the Colombian Arbitration Court as provided in the commitment
clause of the trust agreement. On February 18, 1999 the Arbitration Court
ruled in favor of Fiducolombia S.A. The award was challenged by the
trustor, who appealed. On April 27, 2000 this court ruled confirming the
tribunal's award.
There are also six ordinary lawsuits based on the Trust agreement
mentioned above pending in the civil courts of the Bogota Circuit.
Management based on advice of counsel, believes that no liability exists
for the events alleged in the suits. The claims made by the plaintiffs
total approximately Ps 1,910.
The "Grupo Grancolombiano" trust fund, which was managed by Banco de
Colombia S.A. and liquidated on June 29, 1990 is subject to
contingencies, including some labor-related, through the Contingency Fund
managed by the Fiduciary Company, certain sums deposited by former
trustors of the "Grupo Grancolombiano" trust fund, with the intention of
covering such contingencies. Following advise of counsel, and in
compliance with the purpose established as part of the Memorandum of
Liquidation of Grupo Grancolombiano, 24 of the 29 ongoing cases were
settled in court and there remaining five were settle out-of-court,
charged to funds held in the Group Contingency Fund. In the case of Jorge
Euclides Garcia, a hearing was held on December 4, and the next stage of
process is a court decision. The cases of Jose del Carmen Racero, Pedro
Antonio Alvarez and David Salcedo were not settled by conciliation since
the employment relationship ended when the premises in which they worked
were the property of Compania Nacional de Chocolates S.A. and the
plaintiffs implicated that company as litis consortium. A hearing was set
for January 2, 2003. The management of the trust company and legal
counsel believe that there will be
F-56
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
no additional liabilities that should be accounted, if any should arise
nevertheless, they would directly affect the reserve fund established by
the trust and not Fiducolombia.
Arbitration Tribunal called by Comerintegral Ltda. The Bogota Chamber of
Commerce has informed Fiducolombia that it should receive service of
notice of arbitration and try to settle the dispute. The intention is
that the tribunal should order termination of the trust established on
August 26, 1994 between Sufiducia, now Fiducolombia, and the trustors as
provided for in Section 1260.3 of the Colombian Commercial Code and that
Fiducolombia be ordered to deliver to Comerintegral funds held in a unit
investment fund in proportion to the latter's interest in the 1994 trust.
Fiducolombia received service on March 2, 2001 and entered a plea for
reconvention.
On December 12, 2001 the two curators appointed by the Chamber of
Commerce Arbitration and Conciliation Center to represent the plaintiffs,
accepted their appointments. On January 31, 2002 counsel for the Bank
contested the exceptions proposed and requested evidence. The
conciliation hearing was set for February 28. On May 30, 2002 the
Arbitration Tribunal was installed. On November 26 a hearing was held for
pleadings, and the court set January 29, 2003 as the date for issuing its
decision. There is no need to make provisions for future disbursements
because the amount of funds to be handed over as a result of the
arbitration decision is the same amount as was delivered for the
operation of the trust, now under dispute in arbitration, plus yields
accrued.
In Civil Court 6, Bogota, Invico sued Bancolombia S.A. and Fiducolombia
S.A. The plaintiff alleges that the defendants are obliged to exercise
the alternative rights provided for in Art. 1948 of the Civil Code with
regard to the plot of land "Granjita" under the terms of the trust
agreement. The amount of the claims is Ps 4,000. The case went before the
judge on November 9, 2001 to resolve preliminary exceptions. An order of
January 17, 2002 declared that the preliminary exception was not proven,
and awardsed costs against the petitioner. An order of July 16, 2002
called for a conciliation hearing on November 5, 2002. Conciliation
failed. Nonetheless, given the situation of this case, it is premature to
offer an opinion on the result.
Civil Court 9, Bogota has received a suit brought by Invico against the
same defendants, claiming the production of accounts during their
stewardship as trustee of its assets, by reason of the appointment made
by Invico and its creditors. The claims total Ps 3,000. On December 4,
2001 the conciliation hearing was opened, and declared a failure since
there was no desire to conciliate. The case came before the court on
November 27, 2001 for evidence to be ordered. The lower court finding of
November 19, 2002 published on November 25 found in favor of Fiducolombia
S.A. and the Bank. The plaintiff appealed. Management believes, based on
advise of counsel, that Fiducolombia S.A. and the Bank have a good chance
of success.
LEASING COLOMBIA S.A:
At December 31, 2002, there were some legal actions brought against the
company. According to counsel, they do not entail any risk of loss that
could affect the company's results in the future.
F-57
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
ALMACENAR S.A.:
At December 31, 2002 there were cases pending against the company in the
labor and civil courts.
CTI CARGO S.A.:
The company is facing several civil actions:
Ordinary action brought by Maersk Colombia S.A. for the amount of Ps
2,759 (US$ 963), arising from funds that CTI Cargo is withholding as a
consequence of the unfair termination of the commercial agency agreement
with Sea Land Service. The process awaits the setting of a date for a
reconciliation hearing. Counsel believe that the probability of an
unfavorable outcome is 50%. The Company has made a provision for the
amount of the claim to provide against an unfavorable decision.
CTI Cargo sued SL Service (formerly Sea Land Service Inc) to obtain
payment of the benefits of Art. 1324 of the Commercial Code ("commercial
severance") for about Ps 228 and an indemnity to be estimated by experts
plus monetary correction totaling Ps 1,200 plus monetary correction to be
offset against the amounts withheld. The case was brought on July 4, 2001
before Civil Court 24, Bogota.
Civil case against Leasing Colpatria S.A., in which that company sued CTI
Cargo and Yusen Air & Sea Service France, asking for Ps 200 in damages.
The case went to the Superior Tribunal, Bogota, and was appealed by CTI
Cargo. The company considers that if the court finds against CTI Cargo,
CTI could demand payment from YUSEN Air & Sea Service - France.
Ordinary process by CTI Cargo against the State requesting that
Resolutions No. 911 of May 25, 1999 and 649 of April 22, 2000, issued by
the tax authority DIAN to call on the company's performance guarantee
on the grounds that an obligation guaranteed had not been performed, the
company having failed to provide evidence that goods had arrived in
another country in accordance with the client's requirements. The
amount of the guarantee is Ps 62. Final pleadings have been entered, and
counsel consider that there is a 60% chance of success.
Civil suit, Calderon Cardona Ltda v. CTI Cargo, to establish breach of a
contract of carriage and therefore payment of damages. A conciliation
hearing was held in court. Agreement was reached and the case was closed
in 2002.
(24) FEES AND SERVICE CHARGES
For the years ended December 31, 2000, 2001 and 2002 fees and service
charges consisted of the following:
F-58
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2000 2001 2002
---- ---- -----
Service charges Ps 110,953 Ps 132,410 Ps 145,561
Credit card fees 32,885 39,960 48,992
Credit and debit card annual fees 29,256 39,662 44,117
Checking fees 34,783 37,674 40,972
Warehouse services,net 26,930 32,973 38,873
Commissions and fees from fiduciary activities 20,766 27,101 22,215
Commissions on letters of credit 2,558 2,346 2,929
Commissions expense (40,096) (46,744) (51,351)
------- ------- -------
Total Ps 218,035 Ps 265,382 Ps 292,308
======= ======= =======
(25) ADMINISTRATIVE AND OTHER EXPENSES
Administrative and other expenses for the years ended December 31, 2000,
2001 and 2002 consisted of the following:
2000 2001 2002
---- ---- ----
Public services Ps 17,640 Ps 20,025 Ps 21,089
Advertising 10,151 13,361 12,522
Industry and trade, property, vehicle and
other taxes 33,670 35,372 50,935
Communication, postage and freight 25,572 29,586 34,312
Insurance 24,752 39,750 41,478
Security services 14,473 16,705 18,161
Stationery and supplies 13,148 13,924 14,750
Amortization of deferred charges 37,360 44,529 35,295
Rent 20,082 21,781 14,668
Maintenance and repairs 19,104 21,126 21,854
Contributions and membership dues 10,300 7,693 9,270
Temporary services 4,697 5,839 5,331
Travel expenses 4,187 6,190 8,361
Professional fees 8,696 28,410 14,533
Donations 6,003 4,363 9,455
Call center services 8,253 9,934 13,552
Information processes outsourcing 2,241 4,631 7,760
Other 14,637 10,102 29,169
------- ------- -------
Total Ps 274,966 Ps 333,321 Ps 362,495
======= ======= =======
(26) NET MONETARY INFLATION ADJUSTMENT
The net monetary inflation adjustment for the years ended December 31,
2000 consisted of the following:
F-59
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2000
----
Inflation adjustment related to:
Net book value of equity investments Ps 32,285
Net book value of premises and equipment 32,324
Net book value of other assets 18,738
Shareholders' equity (79,138)
------
Net monetary inflation adjustment Ps 4,209
======
The effect of inflation adjustments on the Bank's net income for the year
ended December 31, 2000 was as follows:
2000
----
Expense associated with
Inflation adjustments to
of balance sheet accounts Ps (4,209)
Tax deductions:
Monetary inflation adjustment of balance
sheet accounts (4,209)
Difference between tax-related monetary
inflation adjustment and monetary
inflation adjustment for book purposes (140)
-----
Total tax deductions 4,349
-----
Statutory income tax rate 35%
Decrease in net income for the year Ps (2,826)
=====
The consolidated financial statements were adjusted for the effect of
inflation occurring after January 1, 1992 on the basis of changes in the
official Colombian middle income consumer price index ("MCPI") until
December 31, 2000. The net effect of such adjustments was accounted for
as gain or loss in the consolidated income statement. As a consequence of
the elimination of the integral inflation adjustments system, the
consolidated income statements for the years 2001 and 2002 do not contain
this net effect.
