AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 2005
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 20-F
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(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, 2004
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: 1-32535
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
PREFERRED SHARES New York Stock Exchange*
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* Bancolombia's Preferred Shares are not listed for trading, but only in
connection with the registration of American Depositary Shares, which are
evidenced by American Depositary Receipts each representing 4 preferred
shares.
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
Preferred 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
PRESENTATION OF FINANCIAL INFORMATION.............................................................. i
FORWARD-LOOKING STATEMENTS......................................................................... ii
PART I............................................................................................. 1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS................................ 1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.............................................. 1
ITEM 3. KEY INFORMATION...................................................................... 1
A. SELECTED FINANCIAL DATA.............................................................. 1
B. CAPITALIZATION AND INDEBTEDNESS...................................................... 5
C. REASONS FOR THE OFFER AND USE OF PROCEEDS............................................ 5
D. RISK FACTORS......................................................................... 6
ITEM 4. INFORMATION ON THE COMPANY........................................................... 15
A. HISTORY AND DEVELOPMENT OF THE COMPANY............................................... 15
B. BUSINESS OVERVIEW.................................................................... 19
C. ORGANIZATIONAL STRUCTURE............................................................. 67
D. PROPERTY, PLANT AND EQUIPMENT........................................................ 68
E. SELECTED STATISTICAL INFORMATION..................................................... 68
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS......................................... 102
A. OPERATING RESULTS.................................................................... 102
B. LIQUIDITY AND CAPITAL RESOURCES...................................................... 117
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.................................. 121
D. TREND INFORMATION.................................................................... 121
E. OFF-BALANCE SHEET ARRANGEMENTS....................................................... 123
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS........................................ 124
G. CRITICAL ACCOUNTING POLICIES AND ESTIMATES........................................... 124
H. RECENT U.S. GAAP PRONOUNCEMENTS...................................................... 125
I. RELATED PARTY TRANSACTIONS........................................................... 126
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES........................................... 126
A. DIRECTORS AND SENIOR MANAGEMENT...................................................... 126
B. COMPENSATION......................................................................... 130
C. BOARD PRACTICES...................................................................... 130
D. EMPLOYEES............................................................................ 132
E. SHARE OWNERSHIP...................................................................... 133
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.................................... 133
A. MAJOR SHAREHOLDERS................................................................... 133
B. RELATED PARTY TRANSACTIONS........................................................... 134
C. INTEREST OF EXPERTS AND COUNSEL...................................................... 135
ITEM 8. FINANCIAL INFORMATION................................................................ 136
A. CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION.................... 136
B. SIGNIFICANT CHANGES.................................................................. 138
ITEM 9. THE OFFER AND LISTING................................................................ 139
A. OFFER AND LISTING DETAILS............................................................ 139
B. PLAN OF DISTRIBUTION................................................................. 140
C. MARKETS.............................................................................. 140
D. SELLING SHAREHOLDERS................................................................. 141
E. DILUTION............................................................................. 141
F. EXPENSES OF THE ISSUE................................................................ 141
ITEM 10. ADDITIONAL INFORMATION............................................................... 141
A. SHARE CAPITAL....................................................................... 141
B. MEMORANDUM AND ARTICLES OF ASSOCIATION.............................................. 141
C. MATERIAL CONTRACTS.................................................................. 148
D. EXCHANGE CONTROLS................................................................... 149
E. TAXATION............................................................................ 149
F. DIVIDENDS AND PAYING AGENTS......................................................... 150
G. STATEMENT BY EXPERTS................................................................ 151
H. DOCUMENTS ON DISPLAY................................................................ 151
I. SUBSIDIARY INFORMATION.............................................................. 151
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................... 151
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES............................... 174
PART II............................................................................................ 174
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...................................... 174
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE PROCEEDS............ 174
ITEM 15. CONTROLS AND PROCEDURES.............................................................. 174
ITEM 16. RESERVED............................................................................. 175
ITEM.16.A AUDIT COMMITTEE FINANCIAL EXPERT..................................................... 175
ITEM.16.B CORPORATE GOVERNANCE AND CODE OF ETHICS.............................................. 175
ITEM.16.C PRINCIPAL ACCOUNTANT FEES AND SERVICES............................................... 176
ITEM.16.D PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS................ 176
PART III........................................................................................... 177
ITEM 17. FINANCIAL STATEMENTS................................................................. 177
ITEM 18. FINANCIAL STATEMENTS................................................................. 177
ITEM 19. EXHIBITS............................................................................. 177
PRESENTATION OF FINANCIAL INFORMATION
BANCOLOMBIA S.A., which may also act under the name of BANCO DE
COLOMBIA S.A. ("Bancolombia," "BC," the "Bank," "us" or "we"), is a banking
institution organized under the laws of the Republic of Colombia ("Colombia").
We maintain accounting records in Colombian pesos ("peso," "pesos" or "Ps"). The
audited consolidated financial statements of BC and subsidiaries in which it
holds, directly or indirectly, 50% or more of the outstanding voting shares (the
"Subsidiaries") for the years ended December 31, 2002, 2003 and 2004 contained
in this annual report on Form 20-F (the "Annual Report") (collectively,
including the notes thereto, the "Financial Statements") are expressed in pesos.
In this Annual Report, references to "U.S. dollar," "U.S. dollars," and "US$"
are to United States dollars.
This Annual Report translates certain peso amounts into U.S. dollars
at specified rates solely for the convenience of the reader. Unless otherwise
indicated, such peso amounts have been translated at the rate of Ps 2,389.75 per
US$ 1.00, which corresponds to the Tasa Representativa del Mercado
("Representative Market Rate") calculated the last business day of December
2004. 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 May 31, 2005, the Representative
Market Rate was Ps 2,338.89 per US$ 1.00. As used in this Annual Report, the
term "billion" means one thousand million (1,000,000,000).
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, Colombian
GAAP. Together, these requirements differ in certain significant respects from
generally accepted accounting principles in the United States ("U.S. GAAP").
References to Colombian GAAP in this annual report are to Colombian GAAP as
supplemented by the applicable rules of the Colombian Superintendency of
Banking.
For consolidation purposes, financial statements of the Bank and its
Subsidiaries must be prepared under uniform accounting policies. In order to
comply with this requirement, financial statements of foreign Subsidiaries were
adjusted as required by Colombian regulations with regard to investments, loans
and leased assets.
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 the following companies: Bancolombia
Cayman, Sistema de Inversiones y Negocios S.A., Sinesa Holding Company and
Future Net Inc. The Bank's subsidiary Almacenar S.A. consolidates the company
Unicargo de Colombia S.A. The subsidiary Colcorp S.A. consolidates the companies
Inmobiliaria Bancol S.A., Abocol S.A., Valores Simesa S.A. (a company resulting
from a spin-off by Simesa S.A. on December 31, 2000), Fundicom S.A. and Todo Uno
Colombia S.A.
i
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 20-F contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and information relating to us that are not based on historical facts but
instead 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," "predict," "target,"
"forecast," "guideline," "should" 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. Forward-looking statements speak only as of the date they
are made, and the Bank does not intend, and does not assume any obligation, to
update these forward-looking statements in light of new information or future
events.
Factors that could cause actual results to differ materially and
adversely include, but are not limited to:
- changes in general economic, business, political, fiscal
or other conditions in Colombia or changes in general
economic or business conditions in Latin America;
- changes in capital markets or in markets in general that
may affect policies or attitudes towards lending to
Colombia or Colombian companies;
- increased costs;
- unanticipated increase in financing and other costs or
the inability to obtain additional debt or equity
financing on attractive terms; and
- the factors discussed under Item 3. Key Information - D.
Risk Factors; Item 5. Operating and Financial Review and
Prospects; and elsewhere in this Annual Report and in
the documents that it incorporates by reference.
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. New factors emerge from time to time, and it is not possible for the
Bank to predict all of these 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 of 1933
(the "Securities Act") and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
Neither our independent auditors, nor any other independent
accountants, have compiled, examined, or performed any procedures, with respect
to the prospective financial information contained herein, nor have they
expressed any opinion or any other form of assurance on such information or its
achievability, and assume no responsibility for, and disclaim any association
with, the prospective financial information.
ii
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 31, 2003 and
2004, and for each of the three years in the period ended December 31, 2004 set
forth below has been derived from our audited Consolidated Financial Statements
included in this Report. The selected consolidated financial data as of December
31, 2000, 2001 and 2002, and for each of the two years in the period ended
December 31, 2001 set forth below have been derived from our audited
consolidated financial statements for the respective periods, which are not
included herein.
The Consolidated Financial Statements for the years ended December
31, 2003 and 2004, were audited by Deloitte & Touche Ltda., independent
accountants. For the years ended December 31, 2002, 2001 and 2000 our
Consolidated Financial Statements were audited by KPMG Ltda., independent
accountants.
The selected data should be read in conjunction with the
consolidated financial statements, related notes thereto, and the reports of the
independent public accounting firms.
In order to provide a better understanding of BC's financial
statements, certain reclassifications were made in the consolidated balance
sheets for fiscal years 2000, 2001, 2002, and 2003. As a result, certain figures
provided in this Annual Report for the years ended December 31, 2000, 2001, 2002
and 2003, such as net accounts receivable, net foreclosed assets, net operating
leases, net and other assets, differ from those reported in the Bank's Annual
Report for the years ended December 31, 2000, 2001, 2002 and 2003. These
reclassifications do not affect the Bank's stockholders' equity for any of the
years for which the Consolidated Balance Sheets were reclassified.
1
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
2000 2001 2002 2003 2004 2004(1)
------------ ------------- ------------ -------------- ------------- --------------
(Ps million and U.S. dollars thousands(1), except per share and per American Depositary
Shares "ADS" amounts)
CONSOLIDATED STATEMENT OF OPERATIONS:
COLOMBIAN GAAP:
Interest income....................... Ps 842,633 Ps 881,757 Ps 738,184 Ps 1,400,255 Ps 1,680,577 US$ 703,244
Interest expense...................... (458,855) (529,074) (466,223) (480,513) (585,744) (245,107)
------------ ------------- ------------ -------------- ------------- --------------
NET INTEREST INCOME................. 383,778 352,683 271,961 919,742 1,094,833 458,137
Provisions for loans and accrued
interest losses(2)................... (152,296) (73,953) (115,154) (162,058) (104,632) (43,784)
Provision for foreclosed assets and
other assets....................... (112,219) (63,537) (71,212) (68,892) (38,949) (16,298)
------------ ------------- ------------ -------------- ------------- --------------
NET INTEREST INCOME AFTER
PROVISIONS......................... 119,263 215,193 85,595 688,792 951,252 398,055
Other operating income................ 341,971 620,188 828,977 674,647 732,994 306,724
Operating expenses.................... (618,352) (696,963) (755,801) (869,350) (936,185) (391,750)
------------ ------------- ------------ -------------- ------------- --------------
NET OPERATING INCOME (LOSS)......... (157,118) 138,418 158,771 494,089 748,061 313,029
Net non-operating income (loss)....... 67,792 51,000 79,787 37,600 71,853 30,067
Net monetary inflation adjustment..... 4,209 - - - - -
------------ ------------- ------------ -------------- ------------- --------------
INCOME (LOSS) BEFORE TAXES.......... (85,117) 189,418 238,558 531,689 819,914 343,096
Minority interest (loss).............. (767) (1,310) 14,440 330 (2,426) (1,015)
Income taxes.......................... (28,106) (31,575) (42,618) (62,635) (238,810) (99,931)
------------ ------------- ------------ -------------- ------------- --------------
NET INCOME (LOSS)................... PS (113,990) PS 156,533 PS 210,380 PS 469,384 PS 578,678 US$ 242,150
============ ============= ============ ============== ============= ==============
Weighted average of Preferred and
Common Shares outstanding(3)........ 542,137,634 576,695,395 576,695,395 576,695,395 576,695,395
Net operating income (loss) per
share(3)(4).......................... Ps (290) Ps 240 Ps 275 Ps 857 Ps 1,297 US$ 0.54
Net operating income (loss) per ADS... (1,159) 960 1,101 3,427 5,189 2.17
Net income (loss) per share(3)(4)..... (210) 271 365 814 1,003 0.42
Net income (loss) per ADS............. (840) 1,084 1,460 3,256 4,012 1.68
Cash dividends declared per share(5).. 36 84 132 272 376 0.16
Cash dividends declared per ADS....... 144 336 528 1,088 1,504 0.63
U.S. GAAP:
Net income (loss)..................... Ps (38,915) Ps 226,048 Ps 207,152 Ps 474,419 Ps 642,126 US$ 268,700
Net income (loss) per share(6)........ (119) 530 461 1,070 1,445 0.60
Net income (loss) per ADS............. (476) 2,120 1,844 4,280 5,780 2.42
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(1) Amounts stated in dollars have been translated at the rate of Ps 2,389.75
to US$ 1.00 which is the Representative Market Rate calculated the last
business day of December 2004, as reported and certified by the
Superintendency of Banking.
(2) Includes a provision for accrued interest losses amounting to Ps 20,178
million, Ps 4,965 million, Ps 4,518 million, Ps 5,316 and Ps 4,483 million
for the years ended December 31, 2000, 2001, 2002, 2003 and 2004
respectively.
(3) Includes Common Shares and 178,435,787 Preferred Shares for 2000, 2001,
2002, 2003 and 2004.
(4) Reflects all dividends per share distributed through December 31, 2000.
Calculated on the basis of average outstanding shares during the period.
(5) This data is presented on an annualized basis.
(6) Reflects all dividends per share distributed up to December 31, 2000.
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 (398 million for each of 2000, 2001, 2002, 2003 and 2004). See
Note 33 to the Financial Statements.
2
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2004(1)
------------ --------------- --------------- -------------- -------------- ---------------
(Ps million and U.S. dollars thousands(1), except per share and per American Depositary
Shares "ADS" amounts)
CONSOLIDATED BALANCE SHEET
COLOMBIAN GAAP:
ASSETS:
Cash and dues from banks............... Ps 428,466 Ps 536,813 Ps 643,405 Ps 848,052 Ps 768,514 US$ 321,588
Overnight funds........................ 291,786 176,666 207,684 598,409 480,846 201,211
Investment securities, net............. 1,575,304 2,984,552 4,343,458 4,336,724 5,250,211 2,196,971
Loans and Financial Leases, net........ 4,826,506 5,078,476 5,864,991 7,642,405 9,600,861 4,017,517
Accrued interest receivable on
loans, net........................... 84,693 77,681 83,459 103,209 121,276 50,748
Customers' acceptances and
derivatives.......................... 40,358 39,907 (15,662) 1,539 43,894 18,368
Accounts receivable, net............... 104,349 104,436 149,955 163,310 173,875 72,759
Premises and equipment, net............ 332,120 320,080 317,724 337,964 346,243 144,887
Foreclosed assets, net................. 75,867 57,012 46,002 27,676 12,206 5,108
Prepaid expenses and deferred charges.. 107,848 84,483 58,403 27,831 15,950 6,674
Goodwill............................... 164,201 141,552 118,904 99,910 73,607 30,801
Operating leases, net(3)............... 195,092 244,195 373,499 537,207 8,311 3,478
Other assets........................... 118,434 186,879 147,949 198,480 315,394 131,977
Reappraisal of assets.................. 262,723 241,727 259,811 253,413 267,941 112,121
------------ --------------- --------------- -------------- -------------- ---------------
TOTAL ASSETS......................... Ps 8,607,747 Ps 10,274,459 Ps 12,599,582 Ps 15,176,129 Ps 17,479,129 US$ 7,314,208
============ =============== =============== ============== ============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits............................... Ps 6,116,022 Ps 7,580,848 Ps 8,788,158 Ps 10,231,997 Ps 11,862,116 US$ 4,963,748
Borrowings............................. 908,103 830,654 1,117,015 1,211,595 1,104,201 462,057
Other liabilities...................... 717,739 892,506 1,410,061 2,043,158 2,422,089 1,013,532
Shareholders' equity................... 865,883 970,451 1,284,348 1,689,379 2,090,723 874,871
TOTAL LIABILITIES AND ------------ --------------- --------------- -------------- -------------- ---------------
SHAREHOLDERS' EQUITY Ps 8,607,747 Ps 10,274,459 Ps 12,599,582 Ps 15,176,129 Ps 17,479,129 US$ 7,314,208
============ =============== =============== ============== ============== ===============
U.S. GAAP:
Shareholders' equity................... Ps 951,191 Ps 1,147,989 Ps 1,413,445 Ps 1,832,886 Ps 2,267,286 US$ 948,754
Shareholders' equity per share(2)...... 1,755 1,991 2,451 3,178 3,932 1.65
Shareholders' equity per ADS(2)........ 7,020 7,964 9,804 12,712 15,728 6.58
------------------
(1) Amounts stated in dollars have been translated at the rate of Ps 2,389.75
to US$ 1.00 which is the Representative Market Rate calculated the last
business day of December 2004, as reported and certified by the
Superintendency of Banking.
(2) Shareholders' equity per share is calculated based on the number of Common
Shares and Preferred Shares. The weighted average (rounded to the nearest
million) of Preferred and Common Shares outstanding amounted to 542
million for the year ended December 31, 2000; and 577 million for the
years ended December 31, 2001, 2002, 2003 and 2004.
(3) In October 23, 2003, the Superintendency of Banking through its External
Circular 040, modified the treatment of financial leases. Since January 1,
2004, instead of recording financial leases as property, plant and
equipment, companies must account for them in their loan portfolio.
Additionally, according to this Circular the assets given in financial
lease contracts, recovered by the lessor when the purchase option was not
exercised, or due to failure of payments from customers are to be
classified as foreclosed assets since January 1, 2004. In the annual
report of year 2003 this assets were disclosed in the line "Other assets".
The Bank did not make reclassifications for these effects in the balance
sheets for years 2000, 2001, 2002 and 2003.
3
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2000 2001 2002 2003 2004
----------- ------------- ------------- -------------- -------------
(percentages, except for operating data)
SELECTED RATIOS: (1)
COLOMBIAN GAAP:
PROFITABILITY RATIOS:
Net interest margin(2)............................... 6.45 4.70 2.95 8.02 7.87
Return on average total assets(3).................... (1.44) 1.65 1.88 3.40 3.62
Return on average shareholders' equity(4)............ (11.75) 14.58 20.42 31.14 32.14
EFFICIENCY RATIO:
Operating expenses as a percentage of net
operating income(5)................................ 85.20 71.64 68.65 54.53 51.22
CAPITAL RATIOS:
Period-end shareholders' equity as a percentage
of period-end total assets......................... 10.06 9.45 10.19 11.13 11.96
Period-end regulatory capital as a percentage of
period-end risk- weighted assets(6)................ 11.09 10.61 11.61 13.08 13.44
CREDIT QUALITY DATA:
Non-performing loans as a percentage of total
loans(7) (11)...................................... 3.52 4.54 1.77 0.95 0.88
"C", "D" and "E" loans as a percentage of total
loans(10) (11)..................................... 10.45 9.70 9.71 4.93 3.86
Allowance for loan and accrued interest losses as a
percentage of non-performing loans (11)............ 175.98 122.91 316.80 515.13 496.30
Allowance for loan and accrued interest losses as a
percentage of "C", "D" and "E" loans(10) (11)...... 59.23 57.57 57.71 99.07 113.47
Allowance for loan and accrued interest losses as
a percentage of total loans (11)................... 6.19 5.58 5.61 4.89 4.37
OPERATING DATA:
Number of branches(8) ............................... 321 323 340 354 377
Number of employees(9)............................... 7,688 7,518 7,581 8,001 8,609
-----------------
(1) Ratios were calculated on the basis of monthly averages.
(2) Defined as net interest income divided by average interest-earning assets.
(3) Net income divided by average total assets.
(4) Net income divided by average shareholders' equity.
(5) Net operating income includes net interest income and other operating
income.
(6) For an explanation of risk-weighted assets and Technical Capital, see Item
4. Information on the Company - B. Business Overview - B.7. Supervision
and Regulation - Capital Adequacy Requirements.
(7) 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. (Each category
includes financial leases)
(8) Number of branches does not include branches of the Bank's Subsidiaries.
(9) The number of employees includes employees of the Bank's consolidated
Subsidiaries.
(10) See Item 4. Information on the Company - E. Selected Statistical
Information - E.3. Loan Portfolio - Classification of the Loan Portfolio
and Credit Categories for a description of "C," "D" and "E" Loans.
(11) In October 23, 2003, the Superintendency of Banking through its External
Circular 040, modified the treatment of financial leases. Since January 1,
2004 instead of be recorded to as premises and equipment, it is accounted
for as loan portfolio.
4
EXCHANGE RATES
On May 31, 2005, the Representative Market Rate was Ps 2,338.89 per
US$ 1.00. The following table sets forth the high and low peso/U.S. dollar
exchange rates for the last six months:
RECENT EXCHANGE RATES OF PESO PER US$ 1.00:
MONTH LOW HIGH
---------------------------------- -------- --------
December 2004..................... 2,316.12 2,481.93
January 2005...................... 2,315.45 2,389.75
February 2005..................... 2,308.58 2,365.79
March 2005 ....................... 2,324.89 2,397.25
April 2005 ....................... 2,328.74 2,374.47
May 2005 ......................... 2,328.69 2,349.59
Source: Superintendency of Banking.
The following table sets forth the average peso/U.S. dollar
Representative Market Rate for each of the five most recent financial years,
calculated by using the average of the exchange rates on the last day of each
month during the period.
The Federal Reserve Bank of New York does not report a rate for
pesos; the Superintendency of Banking calculates the Representative Market Rate
based on the weighted averages of the buy/sell foreign exchange rates quoted
daily by certain financial institutions, including BC, for the purchase and sale
of foreign currency.
PESO/US$ 1.00
REPRESENTATIVE MARKET RATE
PERIOD AVERAGE
--------------------------------- --------
2000............................. 2,104.72
2001............................. 2,301.74
2002............................. 2,534.22
2003............................. 2,875.05
2004............................. 2,614.79
Source: Superintendency of Banking.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
5
D. RISK FACTORS
The factors referred to below, as well as all other information
presented in this Annual Report, should be considered by investors when
reviewing any forward-looking statements contained in this Annual Report, in any
document incorporated in this Annual Report by reference, in any of the Bank'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. The
risks and uncertainties described below are not the only ones that the Bank
faces. Additional risk and uncertainties that the Bank does not know about or
that the Bank currently thinks are immaterial may also impair our business
operations. Any of the following risks, if they actually occur, could materially
and adversely affect our business, results of operations, prospects and
financial condition.
D.1. RISKS RELATING TO COLOMBIA
Most of the Bank's operations, property and customers are located in
Colombia. Accordingly, the quality of our assets, financial condition and
results of operations depend primarily on macroeconomic and political conditions
prevailing in Colombia.
D.1.i. COLOMBIA HAS EXPERIENCED SEVERAL PERIODS OF VIOLENCE AND INSTABILITY
AND SUCH INSTABILITY COULD AFFECT THE ECONOMY AND THE BANK
The Colombian government (excluding departmental and municipal
governments, the "Government") 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.
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. 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.
The Bank has taken measures that are standard industry practices in
Colombia to protect itself against violence. Examples of these measures include,
among others, hiring specialized private security, implementation of security
technology and obtaining insurance against terrorism, fire, strikes and
vandalism.
6
D.1.ii. POLITICAL, ECONOMIC AND FINANCIAL ENVIRONMENT
The following information illustrates the main aspects of the
political, economic and financial environment in Colombia during year 2004:
POLITICAL ENVIRONMENT
In 2004, the Colombian political environment was relatively stable,
despite the fact that at the end of 2003, a referendum that proposed certain
amendments to the Constitution of Colombia (the "Constitution") that would have
enabled financial and political reforms was not approved. Notwithstanding, the
Government has maintained transparent guiding principles of fiscal austerity and
democratic security, which have contributed to creating favorable economic
expectations. At the end of 2004, the Congress of Colombia (the "Congress")
approved a reform to the Constitution that, once effective, would allow for
presidential reelection, which is not permitted under current law. For this
reform to become effective, the Colombian Constitutional Court must first
determine that it conforms in both form and substance with the requirements of
the Constitution. If the Colombian Constitutional Court affirms the
constitutionality of the reform, the present administration could be reelected
in the 2006 presidential elections and remain in office another four years,
continuing its current policies.
Additionally, conflict within Colombia increases the vulnerability
of the Colombian political system . This conflict negatively affects the economy
because it reduces the incentive to invest. The democratic security policy of
the Government has produced positive results, including a decrease in violence.
From December 2003 to December 2004, the number of murders not related to the
internal conflict dropped 18.4% and the number of kidnappings decreased 34.5%.
Terrorist actions also declined 44% for the same period. This has instilled more
trust in the country and in its economy, thus improving the investment
environment.
Deterioration in the economic and political situation of neighboring
countries, could affect national stability or the Colombian economy by
disrupting Colombia's diplomatic or commercial relationships with these
countries.
ECONOMIC ENVIRONMENT
Despite positive trends in the Colombian economy's basic indicators,
which suggest a stable macroeconomic environment, Colombia's fiscal deficit and
growing public debt could affect the economy. After the grave crisis suffered in
recent years, the fundamental economic variables now show positive tendencies.
According to the National Administrative Department of Statistics ("DANE"), in
2004, GDP increased 3.96% and the rate of inflation was 5.5%, meeting the
inflation rate target proposed by the Banco de la Republica of Colombia (the
"Central Bank"). Also, unemployment showed slight recovery: in December 2003,
the unemployment rate was 12.3% whereas in December 2004, it was 12.1%,
decreasing 0.2%. In addition, interest rates have remained low and stable near
7.50%, enabling positive financial sector results and investment reactivation.
The real exchange rate has remained at competitive levels, despite the nominal
revaluation of 13.98%, it was 122.46 at the end of 2004. Relative political calm
in Colombia has helped generate investment incentives and accordingly, private
investment increased 13.32% from December 31, 2003 to December 31, 2004 as
reported by DANE. The greatest perceived risk to the Colombian economy is on the
fiscal front, given the levels of public deficit and indebtedness.
7
The Government faces its greatest challenge on the fiscal front due
to the high level of public debt, International Monetary Fund ("IMF") pressures
to reduce the deficit, and allowances to cover pensions inherited from the
Social Security Institute ("ISS"). Currently, the 2004 fiscal deficit is 1.2% of
GDP, reaching a total amount of Ps 3,010 billion. For 2005, the Government will
have to continue taking actions to improve the condition of public finances in
order to meet the commitments that it has undertaken with the IMF, including its
commitment to reduce the non-financial public sector (the "NFPS"(1)) deficit to
2.5%.
FINANCIAL ENVIRONMENT
Trade and Payment Balance
Expectation for foreign trade and international economic relations
remain positive. Commercial agreements currently in force and in negotiation,
including a free trade agreement with the United States, are expected to sustain
and support growth allowing Colombia to meet the increased demand for exports of
Colombian products. The economic and political situations of Colombia's trade
partners are not considered a risk for Colombian interests; however, we cannot
disregard the possibility of adverse situations for those countries.
The following table sets forth Colombia's trade balance for the
periods indicated:
COLOMBIA'S TRADE BALANCE
---------------------------------------------
2004
IN MILLION OF U.S.$ FOB (FREE ON BOARD)
---------------------------------------------
PERIOD EXPORTS IMPORTS BALANCE
------------------ ------- ------- -------
January 1,166 1,119 47
January- February 2,165 2,140 25
January- March 3,351 3,366 (15)
January- April 4,605 4,629 (24)
January- May 5,922 5,901 21
January- June 7,328 7,169 159
January- July 8,859 8,488 371
January- August 10,366 9,859 507
January- September 11,876 11,141 735
January- October 13,395 12,492 903
January- November 14,971 13,982 989
January- December* 16,483 15,626 857
Source: DANE
* The final figure for this period has not been published yet; this is a
preliminary figure.
Colombia achieved a trade balance surplus of US$ 856.7 million FOB
in 2004, but the future trends of the trade balance will depend on exogenous
factors related to world markets. Net international reserves represented US$
13.5 billion in December 2004. These levels are considered adequate for a stable
macroeconomic environment.
-------------
(1) The non-financial public sector is composed by the Government and
decentralized public entities.
8
Colombia's Indebtedness
According to the Central Bank, the GNC(2) ("Gobierno Nacional
Central") debt as a percentage of GDP halted its upward trend during the 1996 -
2002 period and stabilized at 51% of GDP in 2003. We estimate that for 2004, the
percentage will drop to 46.75% of GDP as a result of the current trend of the
exchange rate and economic growth. The private sector has a relatively small
amount of external debt that does not represent a major risk to creditors.
The risk perception of Colombia's external debt has decreased
throughout 2004. The JPMorgan Emerging Markets Bond Index Plus (EMBI+) level
(for Colombian sovereign debt) dropped from an average of 438.84 basis points in
February 2004 to 359.47 basis points in February 2005. EMBI+ measures the spread
of emerging markets bonds over U.S. Treasury bonds. A lower index level
indicates lower perceived risk.
D.1.iii. RESTRICTIONS REGARDING FOREIGN INVESTMENT IN COLOMBIA
Colombia's International Investment Statute (Decree 2080 of 2000,
amended by Decree 1844 of 2003) regulates the manner in which
non-Colombian-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
Central Bank and specifies procedures to authorize and administer certain types
of foreign investments. Decree 1844 modified Decree 2080 of 2000, simplifying
the procedures for foreign investors to register their investment in Colombia
with the Central Bank. International investments are regulated by the Central
Bank by means of External Resolution 8 of 2000 and External Circular DCIN 83 of
December 2004, setting forth in detail certain procedures regarding registration
of foreign investment in Colombia.
Investors who wish to participate in the Bank's American Depositary
Receipt ("ADR") facility and hold American Depositary Shares ("ADSs") of the
Bank will be required to submit to the custodian of the ADR facility certain
information and comply with certain registration procedures required under the
foreign investment regulations in connection with foreign exchange controls
restricting the conversion of pesos into U.S. dollars. Holders of ADRs who wish
to withdraw the underlying preferred shares will also have to comply with
certain registration and reporting procedures. Under the foreign investment
regulations, the 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.
------------
(2) As used in this context, the central government is composed of the
ministries, administrative departments, some agencies and other entities,
including the Congress, the tax authority, the fiscal authority, the attorney
general, the supervising body of the judiciary, the police and others. The
expenses of these authorities are financed from national budget resources
(according to allocations made from reserves available to the Ministry of
Finance and Public Credit) through the general treasury.
9
Despite the easing of restrictions imposed for foreign investment in
Colombia, we cannot assure that the Colombian Government, Colombian Congress or
the Central Bank will further eliminate restrictions to foreign investments, nor
that they will not implement more restrictive rules in the future. Currently,
Colombia has a free float exchange rate system. However, we cannot assure that
other restrictive rules for the exchange rate system will not be implemented in
the future. In the event that a more restrictive exchange rate system is
implemented, financial institutions, including the Bank, may be unable to
transfer U.S. dollars abroad to pay their financial obligations. See Item 4.
Information on the Company - B. Business Overview - B.7. Supervision and
Regulation and Item 10. Additional Information - E. Taxation.
Article 36 of Decree 2080 of 2000 was also modified by Decree 4210
of 2004 which established that foreign portfolio investments must remain in
Colombia for at least a one year period following the date the investment was
processed through the exchange market.
Article 21 of Decree 4210 provides that when a Colombian company
issues shares of stock to be held through a trust or similar agreement by a
second Colombian company that is regulated by the Superintendency of Banking or
the Superintendency of Securities, and with respect to which a foreign financial
institution will issue receipts representing these securities to be acquired by
foreign investors, these securities will be considered an institutional fund,
and therefore, portfolio investments. Because of its characteristics, the ADR
program is considered a foreign portfolio investment fund. Nevertheless, this
regulation establishes that "provisions contained in Chapter III Title III of
the mentioned decree shall apply to these funds when, because of their nature,
they would be applicable. The Superintendency of Securities shall give the
relevant instructions."
So far the Superintendency of Securities has not given the
instructions as to whether the ADR program shall be subject to Decree 4210.
Nonetheless, FIDUCOLOMBIA S.A., the entity that acts as local custodian, has
expressly stated to the Central Bank and the Superintendency of Securities that
such provision shall not be applicable to the ADR program given its differences
from other foreign portfolio capital investment funds and the fact that it does
not represent movements of money but the registry of shares.
Nevertheless, BC cannot be sure that in the future the
Superintendency of Securities and/or the Central Bank will not demand additional
investments to remain in Colombia for at least a one year period.
D.1.iv. COLOMBIAN CORPORATE DISCLOSURE AND ACCOUNTING STANDARDS MAY DIFFER
FROM THOSE IN THE UNITED STATES
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 4. Information on
the Company - E. Selected Statistical Information - E.4. Summary of Loan Loss
Experience - Allowance for Loan Losses). In addition, capital adequacy
requirements for banks under Colombian regulations differ from those under U.S.
regulations.
10
Changes in banking laws and regulations, or in their official
interpretation, may have a material effect on our business and operations. Since
banking laws and regulations change frequently, their interpretation, and the
manner in which these laws and regulations are applied to financial
institutions, is continuously 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. Also, we cannot assure that
there will be no changes in banking laws or regulations in other countries where
the Bank has subsidiaries, such as Panama and the Cayman Islands.
Pursuant to Law 550 of 1999, the Government began a review of the
present regulations relating to accounting, audit, and information disclosure,
with the intention of conforming them to international standards and proposing
pertinent modifications to Congress.
For more information see Item 4. Information on the Company - B.
Business Overview - B.7. Supervision and Regulation.
D.1.v. INSTABILITY OF COLOMBIAN TAX LEGISLATION COULD ADVERSELY AFFECT THE
BANK'S CONSOLIDATED RESULTS
One of the characteristics of legislation in Colombia is its
instability. This instability can be especially relevant with respect to tax
legislation. Legislation, regulation and jurisprudence can affect tax burdens by
increasing tax rates and fees, creating new taxes, limiting stated expenses and
deductions, and eliminating incentives and non-taxed income.
Since January 1, 2000, BANCOLOMBIA has enjoyed the benefits of a tax
stability regime that will be in effect until the year 2010. During the
effective term of the program, no new national taxes or increases in income tax
rates will apply to the Bank. For more information, see Item 5. Operating and
Financial Review and Prospects - A. Operating Results - A.1. General Discussion
of the Changes in Results.
Other taxes to which the Bank is subject, such as sales tax, stamp
tax, and the municipal Industry and Trade Tax, have remained relatively stable.
If future tax reforms increase the respective rates for these taxes, they should
not have a significant impact on the Bank's consolidated financial statements.
D.2. RISKS RELATING TO OUR INDUSTRY AND OUR OPERATIONS
D.2.i. THE QUALITY OF THE BANK'S LOAN PORTFOLIO AND OF OTHER ASSETS MAY
DECLINE
If the Bank's loan portfolio continues to grow in all targeted
segments, such as retail, Small-and Medium-Sized Enterprises ("SMEs") and large
corporations, the Bank may experience higher levels of past due and
non-performing loans than in the past and may be required to increase its
allowances for non-performing loans.
In particular, if the Bank successfully increases the participation
of consumer and small business credits in its loan portfolio, it may experience
detrimental changes in its credit risk levels. Furthermore, there can be no
assurance that BC will maintain its current level of asset quality and credit
risk in the future.
11
D.2.ii. BC'S CONCENTRATION IN AND RELIANCE ON SHORT-TERM DEPOSITS MAY
INCREASE ITS FUNDING COSTS
The Bank's principal sources of funds are short-term deposits,
checking accounts and savings accounts; they represent a share of 60.7%, 59.6%
and 59.6% of total funds at the end of 2002, 2003, and 2004, respectively. Since
it relies primarily 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.
D.2.iii. BC'S HEAVY RELIANCE ON PUBLIC DEBT TRADING SECURITIES IN ITS
INVESTMENT PORTFOLIO LEAVES IT VULNERABLE TO FLUCTUATIONS IN PUBLIC
DEBT VALUATIONS
During the past three years, public debt trading securities have
represented approximately 70% of BC's total investment portfolio, resulting in
the Bank's significant exposure to a default by Colombia on its debt and to
lower valuations of Colombia's debt in the secondary market. At December 2004,
the Bank's holdings of bonds issued by the Colombian Treasury was valued at Ps
3,705,907 million.
D.2.iv. INCREASED COMPETITION AND CONSOLIDATION IN THE FINANCIAL INDUSTRY
COULD ADVERSELY AFFECT OUR MARKET SHARE
The Colombian financial system is highly competitive. Since the
1990s, when the Colombian financial market was deregulated and international
capital flows resumed, there has been an ongoing process of financial system
consolidation. The consolidation will lead to the creation of large institutions
that benefit from economies of scale, presenting the risk that the Bank could
lose a portion of its share in the industry.
D.3. RISKS RELATING TO OUR ADRS
D.3.i. 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 U.S. dollar. This mechanism is only used to control the
international reserves of Colombia or when the 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 reducing the volatility of the exchange rate.
12
The devaluation of the peso against the dollar was 25% in 2002.
During 2003, the peso appreciated against the U.S. dollar by 3.02% and, in 2004,
the peso again appreciated against the U.S. dollar by 14%. Absent modifying
circumstances, a future peso devaluation would have a negative impact on the
U.S. dollar value of dividends paid to holders of ADRs. Conversely, a peso
revaluation would have a positive effect. In the future, a decrease in oil
exports, a slight increase in U.S. Federal Reserve interest rates and an
adjustment in the U.S. trade balance could produce a slight devaluation.
Although the foreign exchange market is allowed to float freely, there is no
assurance that the Central Bank or the Government will not intervene in the
exchange market in the future.
D.3.ii. REQUIRED GOVERNMENT APPROVALS RELATING TO OWNERSHIP OF OUR PREFERRED
SHARES AND ADRS MAY AFFECT THE MARKET LIQUIDITY OF THE PREFERRED
SHARES AND ADRS
Pursuant to Colombian banking regulations, any transaction resulting
in an individual or corporation holding 10% or more of capital stock of any
Colombian financial institution, including in the case of BC, transactions in
ADRs representing 10% or more of the Bank's outstanding stock, requires prior
authorization from the Superintendency of Banking. Transactions entered into
without the Superintendency of Banking's prior approval are void, and cannot be
recorded in the stock registry of the relevant financial institution.
In addition to the above restriction, pursuant to Colombian
securities regulations, any transaction involving the sale of publicly traded
stock of any Colombian company, including, in the case of BC, any sale of
Preferred Shares (but excluding any sale of ADRs) or Common Shares, for 66,000
or more Unidades de Valor Real ("UVR")(3), must be effected through the Bolsa de
Valores de Colombia (the "Colombian Stock Exchange").
D.3.iii. OUR PREFERRED SHARES HAVE LIMITED VOTING RIGHTS
Under BC's by-laws and Colombian corporate law, holders of Preferred
Shares (and consequently, holders of ADRs) have no voting rights in respect of
Preferred Shares, other than the right to one vote per Preferred Share, in the
following events:
- In the event that changes in BC's by-laws may impair the
conditions or rights assigned to such shares and when
the conversion of such shares into Common Shares is to
be approved.
- When voting the anticipated dissolution, merger or
transformation of the corporation or change of its
corporate purpose.
- When the preferred dividend has not been fully paid
during two consecutive annual terms. In this event,
holders of such shares shall retain their voting rights
until the corresponding accrued dividends have been
fully paid to them.
- When the General Shareholders' Meeting orders the
payment of dividends with issued shares of BC.
----------
(3) The UVR is an inflation-adjusted monetary index generally used for pricing
home-mortgage loans
13
- If at the end of a fiscal period, the Bank does not
produce sufficient profits to pay the minimum dividend
and the Superintendency of Banking, by its own decision
or upon petition of holders of at least ten percent
(10%) of Preferred Shares, determines that benefits were
concealed or shareholders were misled with regard to
benefits received from the Bank by the Bank's directors
or officers decreasing the profits to be distributed,
the Superintendency of Banking may resolve that holders
of Preferred Shares should participate with speaking and
voting rights at the General Shareholders' Meeting, in
the terms established by law.
- When the register of shares at the Colombian Stock
Exchange or at the National Register of Securities is
suspended or canceled. In this event, voting rights
shall be maintained until the irregularities that
resulted in such cancellation or suspension are
resolved.
Holders of ADRs and Preferred 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 law. Under Colombian law, BC's preferred shareholders may have fewer
rights than shareholders of a corporation incorporated in a U.S. jurisdiction.
D.3.iv. PREEMPTIVE RIGHTS MAY NOT BE AVAILABLE TO HOLDERS OF ADRS
The Bank's by-laws and Colombian law require that, whenever the Bank
issues new shares of any outstanding class, it must offer the holders of each
class of shares (including holders of ADRs) the right to purchase a number of
shares of such class sufficient to maintain their existing percentage ownership
of the aggregate capital stock of the Bank. 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 the Bank's ADR facility, unless a registration statement under
the Securities Act is effective with respect to such rights and stocks or an
exemption from the registration requirement thereunder is available. Although
the Bank is not obligated to, it intends to consider at the time of any rights
offering the costs and potential liabilities associated with any such
registration statement, the benefits to the Bank 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 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 the Bank, will have discretion as to the procedure for making
preemptive rights available to the holders of ADRs, 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 ADRs, 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.
14
D.3.v. MARKET FOR ADRS AND PREFERRED SHARES; RELATIVE ILLIQUIDITY OF THE
COLOMBIAN SECURITIES MARKETS
The Bank's ADRs are listed on the New York Stock Exchange ("NYSE")
and commenced trading in 1995 under the symbol "CIB." Average daily trading
volume of ADRs was 32,523 in 2002, 38,847 in 2003 and 136,377 in 2004. Before
1995, 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 Preferred
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.
There can be no assurance that a liquid trading market for the
common or preferred stock will continue or expand. A limited trading market may
impair the ability of an ADR holder to sell Preferred Shares obtained upon
withdrawal of such shares from the ADR Facility on the Colombian Stock Exchange
in the amount and at the price and time such holder desires, and could increase
the volatility of the price of the ADRs.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Bancolombia (formerly, Banco Industrial Colombiano S.A. or "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 merged with Banco de
Colombia (the "Merger"). In connection with the Merger, BIC changed its name to
Bancolombia S.A. and began conducting its commercial activities, products and
services under the commercial name of "Bancolombia."
The Bank was originally established for a fifty-year term, starting
on December 9, 1944. In 1994, this term was extended for fifty more years, until
December 8, 2044. The Bank is domiciled in Colombia and operates under Colombian
laws and regulations, mainly the Colombian Code of Commerce and Decree 663 of
1993, as a sociedad comercial por acciones, de la especie anonima (See Item 4.
Information on the Company - B. Business Overview - B.7. Supervision and
Regulation for an explanation of the main regulations governing the Bank's
activities). 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.
Our agent for service of process in the United States is Puglisi & Associates,
presently located at 850 Library Avenue, Suite 201, Newark, Delaware 19715.
Since 1995, the Bank is a NYSE listed company, and its ADSs are
traded under the symbol "CIB." See Item 9. The Offer and Listing.
15
RECENT DEVELOPMENTS
In October 2004, the Bank took preliminary steps to assess the
feasibility of a business combination among Bancolombia, Conavi Banco Comercial
y de Ahorro S.A. ("Conavi") and Corporacion Financiera Nacional y Suramericana
S.A. ("Corfinsura").
Conavi and Corfinsura are leading financial institutions in the
Colombian market. Conavi is a bank that specializes in residential real estate
finance and has an asset value of Ps 4,651 billion as of December 31, 2004.
Corfinsura is the largest financial corporation institution in Colombia, with an
asset value of Ps 4,145 billion as of December 31, 2004.(4)
On February 28, 2005, Bancolombia entered into a merger agreement
(the "Merger Agreement") with Conavi and Corfinsura, whereby the parties agreed
to merge Conavi and Corfinsura with and into Bancolombia, with the Bank as
surviving entity (the "Merger"). The Merger will take place after Corfinsura has
spun-off part of its investment portfolio, which will be transferred to a new
entity formed by the shareholders of Corfinsura.
On March 28, 2005, the General Shareholders' Meetings of
Bancolombia, Conavi and Corfinsura approved the Merger Agreement.
The shares of Conavi will be exchanged at a ratio of one (1) share
of Bancolombia Common Shares or one (1) share of Bancolombia Preferred Shares,
at the shareholder's option, for 115.39184295 shares of Conavi, and the shares
of Corfinsura will be exchanged at a ratio of one (1) share of Bancolombia
Common Shares or one (1) share of Bancolombia Preferred Shares, at the
shareholder's option, for 1.48709574 shares of Corfinsura (the "Exchange
Ratio"), in accordance with the independent technical valuation study presented
by BNP Paribas S.A., which includes, among other things: (i) the relative
valuation of the respective contributions of Bancolombia, Conavi and Corfinsura
to the Merger and (ii) the exchange ratios applicable to the contemplated
Merger.
Credit Suisse First Boston LLC assisted Bancolombia's Board of
Directors in evaluating the exchange ratios provided in the Merger Agreement and
the BNP report.
According to BNP Paribas' study, the relative valuation of the
contributions of the entities to the combined entity is 75.5% for Bancolombia,
12.7% for Corfinsura after the spin-off and 11.8% for Conavi. Taking into
account the stock that Bancolombia and Corfinsura hold in Conavi before
completing the Merger, which represents 28.5188% and 6.4639% of Conavi,
respectively, as well as the stock that BC currently holds of Corfinsura, which
represents 4.6131% of Corfinsura, once the Merger is completed, it is estimated
that the shareholders of the Bank will hold 79.25% of the merged entity, while
shareholders of Conavi and Corfinsura will hold the remaining 20.75% of the
merged entity.
The Merger is subject to certain closing conditions, which include,
among others, (i) approval by the Colombian Superintendency of Securities of the
alternative that will be presented to Corfinsura's current ordinary bondholders
as a result of the spin-off; (ii) completion of the spin-off; (iii) approval by
the Colombian Superintendency of Banking of the spin-off and the Merger; and
(iv) receipt of all other required regulatory approvals, in Colombia or
elsewhere.
--------------
(4) These figures are audited and presented on an unconsolidated basis.
16
Once these authorizations are obtained, the Merger will be completed
on the date that the merger agreement is included in a public deed signed by the
parties and the notary public. On the same day, Conavi and Corfinsura will be
dissolved without being liquidated and, by virtue of law, the Bank will acquire
all assets, rights and liabilities of Conavi and Corfinsura. In any case, the
Merger will be effective with respect to third parties upon the filing of the
public deed in the public commercial record.
The exchange of shares described above is expected to occur during
the third quarter of 2005. Management estimates that the total number of new
Common Shares and Preferred Shares of Bancolombia to be issued to consummate the
Merger will increase the issued and outstanding capital from 576,695,395 shares
to approximately 727,829,109 shares.
No assurances can be given, that any of the expected benefits and
advantages of the Merger will be realized to the extent currently contemplated
by management, if at all. Moreover, the Merger could require the Bank to invest
more capital than it is expecting or more time and effort by management than it
is expecting in order to realize the benefits BC is projecting for the Merger.
If the Company fails to manage the integration of the businesses of the Bank,
Conavi and Corfinsura effectively, the Company's operations and financial
results after the Merger may be affected, both materially and adversely.
On March 28, 2005, the General Shareholders' Meeting of BC approved
an amendment to the by-laws regarding, among other matters, changes related to
the merger. According to Colombian law, these changes are in force among
shareholders from the date of the meeting, but will not become effective with
respect to third parties until the corresponding public deed is signed by a
representative of BC before a Notary Public and filed in the public register. BC
intends to register this amendment following the completion of the Merger.
On March 18, 2005, the Bank announced its intention to sell its
ownership in Almacenar, and for this reason, entrusted Colcorp to structure a
possible transaction. The Bank owns a direct participation of 94.33% in the
warehouse services company.
CAPITAL EXPENDITURES AND DIVESTITURES
During 2002, the Bank invested US$ 3.84 million (Ps 9,616 million)
in upgrading its administrative personnel's computer technology and US$ 5.02
million (Ps 12,573 million) in opening new branches and in enhancing existing
network branches.
In 2003 and 2004, the Bank made the capital investments listed
below:
- In 2003 and 2004, the Bank invested a total of US$ 5.67
million (Ps 15,829 million) in upgrading the central
computing system, of which US$ 3.62 million was invested
in 2003 and US$ 2.05 million was invested in 2004.
- In 2003 and 2004, the Bank invested a total of US$ 3.71
million (Ps 9,886 million) in acquiring new ATMs and in
upgrading existing ones.
- After having renovated the administrative personnel's
computers in 2002 and 2003, during the second semester
of 2004, the Bank began the technological renovation
process for the branch network computers. This
17
will facilitate access for the branch network to new
technology such as Customer Relation Management ("CRM")
and virtual education, expected to increase the Bank's
commercial efficiency. During 2004, payments were made
in the amount of US$ 3.45 million (Ps 9,062 million).
US$ 2.06 million of this capital expenditure was
financed through leasing. The total project cost will be
approximately US$ 11.2 million.
- During 2003 and 2004, the Bank invested a total of US$
4.69 million (Ps 12,989 million) in maintenance and
enhancements for the current branch network.
- In 2004, the Bank invested US$ 4.0 million (Ps 10,511
million) in equipping its own buildings and rented
buildings. The Bank's recent growth has obliged it to
use a greater amount of physical space. In 2003, this
expenditure represented US$ 0.59 million (Ps 1,701
million).
- In 2003 and 2004, a total of US$ 2.95 million (Ps 8,504
million) was invested in physical security for the
branch network.
The above-mentioned investments were made using Bank resources
except for the investments financed through leasing, as detailed above.
During 2004, total capital expenditures, including the
above-mentioned investments, amounted to US$ 17.84 million (Ps 46,863 million)
distributed as follows:
- Ps 26,882 million in hardware (US$ 11.2 million)
- Ps 14,692 million in furniture and equipment (US$ 6.1
million)
- Ps 5,289 million in software (US$ 2.2 million)
The following table summarizes the Bank's capital contributions and
divestitures for the years 2002 , 2003 and 2004:
CAPITAL CONTRIBUTIONS 2002 2003 2004 TOTAL
---------- ---------- ------- ----------
Todo 1 Services US$ 2,500,200 1,531,373 - 4,031,573
Fundicom S.A. (Ps million) - - 850 850
3001 S.A. (Ps million) - - 255 255
Promotora de Hoteles Medellin S.A. (Ps million) - - 42 42
Leasing Colombia S.A. (Ps million) - - 27,117 27,117
Future Net (Ps million) - - 2,136 2,136
DIVESTITURES 2002 2003 2004 TOTAL
---------- ---------- ------- ----------
CTI Cargo S.A. (Ps million) (1) - 545 - 545
Industrias Forum S.A. (Ps million) (1) - 4,480 - 4,480
Transmetano ESP S.A. (Ps million) (2) - 2,673 - 2,673
Interconexion Electrica S.A. (Ps million) (2) - - 500 500
---------------------
(1) Investments Charged-off
(2) Investments Sold
18
During 2004, and as of the date of this Annual Report, there have
been no public takeover offers by third parties in respect to the Bank's shares
or by the Bank in respect to another company's shares, with the exception of the
Merger with Conavi and Corfinsura, as mentioned above.
B. BUSINESS OVERVIEW
B.1. GENERAL
The Bank provides general banking products and services to large
industrial companies, SMEs, and individuals. We have two main segments: retail
and corporate. Our products and services include depositary services, personal
and corporate loans, credit and debit cards, electronic banking, cash
management, warehousing services, fiduciary and custodial services and
dollar-denominated products, among others. In addition, BC's customers have
access to a large network of branches and ATMs in Colombia. BC believes that it
has the largest service network of any private financial institution in
Colombia, with 377 branch offices operating in 127 cities as of December 31,
2004. For the year ended December 31, 2004, BC had a positive return on average
assets of 3.62% and a positive return on average shareholders' equity of 32.14%.
See Item 5. Operating and Financial Review and Prospects for a detailed
discussion on the results of the Bank's operations.
The following table sets forth the Bank's (unconsolidated) market
share of the Colombian banking market according to information compiled by the
Superintendency of Banking for the years 2002, 2003 and 2004:
BANCOLOMBIA'S (UNCONSOLIDATED) JANUARY - DECEMBER JANUARY - DECEMBER JANUARY - DECEMBER
MARKET SHARE 2002 2003 2004
Total net loans 12.4% 13.0% 13.8%
Total checking accounts 16.7% 17.4% 17.9%
Total savings accounts 10.4% 10.6% 10.5%
Total time deposits 11.3% 11.6% 11.8%
Source: Superintendency of Banking. Average for the twelve-month period of each
year.
B.2. OPERATIONS
The following tables set forth BC's revenues by category of activity
for each of the last three fiscal years:
19
YEAR ENDED DECEMBER 31, 2002
(in millions of Ps)
Governmental
Small and Offshore
Retail Commercial Business Institutional Corporate Commercial
Banking Banking Banking Banking Headquarters Banking Trust Leasing
---------- ---------- --------- ------------- ------------ ---------- --------- ---------
Revenues from
external customers Ps 176,296 Ps 30,930 Ps 18,975 Ps 7,764 Ps (19,835) Ps 6,628 Ps 34,327 Ps 32,884
Revenues from
transactions
with other
operating
segments of
the Bank 22,961 14,308 9,034 21,433 (69,367) (31,185) 1,532 (244)
Interest
income 338,468 150,885 118,925 71,606 255,965 93,871 6,338 3,848
Provision for
loans losses Ps 17,269 Ps 5,851 Ps 3,187 Ps 231 Ps 39,303 Ps 64,951 Ps 647 Ps 3,446
All other
Manufacturing Segments TOTAL
------------- --------- ----------
Revenues from
external customers Ps (14,820) Ps 48,564 Ps 321,713
Revenues from
transactions
with other
operating
segments of
the Bank 9,275 2,074 (20,179)
Interest
income 1,914 24,099 1,065,919
Provision for
loans losses Ps 329 Ps 6,415 Ps 141,629
YEAR ENDED DECEMBER 31, 2003
(in millions of Ps)
Governmental
Small and Offshore
Retail Commercial Business Institutional Corporate Commercial
Banking Banking Banking Banking Headquarters Banking Trust Leasing
---------- ---------- --------- ------------- ------------ ---------- --------- ---------
Revenues from
external
customers Ps 212,472 Ps 32,502 Ps 34,906 Ps 19,007 Ps (30,675) Ps 7,742 Ps 38,424 Ps 47,186
Revenues from
transactions
with other
operating
segments of
the Bank 34,422 22,731 19,795 24,530 (83,150) (7,276) 773 (314)
Interest
income 453,975 179,113 132,127 56,075 386,052 150,602 5,366 8,174
Provision for
loans losses Ps 62,068 Ps 12,781 Ps 365 Ps 1,133 Ps 59,152 Ps 50,360 Ps 2,239 Ps 3,564
All other
Manufacturing Segments TOTAL
------------- --------- ----------
Revenues from
external
customers Ps 31,400 Ps 97,157 Ps 490,121
Revenues from
transactions
with other
operating
segments of
the Bank 16,555 2,138 30,204
Interest
income (6) 23,951 1,395,429
Provision for
loans losses Ps 237 Ps 7,918 Ps 199,817
YEAR ENDED DECEMBER 31, 2004
(in millions of Ps)
Governmental
Small and Offshore
Retail Commercial Business Institutional Corporate Commercial
Banking Banking Banking Banking Headquarters Banking Trust Leasing
---------- ---------- --------- ------------- ------------ ---------- --------- ---------
Revenues from
external
customers Ps 226,318 Ps 33,013 Ps 34,582 Ps 20,277 Ps 5,661 Ps 7,234 Ps 49,178 Ps 88,265
Revenues from
transactions
with other
operating
segments of
the Bank 48,585 27,669 36,438 24,402 (104,324) 4,063 817 (582)
Interest
income 597,066 208,387 200,207 43,857 512,462 172,103 6,412 21,918
Provision for
loans losses Ps 51,614 Ps 3,265 Ps 4,358 Ps (326) Ps (24,416) Ps 36,046 Ps 1,165 Ps 20,293
All other
Manufacturing Segments TOTAL
------------- --------- -----------
Revenues from
external
customers Ps 42,285 Ps 98,197 Ps 605,010
Revenues from
transactions
with other
operating
segments of
the Bank 10,720 8,578 56,366
Interest
income 444 25,089 1,787,945
Provision for
loans losses Ps 1,735 Ps 2,652 Ps 96,386
The following table sets forth BC's geographic revenues and
long-lived assets distribution as of December 31, 2002, 2003 and 2004
20
2002 2003 2004
----------------------------- ----------------------------- -----------------------------
LONG LONG LONG
GEOGRAPHIC INFORMATION REVENUES LIVED - ASSETS REVENUES LIVED - ASSETS REVENUES LIVED - ASSETS
------------- -------------- ------------- -------------- ------------- --------------
Republic of Colombia Ps 1,477,668 Ps 582,318 Ps 1,954,038 Ps 754,204 Ps 2,279,535 Ps 340,304
Republic of Panama 69,314 93,915 151,068 117,863 183,400 1,692
Miami City (1) - - - - 7,002 577
------------- -------------- ------------- -------------- ------------- --------------
Total 1,546,982 676,233 2,105,106 872,067 2,469,937 342,573
Eliminations 20,179 (2,333) (30,204) (1,958) (56,366) (1,119)
------------- -------------- ------------- -------------- ------------- --------------
TOTAL, NET Ps 1,567,161 Ps 673,900 Ps 2,074,902 Ps 870,109 Ps 2,413,571 Ps 341,454
============= ============== ============= ============== ============= ==============
-----------------
(1) Information relating to Bancolombia Miami Agency is included since
2004, because it started operations at the end of 2003.
The following table summarizes and sets forth BC's total revenue
over the last three fiscal years:
2002 2003 2004
---------------- ---------------- ----------------
REVENUES
Total revenues for reportable segments Ps 1,292,716 Ps 1,792,508 Ps 2,317,457
Other revenues 254,266 312,598 152,480
---------------- ---------------- ----------------
Total 1,546,982 2,105,106 2,469,937
---------------- ---------------- ----------------
Elimination of intersegment revenues 20,179 (30,204) (56,366)
---------------- ---------------- ----------------
TOTAL REVENUES FOR REPORTABLE SEGMENTS Ps 1,567,161 Ps 2,074,902 Ps 2,413,571
================ ================ ================
The following table lists the main revenue-producing fees along with
their variation from the prior fiscal year:
AS OF GROWTH
DEC - 2002 DEC - 2003 DEC - 2004 2004/2003
------------ ------------ ------------- ---------
(Ps million)
MAIN FEES AND COMMISSIONS
Service charges Ps 145,561 Ps 180,888 Ps 232,706 28.6%
Credit card fees 48,992 59,041 71,113 20.4%
Credit and debit card annual fees 44,117 57,199 73,369 28.3%
Checking fees 40,972 45,252 46,839 3.5%
Warehouse and logistics services, net 38,873 42,705 49,072 14.9%
Fiduciary and trust activities 22,215 25,647 35,658 39.0%
Commissions on letters of credit 2,929 4,249 9,187 116.2%
Commissions expense (51,351) (81,956) (115,600) 41.1%
------------ ------------ ------------- ---------
TOTAL Ps 292,308 Ps 333,025 Ps 402,344 20.8%
============ ============ ============= =========
21
B.3. OUR BUSINESS
The Bank is a universal bank engaged in retail banking, corporate
banking and other financial activities directed toward its two major customer
segments: retail and corporate. The Bank offers traditional banking products and
services, such as checking accounts, saving accounts, time deposits, lending
(including overdraft facilities), credit cards, and cash management services. It
also offers non-traditional products and services, such as pension banking,
bancassurances, international transfers, fiduciary and trust services, leasing,
brokerage services and investment banking.
SEASONALITY OF DEPOSITS
Historically, the Bank has experienced some seasonality in its
checking account deposits with higher average balances at the end of the year
when customers need increased liquidity and lower balances in the first quarter
of the year when customers move their funds from checking accounts to savings
and mortgage institutions. During December 2002, the aggregate amount deposited
in checking accounts was Ps 2,691 billion which decreased 7.1%, to Ps 2,500
billion by March 31, 2003. During December 2003, the aggregate amount deposited
in checking accounts was Ps 3,546 billion, which declined 18.3% to Ps 2,899
billion by March 31, 2004. During December 2004, the aggregate amount deposited
in checking accounts was Ps 3,799 billion, which declined 16.6% to Ps 3,170
billion by March 31, 2005. As of December 31, 2004, deposits in checking
accounts represented 32.0% of the Bank's total deposits.
B.3.i. RETAIL BANKING
The Bank's Retail Banking segment provides a wide range of financial
products and services to individuals and SMEs. This segment is important for the
Bank's funding and generation of revenues. The Retail Banking Division of the
Bank services more than 1.6 million customers as of December 31, 2004.
The total amount represented by Retail Banking loans, which includes
all types of credit extended to individuals and SMEs, was Ps 3,685,066 million
in 2004, as compared to Ps 2,709,217 million in 2003 and Ps 1,911,829 million in
2002. As of December 31, 2002, 2003 and 2004, total retail loans represented
31%, 34% and 37%, respectively, of the Bank's total loan portfolio. As of
December 31, 2004, 2.9% of total retail loans were past due. The growing share
of retail loans in Bancolombia's loan portfolio is part of a long-term corporate
strategy, aimed at increasing margins and diversifying risks.
The Retail Banking segment comprises Personal Banking, High-Income
Banking, Prestige Banking, SMEs and Microbusinesses.
B.3.i.a. PERSONAL BANKING SEGMENT
This segment serves customers who are employees, retirees, students,
housewives, and free-lance professionals, with monthly incomes under Ps 5
million or annual sales under Ps 100 million. The Personal Banking Segment
provides a comprehensive product portfolio, and coverage through the physical
network and various e-channels.
22
The table below shows the evolution in recent years of the number of
Personal Banking Segment customers classified in its sub-segments.
NUMBER OF CUSTOMERS IN THE PERSONAL BANKING SEGMENT
SUB-SEGMENTS 2002 2003 2004*
---------- ---------- ----------
Basic (1) 772,670 900,211 968,924
Average (2) 135,986 185,225 213,552
High (3) 96,550 129,175 220,013
---------- ---------- ----------
TOTAL PERSONAL BANKING 1,005,206 1,214,611 1,402,489
========== ========== ==========
-----------------------
(1) Customers with a monthly income of less than 2.5 Salario Minimo Legal
Vigente, the effective legal minimum monthly salary (the " SMLV"). One
SMLV is equal to Ps 358,000 per month for 2004, as established by the
Government and published monthly by the Ministry of Social Protection.
(2) Customers with a monthly income from 2.5 to 5 SMLV.
(3) Customers with a monthly income from 5 SMLV to Ps 5 million.
* There was a greater increase in High sub-segment customers due to a change
in the definition of the segment as the upper limit was increased to Ps 5
million a month.
The Bank offers the following baskets of products and services to
its customers in the Personal Banking Segment. The Basic Portfolio is offered to
all customers of this segment while the Complementary Portfolio is offered
according to the customer's particular needs.
Basic Portfolio
- Savings Accounts
- Debit Card
- BANCASEGUROS Insurance
- Credit Card
- Personal Loans
Complementary Portfolio
- Checking Accounts
- CD-Time Deposits (including Leasing and Sufinanciamiento
CD-Time Deposits)
- Pension Banking (offered through a subsidiary)
- International Wire Transfers
- Investment Funds (administered by Fiducolombia and
Comisionista de Colombia)
23
Progress and Innovations
- The customer base grew by 15.5% from December 2003 to
December 2004.
- The Bank saw an increase in the issuance of the Master
Card Ideal Credit Card, which was launched at the end of
2003. This credit card is aimed at employees and
retirees with incomes from 1.5 to 2.5 SMLV. At December
2004, we had more than 17,519 effective cards,
representing an accumulated billing in 2004 of Ps 17.09
billion and an effective loan portfolio of Ps 9.18
billion.
- The Bank broadened the investment portfolio for
customers in this segment by offering the Leasing
CD-Time deposits in 2004 and the offer of the
Sufinanciamiento CD-Time deposits through the branch
network.
- Creation of new payroll plans based on customer and
company needs and on profitability for the Bank.
- The Bank established agreements with banks and money
remitters for transferring money to Colombia.
- A special deposit savings account, Cuenta Giros, was
created for direct payment and administration of
remittances to relatives of Colombian emigrants. This is
one part of a package of products being proposed to
target emigrants and their families in Colombia.
- The Bank experienced growth in Pension Banking for
customers in this segment, with a significant increase
in the number of plans sold from 4,580 in 2003 to 10,359
in 2004.
- A rotating line of credit product is now underway for
customers with income higher than 1 SMLV (Ps 358,000)
per month.
B.3.i.b. PREFERENTIAL BANKING SEGMENT
This segment serves customers who are employees, retirees, students,
housewives, and free-lance professionals with monthly incomes of over Ps 5
million or with annual sales of over Ps 100 million.
Preferential Banking services include personalized attention by a
branch manager or branch account executive, offer of specialized products and
services and preferential attention in some of the Bank's processes.
The table below shows the evolution in recent years of the number of
customers in the Preferential Banking segment.
24
NUMBER OF CUSTOMERS IN THE PREFERENTIAL BANKING SEGMENT
2002 2003 2004*
--------- --------- ---------
Customer 133,907 147,128 51,526
Cross Sales Indicator 3.40 3.43 5.05
========= ========= =========
------------
* There was a decrease in the number of customers due to a change in the
definition of the segment, as the minimum monthly income for inclusion in
this subsegment was increased from Ps 3.7 million to Ps 5 million.
The Bank offers the following baskets of products and services to
its customers in the Preferential Banking Segment. The Basic Portfolio is
offered to all customers of this segment while the complementary portfolio is
offered according to the customer's particular needs.
Basic Portfolio
- Preferential account
-- Checking account with available overdraft line
of credit
-- Savings account
-- Debit card
-- Audioprestamo (loans disbursed by telephone or
virtual branch)
- Gold credit card, Green Amex, or Platinum credit card
Complementary Portfolio
- Personal loans, Vehiprestamo (loan for vehicles) or
Prestahogar (loan for home improvement or purchase)
- Pension Banking (offered through a subsidiary)
- Accounts in foreign currency
- Investment funds
- Bancassurance - ("BANCASEGUROS")
- Visa Cayman Credit Card, issued by our off-shore
subsidiary in Cayman Islands, and linked to deposits
in Panama, Cayman or Miami
Progress and Innovations
- At the beginning of 2004, the Preferential Account was
launched. For customers who hold a Preferential
Account, the Bank automatically covers an overdraft in
the customer's checking account either from its
savings account or from an AudioPrestamo disbursement.
At December 2004, 3,916 customers held Preferential
Accounts.
- The Bank developed a new line of credit (Credito
Preferencial), which satisfies this segment's
financing needs by allowing the customer to choose a
flexible payment plan that fits its needs and cash
flow. At December 2004, Ps 22,430 million had been
disbursed under these lines of credit.
25
- Customers exchanged their old debit cards for the new
Preferential Debit Card, exclusively for Preferential
Banking customers. The Preferential Debit Card offers
the additional benefit of home assistance insurance
and vehicle assistance insurance. As of December 31,
2004, 31,127 debit cards had been exchanged. o The
Bank implemented a special processing line in the
credit process to give greater priority to
Preferential Banking customer requests, thus enabling
reduced credit study and analysis time.
B.3.i.c. PRESTIGE BANKING SEGMENT
In June 2004, the Bank implemented its Prestige Banking division,
for the segment defined as affluent and high net worth individual customers
(customers with assets of over US$ 100,000 under management). The portfolio
includes banking products as well as products of Bank Subsidiaries in Colombia
(Fiducolombia y Comisionista de Colombia) and abroad (Bancolombia Panama,
Bancolombia Cayman) and the Miami Agency. The segment began to operate with 7
relationship managers, 4 in Bogota and 3 in Medellin, who assist over 1,000
customers representing over US$ 348 million in assets under management.
B.3.i.d. ENTREPRENEURIAL BANKING (MICRO-FINANCING) SEGMENT
The customers included in the Entrepreneurial Banking segment are
micro-businesses that meet the following conditions:
- Annual sales between Ps 30 million and Ps 250 million
- Business more than one year old
- Fixed assets under 501 SMLV
- Maximum 10 employees
- Owner/applicant must be 21 to 69 years old
The table below shows the evolution during 2004 of the number of
customers in the Entrepreneurial Banking segment.
NUMBER OF CUSTOMERS IN THE ENTREPRENEURIAL BANKING SEGMENT
SUB-SEGMENT SEP-2004 DEC-2004
--------------------- --------- ----------
Extended Accumulation 3,032 4,214
Simple Accumulation 3,755 5,937
Subsistence 114,638 120,463
--------- ----------
TOTAL 121,425 130,614
========= ==========
26
The Bank offers the following product and service portfolio to
customers in the Entrepreneurial Banking Segment. The basic portfolio is offered
to all customers in this segment whereas the complementary portfolio is offered
based on a customer's particular needs and its credit experience with the Bank.
Basic Portfolio
- Savings account
- Debit card
- Consumer credit (for working capital, purchase of fixed
assets or substitution of liabilities)
Complementary Portfolio
- Life insurance
- Checking account
- Credit card (purchase of credit card loan portfolio from
other banks in the amount of Ps 1 million, for customers
with minimum 6 months credit experience with the Bank)
- Plan Semilla (Investment fund administrated by
Fiducolombia)
In the Entreprenurial Banking Segment, the Bank developed a special
project during 2004 that consists of personalized service by 38 credit
executives in Bogota, 8 in Barranquilla, 8 in Medellin and 7 in Cali. They visit
the customer's business and analyze their financial standing.
Under this special project to serve micro-businesses, Ps 8.38
billion has been disbursed with a balance of Ps 6.41 billion during the year
2004, for an average disbursement of Ps 2.4 million and an average term of 15
months.
B.3.i.e. SMALL-AND MEDIUM-SIZED ENTERPRISES (SMES) SEGMENT
This segment consists of legal entities with annual sales from Ps
250 million to Ps 17.1 billion in Bogota and to Ps 11.4 billion in the rest of
the country and of individuals with independent economic activities (trade,
cattle raising, farming, and others) with annual sales of over Ps 250 million.
The segment is composed of managed and non-managed customers. The
Bank assigns a commercial manager to oversee service provisions to managed
customers. Each commercial manager serves an average of 120 customers. The
distribution is shown below.
27
NUMBER OF CUSTOMERS IN THE SMES SEGMENT
CUSTOMERS 2003 2004
-------- ------
Managed 24,569 29,451
Non-managed 54,977 44,491
-------- ------
TOTAL 79,546 73,942
======== ======
The numbers for 2004 reflect a transfer of customers to the new
Entrepreneurial Banking Segment. Despite this transfer, the segment has grown 5%
in the number of customers throughout 2004.
Customers in the SMEs Segment are served in accordance with the
following principles:
- Personalized attention by a branch manager, branch
senior account executive or an SMEs branch commercial
advisor
- Complete knowledge of the customer
- Basic proposal by economic sector
- Development of Internet and e-mail solutions
- Financial advising (with the cooperation of Vision, a
consulting company specialized in SMEs from the
University of La Sabana)
The Bank offers the following baskets of products and services to
its customers in the SMEs segment:
Basic Portfolio
- Checking account
- Savings account
- MIT (Integrated Treasury Management): corporate virtual
branch, collections and payments.
- Pre-approved amount of indebtedness
- Local currency loan portfolio
-- Ordinary
-- Credipagos Virtual (loans disbursed by the virtual
branch)
- Company credit card
- Payment of national taxes
28
Complementary Portfolio
- Loan Portfolio
-- Foreign currency loans
-- Loans founded by Colombian development banks
-- Leasing
-- Treasury loans
-- Private and direct lines of credit, and /
Discounting of Invoices
- Foreign exchange and international trade
-- Payment means
-- Compensation accounts in Bancolombia's Miami
Agency and Bancolombia Panama S.A.
-- Warehouse and logistics
- Payment of customs duties
- Acquiring services
- Investment funds
- Special lines of credit (guaranteed by the National
Guarantee Fund and Agricultural Guarantee Fund)
- Fiducolombia special products and services
Progress and Innovations
- This segment has accumulated a portfolio in the amount
of Ps 1.5 billion, a 44% increase compared to December
2003.
- Strength in leasing business was evidenced by nearly 97%
growth from December 2003 to December 2004, resulting in
a portfolio totaling Ps 244 billion.
- The use of invoice discounting and of virtual line
Credipagos grew from Ps 37 billion in 2003 to Ps 101
billion in 2004.
- The Bank improved Credipagos Virtual, through which
differential rates and commissions may be agreed upon
with each customer, based on the customer's approved
credit limit.
- The Bank allowed accounts to be linked to Credipagos so
that overdrafts in a customer's checking account can be
covered by the Credipagos line of credit as of a date
agreed upon with the customer.
B.3.ii. CORPORATE BANKING
Corporate Banking provides commercial banking products and services
to all sectors of the economy. Corporate clients are segmented by their economic
activity as well as by their size. This segmentation assures adequate support
and adequate pricing according to the customer's risk level.
29
As of December 31, 2004, the Bank had 3,545 corporate clients
managed by Account Managers, distributed by economic sector as follows:
SECTOR 2003 2004
-------------------------- ------ ------
Agriculture (1) 217 233
Commerce (2) 666 695
Construction (3) 149 231
Government (4) 82 96
Manufacturing (5) 915 907
Telecom and Media (6) 77 89
Individuals (7) 202 126
Natural Resources 120 156
Financial Services (8) 337 413
Non Financial Services (9) 429 499
Other (10) - 100
----- -----
TOTAL 3,194 3,545
===== =====
-----------------------
(1) AGRICULTURE: Classified into 15 sub-sectors, with crops, cattle, poultry
farming and fishing, as the most important economic activities.
(2) COMMERCE: Classified into 13 sub-sectors, with supermarkets, distributors
and retail, as the most important economic activities.
(3) CONSTRUCTION: Divided in the sub-sectors of infrastructure and buildings.
(4) GOVERNMENT: Central administration, territorial and decentralized entities
constitute this sector.
(5) MANUFACTURING: This sector, which has 44 sub-sectors, includes all
companies with a manufacturing process.
(6) TELECOM AND MEDIA: Comprised of 5 sub-sectors, the most important of which
include telecommunications and media companies.
(7) INDIVIDUALS: Includes individuals related to companies in any sector, who
share the same risk as the company.
(8) FINANCIAL SERVICES: Composed of 9 sub-sectors that include all companies
in the financial sector.
(9) NON-FINANCIAL SERVICES: Divided into 10 sub-sectors, the most important of
which are education, health, transportation and tourism services.
(10) OTHER: Companies with No Uniform International Industrial Classification
("CIIU" for its initial in Spanish) available.
Clients are grouped by size into the following four segments:
- MIDDLE MARKET: Customers with annual sales above Ps 11.4
billion outside Bogota, or Ps 17.2 billion in Bogota,
and below Ps 50 billion in both cases.
- CORPORATE: Clients with annual sales over Ps 50 billion.
- INSTITUTIONAL: Clients subject to the supervision of the
Superintendency of Banking, the Superintendency of
Securities, the Superintendency of Health or the
Superintendency of Family Subsidy, as well as
electricity and public utility companies and financial
corporations.
- GOVERNMENT: Includes public sector entities, such as
municipalities, the central administration, territorial
and decentralized entities.
30
The total amount of corporate banking loans, which includes all
types of credits extended to customers of this segment, was Ps 5,413,956 million
in 2004, as compared to Ps 5,272,290 million in 2003 and Ps 4,247,392 million in
2002. As of December 31, 2002, 2003 and 2004, total corporate loans represented
69%, 66% and 54%, respectively, of the Bank's total loan portfolio. As of
December 31, 2004, of the total corporate banking loans, 0.5% were past due.
The Bank offers a portfolio for corporate clients based on their
economic activity. A Basic Portfolio fits all clients' needs and can be
supplemented with a Complementary portfolio that can be adjusted to the
customer's particular features.
