Unassociated Document
 

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON April 28, 2011

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 20-F

 
(Mark One)
 
¨
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
OR
¨
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report__________

Commission file number: 001-32535
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)
Carrera  48 # 26-85, Avenida Los Industriales
Medellín, Colombia
(Address of principal executive offices)

Alejandro Mejia Jaramillo, Investor Relations Manager
Carrera 48 # 26-85, Medellín, Colombia
Tel. +5744041837, Fax. + 574 4045146, e-mail: almejia@bancolombia.com
(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each Class
 
Name of each exchange on which registered
 
American Depositary Shares
 
New York Stock Exchange
Preferred Shares
 
New York Stock Exchange*
  

*
Bancolombia’s preferred shares are not listed for trading directly, but only in connection with its American Depositary Shares, which are evidenced by American Depositary Receipts, each representing four 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
    509,704,584  
Preferred Shares
    278,122,419  

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to
 Section 13 of 15(d) of the Securities Exchange Act of 1934
Yes ¨ No x
 
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “accelerated filer and large, accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
(Do not check if a smaller reporting company)

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP
International Financial Reporting Standards as issued by the International
Accounting Standards Board
Other x
 
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨                      Item 18 x
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨                       No x
 
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS.)
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ¨         No     ¨
 
 
 

 
 
TABLE OF CONTENTS
 
CERTAIN DEFINED TERMS
i
   
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
iii
   
PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION
iv
     
PART I
6
     
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
6
     
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
6
     
ITEM 3.
KEY INFORMATION
6
A.
SELECTED FINANCIAL DATA
6
B.
CAPITALIZATION AND INDEBTEDNESS
10
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
10
D.
RISK FACTORS
10
     
ITEM 4.
INFORMATION ON THE COMPANY
20
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
20
B.
BUSINESS OVERVIEW
23
C.
ORGANIZATIONAL STRUCTURE
45
D.
PROPERTY, PLANT AND EQUIPMENT
46
E.
SELECTED STATISTICAL INFORMATION
47
     
ITEM 4A.
UNRESOLVED STAFF COMMENTS
73
     
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
73
A.
OPERATING RESULTS
73
B.
LIQUIDITY AND CAPITAL RESOURCES
93
C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
99
D.
TREND INFORMATION
99
E.
OFF-BALANCE SHEET ARRANGEMENTS
100
F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
101
G.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
101
H.
RECENT U.S. GAAP PRONOUNCEMENTS
110
I.
RELATED PARTY TRANSACTIONS
128
     
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
113
A.
DIRECTORS AND SENIOR MANAGEMENT
113
B.
COMPENSATION OF DIRECTORS AND OFFICERS
116
C.
BOARD PRACTICES
117
D.
EMPLOYEES
118
E.
SHARE OWNERSHIP
119
     
ITEM 7.
MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS
119
A.
MAJOR STOCKHOLDERS
119
B.
RELATED PARTY TRANSACTIONS
120
C.
INTEREST OF EXPERTS AND COUNSEL
122
     
ITEM 8.
FINANCIAL INFORMATION
122
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
122
B.
SIGNIFICANT CHANGES
123
     
ITEM 9.
THE OFFER AND LISTING
123
A.
OFFER AND LISTING DETAILS
123
B.
PLAN OF DISTRIBUTION
125
C.
MARKETS
125
D.
SELLING STOCKHOLDERS
125
E.
DILUTION
125
F.
EXPENSES OF THE ISSUE
125
     
ITEM 10.
ADDITIONAL INFORMATION
125
A.
SHARE CAPITAL
125
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
126

 
 

 

C.
MATERIAL CONTRACTS
132
D.
EXCHANGE CONTROLS
133
E.
TAXATION
133
F.
DIVIDENDS AND PAYING AGENTS
137
G.
STATEMENT BY EXPERTS
137
H.
DOCUMENTS ON DISPLAY
138
I.
SUBSIDIARY INFORMATION
138
     
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
138
     
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
143
D.
AMERICAN DEPOSITARY SHARES
143
     
PART II
145
     
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
145
     
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
145
     
ITEM 15.
CONTROLS AND PROCEDURES
145
     
ITEM 16.
RESERVED
146
A.
AUDIT COMMITTEE FINANCIAL EXPERT
146
B.
CORPORATE GOVERNANCE AND CODE OF ETHICS
146
C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
146
D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
147
E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
147
F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
147
G.
CORPORATE GOVERNANCE
147
     
PART III
149
     
ITEM 17.
FINANCIAL STATEMENTS
149
     
ITEM 18.
FINANCIAL STATEMENTS
149
     
ITEM 19.
EXHIBITS
149
 
 

 
CERTAIN DEFINED TERMS
 
Unless otherwise specified or if the context so requires, in this annual report:
 
References to “ADSs” refer to our American Depositary Shares (one ADS represents four preferred shares).
 
References to the “Annual Report” refer to this annual report on Form 20-F.
 
References to “Banagrícola” refer to Banagrícola S.A., a company incorporated in Panamá and authorized to operate as a bank holding company under the laws of the Republic of El Salvador, including its subsidiaries on a consolidated basis, unless otherwise indicated or the context otherwise requires.
 
References to “Banca de Inversión” refer to Banca de Inversión Bancolombia S.A. Corporación Financiera, a Subsidiary of Bancolombia S.A. organized under the laws of the Republic of Colombia that specializes in providing investment banking services.
 
References to “Banco Agrícola” refer to Banco Agrícola S.A., a banking institution organized under the laws of the Republic of El Salvador, including its subsidiaries on a consolidated basis, unless otherwise indicated or the context otherwise requires.
 
References to “Bancolombia”, the “Bank”, “us” , “we” or “our”  refer to Bancolombia S.A., a banking institution organized under the laws of the Republic of Colombia, which may also act under the name of Banco de Colombia S.A., including its Subsidiaries on a consolidated basis, unless otherwise indicated or the context otherwise requires.
 
References to “Bancolombia Panamá” refer to Bancolombia Panamá S.A., a Subsidiary of Bancolombia organized under the laws of the Republic of Panama that provides a complete line of banking services mainly to Colombian customers.
 
References to “Central Bank” refer to the Central Bank of Colombia.
 
References to “Colombia” refer to the Republic of Colombia.
 
References to “Conavi” refer to Conavi Banco Comercial y de Ahorros S.A. as it existed immediately before the Conavi/Corfinsura merger (as defined below).
 
References to the “Conavi/Corfinsura merger” refer to the merger of Conavi and Corfinsura with and into Bancolombia, with Bancolombia as the surviving entity, which took effect on July 30, 2005 pursuant to a Merger Agreement dated February 28, 2005.
 
References to “Corfinsura” refer to Corporación Financiera Nacional y Suramericana S.A., as it existed immediately before the Conavi/Corfinsura merger, taking into account the effect of its spin-off of a portion of its investment portfolio effective July 29, 2005.
 
References to “DTF” refer to the Depósitos a Término Fijo rate, the weighted average interest rate paid by finance corporations, commercial banks and commercial finance companies in Colombia for certificates of deposit with maturities of 90 days.
 
References to “Factoring Bancolombia” refer to Factoring Bancolombia S.A., a Subsidiary of Bancolombia organized under the laws of the Republic of Colombia that specializes in accounts receivable financing.
 
References to “Fiduciaria Bancolombia” refer to Fiduciaria Bancolombia S.A., a Subsidiary of Bancolombia which is the largest fund manager among its peers, including other fund managers and brokerage firms in Colombia.
 
 
i

 
 
References to “Leasing Bancolombia” refer to Leasing Bancolombia S.A. Compañía de Financialmiento Comercial, a Subsidiary of Bancolombia organized under the laws of the Republic of Colombia that specializes in leasing activities, offering a wide range of financial leases, operating leases, loans, time deposits and bonds.
 
References to “NYSE” refer to the New York Stock Exchange.
 
References to “preferred shares” and “common shares” refer to our authorized preferred and common shares, designated as acciones preferenciales and acciones ordinarias, respectively.
 
References to “Renting Colombia” refer to Renting Colombia S.A., a Subsidiary of Bancolombia which provides operating lease and fleet management services for individuals and companies.
 
References to “Representative Market Rate” refer to Tasa Representativa del Mercado, the U.S. dollar representative market rate, certified by the Superintendency of Finance. The Representative Market Rate is an economic indicator of the daily exchange rate on the Colombian market spot of currencies. It corresponds to the arithmetical weighted average of the rates of purchase and sale of currencies of interbank transactions of the authorized intermediaries.
 
References to “SEC” refer to the U.S. Securities and Exchange Commission.
 
References to “SMEs” refer to Small and Medium Enterprises.
 
References to “SMMLV” refer to Salario Mínimo Mensual Legal Vigente, the effective legal minimum monthly salary in Colombia.
 
References to “peso”, “pesos” or “COP” refer to the lawful currency of Colombia.
 
References to “Subsidiaries” refer to subsidiaries of Bancolombia in which Bancolombia holds, directly or indirectly, 50% or more of the outstanding voting shares.
 
References to “Superintendency of Finance” refer to the Colombian Superintendency of Finance (Superintendencia Financiera de Colombia), a technical entity under the Ministry of Finance and Public Credit having inspection, supervision and control over the persons involved in financial activities, stock market, insurance and any other services related to the management, use or investment of resources collected from the public.
 
References to “U.S.” or “United States” refer to the United States of America.
 
References to “U.S. dollar”, “USD”, and “US$” refer to the lawful currency of the United States.
 
References to “UVR” refer to Unidades de Valor Real, a Colombian inflation-adjusted monetary index calculated by the board of directors of the Central Bank and generally used for pricing home-mortgage loans.
 
References to “Valores Bancolombia” refer to Valores Bancolombia S.A. Comisionista de Bolsa, a Subsidiary of Bancolombia organized under the laws of the Republic of Colombia that provides brokerage and asset management services to over 200,000 clients.
 
The term “billion” means one thousand million (1,000,000,000).
 
The term “trillion” means one million million (1,000,000,000,000).
 
Our fiscal year ends on December 31, and references in this annual report to any specific fiscal year are to the twelve-month period ended December 31 of such year.
 
 
ii

 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report contains statements which may constitute forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are not based on historical facts but instead represent only the Bank’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside the Bank’s control.The words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “predict”, “target”, “forecast”, “guideline”, “should”, “project” and similar words and expressions, are intended to identify forward-looking statements.  It is possible that the Bank’s actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements.
 
Information regarding important factors that could cause actual results to differ, perhaps materially, from those in the Bank’s forward-looking statements appear in a number of places in this Annual Report, principally in “Item 3. Key Information – D. Risk Factors” and “Item 5.Operating and Financial Review and Prospects”, and include, but are not limited to:  (i) changes in general economic, business, political, social, fiscal or other conditions in Colombia, or in any of the other countries where the Bank operates; (ii) changes in capital markets or in markets in general that may affect policies or attitudes towards lending; (iii) unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms; (iv) inflation, changes in foreign exchange rates and/or interest rates; (v) sovereign risks; (vi) liquidity risks; (vii) increases in defaults by the Bank’s borrowers and other loan delinquencies; (viii) lack of acceptance of new products or services by the Bank’s targeted customers; (ix) competition in the banking, financial services, credit card services, insurance, asset management, remittances, business and other industries in which the Bank operates; (x) adverse determination of legal or regulatory disputes or proceedings; (xi) changes in official regulations and the Colombian government’s banking policy as well as changes in laws, regulations or policies in the jurisdictions in which the Bank does business; (xii) regulatory issues relating to acquisitions; and (xiii) changes in business strategy.
 
Forward-looking statements speak only as of the date they are made and are subject to change, 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 arising after the date of this Annual Report.
 
 
iii

 
 
PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION
 
Accounting Principles
 
The accounting practices used in the preparation of the Bank’s consolidated financial statements follow the special regulations of the Superintendencia Financiera de Colombia (the “Superintendency of Finance”) and generally accepted accounting principles in Colombia (collectively, “Colombian GAAP”).  Together, these requirements differ in certain significant respects from generally accepted accounting principles in the United States (“U.S. GAAP”).  Note 31 to the Bank’s audited consolidated financial statements included in this Annual Report provides a description of the principal differences between Colombian GAAP and U.S. GAAP as they relate to the Bank’s audited consolidated financial statements and provides a reconciliation of net income and stockholders’ equity for the years and dates indicated herein.  References to Colombian GAAP in this Annual Report are to Colombian GAAP as supplemented by the applicable regulations of the Superintendency of Finance.
 
For consolidation purposes under Colombian GAAP, 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.
 
For 2010, the Bank’s consolidated financial statements include companies in which it holds, directly or indirectly, 50% or more of the outstanding voting shares. The Bank consolidates directly Leasing Bancolombia S.A. Compañía de Financiamiento, Fiduciaria Bancolombia S.A.  Sociedad Fiduciaria, Banca de Inversión Bancolombia S.A. Corporación Financiera, Compañía de Financiamiento Tuya S.A., Bancolombia Puerto Rico Internacional Inc, Bancolombia Panamá S.A., Valores Bancolombia S.A.  Comisionista de Bolsa, Factoring Bancolombia S.A. Compañía de Financiamiento and Cobranzas Bancolombia S.A. are in liquidation. Some of the Bank’s Subsidiaries also consolidate their own subsidiaries. Bancolombia Panamá S.A. consolidates Bancolombia Cayman S.A., Sistema de Inversiones y Negocios S.A. Sinesa, Future Net S.A., Suleasing International USA Inc. and Banagrícola S.A. (which, in turn, consolidates Banco Agrícola Panamá S.A, Inversiones Financieras Banco Agrícola S.A. IFBA, Banco Agrícola S.A., Arrendadora Financiera S.A. Arfinsa, Credibac S.A. de C.V., Bursabac S.A. de C.V., AFP Crecer S.A., Aseguradora Suiza Salvadoreña S.A. Asesuisa and Asesuisa Vida S.A.). Banca de Inversión consolidates with Inmobiliaria Bancol S.A., Valores Simesa S.A., Inversiones CFNS S.A.S., Todo Uno Colombia S.A., CFNS Infraestructura S.A.S. and Vivayco S.A.S. The Bank’s Subsidiary Leasing Bancolombia S.A. Compañía de Financiamiento consolidates Leasing Perú S.A., Renting Colombia S.A. (which, in turn, consolidates Renting Perú S.A.C., Capital Investments SAFI S.A., Fondo de Inversión en Arrendamiento Operativo Renting Perú, and Transportempo S.A.S.).  The Bank’s Subsidiary Valores Bancolombia S.A.  Comisionista de Bolsa consolidates Valores Bancolombia Panamá S.A. and Suvalor Panamá Fondo de Inversión S.A. and the Bank’s Subsidiary Fiduciaria Bancolombia S.A.  Sociedad Fiduciaria consolidates FiduPerú S.A. Sociedad Fiduciaria
 
Currencies
 
The Bank maintains accounting records in Colombian pesos.  The audited consolidated financial statements of Bancolombia S.A. as of December 31, 2010, and 2009 and for three years ended December 31, 2010 (collectively, including the notes thereto, the “Financial Statements”) contained in this Annual Report are expressed in pesos.
 
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 COP 1,913.98 per US$ 1.00, which corresponds to the Representative Market Rate calculated on December 31, 2010 the last business day of the year.  The Representative Market Rate is computed and certified by the Superintendency of Finance, 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 Bancolombia S.A.). The Superintendency of Finance 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, U.S. dollars at that rate or any other rate.  On April 27, 2011, the Representative Market Rate was COP 1,787.88 per US$ 1.00.

 
iv

 
 
Rounding Comparability of Data
 
Certain monetary amounts, percentages and other figures included in this Annual Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
 
Information included on or accessible through Bancolombia’s internet site is not part of this Annual Report
 
This Annual Report refers to certain websites as sources for certain information contained herein.  Information contained in or otherwise accessible through these websites is not a part of this Annual Report. All references in this Annual Report to these and other internet sites are inactive textual references to these URLs, or “uniform resource locators”, and are for your informational reference only.
 
The Bank maintains an internet site at www.grupobancolombia.com. In addition, certain of the Bank’s Subsidiaries referred to in this Annual Report maintain separate internet sites. For example, Banco Agrícola maintains an internet site at www.bancoagricola.com. None of the information contained in or otherwise accessible through these websites is part of this annual report.

 
v

 

PART I
 
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, 2010 and 2009, and for each of the three fiscal years in the period ended December 31, 2010 set forth below has been derived from the Bank’s audited consolidated financial statements included in this Annual Report. The selected consolidated financial data as of December 31, 2008, 2007 and 2006, and for each of the two fiscal years in the period ended December 31, 2007 set forth below have been derived from the Bank’s audited consolidated financial statements for the respective periods, which are not included herein.
 
The selected consolidated financial data should be read in conjunction with the Bank’s consolidated financial statements, related notes thereto, and the reports of the Bank’s independent registered public accounting firms.
 
Differences Between Colombian GAAP   and U.S. GAAP Results
 
The Bank’s consolidated financial statements have been prepared in accordance with Colombian GAAP, which are the accounting principles and policies that are summarized in “Note 2. Summary of Significant Accounting Policies” to the Bank’s Financial Statements included in this Annual Report. These accounting principles and policies differ in some significant respects from U.S. GAAP.
 
Consolidated net income under U.S. GAAP for the year ended December 31, 2010 was COP 1,544,761 million (compared with COP 1,172,524 million for fiscal year 2009 and COP 849,920 million for fiscal year 2008). A reconciliation of net income and stockholders equity under U.S. GAAP is included in “Note 31. Differences between Colombian Accounting Principles for Banks and U.S. GAAP” to the Financial Statements included in this Annual Report.
 
 
6

 
 
    
As of and for the year ended December 31,
 
   
2010(1)
   
2010
   
2009
   
2008
    2007(8) (10)     2006  
   
(in millions of COP and thousands of US$ (1), except per share and per American Depositary Share (“ADS”) amounts)
 
CONSOLIDATED STATEMENT OF OPERATIONS:
                                       
Colombian GAAP:
                                       
Interest income
  USD 2,585,547     COP 4,948,685     COP 6,427,698     COP 6,313,743     COP 4,810,408     COP 3,013,732  
Interest expense
    (821,106 )     (1,571,581 )     (2,625,416 )     (2,753,341 )     (2,002,090 )     (1,246,229 )
Net interest income
    1,764,441       3,377,104       3,802,282       3,560,402       2,808,318       1,767,503  
                                                 
Provisions for loans and accrued interest losses, net of recoveries(2)
    (267,811 )     (512,585 )     (1,103,595 )     (1,155,262 )     (617,868 )     (195,361 )
Provision for foreclosed assets and other assets, net of recoveries(3)
    (18,354 )     (35,130 )     (49,779 )     22,095       20,833       45,179  
Net interest income after provisions
    1,478,276       2,829,389       2,648,908       2,427,235       2,211,283       1,617,321  
                                                 
Fees and income from services and  other operating income, net (4)
    1,111,780       2,127,925       1,886,949       1,964,084       1,510,129       1,139,094  
Operating expenses
    (1,618,867 )     (3,098,479 )     (2,895,145 )     (2,639,997 )     (2,271,418 )     (1,871,000 )
Net operating income
    971,189       1,858,835       1,640,712       1,751,322       1,449,994       885,415  
                                                 
Net non-operating income excluding minority interest
    51,878       99,293       93,232       31,888       12,058       45,346  
Minority interest (loss)
    (6,906 )     (13,217 )     (15,081 )     (18,511 )     (13,246 )     (6,352 )
Income before income taxes
    1,016,161       1,944,911       1,718,863       1,764,699       1,448,806       924,409  
                                                 
Income taxes
    (265,633 )     (508,417 )     (462,013 )     (474,056 )     (361,883 )     (174,880 )
Net  income
  USD 750,528     COP 1,436,494     COP 1,256,850     COP 1,290,643     COP 1,086,923     COP 749,529  
                                                 
Weighted average of Preferred and Common Shares outstanding(5)
            787,827,003       787,827,003       787,827,003       758,313,771       787,827,005  
Basic and Diluted net income  per share(5)
    0.95       1,823       1,595       1,638       1,433       1,030  
Basic and Diluted net income per ADS (10)
    3.81       7,292       6,380       6,552       5,732       4,119  
Cash dividends declared per share
            669       637       624       568       532  
Cash dividends declared per share (stated in U.S. Dollars)
            0.35       0.31       0.28       0.28       0.24  
Cash dividends declared per ADS
            2,675       2,547       2,496       2,272       2,128  
Cash dividends declared per ADS (stated in U.S. Dollars)
            1.40       1.25       1.11       1.13       0.95  
                                                 
U.S. GAAP:
                                               
Net income
  USD 807,094     COP 1,544,761 (6)   COP 1,172,524 (6)   COP 849,920     COP 1,015,644     COP 941,183  
Basic and Diluted net income per common share(7)
    1.02       1,961       1,488       1,326       1,683       1,619  
Basic and Diluted net income per ADS (7) (9)
    4.10       7,844       5,952       5,304       6,732       6,476  

 
(1)
Amounts stated in U.S dollars have been translated at the rate of COP 1,913.98 per USD 1.00, which is the Representative Market Rate calculated on December 31, 2010 (the last business day of 2010), as reported and certified by the Superintendency of Finance. Such translations should not be construed as representations that the pesos amount represent, or have been or could be converted into, United States dollars at that or any other rate.
(2)
Represents the provision for loan, accrued interest losses and other receivables, net and recovery of charged-off loans. Includes a provision  for accrued interest losses amounting to COP 14,825 million, COP 35,543 million, COP 58,721 million, COP 46,840 million and COP 33,540  million for the years ended December 31, 2006, 2007, 2008, 2009 and 2010 respectively.
(3)
Represents the provision for foreclosed assets and other assets and the recovery of provisions for foreclosed assets and other assets.
(4)
Represents the total fees and income from services, net and total other operating income.
(5)
The weighted average of preferred and common shares outstanding for fiscal years 2010, 2009 and 2008, includes 278,122,419 preferred shares and 509,704,584 common shares, for fiscal year 2007, includes 248,609,187 preferred shares and 509,704,584 common shares and for fiscal year 2006, includes 218,122,421 preferred shares and 509,704,584 common shares.
(6)
Refer to "Note 31. Differences Between Colombian Accounting Principles for Banks and U.S. GAAP" to our Financial Statements included in this Annual Report.
 
 
7

 
 
(7)
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 (509,704,584 for 2010, 2009, 2008, 2007 and 2006). See "Note 31. Differences Between Colombian Accounting Principles for Banks and U.S. GAAP".
(8)
The consolidated statement of operations for the year ended December 31, 2010, 2009, 2008 and 2007, includes Banagrícola’s results since the beginning of 2007. For U.S. GAAP purposes, see “Note 31. Differences Between Colombian Accounting Principles for Banks and U.S. GAAP - m) Business combinations” to our Financial Statements included in this Annual Report.
(9)
Basic and diluted net income per ADS for any period is defined as basic and diluted net income per share multiplied by four as each ADS is equivalent to four preferred shares of Bancolombia. Basic and diluted net income per ADS should not be considered in isolation, or as a substitute for net income, as a measure of operating performance or as a substitute for cash flows from operations or as a measure of liquidity.
(10)
The consolidated statement of operations for the year ended December 31, 2007 was modified due to reclassifications made beginning in 2008 particularly in commissions from banking services and other services, administrative and other expenses and other income, with the purpose of better presenting comparative information regarding the gains on the sale of mortgage loans. The selected financial data for the year ended December 31, 2006 has not been reclassified because the amounts are insignificant and do not have a material impact on the consolidated statement of operations for that year.

    
As of and for the year ended December 31,
 
   
2010(1)
   
2010
   
2009
   
2008
   
2007(3)
   
2006
 
   
(in millions of COP and thousands of US$ (1), except per share and per American Depositary Share (“ADS”) amounts)
 
CONSOLIDATED BALANCE SHEET
                                   
Colombian GAAP:
                                   
Assets:
                                   
Cash and due from banks
  USD 2,775,577     COP 5,312,398     COP 4,983,569     COP 3,870,927     COP 3,618,619     COP 1,548,752  
Overnight funds
    440,253       842,636       2,388,790       1,748,648       1,609,768       457,614  
Investment securities, net
    4,532,838       8,675,762       8,914,913       7,278,276       5,774,251       5,677,761  
Loans and financial leases, net
    24,081,692       46,091,877       39,610,307       42,508,210       36,245,473       23,811,391  
Accrued interest receivable on loans, net
    165,901       317,532       338,605       505,658       398,560       255,290  
Customers’ acceptances and derivatives
    410,082       784,888       205,367       272,458       196,001       166,395  
Accounts receivable, net
    416,783       797,715       806,885       828,817       716,106       562,598  
Premises and equipment, net
    613,708       1,174,625       992,041       1,171,117       855,818       712,722  
Operating leases, net
    525,663       1,006,108       843,054       726,262       488,333       167,307  
Foreclosed assets, net
    36,718       70,277       80,668       24,653       32,294       18,611  
Prepaid expenses and deferred charges
    167,120       319,864       185,811       132,881       137,901       46,462  
Goodwill
    392,359       750,968       855,724       1,008,639       977,095       40,164  
Other assets
    619,639       1,185,977       922,265       1,093,850       580,642       675,265  
Reappraisal of assets
    399,445       764,529       736,366       612,683       520,788       348,364  
Total assets
  USD 35,577,778     COP 68,095,156     COP 61,864,365     COP 61,783,079     COP 52,151,649     COP 34,488,696  
                                                 
Liabilities and stockholders’ equity:
                                               
Deposits
  USD 22,747,870       43,538,967     COP 42,149,330     COP 40,384,400     COP 34,374,150     COP 23,216,467  
Borrowings(4)
    2,743,282       5,250,587       4,039,150       5,947,925       4,851,246       3,516,426  
Other liabilities
    5,934,472       11,358,462       8,643,056       9,333,909       7,726,983       4,109,191  
Stockholder’ equity
    4,152,154       7,947,140       7,032,829       6,116,845       5,199,270       3,646,612  
Total liabilities and stockholders’ equity
  USD 35,577,778     COP 68,095,156     COP 61,864,365     COP 61,783,079     COP 52,151,649     COP 34,488,696  
                                                 
U.S. GAAP:
                                               
Shareholders’ equity
  USD 4,216,003     COP 8,069,346 (2)   COP 7,095,266 (2)   COP 6,422,815     COP 5,937,554     COP 4,549,018  
Shareholders’ equity per share(5)
    5,352       10,243       9,006       8,153       7,830       6,250  
Shareholders’ equity per ADS(5)
    21,407       40,972       36,024       32,612       31,320       25,001  
   

(1)
Amounts stated in dollars have been translated at the rate of COP 1,913.98 to US$1.00 which is the Representative Market Rate calculated on December 31, 2010 (the last business day of 2010), as reported and certified by the Superintendency of Finance. Such translation should not be construed as representations that the Colombian pesos amounts represent, or have been or could be converted into, United States dollars at that or any other rate.
(2) 
Refer to “Note 31, Differences between Colombian Accounting Principles for Banks and U.S. GAAP” to the Financial Statements included in this Annual Report.
(3) 
The consolidated statement of operations for the year ended December 31, 2010, 2009, 2008 and 2007, includes Banagrícola’s results.  For U.S. GAAP purposes, see "Note 31. Differences between Colombian Accounting Principles for Banks and U.S. GAAP - m) Business combinations".
(4) 
Includes interbank borrowing and domestic development banks borrowings and other.
 
 
8

 
 
(5) 
The weigthed average (rounded to the nearest million) of preferred and common shares outstanding was 788 million for the fiscal year ended December 31, 2010, 2009 and 2008, 758 million for the fiscal year ended December 31, 2007, and 728 million for the fiscal year ended December 31, 2006. Shareholders' equity per share is equal to Shareholders' equity under U.S. GAAP divided by the weighted average of preferred and common shares outstanding, Shareholders' equity per share is equal to shareholders' equity per share multiplied by four preferred shares of Bancolombia (Each ADS is equivalent to four preferred shares of Bancolombia).  Shareholders' equity per share and shareholders' equity per ADS should not be considered in isolation, or as a sustitute for net income, as a measure of operating performance or as a sustitute for cash flows from operations or as a measure of liquidity.  The non-GAAP financial measures described in this footnote are not a substitute for the GAAP measures of financial performance. Should not be considered as an alternate measure of shareholders' equity as determined on a consolidated basis using amounts derived from consolidated balance sheet prepared in accordance with Colombian GAAP.

See “Item 8. Financial Information – A.  Consolidated Statements and Other Financial Information – A.3. Dividend Policy”, for information about the dividends declared per share in both pesos and U.S. dollars during the fiscal years ended in December 31, 2010, 2009, 2008, 2007 and 2006.

   
As of and for the year ended December 31,
 
   
2010
   
2009
   
2008
    2007(10)(11)     2006  
   
(Percentages, except for operating data)
 
SELECTED RATIOS:(1)
                                 
Colombian GAAP:
                                 
Profitability ratios:
                                 
Net interest margin(2)
    6.36       7.22       7.64       7.60       6.19  
Return on average total assets(3)
    2.27       2.01       2.34       2.52       2.31  
Return on average stockholders’ equity(4)
    19.71       19.59       23.68       26.13       22.10  
Efficiency Ratio:
                                       
Operating expenses as a percentage of interest, fees, services and other operating income
    56.28       50.89       47.79       52.60       64.37  
Capital ratios:
                                       
Period-end stockholders’ equity as a percentage of period-end total assets
    11.67       11.37       9.90       9.97       10.57  
Period-end regulatory capital as a percentage of period-end risk- weighted assets(5)
    14.67       13.23       11.24       12.67       11.05  
Credit quality data:
                                       
Non-performing loans as a percentage of total loans(6)
    1.91       2.44       2.35       1.77       1.36  
“C”, “D” and “E” loans as a percentage of total loans(9)
    4.32       5.11       4.40       3.10       2.54  
Allowance for loan and accrued interest losses as a percentage of non-performing loans
    274.36       241.08       224.53       223.67       252.87  
Allowance for loan and accrued interest losses as a percentage of “C”, “D” and “E” loans(9)
    121.45       115.25       120.21       127.38       135.06  
Allowance for loan and accrued interest losses as a percentage of total loans
    5.24       5.89       5.29       3.95       3.43  
OPERATING DATA:
                                       
Number of branches(7)
    921       889       890       888       701  
Number of employees(8)
    22,992       21,201       19,728       24,836       16,222  
 

(1)
Ratios were calculated on the basis of monthly averages.
(2)
Net interest income divided by average interest-earning assets.
(3)
Net income divided by average total assets.
(4)
Net income divided by average stockholders’ equity.
(5)
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”.
(6)
Non-performing loans are microcredit loans that are past due 30 days or more, mortgage and consumer loans that are past due 60 days or more and commercial loans that are past due 90 days or more. (Each category includes financial leases.)
(7)
Number of branches includes branches of the Bank’s Subsidiaries.
(8)
The number of employees includes employees of the Bank’s consolidated Subsidiaries.
(9)
See “Item 4. Information on the Company – E. Selected Statistical Information – E.3. Loan Portfolio – Classication of the loan portfolio and Credit Categories for a description of “C”, “D” and “E” Loans”.
(10)
Selected ratios for the year ended December 31, 2007 include Banagrícola’s results. With respect to U.S. GAAP information; see “Note 31. Differences between  Colombian Accounting Principles for Banks and U.S. GAAP – m) Business combinations”.
(11)
The selected ratios for the year 2007 were modified to reflect certain reclassifications made in commissions from banking services and other services, administrative and other expenses and other income that conform to the presentation of 2008 figures, in order to provide a better basis of comparison with respect to 2008 figures regarding the gains on the sale of mortgage loans. No such changes were made for 2006, as the reclassifications would not have a material impact on the figures for that year, and accordingly, would not be material for comparative purposes.
 
 
9

 
 
Exchange Rates
 
On May 31, 2011, the Representative Market Rate was COP 1,870.60 per USD 1.00. The Federal Reserve Bank of New York does not report a rate for pesos; the Superintendency of Finance calculates the Representative Market Rate based on the weighted average of the buy/sell foreign exchange rates quoted daily by certain financial institutions, including Bancolombia, for the purchase and sale of U.S. dollars.
 
The following table sets forth the high and low peso/U.S. dollar exchange rates for the last six months:
 
Recent exchange rates of pesos per U.S. dollars:
 
Month
 
Low
   
High
 
             
Octuber 2010
    1,786.20       1,846.41  
November 2010
    1,817.70       1,916.96  
December 2010
    1,880.82       2,027.33  
January 2011
    1,838.94       1,913.98  
February 2011
    1,852.67       1,907.69  
March 2011
    1,865.11       1,916.05  

Source: Superintendency of Finance.
 
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.
 
Peso/US$ 1.00
 
Representative Market Rate
 
Period
 
Average
 
       
2010
    1,901.67  
2009
    2,179.64  
2008
    1,993.80  
2007
    2,069.21  
2006
    2,359.13  

Source: Superintendency of Finance.

B.
CAPITALIZATION AND INDEBTEDNESS
 
Not applicable.
 
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
 
Not applicable.
 
D.
RISK FACTORS
 
Investors should consider the following risks and uncertainties, and the other information presented in this Annual Report. In addition, 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 by reference in this Annual Report, 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. If any of the following risks occur, the Bank’s business, results of operations and financial condition, its ability to raise capital and its ability to access funding could be materially and adversely affected. These risk factors should not be considered a complete list of potential risks that may affect Bancolombia.
 
 
10

 
 
Risk Factors Relating to Colombia and Other Countries Where the Bank Operates
 
Exchange rate volatility may adversely affect the Colombian economy, the market price of our ADSs, and the dividends payable to holders of the Bank’s ADSs.
 
Colombia has adopted a floating exchange rate system.The Colombian Central Bank maintains the power to intervene in the exchange market in order to consolidate or dispose of international reserves, and to control any volatility in the exchange rate. From time to time, there have been significant fluctuations in the exchange rate between the Colombian peso and the U.S. dollar. For instance, the peso depreciated 11% in 2008,  appreciated 9% in 2009, and appreciated 6% in 2010. Unforeseen events in the international markets, fluctuations in interest rates or changes in capital flows, may cause exchange rate instability that could generate sharp movements in the value of the peso. Given that a portion of our assets and liabilities are denominated in, or indexed to, foreign currencies, especially the U.S. dollar, sharp movements in exchange rates may negatively impact the Bank’s results.  In addition, exchange rate fluctuations may adversely impact the value of dividends paid to holders of the Bank’s ADSs as well as the market price and liquidity of ADSs.
 
Any additional taxes resulting from changes to tax regulations or the interpretation thereof in Colombia, El Salvador or other countries where the Bank operates, could adversely affect the Bank’s consolidated results.
 
Uncertainty relating to tax legislation poses a constant risk to the Bank. Colombian and Salvadorian national authorities have levied new taxes in recent years. Changes in 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. Notably, the Colombian and Salvadorian governments have significant fiscal deficits that may result in future tax increases. Additional tax regulations could be implemented that could require the Bank to make additional tax payments, negatively affecting its results of operations and cash flow. In addition, national or local taxing authorities may not interpret tax regulations in the same way that the Bank does. Differing interpretations could result in future tax litigation and associated costs.
 
Changes in economic and political conditions in Colombia and El Salvador or in the other countries where the Bank operates may adversely affect the Bank’s financial condition and results of operations.
 
The Bank’s financial condition, results of operations and asset quality are significantly dependent on the macroeconomic and political conditions prevailing in Colombia, El Salvador and the other jurisdictions in which the Bank operates. Accordingly, decreases in the growth rate, periods of negative growth, increases in inflation, changes in policy, or future judicial interpretations of policies involving exchange controls and other matters such as (but not limited to) currency depreciation, inflation, interest rates, taxation, banking laws and regulations and other political or economic developments in or affecting Colombia, El Salvador or the other jurisdictions where the Bank operates may affect the overall business environment and may in turn impact the Bank’s financial condition and results of operations.
 
In particular, the governments of Colombia and El Salvador have historically exercised substantial influence on their economies, and their policies are likely to continue to have an important effect on Colombian and Salvadorian entities (including the Bank), market conditions, prices and rates of return on securities of local issuers (including the Bank’s securities). On August 7, 2010, Juan Manuel Santos Calderon took office as president of Colombia and, accordingly, significant changes in Colombian laws, public policies and regulations may occur.The uncertainties characteristic of a change in government, including potential changes in laws, public policies and regulations, may cause instability and volatility in Colombia and its markets.
 
Future developments in government policies could impair the Bank’s business or financial condition or the market value of its securities.
 
 
11

 
 
The economies of the countries where the Bank operates are vulnerable to external shocks that could be caused by significant economic difficulties experienced by their major regional trading partners or by more general “contagion” effects, which could have a material adverse effect on their economic growth and their ability to service their public debt.
 
A significant decline in the economic growth or a sustained economic downturn of any of Colombia’s or El Salvador’s major trading partners (i.e., United States, China,Venezuela and Ecuador for Colombia and the United States for El Salvador) could have a material adverse impact on Colombia’s and El Salvador’s balance of trade and remittances inflows, resulting in lower economic growth.
 
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.  Political tensions between Colombia and Venezuela in recent years have produced lower trade levels that have adversely impacted economic activity. Although relations with Venezuela have improved significantly since President Juan Manuel Santos Calderón took office in August 2010, the possibility of any further trade restrictions by Venezuela may deepen these adverse effects, while any resurgence in tensions between the two countries may cause political and economic uncertainty, instability, market volatility, lower confidence levels and higher risk aversion by investors and market participants that may negatively affect economic activity.
 
A contagion effect, in which an entire region or class of investment is disfavored by international investors, could negatively affect Colombia and El Salvador or other economies where the bank operates (i.e., Panama, Cayman Islands, Peru and Puerto Rico), as well as the market prices and liquidity of securities issued or owned by the Bank.
 
Colombia has experienced several periods of violence and instability, and such instability could affect the economy and the Bank.
 
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 Colombian 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’s business or financial condition and the market value of the Bank’s securities and any dividends distributed by it, could be adversely affected by rapidly changing economic and social conditions in Colombia and by the Colombian government’s response to such conditions.
 
Risk Factors Relating to the Bank’s Business and the Banking Industry
 
The Bank is subject to credit risk; estimating overexposure to credit risk involves subjective and complex judgments.
 
 A number of our products expose the Bank to credit risk, including loans, financial leases, lending commitments and derivatives.
 
The Bank estimates and establishes reserves for credit risk and potential credit losses. This process involves subjective and complex judgments, including projections of economic conditions and assumptions on the ability of our borrowers to repay their loans. This process is also subject to human error as the Bank’s employees may not always be able to assign an accurate credit rating to a client, which may result in the Bank’s exposure to higher credit risks than indicated by the Bank’s risk rating system. The Bank may not be able to timely detect these risks before they occur, or due to limited resources or available tools, the Bank’s employees may not be able to effectively implement its credit risk management system, which may increase its exposure to credit risk. Moreover, the Bank’s failure to continuously refine its credit risk management system may result in a higher risk exposure for the Bank, which could materially and adversely affect its results of operations and financial position.
 
 
12

 
 
Overall, if the Bank is unable to effectively control the level of non-performing or poor credit quality loans in the future, or if its loan loss reserves are insufficient to cover future loan losses, the Bank’s financial condition and results of operations may be materially and adversely affected.
 
In addition, the amount of the Bank’s non-performing loans may increase in the future, including loan portfolios that the Bank may acquire through auctions or otherwise, as a result of factors beyond the Bank’s control, such as, changes in the income levels of the Bank’s borrowers, increases in the inflation rate or an increase in interest rates, the impact of macroeconomic trends and political events affecting Colombia or other jurisdictions where the Bank operates, or events affecting specific industries. Any of these developments could have a negative effect on the quality of the Bank’s loan portfolio, causing the Bank to increase provisions for loan losses and resulting in reduced profits or in losses.
 
The Bank is subject to credit risks with respect to its non-traditional banking businesses including investing in securities and entering into derivatives transactions.

Non-traditional sources of credit risk can arise from, among other things: investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to the Bank, and executing securities, futures, currency or commodity trades from the Bank’s proprietary trading desk that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries. Any significant increases in exposure to any of these non-traditional risks, or a significant decline in credit risk or bankruptcy of any of the counterparties, could materially and adversely affect the Bank’s results of operations and financial position.
 
The Bank is exposed to risks associated with the mortgage loan market.

Bancolombia is a leader in the Colombian mortgage loan market. Colombia’s mortgage loan market is highly regulated and has historically been affected by various macroeconomic factors such as periods of sustained high interest rates which have historically discouraged customers from borrowing and have resulted in increased defaults in outstanding loans and deterioration in the quality of assets.
 
The Bank is subject to concentration default risks in its loan portfolio. Problems with one or more of its largest borrowers may adversely affect its financial condition and results of operations.

The aggregate outstanding principal amount of the Bank’s 25 largest borrowing relationships represented approximately 14.14% of its total consolidated loan portfolio as of December 31, 2010, as our loan portfolio became somewhat more concentrated in 2010. Problems with one or more of the Bank’s largest borrowers could materially and adversely affect its results of operations and financial position. For more information, see “Item 4. Information on the Company – E. Selected Statistical Information – E.3.Loan Portfolio – Borrowing Relationships”.
 
The value of the collateral or guarantees securing the outstanding principal and interest balance of the Bank’s loans may not be sufficient to cover such outstanding principal and interest. In addition, the Bank may be unable to realize the full value of the collateral or guarantees securing the outstanding principal and interest balance of its loans.

The Bank’s loan collateral primarily includes real estate, assets pledged in financial leasing transactions and other assets that are located primarily in Colombia and El Salvador, the value of which may significantly fluctuate or decline due to factors beyond the Bank’s control. Such factors include macroeconomic factors and political events affecting the local economy. Any decline in the value of the collateral securing the Bank’s loans may result in a reduction in the recovery from collateral realization and may have an adverse impact on the Bank’s results of operations and financial condition. In addition, the Bank may face difficulties in enforcing its rights as a secured creditor. In particular, timing delays and procedural problems in enforcing against collateral and local protectionism, may make foreclosures on collateral and enforcement of judgments difficult, and may result in losses, that could materially and adversely affect the Bank’s results of operations and financial position.
 
 
13

 
 
The Bank is subject to market risk.

We are directly and indirectly affected by changes in market conditions. Market risk, or the risk that values of assets and liabilities or revenues will be adversely affected by variation in market conditions, is inherent in the products and instruments associated with our operations, including loans, deposits, securities, bonds, long-term debt, short-term borrowings, proprietary trading in assets and liabilities and derivatives. Changes in market conditions that may affect our financial condition and results of operations include fluctuations in interest and currency exchange rates, securities prices, changes in the implied volatility of interest rates and foreign exchange rates, among others.
 
The Bank is subject to fluctuations in interest rates, which may materially and adversely affect its results of operations and financial condition.

The Bank holds a substantial portfolio of loans and debt securities that have both fixed and floating interest rates. Therefore, changes in interest rates could adversely affect our net interest margins as well as the prices of these securities. Increases in interest rates may reduce gains or the market value of the Bank’s debt securities. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. On the other hand, decreases in interest rates may cause margin compression and lower net interest income as the Bank usually maintains more assets than liabilities at variable rates. Decreasing interest rates also may trigger loan prepayments which could negatively affect the Bank’s net interest income. Generally, in a declining interest rate environment, prepayment activity increases which reduces the weighted average maturity of the Bank’s interest earning assets and adversely affects its operating results. Prepayment risk also has a significant adverse impact on our earnings from our credit card and collateralized mortgage obligations, since prepayments could shorten the weighted average life of these portfolios, which may result in a mismatch in funding or in reinvestment at lower yields.  In addition, as the Bank implements strategies to reduce future interest rate exposure, it may incur costs related to fluctuations in interest rates which, in turn, may impact its results.
 
The Bank’s income from its proprietary trading activities is highly volatile.

The Bank’s trading income is highly volatile. The Bank derives a portion of its profits from its proprietary trading activities and any significant reduction in its trading income could adversely affect the Bank’s results of operations and financial position. The Bank’s trading income is dependent on numerous factors beyond its control, such as the general market environment, overall market trading activity, interest rate levels, fluctuations in exchange rates and general market volatility. A significant decline in the Bank’s trading income, or the incurrence of a trading loss, could adversely affect the Bank’s results of operations and financial position.
 
The Bank has significant exposure to sovereign risk, and especially Colombian risk, and the Bank’s results could be adversely affected by decreases in the value of its sovereign debt securities.

The Bank’s debt securities portfolio is primarily composed of sovereign debt securities,including  securities issued or guaranteed by the Colombian government. Therefore, the Bank’s results are exposed to credit, market, and liquidity risk associated with sovereign debt. As of December 31, 2010, the Bank’s total debt securities represented 13.6% of its total assets, and 27% of these securities were issued or backed by the Colombian government. A significant decline in the value of the securities issued or guaranteed by the Colombian government could adversely affect the Bank’s debt securities portfolio and consequently the Bank’s results of operations and financial position.
 
The Bank is subject to market, operational and structural risks associated with its derivative transactions.

The Bank enters into derivative transactions for hedging purposes and on behalf of its customers.The Bank is subject to market and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder). In addition, the market practice and documentation for derivative transactions is less developed in the jurisdictions where the Bank operates as compared to other more developed countries, and the court systems in such jurisdictions have limited experience in dealing with issues related to derivative transactions. As a result, there is increased operating and structural risks associated with derivatives transactions in these jurisdictions.
 
 
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In addition, the execution and performance of derivatives transactions depend on the Bank’s ability to develop adequate control and administrative systems, and to hire and retain qualified personnel. Moreover, the Bank’s ability to adequately monitor, analyze and report these derivative transactions depends, to a great extent, on its information technology systems. These factors may further increase the risks associated with these transactions and could materially and adversely affect the Bank’s results of operations and financial position.
 
The Bank’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, which together represented a share of of 72.4% of total liabilities at the end of 2010 compared to 76.9% and 72.4% at the end of 2009, and 2008, respectively. Because the Bank relies primarily on short-term deposits for its funding, in the event of a sudden or unexpected shortage of funds in the banking systems and money markets where the Bank operates, the Bank may not be able to maintain its current level of funding without incurring higher costs or selling assets at prices below their prevailing market value.
 
The Bank is subject to operational risks.

The Bank’s businesses are dependent on the ability to process a large number of transactions efficiently and accurately. Operational risks and losses can result from fraud, employee errors, and failure to properly document transactions or to obtain proper internal authorization, failure to comply with regulatory requirements, breaches of conduct of business rules, equipment failures, natural disasters or the failure of external systems. The Bank’s currently adopted procedures may not be effective in controlling each of the operational risks faced by the Bank.
 
The Bank’s businesses rely heavily on data collection, processing and storage systems, the failure of which could materially and adversely affect the effectiveness of its risk management, reputation and internal control system as well as its financial condition and results of operations.

All of the Bank’s principal businesses are highly dependent on the ability to timely collect and process a large amount of financial and other information at its various branches across numerous markets, at a time when transaction processes have become increasingly complex with increasing volume. The proper functioning of financial control, accounting or other data collection and processing systems is critical to the Bank’s businesses and to its ability to compete effectively. A partial or complete failure of any of these primary systems could materially and adversely affect the Bank’s decision making process, its risk management and internal control systems, the quality of its service, as well as the Bank’s ability to respond on a timely basis to changing market conditions. If the Bank cannot maintain an effective data collection and management system, its business operations, financial condition, reputation and results of operations could be materially and adversely affected. The Bank is also dependent on information systems to operate its website, process transactions, respond to customer inquiries on a timely basis and maintain cost-efficient operations. The Bank may experience operational problems with its information systems as a result of system failures, viruses, computer hackers or other causes. Any material disruption or slowdown of its systems could cause information, including data related to customer requests, to be lost or to be delivered to the Bank’s clients with delays or errors, which could reduce demand for the Bank’s services and products and could materially and adversely affect the Bank’s results of operations and financial position.
 
 
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Any failure to effectively improve or upgrade the Bank’s information technology infrastructure and management information systems in a timely manner could adversely affect its competitiveness, financial condition and results of operations.

The Bank’s ability to remain competitive will depend in part on its ability to upgrade the Bank’s information technology infrastructure on a timely and cost-effective basis. The information available to and received by the Bank’s management through its existing information systems may not be timely and sufficient to manage risks or to plan for and respond to changes in market conditions and other developments in its operations. The Bank is currently undertaking a project to update its information technology platform (“IT platform”) that will result in significant changes in the following areas: treasury, credit cards, customer management, products and distribution channels, financial management and accounting and human resources.. Any failure to effectively improve or upgrade the Bank’s information technology infrastructure and information management information systems in a timely manner could materially and adversely affect the Bank’s competitiveness, financial condition and results of operations.
 
The Bank’s policies and procedures may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose the Bank to fines and other liabilities.

The Bank is required to comply with applicable anti-money laundering, anti-terrorism laws and other regulations. These laws and regulations require the Bank, among other things, to adopt and enforce “know your customer” policies and procedures and to report suspicious and large transactions to the applicable regulatory authorities. While the Bank has adopted policies and procedures aimed at detecting and preventing the use of its banking network for money laundering activities and by terrorists and terrorist-related organizations and individuals generally, such policies and procedures have in some cases only been adopted recently and may not completely eliminate instances where it may be used by other parties to engage in money laundering and other illegal or improper activities. To the extent the Bank may fail to fully comply with applicable laws and regulations, the relevant government agencies to which it reports have the power and authority to impose fines and other penalties on the Bank. In addition, the Bank’s business and reputation could suffer if customers use the Bank for money laundering or illegal or improper purposes.
 
The Bank is subject to regulatory inspections, examinations, inquiries or audits in Colombia and in other countries where it operates, and any sanctions, fines and other penalties resulting from such inspections and audits could materially and adversely affect the Bank’s business, financial condition, results of operations and reputation.
 
The Bank is subject to comprehensive regulation and supervision by the banking authorities of Colombia, El Salvador and the other jurisdictions in which the Bank operates. These regulatory authorities have broad powers to adopt regulations and other requirements affecting or restricting virtually all aspects of its capitalization, organization and operations, including the imposition of anti-money laundering measures and the authority to regulate the terms and conditions of credit that can be applied by banks. In the event of non-compliance with applicable regulations, the Bank could be subject to fines, sanctions or the revocation of licenses or permits to operate its business. In Colombia, for instance,  if the Bank encounters significant financial problems or becomes insolvent or in danger of becoming insolvent, banking authorities would have the power to take over the Bank’s management and operations. Any sanctions, fines and other penalties resulting from non-compliance with regulations in Colombia and in the other jurisdictions where the Bank operates could materially and adversely affect the Bank’s business, financial condition, results of operations and reputation.
 
Moreover, banking and financial services laws and regulations are subject to continuing review and changes, and any such changes in the future may have an adverse impact on the Bank’s operations, including making and collecting loans and other extensions of credit, which could materially and adversely affect the Bank’s results of operations and financial position.
 
The increase of constitutional actions (acciones populares), class actions (acciones de grupo) and other legal actions involving claims for significant monetary awards against financial institutions may affect the Bank’s businesses.
 
Under the Colombian Constitution, individuals may initiate constitutional or class actions to protect their collective or class rights, respectively. Until 2010, Colombian financial institutions, including the Bank, had experienced a substantial increase in the aggregate number of these actions. The great majority of such actions have been related to fees, financial services and interest rates, and their outcome is uncertain. Pursuant to law 1425 of 2010 the monetary awards for plaintiffs in constitutional actions or class actions were eliminated as for January 1, 2011, nevertheless, individuals continue to have the right to initiate constitutional or class actions against the Bank.
 
 
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Acquisitions and strategic partnerships may not perform in accordance with expectations or may disrupt the Bank’s operations and adversely affect its profitability.

An element of the Bank’s business strategy is to identify and pursue growth-enhancing strategic opportunities. As part of that strategy, the Bank acquired interests in various institutions during recent years. For example, in 2007, the Bank acquired 98.9% of all the issued and outstanding shares of Banagrícola. The Bank will continue to actively consider other strategic acquisitions and partnerships from time to time. The Bank may  base assessments of potential acquisitions and partnerships on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. Future acquisitions, investments and alliances may not produce anticipated synergies or perform in accordance with the Bank’s expectations and could adversely affect its operations and profitability. In addition, new demands on the Bank’s existing organization and personnel resulting from the integration of new acquisitions could disrupt the Bank’s operations and adversely affect its operations and profitability.
 
The Bank is subject to increasing competition which may adversely affect its results of operations.

The Bank operates in a highly competitive environment and increased competitive conditions are to be expected in the jurisdictions where the Bank operates. Intensified merger activity in the financial services industry produces larger, better capitalized and more geographically diverse firms that are capable of offering a wider array of financial products and services at more competitive prices. The Bank’s ability to maintain its competitive position depends mainly on its ability to fulfill new customers’ needs through the development of new products and services and the Bank’s ability to offer adequate services and strengthen its customer base through cross-selling. The Bank’s business will be adversely affected if the Bank is not able to maintain efficient service strategies. In addition, the Bank’s efforts to offer new services and products may not succeed if product or market opportunities develop more slowly than expected or if the profitability of opportunities is undermined by competitive pressures.
 
Instability of banking laws and regulations in Colombia and in other jurisdictions where the Bank operates could adversely affect the Bank’s consolidated results.
 
Changes in banking laws and regulations, or in their official interpretation, in Colombia and in other jurisdictions where the Bank operates, may have a material effect on the Bank’s business and operations. Since banking laws and regulations change frequently, they could be adopted, enforced or interpreted in a manner that may have an adverse effect on the Bank’s business.
 
Although Bancolombia currently complies with capital requirements, there can be no assurance, that future regulation will not change or require Bancolombia or its subsidiaries to seek additional capital. Moreover, the various regulators in the world have not reached consensus as to the appropriate level of capitalization for financial services institutions. Regulators in the jurisdictions where Bancolombia operates may alter the current regulatory capital requirements to which Bancolombia is subject and thereby necessitate equity increases that could dilute existing stockholders, lead to required asset sales or adversely impact the return on stockholders’s equity and/or the market price of the Bank’s common and preferred shares.
 
Future restrictions on interest rates or banking fees could negatively affect the Bank’s profitability.
 
In the future, regulations in the jurisdictions where the Bank operates could impose limitations regarding interest rates or fees charged by the Bank. Any such limitations could materially and adversely affect the Bank’s results of operations and financial position.
 
In particular, there has been an ongoing dispute in Colombia among merchants, payment servicers and banks regarding interchange fees. Specifically, in 2004, the Superintendency of Commerce and Industry began an investigation against Credibanco and Redeban, entities that participate in Colombia’s payment services system, for an alleged illegal anticompetitive agreement relating to the manner in which interchange fees were determined according to the agreement.
 
 
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The Superintendency of Commerce and Industry ended the investigation with a commitment of payment system companies (Redeban and Credibanco), and their associated banks (including Bancolombia) to deliver a study containing a methodology to calculate interchange fees and to send information regarding the costs related to the payment services systems. The term of this commitment was ongoing from 2005 to December 2009.
 
In 2008, the Superintendency of Commerce and Industry determined that there was a breach in the compliance of certain commitments signed among Redeban, Credibanco and the banks (including Bancolombia) and imposed a fine on the payment system companies (Redeban and Credibanco), and their associated banks (including Bancolombia). This decision was confirmed in September 2009.
 
Although, the dispute described above has ended, the Superintendency of Commerce and Industry may initiate new investigations regarding the interchange fees. This possibility may lead to additional decreases, which in turn could impact the Bank’s financial results.
 
Banking regulations, accounting standards and corporate disclosures applicable to the Bank and its subsidiaries differ from those in the United States and other countries.
 
While many of the policies underlying Colombian banking 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, capital adequacy requirements for banks under Colombian regulations differ from those under U.S. regulations and may differ from those in effect in other countries. The Bank prepares its annual audited financial statements in accordance with Colombian GAAP, which differs in significant respects from U.S. GAAP and International Financial Reporting Standards (“IFRS”). Thus, Colombian financial statements and reported earnings may differ from those of companies in other countries in these and other respects. Some of the differences affecting earnings and stockholders’ equity include, but are not limited to the accounting treatment for restructuring, loan origination fees and costs, deferred income taxes and the accounting treatment for business combinations. Moreover, 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 Finance that differ from those 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”.
 
Although the Colombian government is currently undertaking a review of present regulations relating to accounting, audit, and information disclosure, with the intention of seeking convergence with international standards, current regulations continue to differ in certain respects from those in other countries.
 
In addition, there may be less publicly available information about the Bank than is regularly published by or about U.S. issuers or issuers in other countries.
 
The occurrence of natural disasters in the regions where the Bank operates could impair its ability to conduct business effectively and could impact the Bank’s results of operations.

The Bank is exposed to the risk of natural disasters such as earthquakes, volcanic eruptions, tornadoes, tropical storms, wind and hurricanes in the regions where it operates, particularly in El Salvador. In the event of a natural disaster, unanticipated problems with the Bank’s disaster recovery systems could have a material adverse effect on the Bank’s ability to conduct business in the affected region, particularly if those problems affect its computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. In addition, if a significant number of the Bank’s local employees and managers were unavailable in the event of a disaster, its ability to effectively conduct business could be severely compromised. A natural disaster or multiple catastrophic events could have a material adverse effect on the Bank’s business and results of operations in the affected region.
 
 
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Risks Relating to the Preferred Shares and the American Depositary Shares (“ADSs”)

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 Mellon, 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 class of shares 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, the Bank might decide not to file a registration statement in some cases.
 
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.
 
The Bank’s preferred shares have limited voting rights.

The Bank’s corporate affairs are governed by its by-laws and Colombian law. Under the by-laws and Colombian law, the Bank’s preferred stockholders may have fewer rights than stockholders of a corporation incorporated in a U.S. jurisdiction. Holders of the Bank’s ADRs and preferred shares are not entitled to vote for the election of directors or to influence the Bank’s management policies. Under the Bank’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 in limited circumstances as described in “Item 10. Additional Information – B. Memorandum and Articles of Association – Description of Share Rights, Preferences and Restrictions – Voting Rights – Preferred Shares”.
 
Holders of the Bank’s ADRs may encounter difficulties in the exercise of dividend and voting rights.

Holders of the Bank’s ADRs may encounter difficulties in the exercise of some of their rights with respect to the shares underlying ADRs. If the Bank makes a distribution to holders of underlying shares in the form of securities, the Depositary is allowed, in its discretion, to sell those securities on behalf of ADR holders and instead distribute the net proceeds to the ADR holders. Also, under some circumstances, ADR holders may not be able to vote by giving instructions to the depositary in those limited instances in which the preferred shares represented by the ADRs have the power to vote.
 
Relative illiquidity of the Colombian securities markets may impair the ability of an ADR holder to sell preferred shares.

The Bank’s common and preferred shares are listed on the Colombian Stock Exchange, which is relatively small and illiquid compared to stock exchanges in major financial centers. In addition, a small number of issuers represent a disproportionately large percentage of market capitalization and trading volume on the Colombian Stock Exchange. A liquid trading market for the Bank’s securities might not develop on the Colombian Stock Exchange. A limited trading market could 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.
 
American Depositary Receipts (“ADRs”) do not have the same tax benefits as other equity investments in Colombia.
Although ADRs represent Bancolombia’s preferred shares, they are held through a fund of foreign capital in Colombia which is subject to a specific tax regulatory regime. Accordingly, the tax benefits applicable in Colombia to equity investments, in particular, those relating to dividends and profits from sale, are not applicable to ADRs, including the Bank’s ADRs. For more information see “Item 10. Additional Information.–E. Taxation –Colombian Taxation”.
 
 
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ITEM 4. INFORMATION ON THE COMPANY
 
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
 
Bancolombia is Colombia’s leading financial institution, providing a wide range of financial products and services to a diversified individual and corporate customer base throughout Colombia as well as in other jurisdictions such as Panama, El Salvador, Puerto Rico, the Cayman Islands, Peru, Brazil, the United States and Spain.
 
Bancolombia is a sociedad comercial por acciones, de la especie anónima, domiciled in Medellín, Colombia and operates under Colombian laws and regulations, mainly the Colombian Code of Commerce and Decree 663 of 1993.
 
Bancolombia was incorporated in Colombia in 1945, under the name Banco Industrial Colombiano S.A. or “BIC” and is incorporated until 2044. In 1998, the Bank merged with Banco de Colombia S.A., and changed its legal name to Bancolombia S.A.  On July 30, 2005, Conavi and Corfinsura merged with and into Bancolombia, with Bancolombia as the surviving entity. Through this merger, Bancolombia gained important competitive advantages, as Conavi and Corfinsura were two of the top financial institutions in the Colombian market at the time.  Conavi, the leader in mortgage banking in Colombia and one of the strongest in retail operations, significantly increased the Bank’s participation and know-how in these specific markets.  On the other hand, Corfinsura, then the largest financial corporation in Colombia and highly regarded for its expertise in handling large and mid-sized corporate credit and financial services, its investment bank and its modern and diversified treasury department, materially strengthened Bancolombia’s multi-banking franchise.
 
In May 2007, Bancolombia Panamá acquired Banagrícola, which controls several subsidiaries, including Banco Agrícola in El Salvador, and is dedicated to banking, commercial and consumer activities, insurance, pension funds and brokerage. Through its first international acquisition, Bancolombia gained a leadership position in the Salvadorian market.
 
Since 1995, Bancolombia has maintained a listing on the NYSE, where its ADSs are traded under the symbol “CIB”, and on the Colombian Stock Exchange, where its preferred shares are traded under the symbol “PFBCOLOM”. Since 1981 Bancolombia’s common shares have been traded on Colombian Exchanges under the symbol “BCOLOMBIA”.  See “Item 9. The Offer and Listing”.
 
Bancolombia has grown substantially over the years, both through organic growth and acquisitions.  As of December 31, 2010, Bancolombia had, on a consolidated basis:
 
 
 
COP 68,095 billion in total assets;
 
 
 
COP 46,092 billion in total net loans and financial leases;
 
 
 
COP 45,539 billion in total deposits; and
 
 
 
COP 7,947 billion in stockholder’ equity.
 
Bancolombia’s consolidated net income for the year ended December 31, 2010 was COP 1,436 billion, representing an average return on equity of 22.07% and an average return on assets of 2.59%.
 
The address and telephone number of the Bank’s headquarters are as follows: Carrera 48 # 26-85, Medellín, Colombia; telephone + (574) 404-1837. Our agent for service of process in the United States is Puglisi & Associates, presently located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
 
 
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KEY RECENT DEVELOPMENTS
 
On March 7, 2011, at the annual general shareholders’ meeting , the shareholders of the Bank elected the following individuals to the Board of Directors for the period from 2011 to 2013: David Bojanini García, José Alberto Vélez Cadavid, Carlos Enrique Piedrahita Arocha Gonzalo Alberto Pérez Rojas, Alejandro Gaviria Uribe, Ricardo Sierra Moreno and Rafael Martinez Villegas.
 
On February 5, 2011, Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A., subsidiaries of Bancolombia S.A., and Suramericana S.A., signed an agreement pursuant to which Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. agreed to sell to Suramericana 97.03% of its shares of capital stock of Asesuisa, an insurance company in the Republic of El Salvador. Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. will receive a total of USD 98 millon as payment for the shares.
 
On January 28, 2011, Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A., subsidiaries of Bancolombia S.A., and Protección S.A. Sociedad Administradora de Fondos de Pensiones y Cesantias (“Protección S.A.”), signed a contract where Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. sold to Protección S.A. the equivalent of 99.99% of its shares of capital stock of AFP Crecer, an administrator of pension funds in the Republic of El Salvador. Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. will receive a total of USD 103 million as payment for the shares.
 
On January 5, 2011 the Bank priced USD 520 million in aggregate principal amount of its Senior Notes due 2016. The Senior Notes have a 5-year maturity and a coupon of 4.25%, payable semi-annually on January 12 and July 12 of each year, beginning on July 12, 2011. The transaction closed on January 12, 2011.
 
On December 15, 2010, Bancolombia S.A., announced its first offering of ordinary notes in the local market, corresponding to a program of ordinary bond issuances up to an aggregate principal amount of two trillion Colombian Pesos (COP 2,000 billion).  The issued amount was six hundred thousand million Colombian Pesos (COP 600 billion).
 
On November 22, 2010, Mr. Jorge Londoño Saldarriaga, Bancolombia’s Chief Executive Officer since 1995, submitted his resignation to the bank’s Board of the Directors, effective on February , 2011.
 
Subsequently, on November 26, 2010, at an extraordinary meeting, the Board of Directors of Bancolombia appointed Mr. Carlos Raul Yepes Jimenez as the new President of Bancolombia.
 
On November 22, 2010, the Board of Directors of Bancolombia approved the issuance of up to COP $1,000 billion (approximately USD 533 million) in aggregate principal amount of Senior Notes ( “Senior Notes”) and the related Reglamento de la Emision (Terms of the Senior Notes).
 
On July 26, 2010, Mr. Juan Camilo Restrepo resigned as a member of the Board of Directors of the Bank and as a new member of the Audit Committee and the Risk Committee, following his appointment as Minister of Agriculture. Bancolombia’s Board of Directors appointed Mr. Ricardo Sierra as a new member of Bancolombia’s Audit Committee and Mr. Carlos Raul Yepes as a new member of the Risk Committee, to replace Mr. Restrepo.
 
On July 19, 2010, the Bank priced the public offering of USD 620 million in aggregate principal amount of its Subordinated Notes due July 26, 2020. The notes have a 10-year maturity and a coupon of 6.125%, payable semi-annually on January 26 and July 26 of each year, commencing on January 26, 2011.
 
On June 21, 2010, the Bank entered into a settlement agreement with members of the Gilinski family pursuant to which the parties agreed, among other things, to end all disputes relating to the acquisition by the former Banco Industrial Colombia, now Bancolombia, of the majority shareholder of the Banco de Colombia.  All such proceedings including arbitrations, as well as criminal investigations have now been terminated in accordance with that agreement.  The resolution of these matters did not have a material effect on the Bank’s results of operations or financial condition.
 
 
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On June 11, 2010 Bancolombia entered into an agreement with the International Finance Corporation, a member of the World Bank Group, for the purpose of providing hedging instruments through a risk management facility in an aggregate principal amount of up to USD 400 million.
 
PUBLIC TAKEOVER OFFERS
 
During 2010, and as of the date of this Annual Report, there have been no public takeover offers by third parties in respect of the Bank’s shares or by the Bank in respect to another company’s shares.
 
CAPITAL EXPENDITURES AND DIVESTITURES
 
During the past three years, Bancolombia has made significant capital expenditures aimed at increasing the Bank’s productivity, accessibility and cost efficiency. These expenditures include the improvements made to the Bank’s “IT Platform” and those related to new ATMs and branches.
 
During 2010, total capital expenditures amounted to COP 297 billion. Such investments were mainly in an IT Platform renewal project (COP 124 billion), the expansion of the Bank’s branch and ATM network (COP 69 billion), the purchase of hardware for the expansion, updating and replacement of the current IT equipment (COP 32 billion), and other investments, such as an anti-fraud system and fixed assets (COP 77 billion). Additionally, purchases of fixed assets related to operating leasing and renting accounted for COP 389 billion during 2010; these activities are conducted mainly by Leasing Bancolombia S.A. and Renting Colombia S.A.
 
Additionally, in September 2010, the Board of Directors authorized Bancolombia to proceed with negotiations with Grupo de Inversiones Suramericana S.A. and Protección S.A. Sociedad Administradora de Fondos de Pensiones y Cesantías regarding the sale of Bancolombia’s ownership interests, currently held through foreign subsidiaries, in AFP Crecer, Asesuisa and Asesuisa Vida in El Salvador. The stock purchase agreements were signed in January 2011 and both transactions are pending for authorization of the regulators in El Salvador and Colombia.
 
The amounts that will be paid toBancolombia are USD 103 million for AFP Crecer and USD 98 million for Asesuisa and Asesuisa Vida.
 
In 2010, Bancolombia funded its capital expenditures with its own resources and plans to continue to fund those currently in progress in the same way.
 
During 2009, total capital expenditures of the Bank and its subsidiaries on a consolidated basis amounted to COP 344 billion. Such investments were made mainly in land and buildings (COP 87 billion), data processing equipment (COP 40 billion), furniture and fixtures (COP 24 billion), vehicles (COP 106 billion), and investments related to the IT Platform Renewal (COP 87 billion).  In 2009, the Bank continued the renovation of its IT Platform, while capital expenditures related to vehicles are primarily due to the business growth of Renting Colombia S.A., Bancolombia’s subsidiary which provides operating lease and fleet management services for individuals and companies.
 
During 2008, total capital expenditures of the Bank and its subsidiaries on a consolidated basis amounted to COP 540 billion. Such investments were made mainly in land and buildings (COP 202 billion), data processing equipment (COP 55 billion), furniture and fixtures (COP 49 billion), vehicles (COP 200 billion) and investments related to the IT Platform Renewal project (COP 36 billion).
 
During 2011, the Bank expects to invest approximately COP 416 billion as follows: COP 255 billion in connection with an IT Platform renewal project, COP 71 billion in connection with the expansion of the Bank’s branch and ATM network, COP 29 billion in connection with the purchase of hardware for the expansion, updating and replacement of the current IT equipment and COP 61 billion in connection with other investments, such as an anti-fraud system and fixed assets. These figures represent only an estimate and may change according to the continuing assessment of the Bank’s projects portfolio. No assurance can be given, however, that all such capital expenditures will be made and, if made, that such expenditures will be in the amounts currently expected.
 
 
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The following table summarizes the Bank’s capital expenditures and divestitures in interests in other companies for the years ending December 31, 2010, 2009 and 2008:
 
   
As of December 31,
 
Capital Expenditures (COP million)
 
2010
   
2009
   
2008
   
Total
 
Banagrícola S.A.
    93       469       2,503       3,065  
Inversiones Financieras Banco Agrícola S.A.
    68       4,512       865       5,445  
Banco Agrícola S.A.
    -       905       3,951       4,856  
Compañía de Financiamiento Comercial Sufinanciamiento S.A.
    -       -       24,997       24,997  
Renting Colombia S.A.
    39,104       -       7,774       46,878  
Asesuisa, S.A.
    -       -       605       605  
FCP Colombia Inmobiliaria
    -       25,700       26,595       52,295  
Factoring Bancolombia S.A.
    -       20,001       5,000       25,001  
Fondo de Inversión en arrendamiento operativo
    1,076       5,476       21,089       27,641  
Visa Inc.
    -       -       5,237       5,237  
Transportempo S.A.
    -       195       2,493       2,688  
Renting Peru S.A.C.
    -       5,466       4,936       10,402  
Inversiones IVL S.A.
    -       -       4,757       4,757  
Epsa S.A. ESP
    -       62,343       -       62,343  
Promotora La Alborada
    -       14,001       -       14,001  
Bancolombia Cayman
    -       10,221       -       10,221  
Inversiones Inmobiliarias Arauco Alameda S.A.
    -       20,657       -       20,657  
Leasing Perú
    25,741       -       -       25,741  
Fiduciaria Bancolombia S.A.
    69       -       -       69  
Inversiones CFNS S.A.S.
    11,441       -       -       11,441  
Fiduciaria GBC Peru
    1,561       -       -       1,561  
Vivayco S.A.S
    1,593       -       -       1,593  
Others
    3,349       7,741       5,076       16,166  
Total Expenditures (COP million)
    84,095       177,687       115,878       377,660  

Divestitures (COP million)
 
2010
   
2009
   
2008
   
Total
 
Acerias Paz del Río(1)
    -       -       56       56  
Banco de Crédito(1)
    -       -       268       268  
Inversiones IVL S.A.(1)
    33,895       -       -       33,895  
Suramericana de Inversiones S.A.(1)
    -       -       1,675       1,675  
Multienlace(1)
    -       -       13,710       13,710  
Bolsa  de Valores de Colombia(1)
    5,886       -       13,468       19,354  
Fundicom S.A.(1)
    -       -       11,789       11,789  
Promotora La Alborada(1)
    -       -       14,001       14,001  
P.A. Renting Colombia(1)
    -       -       13,296       13,296  
Interconexión Eléctrica S.A.(1)
    -       -       1,632       1,632  
Valores Simesa S.A.(1)
    5,184       948       1,248       7,380  
Inversiones Valsimesa S.A.(1)
    -       -       1,119       1,119  
Concesiones Urbanas S.A.(1)
    -       2,859       -       2,859  
Visa Inc(1)
    -       31,589       -       31,589  
Metrotel Redes S.A.(1)
    30,000       -       -       30,000  
Banco Agricola Panamá(2)
    51,677       -       -       51,677  
Others(1)
    4,042       655       3,129       7,826  
Total Divestitures (COP million)
    130,684       36,051       75,391       242,126  
 

(1)
Investments sold
(2) 
Capital decrease
 
   B.
BUSINESS OVERVIEW
 
B.1.
GENERAL
 
COMPANY DESCRIPTION, PRODUCTS AND SERVICES
 
Bancolombia is a full service financial institution incorporated in Colombia that offers a wide range of banking products and services to a diversified individual and corporate customer base of more than 6.9 million customers. Bancolombia delivers its products and services through its regional network comprising Colombia’s largest non-government owned banking network, El Salvador’s leading financial conglomerate, off-shore banking subsidiaries in Panama, Cayman and Puerto Rico, as well as an agency in Miami and subsidiaries in Peru. Together, Bancolombia offers the following products and services:
 
 
23

 
 
Savings and Investment: Bancolombia offers its customers checking accounts, savings accounts, fixed term deposits and a diverse variety of investment products that fit the specific transactional needs of each client and their income bracket.
 
Financing: Bancolombia offers its customers a wide range of credit alternatives which include: trade financing, loans funded by domestic development banks, working capital loans, credit cards, personal loans, vehicle loans, payroll loans and overdrafts, among others. It also offers the following financial specialized products:
 
Mortgage Banking: Bancolombia is a leader in the mortgage market in Colombia, providing full financial support to construction firms and mortgages for individuals and companies.
 
Factoring: Bancolombia offers its clients solutions for handling their working capital and maximizing their asset turnover through comprehensive solutions to manage their accounts receivable financing.
 
Financial and Operating Leases: Bancolombia, primarily through Leasing Bancolombia and its subsidiaries, offers financial and operational leases specifically designed for acquiring fixed assets.
 
Treasury: Bancolombia assists its clients in hedging their market risks through innovative derivative structures. The Bank also performs inter-bank lending, repurchase agreements or “repos”, sovereign and corporate securities sales and trading, foreign currency forwards and spot sales, interest rate and cross currency swaps and European options.
 
Comprehensive Cash Management: Bancolombia provides support to its clients through efficient cash management, offering a portfolio of standard products that allows clients to make payments and collections through different channels.  Our payables and receivables services provide solutions to process and reconcile transactions accurately, efficiently and in a timely manner. We also offer a comprehensive Reporting Solution, providing the data that is required by customers’ internal processes.  In addition, our Bank designs and creates custom-made products in order to address our clients’ specific payment and collection needs, including a a variety of real time web services , straight through processing (STP) and messaging through Swift Net solutions.
 
Foreign Currency: Bancolombia offers its clients specialized solutions to satisfy their investment, financing and payment needs with regard to foreign currency transactions.
 
Bancassurance and Insurance: Bancolombia has amassed a complete portfolio of insurance and pension products directed to new niche markets and centring on the construction of long-term relationships with clients in personal banking. Across its network of branches, Bancolombia offers diverse insurance products (life, personal accident and homeowner’s insurance) offered by Compañía Suramericana de Seguros, one of the principal insurance companies in Colombia. In addition Bancolombia offers unemployment insurance issued by Sure General Cardif Colombia S.A. With respect to El Salvador, Banco Agricola offers a comprehensive portfolio of insurance products from Asesuisa (auto insurance, personal accident and health insurance, fire and associated perils insurance, cargo insurance, among others) and Asesuisa Vida (life insurance).
 
Brokerage Services: Bancolombia offers, through Valores Bancolombia, Suvalor Panama and Bursabac, brokerage and investment advisory services, covering various investment alternatives including equities, futures, foreign currencies, fixed income securities, mutual funds and structured products.
 
Investment Banking: Bancolombia offers, through Banca de Inversión an ample portfolio of value-added services that allows it to advise and assist companies from all economic sectors, including in areas relating to project finance, capital markets, capital investments, M&A, restructurings and corporate lending.
 
 
24

 
 
Asset Management and Trust Services: Bancolombia provides, through Fiduciaria Bancolombia, Valores Bancolombia and AFP Crecer S.A, asset management and trust products that include mutual funds, pension funds, administration and payment trusts, public trusts, real estate trusts, securitization and guarantee trusts.
 
NEW PRODUCTS OR SERVICES
 
Bancolombia continues its efforts to diversify and improve its product portfolio.  Below is a brief description of the new products and services introduced in 2010:
 
Saving and Investment

Indexado Acciones Fund:  mutual fund designed to offer investors profits associated with the performance of the stock index Colcap, which is the stock index that reflects the variations in the prices of the 20 most liquid stocks in the Colombian stock market.
 
Alternativo Dinámico Fund:  closed-end fund that offers investors the possibility to participate in the profitability of assets with high valuation potential such as BRIC Stocks (stocks in the markets of Brazil, Russia, India and China).
 
Banconectados: Savings account targeting young investors, between 13 and 17 years of age, offering services according to age and financial needs such as discounted managment fees, exclusive website, and preferential interest rates. It also offers a loyalty program that gives points according to the balances saved.
 
Plan Crecer: Plan designed to promote saving. It does not charge management fees and it charges clients on a per transaction basis.
 
Plan Progreso:  Plan created to give access to the formal financial system to the people that receive government subsidies with the objective of introducing them to the sense and importance of saving.
 
Plan Nómina Especial: Savings account designed to receive the payroll payments made by a company. This account gives the customer unlimited transactions across our ATM network free of any charge.
 
Electronic Payment for Bogotá D.C. Taxes: This service offers the District taxes contributors an easy way to make their payments using a website, avoiding the inconvenience of going to a branch.
 
Insurance

Mortgage Loan Insurance: Insurance that covers the client’s mortgage loan in case of unemployment, temporal disability or serious illnesses.
 
Payroll Loan Insurance: Insurance directed at the clients with payroll loans. It guarantees the payment of several credit installments in case of unemployment or serious illness.

Financing

20 year Mortgage LoanIt: Provides clients with access to a mortgage product, extending the financing term of credit up to 20 years.
 
Personal loans repayable with remittances: Credit aimed at customers who earn wages or are independent workers but are also beneficiaries of international remittances.  The remittances received by these customers are counted as additional revenue that increases the customer’s capacity of repayment, according to real income and needs.
 
 
25

 
 
Cash Management

Direct pay: Automatic payment product service that allows the generation, encryption, and sending of payments from the client’s server to the bank without human intervention.
 
Treasury

UVR Swap: The UVR-indexed Swap: UVR-COP is a hedging instrument that allows institutional clients to mitigate their portfolios’ exposure to domestic inflation.
 
 Swap with asymmetric flows: This instrument offers our customers the possibility to hedge discontinuous cash flows related to assets and/or liabilities (i.e., quarterly rights vs. yearly liabilities).
 
Asset Swap: Investment strategy composed of: (i) a long position in a fixed income security; and (ii) a hedging instrument (Interest Rate Swap, Cross-currency Swap, Basis Swap, etc.). This strategy provides our clients with a ‘yield pickup’ compared to their portfolio benchmark. Also known as a Yield-Enhancement Strategy structured for fixed income portfolios.
 
IRS Swap with amortization: This instrument is the synthetic variation of a Principal-Only Amortizing Swap, taking into account a series of cash flow streams associated with a plain vanilla Interest Rate Swap, yet with different amortization schedules in terms of rights and obligations.
 
SUFI

Sufi Credit Card: Credit card designed to complement Sufi’s financing offer and is used to pay all the services of maintenance associated with a vehicle. It gives our customers discounts in commercial establishments that give vehicle services such as concessionaires, accessories stores, among others. Also, the Sufi credit card can be used as a regular Mastercard credit card to acquire products and services in different establishments in Colombia and abroad.
 
Foreign Currency
 
Time Deposit Bancolombia Panamá: Debt issued by Bancolombia Panamá, internationally guarded by Euroclear or Clearstream, and offered in Colombia by Valores Bancolombia.
 
Valores Bancolombia

Colombian Global Market: Comprised of foreign securities that are listed in the local market without requiring the registration in the National Registry of Securities and Issuers (RNVE).Valores Bancolombia was selected as one of the three sponsors of this market. At the end on 2010, our Firm was sponsoring the following stocks: Bank of America Corp (BAC), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Apple Inc. (AAPL), Procter & Gamble Co/The (PG), Johnson & Johnson (JNJ), Caterpillar Inc. (CAT).  
 
MAIN LINES OF BUSINESS
 
The Bank manages its business through nine main operating segments: Banking Colombia, Banking El Salvador, Leasing, Trust, Investment Banking, Brokerage, Off Shore, Pension and Insurance, and All other .
 
To see the description and discussion about segments, please see “Item 5.Operating and Financial Review and Prospects – A. Operating Results – Results by Segment”.
 
 
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B.2.
OPERATIONS
 
See Note 31 – section (y) to the Bank’s consolidated financial statements as of December 31, 2010 included in this Annual Report for a description of the principal markets in which the company competes, including a breakdown of total revenues by category of activity and geographic market for each of the last three financial years.
 
B.3.
SEASONALITY OF DEPOSITS
 
Historically, the Bank has experienced some seasonality in its demand deposits, with higher average balances at the end of the year and lower average balances in the first quarter of the year.  This behavior is explained primarily by the increased liquidity provided by the Central Bank at year end, as economic activity tends to be higher during this period resulting in a greater number of transactions. However, we do not consider the seasonality of demand deposits to have a significant impact on our business.
 
B.4.
RAW MATERIALS
 
The Bank on a consolidated basis is not dependent on sources or availability of raw materials.
 
B.5.
DISTRIBUTION NETWORK
 
Bancolombia provides its products and services through a traditional branch network, sales and customer representatives as well as through mobile branches (or Puntos de Atención Móviles), non-banking correspondents, an ATM network, online and computer banking, telephone banking, mobile phone banking services, and PACs, among others. In addition, as of December 31, 2010, Bancolombia had a sales force of approximately 12,422 employees and transactions effected through electronic channels represented more than 88% of all transactions in 2010.

The following are the distribution channels offered by Bancolombia as of December 31, 2010:
 
Branch Network
 
As of December 31, 2010, Bancolombia’s consolidated branch network consisted of 921 offices, which included 736 from Bancolombia, 102 from Banagrícola and 83 from other subsidiaries.

Company* 
 
Number of
branches
2010
   
Number of
branches
2009
   
Number of
branches
2008
 
                   
Bancolombia S.A.(unconsolidated)
    736       713       717  
Bancolombia Panamá  S.A.
    1       1       1  
Bancolombia Miami
    1       1       1  
Leasing Bancolombia S.A.
    17       12       10  
Renting Colombia S.A. (1)
    16       4       4  
Valores Bancolombia
    9       8       7  
Valores Bancolombia Panama S.A.
    1       1       1  
Banca de Inversión Bancolombia S.A
    2       2       2  
Fiduciaria Bancolombia  S.A.
    6       6       6  
Tuya
    6                  
Bancolombia Puerto Rico International Inc.
    1       1       1  
Factoring Bancolombia S.A.
    1       5       5  
Sufinanciamiento S.A.(2)
    -       8       8  
Renting Peru S.A.C. (3)
    5       1       1  
Fondo Inversión Arrend.Operativo Renting Perú I 
    1                  
RC Rent a Car S.A.S.
    -       10       8  
Inversiones CFNS
    1       1       1  
Banco Agrícola S.A.
    102       101       107  
Arrendadora Financiera S.A.
    1       1       1  
Credibac  S.A. de C.V.
    1       1       -  
Bursabac S.A. de C.V.
    1       1       1  
AFP Crecer S.A.
    6       6       6  
 
 
27

 

Company* 
 
Number of
branches
2010
   
Number of
branches
2009
   
Number of
branches
2008
 
Aseguradora Suiza Salvadoreña S.A.
    1       1       1  
Asesuisa Vida S.A.
    1       1       1  
Capital investments S.A.
    1       1       -  
Transportempo SAS
    1       1       -  
Leasing Peru
    1       1       -  
Fiduciaria GBC S.A.  (Peru)
    1       -       -  
Total
    921       889       890  
 
*For some subsidiaries, their central office is considered a branch.
 
(1) 12 offices operated for the Localiza franchise in Colombia, are included in the total number of branches for Renting Colombia S.A.
 
(2) Due to the transfer of part of Sufinaciamiento S.A.’s assets, liabilities and contracts to Bancolombia’s banking unit, SUFI’s 11 branches have been added to the total corresponding to Bancolombia (unconsolidated). 

(3) Four offices operated for the Localiza franchise in Perú, are included in the total number of branches for Renting Peru S.A.C.
 
Non-Banking Correspondents (“CNB”)
 
A CNB is a platform which allows non-financial institutions such as stores open to the public, to provide financial services and transactions in towns where banks and financial institutions have limited or no presence. As of December 31, 2010, there were a total of 742 non-banking correspondents.

Puntos de Atención Móviles (“PAM”)
 
PAMs consist of commercial advisors who visit small towns periodically to offer Bancolombia’s products and services. As of December 31, 2010, there were a total of 600 PAMs.

Kiosks
 
Kiosks, used in El Salvador, are located inside the Bank’s agencies, malls, and other public places and are used to provide the Bank’s clients the possibility of conducting a variety of self-service transactions. As of December 31, 2010, there were a total of 154 kiosks.

Automatic Teller Machines (“ATM”)
 
Bancolombia has a total of 2,945 ATMs, including 2,544 machines in Colombia and 401 ATMs in El Salvador.
 
Online/Computer Banking
 
We offer multiple online and computer based banking alternatives designed to fit the specific needs of our different client segments. Through a variety of platforms (computer and internet based solutions) our clients can review their account balances and monitor transactions in their deposit accounts, loans, and credit cards, make virtual term investments, access funds from pre-approved loans, make payroll and supplier payments, make purchases and bill payments, learn about products and services and complete other transactions in real time.
 
Telephone Banking
 
We provide customized and convenient advisory services to customers of all segments through automatic interactive voice reponse (“IVR”) operations and a 24x7 contact center.
 
 
28

 
 
Punto de Atención Cercano (“PAC”) or Electronic Funds Transfer at Point of Sale (“EFTPOS”)
 
Through our own network of 8,073 PACs our customers may carry out a variety of transactions including transfer of funds, bill payments, and changes to credit and credit card PINs.
 
Mobile Phone Banking Service
 
Our clients can conduct a variety of transactions using their cell phones, including fund transfers between Bancolombia accounts, account balance inquiries, purchase of prepaid cell phone air time and payment of bills and invoices.
 
B.6.
PATENTS, LICENSES AND CONTRACTS
 
The Bank is not dependent on patents or licenses, nor is it dependent on any industrial, commercial or financial contracts (including contracts with customers or suppliers).
 
B.7.
COMPETITION
 
Description of the Colombian Financial System
 
Overview
 
In recent years, the Colombian banking system has been undergoing a period of consolidation given the series of mergers and acquisitions that have taken place within the sector.  More specifically, several mergers and acquisitions took place in 2005, including the Conavi/Corfinsura merger, the acquisition of Banco Aliadas by Banco de Occidente, the merger of Banco Tequendama and Banco Sudameris, as well as the merger of the Colmena and the Caja Social banks.  The trend towards mergers and acquisitions continued throughout 2006, with the completion of certain transactions first announced during 2005. These include the acquisition of Banco Superior by Davivienda, of Banco Granahorrar by BBVA Colombia and of Banco Unión by Banco de Occidente. Also during 2006, Banco de Bogota acquired Megabanco and Davivienda announced its acquisition of Bancafé.  In 2007, HSBC acquired Banitsmo and Bancolombia also completed the acquisition of Banagrícola in El Salvador. For more information on the acquisition of Banagrícola, see “Item 4. Information on the Company – 4.A. History and Development of the Company.” In 2008 the Royal Bank of Scotland (RBS) purchased the Colombian arm of ABN Amro Bank and General Electric (GE) Money acquired a 49.7% stake in Colpatria, with an option of increasing this stake by another 25% by 2012. Also, in 2010, Banco de Bogotá acquired BAC-Credomatic, which has operations in several countries in Central America, for a reported purchase price of COP 3.53 billions.
 
As of December 31, 2010, and according to the Superintendency of Finance, the principal participants in the Colombian financial system were the Central Bank, 19 commercial banks (eleven domestic banks, seven foreign banks, and one state-owned bank), three finance corporations and 23 financing companies (6 leasing companies and 17 traditional financing companies). In addition, trust companies, cooperatives, insurance companies, insurance brokerage firms, bonded warehouse, special state-owned institutions, pension and severance pay funds also participate in the Colombian financial system.
 
The Financial Reform Act of 2009 (Law 1328 passed July 15, 2009) also made important advances towards a multi-banking framework. This new legislation authorized banks to provide merger and acquisition loans and allowed them to conduct financial leasing operations. As a result, some competitors have absorbed their financial leasing subsidiaries into their banking franchises and some leasing companies are in the process of becoming banks.
 