(27) RELATED PARTY TRANSACTIONS
Significant balances and transactions with related parties were as
follows:
F-60
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Shareholders with
Participating stock
lower than 10% of
Shareholders with Bank's the Bank's capital
Participating stock equal Non- officers and with operations
To or higher than 10% consolidated and Board higher than 5%
of Bank's capital subsidiaries of directors Technical Equity
----------------- ------------ ------------ ----------------
2000
Balance Sheet:
Loans Ps -- Ps 10,745 Ps 1,245 Ps 110,000
Accounts receivable -- 143 16 5,137
------ ------ ----- ------
Ps -- Ps 10,888 Ps 1,261 Ps 115,137
====== ====== ===== ======
Deposits Ps 113 Ps 25,341 Ps 114 Ps 2,449
====== ====== ===== ======
Transactions:
Income:
Dividends received Ps -- Ps 2,731 Ps -- Ps --
Interest -- 1,211 260 16,455
Other -- 20 -- 398
------ ------ ----- ------
Total Ps -- Ps 3,962 Ps 260 Ps 16,853
====== ====== ===== ======
Expenses:
Dividends paid Ps -- Ps -- Ps -- Ps --
Interest 15 168 2 93
Fees -- -- 75 --
------ ------ ----- ------
Total Ps 15 Ps 168 Ps 77 Ps 93
====== ====== ===== ======
2001
Balance Sheet:
Loans Ps 51,300 Ps 749 Ps 1,083 Ps 43,500
Accounts receivable 1,262 26 37 3,314
------ ------ ----- ------
Ps 52,562 Ps 775 Ps 1,120 Ps 46,814
====== ====== ===== ======
Deposits Ps 486 Ps 40,403 Ps 226 Ps 499
====== ====== ===== ======
Transactions:
Income:
Dividends received Ps -- Ps 1,775 Ps -- Ps --
Interest 4,895 1,978 167 7,410
Other -- 54 -- --
------ ------ ----- ------
Total Ps 4,895 Ps 3,807 Ps 167 Ps 7,410
====== ====== ===== ======
F-61
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Shareholders with
Participating stock
lower than 10% of
Shareholders with Bank's the Bank's capital
Participating stock equal Non- officers and with operations
To or higher than 10% consolidated and Board higher than 5%
of Bank's capital subsidiaries of directors Technical Equity
----------------- ------------ ------------ ----------------
Expenses:
Interest Ps -- Ps 190 Ps -- Ps 1
Other -- -- 49 --
----- ------ ------ -------
Total Ps -- Ps 190 Ps 49 Ps 1
===== ====== ====== =======
2002:
Balance Sheet:
Loans Ps 28,300 Ps 7,584 Ps 1,744 Ps --
Accounts receivable 653 218 15 --
----- ------ ------ -------
Total Ps 28,953 Ps 7,802 Ps 1,759 Ps --
===== ====== ====== =======
Deposits Ps 575 Ps 16,201 Ps 213 Ps --
Accounts Payable -- 7 1 --
----- ------ ------ -------
Ps 575 Ps 16,208 Ps 214 Ps --
===== ====== ====== =======
Income:
Dividends received Ps -- Ps 11,279 Ps -- Ps --
Interest 5,838 1,077 179 --
Other 2 300 148 --
----- ------ ------ -------
Total Ps 5,840 Ps 12,656 Ps 327 Ps --
===== ====== ====== =======
Expenses:
Interest Ps 28 Ps 140 Ps -- Ps --
Other -- 9,160 132 --
----- ------ ------ -------
Total Ps 28 Ps 9,300 Ps 132 Ps --
===== ====== ====== =======
(28) VOLUNTARY BALANCE SHEET RESTRUCTURING PROGRAM
In 2000, the Bank established two reporting periods in connection with a
balance sheet restructuring. In the first reporting period from January 1
- April 30, 2000, the Bank accrued additional allowances for loans
losses, foreclosed assets and others thereby reducing the amount that had
to be accrued in the second reporting from May 1 - December 31, 2000. The
total amount accrued during the two periods was equal to that which would
otherwise have been accrued over the twelve month reporting period ended
December 31, 2000.
F-62
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The voluntary Balance Sheet Restructuring program was carried out for
protection proposes and aimed at enhancing the financial structure of the
Bank (non-consolidated), affected in the prior two years by the country's
economic situation.
The effects of the voluntary restructuring are summarized as follows:
April December Year
----- -------- ----
Net income (loss) at the end of the period Ps (201,129) 41,146 (159,983)
Plus net income of the year from the
Subsidiaries after eliminations 11,503 34,490 45,993
---------- ------ ---------
Consolidated accumulated losses of the year (189,626) 75,636 (113,990)
Application against legal reserve approved
by stockholder's meeting on August 2000 201,129 -- 201,129
------- ------ -------
Consolidated net addition to
unappropriated retained earnings Ps 11,503 75,636 87,139
======= ====== =======
(29) PURCHASE OF ASSETS AND LIABILITIES
As a growth strategy, the Bank purchased net assets for the years ended
at December 31, 2001 and 2002 of the following entities:
2001
Corficafe Corfinorte Total
Loans in local currency Ps 4,197 17,706 21,903
Loans in foreign currency US$ 1,648 723 2,371
Ps 3,802 1,668 5,470
The price of the loans purchased from Corficafe, was established
according with percentage of 85% and 100% for local currency loans at
amount of $683 and $3,514 respectively and a percentage of 100% for
foreign currency loans.
The price of the loans purchased from Corfinorte was established
according to a percentage fixed by the parties, which averaged 82.41% and
96.93% for local and foreign currency loans, respectively.
F-63
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2002
----
Type of Asset Banco IFI Corfinsura Banco de Corfinorte Bancolombia Corficafe Total
Santander Credito Panama
Loans in local currency
Working capital loans 5,195 425 3,332 43,598 221 -- 123 52,894
Credit cards 2,235 -- -- -- -- -- -- 2,235
Overdrafts 99 -- -- -- -- -- -- 99
Small business loans -- 602 -- -- -- -- -- 602
Loans funded by
domestics developed
banks -- 1,382 -- -- -- -- 1,382
------ ------ ------ ------ ------ ------ ------ ------
Total 7,529 2,409 3,332 43,598 221 -- 123 57,212
Loans in foreign
currency
US$ -- 3,562 -- -- -- 8,631 262 12,456
Ps -- 8,089 -- -- -- 24,276 607 32,972
The price of loans purchased from Instituto de Fomento Industrial IFI,
Corporacion Financiera Nacional and Suramericana (Corfinsura), Banco
Santander, Corficafe and Banco de Credito was set at 96.07%, 101.5%, 98%,
85% and 100% of face value, respectively. There are not reselling
agreement or conditions that allow additional benefits to any of the
parties.
The operation with IFI and Corficafe included the purchase of liabilities
for PS 1,376 and US$263 respectively, corresponding to loans funded by
other institutions.
Loans purchased from Bancolombia-Panama were valued at 50% of face value.
The purpose of the operation was to restructure peso debt as established
in the restructuring agreement. There was no consolidated profit or loss
on this operation.
(30) RECLASSIFICATIONS
For better understanding of presentation of the financial statements of
the Bank's Annual Report on Form 20-F certain balance sheet and statement
of operations accounts were reclassified from the financial statements as
presented to stockholders. The reclassifications were as follows:
F-64
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2001
----
BALANCE SHEET
-------------
Report to
Stockholders Reclassifications SEC Form 20-F
------------ ----------------- -------------
Assets
Loans Ps 5,033,008 Ps 45,468 (1) Ps 5,078,476
Accounts Receivable 182,130 (75,366) (2) and (3) 106,764
Interest Receivable -- 77,681 (3) 77,681
Other Assets 443,054 (47,783) (1) and (2) 395,271
Property and Equipment 561,946 (241,866) (4) 320,080
Assets Leased -- 241,866 (4) 241,866
Equity
Capital 288,348 (288,348) (5) --
Ordinal Shares -- 101,579 (5) and (6) 101,579
Preference Shares -- 253,540 (5) and (6) 253,540
Reserves 205,036 233,682 (6) and (6) 438,718
Surplus 255,320 (235,239) (6) 20,081
Earnings from previous
Profit (loss) for the
period 65,214 (65,214) (6) and (7) --
2002
----
BALANCE SHEET
-------------
Report to
Stockholders Reclassifications SEC Form 20-F
------------ ----------------- -------------
Assets
Loans 5,813,675 51,316 (1) 5,864,991
Accounts Receivable 264,294 (82,631) (2) and (3) 181,663
Interest Receivable -- 83,459 (3) 83,459
Other Assets 346,103 (52,144) (1) and (2) 293,959
Property and Equipment 659,515 (341,791) (4) 317,724
Assets Leased -- 341,791 (4) 341,791
Equity
Capital 288,348 288,348 (5) --
Ordinal Shares -- 101,579 (5) and (6) 101,579
Preference Shares -- 253,540 (5) and (6) 253,540
Reserves 242,084 324,103 (6) 566,187
Surplus 388,909 (351,541) (6) 37,368
Earnings from previous Profit
(loss) for the period 154,627 (154,627) (6) and (7) --
(1) Employee loans are Other Assets in Colombian GAAP, and Loans under US GAAP.
(2) Unconfirmed remittances in transit are Other Assets under Colombian GAAP
and Accounts Receivable under US GAAP.
(3) Interest receivable is part of Accounts Receivable in Colombian GAAP and is
stated separately under US GAAP.
(4) Assets leased are part of Property and Equipment under Colombian GAAP and
are stated separately in US GAAP.
(5) Capital is a single figure in Colombian GAAP; Ordinary and Preference
shares are stated separately in US GAAP.
(6) In the Annual Report on Form 20-F the global amount of revaluations is
distributed to each of the equity accounts affected.
(7) Previous years' earnings are a separate item under Colombian GAAP; they are
classified as unappropriated Earnings under US GAAP.