Basic Portfolio for all economic sectors
- Checking and savings accounts,
- Internet and PC banking,
- Cash management and
- Money payments and collections.
MANUFACTURING Complementary Portfolio
- Loans such as working capital, factoring and leasing,
- Offshore products in Panama, Cayman and Miami and
- Warehouse and logistics.
COMMERCE Complementary Portfolio
- Loans: working capital, loans funded by development
banks and credit and distribution cards,
- Foreign exchange and international trade,
- Offshore current accounts and
- Means of payment in foreign currency.
AGRICULTURE Complementary Portfolio
- Long term loans funded by development banks and working
capital loans,
- Offshore checking accounts and associated payment
products and
- Foreign exchange and international trade.
NON FINANCIAL SERVICES Complementary Portfolio
- Leasing and loans funded by development banks,
- Money collection and payment services and
- Investment funds.
31
NATURAL RESOURCES Complementary Portfolio
- Long term loans, leasing and structured credits,
- Investment funds,
- Offshore checking accounts and
- Foreign Exchange and International trade.
FINANCIAL SERVICES Complementary Portfolio
- Automatic money collection systems,
- Automatic payment systems and
- Investment funds.
TELECOM AND MEDIA Complementary Portfolio
- Long term loans and infrastructure development financing
through leasing,
- Massive money collection systems and
- Investment banking.
CONSTRUCTION Complementary Portfolio
- Working capital loans, long term loans, housing
construction loans and leasing,
- Trusts and
- Investment banking.
GOVERNMENT Complementary Portfolio
- Investment banking and
- Short and long term loans and loans funded by
development banks.
B.4. DISTRIBUTION NETWORK
The Bank distributes its products and services and executes
transactions through six main channels: the branch network, the ATMs network,
the Personal Virtual Branch and the Corporate Virtual Branch, Automatic Payment
Systems, PC Banking and Telephone banking. BC has been increasing its
distribution channels' capacity with more branches and more functionality in the
electronic channels, while providing new transactions, services and selling
products through internet and telephone banking. As of December 31, 2004, the
branch network totaled 377 branch offices located in 127 places in the most
important urban centers and regions of Colombia. This traditional distribution
channel is reinforced by a unified management system that includes Internet
Banking, the network of ATMs, telephone banking and client on-site branches.
Through these channels, customers may carry out most transactions related to
deposit accounts or credit cards, including inquiries, cash withdrawals, payment
of credit card statements and utility and other bills, transfers and deposits.
32
B.4.i. BRANCH NETWORK
BC's branch network has grown 6.5% during 2004, adding 25 new branch
offices for a total of 377 branches located in 127 Colombian cities. The network
is mainly concentrated in the major urban centers with 99 branches in Bogota, 41
in Medellin, 29 in Cali and 19 in Barranquilla.
25 branch offices were opened during 2004 and 2 were closed. The new
branches consist of: 3 traditional offices, 5 service and sales extension
offices, 4 supermarket banking offices, 2 prestige banking segment offices, and
11 on - site branch offices.
The Bank has 30 branches located in supermarkets and oriented to
individuals and SMEs, and 39 on-site branches that serve our corporate customers
and their employees, providing them with the means to solve their transactional
requirements during flexible working hours. BC also maintains its 36 "light"
branches, called NOVA, with multifunctional employees and a low cost structure.
Additionally, there are 35 mobile "branches" attending small towns
where we have no physical presence. These "branches" consist of a commercial
advisor that visits small towns on specific days, to offer BC's products and
services to the local population. We are planning to further develop this new
concept of banking, in order to expand our distribution network to small towns.
B.4.ii. ELECTRONIC DISTRIBUTION CHANNELS
BC has a network of alternative electronic distribution channels,
enabling cost-effective transactions and services. To decongest its branch
offices, the Bank has worked to transfer customer transactions from branch
offices to electronic distribution channels. Transactions effected through
electronic distribution represent 78% of all transactions in 2004.
The following are the electronic distribution channels offered by
the Bank:
B.4.ii.a. AUTOMATIC TELLER MACHINES
BC has 517 ATMs, located in 127 urban centers around the country.
This year the Bank installed 45 new ATMs expanding the network by 9.5%. Our
customers may also take advantage of our strategic alliance with Conavi,
providing access to an additional 550 ATMs at no additional cost. Conavi has
added 26 ATMs since 2003.
BC's ATMs offer the Cirrus and Plus networks in addition to the
Colombian national network, Redeban - Multicolor. This channel is used not only
by our customers, but also by other banks' customers, whose transactions during
2004 accounted for approximately 30% of all the transactions carried out through
our ATM network.
During 2004, the ATMs' hardware was upgraded in order to meet Visa
and Master Card International Triple Des requirements Triple Des is an
encryption algorithm used to reduce ATM and point of sales frauds. We are
preparing to offer customers new transactions and services and to implement a
CRM strategy for such devices.
33
B.4.ii.b. INTERNET BANKING
BC estimates that during 2004 approximately 28% of the Bank's
transactions with its customers were carried out through the Internet, compared
to 21% in 2003. The Bank offers the following Internet channels:
Personal Virtual Branch. Through the Personal Virtual Branch, the
Bank offers 24-hour services, including balance inquiries, savings and credit
card information, payment of credit card balances, disbursement of pre-approved
loans, blocking of credit and debit cards, counter-ordering of checks, transfers
among BC accounts and to Conavi accounts, requests for products and services,
payment of bills, virtual products such as e-card and virtual investments,
customers information update, purchases on commercial vendor websites and
customer service.
BC is concerned about the security of its customers' personal
information on Internet. For this reason, the Bank implemented a second password
for bill payments and other monetary transactions in 2004.
During 2004, a monthly average of 135,200 users visited the Personal
Virtual Branch, an increase of 22.3% over the monthly average of 110,500 users
in 2003. Approximately 3,591,000 transactions were conducted monthly via the
Internet during 2004, compared to a monthly average of 2,512,300 transactions
during 2003, an increase of 42.9%.
TODO1 Alliance. During 2004, BC continued its alliance with
Mercantil Servicios Financieros of Venezuela and Banco del Pichincha of Ecuador
through TODO 1 Services ("TODO 1"). TODO1 is coordinating the development of
Web-based products and services for individual consumers and corporate
customers. This alliance enables BC to improve its e-business development and to
provide better services to its customers.
Corporate Virtual Branch. BC expanded the use of this new channel
throughout the year after the platform was updated in 2003 with TODO1. This new
platform offers a solution for corporate treasury management in accordance with
international standards. Through this service, corporate customers can obtain
credits online, pay services to third parties, make payroll payments and pay
providers with the possibility of approval from different terminals. More than
18,500 corporate and SME clients use this channel.
Facturanet. During 2004, the number of customers using the
electronic bill payment system developed by TODO1 and available to Conavi and
Bancolombia's customers increased approximately 86.8%, totaling more than 86,500
customers at the end of December 2004, compared to approximately 46,300
customers at the end of 2003. Through Facturanet, customers can make monthly
payments and receive alerts via e-mail when a new bill is available for payment.
During 2004, more than 55,281 bills were paid through Facturanet, compared to
38,600 bills in 2003, a 43.2% increase.
B.4.ii.c. AUTOMATIC PAYMENT SYSTEMS
BC's customers may place standing payment orders and pre-register
payments, to be automatically and periodically debited from their accounts. The
Bank's automatic payment system also enables its customers to perform
transactions with any banking institution in Colombia, through the country's
authorized clearing house ACH.
34
During 2004, approximately 17,900,000 payments were conducted via
the automatic payment systems, compared to 11,998,000 payments during 2003,
which represents an increase of 49.2%.
B.4.ii.d. PC BANKING
The remote access platform to the Bank, named Enlinea BANCOLOMBIA,
allows corporate customers to connect to the Bank via modem through an
application installed on a computer at the customer's location. This treasury
management solution has fewer features than the Corporate Virtual Branch, but
has been operating as a corporate solution since before the creation of the
Corporate Virtual Branch.
During 2004, approximately 34,831,208 transactions were conducted
via Enlinea compared to 28,177,000 transactions during 2003, which represents an
increase of 23.62%. As of December 31, 2004, there were 4,545 users of Enlinea,
as compared to 4,462 in 2003. Though this channel hasn't been suspended, most of
the clients are now being referred to the Corporate Virtual Branch so they will
have access to make all the cash management operations.
B.4.ii.e. TELEPHONE BRANCH
The Telephone Branch is the Bank's telephone-banking service that
allows customers to make inquires and monetary transactions over the phone and
to communicate with specialized staff at any time. The Telephone Branch is
available 24 hours a day, 365 days a year.
During 2004, approximately 365,000 customers used the Telephone
Branch, compared to approximately 237,000 customers during 2003, which
represents an increase of 54%. Approximately 22,252,000 transactions were
conducted monthly via the Telephone Branch during 2004, compared to 20,787,000
transactions during 2003, which represents an increment of 7.05%.
In 2004 many innovations were introduced to the Telephone Branch in
order to increase customer satisfaction and provide better security when
executing transactions. These are some of the changes introduced during 2004:
- Identification of preferred customers in order to give
them preferential service through specialized agents.
- Positioning and consolidation of the telesales area as
the channel designed to offer customers products and
services according to their needs through outbound
calls.
- Creation of a second password for some transactions in
order to provide better security to customers.
- Online support to corporate customers through a Help
Desk to help them with some of the problems they may
have with the Corporate Virtual Branch, and the PC
banking software.
35
B.4.iii. SALES FORCE
BC's sales force includes more than 4,300 employees working as
advisors, vendors and customer service personnel, organized as follows:
- 554 branch and executive managers, offering preferential
service to managed customers;
- 67 account managers for Corporate Banking, divided in
market segments according to economic sectors, allowing
them to give specialized advice to clients;
- 1,498 commercial advisors who sell products and services
in the Bank's branches and other commercial offices;
- 594 specialists who offer more complex and higher added
value products; and
- 1,661 tellers and secretaries who refer customers to the
other commercial teams.
B.5. PRODUCTS AND SERVICES
B.5.i. LOAN PORTFOLIO
The following is the loan portfolio available for each of the
segments of customers of the Bank:
B.5.i.a. PERSONAL BANKING LOAN PORTFOLIO
We use a pre-approval method with the help of the automatic scoring
system at each branch, which issues approvals and credit limits in fifteen (15)
minutes.
The final approval is not granted for four to five business days,
depending on how long it takes to verify the required documentation and the type
of guarantee to be used.
The different loans available in this segment are listed below.
- PERSONAL LOAN: Line of credit for free investment with
short and mid-term financing for persons who qualify
under Bank policies.
- VIRTUAL LOAN ("AUDIOPRESTAMO"): This rotating line of
credit is exclusively for individuals. The credit limit
frees capacity for future use as payments are made.
Disbursements can be made through the Virtual Branch,
Telephone Banking or Conavitel. Conavitel is a
homebanking system that permits customers to search for
information and complete banking transactions from home
or office. The money is disbursed in real time to the
customer's primary account and is available 24 hours a
day, 365 days a year.
36
- CAR LOAN ("VEHIPRESTAMO"): Service that finances the
acquisition of vehicles for private or commercial use
(excluding public service vehicles).
- HOME LOAN ("PRESTAHOGAR"): PrestaHogar is aimed at
persons who belong to the Preferential Banking Segment
who wish to purchase or remodel their homes. This loan
may also be used to purchase lots or commercial stores;
the maximum term is 59 months. This line of credit has a
tax benefit that decreases the monthly withholding tax
base by the interest paid the year before in 2004,
pursuant to the limits set forth in effective
regulations.
There has been a large increase in this portfolio in
2004, from a balance of Ps 28.1 billion in December 2003
to a balance of Ps 102.4 billion in December 2004.
- MICRO-BUSINESS CREDIT ("MICROCREDITO"): Line of credit
for micro-businesses granted from Bank resources, with
an automatic Public Territorial Entities 70% guarantee
with Guarantees National Fund ("FNG" for its initials in
Spanish). To serve the Bank's present customers who meet
the definition of a micro-business pursuant to Law 590
of 2000, those customers will enter the normal credit
process for the segment to which they belong and may
apply for the automatic 70% guarantee with FNG. The
maximum term is 24 months.
- STUDENT LOAN ("CREDIESTUDIO"): Line of credit designed
for financing pre-graduate and graduate studies, with
preferential financing interest rates. This line is
offered throughout the country at the first rate Higher
Learning Universities authorized by the Colombian
Institute for the Promotion of Higher Learning (ICFES -
"Instituto Colombiano para el Fomento de la Educacion
Superior").
- LINE OF CREDIT FOR EMPLOYEES OF COMPANIES THAT ARE BANK
CUSTOMERS ("EJECUTIVO EMPRESARIAL"): A line of credit
with preferential rates, aimed at satisfying the
investment and financing needs of employees who work in
companies that are Bank customers.
B.5.i.b. SMALL AND MEDIUM-SIZED ENTERPRISES (SMES) LOAN PORTFOLIO
- ORDINARY LOAN PORTFOLIO: A service through which a loan
is granted to an individual or company based on the
resources maintained in their Checking Accounts, Savings
Accounts and CDs - Time deposits, in order to satisfy
customer needs.
- TREASURY LOANS: A line of credit that seeks to satisfy
customers' working capital needs as generated by
temporary liquidity needs and tax payments.
- Loans funded by Colombian development banks:
- BANCOLDEX (Banco de Comercio Exterior de
Colombia): Line of credit for financing export and
import activities, throughout the chain of
production, channeling national and foreign
currency resources and credit to financial
institutions which operate in the country and
abroad.
37
-- FINAGRO (Fondo para el Financiamiento del Sector
Agropecuario): Line of credit for financing the
different phases in goods production,
commercialization and/or transformation processes
stemming directly from, connected to or
complementary to farming and livestock, forestry,
fishing, water, poultry and bee keeping industry
activities.
-- FINDETER (Financiera de Desarrollo Territorial):
Line of credit that, with credit resources, seeks
to support the execution of programs, projects or
investments that generate local, regional or
national development.
The programs, projects or investments financed must be
common interest-oriented and aimed at improving
community living conditions.
- "CREDICAFE": A rotating credit limit to be used for the
purchase of inputs for and the payment of workers in the
coffee producing industry. It is easy to use and grants
immediate recurring or sporadic disbursements,
consultations and payments by using Bancolombia's
Telephone Branch.
This product is aimed at customers who are coffee
growers, in segments such as SMEs. It requires a prior
study of financial statements and of specific financing
needs based on the payments that stem from the
customer's business.
- "CREDIPAGO VIRTUAL": A rotating credit limit that can be
accessed at any time. It may be used for any purpose and
is easy to use, with immediate recurring or sporadic
disbursements, consultations and payments through
Bancolombia's Virtual Branch. This credit has a minimum
disbursement limit of Ps 1 million and 3, 6, 9, 12, and
24 month terms. At December 2004, the Bank has 4,969
SMEs inscribed in this product, Ps 101.9 billion in
loans and Ps 185.8 billion in the value of assigned
limits available for use.
- INFLATION-INDEXED CREDITS: An Inflation-indexed line of
credit designed to serve corporate customers who seek
different types of financing in accordance with market
evolution and inflation expectations.
- ACQUISITION OF ACCOUNTS RECEIVABLE: A service through
which the current or present amount of an obligation
with a future due date (no later than 180 days after the
date of the discount) is settled or discounted at a
market rate or discount rate, depending on the risk, the
segment and the rating of the individual or company that
becomes bound to the Bank.
Usually, the provider customer (the one who sells a good
or renders a service) requests the acquisition by the
Bank of its accounts receivable because it seeks
additional liquidity and the purchasing customer (the
one who receives the merchandise or service) agrees to
pay the Bank on the due date.
- ENVIRONMENT LINE OF CREDIT: A line of credit specially
designed for investments intended to have a positive
impact on the environment. This line includes an
incentive depending on the level of environmental impact
that the company makes. The incentive is provided by the
Secretary for Economic Issues of the Swiss Government
(SECO).
38
- PRIVATE AND DIRECT LINE OF CREDIT: A line of credit
based on an agreement entered into by and between a
company (Distributor) and the Bank, through which the
Bank, using rotating credit, finances the company's
customers' acquisition of goods and/or services provided
by such company. This line could have the total
endorsement of the company's debt.
The following table summarizes loans extended to individuals and
SMEs in 7 categories and the amount past due for each category:
AS A % OF AS A % OF
TOTAL TOTAL
LOAN LOAN PAST DUE/
PORTFOLIO PORTFOLIO PAST DUE TOTAL
2002 2003 2004 2003 2004 LOANS 2004 TYPE OF LOAN
------------- ------------- ------------- ---------- --------- ----------- ------------
(Ps million except percentages)
RETAIL (1)
Credit cards Ps 254,876 Ps 335,172 Ps 392,900 4.2% 3.9% Ps 13,785 3.5%
Personal loans 561,558 814,885 1,111,250 10.1% 11.1% 43,945 4.0%
Vehicle loans 24,476 229,737 381,723 2.9% 3.8% 9,697 2.5%
Overdrafts 68,490 81,294 89,867 1.0% 0.9% 8,637 9.6%
Loans funded by domestic
development banks 276,157 330,246 359,494 4.1% 3.6% 6,382 1.8%
Trade financing 28,112 19,644 54,189 0.2% 0.5% 156 0.3%
Working capital loans 698,160 898,239 1,295,643 11.2% 12.9% 22,743 1.8%
------------- ------------- ------------- --------- --------- ----------- ------------
TOTAL RETAIL Ps 1,911,829 Ps 2,709,217 Ps 3,685,066 33.7% 36.7% Ps 105,345 2.9%
============= ============= ============= ========= ========= =========== ============
--------------------
(1) Includes loans to high-income individuals and SMEs.
B.5.i.c. CORPORATE BANKING LOAN PORTFOLIO
BC has a wide range of products to satisfy the capital needs of our
Corporate Banking customers, including working capital loans, trade financing
and loans funded by Colombian development banks.
- Working capital loans are the most common type of loan
in the corporate market. These loans are predominantly
variable rate or based on CD-Time deposit rates, and
re-priced every quarter.
- Trade financing loans are typically dollar-denominated,
variable rate loans. As of December 31, 2004, due to
legal restrictions, the loans have maturities of six
months or less, whereas some capital assets are financed
up to three years.
- Loans funded by Colombian development banks are variable
rate, based on CD-Time deposit rates or LIBOR with
maturities between six months and five years.
39
The following table summarizes loans extended to corporate clients
in six categories and the amount past due for each category:
AS A % OF AS A % OF
TOTAL TOTAL PAST DUE/
LOAN LOAN TOTAL
PORTFOLIO PORTFOLIO PAST DUE TYPE OF
2002 2003 2004 2003 2004 LOANS 2004 LOAN
------------- ------------- ------------- ---------- ---------- ---------- ---------
(Ps million except percentages)
CORPORATE
Trade financing Ps 166,620 Ps 149,582 Ps 253,632 1.9% 2.5% Ps 3,862 1.5%
Loans funded by
domestic development
banks 376,378 394,947 770,331 4.9% 7.7% 1,705 0.2%
Working capital loans 3,650,585 4,687,153 4,298,354 58.4% 42.8% 21,211 0.5%
Credit cards 5,218 8,237 24,621 0.1% 0.2% 1,273 5.2%
Overdrafts 48,591 32,371 67,018 0.4% 0.7% 1,668 2.5%
------------- ------------- ------------- ---------- ---------- ---------- ---------
TOTAL CORPORATE Ps 4,247,392 Ps 5,272,290 Ps 5,413,956 65.7% 53.9% Ps 29,719 0.5%
============= ============= ============= ========== ========== ========== =========
B.5.ii. DEPOSIT PRODUCTS
The Bank offers its customers a variety of checking accounts,
savings accounts, fixed term deposits and tax collection services. At December
31, 2004, based on information compiled by the Superintendency of Banking, BC
was the largest bank nationwide in terms of deposits, with a total of Ps 8,778
billion on a non-consolidated basis, representing 12.6% of the Colombian market.
31.74% of BC (non-consolidated) total deposits are in checking accounts, 38.88%
in savings accounts, 27.47% in fixed term deposits (including time deposits) and
1.91% in other deposits. BC has 32.09% of the market share of national taxes and
customs duties payments.
B.5.ii.a. CHECKING ACCOUNTS
A deposit product that allows customers to deposit sums of money in
cash and/or checks and to dispose of balances, totally or partially, through
checks, automatic withdrawals/debits, cash withdrawals, and electronic
transfers. As of December 31, 2004, on a non-consolidated basis, BC had
approximately 380,620 checking accounts with total deposits of Ps 2,786 billion,
an increase of approximately 9.60% over Ps 2,543 billion in 2003. Checking
accounts usually reach their highest level at the end of the year, affected by
the season. BC has 17.8% of the market share for checking accounts in the
country. In addition, following its customer segmentation policy, BC has defined
a new service, the Preferential Account for the Preferential Banking segment, in
which overdrafts are automatically covered from the funds in the customer's
savings account or from the available Audioprestamo installment.
40
B.5.ii.b. SAVINGS ACCOUNTS
BC savings accounts are designed for individuals; they settle and
disburse interest on available balances on a daily basis. BC savings accounts
offer different alternatives of return, handling fee, transactions, and required
minimum balances, all according to customer needs. As of December 31, 2004, on a
non-consolidated basis, BC had approximately 1,367,291 savings accounts with
total deposits of Ps 3,413 billion, increasing approximately 55.70% over Ps
2,192 billion in 2003. In addition, BC offers "Payroll Payment Accounts" to
satisfy company payroll payment needs. Also, BC offers a savings account called
"Pension Payment Account", exclusively for the payment of retiree benefits.
B.5.ii.c. CDS (CERTIFICATE OF TIME DEPOSITS)
These certificates, negotiable on the over-the-counter securities
market, permit management of liquidity surpluses at terms greater than 30 days,
with higher interest rates than those paid on savings accounts. As of December
31, 2004, on a non-consolidated basis, BC had approximately 65,711 fixed term
deposits totaling Ps 2,411 billion as compared to 69,577 time deposits totaling
Ps 1,870 billion in 2003.
B.5.ii.d. DAT - "DEPOSITO DE AHORRO A TERMINO"
A short-term bank deposit agreement that allows holders to receive
interest payments from BC pursuant to the legal policy and specific regulations
approved by the Superintendency of Banking.
B.5.iii. CREDIT CARDS
The Bank operates in the Colombian credit card market through the
issuance of MasterCard, Visa and American Express cards for individuals and
corporate customers. At December 31, 2004, Bancolombia had 383,499 credit cards
distributed in the three franchises, as follows: American Express 22.00%,
MasterCard 45.08%, and Visa 32.92%.
The following table details the type and outstanding number of
credit cards offered by the Bank on an unconsolidated basis:
OUTSTANDING CARDS
TYPE OF CARD SEGMENT DEC. 31, 2003 DEC. 31, 2004
------------- --------------
PERSONAL CREDIT CARDS
Classic Visa and MasterCard Personal 162,157 162,417
Gold Visa and MasterCard High Income 37,843 41,436
Platinum MasterCard High Income 5,187 5,856
BC Exito Visa + BC Ley MC (1) Personal 32,267 36,264
Ideal Card (2) Basic Sub Segment 5,086 17,519
E-card Retail 1,965 1,888
------------- --------------
244,505 265,380
TOTAL PERSONAL ------------- --------------
41
OUTSTANDING CARDS
DEC. 31, 2003 DEC. 31, 2004
TYPE OF CARD SEGMENT --------------- ---------------
BUSINESS CREDIT CARDS
Visa "Empresarial" and MC Corporate SMEs and Corporate 24,790 33,587
Visa Distribution (3) Major retailers - 166
------- -------
TOTAL BUSINESS 24,790 33,753
------- -------
AMERICAN EXPRESS (4)
Blue Personal 32,702 50,434
Green High Income 18,784 23,680
Gold High Income 8,833 10,252
------- -------
TOTAL AMEX 60,319 84,366
------- -------
TOTAL OUTSTANDING CREDIT CARDS 329,614 383,499
------- -------
---------------
(1) BANCOLOMBIA EXITO VISA AND BANCOLOMBIA LEY MASTERCARD: This co-branding
card results from an alliance between Bancolombia and Almacenes Exito, a
supermarket chain, and is directed specifically to Personal Banking
segment customers. It offers exclusive benefits at Exito and Ley stores.
(2) BANCOLOMBIA IDEAL CARD: With this card, the Bank introduces a product
directed to the "Basic" sub-segment of Personal Banking. The target market
is customers with annual income between 1.5 and 2.5 SMLV, giving them an
alternative mean for financing purchases in Colombia. The limits granted
are between Ps 300,000 and Ps 1,000,000 and it has the support of
MasterCard in Colombia.
(3) BANCOLOMBIA VISA DISTRIBUTION CARD: This card is directed to customers of
major retailers, who may purchase products at the retailer, allowing the
Bank the management of receivables and the retailers to conduct business
more efficiently.
(4) AMERICAN EXPRESS: BC is actually the only issuer of American Express cards
in Colombia. The Bank currently issues three types of American Express
card - Blue, Green and Gold - following a market segmentation strategy.
These cards offer wide financing possibilities, as well as convenient
means for making payments and insurance and assistance to cardholders.
This year Bancolombia was number one in credit card billing with a
market share of 18.01%, thanks to having implemented the strategies listed
below.
- American Express Business Consolidation: American Express
has contributed 5.83% to Bancolombia's credit card business
growth at December 2004 and 7.26% to Bancolombia's credit
card business billing growth. This franchise has a credit
card industry market share of 3.0% for outstanding cards and
of 3.86% for billing, which have grown 0.58 points and 0.95
points respectively compared to last year.
- Leader in the Commercial Solutions Business: Bancolombia is
the market leader in this business with a market share of
35% for billing. During this year, the product Bancolombia
Distribucion (Distribution) was launched, targeting the
wholesale company market and seeking to substitute the
private loan for those companies.
- Revamping of the Cobranding Business: With respect to
alliance with Almacenes Exito supermarket and retail chain,
Bancolombia has changed the image of this business and
reinvigorated it by tying it to the chain's loyalty program
as a fundamental strategy for growth. The number of cards
issued at December 2004 was 22,279 and the average monthly
billing was Ps 4,900 million. Also, in November 2004, the
Bancolombia Colmotores General Motors card was launched. It
serves the spare parts and repair market and is aimed at
General Motors cars owners.
42
- Consolidation of the market position of the Bancolombia
Distribucion Sodimac Business: During the year 2004, the
Bancolombia Distribucion card was launched based on an
agreement with Sodimac (a wholesale chain store). This
product is targeted at construction sector SMEs that make
purchases in Homecenter in Medellin, Bogota, Barranquilla,
and Cali.
- Aggressive Growth in the Personal Banking Segment: With the
Bancolombia Ideal card, the Bank serves the market of lowest
income customers that had not been well served previously.
By the end of 2004, it had issued 17,519 cards. The success
of this business is based on tying the payment of the card
to the payroll direct deposit account.
- Other important strategies that reflect efforts to maintain
and manage the portfolio are selective, mass increases of
limits, card upgrading, the loyalty program, and alliances
with commercial establishments.
- Moreover, Bancolombia has continued its administration of
the product Bancolombia Cayman Visa issued by the Bank's
affiliate Bancolombia Panama Cayman. This product is
designed to serve the financing and transaction needs of
Prestige Banking Segment customers and has a specialized
sales force that has driven placement. At the closing of
2004 there were 3,473 outstanding cards and accumulated
billing in the amount of US$ 16,728,281.
The table below shows the Bank's credit card industry market share
on a non-consolidated basis.
ACCUMULATED CREDIT CARD BILLING GROWTH MARKET SHARE
(As of December 31, in Ps million) 2002 2003 2004 2004/2003 2003 2004
------------ ------------- ------------- --------- ------- -------
Bancolombia MasterCard Ps 717,438 Ps 787,331 Ps 889,193 12.9% 9.5% 8.8%
Bancolombia VISA 341,758 406,802 523,916 28.8% 4.9% 5.2%
Bancolombia American Express 17,322 240,872 389,357 61.6% 2.9% 3.9%
------------ ------------- ------------- ------ ----- -----
TOTAL BANCOLOMBIA 1,076,518 1,435,005 1,802,466 25.6% 17.3% 17.9%
============ ============= ============= ====== ===== =====
COLOMBIAN CREDIT CARD INDUSTRY Ps 6,751,628 Ps 8,277,529 Ps 10,090,823 21.9%
============ ============= ============= ======
Source: Credibanco, American Express and Red Multicolor.
CREDIT CARD MARKET SHARE
Number of outstanding credit cards as of GROWTH MARKET SHARE
December 31, 2002 2003 2004 2004/2003 2003 2004
------------- ------------ ------------ --------- ------- -------
Bancolombia MasterCard Ps 158,969 Ps 160,113 Ps 172,870 8.0% 6.5% 6.2%
Bancolombia VISA 100,069 109,182 126,263 15.6% 4.4% 4.5%
Bancolombia American Express 25,093 60,319 84,366 39.9% 2.4% 3.0%
------------- ------------ ------------ ------ ----- -----
TOTAL BANCOLOMBIA 284,131 329,614 383,499 16.3% 13.3% 13.6%
============= ============ ============ ====== ===== =====
COLOMBIAN CREDIT CARD INDUSTRY Ps 2,216,322 Ps 2,488,861 Ps 2,812,228 13.0%
============= ============ ============ ======
Source: Credibanco, American Express and Red Multicolor.
43
B.5.iv. DEBIT CARDS
Bancolombia achieved second place in Colombia after Conavi for the
number of outstanding debit cards with a market share of 14.1% and accumulated
billing in the amount of Ps 7.3 billion, which includes usage in point of sale
transactions and ATMs. The Bank offers four types of debit cards:
- BANCOLOMBIA Maestro Debit Card: 1,354,109 cards,
- BANCOLOMBIA MasterCard Debit Card: 127,410 cards,
- BANCOLOMBIA Preferential Banking Debit Card: 31,127 cards
and
- BANCOLOMBIA Prepaid Debit Card: 20,427 cards.
Growth in this business has been driven by the strategy of linking
the creation of a savings account or checking account to issuing a debit card as
the access key. Likewise, the payroll business has leveraged the placement of
Master Debit cards and prepaid cards, thanks to the different plans designed
based on customer purchase values.
In August 2004, the Preferential Banking Debit Card was launched. It
offers a preferred product to customers in that segment and has exclusive
benefits for this type of customer.
B.5.v. OTHER BANKING PRODUCTS
As a full service bank, BC offers a broad portfolio of financial
products and services. Some important services not reported above are listed in
this section.
B.5.v.a. REMITTANCES
BC accepts for deposit checks drawn on other banks and from other
cities than the city where the account is held.
B.5.v.b. PAYMENT OF NATIONAL AND CUSTOMS TAXES
BC offers its customers the convenience of paying national taxes and
customs duties via its Branch network, and BC transfers the funds to the
government tax and customs agency. This represents an important no-cost
short-term funding source for the Bank. BC has more than 30% of the market share
for national tax and customs duties payments.
B.5.v.c. ACQUIRING BUSINESS
The acquiring business of American Express has expanded in the
Colombian market. At December 31, 2004, there were 55,981 establishments
affiliated with the American Express franchise, representing an increase of
25.6% over last year. As the only local merchant acquirer and processor, the
Bank assumes all of the responsibility for acquiring, compensating and honoring
sales made by these merchants in Colombia. The business achieved a growth of
49.07% as compared to 2003.
44
The acquisition of new merchants to the Visa, MasterCard, and
American Express franchises has resulted in an increase in billing of 18.18% as
compared to last year, which has been driven by the tax measures set forth by
the Government (including a refund of 2 points of the VAT on purchases made with
credit cards), as well as by the recovery of the Colombian economy. For the year
2004, the Bank has kept its lead position with a market share of 35.75%.
B.5.v.d. BANCASSURANCE - ("BANCASEGUROS")
Through its Branch network, the Bank offers several insurance
products (life insurance, home insurance, and personal accident insurance) from
Compania Suramericana de Seguros, one of the major insurance companies in
Colombia. Bancolombia is the first bank in Colombia in this business.
In 2004, BC sold 112,345 insurance policies as compared to 92,898 in
2003, representing an increase of 21%. At December 31, 2004, 219,354 insurance
policies sold by BC were outstanding as compared to 181,060 at December 31,
2003, which represents an increase of 21% in outstanding policies.
During the months of August and September, 2004, the Bank launched
the campaign Ahorre y Proteja su Familia ("Save and Protect your Family") and
sold 40,888 life insurance policies and 1,113 home insurance policies.
B.5.v.e. PENSION BANKING - ("BANCAPENSIONES")
Through its branch network, the Bank offers a Voluntary Pension Fund
"Rentapension," administered by Fiducolombia. The fund allows customers to
obtain, through periodic contributions, tax benefits and interest payments, and
functions as a proposed voluntary savings goal to complement their state
pension. BC sold 10,359 pension plans in 2004 as compared to 4,580 pension plans
in 2003. The assets under management in this pension fund represent Ps 57,425
million at December 2004 as compared to Ps 38,624 million at December 2003,
which represents a 49% increase in assets under management.
During the months of March and April 2004, the Bank launched the
first Voluntary Pension Fund campaign selling during those months a record of
more than 4,662 pension funds.
B.5.v.f. INTERNATIONAL WIRE TRANSFERS
During 2004, the number of Bank branches through which the Bank is
able to process operations in foreign currency increased to 190. The
transactions available through these branches include the purchase and sale of
foreign currency in cash, the purchase and sale of traveler's checks, the
purchase and sale of electronic transfers and the purchase of foreign currency
stemming from family and worker remittances, among others.
45
In the family and worker remittances business, in 2004 the Bank made
an important change in its strategy that included the creation of a specialized
division, the termination of the commercial relation with MoneyGram and the
signing and implementation of new agreements with banks and companies
specialized in money remittances. Among such agreements we highlight the
agreements signed with RIA Financial Inc., Quisqueyana, La Caixa, and Banco
Santander Central Hispano. Also, the agreements with the Banco Popular Group of
Spain and with The Bank of New York for the payment of retirees of United States
Government Agencies who are Colombian residents were maintained, with positive
results. Bancolombia went from having an exclusive remittances business to
having several in the United States and Europe. This new strategy seeks to
enable the Bank to regain its leading position in this business within the
Colombian banking sector.
The creation of special direct deposit savings accounts "Cuenta
Giros" allows the relatives of Colombian emigrants to easily receive remittances
deposited in their accounts. This is part of the total package that we offer to
emigrants and their families in Colombia.
B.5.V.G. TREASURY PRODUCTS
The Bank's Treasury Division is responsible for the management of
the Bank's treasury products and its proprietary liquidity as well as its
foreign exchange and securities positions.
It works under the guides established by the Vice Presidency of Risk
related to market and liquidity risk.
Treasury products were more dynamic during 2004, showing a
significant increase in the volume of operations with clients in product lines
like foreign exchange spot and forward transactions and public debt.
Internal and external interest rates and the macroeconomic
environment translated into important capital gains from bond price increases in
Colombia and Panama. This factor was the main determinant of BC's treasury
results during 2004.
In the local market, the prices of bonds rose due to the high
monetary liquidity provided by the Central Bank and strong economic
fundamentals.
In the international market, a high level of global liquidity,
strong economic fundamentals in emerging economies and a supportive US Treasury
market during 2004 translated into an important reduction in the credit spread
of the bond portfolio yielding important capital gains and positive results for
BC.
This division conducts the following operations for the Bank and for
its clients, in addition to other activities:
46
OVERNIGHT FUNDS:
- INTER-BANKING: These are operations in which BC lends or
borrows funds in Colombian pesos or U.S. dollars to or
from financial institutions on a short term basis (30
days maximum), without receipt or delivery of a
guarantee in exchange. This product allows short-term
management of liquidity surpluses or shortages.
- REPO: In Repo operations BC lends or borrows funds in
Colombian pesos or U.S. dollars for a short term
(maximum 30 days) to or from financial or non-financial
institutions, in exchange for a guarantee in securities.
ISSUANCE OF CDS: BC captures funds in Colombian pesos by issuing
certificates of deposit. Interest rates on such CDs can be fixed or linked to
the DTF (Colombia's average of term deposits) or the CPI (consumer price index).
PRIVATE DEBT INVESTMENT PORTFOLIO: With its private debt portfolios, BC
purchases and sells securities issued by private entities of the Colombian
financial and industrial sectors.
PUBLIC DEBT INVESTMENT PORTFOLIO: With investment in public debt
portfolios, BC purchases and sells securities issued by public entities or those
managed by the Government of Colombia.
SPOT COLOMBIAN PESO / U.S. DOLLAR AND SPOT FOREX: In spot operations
involving the Colombian peso and the U.S. dollar, BC sells and purchases U.S.
dollars in exchange for Colombian pesos in order to serve its customers, assume
a long or short position in the course of an exchange rate swap, or hedge
operations involving derivatives, or obligations or rights of the Bank in a
foreign currency. In Spot Forex operations, BC performs the same role with
currencies other than the U.S. dollar.
SOVEREIGN AND CORPORATE SECURITIES INVESTMENT PORTFOLIO: BC invests in
fixed yield sovereign securities issued by the governments and corporations of
different countries.
CREDIT DERIVATIVES INVESTMENT PORTFOLIO: BC invests in credit linked notes
and credit linked deposits issued by international banks. Such instruments
contain embedded derivatives in which one party transfers to the other for a
period of time the credit risk associated with another issuer in exchange for a
periodic premium which is commonly defined as a Credit Default Swap ("CDS").
FORWARD COLOMBIAN PESO/U.S. DOLLAR: BC purchases and sells U.S. dollars in
exchange for futures contracts for Colombian pesos, determining a date, price,
and specific amount. This is done to fill customer needs, to take a long or
short position in connection with an exchange rate swap, or to hedge assets and
liabilities denominated in U.S. dollars. Such operations are not standardized
with respect to length or minimum amounts. In forward forex operations, BC
performs the same role with currencies other than the U.S. dollar.
47
SECURITIES FORWARD: BC purchases and sells securities with a settlement
date that is more than three days ahead of the trade date, specifying in advance
the amount, price and date of the transaction.
B.5.VI. FIDUCIARY
The Bank offers, through its subsidiary Fiducolombia, a family of five
mutual funds and one voluntary retirement fund, all of which are designed to
provide customers with the opportunity to diversify their investments. As of
December 31, 2004, it had Ps 2,020,227 million in total assets under management,
increasing 45.7% from Ps 1,386,307 million in 2003.
FIDUCUENTA: This fixed income fund seeks to attain stable income in the
short term, preserving the immediate availability of cash. As of December 31,
2004, it had Ps 1,473,565 million in assets under management, increasing 43.3%
from Ps 1,028,183 million in 2003.
FIDURENTA: This fixed income fund seeks to attain stable income in the
medium and long term, with a minimum 30-day investment term. As of December 31,
2004, it had Ps 398,338 million in assets under management, increasing 51.1%
from Ps 263,614 million in 2003.
FIDUDIVISAS: This fund comprises fixed or variable income securities
issued in international markets, with a minimum 90-day investment term. As of
December 31, 2004, it had Ps 2,697 million in assets under management,
decreasing 42.6% from Ps 4,695 million in 2003. This decrease is explained by
the volatility of the exchange rate.
PLAN SEMILLA: This savings alternative pursues the goal of capital
accumulation, which can, in accordance with a customer's needs, assist in paying
for education, purchasing a home, or buying a vehicle. It has a minimum one-year
investment term. As of December 31, 2004, it had Ps 52,189 million in assets
under management, increasing 94.6% from Ps 26,824 million in 2003.
RENTA PENSION: This long-term programmed savings alternative enjoys tax
benefits and can either complement the mandatory state pension or assist in the
pursuit of capital accumulation goals. As of December 31, 2004, it had Ps 86,473
million in assets under management, increasing 49.9% from Ps 57,671 million in
2003.
INDEACCION: This investment alternative allows participation in the local
and international stock markets with the goal of long-term gains. The minimum
investment term is 90 days. As of December 31, 2004, it had Ps 6,965 million in
assets under management, increasing 53.4% from Ps 4,541 million in 2003.
On October 13, 2004, upon obtaining due Superintendency of Banking
authorization, the Special Common Fund Fidunacion was absorbed by Special Common
Fund Fidurenta.
48
ASSET MANAGEMENT BUSINESSES
In the area of asset management businesses, as of December 31, 2004,
the Fiduciary had Ps 12,902 billion in assets under management, increasing
34.87% from Ps 9,566 billion in 2003. Fiducolombia offers a broad range of
products and services by type of trust, including:
PUBLIC TRUST: When managing a public trust for state-owned companies,
Fiducolombia performs collection, payment and asset management operations while
simultaneously performing follow-up, control and reviews of performance as well
as any other activities provided for in the trust contract. In the year 2004,
the public trust, was divided in two categories: Public Trust and Pension Trust
of Territorial Entities. As of December 31, 2004, such trusts had Ps 3,045
billion and Ps 3,161 billion in assets under management, respectively.
MANAGEMENT AND PAYMENT TRUST: Fiducolombia manages assets transferred to
it by an individual or company, performing activities such as collection,
payment and portfolio control, document control, verification of budgetary
performance and presentation of operating results. As of December 31, 2004, such
trusts had Ps 2,730 billion in assets under management, an increase of 78.55%
from Ps 1,529 billion in 2003.
INDIVIDUAL INVESTMENT TRUST: Fiducolombia manages resources transferred to
it by an individual or a company, designing an investment portfolio that takes
into account the customer's requirements in terms of liquidity, security and
profitability. As of December 31, 2004, such trusts had Ps 2,380 billion in
assets under management, an increase of 53.75% from Ps 1,548 billion in 2003.
REAL ESTATE TRUST: Fiducolombia manages third-party resources designated
for the development of housing and/or commercial real estate projects during the
pre-sale, construction and title transfer stages, thus contributing to project
feasibility as well as promotional and sales activities. As of December 31,
2004, such trusts had Ps 178,544 million in assets under management, an increase
of 154.71% from Ps 70,097 million in 2003.
GUARANTEE TRUST: Through this trust business, the trustee or founder of a
trust transfers ownership of one or several of his assets to an autonomous
entity in order to guarantee other financial obligations that the trustee or
founder has incurred. As of December 31, 2004, such trusts had Ps 1,406 billion
in assets under management, increasing 9.16% from Ps 1,288 billion in 2003.
Other products and services offered by the Fiduciary are:
SECURITIES MANAGEMENT: Fiducolombia carries out management activities with
the goal of improving efficiency in the administration of the shareholders'
department in a corporation. Fiducolombia can also act as an agent for payments,
a recording agent and a transfer agent.
49
SECURITIZATION: This financial mechanism allows companies to obtain
financial resources through the public securities markets by the conversion of
assets that are traditionally illiquid into liquid assets, usually through the
establishment of an autonomous entity with assets that serve as collateral for
the issuance of securities. The fiduciary has participated in the securitization
process of cattle, real estate, and loan portfolios, among other items.
ISSUANCE MANAGEMENT: This product is specifically designed for companies
that wish to obtain resources directly from the capital markets by issuing
securities. Fiducolombia, as managing agent, provides advice, securities
issuance, placement through a local broker, interest payment and capital
redemption.
CUSTODY: Fiducolombia has been approved by Morgan Guaranty Trust and The
Bank of New York to act as custodian for ADRs and GDRs since 1995.
B.5.VII. LEASING
Leasing Colombia, as a BC subsidiary specialized in leasing
activities, offers different types of leasing, credit and investment
alternatives.
- FINANCIAL LEASES: Through this product, Leasing Colombia
allows customers to lease previously selected assets.
Customers lease assets with the option to purchase them
at lease-end.
- OPERATING LEASES: Leasing Colombia provides leased
assets, usually involving equipment, for a fixed term
that is shorter than the assets useful life. If the sale
of the assets for a commercial value at lease-end is
initially stipulated, the sale price would be deducted
from the monthly lease payments.
The main activities that require lease financing are infrastructure,
import of goods, international leasing, real estate, vehicles for executives,
leasing for suppliers, and cattle raising.
The following table shows Leasing Colombia's number of lease
contracts, clients and its net value:
YEAR NUMBER OF LEASE NET VALUE
CONTRACTS NUMBER OF CLIENTS (PS MILLION)
---- --------------- ----------------- ------------
2002 3,909 2,442 270,099
2003 5,933 3,814 445,670
2004 8,851 5,449 818,483
===== ===== =======
In 2004, Leasing Colombia continued its positive trend. The
Company's strong performance was rewarded by an increased sector share, as it
was the leasing company with the biggest growth in lease contracts and assets
value in the sector (Source: Fedeleasing, November 2004). The net value of the
leased goods and the loan portfolio increased 88.4% as compared to 2003 and the
after-tax profits showed growth of 152%.
50
B.5.VIII. WAREHOUSING AND LOGISTICS
Almacenar, the warehousing and logistics subsidiary of BC, offers
the following portfolio of services:
- Warehousing: custody of customer merchandise.
- Custom Brokerage: assistance with import and export
related processes.
- Inventory Management: warehousing distribution,
inventory control.
- Picking and Packing: product handling, POP (point of
purchase) material handling.
- Distribution: coordination of transportation.
- File Management: custody and file organization.
- Warrants: issuance of certificates of deposit as
guaranty for bank loans.
Almacenar has been expanding its logistics business, which currently
represents 68.9% of its portfolio of services with important penetration in the
Pharmaceutical market.
On March 18, 2005, the Bank announced its intention to sell its
ownership in Almacenar. For more information please refer to Item 4. Information
on the Company - A. History and Development of the Company - Recent
Developments.
B.5.IX. INVESTMENT BANKING
Colcorp S.A. ("Colcorp") is a subsidiary of BC that specializes in
providing investment banking services to private companies as well as government
entities in areas such as mergers and acquisitions, project finance and
sindicated loan facilities. Colcorp also owns and manages a diversified equity
portfolio, which invests in companies in different sectors of the Colombian
economy, including agriculture, telecommunications and toll road concessions. As
of December 31, 2004, Colcorp's equity portfolio book value was Ps 268,050
million.
B.5.X. BROKERAGE
Comisionista de Colombia S.A. Comisionista de Bolsa ("Comicol"), a
subsidiary of BC, offers brokerage services to the Bank's customers as well as
to its own customers. In this area, Comicol offers two alternatives: fixed and
variable yield instruments, as well as portfolio management, foreign currency
intermediation, investment banking and management of investment funds. Comicol
manages total assets of Ps 1.7 billion from its customers and clients.
B.5.XI. OFF-SHORE BANKING
Bancolombia (Panama) S.A. and Bancolombia Cayman, BC's international
Subsidiaries located in Panama and the Cayman Islands, respectively, provide a
complete line of banking services mainly to Colombian customers, which include
loans to private sector companies, trade financing, lease financing, financing
for industrial projects as well as a
51
complete portfolio of cash management products, such as checking accounts,
international collections and payments and PC Banking. Through these
subsidiaries, BC also offers to its high net worth customers and private banking
customers investment opportunities in U.S. dollars, in savings accounts and in
checking accounts, CD-Time deposits, and investment funds. In 2004, Bancolombia
Cayman started to offer CD-Time deposits and Money Market accounts denominated
in Euros. As of December 31, 2004, Bancolombia Panama S.A. and Bancolombia
Cayman had 8,596 total customers. In addition, Bancolombia Cayman issues Visa
credit cards. At December 31, 2004, 5,961 of these cards issued by the Bank were
outstanding.
B.5.XII. BANCOLOMBIA MIAMI AGENCY
Bancolombia Miami Agency is an international banking agency that
offers a broad range of deposit-taking products and services to non-U.S.
residents, mainly BC customers, including savings, money market and checking
accounts, time deposits, trade finance, working capital and personal loans, and
funds transfers among others. Through the Miami - Agency, the Bank supports its
customers in international trade offering cash management services, and
processing of import and export letters of credit, stand by letters of credit,
guarantees, collections and foreign exchange negotiations. The Agency enhances
its products and services portfolio offering new investment and saving
opportunities in the U.S. for both individuals and corporations.
As of December 2004, one year after the set up, the Agency has more
than 500 clients and over US$ 50 million in deposits from customers.
B.5.XIII. COMMERCIAL FINANCE COMPANY ("SUFINANCIAMIENTO")
In December 2003, BANCOLOMBIA acquired Sufinanciamiento, a finance
company targeted at the massive personal banking segment that is not
traditionally served by commercial banks, specializing in risk products such as
vehicle financing and loans to use at the client's discretion. Sufinanciamiento
also finances insurance premiums and payroll loans.
At present Sufinanciamiento has more than 190,000 customers,
representing an increase of 52.47% from 2003. Most of its customers are reached
at the point of sale. For example 170,000 credit cards are restricted to use in
chain stores through third-party alliance financing under the Almacenes Exito
Cupo-Fijo product.
Sufinanciamiento is making an effort to decrease the average deposit
interest rate by selling CDs through Bancolombia's distribution network, thus
reducing the percentage of treasury deposits.
Sufinanciamiento has experienced significant loan portfolio growth.
In 2004, it showed an average increase of 59.7%. This growth was possible due to
the upward trend in the vehicle loan business, which represented 78.3% of this
company's portfolio.
Sufinanciamiento has reached second place in Colombia loans among
finance companies and the difference with the leader has been reduced
significantly.
52
B.5.XIV. NEW PRODUCTS OR SERVICES
During 2004, the Bank launched the following products and services:
B.5.XIV.A. SERVICE AND SALES EXTENSION BRANCH OFFICES
Extension Branch Offices are offices opened near an existing BC
branch. Through its Extension Branch Offices BC offers different types of
services, financial assessment, and sales of products, using a multiple tasks
cashier and a multiple tasks commercial advisor. The Manager of the Extension
Branch Office is the Manager of the closest branch. In addition, these extension
branch offices have BANCOLOMBIA's e-channels.
B.5.XIV.B. INTERNATIONAL WIRE TRANSFER PRODUCTS
During the second half of 2004, the Bank began implementing a new
strategy for the international wire transfer business. Commercial agreements
were signed with different specialized wire transfer companies who have broad
presence in the main countries where Colombians migrate: United States and
Spain. The Bank also continued signing agreements with banks in Spain for the
receipt and payment of family wire transfers in Colombia.
The new agreements are listed below:
- In operation at December 31, 2004:
-- Ria Telecommunications Inc.
-- Remesas Quisqueyana Inc.
-- La Caja de Ahorros y Pensiones de Barcelona - La
Caixa
- Soon to enter into operation:
-- Dollar Express Inc. - DolEx
-- Bancomercio de El Salvador Inc.
-- Caja de Ahorros y Monte de Piedad de Madrid - Caja
Madrid
-- Banco Santander Central Hispano S.A.
B.5.XIV.C. CREDIT CARD PRODUCTS AND SERVICES
"Bancolombia Distribucion" Credit Card: During 2004, the product
"Bancolombia Distribucion" was launched. It is targeted at wholesale companies
and replaces the Private Credit product for those companies. This card enables
the Bank to handle everything from risk analysis to accounts receivable
collection. The use of this card is restricted and goods or raw materials can
only be bought from the vendor company, ensuring that the line of credit can
only be used for this purpose. Likewise, the Bank facilitates accounts
receivable collection through its different branches nationwide.
In 2004, an agreement was entered into with Sodimac Colombia S.A.
(Homecenter wholesale stores). For additional information see Item 4.
Information on the Company - B. Business Overview - B.5. Products and Services -
B.5.iii. Credit Cards - Consolidation of the market position of the Bancolombia
Distribucion Sodimac Business.
53
At present, there is a sales force devoted to entering Bancolombia
Distribucion agreements with wholesale companies.
B.5.XIV.D. PREFERENTIAL BANKING SEGMENT PRODUCTS
In April 2004, the Preferential Account was launched. This is a
service exclusively for our Preferential Banking Segment customers through which
the Bank automatically covers overdrafts in their checking account, either from
funds in their savings account or from an Audioprestamo disbursement.
"Preferencial Debit Card": In August 2004 we launched Bancolombia
"Preferencial Debit Card", a product especially designed for our customers in
the Preferential Banking Segment, with exclusive conditions for this type of
customer. It is also the access key to Bancolombia checking accounts and/or
savings accounts for our Preferential Customers.
B.6. COMPETITION
B.6.I. DESCRIPTION OF THE COLOMBIAN FINANCIAL SYSTEM
The Colombian financial system was historically 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. This legal framework also permits foreign investment 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,
prescribed the rules governing intervention and established the instruments that
the government may use.
As of December 31, 2004, the principal participants in the Colombian
financial system were the Central Bank, 28 commercial banks (15 domestic banks,
9 foreign banks, and 4 official banks), 4 finance corporations, 15 commercial
finance companies, 9 leasing companies, and 9 government-owned development
banks. In addition, trust companies, cooperatives, insurance companies,
insurance brokerage firms, bonded warehouse, and pension and severance pay funds
also participate in the Colombian financial system.
As of December 31, 2004, 68.66% of the total assets of credit
institutions were held by the Colombian private sector, 16.23% by the foreign
private sector, and 15.11% by public institutions.
54
FINANCIAL SYSTEM EVOLUTION IN 2004
In 2004, the Colombian financial system recovery process was
strengthened. At December 2004, the Credit Institution system profits showed 2.9
trillion Colombian pesos, a growth of 69.04% over the year before.
The positive results in the financial sector in 2004 were, to a
great extent, the product of increased revenues from the valuation of
investments at market prices and improved efficiency levels. The above was
accompanied by increased demand in the credit market, better asset quality and
coverage indicators, and a higher return on equity. In addition, credit
institution solvency remains at high levels, surpassing the legal minimum of
9.0% by 480 basis points. Also, the monetary policy aimed at expanding the
economy has enabled sustained high levels of liquidity and consequently low
interest rates. At the end of December, 2004, the financial sector contributed
5.74% of the GDP growth, a level similar to that recorded before the 1999
crisis. With these results, this sector solidified its importance in the
Colombian economic environment.
B.6.II. BANCOLOMBIA AND ITS COMPETITORS
INDICATORS FOR BANCOLOMBIA AND ITS COMPETITORS
In 2004, the capital adequacy, loan portfolio risk exposure,
profitability and efficiency indicators improved for the financial system at
large. BC's solvency indicator was 13.4%. (For information on how the solvency
ratio is measured, see Item 4. Information on the Company - B. Business Overview
- B.7. Supervision and Regulation - Capital Adequacy Requirements). The
efficiency indicator (measured as operating expenses/total assets) went from
6.3% in December 2003 to 5.9% in December 2004. The loan portfolio quality (past
due loans/total loans) decreased to 1.45% as compared to 1.49% in 2003.
Similarly, portfolio coverage (allowances/past due loans) notably improved to
levels of 302%.
The following table lists key indicators for BC and its main
competitors:
PAST DUE LOAN/ ALLOWANCES/PAST
ROAE ROAA TOTAL LOANS DUE LOANS CAPITAL ADEQUACY
--------------- -------------- -------------- ----------------- ----------------
DEC-03 DEC-04 DEC-03 DEC-04 DEC-03 DEC-04 DEC-03 DEC-04 DEC-03 DEC-04
Bancolombia
(unconsolidated) 20.1% 25.7% 2.8% 3.5% 1.6% 1.5% 298.5% 288.0% 13.2% 13.3%
Banco de Bogota 23.2% 26.9% 2.9% 3.1% 2.2% 1.7% 212.8% 207.7% 9.8% 13.1%
Banco de
Occidente 20.7% 24.4% 2.3% 2.8% 2.9% 2.3% 224.7% 258.2% 9.9% 11.1%
BBVA 10.9% 18.1% 0.9% 1.6% 4.1% 2.8% 201.7% 245.9% 11.1% 11.1%
Citibank 12.6% 22.5% 1.9% 3.5% 1.0% 1.4% 219.4% 120.6% 13.6% 14.1%
Davivienda 14.6% 26.2% 1.8% 3.3% 10.6% 3.3% 96.7% 209.9% 19.3% 18.7%
Banco Popular 18.8% 25.5% 1.9% 2.5% 5.5% 3.5% 116.4% 153.1% 9.6% 13.0%
==== ==== === === ==== === ===== ===== ==== ====
Source: Superintendency of Banking
55
BC is the market leader in most of the types of loans and deposits.
Its main competitors in the corporate sector are Banco de Bogota, Banco de
Occidente, BBVA, and Citibank. In the consumer sector the main competitors are
Banco Popular, Banco de Occidente, and Conavi. The graphics below show BC's
(unconsolidated) and its competitors' market share in the various products,
based on Superintendency of Banking data for the years 2002, 2003, and 2004.
The following graphs show BC's (unconsolidated) and its main
competitors' market share according to information compiled by the
Superintendency of Banking for the years 2002, 2003 and 2004:
TOTAL NET LOANS
MARKET SHARE
[BAR CHART]
Bancolombia Bogota BBVA Davivienda Popular
Jan-Dec-02 12.4 9.1 6.7 6.7 5.5
Jan-Dec-03 13 9.4 6.7 6.4 5.4
Jan-Dec-04 13.8 9.7 7.4 5.8 5.5
TIME DEPOSITS
MARKET SHARE
[BAR CHART]
Bancolombia AV Villas Davivienda Bogota BBVA
Jan-Dec-02 11.3 8.1 7.8 5.4 5.9
Jan-Dec-03 11.6 8.1 7.6 4.2 6.1
Jan-Dec-04 11.8 7.6 7 5.3 6.4
56
CHECKING ACCOUNTS
MARKET SHARE
[BAR CHART]
Bancolombia Bogota BBVA Occidente Popular
Jan-Dec-02 16.7 15.3 11.1 9 7.4
Jan-Dec-03 17.4 15.3 10 9.1 6.9
Jan-Dec-04 17.9 15.9 9.6 9.5 6.5
SAVING ACCOUNTS
MARKET SHARE
[BAR CHART]
Bancolombia Conavi Bogota Davivienda BBVA
Jan-Dec-02 10.4 10.6 7.5 8.4 7.2
Jan-Dec-03 10.6 9.9 8.4 8 7.5
Jan-Dec-04 10.5 9.2 10.1 7.6 8.5
57
B.7. SUPERVISION AND REGULATION
COLOMBIAN BANKING REGULATORS
The principal bodies regulating the Colombian financial system are
the Superintendency of Banking, the Superintendency of Securities, the Ministry
of Finance and the Board of Directors of the Central Bank. Colombia's National
Congress prescribes the general framework under which the government may
regulate the financial system.
- Superintendency of Banking: 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, financial services companies
(such as trust companies, warehouse companies, and pension
and severance pay administration companies) and insurance
companies. Financial institutions must obtain the
authorization of the Superintendency of Banking before
initiating operations.
- Violations to provisions of Colombia's financial system are
subject to administrative sanctions and, in some cases, may
have criminal consequences. The Superintendency of Banking
may inspect Colombian financial institutions on a
discretionary basis, and has the authority to impose fines
on such institutions, their directors and officers for
violations of Colombian laws, regulations, or such financial
institutions' own by-laws.
- In addition, the Superintendency of Banking makes on-site
inspections of Colombian financial institutions, including
BC, on a regular basis.
- Ministry of Finance: As part of its duties, the Ministry of
Finance issues Decrees relating to financial matters that
may affect banking operations in Colombia.
- Superintendency of Securities: The Superintendency of
Securities monitors, promotes and regulates the market for
publicly traded securities in Colombia and oversees its main
participants, including the Colombian Stock Exchange,
brokers, dealers, mutual funds, and issuers. Since BC's
Common Shares and Preferred Shares are publicly traded on
the Colombian Stock Exchange, certain aspects of BC's
operations as issuer are supervised by the Superintendency
of Securities.
- Central Bank: 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 lender of last resort to financial
institutions.
58
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.
REGULATORY FRAMEWORK FOR COLOMBIAN BANKING INSTITUTIONS
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, Law 546 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 the Fondo de Garantias
de Instituciones Financieras ("Fogafin"), a fund meant to assist troubled
financial institutions, to intervene on behalf of economically troubled
companies. The main objective of Law 510 is 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. Law 546 of 1999 regulated the system of
long-term home loans. Later on, Law 795 was issued with the main objective of
broadening the scope of activities to be performed by financial institutions and
to update Colombian regulations with the latest principles of the Basel
Committee. Law 795 also increased the minimum capital requirements in order to
incorporate a financial institution (for more information see "Minimum Capital
Requirements" below) and authorized the Superintendency of Banking to take
precautionary measures, consisting mainly in preventive interventions with
respect to financial institutions whose capital falls 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.
In order to implement and enforce the provisions related to
Colombia's financial system, 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 the rules and regulations covering banking institutions, and in
External Circular 100 of 1995, as amended, it compiled all regulations
applicable to the accounting and financial treatment of banking institutions.
Violations of Laws 510, 795 and specified provisions of Decree 663
and their relevant regulations are subject to administrative sanctions and, in
some cases, criminal penalties.
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 90 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
59
following week for use in calculating interest rates payable by financial
institutions. The TCC is the weighted average interest rate paid by finance
corporations for deposit maturities of 90 days. The DTF is the weighted average
interest rate paid by finance corporations, commercial banks and commercial
finance companies for certificates of deposit with maturities of 90 days. For
the week of May 23 - 29, 2005, the DTF was 7.17% and the TCC was 7.71%.
CAPITAL ADEQUACY REQUIREMENTS
Capital adequacy requirements for Colombian financial institutions
are based on the standards of the Basel Committee. The regulations establish
four categories of assets, which are each 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 mainly of:
- outstanding and paid-in capital stock;
- legal and other reserves;
- profits retained from prior fiscal years;
- the total value, if positive, of the reappraisal of equity
account and the foreign currency translation adjustment;
- the balance of the financial statements conversion
adjustment;
- current fiscal year profits in a proportion equal to the
percentage of prior fiscal year profits that were
capitalized, or allocated to increase the legal reserve, or
used to cover accrued losses;
- any representative shares held as guarantee when the entity
is in compliance with a recovery program aimed at bringing
the Bank back into compliance with capital adequacy
requirements (if the Superintendency of Banking establishes
that such recovery program has failed, these shares shall
not be computed);
- bonds issued by financial institutions and subscribed by
Fondo de Garantias de Instituciones Financieras ("Fogafin")
when they comply with the requirements stated in the
regulations;
- the surplus capital account from donations;
- the value of the capital advance payments; and
- the value of the liabilities owed by minority interests.
60
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 (excluding subsidiaries)
subject to the supervision of the Superintendency of Banking
(including purchases of mandatory convertible bonds); and
- capital investments (including purchases of mandatory
convertible bonds) in foreign financial institutions where
the investor holds at least 20% of the capital of said
institution.
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 the accumulated inflation adjustment of
non-monetary assets (provided that such assets have not been
disposed of);
- 50% of asset reappraisal (excluding revaluations of
foreclosed assets);
- 50% of the gross unrealized gain or loss on investments
available for sale;
- mandatory convertible bonds (provided that the terms and
conditions of their issuance were approved by the
Superintendency of Banking);
- market value of subscribed subordinated bonds as long as
said bonds do not exceed 50% of Primary capital, and comply
with additional requirements;
- the value of the direct or indirect capital investments
and the mandatory convertible bonds devaluation; and
- general allowances.
The following items are deducted from Secondary Capital:
- 50% of the direct or indirect capital investments (in
entities subject to the supervision of the Superintendency
of Banking) and mandatory convertible bonds reappraisal;
- the value of the devaluation of equity investments with
low exchange volume or which are unquoted.
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 the
Bank's capital adequacy as of December 31, 2004:
61
AS OF DECEMBER 31,
2004
-------------------
(Ps million, except
percentages)
Subscribed capital......................................................... Ps 355,119
Capital Advance Payments................................................... 10
Legal reserve and other reserves........................................... 1,010,481
Unappropriated retained earnings........................................... 43,278
Net Income................................................................. 438,059
LESS:
Long - term investments........................................... (155,772)
Non - monetary inflation adjustment............................... (191,701)
------------------
Primary capital (Tier I)................................................... Ps 1,499,474
==================
Reappraisal of assets...................................................... Ps 62,826
Provision loans............................................................ 103,329
Non-monetary inflation adjustment.......................................... 108,893
Market value of subordinated bonds......................................... 4,500
------------------
Computed secondary capital (Tier II)....................................... Ps 279,548
==================
Primary capital (Tier I)................................................... Ps 1,499,474
Secondary capital (up to an amount equal to primary capital) (Tier II)..... 279,548
------------------
Technical Capital.......................................................... Ps 1,779,022
==================
Capital ratios
Primary capital to risk-weighted assets (Tier I)........................... 11.32%
Secondary capital to risk-weighted assets (Tier II)........................ 2.11%
------------------
Technical capital to risk-weighted assets ................................. 13.44%
==================
Risk weighted assets ...................................................... Ps 13,240,657
==================
As of December 31, 2004, the Bank's Technical Capital ratio was
13.44%, thereby exceeding the requirements of the Colombian government and the
Superintendency of Banking by 444 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. The Bank expects, however, to be
able to continue to meet all capital adequacy requirements under Colombian law.
Liquidity risks are currently regulated and market risks are
currently governed by External Circular 100 of 1995, as amended, issued by the
Superintendency of Banking. This circular defines criteria and procedures for
measuring the Bank's exposure to interest rate risk, foreign exchange risk, and
market risk. Under the 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, Colombian
Banks have 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.
62
MINIMUM CAPITAL REQUIREMENTS
The minimum capital requirements for banks on an unconsolidated
basis is now contained in Law 795 of 2003, and as of January 1, 2005 was Ps
54,192 million. Failure to meet such requirements can result in the imposition
of a fine by the Superintendency of Banking of 3.5% of the difference between
the required minimum capital and the Bank's effective capital. The Bank has met
all such requirements. As of December 31, 2004, the Bank's total capital
consisted of Ps 355,119 million of paid-in capital stock and Ps 1,010,481
million of legal and other reserve funds.
FOREIGN CURRENCY POSITION REQUIREMENTS
According to Central Bank regulations, the Bank's Foreign Currency
Position is the difference between the Bank's foreign currency-denominated
assets and liabilities (including any off-balance sheet items), made or
contingent, including those that may be sold in Colombian legal currency.
Resolution 4 of 2001 of the Board of Directors of the Central Bank,
modified by Resolution 2 of 2003 and 1 of 2004, provides that a bank's Foreign
Currency Position cannot, if assets are greater than liabilities, exceed 20% of
the bank's Technical Capital. Currency exchange intermediaries such as BC are
permitted to hold a negative Foreign Currency Position not exceeding the
equivalent in foreign currency of 5% of its Technical Capital (with penalties
being payable after the first business day). As of May 29, 2005, BC had an
unconsolidated dollar-denominated positive net assets position of US$ 94.7
million, which falls within the aforementioned regulatory guidelines. For
further discussion, see Note 3 to the Financial Statements.
The Central Bank also established the Foreign Currency Position in
Cash ("Posicion Propia de Contado en Moneda Extranjera") as the difference
between all foreign currency-denominated assets and liabilities. A bank's
Foreign Currency Position in cash can not exceed 50% of the bank's Technical
Capital. In order to control the peso appreciation that occurred during 2003, on
January 23, 2004, the Board of Directors of the Central Bank issued External
Resolution No. 1 forbidding currency exchange intermediaries, such as BC, to
hold negative Foreign Currency Positions in Cash, and therefore established a
minimum of zero for the Foreign Currency Positions in Cash applicable as of
March 31, 2004. This measure has not affected BC significantly.
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:
63
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
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. Resolution 08,
dated May 5, 2000, lowered said deposit to zero.
The Bank is not required to register with the Central Bank loans in
foreign currency, but must submit to the Central Bank a report of all foreign
currency loans made subject to certain exceptions.
BAD LOAN ALLOWANCE
The Superintendency of Banking has issued guidelines on bad loan
allowances for Colombian credit institutions. See Item 4. Information on the
Company - E. Selected Statistical Information - E.4. Summary of Loan Loss
Experience - 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, the Bank 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 the Bank's capital
stock exceed 20% of the Bank's Technical Capital. In addition, no loan to a
single financial institution may exceed 30% of the Bank's Technical Capital. As
of December 31, 2004, the Bank's lending limit per borrower on an unconsolidated
basis was Ps 143,385 million for unsecured loans and Ps 358,462 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, 2004, the Bank was in compliance
with these limitations.
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. Risk exposure includes loans, leasing transactions and
equity and debt investments.
64
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. However, interest rates must also be consistent with market
terms with a maximum limit established by the Superintendency of Banking.
OWNERSHIP RESTRICTIONS
The Bank is organized as a sociedad anonima 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 the
Bank to have at least five shareholders at all times and provides that no single
shareholder may own 95% or more of the Bank's subscribed capital stock. Article
262 of the Colombian Commerce Code prohibits the Bank's Subsidiaries from
acquiring capital stock of the Bank.
Pursuant to Decree 663 adopted by the government on 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 outstanding stock of BC, 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. These restrictions apply equally to foreign investors and Colombian
persons.
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 the Bank, any sale of the Preferred Shares, for 66,000 UVRs or
more, must be effected through The Colombian Stock Exchange.
DEPOSIT INSURANCE
To protect the customers of commercial banks and certain financial
institutions, Resolution No. 1 of 1988 of the Board of Directors of Fogafin, as
amended, requires mandatory deposit insurance. Under this Resolution No. 1,
banks must pay an annual premium of 0.5% of total funds received on saving
accounts, checking accounts and certificates of deposit. 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 20 million.
Thus, the maximum amount that a customer of a liquidated financial institution
is entitled to recover under deposit insurance is Ps 15 million.
INTERVENTION POWERS 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:
65
- 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;
- fails to comply with the adopted recovery programs;
- fails to comply with the instruction of the Superintendency
of Banking for the exclusion of assets or liabilities, or
- fails to comply with the program of graduate closing
operations agreed with the Superintendency of Banking.
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 present a
restructuring program mandated by the Superintendency of Banking has lapsed or
its purpose has not been accomplished. 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.
ANTI-MONEY LAUNDERING PROVISIONS
The regulatory framework to prevent and control money laundering is
composed of External Circulars 025 of 2003 and 034 of 2004 of the
Superintendency of Banking, which regulates and controls anti-money laundering
issues for financial institutions in Colombia. These Circulars adopt the latest
guidelines related to anti-money laundering and other terrorist activities
established by the Financial Action Task Force on Money Laundering - FATF. These
rules emphasize "know your customer" policies, as well as complete knowledge by
financial institutions of their users and markets. They also establish new
processes and parameters to identify and monitor a financial institution's
customers. According to these regulations, financial institutions must cooperate
with the competent authorities to prevent and control money laundering and
terrorism.
66
TROUBLED FINANCIAL INSTITUTIONS
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. 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 also adopted. These regulations sought to aid the recovery of
the Colombian economy, by helping troubled companies and had some influence on
the Bank's credit policies for such companies. Notably, under Law 546 of 1999,
savings and loan institutions were required to convert into commercial and
savings banks. Also, under this law, commercial banks cannot have participation
in other commercial banks for more than 5 years. Therefore, the Bank's
participation in Conavi (a commercial bank) was only permitted until December
2004. Nevertheless, on December 3, 2004, considering the proposed Merger between
Bancolombia, Conavi and Corfinsura, the Superintendency of Banking granted BC an
extension of 9 months on the permitted term, allowing the Bank to maintain its
participation in Conavi until September 2005.
B.8. RAW MATERIALS
The Bank is not dependent on sources or availability of raw
materials.
C. ORGANIZATIONAL STRUCTURE
The following is a list of BC's significant subsidiaries as of
December 31, 2004:
SUBSIDIARIES
JURISDICTION OF
ENTITY INCORPORATION BUSINESS SHAREHOLDING
---------------------------------------------- --------------- ------------------------------ ------------
Almacenes Generales de Deposito Mercantil S.A.
ALMACENAR Colombia Warehousing and logistics 98.25%
Fiducolombia S.A. Colombia Trust 96.16%
Bancolombia Panama S.A. Panama Banking 100.00%
Bancolombia Cayman Cayman Islands Banking 100.00%
Leasing Colombia S.A. Colombia Leasing 99.99%
Compania Suramericana de Financiamiento Finance
Comercial S.A. SUFINANCIAMIENTO Colombia 99.99%
Colcorp S.A. Corporacion Financiera Colombia Finance 100.00%
Comisionista de Colombia S.A. Colombia Securities Brokerage 99.99%
Abocol S.A. Colombia Chemical 92.32%
Valores Simesa S.A. Colombia Various Commercial Investments 71.75%
Inmobiliaria Bancol S.A. Colombia Real Estate Broker 98.95%
Fundicom S.A. Colombia Metals Engineering 79.87%
Unicargo de Colombia S.A. Colombia Freight Service 98.35%
Sistema de Inversiones y Negocios S.A. Panama Commercial Entity 100.00%
Sinesa Holding Company British Virgin
Island Commercial Entity 100.00%
67
JURISDICTION OF
ENTITY INCORPORATION BUSINESS SHAREHOLDING
---------------------------------------------- --------------- ---------------------------- ------------
Todo UNO Colombia Colombia E-commerce 53.92%
Future Net Inc. Panama E-commerce 60.02%
Compania Metalurgica Colombiana S.A.
COMECOL (1) Colombia Metals Engineering 39.65%
Sociedad Portuaria Mamonal S.A. Colombia Customs Office 92.69%
Abocol Costa Rica S.A. Costa Rica Chemical Products Commercial 92.43%
Fertillanos Ltda. Colombia Chemical Products Commercial 55.39%
=====
--------------------
(1) Controlled through other subsidiaries (Valores Simesa S.A. and Colcorp
S.A.)
D. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 2004, the Bank owned Ps 354.31 billion in
equipment. Ps 175.62 billion correspond to land and buildings, of which
approximately 73.11% are administrative real estate and branches, located in 80
municipalities, but mainly in the cities of Bogota, Medellin and Cali. Ps 60.8
billion correspond to computer equipment, of which 72% corresponds to the
central computer and servers and the rest are PCs, ATMs, telecommunications
equipment and other equipment.
In addition to its own branches, the Bank occupies 177 rented
offices.
The Bank does not have any liens on its property.
For the purpose of centralizing operations, and in order to meet the
Bank's additional physical space requirements in 2004, various departments were
transferred to a single rented building, for which renovations are estimated at
Ps 7.26 billion.
E. SELECTED STATISTICAL INFORMATION
The following information is included for analytical purposes and
should be read in conjunction with Item 5. Operating and Financial Review and
Prospects.
E.1. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
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.
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:
68
R(p) = (1 + N(p))/(1 + I) -1
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 can be negative for a portfolio of peso-denominated
interest-earning assets when the inflation rate for the period is higher than
the average nominal rate of this interest-earning asset portfolio for the same
period. 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, 2002,
2003 and 2004, respectively:
- average annual balances calculated using actual month-end
balances for all of the Bank's assets and liabilities;
- interest income and expense amounts; and
- nominal and real interest 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 interest 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.