Financial System Evolution in 2010
 
Economic activity in Colombia rose at a real annual rate of 4% providing for a robust financial sector. Based on information issued by the Colombian Superintendency of Finance, lending grew at a rate of 17.5% for 2010, in contrast to the stagnation experienced in 2009 when lending grew only 1.9%. The rise in industrial output coupled with the country’s expansive monetary policy drove up the demand for business loans which increased by 20.6% for 2010, compared to just 0.14% for the previous year. Low interest rates and rising confidence drove up consumer loans which grew by 16.4% in 2010, compared to just 1.7%  in 2009. Mortgage and microcredit loans continued to do well, with increases of 13.4% and 16.6% respectively, for 2010.
 
 
29

 
 
The financial system’s level of past due loans as a percentage of the total loan portfolio fell substantially throughout the year, going from 4.11% in December 2009 to 2.81% for the same month in 2010. In addition, coverage, measured as the ratio of allowances to past due loans, ended 2010 at 178.2%, compared to 136.9% at the end of 2009.
 
During 2009, both lending as well as investments gained a greater weighting of the financial system’s structure. Loans increased from 60.2% of total assets at the end of 2009 to 61.5% at the end of 2010.  The investment portfolio as a percentage of total assets increased from 21.8% at the end of 2009 to 22.5% at the end of 2010.
 
As of December 31, 2010, the Colombian financial sector recorded COP 267 trillion in total assets, representing a 15.1% increase as compared to the same period in 2009.  The Colombian financial system’s total composition of assets shows banks with a market share of 90.9%, followed by financing companies with 6.4% and financial corporations with 2.7%.
 
As of December 31, 2010, the capital adequacy ratio (tier 1 + tier 2) for credit institutions was 14.9% (including banks, finance corporations and financing companies), which is well above the minimum legal requirement of 9%.
 
Bancolombia and its Competitors
 
The following table shows the key profitability, capital adequacy ratios and loan portfolio quality indicators for Bancolombia unconsolidated and its main competitors, as published by the Superintendency of Finance. It is important to note that, in the case of mortgages, past due loans used in the calculation shown below incorporate the past due installments, instead of the complete mortgage balance, whenever a mortgage is due in less than 120 days. 
 
   
ROE*
   
ROA**
   
Past due loans/
Total loans
   
Allowances/
Past due loans
   
Capital Adequacy
 
   
Dec-09
   
Dec-08
   
Dec-09
   
Dec-08
   
Dec-09
   
Dec-08
   
Dec-09
   
Dec-08
   
Dec-09
   
Dec-08
 
Bancolombia (unconsolidated)
    14.4 %     17.7 %     2.4 %     2.6 %     3.13 %     3.07 %     184.51 %     164.36 %     17.3 %     14.8 %
Banco de Bogota
    18.4 %     23.2 %     2.5 %     2.6 %     2.92 %     2.50 %     135.24 %     137.01 %     12.8 %     10.3 %
Davivienda
    16.8 %     17.8 %     1.8 %     1.9 %     3.48 %     4.01 %     176.16 %     147.41 %     12.4 %     13.3 %
BBVA
    18.1 %     20.2 %     1.9 %     1.8 %     5.03 %     4.24 %     112.87 %     102.00 %     12.4 %     11.0 %
Banco de Occidente
    18.6 %     24.0 %     2.6 %     2.6 %     3.94 %     3.99 %     143.66 %     132.68 %     11.1 %     10.6 %
Banco Popular
    23.0 %     26.2 %     2.8 %     2.6 %     3.20 %     2.81 %     145.25 %     158.68 %     12.7 %     12.9 %
Citibank
    17.5 %     15.5 %     3.0 %     2.6 %     6.08 %     6.03 %     117.74 %     107.69 %     16.8 %     14.5 %
 
Source:  Superintendency of Finance.
*      ROE is return on average stockholders’ equity.
**    ROA is return on average assets.
 
In 2010, Bancolombia ranked first in Colombia and El Salvador in terms of amount of assets, deposits, stockholders’ equity and net income.
 
The following charts illustrate the market share of Bancolombia unconsolidated and its main competitors with respect to various key products, based on figures published by the Superintendency of Finance for the years ended December 31, 2010, 2009 and 2008:
 
 
30

 
 
Total Net Loans
Market Share
 
Total Net Loans – Market
Share %
 
2010
   
2009
   
2008
 
                   
Bancolombia
    21.66       20.29       21.99  
Bogotá
    14.10       14.46       14.69  
Davivienda
    13.09       13.29       11.93  
BBVA
    9.57       9.53       11.30  
Occidente
    7.40       6.37       6.52  
Popular
    5.50       5.41       4.76  
Citibank
    2.78       2.95       3.39  
 
Source:  Ratios are calculated by Bancolombia based on figures published by the Superintendency of Finance.
 
Checking Accounts
Market Share
 
Checking Accounts – Market Share
%
 
2010
   
2009
   
2008
 
                   
Bancolombia
    22.87       22.19       22.12  
Bogotá
    18.06       18.33       19.28  
Occidente
    15.09       14.65       13.78  
BBVA
    9.68       10.16       8.97  
Davivienda
    9.42       9.47       9.38  
Popular
    3.86       4.24       5.28  
Citibank
    2.74       2.69       2.47  
 
Source:  Ratios are calculated by Bancolombia based on figures published by the Superintendency of Finance.
 
Time Deposits
Market Share
 
Time Deposits – Market Share %
 
2010
   
2009
   
2008
 
                   
Bancolombia
    13.92       17.51       15.54  
Bogotá
    14.57       15.72       14.22  
Davivienda
    14.71       13.03       12.56  
BBVA
    7.30       7.11       13.94  
Citibank
    4.34       4.96       4.31  
Popular
    3.59       4.27       4.27  
Occidente
    3.65       4.12       4.25  
 
Source:  Ratios are calculated by Bancolombia based on figures from the Superintendency of Finance.
 
Saving Accounts
Market Share
 
Saving Accounts – Market Share %
 
2010
   
2009
   
2008
 
                   
Bancolombia
    20.78       20.47       21.59  
Bogotá
    14.95       15.05       13.24  
Davivienda
    11.26       13.26       12.58  
BBVA
    11.56       10.98       11.40  
Popular
    7.12       7.84       7.45  
Occidente
    5.67       6.99       6.95  
Citibank
    3.65       3.07       2.82  
 
Source:  Ratios are calculated by Bancolombia based on figures from the Superintendency of Finance.
 
 
31

 
 
Description of the Salvadorian Financial System
 
As of December 31, 2010, the Salvadorian financial system was comprised of 12 institutions (nine commercial banks, two state owned banks and one foreign bank).
 
The total Salvadorian financial system’s assets amounted to USD 13 billon in 2010, decreasing 0.2% as compared to the previous year. As of December 31, 2010, loans represented 63.2% of total assets in the Salvadorian financial system, while investments represented 15.5% and cash and due from banks represented 16.2%. As of December 2009, the total Salvadorian financial system assets amounted to U.S. $13.1 billion, decreasing 4.3% as compared to the previous year. As of December 31, 2009, loans represented 65.1% of total assets in the Salvadorian financial system, while investments represented 14.2% and cash and due from banks represented 15.8%.
 
Banco Agrícola and its Competitors
 
In 2010, Banco Agrícola continued to lead the Salvadorian financial system and ranked first in terms of assets, loans, deposits, stockholder’s equity and profits. The following table shows the market share for the main institutions of the Salvadorian financial system for the year ended December 31, 2010:
 
         
MARKET SHARE
                   
   
Assets
   
Stockholders’ Equity
   
Loans
   
Deposits
   
Profits
 
Banco Agrícola
    30.0 %     33.8 %     30.4 %     29.3 %     64.7 %
Citi
    18.5 %     20.9 %     15.8 %     18.4 %     6.1 %
HSBC
    15.3 %     15.2 %     14.8 %     15.0 %     8.2 %
Scotiabank
    14.6 %     13.9 %     17.2 %     14.4 %     8.6 %
BAC
    9.5 %     7.7 %     9.5 %     10.2 %     8.4 %
Others
    12.1 %     8.5 %     12.3 %     12.7 %     4.0 %

Source: ABANSA (Asociación Bancaria Salvadoreña).
 
The following charts illustrate the market share of Banco Angrícola and its main competitors with respect to various key products, based on figures published by the Salvadorian Banking Association (ABANSA) for the years ended December 31, 2010, 2009 and 2008:
 
Total Loans
Market Share
 
Total Loans – Market Share %
 
2010
   
2009
   
2008
 
                   
Banco Agrícola
    30.4 %     30.5 %     29.7 %
Citi
    15.8 %     17.8 %     19.6 %
HSBC
    14.8 %     14.4 %     16.2 %
Scotiabank
    17.2 %     17.6 %     17.2 %
BAC
    9.5 %     9.4 %     8.5 %
Others
    12.3 %     10.3 %     8.8 %
 
Source:  Ratios are calculated by Banco Agrícola based on figures published by the Salvadorian Banking Association.
 
Checking Accounts
Market Share
 
Checking Accounts – Market Share %
 
2010
   
2009
   
2008
 
Banco Agrícola
    27.6 %     30.2 %     27.6 %
Citi
    24.7 %     25.7 %     24.7 %
HSBC
    12.0 %     10.9 %     12.0 %
Scotiabank
    10.5 %     11.6 %     10.5 %
BAC
    14.3 %     12.6 %     14.3 %
Others
    10.8 %     9.0 %     10.8 %
 
Source:  Ratios are calculated by Banco Agrícola based on figures published by the Salvadorian Banking Association.
 
 
32

 
 
Time Deposits
Market Share
 
Time Deposits – Market Share %
 
2010
   
2009
   
2008
 
                   
Banco Agrícola
    26.6 %     28.8 %     30.5 %
Citi
    12.6 %     15.5 %     14.5 %
HSBC
    16.5 %     14.3 %     16.5 %
Scotiabank
    16.4 %     17.4 %     16.3 %
BAC
    10.8 %     9.1 %     7.9 %
Others
    17.1 %     14.9 %     14.3 %
 
Source:  Ratios are calculated by Banco Agrícola based on figures published by the Salvadorian Banking Association.
 
Saving Accounts
Market Share
 
Saving Accounts – Market Share %
 
2010
   
2009
   
2008
 
                   
Banco Agrícola
    34.6 %     34.3 %     34.6 %
Citi
    20.8 %     21.7 %     20.8 %
HSBC
    15.7 %     17.6 %     15.7 %
Scotiabank
    15.0 %     15.6 %     15.0 %
BAC
    5.7 %     4.8 %     5.7 %
Others
    8.2 %     5.9 %     8.2 %
 
Source:  Ratios are calculated by Banco Agrícola based on figures published by the Salvadorian Banking Association.
 
B.8.
SUPERVISION AND REGULATION
 
Colombian Banking Regulators
 
Pursuant to Colombia’s Constitution, the Colombian national legislature has the power to prescribe the general legal framework within which the government may regulate the financial system. The agencies vested with the authority to regulate the financial system are the Board of Directors of the Central Bank, the Ministry of Finance, the Superintendency of Finance, the Superintendency of Industry and Commerce (the “SIC”) and the Self-Regulatory Organization (Autoregulador del Mercado de Valores) (the “SRO”).
 
Central Bank
 
The Central Bank exercises the customary functions of a central bank, including price stabilization, monetary policy, regulation of currency circulation, regulation of credit, exchange rate monitoring and management of international reserves. Its board of directors is the regulatory authority for monetary, currency exchange and credit policies, and is responsible for the direction of the Central Bank’s duties. The Central Bank also acts as lender of last resort to financial institutions.
 
Ministry of Finance and Public Credit
 
One of the functions of the Ministry of Finance is to regulate all aspects of finance and insurance activities.
 
As part of its duties, the Ministry of Finance issues decrees relating to financial matters that may affect banking operations in Colombia. In particular, the Ministry of Finance is responsible for regulations relating to capital adequacy, risk limitations, authorized operations, disclosure of information and accounting of financial institutions.
 
 
33

 
Superintendency of Finance
 
The Superintendency of Finance is the authority responsible for supervising and regulating financial institutions, including commercial banks such as the Bank, finance corporations, finance companies, financial services companies and insurance companies. The Superintendency of Finance has broad discretionary powers to supervise financial institutions, including the authority to impose fines on financial institutions and their directors and officers for violations of applicable regulations. The Superintendency of Finance can also conduct on-site inspections of Colombian financial institutions.
 
The Superintendency of Finance is also responsible for monitoring and regulating the market for publicly traded securities in Colombia and for monitoring and supervising securities market participants, including the Colombian Stock Exchange, brokers, dealers, mutual funds and issuers.
 
Financial institutions must obtain the prior authorization of the Superintendency of Finance before commencing operations.
 
Violations of the financial system rules and regulations are subject to administrative and, in some cases, criminal sanctions.
 
Other Colombian regulators
 
Self Regulatory Organization
 
The Self Regulatory Organization is a private entity responsible for the regulation of entities participating in the Colombian capital markets. The Self Regulatory Organization may issue mandatory instructions to its members and supervise its members’ compliance and impose sanctions for violations.
 
All capital market intermediaries, including the Bank, must become members of the SRO and are subject to its regulations.
 
Superintendency of Industry and Commerce
 
The Superintendency of Industry and Commerce is the authority responsible for supervising and regulating competition in several industrial sectors, including financial institutions. The Superintendency of Industry and Commerce is authorized to initiate administrative proceedings and impose sanctions on banks, including the Bank, whenever the financial entity behaves in a manner considered to be anti-competitive.
 
Regulatory Framework for Colombian Banking Institutions
 
The basic regulatory framework of the Colombian financial sector is set forth in Decree 663 of 1993, modified among others, by Law 510 of 1999, Law 546 of 1999, Law 795 of 2003, Law 964 of 2005 and Law 1328 of 2009 as well as in External Resolution 8 of 2000 (exchange control regulation statute) and Resolution 4 (as hereinafter defined) issued by the board of directors of the Central Bank. Decree 663 of 1993 defines the structure of the Colombian financial system and defines several forms of business entities, including: (i) credit institutions (establecimientos de crédito) (which are further categorized into banks, finance corporations (corporaciones financieras), financing companies (compañias de financiamiento comercial) and finance cooperatives (cooperativas financieras)); (ii) financial services entities (sociedades de servicios financieros); (iii) capitalization corporations (sociedades de capitalización); (iv) insurance companies (entidades aseguradoras); and (v) insurance intermediaries (intermediarios de seguros). Furthermore, Decree 663 of 1993 provides that no financial, banking or credit institution may operate in Colombia without the prior approval of the Superintendency of Finance. Additionally, Decree 2555 of 2010 compiled regulations that were dispersed in separate decrees, including regulations regarding capital adequacy and lending activities.
 
 
34

 
 
The main role of banks, finance corporations and financing companies is to receive deposits. Banks place funds back into circulation by means of loans or any active credit operations; finance corporations place funds into circulation by means of active credit operations or investments, with the purpose of promoting the creation or expansion of enterprises; and finance companies place funds back into circulation by means of active credit operations, with the purpose of fostering the sale of goods and services, including the development of leasing operations.
 
Law 510 of 1999 and Law 795 of 2003 substantially amended the powers of the Superintendency of Finance to control, regulate and supervise financial institutions. Law 510 of 1999 also streamlined the procedures for the Fondo de Garantías de Instituciones Financieras (“Fogafin”), the agency that insures deposits in financial institutions and provides credit and support to troubled financial institutions.
 
The main purpose of Law 510 of 1999 was to improve the solvency standards and stability of Colombia’s financial institutions by providing rules for their incorporation and regulating permitted investments of credit institutions, insurance companies and investment companies. Law 546 of 1999 was enacted to regulate the system of long-term home loans. Law 795 of 2003 was enacted to broaden the scope of activities that financial institutions can engage in, to update regulations with some of the then latest principles of the Basel Committee and to increase the minimum capital requirements in order to incorporate a financial institution. (For more information, see “Minimum capital requirements” below.) Law 795 of 2003 also provided authority to the Superintendency of Finance to take preventive measures, consisting mainly of preventive interventions with respect to financial institutions whose capital falls below certain thresholds. For example, in order to avoid a temporary take-over by the Superintendency of Finance, such financial institutions must submit to the Superintendency of Finance a restructuring program to restore their financial condition.
 
The recently enacted Law 1328 of 2009 provides a new set of rights and responsibilities for customers of the financial system and a set of obligations for financial institutions in order to minimize disputes. Prior to Law 1328 of 2009, foreign banks were able to operate in Colombia by establishing a Colombian subsidiary authorized by the Superintendency of Finance. Following the enactment of Law 1328 of 2009, as of June 15, 2013, foreign banks will be permitted to operate through their “branches” and will not be required to incorporate a Colombian subsidiary. Law 1328 of 2009 also broadened the scope of permitted business activities by regulated entities. Following its adoption, credit institutions were allowed to operate leasing businesses and banks were allowed to extend loans to third parties so that borrowers could acquire control of other companies. Pursuant to articles 62 and 63 of law 1430 of 2010 the Superintendency of Finance must follow behavior of the prices charged by financial institutions for at least 6 months; additionally, it must report its findings to the Colombian government. Subsequently the Colombian government may assess if there is “insufficient competition in the relevant market of financial services”. Upon reaching its conclusion, the government has the power to: (i) fix the price of financial services; or (ii) determine price minimums or maximums.The Superintendency of Finance has authority to implement applicable regulations and, accordingly, issues from time to time administrative resolutions and circulars. By means of External Circular 007 of 1996 (as amended), the Superintendency of Finance compiled the rules and regulations applicable to financial institutions.
 
Likewise, by means of External Circular 100 of 1995 (the “Basic Accounting Circular”), the Superintendency of Finance compiled all regulations applicable to the accounting rules and regulations.
 
The exchange control statute defines the different activities that banks, including the Bank, may perform as currency exchange intermediaries, including lending in foreign currency and investment in foreign securities.
 
Violations of any of the above statutes and their relevant regulations are subject to administrative sanctions and, in some cases, criminal sanctions.
 
Key interest rates
 
Colombian commercial banks, finance corporations and consumer financing companies are required to provide the Central Bank, on a weekly basis, with 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 Depósitos a Término Fijo (“DTF”) rates, which are published at the beginning of the following week for use in calculating interest rates payable by financial institutions. The TCC is the weighted average interest rate paid by finance corporations for deposits with maturities of 90 days. The DTF is the weighted average interest rate paid by finance corporations, commercial banks and consumer financing companies for certificates of deposit with maturities of 90 days. For the week of January 3, 2011, the DTF was 3.50% and the TCC was 2.78%.
 
 
35

 
 
Capital adequacy requirements
 
Capital adequacy requirements for Colombian financial institutions (as set forth in Decree 2555 of 2010, as amended) are based on applicable Basel Committee standards. 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 the sum of Tier One Capital (basic capital) and Tier Two Capital (additional capital) (Tier One Capital and Tier Two Capital, collectively, “Technical Capital”).
 
Tier One Capital consists of:
 
 
·
outstanding and paid-in capital stock;
 
·
legal and other reserves;
 
·
profits retained from prior fiscal years;
 
·
the total value of the revaluation of equity account (revalorización del patrimonio) (if positive) and of the foreign currency translation adjustment account (ajuste por conversion de estados financieros);
 
·
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 all profits that must be used to cover accrued losses;
 
·
any representative shares held as  collateral by Fogafin 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 Finance establishes that such recovery program has failed, these shares shall not be computed);
 
·
subordinated bonds issued by financial institutions and subscribed by Fogafin when they  comply with certain requirements stated in the regulations;
 
·
the part of the surplus capital account from donations that complies with the requirements set forth in the applicable regulation;
 
·
the value of dividends declared to be paid-in shares; and
 
·
the value of the liabilities owed by minority interests.

Items deducted from Tier One Capital are:

 
·
any prior or current period losses;
 
·
the total value of the capital revaluation account (revalorización del patrimonio)(if negative);
 
·
accumulated inflation adjustments on non-monetary assets (provided that the respective assets have not been transferred);
 
·
investments in shares, mandatory convertible bonds, subordinated bonds that may be convertible into shares or subordinated debt instruments issued by entities (excluding subsidiaries) subject to the supervision of the Superintendency of Finance excluding appraisals and investments in Finagro credit  establishments and investments undertaken pursuant to Article 63 of Decree 663 of 1993, subject to the conditions set forth in the regulation; and
 
·
investments in shares, mandatory convertible bonds, subordinated bonds that may be convertible into shares or subordinated debt instruments issued by foreign financial institutions where the investor directly or indirectly holds at least 20% of the capital of said institution (excluding subsidiaries). This amount includes foreign currency translation and excludes appraisals.

Tier Two Capital includes other reserves and retained earnings, which are added to the Tier One    Capital in order to establish the total Technical Capital.
 
 
36

 
 
 Tier Two Capital consists of:
 
 
·
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 or assets received as payment of credits);
 
·
mandatory convertible bonds effectively subscribed and paid, with maturities of up to 5 years,provided that the terms and conditions of their issuance were approved by the Superintendency of Finance and subject to the conditions set forth by the Superintendency of Finance;
 
·
subordinated payment obligations as long as said obligations do not exceed 50% of Tier One Capital and comply with additional requirements stated in the regulations;
 
·
the part of the surplus capital account from donations that complies with the requirements set forth in the applicable regulation; and
 
·
general allowances made in accordance with the instructions issued by the Superintendency of Finance.

The following items are deducted from Tier Two Capital:

 
·
50% of the direct or indirect capital investments (in entities subject to the supervision of the Superintendency of Finance, excluding subsidiaries) and mandatory convertible bonds reappraisal that complies with the requirements set forth in the applicable regulation;
 
·
50% of the direct or indirect capital investments (excluding investments in subsidiaries) and mandatory convertible bonds reappraisal of foreign financial entities with respect to which the bank’s share is or exceeds 20% of the entity’s subscribed capital; and
 
·
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 the total amount of Primary Capital.
 
The following table sets forth certain information regarding the Bank’s consolidated capital adequacy as of December 31, 2010 and 2009:
 
   
As of December 31, 2010
   
As of December 31, 2009
 
   
(COP million, except percentages)
 
             
Subscribed capital
  COP 460,684     COP 460,684  
Legal reserve and other reserves
    5,397,973       4,697,355  
Unappropriated retained earnings
    70,611       106,380  
Net Income
    591,261       648,786  
Subordinated bonds subscribed by Fogafin
    -       2,449  
Less:
               
Long - term investments
    (102,204 )     (91,808 )
Non - monetary inflation adjustment
    (74,556 )     (97,527 )
Primary capital (Tier I)
  COP 6,343,769     COP 5,726,319  
                 
Reappraisal of assets
  COP 188,454     COP 201,329  
Provision loans
    35,294       35,899  
Non-monetary inflation adjustment
    41,971       53,457  
Subordinated bonds
    2,407,960       1,269,292  
Computed secondary capital (Tier II)
  COP 2,673,679     COP 1,559,977  
Primary capital (Tier I)
  COP 6,343,769     COP 5,726,319  
Secondary capital (up to an amount equal to primary capital) (Tier II)
    2,673,679       1,559,977  
Technical Capital
  COP 9,017,448     COP 7,286,296  
                 
Capital ratios
               
Primary capital to risk-weighted assets (Tier I)
    10.32 %     10.40 %
Secondary capital to risk-weighted assets (Tier II)
    4.35 %     2.83 %
Technical capital to risk-weighted assets
    14.67 %     13.23 %
                 
Risk-weighted assets including market risk
  COP 61,449,661     COP 55,084,655  
 
 
37

 
 
As of December 31, 2010, the Bank’s technical capital ratio was 14.67%, exceeding the requirements of the Colombian government and the Superintendency of Finance by 567 basis points. As of December 31, 2009, the Bank’s technical capital ratio was 13.23%. The year over-year increase in the capital adequacy ratio is explained by the growth in the Bank’s technical capital which was higher than the growth of APNR (assets assigned with different risk weights).
 
Liquidity risks and market risks are currently governed by the Basic Accounting Circular, issued by the Superintendency of Finance. Since January 2002, Colombian banks have been required to calculate a VaR (value at risk) which is considered in the Bank’s solvency calculation with a methodology provided by the Superintendency of Finance in accordance with the articles 2.1.1.1.1 through 2.1.1.1.16  of  Decree 2555 of 2010, (previously Decree 1720 of 2001). Future changes in VaR requirements could have a material impact on the Bank’s operations. According to the Superintendency of Finance, financial institutions must maintain a ratio between its Technical Capital and credit/market risk-weighted assets of more than 9%.
 
Bancolombia’s loan portfolio, net of provisions, is 100% weighted in the calculation of risk-weighted assets.
 
Minimum capital requirements
 
The minimum capital requirement for banks on an unconsolidated basis is established in Article 80 of Decree 633 of 1993, as amended. The minimum capital requirement for 2010 is COP 68,913 million.Failure to meet such requirement can result in the Taking of Possession (toma de posesión) of the Bank by the Superintendency of Finance (See “Colombian banking regulations—Bankruptcy considerations”).
 
Capital investment limit
 
All investments in subsidiaries and other authorized capital investments, other than those made in order to abide by legal requirements, may not exceed 100% of the total aggregate of capital, equity reserves and the revaluation of equity account of the respective bank, financial corporation or commercial finance company, excluding unadjusted fixed assets and including deductions for accumulated losses.
 
Mandatory investments
 
Central Bank regulations require financial institutions, including the Bank, to make mandatory investments in securities issued by Finagro, a Colombian public financial institution that finances production and rural activities, to support the agricultural sector. The amount of these mandatory investments is calculated based on the current peso-denominated obligations of the relevant financial institution.
 
Foreign Currency Position Requirements
 
According to External Resolution 4 of 2007, issued by the board of directors of the Central Bank as amended (“Resolution 4”), a financial institution’s foreign currency position (posicion propia en moneda extranjera) is the difference between such institution’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.
 
 
38

 
 
Resolution 4 provides that the average of a bank’s foreign currency position for three business days cannot exceed the equivalent in pesos of 20% of the bank’s Technical Capital. Currency exchange intermediaries such as the Bank are permitted to hold a three business days’ average 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).
 
Resolution 4 also defines 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 three business days average foreign currency position in cash cannot exceed 50% of the bank’s Technical Capital. In accordance with Resolution 4, the three day average must be calculated on a daily basis and the foreign currency position in cash cannot be negative.
 
Finally, Resolution 4 requires banks to comply with a gross position of leverage (posicion bruta de apalancamiento). Gross position of leverage is defined as (i) the value of term contracts denominated in foreign currency, plus (ii) the value of transactions denominated in foreign currency to be settled within two days in cash, plus (iii) the value of the exchange rate risk exposure associated with exchange rate options and derivatives. Resolution 4 sets a limit on the gross position of leverage, which cannot exceed 550% of the Technical Capital.
 
Reserve Requirements
 
Commercial banks are required by the board of directors of the Central Bank to satisfy reserve requirements with respect to deposits and other cash demands. Such reserves are held by the Central Bank in the form of cash deposits. According to Resolution 11 of 2008 issued by the board of directors of the Central Bank, as amended, the reserve requirements for Colombian banks are measured bi-weekly and the amounts depend on the class of deposits.
 
Credit institutions must maintain reserves of 11% over the following deposits and cash demands:

 
·
Private demand deposits;
 
·
Government demand deposits;
 
·
Other deposits and liabilities; and
 
·
Savings deposits.
 
In addition, credit institutions must maintain reserves of 4.5% for term deposits with maturities fewer than 540 days and 0% for term deposits with maturities equal to or  more than 540 days.
 
Credit institutions may maintain these reserves in their accounts at the Central Bank.
 
Marginal reserve requirements were eliminated by the Central Bank in 2008.
 
Foreign Currency Loans
 
Residents of Colombia may only obtain foreign currency loans from foreign financial entities registered with the Central Bank and from Colombian currency exchange intermediaries (upon certain events). Foreign currency loans must be either channeled through a foreign exchange intermediary or deposited in offshore compensation accounts.
 
According to regulations issued by the Central Bank, every Colombian resident and institution borrowing funds in foreign currency is generally required to post with the Central Bank noninterest bearing deposits for a specified term, although the size of the required deposit is currently zero. No such deposits would be required for foreign currency loans aimed at financing Colombian investments abroad or for short-term exportation loans (provided the loan is disbursed against the funds of Banco de Comercio Exterior—Bancoldex). In addition, pursuant to Law 9 of 1991, the board of directors of the Central Bank is entitled to impose conditions and limitations on the incurrence of foreign currency indebtedness, as an exchange control policy, in order to avoid pressure in the currency exchange market.
 
 
39

 
Non-Performing Loan Allowance
 
The Superintendency of Finance maintains guidelines on non-performing loan allowances for financial institutions.
 
Lending Activities
 
Decree 2555 of 2010, as amended, sets forth the maximum amounts that a 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 bank’s Technical Capital. However, there are several circumstances under which the limit may be raised. In general, the limit is raised to 25% when amounts lent above 5% of Technical Capital are secured by guarantees that comply with the financial guidelines provided in Decree 2555 of 2010, as amended. Also, according to Decree 2555 of 2010, a bank may not make loans 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, with the exception of loans funded by Colombian development banks which are not subject to such limit.
 
Also, Decree 2555 of 2010 set a maximum limit for risk concentrated in one single party, equivalent to 30% of the Bank’s Technical Capital, the calculation of which includes loans, leasing operations and equity and debt investments.
 
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 Finance.
 
Interest Rate Caps or Limitations
 
Pursuant to Article 884 of the Colombian Commercial Code, there is a limit on the amount of interest that may be charged in commercial transactions.
 
According to the aforementioned, no person or institution can charge an interest rate greater than one and a half times the Interés Bancario Corriente, which is calculated and certified by the Superintendency of Finance every three months. Banks that charge interest rates higher than the maximum permitted rate would commit a crime and would be forced to reverse interest charged in excess of the permitted rate. As of April 2011, the interest rate cap was 26.54% for consumer and ordinary loans and 44.00% for microcredit.
 
Ownership and Management Restrictions
 
The Bank is organized as a stock company (sociedad anónima). Its corporate existence is subject to the rules applicable to commercial companies, principally the Colombian Commerce Code. The Colombian Commerce Code requires stock 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 the stock of the Bank.
 
Pursuant to Decree 663 of 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 the Bank, transactions resulting in holding ADRs representing 10% or more of the outstanding common and preferred shares of the Bank, is subject to the prior authorization of the Superintendency of Finance. For that purpose, the Superintendency of Finance must 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 prior approval of the Superintendency of Finance are null and void and cannot be recorded in the institution’s stock ledger. These restrictions apply equally to Colombian as well as foreign investors.
 
 
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Colombian financial institutions that are issuers of securities to the public must comply with special rules regarding the composition of their board of directors.In particular, at least 25% of the board members of the board of directors of the Bank must be independent. To be considered independent, the board members must not be (i) employees or directors of the Bank; (ii) shareholders of the Bank that directly or indirectly address or control the majority of the voting rights or that may determine the majority composition of the management boards; (iii) shareholders or employees of entities that render certain services to the Bank in cases in which the service provider receives 20% or more of its income from the Bank; (iv) employees or directors of a non-profit organization that receives donations from the Bank in certain amounts; (v) directors of other entities in whose board of directors one of the legal representatives of the Bank participates; and (vi) any other person that receives from the Bank any kind of economic consideration (except as for the considerations received by the board members, the auditing committee or any other committee of the board of directors).
 
Bankruptcy Considerations
 
Pursuant to Colombian banking law, the Superintendency of Finance has the power to intervene in the operations of a bank in order to prevent it from, or to control and reduce the effects of, a bank failure. Accordingly, the Superintendency of Finance may intervene in a bank’s business, (i) prior to the liquidation of the bank, by taking one of the following preventive measures (institutos de salvamento) : (a) submit the bank to a special supervision regime; (b) issue a mandatory order to recapitalize the bank; (c) place the bank under the management of another authorized financial institution,  acting as trustee; (d) order the transfer of all or part of the assets, liabilities and contracts, as well as certain ongoing concerns (establecimientos de comercio) of the bank to another financial institution; (e) order the bank to merge with one or more financial institutions that consent to the merger, whether by creating a new institution or by having another institution absorb the bank; (f) order the adoption of a recovery plan by the bank, including adequate measures to reestablish its financial situation, pursuant to guidelines approved by the government; (g) order the exclusion of certain assets and liabilities by requiring the transfer of such assets and liabilities to another institution designated by the Superintendency of Finance; (h) order the progressive unwinding (desmonte progresivo) of the operations of the bank; or (ii) at any time, by taking possession of the bank (toma de posesión) (“Taking of Possession”) to either administer the bank or order its liquidation, depending on how critical the situation is found to be by the Superintendency of Finance.
 
The following grounds for a Taking of Possession are considered to be “automatic” in the sense that, if the Superintendency of Finance discovers their existence, the Superintendency of Finance is obligated to step in and take over the respective financial institution: (i) if the financial institution’s Technical Capital (patrimonio adecuado) falls below 40% of the legal minimum, or (ii) the expiration of the term of any then current recovery plans or the non-fulfillment of the goals set forth in such plans.The Superintendency of Finance also conducts periodic visits to financial institutions and, as a consequence of these visits, the Superintendency of Finance can impose capital or solvency obligations on financial institutions without taking control of the financial institution.
 
Additionally, and subject to the approval of the Ministry of Finance, the Superintendency of Finance may, at its discretion, initiate intervention procedures under the following circumstances: (i) suspension of payments; (ii) failure to pay deposits; (iii) refusal of the Bank to submit its files, accounts and supporting documentation for inspection by the Superintendency of Finance; (iv) repeated failure to comply with orders and instructions from the Superintendency of Finance; (v) repeated violations of applicable laws and regulations or of the bank’s by-laws; (vi) unauthorized or fraudulent management of the bank’s business; (vii) reduction of the bank’s Technical Capital below 50% of its subscribed capital; (viii) failure to comply with the minimum capital requirements set forth in the Colombian Financial Statute; (ix) failure to comply with the recovery plans that were adopted by the bank; (x) failure to comply with the order of exclusion of certain assets and liabilities to another institution designated by the Superintendency of Finance; and (xi) failure to comply with the order of progressive unwinding (desmonte progresivo) of the operations of the bank.
 
The Superintendency of Finance may decide to order the Taking of Possession subject to the prior opinion of its advisory council (consejo asesor del Superintendente) and with the prior approval of the Ministry of Finance.
 
The purpose of Taking of Possession of a bank is to decide whether the entity should be liquidated, whether it is possible to place it in a position to continue doing business in the ordinary course, or whether other measures may be adopted to secure better conditions so that depositors, creditors and investors may obtain the full or partial payment of their credits.
 
 
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Within two months from the date when the Superintendency of Finance takes possession of a bank, the Superintendency of Finance must decide which of the aforementioned measures is to be pursued. The decision is subject to the prior advisory opinion of Fogafin, which is the government agency that insures deposits made in Colombian financial institutions. The two month term may be extended with the prior consent of Fogafin.
 
Upon the Taking of Possession of a bank, depending on the financial situation of the bank and the reasons that gave rise to such measure, the Superintendency of Finance may (but is not required to) order the bank to suspend payments to its creditors. The Superintendency of Finance has the power to determine that such suspension will affect all of the obligations of the bank, or only certain types of obligations or even obligations up to or in excess of a specified amount.
 
As a result of the Taking of Possession, the Superintendency of Finance must appoint as special agent the person or entity designated by Fogafin to administer the affairs of the bank while such process lasts and until it is decided whether to liquidate the bank.
 
As part of its duties during the Taking of Possession, Fogafin must provide the Superintendency of Finance with the plan to be followed by the special agent in order to meet the goals set for the fulfillment of the measures that may have been adopted. If the underlying problems that gave rise to the Taking of Possession of the bank are not resolved within a term not to exceed two years, the Superintendency of Finance must order the liquidation of the bank.
 
During the Taking of Possession (which period ends when the liquidation process begins or the bank is restored to good financial condition), Colombian banking laws prevent any creditor of the bank from: (i) initiating any procedure for the collection of any amount owed by the bank; (ii) enforcing any judicial decision rendered against the bank to secure payment of any of its obligations; (iii) constituting a lien or attachment over any of the assets of the bank to secure payment of any of its obligations; or (iv) making any payment, advance or compensation or assuming any obligation on behalf of the bank, with the funds or assets that may belong to it and are held by third parties, except for payments that are made by way of set-off between regulated entities of the Colombian financial and insurance systems.
 
In the event that the bank is liquidated, the Superintendency of Finance must, among other measures, provide that all term obligations owed by the bank are due and payable as of the date when the order to liquidate becomes effective.
 
During the liquidation process, claims of creditors rank as follows: (i) amounts owed to employees and former employees for salaries, benefits, indemnities and pensions; (ii) bank deposits and other types of saving instruments; (iii) taxes; (iv) all other credits, except subordinated credits; and (v) subordinated credits. Each category of creditors will collect in the order indicated above, whereby distributions in one category will be subject to completing full distribution in the prior category.
 
Colombian banks and other financial institutions are not subject to the laws and regulations that govern generally the insolvency, restructuring and liquidation of industrial and commercial companies.
 
 Deposit insurance—Troubled Financial Institutions
 
In response to the crisis faced by the Colombian financial system during the early 1980s, in 1985 the Government created Fogafin. 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.
 
 
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To protect the customers of commercial banks and certain financial institutions, Resolution No. 1 of 2010 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 0.3% of total funds received on saving accounts, checking accounts, certificates of deposit and other deposits. If a bank is liquidated, the deposit insurance will cover the funds deposited by an individual or corporation with such bank up to a maximum of COP 20 million regardless of the number of accounts held.
 
Anti-Money Laundering Provisions
 
The regulatory framework to prevent and control money laundering is contained in, among others, Decree 663 of 1993 and Circulars 26 of 2008 and 2010 issued by the Superintendency of Finance, as well as Law 599 of 2000, and the Colombian Criminal Code, as amended.
 
Colombian laws adopt the latest guidelines related to anti-money laundering and other terrorist activities established by the Financial Action Task Force on Money Laundering (“FATF”). Colombia, as a member of the GAFI-SUD (a FATF style regional body), follows all of FATF’s 40 recommendations and eight special recommendations. Circular 26 of 2008 issued by the Superintendency of Finance requires the implementation by financial institutions of a system of controls for money laundering and terrorism financing. These rules emphasize “know your customer” policies and knowledge of customers and markets. They also establish processes and parameters to identify and monitor a financial institution’s customers. According to these regulations, financial institutions must cooperate with the appropriate authorities to prevent and control money laundering and terrorism. Finally, the Colombian criminal code introduced criminal rules and regulations to prevent, control, detect, eliminate and adjudicate all matters related to financing terrorism and money laundering. The criminal rules and regulations cover the omission of reports on cash transactions, mobilization or storage of cash, and the lack of controls.
 
Risk management systems

Commercial banks, including the Bank, must have risk administration systems to meet the Superintendency of Finance minimum standards for compliance and to avoid and mitigate the following risks: (i) credit; (ii) liquidity; (iii) market; (iv) operational; and (v) money laundering and terrorism.

Generally, commercial banks  are required to assign risk-weightings to their assets based on 0%, 25%, 50% and 100% ratios depending on their risks. Standards to evaluate risk have been established and different ratings are awarded (A, B, C, D and E) to each credit asset depending on the level of risk.

Depending on the rating assigned, a different amount of provisions are required, as established by the Superintendency of Finance in Chapter II of the Basic Accounting Circular.

With respect to liquidity and market risks, commercial banks must follow the provisions of the Basic Accounting Circular, which defines criteria and procedures for measuring a bank’s exposure to interest rate risk, foreign exchange risk, and market risk. Under such regulations, banks must send the Superintendency of Finance information on the net present value, duration, and interest rate of its assets, liabilities, and derivative positions. Since January 2002, Colombian banks have 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 Finance.

With respect to operational risk, commercial banks must assign a rating, according to principles provided by the Basic Accounting Circular, to each of their operative lines (such as corporate finance, issue and negotiation of securities, commercial banking, assets management, etc.) in order to record the risk events that may occur and cause fraud, technology problems, legal and reputational problems and problems associated with labor relations at the bank.

Regulatory Framework for Subsidiaries Not Participants in the Financial Sector

All of Bancolombia‘s Colombian subsidiaries that are not part of the finance sector are governed by the laws and regulations stipulated in the Colombian Civil Code and the Colombian Code of Commerce as well as any regulations issued by the Colombian Superintendency of Industry and Commerce and the Superintendency of Corporations or any other type of special regulations that may be applicable to the commercial and industrial activities carried out by said subsidiaries.
 
 
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Banking Regulation of El Salvador

The Financial System Superintendency of El Salvador is the entity responsible for the surveillance, inspection and control of the banking activity in El Salvador.

Pursuant to Article 3 of Decree 628  of 1997, the Salvadorian Financial System Superintendency: (i) fulfills and enforces the laws, regulations and other legal provisions applicable to the central bank of El Salvador and the other entities subject to its surveillance; (ii) issues the set of laws or regulations to be followed by the institutions under its control; (iii) authorizes the establishment, operation, intervention and closure of banks, savings and loan associations, insurance companies and other entities as established by law; (iv) supervises and examines the operations of the institutions under its control and (v) oversees compliance with law.

Banking Law of El Salvador

The Legislature of the Republic of El Salvador establishes the banking law through Decree 697 of 1999, which regulates the financial intermediation and other operations performed by the banks.

The banks are required to establish a reserve requirement, set by the Salvadorian Superintendency of Finance in accordance to the deposits and obligations of such bank.
 
According to the Salvadorian Superintendency of Finance’s regulations, the reserve requirements for Salvadorian banks as of December 31, 2010 are:

   
Ordinary Reserve
Requirements %
 
Checking Accounts
    25.0 %
         
Saving Accounts
    20.0 %
         
Time Deposits
    20.0 %
         
Borrowings from foreign banks
    5.0 %
         
Long-term debt(1)
    15.0% - 20.0 %

 
(1)
15% for long-term debt with maturity above one year and 20% for long-term debt with maturity less than one year.

An extraordinary reserve requirement of 3.0% over the total amount of deposits applicable to banks is in place as of December 31, 2010.

Monetary Integration Law of El Salvador

Since November 2000, El Salvador has used the U.S. dollar as its legal currency. The transition from the Colon (former currency) was enacted by the Monetary Integration Law. This law established a fixed exchange rate of 8.75 Colones per U.S. dollar. The Colon continues to have unrestricted legal circulation, but the central bank has been replacing it with the U.S. dollar any time Colon bills and coins are presented for transactions.
 
Since the implementation of the Monetary Integration Law, all financial operations, such as bank deposits, loans, pensions, issuance of securities and any others made through the financial system, as well as the accounting records, must be expressed in U.S. dollars. The operations or transactions of the financial system made or agreed in colones before the effective date of the Monetary Integration Law are expressed in U.S. dollars at the exchange rate established in such law.
 
 
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C.
ORGANIZATIONAL STRUCTURE
 
The following are the main subsidiaries of Bancolombia S.A.:
 
 
 
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The following is a list of subsidiaries of Bancolombia S.A. as of December 31, 2010:
 
SUBSIDIARIES
 
 
Entity
 
Jurisdiction of
Incorporation
 
Business
 
Shareholding
directly and
indirectly
 
               
Leasing Bancolombia S.A.  Compañía de Financiamiento
 
Colombia
 
Leasing
    100 %
Fiduciaria Bancolombia S.A.  Sociedad Fiduciaria
 
Colombia
 
Trust
    98.81 %
Banca de Inversión Bancolombia S.A.  Corporación Financiera
 
Colombia
 
Investment Banking
    100 %
Valores Bancolombia S.A. Comisionista de Bolsa
 
Colombia
 
Securities brokerage
    100 %
Compañía de Financiamiento Tuya S.A.
 
Colombia
 
Financial services
    99.99 %
Factoring Bancolombia S.A. Compañía de Financiamiento
 
Colombia
 
Financial services
    100 %
Renting Colombia S.A.
 
Colombia
 
Operating leasing
    100 %
Transportempo S.A.S.
 
Colombia
 
Transportation
    100 %
Valores Simesa S.A.
 
Colombia
 
Investments
    68.75 %
Inversiones CFNS S.A.S.
 
Colombia
 
Investments
    100 %
CFNS Infraestructura S.A.S.
 
Colombia
 
Investments
    100 %
Inmobiliaria Bancol S.A.
 
Colombia
 
Real estate broker
    99.00 %
Todo 1 Colombia S.A.
 
Colombia
 
E-commerce
    90.09 %
Vivayco S.A.S.
 
Colombia
 
Portfolio Purchase
    75.00 %
Cobranzas Bancolombia S.A.  (Under “Liquidation process”)
 
Colombia
 
Technical and Administrative Services
    99.99 %
Bancolombia Panamá S.A.
 
Panama
 
Banking
    100 %
Valores Bancolombia Panamá S.A.
 
Panama
 
Securities brokerage
    100 %
Suvalor Panamá Fondo de Inversión S.A.
 
Panama
 
Holding
    100 %
Sistema de Inversiones y Negocios S.A. Sinesa
 
Panama
 
Investments
    100 %
Future Net S.A.
 
Panama
 
E-commerce
    100 %
Banagrícola S.A.
 
Panama
 
Investments
    99.16 %
Banco Agrícola Panamá S.A.
 
Panama
 
Banking
    99.16 %
Banco Agrícola S.A.
 
El Salvador
 
Banking
    97.33 %
AFP Crecer S.A.
 
El Salvador
 
Pension fund
    98.97 %
Aseguradora Suiza Salvadoreña S.A.  Asesuisa
 
El Salvador
 
Insurance company
    96.08 %
Asesuisa Vida S.A.
 
El Salvador
 
Insurance company
    96.08 %
Arrendadora Financiera S.A. Arfinsa
 
El Salvador
 
Leasing
    97.33 %
Credibac S.A. de C.V.
 
El Salvador
 
Credit card services
    97.33 %
Bursabac S.A. de C.V.
 
El Salvador
 
Securities brokerage
    98.89 %
Inversiones Financieras Banco Agrícola S.A. IFBA
 
El Salvador
 
Investments
    98.89 %
Renting Perú S.A.C.
 
Peru
 
Operating leasing
    100 %
Capital Investments SAFI S.A.
 
Peru
 
Trust
    100 %
Fondo de Inversión en Arrendamiento Operativo Renting Perú
 
Peru
 
Car Rental
    100 %
Leasing Perú S.A.
 
Peru
 
Leasing
    100 %
FiduPerú S.A. Sociedad Fiduciaria
 
Peru
 
Trust
    98.82 %
Bancolombia Puerto Rico Internacional, Inc
 
Puerto Rico
 
Banking
    100 %
Suleasing Internacional USA Inc
 
USA
 
Leasing
    100 %
Bancolombia Cayman S.A.
 
Cayman Islands
 
Banking
    100 %
 
 
D.
PROPERTY, PLANT AND EQUIPMENT
 
As of December 31, 2010, the Bank owned COP 2,165.33 billion in property, plant and equipment (including assets that are part of our operating leasing business). COP 804.47 billion correspond to land and buildings, of which approximately 95% are used for administrative offices and branches in 60 municipalities in Colombia and 25 municipalities in El Salvador. COP 196.90 billion correspond to computer equipment, of which 24.26% relate to the central computer and servers of Bancolombia and the rest relate to personal computers, ATMs, telecommunications equipment and other equipment. In 2010, the Bank is running two projects of construction and adaptation:  “Nodo de Comunicaciones”, project progress 90%, COP 46.8 billion and “Sede Alterna 1 y 2” project progress 73%, COP 0.92 billion.
 
 
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In addition to its own branches, the Bank occupies 541 rented offices.
 
The Bank does not have any liens on its property.
 
E.
SELECTED STATISTICAL INFORMATION
 
The following information is included for analytical purposes and should be read in conjunction with the Bank’s consolidated financial statements as well as Item 5. Operating and Financial Review and Prospects. This information has been prepared based on the Bank’s financial records, which are prepared in accordance with Colombian GAAP and do not reflect adjustments necessary to state the information in accordance with U.S. GAAP. See Note 31 to the Bank’s consolidated financial statements as of December 31, 2010 included in this Annual Report for a summary of the significant differences between Colombian GAAP and U.S. GAAP.
 
The consolidated selected statistical information for the year ended December 31, 2006, includes the selected statistical information of Bancolombia and its subsidiaries, without reflecting any pro-forma calculation of the effect of Banagrícola’s acquisition, while consolidated selected statistical information for the years ended December 31, 2007, December 31, 2008, December 31, 2009 and December 31, 2010 corresponds to the Bank and its Subsidiaries, including all additional subsidiaries acquired as a result of the Banagrícola acquisition.
 
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.
 
In addition, the interest rate subtotals are based on the weighted average of the average peso-denominated and U.S. dollar-denominated balances.
 
Average balance sheet
 
The following tables show for the years ended December 31, 2010, 2009 and 2008, respectively: (i) average balances for all of the Bank’s assets and liabilities; (ii) interest earned and interest paid amounts; and (iii) average nominal interest rates/yield for the Bank’s interest-earning assets and interest-bearing liabilities.
 
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Average Balance Sheet and Income from Interest-Earning Assets for the Fiscal Years
Ended December 31,
 
   
2010
   
2009
   
2008
 
   
Average
Balance
   
Interest 
Earned
   
Average
Nominal
Interest
Rate
   
Average 
Balance
   
Interest 
Earned
   
Average
Nominal
Interest
Rate
   
Average
Balance
   
Interest
Earned
   
Average
Nominal
Interest
Rate
 
   
(COP million, except percentages)
 
                                                       
ASSETS
                                                     
Interest-earning assets
                                                     
Overnight funds
                                                     
Peso-denominated
    907,453       32,472       3.6 %     823,303       60,561       7.4 %     428,144       67,339       15.7 %
U.S. Dollar-denominated
    478,224       9,526       2.0 %     1,155,871       15,612       1.4 %     649,167       38,869       6.0 %
Total
    1,385,677       41,998       3.0 %     1,979,174       76,173       3.8 %     1,077,311       106,208       9.9 %
Investment securities
                                                                       
Peso-denominated
    6,381,602       430,911       6.8 %     5,461,175       647,324       11.9 %     4,387,502       406,802       9.3 %
U.S. Dollar-denominated
    2,159,867       11,502       0.5 %     2,210,185       81,234       3.7 %     1,705,124       24,787       1.5 %
Total
    8,541,469       442,413       5.2 %     7,671,360       728,558       9.5 %     6,092,626       431,589       7.1 %
Loans and Financial Leases (1)
                                                                       
Peso-denominated
    32,808,038       3,763,049       11.5 %     31,577,872       4,713,033       14.9 %     28,491,159       4,923,704       17.3 %
U.S. Dollar-denominated
    10,361,466       701,225       6.8 %     11,457,889       909,934       7.9 %     10,922,602       852,242       7.8 %
Total
    43,169,504       4,464,274       10.3 %     43,035,761       5,622,967       13.1 %     39,413,761       5,775,946       14.7 %
Total interest-earning assets
                                                                       
Peso-denominated
    40,097,093       4,226,432       10.5 %     37,862,350       5,420,918       14.3 %     33,306,805       5,397,845       16.2 %
U.S. Dollar-denominated
    12,999,557       722,253       5.6 %     14,823,945       1,006,780       6.8 %     13,276,893       915,898       6.9 %
Total
    53,096,650       4,948,685       9.3 %     52,686,295       6,427,698       12.2 %     46,583,698       6,313,743       13.6 %
                                                                         
Total non-interest-earning assets
                                                                       
Peso-denominated
    6,957,834                       7,440,325                       6,277,291                  
U.S. Dollar-denominated
    3,300,597                       2,502,976                       2,260,525                  
Total
    10,258,431                       9,943,301                       8,537,816                  
                                                                         
Total interest and non-interest- earning assets
                                                                       
Peso-denominated
    47,054,927       4,226,432               45,302,675       5,420,918               39,584,096       5,397,845          
U.S. Dollar-denominated
    16,300,154       722,253               17,326,921       1,006,780               15,537,418       915,898          
Total Assets (COP)
    63,355,081       4,948,685               62,629,596       6,427,698               55,121,514       6,313,743          

(1) Includes performing loans only.

 
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Average Balance Sheet and Interest Paid on Interest-Bearing Liabilities for the Fiscal Years Ended December 31,
 
   
2010
   
2009
   
2008
 
   
Average Balance
   
Interest Paid
   
Yield / Rate(1)
   
Average Balance
   
Interest Paid
   
Yield / Rate(1)
   
Average Balance
   
Interest Paid
   
Yield / Rate(1)
 
   
(COP million, except percentages)
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                                     
Interest-bearing liabilities:
                                                     
Checking deposits
                                                     
Peso-denominated
    852,041       24,357       2.9 %     625,108       19,729       3.2 %     468,000       16,012       3.4 %
U.S. Dollar-denominated
    1,679,362       14,501       0.9 %     1,729,212       23,482       1.4 %     1,733,507       23,245       1.3 %
Total
    2,531,403       38,858       1.5 %     2,354,320       43,211       1.8 %     2,201,507       39,257       1.8 %
Savings deposits
                                                                       
Peso-denominated
    14,046,068       307,106       2.2 %     11,919,042       431,126       3.6 %     10,952,894       555,628       5.1 %
U.S. Dollar-denominated
    2,122,407       14,556       0.7 %     2,154,381       19,739       0.9 %     1,880,546       34,090       1.8 %
Total
    16,168,475       321,662       2.0 %     14,073,423       450,865       3.2 %     12,833,440       589,718       4.6 %
Time deposits
                                                                       
Peso-denominated
    11,117,836       537,145       4.8 %     13,080,400       1,099,678       8.4 %     10,276,935       1,015,373       9.9 %
U.S. Dollar-denominated
    5,835,906       156,601       2.7 %     7,402,123       276,889       3.7 %     5,989,037       241,369       4.0 %
Total
    16,953,742       693,746       4.1 %     20,482,523       1,376,567       6.7 %     16,265,972       1,256,742       7.7 %
Overnight funds
                                                                       
Peso-denominated
    1,457,443       38,867       2.7 %     1,213,463       74,492       6.1 %     1,301,213       123,638       9.5 %
U.S. Dollar-denominated
    119,075       1,584       1.3 %     493,706       19,607       4.0 %     1,013,888       42,491       4.2 %
Total
    1,576,518       40,451       2.6 %     1,707,169       94,099       5.5 %     2,315,101       166,129       7.2 %
Borrowings from development and other domestic banks(2)
                                                                       
Peso-denominated
    2,521,533       133,673       5.3 %     2,889,261       244,644       8.5 %     3,036,553       332,747       11.0 %
U.S. Dollar-denominated
    127,093       5,359       4.2 %     437,439       8,198       1.9 %     600,817       12,153       2.0 %
Total
    2,648,626       139,032       5.2 %     3,326,700       252,842       7.6 %     3,637,370       344,900       9.5 %
Interbank borrowings(2)(3)
                                                                       
Peso-denominated
    -       -               -       -               -       -          
U.S. Dollar-denominated
    1,449,197       19,537       1.3 %     1,270,413       47,650       3.8 %     1,578,252       74,792       4.7 %
Total
    1,449,197       19,537       1.3 %     1,270,413       47,650       3.8 %     1,578,252       74,792       4.7 %
Long-term debt
                                                                       
Peso-denominated
    2,759,345       209,542       7.6 %     2,413,103       256,721       10.6 %     1,640,560       191,533       11.7 %
U.S. Dollar-denominated
    1,952,604       108,753       5.6 %     1,636,497       103,461       6.3 %     1,493,208       90,270       6.0 %
Total
    4,711,949       318,295       6.8 %     4,049,600       360,182       8.9 %     3,133,768       281,803       9.0 %
Total interest-bearing liabilities
                                                                       
Peso-denominated
    32,754,266       1,250,690       3.8 %     32,140,377       2,126,390       6.6 %     27,676,155       2,234,931       8.1 %
U.S. Dollar-denominated
    13,285,644       320,891       2.4 %     15,123,771       499,026       3.3 %     14,289,255       518,410       3.6 %
Total
    46,039,910       1,571,581       3.4 %     47,264,148       2,625,416       5.6 %     41,965,410       2,753,341       6.6 %
 
 
49

 
 
    
Average Balance Sheet and Interest Paid on Interest-Bearing Liabilities for the Fiscal Years Ended December 31,
 
   
2010
   
2009
   
2008
 
   
Average Balance
   
Interest Paid
   
Yield / Rate(1)
   
Average Balance
   
Interest Paid
   
Yield / Rate(1)
   
Average Balance
   
Interest Paid
   
Yield / Rate(1)
 
   
(COP million, except percentages)
 
Total interest and non-interest bearing liabilities and stockholders’ equity
                                                                       
                                                                         
Peso-denominated
    47,981,394       1,250,690               45,380,776       2,126,390               39,524,490       2,234,931          
U.S. Dollar-denominated
    15,373,687       320,891               17,248,820       499,026               15,597,024       518,410          
Total Liabilities and Stockholders’ Equity(COP)
    63,355,081       1,571,581               62,629,596       
2,625,416
              55,121,514       2,753,341          

(1) See “Item 4. Information on the Company – E. Selected Statistical Information – E.1 Distribution of Assets, Liablilities and Stockholders’ Equity; Interest Rates and Interest Differential”.
(2) Includes both short-term and long-term borrowings.
(3) Includes borrowings from banks located outside Colombia.
 
 
50

 
 
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, 2010 compared to the fiscal year ended December 31, 2009; and the fiscal year ended December 31, 2009 compared to the fiscal year ended December 31, 2008. 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.
 
   
2009-2010
Increase (Decrease)
Due To Changes in:
   
2008-2009
Increase (Decrease)
Due To Changes in:
 
   
Volume
   
Rate
   
Net
Change
   
Volume
   
Rate
   
Net
Change
 
   
(COP million)
 
Interest-earning assets:
                                   
Overnight funds
                                   
Peso-denominated
    3,011       (31,100 )     (28,089 )     29,067       (35,845 )     ( 6,778 )
U.S. Dollar-denominated
    (13,498 )     7,412       (6,086 )     6,844       (30,101 )     (23,257 )
Total
    (10,487 )     (23,688 )     (34,175 )     35,911       (65,946 )     (30,035 )
Investment securities
                                               
Peso-denominated
    62,151       (278,564 )     (216,413 )     127,265       113,257       240,522  
U.S. Dollar-denominated
    (268 )     (69,464 )     (69,732 )     18,563       37,884       56,447  
Total
    61,883       (348,028 )     (286,145 )     145,828       151,141       296,969  
Loans and financial leases
                                               
Peso-denominated
    141,099       (1,091,083 )     (949,984 )     460,695       (671,366 )     (210,671 )
U.S. Dollar-denominated
    (74,202 )     (134,507 )     (208,709 )     42,510       15,182       57,692  
Total
    66,897       (1,225,590 )     (1,158,693 )     503,205       (656,184 )     (152,979 )
Total interest-earning assets
                                               
Peso-denominated
    206,261       (1,400,747 )     (1,194,486 )     617,027       (593,954 )     23,073  
U.S. Dollar-denominated
    (87,968 )     (196,559 )     (284,527 )     67,917       22,965       90,882  
Total
    118,293       (1,597,306 )     (1,479,013 )     684,944       (570,989 )     113,955  
                                                 
Interest-bearing liabilities:
                                               
Checking deposits
                                               
Peso-denominated
    6,487       (1,859 )     4,628       4,958       (1,241 )     3,717  
U.S. Dollar-denominated
    (430 )     (8,551 )     (8,981 )     (58 )     295       237  
Total
    6,057       (10,410 )     (4,353 )     4,900       (946 )     3,954  
Savings deposits
                                               
Peso-denominated
    46,506       (170,526 )     (124,020 )     34,947       (159,449 )     (124,502 )
U.S. Dollar-denominated
    (219 )     (4,964 )     (5,183 )     2,509       (16,860 )     (14,351 )
Total
    46,287       (175,490 )     (129,203 )     37,456       (176,309 )     (138,853 )
Time deposits
                                               
Peso-denominated
    (94,819 )     (467,714 )     (562,533 )     235,689       (151,384 )     84,305  
U.S. Dollar-denominated
    (42,028 )     (78,260 )     (120,288 )     52,859       (17,339 )     35,520  
Total
    (136,847 )     (545,974 )     (682,821 )     288,548       (168,723 )     119,825  
Overnight funds
                                               
Peso-denominated
    6,506       (42,131 )     (35,625 )     (5,387 )     (43,759 )     (49,146 )
U.S. Dollar-denominated
    (4,984 )     (13,039 )     (18,023 )     (20,658 )     (2,226 )     (22,884 )
Total
    1,522       (55,170 )     (53,648 )     (26,045 )     (45,985 )     (72,030 )
Borrowings from development  and other domestic banks
                                               
Peso-denominated
    (19,494 )     (91,477 )     (110,971 )     (12,472 )     (75,631 )     (88,103 )
U.S. Dollar-denominated
    (13,086 )     10,247       (2,839 )     (3,062 )     (893 )     (3,955 )
Total
    (32,580 )     (81,230 )     (113,810 )     (15,534 )     (76,524 )     (92,058 )
 
 
51

 
 
   
2009-2010
Increase (Decrease)
Due To Changes in:
   
2008-2009
Increase (Decrease)
Due To Changes in:
 
   
Volume
   
Rate
   
Net
Change
   
Volume
   
Rate
   
Net
Change
 
   
(COP million)
 
Interbank borrowings
                                               
Peso-denominated
    -       -       -       -       -       -  
U.S. Dollar-denominated
    2,410       (30,523 )     (28,113 )     (11,546 )     (15,596 )     (27,142 )
Total
    2,410       (30,523 )     (28,113 )     (11,546 )     (15,596 )     (27,142 )
Long-term debt
                                               
Peso-denominated
    26,293       (73,472 )     (47,179 )     82,188       (17,000 )     65,187  
U.S. Dollar-denominated
    17,606       (12,314 )     5,292       9,059       4,132       13,191  
Total
    43,899       (85,786 )     (41,887 )     91,247       (12,868 )     78,378  
Total interest-bearing liabilities
                                               
Peso-denominated
    (28,521 )     (847,179 )     (875,700 )     339,923       (448,464 )     (108,542 )
U.S. Dollar-denominated
    (40,731 )     (137,404 )     (178,135 )     29,103       (48,487 )     (19,384 )
Total (COP)
    (69,252 )     (984,583 )     (1,053,835 )     369,026       (496,951 )     (127,926 )
 
 INTEREST-EARNING ASSETS — NET INTEREST MARGIN AND SPREAD
 
The following table presents 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, 2010, 2009 and 2008, respectively.
 
   
Interest-Earning Assets-Yield For the Fiscal
Year Ended December 31,
 
   
2010
   
2009
   
2008
 
   
(COP million, except percentages)
 
Total average interest-earning assets
                 
Peso-denominated
    40,097,093       37,862,350       33,306,805  
U.S. Dollar-denominated
    12,999,557       14,823,945       13,276,893  
Total
    53,096,650       52,686,295       46,583,698  
Net interest earned(1)
                       
Peso-denominated
    2,975,742       3,294,528       3,162,914  
U.S. Dollar-denominated
    401,362       507,754       397,488  
Total
    3,377,104       3,802,282       3,560,402  
Average yield on interest-earning assets
                       
Peso-denominated
    10.5 %     14.3 %     16.2 %
U.S. Dollar-denominated
    5.6 %     6.8 %     6.9 %
Total
    9.3 %     12.2 %     13.6 %
Net interest margin(2)
                       
Peso-denominated
    7.4 %     8.7 %     9.5 %
U.S. Dollar-denominated
    3.1 %     3.4 %     3.0 %
Total
    6.4 %     7.2 %     7.6 %
Interest spread(3)
                       
Peso-denominated
    6.7 %     7.7 %     8.1 %
U.S. Dollar-denominated
    3.1 %     3.5 %     3.3 %
Total
    5.9 %     6.6 %     7.0 %
 

(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.
 
 
52

 
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.
 
The Superintendency of Finance requires investments 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 and 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, 2010, Bancolombia’s investment portfolio was COP 8,159 billion.
 
In accordance with Chapter 1 of Circular 100 of 1995 issued by the Superintendency of Finance, investments in debt securities are fully reviewed in June and December and partially reviewed every three months for impairment, by considering the related solvency risk, market exposure, currency exchange and country risk. Investments in securities with certain ratings by external agencies recognized by the Superintendency of Finance cannot be recorded on the balance sheet of the Bank for an amount higher than certain percentages of the face value (as shown in the table below), net of the amortizations recorded as of the valuation date.
 
Long–Term Classification
 
Maximum Face Value (%)
BB+, BB, BB-
 
Ninety (90)
B+, B, B-
 
Seventy (70)
CCC
 
Fifty (50)
DD, EE
  
Zero (0)
 
Short–Term Classification
 
Maximum Face Value (%)
3
 
Ninety (90)
4
 
Fifty (50)
5 and 6
  
Zero (0)
 
Internal or external debt securities issued or guaranteed by the Republic of Colombia, as well as those issued by the Central Bank and those issued or guaranteed by Fogafin, are not subject to this adjustment.
 
The following table sets forth the book value of the Bank’s investments in Colombian government and foreign governments and corporate securities and certain other financial investments as of the dates indicated:
 
   
As of December 31,
 
   
2010(1)(2)
   
2009(1)(2)
   
2008(1)(2)
 
   
(COP million )
 
Foreign currency-denominated
                 
Securities issued or secured by the Colombian government
  COP 111,482     COP 206,806     COP 58,942  
Securities issued or secured by the El Salvador Central Bank
    751,689       811,012       670,266  
Securities issued or secured by government entities(3)
    91,798       117,818       144,518  
Securities issued or secured by other financial entities
    262,361       93,371       69,125  
Securities issued by foreign governments
    522,599       717,640       687,557  
Others(4)
    184,800       171,925       15,398  
Subtotal
    1,924,729       2,118,572       1,645,806  
                         
Peso-denominated
                       
Securities issued or secured by the Colombian government
    2,157,162       3,183,274       2,633,806  
Securities issued or secured by the Colombian Central Bank
    -       -       2  
Securities issued or secured by government entities
    1,011,385       854,620       609,129  
Securities issued or secured by financial entities
    2,969,900       2,143,165       1,849,069  
Others(4)
    117,909       82,313       81,857  
Subtotal
    6,256,356       6,263,372       5,173,863  
Total
  COP 8,181,085     COP 8,381,944     COP 6,819,669  
 
 
53

 
 

(1) 
Includes debt securities only.  Net investments in equity securities were COP 494,678 million, COP 532,969 million and COP 458,607 million for 2010, 2009 and 2008.
(2) 
These amounts are net of allowances for decline in value which were COP 45,726 million for 2010, COP 54,300 million for 2009 and COP 20,927 million for 2008.
(3) 
This amount includes investments in fiduciary certificates of participation. These certificates were issued for the Environmental Trust for the conservation of the Coffee Forest (Fideicomiso Ambiental para la Conservación del Bosque Cafetero “FICAFE”). This trust was formed with the transfer of the coffee sector’s loan portfolio by a number of banks in El Salvador, including Banco Agrícola. The purpose of this transaction was to carry out the restructuring of those loans, promoted by the government of El Salvador. The Bank has recognized an allowance related to probable losses inherent in the FICAFE investment in an amount of COP 49,320 and COP 47,776 at December 31, 2010 and 2009, respectively.
(4) 
Includes debt securities in corporate bonds.
 
As of December 31, 2010, 2009 and 2008 Bancolombia held securities issued by foreign governments in the following amounts:
 
As of December 31,
 
Issuer
 
Investment Amount–Book
 Value (in millions of pesos)(1)
   
Investment Amount–Book
Value (thousands of U.S.
dollars)(1) (2)
 
                 
2010
 
Republic of El Salvador
  COP 335,402     USD 175,238  
   
U.S. Treasury
  COP 99,567     USD 52,021  
   
Republic of Brazil
  COP 68,294     USD 35,682  
   
Republic of Panama
  COP 43,446     USD 22,699  
   
Republic of Peru
  COP 10,720     USD 5,601  
   
Republic of Chile
  COP 153     USD 80  
2009
 
Republic of El Salvador
  COP 357,939     USD 175,097  
   
U.S. Treasury
  COP 137,798     USD 67,408  
   
Republic of Brazil
  COP 172,676     USD 84,470  
   
Republic of Panama
  COP 74,818     USD 36,599  
   
Republic of Peru
  COP 6,804     USD 3,329  
2008
 
Republic of El Salvador
  COP 230,749     USD 102,848  
   
U.S. Treasury
  COP 405,050     USD 180,536  
   
Republic of Brazil
  COP 51,981     USD 23,169  
 

 
(1)
These amonunts are not net of allowances for decline in value which were COP 34,983 million (USD 18 million) for 2010, COP 32,395 million (USD 15.8 million) for 2009 and COP 223 million (USD 0.9 million) for 2008.
 
(2)
These amounts have been translated at the rate of COP 1,913.98 per US$ 1.00 at December 2010, COP 2,044.23 per US$ 1.00 at December 2009 and COP 2,243.59 per US$ 1.00 at December 2008, which corresponds to the Representative Market Rate, calculated on December 31, the last business day of the year.
 
As of December 31, 2010, the Bank’s peso-denominated debt securities portfolio amounted to COP 6,234, remaining stable in terms of relative size compared to the same period last year. Peso-denominated debt securities issued by the Colombian government, represented 34% of the Bank’s peso-denominated debt securities portfolio in 2010.
 
On the other hand, as of December 31, 2010, Bancolombia’s foreign currency-denominated debt securities portfolio amounted to COP 558 billion, decreasing 26% compared to the end of 2009. This variation is primarily explained by a reduction in the Bank’s position in Brazilian sovereign bonds.
 
INVESTMENT SECURITIES PORTFOLIO MATURITY
 
The following table summarizes the maturities and weighted average nominal yields of the Bank’s investment securities as of December 31, 2010:
 
 
54

 
 
    
As of December 31, 2010
 
   
Maturing in less than 1
year
   
Maturing between 1 and 5
years
   
Maturing between 5 and
10 years
   
Maturing in more than 10
years
   
Total
 
   
Balance(1)
   
Yield %(2)
   
Balance(1)
   
Yield %(2)
   
Balance(1)
   
Yield %(2)
   
Balance(1)
   
Yield %(2)
   
Balance(1)
   
Yield %(2)
 
    (COP million, except yields)  
Securities issued or secured by:
                                                           
Foreign currency.- denominated:                                                                                
Colombian government
    3,425       3.57 %     103,385       3.55 %     3,909       6.36 %     763       6.23 %     111,482       3.67 %
El Salvador Central Bank
    616,534       0.20 %     135,155       2.43 %     -       - -       -       -       751,689       0.60 %
Other government entities
    -       - -       19,837       3.98 %     22,655       4.75 %     49,305       4.25 %     91,797       4.31 %
Other financial entities
    5,480       3.91 %     183,618       1.74 %     73,264       5.53 %     -       -       262,362       2.84 %
Foreign governments
    265,903       2.74 %     118,163       1.09 %     60,649       2.38 %     77,884       6.41 %     522,599       2.87 %
Others
    17,472       5.30 %     120,303       7.52 %     47,026       4.59 %     -       -       184,801       6.57 %
Subtotal
    908,814       1.08 %     680,461       3.13 %     207,503       4.33 %     127,952       5.57 %     1,924,730       2.45 %
                                                                                 
Securities issued or secured by: 
                                                                               
Peso-denominated
                                                                               
                                                                                 
Colombian government
    606,974       3.40 %     880,380       5.00 %     17,091       8.77 %     1,026       8.15 %     1,505,471       4.40 %
Government entities
    1,001,713       0.81 %     9,672       5.58 %     -       -       -       -       1,011,385       0.86 %
Other financial entities
    161,777       4,67 %     434,157       7.06 %     1,044,957       6.10 %     782,551       11.46 %     2,423,442       7.91 %
Others
    16,091       5.70 %     90,782       6.63 %     11,035       8.09 %     -       -       117,908       6.64 %
Subtotal
    1,786,555       2.08 %     1,414,991       5.74 %     1,073,083       6.16 %     783,577       11.46 %     5,058,206       5.42 %
                                                                                 
Securities issued or secured by:
                                                                               
UVR-denominated   
                                                                               
                                                                                 
Colombian Government.
    103,609       0.34 %     544,107       0.65 %     -       -       814       3.97 %     648,530       0.61 %
Other financial entities
    -       -       131,327       4.48 %     320,689       3.54 %     88,922       8.18 %     540,938       4.53 %
Subtotal
    103,609       0.34 %     675,434       1.40 %     320,689       3.54 %     89,736       8.14 %     1,189,468       2.39 %
                                                                                 
Total (COP)
    2,798,978               2,770,886               1,601,275               1,001,265               8,172,404          
 

(1)
Amounts are net of allowances for decline in value which amounted to COP 45,727 million in 2010.
(2)
Yield was calculated using the internal return rate (IRR) as of December 31, 2010.
 
As of December 31, 2010, the Bank had the following investments in securities of issuers that exceeded 10% of the Bank’s stockholders’ equity:
 
   
Issuer
 
Amortized Cost
   
Fair value
 
   
(COP million)
 
Securities issued or secured by:
               
Colombian government
 
Ministry of Finance
    2,268,644       2,230,242  
Other financial entities
 
Titularizadora Colombiana
    2,474,877       2,463,602  
Government entities
 
FINAGRO
    1,001,713       989,512  
Total
        5,745,234       5,683,356  
 
 
55

 
 
E.3.
LOAN PORTFOLIO
 
Types of loans
 
The following table shows the Bank’s loan portfolio classified into corporate, retail, financial leases and mortgage loans:

   
As of December 31,
 
   
2010
   
2009
   
2008
   
2007(2)
   
2006
 
               
(COP million)
             
                               
Domestic
                             
Corporate
                             
                               
Trade financing
    1,704,673       623,084       640,033       845,810       777,417  
Loans funded by development banks
    300,459       485,754       970,456       842,957       321,263  
Working capital loans
    18,360,582       15,003,979       15,524,940       13,320,319       11,534,148  
Credit cards
    31,297       26,947       33,039       36,613       50,803  
Overdrafts
    38,563       45,072       55,796       50,536       74,218  
Total corporate
    20,435,574       16,184,836       17,224,264       15,096,235       12,757,849  
                                         
Retail(1)
                                       
                                         
Credit cards
    2,477,808       2,198,127       2,317,178       1,855,999       796,175  
Personal loans
    2,890,095       2,060,776       2,369,852       2,305,390       2,281,177  
Vehicle loans
    1,332,175       1,218,299       1,314,685       1,305,685       963,072  
Overdrafts
    156,244       168,760       208,123       195,063       119,882  
Loans funded by development banks
    667,299       792,437       887,978       713,007       386,283  
Trade financing
    27,547       48,955       98,344       93,037       70,406  
Working capital loans
    4,702,240       4,346,213       4,125,358       3,715,945       2,331,999  
Total retail
    12,253,408       10,833,567       11,321,518       10,184,126       6,948,994  
Financial Leases
    5,737,473       5,390,937       5,406,712       4,698,702       3,553,286  
Mortgage
    2,516,376       2,556,810       2,313,864       1,930,742       1,385,445  
Total loans
    40,942,831       34,966,150       36,266,358       31,909,805       24,645,574  
Allowance for loan losses
    (2,160,119 )     (2,115,161 )     (1,810,577 )     (1,251,561 )     (834,183 )
Total loans, net (COP)
    38,782,712       32,850,989       34,455,781       30,658,244       23,811,391  
                                         
Foreign
                                       
                                         
Corporate
                                       
Trade financing
    1,192,349       551,211       1,128,931       313,736          
Loans funded by development banks
    18,874       41,969       52,308       39,758          
Working capital loans
    3,644,287       3,509,893       3,807,352       2,779,180          
Credit cards
    6,712       8,462       9,327       6,546          
Overdrafts
    5,190       5,530       7,712       8,610          
Total corporate
    4,867,412       4,117,065       5,005,630       3,147,830          
                                         
Retail(1)
                                       
                                         
Credit cards
    156,895       190,932       201,813       164,612          
Personal loans
    1,649,853       1,713,992       1,917,663       1,473,168          
Vehicle loans
    2,705       3,718       5,724       6,711          
Overdrafts
    18,449       19,853       21,089       22,943          
Loans funded by development banks
    12,143       9,410       8,304       6,204          
Trade financing
    7,516       4,343       25,482       4,941          
Working capital loans
    20,705       24,833       13,015       13,399          
Total retail
    1,868,266       1,967,081       2,193,090       1,691,978          
Financial Leases
    96,076       79,064       100,030       125          
Mortgage
    826,505       912,614       1,077,462       952,886          
Total loans
    7,658,259       7,075,824       8,376,212       5,792,819          
Allowance for loan losses
    (349,094 )     (316,506 )     (323,783 )     (205,590 )        
Total loans, net (COP)
    7,309,165       6,759,318       8,052,429       5,587,229          
Total Foreign and Domestic Loans (COP)
    46,091,877       39,610,307       42,508,210       36,245,473          
 
 
56

 
 

 
(1)
Includes loans to high-income individuals and small companies.
 
(2)
In 2007 the foreign loan category became material to the Bank due to the acquisition of Banagrícola.Foreign loans for 2006 are not material and therefore are not separately identified.
 
The Bank classifies its loan portfolio into the following categories: (i) corporate loans (ii) retail and small and medium enterprises loans; (iii) financial leases; and (iv) mortgage loans.
 
As of December 31, 2010, the Bank’s total loan portfolio amounted to COP 48,601 billion, up 16% as compared to COP 42,042 billion in 2009, and 8% higher than the COP 44,643 billion at the end of 2008. Loan volume performance, during 2010, is primarily explained by the significantly increased economic activity in Colombia, which led individuals and corporations to demand more credit. For further discussion of some of these trends please see “Item 5. Operating and Financial Review and Prospects – D.Trend information”.
 
As of December 31, 2010, corporate loans amounted to COP 25,303 billion, or 52% of loans, and increased 25% from COP 20,319 at the end of 2009.
 
Retail and SMEs loans totaled COP 14,122 billion, or 29% of total loans, of which COP 7,175 billion were consumer loans (15% of total loans). Retail and SMEs loans increased 10% over the year.
 
Financial leases totaled COP 5,834 as of the end of 2010, up 7% from COP 5,470 at the end of 2009.
 
Mortgage lending activity was dynamic during 2010, driven mainly by the Colombian government’s housing subsidy program that was implemented in April 2009 as well as by lower long-term interest rates in Colombia. Taking into account securitized loans, mortgages increased 11% over the year. Bancolombia securitized COP 1,627 billion mortgage loans during 2010 in the local market.
 
Borrowing Relationships
 
As of December 31, 2010, the aggregate outstanding principal amount of the Bank’s 25 largest borrowing relationships, on a consolidated basis, represented approximately 14.14% of the loan portfolio, and no single borrowing relationship represented more than 1.52% of the loan book. Also, 100% of those loans were corporate loans and 100% of these relationships were classified as “A”.
 
Maturity and Interest Rate Sensitivity of Loans
 
The following table shows the maturities of the Bank’s loan portfolio as of December 31, 2010:
 
 
57

 
 
   
Due in one year
or less
   
Due from one to
five years
   
Due after five
years
   
Total
 
   
(COP million)
 
Domestic loans and financial leases:
                       
Corporate
                       
Trade financing
    1,549,311       51,785       103,577       1,704,673  
Loans funded by development banks
    47,728       128,687       124,044       300,459  
Working capital loans
    5,831,067       6,307,767       6,221,748       18,360,582  
Credit cards
    5,490       25,507       300       31,297  
Overdrafts
    38,563       -       -       38,563  
Total corporate
    7,472,159       6,513,746       6,449,669       20,435,574  
                                 
Retail
                               
Credit cards
    339,709       2,123,068       15,031       2,477,808  
Personal loans
    269,279       2,582,628       38,188       2,890,095  
Vehicle loans
    71,589       992,018       268,568       1,332,175  
Overdrafts
    156,244       -       -       156,244  
Loans funded by development banks
    50,099       489,226       127,974       667,299  
Trade financing
    27,068       479       -       27,547  
Working capital loans
    1,225,018       3,100,834       376,388       4,702,240  
Total retail
    2,139,006       9,288,253       826,149       12,253,408  
Financial leases
    324,091       3,218,401       2,194,981       5,737,473  
Mortgage
    35,226       123,843       2,357,307       2,516,376  
Total domestic loans and financial leases
    9,970,482       19,144,243       11,828,106       40,942,831  
                                 
Foreign loans and financial leases:
                               
Corporate
                               
Trade financing
    453,687       418,538       320,124       1,192,349  
Loans funded by development banks
    9,728       2,054       7,092       18,874  
Working capital loans
    903,658       1,649,043       1,091,586       3,644,287  
Credit cards
    -       6,712       -       6,712  
Overdrafts
    5,190       -       -       5,190  
Total corporate
    1,372,263       2,076,347       1,418,802       4,867,412  
                                 
Retail
                               
Credit cards
    465       156,412       18       156,895  
Personal loans
    62,830       627,366       959,657       1,649,853  
Vehicle loans
    145       2,320       240       2,705  
Overdrafts
    18,449       -       -       18,449  
Loans funded by development banks
    23       3,142       8,978       12,143  
Trade financing
    3,874       1,322       2,320       7,516  
Working capital loans
    3,338       13,952       3,415       20,705  
Total retail
    89,124       804,514       974,628       1,868,266  
Financial leases
    4,383       78,935       12,758       96,076  
Mortgage
    2,521       38,404       785,580       826,505  
Foreign loans and financial leases
    1,468,291       2,998,200       3,191,768       7,658,259  
Total loans (COP million)
    11,438,773       22,142,443       15,019,874       48,601,090  
 
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, 2010:
 
   
As of December 31, 2010
 
   
(COP million)
 
       
Loans with term of 1 year or more:
     
Variable Rate
     
Domestic-denominated
  COP 
24,135,665
 
Foreign-denominated
    5,262,887  
Total
    29,398,552  
Fixed Rate
       
Domestic-denominated
    6,836,684  
Foreign-denominated
    927,081  
Total
    7,763,765  
Loans with terms of less than 1 year:
       
Domestic-denominated
    9,970,482  
Foreign-denominated
    1,468,291  
Total
    11,438,773  
Total loans
  COP 
 48,601,090
 
 
 
58

 
 
Loans by Economic Activity
 
The following table summarizes the Bank’s loan portfolio, for the periods indicated, by the principal activity of the borrower using the primary Standard Industrial Classification (SIC) 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,
 
    
2010
   
%
   
2009
   
%
   
2008
   
%
   
2007 (1)
   
%
   
2006
   
%
 
         
(COP million ,except percentages)
             
Domestic
                                                           
Agricultural
    1,810,415       4.4 %     1,625,790       4.6 %     1,691,697       4.7 %     1,453,047       4.6 %     996,091       4.0 %
Mining products and oil
    1,863,052       4.6 %     1,193,712       3.4 %     521,249       1.4 %     496,296       1.6 %     456,770       1.9 %
Food, beverage and
                                                                               
tobacco
    2,922,405       7.1 %     2,243,064       6.4 %     2,264,246       6.2 %     1,799,891       5.6 %     1,665,850       6.8 %
Chemical production
    2,727,045       6.7 %     1,310,495       3.7 %     1,790,731       4.9 %     1,145,943       3.6 %     805,900       3.3 %
Other industrial and
                                                                               
manufacturing products
    3,124,519       7.6 %     3,396,188       9.7 %     4,132,049       11.4 %     5,032,310       15.8 %     3,867,432       15.7 %
Government
    1,310,226       3.2 %     1,234,824       3.5 %     659,800       1.8 %     772,539       2.4 %     602,585       2.4 %
Construction
    4,092,951       10.0 %     3,520,673       10.2 %     3,422,564       9.4 %     2,325,378       7.2 %     1,534,816       6.2 %
Trade and tourism
    5,614,774       13.7 %     5,471,749       15.7 %     6,216,359       17.2 %     3,919,082       12.3 %     2,791,340       11.3 %
Transportation and communications
    2,803,387       6.9 %     2,544,050       7.3 %     2,426,608       6.7 %     2,262,124       7.1 %     1,924,129       7.8 %
Public services
    2,220,108       5.4 %     1,659,742       4.7 %     836,298       2.3 %     1,266,250       4.0 %     1,183,361       4.8 %
Consumer services
    9,353,171       22.8 %     7,916,772       22.7 %     8,709,958       24.1 %     8,070,250       25.2 %     5,804,779       23.6 %
Commercial services
    3,100,778       7.6 %     2,849,091       8.1 %     3,594,799       9.9 %     3,366,695       10.6 %     3,012,521       12.2 %
Total loans domestic (COP)
    40,942,831       100.0 %     34,966,150       100.0 %     36,266,358       100.0 %     31,909,805       100.0 %     24,645,574       100.0 %
Foreign
                                                                               
Agricultural
    327,430       4.3 %     301,866       4.3 %     248,631       3.0 %     242,404       4.2 %                
Mining products and oil
    133,052       1.7 %     176,042       2.5 %     189,743       2.3 %     215,540       3.7 %                
Food, beverage and tobacco
    138,252       1.8 %     118,092       1.7 %     232,410       2.8 %     200,439       3.5 %                
Chemical production
    12,850       0.2 %     51,173       0.7 %     95,552       1.1 %     67,425       1.2 %                
Other industrial and manufacturing products
    1,836,483       24.0 %     1,586,708       22.4 %     2,426,601       29.0 %     526,061       9.1 %                
Government
    4       0.0 %     -       0.0 %     -       0.0 %     -       0.0 %                
Construction
    1,231,658       16.1 %     1,375,521       19.4 %     442,021       5.2 %     354,903       6.0 %                
Trade and tourism
    594,213       7.8 %     613,928       8.7 %     751,364       9.0 %     794,335       13.7 %                
Transportation and communications
    149,698       2.0 %     291,613       4.1 %     117,356       1.4 %     78,014       1.4 %                
Public services
    514,250       6.7 %     256,307       3.6 %     275,812       3.3 %     248,345       4.3 %                
Consumer services
    1,946,188       25.4 %     1,971,723       27.9 %     3,202,212       38.2 %     2,494,456       43.0 %                
Commercial services
    774,181       10.0 %     332,851       4.7 %     394,510       4.7 %     570,897       9.9 %                
Total loans foreign (COP)
    7,658,259       100.0 %     7,075,824       100.0 %     8,376,212       100.0 %     5,792,819       100.0 %                
Total Foreign and Domestic Loans (COP)
    48,601,090       100.0 %     42,041,974       100.0 %     44,642,570       100.0 %     37,702,624       100.0 %                

(1)
In 2007 the foreign loan category became material to the Bank due to the acquisition of Banagrícola. Foreign loans for 2006 are not material and therefore are not separately identified.
 
Credit Categories
 
For the purpose of credit risk evaluation, loans and financial lease contracts are classified as follows:
 
Mortgage Loans: These are loans, regardless of value, granted to individuals for the purchase of new or used housing or to build a home, all in accordance with Law 546 of 1999.  These loans include loans denominated in UVR or local currency that are guaranteed by a senior mortgage on the property and that are financed with a total repayment term of 5 to 30 years.
 
Consumer Loans: These are loans and financial leases, regardless of value, granted to individuals for the purchase of consumer goods or to pay for non-commercial or business services.
 
 
59

 
Microcredit Loans: These are issued for the purpose of encouraging the activities of small businesses and are subject to the following requirements: (i) the maximum amount to be lent is equal to twenty-five (25) SMMLV and at any time the balance of any single borrower may not exceed such amount (as stipulated in Article 39 of Law 590 of 2000) and the main source of payment for the corresponding obligation shall be the revenues obtained from activities of the borrower’s micro business. The balance of indebtedness on the part of the borrower may not exceed 120 SMMLV, as applicable, at the moment the credit is approved.
 
Commercial Loans: Commercial loans are loans and financial leases that are granted to individuals or companies in order to carry out organized economic activities; and not classified as microcredit loans.
 
The following table shows the Bank’s loan portfolio categorized in accordance with the regulations of the Superintendency of Finance in effect for the relevant periods:
 
   
Loan Portfolio by Type of Loan
As of December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(COP million)
 
Commercial Loans
    30,992,403       26,011,915       28,068,731       23,397,058       16,028,505  
Consumer Loans
    8,177,175       6,888,615       7,532,649       6,593,211       3,587,260  
Microcredit Loans
    255,082       202,019       143,122       129,900       91,078  
Financial Leases
    5,833,549       5,470,001       5,506,742       4,698,827       3,553,286  
Mortgage
    3,342,881       3,469,424       3,391,326       2,883,628       1,385,445  
Total Loans and Financial Leases
    48,601,090       42,041,974       44,642,570       37,702,624       24,645,574  
Allowance for Loans and Financial Lease Losses
    2,509,213       2,431,667       2,134,360       1,457,151       834,183  
Total Loans and Financial Leases, Net (COP)
    46,091,877       39,610,307       42,508,210       36,245,473       23,811,391  
 
Risk categories
 
The Superintendency of Finance provides the following minimum risk classifications, according to the financial situation of the debtor or the past due days of the obligation:
 
Category A or “Normal Risk”:  Loans and financial leases in this category are appropriately serviced.  The debtor’s financial statements or its projected cash flows, as well as all other credit information available to the Bank, reflect adequate paying capacity.
 
