UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE

SECURITIES EXCHANGE ACT OF 1934

 

For the month of August, 2018

 

Commission File Number 1-11414

 

BANCO LATINOAMERICANO DE COMERCIO EXTERIOR, S.A.

(Exact name of Registrant as specified in its Charter)

 

FOREIGN TRADE BANK OF LATIN AMERICA, INC.

(Translation of Registrant’s name into English)

 

Business Park Torre V, Ave. La Rotonda, Costa del Este

P.O. Box 0819-08730

Panama City, Republic of Panama

(Address of Registrant’s Principal Executive Offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F   x    Form 40-F ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

 

Yes   ¨    No   x

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

 

Yes   ¨    No   x

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: August 10, 2018

 

	FOREIGN TRADE BANK OF LATIN AMERICA, INC.
	(Registrant)
		By:	/s/ Ana Graciela de Méndez
		Name:	Ana Graciela de Méndez
		Title:	CFO

 

 

Banco Latinoamericano

de Comercio Exterior, S.A.

and Subsidiaries

 

Unaudited condensed consolidated interim statement of financial position as of June 30, 2018 and December 31, 2017, and related unaudited condensed consolidated interim statements of profit or loss, unaudited condensed consolidated interim statements of profit or loss and other comprehensive income, unaudited condensed consolidated interim statements of changes in equity and unaudited condensed consolidated interim statements of cash flows for the six months ended June 30, 2018, 2017 and 2016.

 

 

Banco Latinoamericano de Comercio Exterior, S.A.

and Subsidiaries

 

Unaudited condensed consolidated interim financial statements

 

Contents	Pages
Unaudited condensed consolidated interim statements of financial position	3
Unaudited condensed consolidated interim statements of profit or loss	4
Unaudited condensed consolidated interim statements of profit or loss and other comprehensive income	5
Unaudited condensed consolidated interim statements of changes in stockholder’s equity	6
Unaudited condensed consolidated interim statements of cash flows	7
Notes to the unaudited condensed consolidated interim financial statements	8-81

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Unaudited condensed consolidated interim statement of financial position

June 30, 2018 and December 31, 2017

(In US$ thousand)

 

				June 30,				December 31,
				2018				2017
		Notes		(Unaudited)				(Audited)
Assets
Cash and cash equivalents		4,18			683,523				672,048
Financial Instruments:
Securities at fair value through OCI		5,18			21,076				25,135
Securities at amortized cost, net		5,18			78,129				68,934
Loans		5,18			5,555,254				5,505,658
Less:
Allowance for expected credit losses		5			85,711				81,294
Unearned interest and deferred fees		5			6,660				4,985
Loans, net					5,462,883				5,419,379
Derivative financial instruments used for hedging – receivable		5,16,18			6,379				13,338
Investment properties, net					3,971				5,119
Property and equipment, net					6,958				7,420
Intangibles, net					4,790				5,425
Other assets:
Customers' liabilities under acceptances		18			13,656				6,369
Accrued interest receivable		18			38,379				30,872
Other assets		8			11,330				13,708
Total of other assets					63,365				50,949
Total assets					6,331,074				6,267,747
Liabilities and stockholders' equity
Deposits:		9,18
Noninterest-bearing - Demand					1,635				420
Interest-bearing - Demand					18,366				81,644
Time					2,969,001				2,846,780
Total deposits					2,989,002				2,928,844
Derivative financial instruments used for hedging – payable		5,16,18			30,064				34,943
Short-term borrowings and debt		11,18			1,048,470				1,072,723
Long-term borrowings and debt, net		11,18			1,169,672				1,138,844
Other liabilities:
Acceptances outstanding		18			13,656				6,369
Accrued interest payable		18			15,953				15,816
Allowance for expected credit losses on loan commitments and financial guarantees contracts		6			1,652				6,845
Other liabilities		12			15,226				20,551
Total other liabilities					46,487				49,581
Total liabilities					5,283,695				5,224,935
Stockholders' equity:
Common stock		14			279,980				279,980
Treasury stock		15			(58,635	)			(63,248	)
Additional paid-in capital in excess of assigned value of common stock		14			119,059				119,941
Capital reserves					95,210				95,210
Dymanic provision		22			108,756				108,756
Regulatory credit reserve		22			15,201				20,498
Retained earnings		22			485,724				479,712
Accumulated other comprehensive income (loss)		5,16			2,084				1,963
Total stockholders' equity					1,047,379				1,042,812
Total liabilities and stockholders' equity					6,331,074				6,267,747

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Unaudited condensed consolidated interim statements of profit or loss

For the three and six months ended June 30, 2018, 2017 and 2016

(In US$ thousand, except per share amounts)

 

				For the three months ended June 30,												For the six months ended June 30,
		Notes		2018				2017				2016				2018				2017				2016
Interest income:
Deposits					3,225				2,822				894				6,164				4,823				2,064
At fair value through profit or loss					-				-				-				-				-				-
At fair value through OCI					143				126				548				266				296				1,499
Securities at amortized cost					521				441				788				1,006				974				1,572
Loans					58,030				52,710				58,244				111,920				109,137				116,496
Total interest income					61,919				56,099				60,474				119,356				115,230				121,631
Interest expense:
Deposits					16,388				11,593				5,089				30,392				17,800				9,641
Short and long-term borrowings and debt					17,641				15,161				17,198				34,484				33,653				34,286
Total interest expense					34,030				26,754				22,287				64,877				51,453				43,927
Net interest income					27,889				29,345				38,187				54,479				63,777				77,704
Other income:(expense), net
Fees and commissions, net					5,032				5,013				4,434				8,091				8,282				6,807
Loss on derivative financial instruments and foreign currency exchange, net					(516	)			473				500				1,150				604				(339	)
(Loss) gain per financial instrument at fair value through profit or loss					(280	)			(649	)			416				(342	)			(709	)			(3,767	)
Gain (loss) on sale of securities at fair value through OCI					-				(35	)			(30	)			-				79				(315	)
Gain on sale of loans		5			-				12				303				(625	)			98				403
Loss on investment properties at fair value through profit or loss		7			(1,148	)			-				-				(1,148	)			-				-
Other income, net					530				255				556				645				609				907
Other income:(expense), net					3,618				5,069				6,179				7,771				8,963				3,696
Total income					31,507				34,414				44,366				62,250				72,740				81,400
Expenses:
Impairment loss from expected credit losses on loans at amortized cost		5			7,564				5,666				9,966				8,941				9,619				12,109
(Recovery) impairment loss from expected credit losses on investment securities		5			(22	)			(11	)			479				(47	)			(465	)			486
Impairment loss (recovery) from expected credit losses on loan commitments and financial guarantee contracts		5			(5,771	)			(1,324	)			1,579				(5,192	)			(1,161	)			666
Impairment loss in other assets		8			1,740				-				-				1,740				-				-
Salaries and other employee expenses					6,083				7,768				4,898				16,177				14,464				12,778
Depreciation of equipment and leasehold improvements					319				356				334				642				787				663
Amortization of intangible assets					337				178				91				675				379				203
Other expenses					4,631				4,300				4,746				8,190				8,178				8,785
Total expenses					14,881				16,933				22,093				31,126				31,801				35,690
Profit for the period					16,626				17,481				22,273				31,124				40,939				45,710
Earnings per share:
Basic		13			0.42				0.44				0.57				0.79				1.04				1.17
Diluted		13			0.42				0.44				0.57				0.79				1.04				1.17
Weighted average basic shares		13			39,626				39,317				39,078				39,547				39,252				39,037
Weighted average diluted shares		13			39,651				39,347				39,198				39,572				39,280				39,120

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Unaudited condensed consolidated interim statements of profit or loss and other comprehensive income

For the six months ended June 30, 2018, 2017 and 2016

(In US$ thousand)

 

		Notes		2018				2017				2016
Profit for the period					31,124				40,939				45,710
Other comprehensive income (loss):
Items that will not reclassified subsequently to profit and loss:
Change in fair value for revaluation by equity instrument to FVOCI, net of hedging		16			(2,519	)			-				-
Items that are or may be reclassified subsequently to profit and loss:
Change in fair value for debt instrument revaluation, net of hedging		16			83				882				3,053
Reclasification adjustment for gains (losses) included in the profit		16			2,694				(1,514	)			(151	)
Exchange difference in conversion of foreign operating currency					(137	)			-				-
Other comprehensive income (loss)		16			121				(632	)			2,902
Total comprehensive income for the period					31,245				40,307				48,612

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Unaudited condensed consolidated interim statements of changes in stockholders's equity

For the six months ended June 30, 2018, 2017 and 2016

(In US$ thousand)

 

		Common stock				Treasury stock				Additional paid- in capital in excess of assigned value of common stock				Capital reserves				Dynamic provision				Regulatory reserve				Retained earnings				Accumulated other comprehensive income (loss)				Total
Balances at January 1, 2016			279,980				(73,397	)			120,177				95,210				30,788				7,920				521,934				(10,681	)			971,931
Profit for the period			-				-				-				-				-				-				45,710				-				45,710
Other comprehensive income			-				-				-				-				-				-				-				2,902				2,902
Issuance of restricted stock			-				1,259				(1,259	)			-				-				-				-				-				-
Compensation cost - stock options and stock units plans			-				-				1,689				-				-				-				-				-				1,689
Exercised options and stock units vested			-				1,538				(1,449	)			-				-				-				-				-				89
Repurchase of "Class B" and "Class E" common stock			-				-				-				-				-				-				-				-				-
Regulatory reserve			-				-				-				-				-				(2,832	)			2,832				-				-
Dymanic provision			-				-				-				-				7,694				-				(7,694	)			-				-
Dividends declared			-				-				-				-				-				-				(30,052	)			-				(30,052	)
Balances at June 30, 2016			279,980				(70,600	)			119,158				95,210				38,482				5,088				532,730				(7,779	)			992,269
Balances at January 1, 2017			279,980				(69,176	)			120,594				95,210				43,826				18,633				525,048				(2,801	)			1,011,314
Profit for the period			-				-				-				-				-				-				40,939				-				40,939
Other comprehensive income			-				-				-				-				-				-				-				(632	)			(632	)
Issuance of restricted stock			-				1,259				(1,259	)			-				-				-				-				-				-
Compensation cost - stock options and stock units plans			-				-				644				-				-				-				-				-				644
Exercised options and stock units vested			-				3,213				(1,081	)			-				-				-				-				-				2,132
Repurchase of "Class B" and "Class E" common stock			-				(28	)			-				-				-				-				-				-				(28	)
Regulatory reserve			-				-				-				-				-				(11,510	)			11,510				-				-
Dymanic provision			-				-				-				-				63,566				-				(63,566	)			-				-
Dividends declared			-				-				-				-				-				-				(30,229	)			-				(30,229	)
Balances at June 30, 2017			279,980				(64,732	)			118,898				95,210				107,392				7,123				483,702				(3,433	)			1,024,140
Balances at January 1, 2018			279,980				(63,248	)			119,941				95,210				108,756				20,498				479,712				1,963				1,042,812
Profit for the period			-				-				-				-				-				-				31,124				-				31,124
Other comprehensive income			-				-				-				-				-				-				-				121				121
Issuance of restricted stock			-				1,259				(1,259	)			-				-				-				-				-				-
Compensation cost - stock options and stock units plans			-				-				123				-				-				-				-				-				123
Exercised options and stock units vested			-				3,355				254				-				-				-				-				-				3,609
Repurchase of "Class B" and "Class E" common stock			-				(1	)			-				-				-				-				-				-				(1	)
Regulatory reserve			-				-				-				-				-				(5,297	)			5,297				-				-
Dymanic provision			-				-				-				-				-				-				-				-				-
Dividends declared			-				-				-				-				-				-				(30,409	)			-				(30,409	)
Balances at June 30, 2018			279,980				(58,635	)			119,059				95,210				108,756				15,201				485,724				2,084				1,047,379

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Unaudited condensed consolidated interim statements of cash flows

For the six months ended June 30, 2018, 2017 and 2016

(In US$ thousand)

 

		2018				2017				2016
Cash flows from operating activities
Profit for the period			31,124				40,939				45,710
Adjustments to reconcile profit for the year to net cash provided by (used in) operating activities:
Activities of derivative financial instruments used for hedging			2,576				(23,616	)			(5,790	)
Depreciation of equipment and leasehold improvements			642				787				663
Amortization of intangible assets			675				379				203
Loss for disposal of equipment and leasehold improvements			291				64				-
Loss for disposal of intangible assets			6,686				-				-
Loss on investment properties at fair value through profit or loss			1,148				-				-
Impairment loss from expected credit losses			3,662				7,993				13,261
Net loss (gain) on sale of financial assets at fair value through OCI			342				(79	)			(30	)
Gain on sale of property and equipment			(18	)			-				-
Impairment loss on other assets			1,740				-				-
Compensation cost - share-based payment			123				644				1,007
Interest income			(119,356	)			(115,230	)			(121,631	)
Interest expense			64,877				51,453				43,927
Net decrease (increase) in operating assets:
Net decrease (increase) in pledged deposits			18,922				13,615				(4,850	)
Financial instruments at fair value through profit or loss			-				(13	)			53,167
Net decrease (increase) in loans			(52,405	)			449,890				170,666
Other assets			(6,649	)			5,925				5,013
Net increase (decrease) in operating liabilities:
Net increase due to depositors			60,158				550,703				410,831
Financial liabilities at fair value through profit or loss			-				3				(89	)
Other liabilities			1,936				(17,486	)			(18,809	)
Cash provided by operating activities			16,474				965,971				593,249
Interest received			111,849				125,951				120,777
Interest paid			(64,740	)			(55,103	)			(46,217	)
Net cash provided by operating activities			63,583				1,036,819				667,809
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements			(492	)			(346	)			(89	)
Acquisition of intangible assets			(6,725	)			(4	)			(7	)
Proceeds from the redemption of of securities at fair value through OCI			3,684				-				70,341
Proceeds from the sale of securities at fair value through OCI			-				14,488				78,450
Proceeds from maturities of securities at amortized cost			1,334				14,879				29,075
Purchases of securities at fair value through OCI			-				-				(83,627	)
Purchases of securities at amortized cost			(10,529	)			-				(24,071	)
Net cash provided by investing activities			(12,728	)			29,017				70,072
Cash flows from financing activities:
Net decrease in short-term borrowings and debt and securities sold under repurchase agreements			(24,253	)			(983,019	)			(1,234,527	)
Proceeds from long-term borrowings and debt			160,174				219,587				464,969
Repayments of long-term borrowings and debt			(129,346	)			(510,618	)			(299,607	)
Dividends paid			(30,641	)			(30,294	)			(29,722	)
Exercised stock options			3,609				2,003				-
Repurchase of common stock			(1	)			(28	)			-
Net cash used in financing activities			(20,458	)			(1,302,369	)			(1,098,887	)
Net (decrease) increase in cash and cash equivalents			30,397				(236,533	)			(361,006	)
Cash and cash equivalents at beginning of the pereiod			618,807				1,007,726				1,267,302
Cash and cash equivalents at end of the period			649,204				771,193				906,296

 

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

1.

Corporate information

 

Banco Latinoamericano de Comercio Exterior, S. A. (“Bladex Head Office” and together with its subsidiaries “Bladex” or the “Bank”), headquartered in Panama City, Republic of Panama, is a specialized multinational bank established to support the financing of trade and economic integration in Latin America and the Caribbean (the “Region”). The Bank was established pursuant to a May 1975 proposal presented to the Assembly of Governors of Central Banks in the Region, which recommended the creation of a multinational organization to increase the foreign trade financing capacity of the Region. The Bank was organized in 1977, incorporated in 1978 as a corporation pursuant to the laws of the Republic of Panama, and officially initiated operations on January 2, 1979. Under a contract law signed in 1978 between the Republic of Panama and Bladex, the Bank was granted certain privileges by the Republic of Panama, including an exemption from payment of income taxes in Panama.

 

The Bank operates under a general banking license issued by the National Banking Commission of Panama, predecessor of the Superintendence of Banks of Panama (the “SBP”).

 

In the Republic of Panama, banks are regulated by the SBP through Executive Decree No. 52 of April 30, 2008, which adopts the unique text of the Law Decree No. 9 of February 26, 1998, modified by the Law Decree No. 2 of February 22, 2008. Banks are also regulated by resolutions and agreements issued by this entity. The main aspects of this law and its regulations include: the authorization of banking licenses, minimum capital and liquidity requirements, consolidated supervision, procedures for management of credit and market risks, measures to prevent money laundering, the financing of terrorism and related illicit activities, and procedures for banking intervention and liquidation, among others.

 

Bladex Head Office’s subsidiaries are the following:

 

-

Bladex Holdings Inc. a wholly owned subsidiary, incorporated under the laws of the State of Delaware, United States of America (USA), on May 30, 2000. Bladex Holdings Inc. has ownership in Bladex Representacao Ltda.

 

-

Bladex Representaçao Ltda., incorporated under the laws of Brazil on January 7, 2000, acts as the Bank’s representative office in Brazil. Bladex Representacao Ltda. is 99.999% owned by Bladex Head Office and the remaining 0.001% owned by Bladex Holdings Inc.

 

-

Bladex Investimentos Ltda. was incorporated under the laws of Brazil on May 3, 2011. Bladex Head Office owned 99% of Bladex Investimentos Ltda., and Bladex Holdings Inc. owned the remaining 1%. This company had invested substantially all of its assets in an investment fund, Alpha 4x Latam Fundo de Investimento Multimercado, incorporated in Brazil (“the Brazilian Fund”), registered with the Securities and Exchange Commission of Brazil (“CVM”, for its acronym in Portuguese). Bladex Investimentos Ltda. merged with Bladex Representacao Ltda. on April 2016, being the former the extinct company under Brazilian law and prevailing the acquiring company Bladex Representacao Ltda.