69
AVERAGE BALANCE SHEET AND INCOME FROM INTEREST-EARNING ASSETS FOR THE FISCAL YEARS
ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------- ----------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
NOMINAL REAL NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE BALANCE EARNED RATE RATE
------------- ----------- -------- -------- ------------- ----------- -------- --------
(Ps million, except percentages)
ASSETS(1)
INTEREST-EARNING ASSETS(2):
Overnight funds
Peso-denominated.............. Ps 14,221 Ps 9,730 68.4% 57.4% Ps 2,158 Ps 16 0.7% -5.4%
Dollar-denominated............ 226,535 2,095 0.9% 0.9% 403,788 4,747 1.2% 1.2%
------------- ----------- ------------- -----------
Total....................... 240,756 11,825 4.9% 405,946 4,763 1.2%
Investment securities (4)
Peso-denominated.............. 1,908,293 6,352 0.3% -6.3% 2,328,676 318,404 13.7% 6.7%
Dollar-denominated............ 1,663,565 (6,105) -0.4% -0.4% 1,719,568 158,316 9.2% 9.2%
------------- ----------- ------------- -----------
Total....................... 3,571,858 247 0.0% 4,048,244 476,720 11.8%
Loans(3) (5)
Peso-denominated.............. 4,355,031 671,657 15.4% 7.9% 5,526,391 849,441 15.4% 8.3%
Dollar-denominated............ 1,046,841 54,455 5.2% 5.2% 1,485,688 69,331 4.7% 4.7%
------------- ----------- ------------- -----------
Total....................... 5,401,872 726,112 13.4% 7,012,079 918,772 13.1%
Total interest-earning assets
Peso-denominated.............. 6,277,545 687,739 11.0% 3.7% 7,857,225 1,167,861 14.9% 7.9%
Dollar-denominated............ 2,936,941 50,445 1.7% 1.7% 3,609,044 232,394 6.4% 6.4%
------------- ----------- ------------- -----------
Total....................... 9,214,486 738,184 8.0% 11,466,269 1,400,255 12.2%
NON INTEREST-EARNING ASSETS:
Cash due from banks and
Central Bank
Peso-denominated.............. 386,770 463,495
Dollar-denominated............ 28,403 161,124
------------- -------------
Total....................... 415,173 624,619
Allowance for loan losses
Peso-denominated.............. (250,972) (293,112)
Dollar-denominated............ (42,164) (69,455)
------------- -------------
Total....................... (293,136) (362,567)
Non-performing loans
Peso-denominated.............. 130,228 85,318
Dollar-denominated............ 44,536 17,063
------------- -------------
Total....................... 174,764 102,381
Customers' acceptances
Peso-denominated.............. (3,799) 153,776
Dollar-denominated............ 23,980 (127,673)
------------- -------------
Total....................... 20,181 26,103
2004
---------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE
------------ ----------- -------- --------
ASSETS(1)
INTEREST-EARNING ASSETS(2):
Overnight funds
Peso-denominated.............. Ps 7,681 Ps 1,759 22.9% 16.5%
Dollar-denominated............ 332,953 5,414 1.6% 1.6%
------------ -----------
Total....................... 340,634 7,173 2.1%
Investment securities (4)
Peso-denominated.............. 2,937,411 378,820 12.9% 7.0%
Dollar-denominated............ 1,654,701 153,697 9.3% 9.3%
------------ -----------
Total....................... 4,592,112 532,517 11.6%
Loans(3) (5)
Peso-denominated.............. 7,043,820 1,040,049 14.8% 8.8%
Dollar-denominated............ 1,928,495 100,838 5.2% 5.2%
------------ -----------
Total....................... 8,972,315 1,140,887 12.7%
Total interest-earning assets
Peso-denominated.............. 9,988,912 1,420,628 14.2% 8.3%
Dollar-denominated............ 3,916,149 259,949 6.6% 6.6%
------------ -----------
Total....................... 13,905,061 1,680,577 12.1%
NON INTEREST-EARNING ASSETS:
Cash due from banks and
Central Bank
Peso-denominated.............. 503,402
Dollar-denominated............ 205,868
------------
Total....................... 709,270
Allowance for loan losses
Peso-denominated.............. (335,539)
Dollar-denominated............ (89,142)
------------
Total....................... (424,681)
Non-performing loans
Peso-denominated.............. 86,024
Dollar-denominated............ 7,119
------------
Total....................... 93,143
Customers' acceptances
Peso-denominated.............. 545,029
Dollar-denominated............ (487,565)
------------
Total....................... 57,464
70
AVERAGE BALANCE SHEET AND INCOME FROM INTEREST-EARNING ASSETS FOR THE FISCAL YEARS
ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------- ----------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
NOMINAL REAL NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE BALANCE EARNED RATE RATE
------------- ----------- -------- -------- ------------- ------------ -------- --------
(Ps million, except percentages)
Accounts receivable, net
Peso-denominated.............. 166,091 217,143
Dollar-denominated............ 6,801 43,232
------------- -------------
Total....................... 172,892 260,375
Foreclosed assets, net
Peso-denominated.............. 74,314 38,063
Dollar-denominated............ 1,050 -
------------- -------------
Total....................... 75,364 38,063
Premises and equipment, net (5)
Peso-denominated.............. 490,785 627,628
Dollar-denominated............ 152,897 119,042
------------- -------------
Total....................... 643,682 746,670
Other assets
Peso-denominated.............. 671,958 804,439
Dollar-denominated............ 85,997 94,429
------------- -------------
Total....................... 757,955 898,868
Total non interest-earning
assets
Peso-denominated.............. 1,665,375 2,096,750
Dollar-denominated............ 301,500 237,762
------------- -------------
Total....................... 1,966,875 2,334,512
Total interest and non interest-
earnings assets
Peso-denominated.............. 7,942,920 687,739 9,953,975 1,167,861
Dollar-denominated............ 3,238,441 50,445 3,846,806 232,394
------------- ----------- ------------- ------------
TOTAL ASSETS............... Ps 11,181,361 Ps 738,184 Ps 13,800,781 Ps 1,400,255
============= =========== ============= ============
2004
--------------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE
------------- ------------ -------- --------
Accounts receivable, net
Peso-denominated.............. 138,710
Dollar-denominated............ 11,947
-------------
Total....................... 150,657
Foreclosed assets, net
Peso-denominated.............. 23,890
Dollar-denominated............ -
-------------
Total....................... 23,890
Premises and equipment, net (5)
Peso-denominated.............. 346,870
Dollar-denominated............ 10,704
-------------
Total....................... 357,574
Other assets
Peso-denominated.............. 1,106,888
Dollar-denominated............ (7,523)
-------------
Total....................... 1,099,365
Total non interest-earning
assets
Peso-denominated.............. 2,415,274
Dollar-denominated............ (348,592)
------------
Total....................... 2,066,682
Total interest and non interest-
earnings assets
Peso-denominated.............. 12,404,186 1,420,628
Dollar-denominated............ 3,567,557 259,949
------------- ------------
TOTAL ASSETS............... Ps 15,971,743 Ps 1,680,577
============= ============
-------------------------
(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 interest rate for the
dollar-denominated activity is also considered to be the real interest
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 item's interest rate subtotals are based on
weighted averages using the average balances of the item.
(3) Includes performing loans only.
(4) Variation in the average nominal interest rate for 2003, reflect new
regulations issued by the Superintendency of Banking and effective as of
September 1, 2002. See note 2 (g) to the financial statements.
(5) On October 23, 2003, the Superintendency of Banking through its External
Circular 040, modified the treatment of financial leases. Since January 1,
2004, instead of recording financial leases as property, plant and
equipment, companies must account for them in their loan portfolio.
71
AVERAGE BALANCE SHEET AND INTEREST PAID ON INTEREST-BEARING LIABILITIES FOR THE FISCAL YEARS
ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------- ----------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
NOMINAL REAL NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE BALANCE PAID RATE RATE
------------- ----------- -------- -------- ------------- ----------- -------- --------
(Ps million, 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% Ps 154,098 Ps 3,596 2.3% -3.9%
Dollar-denominated.......... 576,933 10,013 1.7% 1.7% 851,005 8,026 0.9% 0.9%
------------- ----------- ------------- -----------
Total..................... 667,265 12,975 1.9% 1,005,103 11,622 1.2%
Savings deposits
Peso-denominated............ 2,077,699 105,442 5.1% -1.8% 2,452,320 112,875 4.6% -1.8%
Dollar-denominated.......... 83,796 1,383 1.7% 1.7% 118,905 1,093 0.9% 0.9%
------------- ----------- ------------- -----------
Total..................... 2,161,495 106,825 4.9% 2,571,225 113,968 4.4%
Time deposits
Peso-denominated............ 2,167,388 211,375 9.8% 2.6% 2,477,658 200,881 8.1% 1.5%
Dollar-denominated.......... 1,386,388 48,903 3.5% 3.5% 1,742,845 49,030 2.8% 2.8%
------------- ----------- ------------- -----------
Total..................... 3,553,776 260,278 7.3% 4,220,503 249,911 5.9%
Overnight funds
Peso-denominated............ 363,623 22,569 6.2% -0.7% 691,205 35,247 5.1% -1.3%
Dollar-denominated.......... 81,474 4,076 5.0% 5.0% 32,776 3,176 9.7% 9.7%
------------- ----------- ------------- -----------
Total..................... 445,097 26,645 6.0% 723,981 38,423 5.3%
Borrowings from domestic
development banks
Peso-denominated............ 436,132 43,722 10.0% 2.8% 654,684 57,537 8.8% 2.2%
Dollar-denominated.......... 77,540 5,595 7.2% 7.2% 33,538 919 2.7% 2.7%
------------- ----------- ------------- -----------
Total..................... 513,672 49,317 9.6% 688,222 58,456 8.5%
Interbank borrowings
Peso-denominated............ - - - -
Dollar-denominated.......... 505,832 9,404 1.9% 1.9% 317,258 5,293 1.7% 1.7%
------------- ----------- ------------- -----------
Total..................... 505,832 9,404 1.9% 1.9% 317,258 5,293 1.7% 1.7%
Long-term debt
Peso-denominated............ 20,776 779 3.7% -3.1% 64,299 2,840 4.4% -1.9%
Dollar-denominated.......... - - - -
------------- ----------- ------------- -----------
Total..................... 20,776 779 3.7% 3.7% 64,299 2,840 4.4% 4.4%
Total interest-bearing
liabilities(4)
Peso-denominated............ 5,155,950 386,849 7.5% 0.5% 6,494,264 412,976 6.4% -0.1%
Dollar-denominated.......... 2,711,963 79,374 2.9% 2.9% 3,096,327 67,537 2.2% 2.2%
------------- ----------- ------------- -----------
Total..................... 7,867,913 466,223 5.9% 9,590,591 480,513 5.0%
2004
---------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE
------------ ----------- -------- --------
LIABILITIES AND SHARE-HOLDERS'
EQUITY(1)(2)(3)
INTEREST-BEARING LIABILITIES:
Checking deposits
Peso-denominated............ Ps 189,362 Ps 4,822 2.5% -2.8%
Dollar-denominated.......... 985,168 8,683 0.9% 0.9%
------------ ----------
Total..................... 1,174,530 13,505 1.1%
Savings deposits
Peso-denominated............ 2,886,563 140,237 4.9% -0.6%
Dollar-denominated.......... 133,130 1,051 0.8% 0.8%
------------ ----------
Total..................... 3,019,693 141,288 4.7%
Time deposits
Peso-denominated............ 2,672,930 229,416 8.6% 2.9%
Dollar-denominated.......... 1,592,067 38,142 2.4% 2.4%
------------ ----------
Total..................... 4,264,997 267,558 6.3%
Overnight funds
Peso-denominated............ 802,920 37,890 4.7% -0.7%
Dollar-denominated.......... 61,501 3,326 5.4% 5.4%
------------ ----------
Total..................... 864,421 41,216 4.8%
Borrowings from domestic
development banks
Peso-denominated............ 777,871 73,383 9.4% 3.7%
Dollar-denominated.......... 8,491 166 2.0% 2.0%
------------ ----------
Total..................... 786,362 73,549 9.4%
Interbank borrowings
Peso-denominated............ - -
Dollar-denominated.......... 312,969 7,389 2.4% 2.4%
------------ ----------
Total..................... 312,969 7,389 2.4% 2.4%
Long-term debt
Peso-denominated............ 443,522 41,239 9.3% 3.6%
Dollar-denominated.......... - -
------------ ----------
Total..................... 443,522 41,239 9.3% 9.3%
Total interest-bearing
liabilities(4)
Peso-denominated............ 7,773,168 526,987 6.8% 1.2%
Dollar-denominated.......... 3,093,326 58,757 1.9% 1.9%
------------ ----------
Total..................... 10,866,494 585,744 5.4%
72
AVERAGE BALANCE SHEET AND INTEREST PAID ON INTEREST-BEARING LIABILITIES FOR THE FISCAL YEARS
ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------- ----------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
NOMINAL REAL NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE BALANCE PAID RATE RATE
------------- ----------- -------- -------- ------------- ----------- -------- --------
(Ps million, except percentages)
NON-INTEREST-BEARING
LIABILITIES:
Checking accounts
Peso-denominated............ 1,437,429 1,685,115
Dollar-denominated.......... 21 -
------------- -------------
Total..................... 1,437,450 1,685,115
Other deposits
Peso-denominated............ 48,331 64,013
Dollar-denominated.......... 50,513 63,641
------------- -------------
Total..................... 98,844 127,654
Bank Acceptances Outstanding
Peso-denominated............ 4,243 3,477
Dollar-denominated.......... 23,980 28,973
------------- -------------
Total..................... 28,223 32,450
Other liabilities
Peso-denominated............ 673,000 821,364
Dollar-denominated.......... 45,472 36,127
------------- -------------
Total..................... 718,472 857,491
Shareholders' equity
Peso-denominated............ 939,774 1,130,654
Dollar-denominated.......... 90,685 376,826
------------- -------------
Total..................... 1,030,459 1,507,480
Total non-interest bearing
liabilities and
shareholders' equity (4)
Peso-denominated............ 3,102,777 3,704,623
Dollar-denominated.......... 210,671 505,567
------------- -------------
Total....................... 3,313,448 4,210,190
Total interest and
non-interest bearing
liabilities and
shareholders' equity
Peso-denominated............ 8,258,727 386,849 10,198,887 412,976
Dollar-denominated.......... 2,922,634 79,374 3,601,894 67,537
------------- ----------- ------------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY Ps 11,181,361 Ps 466,223 Ps 13,800,781 Ps 480,513
============= =========== ============= ===========
2004
----------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE
------------- ----------- -------- --------
NON-INTEREST-BEARING
LIABILITIES:
Checking accounts
Peso-denominated............ 1,926,334
Dollar-denominated.......... -
-------------
Total..................... 1,926,334
Other deposits
Peso-denominated............ 79,552
Dollar-denominated.......... 107,589
-------------
Total..................... 187,141
Bank Acceptances Outstanding
Peso-denominated............ 6,758
Dollar-denominated.......... 40,039
-------------
Total..................... 46,797
Other liabilities
Peso-denominated............ 1,099,367
Dollar-denominated.......... 45,335
-------------
Total..................... 1,144,702
Shareholders' equity
Peso-denominated............ 1,431,112
Dollar-denominated.......... 369,163
-------------
Total..................... 1,800,275
Total non-interest bearing
liabilities and
shareholders' equity (4)
Peso-denominated............ 4,543,123
Dollar-denominated.......... 562,126
-------------
Total....................... 5,105,249
Total interest and
non-interest bearing
liabilities and
shareholders' equity
Peso-denominated............ 12,316,291 526,987
Dollar-denominated.......... 3,655,452 58,757
------------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY Ps 15,971,743 Ps 585,744
============= ==========
---------------
(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 interest rate for the
dollar-denominated activity is also considered to be the real interest
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 item's interest rate subtotals are based on
weighted averages using the average balances of the item.
(3) Includes performing loans only.
(4) Interest income and expense resulting from inflation adjustments are
distributed among the individual asset/liability items for the purpose of
determining the nominal and real interest rates.
73
CHANGES IN NET INTEREST INCOME AND EXPENSES -- VOLUME AND RATE ANALYSIS
The following table allocates, by currency of denomination, changes
in the Bank's net interest income to 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, 2004 compared to the fiscal
year ended December 31, 2003; and the fiscal year ended December 31, 2003
compared to the fiscal year ended December 31, 2002. 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 interest rate have been allocated to the change due to changes in volume.
2002-2003 2003-2004
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN: DUE TO CHANGES IN:
----------------------------------- -------------------------------------
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
---------- ---------- --------- ---------- ---------- -----------
(Ps million)
INTEREST-EARNING ASSETS:
Overnight funds
Peso-denominated Ps (89) Ps (9,625) Ps (9,714) Ps 1,265 Ps 478 Ps 1,743
Dollar-denominated............ 2,084 568 2,652 (1,152) 1,819 667
---------- ---------- ---------- ---------- ---------- -----------
Total....................... 1,995 (9,057) (7,062) 113 2,297 2,410
Investment securities
Peso-denominated.............. 57,480 254,572 312,052 78,505 (18,089) 60,416
Dollar-denominated............ 5,156 159,265 164,421 (6,025) 1,406 (4,619)
---------- ---------- ---------- ---------- ---------- -----------
Total....................... 62,636 413,837 476,473 72,480 (16,683) 55,797
Loans
Peso-denominated.............. 180,045 (2,261) 177,784 224,055 (33,447) 190,608
Dollar-denominated............ 20,479 (5,603) 14,876 23,154 8,353 31,507
---------- ---------- ---------- ---------- ---------- -----------
Total....................... 200,524 (7,864) 192,660 247,209 (25,094) 222,115
Total interest-earning assets
Peso-denominated.............. 237,436 242,686 480,122 303,825 (51,058) 252,767
Dollar-denominated............ 27,719 154,230 181,949 15,977 11,578 27,555
---------- ---------- ---------- ---------- ---------- -----------
TOTAL....................... Ps 265,155 Ps 396,916 Ps 662,071 Ps 319,802 Ps (39,480) Ps 280,322
========== ========== ========== ========== ========== ===========
INTEREST-BEARING LIABILITIES:
Checking deposits
Peso-denominated.............. Ps 1,488 Ps (854) Ps 634 Ps 898 Ps 328 Ps 1,226
Dollar-denominated............ 2,585 (4,572) (1,987) 1,182 (525) 657
---------- ---------- ---------- ---------- ---------- -----------
Total....................... 4,073 (5,426) (1,353) 2,080 (197) 1,883
Savings deposits
Peso-denominated.............. 17,243 (9,810) 7,433 21,097 6,265 27,362
Dollar-denominated............ 323 (613) (290) 112 (154) (42)
---------- ---------- ---------- ---------- ---------- -----------
Total....................... 17,566 (10,423) 7,143 21,209 6,111 27,320
Time deposits
Peso-denominated.............. 25,156 (35,650) (10,494) 16,760 11,775 28,535
Dollar-denominated............ 10,028 (9,901) 127 (3,612) (7,276) (10,888)
---------- ---------- ---------- ---------- ---------- -----------
Total....................... 35,184 (45,551) (10,367) 13,148 4,499 17,647
Overnight funds
Peso-denominated.............. 16,705 (4,027) 12,678 5,272 (2,629) 2,643
Dollar-denominated............ (4,719) 3,819 (900) 1,553 (1,403) 150
---------- ---------- ---------- ---------- ---------- -----------
Total....................... 11,986 (208) 11,778 6,825 (4,032) 2,793
Borrowings from domestic
development banks
Peso-denominated.............. 19,207 (5,392) 13,815 11,621 4,225 15,846
Dollar-denominated............ (1,206) (3,470) (4,676) (490) (263) (753)
---------- ---------- ---------- ---------- ---------- -----------
Total....................... 18,001 (8,862) 9,139 11,131 3,962 15,093
74
2002-2003 2003-2004
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN: DUE TO CHANGES IN:
---------------------------------- -------------------------------------
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
--------- ---------- --------- ---------- ---------- -----------
(Ps million)
Interbank borrowings
Peso-denominated.............. - - - - - -
Dollar-denominated............ (3,146) (965) (4,111) (101) 2,197 2,096
--------- ---------- --------- ---------- ---------- -----------
Total....................... (3,146) (965) (4,111) (101) 2,197 2,096
Long-term debt
Peso-denominated.............. 1,922 139 2,061 35,260 3,139 38,399
Dollar-denominated............ - - - - - -
--------- ---------- --------- ---------- ---------- -----------
Total....................... 1,922 139 2,061 35,260 3,139 38,399
Total interest-bearing
liabilities
Peso-denominated.............. 81,721 (55,594) 26,127 90,908 23,103 114,011
Dollar-denominated............ 3,865 (15,702) (11,837) (1,356) (7,424) (8,780)
--------- ---------- --------- ---------- ---------- -----------
TOTAL....................... Ps 85,586 Ps (71,296) Ps 14,290 Ps 89,552 Ps 15,679 Ps 105,231
========= ========== ========= ========== ========== ===========
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, 2002, 2003 and 2004, respectively.
INTEREST-EARNING ASSETS-YIELD SPREAD FOR THE FISCAL
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2003 2004
------------ ------------- -------------
(in millions of pesos, except percentages)
Total average interest-earning assets
Peso-denominated............................ Ps 6,277,545 Ps 7,857,225 Ps 9,988,912
Dollar-denominated.......................... 2,936,941 3,609,044 3,916,149
------------ ------------- -------------
TOTAL..................................... Ps 9,214,486 Ps 11,466,269 Ps 13,905,061
Net interest earned(1)
Peso-denominated............................ Ps 300,890 Ps 754,885 Ps 893,641
Dollar-denominated.......................... (28,929) 164,857 201,192
------------ ------------- -------------
TOTAL..................................... Ps 271,961 Ps 919,742 Ps 1,094,833
Average yield on interest-earning assets
Peso-denominated............................ 11.0% 14.9% 14.2%
Dollar-denominated.......................... 1.7% 6.4% 6.6%
------------ ------------- -------------
TOTAL..................................... 8.0% 12.2% 12.1%
Net interest margin(2)
Peso-denominated............................ 4.8% 9.6% 8.9%
Dollar-denominated.......................... (1.0)% 4.6% 5.1%
------------ ------------- -------------
TOTAL..................................... 3.0% 8.0% 7.9%
Interest spread(3)
Peso-denominated............................ 3.5% 8.5% 7.4%
Dollar-denominated.......................... (1.2)% 4.3% 4.7%
------------ ------------- -------------
TOTAL..................................... 2.1% 7.2% 6.7%
-----------------------
(1) Net interest earned is interest income less interest paid and includes
interest earned on investments.
(2) Net interest margin is net interest income divided by total average
interest-earning assets.
(3) Interest spread is the difference between the average yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
75
E.2. INVESTMENT PORTFOLIO
The Bank acquires and holds investment securities for liquidity and
other strategic purposes, or when it is required by law, including fixed income
debt and equity securities.
As of September 1, 2002, investments had to be classified as
"trading," "available for sale" or "held to maturity." Trading investments are
those acquired primarily to obtain profits from fluctuations in short-term
prices, and are recorded at market value. 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. "Available for sale" investments are those
held for at least one year (except for Bancolombia Panama's "available for sale"
investments, which have no term restrictions) and they are recorded at market
value with changes to the values of these securities recorded in a separate
account in the equity section. "Held to maturity" investments are those acquired
to be held until maturity and are valued at amortized cost. As of December 31,
2004, the value of BC's dollar- and peso-denominated portfolio on a consolidated
basis was Ps 4,917,853 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 10% to 100% of the cost
of the investment, and for 100% of accrued income.
LONG - TERM CLASSIFICATION MAXIMUM FACE VALUE (%)
-------------------------- ----------------------
BB+, BB, BB- Ninety (90)
B+, B, B- Seventy (70)
C Fifty (50)
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"-
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. Furthermore, an equity
investment's net value cannot be recorded on the balance sheet of the Bank for
an amount higher than 80%, 60%, 40% and 0% of the purchase cost, respectively.
Internal or external debt securities issued or guaranteed by the
Republic of Colombia are not subject to this adjustment, as well as those issued
by the Central Bank and those issued or guaranteed by Fogafin.
76
As of December 2004, BC has not created a provision for any
investment debt securities, except for six securities which provisions amounted
to Ps 4,939 million.
The following table sets forth the Bank's fair value of investments
in government and corporate securities and certain other financial investments
as of the dates indicated:
AS OF DECEMBER 31,
------------------------------------------
2002(1)(2) 2003(1)(2) 2004(1)(2)
------------- ------------ ------------
(in millions of pesos)
DOLLAR-DENOMINATED
Securities issued by the Colombian Government............. Ps 1,322,471 Ps 1,303,377 805,602
Euronotes and Eurobonds................................... 373,339 297,906 326,534
Securities issued by foreign governments (3).............. - 87,109 -
Others.................................................... 92,169 98,324 210,317
------------- ------------ ------------
Subtotal................................................ 1,787,979 1,786,716 1,342,453
------------- ------------ ------------
PESO-DENOMINATED
Securities issued by the Colombian Government............. 1,692,817 1,887,881 2,900,305
Securities issued by the Central Bank..................... 11,767 6,815 4,190
Securities issued by government entities.................. 134,519 107,479 45,806
Securities issued by other financial entities............. 261,266 282,187 457,378
Others.................................................... 201,337 91,342 167,721
------------- ------------ ------------
Subtotal................................................ 2,301,706 2,375,704 3,575,400
------------- ------------ ------------
TOTAL...................................... Ps 4,089,685 Ps 4,162,420 Ps 4,917,853
============= ============ ============
--------------------
(1) Includes debt securities only. The Bank's total long-term investments, net
in equity securities were Ps 253,774 million, Ps 174,304 million and Ps
332,358 million for 2002, 2003 and 2004, respectively.
(2) These amounts are net of allowances for decline in value which were Ps
10,313 million for 2002, Ps 9,171 million for 2003 and Ps 4,939 million
for 2004.
(3) As of December 31, 2003, BC holds one security issued by the U.S. Treasury
Department for Ps 78,544 million (US$ 27,979,448) and one security issued
by the Republic of El Salvador for Ps 8,565 million (US$ 3,051,198).
INVESTMENT SECURITIES PORTFOLIO MATURITY
The following table analyzes the remaining maturities and weighted
average nominal yields of the Bank's investment securities as of December 31,
2004:
77
AS OF DECEMBER 31, 2004
-------------------------------------------------------------------------------------------------
MATURING AFTER FIVE
MATURING IN ONE YEAR OR MATURING AFTER ONE YEAR YEARS THROUGH TEN MATURING AFTER TEN
LESS THROUGH FIVE YEARS YEARS YEARS
------------------------ ----------------------- ---------------------- ----------------------
BALANCE(1) YIELD %(2) BALANCE(1) YIELD %(2) BALANCE(1) YIELD %(2) BALANCE(1) YIELD %(2)
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in millions of pesos, except yields)
DOLLAR-DENOMINATED:
Securities issued by
the Colombian
government.................. Ps 491,085 3.50% Ps 273,670 5.98% Ps 36,725 8.70% Ps 4,122 8.02%
Euronotes and Eurobonds....... 102,717 5.07% 223,817 4.39% - - - -
Securities issued by
foreign governments......... - - - - - - - -
Others........................ 59,530 3.57% 132,154 3.77% 13,607 6.22% 5,026 6.04%
------------ ------- ------------ -------- ---------- -------- ---------- --------
Subtotal................... 653,332 3.76% 629,641 4.95% 50,332 8.03% 9,148 6.93%
------------ ------- ------------ -------- ---------- -------- ---------- --------
PESO-DENOMINATED
Securities issued by the
Colombian government........ 429,076 7.81% 1,949,333 10.60% 512,956 12.38% 8,940 10.37%
Securities issued by the
Central Bank................ 4,102 1.24% 88 8.67% - - - -
Securities issued by the
government entities......... 1,366 7.83% 19,173 9.19% 16,474 12.31% 8,793 13.41%
Securities issued by
other financial entities.... 160,566 8.96% 217,266 9.09% 79,546 7.98% - -
Others........................ 3,051 3.09% 70,562 7.55% 84,365 10.04% 9,743 9.20%
------------ ------- ------------ -------- ---------- -------- ---------- --------
Subtotal................... 598,161 8.05% 2,256,422 10.34% 693,341 11.59% 27,476 10.93%
------------ ------- ------------ -------- ---------- -------- ---------- --------
TOTAL...................... Ps 1,251,493 Ps 2,886,063 Ps 743,673 Ps 36,624
============ ============ ========== ==========
TOTAL
------------------------
BALANCE(1) YIELD %(2)
------------ ----------
DOLLAR-DENOMINATED:
Securities issued by
the Colombian
government.................. Ps 805,602 4.60%
Euronotes and Eurobonds....... 326,534 4.60%
Securities issued by
foreign governments......... - -
Others........................ 210,317 3.93%
------------ -------
Subtotal.................... 1,342,453 4.50%
------------ -------
PESO-DENOMINATED
Securities issued by the
Colombian government........ 2,900,305 10.50%
Securities issued by the
Central Bank................ 4,190 1.40%
Securities issued by
government entities......... 45,806 11.08%
Securities issued by
other financial entities.... 457,378 8.85%
Others........................ 167,721 8.82%
------------ -------
Subtotal................... 3,575,400 10.21%
------------ -------
TOTAL...................... Ps 4,917,853
============
--------------------
(1) These amounts are net of allowances for decline in value which were Ps
4,939 million in 2004.
(2) Yield was calculated using internal return rate (IRR) as of December 31,
2004.
As of December 31, 2004, the Bank had the following investment that
exceeded 10% of its shareholders' equity:
FAIR VALUE AMORTIZED COST
---------- --------------
(Ps million)
Securities issued or secured by
Colombian government Ps 3,705,907 Ps 3,635,582
============== ===============
BC increased the diversification, decreased the size, and shortened
the duration of the dollar denominated portfolio in response to a less positive
outlook for dollar denominated securities in the fixed income market during
2005.
During 2004, BC increased the amount of its peso denominated
portfolio to Ps 3,575 billion, keeping participation in securities issued by the
Colombian government at 81%. As part of BC's strategy to further stabilize its
income, the amount of the portfolio classified as available for sale was
increased.
78
E.3. LOAN PORTFOLIO
In March of 2002, the Colombian Superintendency of Banking, through
its External Circular 011, introduced new modifications to Chapter II of the
External Circular 100 of 1995 ("Basic Accounting Circular"), related to credit
risk management. This norm establishes the general principles and criteria that
institutions must adopt in order to maintain adequately evaluated credit risks
associated with the loan portfolio. It also defines credit categories,
determines qualifications that must be granted to such operations according to
their perceived risk, establishes the frequency with which these qualifications
should be reviewed, stipulates the re-qualification mechanisms, provides
instructions on the accounting criteria and provisions to be made and on the
content and frequency of the reports to be submitted to the Superintendency of
Banking, and fixes internal control mechanisms that institutions must adopt to
assure the adequate fulfillment of this regulation.
The current regulations also require that institutions develop a
system for the management of credit risk (SARC, for its initials in Spanish),
establishing strategies, policies, methods, processes and structures for the
evaluation, monitoring, and control of credit risk. See Item 4. Information on
the Company - E. Selected Statistical Information - E.4. Summary of Loan Loss
Experience - New Provision System (or Credit Risk Management System - "SARC").
The Bank classifies its loan portfolio into the following
categories:
- Corporate loans, which include loans to medium and large
corporations;
- Retail loans, which include loans to individuals, such as
personal lines of credit, vehicle loans and credit card loans,
small business loans;
- Financial leases; 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 into
corporate, retail and mortgage loans:
AS OF DECEMBER 31,
--------------------------------------------------------------------------------
2000 2001 2002 2003 2004
------------ ------------ ------------ ------------ ------------
(Ps million)
CORPORATE
Trade financing .................... Ps 92,213 Ps 95,649 Ps 166,620 Ps 149,582 Ps 253,632
Loans funded by domestic development
banks .............................. 303,718 292,609 376,378 394,947 770,331
Working capital loans .............. 3,053,580 3,040,469 3,650,585 4,687,153 4,298,354
Credit cards ....................... 4,446 3,892 5,218 8,237 24,621
Overdrafts ......................... 51,132 22,755 48,591 32,371 67,018
Other .............................. - 22,886 - - -
------------ ------------ ------------ ------------ ------------
Total corporate ................ 3,505,089 3,478,260 4,247,392 5,272,290 5,413,956
------------ ------------ ------------ ------------ ------------
79
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------
2000 2001 2002 2003 2004
------------ ------------ ------------ ------------ ------------
(Ps million)
RETAIL (1)
Credit cards .......................... 199,351 231,965 254,876 335,172 392,900
Personal loans ........................ 354,223 457,677 561,558 814,885 1,111,250
Vehicle loans ......................... 32,270 15,713 24,476 229,737 381,723
Overdrafts ............................ 58,128 73,372 68,490 81,294 89,867
Loans funded by domestic development
banks ............................... 79,430 138,415 276,157 330,246 359,494
Trade financing ....................... 25,403 38,643 28,112 19,644 54,189
Working capital loans ................. 824,899 881,649 698,160 898,239 1,295,643
------------ ------------ ------------ ------------ ------------
Total retail ................. 1,573,704 1,837,434 1,911,829 2,709,217 3,685,066
------------ ------------ ------------ ------------ ------------
FINANCIAL LEASES (2) ...................... - - - - 880,110
MORTGAGE .................................. 33,278 34,511 38,094 48,161 56,107
------------ ------------ ------------ ------------ ------------
TOTAL LOANS .................. 5,112,071 5,350,205 6,197,315 8,029,668 10,035,239
Allowance for loan losses ................. (285,565) (271,729) (332,324) (387,263) (434,378)
------------ ------------ ------------ ------------ ------------
TOTAL LOANS, NET ............. Ps 4,826,506 Ps 5,078,476 Ps 5,864,991 Ps 7,642,405 Ps 9,600,861
============ ============ ============ ============ ============
--------------
(1) Includes loans to high-income individuals and small companies.
(2) Includes financial leases, according to regulations issued by the
Superintendency of Banking and effective as of January 1, 2004.
In 2004, the Bank's total loan portfolio increased 24.98% to Ps
10,035,239 million from Ps 8,029,668 million in 2003, due primarily to the
recovery of the Colombian economy and the Bank's strategic targeting of
additional market segments discussed in Item 5. Operating and Financial Review
and Prospects - A. Operating Results - A.2. Impact of Economic, Fiscal and
Monetary Policies or Political. The Bank's total loan portfolio increased 29.57%
in 2003 to Ps 8,029,668 million from Ps 6,197,315 million in 2002 due to a
recovery of the Colombian economy.
In 2004, total corporate loans increased 2.69% to Ps 5,413,956
million due primarily to a 95.05% increase in loans funded by domestic
development banks and a 69.56% increase in trade financing loans. In 2003, total
corporate loans increased 24.13% to Ps 5,272,290 million from Ps 4,247,392
million in 2002, due primarily to a 28.39% increase in working capital loans. As
of December 31, 2002, 2003 and 2004 total corporate loans represented 69%, 66%
and 54% respectively, of the Bank's total loan portfolio.
Total retail loans increased 36.02% in 2004 to Ps 3,685,066 million,
due primarily to a 36.37% increase in personal loans, a 66.16% increase in
vehicle loans and a 44.24% increase in working capital loans. In 2003, total
retail loans increased 41.71% to Ps 2,709,217 million from Ps 1,911,829 million
in 2002, due primarily to a 45.11% increase in personal loans, a 838.6% increase
in vehicle loans and a 28.66% increase in working capital loans. As of December
31, 2002, 2003 and 2004 retail loans represented 31%, 34% and 37% respectively,
of the Bank's total loan portfolio.
As of December 31, 2004, the aggregate outstanding principal amount
of the Bank's 25 largest borrowing relationships represented approximately
17.87% of the total loan portfolio, and no single borrowing relationship
represented more than 5.73% of the total loan portfolio. Approximately 42.37% of
such loans are denominated in foreign currencies (U.S. dollars). 100% of these
loans are corporate and, as of December 31, 2004, 87.39% of these relationships
were classified as "A" loans, 4.78% as "B" and 7.83% as "D."
80
MATURITY AND INTEREST RATE SENSITIVITY OF LOANS
The following table shows the maturities of the Bank's loan portfolio:
AS OF DECEMBER 31, 2004
---------------------------------------------------------
DUE AFTER ONE
DUE IN ONE YEAR THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ ------------ ------------ ------------
(Ps million)
PESO-DENOMINATED LOANS AND FINANCIAL LEASES:
CORPORATE
Trade financing ........................................... Ps 50,969 Ps - Ps - Ps 50,969
Loans funded by domestic development banks ................ 43,896 123,108 65,270 232,274
Working capital loans ..................................... 1,216,710 1,297,001 701,497 3,215,208
Credit cards .............................................. 2,397 19,772 - 22,169
Overdrafts ................................................ 57,538 - - 57,538
Other ..................................................... - - - -
------------ ------------ ------------ ------------
Total corporate ....................................... 1,371,510 1,439,881 766,767 3,578,158
------------ ------------ ------------ ------------
RETAIL (1)
Credit cards .............................................. 49,048 297,853 - 346,901
Personal loans ............................................ 141,680 959,550 5,888 1,107,118
Vehicle loans ............................................. 18,603 362,192 517 381,312
Overdrafts ................................................ 89,867 - - 89,867
Loans funded by domestic development banks ................ 46,125 271,627 41,323 359,075
Trade financing ........................................... 35,252 - - 35,252
Working capital loans ..................................... 549,147 638,853 52,833 1,240,833
------------ ------------ ------------ ------------
Total retail .......................................... 929,722 2,530,075 100,561 3,560,358
------------ ------------ ------------ ------------
FINANCIAL LEASES .............................................. 27,187 585,342 173,641 786,170
MORTGAGE ...................................................... 140 3,802 52,165 56,107
------------ ------------ ------------ ------------
TOTAL PESO-DENOMINATED LOANS AND FINANCIAL
LEASES ............................................ Ps 2,328,559 Ps 4,559,100 Ps 1,093,134 Ps 7,980,793
============ ============ ============ ============
DOLLAR-DENOMINATED LOANS AND FINANCIAL LEASES
CORPORATE
Trade financing ........................................... Ps 171,393 Ps - Ps - Ps 171,393
Loans funded by domestic development banks ................ 22,081 547,247 - 569,328
Working capital loans ..................................... 571,900 490,125 11,609 1,073,634
Credit cards .............................................. 290 2,189 - 2,479
Overdrafts ................................................ 18,962 - - 18,962
Other ..................................................... - - - -
------------ ------------ ------------ ------------
Total corporate ....................................... 784,626 1,039,561 11,609 1,835,796
------------ ------------ ------------ ------------
RETAIL (1)
Credit cards .............................................. 17,101 28,897 - 45,998
Personal loans ............................................ 3,618 927 - 4,545
Vehicle loans ............................................. - - - -
Overdrafts ................................................ - - - -
Loans funded by domestic development banks ................ 418 - - 418
Trade financing ........................................... 18,939 - - 18,939
Working capital loans ..................................... 26,876 27,934 - 54,810
------------ ------------ ------------ ------------
Total retail .......................................... 66,952 57,758 - 124,710
------------ ------------ ------------ ------------
FINANCIAL LEASES(2) ........................................... 20,097 62,219 11,624 93,940
MORTGAGE ...................................................... - - - -
------------ ------------ ------------ ------------
TOTAL DOLLAR-DENOMINATED LOANS AND FINANCIAL LEASES ......... 871,675 1,159,538 23,233 2,054,446
------------ ------------ ------------ ------------
TOTAL LOANS AND FINANCIAL LEASES ...................... Ps 3,200,234 Ps 5,718,638 Ps 1,116,367 Ps10,035,239
============ ============ ============ ============
-------------
(1) Includes loans to high-income individuals and small companies.
(2) Includes financial leases, according to regulations issued by the
Superintendency of Banking and effective as of January 1, 2004.
As of December 31, 2004, approximately 31.89% 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.
81
The following table shows the interest rate sensitivity of the
Bank's loan portfolio due after one year and within one year or less as of
December 31, 2004:
AS OF DECEMBER 31,
2004(1)
------------------
(Ps million)
LOANS AND FINANCIAL LEASES DUE AFTER ONE YEAR:
VARIABLE RATE
Peso-denominated.......................... Ps 4,951,855
Dollar-denominated........................ 950,381
------------
Total................................... 5,902,236
------------
FIXED RATE
Peso-denominated.......................... 700,379
Dollar-denominated........................ 232,390
------------
Total................................... 932,769
------------
LOANS AND FINANCIAL LEASES DUE IN ONE YEAR
OR LESS:
Peso-denominated.......................... 2,328,559
Dollar-denominated........................ 871,675
------------
Total................................... 3,200,234
------------
TOTAL LOANS AND FINANCIAL LEASES...... Ps10,035,239
------------
(1) Includes financial leases, according to regulations issued by the
Superintendency of Banking and effective as of January 1, 2004.
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,
------------------------------------------------------------------------------------------------
2000 % 2001 % 2002 % 2003 % 2004 (1) %
----------- ------ ----------- ------ ----------- ------ ----------- ------ ------------- ------
Agricultural................ Ps 100,346 2.0% Ps 136,201 2.5% Ps 135,554 2.2% Ps 183,293 2.3% Ps 480,414 4.8%
Mining products and oil..... 10,199 0.2% 43,881 0.8% 103,624 1.7% 84,414 1.0% 140,137 1.4%
Food, beverage and tobacco.. 449,171 8.8% 68,651 1.3% 174,818 2.8% 133,859 1.7% 666,602 6.6%
Chemical production......... 264,633 5.2% - 0.0% 11,453 0.1% 174 0.0% 386,434 3.9%
Other industrial and
manufacturing products.... 816,477 16.0% 1,550,141 29.0% 1,738,250 28.0% 1,929,007 24.0% 1,762,447 17.6%
Government.................. 657,050 12.8% 91,146 1.6% 152,453 2.4% 836,832 10.4% 1,027,009 10.2%
Construction................ 160,095 3.1% 181,788 3.4% 163,755 2.6% 180,704 2.3% 575,679 5.7%
Trade and tourism........... 731,099 14.3% 712,333 13.3% 816,090 13.2% 893,729 11.1% 1,760,120 17.5%
Transportation and
communications............ 213,519 4.2% 302,100 5.6% 299,184 4.8% 408,285 5.1% 720,031 7.2%
Public services............. 297,329 5.8% 284,031 5.3% 464,054 7.5% 472,451 5.9% 469,658 4.7%
Consumer services........... 303,937 5.9% 1,619,689 30.5% 1,840,735 29.9% 2,380,162 29.6% 1,601,132 16.0%
Commercial services......... 1,108,216 21.7% 360,244 6.7% 297,345 4.8% 526,758 6.6% 445,576 4.4%
----------- ----- ----------- ----- ----------- ----- ----------- ----- ------------- -----
TOTAL LOANS AND
FINANCIAL LEASES....... Ps5,112,071 100.0% Ps5,350,205 100.0% Ps6,197,315 100.0% Ps8,029,668 100.0% Ps 10,035,239 100.0%
=========== ===== =========== ===== =========== ===== =========== ===== ============= =====
----------------
(1) Includes financial leases, according to regulations issued by the
Superintendency of Banking and effective as of January 1, 2004.
82
POLICIES FOR THE GRANTING AND REVIEW OF CREDITS
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.
To maintain credit quality and manage the risk arising from its
lending activities, the Bank has established general loan policies for
evaluation of credits, lending limits to a single customer or economic group
that conform to those required by law, the level of management authority
required to approve a loan, maximum terms of loans, and collateral required for
certain types of loans and their valuation. In addition, the Bank has
established a centralized area for credit analysis, the disbursement process and
the management and custody of promissory notes and guarantees.
BC's policies require every credit to 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 serviceability and
compliance with the loan terms and the country risk where the debtor is
headquartered in the event of overseas credits.
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 and outside Colombia. The Bank applies
the lending limits established under Colombian law, which require that:
- uncollateralized loans to a single customer or economic group
not to exceed 10% of the Bank's (unconsolidated) Technical
Capital (the Bank's largest such loan as of December 31, 2004
is for Ps 86,882 million, which represents 6.06% of the Bank's
(unconsolidated) Technical Capital as of that date and is
current and performing in accordance with its terms);
- collateralized loans to a single customer or economic group
not to exceed 25% of the Bank's (unconsolidated) Technical
Capital (the Bank's largest such loan as of December 31, 2004
is for Ps 109,079 million, which represents 7.61% of the
Bank's (unconsolidated) Technical Capital as of that date 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
(unconsolidated) Technical Capital (no shareholders own more
than 20% of the Bank as of December 31, 2004); and
- a loan to a financial institution may not exceed 30% of the
Bank's (unconsolidated) Technical Capital (the Banks' largest
such loan as of December 31, 2004 is for Ps 19,095 million,
which represents 1.33% of the Bank's (unconsolidated)
Technical Capital as of that date 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.
83
Loan applications, depending on their amount, are presented for
approval to branch managers, the zone or regional managers, the vice presidents,
the President, the Credit Committee and the Board of Directors of BC. In
general, loan application decisions are made by the Bank's management in the
corresponding committee. Loan applications up to a maximum of 200 SMLV or Ps
71.6 million (approximately US$ 29,961) must also be submitted for approval to
the Bank's centralized credit scoring area.
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
--------------------------- ---------------------------
(U.S. dollar) (Ps million) (U.S. dollar) (Ps million)
AUTHORIZATION LEVEL:
Branch Managers................. 13,056 31 21,760 52
Zone Managers................... 138,090 330 230,150 550
Regional Managers Corporate
Banking.................... 1,154,933 2,760 1,924,888 4,600
Middle-corporate and Personal
Banking Regional Managers.... 1,004,289 2,400 1,673,815 4,000
Middle-corporate and Personal
Banking Vice Presidents(3)... 2,887,331 6,900 4,812,219 11,500
Corporate Banking, Financial and
International Vice
Presidents(3).............. 2,887,331 6,900 4,812,219 11,500
President.................... 2,887,331 6,900 4,812,219 11,500
All loans, other than those All loans, other than
requiring the approval of those requiring the
the Board of Directors, approval of the Board of
within the limits Directors, within the
Credit Committee................ established by law. limits established by law.
------------------
(1) Approval limits are measured in nominal pesos or their equivalent in
dollars.
(2) Includes loans with a personal guarantee.
(3) Vice Presidents approval limits are established depending on the borrower
credit risk level. The amounts set in the table below are established to
grant loans to borrowers with the lowest credit risk level, the approval
limits decrease as the borrower credit risk level increase.
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 managers would also require approval from
the branch managers.
The Bank has established policies for the valuation of collateral
received as well as for the determination of the maximum loan amount that can be
granted against the value of the collateral. The Bank undertakes periodically a
valuation of collateral held as security for loans. In addition, when a loan
becomes 60 days past due, the loan is given to a specialized division where
various steps are taken to recover the loan. The Asset Recovery Division may,
acting in coordination with the Commercial area, begin a 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, through the creation of regional committees and a central
qualification office, 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 SMLV (Ps 107.4 million). Additionally, all
the Bank's loans are evaluated monthly based on the days they are
84
past due. When reviewing loans, BC evaluates and updates their risk
classification and makes corresponding adjustment in the provision, if needed.
When monitoring outstanding loans, the Bank examines current financial
statements including, for material loans with a term greater than one year,
current cash flow statements. The Bank centralized its credit review process
through its information systems, including the necessary adjustments of credit
scoring for personal lines of credit. In addition, the Bank keeps track of the
loans reviewed every month and carries out a credit audit process that reviews
the 200 largest debtors and randomly reviews a selection of its other debtors.
CLASSIFICATION OF THE LOAN PORTFOLIO
As indicated by External Circular 011 of March 2002, for purposes of
classifying loans, the Bank first determines whether the loan has become due and
then classifies the loan according to the number of days past due. In addition,
whether or not a loan is past due, the Bank analyzes loans to determine if there
are "potential weaknesses," "deficiencies" or "serious deficiencies" based on
the existence and magnitude of the following factors:
- the expected ability of payment of a debtor and co-debtor, or
the project to be financed, analyzing the income flow 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 on the debtor's current and past compliance with
obligations;
- the timely payment of all 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; these include:
-- Possible market gaps of currencies, maturities and interest
rates in the balance sheet structure and in off-balance
sheet operations, such as financial derivatives;
-- for those loans with variable rates or rates indexed to UVR
or another index, projections, and possible scenarios for
the evolution of payments according to estimates of
interest rates, foreign exchange rates, inflation, and
other variables that may directly affect the payment of
debt;
-- 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; for loans made abroad, an in-house and
market analysis of the risk of the country where the debtor
is domiciled to identify the risks of transfer and exchange
of the currencies required to serve the loan and the legal,
operating and strategic risks of spreading the ability to
pay of the debtor or the project to be financed may be
exposed to.
85
CREDIT CATEGORIES
For the purpose of credit risk evaluation, application of accounting
regulations, and constitution of provisions in accordance with External Circular
011, the Superintendency of Banking requires banking institutions to classify
their credit portfolio into four categories: consumer loans, small business
loans, mortgages and commercial loans.
- 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 are loans granted to very small
corporations with indebtedness levels with the corresponding
entity not higher than 25 SMLV (Ps 8.9 million) (a 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 SMLV (Ps 179.4 million)).
- Mortgages are loans of any amount granted to individuals to
acquire new or used homes or for the construction of
individual homes.
- Commercial loans are all loans, except mortgage, consumer and
small business loans, as defined above (includes ordinary,
preferential and treasury loans).
From January 1, 2004, in accordance with External Circulars 022 and
040 of the Superintendency of Banking, financial leases make up part of the loan
portfolio and are classified according to the above categories. Nevertheless, BC
has decided to present these operations as an independent line on its balance
sheet, given its importance. In accordance with the foregoing, when we make
reference to the loan portfolio, it should be understood to include financial
leases unless we otherwise state.
As of December 31, 2004, BC's commercial loan portfolio amounted to
Ps 7,353,956 million, a 11.01% increase from December 31, 2003. As of December
31, 2003, BC's commercial loan portfolio amounted to Ps 6,624,494 million, which
was an increase of 26.92% from December 31, 2002.
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:
86
LOAN PORTFOLIO BY TYPE OF LOAN
AS OF DECEMBER 31,
--------------------------------------------------------------------
2000(2) 2001(2) 2002(3) 2003 2004
(Ps million)
------------ ------------ ------------ ------------ ------------
Commercial Loans .......... Ps 4,286,220 Ps 4,354,031 Ps 5,219,460 Ps 6,624,494 Ps 7,353,956
Consumer Loans ............ 792,573 961,663 870,898 1,273,159 1,655,066
Small Business Loans ...... - - 68,863 83,854 90,000
Financial Leases(4) ....... - - - - 880,110
Mortgages(1) .............. 33,278 34,511 38,094 48,161 56,107
------------ ------------ ------------ ------------ ------------
TOTAL LOANS AND FINANCIAL
LEASES ............... 5,112,071 5,350,205 6,197,315 8,029,668 10,035,239
Allowance for Loans and
Financial Lease Losses .... 285,565 271,729 332,324 387,263 434,378
------------ ------------ ------------ ------------ ------------
TOTAL LOANS AND FINANCIAL
LEASES, NET .......... Ps 4,826,506 Ps 5,078,476 Ps 5,864,991 Ps 7,642,405 Ps 9,600,861
============ ============ ============ ============ ============
-------------------------------
(1) This category was established by the Superintendency of Banking in
External Circular 050 of 2001.
(2) For 2000 and until 2001, a different regulation was in force
(External Circular 039 of 1999 and External Circular 070 of 2000)
regarding the criteria for the establishment of credit categories.
(3) External Circular 050 of 2001, which was ratified by External
Circular 011 of 2002, modified criteria to classify loans in
commercial, consumer, small business and mortgage, establishing that
the classification should be based on the loan destination and not
based on the amount as it was in previous years.
(4) Includes financial leases, according to regulations issued by the
Superintendency of Banking and effective as of January 1, 2004.
External Circular 011 of 2002 provides the following minimum risk
classifications, according to the past due days of the obligation:
Category A or "Normal Risk": Loans and financial leases in this
category are appropriately serviced (not past due). The debtor's financial
statements or its projected cash flows, as well as all other credit information
are available to the Bank, reflect adequate paying capacity. The following loans
would fall into this category:
LOAN TYPE NUMBER OF MONTHS PAST DUE
Mortgage from 0 and up to 2
Consumer from 0 and up to 1
Small business loans from 0 and up to 1
Commercial from 0 and up to 1
Category B or "Acceptable Risk, Above Normal": Loans and financial
leases in this category are acceptably serviced (not past due) and guaranty
protected, but there are weaknesses which may potentially affect, on a
transitory or permanent basis, the debtor's paying capacity or its projected
cash flows, to the extent that, if not timely corrected, would affect the normal
collection of credit or contracts.
87
The following types of loans would fall into this category:
LOAN TYPE NUMBER OF MONTHS PAST DUE
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 and financial leases 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.
The following types of loans would fall into this category:
LOAN TYPE NUMBER OF MONTHS PAST DUE
--------- -------------------------
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 and financial leases 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.
The following types of loans would fall into this category:
LOAN TYPE NUMBER OF MONTHS PAST DUE
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 and financial
leases in this category are deemed uncollectible.
The following types of loans would fall into this category:
LOAN TYPE NUMBER OF MONTHS PAST DUE
Mortgage more than 18
Consumer more than 6
Small business loans more than 4
Commercial more than 12
---------------------------------------------------
88
Additionally, if a loan to a borrower is downgraded by the Bank to a
classification of "B," "C," "D" or "E," all of the Bank's loans to that client
are similarly downgraded. The Superintendency of Banking may require additional
allowances under certain circumstances.
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,
--------------------------------------------------------------------------------------------------------------
2000 % 2001 % 2002 % 2003 % 2004(1) %
------------ ------ ------------ ------ ------------ ----- ----------- ----- ------------- -------
(Ps million, except percentages)
"A" Normal Ps 4,017,027 78.6% Ps 4,228,248 79.0% Ps 5,115,889 82.6% Ps 7,288,273 90.8% Ps 9,327,398 93.0%
"B" Subnormal 560,961 11.0% 603,068 11.3% 479,429 7.7% 345,297 4.3% 320,959 3.2%
"C" Deficient 209,851 4.1% 103,761 1.9% 142,782 2.3% 109,615 1.4% 93,175 0.9%
"D" Doubtful
Recovery 135,536 2.6% 259,811 4.9% 180,630 2.9% 196,075 2.4% 204,344 2.0%
"E" Unrecoverable 188,696 3.7% 155,317 2.9% 278,585 4.5% 90,408 1.1% 89,363 0.9%
------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------- -------
Total loans and
financial
leases Ps 5,112,071 100.0% Ps 5,350,205 100.0% Ps 6,197,315 100.0% Ps 8,029,668 100.0% Ps 10,035,239 100.0%
============ ====== ============ ====== ============ ====== ============ ====== ============= =======
Loans classified
as "C," "D" and
"E" as a
percentage of
total loans 10.5% 9.7% 9.7% 4.9% 3.9%
---------------------------------
(1) Includes financial leases, according to regulations issued by the
Superintendency of Banking and effective as of January 1, 2004.
Note: In 2000 and 2001, the Bank 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.
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(h) to
the Financial Statements.
In accordance with the regulations of the Superintendency of
Banking, loans are considered non-performing if an installment of principal or
interest is (i) in the case of a commercial loan more than 90 days past due,
(ii) in the case of a consumer loan more than 60 days past due, (iii) in the
case of a small business loans more than 60 days past due or (iv) in the case of
a mortgage loan more than 120 days past due.
Additionally, beginning March 25, 2003, the Bank established as
policy that any loans that are past due more than 30 days will stop accruing
interest in the statement of operations and their entries will be made in
memorandum accounts until the customer recommences payments. It is estimated
that, at December 31, 2004, approximately Ps 277 million of interest are in
memorandum accounts because of the adoption of this policy.
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 sets forth the breakdown of the Bank's 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:
89
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------------------
2000 % 2001 % 2002 % 2003 % 2004 (3) %
----------- ------ ----------- ------ ---------- ------ ---------- ------ ---------- ------
(Ps million, except percentages)
PERFORMING PAST DUE
loans:(1)
Consumer loans past due
from 31 to 60 days........... Ps 18,108 32.4% Ps 19,543 24.8% Ps 17,537 38.6% Ps 24,899 57.3% Ps 21,987 38.7%
Small business loans past
due from 31 to 60 days ... - 0.0% - 0.0% 777 1.7% 2,054 4.7% 1,845 3.2%
Commercial loans past due
from 31 to 90 days ....... 37,576 67.3% 59,066 74.9% 27,149 59.7% 16,518 38.0% 26,398 46.5%
Mortgage loans past due
from 31 to 90/120 days ...... 171 0.3% 202 0.3% 22 0.0% - 0.0% - 0.0%
Financial leases past due
from 31 to 60/90 days
(2) (3) .................. - 0.0% - 0.0% - 0.0% - 0.0% 6,593 11.6%
---------- ----- ---------- ----- ---------- ----- ----------- ----- ---------- -----
Total performing past due
loans ....................... 55,855 100.0% 78,811 100.0% 45,485 100.0% 43,471 100.0% 56,823 100.0%
NON-PERFORMING PAST DUE
LOANS:
Consumer loans past due
from 61 to
180 days .................. 9,660 5.4% 9,711 4.0% 8,993 8.2% 14,304 18.8% 29,120 32.9%
Small business loans past
due from 61 to 180 days ... - 0.0% - 0.0% 1,633 1.5% 3,040 4.0% 3,781 4.3%
Consumer loans past due
more than 180 days ........ 40,161 22.3% 10,019 4.1% 10,678 9.7% 10,765 14.0% 11,762 13.3%
Commercial loans past due
more than 90 days ......... 128,740 71.6% 224,024 91.8% 88,217 80.5% 48,069 63.2% 40,171 45.4%
Mortgage loans past due
more than 91/121 days ..... 1,190 0.7% 138 0.1% 138 0.1% 4 0.0% 37 0.0%
Financial leases past due
more than 61/91 days (3)... - 0.0% - 0.0% - 0.0% - 0.0% 3,580 4.1%
---------- ----- ---------- ----- ---------- ----- ----------- ----- ---------- -----
Total non-performing past
due loans and Financial
leases (3) ................ 179,751 100.0% 243,892 100.0% 109,659 100.0% 76,182 100.0% 88,451 100.0%
Total past due loans
and Financial leases (3). Ps 235,606 Ps 322,703 Ps 155,144 Ps 119,653 Ps 145,274
---------- ---------- ---------- ----------- ----------
Total non-performing past
due
loans and Financial
leases (3)................. 179,751 243,892 109,659 76,182 88,451
Allowance for loan and
financial leases losses
(3)....................... (285,565) (271,729) (332,324) (387,263) (434,378)
Foreclosed assets............ 169,272 163,000 153,873 162,766 153,071
Allowance for estimated
losses on foreclosed
assets..................... (93,405) (105,988) (107,871) (135,090) (140,865)
Other accounts receivable
more than 180 days past
due........................ 22,573 17,875 8,655 25,848 5,813
Allowance for accounts
receivable and accrued
interest losses............ (50,350) (42,707) (24,891) (26,182) (18,807)
---------- ---------- ---------- ----------- -----------
Total non-performing
assets, net.................. Ps (57,724) Ps 4,343 Ps(192,899) Ps (283,739) Ps (346,715)
---------- ---------- ---------- ----------- -----------
Loans at least one day past
due as a percentage of
total loans (3)............ 4.6% 6.0% 2.5% 1.5% 1.5%
Allowance for loan losses
as a percentage of loans
at least one day past due
(3)........................ 121.2% 84.2% 214.2% 323.7% 299.0%
Allowance for loan losses
as a percentage of loans
classified as "C," "D"
and "E" (3)................ 53.5% 52.4% 55.2% 97.8% 112.3%
Percentage of performing
loans to total loans (3)... 96.5% 95.5% 98.2% 99.1% 99.1%
-----------------------
(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) The Consumer loans are due from 31 to 60 days and the commercial loans are
due from 31 to 90 days.
(3) Includes financial leases, according to regulations issued by the
Superintendency of Banking and effective as of January 1, 2004.
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:
90
AS OF DECEMBER 31,
-----------------------------------------------------------
2000 2001 2002 2003 2004 (1)
----------- ---------- ---------- ---------- ----------
(Ps million, except percentages)
Loans and financial leases secured by real
guarantees as a percentage of total loans and
financial leases......................................... 35.4% 44.8% 37.5% 32.9% 40.1%
Loans and financial leases classified as "A" as a
percentage of total loans and financial leases........... 78.6% 79.0% 82.6% 90.8% 92.9%
Loans and financial leases classified as "B as a
percentage of total loans and financial leases........... 11.0% 11.3% 7.7% 4.3% 3.2%
Loans and financial leases classified as "C", "D"
and "E" as a percentage of total loan and
financial lease.......................................... 10.5% 9.7% 9.7% 4.9% 3.9%
Total allowance for loan and financial lease losses
as a percentage of non-performing loans and
financial leases......................................... 158.9% 111.4% 303.1% 508.3% 491.1%
Total allowance for loan and financial lease losses
as a percentage of loan and financial lease
classified as "C", "D" and "E"........................... 53.5% 52.4% 55.2% 97.8% 112.3%
Non-performing loans and financial leases as a
percentage of total loans and financial leases........... 3.5% 4.6% 1.8% 0.9% 0.9%
Loans and financial leases classified as "C", "D"
and "E".................................................. Ps 534,083 Ps 518,889 Ps 601,997 Ps 396,098 Ps 386,882
TOTAL NON-PERFORMING LOANS AND FINANCIAL LEASES.......... Ps 179,751 Ps 243,892 Ps 109,659 Ps 76,182 Ps 88,451
----------------
(1) Includes financial leases, according to regulations issued by the
Superintendency of Banking and effective as of January 1, 2004.
The following table shows BC's past due loan portfolio by type of loan:
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------------
2000 % 2001 % 2002 % 2003 % 2004 %
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
(Ps million, except percentages)
CORPORATE
Trade financing........ Ps 9,329 4.0% Ps 5,398 1.6% Ps 143 0.0% Ps 2,841 2.3% Ps 3,862 2.7%
Loans funded by
domestic development
banks................ 10,073 4.3 7,950 2.5 1,360 0.9 1,149 1.0 1,705 1.2
Working capital loans.. 145,506 61.8 210,281 65.2 75,333 48.6 30,706 25.7 21,211 14.6
Credit cards........... 48 0.0 103 0.0 90 0.1 136 0.1 1,273 0.9
Overdrafts............. 1,408 0.6 1,583 0.5 - 0.0 1,032 0.9 1,668 1.1
Other.................. - 0.0 - 0.0 - 0.0 - 0.0 - 0.0
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total corporate...... 166,364 70.6% 225,315 69.8% 76,926 49.6% 35,864 30.0% 29,719 20.5
RETAIL (1)
Credit cards........... 11,686 5.0 10,606 3.3 14,930 9.6 12,204 10.2 13,785 9.5
Personal loans......... 10,734 4.6 17,442 5.4 25,516 16.4 32,876 27.5 43,945 30.2
Vehicle loans.......... 1,402 0.6 323 0.1 534 0.3 6,453 5.4 9,697 6.7
Overdrafts............. 8,924 3.8 8,491 2.6 - 0.0 7,967 6.6 8,637 5.9
Loans funded by
domestic development
banks................ - 0.0 6,843 2.1 3,840 2.5 5,299 4.4 6,382 4.4
Trade financing........ 1,320 0.6 1,841 0.6 890 0.6 355 0.3 156 0.1
Working capital loans.. 33,815 14.4 50,563 15.7 31,644 20.4 18,084 15.1 22,743 15.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total retail......... 67,881 28.8% 96,109 29.8% 77,354 49.8% 83,238 69.5% 105,345 72.5
FINANCIAL LEASES (2)... - 0.0% - 0.0% - 0.0% - 0.0% 10,173 7.0%
MORTGAGE............... 1,361 0.6% 1,279 0.4% 864 0.6% 551 0.5% 37 0.0%
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
TOTAL PAST DUE
LOANS AND
FINANCIAL LEASES.. Ps 235,606 100.0% Ps 322,703 100.0% Ps 155,144 100.0% Ps 119,653 100.0% Ps 145,274 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
------------------
(1) Includes loans to high-income individuals and small companies.
(2) Includes financial leases, according to regulations issued by the
Superintendency of Banking and effective as of January 1, 2004.
The past due portfolio increased 21.41% between 2003 and 2004, from
Ps 119,653 million at December 31, 2003, to Ps 145,274 million at December 31,
2004, mainly due to an increase in past due Retail loans as a result of the
Bank's growth in these types of loans. The implementation of a defaulted loans
recovery strategy through a specialized department for asset recovery explains
the 22.88% decrease between 2002 and 2003.
91
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,
-----------------------------------------------------------------------------------
2000 % 2001 % 2002 % 2003 %
------------- ----- ------------ ---- ------------ ---- ------------- ----
(Ps million, except percentages)
SECURED
Current........................................ Ps 1,701,775 33.3% Ps 2,203,986 41.2% Ps 2,261,968 36.5% Ps 2,596,226 32.3%
Past due loans from 31 to 60 days
(consumer)............................... - 0.0 - 0.0 3,686 0.1 5,690 0.1
Past due financial leases from 31 to 60
days (consumer) (2)......... ............ - 0.0 - 0.0 - 0.0 - 0.0
Past due loans from 61 to 90
days (consumer).......................... 2,903 0.1 4,009 0.1 - 0.0 2,020 0.0
Past due financial leases from 61 to 90
days (consumer) (2)...................... - 0.0 - 0.0 - 0.0 - 0.0
Past due loans from 31 to 60
days (small business loans).............. - 0.0 - 0.0 246 0.0 466 0.0
Past due loans from 61 to 90
days (small business loans).............. - 0.0 - 0.0 89 0.0 315 0.1
Past due loans from 31 to 90/120
days (mortgage).......................... 171 0.0 202 0.0 22 0.0 - 0.0
Past due loans from 91 to 180
days (consumer).......................... 1,572 0.0 1,823 0.0 1,881 0.0 2,995 0.1
Past due financial leases from 91 to 180
days (consumer) (2)...................... - 0.0 - 0.0 - 0.0 - 0.0
Past due loans from 91 to 180 days (small
business loans) ......................... - 0.0 - 0.0 415 0.0 476 0.0
Past due loans from 91/121 to 180 days
(mortgage) ............................... 3 0.0 - 0.0 - 0.0 4 0.0
Past due loans from 31 to 90 days (commercial). 14,268 0.3 51,414 1.0 9,617 0.2 10,935 0.1
Past due financial leases from 31 to 90
days (commercial) (2)..................... - 0.0 - 0.0 - 0.0 - 0.0
Past due loans from 181 days to 360
days (consumer)........................... 2,784 0.1 2,835 0.1 - 0.0 2,589 0.0
Past due financial leases from 181 to 360
days (consumer) (2)....................... - 0.0 - 0.0 - 0.0 - 0.0
Past due loans from 181 to 360 days (small
business loans) .......................... - 0.0 - 0.0 - 0.0 - 0.0
Past due loans from 181 days to 360 days
(mortgage)................................ 1,083 0.0 138 0.0 138 0.0 - 0.0
Past due loans from 91 to 180 days (commercial. 29,198 0.6 35,933 0.7 8,736 0.1 5,751 0.1
Past due financial leases from 91 to 180 days
(commercial) (2).......................... - 0.0 - 0.0 - 0.0 - 0.0
Past due loans from 121 to 360 days
(commercial) ............................. 10,368 0.2 47,628 0.9 10,452 0.2 8,995 0.1
Past due financial leases from 121 to 360
days (commercial) (2)..................... - 0.0 - 0.0 - 0.0 - 0.0
Past due loans more than 360 days.............. 43,321 0.8 50,554 0.9 29,501 0.5 17,217 0.2
Past due financial leases more than
360 days (2).............................. - 0.0 - 0.0 - 0.0 - 0.0
------------- ---- ------------ ---- ------------ ---- ------------- ----
TOTAL Ps 1,807,446 35.4% Ps 2,398,522 44.9% Ps 2,326,751 37.6% Ps 2,653,679 33.1%
============= ==== ============ ==== ============ ==== ============= ====
UNSECURED(1)
Current Ps 3,174,690 62.1% Ps 2,823,516 52.8% Ps 3,780,203 61.0% Ps 5,313,789 66.2%
Past due loans from 31 to 60
days (consumer)........................... 15,205 0.3 15,534 0.3 13,851 0.2 19,209 0.2
Past due loans from 61 to 90 days
(consumer)................................ - 0.0 - 0.0 - 0.0 - 0.0
Past due loans from 31 to 60 days (small
business loans)........................... - 0.0 - 0.0 531 0.0 1,588 0.0
Past due loans from 61 to 90 days (small
business loans)........................... - 0.0 - 0.0 308 0.0 793 0.0
Past due loans from 91 to 180 days (consumer).. 8,088 0.2 7,888 0.1 7,112 0.1 9,289 0.1
AS OF DECEMBER 31,
-------------------------
2004 %
--------------- ------
(Ps million, except percentages)
SECURED
Current....................................... Ps 3,950,303 39.4%
Past due loans from 31 to 60 days
(consumer).............................. 7,027 0.1
Past due financial leases from 31 to 60
days (consumer) (2)......... ........... 79 0.0
Past due loans from 61 to 90
days (consumer)......................... 3,441 0.0
Past due financial leases from 61 to 90
days (consumer) (2)..................... 78 0.0
Past due loans from 31 to 60
days (small business loans)............. 665 0.0
Past due loans from 61 to 90
days (small business loans)............. 411 0.0
Past due loans from 31 to 90/120
days (mortgage)......................... - 0.0
Past due loans from 91 to 180
days (consumer)......................... 6,074 0.1
Past due financial leases from 91 to 180
days (consumer) (2)..................... 83 0.0
Past due loans from 91 to 180 days (small
business loans) ........................ 926 0.0
Past due loans from 91/121 to 180 days
(mortgage) .............................. - 0.0
Past due loans from 31 to 90 days (commercial) 16,295 0.2
Past due financial leases from 31 to 90
days (commercial) (2).................... 6,514 0.1
Past due loans from 181 days to 360
days (consumer).......................... 3,348 0.0
Past due financial leases from 181 to 360
days (consumer) (2)...................... 76 0.0
Past due loans from 181 to 360 days (small
business loans) ......................... - 0.0
Past due loans from 181 days to 360 days
(mortgage)............................... 37 0.0
Past due loans from 91 to 180 days (commercial 8,730 0.1
Past due financial leases from 91 to 180 days
(commercial) (2)......................... 1,845 0.0
Past due loans from 121 to 360 days
(commercial) ............................ 6,156 0.1
Past due financial leases from 121 to 360
days (commercial) (2).................... 924 0.0
Past due loans more than 360 days............. 9,661 0.1
Past due financial leases more than
360 days (2)............................. 573 0.0
------------ ----
TOTAL Ps 4,023,246 40.2%
============ ====
UNSECURED(1)
Current Ps 5,939,662 59.2%
Past due loans from 31 to 60
days (consumer).......................... 14,960 0.1
Past due loans from 61 to 90 days
(consumer)............................... 7,115 0.1
Past due loans from 31 to 60 days (small
business loans).......................... 1,180 0.0
Past due loans from 61 to 90 days (small
business loans).......................... 557 0.0
Past due loans from 91 to 180 days (consumer). 12,490 0.1
92
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------------------
2000 % 2001 % 2002 % 2003 % 2004 %
----------- ----- ------------ ----- ----------- ----- ---------- ----- ----------- -----
Past due loans from 91 to
180 days (small business
loans)..................... - 0.0 - 0.0 821 0.0 1,456 0.0 1,887 0.0
Past due loans from 31 to
90 days (commercial)....... 23,308 0.4 7,652 0.1 17,532 0.3 5,583 0.1 10,103 0.1
Past due loans from 181 days
to 360 days (consumer).... 31,649 0.6 7,184 0.1 10,678 0.2 8,176 0.1 8,414 0.1
Past due loans from 91 to
180 days (commercial)...... 5,537 0.1 3,493 0.1 9,358 0.2 2,980 0.0 3,980 0.0
Past due loans from 121 to
360 days (commercial) ..... 7,001 0.1 34,077 0.6 9,192 0.1 8,889 0.1 6,863 0.1
Past due loans more than 360
days........................... 39,147 0.8 52,339 1.0 20,978 0.3 4,237 0.1 4,782 0.0
----------- ----- ----------- ----- ----------- ---- ----------- ----- ----------- -----
TOTAL.......................... Ps3,304,625 64.6% Ps2,951,683 55.1% Ps3,870,564 62.4% Ps5,375,989 66.9% Ps6,011,993 59.8%
=========== ===== =========== ===== =========== ----- ----------- ----- ----------- -----
TOTAL CURRENT LOANS AND
FINANCIAL LEASES (2)....... Ps4,876,465 95.4% Ps5,027,502 94.0% Ps6,042,171 97.5% Ps7,910,015 98.5% Ps9,889,965 98.6%
Past due loans from 31 to 60
days (consumer)............ 15,205 0.4 15,534 0.4 17,537 0.3 24,899 0.3 21,987 0.2
Past due financial leases
from 31 to 60 days
(consumer) (2)............. - 0.0 - 0.0 - 0.0 - 0.0 79 0.0
Past due loans from 61 to 90
days (consumer)............ 2,903 0.0 4,009 0.0 - 0.0 2,020 0.0 10,556 0.1
Past due financial leases from
61 to 90 days (consumer)
(2)........................ - 0.0 - 0.0 - 0.0 - 0.0 78 0.0
Past due loans from 31 to 60
days (small business
loans)..................... - 0.0 - 0.0 777 0.0 2,054 0.0 1,845 0.0
Past due loans from 61 to 90
days (small business
loans)..................... - 0.0 - 0.0 397 0.0 1,108 0.0 968 0.0
Past due loans from 31 to
90/120 days (mortgage)..... 171 0.0 202 0.0 22 0.0 - 0.0 - 0.0
Past due loans from 31 to
90 days (commercial)....... 37,576 0.7 59,066 1.1 27,149 0.4 16,518 0.2 26,398 0.3
Past due financial leases
from 31 to 90 days
(commercial)(2)............ - 0.0 - 0.0 - 0.0 - 0.0 6,514 0.1
Past due loans from 91 to
180 days (consumer)........ 9,660 0.2 9,711 0.2 8,993 0.1 12,284 0.2 18,564 0.2
Past due financial leases
from 91 to 180 days
(consumer) (2)............. - 0.0 - 0.0 - 0.0 - 0.0 83 0.0
Past due loans from 91 to
180 days (small business
loans)..................... - 0.0 - 0.0 1,236 0.0 1,932 0.0 2,813 0.0
Past due loans from 91/121
to 180 days (mortgage)..... 3 0.0 - 0.0 - 0.0 4 0.0 - 0.0
Past due loans from 91 to
180 days (commercial)...... 34,735 0.7 39,426 0.7 18,094 0.3 8,731 0.1 12,710 0.1
Past due financial leases
from 91 to 180 days
(commercial) (2)........... - 0.0 - 0.0 - 0.0 - 0.0 1,845 0.0
Past due loans from 121 to
360 days (commercial) ..... 17,369 0.3 81,705 1.5 19,644 0.3 17,884 0.2 13,019 0.2
Past due financial leases from
121 to 360 days
(commercial) (2)........... - 0.0 - 0.0 - 0.0 - 0.0 924 0.0
Past due loans from 181 days
to 360 days (consumer)..... 34,433 0.7 10,019 0.2 10,678 0.2 10,765 0.1 11,762 0.1
Past due financial leases
from 181 to 360 days
(consumer) (2)............ - 0.0 - 0.0 - 0.0 - 0.0 76 0.0
Past due loans from 181 days
to 360 days (mortgage)..... 1,083 0.0 138 0.0 138 0.0 - 0.0 37 0.0
Total past due loans more
than 360 days.............. 82,468 1.6 102,893 1.9 50,479 0.9 21,454 0.4 14,443 0.1
Total past due financial
leases more than 360
days (2)................... - 0.0 - 0.0 - 0.0 - 0.0 573 0.0
TOTAL PAST DUE LOANS AND
FINANCIAL LEASES (2)....... 235,606 4.6 322,703 6.0 155,144 2.5 119,653 1.5 145,274 1.4
----------- ----- ----------- ---- ---------- ---- ----------- ----- ---------- -----
Total gross loans and
financial leases (2)........... 5,112,071 100.0 5,350,205 100.0 6,197,315 100.0 8,029,668 100.0 10,035,239 100.0
Allowance for loan and
financial lease
losses (2)................. (285,565) (5.6) (271,729) (5.1) (332,324) (5.4) (387,263) (4.8) (434,378) (4.3)
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
TOTAL LOANS AND FINANCIAL
LEASES, NET (2)........... Ps4,826,506 94.4% Ps5,078,476 94.9% Ps5,864,991 94.6% Ps7,642,405 95.2% Ps9,600,861 95.7%
=========== ===== =========== ===== =========== ===== =========== ===== =========== =====
-----------------------
(1) Includes loans with personal guarantees.
(2) Includes financial leases, according to regulations issued by the
Superintendency of Banking and effective as of January 1, 2004.