Category B or “Acceptable Risk, Above Normal”: Loans and financial leases in this category are acceptably serviced 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.
 
Category C or “Appreciable Risk”: Loans and financial leases in this category represent insufficiencies in the debtor’s paying capacity or in the project’s cash flow, which may compromise the normal collection of the obligations.
 
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.
 
Category E or “Risk of Non-Recoverability”: Loans and financial leases in this category are deemed uncollectible.
 
 
60

 
 
For further details about these risk categories see “Note 2. Summary of significant accounting policies – (i) Loans and Financial Leases – Evaluation by credit risk categories” to the Consolidated Financial Statements.
 
    
As of December 31,
 
   
2010
   
%
   
2009
   
%
   
2008
   
%
   
2007
   
%
   
2006
   
%
 
   
(COP million, except percentages)
 
“A” Normal
    44,914,187       92.4 %     38,180,628       90.8 %     40,650,096       91.0 %     35,397,503       93.9 %     23,310,545       94.6 %
“B” Subnormal
    1,588,798       3.3 %     1,711,661       4.1 %     2,216,832       5.0 %     1,135,022       3.0 %     708,774       2.9 %
“C” Deficient
    606,901       1.2 %     703,053       1.7 %     576,557       1.3 %     300,085       0.8 %     209,386       0.8 %
“D” Doubtful Recovery
    1,014,289       2.1 %     1,105,442       2.6 %     871,892       2.0 %     604,034       1.6 %     242,763       1.0 %
“E” Unrecoverable
    476,915       1.0 %     341,190       0.8 %     327,193       0.7 %     265,980       0.7 %     174,106       0.7 %
Total loans and financial leases
    48,601,090       100.0 %     42,041,974       100.0 %     44,642,570       100.0 %     37,702,624       100.0 %     24,645,574       100.0 %
Loans classified as “C”, “D” and “E” as a percentage of total loans
    4.3 %             5.1 %             4.0 %             3.1 %             2.5 %        
 
Suspension of Accruals
 
The Superintendency of Finance established that interest, UVR, lease payments and other items of income cease to be accrued in the statement of operations 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 and financial lease
 
Arrears in excess of:
Mortgage
 
2 months
Consumer
 
2 months
Microcredit
 
1 month
Commercial
 
3 months

However, the Bank adopts a stricter policy for every credit category, except for mortgages, under which loans are placed in non-accrual status once those loans are 30 days or more overdue. Under this policy, once the accumulation of interest is suspended, the Bank records an allowance equal to the interest that had accrued up to that point. Mortgage loans, on the other hand, are placed in non-accrual status once they are 60 days past due, at which time an allowance is made for 100% of the interest accrued up to that point.

Amounts due on loans that become past due and that at some point have stopped accruing interest, UVR, lease payments or other items of income will be recorded in memorandum accounts until such amounts are actually collected.
 
The following table sets forth the breakdown of the non-performing past due loans by type of loan in accordance with the criteria of the Superintendency of Finance for domestic and for foreign loans at the end of each period:
 
    
As of December 31,
 
   
2010
   
%
   
2009
   
%
   
2008
   
%
   
2007
   
%
   
2006
   
%
 
   
(COP million, except percentages)
 
Performing past due loans:(1)
                                                           
Consumer loans(2)
    117,787       25.2 %     141,813       23.7 %     150,762       22.4 %     131,824       30.1 %     62,201       26.4 %
Commercial loans(3)
    197,895       42.4 %     254,923       42.5 %     323,185       48.0 %     164,163       37.4 %     74,577       31.8 %
Mortgage loans(4)
    107,639       23.0 %     115,611       19.3 %     100,785       15.0 %     81,523       18.6 %     62,919       26.8 %
Financial leases(5)
    43,819       9.4 %     87,202       14.5 %     98,644       14.6 %     61,055       13.9 %     35,150       15.0 %
Total perf. PDLs
    467,140       100.0 %     599,549       100.0 %     673,376       100.0 %     438,565       100.0 %     234,847       100.0 %
                                                                                 
Non-performing PDLs:
                                                                               
Consumer loans(6)
    180,668       19.5 %     231,790       22.6 %     296,153       31.2 %     234,659       35.2 %     114,101       34.1 %
 
 
61

 
 
    
As of December 31,
 
   
2010
   
%
   
2009
   
%
   
2008
   
%
   
2007
   
%
   
2006
   
%
 
   
(COP million, except percentages)
 
Small loans(7)
    22,193       2.4 %     17,250       1.7 %     17,600       1.9 %     14,630       2.2 %     10,003       3.0 %
Commercial loans(8)
    450,161       48.5 %     488,248       47.5 %     387,571       40.7 %     233,883       35.1 %     133,987       40.0 %
Mortgage loans(9)
    195,631       21.1 %     197,323       19.2 %     184,597       19.4 %     124,251       18.6 %     65,187       19.5 %
Financial leases(10)
    80,106       8.5 %     93,101       9.0 %     64,708       6.8 %     58,945       8.9 %     11,210       3.4 %
Total non-perf. PDLs
    928,759       100.0 %     1,027,712       100.0 %     950,629       100.0 %     666,368       100.0 %     334,488       100.0 %
                                                                                 
Total PDLs (COP)
    1,395,899               1,627,261               1,624,005               1,104,933               569,335          
                                                                                 
Total non-perf. PDLs
    928,759               1,027,712               950,629               666,368               334,488          
Foreclosed assets
    257,603               250,976               204,480               234,116               193,004          
Other accounts receivable (overdue > 180 days)
    19,190               33,800               34,486               38,182               29,146          
Total non-performing assets (COP)
    1,205,552               1,312,488               1,189,595               938,666               556,638          
Allowance for loan losses
    (2,509,213 )             (2,431,667 )             (2,134,360 )             (1,457,151 )             (834,183 )        
Allowance for estimated losses on foreclosed assets
    (187,326 )             (170,308 )             (179,827 )             (201,822 )             (174,393 )        
Allowance for accounts receivable and accrued interest losses
    (111,848 )             (124,916 )             (114,009 )             (69,956 )             (34,936 )        
                                                                                 
PDLs/ Total loans
            2.9 %             3.9 %             3.6 %             2.9 %             2.3 %
Allowance for loan losses/ PDLs
            179,8 %             149.4 %             131.4 %             131.9 %             146.5 %
Allowance for loan losses/ Loans classified as “C”, “D” and “E”
            119.6 %             113.1 %             120.2 %             124.5 %             133.2 %
Perf. Loans/Total loans
            98.1 %             97.6 %             97.9 %             98.2 %             98.6 %
 

(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.
(2)
Past due from 31 to 60 days.
(3)
Past due from 31 to 90 days.
(4)
Past due from 31 to 60 days.
(5)
The Consumer financial leases are due from 31 to 60 days and the commercial financial leases are due from 31 to 90 days.
(6)
Past due more than 60 days.
(7)
Past due more than 30 days.
(8)
Past due more than 90 days.
(9)
Past due more than 60 days.
(10)
The Consumer financial leases are more than 60 days and the commercial financial leases are more than 90 days.
 
 
62

 
The following table sets forth the breakdown of the non-performing past due loans by type of loan in accordance with the criteria of the Superintendency of Finance for domestic and for foreign loans at the end of each period:
 
   
As of December 31,
 
Non-performing past due loans:
 
2010
   
2009
   
2008
   
2007 (1)
   
2006
 
Consumer loans(2)
                             
Domestic
  COP 124,149     COP 169,357     COP 243,487     COP 204,739     COP -  
Foreign
    56,519       62,433       52,666       29,920       -  
Total Consumer Loans
    180,668       231,790       296,153       234,659       114,101  
Microcredit loans (3)
                                       
Domestic
    20,602       15,025       15,583       12,888       -  
Foreign
    1,591       2,225       2,017       1,742       -  
Total Small Loans
    22,193       17,250       17,600       14,630       10,003  
Commercial loans(4)
                                       
Domestic
    378,380       430,695       336,958       192,457       -  
Foreign
    71,781       57,553       50,613       41,426       -  
Total Commercial Loans
    450,161       488,248       387,571       233,883       133,987  
Mortgage loans(5)
                                       
Domestic
    151,975       159,697       161,284       105,516       -  
Foreign
    43,656       37,626       23,313       18,735       -  
Total Mortgage Loans
    195,631       197,323       184,597       124,251       65,187  
Financial leases(6)
                                       
Domestic
    80,106       93,100       63,160       58,902       -  
Foreign
    -       1       1,548       43       -  
Total  Financial leases
    80,106       93,101       64,708       58,945       11,210  
Total non-perf. PDLs (domestic)
    755,212       867,874       820,472       574,502       -  
Total non-perf. PDLs (foreign)
    173,547       159,838       130,157       91,866       -  
Total non-perf. PDLs
  COP 928,759     COP 1,027,712     COP 950,629     COP 666,368     COP 334,488  
   

(1) 
In 2007 the Foreign loan category becomes material to the Bank due to the acquisition of Banagrícola.This category was not material to the Bank for 2006 and is therefore not separately reported.
(2) 
Past due more than 60 days.
(3) 
Past due more than 30 days.
(4) 
Past due more than 90 days.
(5) 
Past due more than 60 days.
(6) 
Past due financial leases incluses Consumer financial leases that  are more than 60 days past due  and the commercial financial leases that  are more than 90 days past due.
 
 
63

 
 
The following table illustrates Bancolombia’s past due loan portfolio by type of loan:
 
    
As of December 31,
 
   
2010
   
%
   
2009
   
%
   
2008
   
%
   
2007 (1)
   
%
   
2006
   
%
 
   
(COP million, except percentages)
 
Domestic
                                                           
Corporate
                                                           
Trade financing
    1,685       0.2 %     3,945       0.3 %     2,472       0.2 %     9,073       1.0 %     18,218       3.2 %
Loans funded by development banks
    22,497       1.9 %     13,933       1.0 %     22,125       1.6 %     6,710       0.7 %     6,820       1.2 %
Working capital loans
    189,833       16.4 %     154,071       11.2 %     150,795       11.1 %     101,613       10.8 %     67,267       11.8 %
Credit cards
    351       0.0 %     376       0.0 %     456       0.0 %     377       0.0 %     2,669       0.5 %
Overdrafts
    1,975       0.2 %     2,781       0.2 %     3,032       0.2 %     1,835       0.2 %     7,716       1.4 %
Total corporate
    216,341       18.7 %     175,106       12.7 %     178,880       13.1 %     119,608       12.7 %     102,690       18.0 %
                                                                                 
Retail
                                                                               
Credit cards
    137,649       11.9 %     163,924       11.9 %     172,409       12.7 %     144,621       15.3 %     40,307       7.1 %
Personal loans
    62,392       5.4 %     86,358       6.3 %     144,336       10.6 %     128,954       13.7 %     113,514       19.9 %
Vehicle loans
    68,194       5.9 %     117,601       8.6 %     142,336       10.5 %     74,379       7.9 %     41,641       7.3 %
Overdrafts
    15,368       1.3 %     20,106       1.5 %     33,277       2.5 %     27,932       3.0 %     11,771       2.1 %
Loans funded  by development banks
    31,752       2.7 %     30,733       2.2 %     33,530       2.5 %     21,168       2.2 %     12,166       2.1 %
Trade financing
    947       0.1 %     961       0.1 %     8,169       0.6 %     3,213       0.3 %     1,403       0.2 %
Working capital loans
    272,522       23.5 %     353,744       25.7 %     287,587       21.2 %     139,307       14.8 %     57,976       10.2 %
Total retail
    588,824       50.8 %     773,427       56.3 %     821,644       60.6 %     539,574       57.2 %     278,778       49.0 %
Financial Leases)
    123,925       10.7 %     179,632       13.1 %     155,678       11.5 %     119,956       12.7 %     46,359       8.1 %
Mortgage
    230,018       19.8 %     246,277       17.9 %     201,186       14.8 %     164,901       17.5 %     141,508       24.9 %
Total past due loans (COP)
    1,159,108       100.0 %     1,374,442       100.0 %     1,357,388       100.0 %     944,039       100.0 %     569,335       100.0 %
                                                                                 
Foreign
                                                                               
Corporate
                                                                               
Trade financing
    9,535       4.0 %     14,978       5.9 %     19,157       7.2 %     5,098       3.2 %                
Loans funded by development banks
    376       0.2 %     2,306       0.9 %     1,552       0.6 %     1,132       0.7 %                
Working capital loans
    76,559       32.3 %     80,031       31.7 %     106,532       40.0 %     64,522       40.1 %                
Credit cards
    434       0.2 %     499       0.1 %     222       0.0 %     130       0.0 %                
Overdrafts
    775       0.3 %     287       0.0 %     341       0.1 %     137       0.1 %                
Total corporate
    87,679       37.0 %     98,101       38.6 %     127,804       47.9 %     71,019       44.1 %                
                                                                                 
Retail
                                                                               
Credit cards
    7,615       3.2 %     12,450       4.9 %     10,692       4.0 %     6,901       4.3 %                
Personal loans
    65,749       27.8 %     72,157       28.5 %     63,172       23.7 %     39,739       24.7 %                
Vehicle loans
    203       0.1 %     239       0.1 %     110       0.0 %     116       0.0 %                
Overdrafts
    134       0.1 %     99       0.0 %     103       0.0 %     321       0.2 %                
Loans funded by development banks
    569       0.2 %     260       0.1 %     568       0.2 %     96       0.1 %                
Trade financing
    199       0.1 %     213       0.1 %     243       0.1 %     191       0.1 %                
Working capital loans
    1,391       0.6 %     1,972       0.8 %     1,764       0.7 %     1,535       1.0 %                
Total retail
    75,860       32.1 %     87,390       34.5 %     76,652       28.7 %     48,899       30.4 %                
Financial Leases
    -       0.0 %     671       0.3 %     7,674       2.9 %     43       0.0 %                
Mortgage
    73,252       30.9 %     66,657       26.6 %     54,487       20.5 %     40,933       25.5 %                
Total past due loans (COP)
    236,791       100.0 %     252,819       100.0 %     266,617       100.0 %     160,894       100.0 %                
 

(1)
In 2007 the foreign loan category became material to the Bank due to the acquisition of Banagrícola. Foreign loans for 2006 are not material and therefore are not separately identified.
 
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,
 
   
2010
   
%
   
2009
   
%
   
2008
   
%
   
2007
   
%
   
2006
   
%
 
   
(COP million, except percentages)
 
Secured
                                                           
Current
    20,970,409       43.2 %     19,061,249       45.3 %     17,779,101       39.8 %     16,923,998       44.9 %     10,762,717       43.7 %
Past due Commercial loans
    327,323       0.7 %     411,359       1.0 %     324,541       0.7 %     198,901       0.5 %     96,641       0.4 %
Past due Consumer loans
    73,476       0.2 %     88,740       0.2 %     70,934       0.2 %     72,601       0.2 %     29,116       0.1 %
Past due Microcredit loans
    11,415       0.1 %     7,824       0.1 %     8,175       0.1 %     7,156       0.0 %     3,972       0.0 %
Past due Mortgage loans
    303,270       0.6 %     312,934       0.7 %     285,382       0.6 %     205,774       0.6 %     148,050       0.6 %
Past due Financial leases
    123,925       0.3 %     180,303       0.4 %     163,352       0.4 %     120,000       0.3 %     46,360       0.2 %
Total (COP)
    21,809,818       45.1 %     20,062,409       47.7 %     18,631,485       41.8 %     17,528,430       46.5 %     11,086,856       45.0 %
                                                                                 
Unsecured(1)
                                                                               
Current
    26,234,778       54.0 %     21,353,464       50.8 %     25,239,464       56.5 %     19,673,693       52.2 %     13,313,522       54.0 %
Past due Commercial loans
    320,738       0.7 %     331,812       0.8 %     386,215       0.9 %     199,145       0.5 %     91,979       0.4 %
Past due Consumer loans
    224,978       0.5 %     284,863       0.7 %     375,981       0.8 %     293,882       0.8 %     147,186       0.6 %
Past due Microcredit loans
    10,778       0.0 %     9,426       0.0 %     9,425       0.0 %     7,474       0.0 %     6,031       0.0 %
Total (COP)
    26,791,272       55.2 %     21,979,565       52.3 %     26,011,085       58.2 %     20,174,194       53.5 %     13,558,718       55.0 %
                                                                                 
Total current loans and financial leases
    47,205,191       97.1 %      40,414,713       96.1 %     43,018,565       96.4 %     36,597,691       97.1 %     24,076,239       97.7 %
Past due Commercial loans
    648,061       1.4 %     743,171       1.9 %     710,756       1.6 %     398,046       1.0 %     188,620       0.8 %
Past due Consumer loans
    298,454       0.6 %     373,603       0.9 %     446,915       1.0 %     366,483       1.0 %     176,302       0.7 %
 
Past due Microcredit loans
    22,189       0.1 %     17,250       0.0 %     17,600       0.0 %     14,630       0.0 %     10,003       0.0 %
Past due Mortgage loans
    303,270       0.6 %     312,934       0.7 %     285,382       0.6 %     205,774       0.6 %     148,050       0.6 %
Past due Financial leases
    123,925       0.3 %     180,303       0.4 %     163,352       0.4 %     120,000       0.3 %     46,360       0.2 %
Total past due loans and financial leases (COP)
    1,395,899       2.9 %     1,627,261       3.9 %     1,624,005       3.6 %     1,104,933       2.9 %     569,335       2.3 %
Total gross loans and financial leases
    48,601,090       100 %     42,041,974       100 %     44,642,570       100 %     37,702,624       100 %     24,645,574       100 %
Allowance for loan and financial lease losses
    (2,509,213 )     (5.2 )%     (2,431,667 )     (5.8 )%     (2,134,360 )     (4.8 )%     (1,457,151 )     (3.9 )%     (834,183 )     (3.4 )%
Total loans and financial leases, net (COP)
    46,091,877       94.8 %     39,610,307       94.2 %     42,508,210       95.2 %     36,245,473       96.1 %     23,811,391       96.6 %
  

(1)   Includes loans with personal guarantees.
 
 
64

 
 
Non-performing loans, Accruing loans which are contractually past due 90 days and performing troubled debt restructuring loans
 
Non-performing loans and accruing loans which are contractually past due 90 days
 
As of December 31, 2010, 2009, 2008, 2007 and 2006, Bancolombia did not have any performing loans which were past due for 90 days or more.
 
The following table shows the non-performing loans portfolio classified into foreign and domestic loans, the gross interest income that would have been recorded in the period that ended if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination and the amount of interest income on those loans that were included in net income for the period.
 
    
As of December 31,
 
   
2010
 
   
Amount of Loans
   
Gross Interest Income
   
Interest income included in
net income for the period
 
         
(COP million)
       
                   
Foreign loans
  COP 173,547     COP 16,682     COP 3,427  
Domestic loans
    755,212       278,343       202,577  
Non-performing loans
  COP 928,759     COP 295,025     COP 206,004  

    
As of December 31,
 
   
2009
 
   
Amount of Loans
   
Gross Interest Income
   
Interest income included in net
income for the period
 
         
(COP million)
       
                   
Foreign loans
  COP 159,838     COP 15,957     COP 3,080  
Domestic loans
    867,874       302,451       208,829  
Non-performing loans
  COP 1,027,712     COP 318,408     COP 211,909  
 
 
65

 
 
Performing Troubled Debt Restructuring Loans
 
The following table presents a summary of the Bank’s Troubled Debt Restructuring loans accounted for on a performing basis in accordance with the criteria of the Superintendency of Finance in effect at the end of each period, classified into foreign and domestic loans:
 
   
As of December 31,
 
   
2010
   
2009
   
2008
   
2007(1)
   
2006
 
               
(COP million)
             
                               
Foreign loans
    266,173       169,459       176,246       111,870       -  
Domestic loans
    1,088,117       994,506       623,722       521,181       578,099  
Total Performing Troubled Debt Restructuring loans (COP)
    1,354,290       1,163,965       799,968       633,051       578,099  
 

(1) In 2007 the foreign loan category became material to the Bank due to the acquisition of Banagrícola.
 
The following table shows the Bank’s Performing Troubled Debt Restructuring loan portfolio classified into foreign and domestic loans, the gross interest income that would have been recorded in the period that ended if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination and the amount of interest income on those loans that was included in net income for the period.
 
   
As of December 31,
 
   
2010
 
   
Amount of Loans
   
Gross Interest Income
   
Interest income included in
net income for the period
 
         
(COP million)
       
                   
Foreign loans
    266,173       16,984       16,984  
Domestic loans
    1,088,117       92,130       92,130  
Total Performing Troubled Debt Restructuring loans
  COP 1,354,290     COP 109,114     COP 109,114  
 
   
As of December 31,
 
   
2009
 
   
Amount of Loans
   
Gross Interest Income
   
Interest income
included in net income
for the period
 
         
(COP million)
       
                   
Foreign loans
    169,459       14,006       14,006  
Domestic loans
    994,506       66,469       66,469  
Total Performing Troubled Debt Restructuring loans
  COP 1,163,965     COP 80,475     COP
 80,475
 
 
Policies for the granting and review of credit
 
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 the evaluation of credit, the determination of lending limits to customers and the level of management authority required to approve a loan.  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.
 
Bancolombia’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 and information received from the two credit risk bureaus currently operating in Colombia.
 
 
66

 
 
In addition to the 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 to borrowers established under Colombian law, which require that: (i) uncollateralized loans to a single customer or economic group may not exceed 10% of the Bank’s (unconsolidated) Technical Capital, (ii) collateralized loans to a single customer or economic group may not exceed 25% of the Bank’s (unconsolidated) Technical Capital; (iii) a loan to a stockholder of the Bank, who owns a position exceeding 20% of the Bank’s Capital, may not exceed 20% of the Bank’s (unconsolidated) Technical Capital; and (iv) a loan to a financial institution may not exceed 30% of the Bank’s (unconsolidated) Technical Capital.
 
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. Almost 70% of the Bank‘s loan portfolio has a maturity of five years or less.
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 Bancolombia. In general, loan application decisions are made by the Bank’s management in the corresponding committee. Approval at each level also requires the agreement of each lower level of the approval hierarchy.
 
Loans to managers, directors and affiliates of the Bank must be approved by the board of directors of the Bank, which has the authority to grant loans in any principal amount subject to the Bank’s legal lending limit.
 
 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. Periodically, the Bank undertakes a valuation of collateral held as security for loans. In addition, for retail  and mortgage loans that are between 5 and 60 days past due, an external collection company controls each obligation payment, for commercial lending this procedure is always made by internal employees. When a loan becomes 60 days past due, the loan will be given to an independent and specialized division where various steps will be taken to recover the loan.
 
With respect to monitoring outstanding loans, the Bank, in accordance with the requirements of the Superintendency of Finance, has implemented regional committees and a central qualification office to undertake a biannual evaluation of the loan portfolio, during the months of May and November each year.  At least 50% of the outstanding portfolio is evaluated by the Superintendency of Finance.  Clients evaluated have, among others, the following characteristics: high exposure, more than 30 days past due, bad record of historical payment behavior either with the Bank or the financial system and restructured loans or loans that are part of the watch list. The 30 clients with the largest debt and the 30 clients with the least debt in each region are also included, and 30 more clients are randomly selected. When monitoring outstanding loans, the Bank examines current financial statements including cash flow and financial indicators.
 
Additionally, all of the Bank’s loans are evaluated monthly based on the days they are past due. When reviewing loans, Bancolombia evaluates and updates their risk classification and makes corresponding adjustments in the provisions, if needed.
 
In addition, the Bank carries out a credit audit process that reviews clients with financial weaknesses, early past due loans, clients in sectors that are underperforming, and branches with high records of write offs, among others.
 
 
67

 
 
E.4.
SUMMARY OF LOAN LOSS EXPERIENCE
 
ALLOWANCE FOR LOAN LOSSES
 
The Bank records an allowance for loans and financial leases losses in accordance with the regulations established by the Superintendency of Finance. For further details regarding the regulation and methodologies for the calculation of such allowances please see Item 5. Operating and Financial Review and Prospects - "Allowance for credit losses" and Note 2.i. of Notes to Financial Statements included in this Annual Report.
 
The following table sets forth the changes in the allowance for loan and financial lease losses:
 
   
Year Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(COP million)
 
Balance at beginning of period
    2,431,667       2,134,360       1,457,151       834,183       705,882  
Balance at beginning of period (Factoring Bancolombia)
    -       -       -       -       5,625  
Balance at beginning of period (Banagrícola’s subsidiaries)(3)
    -       -       -       147,357       -  
Provisions for loan losses(1)
    1,842,406       2,448,581       1,986,710       1,203,543       568,679  
Recoveries of provisions
    (1,085,211 )     (1,186,674 )     (807,245 )     (516,218 )     (308,004 )
Charge-offs
    (658,151 )     (925,592 )     (547,860 )     (186,273 )     (136,789 )
Effect of difference in exchange rate
    (21,498 )     (39,008 )     45,604       (25,441 )     (1,210 )
Balance at end of year (2) (COP)
    2,509,213       2,431,667       2,134,360       1,457,151       834,183  
 

(1)
The provision for past due accrued interest receivable, which is not included in this item, amounted to COP 33,540 million, COP 46,840 million, COP  58,721 million, COP 35,543 million and COP 14,825 for the years ended December 31, 2010, 2009, 2008, 2007 and 2006, respectively.
(2)
The allowance for past due accrued interest receivable, which is not included in this item, amounted to COP 38,952 million, COP 45,937 million, COP 54,323 million, COP  33,303 million and COP 11,644 for the years ended December 31, 2010, 2009, 2008, 2007 and 2006, respectively. The allowance at the beginning the period for past due accrued interest receivable , which is not included in this item, amounted to COP 45,937 million, COP 54,323 million, COP 33,303 million, COP 11,644 million and COP 8,655 for the years ended December 31, 2010, 2009, 2008, 2007 and 2006, respectively.
(3)
Includes allowance for loan losses of Banco Agrícola, Banco Agricola Panamá, Arrendadora Financiera, Credibac, Aseguradora Suiza Salvadoreña and Asesuisa Vida.
 
The recoveries of charged-off loans are recorded in the consolidated statement of operations and are not included in provisions for loan losses. See the Consolidated Statement of Operations on the line: Recovery of Charged-off loans.
 
The following table sets forth the allocation of the Bank’s allowance for loan and financial lease losses by type of loan using the classification of the Superintendency of Finance:
 
   
As of December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
   
(COP million)
 
Commercial loans
    1,465,318       1,443,943       1,202,047       791,957       356,272  
Consumer loans
    559,789       523,353       502,496       340,247       152,842  
Microcredit loans
    21,719       17,263       12,424       9,050       6,365  
Financial leases
    269,634       253,764       197,952       133,837       49,463  
Mortgage
    157,459       157,445       122,407       53,973       23,948  
General
    35,294       35,899       97,034       128,087       245,293  
Total allowance for loan losses (COP)
    2,509,213       2,431,667       2,134,360       1,457,151       834,183  
 
 
68

 
 
The following table sets forth the allocation of the Bank’s allowance for loans and financial leases losses by type of loan:
 
    
As of December 31,
 
   
2010
   
%
   
2009
   
%
   
2008
   
%
   
2007(1)
   
%
   
2006
   
%
 
   
(COP million, except percentages)
 
Domestic
                                                           
Corporate
                                                           
                                                             
Trade financing
    36,857       1.7 %     22,834       1.1 %     13,081       0.7 %     21,184       1.7 %     17,154       2.1 %
Loans funded by development banks
    39,189       1.8 %     47,540       2.2 %     61,430       3.4 %     27,612       2.2 %     7,057       0.8 %
Working capital loans
    687,038       31.8 %     614,342       29.0 %     522,065       28.8 %     379,169       30.3 %     261,589       31.4 %
Credit cards
    898       0.0 %     826       0.0 %     1,134       0.1 %     1,176       0.1 %     2,324       0.3 %
Overdrafts
    2,892       0.1 %     3,783       0.2 %     3,983       0.2 %     2,383       0.2 %     3,617       0.4 %
Total corporate
    766,874       35.4 %     689,325       32.5 %     601,693       33.2 %     431,524       34.5 %     291,741       35.0 %
Retail
                                                                               
Credit cards
    285,248       13.2 %     266,094       12.6 %     208,323       11.5 %     128,523       10.3 %     36,062       4.3 %
Personal loans
    124,912       5.8 %     122,265       5.8 %     166,880       9.2 %     126,297       10.1 %     92,625       11.1 %
Vehicle loans
    95,308       4.4 %     112,626       5.3 %     115,593       6.4 %     68,938       5.5 %     30,698       3.7 %
Overdrafts
    13,341       0.6 %     16,650       0.8 %     24,002       1.3 %     16,451       1.3 %     4,274       0.5 %
Loans funded by development banks
    45,927       2.1 %     48,354       2.3 %     41,323       2.3 %     30,064       2.4 %     5,817       0.7 %
Trade financing
    1,333       0.1 %     2,450       0.1 %     7,616       0.4 %     5,111       0.4 %     1,254       0.2 %
Working capital loans
    393,285       18.2 %     442,116       20.9 %     330,437       18.3 %     204,022       16.3 %     53,008       6.4 %
Total retail
    959,354       44.4 %     1,010,555       47.8 %     894,174       49.4 %     579,406       46.3 %     223,738       26.9 %
Financial Leases)
    273,556       12.7 %     251,618       11.9 %     187,514       10.4 %     133,757       10.7 %     49,463       5.9 %
Mortgage
    133,101       6.2 %     136,674       6.5 %     103,133       5.7 %     37,863       3.0 %     23,948       2.9 %
General
    27,234       1.3 %     26,989       1.3 %     24,062       1.3 %     69,011       5.5 %     245,293       29.3 %
Total allowance for loan losses (COP)
    2,160,119       100 %     2,115,161       100.0 %     1,810,576       100.0 %     1,251,561       100.0 %     834,183       100.0 %
                                                                                 
Foreign
                                                                               
Corporate
                                                                               
                                                                                 
Trade financing
    26,344       7.6 %     13,502       4.3 %     13,633       4.2 %     5,155       2.5 %                
Loans funded by development banks
    554       0.2 %     1,107       0.3 %     545       0.2 %     432       0.2 %                
Working capital loans
    174,348       49.9 %     172,704       54.6 %     132,294       40.9 %     76,002       37.0 %                
Credit cards
    344       0.1 %     387       0.0 %     177       0.0 %     97       0.0 %                
Overdrafts
    513       0.2 %     656       0.2 %     222       0.1 %     323       0.2 %                
Total corporate
    202,103       58.0 %     188,356       59.4 %     146,871       45.4 %     82,009       39.9 %                
Retail
                                                                               
Credit cards
    10,991       3.2 %     12,961       4.1 %     9,469       2.9 %     6,258       3.0 %                
Personal loans
    97,239       27.9 %     78,999       25.0 %     62,409       19.3 %     40,388       19.6 %                
Vehicle loans
    220       0.1 %     242       0.1 %     152       0.0 %     142       0.1 %                
Overdrafts
    2,403       0.7 %     2,032       0.6 %     564       0.2 %     625       0.3 %                
Loans funded by development banks
    708       0.2 %     332       0.1 %     274       0.1 %     108       0.1 %                
Trade financing
    303       0.1 %     214       0.1 %     525       0.2 %     101       0.1 %                
Working capital loans
    1,025       0.3 %     1,542       0.5 %     838       0.3 %     692       0.3 %                
Total retail
    112,889       32.5 %     96,322       30.5 %     74,231       23.0 %     48,314       23.5 %                
Financial Leases
    1,685       0.5 %     2,147       0.7 %     10,436       3.1 %     81       0.0 %                
Mortgage
    24,357       7.0 %     20,771       6.6 %     19,274       6.0 %     16,110       7.8 %                
General
    8,060       2.0 %     8,910       2.8 %     72,972       22.5 %     59,076       28.8 %                
Total allowance for loan losses (COP)
    349,094       100 %     316,506       100.0 %     323,784       100.0 %     205,590       100.0 %                    


(1)   In 2007 the foreign loan category became material to the Bank due to the acquisition of Banagrícola. Foreign loans for 2006 are not material and therefore are not separately identified.
 
As of December 31, 2010, allowances for loans and financial lease losses amounted to COP 2,509 billion (5.2% of total loans), up 3.2% as compared to COP 2,432 billion (5.8% of loans) at the end of 2009 and up 17.6% as compared to COP 2,134 billion (4.8% of loans) at the end of 2008.
 
Coverage, measured by the ratio of allowances for loan losses to past due loans (overdue 30 or more days), reached 180% at the end of 2010, increasing from 149% at the end of 2009 and 131% at the end of 2008. For futher information regarding asset quality and provision charges see “Item 5. Operating and Financial Review and Prospects”.
 
 
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CHARGE-OFFS
 
The following table shows the allocation of the Bank’s charge-offs by type of loan as of December 31, 2010, 2009, 2008, 2007 and 2006:
 
   
Year ended December 31,
 
   
2010
   
2009
   
2008
   
2007(1)
   
2006
 
   
(COP million)
 
Domestic
                             
Trade financing
    2,165       263       2,558       151       5,507  
Loans funded by development banks
    22,368       37,112       8,820       1,320       -  
Working capital loans
    202,241       329,603       45,941       16,068       49,474  
Credit cards
    172,804       195,676       166,067       28,179       10,067  
Personal loans
    69,808       96,597       138,007       65,006       46,095  
Vehicle loans
    55,711       57,966       29,088       10,131       6,483  
Overdrafts
    15,052       27,685       52,822       3,733       4,544  
Mortgage & other
    679       29,027       509       1,791       12,795  
Financial leases
    23,799       30,284       27,650       2,029       1,824  
Total charge-offs (COP)
    564,627       804,213       471,462       128,408       136,789  
                                         
Foreign
                                       
Trade financing
    3,999       74       1,819       -          
Loans funded by development banks
    6       62       -       -          
Working capital loans
    31,207       31,850       21,581       31,240          
Credit cards
    10,969       13,460       10,734       5,077          
Personal loans
    45,898       62,854       39,073       21,079          
Vehicle loans
    167       55       88       59          
Overdrafts
    947       1,167       620       407          
Mortgage & other
    331       3,472       2,434       -          
Financial leases
    -       8,385       49       -          
Total charge-offs (COP)
    93,524       121,379       76,398       57,862          
 

(1)
In 2007 the foreign loan category became material to the Bank due to the acquisition of Banagrícola. Foreign loans for 2006 are not material and therefore are not separately identified.
 
The ratio of charge-offs to average outstanding loans for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 was as follows:
 
   
Year ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Ratio of charge-offs to average outstanding loans
    1.49 %     2.10 %     1.36 %     0.60 %     0.63 %

The Bank charges off loans that are classified as “unrecoverable” once they become overdue: (i) 180 days for consumer and micro loans, (ii) 360 days for commercial loans and (iii) 54 months for mortgage loans.
 
All charge-offs must be approved by the board of directors. Even if a loan is charged off, management remains responsible for decisions in respect of the loan, and neither the Bank nor its Subsidiaries in Colombia are released from their obligations to pursue recovery as appropriate.
 
The recovery of charged-off loans is accounted for as income in the Consolidated Statement of Operations.
 
POTENTIAL PROBLEM LOANS
 
In order to carefully monitor the credit risk associated with clients, the Bank has established a committee that meets monthly dedicated to identifying potential problem loans which are then included in what is called the watch list.  In general, these loans are related to clients that could face difficulties in the future in the repayment of their obligations with the Bank but who have had a good record of payment behavior. This situation could be related to internal factors such as economic activity, financial weakness or any other external events that could affect the client’s business.
 
 
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As of December 31 2010, 1054 clients with loans amounting to COP 1.6 billion were performing and part of the watch list.
 
CROSS–BORDER OUTSTANDING LOANS AND INVESTMENTS
 
As of December 31, 2010, 2009 and 2008, total cross-border outstanding loans and investments amounted to approximately USD 4,092 million, USD 4,367 million and USD 4,386 million, respectively. As of December 31, 2010, total outstanding loans to borrowers in foreign countries amounted to USD 4,007 million, and total investments were USD 895 million. As of December 31, 2010, total cross-border outstanding loans and investments represented 13.78% of total assets.
 
The Bank had no cross-border outstanding acceptances, interest-earning deposits with other banks or any other monetary assets denominated in pesos or other non-local currencies, in which the total exceeded 1% of consolidated total assets at December 31, 2010, 2009 and 2008.
 
The following table presents information with respect to the Bank’s cross-border outstanding loans and investments for the years ended on December 31, 2010, 2009 and 2008:
 
   
2010
   
2009
   
2008
 
   
(thousands of U.S. dollars)
 
El Salvador
  USD 3,006,200     USD 3,057,261     USD 3,036,433  
Guatemala
    581,671       438,622       400,291  
Panama
    407,418       82,273       54,461  
Costa Rica
    225,344       200,721       205,708  
Peru
    130,774       18,203       28,007  
Brazil
    128,228       141,142       80,383  
Chile
    107,215       71,809       53,311  
United States
    90,828       124,813       258,665  
Honduras
    76,635       44,876       49,500  
Mexico
    69,957       74,661       73,830  
Venezuela
    30,453       3,186       7  
Bahamas
    9,316       -       -  
Cayman Islands
    7,800       23,336       -  
Nicaragua
    6,916       14,322       28,062  
Ecuador
    6,017       6,658       18,003  
Dominican Republic
    5,080       -       4,639  
Guyana
    5,000       1,000       2,000  
British Virgin Islands
    4,700       32,191       57,594  
Curazao
    1,000       1,000       3,000  
Spain
    885       7       8  
United Kingdom
    435       30,432       32,419  
Other
    558       375       30  
Total Cross-Border Outstanding Loans and Investments
  USD 4,902,430     USD 4,366,888     USD 4,386,351  
 
 
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E.5.
DEPOSITS
 
The following table shows the composition of the Bank’s deposits for 2010, 2009 and 2008:
 
   
As of December 31,
 
   
2010
   
2009
   
2008
 
   
(COP million)
 
Non-interest bearing deposits:
                 
Checking accounts
  COP 6,980,322     COP 5,858,667     COP 5,289,918  
Other deposits
    651,894       449,113       433,542  
Total
    7,632,216       6,307,780       5,723,460  
                         
Interest bearing deposits:
                       
Checking accounts
    2,575,611       2,366,281       2,011,132  
Time deposits
    15,270,271       18,331,488       18,652,738  
Savings deposits
    18,060,869       15,143,781       13,997,070  
Total
    35,906,751       35,841,550       34,660,940  
Total deposits
  COP 43,538,967     COP 42,149,330     COP 40,384,400  

The following table shows the time deposits held by the Bank as of December 31, 2010, by amount and maturity for deposits:
 
   
At December 31, 2010
 
   
Peso-
Denominated
   
U.S. dollar -
Denominated
   
Total
 
   
(COP million)
 
Time deposits higher than US$ 100,000(1)
                 
Up to 3 months
  COP 697,744     COP 961,693     COP 1,659,437  
From 3 to 6 months
    1,222,044       354,210       1,576,254  
From 6 to 12 months
    1,300,821       1,178,161       2,478,982  
More than 12 months
    3,122,978       2,075,816       5,198,794  
Time deposits less than US$ 100,000(1)
    2,861,354       1,495,450       4,356,804  
Total
  COP 9,204,941     COP 6,065,330     COP 15,270,271  
 

(1)
Approximately COP 191 million at the Representative Market Rate as of December 31, 2010.
 
For a description of the average amount and the average rate paid for 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:
 
   
Year
ended December 31,
 
   
2010
   
2009
   
2008
 
   
(in percentages)
 
Net income as a percentage of:
                 
Average total assets
    2.27       2.01       2.34  
Average stockholders’ equity
    19.71       19.59       23.68  
Dividends declared per share as a percentage of consolidated net income per share(1)
    36.68       39.92       38.09  
Average stockholders’ equity as a percentage of average total assets
    11.50       10.24       9.89  
Return on interest-earning assets(2)
    9.32       12.20       13.55  
 

(1)
Dividends are paid based on unconsolidated earnings. Net income per share is calculated using the average number of common and preferred shares outstanding during the year.
(2)
Defined as total interest earned divided by average interest-earning assets.
 
 
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E.7.
INTERBANK BORROWINGS
 
The following table sets forth certain information regarding the foreign interbank borrowings by the Bank for the periods indicated:
 
   
As of December 31,
 
   
2010
   
2009
   
2008
 
   
Amount
   
Rate(3)
   
Amount
   
Rate(3)
   
Amount
   
Rate(3)
 
   
(COP million, except percentages)
 
       
End of period
    2,698,941       0.72 %     1,152,918       4.1 %     2,077,291       3.9 %
Weighted average during period
    1,449,197       1.30 %     1,270,413       3.8 %     1,578,252       4.7 %
Maximum amount of borrowing at any month-end
    2,698,941 (1)             2,102,719 (2)             2,077,291 (1)        
Interest paid during the year
    19,537               47,650               81,178          
 

(1) 
December
(2)
January
(3)
Corresponds to the ratio of interest paid to foreign interbank borrowings.
 
ITEM 4 A.
UNRESOLVED STAFF COMMENTS
 
As of the date of the filing of this Annual Report, the Bank has no unresolved written comments from the Securities and Exchange Commission (the “SEC”) staff regarding the Bank’s periodical reports required to be filed under the Exchange Act of 1934.
 
ITEM 5. 
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
 
A.
OPERATING RESULTS
 
The following discussion should be read in conjunction with Bancolombia’s audited consolidated financial statements for the three year period ended December 31, 2010.
 
Bancolombia’s audited consolidated financial statements for the periods ended December 31, 2010, 2009 and 2008 are prepared following the accounting practices and the special regulations of the Superintendency of Finance, or, in the absence of such regulations, Colombian GAAP. Together, these requirements differ in certain significant respects from U.S. GAAP. Note 31 to the Bank’s audited consolidated financial statements included in this Annual Report provides a description of the significant differences between Colombian GAAP and U.S. GAAP as they relate to the Bank’s audited consolidated financial statements and provides a reconciliation of net income and stockholders’ equity for the years and dates indicated herein.
 
IMPACT OF ECONOMIC AND MONETARY POLICIES IN BANCOLOMBIA’S RESULTS

Bancolombia’s operations are affected by external factors such as: economic activity, interest rates, inflation and exchange rates. The following discussion summarizes the recent behavior of such variables.

Economic activity

Colombia’s GDP growth was 4.3% in 2010, significantly higher than the 1.5% obtained in 2009. This figure is indeed favorable for it shows that better household consumption and also investment vitality are driving a stronger economic expansion.

The Colombian Statistics Bureau (DANE) revised Colombia’s GDP growth for 2009 upwards. This means that the country neither grew by 0.4% or 0.8% as reported initially and by subsequent revision, but by 1.5% which was remarkable for a year in which the global economy recorded its worst performance since 1946, with declines of 0.6% worldwide, and 1.9% in the case of Latin America.
 
 
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In 2010, Colombia´s domestic demand rose by 5.9%, reconfirming the trend that began at the end of 2009, but the external sector dampened the overall growth with imports increasing by 14.7% compared with the drop of 7.3% in 2009.

On the demand side, key GDP components performed as follows in 2010 compared to 2009: consumption increased 4.4%; investment grew 11.0% and exports increased 2.2%.

For 2010, gross capital formation represented 26% of GDP; household consumption represented 65%, government consumption 16%, exports 16% and imports 24%.

The activities that led growth during the year were mining (11% growth), trade (6% growth), manufacturing (5% growth) and transportation (5% growth).

Interest Rates

Between July, 2008 and May 2010, the Central Bank decreased its benchmark rate from 10.0% to 3.0% in order to incentivize economic activity. During 2010, amid an environment of low inflationary pressures, rates were maintained at 3.0%.  In the first months of 2011, the Central Bank increased its benchmark rate 50 basis points to 3.50% (two consecutive increases of 25 basis points) motivated by rising domestic demand and increasing lending activity, as well as the estimated GDP growth for 2011, a projected inflation rate approaching the midpoint of the long-term targeted range and inflation expectations for over one year surpassing the long-term target.

It is important to note that the Central Bank does not consider that this increase in the cost of money shall negatively affect the country’s GDP growth and employment, on the contrary, higher interest rates shall contribute to  maintain inflation over time within the long-term targeted range (between 2% and 4%).

Inflation

Year-end inflation rate for 2010 was 3.17%, higher than the 2.0% recorded for 2009.

Historically 93% of the total inflation rate for the year is reached at November, but in 2010 it came to just 79.2%, that is to say November and December accounted for 20.8% of the total annual inflation increase. It is the first time this has happened in the last 20 years, and is due to the disasters caused by the heavy rainfall that damaged crops and infrastructure in the country over recent months thereby driving up the cost of food and other services such as transport.

The 12-month core inflation rate for 2010 came to 2.82%, thereby remaining within the Central Bank’s targeted inflation range. Also, upon excluding regulated goods and services along with food, the monthly rise in inflation comes to just 0.14% with the 12-month figure running at 1.79%; it must be noted however that the cost of regulated goods and services in December rose by 0.72%, given the rise in gas and petrol prices and their effect on inter-municipal bus services. December’s CPI increase was not due to any problems with demand, but to negative shocks on the supply side which are unlikely to have any tangible effect on the monetary policy decisions to be taken by Central Bank in 2011.

Exchange rate

The Colombian Peso appreciated 6% versus the US Dollar during 2010.

Foreign Direct Investment flows into Colombia were one of the main drivers of this appreciation. During 2010, FDI totaled USD 8,093 million, of which 95% was related to oil, gas and mining. FDI is expected to grow more than 30% in 2011. Abundance of US dollars in the US economy was also a factor that contributed to the appreciation as international investors were looking for investments in currencies that were not likely to lose value versus the US dollar and that could offer better returns than dollar denominated securities.

 
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The negative impact of the strengthening of the COP was mainly suffered by exporting oriented companies that lost competitiveness as they had a big portion of their expenses in local currency.

Outlook

Future prospects for the Colombian financial sector in general, and for Bancolombia in particular, are expected to depend on the factors listed below:
 
Favorable factors for the Colombian economy –
mid-term
 
Unfavorable factors for the Colombian
economy – mid-term
     
Benefits derived from past monetary policies aimed at achieving sustainable growth.
 
Underdeveloped infrastructure that translates into a constraint for growth.
     
Positive inflationary outlook
 
Commodity dependent export activity.
     
Investment grade rating given to Colombia by Standard and Poor’s in 2011, which should continue to strengthen investor confidence.
 
Despite successful efforts to diversify export markets, there is still concentration in specific export destinations, particularly the United States.
     
Reforms underway, such as the so called Fiscal Rule, that if approved will further contribute to the country’s fiscal sustainability.
 
Exchange rate uncertainties that could expose the economy to highly volatile markets or build inflation pressures.
     
Stronger local capital markets, with little exposure to “toxic assets” and with low currency mismatches.
 
Risk of new fiscal measures, currently under study by the Congress, not being approved.
     
A well capitalized banking system.
 
Possible escalation in activities of guerilla and drug cartels that may hurt investor confidence.
     
Well-developed supervision and regulation of the financial system.
   
     
Low indebtedness of households and a well provisioned banking system.
   
     
Adequate international reserves to short term debt.
   
     
Limited exposure of corporations to speculation through derivatives.
   
 
GENERAL DISCUSSION OF THE CHANGES IN RESULTS
 
Summary
 
During 2010, Bancolombia strengthened its competitive position and full-service financial model,  and benefited from the diversity of its leading franchises. For the year 2010, net income totaled COP 1,436 billion (COP 1,823 per share – US$ 3.81 per ADR), which represents an increase of 14% as compared to COP 1,257 billion net income for the fiscal year 2009 and an increase of 11% as compared to COP 1,291 billion net income for the fiscal year 2008.
 
 
75

 
 
Bancolombia’s return on average stockholders’ equity for 2010 was 19.7%, up from 19.6% in 2009 and down from 23.7% in 2008.
 
Margin compression during 2010: net interest margin decreased throughout 2010 and reached 6.13% for the whole year, down from 6.98% in 2009 and 7.42% in 2008.
 
Credit cost decreased: provision charges, net of recoveries, totaled COP 548 billion for 2010, down from COP 1,153 billion in 2009 and COP 1,133 billion in 2008.
 
Loans and financial leases grew 16% during the year. This performance was driven primarily by significantly increased economic activity in Colombia, which led individuals and corporations to demand more credit,especially in the second half of the year.
 
Strong balance sheet: reserves for loan losses represented 5.2% of total loans and 180% of past due loans at the end of 2010, while capital adequacy finished 2010 at 14.7% (Tier 1 ratio of 10.3%), higher than the 13.2% (Tier 1 ratio of 10.4%) reported at the end of 2009.
 
Solid liquidity position: deposits increased 3% during 2010, while the ratio of net loans to deposits (including borrowings from development banks) was 100% at the end of the year.
 
REVENUE PERFORMANCE
 
Net Interest Income
 
For the year 2010, net interest income totaled COP 3,377 billion, down 11% as compared to COP 3,802 billion in 2009 and down 5% as compared to COP 3,560 billion in 2008. This performance is explained by the combined effect of lower net interest margins and slow growth in the loan portfolio during the first half of the year.  During 2010, Colombian central bank reduced its reference rate from 3.5% to 3%, which increased money supply in the economy and caused asset side rates to decrease at a faster pace than the liability side rates, and as a result margins were compressed.Net interest income represented 61% of revenues in 2010, compared to 67% for 2009 and 64% for 2008.
 
Interest income, which is the sum of interest on loans, financial leases, overnight funds and income from investment securities, totaled COP 4,949 billion in 2010, down 23% as compared to COP 6,428 billion in 2008 and down 22% as compared to COP 6,314 billion in 2008. The 2010 performance was driven by lower income from securities and lower interest income on loans and financial leases.
 
Interest on loans and financial leases also reflected the impact of lower interest rates during 2010. The weighted average nominal interest rate on loans and financial leases decreased to 10.3% in 2010 from 13.1% in 2009 and 14.7% in 2008. As a result, interest on loans and financial leases totaled COP 4,464 billion (90% of interest income) and decreased 21% as compared to COP 5,623 billion in 2009 and 23% as compared to COP 5,776 in 2008.
 
Interest on investment securities, which includes, among other items, the interest paid or accrued on debt securities and mark-to-market valuation adjustments, totaled COP 442 billion in 2010, down 39% as compared to 2009 and up 3% as compared to 2008. This performance was driven by lower market interest rates which remained stable as compared to 2009.
 
Regarding interest expenses, interest paid on liabilities totaled COP 1,572 billion in 2010, down COP 40% as compared to COP 2,625 billion in 2009, and down 43% as compared to COP 2,753 billion in 2008. Such a decrease in interest expenses is explained by lower interest rates paid on deposits and a more favorable funding mix (one with a greater proportion of demand deposits). Overall, the average interest rate paid on interest-bearing liabilities decreased to 3.4% in 2010 from 5.6% in 2009 and 6.6% in 2008.
 
 
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Net Fees and Income from Financial Services
 
For the year 2010, net fees and income from services totaled COP 1,579 billion, up 5% as compared to COP 1,506 in 2009 and up 20% as compared to COP 1,314 in 2008. This increase was driven primarily by the solid performance of credit and debit card annual fees, banking services and collection and payments fees.
 
Commissions from banking services increased by 22% due to higher fees from advisory and project finance arrangements. The 35% reduction of credit card merchant fees was due to lower charges per transaction to merchants. Check remittances decreased 31% due to fewer transactions and lower charges per transaction to customers.
 
Bancolombia distribution channels performed an increasing number of transactions in 2010. In particular, our Colombia Banking operation performed about 1.1 billion transactions during 2010, which represents an increase of 7% as compared to the levels experienced in 2009. The higher transactional levels, together with fee increments and the elimination of fee exemptions in certain payment instruments (like debit cards and credit cards) for some segments explained the solid performance of fees.
 
The following table lists the main revenue-producing fees along with their variation from the prior fiscal year:
 
   
Year
   
Growth
 
   
2010
   
2009
   
2008
   
2010/2009
 
   
(COP million)
       
Main fees and commissions
                       
Commissions from banking services
    306,917       251,734       238,918       21.92 %
Electronic services and ATM fees
    57,019       58,944       86,070       (3.27 )%
Branch network services
    118,647       110,837       104,010       7.05 %
Collections and payments fees
    226,537       187,348       157,281       20.92 %
Credit card merchant fees
    18,355       28,200       32,215       (34.91 )%
Credit and debit card annual fees
    564,457       548,820       446,647       2.85 %
Checking fees
    69,425       69,544       67,963       (0.17 )%
Fiduciary activities
    165,075       171,927       98,799       (3.99 )%
Pension plan administration
    90,131       96,678       87,826       (6.77 )%
Brokerage fees
    36,779       45,966       54,742       (19.99 )%
Check remittance
    17,693       25,812       26,148       (31.45 )%
International operations
    58,559       53,614       47,962       9.22 %
Fees and other service expenses
    (149,653 )     (143,151 )     (134,939 )     4.54 %
Total fees and income from services, net
    1,579,941       1,506,273       1,313,642       4.89 %
 
Other Operating Income
 
For 2009, total other operating income was COP 548 billion, 44% higher than the COP 381 billion reported in 2009, but 16% lower than the COP 650 billion obtained in 2008.
 
Revenue from rent of real estate properties and operating leases had a significant impact in the other operating income line of COP 178 billion, 14% higher than the COP 156 billion reported in 2009, and 68% higher than the COP 105 billion obtained in 2008.
 
In addition, the sale of Bancolombia’s stakes in IVL S.A. and Metrotel Redes S.A. positively affected other operating income in the year. As part of this transaction, the Bank recorded non-recurring gains on sales of equities of COP 34 billion for 2010.
 
Foreign exchange net gains decreased significantly by 129% from COP 216 billion in 2009 to COP 62 billion in 2010, due to the 6% appreciation of the COP versus the USD, which caused USD denominated obligations to be lower when converted to COP. On the other hand, forward contracts in foreign currency fell by 81% from COP 266 billion  in 2009 to COP 51 billion in 2010, due also to the appreciation of the COP versus the dollar which caused a negative carry and a smaller gain in forward contracts.
 
 
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Operating expenses
 
For 2010, operating expenses totaled COP 3,098 billion, up 7% as compared to COP 2,826 billion in 2009 and 17% as compared to 2008.
 
Personnel expenses (the sum of salaries and employee benefits, bonus plan payments and compensation) totaled COP 1,294 billion in 2010, up 13% as compared to 2009. This performance was primarily driven by the combined effect of larger headcount and wage increments during 2010. Salaries were raised in line with the 2010 inflation rate of 3.17%.
 
Administrative and other expenses totaled COP 1,455 billion in 2010, up 3% as compared to 2009 and up 15% as compared to 2008, driven by increased fees paid in connection with software development and IT upgrades.
 
Depreciation expense totaled COP 195 billion in 2010, increasing 6% as compared to COP 185 billion in 2009. This increase was driven by the growth in the operating lease business of Bancolombia. In particular, COP 85 billion or 44% of 2010’s depreciation expense is associated with operating lease assets, compared to COP 70 billion or 38% of depreciation expense in 2009.
 
The following table summarizes the principal components of Bancolombia’s operating expenses for the last three fiscal years:
 
   
Year ended December 31,
 
   
2010
   
2009
   
2008
 
   
(COP million)
 
Operating expenses:
                 
Salaries and employee benefits
    1,139,947       1,034,942       928,997  
Bonus plan payments
    126,839       90,341       125,393  
Compensation
    27,551       19,725       23,539  
Administrative and other expenses
    1,455,025       1,418,145       1,268,982  
Deposit security, net
    84,399       74,228       52,151  
Donation expenses
    13,008       3,506       26,653  
Depreciation
    195,744       185,027       141,133  
Goodwill amortization
    55,966       69,231       73,149  
Total operating expenses
    3,098,479       2,895,145       2,639,997  
 
Provision Charges and Credit Quality
 
For the year 2010, provision charges (net of recoveries) totaled COP 548 billion (or 1.2% of average loans), which represents a decrease of 53% as compared to COP 1,153 billion in 2009 (or 2.6% of average loans) and an decrease of  52% as compared to 1,133 billion in 2008 (or 2.8% of average loans). The lower level of credit cost was driven by lower net charge-offs in our loan portfolio and lower reserve additions across all credit segments, reflecting the better economic activity and stronger labor markets.
 
Net loan charge-offs totaled COP 666 billion in 2010, down 28% from COP 926 billion in 2009 and up 22% from COP 548 billion in 2008. Past due loans amounted to COP 1,396 billion in 2010, down 14% as compared to COP 1,627 billion in 2009, and 14% lower than COP 1,624 billion in 2008.
 
The delinquencies ratio (loans overdue more than 30 days divided by total loans) reached 2.87% as of the end of 2010, down from 3.87% at the end of 2009 and down from 3.64% at the end of 2008.
 
Allowance for credit losses
 
Under Colombian GAAP and according to the rules issued by the Colombian Superintendency of Finance, a bank must follow minimum provided standards for establishing allowances for loan losses, which require banks to analyze on an ongoing basis the credit risk to which their loan portfolio is exposed, considering the terms of the corresponding obligations as well as the level of risk associated with the borrowers. The risk evaluation is based on information relating to the historical performance data, the particular characteristics of the borrower, collaterals, debt service with other entities, macroeconomic factors and financial information, among others. The standards for provisioning vary for every credit category.
 
 
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Commercial and consumer loans are provisioned following standard models developed by the Superintendency of Finance. According to the models the allowance for loan losses is stated through the calculation of the Expected Loss:
 
Expected Loss = [Probability of default] x [Exposure at default] x [Loss given default]
 
The probability of default is calculated and provided by the Superintendency of Finance based on historical data.  Exposure at default is defined as the current balance of the principal, interest, interest receivable accounts and other receivables regarding consumer and retail loan obligations at the moment of default. The Loss Given Default (“LGD”) is defined as the expected loss occurred after default and is calculated and provided by the Superintendency of Finance. The LGD varies according to the type of collateral and would increase gradually depending on the number of days the loan has been in default. It is important to note that in 2008 and 2009, Bancolombia applied stricter parameters in the estimation of the LGD of its loan portfolio by reducing the number of the past due days that are used in such calculation and adjusting some percentages. These parameters were maintained in 2010. Therefore, allowances increased and produced higher provision charges that reflected on higher coverage ratio for loan losses. In addition to the allowances calculated by the reference models, the Bank also sets up marginal allowances for certain clients which are considered to bear an increased inherent risk due to determined risk factors such as macroeconomic or industry deterioration trends or any other factors that could indicate early impairment. The changes in the LGD parameters and the marginal allowances for certain clients in the commercial loan portfolio were made to better reflect the credit risk associated with increasing defaults and the deterioration of the economy.
 
For mortgage and microcredit loans there are no standard models required or provided by the regulator. In order to calculate allowances for these segments, the Bank must maintain at all times individual provisions equal to or greater than the minimum percentages provided by the Colombian Superintendency of Finance. The minimum percentages vary depending on the risk category assigned to every loan within the mortgage and microcredit categories (the higher the risk, the higher the allowance percentage). In addition, the minimum percentages might differ if the loan has any collateral.
 
The Bank has also adopted, for its Colombian operation, a more rigorous policy in the calculation of allowances for mortgage and microcredit loans as compared to that required by the regulator. The Bank’s policy aims at better reflecting the higher risk of these segments throughout the economic downturn. Such policy has established higher allowance percentages for loans classified in the C, D and E risk categories.
 
For mortgage and microcredit loans, the Bank sets up a general allowance, which corresponds to one percent (1%) of the outstanding principal. By virtue of applying the standardized models supplied by the Superintendency of Finance for commercial and consumer loans, no general allowances are any longer assigned to commercial and consumer loans.
 
All in all, allowances for loan and financial lease losses amounted to COP 2,509 billion or 5.2% of total loans at the end of 2010 and increased from COP 2,432 billion, or 5.8% of total loans as of December 31, 2009. Likewise, coverage for loan losses, measured by the ratio of allowances to past due loans (“PDLs”) (overdue 30 days), reached 180% at the end of 2010, up from 149% at the end of 2009. The coverage increase reflects the Bank’s prudent approach toward risk and incorporates as mentioned above stricter parameters than those required by the Superintendency of Finance. Additionally a low deterioration of the loan portfolio during 2010, contributed to a higher coverage ratio. As of December 31, 2010, allowances in the amount of COP 559 billion were recorded in excess of the minimum allowances required by Colombia’s Superintendency of Finance.
 
The Bank’s management considers that the Bank’s allowances for loan and financial leases losses adequately reflect the credit risk associated with its loan portfolio given the current economic environment and the available information upon which the credit assessments are exercised. Nonetheless, the methodology used in the allowance and provision charges determination is based on the existence and magnitude of determined factors that are not necessarily an indication of future losses and accordingly no assurance can be given that current allowances and provision charges will exactly reflect actual losses.
 
 
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For further details regarding the regulation and methodologies for the calculation of allowances following the accounting practices and the special regulations of the Superintendency of Finance, please see “Note 2.i. Loans and Financial Lease”  of Notes to Financial Statements included in this Annual Report.
 
For a description of the loan portfolio, the summary of loan experience, potential problem loans and charge-offs see “Item 4. Information on the Company – E. Selected Statistical Information – E.3. Loan Portfolio” and “Item 4. Information on the Company – E. Selected Statistical Information – E.4. Summary of loan loss experience”.
 
Allowances for loan losses calculated following practices and special regulations of the Superintendency of Finance differ in certain significant respects from U.S. GAAP. Note 31- e) “Allowance for loan losses, financial leases, foreclosed assets and other receivables” to the Bank’s audited consolidated financial statements included in this Annual Report provides a description of the significant differences between Colombian GAAP and U.S. GAAP in this respect and a reconciliation of allowances following U.S. GAAP.
 
Merger Expenses and Goodwill Amortization
 
For the year ended December 31, 2010, goodwill amortization amounted to COP 56 billion, 19% down from COP 69 billion in 2009 and 23% down from COP 73 billion in 2008.
 
As of December 31, 2010, outstanding goodwill totaled COP 751 billion, which represents a 12% decrease from COP 856 billion at the end of 2009. Outstanding goodwill represented 1.1% of the Bank’s total assets and primarily comprises the goodwill related to the acquisition of Banagrícola, which is being amortized over 20 years beginning in May 2007. The 6% appreciation of the COP against the U.S. dollar during 2010 had the effect of increasing the Bank’s dollar-denominated goodwill, principally relating to the Banagricola acquisision.
 
Non-Operating Income (Expenses)
 
Net non-operating income, which includes gains/losses from the sale of foreclosed assets, property, plant and equipment and other assets and income from minority interests, totaled COP 86 billion in 2010, 10% higher than COP 78 billion in 2009. This performance is explained by higher non-operating income in 2010, which increased 35% compared to 2009, driven by gains on the sale of properties.
 
Net non-operating income totaled COP 78 billion in 2009, significantly higher than COP 13 billion in 2008. This performance is explained by lower non-operating expenses in 2009, which decreased 25% compared to 2008, driven by lower expenses related to legal proceedings.
 
The following table summarizes the components of the Bank’s non-operating income and expenses for the last three fiscal years:  
 
   
Year ended December 31,
 
   
2010
   
2009
   
2008
 
   
(COP million)
 
Non-operating income (expenses), net:
                 
Other income(1)
    267,472       198,761       172,550  
Minority interest
    (13,217 )     (15,081 )     (18,511 )
Other expenses(2)
    (168,179 )     (105,529 )     (140,662 )
Total non-operating income (expenses), net
    86,076       78,151       13,377  
 

(1)
Includes gains on sale of foreclosed assets, property, plant and equipment, reimbursement of the provisions, deferred tax recovery.
(2)
Include operational losses and losses from the sale of foreclosed assets, property, plant and equipment and payment of administrative processes.
 
 
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Income Tax Expenses
 
Income tax expense for the fiscal year 2010 totaled COP 508 billion, up 10% as compared to COP 462 billion in 2009 and 7% above the COP 474 billion in 2008.
 
Tax expense is determined for every subsidiary following the tax law of the country where it is domiciled. It is important to note that Bancolombia (unconsolidated), Leasing Bancolombia, Banca de Inversion Bancolombia and Fiduciaria Bancolombia signed an agreement with the Government of Colombia in order to be subject to the tax stability regime for ten years beginning on January 2001. Pursuant to the tax stability regime, those firms agreed to be taxed two percentage points above the applicable income tax rate in Colombia in exchange for an exemption with regard to any new national taxes or rates required after the date of the agreement. For this reason, in 2010, 2009 and 2008, Bancolombia (unconsolidated), Leasing Bancolombia, Banca de Inversion Bancolombia and Fiduciaria Bancolombia did not pay any financial transaction tax, wealth tax or income surtax. Consequently, Bancolombia (unconsolidated), Leasing Bancolombia, Banca de Inversion Bancolombia and Fiduciaria Bancolombia were taxed at a total income tax rate of 35% for the fiscal years 2010, 2009 and 2008, two percentage points above the required tax rate for the companies that were not subject to the tax stability regime in Colombia. This agreement terminated in December 31, 2010 (in the case of Fiduciaria Bancolombia, the agreement was terminated in December 31, 2009).As result of the expiration of the tax stability regime agreement, Bancolombia will be subject to any new taxes or increases in tax rates that are implemented on or after January 1, 2011.
 
In the case of Bancolombia Panama and Subsidiaries, Banagrícola and Banco Agrícola Panama, which are domiciled in Panama and permitted to operate through an international banking license, income tax is governed by the Panamanian tax law. Pursuant to Panamanian tax law Bancolombia Panama and Subsidiaries, Banagrícola and Banco Agrícola Panama profits are not subject to income tax in Panama. Subsidiaries incorporated in El Salvador pay income tax of 25% on profits obtained within the country. For further details about the income tax expense calculation see “Note 21. Accrued Expenses – Income Tax Expense” of Notes to the Consolidated Financial Statements.
 
GENERAL DISCUSSION OF THE CHANGES IN RESULTS FOR 2009 versus 2008
 
Summary
 
Despite a slow economic growth environment, Bancolombia further strengthened its competitive position and full-service financial model, while benefiting from the diversity of its leading franchises. For the year 2009, net income totaled COP 1,257 billion (COP 1,595 per share – US$ 3.12 per ADR), which represents a decrease of 3% as compared to COP 1,291 billion net income for the fiscal year 2008.
 
As a result of lower net income and a less leveraged capital structure, Bancolombia’s return on average stockholders’ equity for 2009 decreased to 19.6%, from 23.7% in 2008.
 
Margins were compressed during 2009: Net interest margin decreased throughout 2009 and reached 7.22% in 2009, down from 7.70% in 2008.
 
Credit cost remained high: Provision charges, net of recoveries, totaled COP 1,153 billion for 2009, up from COP 1,133 billion in 2008.
 
Loans and financial leases decreased 6% during the year. This performance was driven primarily by higher than anticipated prepayments and lower demand on corporate loans motivated by increased activity of non-financial firms in the domestic and international debt markets.
 
The Bank continued to have a strong balance sheet.Reserves for loan losses represented 5.8% of total loans and 149% of past due loans at the end of 2009, compared with 4.9% of total loans and 131% of past due loans at December 31, 2008, while capital adequacy finished 2009 at 13.2% (Tier 1 ratio of 10.4%), higher than the 11.2% (Tier 1 ratio of 9.0%) reported at the end of 2008.
 
 
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Solid liquidity position: deposits increased 4% during 2009, while the ratio of net loans to deposits (including borrowings from development banks) was 88% at the end of the year
 
REVENUE PERFORMANCE
 
Net Interest Income
 
For the year 2009, net interest income totaled COP 3,802 billion, up 7% as compared to COP 3,560 billion in 2008. This performance is explained by the combined effect of lower interest expenses and higher interest income in 2009. Net interest income represented 67% of revenues in 2009, compared to 64% for 2008.
 
Interest income, which is the sum of interest on loans, financial leases, overnight funds and income from investment securities, totaled COP 6,428 billion in 2009, up 2% as compared to COP 6,314 billion in 2008. This performance was partially driven by higher income from securities, though it was negatively impacted by lower interest income on loans and financial leases.
 
Although interest on loans and financial leases benefited from higher average balances in 2009, which increased 9% during the year, such positive effect was completely offset by lower interest rates on loans. The weighted average nominal interest rate on loans and financial leases decreased to 13.1% in 2009 from 14.7% in 2008. As a result, interest on loans and financial leases totaled COP 5,624 billion (88% of interest income) and decreased COP 152 billion (or 3%) as compared to 2008.
 
Interest on investment securities, which incorporates, among other items, the interest accrual of debt securities and mark-to-market valuation adjustments, totaled COP 729 billion in 2009, up 69% as compared to 2008. This performance was driven by a larger investment portfolio (the Bank’s average investment portfolio grew 26% during 2009), positive mark-to-market valuation effect due to higher bond prices, positive effects produced by the reclassification of the bank’s investment in the private capital fund Fondo inmobiliario Colombia and the recording of the net present value (“NPV”) of the estimated residual income derived from the pools of securitized mortgages.
 
In the fourth quarter of 2009, FCP Colombia Inmobiliaria, a fund that purchases and manages investment in real estate assets, issued units that were not bought by Bancolombia. As a result the Bank no longer held a controlling interest in the fund, stopped consolidating its financial statements and reclassified this investment as part of the trading category in order to be in compliance with accounting regulations on this matter. This reclassification produced positive effects in the Bank’s income from investment securities, which was positively impacted by income of COP 100 billion related to the greater market value of the Fund’s units in 2009. In addition, and in accordance with new regulations related to the accounting treatment of securitized mortgages issued by Colombian regulators, the Bank recorded, for the first time, the NPV of the estimated residual income that will be generated by the pools of securitized mortgages. Under the terms of the mortgage securitization transaction documents, Bancolombia is entitled to receive any residual income generated by the pool of mortgages after complete payment of the pool’s debt services and administrative charges. Therefore, the Bank proceeded to incorporate, for the first time, into the value of its mortgage backed securities, the net present value of the expected estimated residual income which takes into account performance assumptions based on historical statistical data. As a result, interest income from investment securities was positively impacted by income of COP 58 billion related to the greater value of the mortgage backed securities in 2009. The combined positive effect then, of the reclassification of Fondo Inmobiliario Colombia’s units in the trading category and the incorporation of the NPV of the residual income generated by pools of securitized mortgages into the value of mortgage backed securities was COP 158 billion and accounts for  53% of the year over year variation in the interest on investment securities.
 
Regarding interest expenses, despite a greater average volume of interest-bearing liabilities in 2009, which increased 13% as compared to 2008, interest paid on such liabilities decreased 5% over the year and totaled COP 2,625 billion in 2009, down COP 128 billion as compared to 2008. Such a decrease in interest expenses is explained by lower interest rates paid on deposits and a more favorable funding mix (one with a greater proportion of demand deposits). Overall, the average interest rate paid on interest-bearing liabilities decreased to 5.6% in 2009 from 6.6% in 2008.
 
 
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Net Fees and Income from Financial Services
 
For the year 2009, net fees and income from services totaled COP 1,506 billion, up 15% as compared to 2008. This increase was driven primarily by the solid performance of credit and debit card annual fees, fiduciary activities and collection and payments fees.
 
Despite the lower economic activity, our distributions channels performed an increasing number of transactions in 2009. In particular, our Colombia Banking operation performed more than a billion transactions during 2009, which represents an increase of 5% as compared to the levels experienced in 2008. The higher transactional levels, together with fee increments and the elimination of fee exemptions in certain payment instruments (like debit cards and credit cards) for some segments explained the solid performance of fees. In addition, fiduciary activities benefited from the increase in assets under management, which amounted to COP 55,153 billion by year end in 2009 up from COP 42,677 billion in 2008.
 
Other Operating Income
 
For 2009, total other operating income was COP 381 billion, substantially lower than the COP 650 billion reported in 2008.
 
During 2008, the Colombian Superintendency of Finance issued external circulars number 025, 030, 044 and 063 (the “2008 External Circulars”) establishing new guidelines for the valuation of derivatives and structured products. As a result of this change, Bancolombia recorded a reduction in the carrying value of derivatives that produced charges of COP 123 billion in 2009 and COP 145 billion in 2008. However, the net impact of such regulatory change was greater in 2009, because in 2008 other operating income was positively affected by greater mark-to-market gains produced by the formerly used methodology, which yielded results that were magnified by the market’s conditions in the second half of 2008. Bancolombia finished amortizing the one-time adjustments in carrying value related to the change in methodology in the first half of year 2009.
 
In addition, the sale of Bancolombia’s interest in Multienlace S.A. positively affected other operating income in 2008. As part of this transaction, the Bank recorded gains on sales of investment securities of COP 92 billion for 2008.
 
Operating expenses
 
For 2009, operating expenses totaled COP 2,826 billion, up 10% as compared to 2008.
 
Personnel expenses (the sum of salaries and employee benefits, bonus plan payments and compensation) totaled COP 1,145 billion in 2009, up 6% as compared to 2008. This performance was primarily driven by the combined effect of larger headcount (the bank increased its number of employees to 1,473 during 2009, representing a 7% increase compared to 2008) and wage increments during 2009, which off-set lower bonus plan payments and compensation in 2009 vs. 2008.
 
Administrative and other expenses totaled COP 1,418 billion in 2009, up 12% as compared to 2008, driven by increased fees paid in connection with software development and IT upgrades, greater collection efforts, greater costs associated with deposit insurance and higher taxes and tariffs.
 
Depreciation expense totaled COP 185 billion in 2009, increasing 31% as compared to 2008. This increase was driven by the growth in the depreciation of assets that are part of the operating lease business of Bancolombia. In particular, COP 70 billion or 38% of 2009’s depreciation expense is associated with operating lease assets.
 
 
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Provision Charges and Credit Quality
 
For the year 2009, provision charges (net of recoveries) totaled COP 1,153 billion (or 2.6% of average loans), which represents an increase of 2% as compared to COP 1,133 billion in 2008 (or 2.8% of average loans). The high level of credit cost was driven by higher net charge-offs in our loan portfolio and higher reserve additions for deterioration across all credit segments, reflecting the lower economic activity and weaker labor markets.
 
Net loans’ charge-offs totaled COP 926 billion in 2009, up 69% from 548 COP billion in 2008, while the increase in the amount of past due loans before charge-offs amounted to COP 929 billion in 2009, down 13% as compared to COP 1,067 billion in 2008.
 
The delinquencies ratio (loans overdue more than 30 days divided by total loans) reached 3.87% as of the end of 2009, up from 3.64% at the end of 2008.
 
Allowance for credit losses
 
Allowances for loan and financial lease losses amounted to COP 2,432 billion or 5.8% of total loans at the end of 2009 up from COP 2,134 billion, or 4.8% of total loans as of December 31, 2008. Coverage for loan losses, measured by the ratio of allowances to PDLs (overdue 30 days) also increased, reaching 149% at the end of 2009, up from 131% at the end of 2008. The coverage increase reflects the Bank’s prudent approach toward risk and incorporates as mentioned above stricter parameters than those required by the Superintendency of Finance. As of December 31, 2009, allowances in the amount of COP 494 billion were recorded in excess of the minimum allowances required by Colombia’s Superintendency of Finance.
 
Allowances for loan losses calculated following practices and special regulations of the Superintendency of Finance differ in certain significant respects from U.S. GAAP. Note 31- e) “Allowance for loan losses, financial leases, foreclosed assets and other receivables” to the Bank’s audited consolidated financial statements included in this Annual Report provides a description of the significant differences between Colombian GAAP and U.S. GAAP in this respect and a reconciliation of allowances following U.S. GAAP.
 
Merger Expenses and Goodwill Amortization
 
For the year ended December 31, 2009, goodwill amortization amounted to COP 69 billion, down from COP 73 billion in 2008 (5% decrease). During 2008 the Bank completed the amortization of goodwill recorded in connection with the acquisition of Banco de Colombia S.A. that occurred in the year 1998.
 
As of December 31, 2009, outstanding goodwill totaled COP 856 billion, which represents a 15% decrease from COP 1,009 billion at the end of 2008. Outstanding goodwill represented 1.4% of the Bank’s total assets and primarily comprises the goodwill related to the acquisition of Banagrícola, which will be amortized over 20 years beginning in May 2007.
 
Non-Operating Income (Expenses)
 
Net non-operating income, which includes gains/losses from the sale of foreclosed assets, property, plant and equipment and other assets and income from minority interests, totaled COP 78 billion in 2009, significantly higher than COP 13 billion in 2008. This performance is explained by lower non-operating expenses in 2009, which decreased 25% compared to 2008, driven by lower expenses related to legal proceedings.
 
Income Tax Expenses
 
Income tax expense for the fiscal year 2009 totaled COP 462 billion, down 3% as compared to COP 474 billion in 2008.
 
 
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Tax expense is determined for every subsidiary following the tax law of the country where it is domiciled. It is important to note that Bancolombia (unconsolidated), Leasing Bancolombia, Banca de Inversion Bancolombia and Fiduciaria Bancolombia signed an agreement with the Government of Colombia in order to be subject to the tax stability regime for ten years beginning on January 2001. Pursuant to the tax stability regime, those firms agreed to be taxed two percentage points above the applicable income tax rate in Colombia in exchange for an exemption with regard to any new national taxes or rates required after the date of the agreement. For this reason, in 2009, 2008 and 2007, Bancolombia (unconsolidated), Leasing Bancolombia, Banca de Inversion Bancolombia and Fiduciaria Bancolombia did not pay any financial transaction tax, wealth tax or income surtax. Consequently, Bancolombia (unconsolidated), Leasing Bancolombia, Banca de Inversion Bancolombia and Fiduciaria Bancolombia were taxed at a total income tax rate of 36% for the fiscal year 2007, and 35% for the year 2008 and 2009, 2 percentage points above the required tax rate for the companies that were not subject to the tax stability regime in Colombia. This agreement will be terminated in December 31, 2010 (in the case of Fiduciaria Bancolombia, the agreement was terminated in December 31, 2009).
 
In the case of Bancolombia Panama and Subsidiaries, Banagrícola and Banco Agrícola Panama, which are domiciled in Panama and permitted to operate through an international banking license, income tax is governed by the Panamanian tax law. Pursuant to Panamanian tax law Bancolombia Panama and Subsidiaries, Banagrícola and Banco Agrícola Panama Profits are not subject to income tax in Panama. Subsidiaries incorporated in El Salvador pay income tax of 25% on profits obtained within the country. For further details about the income tax expense calculation see “Note 21.  Accrued Expenses – Income Tax Expense” of Notes to the Consolidated Financial Statements.
 
RESULTS BY SEGMENT
 
The Bank manages its business through nine main operating segments: Banking Colombia, Banking El Salvador, Leasing, Trust, Investment Banking, Brokerage, Off Shore, Pension and Insurance, and All other.
 
These segments changed from those reported in 2009. For an explanation of the reasons for this change, please see Note 31-section (y) “Segments Disclosure” to the Bank’s consolidated financial statements as of December 31, 2010.
 
Banking Colombia: This segment provides retail and corporate banking products and services to individuals, companies and national and local governments in Colombia. The Bank’s strategy in Colombia is to grow with these clients based on value-added, long-term relationships. In order to offer specialized services to individuals and small and medium-size enterprises (SMEs), the Bank’s retail sales force targets the clients classified as: Personal, Private, Entrepreneurs, Foreign Residents and SMEs. The Bank’s corporate and government sales force targets and specializes in companies with more than COP 16,000 million in revenue of nine economic sectors: Agribusiness, Commerce, Manufacturing of Supplies and Materials, Media, Financial Services, Non-Financial Services, Construction, Government and Natural Resources.
 
This segment is also responsible for the management of the Bank’s proprietary trading activities, liquidity and distribution of treasury products and services to its client base in Colombia.
 
    Year ended December 31,  
   
2010
   
2009
   
2008
   
Change 2010-2009
   
Change 2009-2008
 
   
(COP in million)
 
Net Interest Income
    2,617,840       2,954,586       2,846,819       (11.40 )%     3.79 %
Net provisions
    (378,778 )     (866,097 )     (955,657 )     (56.27 )%     (9.37 )%
Net Commissions
    1,197,419       1,116,632       1,000,716       7.23 %     11.58 %
Other net revenues
    444,676       276,437       529,493       60.86 %     (47.79 )%
Total Operating Income
    3,881,157       3,481,558       3,421,371       11.48 %     1.76 %
Operating expenses
    2,442,504       2,209,990       2,056,822       10.52 %     7.45 %
Non-operating income (expense)
    71,628       61,378       25,904       16.70 %     136.94 %
Income before income taxes
    1,510,281       1,332,946       1,390,453       13.30 %     (4.14 )%
Income tax expense
    (334,712 )     (316,170 )     (348,911 )     5.86 %     (9.38 )%
Segment profit
    1,175,569       1,016,776       1,041,542       15.62 %     (2.38 )%
Segment assets
    49,499,711       42,952,531       41,815,182       15.24 %     2.72 %
 
 
85

 
 
In 2010, profit for Banking Colombia increased 16% to COP 1,176 billion.
 
Net interest income decreased 11.4% to COP 2,617 billion, due to a compression in net interest margins generated by a reduction of the Colombian Central Bank’s interest rate and slow credit demand during the first half of the year. Towards the second half of the year, credit demand picked up and permitted the loan portfolio to expand. Consumer loans and mortgages (including COP 1,627 billion in securitized mortgages) lead the growth, and commercial loans followed as utilization of installed capacity of companies increased as well.
 
Net provision charges decreased 56% to COP 379 billion, due to a good performance of credit quality and low deterioration of the loan portfolio. Despite this reduction in provision charges, coverage of past due loans increased from 157.62% in 2009 to 173.59% in 2010. Operating expenses increased 10.5% to COP 2,443, due to increased administrative expenses and labor costs. A big driver for these expenses was the IT renovation project that Grupo Bancolombia is currently undertaking, which demands labor and operational expenses. For 2011, operating expenses are expected to grow at a similar rate as they did in 2010.
 
Assets attributable to Banking Colombia grew 15.2% during the year, mainly driven by the growth in loans.
 
In 2009, profit for Banking Colombia decreased 2.4% to COP 1,017 billion due to weak growth in the loan portfolio combined with a reduction in net interest margins, which caused net interest income to grow only 3.8%. Additionally, operating expenses grew by 7.4%.  Even though commissions grew 11.6% and provisions decreased 9.4%, these decreases were not sufficient to prevent a decline in segment profit for the year. Operating expenses grew 7.45%, driven by wage increases and higher administrative expenses due to inflation.
 
Banking El Salvador: This segment provides retail and commercial banking products and services to individuals, companies and national and local governments in El Salvador. Banking El Salvador also includes operations of the following subsidiaries:  Arrendadora Financiera S.A., Credibac S.A. de CV and   Bursabac S.A. de CV.
 
This segment is also responsible for the management of the Bank’s proprietary trading activities, liquidity and distribution of treasury products and services to its client base in El Salvador.
 
    Year ended December 31,  
   
2010
   
2009
   
2008
   
Change 2010-2009
   
Change 2009-2008
 
   
(COP in million)
 
Net Interest Income
    362,155       393,873       321,797       (8.05 )%     22.40 %
Net provisions
    (102,681 )     (179,418 )     (92,572 )     (42.77 )%     93.81 %
Net Commissions
    115,206       136,137       131,145       (15.37 )%     3.81 %
Other net revenues
    18,476       16,759       17,505       10.25 %     (4.26 )%
Total Operating Income
    393,156       367,351       377,875       7.02 %     (2.79 )%
Operating expenses
    189,922       238,432       215,880       (20.35 )%     10.45 %
Non-operating income (expense)
    600       (8,748 )     22,278       (106.86 )%     (139.27 )%
Income before income taxes
    203,834       120,171       184,273       69.62 %     (34.79 )%
Income tax expense
    (54,547 )     (23,446 )     (36,897 )     132.65 %     (36.46 )%
Segment profit
    149,287       96,725       147,376       54.34 %     (34.37 )%
Segment assets
    7,093,621       7,756,293       8,526,531       (8.54 )%     (9.03 )%

In 2010, profit for Banking El Salvador increased 54% to COP 149 billion.
 
 
86

 
 
Net interest income decreased 8.1% to COP 362 billion, due the contraction of the loan portfolio. During 2010, margins expanded from 5.3% to 5.8% but that expansion was not enough to offset the contraction of the loan portfolio. This contraction was caused by a weak economy in El Salvador. Nevertheless deposits did not contract and their cost remained stable. The decision of maintaining the amount of deposits instead of reducing them was a measure designed to enhance the Bank’s ability to grow the loan book when credit demand picks up again.
 
Net provision charges decreased 43% to COP 103 billion, in line with an improvement in the credit quality of the loan portfolio. In banking operations in El Salvador, we maintained strict discipline in credit standards in order to prevent any significant deterioration of the loan book due to weak economic performance. Allowances for bad loan losses as a percentage of past due loans at the end of 2010 was 100% and past due loans as a percentage of gross loans was 4.84% for Banking El Salvador.
 
Operating expenses decreased 20% to COP 190 billion, due to a reduction in administrative and personnel expenses aimed at achieving higher efficiency, which deteriorated in 2009.
 
Non-operating income also presented a positive change, as it generated a profit of COP 0.6 billion compared with a term of COP 8.748 billion in 2009. This variation is explained by the impact of the conversion of USD to COP which appreciated during 2009.
 
Assets attributable to Banking El Salvador decreased 8.5% during the year, mainly driven by the contraction of 3.4% in the loan book of Banco Agricola.
 
In 2009, profit for Banking El Salvador decreased 34.4% to COP 97 billion. Net interest income grew 22.4% to COP 394 billion despite the asset contraction of 9% during the year; this was possible due to a smaller increase in cost of deposits as compared to the increase of interest revenues. Credit quality and increased risk of deterioration of loans, forced the Bank to increase provisions by 93.8% in order maintain an adequate allowance and this resulted in a reduction of operating income of 2.8%. Operating expenses grew 10.4% due to increases in labor costs and other administrative expenses. Non operating income presented a loss of COP 8.9 billion due to the effect of converting dollar-denominated assets into Colombian pesos and the depreciation of the USD versus the COP.
 
Leasing: This segment provides financial and operational leases, including cross-border and international leasing services to clients in Colombia, Central America, Mexico and Brazil. Bancolombia offers these services mainly through the following Subsidiaries: Leasing Bancolombia S.A., Renting Colombia S.A., Renting Perú S.A.C., Leasing Peru S.A., Tempo Rent a Car S.A. and Capital Investment Safi S.A,
 
    Year ended December 31,  
   
2010
   
2009
   
2008
   
Change 2010-2009
   
Change 2009-2008
 
   
(COP in million)
 
Net Interest Income
    443,574       432,472       428,817       2.57 %     0.85 %
Net provisions
    (48,262 )     (96,419 )     (85,898 )     (49.95 )%     12.25 %
Net Commissions
    4,895       597       5,951       719.93 %     (89.97 )%
Other net revenues
    53,799       46,197       17,278       16.46 %     167.37 %
Total Operating Income
    454,006       382,847       366,148       18.59 %     4.56 %
Operating expenses
    213,433       183,597       171,832       16.25 %     6.85 %
Non-operating income (expense)
    (7,032 )     (5,345 )     (3,479 )     31.56 %     53.64 %
Income before income taxes
    233,541       193,905       190,837       20.44 %     1.61 %
Income tax expense
    (47,208 )     (43,348 )     (35,729 )     8.90 %     21.32 %
Segment profit
    186,333       150,557       155,108       23.76 %     (2.93 )%
Segment assets
    8,345,821       7,341,863       6,939,220       13.67 %     5.8 %

In 2010, profit for Leasing increased 24% to COP 186 billion.
 
Net interest income increased 2.6% to COP 444 billion. Demand for leasing products was weak during the year and grew less than demand for credit products.
 
 
87

 
 
Net provision charges decreased 50% to COP 48 billion, due to  better credit quality and high provision charges that the company made in previous years. Allowances for bad loan losses ,as a percentage of gross loans, was 220% and past due loans as a percentage of gross loans was 2.04% at  end of 2010, up from144% and 3.14% respectively at the end of 2009.
 
Operating expenses increased 16.3% to COP 213 billion, due to increased labor costs and administrative expenses, derived from the integration of Leasing Bancolombia and Renting Bancolombia and the commencement of operations in Perú.
 
Assets attributable to Leasing grew 13.7% to COP 8,346 billion, mainly driven by the reduction of provisions and recoveries that almost completely offset provisions.
 
In 2009, profit for the Leasing segment decreased 2.9% to COP 151 billion. Net interest income increased 0.9% during the year due to a slowdown in demand for leasing products and a compression in margins and higher provision charges. Most of the leasing products are demanded by SMEs and large corporations that had excess installed capacity during 2009 and therefore did not require expanding their plants or acquiring new machinery. Net provision expenses increased 12.2% to COP 96 billion due to a higher deterioration of the leasing book, in part because of a slow economy that reduced demand for SMEs’ output. Operating expenses grew 6.8% due to increased labor cost, expenses associated with IT systems and expansion of leasing activities in Peru.
 
Trust: This segment provides trust services and asset management to clients in Colombia and Peru through Fiduciaria Bancolombia and Fiduciaria GBC S.A. The main products offered by this segment include money market accounts, mutual and pension funds, private equity funds, payment trust, custody services, and corporate trust.
 