 

-

Bladex Development Corp. was incorporated under the laws of Panama on June 5, 2014. Bladex Development Corp. is 100% owned by Bladex Head Office.

 

-

BLX Soluciones, S.A. de C.V., SOFOM, E.N.R. was incorporated under the laws of Mexico on June 13, 2014. BLX Soluciones is 99.9% owned by Bladex Head Office, and Bladex Development Corp. owns the remaining 0.1%. The company specializes in offering financial leasing and other financial products such as loans and factoring.

 

Bladex Head Office has an agency in New York City, USA (the “New York Agency”), which began operations on March 27, 1989. The New York Agency is principally engaged in financing transactions related to international trade, mostly the confirmation and financing of letters of credit for customers in the Region. The New York Agency also has authorization to book transactions through an International Banking Facility (“IBF”).

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

1.

Corporate information (continued)

 

The Bank has representative offices in Buenos Aires, Argentina; in Mexico City; in Lima, Peru; and in Bogota, Colombia.

 

These unaudited condensed consolidated interim financial statements were authorized for issue by the Board of Directors on July 17, 2018.

 

2.

Basis of preparation of the consolidated financial statements

 

2.1

Statement of compliance

 

These unaudited consolidated interim financial statements of Banco Latinoamericano de Comercio Exterior, S. A. and its subsidiaries have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting (IAS 34) issued by the International Accounting Standards Board ("IASB"). As all the disclosures required by IFRS for annual period consolidated financial statements are not included herein, these unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2017, contained in the Bank’s annual audited consolidated financial statements. The unaudited condensed consolidated interim statements of profit or loss, profit or loss and other comprehensive income, changes in equity and cash flows for the periods presented are not necessarily indicative of results expected for any future period.

 

2.2

Reclassification

 

Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the previously reported changes in net assets or equity.

 

3.

Summary of new significant accounting policies

 

3.1

Investment properties

 

Property and Land that is held for long-term rental yields, operating leases and/or for capital appreciation, and that is not occupied by the Bank, is classified as investment property. Investment property is measured initially at its cost, including related transaction costs and where applicable borrowing costs. After initial recognition, investment property is carried at fair value.

 

Fair value is based on active market prices, adjusted, if necessary, for differences in the nature, location or condition of the specific asset. If this information is not available, the Bank uses alternative valuation methods, such as recent prices on less active markets or discounted cash flow projections. Valuations are performed as of the financial position date by professional valuers who hold recognised and relevant professional qualifications and have recent experience in the location and category of the investment property being valued. These valuations form the basis for the carrying amounts in the consolidated financial statements.

 

The fair value of investment property reflects, among other things, rental income from current leases and other assumptions market participants would make when pricing the property under current market conditions.

 

Subsequent expenditure is capitalised to the asset’s carrying amount only when it is probable that future economic benefits associated with the expenditure will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance costs are expensed when incurred. When part of an investment property is replaced, the carrying amount of the replaced part is derecognised.

 

Changes in fair values are recognised in the income statement. Investment properties are derecognised when they have been disposed.

 

Where the Bank disposes of a property at fair value in an arm’s length transaction, the carrying value immediately prior to the sale is adjusted to the transaction price, and the adjustment is recorded in the income statement within from fair value adjustment on investment property.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

3.

Summary of new significant accounting policies (continued)

 

3.1

Investment properties (continued)

 

If an investment property becomes owner-occupied, it is reclassified as property, plant and equipment. Its fair value at the date of reclassification becomes its cost for subsequent accounting purposes.

 

4.

Cash and cash equivalents

 

		June 30, 2018				December 31, 2017
Cash and due from banks			7,046				11,032
Interest-bearing deposits in banks			676,477				661,016
Total			683,523				672,048
Less:
Pledged deposits			34,319				53,241
Total cash and cash equivalents			649,204				618,807

 

The following table presents the details on interest-bearing deposits in banks and pledged deposits:

 

		June 30, 2018								December 31, 2017
		Amount				Range Interest rate				Amount				Range Interest rate
Interest-bearing deposits in banks:
Demand deposits(1)			676,477				0.25% a 2.07%				661,016				0.25% a 1.55%
Time deposits(2)			-				-				-				-
Total			676,477								661,016
Pledged deposits:
New York(3)			3,500				-				3,000				-
Panama(4)			30,819				1.91	%			50,241				1.42	%
Total			34,319								53,241

 

(1)

Demand deposits with bearing interest based on the daily rates determined by banks.

(2)

Time deposits “overnight” calculated on an average interest rate.

(3)

The New York Agency had a pledged deposit with the New York State Banking Department, as required by law since March 1994.

(4)

The Bank had pledged deposits to secure derivative financial instruments transactions.

  

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

  

5.

Financial instruments

 

Financial instruments at fair value through other comprehensive income “FVOCI”

 

The amortized cost, related unrealized gross gain (loss) and fair value of financial instruments at fair value through other comprehensive income by country risk and type of debt are as follows:

 

Equity Investment at FVOCI

 

		June 30, 2018
						Unrealized
		Amortized cost				Gain				Loss				Fair value
Equity investments (1)
Brazil			8,402				4,997				8,435				4,964
			8,402				4,997				8,435				4,964

 

Securities at FVOCI

 

		June 30, 2018
						Unrealized
		Amortized cost				Gain				Loss				Fair value
Sovereign debt:
Brazil			2,943				-				133				2,810
Chile			5,159				-				160				4,999
Trinidad and Tobago			8,615				-				312				8,303
			16,717				-				605				16,112
			25,119				4,997				9,040				21,076

 

Equity Investment at FVOCI

 

		December 31, 2017
						Unrealized
		Amortized cost				Gain				Loss				Fair value
Equity investments (1)
Brazil			8,630				-				228				8,402
			8,630				-				228				8,402

 

Securities at FVOCI

 

		December 31, 2017
						Unrealized
		Amortized cost				Gain				Loss				Fair value
Sovereign debt:
Brazil			2,937				29				12				2,954
Chile			5,182				-				35				5,147
Trinidad and Tobago			8,843				-				211				8,632
			16,962				29				258				16,733
			25,592				29				486				25,135

 

(1)

Equity instruments were initially recognized at fair value. These equity instruments correspond to equity securities classified with the irrevocable option of changes in OCI.

 

  

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Financial instruments at fair value through other comprehensive income (continued)

 

Securities at FVOCI (continued)

 

As of June 30, 2018 and as of December 31, 2017, there were no securities at fair value through other comprehensive income accounted for as secured financings.

 

The following table discloses those securities that had unrealized losses for a period less than 12 month and for 12 months or longer:

 

		June 30, 2018
		Less than 12 months								12 months or longer								Total
		Fair value				Unrealized gross losses				Fair value				Unrealized gross losses				Fair value				Unrealized gross losses
Sovereign debt			6,872				233				9,240				372				16,112				605
Total			6,872				233				9,240				372				16,112				605

 

		December 31, 2017
		Less than 12 months								12 months or longer								Total
		Fair value				Unrealized gross losses				Fair value				Unrealized gross losses				Fair value				Unrealized gross losses
Sovereign debt			5,147				35				9,616				223				14,763				258
Total			5,147				35				9,616				223				14,763				258

 

The following table presents the realized gains and losses on sale of securities at fair value through other comprehensive income:

 

		Three months ended June 30th
		2018				2017				2016
Realized gain on sale of securities			-				130				7,432
Realized loss on sale of securities			-				(165	)			(7,462	)
Net gain (loss) on sale of securities at fair value through other comprehensive income			-				(35	)			(30	)

 

		Six months ended June 30th
		2018				2017				2016
Realized gain on sale of securities			-				667				7,471
Realized loss on sale of securities			-				(588	)			(7,786	)
Net gain (loss) on sale of securities at fair value through other comprehensive income			-				79				(315	)

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Financial instruments at fair value through other comprehensive income (continued)

 

Securities at FVOCI (continued)

 

Securities at fair value through other comprehensive income classified by issuer’s credit quality indicators are as follows:

 

Rating(1)		June 30, 2018				December 31, 2017
1-4			16,112				16,733
5-6			-				-
7			-				-
8			-				-
9			-				-
10			-				-
Total			16,112				16,733

 

(1)

Current ratings as of June 30, 2018 and December 31, 2017, respectively.

 

The amortized cost and fair value of securities at fair value through other comprehensive income by contractual maturity are shown in the following tables:

 

		June 30, 2018								December 31, 2017
		Amortized cost				Fair value				Amortized cost				Fair value
Due within 1 year			-				-				-				-
After 1 year but within 5 years			16,717				16,112				16,962				16,733
After 5 years but within 10 years			-				-				-				-
			16,717				16,112				16,962				16,733

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Financial instruments at fair value through other comprehensive income (continued)

 

Securities at FVOCI (continued)

 

The significant changes in the gross carrying amount of securities at fair value through other comprehensive income during the period that contributed to changes in the allowance for expected credit loss, is provided at the table below:

 

		Stage 1				Stage 2				Stage 3				Total
Gross carrying amount as of December 31, 2017			13,779				2,954				-				16,733
Transfer in book value to stage 2			-				-				-				-
Transfer in financial instruments with credit-impaired			-				-				-				-
Transfer in book value to stage 1			-				-				-				-
Financial instruments that have been derecognized during the period			(477	)			(144	)			-				(621	)
Changes due to financial instruments recognized as of December 31, 2017			(477	)			(144	)			-				(621	)
New financial assets originated or purchased			-				-				-				-
Write-offs			-				-				-				-
Gross carrying amount as of June 30, 2018			13,302				2,810				-				16,112

 

		Stage 1				Stage 2				Stage 3				Total
Gross carrying amount as of December 31, 2016			27,821				2,786				-				30,607
Transfer in book value to stage 2			-				-				-				-
Transfer in financial instruments with credit-impaired			-				-				-				-
Transfer in book value to stage 1			-				-				-				-
Financial instruments that have been derecognized during the year			(14,042	)			168				-				(13,874	)
Changes due to financial instruments recognized as of December 31, 2016			(14,042	)			168				-				(13,874	)
New financial assets originated or purchased			-				-				-				-
Write-offs			-				-				-				-
Gross carrying amount as of December 31, 2017			13,779				2,954				-				16,733

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Securities at FVOCI (continued)

 

The allowance for expected credit losses relating to securities at fair value through other comprehensive income, which is recorded in equity under accumulated other comprehensive income (loss), is as follow:

 

		Stage 1 (1)				Stage 2 (2)				Stage 3 (3)				Total
Allowance for expected credit losses as of December 31, 2017			24				198				-				222
Transfer to lifetime expected credit losses			-				-				-				-
Transfer to credit-impaired financial instruments			-				-				-				-
Transfer to 12-month expected credit losses			-				-				-				-
Net effect of changes in reserve for expected credit losses			(1	)			2								1
Financial instruments that have been derecognized during the period			-				-				-				-
			(1	)			2				-				1
New financial assets originated or purchased			-				-				-				-
Write-offs			-				-				-				-
Allowance for expected credit losses as of June 30, 2018			23				200				-				223

 

		Stage 1 (1)				Stage 2 (2)				Stage 3 (3)				Total
Allowance for expected credit losses as of December 31, 2016			42				263				-				305
Transfer to lifetime expected credit losses			-				-				-				-
Transfer to credit-impaired financial instruments			-				-				-				-
Transfer to 12-month expected credit losses			-				-				-				-
Net effect of changes in reserve for expected credit losses			(6	)			(65	)			-				(71	)
Financial instruments that have been derecognized during the year			(12	)			-				-				(12	)
Changes due to financial instruments recognized as of December 31, 2016:			(18	)			(65	)			-				(83	)
New financial assets originated or purchased			-				-				-				-
Write-offs			-				-				-				-
Allowance for expected credit losses as of December 31, 2017			24				198				-				222

 

(1)

12-month expected credit losses.

(2)

Lifetime expected credit losses.

(3)

Credit-impaired financial assets (lifetime expected credit losses).

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Securities at amortized cost

 

The amortized cost, related unrealized gross gain (loss) and fair value of these securities by country risk and type of debt, excluding the amounts of allowance for expected credit losses are as follows:

 

		June 30, 2018
						Unrealized
		Amortized cost (1)				Gain				Loss				Fair value
Corporate debt:
Brazil			1,487				-				24				1,463
Mexico			21,661				-				542				21,119
Panama			12,978				15				-				12,993
			36,126				15				566				35,575
Sovereign debt:
Colombia			28,594				-				359				28,235
Mexico			5,208				-				220				4,988
Panama			8,349				-				78				8,271
			42,151				-				657				41,494
			78,277				15				1,223				77,069

 

		December 31, 2017
						Unrealized
		Amortized cost (2)				Gain				Loss				Fair value
Corporate debt:
Brazil			1,485				3				-				1,488
Panama			9,978				-				-				9,978
			11,463				3				-				11,466
Sovereign debt:
Brazil			29,006				67				16				29,057
Mexico			20,203				-				167				20,036
Panama			8,458				-				11				8,447
			57,667				67				194				57,540
			69,130				70				194				69,006

 

(1)

Amounts do not include allowance for expected credit losses of $148.

(2)

Amounts do not include allowance for expected credit losses of $196.

 

As of June 30, 2018, and December 31, 2017, there were no securities at amortized cost accounted for as secured financial liabilities.

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Securities at amortized cost (continued)

 

The amortized cost and fair value of securities at amortized cost by contractual maturity are shown in the following tables:

 

		June 30, 2018								December 31, 2017
		Amortized cost (1)				Fair value				Amortized cost (2)				Fair value
Due within 1 year			23,417				23,378				7,978				7,978
After 1 year but within 5 years			54,860				53,691				61,152				61,028
After 5 years but within 10 years			-				-				-				-
			78,277				77,069				69,130				69,006

 

(1)

Amounts do not include allowance for expected credit losses of $148.

(2)

Amounts do not include allowance for expected credit losses of $196.

 

Securities at amortized cost classified by issuer’s credit quality indicators are as follows:

 

Rating(3)		June 30, 2018				December 31, 2017
1-4			76,790				57,667
5-6			1,487				11,463
7			-				-
8			-				-
9			-				-
10			-				-
Total			78,277				69,130

 

(3)

Current ratings as of June 30, 2018 and December 31, 2017, respectively.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Securities at amortized cost (continued)

 

The significant changes in the gross carrying amount of securities at amortized cost during the period that contributed to changes in the allowance for expected credit loss, is provided at the table below:

 

		Stage 1				Stage 2				Stage 3				Total
Gross carrying amount as of December 31, 2017			67,645				1,485				-				69,130
Transfer in book value to stage 2			-				-				-				-
Transfer in financial instruments with credit impaired			-				-				-				-
Transfer in book value to stage 1			-				-				-				-
Financial instruments that have been derecognized during the period			(1,674	)			2				-				(1,672	)
Changes due to financial instruments recognized as of December 31, 2017			(1,674	)			2				-				(1,672	)
New financial assets originated or purchased			10,819				-				-				10,819
Write-offs			-				-				-				-
Gross carrying amount as of June 30, 2018			76,790				1,487				-				78,277

 

		Stage 1				Stage 2				Stage 3				Total
Gross carrying amount as of December 31, 2016			65,154				12,687				-				77,841
Transfer in book value to stage 2			-				-				-				-
Transfer in financial instruments with credit impaired			-				-				-				-
Transfer in book value to stage 1			-				-				-				-
Financial instruments that have been derecognized during the year			(7,487	)			(11,202	)			-				(18,689	)
Changes due to financial instruments recognized as of December 31, 2016			(7,487	)			(11,202	)			-				(18,689	)
New financial assets originated or purchased			9,978				-				-				9,978
Write-offs			-				-				-				-
Gross carrying amount as of December 31, 2017			67,645				1,485				-				69,130

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Securities at amortized cost (continued)

 

The allowance for expected credit losses relating to securities at amortized cost is as follow:

 

		Stage 1 (1)				Stage 2 (2)				Stage 3 (3)				Total
Allowance for expected credit losses as of December 31, 2017			144				52				-				196
Transfer to lifetime expected credit losses			-				-				-				-
Transfer to credit-impaired financial instruments			-				-				-				-
Transfer to 12-month expected credit losses			-				-				-				-
Net effect of changes in reserve for expected credit losses			(48	)			(22	)			-				(70	)
Financial instruments that have been derecognized during the period			(8	)			-				-				(8	)
Changes due to financial instruments recognized as of December 31, 2017:			(56	)			(22	)			-				(78	)
New financial assets originated or purchased			30				-				-				30
Allowance for expected credit losses as of June 30, 2018			118				30				-				148

 

		Stage 1 (1)				Stage 2 (2)				Stage 3 (3)				Total
Allowance for expected credit losses as of December 31, 2016			99				503				-				602
Transfer to lifetime expected credit losses			-				-				-				-
Transfer to credit-impaired financial instruments			-				-				-				-
Transfer to 12-month expected credit losses			-				-				-				-
Net effect of changes in reserve for expected credit losses			(16	)			(29	)			-				(45	)
Financial instruments that have been derecognized during the year			(18	)			(422	)			-				(440	)
Changes due to financial instruments recognized as of December 31, 2016:			(34	)			(451	)			-				(485	)
New financial assets originated or purchased			79				-				-				79
Allowance for expected credit losses as of December 31, 2016			144				52				-				196

 

(1)

12-month expected credit losses.

(2)

Lifetime expected credit losses.

(3)

Credit-impaired financial assets (lifetime expected credit losses).

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Recognition and derecognition of financial assets

 

During the periods ended June 30, 2018, 2017 and 2016, the Bank sold loans measured at amortized cost. These sales were made based on compliance with the Bank's strategy to optimize the loan portfolio.