93
E.4. SUMMARY OF LOAN LOSS EXPERIENCE
ALLOWANCE FOR LOAN LOSSES
The Bank complies with Colombian regulations regarding allowances
for loan losses by 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 started
to accumulate a general allowance, which should amount to 1% of the total loans
within three years starting July 31, 1999. The 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 current regulation contained in External Circular
011 of March, 2002, requires that all debtors whose indebtedness for the
different categories of credit exceeds 300 SMLV (Ps 107.4 million for 2004), 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. Every six months, the Bank evaluates all debtors whose
indebtedness for the various credit facilities exceeds 300 SMLV (Ps 107.4
million); additionally, these credits, and those which do not meet this
condition, are evaluated monthly based on the days they are past due. In
addition, through the Bank's Vice President for Risk Management office, the Bank
performs an ongoing review of the loan portfolio from time to time 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)
for commercial, small business, consumer and mortgage loans classified as
follows:
"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 secured loans, whether such
security is collateralized or personal guaranteed. The largest amount of
allowances is allocated to consumer, commercial and small business loans that
are secured by personal guarantees or unsecured. The allowance for loan losses
is calculated including the value of the underlying security. External Circular
011 of March, 2002, issued 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:
94
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%
===================================================================
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%
===================================================================
There are special requirements for the allowance needed 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 guaranteed for restructured loans with wide maturities
secured by guaranties that could prove difficult to sell. 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.
Additionally, on July 26, 2004, the Bank established an internal
policy to increase allowances for small business and consumer loans. The
following table shows the allowance 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):
CLASSIFICATION CONSUMER SMALL BUSINESS LOANS
--------------------------------------------------
A 0% 0%
B 30% 30%
C 50% 60%
D 100% 100%
E 100% 100%
--------------------------------------------------
95
The following table sets forth the activity in the allowance for
loan and financial lease losses:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- ----------
(Ps million)
Balance at beginning of period ......... Ps 295,016 Ps 285,565 Ps 271,729 Ps 332,324 Ps 387,263
Balance at beginning of period
(Sufinanciamiento) ................... - - - 11,854 -
Allowance for financial leasing
reclassification (5) ................. - - - - 7,002
Provisions for loan losses.............. 264,756 86,793 143,361 286,170 186,480
Effect of revaluing to constant
pesos (3) ............................ (19,008) - - - -
Effect of difference in exchange
interest rate (4) .................... - - 10,366 (284) (12,751)
Charge-offs ............................ (148,056) (83,586) (71,592) (112,393) (55,032)
Recovering from previous fiscal years .. (107,143) (17,043) (21,540) (130,408) (78,584)
---------- ---------- ---------- ---------- ----------
BALANCE AT END OF PERIOD (1) (2) ... Ps 285,565 Ps 271,729 Ps 332,324 Ps 387,263 Ps 434,378
========== ========== ========== ========== ==========
--------------------
(1) The provision for past due accrued interest receivable, which is not
included in this item, amounted to Ps 20,178 million, Ps 4,965 million, Ps
4,518 million, Ps 5,316 million and Ps 4,483 million for the years ended
December 31, 2000, 2001, 2002, 2003 and 2004 respectively.
(2) The allowance past due accrued interest receivable, which is not included
in this item, amounted to Ps 30,771 million, Ps 27,011 million, Ps 15,074
million, Ps 5,170 million and Ps 4,603 million for the years ended
December 31, 2000, 2001, 2002, 2003 and 2004 respectively,
(3) Inflation adjustment was eliminated starting on January 1, 2001. See Note
2(b) to the Financial Statements.
(4) For years 2000 and 2001, the effect of difference in exchange interest
rate was included as a part of recoveries.
(5) Includes allowance for financial leases, according to regulations issued
by the Superintendency of Banking and effective as of January 1, 2004.
The following table shows the allocation of the Bank's allowance for
loan and financial lease losses by type of loan using the classification of the
Superintendency of Banking:
AS OF DECEMBER 31,
------------------------------------------------------------------
2000 2001 2002 2003 2004 (2)
---------- ---------- ---------- ---------- ----------
(Ps million)
Commercial loans ..................... Ps 212,428 Ps 178,471 Ps 243,835 Ps 276,285 Ps 271,296
Consumer loans ....................... 46,537 46,723 22,668 27,429 49,350
Small business loans ................. - - 1,260 2,082 4,271
Financial leases ..................... - - - - 6,529
Mortgages ............................ 1,667 1,116 849 440 37
General(1) ........................... 24,933 45,419 63,712 81,027 102,895
---------- ---------- ---------- ---------- ----------
TOTAL ALLOWANCE FOR LOAN AND
FINANCIAL LEASE LOSSES ....... Ps 285,565 Ps 271,729 Ps 332,324 Ps 387,263 Ps 434,378
========== ========== ========== ========== ==========
------------------------
(1) This is a provision established in 1999 by Circular 044 issued by the
Superintendency of Banking.
(2) Includes financial leases, according to regulations issued by the
Superintendency of Banking and effective as of January 1, 2004.
The following table shows the allocation of the Bank's allowance for
loan and financial lease losses by type of loan:
96
AS OF DECEMBER 31,
-----------------------------------------------------------------------------------------------
2000 % 2001 % 2002 % 2003 % 2004 %
---------- ----- ---------- ---- ---------- ---- ---------- ---- ---------- ----
(Ps million, except percentages)
CORPORATE
Trade financing............ Ps 1,413 0.5% Ps 491 0.2% Ps 3,073 0.9% Ps 217 0.1% Ps 3,496 0.8%
Loans funded by domestic
development banks....... 1,972 0.7 845 0.3 812 0.2 57,745 14.9 10,057 2.3
Working capital loans...... 180,470 63.2 177,135 65.2 212,108 63.8 202,403 52.3 243,862 56.2
Credit cards............... 46 0.0 - 0.0 107 0.0 34 0.0 971 0.2
Overdrafts................. 923 0.3 - 0.0 1,313 0.4 370 0.1 919 0.2
Other...................... - 0.0 - 0.0 - 0.0 - 0.0 - 0.0
---------- ----- ---------- ---- ---------- ---- ---------- ---- ---------- ----
Total corporate......... 184,824 64.7 178,471 65.7 217,413 65.3 260,769 67.4 259,305 59.7
RETAIL (1)
Credit cards............... 8,039 2.8 5,823 2.1 9,568 2.9 6,452 1.7 11,965 2.8
Personal loans............. 14,316 5.0 5,947 2.2 9,816 3.0 15,687 4.1 27,718 6.4
Vehicle loans.............. 741 0.3 99 0.0 77 0.0 8,550 2.2 6,121 1.4
Overdrafts................. 3,332 1.2 2,727 1.0 3,318 1.0 1,908 0.5 2,791 0.6
Loans funded by domestic
development banks....... 847 0.3 851 0.3 1,507 0.5 642 0.2 1,770 0.4
Trade financing............ 734 0.3 349 0.1 792 0.2 119 0.0 59 0.0
Working capital loans...... 46,132 16.1 30,927 11.3 25,272 7.6 11,669 2.9 15,188 3.6
---------- ----- ---------- ---- ---------- ---- ---------- ---- ---------- ----
Total retail........... 74,141 26.0 46,723 17.2 50,350 15.2 45,027 11.6 65,612 15.2
---------- ----- ---------- ---- ---------- ---- ---------- ---- ---------- ----
FINANCIAL LEASES(3)........ - 0.0 - 0.0 - 0.0 - 0.0 6,529 1.4
MORTGAGE................... 1,667 0.6 1,116 0.4 849 0.3 440 0.1 37 0.0
GENERAL(2)................. 24,933 8.7 45,419 16.7 63,712 19.2 81,027 20.9 102,895 23.7
---------- ----- ---------- ---- ---------- ---- ---------- ---- ---------- ----
TOTAL ALLOWANCE FOR
LOAN AND FINANCIAL
LEASE LOSSES......... Ps 285,565 100.0% Ps 271,729 100.0% Ps 332,324 100.0% Ps 387,263 100.0% Ps 434,378 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
-----------------------
(1) Includes allowances for loans to high-income individuals and small
companies.
(2) This is a provision established in 1999 by Circular 044 issued by the
Superintendency of Banking.
(3) At December 31, 2004 allowance for financial leases is included in the
allowance for loans.
As of December 31, 2004, the allowance for loan and financial lease
losses increased 12.2% to Ps 434,378 million from Ps 387,263 million at December
31, 2003, due primarily to an increase in general allowances and working capital
loans. As of December 31, 2003, the allowance for loan and financial lease
losses increased 16.5% compared to December 31, 2002 due primarily to an
increase in general allowance and loans funded by domestic development banks.
NEW PROVISION SYSTEM (OR CREDIT RISK MANAGEMENT SYSTEM - "SARC")
Through External Circular 011 of March 5, 2002, which modifies
Chapter II of External Circular 100 of 1995 (Basic and Accounting Circular),
regarding management of credit risk, the Superintendency of Banking requires
entities subject 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.
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 shown in the table below:
97
MAXIMUM
PHASE DESCRIPTION DEADLINE
----- ---------------------------------------------------------------------------- ------------
I Preparation and submission of the document supporting the
development 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 June 28,
resources, as well as a general auditing process. 2002
Additionally, significant preparation time shall be required to
reconstruct the historical information necessary for the
implementation of the SARC by the Bank.
II Conclusion of the process of reconstruction of historical
information and the information and/or computer
programs which will assure adequate assessment and December 31,
management of credit risk. 2002
III During this phase, the entity shall begin estimating expected
losses by applying the methodology proposed for
such purpose in order to calibrate any relevant variables which
guarantee the results of the methodology.
The Superintendency of Banking extended the SARC phase III due
date through the External Circular 030 of June 2003. The
regulator required the banks to have SARC working as a parallel
provision system during 2004, in order to test its correct December 31,
operation. 2003
Through External Circular 052 of December 30, 2004, the Superintendency of
Banking required entities to continue with SARC working as a parallel
provision system and established that on July 1, 2005, it will present its
reference methodology for commercial loans. Then, entities could voluntary
submit their internal commercial loan methodologies for their assessment
and later approval or objection. Initially, the reference methodology will
be presented for commercial loans and then for consumer, mortgages and
small business loans.
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);
98
- Estimate or quantification of the expected loss that may
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 loan would become
unrecoverable. The existence and suitability of the
collateral that supports the loans are an important
factor that should be taken into account in the context.
The allowances for loans must be based on the estimate of the
expected losses, and minimum levels of allowances must be maintained in
accordance with current provisions. A general allowance of 1% on the total gross
portfolio is maintained.
For the estimate of expected losses and allowances, the Bank has to
follow guidelines established by the methodological documents published by the
Basel Internal Rating Approach. This model 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 if default occurs
The Bank has adequately fulfilled each one of the phases established
by the Superintendency of Banking and, through December 30, 2004, continues with
the parallel provision system. During 2005, the entity will continue making the
necessary adjustments to comply with the general guidelines and deadlines
provided by the External Circular 052 of December 31, 2004.
CHARGE-OFFS
The following table shows the allocation of the Bank's charge-offs
by type of loan as of December 31, 2000, 2001, 2002, 2003 and 2004:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2000 2001 2002 2003 2004
---------- ---------- --------- ---------- ---------
(Ps million)
Trade financing............................... Ps 54 Ps - Ps 24,470 Ps 546 Ps 100
Loans funded by domestic development
banks ...................................... - - - 1,760 2,832
Working capital loans......................... 111,652 49,460 36,022 72,298 15,350
Credit cards.................................. 20 - 517 10,035 9,015
Personal loans................................ 16,366 17,338 9,140 19,475 20,251
Vehicle loans................................. 2,377 506 35 1,419 1,981
Overdrafts.................................... 13,563 13,902 1,086 6,394 3,981
Mortgage & other.............................. 4,024 2,380 322 466 385
Financial leases (1) ......................... - - - - 1,137
---------- ---------- --------- ---------- ---------
TOTAL CHARGE-OFFS........................ Ps 148,056 Ps 83,586 Ps 71,592 Ps 112,393 Ps 55,032
===-====== ========== ========= ========== =========
--------------
(1) In October 23, 2003, the Superintendency of Banking through its External
Circular 040, modified the treatment of financial leases. Since January 1,
2004 it is accounted for as loan portfolio.
99
The Bank has a policy of actively pursuing the collection of
charged-off balances. In practice, the manager of the branch where the loan was
made and the attorney handle the collection process until a final judgment is
obtained. 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 paid.
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. The Bank informs the Superintendency of
Banking, on a quarterly basis, the amount of charge-offs it approves. As of
December 31, 2004, the Bank registered Ps 43,270 million in recoveries of
charge-off loans in previous periods.
CROSS - BORDER OUTSTANDING LOANS AND INVESTMENTS
As of December 31, 2003 and 2004, total cross-border outstanding
loans and investments amounted to approximately US$ 162 million and US$ 175
million, respectively. At 2004, total outstanding loans to borrowers in foreign
countries amounted to US$ 32 million and total investments were US$ 143 million.
As of December 31, 2004, total cross-border outstanding loans and investments
represented 2.4% of total assets.
The following table presents information with respect to the Bank's
cross-border outstanding loans and investments for the years ended on December
31, 2003 and 2004:
2003 2004
----------- -----------
(U.S. thousand dollars)
Mexico US$ 52,249 US$ 77,200
Brazil 42,790 30,980
United States 29,000 22,048
Chile 2,000 10,034
British Virgin Island - 9,912
Puerto Rico - 5,000
Bolivia - 5,000
Peru 3,403 3,633
Ecuador 1,726 3,200
Panama 7,552 2,652
El Salvador 3,000 2,000
Cayman Islands 11,712 1,745
Dominican Republic 4,696 1,027
Costa Rica 2,000 1,000
Guatemala 1,590 -
Venezuela 500 -
----------- -----------
TOTAL CROSS-BORDER OUTSTANDING LOANS AND
INVESTMENTS US$ 162,218 US$ 175,431
=========== ===========
100
E.5. DEPOSITS
The following table shows the composition of the Bank's deposits for
2002, 2003 and 2004:
AS OF DECEMBER 31,
-----------------------------------------
2002 2003 2004
------------ ------------- -----------
(Ps million)
NON-INTEREST BEARING DEPOSITS:
Checking accounts......................... Ps 1,876,026 Ps 2,193,069 Ps 2,523,505
Other deposits............................ 94,573 126,718 167,174
------------ ------------- -------------
Total................................. 1,970,599 2,319,787 2,690,679
------------ ------------- -------------
INTEREST BEARING DEPOSITS:
Checking accounts......................... 815,367 1,353,123 1,275,618
Time deposits............................. 3,603,466 4,237,345 4,361,206
Savings deposits.......................... 2,398,726 2,321,742 3,534,613
------------ ------------- -------------
Total................................. 6,817,559 7,912,210 9,171,437
------------ ------------- -------------
TOTAL DEPOSITS........................ Ps 8,788,158 Ps 10,231,997 Ps 11,862,116
============ ============= =============
The following table shows the time deposits held by the Bank at
December 31, 2004, by amount and maturity for deposits:
AT DECEMBER 31, 2004
-----------------------------------------
PESOS DOLLARS TOTAL
------------ ------------ ------------
(Ps million)
Up to 3 months (1)................................. Ps 575,661 Ps 623,369 Ps 1,199,030
From 3 to 6 months (1)............................. 457,003 299,816 756,819
From 6 to 12 months (1)............................ 198,958 170,353 369,311
More than 12 months (1)............................ 689,978 101,253 791,231
Time deposits less than Ps 239 million (2)......... 949,931 294,884 1,244,815
------------ ------------ ------------
TOTAL.......................................... Ps 2,871,531 Ps 1,489,675 Ps 4,361,206
============ ============ ============
--------------
(1) Time deposits higher than Ps 239 million (the equivalent of US$ 100,000 at
the Representative Market Rate as of December 31, 2004).
(2) The equivalent of US$ 100,000 at the Representative Market Rate as of
December 31, 2004.
For a description of the average amount and the average rate paid of
deposits, see Item 4. Information on the Company - E. Selected Statistical
Information - E.1. Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential.
E.6. RETURN ON EQUITY AND ASSETS
The following table presents certain selected financial ratios of
the Bank for the periods indicated:
101
FOR THE FISCAL YEAR
ENDED DECEMBER 31,
---------------------
2002 2003 2004
----- ----- -----
(in percentages)
Net income as a percentage of:
Average total assets............................ 1.88 3.40 3.62
Average shareholders' equity.................... 20.42 31.14 32.14
Dividends declared per share as a percentage of
net income per share(1)......................... 36.18 33.42 37.47
Average shareholders' equity as a percentage of
average total assets............................ 9.22 10.92 11.27
Return on interest-earning assets(2).............. 8.00 12.20 12.10
---------------------
(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.
E.7. INTERBANK BORROWINGS
The following table sets forth interbank borrowings by the Bank for
the periods indicated:
AS OF DECEMBER 31,
---------------------------------------------------------------------
2002 2003 2004
--------------------- --------------------- ---------------------
AMOUNT RATE(1) AMOUNT RATE(1) AMOUNT RATE(1)
----------- ------- ----------- ------- ----------- -------
(Ps million, except percentages)
End of period..................... Ps 403,962 2.44% Ps 456,059 1.24% Ps 246,282 2.77%
Weighted average during period.... 505,832 1.86% 317,258 1.67% 312,969 2.36%
Maximum amount of borrowing at
any month-end................... (2)594,810 (3)477,975 (4)417,187
Interest paid during the year..... 9,404 5,293 7,389
---------------
(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.
(2) September.
(3) November.
(4) January.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS(5)
During 2004, there was an increase in the proportion of productive
assets to total assets, as well as an increase in the relation between
productive assets to interest-bearing liabilities. Likewise, there was a slight
decrease in the proportion that interest-bearing liabilities represent in the
funding structure. The deposit structure presented increases in the volume of
low-cost deposits, such as checking accounts and savings accounts. These
variations had a positive impact in the net interest margin.
-----------------
(5) Average balance sheet numbers are used in this section, unless otherwise
stated.
102
The expansion of low-cost deposits and the bond issuance at the
beginning of the year allowed the Bank to increase the volume of the loan
portfolio and the investment portfolio. The loan portfolio showed an average
increase in volume of 28%, responding to the positive performance of the
Colombian economy, resulting in growth of more than 24% of the interest income
on loans, in spite of the decrease seen in the average nominal interest rate,
which dropped from 13.1% to 12.7%. The average growth of the investment
portfolio was 13.4% and interest on investments increased 11.7% in response to
fluctuations of interest rates and to the market value of these investments, in
particular TES bonds, which prices dropped during the first semester of the year
and then returned to their prior upward trend during the second semester.
In spite of the fact that the year 2004 was marked by high market
liquidity, as had been the year 2003, a competitive environment generated an
increase in deposit rates and a consequent reduction in the net interest margin.
Thus, although the average volume of interest-bearing liabilities showed an
increase of 13%, interest expenses at the end of the year increased nearly 22%.
This growth is explained not only by the increased volume and increases in some
average nominal deposit rates, such as savings accounts and time deposits that
rose 300 and 400 basis points, respectively, but also by the interest generated
by the Ps 400 billion bond issuance that the Bank made in order to increase the
duration of its interest-bearing liabilities, thus decreasing risks.
The Bank's 23% net income growth is explained by an increase of 19%
in net interest income compared to growth of 8% in operating expenses, including
merger and goodwill amortization expenses. The strategies that the Bank adopted
during 2004 to improve its efficiency enabled the operating expenses to
operating income ratio to drop from 55% to 51%. Finally, as a consequence of the
tax credit expiration period ending in 2004, BC's income tax increased nearly
281%.
A.1. GENERAL DISCUSSION OF THE CHANGES IN RESULTS
RESULTS FROM OPERATIONS
BC's net income for 2004 totaled Ps 578,678 million, which
represents a 23.3% increase as compared to Ps 469,384 million obtained during
2003. This result reflects the behavior of the Colombian economy, as well as the
actions and efforts that the Bank made during the year to improve the structure
and quality of the assets and liabilities on its balance sheet.
Balance Sheet Structure
The general structure of the balance sheet showed a positive
evolution during 2004. The ratio of the average volume of interest-earning
assets over average total assets rose from 83% in 2003 to 87% in 2004, and the
ratio of interest-earning assets over interest-bearing liabilities increased
from 120% in 2003 to 128% in 2004.
The loan portfolio share of total interest-earning assets rose from
61% in 2003 to 65% in 2004, whereas the investment portfolio share of total
interest-earning assets dropped from 35% to 33% for the same period. Overnight
funds represented the remaining portion of total interest-earning assets, which
average volume share dropped from 4% in 2003 to 2% in 2004.
103
In the total resource structure (liabilities and shareholders'
equity), on average, the share of liabilities dropped slightly from 2003 to
2004, from 89.1% to 88.7%. Interest-bearing liabilities decreased from an
average of 78% of total liabilities in 2003 to 77% in 2004, which resulted in
the decrease of total resources from 69% to 68%. Deposits, including
non-interest earning checking accounts, decreased from an average of 77% of
total liabilities in 2003 to 73% in 2004. Among said deposits, during 2004
checking accounts represented an average of 30% of the volume, time deposits 41%
and savings accounts 29%, as compared to 28%, 45%, and 27%, respectively in
2003, evidencing an increase in the share of low-cost deposits such as checking
accounts and savings accounts, which favored the net interest margin.
Finally, the increase in the shareholders' equity percentage of the
total resource structure rose from 10.9% to 11.3%, reflecting a decrease in the
leverage ratio, estimated as the total assets over average shareholders' equity,
which dropped from 915% in 2003 to 887% in 2004. The capital adequacy ratio rose
from 13.08% in 2003 to 13.44% in 2004, 444 basis points higher than the minimum
required by Colombian law, which evidences the Bank's strategies to consolidate
its solvency and soundness.
Balance Sheet Dynamics
Average total assets grew 15.7% in 2004, reaching an average of Ps
15,971,743 million as compared to an average of Ps 13,800,781 million in 2003,
when they grew 23.4% from Ps 11,181,361 million recorded in 2002.
The loan portfolio grew 28% from an average of Ps 7,012,079 million
in 2003 to Ps 8,972,315 million in 2004, whereas the investment portfolio grew
13.4%, from an average of Ps 4,048,244 million in 2003 to an average of Ps
4,592,112 million in 2004.
Total average liabilities grew 15.3%, totaling Ps 14,171,468 million
in 2004 as compared to Ps 12,293,301 million recorded in 2003. Deposits grew
9.5%, going from an average of Ps 9,481,946 million in 2003 to an average of Ps
10,385,554 million in 2004. It is worth highlighting the increase in low-cost
deposits, such as checking accounts and savings accounts at rates of 15.3% and
17.4%, respectively, as compared with time deposits, which grew at a rate of
only 1.1%.
Balance Sheet Quality
At December 31, 2004, the non-performing past due loans share of the
total loan portfolio was 0.88%, whereas it was 0.95% at December 31, 2003
showing a positive evolution, and the total past due loans share of the total
loan portfolio dropped from 1.49% to 1.45%. Likewise, the non-performing loans
and foreclosed assets (after allowances) share of the shareholders' equity
dropped from 9% at December 31, 2003 to 7% at December 31, 2004.
The coverage ratio represented by the allowances for loans losses
over the total loan portfolio decreased from 323.7% at December 31, 2003 to
299.0% at December 31, 2004, which is consistent with the general improvement in
loan portfolio quality, related to the positive evolution of the Colombian
economy in recent years.
104
Income Statement's Structure - Breakdown Analysis
Upon analyzing the composition of the net income obtained during
2004, the total operating income recorded at the end of the year reached Ps
1,827,827 million. Of this amount, the income corresponding to net interest,
including net income from operating leasing and gains on sales of investments,
represented 66% (Ps 1,214,933 million), income corresponding to fees and
services, represented 22% (Ps 402,344 million), and income corresponding to
other operating income represented the remaining 12% (Ps 210,550 million). In
2003 there was a similar general structure of the composition of operating
income before provisions, with 66%, 21%, and 13%, respectively.
Also, provisions for loans portfolio losses, accrued interest, and
foreclosed assets, which in 2003 represented 14% of total operating income, in
2004 represented only 8% (Ps 143,581 million), whereas operating expenses, not
including merger expenses, which in 2003 represented 55% of such income, in 2004
represented 51%, thus showing a positive evolution in BC's efficiency levels.
As a result of the above, the operating margin after total operating
expenses and provisions was 41% of total operating income in 2004 (Ps 748,061
million) as compared to 31% recorded in 2003.
Taking this net income after operating expenses and provisions as a
new reference, net non-operating income rose an additional 10% in 2004 (Ps
71,853 million), even while provisions for income taxes deducted 11.8% from net
income after operating expenses and provisions in 2003 as compared to 29.2% in
2004 (Ps 238,810 million), for a final net income in 2004 of Ps 578,678 million,
as we mentioned above. The change in the share of provisions for income taxes is
related to the change in tax rates due to the tax credit expiration, as is
described in more detail below.
General Income Statement Dynamics
In general terms, the growth in income and expenses during 2004 was
more balanced than the growth recorded in 2003. The increase of 23.3% recorded
in net income in 2004 as compared to that obtained in 2003 may be explained by
an increase of 19% in net interest income to Ps 1,094,833 million as compared to
an increase of only 8% in operating expenses to Ps 936,185 million.
BC's net income for 2003 totaled Ps 469,384 million, an increase of
123.1% from Ps 210,380 million in 2002. Interest income was a determining factor
for this growth, as it totaled Ps 1,400,255 million in 2003, an increase of
89.7% as compared to 2002.
The increase in net interest income in 2004 was mainly due to the
result observed in loan portfolio interest that totaled Ps 1,140,887 million,
recording an increase of 24.2% as compared to the loan portfolio interest
obtained in 2003. Also, income from investments, which represented Ps 532,517
million in 2004, increased 11.7% as compared to 2003. However, this change is
not comparable to 2002 when the financial statements were affected by a change
in Colombian regulations introduced near the end of 2002 regarding the
investment valuation methodology. In 2004 the moderate growth is mainly
explained by the decline in Colombian bond prices that took place during the
second quarter. Nevertheless, the trend in Colombian bond prices corrected
during the second half of the year.
Other net operating income, from which we highlight that associated
with fees and services, operating leases, and gains on sales of investments,
recorded an increase of 8.6% in 2004 as compared to the previous year, as it
rose from Ps 674,647 million to Ps 732,994 million.
105
Operating expenses, including goodwill amortization and merger
expenses, rose from Ps 869,350 million in 2003 to Ps 936,185 million in 2004,
which represents an increase of less than 8%, as we mentioned above.
As a result of the tax credit expiration, the Bank's income tax
recorded an increase of approximately 281% in 2004.
As a result of greater market liquidity, interest expense increased
only 3.1% from 2002 to 2003, allowing net interest income to reach Ps 919,742
million at December 31, 2003. This represents an increase of 238.2% as compared
to December 31, 2002, when net interest income was Ps 271,961 million. Operating
expenses totaled Ps 869,350 million at December 31, 2003, an increase of 15% as
compared to Ps 755,801 million on December 31, 2002. However, if we exclude
non-recurring expenses due to goodwill amortization and expenses related to the
merger with Banco de Colombia S.A., the increase represents 12.1% as compared to
December 31, 2002.
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2003 2004
---------- ---------- ------------
(Ps million)
NET INCOME:
Net interest income............................ Ps 271,961 Ps 919,742 Ps 1,094,833
Provision for loan and accrued interest
losses....................................... (115,154) (162,058) (104,632)
Provision for foreclosed assets and other
assets....................................... (71,212) (68,892) (38,949)
Other operating income......................... 828,977 674,647 732,994
Non-operating income .......................... 79,787 37,600 71,853
Operating expenses............................. (755,801) (869,350) (936,185)
Income before taxes............................ 238,558 531,689 819,914
Minority interest.............................. 14,440 330 (2,426)
Income tax..................................... (42,618) (62,635) (238,810)
---------- ---------- ------------
NET INCOME.............................. Ps 210,380 Ps 469,384 Ps 578,678
========== ========== ============
INTEREST INCOME
The interest income for the year ending December 31, 2004, totaled
Ps 1,680,577 million, which represents a 20% increase from Ps 1,400,255 for
2003.
The average volume of interest-earning assets or productive assets
showed an increase of 21.3% as it rose from Ps 11,466,269 million in 2003 to Ps
13,905,061 million in 2004. The increase in interest income generation was
mostly due to the behavior of the loan portfolio volume, which showed an average
growth after allowances of 28%, from Ps 7,012,079 million in 2003 to Ps
8,972,315 million in 2004. The average loan portfolio grew 29.8% in 2003 from Ps
5,401,872 million in 2002, reflecting the expansion of and increased confidence
in the Colombian economy. Although the average rate of return for the loan
portfolio decreased from 13.4% in 2002 to 13.1% in 2003, the interest income
from the loan portfolio increased 26.5% in the same period. The increase in loan
demand in 2004 reflects the expansion of the Colombian economy during 2004,
which grew 3.96%.
The amount of past due loans increased 21% in 2004, whereas
non-performing loans increased 16% in the same period. Non-performing loans
represented 64% of total past due loans in 2003 but only represented 61% in
2004, which also improved interest income.
106
Likewise, the average volume of the investment portfolio increased
from Ps 4,048,244 million in 2003 to Ps 4,592,112 million in 2004, representing
an increase of 13.4%. The average volume of the investment portfolio grew 13.3%
from 2002 to 2003. However, the rate of return increased 11.8%, rising from Ps
247 million at December 31, 2002, to Ps 476,720 million at December 31, 2003.
These numbers, however, also reflect new regulations issued by the
Superintendency of Banking and effective as of September 1, 2002. See note 2(g)
to the Financial Statements.
The increase in the loan portfolio volume enabled an increase in
interest income of 24.2%, rising from Ps 918,772 million in 2003 to Ps 1,140,887
million in 2004. This growth was favored by the expiration during 2004 of grace
periods for a significant number of restructured loans. As a result, the changes
in the interest on loans was positive, despite the fact that the average nominal
interest rate dropped 40 basis points, from 13.1% in 2003 to 12.7% at 2004.
Differential analysis shows that due to the loan portfolio growth, there was an
increase in interest income of Ps 247,209 million (26.9% more than the previous
year); however, the negative effect of the reduction in the average interest
rate on the loan portfolio produced a decrease of Ps 25,094 million as compared
to the amount of interest generated in 2003 (representing 2.7% of such
interest).
The loan portfolio interest rate decrease occurred in the local
currency loan portfolio, which in 2004 represented 78.5% of the total loan
portfolio (0.3% less than the previous year), the average nominal rate of which
dropped from 15.4% to 14.8% from 2003 to 2004, whereas the foreign currency
interest rate rose from 4.7% to 5.2% for the same period.
Income associated with the investment portfolio grew 11.7%, rising
from Ps 476,720 million in 2003 to Ps 532,517 million in 2004. The positive
performance of this portfolio was primarily due to the upward price trend of the
Treasury Bonds (TES) during the second half of 2004, despite the fact that the
average nominal yield for the investment portfolio dropped from 11.8% in 2003 to
11.6% in 2004. The yield decrease had a negative effect of 3.5% on the increase
in income as compared to the previous year, which, solely by virtue of the
increase in the portfolio volume, would have otherwise been 15.2%.
In general terms and taking into account total interest-earning
assets, the negative effect due to the drop in interest rates represented a 2.8%
lower increase in interest income in 2004 as compared to 2003, which, only
taking into consideration the growth in volume, would have otherwise represented
22.8%, not the 20% shown.
INTEREST EXPENSE
The interest expense in 2004 totaled Ps 585,744 million, which
represents an increase of 21.9% as compared to Ps 480,513 million in 2003.
Interest expense rose 3.1% in 2003 from Ps 466,223 million in 2002. In spite of
the decrease in the nominal rates of return for time deposits, which fell from
7.3% in 2002 to 5.9% in 2003, and for savings deposits, which fell from 4.9% in
2002 to 4.4% in 2003, the average volume of time deposits rose 18.8% in 2003,
and the volume of savings deposits rose 19%. These increases reflected efforts
made by the commercial areas of BC to attract additional low-cost deposits, as
well as a general decrease in Colombian market rates due to high liquidity.
The average volume of interest-bearing liabilities showed an
increase of 13% during the year, going from Ps 9,590,591 million in 2003 to Ps
10,866,494 million in 2004. In February 2004, BC issued bonds in the amount of
Ps 400,000 million, for the purpose of extending the duration of BC's
interest-bearing liabilities. As a result, the average growth of time deposits
was only 1.1% during 2004, as compared to a growth of 18.8% during 2003. In
addition, the average volume of interest-bearing checking accounts and of
savings accounts each rose 17%.
107
As to the interest-bearing liabilities, during 2004 the issued bonds
bore interest in the amount of Ps 41,239 million; this figure partially
represents the increase in interest expense.
Interest paid on savings accounts and on time deposits showed an
increase of 24% and 7.1%, respectively, as compared to the previous year.
Similar to interest-earning assets, this was mainly due to the increase in
volume of savings accounts and time deposits, although it was also influenced by
the increase in deposit rates. The average nominal interest rate paid on savings
accounts rose from 4.4% in 2003 to 4.7% in 2004, and the CD's rate increased 40
basis points, reaching 6.3% in 2004, as compared to 5.9% in 2003. Even though
2004 and 2003 were both marked by high market liquidity, competition in the
market generated an increase in deposit rates and the resulting reduction in the
net interest margin.
Upon making the differential analysis of the growth in interest
expense associated with the increase in volume of deposits and the growth in
interest expense associated with the increase in average interest rates, the
outcome shows that 75% of the CD's interest increase was due to a growth in
volume and only 25% was due to the growth in the average interest rate whereas
for savings accounts the percentages were 78% and 22%, respectively. Upon
analyzing the growth in total interest expense considering the increase in the
average volume of interest-bearing liabilities and in the rates paid on their
different components, we found that 85% of the increase in interest expense was
due to the growth in volume of deposits and only 15% was attributable to the
increase in average interest rates.
NET INTEREST INCOME
As we mentioned above, the net interest income grew 19%, from Ps
919,742 million in 2003 to Ps 1,094,833 million in 2004. The foregoing, added to
the variations seen in interest-earning assets, led to a stable result regarding
the net interest margin that, calculated as the net interest income over the
average volume of interest-earning assets for 2003 and 2004, shows a slight drop
from 8.0% to 7.9%. BC's net interest income in 2003 increased 238.2% from Ps
271,961 million in 2002. This increase resulted in part from BC's efforts to
improve the funding mix through an increase in low-cost deposits and an increase
in interest-earnings assets. The nominal rate of return for interest-earning
assets rose from 8.0% in 2002 to 12.2% in 2003. The nominal rate of return for
interest-bearing liabilities decreased 0.9%, registering 5.0% in 2003, compared
to 5.9% for 2002.
The growth observed in interest-earning assets and interest-bearing
liabilities was 21% and 13%, respectively, as was explained in detail in the
sections above. The share of interest-earning assets in total assets and in
interest-bearing liabilities increased from 83% to 87% in the first case and
from 120% to 128% in the second case, which favors the net interest margin in
spite of the decrease seen in the loan portfolio average interest rate and in
the investment portfolio average yield and the increase seen in deposit rates,
which were explained in detail above.
Upon making a global analysis, we found that the nominal average
interest-earning asset rate was 12.1% for 2004, remaining quite stable as
compared to 2003 when it was 12.2%. Also, the nominal average interest-bearing
liabilities rate was 5.4% for 2004, increasing as compared to 5.0% for 2003.
As a result of these variations in volumes and rates, and as was
explained in detail in the corresponding sections, there was a growth of 20% in
interest income from 2003 to 2004, as compared to a growth of 21.9% in interest
expenses. The growth in income was related to the effect of the increase in
volume of loans and was limited by the effect of the drop in the average nominal
loan portfolio rate and the average nominal investment portfolio yield. In
addition, 85% of the interest expense growth is explained by the increase in the
volume of interest-bearing liabilities and the remaining 15% growth was due to
the increase in deposit interest rates. Therefore, there is net interest growth
of 19%, which combined with the growth of 20% recorded in interest-earning
assets returns a net interest margin in 2004 almost identical to the one
obtained in 2003.
108
Average Nominal
Interest Rate and
Net Interest Margin
1999 - 2004
[LINE GRAPH]
Average Nominal
Interest Rate and
Net Interest Margin
---------------------------------------------
1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ----
Interest earning assets 20.2% 14.2% 11.7% 8.0% 12.2% 12.1%
Interest bearing liabilities 13.2% 8.6% 8.2% 5.9% 5.0% 5.4%
Net interest margin 6.7% 6.5% 4.7% 3.0% 8.0% 7.9%
The following table shows components of the Bank's consolidated net
interest income before provisions for loan and accrued interest losses:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2003 2004
--------------- ----------------- -------------
(Ps million, except percentages)
INTEREST INCOME:
Loans............................................. Ps 726,112 Ps 918,772 Ps 1,140,887
Investment securities............................. 247 476,720 532,517
Overnight funds................................... 11,825 4,763 7,173
--------------- ----------------- -------------
TOTAL INTEREST INCOME......................... 738,184 1,400,255 1,680,577
INTEREST EXPENSE:
Time deposits and checking accounts............... 273,253 261,533 281,063
Savings deposits.................................. 106,825 113,968 141,288
Borrowings from domestic development banks........ 49,317 58,456 73,549
Interbank borrowings.............................. 9,404 5,293 7,389
Amortized premium on investments.................. 26,645 38,423 41,216
Long-term debt.................................... 779 2,840 41,239
--------------- ----------------- -------------
TOTAL INTEREST EXPENSE........................ 466,223 480,513 585,744
NET INTEREST INCOME........................... Ps 271,961 Ps 919,742 Ps 1,094,833
=============== ================= =============
Average nominal interest rates on loans........... 13.4% 13.1% 12.7%
Average nominal interest rates on time deposits... 7.3% 5.9% 6.3%
Average nominal interest rates on savings 4.9% 4.4% 4.7%
deposits........................................
109
PROVISIONS FOR LOAN AND ACCRUED INTEREST LOSSES
The recovery of the Colombian economy was reflected in the payment
behavior of borrowers during 2004. Due to the above, the provision for loan
portfolio and accrued interest losses decreased 35.4%, from Ps 162,058 million
in 2003 to Ps 104,632 million in 2004. Provisions for loan portfolio and accrued
interest losses in 2003 increased 40.7% from Ps 115,154 million in 2002. This
increase resulted mostly from the growth in the average volume of the loan
portfolio, from Ps 5,401,872 million in 2002 to Ps 7,012,079 million in 2003, an
increase of 30%.
During 2004, BC modified its policy for consumer and small business
loans, for purposes of covering the greater risk levels determined during the
Credit Risk Manangement System ("SARC" "Sistema de Administracion de Riesgo
Crediticio") implementation process. For a description of this process see Item
4. Information on the Company - E. Selected Statistical Information - E.4.
Summary of Loan Loss Experience. This change led to a growth in the allowances
for consumer and small business loans on the consolidated balance sheet of 80%
and 105%, respectively. Allowances for loan portfolio losses on the consolidated
balance sheet rose from Ps 387,263 million to Ps 434,378 million, representing a
growth of 12% from 2003 to 2004.
Therefore, as of December 31, 2004, 61% of the Bank's past due loans
were non-performing as compared to 63.7% as of December 31, 2003. The past due
loans coverage reached 299% and the non-performing loans coverage was 491%.
Allowances for loans and accrued interest losses, as a percentage of
the non-performing loans, were 515% in 2003, and 317% in 2002 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, 2002, 2003 and 2004, the allowances for loan losses existing under Colombian
GAAP were Ps 332,324 million, Ps 387,263 million and Ps 434,378 million,
respectively, and the allowances that would have been required under U.S. GAAP
were Ps 348,502 million, Ps 363,068 million and Ps 393,138 million,
respectively.
OTHER OPERATING INCOME
BC's other operating income consists largely of fees and service
charges. Fees include credit card merchant fees, credit and debit card annual
fees, checking fees, warehouse and logistic services fees, commissions and fees
from fiduciary activities and letters of credit. Service charges consist
primarily of money transfer fees, remittances, bank acceptances and electronic
services.
Net income from commissions and services increased 20.8% totaling Ps
402,344 million in 2004 as compared to Ps 333,025 million in 2003. This growth
is the result of the Bank's strategy during 2004 to increase the use of
electronic channels, as well as the Bank's positioning in the credit card
market, including the expansion of the American Express franchise. Likewise,
special emphasis was made on the money remittances market, a business with great
potential given the ever-growing number of Colombians abroad. At December 31,
2004, 78.8% of the Bank's (unconsolidated) transactions were effected through
distribution channels different from the branches.
110
Net income from commissions and services increased from Ps 292,308
million in 2002, to Ps 333,025 million in 2003, an increase of 14%.
Foreign exchange operations (including income from forward
contracts), another component of operating income, also yielded gains in 2004,
rising from Ps 49,751 million at December 31, 2003, to Ps 56,774 million at
December 31, 2004, an increase of 14%, whereas at December 31, 2002 their value
was Ps 30,759 million.
Also, income from dividends mainly from BC investments in
non-affiliate companies, Conavi S.A., Corfinsura S.A., and Proteccion S.A.,
totaled Ps 30,546 million at 2004, remaining stable as compared to 2003, year in
which they had reached a total of Ps 30,734 million, which represented an
increase of 57.7% from Ps 19,491 million as compared to 2002.
Income associated with financial leases registered another good year
for the Bank. At December 31, 2004, leasing income totaled Ps 99,854 million,
representing an increase of 69.9% as compared to Ps 58,774 million in 2003. BC
affiliates, Bancolombia (Panama) S.A. and Leasing Colombia, provide financial
leases to commercial customers, while Sufinanciamiento provides financial leases
to consumers. Income from leasing operations increased 48% in 2003, from Ps
39,596 million at December 31, 2002. This increase was influenced by tax reforms
(Law 863 of December 29, 2003) that provide an incentive for Colombian companies
to enter into leasing contracts.
Commercial subsidiaries also provide revenue from the production and
commercialization of agro-chemical fertilizers, load transportation, and
royalties stemming from mining operations. In 2004, income from real sector
subsidiaries amounted to Ps 78,973 million, increasing 3.3% as compared to Ps
76,446 million in 2003. Growth in the Colombian economy, which was 3.96% for
2004, directly influenced the results of these companies. Revenue from these
operations showed a 45% increase during 2003 from Ps 52,759 million in 2002.
The following table summarizes the components of the Bank's other
operating income for the last three fiscal years:
YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2003 2004
----------- ---------- ---------
(Ps million)
OTHER OPERATING INCOME:
Fees and service charges, net.................... Ps 292,308 Ps 333,025 Ps 402,344
Foreign exchange gain (loss), net................ 93,371 39,262 (90,706)
Dividend income (1).............................. 19,491 30,734 30,546
Forward contracts gain (loss), net............... (62,612) 10,489 147,480
Financial leases................................. 39,596 58,774 99,854
Revenues from commercial subsidiaries............ 52,759 76,446 78,973
Gains on sales of investments, net............... 372,793 75,540 20,246
Other............................................ 21,271 50,377 44,257
----------- ---------- ----------
TOTAL OTHER OPERATING INCOME............... Ps 828,977 Ps 674,647 Ps 732,994
=========== ========== ==========
-----------------
(1) Income from dividends represents only the recognition of income from
unconsolidated subsidiaries under Colombian GAAP.
111
OTHER OPERATING EXPENSES
In 2004, Bancolombia's operating expenses, including merger
expenses, increased 7.7% from Ps 936,185 million as compared to Ps 869,350
million in 2003.
Expenses associated with employee salaries and company benefits were
Ps 396,480 million in 2004, as compared to Ps 343,308 million in 2003. This
variation was greatly due to the salary increase approved for 2004 and to the
hiring of 554 additional employees. Salary expenditures rose during 2003 from Ps
286,307 million in 2002, which increase resulted largely from the complete
amortization of the Bank's outstanding pension liability, increases in salaries
and the hiring of 420 contract employees during 2003.
Administrative expenses and other expenses totaled Ps 451,095
million at 2004, which represents an increase of 12.0% as compared to Ps 402,685
million in 2003. During 2004, donations amounted to Ps 11,060 million,
representing significant tax benefits for the Bank.
During 2004, the Bank's operating expenses increased 7.7%. This
percentage is near the Colombian inflation rate for 2004.
The ratio of operating expenses over total average assets dropped
from 6.3% in 2003 to 5.9% in 2004, and the ratio of operating expenses over
operating income dropped from 54.5% in 2003 to 51.2% in 2004. Net income from
fees and service charges over operating expenses (without including merger
expenses and goodwill amortization) increased from 41% recorded in 2003 to 44%
in 2004.
MERGER EXPENSES AND GOODWILL AMORTIZATION
BC completed its merger with Banco de Colombia S.A. on April 3,
1998. For each of fiscal years 2004 and 2003, the amortization of goodwill
recorded in connection with the merger with Banco de Colombia S.A. totaled Ps
22,648 million. As of December 31, 2004, outstanding goodwill from the merger
totaled Ps 73,607 million, which the Bank intends to continue to amortize at Ps
22,648 million each year for the next four years. In 2003, BC amortized Ps
29,627 million of goodwill related to the acquisition of Sufinanciamiento S.A.
BC also amortized Ps 6,721 million of the goodwill derived from its increased
investment in Fiducolombia S.A.
For year 2002, merger expenses and goodwill amortization totaled Ps
33,028 million.
The following table summarizes the principal components of BC's
operating expenses for the last three fiscal years:
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2003 2004
---------- ---------- ----------
(Ps million)
OPERATING EXPENSES:
Salaries and employee benefits.................................... Ps 286,307 Ps 343,308 Ps 396,480
Severance benefits................................................ 29,575 22,959 15,169
Administrative and other expenses................................. 362,495 402,685 451,095
Depreciation ..................................................... 34,444 40,625 46,872
Losses on sales of loans, net..................................... 9,952 - 266
Merger expenses................................................... 10,379 - -
Goodwill amortization (1)......................................... 22,649 59,773 26,303
---------- ---------- ----------
TOTAL OPERATING EXPENSES..................................... Ps 755,801 Ps 869,350 Ps 936,185
========== ========== ==========
(1) As of December 31, 2003, included the amortization of the goodwill derived
from: merger with Banco de Colombia, the acquisition of Sufinanciamiento
and the increase in the participation on Fiducolombia.
112
NON-OPERATING INCOME (EXPENSES)
Non-operating income includes recovered written-off loans, as well
as the recovery of provisions for foreclosed assets; property, plant and
equipment, and other assets. It also includes gains from the sale of foreclosed
assets, real estate, and other assets.
Net non-operating income for 2004 totaled Ps 71,853 million, growing
91% as compared to Ps 37,600 million in 2003. This increase is due to a
significant volume of recovered written-off loans that showed growth of nearly
55%. In addition, by donating fixed assets and foreclosed assets, the provisions
associated with such assets and goods were recovered.
For 2003, net non-operating income decreased 53% from Ps 79,787
million for 2002, which was partially explained by the improvement in the
Colombian economy, which allowed the Bank's loan portfolio quality to improve
and led to the receipt by the Bank of fewer foreclosed assets.
The following table summarizes the components of BC's non-operating
income and expenses for the last three fiscal years:
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2003 2004
---------- ---------- ----------
(Ps million)
NON-OPERATING INCOME (EXPENSES):
Other income........................................... Ps 131,026 Ps 83,041 Ps 130,389
Other expenses......................................... (51,239) (45,441) (58,536)
---------- ---------- ----------
TOTAL NON-OPERATING INCOME (EXPENSES), NET..... Ps 79,787 Ps 37,600 Ps 71,853
========== ========== ==========
INCOME TAX EXPENSES
Income tax for 2004 represented Ps 238,810 million as compared to Ps
62,635 million in 2003. Due to the expiration of BC's tax credit, income tax for
2004 was calculated based on net taxable income, different from past years when
it was calculated based on presumed income. In 2003, BC's income tax increased
47% over Ps 42,618 million in 2002. This increase resulted primarily from BC's
higher taxable fiscal income and higher shareholders' equity, which form the
basis for computing Colombia's income tax and presumed income tax, respectively.
Law 788 of 2002 established a surcharge tax that increased the
income tax rate for corporations from 35% to 38.5%. This surcharge tax, however,
did not apply to those corporations that had been accepted in the "Tax Stability
Regime" established by the Colombian government. Bancolombia and Leasing
Colombia are under this regime for ten years beginning on January 2001.
Fiducolombia and Colcorp have requested to be included in the regime of tax
stability, but a definite decision has not been given yet.
Pursuant to the "Tax Stability Regime", Bancolombia and Leasing
Colombia agreed to be taxed at a total income tax rate of 37% beginning on
January 1, 2001 (2% higher than the prevailing income tax rate at that time), in
exchange for exemption from increases in the income tax rate and from any other
new taxes until December 31, 2010. As a result, these companies currently
benefit from a 37% income tax rate, rather than the 38.5% rate generally
applicable to other corporations.
113
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 that affect net income include the methods of accounting for
income taxes, employee benefit plans, loan origination fees and costs, business
combinations and allowances for loan losses. For a summary of the most
significant adjustments required to calculate net income under U.S. GAAP, see
Note 33 to the Financial Statements.
A.2. IMPACT OF ECONOMIC, FISCAL AND MONETARY POLICIES OR POLITICAL
FACTORS IN BANCOLOMBIA'S RESULTS
Bancolombia's operations are affected by factors such as the growth
of the Colombian economy, the dynamics of the lending business, the Central
Bank's monetary policy measures, domestic price levels, exchange rate evolution,
the nature of the fiscal policy, the behavior of external markets and
competition with other financial institutions.
ECONOMIC GROWTH AND FINANCIAL SECTOR DYNAMICS
The Colombian economy and the financial system have grown
dynamically in recent years and their recovery has strengthened in 2004. From
January to December 2004, the economy grew 3.96% in annual terms and the
financial sector grew 9.24%. The financial sector is greatly influenced by the
dynamics of the economy. High rates of economic growth produce better results in
the various categories included in credit institutions' statements of
operations: there are more credits granted and more commissions, fewer past due
loans and, therefore, less need to increase provisions on BC's balance sheet. As
a result, BC earns more profits and maintains better financial indicators.
At the end of the 1990s, the economic crisis negatively influenced
financial institutions, resulting in higher reported losses. This led to a
series of measures in the following years, to counterattack the crisis. Such
measures, along with improvements in macroeconomic indicators, permitted greater
stability in Colombia's financial sector in recent years.
Future prospects for the financial sector as a whole, and for
Bancolombia specifically, will depend on regulatory and legal changes, including
those that result from the globalization of financial services, privatizations,
and continued economic growth, which will depend in part on the conclusion of
government initiatives regarding tax and pension reform as well as other factors
listed in the following chart:
114
FAVORABLE FACTORS FOR THE COLOMBIAN UNFAVORABLE FACTORS FOR THE COLOMBIAN
ECONOMY - MID-TERM ECONOMY - MID-TERM
-------------------------------------------- ---------------------------------------------
- Policies supporting macroeconomic - Higher unemployment expectations due to
stabilization fiscal adjustments
- Achievements in democratic security - Reduction of proven oil reserves
- Greater confidence in the economy - New tax burdens to cover the fiscal
- Growth of aggregate demand deficit
- Higher perspectives of financial - A modified value added tax (VAT)
services levels as a percentage of GDP - Increases in foreign interest rates
- Low interest rates - Expectations regarding the Presidential
- Greater use of installed capacity re-election
- Increased exports to the United
States and Venezuela
- Positive foreign demand for
non-traditional products
There is no guarantee of sustained economic growth, and new fiscal
restrictions could result in a reduction in demand and slow the rate of economic
growth. Such events could negatively affect BC's results.
CENTRAL BANK MONETARY POLICY MEASURES
The Central Bank has aided Colombia's economic recovery by
successfully preserving appropriate interest rate levels. In general, it appears
the Central Bank has successfully met its proposed goals for applying the
monetary policy.
Nominal interest rates are at levels that do not cause monetary
instability or inflationary pressures, at near 7.6%. Also, the real interest
rate in 2004 reached a level of 1.69%. We expect the rates to remain stable,
preserving macroeconomic balance.
The stable monetary policies have permitted BC greater flexibility,
with current interest rates producing sufficient liquidity to reduce the cost of
funding resources. However, there is no guarantee that the expansionary monetary
policy will continue, and if interest rates increase, BC's results will be
affected by higher funding costs.
DOMESTIC PRICE LEVELS
The inflation rate was low in 2004, closing the year at 5.5%, within
the range projected by the Central Bank (5% to 6%). We expect that a similar
inflation rate will continue during 2005. As a result of low inflation and low
interest rates, increased economic activity and good financial performance
(including good performance by BC) can be expected. A variation in the inflation
rate could generate increases or decreases in returns on the loan portfolio as
they relate to interest rates and, therefore, this could affect the Bank's
statements of operations.
115
EXCHANGE RATE EVOLUTION
The real exchange rate index remains above 117 in 2004. It was above
135 in 2003. Such levels strengthen the preferred trade exchange with the ATPDEA
(Andean Trade Promotion and Drug Eradication Act), promote the negotiation of
bilateral agreements, such as the FTA (Free Trade Agreement) with the United
States, and promote some advantages in our participation in AFTA (America's Free
Trade Agreement) in 2006. It is believed controlling inflation in Colombia is
Colombia's best instrument for competitiveness. Exchange rate volatility could
affect BC's business in U.S. dollars, that represent about 9.9% of its total
assets.
NATURE OF FISCAL POLICY
One of the difficulties that Colombia has faced in recent years has
been financing the public sector budget. The CPS (Consolidated Public Sector)
deficit rose to nearly 2.7% of the GDP in 2003; however, it dropped to around
1.2% of the GDP in 2004, and is estimated at 2.5% of the GDP for 2005. This
situation goes hand in hand with high levels of external and internal
indebtedness.
To help manage the internal indebtedness, the Colombian financial
system became the main buyer of Colombian Treasury bonds (TES). BC is the
largest holder of Colombian public debt. As a result, there could be a risk of
significant exposure for credit institutions holding such kind of securities
including Bancolombia.
In order to manage the non-financial sector deficit, the Government
has initiated structural reforms (tax and pension) aimed at relieving its budget
imbalances. Continuous tax increases are a factor that does not favor dynamic
growth because it adversely affects demand.
The recent tax reform effective as of January 1, 2004, included an
increase in the tax on financial transactions from 2004 to 2007 from 0.3% to
0.4%. For the financial sector, this implies alterations that will have damaging
effects, such as: increasing reliance on cash given the financial costs that the
tax implies, increasing demand on cash resources for financial institutions,
less use of checks in the economy, reducing the use of electronic services at
the Central Bank and surcharges on funding, among others.
As BC is protected by the tax stability regime, it is not subject to
any national level tax created since the year 2001, such as the financial
transaction tax over it is own transactions, as well as the 0.3% tax on equity.
See Item 5. Operating and Financial Review and Prospects - A. Operating Results
- A.1. General Discussion of the Changes in Results - Income Tax Expenses.
EXTERNAL MARKET BEHAVIOR
For the Colombian economy, during the year 2004, foreign trade was a
source of opportunities to strengthen economic growth through agreements such as
the ATPDEA (Andean Trade Promotion and Drug Eradication Act) now in force and
the FTA (Free Trade Agreement) with the United States being negotiated, as well
as through the AFTA (America's Free Trade Agreement) with the United States that
will enter into effect in 2006. Likewise, the support given by multilateral
lending institutions, the IMF and the IADB (Inter-American Development Bank),
and also by countries such as the United States, has been and will continue to
be of great importance. BC may benefit from this support as it offers a broad
array of products that facilitate the export process.
116
Moreover, the ever increasing remittances (transfers of foreign
currency from Colombians abroad to Colombians in Colombia) have surpassed export
levels of traditional products such as coffee. Based on IADB estimates, in 2004,
remittances will represent nearly US$ 4,460 billion, as compared with US$ 3,145
billion in 2003 and nearly US$2,770 billion in 2002. BC may increase its market
share in the remittance market by broadening its remittance receiving channels.
COMPETITION FROM OTHER FINANCIAL INSTITUTIONS
The Colombian financial market is highly competitive. In the past
decade, Colombian banking has been re-shaped as a result of market deregulation,
growing consumption and the introduction of international competitors. The above
situation has led to a greater degree of financial system consolidation, which
we believe will continue in upcoming years. This consolidation will in turn lead
to the creation of larger institutions that are expected to generate economies
of scale.
Increased competitiveness and industry consolidation could affect
BC's market share.
Bancolombia's results and, more specifically, ADR prices will depend
on developments affecting each of the factors described above.
B. LIQUIDITY AND CAPITAL RESOURCES
B.1. LIQUIDITY AND FUNDING
The Central Bank establishes reserve requirements that determine the
minimum amount of liquidity for Colombian banks. In order to meet its own
working capital needs, to honor withdrawals of deposits, to make payments upon
maturity of liabilities, and to extend loans, we maintain a proper balance
between maturity distribution and diversity of funding sources.
Interest rate volatility and political uncertainty in the Colombian
financial system have led investors to prefer short-term investments, making
medium and long-term financing harder to acquire. BC's deposit base is
short-term, but its stable nature has enabled BC to offer longer-term loans with
a wider margin. We believe that longer term funding will soon become more
available and will enable financial institutions to minimize liquidity risks. We
believe that our working capital is sufficient for present requirements. For
additional information about risk management see Item 11. Quantitative and
Qualitative Disclosures about Market Risk.
BC maintained a short-term negative gap during 2004 and also 2003 in
terms of maturities. Checking and savings accounts and time deposits are our
most important sources of funding.
However, we have different sources of liquidity, including
short-term and trading investments, borrowings from domestic development banks,
interbank borrowing and securities repurchase transactions, overnight funds and
access to funds from the Central Bank, all of which were used from time to time
on a short-term basis.
117
The following chart shows checking, time deposits and saving
deposits as a percentage of BC's overall deposits for the years, 2002, 2003 and
2004:
2002 2003 2004
---- ---- ----
Checking deposits 25.4% 28.0% 26.8%
Time deposits 34.0% 33.4% 30.7%
Saving deposits 22.6% 18.3% 24.9%
==== ==== ====
BC relies primarily on short-term deposits for its funding but
manages its risk and maintains reserves with the intention, although not the
guarantee, that in the case of a sudden shortage of funds in the Colombian
banking system and money markets, BC will be able to maintain its levels of
funding while minimizing funding costs and avoiding liquidation of assets.
As part of the Bank's strategy to acquire longer-term financing, on
February 11, 2004, Bancolombia issued ordinary bonds totaling Ps 400 billion in
the Colombian market. The bonds were offered in Colombia and are registered with
the Colombian Stock Exchange. As of December 31, 2004 the aggregate face value
of bonds issued by the Bank was Ps 552,531 million. For further information see
note 20 in the Consolidated Financial Statements.
As a result of this offering, Bancolombia has improved its liability
structure by extending the duration of its liabilities. This provides the Bank
with greater liquidity to fund its long-term loans, reducing reliance on
short-term borrowings and thus reducing risk. The Bank may intend to continue
and increase the use of this type of funding in the future.
Cash flows for the Bank include net cash provided for operating
activities, net cash used in investing activities and net cash provided by
financing activities. The following table shows those flows for the years ended
December 31, 2002, 2003 and 2004:
Ps million 2002 2003 2004
----------- ----------- ------------
Operating Activities Ps 546,935 Ps 602,124 Ps 572,772
Investing activities (2,315,976) (1,986,064) (2,114,804)
Financing activities 1,906,651 1,979,312 1,344,931
=========== =========== ============
In the event that the Bank has a liquidity shortfall, it might be
required to sell assets at a discount rate in order to increase liquidity. The
Bank manages this risk by analyzing the maturity of its assets and liabilities.
In addition, Management believes that the relative high volume and quality of
net liquid assets is sufficient to maintain the Bank's liquidity and its ability
to comply with its commitments when due. However, no assurance can be given
that, in the event of a liquidity shortfall, BC would not be required to sell
assets at a discount rate.
118
AS OF DECEMBER 31,
---------------------------------------------------------------------------------
% OF TOTAL % OF TOTAL % OF TOTAL
2002 FUNDING 2003 FUNDING 2004 FUNDING
------------ ---------- ------------ ---------- ------------ ----------
(Ps million, except percentages)
CHECKING DEPOSITS
Peso-denominated................. Ps 2,083,931 19.7% Ps 2,536,169 20.0% Ps 2,699,776 19.1%
Dollar-denominated............... 607,462 5.7% 1,010,023 8.0% 1,099,347 7.7%
------------ ----- ------------ ----- ------------ -----
Total.......................... 2,691,393 25.4% 3,546,192 28.0% 3,799,123 26.8%
------------ ----- ------------ ----- ------------ -----
TIME DEPOSITS
Peso-denominated................. 1,959,190 18.5% 2,432,245 19.2% 2,871,531 20.2%
Dollar-denominated............... 1,644,276 15.5% 1,805,100 14.2% 1,489,675 10.5%
------------ ----- ------------ ----- ------------ -----
Total.......................... 3,603,466 34.0% 4,237,345 33.4% 4,361,206 30.7%
------------ ----- ------------ ----- ------------ -----
SAVINGS DEPOSITS
Peso-denominated................. 2,294,374 21.6% 2,184,902 17.2% 3,395,749 23.9%
Dollar-denominated............... 104,352 1.0% 136,840 1.1% 138,864 1.0%
------------ ----- ------------ ----- ------------ -----
Total.......................... 2,398,726 22.6% 2,321,742 18.3% 3,534,613 24.9%
------------ ----- ------------ ----- ------------ -----
OTHER DEPOSITS
Peso-denominated................. 64,581 0.6% 69,403 0.5% 84,220 0.6%
Dollar-denominated............... 29,992 0.3% 57,315 0.5% 82,954 0.6%
------------ ----- ------------ ----- ------------ -----
Total.......................... 94,573 0.9% 126,718 1.0% 167,174 1.2%
------------ ----- ------------ ----- ------------ -----
INTERBANK BORROWINGS
Peso-denominated................. - 0.0% - 0.0% - 0.0%
Dollar-denominated............... 403,962 3.8% 456,059 3.6% 246,282 1.7%
------------ ----- ------------ ----- ------------ -----
Total.......................... 403,962 3.8% 456,059 3.6% 246,282 1.7%
------------ ----- ------------ ----- ------------ -----
OVERNIGHT FUNDS
Peso-denominated................. 550,807 5.2% 1,118,139 8.8% 616,494 4.3%
Dollar-denominated............... 59,351 0.6% - 0.0% - 0.0%
------------ ----- ------------ ----- ------------ -----
Total.......................... 610,158 5.8% 1,118,139 8.8% 616,494 4.3%
------------ ----- ------------ ----- ------------ -----
DOMESTIC DEVELOPMENT BANK
BORROWINGS
Peso-denominated................. 673,654 6.3% 737,417 5.8% 855,970 6.0%
Dollar-denominated............... 39,399 0.4% 18,119 0.2% 1,949 0.0%
------------ ----- ------------ ----- ------------ -----
Total.......................... 713,053 6.7% 755,536 6.0% 857,919 6.0%
------------ ----- ------------ ----- ------------ -----
BANK ACCEPTANCES OUTSTANDING
Peso-denominated................. 3,456 0.0% 8,304 0.1% 16,119 0.1%
Dollar-denominated............... 27,594 0.3% 27,529 0.2% 50,474 0.4%
------------ ----- ------------ ----- ------------ -----
Total.......................... 31,050 0.3% 35,833 0.3% 66,593 0.5%
------------ ----- ------------ ----- ------------ -----
LONG TERM DEBT
Peso-denominated................. 62,782 0.6% 71,818 0.6% 552,531 3.9%
Dollar-denominated........... - 0.0% - 0.0% - 0.0%
------------ ----- ------------ ----- ------------ -----
Total................... 62,782 0.6% 71,818 0.6% 552,531 3.9%
------------ ----- ------------ ----- ------------ -----
TOTAL FUNDING
Peso-denominated................. 7,692,775 72.5% 9,158,397 72.2% 11,092,390 78.1%
Dollar-denominated............... 2,916,388 27.5% 3,510,985 27.8% 3,109,545 21.9%
------------ ----- ------------ ----- ------------ -----
Total.......................... Ps10,609,163 100.0% Ps12,669,382 100.0% Ps14,201,935 100.0%
============ ===== ============ ===== ============ =====
B.2. FINANCIAL INSTRUMENTS AND TREASURY ACTIVITIES
The Treasury Division, through its currency desks, is able to make
all operations in local or foreign currency legally authorized in Colombia.
These include derivative operations, purchase and sale of fixed income
securities, and securities indexed to a rate or index, operations with
agreements of repurchase or resale, short sales, temporary securities transfers,
simultaneous operations, and operations on the foreign exchange market.
119
Among the Treasury Division's liquidity controls, is the daily
verification that the difference between the interbank asset funds and the
interbank liability funds does not exceed 7.5% of the sum of deposits, credits
from banks and other financial liabilities and obligations.
According to limits set by the Board of Directors, the sum of
repurchase commitments and interbank borrowings with financial entities must not
exceed 10% of the Bank's total liabilities.
With regard to investments in local and foreign currency, the
Division must verify the availability of funds for investment as well as each
investment's compatibility with the Bank's liquidity structure before taking any
additional positions.
Investments in local and foreign currencies are kept in electronic
custody by local custody providers (Deposito Centralizado de Valores - Deceval).
Foreign securities are kept in the custody of Clearstream Bank.
The Treasury Division has to comply with investment limits which are
calculated as percentage of technical capital (TC) of the Bank according to the
following classification:
CONCEPT LIMIT %
------------------------------------------------ -------
Negotiable investments, local currency 180%
Available investments for sale, local currency 100%
Investments through due date, local currency 100%
Negotiable investments, foreign currency 50%
Investments available for sale, foreign currency 50%
Investments through due date, foreign currency 50%
====
The local currency portfolio is divided into public debt, primarily
local treasury securities issued at a fixed rate or at a floating rate indexed
to inflation (TES UVR), and private debt, securities issued at a fixed rate or
at a floating rate indexed to DTF or CPI.
The foreign currency portfolio is made up of fixed rate bonds issued
by the Republic of Colombia and denominated in U.S. dollars and in Euros,
although BC is not exposed to fluctuations in the exchange rates of these
currencies, as it enters into forward sale agreements with terms of 180 and 360
days. Generally, the maximum maturity term of the securities is 10 years,
nevertheless there is a duration close to 2 years.
Additionally, the Bank trades foreign exchange forward agreements
with two main purposes:
- To protect against foreign exchange rate volatility in
its foreign exchange position (cash and investment
portfolio).
- As a speculative position through which, by selling and
buying forward agreements, the Bank takes advantage of
market opportunities.
120
In the foreign subsidiaries, the investment portfolio is held in
dollars and comprises fixed rate investments and floating rate investments, such
as those indexed to the Libor rate. With regard to the management of issuers,
the foreign subsidiaries manage Latin American issuers for which an individual
credit study has been made according to the methodology defined in the Bank's
Treasury Division guidelines. Bancolombia's investment policies do not include
restrictions regarding the maturity of the securities held in the portfolio, but
do include a target duration for the entire portfolio instead.
The Bank's investment portfolio includes among its assets credit
linked notes (CLN's) which are bought to take advantage of market opportunities.
Through the use of these instruments, BC sells credit protection against
Colombian Sovereign risk.
B.3. COMMITMENT FOR CAPITAL EXPENDITURES
See Item 4. Information on the Company - A. History and Development
of the Company - Capital Expenditures and Divestitures.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
BC is not dependent on research and development of patents or
licenses.
D. TREND INFORMATION
ECONOMIC TRENDS
The main Colombian economic variables evolved in a positive manner
during 2004, in an environment of strengthened confidence as a result of the
actions taken by the Government, and the commitment shown by entrepreneurs and
the external sector. Such evolution allows us to foresee a positive economic
behavior for 2005.
In 2004, GDP grew 3.96% and inflation increased 5.5%. At the same
time, we saw a recovery in the unemployment rate, as it fell to 12.1% at
December 31, 2004. In addition to the above, interest rates remained low and
stable, enabling favorable results in the financial sector. The real exchange
rate stayed at competitive levels despite the nominal revaluation of 13.98%.
The Colombian political environment is stable. The main Government
directives in respect of fiscal austerity and democratic security in recent
years have been clear and have contributed to economic agents having favorable
expectations. However, the greatest risk is on the fiscal front, given the level
of deficit and of public indebtedness. In the near future, we expect Congress to
consolidate and approve structural reforms, such as the pension and tax reforms,
which will contribute to strengthening better expectations.
The results of Colombia's foreign trade and international economic
relations were positive during 2004. The trade agreements in force and to be
finalized (such as the FTA with the United States) will have an important impact
on growth. Also, the political and economic situation of some of Colombia's
trade partners should not be risky for Colombian interests, though we cannot
discard all possible risks.
121
During the first months of 2005, the economy in general has
maintained the trend seen in 2004 of positive expectations for economic growth,
with low prices, stable interest rates and decreased unemployment. In the
political environment, the President maintains a high approval rating, which
stimulates foreign investment and encourages a good environment for sustaining
economic growth. Also, the Democratic Security Policy has shown positive
results, reflected by a decrease in violence indexes, thus generating incentives
for investment. In the short term, we do not foresee alterations to the foreign
policy which would affect national stability.
BC's net income amounted to Ps 127.7 billion during the quarter
ended March 31, 2005, as compared to net income of Ps 124.0 billion for the
first quarter of 2004.
Net interest income decreased to Ps 294.6 billion for the quarter
ended March 31, 2005, as compared to Ps 318.5 billion for the first quarter of
2004, even though interest on loans increased to Ps 315.6 billion as of March
31, 2005 and interest on investment securities reached Ps 111.3 billion.
Provisions for loan and interest losses amounted to Ps 32.2 billion
for the quarter ended March 31, 2005, increasing 46.2% as compared to Ps 22.0
billion for the first quarter of 2004. Net fees and net services charges
increased to Ps 112.9 billion during the first quarter of 2005, which represents
an increase of 14.3% as compared to Ps 98.8 billion for the first quarter of
2004.
Operating expenses amounted to Ps 244.9 billion for the first
quarter of 2005, which represents an increase of 10.6% compared to Ps 221.4
billion for the quarter ended March 31, 2004.
BC's total assets increased 18.0% over the year to Ps 18,218 billion
as of March 31, 2005 from Ps 15,442 billion as of March 31, 2004. Net loans
increased 27.8% over the year to Ps 10,159 billion from Ps 7,949 billion as of
March 31, 2004. The investment securities amounted to Ps 10,159 billion as of
March 31, 2005 increasing 4.6% as compared to Ps 5,082 billion as of March 31,
2004. As of March 31, 2005 the investment in debt securities accounted for 94.5%
of total investment securities.
Stockholders' equity totaled Ps 1,983 billion at the end of the
first quarter of 2005, increasing 17.2% compared to Ps 1,692 billion for the
first quarter of 2004.
As to efficiency indicators, operating expenses over total assets
dropped from 6.5% to 6.1% from March 31, 2004 to March 31, 2005, whereas
operating expenses over net operating income, without including provisions and
calculated on a yearly accrual until March, rose from 48.4% to 53.9% from March
31, 2004 to March 31, 2005. The loan portfolio quality dropped from 1.8% to
1.7%, and the loan portfolio and interest provisions over past due loans dropped
from 291.5% to 254.7% during the March 2004 - March 2005 period.
On February 28, 2005, Bancolombia entered into a merger agreement
with Conavi and Corfinsura, whereby the parties agreed to merge Conavi and
Corfinsura with and into Bancolombia, with the Bank as surviving entity. The
Merger will take place after Corfinsura has spun-off part of its investment
portfolio, which will be transferred to a new entity formed by the shareholders
of Corfinsura.
On March 28, 2005, the General Shareholders' Meetings of
Bancolombia, Conavi and Corfinsura approved the Merger Agreement.
For more information on the Merger please refer to Item 4.
Information on the Company - A. History and Development of the Company - Recent
Developments.
122
Since April 1, 2005, a new model for setting discount rates for merchants
accepting payments for sales using Visa and MasterCard debit and credit cards
went into effect in Colombia. Under this new scheme, the discount rate is
determined directly by the acquiring bank, and not by the card franchises as it
was before. The reason behind this change is for these fees to be determined
based on the financial services each applicable bank provides and on each
merchant demand for accepting cards, using objective criteria for setting each
discount rate.
This change is intended to increase competition in the market for credit card
services; therefore, discount fees are expected to drop after reviewing the
total client - bank commercial relationship , including the above-mentioned
discount rates. This expected trend could have a negative impact on the
evolution of the Bank's revenues for this service. However, the change is also
intended to help develop the payment industry in Colombia, increasing card
holder consumption in Colombian merchants and the number of transactions made,
as well as increasing the number of market segments and merchants accepting
debit and credit cards as a means of payment.
E. OFF-BALANCE SHEET ARRANGEMENTS
The following are the off-balance sheet arrangements in which BC is
involved: standby letters of credit and bank guarantees.
In order to meet the needs of its customers, BC issues financial
standby letters of credit and bank guarantees. At December 31, 2002, 2003 and
2004, outstanding letters of credits and bank guarantees issued by BC totaled Ps
429,361 million, Ps 692,795 million and Ps 559,018 million, respectively.
Financial standby letters of credit include guarantees of payment of
credit facilities, promissory notes and trade acceptances.
Bank guarantees are performance guarantees that are issued to
guarantee a customer's tender bid on a construction or systems installation
project or to guarantee completion of such projects in accordance with contract
terms. They are also issued to support a customer's obligation to supply
specified products, commodities, or maintenance or guaranty services to a third
party.
The table below summarizes at December 31, 2003 and 2004 all of BC's
guarantees where the Bank is the guarantor. The maximum potential amount of
future payments represents the notional amounts that could be lost under the
guarantees if there were a total default by the guaranteed parties, without
consideration of possible recoveries under recourse provisions or from
collateral held or pledged. Such amounts bear no relationship to the anticipated
losses on these guarantees and greatly exceed anticipated losses.
MAXIMUM POTENTIAL AMOUNT
EXPIRE WITHIN ONE YEAR EXPIRE AFTER ONE YEAR TOTAL AMOUNT OUTSTANDING OF FUTURE PAYMENTS
------------------------- ----------------------- ------------------------ ------------------------
2003 2004 2003 2004 2003 2004 2003 2004
----------- ----------- ---------- ---------- ---------- ----------- ---------- -----------
Financial standby
letters of credit Ps 384,995 Ps 402,969 Ps 842 Ps 18,674 Ps 385,837 Ps 421,643 Ps 385,837 Ps 421,643
Bank guarantees 212,557 69,104 94,401 68,271 306,958 137,375 306,958 137,375
----------- ----------- ---------- ---------- ---------- ----------- ---------- -----------
TOTAL Ps 597,552 Ps 472,073 Ps 95,243 Ps 86,945 Ps 692,795 Ps 559,018 Ps 692,795 Ps 559,018
=========== =========== ========== ========== ========== =========== ========== ===========
123
As of December 31, 2004, the bank held Ps 3.7 billion of securities
issued by the Republic of Colombia that exceeded 10% of the Bank's shareholders'
equity.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table shows BC's known contractual obligations as of
December 31, 2004:
LESS THAN 1 1-3 3-5 MORE THAN 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
--------------- ----------- ---------- ---------- -----------
(Ps millions)
Long-term debt obligations Ps 552,531 Ps 124,966 Ps 236,863 Ps 183,910 Ps 6,792
Time deposits 4,361,206 3,565,042 707,672 87,900 592
Commitments to originate loans 17,824 17,824 - - -
Commitments of repurchase of investments 559,494 559,494 - - -
Capital (finance) leases obligations 217 100 117 - -
Employee benefit plans (1) 86,353 11,443 24,367 26,603 23,940
--------------- ----------- ---------- ---------- -----------
TOTAL Ps 5,577,625 Ps4,278,869 Ps 969,019 Ps 298,413 Ps 31,324
=============== =========== ========== ========== ===========
---------------------
(1) In 2003, the Bank amortized the total actuarial calculation.
G. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following are considered critical accounting policies, given
their significant impact on the financial condition and operating performance of
BC. This information should be read together with Note 2 of the Consolidated
Financial Statements.
EVALUATION OF LOAN PORTFOLIO RISK AND DETERMINATION OF ALLOWANCES
FOR LOAN LOSSES: BC currently evaluates loan portfolio risk according to the
rules issued by the Superintendency of Banking, which establish qualitative and
quantitative standards for assigning a risk category to individual assets. The
qualitative analysis includes the evaluation of "potential weaknesses,"
"deficiencies" or "serious deficiencies" based on the existence and magnitude of
the specific factors, according to the judgment of management. For the
quantitative evaluation, the Bank first determines whether the loan has become
due and then classifies the loan according to the number of days past due.
The Superintendency of Banking requires minimum allowance levels for
each category of credit risk and each type of loan in the Bank's portfolio. In
addition, the Superintendency of Banking requires BC to maintain a general
allowance equal to 1% of the gross loan portfolio.
BC considers that the accounting estimates used in the methodology
to determine the allowance for loans losses are "critical accounting estimates"
because: (a) by its nature, the allowance requires us to make judgments and
assumptions regarding our loan portfolio, (b) the methodology used in its
determination is based on the existence and magnitude of determined factors that
are not necessarily an indication of future losses and (c) the amount of the
provision is set using a percentage based on the risk category assigned to the
loan and it is impossible to ensure that said percentage will exactly reflect
the probability of loss.
124
CONTINGENT LIABILITIES: We are subject to contingent liabilities,
including judicial, regulatory and arbitration proceedings and tax and other
claims arising from the conduct of our business activities. Allowances are
established for legal and other claims by assessing the likelihood of the loss
actually occurring as possible, probable or remote. The contingency is recorded
as a provision when all the information available indicates that it is probable
that we will incur in future disbursements for events that happened before the
balance sheet date and the amounts may be reasonably estimated. We involve
internal and external experts in assessing probability and in estimating any
amounts involved.
Throughout the life of a contingency, our internal experts may learn
of additional information that can affect the assessments about probability or
about the estimates of amounts involved. Changes in these assessments can lead
to changes in recorded allowances.
BC considers that the estimates used to determine the allowance for
contingent liabilities are "critical accounting estimates" because the
probability of their occurrence is based on our attorneys' judgment, which will
not necessarily coincide with the future outcome of the proceedings.
PENSION PLAN: The Bank and its Subsidiaries Almacenar S.A. and
Abocol apply the provisions of Decree 1517 of 1998, 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 percentages needed to complete amortization
by 2010. Under the Bank's noncontributory unfunded defined benefit pension plan,
benefits are based on length of service and level of compensation.
BC considers that the accounting estimates related to its pension
plan are "critical accounting estimates" because the determination of the
contributions to the plan involves judgments and assumptions made by the
actuaries related to the future macroeconomic and employees demographics
factors, among others.
H. RECENT U.S. GAAP PRONOUNCEMENTS
In December 2004, the FASB revised Statement No. 123, Accounting for
Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This Statement does not address the accounting for employee share
ownership plans, which are subject to AICPA Statement of Position 93-6,
Employers' Accounting for Employee Stock Ownership Plans. The Bank evaluated the
impact of applying FASB Statement 123 (R), and determined it will have no impact
on net income or stockholders' equity.
In December 2004, the FASB issued Statement No. 153, Exchanges of
Non-monetary Assets -an amendment of APB Opinion No. 29. The guidance in APB
Opinion No. 29, Accounting for Non-monetary Transactions, is based on the
principle that exchanges of non-monetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of non-monetary
assets that do not have commercial substance. The Bank does not anticipate that
the adoption of FASB Statement 153 will have a material impact on its financial
position, cash flow and results of operations.
125
In December 2004, the FASB issued Statement No. 152, Accounting for
Real Estate Time-Sharing Transactions -an amendment of FASB Statements No. 66
and 67. This Statement amends FASB Statement No. 66, Accounting for Sales of
Real Estate, to reference the financial accounting and reporting guidance for
real estate time-sharing transactions that is provided in AICPA Statement of
Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This
Statement also amends FASB Statement No. 67, Accounting for Costs and Initial
Rental Operations of Real Estate Projects, to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005. FASB Statement 152 will have no impact on the Bank's net income or
stockholders' equity.
In April 2004, the FASB issued FSP No. FAS 129-1, Disclosure
Requirements under FASB Statement No. 129, Disclosure of Information about
Capital Structure, Relating to Contingently Convertible Securities. Statement
129 applies to all contingently convertible securities, including those
containing contingent conversion requirements that have not been met and are not
otherwise required to be included in the computation of diluted EPS in
accordance with FASB Statement No. 128, Earnings per Share. To comply with
paragraph 4 of Statement 129, the significant terms of the conversion features
of the contingently convertible security should be disclosed to enable users of
financial statements to understand the circumstances of the contingency and the
potential impact of conversion. This Statement may have an impact if the Bank
issues contingently convertible securities.
In December 2003, the AICPA issued Statement of Position 03-3 ("SOP
03-3"), Accounting for Certain Loans or Debt Securities Acquired in a Transfer.
SOP 03-3 provides guidance on the accounting for differences between contractual
and expected cash flows from the purchaser's initial investment in loans or debt
securities acquired in a transfer, if those differences are attributable, at
least in part, to credit quality. Among other things, SOP 03-3: (1) prohibits
the recognition of the excess of contractual cash flows over expected cash flows
as an adjustment of yield, loss accrual or valuation allowance at the time of
purchase; (2) requires that subsequent increases in expected cash flows be
recognized prospectively through an adjustment of yield; and (3) requires that
subsequent decreases in expected cash flows be recognized as an impairment. In
addition, SOP 03-3 prohibits the creation or carrying over of a valuation
allowance in the initial accounting of all loans within its scope that are
acquired in a transfer. SOP 03-3 becomes effective for loans or debt securities
acquired in fiscal years beginning after December 15, 2004. The Bank is
evaluating the impacts of the SOP 03-3.
I. RELATED PARTY TRANSACTIONS
See Item 7. Major Shareholders and Related Party Transactions - B.
Related Party Transactions.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
On December 31, 2004, the following persons acted as current
directors, alternate directors and senior management of BC:
126
DIRECTORS
Juan Camilo Ochoa Restrepo was born in 1939. He is the President of
Suramericana de Inversiones S.A. Previously, he was President of Corfinsura S.A.
from 2000 to March 2004 and Manager of Compania de Investigaciones Economicas
Prospeccion S.A. from 1990 to 2000. He was Associate Professor in the
Mathematics and Economics Departments of the Mines Faculty of the Universidad
Nacional of Colombia from 1969 to 1973 and from 1978 to 1990, and Teaching and
Research Assistant in the Mathematics and Education Departments of the
University of California, Berkley, USA from 1973 to 1977. He also worked in the
Economics Research Department of the National Industrial Association (Asociacion
Nacional de Industriales "ANDI") from 1966 to 1969. Mr. Ochoa Restrepo worked as
Design Engineer in the Engineering Department of Integral Ltda. from 1963 to
1966.
Mr. Ochoa Restrepo is the President of the Board of Directors of
Bancolombia S.A. and is a member of the Board of Directors of Inversura S.A.,
Compania de Cementos Argos S.A., Inversiones Nacional de Chocolates S.A.,
Smurfit Carton de Colombia S.A., Tipiel S.A. and Vidrio Andino S.A.
Carlos Enrique Piedrahita Arocha was born in 1954. He has been the
President of Compania Nacional de Chocolates S.A. since 2000 and President of
Inversiones Nacional de Chocolates S.A. since 2003. He was President of Banco
Corfinsura Internacional Inc. (Puerto Rico) from 1998 to 2000, President of
Corfinsura (Corporacion Financiera Nacional y Suramericana S.A.) from 1993 to
2000, Vice President of Finance of Compania Suramericana de Seguros S.A. from
1989 to 1993, Vice President of personal banking of Banco Industrial Colombiano
from 1986 to 1989, National Manager of Credit Cards of Banco Industrial
Colombiano from 1984 to 1986, and General Manager of Suleasing S.A. from 1981 to
1984.
Mr. Piedrahita Arocha is a member of the Board of Directors of
Suramericana de Inversiones S.A., Compania de Cemento Argos S.A., Corfinsura
S.A., Inveralimenticias S.A. and Fogafin. He is also a member of the Board of
Directors of the following civic associations: Hospital San Vicente de Paul,
Corporacion de Investigaciones Biologicas CIB, Proantioquia and Consejo
Empresario de America Latina.
Jose Alberto Velez Cadavid was born in 1950. He assumed the
Presidency of Compania de Cemento Argos S.A. since November 2003. Since 1984, he
held several managerial positions at Suramericana de Seguros S.A., including
Vice President of Marketing and Sales, Vice President of Investments, Vice
President of Enterprise Development and President of Inversura S.A. and of
Suramericana de Seguros S.A.
Mr. Velez Cadavid is also member of the Board of Directors of
Suramericana de Inversiones S.A., Corfinsura S.A., Almacenes Exito S.A. and
Cementos del Caribe S.A.
Gonzalo Alberto Perez Rojas was born in 1958. He is the President of
Inversura S.A. He held different managerial positions at Compania Suramericana
de Seguros since 1981, such as Vice President of Corporate Businesses and Vice
President of Insurance and Capitalization.
Mr. Perez Rojas is also a member of the Board of Directors of
Confecciones Colombia S.A., Corfinsura S.A., Interoceanica de Seguros S.A.
(Republica de Panama) and ANDI. He is also Alternate Director of the Boards of
Directors of Compania de Cementos Argos S.A., Compania Colombiana de Tabaco S.A.
and Colombiana de Inversiones S.A.
127
Ricardo Sierra Moreno was born in 1951. He has been the President of
Productora Distrihogar S.A. since 1989. Before he had held positions as Chief
Financial Officer of Suramericana de Seguros S.A. from 1982 to 1989 and Regional
Manager of Corporacion Financiera Suramericana S.A. Corfinsura from 1979 to
1982.
Mr. Sierra Moreno is also member of the Board of Directors of
Corporacion Financiera Nacional y Suramericana S.A. Corfinsura, Industrias
Alimenticias NOEL S.A., Compania de Empaques S.A. He is also a member of the
ANDI's sectional board since 1992.
ALTERNATE DIRECTORS
Luis Mariano Sanin Echeverri was born in 1945. He has been the
President of Fabricato Tejicodor S.A. since the year 2000. Previously he was
President of Tejidos El Condor S.A. from 1996 to 2000, General Manager of
Cryogas S.A. from 1984 to 1996, Technical Vice President of Corporacion
Financiera Nacional from 1977 to 1984, Manager of Exportations and Planning of
Pantex and Fabricato from 1973 to 1977. He also held positions at the ANDI from
1968 to 1969 and from 1971 to 1973.
Mr. Sanin Echeverri is member of the Board of Directors of Compania
Colombiana de Tabaco S.A., Colombiana de Inversiones S.A, Industrias Estra S.A.,
Diagonal, Ascoltex, Inexmoda, Promotora de Hoteles S.A. and Fabrisedas.
Luis Alberto Zuleta Jaramillo was born in 1946. He is an economist
and has worked as private consultant in Economics and Finance since 1986. He
worked as a researcher at Fedesarrollo from 1987 to 1996 and from 1999 to 2004,
First Director of Fondo de Garantias de Instituciones Financieras from 1985 to
1986 and SubManager of Development of the Central Bank from 1984 to 1985. He has
also worked as consultant for different governmental institutions.
Mr. Zuleta Jaramillo is member of the Board of Directors of
Inversura S.A., Crystal S.A. and Fundacion Proninez.
German Botero Arango was born in 1948. He has been the General
Manager of Cementos El Cairo S.A. since 1986. He is also the Vice President for
corporate matters of Compania de Cementos Argos S.A. Previously he was the
Director of the Colombian Institute of Cement Producers.
Mr. Botero Arango is member of the Board of Directors of Cementos
del Valle S.A., Omya de Colombia S.A., Cementos Paz del Rio S.A., Suramericana
de Inversiones S.A., ANDI, Colombo American Chamber of Commerce and National
Parenthood Association "PROFAMILIA".
Federico Echavarria Restrepo was born in 1963. He is the General
Manager of Chivor E.S.P. Previously he was General Manager of Merilectrica
E.S.P. from 1997 to June 2004. He also was Vice President of Investment Banking
of Corfinsura S.A. from 1994 to 1997, Associate for Investment Banking - Latin
America for Merryl Lynch & Co., Inc. form 1993 to 1994 and held several
management positions at Suramericana de Seguros from 1987 to 1991.
Mr. Echavarria Restrepo is currently a member of the Board of
Directors of Acolgen (Association of Power Generators). He has been a member of
the Board of Directors of Enka de Colombia S.A. and SuValor S.A. Comisionista de
Bolsa.
Maria Angelica Arbelaez was born in 1965. She is the Vice President
of Economics of Asociacion Bancaria y de Entidades Financieras de Colombia -
ASOBANCARIA. She held different positions at Fedesarrollo from 1997 to 2004. She
was external consultant of the Organization of American States "OAS" in 1997.
She worked for the Ministry of External Commerce from 1992 to 1997.
128
SENIOR MANAGEMENT
Jorge Londono Saldarriaga has been the President of BC since 1996,
and was previously a member of its Board of Directors for three years.
Previously he was President of Suvalor S.A. Comisionista de Bolsa and Vice
President of Investing of Suramericana de Seguros. Mr. Londono Saldarriaga was
born in 1947.
Leonardo Hincapie Naranjo has been the Vice President of Risk
Management since 1996, and has held different managerial positions at BC since
1971 such as Planning Assistant, Manager of Antioquia Region, Internal
Inspector, and Vice President of Finance. Mr. Hincapie Naranjo was born in 1948.
Santiago Perez Moreno has been the Vice President of Personal and
Medium and Small Business Banking since 1998, and has held different managerial
positions at BC since 1981 such as Personal Banking Manager for Bogota Region,
International Commerce Manager for Bogota Region, and assistant at the Vice
Presidency of International Commerce. Mr. Perez Moreno was born in 1955.
Jaime Alberto Velasquez Botero has been the Vice President of
Finance since 1997. From 1988 through 1997 he held several managerial positions
in the Economic Department and Investor Relations Department. Before he had
worked at C.I. Banacol. Mr. Velasquez Botero was born in 1960.
Leonardo Uribe Correa has been the Legal Vice President and
Secretary General of BC since 1984. Before he held positions at Colcarburo S.A.,
Empresas Publicas de Medellin, Universidad Pontificia Bolivariana and Personeria
de Medellin. Mr. Uribe Correa was born in 1946.
Gabriel Jaime Agudelo Tobon is the Vice President of Services and
Technology, and has held several positions at BC since 1973. Mr. Agudelo Tobon
was born in 1952.
Gonzalo Toro Bridge has been Vice President of Corporate Banking
since 2003. Since 1988 he assumed positions as Assistant of the Vice Presidency
of Corporate and International Banking and from 1994 to 2003 as Vice President
of Corporate and International Banking. Mr. Toro Bridge was born in 1960.
Federico Ochoa Barrera has been the Executive and Services Vice
President of BC since 1998. Before the merger of Banco Industrial Colombiano and
Banco de Colombia, he held several positions at Banco de Colombia, including
National Branches Vice President, Administrative Vice President, Executive and
Commercial Vice President and Executive President. Mr. Ochoa Barrera was born in
1947.
Hernan Dario Ramirez Giraldo has been the Vice President of Internal
Audit. He has worked at BC for 18 years, holding positions such as General
Accountant, Operations Manager of FiduBIC and Internal Auditor. Mr. Ramirez
Giraldo was born in 1958.
Luis Fernando Montoya Cusso has been the Vice President of
Operations since 1998. Since 1973 he has occupied several positions at BC,
including messenger, computers assistant, Manager of Northern, Bogota and Cucuta
Regions, and Operations Manager. Mr. Montoya Cusso was born in 1954.
Jairo Burgos de la Espriella has been the Vice President of Human
Resources since 1998. Since 1990 he held several positions in the Human
Resources Department. Mr. Burgos de la Espriella was born in 1965.
129
There are no family relationships between the directors and senior
management of BC listed above.
No arrangements or understandings have been made by major
shareholders, customers, suppliers or others pursuant to which any of the above
directors or members of senior management were selected.
B. COMPENSATION
BC compensates each of its directors Ps 1,200,000 per meeting. The
directors receive no other compensation or benefit. Consistent with Colombian
law, we do not disclose to our shareholders, or otherwise make public,
information regarding the compensation of our individual officers. 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, 2004 was Ps 19,881 million.
BC has established an incentive compensation plan that awards
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 its executives achievement
of individual goals. BC's variable compensation has deferred elements and
depending on the amount awarded, the bonuses are payable 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 or Preferred 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 that are the basis of such bonuses have been sustained over
time and were not the result of a particular, extraordinary transaction that
does not reflect better performance, according to guidelines designed by the
Bank. Such elements are solely paid when certain future profits are obtained. At
December 31, 2004, based on internal analysis, there was a provision maintained
for future compensation payments in the amount of Ps 10,505 million.
The Bank paid a total of Ps 326,089 million for salaries of
personnel employed directly by the Bank and upper management of its affiliates.
The sum of Ps 12,742 million that was paid for the incentive compensation plan
is included in that amount.
C. BOARD PRACTICES
The following are the terms of office and the period during which
the principal and alternate directors have served BC, as of December 31, 2004:
FIRST ELECTED TO TERM
NAME THE BOARD EXPIRES
-------------------------------- ---------------- -------
Juan Camilo Restrepo Ochoa 2004 2006
Carlos Enrique Piedrahita Arocha 1994 2006
Jose Alberto Velez Cadavid 1996 2006
Gonzalo Alberto Perez Rojas 2004 2006
Ricardo Sierra Moreno 1996 2006
Luis Mariano Sanin 2002 2006
Luis Alberto Zuleta Jaramillo 2004 2006
German Botero Arango 2002 2006
Federico Echavarria Restrepo(1) 2002 2006
Maria Angelica Arbelaez 2004 2006
==== ====
------------------
(1) Mr. Echavarria resigned in September 2004.
130
On February 26, 2004, the General Shareholders' Meeting elected a
new Board of Directors replacing some of the previous directors. The new
elections reflect changes in the composition of the executive offices of some of
BC's major shareholders. The elected directors assumed their positions following
the presentation to and acceptance by the Superintendency of Banking in
accordance with applicable regulations.
By letter dated February 18, 2005, and taking into account the
business combination of Bancolombia, Corfinsura and Conavi, the Bank's principal
and alternate directors recommended that the General Meeting of Shareholders
elect a new Board of Directors.
On March 28, 2005, the General Meeting of Shareholders considered
the proposal and decided to ratify the principal directors of the Board and make
some changes to the alternate directors. The Board of Directors for the
remainder of the period ending in 2006 is as follows:
PRINCIPAL / FIRST ELECTED TERM
NAME ALTERNATE TO THE BOARD EXPIRES
-------------------------------- ----------- ------------- -------
Juan Camilo Restrepo Ochoa Principal 2004 2006
Carlos Enrique Piedrahita Arocha Principal 1994 2006
Jose Alberto Velez Cadavid Principal 1996 2006
Gonzalo Alberto Perez Rojas Principal 2004 2006
Ricardo Sierra Moreno Principal 1996 2006
Luis Mariano Sanin Alternate 2002 2006
Luis Alberto Zuleta Jaramillo Alternate 2004 2006
German Botero Arango Alternate 2002 2006
Carlos Mario Giraldo Moreno Alternate 2005 2006
Alejandro Gaviria Uribe Alternate 2005 2006
==== ====
The following are the current terms of office and the period during
which the members of senior management have served BC. There are no defined
expiration terms.
NAME PERIOD SERVED
------------------------------ -------------
PRESIDENT
Jorge Londono Saldarriaga Since 1996
VICE PRESIDENTS
Leonardo Hincapie Naranjo Since 1971
Santiago Perez Moreno Since 1981
Jaime Alberto Velasquez Botero Since 1988
Leonardo Uribe Correa Since 1984
Gabriel Jaime Agudelo Tobon Since 1973
Gonzalo Toro Bridge Since 1988
Federico Ochoa Barrera Since 1984
Hernan Dario Ramirez Giraldo Since 1985
Luis Fernando Montoya Cusso Since 1973
Jairo Burgos de la Espriella Since 1990
==========
Neither BC nor its Subsidiaries have any service contracts with BC's
directors providing for benefits upon termination of employment.
131
BC, in accordance with the requirements of External Circular 007 of
2001 issued by the Superintendency of Banking, has an audit committee whose main
purpose is to support the Board of Directors in supervising the effectiveness of
the Bank's internal controls. The committee consists of three directors who are
elected by the Board of Directors for a period of two years, one of whom must be
a financial expert. The current members are Luis Alberto Zuleta Jaramillo, Jose
Alberto Velez Cadavid, and Ricardo Sierra Moreno. The audit committee may also
designate independent advisors to support its activity.
As established by the Superintendency of Banking, the audit
committee has a charter that establishes its composition, organization,
objectives, duties, responsibilities and extension of its activities. The audit
committee must meet at least quarterly and must present a report of its
activities at the General Shareholders' Meeting.
BC currently complies with applicable requirements of the Sarbanes
Oxley Act of 2002 for foreign issuers with respect to the composition and
functions of its audit committee, and the rules thereunder by the Securities and
Exchange Commission. As soon as they are applicable to foreign issuers, BC will
comply with any additional requirements required.
The Board of Directors of BC has established a remuneration
committee whose members are Ricardo Sierra Moreno and Carlos Enrique Piedrahita.
The main function of this committee is to determine policies for hiring,
compensation and development of the Bank's executive officers. The committee
will also supervise the goals established in the compensation programs and
recommend the adoption of new remuneration programs for BC's executive officers.
D. EMPLOYEES
The following table sets forth the number of employees of BC for the
last three fiscal years:
TOTAL NUMBER OF EMPLOYEES EMPLOYED
BY BC AND ITS CONSOLIDATED NUMBER OF EMPLOYEES EMPLOYED
AS OF DECEMBER 31 SUBSIDIARIES BY BC DIRECTLY
----------------- ---------------------------------- ----------------------------
2002 7,581 6,364
2003 8,001 6,473
2004 8,609 7,027
===== =====
On December 31, 2004, Bancolombia and its consolidated Subsidiaries
had 8,609 employees of which 7,027 were employed directly by the Bank. Of the
7,027 employees directly contracted by the Bank, 4,956 belong to operations
personnel and 2,071 are management employees. Of the 7,027 employees,
approximately 28.65% are located in the Bogota Region, 15.45% in the South
Region, 13.12% in the Antioquia Region, 20.76% in the Medellin headquarters,
11.57% in the Central Region and 10.45% in the North Region. During 2004, the
Bank contracted an average of 110 employees per month through temporary
personnel service companies. Of the employees, approximately 22.39% belong to a
labor union called Sintrabancol and 11.73% are members of an industry union
called UNEB. A collective bargaining agreement with both unions has been in
effect since November 1, 2003 and is set to expire on October 31, 2005.
The Bank is satisfied with the existing collective bargaining
agreement, both for the labor costs and its implications, as well as for the
relationship it has helped to develop with the labor unions and BC employees.
132
E. SHARE OWNERSHIP
The following directors and managers owned Common Shares in BC as of
December 31, 2004: Juan Camilo Ochoa Restrepo, Ricardo Sierra Moreno, Gonzalo
Alberto Perez Rojas, German Botero Arango, Jorge Londono Saldarriaga, Luis
Santiago Perez Moreno and Gonzalo Toro Bridge. None of their shareholdings,
individually or in the aggregate, exceeded 1% of BC's outstanding Common Shares.
Luis Santiago Perez Moreno is the only executive officer of BC who
owned any Preferred Shares in BC as of December 31, 2004. His shareholding did
not exceed 1% of BC's outstanding Preferred Shares.
As of December 31, 2004, BC had no outstanding options to acquire
any of its outstanding Common Shares or Preferred Shares.
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 by each person known to BC to own beneficially more than 5% of
each class of BC's outstanding capital stock as of December 31, 2004. A
beneficial owner includes anyone who has the power to receive the economic
benefit of ownership of the securities.
% OWNERSHIP OF % OWNERSHIP OF
COMMON PREFERRED COMMON PREFERRED
NAME SHARES SHARES SHARES(1) SHARES(1)
------------------------------------------------ ----------- ----------- -------------- --------------
Suramericana de Inversiones and Subsidiaries (2) 157,594,234 65,000 39.6% 0.0%
Cementos Argos and Subsidiaries (3) 55,613,665 7,727,568 14.0% 4.3%
ADR Program - 106,602,171 - 59.7%
Subsidiaries of Mercantil de Servicios
Financieros C.A. 32,866,714 - 8.3% -
Fondo de Pensiones Obligatorias Proteccion S.A. 5,449,375 23,046,773 1.4% 12.9%
Emmery Equity Corporation 24,387,619 - 6.1% -
Lorange Industrial Corporation 20,612,331 - 5.2% -
=========== =========== ==== ====
-----------------------
(1) Common shares have one vote per share; Preferred Shares have limited
voting rights under certain circumstances specified in the by-laws of BC
filed as Exhibit 1 to this Annual Report.
(2) Represents ownership of Suramericana de Inversiones S.A. directly and
through its subisidiaries Portafolio de Inversiones Suramericana S.A.,
Fideicomiso Citirust-Suramericana-IFC, Inversiones SPC S.A., Compania
Suramericana de Construcciones S.A., Cia. Suramericana de Seguros de Vida
S.A and Suramericana Administradora de Riesgos Profesionales y Seguros
SURATEP.
(3) Represents ownership of Compania de Cementos Argos S.A. directly and
through its subsidiaries Cementos del Valle S.A. and Cementos del Nare
S.A.
133
As of December 31, 2004 a total of 398,259,608 Common Shares and
178,435,787 Preferred Shares were registered in the Bank's shareholder registry
in the name of 15,892 shareholders. As of December 31, 2004, a total of
106,602,171 Preferred Shares, representing 59.7% of outstanding Preferred
Shares, were directly held by one record holder in the United States. No Common
Shares were held by record holders in the United States.
There has not been any significant changes in the percentage
ownership held by any major shareholder during the past three years.
Major shareholders of the Bank do not have different voting rights.
They all vote according to their participation in the Bank's outstanding shares.
There are no arrangements known to the company whose operation may
at a subsequent date result in a change in control of the company.
To the extent known to the Bank, and in accordance with Colombian
law, BC is not directly or indirectly owned or controlled by any other entity or
person.
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 presented other unfavorable features.
None of the related party transactions are considered material to
the company or to the related party and there are no transactions that are
unusual in their nature or conditions.
BC had a total amount of Ps 20,130 million of loans outstanding to
related parties (for purposes of United States securities laws). This amount
includes the largest amount outstanding as of May 31, 2005, which is a working
capital loan to Multienlace S.A. outstanding for Ps 2,897 million and accrued
interest for Ps 62 million. The average rate for this loan is 12.26%.
During 2004, significant balances and transactions with related
parties were as follows:
134
2004
ENTERPRISES THAT DIRECTLY OR INDIRECTLY
THROUGH ONE OR MORE INTERMEDIARIES,
CONTROL
OR ARE CONTROLLED BY, OR ARE UNDER
COMMON CONTROL WITH, THE COMPANY
AND ASSOCIATES KEY MANAGEMENT PERSONNEL (1)
--------------------------------------- ----------------------------
(Ps million)
BALANCE SHEET
Investment securities Ps 21,443 Ps -
Loans 5,135 14,995
Customers' acceptances
and derivatives 27 -
Accounts receivable 9,958 3,045
-------------------- -----------------
TOTAL Ps 36,563 Ps 18,040
==================== =================
Deposits Ps 254,581 Ps 812
Overnight funds 106 -
Account Payable - -
Bonds 21,500 -
-------------------- -----------------
TOTAL Ps 276,187 Ps 812
==================== =================
TRANSACTIONS INCOME
Dividends received Ps 25,814 Ps -
Interest and fees 2,846 1,626
Other 354 -
-------------------- -----------------
TOTAL Ps 29,014 Ps 1,626
==================== =================
EXPENSES
Interest Ps 11,687 Ps 14
Fees - 99
Other - -
-------------------- -----------------
TOTAL Ps 11,687 Ps 113
==================== =================
---------------------
(1) For 2004, includes, in addition to the members of the Board of Directors,
the President and the Vice-Presidents, as well as other employees who have
legal representation of the Bank.
C. INTEREST OF EXPERTS AND COUNSEL
Not applicable.
135
ITEM 8. FINANCIAL INFORMATION.
A. CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
A.1. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to pages F- 1 through F - 115.
A.2. LEGAL PROCEEDINGS
The Bank (unconsolidated) 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 commercial and civil
litigation outstanding at December 31, 2004 amounting to Ps 317,378 million. As
of December 31, 2004, Ps 12,185 million of these liabilities are covered in a
guarantee contract entered into by Fogafin and private investors when Banco de
Colombia was sold to investors. This guarantee contract remains in force in
connection with litigation that was commenced before the privatization of Banco
de Colombia. In the opinion of management, after consultation with its external
Colombian legal counsel, the outcome of these contingent liabilities relating to
ordinary commercial and civil 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 at December 31, 2004 of Ps 13,933 million.
OTHER LEGAL PROCEEDINGS
The legal claims in which the Bank has been linked as defendant are
duly provisioned in the cases required, in accordance with Colombian
regulations, as shown in the notes to the financial statements. No event has
occurred in said legal proceedings that may significantly and negatively impact
the regular course of business of the Bank or its results.
In 2004 an arbitration process was initiated by the Bank under the
auspices of the Bogota Chamber of Commerce to resolve certain claims related to
hidden contingencies and liabilities that the Bank believes are payable by the
former owners of Banco de Colombia. This arbitration is currently in the
discovery stage. BC's claim under this suit amounts to approximately Ps 50,614
million, not including interest updates.
With respect to the criminal investigation initiated by the sellers
of Banco de Colombia against some of the managers of the Bank, the prosecutor's
office before the Colombian Criminal Supreme Court confirmed on July 8, 2004 the
previous decision of the Special Unit of the prosecutor's office for Crime
against Public Administration dated December 26, 2003 declining to initiate
criminal action against the President and some of the Vicepresidents of the
Bank.
The prosecutor's office's decision is final and there is no appeal
against it. Civil liability of the Bank for these actions also cannot be
claimed.
136
In relation to the arbitration initiated by Luis Alberto Duran
Valencia and other minority shareholders of the former Banco de Colombia, by
means of a class action, the arbitration award was finalized on January 30,
2004. The Arbitration Tribunal decided that the announced capitalization by BIC
to the Superintendency of Banking on September 19, 1997 for an amount equal to
US$ 150 million, as one of the sources for the financing of the acquisition of
51% of the shares of Banco de Colombia, constituted a binding commitment that
should have been duly fulfilled by BIC. Notwithstanding the foregoing, the
failure of BIC to complete the capitalization is easily explained. BIC issued
and offered shares to its shareholders on January 5, 1998, at a price of Ps
3,800 per share, for a total of Ps 190,760 million. At the exchange rate at that
time, the relevant shares were valued at the announced US$ 150 million, but
included a term for placement of 45 days and did not allow for dividends during
the first year. During the 45 day placement term, the price of the shares
decreased, and it became less expensive to purchase shares in the secondary
markets which included the right to a dividend than to purchase the offered
shares with no dividend. For the foregoing reason, the minority shareholders of
BIC did not subscribe Ps 72,123 million of the offering, with the result being
that the major shareholders contributed only Ps 118,636 million in total.
The fact of not totally completing the capitalization announced
caused, pursuant to the Tribunal's point of view, a liability for the Bank which
generated damages to the shareholders of the former Banco de Colombia who
entered the merged institution proportionately to their participation in said
institution. The damages are estimated at Ps 14,646 million, which updated for
inflation and interest, equal Ps 22,208 million, but after deductions ordered by
the same Tribunal, leave the Bank with a net liability of Ps 19,214 million
under the decision.
Other claims for an amount close to Ps 400,000 million were resolved
in favor of the Bank by the Tribunal.
Mr. Rafael H. Gamboa, one of the members of the arbitral panel,
abstained from voting because he believed that BIC's conduct during the process
of the merger conformed to the legal norms in force and to the acts of the
regulatory authorities, a conclusion that was also reached by the
Superintendency of Banking.
The Bank has filed an extraordinary proceeding of annulment of the
above mentioned arbitration award before the Superior Tribunal of Bogota by
means of which the Bank requests such Tribunal to determine if the arbitrators'
decision was taken according to current Colombian procedure and regulations. The
proceeding of annulment refers exclusively to the award against Bancolombia. In
all matters favorable to the Bank, the arbitration award is final.
On June 2, 2004, another arbitration was initiated by the Sellers of
Banco de Colombia against Bancolombia and some of its administrators, based on
charges similar to those presented in the past before various administrative and
judicial authorities, related to the process of acquisition by BIC of a majority
of the stock of the old Banco de Colombia and the later merger of both entities.
The arbitration will be decided by an arbitral tribunal in Bogota,
Colombia. This proceeding is currently in the discovery stage.
Additional information of the Bank (unconsolidated) and its
Subsidiaries on these and other legal proceedings may be found in Note 26 to
Consolidated Financial Statements.
137
A.3. DIVIDEND POLICY
The declaration, amount and payment of dividends is based on BC's
unconsolidated earnings. 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 in issued stock of Bancolombia, 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 dividend per share
requirement of 50% or 70%, as the case may be, may be waived by an affirmative
vote of the holders of 78% of the 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;
- second, to the payment of the minimum dividend on the
Preferred Shares (for more information, see Item 10.
Additional Information - B. Memorandum and Articles of
Association); and
- third, as may be determined in the ordinary annual
shareholders' meeting by the vote of the holders of a
majority of the 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.
The following table sets forth the annual cash dividends paid on
each Common Share and each Preferred 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)
---------------------------------------- --------------- ---------------
(Ps) (U.S. DOLLARS)
2000.................................... 36 0.016
2001.................................... 84 0.036
2002.................................... 132 0.045
2003.................................... 272 0.101
2004.................................... 376 0.159
---------------
(1) Includes Common Shares and Preferred Shares.
(2) Cash dividends were 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).
B. SIGNIFICANT CHANGES
There has not been any significant change since the date of the
annual financial statements included in this document.
138
ITEM 9. THE OFFER AND LISTING.
A. OFFER AND LISTING DETAILS
BC is a 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 Preferred
Shares on the Medellin Stock Exchange until July 3, 2001, when the Medellin
Stock Exchange, the Bogota Stock Exchange and the Occidente Stock Exchange
merged to form the Colombian Stock Exchange (expressed in nominal pesos). The
table also sets forth the reported high and low sale prices, and the trading
volume of the ADSs on the NYSE for the periods indicated:
MEDELLIN/COLOMBIA STOCK EXCHANGE NEW YORK STOCK EXCHANGE
-------------------------------- ----------------------------------
Ps PER PREFERRED SHARE US$ PER ADS
-------------------------------- --------------- TRADING VOLUME
HIGH LOW HIGH LOW (NUMBER OF ADSs)
---------------- ---------- ----- ---- ----------------
YEAR ENDING
December 29, 2000 1,550 1,550 4.90 1.80 5,304,200
December 31, 2001 1,300 650 3.20 1.00 4,702,300
December 31, 2002 1,800 1,025 2.88 1.35 8,195,800
December 31, 2003 3,800 1,750 5.35 2.32 9,789,400
December 31, 2004 9,030 3,839 14.12 5.30 31,487,800
Source: NYSENet (Composite Index), Medellin Stock Exchange and Colombia Stock
Exchange.
COLOMBIA STOCK EXCHANGE NEW YORK STOCK EXCHANGE
--------------------------------- --------------------------------
Ps PER PREFERRED TRADING
SHARES VOLUME US$ PER ADS
---------------- (NUMBER OF ------------ TRADING VOLUME
HIGH LOW SHARES) HIGH LOW (NUMBER OF ADSs)
----- ----- ---------- ----- ---- ----------------
(in nominal pesos)
2003
First quarter 2,100 1,750 5,558,711 2.99 2.32 1,314,400
Second quarter 3,610 2,030 5,141,347 5.15 2.70 1,724,300
Third quarter 3,800 3,400 11,882,892 5.35 4.35 3,067,000
Fourth quarter 3,760 3,449 31,504,803 5.35 4.70 3,683,700
2004
First quarter 5,690 3,839 31,425,717 7.56 5.30 11,619,300
Second quarter 5,420 4,040 17,645,435 8.05 6.20 5,671,600
Third quarter 5,590 3,945 13,801,666 8.89 6.23 4,276,600
Fourth quarter 9,030 5,180 18,496,334 14.12 7.86 9,920,300
2005
First quarter 9,680 7,670 10,303,797 17.78 12.40 17,090,700
Source: Colombia Stock Exchange, NYSENet (Composite Index).
139
COLOMBIA STOCK EXCHANGE
----------------------- NEW YORK STOCK EXCHANGE
Ps PER PREFERRED SHARE US$ PER ADS
----------------------- -------------- TRADING VOLUME
HIGH LOW HIGH LOW (NUMBER OF ADSs)
----- ----- ----- ----- ----------------
MONTH
December 2004 8,300 6,650 14.25 10.90 3,962,200
January 2005 8,250 7,670 14.38 12.54 3,721,700
February 2005 9,680 8,150 16.74 13.69 5,462,000
March 2005 9,550 7,980 17.78 12.40 7,907,000
April 2005 9,010 8,180 15.45 13.30 2,387,500
May 2005 8,900 8,190 15.15 13.83 2,855,800
Source: NYSENet (Composite Index) 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 or Calle 30A No. 6-38, Bogota, Colombia. The Depositary's principal
executive office is located at One Wall Street, New York, New York 10286.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
BC's ADSs, each of which represents the right to receive four
Preferred Shares deposited in Colombia with the Custodian under the Deposit
Agreement, have been listed on the NYSE since July 1995. The Preferred 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 Preferred Shares. On
September 30, 1998, BC filed a registration statement with the Commission to
register the Preferred Shares issued in connection with the merger between BIC
and Banco de Colombia in the form of ADRs, for resale by the holders into the
U.S. public market from time to time. On March 14, 2005, BC filed an amendment
to the registration statement deregistering the remaining unsold shares.
On December 31, 2004, 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 Preferred Shares outstanding, of which 106,602,171 were directly
held by record holders in the United States (represented by 26,650,543 ADSs).
Because certain of the Preferred Shares and ADSs are held by nominees, the
number of record holders may not be representative of the number of beneficial
owners.
140
The Colombian Stock Exchange is the principal non-U.S. trading
market for the Preferred Shares. As of December 31, 2004, the market
capitalization for BC's Preferred Shares on the Colombian Stock Exchange was Ps
1,445,330 trillion. There are no official market makers or independent
specialists 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, 2004, was Ps 59,336,819
trillion, with 106 companies listed as of that date. A substantial portion of
the trading on the Colombian Stock Exchanges consists of trading in debt
securities.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
BC'S CORPORATE PURPOSE
Pursuant to Article Five of its by-laws, BC's corporate purpose
consists of all kinds of banking operations, business, acts and services.
Subject to applicable law, BC may carry out all the activities and investments
authorized to banking establishments. BC is authorized to participate in the
capital stock of other companies, subject to any restrictions imposed by
applicable law.
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BOARD OF DIRECTORS
The directors of BC must abstain from participating, directly or
through an intermediary, in their own interest or in the interest of a third
party, in activities that may compete against the company or in
conflict-of-interest transactions, unless the General Shareholders Meeting
grants express authorization to such director. For such purposes, the directors
shall provide the Shareholders Meeting with all the relevant information
necessary for the meeting to reach a decision. If the director is a shareholder,
his or her vote shall be excluded from the respective decision process. In any
case, the General Shareholders Meeting will only grant its authorization if the
act does not impair BC's interests.
The Shareholders Meeting, not the Board of Directors Meeting, is the
corporate body entitled to determine the compensation to be granted to
directors.
Pursuant to the by-laws of BC, the Board of Directors has the power
to authorize the execution of any agreement, within the corporate purpose of BC,
and to adopt the necessary measures in order for the Bank to accomplish its
purpose, but these do not provide for any specific borrowing powers exercisable
by the Board of Directors.
The by-laws of BC do not provide for: (i) any age limit requirement
for the retirement or non-retirement of directors or (ii) any number of shares
required for director's qualification.
DESCRIPTION OF SHARE CAPITAL
VOTING RIGHTS
Common Shares
The holders of Common Shares will be entitled to vote on the basis
of one vote per share on any matter put to a vote to the shareholders at any
general shareholders' meeting. These general meetings may be ordinary meetings
or extraordinary meetings. Ordinary general meetings occur at least once a year
during the three months after the end of the prior fiscal year, for the
following purposes:
- to consider the approval of BC's annual report,
including the financial statements for the preceding
fiscal year;
- to review the annual report of the external auditor;
- to determine the compensation for the members of the
Board of Directors, the External Auditor and the Client
Representative ("Defensor del Cliente").(6)
- to elect directors, the Client Representative and the
External Auditor (each for a two-year term); and
- to determine the dividend policy and the allocation of
profits, if any, of the preceding fiscal year, as well
as any retained earnings from previous fiscal years.
------------
(6) The Client Representative acts as spokesman of the clients and users
before the Bank, his primary duty is to objectively solve, free of charge
and within the terms established by law, the individual complaints
submitted by clients.
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Directors are elected under a proportional representation voting
system. Under that system:
- each holder of Common Shares is entitled at the annual
general shareholders' meeting to nominate for election
one or more directors;
- each nomination of one or more directors constitutes a
group for the purposes of the election;
- each group of nominees must contain a hierarchy as to
the order of preference for nominees in that group to be
elected;
- once all groups have been nominated, holders of Common
Shares may cast one vote for each common share held in
favor of a particular group of nominees. Votes may not
be cast for particular nominees in a group; they may be
cast only for the entire group;
- the total number of votes cast in the election is
divided by the number of directors to be elected. The
resulting quotient is the quota of votes necessary to
elect particular directors. For each time that the
number of votes cast for a group of nominees is
divisible by the quota of votes, one nominee from that
group is elected, in the order of the hierarchy of that
group; and
- when no group has enough remaining votes to satisfy the
quota of votes necessary to elect a director, any
remaining board seat or seats are filled by electing the
highest remaining nominee from the group with the
highest number of remaining votes cast until all
available seats have been filled.
Extraordinary general shareholders' meetings may take place when
duly called for a specified purpose or purposes, or, without prior notice, when
holders representing all outstanding shares entitled to vote on the issues
presented are present at the meeting.
Quorum for both ordinary and extraordinary general shareholders'
meetings to be convened at first call requires the presence of two or more
shareholders representing at least half plus one of the outstanding shares
entitled to vote at the relevant meeting. If a quorum is not present, a
subsequent meeting is called at which the presence of two or more holders of
shares entitled to vote at the relevant meeting constitutes a quorum, regardless
of the number of shares represented. General meetings (whether ordinary or
extraordinary) may be called by the Board of Directors, the President or the
External Auditor of BC. In addition, two or more shareholders representing at
least 20% of the outstanding shares have the right to request that a general
meeting be convened. Notice of ordinary general meetings must be published in
one newspaper of wide circulation at BC's principal place of business at least
15 business days prior to an ordinary general meeting. Notice of extraordinary
general meetings, listing the matters to be addressed at such a meeting must be
published in one newspaper of wide circulation at BC's principal place of
business at least five business days prior to an extraordinary general meeting.
Except when Colombian law or BC's by-laws require a special
majority, action may be taken at a general meeting by the vote of two or more
shareholders representing a majority of Common Shares present. Pursuant to
Colombian law and/or BC's by-laws, special majorities are required to adopt the
following corporate actions:
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- a favorable vote of at least 70% of the Common Shares
represented at a general shareholders' meeting is
required to approve the issuance of stock without
granting a preemptive right in respect of that stock in
favor of the shareholders;
- a favorable vote of at least 78% of the holders of
Common Shares present to decide not to distribute as
dividend at least 50% of the annual net profits of any
given fiscal year as required by Colombian law;
- a favorable vote of at least 80% of the holders of
shares present to approve the payment of a stock
dividend; and
- a favorable vote of at least 70% of the holders of
Common Shares and of subscribed Preferred Shares to
effect a decision to impair the conditions or rights
established for such Preferred Shares, or a decision to
convert those Preferred Shares into Common Shares.
Adoption of certain of the above-mentioned corporate actions also
requires the favorable vote of a majority of the Preferred Shares as specified
by Colombian law and the by-laws. If the Superintendency of Banking determines
that any amendment to the by-laws fails to comply with Colombian law, it may
demand that the relevant provisions be modified accordingly. Under these
circumstances, BC will be obligated to comply in a timely manner.
Preferred Shares
The holders of Preferred Shares are not entitled to receive notice
of, attend or vote at any general meeting of holders of Common Shares except as
described below.
The holders of Preferred Shares will be entitled to vote on the
basis of one vote per share at any shareholders' meeting, whenever the
shareholders vote on the matters described on Item 3. Key Information - D. Risk
Factors - D.3. Risks Relating to Our ADRs - D.3.iii. Our Preferred Shares Have
Limited Voting Rights.
BC will cause a notice of any meeting at which holders of Preferred
Shares are entitled to vote to be mailed to each record holder of Preferred
Shares. Each notice will include a statement stating:
- the date of the meeting;
- a description of any resolution to be proposed for
adoption at the meeting on which the holders of
Preferred Shares are entitled to vote; and
- instructions for the delivery of proxies.
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DIVIDENDS
Common Shares
The holders of Common Shares, once they have approved the financial
statements, determine the allocation of distributable profits, if any, for the
preceding year. This is done by a resolution adopted by the vote of the holders
of a majority of the Common Shares at the annual general meeting of holders of
Common Shares pursuant to the recommendation of the Board of Directors and
President.
Under the Colombian Commerce Code, a company must, after payment of
income taxes and appropriation of legal reserves, and after off-setting losses
from prior fiscal years, distribute at least 50% of its annual net profits to
all shareholders, payable in cash, or as determined by the shareholders, within
a period of one year following the date on which the shareholders determine the
dividends. If the total amount segregated in all reserves of a company exceeds
its outstanding capital, this percentage is increased to 70%. The minimum common
stock dividend requirement of 50% or 70%, as the case may be, may be waived by a
favorable vote of the holders of 78% of a company's common stock present at the
meeting.
Under Colombian law and BC's by-laws annual net profits are to be
applied as follows:
- first, an amount equivalent to 10% of net profits is
segregated to build a legal reserve until that reserve
is equal to at least 50% of BC's paid-in capital;
- second, payment of the minimum dividend on the Preferred
Shares; and
- third, allocation of the balance of the net profits is
determined by the holders of a majority of the Common
Shares entitled to vote on the recommendation of the
Board of Directors and President and may, subject to
further reserves required by the by-laws, be distributed
as dividends.
Under Colombian law, the dividends declared on the Common Shares
cannot exceed the dividends declared on the Preferred Shares. BC's by-laws
require it to maintain a reserve fund equal to 50% of paid-in capital. All
Common Shares that are fully paid and outstanding at the time a dividend or
other distribution is declared are entitled to share equally in that dividend or
other distribution. Common shares that are only partially-paid participate in a
dividend or distribution in the same proportion that those shares have been paid
at the time of the dividend or distribution.
The general shareholders' meeting may allocate a portion of the
profits to welfare, education or civic services, or to support economic
organizations of the Bank's employees.
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Preferred Shares
Holders of Preferred Shares are entitled to receive dividends based
on the profits of the preceding fiscal year, after canceling losses affecting
the capital and once the amount that shall be legally set apart for the legal
reserve has been deducted, but before creating or accruing for any other
reserve, of a minimum preferred dividend equal to one per cent (1%) yearly of
the subscription price of the Preferred Share, provided this dividend is higher
than the dividend assigned to Common Shares, in which case, the dividend shall
be increased to an amount that is equal to the per share dividend on the Common
Shares. The dividend received by holders of Common Shares may not be higher than
the dividend assigned to Preferred Shares.
Payment of the preferred dividend shall be made at the time and in
the manner established by the general shareholders' meeting and with the
priority indicated by Colombian law.
In the event that the holders of Preferred Shares have not received
the minimum dividend for a period in excess of two consecutive fiscal years,
they will acquire voting rights. See Item 3. Key Information - D. Risk Factors -
D.3. Risks Relating to Our ADRs - D.3.iii. Our Preferred Shares Have Limited
Voting Rights.
General
The dividend periods may be different from the periods covered by
the general balance sheet. The general shareholders' meeting will determine such
dividend periods, the effective date, the system and the place for payment of
dividends.
Dividends declared on the Common Shares and the Preferred Shares
will be payable to the record holders of those shares, as they appear on BC's
stock registry, on the appropriate record dates as determined by the general
shareholders' meeting.
Any stock dividend payable by BC will be paid in Common Shares to
the holders of Common Shares and in Preferred Shares to the holders of Preferred
Shares. Nonetheless, a general shareholders' meeting may authorize the payment
in Common Shares to all shareholders.
Any stock dividend payable in Common Shares requires the approval of
80% or more of the shares present at a shareholders' meeting, which will include
80% or more of the outstanding Preferred Shares. In the event that none of the
holders of Preferred Shares is present at such meeting, a stock dividend may be
paid to the holders of Common Shares that approve such a payment.
Liquidation Rights
BC will be dissolved if certain events take place, including the
following:
- its term of existence, as stated in the by-laws, expires
without being extended by the shareholders prior to its
expiration date;
- losses cause the decrease of its shareholders' equity
below 50% of its outstanding capital stock, unless one
or more of the corrective measures described in the
Colombian Commerce Code are adopted by the shareholders
within six months;
- by decision of the general shareholders' meeting.
- in certain other events expressly provided by law and in
the by-laws.
146
Upon dissolution, a liquidator must be appointed by a general
meeting of the shareholders to wind up its affairs. In addition, the
Superintendency of Banking has the power to take over the operations and assets
of a commercial bank and proceed to its liquidation under certain circumstances
and in the manner prescribed in the Estatuto Organico del Sistema Financiero
Decree 663 of 1993.
Upon liquidation, holders of fully paid Preferred Shares will be
entitled to receive in pesos, out of the surplus assets available for
distribution to shareholders, pari passu with any of the other shares ranking at
that time pari passu with the Preferred Shares as regards participation in BC's
surplus assets or the liquidation parity shares, a liquidation distribution of
an amount equal to the subscription price of those Preferred Shares before any
distribution or payment may be made to holders of Common Shares and any other
shares at that time ranking junior to the Preferred Shares as regards BC's
participation in BC's surplus assets. If, upon any liquidation, assets that are
available for distribution among the holders of Preferred Shares and liquidation
parity shares are insufficient to pay in full their respective liquidation
preferences, then those assets will be distributed among those holders pro rata
in accordance with the respective liquidation preference amounts payable to
them.
Subject to the preferential liquidation rights of holders of
Preferred Shares, all fully paid Common Shares will be entitled to participate
equally in any distribution upon liquidation. Partially paid Common Shares must
participate in a distribution upon liquidation in the same proportion that those
shares have been paid at the time of the distribution.
To the extent there are surplus assets available for distribution
after full payment to the holders of Common Shares of the initial subscription
price of the Common Shares, the holders of shares of capital stock will be
entitled to receive an amount per share equivalent to the difference between the
initial subscription price paid on each of their respective shares and the
highest subscription price paid, on any given time, in the issuance of any
series or our Preferred Shares. Any surplus assets available after such a
distribution is effected will be distributed among all holders of shares of
capital stock pro rata in accordance with their respective holdings of shares.
Preemptive Rights and Other Anti-Dilution Provisions
Pursuant to the Colombian Commerce Code, BC is allowed to have an
amount of outstanding capital stock smaller than the authorized capital stock
set out in its by-laws. Under BC's by-laws, the holders of Common Shares
determine the amount of authorized capital stock, and the Board of Directors has
the power to (a) order the issuance and regulate the terms of subscription of
Common Shares up to the total amount of authorized capital stock and (b)
regulate the issuance of shares with rights to a preferential dividend but
without the right to vote, when expressly delegated by the general shareholders'
meeting. The issuance of Preferred Shares must always be first approved by the
general shareholders' meeting, which shall determine the nature and extent of
any privileges, according to the by-laws and Colombian law.
At the time a Colombian company is formed, its outstanding capital
stock must represent at least 50% of the authorized capital. Any increases in
the authorized capital stock or decreases in the outstanding capital stock must
be approved by the majority of shareholders required to approve a general
amendment to the by-laws. Pursuant to Decree 663, the Superintendency of Banking
may order a commercial bank to increase its outstanding capital stock under
certain special circumstances.
147
The Bank's by-laws and Colombian law require that, whenever the Bank
issues new shares of any outstanding class, it must 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 ownership of the aggregate
capital stock of the Bank. These rights are called preemptive rights. See Item
3. Key Information - D. Risk Factors - D.3. Risks Relating to Our ADRs - D.3.iv.
Preemptive Rights May Not Be Available to Holders of ADRs.
A general meeting of shareholders may suspend preemptive rights
with respect to a particular capital increase by a favorable vote of at least
70% of the shares represented at the meeting. Preemptive rights must be
exercised within the period stated in the share placement terms of the increase,
which cannot be shorter than 15 business days following the publication of the
notice of the public offer of that capital increase. From the date of the notice
of the share placement terms, preemptive rights may be transferred separately
from the corresponding shares.
The Superintendency of Banking will authorize decreases in the
outstanding capital stock decided by the holders of Common Shares only if:
- BC has no liabilities;
- BC's creditors consent in writing; or
- the outstanding capital stock remaining after the
reduction represents at least twice the amount of BC's
liabilities.
No Redemption
Colombian law prohibits BC from repurchasing shares of its capital
stock, including the Preferred Shares.
C. MATERIAL CONTRACTS
On December 29, 2003, BC and certain of its subsidiaries acquired
99.99% of Compania Suramericana de Financiamiento Comercial S.A.
Sufinanciamiento from Portafolio de Inversiones Suramericana S.A., Compania
Suramericana de Inversiones S.A., Compania Suramericana de Construcciones S.A.,
Corporacion Financiera Nacional y Suramericana S.A. Corfinsura, and Fundacion
Suramericana. The purchase price paid by BC and its relevant subsidiaries was Ps
75,016 million.
On February 28, 2005, Bancolombia, Conavi Banco Comercial y de
Ahorro S.A. and Corporacion Financiera Nacional y Suramericana S.A. Corfinsura
entered into a merger agreement, whereby the parties agreed to merge Conavi and
Corfinsura with and into the Bank, as surviving entity, after Corfinsura has
spun-off part of its investment portfolio, which will be transferred to a new
entity formed by the shareholders of Corfinsura. Detailed information on this
agreement can be found in Item 4. Information on the Company - A. History and
Development of the Company.
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D. EXCHANGE CONTROLS
The Central Bank has consistently 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 Foreign Exchange Statute is contained in Law 9 of 1991 and
External Resolution No. 8 of 2000, which was regulated by the External
Regulating Circular DCIN 83 of 2004 of the Board of Directors of the Central
Bank. The International Investment Statute of Colombia is also contained in
Decree 2080 of 2000 and Decree 1844 of 2003, as amended, and 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 Preferred 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
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 Preferred 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 Preferred Shares. For a detailed discussion of ownership
restrictions see Item 4. Information on the Company - B. Business Overview -
B.7. Supervision and Regulation - Ownership Restrictions.
E. TAXATION
In Colombia, dividends received by foreign companies or other
foreign entities, non resident individuals and successions of non residents are
subject to income taxes.
Pursuant to the International Investment Statute (see Item 10.
Additional Information - D. Exchange Controls) the Preferred Shares deposited
under the Deposit Agreement constitute a "Foreign Institutional Capital
Investment Fund". Under Article 18-1 of the Estatuto Tributario, Decree 624 of
1989 as amended (the "Fiscal Statute"), 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 BC. Therefore, provided that distributions are made
by BC to the holders of ADRs through the Depositary, all distributions by BC
made on account of Preferred 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% tax).
149
Dividends paid to a holder of Preferred Shares (as distinguished
from the ADSs representing such Preferred Shares) who is not a resident of
Colombia, as defined below, and who holds the Preferred Shares in his own name,
rather than through another institutional or individual fund, will be subject to
Colombian income taxes at a special rate of 7%. However, if such dividends do
not correspond to BC's profits that have been taxed at the corporate level, the
applicable rate is 35% (and will be the new basis for the especial flat rate of
7%).
In the event that a holder of ADRs who is not a resident of Colombia
chooses to surrender its ADSs and withdraw the underlying Preferred 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 Preferred Shares
through either an "institutional fund" or an "individual fund" under foreign
investment regulations, in which case dividends payable with respect to the
Preferred Shares would receive the same preferential treatment as a holder of
ADRs.
For purposes of Colombian taxation, an individual 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 entity is a resident
of Colombia if it is organized under the laws of Colombia.
Foreign companies and individuals that are non Colombian residents
are required by law to file an income tax declaration in Colombia when dividends
have been subject to withholding taxes. However, foreign institutional capital
investment funds are not required under law to file income tax declaration in
Colombia.
In accordance with article 36-1 of the Fiscal Statute, earnings
obtained by a non resident of Colombia derived from stock trading are not
subject to income, withholding, remittance or other taxes in Colombia when the
stock is registered in the Colombian Stock Exchange and the transaction does not
involve the sale of 10% or more of the company's outstanding stock by the same
beneficiary.
In all cases in which earnings derived from stock trading are
subject to income and remittance taxes, the applicable rate for income tax will
be 14% and the applicable rate for remittance tax will be 1% (after income tax).
The filing of an income tax declaration is required in this case.
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 or Preferred Shares from non- residents to residents or
non-residents of Colombia by gift or inheritance are not subject to Colombian
gift or inheritance taxes. Transfers of ADSs or Preferred Shares by gift or
inheritance from residents to residents or non residents of Colombia will be
subject to Colombian gift or inheritance tax at a flat rate of 35%, in the value
of the Preferred Shares transferred. There are no Colombian stamp, issue,
registration, transfer or similar taxes or duties payable by holders of
Preferred Shares or ADSs.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
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G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
BC files periodic reports and other information with the Commission.
You may read and copy any document that BC 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.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTRODUCTION
The following section describes the market risks that BC is exposed
to and the tools and methodology used to measure these risks as of December 31,
2004.
BC's Board of Directors and the senior management has formalized its
policies, procedures, strategies and rules of action of the areas involved in
the treasury management process in the "Treasury Management Manual". This manual
defines the roles and responsibilities of each area and their interrelation to
ensure an adequate separation of functions and functional independence between
the front, middle and back office. Moreover, the manual contains the process and
technical support, the internal auditing procedure and policies, the procedures
and methodologies, and the description of the levels of responsibilities of the
areas involved in the treasury management process.
The main objective of risk management is to plan, coordinate,
monitor, report and propose policies for market and liquidity risks for the
Bank. This leads the organization to efficient asset and liabilities
administration.
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 management.
The measurement of market risk, performance, results of the Bank's
investment portfolio and compliance with policies are reported on a daily basis
to the Bank's senior management, specifically to the members of the Assets and
Liabilities Management Committee (GAP "Gestion de Activos y Pasivos"), to the
Risks Committee and also to the Board of Directors in every meeting.
151
The Bank's assets comprise trading and non-trading instruments.
Trading instruments are those that constitute the treasury book and include
primarily fixed income securities. The Bank book comprises the Treasury book and
the rest of the Bank's assets and liabilities, including primarily loans, time
deposits, checking accounts and savings accounts. These accounts are not
included in the Treasury book because they are not considered trading
instruments.
The Bank limits trading of derivative instruments. Forward foreign
currency operations are used to cover our risk in positions in foreign
currencies. For unconventional trading instruments, the Bank has designed a
process of approval by different areas. This guaranties that every area involved
is prepared to enter a new product into their procedures. Also, the Board of
Directors has to approve any new unconventional trading instruments.
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 Accounting Circular
(Circular 100 of 1995), as updated by the External Circular 031 of 2004, each as
issued by 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 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;
- foreign exchange rate risk; and
- UVR price risk and stock price risk.
Following is a brief explanation of the VaR model used by BC and its
Subsidiaries to calculate the market risk based on interest rate risk, foreign
exchange rate risk and stock price risk. In addition, there is a presentation of
the market risks reports and analysis of BC and its Subsidiaries.
VAR MODEL
INTEREST RATE RISK
BC calculates the interest rate risk for local currency, foreign
currency and UVR in accordance with Chapter XXI of the Basic Accounting
Circular. The interest rate risk is the probability of loss in the value of a
position of the balance due to fluctuations in market interest rates or market
curves. As indicated, the methodology used in this Annual Report to measure such
risk consists of 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") with a 99%
confidence level, which is established by the Superintendency of Banking
according to the market's historic performance.
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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 established
depreciation).
DURATION: 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, modified duration measures the
sensitivity of the value of a position to interest rate
changes.
(delta)i: Maximum probable variation of the interest rate for the
instrument or position of the balance.
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 of computing VaR, which in the case of 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") with a 99% confidence level, 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, as the case may be.
VAR = NP * (delta)e
153
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 of 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 Superintendency of Banking.
For publicly traded stocks:
VAR = PosA* (delta) p
For non-publicly traded stocks:
VAR = PosA* 1.2 * (delta) p
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
(the "Total Market Risk Value"). Such market risk VaR is included in the
solvency calculation in accordance with Decree 1720 of 2001.
VaR(TOTAL)= Square Root [Sigma(n)(i=1)(VaR(i))(2)(rho)(2)(i) + Sigma(n)(i=1)
Sigma(n)(j=1),(j not equal to i)VaR(i)VaR(j)(rho)(ij)]
The Superintendency of Banking requires Bancolombia, Leasing
Colombia, Fiducolombia, Colcorp and Sufinanciamiento to calculate the interest
rate VaR of local currency and foreign currency positions in the Banking book
which contains all the balance sheet and Treasury book which refers to the
securities contained in the organization's portfolio separately for the
positions' remaining maturities in the following categories:
154
- 1 month or less,
- more than 1 month but not more than 2 months,
- more than 3 months but not more than 6 months,
- more than 6 months but not more than 12 months,
- more than 12 months, but not more than 24 months, and
- more than 24 months.
ASSUMPTIONS AND 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.
BC and its affiliate's VaR model assume that variations in the
market risk factors have a normal distribution. In addition, the model assumes
that the correlations and variations in market rates or prices included in the
historical data are independent and identically distributed random variables,
and provide a good estimate of the correlation and the rate or price variations
in the future.
According to the Superintendency of Banking regulations, the Bank's
checking accounts and savings account's net present values have to be
distributed in the time horizon brackets, after matching assets and liabilities
positions. The duration of the checking accounts and savings accounts classified
in the first bracket is equal to five (5) days and the duration of the values
classified in each time horizon bracket is equal to the weighted average
duration of the assets for each time horizon. As a result, the duration of the
checking accounts and savings accounts on the Bank's information is equal to the
weighted average durations of these accounts for each time bracket.
BANCOLOMBIA (UNCONSOLIDATED)
The table below provides information about BC's (unconsolidated) VaR
calculations for all balance sheet items that are in pesos. It shows the
following information for each group of assets and liabilities described in the
title of the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the
interest rate
155
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
VALUE AT RISK FOR PESO (LOCAL CURRENCY)
ASSETS NPV DUR Y (DELTA)i VAR
------------------------------------------------------------------------ --------- ----- ----- -------- -------
Overnight funds 42,814 0.10 6.65% 135 5
Trading securities issued by the Colombian government - TES IPC rate 68,192 10.59 10.48% 150 888
Trading securities issued by the Colombian government - TES fixed rate 845,836 24.18 9.58% 150 25,178
Other trading securities issued by the Colombian government 45,447 9.69 10.37% 30 109
Trading securities issued by financial institutions 317,606 2.68 9.23% 30 211
Other marketable trading securities 78,565 19.36 11.80% 30 376
Held to maturity securities issued by the Colombian government - TES
fixed rate 169,012 19.99 11.04% 250 6,899
Other held to maturity securities issued by the Colombian government 21,066 9.57 11.21% 126 209
Held to maturity securities issued by financial institutions 89,338 3.08 9.74% 126 285
Other held to maturity securities 3,721 41.05 4.55% 126 159
Available for sale securities issued by the Colombian government - TES
fixed rate 494,057 30.49 9.97% 250 30,783
Available for sale securities issued by financial institutions 19,927 1.90 12.33% 126 39
Commercial loans - fixed rate 598,156 3.78 15.62% 126 2,334
Commercial loans - variable rate 4,997,817 3.55 15.93% 126 18,280
Mortgage loans in pesos 282 22.68 15.62% 126 7
Consumer loans - fixed rate 652,155 6.58 23.79% 222 7,750
Consumer loans - variable rate 934,564 2.69 16.05% 30 618
Small business loans - fixed rate 25,846 11.93 15.62% 222 558
Small business loans - variable rate 77,282 2.48 16.28% 30 47
Customers' acceptances 16,020 1.31 0.00% 126 22
Other assets 67,426 27.62 15.62% 126 1,921
Rights buyback trading securities issued by the Colombian government -
TES fixed rate 13,923 7.42 8.22% 150 127
Other rights buyback trading securities issued by the Colombian
government 799 10.02 11.13% 30 2
Rights buyback trading securities issued by financial institutions 25,018 2.05 9.12% 30 13
Other rights buyback trading securities 4,593 3.19 10.34% 30 4
Rights buyback available for sale securities issued by the Colombian
government - TES fixed rate 703,103 30.65 10.07% 250 44,025
LIABILITIES
Non-interest bearing checking accounts 2,418,539 24.80 0.00% 126 62,613
Interest bearing checking accounts 219,527 2.49 2.74% 126 569
Time deposits 2,074,130 2.37 8.25% 126 5,097
DAT 89,584 0.15 8.25% 126 14
Saving deposits 3,312,383 0.63 4.84% 126 1,824
Overnight funds 57,000 0.10 6.65% 135 6
Repurchase agreements 536,276 0.47 5.25% 250 519
Bank acceptances outstandings 16,020 1.31 0.00% 126 22
Interbank borrowings 587,612 3.21 8.52% 126 1,959
Long term debt 425,384 2.38 9.96% 126 1,047
INTEREST RATES DERIVATIVES
Interest rate SWAP - Variable part, long position 13,604 2.94 5.05% 30 10
Interest rate SWAP - Variable part, short position 20,853 4.31 4.87% 30 22
Forward contracts long position issued by the Colombian government - TES 217,886 18.80 9.00% 150 5,049
fixed rate
Forward contracts long position securities issued by financial
institutions 86,314 2.80 9.37% 30 60
Forward contracts long position others securities 11,182 7.50 11.67% 30 21
Forward contracts short position synthetic (314,491) 1.00 3.46% 30 (79)
Forward contracts short position issued by the Colombian government -
TES fixed rate (203,572) 42.19 11.00% 150 (10,568)
Forward contracts long position others securities 202,019 0.11 2.02% 30 5
FOREIGN EXCHANGE FORWARDS
Foreign exchange contracts long position in local currency 2,747,671 2.27 10.00% 30 1,544
Foreign exchange contracts short position in local currency (2,227,509) 3.20 10.00% 30 (1,764)
156
BC's (unconsolidated) interest rate risk factors in local currency
are basically, the DTF, repo ("repurchase agreement") rate, interbanking rate,
consumer credit rate, and Colombian Treasury bonds rate (TES). The DTF and the
TES are the most volatile and have the largest value at risk outcomes. In the
table above the securities that are affected by the DTF's risk factor are all
the securities issued by financial institutions and the other securities.
Although the largest assets are the loans, their average duration is 3.74 months
compared to the average duration of TES, which is 26.70 months, and the average
duration of the checking accounts and savings accounts, which provide the
principal effect on the DTF risk factor outcome, is 10.52 months.
Ps million
RISK FACTOR VAR
--------------------------- ----------
DTF (48,690.50)
Repurchase Agreements' Rate (518.62)
Interbank Rate (1.58)
Consumer Loan Rate 8,307.50
TES Rates 102,382.95
==========
The average VaR for the TES factor in 2004 was Ps 85,382 million
with a standard deviation of Ps 21,997 million. The DTF factor includes assets
such as commercial loans and other investments different from TES. Also the DTF
factor includes all liabilities in local currency except repos, overnight fund
and derivatives different from TES and forwards of foreign currency. As a
result, the average VaR for the DTF factor for 2004 is Ps (34,104) million with
a standard deviation of Ps 16,748 million of local currency. These values can be
negative when the assets that are being affected by certain risk factor are
smaller than the liabilities affected by the same risk factor.
The table below provides information about BC's (unconsolidated) VaR
calculations for all balance sheet items that are in a currency other than the
peso or UVR. It shows the following information for each group of assets and
liabilities described in the title of the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
Var: Value at risk for the group for changes in the
interest rate
157
INTEREST RATE RISK IN FOREIGN CURRENCY
(U.S. DOLLARS)
ASSETS NPV DUR Y (DELTA)i VAR
------------------------------------------------------------------------- ------------ ----- ----- -------- -------
Overnight funds 11,020,044 0.10 1.67% 12 110
Trading securities issued by the Colombian government - U.S. dollar,
denominated TES 224,097 13.77 3.11% 12 308
Trading securities issued by the Colombian government - TES yankees 7,234,636 42.31 6.01% 12 30,441
Other trading securities issued by the Colombian government 109,195,487 14.05 2.99% 12 152,806
Other marketable trading securities 10,682,568 12.29 16.86% 12 12,959
Held to maturity securities issued by the Colombian government - TES
yankees 5,436,431 3.77 4.15% 41.18 6,990
Held to maturity securities issued by the Colombian government 92,111,366 9.77 8.85% 41.18 305,968
Other held to maturity securities 6,444,383 13.75 3.45% 41.18 30,257
Available for sale securities issued by the Colombian government - TES
yankees 11,480,554 44.05 6.20% 41.18 172,335
Available for sale trading securities issued by the Colombian government 26,965,890 21.57 3.58% 41.18 198,540
Available for sale securities other held 24,025,284 17.18 3.72% 41.18 140,971
Commercial loans - fixed rate 98,437 22.85 5.67% 41.18 767
Commercial loans - variable rate 284,445,040 1.93 4.71% 41.18 187,209
Consumer loans - fixed rate 17,062,887 2.26 15.39% 41.18 13,043
Consumer loans - variable rate 223,701 0.29 4.61% 6.86 4
Rights buyback trading securities issued by the Colombian government -
U.S. dollar, denominated TES 560,242 13.77 3.11% 12.00 769
LIABILITIES
Non-interest bearing checking accounts 19,649,117 10.41 0.00% 12 20,449
Interest bearing checking accounts 15,733,515 8.30 0.79% 12 13,039
Time deposits 164,810,297 3.68 2.28% 41.18 207,231
Saving deposits 2,653,163 11.65 0.90% 12 3,086
Other 5,244 0.03 3.00% 12 0
Interbank borrowings 380,143,986 5.33 2.78% 41.18 692,440
INTEREST RATES AND DERIVATIVES
Forward contracts short position issued by the Colombian government - TES
yankees (2,026,366) 39.23 5.68% 12 (7,909)
Other forward contracts short position issued by the Colombian government (1,825,474) 63.33 13.57% 12 (11,433)
Forward contracts long position others securities 5,860,423 0.59 2.39% 12 346
FOREIGN EXCHANGE FORWARDS
Foreign exchange contracts long position in forex 1,892,591,441 3.70 1.78% 12 698,221
Foreign exchange contracts short position in forex (2,118,130,001) 3.15 1.70% 12 (666,652)
The risk factors of the interest rate risk in foreign currency are
the Libor and the Money Market rates. These rates are not very volatile. The
average VaR for the Libor factor in 2004 was Ps 1,405 million with a standard
deviation of Ps 743 million. The Libor rate risk factor affects assets such as
commercial and consumer loans and long-term investment. The average VaR for the
Money Market factor for 2004 is Ps 449 million with a standard deviation of Ps
134 million. The Money Market factor affects Colombian short-term Treasury
bonds, liabilities and foreign exchange forwards.
Ps million
------------------------
RISK FACTOR VAR
------------------------
Libor 373.79
Money Market US$ 414.36
======
The table below provides information about BC's (unconsolidated) VaR
calculations for all balance sheet items that are in UVR. It shows the following
information for each group of assets and liabilities described in the title of
the group:
158
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the
interest rate
INTEREST RATE RISK IN UVR
(UVR)
ASSETS NPV DUR Y (DELTA)i VAR
----------------------------------------------------------------- ------------- ------ ---- -------- ----------
Trading securities issued by the Colombian government - TES fixed
rate 1,208,624,894 26.22 1.27% 12.4 3,262,295
Trading securities issued by financial institutions 308,077,883 24.73 2.03% 12.4 784,937
Other marketable trading securities 422,043,280 49.54 3.04% 12.4 2,153,289
Other held to maturity securities issued by the Colombian
government 1,482,215,099 93.72 0.00% 12.4 14,345,615
Other held to maturity securities 169,451,056 49.02 4.70% 12.4 854,569
Available for sale securities issued by the Colombian government
- TES fixed rate 367,852,794 19.92 2.70% 12.4 755,119
INTEREST RATES DERIVATIVES
Interest rate SWAP - fixed part, long position 55,058,234 7.57 0.00% 12.4 43,025
Forward contracts long position issued by the Colombian
government - TES fixed rate 155,467,326 19.92 2.70% 12.4 319,140
Forward contracts long position securities issued by financial
institutions 13,485,746 1.63 0.88% 12.4 2,273
Forward contracts short position synthetic (167,894,194) 0.20 2.12% 12.4 (3,452)
Forward contracts short position issued by the Colombian
government - TES fixed rate (377,047,118) 51.89 4.68% 12.4 (2,012,706)
Forward contracts long position others securities 372,534,441 0.13 2.02% 12.4 4,855
The risk factor for all the positions in UVR is the Real Rate risk
factor. The average VaR for the Real Rate factor in 2004 was Ps 2,783 million
with a standard deviation of Ps 442 million.
Ps million
----------------------
RISK FACTOR VAR
----------- --------
Real Rate 2,992.92
========
The table below provides information about BC's (unconsolidated) VaR
calculations for changes in the price of a currency other than the peso. It
shows the following information for each specific currency:
NET POSITION: Net position for that currency presented in
the original currency
PRICE: Price of the currency on the day of calculation
PESOS VALUE: Net position of that currency presented in pesos
(delta)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the
price of the currency
159
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELTA)e VAR
---------------- ------- ---------------- -------- ---------------
U.S. Dollars (23,274,151) 2,390 (55,619,401,827) 2.63% (1,462,790,268)
Japanese Yen (YEN) 12,090,899 23 280,274,297 5.18% 14,518,209
British Pound (127,494) 4,594 (585,746,670) 2.63% (15,405,137)
Venezuelan Bolivar 5,915,893 1 7,381,852 2.63% 194,143
Canadian Dollar 75,515 1,980 149,550,447 2.63% 3,933,177
Swiss Franc (96,427) 2,107 (203,152,982) 2.63% (5,342,923)
European Currency Unit (EURO) 7,116,723 3,256 23,173,995,377 5.45% 1,262,982,748
Swedish Krone 62,231 361 22,442,799 2.63% 590,246
Danish Krone 200,714 438 87,839,574 2.63% 2,310,181
VALUE AT RISK (32,686,817,134) (199,009,626)
UVR 4,076,236,199 146 594,854,931,487 3.90% 23,199,342,328
Available for sale investments - tradable 626,040,393,364 6.00% 37,562,423,602
Available for sale investments - nontradable - not
registered in exchange 26,375,820,332 9.00% 2,848,588,596
Investments in funds 120,985,776,955 12.06% 17,509,061,641
VALUE AT RISK 80,920,406,540
The risk factors regarding foreign exchange risk are the TRM (the
dollar Representative Market Rate), the EURO and the YEN. The net position could
be negative if we have an amount in short position larger than the amount in
long positions. The UVR risk factor is considered to be a price risk factor,
which means that a UVR position has two kinds of market risk: interest rate risk
and price risk. For positions in local stocks, we have the IGBC (Colombian Stock
Exchange General Index) risk factor. Finally, two new price risk factors were
incorporated in 2004 in the model: risk factor RFOND (Rentability Investments
funds ) which is the risk factor that applies for investments in national funds
and risk factor (DJIA) which applies for investments in foreign funds (stocks)
and investment in foreign funds (other investments). The TRM includes the
American Dollar, the British Pound, the Venezuelan Bolivar, the Canadian Dollar,
the Swiss Franc, the Swedish Krona and the Danish Krone. The more volatile VaR
outcomes are the UVR and TRM risk factors followed by the IGBC. The average VaR
for the UVR factor in 2004 was Ps 20,328 million with a standard deviation of Ps
4,788 million. The average VaR for the TRM factor in 2004 was Ps (3,293) million
with a standard deviation of Ps 6,381 million. The average VaR for the IGBC
factor in 2004 was Ps 38,410 million with a standard deviation of Ps 2,060
million.