    Year ended December 31,  
   
2010
   
2009
   
2008
   
Change 2010-2009
   
Change 2009-2008
 
   
(COP in million)
 
Net Interest Income
    16,933       17,225       14,483       (1.70 )%     18.93 %
Net provisions
    (394 )     (2,364 )     (948 )     (83.33 )%     149.37 %
Net Commissions
    144,786       153,731       88,584       (5.82 )%     73.54 %
Other net revenues
    874       3,391       2,533       (74.23 )%     33.87 %
Total Operating Income
    162,199       171,983       104,652       (5.69 )%     64.34 %
Operating expenses
    53,805       44,808       36,635       20.08 %     22.31 %
Non-operating income (expense)
    (742 )     1,088       (2,189 )     (168.20 )%     (149.70 )%
Income before income taxes
    107,652       128,263       65,828       (16.07 )%     94.85 %
Income tax expense
    (34,660 )     (44,333 )     (24,420 )     (21.82 )%     81.54 %
Segment profit
    72,992       83,930       41,408       (13.03 )%     102.69 %
Segment assets
    272,797       256,195       206,186       6.48 %     24.25 %

In 2010, profit for the Trust segment decreased 13% to COP 73 billion.
 
Net interest income decreased 1.7% to COP 17 billion, due to the contraction of the net interest margin. Commissions fell 5.8% due to a slowdown in corporate and government trust-related fees in the first half of the year. Operating expenses grew 20% to COP 54 billion due to increases in labor and administrative expenses related to consulting fees associated with the implementation of new products and services.
 
Assets attributable to the Trust segment grew 6% during the year to COP 273 billion, mainly driven by the growth in the investment securities portfolio of Fiduciaria Bancolombia.
 
In 2009, profit for the Trust segment increased 102.7% to COP 84 billion. Net commissions, which are the main revenue generator, increased 73.5% as assets under management also increased. Mutual fund assets that were managed by the Brokerage segment were transferred to the Trust segment, with the corresponding transfer of revenues. Other revenues increased 33.9% as fees derived from consortiums and joint ventures in trust activities increased. Net Interest Income also improved due to increased returns on investments. Operating expenses increased 22.3% to COP 45 billion, primarily as a result of the increased cost of managing more assets.
 
 
88

 
 
Investment Banking: This segment provides corporate and project finance advisory, underwriting, capital markets services and private equity management through Banca de Inversion Bancolombia S.A. Its customers include private and publicly-held corporations as well as government institutions.
 
    Year ended December 31,  
   
2010
   
2009
   
2008
   
Change 2010-2009
   
Change 2009-2008
 
   
(COP in million)
 
Net Interest Income
    10,303       17,438       7,159       (40.92 )%     143.58 %
Net provisions
    1,168       (1,236 )     7,227       (194.50 )%     (117.10 )%
Net Commissions
    31,913       14,934       13,719       113.69 %     8.86 %
Other net revenues
    94,743       31,618       55,682       199.65 %     (43.22 )%
Total Operating Income
    138,127       62,754       83,787       120.11 %     (25.10 )%
Operating expenses
    16,673       15,926       11,963       4.69 %     33.13 %
Non-operating income (expense)
    133       2,258       546       (94.11 )%     313.55 %
Income before income taxes
    121,587       49,086       72,370       147.70 %     (32.17 )%
Income tax expense
    (18,632 )     (5,460 )     (1,347 )     241.25 %     305.35 %
Segment profit
    102,955       43,626       71,023       135.99 %     (38.57 )%
Segment assets
    427,967       398,267       369,867       7.46 %     7.68 %

In 2010, profit for the Investment Banking segment increased 136% to COP 103 billion.
 
Net interest income decreased 40.9% to COP 10 billion, due to the contraction of the loan portfolio and margins; offset partially by a recovery of provisions that mitigated the impact of lower interest income. Net commissions grew 113.7% to COP 32 billion, led by fees generated by corporate finance advisory services and capital markets related fees. Corporate bond issuance was robust in Colombia in 2010 and Banca de Inversion Bancolombia participated in deals worth COP 2.5 trillion.
 
Other revenues almost doubled to COP 95 billion due to gains of COP 34 billion from sale of stakes in companies, especially in the first half of the year.
 
Operating expenses grew 4.7% to COP 17 billion, due to increased labor costs, which grew in line with inflation.
 
Assets attributable to Investment Banking grew 7.5% during the year to COP 428 billion, mainly driven by the growth in the investment portfolio.
 
In 2009, profit for the Investment Banking segment decreased 38.6% to COP 44 billion. Net interest income increased 143.6% to COP 17 billion as the securities portfolio recovered the value lost in 2008. Commissions from advisory services grew 8.9%, driven by higher fees from a larger number of M&A and project finance mandates in the year. Other net revenues decreased by COP 24 billion, reflecting the absence of one-time capital gains on investments that were sold in 2008.
 
 
89

 
 
Brokerage: This segment provides brokerage, investment advisory and private banking services to individuals and institutions through Valores Bancolombia S.A., Valores Bancolombia Panama S.A. and Suvalor Panamá Fondos de Inversión. It sells and distributes equities, futures, foreign currencies, fixed income securities, mutual funds and structured products.
 
    Year ended December 31,  
   
2010
   
2009
   
2008
   
Change 2010-2009
   
Change 2009-2008
 
   
(COP in million)
 
Net Interest Income
    28,102       58,129       34,308       (51.66 )%     69.43 %
Net provisions
    (208 )     (152 )     (183 )     36.91 %     (16.84 )%
Net Commissions
    52,711       48,927       56,796       7.73 %     (13.86 )%
Other net revenues
    4,581       2,177       6,616       110.43 %     (67.09 )%
Total Operating Income
    85,186       109,081       97,537       (21.91 )%     11.84 %
Operating expenses
    86,699       81,679       71,304       6.15 %     14.55 %
Non-operating income (expense)
    15,206       (1,582 )     2,507       (1061.10 )%     (163.10 )%
Income before income taxes
    13,693       25,820       28,740       (46.97 )%     (10.16 )%
Income tax expense
    (1,245 )     (8,371 )     (9,283 )     (85.13 )%     (9.82 )%
Segment profit
    12,448       17,449       19,457       (28.66 )%     (10.32 )%
Segment assets
    851,844       1,129,222       884,800       (24.56 )%     27.62 %

In 2010, profit for the Brokerage segment decreased 28.7% to COP 12 billion.
 
Net interest income decreased 51.7% to COP 28 billion, due a reduction in gains on securities.
 
Net commissions increased 7.7% to COP 53 billion, as increased trading activity in 2010 generated more fees and revenues from third-party portfolios, as assets under management, grew 93% to COP 1,500 billion.
 
Operating expenses increased 6.1% to COP 87 billion, due to labor cost increases and higher IT expenditures.
 
Assets attributable to the Brokerage segment decreased 24.6% during the year, mainly driven by a decrease in active positions in market activities. There was also a decrease in positions in market making activities in the liability side of the balance sheet.
 
In 2009, profit for the Brokerage segment decreased 10.3% to COP 44 billion. Net interest income grew 69.4% due to gains on securities held by Valores Bancolombia S.A. Commissions decreased 13.9% to COP 49 billion during the year due to lower trading activities and to the transfer of assets under management and associated commission revenues to the Trust segment. Operating expenses increased 14.6% due to greater labor and administrative cost.
 
Off Shore: This segment provides a complete line of offshore banking services to Colombian and Salvadorian customers through Bancolombia Panamá S.A., Bancolombia Cayman, Bancolombia Puerto Rico International Inc. and Banco Agrícola (Panama) S.A. It offers 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. Through these Subsidiaries, the Bank also offers investment opportunities in U.S. dollars, savings and checking accounts, time deposits, and investment funds to its high net worth clients and private banking customers.
 
 
90

 
 
The performance of Bancolombia Panamá, which has a significant weight in this segment, refers only to the results reported by Bancolombia Panamá’s offshore commercial banking activities and does not consolidate the results of Banco Agrícola, which are reflected in the results for the segment Banking El Salvador.
 
    Year ended December 31,  
   
2010
   
2009
   
2008
   
Change 2010-2009
   
Change 2009-2008
 
   
(COP in million)
 
Net Interest Income
    108,114       96,131       34,096       12.47 %     181.94 %
Net provisions
    (19,754 )     (8,358 )     (13,104 )     136.35 %     (36.22 )%
Net Commissions
    12,432       10,595       10,093       17.34 %     4.97 %
Other net revenues
    87,081       35,486       18,048       145.40 %     96.62 %
Total Operating Income
    187,873       133,854       49,133       40.36 %     172.43 %
Operating expenses
    66,811       84,208       74,501       (20.66 )%     13.03 %
Non-operating income (expense)
    (3,279 )     (1,286 )     3,578       154.98 %     (135.94 )%
Income before income taxes
    117,783       48,360       (21,790 )     143.55 %     (321.94 )%
Income tax expense
    -       -       -       N/A       N/A  
Segment profit/(loss)
    117,783       48,360       (21,790 )     143.55 %     (321.94 )%
Segment assets
    6,068,344       6,362,171       6,939,710       (4.62 )%     (8.32 )%

In 2010, profit for the Off Shore segment increased 144% to COP 118 billion
 
Net interest income increased 12.5% to COP 108 billion, despite the asset contraction of 4,6% during the year; this was possible due to a smaller increase in cost of deposits as compared to the increase of interest revenues.
 
Net provision charges increased 136.3% to COP 20 billion, due to greater deterioration in the loan portfolio.
 
Other net revenues grew 145% to COP 87 billion, mostly due to an increase in dividends received from.Banagrícola (part of the Banking El Salvador segment). These dividends were increased because the capital in Banagrícola was higher than required due to slow demand in credit in El Salvador. These dividends are eliminated in the consolidation process that generates the consolidated financial statements.
 
Operating expenses decreased 20.7% to COP 67 billion, due to lower amortization charges of the goodwill created with the purchase of Banagrícola, which was reflected in Bancolombia Panamá. The 6% appreciation of the COP against the U.S. dollar during 2010 had the effect of decreasing the pace of amortization of goodwill when measured in COP.
 
Assets attributable to the Off Shore segment decreased 4.6% during the year, mainly driven by the contraction of the loan and investment securities portfolio.
 
The jurisdictions where operations of the Off Shore segment are conducted have no corporate income taxes.
 
In 2009, profit for the Off Shore segment was COP 48 billion, increasing from a loss of COP 22 billion in 2008. Net interest income increased by 181.9% to COP 96 billion, because of higher spreads on loans and small increases in interest expenses. Net provisions decreased by 36.2% due to better credit quality of the loan portfolio and recoveries of provisions with respect to loans that were prepaid during the year. Other revenues also had a positive trend as it reached COP 35 billion, up 96.6% from 2008, explained mainly by penalties received from pre-payments of loans. Operating expenses increased by 13%, due to higher labor costs
 
 
91

 
 
Pension and Insurance: This segment provides pension plan administration and insurance services to individuals and companies in El Salvador through Crecer S.A., Aseguradora Suiza Salvadoreña S.A. and Asesuisa Vida S.A.
 
    Year ended December 31,  
   
2010
   
2009
   
2008
   
Change 2010-2009
   
Change 2009-2008
 
   
(COP in million)
 
Net Interest Income
    4,046       7,109       5,454       (43.09 )%     30.34 %
Net provisions
    593       3,258       (1,364 )     (81.80 )%     (338.86 )%
Net Commissions
    89,969       96,676       84,386       (6.94 )%     14.56 %
Other net revenues
    (14,887 )     (17,391 )     (2,418 )     (14.40 )%     619.23 %
Total Operating Income
    79,721       89,652       86,058       (11.08 )%     4.18 %
Operating expenses
    31,115       38,278       36,895       (18.71 )%     3.75 %
Non-operating income (expense)
    1,752       (236 )     6,852       (842.37 )%     (103.44 )%
Income before income taxes
    50,358       51,138       56,015       (1.53 )%     (8.71 )%
Income tax expense
    (11,557 )     (13,395 )     (11,713 )     (13.72 )%     14.36 %
Segment profit
    38,801       37,743       44,302       2.80 %     (14.81 )%
Segment assets
    229,156       242,226       275,493       (5.40 )%     (12.08 )%
 
In 2010, profit for the Pension and Insurance segment increased 2.8% to COP 39 billion.
 
Net commissions, which are the main revenue generators, decreased 6.9% to COP 90 billion, due the contraction of assets under management as employment in El Salvador suffered with the slowdown in economic activity , individuals contributed less to pension plans and purchased fewer insurance policies. As a result, operating income also decreased 11.1% during the year.
 
Operating expenses decreased 18.7% to COP 31 billion due to lower administrative and labor expenses.
 
Assets attributable to Pension and Insurance decreased 5.4% during the year, mainly driven by the contraction of the investment portfolio.
 
In 2009, profit for the Pension and Insurance segment decreased 14.8% to COP 38 billion. Net commissions grew 14,6% to COP 97 billion as assets under management recovered from the crisis of 2008 and more policies were issued. Operating Expenses increased 3.7%, in line with expected increments in labor cost and other administrative expenses.
 
All other: This includes results from particular investment vehicles of Bancolombia: Valores Simesa, Inmobiliaria Bancol, Todo 1 Colombia S.A., Inversiones CFNS, CFNS Infraestructura S.A.S, Sinesa, Sinesa Holding, Future Net, Vivayco S.A.S., Banagrícola, Inversiones Financieras Banco Agrícola, Banco Agrícola Panamá and others.
 
    Year ended December 31,  
   
2010
   
2009
   
2008
   
Change 2010-2009
   
Change 2009-2008
 
   
(COP in million)
 
Net Interest Income
    680       (1,694 )     9,763       (140.14 )%     (117.35 )%
Net provisions
    (181 )     1,437       8,129       (112.60 )%     (82.32 )%
Net Commissions
    840       1,920       907       (56.25 )%     111.69 %
Other net revenues
    100,036       148,526       29,821       (32.65 )%     398.06 %
Total Operating Income
    101,375       150,189       48,620       (32.50 )%     208.90 %
Operating expenses
    25,343       28,493       32,968       (11.06 )%     (13.57 )%
Non-operating income (expense)
    19,814       13,960       16,977       41.93 %     (17.77 )%
Income before income taxes
    95,846       135,656       32,629       (29.35 )%     315.75 %
Income tax expense
    (5,856 )     (7,490 )     (5,756 )     (21.82 )%     30.13 %
Segment profit
    89,990       128,166       26,873       (29.79 )%     376.93 %
Segment assets
    1,529,612       1,502,366       1,532,178       1.81 %     (1.95 )%
 
 
92

 
 
In 2010, profit for All Other decreased 29.8% to COP 89 billion.
 
Other revenue, which is the most significant revenue line decreased 32.6% to COP 100 billion. The reduction is explained by lower dividends received by the companies that compose the segment.
 
Operating expenses decreased 11.1% to COP 25 billion, due to  lower amortization charges.
 
Assets attributable to All Other grew only 1.8% during the year, since no significant changes happened in the group of companies.
 
In 2009, profit for All Other increased 376.9% to COP 128 billion. The businesses grouped together in this classification are very diverse, nevertheless the main source of revenue are dividends and capital gains from sales of assets and divestitures which increased and impacted the line Other net revenues in 2009 due to dividends received by Banagricola and Banco Agricola Panamá.
 
 
B.
LIQUIDITY AND CAPITAL RESOURCES
 
B.1.
LIQUIDITY AND FUNDING
 
Market Scenario
 
Macroeconomic policies established by Colombia’s Central Bank impact directly the liquidity levels of the financial system. During 2010, the Central Bank continued with an expansive monetary policy and maintained its reference rate in minimum historical levels. However, the liquidity levels of the system were lower as compared to last year due to the better performance of the economy and the increase in credit demand. The Bank liquidity levels were adequate and within both the internal and regulatory limits.
 
Liquidity Management
 
The Asset and Liability Management Committee (“ALCO”) defines the main policies of liquidity and funding in accordance with the Bank’s desired balance sheet structure.
 
The Bank uses a variety of funding sources to generate liquidity taking into consideration market conditions, interest rates, liquidity needs and the desired maturity profile of funding instruments. Consequently, policies are designed to achieve an optimal match between asset and liability profiles regarding maturities, interest rates and currency exposure.
 
One of the Bank’s main strategies is to maintain a solid liquidity position., ALCO has established a minimum amount of liquid assets, calculated in relative terms to the total assets, in order to guarantee the proper operation of banking activities such as lending and withdrawals of deposits, protect capital and take advantage of market opportunities. ALCO has delegated the short-term liquidity assessment task to a smaller committee called the Liquidity Committee, which revises strategies and policies regarding liquidity. In addition, the Bank has defined a contingency liquidity plan that allows the organization to raise funds under stressed market scenarios. This contingency plan is tested on a continuous basis to guarantee its viability.
 
Liquid Assets consist of cash, cash equivalents, and securities admitted by the Central Bank to engage in repurchase agreements.  The securities that comprise liquid assets are reviewed by ALCO in light of the Bank’s liquidity objective; these investments are not constituted for trading and they must follow the investment policy defined by ALCO. Part of these securities are issued by the Colombian central government, others are issued by other Colombian government institutions and are mandatory investments.Securities issued by some foreign govermments are also taken into account as part of liquid assets.
 
 
93

 
 
The Bank measures liquid assets on a daily basis and compares this result with an objective target of minimum requirements defined by ALCO. A liquid assets has policy been established under which daily liquid assets must be equal to or higher than this target. Inthe event the limit is not reached there is a 5-day period in which to increase liquidity levels.
 
The Superintendency of Finance requires each financial entity to have liquid assets greater than the contractual liquidity accumulative one week GAP. This contractual GAP includes the maturity of assets and liabilities of the current positions and does not include projections of future operations. The loan portfolio is affected by historical default and prepayment indicators. The maturity of deposits is modeled according to the regulation.
 
All of Bancolombia’s local subsidiaries met this regulatory limit throughout the year.
 
During 2010, the Bank maintained a solid liquidity position; however it was lower as compared to 2009. The ratio of net loans to deposits (including borrowings from development banks) was 100% at the end of 2010, up from 88% at the end of 2009. The increase of the ratio is explained partly by a change in the Bank’s funding structure; as Bancolombia issued ordinary notes in Colombian and international markets and obtained additional funding from international banks. Short term funding was also increased as the Bank wanted to take advantage of the low interest rates in Colombian and international markets.
 
The following table sets forth checking, time deposits and saving deposits as a percentage of the Bank’s total liabilities for the years 2010, 2009 and 2008:
 
   
2010
   
2009
   
2008
 
Checking deposits
    15.9 %     15.0 %     13.1 %
Time deposits
    25.4 %     33.5 %     33.6 %
Saving deposits
    30.1 %     27.6 %     25.1 %

The Bank’s principal sources of funding are short-term deposits which are primarily composed of time deposits, checking accounts and savings accounts. The funding structure in 2010 changed, as the proportion of saving deposits increased while that of time deposits decreased. This change was due in part to our strategy of managing additional financial costs that would be incurred by the Bank starting 2011 due to the application in 2011 of a transactional tax on time deposits that would affect short-term deposits most. Prior to 2011, Bancolombia (unconsolidated), Leasing Bancolombia, Banca de Inversion Bancolombia and Fiduciaria Bancolombia were not subject to this tax as part of the fiscal stability regime discussed above, which expired at the end of 2010. Furthermore, a change in tax regulation, effective January 1, 2011, regarding financial transactions in Colombia had a positive effect in the growth of savings accounts as clients migrated liquid resources from fiduciaries and brokers to savings accounts ahead of the change in regulation. Deposits as a percentage of the Bank’s total liabilities in 2010 were 71.4%, decreasing from 76.1% at the end of 2009. This change is explained by the issuance of long-term debt which increased total liabilities.
 
The Bank experienced deposit growth during 2010 as total deposits reached COP 43,538 billion, an increase of COP 1,390 billon as compared to 2009. Deposits represented 64% of assets at the end of 2010, down from 68% at the end of 2009.
 
As of December 31, 2010, the Bank’s liabilities reached COP 60,148 billion, increasing 9.7 % as compared to the end of 2009. Liabilities denominated in pesos, which represent 73% of total liabilities (74% at the end of 2009), increased 8.5% as compared to the end of 2009, while deposits denominated in U.S. dollars totaled COP 16,208 billion, increasing 13.2% as compared to the end of 2009.
 
The Bank also had total outstanding borrowings from domestic development banks of COP 2,551 billion at the end of 2010. These borrowings represent a good quality source of funding provided by governmental entities in order to promote lending activities within specific sectors of the Colombian economy. This funding source is fully matched with related loans in terms of maturity and interest rates.
 
 
94

 
 
In addition to the main sources of funding described above, the Bank uses: (i) its debt securities portfolio as a source of short-term liquidity by engaging in repurchase agreements transactions, overnight-loan funds and the Central Bank’s funds and (ii) the issuance of bonds on a regular basis to reduce the maturity mismatch between assets and liabilities, reducing the liquidity risk. During 2010 the Bank obtained funds from an issuance of ordinary notes with an aggregate principal amount of COP 1,225 billion in a public offering in Colombia Additionally, on July 27, 2010, Bancolombia issued subordinated ordinary notes (with maturity of 10 years) with an aggregate principal amount of US$620 million in the United States and international markets. As of December 31, 2010, the total outstanding aggregate principal amount of bonds issued by the Bank was COP 5,718 billion.
 
The Bank’s management believes that the current level of liquidity is adequate and will seek to maintain its solid deposit base and the access to alternative sources of funding such as borrowings from domestic development banks, repurchase agreements, bond issuances, overnight funds and Central Bank funds, in light of market conditions, interest rates and the desired maturity profile of liabilities.
 
The following table sets forth the components of the Bank’s liabilities for the years 2010, 2009 and 2008:

As of December 31,
 
   
2010
   
% of total
funding
   
2009
   
% of total
funding
   
2008
   
% of total
funding
 
(COP million, except percentages)  
Checking deposits
                                   
Peso-denominated
  COP 7,275,904       12.1 %   COP 5,840,450       10.7 %   COP 5,365,391       9.6 %
U.S. dollar-denominated
    2,280,029       3.8 %     2,384,498       4.3 %     1,935,659       3.5 %
Total
    9,555,933       15.9 %     8,224,948       15.0 %     7,301,050       13.1 %
Time deposits
                                               
Peso-denominated
    9,215,754       15.3 %     11,940,626       21.8 %     11,804,875       21.3 %
U.S. dollar-denominated
    6,054,517       10.1 %     6,390,862       11.7 %     6,847,863       12.3 %
Total
    15,270,271       25.4 %     18,331,488       33.5 %     18,652,738       33.6 %
Savings deposits
                                               
Peso-denominated
    15,794,026       26.3 %     12,999,375       23.7 %     11,928,822       21.4 %
U.S. dollar-denominated
    2,266,843       3.8 %     2,144,406       3.9 %     2,068,248       3.7 %
Total
    18,060,869       30.1 %     15,143,781       27.6 %     13,997,070       25.1 %
Other deposits
                                               
Peso-denominated
    507,002       0.8 %     329,693       0.6 %     272,755       0.5 %
U.S. dollar-denominated
    144,892       0.2 %     119,420       0.2 %     160,787       0.3 %
Total
    651,894       1.0 %     449,113       0.8 %     433,542       0.8 %
Interbank Borrowings
                                               
Peso-denominated
    -       0.0 %     -       0.0 %     -       0.0 %
U.S. dollar-denominated
    2,698,941       4.5 %     1,152,918       2.1 %     2,077,291       3.7 %
Total
    2,698,941       4.5 %     1,152,918       2.1 %     2,077,291       3.7 %
Repurchase agreement and interbank funds
                                               
Peso-denominated
    1,784,060       3.0 %     1,280,796       2.3 %     1,646,924       3.0 %
U.S. dollar-denominated
    174,786       0.3 %     61,405       0.1 %     917,284       1.6 %
Total
    1,958,846       3.3 %     1,342,201       2.4 %     2,564,208       4.6 %
Domestic development banks Borrowings and other(1)
                                               
Peso-denominated
    2,479,778       4.1 %     2,672,752       4.9 %     3,210,780       5.8 %
U.S. dollar-denominated
    71,868       0.1 %     213,480       0.4 %     659,854       1.2 %
Total
    2,551,646       4.2 %     2,886,232       5.3 %     3,870,634       7.0 %
Bank acceptances outstanding and derivatives
                                               
Peso-denominated
    911,353       1.5 %     -       0.0 %     -       0.0 %
U.S. dollar-denominated
    (265,979 )     (0.4 )%     47,609       0.1 %     56,935       0.1 %
Total
    645,374       1.1 %     47,609       0.1 %     56,935       0.1 %
Long term debt
                                               
Peso-denominated
    3,332,068       5.5 %     2,699,565       4.9 %     1,957,310       3.5 %
U.S. dollar-denominated
    2,386,308       4.0 %     1,474,057       2.7 %     1,686,176       3.0 %
Total
    5,718,376       9.5 %     4,173,622       7.6 %     3,643,486       6.5 %
 
 
95

 
 
As of December 31,
 
   
2010
   
% of total
funding
   
2009
   
% of total
funding
   
2008
   
% of total
funding
 
(COP million, except percentages)  
Other liabilities
                                               
Peso-denominated
    2,639,857       4.4 %     2,749,575       5.0 %     2,672,406       4.8 %
U.S. dollar-denominated
    396,009       0.6 %     330,049       0.6 %     396,874       0.7 %
Total
    3,035,866       5.0 %     3,079,624       5.6 %     3,069,280       5.5 %
                                                 
Total funding
                                               
Peso-denominated
    43,939,802       73.0 %     40,512,832       73.9 %     38,859,263       69.9 %
Dollar-denominated
    16,208,214       27.0 %     14,318,704       26.1 %     16,806,971       30.1 %
Total liabilities
  COP 60,148,016       100.0 %   COP 54,831,536       100.0 %   COP 55,666,234       100.0 %
 

 
(1)
Includes borrowings from commercial banks and other non-financial entities.
 
Consolidated Statement of Cash Flows
 
Cash flows for the Bank include net cash used in 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, 2010, 2009 and 2008:

   
2010
   
2009
   
2008
 
         
(COP million)
       
Operating activities
  COP (3,066,491 )   COP 5,721,087     COP (402,768 )
Investing activities
    (1,093,268 )     (1,027,548 )     (949,537 )
Financing activities
    3,047,868       (2,818,255 )     1,636,871  
Net (decrease) increase in cash and cash equivalents
  COP (1,111,891 )   COP 1,875,284     COP 284,566  
 
Cash flows in 2010 were significantly different from those observed in 2009 and 2008.
 
During 2010, the Bank reported a negative net cash flow that decreased the stock of cash and equivalents by COP 1,112 billion. This result is explained by COP 3,047 billion cash provided by financing activities, offset by COP 1,093 billion and COP 3,066 billion used in investing activities and operating activities respectively.
 
Operating Activities
 
Cash was used in 2010 in operating activities; growth in the loan portfolio of COP 7,843 billion was the principal use of these resources. The primary sources of cash for operating activities were deposits that increased by 2,008 billion and trading investments that decreased by COP 1,080 billion.
 
The loan portfolio used cash in 2008 and 2010 in similar amounts COP 6,534 billion and COP 7,843 billion respectively. In 2009, economic growth slowed; credit demand was low, the loan portfolio stayed stable decreasing COP 766 billion, liquidity was accumulated.
 
Deposits have been a source of liquidity during the last three years since the Bank funds an important part of its loan portfolio with these resources. In 2008, deposits increased by COP 4,966 billion; loan portfolio growth was mainly financed by deposits. In 2009, deposits increased by COP 2,695 billion, liquidity levels were high throughout the year; this liquidity was used in 2010.
 
 
96

 
 
Trading investment securities in 2008 and 2009 used liquidity by COP 546 billion and COP 219 billion respectively. During 2010, there was a significant change, as COP 1,081 billion securities were sold and resources were used to fund growth in the loan portfolio.
 
Investing Activities
 
Investing activities also used cash in 2010; purchase of property plant and equipment increased by COP 546 billion, held to maturity debt securities increased by COP 435 billion and the technological renewal program used COP 101 billion.
 
Held to maturity debt securities have used liquidity during 2010, 2009, and 2008 in similar amounts; COP 435 billion, COP 649 billion and COP 518 billion respectively. The bank classifies part of its investments as held to maturity in order to manage interest rate risk, a portion of them are mandatory investments required by the Superintendency of  Finance.
 
Net purchase of property plant and equipment includes operating leases which is part of the loan portfolio. In 2010, the increase was COP 546 billion; increase in operating leases explains 49% of this growth. In 2009, this value was lower, COP 203 billion, 92% of which corresponded to operating leases. In 2008, the increase was COP 712 billion; 42% of which corresponded to operating leases.
 
The Bank has investments related to the technological renewal program. During 2010, 2009 and 2008, the Bank invested COP 101 billion, COP 92 billion and COP 30 billion, respectively, in its technological renewal program.
 
Financing Activities
 
Financing activities provided cash during 2010; overnight funding and interbank lending increased by COP 1,896 billion, placement of long term debts increased by COP 1,654 billion. Cash was used in paying dividends to stock holders; COP 502 Billion.
 
In 2008 and 2010, overnight and interbank borrowing increased by COP 1,463 billion and COP 1,896 billion respectively due to the high credit demand. In 2009, the use of these funds decreased by 3,003 billion due to the high liquidity.
 
Structural funding is important to manage liquidity and interest rate risk; long term debt is part of the Bank’s funding structure. During 2010, 2009 and 2008, the bank issued long term debt of COP 1,654 billion, COP 676 billion and 621 billion respectively.  Long term debt is issued in dollars and pesos to finance growth in both currencies.
 
Payments of dividends to stockholders in 2010, 2009 and 2008, were COP 502 billion, COP 492 billion and COP 448 billion respectively.
 
Capital Position
 
The Bank and its subsidiaries comply with the capital adequacy requirements in their respective countries of operation.
 
Stockholders’ equity amounted to COP 7,947 billion at the end of 2010, up 13% as compared to COP 7,033 billion in stockholders’ equity at the end of 2009. This increase is the net effect of paying out dividends, generating earnings during the year 2010 and all the other transactions that directly affect the stockholders’ equity.
 
 
97

 
 
In addition, on a consolidated basis, the Bank’s capital adequacy ratio was 14.7% as of December 31, 2010, higher than the 13.2% at the end of 2009 and the 11.2% as of December 31, 2008. The Bank’s capital adequacy ratio exceeded the requirements of the Colombian government and the Superintendency of Finance by 567 basis points. The basic capital ratio (tier 1) was 10.32% and the tangible capital ratio, which is equal to stockholders’ equity minus goodwill and intangible assets divided by tangible assets, was 10.26% at the end of 2010. For a full description of our capital adequacy requirements please see “Item 4. History and development of the company – B. Business Overview – B.7 – Supervision and Regulation”.
 
TECHNICAL CAPITAL RISK WEIGHTED
ASSETS
 
As of December 31,
 
Consolidated (COP million)
 
2010
   
%
   
2009
   
%
   
2008
   
%
 
Basic capital (Tier I)
    6,343,769       10.32       5,726,319       10.40       4,971,755       8.95  
Additional  capital (Tier II)
    2,673,679       4.35       1,559,977       2.83       1,273,869       2.29  
Technical capital(1)
    9,017,449               7,286,296               6,245,624          
Risk weighted assets included market risk
    61,449,661               55,084,655               55,542,485          
CAPITAL ADEQUACY(2)
    14.67 %             13.23 %             11.24 %        
 

 
(1)
Technical capital is the sum of basic and additional capital.
 
(2)
Capital adequacy is technical capital divided by risk weighted assets.

B.2.
FINANCIAL INSTRUMENTS AND TREASURY ACTIVITIES
 
The Bank’s treasury division is able to carry out all transactions in local or foreign currencies that are legally authorized in Colombia. These include derivative transactions, purchase and sale of fixed income securities and indexed securities, repurchase or resale transactions, short sales, temporary securities transfers, simultaneous transactions and transactions on the foreign currency exchange market.
 
The Bank monitors treasury division activities through policies regarding management of liquidity, market, legal, credit and operational risks.  Such policies are monitored by the Vice President of Risk Management. In order to be able to control market and liquidity risks, the Bank sets limits intended to keep its exposure levels and losses within certain ranges determined by the Bank’s board of directors. The Bank’s investment policies do not include restrictions regarding the maturity of the securities held in the portfolio, except those related to the liquidity portfolio, but do include a target (weighted average) duration for the entire portfolio.
 
Before taking any additional positions, the Bank’s treasury division also verifies, with respect to investments in local and in foreign currencies, the availability of funds for investment and each investment’s compatibility with the Bank’s liquidity structure.
 
As further described in “Item 11. Quantitative and Qualitative Disclosure About Market Risk”, the market risk stated in the treasury book is measured using methodologies of value at risk (VaR), and the position limits are based on the results of these methodologies. The Bank has defined VaR limits that follow a hierarchical structure, which avoid the concentration of market risk in certain groups of assets and also take advantage of portfolio diversification. In addition to VaR limits, the Bank also uses stop loss advisories to inform senior management when losses are close to certain established thresholds in the trading book. Moreover, for the options portfolio the Bank has set limits based on the sensitivity of the portfolio to the underlying, volatility and interest rates. As part of its operation, the Bank holds cash and cash equivalents primarily in Colombian pesos and U.S. dollars. Nevertheless, those positions, as well as any other currency position, are determined by the treasury division in connection with the Bank’s currency risk assessment and management. Specifically, the Bank’s exposure to currency risk primarily arises from changes in the U.S. dollar/COP exchange rate. The exposure to currency risk is managed by the Bank’s treasury division. The Bank uses a VaR calculation to limit the exposure to currency risk of its balance sheet. These limits are supervised on a daily basis by the Bank’s Market Risk Management Office. The Bank’s treasury division manages a derivative portfolio which includes forward agreements in foreign currency with the purpose of hedging its currency exposure.
 
 
98

 
 
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.
 
Not Applicable
 
 
D.
TREND INFORMATION
 
During the first half of 2010, the Bank’s net interest income was pressured by decreasing interest margins and the contraction of the loan portfolio in line with the  trend experienced in 2009. During the second half of the year, net interest income remained stable as interest rates and margins also remained stable and credit volumes increased as demand grew. In addition, credit cost in 2010 was lower, as provision charges were below their historical relative level. Future levels of loan volumes, interest margins and credit cost will be key drivers of the Bank’s performance. The following is a brief discussion of recent trends with regard to those three elements.
 
Loan Volume Performance
 
Gross loans and financial leases (i.e, before allowance for loans and financial lease losses) increased 16% during 2010. Credit growth was slow during the first half of the year, mainly because large companies in Colombia did not require expanding their facilities due to excess installed capacity and some were prepaying some loans. Government spending during the 2010 presidential pre-electoral season was restricted and some projects were delayed, which negatively impacted economic growth and credit demand in the first six months of the year.
 
During the second half of the year, economic activity in Colombia improved and consumer confidence increased. As a result, demand in mortgages and consumer loans picked up vigorously and commercial loans started growing again. By the end of the year, commercial loans grew 19%, consumer loans grew 19%, small business loans grew 26%, leasing grew 7% and mortgages (including securitized mortgages) increased 11%, in each case from the level at the end of 2009.
 
Economic growth in El Salvador was slow in 2010 and Banco Agricola’s loan book contracted as there was lower demand from corporate and individuals; this generated a lagging effect in the Grupo Bancolombia’s overall book.
 
USD denominated loans grew 26% during 2010. This reflected the recovery of international trade as the world economy improved and there was greater demand from companies with revenues in USD. Corporations in Colombia and off shore financing, particularly in Central America, led the demand for this type of loan. Nevertheless, this growth was offset by the USD depreciation versus the COP.
 
Debt issuances by Colombian companies were COP 13,796 billion in 2010 (up 1% from COP 13,694 billion in 2009), and non-financial firms issued about COP 4,900 billion (down 26% from COP 6,630 billion in 2009). Although during 2009 the Bank suffered the impact of corporations obtaining resources from local capital markets instead of taking loans, in 2010 the impact was lesser due to the higher demand for resources and the competitive interest rates offered by banks. Mid size companies and SMEs demanded more credit and that allowed the Bank to grow its loan portfolio.
 
Credit demand is expected to be strong in 2011 as the economy in Colombia continues to grow, and individuals and corporations demand consumer and commercial loans; and as the economy in El Salvador recovers from the crisis of 2008 - 2010.
 
 
99

 
 
Net Interest Margins
 
The majority of the Bank’s loan book has a variable rate (60% of loans have a maturity of more than a year and variable rates) and the re-pricing pace of our assets tends to be faster than that of our liabilities. Consequently, the interest rate cuts in Colombia during the first quarter of 2010 had an effect on the Bank’s net interest margins, as they shrank from 6.7% in the fourth quarter of 2009 to 5.9% in the fourth quarter of 2010.
 
The bank’s strategy during the year was to defend the net interest margin by changing the mix of deposits and increasing the proportion of demand deposits (savings and checking accounts) which are less expensive than time deposits.
 
Ample liquidity, a more favorable deposit mix (one with a greater proportion of demand deposits) and a potential increase in interest rates in the economy point toward stability in interest margins in 2011.
 
Credit Cost
 
 For the year 2010, the cost of credit was 1.2% of average loans, lower than the 2.6% experienced in 2009 and the 2.8% in 2008 This lower level of credit cost was driven by lower net charge-offs in our loan portfolio and lower reserve additions across all credit segments, reflecting the better economic activity and stronger labor markets.
 
A better economic outlook and signs of improvement in asset quality point towards a more positive scenario for asset quality and provision burden in 2011.
 
 
E.
OFF-BALANCE SHEET ARRANGEMENTS
 
The following are the off-balance sheet arrangements in which the Bank is involved: standby letters of credit, letters of credit and bank guarantees.
 
Standby letters of credit and bank guarantees are conditional commitments issued by us to guarantee the performance of a customer to a third party. The Bank typically has recourse to recover from the customer any amounts paid under these guarantees. In addition, the Bank may hold cash or other highly liquid collateral to support these guarantees.
 
At December 31 2010,2009 and 2008, outstanding letters of credit and bank guarantees issued by Bancolombia totaled COP 3,198,143  million, COP 3,094,924 million and COP 3,524,631 million, respectively.
 
The table below summarizes at December 31, 2010 and 2009 all of the Bank’s guarantees where the Bank is the guarantor.  The total amount outstanding represents maximum potential amount (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 greatly exceed anticipated losses.
 
 Commissions received from these arrangements amounted to COP 23,250, COP 15,280 and COP 10,895 for 2010, 2009 and 2008 respectively.  (For commitments to originate loans see F. Tabular disclosure of contractual obligations, for unused credit lines see Item 18. Note 17 Interbank Borrowings.
 
    
Expire within one year
At December 31,
   
Expire after one year
At December 31,
   
Total amount outstanding
At December 31,
   
Maximum potential
amount of future losses
At December 31,
 
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
    COP millions  
Financial standby letters of credit
    1,146,617       1,280,104       540,354       323,997       1,686,971       1,604,101       1,686,971       1,604,101  
Bank guarantees
    1,111,606       1,047,549       399,566       443,274       1,511,172       1,490,823       1,511,172       1,490,823  
Total (COP)
    2,258,223       2,327,653       939,920       767,271       3,198,143       3,094,924       3,198,143       3,094,924  
 
 
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F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 
The following table shows the Bank’s contractual obligations as of December 31, 2010:
 
Contractual Obligations
 
Total
   
Less than
1 year
   
1-3
years
   
3-5
years
   
After
5 years
 
   
(COP millions)
 
Long-term debt obligations
  COP 5,817,459     COP 845,997     COP 1,201,792     COP 542,610     COP 3,227,060  
Time deposits
    15,426,539       13,390,962       1,200,455       189,474       645,647  
Commitments to originate loans
    1,926,117       1,926,117       -       -       -  
Commitments of repurchase of investments
    -       -       -       -       -  
Employee benefit plans
    220,633       63,857       38,908       37,302       80,567  
Borrowings from domestic development banks
    2,551,646       303,780       746,668       642,915       858,283  
Total
  COP 25,942,394     COP 16,530,713     COP 3,187,823     COP 1,412,301     COP 4,811,557  
 
The amounts shown in the table include interest costs on debt. The Bank does not have any uncertain positions to report.
 
 
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 the Bank. This information should be read together with Note 2. Summary of significant accounting policies of the Consolidated Financial Statements.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES UNDER COLOMBIAN GAAP
 
Evaluation of loan portfolio risk and determination of allowances for loan losses: Under Colombian GAAP, the Bank currently evaluates loan portfolio risk according to the rules issued by the Colombian Superintendency of Finance, which establishes 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 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.
 
Commercial and consumer loans are provisioned following standard models developed by the Colombian Superintendency of Finance. According to the models, the allowance for loan losses is stated through the calculation of the Expected Loss.
 
Microcredit and mortgage loans are provisioned considering a minimum allowance level for each credit category.  In addition, a general allowance equal to 1% of the outstanding loan balance is required.
 
The Bank considers the accounting estimates used in the methodology to determine the allowance for loan losses to be “critical accounting estimates” because: (a) by its nature, the allowance requires the Bank to make judgments and assumptions regarding the Bank’s 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 that is based on reference models for commercial and consumer portfolio and a percentage based on the risk category for microcredit and mortgage portfolio, although it is  impossible to ensure that this percentage will exactly reflect the probability of loss.
 
 
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Contingent Liabilities:
 
The Bank is subject to contingent liabilities, including judicial, regulatory and arbitration proceedings and tax and other claims arising from the conduct of the Bank’s business activities. Under Colombian GAAP, allowances are established for legal and other claims by assessing the likelihood of the loss actually occurring as probable, possible or remote.  Contingencies are partially provisioned and are recorded when all the information available indicates that it is probable that the Bank will be required to make disbursements in the future for events that happened before the balance sheet date and the amounts may be reasonably estimated. The Bank engages internal and external experts (lawyers and actuaries) in assessing probability and in estimating any amounts involved.
 
Throughout the life of a contingency, the Bank may learn of additional information that can affect assessments regarding probability or the estimates of amounts involved. Changes in these assessments can lead to changes in recorded allowances.
 
The Bank considers the estimates used to determine the allowance for contingent liabilities to be “critical accounting estimates” because the probability of their occurrence and the amounts that the Bank may be required to pay are based on the Bank’s judgment, which will not necessarily coincide with the future outcome of the proceedings.
 
Pension Plan: Under Colombian GAAP, the Bank applies the provisions of Decree 4565 of 2010, which requires a distribution of charges to amortize the actuarial calculation by 2029. The distribution is calculated by taking the percentage amortized up to December 2009 and annually adding the minimum percentages needed to complete amortization by 2029.  Under the Bank’s non-contributory unfunded defined benefit pension plan, benefits are based on length of service and level of compensation.
 
The Bank 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 future macroeconomic and employee demographic factors, among others, which will not necessarily coincide with the future outcome of such factors.
 
Recognition of Business Combinations: Upon a business combination, the Colombian purchase method of accounting 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 includes 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.
 
The pooling of interests method of accounting requires the aggregate of the stockholders’ equity of the entities included in the business.
 
The Conavi/Corfinsura Merger was accounted for using the pooling of interests method in accordance with the methodology suggested by the Superintendency of Finance. The Sufinanciamiento, Comercia (now Factoring Bancolombia), Sutecnología and Banagrícola acquisitions were accounted for using the purchase method under Colombian GAAP.
 
Goodwill Recognized Upon Business Combinations: The Bank tests goodwill recognized upon business combinations for impairment at least annually using a two-step process that begins with an estimation of the fair value of a reporting unit. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. However, if certain criteria are met, the requirement to test goodwill for impairment annually can be satisfied without a remeasurement of the fair value of a reporting unit. Fair value is determined by management by reference to market value, if available, or by pricing models or with the assistance of a qualified evaluator. Determination of a fair value by a qualified evaluator or pricing model requires management to make assumptions and use estimates.
 
The most significant amounts of goodwill and intangibles relate to the acquisition of Conavi and Corfinsura in 2005 and Banagrícola in 2007. The valuation models used to determine the fair value of these companies and the intangibles are sensitive to changes in the assumptions. Adverse changes in any of these factors could lead the bank to record a goodwill or intangible impairment charge. Management believes that the assumptions and estimates used are reasonable and supportable in the existing market environment and commensurate with the risk profile of the assets valued. However, different assumptions and estimates could be used which would lead to different results.
 
 
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Under Colombian GAAP, financial entities have to register amortization of goodwill.  According to the guidelines issued by Superintendency of Finance, the goodwill should be amortized using the exponential method, however, others methods which provide a better association between the revenues and expenses are permitted.  Since January, 2008, the straight-line method has been used to amortize goodwill, since the Bank considers this method to provide a better association between the revenues and expenses corresponding to this investment. Under Colombian GAAP the Bank performs impairment test using discounted cash flow technique.
 
The Bank considers amortization and impairment tests to be “critical accounting estimates” because of the importance of assumptions used in the testing and the sensitivity of the results to the assumptions used.
 
Recognition and Measurement of Financial Instruments at Fair Value: A portion of the Bank’s assets is carried at fair value for Colombian GAAP purposes, including equity and debt securities with quotations available or where quoted prices are available for similar assets, derivatives, customers’ acceptances and short-term borrowings.
 
Under Colombian GAAP, the fair value of a financial instrument is defined as the estimated amount at which the instrument could be exchanged in a current transaction between willing and independent parties. A large proportion of the Bank’s assets reported at fair value are based on quoted market prices, which provide the best indication of fair value. If quoted market prices are not available, the Bank discounts the expected cash flows using market interest rates which take into account the credit quality and duration of the investment. The degree of management’s judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices. When observable market prices and parameters do not exist, management’s judgment is necessary to estimate fair value, in terms of estimating the future cash flows, based on variables of the instruments, the inherent credit risk and the applicable interest rate to discount those cash flows.
 
As of December 31, 2010, the Bank’s assets that were fair-valued using discounted cash flow techniques amounted to COP 3,583 billion and mainly included bonds and notes issued by the Colombian government or its entities and corporate debt securities.
 
As of December 31, 2010, derivative financial instruments were not recognized based on quoted prices and as a consequence, valuation techniques such as discounted cash flows, Black-Scholes and similar methodologies were performed to measure the estimated fair value, using where possible current market-based or independently sourced market parameters, such as interest rates, currency rates and forward curves based on transactions.
 
The estimated fair value of instruments based upon internally developed valuation techniques could vary if other valuation methods or assumptions were used.

As of December 31, 2010, our financial derivatives that were fair-valued using discounted cash flows and Black-Scholes techniques amounted net to COP 118 billion and mainly included market rate and interest rate swaps and forwards.
 
For the Bank’s derivative financial instruments that have optionality, the relevant option model is used. For a further discussion on the effect of a change in interest rates and foreign exchange rates on the Bank’s portfolio see “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.
 
Securitizations: The Bank has securitized both performing and non-performing mortgage loans which, according to Colombian GAAP, have been accounted for as sales, and, as such, said loans have been removed from the Bank’s balance sheet.

As of 2009 (effective date), when External Circular 047 of 2008 was issued, assets subject to portfolio securitizations could be derecognized as firm transfers or disposals providing the following conditions were fulfilled:
 
 
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Assets assigned to securitizations must be transferred exclusively to securitization firms in order to set up Special-Purpose Vehicles (SPVs).
 
 
In the case of securitizations carried out by securitization firms or directly by credit establishments, the disposal of the corresponding assets must be carried out by separating the equity value of the securitized assets and creating the corresponding SPV.
 
 
The disposal or transfer of securitized assets must not be subject to any type of express or implicit cancellation clause or provision.
 
 
In transferring or disposing of these securitized assets, the total benefits and risks inherent or accruing from such assets must also have been totally transferred.
 
 
Under no circumstance shall the originator conserve discretionary rights to dispose of, control, limit, encumber, substitute, reacquire or use the assets thus transferred or disposed of.
 
Also, this new regulation provided that in cases where the transferor retains a positive residual interest, it may record as an investment the fair value of the residual interest subject to the conditions defined for this purpose in the applicable rules and regulations of the issue in question, with a balancing entry in the investment valuation income account. This value must be updated at least every year, on the anniversary of the date on which the SPV was set up and in any case on the closing date of the fiscal period in question. As a result of the above, the Bank has recognized retained interest as held to maturity debt securities in the amount of COP 19,699 and COP 57,358 as of December 31, 2010 and 2009 respectively.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES UNDER U.S. GAAP
 
Allowance of Deferred Tax Assets
 
A valuation allowance for deferred tax assets is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization of the tax benefit of existing deductible temporary differences or carryforwards ultimately depends on the existence of sufficient taxable income in future periods.
 
In determining a valuation allowance, the Bank performs a review of future taxable income (exclusive of reversing temporary differences and carryforwards) and future reversals of existing taxable temporary differences. Management’s judgment on the likelihood that deferred tax assets can be realized is subjective and involves estimates and assumptions about matters that are inherently uncertain.
 
With regard to state taxes, Bancolombia is subject to Colombian tax legislation. In the case of its companies based in El Salvador, it must also calculate the corresponding taxes according to Salvadorian tax legislation.
 
With regard to municipal and departmental taxes, these must be calculated according to tax legislation applicable in each of the municipal jurisdictions in which the Bank’s branch offices are located.
 
The application of tax legislation is subject to diverse interpretations on the part of both tax payers and the Colombian tax authorities (Dirección de Impuestos y Aduanas Nacionales)
 
When calculating deferred tax, the Bank considers future estimates, the figures recorded in its financial statements, as well as applicable tax legislation.
 
 
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Valuation of the deferred tax asset is considered to be a critical accounting estimate, because it requires determinations involving estimates of profits and future taxable incomes that are inherently uncertain and can be affected by changes in economic conditions and other factors, including future changes in law. The valuation allowance has been determined based on estimations of taxable income and the application of current fiscal laws.
 
Evaluation of Loan Portfolio Risk and Determination of Allowances for Loan Losses: Under U.S. GAAP, the Bank considers loans to be impaired when it is probable that all amounts of principal and interest will not be collected according to the contractual terms of the loan agreement. The allowance for significant impaired loans are assessed based on the present value of estimated future cash flows discounted at the effective loan rate or the fair value of the collateral in the case where the loan is considered collateral-dependent. An allowance for impaired loans is provided when discounted future cash flows or the fair value of collateral is lower than book value.
 
In addition, if necessary, a specific allowance for loan losses is established for non-impaired individual loans, based on regular reviews of individual loans, recent loss experience, credit scores, the risk characteristics of the various classifications of loans and other factors directly influencing the potential collectability and affecting the quality of the loan portfolio.
 
Determining the allowance for loan losses requires significant management judgments and estimates including, among others, identifying impaired loans, determining customers’ ability to pay and estimating the fair value of underlying collateral or the expected future cash flows to be received.
 
To calculate the allowance required for smaller-balance impaired loans and unimpaired loans, historical loss ratios are determined by analyzing historical losses. Loss estimates are analyzed by loan type and thus for homogeneous groups of clients. Such historical ratios are updated to incorporate the most recent data reflecting current economic conditions, industry performance trends, geographic or obligor concentrations within each portfolio segment and any other pertinent information that may affect the estimation of the allowance for loan losses.
 
A one-percent decrease in the expected cash flows could result in an impairment of the portfolio of approximately COP 9,554 million. These sensitivity analyses do not represent management’s expectations of the decline in risk ratings or the increases in loss rates, but are provided as hypothetical scenarios to assess the sensitivity of the allowance for loan and lease losses to changes in key inputs. The Bank believes the risk ratings and loss severities currently in use are appropriate and represent management’s expectations about the credit risk inherent in its loan portfolio.
 
The Bank considers accounting estimates related to provisions for loans and advances “critical accounting estimates” because: (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and advances are based on recent performance experience, and (ii) any significant difference between the Bank’s estimated losses (as reflected in the provisions) and actual losses would require the Bank to take provisions which, if significantly different, could have a material impact on its future financial condition and results of operations. The Bank’s assumptions about estimated losses are based on past performance, past customer behavior, the credit quality of recent underwritten business and general economic conditions, which are not necessarily an indication of future losses.
 
Pension Plan: Under U.S. GAAP, actuarial valuation of its pension plan is performed annually using the projected unit credit method in accordance with ASC 715 Compensation-Retirement Benefits and prepared using actuarial, economic and demographic assumptions about future events.
 
The Bank considers the accounting estimates related to its pension plan to be “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 employee demographic factors, among others, which will not necessarily coincide with the future outcome of such factors.
 
Recognition and Measurement of Intangibles Recognized Upon Business Combinations: Under U.S. GAAP, the Bank accounts for acquired businesses using the acquisition purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The application of the acquisition method requires certain estimates and assumptions, especially concerning the determination of fair values of the acquired intangible assets and property, plant and equipment, as well as the liabilities assumed at the date of the acquisition.
 
 
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In addition, the useful lives of acquired intangible assets, property, plant and equipment have to be determined. The judgments made in the context of the purchase price allocation can materially impact the Bank’s future results of operations. Accordingly, for significant acquisitions, the Bank obtains assistance from third-party valuation specialists. The valuations are based on information available at the acquisition date and different methodologies are used for each intangible identified.
 
Goodwill and Intangibles Recognised Upon Business Combinations: Under U.S. GAAP, for business acquisitions occurred before January 1, 2009, goodwill was measured as the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed.  Since January 1, 2009 goodwill has been measured as the excess of the sum of the consideration transferred, the fair value of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. The Bank tests goodwill recognized upon business combinations for impairment at least annually using a two-step process that begins with an estimation of the fair value of a reporting unit. A reporting unit is defined as an operating segment or one level below an operating segment; which is a business component that earns revenues and incurs expenses, whose operating results are regularly reviewed by management to assess performance and allocate resources. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. However, if certain criteria are met, the requirement to test goodwill for impairment annually can be satisfied without a remeasurement of the fair value of a reporting unit. Fair value is determined by management by reference to market value, if available, by pricing models, or with the assistance of a qualified evaluator. Determination of fair value by a qualified evaluator or pricing model requires management to make assumptions and use estimates to forecast cash flow for periods that are beyond the normal requirements of management reporting; the assessment of the discount rate appropriate to the reporting unit; estimation of the fair value of reporting units; and the valuation of the separable assets of each business whose goodwill is being reviewed.
 
The amount of goodwill allocated to the reporting unit and the key assumptions used by management in determining the fair value are:
 
Reporting segments
 
Reporting Unit
 
Goodwill
2010
 
Valuation
Methodology
 
Key
Assumptions
 
Discount Rate
(real)
   
Growth rate
(real)
 
                             
Banking El Salvador
 
Banco Agrícola
  COP 568.058  
Cash flow
 
10 years plan
    10.0 %     1.25 %
Banking Colombia
 
Bancolombia Tuya and Factoring(1)
    428,040  
Cash flow
 
10 years plan
    12.5 %     5.2 %
Leasing
 
Leasing Bancolombia
    54,238  
Cash flow
 
10 years plan
    12.5 %     0 %
Pension and Insurance
 
AFP Crecer and
Aseguradora Suiza
    50,890  
Cash flow
 
10 years plan
    10.0% -11.7 %     0 %
Trust
 
Fiduciaria Bancolombia
    2,493  
Cash flow
 
10 years plan
    12.5 %     5.2 %
Investments
 
Banca de Inversión
    132,273  
Cash flow
 
10 years plan
    12.5 %     5.2 %
Brokerage
 
Valores Bancolombia
    43,722  
Cash flow
 
10 years plan
    12.5 %     5.2 %
Off Shore
 
Bancolombia Puerto Rico
    31,534  
Cash flow
 
10 years plan
    12.5 %     5.2 %
All Other Segments
 
Inversiones CFNS
  COP 1,330  
Cash flow
 
10 years plan
    12.5 %     5.2 %
 

 
(1)
In 2009, the Bank has performed the impairment test of Factoring Bancolombia’s  goodwill and concluded there was an impairment. The impairment loss has been recorded to the extent of carrying amount of the goodwill. There are no reporting units close to failing the first step of the impairment test performed during 2010.
 
The changes in the organizational structure in 2010 resulted in the creation of new reporting segments. As a result, the Bank identified new reporting units as required under ASC 350, Intangibles— Goodwill and Other. Goodwill affected by the reorganization has been reassigned from seven reporting units to nine. There are no reporting units close to failing the first step of the impairment test performed during 2010.

 
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The long-term growth rates have been based on respective country GDP rates adjusted for inflation. The risk discount rates are based on observable market long-term government bond yields and average industry betas adjusted for an appropriate risk premium.
 
The most significant amounts of goodwill and intangibles relate to the Conavi/Corfinsura Merger in 2005 (allocated to Bancolombia, Tuya and Factoring Reporting Unit) and the acquisition of Banagrícola in 2007. The valuation models used to determine the fair value of these companies and the intangibles are sensitive to changes in the assumptions. Significant adverse changes in discount rate or growth rate could lead the Bank to record a goodwill or intangible impairment charge. Management believes that the assumptions and estimates used are reasonable and supportable in the existing market environment and commensurate with the risk profile of the assets valued. However, different assumptions and estimates could be used which would lead to different results.
 
Recognition and Measurement of Financial Instruments at Fair Value:
 
Effective January 1, 2008, for U.S. GAAP purposes, the Bank adopted ASC 820 – Fair Value Measurements and Disclosures. As a result, the Bank has made amendments to the techniques used in measuring the fair value in order to include considerations about credit risk, as described below.
 
The Bank holds debt and equity securities, derivatives, assets-backed securities, loans, short-term borrowings and long term-debt, to meet clients’ needs and to manage liquidity needs and market risk.
 
 
a.
Overall Valuation Methodology
 
When available, the Bank generally uses quoted market prices to determine fair value, and classifies such items within Level 1 of the fair value hierarchy established under ASC 820. Where available, the Bank may also make use of quoted prices for recent trading activity in positions with the same or similar characteristics to that being valued.
 
If quoted market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency rates and option volatilities. Financial instruments valued in this manner are classified within level 2 of the fair-value hierarchy under ASC 820.
 
When an internally developed model is used to price a significant product, it is subject to validation and testing by independent personnel and the item would be classified as Level 3 of the fair-value hierarchy established under ASC 820.
 
 
b.
Credit Valuation Adjustments
 
For U.S. GAAP purposes, beginning January 1, 2008 with the adoption of fair-value measurement guidance, the Bank has measured the effects of the credit risk of its counterparties and its own creditworthiness in determining fair value of certain financial instruments that are measured on a recurring basis.
 
Counterparty credit-risk adjustments are applied to derivatives, such as over-the-counter derivatives, where the base valuation uses market parameters based on the LIBOR, the COP interest rate curve implicit in the Cross Currency Swap Curve and foreign exchange curves.
 
The Bank generally calculates the asset’s credit risk adjustment for derivatives transacted with international financial institutions by incorporating indicative credit related pricing that is generally observable in the Credit Default Swap (“CDS”) market. The credit risk adjustment for derivatives transacted with all other counterparties is calculated by incorporating unobservable credit data derived from internal credit qualifications to the financial institutions and corporations located in Colombia.
 
 
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The Bank also considers its own creditworthiness when determining the fair value of an instrument, including OTC derivative instruments if the Bank believes market participants would take that into account when trading the respective instrument. The approach to measuring the impact of the Bank’s credit risk on an instrument is in the same as for third-party credit risk.
 
As of December 31, 2010, a hundred basis points increase in our own credit spreads when determining the credit valuation adjustment of our derivative portfolio, could result in a reduction of the associated adjustment of approximately COP 1,059 in 2010. On the other hand, a hundred basis points increase in the counterparty credit spreads when determining the credit valuation adjustment of our derivative portfolio, could result in an increase of the associated adjustment of approximately COP 7,883 in 2010. These sensitivity analyses do not represent management’s expectations of the changes in the counterparties’ credit risk, but are provided as hypothetical scenarios to assess the sensitivity of the fair value of our derivative portfolio to changes in credit spreads.
 
 
c.
Loans
 
The Bank is required, on a nonrecurring basis, to adjust the carrying value of certain assets or provide valuation allowances related to certain assets using fair-value measurements in accordance with U.S. GAAP.  Loans are generally not recorded at fair value on a recurring basis. Periodically, the Bank records nonrecurring adjustments for including certain impairment amounts for collateral-dependent loans calculated in accordance with ASC 450 Contingencies when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Estimates of fair value used for collateral supporting loans generally are based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. Loans subject to nonrecurring fair value measurement were COP 266,503 millions at December 31, 2010 classified as Level 3. Changes in fair value recognized for loan impairment reserves on loans held by the Bank on December 31, 2010 represented impairment losses for COP 91,814 millions for the year ended December 31, 2010.
 
 
d.
Other than Temporary Impairment:
 
The Bank conducts regular reviews to assess whether other than temporary impairment exists, in accordance with ASC 320. If the Bank determines that unrealized losses are temporary in nature, they are recorded in Accumulated Other Comprehensive Income.
 
U.S. GAAP requires, when an entity intends to sell an impaired debt security or it is more likely than not that it will be required to sell prior to recovery of its amortized cost basis, the recognition in earnings of the impairment loss on investment securities for decline in fair value. Determinations of whether a decline is other than a temporary decline often involve estimating the outcome of future events. Management judgment is required in determining whether factors exist that indicate that an impairment loss has been incurred at the balance sheet date. These judgments are based on subjective as well as objective factors. The Bank conducts a review semi-annually to identify and evaluate investment securities that have indications of possible impairment.
 
The Bank has determined that unrealized losses on investments as of December 31, 2010 are temporary in nature because it does not intend to sell an impaired debt security and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost.
 
The substantial majority of the investments in an unrealized loss position for 12 months or more are primarily securities issued by Titularizadora Colombiana, denominated in Unidad de Valor Real (the “Real Value Unit” or “UVR”). Unrealized losses may decline as interest rates fall below the purchased yield and as the securities approach maturity. Since the Bank does not intend to sell an impaired debt security and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost, which could be maturity, the unrealized loss is considered temporary.
 
The Bank considers that the accounting estimate related to the valuation of financial assets and financial liabilities, including derivatives where quoted market prices are not available to be a ‘critical accounting estimate’ because: (i) it is highly susceptible to change from period to period because it requires management to make assumptions about interest rates, volatility, exchange rates, the credit rating of the counterparty, valuation adjustments and specific features of the transactions and (ii) the impact that recognizing a change in the valuations would have on the assets reported on its balance sheet as well as its net profit/(loss) could be material.
 
 
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Securitizations:
 
Before 2010, if the SPE activities were sufficiently restricted to meet certain accounting requirements in order to be considered a qualifying special-purpose entity (QSPE), the trust was not consolidated by the seller of the transferred assets. Additionally, under ASC 810 Consolidation, if trusts other than QSPEs met the definition of a variable interest entity (VIE), the Bank evaluated whether the bank were the primary beneficiary of the trust and, if so, consolidate it. For U.S. GAAP purposes, since the activities of some vehicles ware not sufficiently restricted to meet certain accounting requirements in order to be considered a QSPE, these vehicles were deemed variable interest entities in accordance with ASC 810 and therefore, in those cases where the Bank holds the majority of the residual interests in these vehicles, the Bank concluded to be the primary beneficiary, as the party that expects to absorb the majority of the expected losses of such vehicles.

Under U.S. GAAP, beginning 2010 the Bank adopted the new standard stablished in FAS 166 (ASC 810) “Accounting for transfers of financial assets”. Under the new standard, there are two key accounting determinations that must be made relating to securitizations. A decision must be made as to whether a transfer would be considered a sale under U.S. GAAP, resulting in the transferred assets being removed from the Bank’s consolidated balance sheet with a gain or loss recognized. Alternatively, the transfer would be considered a secured borrowing, resulting in recognition of a liability in our consolidated balance sheet. The second key determination to be made is whether the securitization vehicle must be consolidated and included in our consolidated balance sheet or whether such securitization vehicle is sufficiently independent that it does not need to be consolidated. This change in accounting principle did not have a material effect to the Bank notes US GAAP.
 
Under ASC 810 Consolidation, if trusts other than SPEs meet the definition of a variable interest entity (VIE), we must evaluate whether we are the primary beneficiary of the trust and, if so, must consolidate it. In those cases where the Bank holds the majority of the residual interests in these vehicles, the Bank concluded to be the primary beneficiary, as the party that receive benefits or absorb losses that could potentially be significant to the VIE.
 
Additionally and in order to consolidate these vehicles used to securitize the Bank’s performing loans, the Bank records loans net of allowance for loan losses. For this process, the Bank considers the evaluation of loan portfolio risk and determination of allowances for loan losses under U.S. GAAP to be “critical accounting estimates” because it is based on estimations. (See more details above in Evaluation of Loan Portfolio Risk and Determination of Allowances for Loan Losses in this item).
 
The table below presents the assets and liabilities of vehicles used to securitize the Bank’s loans, which have been consolidated on the Banks’s balance sheet at December 31, 2010, and the Bank’s allowance for loan losses resulting from its involvement with consolidated vehicles used to securitize the Bank’s loans as of December 31, 2010.
 
The allowance for loan losses represents management’s estimate of probable losses inherent in this portfolio, as of December 31:
 
   
2010
   
2009
 
Assets
  COP 3,957,769     COP 2,696,829  
Liabilities
    2,244,528       1,428,353  
Allowance for loans losses
  COP 162,443     COP 130,121  
 
 
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H.
RECENT U.S. GAAP PRONOUNCEMENTS
 
In April 2011, FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”, to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The new guidance requires for creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered troubled debt restructurings. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring. As a result of applying these amendments, the Bank expects that it may include additional U.S. GAAP disclosures with respect to future periods. Management is currently evaluating the impact the ASU 2011-02 would have on the Bank‘s financial statement and U.S.GAAP disclosures.

In January 2011, FASB issued ASU 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU  2010-20”, to temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. Under the existing effective date in ASU 2010-20, the Bank would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. In April 2011, FASB issuad ASU 2011-02, “A creditor’s of whether a restructuring is a troubled debt restructuring”. According to ASU 2011-02, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption ad de disclosures deferred by ASU 2010-01 are effective for periods beginning after June 15, 2011. Management is currently evaluating the impact the ASU 2011-01 would have on the Bank‘s financial statement and U.S.GAAP disclosures.

In December 2010, the FASB issued ASU 2010-29 “Disclosure of Supplementary Pro Forma Information for Business Combinations”, to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. Paragraph 805-10-50-2(h) requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.The adoption had no impact on the U.S. GAAP disclosures and financial information released by the Bank for the reporting period ending on December 31, 2010.

 
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In December 2010, the FASB issued ASU 2010-28 “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. Under Topic ASC 350 on goodwill and other intangible assets, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The amendments in this Update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this Update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Bank has taken into account the amendments introduced by this Update during the annual goodwill impairment test for reporting period ending on December 31, 2010.

In August 2010, the FASB issued ASU 2010-22 to amend various SEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics related to: form of condensed financial statements, debt issue costs in conjunction with a business combination, business combinations prior to an initial public offering, accounting for divestiture of a subsidiary and other topics. The proposed amendments do not include an effective date, applications must be considered after publication. The adoption had no impact on the U.S. GAAP disclosures and financial information released by the Bank.

In August 2010, the FASB issued ASU 2010-21 to amend various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The proposed amendments do not include an effective date, applications must be considered after publication. The Bank does not expect any significant effect in its U.S. GAAP disclosures and financial information.

In July 2010, the FASB issued ASU 2010-20, to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class of financing receivable certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.

In February 2010, the FASB issued ASU 2010-10, to defer the effective date of the amendments to the consolidation requirements made by FASB Statement 167 (ASC 810-10) to a reporting entity’s interest in certain types of entities and clarify other aspects of the Statement 167 amendments. The ASU also clarifies how a related party’s interests in an entity should be considered when evaluating the criteria for determining whether a decision maker or service provider fee represents a variable interest. In addition, the ASU also clarifies that a quantitative calculation should not be the sole basis for evaluating whether a decision maker’s or service provider’s fee is a variable interest. FASB Statement 167 was adopted on January 1, 2010.
 
 
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In January 2010, the FASB issued ASU 2010-06, which amends ASC 820 to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The ASU also clarified existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. Further, the ASU amended guidance on employers’ disclosures about post retirement benefit plan assets under ASC 715 to require that disclosures be provided by classes of assets instead of by major categories of assets. The ASU was effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

In December 2009, the FASB issued ASU 2009-17, which codifies Statement 167 and revises the former guidance under Interpretation 46(R). The amendments in ASU 2009-17 replace the quantitative-based risks-and-rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has (1) the power to direct the activities of a variable interest entity that most significantly affects the entity’s economic performance, and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity. The ASU also requires additional disclosures about a reporting entity’s involvement with variable interest entities and about any significant changes in risk exposure as a result of that involvement. It is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. The Bank does not expect any significant effect in its U.S. GAAP disclosures and financial information.

In June 2009, the FASB issued FASB Statement No. 166, Accounting for Transfers of Financial Assets -an amendment of FASB Statement No. 140 (“SFAS 166”), amending the guidance on transfers of financial assets in order to address practice issues highlighted most recently by events related to the economic downturn. The amendments include: (1) eliminating the qualifying special-purpose entity concept, (2) a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, (3) clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale, (4) a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor, and (5) extensive new disclosures. The Bank adopted this new guidance on January 1, 2010 and is applying it prospectively.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (ASC 810). This standard represents a significant change to the previous accounting rules in that it: (1) eliminates the scope exception for qualifying special-purpose entities; (2) changes the consolidation model to one based on power and economics; (3) requires a company to continually reassess whether it should consolidate an entity; (4) requires an assessment of whether an entity is subject to the standard due to a troubled debt restructuring, and (5) requires extensive new disclosures. The Bank adopted this new guidance on January 1, 2010.
 
Recent Colombian GAAP Pronouncements:
 
As explain in Note 21 Accrued expenses, during 2010 the Colombian government established a new equity tax for 2011, which is payable in 8 semi-annually installments during the next four years. Under U.S. GAAP, this equity tax will be recorded in the year 2010 Statement of Operations for its present value amounting to COP 446,052.   
 
 
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ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
 
A.
DIRECTORS AND SENIOR MANAGEMENT
 
As of April 20, 2011, the following persons acted as directors and senior management of the Bank:
 
Directors
 
David Emilio Bojanini García was born in 1956. He has been the Chief Executive Officer of Grupo de Inversiones Suramericana S.A. since September 2006 and was the CEO of Administradora de Fondos de Pensiones y Cesantías “Protección S.A.” from 1991 to September 2006. Before that time, he was Actuarial Manager in Suramericana de Seguros S.A. Currently he is a member of the board of directors of Bancolombia, Grupo  Inversiones Nacional de Chocolates, Inversiones Argos S.A. and  Suramericana S.A.He is also part of the l Board of Directors of  Proantioquia  and the Privy Council for Competitiveness. He is a member of the Consejo Empresarial de América Latina – CEAL (Business Council for Latin America) as well as a member of the board of directors the Empresarios por la Educación Foundation, El Cinco Foundation and Mi Sangre Foundation, among others.
 
José Alberto Vélez Cadavid was born in 1950. He has been the President of Inversiones Argos S.A. since August 2003 and of Cementos Argos S.A. since December 2005. He has held several management positions at Suramericana de Seguros S.A. since 1984, including Vice President of Marketing and Sales, Vice President of Investments, Vice President of Enterprise Development and President of Inversura S.A. and Suramericana de Seguros S.A. Currently Mr. Vélez Cadavid is also a member of the board of directors of Suramericana de Inversiones S.A., Grupo Nacional de Chocolates S.A. and Calcetines Crystal S.A.
 
Carlos Enrique Piedrahita Arocha was born in 1954.  He has been President of Compañía Nacional de Chocolates S.A. since 2000 and President of Grupo Nacional de Chocolates S.A. (formerly Inversiones Nacional de Chocolates S.A.) since 2003.  He was President of Corfinsura from 1993 to 2000, Vice President of Finance of Compañía 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., Consejo Empresario de America Latina -CEAL and Inversiones Argos S.A. He is also a member of the board of directors of the following not-for-profit organizations:  Hospital San Vicente de Paúl, Proantioquia and Consejo Privado de Competitividad.
 
Gonzalo Alberto Pérez Rojas was born in 1958. He is the President of Inversura S.A. He has held different management positions at Compañía Suramericana de Seguros since 1981, such as Vice President of Corporate Businesses and Vice President of Insurance and Capitalization. Mr. Pérez Rojas is also a member of the board of directors of Suramericana Panamá, Fasecolda (Federación de Aseguradores Colombianos), Colombiana de Inversiones S.A., Fundación Suramericana,  Grupo Nacional de Chocolates S.A. and Fundación Grupo Nacional de Chocolates.
 
Ricardo Sierra Moreno was born in 1951. He has been the President of Productora Distrihogar S.A. since 1989. He had previously held positions as Chief Financial Officer of Suramericana de Seguros S.A. from 1982 to 1989 and Regional Manager of Corporación Financiera Suramericana S.A. Corfinsura from 1979 to 1982. Mr. Sierra Moreno is also a member of the board of directors of Conconcreto S.A., Carulla Vivero S.A., UNE EPM Telecomunicaciones S.A. and Calcetines Crystal S.A. He has also been a member of the ANDI’s sectional board since 1992.
 
Alejandro Gaviria Uribe was born in 1965. Since 2004, he has been a professor and researcher at Universidad de los Andes (Bogota, Colombia) and a columnist for the weekly publication “El Espectador”. Previously, he was the Sub-director of the National Planning Department from 2002 to 2004 and the Sub-director of Fedesarrollo from 2000 to 2002. He was an associate researcher for Fedesarrollo from 2000 to 2001, a researcher for the Inter-American Development Bank (ABD) from 1998 to 2000 and the Head of the National Planning Department of Colombia from 1993 to 1994. He has also held positions as economist in the Federación Nacional de Cafeteros and civil engineer for Suramericana de Seguros S.A. Currently he is a member of the board of directors Isagen S.A. E.S.P. He is also currently the economics dean at Universidad de los Andes.
 
 
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Rafael Martinez Villegas was born in 1942. He holds a degree in Business Administration from EAFIT University in Medellin, and a Master’s degree in Science in Accounting from Texas Tech University. He had previously held positions as an auditor at the firm of Peat Marwick, Mitchell & Co, General Manager of Prebel, President of Inversiones Aliadas S.A. and Corporación Financiera Aliadas S.A. He also has been a member of the board of directors of Prebel S.A., Productos Familia S.A., Enka de Colombia S.A, Corporación Financiera Suramericana S.A and Orquesta Filarmónica de Medellín, among others. He is now dedicated to his own business.
 
For additional information regarding the Bank’s board of directors and its functions please see “Item 10. Additional Information – B. Memorandum and Articles of Association – Board of Directors.”
 
Senior Management
 
Carlos Raúl Yepes Jimenez was born in 1964. He has been the President of Bancolombia since February, 2011 and was previously a member of its board of directors for five years. Mr. Yepes was Corporate Vice President of Cementos Argos S.A. from 2003 to 2011, Legal Director of Bancolombia from 1994 to 2003 and also Legal Director of CI Unión de Bananeros de Urabá (“Uniban”) from 1991 to 1994.
 
Mr. Yepes holds a degree in law from Universidad Pontificia Bolivariana and a degree in Business Law from Universidad Externado de Colombia.
 
Sergio Restrepo Isaza was born in 1961. He has been Executive Vice President of Corporate Development of Bancolombia since the Conavi/Corfinsura merger was completed on July 30, 2005. Previously, he had been President (CEO) of Corfinsura since 2004 and held various managerial positions at Corfinsura such as Vice President of Investment Banking from 1996 to 2004, Vice President of Investment and International Affairs from 1993 to 1996, and before that, Assistant to the CEO, Regional Manager, International Sub-manager and Project Director. Mr. Restrepo Isaza holds a B.A. degree from Universidad EAFIT and a Master of Science in Management degree from Stanford University.
 
Juan Carlos Mora Uribe was born in 1965. He has been  Risk Management Vice President of Bancolombia between July  2005 and March 2011 when he was designated as Technology and Innova Vice President. He served as the Vice President of Operations of Corfinsura since 2003 and held various positions within the corporation such as Corporate Finance Manager from 1995 to 2003, account executive from 1992 to 1995 and credit analyst from 1991 to 1992. Mr. Mora Uribe holds a B.A. degree from Universidad EAFIT and an M.B.A. degree from Babson College.
 
Santiago Pérez Moreno was born in 1955.  He has been the Vice President of Personal and SMEs Banking since 1989, and has held different managerial positions at Bancolombia since 1981, such as Personal Banking Manager for the Bogota Region, International Commerce Manager for the Bogota Region and assistant for the Vice Presidency of International Commerce. Mr. Pérez Moreno holds an Industrial Economics degree from Universidad de los Andes and an M.B.A. from IESE in Barcelona.
 
Jaime Alberto Velásquez Botero was born in 1960.  He has been the Vice President of Finance of Bancolombia since 1997. Mr Velasquez holds an economic degree from Universiad de Antioquia. From 1989 through 1997, he held several managerial positions in the Economic Department and Investor Relations Department of the Bank. Previously, he worked at C.I. Banacol from 1987 to 1989. Mr. Velásquez Botero holds an Economics Degree from Universidad de Antioquia.
 
Mauricio Rosillo Rojas was born in 1969. He has been the Legal Vice President of Bancolombia since December 2008. Mr. Rosillo Rojas holds a law degree from Pontificia Universidad Javeriana, obtained a post graduate degree in financial law from Universidad de Los Andes, and a Master’s degree in commercial and economic law from the University of Georgia. Mr. Rosillo Rojas has held several positions in the public and private sectors including secretary general of Fedeleasing, Interim Colombian Superintendent of Banking Cooperatives (“Superintendente de Economia Solidaria (encargado)”), director of financial regulation of the Colombian Ministry of Finance, supervisor of the securities market of the Colombian Stock Exchange and president of Autoregulador del Mercado de Valores, a Colombian self-regulatory organization.
 
 
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Olga Botero Peláez was born in 1963. She has been the Vice President of Technology of Bancolombia since October 2006.  She has held different positions in companies including Hewlett Packard, Suramericana de Seguros S.A., Mecosoft and Orbitel.  During her seven years at Orbitel, she held several positions, including Marketing Operations Manager, Customer Services Manager and National Sales Manager.  She has also been a professor at universities including Universidad EAFIT, Universidad Javeriana and Universidad de la Sabana. Mrs. Botero Peláez is an engineer and has both a bachelor’s degree and a Master’s degree in Computer Science from Iowa State University. Mrs. Botero will retire from the Bank effective April 30, 2011.
 
Gonzalo Toro Bridge was born in 1960. He has been Vice President of Corporate Banking of Bancolombia since 2003.  From 1988 to 1994, he was the Assistant of the Vice Presidency of Corporate and International Banking and from 1994 to 2003 he was the Vice President of Corporate and International Banking. Mr. Toro Bridge holds a B.A. degree from Universidad EAFIT and a certificate of attendance from the Advanced Management Program for overseas bankers of the University of Pennsylvania.
 
Augusto Restrepo Gómez was born in 1962. He has been Administrative Vice President of Bancolombia between August 2017 and 2011 when he was designated as Vice President of Humand Resources.   Mr. Restrepo Gómez has worked in Bancolombia for 27 years holding several positions at different departments of Bancolombia such as analyst, sub-manager, chief of department and regional manager.  Most recently he was the Administratve Vice President of Bancolombia.  He is also member of the board of directors of ACH Colombia S.A., Multienlace S.A., Todo 1 Colombia S.A. and Redeban Multicolor S.A. Mr. Restrepo Gómez holds a B.A. degree from the Universidad Cooperativa de Colombia, and obtained a post graduate degree in Marketing from Universidad EAFIT. His post-graduate education also includes among others, courses in Advanced Management from Universidad de los Andes and Universidad de la Sabana.
 
Luis Fernando Montoya Cusso was born in 1954. He has been the Vice President of Operations since 1998.  Since 1983, he has occupied several positions at Bancolombia, including Manager of Cúcuta Region from 1983 to 1985, Northern Region from 1986 to 1991, Bogota Region from 1991 to 1993, and Operations Manager. Mr. Montoya Cusso holds a B.A. degree from Universidad EAFIT.
 
Luis Fernando Muñoz Serna was born in 1956. He has been the Vice President of Mortgage Banking since the Conavi/Corfinsura merger that was completed on July 30, 2005.  He joined Conavi in 1989 as Regional Manager for Bogota, holding various positions at Conavi such as Vice President of Business Development and Vice President of Corporate Banking since 1994. Previously, Mr. Muñoz Serna worked as Branch Manager for the main office of BIC in Bogota from 1983 to 1989 and Branch Manager for the main office of Banco Real de Colombia in Bogota from April to October 1989. Mr. Muñoz Serna holds an industrial engineering degree from Pontificia Universidad Javeriana.
 
Luis Arturo Penagos Londoño was born in 1950. He has been Vice President of Internal Audit between  January  2006 and April 2011 when he was designated as interim Administrative Vice President.  He had previously been the Internal Auditor of Conavi since 1993 and the Compliance Officer since 1996.  He was the CEO of El Mundo newspaper from 1990 to 1991 and the external auditor of Uniban S.A. from 1980 to 1983.  He also worked as audit assistant to Coltejer S.A. from 1977 to 1990 and was the Dean of the B.A. Department of Universidad EAFIT from 1983 to 1993. Mr. Penagos Londoño is a CPA from Universidad de Antioquia.  He holds an MBA degree, a specialization diploma in Systems Audit from Universidad EAFIT and a specialization diploma in Money Laundering prevention from Salamanca University.
 
Carlos Alberto Rodriguez López was born in 1967. He has been the Vice President of Treasury since March of 2008. Among other positions, he has been Director of the Market Transactions Department of the Central Bank, General Director of Public Credit and National Treasury, Vice President of Market Development of the Colombian Stock Exchange, and Chief Financial officer (CFO) at Interconexion Electrica S.A. (ISA).  He has also been a professor at Universidad de los Andes. Mr. Rodriguez Lopez holds undergraduate and post-graduate degrees in economics from Universidad de los Andes and an MBA from Insead (France).
 
 
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Carmenza Henao Tisnes was born in 1960. She was appointed Interim Vice President of Internal Audit in April 2011. Mrs Henao previously worked in Bancolombia for 28 years holding several positions at different departments of Bancolombia such as analyst and manager of audit technology.  Most recently she was the Audit National Manager of Bancolombia Banches. She has also been a professor at universities including Universidad EAFIT, Universidad Pontificia Bolivariana, Universidad de Medellin and Universidad San Buenaventura. Mrs. Henao Tisnes is a system engineer and specialized in Finance at Universidad Eafit.
 
Rodrigo Prieto Uribe was born in 1973. He was appointed Interim Risk Management Vice President of Bancolombia in March 2011. Mr Prieto worked in Bancolombia for 12 years holding several positions at different departments of Bancolombia such as analyst, manager of risk administration, planning manager and manager of Capital allocation and risk quantification. Most recently he was the director of planning and projects. He has also been a professor at universities including Universidad EAFIT, Escuela de Ingenieria de Antioquia and Universidad de los Andes. Mr Prieto Uribe is a civil engineer and has a Master’s degree in Economics from Universidad de los Andes and a Master’s degree in  Finance Instituto Tecnológico y de Estudios Superiores de Monterrey.
 
There are no family relationships between the directors and senior management of Bancolombia listed above.
 
No arrangements or understandings have been made by major stockholders, customers, suppliers or others pursuant to which any of the above directors or members of senior management were selected.
 
 
B.
COMPENSATION OF DIRECTORS AND OFFICERS
 
During 2010 the Bank paid each director a fee of COP 3 million per month for sitting on the Board, and another fee of COP 3 million for attending each session of the committees. The members of the Board of Directors who belong to other advisory committees were paid additional monthly fees ranging from COP 3 million to COP 15.0 million.
 
The directors received no other compensation or benefits.There is no stock option plan for directors.  Consistent with Colombian law, the Bank does not make public information regarding the compensation of the Bank’s individual officers. The Bank’s stockholders may request that information during the period preceding the annual general stockholders’ meeting.  The aggregate amount of remuneration paid by the Bank and consolidated subsidiaries to all directors, alternate directors and senior management during the fiscal year ended December 31, 2010 was COP 46.33 billion.
 
The board of directors approves the salary increases for vice presidents and authorizes the CEO to readjust the salary of the remaining employees.
 
The Bank has established an incentive compensation plan that awards bonuses semi-annually to its management employees.  In determining the amount of any bonuses, the Bank takes into consideration the overall return on equity of the Bank and its executives’ achievement of their individual goals. The Bank’s variable compensation has deferred elements and depending on the amount awarded, the bonuses are payable in cash and as a combination of cash, a right to receive in three years an amount in cash determined with reference to the value of the  Bank’s stocks 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. .This incentive compensation plan is not in the form of stock options.
 
 The Bank paid a total of COP 971.17 billion for salaries of personnel employed directly by the Bank and senior management of its affiliates.  The sum of COP 31.17 billion that was paid for the incentive compensation plan was included in the total amount.
 
As of December 31, 2010, the Bank had provisioned the 90.54% of actuarial obligation corresponding to retirement pensions payable by the Bank, which amounted to COP 112.59 billion. Decree 4565 of 2010 established the year 2029 as the deadline for amortization.
 
 
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C.
BOARD PRACTICES
 
At the stockholders’ meeting held on March 1, 2011 the stockholders of the Bank elected Rafael Martinez Villegas to serve as an independent member of the Board of Directors.
 
The Board of Directors is composed of the following members for the April 2011-March 2013 period:
 
Name
 
First Elected
to the Board
   
Term
Expires
 
David Bojanini García
  2006     2011  
José Alberto Vélez Cadavid
  1996     2011  
Carlos Enrique Piedrahita Arocha
  1994(1)     2011  
Gonzalo Alberto Pérez Rojas
  2004(2)     2011  
Ricardo Sierra Moreno
  1996(3)     2011  
Alejandro Gaviria Uribe
  2005     2011  
Rafael Martinez Villegas
  2010     2011  
 

(1) Carlos Enrique Piedrahita Arocha had previously served as Bank’s Director during the period 1990-1993.
(2) Gonzalo Alberto Pérez Rojas had previously served as Bank’s Director during the period 1990-1994.
(3) Ricardo Sierra Moreno had previously served as Bank’s Director during the period 1982-1988.
 
The following are the current terms of office and the period during which the members of senior management have served Bancolombia. There are no defined expiration terms.  The members of senior management can be removed by a decision of the board of directors.
 
Name
 
Period Served
President
   
Carlos Raúl Yepes Jimenez
 
Since 2011
     
Vice Presidents
   
Sergio Restrepo Isaza
 
Since 2005
Jaime Alberto Velásquez Botero
 
Since 1997
Juan Carlos Mora Uribe
 
Since 2005
Mauricio Rosillo Rojas
 
Since 2008
Santiago Pérez Moreno
 
Since 1989
Gonzalo Toro Bridge
 
Since 1998
Luis Fernando Muñoz Serna
 
Since 2005
Olga Botero Peláez
 
Since 2007
Luis Arturo Penagos Londoño
 
Since 2006
Augusto Restrepo Gómez
 
Since 2007
Luis Fernando Montoya Cusso
 
Since 1998
Carlos Alberto Rodríguez López
 
Since 2008
Rodrigo Prieto Uribe (Interim)
 
Since 2011
Carmenza Henao Tisnes (Interim)
 
Since 2011

Neither the Bank nor its Subsidiaries have any service contracts with the Bank’s directors providing for benefits upon termination of employment.
 
For further information about the Bank’s corporate governance practices please see “Item 16. Reserved – 16.B. Corporate Governance and Code of Ethics”.
 
Audit Committee
 
In accordance with the Colombian regulation the Bank has an audit committee whose main purpose is to support the Bank’s board of directors in supervising the effectiveness of the Bank’s internal controls. The committee consists of three independent directors, one of whom must be a financial expert, who are elected by the board of directors for a period of two years.
 
 
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The audit committee is composed of Mr. Alejandro Gaviria Uribe, Mr. Rafael Martinez Villegas, and Mr. Ricardo Sierra Moreno.
 
Pursuant to applicable U.S. laws for foreign private issuers, Mr. Alejandro Gaviria Uribe serves as the financial expert of the Audit Committee.
 
As established by the Superintendency of Finance, the audit committee has a charter approved by the Bank’s board of directors which establishes its composition, organization, objectives, duties, responsibilities and extension of its activities.  The Bank’s board of directors also establishes the remuneration of the members of the audit committee. The audit committee must meet at least quarterly and must present a report of its activities at the general stockholders’ meeting.
 
The Bank currently complies with the requirements of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder, as applicable to foreign private issuers with respect to the composition and functions of its audit committee.
 
Designation, Compensation and Development Committee
 
The board of directors of the Bank has established a designation, compensation and development committee whose members are elected by the board of directors. There are no defined expiration terms.
 
The main function of this committee is to determine hiring, compensation and development policies of the Bank’s executive officers. The committee also supervises the goals established in the compensation programs and recommends the adoption of new remuneration programs for the Bank’s executive officers.
 