 

The amounts and gains arising from the derecognition of these financial instruments are presented in the following table. These gains are presented within the line “gain on sale of loans” in the consolidated statement of profit or loss.

 

		Assignments and participations				Gains (losses)
For the year ended June 30, 2018			71,667				(625	)
For the year ended June 30, 2017			70,400				98
For the year ended June 30, 2016			53,900				326

 

Loans – at amortized cost

 

The following table set forth details of the Bank’s gross loan portfolio:

 

		June 30, 2018				December 31, 2017
Corporations:
Private			1,856,611				1,882,846
State-owned			726,845				723,267
Banking and financial institutions:
Private			2,350,310				2,083,795
State-owned			494,042				573,649
Middle-market companies:
Private			127,446				242,101
Total			5,555,254				5,505,658

 

The composition of the gross loan portfolio by industry is as follows:

 

		June 30, 2018				December 31, 2017
Banking and financial institutions			2,844,352				2,657,444
Industrial			807,788				772,238
Oil and petroleum derived products			859,209				735,413
Agricultural			535,751				501,241
Services			223,861				430,717
Mining			90,600				231,687
Others			193,693				176,918
Total			5,555,254				5,505,658

 

Loans are reported at their amortized cost considering the principal outstanding amounts net of unearned interest, deferred fees and allowance for expected credit losses.

 

The amortization of net unearned interest and deferred fees are recognized as an adjustment to the related loan yield using the effective interest rate method.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Loans – at amortized cost (continued)

 

As of June 30, 2018, and December 31, 2017, the unearned discount interest and deferred fees amounted to $6,660 and $4,985, respectively.

 

Loans classified by borrower’s credit quality indicators are as follows:

 

June 30, 2018
		Corporations								Banking and financial institutions								Middle-market companies
Rating(1)		Private				State-owned				Private				State-owned				Private				Total
1-4			1,389,558				461,012				2,021,533				219,362				56,398				4,147,863
5-6			385,933				265,833				328,777				274,680				36,048				1,291,271
7			61,845				-				-				-				-				61,845
8			19,275				-				-				-				-				19,275
9			-				-				-				-				-				-
10			-				-				-				-				35,000				35,000
Total			1,856,611				726,845				2,350,310				494,042				127,446				5,555,254

 

December 31, 2017
		Corporations								Banking and financial institutions								Middle-market companies
Rating(1)		Private				State-owned				Private				State-owned				Private				Total
1-4			1,336,032				563,877				1,729,592				361,236				147,212				4,137,949
5-6			523,055				159,390				354,203				212,413				59,889				1,308,950
7			-				-				-				-				-				-
8			23,759				-				-				-				-				23,759
9			-				-				-				-				-				-
10			-				-				-				-				35,000				35,000
Total			1,882,846				723,267				2,083,795				573,649				242,101				5,505,658

 

⁽¹⁾ Current ratings as of June 30, 2018 and December 31, 2017, respectively.

 

  

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Loans – at amortized cost (continued)

 

The following table provides a breakdown of loans by country risk:

 

		June 30, 2018				December 31, 2017
Country:
Argentina			547,142				294,613
Belgium			12,941				11,368
Bolivia			10,000				15,000
Brazil			995,411				1,019,466
Chile			187,548				170,827
Colombia			677,327				829,136
Costa Rica			359,748				356,459
Dominican Republic			253,228				249,926
Ecuador			215,111				94,315
El Salvador			30,140				55,110
Germany			27,500				37,500
Guatemala			287,881				309,024
Honduras			77,932				74,476
Jamaica			57,482				24,435
Luxembourg			16,829				19,924
Mexico			794,585				850,463
Nicaragua			24,953				29,804
Panama			443,593				500,134
Paraguay			69,347				59,536
Peru			232,756				211,846
Singapore			43,200				54,500
Switzerland			600				3,687
Trinidad and Tobago			175,000				175,000
United States of America			-				44,109
Uruguay			15,000				15,000
Total			5,555,254				5,505,658

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Loans – at amortized cost (continued)

 

The remaining loan maturities are summarized as follows:

 

		June 30, 2018				December 31, 2017
Current:
Up to 1 month			867,925				846,993
From 1 month to 3 months			1,131,910				1,079,793
From 3 months to 6 months			949,205				1,175,801
From 6 months to 1 year			1,032,099				922,711
From 1 year to 2 years			389,620				392,456
From 2 years to 5 years			1,045,462				989,222
More than 5 years			84,758				39,923
			5,500,979				5,446,899
Impaired			54,275				58,759
Total			5,555,254				5,505,658

 

As of June 30, 2018, and December 31, 2017, the range of interest rates on loans fluctuates from 1.20% and 11.77% (2017: 1.35% y 11.52%).

 

The fixed and floating interest rate distribution of the loan portfolio is as follows:

 

		June 30, 2018				December 31, 2017
Fixed interest rates			2,596,773				2,378,509
Floating interest rates			2,958,481				3,127,149
Total			5,555,254				5,505,658

 

As of June 30, 2018, and December 31, 2017, 79% and 85%, of the loan portfolio at fixed interest rates has remaining maturities of less than 180 days.

 

An analysis of credit-impaired loans is detailed as follows:

 

		June 30, 2018												2018
		Recorded investment				Past due principal balance				Related allowance Stage 3				Average principal loan balance				Balance interest recognized
With an allowance recorded:
Private corporations			19,275				-				3,400				23,562				647
Middle-market companies			35,000				35,000				22,824				35,000				3,574
Total			54,275				35,000				26,224				58,562				4,221

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Loans – at amortized cost (continued)

 

		December 31, 2017												2017
		Recorded investment				Past due principal balance				Related allowance Stage 3				Average principal loan balance				Balance interest recognized
With an allowance recorded:
Private corporations			23,759				-				7,468				5,988				229
Middle-market companies			35,000				35,000				20,527				35,000				3,028
Total			58,759				35,000				27,995				40,988				3,257

 

The following is a summary of information of interest amounts recognized on an effective interest basis on net carrying amount for those financial assets in Stage 3:

 

		Three months ended June 30,
		2018				2017				2016
Interest revenue calculated on the net carrying amount (net of credit allowance)			469				359				585

 

		Six months ended June 30,
		2018				2017				2016
Interest revenue calculated on the net carrying amount (net of credit allowance)			964				853				662

 

The following table presents an aging analysis of the loan portfolio:

 

June 30, 2018
		91-120  days				121-150  days				151-180  days				Greater than 180 days				Total Past due				Delinquent				Current				Total
Corporations			-				-				-				-				-				-				2,583,456				2,583,456
Banking and financial institutions			-				-				-				-				-				-				2,844,352				2,844,352
Middle-market companies			-				-				-				35,000				35,000				-				92,446				127,446
Total			-				-				-				35,000				35,000				-				5,520,254				5,555,254

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Loans – at amortized cost (continued)

 

December 31, 2017
		91-120  days				121-150  days				151-180  days				Greater than 180 days				Total Past due				Delinquent				Current				Total
Corporations			-				-				-				-				-				-				2,606,113				2,606,113
Banking and financial institutions			-				-				-				-				-				-				2,657,444				2,657,444
Middle-market companies			-				-				-				35,000				35,000				-				207,101				242,101
Total			-				-				-				35,000				35,000				-				5,470,658				5,505,658

 

As of June 30, 2018, and December 31, 2017, the Bank had credit transactions in the normal course of business with 15% and 21%, respectively, of its Class “A” and “B” stockholders. All transactions were made based on arm’s-length terms and subject to prevailing commercial criteria and market rates and were subject to all the Bank’s Corporate Governance and control procedures. As of June 30, 2018, and December 31, 2017, approximately 11% and 14%, respectively, of the outstanding loan portfolio was placed with the Bank’s Class “A” and “B” stockholders and their related parties. As of June 30, 2018, the Bank was not directly or indirectly owned or controlled by another corporation or any foreign government, and no Class “A” or “B” shareholder was the registered owner of more than 3.5% of the total outstanding shares of the voting capital stock of the Bank.

 

Modified financial assets

 

The following table refer to modified financial assets, where modification does not result in de-recognition:

 

Modified financial assets (with loss allowance based on lifetime ECL) modified during the period		June 30, 2018				December 31, 2017
Gross carrying amount before modification			-				8,855
Loss allowance before modification			-				(3,344	)
Net amortized cost before modification			-				5,511
Gross carrying amount after modification			-				4,484
Loss allowance after modification			-				(4,484	)
Net amortized cost after modification			-				-

 

For the modified financial assets during the year 2017, were received other real estate owned for $ 5,119.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Loans – at amortized cost (continued)

 

The significant changes in the gross carrying amount of loans during the period that contributed to changes in the allowance for expected credit loss, is provided at the table below:

 

		Stage 1				Stage 2				Stage 3				Total
Gross carrying amount as of December 31, 2017			4,839,227				607,672				58,759				5,505,658
Transfer in book value to stage 2			(25,641	)			25,641				-				-
Transfer in Financial Instruments with credit-impaired			-				-				-				-
Transfer in book value to stage 1			35,222				(35,222	)			-				-
Financial instruments that have been derecognized during the period			(3,145,011	)			(287,537	)			-				(3,432,548	)
Changes due to financial instruments recognized as of December 31, 2017			(3,135,430	)			(297,118	)			-				(3,432,548	)
New financial assets originated or purchased			3,486,667				-				-				3,486,667
Write-offs			(39	)			-				(4,484	)			(4,523	)
Gross carrying amount as of June 30, 2018			5,190,425				310,554				54,275				5,555,254

 

		Stage 1				Stage 2				Stage 3				Total
Gross carrying amount as of December 31, 2016			5,019,368				935,999				65,364				6,020,731
Transfer in book value to stage 2			(41,167	)			41,167				-				-
Transfer in Financial Instruments with credit -impaired			-				(46,673	)			46,673				-
Transfer in book value to stage 1			8,000				(8,000	)			-				-
Financial instruments that have been derecognized during the year			(4,214,697	)			(313,394	)			(21,667	)			(4,549,758	)
Changes due to financial instruments recognized as of December 31, 2016			(4,247,864	)			(326,900	)			25,006				(4,549,758	)
New financial assets originated or purchased			4,067,723				-				-				4,067,723
Write-offs			-				(1,427	)			(31,611	)			(33,038	)
Gross carrying amount as of  December 31, 2017			4,839,227				607,672				58,759				5,505,658

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Loans – at amortized cost (continued)

 

The allowances for expected credit losses related to loans at amortized cost are as follows:

 

		Stage 1 (1)				Stage 2 (2)				Stage 3 (3)				Total
Allowance for expected credit losses as of  December 31, 2017			19,821				33,477				27,996				81,294
Transfer to lifetime expected credit losses			(194	)			194				-				-
Transfer to credit impaired financial instruments			-				-				-				-
Transfer to 12-month expected credit losses			4,125				(4,125	)			-				-
Net effect of changes in reserve for expected  credit losses			(3,747	)			2,563				2,714				1,530
Financial instruments that have been derecognized during the period			(10,666	)			(7,948	)			-				(18,614	)
Changes due to financial instruments recognized  as of December 31, 2017			(10,482	)			(9,316	)			2,714				(17,084	)
New financial assets originated or purchased			26,024				-				-				26,024
Write-offs			(39	)			-				(4,484	)			(4,523	)
Recoveries of amounts previously written off			-				-				-				-
Allowance for expected credit losses as of  June 30, 2018			35,324				24,161				26,226				85,711

 

		Stage 1 (1)				Stage 2 (2)				Stage 3 (3)				Total
Allowance for expected credit losses as of  December 31, 2016			29,036				41,599				35,353				105,988
Transfer to lifetime expected credit losses			(672	)			672				-				-
Transfer to credit-impaired financial instruments			-				(12,845	)			12,845				-
Transfer to 12-month expected credit losses			1,428				(1,428	)			-				-
Net effect of changes in reserve for expected  credit losses			(2,900	)			18,227				20,257				35,584
Financial instruments that have been derecognized during the year			(24,434	)			(11,321	)			(8,333	)			(44,088	)
Changes due to financial instruments recognized  as of December 31, 2016			(26,578	)			(6,695	)			24,769				(8,504	)
New financial assets originated or purchased			17,363				-				-				17,363
Write-offs			-				(1,427	)			(32,126	)			(33,553	)
Recoveries of amounts previously written off			-				-				-				-
Allowance for expected credit losses as of December 31, 2017			19,821				33,477				27,996				81,294

 

(1)

12-month expected credit losses.

(2)

Lifetime expected credit losses.

(3)

Credit-impaired financial assets (lifetime expected credit losses).

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Derivative financial instruments for hedging purposes

 

Quantitative information on derivative financial instruments held for hedging purposes is as follows:

 

		June 30, 2018
		Nominal				Carrying amount of the hedging instrument								Changes in fair value used for calculating hedge
		Amount				Asset				Liability				ineffectiveness
Fair value hedges:
Interest rate swaps			433,500				216				(8,262	)			(3,687	)
Cross-currency swaps			236,077				2,179				(16,967	)			9,493
Cash flow hedges:
Interest rate swaps			632,500				1,343				(2,077	)			(432,678	)
Cross-currency swaps			23,025				-				(173	)			(1,051	)
Foreign exchange forward			266,621				2,521				(2,586	)			(8,674	)
Net investment hedges:
Foreign exchange forward			4,402				120				-				70
Total			1,596,125				6,379				(30,064	)			(436,527	)

 

		December 31, 2017
		Nominal				Carrying amount of the hedging instrument								Changes in fair value used for calculating hedge
		Amount				Asset				Liability				ineffectiveness
Fair value hedges:
Interest rate swaps			367,500				-				(4,361	)			(2,394	)
Cross-currency swaps			306,961				3,672				(30,154	)			15,900
Cash flow hedges:
Interest rate swaps			595,000				127				(428	)			995
Cross-currency swaps			23,025				879				-				2,132
Foreign exchange forward			225,388				8,610				-				11,835
Net investment hedges:
Foreign exchange forward			9,243				50				-				181
Total			1,527,117				13,338				(34,943	)			28,649

 

The hedging instruments presented in the tables above are in the line item in the statement of financial position at fair value - Derivative financial instruments used for hedging – receivable or at fair value – Derivative financial instruments used for hedging – payable.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Derivative financial instruments for hedging purposes (continued)

 

The gains and losses resulting from activities of derivative financial instruments and hedging recognized in the consolidated statements of profit or loss are presented below:

 

		Three months ended June 30, 2018
		Gain (loss) recognized in OCI (effective portion)				Classification of gain (loss)		Gain (loss) reclassified from accumulated OCI to the consolidated statement of profit or loss				Gain (loss) recognized on derivatives (ineffective portion)
Derivatives – cash flow hedge
Interest rate swaps			(468	)		Gain (loss) on interest rate swap			-				-
Cross-currency swaps			856			Gain (loss) on foreign currency exchange			-				-
						Interest income – loans			746				-
Foreign exchange forward			9,923			Interest income – securities at FVOCI			-				-
						Interest expense – borrowings and debt			1,117				-
						Interest expenses – deposits			-				-
						Gain (loss) on foreign currency exchange			642				-
Total			10,311						2,505				-
Derivatives – net investment hedge
Foreign exchange forward			(928	)
Total			(928	)

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Derivative financial instruments for hedging purposes (continued)

 

		Six months ended June 30, 2018
		Gain (loss) recognized in OCI (effective portion)				Classification of gain (loss)		Gain (loss) reclassified from accumulated OCI to the consolidated statement of profit or loss				Gain (loss) recognized on derivatives (ineffective portion)
Derivatives – cash flow hedge
Interest rate swaps			(2,011	)		Gain (loss) on interest rate swap			-				-
Cross-currency swaps			1,040			Gain (loss) on foreign currency exchange			-				4
						Interest income – loans			1,164				-
Foreign exchange forward			7,298			Interest income – securities at FVOCI			-				-
						Interest expense – borrowings and debt			2,227				-
						Interest expenses – deposits			-				-
						Gain (loss) on foreign currency exchange			(2,732	)			-
Total			6,327						659				4
Derivatives – net investment hedge
Foreign exchange forward			(919	)
Total			(919	)

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Derivative financial instruments for hedging purposes (continued)

 

		Three months ended June 30, 2017
		Gain (loss) recognized in OCI (effective portion)				Classification of gain (loss)		Gain (loss) reclassified from accumulated OCI to the consolidated statement of profit or loss				Gain (loss) recognized on derivatives (ineffective portion)
Derivatives – cash flow hedge
Interest rate swaps			(431	)		Gain (loss) on interest rate swap			-				51
Cross-currency swaps			86			Gain (loss) on foreign currency exchange			-				18
						Interest income – loans			(2,158	)			-
Foreign exchange forward			8,708			Interest income – securities at FVOCI			-				-
						Interest expense – borrowings and debt			(2,032	)			-
						Interest expenses – deposits			-				-
						Gain (loss) on foreign currency exchange			8,594				-
Total			8,363						4,404				69

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Derivative financial instruments for hedging purposes (continued)

 

		Six months ended June 30, 2017
		Gain (loss) recognized in OCI (effective portion)				Classification of  gain (loss)		Gain (loss) reclassified from accumulated OCI to the consolidated  statement of profit or loss				Gain (loss) recognized on derivatives (ineffective portion)
Derivatives – cash flow hedge
Interest rate swaps			(815	)		Gain (loss) on interest rate swap			-				284
Cross-currency swaps			(1,333	)		Gain (loss) on foreign exchange			-				43
						Interest income – loans			(287	)			-
Forward foreign exchange			(1,130	)		Interest income – securities at FVOCI			-				-
						Interest income – loans			(2,832	)			-
						Interest expense – borrowings and debt			-				-
						Interest expenses – deposits			(18,575	)			-
						Gain (loss) on foreign currency exchange			-				284
Total			(3,278	)					(21,694	)			327