Ps million
------------------------
RISK FACTOR VAR
----------- ---------
UVR 23,199.34
TRM (1,476.51)
EURO 1,262.98
YEN 14.52
IGBC 40,411.01
RFOND 17,509.06
=========
160
After using the VaRTOTAL formula, according to "Total Market Risk
Value" section, the Aggregate Market Value at Risk of the Bank (unconsolidated)
on December 31, 2004 was equal to Ps 79,735 million of local currency. The Bank
follows the Superintendency of Banking regulations. After December 31, 2003 the
Bank (unconsolidated) had to include in the solvency rate formula 100% of the
Aggregate Market Value at Risk.
SOLVENCY RATE FORMULA:
Capital/Risk_Weighted_Assets+[Var*(100/9)> or = 9%
The Bank's (unconsolidated) average Total Market Risk Value for 2004
was Ps 66,055 million with a standard deviation of Ps 15,370 million. The
maximum value during 2004 was Ps 91,797 million in September 2004, and the
minimum value during 2004 was Ps 45,964 million in January 2004. Most of the
increase in the Total Market Risk Value during 2004 can be explained by an
increase in the portfolio duration during September. This VaR increase was a
result of the debt exchange of short term securities by long term securities.
This exchange was made with the national government and had a direct influence
on the average duration of the portfolio increasing the value of VaR for
September and having a direct effect on the 2004 average.
COLCORP
The table below provides information about BC's Subsidiary Colcorp's
VaR calculations for all balance sheet items that are in pesos. It shows the
following information for each group of assets and liabilities described in the
title of the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest
rate
161
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
VALUE AT RISK FOR PESO (LOCAL CURRENCY)
ASSETS NPV DUR Y (DELTA)i VAR
---------------------------------------------------------------------- ------- ----- ----- -------- -----
Trading securities issued by the Colombian government - TES fixed rate 2,292 26.60 0.10% 150 75
Other trading securities issued by the Colombian government 42 2.97 0.12% 30 0
Trading securities issued by financial institutions 6,791 4.49 0.10% 30 8
Other marketable trading securities 38,238 12.01 0.12% 30 137
Other held to maturity securities issued by the Colombian government 320 8.23 0.06% 126 3
Held to maturity securities issued by financial institutions 537 0.69 0.05% 126 0
Other held to maturity securities 1,730 65.54 0.06% 126 88
Available for sale securities issued by the Colombian government - TES
fixed rate 21,797 27.55 0.10% 250 1,227
Mortgage loans in pesos 2,713 2.37 0.13% 126 7
Consumer loans - variable rate 873 40.24 0.13% 126 37
LIABILITIES
Time deposits 64,364 1.90 9.31% 126 126
Interbank borrowings 2,855 4.91 7.79% 126 15
INTEREST RATES DERIVATIVES
Forward contracts short position others securities (3,458) 10.38 12.18% 30 (9)
Forward contracts long position others securities 3,137 0.11 2.98% 30 0
FOREIGN EXCHANGE FORWARDS
Foreign exchange contracts long position in local currency 2,386 0.10 8.00% 30 0
The table below provides information about Colcorp's VaR
calculations for all balance sheet items that are in a currency other than pesos
or UVR. It shows the following information for each group of assets and
liabilities described in the title of the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest
rate
INTEREST RATE RISK IN FOREIGN CURRENCY
(U.S. DOLLARS)
ASSETS NPV DUR Y (DELTA)i VAR
----------------------------------------------------------- ----------- ------ ------ -------- -----
Other marketable trading securities 1,171,553 57.85 5.66% 12 6,743
FOREIGN EXCHANGE FORWARDS
Foreign exchange contracts short position in local currency (1,000,000) 0.20 5.00% 12 (20)
The table below provides information about Colcorp's VaR
calculations for all balance sheet items that are in UVR. It shows the following
information for each group of assets and liabilities described in the title of
the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest
rate
162
INTEREST RATE RISK IN UVR
(UVR)
ASSETS NPV DUR Y (DELTA)i VAR
-------------------------------------------------------------------- ----------- ----- ---- -------- -------
Trading securities issued by financial institutions 19,375,264 36.37 3.67% 12.4 72,551
Other marketable trading securities 6,267,207 49.01 4.70% 12.4 31,602
Other held to maturity securities issued by the Colombian government 18,358,906 96.13 0.00% 12.4 182,261
Other held to maturity securities 15,954,553 40.91 5.01% 12.4 67,135
The table below provides information about Colcorp's VaR
calculations for changes in the price of a currency other than the peso. It
shows the following information for each group which represent an specific
currency:
NET POSITION: Net position for that currency presented in
the original currency
PRICE: Price of the currency on the day of calculation
PESOS VALUE: Net position of that currency presented
in pesos
(delta)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the
price of the currency
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELTA)e VAR
--------------- ------- ------------- -------- ------
U.S Dollars 176,805 2,390 422,519,749 2.63% 11
VALUE AT RISK 11
UVR 60,445,052 146 8,820,891,506 3.90% 344
Available for sale investments tradable 58,703,480,150 6.00% 3,522
Available for sale investments nontradable 125,953,358,694 9.00% 13,603
Investments in mutual funds 9,314,986 12.06% 1
VALUE AT RISK 17,481
Ps million
----------------------------
RISK FACTOR VAR
---------------- ---------
DTF 131.57
Real Rate 51.59
Money Market US$ 16.07
TES Rate 1,302.07
UVR 344.01
TRM 11.11
IGBC 17,125.17
RFOND 1.35
=========
163
Colcorp's main assets are investments and stocks, and were the most
relevant positions affecting the IGBC risk factor. Its liabilities are basically
CDs, interbank borrowings and repurchase agreements.
The average VaR for IGBC during 2004 was Ps 19,168 million with a
standard deviation of Ps 2,046 million, and the average VaR for TES during 2004
was Ps 544 million with a standard deviation of Ps 338 million. As of December
31, 2004, Colcorp's Total Market Risk Value was Ps 16,893 million. Its average
Total Market Risk Value during 2004 was Ps 15,516 million, with a maximum value
during 2004 of Ps 16,044 million and a minimum value during 2004 of Ps 14,742
million.
LEASING COLOMBIA
The table below provides information about BC's Subsidiary Leasing
Colombia's VaR calculations for all balance sheet items that are in pesos. It
shows the following information for each group of assets and liabilities
described in the title of the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest
rate
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
VALUE AT RISK FOR PESO (LOCAL CURRENCY)
ASSETS NPV DUR Y (DELTA)i VAR
-------------------------------------------------------------------- -------- ------ ------ -------- ------
Trading securities issued by the Colombian government - TES fixed
rate 30,076 10.97 8.31% 150 407
Other trading securities issued by the Colombian government 835 10.64 10.20% 30 2
Trading securities issued by financial institutions 8,026 4.73 9.23% 30 9
Other marketable trading securities 1,546 7.82 8.78% 30 3
Other held to maturity securities issued by the Colombian government 217 8.13 6.36% 126 2
Commercial loans - fixed rate 1,598 12.85 15.79% 126 21
Commercial loans - variable rate 858,367 3.12 15.79% 126 2,763
Consumer loans - fixed rate 1,025 13.41 15.79% 222 25
Consumer loans - variable rate 10,764 1.86 15.79% 30 5
Small business loans - variable rate 17 6.37 15.79% 30 0
Rights buyback trading securities issued by the Colombian
government - TES fixed rate 5,774 17.23 8.70% 150 123
LIABILITIES
Time deposits 464,635 2.95 9.06% 126 1,421
Repurchase agreements 5,056 1.13 7.56% 250 12
Interbank borrowings 243,672 1.86 9.99% 126 468
Long term debt 146,905 3.32 9.06% 126 506
The table below provides information about Leasing Colombia's VaR
calculations for all balance sheet items that are in a currency other than pesos
or UVR. It shows the following information for each group of assets and
liabilities described in the title of the group:
164
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest
rate
INTEREST RATE RISK IN FOREIGN CURRENCY
(U.S. DOLLARS)
LIABILITIES NPV DUR Y (DELTA)i VAR
-------------------- ------- ----- ----- -------- ----
Interbank borrowings 513,710 5.17 3.19% 41.18 907
The table below provides information about Leasing Colombia's VaR
calculations for all balance sheet items that are in UVR. It shows the following
information for each group of assets and liabilities described in the title of
the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest
rate
INTEREST RATE RISK IN UVR
(UVR)
ASSETS NPV DUR Y (DELTA)i VAR
-------------------------------------------------------------------- ---------- ------ ------ -------- -------
Trading securities issued by financial institutions 17,195,318 15.50 3.15% 12.4 27,448
Other marketable trading securities 15,854,403 40.89 5.14% 12.4 66,666
Other held to maturity securities issued by the Colombian government 54,012,300 99.36 0.00% 12.4 554,246
The table below provides information about Leasing Colombia's VaR
calculations for changes in the price of a currency other than pesos. It shows
the following information for each group which represent a specific currency:
NET POSITION: Net position for that currency presented in the
original currency
PRICE: Price of the currency on the day of calculation
PESOS VALUE: Net position of that currency presented in pesos
(delta)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the
price of the currency
165
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELTA)e VAR
------------- ----- ---------------- -------- ------------
U.S. Dollars (496,054) 2,390 (1,185,445,047) 2.63% (31,177,205)
VALUE AT RISK (1,185,445,047) (31,177,205)
UVR 87,062,021 146 12,705,169,643 3.90% 495,501,616
Investments in mutual funds 123,296,337 12.06% 17,843,446
VALUE AT RISK 482,167,857
Ps million
----------------------------
RISK FACTOR VAR
------------------- -------
DTF 410.99
Repo Rate (11.73)
Real Rate 94.62
Libor (2.17)
Consumer Loans Rate 24.88
TES Rate 529.40
UVR 495.50
TRM (31.18)
RFOND 17.84
======
Leasing Colombia's main assets are the leasing operations that are
included in the loan portfolio, where the risk factor is the DTF. Its
liabilities are basically CDs and interbank borrowings where the DTF is also the
main risk factor.
The average VaR for the DTF during 2004 was Ps 230 million with a
standard deviation of Ps 335 million. As of December 31, 2004, Total Market Risk
Value was Ps 1,374 million. The average Total Market Risk Value during 2004 was
Ps 1,345 million, with a maximum value during 2004 of Ps 3,052 million and a
minimum value of Ps 743 million.
SUFINANCIAMIENTO
The table below provides information about BC's Subsidiary
Sufinanciamiento's VaR calculations for all balance sheet items that are in
pesos. It shows the following information for each group of assets and
liabilities described in the title of the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the
interest rate
166
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
VALUE AT RISK FOR PESO (LOCAL CURRENCY)
ASSETS NPV DUR Y (DELTA)i VAR
------------------------------------------------------------------- --------- ----- ------ -------- ------
Other trading securities issued by the Colombian government 343 9.15 7.55% 30 1
Commercial loans and operations of financial leases - fixed rate 3,826 3.16 29.45% 126 12
Commercial loans and operations of financial leases - variable rate 241,879 0.53 29.23% 126 130
Consumer loans - fixed rate 12,772 3.33 29.47% 222 76
Consumer loans - variable rate 225,760 0.52 29.23% 30 29
Other assets 1,656 0.57 29.23% 126 1
LIABILITIES
Time deposits 405,117 3.27 9.67% 126 1,371
Interbank borrowings 24,624 0.48 7.76% 126 12
Long term debt 5,154 7.66 7.94% 126 41
The table below provides information about Sufinanciamiento's VaR
calculations for changes in the price of a currency other than pesos. It shows
the following information for each group which represent a specific currency:
NET POSITION: Net position for the currency presented in the
original currency
PRICE: Price of the currency on the day of calculation
PESOS VALUE: Net position of the currency presented in pesos
(delta)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the
price of the currency
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELTA)e VAR
-------------- ------ ----------- -------- -----------
Available for sale investments tradable 9,849 6.00% 0
Available for sale investments nontradable 2,730,234,058 9.00% 294,865,278
VALUE AT RISK 294,865,278
Ps million
--------------------------------
RISK FACTOR VAR
------------------- ----------
DTF (1,251.32)
Consumer Loans Rate 76.32
IBC 294.87
========
Sufinanciamiento's main assets are loans, where the risk factor is
the DTF. Its liabilities are basically CDs and interbank borrowings, where the
DTF is also the main risk factor.
167
The average VaR for the DTF during 2004 was Ps 807 million with a
standard deviation of Ps 364 million. As of December 31, 2004, the Total Market
Risk Value was Ps 1,438 million. The average Total Market Risk Value of
Sufinanciamiento during 2004 was Ps 807 million, a maximum value of Ps 1,438
million and a minimum value of Ps 424 million.
FIDUCOLOMBIA
The table below provides information about BC's Subsidiary
Fiducolombia's VaR calculations for all balance sheet items that are in pesos.
It shows the following information for each group of assets and liabilities
described in the title of the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the
interest rate
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
VALUE AT RISK FOR PESO (LOCAL CURRENCY)
ASSETS NPV DUR Y (DELTA)i VAR
------------------------------------------------------------------ ------- ------ ------ -------- ----
Trading securities issued by the Colombian government - TES fixed
rate 15,172 16.46 9.01% 150 308
Other trading securities issued by the Colombian government 2,014 9.33 11.45% 30 5
Trading securities issued by financial institutions 13,218 3.52 9.82% 30 12
Other marketable trading securities 14,660 2.21 8.19% 30 8
Held to maturity securities issued by the Colombian government -
TES fixed rate 8,276 7.38 11.74% 250 125
Available for sale securities issued by the Colombian government -
TES fixed rate 6,561 21.67 9.35% 250 291
Rights buyback trading securities issued by the Colombian
government - TES fixed rate 1,085 69.91 12.65% 150 93
The table below provides information about Fiducolombia's VaR
calculations for all balance sheet items that are in a currency other than pesos
or UVR. It shows the following information for each group of assets and
liabilities described in the title of the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the
interest rate
INTEREST RATE RISK IN FOREIGN CURRENCY
(U.S. DOLLARS)
ASSETS NPV DUR Y (DELTA)i VAR
------- ------- ------- -------- -----
Trading securities issued by the Colombian government - U.S.
Dollars, denominated TES 33,615 13.58 3.11% 12 46
168
The table below provides information about Fiducolombia's VaR
calculations for all balance sheet items that are in UVR. It shows the following
information for each group of assets and liabilities described in the title of
the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the
interest rate
INTEREST RATE RISK IN UVR
(UVR)
ASSETS NPV DUR Y (DELTA)i VAR
----------------------------------------------------------------------- ---------- ------ ------ -------- -------
Trading securities issued by the Colombian government - TES fixed rate 22,200,600 19.83 2.70% 12.4 45,367
Other marketable trading securities 22,986,183 27.15 2.00% 12.4 64,346
Held to maturity securities issued by financial institutions 46,816,070 35.47 4.85% 12.4 170,829
Other held to maturity securities 19,259,223 48.17 4.70% 12.4 95,441
The table below provides information about Fiducolombia's VaR
calculations for changes in the price of a currency other than pesos. It shows
the following information for each group which represent an specific currency:
NET POSITION: Net position for the currency presented in the
original currency
PRICE: Price of the currency on the day of calculation
PESOS VALUE: Net Position of that currency presented in pesos
(delta)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the
price of the currency
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALU (DELTA)e VAR
-------------- ------ --------------- -------- ------------
U.S. Dollars 33,615 2,390 80,330,251 2.63% 211,268,561
VALUE AT RISK 211,268,561
UVR 111,266,970 146 16,237,455,960 3.90% 633,260,782
Available for sale investments - nontradable - not registered
in exchange 1,068,804,391 9.00% 115,430,874
Investments in mutual funds 118,190,359 12.06% 14,253,757
VALUE AT RISK 129,684,632
169
Ps million
--------------------------
RISK FACTOR VAR
---------------- -------
DTF 24.17
Real Rate 54.87
Money Market US$ 0.11
TES Rate 816.35
UVR 633.26
TRM 2.13
IGBC 115.43
RFOND 14.25
======
Fiducolombia's Total Market Risk Value relates to its investments.
The most significant risk factor is the TES. The average VaR for the TES during
2004 was Ps 880 million with a standard deviation of Ps 183 million. As of
December 31, 2004, the Total Market Risk Value was Ps 1,261 million. The average
Total Market Risk Value of Fiducolombia during 2004 was Ps 1,184 million, with a
maximum value of Ps 1,570 million and a minimum value of Ps 797 million.
COMISIONISTA DE COLOMBIA - COMICOL
The table below provides information about BC's Subsidiary Comicol's
VaR calculations for all balance sheet items that are in pesos. It shows the
following information for each group of assets and liabilities described in the
title of the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the
interest rate
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
VALUE AT RISK FOR PESO (LOCAL CURRENCY)
ASSETS NPV DUR Y (DELTA)i VAR
---------------------------------------------------------------------- ------ ----- ----- -------- ----------
Trading securities issued by the Colombian government - TES fixed rate 3,490 13.02 8.44% 150 56,026,651
Trading securities issued by financial institutions 3,196 3.30 9.31% 30 2,609,504
Other marketable trading securities 2,023 10.32 9.53% 30 5,174,948
Other held to maturity securities issued by the Colombian government 52 8.12 7.78% 126 436,463
Rights buyback trading securities issued by financial institutions 294 0.10 2.02% 250 60,489
FOREIGN EXCHANGE FORWARDS
Foreign exchange contracts long position in local currency 2,385 0.47 8.19% 30 3,335,033
170
The table below provides information about Comicol's VaR
calculations for all balance sheet items that are in a currency other than pesos
or UVR. It shows the following information for each group of assets and
liabilities described in the title of the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the
interest rate
INTEREST RATE RISK IN FOREIGN CURRENCY
VALUE AT RISK FOR PESO (FOREIGN CURRENCY)
ASSETS NPV DUR Y (DELTA)i VAR
-------------------------------------------------- ---------- ----- ---- -------- ------
Other marketable trading securities 1,140,400 56.58 6.29% 12 6,449
FOREIGN EXCHANGE FORWARDS
Foreign exchange contracts short position in forex (1,000,000) 0.47 2.38% 12 (559)
The table below provides information about Comicol's VaR
calculations for all balance sheet items that are in UVR. It shows the following
information for each group of assets and liabilities described in the title of
the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the
interest rate
INTEREST RATE RISK IN UVR
(UVR)
ASSETS NPV DUR Y (DELTA)i VAR
--------------------------------------------------- ---------- ------ ----- -------- -------
Trading securities issued by financial institutions 2,168,523 3.42 1.01% 12.4 76,035
Other marketable trading securities 4,955,029 27.22 1.96% 12.4 709,877
The table below provides information about Comicol's VaR
calculations for changes in the price of a currency other than pesos. It shows
the following information for each group which represent an specific currency:
171
NET POSITION: Net position for that currency presented in the
original currency
PRICE: Price of the currency on the day of calculation
PESOS VALUE: Net position of that currency presented in
pesos
(delta)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the
price of the currency
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELTA)e VAR
------------ ------ -------------- -------- ----------
U.S. Dollars 140,400 2,390 335,520,900 2.63% 8,824,200
VALUE AT RISK 8,824,200
UVR 7,123,552 146 1,039,557,067 3.90% 40,542,726
VALUE AT RISK 49,366,925
Ps million
---------------------------
RISK FACTOR VAR
---------------- --------
DTF 8.22
Repo Rate 0.06
Real Rate 2.14
Money Market US$ 15.33
TES Rate 56.03
UVR 40.54
TRM 71.67
=====
Comicol's Total Market Risk Value is determined by its investments.
The most significant risk factor during 2004 was the TES. The average VaR for
the TES during 2004 was Ps 477 million with a standard deviation of Ps 484
million. As of December 31, 2004, the Total Market Risk Value was Ps 59.47
million. The average Total Market Risk Value of Comicol during 2004 was Ps 550
million. The reason for the decline of Comicol's Total Market Risk Value during
2004 was the diversification in the portfolio of investments. This portfolio
includes investments on securities which contain lower Market Risk, because they
have lower volatility.
BANCOLOMBIA PANAMA AND BANCOLOMBIA CAYMAN
BC's Subsidiaries Bancolombia Panama and Bancolombia Cayman apply
the same VaR methodology to measure market risk. The only difference is that
Bancolombia Panama and Bancolombia Cayman calculate the volatility of the risk
factors using the JP Morgan risk metrics methodology. As we mentioned before, BC
(unconsolidated) and its local Subsidiaries use the volatilities published by
the Superintendency of Banking. Bancolombia Panama and Bancolombia Cayman
measure the market value at risk since August 2003.
172
Bancolombia Panama's and Bancolombia Cayman's market risks are
mainly related to their portfolio of investments, which one year ago were
concentrated on securities issued by the Republic of Colombia, but at the end of
2004 were diversified among securities issued in Colombia, Mexico, Brazil,
United States, Chile, El Salvador and Peru.
The table below provides information about Bancolombia Panama's and
Bancolombia Cayman's VaR calculations for portfolio of investments items that
are in U.S. thousands dollars. It shows the following information for each group
of investments described in the title of the group:
NPV: Sum of the net present value for the group
DUR: Weighted average duration for the group
Y: Weighted average market yield for the group
(delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the
interest rate
PORTFOLIO OF INVESTMENTS
(US$ MILLION)
NPV DUR Y (DELTA)i VAR
------- ----------- ----- -------- ------
Available for sale securities issued by the Colombian government 81,489 34.7 5.09% 14 1,263
Trading securities issued by the Colombian government 30,940 15.5 5.03% 12 569
Available for sale securities issued by Colombian corporations 28,481 16.4 4.04% 11 219
Available for sale securities issued by Colombian financial institutions 5,000 11.5 3.83% 11 23
Available for sale securities issued by Mexican corporations 34,775 13.1 3.38% 12 92
Trading securities issued by Mexican corporations 20,211 31.2 3.64% 10 605
Available for sale securities issued by Brazilian financial institutions 24,561 7.6 3.04% 16 103
Available for sale securities issued by the Brazilian government 5,753 26.2 4.66% 15 65
Available for sale securities issued by United States corporations 14,990 11.6 2.98% 9 31
Available for sale securities issued by Chile corporations 5,913 21.4 4.17% 10 53
Available for sale securities issued by Peru corporations 3,333 57.4 8.32% 12 94
Available for sale securities issued by the El Salvador government 1,980 3.7 6.26% 8 2
Ps million
---------------------------------
RISK FACTOR VAR
------------------------- ------
Republic of Colombia 2006 20
Republic of Colombia 2007 972
Republic of Colombia 2009 1,081
Republic of Brazil 2006 68
Republic of Brazil 2007 101
Republic of Mexico 2006 29
Republic of Mexico 2007 310
Republic of Mexico 2009 358
US Treasury 2006 3
US Treasury 2007 83
US Treasury 2014 94
=====
As of December 31, 2004, the Total Market Risk Value was US$
2,546,292. The average Total Market Risk Value was US$ 9,461,603 with a maximum
value of US$ 17,308,564 in January and a minimum value of US$ 2,546,292 in
December. The decline of the VaR of Bancolombia Panama and Bancolombia Cayman
during 2004 was determined by the reduction of the size of portfolio, the
reduction of the volatility of the risk factors and the reduction of the
portfolio duration.
173
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There has not been a material default in the payment of principal,
interest, a sinking or purchase fund installment in BC operation.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
An evaluation has been carried out, under the supervision and with
the participation of BC's management, including President Jorge Londono
Saldarriaga and Finance 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-15(e). 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 Jorge Londono Saldarriaga and Finance
Vice-President Jaime Alberto Velasquez Botero, concluded that our disclosure
controls and procedures are effective.
In the first quarter of 2004, BC engaged Price Waterhouse Coopers
(Colombia) to assist BC in the evaluation of its internal control in a
group-wide program to reinforce effectiveness of its internal control over
financial reporting. As of the date of this filing, BC continues to develop this
program.
There have been no changes in BC's internal control during the
period covered by the Annual Report that has materially affected, or is
reasonably likely to materially affect, BC's internal control over financial
reporting.
174
ITEM 16.RESERVED
ITEM.16.A AUDIT COMMITTEE FINANCIAL EXPERT
Luis Alberto Zuleta Jaramillo serves as the board of directors audit
committee financial expert, complying with the requirements of Sarbanes Oxley
Act regarding audit committee financial experts.
ITEM.16.B CORPORATE GOVERNANCE AND CODE OF ETHICS
Under the NYSE's Corporate Governance Standards, Bancolombia, as a
listed foreign private issuer, must disclose any significant ways in which its
corporate governance practices differ from those followed by U.S. companies
under NYSE listing standards.
Corporate Governance in Colombia. In Colombia, a series of laws and
regulations set forth corporate governance requirements. Among them, Resolution
275 of the Superintendency of Securities (issued on May 23, 2001) contains the
corporate governance standards to be followed by companies issuing securities
that may be purchased by Colombian pension funds. Bancolombia's corporate
governance standards comply with these legal requirements and follow regional
recommendations, including the OECD's White Paper on Corporate Governance for
Latin America and the Andean Development Corporation's (CAF) Corporate
Governance Code.
Independence of Directors. Colombian law does not require the Board
of Directors to be composed of a majority of independent directors. However,
Colombian law mandates that all directors exercise independent judgment under
all circumstances. Bancolombia's Corporate Governance Code includes a provision
stating that directors shall exercise independent judgment and requires that
Bancolombia's management recommends to its shareholders a list of directors
containing at least two independent directors.
Structure of the Board of Directors. Bancolombia's Board of
Directors includes five (5) principal directors and five (5) alternate
directors. Even though it is customary that only principal directors attend
meetings of the Board of Directors, alternate directors perform an active role
in Bancolombia's corporate governance, as they are members of some Committees.
Although there is no prohibition under Colombian regulations for
officers to be members of the Board of Directors, it is customary for Colombian
companies to maintain separation between the directors and management.
Bancolombia's Board of Directors does not include any management members,
although the CEO attends the monthly meetings of the Board of Directors (but is
not allowed to vote) and Committees have some officers or employees as permanent
members to guarantee an adequate flow of information between employees,
management and directors. The roles of Bancolombia's CEO and Chairman are
completely separate.
Committees of the Board of Directors. The Board of Directors has a
"Board Issues Committee", a "Nomination, Compensation and Development Committee"
and an "Audit Committee", each of which is composed of both directors and
officers. These committees have drafted charters and address various corporate
governance subjects, in accordance with NYSE Corporate Governance Standards, and
Bancolombia's Audit Committee complies with NYSE Corporate Governance Standards
applicable to foreign private issuers.
175
Bancolombia has adopted an Ethics Code and a Corporate Governance
Code, both of which are directed to all employees, officers and directors.
English translations of the Ethics Code and the Corporate Governance Code are
available at Bancolombia's website at www.bancolombia.com.co. The Spanish
versions of these codes will prevail for all legal purposes.
ITEM.16.C PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed under the caption audit fees for
professional services rendered to BC for the audit of its financial statements
and for services that are normally provided in connection with statutory or
regulatory filings or engagements, totaled Ps 1,509 million at December 31, 2003
and Ps 1,654 million at December 31, 2004.
There were no fees corresponding to audit related fees, tax fees or
other fees billed to BC in the last two years.
The Bank's audit committee charter includes the following
pre-approval policies and procedures:
The audit committee will approve each year the work plan of the
external auditors, which will include all services that according to the
applicable law may be rendered by the external auditors.
For those events in which additional services are required to be
provided by the external auditors, such services must be previously approved by
the audit committee. Whenever this approval cannot be given at a meeting held by
the audit committee, the approval will be obtained through the Vice Presidency
of Internal Audit, who will be responsible of reaching each of the audit
committee members. The approval will be obtained with the favorable vote of the
majority of its members.
Every request of approval of additional services must be adequately
sustained, including complete and effective information regarding the
characteristics of the service that will be provided by the external auditors.
In all cases, the budget of the external auditors must be approved by the
General Shareholders Meeting.
ITEM.16.D PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Bancolombia did not repurchase any shares in 2004.
176
FINANCIAL STATEMENTS.
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to pages F - 1 through F - 115.
ITEM 19. EXHIBITS
The following exhibits are filed as part of this annual report.
1. -- Corporate by-laws (estatutos sociales) of the registrant, as amended
through March 28, 2005, together with an English translation.
12.1-- CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated June 17, 2005.
12.2-- CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated June 17, 2005.
13.1-- CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated June 17, 2005.
13.2-- CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated June 17, 2005.
177
SIGNATURE
Pursuant to the requirement of Section 12 of the Securities Exchange Act
of 1934, the registrant hereby certifies that it meets all of the requirements
for filling on Form 20-F and that it has duly caused and authorized the
undersigned to sign this Annual Report on its behalf.
Dated: June 17, 2005
BANCOLOMBIA S.A.
By: /s/ JAIME ALBERTO VELASQUEZ B.
--------------------------------
Name: Jaime Alberto Velasquez B.
Title: Vice President, Finance.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITORS' REPORT F-2
INDEPENDENT AUDITORS' REPORT F-3
CONSOLIDATED BALANCE SHEETS
Year Ended December 31, 2003 and 2004 F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 2002, 2003 and 2004 F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended December 31, 2002, 2003 and 2004 F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2002, 2003 and 2004 F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-11
F-1
[DELOITTE LOGO]
Deloitte & Touche Ltda.
Edificio Corfivalle
Calle 16 Sur No.* 43A - 49 Piso 9 y 10
A.A. 404
Nit. 860.005.813-4
Medellin
INDEPENDENT AUDITORS' REPORT Colombia
Tel. +57(4) 3138899
Fax: +57(4) 3133225
www.deloitte.com
To the Board of directors and shareholders of Bancolombia S.A. :
We have audited the accompanying consolidated balance sheets of Bancolombia S.A.
and subsidiaries (the "Bank") as at December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 2004. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Bank is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Bank's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Bank as at
December 31, 2004 and 2003, and the consolidated results of its operations and
its cash flows for each of the two years in the period ended December 31, 2004
in conformity with accounting principles generally accepted in Colombia.
Accounting principles generally accepted in Colombia vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
net income for each of the two years in the period ended December 31, 2004 and
the determination of shareholders' equity as at December 31, 2004 and 2003, to
the extent summarized in Note 33 to the consolidated financial statements.
Our audits also comprehended the translation of Colombian pesos amounts into
U.S. dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 2(c). Such U.S. dollar amounts are
presented solely for the convenience of readers in the United States of America.
[DELOITTE & TOUCHE]
Medellin, Colombia
May 18, 2005
Una firma miembro de
Audit.Tax.Consulting.Financial Advisory. Deloitte Touche Tohmatsu
F-2
[KPMG LOGO]
KPMG Ltda. Telefono 57 (4) 3140404
Carrera 43 A No. 16 A Sur - 38 Fax 57 (4) 3132554
Medellin - Colombia www.kpmg.com.co
REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Bancolombia S.A.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Bancolombia S.A. and subsidiaries for
the year 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 on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Bancolombia S.A. and subsidiaries for the year ended December 31, 2002, in
conformity with accounting principles generally accepted in Colombia for
financial institutions.
As discussed in Note 33i to the financial statements, the Colombia
Superintendency of Banking 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 United States of America would have affected consolidated results of
operations and consolidated stockholders' equity for the year ended December 31,
2002, to the extent summarized in Note 33 to the consolidated financial
statements.
[KPMG LTDA.]
Medellin, Colombia
January 21, 2003, except as to the 2003 column in note 24 and note 33, which are
as of March 12, 2003.
KPMG Ltda., socidedad Colombiana de responsabilidad limitada KPMG Ltda.
miembro de KPMG International, cooperativa Suiza Nit. 860.000.846-4
F-3
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2004
(Stated in millions of pesos and thousands of U.S. Dollars)
2003 2004 2004 (1)
---------------- --------------- ---------------
U.S. Dollar
ASSETS
Cash and cash equivalents:
Cash and due from banks (Note 4) Ps 848,052 Ps 768,514 US$ 321,588
Overnight funds 598,409 480,846 201,211
---------------- --------------- ---------------
TOTAL CASH AND CASH EQUIVALENTS 1,446,461 1,249,360 522,799
---------------- --------------- ---------------
Investment securities (Note 5):
Debt securities: 4,171,591 4,922,792 2,059,961
Trading securities 1,644,068 2,245,756 939,745
Available for sale 1,805,230 1,943,685 813,342
Held to maturity 722,293 733,351 306,874
Equity securities 246,172 393,044 164,471
Trading securities 17,667 129,964 54,384
Available for sale 228,505 263,080 110,087
Market value allowance (81,039) (65,625) (27,461)
---------------- --------------- ---------------
TOTAL INVESTMENT SECURITIES 4,336,724 5,250,211 2,196,971
---------------- --------------- ---------------
Loans and financial leases (Notes 6 and 29):
Commercial loans 6,624,494 7,353,956 3,077,291
Consumer loans 1,273,159 1,655,066 692,569
Small business loans 83,854 90,000 37,661
Mortgage loans 48,161 56,107 23,478
Financial leases - 880,110 368,285
Allowance for loans and financial leases losses (Note 7) (387,263) (434,378) (181,767)
---------------- --------------- ---------------
LOANS AND FINANCIAL LEASES, NET 7,642,405 9,600,861 4,017,517
---------------- --------------- ---------------
Accrued interest receivable on loans and financial leases:
Accrued interest receivable on loans and financial leases 108,379 125,879 52,675
Allowance for accrued interest losses (Note 7) (5,170) (4,603) (1,927)
---------------- --------------- ---------------
INTEREST ACCRUED, NET 103,209 121,276 50,748
---------------- --------------- ---------------
Customers' acceptances and derivatives (Note 8) 1,539 43,894 18,368
Accounts receivable, net (Notes 9 and 29) 163,310 173,875 72,759
Premises and equipment, net (Note 10) 337,964 346,243 144,887
Operating leases, net (Note 11) 537,207 8,311 3,478
Foreclosed assets, net (Note 15) 27,676 12,206 5,108
Prepaid expenses and deferred charges (Note 12) 27,831 15,950 6,674
Goodwill (Note 14) 99,910 73,607 30,801
Other assets (Note 13) 198,480 315,394 131,977
Reappraisal of assets (Note 16) 253,413 267,941 112,121
---------------- --------------- ---------------
TOTAL ASSETS Ps 15,176,129 Ps 17,479,129 US$ 7,314,208
================ =============== ===============
Memorandum accounts (Note 25) Ps 59,814,787 Ps 78,232,437 US$ 32,736,662
================ =============== ===============
F-4
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2004
(Stated in millions of pesos and thousands of U.S. Dollars)
2003 2004 2004 (1)
---------------- --------------- ---------------
U.S. Dollar
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 29)
Non-interest bearing: Ps 2,319,787 Ps 2,690,679 US$ 1,125,925
Checking accounts 2,193,069 2,523,505 1,055,970
Other 126,718 167,174 69,955
Interest bearing: 7,912,210 9,171,437 3,837,823
Checking accounts 1,353,123 1,275,618 533,787
Time deposits 4,237,345 4,361,206 1,824,963
Savings deposits 2,321,742 3,534,613 1,479,073
---------------- --------------- ---------------
TOTAL DEPOSITS 10,231,997 11,862,116 4,963,748
---------------- --------------- ---------------
Overnight funds 1,118,139 616,494 257,974
Bank acceptances outstanding 35,833 66,593 27,866
Interbank borrowings (Note 17) 456,059 246,282 103,058
Borrowings from domestic development banks (Note 18) 755,536 857,919 358,999
Accounts payable 451,501 729,448 305,240
Accrued interest payable 93,818 109,164 45,680
Other liabilities (Note 19) 174,317 232,932 97,471
Long-term debt (Note 20) 71,818 552,531 231,209
Accrued expenses (Note 21) 56,173 71,649 29,982
Minority interest in consolidated subsidiaries 41,559 43,278 18,110
---------------- --------------- ---------------
TOTAL LIABILITIES 13,486,750 15,388,406 6,439,337
---------------- --------------- ---------------
Stockholders' equity (Notes 22 and 24)
Subscribed and paid in capital: 355,119 355,119 148,601
Nonvoting preference shares 101,579 101,579 42,506
Common shares 253,540 253,540 106,095
Retained earnings: 1,209,738 1,589,159 664,990
Appropriated (Note 23) 740,354 1,010,481 422,840
Unappropriated 469,384 578,678 242,150
Reappraisal of assets (Note 16) 30,086 42,237 17,674
Gross unrealized net gain or loss on investments 94,436 104,208 43,606
STOCKHOLDERS' EQUITY 1,689,379 2,090,723 874,871
---------------- --------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Ps 15,176,129 Ps 17,479,129 US$ 7,314,208
================ =============== ===============
Memorandum Accounts (Note 25) Ps 59,814,787 Ps 78,232,437 US$ 32,736,662
================ =============== ===============
----------
See accompanying notes to consolidated financial statements.
(1) See note 2 (bb)
F-5
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2002, 2003 and 2004
(Stated in millions of pesos and thousands of U.S. Dollars, except
per share data)
2002 2003 2004 2004 (1)
------------- ------------- ------------- --------------
U.S. Dollar
Interest income:
Loans in local currency Ps 671,657 Ps 849,441 Ps 1,040,049 U.S. 435,212
Loans in foreign currency 54,455 69,331 100,838 42,197
------------- ------------- ------------- --------------
TOTAL INTEREST ON LOANS 726,112 918,772 1,140,887 477,409
------------- ------------- ------------- --------------
Investment securities 247 476,720 532,517 222,834
Overnight funds and other 11,825 4,763 7,173 3,001
------------- ------------- ------------- --------------
TOTAL INTEREST INCOME 738,184 1,400,255 1,680,577 703,244
------------- ------------- ------------- --------------
Interest expense
Checking accounts 12,975 11,622 13,505 5,650
Time deposits 260,278 249,911 267,558 111,961
Saving deposits 106,825 113,968 141,288 59,123
------------- ------------- ------------- --------------
TOTAL INTEREST ON DEPOSITS 380,078 375,501 422,351 176,734
------------- ------------- ------------- --------------
Interbank borrowings 9,404 5,293 7,389 3,092
Borrowings from domestic development banks 49,317 58,456 73,549 30,777
Overnight funds 26,645 38,423 41,216 17,247
Long-term debt 779 2,840 41,239 17,257
------------- ------------- ------------- --------------
TOTAL INTEREST EXPENSE 466,223 480,513 585,744 245,107
------------- ------------- ------------- --------------
NET INTEREST INCOME 271,961 919,742 1,094,833 458,137
------------- ------------- ------------- --------------
Provision for loan and accrued interest losses,
net of recoveries (Note 7) 115,154 162,058 104,632 43,784
Provision for foreclosed assets and other assets 71,212 68,892 38,949 16,298
------------- ------------- ------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR LOANS,
AND ACCRUED INTEREST, FORECLOSED ASSETS AND
OTHER ASSETS, LOSSES 85,595 688,792 951,252 398,055
------------- ------------- ------------- --------------
Other operating income:
Fees and service charges, net (Note 27) 292,308 333,025 402,344 168,362
Foreign exchange gains, net 93,371 39,262 (90,706) (37,956)
Dividend income (Note 5) 19,491 30,734 30,546 12,782
Forward contracts (62,612) 10,489 147,480 61,714
Financial leases 39,596 58,774 99,854 41,784
Gains on sales of investments, net 372,793 75,540 20,246 8,472
Revenues from commercial subsidiaries 52,759 76,446 78,973 33,047
Other 21,271 50,377 44,257 18,519
------------- ------------- ------------- --------------
TOTAL OTHER OPERATING INCOME Ps 828,977 Ps 674,647 Ps 732,994 U.S. 306,724
------------- ------------- ------------- --------------
F-6
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2002, 2003 and 2004
(Stated in millions of pesos and thousands of U.S. Dollars, except
per share data)
2002 2003 2004 2004 (1)
------------- ------------- ------------- --------------
U.S. Dollar
Operating expenses
Salaries and employee benefits Ps 286,307 Ps 343,308 Ps 396,480 U.S. 165,909
Severance benefits 29,575 22,959 15,169 6,347
Administrative and other expenses (Note 28) 362,495 402,685 451,095 188,762
Depreciation (Note 10) 34,444 40,625 46,872 19,614
Losses on sales of loans, net 9,952 - 266 111
Merger expenses 10,379 - - -
Goodwill amortization 22,649 59,773 26,303 11,007
------------- ------------- ------------- --------------
TOTAL OPERATING EXPENSES 755,801 869,350 936,185 391,750
------------- ------------- ------------- --------------
Non-operating income (expense)
Other income 131,026 83,041 130,389 54,562
Other expense (51,239) (45,441) (58,536) (24,495)
------------- ------------- ------------- --------------
TOTAL NON-OPERATING INCOME 79,787 37,600 71,853 30,067
------------- ------------- ------------- --------------
Income before minority interest and provision
for income taxes 238,558 531,689 819,914 343,096
------------- ------------- ------------- --------------
Minority interest 14,440 330 (2,426) (1,015)
Provision for income taxes (Note 21) 42,618 62,635 238,810 99,931
------------- ------------- ------------- --------------
NET INCOME (LOSS) Ps 210,380 Ps 469,384 Ps 578,678 U.S. 242,150
------------- ------------- ------------- --------------
EARNINGS (LOSS) PER SHARE Ps 365 Ps 814 Ps 1,003 U.S. 0.42
============= ============= ============= ==============
----------
See accompanying notes to consolidated financial statements.
(1) See Note 2 (bb)
F-7
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2002, 2003 and 2004
Expressed in terms of the purchasing power of Colombian pesos as of
December 31, 2004
(Stated in millions of pesos and thousands of U.S. Dollars, except share data)
Non Voting Preference
Shares Voting Common Shares Retained Earnings
------------------------ ------------------------ ---------------------------
Appro- Unappro-
Number Value Number Value priated priated
----------- ----------- ----------- ----------- ------------- ------------
BALANCE AT DECEMBER 31, 2001 178,435,787 Ps 101,579 398,259,608 Ps 253,540 Ps 438,718 Ps 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 178,435,787 101,579 398,259,608 253,540 566,187 210,380
Net income - - - - - 469,384
Transfer to appropriated
retained earnings - - - - 210,380 (210,380)
Valuation of investment - - - - - -
Dividends declared - - - - (76,124) -
Other - - - - 39,911 -
----------- ----------- ----------- ----------- ------------- ------------
BALANCE AT DECEMBER 31, 2003 178,435,787 101,579 398,259,608 253,540 740,354 469,384
Net income - - - - - 578,678
Transfer to appropriated
retained earnings - - - - 469,384 (469,384)
Valuation of investment - - - - - -
Dividends declared - - - - (156,861) -
Other - - - - (42,396) -
----------- ----------- ----------- ----------- ------------- ------------
BALANCE AT DECEMBER 31, 2004 178,435,787 Ps 101,579 398,259,608 Ps 253,540 Ps 1,010,481 Ps 578,678
=========== =========== =========== =========== ============= ============
BALANCE AT DECEMBER 31, 2004
(UNAUDITED) 178,435,787 US$ 42,506 398,259,608 US$ 106,095 US$ 422,840 US$ 242,150
=========== =========== =========== =========== ============= ============
Surplus Total
------------------------------- -------------
Gross unrealized
gain or loss on
Reappraisal investments Stockholders'
of assets available for sale equity
----------- ------------------ -------------
BALANCE AT DECEMBER 31, 2001 Ps 20,081 - Ps 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 37,368 115,294 1,284,348
Net income - - 469,384
Transfer to appropriated
retained earnings - - -
Valuation of investment (7,282) (20,858) (28,140)
Dividends declared - - (76,124)
Other - - 39,911
----------- ------------------ -------------
BALANCE AT DECEMBER 31, 2003 30,086 94,436 1,689,379
Net income - - 578,678
Transfer to appropriated
retained earnings - - -
Valuation of investment 12,151 9,772 21,923
Dividends declared - - (156,861)
Other - - (42,396)
----------- ------------------ -------------
BALANCE AT DECEMBER 31, 2004 Ps 42,237 Ps 104,208 Ps 2,090,723
=========== ================== =============
BALANCE AT DECEMBER 31, 2004
(UNAUDITED) US$ 17,674 US$ 43,606 US$ 874,871
=========== ================== =============
See accompanying notes to consolidated financial statements.
F-8
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2003 and 2004
(Stated in millions of pesos and thousands of U.S. Dollars)
2002 2003 2004 2004
-------------- -------------- -------------- -------------
(Unaudited)
Cash flows from operating activities:
Net income (loss) Ps 210,380 Ps 469,384 Ps 578,678 US$ 242,150
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 34,444 40,625 46,872 19,614
Amortization 57,943 86,010 39,377 16,478
Minority interest (8,043) (9,577) 1,719 719
Provision for loan, accrued interest and
accounts receivable losses 153,004 305,673 191,207 80,011
Provision for foreclosed assets 17,236 32,458 23,002 9,625
Provision for losses on investment securities
and equity investments 47,722 29,381 2,821 1,180
Provision for premises and equipment 3,548 5,665 2,223 930
Provision for other assets 2,552 723 4,953 2,073
Reversal of provision for investments (10,022) (8,400) (4,500) (1,883)
Reversal of provision for loans and accounts
receivable (37,850) (143,615) (85,152) (35,632)
Reversal of provision for foreclosed assets (15,333) (5,493) (17,239) (7,214)
Reversal of provision for other assets (1,534) (41) (38) (16)
Reversal of provision for premises and equipment (7,905) (3,016) (6,149) (2,573)
Loss (gain) on sales of premises and equipment 369 393 (839) (351)
Loss (gain) on sales on investments securities 161 (5,878) 27 11
Realized and unrealized loss (gain) on
derivative financial instruments 1,299 5,409 (129,616) (54,238)
Loss (gain) on sales on foreclosed assets 7,121 2,867 3,433 1,437
Valuation gain (loss) on investment securities 37,736 (246,871) (266,428) (111,488)
Foreclosed assets donation 8,840 1,029 10,854 4,542
(Increase) in accounts receivable (75,496) (11,724) (28,454) (11,907)
Decrease (increase) in other assets 56,571 (63,752) (161,362) (67,523)
Increase in accounts payable 76,639 116,060 293,293 122,730
Increase in other liabilities 34,950 3,745 58,614 24,527
Other (47,397) 1,069 15,476 6,476
-------------- -------------- -------------- -------------
Net cash provided by operating activities 546,935 602,124 572,772 239,678
-------------- -------------- -------------- -------------
F-9
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2003 and 2004
(Stated in millions of pesos and thousands of U.S. Dollars)
2002 2003 2004 2004
-------------- -------------- -------------- -------------
(Unaudited)
Cash flows from investing activities:
(Increase) in loans Ps (947,739) Ps (1,941,055) Ps (1,565,627) US$ (655,143)
Decrease (increase) in customers' acceptances 54,254 (17,827) 118,021 49,387
Proceeds from sales of premises and equipment 15,048 35,737 48,454 20,276
Proceeds from sales of foreclosed assets 24,743 10,384 16,315 6,827
(Purchases) of premises and equipment (143,073) (290,947) (96,333) (40,311)
(Purchases) sales of investment securities (1,319,241) 96,942 (635,634) (265,983)
Proceeds from sales of long term investments 32 120,702 - -
-------------- -------------- -------------- -------------
Net cash used in investing activities (2,315,976) (1,986,064) (2,114,804) (884,947)
-------------- -------------- -------------- -------------
Cash flows from financing activities:
Dividends paid (48,442) (76,124) (156,861) (65,639)
Increase in deposits 1,207,310 1,443,839 1,630,119 682,129
Increase in long-term debt 54,258 9,036 480,713 201,156
Increase (decrease) in overnight funds 407,164 507,981 (501,645) (209,915)
Increase (decrease) in interbank borrowings and
borrowings from domestic development banks 286,361 94,580 (107,395) (44,940)
-------------- -------------- -------------- -------------
Net cash provided by financing activities 1,906,651 1,979,312 1,344,931 562,791
-------------- -------------- -------------- -------------
Increase (decrease) in cash and cash equivalents 137,610 595,372 (197,101) (82,478)
Cash and cash equivalents at beginning of year 713,479 851,089 1,446,461 605,277
-------------- -------------- -------------- -------------
Cash and cash equivalents at end of year Ps 851,089 Ps 1,446,461 Ps 1,249,360 US$ 522,799
============== ============== ============== =============
Supplemental disclosure of cash flows
information:
Cash paid during the year for:
Interest Ps 472,795 Ps 459,893 Ps 173,846 US$ 72,747
============== ============== ============== =============
Income taxes Ps 6,892 Ps 5,988 Ps 207,856 US$ 86,978
============== ============== ============== =============
----------
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 7,027 employees and operates through 377
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 "Subsidiaries"). Compania
Suramericana de Financiamiento Comercial S.A. ("Sufinanciamiento").
Sufinanciamiento has been consolidated by the Bank since December 31,
2003. The consolidated Subsidiaries are:
INDIRECT INDIRECT
PARTICIPATION PARTICIPATION
PERCENTAGE PERCENTAGE DATE OF
ENTITY LOCATION BUSINESS 2003 2004 CREATION
------ -------- -------- ------------- ------------- --------------
Almacenes Generales de Deposito
Mercantil S.A. ALMACENAR Colombia Warehousing and logistics 98.25 98.25 February 1953
Fiducolombia S.A. Colombia Trust 96.16 96.16 January 1992
Bancolombia Panama S.A. Panama Banking 100 100 January 1973
Bancolombia Cayman Cayman Islands Banking 100 100 August 1987
Leasing Colombia S.A. Colombia Leasing 99.99 99.99 December 1978
Compania Suramericana de
Financiamiento Comercial S.A.
SUFINANCIAMIENTO Colombia Finance 99.99 99.99 November 1971
Colcorp S.A. Corporacion
Financiera Colombia Finance 100 100 July 1994
Comisionista de Colombia S.A. Colombia Securities Brokerage 99.99 99.99 December 1991
Abocol S.A. Colombia Chemical 92.32 92.32 March 1960
Valores Simesa S.A. Colombia Various Commercial 71.75 71.75 December 2000
Investments
Inmobiliaria Bancol S.A. Colombia Real estate broker 98.95 98.95 June 1995
Fundicom S.A. Colombia Metals engineering 79.86 79.87 May 2000
Unicargo de Colombia S.A. Colombia Freight service 98.35 98.35 August 1994
Sistema de Inversiones y
Negocios S.A. Panama Commercial entity 100 100 September 1975
Sinesa Holding Company British Virgin Islands Commercial entity 100 100 June 1988
Todo 1 Colombia S.A. Colombia E-commerce 53.92 53.92 June 2001
Future Net Inc. Panama E-commerce 60.02 60.02 November 2000
Compania Metalurgica
Colombiana S.A. COMECOL(1) Colombia Metals engineering 39.65 39.65 December 1996
Sociedad Portuaria Mamonal S.A. Colombia Customs office 92.69 92.69 August 1991
Abocol Costa Rica S.A. Costa Rica Chemical products 92.43 92.43 December 2001
commercial
Fertillanos Ltda. Colombia Chemical products 55.39 55.39 October 2001
commercial
(1) Controlled through other subsidiaries (Valores Simesa S.A. and Colcorp S.A.)
F-11
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
On December 29, 2003, in accordance with the authorization
given by the Superintendencia Bancaria (the "Superintendency of Banking"),
the Bank acquired 94.89% of the capital of Sufinanciamiento S.A. The
remaining 5.10% of the participation was acquired by other Subsidiaries.
The acquisition price paid by BC was Ps 71,192 and the capital
amount registered at November 30, 2003 for acquired stock was Ps 41,565.
As such, the acquisition for control of Sufinanciamiento S.A. generated
goodwill for the difference, Ps 29,627.
Chapter XVII of 1995 External Circular 100 issued by the
Superintendency of Banking establishes that the goodwill will amortize in
proportional monthly installments affecting the statement of operations
during the time in which it is reasonably expected that future benefits
will be obtained and that, in any case, such term may not exceed ten (10)
years. Notwithstanding, in consideration that results allow, management
amortized one hundred percent of the value of this goodwill in the
statement of operations of 2003, in this way avoiding affecting future
results. This fact was made known in a timely manner to the
Superintendency of Banking.
One of the shareholders of Bancolombia S.A., Conavi Banco
Comercial y de Ahorros S.A. and Corfinsura S.A. is Suramericana de
Inversiones S.A. At September 14, 2004, Suramericana de Inversiones S.A.
required a formal analysis to determine if it is convenient to merge the
three companies (refer to Note 32).
(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 Superintendency of Banking, or, in the absence of such regulations,
the accounting principles 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
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,
Sistema de Inversiones y Negocios S.A., Sinesa Holding Company and Future
Net Inc. The Bank's Subsidiary Almacenar S.A. subconsolidates Unicargo de
Colombia S.A. The Subsidiary Colcorp S.A. subconsolidates Inmobiliaria
Bancol S.A., Abocol S.A., Valores Simesa S.A. (a company resulting from a
spin-off by Simesa S.A. at December 31, 2000), Fundicom S.A. and Todo Uno
Colombia.
F-12
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 Colombian GAAP, when 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 (Consumer Price Index) for middle-income earners. The adjustment
was applied monthly to non-monetary assets, equity (except for the
reappraisal of assets 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.
(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 foreign exchange purchases and sales on the exchange market.
Operations in foreign currencies other than United States
Dollars are converted into United States Dollars using the rate of
exchange published by Reuters and then re-expressed in Colombian Pesos at
the Representative Market Rate calculated on the last business day of the
month and certified by the Superintendency of Banking. The Representative
Market Rate at December 31, 2004 was Ps 2,389.75.
Before 2004 External Circular 006 entered into effect, the
translation of United States Dollars to Colombian Pesos was calculated
using the average Representative Market Rate certified by the
Superintendency of Banking, solely taking into account the business days
in the corresponding month. Said rate at December 31, 2003 was Ps 2,807.20
and at December 31, 2002 was Ps 2,814.89.
Foreign currency position is the difference between assets and
liabilities denominated in foreign currency, recorded in and out of the
balance, realized or contingent, including those that are settled in
Colombian local currency, which correspond to the financial statements
that include operations within the national territory.
F-13
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Spot foreign currency position is the difference between
assets and liabilities, denominated in foreign currency, based on the
unique chart of accounts; investments available for sale in equity and
debt securities, held to maturity and capital contributions in foreign
branches and derivates as indicated: forward contracts, futures contracts,
swaps and profit or loss in option valuation. Operations that can be
settled in local currency are not included in this position.
The maximum amount of the Bank's foreign currency position
cannot exceed twenty percent (20%) of the technical equity (for an
explanation of technical equity, see Item 4. Information on the Company -
B. Business Overview - B.7. Supervision and Regulation - Capital Adequacy
Requirements) and the Bank's spot foreign currency position cannot exceed
fifty percent (50%) of the technical equity.
The minimum amount of spot foreign currency position can only
be negative one day, without exceeding five percent (5%) of the technical
equity.
Pursuant to the provisions set forth in Banco de la Republica
(the "Colombian Central Bank") Board of Directors 2004 External Resolution
1 2004, as of March 31, 2004, the spot foreign currency position cannot be
negative.
The assets and liabilities in foreign currency of the
Subsidiaries abroad included in the consolidated financial statements were
converted into Colombian Pesos using the Representative Market Rate
calculated the last business day of the month.
The equity accounts were converted into Colombian Pesos using
historical exchange rates.
The income accounts were converted at an average rate of Ps
2,877.54 and Ps 2,626.22 per Dollar for the years 2003 and 2004,
respectively. Said rates correspond to the average value of the
representative market exchange rate on the business days in the period
from January 1 to December 31 of each year.
(d) CASH AND CASH EQUIVALENTS
The statement of cash flows was prepared using the indirect
method. Overnight funds sold with reselling agreements are considered to
be cash equivalents for the purposes of this statement.
F-14
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(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. The most significant
estimates are: allowance for loans, accrued interest losses, allowance for
foreclosed assets and valuation of investments and derivatives. Actual
results could differ from those estimates.
(f) OVERNIGHT FUNDS SOLD AND RESELLING AGREEMENTS
This account records the funds directly placed by the Bank and
its Subsidiaries in another financial institution with or without
investment collateral, using surplus liquidity, with or without a
commitment to resell, at terms of up to 30 days. The account also includes
overnight deposits with banks abroad using Bank funds deposited outside
Colombia.
Transactions 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, investments in companies
that Bancolombia has less than 50% of outstanding shares, to satisfy
requirements of law or regulation, or simply to eliminate or significantly
reduce market risks to which assets, liabilities or other balance sheet
items are exposed.
1. CLASSIFICATION
The investments are classified as "trading investments",
"investments available for sale" and "investments held to maturity". The
first two of these groups may include investments in debt or equity
securities. The third shall only include investments in debt securities.
Debt securities 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.
TRADING SECURITIES
Trading investments are those acquired for the main purpose of
obtaining profits from fluctuations in short-term prices.
F-15
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 they are mandatory investments entered into on the primary
market and provided that the counterparty for the operation is the Colombian
Central Bank, the General Treasury Direction of Colombia, institutions overseen
by the Superintendency of Banking or the Securities Superintendency or in the
exceptional cases that the Superintendency of Banking may determine.
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 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.
Bank Subsidiary Bancolombia Panama S.A. classifies the investments
it maintains for the purpose of exercising control as permanent in accordance
with Panama Superintendency of Banking Order 7 of 2000.
2. VALUATION
The purpose of valuation is to record the appropriate amount for a
given investment at a determinate date.
2.1 DEBT SECURITIES
Debt securities are valued daily and the result is recorded daily.
The procedures are defined in 1995 External Circular 100, Chapter I, numeral 6.1
issued by Superintendency of Banking.
The Bank determines the market value of trading debt securities and
of available for sale debt securities by using the prices, reference rates and
margins that the Bolsa de Valores de Colombia (the "Colombian Stock Exchange")
calculates and publishes daily.
Investments in debt securities held to maturity are valued
exponentially as of the internal rate of return calculated on the purchase date.
F-16
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2.2 EQUITY SECURITIES
Equity investments are valued monthly and the results of the
valuation are recorded monthly. They are valued based on the level of exchange
volume at the time of valuation, as follows:
- High-volume: They are valued based on the daily weighted
average trading price published by the exchange.
- Medium-volume: They are valued based on the average
price published by the exchange, being the weighted
average trading price on the last five days on which
securities are traded.
- Low volume and unquoted: They are valued based on the
increase or decrease according to the investor's share
of the variations in equity value calculated based on
the most recent audited financial statements that cannot
be older than six months since valuation date, or more
recent statements, if available.
2.3 SECURITIES IN FOREIGN CURRENCY, IN REAL VALUE UNITS (UVR) OR IN OTHER UNITS
First, we determine the market value of the respective security in
its original currency or unit.
As of January 2004, pursuant to 2004 External Circular 003 issued by
the Superintendency of Banking, if the security is denominated in a currency
other than the United States Dollar, the value of the security determined in its
original currency is converted into United States Dollars using the foreign
exchange translation rates published on the valuation date on the European
Central Bank web page. The value thus obtained is multiplied by the
Representative Market Rate effective on the valuation date (which is the current
rate for the next day) and certified by the Superintendency of Banking or by the
effective unit for the same day, as the case may be.
Before 2004 External Circular 003 issued by the Superintendency of
Banking entered into effect, to convert the value in United States Dollars of
securities denominated in foreign currency into Colombian Pesos, we multiplied
the value by the Representative Market Rate effective on the valuation date and
certified by the Superintendency of Banking.
3. RECORDING
3.1 TRADING INVESTMENTS
The difference between current and previous market value is used to
adjust the value of the investment and is credited or charged to earnings as
income or expense, respectively.
F-17
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
3.2 INVESTMENTS HELD TO MATURITY
The present value corresponds to the exponential valuation using the
internal rate of return calculated at the time of purchase and its updated value
is recorded as the greater of the investment value and its offsetting entry is
recorded as income in the fiscal period operations statement.
These investments are recorded at amortized cost and interest
accruals are recorded in earnings.
3.3 INVESTMENTS AVAILABLE FOR SALE
3.3.1 DEBT SECURITIES
Changes in the values of these securities are recorded using the
following procedure:
The difference between the present value on the valuation date and
the previous present value increases or decreases 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 difference between the market value and the present value of the
investment increases or decreases its value and is credited to the equity
account as unrealized earnings or loss account.
3.3.2 EQUITY INVESTMENTS
The changes found in these securities have accounting entries made
according to the investment trading volume, as follows:
3.3.2.1 INVESTMENTS IN SECURITIES WITH LOW VOLUME OR UNQUOTED SECURITIES
If the investment value based on the investor's shares of the equity
of the investee is greater than the value at which the investment is registered,
the difference will affect, in the first place, the provision or devaluation
until it runs out, and the excess is registered as a surplus for valuation in
stockholders' equity against reappraisal of the assets account.
If the investment value based on the investor's shares of the equity
of the investee is less than the value at which the investment is registered,
the difference will affect, in the first place, the surplus for valuation of the
corresponding investment until it runs out, and the excess is registered as
devaluation of said investment within capital, against devaluation of the assets
account.
When the dividends or profits are distributed in kind, including
those from capitalizing
F-18
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
the equity revaluation account, the portion recorded as the surplus for
valuation must be recorded as income, charged against the investment and the
surplus must be reversed. When the dividends or profits are distributed in cash,
the value recorded as surplus for valuation must be recorded as income, the
surplus reversed and the excess amount of the dividends must be recorded as a
lesser investment value.
Investments in Panama and in its affiliates are recorded pursuant to
Order 7 of 2000 as permanent investments.
3.3.2.2 HIGH OR MEDIUM - VOLUME
The update of the market value of these securities is recorded as an
accumulated unrealized gain or loss, within the equity accounts, crediting or
debiting the investment.
Dividends or profits distributed in kind or in cash, including those
from capitalizing the equity revaluation account, must be recorded as income up
to the amount corresponding to the investor of profits or equity revaluation
that the issuer has recorded since the investment acquisition date, charged to
accounts receivable.
Before External Circular 049 dated November 30, 2004 issued by
Superintendency of Banking became effective, dividends or profits distributed in
kind or in cash, including those from capitalizing the equity revaluation
account, had to be recorded up to the amount that had been recorded as
accumulated unrealized gains, during the fiscal year to which the profits and
equity revaluation distributed corresponded, and were charged to the latter. The
collection of the dividends in cash had to be recorded as a lesser value of the
investment.
4. PROVISIONS OR LOSSES DUE TO CREDIT RISK CLASSIFICATION
The prices of trading and available for sale debt securities that do
not have fair exchange prices, those classified as held to maturity as well as
the price for equity securities with low or minimum volume or that are unquoted
must be adjusted on each valuation date, based on the credit risk
classification.
Internal or external debt securities issued or guaranteed by the
Republic of Colombia or the Colombian Guarantee Fund for Financial Institutions
("Fogafin" for its Spanish initials) or issued by the Central Bank are not
subject to this adjustment.
4.1 SECURITIES ISSUED ABROAD OR WITH FOREIGN RANKING
Securities that are rated by a rating firm acknowledged by the
Colombian Securities Superintendency or securities issued by entities that are
rated by those rating firms cannot be registered for an amount that exceeds the
following percentages of their nominal net amortization value made up to the
valuation date:
F-19
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
LONG TERM MAX. AMOUNT SHORT TERM MAX. AMOUNT
RANKING % RANKING %
------------ ----------- ---------- -----------
BB+, BB, BB- Ninety (90) 3 Ninety (90)
B+, B, B- Seventy (70) 4 Fifty (50)
CCC Fifty (50) 5 y 6 Zero (0)
DD, EE Zero (0)
Provisions for investments classified as held to maturity, for which
it is possible to establish a fair exchange value, correspond to the difference
between the recorded value and the fair exchange value.
4.2 SECURITIES FROM ISSUES OR ISSUERS WITHOUT ANY FOREIGN RATING AND EQUITY
SECURITIES
These securities are rated and classified according to the
methodology defined by the Bank and its Subsidiaries.
MAX. REGISTERED
AMOUNT
CATEGORY % (1) INVESTMENT CHARACTERISTICS
----------------------- --------------- ----------------------------------------------
B Acceptable risk, Eighty (80) Present factors of uncertainty that could
greater than normal affect the capacity to continue adequately
fulfilling debt service and weaknesses that
could affect their financial situation.
C Appreciable risk Sixty (60) Present medium-high probabilities of
non-fulfillment of timely payments of capital
and interest in their financial situation that
may compromise the recovery of the investment.
D Significant risk Forty (40) Present non-fulfillment of agreed terms of the
security and material deficiencies in their
financial situation, the probability of
recovering the investment is highly doubtful.
E Unrecoverable Zero (0) Recovery highly improbable.
----------
(1) On the net nominal amortization values made up to the valuation date for
debt securities or the acquisition cost for equity securities.
F-20
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(h) LOANS AND FINANCIAL LEASE OPERATIONS
These accounts record loans and financial leases made by the Bank
and its Subsidiaries in the various modalities permitted. They are funded by the
Bank's 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 converted
into local currency.
The Subsidiary Bancolombia Panama S.A., authorized by the Panama
Superintendency of Banking, includes participating credits in its loan
portfolio. These are loans for which the subsidiary assumes no credit risk,
which, in spite of having been sold and 100% paid up, are not taken out or
omitted from the portfolio group. The profit in this business activity is seen
in the net interest margin between the loan participation portfolio and the
original loan portfolio.
External Circular 040 dated October 23, 2003 modified the treatment
of financial leases. Since January 1, 2004 they have been included as part of
the loan portfolio. For additional information see Note 2 (o).
The institutions overseen by the Superintendency of Banking must
have a Credit Risk Administration System that gathers policies, processes,
models, and control mechanisms to enable risk identification, measurement, and
proper mitigation.
Credit risk evaluation is done pursuant to effective regulations,
using an ongoing monitoring process and periodical portfolio classification as
described below.
For provisions, we apply Superintendency of Banking regulations as
described below; in addition, we calculate probable expected losses and we test
estimating provisions using this methodology.
During the month of December 2004, External Circular 052 modified
1995 External Circular 100 Chapter II issued by the Superintendency of Banking,
which sets forth guidelines for credit risk administration. This Circular
defines the basic elements of the system for the management of credit risk
(SARC, for its initials in Spanish) and introduces reference models and a time
schedule for submitting the internal models to the Superintendency of Banking,
among others. The Bank has adopted all required modifications and will continue
its in-depth develop of the proposed schemas as described below.
F-21
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
1. CLASSIFICATION
Loans and financial lease contracts are classified as follows:
HOME MORTGAGE LOANS
These are loans, no matter what their value, made to individuals for
the purchase of new or used housing or to build a home, all in accordance with
1999 Law 546. This type of loan is not a significant share of the loan
portfolio. Therefore, its characteristics are not described here. Total loans of
this type accounted for 0.003% of the Bank's total gross loans.
CONSUMER LOANS
These are loans and financial leases, no matter what their value,
granted to individuals for the purchase of consumer goods or to pay for
non-commercial or business services.
SMALL BUSINESS LOANS
These are loans and financial leases granted to microbusinesses.
"Microbusiness" means any economic exploitation unit owned by an
individual or corporate entity, in entrepreneurial, farming and livestock,
industrial, commercial or service activities, whether rural or urban, whose
staff does not exceed ten (10) workers and whose total assets are under five
hundred one (501) effective legal minimum monthly salaries ("SMLVs").
The Subsidiary Bancolombia Panama S.A. does not grant this type of
loan.
COMMERCIAL LOANS
These are loans and financial leases, other than mortgage loans,
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.
2. EVALUATION FREQUENCY
The Bank and its Subsidiaries make continuous evaluations of their
lending and financial lease operation risk, making all necessary modifications
to the respective classifications when there are new analyses or data to justify
such changes.
F-22
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
In the months of May and November, the Bank and its Subsidiaries
evaluate all loans and financial leases that are past due after having been
restructured and that at the time of the evaluation exceed three-hundred (300)
effective SMLVs, as well as loans from debtors whose debt from the different
loan types exceeds this same amount.
3. EVALUATION CRITERIA
The Bank and its Subsidiaries evaluate loans and financial leases
using the following criteria required by the Superintendency of Banking:
They evaluate the 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 information required
for the debtor: income and outgoing cash flows, economic solvency, information
on its current and past compliance with its obligations as well as the financial
and credit history of debtors in risk centers, the number of times loans have
been restructured, possible financial risks to cash flow, legal, operational and
strategic risks, and the possibility of contagion.
4. CLASSIFICATION
The Bank and its Subsidiaries classify loans and financial leases on
the basis of the above criteria into the following credit risk categories:
CATEGORY COMMERCIAL CONSUMER
---------------------------------- ------------------------------------ ------------------------------------
"A" Normal Risk current - and up to 1 month past due current - and up to 1 month past due
"B" Acceptable Risk, Above Normal 1-3 months past due 1-2 months past due
"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
CATEGORY SMALL BUSINESS LOANS HOME MORTGAGE
---------------------------------- ------------------------------------ ------------------------------------
"A" Normal Risk current - and up to 1 month past due current - and up to 2 months past due
"B" Acceptable Risk, Above Normal 1-2 months past due 2-5 months past due
"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.
F-23
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
RULES OF ALIGNMENT
A Bank and/or Subsidiary classification of B, C, D or E for any loan
or financial lease would automatically classify all of that debtor's accounts in
the same category, unless it can be shown to the Superintendency of Banking that
we have sound reasons for a lower risk classification.
Under the terms of the Colombian Commercial Code Articles 260-262,
financial institutions that are related will receive the same classification as
the parent institution unless the Superintendency of Banking is shown that there
are good reasons for maintaining it/them in a lower risk category.
The Superintendency of Banking requires that entities 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 of Banking can order reclassifications and
reranking of the classifications assigned by financial institutions. It can also
order loan portfolio reclassifications for an economic sector, geographical zone
or for one debtor or a group of debtors, whose borrowings must be accrued
pursuant to rules on individual debt limits.
5. SUSPENSION OF ACCRUALS
The Superintendency of Banking established that interest, lease
payments and other items of income cease to be accrued in the statement of
operation 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
As of March 25, 2003, the Bank established as policy that loans of
any type that are past due more than thirty (30) days will stop accruing
interest in the statement of operations and their entries will be made in
memorandum accounts until such time that the customer does not proceed to
cancel. It is estimated that at December 31, 2003 and 2004, approximately Ps 280
and Ps 277, respectively, are entered in memorandum accounts due to the Bank
adopting this policy. Likewise, the Subsidiary Bancolombia Panama S.A. applied
the Bank's policy in 2004 and the Subsidiary Sufinanciamiento S.A. has
implemented it since September 1, 2004.
F-24
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The other Subsidiaries defined as loan institutions will continue
applying the instructions of the Superintendency of Banking.
Those loans that become past due and that at some point have stopped
accruing interest, exchange rate corrections or adjustments, income from other
concepts, will stop accruing said income from their collection. Their entries
will be recorded in memorandum accounts until such loans are collected.
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 and
financial leases. This proportion may be higher if the general shareholders'
meeting so approves. The provision will be updated every month according to
increases or decreases in the loan portfolio volume.
Individual Provisions :
Based on the Superintendency of Banking regulations, minimum
allowances for loans and financial leases must correspond to the following
percentages, calculated on the basis of unsecured outstanding balances, pending
implementation of a internal methodology that permits the calculation of
allowances taking into account the expected losses in case of default:
SMALL BUSINESS
COMMERCIAL CONSUMER 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 20 100 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
Notwithstanding, until the new methodology, set forth through
Circular 052 dated December 30, 2004 issued by the Superintendency of Banking is
implemented, the Bank administration, seeking to anticipate the effects of
calculating expected losses decided to increase the provisions since March, 2004
for the Consumer and Small Business categories on an unconsolidated basis,
which, at the end of December 2004 were applied as follows:
F-25
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
CLASSIFICATION CONSUMER SMALL BUSINESS
-------------------------------- --------------------- ---------------------
Interest/ Interest/
Capital others Capital others
B- Acceptable Risk, Above Normal 30 30 30 30
C- Appreciable Risk 50 100 60 100
D- Significant Risk 100 100 100 100
E- Risk of Unrecoverability 100 100 100 100
Additional provisions recorded by the Bank due to adopting said
policy at the end of December 2004 on an unconsolidated basis represented
approximately Ps 18,280.
At the end of December 2004, the Subsidiary Sufinanciamiento S.A.
applied 33.5% for the loan portfolio classified "B" and 100% for the loan
portfolio classified "C", "D" and "E" in the provision percentages used.
7. THE EFFECT OF SECURITY ON PROVISIONS
For individual provisions, admissible security is valued at no more
than 70% of its value. Notwithstanding, depending on whether the security is a
mortgage or not and on the length of time the loan has been in arrears, we only
take into consideration the percentages of the total security value indicated
below.
TIME ELAPSED FROM DEFAULT DATE TO SECURITY NON-EXECUTION
% COVER OF SECURITY 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
The security is admissible when it is formalized and if it has a
professionally-established and objective value to provide effective legal
backing to repayment of the secured loan, giving the lender or creditor
preferential or prior rights to obtain payment, and if it is reasonably
marketable.
To calculate provisions, the value of the security represented in
pledges on the debtor's commercial or industrial establishments, real estate
that is part of the respective establishment or mortgages on real estate where
the establishment operates is not taken into consideration.
F-26
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 do not base their decision to lend on
the amount or type of security offered, since we 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 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 Small and Medium Sized Enterprises ("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 not only
the criteria applicable to regular borrowers but also the provisions set forth
in Law 358 of 1997 and Law 617 of 2000.
9. RESTRUCTURED LOANS
A "restructured loan" is a loan for which a legal agreement exists
whose purpose or effect is to modify some of the terms of the loan for the
debtor's benefit and at its request. This includes informal or non-moratorium
agreements, Law 550 of 1999 agreements, Law 617 of 2000 agreements, and special
restructuring as defined in the Superintendency of Banking Circular 39 of 1999.
For the loans restructured as indicated above or using other
restructuring modes which include the capitalization of interest recorded in
memorandum accounts or balances written off, including capital, interest and
other items, the amounts capitalized are recorded as deferred income and they
are amortized in proportion to the amounts actually collected.
10. WRITE OFFS
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, provided they meet the following conditions:
- Provision of 100% of all amounts past due (capital,
interest and other items)
- One hundred eighty (180) days past due for consumer and
small business loans
- Three hundred sixty (360) days past due for commercial
loans
- Five hundred forty (540) days past due for 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 respect
of the loan, and neither the Bank nor its Subsidiaries are relieved of their
obligations to pursue recovery as appropriate.
F-27
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Write-offs in Bancolombia Panama S.A.
In the case of the affiliate in Panama, we take into account the
Republic of Panama Superintendency of Banking Order 6-2000 dated June 28, 2000,
which states that Bancolombia Panama 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 and its Subsidiary Bancolombia Panama S.A. issue local
currency and foreign currency bank acceptances for up to 180 days for import or
export operations or for local purchases of merchandise, pursuant to legal
provisions.
They are treated as active loans and may not exceed 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 "past due bank acceptances" until it is paid, and as of
maturity, these acceptances are subject to reserve requirements for on 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 the internationally-accepted deferred credit mode for
up to one year. The ledgers may therefore contain foreign currency acceptances
for more than 180 days.