F-65
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
STATEMENT OF EARNINGS
The Report to Stockholders shows operating income and expenses as
separate items. Form 20-F shows only the net figure between the two. In
addition, for 2000, the following reclassification was made: The
provision for leasing, foreclosed assets and other assets are stated in a
separated item which were part of the administrative and other expenses.
(31) DIFFERENCES BETWEEN COLOMBIAN ACCOUNTING PRINCIPLES FOR BANKS AND U.S.
GAAP
The Bank's financial statements are prepared in accordance with generally
accepted accounting principles and practices prescribed by the
Superintendency of Banking and other legal provisions (Colombian GAAP).
Because these principles and regulations differ in certain significant
respects from U.S. GAAP, this note presents a reconciliation of net
income and stockholders' equity to U.S. GAAP as applicable particularly
to financial institutions.
A) RECONCILIATION OF NET INCOME (LOSS):
The following summarizes the principal differences between accounting
practices under Colombian and U.S. GAAP and their effects on net
income for the years ended December 31, 2000, 2001 and 2002:
2000 2001 2002
---- ---- ----
Consolidated net income (loss) under
Colombian GAAP: Ps (113,990) Ps 156,533 Ps 210,380
a) Deferred income taxes 10,121 62,252 47,014
b) Employee benefit plans (8,675) (9,846) (2,502)
c) Inflation adjustment 1,556 (187) --
d) Revaluation of assets -- -- --
e) Allowance for loan losses 45,037 14,120 (66,100)
f) Loan origination fees and costs (240) 11,312 12,960
g) Interest recognition on non-accrual
loans -- -- 98
h) Deferred charges 8,239 (8,224) 9,125
i) Investment securities -- (5) 1,189
j) Investments in unaffiliated companies (350) (193) (589)
k) Investments in affiliates 11,045 7,650 (19,916)
l) Lessee accounting -- 81 (81)
m) Business combinations 2,767 (1,870) 20,108
n) Foreign currency translation adjustment -- -- (4,534)
o) Other 5,575 (5,575) --
Consolidated net income (loss) under
U.S. GAAP Ps (38,915) Ps 226,048 Ps 207,152
======== ======= =======
F-66
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
B) RECONCILIATION OF STOCKHOLDERS' EQUITY:
The following summarizes the principal differences between accounting
practices under Colombian GAAP and U.S. GAAP and their effects on
stockholders' equity for the years ended December 31, 2000, 2001 and
2002:
2000 2001 2002
---- ---- ----
Consolidated stockholders'
equity under Colombian GAAP Ps 865,883 Ps 970,451 Ps 1,284,348
a) Deferred income taxes 22,530 82,138 86,100
b) Employee benefit plans (23,059) (24,168) (25,548)
c) Inflation adjustment 43,403 43,216 43,216
d) Revaluation of assets (47,357) (20,081) (37,368)
e) Allowance for loan losses 98,434 112,554 46,454
f) Loan origination fees and costs 7,365 18,677 31,637
f) Interest recognition on non-accrual loans -- -- 98
h) Deferred charges (43,385) (51,609) (42,484)
i) Investment securities -- (1,189) --
j) Investment in unaffiliated companies (6,043) (6,236) (6,825)
k) Investments in affiliates 43,946 42,126 31,680
l) Lessee accounting -- 81 --
m) Business combination (16,101) (17,971) 2,137
n) Foreign currency adjustment -- -- --
o) Other 5,575 -- --
------ ------- -------
85,308 177,538 129,097
------ ------- -------
Consolidated stockholders' equity under U.S.
GAAP Ps 951,191 Ps 1,147,989 Ps 1,413,445
======= ========= =========
C) ANALYSIS OF CHANGES IN STOCKHOLDERS' EQUITY:
The following summarizes the changes in stockholders' equity under
U.S. GAAP for the years ended December 31, 2000, 2001 and 2002:
F-67
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2000 2001 2002
---- ---- ----
Balance at beginning of year Ps 724,636 Ps 951,191 Ps 1,147,989
Shares issued 257,463 -- --
Net income (loss) (38,915) 226,048 207,152
Dividends declared -- (20,760) (48,442)
Other comprehensive income (loss) (1,295) (4,561) 87,368
Other 9,302 (3,929) 19,378
------- --------- ---------
Balance at end of year Ps 951,191 Ps 1,147,989 Ps 1,413,445
======= ========= =========
D) STATEMENT OF COMPREHENSIVE INCOME (LOSS):
2000 2001 2002
---- ---- ----
Net Income (loss) Ps (38,915) Ps 226,048 Ps 207,152
Other comprehensive income, net of tax:
Foreign currency translation adjustments (5,163) -- --
Components of other comprehensive
from equity method investees -- (9,470) 9,470
Unrealized gain or loss on securities
available for sale -- (770) 72,635
Additional minimum pension liability
offset to shareholder's equity 3,868 5,679 729
Foreign currency translation adjustment -- -- 4,534
------ ------- -------
Other comprehensive income (loss) (1,295) (4,561) 87,368
------ ------- -------
Comprehensive income (loss) Ps (40,210) Ps 221,487 Ps 294,520
====== ======= =======
Other comprehensive income
2000
Before-Tax (Tax Expense) Net-of-tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustment Ps (7,943) Ps 2,780 Ps (5,163)
Additional minimum pension liability 5,951 (2,083) 3,868
----- ----- -----
Other comprehensive income Ps (1,992) Ps 697 Ps (1,295)
===== ===== =====
F-68
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2001
Before-Tax (Tax Expense) Net-of-tax
Amount or Benefit Amount
------ ---------- ------
Components of other comprehensive
from equity method investees Ps (14,570) Ps 5,100 Ps (9,470)
Unrealized gain or loss on securities
available for sale (1,185) 415 (770)
Additional minimum pension liability 8,737 (3,058) 5,679
----- ----- -----
Other comprehensive income Ps (7,018) Ps 2,457 Ps (4,561)
===== ===== =====
2002
Before-Tax (Tax Expense) Net-of-tax
Amount or Benefit Amount
------ ---------- ------
Components of other comprehensive
from equity method investees Ps 14,570 Ps (5,100) Ps 9,470
Unrealized gain or loss on securities
available for sale 115,294 (42,659) 72,635
Additional minimum pension liability 1,122 (393) 729
Foreign currency translation adjustment 4,534 -- 4,534
----- ------ ------
Other comprehensive income Ps 135,520 Ps (48,152) Ps 87,368
======= ====== ======
Accumulated other comprehensive income
Components
of other
comprehensive
Additional Foreign Unrealizable income from Accumulated
Minimum Currency Gains equity Other
Pension Translation On method Comprehensive
Liability Adjustment Securities investees Income
--------- ---------- ---------- --------- ------
Beginning balance 2000 Ps (12,036) Ps 5,163 Ps -- Ps -- Ps (6,873)
Current-period change 3,868 (5,163) -- -- (1,295)
------ ----- ------ ----- ------
Ending balance 2000 (8,168) -- -- -- (8,168)
====== ===== ====== ===== ======
Beginning balance 2001 (8,168) -- -- -- (8,168)
Current-period change 5,679 -- (770) (9,470) (4,561)
------ ----- ------ ----- ------
Ending balance 2001 (2,489) -- (770) (9,470) (12,729)
====== ===== ====== ===== ======
Beginning balance 2002 (2,489) -- (770) (9,470) (12,729)
Current-period change 729 4,534 72,635 9,470 87,368
------ ----- ------ ----- ------
Ending balance 2002 Ps (1,760) Ps 4,534 Ps 71,865 Ps -- Ps 74,639
====== ===== ====== ===== ======
F-69
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
SUMMARY OF SIGNIFICANT DIFFERENCES AND REQUIRED U.S. GAAP DISCLOSURES
a) Deferred income taxes:
Under Colombian GAAP, deferred income taxes are generally
recognized for timing differences in a manner similar to Accounting
Principles Board Opinion No. 11.
Under U.S. GAAP, deferred tax assets or liabilities must be
recorded for temporary differences between the financial and tax
bases of assets and liabilities. A valuation allowance is provided
for deferred tax assets to the extent that it is more likely than
not that they will not be realized.
Income tax expense under U.S. GAAP is comprised of the following
components for the years ended at December 31, 2000, 2001 and 2002:
2000 2001 2002
---- ---- ----
Current income tax expense Ps 16,506 Ps 31,603 Ps 44,533
Deferred income tax (benefit) expense 1,479 (62,280) (48,930)
----- -------- --------
Total Ps 17,985 Ps (30,677) Ps (4,397)
====== ======== =======
Temporary differences between the amounts reported in the financial
statements and the tax bases for assets and liabilities result in
deferred taxes. Deferred tax assets and liabilities at December 31,
2001 and 2002 were as follows:
2001 2002
---- ----
Deferred tax assets and liabilities
Deferred tax assets:
Accrual of employee benefits Ps 8,458 Ps 9,391
Preoperating expenses 18,062 15,584
Unrealized loss on investment securities 415 --
Allowance for loan losses 712 225
Fixed assets 42,016 22,023
Net operating loss carry forwards 121,746 92,337
Excess of presumed income over taxable income 27,290 36,242
Other 63,675 76,893
------- -------
Total gross deferred tax assets 282,374 252,695
Less valuation allowance (136,620) (61,256)
------- -------
Net deferred tax asset 145,754 191,439
------- -------
F-70
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2001 2002
---- ----
Deferred tax liabilities:
Unrealized gain on investment securities -- 42,659
Inflation adjustment 15,126 15,990
Allowance for loan losses 26,574 539
Lease financing 28 -
Other 23,242 45,589
------ -------
Total deferred liabilities 64,970 104,777
------ -------
Net deferred asset 80,784 86,662
------ -------
The valuation allowance for deferred tax assets as of December 31,
2002 and 2001 was Ps 61,256 and Ps 136,620 respectively. The net
change in the total valuation allowance for the years ended
December 31, 2002 and 2001 was a decrease of Ps 75,364 and Ps
63,962, respectively. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the
existing valuation allowances at December 31, 2002. The amount of
the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
The 35% income tax nominal rate differs from (44.9%) and (6.2)%
effective rate for years 2001 and 2002, due to the following:
2001 2002
------------------------ -------------------------
Profit before tax U.S. GAAP Ps 195,371 Ps 202,755
-------- --------
35% tax 68,380 70,964
Nondeductible items/provisions 32,001 27,159
Nontaxable income (46,829) (27,003)
Increase/(decrease) valuation allowance (76,429) (82,694)
Decrease tax readjustments to fixed assets 3,795 19,993
Deductible item (9,291) (9,796)
Effective tax rate changes -- 2,284
Tax discounts for donation (2,304) (5,304)
-------- --------
Income tax (income) Ps (30,677) Ps (4,397)
======== ========
F-71
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
As of December 31, 2002, The Bank had the intention of capitalize
the results from its off-shore subsidiaries. According with this
practice, the results of operations for the years ended December
31, 2000, 2001 and 2002 of Bancolombia Panama and subsidiaries were
capitalized.
b) Employee benefit plans:
U.S. GAAP requires the recognition of pension cost based on
actuarial computations under a prescribed methodology which differs
from that used under Colombian GAAP. For purposes of the U.S. GAAP
reconciliation, the resulting transition obligation is being
amortized from January 1, 1989 for a period of 18 years for the
pension plan and 27 years for the severance plan.