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Derivative financial instruments for hedging purposes (continued)

 

		Three months ended June 30, 2016
		Gain (loss) recognized in OCI (effective portion)				Classification of gain (loss)		Gain (loss) reclassified from accumulated OCI to the consolidated statement of profit or loss				Gain (loss) recognized on derivatives (ineffective portion)
Derivatives – cash flow hedge
Interest rate swaps			(840	)		Gain (loss) on interest rate swap			-				(383	)
Cross-currency swaps			(1,025	)		Gain (loss) on foreign exchange			-				89
						Interest income – loans			(1,003	)			-
Forward foreign exchange			(661	)		Interest income – securities at FVOCI			220				-
						Interest income – loans			173				-
						Interest expense – borrowings and debt			-				-
						Interest expenses – deposits			694				-
						Gain (loss) on foreign currency exchange			-				(383	)
Total			(2,526	)					84				(294	)

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Derivative financial instruments for hedging purposes (continued)

 

		Six months ended June 30, 2016
		Gain (loss) recognized in OCI (effective portion)				Classification of gain (loss)		Gain (loss) reclassified from accumulated OCI to the consolidated statement of profit or loss				Gain (loss) recognized on derivatives (ineffective portion)
Derivatives – cash flow hedge
Interest rate swaps			(2,458	)		Gain (loss) on interest rate swap			-				(961	)
Cross-currency swaps			1,762			Gain (loss) on foreign exchange			-				26
						Interest income – loans			-				-
Forward foreign exchange			(1,876	)		Interest income – securities at FVOCI			-				-
						Interest income – loans			(1,755	)			-
						Interest expense – borrowings and debt			350				-
						Interest expenses – deposits			-				-
						Gain (loss) on foreign currency exchange			4,634				-
Total			(2,572	)					3,229				(935	)

 

For the agreements qualified as fair value hedge, the Bank recognized in the consolidated statement of profit or loss the gain (loss) on the derivative financial instruments and the gain (loss) of the hedged asset or liability related. The details as follows:

 

		June 30, 2018
		Classification in consolidated statement of profit or loss		Gain (loss) on derivatives				Gain (loss) on hedge item				Net gain (loss)
Derivatives – fair value hedge
Interest rate swaps		Interest income – securities at FVOCI			(21	)			194				173
		Interest income – loans			(14	)			160				146
		Interest expenses – borrowings and debt			(555	)			(6,099	)			(6,654	)
		Derivative financial instruments and hedging			(3,425	)			3,262				(163	)
Cross-currency swaps		Interest income – loans			(488	)			936				448
		Interest expenses – borrowings and debt			98				(4,535	)			(4,437	)
		Derivative financial instruments and hedging			(1,172	)			2,312				1,140
Total					(5,577	)			(3,770	)			(9,347	)

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Derivative financial instruments for hedging purposes (continued)

 

		June 30, 2017
		Classification in consolidated statement of profit or loss		Gain (loss) on derivatives				Gain (loss) on hedge item				Net gain (loss)
Derivatives – fair value hedge
Interest rate swaps		Interest income – securities at FVOCI			(79	)			277				198
		Interest income loans			(12	)			158				146
		Interest expenses – borrowings and debt			976				(10,206	)			(9,230	)
		Derivative financial instruments and hedging			593				(379	)			214
Cross-currency swaps		Interest income loans			(394	)			716				322
		Interest expenses – borrowings and debt			743				(4,772	)			(4,029	)
		Derivative financial instruments and hedging			19,217				(20,685	)			(1,468	)
Total					21,044				(34,891	)			(13,847	)

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Derivative financial instruments for hedging purposes (continued)

 

		June 30, 2016
		Classification in consolidated statement of profit or loss		Gain (loss) on derivatives				Gain (loss) on hedge item				Net gain (loss)
Derivatives – fair value hedge
Interest rate swaps		Interest income – securities at FVOCI			(362	)			836				474
		Interest income loans			(137	)			1,508				1,371
		Interest expenses – borrowings and debt			2,889				(14,126	)			(11,237	)
		Derivative financial instruments and hedging			(1,404	)			1,798				394
Cross-currency swaps		Interest income loans			(137	)			354				217
		Interest expenses – borrowings and debt			(36	)			(2,472	)			(2,508	)
		Derivative financial instruments and hedging			(3,713	)			3,213				(500	)
Total					(2,900	)			(8,889	)			(11,789	)

 

Derivatives financial position and performance

 

The following tables details the changes of the market value of the underlying item in the statement of financial position related to fair value hedges:

 

		June 30, 2018
Fair value hedges		Carrying amount				Accumulated fair value adjustments				Line item in the statement of financial position
Interest rate risk
Loans			15,983				(15	)		Loans
Issuances			(347,174	)			7,520			Short and long-term borrowings and debt
Foreign exchange rate risk and interest rate risk:
Securities at FVOCI			12,425				(468	)		Securities at FVOCI
Loans			11,661				(1,282	)		Loans
Issuances			(206,603	)			19,043			Short and long-term borrowings and debt

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Derivative financial instruments for hedging purposes (continued)

 

Derivatives financial position and performance (continued)

 

		December 31, 2017
Fair value hedges		Carrying amount				Accumulated fair value adjustments				Line item in the statement of financial position
Interest rate risk
Loans			-				-			Loans
Issuances			355,000				(4,411	)		Short and long-term borrowings and debt
Foreign exchange rate risk and interest rate risk:
Securities at FVOCI			12,369				(32	)		Securities at FVOCI
Loans			25,027				744			Loans
Issuances			(249,328	)			(2,301	)		Short and long-term borrowings and debt

 

The following tables details the profile of the timing of the nominal amount of the hedging instrument:

 

		June 30, 2018
Risk type		Foreign Exchange risk				Interest rate risk				Foreign exchange and Interest rate risk				Total
Up to 1 month			64,231				-				8,127				72,358
31 to 60 days			9,672				-				-				9,672
61 to 90 days			62,684				150,000				-				212,684
91 to 180 days			22,613				177,500				-				200,113
181 to 365 days			83,250				182,000				73,193				338,443
1 to 2 years			101,884				467,500				-				569,384
2 to 5 years			4,224				89,000				31,479				124,703
More than 5 years			-				-				68,768				68,768
Total			348,558				1,066,000				181,567				1,596,125

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Derivative financial instruments for hedging purposes (continued)

 

Derivatives financial position and performance (continued)

 

Analysis of maturity of the derivatives by type of risk covered:

 

		December 31, 2017
Risk type		Foreign Exchange risk				Interest rate risk				Foreign exchange and Interest rate risk				Total
Up to 1 month			69,459				-				-				69,459
31 to 60 days			26,104				-				-				26,104
61 to 90 days			1,729				185,000				16,821				203,550
91 to 180 days			16,567				137,500				-				154,067
181 to 365 days			68,952				202,500				8,127				279,579
1 to 2 years			178,331				21,500				73,193				273,024
2 to 5 years			4,413				416,000				24,872				445,285
More than 5 years			-				-				76,049				76,049
Total			365,555				962,500				199,062				1,527,117

 

For control purposes, derivative instruments are recorded at their nominal amount (“notional amount”) in memorandum accounts. Interest rate swaps are made either in a single currency or cross currency for a prescribed period to exchange a series of interest rate flows, which involve fixed for floating interest payments, and vice versa. The Bank also engages in certain foreign exchange trades to serve customers’ transaction needs and to manage foreign currency risk. All such positions are hedged with an offsetting contract for the same currency.

 

The Bank manages and controls the risks on these foreign exchange trades by establishing counterparty credit limits by customer and by adopting policies that do not allow for open positions in the credit and investment portfolio. The Bank also uses foreign currency exchange contracts to hedge the foreign exchange risk associated with the Bank’s equity investment in a non-U.S. dollar functional currency foreign subsidiary. Derivative and foreign exchange instruments negotiated by the Bank are executed mainly over-the-counter (OTC). These contracts are executed between two counterparties that negotiate specific agreement terms, including notional amount, exercise price and maturity.

 

The maximum length of time over which the Bank has hedged its exposure to the variability in future cash flows on forecasted transactions is 5.7 years.

 

The Bank recognized the lifetime associated cost of the foreign exchange forward agreements into interest income, as an adjustment to the yield on hedge items creating an accumulated reserve in OCI, reclassified to profit or loss at its’ maturity. The Bank estimates that approximately $349, are expected to be reclassified into profit or loss during the twelve-month year ending June 30, 2019.

 

The Bank recognized the lifetime associated cost of the foreign exchange forward agreements into interest expense, as an adjustment to the yield on hedge items creating an accumulated reserve in OCI, reclassified to profit or loss at its’ maturity. The Bank estimates that approximately $1,950, are expected to be reclassified into profit or loss during the twelve-month year ending June 30, 2019.

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Derivative financial instruments for hedging purposes (continued)

 

Types of Derivatives and Foreign Exchange Instruments

 

Interest rate swaps are contracts in which a series of interest rate flows in a single currency are exchanged over a prescribed period. The Bank has designated a portion of these derivative instruments as fair value hedges and a portion as cash flow hedges. Cross currency swaps are contracts that generally involve the exchange of both interest and principal amounts in two different currencies. The Bank has designated a portion of these derivative instruments as fair value hedges and a portion as cash flow hedges. Foreign exchange forward contracts represent an agreement to purchase or sell foreign currency at a future date at agreed-upon terms. The Bank has designated these derivative instruments as cash flow hedges and net investment hedges.

 

Offsetting of financial assets and liabilities

 

In the ordinary course of business, the Bank enters into derivative financial instrument transactions and securities sold under repurchase agreements under industry standards agreements. Depending on the collateral requirements stated in the contracts, the Bank and counterparties can receive or deliver collateral based on the fair value of the financial instruments transacted between parties. Collateral typically consists of cash deposits and securities. The master netting agreements include clauses that, in the event of default, provide for close-out netting, which allows all positions with the defaulting counterparty to be terminated and net settled with a single payment amount.

 

The International Swaps and Derivatives Association master agreement (“ISDA”) and similar master netting arrangements do not meet the criteria for offsetting in the consolidated statement of financial position. This is because they create for the parties to the agreement a right of set-off of recognized amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Bank or the counterparties or following other predetermined events.

 

The following tables summarize financial assets and liabilities that have been offset in the consolidated statement of financial position or are subject to master netting agreements:

 

a)

Derivative financial instruments – assets

 

June 30, 2018
						Gross amounts offset in the consolidated				Net amount of assets presented in the				Gross amounts not offset in the consolidated statement of financial position
Description		Gross amounts assets				statement of financial position				consolidated statement of financial position				Financial instruments				Cash collateral received				Net Amount
Derivative financial instruments used for hedging – receivable – at fair value			6,379				-				6,379				-				(3,906	)			2,473
Total			6,379				-				6,379				-				(3,906	)			2,473

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Offsetting of financial assets and liabilities (continued)

 

a)

Derivative financial instruments – assets (continued)

 

December 31, 2017
						Gross amounts offset in the consolidated				Net amount of assets presented in the				Gross amounts not offset in the consolidated statement of financial position
Description		Gross amounts assets				statement of financial position				consolidated statement of financial position				Financial instruments				Cash collateral received				Net Amount
Derivative financial instruments used for hedging – receivable – at fair value			13,338				-				13,338				-				(22,304	)			(8,966	)
Total			13,338				-				13,338				-				(22,304	)			(8,966	)

 

The following table presents the reconciliation of assets that have been offset or are subject to master netting agreements to individual line items in the consolidated statement of financial position:

 

		June 30, 2018
Description		Gross amounts of assets				Gross amounts offset in the consolidated statement of financial position				Net amount of assets presented in the consolidated statement of financial position
Derivative financial instruments used for hedging – receivable – at fair value			6,379				-				6,379
Total			6,379				-				6,379

 

		December 31, 2017
Description		Gross amounts of assets				Gross amounts offset in the consolidated statement of financial position				Net amount of assets presented in the consolidated statement of financial position
Derivative financial instruments used for hedging – receivable – at fair value			13,338				-				13,338
Total			13,338				-				13,338

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial instruments (continued)

 

Offsetting of financial assets and liabilities (continued)

 

b)

Financial liabilities and derivative financial instruments – liabilities

 

June 30, 2018
		Gross				Gross amounts offset in the consolidated				Net amount of liabilities presented in the consolidated				Gross amounts not offset in the consolidated statement of financial position
Description		amounts of liabilities				statement of financial position				statement of financial position				Financial instruments				Cash collateral pledged				Net Amount
Derivative financial instruments used for hedging – payable – at fair value			30,064				-				30,064				-				(30,819	)			(755	)
Total			30,064				-				30,064				-				(30,819	)			(755	)

 

December 31, 2017
		Gross				Gross amounts offset in the consolidated				Net amount of liabilities presented in the consolidated				Gross amounts not offset in the consolidated statement of financial position
Description		amounts of liabilities				statement of financial position				statement of financial position				Financial instruments				Cash collateral pledged				Net Amount
Derivative financial instruments used for hedging – payable – at fair value			34,943				-				34,943				-				(50,241	)			(15,298	)
Total			34,943				-				34,943				-				(50,241	)			(15,298	)

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

5.

Financial Instruments (continued)

 

Offsetting of financial assets and liabilities (continued)

 

b)

Financial liabilities and derivative financial instruments – liabilities (continued)

 

The following table presents the reconciliation of liabilities that have been offset or are subject to master netting agreements to individual line items in the consolidated statement of financial position:

 

		June 30, 2018
Description		Gross amounts of liabilities				Gross amounts offset in the consolidated statement of financial position				Net amount of liabilities presented in the consolidated statement of financial position
Derivative financial instruments:
Derivative financial instruments used for hedging – payable – at fair value			30,064				-				30,064
Total derivative financial instruments			30,064				-				30,064

 

		December 31, 2017
Description		Gross amounts of liabilities				Gross amounts offset in the consolidated statement of financial position				Net amount of liabilities presented in the consolidated statement of financial position
Derivative financial instruments:
Derivative financial instruments used for hedging – payable – at fair value			34,943				-				34,943
Total derivative financial instruments			34,943				-				34,943

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

6.

Loans commitments and financial guarantees contracts

 

In the normal course of business, to meet the financing needs of its customers, the Bank is party to loans commitments and financial guarantees contracts. These instruments involve, to varying degrees, elements of credit and market risk more than the amount recognized in the consolidated statement of financial position. Credit risk represents the possibility of loss resulting from the failure of a customer to perform in accordance with the terms of a contract.

 

The Bank’s outstanding loans commitments and financial guarantees contracts are as follows:

 

		June 30, 2018				December 31, 2017
Confirmed letters of credit			-				273,449
Stand-by letters of credit and guaranteed –    Commercial risk			354,648				168,976
Credit commitments			130,578				45,578
Total			485,226				488,003

 

The remaining maturity profile of the Bank’s outstanding loans commitments and financial guarantees contracts is as follows:

 

Maturities		June 30, 2018				December 31, 2017
Up to 1 year			454,648				457,168
From 1 to 2 years			-				257
From 2 to 5 years			30,000				30,000
More than 5 years			578				578
Total			485,226				488,003

 

Loans commitments and financial guarantees contracts classified by issuer’s credit quality indicators are as follows:

 

Rating(1)		June 30, 2018				December 31, 2017
1-4			270,028				151,934
5-6			215,198				336,069
7			-				-
8			-				-
9			-				-
10			-				-
Total			485,226				488,003

 

(1)

Current ratings as of June 30, 2018 and December 31, 2017, respectively.

  

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

6.

Loans commitments and financial guarantees contracts (continued)

 

The breakdown of the Bank’s loans commitments and financial guarantees contracts exposure by country risk is as follows:

 

		June 30, 2018				December 31, 2017
Country:
Argentina			7,577				7,546
Bolivia			200				200
Brazil			50,000				-
Canada			385				425
Chile			63				15,000
Colombia			67,000				91,020
Costa Rica			7,817				19,848
Dominican Republic			16,500				-
Ecuador			165,787				252,800
El Salvador			448				767
Guatemala			11,700				11,788
Honduras			1,310				890
Mexico			84,988				35,643
Panama			28,552				31,260
Paraguay			-				22
Peru			-				17,618
Uruguay			42,899				3,176
Total			485,226				488,003

 

Letters of credit and guarantees

 

The Bank, on behalf of its client’s base, advises and confirms letters of credit to facilitate foreign trade transactions. When confirming letters of credit, the Bank adds its own unqualified assurance that the issuing bank will pay and that if the issuing bank does not honor drafts drawn on the letter of credit, the Bank will. The Bank provides stand-by letters of credit and guarantees, which are issued on behalf of institutional clients in connection with financing between its clients and third parties. The Bank applies the same credit policies used in its lending process, and once issued the commitment is irrevocable and remains valid until its expiration. Credit risk arises from the Bank's obligation to make payment in the event of a client’s contractual default to a third party. Risks associated with stand-by letters of credit and guarantees are included in the evaluation of the Bank’s overall credit risk.

 

Credit commitments

 

Commitments to extend credit are binding legal agreements to lend to clients. Commitments generally have fixed expiration dates or other termination clauses and require payment of a fee to the Bank. As some commitments expire without being drawn down, the total commitment amounts do not necessarily represent future cash requirements.

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

6.