DERIVATIVES
The Bank and its Subsidiaries record the amount of agreements
between two or more parties to purchase or sell assets at a future date, whose
compliance or settlement is agreed upon more than two business days following
the operation initiation date, in order to provide or obtain hedging, in the
terms defined by competent authorities. Therefore, these agreements create
reciprocal and unconditional rights and obligations. Operations are formalized
by contract or letter of intent. The Bank has contracts for forwards, for
options, swaps and futures.
Currency derivatives are designed to cover exchange exposure risks
on structural or traded open positions by setting up a reciprocal operation or
synthetic coverage for up to the maximum exposures allowed by the regulation and
control agencies.
The difference between rights and obligations is recorded as income
or expense, as the case may be.
F-28
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
NEXT DAY OPERATIONS
These include all agreements or contracts that meet the needs of two
parties acting outside the market, for the purpose of accepting or delivering a
specific quantity of a product or underlying asset with defined specifications
that are performed a maximum of two business days after the date of the
agreement.
Such operations entered into force through March 19, External
Circular 012 of 2004 issued by Superintendency of Banking. For the period ending
on December 31, 2003, cash operations, also known as "Next Day Operations", were
recorded in accounts receivable or in accounts payable depending on their
nature.
FORWARD CONTRACTS
A forward contract is any agreement or contract that meets the needs
of two parties acting outside the market for the purpose of accepting or
delivering a specific quantity of a product or underlying asset with defined
specifications regarding price, date, place and means of delivery.
FUTURE CONTRACTS
These are standard contracts for future delivery, specifying due
date, quantities, amounts, qualities, etc. The valuation is calculated pursuant
to the stock market practices where the securities are traded.
Futures may be liquidated in cash, by a reciprocal operation prior
to the due date, by physical delivery of a product or by liquidating against an
index.
SWAP CONTRACTS OR FINANCIAL EXCHANGE CONTRACTS
A swap contract or financial exchange contract is a contract between
two parties that agree to exchange flows of money within the time set forth in
the obligations, which is financially similar to a series of Forward Contracts
whose objective is to reduce costs and risks due to variations in exchange rates
or in interest rates.
OPTIONS CONTRACTS
In options contracts, the holder of an option has the right, but not
necessarily the obligation, to purchase or sell a specific quantity of an asset
at a given price on a given date or during a determined period. The Bank has
established an accepted technique for valuing these operations, taking into
account market risks, operational risks and legal risks.
Derivatives are accounted for at fair value on a daily basis and
results of the valuation are recorded on the same basis.
F-29
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(j) FORECLOSED ASSETS
The Bank and its Subsidiaries record the adjusted value of
foreclosed assets received in payment of unpaid loans in this account.
The following criteria apply to the recording of foreclosed assets:
- The initial value recorded is the value specified in the
court award or the one agreed upon by the debtors.
- If the property received in payment is not in a sellable
condition, its book value is increased by the expenses
the Bank and its Subsidiaries incur to put it into a
sellable condition.
- If the proceeds of the sale are more than the settlement
value agreed upon with the debtor, that difference is
recorded as an account payable to the debtor. If the
proceeds of sale are expected to be insufficient to
cover the outstanding debt, the difference is recorded
as an allowance.
Real estate received in payment corresponding to investment
securities are valued by applying the criteria indicated in this note in letter
g Investments, but taking into account provision requirements for the periods
referred to below.
LEGAL TERM FOR THE SALE OF FORECLOSED ASSETS
Institutions must sell the goods that have been transferred in
payment of debts previously contracted in the course of business or that have
been adjusted at public auction due to mortgages in their name no later than two
years after the foreclosing date, except when upon the Board of Directors'
request, the Superintendency of Banking extends the term. However, in no case
may the extension exceed an additional period of two years.
PROVISIONS FOR FORECLOSED ASSETS
With the issuance of the Superintendency of Banking External
Circular 034 of August 2003, (Current since October 2003) supervised banks must
design and adopt their own internal models for the calculation of provisions for
foreclosed assets, by means of which expected losses for all types of assets are
estimated. Until such model is presented and approved by the Superintendency of
Banking, provisions will be made following the parameters below.
F-30
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Real estate
A provision equal to 30% of the value of the asset at the time of
receipt must be made in proportional monthly installments within the first year
following receipt. This provision will increase an additional 30% in
proportional monthly installments within the second year following receipt of
the asset. Once the legal term for sale has expired without authorization to
extend, the provision must be 80% of the value upon receipt. In case the term
extension is granted, the remaining 20% of the provision may be constituted
within said term.
Moveable Assets
A provision equal to 35% of the value of the asset at the time of
acquisition must be made in proportional monthly installments within the first
year following receipt. Said provision must be increased an additional 35% in
proportional monthly installments within the second year following receipt of
the asset. Once the legal term for sale has expired without authorization to
extend, the provision must be 100% of the book value of the asset prior to
provisions. If the term extension is granted, the remaining 30% of the provision
may be constituted within said term.
The Bank and its Subsidiaries do not have their own internal model
for calculating provisions for foreclosed assets through which expected losses
are estimated by type of asset and approved by the Superintendency of Banking.
Based on individual analyses related to the feasibility of realizing
a return on some foreclosed assets, the Bank records provisions for them, which
are higher than the provisions that the Superintendency of Banking requires.
(k) LOAN FEES
Loan origination and commitment fees, as well as direct loan
origination and commitment costs, are recorded in the consolidated statement of
operations 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 which 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. The annual depreciation rates for each asset
item are:
F-31
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Buildings 5%
Equipment, furniture and fittings 10%
Computer equipment 20%
Vehicles 20%
The individual net book value of real estate (cost less accumulated
depreciation) is compared against market values taken from independent
professional appraisals. If the market value is higher, a reappraisal is
recorded; otherwise, the difference is charged to expenses for the period.
Valuations must be made at least every three years.
At December 31, 2003 and 2004, 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:
Corrective maintenance provides for the immediate replacement of
parts, accessories or elements that may affect safety or proper operation.
Preventive maintenance consists of regular checks of architectural and
electrical items, conducted twice a year and the maintenance of equipment,
furniture and fittings is done three to four times a year.
(m) BRANCHES AND AGENCIES
This account records the operations between the Bank's branches and
agencies.
Balances are reconciled monthly and pending items are adjusted
within thirty (30) calendar days. On the date of the financial statements, the
Bank reclassifies net balances representing branch and agency transactions to
asset or liability accounts and the respective income or expense is recorded.
(n) PREPAID EXPENSES AND DEFERRED CHARGES
Prepaid expenses are payments made by the Bank and its Subsidiaries
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 goods and services received, for which the Bank expects to
obtain future economic benefits.
Amortization of prepaid expenses and deferred charges is calculated
from the date which they contribute to the generation of income, considering the
following factors:
F-32
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 period no
greater than two years.
- Software is amortized over a maximum of three years.
- The goodwill corresponding to acquiring 51% of the
shares of Banco de Colombia is being amortized over ten
years. Goodwill arises from the amount paid in the 1998
merger over and above the equity value, plus certain
expenses incurred in the process.
- On December 29, 2003, the Bank, its Subsidiary Colcorp
S.A duly authorized by the Superintendency of Banking
and Inmobiliaria Bancol S.A acquired 99.99% of the stock
of the Compania Suramericana de Financiamiento Comercial
S.A. Sufinanciamiento. In this operation goodwill was
generated, which was totally amortized in the month of
December 2003.
- The goodwill generated by acquiring 10.23% of the shares
of Fiducolombia S.A. was totally amortized in the month
of December 2003.
- Stationery is amortized as and when consumed.
- Bonuses under the voluntary retirement plan are
amortized as permitted by the Superintendency of
Banking.
- Contributions and affiliations are amortized over the
period prepaid.
- Institutional advertising and publicity is amortized
during a period equal to the period established for the
accounting period. For advertising for new product
launching or brand or name changes for the institution
or its products, the amortization period cannot exceed
three (3) years. Other disbursements corresponding to
occasional advertising and publicity cannot be deferred
no matter what their amount.
- All other items are amortized over the period in which
it is estimated that the expense will be recovered or
expected benefits will be realized.
During the year 2004, the Bank did not have any deferred charges for
rented property remodeling or enhancement.
F-33
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(o) LEASED ASSETS
Subsidiaries Leasing Colombia S.A., Sufinanciamiento S.A. and
Bancolombia Panama S.A. record the value of assets delivered under financial
leases.
Since December 31, 2003 the Companies record the value of the goods
delivered under financial leases entered into as of January 1, 1996, 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.
During 2003 the Superintendency of Banking modified the accounts
chart regarding lease operations and accounts receivable provisions pursuant to
External Circulars 022 and 040. Such modifications were applied as of January 1,
2004.
Financial leases that were recorded in an independent line were
reclassified to loan portfolio line.
Operational leases entered into by the Companies, are accounted for
as assets given in operational lease, after the respective contract is entered
into by the parties and the leased asset is given to the user.
Depreciation will be recorded for the lesser of the useful life of
the good and the lease contract term. The Companies use the financial
depreciation methodology that requires that the depreciation expense is recorded
for each month or fraction thereof.
Also, a general provision of 1% of the value of goods delivered
under financial leases will continue to be made, without the sum of the accrued
depreciation and the general provision exceeding 100% of the value of the goods
delivered under the operating lease contracts.
(p) REAPPRAISALS
This account records reappraisals of available for sale investments
with low exchange volume or which are unquoted, property and equipment, real
estate and works of art and culture.
Starting from October of 2003, with the coming in force of External
Circular 034, the Superintendency of Banking prohibited the non-registration of
reappraisals for foreclosed assets, and a maximum term is established for
reversing those existing, until December of 2003.
Valuations are subject to the accounting policy for each type of
asset.
F-34
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(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 thirty (30) calendar days, except the operations with the
Colombian Central Bank. 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 in which 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 Note 2(h).
(s) RETIREMENT PENSIONS
The Bank and its Subsidiaries Almacenar S.A. and Abocol apply the
provisions in Decree 1517 of 1998, 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 percentages needed to complete amortization by 2010. As of December 31,
2004, the Bank has amortized the total actuarial calculation.
(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.
F-35
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(u) RECOGNITION OF INTEREST REVENUE
Interest revenue is recognized in current earnings as it accrues.
Interest is suspended when due and there is a doubt regarding its
collectibility.
(v) CONTINGENT ACCOUNTS
These accounts record operations in which the Bank and its
Subsidiaries acquire rights or assume obligations conditioned by possible future
events with varying degrees of probability, such as definite, possible or
remote. Likewise, they include financial yields as of when loan portfolio and
financial lease interest entry into the statement of operations is suspended.
Contingent accounts are included in the caption memorandum accounts of the
balance sheet.
(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 that record the figures used in preparing tax returns, internal control
or management information and reciprocal operations between the Bank and its
Subsidiaries.
(x) NET INCOME PER SHARE
To determine net income per share, the Bank uses the weighted
average of the number of shares outstanding during the accounting period. For
the periods ended December 31, 2002, 2003 and 2004, the weighted average of the
Bank's outstanding shares was 576,695,395.
(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
major market risks, in order to provide protection against losses due to
possible variations in asset or liability values.
(z) CAPITAL ADEQUACY
Capital Adequacy for Banks is required to be not less than 9% of
their total credit risk weighted assets and credit contingencies. Under Decree
1720 of 2001 calculation of capital adequacy must incorporate market risk in
addition to the credit risk. This new risk for capital adequacy requirement was
covered 80% in 2003 and 100% in 2004. Calculations are made each month on an
unconsolidated basis and in June and December on consolidated accounts which
include the Bank's financial Subsidiaries in Colombia and abroad.
F-36
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
As of June 2004 when Decree 2061 was issued, modifications to Decree
1720 of 2001 were set forth that provide new rules for calculating mandatory
convertible bonds and currency-linked bonds in the additional equity of credit
institutions , as well as modifications to the classification and weighting of
mortgage loans, derivative operations and securities from securitization
processes.
As of December 31, 2003 and 2004 the capital adequacy ratio was
13.08% and 13.45%, respectively.
(aa) LEGAL RESERVE
According to Colombian law, credit institutions must constitute a
legal reserve that will amount to at least fifty percent (50%) of the subscribed
capital, formed with ten percent (10%) of the net income of each period.
(bb) CONVENIENCE TRANSLATION TO U.S. DOLLARS
The Bank maintains its accounting records and prepares its financial
statements in Colombian pesos. The U.S. dollar amounts presented in the
financial statements and accompanying notes have been converted from peso
figures solely for the convenience of the reader at the exchange rate of Ps
2,389.75 per US$ 1, which is approximately the exchange rate, in effect at
December 31, 2004. This translation may not be construed to represent that the
Colombian peso represents or has been or could be converted into U.S. dollars at
that or any other rate.
(cc) INCOME TAX
The income tax is determined as follows: from the ordinary and
extraordinary income realized in the period, that being susceptible of produce
net increase of shareholders' equity in the moment they incurred and, that have
not been excepted, are reduced returns, reductions and discounts to obtain net
income. As appropriated, realized costs that have a direct relation with income
are reduced to determine income before taxes. Deductions are applied to income
before taxes to obtain the taxable income for the ordinary system.
For purposes of income tax, it is presumed that the taxable income
is not lower than 6% of shareholder's equity at the last day of the immediately
previous taxable period. The excess of taxable income determined under the
ordinary system over presumed income becomes taxable income to which the
statutory tax rate applies.
When income tax is paid on presumed income, the difference between
this and the income tax calculated under ordinary system can be adjusted in the
following five years.
F-37
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Deferred income taxes are generally recognized for timing
differences for commercial and manufacturing subsidiaries. For financial
companies, the Superintendency of Banking has restricted inclusion of
timing differences related to the amortization of fiscal losses and the
excess of presumed income over ordinary income as a deferred tax asset.
(3) TRANSACTIONS IN FOREIGN CURRENCY
The Superintendency of Banking sets limits on the amount of
foreign-currency assets and liabilities. The Bank was in compliance with
the subject rules as of December 31, 2003 and 2004.
Substantially all foreign currency holdings are in U.S.
dollars. The consolidated foreign currency assets and liabilities of the
Bank at December 31, 2003 and 2004 were as follows:
2003 2004
--------------- ------------
ASSETS:
Cash and due from banks US$ 63,117 US$ 73,391
Overnight funds 210,093 180,720
Investment securities 637,960 562,723
Loans 627,104 825,371
Customers' acceptances and derivatives (192,300) (203,714)
Accounts receivable 8,647 13,574
Premises and equipment, net 44,424 2,433
Other assets 3,046 3,379
--------------- ------------
Total foreign currency assets US$ 1,402,091 US$1,457,877
--------------- ------------
LIABILITIES:
Deposits 1,071,986 1,176,207
Bank acceptances outstanding 9,807 21,121
Borrowings from domestic development banks 6,455 815
Interbank borrowings 162,460 103,058
Other liabilities 11,660 12,682
--------------- ------------
Total foreign currency liabilities 1,262,368 1,313,883
--------------- ------------
NET FOREIGN CURRENCY ASSET POSITION US$ 139,723 US$ 143,994
=============== ============
The Bank's unconsolidated net foreign currency asset position
amounted to US$ 201,620 and US$ 209,513 at December 31, 2003 and 2004,
respectively. The Bank has the required net foreign currency position
within the legal terms.
At December 31, 2003 and 2004, the Subsidiaries Bancolombia
Panama S.A. and Bancolombia Cayman had 86.32% and 67.85% of the
consolidated assets in foreign currency and 83.84% and 83.31% of the
consolidated liabilities in foreign currency, respectively.
F-38
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(4) CASH AND DUE FROM BANKS
The balances of cash and due from banks at December 31, 2003
and 2004 consisted of the following:
2003 2004
---------- ----------
COLOMBIAN PESO DENOMINATED:
Cash Ps 436,146 Ps 492,243
Due from the Colombian Central Bank 202,275 52,830
Due from domestic banks 6,014 25,770
Remittances of domestic negotiated checks in transit 26,704 22,625
Provision (268) (339)
---------- ----------
TOTAL LOCAL CURRENCY 670,871 593,129
---------- ----------
FOREIGN CURRENCY:
Cash 34,951 77,304
Due from the Colombian Central Bank 9,560 8,514
Due from foreign banks 128,313 85,465
Remittances of foreign negotiated checks in transit 4,752 4,276
Provision (395) (174)
---------- ----------
TOTAL FOREIGN CURRENCY 177,181 175,385
---------- ----------
TOTAL CASH AND DUE FROM BANKS Ps 848,052 Ps 768,514
========== ==========
Reserves against transactions and time deposits with the
Colombian Central Bank amounted to Ps 628,071 and Ps 516,648 at December
31, 2003 and 2004, respectively. The restriction, which is prescribed by
the Colombian Central Bank, is based on a percentage of deposits
maintained at the Bank by its customers.
(5) INVESTMENT SECURITIES
Investment securities at December 31, 2003 and 2004 consisted
of the following:
2003 2004
------------ ------------
TRADING SECURITIES
COLOMBIAN PESO DENOMINATED:
Colombian government Ps 823,750 Ps 1,223,762
Colombian Central Bank 657 261
Government entities 22,196 65,478
Financial institutions 419,439 564,115
Corporate bonds 17,229 19,930
Other marketable equity securities 20,776 68,316
------------ ------------
Total local currency denominated 1,304,047 1,941,862
------------ ------------
F-39
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2003 2004
------------ ------------
FOREIGN CURRENCY DENOMINATED:
Colombian government 325,255 282,897
Government entities 29,293 150,961
Other marketable equity securities 3,140 -
------------ ------------
Total foreign currency denominated 357,688 433,858
------------ ------------
Total trading securities 1,661,735 2,375,720
------------ ------------
Allowance for trading securities (5,652) (53)
------------ ------------
Trading securities, net Ps 1,656,083 Ps 2,375,667
============ ============
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 9.08% and
4.60% for 2003 and 2004, respectively.
The Bank had pledged investments securities of Ps 1,309,332
and Ps 787,957 as collateral to secure lines of credit at international
banks, domestic development banks and other financial institutions as of
December 31, 2003 and 2004, respectively.
The Bank sold Ps 66,720,388 and Ps 118,823,601 of investment
securities during the years ended December 31, 2003 and 2004,
respectively.
2003 2004
------------- -------------
AVAILABLE FOR SALE - DEBT SECURITIES
COLOMBIAN PESO DENOMINATED:
Colombian government Ps 582,737 Ps 1,279,564
Financial institutions - 14,687
------------- -------------
Total local currency denominated 582,737 1,294,251
------------- -------------
FOREIGN CURRENCY DENOMINATED:
Colombian government 866,072 289,584
Financial institutions 166,406 114,322
Other marketable equity securities 190,015 245,528
------------- -------------
Total foreign currency denominated 1,222,493 649,434
------------- -------------
Total Available for sale - Debt securities 1,805,230 1,943,685
------------- -------------
Allowance for Available for sale - Debt securities (1,372) -
------------- -------------
Total Available for sale - Debt securities, net Ps 1,803,858 Ps 1,943,685
============= =============
F-40
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
PARTICIPATION
PERCENTAGE AT
DECEMBER 31, 2004 2003 2004
----------------- ------------ ------------
AVAILABLE FOR SALE - EQUITY SECURITIES
Corporacion Nacional de Ahorro y Vivienda S.A. Conavi 28.52% Ps 88,681 Ps 88,681
Todo Uno Services 39.05% 57,518 52,152
Corporacion Financiera Suramericana S.A. Corfinsura 4.61% 22,123 55,749
Urbanizacion Chico Oriental No. 2 Ltda. (1) 24.37% 7,848 7,848
Carreteras Nacionales del Meta S.A. 8.44% 6,418 5,615
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. 48.60% 6,957 6,957
Fideicomiso Devinorte 10.31% 5,277 5,277
Concesiones CCFC S.A. 25.50% 4,358 4,358
Venrepa C.A. 99.62% 3,169 2,697
Banco Latinoamericano de exportaciones BLADEX S.A. 0.20% 2,387 2,183
Deposito Centralizado de Valores de Colombia Deceval
S.A. 6.98% 1,276 1,527
Compania de Inversiones Bogota S.A. 13.00% 653 653
3001 S.A. 5.85% 699 955
Urbanizacion Sierras del Chico Ltda. (1) 0.55% 203 203
Concesiones Urbanas S.A. 33.32% 783 8,446
Other 13,140 12,765
------------ ------------
TOTAL AVAILABLE FOR SALE - EQUITY SECURITIES 228,504 263,080
Allowance for other-than-temporary impairment in value (70,296) (60,685)
------------ ------------
TOTAL AVAILABLE FOR SALE - EQUITY SECURITIES, NET Ps 158,208 Ps 202,395
============ ============
----------
(1) Allowance was increased in compliance with instructions of Superintendency
of Banking.
Dividends received from equity investments amounted to Ps
19,491, Ps 30,734 and Ps 30,546 for the years ended December 31, 2002,
2003 and 2004, respectively.
Most of the equity investments were classified as Category
"A". The following investments are classified in categories other than
"A":
F-41
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2003 2004
------------------------- -----------------------
VALUATION VALUATION
CATEGORY ALLOWANCE CATEGORY ALLOWANCE
-------- ---------- -------- ----------
Todo Uno Services D Ps 53,932 D Ps 48,153
Urbanizacion Chico Oriental No. 2 Ltda. E 7,848 E 7,848
Urbanizacion Sierras del Chico Ltda. E 203 E 203
Industria Colombo Andina Inca S.A. E 300 E 300
Venrepa C.A. E 3,169 E 2,697
Compania de Inversiones Bogota S.A. E 653 E -
3001 S.A. E 699 E 955
Sociedad Portuaria San Andres E 3 E 3
Sociedad Promotora Siderurgica Colombiana E.U. E 365 E 387
Tesicol E 4 E 4
Prina E 275 - -
== ========== == ==========
2003 2004
------------- -------------
HELD TO MATURITY SECURITIES
COLOMBIAN PESO DENOMINATED:
Colombian government Ps 701,941 Ps 657,771
Government entities 3,764 3,719
Financial institutions 7,045 53,471
Other 9,543 18,390
------------- -------------
TOTAL HELD TO MATURITY SECURITIES 722,293 733,351
Allowance for other-than-temporary impairment in value (3,719) (4,887)
------------- -------------
TOTAL HELD TO MATURITY SECURITIES, NET Ps 718,574 Ps 728,464
============= =============
(6) LOANS AND FINANCIAL LEASES
The following represents the classification of the total loan
portfolio and financial lease contracts as of December 31, 2003 and 2004
in accordance with the provisions of the Superintendency of Banking:
DECEMBER 31, 2003
CLASSIFICATION MORTGAGE COMMERCIAL CONSUMER SMALL LOAN TOTAL
-------------------- --------- ------------- ------------- ----------- --------------
"A" Normal Risk Ps 47,676 Ps 5,968,085 Ps 1,195,833 Ps 76,679 Ps 7,288,273
"B" Acceptable Risk 4 309,324 32,805 3,164 345,297
"C" Appreciable Risk - 96,431 11,816 1,368 109,615
"D" Significant Risk 18 180,263 15,048 746 196,075
"E" Unrecoverable 463 70,391 17,657 1,897 90,408
--------- ------------- ------------- ----------- --------------
TOTAL LOANS Ps 48,161 Ps 6,624,494 Ps 1,273,159 Ps 83,854 Ps 8,029,668
========= ============= ============= =========== ==============
F-42
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
DECEMBER 31, 2004
FINANCIAL
CLASSIFICATION MORTGAGE COMMERCIAL CONSUMER SMALL LOAN LEASES TOTAL
----------------------- --------- ------------- ------------- ----------- ----------- -------------
"A" Normal Risk Ps 56,067 Ps 6,803,951 Ps 1,560,599 Ps 81,859 Ps 824,922 Ps 9,327,398
"B" Acceptable Risk 3 251,638 36,752 2,979 29,587 320,959
"C" Appreciable Risk - 58,548 14,719 1,208 18,700 93,175
"D" Significant Risk - 176,448 21,804 864 5,228 204,344
"E" Unrecoverable 37 63,371 21,192 3,090 1,673 89,363
--------- ------------- ------------- ----------- ----------- -------------
TOTAL LOANS AND
FINANCIAL LEASES (1) Ps 56,107 Ps 7,353,956 Ps 1,655,066 Ps 90,000 Ps 880,110 Ps 10,035,239
========= ============= ============= =========== =========== =============
----------
(1) On October 23, 2003, the Superintendency of Banking through its External
Circular 040, modified the treatment of financial leases. Since January 1,
2004 it is accounted for as part of the loan portfolio.
Promissory notes by means of which loans amounting to Ps
725,193 and Ps 1,129,825 at December 31, 2003 and 2004, respectively, have
been documented were duly endorsed to domestic development banks, as
required for laws regulating such type of loans.
The following represents a summary of restructured loans as of
December 31, 2003 and 2004:
2003 2004
----------- -------------
Ordinary restructurings Ps 482,967 Ps 406,964
Extraordinary restructurings 38,928 13,060
Under law 550 71,503 61,255
Under law 617 108,395 156,617
Creditor agreement proceedings 11,364 9,793
Performance Agreement 49,564 3,420
Interest and other receivable items 12,874 9,767
----------- -------------
775,595 660,876
Allowances for loan losses (192,539) (205,074)
----------- -------------
NET OF RESTRUCTURED LOANS Ps 583,056 Ps 455,802
=========== =============
F-43
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, FINANCIAL LEASES AND ACCRUED INTEREST LOSSES
An analysis of the activity in the allowance for loans and
financial leases losses during the years ended December 31, 2002, 2003 and
2004 is as follows:
2002 2003 2004
----------- ------------ -----------
Balance at beginning of year Ps 271,729 Ps 332,324 Ps 387,263
Allowance for financial lease reclassification (1) - - 7,002
Balance at beginning of year (Sufinanciamiento) - 11,854 -
Provision 143,361 286,170 186,480
Charge-offs (71,592) (112,393) (55,032)
Effect of changes in exchange rate 10,366 (284) (12,751)
Recoveries (21,540) (130,408) (78,584)
----------- ------------ -----------
Balance at end of year Ps 332,324 Ps 387,263 Ps 434,378
=========== ============ ===========
Ratio of charge-offs to average outstanding loans 1.31% 1.61% 0.62%
=========== ============ ===========
----------
(1) On October 23, 2003, the Superintendency of Banking through its External
Circular 040, modified the treatment of financial leases. Since January 1,
2004 they are accounted for as part of the loan portfolio.
The activity in the allowance for accrued interest losses
during the year ended December 31, 2002, 2003 and 2004 is as follows:
2002 2003 2004
----------- ------------ -----------
Balance at beginning of year Ps 27,011 Ps 15,074 Ps 5,170
Balance at beginning of year (Sufinanciamiento) - 769 -
Financial lease reclassification (1) - - 473
Provision 4,518 5,316 4,483
Charge-offs (5,293) (4,089) (2,072)
Recoveries (11,834) (11,897) (3,332)
Effect of changes in exchange rate 672 (3) (119)
----------- ------------ -----------
Balance at end of year Ps 15,074 Ps 5,170 Ps 4,603
=========== ============ ===========
----------
(1) On October 23, 2003, the Superintendency of Banking through its External
Circular 040, modified the treatment of financial leases. Since January 1,
2004 they are accounted for as part of the loan portfolio.
F-44
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(8) CUSTOMER ACCEPTANCES AND DERIVATIVES
The Bank's rights and commitments from derivatives operations
as of December 31, 2003 and 2004 were as follows:
2003 2004
------------- -------------
CUSTOMER ACCEPTANCES
Current Ps 35,806 Ps 64,515
Overdue - 1,979
------------- -------------
Total 35,806 66,494
DERIVATIVES
(Fair value of derivatives instruments)
NEXT DAY OPERATIONS
Foreign exchange rights contracts to buy - 94,891
Foreign exchange rights contracts to sell - 9,122
Financial instruments rights to buy (local currency) - 2,451
------------- -------------
Total rights - 106,464
Foreign exchange commitments contracts to buy - (95,133)
Foreign exchange commitments contracts to sell - (9,102)
Financial instruments commitments to buy (local currency) - (2,448)
------------- -------------
Total obligations - (106,683)
------------- -------------
TOTAL NEXT DAY OPERATIONS - (219)
------------- -------------
FORWARD CONTRACTS
Foreign exchange rights contracts to buy 747,839 2,988,149
Foreign exchange rights contracts to sell 1,744,465 4,142,648
Financial instruments rights to buy (local currency) 165,262 338,543
Financial instruments rights to sell (local currency) 146,542 273,656
Other rights - 2,385
------------- -------------
Total rights 2,804,108 7,745,381
Foreign exchange commitments contracts to buy (750,146) (3,078,485)
Foreign exchange commitments contracts to sell (1,773,315) (4,076,909)
Financial instruments commitments to buy (local currency) (168,213) (336,544)
Financial instruments commitments to sell (local currency) (146,431) (275,713)
------------- -------------
Total obligations (2,838,105) (7,767,651)
------------- -------------
TOTAL FORWARD CONTRACTS (33,997) (22,270)
------------- -------------
FUTURES CONTRACTS
Foreign exchange rights contracts to buy Ps 7,720 Ps 14,578
Foreign exchange rights contracts to sell 64,116 52,723
Financial instruments rights to buy (local currency) 258 -
------------- -------------
Total rights 72,094 67,301
F-45
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2003 2004
------------- -------------
Foreign exchange commitments contracts to buy (7,690) (14,578)
Foreign exchange commitments contracts to sell (64,425) (52,723)
Financial instruments commitments to buy (local currency) (258) -
------------- -------------
Total obligations (72,373) (67,301)
TOTAL FUTURE CONTRACTS (279) -
SWAPS
Interest rate rights contracts 120 8,227
Interest rate commitments contracts (111) (8,338)
------------- -------------
TOTAL SWAPS 9 (111)
------------- -------------
TOTAL CUSTOMER ACCEPTANCES AND DERIVATIVES Ps 1,539 Ps 43,894
============= =============
The Bank currently has an investment portfolio in local and
foreign currencies 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 investment portfolio.
These derivatives help protect the Bank against exchange-rate fluctuation
and increase 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 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, the Bank's
derivatives portfolio is marked to market daily. Unrealized gains and
losses are expressed in the statement of operations.
For forward contracts as of December 31, 2004, the average
cost of rights and commitments relating to the purchase of financial
instruments is 10.01% with an average maturity of 8 days and the average
yield from rights and commitments relating to the sale of financial
instruments is 7.38% with an average maturity of 2 days.
The average yield from rights and commitments relating to the
sale of foreign currency as of December 31, 2004 is 7.16% annually with an
average maturity of 120 days. The average yield from rights and
commitments relating to the purchase of foreign currency is 6.65% annually
with an average maturity of 109 days.
The rates and the maturities indicated for forward contracts
are the same for futures contracts.
The average value of hedging portfolio during the year 2004
was US$ 218,084 and the average yield was 7.40%.
F-46
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(9) ACCOUNTS RECEIVABLE
As of December 31, 2003 and 2004, accounts receivable
consisted of the following:
2003 2004
------------- -------------
Credit card compensation Ps 75,914 Ps 90,417
Overnight funds sold 101 668
Commissions 6,986 8,875
Sierras del Chico y Chico Oriental 2,574 3,098
Renting 362 448
Advances to contractors and honoraries 10,951 12,923
Commitment seller 2,387 3,183
Warehousing services 7,358 9,135
Dividends 443 632
Services and properties sells 29,823 34,102
Employee advances 318 273
Banco de Comercio Exterior de Colombia ("Bancoldex") - 900
Fondo de Garantias de Instituciones Financieras ("Fogafin") - 8,139
Sale of shares 8,081 -
Other receivables 33,379 15,922
------------- -------------
TOTAL ACCOUNTS RECEIVABLE 178,677 188,715
Allowance for accounts receivable losses (15,367) (14,840)
------------- -------------
ACCOUNTS RECEIVABLE Ps 163,310 Ps 173,875
============= =============
The activity in the allowance for accounts receivable during
the years ended December 31, 2002, 2003 and 2004 is as follows:
2002 2003 2004
----------- ------------- -------------
Balance at beginning of year Ps 13,679 Ps 7,140 Ps 15,367
Balance at beginning of year (Sufinanciamiento) - 593 -
Provision for uncollectible amounts 2,689 13,303 6,923
Charge-offs (3,867) (1,474) (2,292)
Reversal of provision and recoveries (1) (5,361) (4,195) (5,158)
----------- ------------- -------------
Balance at end of year Ps 7,140 Ps 15,367 Ps 14,840
=========== ============= =============
----------
(1) Includes reversal of provisions of the Subsidiary CTI Cargo which was
charged off in 2003.
F-47
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(10) PREMISES AND EQUIPMENT
At December 31, 2003 and 2004 premises and equipment consisted
of the following:
2003 2004
------------- --------------
PREMISES AND EQUIPMENT
Land Ps 53,491 Ps 49,357
Buildings 221,302 212,036
Warehouses 27,369 29,663
Furniture, equipment and fixtures 114,074 126,099
Computer equipment 178,026 199,196
Vehicles 4,790 4,281
Construction in progress 4,696 17,415
Machinery and equipment 103,071 70,070
Equipment in - transit 35,864 38,113
Rural premises 1,091 -
------------- --------------
Total 743,774 746,230
Less accumulated depreciation (377,186) (375,069)
Allowance (28,624) (24,918)
------------- --------------
PREMISES AND EQUIPMENT, NET Ps 337,964 Ps 346,243
============= ==============
Depreciation expense for the years ended December 31, 2002,
2003 and 2004, amounted to Ps 33,813, Ps 37,738 and Ps 42,832
respectively.
(11) OPERATING LEASES
At December 31, 2003 and 2004 operating leases consisted of
the following:
2003 2004
------------- --------------
OPERATING LEASES
Machinery and equipment Ps 328,820 Ps 1,358
Vehicles 118,204 2,273
Furniture, equipment and fixtures 2,305 -
Ships, trains and livestock 24,012 -
Computer equipment 24,673 10,396
Real goods 52,707 -
------------- --------------
TOTAL 550,721 14,027
Rents 9,758 243
Less accumulated depreciation (9,547) (5,878)
Allowance (13,725) (81)
------------- --------------
OPERATING LEASES, NET (1) Ps 537,207 Ps 8,311
============= ==============
----------
(1) On October 23, 2003, the Superintendency of Banking through its External
Circular 040, modified the treatment of financial leases. Since January 1,
2004 they are accounted for as part of the loan portfolio. For this
reason, the line "leases, net", in the balance sheet of the year 2003, was
replaced by the line "operating leases net".
F-48
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Depreciation expense for the years ended December 31, 2002,
2003 and 2004, amounted to Ps 631, Ps 2,887 and Ps 4,040 respectively.
(12) PREPAID EXPENSES AND DEFERRED CHARGES
At December 31, 2003 and 2004, prepaid expenses and deferred
charges consisted of the following:
2003 2004
-------------- --------------
PREPAID EXPENSES:
Insurance premiums Ps 5,620 Ps 5,242
Interest 72 59
Other 1,054 1,199
-------------- --------------
TOTAL PREPAID EXPENSES 6,746 6,500
DEFERRED CHARGES:
Studies and projects 4,333 204
Computer programs 8,513 6,726
Remodeling 593 593
Organization and pre-operating expenses 218 -
Leasehold improvements 212 815
Deferred taxes non-banking entities 318 240
Stationery and supplies 563 239
Contributions 34 5
Other 6,301 628
-------------- --------------
TOTAL DEFERRED CHARGES Ps 21,085 Ps 9,450
-------------- --------------
TOTAL PREPAID EXPENSES AND DEFERRED CHARGES Ps 27,831 Ps 15,950
============== ==============
F-49
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(13) OTHER ASSETS
At December 31, 2003 and 2004 other assets consisted of the
following:
2003 2004
------------- -------------
OTHER ASSETS:
Value added tax deductible and withholding taxes Ps 57,786 Ps 111,532
Investment in Trust 54,458 53,349
Deposits 12,066 20,543
Assets to place in lease contracts 33,224 70,746
Inventory 31,524 52,202
Other 9,422 7,022
------------- -------------
TOTAL OTHER ASSETS (1) Ps 198,480 Ps 315,394
------------- -------------
----------
(1) For year 2004, the line "other assets" in the balance sheet includes the
commercial subsidiaries' inventory. In the Annual Report of year 2003 this
concept was classified as "foreclosed assets".
(14) GOODWILL
The activity of the goodwill during the years ended December
31, 2002, 2003 and 2004 is as follows:
2002 2003 2004
------------- ------------- ------------
Balance at beginning of year Ps 141,552 Ps 118,903 Ps 99,910
Balance at beginning of year (Sufinanciamiento) - 4,433 -
Additions - 36,347 -
Amortization (2) (22,649) (59,773) (26,303)
------------- ------------- ------------
Balance at end of year (1) Ps 118,903 Ps 99,910 Ps 73,607
============= ============= ============
----------
(1) In the Annual Report of year 2003, goodwill was included in the line
"prepaid expenses, deferred charges and other assets" of the balance
sheet. For year 2004, goodwill is disclosed independently.
(2) As of December 31, 2003, included the amortization of the goodwill derived
from: merger with Banco de Colombia, the acquisition of Sufinanciamiento
and the increase in the participation on Fiducolombia.
F-50
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(15) FORECLOSED ASSETS
At December 31, 2003 and 2004, foreclosed assets consisted of
the following:
2003 2004
------------ ------------
Equity securities Ps 48,248 Ps 54,866
Real estate 112,381 95,637
Other assets 2,137 2,568
------------ ------------
TOTAL 162,766 153,071
Allowance (135,090) (140,865)
------------ ------------
TOTAL FORECLOSED ASSETS, NET (1) Ps 27,676 Ps 12,206
============ ============
----------
(1) In the Annual Report of year 2003, the line "foreclosed assets" in the
balance sheet included the commercial subsidiaries' inventory, for year
2004 this concept was classified as "other assets".
The following is a summary of equity securities classified as
foreclosed assets:
2003 2004
------------ ------------
Urbanizacion Sierras del Chico Ltda Ps 11,567 Ps 11,567
Chico Oriental Numero 2 Ltda. 14,053 14,053
Pizano S.A. 3,663 3,663
Convertible Securities Pizano S.A. 3,221 3,221
Patrimonio Lineas Agromar 1,399 1,399
Fideicomiso Emcocables 2 Santa Ana 2,991 837
Fideicomiso Pagos Procam 7,044 7,044
Textiles Fabricato - 4,313
Conconcreto S.A. - 2,622
Other 4,310 6,147
------------ ------------
TOTAL Ps 48,248 Ps 54,866
============ ============
The activity of the valuation allowance for foreclosed assets
during the years ended December 31, 2002, 2003 and 2004 is as follows:
F-51
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2002 2003 2004
------------ ----------- -------------
Balance at beginning of year Ps 105,988 Ps 107,871 Ps 135,090
Balance at beginning of year 2003 (Sufinanciamiento) - 222 -
Provision 17,236 32,458 23,002
Reversals of previously recorded provisions (15,353) (5,461) (17,227)
------------ ----------- -------------
Balance at the end of year Ps 107,871 Ps 135,090 Ps 140,865
============ =========== =============
(16) REAPPRAISAL OF ASSETS
The following describes reappraisals of assets at December 31,
2003 and 2004:
2003 2004
----------- -------------
Asset revaluations Ps 253,413 Ps 267,941
Less: proportional equity revaluations (198,072) (198,072)
Less: minority interests (25,255) (27,632)
----------- -------------
TOTAL EQUITY REVALUATIONS Ps 30,086 Ps 42,237
=========== =============
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.
(17) INTERBANK BORROWINGS
Interbank borrowings, primarily denominated in U.S. dollars,
at December 31, 2003 and 2004 are summarized as follows:
2003 2004
----------- -------------
FOREIGN BANKS
Short-term Ps 249,874 Ps 137,965
Long-term 206,185 108,317
----------- -------------
TOTAL Ps 456,059 Ps 246,282
=========== =============
Short-term interbank borrowings, obtained from other banks for
liquidity purposes, are unsecured and generally have maturities ranging
from 90 to 180 days.
F-52
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Interest rates on U.S. dollar denominated short-term
borrowings from foreign banks averaged 1.24% and 2.65% in 2003 and 2004,
respectively.
For long term interbank borrowings, the average interest rate
was 5.84% and 2.26% in 2003 and 2004, respectively, and maturities at
December 31, 2004 were as follows:
2004(1)
--------------
2005 Ps 59,069
2006 49,248
--------------
Ps 108,317
==============
----------
(1) The schedule of payments of Interbank Borrowings as of December 31, 2004
differ of the schedule of payments presented in the Annual Report of year
2003, due to the prepayments made by the Bank during year 2004.
(18) 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 Colombian 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 3% to 6% 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, 2003 and 2004, borrowings from domestic
development banks received from certain Colombian government agencies
consisted of the following:
F-53
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2003 2004
----------- -----------
Fondo para el Financiamiento del Sector Agropecuario Ps 180,648 Ps 216,631
Banco de Comercio Exterior de Colombia ("Bancoldex")(1) 426,068 334,855
Findeter 89,148 220,820
Colombian Central Bank 53 -
Other 59,619 85,613
----------- -----------
TOTAL Ps 755,536 Ps 857,919
=========== ===========
----------
(1) 2003 includes loans transferred from IFI to Bancoldex.
Interest rates on borrowings from domestic development banks
averaged 8.26% and 8.38% in 2003 and 2004, respectively, in local currency
and 5.29% and 7.45% in 2003 and 2004, respectively, in foreign currency.
Maturities at December 31, 2004 were as follows:
2005 Ps 141,764
2006 100,623
2007 148,774
2008 126,730
2009 163,311
2010 and thereafter 176,717
---------------
TOTAL Ps 857,919
===============
(19) OTHER LIABILITIES
As of December 31, 2003 and 2004, other liabilities consisted
of the following:
2003 2004
----------- ------------
Unearned income Ps 11,030 Ps 8,760
Accrued severance Law 50, net of advances 4,510 5,033
Accrued severance pre-Law 50, net of advances to employees
of Ps 10,438 and Ps 11,652 in 2003 and 2004, respectively 11,675 12,378
Accrued payroll and other severance benefits 18,610 23,413
Accrued pension obligations net of deferred cost 78,578 86,353
Negative goodwill 2,313 1,426
Deferred interest on restructured loans 32,452 45,286
Other 15,149 50,283
----------- ------------
TOTAL Ps 174,317 Ps 232,932
=========== ============
F-54
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 regulations entitle 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.
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 and
other private funds have 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, 2002, 2003 and 2004:
PROJECTED
PENSION DEFERRED
LIABILITY COST NET
----------- ----------- ----------
BALANCE AT DECEMBER 31, 2001 Ps 72,983 Ps (10,755) Ps 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
=========== =========== ==========
Adjustment per actuarial valuation 10,120 (10,120) -
Benefits paid (9,245) - (9,245)
Pension expense - 19,501 19,501
----------- ----------- ----------
BALANCE AT DECEMBER 31, 2003 Ps 79,438 Ps (860) Ps 78,578
=========== =========== ==========
Adjustment per actuarial valuation 17,064 (17,064) -
Benefits paid (9,364) - (9,364)
Pension expense - 17,139 17,139
----------- ----------- ----------
BALANCE AT DECEMBER 31, 2004 Ps 87,138 Ps (785) Ps 86,353
=========== =========== ==========
F-55
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, 2002, 2003, and 2004 was determined on the basis of actuarial
calculations in conformity with Colombian law. The significant assumptions
utilized in the actuarial calculations for the years ended December 31,
2002, 2003 and 2004 were as follows:
2002 2003 2004
----- ----- -----
Discount rate 24.82% 23.03% 21.23%
Future pension increases 17.14% 15.33% 13.72%
===== ===== =====
(20) LONG TERM-DEBT
The scheduled maturities of long term-debt at December 31,
2004 are as follows:
2005 Ps 124,966
2006 85,985
2007 150,878
2008 15,630
2009 168,280
2010 and thereafter 6,792
----------
Ps 552,531
==========
Long term debt consists of bonds issued by the Bank, Leasing
Colombia S.A., Abocol S.A., Fundicom S.A., and by Sufinanciamiento S.A.
bearing interest at the following rates:
BANCOLOMBIA S.A.
---------------------------------------------------------------
Issue Date Maturity Date Rate
---------- ------------- -------------------
11-Feb-04 11-Aug-05 DTF+1.5%
11-Feb-04 11-Feb-06 DTF+1.7%
11-Feb-04 11-Feb-07 DTF+2.00%, CPI+3.9%
11-Feb-04 11-Feb-09 DTF+2.35%, CPI+4.7%
ABOCOL S.A.
---------------------------------------------------------
Issue Date Maturity Date Rate
---------- ------------- --------
12-Aug-02 12-Aug-06 CPI+7.9%
13-Aug-02 13-Aug-06 CPI+7.9%
12-Aug-02 12-Aug-07 CPI+8.0%
F-56
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
FUNDICOM S.A.
-------------------------------------------------------
Issue Date Maturity Date Rate
---------- ------------- ----
10-Aug-03 10-Aug-15 CPI
SUFINANCIAMIENTO S.A.
-------------------------------------------------------
Issue Date Maturity Date Rate
---------- ------------- ----
11-Mar-04 11-Mar-14 7.82%
LEASING COLOMBIA S.A.
--------------------------------------------------------------
Issue Date Maturity Date Rate
---------- ------------- ------------------
09-Dec-02 09-Jun-05 DTF+2.1%
09-Dec-02 09-Dec-05 DTF+2.2%
09-Dec-02 09-Dec-07 DTF+2.6%
09-Dec-02 09-Jun-08 DTF+2.7%
09-Dec-02 09-Dec-08 DTF+3.0%
08-Jun-04 08-Dec-05 DTF+2.0%
08-Jun-04 08-Jun-06 DTF+2.2%
08-Jun-04 08-Jun-07 DTF+2.5%
08-Jun-04 08-Jun-08 DTF+2.8%
08-Jun-04 08-Jun-09 DTF+3.0%
30-Nov-04 30-May-06 DTF+1.9%
30-Nov-04 30-Nov-06 DTF+2.0%
30-Nov-04 30-Nov-07 DTF+2.3%, CPI+4.5%
30-Nov-04 30-Nov-08 DTF+2.7%
30-Nov-04 30-Nov-09 DTF+3.0%
---------------
DTF: Average weekly rate of term deposits (issued by commercial and mortgage
banks and commercial finance companies) with a maturity of 90 days.
CPI: Consumer price index
F-57
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(21) ACCRUED EXPENSES
As of December 31, 2003 and 2004, accrued expenses consisted
of the following:
2003 2004
------------- ------------
Interest payable Ps 218 Ps 1,046
Income tax payable 6,064 10,547
Fines and sanctions (1) 30,200 38,829
Labor obligations 7,446 7,617
Other 12,245 13,610
------------- ------------
TOTAL Ps 56,173 Ps 71,649
============= ============
--------------
(1) See Note 26(d) as it refers to the Bank.
The statutory income tax rate for 2001 was 35%. For 2002, 2003
and 2004 the statutory income tax was 37% for the Bank, Leasing Colombia
S.A., Colcorp S.A. and Fiducolombia S.A. according to an agreement of tax
stability and 38.5% for the other Subsidiaries, respectively.
The Bank's tax liability is calculated based on the greater of
(i) net taxable income and (ii) presumed income, which, in 2003 and 2004
is 6% of stockholders' equity.
The following is a reconciliation of taxable income before
income taxes for the years ended December 31, 2002, 2003 and 2004:
2002 2003 2004
------------- ------------ -------------
Income before income taxes Ps 252,998 Ps 532,019 Ps 817,488
Adjustments for consolidation purposes, net (7,114) (26,722) 209,987
Difference between net operating loss
carry-forwards and presumed income 54,015 16,404 (134,715)
Non-deductible provisions, costs and expenses 99,806 107,926 176,454
Nontaxable or exempt income (251,005) (420,253) (392,273)
Difference between monetary correction for
tax purposes and for financial reporting purposes (27,989) (40,040) (47,484)
------------- ------------ -------------
Taxable income Ps 120,711 Ps 169,334 Ps 629,457
Statutory tax rate (1) 36.89% 36.84% 37.75%
------------- ------------ -------------
Estimated current income tax Ps 44,533 Ps 62,391 Ps 237,620
Deferred income tax expense (benefit) (1,915) 244 1,190
------------- ------------ -------------
TOTAL Ps 42,618 Ps 62,635 Ps 238,810
============= ============ =============
----------
(1) The statutory income tax rate for 2003 and 2004 was 37% for the Bank,
Leasing Colombia S.A., Colcorp S.A. and Fiducolombia S.A., according to
the agreement of tax stability and 38.5% for the other Subsidiaries,
respectively.
F-58
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Income taxes for the years ended December 31, 2003 and 2004
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 following represents a summary of the utilizable date for
the fiscal losses to be amortized and the excess of presumed income over
ordinary income:
FISCAL LOSSES TO EXCESS OF PRESUMED INCOME
AMORTIZE OVER ORDINARY INCOME
---------------- --------------------------
2005 Ps 8,035 Ps 66,343
2006 2,820 6,133
2007 - -
2008 - -
2009 - -
----------- ----------
Ps 10,855 Ps 72,476
=========== ==========
(22) SUBSCRIBED AND PAID-IN CAPITAL
Subscribed and paid-in capital consisted of the following:
2002 2003 2004
----------- ----------- -----------
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
=========== =========== ===========
Non-voting shares with preferred dividend will be entitled to
receive a minimum preferred dividend equal to one percent (1%) of the
initial offering price per preferred share for each fiscal year the bank
reports profits after the Bank recoups any losses that affect its capital
and deducts any contribution to a reserve account that must be made by
law, and before the Bank creates or increases any other reserve. In
addition, the dividend per share paid on preferred stock cannot be less
than the dividend per share paid on ordinary stock (and will be increased
if a higher dividend on ordinary stock is declared).
Each non-voting share with preferred dividend confers on its
holder the right to participate in the shareholders' meetings and to vote
solely on the matters provided for by law and in the By-laws:
A foreign capital institutional investment fund in Colombia
has been constituted to hold certain non-voting preferred shares issued by
the Bank and American Depositary Shares (ADSs) related to the non-voting
preferred shares have been issued abroad.
F-59
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(23) APPROPRIATED RETAINED EARNINGS
Pursuant to Colombian law, 10% of the net income of the Bank
and its Colombian Subsidiaries in each year must be appropriated with a
credit to a "legal reserve fund" until its balance is 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.
The component "other" in the consolidated statements of
stockholders' equity corresponds to the Subsidiaries' retained earnings
that are not eliminated in the consolidation process.
Appropriated retained earnings consist of the following:
2002 2003 2004
--------------- -------------- --------------
Legal reserve Ps 386,009 Ps 497,075 Ps 638,716
Additional paid - in capital 107,359 107,359 107,359
Other reserves 72,819 135,920 264,406
--------------- -------------- --------------
TOTAL Ps 566,187 Ps 740,354 Ps 1,010,481
=============== ============== ==============
In addition, paid-in capital of Ps 107,359 at December 31,
2002, 2003 and 2004 was recorded as part of the legal reserve, as required
by the Superintendency of Banking.
(24) DIVIDENDS DECLARED
The Bank's shareholders declared common stock dividends with
respect to the preceding year's earnings of the Bank (the parent company)
to be payable during 2003, 2004 and 2005 as indicated below:
F-60
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2003 2004 2005
------------------ ------------------- ------------------
Preceding year's
unconsolidated
earnings Ps 150,923 Ps 309,772 Ps 430,807
132 pesos per 272 pesos per share 376 pesos per
share payable in payable in four share payable in
four quarterly quarterly four quarterly
installments of 33 installments of 68 installments of 94
pesos per share pesos per share pesos per share
Dividends in cash from April 2003 on from April 2004 on from April 2005 on
398,259,608 and 398,259,608 and 398,259,608 and
178,435,787 common 178,435,787 common 178,435,787 common
and preferences and preferences and preferences
shares, shares, shares,
respectively. respectively. respectively.
Total dividends declared Ps 76,124 Ps 156,861 Ps 216,837
Dividends payable at
December 31 Ps 22,776 Ps 44,099
================== =================== ==================
(25) MEMORANDUM ACCOUNTS
At December 31, 2003 and 2004, memorandum accounts consisted
of the following:
2003 2004
--------------- ----------------
TRUST:
Investment trusts Ps 9,566,526 Ps 14,551,133
COMMITMENTS:
Civil litigation against the Bank 1,000,681 1,982,256
Unused credit card limits 1,387,674 1,721,090
Issued and confirmed letters of credit 385,837 421,643
Uncommitted lines of credit 318,423 347,833
Bank guarantees 306,958 137,375
Approved credits not disbursed 13,262 17,824
Other 471 1,250
--------------- ----------------
TOTAL Ps 12,979,832 Ps 19,180,404
=============== ================
F-61
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
OTHER MEMORANDUM ACCOUNTS:
2003 2004
-------------- ---------------
MEMORANDUM ACCOUNTS RECEIVABLE:
Tax value of assets Ps 10,764,706 Ps 12,383,426
Assets and securities given in custody 2,639,400 3,985,019
Negotiable investments in debt securities 807,824 2,143,814
Investments available for the sale in debt securities 1,043,085 1,672,536
Quotas of leasing for receive 668,172 1,082,024
Assets and securities given as a collateral 1,508,112 934,208
Investments held to maturity 704,188 767,261
Written-off assets 668,999 638,654
Adjustments for inflation of assets 222,117 217,785
Accounts to receive yields trading investments in debt
securities 133,629 165,073
Remittances sent for collection 30,132 27,259
Other memorandum account receivable 1,696,849 1,265,149
-------------- ---------------
TOTAL Ps 20,887,213 Ps 25,282,208
MEMORANDUM ACCOUNTS PAYABLE:
Assets and securities received as collateral Ps 7,650,641 Ps 8,406,554
Qualification commercial loans 6,721,739 7,459,747
Tax value of shareholders' equity 1,742,916 2,205,064
Assets and securities received in custody 2,046,084 1,776,613
Qualification consumer loans 1,273,292 1,653,473
Adjustment for inflation of equity 492,729 490,297
Qualification small business loans 84,979 91,168
Merchandise in owned warehouses 59,490 66,339
Merchandise in third-party warehouses 101,589 47,026
Other memorandum account payable 5,774,283 11,573,544
-------------- ---------------
TOTAL Ps 25,947,742 Ps 33,769,825
-------------- ---------------
TOTAL MEMORANDUM ACCOUNTS Ps 59,814,787 Ps 78,232,437
============== ===============
(26) COMMITMENTS AND CONTINGENCIES
THE PARENT COMPANY (THE BANK)
a) CONTINGENCIES COVERED BY FOGAFIN:
During the privatization process of Banco de Colombia (which
merged with and into the Bank in 1998), completed on January 31, 1994, the
Fogafin made a commitment to assume the cost of contingent liabilities
resulting from events that occurred before the date when the stock was
sold, that should be claimed within the five (5) subsequent years.
Fogafin's guarantee covers eighty percent (80%) of the first Ps 10,000,
discounting allowances, and thereafter, one hundred percent (100%), all
annually adjusted according to the consumer price index.
F-62
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
As established in the guarantee contract, Banco de Colombia
committed to transfer to the Fogafin all the rights that it then had in
Sierras del Chico Ltda. and Chico Oriental Numero Dos Ltda. for an amount
no lesser than the book value as of December 31, 1993, including inflation
adjustments and excluding any valuations. A judicial process was initiated
questioning the validity and binding effect of the commitment to transfer
these rights to Fogafin, but no final ruling has been made.
At December 31, 2003 and 2004, the civil contingencies covered
by the guarantee amounted to approximately Ps 21,500 and Ps 12,185,
respectively, with allowances at the same dates amounting to Ps 1,588 and
Ps 1,370. Labor contingencies amount to Ps 486 and Ps 305 and have
allowances of Ps 244 and Ps 153, respectively.
b) LEGAL PROCESSES
At December 31, 2003 and 2004, other than the litigation
discussed under (a) above, there were labor-related claims against the
Bank amounting to approximately Ps 9,118 and Ps 10,015, respectively (the
final result of such litigation is not predictable due to the
controvertible nature of the obligations). The allowances for
contingencies on those dates amounted to Ps 4,372 and Ps 4,911,
respectively.
At December 31, 2003 and 2004, there were ordinary civil
lawsuits, group actions, and civil actions within criminal and executive
processes against the Bank with total claims of approximately Ps 85,670
and Ps 301,823, respectively and with allowances on the same dates of Ps
2,998 and Ps 4,327, respectively.
Allowances are recorded when processes are ruled in the first
instance against the Bank or based on the opinion of the attorneys
handling the litigations.
At December 31, 2004, the Superintendency of Banking has
imposed fines on the Bank amounting to Ps 272, for which complete
allowances have been created, even though the Bank considers it has filed
valid arguments against the decisions of the Superintendency of Banking.
c) CONTINGENCIES RELATED TO THE PURCHASE OF 51% OF FORMER BANCO DE
COLOMBIA S.A. ("BANCO DE COLOMBIA") STOCK AND LATER MERGER WITH
BANCO INDUSTRIAL COLOMBIANO ("BIC", NOW BANCOLOMBIA)
Contingency guarantee, former Banco de Colombia
The selling shareholders of the majority interest of former
Banco de Colombia constituted a guarantee trust in favor of the Bank with
Fiduanglo (currently, Lloyds Trust) as trustee, on Bancolombia stock in
order to respond for the contingencies and hidden liabilities of the sold
bank. The guarantee covers claims between US$ 7,500 and US$ 30,000.
F-63
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
An arbitration proceeding is currently occurring at the
Arbitration Center of the Bogota Chamber of Commerce. It is now in the
discovery stage. The Bank initiated this proceeding against Jaime Gilinski
as one of the debtors severally liable for the whole debt, to determine
the validity of the claims that the Bank has filed against the trust and
to make the guarantee effective. The claims amount to approximately Ps
50,614, without including updates or interests.
The Gilinski Case
Criminal Investigation
On July 8, 2004, the prosecutor's office before the Colombian
Penal Supreme Court, confirmed the previous decision of the Special Unit
of the prosecutor's office for Crime against Public Administration in
which this Unit declined to initiate penal action against Jorge Londono
Saldarriaga and Federico Ochoa Barrera, the Bank's President and
Vice-president, respectively.
The investigation was forwarded due to denouncements made by
the Gilinski family and by companies that the family controls, stating
that, during the Banco de Colombia acquisition process and its later
merger with Banco Industrial Colombiano, the crimes of fraud, unauthorized
operations with shareholders, and undue use of public resources, among
others, were allegedly committed. In addition, the Gilinski family filed
several civil legal actions against the Bank, in their condition as
civilly liable third parties.
The above-mentioned Unit proffered a decision regarding the
appeal filed by the denouncers' attorneys against the decision proffered
during the first instance on December 26, 2003, and reiterated that there
were no grounds for the alleged crimes, thus confirming the estoppel of
the investigation. Consequently, the Bank was also exonerated of having to
indemnify the denouncers as civilly liable third parties.
Superintendency of Banking
The administrative court decision is still pending regarding
the legality of the sanction of Ps 44 imposed by the Superintendency of
Banking for an interbank credit granted by the former Banco de Colombia to
Banco Industrial Colombiano when both institutions were in the process of
merging. The Superintendency of Banking dismissed the other complaints
made by the Gilinski family.
F-64
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Arbitration
Jaime Gilinski and Isaac Gilinski and some foreign successor
companies of Bancol y cia S. en C. resorted to an arbitration over the
alleged controversy against the Bank and some of its administrators, in
which charges similar to those previously filed with various
administrative and judicial agencies were alleged, relating to the
acquisition process of the majority share of the former Banco de Colombia
by BIC, and the later merger of these two institutions. The arbitration
began on June 2, 2004, and at present the case is in the discovery stage.
The cause of action consists of the declaration of the
inefficacy of BIC's acquisition of the majority share in the capital of
the former Banco de Colombia, and as secondary causes of action, the
declaration that the contract with the commitment to purchase and sell
entered into by and between the parties is absolutely null and void and
does not even exist, that the acquisition of the Banco de Colombia GDS's
and Notes is absolutely null and void, the declaration of the Bank
liability regarding the damages caused by alleged fraudulent operations
and fraudulent representations regarding the above-mentioned contract; and
the last secondary cause of action if none of the above should prosper was
the declaration that the Bank had defaulted on the above-mentioned
contract.
We consider that the possibility of incurring any liability
from this proceeding is remote, given the fact that the legal action lacks
legal and probatory support, and considering that there have been prior
court pronouncements that have exonerated the Bank and its administrators
from similar petitions or petitions related to the petitions made in this
proceeding.
Class Action Luis Alberto Duran Valencia
To date, the Bogota Supreme Court decision is still pending on
the special appeal for annulment filed by the Bank regarding reviewing the
effective regulations on the decision proffered by arbitration following
the class action filed by Luis Alberto Duran Valencia and other
shareholders of the former Banco de Colombia.
The mentioned decision, proffered on January 30, 2004,
declared that the shareholders of the former Banco de Colombia who entered
the merged institution had suffered damages derived from a deficit in the
capitalization made by BIC in 1998, which the court estimated at Ps
22,408, for a net value to be paid of Ps 19,214, after deductions for
costs that the court ordered. The court denied the remaining causes of
action in the group action, estimated at an approximate value of Ps
400,000, and it absolved the other shareholder companies of the former BIC
that had also been sued.
The appeal solely seeks to annul the part of the decision in
dispute, which is limited to the sentence for the Bank. Regarding the
other causes of action, the decision declared them res judicata in favor
of the Bank legal position.
We consider that a liability to be incurred by the Bank, is
unlikely given the existence of serious arguments that may lead to a
decision that would acknowledge some of the grounds invoked in the appeal
for annulment. The Bank has an allowance in the amount of Ps 15,192, as it
awaits the definitive decision regarding this matter.
F-65
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
People's Action Maximiliano Echeverri M
We consider the likelihood of the Bank's liability for this legal
action, filed with the Cundinamarca Contentious Administrative Court against the
Bank and the Superintendency of Banking and the Securities Superintendency,
remote, because the acquisition and merger process obeyed the law and business
ethics.
The cause of action of this legal action is the declaration of
violation of the group interests for administrative morality and free economic
competition, due to alleged omissions by the Colombian state supervision and
control agencies in the acquisition process of the former Banco de Colombia and
the later merger with BIC, and alleged Bank maneuvers to prevent the
shareholders of the first institution from having all of the information they
required to make the decisions at hand.
d) NATIONAL TAX AND CUSTOMS AGENCY ("DIAN")
For the taxable year 1996, when determining the income tax and
complementary taxes, the former Banco de Colombia requested that donations to
universities be considered deductions and a tax discount at the same time. DIAN
proceeded to reject the deduction of the mentioned donations, arguing that this
constituted dual benefit on one sole economic item, and it deemed that was not
allowed pursuant to applicable law.
On April 4, 2000, the Bank filed with the Honorable Cundinamarca
Administrative Court a legal action to declare null and reestablish the right
against administrative acts that modify private liquidation. On April 26, 2001,
the Honorable Court proffered its decision not granting the Bank's petitions.
Due to the above, an appeal was filed with the Honorable Council of State on
September 18, 2001. On August 9, 2002, the Honorable Council of State revoked
the first instance sentence; it annulled the sanction due to inaccuracy and
confirmed the greater tax officially settled, not because of the simultaneous
nature of the benefits, but because of the destination of the resources that the
Bank had donated. On September 24, 2002, a special petition for reconsideration
against the sentence was filed with the Open Court of the Honorable Council of
State. This sentence is still pending pronouncement.
On July 30, 2003 the Bank reached a conciliation agreement with
DIAN, under the terms in 2002 Law 788 Article 98, and paid the sum of Ps 2,538,
but on February 26, 2004, the Honorable Council of State rejected the request to
approve the conciliation agreement entered into by the parties, and that
unfavorable decision was later confirmed for a regular petition for
reconsideration.
The allowance that was constituted is Ps 7,076. The contingency is
deemed probable because the Honorable State Council Open Court seldom revokes
sentences that its regional courts proffer.
F-66
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The petition for reconsideration filed by the Bank against the
Official Revised Settlement of the income tax and complementary taxes for the
year 1999, through which the deduction for incentives from collecting customers'
taxes in the amount of Ps 4,263 was disregarded, was decided against the Bank on
April 30, 2004 and the Official Revised Settlement was confirmed. The dispute
pending represents Ps 3,231, which includes the tax in dispute plus late payment
interests, and there is a 100% allowance for it. On September 9, 2004, a legal
action was filed with the Antioquia Administrative Court, which was admitted on
November 23, 2004.
Regarding the tax on financial transactions for the year 1999, after
the conciliation reached with DIAN the year before, on March 15, 2004, DIAN
issued the writ to close the dossier due to termination by mutual agreement.
From the previous year, a provision of Ps 9,486 had been made, which was
recovered during this fiscal period.
At December 31, 2004, DIAN and the District Tax Direction of Bogota
have imposed fines on the Bank amounting to Ps 3,433 for tax collection. The
Bank has filed the pertinent appeals and legal actions and has made provisions
in the amount of Ps 2,020 for such fines.
FIDUCOLOMBIA S.A.
Executive processes have been filed against the Bank's Trust
subsidiary (Fiducolombia), which in the opinion of management and attorneys
handling the litigations are not likely to result in an unfavorable ruling or to
affect the Trust Company.
Carlos Paz Mendez Process
As of December 31, 2004, there is a proceeding underway against
Banco de Colombia (currently, the Bank) and the Trust Company at Civil Court 12
of Bogota. The plaintiff is Mr. Carlos Paz Mendez, and the proceedings commenced
on July 16, 1993. On November 5, 1998, the tribunal issued a ruling favorable to
Fiducolombia and ordered the plaintiff to pay costs. The defendant's appeal was
accepted on December 14, 1998. On appeal, the Bank's and Fiducolombia's lawyer
requested an audience under Article 360 of the Civil Procedural Code, and that
audience was held on May 9, 2001. By means of the decision dated March 25, 2003,
proceeding for annulment was admitted which has been decided and the
pronouncement confirmed the first instance sentence in favor of the Trust
Company and the Bank. At present, the appeal for reversal filed by the
plaintiff's attorney against the sentence proffered by the Bogota Judicial
District High Court on December 19, 2002, and the pronouncement confirming the
first instance sentence in favor of the Trust Company and the Bank, is pending.
This process is expressly covered by the contract of liability
contingencies subscribed with Fogafin, contained in Public Deed No. 0182 of
January 18, 1994 of Notary Two of Bogota D.C., according to protocol
relationship in the aforementioned public document named Annex No. 1. The Trust
Company's management and attorneys consider that the likelihood of obtaining a
favorable ruling is high. By virtue of the above, Fiducolombia has not made any
allowances for this concept.
F-67
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Silvana Trust
Seven proceedings are underway in the civil courts of the Bogota
Circuit and in an Arbitration Court which ruled in favor of the Trust Company.
All of the proceedings arise from Fiducolombia S.A.'s role as trustee in the
guarantee mercantile trust agreement entered into on December 1, 1993, with
Gallego Inmobiliaria S.A. and the appraisal Vector (appraisal company) made of
the property.
Two of the aforementioned proceedings terminated because of
expiration. However, on December 11, 2003, a new ordinary proceeding was
initiated against Fiducolombia, following a legal action filed during the month
of September 2003. The Circuit Civil Court Nine ordered for all of the
proceedings to be consolidated into the Tarazona Bermudez Proceeding, in order
to ensure one sole legal proceeding, and it is currently in the discovery stage.
As indicated by the Trust Company's attorneys, management considers
that there will be no liability based on the facts established in the processes.
The plaintiffs claim amounts to approximately Ps 718.
Grancolombiano Group
The "Grupo Grancolombiano" Trust that was managed by Banco de
Colombia S.A. and liquidated on June 29, 1990, is subject to contingencies,
among them, labor contingencies. For that purpose, a sum of money has been
reserved through the "Contingency Fund" Trust managed by Fiducolombia. These
sums were contributed by former trustors of the "Grupo Grancolombiano" trust
with the purpose of covering such contingencies. As recommended by the lawyer
for, and in compliance with the purpose established in the Minutes of
Liquidation of the "Grupo Grancolombiano", 24 of the 29 proceedings filed were
reconciled before a judge. Five more reconciliations occurred outside court with
charge to the funds of the Contingency Fund of Grupo Grancolombiano. In the
proceedings of Jorge Euclides Garcia Prado, on December 4, 2003, the fourth
proceeding took place to be followed next by a decision. The proceedings of Jose
del Carmen Racero Toribio, Pedro Antonio Alvarez Serpa and David Salcedo Mejia
were not reconciled because the employment relationship ended when the building
in which they worked was the property of the Compania Nacional de Chocolates
S.A. The plaintiff integrated the litis consorcio with this company. In one
case, the Court of Law in a first instance ruling limited the payment of a
retirement pension, with the possibility of repeating against Nacional de
Chocolates S.A. In two cases, it declared that the exception of petition before
time was proven. In the remaining case, the court absolved the Bank of any
liability. An appeal was filed by the parties, as a result of which the
Antioquia High Court confirmed the sentence proffered by the Caucasia Circuit
Civil Court. During the years 2003 and 2004 several legal actions have been
filed, which were consolidated into the Dagoberto Tulio Correa proceeding, which
is being decided by the Caucasia Circuit Civil Court and January 26, 2005 was
indicated as the date on which the first process hearing would take place.
Appeals are pending before the Superior Court of Antioquia.
F-68
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The Trust Company's management and legal advisors do not believe
that these cases will result in any additional liabilities. If any liability
does result, it will affect the trust's reserve fund but not Fiducolombia
itself.
Comerintegral Ltda. Process
The Arbitration Court summoned by Comerintegral Ltda., against
Fiducolombia, proffered a decision on June 25, 2004 in favor of the Trust
Company.
Invico Ltda. Processes
Invico Ltda. has a suit pending against the Bank and Fiducolombia
S.A. in Civil Court 6 of Bogota. The plaintiff seeks a ruling declaring that the
Bank and Fiducolombia S.A. must exercise the alternate right contained in
Article 1948 of the Civil Code, in reference to the land lot denominated
"Granjita", pursuant to the trust mandate contracted claims amount to Ps 4,000.
Proceedings began on November 9, 2001, and on January 17, 2002, the court issued
a ruling dismissing the claim and ordering the plaintiff to pay costs. By means
of writ dated July 16, 2002, a settlement hearing was ordered for November 5,
2002. The diligence of reconciliation was declared a failure. At present, this
case is in the discovery stage and we are waiting for the expert appointed who
has agreed to give his expert decision. However, it is still premature to give
any views regarding said proceeding.
Invico has also pursued "Accountability" proceedings against the
Bank and Fiducolombia S.A. in Civil Court 9 of Bogota. In these proceedings
Invico seeks to hold the Bank and Fiducolombia S.A. accountable for their time
as trustees of its property, as a result of the appointment and choice that the
former and its creditors made. The amount sought is Ps 3,000. Settlement
hearings on December 4, 2001, failed. The case went to trial on November 27,
2001, beginning with the collection of evidence. On November 19, 2002, the edict
dated the 25th of the same month proffered a sentence in favor of the trust
company and the Bank. The sentence was appealed by the plaintiff, and such
appeal is now underway. There is a large probability of success by the Bank and
Fiducolombia S.A. as there is already a sentence in favor of the Trust Company
and we believe that the court will not modify it.
LEASING COLOMBIA S.A.
Leasing Colombia S.A. has twenty-one (21) first instance litigations
against it, out of which nineteen (19) correspond to extra-contractual civil
liability proceedings, as a result of damages caused by company-owned vehicles
and leased vehicles. In these proceedings there are defendant petitions for
contract lessees and the insurance companies that cover their assets to be
summoned to furnish guaranty. Without prejudice to the above, jurisprudence on
the matter is clear: no sentence against a leasing company has ever been
pronounced regarding such claims.
The two remaining proceedings involve contractual liability claims
by virtue of alleged Leasing Colombia S.A. default; these will probably be ruled
in our favor as the claims lack legal support.
F-69
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The economic amount of such contingencies represents the sum of Ps
7,731. This sum has not been provisioned, by virtue of the above considerations.
SUFINANCIAMIENTO
The legal opinion of the various attorneys regarding the proceedings
being forwarded against Sufinanciamiento is that an adverse decision is a remote
possibility because:
- Most of the proceedings are first instance legal actions
with nothing to indicate any adverse decision against
Sufinanciamiento.
- For the proceedings in which decisions have been proffered,
the decisions were in favor of Sufinanciamiento.
- In the case of extra-contractual civil liability or of third
party civil liability claims filed regarding leased goods,
jurisprudence has stated that leasing companies should not
be summoned to answer because they do not have the material
custody of the vehicle.
Taking the above arguments into account, the risk of contingencies
is remote and therefore no provisions have been made for such matters.
Nonetheless, the claims are recorded in the Sufinanciamiento's. memorandum
accounts in the amount of Ps 5,981 at the fiscal period closing corresponding to
the year 2004.
ALMACENAR S.A.
At December 31, 2003 and 2004, labor and civil proceedings against
Almacenar S.A. were underway. Due to the debatable nature of the obligations,
they are difficult to quantify.
At December 31, 2003 and 2004, there are allowances amounting to Ps
296 and Ps 509, respectively, to cover any liability resulting from these
proceedings.
ABOCOL S.A.
At December 31, 2004, there are labor proceedings against for an
approximate value of Ps 100 for which complete allowances have been created.
BANCOLOMBIA PANAMA S.A. and its subsidiaries do not report contingencies.