PENSION PLAN
In 1967, the Social Security Institute assumed the pension
obligation for the majority of the Bank's employees; however,
employees who had more than ten years of service prior to this
date, continue to participate in the Bank's noncontributory defined
benefit pension plan. Under this plan, benefits are based on length
of service and level of compensation. As of December 31, 2002,
there were 1,099 participants covered by the Plan.
While Colombian GAAP requires calculation of the estimated
liability using actuarial methodology given by the law, the
actuarial assumptions, based on nominal discount, salary and
pension increase rates, and the method of computing the net
periodic pension costs differ from those required by U.S. GAAP.
SEVERANCE OBLIGATION
Under Colombian labor regulations, employees are entitled to
receive one month's salary for each year of service. This benefit
accumulates and is paid to the employees upon their termination or
retirement from the Bank; however, employees may request advances
against this benefit at any time. In 1990, the Colombian government
revised its labor regulations to permit companies, subject to the
approval of the employees, to pay the severance obligation to their
employees on a current basis. Law 50, 1990, also enabled each
worker freely to choose the pension fund that will manage the
amount of his/her severance paid accrued during the year. This
amount must be transferred by headquarters to the pension funds no
later than the following period. In order to entice the employees
to change to this new method of receiving the severance benefit on
a current basis, in 1999 and 2000, the Bank negotiated settlements
with executive employees. These settlements consisted of the
current value of their accumulated benefit plus a one-time bonus
payment. The Bank elected to expense this settlement of Ps 297 and
Ps 124 in its entirety during 1999 and 2000, respectively. The
modification of this severance benefit represents a plan
curtailment under U.S. GAAP.
F-72
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
As of December 31, 2002 there were 2,119 participants remaining in
the original severance plan.
DISCLOSURE AND CALCULATION OF DIFFERENCES UNDER U.S. GAAP
The combined costs for the above mentioned benefit plans, determined
using U.S. GAAP, for the years ended December 31, 2000, 2001 and
2002 are summarized below:
2000 2001 2002
---------- ---------- ----------
Change in benefit obligation
Unfunded benefit obligation at beginning
of year Ps 118,024 Ps 113,243 Ps 107,061
Service cost 1,777 1,911 1,663
Interest cost 28,154 28,444 26,482
Advances (7,968) -- --
Actuarial gain (loss) (745) (18,191) (7,088)
2000 2001 2002
---------- ---------- ----------
Benefits paid (11,580) (18,346) (20,861)
Divesture Simesa (6,670) -- --
Effect to restating to constant pesos (7,749) -- --
---------- ---------- ----------
Unfounded benefit obligation at end of year Ps 113,243 Ps 107,061 Ps 107,257
========== ========== ==========
Funded status Ps(113,243) Ps(107,061) Ps(107,257)
Unrecognized net transition loss 9,687 8,638 7,588
Unrecognized net actuarial loss (gain) 21,803 3,252 (3,841)
Unrecognized prior service cost 1,289 1,146 1,002
---------- ---------- ----------
Accrued benefit cost under U.S.GAAP (80,464) (94,025) (102,508)
---------- ---------- ----------
Accrued benefit cost under Colombian GAAP (69,972) (73,687) (79,668)
---------- ---------- ----------
Difference to be recognized under U.S. GAAP (10,492) (20,338) (22,840)
---------- ---------- ----------
Additional minimum pension liability
offset to Stockholders' equity (12,567) (3,830) (2,708)
---------- ---------- ----------
Total difference to be recognized under
U.S.GAAP Stockholders' equity Ps (23,059) Ps (24,168) Ps (25,548)
========== ========== ==========
The actuarial assumptions adopted have been applied net of the
effects of price inflation. The resulting significant assumptions
used in determining the actuarial present value of pension
obligation and the projected pension
F-73
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
obligation for the plan years were as follows:
2000 2001 2002
--------- --------- ---------
Discount rate 8% 8% 8%
Rate of compensation increases 2% 2% 2%
Rate of pension increases 0% 0% 0%
Components of net periodic benefit cost
Service cost Ps 1,777 Ps 1,911 Ps 1,663
Interest cost 28,154 28,444 26,482
Amortization of prior service 143 143 143
Amortization of unrecognized net transition
obligation 1,048 1,048 1,048
Amortization of actuarial unrecognized net
gain (loss) 913 360 7
--------- --------- ---------
Net periodic pension cost under U.S.GAAP 32,035 31,906 29,343
2000 2001 2002
--------- --------- ---------
Net periodic pension cost under Colombian
GAAP Ps 23,360 Ps 22,060 Ps 26,841
--------- --------- ---------
Difference to be recognized under U.S.
GAAP Ps (8,675) Ps (9,846) Ps (2,502)
========= ========= =========
c) Inflation adjustment
Since January 1, 1992 and up to December 31, 2000 the consolidated
financial statements were adjusted for inflation based on the
variation in the CPI for middle income-earners. The adjustment was
applied monthly to non-monetary assets, equity (except for the
revaluation surplus and exchange adjustment) contingent accounts and
memorandum accounts. No adjustment was made to income, costs and
expenses, and the financial statements for the preceding period did
not have to be re-expressed.
Financial statements are adjusted for inflation under U.S. GAAP when
an entity operates in a hyperinflationary environment. The U.S GAAP
Adjustment represent the cumulative inflation adjustment on the
Bank's non-monetary assets for inflation occurring prior to January
1,1992, less depreciation expense.
Under Colombian GAAP, the Bank updates the market value of
properties, plant and equipment and recognizes this effect of
revaluation in the equity, and in Statement of Operations when the
market value is less than the book value. The last valuation was in
December 2001.
F-74
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The components of the pro-forma adjustments to net income are as
follows:
2000 2001 2002
-------- -------- --------
Additional inflation adjustment on non-monetary
assets and stockholders' equity Ps 1,859 Ps -- Ps --
Additional depreciation of inflation adjustments
related to non-monetary assets (303) (187) --
-------- -------- --------
Increase (decreased) in net income Ps 1,556 Ps (187) Ps --
======== ======== ========
The components of the adjustments to stockholders' equity are as
follows:
2000 2001 2002
-------- -------- --------
Effects of indexation on non-monetary assets:
Premises and equipment Ps42,892 Ps42,705 Ps42,705
Equity investments 511 511 511
-------- -------- --------
Ps43,403 Ps43,216 Ps43,216
======== ======== ========
d) Revaluation of assets
In accordance with Colombian GAAP, reappraisals of a portion of the
Bank's premises and equipment, equity investments and other
non-monetary assets are made periodically and recorded in offsetting
accounts which are shown under the asset caption "Asset
reappraisals" and the stockholders' equity caption "Surplus from
reappraisals of assets". Under U.S. GAAP, reappraisals of assets are
not permitted.
e) Allowance for loan losses
The methodology for evaluating loans under Colombian GAAP, as
discussed in Note 2h, is based on their inherent risk
characteristics and serves as a basis for recording loss allowances
based on loss percentage estimates, established by the
Superintendency of Banking. Under both Colombian and U.S. GAAP, the
loan loss allowance is determined and monitored on an ongoing basis,
and is established through periodic provisions charged to
operations.
U.S. GAAP requires a specific valuation allowance for impaired
loans. Impaired loans are non-homogeneous loans that are evaluated
individually for impairment and that are not performing in
accordance with their contractual terms. An impaired loan is to be
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or at the loan's
observable market price or the fair value of the collateral if the
loan is collateral dependent. Troubled debt restructurings are
evaluated in this manner.
In general, commercial loans, which are 91 or more days past due,
consumer and small business loans, which are 61 or more days past
due, together with certain other loans identified by management, are
deemed to be impaired.
F-75
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following summarizes the allowance for loan losses under
Colombian and U.S. GAAP at December 31, 2000, 2001 and 2002:
2000 2001 2002
---------- ---------- ----------
Allowance for loan losses under
Colombian GAAP
Allowance for loan losses Ps 285,565 Ps 271,729 Ps 332,324
Allowance for other receivable (1) -- 28,463 18,073
Allowance for lease rentals and
related receivable 6,243 6,746 8,832
Allowance for foreclosed assets 93,591 106,081 107,962
---------- ---------- ----------
Ps 385,399 Ps 413,019 Ps 467,191
---------- ---------- ----------
Allowance for loan losses under
U.S. GAAP
Allowance for loan losses
and other receivables Ps 227,247 Ps 223,227 Ps 339,612
Allowance for lease rentals and
related receivable 2,223 7,792 8,890
Allowance for foreclosed assets 57,495 69,446 72,235
---------- ---------- ----------
Ps 286,965 Ps 300,465 Ps 420,737
---------- ---------- ----------
Additional allowance for loan losses
under U.S. GAAP Ps (98,434) Ps(112,554) Ps (46,454)
========== ========== ==========
(1) For the year 2000, this allowance was not presented
separately.