Loans commitments and financial guarantees contracts (continued)

 

The allowances for expected credit losses related to loans commitments and financial guarantees contracts are as follows:

 

		Stage 1 (1)				Stage 2 (2)				Stage 3 (3)				Total
Allowance for expected credit losses as of December 31, 2017			1,358				5,487				-				6,845
Transfer to lifetime expected credit losses			-				-				-				-
Transfer to credit-impaired financial instruments			-				-				-				-
Transfer to 12-month expected credit losses			36				(36	)			-				-
Net effect of changes in reserve for expected credit loss			(43	)			(3,879	)			-				(3,922	)
Financial instruments that have been derecognized during the period			(1,071	)			(1,453	)			-				(2,524	)
Changes due to instruments recognized as of December 31, 2017:			(1,078	)			(5,368	)			-				(6,446	)
New instruments originated or purchased			1,253				-				-				1,253
Allowance for expected credit losses as of June 30, 2018			1,533				119				-				1,652

 

		Stage 1 (1)				Stage 2 (2)				Stage 3 (3)				Total
Allowance for expected credit losses as of December 31, 2016			1,143				4,633				-				5,776
Transfer to lifetime expected credit losses			(1	)			1				-				-
Transfer to credit-impaired financial instruments			-				-				-				-
Transfer to 12-month expected credit losses			-				-				-				-
Net effect of changes in reserve for expected credit loss			(54	)			853				-				799
Financial instruments that have been derecognized during the year			(971	)			-				-				(971	)
Changes due to instruments recognized as of December 31, 2016:			(1,026	)			854				-				(172	)
New instruments originated or purchased			1,241				-				-				1,241
Allowance for expected credit losses as of December 31, 2017			1,358				5,487				-				6,845

 

(1)

12-month expected credit losses.

(2)

Lifetime expected credit losses.

(3)

Credit-impaired financial assets (lifetime expected credit losses).

 

The reserve for expected credit losses on loans commitments and financial guarantees contracts reflects the Bank’s Management estimate of expected credit losses items such as: confirmed letters of credit, stand-by letters of credit, guarantees and credit commitments.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

7.

Investment Properties

 

Investment properties are measured at fair value through profit or loss. The gains and losses resulting from fair value adjustments are recognized in the consolidated statements of profit or loss. A summary as follows:

 

		June 30, 2018
		Carrying amount				Gross gain				Gross loss				Fair value
Investment Properties (1)
Paraguay			5,119				-				1,148				3,971
			5,119				-				1,148				3,971

 

		December 31, 2017
		Initial recognition				Gross gain				Gross loss				Fair value
Investment Properties (1)
Paraguay			5,119				-				-				5,119
			5,119				-				-				5,119

 

(1)

Other real estate owned as dation in payment.

 

8.

Other assets

 

Following is a summary of other assets:

 

		June 30, 2018				December 31, 2017
Accounts receivable			6,394				6,793
IT projects under development			1,594				1,405
Other (1)			3,342				5,510
			11,330				13,708

 

(1)

As of June 30, 2018 the Bank derecognized the amount of $1.7 million related to a leasing under development, outstanding as of December 31, 2017, in the consolidated financial statement of profit or loss as Impairment loss in Other Assets.

 

9.

Deposits

 

The maturity profile of the Bank’s deposits is as follows:

 

		June 30, 2018				December 31, 2017
Demand			20,001				82,064
Up to 1 month			1,210,250				1,147,772
From 1 month to 3 months			286,386				492,205
From 3 months to 6 months			699,791				411,159
From 6 months to 1 year			533,250				571,500
From 1 year to 2 years			95,691				76,422
From 2 years to 5 years			143,633				147,722
			2,989,002				2,928,844

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

9.

Deposits (continued)

 

The following table presents additional information regarding the Bank’s deposits:

 

		June 30, 2018				December 31, 2017
Aggregate amounts of time deposits of $100,000 or more			2,988,580				2,928,425
Aggregate amounts of deposits in the New York Agency			273,283				266,158

 

		Three months ended June 30th
			2018				2017				2016
Interest expense paid to deposits in the New York Agency.			1,396				847				464

 

		Six months ended June 30th
			2018				2017				2016
Interest expense paid to deposits in the New York Agency.			2,549				1,557				853

 

10.

Securities sold under repurchase agreements

 

As of June 30, 2018, and as of December 31, 2017, the Bank does not have financing transactions under repurchase agreements.

 

During the periods ended June 30, 2018 and 2016, interest expense related to financing transactions under repurchase agreements totaled $291 and $544, respectively, corresponding to interest expense generated by the financing contracts under repurchase agreements. These expenses are included in the interest expense – short-term and long-term borrowings and debt line in the consolidated statements of profit or loss. As of June 30, 2017, the Bank did not incur in any interest expense generated by financial liabilities under repurchase agreements.

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

11.

Borrowings and debt

 

Short-term borrowings and debt

 

The breakdown of short-term (original maturity of less than one year) borrowings and debt, together with contractual interest rates, is as follows:

 

		June 30, 2018				December 31, 2017
Short-term Borrowings:
At fixed interest rates			465,035				429,069
At floating interest rates			530,140				633,154
Total borrowings			995,175				1,062,223
Short-term Debt:
At fixed interest rates			10,500				10,500
At floating interest rates			42,795				-
Total debt			53,295				10,500
Total short-term borrowings and debt			1,048,470				1,072,723
Average outstanding balance during the period			897,397				710,021
Maximum balance at any month-end			1,057,619				1,072,723
Range of fixed interest rates on borrowing and debt in U.S. dollars			1.95% to 2.39%				1.60% to 1.95%
Range of floating interest rates on borrowing in U.S. dollars			2.29% to 2.61%				1.77% to 2.08%
Range of fixed interest rates on borrowing in Mexican pesos			8.16% to 8.17%				7.92%
Range of floating interest rate on borrowing in Mexican pesos			8.16% to 8.28%				7.68% to 7.89%
Weighted average interest rate at end of the period			2.88%				2.16%
Weighted average interest rate during the period			2.85%				1.66%

 

The outstanding balances of short-term borrowings and debt by currency, are as follows:

 

		June 30, 2018				December 31, 2017
Currency
US dollar			963,000				1,044,500
Mexican peso			85,470				28,223
Total			1,048,470				1,072,723

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

11.

Borrowings and debt (continued)

 

Long-term borrowings and debt

 

Borrowings consist of long-term and syndicated loans obtained from international banks. Debt instruments consist of public and private issuances under the Bank's Euro Medium Term Notes Program (“EMTN”) as well as public issuances in the Mexican market. The breakdown of borrowings and long-term debt (original maturity of more than one year), together with contractual interest rates, and prepaid commission of $3,317 and $4,211 as of June 30, 2018 and December 31, 2017, respectively, are as follows:

 

		June 30, 2018				December 31, 2017
Long-term Borrowings:
At fixed interest rates with due dates from August 2018 to February 2022			68,550				44,011
At floating interest rates with due dates from August 2019 to June 2021			484,174				379,000
Total borrowings			552,724				423,011
Long-term Debt:
At fixed interest rates with due dates from July 2018 to March 2024			510,379				532,305
At floating interest rates with due dates from April 2019 to June 2023			109,886				187,739
Total long-term debt			620,265				720,044
Total long-term borrowings and debt			1,172,989				1,143,055
Less: Prepaid commission			(3,317	)			(4,211	)
Total long-term borrowings and debt, net			1,169,672				1,138,844
Net average outstanding balance during the year			1,116,626				1,477,788
Maximum outstanding balance at any month – end			1,172,989				2,010,078
Range of fixed interest rates on borrowing and debt in U.S. dollars			1.35% to 3.25%				1.35% to 3.25%
Range of floating interest rates on borrowing and debt in U.S. dollars			2.62% to 3.49%				2.61% to 3.01%
Range of fixed interest rates on borrowing in Mexican pesos			5.05% to 9.09%				4.89% to 9.09%
Range of floating interest rates on borrowing and debt in Mexican pesos			8.44%				7.99% to 8.00%
Range of fixed interest rate on debt in Japanese yens			0.46% to 0.50%				0.46% to 0.81%
Range of fixed interest rate on debt in Euros			3.75%				3.75%
Range of fixed interest rate on debt in Australian dollar			3.33%				3.33%
Weighted average interest rate at the end of the period			4.12%				3.60%
Weighted average interest rate during the period			3.85%				3.43%

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

11.

Borrowings and debt (continued)

 

Long-term borrowings and debt (continued)

 

The balances of long-term borrowings and debt by currency, excluding prepaid commission, are as follows:

 

		June 30, 2018				December 31, 2017
Currency
US dollar			885,724				753,981
Mexican peso			123,610				206,750
Japanese yen			81,003				98,711
Euro			60,453				60,178
Australian dollar			22,199				23,435
Total			1,172,989				1,143,055

 

The Bank's funding activities include: (i) EMTN, which may be used to issue notes for up to $2.3 billion, with maturities from 7 days up to a maximum of 30 years, at fixed or floating interest rates, or at discount, and in various currencies. The notes are generally issued in bearer or registered form through one or more authorized financial institutions; (ii) Short-and Long-Term Notes “Certificados Bursatiles” Program (the “Mexico Program”) in the Mexican local market, registered with the Mexican National Registry of Securities maintained by the National Banking and Securities Commission in Mexico (“CNBV”, for its acronym in Spanish), for an authorized aggregate principal amount of 10 billion Mexican pesos with maturities from one day to 30 years.

 

Some borrowing agreements include various events of default and covenants related to minimum capital adequacy ratios, incurrence of additional liens, and asset sales, as well as other customary covenants, representations and warranties. As of June 30, 2018, the Bank was in compliance with all covenants.

 

The future payments of long-term borrowings and debt outstanding as of June 30, 2018, are as follows:

 

Payments		Outstanding
2018			14,388
2019			362,526
2020			483,645
2021			216,928
2022			10,049
2023			25,000
2024			60,453
			1,172,989

 

12.

Other liabilities

 

Following is a summary of other liabilities:

 

		June 30, 2018				December 31, 2017
Accruals and other accumulated expenses			5,931				8,018
Accounts payable			6,466				9,307
Others			2,829				3,226
			15,226				20,551

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

13.

Earnings per share

 

The following table presents a reconciliation of the income and share data used in the basic and diluted earnings per share (“EPS”) computations for the dates indicated:

 

		Three months ended June30th
		2018				2017				2016
(Thousands of U.S. dollars)
Profit for the period			16,625				17,481				22,272
(U.S. dollars)
Basic earnings per share			0.42				0.44				0.57
Diluted earnings per share			0.42				0.44				0.57
(Share units)
Weighted average common shares outstanding -   applicable to basic			39,626				39,317				39,078
Effect of diluted securities:
Stock options and restricted stock units plan			25				30				120
Adjusted weighted average common shares outstanding applicable to diluted EPS			39,651				39,347				39,198

 

		Six months ended June30th
		2018				2017				2016
(Thousands of U.S. dollars)
Profit for the period			31,124				40,939				45,710
(U.S. dollars)
Basic earnings per share			0.79				1.04				1.17
Diluted earnings per share			0.79				1.04				1.17
(Share units)
Weighted average common shares outstanding -   applicable to basic			39,547				39,252				39,037
Effect of diluted securities:
Stock options and restricted stock units plan			25				28				83
Adjusted weighted average common shares outstanding applicable to diluted EPS			39,572				39,280				39,120

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

14.

Capital and additional paid-in capital in excess

 

Common stock

 

The Bank’s common stock is divided into four categories:

 

1)

“Class A”; shares may only be issued to Latin American Central Banks or banks in which the state or other government agency is the majority shareholder.

2)

“Class B”; shares may only be issued to banks or financial institutions.

3)

“Class E”; shares may be issued to any person whether a natural person or a legal entity.

4)

“Class F”; may only be issued to state entities and agencies of non-Latin American countries, including, among others, central banks and majority state-owned banks in those countries, and multilateral financial institutions either international or regional institutions.

 

The holders of “Class B” shares have the right to convert or exchange their “Class B” shares, at any time, and without restriction, for “Class E” shares, at a rate of one-to-one.

 

The following table provides detailed information on the Bank’s common stock activity per class for each of the periods in the three-years ended June 30, 2018, 2017and 2016:

 

(Share units)		“Class A”				“Class B”				“Class E”				“Class F”				Total
Authorized		40,000,000				40,000,000				100,000,000				100,000,000				280,000,000
Outstanding at January 1, 2016			6,342,189				2,474,469				30,152,247				-				38,968,905
Conversions			-				-				-				-				-
Restricted stock issued – directors			-				-				57,000				-				57,000
Exercised stock options - compensation plans			-				-				-				-				-
Restricted stock units – vested			-				-				69,678				-				69,678
Outstanding at June 30, 2016			6,342,189				2,474,469				30,278,925				-				39,095,583
Outstanding at January 1, 2017			6,342,189				2,474,469				30,343,390				-				39,160,048
Repurchase common stock			-				(1,000	)			-				-				(1,000	)
Restricted stock issued – directors			-				-				57,000				-				57,000
Exercised stock options - compensation plans			-				-				74,995				-				74,995
Restricted stock units – vested			-				-				70,519				-				70,519
Outstanding at June 30, 2017			6,342,189				2,473,469				30,545,904				-				39,361,562
Outstanding at January 1, 2018			6,342,189				2,408,806				30,677,840				-				39,428,835
Conversions			-				(64,386	)			64,386				-				-
Repurchase common stock			-				-				(64	)			-				(64	)
Restricted stock issued – directors			-				-				57,000				-				57,000
Exercised stock options - compensation plans			-				-				102,918				-				102,918
Restricted stock units – vested			-				-				49,055				-				49,055
Outstanding at June 30, 2018			6,342,189				2,344,420				30,951,135				-				39,637,744

 

Additional paid-in capital in excess

 

As of June 30, 2018, and December 31, 2017, the additional paid-in capital consists of additional cash contributions to the common capital paid by shareholders.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

15.

Treasury stock

 

The following table presents information regarding shares repurchased but not retired by the Bank and accordingly classified as treasury stock:

 

		“Class A”								“Class B”								“Class E”								Total
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount
Outstanding at January 1, 2016			318,140				10,708				589,174				16,242				2,103,620				46,447				3,010,934				73,397
Repurchase of common stock			-				-				-				-				-				-				-				-
Restricted stock issued – directors			-				-				-				-				(57,000	)			(1,259	)			(57,000	)			(1,259	)
Exercised stock options - compensation plans			-				-				-				-				-				-				-				-
Restricted stock units – vested			-				-				-				-				(69,678	)			(1,538	)			(69,678	)			(1,538	)
Outstanding at June 30, 2016			318,140				10,708				589,174				16,242				1,976,942				43,650				2,884,256				70,600
Outstanding at January 1, 2017			318,140				10,708				589,174				16,242				1,912,477				42,226				2,819,791				69,176
Repurchase of common stock			-				-				1,000				28				-				-				1,000				28
Restricted stock issued – directors			-				-				-				-				(57,000	)			(1,259	)			(57,000	)			(1,259	)
Exercised stock options - compensation plans			-				-				-				-				(74,995	)			(1,656	)			(74,995	)			(1,656	)
Restricted stock units – vested			-				-				-				-				(70,519	)			(1,557	)			(70,519	)			(1,557	)
Outstanding at June 30, 2017			318,140				10,708				590,174				16,270				1,709,963				37,754				2,618,277				64,732
Outstanding at January 1, 2018			318,140				10,708				590,174				16,270				1,642,690				36,270				2,551,004				63,248
Repurchase of common stock			-				-				-				-				64				1				64				1
Restricted stock issued - directors			-				-				-				-				(57,000	)			(1,259	)			(57,000	)			(1,259	)
Exercised stock options - compensation plans			-				-				-				-				(102,918	)			(2,272	)			(102,918	)			(2,272	)
Restricted stock units - vested			-				-				-				-				(49,055	)			(1,083	)			(49,055	)			(1,083	)
Outstanding at June 30, 2018			318,140				10,708				590,174				16,270				1,433,781				31,657				2,342,095				58,635

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

16.

Accumulated other comprehensive income (loss)

 

The breakdown of accumulated other comprehensive income (loss) related to financial instruments at FVOCI, derivative financial instruments, and foreign currency translation is as follows:

 

		Financial instruments at FVOCI				Derivative financial instruments				Foreign currency translation adjustment				Total
Balance as of January 1, 2016			(8,931	)			(1,750	)			-				(10,681	)
Change in fair value for revaluation by debt instrument, net of hedging			5,730				(2,677	)			-				3,053
Reclassification adjustment for (gains) loss included in the net profit (1)			1,670				(1,821	)			-				(151	)
Other comprehensive income (loss) from the period			7,400				(4,498	)			-				2,902
Balance as of June 30, 2016			(1,531	)			(6,248	)			-				(7,779	)
Balance as of January 1, 2017			(853	)			(1,948	)			-				(2,801	)
Change in fair value for revaluation by debt instrument, net of hedging			(57	)			939				-				882
Reclassification adjustment for (gains) loss included in the net profit (1)			173				(1,687	)			-				(1,514	)
Other comprehensive income (loss) from the period			116				(748	)			-				(632	)
Balance as of June 30, 2017			(737	)			(2,696	)			-				(3,433	)
Balance as of January 1, 2018			(385	)			858				1,490				1,963
Change in fair value for revaluation by debt instrument, net of hedging			(168	)			251				-				83
Change in fair value for revaluation by equity instrument, net of hedging			(3,379	)			860				-				(2,519	)
Reclassification adjustment for (gains) loss included in the net profit (1)			(38	)			2,732				-				2,694
Foreign currency translation adjustment			-				-				(137	)			(137	)
Other comprehensive income (loss) from the period			(3,585	)			3,843				(137	)			121
Balance as of June 30, 2018			(3,970	)			4,701				1,353				2,084

 

(1)

Reclassification adjustments include amounts recognized in profit of the year that had been part of other comprehensive income (loss) in this and previous periods.

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

16.