F-70
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(27) FEES AND SERVICE CHARGES
For the years ended December 31, 2002, 2003 and 2004 fees and
service charges consisted of the following:
2002 2003 2004
------------- ------------- -------------
Service charges Ps 145,561 Ps 180,888 Ps 232,706
Credit card fees 48,992 59,041 71,113
Credit and debit card annual fees 44,117 57,199 73,369
Checking fees 40,972 45,252 46,839
Warehouse and logistic services, net 38,873 42,705 49,072
Fiduciary activities 22,215 25,647 35,658
Commissions on letters of credit 2,929 4,249 9,187
Commissions expense (51,351) (81,956) (115,600)
------------- ------------- -------------
TOTAL Ps 292,308 Ps 333,025 Ps 402,344
============= ============= =============
(28) ADMINISTRATIVE AND OTHER EXPENSES
Administrative and other expenses for the years ended December 31,
2002, 2003 and 2004 consisted of the following:
2002 2003 2004
--------------- ------------- -----------
Public services Ps 21,089 Ps 27,882 Ps 28,558
Advertising 12,522 17,328 20,754
Industry and trade, property, vehicle and other taxes 50,935 44,774 55,145
Communication, postage and freight 34,312 37,003 39,613
Insurance 41,478 47,040 37,123
Security services 18,161 17,167 18,404
Stationery and supplies 14,750 17,458 18,583
Amortization of deferred charges 35,295 27,014 16,729
Rental expenses 14,668 14,167 16,963
Maintenance and repairs 21,854 38,049 49,794
Contributions and membership dues 9,270 10,287 13,177
Temporary services 5,331 7,579 9,174
Travel expenses 8,361 9,942 10,690
Professional fees 14,533 17,614 29,167
Donations 9,455 1,708 11,060
Call center services 13,552 7,094 8,672
Information processes outsourcing 7,760 10,722 13,420
Other 29,169 49,857 54,069
--------------- ------------- -----------
TOTAL Ps 362,495 Ps 402,685 Ps 451,095
=============== ============= ===========
F-71
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(29) RELATED PARTY TRANSACTIONS
Significant balances and transactions with related parties were as
follows:
2002
SHAREHOLDERS WITH
PARTICIPATING STOCK LOWER
SHAREHOLDERS WITH THAN 10% OF THE BANK'S
PARTICIPATING STOCK CAPITAL AND WITH
EQUAL TO OR HIGHER THAN NON-CONSOLIDATED BANK'S OFFICERS AND OPERATIONS HIGHER THAN 5%
10% OF BANK'S CAPITAL INVESTMENTS BOARD OF DIRECTORS TECHNICAL EQUITY
----------------------- ---------------- ------------------- --------------------------
BALANCE SHEET
Loans 28,300 7,584 1,744 -
Accounts receivable 653 218 15 -
---------------------- ---------------- ------------------- --------------------------
TOTAL Ps 28,953 Ps 7,802 Ps 1,759 Ps -
====================== ================ =================== ==========================
Deposits 575 16,201 213 -
Accounts payable - 7 1 -
---------------------- ---------------- ------------------- --------------------------
TOTAL Ps 575 Ps 16,208 Ps 214 Ps -
====================== ================ =================== ==========================
TRANSACTIONS
INCOME
Dividends received - 11,279 - -
Interest 5,838 1,077 179 -
Other 2 300 148 -
---------------------- ---------------- ------------------- --------------------------
TOTAL Ps 5,840 Ps 12,656 Ps 327 Ps -
====================== ================ =================== ==========================
EXPENSES
Interest 28 140 - -
Other - 9,160 132 -
---------------------- ---------------- ------------------- --------------------------
TOTAL Ps 28 Ps 9,300 Ps 132 Ps -
====================== ================ =================== ==========================
F-72
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2003
SHAREHOLDERS WITH
PARTICIPATING STOCK LOWER
SHAREHOLDERS WITH THAN 10% OF THE BANK'S
PARTICIPATING STOCK CAPITAL AND WITH
EQUAL TO OR HIGHER THAN NON-CONSOLIDATED BANK'S OFFICERS AND OPERATIONS HIGHER THAN 5%
10% OF BANK'S CAPITAL INVESTMENTS BOARD OF DIRECTORS TECHNICAL EQUITY
----------------------- ---------------- ------------------- --------------------------
BALANCE SHEET
Investment securities - 2,355 - -
Loans - 11,061 12,246 -
Accounts receivable - 3,085 150 -
---------------------- ---------------- ------------------- --------------------------
TOTAL Ps - Ps 16,501 Ps 12,396 Ps -
====================== ================ =================== ==========================
Deposits 4 36,561 1,441 83,793
Overnight funds - 84 - -
Accounts payable - 141 8 -
---------------------- ---------------- ------------------- --------------------------
TOTAL Ps 4 Ps 36,786 Ps 1,449 Ps 83,793
====================== ================ =================== ==========================
TRANSACTIONS
INCOME
Dividends received - 25,777 - -
Interest - 2,297 1,205 74
Other - 269 24 -
---------------------- ---------------- ------------------- --------------------------
TOTAL Ps - Ps 28,343 Ps 1,229 Ps 74
====================== ================ =================== ==========================
EXPENSES
Interest 1 12,330 61 5,883
Other - 2,261 69 -
---------------------- ---------------- ------------------- --------------------------
TOTAL Ps 1 Ps 14,591 Ps 130 Ps 5,883
====================== ================ =================== ==========================
F-73
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004
SHAREHOLDERS WITH
PARTICIPATING STOCK LOWER
SHAREHOLDERS WITH THAN 10% OF THE BANK'S
PARTICIPATING STOCK CAPITAL AND WITH
EQUAL TO OR HIGHER THAN NON-CONSOLIDATED BANK'S OFFICERS AND OPERATIONS HIGHER THAN 5%
10% OF BANK'S CAPITAL INVESTMENTS BOARD OF DIRECTORS (1) TECHNICAL EQUITY
----------------------- ---------------- ---------------------- --------------------------
BALANCE SHEET
Investment securities - 21,443 - -
Loans - 5,135 14,995 -
Customer's acceptances and
derivatives - 27 - -
Accounts receivable - 9,958 3,045 -
---------------------- ---------------- --------------------- ------------------------
TOTAL Ps - Ps 36,563 Ps 18,040 Ps -
====================== ================ ===================== ========================
Deposits 6 32,349 812 222,226
Overnight funds - 106 - -
Accounts payable - - - -
Bonds - 10,000 - 11,500
---------------------- ---------------- --------------------- ------------------------
TOTAL Ps 6 Ps 42,455 Ps 812 Ps 233,726
====================== ================ ===================== ========================
TRANSACTIONS
INCOME
Dividends received - 25,814 - -
Interest and fees - 2,693 1,626 153
Other - 354 - -
---------------------- ---------------- --------------------- ------------------------
TOTAL Ps - Ps 28,861 Ps 1,626 Ps 153
====================== ================ ===================== ========================
EXPENSES
Interest - 4,762 14 6,925
Fees - - 99 -
Other - - - -
---------------------- ---------------- --------------------- ------------------------
TOTAL Ps - Ps 4,762 Ps 113 Ps 6,925
====================== ================ ===================== ========================
---------------
(1) For 2003 and 2004, includes, in addition to the Members of the Board of
Directors, the President and the Vice-Presidents, as well as other employees
who have legal representation of the Bank.
F-74
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(30) PURCHASE OF ASSETS AND LIABILITIES
As a growth strategy, the Bank purchased assets and liabilities from
the institutions below.
In 2003, from Instituto de Fomento Industrial ("IFI"), the Bank
purchased a Loan Portfolio in Foreign Currency in the amount of US$ 1,794,
equivalent to Ps 5,169 at the date of purchase. The purchase percentage
was 95%.
During 2004, the Bank purchased from Sufinanciamiento S.A., a Loan
Portfolio in Local Currency in the amount of Ps 926 and the purchase
percentage was 55%. From Comercia S.A. Local Currency Loan Portfolio in
the amount of Ps 51,405 and the purchase percentage was 100%. From Central
de Inversiones S.A. (CISA) the Bank purchased a loan portfolio in local
currency in the amount of Ps 20,544 and the purchase percentage was 90%.
SALE OF ASSETS AND LIABILITIES
In 2003, the Bank sold Local Currency Loan Portfolio to Banco de
Credito in the amount of Ps 43,776 and the sale percentage was 100%.
In 2004, the Bank sold Local Currency Loan Portfolio with FINAGRO
resources to Leasing del Valle in the amount of Ps 148 and the sale
percentage was 100%.
During 2003 and 2004, the Bank made sales of its deteriorated and
written-off farming and livestock loan portfolio in the amount of Ps 1,079
and Ps 95, respectively, pursuant to an agreement entered into with
Finagro in October 2001, as administrator of the National Farming and
Livestock Reactivation Program resources within the legal framework set
forth in Ministry of Agriculture and Rural Development Decree 967 of 2000.
With this value, the total amount of the loans is understood as paid.
(31) RECLASSIFICATIONS
For better understanding of presentation of the financial statements
of the Bank's Annual Report on Form 20-F, certain statement of operations
accounts were reclassified from the financial statements as presented to
stockholders.
F-75
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(32) SUBSEQUENT EVENTS
The merger of the Bank, Conavi, and Corfinsura was agreed upon
mainly for the following purposes:
- To consolidate an institution with the ability to
respond to the demands of present economic dynamics and
of the international financial market.
- To take advantage of the complementary aspects of the
institutions and of their synergy.
- To diversify risks to a greater extent.
- To generate a broader service-integrated portfolio.
- To enable financing projects of greater magnitude than
those that each of the financial institutions could
individually finance.
- To rationalize the office network into a single
structure.
In its February 18, 2005 meeting, the Bank's Board of Directors
authorized the Administration to go forward with the merger process with
Conavi and Corfinsura, under the following terms:
1. Business Combination Stages
For the combination process among the three institutions, first, a
spin-off of Corfinsura is contemplated. Part of the investment portfolio
that this company owns in shares, particularly in the non financial
sector, along with a portion of its liabilities and equity, will be spun
off to a non-financial investment company that will be created.
Once the above-mentioned spin-off is completed, the merger between
Corfinsura (after the spin-off), Conavi and the Bank will be formalized.
The entities will combine through a stock for stock merger, in which the
Bank will be the surviving entity.
According to the foregoing, the merger of Conavi, Bancolombia and
Corfinsura will remain subject to the condition that the spin off of
Corfinsura is first perfected.
On March 28, 2005, the general shareholders' meeting of each of the
Bank, Conavi and Corfinsura approved the merger.
F-76
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2. Valuation of the Institutions
In the same meeting, the Board analyzed the independent technical
valuation study presented by BNP Paribas S.A. which contains, among other
things: (i) the relative valuation of the respective contributions of the
Bank, Conavi and Corfinsura for the merger and (ii) the exchange ratio
applicable to the contemplated merger between the aforementioned entities.
According to the study, the relative valuation of the respective
contributions is the following:
- The Bank: 75.5%
- Corfinsura after the spin-off: 12.7%
- Conavi: 11.8%
Taking into account the stock that Bancolombia and Confinsura hold
of Conavi before completing the merger, which is 28,5188% and 6,4639%,
respectively, as well as 4,6131% of the stock that the Bank currently
holds of Corfinsura, once the merger is completed, it is estimated that
the shareholders of Bancolombia will hold 79,25% of the merged entity,
while shareholders of Conavi and Corfinsura will hold the remaining
20.75%.
3. Exchange Ratio
According to the same study, the proposed exchange ratio for Conavi
shareholders will be one (1) share of Bancolombia common stock or one (1)
share of Bancolombia preferred stock without voting rights, at the
shareholder's option, for 115,39184295 shares of Conavi. The proposed
exchange ratio for Corfinsura shareholders will be one (1) share of
Bancolombia common stock or one (1) share of Bancolombia preferred stock
without voting rights, at the shareholder's option, for 1,48709574 shares
of Corfinsura, once it has completed the spin off.
4. Fairness Opinion
Credit Suisse First Boston LLC assisted the Bank's Board of
Directors in evaluating the exchange ratios provided in the merger
agreement and the BNP report.
5. Decisions Taken by the Board of Directors
Finally, based on the foregoing, the Board of directors decided to
submit the matter of the contemplated merger described herein to the
consideration of the Bank's shareholders at the General Shareholders
Meeting for their approval.
Particularly, the directors unanimously decided:
F-77
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
- To authorize the officers of the Bank to sign, on behalf
of Bancolombia, the merger agreement with Conavi and
Corfinsura based on the terms suggested by the BNP
Paribas S.A. valuation study.
- To authorize the officers of the Bank to begin taking
all of the steps necessary to consummate the merger,
including obtaining any required authorizations, with
the objective of completing the merger in a timely
fashion.
- To order the notice of the ordinary General Shareholders
Meeting on March 28, 2005 at 10:30 a.m. in the Teatro
Metropolitano de Medellin (Medellin Metropolitan
Theater), where, in addition to the issues pertaining to
the ordinary meeting, the following items will be
submitted for the consideration and approval by the
shareholders: (i) the approval of the merger agreement
that the Entities will sign; (ii) the increase in
authorized capital to accomplish the exchange of shares,
among other things; and (iii) the issuance of common and
preferred shares.
The Board of Directors cautioned that the contemplated transaction
would be subject to approval at the General Shareholders Meetings of each
of the three Entities and relevant regulatory authorities.
Having obtained the Board's authorization, on February 28, 2005, the
Bank's administration signed a Merger Agreement with Conavi and
Corfinsura.
On March 18, 2005, the Bank announced its intention to sell its
ownership in Almacenar, and for this reason, entrusted Colcorp to
structure a possible transaction. The Bank owns a direct participation of
94.33% in the warehouse services company.
(33) 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 accounting principles generally accepted in the United
States of America ("U.S. GAAP"), this note presents a reconciliation of
net income and stockholders' equity to U.S. GAAP.
a) RECONCILIATION OF NET INCOME:
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, 2002, 2003 and 2004:
F-78
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2002 2003 2004
------------ ------------ ------------
CONSOLIDATED NET INCOME UNDER COLOMBIAN GAAP Ps 210,380 Ps 469,384 Ps 578,678
a) Deferred income taxes 47,014 (140,555) 49,073
b) Employee benefit plans (2,502) 1,757 1,203
c) Inflation adjustment - - -
d) Revaluation of assets - - -
e) Allowance for loans, financial leases losses and foreclosed assets (66,100) 55,908 (159)
f) Loan origination fees and costs 12,960 11,719 7,100
g) Interest recognition on non-accrual loans 98 729 1,205
h) Deferred charges 9,125 31,787 9,422
i) Investment securities 1,189 - 1,111
j) Investments in unaffiliated companies (589) (591) (252)
k) Investments in affiliates (19,916) 10,168 (29,548)
l) Lessee accounting (81) - -
m) Business combinations
m.i) Adjustment goodwill (6,889) (10,314) (8,504)
m.ii) Adjustment amortization 26,997 41,452 22,577
n) Foreign currency translation adjustment (4,534) 2,975 10,220
------------ ------------ ------------
CONSOLIDATED NET INCOME (LOSS) UNDER U.S. GAAP Ps 207,152 Ps 474,419 Ps 642,126
============ ============ ============
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, 2002, 2003, and
2004:
2002 2003 2004
------------ ------------ ------------
CONSOLIDATED STOCKHOLDERS' EQUITY UNDER COLOMBIAN GAAP Ps 1,284,348 Ps 1,689,379 Ps 2,090,723
a) Deferred income taxes 86,100 (45,234) 6,317
b) Employee benefit plans (25,548) (27,855) (36,129)
c) Inflation adjustment 43,216 43,216 43,216
d) Revaluation of assets (37,368) (30,086) (42,237)
e) Allowance for loans, financial leases losses and foreclosed assets 46,454 102,362 102,203
f) Loan origination fees and costs 31,637 43,356 50,456
g) Interest recognition on non-accrual loans 98 827 2,032
h) Deferred charges (42,484) (10,697) (1,275)
i) Investment securities - (89) -
j) Investments in unaffiliated companies (6,825) (7,416) (7,668)
k) Investments in affiliates 31,680 41,848 12,300
l) Lessee accounting - - -
m) Business combinations
m.i) Adjustment goodwill (21,229) (31,543) (40,047)
m.ii) Adjustment amortization 23,366 64,818 87,395
------------ ------------ ------------
129,097 143,507 176,563
------------ ------------ ------------
CONSOLIDATED STOCKHOLDERS' EQUITY UNDER U.S. GAAP Ps 1,413,445 Ps 1,832,886 Ps 2,267,286
============ ============ ============
F-79
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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, 2002, 2003 and 2004:
2002 2003 2004
------------ ------------ ------------
Balance at beginning of year Ps 1,147,989 Ps 1,413,445 Ps 1,832,886
Net income 207,152 474,419 642,126
Dividends declared (48,442) (76,124) (156,861)
Other comprehensive income (loss) 87,368 (18,765) (8,469)
Other (1) 19,378 39,911 (42,396)
------------ ------------ ------------
Balance at end of year Ps 1,413,445 Ps 1,832,886 Ps 2,267,286
============ ============ ============
------------------------
(1) Correspond to the Subsidiaries' retained earnings that are not
eliminated in the consolidation process.
d) STATEMENT OF COMPREHENSIVE INCOME (LOSS):
2002 2003 2004
------------ ------------ ------------
Net Income Ps 207,152 Ps 474,419 Ps 642,126
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments 4,534 (2,975) (10,220)
Components of other comprehensive from
equity method investees 9,470 - -
Unrealized gain or (loss) on securities available for sale 72,635 (13,196) 7,716
Additional minimum pension liability
offset to shareholder's equity 729 (2,594) (5,965)
------------ ------------ ------------
Other comprehensive income (loss) 87,368 (18,765) (8,469)
------------ ------------ ------------
Comprehensive income Ps 294,520 Ps 455,654 Ps 633,657
============ ============ ============
F-80
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
OTHER COMPREHENSIVE INCOME (LOSS)
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 (loss) Ps 135,520 Ps (48,152) Ps 87,368
============= ============== ============
2003
BEFORE-TAX (TAX EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
------------- -------------- ------------
Unrealized gain or (loss) on securities
available for sale Ps (20,947) Ps 7,751 Ps (13,196)
Additional minimum pension liability (4,064) 1,470 (2,594)
Foreign currency translation adjustment (2,975) - (2,975)
------------- -------------- ------------
Other comprehensive income (loss) Ps (27,986) Ps 9,221 Ps (18,765)
============= ============== ============
2004
BEFORE-TAX (TAX EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
------------- -------------- ------------
Unrealized gain or (loss) on securities
available for sale Ps 8,750 Ps (1,034) Ps 7,716
Additional minimum pension liability (9,477) 3,512 (5,965)
Foreign currency translation adjustment (10,220) - (10,220)
------------- -------------- ------------
Other comprehensive income (loss) Ps (10,947) Ps 2,478 Ps (8,469)
============= ============== ============
F-81
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
ACCUMULATED OTHER COMPREHENSIVE INCOME
COMPONENTS OF
ADDITIONAL FOREIGN UNREALIZED OTHER ACCUMULATED
MINIMUM CURRENCY GAINS (LOSSES) COMPREHENSIVE OTHER
PENSION TRANSLATION ON INCOME FROM EQUITY COMPREHENSIVE
LIABILITY ADJUSTMENT SECURITIES METHOD INVESTEES INCOME
------------ ------------ -------------- ------------------ --------------
Beginning balance 2002 Ps (2,489) Ps - Ps (770) Ps (9,470) Ps (12,729)
Current-period change 729 4,534 72,635 9,470 87,368
------------ ------------ -------------- -------------- --------------
Ending balance 2002 (1,760) 4,534 71,865 - 74,639
============ ============ ============== ============== ==============
Beginning balance 2003 (1,760) 4,534 71,865 - 74,639
Current-period change (2,594) (2,975) (13,196) - (18,765)
------------ ------------ -------------- -------------- --------------
Ending balance 2003 (4,354) 1,559 58,669 - 55,874
============ ============ ============== ============== ==============
Beginning balance 2004 (4,354) 1,559 58,669 - 55,874
Current-period change (5,965) (10,220) 7,716 - (8,469)
------------ ------------ -------------- -------------- --------------
Ending balance 2004 Ps (10,319) Ps (8,661) Ps 66,385 Ps - Ps 47,405
============ ============ ============== ============== ==============
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 (not temporary differences as in SFAS No. 109) for
commercial and manufacturing subsidiaries. For financial companies, the
Superintendency of Banking has restricted inclusion of timing differences
related to the amortization of fiscal losses and the excess of presumed
income over ordinary income as a deferred tax asset.
Under U.S. GAAP, deferred tax assets or liabilities must be recorded
for all 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, 2002, 2003 and 2004:
2002 2003 2004
----------- ----------- -------------
Current income tax expense Ps 44,533 Ps 62,391 Ps 237,620
Deferred income tax (benefit) expense (48,930) 140,799 (47,883)
----------- ----------- -------------
TOTAL Ps (4,397) Ps 203,190 Ps 189,737
=========== =========== =============
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, 2003 and 2004
were as follows:
F-82
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2003 2004
-------------- ----------------
DEFERRED TAX ASSETS AND LIABILITIES
DEFERRED TAX ASSETS:
Accrual of employee benefits Ps 10,265 Ps 13,410
Allowance for loan losses 14,718 -
Fixed assets 52,866 67,321
Tax losses 37,342 36,357
Forward, future and swaps effect 12,687 8,362
Allowance for foreclosed assets 29,581 27,863
Fiduciary assets 9,892 5,671
Accrued expenses 3,414 17,110
Other 14,401 18,248
-------------- ----------------
Total gross deferred tax assets 185,166 194,342
Less valuation allowance (83,584) (5,330)
-------------- ----------------
NET DEFERRED TAX ASSET Ps 101,582 Ps 189,012
-------------- ----------------
DEFERRED TAX LIABILITIES:
Unrealized gain on investment securities Ps 34,908 Ps 35,943
Allowance for loan losses - 3,677
Loan origination fees and cost 16,039 18,707
Intangible assets - 26,819
Inflation adjustments 39,508 48,637
Goodwill recognition 24,632 33,012
Excess of accrued income over valuation income 19,162 8,924
Other 12,248 7,848
-------------- ----------------
TOTAL DEFERRED LIABILITIES 146,498 183,567
-------------- ----------------
NET DEFERRED ASSET (LIABILITY) Ps (44,916) Ps 5,445
============== ================
The valuation allowance for deferred tax assets as of December 31, 2003
and 2004 was Ps 83,584 and Ps 5,330, respectively. The net change in the total
valuation allowance for the year ended December 31, 2003 was an increase of Ps
22,328 and for the year ended December 31, 2004 was an decrease of Ps 78,254. 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,
F-83
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004. 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
carry forward period are reduced.
The 35% income tax nominal rate for year 2002, and the 37% income tax
nominal rate for years 2003 and 2004 differs from (2%), 30% and 23% effective
rate for years 2002, 2003 and 2004, due to the following:
2002 2003 2004
------------ ----------- -----------
Income before tax U.S. GAAP Ps 202,755 Ps 677,609 Ps 831,863
------------ ----------- -----------
35% tax (for year 2002) and 37% tax (for
years 2003 and 2004) 70,964 250,716 307,789
Nondeductible items / provisions 27,159 26,946 15,433
Nontaxable income (27,003) (81,985) (37,662)
Others 7,177 (14,815) (17,569)
Increase (decrease) valuation allowance (82,694) 22,328 (78,254)
------------ ----------- -----------
Income tax Ps (4,397) Ps 203,190 Ps 189,737
============ =========== ===========
As of December 31, 2004, the Bank had the intention of capitalize
the results from its off-shore Subsidiaries. Accordingly, no deferred
income tax liability was recorded for the undistributed profits of
Bancolombia Panama and subsidiaries. The deferred income tax related to
the undistributed profits in such Subsidiaries that was not recorded is Ps
222,925 at December 31, 2004.
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 transition obligation calculated at the date we
adopted SFAS 87 is being amortized from January 1, 1989, for a period of
18 years for the pension plan and 27 years for the severance plan.
F-84
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 that date, continue to participate in
the Bank's noncontributory unfunded defined benefit pension plan. Under this
plan, benefits are based on length of service and level of compensation. As of
December 31, 2004, there were 1,069 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 from 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.
Under U.S. GAAP, a curtailment is an event that significantly
reduces the expected years of future service of present employees or eliminates
for a significant number of employees the accrual of defined benefits for some
or all of their future services. Consequently, this modification reduces, rather
than increase, the projected benefit obligation. Such a reduction is used to
reduce any existing unrecognized prior service cost, and the excess, if any, is
amortized on the same basis as the cost of benefit increases.
As of December 31, 2004 there were 2,026 participants remaining in
the original severance plan.
F-85
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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, 2002, 2003 and 2004 are
summarized below:
2002 2003 2004
------------- ------------- -------------
CHANGE IN BENEFIT OBLIGATION
Unfunded benefit obligation at beginning of year Ps 107,061 Ps 107,257 Ps 113,715
Service cost 1,663 1,557 1,543
Interest cost 26,482 25,616 25,624
Actuarial gain (loss) (7,088) (1,025) 7,763
Benefits paid (20,861) (19,690) (21,016)
------------- ------------- -------------
Unfunded benefit obligation at end of year Ps 107,257 Ps 113,715 Ps 127,629
============= ============= =============
Funded status (107,257) (113,715) (127,629)
Unrecognized net transition loss 7,588 6,541 5,493
Unrecognized net actuarial loss (gain) (3,841) (4,872) 2,809
Unrecognized prior service cost 1,002 860 716
------------- ------------- -------------
Accrued benefit cost under U.S.GAAP (102,508) (111,186) (118,611)
============= ============= =============
Accrued benefit cost under Colombian GAAP (79,668) (90,103) (98,731)
------------- ------------- -------------
Difference to be recognized under U.S. GAAP (22,840) (21,083) (19,880)
------------- ------------- -------------
Additional minimum pension liability
offset to Stockholders' equity (2,708) (6,772) (16,249)
------------- ------------- -------------
TOTAL DIFFERENCE TO BE RECOGNIZED UNDER
------------- ------------- -------------
U.S. GAAP STOCKHOLDERS' EQUITY Ps (25,548) Ps (27,855) Ps (36,129)
============= ============= =============
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 obligation for the plan years were as follows:
2002 2003 2004
----- ---- ----
Discount rate 8% 8% 8%
Rate of compensation increases 2% 2% 2%
Rate of pension increases 0% 0% 0%
== == ==
F-86
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2002 2003 2004
----------- --- ----------- -----------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost Ps 1,663 Ps 1,557 Ps 1,543
Interest cost 26,482 25,616 25,624
Amortization of prior service 143 143 143
Amortization of unrecognized net transition obligation 1,048 1,047 1,048
Amortization of actuarial unrecognized net gain (loss) 7 5 82
----------- ----------- -----------
Net periodic pension cost under U.S. GAAP 29,343 28,368 28,440
Net periodic pension cost under Colombian GAAP 26,841 30,125 29,643
----------- ----------- -----------
Difference to be recognized under U.S. GAAP Ps (2,502) Ps 1,757 Ps 1,203
=========== =========== ===========
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
2005 10,132 8,759
2006 8,761 2,684
2007 7,516 3,159
2008 6,597 3,815
2009 5,753 3,312
Years 2010 - 2014 19,735 28,417
====== ======
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 represents the cumulative inflation adjustment on the Bank's
non-monetary assets for inflation occurring prior to January 1, 2001, less
depreciation expense.
F-87
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 "reappraisal of assets" and the
stockholders' equity caption "Surplus from reappraisals of assets". The
last valuation was in December 2004. 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 2 (h), 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 GAAP 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.
Under U.S. GAAP, allowance for loan losses represents management's
estimate of probable losses inherent in the portfolio. Attribution of the
allowance is made for analytical purposes only, and the entire allowance
is available to absorb probable loan losses inherent in the portfolio
including unfunded commitments. Additions to the allowance are made by
means of the provision for loan losses. Loan losses are deducted from the
allowance, and subsequent recoveries are added. Securities received in
exchange for loan claims in debt restructurings are initially recorded at
fair value, with any gain or loss reflected as a recovery or charge-off to
the allowance, and are subsequently accounted for as securities
available-for-sale.
In the corporate portfolio, larger-balance, non-homogeneous
exposures representing significant individual credit exposures are
evaluated based upon the borrower's overall financial condition,
resources, and payment record; the prospects for support from any
financially responsible guarantors; and, if appropriate, the realizable
value of any collateral. Reserves are established for these loans based
upon an estimate of probable losses for individual larger-balance,
non-homogeneous loans deemed impaired. This estimate considers all
available evidence including, as appropriate, the present value of the
expected future cash flows discounted at the loan's contractual effective
rate, the secondary market value of the loan and the fair value of
collateral. The allowance for loan losses attributed to the remaining
portfolio is established via a process that estimates the probable loss
inherent in the portfolio based upon various statistical analyses. These
analyses consider historical and projected default rates and loss
severities; internal risk rating, industry, and other environmental
factors. The Bank also considers overall portfolio indicators including
trends in internally risk-rated exposures, classified exposures,
cash-basis loans, historical and forecasted write-offs, and a review of
industry, and portfolio concentrations, including current developments
within those segments. In addition, the Bank considers the current
business strategy and credit process, including credit limit setting and
compliance, credit approvals, loan underwriting criteria, and loan workout
procedures.
F-88
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Each portfolio of smaller-balance, homogeneous loans, including
consumer revolving credit, credit cards, and most other consumer loans, is
collectively evaluated for impairment. The allowance for credit losses
attributed to these loans is established via a process that estimates the
probable losses inherent in the portfolio, based upon various statistical
analyses. These include migration analysis, in which historical
delinquency and credit loss experience is applied to the current aging of
the portfolio, together with analyses that reflect current trends and
conditions. The Bank also considers overall portfolio indicators including
historical credit losses, delinquent, non-performing and classified loans,
and trends in volumes and terms of loans; an evaluation of overall credit
quality and the credit process, including lending policies and procedures;
and economic, geographical, product and other environmental factors.
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.
The following summarizes the allowance for loan and financial lease
losses under Colombian GAAP and U.S. GAAP at December 31, 2002, 2003 and
2004:
2002 2003 2004
------------ ------------- -----------
ALLOWANCE FOR LOANS, FINANCIAL LEASE LOSSES AND FORECLOSED
ASSETS UNDER COLOMBIAN GAAP
Allowance for loans and financial lease losses Ps 341,156 Ps 400,838 Ps 434,378
Allowance for accrued interest and other receivable 18,073 5,597 4,729
Allowance for foreclosed assets 107,962 135,121 140,865
------------ ------------ -----------
Ps 467,191 Ps 541,556 Ps 579,972
------------ ------------ -----------
ALLOWANCE FOR LOAN LOSSES UNDER U.S. GAAP
Allowance for loans, financial lease, accrued interest
losses and other related receivable
348,502 363,068 393,138
Allowance for foreclosed assets 72,235 76,126 84,631
------------ ------------ -----------
Ps 420,737 Ps 439,194 Ps 477,769
------------ ------------ -----------
DIFFERENCE TO BE RECOGNIZED AS AN ADJUSTMENT TO
COLOMBIAN GAAP STOCKHOLDERS' EQUITY Ps 46,454 Ps 102,362 Ps 102,203
============ ============ ===========
An analysis of the activity in the allowance for loans and financial
lease losses under U.S. GAAP during the year ended December 31, 2003 and
2004 is as follows:
F-89
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2003 2004
---------- -----------
Provision at the beginning of the period 348,502 363,068
Currency Translation and other adjustments (284) (12,751)
Acquisitions of Business (Sufinanciamiento) 11,854 -
Charge-offs (112,393) (55,032)
Recoveries (130,408) (78,584)
Charged to profit and loss account 245,797 176,437
--------- -----------
Provision at the end of the period (1) 363,068 393,138
========= ===========
Gross Loans and financial leases 8,029,668 10,035,239
Closing customers provisions as a percentage of gross loans 4.52% 3.92%
Customers charges against profits as percentage of gross loans 3.06% 1.76%
-------------------
(1) Includes financial leases.
At December 31, 2002, 2003, and 2004, the carrying value of loans
considered to be impaired, under SFAS No. 114 (not including restructured loans)
was approximately Ps 136,718, Ps 329,864 and Ps 118,710, respectively, and the
related allowance for loan losses on those impaired loans totaled Ps 121,253, Ps
153,089 and Ps 22,243, respectively.
For the years ended December 31, 2002, 2003 and 2004, the Bank
recognized interest income of approximately Ps 5,594, Ps 5,586 and Ps 6,653
respectively, on such impaired loans.
The total amount of loans evaluated under a methodology different
than SFAS 114 methodology was Ps 9,500,198.
Foreclosed assets Under Colombian GAAP, the Bank must design and
adopt its own internal models for the calculation of provisions for foreclosed
assets by means of which the expected loss for all types of assets is estimated.
For real estate, the provision is equal to 30% of the value of the asset at the
time of receipt and must be constituted in proportional monthly installments
within the first year following receipt. This provision will increase an
additional 30% in proportional monthly installments within the second year
following receipt of the asset. Once the legal term for sale has expired without
authorization to extend, the provision must be 80% of the value upon receipt. In
case the term extension is granted, the remaining 20% of the provision may be
constituted within said term.
F-90
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
For moveable assets, the provision is equal to 35% of the
value of the asset at the time of acquisition and must be constituted in
proportional monthly installments within the first year following receipt.
Said provision must be increased and additional 35% within the second year
following receipt of the asset. Once the legal term for sale has expired
without authorization to extend, the provision must be 100% of the book
value of the asset prior to provisions. In case the term extension is
granted, the remaining 30% of the provision may be constituted within said
term.
Under U.S. GAAP, in order to assess for impairment its
foreclosed assets, the Bank applies the methodology described by the SFAS
144 and SFAS 15 with respect to the method to evaluate the recoverability
of the assets and to the measurement of the impairment loss. Accordingly,
after a troubled debt restructuring, the Bank accounts for assets received
in satisfaction of a receivable the same as if the assets had been
acquired for cash. The application of SFAS 15 results in the measurement
of a new cost basis for the long-lived asset received in full satisfaction
of a receivable. A loss is recognized for any initial or subsequent
write-down to fair value less cost to sell. A gain is recognized for any
subsequent increase in fair value less cost to sell, but not in excess of
the cumulative loss previously recognized for a write-down to fair value
less cost to sell.
f) LOAN ORIGINATION FEES AND COSTS
Under Colombian GAAP, the Bank recognizes 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
deferred and recognized over the life of the related loans as an
adjustment of yield.
g) INTEREST RECOGNITION - NON-ACCRUAL LOANS
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 past due 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.
Additionally, beginning March 25, 2003, all loans that are
past due more than thirty days will stop accruing interest in the
statement of operations and their entries will be made in memorandum
accounts until such time that the customer does not proceed to cancel. It
is estimated that at December 31, 2004, approximately Ps 277 are found
entered in memorandum accounts because of the adoption of this policy.
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.
F-91
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
As a result, for U.S. GAAP purposes, interest income on
past-due consumer and small business loans between 61 and 90 days past due
for the year 2002, was included as accrued interest. Interest income from
past-due mortgage loans between 91 and 120 days past due was reversed for
the year 2002.
For the years 2003 and 2004, interest income on past due
commercial, consumer and small business loans between 31 and 90 days past
due, was accounted as accrued interest.
h) DEFERRED CHARGES
The Bank and its Subsidiaries have deferred certain
pre-operating 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", and the first two types were divided between 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.
FOREIGN EXCHANGE GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE
Under Colombian GAAP, movements resulting from changes in
foreign currency exchange rates are reflected in consolidated net income.
Under US GAAP, EITF 96-15, Accounting for the Effects of Changes in
Foreign Currency Exchange Rates on Foreign-Currency-Denominated
Available-for-Sale Debt Securities, as amended by SFAS 133, the change in
value of available for sale debt securities as a result of changes in
foreign currency exchange rates is reflected in shareholders' equity.
F-92
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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, it is not practical to determine the cumulative effect of this
change in accounting method as of January 1, 2002 or prior period pro forma
effects.
The effect of the change on net income under Colombian GAAP for the
year ended December 31, 2002, is as follows:
PER SHARE
2002 AMOUNTS
-------- ----------
Consolidated net income under Colombian GAAP, before
change in accounting method for investment securities 230,773 Ps 400.16
Effect of change in valuation method for investment
securities at September 2, 2002, net of tax (20,393) (35.36)
Consolidated net income under
Colombian GAAP as reported 210,380 Ps 364.80
======= ==========
Under U.S. 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, 2003 and 2004, the Bank's portfolio was
classified as "trading", "held to maturity" and "available for sale".
F-93
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 - DEBT SECURITIES
DECEMBER 31, 2003
Securities issued or secured by Colombian government Ps 1,361,700 Ps 75,869 Ps 454 Ps 1,286,285
Securities issued or secured by government entities 87,808 8,865 1 78,944
Securities issued or secured by financial entities 93,052 646 417 92,823
Eurobonds and Euronotes 174,189 5,218 313 169,284
Other investments 87,109 10 - 87,099
---------------- ------------- ------------ ---------------
Ps 1,803,858 Ps 90,608 Ps 1,185 Ps 1,714,435
================ ============= ============ ===============
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
---------------- ------------- ------------ ---------------
AVAILABLE FOR SALE - DEBT SECURITIES
DECEMBER 31, 2004
Securities issued or secured by Colombian government Ps 1,569,148 Ps 67,258 Ps 385 Ps 1,502,275
Securities issued or secured by government entities 19,060 34 - 19,026
Securities issued or secured by financial entities 190,261 3,130 5,506 192,637
Other investments 165,216 466 647 165,397
---------------- ------------- ------------ ---------------
Ps 1,943,685 Ps 70,888 Ps 6,538 Ps 1,879,335
================ ============= ============ ===============
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
---------------- ------------- ------------ ---------------
HELD TO MATURITY
DECEMBER 31, 2003
Securities issued or secured by Colombian government Ps 650,561 Ps 22,788 Ps 74,785 Ps 702,558
Other investments 15,931 - 85 16,016
---------------- ------------- ------------ ---------------
Ps 666,492 Ps 22,788 Ps 74,870 Ps 718,574
================ ============= ============ ===============
F-94
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
---------------- ------------- ------------ ---------------
HELD TO MATURITY
DECEMBER 31, 2004
Securities issued or secured by Colombian government Ps 590,444 Ps 17,115 Ps 87,441 Ps 660,770
Securities issued or secured by financial entities 20,728 235 2,085 22,578
Other investments 43,325 246 2,037 45,116
---------------- ------------- ------------ ---------------
Ps 654,497 Ps 17,596 Ps 91,563 Ps 728,464
================ ============= ============ ===============
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
---------------- ------------- ------------ ---------------
AVAILABLE FOR SALE - EQUITY SECURITIES
DECEMBER 31, 2003
Corfinsura 22,015 5,014 - 17,001
---------------- ------------- ------------ ---------------
Ps 22,015 Ps 5,014 Ps - Ps 17,001
================ ============= ============ ===============
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
---------------- ------------- ------------ ---------------
AVAILABLE FOR SALE - EQUITY SECURITIES
DECEMBER 31, 2004
Corfinsura 55,749 38,748 - 17,001
---------------- ------------- ------------ ---------------
Ps 55,749 Ps 38,748 Ps - Ps 17,001
================ ============= ============ ===============
The scheduled maturities of debt securities at December 31, 2004
were as follows:
HELD TO MATURITY AVAILABLE FOR SALE
----------------------------- --------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------- ------------ ---------------- -------------
Due in one year or less Ps 263,141 Ps 275,595 Ps 176,142 Ps 176,750
Due from one year to five years 214,517 219,173 1,623,600 1,685,842
Due from five year to ten years 245,779 156,555 75,483 76,992
Due more ten years 5,027 3,174 4,110 4,101
-------------- ------------ ---------------- -------------
TOTAL Ps 728,464 Ps 654,497 Ps 1,879,335 Ps 1,943,685
============== ============ ================ =============
F-95
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Investments classified as "Held to maturity" for purposes of U.S.
GAAP are securities issued or secured by the Colombian government, which the
bank has the intention and ability to hold to maturity.
The cost of available for sale securities was determined based on
its carrying amount plus gross unrealized losses minus gross unrealized gains.
The cost of securities classified as Held to maturity is equal to the carrying
amount under Colombian GAAP, as these investments are not accounted for at fair
value.
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.
UNREALIZED LOSSES DISCLOSURE
Investments that have been in continuous unrealized loss position
for less than 12 months are:
GROSS
UNREALIZED COST
FAIR VALUE LOSSES BASIS
------------ ----------- -------------
AVAILABLE FOR SALE
DECEMBER 31, 2004
Securities issued or secured by Colombian government Ps 70,353 Ps 372 Ps 70,725
Securities issued or secured by financial entities 43,911 5,506 49,417
Other investments 139,373 647 140,020
------------ ----------- -------------
Ps 253,637 Ps 6,525 Ps 260,162
============ =========== =============
GROSS
UNREALIZED COST
FAIR VALUE LOSSES BASIS
----------- ---------- -------------
HELD TO MATURITY
DECEMBER 31, 2004
Securities issued or secured by Colombian government Ps 38,176 Ps 24,508 Ps 62,684
Securities issued or secured by Government entities 3,174 1,852 5,026
Securities issued or secured by financial entities 8,450 2,084 10,534
Other investments 30,482 186 30,668
----------- ---------- -------------
TOTAL Ps 80,282 Ps 28,630 Ps 108,912
=========== ========== =============
F-96
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Investments that have been in continuous unrealized loss position
for 12 months or longer are:
GROSS
UNREALIZED COST
FAIR VALUE LOSSES BASIS
---------- ---------- ---------
IMPAIRMENT AVAILABLE FOR SALE
DECEMBER 31, 2004
Securities issued or secured by Colombian government Ps 3,769 Ps 13 Ps 3,782
---------- ---------- ---------
TOTAL Ps 3,769 Ps 13 Ps 3,782
========== ========== =========
GROSS
UNREALIZED COST
FAIR VALUE LOSSES BASIS
---------- ---------- -----------
IMPAIRMENT HELD TO MATURITY
DECEMBER 31, 2004
Securities issued or secured by Colombian government Ps 112,192 Ps 62,933 Ps 175,125
---------- ---------- -----------
TOTAL Ps 112,192 Ps 62,933 Ps 175,125
========== ========== ===========
As of December 31, 2004, most of the investment securities that
presented gross unrealized losses were issued by national government,
governmental entities and financial entities.
As of December 31, 2004, 281 investment securities presented gross
unrealized losses.
No other-than-temporary impairment has been recognized for the
investment in debt securities held to maturity because the Bank has the ability
and the positive intent to hold these securities until the amortized cost is
recovered, there does not appear to be any credit deterioration, and recovery
seems probable. Held to maturity investments that presented gross unrealized
losses correspond to mandatory investments.
The amount of unrealized holding gain or loss on trading securities
included in earnings during 2003 and 2004 was Ps 246,871 and Ps 266,428,
respectively.
The Bank conducts regular reviews to assess whether other than
temporary impairment exists. A number of factors are considered in performing an
impairment analysis of securities.
F-97
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Those factors include:
(a) the length of time and the extent to which the market
value has been less than cost;
(b) the financial condition and near-term prospects of the
issuer, including any specific events which may
influence the operations of the issuer (such as
changes in technology that may impair the earnings
potential of the investment, or the discontinuance
of a segment of a business that may affect the
future earnings potential); or
(c) the intent and ability of the Bank to retain its
investment in the issuer for a period of time
sufficient to allow for any anticipated recovery
in market value.
The Bank also takes into account changes in economic
conditions globally, regionally, or related to specific issuers or
industries that could adversely affect these values.
j) INVESTMENT IN UNAFFILIATED COMPANIES. HIGH AND MEDIUM VOLUME QUOTATION
INVESTMENT SECURITIES CLASSIFIED AS "AVAILABLE FOR SALE " UNDER COLOMBIAN
GAAP.
For purposes of Colombian GAAP, an investment in High and
Medium volume quotation equity securities of an investee is recorded using
the average price published by the exchange. The result of 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 recorded at cost if the investor cannot
exercise significant influence. However, dividends paid in the form of
additional shares of common stock 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.
Under Colombian GAAP, low and minimum volume and unquoted
equity securities are valuated pursuant the shareholders' equity
comparison method. Under this method, the Bank accounts for increases of
shareholders' equity of the investee as reappraisal, and decreases as
devaluation. If at the valuation date the shareholders' equity of the
investee is less than its previous value, and the Bank had registered a
reappraisal, this reappraisal is affected until it runs out. Once
reappraisal runs out, the Bank records a devaluation. Likewise, if on the
valuation date the shareholders' equity of the investee is greater than
its previous value, and the Bank had registered a devaluation, this
reappraisal is affected until it runs out. Once devaluation runs out, the
Bank records a reappraisal.
F-98
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 Panama S.A.,
Sufinanciamiento S.A. 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,
automobile and furniture and fixtures (with terms between three and five
years).
Under Colombian GAAP, leases are classified into financial
leases and operating leases. Since January 1, 2004, goods given in
financial lease to third parties with a purchase option are recorded in
the loan portfolio. Goods given in operating lease are recorded as
property, plant, and equipment. For both types of leasing, the initial
record must represent the value to be financed of the good given in
leasing (that is, the acquisition or construction cost) and the value of
the improvement and expenses that can be capitalized, which represent a
greater value of the lease operation to be financed.
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 financial leases as of December 31, 2003 and 2004:
2003 2004
---------- ------------
Total minimum lease payments to be received Ps 665,087 Ps 1,091,505
Estimated residual values of leased property 41,606 55,937
Less: Unearned income (172,245) (285,896)
---------- ------------
Net investment in direct financial leases Ps 534,448 Ps 861,546
========== ============
The following schedule shows the future minimum lease payments
to be received on direct financial leases for each of the next five years
and thereafter.
F-99
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
YEAR ENDED DECEMBER 31,
2005 Ps 346,222
2006 282,999
2007 195,522
2008 112,145
2009 88,417
Later years, through 2010 66,200
TOTAL MINIMUM FUTURE
-------------
LEASE PAYMENTS TO BE RECEIVED Ps 1,091,505
=============
m) BUSINESS COMBINATIONS
Purchase method of accounting
Upon a business combination, the purchase method of accounting
under U.S. GAAP requires that (i) the purchase price be allocated to the
identifiable 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.
Upon a business combination, the purchase method of accounting
under Colombian GAAP requires that (i) the purchase price be 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, the Bank deferred and amortized other merger
related charges over 36 months under Colombian GAAP, while under U.S. GAAP
those charges are being amortized over 120 months.
The reappraisal was allocated to the acquired assets to adjust
them to their fair market value. For this reason, this reappraisal was
included in the determination of depreciation as of the merger. Under
Colombian GAAP, the reappraisal of assets is not subject to depreciation.
On December 29, 2003, the Bank and its Subsidiaries acquired
99.99% of the outstanding common shares of Sufinanciamiento S.A. Under
U.S. GAAP, the results of Sufinanciamiento's operations have been included
in the consolidated financial statements since that date. Sufinanciamiento
is a commercial financing company, specializing in automobile loans.
F-100
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The acquisition of Sufinanciamiento will allow the Bank and
its Subsidiaries to complement its portfolio of products improving
commercial financing activities, more specifically automobile financing.
The aggregate purchase price was Ps 75,016 paid in cash. The value of the
1,415 million common shares acquired was determined based on the
discounted cash flows, prepared based on the historical financial
statements from January 1999 to June 2003. Sufinanciamiento's cash flows
were estimated by the Bank based on the current economic environment in
Colombia and the nature of the business of the acquired entity.
The following table summarizes the estimated fair values of
the assets acquired and liabilities assumed at the date of acquisition.
FAIR VALUE OF ASSETS ACQUIRED AND
LIABILITIES ASSUMED UNDER U.S. GAAP
AS OF DECEMBER 31, 2003
-----------------------------------
TOTAL PURCHASE PRICE, NET OF CASH ACQUIRED Ps 63,622
--------------
Assets acquired 304,256
Premises and equipment, net 7,358
Liabilities assumed 269,268
--------------
NET ASSETS ACQUIRED Ps 42,346
==============
EXCESS OF COST OVER THE FAIR VALUE OF ACQUIRED NET ASSETS 21,276
INTANGIBLE ASSET 1,562
--------------
GOODWILL Ps 19,714
==============
The excess of purchase price amounted to Ps 21,276 and Ps
1,562 was assigned to a contract with Almacenes Exito (intangible assets)
while the remaining Ps 19,714 was assigned to goodwill.
In 2003 Sufinanciamiento S.A. signed an agreement with
Almacenes Exito, a major retailer in Colombia, whereby the former will be
the only financing provider to the latter's clients. Given the
significance of this agreement to Sufinanciamiento's operations and the
future benefits it will bring to the Bank's strategic and financial
positions, this contractual relationship has been identified as an
intangible asset and fair valued by the Bank.
The following unaudited pro forma information for 2002 and
2003 reflects the consolidated results of operations as if the acquisition
had occurred at the beginning of each year presented and includes the
amortization of intangibles, as appropriate. The unaudited pro forma
financial information presented is not necessarily indicative of the
results of operations that might have occurred had the transaction been
completed at the beginning of the year specified, and does not purport to
represent what the consolidated results might be for any future period.
F-101
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2002
-------
U.S. GAAP Net income 224,272
Revenues 787,051
Earnings per share 504.32
=======
2003
---------
U.S. GAAP Net income 481,736
Revenues 1,465,973
Earnings per share 1,088.44
=========
Under Colombian GAAP, the Bank consolidated Sufinanciamiento's
earnings since January 1, 2003, as if the acquisition had occurred at the
beginning of the year. Accordingly, virtually all of the amounts for
pre-acquisition periods in the primary financial statements are different
from the amounts that would be presented under U.S. GAAP. In effect, the
financial statements presented as the primary financial statements are of
a different reporting entity than would be required under U.S. GAAP.
The Bank understands that, in these circumstances,
reconciliation of net income and stockholders' equity alone will not
produce information content substantially similar to U.S. GAAP with
respect to the pre-acquisition periods. However, given the insignificance
of Sufinanciamiento's operations, the Bank decided not to present a
columnar reconciliation removing the acquired business. The Bank also
believes that the differences are not so pervasive that U.S. GAAP
condensed income and cash flow statements are necessary.
Goodwill and intangible assets
Under U.S. GAAP, from January 1, 2002, the Bank no longer
amortizes goodwill, but it is subject to an annual impairment test. The
Bank believes it does not have intangible assets with indefinite lives.
Prior to December 31, 2001, the Bank recognized an excess of
fair value of acquired net assets over cost (commonly referred to as
negative goodwill) on certain business combinations. Under Colombian GAAP,
negative goodwill is recorded as a liability and it is amortized over a
period of five years.
Under U.S. GAAP, as explained previously, the Bank adopted
SFAS No. 141 on January 1, 2002. Upon adoption of SFAS No. 141, any
unamortized negative goodwill related to an excess over cost arising from
business combinations for which the acquisition date was before July 1,
2001 was written off and recognized as the effect of a change in
accounting principle.
F-102
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The Bank has performed the required impairment test of each
reporting unit's goodwill and concluded that there was no impairment of
goodwill. Accordingly, the Bank reversed the amortization of goodwill from
Colombian GAAP for the year ended 2004.
The activity of the goodwill and intangible assets during the
years ended December 31, 2002, 2003 and 2004 is as follows:
2002 2003 2004
------------ ------------- -------------
GOODWILL
Balance at beginning of year Ps 141,553 Ps 141,553 Ps 161,267
Additions (Sufinanciamiento acquisition) - 19,714 -
------------ ------------- -------------
Balance at end of year Ps 141,553 Ps 161,267 Ps 161,267
============ ============= =============
2003 2004
-------- --------
INTANGIBLE ASSETS
Balance at beginning of year Ps - Ps 1,562
Additions (Sufinanciamiento acquisition) 1,562 -
Amortization - (156)
-------- --------
Balance at end of year Ps 1,562 Ps 1,406
======== ========
As of December 31, 2004 the total amount of goodwill
outstanding is tax deductible in accordance with tax regulations in
Colombia. Accordingly, deferred income taxes are recorded for the
difference between the unamortized amount of goodwill under Colombian GAAP
and the balance under US GAAP.
n) FOREIGN CURRENCY TRANSLATION ADJUSTMENT
For Colombian GAAP, the translation adjustments 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 and SFAS No. 130,
the translation adjustments shall be reported as a component of
stockholders' equity, in other comprehensive income.
o) GUARANTEES
In order to meet the needs of its customers, the Bank issues
financial standby letters of credit and bank guarantees. At December 31,
2003 and 2004, outstanding letters of credits and bank guarantees issued
by the Bank totaled Ps 692,795 and Ps 559,018, respectively.
F-103
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The table below summarizes, at December 31, 2003 and 2004, all
of the Bank's guarantees where the Bank is the guarantor. The maximum
potential amount of future payments represents the notional amounts that
could be lost under the guarantees if there were a total default by the
guaranteed parties, without consideration of possible recoveries under
recourse provisions or from collateral held or pledged. Such amounts bear
no relationship to the anticipated losses on these guarantees and greatly
exceed anticipated losses.
MAXIMUM POTENTIAL
AMOUNT OF FUTURE
EXPIRE WITHIN ONE YEAR EXPIRE AFTER ONE YEAR TOTAL AMOUNT OUTSTANDING PAYMENTS
------------------------ ---------------------- ------------------------ ----------------------
2003 2004 2003 2004 2003 2004 2003 2004
------------ --------- --------- -------- ---------- ------------ ---------- ----------
Financial standby
letters of credit Ps 384,995 Ps 402,969 Ps 842 Ps 18,674 Ps 385,837 Ps 421,643 Ps 385,837 Ps 421,643
Bank guarantees 212,557 69,104 94,401 68,271 306,958 137,375 306,958 137,375
------------ ---------- --------- --------- ---------- ------------ ---------- ----------
TOTAL Ps 597,552 Ps 472,073 Ps 95,243 Ps 86,945 Ps 692,795 Ps 559,018 Ps 692,795 Ps 559,018
============ ========== ========= ========= ========== ============ ========== ==========
Financial standby letters of credit include guarantees of
payment of credit facilities, promissory notes and trade acceptances.
Bank guarantees are performance guarantees that are issued to
guarantee a customer's tender bid on a construction or systems
installation project or to guarantee completion of such projects in
accordance with contract terms. They are also issued to support a
customer's obligation to supply specified products, commodities, or
maintenance or warranty services to a third party.
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,
2003 and 2004 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-104
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
DECEMBER 31, 2003 DECEMBER 31, 2004
----------------------------- ------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- -------------- -------------
FINANCIAL ASSETS
Cash and cash equivalents Ps 1,446,461 Ps 1,446,461 Ps 1,249,360 Ps 1,249,360
Investment securities 4,247,301 4,284,642 5,250,211 5,176,244
Loans and accrued interest receivable on loans, net 7,745,614 7,778,555 9,722,137 9,767,980
Customers' acceptances 35,806 35,806 66,494 66,494
Forward contracts (33,997) (33,997) (22,270) (22,270)
Future Contracts (279) (279) - -
Swaps 9 9 (111) (111)
Next day operations - - (219) (219)
FINANCIAL LIABILITIES:
Deposits Ps 10,231,997 Ps 10,231,997 Ps 11,862,116 Ps 12,030,870
Overnight funds 1,118,139 1,118,139 616,494 616,494
Bank acceptances outstanding 35,833 35,833 66,593 66,593
Interbank borrowings 456,059 456,059 246,282 246,282
Borrowings from domestic development banks 755,536 755,536 857,919 857,919
Long term debt 71,818 76,933 552,531 564,417
============= ============= ============== =============
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,
customers' acceptances, accrued interest receivable, accounts receivable,
accounts payable, accrued interest payable and bank acceptances
outstanding.
Investment securities
The fair value of these financial instruments which include
time deposits in financial entities are calculated by the Colombian Stock
Exchange, except for financial instruments classified "held to maturity",
for which the fair value was determined using discounted cash flows with
actual market rates for similar assets.
F-105
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Loans
The Bank has estimated the fair value of the loan portfolio
pursuant three methods depending of the type of loan being analyzed.
Estimated fair value of the homogeneous loan portfolio, including
consumer, mortgage and small business loans, has been determined based
upon various statistical analyses. These include migration analysis, in
which historical delinquency and credit loss experience is applied to the
current aging of the portfolio, together with analyses that reflect
current trends and conditions. Estimated fair value of loans with
collateral has been calculated using the realizable value of collateral.
Estimated fair value of restructured loans has been determined based on
the present value of expected future cash flow method discounted at the
loan's contractual effective rate.
Derivatives
The Bank's derivatives are recorded at fair value on a daily
basis in conformity with the rules prescribed by the Superintendency of
Banking, in accordance with the class of instrument, as follows:
Foreign exchange forward contracts:
The purchase or sale value of the exchange rate is estimated
to obtain the net value in foreign currency at valuation day and calculate
the net gain or loss.
Financial instruments forward contracts:
The fair value without yields is estimated to value the agreed
amount to present value and calculate the net gain or loss.
Balance sheet classification:
Under Colombian GAAP, the Bank's derivative instruments are
grouped and presented net as either an asset or a liability.
U.S. GAAP restricts the ability to offset where the right of
set off exists between two parties (that is, where a debtor-creditor
relationship exists).
Typically, under U.S. GAAP, financial assets and liabilities
can be offset and the net amount reported in the balance sheet when (a)
each of two parties owes the other determinable amounts, (b) the reporting
party has the right to set off the amount owed with the amount owed by the
other party, (c) the reporting party intends to set off and (d) the right
of setoff is enforceable at law.
Consequently, the relevant assets and liabilities would be
increased by Ps 229,595 as at December 31, 2004 in a U.S. GAAP balance
sheet, with no effect on net income or shareholders' equity.
F-106
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Futures Contracts
The fair value of futures contracts and other derivatives
traded in stock markets are calculated by the respective stock market
where the Bank has conducted its operation.
Deposits
In 2003 the carrying amount of the deposits was approximated
to their fair value as they were mostly variable rate deposits. In 2004,
the participation of fixed rate deposits increased; therefore, the
carrying amount of the deposits does not approximate their fair value.
The fair value of time deposits was estimated based on the
discounted value of contractual cash flows using the rates currently
offered for deposits of similar remaining maturities.
Fair value of deposits with undefined maturities represents
the amount payable on demand as of the balance sheet date.
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 nature. Long-term and domestic development
bank borrowings have also been valued at their carrying amount because
they bear interest at variable rates.
Long term debt
Long term debt are bonds issued by the Bank, Leasing Colombia
S.A., Abocol S.A., Fundicom S.A. and Sufinanciamiento S.A.
The fair value of bonds issued by the Bank, Leasing Colombia
S.A. and Abocol S.A. were estimated using quoted market prices. Bonds
issued by Fundicom S.A. and Sufinanciamiento S.A. are non marketable. For
this reason the carrying amounts were considered to approximate fair
value.
q) 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.
F-107
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
r) 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.
s) EARNINGS PER SHARE
Under Colombian GAAP, earnings per share ("EPS") are computed
by dividing net income by the weighted average number of both common and
preference shares outstanding for each period presented.
U.S. GAAP 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.
For the years ended December 31, 2002, 2003 and 2004, the Bank had a
simple capital structure. Therefore, there was no difference between basic
or diluted EPS for these years.
The following summarizes information related to the
computation of basic EPS for the years ended December 31, 2002, 2003 and
2004 (millions of pesos, except per share data):
2002 2003 2004
------------- -------------- -------------
U.S. GAAP net income Ps 207,152 Ps 474,419 Ps 642,126
Less preferred share dividends 23,554 48,535 67,092
------------- -------------- -------------
Income attributable to common stockholders 183,598 425,884 575,034
============= ============== =============
Weighted average number of common shares
outstanding used in basic EPS calculation (in millions) 398 398 398
------------- -------------- -------------
Basic and Diluted earnings per share Ps 461.30 Ps 1,070.06 Ps 1,444.81
============= ============== =============
t) CASH FLOW
During 2004, reserves against transactions and time deposits
with the Colombian Central Bank amounted to Ps 516,648. Under Colombian
GAAP, this amount is classified as cash and cash equivalent, while, for
U.S. GAAP purposes, restricted cash does not represent part of cash and
cash equivalents for cash flow statement presentation because it cannot be
withdrawn without prior notice or penalty.
F-108
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Also, during 2004 Ps 41,574 related to restructured loans were
transferred to foreclosed assets. Such transfers affect the Bank's balance
sheet but do not result in cash receipts or cash payments in the period.
u) SEGMENTS DISCLOSURE
The following presents information about reported operating segment
profit or loss, and segment assets:
2002
Governmental
Small And Offshore
Retail Commercial Business Institutional Corporate Commercial
Banking Banking Banking Banking Headquarters Banking Trust Leasing
------------ ------------ ------------ ------------- ------------ ------------ ---------- ----------
Revenues from external
customers Ps 176,296 Ps 30,930 Ps 18,975 Ps 7,764 Ps (19,835) Ps 6,628 Ps 34,327 Ps 32,884
Revenues from
transactions with
other operating
segments of the same
enterprise 22,961 14,308 9,034 21,433 (69,367) (31,185) 1,532 (244)
Interest income 338,468 150,885 118,925 71,606 255,965 93,871 6,338 3,848
Interest expense 135,141 14,687 12,420 55,261 172,153 70,217 2,047 20,943
Net interest revenue 203, 327 136,198 106,505 16,345 83,812 23,654 4,291 (17,095)
Depreciation and
amortization expense - - - - 27,788 846 1,078 809
Provision for loan
losses 17,269 5,851 3,187 231 39,303 64,951 647 3,446
Administrative and
other expense 254,704 34,542 29,203 30,170 157,202 3,885 21,594 7,177
Income tax expense or
benefit - - - - 25,364 - 5,648 1,214
Other income or
expense, net 1,922 (144) 51 (1,122) 16,344 86,293 1,180 1,435
Segment profit before
distribution of
income (expense) for
treasury funds 132,533 140,899 102,175 14,019 (238,703) 15,708 12,363 4,334
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 Ps 12,363 Ps 4,334
============ ============ ============ ============= ============ ============ ========== ==========
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 Ps 74,151 Ps 308,046
============ ============ ============ ============= ============ ============ ========== ==========
All other
Manufacturing Segments Total
------------- ----------- -------------
Revenues from external
customers Ps (14,820) Ps 48,564 Ps 321,713
Revenues from
transactions with
other operating
segments of the same
enterprise 9,275 2,074 (20,179)
Interest income 1,914 24,099 1,065,919
Interest expense 5,036 22,631 510,536
Net interest revenue (3,122) 1,468 555,383
Depreciation and
amortization expense 1,023 5,247 36,791
Provision for loan
losses 329 6,415 141,629
Administrative and
other expense 21,686 54,215 614,378
Income tax expense or
benefit 1,938 8,453 42,617
Other income or
expense, net 21,127 41,613 168,699
Segment profit before
distribution of
income (expense) for
treasury funds (12,516) 19,389 190,201
Distribution of income
(expense) for
treasury funds (1) - - -
============= =========== =============
Segment profit Ps (12,516) Ps 19,389 Ps 190,201
============= =========== =============
Segments assets Ps 225,413 Ps 530,270 Ps 13,715,590
============= =========== =============
---------------------
(1) Those costs are calculated based on the funds that segments use or provide
and do not have an impact in the final result.
F-109
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2003
Governmental
Small And Offshore
Retail Commercial Business Institutional Corporate Commercial
Banking Banking Banking Banking Headquarters Banking Trust Leasing
------------ ------------ ------------ ------------- ------------ ------------ ---------- ----------
Revenues from external
customers Ps 212,472 Ps 32,502 Ps 34,906 Ps 19,007 Ps (30,675) Ps 7,742 Ps 38,424 Ps 47,186
Revenues from
transactions with
other operating
segments of the
same enterprise 34,422 22,731 19,795 24,530 (83,150) (7,276) 773 (314)
Interest income 453,975 179,113 132,127 56,075 386,052 150,602 5,366 8,174
Interest expense 147,647 17,395 18,361 59,119 139,860 63,874 109 50,274
Net interest revenue 306,328 161,718 113,766 (3,044) 246,192 86,728 5,257 (42,100)
Depreciation and
amortization
expense - - - - 33,544 882 1,032 3,377
Provision for loan
losses 62,068 12,781 365 1,133 59,152 50,360 2,239 3,564
Administrative and
other expense 336,412 40,112 38,541 24,275 168,793 7,122 23,368 12,739
Income tax expense
or benefit - - - - 35,498 - 6,430 4,240
Other income or
expense, net 3,354 (462) (449) 153 29,576 89,901 1,308 11,773
Segment profit
before
distribution of
income (expense)
for treasury funds 158,096 163,596 129,112 15,238 (135,044) 118,731 12,693 (7,375)
Distribution of
income (expense)
for treasury
funds (1) 96,777 (75,379) (49,667) 50,866 (22,597) - - -
============ ============ ============ ============= ============ ============ ========== ==========
Segment profit Ps 254,873 Ps 88,217 Ps 79,445 Ps 66,104 Ps (157,641) Ps 118,731 Ps 12,693 Ps (7,375)
============ ============ ============ ============= ============ ============ ========== ==========
Segments assets Ps 3,127,442 Ps 1,838,100 Ps 1,449,736 Ps 665,609 Ps 4,230,798 Ps 3,748,134 Ps 73,395 Ps 554,073
============ ============ ============ ============= ============ ============ ========== ==========
All other
Manufacturing Segments Total
------------- ----------- -------------
Revenues from external
customers Ps 31,400 Ps 97,157 Ps 490,121
Revenues from
transactions with
other operating
segments of the
same enterprise 16,555 2,138 30,204
Interest income (6) 23,951 1,395,429
Interest expense 9,008 15,007 520,654
Net interest revenue (9,014) 8,944 874,775
Depreciation and
amortization
expense 2,747 4,262 45,844
Provision for loan
losses 237 7,918 199,817
Administrative and
other expense 26,035 59,006 736,403
Income tax expense
or benefit 1,528 14,938 62,634
Other income or
expense, net (783) 14,815 149,186
Segment profit
before
distribution of
income (expense)
for treasury funds 7,611 36,930 499,588
Distribution of
income (expense)
for treasury
funds (1) - - -
============= =========== =============
Segment profit Ps 7,611 Ps 36,930 Ps 499,588
============= =========== =============
Segments assets Ps 221,222 Ps 596,422 Ps 16,504,931
============= =========== =============
---------------------
(1) Those costs are calculated based on the funds that segments use or provide
and do not have an impact in the final result.
F-110
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004
Governmental
Small And Offshore
Retail Commercial Business Institutional Corporate Commercial
Banking Banking Banking Banking Headquarters Banking Trust Leasing
------------ ------------ ------------ ------------- ------------ ------------ ---------- ------------
Revenues from external
customers Ps 226,318 Ps 33,013 Ps 34,582 Ps 20,277 Ps 5,661 Ps 7,234 Ps 49,178 Ps 88,265
Revenues from
transactions with
other operating
segments of the
same enterprise 48,585 27,669 36,438 24,402 (104,324) 4,063 817 (582)
Interest income 597,066 208,387 200,207 43,857 512,462 172,103 6,412 21,918
Interest expense 138,503 29,896 20,877 81,164 144,037 47,919 2 88,676
Net interest revenue 458,563 178,491 179,330 (37,307) 368,425 124,184 6,410 (66,758)
Depreciation and
amortization
expense - - - - 41,584 357 1,085 4,462
Provision for loan
losses 51,614 3,265 4,358 (326) (24,416) 36,046 1,165 20,293
Administrative and
other expense 371,517 46,997 46,078 28,622 208,845 8,262 26,112 18,951
Income tax expense
or benefit - - - - 200,967 - 10,355 10,278
Other income or
expense, net (1,121) (528) - - (42,172) 19,304 1,275 15,721
Segment profit
before
distribution of
income (expense)
for treasury funds 309,214 188,383 199,914 (20,924) (199,390) 110,120 18,963 (17,338)
Distribution of
income(expense)
for treasury
funds(1) 56,937 (46,341) (74,825) 99,032 (34,803) - - -
============ ============ ============ ============= ============ ============= =========== =============
Segment profit Ps 366,151 Ps 142,042 Ps 125,089 Ps 78,108 Ps (234,193) Ps 110,120 Ps 18,963 Ps (17,338)
============ ============ ============ ============= ============ ============= =========== =============
Segments assets Ps 4,064,951 Ps 2,162,364 Ps 2,125,485 Ps 597,028 Ps 5,405,788 Ps 3,463,813 Ps 91,306 Ps 1,003,995
============ ============ ============ ============= ============ ============= =========== =============
All other
Manufacturing Segments Total
------------- ----------- -------------
Revenues from external
customers Ps 42,285 Ps 98,197 Ps 605,010
Revenues from
transactions with
other operating
segments of the
same enterprise 10,720 8,578 56,366
Interest income 444 25,089 1,787,945
Interest expense 11,191 14,255 576,520
Net interest revenue (10,747) 10,834 1,211,425
Depreciation and
amortization
expense 958 4,287 52,733
Provision for loan
losses 1,735 2,652 96,386
Administrative and
other expense 28,645 67,422 851,451
Income tax expense
or benefit 4,344 12,866 238,810
Other income or
expense, net (650) 9,794 1,623
Segment profit
before
distribution of
income (expense)
for treasury funds 5,926 40,176 635,044
Distribution of
income(expense)
for treasury
funds(1) - - -
============= =========== =============
Segment profit Ps 5,926 Ps 40,176 Ps 635,044
============= =========== =============
Segments assets Ps 247,032 Ps 584,746 Ps 19,746,508
============= =========== =============
---------------------
(1) Those costs are calculated based on the funds that segments use or provide
and do not have an impact in the final result.
F-111
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:
2002 2003 2004
--------------- ----------------- ------------------
REVENUES
Total revenues for reportable segments Ps 1,292,716 Ps 1,792,508 Ps 2,317,457
Other revenues 254,266 312,598 152,480
--------------- ----------------- ------------------
Total 1,546,982 2,105,106 2,469,937
--------------- ----------------- ------------------
Elimination of intersegment revenues 20,179 (30,204) (56,366)
--------------- ----------------- ------------------
TOTAL REVENUES FOR REPORTABLE SEGMENTS Ps 1,567,161 Ps 2,074,902 Ps 2,413,571
=============== ================= ==================
PROFIT OR LOSS
Total profit or loss for reportable segments Ps 170,812 Ps 462,658 Ps 594,868
Other profit or loss 19,389 36,930 40,176
--------------- ----------------- ------------------
Total 190,201 499,588 635,044
--------------- ----------------- ------------------
Elimination of intersegment profits 20,179 (30,204) (56,366)
--------------- ----------------- ------------------
NET INCOME (LOSS) Ps 210,380 Ps 469,384 Ps 578,678
=============== ================= ==================
ASSETS
Total assets for reportable segments Ps 13,185,320 Ps 15,908,509 Ps 19,161,762
Other assets 530,270 596,422 584,746
--------------- ----------------- ------------------
Total 13,715,590 16,504,931 19,746,508
--------------- ----------------- ------------------
Elimination of intersegment assets (1,116,008) (1,328,802) (2,267,379)
--------------- ----------------- ------------------
CONSOLIDATED TOTAL Ps 12,599,582 Ps 15,176,129 Ps 17,479,129
=============== ================= ==================
The following summarizes the Bank's revenues and long-lived assets
attributable to Colombia and other foreign countries:
2003 2004
----------------------------------- ---------------------------
LONG LONG
GEOGRAPHIC INFORMATION REVENUES LIVED - ASSETS REVENUES LIVED - ASSETS
--------------- ----------------- ----------- --------------
Republic of Colombia 1,954,038 754,204 2,279,535 340,304
Republic of Panama and Cayman Islands 151,068 117,863 183,400 1,692
Miami City - - 7,002 577
--------------- ----------------- ----------- --------------
Total 2,105,106 872,067 2,469,937 342,573
Eliminations (30,204) (1,958) (56,366) (1,119)
--------------- ----------------- ----------- --------------
TOTAL, NET 2,074,902 870,109 2,413,571 341,454
=============== ================= =========== ==============
F-112
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The segments reported embrace the following activities:
RETAIL BANKING: The Bank's Retail Banking segment provides a wide
range of financial products and services to individuals and SMEs. This segment
is important for the Bank's funding and generation of revenues.
COMMERCIAL BANKING: The Commercial Banking Segment provides
commercial banking products and services to all sectors of the economy.
Corporate clients are segmented by their economic activity as well as by their
size. This segmentation assures adequate support and adequate pricing according
to their risk level.
SMALL BUSINESS BANKING: This segment includes legal entities with
annual sales of from Ps 250 to Ps 17.1 billion in Bogota and to Ps 11.4 billion
in the rest of the country and individuals with independent economic activities
(trade, cattle raising, farming, and others) with annual sales of over Ps 250
GOVERNMENTAL AND INSTITUTIONAL BANKING: This segment provides
services to institutional customers subject to the supervision of the
Superintendency of Banking, the Superintendency of Securities, the
Superintendency of Health or the Superintendency of Family Subsidy, and also
electric and financial corporations. The governmental customers include public
sector entities.
OFFSHORE COMMERCIAL BANKING: Bancolombia Panama S.A. and Bancolombia
Cayman, the Bank's international Subsidiaries located in Panama and the Cayman
Islands, respectively, provide a complete line of banking services mainly to
Colombian customers, which includes loans to private sector companies, trade
financing, lease financing, financing for industrial projects as well as a
complete portfolio of cash management products, such as checking accounts,
international collections and payments and PC Banking. Through these
Subsidiaries, the Bank also offers to its high net worth customers and private
banking customers investment opportunities in U.S. dollars, in savings accounts
and in checking accounts, CD-time deposits, and investment funds.
TRUST: The Bank offers, through its Subsidiary Fiducolombia S.A., a
family of five mutual funds and one voluntary retirement fund, all of which are
designed to provide customers with the opportunity to diversify their
investments. As of December 31, 2004, Fiducolombia S.A. had Ps 2,020,227 in
total assets under management, increasing 45.73% from Ps 1,386,307 in 2003.
Additionally, Fiducolombia offers a broad range of products and services by type
of trust, among which the following stand out: Public trust, management and
payment trust, individual investment trust, real estate trust and guarantee
trust.
F-113
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
LEASING: Leasing Colombia S.A. and Sufinanciamiento S.A., as the
Bank's Subsidiaries specialized in lease activities, offer financial and
operational leases. The main activities that require lease financing are
infrastructure, import of goods, international leases, real estate, vehicles for
executives, leasing for suppliers, and cattle raising.
MANUFACTURING: The manufacturing segment of the Bank provides a wide
range of products to individuals and companies such us: metal parts in gray and
ductile iron, both wrought and finished, such as brake systems for passenger
automobiles and trucks, accessories for aqueducts and agriculture machinery.
Another line of production include compound fertilizers, ammonia, ammonium
nitrate and nitric acid.
ALL OTHER SEGMENTS: Provide the following products and services:
- Warehouse and logistics services through Almacenar S.A., a
Subsidiary of the Bank;
- Colcorp S.A. is a Subsidiary of the Bank that specializes in
providing investment banking services to a variety of the
Bank's customers; and
- Comicol S.A. Comisionista de Bolsa, a Subsidiary of the Bank,
offers brokerage services to the Bank's customers as well as
its own customers.
RECENT U.S. GAAP PRONOUNCEMENTS
In December 2004, the FASB revised Statement No. 123, Accounting for
Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This Statement does not address the accounting for employee share
ownership plans, which are subject to AICPA Statement of Position 93-6,
Employers' Accounting for Employee Stock Ownership Plans. The Bank evaluated the
impact of applying FASB Statement 123 (R), and determined it will have no impact
on net income or stockholders' equity.
F-114
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
In December 2004, the FASB issued Statement No. 153, Exchanges of
Non-monetary Assets -an amendment of APB Opinion No. 29. The guidance in APB
Opinion No. 29, Accounting for Non-monetary Transactions, is based on the
principle that exchanges of non-monetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of non-monetary
assets that do not have commercial substance. The Bank does not anticipate that
the adoption of FASB Statement 153 will have a material impact on its financial
position, cash flow and results of operations.
In December 2004, the FASB issued Statement No. 152, Accounting for
Real Estate Time-Sharing Transactions -an amendment of FASB Statements No. 66
and 67. This Statement amends FASB Statement No. 66, Accounting for Sales of
Real Estate, to reference the financial accounting and reporting guidance for
real estate time-sharing transactions that is provided in AICPA Statement of
Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This
Statement also amends FASB Statement No. 67, Accounting for Costs and Initial
Rental Operations of Real Estate Projects, to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005. FASB Statement 152 will have no impact on the Bank's net income or
stockholders' equity.
In April 2004, the FASB issued FSP No. FAS 129-1, Disclosure
Requirements under FASB Statement No. 129, Disclosure of Information about
Capital Structure, Relating to Contingently Convertible Securities. Statement
129 applies to all contingently convertible securities, including those
containing contingent conversion requirements that have not been met and are not
otherwise required to be included in the computation of diluted EPS in
accordance with FASB Statement No. 128, Earnings per Share. To comply with
paragraph 4 of Statement 129, the significant terms of the conversion features
of the contingently convertible security should be disclosed to enable users of
financial statements to understand the circumstances of the contingency and the
potential impact of conversion. This Statement may have an impact if the Bank
issues contingently convertible securities.
In December 2003, the AICPA issued Statement of Position 03-3 ("SOP
03-3"), Accounting for Certain Loans or Debt Securities Acquired in a Transfer.
SOP 03-3 provides guidance on the accounting for differences between contractual
and expected cash flows from the purchaser's initial investment in loans or debt
securities acquired in a transfer, if those differences are attributable, at
least in part, to credit quality. Among other things, SOP 03-3: (1) prohibits
the recognition of the excess of contractual cash flows over expected cash flows
as an adjustment of yield, loss accrual or valuation allowance at the time of
purchase; (2) requires that subsequent increases in expected cash flows be
recognized prospectively through an adjustment of yield; and (3) requires that
subsequent decreases in expected cash flows be recognized as an impairment. In
addition, SOP 03-3 prohibits the creation or carrying over of a valuation
allowance in the initial accounting of all loans within its scope that are
acquired in a transfer. SOP 03-3 becomes effective for loans or debt securities
acquired in fiscal years beginning after December 15, 2004. The Bank is
evaluating the impacts of the SOP 03-3.
F-115