At December 31, 2000, 2001, and 2002, the carrying value of loans
considered to be impaired, under SFAS No. 114 (not including
restructured loans) was approximately Ps 189,368, Ps 196,983 and Ps
136,718 respectively, and the related allowance for loan losses on
those impaired loans totaled Ps 146,211, Ps 134,679 and Ps 121,253,
respectively.
For the years ended December 31, 2000, 2001 and 2002, the Bank
recognized interest income of approximately Ps 17,266, Ps 5,741 and
Ps 5,594, respectively on such impaired loans.
f) Loan origination fees and costs
The Bank earns commissions (origination fees) on loans, lines of
credit and letters of credit when collected and records related
direct costs when incurred. For U.S. GAAP under SFAS No.91,
"Accounting for Non-refundable Fees and Costs Associated with
Origination or Acquiring Loans and Initial Direct Costs of Leases",
loan origination fees and certain direct loan origination cost are
recognized over the life of the related loans as an adjustment of
yield.
g) Interest recognition - non-accrual loans
F-76
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Since March 5, 2002, for Colombian GAAP purposes interest income is
not accrued on (i) commercial loans that are more than 90 days past
due (ii) consumer and small business loans that are more than 60
days or (iii) mortgage loans that are more than 120 days past due.
Once a loan is non-performing, an allowance is established for 100%
of the accrued interest receivable and the Bank ceases to recognize
interest income on that loan. The Bank recognizes interest income on
a cash basis for non-accrual loans.
For U.S. GAAP purposes, all accrued interest is reversed against
interest income once a loan becomes more than 90 days past due. U.S.
GAAP also requires that if the collectibility of the principal of a
non-accrual loan is in doubt, cash payments should be applied to
reduce the principal to the extent necessary to remove such doubt.
As a result, for U.S. GAAP purposes interest income on past due
consumer and small business loans between 61 and 90 days, was
included as accrued interest. Interest income from past due mortgage
loans between 91 and 120 days, was reversed.
h) Deferred charges
The Bank and its subsidiaries have deferred certain preoperating
expenses and other deferred charges, which are expensed as incurred
under U.S. GAAP.
i) Investment securities
Up to August 2002, under Colombian GAAP securities were classified
as "trading", "non-trading held to maturity", "permanent" and
"hedges", the two first were divided debt and equity securities.
In September 2002, the Superintendency of Banking issued External
Circular 033 which changed the classification of investment
securities as trading, held to maturity, and available for sale.
According to this norm, an investment will be classified as trading
when the Bank acquires it for the purpose of selling it in the near
term, as held to maturity when the bank has the intention and
ability to hold it to maturity, and as available for sale when the
investment is not classified as trading or held to maturity.
Change in Accounting Method for Investment Securities
As required by External Circular 033 of 2002, effective September 2,
2002, the Bank changed its method of classification and valuation
for investment securities. The effect of the change under Colombian
GAAP, was a decrease to net income of Ps 20,393. This effect was the
result of a change in the methodology used to determine the fair
value for investment securities. Due to the effective date of
adoption required it is not practical to determine the cumulative
effect of this change in accounting method as of January 1, 2002 or
prior period proforma effects.
The effect of the change on net income under Colombian GAAP for the
year ended December 31, 2002 is as follows:
F-77
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2002 Per share amounts
---- -----------------
Consolidated net income under
Colombian GAAP, before change in
accounting method for investment
securities Ps230,773 Ps400,16
Effect of change in valuation method
for investment securities at
September 2, 2002, net of tax (20,393) (35,36)
--------- --------
Consolidated net income (loss) under
Colombian GAAP as reported Ps210,380 Ps364,80
========= ========
Under US GAAP, investment securities that have readily determinable
market values, are accounted for as follows:
- Debt and equity securities that are bought and held
principally for the purpose of selling them in the short term
are classified as trading securities and are reported at fair
value, with unrealized gains and losses included in earnings.
- Debt securities that the Bank has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and are reported at amortized cost.
- Debt and equity securities not classified as either
held-to-maturity or trading securities are classified as
available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and
reported net of taxes, as a separate component of
stockholders' equity. Any loss in value of an investment
considered other than temporary is recognized in earnings
As of December 31, 2000 the Bank classified its portfolio as trading
and held to maturity investments and at December 31, 2001 and 2002
the Bank's portfolio was classified as trading, held to maturity and
available for sale.
The carrying amounts, gross unrealized gains and losses and
approximate fair value of debt securities classified as
held-to-maturity and available for sale under U.S. GAAP are shown
below:
Gross Gross
unrealized unrealized Cost
Fair value gains losses basis
---------- ----- ------ -----
AVAILABLE FOR SALE:
December 31, 2001
Securities issued or secured by
Colombian government Ps1,320 Ps -- Ps 428 Ps1,748
Securities issued or secured by
Government entities 5,636 -- 755 6,391
------- ------- ------- -------
Total Ps6,956 Ps -- Ps1,183 Ps8,139
======= ======= ======= =======
F-78
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Gross Gross
unrealized unrealized Cost
Fair value gains losses basis
---------- ----- ------ -----
AVAILABLE FOR SALE:
December 31, 2002
Securities issued or secured by
Colombian government Ps1,443,463 Ps 107,632 Ps 292 Ps1,336,123
Securities issued or secured by
Government entities 71,619 1,784 837 70,672
Securities issued or secured by
Financial entities 35,470 2,285 -- 33,185
Eurobonds and Euronotes 299,662 7,430 264 292,496
Other investments 35,924 -- 11 35,935
----------- ----------- ----------- -----------
Ps1,886,138 Ps 119,131 Ps 1,404 Ps1,768,411
=========== =========== =========== ===========
Gross Gross
unrealized unrealized Amortized
Fair value gains losses Cost
---------- ----- ------ ----
HELD TO MATURITY:
December 31, 2001
Securities issued or secured by
Colombian government Ps 57,768 Ps 3,929 Ps 11,078 Ps 64,917
Securities issued or secured by
Central Bank 11 -- 1 12
Securities issued or secured by
Government entities 46,810 10,214 20,815 57,411
--------- --------- --------- ---------
Total Ps104,589 Ps 14,143 Ps 31,894 Ps122,340
========= ========= ========= =========
HELD TO MATURITY
December 31, 2002
Securities issued or secured by
Colombian government Ps600,414 Ps 4,069 Ps 93 Ps596,438
Eurobonds and Euronotes 5,001 -- 2,297 7,298
Other investments 4,245 -- -- 4,245
--------- --------- --------- ---------
Ps609,660 Ps 4,069 Ps 2,390 Ps607,981
========= ========= ========= =========
F-79
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The scheduled maturities of debt securities at December 31, 2002
were as follows:
Held to maturity Available for sale
---------------- ------------------
Amortized Fair Cost Fair
Cost Value Basis Value
Due in one year or less Ps 10,941 Ps 10,944 Ps 137,264 Ps 141,569
Due from one year to five years 586,397 590,354 1,087,969 1,153,205
Due from five years to ten years 10,643 8,362 543,178 591,364
----------- ----------- ----------- -----------
Total Ps 607,981 Ps 609,660 Ps1,768,411 Ps1,886,138
As of December 31, 2000 and 2001, investments classified as held to
maturity for purposes of U.S. GAAP were mandatory investments, which
were required by law depending on the level of deposits.
Investments classified as "held to maturity" for purposes of U.S.
GAAP are securities issued or secured by Colombian government, which
the bank has the intention and ability to hold to maturity.
The Bank is not required under Colombian GAAP to disclose the
proceeds from the sale of investment securities nor gains or losses
resulting from such sales. As a result, it is not feasible to obtain
that information in a reasonable manner for disclosure under U.S.
GAAP.
Investments in non marketable equity securities:
j) Investment in unaffiliates companies. High and Median quotation
investments securities classified as "Available for sale " under
Colombian GAAP.
For purposes of Colombian GAAP, an investment in low, minimum
exchange or unquoted equity securities of an investee is recorded
using the average price published by the exchange. The result of
F-80
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
the valuation is recorded as unrealized gain or loss in
shareholders' equity. The investee also records common stock
dividends as income.
Under U.S. GAAP, an investment in non-marketable equity securities
of an investee is also recorded at cost if the investor cannot
exercise significant influence. However, common stock dividends are
not recorded as income. Instead, the costs of the shares previously
held are allocated equitably to the total shares held after receipt
of the stock dividend. When any shares are later disposed of, a gain
or loss is determined on the basis of the adjusted cost per share.
k) Investments in affiliates. Investments in low, minimum exchange or
unquoted equity securities classified as "Available for sale" for
purposes of Colombian GAAP
For purposes of Colombian GAAP, an investment in non-marketable
equity securities of an investee is recorded using the "intrinsic
value" method. Under the intrinsic value method, the Bank records
equity increases in stockholders' equity of the investee as a
component of other comprehensive income and decreases in
stockholders' equity of the investee with a charge to the
Consolidated Statement of Operations. Also under equity method, cash
dividends and common stock dividends reduced the equity amount.
Under U.S. GAAP, an investment in non-marketable equity securities
is recorded using the equity method when the investor can exercise
significant influence or the cost method when significant influence
cannot be exercised.
l) Lessee accounting
The Bank's subsidiaries, Bancolombia de Panama and Leasing Colombia
S.A., lease certain assets to third parties under non cancelable
lease arrangements. These lease arrangements involve machinery and
equipment, computer equipment and furniture and fixtures (with terms
between three and five years).