Accumulated other comprehensive income (loss) (continued)

 

The following table presents amounts reclassified from other comprehensive income to the profit of the period:

 

Three months ended June 30, 2018
Details about accumulated other comprehensive income components		Amount reclassified from accumulated other comprehensive income				Affected line item in the consolidated statement of profit or loss where net income is presented
Realized gains (losses) on securities at FVOCI:			-			Interest income – securities at FVOCI
			-			Net gain on sale of securities at FVOCI
			41			Derivative financial instruments and hedging
			41
Gains (losses) on derivative financial instruments:
Foreign exchange forward			(746	)		Interest income – loans
			(1,116	)		Interest expense – borrowings and deposits
			288			Net gain (loss) on foreign currency exchange
Interest rate swaps			-			Net gain (loss) on interest rate swaps
Cross-currency interest rate swap			-			Net gain (loss) on cross-currency interest rate swap
			(1,574	)

 

Six months ended June 30, 2018
Details about accumulated other comprehensive income components		Amount reclassified from accumulated other comprehensive income				Affected line item in the consolidated statement of profit or loss where net income is presented
Realized gains (losses) on securities at FVOCI:			-			Interest income – securities at FVOCI
			-			Net gain on sale of securities at FVOCI
			38			Derivative financial instruments and hedging
			38
Gains (losses) on derivative financial instruments:
Foreign exchange forward			(1,164	)		Interest income – loans
			(2,227	)		Interest expense – borrowings and deposits
			667			Net gain (loss) on foreign currency exchange
Interest rate swaps			(8	)		Net gain (loss) on interest rate swaps
Cross-currency interest rate swap			-			Net gain (loss) on cross-currency interest rate swap
			(2,732	)

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

16.

Accumulated other comprehensive income (loss) (continued)

 

Three months ended June 30, 2017
Details about accumulated other comprehensive income components		Amount reclassified from accumulated other  comprehensive income				Affected line item in the consolidated statement of profit or loss where net income is presented
Realized gains (losses) on securities at FVOCI:			-			Interest income – securities at FVOCI
			60			Net gain on sale of securities at FVOCI
			(129	)		Derivative financial instruments and hedging
			(69	)
Gains (losses) on derivative financial instruments:
Foreign exchange forward			(2,158	)		Interest income – loans
			(2,032	)		Interest expense – borrowings and deposits
			3,235			Net gain (loss) on foreign currency exchange
Interest rate swaps			51			Net gain (loss) on interest rate swaps
Cross-currency interest rate swap			3			Net gain (loss) on cross-currency interest rate swap
			(901	)

 

Six months ended June 30, 2017
Details about accumulated other comprehensive income components		Amount reclassified from accumulated other comprehensive income				Affected line item in the consolidated statement of profit or loss where net income is presented
Realized gains (losses) on securities at FVOCI:			-			Interest income – securities at FVOCI
			24			Net gain on sale of securities at FVOCI
			(197	)		Derivative financial instruments and hedging
			(173	)
Gains (losses) on derivative financial instruments:
Foreign exchange forward			(4,029	)		Interest income – loans
			(1,251	)		Interest expense – borrowings and deposits
			6,748			Net gain (loss) on foreign currency exchange
Interest rate swaps			214			Net gain (loss) on interest rate swaps
Cross-currency interest rate swap			5			Net gain (loss) on cross-currency interest rate swap
			1,687

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

16.

Accumulated other comprehensive income (loss) (continued)

 

Three months ended June 30, 2016
Details about accumulated other comprehensive income components		Amount reclassified from accumulated other comprehensive income				Affected line item in the consolidated statement of profit or loss where net income is presented
Realized gains (losses) on securities at FVOCI:			221			Interest income – securities at FVOCI
			(1,017	)		Net gain on sale of securities at FVOCI
			(346	)		Derivative financial instruments and hedging
			(1,142	)
Gains (losses) on derivative financial instruments:
Foreign exchange forward			(1,003	)		Interest income – loans
			231			Interest expense – borrowings and deposits
			2,231			Net gain (loss) on foreign currency exchange
Interest rate swaps			28			Net gain (loss) on interest rate swaps
Cross-currency interest rate swap			13			Net gain (loss) on cross-currency interest rate swap
			1,500

 

Six months ended June 30, 2016
Details about accumulated other comprehensive income components		Amount reclassified from accumulated other comprehensive income				Affected line item in the consolidated statement of profit or loss where net income is presented
Realized gains (losses) on securities at FVOCI:			-			Interest income – securities at FVOCI
			(967	)		Net gain on sale of securities at FVOCI
			(703	)		Derivative financial instruments and hedging
			(1,670	)
Gains (losses) on derivative financial instruments:
Foreign exchange forward			(1,755	)		Interest income – loans
			408			Interest expense – borrowings and deposits
			2,495			Net gain (loss) on foreign currency exchange
Interest rate swaps			606			Net gain (loss) on interest rate swaps
Cross-currency interest rate swap			67			Net gain (loss) on cross-currency interest rate swap
			1,821

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

17.

Business segment information

 

The Bank’s activities are managed and executed in two business segments: Commercial and Treasury. The business segment results are determined based on the Bank’s managerial accounting process as defined by IFRS 8 – Operating Segments, which assigns consolidated statement of financial positions, revenue and expense items to each business segment on a systematic basis. The Chief Operating Decision Maker (CODM), represented by the Chief Executive Officer (CEO) and the Executive Committee reviews internal management reports from each division at least quarterly. Segment profit, as included in the internal management reports is used to measure performance as management believes that this information is the most relevant in evaluating the results of the respective segments relative to other entities that operate within the same industry.

 

The Bank’s net interest income represents the main driver of profits; therefore, the Bank presents its interest-earning assets by business segment, to give an indication of the size of business generating net interest income. Interest-earning assets also generate gains and losses on sales, such as for financial instruments at fair value through OCI and financial instruments at fair value through profit or loss, which are included in net other income, in the Treasury Segment. The Bank also discloses its other assets and contingencies by business segment, to give an indication of the size of business that generates net fees and commissions, also included in net other income, in the Commercial Business Segment.

 

The Commercial Business Segment incorporates all of the Bank’s financial intermediation and fees generated by the commercial portfolio. The commercial portfolio includes book value of loans at amortized cost, acceptances, loan commitments and financial guarantee contracts. Profits from the Commercial Business Segment include net interest income from loans at amortized cost, fee income, gain on sale of loans at amortized cost, impairment loss from expected credit losses on loans at amortized cost, impairment loss from expected credit losses on loan commitments and financial guarantee contracts, and allocated expenses.

 

The Treasury Business Segment incorporates deposits in banks and all the Bank’s financial instruments at fair value through profit or loss, financial instruments at fair value through OCI and securities at amortized cost. Profits from the Treasury Business Segment include net interest income from deposits with banks, financial instruments at fair value through OCI and securities at amortized cost, derivative financial instruments foreign currency exchange, gain (loss) for financial instrument at fair value through profit or loss, gain (loss) for financial instrument at fair value through OCI, impairment loss for expected credit losses on investment securities, other income and allocated expenses.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

17.

Business segment information (continued)

 

The following table provides certain information regarding the Bank’s operations by segment:

 

		Periods ended June 30th
		2018(1)				2017(1)				2016(1)
Commercial
Interest income			111,919				109,137				116,496
Less:
Interest expense			56,962				45,822				46,984
Net interest income			54,957				63,315				69,512
Net other income (2)			6,840				8,687				7,780
Total income			61,797				72,002				77,292
Less:
Impairment loss from expected credit losses on loans and impairment loss from expected credit losses on loan commitments and financial guarantee contracts			3,749				4,116				1,230
Impairment loss in other assets			1,740				-				-
Expenses, less impairment loss from expected credit losses			19,567				8,700				9,578
Profit for the period			36,741				23,954				27,227
Commercial assets and loan commitments and financial guarantee contracts (end of period balances):
Interest-earning assets (3 and 5)			5,548,594				5,563,592				6,511,779
Other assets and loan commitments and financial guarantee contracts (4)			498,304				269,575				395,585
Total interest-earning assets, other assets and loan commitments and financial guarantee contracts			6,046,898				5,833,167				6,907,364
Treasury
Interest income			7,437				6,093				5,135
Less:
Interest expense			7,915				5,631				(3,057	)
Net interest income			(478	)			462				8,192
Net other income (2)			931				276				(4,084	)
Total income			453				738				4,108
Less:
(Recovery) impairment loss for expected credit losses on investment securities			(47	)			(465	)			486
Expenses, less impairment loss for expected credit losses			6,117				5,314				5,549
Profit (loss) for the period			(5,617	)			(4,111	)			(1,927	)
Treasury assets (end of period balances):
Interest-earning assets (3 and 5)			777,912				898,777				1,124,621
Total interest-earning assets			777,912				898,777				1,124,621

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

17.

Business segment information (continued)

 

		Periods ended June 30th
Combined business segment total		2018(1)				2017(1)				2016(1)
Interest income			119,356				115,230				121,631
Less:
Interest expense			64,877				51,453				43,927
Net interest income			54,479				63,777				77,704
Net other income (2)			7,771				8,963				3,696
Total income			62,250				72,740				81,400
Less:
Impairment loss from expected credit losses on loans and impairment loss from expected credit losses on loan commitments and financial guarantee contracts			3,749				8,458				12,775
Impairment loss in other assets			1,740				-				-
(Recoveries) impairment loss from expected credit losses on investment securities			(47	)			(465	)			486
Expenses, less impairment loss from expected credit losses			25,684				23,808				22,429
Profit for the period			31,124				40,939				45,710

 

		June 30, 2018				December 31, 2017
Total assets and loan commitments and financial guarantee contracts (end of period balances):
Interest-earning assets (3 and 5)			6,326,506				6,258,584
Other assets and loan commitments and financial guarantee contracts (4)			498,304				493,794
Total interest-earning assets, other assets and loan commitments and financial guarantee contracts			6,824,810				6,752,378

 

(1)

The numbers set out in these tables have been rounded and accordingly may not total exactly.

(2)

Net other income consists of other income including gains on sale of loans, gains (loss) per financial instrument at FVTPL and FVOCI, derivative instruments and foreign currency exchange.

(3)

Includes deposits and loans, net of unearned interest and deferred fees.

(4)

Includes customers’ liabilities under acceptances, loans commitments and financial guarantees contracts.

(5)

Includes cash and cash equivalents, interest-bearing deposits with banks, financial instruments at fair value through OCI, financial instruments at amortized cost and financial instruments at fair value through profit or loss.

 

		June 30, 2018				December 31, 2017
Reconciliation of total assets:
Interest-earning assets – business segment			6,326,506				6,258,584
Equity investment			4,964				8,402
Allowance for expected credit losses on loans			(85,711	)			(81,294	)
Allowance for expected credit losses on securities at amortized cost			(148	)			(196	)
Customers’ liabilities under acceptances			3,971				6,369
Investment properties, net			13,656				-
Intangibles, net			4,790				5,425
Accrued interest receivable			38,379				30,872
Property and equipment, net			6,958				7,420
Derivative financial instruments used for hedging - receivable			6,379				13,338
Other assets			11,330				18,827
Total assets – consolidated financial statements			6,331,074				6,267,747

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

18.

Fair value of financial instruments

 

The Bank determines the fair value of its financial instruments using the fair value hierarchy established in IFRS 13 - Fair Value Measurements and Disclosure, which requires the Bank to maximize the use of observable inputs (those that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market information obtained from sources independent of the reporting entity) and to minimize the use of unobservable inputs (those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances) when measuring fair value. Fair value is used on a recurring basis to measure assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets and liabilities for impairment or for disclosure purposes. Fair value is defined 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. Depending on the nature of the asset or liability, the Bank uses some valuation techniques and assumptions when estimating fair value. The Bank applied the following fair value hierarchy:

 

Level 1 – Assets or liabilities for which an identical instrument is traded in an active market, such as publicly-traded instruments or futures contracts.

 

Level 2 – Assets or liabilities valued based on observable market data for similar instruments, quoted prices in markets that are not active; or other observable inputs that can be corroborated by observable market data for substantially the full term of the asset or liability.

 

Level 3 – Assets or liabilities for which significant valuation assumptions are not readily observable in the market; instruments measured based on the best available information, which might include some internally-developed data, and considers risk premiums that a market participant would require.

 

When determining the fair value measurements for assets and liabilities that are required or permitted to be recorded at fair value, the Bank considers the principal or most advantageous market in which it would transact and considers the assumptions that market participants would use when pricing the asset or liability. When possible, the Bank uses active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Bank uses observable market information for similar assets and liabilities. However, certain assets and liabilities are not actively traded in observable markets and the Bank must use alternative valuation techniques to determine the fair value measurement. The frequency of transactions, the size of the bid-ask spread and the size of the investment are factors considered in determining the liquidity of markets and the relevance of observed prices in those markets.

 

When there has been a significant decrease in the volume or level of activity for a financial asset or liability, the Bank uses the present value technique which considers market information to determine a representative fair value in usual market conditions.

 

A description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis, including the general classification of such assets and liabilities under the fair value hierarchy is presented below:

 

Financial instruments at FVTPL and FVOCI

 

Financial instruments at FVTPL are carried at fair value, which is based upon quoted prices when available, or if quoted market prices are not available, on discounted expected cash flows using market rates commensurate with the credit quality and maturity of the security.

 

Financial instruments at FVOCI are carried at fair value, based on quoted market prices when available, or if quoted market prices are not available, based on discounted expected cash flows using market rates commensurate with the credit quality and maturity of the security.

 

When quoted prices are available in an active market, financial instruments at FVOCI and financial instruments at FVTPL are classified in level 1 of the fair value hierarchy. If quoted market prices are not available or they are available in markets that are not active, then fair values are estimated based upon quoted prices of similar instruments, or where these are not available, by using internal valuation techniques, principally discounted cash flows models. Such securities are classified within level 2 of the fair value hierarchy.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

18.

Fair value of financial instruments (continued)

 

Derivative financial instruments

 

The valuation techniques and inputs depend on the type of derivative and the nature of the underlying instrument. Exchange-traded derivatives that are valued using quoted prices are classified within level 1 of the fair value hierarchy.

 

For those derivative contracts without quoted market prices, fair value is based on internal valuation techniques using inputs that are readily observable and that can be validated by information available in the market. The principal technique used to value these instruments is the discounted cash flows model and the key inputs considered in this technique include interest rate yield curves and foreign exchange rates. These derivatives are classified within level 2 of the fair value hierarchy.

 

The fair value adjustments applied by the Bank to its derivative carrying values include credit valuation adjustments (“CVA”), which are applied to OTC derivative instruments, in which the base valuation generally discounts expected cash flows using the Overnight Index Swap (“OIS”) interest rate curves. Because not all counterparties have the same credit risk as that implied by the relevant OIS curve, a CVA is necessary to incorporate the market view of both, counterparty credit risk and the Bank’s own credit risk, in the valuation.

 

Own-credit and counterparty CVA is determined using a fair value curve consistent with the Bank’s or counterparty credit rating. The CVA is designed to incorporate a market view of the credit risk inherent in the derivative portfolio. However, most of the Bank’s derivative instruments are negotiated bilateral contracts and are not commonly transferred to third parties. Derivative instruments are normally settled contractually, or if terminated early, are terminated at a value negotiated bilaterally between the counterparties. Therefore, the CVA (both counterparty and own-credit) may not be realized upon a settlement or termination in the normal course of business. In addition, all or a portion of the CVA may be reversed or otherwise adjusted in future periods in the event of changes in the credit risk of the Bank or its counterparties or due to the anticipated termination of the transactions.

 

Transfer of financial assets

 

Gains or losses on sale of loans depend in part on the carrying amount of the financial assets involved in the transfer, and its fair value at the date of transfer. The fair value of instruments is determined based upon quoted market prices when available, or are based on the present value of future expected cash flows using information related to credit losses, prepayment speeds, forward yield curves, and discounted rates commensurate with the risk involved.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

18.

Fair value of financial instruments (continued)

 

Financial instruments measured at fair value on a recurring basis by caption on the consolidated statement of financial positions using the fair value hierarchy are described below:

 

		June 30, 2018
		Level 1(a)				Level 2(b)				Level 3(c)				Total
Assets
Securities at fair value through OCI:
Equity investments			4,964				-				-				4,964
Sovereign debt (1)			16,112				-				-				16,112
Total securities at fair value through OCI			21,076				-				-				21,076
Derivative financial instruments used for hedging – receivable:
Interest rate swaps			-				1,559				-				1,559
Cross-currency interest rate swaps			-				2,179				-				2,179
Foreign exchange forward			-				2,641				-				2,641
Total derivative financial instrument used for hedging – receivable			-				6,379				-				6,379
Total financial assets at fair value			21,076				6,379				-				27,455
Liabilities
Derivative financial instruments used for hedging – payable:
Interest rate swaps			-				10,339				-				10,339
Cross-currency interest rate swaps			-				17,139				-				17,139
Foreign exchange forward			-				2,586				-				2,586
Total derivative financial instruments used for hedging – payable			-				30,064				-				30,064
Total financial liabilities at fair value			-				30,064				-				30,064

 

(a)

Level 1: Quoted market prices in an active market.

(b)

Level 2: Quoted market prices in an inactive market or internally developed models with significant observable market.

(c)

Level 3: Internally developed models with significant unobservable market information.

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

18.

Fair value of financial instruments (continued)

 

		December 31, 2017
		Level 1(a)				Level 2(b)				Level 3(c)				Total
Assets
Securities at fair value through OCI:
Corporate debt			8,402				-				-				8,402
Sovereign debt (1)			16,733				-				-				16,733
Total securities at fair value through OCI			25,135				-				-				25,135
Derivative financial instruments used for hedging – receivable:
Interest rate swaps			-				129				-				129
Cross-currency interest rate swaps			-				4,550				-				4,550
Foreign exchange forward			-				8,659				-				8,659
Total derivative financial instrument used for hedging – receivable			-				13,338				-				13,338
Total financial assets at fair value			25,135				13,338				-				38,473
Liabilities
Derivative financial instruments used for hedging – payable:
Interest rate swaps			-				4,789				-				4,789
Cross-currency interest rate swaps			-				30,154				-				30,154
Total derivative financial instruments used for hedging – payable			-				34,943				-				34,943
Total financial liabilities at fair value			-				34,943				-				34,943

 

(a)

Level 1: Quoted market prices in an active market.