The duties of the Designation, Compensation and Development Committee are: (i) setting the administration policies regarding the selection, evaluation, compensation, and development processes for senior management; (ii) determining the goals for senior management; (iii) proposing objective criteria under which the Bank hires senior management and designs succession plans; (iv) evaluating the performance of senior management and (v) issuing recommendations for the board of directors of the Bank concerning appointments and compensation of the President and senior management.
 
The members of the Designation, Compensation and Development committee are Ricardo Sierra Moreno, Carlos Enrique Piedrahita Arocha, David Bojanini Garcia and Jose Alberto Velez Cadavid.
 
 
D.
EMPLOYEES
 
The following table sets forth the number of employees of the Bank for the last three fiscal years:
 
As of December 31
 
Total number of employees employed by
Bancolombia and its consolidated
Subsidiaries
   
Number of employees employed by 
Bancolombia and Bancolombia
Miami Agency
 
2010
    22,992       16,209  
2009
    21,201       14,583  
2008
    19,728       13,479  
 
As of December 31, 2010, Bancolombia and its consolidated subsidiaries had 22.992 employees of which 16.209 were employed directly by the Bank.  Of the 16.209 employees directly contracted by the Bank, 11,115 are operations personnel and 5.076 are management employees. Of the 16.209 employees, approximately 24.83% are located in the Bogota Region, 13.07% in the South Region, 16.4% in the Antioquia Region, 24.83% in the Medellin headquarters, 11.07% in the Central Region, 9.69% in the Caribbean Region and 0.11% in the Miami Agency.  During 2010, the Bank employed an average of 300 employees per month through temporary personnel service companies.
 
 
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Of the employees directly employed by Bancolombia, approximately 11.06% are part of a labor union called Sintrabancol, 8.89% are members of an industry union called Uneb, and 0.37% belong to an industry labor union called Sintraenfi. A collective bargaining agreement was reached with Uneb and Sintrabancol in October, 2008.  The agreement has been in effect since November 1, 2008 and is set to expire on October 31, 2011. This agreement applies to approximately 11,115 employees regardless of whether they are members of a union.
 
With the execution of the Agreement, Bancolombia and its labor unions continue to work on the consolidation of long-term labor relationships based on mutual trust and respect.
 
 
E.
SHARE OWNERSHIP
 
The following directors and managers owned common shares in Bancolombia as of November 30, 2010: Ricardo Sierra Moreno, Gonzalo Alberto Pérez Rojas, Sergio Restrepo Isaza, Olga Botero Peláez, Carlos Alberto Rodríguez López and Gonzalo Toro Bridge. None of their shareholdings, individually or in the aggregate, exceeded 1% of Bancolombia’s outstanding common shares.
 
The following managers owned preferred shares in Bancolombia as of November 30, 2010: Sergio Restrepo Isaza, and Luis Santiago Pérez Moreno. None of their shareholdings exceeds 1% of Bancolombia’s outstanding preferred shares.
 
As of December 31, 2010, there were no outstanding options to acquire any of Bancolombia’s outstanding common shares or preferred shares.
 
ITEM 7.
MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS
 
 
A.
MAJOR STOCKHOLDERS
 
In accordance with the Bank’s by-laws, there are two classes of stock authorized and outstanding: common shares and preferred shares.  Each common share entitles its holder to one vote at meetings of the Bank’s stockholders, and there are no differences in the voting rights conferred by any of the common shares. Under the Bank’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 in limited circumstances as described in “Item 10. Additional Information – B. Memorandum and Articles of Association – Description of Share Rights, Preferences and Restrictions – Voting Rights – Preferred Shares”.
 
The following table sets forth, solely for purposes of United States securities laws, certain information regarding the beneficial ownership of Bancolombia’s capital stock by each person known to Bancolombia to own beneficially more than 5% of each class of Bancolombia’s outstanding capital stock as of March 31, 2011. A beneficial owner includes anyone who has the power to receive the economic benefit of ownership of the securities.
 
Name
 
Common
Shares
   
Preferred
Shares
   
%
Ownership
of Common
Shares(1)
   
%
Ownership
Of Preferred
Shares(1)
   
%
Ownership
of Total
Shares(1)
 
Grupo de Inversiones Suramericana S.A (2)     229,079,037       208,326       44.94 %     0.07 %     29.10 %
Inversiones Argos S.A.(3)
    48,587,837       -       9.53 %     0.00 %     6.17 %
ADR Program
    -       154,040,444       0.00 %     56.39 %     19.55 %
Fondo de Pensiones Obligatorias Protección S.A.
    9,832,860       25,991,038       1.93 %     9.35 %     4.55 %
Fondo de Pensiones Obligatorias Porvenir
    30,460,216       9,853,403       5.98 %     3.54 %     5.12 %
Fondo de Pensiones Horizonte
    12,132,508       11,837,366       2.38 %     4.26 %     3.04 %
(1)
Common shares have one vote per share; preferred shares have limited voting rights under certain circumstances specified in the by-laws of Bancolombia filed as Exhibit 1 to this Annual Report.
(2)
Represents ownership of Grupo de Inversiones Suramericana S.A. directly and through its subsidiaries: Portafolio de Inversiones Suramericana S.A. (en liquidacion), Fideicomiso Cititrust - Suramericana II, Inversiones y Construcciones Estrategicas S.A, Cia. Suramericana de Seguros de Vida S.A., Cia. Suramericana de seguros S.A , Suratep.
 
 
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(3)
Represents ownership of Inversiones Argos S.A. directly and through subsidiary Cementos Argos S.A.
 
As of March 31, 2011, a total of 509,704,584 common shares and 278,122,419 preferred shares were registered in the Bank’s stockholder registry in the name of 17,410 stockholders. A total of 154,040,444 representing 55.4% of preferred shares were part of the ADR Program and were held by 42 record holders registered in the Bank of New York Mellon’s registered stockholder list. Given that some 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.
 
During 2010, the Bank’s ADR program changed its percentage ownership of the Bank decreasing from 19.99% as of March 31, 2010 to 19.55% by the end of March 2011, as depositary receipts were cancelled throughout the period. In addition, Fondo de Pensiones Obligatorias Protección, Fondo de Pensiones Obligatorias Porvenir Moderado, and Fondo de Pensiones Horizonte, three Colombian private pension fund managers, increased their percentage of ownership reaching 4.55%, 5.12% and 3.04% as of March 31, 2011 compared to the 4.83%, 5.48% and 3.49% held by them, respectively, as of March 31, 2010.
 
There are no arrangements known to the Bank which 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, Bancolombia is not directly or indirectly owned or controlled by any other entity or person.
 
 
B.
RELATED PARTY TRANSACTIONS
 
Related Parties, for the purpose of this item, means the Bank’s Subsidiaries, the senior management of both the Bank and its Subsidiaries, the Bank’s shareholders having a participation equal to or above ten percent (10%) of the capital of the Bank, and all companies where the Bank has a participation equal to or above ten percent (10%) of their capital.
 
Colombian law sets forth certain restrictions and limitations on transactions carried out with related parties, these being understood to be principal stockholders, subsidiaries and management.
 
Transactions that are prohibited in the case of credit institutions are described in Decree 663 of 1993, specifically in Articles 119 and 122 thereof, as well as in the Code of Commerce duly amended by Law 222 of 1995, when applicable. Credit and risk concentration limits are regulated by Decree 2360 of 1993, including its respective amendments and addendas.
 
The above-mentioned laws regulate, among others, the following: (i) subsidiaries must carry out their activities independently and with administrative autonomy; (ii) transactions between the parent company and its subsidiaries must be of a real nature and cannot differ considerably from standard market conditions, nor be in detriment to the Colombian government, stockholders or third parties and (iii) subsidiaries may not acquire any shares issued by their parent company.
 
According to the provisions of the Code of Commerce of Colombia, neither the Bank’s directors nor the management may directly or indirectly, purchase or sell shares issued by the Bank while they remain in their offices, except when said transactions are (i) carried out for reasons other than purely speculative and with due authorization from the board of directors, which shall be granted by the affirmative vote of two thirds of its members, excluding that of the person requesting such authorization, or (ii) when the board of directors should consider such transactions to be convenient and the shareholders shall have authorized such transactions with the affirmative vote of its ordinary majority as provided in the Bank’s by-laws, excluding the vote of the person requesting such authorization.
 
The Bank’s Corporate Governance Code provides that in any event, any transaction in Bancolombia’s shares carried out by any official, director or manager, may not be done for speculative purposes, which would be presumed for example in the case of the following three conditions coinciding:  (a) suspiciously short lapses existing between the purchase and the sale of shares; (b) situations arising proving to be exceptionally favorable for the Bank, and (c) significant profits being obtained from this transaction.
 
 
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According to Article 122 of Decree 663 of 1993, transactions that should be determined by the Colombian Government as carried out by credit institutions with their shareholders holding 5% or more of the subscribed capital, with their managers, as well as those carried out with spouses and relatives of shareholders and managers with up to a second degree of consanguinity or affinity, or of a single civil status, shall require the unanimous affirmative vote on the part of the members of the board of directors attending the corresponding meeting.  In the minutes of this meeting no condition may be agreed upon that is different from that otherwise used by the entity with regard to the public, according to the type of transaction in question, except those transactions that are carried out with managers to address health, education, housing and transport issues according to the rules and regulations that the board of directors should determine in a general fashion for such purpose. To grant this type of credit, the Bank must verify that regulations concerning limits of credit and concentration of risks are not violated.
 
All economic relations that the Bank maintains with its directors, and senior executives shall be conducted within the limitations and conditions established by applicable legislation and regulations governing the prevention, handling and resolution of conflicts of interest.
 
From time to time, Bancolombia makes loans to 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 required collateral, as those prevailing at the time for comparable transactions with other similarly situated persons, and have not involved more than the normal risk of collectability or presented other unfavorable features.
 
Bancolombia, on a non-consolidated basis, had a total amount of COP 140,277 million in loans outstanding to related parties as of February 28, 2011. This amount includes a loan to Inversiones Argos S.A. which is  the largest loan outstanding as of February 28, 2011 in the amount of COP 90,000 million (which is represented in ordinary loans) and accrued interest for COP 846 million. As of February 28, 2011, the average interest rate for this loan is 5.53%.
 
2010
 
   
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
 
   
(COP million)
       
Balance Sheet
           
Investment securities
    349,253       -  
Loans
    456,535       41,497  
Customers’ acceptances and derivatives
    26,121       -  
Accounts receivable
    11,497       286  
Total
  COP 843,406     COP 41,783  
                 
Deposits
    1,146,634       4,498  
Overnight funds
    3,309,993       5,574  
Derivatives
    1,676       6  
Accounts payable
    32       499  
Bonds
    258,667       500  
Total
  COP 4,717,002     COP 11,077  
                 
Transactions Income
               
Dividends received
    16,758       -  
Interest and fees
    13,167       3,560  
Other
    2,509       244  
Total
  COP 32,434     COP 3,804  
 
 
121

 
 
2010
 
   
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
 
   
(COP million)
       
Expenses
               
Interest
    24,122       39  
Fees
    19       1,240  
Other
    25,611       595  
Total
  COP 49,752     COP 1,874  
 
For additional information regarding the Bank’s related party transactions, please see “Note 29 to the Consolidated Financial Statements”.
 
 
C.
INTEREST OF EXPERTS AND COUNSEL
 
Not applicable.
 
ITEM 8.
FINANCIAL INFORMATION
 
 
    A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
 
 
A.1.
CONSOLIDATED FINANCIAL STATEMENTS
 
Reference is made to pages F- 1 through F – 113.
 
 
A.2.
LEGAL PROCEEDINGS
 
            The Bank is involved in normal collection proceedings and 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 as of December 31, 2010 amounting to COP 212,676 million. As of December 31, 2010, there are seven (7) judicial proceedings against the Bank with an individual value exceeding COP 5,000 million. The Bank has established accounting provisions only with respect to those contingent liabilities whose likelihood of becoming an actual liability was considered “probable” and as to which an amount or range of amounts could be reasonably estimated.
 
            As of December 31, 2010, COP 173 million of these   liabilities are covered in a guarantee contract entered into by Fogafin and private investors when the former Banco de Colombia S.A. was privatized in 1994. This guarantee contract remains in force in connection with litigation that was commenced before the privatization of former Banco de Colombia S.A.
 
            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 the Bank’s financial condition or results of operations and the possibility of loss by the Bank as a result of such litigation is not likely to exceed the recorded allowance as of December 31, 2010 of COP 12,164 million.   
 
Until recently, the most significant legal proceedings to which the Bank was a party or to which it was connected were those relating to disputes with the Gilinski family, the controlling shareholders of Banco de Colombia S.A. and its merger with a predecessor of the Bank.  These proceedings including arbitrations, as well as criminal investigations.  On June 21, 2010, the Bank entered into a settlement agreement with members of the Gilinski family pursuant to which the parties agreed, among other things, to end all disputes relating to the acquisition.  All such proceedings have now been terminated in accordance with that agreement.  The resolution of these matters did not have a material effect on the Bank’s results of operations or financial condition.

 
122

 
 
A.3.
DIVIDEND POLICY
 
The declaration, amount and payment of dividends is based on Bancolombia’s unconsolidated earnings. Dividends must be approved at the ordinary annual stockholders’ meeting upon the recommendation of the board of directors. 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, Bancolombia must distribute to its stockholders 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 stockholders, in cash or in issued stock of Bancolombia, as may be determined by the stockholders, and within a year from the date of the ordinary annual stockholders’ meeting in which the dividend was declared. According to Colombia’s law, the minimum dividend per share may be waived by an affirmative vote of the holders of 78% of the shares present at the stockholders’ meeting.
 
The annual net profits of Bancolombia must be applied as follows: (i) first, an amount equal to 10% of Bancolombia’s net profits to a legal reserve until such reserve is equal to at least 50% of the Bank’s paid-in capital; (ii) 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 (iii) third, as may be determined in the ordinary annual stockholders’ meeting by the vote of the holders of a majority of the shares entitled to vote.
 
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
income earned in:
 
Cash Dividends
per share(1)(2)
   
Cash Dividends
per share(1)(3)
 
   
(COP)
   
(U.S. dollars)
 
2010
    669       0.357  
2009
    637       0.331  
2008
    624       0.245  
2007
    568       0.310  
2006
    532       0.243  
 

 
(1) 
Includes common shares and preferred shares.
 
(2)
Cash dividends for 2009, 2008, 2007 and 2006 were paid in quarterly installments and cash dividends for 2010 will be paid in quarterly installments.
 
(3)
Amounts have been translated from pesos at the Representative Market Rate in effect at the end of the month in which the dividends were declared (March).
 
 
B.
SIGNIFICANT CHANGES
 
There have not been any significant changes since the date of the annual financial statements included in this document.
 
ITEM 9.
THE OFFER AND LISTING
 
 
A.
OFFER AND LISTING DETAILS
 
Bancolombia’s ADRs, each representing four preferred shares, have been listed on the New York Stock Exchange (“NYSE”) since 1995, where they are traded under the symbol “CIB”. Bancolombia’s preferred shares are also listed on the Colombian Stock Exchange.
 
The table below sets forth, for the periods indicated, the reported high and low market prices and share trading volume for the preferred shares on the Colombian Stock Exchange.  The table also sets forth the reported high and low market prices and the trading volume of the ADRs on the NYSE for the periods indicated:
 
 
123

 
 
   
Colombia Stock Exchange
   
New York Stock Exchange
 
   
COP Per Preferred Share
   
US$ per ADS
   
Trading Volume
 
   
High
   
Low
   
High
   
Low
   
(Number of ADSs)
 
                               
Year Ending
                             
December 31, 2010
    31,820       20,400       69.44       40.10       92,823,574  
December 31, 2009
    24,200       10,440       48.00       15.90       110,933,010  
December 31, 2008
    18,960       9,300       44.00       15.00       135,165,148  
December 31, 2007
    19,360       13,200       39.00       24.00       132,406,300  
December 31, 2006
    20,700       12,980       36.18       20.00       93,232,700  

Source:  NYSENet (Composite Index) and Colombia Stock Exchange.

   
Colombia Stock Exchange
   
New York Stock Exchange
 
   
COP Per Preferred
Shares
   
Trading
Volume
   
US$ per ADS
       
   
High
   
Low
   
(Number of
Shares)
   
High
   
Low
   
Trading Volume
(Number of ADSs)
 
   
(in nominal pesos)
                   
2011
                                   
First quarter
    29,700       25,160       40,901,113       63.53       53.56       26,407,950  
                                                 
2010
                                               
First quarter
    23,540       20,400       30,022,171       48.30       40.10       20,026,846  
Second quarter
    24,300       21,680       24,614,457       51.96       42.53       19,949,298  
Third quarter
    30,280       23,740       31,640,593       67.56       49.85       30,367,572  
Fourth quarter
    31,820       28,400       25,356,000       69.44       59.31       22,479,858  
                                                 
2009
                                               
First quarter
    13,160       10,440       64,657,870       24.33       15.90       33,167,974  
Second quarter
    16,500       12,160       64,560,996       32.19       18.96       31,275,488  
Third quarter
    20,700       14,980       55,568,395       43.29       28.23       23,001,042  
Fourth quarter
    24,200       19,240       38,539,785       48.00       38.17       23,488,506  
   
  Source: NYSENet (Composite Index) and Colombia Stock Exchange.
 

   
Colombia Stock Exchange
   
New York Stock Exchange
 
   
COP Per Preferred Share
   
US$ per ADS
   
Trading Volume
 
   
High
   
Low
   
High
   
Low
   
(Number of ADSs)
 
                               
Month
                             
November 2010
    31,820       28,400       69.44       59.41       5,935,305  
December 2010
    31,140       28,800       66.31       59.31       7,762,612  
January 2011
    29,620       25,840       62.39       55.42       9,334,755  
February 2011
    27,600       25,160       59.51       53.56       8,888,007  
March 2011
    29,700       26,820       63.53       55.87       8,185,188  
April 2011(1)
    30,100       27,500       66.95       61.38       4,625,459  
Source: NYSENet (Composite Index) and Colombia Stock Exchange.
 
 

(1)  Figures are as of April 18, 2011.

ADRs evidencing ADSs are issuable by The Bank of New York Mellon (the “Depositary”), as Depositary, pursuant to the Deposit Agreement, dated as of July 25, 1995, entered into by Bancolombia, 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 (as amended, the “Deposit Agreement”).  The Deposit Agreement was amended and restated on January 14, 2008. 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 Fiduciaria Bancolombia, as agent of the Depositary, currently located at Carrera 48, No. 26 - 85, Medellín, Colombia or Calle 30A No. 6-38, Bogotá, Colombia.  The Depositary’s principal executive office is located at One Wall Street, New York, New York 10286.
 
 
124

 
 
On September 30, 1998, Bancolombia filed a registration statement on Form F-3 with the SEC to register ADSs evidenced by ADRs, each representing four preferred shares, issued in connection with the merger between BIC and Banco de Colombia for resale by the holders into the U.S. public market from time to time. On January 24, 2005, the Board determined to deregister the unsold ADSs registered under the registration statement on Form F-3. On March 14, 2005, Bancolombia filed an amendment to the registration statement deregistering the remaining unsold ADSs. On August 8, 2005, Bancolombia filed, through the Depositary, a registration statement on Form F-6 registering 50,000,000 ADSs evidenced by ADRs in connection with the Conavi/Corfinsura merger.  On May 14, 2007, Bancolombia filed an automatic shelf registration statement on Form F-3 with the SEC to register an indeterminate amount of debt securities, preferred shares and rights to subscribe for preferred shares in connection with the subsequent offerings which took place in the second and third quarter of 2007. On January 14, 2008, by filing the Form F-6 before the SEC, Bancolombia increased the amount of its ADR program up to 400,000,000 American Depositary Shares, and registered some amendments to the Depositary Agreement of ADS’s between Bancolombia and the Bank of New York. On July 13, 2010, Bancolombia filed an automatic shelf registration statement on Form F-3 with the SEC to register an indeterminate amount of debt securities, preferred shares, American Depositary Shares representing preferred shares and rights to subscribe for preferred shares in connection with the subsequent offering of subordinated debt securities which took place on July 19, 2010.
 
 
B.
PLAN OF DISTRIBUTION
 
Not applicable.
 
 
C.
MARKETS
 
The Colombian Stock Exchange is the principal non-U.S. trading market for the preferred shares and the sole market for the common shares. As of December 31, 2010, the market capitalization for Bancolombia’s preferred shares based on the closing price in the Colombian Stock Exchange was COP 8,327 billion (Bancolombia’s total market capitalization, which includes the common and preferred shares, was COP 23,363 billion or US$ 12.21 billion as of the same date).
 
There are no official market makers or independent specialists on 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 aggregate equity market capitalization of the Colombian Stock Exchange as of December 31, 2010, was COP 519,749 billion (U.S. dollars 261.2 billion), with 106 companies listed as of that date.
 
 
D.
SELLING STOCKHOLDERS
 
Not applicable.
 
 
E.
DILUTION
 
Not applicable.
 
 
F.
EXPENSES OF THE ISSUE
 
Not applicable.
 
ITEM 10.
ADDITIONAL INFORMATION
 
 
A.
SHARE CAPITAL
 
Not applicable.
 
 
125

 
 
 
B.
MEMORANDUM AND ARTICLES OF ASSOCIATION
 
Set forth below is certain information concerning the Bank’s capital stock and a brief summary of certain significant provisions of the Bank’s by-laws and Colombian corporate law.  This description does not purport to be complete and is qualified by reference to the Bank’s by-laws (an English translation of which is attached to this Annual Report as Exhibit 1) and to Colombian corporate law.
 
Bancolombia is a publicly held corporation with its principal place of business in the city of Medellín, Colombia, governed mainly by the Bank’s by-laws and by Colombian corporate law.
 
BANCOLOMBIA’S CORPORATE PURPOSE
 
Pursuant to Article four of its by-laws, Bancolombia’s corporate purpose consists of all kinds of banking operations, business, acts and services. Subject to applicable law, Bancolombia may carry out all the activities and investments authorized to banking establishments. Bancolombia is also authorized to participate in the capital stock of other companies, subject to any restrictions imposed by applicable law.
 
BOARD OF DIRECTORS
 
As of the date of filing of this Annual Report, Bancolombia’s board of directors is composed of seven (7) directors, elected for a two-year term on, with no alternate directors being provided for. For additional information regarding Bancolombia’s current directors please see “Item 6.A – Directors and Senior Management – Directors”.
 
After being designated, all of the members of the Board of Directors need an authorization from the Superintendency of Finance. This entity analyzes if the director has an adequate profile for the position according to the requirements of the Colombian Law.
 
The directors of Bancolombia must abstain from participating, directly or through an intermediary, on their own behalf or on behalf of a third party, in activities that may compete against the Bank or in conflict-of-interest transactions that may generate a conflict of interest situation, unless the general shareholders meeting expressly authorizes such transactions. For such purposes, the directors shall provide the shareholders meeting with all the relevant information necessary for the shareholders 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 could only grant its authorization if the act does not adversely affect Bancolombia’s interests.
 
In the general annual shareholders meeting the shareholders are responsible for determining, the compensation of the members of the board of directors.
 
Pursuant to the by-laws of Bancolombia, the board of directors has the power to authorize the execution of any agreement, within the corporate purpose of Bancolombia, and to adopt the necessary measures in order for the Bank to accomplish its purpose.
 
The by-laws of Bancolombia provide an age limit requirement of 65 years regarding retirement for senior management. It also provides an age limit of 70 years for the members of the Board of Directors at the time of their election.
 
DESCRIPTION OF SHARE RIGHTS, PREFERENCES AND RESTRICTIONS
 
Bancolombia’s by-laws provide for an authorized capital stock of COP 500 billion divided into 1,000,000,000 shares of a par value of COP 500 each, which must belong to one of the following classes: (i) common shares, (ii) privileged shares; and (iii) shares with preferred dividend and no voting rights (“preferred shares”). Pursuant to Article 6 of the by-laws, all shares issued shall have the same nominal value.
 
 
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As of December 31, 2010, Bancolombia had 509,704,584 common shares and 278,122,419 preferred shares outstanding and a capital stock of COP 393,914 million divided into 787,827,003 shares. No privileged shares have been issued by Bancolombia.
 
Voting Rights
 
Common Shares
 
The holders of common shares are entitled to vote on the basis of one vote per share on any matter subject to approval at a general shareholders’ meeting. These general meetings may be ordinary meetings or extraordinary meetings.
 
Ordinary general shareholder’s meetings occur at least once a year but no later than three months after the end of the prior fiscal year, for the following purposes: (i) to consider the approval of Bancolombia’s annual report, including the financial statements for the preceding fiscal year; (ii) to review the annual report prepared by the external auditor; (iii) to determine the compensation for the members of the board of directors, the external auditor and the client representative (defensor del consumidor financiero). 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; (iv) to elect directors, the client representative and the external auditor (each for a two-year term); and (v) 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.
 
According to Decree 3923 of 2006, the election of independent directors must be in a separate ballot from the ballot to elect the rest of the directors, unless the reaching of the minimum number of independent directors required by law or by the by-laws is assured, or when there is only one list that includes the minimum number of independent directors required by law or by the by-laws.
 
According to Law 964 of 2005, 25% of the members of the board of directors shall be independent. A person who is an “independent director” is understood to mean a director who is NOT: (i) An employee or director of the issuer or any of its parent or subsidiary companies, including all those persons acting in said capacity during the year immediately preceding that in which they were appointed, except in the case of an independent member of the board of directors being re-elected; (ii) Shareholders, who either directly or by virtue of an agreement direct, guide or control the majority of the entity’s voting rights or who determine the majority composition of the administrative, directing or controlling bodies of this same entity; (iii) A partner or employee of any association or firm that provides advisory or consultancy services to the issuer or to companies who belong to the same economic group to which the issuer in question belongs, in the event that income obtained from such services represent for said association or firm twenty per cent (20%) or more of its total operating income; (iv) An employee or director of a foundation, association or institution that receives significant donations from the issuer. The term “significant donations” is quantified as being twenty per cent (20%) or more of the total amount of donations received by the respective institution; (v) An administrator of any entity on whose board of directors a legal representative of the issuer participates; and (vi) Any person who receives from the issuer any kind of remuneration different from fees as a member of the board of directors, of the audit committee or any other committee set up by the board of directors.  Both elections are made under a proportional representation voting system. Under that system: (i) each holder of common shares is entitled at the annual general shareholders’ meeting to nominate for election of one or more directors; (ii) each nomination of one or more directors constitutes a group for the purposes of the election; (iii) each group of nominees must contain a hierarchy as to the order of preference for nominees in that group to be elected; (iv) 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; (v) the total number of votes casted 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 (vi)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.
 
 
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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 one 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 Bancolombia. 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 Bancolombia’s principal place of business at least 15 business days prior to an ordinary general shareholders’ 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 Bancolombia’s principal place of business at least five calendar days prior to an extraordinary general meeting.
 
Except when Colombian law or Bancolombia’s by-laws require a special majority, action may be taken at a general shareholder’s meeting by the vote of two or more shareholders representing a majority of common shares present. Pursuant to Colombian law and/or Bancolombia’s by-laws, special majorities are required to adopt the following corporate actions: (i) a favorable vote of at least 70% of the 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; (ii) 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; (iii) a favorable vote of at least 80% of the holders of common shares and 80% of the holders of subscribed preferred shares to approve the payment of a stock dividend; and (iv)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 Bancolombia’s by-laws. If the Superintendency of Finance 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, Bancolombia will be obligated to comply in a timely manner.
 
Preferred Shares
 
The holders of preferred shares are not entitled to receive notice of, attend to or vote at any general shareholder’s 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 a shareholders vote is required on the following matters: (i) In the event that changes in the Bank’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. (ii)When voting the anticipated dissolution, merger or transformation of the corporation or change of its corporate purpose. (iii) 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. (iv) When the general shareholders’ meeting orders the payment of dividends with issued shares of the Bank. (v)If at the end of a fiscal period, the Bank’s profits are not enough to pay the minimum dividend and the Superintendency of Finance, 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 Finance 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. (vi)When the registration of shares at the Colombian Stock Exchange or at the National Register of Securities and Issuers which is a registry kept by the Superintendency of Finance, is suspended or canceled. In this event, voting rights shall be maintained until the irregularities that resulted in such cancellation or suspension are resolved.
 
 
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Bancolombia must 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 must include a statement stating: (i) the date of the meeting; (ii) 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 (iii) instructions for the delivery of proxies.
 
Dividends
 
Common Shares
 
Once the balance sheet is approved by the general shareholders meeting, the appropriation for the payment of taxes of the corresponding taxable year has been made, and the transfers to the legal reserve have been performed, then they can determine the allocation of distributable profits, if any, of the preceding year. This is done through a resolution adopted by the vote of the holders of a majority of the common shares at the annual general shareholder’s meeting pursuant to the recommendation of the board of directors and the President of Bancolombia.
 
Under the Colombian Commerce Code, a company must 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 Bancolombia’s by-laws annual net profits are to be applied as follows: (i)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 Bancolombia’s paid-in capital; (ii) second, payment of the minimum dividend on the preferred shares; and (iii)third, allocation 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 the President and may, subject to further reserves required by the by-laws, be distributed as dividends (iv)under Colombian law, the dividends payable to the holders of common shares cannot exceed the dividends payable to holders of the preferred shares. Bancolombia’s by-laws requires to maintain a reserve fund equal to 50% of paid-in capital. All common shares that are fully paid in 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 in participate in a dividend or distribution in the same proportion than the shares have been paid in 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.
 
Preferred Shares
 
Holders of preferred shares are entitled to receive dividends based on the profits of the preceding fiscal year, after deducting 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, if this is not the 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 in 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 certain voting rights. See “Item 10.B Memorandum and Articles of Association – Description of Share Rights, Preferences and Restrictions – Voting Rights – Preferred Shares”.
 
 
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General aspects involving Dividends
 
Subject to the decision of the General Meeting of Shareholders, the dividend may be payable is stock. This decision shall be compulsory to the stockholder’s provided it has been approved of the majority in the manner provided for on number 3 of Article 47 of the Bancolombia’s By-laws.
 
The dividend periods may be different from the periods covered by the general balance sheet. In the general shareholders’ meeting, shareholders 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 are recorded on Bancolombia’s stock registry, on the appropriate record dates as determined in the general shareholders’ meeting.
 
Any stock dividend payable by Bancolombia will be paid in common shares to the holders of common shares and in preferred shares to the holders of preferred shares. Nonetheless, Shareholders at the 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 only be paid to the holders of common shares that approve such a payment.
 
Liquidation Rights
 
Bancolombia will be dissolved if certain events take place, including the following: (i)  its term of existence, as stated in the by-laws, expires without being extended by the shareholders prior to its expiration date; (ii) 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; (iii) by decision at the general shareholders’ meeting; (iv) in certain other events expressly provided by law and in the by-laws.
 
Upon dissolution, a liquidator must be appointed by a general meeting of the shareholders to wind up its affairs. In addition, the Superintendency of Finance 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 Orgánico del Sistema Financiero Decree 663 of 1993. For more information see “Item 4. Information on The Company - B. Business Overview - B.7. Supervision and Regulation - Intervention Powers of the Superintendency of Finance- Bankruptcy Considerations”.
 
Preemptive Rights and Other Anti-Dilution Provisions
 
Pursuant to the Colombian Commerce Code, Bancolombia is allowed to have an amount of outstanding capital stock smaller than the authorized capital stock set out in its by-laws. Under Bancolombia’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 at the general shareholders’ meeting. The issuance of preferred shares must always be first approved at 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 Finance may order a commercial bank to increase its outstanding capital stock under certain special circumstances.
 
 
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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 – Preemptive rights may not be available to holders of ADRs.”
 
Shareholders at 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 Finance will authorize decreases in the outstanding capital stock decided by the holders of common shares only if: (i) Bancolombia has no liabilities; (ii) Bancolombia’s creditors consent in writing; or (iii) the outstanding capital stock remaining after the reduction represents at least twice the amount of Bancolombia’s liabilities.
 
Limits on Purchases and Sales of Capital Stock by Related Parties
 
Pursuant to the Colombian Commerce Code, the members of the Bank’s board of directors and certain of our principal executive officers may not, directly or indirectly, buy or sell shares of our capital stock while they hold their positions, except when dealing with non-speculative operations and in that case they need to obtain the prior authorization of the board of directors passed with the vote of two–thirds of its members (excluding, in the case of transactions by a director, such director’s vote) or when deemed relevant by the Board of Directors of the Bank with the authorization of the Shareholders Meeting the affirmative vote of the ordinary majority foreseen in the bylaws, excluding the vote of the petitioner.
 
No Redemption
 
Colombian law prohibits Bancolombia from repurchasing shares of its capital stock, including the preferred shares.
 
Limitations on the Rights to Hold Securities

There are no limitations in our by-laws or Colombian law on the rights of Colombian residents or foreign investors to own the shares of the Bank, or on the right to hold or exercise voting rights with respect to those shares.
 
Restrictions on Change of Control Mergers, Acquisitions or Corporate Restructuring of the Company

Under Colombian law and our by-laws, the general shareholders’ meeting has full and exclusive authority to approve any corporate restructuring including, mergers, acquisitions or spin-offs upon authorization by the Colombian Superintendency of Finance.
 
Ownership Threshold Requiring Public Disclosure
 
We must disclose to the Superintendency of Finance at the end of each fiscal year the names of the shareholders of our company, indicating at least, the twenty shareholders with the highest number of shares.
 
Colombian securities regulations set forth the obligation to disclose any material event or hecho relevante. Any transfer of shares equal or greater than 5% of our capital stock or any person acquiring a percentage of shares that would make him the beneficial owner of 5% or more of our capital stock, is a material event, and therefore, must be disclosed to the Superintendency of Finance.
 
 
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Changes in the Capital of the Company

There are no conditions in our by-laws governing changes in our capital stock that are more stringent than those required under Colombian law.
 
 
C.
MATERIAL CONTRACTS
 
In March 2010, Leasing Bancolombia S.A Compañía de Financiamiento Comercial, signed a stockholder purchase agreement with Mitsubishi Corporation to acquire the shares that Mitsubishi has in Renting Colombia S.A. Therefore, Leasing Bancolombia S.A. owns 94.5% of Renting Colombia S.A.

On March 19, 2010, 25% of the assets, liabilities and contracts of Sufinanciamiento Finance Company were assigned to its parent company, Bancolombia, as authorized by the Colombian Superintendency of Finance. Pursuant to the transaction, Sufinanciamiento assigned to Bancolombia assets and contracts totaling COP 1,208,019 million and Bancolombia assumed liabilities of Sufinanciamiento totaling COP 1,192,809 million. The difference, amounting to COP 15,210 million was paid by Bancolombia.  Also pursuant to the Transaction, Bancolombia kept the trademark of Sufinanciamiento, which will hereafter be used to identify the automobile finance division of Bancolombia.
On November 17, 2010, Tuya S.A. Compañía de Financiamiento advanced in a corporate break-up and as a result, a new company named Cobranzas Bancolombia S.A., was incorporated with an authorized capital of $95millionwas created. As of December 31, 2010 Cobranzas Bancolombia S.A. was dissolved and in the process of liquidation.  Tuya S.A, the spun off company, continues developing its objective as finance company (compañía de financiamiento).

On December 17 2010, Sinesa Holding Company, subsidiary of Bancolombia, constituted under the British Virgin Islands legislation, was dissolved.  By virtue of the dissolution and liquidation, the assets of the Company were transferred to Sistemas de Inversiones y Negocios S.A. "Sinesa", subsidiary of Bancolombia Panama.
On December 28, 2010, Bancolombia S.A., transferred several real estate properties which form part of the “San Martin” building complex located in Bogotá, Colombia to the Fondo de Capital Privado Inmobiliario Colombia, which is administered by Fiduciaria Bancolombia. The transfer included the sale of 13 real estate properties in exchange for COP 58,569 million (approximately USD 29,343 million), which has already been paid to Bancolombia, and the transfer of 9 real estate properties for a value of COP 17,101 million (approximately USD 8,568 million ) in exchange for increased ownership interests in the Fondo de Capital Privado Inmobiliario Colombia. Bancolombia S.A. will remain in the building as a renter.

On January 28, 2011, Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A., subsidiaries of Bancolombia S.A., and Protección S.A. Sociedad Administradora de Fondos de Pensiones y Cesantias (“Protección S.A.”), signed a contract where Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. sell to Protección S.A. its shares equivalent to 99.99% of the capital stock of AFP Crecer, organization administrator of pension funds in the Republic of El Salvador. Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. will receive a total of USD 103 million as payment for the shares.

On February 5, 2011, Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A., subsidiaries of Bancolombia S.A., and Suramericana S.A., signed an agreement pursuant to which Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. agreed to sell to Suramericana 97.03% of its shares of capital stock of Asesuisa, an insurance company in the Republic of El Salvador. Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. will receive a total of USD 98 million as payment for the shares.
 
 
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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 shortages of foreign currency, foreign currency may not be available to private sector companies and foreign currency needed by the Bank to service foreign currency obligations may not 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 were implemented by the External Regulating Circular DCIN 83 of 2006 of the board of directors of the Central Bank including its respective amendments. 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.
 
Under Colombian law and the Bank’s by-laws, 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
 
Colombian Taxation
 
For purposes of Colombian taxation, an individual is a resident of Colombia if he or she is physically present in Colombia for six or more months during the calendar year or six or more consecutive or non consecutive months during fiscal year. For purposes of Colombian taxation, a legal entity is a resident of Colombia if it is organized under the laws of Colombia.
 
In Colombia, dividends received by foreign companies or other foreign entities, non-resident individuals and successions of non-residents are subject to income taxes.
 
Foreign companies, foreign investment funds, and individuals that are not Colombian residents are not required by law to file an income tax return in Colombia when dividends that have not been taxed at the corporate level have been subject to withholding 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, withholdingor other taxes, provided that such dividends are paid in respect of previously taxed earnings of Bancolombia. Therefore, provided that distributions are made by the Bank to the holders of ADRs through the Depositary, all distributions by the Bank 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 and withholding taxes, except when distributions are paid out of non-taxed earnings of the Bank, in which case the applicable tax rate for that distribution dividend is 33%.
 
Likewise, 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 income tax if such dividends do not correspond to the Bank’s profits that have been taxed at the corporate level. For these purposes, the applicable rate is 33%.
 
 
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Pursuant to article 36-1 of the Fiscal Statute, earnings received by a non-resident of Colombia derived from stock trading are not subject to income, withholding or other taxes in Colombia when the stock is listed 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 beneficial owner in the same taxable year.
 
In the case of preferred shares trading in Colombia, the seller has to file an income tax return, and, if article 36-1 of the Colombian Fiscal Statute is not applicable, the transaction is subject to income tax at a rate of 33%. The sale of stock by foreign institutional capital investment funds is not subject to income tax pursuant to article 18-1 of the Fiscal Statute.
 
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 from non-residents or residents to non-residents of Colombia by gift or inheritance are not subject to Colombian income tax.  Transfers of ADSs or preferred shares by gift or inheritance from residents to residents or from non-residents to residents will be subject to Colombian income tax at the income tax rate applicable for occasional gains obtained by residents of Colombia. Transfers of preferred shares by gift or inheritance from non-residents to non-residents or from residents to non-residents are also subject to income tax in Colombia at a rate of 34% for 2007 and 33% for 2008 and thereafter. There is no Colombian stamp, issue, registration, transfer or similar taxes or duties payable by holders of preferred shares or ADSs.
 
United States Federal Income Taxation Considerations
 
In General
 
This section describes the material United States federal income tax consequences generally applicable to ownership by a U.S. holder (as defined below) of preferred shares or ADSs. It applies to you only if you hold your preferred shares or ADSs as capital assets for U.S. federal income tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special rules, including:
 
 
a dealer in securities;
 
 
a trader in securities that elects to use a mark-to-market method of accounting for securities holdings;
 
 
a tax-exempt organization;
 
 
a life insurance company;
 
 
a person liable for alternative minimum tax;
 
 
a person that actually or constructively owns 10% or more of the Bank’s voting stock;
 
 
a person that holds preferred shares or ADSs as part of a straddle or a hedging or conversion transaction; or
 
 
a person whose functional currency is not the U.S. dollar.
 
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions all as currently in effect.  These laws are subject to change, possibly on a retroactive basis. There is currently no comprehensive income tax treaty between the United States and Colombia.  In addition, this section is based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms.  For United States federal income tax purposes, if you hold ADRs evidencing ADSs, you generally will be treated as the owner of the preferred shares represented by those ADRs.  Exchanges of preferred shares for ADRs, and ADRs for preferred shares generally will not be subject to United States federal income tax.
 
 
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You are a U.S. holder if you are a beneficial owner of preferred shares or ADSs and you are:
 
 
a citizen or resident of the United States;
 
 
a domestic corporation;
 
 
an estate whose income is subject to United States federal income tax regardless of its source; or
 
 
a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.
 
If a partnership holds the preferred shares or ADSs, the United States federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership.  A partner in a partnership holding the preferred shares or ADSs should consult its tax advisor with regard to the United States federal income tax treatment of its investment in the preferred shares or ADSs.
 
You should consult your own tax advisor regarding the United States federal, state and local and the Colombian and other tax consequences of owning and disposing of preferred shares and ADSs in your particular circumstances.
 
This discussion addresses only United States federal income taxation.
 
Taxation of Dividends
 
Under the United States federal income tax laws, and subject to the passive foreign investment company, or PFIC, rules discussed below, if you are a U.S. holder, the gross amount of any dividend the Bank pays out of its current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation. If you are a noncorporate U.S. holder, dividends paid to you in taxable years beginning before January 1, 2013 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold the preferred shares or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date (or if the dividend is attributable to a period or periods aggregating over 366 days, provided that you hold the preferred shares or ADSs for more than 90 days during the 181-day period beginning 90 days before the ex-dividend date) and meet other holding period requirements. Dividends paid with respect to the preferred shares or ADSs generally will be qualified dividend income provided that, in the year that you receive the dividend, the preferred shares or ADSs are readily tradable on an established securities market in the United States. The preferred shares are currently not traded on an established securities market in the United States. Therefore, dividends paid with respect to the preferred shares will not be qualified dividend income and will be taxed as ordinary income. The Bank believes that its ADSs, which are listed on the NYSE, are readily tradable on an established securities market in the United States; however, there can be no assurance that the Bank’s ADSs will continue to be readily tradable on an established securities market.
 
You must include any Colombian tax withheld from the dividend payment in this gross amount even though you do not in fact receive it.  The dividend is taxable to you when you, in the case of preferred shares, or the Depositary, in the case of ADSs, receive the dividend, actually or constructively.  The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations.  The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the peso payments made, determined at the spot peso/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars.  Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the preferred shares or ADSs and thereafter as capital gain.
 
 
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Subject to certain limitations, the Colombian tax withheld and paid over to Colombia will generally be creditable or deductible against your U.S. federal income tax liability.  Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate.
 
For purposes of calculating a U.S. Holder’s United States foreign tax credit limitation, dividends will be income from sources outside the United States and, depending on your circumstances, will generally be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to you. You should consult your own tax advisor regarding the foreign tax credit rules.
 
Taxation of Capital Gains
 
Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your preferred shares or ADSs, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your preferred shares or ADSs. Capital gain of a noncorporate U.S. holder that is recognized in taxable years beginning before January 1, 2013 is generally taxed at a maximum rate of 15% where the holder has a holding period greater than one year. The deductibility of capital losses is subject to limitations.  The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
 
PFIC Rules
 
The Bank believes that the Bank’s preferred shares and ADSs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change.
 
In general, if you are a U.S. holder, the Bank will be a PFIC with respect to you if for any taxable year in which you held the Bank’s preferred shares or ADSs:
 
 
at least 75% of the Bank’s gross income for the taxable year is passive income; or
 
 
at least 50% of the value, determined on the basis of a quarterly average, of the Bank’s assets is attributable to assets that produce or are held for the production of passive income.
 
Passive income generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. However, income derived in the active conduct of a banking business by a qualifying foreign bank is not passive income.  If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.
 
If the Bank is treated as a PFIC, and you are a U.S. holder that did not make a mark-to-market election, as described below, you will be subject to special rules with respect to:
 
 
any gain you realize on the sale or other disposition of your preferred shares or ADSs; and
 
 
any excess distribution that the Bank makes to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the preferred shares or ADSs during the three preceding taxable years or, if shorter, your holding period for the preferred shares or ADSs).
 
 
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Under these rules:
 
 
the gain or excess distribution will be allocated ratably over your holding period for the preferred shares or ADSs;
 
 
the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income;
 
 
the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year; and
 
 
the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.
 
Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.
 
If you own preferred shares or ADSs in a PFIC that are treated as marketable stock, you may make a mark-to-market election. If you make this election, you will not be subject to the PFIC rules described above.  Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your preferred shares or ADSs at the end of the taxable year over your adjusted basis in your preferred shares or ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your preferred shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the preferred shares or ADSs will be adjusted to reflect any such income or loss amounts.
 
In addition, notwithstanding any election you make with regard to the preferred shares or ADSs, dividends that you receive from us will not constitute qualified dividend income to you if the Bank is a PFIC either in the taxable year of the distribution or the preceding taxable year.  Moreover, your preferred shares or ADSs will be treated as stock in a PFIC if the Bank was a PFIC at any time during your holding period in your preferred shares or ADSs, even if the Bank is not currently a PFIC.  For purposes of this rule, if you make a mark-to-market election with respect to your preferred shares or ADSs, you will be treated as having a new holding period in your preferred shares or ADSs beginning on the first day of the first taxable year beginning after the last taxable year for which the mark-to-market election applies. Dividends that you receive that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of the Bank’s accumulated earnings and profits (as determined for United States federal income tax purposes) in your gross income, and it will be subject to tax at rates applicable to ordinary income.
 
If you own preferred shares or ADSs during any year that the Bank is a PFIC with respect to you, you must file Internal Revenue Service Form 8621.
 
 
F.
DIVIDENDS AND PAYING AGENTS
 
Not applicable.
 
 
G.
STATEMENT BY EXPERTS
 
Not applicable.
 
 
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H.
DOCUMENTS ON DISPLAY
 
Bancolombia files reports and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any document that Bancolombia files at the SEC’s public reference room at 100 F Street N.E., Washington, DC 20549. Some of the Bank’s 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 to which Bancolombia is exposed and the tools and methodology used to measure these risks as of December 31, 2010.  Bancolombia faces market risk as a consequence of its lending, trading and investments businesses.  Market risk represents the potential loss due to adverse changes in market prices of financial instruments as a result of movements in interest rates, foreign exchange rates and equity prices and other risk factors, such as sovereign risk. 
 
Bancolombia’s risk management strategy, called the Integrated Risk Management Strategy, is based on principles set by international bodies and by Colombian rules and regulations, and is guided by Bancolombia’s corporate strategy.  The main objective of the Integrated Risk Management Strategy is to identify, measure, coordinate, monitor, report and propose policies for market and liquidity risks of the Bank, which in turn serve to facilitate the efficient administration of Bancolombia’s assets and liabilities. Bancolombia’s board of directors and senior management have formalized the policies, procedures, strategies and rules of action for market risk administration in its “Market Risk Manual”.  This manual defines the roles and responsibilities within each subdivision of the Bank and their interaction to ensure adequate market risk administration.
 
The Bank’s Market Risks Management Office is responsible for: (a) identifying, measuring, monitoring, analyzing and controlling the market risk inherent in the Bank’s businesses, (b) analyzing the Bank’s exposure under stress scenarios and confirming compliance with Bancolombia’s risk management policies, (c) designing the methodologies for valuation of the market value of certain securities and financial instruments, (d) reporting to senior management and the board of directors any violation of Bancolombia’s risk management policies, (e) reporting to the senior management on a daily basis the levels of market risk associated with the trading instruments recorded in its treasury book (the “Treasury Book”), and (f) proposing policies to the board of directors and to senior management that ensure the maintenance of predetermined risk levels. The Bank has also implemented an approval process for new products across each of its subdivisions.  This process is designed to ensure that every subdivision is prepared to incorporate the new product into their procedures, that every risk is considered before the product is incorporated and that approval is obtained from the board of directors before the new product can be sold.
 
The Bank’s assets include both trading and non-trading instruments.  Trading instruments are recorded in the Treasury Book (the “Treasury Book”) and include fixed income securities, foreign exchange (FX) futures, bonds futures and over-the-counter plain vanilla derivatives. Trading in derivatives includes forward contracts in foreign currency operations, plain vanilla options on U.S. dollar/COP currency, foreign exchange swaps and interest rate swaps.  Non-trading instruments are recorded in the Bank’s banking book (the “Banking Book”), which includes primarily loans, time deposits, checking accounts and savings accounts.
 
 The Bank uses a value at risk (“VaR”) calculation to limit its exposure to the market risk of its Treasury Book. The board of directors is responsible for establishing the maximum VaR based on its assessment of the appropriate level of risk for Bancolombia.  The Investment Committee is responsible for establishing the maximum VaR by type of investment (e.g., fixed income in public debt) and by type of risk (e.g., currency risk).  These limits are supervised on a daily basis by the Market Risk Management Office.
 
 
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For managing the interest rate risk from banking activities, the Bank analyzes the interest rate mismatches between its interest earning assets and its interest bearing liabilities. In addition, the foreign currency exchange rate exposures arising from the Banking Book are provided to the Treasury Division where these positions are aggregated and managed.
 
Trading Instruments Market Risk Measurement
 
The Bank currently measures the Tresury Book exposure to market risk (including over-the-counter derivatives positions) as well as the currency risk exposure of the Banking Book, which is provided to the Treasury Division, using a VaR methodology established in accordance with “Chapter XXI of the Basic Accounting Circular”, issued by the Superintendency of Finance.
 
The VaR methodology established by “Chapter XXI of the Basic Accounting Circular” is based on the model recommended by the Amendment to the Capital Accord to Incorporate Market Risks of Basel Committee of 2005, which focuses on the Treasury Book and excludes investments classified as “held to maturity” and any other investment that comprises the Banking Book, such as non-trading positions.   In addition, the methodology eliminates the aggregation of risks by the use of correlations and in the alternative, provides for a new allocation system based on defined zones and bands. The VaR is estimated with a 99% confidence level and ten days time horizon, adjusted by a multiplicative factor equal to three.
 
The total market risk for the Bank is calculated by the arithmetical aggregation of the VaR calculated for each subsidiary. The aggregated VaR is reflected in the Bank’s Capital Adequacy (Solvency) ratio, in accordance with Decree 1720 of 2001.
 
For purposes of VaR calculations, a risk exposure category is any market variable that is able to influence potential changes in the portfolio value.  Taking into account a given risk exposure, the VaR model assesses the maximum loss not exceeded at a specified confidence level over a given period of time.  The fluctuations in the portfolio’s VaR depend on volatility, modified duration and positions changes relating to the different instruments that are subject to market risk.
 
The relevant risk exposure categories for which VaR is computed by Bancolombia according to the “Chapter XXI, appendix 1 of the Basic Accounting Circular” are: (i) interest rate risks relating to local currency, foreign currency and UVR; (ii) currency risk; (iii) stock price risk; and (iv) fund risk.
 
Interest Rate Risk: The interest rate risk is the probability of loss of value of a position due to fluctuations in market interest rates.  Bancolombia calculates the interest rate risk for positions in local currency, foreign currency and UVR separately; in accordance with Chapter XXI of the Basic Accounting Circular issued by the Superintendency of Finance.  The calculation of the interest rate risk begins by determining the net position in each instrument and estimating its sensitivity by multiplying its net present value (“NPV”) by its “modified duration” and by the interest rate’s estimated fluctuation (as defined by the Superintendency of Finance). The interest rate’s fluctuations are established by the Superintendency of Finance according to historical market performance, as shown in the following table:
 
 
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Interest Risk – Sensitivity by Bands and Zones
 
         
Modified Duration
   
Interest rate Fluctuations (basis points)
 
Zone
 
Band
   
Low
   
High
   
Pesos
   
UVR
   
US$
 
                                     
Zone 1
    1       0       0.08       221       221       100  
    2       0.08       0.25       221       221       100  
    3       0.25       0.5       221       221       100  
    4       0.5       1       221       221       100  
Zone 2
    5       1       1.9       206       208       90  
    6       1.9       2.8       190       195       80  
    7       2.8       3.6       175       182       75  
Zone 3
    8       3.6       4.3       159       168       75  
    9       4.3       5.7       144       155       70  
    10       5.7       7.3       128       142       65  
    11       7.3       9.3       118       142       60  
    12       9.3       10.6       118       142       60  
    13       10.6       12       118       142       60  
    14       12       20       118       142       60  
    15       20       -       118       142       60  

Once the sensitivity factor is calculated for each position, the modified duration is then used to classify each position within a corresponding band (given by the Superintendency of Finance. A net sensitivity is then calculated for each band, by determining the difference between the sum of all short-positions and the sum of all long-positions.  Then a net position is calculated for each zone (which consists of a series of bands) determined by the Superintendency of Finance.  The final step is to make adjustments within each band, across bands and within each zone, which results is a number that is the interest rate risk VaR. Each adjustment is performed following the guidelines established by the Superintendency of Finance.
 
The Bank’s exposure to interest risk primarily arises from investments in Colombian government’s treasury bonds (TES) and securities issued by the Colombian government.
 
 The interest rate risk VaR decreased from COP 173 billion as of December 31, 2009 to COP 156 billion as of December 31, 2010. This decrease was due to the Bank’s shorter bond portfolio,primarily composed of Colombian government treasury bonds TES,.  During 2010 the average interest rate risk VaR was COP 1 billion, the maximum value was COP 191 billion, and the minimum value was COP 155 billion.
 
Currency, Equity and Fund Risk:  The VaR model uses a sensitivity factor to calculate the probability of loss due to fluctuations in the price of stocks, funds and currencies in which the Bank maintains a position.  As previously indicated, the methodology used in this Annual Report to measure such risk consists of computing VaR, which is derived by multiplying the position by the maximum probable variation in the price of such positions (“Dp”).  The Dp is determined by the Superintendency of Finance, as shown in the following table:
 
Sensitivity Factor for Currency Risks, Equity Risks and Fund Risks
 
USD
    4.4 %
Euro
    6.0 %
Other currencies
    8.0 %
Funds
    14.7 %
Stock Price
    14.7 %

The currency risk VaR decreased from COP 14 billion as of December 31, 2009 to COP 9 billion as of December 31, 2010. This decrease was due to the reduction in the net short position exposed to currency risk in the Bank. During 2010 the average currency risk VaR was COP 16 billion, the maximum value was COP 27 billion, and the minimum value was COP 6 billion.
 
The equity risk VaR risk decreased from COP 81 billion as of December 31, 2009 to COP 69 billion as of December 31, 2010 due to a reduction in these investments. During 2010 the average equity VaR was COP 66 billion, the maximum value was COP 82 billion, and the minimum value was COP 59 billion.
 
 
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The fund risk which arises from investment in mutual funds decreased from COP 20 billion as of December 31, 2009 to COP 6 billion as of December 31, 2010, due to a reduction in these investments. During 2010 the average fund risk VaR was COP 5 billion, the maximum value was COP 7 billion, and the minimum value was COP 3 billion.
 
Total Market Risk VaR
 
The total market risk VaR is calculated as the algebraic sum of the interest rate risk, the currency risk, the equity risk and the fund risk.
 
As of December 31, 2010, the total market risk VaR amounted to COP 239 billion which represents an increase from COP 289 billion in 2009, due to the increase in interest rate risk VaR and equity risk VaR.

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, VaR models should not be viewed as predictive of future results. The Bank may incur in 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 the Bank’s VaR models. A VaR model does not calculate the greatest possible loss. The results of these models and analysis thereof are subject to the reasonable judgment of the Bank’s risk management personnel.
 
The table below provides information about Bancolombia’s consolidated VaR for trading instruments at the end of 2010 and 2009.
             
(COP million)
 
2010
   
2009
 
             
Interest Rate Risk VaR
    157,742       173,964  
Currency Risk VaR
    9,901       14,277  
Equity Risk VaR
    69,165       81,005  
Fund Risk VaR
    6,963       20,376  
Total VaR
    243,771       289,621  
 
During 2010 the average Total VaR was COP 261 billion, the maximum value was COP 284 billion, and the minimum value was COP 243 billion.
 
Non-Trading Instruments Market Risk Measurement
 
The Banking Book’s relevant risk exposure is interest rate risk, which is the probability of unexpected changes in net interest income as a result of a change in market interest rates. Changes in interest rates affect Bancolombia’s earnings as a result of timing differences on the repricing of the assets and liabilities. The Bank manages the interest rate risk arising from banking activities in non trading instruments by analyzing the interest rate mismatches between its interest earning assets and its interest bearing liabilities.  The foreign currency exchange rate exposures arising from the Banking Book are provided to the Treasury Division where these positions are aggregated and managed.
 
The Bank has performed a sensitivity analysis of market risk sensitive instruments based on hypothetical changes in the interest rates. The Bank has estimated the impact that a change in interest rates would have on the net present value of each position in the Banking Book, using a modified duration model and assuming positive parallel shifts of 50 and 100 basis points.
 
 
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The following tables provide information about Bancolombia’s interest rate sensitivity for the balance sheet items comprising the Banking Book. These tables show the following information for each group of assets and liabilities:
 
FAIR VALUE: Sum of the original net present value.
 
 
+ 50 bps:   Net present value change with an increase of 50 bps.
 
 
+ 100 bps:  Net present value change with an increase of 100 bps.
 
Interest Rate Risk (COP million)
2010
 
   
FAIR VALUE
   
+50bps
   
+100bps
 
                   
Assets
                 
Held To Maturity Securities
    3,696,888       (32,282 )     (64,417 )
Loans
    48.668.026       (189,863 )     (378,861 )
Total interest rate sensitive assets
    52,364,915       (222,144 )     (443,278 )

Liabilities
 
FAIR VALUE
   
+50bps
   
+100bps
 
Checking Accounts - Saving Deposits
    28.194.158       (110.093 )     (219.686 )
Time Deposits
    15.379.687       (40.613 )     (81.041 )
Interbank borrowings
    5.382.415       (7.573 )     (15.111 )
Long-term debt
    5.899.291       (80.504 )     (160.642 )
Convertible Bonds
    419.459       (410 )     (818 )
Total interest rate sensitive liabilities
    55.275.010       (239.193 )     (477.297 )
                         
Total net change
            17,048       34,019  

Interest Rate Risk (COP million)
2009
 
   
FAIR VALUE
   
+50bps
   
+100bps
 
                   
Assets
                 
Held To Maturity Securities
    3,077,121       (26,574 )     (53,028 )
Loans
    43,359,552       (177,344 )     (353,880 )
Total interest rate sensitive assets
    46,436,673       (203,918 )     (406,908 )

Liabilities
 
FAIR VALUE
   
+50bps
   
+100bps
 
Checking Accounts - Saving Deposits
    22,954,585       (73,822 )     (147,111 )
Time Deposits
    18,255,567       (37,470 )     (74,769 )
Interbank borrowings
    4,434,489       (4,555 )     (9,090 )
Long-term debt
    4,332,866       (39,283 )     (78,388 )
Convertible Bonds
    40,270       (526 )     (1,049 )
Total interest rate sensitive liabilities
    50,017,778       (155,656 )     (310,407 )
                         
Total net change
            (48,262 )     (96,501 )
 
 
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A rise in interest rates decreases the fair value of the assets and liabilities of the Bank, therefore, affects negatively the Bank’s market value on the active side and positively on the liabilities side.
 
Bancolombia’s largest assets are loans, which represent 93.37% of the total NPV of the total interest rate sensitive assets in the Banking Book.  The change in market value of assets as a result of a 50 basis points parallel shift of the yield curve has increased from COP 204 billion in 2009 to COP 222 billion in 2010 due to an increase in the duration of the Commercial Loans Portfolio.
 
On the liabilities side, Bancolombia’s largest interest rate sensitive liabilities are demand deposits and time deposits which represent 51.01% and 27.82%, respectively of the total NPV of the total interest rate sensitive liabilities in the Banking Book. The change in market value of liabilities as a result of a 50 basis points parallel shift of the yield curve increased from COP 156 billion in 2009 to COP 239 billion in 2010, reflecting the increase in demand deposits and the issuance of long-term debt during 2010.
 
As of December 31, 2010, the net change in the NPV for the market risk sensitive instruments, entered into for other than trading purposes with positive parallel shifts of 50 and 100 basis points were COP 17 billion and COP 34 billion, respectively. The decrease in the interest rate risk in 2010 versus 2009 reflects the higher duration of the demand deposits and the long-term debt in 2010.
 
Assumptions and Limitations of Sensitivity Analysis: Sensitivity analysis is based on the following assumptions, and should not be relied on as indicative of future results: When computing the NPV of the market risk sensitive instruments and its modified duration we have relied on two key assumptions: (a) a uniform change of interest rates of assets and liabilities and of rates for different maturities; and (b) modified duration of variable rate assets and liabilities is taken to be the time remaining until the next interest reset date.

ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 
 
D.
AMERICAN DEPOSITARY SHARES
 
D.3.
FEES AND CHARGES APPLICABLE TO HOLDERS OF AMERICAN DEPOSITARY RECEIPTS
 
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
 
The following are the fees charged by the depositary:
 
Persons depositing or withdrawing shares must pay:
 
For:
$5.00 per 100 ADSs (or portion of 100 ADSs)
 
• Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
• Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
Registration or transfer fees
 
• Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
Expenses of the depositary
 
• Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)
• Converting foreign currency to U.S. dollars
 
 
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Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes
 
• As necessary
Any charges incurred by the depositary
or its agents for servicing the deposited securities
 
• As necessary

D.4.i.
FEES INCURRED IN PAST ANNUAL PERIOD
 
From January 1, 2010, to December 31, 2010, the depositary reimbursed Bancolombia US$ 300,000 for expenses related to the administration and maintenance of the ADR facility, investor relations activities, annual listing fees and any other ADR program-related expenses incurred by Bancolombia directly associated with the company’s preferred share ADR program. In addition, Fiduciaria Bancolombia, a subsidiary of the Bank, received USD 171,948.00 from the Bank of New York Mellon during the same period in connection to its role as local custodian of the depositary bank.
 
D.4.ii.
FEES TO BE PAID IN THE FUTURE
 
The Bank of New York Mellon, as depositary, has agreed to reimburse the Bank for expenses incured that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to the Company based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse the Company, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depositary collects from investors.
 
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
 
 
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PART II
 
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
 
There has not been any default in the payment of dividends, principal, interest, a sinking or purchase fund installment in Bancolombia operation or any of its subsidiaries.
 
ITEM 14.      MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
No matters to report.
 
ITEM 15. 
CONTROLS AND PROCEDURES
 
The Bank carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures.  As a result, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports the Bank files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and regulations of the SEC and to provide reasonable assurance that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding disclosure.
 
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.
 
Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Management’s Report on Internal Control Over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Bank’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
The Bank’s internal control over financial reporting includes those policies and procedures that:
 
 
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Bank;
 
 
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Bank are being made only in accordance with authorizations of the Bank's management and directors; and
 
 
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Bank’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 
145

 
 
Management assessed the effectiveness of internal control over financial reporting as of December 31, 2010 based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management concluded that the Bank’s internal control over financial reporting was effective as of December 31, 2010. In addition, there were no changes in Bank’s internal control over financial reporting during the period covered by this annual report that has materially affected, or is reasonable likely to materially affect the Bank’s internal control over financial reporting.
 
The effectiveness of the Bank’s internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers Ltda., an independent registered public accounting firm, whose report is included on page F-4 of this annual report.
 
ITEM 16. RESERVED
 
 
A.
AUDIT COMMITTEE FINANCIAL EXPERT
 
The board of directors of Bancolombia appointed Mr. Alejandro Gaviria Uribe as the “audit committee financial expert” in accordance with SEC rules and regulations.
 
Our audit committee financial expert, along with the other members of our audit committee, is considered to be independent according to applicable NYSE criteria.
 
Mr. Gaviria Uribe has served as the Bank’s audit committee financial expert since May 22, 2007, he does not own any shares of Bancolombia and there is no business relationship between him and the Bank, except for standard personal banking services. Further, there is no fee arrangement between Mr. Gaviria Uribe and the Bank, except in connection with his capacity as a member of the Bank’s board of directors and now as a member of the audit committee. Mr. Gaviria Uribe is considered an independent director under Colombian law and the Bank’s Corporate Governance Code, as well as under NYSE’s director independence standards. For more information regarding our audit committee, see “Item 6. Directors, Senior Management and Employees—Board Practices—Audit Committee.”
 
 
B.
CORPORATE GOVERNANCE AND CODE OF ETHICS
 
Bancolombia has adopted a Code of Ethics and a Corporate Governance Code, both of which apply to all employees, including our Chief Executive Officer (principal executive officer), Chief Financial Officer (principal financial officer) and Controller (principal accounting officer), as well as to the directors of the Bank.
 
English translations of the Ethics Code and the Corporate Governance Code are posted at Bancolombia’s website at www.grupobancolombia.com.co. The Spanish versions of these codes will prevail for all legal purposes.
 
The Bank also has a phone line called “línea ética” which is available for anonymous reporting of any evidence of improper conduct.
 
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. See “Item 16. Reserved – 16.G Corporate Governance.”
 
 
C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The aggregate fees billed under the caption audit fees for professional services rendered to Bancolombia for the audit of its financial statements and for services that are normally provided to Bancolombia, in connection with statutory or regulatory filings or engagements totaled COP 9,579 million and COP 8,314 million. for the years 2010 and 2009 respectively.
 
Additionally other audit-related fees totaled COP 724 million audited for the year 2009.  Bancolombia paid no tax fees or other fees for the years 2010 and 2009 to PricewaterhouseCoopers Ltda.
 
 
146

 
 
The Bank’s audit committee charter includes the following pre-approval policies and procedures, which are included in the audit committee’s charters:
 
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 instances 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 is not obtained at a meeting held by the audit committee, the approval will be obtained through the Vice Presidency of Internal Audit, who will be responsible for soliciting the consent from 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.
 
 
D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
None.
 
 
E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 
Colombian law prohibits the repurchase of shares issued by entities supervised by the Superintendency of Finance. Therefore, neither Bancolombia nor any affiliated purchaser repurchased any shares during fiscal year 2010.
 
 
F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
 
Not applicable.
 
 
G. 
CORPORATE GOVERNANCE
 
Bancolombia, as a listed company that qualifies as a foreign private issuer under the NYSE listing standards in accordance with the NYSE corporate governance rules, is permitted to follow home-country practice in some circumstances in lieu of the provisions of the corporate governance rules contained in Section 303A of the NYSE Listed Company Manual that are applicable to U.S. companies. The Bank follows corporate governance practices applicable to Colombian companies and those described in the Bank’s Corporate Governance Code (the “Corporate Governance Code”) which in turn follows Colombian corporate governance rules. An English translation of the Corporate Governance Code is available at Bancolombia’s website at www.grupobancolombia.com.co. The Spanish version will prevail for all legal purposes.
 
In Colombia, a series of laws and regulations set forth corporate governance requirements. External Circular 056 of 2007 issued by the Superintendency of Finance, contains the corporate governance standards to be followed by companies issuing securities that may be purchased by Colombian pension funds, and determines that entities under supervision of the Superintendency of Finance, when making investment decisions, must take into account the recommendations established by the “Country Code” and the corporate governance standards followed by the entities who are beneficiaries of the investment. Additionally, External Circular 055 of 2007 establishes that entities under the supervision of the Superintendency of Finance must adopt mechanisms for the periodic disclosure of their corporate governance standards.
 
Additionally, Law 964 of 2005 established mandatory corporate governance requirements for all issuers whose securities are publicly traded in the Colombian market, and Decree 3139 of 2006 regulates disclosure and market information for the Colombian securities market SIMEV (Sistema Integral de Información del Mercado de Valores).  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.
 
 
147

 
 
The following is a summary of the significant differences between the corporate governance practices followed by Bancolombia and those applicable to domestic issuers under the NYSE listing standards:
 
 
·
Independence of Directors. Under NYSE corporate governance rules, a majority of a U.S. company’s board of directors must be composed of independent directors. Law 964 of 2005 requires that at least 25% of the members of the Bank’s board of directors are independent directors, and Decree 3923 of 2006 regulates their election. Additionally, 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 stockholders lists of director nominees of which at least 25% are independent directors. For the independence test applicable to directors of Bancolombia see “Item 10. Additional Information. – B. Memorandum and Articles of Association – Board of Directors”.
 
 
·
Non-Executive Director Meetings. Pursuant to the NYSE listing standards, non-executive directors of U.S. listed companies must meet on a regular basis without management present. The non-executive directors of Bancolombia do not meet formally without management present. There is no prohibition under Colombian regulations for officers to be members of the board of directors; however 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, however the CEO attends the monthly meetings of the Bank’s board of directors (but is not allowed to vote) and committees may have officers or employees as permanent members to guarantee an adequate flow of information between employees, management and directors. In accordance with the Law 964 of 2005 and the Bank’s by-laws, no executive officer can be elected as chairman of the Bank’s board of directors.
 
 
·
Committees of the Board of Directors. Under NYSE listing standards, all U.S. companies listed on the NYSE must have an audit committee, a compensation committee, and a nominating/corporate governance committee and all members of such committees must be independent. In each case, the independence of directors must be established pursuant to highly detailed rules promulgated by the NYSE and, in the case of the audit committee, the NYSE and the SEC. The Bank’s board of directors has a “Board Issues Committee”, a “Designation, Compensation and Development Committee”, a “Corporate Governance Committee” and an “Audit Committee”, each of which is composed of both directors and officers, except the audit committee which is composed of three independent directors but no officers. For a description of these committees see “Item 6. Directors, Senior Management and Employees – C. Board Practices”.
 
 
·
Stockholder Approval of Equity Compensation Plans. Under NYSE listing standards, stockholders of U.S. companies must be given the opportunity to vote on all equity compensation plans and to approve material revisions to those plans, with limited exceptions set forth in the NYSE rules. Under Colombian laws applicable to Bancolombia, such approval from stockholder is also required.
 
 
·
Stockholder Approval of Dividends. While NYSE corporate governance standards do not require listed companies to have stockholders approve or declare dividends, in accordance with the Colombian Code of Commerce, annual dividends must be approved by Bancolombia’s shareholders.
 
 
148

 
 
PART III
 
FINANCIAL STATEMENTS
 
ITEM 17. 
FINANCIAL STATEMENTS
 
Not applicable.
 
ITEM 18. 
FINANCIAL STATEMENTS
 
Reference is made to pages F - 1 through F – 113.
 
ITEM 19.
EXHIBITS
 
The following exhibits are filed as part of this Annual Report.
 
1.
 
English translation of corporate by-laws (estatutos sociales) of the registrant, as amended on March 7, 2011.
2 (2)
 
The Deposit Agreement entered into between Bancolombia and The Bank of New York, as amended on January 14, 2008.
4.1.(3)
 
English summary of the Agreement for transfer of assets, liabilities and contracts of Sufinanciamiento S.A. Compañia de Financiamiento to Bancolombia S.A. dated March 19, 2010.
4.1. (3)
 
English summary of the Share Purchase Agreement among Leasing Bancolombia, Banca de Inversion Bancolombia, Inversiones CFNS, Fundacion Bancolombia y Factoring Bancolombia, Mitsubishi International Corporation and Mitsubishi Corporation dated March 12, 2010.
4.1.
 
English summary of the Sale Agreement of Asesuisa entered into among Bancoagrícola S.A., Inversiones Financieras Banco Agrícola and Suramericana dated February 5, 2011.
4.1.
 
English summary of the Sale Agreement of AFP Crecer entered into Bancoagrícola S.A., Inversiones Financieras Banco Agrícola and Proteccion S.A. Sociedad Administradora de Fondos de Pensiones y Cesantias dated December 28, 2010.
4.1.
 
English summary of the sale agreement of a several real estate propierties which form part of the “San Martin” building complex entered into Bancolombia S.A.  and Fondo de Capital Privado Inmobiliario Colombia.
4.1.
 
English summary of the dissolved of Sinesa Holding Company, subsidiary of Bancolombia.
4.1.
 
English summary of the formative documents of a new entity Cobranzas Bancolombia S.A., after the corporate break-up of Tuya S.A. Compañía de Financiamiento.
7
 
Selected Ratios’ Calculation.
8.1.
 
List of Subsidiaries.
11(1)
 
English translation of the Ethics Code of the registrant, as amended on June 23, 2008.
12.1
 
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 28, 2011.
12.2
 
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 28, 2011.
13.1
 
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 28, 2011.
13.2
 
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 28, 2011.
15.(a)(1)
 
English translation of Corporate Governance Code (Código de Buen Gobierno) of the registrant, as amended on June 23, 2008.


(1)
Incorporated by reference to the Bank’s Annual Report on Form 20-F for the year ended December 31, 2007 filed on July 8, 2008.
(2)
Incorporated by reference to the Registration Statement in Form F-6, filed by Bancolombia on January 14, 2008.
(3)
Incorporated by reference to the Bank’s Annual Report on Form 20-F for the year ended December 31, 2009 filed on June11, 2010.
 
 
149

 

SIGNATURES
 
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 
BANCOLOMBIA S.A.
 
 
 
 
 
/s/ JAIME ALBERTO VELASQUEZ BOTERO
 
 
Name: Jaime Alberto Velasquez Botero.
 
 
Title:  Vice President, Finance
 

Date: April 28, 2011
 
 
150

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
   
Page
     
Reports of Independent Registered Public Accounting Firms
 
F-2
     
Consolidated Balance Sheets
   
As of December 31, 2010 and 2009
 
F-4
     
Consolidated Statements of Operations
   
As of December 31, 2010, 2009 and 2008
 
F-6
     
Consolidated Statements of Stockholders’ Equity
   
As of December 31, 2010, 2009 and 2008
 
F-8
     
Consolidated Statements of Cash Flows
   
As of December 31, 2010, 2009 and 2008
 
F-9
     
Notes to Consolidated Financial Statements
 
F-10
 
 
F-1

 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of Bancolombia S. A.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Bancolombia S. A. and its subsidiaries (the "Bank") at December 31, 2010 and 2009, and the results of their operations and cash flows for the years ended December 31, 2010, 2009 and 2008 in conformity with accounting principles generally accepted in Colombia and the special regulations of the Colombian Superintendency of Finance, collectively “Colombian GAAP” .  Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Bank's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in “Management's Report on Internal Control Over Financial Reporting” appearing under Item 15.  Our responsibility is to express opinions on these consolidated financial statements and on the Bank’s internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and auditing standards generally accepted in Colombia.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the consolidated financial statements included 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, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2 (h), (i) and (j) to the consolidated financial statements, in 2009 the Bank changed the manner in which it values the swaps and equity securities and recognizes in the records the residual rights originated in the securitization of mortgage loans due to the adoption in 2009 of the new regulations of the Colombian Superintendency of Finance. Additionally, in 2010, as discussed in Note 2 (d), the Bank has revised the presentation of the consolidated statements of cash flows for all periods presented.
 

PricewaterhouseCoopers  Ltda.,  Edificio Forum, Calle 7 Sur No. 42-70, Torre 2, Piso 11, Medellín, Colombia,
Tel: (57-4) 325 4320, Fax: (57-4) 325 4322, www.pwc.com/co
 
 
F-2

 
 
 
To The Board of Directors and Stockholders of Bancolombia S. A.

April 28, 2011

Colombian GAAP varies in certain significant respects from accounting principles generally accepted in the United States of America.  Information relating to the nature and effect of such differences is presented in Note 31 to the consolidated financial statements.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers Ltda.
Medellin, Colombia
April 28, 2011
 
 
F-3

 
 
BANCOLOMBIA S.A. AND SUBSIDIARIES
 
Consolidated Balance Sheets
 
December 31, 2010 and 2009
 
(Stated in millions of Colombian pesos and thousands of U.S. Dollars)

   
Notes
   
2010(1)
(Unaudited)
   
2010
   
2009
 
         
U.S. Dollar
             
Assets
                       
                         
Cash and cash equivalents:
                       
Cash and due from banks
  4     USD 2,775,577     COP 5,312,398     COP 4,983,569  
Overnight funds and interbank loans
          440,253       842,636       2,388,790  
Total cash and cash equivalents
          3,215,830       6,155,034       7,372,359  
                               
Investment securities:
  5                          
Debt securities:
          4,298,274       8,226,811       8,436,244  
Trading
          1,165,390       2,230,533       3,037,819  
Available for sale
          1,173,445       2,245,951       2,175,494  
Held to maturity
          1,959,439       3,750,327       3,222,931  
Equity securities:
          281,778       539,318       580,214  
Trading
          139,048       266,135       330,840  
Available for sale
          142,730       273,183       249,374  
 Allowance for impairment
          (47,214 )     (90,367 )     (101,545 )
Total investment securities
          4,532,838       8,675,762       8,914,913  
                               
Loans and financial leases:
  6                          
Commercial loans
          16,192,647       30,992,403       26,011,915  
Consumer loans
          4,272,341       8,177,175       6,888,615  
Microcredit loans
          133,273       255,082       202,019  
Mortgage loans
          1,746,560       3,342,881       3,469,424  
Financial leases
          3,047,863       5,833,549       5,470,001  
Allowance for loans and financial lease losses
  7       (1,310,992 )     (2,509,213 )     (2,431,667 )
Total loans and financial leases, net
          24,081,692       46,091,877       39,610,307  
                               
Accrued interest receivable on loans and financial leases:
                             
Accrued interest receivable on loans and financial leases
          186,252       356,484       384,542  
Allowance for accrued interest losses
  7       (20,351 )     (38,952 )     (45,937 )
Total interest accrued, net
          165,901       317,532       338,605  
                               
Customers’ acceptances and derivatives
  8       410,082       784,888       205,367  
Accounts receivable, net
  9       416,783       797,715       806,885  
Premises and equipment, net
  10       613,708       1,174,625       992,041  
Premises and equipment under operating leases, net
  11       525,663       1,006,108       843,054  
Foreclosed assets, net
  15       36,718       70,277       80,668  
Prepaid expenses and deferred charges, net
  12       167,120       319,864       185,811  
Goodwill
  14       392,359       750,968       855,724  
Other assets
  13       619,639       1,185,977       922,265  
Reappraisal of assets
  16       399,445       764,529       736,366  
Total assets
        USD 35,577,778     COP 68,095,156     COP 61,864,365  
                               
Memorandum accounts
  25     USD 196,463,347     COP 376,026,917     COP 304,507,396  

 
F-4

 
 
BANCOLOMBIA S.A. AND SUBSIDIARIES
 
Consolidated Balance Sheets
 
December 31, 2010 and 2009
 
(Stated in millions of Colombian pesos and thousands of U.S. Dollars)

   
Notes
 
2010(1)
(Unaudited)
   
2010
   
2009
 
       
U.S. Dollar
             
                       
Liabilities and Stockholders’ Equity
                           
                             
Deposits
                           
                             
Non bearing interest:
      USD 3,987,616     COP 7,632,216     COP 6,307,780  
Checking accounts
        3,647,020       6,980,322       5,858,667  
Other
        340,596       651,894       449,113  
Interest bearing:
        18,760,254       35,906,751       35,841,550  
Checking accounts
        1,345,683       2,575,611       2,366,281  
Time deposits
        7,978,281       15,270,271       18,331,488  
Savings deposits
        9,436,290       18,060,869       15,143,781  
Total deposits
        22,747,870       43,538,967       42,149,330  
                             
Overnight funds and interbank borrowings
        1,023,441       1,958,846       1,342,201  
Bank acceptances outstanding and derivatives
        337,190       645,374       47,609  
Other interbank borrowings
 
17
    1,410,120       2,698,941       1,152,918  
Borrowings from development and other domestic banks
 
18
    1,333,162       2,551,646       2,886,232  
Accounts payable
        886,217       1,696,201       1,656,154  
Accrued interest payable
        154,955       296,580       411,796  
Other liabilities
 
19
    360,205       689,426       665,893  
Long-term debt
 
20
    2,987,688       5,718,376       4,173,622  
Accrued expenses
 
21
    147,883       283,047       239,400  
Minority interest
        36,893       70,612       106,381  
Total liabilities
        31,425,624       60,148,016       54,831,536  
                             
Stockholders’ equity
 
22, 24
                       
Subscribed and paid in capital:
        240,694       460,684       460,684  
Nonvoting preference shares
        79,114       151,422       151,422  
Common shares
        161,580       309,262       309,262  
Retained earnings:
        3,570,814       6,834,467       5,954,205  
Appropriated
 
23
    2,820,287       5,397,973       4,697,355  
Unappropriated
        750,527       1,436,494       1,256,850  
Reappraisal of assets
 
16
    325,096       622,227       582,377  
Gross unrealized net gain on investments
        15,550       29,762       35,563  
Total stockholders’ equity
        4,152,154       7,947,140       7,032,829  
                             
Total liabilities and stockholders’ equity
      USD 35,577,778     COP 68,095,156     COP 61,864,365  
                             
Memorandum accounts
 
25
  USD 196,463,347     COP 376,026,917     COP 304,507,396  

The accompanying notes, numbered 1 to 31, form an integral part of these Consolidated Financial Statements.

(1)
See note 2 (c).

 
F-5

 

BANCOLOMBIA S.A. AND SUBSIDIARIES
 
Consolidated Statements of Operations
 
Years ended December 31, 2010, 2009 and 2008
 
(Stated in millions of Colombian pesos and thousands of U.S. Dollars, except per share data)

   
Note
 
2010 (1)
(Unaudited)
   
2010
   
2009
   
2008
 
       
U.S. Dollar
                   
                             
Interest income:
                           
Loans
      USD 2,033,519     COP 3,892,114     COP 4,900,062     COP 4,999,520  
Investment securities
        231,148       442,413       728,558       431,589  
Overnight funds and interbank loans
        21,943       41,998       76,173       106,208  
Financial leases
        298,937       572,160       722,905       776,426  
Total interest income
        2,585,547       4,948,685       6,427,698       6,313,743  
                                     
Interest expense:
                                   
Checking accounts
        20,302       38,858       43,211       39,257  
Time deposits
        362,463       693,746       1,376,567       1,256,742  
Saving deposits
        168,059       321,662       450,865       589,718  
Total interest expense on deposits
        550,824       1,054,266       1,870,643       1,885,717  
                                     
Interbank borrowings
        10,208       19,537       47,650       74,792  
Borrowings from development and other domestic banks
        72,640       139,032       252,842       344,900  
Overnight funds
        21,134       40,451       94,099       166,129  
Long-term debt
        166,300       318,295       360,182       281,803  
Total interest expense
        821,106       1,571,581       2,625,416       2,753,341  
                                     
Net interest income
        1,764,441       3,377,104       3,802,282       3,560,402  
                                     
Provision for loan, accrued interest losses and other receivables, net
 
7
    (412,122 )     (788,794 )     (1,317,846 )     (1,263,405 )
Recovery of charged-off loans
        144,311       276,209       214,251       108,143  
Provision for foreclosed assets and other assets
        (35,103 )     (67,187 )     (98,437 )     (46,297 )
Recovery of provisions for foreclosed assets and other assets
        16,749       32,057       48,658       68,392  
Total net provisions
        (286,165 )     (547,715 )     (1,153,374 )     (1,133,167 )
Net interest income after provisions for loans and accrued interest losses
        1,478,276       2,829,389       2,648,908       2,427,235  
                                     
Fees and other service income:
                                   
Commissions from banking services
        160,355       306,917       251,734       238,918  
Electronic services and ATMs fees
        29,791       57,019       58,944       86,070  
Branch network services
        61,990       118,647       110,837       104,010  
Collections and payments fees
        118,359       226,537       187,348       157,281  
Credit card merchant fees
        9,590       18,355       28,200       32,215  
Credit and debit card annual fees
        294,913       564,457       548,820       446,647  
Checking fees
        36,273       69,425       69,544       67,963  
Fiduciary activities
        86,247       165,075       171,927       98,799  
Pension plan management
        47,091       90,131       96,678       87,826  
Brokerage fees
        19,216       36,779       45,966       54,742  
Check remittance
        9,244       17,693       25,812       26,148  
International wire transfers
        30,595       58,559       53,614       47,962  
Total fees and other service income
      USD 903,664     COP 1,729,594     COP 1,649,424     COP 1,448,581  
                                     
Fees and other service expenses
        (78,189 )     (149,653 )     (143,151 )     (134,939 )
 Total fees and income from services, net
        825,475       1,579,941       1,506,273       1,313,642  
                                     
Other operating income:
                                   
Foreign exchange gains (loss), net
        32,451       62,110       (216,411 )     113,584  
Gains of forward contracts in foreign currency
        26,903       51,491       265,969       142,431  
Gains on sales of investments on equity securities
        23,885       45,716       584       92,125  
Gains on sale of mortgage loans
        44,860       85,862       53,784       41,080  
Dividend income
        18,129       34,699       24,045       39,586  
Revenues from commercial subsidiaries
        45,782       87,625       96,605       101,730  
Insurance income
        1,467       2,808       12       13,948  
 
 
F-6

 

BANCOLOMBIA S.A. AND SUBSIDIARIES
 
Consolidated Statements of Operations
 
Years ended December 31, 2010, 2009 and 2008
 
(Stated in millions of Colombian pesos and thousands of U.S. Dollars, except per share data)

   
Note
 
2010 (1)
(Unaudited)
   
2010
   
2009
   
2008
 
       
U.S. Dollar
                   
Communication, postage, rent and others
        92,829       177,673       156,088       105,958  
Total other operating income
        286,306       547,984       380,676       650,442  
Total operating income
        2,590,057       4,957,314       4,535,857       4,391,319  
                                     
Operating expenses:
                                   
Salaries and employee benefits
        595,590       1,139,947       1,034,942       928,997  
Bonus plan payments
        66,270       126,839       90,341       125,393  
Termination benefits
        14,395       27,551       19,725       23,539  
Administrative and other expenses
 
27
    760,209       1,455,025       1,418,145       1,268,982  
Insurance on deposits, net
        44,096       84,399       74,228       52,151  
Donation expenses
        6,796       13,008       3,506       26,653  
Depreciation
 
10
    102,271       195,744       185,027       141,133  
Goodwill amortization
        29,240       55,966       69,231       73,149  
Total operating expenses
        1,618,867       3,098,479       2,895,145       2,639,997  
Net operating income
        971,190       1,858,835       1,640,712       1,751,322  
                                     
Non-operating income:
                                   
Other income
        139,747       267,472       198,761       172,550  
Minority interest
        (6,906 )     (13,217 )     (15,081 )     (18,511 )
Other expense
        (87,869 )     (168,179 )     (105,529 )     (140,662 )
Total non-operating income, net
 
28
    44,972       86,076       78,151       13,377  
                                     
Income before income taxes
        1,016,162       1,944,911       1,718,863       1,764,699  
Income tax expense
 
21
    (265,633 )     (508,417 )     (462,013 )     (474,056 )
Net income
      USD 750,529     COP 1,436,494     COP 1,256,850     COP 1,290,643  
                                     
Earnings  per share
      USD 0.95     COP 1,823     COP 1,595     COP 1,638  

The accompanying notes, numbered 1 to 31, form an integral part of these Consolidated Financial Statements.
 
 
(1)
See note 2 (c).

 
F-7

 
 
BANCOLOMBIA S.A. AND SUBSIDIARIES
 
Consolidated Statements of Stockholders’ Equity
 
Years ended December 31, 2010, 2009 and 2008
 
(Stated in millions of Colombian pesos and thousands of U.S. Dollars, except share data)

    
Non Voting Preferred Shares
   
Voting Common Shares
   
Retained Earnings
   
Surplus
   
Total
 
   
Number
   
Par Value
   
Number
   
Par Value
   
Appro-
Priated
   
Unappro-
Priated
   
Reappraisal
of assets
   
Gross unrealized
gain or( loss) on 
available for sale
investments
   
Stockholders’
equity
 
                                                       
Balance at December 31, 2007
    278,122,419     COP 151,422       509,704,584     COP  309,262     COP  3,359,604     COP  1,086,923     COP  319,646     COP (27,587 )   COP  5,199,270  
Net income
    -       -       -       -       -       1,290,643       -       -       1,290,643  
Transfer to appropriated retained earnings
    -       -       -       -       1,086,923       (1,086,923 )     -       -       -  
Reappraisal of  assets and valuation of investments
    -       -       -       -       -       -       128,865       (30,427 )     98,438  
Dividends declared
    -       -       -       -       (447,486 )     -       -       -       (447,486 )
Other
    -       -       -       -       (24,020 )     -       -       -       (24,020 )
Balance at December 31, 2008
    278,122,419       151,422       509,704,584       309,262       3,975,021       1,290,643       448,511       (58,014 )     6,116,845  
Net income
    -       -       -       -       -       1,256,850       -       -       1,256,850  
Transfer to appropriated retained earnings
    -       -       -       -       1,290,643       (1,290,643 )     -       -       -  
Reappraisal of assets and valuation of investments
    -       -       -       -       -       -       133,866       93,577       227,443  
Dividends declared
    -       -       -       -       (491,604 )     -       -       -       (491,604 )
Other
    -       -       -       -       (76,705 )     -       -       -       (76,705 )
Balance at December 31, 2009
    278,122,419       151,422       509,704,584       309,262       4,697,355       1,256,850       582,377       35,563       7,032,829  
Net Income
    -       -       -       -       -       1,436,494       -       -       1,436,494  
Transfer to appropriated retained earnings
    -       -       -       -       1,256,850       (1,256,850 )     -       -       -  
Reappraisal of assets and valuation of investment
    -       -       -       -       -       -       39,850       (5,801 )     34,049  
Dividends Declared
    -       -       -       -       (501,688 )     -       -       -       (501,688 )
Other
    -       -       -       -       (54,544 )     -       -       -       (54,544 )
Balance at December 31, 2010
    278,122,419     COP 151,422       509,704,584     COP  309,262     COP  5,397,973     COP  1,436,494     COP  622,227     COP 29,762     COP  7,947,140  
Balance at December 31, 2010(1) (Unaudited)
           USD 79,114              USD  161,580     USD  2,820,287     USD  750,527     USD  325,096     USD  15,550     USD  4,152,154  

The accompanying notes, numbered 1 to 31, form an integral part of these Consolidated Financial Statements.
 