Under Colombian GAAP, assets leased to third parties with purchase
options are recorded as premises and equipment at cost. Contracts
made up to December 31, 1995 were recorded at acquisition or
construction cost (including capitalizable improvements and expenses
which increases the value of the property) and were adjusted for
inflation up to December 31, 2000. The impact of this accounting
method on the results of operations is substantially the same as
under U.S. GAAP.
Under U.S. GAAP, a net investment in direct financing leases would
be established in an account representing the present value of the
minimum lease payments plus the unguaranteed residual value accruing
to the benefit of the lessor.
Disclosure lessor accounting.
The following lists the components of the net investment in direct
financing leases as of December 31, 2001 and 2002:
F-81
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2001 2002
---------- ----------
Total minimum lease payments to be received Ps 324,505 Ps 469,895
Estimated residual values of leased property 26,862 32,987
Less: Unearned income (75,046) (102,721)
---------- ----------
Net investment in direct financing leases Ps 276,321 Ps 400,161
========== ==========
The following schedule shows the future minimum lease payments to be
received on direct financing leases for each of the succeeding later
years, through 2008:
Year ending December 31:
2003 Ps149,413
2004 117,249
2005 83,277
2006 58,807
2007 37,140
Later years, through 2008 24,009
---------
Total minimum future lease payments
to be received Ps469,895
=========
Lessee accounting
Colombian accounting practice for operating and financial leasing
operations are as follows for the lessee:
(1) Financial leases are those involving land, sale-and-leaseback
and short-term operations:
- Real estate operations under five years.
- Machinery and equipment operations under three years
- Furniture and fittings operations under three years
- Vehicles and equipment operations under two years
(2) All other leasing contracts are operating leases.
Financial leases are treated as intangible assets matched by a
liability equal to the cost of the asset net of the financing
component. The asset is amortized or depreciated over its useful
life.
Payments under operating leases are charged to operating expenses.
Under U.S. GAAP financial leases must meet one of the following
conditions:
F-82
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
- Ownership is transferred
- There is a purchase option
- The contract is for 75% or more of the useful life of the
asset
- The present value of the contract is 90% or more of the value
of the asset.
Financial contracts are recorded as an asset with a matching
liability for the value of the asset leased, and the asset is
depreciated in the same way as other owned assets.
Depreciation is charged over the useful life of the asset if
ownership is transferred or if the lease contains a purchase option.
In other cases, the asset is depreciated over the life of the
contract.
A constant rate of interest is established to charge off the
financial component to expenses. A portion of each payment is
charged as an interest expense and the balance reduces the
liability. For operating leases the lessee records an expense on a
straight-line basis.
m) Business combination
The purchase method of accounting under U.S. GAAP requires that (i)
the purchase price be allocated to the acquired assets and
liabilities on the basis of fair market value, (ii) the statement of
operations of the acquiring company for the period in which a
business combination occurs include the income of the acquired
company after the date of acquisition, and (iii) the costs directly
related to the purchase of a business combination be included as a
cost of the acquisition and, therefore, recorded as a component of
goodwill.
Effective July 1, 2001, the bank adopted the provisions of SFAS No.
141, and certain provisions of SFAS No. 142, as required for
goodwill and intangible assets resulting from business combinations
consummated after June 30, 2001. The new rules required that all
business combinations consummated after June 30, 2001 be accounted
for under purchase method. The nonamortization provisions of the new
rules affecting good will and intangible assets with indefinite
lives are effective for all business combinations completed after
June 30, 2001.
On January 1, 2002, the Bank adopted the remaining provisions of
SFAS No. 142. Under the new rules, effective January 1, 2002,
goodwill is no longer amortized, but is subject to annual impairment
test. The bank believes it does not have intangible assets with
indefinite lives.
The Bank has performed the required impairment test of goodwill and
there was no impairment of goodwill. Pursuant to the application of
the new rule, the Bank reversed the amortization of goodwill from
Colombian GAAP for the year ended 2002. See note 31 r), for proforma
disclosures related to the adoption of SFAS No.142 on net income
(loss) and earnings (loss) per share.
The purchase method of accounting under Colombian GAAP requires that
(i) the purchase price be
F-83
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
allocated to the acquired assets and liabilities on the basis of
their book value, (ii) the statement of income of the acquiring
company for the period in which a business combination occurs
include the income of the acquired company as if the acquisition had
occurred on the first day of the reporting period and (iii) the
costs directly related to the purchase business combination not be
considered as a cost of the acquisition, but deferred and amortized
over a reasonable period as determined by management.
In addition, certain other merger related charges are permitted to
be deferred and amortized under Colombian GAAP over 36 months while
under US GAAP they are expensed as incurred.
n) Foreign currency translation adjustment
For Colombian GAAP the translation adjustment resulting in the
conversion of foreign currency statements was included in the
determination of net income.
Under U.S. GAAP according to SFAS No. 52, the translation adjustment
shall be reported as a component of stockholders' equity.
o) Other
In 2000, the Company accrued Ps 5,575 related to a penalty for early
termination of a contract although management did not formally
decide to terminate the subject contract until 2001.
Under U.S. GAAP, the accrual of such amount in 2000 would not be
appropriate. Accordingly, this amount has been reversed for U.S.
GAAP purposes.
p) Estimated fair value of financial instruments
As required by U.S. GAAP, the estimated fair value of the Bank's
financial instruments, their carrying values and the major
assumptions and methodologies used to estimate fair values at
December 31, 2001 and 2002 are presented hereunder. The fair value
of a financial instrument is defined as the amount at which the
instruments could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale.
For those financial instruments with no quoted market prices
available, fair values have been estimated using present value or
other valuation techniques. These techniques are inherently
subjective and are significantly affected by the assumptions used,
including the discount rates, estimates of future cash flows and
prepayment assumptions.
In addition, the fair values presented below do not attempt to
estimate the value of the Bank's fee generating businesses and
anticipated future business activities, that is, they do not
represent the Bank's value as a going concern.
F-84
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
December 31, 2001 December 31, 2002
---------------------------- ------------------------------
Carrying Estimated Carrying Estimated
Amount Fair value Amount Fair value
------ ---------- ------ ----------
Financial assets:
Cash and cash equivalents Ps 713,479 Ps 713,749 Ps 851,089 Ps 851,089
Investment securities 2,799,791 2,780,849 4,227,410 4,343,458
Loans, net 5,078,476 5,035,592 5,864,991 5,875,776
Foreign exchange and forward
Contracts - gain (loss) 9,232 9,232 (46,334) (46,334)
Accrued interest receivable on loans 77,681 77,681 83,459 83,459
Customers' acceptances 30,675 30,675 30,672 30,672
Financial liabilities:
Deposits 7,580,848 7,580,848 8,788,158 8,788,158
Overnight funds 202,994 202,994 610,158 610,158
Bank acceptances outstanding 31,066 31,066 31,050 31,050
Interbank borrowings 399,595 399,595 403,962 403,962
Borrowings from domestic development
banks 431,059 431,059 713,053 713,053
Long term debt 8,523 8,523 62,782 62,782
Off Balance Sheet Instruments:
Commitments to extend credit 7,727,587 -- 9,692,273 --
The following notes summarize the methods and assumptions used in
estimating the fair values of financial instruments:
SHORT-TERM FINANCIAL INSTRUMENTS
Short-term financial instruments are valued at their carrying
amounts included in the consolidated balance sheet, which are
reasonable estimates of fair value due to the relatively short
period to maturity of the instruments. This approach was used for
cash and cash equivalents, time deposits in financial entities,
customers' acceptances, accrued interest receivable and bank
acceptances outstanding.
INVESTMENT SECURITIES
In general, the estimated fair values of these financial instruments
were determined using either quoted market prices or dealer quotes
where available, or quoted market prices of financial instruments
with similar characteristics. Investment securities carried by the
Bank to comply with legal provisions, were valued at their carrying
amounts since they had no readily available market prices.
F-85
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
LOANS
Estimated fair values have been determined for loan portfolios with
similar financial characteristics. Loans were segregated by type
such as commercial and consumer, and each category was further
segmented based on maturity fixed and variable rates and accrual and
non-accrual status. The fair values of fixed-rate loans were
estimated by discounting scheduled cash flows using prevailing
market rates for these loans at the end of 2001 and 2002,
respectively. For variable-rate loans, their carrying amounts were
considered to be equivalent to their fair values. In addition, for
non-accrual loans, the estimated fair values were based on the
discounted value of estimated cash flows using higher discount rates
appropriate to the higher risk involved considering the criteria
established by SFAS 114.
DERIVATIVES
BC's derivatives are recorded at fair value on daily basis in
conformity with the rules prescribed by the Superintendency of
Banking, according with the class of instrument, as follows:
Foreign exchange forward contracts:
It must estimate the purchase or sale value of the exchange rate,
then obtain the net value in foreign currency at valuation day and
calculate the net gain or loss.
Financial Instruments forward contracts:
It is estimated the fair value without yields, then it must to value
the agreed amount to present value and calculate the net gain or
loss.
Futures Contracts:
The fair value of future contracts and other derivatives traded in
stock markets are calculated by the respective stock market where
BC's has conducted its operation.
DEPOSITS
The fair value of deposits with no defined maturity, such as
non-interest bearing deposits and saving accounts, is taken to be
the amount payable on demand at the reporting date. Fixed-maturity
deposits have also been valued at their carrying amounts given the
short-term maturity of such deposits.
INTERBANK BORROWINGS AND BORROWINGS FROM DOMESTIC DEVELOPMENT BANKS
Short-term interbank borrowings and borrowings from domestic
development banks have been valued at their carrying amounts because
of their relatively short-term mature. Long-term and domestic
F-86
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
development banks borrowings have also been valued at their carrying
amount because they bear interest at variable rates.