(b)

Level 2: Quoted market prices in an inactive market or internally developed models with significant observable market.

(c)

Level 3: Internally developed models with significant unobservable market information.

 

(1)

At December 31, 2017, securities at fair value through OCI for $2,955 were reclassified from level 2 to level 1 of the fair value hierarchy given that Bloomberg's valuation "BVAL" for these values increased from 7 (in 2016) to 10 (in 2017).

.

The following information should not be interpreted as an estimate of the fair value of the Bank. Fair value calculations are only provided for a limited portion of the Bank’s financial assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparison of fair value information of the Bank and other companies may not be meaningful for comparative analysis.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

18.

Fair value of financial instruments (continued)

 

The following methods and assumptions were used by the Bank’s management in estimating the fair values of financial instruments whose fair value is not measured on a recurring basis:

 

Financial instruments with carrying value that approximates fair value

 

The carrying value of certain financial assets, including cash and due from banks, interest-bearing deposits in banks, customers’ liabilities under acceptances, accrued interest receivable and certain financial liabilities including customer’s demand and time deposits, securities sold under repurchase agreements, accrued interest payable, and acceptances outstanding, as a result of their short-term nature, are considered to approximate fair value. These instruments are classified in Level 2.

 

Securities at amortized cost

 

The fair value has been based upon current market quotations, where available. If quoted market prices are not available, fair value has been estimated based upon quoted price of similar instruments, or where these are not available, on discounted expected cash flows using market rates commensurate with the credit quality and maturity of the security. These securities are classified in Levels 1and 2.

 

Loans at amortized cost

 

The fair value of the loan portfolio, including impaired loans, is estimated by discounting future cash flows using the current rates at which loans would be made to borrowers with similar credit ratings and for the same remaining maturities, considering the contractual terms in effect as of December 31 of the relevant year. These assets are classified in Level 2.

 

Short and long-term borrowings and debt

 

The fair value of short and long-term borrowings and debt is estimated using discounted cash flow analysis based on the current incremental borrowing rates for similar types of borrowing arrangements, considering the changes in the Bank’s credit margin. These liabilities are classified in Level 2.

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

18.

Fair value of financial instruments (continued)

 

The following table provides information on the carrying value and estimated fair value of the Bank’s financial instruments that are not measured on a recurring basis:

 

		June 30, 2018
		Carrying value				Fair value				Level 1(a)				Level 2(b)				Level 3(c)
Financial assets
Instruments with carrying value that approximates fair value:
Cash and deposits on banks			683,523				683,523				-				683,523				-
Acceptances			13,656				13,656				-				13,656				-
Interest receivable			38,379				38,379				-				38,379				-
Securities at amortized cost (2)			78,129				76,921				58,826				5,137				12,958
Loans, net (1)			5,462,883				5,524,889				-				5,524,889				-
Financial liabilities
Instruments with carrying value that approximates fair value:
Deposits			2,989,002				2,989,002				-				2,989,002				-
Acceptances			13,656				13,656				-				13,656				-
Interest payable			15,953				15.953				-				15,953				-
Short-term borrowings and debt			1,048,470				1,049,020				-				1,049,020				-
Long-term borrowings and debt, net			1,169,672				1,193,297				-				1,193,297				-

 

		December 31, 2017
		Carrying value				Fair value				Level 1(a)				Level 2(b)				Level 3(c)
Financial assets
Instruments with carrying value that approximates fair value:
Cash and deposits on banks			672,048				672,048				-				672,048				-
Acceptances			6,369				6,369				-				6,369				-
Interest receivable			30,872				30,872				-				30,872				-
Securities at amortized cost (2)			68,934				69,006				50,581				8,447				9,978
Loans, net (1)			5,419,379				5,520,604				-				5,520,604				-
Financial liabilities
Instruments with carrying value that approximates fair value:
Deposits			2,928,844				2,928,844				-				2,928,844				-
Acceptances			6,369				6,369				-				6,369				-
Interest payable			15,816				15,816				-				15,816				-
Short-term borrowings and debt			1,072,723				1,072,483				-				1,072,483				-
Long-term borrowings and debt, net			1,138,844				1,158,534				-				1,158,534				-

 

(a)

Level 1: Quoted market prices in an active market.

(b)

Level 2: Quoted market prices in an inactive market or internally developed models with significant observable market.

(c)

Level 3: Internally developed models with significant unobservable market information.

 

(1)

The carrying value of loans at amortized cost is net of the allowance for expected credit losses of $85.7 million and unearned interest and deferred fees of $6.7 million for June 30, 2018; allowance for expected credit losses of $81.3 million and unearned interest and deferred fees of $5.0 million for December 31, 2017.

 

(2)

The carrying value of securities at amortized cost is net of the allowance for expected credit losses of $0.1 million as of June 30, 2018 and $0.2 million as of December 31, 2017.

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

19.

Related party transactions

 

During the reporting periods, total compensation paid to directors and the executives of Bladex as representatives of the Bank amounted to:

 

		Three months ended June 30,
		2018				2017				2016
Expenses:
Compensation costs paid to directors			177				189				164
Compensation costs paid to executives			550				996				2,016

 

		Six months ended June 30,
		2018				2017				2016
Expenses:
Compensation costs paid to directors			211				223				239
Compensation costs paid to executives			3,488				1,389				3,350

 

20.

Litigation

 

Bladex is not engaged in any litigation that is material to the Bank’s business or, to the best of the knowledge of the Bank’s management that is likely to have an adverse effect on its business, financial condition or results of operations.

 

21.

Risk management

 

Risk is inherent in the Bank’s activities, but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities. The Bank is exposed to market, credit, compliance and liquidity risk. It is also subject to country risk and various operating risks.

 

The Board of Directors is responsible for the overall risk management approach and for approving the risk management strategies and principles. The Board has appointed a Risk Committee which has the responsibility to monitor the overall risk process within the Bank.

 

The Risk Committee has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits. The Risk Committee is responsible for managing risk decisions and monitoring risk levels and reports on a weekly basis to the Executive Committee.

 

The Risk Management Unit is responsible for implementing and maintaining risk related procedures to ensure an independent control process is maintained. The unit works closely with the Risk Committee to ensure that procedures are compliant with the overall framework.

 

The Risk Management Unit is responsible for monitoring compliance with risk principles, policies and limits across the Bank. This unit also ensures the complete capture of the risks in risk measurement and reporting systems. Exceptions are reported on a daily basis, where necessary, to the Risk Committee, and the relevant actions are taken to address exceptions and any areas of weakness.

 

The Bank ‘s Assets/Liabilities Committee (ALCO) is responsible for managing the Bank’s assets and liabilities and the overall financial structure. It is also primarily responsible for the funding and liquidity risks of the Bank. The Bank’s policy is that risk management processes throughout the Bank are audited annually by the Internal Audit function, which examines both the adequacy of the procedures and the Bank’s compliance with the procedures. Internal Audit discusses the results of all assessments with management, and reports its findings and recommendations to the Audit Committee.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

21.

Risk management (continued)

 

Risk measurement and reporting systems

 

The Bank’s risks are measured using a method that reflects both the expected loss likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical models. The models make use of probabilities derived from historical experience, adjusted to reflect the economic environment. The Bank also runs worst-case scenarios that would arise in the event that extreme events which are unlikely to occur do, in fact, occur.

 

Monitoring and controlling risks is primarily performed based on limits established by the Bank. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept, with additional emphasis on selected industries. In addition, the Bank’s policy is to measure and monitor the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities. Information compiled from all the businesses is examined and processed to analyze, control and identify risks on a timely basis. This information is presented and explained to the Board of Directors, the Risk Committee, and the head of each business division. The report includes aggregate credit exposure, credit metric forecasts, market risk sensitivities, stop losses, liquidity ratios and risk profile changes. On a monthly basis, detailed reporting of industry, customer and geographic risks takes place. Senior management assesses the appropriateness of the allowance for credit losses on a monthly basis. The Supervisory Board receives a comprehensive risk report once a quarter which is designed to provide all the necessary information to assess and conclude on the risks of the Bank. For all levels throughout the Bank, specifically tailored risk reports are prepared and distributed to ensure that all business divisions have access to extensive, necessary and up–to–date information.

 

Risk mitigation

 

As part of its overall risk management, the Bank uses derivatives and other instruments to manage exposures resulting from changes in interest rates, foreign currencies, equity risks, credit risks, and exposures arising from forecast transactions.

 

In accordance with the Bank’s policy, its risk profile is assessed before entering into hedge transactions, which are authorized by the appropriate level of seniority within the Bank. The effectiveness of hedges is assessed by the Risk Controlling Unit (based on economic considerations rather than the IFRS hedge accounting regulations). The effectiveness of all the hedge relationships is monitored by the Risk Controlling Unit quarterly. In situations of ineffectiveness, the Bank will enter into a new hedge relationship to mitigate risk on a continuous basis.

 

Risk concentration

 

Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographical region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location. To avoid excessive concentrations of risk, the Bank’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly. Selective hedging is used within the Bank to manage risk concentrations at both the relationship and industry levels.

 

The Bank has exposure to the following risk from financial instruments:

 

Credit risk

 

Credit risk is the risk that the Bank will incur a loss because its customers or counterparties fail to discharge their contractual obligations. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to such limits.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

21.

Risk management (continued)

 

Credit risk (continued)

 

The Bank has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established using a credit risk classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision. The credit quality review process aims to allow the Bank to assess the potential loss because of the risks to which it is exposed and take corrective action.

 

Individually assessed allowances

 

The Bank determines the allowances appropriate for each individually significant loan or advance on an individual basis, considering any overdue payments of interests, credit rating downgrades, or infringement of the original terms of the contract. Items considered when determining allowance amounts include the sustainability of the counterparty’s business plan, its ability to improve performance if it is in a financial difficulty, projected receipts and the expected payout should bankruptcy ensue, the availability of other financial support, the realizable value of collateral and the timing of the expected cash flows. Allowances for losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.

 

Collectively assessed allowances

 

Allowances are assessed collectively for losses on loans and advances and for debt investments at amortized costs that are not individually significant and for individually significant loans and advances that have been assessed individually and found not to be impaired. The Bank generally bases its analyses on historical experience and prospective information. However, when there are significant market developments, regional and/or global, the Bank would include macroeconomic factors within its assessments. These factors include, depending on the characteristics of the individual or collective assessment: unemployment rates, current levels of bad debt, changes in the law, changes in regulation, bankruptcy trends, and other consumer data. The Bank may use the aforementioned factors as appropriate to adjust the impairment allowances.

 

Allowances are evaluated separately at each reporting date with each portfolio. The collective assessment is made for groups of assets with similar risk characteristics, in order to determine whether provision should be made due to incurred loss events for which there is objective evidence, but the effects of which are not yet evident in the individual loans assessments. The collective assessment takes account of data from the loan portfolio (such as historical losses on the portfolio, levels of arrears, credit utilization, loan to collateral ratios and expected receipts and recoveries once impaired) or economic data (such as current economic conditions, unemployment levels and local or industry–specific problems). The approximate time when a loss is likely to have been incurred and the time it will be identified as requiring an individually assessed impairment allowance is also taken into consideration. The impairment allowance is then reviewed by credit management to ensure alignment with the Bank’s overall policy.

 

Financial guarantees and letters of credit are assessed in a similar manner as for loans.

 

Derivative financial instruments

 

Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded on the statement of financial position at fair value.

With gross–settled derivatives, the Bank is also exposed to a settlement risk, being the risk that the Bank honors its obligation, but the counterparty fails to deliver the counter value.

 

Credit–related commitments risks

 

The Bank makes available to its customers guarantees that may require that the Bank makes payments on their behalf and enters into commitments to extend credit lines to secure their liquidity needs. Letters of credit and guarantees (including standby letters of credit) commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Such commitments expose the Bank to similar risks to loans and are mitigated by the same control processes and policies.

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

21.

Risk management (continued)

 

Credit risk (continued)

 

Collateral and other credit enhancements

 

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are in place covering the acceptability and valuation of each type of collateral.

 

The main types of collateral obtained are, as follows:

 

- For commercial lending, charges over real estate properties, inventory and trade receivables.

 

The Bank also obtains guarantees from parent companies for loans to their subsidiaries. Management monitors the market value of collateral and will request additional collateral in accordance with the underlying agreement. It is the Bank’s policy to dispose of repossessed properties in an orderly fashion. The proceeds are used to reduce or repay the outstanding claim. In general, the Bank does not occupy repossessed properties for business use.

 

The Bank also makes use of master netting agreements with counterparties with whom a significant volume of transactions are undertaken. Such arrangements provide for single net settlement of all financial instruments covered by the agreements in the event of default on any one contract. Master netting arrangements do not normally result in an offset of balance–sheet assets and liabilities unless certain conditions for offsetting.

 

Although master netting arrangements may significantly reduce credit risk, it should be noted that:

 

-

Credit risk is eliminated only to the extent that amounts due to the same counterparty will be settled after the assets are realized.

-

The extent to which overall credit risk is reduced may change substantially within a short period because the exposure is affected by each transaction subject to the arrangement.

 

Liquidity risk

 

Liquidity refers to the Bank’s ability to maintain adequate cash flows to fund operations and meet obligations and other commitments on a timely basis.

 

As established by the Bank’s liquidity policy, the Bank’s liquid assets are held in overnight deposits with the Federal Reserve Bank of New York or in the form of interbank deposits with reputable international banks that have A1, P1, or F1 ratings from two of the major internationally – recognized rating agencies and are primarily located outside of the Region. In addition, the Bank’s liquidity policy allows for investing in negotiable money market instruments, including Euro certificates of deposit, commercial paper, and other liquid instruments with maturities of up to three years. These instruments must be of investment grade quality A or better, must have a liquid secondary market and be considered as such according to Basel III rules.

 

The Bank performs daily reviews, controls and periodic stress tests on its liquidity position, including the application of a series of limits to restrict its overall liquidity risk and to monitor the liquidity level according to the macroeconomic environment. The Bank determines the level of liquid assets to be held on a daily basis, adopting a Liquidity Coverage Ratio methodology referencing the Basel Committee guidelines. Additionally, the Liquidity Coverage Ratio is complemented with the use of the Net Stable Funding Ratio to maintain an adequate long-term funding structure.

 

Specific limits have been established to control (1) cumulative maturity “gaps” between assets and liabilities, for each maturity classification presented in the Bank’s internal liquidity reports, and (2) concentrations of deposits taken from any client or economic group maturing in one day and total maximum deposits maturing in one day.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

21.

Risk management (continued)

 

Liquidity risk (continued)

 

The Bank follows a Contingent Liquidity Plan. The plan contemplates the regular monitoring of several quantified internal and external reference benchmarks (such as deposit level, Emerging Markets Bonds Index Plus, LIBOR-OIS spread and market interest rates), which in cases of high volatility would trigger implementation of a series of precautionary measures to reinforce the Bank’s liquidity position. In the Bank’s opinion, its liquidity position is adequate for the Bank’s present requirements.

 

While the Bank’s liabilities generally mature over somewhat shorter periods than its assets, the associated liquidity risk is diminished by the short-term nature of the loan portfolio, as the Bank is engaged primarily in the financing of foreign trade.

 

The following table details the Banks’s assets and liabilities grouped by its remaining maturity with respect to the contractual maturity:

 

		June 30, 2018
Description		Up to 3 months				3 to 6 months				6 months to 1 year				1 to 5 years				More than 5 years				Without maturity				Total
Assets
Cash and cash equivalent			683,523				-				-				-				-				-				683,523
Investment securities			5,330				1,650				16,397				70,864				-				-				94,241
Equity investments			-				-				-				-				-				4,964				4,964
Loans at amortized cost			2,034,835				949,205				1,052,599				1,479,582				39,033				-				5,555,254
Unearned interest and deferred fees			(793	)			(988	)			(514	)			(4,276	)			(89	)			-				(6,660	)
Allowance for expected credit losses			(35,679	)			(9,494	)			(6,490	)			(23,929	)			(10,119	)			-				(85,711	)
Other assets			28,537				20,499				12,440				7,629				537				15,821				85,463
Total			2,715,753				960,872				1,074,432				1,529,870				29,362				20,785				6,331,074
Liabilities
Deposits			2,267,468				267,275				363,174				91,085				-				-				2,989,002
Other liabilities			608,143				315,315				346,263				950,763				66,146				8,063				2,294,693
Total			2,875,611				582,590				709,437				1,041,849				66,146				8,063				5,283,695
Confirmed letters of credit			-				-				-				-				-				-				-
Stand-by letters of credit and guaranteed – Commercial risk			102,487				177,841				61,094				13,226				-				-				354,648
Credit commitments			50,000				50,000				-				30,000				578				-				130,578
Total			152,487				227,841				61,094				43,226				578				-				485,226
Net position			(312,344	)			150,441				303,901				444,795				(37,362	)			12,723				562,154

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

21.