(1) See note 2 (c).
 
 
F-8

 
 
BANCOLOMBIA S.A.AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows
 
Years ended December 31, 2010, 2009 and 2008
 
(Stated in millions of  Colombian pesos and thousands of U.S. Dollars)

   
2010 (1)
   
2010
   
2009
   
2008
 
   
(Unaudited)
                   
                         
Cash flows from operating activities:
                       
Net income
  USD 750,529     COP 1,436,494     COP 1,256,850     COP 1,290,643  
Minority interest
    6,906       13,217       15,080       18,511  
                                 
Adjustments to reconcile net income to net cash used in operating activities:
                               
                                 
Provision for loan, accrued interest and accounts receivable losses
    414,167       792,708       1,317,845       1,260,655  
Provision for foreclosed assets and other assets
    23,212       44,428       97,917       16,265  
Depreciation and amortization
    179,257       343,095       364,607       313,592  
Recovery of provision for foreclosed assets and other assets
    (21,851 )     (41,823 )     (48,657 )     (69,253 )
Gains on sale of mortgage loans and other assets
    (61,813 )     (118,309 )     (51,822 )     (37,044 )
Unrealized gains on investment securities
    (277,710 )     (531,531 )     (760,647 )     (568,061 )
Unrealized gains on derivative contracts
    (5,621 )     (10,759 )     (241,024 )     (129,688 )
Foreclosed assets donation
    3,488       6,676       1,211       7,311  
(Increase) Decrease in loans and financial leases
    (4,097,903 )     (7,843,304 )     766,073       (6,533,700 )
Decrease in customers’ acceptances and derivatives
    25,574       48,948       312,156       61,272  
(Increase) Decrease in accounts receivable
    (1,795 )     (3,435 )     111,339       (306,303 )
(Increase) Decrease in other assets
    (115,923 )     (221,871 )     23,418       (98,256 )
Increase in deposits
    1,049,118       2,007,990       2,695,386       4,966,018  
Increase in other liabilities
    7,076       13,545       42,240       92,512  
(Decrease) Increase in accounts payable
    (43,604 )     (83,457 )     (13,476 )     86,572  
Increase (Decrease) in estimated liabilities and allowances
    27,606       52,837       (17,850 )     47,263  
Change in trading investment securities
    564,567       1,080,569       (219,073 )     (546,279 )
Net losses on sales of foreclosed assets
    64,457       123,370       48,984       54,575  
(Increase) Decrease in assets to place in lease contracts
    (91,892 )     (175,879 )     20,530       (329,373 )
Net cash (used in) provided by operating activities
    (1,602,155 )     (3,066,491 )     5,721,087       (402,768 )
                                 
Cash flows from investing activities:
                               
Purchases of available for sale debt securities
    (1,162,919 )     (2,225,803 )     (1,309,991 )     (644,602 )
Proceeds from sales of  available for sale  debt securities
    1,148,493       2,198,192       1,297,458       825,723  
Purchases of held to maturity debt securities
    (798,458 )     (1,528,232 )     (2,044,603 )     (1,038,122 )
Proceeds from maturities of debt securities
    571,192       1,093,250       1,396,112       520,224  
Purchases of available for sale equity securities
    (21,739 )     (41,608 )     (79,948 )     (16,565 )
Proceeds from sales of equity securities
    30,547       58,467       9,251       145,672  
Purchases of property, plant and equipment
    (547,151 )     (1,047,237 )     (364,326 )     (773,003 )
Proceeds from sales of property and equipment
    261,716       500,919       160,635       60,885  
Software purcharses under INNOVA project
    (52,881 )     (101,216 )     (92,136 )     (29,749 )
Net cash used in investing activities
    (571,200 )     (1,093,268 )     (1,027,548 )     (949,537 )
                                 
Increase (Decrease) in overnight funds
    326,187       624,316       (1,171,450 )     478,070  
Increase (Decrease) in interbank borrowings
    664,336       1,271,526       (1,831,437 )     985,467  
Placement of long-term debt
    1,237,829       2,369,179       1,414,939       864,258  
Payment of long-term debt
    (373,810 )     (715,465 )     (738,703 )     (243,438 )
Dividends paid
    (262,118 )     (501,688 )     (491,604 )     (447,486 )
Net cash provided by (used in) financing activities
    1,592,424       3,047,868       (2,818,255 )     1,636,871  
                                 
Effects of exchange rate changes on cash and cash equivalents
    (55,086 )     (105,434 )     (122,500 )     106,622  
(Decrease) Increase in cash and cash equivalents
    (580,931 )     (1,111,891 )     1,875,284       284,566  
Cash and cash equivalents at beginning of year
    3,851,847       7,372,359       5,619,575       5,228,387  
Cash and cash equivalents at end of year
  USD 3,215,830     COP 6,155,034     COP 7,372,359     COP 5,619,575  
Supplemental disclosure of cash flows information:
                               
Cash paid during the year for:
                               
Interest
    881,304       1,686,798       2,614,527       2,639,069  
Income taxes
    166,292       318,279       357,298       214,679  

See accompanying notes to consolidated financial statements.

(1) See note 2 (c ) and 2 (d)

 
F-9

 
 
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of  Colombian pesos and thousands of U.S. dollars. Except for the Representative Market Rate)
 
(1)  Organization and Background
 
Bancolombia S.A. (“the Bank”) is a private commercial bank incorporated under Colombian law on January 24, 1945 and is incorporated until 2044. On April 3, 1998, Banco Industrial Colombiano S.A. (“BIC”) merged with Banco de Colombia S.A. and the surviving entity was renamed Bancolombia S.A. The registered office and business address of Bancolombia S.A. is in Medellín, Colombia.  Bancolombia S.A. and its subsidiaries are defined herein as the Bank.

As for recent amendments to the Bank’s by-laws’ the most important have been as follows: (i) by means of Public Deed No. 633 drawn up on April 3, 1998 before the Notary Public No. 14 of the Circuit of Medellín, BIC took over Banco de Colombia S.A. which was dissolved without being liquidated, and changed its corporate name to Bancolombia S.A.; (ii) by means of  Public Deed No. 3974 drawn up on July 30, 2005 before the Notary Public No. 29 of the Circuit of Medellín the merger between Bancolombia, Conavi and Corfinsura (spin-off) was duly made official. By virtue of this merger, Bancolombia took over the total amount of assets, rights and obligations of Conavi and Corfinsura, which were dissolved but not liquidated; and (iii) the last amendment was made by means of Public Deed No. 1614 drawn up on March 15, 2007 before the Notary Public No. 29 of the Circuit of Medellín, the main purpose of which was to simplify the workings of its Board of Directors, eliminating alternate members and reducing the number of principal members to nine.

Bancolombia S.A.’s business purpose is to carry out all operations, transactions, acts and services inherent to the banking business through banking establishments that carry its name and according to all applicable legislation.

Bancolombia S.A also has an agency in Miami, Florida, United States of America.

The consolidated financial statements include the assets, liabilities, earnings, contingent accounts and memorandum accounts of the Bank and other entities in which the Bank holds, directly or indirectly, 50% or more of the outstanding voting shares (the “Subsidiaries”).  Bancolombia S.A. has the following subsidiaries making up the Bancolombia Group, which is currently registered as a corporate group:

            
Participation
   
Participation
 
           
percentage
   
percentage
 
Entity
 
Location
 
Business
 
Dec-2010
   
Dec-2009
 
                     
Leasing Bancolombia S.A. Compañía de Financiamiento
 
Colombia
 
Leasing
    100       100  
Fiduciaria Bancolombia S.A. Sociedad Fiduciaria
 
Colombia
 
Trust
    98.81       98.81  
Banca de Inversión Bancolombia S.A. Corporación Financiera
 
Colombia
 
Investment banking
    100       100  
Valores Bancolombia S.A. Comisionista de Bolsa
 
Colombia
 
Securities brokerage
    100       100  
Compañía de Financiamiento Tuya S.A.  (Formerly Compañía de Financiamiento Sufinanciamiento S.A.)
 
Colombia
 
Financial services
    99.99       99.99  
Factoring Bancolombia S.A. Compañía de Financiamiento
 
Colombia
 
Financial services
    100       100  
Renting Colombia S.A. (1)
 
Colombia
 
Operating leasing
    100       80.5  
Transportempo S.A.S.
 
Colombia
 
Transportation
    100       80.5  
RC Rent a Car S.A.S. (2)
 
Colombia
 
Car rental
    -       80.5  
Valores Simesa S.A.
 
Colombia
 
Investments
    68.75       69.66  
Inversiones CFNS S.A.S.
 
Colombia
 
Investments
    100       100  
CFNS Infraestructura S.A.S. (3)
 
Colombia
 
Investments
    100       -  
Inmobiliaria Bancol S.A.
 
Colombia
 
Real estate broker
    99.00       99.03  
Todo 1 Colombia S.A.
 
Colombia
 
E-commerce
    90.09       89.92  

 
F-10

 

            
Participation
   
Participation
 
           
percentage
   
percentage
 
Entity
 
Location
 
Business
 
Dec-2010
   
Dec-2009
 
                     
Vivayco S.A.S. (3)
 
Colombia
 
Portfolio Purchase
    75       -  
Cobranzas Bancolombia S.A.  (Under “Liquidation process”)  (3)
 
Colombia
 
Technical and
Administrative 
Services
    99.99       -  
Patrimonio Autónomo CV Sufinanciamiento (4)
 
Colombia
 
Loan management
    -       100  
Inversiones Valores y Logística S.A.(Under “Liquidation process”) (5)
 
Colombia
 
Investments
    -       98.25  
Bancolombia Panamá S.A.
 
Panama
 
Banking
    100       100  
Valores Bancolombia Panamá S.A. (Formerly Suvalor Panamá S.A.)
 
Panama
 
Securities brokerage
    100       100  
Suvalor Panamá Fondo de Inversión S.A.
 
Panama
 
Holding
    100       100  
Sistema de Inversiones y Negocios S.A. Sinesa
 
Panama
 
Investments
    100       100  
Future Net S.A.
 
Panama
 
E-commerce
    100       100  
Banagrícola S.A.
 
Panama
 
Investments
    99.16       99.16  
Banco Agrícola Panamá S.A.
 
Panama
 
Banking
    99.16       99.16  
Banco Agrícola S.A.
 
El Salvador
 
Banking
    97.33       97.28  
AFP Crecer S.A.(6)
 
El Salvador
 
Pension fund
    98.97       98.96  
Aseguradora Suiza Salvadoreña S.A.  Asesuisa(6)
 
El Salvador
 
Insurance company
    96.08       96.07  
Asesuisa Vida S.A.(6)
 
El Salvador
 
Insurance company
    96.08       96.07  
Arrendadora Financiera S.A. Arfinsa
 
El Salvador
 
Leasing
    97.33       97.29  
Credibac S.A. de C.V.
 
El Salvador
 
Credit card services
    97.33       97.28  
Bursabac S.A. de C.V.
 
El Salvador
 
Securities brokerage
    98.89       98.87  
Inversiones Financieras Banco Agrícola S.A. IFBA
 
El Salvador
 
Investments
    98.89       98.87  
Renting Perú S.A.C.
 
Peru
 
Operating leasing
    100       80.6  
Capital Investments SAFI S.A.
 
Peru
 
Trust
    100       80.6  
Fondo de Inversión en Arrendamiento Operativo Renting Perú
 
Peru
 
Car Rental
    100       80.6  
Leasing Perú
 
Peru
 
Leasing
    100       100  
FiduPerú S.A. Sociedad Fiduciaria (Formerly Fiduciaria GBC S.A.)
 
Peru
 
Trust
    98.82       98.82  
Bancolombia Puerto Rico Internacional, Inc.
 
Puerto Rico
 
Banking
    100       100  
Suleasing International USA, Inc.
 
USA
 
Leasing
    100       100  
Sinesa Holding Company Ltda. (7)
 
British Virgin Islands
 
Investments
    -       100  
Bancolombia Caymán S.A.
 
Cayman Islands
 
Banking
    100       100  

(1)   In March 2010, Mitsubishi Corporation and Mitsubishi International Corporation sold its stake in Renting Colombia to Leasing Bancolombia S.A. Compañía de Financiamiento, Banca de Inversión Bancolombia S.A. Corporación Financiera, Inversiones CFNS S.A.S. and Factoring Bancolombia S.A. Compañía de Financiamiento.
(2)   Company merged into Renting Colombia S.A. in February 2010.
(3)   Company created in 2010.
(4)   Company liquidated in 2010.
(5)   Company sold in 2010.
(6)   On September 13, 2010, The Board of Directors of Bancolombia S.A. authorized the Bank to proceed with negotiations with Grupo de Inversiones Suramericana S.A. and Protección S.A. Sociedad Administradora de Fondos de Pensiones y Cesantías regarding the sale of the Bank’s ownership interests in AFP Crecer, Asesuisa and Asesuisa Vida in El Salvador which are currently held through foreign subsidiaries. The Bank expects that no impairment losses will be recognized for the sale. (See Note 30)
(7)   Company dissolved in December 2010.  The investments that the company had in Banca de Inversión Bancolombia S.A. Corporación Financiera and Future Net S.A., were transferred to Sistema de Inversiones y Negocios S.A. Sinesa

 
F-11

 
 
(2) Summary of Significant Accounting Policies
 
(a) Basis of Presentation

For the preparation and disclosures of financial statements, the Bank follows generally accepted accounting principles in Colombia and the special regulations of the Superintendency of Finance, collectively “Colombian Banking GAAP”.

The financial statements of foreign subsidiaries were adjusted in order to adopt uniform accounting practices as required by Colombian GAAP.

Intercompany operations and balances are eliminated upon consolidation.

The Bank holds the majority voting rights in the following companies: Prosicol E.U, Urbanización Sierras del Chicó Ltda. and Chicó Oriental No.2. Ltda. which were not included in the Consolidated Financial Statements due to the fact that these companies are either being wound up, subject to litigation proceedings or are currently in a non-productive stage.
 
See note (26) Commitments and Contingencies.
 
(b) Translation of Foreign Currency Transactions and Balances

Translation of financial statements in foreign currency

The balance sheet accounts are converted to pesos using the exchange rate applicable at the end of the year (except equity accounts which are translated at the historical exchange rate). The exchange rate at December 31, 2010 and December 31, 2009 was COP 1,913.98 and COP 2,044.23 per US$ 1, respectively. For the income accounts the average exchange rate was used. Exchange differences   originating in balance sheet accounts are recorded as “Cumulative Translation Adjustments” in the Consolidated Statements of Stockholder’s Equity and the exchange differences originating in the Consolidated statements of operations accounts are recorded as “Foreign exchange gains (loss)” in the Consolidated statements of  operations.

Transactions in foreign currency

Transactions and balances in foreign currency are converted by the Bank and its Subsidiaries to pesos using the market exchange rates applicable on the corresponding dates, as established by the Superintendency of Finance. The exchange rates at December 31, 2010 and December 31, 2009 are those stated above.
 
Exchange rate differences arising from adjustments and remeasurement of assets and liabilities denominated in foreign currency are recorded in the consolidated statements of operations.

(c) 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 COP 1,913.98 per US$ 1, which is the exchange rate, calculated on December 31, 2010, the last business day of the year, by the Superintendency of Finance. 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.
 
 
F-12

 

(d) Cash and Cash Equivalents

The statement of cash flows was prepared using the indirect method. Cash and cash equivalents consist of cash and due from banks and all highly liquid investments with a maturity of three months or less at the date of acquisition.

Under Colombian Banking GAAP there are no special requirements of forms to prepare the Bank’s statement of cash flows. Accordingly, the Bank reclassified some items in its statements of cash flows for the year 2010, to improve its presentation in preparing the statement of cash flows in accordance with the presentation in the International Financial Reporting Standard No. 7, “Statement of Cash Flows”. Prior year amounts have also been reclassified to conform with the 2010 presentation.

As a part of the reclassifications, changes in trading investment securities and losses from sales of foreclosed assets were reclassified from investing activities to operating activities and a component of other assets from operating activities to investing activities.

Amounts previously published and the revised amounts are detailed bellow:

   
2009
   
2008
 
   
Previous
   
As revised
   
Previous
   
As revised
 
Net cash provided by operating activities
  COP 5,673,995       5,721,087     COP (7,133 )   COP (402,768 )
Net cash used in investing activities
    (978,475 )     (1,027,548 )     (1,602,345 )     (949,537 )
Net cash used in financing activities
    (2,942,736 )     (2,818,255 )     2,000,666       1,636,871  

(e)  Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with Colombian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual losses could differ from those estimated.

(f) Real Value Unit Rate (UVR)

The operations that the Bank carries out with regard to mortgage loans linked to the Unidad de Valor Real (the “Real Value Unit” or “UVR”) are adjusted on a daily basis according to the daily value of the UVR, as published by the Central Bank. The values assigned by the Central Bank to the UVR, in Colombian pesos, on December 31, 2010 and 2009, were COP 190.8298 and COP 186.2734, respectively. The UVR rate corresponds to the monthly variance of the IPC (Colombian Consumer Index Price) during the calendar month immediately prior to the month for which the UVR rate is being calculated.  In light of the above, the annualized UVR rate increased at December 31, 2010 and 2009 by 0.36% and (2.55%), respectively.

 (g) Overnight Funds and Interbank Loans and Borrowings

Overnight funds and interbank loans and borrowings include: Interbank funds and securities sold and purchased under repurchase agreements (“Repos”).
 
Interbank Funds

Interbank Funds include loans made to other financial institutions and borrowings from the Central Bank or other financial institutions with maturities between 1 to 30 days.
 
 
F-13

 
 
Repos

Asset Position: Refers to transactions that are accounted for as collateralized lending in which the Bank or its subsidiaries purchase securities with an agreement to resell them to the seller at a stated price plus interest at a specified date, not exceeding one year. The amount recorded in this account related to the money lent and the investment securities purchased are recorded in memorandum accounts. Accrued interest is recorded in accounts receivables.

Liability Position: Refers to transactions that are accounted for as collateralized borrowing in which the Bank or its subsidiaries sell securities with an agreement to repurchase them from the buyer at a stated price plus interest at a specified date, not exceeding one year. The amount is recorded as a liability related to the money borrowed and the investment security sold is reclassified inside the investment securities account into “Investment Securities under Repurchase Agreement”. Accrued interest is recorded in accounts payable.

Under Colombian GAAP repo transactions do not qualify as true purchase/sales and therefore these investments are kept in the Bank’s book.

(h) Investment Securities

1. Classification

Investment securities are classified as “trading”, “held to maturity”, and “available for sale”.

Trading Securities

Trading investments are those acquired mainly for the purpose of profiting from fluctuations in short-term prices.

Held to Maturity Securities

Investments “held to maturity” are debt securities acquired for the purpose of holding until maturity. Reclassification to a different category is permitted only under specific situations. These investments only are sold for liquidity operations, in exceptional cases, as determined by the Superintendency of Finance.

Available for Sale Securities

These are investments which do not fall into either of the above classifications, for which the investor has the stated intention and legal, contractual, financial, and operational capacity to hold the investments for at least one year from the date of classification.

Investments intented to be held for less than one year are classified as trading securities. This classification also covers equity investments with low market liquidity or those with no quoted share price.

2.  Investment Valuation

2.1. Debt Securities

Trading securities are valued daily at fair value and the result is recorded daily. The Bank determines the fair value of trading and available for sale debt securities by using the prices, reference rates and margins provided by Infoval (entity created to provide market prices from the Colombia Stock Exchange). These prices are calculated and published daily.

Held to maturity investments are valued at amortized cost based on an internal rate of return calculated on the purchase date.

 
F-14

 

2.2 Equity Securities

External Circular 100 of 1995 issued by the Superintendency of Finance provides that investments be valued on a daily basis; however, in the case of investments in shares with little or low market liquidity, or that are not listed on the stock exchange, the valuation source of these investments is the financial statements of the related company. The Bank records the valuation of these investments on a monthly basis.
 
Since August 24, 2009, equity securities are valued as follows:

a.  Listed equity securities on the Stock Exchange in Colombia

These investments are valued at prices published by authorized entities. In the absence of a price calculated for the day on which these investments are valued, the last known valuation price is used. For low volume trading securities the Bank uses the method described below in section b.
 
b.  Non-listed equity securities
 
These investments are valued based on their purchase cost which is increased or decreased based on the investor’s share in all subsequent changes in the issuer’s equity.
 
For this purpose, the issuer’s equity is calculated based on the latest certified financial statements released by the issuer, within six (6) months prior to the date of determination.
 
Until August 24, 2009, in accordance with External Circular 030 of 2009 issued by the Colombian Superintendency of Finance, equity securities were valued based on the trade-weighted stock index applicable on the valuation date, as show below:
 
High-trading stocks: based on the last daily average trade-weighted price as published by the stock exchange.
 
Medium-trading stocks: based on the average price for the last five (5) days on which such stocks were traded.
 
Low-trading stocks or those with no quoted share prices: Value was calculated the same way described in b. above.
 
This change in the valuation estimate increased the “surplus revaluation of asset account” on the stockholders’ equity by approximately COP 88,384 for the year 2009.
 
Shares held in investment funds and structured securitizations through funds or self-standing trusts are valued using the unit value calculated by the fund manager on the day immediately proceeding the date on which such investments are valued. In the case of the Private Capital Fund, - Fondo Inmobiliario Colombia -, the unit value is calculated based on the fund financial statements in which real estate assets are recorded at their fair value.
 
2.3 Securities Denominated in Foreign Currency or in UVR

Foreign exchange gains or losses resulting from investment in foreign currency securities and UVR Securities are recorded as net foreign exchange gain or loss in the consolidated statements of operations, and interest income, respectively.

 
F-15

 

3.  Investment securities, subsequent measurement

All investment securities are initially recorded at their purchase cost. Subsequent measurement is recorded as follows:

3.1 Trading Investments

Changes in the fair value of the investment are recorded in the consolidated statement of operations.

3.2 Investments Held to Maturity

Investments held to maturity are accounted for at amortized cost using the effective interest rate method.

Interest accruals are recorded as interest income on investment securities.

3.3 Investments Available for Sale

3.3.1 Debt Securities

Changes in the fair value of the investment are recorded in stockholders’ equity in the account denominated “surplus gross unrealized gains or loss on investments available for sale”.

Interest accruals are recorded as interest income on investment securities in the statement of operations.

3.3.2 Equity Investments

Changes in the fair value of the investments are recorded in accordance with the trading of the investment as follows:

Investments in high or medium volume trading securities, quoted on a stock exchange, are recorded in the investment account, with a charge or credit in stockholders’ equity in the account “surplus from unrealized gains or loss on available for sale investment".

Changes in the fair value of investments in securities with little or low liquidity on the exchange or not listed on stock exchanges are recorded as other assets in a special account “reappraisal of assets” with a charge or credit in the stockholders’ equity in the account “surplus of revaluations of assets”. A decrease in the fair value of the investment below the purchase cost is recorded as a provision with a charge in the statement of operations. This provision could be reversed in the future if the fair value increases above the investment cost.

Dividends received in cash or shares on investment equity securities are recorded as income on an accrual basis.

 
F-16

 

4. Impairment Test on Investment Securities

Debt securities, with the exception of debt securities issued or guaranteed by the Republic of Colombia or the Colombian Guarantee Fund for Financial Institutions (“Fogafin”) or issued by the Central Bank, and equity securities with low liquidity or not listed on stock exchanges must be tested for impairment on a quarterly basis as follows:

4.1 Securities with External Ratings

Securities that are rated by a rating firm approved by the Superintendency of Finance may not be recorded for an amount that exceeds the following percentages of their nominal value, net of amortization for debt securities, or purchase cost for equity securities, as of the valuation date:

Long Term
 
Max. Amount
 
Short Term
 
Max. Amount
Rating
 
%
 
Ranking
 
%
BB+, BB, BB-
 
Ninety (90)
  3  
Ninety (90)
B+, B, B-
 
Seventy (70)
  4  
Fifty (50)
CCC
 
Fifty (50)
 
5 and 6
 
Zero (0)
DD, EE
 
Zero (0)
       

However, for debt securities classified as held to maturity, with known fair value, impairment is recorded for the difference between its carrying value and such fair value.

4.2 Securities without any External Credit Rating

These securities are rated according to the methodology defined by the Bank. The securities are rated as “A” except when there is a risk associated with them, in which case they are rated from rating B to E. The maximum value, as defined by the Superintendency of Finance, at which these investments are recorded, according to their rating is:

Rating
 
Max. Registered
Amount  % (1)
 
Investment Characteristics
B   Acceptable risk, greater than normal
 
Eighty (80)
 
Current factors of uncertainty that could affect the capacity to continue adequately fulfilling debt service and weaknesses that could affect financial situation.
C   Appreciable risk
 
Sixty (60)
 
Current medium-high probabilities of non-fulfillment of timely payments of capital and interest that may compromise the recovery of the investment.
D   Significant risk
 
Forty (40)
 
Current 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)
Based on the net nominal amount as of the valuation date for debt securities or the acquisition cost, net of allowances for equity securities.

 
F-17

 

In assessing investment securities for impairment, the Bank reviews the ratings issued by ratings agencies and verifies its internal rating model and calculates the percentages in accordance with those credit ratings. If the resulting amount is less than its carrying amount, the carrying amount of the investment is reduced to the face value, net of the amortizations recorded, multiplying by that percentage. An impairment loss is recognized immediately in the consolidated statement of operations for trading and held to maturity securities, for investments available for sale an impairment loss is recognized in the consolidated statement of operations, unless the investment is carried at a revalued amount.

5. Reclassification of Investment securities
 
The Bank reclassifies investments from available for sale to trading when its main purpose is to obtain gains on short-term price fluctuations.
 
An investment reclassified from available for sale to trading is subject to accounting and valuation rules and regulations applicable to the trading category. As a result, unrealized gains or losses must be accounted for as either income or expense on the date on which the investment is reclassified.
 
In 2009 the Bank and its subsidiary Banca de Inversión Bancolombia S.A., reclassified certain investments pursuant to the aforementioned provision. This reclassification resulted in an increase in income totaling COP$ 80,398. No reclassifications were performed in 2010.
 
(i) Loans and Financial Leases

The Bank grants loans to customers in the following segments: residential mortgage, commercial, consumer and small business loans. A substantial portion of the Bank’s loan portfolio is represented by commercial loans throughout Colombia.

Loans are recorded at the principal outstanding less allowance for impairment. Accrued interest is recorded in account receivables and unearned income is recorded as a liability.

Financial leasing operations are initially recorded as loans for an amount equal to the book value of the asset to be leased to the customer and subsequently, the loan is amortized when the rental payments are due in the amount of the payment corresponding to principal.
 
Suspension Interest Accruals
 
The Superintendency of Finance requires that interest, income, lease payments and other items of income cease to be accrued in the statement of operations after a loan is in arrears for more than two months for mortgage and consumer loans, three months for commercial loans and one month for small business loans. However, the Bank adopted a policy, in which commercial, consumer and small business loans that are past due more than 30 days and mortgages that are past due more than 60 days will stop accruing interest in the statement of operations. Instead, interest and principal payments are reflected in memorandum accounts until such time that the customer proceeds to pay amounts due or overdue. After that, the interest collected is recorded as income on a cash basis. The Bank has recorded an allowance for 100% of any accrued interest, after the suspension of accruals.

 
F-18

 
 
Credit Risk Evaluation

The Bank analyzes on an ongoing basis the credit risk to which its loan portfolio is exposed considering the terms of the corresponding obligations as well as the level of risk associated with the borrower. This risk evaluation is based on information relating to historical performance data, particular characteristics of the borrower, collateral, debt service with other entities, macroeconomic factors, financial information, etc. For consumer, mortgage and small business loans the analysis is performed only on the basis of the past due days of the loans.

For commercial loans, the following minimum credit risk ratings are assigned, according to the financial situation of the debtor and/or the past due days of the obligation; additionally, all significant counterparty relationships as well as loans under special supervision are reviewed in detail every six months:

Rating
 
Qualitative Factors
A - Normal Risk
 
Loans and financial leases in this category are appropriately serviced. The debtor’s financial statements or its projected cash flows, as well as all other credit information available to the Bank, reflect adequate paying capacity.
B - Acceptable Risk, Above  Normal
 
Loans and financial leases in this category are acceptably serviced 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.
C - 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.
D – Significant Risk
 
Loans and financial leases in this category are deemed uncollectible.
E – Unrecoverable
  
Loans and financial leases in this category are considered default loans.
 
Allowance for Loan Losses
 
Commercial and consumer loans
 
Allowances for loan losses are established based on the parameters issued by the Superintendency of Finance.

The Bank has adopted the Reference’s Models for Commercial and Consumer loans, MRC and MRCO, respectively, issued by the Superintendency of Finance, whose application became mandatory for commercial loans in July 2007 and for consumer loans in July 2008.

Based on these models, the individual provision for loan portfolios is calculated as a sum of the following individual components:

(a)  The individual current credit risk (counter-cycle): corresponding to the portion of the individual provision on the loan portfolio that reflects the current credit risk for each debtor.

(b) The individual future credit risk: corresponding to the portion of the individual provision on the loan portfolio, reflecting future possible changes in the debtor’s credit risk. This portion is included to reduce the impact on the income statement when such a situation occurs. The internal reference models must take into account and calculate this component based on all available information reflecting such changes.

 
F-19

 

Under no circumstance may the individual future credit risk component for each obligation be less than zero and neither may it exceed the expected loss calculated using matrix B included below; also, the sum of both components may not exceed the total value of the exposure of the loan.

According to the reference models, the allowance for loan losses is calculated as follows:

Expected Loss = [Probability of default] x [Exposure at default] x [Loss given default]

Probability of Default (PD)

Probability of Default is defined as the probability of the debtor within a specific loan portfolio or segment and rating, defaulting on its obligations within the next twelve (12) months. This probability of default is established by the Superintendency of Finance.

Banco Agricola S.A. uses an internal model to calculate the Probability of Default (PD), duly authorized by the Superintendency of Finance.

Probability of Default is calculated based on the following matrixes authorized by the Superintendency of Finance according to the type of portfolio:

The following classification is needed to apply the Reference´s Models for Commercial loans, MRC issued by the Superintendency of Finance:

Classification of commercial loans for level of assets
Size of the Corporation
 
Level of assets in SMMLV
 
COP
Large Corporations
 
More than 15,000
 
More than 7,725
Medium Corporations
 
Between 5,000 and 15,000
 
Between 2,575 and 7,725
Small Corporations
  
Less than 5,000
  
Less than 2,575

SMMLV: refers to Salario Mínimo Mensual Legal Vigente. In 2010, the effective legal minimum monthly salary in Colombia was COP 515.000 (in pesos)

Commercial loans

MATRIX A
 
Rating
 
Large Corporations
   
Medium Corporations
   
Small entities
   
Natural persons
 
                         
AA
    1.53 %     1.51 %     4.18 %     5.27 %
A
    2.24 %     2.40 %     5.30 %     6.39 %
BB
    9.55 %     11.65 %     18.56 %     18.72 %
B
    12.24 %     14.64 %     22.73 %     22.00 %
CC
    19.77 %     23.09 %     32.50 %     32.21 %
Default
    100.00 %     100.00 %     100.00 %     100.00 %

MATRIX B
 
Rating
 
Large Corporations
   
Medium Corporations
   
Small entibies
   
Natural persons
 
                         
AA
    2.19 %     4.19 %     7.52 %     8.22 %
A
    3.54 %         6.32 %     8.64 %     9.41 %
BB
    14.13 %     18.49 %     20.26 %     22.36 %
B
    15.22 %     21.45 %     24.15 %     25.81 %
CC
    23.35 %     26.70 %     33.57 %     37.01 %
Default
    100.00 %     100.00 %     100.00 %     100.00 %
 
 
F-20

 

Consumer loans

MATRIX A
 
Rating
 
Vehicles
   
Others
   
Credit Cards
 
                   
AA
    0.97 %     2.10 %     1.58 %
A
    3.12 %     3.88 %     5.35 %
BB
    7.48 %     12.68 %     9.53 %
B
    15.76 %     14.16 %     14.17 %
CC
    31.01 %     22.57 %     17.06 %
Default
    100.00 %     100.00 %     100.00 %

MATRIX B
 
Rating
 
Vehicles
   
Others
   
Credit Cards
 
                   
AA
    2.75 %     3.36 %     3.88 %
A
    4.91 %     7.13 %     5.67 %
BB
    16.53 %     18.57 %     21.72 %
B
    24.80 %     23.21 %     23.20 %
CC
    44.84 %     30.89 %     36.40 %
Default
    100.00 %     100.00 %     100.00 %

Exposure at Default

Exposure at default is defined as the current loan balance of the principal, plus interest receivable accounts and other receivables of the customer.

Loss Given Default (LGD)

Loss Given Default is the economic loss incurred by the Bank when events of default occur. The LGD for debtors classified in the default rating depends on the type of collateral and gradually increases the provision according to the amount of days lapsing after being classified in such rating. For this purposes 100% of the collateral value is considered to cover the principal amount. Loss Given Default is calculated based on the following matrixes authorized by the Superintendency of Finance according to the type of loan portfolio:

Commercial loans

Collateral
 
LGD
Initial
   
Days After
Default
   
LGD
   
Days After
Default
   
LGD
   
Days After
Default
   
LGD
 
Days After
Default
Financial collateral not adequate
    55 %   0       100 %  
1 onwards
                     
Financial collateral: FNG y FAG (*)
    12 %   0-359       70 %   360-539       100 %  
540 onwards
         
Real estate – commercial and residential
    40 %   0       60 %   1-89       80 %    90-209       100 %
210 onwards
Assets leased in leasing agreements
    45 %   0       90 %   1-89       100 %  
90 onwards
           
Other collaterals
    50 %   0       90 %   1-89       100 %  
90 onwards
           
Rights
    45 %   0       60 %   1-89       80 %   90-209       100 %
210 onwards
Without collateral or not accepted for local purposes
    55 %   0       100 %  
1 onwards
                              
 
 
F-21

 
 
Consumer loans

Collateral
 
LGD Initial
   
Days After
Default
   
LGD
   
Days After
Default
   
LGD
   
Days After
Default
   
LGD
 
Days After
Default
Financial collateral not adequate
    65 %   0       90 %   1-29       90 %   30-89       100 %
90 onwards
Financial collateral: FNG y FAG (*)
    12 %   0- 359       70 %   360-539       100 %  
540 onwards
           
Real estate – commercial and residential
    40 %   0       80 %   1-29       90 %   30-89       100 %
90 onwards
Assets leased in leasing agreements- real estate
    35 %   0       80 %   1-29       90 %   30-89       100 %
90 onwards
Assets leased in leasing agreements – other than real estate
    45 %   0       85 %   1-29       90 %   30-89       100 %
90 onwards
Other collaterals
    50 %   0       85 %   1-29       90 %   30-89       100 %
90 onwards
Rights
    45 %   0       80 %   1-29       90 %   30-89       100 %
90 onwards
Without collateral or not accepted for local purposes
    65 %   0       90 %   1-29       90 %   30-89       100 %
90 onwards
 
(*) 
Collateral provided to the clients by local government entities named:
FNG = Fondo Nacional de Garantías. The Fondo Nacional de Garantías, guarantees credit operations up to 70% to financial intermediaries,  supporting activities of all economic sectors (except agriculture). The fund guarantees credits destined for working capital, acquisition of fixed assets and in general, financial resources needed by medium and small corporations, only if these resources are invested in productive activities.
 FNA = Fondo Nacional Agropecuario.

For sovereign collateral, letter credits and deposits the LGD is zero (0).

The Bank and its subsidiaries Factoring Bancolombia S.A., Leasing Bancolombia S.A. and Tuya S.A. also record other provisions for specific commercial clients besides the minimum provisions required by the Superintendency of Finance, bearing in mind specific risk factors affecting clients including: macroeconomic, industry and any other factors that could indicate early impairment. At December 31, 2010, and 2009 additional provisions were recorded totaling COP 344,597 and COP 374,433, respectively.

Mortgage Residential Loans and Small Business Loans

In compliance with instructions issued by the Superintendency of Finance for mortgage residential loans and small business loans, the Bank must maintain at all times individual provisions corresponding to minimum percentages which might differ if the loan has any collateral (up to seventy percent (70%) of the collateral value is considered to cover the principal). There are no reference models issued for this type of loans.

Similar to the commercial and consumer portfolio, for mortgage residential loans and small business loans, the Bank has adopted a special policy of maintaining an additional provision, for loans pertaining to the credit risk categories C, D and E, regardless of the value of the collateral. Allowances are calculated based on the following matrix authorized by the Superintendency of Finance:

 
F-22

 

   
Mortgage Residential Loans
Principal outstanding
 
Risk Rating
 
With Collateral
   
Without Collateral
   
Accounts receivables
 
                   
A – Normal
    1 %     1 %     1 %
B – Acceptable
    2.20 %     3.20 %     100 %
C – Appreciable
    60 %     60 %     100 %
D – Significant
    100 %     100 %     100 %
E – Unrecoverable
    100 %     100 %     100 %

Valuation of Mortgage Collateral for Allowance Purposes

The fair value of the collateral recorded by the Bank is established based on parameters issued by the Superintendency of Finance:
 
·               In the case of mortgage collateral consisting of residential real estate, the fair value shall be the appraisal established when the loan was disbursed and subsequently adjusted on a quarterly basis according to the residential price index published by the National Planning Department.
 
·               In the case of mortgage collateral consisting of premises different from residential real estate, the fair value is updated on a periodic basis when the loan is renewed or impaired.
 
General Allowance

The Bank records a general provision corresponding to one per cent (1%) of the total value of mortgage and small business loans.

The general provision, however, may be increased if approved by the general stockholders’ meeting, and is updated on a monthly basis according to the increases or decreases in the loan portfolio.
 
 Charge-Offs

Biannually in June and December, the Bank writes off in full debtors classified as “unrecoverable”, based on the following criteria: (i) provision of 100% of all amounts past due (capital, interest and other items); (ii) One hundred eighty (180) days past due for consumer and micro loans; (iii) Three hundred sixty (360) days past due for commercial loans and (iv) Fifty four (54) months for mortgage loans.

The recovery of charged-off loans is accounted for as income in statements of operations.
 
Sale of loan portfolios under securitizations process
 
Portfolio loans sold under securitization processes are derecognized at their net book value. Any difference arising between the proceeds of the sale and its book value is recorded as an income or expense, as applicable, in the statement of operations.
 
Loans that are securitized are derecognized as non recourse credit providing the following conditions are fulfilled:
 
 
·
Loans are transferred exclusively to a special purpose entity (SPE).
 
 
·
The disposal or transfer of securitized assets shall not be subject to any type of restriction by the transferor.
 
 
F-23

 
 
 
·
The risks and returns of the loans must also have been totally transferred to the SPE.
 
 
·
Under no circumstance shall the transferor conserve discretionary rights to dispose of, control, limit, encumber, substitute, reacquire, or use the assets thus transferred or disposed of.
 
After 2008, according to Superitendency regulations any residual beneficial interest retained by the Bank in a securitization process must be recorded as a trading investment in an amount equal to the value established for the beneficial interest in the balance sheet of the special purpose entity created for such purpose. Before this date residual beneficial interests were not recognized. As a result, the Bank recognized residual beneficial interests in 2010 and 2009 in investment securities increasing income amounting to COP 19,699 and COP 57,358, respectively.
 
Troubled Restructured Loans

Loans are restructured when the Bank, because of economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

Troubled restructured loans are accounted for according to the restructuring agreement rules, including income accruals. When the agreement includes the capitalization of non-accrual interest previously recorded in memorandum accounts that interest is recorded by increasing the loan balance with a credit to deferred income in other liabilities and amortized with a credit to income on a cash receipts basis.

In order to calculate the corresponding provisions, the ratings for these loans may be upgraded only when the Bank collects the principal of the loan on a regular basis.

For this purpose, the Bank has defined the following policy:

•  Restructured loans rated either B or C, remain in this rating for two months following the date of the restructuring agreement; thereafter, the rating may be improved by one grade when the Bank collects four timely payments.

•  Restructured loans rated D or E remain in this rating for four months following the date of the restructuring agreement; thereafter, the rating may be improved to a C rating when the Bank collects two timely payments, to B when the Bank collects four additional consecutive timely payments, and then to A when the Bank collects an additional four timely payments.

(j) Derivatives

Under Colombian Banking GAAP, derivatives are defined as agreements between two or more parties to purchase or sell financial instruments at a future date or agreements where the underlying is an index in a stock exchange. The Bank performs derivatives operations for trading or hedging purposes but not for speculation in forwards, options or swaps where the underlying assets are only foreign currency and financial instruments.

In 2010, the Bank recognized all of its derivatives instruments on its balance sheet as either assets or obligations depending on the rights or obligations under the derivatives contracts. Before 2010, all derivatives were recognized as assets on a net basis. This change in accounting principle does not have a material effect on the balance sheet. All derivatives shall be measured at fair value; changes in the fair value are recognized currently in the statement of operations, except that premium received or paid in option contracts and changes in the fair value of swap contracts on their first day are deferred and recognized in the statement of operations on a straight line basis during the life of the contract. Accounting Superintendency rules permit hedge accounting, but the Bank does not use it.

 
F-24

 

Derivative fair value measurements are established as follows:

Forward Contracts
 
The fair value of forward contracts is determined using the standardized methodology issued by the Colombian Superintendency of Finance, using the quoted forward price points published by authorized pricing providers and/or authorized brokerage firms that represent a major portion of market liquidity.

Swap Contracts

The fair value of swap contracts is determined using the discounted cash flow method at the interest rates applicable for each flow. Interest rate curves are drawn up based on information provided by Bloomberg and Infoval. Counterparty credit risk on the swap is not included in the valuation process.

  The change in the fair value of swap contracts on the first day is recorded as deferred income.

Option Contracts

The fair value of option contracts is determined using the Black-Scholes/Merton method.

Spot Transactions

These are transactions that are recorded with a term for their respective clearance equal to the date on which the transaction is recorded or up to three (3) business days beginning on the day after the transaction was completed.

(k) Foreclosed Assets

The Bank records foreclosed assets using the following criteria:
 
 
·
Foreclosed real estate is recognized at the amount specified in the foreclosure award or at the price that both parties have agreed on the basis of a valuation by reference to market evidence of transaction prices for similar properties.
 
 
·
If the amount recognized in the contract for the foreclosed asset is more than the balance of the loan outstanding, that difference is recorded as accounts payable to the debtor. If such amount is insufficient to cover the outstanding loan, the difference must be immediately recorded on the statement of operations as a non-operating expense.
 
 
·
Other assets received in payment corresponding to investment securities are valued by applying the criteria indicated in the investment securities accounting policy.
 
 
·
Profits on credit sales of foreclosed assets are deferred over the life of the credit and are recognized on a cash basis; losses are recognized in the statement of operations.
 
 
·
When the fair value of the asset is lower than its book value, a provision is recorded for the difference.
 
 
·
Reappraisals of foreclosed assets are recorded as memorandum accounts.
 
Legal Term for the Sale of Foreclosed Assets

Financial Institutions must sell the foreclosed assets, by a date no later than two years after the foreclosure date except when upon the board of directors’ request, the Superintendency of Finance extends the term.  However, in any event, the extension may not exceed an additional period of two years.

 
F-25

 

Impairment of Foreclosed Assets

The Superintendency of Finance requires that a Bank record a provision equal to 60% for real estate and 70%, for other foreclosed assets, of the carrying value of the asset at the time of receipt, which must be recorded in proportional monthly installments within the two years following its receipt. Once the legal term for sale has expired, the provision must be increased to 80% and 100%, respectively.  If the term extension to sell the asset is granted by the Superintendency, this increase may be recorded on a monthly basis within the new term.

Also, it is the Bank’s policy, in the case of foreclosed assets that remain for more than five years in the Bank’s possession to increase the provision up to 100% of its book value. Foreclosed assets under commitment agreements to sell are excluded from this practice.

(l) 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 earned as incurred.

(m) Premises and Equipment

Premises and equipment are recorded at the cost of acquisition, including direct and indirect costs and expenses incurred in their construction plus the inflation adjustment recorded until 2001 for premises and equipment purchased before that year.

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:

Buildings
    5 %
Equipment, furniture and fittings
    10 %
Computer equipment
    20 %
Vehicles
    20 %
Monitors, laptops and CPU’s
    33 %

The net book value of land and buildings (cost less accumulated depreciation) is compared against fair values taken from independent professional appraisals. If the fair value is higher, the difference is recorded as a “Reappraisal of Assets” with a credit to the “Surplus for Reappraisal of Assets” in Stockholders’ Equity; otherwise, the difference is charged to expenses as provision for other assets of the period. This provision could be reversed in the future if the fair value of the asset increases. Appraisals must be made at least every three years.
 
(n) Prepaid Expenses, Deferred Charges

Amortization of prepaid expenses and deferred charges is calculated from the date which they contribute to the generation of income, based on the following factors:

Prepaid Expenses

Prepaid expenses include mainly the following monetary items: interest, 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.

 
F-26

 

Deferred Charges
 
 
·
Software is amortized over a maximum of three years.
 
 
·
Stationery is expensed when consumed.
 
 
·
The discount on the issuance of long-term debt is amortized over the term of the debt on a straight-line basis.
 
 
·
Contributions and affiliations are amortized over the period prepaid.
 
 
·
The Bank has been developing a major project to renew its technological infrastructure, named Innova. Accounting guidelines in the case of the Innova project are as follows:
 
 
·
The fees that are not directly related to software development and other indirect costs (gap analysis, training, replacing internal resources, etc) are recorded as an expense on an accrual basis.
 
 
·
Software licenses and fees and other payments that directly relate to software development are deferred and then amortized over a period of 36 months, from the date when the software begins to be used in the Bank’s operations.
 
(o) Premises and Equipment Held under Operating Leases

The subsidiaries Leasing Bancolombia S. A. and Renting Colombia S. A. lease assets under operating leasing arrangements. Assets under operating leases are recorded at cost. Equipment other than vehicles is fully depreciated over the shorter of the lease term or its useful life.

Since 2010, depreciation on vehicles under operating leasing arrangements is as follows:

1. Residual values of vehicles are established on a technical basis.

2. For vehicles purchased before December 31, 2009, their cost less their residual value is depreciated over a useful life of five years.

3. For vehicles purchased since January 1, 2010, their cost less their residual value is depreciated over the lease term.

4. When the lease agreement is renewed or the vehicle is received and placed under a new lease agreement, the new residual value is established and this book value less the new residual value is depreciated over the new lease term.

Before 2010, all vehicles were depreciated on a straight-line basis in a five year term, based on their cost less their residual values. The effect of the change was not material.

According to the rules of the Colombian Superintendencey of Finance, a general provision of 1% of the book value of premises and equipment under operating leases is established and is charged to the statement of operations.

(p) Goodwill

Goodwill value acquired is determined once the Bank effectively obtains control over the acquired entity in an amount equal to the difference between the price paid and the net book value of the assets and liabilities acquired. Goodwill must be allocated to each of the business segments acquired, which must be fully identified in the accounting records.

 
F-27

 

Since January 2008, goodwill recorded in the Group Banagrícola acquisition, is amortized on a straight-line basis over 20 years since the Bank considers this method reflecting the pattern in which the asset’s future economic benefits are expected to be received from the business acquired.

Goodwill allocated to business segments is tested for impairment annually, comparing the fair value with the book value of the business segments.
  
In the case of goodwill acquired by the Bank and its subsidiaries before 2008 when the new regulation came into full force, the amortization term was maintained  in ten years and three years for goodwill recorded in the subsidiaries Banagrícola S.A. and Inversiones Financieras Banagrícola S.A., respectively. Goodwill from the acquisition of Renting Colombia is being amortized by Leasing Bancolombia S.A. over a period of five years on a straight-line basis.
 
 (q) Reappraisals of assets

This account records the excess over net book value of real estate properties and available for sale investments with a low volume trading on the market or non-listed investments.

Valuations are subject to the accounting policy for each type of asset.
 
(r) Trusteeships

Net assets put in trust under trust agreements are recorded in other assets at their book value. This account is adjusted periodically by the equity share of the Bank in the trust.

(s) 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 or the money is collected in the case of profits obtained from the sale of foreclosed assets on credit agreements.

The capitalization of yields on restructured loans that have been recorded in memorandum accounts or as charged off loan balances are included in this category as indicated in this note under loans and financial leases.

(t) Deferred Tax

Deferred income taxes in Colombia (both assets and liabilities) are generally recognized for timing differences. However, for financial companies, the Superintendency of Finance has restricted the inclusion of deferred income tax assets and accordingly, the Bank has recorded no such assets.

(u) Legal Retirement Pensions

Under Colombian laws, employees’ pension obligations are managed as a defined contribution plan since 1990. The Bank’s legal retirement benefit obligation as of December 31, 2010 and 2009 essentially relates to retired employees who rendered services to the Bank before the current regulations took effect. Under Colombian GAAP, retirement pension liabilities are calculated on an actuarial basis. The actuarial liability is amortized on a straight line basis over periods defined by local rules. The Bank’s pension liability as of December 31, 2009 was fully amortized, but during 2010 the Government implemented a new mortality table to calculate the liability. For this reason, the increase in the Bank’s retirement pension liability as of December 31, 2010 will be amortized over a period ending in 2029.

 
F-28

 

(v) Estimated Labor Liabilities

Other legal estimated labor liabilities are recorded based on applicable legislation and current labor agreements.

In addition to legal benefits, the Bank granted to its employees other benefits such as retirement and seniority bonuses. The liability for retirement bonuses is calculated on an actuarial basis and fully recognized in the statement of operations. Liability for seniority bonuses is accrued and recorded on a straight-line basis during the collective agreement term of the Bank with its employees.

(w) Other Accrued Expenses

The Bank records provisions to cover estimated liabilities, such as fines, sanctions, litigations and lawsuits, provided that the Bank has acquired a right, and therefore has an obligation; and the liability is probable, justifiable, quantifiable and verifiable.

This account also records estimates for taxes and labor expenses.

(x) Other Income, Costs and Expenses

Other income and expenses are recognized on an accrual basis.

Loan origination costs are recorded in the statement of operations when incurred and the corresponding revenues when collected. The Bank has not implemented a policy of collecting commissions on the origination of the loans, and the commissions that it collects from credit cards are recorded in the income accounts using the accrual method.

Profits in leaseback transactions of real estate with a real estate investment fund, after duly evaluating the legal and economic aspects of the transaction under Colombian GAAP, are duly recorded in the income statement. Other income for 2010 includes amounts in respect of a gain on sale of property, plant and equipment as a result of a sale leaseback transaction under which the Bank sold certain real estate to a real estate investment fund and leased back such property. See Note 28.

(y) Memorandum Accounts

Contingent accounts record operations in which the Bank acquires rights or assumes obligations conditioned by possible or remote future events. They also include financial income accrued on nonaccrued assets inthe loan portfolio and financial leasing operations.

Contingencies including fines, sanctions, litigation and lawsuits are evaluated by the Legal Department and its legal counsel. Estimating loss contingencies necessarily implies exercising judgment and is therefore subject to opinion. In estimating loss contingencies regarding pending legal proceedings against the Bank, legal counsel evaluates, among other aspects, the merits of the case, the case law of the courts in question and the current status of the individual proceedings.
 
If this evaluation reveals the probability that a material loss has occurred and the amount of the liability can be estimated, then this is duly recorded in the financial statements. If the evaluation reveals that a potential loss is not probable, or the outcome either is uncertain or probable but the amount of the loss cannot be estimated, then the nature of the corresponding contingency is disclosed in a note to the financial statements along with the probable estimated range of the loss. Loss contingencies that are estimated as being remote are not disclosed.
 
Memorandum accounts also record third party operations whose nature does not affect the financial situation of the Bank. Contingent and memorandum accounts are included in the caption “memorandum accounts” of the balance sheet. This also includes tax memorandum accounts that record figures for drawing up tax returns, as well as all those internal control or management information accounts and reciprocal transactions carried out between the Bank and its Subsidiaries.
 
 
F-29

 

(z) Net Income per Share

Under Colombian GAAP, in order to determine net income per share, the Bank uses the weighted average of Preferred and Common Shares outstanding during the accounting period. During the last two years ended on December 31, the Bank’s weighted average of Preferred and Common Shares outstanding was 787,827,003.
 
(aa) Insurance Liabilities

Actuarial liabilities

Actuarial liability for long term individual life insurance is calculated based on mortality tables, interest rate and actuarial formulas for each type of insurance.

The interest rate used in calculating the liability is the rate used to calculate the premium of the insurance life according to each type of insurance.

Premiums

Premiums on short-duration insurance contracts are deferred and amortized against income on a straight-line basis during the insurance contract life.

Liability for incurred but not reported claims

The liability for incurred but not reported claims (“IBNR”) is calculated as the average value of payments made by claims over the last three years but not reported in the year they occurred.

Salvage and Recovery

This item records all those revenues received from salvaging goods subject to claims for which the insurance company has paid its clients the corresponding indemnities.

(ab) Business Combinations

Business combinations under Colombian GAAP are recorded as follows: (i) the assets acquired and the liabilities assumed are recorded at book value, (ii) the statement of income of the acquiring company for the period in which a business combination occurs includes 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 are not considered as a cost of the acquisition, but deferred and amortized over a reasonable period as determined by Bank management.
 
However, the Conavi and Corfinsura acquisition which occurred in 2004, was accounted for using the pooling of interests method due to the combination was between entities under common control.
 
(3) Transactions in Foreign Currency
 
The Colombian regulations define limits on the amount of foreign-currency assets and liabilities. As of December 31, 2010 and 2009, the Bank was in compliance with these regulations.

 
F-30

 

Substantially all foreign currency holdings are in U.S. Dollars.The consolidated foreign currency assets and liabilities, converted to US$, of the Bank at December 31, 2010 and 2009 were as follows:
  
   
2010
   
2009
 
             
Assets:
           
Cash and due from banks
  USD 851,919     USD 853,373  
Overnight funds
    173,309       215,111  
Investment securities
    1,026,669       1,086,060  
Loans, net
    6,308,184       4,835,742  
Customers’ acceptances and derivatives
    (522,527 )     (258,251 )
Accounts receivable
    93,263       78,298  
Premises and equipment, net
    90,527       70,958  
Other assets
    721,287       647,983  
Total foreign currency assets
  USD 8,742,631     USD 7,529,274  
                 
Liabilities:
               
Deposits
    5,614,625       5,400,168  
Bank acceptances outstanding and derivatives
    (138,967 )     23,290  
Borrowings from development and other domestic banks
    37,549       104,431  
Interbank borrowings
    1,410,120       563,986  
Other liabilities
    1,545,002       912,574  
Total foreign currency liabilities
    8,468,329       7,004,449  
Net foreign currency asset position
  USD 274,302     USD 524,825  

At December 31, 2010 and 2009, the Bank net foreign exchange propietary trading amounted to USD 56,370 and USD 287,911 respectively; which meet the legal requirements.

At December 31, 2010 and 2009, foreign currency of foreign subsidiaries represents 73.02% and 85.75%, respectively, of the consolidated assets in foreign currency and 68.40% and 81.67% respectively, of the consolidated liabilities in foreign currency.
 
(4) Cash and Due from Banks
 
The balances of cash and due from banks consisted of the following:

   
2010
   
2009
 
             
Colombian peso denominated:
           
Cash
  COP 2,229,095     COP 2,119,221  
Due from the Colombian Central Bank
    1,384,728       1,058,186  
Due from domestic banks
    61,129       51,042  
Remittances of domestic negotiated checks in transit
    7,327       11,160  
Allowance for cash and due from banks
    (436 )     (531 )
Total local currency
    3,681,843       3,239,078  
                 
Foreign currency:
               
Cash
    127,756       185,578  
Due from the Colombian and El Salvador Central Bank
    621,138       619,151  
Due from foreign banks
    812,428       857,259  
Remittances of foreign negotiated checks in transit
    69,233       82,526  
Allowance for cash and due from banks
    -       (23 )
Total foreign currency
    1,630,555       1,744,491  
Total cash and due from banks
  COP 5,312,398     COP 4,983,569  

 
F-31

 
 
(5) Investment Securities
 
Investments in trading securities consisted of the following:

   
2010
   
2009
 
             
Trading Securities
           
             
Colombian peso denominated:
           
Colombian government
  COP 1,599,651     COP 2,569,359  
Government entities
    34,493       27,306  
Financial institutions
    455,791       297,645  
Corporate bonds
    110,176       57,331  
Equity securities
    246,972       324,717  
Total local currency denominated
    2,447,083       3,276,358  
                 
Foreign currency denominated:
               
Colombian government
    22,214       39,473  
Foreign governments
    2,401       10,534  
Government entities
    4,800       -  
Financial institutions
    147       16,435  
Corporate bonds
    860       19,736  
Equity securities
    19,163       6,123  
Total foreign currency denominated
    49,585       92,301  
Total trading securities
    2,496,668       3,368,659  
Allowance for trading securities
    (9,067 )     (9,835 )
Total trading securities, net
  COP 2,487,601     COP 3,358,824  

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 3.67% and 3.94% for 2010 and 2009, respectively.

As of December 31, 2010 and 2009, the Bank pledged investment securities amounting to COP 1,292,211 and COP 660,902, respectively, as collateral to secure lines of credit at international banks, domestic development banks and other financial institutions.

Investments in available for sale securities consisted of the following:

Available for sale - Debt securities
 
2010
   
2009
 
             
Colombian peso denominated:
           
Colombian government
  COP 78,107     COP 106,067  
Financial institutions
    1,048,193       823,104  
Other
    3,192       6,483  
Total local currency denominated
    1,129,492       935,654  
                 
Foreign currency denominated:
               
Colombian government
    89,268       167,333  
El Salvador Central Bank
    164,493       190,744  
Government entities(1)
    86,802       116,570  
Foreign governments
    509,335       656,694  
Financial institutions
    147,493       23,310  
Corporate bonds
    56,186       79,932  
Other
    62,882       5,257  
Total foreign currency denominated
    1,116,459       1,239,840  
Total Available for sale - Debt securities
    2,245,951       2,175,494  
Valuation allowance for available for sale securities
    (34,983 )     (32,396 )
Total available for sale securities, net
  COP 2,210,968     COP 2,143,098  
 
 
F-32

 
 
 
(1)
This amount includes investments in fiduciary certificates of participation. These certificates were issued for the Environmental Trust for the conservation of the Coffee Forest (Fideicomiso Ambiental para la Conservación del Bosque Cafetero “FICAFE”). This trust was formed with the transfer of the coffee sector’s loan portfolio by a number of banks in El Salvador, including Banco Agrícola. The purpose of this transaction was to carry out the restructuring of those loans, promoted by the government of El Salvador.

The Bank sold COP 2,198,192 and COP 1,297,458 of available for sale securities during the years ended December 31, 2010 and 2009, respectively.
 
   
Participation
Percentage at
December 31, 2010
   
2010
   
Participation
Percentage at
December31,2009
   
2009
 
Available for sale - equity securities
                       
                         
EPSA S.A. ESP
    1.96 %   COP 62,343       1.96 %   COP 62,343  
Todo Uno Services
    47.72 %     45,597       47.72 %     48,700  
Bolsa de Valores de Colombia
    8.38 %     41,194       10.00 %     31,018  
Sociedad Administradora de Fondos de Pensiones y de Cesantías Protección S.A.
    23.44 %     22,102       23.44 %     19,481  
Inversiones Inmobiliaria Arauco Almeda(1)
    45.00 %     20,657       -       -  
Titularizadora Colombiana S.A.
    21.25 %     17,308       21.25 %     17,308  
Promotora La Alborada
    3.33 %     14,001       3.33 %     14,001  
Metrotel Redes(2)
    0.00 %     -       28.42 %     10,568  
Urbanización Chico Oriental No. 2 Ltda.(3)
    86.45 %     7,848       86.45 %     7,848  
Concesiones CCFC S.A.
    25.50 %     7,223       25.50 %     4,358  
Concesiones Urbanas S.A.
    33.33 %     5,591       33.33 %     5,591  
Cadenalco S.A. Titularización
    3.33 %     5,106       3.33 %     4,912  
Deposito Centralizado de valores de Colombia Deceval S.A.
    13.59 %     4,738       15.78 %     4,738  
Redeban Red Multicolor
    20.36 %     4,396       20.36 %     4,396  
Banco Latinoamericano  de exportaciones BLADEX S.A.
    0.27 %     1,786       0.27 %     1,841  
Other
            13,293               12,271  
     Total equity securities
            273,183               249,374  
                                 
Valuation allowance for equity securities
            (44,640 )             (47,245 )
Total equity securities, net
          COP 228,543             COP 202,129  
  

(1) During the period ended in December 2010, the payments in advance that Banca de Inversión, the Bank’s investment banking unit, made to Inversiones Inmobiliarias Arauco Alameda S.A. for COP 20,657 were formalized, with the corresponding stock issuance.

(2) In 2010, Banca de Inversión, the Bank’s investment banking unit had a divestiture in its Metrotel Redes investment. As a result of that transaction, the Bank recorded gains on sales of investment securities for COP 19,432.

(3) Urbanización Chico Oriental No.2 Ltda is not consolidated as indicated in Note 2(a).

Dividends received from equity investments amounted to COP 34,699, COP 24,045 and COP 39,586 for the years ended December 31, 2010, 2009 and 2008, respectively.

 
F-33

 

The following equity securities are impaired under Colombian GAAP and the Bank has recognized the impairment amounts:

   
2010
   
2009
 
         
Valuation
         
Valuation
 
   
Category
   
Allowance
   
Category
   
Allowance
 
                         
Todo Uno Services
  B     COP 26,325     B     COP 28,503  
Urbanización Chicó Oriental No. 2 Ltda.
  E       7,848     E       7,848  
Urbanización Sierras del Chicó Ltda.
  E       203     E       203  
Industria Colombo Andina Inca S.A.
  E       367     E       367  
Sociedad Promotora Siderúrgica Colombiana E.U.
  D       -     D       427  
Promotora La Alborada
  E       9,897     E       9,897  
          COP 44,640           COP 47,245  
 
Investments in held to maturity securities consisted of the following:
 
   
2010
   
2009
 
Held to Maturity Securities
           
             
Colombian peso denominated:
           
Colombian government
  COP 479,404     COP 507,848  
Government entities
    976,891       827,314  
Financial institutions
    1,475,318       1,032,354  
Corporate bonds
    5,883       30,238  
Total Colombian-Peso denominated
    2,937,496       2,397,754  
                 
Foreign currency denominated:
               
El Salvador Central Bank
    587,196       620,267  
Government entities
    195       1,247  
Foreign governments
    45,845       82,807  
Financial institutions
    114,721       53,626  
Other
    64,874       67,230  
Total foreign currency denominated
    812,831       825,177  
      3,750,327       3,222,931  
 Valuation allowance for Held to Maturity securities
    (1,677 )     (12,069 )
Total Held to Maturity securities, net
  COP 3,748,650     COP 3,210,862  

The following table summarizes the maturities and weighted average yields of the Bank’s investment securities as of December 31, 2010:
 
    
As of December 31, 2010
 
   
Maturing in less than 1 year
   
Maturing between 1 and 5 years
   
Maturing between 5 and
10 years
   
Maturing in more than 10
years
   
Total
 
   
Balance(1)
   
Yield %(2)
   
Balance(1)
   
Yield %(2)
   
Balance(1)
   
Yield %(2)
   
Balance(1)
   
Yield %(2)
   
Balance(1)
   
Yield %(2)
 
   
(in millions of pesos (COP), except yields)
 
Securities issued or secured by:
                                                           
Foreign currency.-denominated:
                                                           
Colombian government
    3,425       3.57 %     103,385       3.55 %     3,909       6.36 %     763       6.23 %     111,482       3.67 %
El Salvador Central Bank
    616,534       0.20 %     135,155       2.43 %     -       -       -       -       751,689       0.60 %
Other government entities
    -       -       19,837       3.98 %     22,655       4.75 %     49,305       4.25 %     91,797       4.31 %
Other financial entities
    5,480       3.91 %     183,618       1.74 %     73,264       5.53 %     -       -       262,362       2.84 %
Foreign governments
    265,903       2.74 %     118,163       1.09 %     60,649       2.38 %     77,884       6.41 %     522,599       2.87 %
Others
    17,472       5.30 %     120,303       7.52 %     47,026       4.59 %     -       -       184,801       6.57 %
Subtotal
    908,814       1.08 %     680,461       3.13 %     207,503       4.33 %     127,952       5.57 %     1,924,730       2.45 %
 
 
F-34

 
 
    
As of December 31, 2010
 
   
Maturing in less than 1 year
   
Maturing between 1 and 5 years
   
Maturing between 5 and
10 years
   
Maturing in more than 10
years
   
Total
 
   
Balance(1)
   
Yield %(2)
   
Balance(1)
   
Yield %(2)
   
Balance(1)
   
Yield %(2)
   
Balance(1)
   
Yield %(2)
   
Balance(1)
   
Yield %(2)
 
   
(in millions of pesos (COP), except yields)
 
Securities issued or secured by:
                                                           
Peso-denominated
                                                           
                                                             
Colombian government
    606,974       3.40 %     880,380       5.00 %     17,091       8.77 %     1,026       8.15 %     1,505,471       4.40 %
Government entities
    1,001,713       0.81 %     9,672       5.58 %     -       -       -       -       1,011,385       0.86 %
Other financial entities
    161,777       4.67 %     434,157       7.06 %     1,044,957       6.10 %     782,551       11.46 %     2,423,442       7.91 %
Others
    16,091       5.70 %     90,782       6.63 %     11,035       8.09 %     -       -       117,908       6.64 %
Subtotal
    1,786,555       2.08 %     1,414,991       5.74 %     1,073,083       6.16 %     783,577       11.46 %     5,058,206       5.42 %
                                                                                 
Securities issued or secured by:
                                                                               
UVR-denominated
                                                                               
                                                                                 
Colombian government
    103,609       0.34 %     544,107       0.65 %     -       -       814       3.97 %     648,530       0.61 %
Other financial entities
    -       -       131,327       4.48 %     320,689       3.54 %     88,922       8.18 %     540,938       4.53 %
Subtotal
    103,609       0.34 %     675,434       1.40 %     320,689       3.54 %     89,736       8.14 %     1,189,468       2.39 %
                                                                                 
Total (COP)
    2,798,978               2,770,886               1,601,275               1,001,265               8,172,404          
                                                                                 

 
(1)
Amounts are net of allowances for decline in value which amounted to COP 45,727 million in 2010.
 
(2)
Yield was calculated using the internal return rate (IRR) as of December 31, 2010.
 
(6) Loans and Financial Leases
 
Loan portfolio and financial lease contracts were classified, in accordance with the provisions of the Superintendency of Finance, as follows:
 
  December 31, 2010
 
Rating
 
Mortgage
   
Commercial
   
Consumer
   
Small loans
   
Financial leases
   
Total
 
                                                 
“A” Normal
  COP 3,070,146     COP 28,873,068     COP 7,391,320     COP 222,455     COP 5,357,198     COP 44,914,187  
“B” Acceptable
    97,124       929,599       313,562       8,198       240,315       1,588,798  
“C” Appreciable
    62,126       337,637       131,836       5,519       69,783       606,901  
“D” Significant
    40,002       594,824       232,909       6,034       140,520       1,014,289  
“E”  Unrecoverable
    73,483       257,275       107,548       12,876       25,733       476,915  
Total loans and  financial  leases
  COP 3,342,881     COP 30,992,403     COP 8,177,175     COP 255,082     COP 5,833,549     COP 48,601,090  

  December 31, 2009
 
Rating
 
Mortgage
   
Commercial
   
Consumer
   
Small loans
   
Financial leases
   
Total
 
                                                 
“A” Normal
  COP 3,179,350     COP 23,818,672     COP 5,987,880     COP 174,026     COP 5,020,700     COP 38,180,628  
“B” Acceptable
    119,099       926,077       436,897       7,656       221,932       1,711,661  
“C” Appreciable
    68,753       362,110       169,940       5,622       96,628       703,053  
“D” Significant
    47,498       695,820       231,374       5,940       124,810       1,105,442  
“E”  Unrecoverable
    54,724       209,236       62,524       8,775       5,931       341,190  
Total loans and financial leases
  COP 3,469,424     COP 26,011,915     COP 6,888,615     COP 202,019     COP 5,470,001     COP 42,041,974  

Promissory notes documenting loans amounting to COP 998,775 and COP 1,329,570 at December 31, 2010 and 2009, respectively, have been duly endorsed to development banks, as required by applicable laws.

 
F-35

 

The following table represents a summary of troubled loans restructured:
 
   
2010
   
2009
 
             
Performed by the Bank
  COP 1,533,596     COP 1,232,281  
Performed under local regulations
    223,166       191,624  
Interest and other receivables items
    18,073       17,613  
Trouble loans restructured
    1,774,835       1,441,518  
                 
Allowances for loan losses
    (627,068 )     (575,017 )
Troubled loans restructured net
  COP  1,147,767     COP 866,501  
 
(7)
Allowance for Loans, Financial Leases and Accrued Interest Losses
 
The following table sets forth an analysis of the activity in the allowance for loans and financial leases losses:
 
   
2010
   
2009
   
2008
 
                   
Balance at beginning of year
  COP 2,431,667     COP 2,134,360     COP  1,457,151  
Provision for loan losses
    1,842,406       2,448,581       1,986,710  
Reversals of provision
    (1,085,211 )     (1,186,674 )     (807,245 )
Charge-offs
    (658,151 )     (925,592 )     (547,860 )
Effect of changes in foreign exchange rates
    (21,498 )     (39,008 )     45,604  
Balance at end of year
  COP  2,509,213     COP 2,431,667     COP 2,134,360  
Ratio of charge-offs to average outstanding loans
    1.49 %     2.10 %     1.36 %
                          
Recovery of charged-off loans
  COP 276,209     COP 214,251     COP 108,143  

Recoveries of charged-offs loans are recorded separately in the consolidated statement of operations.
 
The following table sets forth the activity in the allowance for accrued interest losses:

   
2010
   
2009
   
2008
 
                   
Balance at beginning of year
  COP 45,937     COP 54,323     COP 33,303  
Provision
    33,540       46,840       58,721  
Charge-offs
    (18,057 )     (25,707 )     (12,782 )
Reversal of provisions
    (22,118 )     (28,980 )     (25,581 )
Effect of changes in foreign exchange rates
    (350 )     (539 )     662  
Balance at end of year
  COP  38,952     COP 45,937     COP 54,323  
  
 
F-36

 
 
(8) Customers’ Acceptances and Derivatives
 
The Bank’s rights and commitments from customers’ acceptances and derivatives operations were as follows:
 
   
2010
   
2009
 
Assets
           
             
Customer Acceptances
  COP 47,486     COP 47,610  
                 
Assets Derivatives
               
Spot Transactions
    44       108  
Forward Contracts
    136,593       52,154  
Swaps
    569,262       109,792  
Options
    31,503       (4,297 )
Total Assets Derivatives
    737,402       157,757  
Total  Customer Acceptances and Derivative Assets
    784,888       205,367  
                 
Liabilities
               
                 
Customers Acceptances
    47,486       47,610  
                 
Liabilities Derivatives
               
Forward contracts
    104,634       -  
Swaps
    457,944       -  
Options
    35,310       -  
Total Liabilities Derivatives
    597,888       -  
                 
Total  Customers Acceptances and Derivative liabilities
  COP  645,374     COP 47,610  

The effective annual interest rates and the average maturity of forward contracts for the year ended December 31, 2010 and 2009 were:

   
Purchases
   
Sales
 
    
Yield
   
Maturity(days)
   
Yield
   
Maturity(days)
 
                         
Financial instruments
    4.56 %     3       4.54 %     4  
Foreign currency
    7.31 %     256       13.78 %     244  
 
 (9) Accounts Receivable
 
Accounts receivable consisted of the following:

   
2010(1)
   
2009(1)
 
             
Balance in favor on credit card clearing house
  COP 342,095     COP 312,638  
Advances to suppliers
    224,580       238,191  
Insurance premium receivables
    65,211       51,210  
Commissions
    49,252       50,737  
Other accrued interest receivable
    10,067       27,899  
Advances on commitments to purchase assets
    3,688       27,717  
Services and properties sold
    14,261       24,848  
Advance for investment capitalization purposes
    5,877       20,657  
Recoveries of insurance on deposits (“Fogafin”)
    9,874       16,177  
Treasury operations pending payment by  counterparties
    903       13,615  
Other credit card receivable (joint venture Tuya S.A.)
    10,028       8,031  
Sale of goods and services
    7,159       11,407  
Accounts receivables in branches
    18,179       6,869  
 Advances to employees
    1,253       6,546  
Sierras del Chicó and Chicó Oriental
    4,761       4,701  
Fees on international wire transfers
    13,199       3,986  
Insurance on securitization process
    6,872       3,705  
Dividends
    2,187       2,101  
Overnight funds sold
    34       128  
Other receivables
    71,994       48,341  
Total accounts receivable
    861,474       879,504  
Allowance for accounts receivable losses
    (63,759 )     (72,619 )
Accounts receivable, net
  COP 797,715     COP 806,885  
 

(1) Includes all accounts receivable except those originated for interest loans.
 
 
F-37

 
 
The changes in allowance for accounts receivable losses are as follows:

   
2010
   
2009
   
2008
 
                   
Balance at beginning of year
  COP 72,619     COP 56,318     COP 34,404  
Provision for uncollectible amounts
    63,224       86,165       68,997  
Charge-offs
    (24,920 )     (29,456 )     (16,481 )
Effect of Charges in foreign exchange rates
    (2,170 )     (910 )     1,247  
Release of provisions
    (44,994 )     (39,498 )     (31,849 )
Balance at end of year
  COP 63,759     COP 72,619     COP 56,318  
 
(10)
Premises and Equipment
 
At December 31, 2010 and 2009 Property, Plant and Equipment consisted of the following:

   
2010
   
2009
 
             
Premises and Equipment
           
Land
  COP 121,640     COP 129,170  
Buildings
    650,900       689,723  
Furniture, equipment and fixtures
    247,773       257,958  
Computer equipment
    422,980       483,321  
Vehicles
    9,799       10,461  
Construction in progress
    61,525       30,791  
Equipment in  transit
    370,223       138,757  
Total
    1,884,840       1,740,181  
Less Accumulated depreciation
    (707,111 )     (743,595 )
Allowance for impairment
    (3,104 )     (4,545 )
Premises and equipment, net
  COP  1,174,625     COP 992,041  

Property and equipment depreciation expense for the years ended December 31, 2010, December 31, 2009 and December 31, 2008, amounted to COP 106,974, COP 114,844, and COP 98,301, respectively.
 
(11) Premises and equipment under Operating Leases
 
Premises and equipment under operating leases where the Bank or any of its subsidiaries act as lessor consisted of the following:
 
   
2010
   
2009
 
             
Machinery and equipment
  COP 110,381     COP 67,100  
Vehicles
    717,959       592,761  
Furniture, equipment and fixtures
    23,234       17,159  
Computer equipment
    248,298       212,468  
Real estate
    253,974       197,414  
Total
    1,353,846       1,086,902  
 Lease payments receivables under lease contracts
    24,535       24,519  
Less accumulated depreciation
    (357,888 )     (257,999 )
Allowance for impairment
    (14,385 )     (10,368 )
Operating Leases, net
  COP  1,006,108     COP 843,054  
 
Operating lease depreciation expense for the years ended December 31, 2010, 2009 and 2008, amounted to COP 88,770, COP 70,183 and COP 42,832, respectively.

 
F-38

 
 
(12) Prepaid Expenses and Deferred Charges
 
At December 31, 2010 and 2009 prepaid expenses and deferred charges consisted of the following:
 
   
2010
   
2009
 
Prepaid expenses:
           
Insurance premiums
  COP 13,143     COP 8,890  
Software licenses
    4,504       8,504  
Other
    2,631       2,413  
Total prepaid expenses
    20,278       19,807  
                 
Deferred charges:
               
Studies and projects
    -       2,084  
Software other than under the  Innova project
    67,786       60,046  
Leasehold improvements
    3,735       2,246  
Stationery and supplies
    1,257       1,743  
 Discounts on  issuance of bonds
    31,863       10,169  
Software purchased and related capitalized costs under INNOVA project
    172,982       80,390  
Banagrícola acquisition costs
    -       6,138  
Commisions
    1,728       1,984  
Swaps fair value adjustment originated on their first contract day
    18,021       -  
Other
    2,214       1,204  
Total deferred charges
    299,586       166,004  
Total prepaid expenses and deferred charges
  COP 319,864     COP 185,811  
 
(13) Other Assets
 
At December 31, 2010 and 2009 other assets consisted of the following:

   
2010
   
2009
 
             
Other assets:
           
Value added tax deductible and withholding taxes
  COP 41,533     COP 46,540  
Investment in Trust
    9,551       2,773  
 Deposits in derivative operations
    268,119       172,714  
Assets to place in lease contracts
    826,071       650,010  
Inventory
    1,807       1,826  
 Joint Ventures
    13,484       10,057  
Other
    25,412       38,345  
Total other assets
  COP 1,185,977     COP 922,265  
 
(14) Goodwill
 
The activities in goodwill are as follows:

   
2010
   
2009
   
2008
 
                   
Balance at beginning of the year
  COP 855,724     COP 1,008,639     COP 977,095  
Additions derived from the acquisition of Banagrícola by Bancolombia Panamá
    27       279       1,786  
Additions derived from the Purchase to noncontrolling interest of Renting Colombia by Leasing Bancolombia(1)
    6,038       -       -  
Reclassifications
    -       -       (1,325 )
Other Additions
    137       1,996       3,329  
Amortization
    (55,966 )     (69,231 )     (73,009 )
Effect of change in foreign exchange rates
    (54,992 )     (85,959 )     100,763  
Balance at end of the year
  COP 750,968     COP 855,724     COP 1,008,639  
 
 
F-39

 
 

(1) In March, 2010, Leasing Bancolombia increased its equity interest participation in Renting Colombia, by buying the shares that the foreign partners, Mitsubishi International Corparation and Mitsubishi Corporation, held in Renting Colombia. As of December 31, 2010, the Bank had a participation of 100 % in Renting Colombia.
 
Goodwill derived from the acquisition of Banagrícola S.A. is allocated by segments at December 31, 2010 as follows:

Segments
 
Gross
   
Net of amortization
 
             
Banking El Salvador
  COP 833,669     COP 623,455  
Insurance
    25,739       19,249  
Pensions
    30,308       22,666  
    COP 889,716     COP 665,370  

At December 31, 2010, Goodwill derived from the acquisition of Banagricola S.A. was tested for impairment by external advisors, using the discounted cash flow methodology. The Bank concluded that there is no impairment of goodwill under Colombian GAAP.
 
(15) Foreclosed Assets
 
Foreclosed assets consisted of the following:
 
   
2010
   
2009
 
             
Equity securities
  COP 53,206     COP 56,104  
Real estate
    180,083       167,340  
Machinery and Equipment
    2,242       5,481  
Vehicles
    12,814       9,875  
Other assets
    9,258       12,176  
Total
    257,603       250,976  
Allowance for  impairment
    (187,326 )     (170,308 )
Total foreclosed assets, net
  COP 70,277     COP 80,668  

The following is a summary of equity securities classified as foreclosed assets:
 
   
2010
   
2009
 
             
Chicó Oriental Número 2 Ltda.
  COP 14,202     COP 14,202  
Urbanización Sierras del Chicó Ltda.
    11,703       11,703  
Procampo trust
    7,044       7,044  
Pizano S.A.
    3,663       3,663  
Convertible Securities Pizano S.A.
    3,221       3,221  
Fibra Tolima trust
    1,572       1,572  
Calima Resort  trust
    1,485       1,485  
BIMA trust
    675       675  
Clinica Shaio trust
    456       456  
Líneas Agromar trust
    209       209  
Mercantil Nilo
    4,785       7,564  
Loan portfolio shares
    714       1,004  
Acciones Promotora La Alborada
    436       436  
Other
    3,041       2,870  
Total
  COP 53,206     COP 56,104  
 
 
F-40

 

The activity in the allowance for foreclosed assets is as follows:
 
   
2010
   
2009
   
2008
 
                   
Balance at beginning of year
  COP 170,308     COP 179,827     COP 201,822  
Provision
    45,077       36,521       19,725  
Charge - offs
    (502 )     -       (128 )
Recoveries
    (23,057 )     (39,451 )     (48,717 )
Reclassifications
    -       26       133  
Effect of changes in foreign exchange rates
    (4,500 )     (6,615 )     6,992  
Balance at the end of year
  COP 187,326     COP 170,308     COP 179,827  
 
(16) Reappraisal of Assets and surplus for Reappraisal of Assets
 
The following table describes reappraisals of assets:

   
2010
   
2009
 
             
Reappraisal of Assets, net
  COP 764,529     COP 736,366  
Less: proportional assets revaluation purchased under business combination  process (1)
    (110,903 )     (116,052 )
Less: minority interests
    (31,399 )     (37,936 )
Total surplus for Reappraisal of Assets
  COP 622,227     COP 582,378  
______________
 
(1)
Refer to the business combination process with Banca Inversión Bancolombia S.A., Leasing Bancolombia S.A., Fiduciaria Bancolombia S.A., Tuya S.A. (before Compañia de Sufinanciamiento S.A), Valores Bancolombia S.A., Factoring Bancolombia S.A., Inversiones Financieras Banco Agrícola S.A., calculated on the acquisition date. Consolidation rules require this value to be unchanged while the investment is held.
 
(17)  Interbank Borrowings
 
Interbank borrowings, primarily denominated in U.S. Dollars, at December 31, are summarized as follows:
   
2010
   
2009
 
Foreign banks
           
Short-term
  COP 2,584     COP 320,378  
Long-term
    2,696,358       832,540  
Total
  COP 2,698,942     COP 1,152,918  

For the purposes of this classification, short-term interbank borrowings, obtained from other banks for liquidity purposes, are unsecured and generally have maturities ranging from 90 to 180 days.

As of December 31, 2010 and 2009, the average interest rates on U.S. dollar denominated short-term borrowings from foreign banks were 1.13% and 1.04%, respectively.

For long-term interbank borrowings, the weighted average interest rate was 1.20% and 2.81% in 2010 and 2009, respectively.

 
F-41

 
  
Maturities of interbank borrowings at the end of the year 2010 were as follows:
   
2010
 
       
2011
  COP 2,431,095  
2012
    26,751  
2013
    147,812  
2014
    46,104  
2015 and thereafter
    47,180  
    COP 2,698,942  

The unused credit lines of interbank borrowings at the end of the year 2010 and 2009 were USD 428,490 and USD 1,227,000 respectively.

The maximum amount of borrowing at any month-end during 2010 and 2009 was COP 2,698,941 and COP 2,102,719, respectively.

The minimum amount of borrowing at any month-end during 2010 and 2009 was COP 938,735 and   COP 744,030, respectively.
 
(18) Borrowings from Development and other domestic 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.
 
Loans under these programs 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 reminder 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, 2010 and 2009, borrowings from domestic development banks received from certain Colombian Goverment Agencies consisted of the following:

   
2010
   
2009
 
             
Banco de Comercio Exterior de Colombia (“Bancoldex”)
  COP 721,632     COP 1,053,562  
Fondo para el Financiamiento del Sector Agropecuario (“Finagro”)
    648,011       729,495  
Findeter
    1,033,604       1,007,250  
Other
    148,399       95,925  
Total
  COP 2,551,646     COP 2,886,232  

Interest rates on borrowings from development and other domestic banks averaged 5.3% and 8.5% in 2010 and 2009, respectively, in local currency and 4.2% and 1.9% in 2010 and 2009, respectively, in foreign currency. Maturities at December 31, 2010 were as follows:

2011
  COP 303,780  
2012
    338,486  
2013
    408,182  
2014
    360,007  
2015
    282,908  
2016 and thereafter
    858,283  
Total
  COP 2,551,646  
 
 
F-42

 
 
(19)  Other Liabilities
 
Other liabilities consisted of the following:
   
2010
   
2009
 
             
Unearned income(1)
  COP 42,674     COP 36,144  
Accrued severance Law 50, net of advances
    31,990       26,774  
Accrued severance before Law 50, net of advances to employees
    15,904       16,572  
Accrued payroll and other severance benefits
    101,216       101,989  
Accrued pension obligations net of deferred cost
    112,595       112,595  
Deferred interest on troubled loans restructured
    69,563       59,546  
Deferred tax liability
    108,440       114,071  
Advances
    60,751       77,463  
Insurance liabilities
    80,797       80,876  
Deferred profit on sales of assets
    3,252       3,290  
Deferred commissions on standby letters
    3,664       1,258  
Other
    58,580       35,315  
Total
  COP 689,426     COP 665,893  
______________
 
(1)
Unearned income principally consists of prepayments of interest by customers.

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 the pension obligation for the majority of the Bank’s employees.

Pension obligation

The following is an analysis of the Bank’s pension obligations:

   
Projected
             
   
pension
             
   
liability
   
Deferred cost
   
Net
 
Balance at december 31, 2007
  COP 110,669     COP -     COP 110,669  
                         
Adjustment per actuarial valuation
    12,261       (12,261 )     -  
Benefits paid
    (11,171 )     -       (11,171 )
Pension expense
    -       12,261       12,261  
Balance at December 31, 2008
  COP 111,759     COP -     COP 111,759  
                         
Adjustment per actuarial valuation
    11,883       (11,883 )     -  
Benefits paid
    (11,047 )     -       (11,047 )
Pension expense
    -       11,883       11,883  
                          
Balance at December 31, 2009
    112,595       -       112,595  
                         
Adjustment per actuarial valuation
    10,824       -       10,824  
Benefits paid
    (10,824 )     -       (10,824 )
Pension expense
    -       -       -  
Liability adjusment for changes in actuarial assumptions
    11,752       11,752       -  
Balance at December 31, 2010
  COP 124,347     COP 11,752     COP 112,595  

 
F-43

 

In compliance with Colombian law, the present value of the obligation for pensions was determined on the basis of actuarial calculations. The significant assumptions used in the actuarial calculations were the following:

   
2010
   
2009
   
2008
 
                   
Discount rate
    4.80 %     4.80 %     12.43 %
Future pension increases
    4.51 %     6.48 %     7.63 %
 
(20) Long-Term Debt
 
Companies are authorized by the Superintendency of Finance to issue or place ordinary bonds or general unsecured bonds.
 
Long-term debt consists of bonds issued by Bancolombia S.A. (and its subsidiaries), Banco Agrícola S.A., Leasing Bancolombia, TUYA S.A. and Renting Colombia S.A.
 
2010
 
Issuer
 
Currency
 
Issued
   
Balance
   
Rate
 
Bancolombia S.A.
 
Local
  COP 3,498,860     COP 2,110,627       4.3% - 10.7 %
Bancolombia S.A.
 
Foreign
  USD 1,020,000       1,952,260       6.2% - 6.9 %
Leasing Bancolombia S.A.
 
Local
  COP 1,352,969       967,803       4.7% - 9.4 %
Banco Agricola S.A.
 
Foreign
  USD 490,000       434,048       3.2% - 5.0 %
Renting Colombia S.A.
 
Local
  COP 235,190       199,138       6.5% - 10.0 %
Tuya S.A.
 
Local
  COP 54,500       54,500       5.10 %
Total Long term debt
               COP 5,718,376          

2009
 
Issuer
 
Currency
 
Issued
   
Balance
   
Rate
 
Bancolombia S.A.
 
Local
  COP 3,089,404     COP 1,752,153       4.9% - 14.6 %
Bancolombia S.A.
 
Foreign
  USD 400,000       817,692       6.90 %
Leasing Bancolombia S.A.
 
Local
  COP 912,969       657,094       5.5% - 10.9 %
Banco Agricola S.A.
 
Foreign
  USD 520,000       656,365       4.3% - 5.8 %
Renting Colombia S.A.
 
Local
  COP 259,540       237,818       5.5% - 9.5 %
Tuya S.A.
 
Local
  COP 52,500       52,500       5.10 %
Total Long term debt
               COP 4,173,622          
 
The scheduled maturities of long term-debt at December 31, 2010 are as follows:

2011
  COP 746,914  
2012
    543,278  
2013
    658,514  
2014
    359,314  
2015
    183,296  
2016 and thereafter
    3,227,060  
    COP 5,718,376  

 
F-44

 
 
 (21) Accrued Expenses
 
Accrued expenses consisted of the following:

   
2010
   
2009
 
             
Income tax payable
  COP 812     COP 40,899  
Fines and sanctions(1)
    72,919       53,336  
Labor obligations
    120,118       67,997  
FICAFE contingency(2)
    54,213       52,811  
Accrued expenses Almacenes Éxito
    1,743       1,178  
Membership Program
    5,415       3,284  
Other
    27,827       19,895  
Total
  COP 283,047     COP 239,400  
       ______________
 
(1)
  See Note 26(d).
 