LONG TERM DEBT
Long term debt are bonds emitted by Leasing Colombia S.A. and Abocol
S.A. Buyers of this bonds are Colombian Pension Funds and it's price
of negotiation is similar to the carrying amount.
p) Paid-in-capital
In accordance with Colombian GAAP, paid-in capital in excess of par
value of shares issued is credited to a legal reserve. Under U.S.
GAAP, capital in excess of par value is credited to paid-in capital.
q) Unearned interest income
Under Colombian GAAP, unearned interest income is recorded as a
liability in the balance sheet. For U.S. GAAP purposes, only the net
amounts (loan amount less unearned interest) would be classified as
a loan. Under Colombian GAAP, unearned interest is amortized on a
straight - line basis whereas U.S. GAAP requires the use of the
effective interest method. However, the difference does not have a
material impact on the Bank's financial statements.
r) Earnings per share
Under Colombian GAAP, earnings per share is computed by dividing net
income by the weighted average number of both common and preference
shares outstanding for each period presented.
U.S. GAAP also requires dual presentation of basic and diluted EPS
for entities with complex capital structures as a well as a
reconciliation of the basic EPS computation to the diluted EPS
computation. Basic EPS is calculated by dividing net income
available to common stockholders by the weighted average number of
common shares outstanding. Diluted EPS assumes the issuance of
common shares for all dilutive potential common shares outstanding
during the reporting period. As of December 31, 2000, 2001 and 2002,
the Bank had a simple capital structure. Therefore, no difference
between Basic or Diluted EPS existed as of these dates.
The following summarizes information related to the computation of
basic earning(loss) per share for the years ended December 31, 2000,
2001 and 2002 (millions of pesos, except per share data):
2000 2001 2002
--------- --------- ---------
U.S. GAAP net income (loss) Ps(38,915) Ps226,048 Ps207,152
--------- --------- ---------
Less preferred share dividends 6,424 14,989 23,554
--------- --------- ---------
F-87
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Income (loss) attributable to common
stockholders Ps(45,339) Ps211,059 Ps183,598
========= ========= =========
Weighted average number of common
shares outstanding used in basic EPS
calculation (in millions) 380 398 398
--------- --------- ---------
Basic earnings (loss) per share Ps(119.31) Ps 530.30 Ps 461.30
========= ========= =========
Pro-forma net income (loss) and basic earnings (loss) per share for
the years ended December 31, 2000, 2001 and 2002, adjusted to
exclude amortization expense (net of tax) related to goodwill is as
follows:
2000 2001 2002
--------- --------- ---------
Income (loss) attributable to common
stockholders Ps(45,339) Ps211,059 Ps183,598
========= ========= =========
Goodwill amortization 14,722 14,722 --
--------- --------- ---------
Adjusted Income (loss) attributable
to common stockholders Ps(30,617) Ps225,781 Ps183,598
========= ========= =========
Basic earning (loss) per share:
Reported basic earnings (loss) per share Ps(119.31) Ps 530.30 Ps 461.30
========= ========= =========
Goodwill amortization 38.74 36.99 --
--------- --------- ---------
Adjusted basic earnings (loss) Per share Ps (80.57) Ps 567.29 Ps 461.30
========= ========= =========
s) Merger expenses
The indirect costs of the merger of Ps 33,028 recorded as "Merger
expenses" in the consolidated statement of income under Colombian
GAAP would be recorded, for U.S. GAAP purposes, in the respective
line items to which the costs related.
F-88
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
t) Segments Disclosure
The following presents certain information about reported segment
profit or loss, and segment assets:
2000
Governmental
Small And
Retail Commercial Business Institutional Corporate
Banking Banking Banking Banking Headquarters
------- ------- ------- ------- ------------
Revenues from external customers Ps 125,042 Ps 27,056 Ps 11,439 Ps 11,984 Ps (12,993)
Revenues from transactions with other
operating segments of the same
enterprise 18,344 2,666 340 (3,507) (8,954)
Interest income 251,131 178,684 82,249 95,082 133,440
Interest expense 155,366 16,267 10,800 40,716 135,086
Net interest revenue 95,765 162,417 71,629 54,366 (1,646)
Depreciation and amortization expense -- -- -- -- 34,064
Provision for loans losses 53,492 7,942 4,865 33,124 120,848
Administrative and other expense 303,243 22,737 18,396 19,143 86,636
Net monetary inflation adjustment -- -- -- -- 4,170
Income tax expense or benefit -- -- -- -- 22,823
Other income or expense, net 21,424 494 996 2,389 28,738
Merger expenses -- -- -- -- 44,828
------------ ------------ ------------ ------------ ------------
Segment profit before distribution of
income (expense) for treasury funds (96,160) 161,954 61,143 12,965 (299,884)
Distribution of income (expense) for
treasury funds (1) 146,545 (107,214) (42,974) (64) 3,707
Segment profit Ps 50,385 Ps 54,740 Ps 18,169 Ps 12,901 Ps (296,177)
============ ============ ============ ============ ============
Segments assets Ps 1,681,547 Ps 1,441,311 Ps 669,758 Ps 813,649 Ps 2,387,801
============ ============ ============ ============ ============
Offshore
Commercial All other
Banking Trust Leasing Manufacturing Segments Total
------- ----- ------- ------------- -------- -----
Revenues from external customers Ps 11,884 Ps 19,215 Ps 22,434 Ps 37,817 Ps 27,937 Ps 281,815
Revenues from transactions with other
operating segments of the same
enterprise 17,683 (384) (210) 815 (1,782) 25,011
Interest income 108,579 5,299 4,341 997 24,524 884,506
Interest expense 81,766 1 18,043 16,560 23,105 497,710
Net interest revenue 26,813 5,298 (13,702) (15,563) 1,419 386,796
Depreciation and amortization expense 460 1,144 3,173 1,119 3,737 43,697
Provision for loans losses 10,435 925 7,435 333 7,298 246,697
Administrative and other expense 1,632 13,108 4,381 25,056 26,783 521,115
Net monetary inflation adjustment -- (2,947) 142 3,727 (1,161) 3,931
Income tax expense or benefit -- 2,455 1,007 315 1,506 28,106
Other income or expense, net 3,486 1,591 2,474 789 20,036 82,417
Merger expenses -- -- -- -- -- 44,828
------------ ------------ ------------ ------------ ------------ ------------
Segment profit before distribution of
income (expense) for treasury funds 47,339 5,141 (4,858) 762 7,125 (104,473)
Distribution of income (expense) for
treasury funds (1) -- -- -- -- -- --
Segment profit Ps 47,339 Ps 5,141 Ps (4,858) Ps 762 Ps 7,125 Ps (104,473)
============ ============ ============ ============ ============ ============
Segments assets Ps 1,661,136 Ps 52,424 Ps 128,417 Ps 225,219 Ps 430,396 Ps 9,491,658
============ ============ ============ ============ ============ ============
(1) Those costs are calculated base on the funds that segments use
or provide. Those do not have an impact in the final result
F-89
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2001
Governmental
Small And
Retail Commercial Business Institutional Corporate
Banking Banking Banking Banking Headquarters
------- ------- ------- ------- ------------
Revenues from external
customers Ps 149,834 Ps 25,125 Ps 12,042 Ps 10,831 Ps (7,463)
Revenues from transactions
with other operating segments
of the same enterprise 30,138 3,193 3,260 (1,603) (37,727)
Interest income 321,459 210,010 112,038 94,154 189,858
Interest expense 162,625 14,195 9,903 53,949 194,883
Net interest revenue 158,834 195,815 102,135 40,205 (5,025)
Depreciation and amortization
expense -- -- -- -- 27,567
Provision for loans losses 31,142 2,890 (2,630) 4,070 53,984
Administrative and other
expense 305,183 25,790 20,334 20,591 70,814
Net monetary inflation
adjustment -- -- -- -- --
Income tax expense or benefit -- -- -- -- 33,302
Other income or expense, net 24,295 1,456 1,275 82 18,664
Merger expenses -- -- -- -- 42,206
Segment profit before
distribution of income
(expense) for treasury funds 26,776 196,909 101,008 24,854 (259,424)
Distribution of income
(expense) for treasury funds(1) 139,212 (131,173) (58,151) 22,779 27,333
Segment profit Ps 165,988 Ps 65,736 Ps 42,857 Ps 47,633 Ps (232,091)
============ ============ ============ ============ ============
Segments assets Ps 1,960,065 Ps 1,652,670 Ps 843,872 Ps 748,559 Ps 2,832,592
============ ============ ============ ============ ============
Offshore
Commercial All other
Banking Trust Leasing Manufacturing Segments Total
------- ----- ------- ------------- -------- -----
Revenues from external
customers Ps 9,234 Ps 24,309 Ps 26,687 Ps 40,059 Ps 66,167 Ps 356,825
Revenues from transactions
with other operating segments
of the same enterprise 7,170 888 508 1,535 4,903 12,265
Interest income 132,437 6,158 12,385 1,230 25,859 1,105,588
Interest expense 86,357 -- 28,328 11,622 25,128 586,990
Net interest revenue 46,080 6,158 (15,943) (10,392) 731 518,598
Depreciation and amortization
expense 699 1,299 907 1,519 9,755 41,746
Provision for loans losses 16,790 946 4,608 876 5,826 118,502
Administrative and other
expense 4,319 14,369 5,630 28,026 46,228 541,284
Net monetary inflation
adjustment -- -- -- 2,761 (208) 2,553
Income tax expense or benefit -- 4,047 304 1,203 6,679 45,535
Other income or expense, net 6,950 (378) 2,953 1,537 6,652 63,486
Merger expenses -- -- -- -- -- 42,206
Segment profit before
distribution of income
(expense) for treasury funds 47,626 10,316 2,756 3,876 9,757 164,454
Distribution of income
(expense) for treasury funds(1) -- -- -- -- -- --
Segment profit Ps 47,626 Ps 10,316 Ps 2,756 Ps 3,876 Ps 9,757 Ps 164,454
============ ============ ============ ============ ============ ============
Segments assets Ps 2,159,016 Ps 64,020 Ps 201,312 Ps 226,300 Ps 517,967 Ps11,206,373
============ ============ ============ ============ ============ ============
(1) Those costs are calculated base on the funds that segments use
or provide. Those do not have an impact in the final result
F-90
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2002
Governmental
Small And Offshore
Retail Commercial Business Institutional Corporate Commercial
Banking Banking Banking Banking Headquarters Banking
------- ------- ------- ------- ------------ -------
Revenues from external
customers Ps 176,296 Ps 30,930 Ps 18,975 Ps 7,764 Ps (19,835) Ps 6,628
Revenues from transactions
with other operating segments
of the same enterprise 22,961 14,308 9,034 21,433 (69,367) (31,185)
Interest income 338,468 150,885 118,925 71,606 255,965 93,871