Risk management (continued)

 

Liquidity risk (continued)

 

		December 31, 2017
Description		Up to 3 months				3 to 6 months				6 months to 1 year				1 to 5 years				More than 5 years				Without maturity				Total
Assets
Cash and cash equivalent			672,048				-				-				-				-				-				672,048
Investment securities			700				279				7,000				77,688				-				-				85,667
Equity investments			-				-				-				-				-				8,402				8,402
Loans at amortized cost			1,926,787				1,175,801				922,711				1,386,161				94,198				-				5,505,658
Unearned interest and deferred fees			(472	)			(479	)			(223	)			(3,546	)			(248	)			(17	)			(4,985	)
Allowance for expected credit losses			(35,787	)			(6,302	)			(8,208	)			(24,827	)			(6,170	)			-				(81,294	)
Other assets			31,282				8,635				13,175				3,819				9,398				15,942				82,251
Total			2,594,558				1,177,934				934,455				1,439,295				97,178				24,327				6,267,747
Liabilities
Deposits			1,722,041				411,158				571,500				224,145				-				-				2,928,844
Other liabilities			806,547				151,090				291,694				979,958				66,802				-				2,296,091
Total			2,528,588				562,248				863,194				1,204,103				66,802				-				5,224,935
Confirmed letters of credit			169,042				101,403				3,004				-				-				-				273,449
Stand-by letters of credit and guaranteed – commercial risk			18,687				72,080				77,952				257				-				-				168,976
Credit commitments			-				15,000				-				30,000				578				-				45,578
Total			187,729				188,483				80,956				30,257				578				-				488,003
Net position			(121,759	)			427,203				(9,695	)			204,935				29,798				24,327				554,809

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

21.

Risk management (continued)

 

Market risk (continued)

 

Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. Market risk is inherent in the financial instruments associated with many of the Bank’s operations and activities, including loans, deposits, securities held to maturity and financial instruments through OCI, short- and long-term borrowings and debt, derivatives and financial liabilities through profit or loss. This risk may result from fluctuations in different parameters: interest rates, currency exchange rates, inflation rates and changes in the implied volatility. Accordingly, depending on the instruments or activities impacted, market risks can have wide ranging, complex adverse effects on the Bank’s financial condition, results of operations, cash flows and business.

 

Interest rate risk

 

The Bank endeavors to manage its assets and liabilities in order to reduce the potential adverse effects on the net interest income that could be produced by interest rate changes. The Bank’s interest rate risk is the exposure of earnings (current and potential) and capital to adverse changes in interest rates and is managed by attempting to match the term and repricing characteristics of the Bank’s interest rate sensitive assets and liabilities. The Bank’s policy with respect to interest rate risk provides that the Bank establishes limits with regards to: (1) changes in net interest income due to a potential impact, given certain movements in interest rates and (2) changes in the amount of available equity funds of the Bank, given a one basis point movement in interest rates.

 

The following summary table presents a sensitivity analysis of the effect on the Bank’s results of operations derived from a reasonable variation in interest rates which its financial obligations are subject to, based on change in points.

 

		Change in interest rate		Effect on income
June 30, 2018		+200 bps			11,152
		-200 bps			(11,184	)
June 30, 2017		+200 bps			21,800
		-200 bps			(6,163	)
June 30, 2016		+200 bps			17,019
		-200 bps			(1,874	)

 

This analysis is based on the prior year changes in interest rates and assesses the impact on income, with balances as of June 30, 2018 and December 31, 2017. This sensitivity provides an idea of the changes in interest rates, taking as example the volatility of the interest rate of the previous period.

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

21.

Risk management (continued)

 

Market risk (continued)

 

Interest rate risk (continued)

 

The table below summarizes the Bank's exposure based on the terms of repricing of interest rates on financial assets and liabilities.

 

		June 30, 2018
Description		Up to 3 months				3 to 6 months				6 months to 1 year				1 to 5 years				More than 5 years				Total
Assets
Investments securities			5,330				1,650				16,397				70,864				-				94,241
Equity investments			-				-				-				-				4,964				4,964
Loans			3,924,676				1,067,542				443,875				108,568				10,593				5,555,254
Total			3,930,006				1,069,192				460,272				179,532				15,557				5,654,459
Liabilities
Deposits			2,247,467				267,275				363,174				91,085				-				2,969,001
Securities sold under repurchase agreements			-				-				-				-				-				-
Short and long-term borrowings and debt, net			1,577,038				77,404				91,830				411,417				60,453				2,218,142
Total			3,824,505				344,679				455,004				502,502				60,453				5,187,143
Total interest rate sensibility			105,501				724,513				5,268				(323,070	)			(44,896	)			467,316

 

		December 31, 2017
Description		Up to 3 months				3 to 6 months				6 months to 1 year				1 to 5 years				More than 5 years				Total
Assets
Investments securities			700				279				7,000				77,688				-				85,667
Equity investments			-				-				-				-				8,402				8,402
Loans			4,067,639				952,542				301,334				173,550				10,593				5,505,658
Total			4,068,339				952,821				308,334				251,238				18,995				5,599,727
Liabilities
Deposits			2,242,220				305,415				197,060				102,085				-				2,846,780
Short and long-term borrowings and debt, net			1,585,145				2,538				85,232				482,814				55,838				2,211,567
Total			3,827,365				307,953				282,292				584,899				55,838				5,058,347
Total interest rate sensibility			240,974				644,868				26,042				(333,661	)			(36,843	)			541,380

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

21.

Risk management (continued)

 

Market risk (continued)

 

Currency risk

 

Currency risk is the risk that the value of a financial instrument will fluctuate because of changes in exchange rates of foreign currencies, and other financial variables, as well as the reaction of market participants to political and economic events. For purposes of accounting standards this risk does not come from financial instruments that are not monetary items, or for financial instruments denominated in the functional currency. Exposure to currency risk is low since the Bank’s has maximum exposure limits established by the Board.

 

Most of the Bank’s assets and most of its liabilities are denominated in US American Dollars and hence the Bank does not incur a significant currency exchange risk. The currency exchange rate risk is mitigated using derivatives, which, although perfectly covered economically, may generate a certain accounting volatility.

 

The following table details the maximum to foreign currency, where all assets and liabilities are presented based on their book value, except for derivatives, which are included within other assets and other liabilities based on its value nominal.

 

		June 30, 2018
		Brazilian Real expressed in US$				European Euro expressed in US$				Japanese Yen expressed in US$				Colombian Peso expressed in US$				Mexican Peso expressed in US$				Other currencies expressed in US$(1)				Total
Exchange rate			3.8749				1.1678				110.735				2931.610				19.8620				-				-
Assets
Cash and cash equivalent			249				19				2				39				10,262				79				10,650
Equity investments			-				-				-				-				-				-				-
Loans			-				-				-				-				137,092				-				137,092
Total			249				19				2				39				147,354				79				147,742
Liabilities
Borrowings and deposit placements			-				-				-				-				145,169				-				145,169
Other Liabilities			-				-				-				-				1,661				-				1,661
Total			-				-				-				-				146,830				-				146,830
											-
Net currency position			249				19				2				39				524				79				912

 

(1)

It includes other currencies such as: Argentine pesos, Australian- dollar, Swiss franc, Pound sterling, Peruvian soles and Remimbis.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

21.

Risk management (continued)

 

Market risk (continued)

 

Currency risk (continued)

 

		December 31, 2017
		Brazilian Real expressed in US$				European Euro expressed in US$				Japanese Yen expressed in US$				Colombian Peso expressed in US$				Mexican Peso expressed in US$				Other currencies expressed in US$(1)				Total
Exchange rate			3.31				1.20				112.66				2,985.78				19.67				-				-
Assets
Cash and cash equivalent			87				2				4				91				369				75				628
Equity investments			168				-				-				-				-				-				168
Loans			-				-				-				-				143,182				-				143,182
Total			255				2				4				91				143,551				75				143,978
Liabilities
Borrowings and deposit placements			-				-				-				-				143,661				-				143,661
Total			-				-				-				-				143,661				-				143,661
Net currency position			255				2				4				91				(110	)			75				317

 

(1)

It includes other currencies such as: Argentine pesos, Australian- dollar, Canadian dollar, Swiss franc, Peruvian soles and Remimbis.

 

Operational Risk

 

Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to operate effectively, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. Bladex, like all financial institutions, is exposed to operational risks, including the risk of fraud by employees and outsiders, failure to obtain proper internal authorizations, failure to properly document transactions, equipment failures, and errors by employees, and any failure, interruption or breach in the security or operation of the Bank’s information technology systems could result in interruptions in such activities. Operational problems or errors may occur, and their occurrence may have a material adverse impact on the Bank’s business, financial condition, results of operations and cash flows. The Bank cannot expect to eliminate all operational risks, but it endeavors to manage these risks through a control framework and by monitoring and responding to potential risks. Controls include effective segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes, such as the use of internal audit.

 

Capital management

 

The primary objectives of the Bank’s capital management policy are to ensure that the Bank complies with externally imposed capital requirements and maintains strong credit ratings and healthy capital ratios to support its business and to maximize shareholder value.

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

21.

Risk management (continued)

 

Capital management (continued)

 

The Bank manages its capital structure and adjusts it according to changes in economic conditions and the risk characteristics of its activities. To maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes have been made to the objectives, policies and processes from the previous years. However, they are under constant review by the Board.

 

		June 30, 2018				December 31, 2017
Tier 1 capital			1,037,847				1,048,304
Risk weighted assets			5,582,698				5,601,518
Tier 1 capital ratio			18.59	%			18.71	%

 

22.

Applicable laws and regulations

 

Liquidity index

 

The Rule No. 4-2008 issued by the Superintendence of Banks of Panama (SBP) establishes that every general license or international license bank must maintain, always, a minimum balance of liquid assets equivalent to 30% of the gross total of its deposits in the Republic of Panama or overseas up to 186 days, counted from the date of the report. The formula is based on the following parameters:

 

Liquid assets	x 100 = X% (Liquidity index)
Liabilities  (Deposits Received)

 

As of June 30, 2018, and December 31, 2017, the percentage of the liquidity index reported by the Bank to the regulator was 81.97% and 88.78%, respectively.

 

Capital adequacy

 

The Banking Law in the Republic of Panama and the Rules No. 01-2015 and 03-2016 require that the general license banks maintain a total capital adequacy index that shall not be lower, at any time, than 8% of total assets and off-balance sheet irrevocable contingency transactions , weighted according to their risks; and ordinary primary capital that shall not be less than 4.5% of its assets and off-balance sheet transactions that represent an irrevocable contingency, weighted according to their risks; and a primary capital that shall not be less than 6% of its assets and off-balance sheet transactions that represent an irrevocable contingency, weighted according to their risks.

 

As of June 30, 2018, the Bank's total capital adequacy ratio is 18.59%, which is in compliance with the capital adequacy indexes required by the Banking Law in the Republic of Panama.

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

22.

Applicable laws and regulations (continued)

 

Specific provisions

 

The Rule No. 4-2013, modified by Rule No. 8-2014, indicates that the specific provisions are originated from the objective and concrete evidence of impairment. These provisions must be established for credit facilities classified according to the risk categories denominated: special mention, substandard, doubtful, or unrecoverable, both for individual credit facilities as for a group of such facilities. In the case of a group, it corresponds to circumstances that indicate the existence of deterioration in credit quality, although individual identification is still not possible.

 

Banks must calculate and maintain at all times the amount of the specific provisions determined by the methodology specified in this Rule, which takes into account the balance owed of each credit facility classified in any of the categories subject to provision, mentioned in the paragraph above; the present value of each guarantee available in order to mitigate risk, as established by type of guarantee; and a weighting table that applies to the net balance subject to loss of such credit facilities.

 

In Article 34 of this Rule, it establishes that all credits must be classified in the following five (5) categories, according to their default risk and loan conditions, and establishes a minimum reserve for each classification: normal 0%, special mention 2%, substandard 15%, doubtful 50%, and unrecoverable 100%.

 

If there is an excess in the specific provision, calculated in accordance with this Rule, compared to the provision calculated in accordance with IFRS, this excess will be accounted as a regulatory credit reserve in Stockholder’s Equity and will increases or decreases with allocations towards the retained earnings. The balance of the regulatory credit reserve will not be considered as capital funds for calculating certain ratios or prudential indicators mentioned in the Rule.

 

Based on the classification of risks, real guarantees and in accordance with Rule No. 04-2013 of the Superintendence of Banks of Panama, the Bank classified the loan portfolio as follows:

 

		June 30, 2018
Loans		Normal				Special Mention				Substandard				Doubtful				Unrecoverable				Total
Corporations			2,502,336				61,845				19,275				-				-				2,583,456
Banks:
Private			2,350,310				-				-				-				-				2,350,310
State-owned			494,042				-				-				-				-				494,042
			2,844,352				-				-				-				-				2,844,352
Others			92,446				-				-				-				35,000				127,446
Total			5,439,134				61,845				19,275				-				35,000				5,555,254
Loans provision:
Specific			-				12,592				3,400				-				22,824				38,816
Total			-				12,592				3,400				-				22,824				38,816

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

22.

Applicable laws and regulations (continued)

 

Specific provisions (continued)

 

		December 31, 2017
Loans		Normal				Special Mention				Substandard				Doubtful				Unrecoverable				Total
Corporations			2,789,454				-				23,759				-				35,000				2,848,213
Banks:
Private			1,822,350				-				-				-				-				1,822,350
State-owned			573,649				-				-				-				-				573,649
			2,395,999				-				-				-				-				2,395,999
Others			261,446				-				-				-				-				261,446
Total			5,446,899				-				23,759				-				35,000				5,505,658
Loans provision:
Specific			-				-				7,238				-				17,500				24,738
Total			-				-				7,238				-				17,500				24,738

 

As of June 30, 2018, and December 31, 2017, the total restructured loans amounted to $28,440 and $32,924, respectively.

 

Non-accruing loans are presented by category as follows:

 

		June 30, 2018
Non-accruing loans		Normal				Special Mention				Substandard				Doubtful				Unrecoverable				Total
Impaired loans			-				-				19,275				-				35,000				54,275
Total			-				-				19,275				-				35,000				54,275

 

 

		December 31,2017
Non-accruing loans		Normal				Special Mention				Substandard				Doubtful				Unrecoverable				Total
Impaired loans			-				-				23,759				-				35,000				58,759
Total			-				-				23,759				-				35,000				58,759

 

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

22.

Applicable laws and regulations (continued)

 

Specific provisions (continued)

 

		June 30, 2018				December 31, 2017
Non-accruing loans:
Private corporations			19,275				23,759
Middle-market companies			35,000				35,000
Total non-accruing loans			54,275				58,759
Interests that would be reversed if the loans had been classified as non-accruing loans			4,221				3,257
Income from collected interest on non-accruing loans			-				551

 

Credit risk coverage - dynamic provision

 

The Superintendence of Banks of Panama by means of the Rule No. 4-2013, which governs as of June 30, 2014 and repeals in all its parts the Rule No. 6-2000 and all its amendments, establish the compulsory constitution of a dynamic provision in addition to the specific provision as part of the total provisions for credit risk coverage.

 

The dynamic provision is an equity consignment associated to the regulatory capital, but does not replace or offset the capital adequacy requirements established by the Superintendence of Banks of Panama. The Rule in Article 50, numeral 2, establishes the period of adjustment where banks must ensure that they have the minimum percentages of risk-weighted assets, without prejudice to the Bank's decision to apply the corresponding amount in accordance with what establishes Article 37 of this Rule.

 

Methodology for the constitution of the regulatory credit reserve

 

The Superintendence of Banks of Panama by means of the General Resolution of Board of Directors SBP-GJD-0003-2013 of July 9, 2013, establishes the accounting methodology of the identified differences that rise between the application of the International Financial Reporting Standards (IFRS) and the application of prudential regulations issued by the SBP; as well as the additional disclosures require to be included in the notes to the consolidated financial statements.

 

The parameters established in this methodology are the following:

        

1.

“The calculations of how the accounting balances would be applied in accordance to IFRS and the prudential standards issued by the Superintendence of Banks of Panama will be carried out and the respective figures will be compared.

 

2.

When the calculation made in accordance with IFRS results in a greater reserve or provision for the Bank compared to the one resulting from the use of the prudential standards issued by the SBP, the Bank will account the IFRS figures.

 

3.

When the impact of the use of prudential standards results in a greater reserve or provision for the bank, the effect of the application of IFRS will be recorded in profit and loss, and the difference between IFRS calculation compared to the prudential standards calculation will be appropriated in the retained earnings as a regulatory credit reserve. If the Bank does not have sufficient retained earnings, the difference will be presented as an accumulated deficit account.

 

4.

The regulatory credit reserve mentioned in numeral 3 of this Rule may not be reversed against the retained earnings as long as there are differences between the IFRS and the originated prudential regulations”.

 

Banco Latinoamericano de Comercio Exterior, S. A. and Subsidiaries

Notes to the unaudited condensed consolidated interim financial statements

(Amounts expressed in thousands of U.S. dollars, unless otherwise indicated)

 

22.

Applicable laws and regulations (continued)

 

Credit risk coverage - dynamic provision (continued)

 

Considering that the Bank presents its consolidated financial statements under IFRS, specifically for its expected credit reserves under IFRS 9, the line "Regulatory credit reserve" established by the Superintendence of Banks of Panama has been used to present the difference between the application of the accounting standard used and the prudential regulations of the Superintendence of Banks of Panama to comply with the requirements of the Rule No. 4-2013.

 

As of June 30, 2018, and December 31, 2017, the total amount of the dynamic provision and the regulatory credit reserve calculated according to the guidelines of Rule No. 4-2013 of the Superintendence of Banks of Panama is $123,957 and $ 129,254. respectively, taken in full from retained earnings for purposes of compliance with local regulatory requirements. This appropriation is restricted to distributing dividends in order to comply with local regulatory. As follows, the detail:

 

		June 30, 2018				December 31, 2017
Dynamic provision			108,756				108,756
Regulatory credit reserve			15,201				20,498
			123,957				129,254

 

23.

Subsequent Events

 

Bladex announced a quarterly cash dividend of $0.385 US dollar cent per share corresponding to the quarter of 2018. The cash dividend was approved by the Board of Directors at its meeting held on July 17, 2018 and it is payable on August 15, 2018 to the Bank’s stockholders as of July 31, 2018 record date.