(2)
As a result of Banagrícola’s acquisition, the Bank since the year ended December 31, 2007, has established an allowance available to absorb probable losses inherent in the FICAFE investment, booked through its subsidiary, Banco Agrícola S.A. FICAFE investment consists of fiduciary’s securities, issued by the Foundation of Enviromental Preservation of Coffee-Producing Lands established by the Salvadorian government (See Note 5)

Income tax

Colombian tax regulations applicable to the Bank and its subsidiaries provide the following:

(a) The applicable statutory tax rate from 2008 to 2010 and subsequent years is 33%. However, the tax authorities allow entities, in order to avoid any uncertainty derived from changes in the tax framework of the country, to agree and fix the tax rates for a defined period of time (ranging from 10 to a maximum of 20 years) to be applied by each entity in their income tax returns to the regulator, and the compliance of certain covenants by the companies established in the contracts. Pursuant to the above, the Bank and some of its subsidiaries have signed individual agreements with the tax authorities to report their taxes under this option, as follows:

Company
 
Tax rate
   
Period
 
Agreement expiration
Bancolombia
 
35
 
2001-2010
 
2010
Banca de Inversión
 
35
%  
2001-2010
 
2010
Leasing Bancolombia
 
35
%  
2001-2010
 
2010
Fiduciaria Bancolombia
  
35
%
 
2000-2009
  
2009

At December 31, 2010 the Bank and its subsidiaries was in compliance with all the covenants established in these agreements.

(b) The minimum basis to determine taxable income for the year may not be below 3% of an entity’s net assets, calculated based on the tax basis as of the last day of the immediately preceding taxable year (presumptive income). However, any difference with the ordinary taxable income that would have been paid in the case of the 3% net assets threshold, can be deducted in subsequent years, in a similar way as those procedures applied to compensate tax loss carry forwards.

(c)Taxable loss carry forwards are deductible in future years, in periods established by the tax regulations. As of December 31, 2010, the Bank and its subsidiaries in Colombia had accumulated tax loss carry-forwards and excesses of presumptive income generated in previous years, as follows:

 
F-45

 

Tax loss carry-forwards:
 
 Expiration
date
 
Loss 
carry-forwards
   
Excess of
presumed
income
 
With no Maximum expiry date
  COP 153,773     COP 10,574  
2014
    699       5,108  
2013
    896       4,582  
2012
    551       1,783  
2011
    22       3,022  
    COP 155,941     COP 25,069  

(d) Any non-recurring taxable income is reported and taxed separately from any ordinary taxable income, although the same income tax rate as stated in a) is applicable to both. Non recurring taxable income is mainly generated by gains obtained from the disposal of fixed assets owned more than two years and gains resulting from the liquidation of partnerships inheritances, legacies and donations.

(e) Companies can deduct from their taxable income a special allowance calculated on their performing property and equipment purchased during the year in addition to their depreciation charges. For 2010 and 2009, the special allowance represented 40% and 30% of the purchased asset, respectively. If the property and equipment subject to the allowance is disposed before the end of its useful life, an adjustment to income calculated in proportion to the remaining useful life of the asset, should be added to the company’s taxable income basis in the year the asset is sold.This allowance has been eliminated in 2011, except for companies under special agreements with the tax authorities as explained in a) above.

(f) Intercompany transactions with overseas related parties in countries considered tax heavens, are required for income tax purposes, to be considered as taxable income, by considering the prices and profit margins that should have been used in comparable third parties arm’s length transactions.  As of the date of the issuance of these financial statements, the Bank’s Management and its advisors have not yet concluded the transfer pricing analysis for 2010; however, they consider that based on the satisfactory results of the studies in 2009 and the operations for 2010, no significant additional tax provisions should be required.

Foreign tax regulations in the countries where the Bank has its main foreign subsidiaries provide the following:

a) In the Bank subsidiaries in Panama (Bancolombia Panama and Subsidiaries, Banagrícola and Banco Agrícola Panama) income tax is governed by the Panamanian Tax Code. Net income obtained by the aforementioned companies is not subject to income tax in Panama.

b) Bank subsidiaries incorporated in El Salvador pay income taxes on taxable income at a statutory rate of 25% obtained within the country.

c) The Bank subsidiary in Puerto Rico, according to the law governing the International Banking Center is 100% exempt of income taxes, if income is obtained from international banking activities, pursuant to said law.

d) Bank subsidiaries incorporated in Peru pay income taxes on taxable income at a statutory rate of 30% obtained within the country.

Profits obtained in Bank foreign subsidiaries are taxable income in Colombia only when they are distributed as dividends on a cash basis; however, the Bank management does not have plans to return to the Parent Company in Colombia the accumulated profits in the Bank’s foreign operations. Accordingly the Bank has not recorded any deferred tax liability for this matter. At December 31, 2010, profits accumulated in the Bank foreign operations amount to COP 563,158.

 
F-46

 

The following is a reconciliation of taxable income before income taxes:

   
2010
   
2009
   
2008
 
                   
Income before income taxes
  COP 1,944,911     COP 1,718,864     COP 1,764,699  
Difference between net operating loss carry-forwards and presumed income
    24,021       37,866       9,874  
Non-deductible provisions, costs and expenses
    245,133       163,949       202,605  
Non-taxable or exempt income
    (630,938 )     (456,532 )     (352,224 )
Excess of accrued income over  unrealized income  on trading investments
    (52,304 )     (90,726 )     (78,648 )
Amortization of excess of presumed income over ordinary income and amortization of net operating loss carry- forwards
    (1,574 )     (46,703 )     (15,433 )
Difference between profit on sale of assets for tax purposes and for financial reporting purposes
    (63,501 )     (3,729 )     (29,847 )
Unrealized  income on  derivatives financial instruments
    18,851       74,120       (86,314 )
Special tax deduction for investments in operating assets
    (157,054 )     (104,333 )     (203,272 )
Non controlling interest
    16,601       18,082       20,117  
Other
    45,115       16,589       (18,307 )
Taxable income
    1,389,261       1,327,447       1,213,250  
Statutory tax rate
    35.79 %     34.63 %     34.32 %
Estimated current income tax
    497,231       459,732       416,381  
Deferred income tax expense (benefit)
    11,186       2,281       57,675  
Total
  COP 508,417     COP 462,013     COP 474,056  

Income taxes for the years ended December 31, 2009 and 2010 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 (see Note 26).

Equity taxes

Since 2007 Colombian tax regulations require companies to annually pay a special tax, additionally to the income tax, calculated on their net assets established under tax basis as of January 1 of each year at the statutory tax rate of 1.2%. During 2010 and 2011 new regulations on this matter coming into force require companies to calculate this tax only once for the next year as of January 1, 2011 at the tax rate of 6% and payable in eight semi-annual installments over four years without interest.  The equity tax calculated by the Bank and its subsidiaries amounts approximately to COP 446,052, which, according to accounting rules in Colombia, would be recorded as a deferred asset to be amortized, one portion against stockholder equity and other portion to income on straight line basis over four years.
 
(22) Subscribed and Paid-in Capital
 
Subscribed and paid-in capital consisted of the following:
 
   
2010
   
2009
   
2008
 
                   
Authorized shares
    1,000,000,000       1,000,000,000       1,000,000,000  
Issued and outstanding:
                       
Common shares with a nominal value of COP 500 (in pesos)
    509,704,584       509,704,584       509,704,584  
Preference shares with a nominal value of COP 500 (in pesos)
    278,122,419       278,122,419       278,122,419  

 
F-47

 

Pursuant to Colombian law, minimum regulatory capital for banks is required to be not less than 9% of their total assets weighted by credit risk ratings and credit risk contingencies. Under Decree 1720 of 2001, the calculation of minimum regulatory capital must incorporate market risk in addition to credit risk. This minimum regulatory capital was fully covered in 2010 and 2009. 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.

As of December 31, 2010 and 2009 the Bank’s consolidated minimum regulatory capital ratio was 14.67% and 13.23%, respectively.
 
(23) Appropriated Retained Earnings
 
Pursuant to Colombian law, 10% of the unconsolidated net income of the Bank and its Colombian subsidiaries in each year must be appropriated through 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.

Appropriated retained earnings consist of the following:

   
2010
   
2009
   
2008
 
                   
Legal reserve (1)
  COP 3,695,686     COP 2,993,074     COP 2,172,068  
Additional paid-in capital
    1,165,617       1,165,617       1,165,617  
Other reserves
    536,670       538,664       637,336  
Total
  COP 5,397,973     COP 4,697,355     COP 3,975,021  
    _________________
(1) Includes legal reserve and net income from previous years.

Reserve for Country Risk

Banco Agrícola S.A., Aseguradora Suiza Salvadoreña S.A. and Asesuisa Vida S.A., record reserves for country risk in their stockholder’s equity.

Institutions that place or commit funds in other countries use the sovereign risk ratings for the country in question in order to determine the country risk. Said ratings are issued by well-known international risk rating agencies for long-term obligations.

Any increase in these reserves gives rise to a debit to the appropriated retained earnings account – profits from prior years and a credit in the restricted equity account – profits from prior years.  Drops in the reserves cause a reverse effect in the books.
 
(24) Dividends Declared
 
Dividends are declared and paid to stockholders based on net income from the previous year based on the unconsolidated financial statements. Dividends were paid as indicated below:

   
2011
   
2010
   
2009
 
Preceding year’s unconsolidated net income
  COP 1,177,999     COP 1,000,157     COP 1,043,669  
                         
Dividends in cash (in Colombian     pesos)
 
COP 668.64 per share payable in four quarterly installments of COP 167.16 per share from April 2011 on 509,704,584 and 278,122,419 common and preferred shares, respectively
   
COP 636.80 per share payable in four quarterly installments of COP 159.20 per share from April 2010 on 509,704,584 and 278,122,419 common and preferred shares, respectively
   
COP 624 per share payable in four quarterly installments of COP 156 per share from April 2009 on 509,704,584 and 278,122,419 common and preferred shares, respectively
 
Total dividends declared
  COP 526,773     COP 501,688     COP 491,604  
Dividends payable at December 31(1)
          COP 134,115     COP 131,370  
    _________________
 
(1)
The amount of the dividends payable at December 31, is recorded under accounts payable in the Consolidated Balance Sheets.
 
 
F-48

 
 
(25) Memorandum Accounts
 
Memorandum accounts were composed of the following:
   
2010
   
2009
 
             
Trust:
           
Managed by subsidiary companies
  COP 58,268,681     COP 55,153,404  
                 
Commitments:
               
Unused credit card limits
    8,052,833       6,797,251  
Civil law suits  against the Bank
    431,291       794,704  
Unused letters of credit
    1,686,971       1,604,101  
Unused  lines of credit
    865,377       1,030,437  
Bank guarantees
    1,511,172       1,490,823  
Approved loans not disbursed
    1,926,117       1,417,015  
Nation account payable (546 law)
    22,444       28,316  
Derivatives(notional amounts)(1)
    22,610,690       -  
Insurance(coverages on written policies)
    47,573,300       40,966,278  
Other
    1,511,948       1,549,213  
Total
  COP 144,460,824     COP 110,831,542  
 
Other memorandum accounts:
   
2010
   
2009
 
             
Memorandum accounts in favor:
           
Tax value of assets
  COP 52,006,460     COP 49,342,301  
Assets and securities given in custody
    5,355,106       6,944,344  
Assets and securities given as collateral
    2,638,014       2,731,855  
Trading investments in debt securities
    1,944,290       2,696,095  
Written-off assets
    2,760,740       2,748,818  
Future lease payment receivables under lease contracts
    7,537,849       7,172,198  
Investments held to maturity
    2,948,105       2,412,718  
Inflation adjustments of assets
    83,944       106,916  
Interest receivables on trading investments
in debt securities
    1,655,578       1,141,423  
Investments available for  sale in debt securities
    1,469,400       1,346,180  
Remittances sent for collection
    317,416       330,572  
Amortized debt securities investment
    1,364,219       1,109,789  
Other memorandum account in favour
    22,781,857       8,168,301  
Total
  COP 102,862,978     COP 86,251,510  
                 
Memorandum accounts against:
               
Assets and securities received as collateral
  COP 35,836,448     COP 32,829,483  
 Loans financial and  operating leases classified by credit risk
    49,847,113       43,140,675  
 Assets and securities received in custody
    5,807,245       6,185,906  
 Tax value of stockholders’ equity
    8,735,644       7,375,394  
 Adjustment for inflation of equity
    888,539       889,995  
 Other memorandum account against
    27,588,126       17,002,891  
Total
    128,703,115       107,424,344  
Total memorandum accounts
  COP 376,026,917     COP 304,507,396  

(1) In compliance with Colombian regulations over derivatives and structured products operations, effective January 1, 2010.
 
 
F-49

 
 
(26) Contingencies
 
For the years ended December 31, 2010 and 2009, the Bank recorded provisions for probable contingencies of COP 72,919 and COP  53,336 respectively. The detail of the contingencies was as follows:
 
The Parent Company

 
a)
Contingencies Covered by FOGAFIN:

During the privatization process of Banco de Colombia (which merged with and into the Bank in 1998) and completed on January 31, 1994, Fogafin made a commitment to assume the cost of contingent liabilities resulting from events that occurred before the date of the stock purchase which were claimed within  five  years after the stock purchase. Fogafin’s guarantee covers eighty percent (80%) of the first COP 10,000, not considering allowances, and thereafter, one hundred percent (100%), all annually adjusted according to the consumer price index.

At December 31, 2010, the civil contingencies covered by Fogafin’s guarantee amounted to approximately COP 173, with allowance at the same date amounting to COP 171.

 
b)
Legal Processes

At December 31, 2010 and 2009, several ordinary civil complaints, class actions and civil actions were filed against the Bank, as part of criminal and executive proceedings, claiming approximately COP 224,421 and COP 664,772 for both years, for which provisions were set up totaling COP 12,624 and COP 31,219, respectively.

Contingencies against the Bank greater than COP 5,000, as of December 31, 2010, are:
 
Proceeding
 
Actual
   
Provision
   
Probability
Inversiones C.B.S.A
  COP 40,806     COP -    
Remote
Carlos Julio Aguilar and others
    30,210       -    
Possible
Popular action filed by Maria del Rosario Escobar Girona against the Public Defender´s Office and Bancolombia
    25,500       -    
Remote
Editorial Oveja Negra Ltda and Jose Vicente Katarain Velez
    9,635       -    
Remote
Invico Ltda, Dalia Bibliowicz Kaplan and  Anniel Amiran Bibliowcz
    6,601       3,500    
Probable
Ordinary lawsuit filed by Gloria Amparo Zuluaga Arcila
    5,784       -    
Remote
Ordinary lawsuit filed by Ramon Orlando Pardo Osorio and Ocenano films op ltda US 3.000
  COP 5,699     COP -    
Remote

 
F-50

 
 
These proceedings are outlined below:
 
Inversiones C.B. S.A.
 
In 1997, Conavi granted a loan of COP 6,000 to Inversiones C.B S.A. for the purpose of building a real estate project. This loan was scheduled to be paid out to the borrower in periodic installments based on the progress of said project, this amongst other terms and conditions.
 
Given the fact that construction work ground to a halt and the builder fell into arrears, Conavi suspended the payment of the loan, which in the opinion of the plaintiffs gave rise to consequential damages.  The claim filed by the plaintiffs states that the Bank must pay Inversiones C.B S.A. certain sums of money including loss of profits and corresponding interest, the opportunity cost of capital, the value of the project's liabilities as well as the effect of  inflation. 
 
This contingency is considered to be quite remote, since the Parent Company paid out the loan according to the terms and conditions agreed upon, and the plaintiffs were at fault in assigning the funds together with other external causes such as the project's lack of feasibility and the crisis prevailing within the construction sector, all of which contributed to the failure of the project in question.
 
In August 2010, a favorable ruling in the first instance was granted to the Bank, which was later appealed by the plaintiff, with regard to which no decision has been arrived at, as yet. This contingency is remote.
 
Carlos Julio Aguilar and others.
 
This popular action was filed by the plaintiff arguing that the restructuring of the financial obligations on the part of the Department of Valle and the performance plan signed by said plaintiff allegedly violates the collective rights of public morality and the Department’s heritage.  Evidence was being heard for this action but was suspended due to the amount of proceedings that had accumulated. Therefore it shall be heard in conjunction with another popular action filed by Carlos Aponte based on this same alleged grievance.  Currently the case is pending the presentation of expert opinion testimony with regard to the amount of interest charged to the Department of Valle by the different banks involved. This contingency is possible.
 
Constitutional public interest action: María del Rosario Escobar Girona vs Bancolombia S.A. and la Defensoría del Pueblo.
 
This suit is based on an alleged infringement of collective rights and interests relating to administrative morality and the defense of public finances, as a result of the alleged failure to pay on the part of the Bank the amount ruled on a class action suit filed by Luis Alberto Durán.
 
On September 10, 2009, the Administrative Court No. 42 of Bogota - Fourth Section held a public interest conciliation hearing in connection with the aforementioned case.
 
The plaintiff alleged breach by the Bank of collective rights and interests regarding administrative morality and the defense of public property in connection with its failure to pay amounts due under certain arbitral proceedings.
 
The defendants were notified and the Bank on October 23, 2009 responded to the lawsuit. On February 18, 2010, the public interest conciliation hearing was declared failed.
 
On March 11, 2010 discovery was opened.
 
In September 2010, was presented a conflict of jurisdiction in connection with the consideration of the Administrative Court No. 42 of Bogota arguing its incompetence to process of this Constitutional action. This conflict of Jurisdiction was resolved by the Tribunal Administrativo de Cundinamarca  on decision dated September 23, 2010, according to which the Administrative Court No. 42 of Bogota must process this Constitutional action.
 
On February 10, 2011, The Administrative Court No. 42 of Bogota held a new public interest conciliation hearing in connection with the aforementioned case.
 
On February 10, 2011, was celebrated a new public interest conciliation hearing, in which was presented a project of agreement approved by the plaintiff, la Defensoría del Pueblo and the General Attorney's office.
 
On February 22, 2011, the judge did not approve the agreement presented by the plaintiff, la Defensoría del Pueblo and the General Attorney's office on February 10.
 
On February 28, 2011, the Bank and la Defensoría del Pueblo presented an appeal (recurso de reposición y subsidiariamente de apelacion) against the decision made by judge on February 22, 2011.
 
 
 
 
F-51

 
 
 
.Invico
 
This action is based on an alleged liability on the part of the Bank and Fiducolombia in managing the "Quiebra Invico" trust , claiming that the Bank and Fiducolombia  did not duly defend the interests of the trustee and its beneficiaries, upon not completing the price of the property subject to a action claiming tremendous damage for which the trustee was given a favorable ruling and instead decided to settle the contract by returning the La Granjita property. We have argued that the defendants are under no obligation to exercise the alternate right pursuant to Article 1948 of the C.C., and therefore they fully complied with the trust arrangement. The Supreme Court of Justice failed to  admit the appeal filed by Invico’s attorney and ordered the file to be returned to the Civil Division of the High Court of Bogotá Invico’s attorney appealed this process.  Since the appeal was rejected, the ruling in the second instance in favor of the Bank was duly upheld. This contingency is probable.
 
Sale of Almacenar

In December 2006, the Bank’s subsidiary Almacenes Generales de Deposito Almacenar S.A. was spun off to create two additional companies, Inversiones IVL S.A. and LAB Investment Logistics S.A. Subsequently in 2007, the Parent Company sold its shares in LAB Investment Logistics S.A. and Almacenar S.A., pledging to cover any contingencies caused before the date on which these were sold, and which would only become apparent after the transaction was completed. In particular, the Parent Company, undertook to cover any losses incurred by Almacenar as a result of a fire that broke out in May 2005 in its warehouse located in the Salomia district in  Cali.
 
The proceedings initiated by Seguros Comerciales Bolívar S.A., in representation of Cadbury Adams are still pending, in which a total of COP 30,901 is being claimed. However, the claimed compensation for merchandise based on selling prices or the loss of profits are not the responsibility of the depository.  For this contingency, the Parent Company shall have at its disposal the COP 11,467 that remains from the compensation payable on the part of Suramericana de Seguros as well as a provision of COP 1,200. These proceedings were being heard by Civil Court No. 22 of the Circuit of Bogota before a settlement agreement was signed by the parties bringing the case to an end.
 
Siierras del Chicó Ltda. and Chicó Oriental No. 2 Ltda.
 
According to the terms and conditions contained in a guarantee agreement for contingent liabilities entered into by the Parent Company and the Fondo Nacional de Garantías FOGAFÍN (the Colombian National Guarantee Fund) on January 18, 1994, said Fund called for an arbitration panel to be set up  in order for the Parent Company to hand over the rights held by the former Banco de Colombia in the companies Sierras del Chicó Ltda. and Chicó Oriental No. 2 Ltda. at December 31, 1993.
 
The Arbitration Panel ruled in favor of FOGAFIN in an award issued on October 21, 2010. The Bank then filed an appeal to revoke the award and requested that compliance with the award be suspended. Both the appeal and said request are being heard by the  Third Section of the State Council. The Bank has paid the amount it was ordered to pay in the award.
 
Developments related to the Gilinsky Case
 
On June 21, 2010, Bancolombia S.A., entered into a settlement agreement with members of the Gilinski family pursuant to  which the parties agreed, among other things to end all disputes relating to the acquisition by the former Banco de Colombia. All such proceedings arbitrations, as well as criminal investigations have now been terminated in accordance with that agreement. The resolution of these matters did not have a material effect on the Bank’s results of operations or financial condition.

 
F-52

 

 
c) DIAN

Special Requirement
 
On December 27, 2007, the Bank received a notice from the Tax Administration of Medellin (“Administración de Impuestos de Medellin”) regarding the income tax (“impuesto de renta”) for the year 2006, in which the amount of COP 30,390  is at issue and a proposed fine of COP 48,623 is discussed.
 
On September 23, 2008, the aforementioned tax authorities issued an official tax settlement.
 
On October 15, 2009, a ruling was given on the appeal regarding the officially revised tax settlement, in which DIAN (the Colombian Tax Authorities) accepted part of the disputed tax amount and fine. Now only COP  20,137 in tax as well as a fine of COP 21,696, remains in dispute.
 
On March 15, 2010, the Bank filed a motion to vacate and re-establish its rights, as well as the officially reviewed tax settlement  dated September 23, 2008. This motion was granted on June 22, 2010.
 
The Bank and its tax advisors consider that the tax return filed for this period was drawn up in compliance with all applicable legislation.
 
The provision set up for this contingency amounts to COP 35,644.
 
Municipalities
 
 Industry and Commerce Tax corresponding to 2006
 
This dispute relates to the increase in the Industry and Commerce tax base with regard to returns corresponding to the savings section.
 
Special  requirement  was issued on September 23, 2008 by the Bogotá District Council for the second two-month period of 2006 stipulating COP 2,937 in tax owing and a fine of COP 4,863.
 
This requirement was contested on December 19, 2008, requesting that the requirement be revoked given the lack of grounds and an arithmetic error in the corresponding settlement.
 
A resolution in this regard was issued on January 25, 2010, confirming the decision contained in the officially reviewed tax settlement. The Bank filed appeals against Resolutions issued in 2009 and 2010 on Jun 25, 2010
 
The provision for this contingency comes to COP 6,131. On November 27, 2008 a special requirement was received for the third, fourth, fifth and sixth bi-monthly periods of 2006. This requirement stated an amount of COP 5,236 in tax owing and a fine of COP 8,377. This requirement was subsequently contested requesting that the requirement be revoked given the lack of grounds and an arithmetic error in the corresponding settlement.
 
On April 21, 2009, the Bogota District Council replied to the appeal against the officially reviewed tax settlement, reducing the claimed amounts to COP 1,194 in tax owing and a fine of COP 1,964.
 
The provision for this contingency comes to COP 2,537.

 
F-53

 
 
Industry and Commerce Tax corresponding to 2007
 
 This dispute  related to the increase in the Industry and Commerce tax base with regard to returns corresponding to savings:
 
On September 28, 2009 the Bogotá City Council issued a special requirement for the second bi-monthly period of 2007, stating an amount of COP 347 in tax owing and a fine of COP 556. This requirement was subsequently contested on December 28, 2009 and in April 2010 the Bank received the officially reviewed tax settlement which was subsequently contested on June 16, 2010.
 
On November 25, 2009, a special requirement was received from the Industry and Commerce tax authorities for the third bi-monthly period of 2007, claiming COP 243 in tax owing and a fine of COP 388. The Bank contested this on February 25, 2010, to which an officially reviewed tax settlement was received on June 4, 2010 to which the Bank lodged an appeal for review on August 4, 2010.
 
On January 28, 2010, a special requirement was received from the Industry and Commerce tax authorities for the fourth, fifth and sixth bi-monthly periods of 2007, claiming COP 155 and COP 248 in tax owing. The Bank contested this on April 28, 2010, to which an officially reviewed tax settlement was received on May 28, 2010. Consequently, the Bank lodged an appeal for review on July 21, 2010. This contingency is remote.
 
 Industry and Commerce Tax corresponding to 2008
 
Notices were issued to reconsider the Industry and Commerce’s taxable income for the year 2008 related to saving section.
 
On July 28, 2010, a notice was received for the first two months period of 2008.  This notice stated an amount of COP 994 in tax owing and a fine of COP 1,591.
 
On September 24, 2010, a notice was received for the second, third, fourth, fifth and sixth two months period of 2008.  This notice stated an amount of COP 3,049 in tax owing and a fine of COP 4,878. The answer to the especial requirement was given on December, 2010. This contingency is remote.
 
Pro Senior Citizen Stamp Tax for fiscal years 2005 and 2006
 
On June 24,  2008 two official review settlements Nos. 001-08 and 002-08 were received for the third, fourth, fifth and sixth bi-monthly periods of 2005 as well as the first, second, third and fourth bi-monthly periods of 2006, respectively, from the Barranquilla District Council, disputing a stamp tax of COP 113 and issuing a fine of COP 182.
 
On October 23, 2008, proceedings were filed to revoke and re-establish rights with regard to the official review settlements; the claim lodged for  the fiscal year 2005 was admitted and is now underway.

The claim for fiscal year 2006 is still being admitted, an appeal was filed before the Contentious-Administrative Tribunal and is still pending admission.

The provision set up for this contingency with regard to the Industry and Commerce tax return come to COP 255.
 
 Pro Senior Citizen Stamp Tax for fiscal year 2007

On July 1, 2008 special requirement No. 0123-08 was received for the fifth and sixth bi-monthly periods of 2006 and the first, second, third, fifth and sixth bi-monthly periods of 2007; from the Barranquilla District Council, disputing a stamp tax of COP 91 and issuing a fine of COP 146.

 
F-54

 
 
On September 18, 2008 the Parent Company contested this special requirement based on the same terms on which it filed proceedings to revoke and reestablish the right for the bi-monthly periods of 2005 and 2006.  
 
On June 9, 2009, proceedings were filed to revoke and re-establish rights with regard to the special requirement. This was duly admitted and notice is being served. The expense corresponding to these proceedings were paid in April 2010.
 
The provision set up for this contingency with regard to the Industry and Commerce tax return come to COP 176. This contingency is considered remote
 
FIDUCIARIA BANCOLOMBIA S.A.
 
1. Invico Ltda, has a lawsuit pending against the Bank and Fiducolombia S.A (now Fiduciaria Bancolombia S.A) in the Sixth Civil Circuit Court of Bogota (Juzgado Sexto Civil del Circuito de Bogota). The plaintiff seeks a ruling declaring that the Bank and Fiducolombia S.A (now Fiduciaria Bancolombia S.A) must exercise the alternative right contained in Article 1948 of the Civil Code, in reference to the land lot denominated “La Granjita.” pursuant to the trust mandate. The claims amounted to COP 4,000. A First Instance Court ruled against the fiduciary, but such ruling was subsequently revoked in its entirety by the Civil Division of the Superior Court of Bogota. The plaintiff, within the prescribed legal terms, filed an appeal for review by a higher court which is currently pending admittance.
 
The legal counsel in charge of this case considers that a non favorable ruling is remote.There is no provision fot this contingency.
 
2. With regard to the Santa Sofia Trust, a class action suit was filed by the owners of the Santa Sofia Condominium against Bogotá City Hall, in which a claim was made against Fiducolombia S.A. (currently Fiduciaria Bancolombia S.A.) and others alleging damage to their property due to flaws with the terrain, and alleging that no building permit should have been granted. A ruling in the first instance rejected these claims and the plaintiffs lodged the corresponding appeal, which is currently underway. This contingency is possible
 
3. Ordinary proceedings filed by Álvaro Navarro T & Cía. S. en C. against Fiduciaria Bancolombia S.A. in which the plaintiff claims that Public Deed No. 5496 drawn up before Notary Public No, 3 of the Circuit of Cartagena should be revoked. According to said Public Deed, title to the ownership of the property held in trust was given over in the form of payment to the beneficiaries: Banco del Pacifico (currently being wound up), BIC S.A. (now known as Bancolombia S.A.) and Bancafé S.A As a result, the restitution of the above-mentioned property was claimed along with the payment of damages which the plaintiff estimates at COP 10 per month, as of the date on which the property was given over in the form of payment until its restitutions. This contingency is considered remote
 
4. Arbitration proceedings were filed by XIE S.A. claiming that the Fiduciaria had failed to comply with its explicit and implicit obligations, as contained in the Trust Agreement, by means of which the Trust, Alianza Suba Stretch II was set up, upon denying and/or restraining the rights corresponding to XIE S.A. with regard to the surplus and temporary collateral sub-account for this Trust. Payment for the damages caused by the Fiduciaria’s conduct is also claimed, these being initially estimated at COP 1,000 but were subsequently increased to COP 1,080. These proceedings are pending the hearing of evidence. This contingency is reasonably possible.
 
5. Arbitration proceedings were filed by Metrovivienda claiming that the Fiduciaria had defaulted on the trust agreement signed by both parties, and as a result of this that the Fiduciaria should pay for damages caused by errors contained in the land tax returns on the property transferred to the Trust. The amount of damages being claimed comes to COP 282. These proceedings are pending a correction in the claim filed by the plaintiff. This contingency is reasonably possible.
 
6. Ordinary proceedings filed by Aseo Total E.S.P. claiming that the Fiduciaria failed to comply with its obligation to pay Aseo Total E.S.P. a sum of money that was assigned to this Company by Corpoaseo Total S.A. E.SP. corresponding to the recovery of the amounts due on the concession contract issued for cleaning services in Bogotá. These amounts were subject to a seizure of property on the part of Dian, the Colombian tax authorities. The amount being claimed is estimated at COP 1,307 plus the corresponding interest. These proceedings are pending notice of a conciliation hearing. This contingency is reasonably possible.

 
F-55

 
 
7. The Consorcio Municali consortium is currently defending two (2) direct redress actions, claiming the payment of obligations on the part of the trustee, which according to the plaintiffs were paid by the consortium to third parties, without due authorization. A ruling of the first instance against the plaintiff was given for one of these actions and the other is still being contested. This contingency is reasonably possible.
 
8. With regard to the consortium Consorcio Fidupensional Cundinamarca, it is currently defending a coercive collection process filed by the Colombian Social Security Institute (Instituto de Seguros Sociales) claiming the payment of default interest on social security payments to the Department of Cundinamarca. No ruling in the first instance has been given as yet.  This contingency is reasonably possible
 
TUYA S.A. (formerly Compañía Sufinanciamiento S.A.)
 
The Company is contesting certain legal proceedings claiming an estimated COP 3,557.  According to information provided by the Company’s external legal consuel in charge of the case, only four of these proceedings involve a probable loss for the Company, and therefore a provision has been set up for COP 78.
 
Also, the Company has not posted any contingencies for probable losses on proceedings filed by tax inspection authorities.
 
BANCO AGRICOLA S.A.
 
In its normal course of business, the Company and its subsidiaries are involved in lawsuits or legal proceedings that are filed by various interested parties. These actions are normally claims relating to commercial law or current tax regulations. In some cases, these actions are based on monetary claims for matters that are ascribed to the Company and its subsidiaries.
 
As of December 31, 2010 and 2009, Banagrícola has the following judicial or administrative litigations:
 
In 2007, a claim for damages was filed before the Fifth Commercial Court of San Salvador against the Bank for its alleged responsibility in handling executive commercial proceedings filed by the Bank against a client in 1989. The amount claimed totaled USD 220,000. The Bank filed an action for the enforcement of its rights before the Civil Division of the Supreme Court of Justice  requesting that the case be heard before a Civil Court Judge. On December 5, 2008, the Supreme Court of Justice ruled that there were grounds for the action for the enforcement of rights as requested by the Bank. On December 15, 2008, the Fifth Commercial Court of San Salvador ruled that there was a jurisdictional exception and it upheldthe right of the plaintiff to file his complaint before a court of competent jurisdiction. Formal notice of such was given to the Bank on January 6, 2009.
 
On December 8, 2009, notice was given to the Bank of a lawsuit filed against it before the Second Civil Court of San Salvador, which consisted of summary indemnity proceedings claiming damages, both material as well as pain and suffering for USD 284,470 and USD 5,000, respectively. This suit is similar to the above mentioned claim for damages filed against the Bank. On December 11, 2009, the Bank contested this suit refuting the claims therein contained. In compliance with that stipulated by the Superintendency of the Financial System, the Bank has duly disclosed these proceedings; however, according to the opinion given by the Bank’s legal counsel, dated February 8, 2010, the Bank has sufficient grounds on which to successfully defend itself against the corresponding claims, and the possibility of losing this case is considered remote.
 
In August 2009, the Bank desisted from continuing with two contentious administrative lawsuits against the DGII - Dirección General de Impuestos Internos (Internal Tax Administration Department) before the Supreme Court of Justice, based on the complementary determination regarding Transfer Tax on Real Estate and Services Provided (VAT), relating to the fiscal year of 2002, availing itself of the benefits accorded by Legislative Decree No. 652, accepting the corresponding liability with the DGII.  The effect on expense for 2009 came to COP 2,131.

 
F-56

 
 
FACTORING  BANCOLOMBIA S.A.
 
Factoring Bancolombia S.A. is currently a party in the following proceedings:
 
Two official summonses issued by Colombia's Central Bank to all financial institutions, in response to  the claims received from a group of debtors holding obligations based on the UPAC system. Since Factoring Bancolombia is not in the mortgage loan business, we do not expect these claims to succeed.
 
VALORES BANCOLOMBIA  S.A.
 
At December 31, 2010, the Company was defending an ordinary contractual civil liability action for which approximately COP 500 was being claimed. According to information provided by the Company’s external legal counsel in charge of the case the probability of loss is remote. Since the corresponding contingency is also rated as being remote none of these proceedings have been provisioned.
 
LEASING BANCOLOMBIA S.A.
 
 Contingencies on claims filed against the Company amounted to COP 1,000 at December 31, 2010, which are broken down as follows:
 
Name of the process
 
Initial Amount
   
Current amount
   
Contingency
Rating
                     
Chevor S.A.
  COP 11,750     COP 11,750    
Remote
Casa Inglesa Ltda y Rolant Hughes Williams
    3,000       3,000    
Remote
Carlos Andres Peña*
    2,520       2,520    
Remote
Aura Liliana Rodriguez*
    1,301       1,545    
Remote
Jose Maria Arcila*
    1,229       1,229    
Remote
Jose Manuel Sanabria*
    1,052       1,234    
Remote
Transportes Cetta
    1,789       1,418    
Eventual
Aura Rosinda Ospina Avendaño*
    4,845       5,021    
Remote
Chevor S.A. (annulment)
    1,500       1,500    
Remote
Martha Edilma Ballesteros*
    1,034       1,034    
Remote
Patricia Yolanda Ceballos*
  COP 1,034     COP 1,034    
Remote
 
The proceedings marked with an asterisk (*) are civil liability claims on traffic accidents for which, according to the experience and supporting evidence in the relevant case law on the part of our defense attorneys, the possibility of a ruling being given against us is remote and therefore the risk is low. The amount claimed in these proceedings could be high, based on the moral damages normally awarded to this type of accident in the case of deaths or the amount of victims.
 
Proceedings are given a “possible" rating when although evidence for the defense may be good, the actual status or the normal variables pertaining to such processes are legally considered as warranting special care, and thus entail a certain possible risk.
 
Currently the actions filed by Chevor S.A. are still being concluded based on a settlement between some of the parties involved in the process and therefore they have been rated as remote. For the Company no payment whatsoever is due on the settlement or conciliation of both cases.

 
F-57

 
 
Only two processes have been provisioned, one of which can be recovered through the leasing contract since this is an executory collection action involving a condominium, and the other is an ordinary process filed against the Company for damages sustained on the basis of a procedure filed before the Ministry of Transport.  Both actions have been provisioned in the amount of COP 197.
 
A provision of COP 200 has been set up for the Company’s labor lawsuits.
 
(27) Administrative and Other Expenses
 
Administrative and other expenses consisted of the following:
  
     Year ended December 31  
   
2010
   
2009
   
2008
 
                   
Industry and trade, property, vehicle and other taxes
  COP 213,668     COP 215,633     COP 193,628  
Professional fees
    199,246       201,676       155,000  
Maintenance and repairs
    157,365       156,928       147,441  
Communication, postage and freight
    140,593       123,620       104,902  
Rental expenses
    93,053       79,944       61,026  
Advertising
    89,334       81,775       88,003  
Public services
    75,327       81,903       70,680  
Temporary services
    74,623       44,582       40,192  
Joint venture SUFI- Almacenes Exito S.A. Expenses
    59,798       38,073       31,481  
Security  services
    41,635       38,398       31,752  
Software
    33,375       16,361       8,804  
Contributions and membership fees
    29,284       31,814       32,989  
Stationery and supplies
    26,590       25,682       34,914  
Insurance
    26,116       23,241       29,054  
Travel expenses
    24,065       21,927       22,124  
Operational expenses related to join ventures
    19,298       16,904       12,115  
Information processes outsourcing
    17,754       54,457       46,746  
Operational Risk
    16,356       9,933       5,360  
Amortization of deferred charges
    15,917       36,761       73,541  
Donations
    13,008       3,506       26,653  
Call center services
    4,100       35,710       32,321  
Public relationship
    2,531       2,438       2,455  
Electronic processing data
    340       5,825       4,663  
Other
    81,649       71,054       13,138  
Total
  COP 1,455,025     COP 1,418,145     COP 1,268,982  
______________
 
 (28)Non-Operating Income (Expenses)
 
The following table summarizes the components of the Bank’s non-operating income and expenses:
 
   
Year ended December 31,
 
   
2010
   
2009
   
2008
 
       
Non-operating income (expenses):
                 
Other income(1)
  COP 267,472     COP 198,761     COP 172,550  
 Non – controlling  interest
    (13,217 )     (15,081 )     (18,511 )
Other expenses(2)
    (168,179 )     (105,529 )     (140,662 )
Total non-operating income (expenses), net
  COP 86,076     COP     78,151     COP 13,377  
___________________
 
(1)
Includes gains on sale of foreclosed assets, property, plant and equipment and other assets, securization residual benefit, insurance contracts sale and rent.
(2)      Include operational losses and losses from the sale of foreclosed assets, property, plant and equipment and payments for fines, sanctions, lawsuits and indemnities.
 
 
F-58

 
 
(29) Related Party Transactions
 
Significant balances and transactions with related parties were as follows:

2010
 
   
Shareholders with
participating stock
equal to or higher than
10% of Bank’s capital
   
Non-consolidated
investments
   
Bank’s officers and board of
directors
   
Shareholders with
participating stock lower
than 10% of the Bank’s
capital and with operations
higher than 5% technical
equity
 
                         
Balance Sheet
                       
Investment securities
  COP -     COP 347,213     COP -     COP 2,040  
Loans
    36       122,038       41,497       334,461  
Customer’s acceptances and  derivatives
    -       -       -       26,121  
Accounts receivable
    -       10,321       286       1,176  
Total
    36       479,572       41,783       363,798  
                                 
Deposits
    20,430       149,634       4,498       976,570  
Overnight funds
    3,127,961       60,164       5,574       121,868  
Derivatives
    -       -       6       1,676  
Accounts payable
    13       19       499       -  
Bonds
    -       1,000       500       257,667  
Total
    3,148,404       210,817       11,077       1,357,781  
                                 
Transactions
                               
Income
                               
Dividends received
    -       16,758       -       -  
Interest and fees
    12       4,267       3,560       8,888  
Other
    -       1,935       244       574  
Total
    12       22,960       3,804       9,462  
                                 
Expenses
                               
Interest
    447       2,825       39       20,850  
Fees
    -       2       1,240       17  
Other
    5       21,736       595       3,870  
Total
  COP 452     COP 24,563     COP 1,874     COP 24,737  
 
 
F-59

 
 
2009
 
   
Stockholders with
participating stock
equal to or higher than
10% of Bank’s capital
   
Non-consolidated
investments
   
Bank’s officers and
board of directors
   
Stockholders with
participating stock
lower than 10% of the
Bank’s capital and
with operations higher
than 5% technical
equity
 
                         
Balance Sheet
                       
Investment securities
  COP -     COP 285,338     COP -     COP -  
Loans
    -       49,108       37,900       -  
Customer’s acceptances and derivatives
    -       -       52       3,725  
Accounts receivable
    9       2,752       449       -  
Total
    9       337,198       38,401       3,725  
                                 
Deposits
    4,539       108,469       10,772       1,433,865  
Accounts payable
    67       25,269       1,196       -  
Bonds
    1,947       1,000       500       177,667  
Total
    6,553       134,738       12,468       1,611,532  
                                 
Transactions
                               
Income
                               
Dividends received
    -       21,521       -       -  
Interest and fees
    1,119       13,806       4,899       4,285  
Other
    -       431       261       -  
Total
    1,119       35,758       5,160       4,285  
                                 
Expenses
                               
Interest
    313       4,669       214       59,321  
Fees
    -       1,100       1,039       2  
Other
    1,711       15,027       1,005       -  
Total
  COP 2,024     COP 20,796     COP 2,258     COP 59,323  

2008
 
   
Stockholders with
participating stock equal to
or higher than 10% of
Bank’s capital
   
Non-consolidated
investments
   
Bank’s officers and board of
directors
   
Stockholders with
participating stock lower
than 10% of the Bank’s
capital and with operations
higher than 5% technical
equity
 
                         
Balance Sheet
                       
Investment securities
  COP -     COP 54,331     COP -     COP -  
Loans
    15       21,979       8,020       296,715  
Customer’s acceptances and derivatives
    9,496       -       -       -  
Accounts receivable
    8       1,377       136       6,968  
Total
    9,519       77,687       8,156       303,683  
                                 
Deposits
    31,766       110,715       4,176       1,213,832  
Bonds
    1,947       -       -       94,667  
Total
    33,713       110,715       4,176       1,308,499  
                                 
Transactions
                               
Income
                               
Dividends received
    -       9,737       -       -  
Interest and fees
    9,532       4,004       3,420       26,240  
Total
    9,532       13,741       3,420       26,240  
                                 
Expenses
                               
Interest
    455       42,114       2,923       98,727  
Fees
    -       2       892       3  
Total
  COP 455     COP 42,116     COP 3,815     COP 98,730  

 
F-60

 
 
(30) Subsequent Events
 
On January 6, 2011, the Bank priced USD 520,000 in aggregate principal amount of its Senior Notes due 2016. The Senior Notes have a 5-year maturity and a coupon of 4.25%, payable semi-annually on January 12 and July 12 of each year, beginning on July 12, 2011. The transaction was closed on January 12, 2011, subject to customary closing conditions.

The offering was  made within the United States only to "qualified institutional buyers" pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and outside the United States to persons that are not "U.S. persons" as such term is defined in Rule 902(k) of Regulation S under the Securities Act.

On January 24, 2011, the Colombian Superintendency of Finance authorized Mr. Carlos Raúl Yepes Jiménez to take up posesion as President of Bancolombia S.A. Mr. Yepes will join Bancolombia S.A. as President on February 1, 2011. Mr. Yepes’ resignation as a member of the Board of Directors and the Risk Committee of Bancolombia S.A. became effective on January 31, 2011.
 
On January 28, 2011, Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A., subsidiaries of Bancolombia S.A., and Protección S.A. Sociedad Administradora de Fondos de Pensiones y Cesantias (“Protección S.A.”), signed a contract where Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. sell to Protección S.A. its shares equivalent to 99.99% of the capital stock of AFP Crecer, organization administrator of pensions funds in the Republic of El Salvador. Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. will receive a total of USD 103,000 as payment for the shares.

On February 5, 2011, Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A., subsidiaries of Bancolombia S.A., and Suramericana S.A., signed an agreement pursuant to which Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. agreed to sell to Suramericana 97.03% of its shares of capital stock of Asesuisa, an insurance company in the Republic of El Salvador. Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. will receive a total of USD 98,000 as payment for the shares.

The sales are subject to the fulfillment of certain conditions precedent, including the authorizations required from the Superintendency of the Financial System of El Salvador and the Colombian Superintendency of Finance.

On March 16, 2011, Standard & Poor's Ratings Services raised the long-term and short-term foreign-currency sovereign credit ratings on the Republic of Colombia to 'BBB-' and 'A-3', respectively, from 'BB+' and 'B'. Standard & Poor's also affirmed the 'BBB+' long-term and 'A-2' short-term local-currency ratings on the Republic of Colombia.

 
F-61

 
 
(31) Differences between Colombian Accounting Principles for Banks and U.S. GAAP
 
The Bank’s financial statements are prepared in accordance with generally accepted accounting principles and practices prescribed by the Superintendency of Finance and other legal provisions (“Colombian GAAP”). These principles and regulations differ in certain significant respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”), the principal differences between Colombian GAAP and U.S. GAAP and the effect on consolidated net income and consolidated stockholders’ equity are presented below, with an explanation of the adjustment.

The following is a summary of the adjustments to consolidated net income and consolidated stockholders’ equity.
 
 
a)
Reconciliation of consolidated net income:
   
2010
   
2009
   
2008
 
                   
Consolidated net income under Colombian GAAP
  COP 1,436,494     COP 1,256,850     COP 1,290,643  
a) Deferred income taxes
    65,370       59,131       83,358  
b) Employee benefit plans
    (8,859 )     28,443       (18,463 )
c) Fixed Assets
    (48,466 )     (21,361 )     14,496  
e) Allowance for loans losses, financial lease losses, foreclosed assets and other receivables
    (17,351 )     (364,860 )     (338,799 )
f) Loan origination fees and costs
    7,006       10,293       (26,942 )
g) Interest recognition on non-accrual loans
    (5,310 )     (4,939 )     (78 )
h) Deferred charges
    35,011       54,796       24,455  
i) Investment securities & derivatives
    (43,438 )     22,438       (141,392 )
j) Dividends received from investments in unaffiliated companies
    (2,644 )     (740 )     (359 )
k) Investments in affiliates
    5,704       35,851       33,815  
l) Lessor accounting
    17,221       43,812       (1,294 )
m) Business combinations
                       
  m.ii) Goodwill
    61,440       59,583       55,603  
  m.iii) Intangible assets
    (58,559 )     (67,451 )     (106,133 )
  m.iv) Fair value adjustments to assets and liabilities acquired
    34,810       25,214       18,254  
n) Securitization
    34,013       23,682       (3,417 )
o) Foreign currency translation adjustment
    1,579       13,022       (30,370 )
p) Non-controlling interest
    (1,292 )     (1,946 )     (1,638 )
r) Guarantees
    (7,230 )     (2,617 )     (4,672 )
s) Insurance Contracts
    (2,903 )     5,497       505  
v) Equity tax
    (2,114 )     (2,174 )     2,348  
w) Contingencies
    44,279       -       -  
Net income attributable to the controlling interest under U.S. GAAP
    1,544,761       1,172,524       849,920  
(p) Non-controlling Interest under U.S.GAAP
    26,041       (19,043 )     26,093  
Total net income under U.S.GAAP
  COP 1,570,802     COP 1,153,481     COP 876,013  
                         
Net income from continuing operations
  COP 1,480,778     COP 1,124,433     COP 748,803  
Income  from operations and disposal of discontinued Operations
  COP 63,983     COP 48,091     COP 101,117  

 
F-62

 
 
 
b) 
Reconciliation of Stockholders’ Equity:
   
2010
   
2009
 
             
Consolidated stockholders’ equity under Colombian GAAP
  COP 7,947,140     COP 7,032,829  
a) Deferred income taxes
    47,166       (16,538 )
b) Employee benefit plans
    (6,203 )     (9,068 )
c) Fixed assets
    301,598       276,368  
d) Revaluation of assets
    (567,024 )     (527,174 )
e) Allowance for loans losses, financial lease losses, foreclosed assets and other receivables
    (159,109 )     (139,872 )
f) Loan origination fees and costs
    68,129       61,123  
g) Interest recognition on non-accrual loans
    4,890       10,200  
h) Deferred charges
    63,117       28,106  
i) Investment securities & derivatives
    (313,405 )     (214,822 )
j) Dividends received from Investments in unaffiliated companies
    (18,009 )     (15,365 )
k) Investments in affiliates
    124,325       120,162  
l) Lessor accounting
    (11,098 )     1,944  
m) Business combinations
               
  m.ii)  Goodwill
    395,612       327,809  
  m.iii) Intangible assets
    293,126       369,234  
  m.iv) Fair value adjustments to assets and liabilities acquired
    (47,452 )     (79,109 )
n) Securitization
    69,473       25,223  
p) Non-controlling interest
    (146,441 )     (145,149 )
r) Guarantees
    (20,639 )     (13,409 )
s) Insurance contracts
    (129 )     2,774  
w) Contingencies
    44,279       -  
Controlling interest stockholders’ equity under U.S GAAP
    8,069,346       7,095,266  
p) Non-controlling Interest under U.S.GAAP
    160,526       181,778  
Total stockholders’ equity under U.S.GAAP
  COP 8,229,872     COP 7,277,044  
 
 
c)
Supplemental Consolidated Statements of Cash Flows, Stockholders’ Equity and Comprehensive Income:

The following are the consolidated statements of cash flows, stockholders’ equity and other comprehensive income under U.S.GAAP for years ended December, 31, 2010, 2009 and 2008.

Supplemental Consolidated Condensed Statements of Cash Flows (1)
 
   
2010
   
2009(2)
   
2008
 
                   
Net income attributable to the controlling interest under U.S.GAAP
  COP 1,544,761     COP 1,172,524     COP 849,920  
Adjustments to reconcile net income to net cash provided by operating activities
    2,179,343       2,804,863       599,509  
Net cash provided by operating activities
    3,724,104       3,977,387       1,449,429  
Net cash used in investing activities
    (10,779,060 )     (1,977,879 )     (9,131,438 )
Net cash provided by (used in) by financing activities
    5,893,672       (116,794 )     7,977,416  
(Decrease) Increase in cash and cash equivalents
    (1,161,284 )     1,882,714       295,407  
Effect of exchange rate changes on cash and cash equivalents
    (105,434 )     (122,502 )     60,708  
Cash and cash equivalents at beginning of year
    7,401,416       5,641,204       5,285,089  
Cash and cash equivalents at end of year (3)
  COP 6,134,698     COP 7,401,416     COP 5,641,204  
 

(1)
These consolidated statements of cash flows include the following non-cash transactions for the years 2010, 2009 and 2008 respectively: COP 152,154 COP 104,360 and COP 4,050 related to restructured loans that were transferred to foreclosed assets and the effect of foreign exchange rates on cash balances held in foreign currency for COP 60,500, COP 208,241 and COP 88,783.
(2)
During 2009, the Bank has recorded the Net Present Value of the estimated residual income generated by the pools of securitized mortgages that are not subject to consolidation amounting to COP 3,371, which is considered a non-cash transaction.
(3)
The assets of SPEs subject to consolidation under U.S. GAAP, include cash for an amount of COP 78,102, COP 29,057 and COP 21,629 for 2010, 2009 and 2008 respectively.

 
F-63

 

Supplemental Consolidated Condensed Changes in Stockholders’ Equity
 
   
2010
   
2009
   
2008(1)
 
                   
Controlling Interest
                 
Balance at beginning of year
  COP 7,095,266     COP 6,422,815     COP 5,937,554  
Net income
    1,544,761       1,172,524       849,920  
Dividends declared
    (501,688 )     (491,604 )     (447,486 )
Other comprehensive (loss) income
    (62,954 )     (1,064 )     88,609  
Other movements
    (6,039 )     (7,405 )     (5,782 )
Balance at the ended of year
  COP 8,069,346     COP 7,095,266     COP 6,422,815  
Noncontrolling Interest
                       
Balance at beginning of year
    181,778        147,762        63,061   
Net income  in noncontrolling interest
    26,041       (19,043 )     26,093  
Net change in noncontrolling interest
    (47,293 )     53,059       58,608  
Balance at end of  year
    160,526       181,778       147,762  
Total stockholders’ equity under U.S GAAP
  COP 8,229,872     COP 7,277,044     COP 6,570,577  
 

(1) 
Revised due to the adoption of ASC 810-10-65 see section  p) Noncontrolling interest

Supplemental Consolidated Statement of Comprehensive Income

   
2010
   
2009
   
2008(1)
 
                   
Net income attributable to the controlling interest under U.S. GAAP
  COP 1,544,761     COP 1,172,524     COP 849,920  
Other comprehensive income, net of tax:
                       
Unrealized gain or (loss) on securities available for sale
    (10,470 )     95,257       23,281  
Pension liability
    7,855       (9,997 )     (5,314 )
Foreign currency translation adjustments
    (60,339 )     (86,324 )     70,642  
Other comprehensive income (loss)
    (62,954 )     (1,064 )     88,609  
Comprehensive income attributable to the controlling interest under U.S. GAAP
    1,481,807       1,171,460       938,529  
Comprehensive  income attributable to the noncontrolling interest under U.S. GAAP
    26,041       (19,043 )     26,093  
Comprehensive income
  COP 1,507,848     COP 1,152,417     COP 964,622  
 

(1) 
Revised due to the adoption of ASC 810-10-65 see section  p) Noncontrolling interest

Total other comprehensive income (loss)
2010
 
                   
   
Before-Tax
   
(Tax Expense)
   
Net-of-tax
 
   
Amount
   
or Benefit
   
Amount
 
Unrealized gain (loss) on securities available for sale
  COP (7,276   COP (3,194   COP (10,470
Additional pension liability
    11,724       (3,869 )     7,855  
Foreign currency translation adjustment
    (60,339 )     -       (60,339 )
Other comprehensive income (loss)
  COP (55,891 )   COP (7,063 )   COP (62,954 )

 
F-64

 


2009
 
                   
   
Before-Tax
   
(Tax Expense)
   
Net-of-tax
 
   
Amount
   
or Benefit
   
Amount
 
                   
Unrealized gain  (loss) on securities available for sale
  COP 134,173     COP (38,916   COP 95,257  
Additional pension liability
    (15,380 )     5,383       (9,997 )
Foreign currency translation adjustment
    (86,324 )     -       (86,324 )
Other comprehensive income (loss)
  COP 32,469     COP (33,533 )   COP (1,064 )

2008
 
                   
   
Before-Tax
   
(Tax Expense)
   
Net-of-tax
 
   
Amount
   
or Benefit
   
Amount
 
                   
Unrealized gain or (loss) on securities available for sale
  COP 39,570     COP (16,289 )   COP 23,281  
Additional pension liability
    (8,175 )     2,861       (5,314 )
Foreign currency translation adjustment
    70,642       -       70,642  
Other comprehensive income (loss)
  COP 102,037     COP (13,428 )   COP 88,609  

Total accumulated other comprehensive income

   
Unrealized
         
Foreign
   
Accumulated
 
   
Gains(Losses)
         
Currency
   
Other
 
   
on
   
Pension
   
Traslation
   
Comprehensive
 
   
Securities,net of taxes
   
Liability, net of taxes
   
Adjustment
   
Income
 
                                 
Beginning balance 2010
  COP 6,146     COP (17,396 )   COP (102,667 )   COP (113,917 )
Current-period change
    (10,470 )     7,855       (60,339 )     (62,954 )
                                 
Ending balance 2010
  COP (4,324 )   COP (9,541 )   COP (163,006 )   COP (176,871 )
                                 
Beginning balance 2009
  COP (89,111 )   COP (7,399 )   COP (16,343 )   COP (112,853 )
Current-period change
    95,257       (9,997 )     (86,324 )     (1,064 )
                                 
Ending balance 2009
  COP 6,146     COP (17,396 )   COP (102,667 )   COP (113,917 )
                                 
Beginning balance 2008
  COP (113,165 )   COP (1,503 )   COP (86,985 )   COP (201,653 )
Current-period change
    23,281       (5,314 )     70,642       88,609  
Prior years Adjustments
    773       (582 )     -       191  
                                 
Ending balance 2008
  COP (89,111 )   COP (7,399 )   COP (16,343 )   COP (112,853 )
 
 
F-65

 
 
Summary of significant differences and required U.S. GAAP disclosures

 
a) 
Deferred income taxes:

Under Colombian GAAP, deferred income taxes are generally recognized due to timing differences for commercial and manufacturing subsidiaries.  For financial institutions, the Superintendency of Finance has restricted the inclusion of deferred income tax assets; accordingly the Bank has recorded no such assets.

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. During 2010, 2009 and 2008, the Bank calculated deferred income taxes based on the tax benefits received upon the acquisition of certain property and equipment in accordancewith US GAAP.

Income tax expense under U.S. GAAP is comprised of the following components for the years ended at December 31, 2010, 2009 and 2008:

   
2010
   
2009
   
2008
 
                         
Current income tax expense
  COP 497,231     COP 459,732     COP 416,381  
Deferred income tax (benefit) expense(1)
    (70,943 )     (56,850 )     (25,683 )
Total
  COP 426,288     COP 402,882     COP 390,698  

 
(1)
In 2010, 2009 and 2008 the foreign currency adjustment of the foreign subsidiaries’ deferred tax assests and liabilities amounted to COP 5,397, COP 9,761 and COP (12,951) respectively.

   
2010
   
2009
   
2008
 
                         
Continuing operation income tax
  COP 410,821     COP 391,848     COP 360,842  
Discontinued operation income tax(1)
    15,467       11,034       29,856  
Income tax
  COP 426,288     COP 402,882     COP 390,698  

 
(1)
It includes income taxes related to discontinued operations of Asesuisa, AFP Crecer, IVL and Multienlace for the years 2010, 2009, 2008, as indicated in Note 31 q) Discountinued Operations.

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, 2010 and 2009 were as follows:
   
2010
   
2009
 
Deferred tax assets and liabilities
           
             
Deferred tax assets:
           
Accrual of employee benefits
  COP 40,458     COP 21,394  
Allowance for loan losses
    154,265       155,504  
Allowance for foreclosed assets
    13,616       10,323  
Fixed assets
    132,085       134,523  
Loss carryforwards and excess of presumed income over ordinary income
    59,532       52,253  
Unrealized loss on forwards, futures and swaps
    1,379       3,359  
Accrued expenses
    15,445       20,110  
Unrealized loss on investments over trading securities
    -       3,718  
Business combination
    -       1,304  
Unrealized loss on investment over available for sale securities
    16,000       20,396  
Other
    29,941       30,140  
Total gross deferred tax assets
    462,721       453,024  
Less valuation allowance
    (18,713 )     (75,642 )
Net deferred tax asset
  COP 444,008     COP 377,382  
 
 
F-66

 

   
2010
   
2009
 
             
Deferred tax liabilities:
           
Unrealized gain on investment over available for sale securities
    12,809       14,007  
Fixed assets
    196,109       178,092  
Allowance for loan losses
    37,843       41,958  
Allowance for foreclosed assets
    4,755       16,575  
Loan origination fees and costs
    24,334       23,738  
Unrealized gains on forwards, futures and swaps
    38,553       57,612  
Intangible assets
    76,660       97,794  
Inflation adjustments
    11,732       12,459  
Business Combination
    20,507       14,834  
Unrealized gains on investments over trading securities
    27,460       21,126  
Accrued expenses
    54       38  
Securitization
    27,901       8,828  
Other
    26,198       20,501  
Total deferred liabilities
    504,915       507,562  
Net deferred liability
  COP (60,907 )   COP (130,180 )

The valuation allowance for deferred tax assets as of December 31, 2010 and 2009 was COP 18,713 and COP 75,642, respectively. The net change in the total valuation allowance for the year ended December 31, 2010 was a decrease of COP 56,930 and for the year ended December 31, 2009 was an increase of COP 12,529.  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 over an entity level basis 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 Bank will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2010. 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 income tax nominal tax rate was 35% for the years 2010, 2009 and 2008. This tax rate differs from the 21.45%, 25.57% and 31.49% effective tax rates for years 2010, 2009 and 2008, respectively, due to the following:
   
2010
   
2009
   
2008
 
                   
Income before tax U.S. GAAP(1)
  COP 1,961,767     COP 1,594,450     COP 1,214,526  
Noncontrolling interest
    26,041       (19,043 )     26,093  
Income before tax U.S. GAAP attributable to the controlling interest
    1,987,808       1,575,407       1,240,619  
Income tax as per statutory rate
    695,733       551,392       434,217  
Foreign profits taxed at other rates
    (31,864 )     6,223       (13,492 )
Foreign profits exempt from tax
    (32,203 )     (22,739 )     (45,544 )
Non-deductible items
    76,598       42,350       59,596  
Non-taxable income
    (182,996 )     (130,473 )     (114,236 )
Other
    (42,050 )     (56,400 )     16,535  
Decrease (increase) in deferred tax valuation allowance
    (56,930 )     12,529       53,622  
Income tax
  COP 426,288     COP 402,882     COP 390,698  

(1) For continuing and discontinued operations.

For years ended December 31, 2010, 2009 and 2008, non-taxable income mainly includes dividends received from the affiliated companies, gains on sale of tax exempt equity securities and tax exempt interest income on mortgage securities and certain interest residential mortgage loans.

 
F-67

 

At December 31, 2010, the Bank had undistributed earnings of international subsidiaries amounting to COP 563,158 on which deferred income taxes have not been provided because earnings are expected to be reinvested indefinitely outside of Colombia. Upon distribution of those earnings in the form of dividends otherwise the Bank in Colombia would be subject to income tax.

Uncertainty in income taxes under ASC 740-10

The Bank followed the provisions contained in ASC 740-10 with regard to uncertainty in income taxes.
 
The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
 
The Bank records interest and penalties, when necessary, related to the probable losses in other expenses in the statements of operations as of December 31, 2010, 2009 and 2008.
 
The Bank is not aware of positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will be significantly increased or decreased within 12 months of the reporting date.

The open tax years of the major companies of the Bancolombia Group are as follows:

Company
 
Open tax year
 
       
LOCAL SUBSIDIARIES
     
       
Bancolombia
 
2005 , 2008 and 2010
 
Leasing Bancolombia
    2008 - 2010  
Factoring Bancolombia
    2007 - 2010  
Fiduciaria Bancolombia
    2010  
Banca de Inversión
 
2008 and 2010
 
Valores Bancolombia
    2008 - 2010  
Tuya (antes Sufinanciamiento)
    2008 - 2010  
Renting Colombia
    2008 - 2010  
         
FOREIGN SUBSIDIARIES
       
Banco Agrícola
    2007 - 2010  

 
b) 
Employee benefit plans:

U.S. GAAP requires the recognition of pension costs based on actuarial computations under a prescribed methodology which differs from that used under Colombian GAAP as indicated below:

Pension Plan

Under Colombian laws in 1967 the Goverment 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, continued participating in the Bank’s non-contributory unfunded defined benefit pension plan. Under this unfunded plan, benefits are based on length of service and level of compensation.  As of December 31, 2010, there were 872 participants (894 in 2009) covered by the Plan.

 
F-68

 

The measurement for this pension plan obligations differs from Colombian GAAP to U.S. GAAP basically due to the fact that Colombian GAAP requires calculation of the projected benefit obligation using nominal average historical discount rates and the liability was amortized against expenses on a straight line basis, over defined periods stablished by the local rules. After 2010, new increases in the liability related to changes in mortality tables, will be amortized until the year 2029.

For U.S. GAAP purposes, actuarial valuations of pension plans are performed annually using discount rates based on a review of high quality corporate bonds yields with maturities approximating the remaining life of the projected benefit obligation. Changes in the projected benefit obligation due to gains or losses for changes in actuarial assumptions and prior services costs are recorded against Accumulated Other Comprehensive Income and amortized to expenses on a straight line basis over the future services periods of the employees or for inactive participants in the plan over their remaining life expectancy. Amortization of accumulated gain or losses, only begin when they exceed 10% of the projected benefit obligations.

Net period pension costs taken to expenses include the service cost attributed by the plans benefit formula, interest cost and amortization of prior services cost and actuarial gains or losses on the plan as explain above.

Severance obligation

Under Colombian labor regulations, employees hired before 1990 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, calculated on the last salary base; however, employees may request advances against this benefit at any time. In 1990, the Colombian government revised its labor regulations for new employees to permit companies, subject to the approval of the employees, transfer this obligation annually to private pension funds.  The Bank severance obligation relate to employees hired before 1990.

Under Colombian GAAP the liability for this unfunded employee benefit plan is recorded on an accrual basis. For US GAAP purposes the liability is calculated and recorded on an actuarial basis described previously by pension plan in accordance with ASC 715.

As of December 31, 2010, there were 1,369 participants (1,483 in 2009) remaining in the original severance plan.

Retirement Premium Pension Plan

Under Colombian labor regulations, employers and employees are entitled to negotiate compensations other than benefit plans stated by the law by means of private agreements. As result of an agreement signed by the Bank with its employees who are entitled to enjoy their pension assumed by the pension funds, the Bank recognizes to their employees a premium for once at the moment of the employee retirement date.   During 2008 under Colombian GAAP this liability was accumulated on accrual basis; however, in 2010 the obligation was calculated in the same way than US GAAP and the difference was eliminated.
 
 
F-69

 
 
 
Disclosure and calculation of differences under U.S. GAAP

   
2010
   
2009
   
2008
 
                   
Components of net periodic benefit cost
                 
Service cost
  COP 9,190     COP 4,807     COP 5,039  
Interest cost
    23,234       21,841       21,831  
Amortization of prior service cost
    1,217       1,217       1,217  
Amortization of net transition obligation
    304       303       789  
Amortization of net (gain) or loss
    (477 )     (2,587 )     (3,412 )
Recognition of premiun pension(1)
    -       -       23,534  
Adjustment to be recognized
                       
Net periodic pension cost under U.S. GAAP
    33,468       25,581       48,998  
Net periodic pension cost under Colombian GAAP
    24,609       54,024       30,535  
Difference to be recognized under U.S. GAAP (loss)/ gain
  COP (8,859 )   COP 28,443     COP (18,463 )


 
(1)
As of December 31, 2008, the Bank recognized accumulated reserves of prior years for the premium pension plan using the actuarial methodology required by ASC 715.

The combined costs for the above mentioned benefit plans, determined using U.S. GAAP, for the years ended December 31, 2010, 2009 and 2008, are summarized below:

   
2010
   
2009
   
2008
 
                   
Change in project benefit obligation
                 
Unfunded benefit obligation at beginning of year
  COP 169,391     COP 154,058     COP 119,831  
Recognition of premium pension(1)
    -       -       25,399  
Service cost
    9,190       4,807       5,039  
Interest cost
    23,234       21,841       21,831  
Actuarial (gain)/loss
    (10,680 )     14,313       5,593  
Benefits paid
    (21,779 )     (25,628 )     (23,635 )
Unfunded benefit obligation at end of year
  COP 169,356     COP 169,391     COP 154,058  
                         
Accrued benefit cost under Colombian GAAP
    (163,153 )     (160,323 )     (131,927 )
                         
Difference to be recognized under U.S. GAAP Stockholders’ equity
  COP (6,203 )   COP (9,068 )   COP (22,131 )


 
(1)
As of December 31, 2008, the Bank recognized accumulated reserves of prior years for the premium pension plan using the actuarial methodology required by ASC 715.
 
   
2010
   
2009
 
             
Net Amount Recognized in the Consolidated Balance Sheet at December 31.
           
Statement of Financial Position
           
Noncurrent Assets
  COP (482 )   COP -  
Current Liabilities
    16,415       15,368  
Noncurrent Liabilities
    153,423       154,023  
Amount Recognized in Financial Position
  COP 169,356     COP 169,391  
                 
Accumulated Other Comprehensive Income
               
Net Actuarial Gain (Loss)
  COP (4,235 )   COP (14,440 )
Net Prior Service (Cost)/Credit
    (9,684 )     (10,901 )
Net Transition Obligation
    (807 )     (1,109 )
Total at December 31
    ( 14,726 )     (26,450 )
Deferred income tax
    5,185       9,054  
Accumulated other comprehensive Income /(loss)
  COP (9,541 )   COP (17,396 )
 
 
F-70

 

The change of the Accumulated Other Comprehensive Income that took place during the years 2010 and 2009, are described as follows:
   
2010
   
2009
 
             
Increase or (decrease) in
           
Accumulated Other Comprehensive Income
           
             
Recognized during year - Transition Obligation/(Asset)
  COP 304     COP 303  
Recognized during year - Prior Service Cost/(Credit)
    1,217       1,217  
Recognized during year - Net Actuarial Losses/(Gains)
    (477 )     (2,587 )
Occurring during year - Net Actuarial (Losses)/Gains
    10,680       (14,313 )
Accumulated other comprehensive Income /(loss) in current year
  COP 11,724     COP (15,380 )

The Bank expects the following amounts in other comprehensive income to be recognized as components of net periodic pension cost during 2011:

Net transition obligation/(asset)
  COP 304  
Net prior service cost
    1,217  
Net loss/(gain)
    (1,593 )
Total
  COP (72 )

The economic assumptions used in determining the actuarial present value of pension obligation and the projected pension obligations for the plan years, in nominal terms, were as follows:

   
2010
   
2009
   
2008
 
                   
Discount rate
    7.90 %     8.75 %     9.75 %
Rate of compensation increases
    5.50 %     6.00 %     7.00 %
Rate of pension increases
    4.00 %     4.50 %     5.50 %
 
Estimated Future Benefit Payments

The benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:

   
Pension Benefits
   
Other Benefits(1)
 
             
2011
  COP 13,058     COP 20,108  
2012
    12,322       12,823  
2013
    12,118       15,559  
2014
    12,300       8,909  
2015
    12,450       2,875  
Years 2016-2020
  COP 63,022     COP 101,847  

 
(1)
Includes expected future benefit payments for severance obligation and retirement premium pension plan..

 
F-71

 

 
c) 
Fixed assets:
 
The following table shows the adjustments for each item:

    Net Income  
   
2010
   
2009
   
2008
 
Items
                 
Inflation adjustment
  COP (45 )   COP (1,026 )   COP (1,914 )
Capitalization of Interest Cost
    5       (641 )     15,862  
Expense depreciation of the Fund  “See note 31 (i)”
    (40,123 )     (19,622 )     -  
Assets held for sale
    (879 )     (72 )     548  
Impairment of  long lived assets
    (7,424 )     -       -  
Total
  COP (48,466 )   COP (21,361 )   COP 14,496  
 
   
Stockholders’equity
 
   
2010
   
2009
 
Items
           
Inflation adjustment
  COP 35,553     COP 35,598  
Capitalization of Interest Cost
    15,226       15,221  
Recognition of premises and equipment of the Fund  (“See note 31 (i)”)
    258,646       225,073  
Assets held for sale
    (403 )     476  
 Impairment of long lived assets
    (7,424 )     -  
Total
  COP 301,598     COP 276,368  

Inflation adjustment

The consolidated financial statements under Colombian GAAP were adjusted for inflation based on the variation in the local index consumer price (IPC), from January 1, 1992, to December 31, 2000.

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.

Capitalization of Interest Cost

Under Colombian GAAP, the interest costs were recorded as expenses in the Bank‘s statement of operations. Under U.S. GAAP, in accordance to ASC 835-20, the Bank has capitalized interest costs incurred during the construction of fixed assets. The capitalized interest is amortized over the estimated useful life of the asset.

Impairment of long lived assets
 
In the case of all vehicles of Renting Colombia, recorded as equipment under operating lease, under Colombian GAAP, if the net of comparing their book values with their fair value, is positive, this amount is recorded in the balance sheet.

Under U.S. GAAP, in accordance to ASC 360-10-35, these assets are subject to recognition of an impairment loss if the book values of those assets are not recoverable and exceed its fair value.  The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and then an impairment loss is recorded for the difference between the carrying amount and the fair value of the assets.
 
 
F-72

 

 Real estate held for sale

According to Colombian GAAP, these assets are recorded similarly to real estate in use.

Under U.S. GAAP, long-held assets classified as held for sale are recorded at the lower between carrying amount and fair value less estimated costs to sell and are not subject to depreciation.
 
 
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 the effects of the increase or decrease in the balance sheet under the assets caption  “reappraisal of assets”  and in the stockholders’ equity caption “Surplus from reappraisals of assets”.  The last revaluation was made in December 2010.  Under U.S. GAAP, reappraisals of assets are not permitted and thus balances are reversed.
 
 
e)
Allowance for loan losses, financial leases, foreclosed assets and other receivables

As established by the Superintendency of Finance, the methodology for evaluating loans and financial leases under Colombian GAAP, as discussed in Note 2 (i), is based on their inherent risk characteristics and serves as a basis for recording loss allowances based on loss percentages estimated or established by Superintendency of Finance. Under Colombian GAAP, the loan loss allowance is determined and monitored on an ongoing basis, and is established through periodic provisions charged to statements of operations.

Under U.S. GAAP (ASC 310-10-35), the Bank considers loans to be impaired when it is probable that all amounts of principal and interest will not be collected according to the contractual terms of the loan agreement. The allowance for significant impaired loans exceding COP 2,000 including troubled debt restructuring loan is assessed based on the present value of estimated future cash flows discounted at the original effective loan rate or the fair value of the collateral net of estimated costs to sell in the case where the loan is considered collateral-dependent. An allowance for impaired loans is provided when estimated future cash flows discounted at their original effective rate or collateral fair value is lower than book value.

To calculate the allowance required for smaller-balance loans and all performing loans, historical loss ratios are determined by analyzing historical losses. Loss estimates are analyzed by loan type and for homogeneous groups of clients established according underlying risk or other characteristics of each group. Such historical ratios are updated to incorporate the most recent data reflecting current economic conditions, industry performance trends and any other pertinent information that may affect the estimation of the allowance for loan losses.

Many factors can affect the Bank’s estimates of allowance for loan losses, including volatility of default probability, migrations and estimated loss severity.

Credit losses relating to loans, which may be for all or part of a particular loan are deducted from the allowance. The related loan balance is charged off in the year in which the loans are deemed uncollectible. Recoveries of loans and trade receivables previously charged off are credited to the allowance when received. The allowance is increased by provisions and recoveries of loans and leases previously charged off, and are reduced by charged-off loans and leases deemed uncollectible.

In addition, for U.S. GAAP purposes, the Bank maintains an allowance for credit losses on off-balance sheet credit instruments, including commitments to extend credit, guarantees granted, standby letters of credit and other financial instruments. This allowance is recorded as a liability. The Bank uses the same methodology as described for the allowance for loans losses, but including an estimated probability of drawdown by the borrower.
 
 
F-73

 

Foreclosed assets

Under Colombian GAAP the Superintendency of Finance requires the Bank to record a provision equal to 60% for foreclosed real estate and 70% for other foreclosed assets, in each case based on the carrying value of the asset at the time of receipt, which provision must be recorded in proportional monthly installments within the two years following its receipt.    Once the legal term for sale has expired, the provision must be increased to 80% and 100%, respectively.  If an extension of the term extension to sell the asset is granted by the Superintendence, this increase may be recorded on monthly basis within the new term.

Also, it is the Bank’s policy, in the case of foreclosed assets that remain for more than 5 years in the Bank’s possession to increase the provision to 100% of its book value.

Under U.S. GAAP, foreclosed assets are recorded as assets held for sale at the lower of the carrying amount of the loans or fair value of assets less their cost to sell. Gains or losses from the realization of foreclosed assets are included in the statement of operations.

The following summarizes the allowance for loan and financial lease losses and forclosed assets under Colombian GAAP and U.S. GAAP:
   
2010
   
2009
 
             
Allowance for loans, financial lease losses and foreclosed assets under Colombian GAAP
           
Allowance for loans and financial lease losses
  COP 2,509,213     COP 2,431,666  
Allowance for accrued interest and other receivables
    102,711       118,556  
Allowance for foreclosed assets
    191,683       177,870  
      2,803,607       2,728,092  
Allowance for loan losses under U.S. GAAP
               
                 
Allowance for loans, financial lease, accrued interest losses and other related receivables
    2,837,927       2,740,501  
Allowance for foreclosed assets
    124,789       127,463  
      2,962,716       2,867,964  
Difference to be recognized as an adjustment to Colombian GAAP stockholders’ equity
  COP (159,109 )   COP (139,872 )

   
2010
   
2009
   
2008
 
Difference recognized in net income under U.S. GAAP
                 
Allowance for loans, financial lease losses and other receivables
  COP (35,725 )   COP (345,338 )   COP (314,101 )
Allowance for foreclosed assets
    18,374       (19,522 )     (24,698 )
    COP (17,351 )(1)   COP (364,860 )(2)   COP (338,799 )
          


 
(1)
For 2010, the difference of COP (19,237) between the reconciliations for the years 2010 COP (159,109) and 2009 COP (139,872) that are recognized as adjustments to Colombian GAAP stockholders’ equity is different from the difference recognized in net income under U.S.GAAP COP (17,351) in the amount of COP (1,886) due to the cumulative translation adjustment related to foreign operations recorded in other comprehensive income.

 
(2)
For 2009, the difference of COP (369,311) between the reconciliations for the years 2009 COP (139,872) and 2008 COP 229,439 that are recognized as adjustments to Colombian GAAP stockholders’ equity is different from the difference recognized in net income under U.S.GAAP COP (364,860) in the amount of COP (4,451) due to the cumulative translation adjustment related to foreign operations recorded in other comprehensive income.

 
F-74

 

An analysis of the activity in the allowance for loans and financial lease losses under U.S. GAAP during the year ended December 31, 2010, 2009 and 2008 is as follows:

   
2010
   
2009
   
2008
 
                   
Allowance at the beginning of the year
  COP 2,740,501     COP 2,089,940     COP 1,055,697  
Provision for credit losses
    545,929       1,454,076       1,466,085  
Effect of changes in foreign exchange rates
    (24,018 )     (40,457 )     47,512  
Charge-offs
    (701,128 )     (980,755 )     (577,123 )
Recoveries of charged-off loans
    276,209       214,251       108,143  
Reclassifications
    434       3,446       (10,374 )
Allowance at the end of the year
(1)  COP 2,837,927     COP 2,740,501     COP 2,089,940  
                         
Gross loans and financial leases
    48,601,090       42,041,974       44,642,570  
                         
Allowance at the end of the period as a percentage of gross loans
    5.84 %     6.52 %     4.68 %
                         
Allowance for credit losses as percentage of gross loans
    1.12 %     3.46 %     3.28 %

(1) The allowance at the end of the year of this table differs by COP 70,086 from the amount of COP 2,908,013 "allowance for credit losses under U.S. GAAP". This difference corresponds to: a) The amount of COP 81,901 to the following lines that impact the allowance for loan losses under U.S.GAAP and are included in this reconciliations lines: Lessor accounting COP 15,893; Securitization non-performing loans COP 1,243; Business Combinations COP 57,569 and Interest recognition on non-accrual loans COP 7,196. b)  Allowance for loans's contingencies in the amount of COP (11,211). c) Discontinued operations in the amount of COP (604).

The recorded investments in impaired loans were approximately COP 3,880,773 and COP 3,657,170 for the years ended December 31, 2010 and 2009, respectively, and the related allowance for loan losses on those impaired loans totaled COP 1,574,620 and COP 1,618,824, respectively.

The average recorded investments in impaired loans were approximately COP 3,768,961 and COP 3,168,685 for the years ended December 31, 2010 and 2009, respectively, and the related allowance for loan losses on those impaired loans totaled   COP 1,596,722 and   COP 1,343,980, respectively.

The interest income that would have been recorded for impaired loans in accordance with the original contractual terms amounted to COP 493,481 and COP 398,883 for the year ended 2010 and 2009 respectively.

For the years ended December 31, 2010, 2009 and 2008, the Bank recognized interest income of approximately COP  200,283,  COP  158,645 and  COP  89,917,  respectively, on such impaired loans.

The small balances-homogeneous loans evaluated under ASC 450 methodology amounted to COP 44,720,318 and COP 38,384,804 for the years ended December 31, 2010 and 2009, respectively.

The following summarizes each class of financing receivable and the allowance for credit losses under U.S. GAAP. See Note 2 (i) “loans and financial leases” section of this document.

Loan Portfolio by Loan Type
 
                                     
2010
 
                                     
   
Commercial
   
Consumer
   
Residential
Mortgage
   
Microcredit
Loans
   
Financial Leases
   
Total
 
                                     
Loans and financial leases
  COP 30,859,308       8,176,938       7,339,160       255,083       8,561,605     COP 55,192,094  
Accrued interest receivable
    196,595       73,103       17,960       2,844       31,547       322,049  
Loans origination fees and costs
    38,093       10,094       9,059       315       10,568       68,129  
‎Unearned income
    (8,850 )     -       -       -       (2,168,121 )     (2,176,971 )
‎Unamortized discounts or premiums
    54,525       -       -       -       -       54,525  
Capital
    31,139,671       8,260,135       7,366,179       258,242       6,435,599       53,459,826  
                                                 
Allowance for loans and financial leases
    (1,509,815 )     (729,088 )     (380,479 )     (57,263 )     (231,368 )     (2,908,013 )
                                                 
Carrying Amount
  COP 29,629,856       7,531,047       6,985,700       200,979       6,204,231     COP 50,551,813  
 
 
F-75

 

Loans and asset quality

The following tables are presented for each type of financing receivable, and provide additional information about our credit risks and the adequacy of our allowance for credit losses.

Allowance for credit losses

The following table sets forth the changes in the allowance and an allocation of the allowance by loan type:

Allowance for Credit Losses and Recorded Investment in Financing Receivables
For the Year Ended December 31 2010
                                     
   
Commercial
   
Consumer
   
Residential
Mortgage
   
Microcredit
Loans
   
Financial
Leases
   
Total
 
Allowance for credit losses:
                                   
Ending balance: individually evaluated for impairment
  COP 918,248       47,406       35,667       15,419       55,217     COP 1,071,957  
Ending balance: collectively evaluated for impairment
    591,567       681,682       344,812       41,844       176,151       1,836,056
(1)
Ending balance
  COP 1,509,815       729,088       380,479       57,263       231,368     COP 2,908,013  
Financing receivables:
                                               
Ending balance: individually evaluated for impairment
  COP 2,270,817       162,045       166,523       28,620       215,200     COP 2,843,205  
Ending balance: collectively evaluated for impairment
    28,868,854       8,098,090       7,199,656       229,622       6,220,399       50,616,621  
Ending balance
  COP 31,139,671       8,260,135       7,366,179       258,242       6,435,599     COP 53,459,826  
 
(1) The amount COP 502,624 corresponds to impaired loans.
  
Past due loans

The table below sets forth information about our past due loans.

Age Analysis of Past Due Financing Receivables
As of December 31, 2010

    
31–90 Days
Past Due
   
91–180 Days
Past Due
   
181-360 Days
Past Due
   
Greater than 360
Days
   
Total Past Due
   
Current
   
Total Financing
 
Commercial
  COP 197,895       133,300       171,365       145,496     COP 648,056       30,491,615     COP 31,139,671  
                                                         
   
31–60 Days
Past Due
   
61–90 Days Past
Due
   
91–180 Days
Past Due
   
181-360 Days Past
Due
   
Total Past Due
   
Current
   
Total Financing
 
Consumer
    117,787       45,192       94,472       41,004       298.455       7,961,680       8,260,135  
                                                         
   
31–120 Days
Past Due
   
121–180 Days
Past Due
   
181-360 Days
Past Due
   
Greater than 360
Days
   
Total Past Due
   
Current
   
Total Financing
 
Residential Mortgage
    157,177       27,256       40,547       78,290       303,270       7,062,909       7,366,179  
 
 
F-76

 
 
   
31–90 Days
Past Due
   
91–180 Days
Past Due
   
181-360 Days
Past Due
   
Greater than 360
Days
   
Total Past Due
   
Current
   
Total Financing
 
Financial Leases
    44,250       25,763       19,253       34,659       123,925       6,311,674       6,435,599  
                                                         
   
31–60 Days
Past Due
   
61–90 Days
Past Due
   
91–120 Days
Past Due
           
Total Past Due
   
Current
   
Total Financing
 
Microcredit Loans
    5,613       3,155       13,425               22,193       236,049       258,242  
                                                         
                   
Total
             COP 1,395,899       52,063,927     COP 53,459,826  
 
 
Credit quality indicators

The following table illustrates credit risks by type and internally assigned grades:

Credit Quality Indicators
As of December 31 2010
                                     
Rating
 
Residential
Mortgage
   
Commercial
   
Consumer
   
Small Loans
   
Financial leases
   
Total
 
                                     
"A"  Normal
  COP 7,090,836     COP 28,996,285     COP 7,463,591     COP 225,169     COP 5,956,555     COP 49,732,436  
"B"  Acceptable
    97,917       938,729       317,183       8,358       241,562       1,603,749  
"C"  Appreciable
    62,663       340,155       133,507       5,569       69,885       611,779  
"D"  Significant
    40,381       603,955       236,027       6,087       141,466       1,027,916  
"E"  Unrecoverable
    74,382       260,547       109,827       13,059       26,131       483,946  
Total loans and financial leases
  COP 7,366,179     COP 31,139,671     COP 8,260,135     COP 258,242     COP 6,435,599     COP 53,459,826  

Internally assigned ratings are the same as those defined by Superintendency of Finance,  described in the Note 2 (i) “loans and financial leases” section of this document.

Impaired loans

As of December 31, 2010 loans considered impaired are presented in the following table:

Impaired Loans
For the Year Ended December 31 2010
   
   
Recorded
Investment
   
Unpaid Principal
Balance
   
Related Allowance
   
Interest Income
Recognized
 
                         
With no related allowance recorded:
                       
Commercial
  COP 268,356       265,060       -       39,873  
Consumer
    32       32       -       14  
Residential Mortgage
    492       484       -       213  
Microcredit Loans
    30       29       -       4  
Financial Leases
    76,216       76,035       -       215  
                                 
With an allowance recorded:
                               
Commercial
  COP 2,200,896       2,178,187       990,312       242,888  
Consumer
    571,010       563,104       314,929       107,266  
Residential Mortgage
    300,974       298,080       128,682       26,017  
Microcredit Loans
    39,254       38,742       24,324       10,108  
Financial Leases
    403,002       401,336       116,334       2,546  
                                 
Total
  COP 3,860,262       3,821,089       1,574,581       429,144  
 
 
F-77

 
 
Accounting Policies

Loans and Financial Leases
 
The Bank grants loans to customers in the following segments: residential mortgage, commercial, consumer and small business loans. A substantial portion of the Bank loan portfolio is represented by commercial loans throughout Colombia.
 
 Loans are recorded at the principal outstanding less allowance for impairment and include loan origination fees and cost and accrued interest receivable. Accrued interest unearned income is recorded as a liability.

Assets Serving as Collateral

As of December 31, 2010 and 2009, the Bank had pledged investments securities amounting to COP 1,292,211 and COP 660,902, respectively as collateral to secure lines of credit at international banks, domestic development banks and other financial institutions.
 
Non-performing loans and accruing loans which are contractually past due 90 days

As of December 31, 2010 and 2009, Bancolombia did not have any performing loans which were past due for 90 days or more.

Financing Receivables on Nonaccrual Status Under US GAAP
As of December 31, 2010
   
2010
 
Commercial
  COP 450,161  
Consumer
    154,247  
Residential Mortgage
    185,819  
Microcredit Loans
    17,364  
Financial Leases
    80,106  
Total
  COP 887,697  
 
Accounting Policies for Off-Balance-Sheet Credit Exposures
 
 The off balance sheet credit exposures are evaluated and an allowance recorded using the same methodologies applied to loans and allowance for loans losses in the balance sheet credit exposures.
 
Purchases of financing receivables
 
The Bank in 2010 bought assets from Titularizadora Colombiana for COP 224,879 and to Factoring Bancolombia S.A. for COP 54,893.

The subordinate Vivayco S.A.S. purchased during 2010 loans amounting COP 21,021.
 
Sales of financing receivables

The Bank sold in 2010 residential mortgage loans to the Titularizadora Colombiana for COP 1,623,244. The Bank recognized a gain on sale for COP 47,362.
 
The Bank sold in 2010 impaired loans to Reintegra S.A. for COP 25,801.

 
F-78

 

The subordinate Factoring Bancolombia S.A., sold in 2010 impaired loans to Reintegra S.A. for COP 155.
 