Interest expense 135,141 14,687 12,420 55,261 172,153 70,217
Net interest revenue 203,327 136,198 106,505 16,345 83,812 23,654
Depreciation and amortization
expense -- -- -- -- 27,788 846
Allowance for loans losses 17,269 5,851 3,187 231 39,303 64,951
Administrative and other
expense 254,704 34,542 29,203 30,170 124,174 3,885
Net monetary inflation
adjustment -- -- -- -- -- --
Income tax expense or benefit -- -- -- -- 25,364 --
Other income or expense, net 1,922 (144) 51 (1,122) 16,344 86,293
Merger expenses -- -- -- -- 33,028 --
Segment profit before
distribution of income
(expense) for treasury funds 132,533 140,899 102,175 14,019 (238,703) 15,708
Distribution of income
(expense) for treasury
funds (1) 116,985 (85,774) (55,594) 41,547 (17,164) --
============= ============= ============= ============= ============= =============
Segment profit Ps 249,518 Ps 55,125 Ps 46,581 Ps 55,566 Ps (255,867) Ps 15,708
============= ============= ============= ============= ============= =============
Segments assets Ps 2,334,832 Ps 1,606,634 Ps 1,137,409 Ps 717,142 Ps 3,796,115 Ps 2,985,578
============= ============= ============= ============= ============= =============
All other
Trust Leasing Manufacturing Segments Total
----- ------- ------------- -------- -----
Revenues from external
customers Ps 34,327 Ps 32,884 Ps (14,820) Ps 48,564 Ps 321,713
Revenues from transactions
with other operating segments
of the same enterprise 1,532 (244) 9,275 2,074 (20,179)
Interest income 6,338 3,848 1,914 24,099 1,065,919
Interest expense 2,047 20,943 5,036 22,631 510,536
Net interest revenue 4,291 (17,095) (3,122) 1,468 555,383
Depreciation and amortization
expense 1,078 809 1,023 5,247 36,791
Allowance for loans losses 647 3,446 329 6,415 141,629
Administrative and other
expense 21,594 7,177 21,686 54,215 581,350
Net monetary inflation
adjustment -- -- -- -- --
Income tax expense or benefit 5,648 1,214 1,938 8,453 42,617
Other income or expense, net 1,180 1,435 21,127 41,613 168,699
Merger expenses -- -- -- -- 33,028
Segment profit before
distribution of income
(expense) for treasury funds 12,363 4,334 (12,516) 19,389 190,201
Distribution of income
(expense) for treasury
funds (1) -- -- -- -- --
============= ============= ============= ============= =============
Segment profit Ps 12,363 Ps 4,334 Ps (12,516) Ps 19,389 Ps 190,201
============= ============= ============= ============= =============
Segments assets Ps 74,151 Ps 308,046 Ps 225,413 Ps 530,270 Ps 13,715,590
============= ============= ============= ============= =============
(1) Those costs are calculated base on the funds that segments use
or provide. Those do not have an impact in the final result
F-91
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following is a reconciliation of reportable segments revenues,
profit or loss and assets, to the Banks' consolidated totals.
2000 2001 2002
------------- ------------- -------------
Revenues
Total revenues for reportable segments Ps 1,140,653 Ps 1,377,748 Ps 1,292,716
Other revenues 69,034 136,462 254,266
Elimination of intersegment revenues (25,011) (12,265) 20,179
------------- ------------- -------------
Total revenues for reportable segments Ps 1,184,676 Ps 1,501,945 Ps 1,567,161
============= ============= =============
2000 2001 2002
------------- ------------- -------------
Profit or Loss
Total profit or loss for reportable segments Ps (111,599) Ps 154,697 Ps 170,812
Other profit or loss 7,123 9,756 19,389
Elimination of intersegment profits (9,514) (7,920) 20,179
------------- ------------- -------------
Net income (loss) Ps (113,990) Ps 156,533 Ps 210,380
============= ============= =============
Assets
Total assets for reportable segments Ps 9,061,262 Ps 10,688,406 Ps 13,185,320
Other assets 430,396 517,967 530,270
Elimination of intersegment assets (883,911) (931,914) (1,116,008)
------------- ------------- -------------
Consolidated total Ps 8,607,747 Ps 10,274,459 Ps 12,599,582
============= ============= =============
The following sumarizes the Bank's revenues and long-lived assets
attributable to Colombia and other foreign countries:
2002
--------------------------------
Long
Geographic Information Revenues Lived-Assets
-------- ------------
Republic of Colombia 1,477,668 582,318
Republic of Panama 69,314 93,915
--------- ---------
Total 1,546,982 676,233
Eliminations 20,179 (2,333)
--------- ---------
Total, net 1,567,161 673,900
F-92
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
RECENT U.S. GAAP PRONOUNCEMENTS
In June 2002, the FASB issued Statement No. 146 "Accounting for
Costs Associated with Exit or Disposal Activities", This Statement
addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity."
This Statement requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is
incurred. A fundamental conclusion is that an entity's commitment to
a plan, by itself, does not create a present obligation to others
that meets the definition of a liability. Therefore, this Statement
eliminates the definition and requirements for recognition of exit
costs in Issue 94-3. This Statement also establishes that fair value
is the objective for initial measurement of the liability. The
provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, early
application encouraged. BC is evaluating the impact Statement 146
may have on its future Consolidated Financial Statements.
In October, 2002, the FASB issued Statement No. 147 "Acquisitions of
Certain Financial Institutions". Except for transactions between two
or more mutual enterprises, this Statement requires that
acquisitions of certain financial institutions be accounted for in
accordance with FASB Statements No. 141, "Business Combinations",
and No. 142, "Goodwill and Other Intangible Assets". Thus, the
requirement to recognize (and subsequently amortize) any excess of
the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions
within the scope of this Statement. In addition, this Statement
amends FASB Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", to include in its scope long-term
customer-relationship intangible assets of financial institutions
such as depositor and borrower-relationship intangible assets and
credit cardholder intangible assets. The Effective Date of This
Statement about the application of the purchase method of
accounting, is effective for acquisitions for which the date of
acquisition is on or after October 1, 2002. This Statement may have
an impact on BC if another business combination would take place.
In November, 2002, the FASB issued the Financial Accounting
Standards Board Interpretation No. 45, "Guarantor's Accounting and
Disclosure requirements for Guarantees Including Indirect Guarantees
of Indebtedness of Others." The Interpretation expands on the
accounting guidance of Statements No. 5, 57, and 107 and
incorporates without change the provisions of FASB Interpretation
No. 34, which is being superseded. The Interpretation elaborates on
the existing disclosure requirements for most guarantees, including
loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value,
of the obligations it assumes under that guarantee and must disclose
that information in its interim and annual financial statements.
This guidance does not apply to certain guarantee contracts, such as
those issued by insurance companies or for a lessee's residual value
guarantee embedded in a capital lease. The provisions related to
recognizing a liability at inception of the guarantee for the fair
value of the guarantor's obligations would not apply to product
warranties or to guarantees accounted for as derivatives. The
initial recognition and initial measurement provisions apply on a
prospective basis to guarantees issued or modified after December
31, 2002, regardless of the guarantor's fiscal year-end. The
disclosure requirements in the Interpretation are effective for
financial statements of
F-93
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
interim or annual periods ending after December 15, 2002. BC is
evaluating the impact FIN 45 may have on its future Consolidated
Financial Statements.
In January, 2003, the Financial Accounting Standards Board (FASB)
has issued Interpretation No. 46, Consolidation of Variable Interest
Entities. Many variable interest entities have commonly been
referred to as special-purpose entities or off-balance sheet
structures, but the guidance applies to a larger population of
entities. Consolidation by a primary beneficiary of the assets,
liabilities and results of activities of variable interest entities
will provide more complete information about the resources,
obligations, risks and opportunities of the consolidated company. To
further assist financial statement users in assessing a company's
risks, the Interpretation also requires disclosures about variable
interest entities that the company is not required to consolidate
but in which it has a significant variable interest. The
consolidation requirements of Interpretation 46 apply immediately to
variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the variable
interest entity was established. The interpretation FIN 46 will have
no impact on net income or stockholders' equity.
In December, 2002, FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an
amendment of FASB Statement No. 123". This Statement provide
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee
compensation. In addition, this Statement require prominent
disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. This Statement
permits two additional transition methods for entities that adopt
the preferable method of accounting for stock-based employee
compensation. Both of those methods avoid the ramp-up effect arising
from prospective application of the fair value based method. In
addition, this Statement does not permit the use of the original
Statement 123 prospective method of transition for changes to the
fair value based method made in fiscal years beginning after
December 15, 2003. Also, in the absence of a single accounting
method for stock-based employee compensation, this Statement
requires disclosure of comparable information for all companies
regardless of whether, when, or how an entity adopts the preferable,
fair value based method of accounting. In addition, this Statement
improves the timeliness of those disclosures by requiring their
inclusion in financial reports for interim periods. BC evaluated the
impact of applying FASB 148, and determined it will have no impact
on net income or stockholders' equity.
F-94