Policies for the granting and review of credit

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 the evaluation of credits, the determination of lending limits to customers and the level of management authority required to approve a loan.  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.
 
Bancolombia’s policies require every credit to be analyzed using the following factors:  the 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 and information received from the two credit risk bureaus currently operating in Colombia.
 
In addition to the analysis of the borrower, the Bank assesses 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 lending limits to borrowers established under Colombian law, which require that: (i) uncollateralized loans to a single customer or economic group may not exceed 10% of the Bank’s (unconsolidated) Technical Capital, (ii) collateralized loans to a single customer or economic group may not exceed 25% of the Bank’s (unconsolidated) Technical Capital; (iii) a loan to a stockholder of the Bank, who owns a position exceeding 20% of the Bank’s Capital, may not exceed 20% of the Bank’s (unconsolidated) Technical Capital; and (iv) a loan to a financial institution may not exceed 30% of the Bank’s (unconsolidated) Technical Capital.
 
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. Approximately 70% of the portfolio of the Bank has a maturity of five years or less.
 
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 Bancolombia. In general, loan application decisions are made by the Bank’s management in the corresponding committee. These policies apply to all segments evaluated.
 
Loans to managers, directors and affiliates of the Bank must be approved by the board of directors of the Bank, which has the authority to grant loans in any principal amount subject to the Bank’s legal lending limit.
 
  The Bank has established its 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. Periodically, the Bank undertakes a valuation of collateral held as security for loans. In addition, for retail and mortgage, when a loan becomes between 5 and 60 days past due, an external collection company assists in obtaining payments. For commercial lending this procedure for collecting is performed internally. When a loan becomes 60 days past due, the loan will be given to an independent and specialized division where recovery steps will be taken. 

 
F-79

 

With respect to monitoring outstanding loans, the Bank, in accordance with the requirements of the Superintendency of Finance, has implemented regional committees and a central qualification office to undertake a biannual evaluation of the loan portfolio, during the months of May and November of each year.  At least 50% of the outstanding portfolio is evaluated by the Bank under rules of Superintendency of Finance.  Clients evaluated have, among others, the following characteristics: high exposure, more than 30 days past due, bad record of historical payment behavior either with the Bank or the financial system and restructured loans or loans that are part of the watch list. Also are included the 30 clients for which the bank has the longest exposure and the 30 clients with the less lowest exposure in each region, and 30 more randomly selected. When monitoring outstanding loans, the Bank examines current financial statements of the borrower including cash flow and financial indicators.
 
Additionally, all of the Bank’s loans are evaluated monthly based on the days they are past due, (from 30 days past due). When reviewing loans, Bancolombia evaluates and updates their risk classification and makes corresponding adjustments in the provisions, if needed.
 
In addition, the Bank carries out a credit audit process that reviews clients with financial weaknesses, early past due loans, clients in sectors that are underperforming, and branches with high records of write offs, among others.

 
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 ASU 310-20 ,“Receivables Nonrefundable Fees  and Other Costs”, loan origination fees and certain direct loan origination costs are deferred and recognized over the life of the related loans as an adjustment of yield.
 
 
g)
Interest recognition – non-accrual loans
 
For Colombian GAAP purposes, the Bank established that commercial, consumer and microcredit loans that are past due more than thirty days and mortgages that are past due more than 60 days will stop accruing interest in the statement of operations and their entries will be made in memorandum accounts until effective payment is collected.

For U.S. GAAP purposes accrual of interest income is discontinued once a loan becomes more than 90 days past due   While the loan is on non-accrual status is generally recognized as income on a cash basis unless collection of principal is doubtful, in which case, cash collections are applied against unpaid principal balance.

 
h)
Deferred charges

For Colombian GAAP purposes, the Bank has deferred certain pre-operating expenses, and other charges, which are expensed as incurred under U.S. GAAP.

Under Colombian GAAP, the cost of issuance of bonds is recorded by the Bank as a deferred charge and amortized on a monthly basis over a term of three (3) years. Nevertheless, under U.S. GAAP (ASC 350-40), the cost of issuance of bonds must be amortized over the life of the bonds.

Under Colombian GAAP, the payroll-related costs for employees who are directly associated with a software project, are recorded by the Bank as a expense. Under U.S. GAAP the payroll-related costs are capitalized during the application development stage in accordance with ASC 350-40-25.

Under Colombian GAAP, the Bank accounted for improvements on leased property in the statement of operation as expenses. Under U.S. GAAP, leasehold improvements are recorded as a deferred charge and amortized on a monthly basis over the term of the contract.

 
F-80

 
 
 
i) 
Investment securities and Derivatives
 
 The table below provides details regarding the differences in investment securities and derivatives between Colombian GAAP and U.S. GAAP:

Consolidated net income
 
2010
   
2009
   
2008
 
     
                 
Fair value adjustment on trading and available for sale securities
  COP 31,612     COP (12,450 )   COP 28,978  
Foreign exchange gains or losses on available for sale debt securities
    5,491       8,364       (8,315 )
Fair value adjustment on derivatives instruments
    (25,886 )     159,284       (162,055 )
Consolidation of VIEs     
    (54,655 )     (132,760 )     -  
     
  COP (43,438 )   COP 22,438     COP (141,392 )
     
                       
Consolidated stockholders' equity
            2010       2009  
Fair value adjustment on trading and available for sale securities    
          COP 60,717     COP 56,822  
Change in classification of held to maturity to available for sale securities
            (44,620 )     (66,115 )
Fair value adjustment on derivatives instruments
            (30,440 )     (4,554 )
Consolidation  of VIEs
            (299,062 )     (200,975 )
            COP (313,405 )   COP (214,822 )

Fair value adjustment on trading and available for sale investment securities

 Investment securities fair value under Colombian GAAP is established in a manner similar to that under U.S. GAAP. However, under Colombian GAAP, the fair value of certain debt investment securities classified as trading or available for sale is established at amortized cost or in a different way than U.S. GAAP. Fair value adjustments of securities classified as available for sale are recorded in equity.

Classification of securities as held to maturity

Certain securities issued or secured by the Colombian government are classified as held to maturity under Colombian GAAP. Under U.S. GAAP, as the Bank has not the positive intent to hold those securities to maturity due to certain waivers permitted under Colombian rules, they are reclassified as available for sale securities.
 
Foreign Exchange Gains and Losses on Securities Available For Sale

Under Colombian GAAP, changes in the fair value as a result of changes in foreign currency exchange rates on available for sale debt securities are reflected in the consolidated Statements of Operations. Under U.S. GAAP, those changes are reflected in stockholders’ equity.

Impairment of investments

For Colombian GAAP and U.S. GAAP purposes, the Bank conducts regular reviews to assess whether other than temporary impairment exists.

Under Colombian GAAP, the Bank reviews the ratings issued by rating agencies, and if any security in its portfolio has been classified below B, the Bank applies “the maximum registered amount rate” established by the Superintendency of Finance.

If the amount calculated is less than the carrying amount, the carrying amount of the investment is reduced to the face value net of the amortizations recorded multiplying by that percentage. An impairment loss is recognized immediately in Statement of Operations.

 
F-81

 

   As a consequence of this procedure, under Colombian GAAP, the Bank has recognized a valuation allowance for debt securities amounted to COP 45,727 and COP 54,300, for years ending at December 31, 2010 and 2009, respectively of which COP 34,856 and COP 32,779 for 2010 and 2009 respectively were reversed for U.S. GAAP purposes.

For U.S. GAAP purposes, the Bank considers a number of factors in performing an impairment analysis of securities. Those factors include:

 
a.
the length of time and the extent to which the market value of the security 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); and

 
c.
the intent and ability of the Bank to retain its investment in the issuer for a period of time that allows for any anticipated recovery in market value. Under U.S. GAAP, the Bank evaluates the intention to sell an impaired debt security and the likelihood that it will be required to sell the debt security before the recovery of its amortized cost.
 
The Bank also takes into account changes in global and regional economic conditions and changes related to specific issuers or industries that could adversely affect these values.

Under U.S. GAAP, when an entity  intends to sell an impaired debt security or it is more likely than not it will be required to sell prior to recovery of its amortized cost basis, an other than temporary impairment (“OTTI”) is deemed to have occurred. In these instances, the OTTI loss is recognized in earnings equal to the entire difference between the debt security’s amortized cost basis and its fair value at the balance sheet date.

 When an entity does not intend to sell an impaired debt security and it is not more likely than not it will be required to sell prior to recovery of its amortized cost basis, the entity must determine whether it will recover its amortized cost basis. If it concludes it will not, a credit loss exists and the resulting OTTI is separated into the amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income (OCI).

 The guidance requires that the total OTTI (difference between the fair value and the amortized cost of the debt security) be presented in the statement of earnings with an offset in a separate line item for any amount of the total OTTI that is recognized in OCI.

 The substantial majority of the investments in an unrealized loss position for 12 months or more are primarily mandatory securities issued or secured by the Colombian Government, denominated in pesos and Unidad de Valor Real (the “Real Value Unit” or “UVR”). These securities were issued with a fixed interest rate and average maturity of less than eight years. The Bank has determined that unrealized losses on investments at December 31, 2010 are temporary in nature because it does not intend to sell an impaired debt security and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost and expects to recover the entire amortized cost basis of the securities.

As of December 31, 2010, 625 investment securities presented gross unrealized losses.

Due to the impairment assessment performed under U.S. GAAP, the Bank has recognized impairment for debt securities amounted to COP 10,871 and COP 21,521, for the years ending at December 31, 2010 and 2009, respectively. This decline is based on investment sales that occurred during 2010.

 
F-82

 

Fair value adjustment on derivatives instruments

Fair value measurement of derivatives instruments under Colombian GAAP is similar to U.S. GAAP, specifically ASC 820, except for the following:

 
a.
Under Colombian GAAP performance risk is not considered in the determination of the fair value. Likewise, the swap instrument first valuation day under Colombian GAAP is deferred and amortized on a straight line basis over the life of the instrument. Under U.S. GAAP, all the changes in the fair value of trading derivatives are recognized in the Statement of Operations. According to ASC 820 requirements, , counterparty credit-risk adjustments are applied to derivatives when the Bank’s position is a derivative asset and the Bank’s credit risk is incorporated when the position is a derivative liability.

 
b.
Until 2008 under Colombian GAAP, measured based on the Bank’s valuation technique approved by the Superintendency of Finance, which included the use of risk free discount rates for the valuation of the swap right leg and risk adjusted discount rate for the swap obligation leg. For U.S. GAAP purposes, the fair value of swaps was measured using risk free discount rates for both swap legs. Since 2009, the fair value of swaps under Colombian GAAP is also measured using free risk discount rates for both swap legs.

Consolidation of VIEs

In 2008, the Bank and Suramericana Group, created Fondo de Capital Privado Colombia Inmobiliana (the “Fund”), with the purpose of investing in real estate property. As a result during the years 2010 and 2009 Suramericana Group transferred real estate property amounting COP 31,499 and COP 36,840 respectively to the Fund.

Under Colombian GAAP, the interest in participations of funds are classified as equity securities as trading or available for sale. The interest in the Fund in the amount of COP 202,991 and 153,071 were classified as trading in December 31, 2010 and 2009. Furthermore, under Colombian GAAP there is no specific guidance for consolidation of variable interest entities and therefore, the consolidation analysis is based solely on the voting rights concept, under which the condition for a controlling financial interest, is ownership of over 50% of the outstanding voting shares.
 
During 2009, the Bank ceased consolidating the Fund under Colombian GAAP due to the entrance of other investors that decrease its share in the Fund below 50%.
 
Under U.S. GAAP and as of December 31, 2010 and 2009, the Bank has identified the Fund as a variable interest entity because the only holder of equity investment at risk, lack the direct or indirect ability through voting rights or similar rights to make decisions about Fund's activities that have a significant effect on the success of the Fund. The Bank is identified as the primary beneficiary because it has the power to direct the activities of the Fund that most significantly impact the Fund’s economic performance and receive benefits or absorb losses that could potentially be significant to the VIE. For this reason, assets of the Fund, as well as its liabilities and results of operations were included in the consolidated financial statements of the Bank for the years ended December 31, 2010 and 2009. The Bank recognizes non controlling interest in the amount of COP 139,076 at December 31, 2010.
 
The table below presents a summary of the assets and liabilities of the Fund under U.S. GAAP consolidated by the Bank as of December 31:
 
   
2010
   
2009
     
2010
   
2009
 
Assets
           
Liabilities
           
Premises and equipments, net
  COP 258,646     COP 225,073  
Other liabilities
  COP 9,942     COP 10,431  
                 
Noncontrolling interest
    139,076       135,309  
Other assets
    25,689       8,422  
Stockholders’ equity
    135,317       87,755  
    COP 284,335     COP 233,495       COP 284,335     COP 233,495  
 
                    Additional disclosures for investment securities under U.S. GAAP

The carrying amounts, gross unrealized gains and losses and approximate fair value of debt securities classified as 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, 2010
                       
Securities issued or secured by Colombian government
  COP 610,500     COP 7,400     COP (37,230 )   COP 640,330  
Securities issued or secured by government entities
    965,262       14       (11,839 )     977,087  
Securities issued or secured by other financial entities
    918,896       2,913       (11,296 )     927,279  
Securities issued or secured by foreign governments
    557,491       3,390       (7,348 )     561,449  
Securities issued or secured by the El Salvador Central Bank
    751,246       126       (481 )     751,601  
Other investments
    200,895       9,054       (3,350 )     195,191  
Total
  COP 4,004,290     COP 22,897     COP (71,544 )   COP 4,052,937  
 
 
F-83

 
 
         
Gross
   
Gross
       
         
unrealized
   
unrealized
   
Cost
 
   
Fair value
   
gains
   
losses
   
basis
 
                         
Available for sale - Debt securities
                       
December 31, 2009
                       
Securities issued or secured by Colombian government
  COP 723,728     COP 5,859     COP (71,387 )   COP 789,256  
Securities issued or secured by government entities
    821,725       112       (6,948 )     828,561  
Securities issued or secured by other financial entities
    505,339       25,781       (12,257 )     491,815  
Securities issued or secured by foreign governments
    738,912       29,397       (2,332 )     711,847  
Securities issued or secured by the El Salvador Central Bank
    810,317       905       (1,197 )     810,609  
Other investments
    181,926       6,665       (983 )     176,244  
Total
  COP 3,781,947     COP 68,719     COP (95,104 )   COP 3,808,332  
 
         
Gross
   
Gross
       
         
unrealized
   
unrealized
   
Cost
 
   
Fair value
   
gains
   
losses
   
basis
 
                         
Available for sale – Equity securities
                       
December 31, 2010
                       
Inmobiliaria Cadenalco
  COP 5,107     COP 2,616     COP -     COP 2,491  
Bolsa de Valores de Colombia
    73,197       38,511       -       34,686  
Total
  COP 78,304     COP 41,127     COP -     COP 37,177  
 
         
Gross
   
Gross
       
         
unrealized
   
unrealized
   
Cost
 
   
Fair value
   
gains
   
losses
   
basis
 
                         
Available for sale – Equity securities
                       
December 31, 2009
                       
Inmobiliaria Cadenalco
  COP 4,912     COP 2,421     COP -     COP 2,491  
Bolsa de Valores de Colombia
    27,316       23,593       -       3,723  
Total
  COP 32,228     COP 26,014     COP -     COP 6,214  
 
The scheduled maturities of debt securities at December 31, 2010 were as follows:
 
   
Available for sale
   
   
Amortized
   
Fair
 
   
cost
   
value
 
           
Due in one year or less
  COP 1,997,571     COP 1,983,204  
Due from one year to five years
    975,807       948,963  
Due from five years to ten years
    798,973       799,873  
Due more than ten years
    280,586       272,250  
Total
  COP 4,052,937     COP 4,004,290  

 
F-84

 
 
Unrealized Losses Disclosure
 
Investments that have been in a continuous unrealized loss position for less than 12 months are:

         
Gross
       
         
unrealized
   
Cost
 
   
Fair value
   
losses
   
basis
 
                   
Available for Sale Debt securities
                 
December 31, 2010
                 
Securities issued or secured by Colombian government
  COP 39,618     COP (1,324 )   COP 40,942  
Securities issued or secured by government entities
    965,053       (11,839 )     976,891  
Securities issued or secured by other financial entities
    801,396       (11,055 )     812,450  
Securities issued or secured by foreign governments
    251,064       (6,950 )     258,014  
Securities issued or secured by the El Salvador Central Bank
    630,538       (481 )     631,018  
Other investments
    80,365       (3,227 )     83,591  
Total
  COP 2,768,034     COP (34,876 )   COP 2,802,906  

Investments that have been in a continuous unrealized loss position for 12 months or longer are:

         
Gross
       
         
unrealized
   
Cost
 
   
Fair value
   
losses
   
basis
 
                   
Available for Sale Debt securities
                 
December 31, 2010
                 
Securities issued or secured by Colombian government
  COP 436,098     COP (35,906 )   COP 472,004  
Securities issued or secured by  other financial entities
    30,372       (241 )     30,613  
Securities issued or secured by foreign goverment
    21,808       (397 )     22,205  
Other investments
    4,476       (124 )     4,600  
Total
  COP 492,754     COP (36,668 )   COP 529,422  

Additional disclosures for derivatives instruments under U.S. GAAP

The tables below present the financial position of the derivatives contracts as of December 31, 2010 and 2009 and their gain and loss recognised in the Statement of Operations as well as the volume of operations:
 
   
Asset
 
Liability
 
   
2010
 
2009
 
2010
 
2009
 
Derivatives not designated as hedging instruments
 
Balance sheet
location
 
Fair Value
 
Balance sheet
location
 
Fair Value
 
Balance sheet
location
 
Fair Value
 
Balance sheet
location
 
Fair Value
 
       
 Interest rate contracts
 
Other assets
  COP 26,380  
Other assets
  COP (805 )
Other liability
  COP (23,638 )
Other liability
  COP 24,791  
 Foreign exchange contracts
 
Other assets
    440,807  
Other assets
    370,176  
Other liability
    (332,731 )
Other liability
    (241,045 )
TOTAL (COP)
      COP 467,187       COP 369,371       COP (356,369 )     COP (216,254 )

   
2010
   
2009
 
Collateral
  COP 279,650     COP 71,604  
 
       
2010
   
2009
 
Derivatives not designated as
hedging instruments
 
Location of Gain or (Loss)
Recognized in income on
Derivative
 
Amount of gain or (loss) recognized in
income on derivative
 
                 
   
Interest income (expenses)
  COP (33,193 )   COP 20,181  
   
Foreign currency gain (loss)
    7,586       408,320  
        COP (25,607 )   COP 428,501  
 
 
F-85

 
 
       
2010
   
2009
 
   
Derivatives not designated as
hedging instruments
 
Notional amounts as of
December 31,
 
                 
   
Interest rate contracts
  COP 2,841,063     COP 2,718,149  
   
Foreign exchange contracts
    18,439,133       14,952,640  
         COP 21,280,196     COP 17,670,789  

 
j)
Dividends received from Investments in unaffiliated companies.
 
Under Colombian GAAP, stock dividends are recorded as income; under U.S. GAAP, 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.

Under Colombian GAAP, investments in affiliates where the investor has the ability to exercise significant influence are recorded at cost and classified as available for sale.
 
The difference between the cost and equity participation is recorded as reappraisal of assets in assets and stockholders’ equity. This reappraisal is reversed for U.S. GAAP purposes.
 
Under U.S. GAAP, investments where the investor has the ability to exercise significant influence are   recorded using the equity method.
 
 
 l)
Lessor accounting
 
Certain of the Bank’s subsidiaries lease assets to third parties under non-cancelable lease arrangements. These lease arrangements involve machinery and equipment, computer equipment, automobile and furniture and fixtures and their terms range between three and five years.

Under Colombian GAAP, for financial entities, leases are classified as either financial leases or operating leases, according to the terms of the lease agreements. Goods provided through leases to third parties with a purchase option are recorded in the loan portfolio. Goods provided through operating leases are recorded as property, plant and equipment. For both types of leasing, their initial measurement represents the value to be financed of the good to be leased (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.

 
F-86

 

Under U.S. GAAP, from the stand point of the lessor, leases are classified as direct finance leases or operating leases. Leases are classified as direct finance leases if certain criterias are met in the lease contract; otherwise they are classified as operating leases. The net investments in direct financing leases represent the present value of the minimum lease payments plus the unguaranteed residual value.

The adjustment under U.S. GAAP is related to certain leases signed by the Bank subsidiaries Renting Colombia and Leasing Bancolombia classified as operating leases under Colombian GAAP, which met the criteria to be classified as direct finance leases under U.S. GAAP.

The following list the components of the net investment in direct financial leases as of December 31, 2010 and 2009:
   
2010
   
2009
 
             
Total minimum lease payments to be received
  COP 7,879,320     COP 6,975,506  
Less: Allowance for uncollectibles
    (231,368 )     (200,757 )
Net minimum lease payments receivable
    7,647,952       6,774,749  
Estimated residual values of leased property
    713,829       649,567  
Less:  Unearned income
    (2,168,121 )     (1,745,677 )
Net investment in direct financial leases
  COP 6,193,660     COP 5,678,639  
 
The following schedule shows the future minimum lease payments to be received on direct financial leases and operating leases for each of the next five years and thereafter.

Year Ended December 31,
 
Financial leases
   
Operating Leases
 
2011
  COP 396,885     COP 214,570  
2012
    805,578       174,868  
2013
    1,210,184       144,899  
2014
    885,622       115,257  
2015
    967,011       92,153  
                                  2016 and later
    3,614,040       248,766  
Total minimum future lease payments to be received
  COP 7,879,320     COP 990,513  

 
m) 
Business combinations

m.i)  Purchase method of accounting

In regard to 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.

Each of the Banagrícola S.A. and Factoring Bancolombia acquisitions were accounted for using the purchase method under Colombian GAAP, in accordance with the methodology suggested by the Superintendency of Finance.
 
In regard to 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.

 
F-87

 
 
m.ii) Goodwill

   Under Colombian GAAP, goodwill derived from business combinations effective before October 2006, is amortized over a maximum period of ten years. In business combinations that occurred after October 2006, the resulting goodwill is amortized on a term of twenty (20) years, unless the entity voluntarily selects a shorter period of amortization using an exponential method. Under this method the charge for amortization is increased exponentially every year. However, the Bank, since January, 2008, has used the straight-line method to amortize goodwill, since the Bank considers this method provides a better association between the revenues and expenses corresponding to this investment.
 
Under Colombian GAAP, in the case of goodwill acquired by the Bank and its subsidiaries before the date when the new regulation came into full force in year 2007, the amortization term was maintained from three to ten years for goodwill recorded in the subsidiaries Banagrícola S.A. and Inversiones Financieras Banagrícola S.A., as permitted by Superintendency of Finance at the acquisition date.
 
Under U.S. GAAP, the Bank does not amortize goodwill, but it is subject to an annual impairment test.
 
Under ASC 350, the goodwill impairment analysis is done in two steps. The first step requires a comparison of the fair value of the individual reporting unit to its carrying value including goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit exceeds the fair value, there is an indication of potential impairment and a second step of testing is performed to measure the amount of impairment, if any, for that reporting unit.
 
 When required, the second step of testing involves calculating the implied fair value of goodwill for each of the affected reporting units. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit determined in step one over the fair value of the net assets and identifiable intangibles as if the reporting unit were being acquired. If the amount of the goodwill allocated to the reporting unit exceeds the implied fair value of the goodwill in the pro forma purchase price allocation, an impairment charge is recorded for the excess. An impairment charge recognized cannot exceed the amount of goodwill allocated to a reporting unit and cannot be reversed subsequently even if the fair value of the reporting unit recovers.
 
Under U.S. GAAP, the Bank annually has performed the required impairment test of each reporting segment’s goodwill. For December 31, 2010, no impairment was recognized against goodwill. During 2009, the Bank concluded that there was an impairment of Factoring Bancolombia’s goodwill and recorded an impairtment charge for the excess over the fair value amounting COP 7,787.
 
During 2010, the Bank has modified the distribution of the goodwill by segments in order to be consistent with the segments presented in the note 31, y) Segment Disclosure.

The changes in Goodwill by segment during 2009 and 2010 were as follows:
 
 
F-88

 
 
    
Banking Colombia
   
Banking El Salvador
   
Leasing
   
Trust
   
Investments
   
Brokerage
   
Off Shore
   
All other segments
   
Pension and Insurance
   
 
Total
 
Goodwill U.S. GAAP
                                                           
 Balance as of December 31, 2008
  COP 435,827     COP 661,259     COP 54,238     COP 2,493     COP 132,273     COP 43,722     COP 31,534     COP 1,330     COP 59,654     COP  1,422,330  
 Accumulated impairment losses
    -       -       -       -       -       -       -       -       -       -  
 Balance as of January 1, 2009
    435,827       661,259       54,238       2,493       132,273       43,722       31,534       1,330       59,654       1,422,330  
 Additions
    -       4,047       -       -       -       -       -       -       -       4,047  
 Impairment
    (7,787 )     -       -       -       -       -       -       -       -       (7,787 )
 Foreign currency adjustment
    -       (58,758 )     -       -       -       -       -       -       (5,300 )     (64,058 )
 Balance as of December 31, 2009
    428,040       606,548       54,238       2,493       132,273       43,722       31,534       1,330       54,354       1,354,532  
Goodwill under Colombian GAAP
    (59 )     855,525       -       -       -       -       -       -       -       855,466  
Difference related to goodwill to be recognized under U.S. GAAP
    428,099       (248,977 )     54,238       2,493       132,273       43,722       31,534       1,330       54,354       499,066  
                                                                                 
Recognized in Stockholders' equity as
                                                                               
 Revaluation of assets
    -       -       -       -       171,257       -       -       -       -       171,257  
Goodwill
    428,099       (248,977 )     54,238       2,493       (38,983 )     43,722       31,534       1,330       54,354       327,809  
Goodwill U.S. GAAP
                                                                               
 
Balance as of December 31, 2009
    435,827       606,548       54,238       2,493       132,273       43,722       31,534       1,330       54,354         1,362,319  
 Accumulated impairment losses
    (7,787 )     -       -       -       -       -       -       -       -       (7,787 )
 Balance as of January 1, 2010
    428,040       606,548       54,238       2,493       132,273       43,722       31,534       1,330       54,354       1,354,532  
Goodwill derecognized related to a disposal group classified as held for sale
    -       -       -       -       -       -       -       -       (50,890 )     (50,890 )
 Foreign currency adjustment
    -       12,543       -       -       -       -       -       -       (3,464 )     9,079  
 Balance as of December 31, 2010
    428,040       619,091       54,238       2,493       132,273       43,722       31,534       1,330       -       1,312,721  
Goodwill under Colombian GAAP(1)
    (5 )     745,661       5,267       -       78       -       -       -       -       751,001  
Difference related to goodwill to be recognized under U.S. GAAP
    428,045       (126,570 )     48,971       2,493       132,195       43,722       31,534       1,330       -       561,720  
Recognized in Stockholders' equity as
                                                                               
 Revaluation of assets
    -       -       -       -       166,108       -       -       -       -       166,108  
Goodwill
  COP 428,045     COP (126,570 )   COP 48,971     COP 2,493     COP (33,913 )   COP 43,722     COP 31,534     COP 1,330     COP -     COP 395,612  
 
(1)
In March 2010, Leasing Bancolombia  acquired 3,185,007 outstanding shares of Renting Colombia from Mitsubishi International Corporation and Mitsubishi Corporation, formerly Renting Bancolombia non-controlling interest. The excess paid over the book value of the non controlling interest was COP 6,038 at December 31, Bancolombia held an interest of 100% of Renting Colombia’s total stockholders’ equity.
 
 
F-89

 

Under Colombian GAAP, the entire purchase was accounted for as goodwill by Leasing Bancolombia. According to ASC 805-10 (SFAS 141 –R-), a subsequent adjustment resulting from changes in the non-controlling interests’ share must be accounted for in equity.

m.iii) Intangible Assets

Under Colombian GAAP, the purchase method of accounting allocates to goodwill all of the excess value paid derived from business combinations. Under U.S. GAAP acquired intangible assets, are assigned to registered brands, deposits, customers relationship and others.

The activity of the Bank’s intangible assets during the years ended December 31, 2010, 2009 and 2008 is as follows:
   
2010
   
2009
   
2008
 
                   
Intangible Assets
                 
Balance at beginning of year
  COP 369,234     COP 468,546     COP 487,691  
Reclassifications(1)
    -       -       45,951  
Amortization
    (58,559 )     (67,451 )     (79,578 )
Impairment
    -       -       (26,555 )
Intangibles reclassified to assets held for sale (see Note 31, q - Discontinued operations)
    (69,944 )     -       -  
Foreign currency translation adjustment(2) (3)
    (17,548 )     (31,861 )     41,037  
Balance at end of year
  COP 223,183     COP 369,234     COP 468,546  

 
(1) 
It corresponds to the recognition of the brand of Banco Agrícola from goodwill to intangible of finite life as a result of the initial decision of the Bank’s management.
 
(2)
The foreign currency translation adjustment for the amortization expense amounts COP 8,656.
 
(3)
The foreign currency translation adjustment for the carrying amount is COP 26,204.

Intangible assets were as follows:

   
December 31, 2010
   
December 31, 2009
 
   
Gross carrying
amount
   
Accumulated
amortization
   
Impairment
   
Gross carrying
amount
   
Accumulated
amortization
   
Impairment
 
                                     
Amortizable intangible assets
  COP 427,393     COP 204,210     COP -     COP 445,261     COP 165,330     COP -  
Amortizable intangible related to a disposal group classified as held for sale
    122,498       52,554       -       130,834       41,531       -  
Total
  COP 549,891     COP 256,764     COP -     COP 576,095     COP 206,861     COP -  

The following table shows the intangible assets gross carrying amount, detailed with their respective useful lives:
   
December 31, 2010
   
Weight useful life (months)
 
             
Brand
  COP 39,201       60  
Service asset
    6,206       169  
Asset management
    30,004       125  
Benefits associated to Loans
    77,354       201  
Core Deposits
    118,610       151  
Customer relationship Conavi and Corfinsura
    22,400       105  
Customer relationship Factoring Bancolombia
    7,267       48  
Customer relationship Conglomerado Banagrícola
    122,293       159  
Others
    4,058       105  
TOTAL
  COP 427,393          
 
 
F-90

 

The estimated aggregate amortization expense for intangible assets for the next five fiscal years is as follows:

Fiscal year ending
December 31,
 
Aggregate amortization expense
 
2011
  COP 54,500  
2012
    43,464  
2013
    34,667  
2014
    31,444  
2015
    25,273  
Total
  COP 189,348  

m.iv) Fair value of assets and liabilities acquired

Under Colombian GAAP, the purchase method of accounting allocates to goodwill all of the excesses value paid derived from business combinations. For U.S. GAAP purposes, the primary financial statements allocate the fair value adjustments to each of the respective assets and liabilities. Currently, the Bank recognizes adjustments to the Stockholders’ Equity related to business combination due to fair value adquisition date differences in fixed and foreclosed assets, time deposits, long-term debt, loans and securitization of non-performing loans.

 
n)
Securitization

Transfers of financial assets

The Bank securitizes performing and non-performing mortgage loans using different securitization vehicles.

The Bank transfers performing and non-performing mortgages to (SPE) Special Purpose Entities which are not related parties. The special purpose entities issue notes (debt securities) and use the proceeds to buy the residential mortgage portfolio from Bancolombia and other Colombian banks. In a securitization, various classes of debt securities may be issued and are generally collateralized by the transferor.

The securitized loans may be serviced by the Bank or by third parties. The Bank may also retain an interest in the form of the securities acquired and fees on the securitized receivable.

Under Colombian GAAP, the securitization of performing and non-performing residential mortgage loans, is recorded as sales of financial assets and therefore, securitized loans have been removed from the Bank’s balance sheet. Additionally, the Bank recognizes in the income statement at the moment of the operation the difference between the book value of the securitized portfolio and the value received.

Before 2010 under U.S. GAAP, if the SPE activities were sufficiently restricted to meet certain accounting requirements in order to be considered a qualifying special-purpose entity (QSPE), the trust was not consolidated by the seller of the transferred assets. Additionally, under ASC 810, if trusts other than QSPEs met the definition of a variable interest entity (VIE), the Bank evaluated whether the Bank was the primary beneficiary of the trust and, if so, was required to consolidate it.
 
 
F-91

 
 
Under U.S. GAAP, since January 2010 when an entity transfers financial assets, need to assess first whether the transferee should be consolidated. The party that has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, it is considered the primary beneficiary and therefore should consolidate the VIE.
 
Hence, the Bank assessed on 1 January 2010 whether or not it was the primary beneficiary on those VIEs where it had a variable interest and as a result of such assessment, some VIEs where consolidated on January 1, 2010 that were not consolidated as of December 31, 2009. This change in accounting principle did not have a material effect on the adoption date.

For those transfers of financial assets made in 2010, the Bank first assessed the consolidation principle and for those which it is not the primary beneficiary, the sale accounting under US GAAP was further assessed. If considered a sale, the transferred assets were removed from the Bank’s consolidated balance sheet with a gain or loss recognized. If not a sale, the transfer is considered a secured borrowing, resulting in the recognition of a liability in the consolidated balance sheet.

The table below presents a summary of the assets and liabilities of VIEs which have been consolidated on the Bank’s balance sheet at December 31, 2010 and 2009:

   
2010
   
2009
 
Assets
  COP 3,957,769     COP 2,696,829  
Liabilities
    2,244,528       1,428,353  
Allowance for loans losses
  COP 162,443     COP 130,121  
 
The allowance for loan losses represents the management’s estimate of probable losses inherent in the portfolio. The allowance for loan losses is calculated based on criteria described in e) Allowance for loan losses, financial leases, foreclosed assets and other receivables.

The Bank did not provide any additional financial support to these VIEs or others during 2010. Further, the Bank does not have any contractual commitments or obligations to provide additional financial support to these VIEs or others. The investors in debt securities issued by the securitization entities have no recourse to other assets of the Bank.

The Bank received servicing fees from Titularizadora Colombiana S.A. (structuring) of COP 23,542 and COP 20,490 for the year ended 31 December 2010 and 2009, respectively. The Bank believes that the fees reflects an adequate compensation for the services and are priced based on market value.

Cash flows received from securitization entities for the year ended December 31, 2010 and 2009 amounted to COP 6,207 and COP 200,914, respectively.
 
The securitization transactions are source of funding for the Bank.The securitization of performing loans transfers the risks of the loan portfolio to the holders of the debt securities issued by the securitization entities.

Securitization of Non-performing Loans
 
The Bank retains all the risks of the securitized non-performing loans portfolio. In case of default of the borrower of the loan, the Bank is required to contribute other loan or cash to the securitization entity in order to ensure the debt securities issue are been paid. Those securitization transactions are consolidated under U.S. GAAP.
 
Retained Interests in the Securitization vehicles

Under Colombian GAAP, retained interests in the securitization vehicles were recognized as described in Note 2.

For U.S. GAAP purposes, retained interests in those securitization vehicles that are not subject to consolidation during the fiscal year ended December 31, 2010, as the Bank was not considered to be the primary beneficiary in accordance with ASC 810, should be recognized and recorded at fair value, as available-for-sale or trading securities in accordance with ASC 320. To determine their fair values of these securities, the Bank discounted the estimated future cash flows of these securities.

 
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For securities classified as available for sale, unrealized gains or losses over the amortized cost basis are charged to equity through Other Comprehensive Income, unless unrealized losses are deemed to be other than temporary, in which case they are charged to the Statement of Operations.

Securities held for the purpose of selling them in the short term are classified as “trading” and are reported at fair value, with gains and losses included in earnings.

For U.S. GAAP purposes, the amortized cost, unrealized gain/loss and fair value of retained interest qualifying for sale treatment but not subject to consolidation as of December 31, 2010 and 2009, are as follows:

Balance Sheet
 
2010
   
2009
 
 Available for Sale Securities
           
Amortized Cost
  COP 579,394     COP 297,267  
Net Unrealized Gain/(Loss)
    (7,192 )     8,301  
Fair Value
    572,202       305,568  
                 
Trading Securities
               
Fair Value
  COP 11,099     COP 20,239  

For U.S. GAAP purposes, cash flows and proceeds received of SPEs qualifying for sale treatment but not subject to consolidation as of December 31, 2010 and 2009, are as follows:

   
2010
   
2009
 
             
Cash Flows
  COP 5,583     COP 65,653  
Proceeds Received
    811,544       223,224  

 
o)
Foreign currency translation adjustment

Under Colombian GAAP, for purposes of consolidation, the income accounts of foreign currency financial statements, are converted to pesos using the average exchange rates, the exchange difference originated in the consolidated statement of operations accounts is recorded as foreign exchange gain Loss in results.

Under U.S. GAAP, according to ASC 830 and ASC 220, the translation adjustments shall be reported as a component of stockholders’ equity, in other comprehensive income.

 
p)
Non-controlling  Interest

The non-controlling interest corresponds to the proportional adjustments to the stockholders’ equity and net income originated by the subsidiaries where the Bank holds less than 100% of participation.

Under Colombian GAAP, the non-controlling interest is presented as minority interest outside stockholders’ equity. For U.S. GAAP purposes, as of January 1, 2009, the Bank adopted ASC 810-10-65-65-1 which requires the non-controlling interest in subsidiaries to be classified as a separate component of stockholders’ equity in the consolidated financial statements. Additionally, consolidated net income and comprehensive income are reported with separate disclosure of the amounts attributable to the parent and to the noncontrolling interest. The presentation and disclosure requirements have been applied restrospectively for all periods presented on the Supplemental Consolidated Condensed Balance Sheet, Statements of Operations and Comprehensive Income.

 
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q)
Discontinued Operations

On June 9, 2008, Bancolombia sold to Stratton Spain S.L 94.90% of its direct interest and 3.32% of its direct interest held through Banca de Inversión Bancolombia S.A. and Fiduciaria Bancolombia S.A. in Multienlace S.A.  The transaction price amounted to COP 105,882. The Bank registered in 2008 a gain on sale of this investment for COP 83,006.
 
On July 24, 2008, Bancolombia liquidated 100.00% of its direct interest held through Suleasing Internacional USA Inc. and Bancolombia Panamá S.A. in Suinternal Do Brasil Locacao de Bens S.A.  The Bank registered in 2008 a loss on sale of this investment for COP 11.
 
On September 18, 2008, Bancolombia liquidated 71.75% of its direct interest held through Banca de Inversión Bancolombia S.A. in Inversiones Valsimesa S.A.  The Bank registered in 2008 a gain on sale of this investment for COP 5,310.
 
On November 19, 2008, Bancolombia sold to Mitsubishi Corporation 100.00% of its direct interest held through Banca de Inversión Bancolombia S.A. in P.A. Renting Colombia. The Bank registered in 2008 a gain on sale of this investment for COP 2,988.
 
On December 22, 2008, Bancolombia sold to Corporation Delta Codelta. 80.00% of its direct interest held through Banca de Inversión Bancolombia S.A., Inmobiliaria Bancol S.A. and Valores Simesa S.A  in Fundiciones y Componentes Automotores. The Bank registered in 2008 a gain on sale of this investment for COP 13,692.

On January 29, 2010, Bancolombia sold to Inversiones EGEO I S.A.S 98.25% of its direct interest held through Banca de Inversión Bancolombia S.A. in Inversiones Valores y Logística S.A. The Bank registered in 2010 a gain on sale of this investment for COP 27,995.

In September 2010, the Board of Directors of Bancolombia granted its authorization to carry out negotiations with Grupo de Inversiones Suramericana S.A. y Protección S.A. Sociedad Administradora de Fondos de Pensiones y Cesantias, on the sale of the equity interests that Bancolombia owns, through its offshore subsidiaries, in Asesuisa, Asesuisa Vida and AFP Crecer in El Salvador.

On January 28, 2011, Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A., subsidiaries of Bancolombia S.A., and Protección S.A. Sociedad Administradora de Fondos de Pensiones y Cesantias (“Protección S.A.”), signed a contract where Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. sell to Protección S.A. its shares equivalent to 99.99% of the capital stock of AFP Crecer, an organization that administers pensions funds in the Republic of El Salvador. Banagrícola S.A. e Inversiones Financieras Banco Agrícola S.A. will receive a total of USD 103,000 as payment for the shares.

On February 5, 2011, Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A., subsidiaries of Bancolombia S.A., and Suramericana S.A., signed an agreement pursuant to which Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. agreed to sell to Suramericana 97.03% of its shares of capital stock of Asesuisa, an insurance company in the Republic of El Salvador. Banagrícola S.A. and Inversiones Financieras Banco Agrícola S.A. will receive a total of USD 98,000 as payment for the shares.

The results of the discontinued operations under U.S. GAAP were as follows:

   
2010
   
2009
   
2008
 
Profit (losses) from discontinued operations before income taxes
  COP 79,450     COP 59,125     COP 130,973  
Income taxes (benefit) expense
    15,467       11,034       29,856  
Profit (losses) from discontinued operations
  COP 63,983     COP 48,091     COP 101,117  
 
 
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r)
Guarantees

In order to meet the needs of its customers, the Bank issues financial standby letters of credit and bank guarantees.  At December 31, 2010 and 2009, outstanding letters of credit and bank guarantees issued by the Bank totaled COP 3,198,143 and COP 3,094,924, respectively. Under Colombian GAAP, the Bank recognizes in memorandum accounts the full guaranted amount.

The table below summarizes, at December 31, 2010 and 2009, all of the Bank’s guarantees where the Bank is the guarantor.
   
Expire within one year
   
Expire after one year
   
Total amount outstanding
   
Maximum potential amount of
future losses
 
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
Financial standby letters of credit
  COP 1,146,617     COP 1,280,104     COP 540,354     COP 323,997     COP 1,686,971     COP 1,604,101     COP 1,686,971     COP 1,604,101  
Bank guarantees
    1,111,606       1,047,549       399,466       443,274       1,511,172       1,490,823       1,511,172       1,490,823  
Total
  COP 2,258,223     COP 2,327,653     COP 939,820     COP 767,271     COP 3,198,143     COP 3,094,924     COP 3,198,143     COP 3,094,924  

The maximum potential payments represent a “worse-case scenario”, and do not necessarily reflect expected results. The Bank does not hold collateral over the guarantees issued.

Under US GAAP, as of December 31, 2010 and 2009, the Bank recognized COP 23,250 and COP 15,280 as a liability for the fair value of the obligations assumed at its reception. The difference (from 2009 to 2010) corresponds to the increase of commissions during 2010. Such liabilities are being amortized over the expected term of the guarantee.

 
s)
Insurance contracts

Under U.S. GAAP, reserves for individual and group life insurance are computed on the basis of interest rates, mortality tables, including a margin for adverse deviations. For the year 2010 and 2009, reserve discount rate was 4.5%, based on the Bank’s own profitability experience.

Under Colombian GAAP, there are not reserves for adverse deviations.

 
t)
Estimated Fair Value of Financial Instruments
 
Fair value of financial instruments
 
Effective January 1, 2008, the Bank adopted ASC 820 - Fair Value Measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair-value measurements. As a result of the adoption, the Bank has made some amendments to the techniques applied in measuring the fair value in order to include considerations about own credit and counterparty risk.

The framework for measuring fair value under Colombian GAAP is substantially consistent with ASC 820, except for considerations about own credit risk, counterparty risk and valuation of collaterals.
 
Fair-Value Hierarchy
 
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions. These two types of inputs have created the following fair-value hierarchy:
 
 
F-95

 
 
Level 1- Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt, futures, and equity securities that are traded in an active exchange market.
 
Level 2- Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain bonds issued by government or its entities, corporate debt securities and derivative contracts.
 
Level 3- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain retained residual interests in securitizations, asset-backed securities (ABS), highly structured or long-term derivative contracts and certain collateralized debt obligations (CDO) where independent pricing information was not able to be obtained for a significant portion of the underlying assets.
 
The Bank considers relevant and observable market prices in its valuations where possible. The frequency of transactions, the size of the bid-ask spread and the amount of adjustment necessary when comparing similar transactions are all factors in determining the liquidity of markets and the relevance of observed prices in those markets.
 
Determination of Fair Value

For assets and liabilities carried at fair value, the Bank measures such value using the procedures set out below. The Bank did not choose to measure financial instruments and certain other items at fair value based on the ASC 825.

When available, the Bank generally uses quoted market prices to determine fair value and classifies such items in Level 1. The Bank will make use of acceptable practical expedients (mid-market pricing or other pricing conventions) to calculate fair value.

Where available, the Bank may also make use of quoted prices for recent trading activity in positions with the same or similar characteristics to that being valued. The frequency and size of transactions and the amount of the bid-ask spread are among the factors considered in determining the liquidity of markets and the relevance of observed prices from those markets. If relevant and observable prices are available, those valuations would be classified as Level 2.

If quoted market prices are not available, fair value is based upon internally developed valuation techniques such as discounted cash flows, pricing models and similar methodologies that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency rates, option volatilities, etc. Items valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 2 or 3 even though there may be some significant inputs that are readily observable.

Fair-value estimates from internal valuation techniques are verified, where possible, to prices obtained from independent price providers or non-bidding brokers. Price providers and non-bidding brokers’ valuations may be based on a variety of inputs ranging from observed prices to proprietary valuation models.
 
 
F-96

 

  The estimated fair value based upon internally developed valuation techniques could vary if other valuation methods or assumptions were used. The Bank believes its valuation methods are appropriate and consistent with other market participants. Nevertheless, the use of different valuation methods or assumptions, including imprecision in estimating unobservable market inputs, to determine the fair value of certain financial instruments could result in different estimates of fair value at the reporting date and the amount of gain or loss recorded for a particular instrument. Most of the valuation models are not significantly subjective, because they can be tested and, if necessary, recalibrated by the internal calculation of and subsequent comparison to market prices of actively traded securities, where available.
 
Financial instruments that are classified as trading, or available for sale, and all derivatives, are stated at fair value. The fair value of such financial instruments is the estimated amount at which an asset could be sold or a liability transferred in a current transaction between willing parties, other than in a forced or liquidation sale.
 
The following section describes the valuation methodologies used by the Bank, including an indication of the level in the fair-value hierarchy in which each instrument is generally classified. Where appropriate, the description includes details of the valuation models, the key inputs to those models as well as any significant assumptions.
 
1.  Fair value measurement on a recurring and non-recurring basis (ASC 820)
 
Investment securities
 
a)     Debt securities:

When available, the Bank uses quoted market prices to determine the fair value and such items are classified in Level 1 of the fair value hierarchy.  For securities not traded or over the counter, the Bank generally determines fair value utilizing internal valuation and standard techniques. These techniques include determination of expected future cash flows which are discounted using curves of the applicable currencies and interest. The interest and foreign exchange curves are generally observable market data and reference yield and exchange curves derived from quoted interest and exchange rates in appropriate time bandings, which match the timings of the cash flows and maturities of the instruments. Fair value estimates from internal valuation techniques are verified and tested by independent personnel.

Price providers compile prices from various sources and may apply matrix pricing for similar securities where no price is observable. If available, the Bank may also use quoted prices for recent trading activity of assets with similar characteristics to the security. These securities priced using such methods are generally classified as Level 2. However, when less liquidity exists for a security, a quoted price is stale or prices from independent sources vary, a security is generally classified as Level 3.

b)     Equity securities

When available, the Bank uses quoted market prices to determine the fair value and such items are classified in Level 1and Level 2 of the fair value hierarchy and in trading or investment category.
 
Derivatives
 
Derivatives entered into by the Bank are executed over the counter and so are valued using internal valuation techniques as no quoted market prices exist for such instruments. The valuation techniques and inputs depend on the type of derivative and the nature of the underlying instrument. For over the counter derivatives those trades in liquid markets are valued using industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and forward and spot prices for currencies. In addition, these estimates consider assumptions for our own credit risk and the respective counterparty credit risk.
 
    The key inputs depend upon the type of derivative and the nature of the underlying instrument and include interest rate yield curves, foreign exchange rates, the spot price of the underlying volatility, credit curves and correlation of such inputs. The item is placed in either Level 1, level 2 or Level 3 depending on the observability of the significant inputs to the model. Correlation and items with longer tenors are generally less observable.
 
 
F-97

 
 
When appropriate, valuations are adjusted for various factors such as liquidity, bid /offer spreads and credit considerations.
 
Credit Valuation Adjustment
 
Under Colombian GAAP, the measurement of the fair value of derivatives does not include the credit valuation adjustment (“CVA”). Under U.S. GAAP, beginning January 1, 2008 with the adoptions of ASC 820 the Bank is measuring the effects of the credit risk of its counterparties and its own creditworthiness in determining fair value of the swap and forward derivatives.
 
Counterparty credit-risk adjustments are applied to derivatives when the Bank’s position is a derivative asset and its credit risk is incorporated when the position is a derivative liability. The Bank attempts to mitigate credit risk to third parties which are international banks by entering into master netting agreements. When assessing the impact of credit exposure, only the net counterparty exposure is considered at risk; due to the offsetting of certain same-counterparty positions and the application of cash and other collateral. The Bank generally calculates the asset’s credit risk adjustment for derivatives transacted with international financial institutions by incorporating indicative credit related pricing that is generally observable in the market (“CDS”). The credit-risk adjustment for derivatives transacted with non-public counterparties is calculated by incorporating unobservable credit data derived from internal credit qualifications to the financial institutions and corporate companies located in Colombia. The Bank also considers its own creditworthiness when determining the fair value of an instrument, including OTC derivative instruments if the Bank believes market participants would take that into account when transacting the respective instrument. The approach to measuring the impact of the Bank’s credit risk on an instrument transacted with international financial institutions is done using the Asset Swap Curve calculated for subordinated bonds issued by the Bank in foreign currency.  The Bank calculates the liability’s credit risk adjustment for derivatives transacted with local financial institutions by incorporating credit data derived qualifications released in the Colombian financial market.
 
   A hundred basis points increase in our own credit spreads when determining the credit valuation adjustment of our derivative portfolio, could result in a reduction of the associated adjustment of approximately COP 1,059 in 2010. These sensitivity analyses do not represent management’s expectations of the changes in our own credit risk, but are provided as hypothetical scenarios to assess the sensitivity of the fair value of our derivative portfolio to changes in credit spreads.
 
   A hundred basis points increase in the counterparty credit spreads when determining the credit valuation adjustment of our derivative portfolio, could result in a increase of the associated adjustment of approximately COP 7,883 in 2010. These sensitivity analyses do not represent management’s expectations of the changes in the counterparties credit risk, but are provided as hypothetical scenarios to assess the sensitivity of the fair value of our derivative portfolio to changes in credit spreads.
 
Impaired loans measured at fair value

The Bank, as a practical expedient, measured certain impaired loan based on the fair values of the collateral less costs to sell. The fair values were determined using internal valuation techniques.These techniques include basically a matrix pricing using recent transactions involving collateral with similar characteristics. The key inputs to the matrix depend upon the type of collateral and include property price index (per region, size, type etc.), physical conditions and expected selling costs. In certain cases, the Bank may also use experts to validate the prices obtained using the matrix.
 
Mortgage-backed securities

The Bank invests in asset-backed securities which the underlying assets correspond to mortgages issued by financial institutions. The Bank does not have a significant exposure to sub-prime securities. The asset-backed securities are denominated in local market TIPS and can be classified either as trading or available for sale. These asset-backed securities have different vintages and are generally classified as AAA by credit ratings. The Bank does not expect significant changes in those ratings.

 
F-98

 

Fair values were estimated using discounted cash flows using models which the main key economic assumptions used are estimates of prepayment rates and resultant weighted average lives of the securitised mortgage portfolio, probability of default and interest rate curves. These items are classified as Level 3.

2. Fair value disclosures

 ASC 825 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of financial position, for which it is practicable to estimate fair value. The financial instruments below are not recorded at fair value on a recurring and nonrecurring basis:
 
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, accrued interest receivable, customers’ acceptances, accounts receivable, accounts payable, accrued interest payable and bank acceptances outstanding.
 
Deposits

The fair value of Time Deposits was estimated based on the discounted value of cash flows using the appropriate discount rate for the applicable maturity. Fair value of deposits with undefined maturities represents the amount payable on demand as of the balance sheet date.
 
Interbank borrowings and borrowings from development and other domestic 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

The fair value of long-term debt, which comprises bonds issued by Bancolombia and its subsidiaries, was estimated substantially based on quoted market prices. Certain bonds which are nonpublic trading, issued by Tuya S.A., were determined based on the discounted value of cash flows using the rates currently offered for deposits of similar remaining maturities and its own creditworthiness.
 
 
F-99

 
 
Items Measured at Fair Value on a Recurring Basis

The following table presents for each of the fair-value hierarchy levels the Bank’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2010 and 2009 based on the U.S. GAAP carrying amount:

   
Fair value measurements using as of December 31,
       
   
2010
       
   
Level 1
   
Level 2
   
Level 3
   
Total Balance
 
Assets
                       
                         
Trading account
  COP 965,252     COP 1,183,027     COP 79,141     COP 2,227,420  
Securities issued or secured by Colombian government
    945,208       675,455       1,046       1,621,709  
Securities issued or secured by government entities
    4,800       34,132       -       38,932  
Securities issued or secured by other financial entities
    11,984       370,019       60,330       442,333  
Securities issued or secured by Foreign governments
    2,401       -       -       2,401  
Other investments
    859       103,420       6.666       110,945  
Morgage-backed securities
    -       1       11,099       11,100  
Investment securities
    821,663       2,072,978       1,195,173       4,089,814  
Available for sale -Debt securities
                               
Securities issued or secured by Colombian government
    160,478       450,021       -       610,499  
Securities issued or secured by government entities
    -       965,053       210       965,263  
Securities issued or secured by other financial entities
    223,358       90,860       39,695       353,913  
Securities issued or secured by Foreign governments
    221,471       336,020       -       557,491  
Securities issued or secured by the El Salvador Central Bank
    -       168,180       583,066       751,246  
Other investments
    143,159       57,737       -       200,896  
Morgage-backed securities
    -       -       572,202       572,202  
Equity securities
    73,197       5,107       -       78,304  
Derivatives
    317       95,082       371,787       467,186  
Foreign exchange contracts
    -       88,542       352,264       440,806  
Interest rate contracts
    317       6,540       19,523       26,380  
Liabilities
                               
Derivatives
    (302 )     (188,514 )     (167,554 )     (356,370 )
Foreign exchange contracts
    -       (146,406 )     (186,325 )     (332,731 )
Interest rate contracts
    (302 )     (42,108 )     18,771       (23,639 )
    COP 1,786,930     COP 3,162,573     COP 1,478,547     COP 6,428,050  
      27.80 %     49.20 %     23.00 %        
 
 
F-100

 

   
Fair value measurements using as of December 31,
       
             
   
2009
       
   
Level 1
   
Level 2
   
Level 3
   
Total Balance
 
Assets
                       
                         
Trading account
  COP 1,990,411     COP 1,098,705     COP 51,340     COP 3,140,456  
                                 
Securities issued or secured by Colombian government
    1,968,190       645,031       3,126       2,616,347  
Securities issued or secured by government entities
    -       25,308       -       25,308  
Securities issued or secured by other financial entities
    29       370,763       24,811       395,603  
Other investments
    22,192       57,603       3,164       82,959  
Morgage-backed securities
    -       -       20,239       20,239  
                                 
Investment securities
    784,404       2,117,244       911,397       3,813,045  
Available for sale - Debt securities
                               
Securities issued or secured by Colombian government
    254,667       466,848       2,215       723,730  
Securities issued or secured by government entities
    -       820,400       1,325       821,725  
Securities issued or secured by other financial entities
    17,330       181,311       -       198,641  
Securities issued or secured by Foreign governments
    333,928       404,984       -       738,912  
Securities issued or secured by the El Salvador Central Bank
    -       211,861       598,455       810,316  
Other investments
    151,163       26,928       3,834       181,925  
Morgage-backed securities
    -       -       305,568       305,568  
Equity securities
    27,316       4,912       -       32,228  
                                 
Derivatives
    351       94,282       274,842       369,475  
Foreign exchange contracts
    -       102,748       270,666       373,414  
Interest rate contracts
    351       (8,466 )     4,176       (3,939 )
                                 
Liabilities
                               
Derivatives
    (332 )     (215,923 )     -       (216,255 )
Foreign exchange contracts
    -       (241,045 )     -       (241,045 )
Interest rate contracts
    (332 )     25,122       -       24,790  
    COP 2,774,834     COP 3,094,308     COP 1,237,579     COP 7,106,721  
      39.05 %     43.54 %     17.41 %        
                                 

 
F-101

 
 
Changes in Level 3 Fair-Value Category
The table below presents reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable   inputs (Level 3) during 2010.

   
   
Balance,
January 1,
2010
   
Included in
earnings
   
Included in
OCI
   
Purchases
   
Settlement
   
Prepaids
   
Transfers in
to/out of Level
3
   
Balance,
December 31,
2010
 
   
Investment securities
  COP 911,397     COP 1,999     COP (7,653 )   COP 1,189,576     COP (890,201 )   COP (9,945 )   COP -     COP 1,195,173  
   
                                                                 
Securities issued or secured by Colombian government
    2,215       -       -       -       (2,215 )     -       -       -  
Securities issued or secured by government entities
    1,325       (10 )     40       -       (1,072 )     (73 )     -       210  
Securities issued or secured by other financial entities
    3,835       (181 )     213       35,828       -       -       -       39,695  
Securities issued or secured by the El Salvador Central Bank
    598,455       19       (273 )     583,320       (598,455 )     -       -       583,066  
Other investments
      -       -       -       -       -       -       -       -  
Morgage-backed securities
      305,567       2,171       (7,633 )     570,428       (288,459 )     (9,872 )     -       572,202  
   
                                                                 
   
Trading account assets
  COP 51,340     COP (9,233 )   COP -     COP 56,060     COP (20,206 )   COP (625 )   COP 1,805     COP 79,141  
   
                                                                 
Securities issued or secured by Colombian government
    3,126       (260 )     -       -       (1,260 )     (560 )     -       1,046  
Securities issued or secured by government entities
    -       -       -       -       -       -       -       -  
Securities issued or secured by other financial entities
    27,975       (334 )     -       49,949       (18,504 )     -       1,244       60,330  
Other investments
      -       (6 )     -       6,111       -       -       561       6,666  
Morgage-backed securities
      20,239       (8,633 )     -       -       (442 )     (65 )     -       11,099  
   
                                                                 
   
Derivatives
  COP 274,842     COP 74,616     COP -     COP 43,477     COP (95,525 )   COP (93,177 )   COP -     COP 204,233  
Foreign exchange contracts
      267,428       74,450       -       15,196       (93,110 )     (98,025 )     -       165,939  
Interest rate contracts
      7,414       166       -       28,281       (2,415 )     4,848       -       38,294  
   
                                                                 
 
 
F-102

 
 
   
   
Balance,
January
1, 2009
   
Included in
earnings
   
Included
in OCI
   
Purchases
   
Settlement
   
Prepaids
   
Transfers in
to/out of
Level 3
   
Balance,
December 31,
2009
 
   
Investment securities
  COP 967,517     COP (8,400 )   COP 4,155     COP 778,081     COP (787,211 )   COP (48,794 )   COP 6,049     COP 911,397  
   
                                                                 
Securities issued or secured by Colombian government
    -       -       97       -       -       -       2,214       2,311  
Securities issued or secured by government entities
    1,628       83       91       66       (3 )     (541 )     -       1,324  
Securities issued or secured by other financial entities
    12,181       -       -       -       (12,181 )     -       -       -  
Securities issued or secured by foreign Governments
    2,855       -       -       -       (2,855 )     -       -       -  
Securities issued or secured by the El Salvador Central Bank
    638,637       9       (513 )     598,959       (638,637 )     -       -       598,455  
Other investments
      -       -       1,035       -       -       -       3,835       4,870  
Morgage-backed securities
      312,216       (8,492 )     3,445       179,056       (133,535 )     (48,253 )     -       304,437  
   
                                                                 
   
Trading account assets
  COP 79,391     COP (4,664 )   COP -     COP 2,809     COP (15,355 )   COP (13,922 )   COP 3,081     COP 51,340  
   
                                                                 
Securities issued or secured by Colombian government
    1,875       154       -       284       (139 )     -       951       3,125  
Securities issued or secured by government entities
    10,219       -       -       -       (5,136 )     -       -       5,083  
Securities issued or secured by other financial entities
    17,955       (975 )     -       2,501       -       -       -       19,481  
Other investments
      -       1,257       -       24       -       -       2,130       3,411  
Morgage-backed securities
      49,342       (5,100 )     -       -       (10,080 )     (13,922 )     -       20,240  
   
                                                                 
   
Derivatives
  COP 19,978     COP 129,419     COP -     COP 180,033     COP (8,847 )   COP (45,741 )   COP -     COP 274,842  
Foreign exchange contracts
      2,789       105,981       -       175,088       (8,797 )     (47,723 )     -       227,338  
Interest rate contracts
      17,189       23,438       -       4,945       (50 )     1,982       -       47,504  
   
                                                                 

 
F-103

 

Transfers between Level 1 and Level 2 of the Fair Value Hierarchy

The Bank did not have any significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during 2010.

Nonfinancial assets and nonfinancial liabilities measured at Fair Value
 
The following table present for each of the fair-value hierarchy levels the bank’s assets and liabilities that are measured at fair value on a nonrecurring basis at December 31, 2010 and 2009 based on the U.S. GAAP carrying amount:

   
Fair value measurements using
       
Year ended
 
Level 1
   
Level 2
    Level 3    
Total gain (losses)
 
2010
                       
Collateralized loans
  COP -     COP -     COP 266,503     COP 91,814  
Foreclosed assets
    -       -       57,755       2,130  
Fixed assets
    -       -       22,351       (71 )
    COP -     COP -     COP 346,609     COP 93,873  
2009
                               
Collateralized loans
  COP -     COP -     COP 233,336     COP (97,498 )
Foreclosed assets
    -       -       59,448       (22,014 )
Fixed assets
    -       -       29,469       (3,515 )
Factoring Bancolombia’s goodwill (1)
    -       -       -       (7,787 )
                                 
     
  COP -     COP -     COP 322,253     COP (130,814 )

 (1) In 2009 the Bank has performed the impairment test of Factoring Bancolombia’s goodwill and concluded there was impairment. The impairment loss has been recorded to the extent of carrying amount of the goodwill.
 
ASC 825 Disclosures

The table below presents the disclosures required by ASC 825 to all assets and liabilities based on the U.S. GAAP carrying amounts:
     
 
December 31, 2010
   
December 31, 2009
 
     
 
U.S. GAAP
Amount
   
Estimated fair
value
   
U.S. GAAP
Amount
   
Estimated fair
value
 
Financial assets
                       
Cash and due from banks
  COP 6,134,698     COP 6,134,698     COP 7,401,416     COP 7,401,416  
Investment securities, net  
    4,028,953       4,113,265       3,874,840       3,836,355  
Trading account  
    2,246,615       2,290,949       3,203,409       3,208,061  
Loans and accrued interest receivable on loans, net
    50,551,812       52,030,037       42,794,378       45,695,315  
Custumers' acceptances  
    47,486       47,486       47,609       47,609  
Derivatives    
    467,187       467,187       369,371       369,371  
Financial liabilities
                               
Derivatives    
    356,369       356,369       216,254       216,254  
Time deposits  
    15,270,271       15,390,762       18,331,488       18,662,878  
Overnight funds  
    1,962,178       1,962,178       1,348,947       1,348,947  
Bank acceptances outstanding  
    47,486       47,486       47,609       47,609  
Interbank borrowings(1)
    2,703,279       2,703,279       1,158,133       1,158,133  
Borrowings from development   
                               
and other domestic banks(1)
    2,564,580       2,564,580       2,903,041       2,903,041  
Bonds  
    5,817,459       6,071,037       4,269,780       4,400,690  

 
(1)
Interbank borrowings and borrowings from domestic development banks have been valued at their carrying amounts because of their relatively short-term nature. In addition, these instruments bear interest at variable rates.

 
F-104

 

 
u)
Paid-in capital

In accordance with Colombian GAAP, paid-in capital in excess of par value of common and preferred shares issued is credited to a legal reserve. Under U.S. GAAP, capital in excess of par value is credited to paidin capital.

 
v)
Equity tax
Since 2007 Colombian tax regulations require companies pay annually a special tax, calculated on their net assets established under tax basis as of January 1 of each year, at the tax statutory rate of 1.2%. During 2010 and 2011 new regulation on this matter coming in force require the companies to calculate this tax only once for the four years beginning in 2011 at the tax rate of 6%,  payable in 8 semi-annually installments without interest.

Under Colombian GAAP, equity tax is allowed to be recorded directly in shareholders’ equity. Under U.S. GAAP, equity tax is recorded directly on Statements of Operations.

 
w)
Contingencies
 
According to Colombian GAAP, provisions for contingencies relating to government fines or penalties must be established for at least 50% of the total value of such amount which are then adjusted to 100% of the total when the administrative ruling becomes final and is no longer subject to administrative appeal.
 
According to U.S. GAAP, an estimated loss from a loss contingency shall be accrued by a charge to income if information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and the amount of loss can be reasonably estimated.

 
x)
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 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, 2010, 2009 and 2008, the Bank had a simple capital structure. Therefore, there was no difference between basic or diluted EPS for these years.

The following table summarizes information related to the computation of basic EPS for the years ended December 31, 2010, 2009 and 2008 (in millions of pesos, except per share data):
   
2010
   
2009
   
2008
 
                   
U.S. GAAP consolidated net income
  COP 1,544,761     COP 1,172,524     COP 849,920  
Less preferred share dividends
    185,964       177,108       173,548  
Income attributable to common stockholders
    1,358,797       995,416       676,372  
                         
Income from continuing operations attributable to common stockholders
    1,294,814       947,325       575,255  
Income (loss) from operations and disposal of discontinued operations
    63,983       48,091       101,117  
Income attributable to common stockholders
    1,358,797       995,416       676,372  
                         
Weighted average number of common shares outstanding used in basic EPS calculation (in millions)
    510       510       510  
Basic and Diluted earnings per share (U.S. GAAP):
                       
Income from continuing operations
    2,538.85       1,857.49       1,127.94  
Income (loss) from operations and disposal of discontinued operations
    125.46       94.30       198.27  
Income attributable to common stockholders
  COP 2,664.31     COP 1,951.79     COP 1,326.21  
 
 
F-105

 

 
y)
Segments Disclosure
 
Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly used by the chief operating decision maker in deciding how to allocate resources and assessing performance.

Until 2009, The Bank managed its business through six main operating segments: Retail and Small Business Banking, Corporate and Governmental Banking, Treasury, Offshore Commercial Banking, Leasing and All Other Segments.

In 2010, the Bank realigned its operating segments to reflect the core businesses in which the Bank operates and how it is managed.The changes in the Bank’s operating segments are a result of changes within the organizational management of the business and reporting structure, and how the chief operating decision maker reviews the financial information of the business on a regular basis.

The Bank changed from segments based on its market segmentation, customer’s needs and trading partners to segments that are strategic business units that are managed separately based on the fundamental differences in their operations. The new segments structure include: Banking Colombia, Banking El Salvador, Leasing, Trust, Investment, Brokerage, Off Shore, Pension and Insurance, and All other segments.

Additionally, the Bank manages and measures the performance of its operations through these business segments using the same accounting policies described in the summary of significant accounting policies (see Note 2).

As a result of these changes, the financial data for the prior periods has been retrospectively reclassified.

The Bank does not have any individual external customer which represents 10% or more of the enterprise’s revenues.

The following presents information on reported operating segment profit or loss, and segment assets under Colombian GAAP:

 
F-106

 

   
December 31, 2010
 
   
Banking
Colombia
 
Banking El
Salvador
 
Leasing
 
Trust
 
Investment
Banking
 
Brokerage
 
Off Shore
 
Pension
and
Insurance
 
All Other
Segments
 
Total before
eliminations
 
Adjustments
for
consolidation
purposes (1)
 
Total after
eliminations
 
                                                   
Net Interest Income
  COP 2,617,840     362,155     443,574     16,933     10,303     28,102     108,114     4,046     680     3,591,747     -     3,591,747  
Interest income
    3,645,216     473,294     932,697     17,064     11,630     42,635     205,345     4,742     1,843     5,334,466     -     5,334,466  
Interest expense
    1,027,376     111,139     489,123     131     1,327     14,533     97,231     696     1,163     1,742,719     -     1,742,719  
Revenues (expenses) from transactions with other operating segments of the Bank
    (5,218 )   17,418     8,736     (790 )   779     (174 )   (7,305 )   (17,695 )   4,249     -     -     -  
Net provisions
    (378,778 )   (102,681 )   (48,262 )   (394 )   1,168     (208 )   (19,754 )   593     (181 )   (548,497 )   782     (547,715 )
Net Commissions
    1,197,419     115,206     4,895     144,786     31,913     52,711     12,432     89,969     840     1,650,171     -     1,650,171  
Foreign exchange gains,and Derivatives
    105,444     947     57     1,196     33     299     (8,581 )   -     640     100,035     -     100,035  
Other operating income
    344,450     111     45,006     468     93,931     4,456     102,967     2,808     95,147     689,344     (495,926 )   193,418  
Total Operating Income
    3,881,157     393,156     454,006     162,199     138,127     85,186     187,873     79,721     101,375     5,482,800     (495,144 )   4,987,656  
Operating Income before provisions
    4,259,935     495,837     502,268     162,593     136,959     85,394     207,627     79,128     101,556     6,031,297     (495,926 )   5,535,371  
Salaries and employee benefits
    1,024,904     86,388     71,384     34,458     12,587     60,842     6,937     15,059     3,819     1,316,378     -     1,316,378  
Administrative and other expenses
    1,417,600     103,534     142,049     19,347     4,086     25,857     59,874     16,056     21,524     1,809,927     -     1,809,927  
Operating expenses
    2,442,504     189,922     213,433     53,805     16,673     86,699     66,811     31,115     25,343     3,126,305     -     3,126,305  
Non-operating income (expense)
    71,628     600     (7,032 )   (742 )   133     15,206     (3,279 )   1,752     19,814     98,080     (14,520 )   83,560  
Income before income taxes
    1,510,281     203,834     233,541     107,652     121,587     13,693     117,783     50,358     95,846     2,454,575     (509,664 )   1,944,911  
Income tax expense
    (334,712 )   (54,547 )   (47,208 )   (34,660 )   (18,632 )   (1,245 )   -     (11,557 )   (5,856 )   (508,417 )   -     (508,417 )
Segment profit/loss
    1,175,569     149,287     186,333     72,992     102,955     12,448     117,783     38,801     89,990     1,946,158     (509,664 )   1,436,494  
Segment assets
  COP 49,499,711     7,093,621     8,345,821     272,797     427,967     851,844     6,068,344     229,156     1,529,612     74,318,873     (6,223,717 )   68,095,156  

(1) Includes provisions, dividends, gains on sales and noncontrolling interest

 
F-107

 

     December 31, 2009  
   
Banking
Colombia
 
Banking
El
Salvador
 
Leasing
 
Trust
 
Investment
Banking
 
Brokerage
 
Off
Shore
 
Pension
and
Insurance
 
All Other
Segments
 
Total before
eliminations
 
Adjustments
for
consolidation
purposes (1)
 
Total after
eliminations
 
                                                   
Net Interest Income
  COP 2,954,586     393,873     432,472     17,225     17,438     58,129     96,131     7,109     (1,694 )   3,975,269     837     3,976,106  
Interest income
    4,665,475     601,181     1,062,568     17,237     20,226     87,494     278,289     7,109     7,142     6,746,721     837     6,747,558  
Interest expense
    1,710,889     207,308     630,096     12     2,788     29,365     182,158     -     8,836     2,771,452     -     2,771,452  
Revenues (expenses) from transactions with other operating segments of the Bank
    (3,956 )   15,614     5,991     (232 )   301     291     (9,830 )   (17,403 )   9,224     -     -     -  
Net provisions
    (866,097 )   (179,418 )   (96,419 )   (2,364 )   (1,236 )   (152 )   (8,358 )   3,258     1,437     (1,149,349 )   (4,025 )   (1,153,374 )
Net Commissions
    1,116,632     136,137     597     153,731     14,934     48,927     10,595     96,676     1,920     1,580,149     -     1,580,149  
Foreign exchange gains,and Derivatives
    36,377     1,007     (185 )   3,162     (24 )   565     941     -     818     42,661     -     42,661  
Other operating income
    244,016     138     40,391     461     31,341     1,321     44,375     12     138,484     500,539     (370,416 )   130,123  
Total Operating Income
    3,481,558     367,351     382,847     171,983     62,754     109,081     133,854     89,652     150,189     4,949,269     (373,604 )   4,575,665  
Operating Income before provisions
    4,347,655     546,769     479,266     174,347     63,990     109,233     142,212     86,394     148,752     6,098,618     (369,579 )   5,729,039  
Salaries and employee benefits
    878,949     101,483     62,424     31,082     11,979     53,416     8,215     16,876     3,191     1,167,615     -     1,167,615  
Administrative and other expenses
    1,331,041     136,949     121,173     13,726     3,947     28,263     75,993     21,402     25,302     1,757,796     -     1,757,796  
Operating expenses
    2,209,990     238,432     183,597     44,808     15,926     81,679     84,208     38,278     28,493     2,925,411           2,925,411  
Non-operating income (expense)
    61,378     (8,748 )   (5,345 )   1,088     2,258     (1,582 )   (1,286 )   (236 )   13,960     61,487     7,122     68,609  
Income before income taxes
    1,332,946     120,171     193,905     128,263     49,086     25,820     48,360     51,138     135,656     2,085,345     (366,482 )   1,718,863  
Income tax expense
    (316,170 )   (23,446 )   (43,348 )   (44,333 )   (5,460 )   (8,371 )   -     (13,395 )   (7,490 )   (462,013 )   -     (462,013 )
Segment profit/loss
    1,016,776     96,725     150,557     83,930     43,626     17,449     48,360     37,743     128,166     1,623,332     (366,482 )   1,256,850  
Segment assets
  COP 42,952,531     7,756,293     7,341,863     256,195     398,267     1,129,222     6,362,171     242,226     1,502,366     67,941,134     (6,076,769 )   61,864,365  

(1) Includes provisions, dividends, gains on sales and noncontrolling interest
 
 
F-108

 

    
December 31,2008
 
   
Banking
Colombia
 
Banking
El
Salvador
 
Leasing
 
Trust
 
Investment
Banking
 
Brokerage
 
Off Shore
 
Pension
and
Insurance
 
All Other
Segments
 
Total before
eliminations
 
Adjustments
for
consolidation
purposes (1)
 
Total after
eliminations
 
                                                   
Net Interest Income
  COP 2,846,819     321,797     428,817     14,483     7,159     34,308     34,096     5,454     9,763     3,702,696     -     3,702,696  
Interest income
    4,618,275     514,344     1,062,177     14,530     13,096     73,161     217,805     5,454     44,070     6,562,912     -     6,562,912  
Interest expense
    1,771,456     192,547     633,360     47     5,937     38,853     183,709     -     34,307     2,860,216     -     2,860,216  
Revenues (expenses) from transactions with other operating segments of the Bank
    19,479     16,282     (26,233 )   600     1,887     2,635     (7,017 )   (16,367 )   8,734     -     -     -  
Net provisions
    (955,657 )   (92,572 )   (85,898 )   (948 )   7,227     (183 )   (13,104 )   (1,364 )   8,129     (1,134,370 )   1,203     (1,133,167 )
Net Commissions
    1,000,716     131,145     5,951     88,584     13,719     56,796     10,093     84,386     907     1,392,297           1,392,297  
Foreign exchange gains,and Derivatives
    204,331     1,069     (2,324 )   590     26     2,912     (954 )   -     (953 )   204,697     -     204,697  
Other operating income
    305,683     154     45,835     1,343     53,769     1,069     26,019     13,949     22,040     469,861     (225,229 )   244,632  
Total Operating Income
    3,421,371     377,875     366,148     104,652     83,787     97,537     49,133     86,058     48,620     4,635,181     (224,026 )   4,411,155  
Operating Income before provisions
    4,377,028     470,447     452,046     105,600     76,560     97,720     62,237     87,422     40,491     5,769,551     (225,229 )   5,544,322  
Salaries and employee benefits
    848,854     90,041     59,578     24,780     8,417     45,123     5,967     15,690     2,987     1,101,437     -     1,101,437  
Administrative and other expenses
    1,207,968     125,839     112,254     11,855     3,546     26,181     68,534     21,205     29,981     1,607,363     -     1,607,363  
Operating expenses
    2,056,822     215,880     171,832     36,635     11,963     71,304     74,501     36,895     32,968     2,708,800     -     2,708,800  
Non-operating income (expense)
    25,904     22,278     (3,479 )   (2,189 )   546     2,507     3,578     6,852     16,977     72,974     (10,630 )   62,344  
Income before income taxes
    1,390,453     184,273     190,837     65,828     72,370     28,740     (21,790 )   56,015     32,629     1,999,355     (234,656 )   1,764,699  
Income tax expense
    (348,911 )   (36,897 )   (35,729 )   (24,420 )   (1,347 )   (9,283 )   -     (11,713 )   (5,756 )   (474,056 )   -     (474,056 )
Segment profit/loss
    1,041,542     147,376     155,108     41,408     71,023     19,457     (21,790 )   44,302     26,873     1,525,299     (234,656 )   1,290,643  
Segment assets
  COP 41,815,182     8,526,531     6,939,220     206,186     369,867     884,800     6,939,710     275,493     1,532,178     67,489,166     (5,706,087 )   61,783,079  

(1) Includes provisions, dividends, gains on sales and noncontrolling  interest
 
 
F-109

 

The following summarizes the Bank’s revenues and long-lived assets attributable to Colombia and other foreign countries:
   
As of December 31,
 
   
2010
   
2009
 
         
Long
         
Long
 
Geographic Information
 
Revenues
   
Term – Assets (1)
   
Revenues
   
Term – Assets (1)
 
                         
Colombia
    9,464,134       2,030,204       7,683,556       1,715,504  
Panama and   Cayman Islands
    442,772       7,723       274,620       8,964  
Puerto Rico
    28,170       128       36,047       180  
Perú
    24,931       65,004       21,755       25,441  
El Salvador
    1,079,476       132,541       847,198       147,397  
USA
    37,403       -       44,459       108  
Total
    11,076,886       2,235,600       8,907,635       1,897,594  
Eliminations of intersegment operations
    (865,814 )     11       (449,837 )     11  
Total, net
  COP 10,211,072     COP 2,235,611     COP 8,457,798     COP 1,897,605  

(1)    Included foreclosed assets, net, and property, plant and equipment, net.

As of December 31, 2010, the following are the Bank’s operating segments:

Banking Colombia: This segment provides retail and corporate banking products and services to individuals, companies and national and local governments in Colombia. The Bank’s strategy in Colombia is to grow with these clients based on value-added, long-term relationships. In order to offer specialized services to individuals and small and medium size enterprises (SMEs), the Bank’s retail sales force targets the clients classified as: Personal, Private, Entrepreneurs, Foreign Residents and SMEs. The Bank’s corporate and goverment sales force targets and specializes in companies with more than COP 16,000 million in revenue of nine economic sectors: Agribusiness, Commerce, Manufacturing of Supplies and Materials, Media, Financial Services, Non-Financial Services, Construction, Government and Natural Resources.
 
Banking El Salvador: This segment provides retail and commercial banking products and services to individuals, companies and national and local governments in El Salvador. Banking El Salvador also includes operations of the following subsidiaries Arrendadora Financiera S.A., Credibac S.A. de CV and Bursabac S.A. de CV.
 
This segment is also responsible for the management of the Bank’s proprietary trading activities, liquidity and distribution of treasury products and services to its client base in El Salvador.
 
Leasing: This segment provides financial and operational leases, including cross-border and international leasing services to clients in Colombia, Central America, Mexico and Brazil. Bancolombia offers these services mainly through the following Subsidiaries: Leasing Bancolombia S.A., Renting Colombia S.A., Renting Perú S.A.C., Leasing Peru S.A., Tempo Rent a Car S.A. and Capital Investment Safi S.A.
 
Trust: This segment provides trust services and asset management to clients in Colombia and Peru through Fiduciaria Bancolombia and Fiduciaria GBC S.A. The main products offered by this segment include money market accounts, mutual and pension funds, private equity funds, payment trust, custody services, and corporate trust.
 
Investment Banking: This segment provides corporate and project finance advisory, underwriting, capital markets services and private equity management through Banca de Inversion Bancolombia S.A. Its customers include private and publicly-held corporations as well as government institutions.
 
Brokerage: This segment provides brokerage, investment advisory and private banking services to individuals and institutions through Valores Bancolombia S.A., Valores Bancolombia Panama S.A. and Suvalor Panamá Fondos de Inversión. It sells and distributes equities, futures, foreign currencies, fixed income securities, mutual funds and structured products.
 
 
F-110

 
 
Off Shore: This segment provides a complete line of offshore banking services to Colombian and Salvadorian customers through Bancolombia Panamá S.A., Bancolombia Cayman, and Bancolombia Puerto Rico International Inc. It offers 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. Through these Subsidiaries, the Bank also offers investment opportunities in U.S. dollars, savings and checking accounts, time deposits, and investment funds to its high net worth clients and private banking customers.
 
Pension and Insurance: This segment provides pension plan administration and insurance services to individuals and companies in El Salvador through Crecer S.A., Aseguradora Suiza Salvadoreña S.A. and Asesuisa Vida S.A.
 
All other segments: This segment includes results from small operation of particular investment vehicles of Bancolombia: Valores Simesa, Inmobiliaria Bancol, Todo1 Colombia S.A., Inversiones CFNS, CFNS Infraestructura S.A.S, Sinesa, Sinesa Holding, Future Net, Vivayco S.A.S., Banagrícola, Inversiones Financieras Banco Agrícola, Banco Agrícola Panamá and others.
 
 
z)
Recent U.S. GAAP Pronouncements

In April 2011, FASB issued ASU 2011-02, “A Creditor’s Determination of whether a Restructuring Is a Troubled Debt Restructuring”, to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The new guidance requires for creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered troubled debt restructurings. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring. As a result of applying these amendments, the Bank considers that newly considerations in its U.S. GAAP disclosures and financial information should be applied. Management is currently evaluating the impact the ASU 2011-02 would have on the Bank‘s financial statement and U.S.GAAP disclosures.The Bank does not expect any significant impact.

In January 2011, FASB issued ASU 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU  2010-20”, to temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. Under the existing effective date in ASU 2010-20, the Bank would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. According to ASU 2011-02, the amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Management is currently evaluating the impact the ASU 2011-01 would have on the Bank‘s financial statement and U.S.GAAP disclosures.

In December 2010, the FASB issued ASU 2010-29 “Disclosure of Supplementary Pro Forma Information for Business Combinations”, to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. Paragraph 805-10-50-2(h) requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.The adoption had no impact on the U.S. GAAP disclosures and financial information released by the Bank for the reporting period ending on December 31, 2010.

 
F-111

 

In December 2010, the FASB issued ASU 2010-28 “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. Under Topic ASC 350 on goodwill and other intangible assets, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The amendments in this Update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this Update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Bank has taken into account the amendments introduced by this Update during the annual goodwill impairment test for reporting period ending on December 31, 2010.

In August 2010, the FASB issued ASU 2010-22 to amend various SEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics related to: Form of condensed financial statements, Debt Issue Costs in Conjunction with a Business Combination, Business Combinations Prior to an Initial Public Offering, Accounting for Divestiture of a Subsidiary and other topics. The proposed amendments do not include an effective date, applications must be considered after publication. The adoption had no impact on the U.S. GAAP disclosures and financial information released by the Bank.
In August 2010, the FASB issued ASU 2010-21 to amend various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The proposed amendments do not include an effective date, applications must be considered after publication. The Bank does not expect any significant effect in its U.S. GAAP disclosures and financial information.

In July 2010, the FASB issued ASU 2010-20, to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class of financing receivable certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.
In February 2010, the FASB issued ASU 2010-10, to defer the effective date of the amendments to the consolidation requirements made by FASB Statement 167 (ASC 810-10) to a reporting entity’s interest in certain types of entities and clarify other aspects of the Statement 167 amendments. The ASU also clarifies how a related party’s interests in an entity should be considered when evaluating the criteria for determining whether a decision maker or service provider fee represents a variable interest. In addition, the ASU also clarifies that a quantitative calculation should not be the sole basis for evaluating whether a decision maker’s or service provider’s fee is a variable interest.  The FASB Statement 167 was adopted on January 1, 2010.
 
In January 2010, the FASB issued ASU 2010-06, which amends ASC 820 to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The ASU also clarified existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. Further, the ASU amended guidance on employers’ disclosures about post retirement benefit plan assets under ASC 715 to require that disclosures be provided by classes of assets instead of by major categories of assets. The ASU was effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard had no significant impact on the U.S. GAAP disclousures and financial information.

 
F-112

 

In December 2009, the FASB issued ASU 2009-17, which codifies Statement 167 and revises the former guidance under Interpretation 46(R). The amendments in ASU 2009-17 replace the quantitative-based risks-and-rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has (1) the power to direct the activities of a variable interest entity that most significantly affects the entity’s economic performance, and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity. The ASU also requires additional disclosures about a reporting entity’s involvement with variable interest entities and about any significant changes in risk exposure as a result of that involvement. It is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. The Bank does not expect any significant effect in its U.S. GAAP disclosures and financial information.

In June 2009, the FASB issued FASB Statement No. 166, Accounting for Transfers of Financial Assets -an amendment of FASB Statement No. 140 (“SFAS 166”), amending the guidance on transfers of financial assets in order to address practice issues highlighted most recently by events related to the economic downturn. The amendments include: (1) eliminating the qualifying special-purpose entity concept, (2) a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, (3) clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale, (4) a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor, and (5) extensive new disclosures. The Bank adopted this new guidance on January 1, 2010 and is applied prospectively.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (ASC 810). This standard represents a significant change to the previous accounting rules in that it: (1) eliminates the scope exception for qualifying special-purpose entities; (2) changes the consolidation model to one based on power and economics; (3) requires a company to continually reassess whether it should consolidate an entity; (4) requires an assessment of whether an entity is subject to the standard due to a troubled debt restructuring, and (5) requires extensive new disclosures. The Bank adopted this new guidance on January 1, 2010.

Recent Colombian GAAP Pronouncements:
 
As explain in Note 21 Accrued expenses, during 2010 the Colombian government established a new equity tax for 2011, which is payable in 8 semi-annually installments during the next four years. Under U.S. GAAP, this equity tax will be recorded in the year 2011 Statement of Operations for its present value amounting aproximately to COP 446,052. 
 
 
F-113

 

EXHIBIT INDEX

The following exhibits are filed as part of this Annual Report.

1.
 
English translation of corporate by-laws (estatutos sociales) of the registrant, as amended on March 7, 2011.
2 (2)
 
The Deposit Agreement entered into between Bancolombia and The Bank of New York, as amended on January 14, 2008.
     
4.1.(3)
 
English summary of the Agreement for transfer of assets, liabilities and contracts of Sufinanciamiento S.A. Compañia de Financiamiento to Bancolombia S.A. dated March 19, 2010.
4.1. (3)
 
English summary of the Share Purchase Agreement among Leasing Bancolombia, Banca de Inversion Bancolombia, Inversiones CFNS, Fundacion Bancolombia y Factoring Bancolombia, Mitsubishi International Corporation and Mitsubishi Corporation dated March 12, 2010.
4.1.
 
English summary of the Sale Agreement of Asesuisa entered into among Bancoagrícola S.A., Inversiones Financieras Banco Agrícola and Suramericana dated February 5, 2011.
4.1.
 
English summary of the Sale Agreement of AFP Crecer entered into Bancoagrícola S.A., Inversiones Financieras Banco Agrícola and Proteccion S.A. Sociedad Administradora de Fondos de Pensiones y Cesantias dated December 28, 2010.
4.1.
 
English summary of the sale agreement of a several real estate propierties which form part of the “San Martin” building complex entered into Bancolombia S.A.  and Fondo de Capital Privado Inmobiliario Colombia.
4.1.
 
English summary of the dissolved of Sinesa Holding Company, subsidiary of Bancolombia.
4.1.
 
English summary of the formative documents of a new entity Cobranzas Bancolombia S.A., after the corporate break-up of Tuya S.A. Compañía de Financiamiento.
     
7
 
Selected Ratios’ Calculation.
8.1.
 
List of Subsidiaries.
11(1)
 
English translation of the Ethics Code of the registrant, as amended on June 23, 2008.
12.1
 
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 28, 2011.
12.2
 
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 28, 2011.
13.1
 
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 28, 2011.
13.2
 
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 28, 2011.
15.(a)(1)
  
English translation of Corporate Governance Code (Código de Buen Gobierno) of the registrant, as amended on June 23, 2008.
 

(1) Incorporated by reference to the Bank’s Annual Report on Form 20-F for the year ended December 31, 2007 filed on July 8, 2008.
(2) Incorporated by reference to the Registration Statement in Form F-6, filed by Bancolombia on January 14, 2008.
(3) Incorporated by reference to the Bank’s Annual Report on Form 20-F for the year ended December 31, 2009 filed on June11, 2010.